Commission income earned by life insurance broker was taxable

By Law Times

Taxpayer was life insurance broker employed by G Inc., was majority shareholder of G Inc. and was director and officer. Commissions in respect to any life insurance policies placed through services of taxpayer were paid to, and received by, G Inc. and G Inc. paid salary to taxpayer for services he provided on its behalf. In 2014, taxpayer purchased life insurance policy with benefit amount of $1,000,000 on his own life. Insurer paid first year commission in amount of $20,822.41 to G Inc. and bonus commission of $36,439.22 was paid in respect of policy by C Ltd. to G Inc.. In 2014, G Inc. paid salary of $111,617 to taxpayer and relying on Canada Revenue Agency (CRA) administrative policy, taxpayer deducted from his salary $57,261.53, which represented total of commissions in respect of policy. CRA issued reassessment to disallow deduction of commissions. Taxpayer appealed. Appeal dismissed. Nothing in s. 8 of Income Tax Act permitted taxpayer, in computing his income from employment in 2014, to deduct commissions received by G Inc. in respect of policy. Commission income earned by life insurance broker was taxable. If CRA determined that particular taxpayer did not qualify for favourable treatment set out in CRA’s administrative policy, taxpayer’s appeal could not be decided in manner that was inconsistent with Act. Even if administrative policy could be applied, taxpayer did not come within that policy.

Ghumman v. The Queen (2019), 2019 CarswellNat 2252, 2019 CarswellNat 2324, 2019 TCC 125, 2019 CCI 125, Don R. Sommerfeldt J. (T.C.C. [Informal Procedure]).

Case Law is a weekly summary of notable civil and criminal court decisions by the Supreme Court of Canada, the Federal Court of Canada and all Ontario courts. These cases may be found online in WestlawNext Canada. To subscribe, please visit store.thomsonreuters.ca

Taxpayer was life insurance broker employed by G Inc., was majority shareholder of G Inc. and was director and officer. Commissions in respect to any life insurance policies placed through services of taxpayer were paid to, and received by, G Inc. and G Inc. paid salary to taxpayer for services he provided on its behalf. In 2014, taxpayer purchased life insurance policy with benefit amount of $1,000,000 on his own life. Insurer paid first year commission in amount of $20,822.41 to G Inc. and bonus commission of $36,439.22 was paid in respect of policy by C Ltd. to G Inc.. In 2014, G Inc. paid salary of $111,617 to taxpayer and relying on Canada Revenue Agency (CRA) administrative policy, taxpayer deducted from his salary $57,261.53, which represented total of commissions in respect of policy. CRA issued reassessment to disallow deduction of commissions. Taxpayer appealed. Appeal dismissed. Nothing in s. 8 of Income Tax Act permitted taxpayer, in computing his income from employment in 2014, to deduct commissions received by G Inc. in respect of policy. Commission income earned by life insurance broker was taxable. If CRA determined that particular taxpayer did not qualify for favourable treatment set out in CRA’s administrative policy, taxpayer’s appeal could not be decided in manner that was inconsistent with Act. Even if administrative policy could be applied, taxpayer did not come within that policy.

Ghumman v. The Queen (2019), 2019 CarswellNat 2252, 2019 CarswellNat 2324, 2019 TCC 125, 2019 CCI 125, Don R. Sommerfeldt J. (T.C.C. [Informal Procedure]).

Case Law is a weekly summary of notable civil and criminal court decisions by the Supreme Court of Canada, the Federal Court of Canada and all Ontario courts. These cases may be found online in WestlawNext Canada. To subscribe, please visit store.thomsonreuters.ca

Overpaid workers will only pay back ‘net’ amounts under proposed new tax rules

By Terry Pedwell

THE CANADIAN PRESS

OTTAWA _ The country’s biggest civil-service union declared a victory for its members Tuesday as the Trudeau government moved to change a tax rule that has caused headaches for federal employees overpaid by the problem-plagued civil service pay system.

The Finance Department announced draft legislation that would see overpaid employees  regardless who they work for  required to repay only the amounts deposited into their bank accounts in a prior tax year.

The draft was released shortly before the government also announced it was replacing the top bureaucrat in charge of the buggy Phoenix pay system.

