Canadian residents pay income tax on their worldwide income. In an effort to crack down on unreported offshore income, the Canada Revenue Agency (the “CRA”) recently announced that it will start a cross-border investigation in the United States.

The investigation will look through the past six years’ worth of real estate transactions, from 2014 to 2020, in search of any American “real estate and real property data where a Canadian resident is the owner or party to the purchase, sale or transfer.” CRA will seek information such as municipal addresses, owner names, square footage, sales histories, and property tax assessments.

CRA said in its notice, titled Bulk United States Real Property Data Re: Canadian Residents, that “[t]his information will enhance the Agency’s ability to administer tax programs and to enhance the various tax Acts in order to protect Canada’s revenue base and to support the Agency’s business and research processes.”

Lost tax revenue in the real estate sector has been a key issue for CRA. CRA estimates that the amount of unpaid taxes in the real estate sector is in excess of $1 billion. As we discussed in our previous blog post, CRA’s $1 Billion Real Estate Nut: Tough to Crack, CRA has become increasingly aggressive in its real estate audits in the last five years.

In its endeavour to identify and tax Canadians’ worldwide income, CRA has authority, through Canada’s tax treaty with the US, to seek assistance from our neighbour south of the border.

Canadian taxpayers who are ultimately discovered and reassessed as a result of this upcoming investigation can face significant penalties and interest. For instance, a taxpayer who has knowingly failed to disclose foreign property worth over $100,000 on a T1135 form may be subject to a penalty equal to 5% of the cost of that property, if the form is overdue by more than 24 months. These penalties can accumulate quickly if the failure to file, for example a T1135, occurred for a number of years.

Concerned taxpayers with unreported income may consider proactively disclosing their information to the CRA before any reassessment, through the CRA’s Voluntary Disclosure Program.

That program has two tracks: (1) the General Program and (2) the Limited Program. The General Program provides greater relief from penalties, interest, and criminal prosecution. The Limited Program provides limited relief where there is an element of intentional conduct on the part of the taxpayer. Taxpayers will not face criminal prosecution nor be charged gross negligence penalties, but will be charged other penalties and interest.

CRA considers several factors in deciding which of the two tracks is suitable, including whether the disclosure was only made after a CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project).

Accordingly, now that CRA’s announcement has been made about its US investigation, voluntary disclosure applications regarding real estate in the US may be caught under the Limited Program.

Whether you are seeking proactive assistance in filing a voluntary disclosure with respect to unreported income or property outside of Canada or if you have already been contacted by CRA’s audit division, the specialists at TaxChambers LLP can help.

David Piccolo
david.piccolo@taxchambers.ca

Jessica Bishara
jessica.bishara@taxchambers.ca

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Michael Woods was interviewed with respect to China’s recent expression of interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The article can be found at this link:

https://www.scmp.com/economy/china-economy/article/3092143/chinas-interest-trans-pacific-trade-deal-met-scepticism-those

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CUSMA/USMCA will come into force on July 1, 2020, at which time increased and more complex Regional Value Content (RVC) requirements for both vehicles and automotive parts will be effective.  The RVC for passenger vehicles and lights trucks will increase to 66% on July 1 and for heavy trucks, it will be 60%.  The chart below summarizes the transition of those requirements to their final RVC of 75% and 70%, respectively.

Similarly, the regional value content requirements (RVC) for automotive parts will increase, but determining the applicable RVC for a particular part will be more complex.  The RVC for a part will depend not only on its description and tariff classification, but also on how it is used and into which of the parts categories it fits.  To qualify as originating, some parts may require a change in tariff classification requirement, an RVC or both.  Where a part must satisfy an RVC requirement, the following chart generally describes the RVC that will apply following the applicable transition periods, based on the category of part and the type of vehicle into which it will be incorporated.  The transition period for the listed parts categories for use in passenger vehicles and light trucks is 3 years, ending July 1, 2023.  For heavy trucks, the transition period will end on July 1, 2027.  The higher RVC for the listed engines and gear boxes incorporated into Other Vehicles (e.g. ambulances, motor homes, vehicles for the transport of more than 15 persons, etc.) kicks in immediately on July 1, 2020.

