27/9/2013
For most taxpayers, CRA has only 3 years to reassess a tax return, after originally processing it. For GST/HST returns, the period is four years after the person was supposed to file the return, whether or not he filed it. (See ITA s. 152(3.1) and ETA s. 298(1)(a).)
As Justice Campbell Miller confirms in this decision, if the CRA has “‘requested additional information from the [taxpayer or registrant] and not having received that information, and having requested a waiver from the appellant which the appellant refused to give, the [CRA] [is] clearly entitled to issue a reassessment to protect [its] rights prior to the expiry of the three-year period.'” (Para. 11, citing the Federal Court of Appeal in Karda v. The Queen, 2006 FCA 238, an appeal of one of C. Miller’s earlier decisions.)
Usually, the taxpayer will prefer to give the waiver and influence the audit process rather than face a less favorable “protective assessment”.
See Golini v. The Queen, (2013 TCC C. Miller) https://www.facebook.com/v2.6/plugins/like.php?action=like&app_id=190291501407&channel=https%3A%2F%2Fstaticxx.facebook.com%2Fx%2Fconnect%2Fxd_arbiter%2F%3Fversion%3D46%23cb%3Df38a073305a635%26domain%3Dwww.yasny.ca%26is_canvas%3Dfalse%26origin%3Dhttps%253A%252F%252Fwww.yasny.ca%252Ff301543e2dfb0f%26relation%3Dparent.parent&container_width=0&href=http%3A%2F%2Fyasny.ca%2F2%2Fpost%2F2013%2F09%2Fgolini-v-the-queen-2013-tcc-c-miller-if-you-dont-give-an-auditor-information-cra-can-issue-a-protective-reassessment.html&layout=button_count&locale=en_US&sdk=joey&share=false&show_faces=false&width=90
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Sotski v. The Queen, (2013 TCC Pizzitelli) — Medical expense credit for engineered laminate hardwood flooring
26/9/2013
Taxpayers may claim a credit against taxes for their “medical expenses” if the expenses are higher than $2,152 (for 2013) or “3% of net income” (whichever is less).
“Medical expenses” are defined in s. 118.2(2). They can include renovations or alterations to your home if they help a person with a “severe and prolonged mobility impairment” access or move around in the home. In cases before 2005, the Tax Court had said that qualifying expenses could include: (a) hardwood floors bought to replace carpets for a person with severe allergies or (b) home alterations to install a hot tub. The Government (Department of Finance) thought these types of expenses were abusing the tax credit. So, starting February 2005, the credit was changed to disallow home alteration expenses if:
(i) they would typically be expected to increase the value of the home; or
(ii) they are the kind that would normally be incurred by persons who do not have a severe and prolonged mobility impairment.
Based on that change in law, the Tax Court judges had refused to allow the credit for hardwood floors or for swimming pool installation expenses: Hendricks v Canada, 2008 TCC 497 (CanLII); Barnes v Canada, 2009 TCC 429 (CanLII).
Even so, Justice Pizzitelli allowed the Appellant’s claim for a credit for the costs of stripping out 5-year old carpeting in part of the home and replacing it with engineered hardwood laminate, as the wood helped her husband get around more easily. (He suffered from Parkinson’s disease and related illnesses.) To justify his decision, Justice Pizzitelli distinguished the earlier cases noting (a) the replacement of a relatively new carpet (and only part of it) with cheap hardwood laminate did not increase the value of the home and (b) though healthy people might make a similar change, there was no personal choice in this one; it was essential and there was no cheaper way to do it. (Paras. 6 and 11.)