Marie Lemay, whom many frustrated civil servants turned to directly for help in dealing with pay gaffes, was appointed as senior adviser to the secretariat that runs the federal cabinet, the Privy Council Office,  “prior to an upcoming appointment,” the Prime Minister’s Office announced.

Lemay had worked as deputy minister in charge of Phoenix since shortly after the system was launched in the spring of 2016, and was the public face of Phoenix as complaints about paycheques began pouring into her office at Public Services and Procurement Canada.

Many of those complaints involved overpayments to government employees, which were exacerbated by stiffly interpreted federal tax laws.

Under current legislation, any employee who received an overpayment in a previous year was required to pay back the gross amount of the overpayment to their employer, which includes income taxes, Canada Pension Plan contributions and Employment Insurance premiums.

In many cases, the law meant workers were required to pay back to the government hundreds, and even thousands, of dollars they never directly received.

The Public Service Alliance of Canada, which represents the bulk of federal workers, had called on Ottawa to exempt civil servants from the tax law, given the size and complexity of overpayments made through the Phoenix system.

It called the proposed new legislation a “major victory” while lamenting that the move should have been made much sooner.

“We would have preferred to have this legislation tabled years ago, but we’re pleased that it will be retroactive to 2016, the year the Phoenix crisis began,” PSAC national president Chris Aylward said in a statement.

“The government must now move as quickly as possible to implement the legislation.”

Since its launch nearly three years ago, more than half the federal civil service more than 156,000 workers have been overpaid, underpaid or not paid at all through Phoenix.

For many of those who inadvertently received too much pay, returning the money has been a two-pronged nightmare. In many cases, employees were told to keep track of the money, but not to pay it back until later so as to not further burden the pay system.

Those same employees who hadn’t paid back the overpayments until a following tax year were later told they must pay back the amounts deposited to their bank accounts, plus CPP contributions, EI premiums and income taxes that had already been deducted by their employer.

“To alleviate this burden and help affected employees, the Department of Finance Canada is releasing draft legislative proposals that would under certain conditions permit an affected employee to repay to their employer only the net amount of the overpayment received in a previous year, rather than the gross amount,” the department said in a statement Tuesday.

“Under the proposed legislation, the (Canada Revenue Agency) would be able to refund directly to the employer the income tax, CPP, and EI withheld on an overpayment that occurred through a system, administrative, or clerical error. As a result, affected employees who received overpayments through no fault of their own would no longer be responsible for recovering these amounts from the CRA and repaying the gross amount of the overpayment to their employer.”

Even though the draft legislation is only in the proposal stages, the department said public and private-sector employees can apply the new rules to their individual tax situations “immediately” for overpayments made after 2015, and that CRA will process overpayments as if the legislation has already been enacted.

The government’s goal in launching Phoenix in 2016 was to streamline multiple outdated civil service pay systems, and save taxpayers millions of dollars in the process.

But the bungled pay project was estimated by the end of 2018 to have cost $1.1 billion, including its implementation and efforts aimed at stabilizing it that have continued into this year.

Here’s how CPP, EI and small business taxes are changing in 2019

Global News: By 

Your paycheque might see an adjustment come 2019 as new Canada Pension Plan (CPP) and Employment Insurance (EI) rates kick in.

For many Canadians, the changes will be slight, considering CPP’s cut is rising while EI is falling.

Small business owners will see additional changes: the tax rate is set to fall, but passive investment income will be taxed more heavily.

Here’s a breakdown of some of Canada’s 2019 tax changes.

EI premium rate lowers thanks to strong employment numbers

Canada’s unemployment rate has dropped to 40-year lows, resulting in reduced demand for EI and allowing Ottawa to shrink the amount it collects to keep the fund afloat.

EI rates that employees pay are dropping by four cents per $100 of insurable earnings from $1.66 to $1.62. In Quebec, the rates are dropping five cents per $100 of insurable earnings from $1.30 to $1.25.

The amount employers contribute, which is 1.4 times what employees pay, will also be reduced.

The changes, announced in September, go into effect Jan. 1.