Detailed descriptions of the Parts Categories can be found in Tables A.1 – G of the Uniform Regulations . The Uniform Regulations were posted on June 3, 2020 on the USTR website and, as of June 28, remain subject to legal review and authentication.

Most vehicle producers also face new certification requirements in the form of:

1. Minimum Steel purchase requirements where 70% of corporate purchases must be originating;
2. Minimum Aluminum purchase requirements where 70% of corporate purchases must be originating; and
3. Minimum Labour Value Content requirements where a certain minimum percentage of the vehicle must be produced using high-wage labour.

The detailed requirements of these three requirements remain somewhat unclear, but it is possible, if not likely, that vehicle producers will look to their auto parts suppliers for information that will support the vehicle producer’s certifications of compliance.  While the U.S. Government, as part of its Updated Interim Implementing Instructions (June 16, 2020), has issued non-binding guidance on their intended application of certain of these requirements, further guidance has not yet been provided by the Canadian Government.

We will continue to monitor for updates.  Please do not hesitate to contact me if you would like further information, training, or other support to implement the new CUSMA/USMCA requirements.  I can be reached at (416) 350-1234 or at heather@lexsage.com.

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The Canada-United States-Mexico Agreement (CUSMA or USMCA) will introduce new and complex requirements for the automotive industry.  Not only will vehicle producers face increased Regional Value Content requirements starting July 1, 2020, but they will be required to meet the following requirements:

1. minimum purchase requirements for North American steel and aluminum;
2. labour value content requirements that at lease a certain portion of each vehicle be produced using high-wage labour (US $16/C $20.88 average wage rate); and
3. certain parts (Super Core Parts) incorporated into a vehicle must be originating.

Both the CUSMA/USMCA Uniform Regulations posted on June 3, 2020 and the non-binding guidance issued by the U.S. Customs Authority (CBP)  in the form of Interim Implementing Instructions have started to provide some clarification regarding how the new requirements will work, at least from the U.S. perspective.  However, the Uniform Regulations are not yet final.  The posted version includes the following statement: “Subject to Legal Review in English, Spanish and French for Accuracy, Clarity and Consistency Subject to Authentication of English, Spanish and French Versions”.  We anticipate that the final Uniform Regulations will be published on or before July 1.

While Canada has provided helpful clarification on the new CUSMA certification of origin and certain other import requirements, there does not appear to be much information on their CUSMA Webpage regarding implementation of the new automotive rules.  There remain questions about what is required under the new automotive rules, including what will be required from automotive parts makers to support a vehicle producer’s Labour Value Content certification.

The updated version of the U.S. issued Interim Implementing Instructions provides the following direction:

1. U.S. Customs & Border Protection (CBP) understands that the trade may need time to adjust business practices to comply with the new requirements under the USMCA (CUSMA), particularly relating to the preferential tariff treatment of goods. The instructions go on to state that during the first six months after entry into force, CBP will focus on supporting the trade’s efforts to fully comply with the USMCA requirements, including providing webinars and other outreach efforts to educate the trade;
2. Importantly, it states that Importers are required to exercise reasonable care when making a claim under USMCA (CUSMA), including ensuring that they are in possession of a complete and valid certification of origin at the time of making a claim and meeting all recordkeeping obligations;
3. However, the instructions go on to provide that In order to provide the trade sufficient time to adjust to the new requirements and in consideration of the business process changes necessary to achieve full compliance, CBP may in appropriate cases show restraint in enforcement during the six-month period after USMCA’s entry-into-force.  Note that it does not say that the RVC and certification of origin requirements will be delayed;
4. In connection with a vehicle producer’s requirement to meet minimum Labour Value Content requirements it states that vehicle producers will be required to submit details about their auto parts suppliers (including the average hourly wage rate), if they rely on that supplier to meet the Labour Value Content requirement.  The auto parts industry, wanting to support their vehicle producing customers, may find this requirement quite challenging; and
5. Automotive producers, exporters, and importers will be allowed until December 31, 2020 to obtain and submit necessary certification and documentation to support their Labour Value Content certification, steel certification, and aluminum certification for passenger vehicles, light trucks, and heavy trucks.

