Self-employed – Doug Carroll

Uber-taxation arrives; GST/HST catching up with ride-sharing services

At issue

Millennials may believe that the sharing economy is the economy, but our tax system needs time to adapt. In the breach, both purveyors and consumers may be unclear as to the true ultimate economic cost and value of these novel offerings.

Arguably, the poster-child for the new economy is Uber, the ride-sharing technology company that has disrupted the taxi industry across the globe. This and other new technologies can also be disruptive to tax authorities: What jurisdiction can levy tax? Who do you collect it from? And as a starting point, is it even something that is taxable?

In this last respect, the 2017 Federal Budget has brought some clarity to the intersection of ride-sharing and taxis for GST/HST purposes.

CRA and the sharing economy

For a few years now, the Canada Revenue Agency has used news releases and its own website to make taxpayers aware that tax obligations arise out of the sharing economy. It enumerates five sectors that have emerged: accommodation sharing, ride sharing, music and video streaming, online staffing and peer/crowd funding.

Income from sharing-economy activities must be reported for income tax purposes, whether earned by an individual or a registered business. As well, these activities are often caught by GST/HST, imposing collection, remittance and reporting obligations.

Excise Tax Act (R.S.C., 1985, c. E-15) – GST/HST small supplier rules

Suppliers of goods and services covered by the GST/HST must register and comply with the rules under the Excise Tax Act (ETA). However, s.148(1) relieves certain small suppliers who supply less than $30,000 annually in goods or services from having to collect the tax. As it doesn’t collect and remit the tax, a small supplier is also not entitled to claim input tax credits (which are available to registrants).

This general rule is then modified in s.240. Section 240(1) sets out the requirement for suppliers to be registered under the ETA, excepting small suppliers and a few others from registration. There is then an exception to the exception:

Taxi business – s. 240(1.1) Notwithstanding subsection (1), every small supplier who carries on a taxi business is required to be registered for the purposes of this Part in respect of that business.

Uber Canada inc. c. Agence du revenu du Québec, 2016 QCCA 130

Uber appealed a motions judge’s ruling that denied its attempt to obtain a return of property seized from its premises under warrant by Revenu Quebec. Among the issues raised in the appeal was whether certain Uber drivers were carrying on a taxi business. Section 407.1 of the Quebec legislation has similar wording and effect as ETA s.240(1.1).

Uber lost its appeal and subsequently negotiated an agreement with Quebec regulators (September 2016) requiring its drivers in that province to register for GST and QST. This appears on the Uber website, but there is no mention of other provinces (at time of writing).

Federal Budget 2017 – Amend ITA s.123 definition of “taxi business”

In the Budget, the government noted the similarity between commercial ride-sharing services facilitated by web applications and traditional taxi services. However, for a variety of regulatory reasons, under current tax rules ride-sharing may not be subject to the same GST/HST rules applicable to taxis.

The existing definition in the ETA is one brief sentence referring specifically to transport by “taxi”. To place matters on a level footing, the definition will be expanded to include “taxi or other similar vehicle”, including transportation “arranged or coordinated through an electronic platform or system”.

Practice points

While new technologies like ride-sharing may quickly change commercial dynamics, rest assured – unfortunately for individual wallets – that the tax system will eventually follow.
For drivers, it seems likely that the central ride-sharing service will take care of GST/HST collection and compliance (as is the case in Quebec now). It remains to be seen how demand may be affected by this narrowing of cost differential vis-à-vis traditional taxis.
For consumers, the ETA amendments to the definition of a taxi business come into effect as of Canada Day, 2017. Enjoy the ride while you can..”

CRA relaxes position on deductibility of PHSP premium payments

At issue

Claiming annual payments for medical expenses does not often lead to significant tax relief. In addition to being a non-refundable tax credit at the lowest bracket rate, there is a cap on the amount used as the base for calculating the claim.

For business owners, a strategy that may offer a better tax result is to establish a private health services plan (PHSP) for employees. Carefully structured, this entitles the employer to a business deduction for the plan premium, while the employee will have no income inclusion when premiums are deposited nor when qualifying medical payments are eventually paid out of the PHSP.

In November 2015, the Canada Revenue agency (CRA) announced a welcome change in its position on deductibility of PHSP premium payments.

CRA Income Tax Folio S1-F1-C1, Medical Expense Tax Credit (METC)

This is the CRA’s administrative guide to claiming medical expenses. Qualifying expenses are enumerated in the folio, and may be claimed for any 12-month period that ends in the taxation year for which a return is being filed.

As with most tax credits, the credit rate is at the lowest bracket rate (federally 15%) multiplied by the qualifying amount. But unlike most credits, the actual amount expended is not what is used directly for the calculation. Rather, the medical expense total is reduced by the lesser of two figures:

the fixed amount (indexed annually), which is $2,208 for the 2015 tax year, and
3% of the taxpayer’s net income

A similar calculation applies for the corresponding provincial/territorial credit.