Pizzitelli J. felt this case did not offend the spirit of the law, which was to prevent people from improving their homes at the expense of other taxpayers. And he noted:
“It would indeed seem an absurd result that if the Appellant here hired an engineer to design a super smooth concrete floor or “medical floor” to use the Respondent’s term, with no resistance to specifically suit the needs of the Appellant at great expense, that that would qualify while using the most modest means to achieve the same result would not.” (Para. 15)
There wasn’t a lot of money involved here (“$3,675 expended in 2010”). So, it’s hard to understand why CRA put itself and the taxpayer to the expense. But CRA is an institution responsible for applying the law and is supposed to do that consistently. It’s hard for CRA to make exceptions without clear reasons. Here, the law was recently changed and seems to prohibit the deduction: Laminate wood floors are improvements that normal and healthy people make; so the taxpayer’s expense seems to fail s. 118.2(1)(l.2)(ii).
Even so, Justice Pizzitelli clearly took a practical approach, as he explains in the quote from para. 15 (above). The Appellant represented herself and was obviously determined and intelligent. The case shows that courts will respond to arguments of fairness in some cases. There are many cases, though, where the Tax Court judges have applied the law against a taxpayer, despite recognizing that the result is unfair. So, one never knows how a case will turn out. Still, it helps to be able to show that your view of the law leads to a fair and practical result.
See Sotski v. The Queen, (2013 TCC Pizzitelli)
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Radonjic v .Canada Revenue Agency, (2013 FC Russell) — Even if you play poker full time, your winnings may not be taxable
21/9/2013
Mr. Radonjic was a poker player. In 2004, he began winning in online poker and by May, he was so successful, he made poker his full-time job. He had multiple computer screens (up to 10 monitors) running poker games in his home office. So, relying on advice from his accountant and on CRA’s discussion of Gambling Profits in its Bulletin IT-334R2 (“Miscellaneous Receipts”), he filed his 2004-2007 tax returns reporting his poker winnings as income.
Around 2011, after speaking with other poker friends, Mr. Radonjic decided that his winnings weren’t taxable. So, he asked CRA to allow him to adjust his returns after the 3-year normal reassessment period. (See Form T1-ADJ “T1 Adjustment Request”.)
The Income Tax Act gives CRA a number of ways to offer “taxpayer relief”. The most commonly sought types of relief are interest and penalty waivers. But CRA may also allow taxpayers to file late elections (s. 220(3.2)) or to amend their returns after the “normal reassessment period” (s. 152(4.2) (but only for individuals and testamentary trusts)).
So, CRA could have let Mr. Radonjic amend his returns but it refused. He asked again (“Second Administrative Review”). CRA still refused, on the basis that his winnings were business income. So, he asked the Federal Court to review CRA’s decision.
If CRA or any other “federal board, commission or other tribunal” makes an unreasonable decision, the person affected can apply to the Federal Court to “set aside [the decision] and refer [it] back for determination in accordance with such directions as [the Court] considers to be appropriate”. (Federal Courts Act (R.S.C., 1985, c. F-7), s. 18.1.)
Generally, the Federal Court may only intervene if it thinks the CRA acted unreasonably and, even then, the Court will usually only send the case back to the CRA to reconsider, as it did in Mr. Radonjic’s case. The Court won’t direct CRA’s decision or force it to allow the late filing or to waive interest or penalty. But often, the Court’s reasons make clear the decision CRA must take. So it was in this case, where Judge Russell’s reasons make it hard to think when a successful poker player would have to report his winnings as taxable income.
Judge Russell agreed with Mr. Radonjic that the CRA was unreasonable in refusing the late amendments for the following reasons:
(a) The Minister relied on past success to conclude that Mr. Radonjic had a “reasonable expectation of profit”. (Often, where a taxpayer loses in gambling, the Minister looks back and concludes that he could not have had a reasonable expectation of profit. But the Federal Court says that past performance should not be a guide);
“(b) The Minister concludes that the Applicant had a “system” but does not provide any meaningful explanation of what this system might be. It looks as though the Applicant’s simply playing online poker on his computer on an intense and regular basis over an extended period of time is equated with a system.”