We expect to see final Uniform Regulations and a further updated CBP Interim Implementing Instructions before July 1 and with just over a week before CUSMA/USMCA comes into effect, we will continue to watch for developments and clarifications.

Please do not hesitate to contact Heather Innes (416) 350-1234 if you have questions or would like assistance managing any of these requirements.

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The Canada-United States-Mexico Agreement (CUSMA), also referred to as the United States-Canada-Mexico Agreement (USMCA), comes into effect on July 1, 2020.  Are you ready?

The full CUSMA Agreement was signed in November of 2018, and later amended in December 2019.  In April of this year each of the three parties notified that they had completed their respective ratification processes.  This meant that the agreement could be implemented on July 1.

The CUSMA Uniform Regulations containing important clarifying details, were posted by the United States on June 3 with the qualifier that they remain subject to legal review and authentication by each of the three countries. The U.S. Customs and Border Protection posted non-binding guidance in the form of Interim Implementing Instructions that were updated on    June 16 (“CBP Implementing Instructions”). The CBP Implementing Instructions provide insight as to how the U.S. intends to implement many of the CUSMA requirements.  There were some surprising interpretations regarding the Labour Content Value requirement for the auto industry.  Similar guidance from the Canadian government, particularly on some of the more complex automotive rules has not been published.

All said, we are faced with little time to implement some complex, and in some instances, unclear, requirements to ensure that goods continue to enjoy preferential duty treatment when exported/imported across North America.

CUSMA introduces many changes to the rules for securing preferential duty treatment when your parts, material inputs and finished products cross a North American border. CUSMA is NOT NAFTA and having a NAFTA process and NAFTA certificates of origin will not be enough to secure and support duty free treatment for goods that are imported/exported in North America.  If your products or production inputs don’t meet the CUSMA origin requirements, or if you don’t secure or are not able to provide the required CUSMA certification of origin, your products may be subjected to duties.

For many industries, the rules of origin and the methods of qualifying are similar to those under NAFTA.  However, for others, such as the automotive and textile industries, the rules have changed and compliance with the new rules will require a detailed reassessment of the goods that you export to customers in the United States and/or Mexico.

For all industries, the certification process has changed, and CUSMA certifications of origin will be required to support your claim for CUSMA preferential tariff treatment.  As of July 1, 2020, NAFTA certificates of origin will no longer qualify.  Nor will NAFTA advanced rulings remain valid for imports/exports made on or after July 1.

With little time to prepare for CUSMA, many organizations are left scrambling.  With the July 1 entry date fast approaching, here are some suggestions:

1. Assign and train designated individuals, including a CUSMA Lead within your organization to organize, complete and be accountable for product assessments and CUSMA certifications of origin;
2. Complete an inventory and detailed CUSMA assessment of your current and future product programs. To effectively conduct your assessment you need to: (i) start with the correct HS tariff codes; (ii) collect complete CUSMA based information from your own suppliers to support your review; (iii) ensure that you are working with the appropriate CUSMA product rule; and (iv) ensure that your calculations comply with detailed CUSMA rules;
3. Address shortfalls where your products don’t meet the CUSMA origin requirements. If your customers demand CUSMA originating goods and your goods don’t qualify, you risk losing critical business.  If your products don’t meet the requirements, establish a process that includes coordination with your Legal and Customs teams to identify options to attain qualifying status;
4. Complete your CUSMA certifications of origin. These are not NAFTA certificates of origin and while CUSMA does not require a specific format, it does require the inclusion of certain information;
5. Ensure that your document systems and retention processes meet the CUSMA documentary support and retention requirements; and
6. When in doubt, seek an Advanced Ruling: The CUSMA rules are complex and, in some instances, unclear.  If your organization is not certain that your good meets the CUSMA origin qualifying requirements, work with your Legal team to seek an Advanced Ruling.

We continue to monitor the implementation of CUSMA and expect further clarification from both the Canadian and U.S. governments.

Should you wish further information or assistance for your organization, please don’t hesitate to reach out to Heather Innes at (416) 350-1234 or heather@lexsage.com.