Income Tax Act (ITA) Canada

A “private health services plan” is defined in ITA s.248(1). Practical guidance is given in IT339R2 ARCHIVED – Meaning of private health services plan. Though archived, this bulletin continues to be referenced in CRA’s own communications. It confirms that a payment made into a PHSP is a business expense for the employer under ITA s.18(1)(a), but not a benefit to the employee under ITA s.6(1)(a)(i).

Key to being a PHSP is that it is based on an employment relationship. A plan could be at risk of losing PHSP treatment if benefits favour shareholders over employees. On the other hand, it may be acceptable if the benefits of a shareholder-employee are comparable to other employees. Further insight on this issue can be gleaned from Income Tax Folio S2-F1-C1, Health and Welfare Trusts.

CRA roundtable, Canadian Tax Foundation conference – November 24, 2015

CRA’s position has to-date been that in order to qualify as a PHSP, all medical expenses covered under a plan had to be eligible for the METC. The question was posed to the CRA panel whether the agency had an update regarding its position.

The CRA now considers that a plan is a PHSP as long as all or substantially all of the premiums paid relate to medical expenses eligible for the METC. Generally that means 90% or more of covered expenses must be METC-qualified. The reason for the change is to alleviate concerns that nominal or incidental charges (eg., non-prescription vitamins) may put a plan offside, thus allowing for certainty and flexibility in plan design and administration.

The revised position is retroactive to January 1, 2015.

Practice points

A personal tax credit is available to offset qualifying medical expenses. However, due to the structure of the credit calculation, the amount of relief is often limited.
Bearing in mind what costs there may be in establishing a PHSP, a plan of this type will likely lead to a better tax result for supporting medical expenses incurred by employees.
A PHSP is based on an employment relationship. Where shareholders are also employees, expert advice should be sought in order to assure that the proposed plan remains within the PHSP rules.

Employee or independent contractor

At issue

The distinction between being treated as an employee or independent contractor is a frequently contended issue between taxpayers and the Canada Revenue Agency (CRA), and in turn a matter that often proceeds to court. It has implications on both sides of the contracted relationship, including:

Tax rates and reporting obligations of the respective parties,
Generation of RRSP contribution room,
Premium obligations for employment insurance and Canada Pension Plan, and entitlement to associated EI and CPP benefits,
Requirement to collect, report and remit GST/HST, and
Entitlement to and constraints upon tax deductions.

Though independent contractor characterization may more often be viewed from the working party perspective, it may also affect tax cost and administrative burden to the otherwise employer party. Furthermore, that working party may be able to receive payments through a corporation, enabling a greater degree of flexibility in ultimately distributing net receipts into personal hands.

But being treated as employment or an independent contract is not merely a matter of the parties saying so. The CRA or the courts may concur, but often will see it otherwise.

Gomez Consulting v. R., 2013 TCC 3

Gomez Consulting provided information technology (IT) consulting services to two federal agency clients: the Canada Revenue Agency and the Canada Mortgage and Housing Corporation (“the Clients”). In reporting its taxes for the relevant years, it claimed entitlement to the small business deduction, as well as certain deductions in calculating its tax liability.

On reassessment, the Minister of Revenue treated the corporation as a personal services corporation, but for which Mr. Luis Gomez Almeida (shareholder and employee of Gomez Consulting) was simply an employee of the Clients in his personal capacity.

In appealing the reassessment, Gomez Consulting relied heavily on the intentions of the parties, suggested to be inferred in part from the business contracts. As well, another IT consultant was called as a witness, testifying that he had been recognized as an independent contractor by the CRA appeals division.

The judge reviewed and adopted the position of a number of cases expressing the view that intent is not a relevant consideration in the personal services business analysis. On the facts, given the hourly pay rate, provision of tools and work space, and requirement to complete the work personally, the judge concluded that it was a personal services business. Small business rate and all deduction claims denied.

Wiebe Door Services Ltd v. M.N.R., 87 DTC 5025

This is the oft-cited and followed case from the Federal Court of Appeal that lays out a test for determining whether a person is an employee or an independent contractor.

The case was cited with approval by the Supreme Court of Canada in 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59. The summary in this latter case affirms that each situation must be evaluated on its own facts, within a framework that considers:

Control the employer has over the worker’s activities,
Whether the worker provides his or her own equipment,
Whether the worker hires his or her own helpers,
Degree of financial risk taken by the worker,
Degree of responsibility for investment and management held by the worker, and
Worker’s opportunity for profit in the performance of his or her tasks.

Though detailed, this is not necessarily an exhaustive list, and the weight to be accorded to each factor depends on the facts in issue.

Practice points

Facts matter, and substance trumps form. Where an employment arrangement is dressed up to appear as something else – whether intentionally or inadvertently – the tax system will inquire and attempt to treat it in accordance with its true nature.
Whether or not rendered into a written contract, the intentions of parties may very well bind them vis-à-vis one another. The parties should not however assume that this will thereby bind the taxing authority.
The interposition of a corporation as the working party contractor in no way assures availability of the small business rate and deductions. The personal services business rules may apply as a look-through to effectively treat the individual as an employee.