“(c) … Everyone who competes in online poker wants to win and will attempt to narrow the odds in their favour in any way they can. But this does not mean they have devised a system if they do win; chance remains the predominant factor in whether they win or lose, as it did on the facts of this case;”
“(d) The method of payment used was no indicator of a “system” or a reasonable expectation of profits. Everyone who wants to pay has to set up some kind of payment system, so this cannot be an indication of running a business. Paypal accounts are used in a variety of contexts where payment is required online;”
“(e) The Applicant’s cutting back on other work and income while he won at poker is also no indicator of a system or running a business with a reasonable expectation of profit. A large gambling win could result in the winner quitting work entirely, but that would not mean he or she had been running a business.”
“(g) There is no indication that the monitors or other equipment which the Applicant used to gamble in this case were anything special or that the Applicant had made capital investments for the purpose of running a business or earning a profit;” (One could say of very many businesses that there is nothing special about the equipment they use — such as phones, computers, etc.)
“(h) The Applicant’s record keeping was minimal and entirely consistent with the need to prove the source of funds for tax purposes. They were not business records in any meaningful way, and did not even correlate to CRA’s own criteria.” (Para. 52.)
Given the facts in this case and the judge’s analysis of them, one might well conclude that a poker player need never report his winnings as taxable income in Canada. The Court’s analysis in this case seems extreme and CRA may try to confine it to its facts.
Note also that the same reasoning would mean that a poker player who loses might never be able to claim his losses against other income sources: See Cohen v Canada, 2011 TCC 262.
Perhaps if the player has employees or partners working at computers, executing his instructions or following a system, that degree of activity might be enough for the Court to say there is a business.
In the U.S., where gambling income is taxable anyway and the issue is more the legality of online poker, the Poker Players Alliance (PPA) argues that poker is a game of skill, not chance, a view that would support CRA’s position in cases like these. See “Games of Skill and Games of Chance: Poker as a Game of Skill – PPA (2009)”.
See Radonjic v .Canada Revenue Agency, (2013 FC Russell) https://www.facebook.com/v2.6/plugins/like.php?action=like&app_id=190291501407&channel=https%3A%2F%2Fstaticxx.facebook.com%2Fx%2Fconnect%2Fxd_arbiter%2F%3Fversion%3D46%23cb%3Df1aca9c625a8b18%26domain%3Dwww.yasny.ca%26is_canvas%3Dfalse%26origin%3Dhttps%253A%252F%252Fwww.yasny.ca%252Ff301543e2dfb0f%26relation%3Dparent.parent&container_width=0&href=http%3A%2F%2Fyasny.ca%2F2%2Fpost%2F2013%2F09%2Fradonjic-v-canada-revenue-agency-2013-fc-russell-even-if-you-play-poker-full-time-your-winnings-may-not-be-taxable.html&layout=button_count&locale=en_US&sdk=joey&share=false&show_faces=false&width=90
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Bandula v. The Queen, (2013 TCC Bocock) — Drywall contractor escapes gross negligence penalties despite admitted under-reporting
20/9/2013
Mr. Bandula, was a drywall contractor who immigrated to Canada in 2000. The reassessments related to his 2002 and 2003 tax years and GST reporting periods. Justice Bocock didn’t believe the contractor’s excuses for under-reporting or his claims to extra, unreceipted business expenses. (CRA had allowed unvouchered business expenses and, because the Appellant couldn’t show which of his claims were beyond those allowed, the TCC refused to allow any of them: para. 33.)
The only issue left was whether gross negligence penalties ought to apply. Justice Bocock said they should not, largely because: (a) Mr. Bandula was a new immigrant in 2002-2003 and didn’t understand Canada’s tax system well and (b) (more important) because CRA had dealt with him in English, though his English was obviously poor. (Para. 44.)
The result was generous to Mr. Bandula: He had admitted to telling his accountant (who was not a witness) that the excesses were gifts from family, when the accountant questioned unexplained bank deposits. Mr. Bandula abandoned that claim in the TCC, though. (Para. 24.) On its own, that fact suggests a deliberate attempt to mislead when he filed (through his accountant) his tax returns.