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On May 20, 2020, Prince Edward Island’s Premier, Dennis King, announced that the province will begin the approval process for seasonal residents starting on June 1, 2020. In order to be approved, seasonal residents must show that they are the owners of the residence in P.E.I., and must also guarantee that they will self-isolate for 14 days.

Members of the NEXUS program must be very cautious when entering P.E.I. as seasonal residents. The CBSA requires that all seasonal residents prepare a list of goods that will remain in Canada. In the past, members of the NEXUS program have had their NEXUS cards revoked because they did not have a complete list of personal effects prepared, and had to go through the appeals process to be reinstated in the NEXUS program.

What do I have to include on my list?

The CBSA explains in Memorandum D2-2-3 that seasonal residents must prepare a detailed list in duplicate of all personal effects that are to be imported, meaning all the personal goods and household goods that will remain in Canada.

The CBSA requires that the list include the make, model, serial numbers (where possible) and approximate value of each item. General household items can be listed in a group with the overall value (e.g., kitchen utensils –$XXX). Seasonal residents can also use the BSF186 form, which can be downloaded here. The CBSA defines “household effects” as furniture and goods that are found in a home, and tools and equipment that are used in the maintenance of a home.

Do construction materials and electrical fixtures count as household effects?

The CBSA does not include construction material, electrical fixtures, or any other goods that are permanently attached or incorporated into a home to be “household effects”. These goods must be declared at the border to the CBSA Officer.

How can I declare goods that are going to be delivered, or brought into Canada later on by my family members?

If some goods are scheduled to be delivered or brought in at a later date, a second list with all “goods to follow” must also be provided to the CBSA. The list of “goods to follow” must be provided when seasonal residents first arrive, despite the fact that the goods are going to be imported at a later date.

What happens if I did not complete my list?

If a seasonal resident has not completed a list, the CBSA may ask that a list be prepared prior to entering Canada. However, NEXUS members should be extremely careful and should always prepare a list prior to arriving at the border in order to avoid jeopardizing their NEXUS status.

For more information, please contact LexSage Professional Corporation at 416-307-4168 or at cyndee@lexsage.com.

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Accounting involves communication and the use of language to convey business information. As with all languages, communication can create misunderstandings if one does not understand the underlying assumptions and principles of language structure.

Bookkeepers keep the financial records of a business enterprise accurate to the penny. Accountants use the bookkeeper’s numbers to produce the enterprise’s financial statements: the income statement, balance sheet and statement of cash flows. Hence, it is understandable that investors and non-accountants consider the reported profits of a business – the “bottom line” of an income statement – to be the last word in financial reporting. But is it?

Click here to continue reading.

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On March 26, 2020, the Canada Border Services Agency (“CBSA”) notified certain importers under verification that the CBSA was temporarily suspending trade compliance activities due to COVID-19 – see The CBSA Temporarily Suspends Trade Compliance Activities due to COVID-19.

On May 19, 2020, importers received an update from the CBSA informing external stakeholders that the suspension has been extended until further notice.  A CBSA verification officer wrote the following in an email:

“The details of this suspension, both in terms of scope and duration is currently being reviewed by NHQ.  For now, we will continue to hold off on trade compliance interactions with stakeholders. The CBSA is reviewing this approach and will have more information in the coming days. For greater clarity, the CBSA is continuing to process drawback claims, applications for the Duties Relief Program, and B2 requests for adjustments, and these are unaffected by this temporary suspension. If your company wishes to continue the verification process, please email me. ”

What this means is that all trade compliance verification (audit) activities with respect to Canadian customs laws (e.g., origin, tariff classification, valuation, etc.) continue to be suspended and no end date to the suspension is being provided.The CBSA verification officers are not being called back to work at this time.

However, this is just a delay in trade compliance verification activities – during the COVID-19 crisis, new trade compliance verification activities will not commence and importers under verification will not be contacted by CBSA compliance officers to provide information to the CBSA. Importers who were under trade compliance verification at the time the temporary suspension started should take the opportunity to continue to gather information requested by the CBSA and should continue to research any issues that may be under verification.