“This will be the lowest EI premium rate since 1980 — and for most Canadian workers, the lowest they have paid since entering the workforce,” Finance Minister Bill Morneau and Social Development Minister Jean-Yves Duclos said in a joint statement.

The EI rate is set by a commission that has been in place for 75 years. The rate is adjusted according to a seven-year break-even mechanism that aims to provide stable rates as well as to ensure the premium collected goes only to EI purposes.

CPP set to increase annually 

The CPP is being “gradually enhanced” over the next seven years by way of increased contributions — meaning you gradually pay more now in order to get more later on. The overall aim is to grow the amount you will receive to one-third of average work earnings, up from a quarter.

In 2019, the amount you contribute will increase to 5.1 per cent, up from 4.95 per cent, for earnings between $3,500 and $57,400. These contributions are matched by your employer.

Here’s how much that works out to, according to a Canadian Federation of Independent Business (CFIB) estimate:

  • Someone earning $27,450 will pay $36 more annually,
  • Someone earning $55,900 will pay $79 more annually,
  • Someone earning $85,000 will pay $83 more annually.

The changes will only impact those currently paying into CPP. Eligibility for CPP is not impacted, nor is the amount people are currently receiving.

You can see how much EI and CPP you are likely to pay by using the Government of Canada’s online payroll deductions calculator.

The EI and CPP changes will likely make the biggest impact on small businesses and self-employed Canadians, says Monique Moreau, VP of national affairs at the CFIB.

“What the Canadian may see on their pay stub may not seem like a lot to them but they’re not seeing the other end of it, which is what their employer pays on their behalf,” said Moreau.

“You have to keep in mind that anyone who is self-employed actually pays it twice…so those business owners are going to be feeling it even more.”

Small business tax changes

Small business owners are set to get a tax break this year by way of a reduced overall tax rate, falling to nine per cent from 10 per cent.

This will result in annual savings of $7,500 for small businesses, according to CFIB.

Meanwhile, a businesses’ income over $50,000 from passive investments such as real estate, stocks and bonds will be hit with higher taxes. The more a business holds, the more their small business deduction limit will be reduced.

With these changes, along with new carbon taxes, Moreau predicts that it’ll be over a year from now when business owners find themselves “holding the bag” over these “complicated tax changes.”

“We know that the average small business owner doesn’t know a lot about these changes,” said Moreau.

“While it may not impact a whole many of them, the government hasn’t done a particularly great job in communicating what those changes mean to business owners who do use it.”

Warning: Don’t be fooled by the working income tax benefit tax scheme

 The Canada Revenue Agency (CRA) is warning Canadians about getting involved in schemes where promoters, usually tax representatives or tax preparers, are claiming they can get a tax refund for participants from the working income tax benefit (WITB) even if they have no work income.

Setting the record straight: What is the working income tax benefit?

The working income tax benefit (WITB) is a refundable tax credit intended to give tax relief for eligible low-income individuals and families who are currently in the workforce. It also encourages Canadians to enter the workforce. You can only claim the WITB if you are earning income from working in Canada.

Be careful—here’s how the scheme works:

Here is what to watch for in the WITB scheme:

  • The promoter, who is usually a tax preparer or tax professional, will tell you they can increase your tax refund.
  • They will tell you that they will prepare a T4 (a T4 is a slip that shows your work earnings, or employment income) in your name and they will list an income amount in box 14 of the slip that will maximize your tax refund.
    • If you have not worked as an employee in Canada then you should not have a T4 slip with your name on it.Reporting this amount may result in serious consequences to you.
  • By law, when preparing a T4, an employer must subtract certain amounts from your work earnings. These include deductions such as: income tax and mandatory employee contributions to certain programs (Employment Insurance (EI), the Canadian Pension Plan (CPP) and the Quebec Pension Plan (QPP)). The promoter will tell you that you must pay them the tax deductions they noted on the T4 slip as well as a fee for them completing your tax return. A legitimate tax preparer will never ask you to pay back deductions and will not prepare a T4 for you when you did not earn income in Canada

A good rule of thumb – If something sounds too good to be true, it most likely is.

What are the consequences to you if you participate in these schemes and what can you do?

The WITB is not intended for individuals who have no work income. If someone claims it is, they are misleading you and there may be serious consequences.