Though Mr. Bandula won gross negligence relief in Tax Court, this is an expensive, slow and unreliable way to resolve a tax problem. (Initially, CRA had charged Mr. Bandula with tax evasion. So, the problem would have been even more complicated, costly and uncomfortable for him.) His accountant had warned him about unvouchered expenses and, obviously, had suspicions of under-reported revenue. Given that Mr. Bandula was a contractor, his risk of audit was higher than average, in part because major construction clients will demand invoices and will file T5018s reporting their payments to CRA. (Clients had filed T5018s for payments to Mr. Bandula (para. 17) and that may easily be how CRA found him.)
The higher lesson from this decision seems this: Contractors are ideal candidates for CRA’s Voluntary Disclosure Program. And accountants who have clients in that industry whom they suspect of under-reporting would do a good service by warning their clients of the risks and alerting them to the benefits of the VDP.
See Bandula v. The Queen, (2013 TCC Bocock) https://www.facebook.com/v2.6/plugins/like.php?action=like&app_id=190291501407&channel=https%3A%2F%2Fstaticxx.facebook.com%2Fx%2Fconnect%2Fxd_arbiter%2F%3Fversion%3D46%23cb%3Df3daf4c23cd74a%26domain%3Dwww.yasny.ca%26is_canvas%3Dfalse%26origin%3Dhttps%253A%252F%252Fwww.yasny.ca%252Ff301543e2dfb0f%26relation%3Dparent.parent&container_width=0&href=http%3A%2F%2Fyasny.ca%2F2%2Fpost%2F2013%2F09%2Fbandula-v-the-queen-2013-tcc-bocock-drywall-contractor-escapes-gross-negligence-penalties-despite-admitted-under-reporting.html&layout=button_count&locale=en_US&sdk=joey&share=false&show_faces=false&width=90
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Rizak v. M.N.R., (2013 TCC, Graham) — a university graduate research student’s pay is employment income for EI benefits
19/9/2013
In Employment Insurance cases, like this one, either the business denies that the worker was an employee (to avoid EI and CPP payments) or the worker claims to be an employee so that he can have EI benefits. Here, the worker, Mr. Rizak, claimed he was a university employee when he worked as a graduate research assistant in neuroscience at the University of British Columbia. The TCC agreed.
Businesses often like to hire workers as independent contractors, to save paying CPP contributions or EI premiums. The savings aren’t always greater than the costs, though. For example, independent contractors earning more than $30,000 each year must collect GST/HST and some businesses, such as insurers or banks, may not be able to recover the HST paid. Because CPP and EI amounts are capped, unrecoverable GST/HST costs can exceed the savings from not paying CPP or EI. For the worker, independent contractor status can add administrative expenses, such as extra tax reporting (e.g., for GST/HST) and CPP costs. But because the EI Act now allows self-employed persons to elect to have employment insurance, “independent contractor” status may not have the same disadvantages for workers that it once had. (See Part VII.1 of the Employment Insurance Act: Benefits for Self-Employed Persons.)
Though the tax courts repeat the same criteria (such as degree of control and ownership of tools) for deciding whether a worker is an employee or independent contractor, the decisions seem random. It is impossible to predict how a court might classify a worker, even where the parties agree on how they want to treat their relationship.
In this case, the CRA had agreed with UBC that the worker was not paid as an employee. Justice Graham reviewed tax cases in which the Tax Court came to conflicting decisions on the employment status of university students and postdoctoral fellows. He decided that the normal four-factor tests that courts apply is not helpful for University stipends:
“‘The question at issue is not whether the agreement between the parties is a contract of employment or a contract for services (employee versus independent contractor status), but whether it is a contract of employment or an agreement of financial assistance regarding continuing studies (employee versus student or postgraduate student status).’” (Para. 33.)
Even so, Graham J. said that, had he applied the normal tests, he would have found Mr. Rizak was an employee, not an independent contractor.
It weakened the University’s position that it had agreed that Mr. Rizak was an “employee” during periods before and after his time as a graduate student. (Para. 38.)
