Tag: Tax

Is a mortgage incentive taxable to a borrower financing a real estate purchase?

At issue

Real estate values have been rising at rates beyond historical norms over the last few years, especially in some major urban centres. Whether purchasers are seeking home ownership or investment opportunity, the usual need for mortgage financing is accentuated when property values rise so rapidly.

This is generally good news for financiers, but obviously the competition for borrowers can be stiff. The marketing minds at these institutions have come up with some innovative ways to attract the attention of purchasers, along with novel product features.

No doubt borrowers are appreciative of the competition that keeps interest rates in check, and for the perks they appear to be receiving. Appearance, however, is not necessarily reality, and a closer look at the tax implications of mortgage incentives will allow borrowers to better evaluate a given proposition.

Income Tax Act (ITA) sections

A few ITA sections have bearing on the discussion here, beginning with the basic rule of income in s.9, followed by some broad categories of income inclusions in s.12:

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.

…

12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable …

Among the forty or so categories in s.12, two paragraphs are of particular note: (c) interest, and (x) inducements and reimbursements.

2016-0681271E5 – Cash back amounts on renewed mortgages – March 21, 2017

In the situation brought before the CRA, a corporation receives cashback amounts from a bank at the time it renews mortgages relating to its rental properties. The cashbacks are subject to payback if certain events occur within 3 to 5 years. The questions posed are whether the cashback is taxable to the borrower, and whether any payback can be claimed as a deduction.

The CRA writer begins by ruling out the possibility of the cashback being an interest payment to the borrower. She then touches on the general rule under s.9(1), which may alone suffice, but rests the determination mainly on being an inducement pursuant to para.12(1)(x). The amount of the inducement would be treated as income for the tax year in which it is received.

As to any payback, if an inducement is included in income pursuant to para.12(1)(x), a related payback in a later tax year would entitle the taxpayer to claim a deduction under para.20(1)(hh) in that later time.

CRA Views 2015-0609071E5: Mortgage incentive – February 22, 2017

A credit union offered its members a bonus on deposits to a particular type of savings account, conditional on the funds being used as a down payment for a property purchase, with the mortgage being placed with the credit union. The credit union’s position is that, as there is already a flat interest rate on the account, the bonus should not be considered interest to the borrower.

As above, the CRA writer here also addresses whether the bonus may be interest, but does not come to a conclusion, and instead states that if the bonus does not meet that requirement then it may still be taxable under another ITA provision.

Both s.9(1) and s.12(1)(x) are dependent upon the taxpayer having income from “a business or property.” That is a question of fact, and “without a detailed review of the relevant facts and documentation, we are unable to provide a definitive response.”

Practice points

  1. The upfront rate on a mortgage is usually the main cost to a borrower, but other fees or concessions could increase or decrease that. An inducement in the form of an incentive is one such amount that can reduce the effective cost.
  2. Where an incentive is received by a borrower/taxpayer in the course of earning income from a business or property, such as a rental unit, the amount is likely a taxable amount.
  3. Where the borrower is not trying to earn income from the property, for example a family home, it is not clear whether the amount is taxable. While this leaves such individuals uncertain, at the same time it is conceivable that such amounts could be received non-taxable if the incentive program is carefully designed.

Being an investment professional can influence tax treatment of your own investments

At issue

There is a fundamental concept in tax that determines how your investments are treated, being whether you are trading on ‘income account’ or on ‘capital account’.

It’s a concept that can cut both ways. On capital account, only half of gains are taxable, and only once realized; correspondingly, when losses are realized they can only be applied to reduce capital gains. On the other hand, income account treatment means full taxation on a year-to-year basis, while expenses in this arena are fully deductible in the year.

The ideal case for an investor would be to have all gains treated under capital account, and all expenses treated on a current/income account basis. As you might expect though, it’s not a matter of an investor simply choosing, though intention is part of the legal test.

What may surprise many people though, is that who you are – at least in terms of your professional/business profile – can influence how you are treated.

Income Tax Act (ITA) section 248 – Definitions

“business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and … an adventure or concern in the nature of trade …”

Rajchgot v. the Queen, 2004 TCC 548

This is an oft-referenced authority on the legal test for income and capital treatment. The starting point is whether securities giving rise to a loss or gain are part of business activity (trading property) or investment activity (holding property). And the entrée into that analysis begins with ascertaining the taxpayer’s intention at the time of acquiring the securities.

Determining intention is understandably difficult, and is not helped much by a taxpayer’s statements, as those would be almost entirely self-serving. Intention then is derived by inquiring into and observing the taxpayer’s whole course of conduct. The framework for this analysis is arranged under the following headings:

  • Frequency of transactions
  • Duration of holdings
  • Nature and quantity of securities held
  • Time spent on the activity
  • Financing
  • Particular knowledge possessed by the individual

Foote v. the Queen, 2017 TCC 61 (released April 21, 2017)

According to the case fact summary, Mr. Foote had a sense that the markets had bottomed out in March 2009. Over the course of that year, he carried out 38 purchase transactions with an aggregate value of about $2.5 million, and generated about $3.0 million from 50 sale transactions. His total gain was about 23%. Mr. Foote reported the net result as capital gains in his 2009 income tax return. The Canada Revenue Agency (CRA) reassessed the amount as income, and Mr. Foote appealed to the Tax Court of Canada.

Mr. Foote had been in the investment industry for over 25 years, at the time working as head of institutional trading at a major investment dealer. In his role, he did not directly trade securities, but did oversee others who traded. On a personal level, he testified that his investment strategy had always been to invest in diversified securities he felt had the potential for 30% returns over a reasonable time frame.

The judge reviewed the facts under the Rajchgot heads of analysis. Trade frequency had tripled in 2009 relative to prior years, and hold periods averaged just 50 days, with some securities bought and sold within the same week. Despite not technically being a trader, his position “in common parlance and as generally described in the markets” nonetheless fell into that category. While acknowledging that the activities did not amount to “carrying on a business of trading securities”, the judge found that they handily met the requirements of “an adventure or concern in the nature of trade” under the ITA s.248 definition of business. Accordingly, the appropriate treatment of the gains was held to be income.

Practice points

  1. Tax treatment of securities trading can vary based on the subject matter traded, the manner of trading, and the individual carrying out the trades. Frequent trades and short holding periods tend toward full income inclusion, as opposed to capital gains treatment.
  2. Working within the investment industry does not invariably result in income treatment. For example, being the vice-president of human resources or information technology for a securities dealer would not in itself suffice. However, where a person’s job is integral to the business function of trading securities, that fact is far more influential in arriving at a determination of income treatment. And it is not a sufficient reply to merely show that the individual was not trading on insider-type information.
  3. Still, it remains possible for even a full-time professional trader to be trading on capital account in his or her personal affairs, if the facts can support that conclusion.

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

  1. While new technologies like ride-sharing may quickly change commercial dynamics, rest assured – unfortunately for individual wallets – that the tax system will eventually follow.
  2. 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.
  3. 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..”