Those who choose to participate in these schemes and those who promote them face serious consequences, including penalties, court fines, and even jail time.

People who avoid or evade taxes take resources away from social programs that all Canadians benefit from.

All taxpayers, including those who pay tax experts to prepare their taxes, are legally responsible for the accuracy of their tax returns.

The CRA encourages all Canadians to seek an independent second opinion from a reputable tax or legal professional on important tax and legal matters.

If you suspect someone of promoting or participating in an abusive tax scheme, you can report it at Canada.ca/taxes-leads or by calling the Leads program at 1-866-809-6841. You may give information anonymously.

For more information on tax schemes, please visit Canada.ca/tax-schemes

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SOURCE Canada Revenue Agency

Doing taxes used to be an even bigger pain

By Shirley Tillotson, Inglis Professor at University of King’s College, Professor of Canadian History (Dalhousie University, retired), Dalhousie University

THE CANADIAN PRESS

This article was originally published on The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts. Disclosure information is available on the original site.

___

Author: Shirley Tillotson, Inglis Professor at University of King’s College, Professor of Canadian History (Dalhousie University, retired), Dalhousie University

If your income is mainly a paycheque, filing a Canadian income tax return these days is pretty easy. And that’s no accident.

Smart innovations in tax administration in the 1950s built a slick collection system that worked. Except, of course, for small business. And, for the moment, let’s not speak of the many avenues of escape that capital income has enjoyed.

But taxing employees? We figured out how to do that pretty painlessly almost 70 years ago. Surely we can do the same for more tax filers today.

When federal taxation of wages and small salaries was launched during the Second World War, there was incomprehension, chaos and widespread resentment. Tax protest was part of several strikes by organized labour in 1941 and 1942. Non-union workers refused overtime for tax reasons, a real problem for wartime industries.

The new income tax law left lower-income workers no wiggle room in their household budgets.

My book, “Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy,” contains examples of protest letters that poured in to the federal Finance Department from people like Miss W.E. Drummond. She was a white-collar employee earning a decent wage. She detailed every item in her weekly budget and asked: “What am I to do, drop this Insurance for my old age? Let my home people starve or go on relief?”

Tax forms were nightmarish

To complaints like hers, James Lorimer Ilsley, then the finance minister, responded with concessions such as allowing a tax credit for some insurance premiums.

But concessions made another tax problem worse: The forms. Their format was unchanged from the 1920s and 1930s, when federal income taxpayers were mostly professional men or business owners. Expressed in dense legalese, they were typeset mostly in six and seven point. If Miss Drummond wanted to know whether her insurance payments were deductible, she had to wade through 111 words of lawyer-ly instruction, 62 of them in tiny print, the rest of them smaller.

Confronted with these forms, semi-literate fishermen in coastal British Columbia and barely educated millworkers in New Brunswick (or their often equally ill-equipped employers) struggled to understand tax terms like “married status.”

“Married status” would lower their taxes, and unmarried people could claim it. But first they’d have to figure out if they and a “wholly dependent relative” lived in a “self-contained domestic establishment… containing at least two bedrooms in which residence amongst other things the taxpayer as a general rule sleeps and has his meals prepared and served.” And served?!

‘Tax conscious’

Dreadfully inaccessible forms were not the only source of pain for wage-earning taxpayers.

Some people thought that paying income tax was meant to hurt, at least a little.

Former Prime Minister Arthur Meighen made this view clear in the 1939 Senate debate on war income taxation. Exemption levels should be so low that almost every earner would be an income taxpayer. Only if they personally felt a pinch in the pocketbook would voters be “tax conscious.” Only then would they care about “preventing waste in government.”

Meighen’s wish came true. Not only did the wartime government lower exemptions in 1941, and drastically so in 1942, they also told the nation’s payroll clerks to clip from paycheques only 95 per cent of the amount that would likely show up in employees’ year-end calculations of tax payable.

That way, at tax filing time, most employees would still owe income tax, beyond what the payroll clerk had been collecting all year. Pretty much everyone working for a wage would have to actually fork over some cash with their return.

To be fair, this was a way of avoiding any risk of over-deducting. But it also made taxpayers feel the pain of payment _ to good moral effect, some thought.