In a very interesting twist at the end of the decision, Justice Graham spoke about the negative income tax effects of Mr. Rizak’s success. Though he won his claim for EI benefits, he lost on the income tax issue, for himself and for other students. (Part of his income was for the 2010 tax year, which CRA could still reassess.) As the judge noted: “Generally speaking, scholarship and fellowship payments received by graduate students are not taxable under the Income Tax Act“. (See ITA s. 56(3) and paras. 43-44 of the decision.) Employment income, though, is taxable. Mr. Rizak won because Justice Graham agreed that the amount was not a fellowship stipend and that he was paid, rather, as an employee. So, he should have paid income tax on what he called his “salary” — but he had not reported it as employment income in his tax return.
See Rizak v. MNR (2013 TCC, Graham)https://www.facebook.com/v2.6/plugins/like.php?action=like&app_id=190291501407&channel=https%3A%2F%2Fstaticxx.facebook.com%2Fx%2Fconnect%2Fxd_arbiter%2F%3Fversion%3D46%23cb%3Df23ca19c862f8f4%26domain%3Dwww.yasny.ca%26is_canvas%3Dfalse%26origin%3Dhttps%253A%252F%252Fwww.yasny.ca%252Ff301543e2dfb0f%26relation%3Dparent.parent&container_width=0&href=http%3A%2F%2Fyasny.ca%2F2%2Fpost%2F2013%2F09%2Frizak-v-mnr-2013-tcc-graham-a-university-graduate-student-is-an-employee-for-ei-benefits.html&layout=button_count&locale=en_US&sdk=joey&share=false&show_faces=false&width=90
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2411-3250 Québec Inc. c. La Reine, (2013 TCC, Lamarre) — Claiming GST input tax credits? You must make sure your supplier is registered & have proper receipts
This was another of many cases from Quebec in which CRA, through Revenu Quebec, denies a company the input tax credits it claimed on a return. Here, Justice Lamarre said the appellant, a grocery store, was not entitled to the ITCs it claimed and must pay gross negligence penalties.
In these schemes, a GST registrant contracts with a third party for “services” and claims input tax credits for GST paid on the bills. But the services are not really provided or the supplier is not registered and the GST supposedly paid never reaches CRA (or Revenu Quebec). (For a recent and similar case, see Entreprises DRF Inc. c. La Reine, (2013 TCC, Angers).)
In this case, the grocery store, which had used the same employees for 20 years, contracted with a company that pretended to be an employment agency. The agency pretended to hire the grocery store’s employees and contract their services back to the grocery store. The agency wasn’t registered for GST and no GST ever reached CRA. And, perhaps more damaging for credibility, the agency made no profit on the service. (Para. 62.)
“[57] Now, the evidence is very clear that [the agency] never supplied nor engaged any employee to the appellant. All the employees who worked for the grocery were hired by Mr. Neveu [the owner of the grocery] directly at Laverlochere, without ever going through [the agency].” [My translation from the French.]
This case offers an interesting reminder for Tax Court appeals: To help its case, the appellant gave the court copies of contracts between the grocery store employees and the employment agency. Justice Lamarre rejected the evidence, noting that the appellant never showed Revenu Quebec the contracts during the audit or even before the hearing. (Para. 61) The Tax Court rules require a taxpayer to disclose documents it intends to use or risk having the court refuse to allow them as evidence. (See rule 89 of the General Procedure rules. Though there isn’t a similar rule for GST appeals, even without the rule, the Tax Court judges may not believe a document a party introduces late in the dispute process.)
The rules for claiming input tax credits (ITC) are strict. To claim an ITC, you must have receipts or invoices that show, among other things, that the service or goods supplier had a valid GST registration number. If the supplier is a fraud and the number proves false, CRA may deny you the input tax credits, as it has in many cases.
CRA has a webpage that allows you to check the registration status of your suppliers. If you have any doubt about a new supplier, check the GST/HST number it offers you on its invoices. Go to the CRA’s GST/HST Registry.