That being said, even though trade compliance verification activities are suspended, importers still must comply with Canada’s import and customs laws. Trade compliance activities actions will start again. Any tariff classification, origin, valuation or other errors made during the COVID-19 temporary shutdown period may be the subject of a future trade compliance verification and enforcement action.

If you have further questions, please do not hesitate to contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

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As part of its response to the COVID-19 outbreak, the Government of Canada has created a number of emergency benefits to assist individuals and businesses through these troubling financial times.  For businesses, the centerpiece of the Government’s response has been two wage subsidies – the Temporary 10% Wage Subsidy and the Canada Emergency Wage Subsidy (CEWS).

The Government originally pegged the cost of the CEWS at $73 billion and with news that the program will be extended into the summer [see: Emergency wage subsidy extending into summer: PM], it appears that the cost of these wage subsidies will exceed $100 billion.

While the Government has focused its resources to ensuring that these benefits are delivered in a timely fashion, it is inevitable that the Government will pivot and focus its resources to ensuring that these benefits were delivered to those who actually qualified for them.  Given the design of the CEWS, any CRA audits into a business’ CEWS application could lead to a number of potential audit trails.

The first potential starting point in an audit is a review of the business’ revenues.  Given that a business is eligible based on a comparison of revenues between two periods – the default comparison being a year-over-year comparison – CRA will look at how a business calculated its qualifying revenue for the two comparison periods.  This could raise a number of topics including income suppression, revenue recognition policies, income versus capital gains characterizations, and pricing between non-arm’s length entities.

Each of these topics could create further follow-up audit issues. For example, any income suppression detected could raise questions as to whether GST/HST has been remitted correctly. Income versus capital gains characterizations could raise questions as to the kinds of deductions the business was permitted to claim.  Pricing issues between non-arm’s length entities create issues as to the reasonableness of deductions claimed within the group.

A second potential starting point in an audit could be a review of the business’ employees.  CRA could look into whether these employees were actually employees and not independent contractors.  CRA could also review how employee benefits, allowances, or deductions were administered to determine if they were treated correctly pursuant to the Income Tax Act.

One final note is that both the CEWS and the Temporary 10% Wage Subsidy are administered through a business’ payroll account.  In the event that an audit creates a liability in the business’ payroll account, corporate directors should also be mindful of their exposure to potential director’s liability under section 227.1 of the Income Tax Act.

Whether you are seeking proactive assistance in determining if your business qualifies for the CEWS or if you fear that you are potentially exposed to an issue on a CRA audit, the specialists at TaxChambers LLP can help.

David Piccolo
david.piccolo@taxchambers.ca

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Canada has indicated that the Canada-U.S. border will remain closed to non-essential travel until June 21, 2020.  “Non-essential” travel includes travel that is considered as tourism or recreational in nature.

The restrictions may be extended again.  On March 21, the restrictions on essential travel across the border were implemented for a 30-day period in an effort to stem the transmission of COVID-19.  The 30-day period was thereafter extended to May 21, 2020. The restriction may be extended again.

That being said, the Canada-U.S. border has remained open to trade in goods and services. The partial closure of the border does not affect essential travel, including truck and rail traffic carrying food, fuel, essential medicines, personal protective equipment, and other goods essential to supply chains.

Individuals who must travel for essential work (e.g., nurses) and for urgent reasons continue to be able to cross the border.  Several categories of people are permitted to travel because they provide critical services, if they have no symptoms. These include people who:

• are making necessary medical deliveries required for patient care, such as:
  • cells;
  • organs;
  • tissues;
  • blood and blood products; and
  • other similar lifesaving human body parts,
• work in the trade and transportation sector who are important for the movement of goods and people, including:
  • truck drivers; and
  • crew on any plane, train or marine vessel,
• cross the border regularly to go to work, including in the health care sector or critical infrastructure workers; or,
• have to cross the border to provide or receive essential services, including emergency responders and personnel providing essential services to Canadians related to the COVID-19 outbreak.

Flights between Canada and the United States still continue, however there are fewer flights per day.

For more information about Canada’s import restrictions, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  There is more information posted on the LexSage website.

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