Debts went unpaid

By 1951, however, tax administrators had discovered a downside to this exercise in moral instruction. Every year, hundreds of thousands of small tax liabilities went unpaid. Collecting those debts placed the federal government in the role of big, bad collection agency garnishing some pretty small wages.

The solution: Abandon the practice of payroll clerks collecting throughout the year only 95 per cent of tax owing. Tell them to deduct 100 per cent instead.

No more making tax debtors out of struggling wage earners. Instead, most employee tax returns would produce _ yippee! _ a refund.

In the spring of 1952, Canadians rushed enthusiastically to file their tax returns (or so it was reported in the Toronto Daily Star).

But the Globe and Mail’s editors took a darker view. The revenue authority was collecting more tax than was owed. The collections were therefore “illegal,” “contrary to the principle underlying our constitution,” and “stupid.”

Why “stupid?” As the editors of the Winnipeg Tribune argued, if taxpayers didn’t actually pay cash at tax time, they might forget that “government was spending a great deal of money.” They’d no longer be tax conscious.

Built revenue for pensions and medicare

For the remainder of the Liberals’ term under Louis St. Laurent, opposition members like Waldo Monteith pushed this point. But the system continued. It built revenue for the welfare state in much the same way that personal savings build when you set up a monthly deduction.

The over-payment method was not the only innovation in tax administration. For the 1948 tax year, a short T1 form was introduced. Pamphlet-sized and legible, it was clearly the work of a skilled designer. Non-lawyers could read it without weeping.

These and other innovations have made reporting income and claiming credits on employment income relatively easy. Perhaps we’re now at the point where many of us the 57 per cent of filers with income primarily from employment would be well-served by a more automated tax assessment. The ritual of completing even a simplified form may be just another exercise in tax consciousness, a flogging of the form-phobic that only inflames anti-tax feeling.

For the other 43 per cent, and especially for small businesses where tax compliance competes painfully with other uses of time and money, the lesson of the 1950s is that tax administration matters. As Canada’s auditor general has recently reminded us, when the revenue agency is underfunded, service shrivels.

We have seen the current government increase CRA funding to improve services to small business in particular and taxpayers generally. It’s too soon to tell (from publicly available information, at least) what impact this will have.

But making employees’ tax compliance easy helped make personal income tax the workhorse of Canada’s taxation system. Now we need to do the same for small business.

We should consider simplifying the law, of course. But even if legal complexity is required for fairness, as it often is, skilled administration can make paying taxes much less painful. And that might protect the revenue  as well as serving the taxpayer.

 

Canada: Creative Uses of Life Insurance, Split Beneficiary Planning – ILScorp.com

Get Started: 5 tips for last minute business tax filers

By Joyce M. Rosenberg

THE ASSOCIATED PRESS

NEW YORK _ AVOIDING LAST-MINUTE TAX MISTAKES

Business owners can find it a tall order to complete their tax returns while also running their companies. When an owner is distracted, or not paying close attention to IRS rules, that’s when mistakes happen. Some of the common ones to avoid:

_If you’re a freelancer or independent contractor, make sure you have all the 1099 forms you need from people or companies you’ve worked for. If you file your return and you’re missing any of your 1099s, you’ll be hearing from the IRS. The government cross-checks the 1099 copies it gets with the amount of income you report, and if there’s a discrepancy, the IRS will want to know why.

_If your business is a partnership, be sure the income and deductions reported to the IRS on your firm’s Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., matches what you report on your Form 1040. If you find an error on the K-1, make sure the form is corrected before you file your return.

_If you’re deducting the cost of business meals and entertainment, you can claim only half the amount you spent.

_If you want to take a deduction for a home office, you must have been using the office exclusively and regularly as your principal place of business. If the office is a desk in the corner of your family room, it’s not likely to pass muster with the IRS.

_If you drive your car for business and personal use, make sure you get as big a deduction as the law allows. The IRS gives you two choices; the first is a standard deduction of 53.5 cents per mile the car was driven for business. The second alternative is a portion of expenses like gas, insurance, lease payments and maintenance that is prorated to the amount the car was used for business. You should calculate your costs using both methods to be sure you get the biggest deduction allowable.

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