Spring tax compliance season is upon us and there are changes applicable to a broad range of taxpayers.
As an employer, if you claimed the Temporary Wage Subsidy and have not yet filed form PD27, this form should be filed as soon as possible to avoid penalties for under-withholding on 2020 payroll remittances. Also, T4 Statement of Employment Income filings will be more onerous for 2020, requiring additional breakdowns of amounts in Box 14.
Individual taxpayers who received COVID-19 related benefits from the government in 2020 will have additional slips to report and may find they are required to repay benefits in certain situations or make a tax payment by April 30, 2021.
For trusts, if you have not filed a T3 Trust Return in the past, you may be required to going forward. If this new filing requirement applies, additional information will now be required to be disclosed to CRA in a prescribed format.
New T4 reporting requirements
CRA has introduced new T4 reporting codes, applicable to all employers, to assist CRA with gathering additional information about when employment income was received by employees in 2020. The new reporting may seem innocent but it may prove quite onerous for some employers.
For CRA to ensure that the recipients of the Canada Emergency Response Benefit (CERB) and Canada Emergency Student Benefit (CESB) were entitled to receive these benefits, T4 slips issued to employees and filed with CRA will now be required to detail when remuneration related to employment was paid to an employee.
Furthermore, CRA has indicated it will be using the data obtained in this reporting to ensure Canada Emergency Wage Subsidy (CEWS) amounts received by employers accurately reflect what was paid to their employees. We will no doubt see audits launched as a result of discrepancies.
Previously, when filing a T4, the employer could simply aggregate all amounts paid to an employee in the year, in Box 14.
CRA now requires that employment income and retroactive payments being reported in Box 14 – Total Income, be further broken down to specifically identify remuneration paid in the following CEWS periods:
Code 57: Employment income paid March 15 to May 9 (Period 1 and Period 2)
Code 58: Employment income paid May 10 to July 4 (Period 3 and Period 4)
Code 59: Employment income paid July 5 to August 29 (Period 5 and Period 6)
Code 60: Employment Income paid August 30 to September 26 (Period 7)
The amounts should be reported based on the date the employee was paid, not in the period in which the employee earned the income.
This can create challenges for employers whose pay periods may not directly align with the CEWS periods whether they claimed CEWS or not.
Employers that did not qualify for CEWS are not likely to have determined the amount of remuneration paid to employees during the prescribed CEWS periods. Furthermore, as the periods are four weeks long, always beginning on a Sunday, the actual pay dates included in each CEWS period would vary for each employer depending on how often employees are paid.
For example, where an employer pays its employees a salary on a bi-monthly basis (15th and last day of the month):
Box 57 would include pay dates falling between March 15, 2020 and May 9, 2020. Due to normal pay dates falling on weekends (such as March 15th which would be paid on the preceding Friday), this period would only include the pay dates of March 31, April 15 and April 30 in this case.
Box 58 would include four pay dates, Box 59 – three pay dates and box 60 – two pay dates.
As is evident in the above example, the calculation and pro rating exercise, while not difficult, may prove time consuming.
Employers should therefore ensure their 2020 payroll information is in a format congruent with the above requirements. No announcement has been made yet as to whether the payment by CEWS period reporting will be extended to cover subsidy periods beyond Sept. 26, 2020, or continued into 2021. Currently, the forms released by CRA and approved for employer reporting, only require the above discussed breakdown of Box 14 and it is unlikely we will see further changes in requirements for 2020 with the March 1, 2021 filing deadline quickly approaching.
10% Temporary Wage Subsidy
The TWS was a three month measure allowing eligible employers to reduce their payroll remittances of federal, provincial or territorial income tax by the amount of the subsidy for remuneration paid between March 18 and June 19, 2020. CPP and EI remittances could not be reduced by this subsidy.
Employers should complete the Form PD27 as soon as possible to indicate the amount of the subsidy claimed so CRA can reconcile the employer’s Payroll program (RP) accounts with the T4 Information Return filed for 2020. If the employer was entitled to a subsidy in excess of income tax withholdings, the employer can indicate on Form PD27 how it wants to apply the remaining balance. Employers who did not claim the TWS and did not reduce their payroll withholdings can now claim the TWS if they are an ‘eligible employer’ by completing and submitting this form. Note that the total claim for CEWS and TWS cannot exceed the 75% of eligible remuneration per eligible employee when aggregating both subsidies.
Employers who claimed TWS and have not yet submitted form PD27 may receive letters from CRA indicating that they have not made sufficient remittances in 2020. Filing Form PD27 as soon as possible should allow CRA to reconcile the amounts outstanding.
Employers should therefore ensure they have completed and filed Form PD27 as soon as possible.
T4A Forms for Individuals
Payments made to individuals under the CERB and CESB programs as well as the Canada Recovery Benefit, Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit are taxable to the individuals who received them. CRA has begun issuing T4A slips to individuals who benefited from payments under these programs and, if the slips are not received in the mail, individuals should check their CRA My Account online for the completed slip to include in their 2020 tax return.
Individuals should be aware that, unlike Employment Insurance (EI) some of these support payments had nominal or no tax withheld at the time of payment. As such, tax owing will be calculated at the individual’s marginal tax rate on their T1 personal tax return and a payment to the government may be required by April 30, 2021.
There will be no change for Individuals who received EI benefits from Service Canada. These individuals will continue to receive a T4E slip reporting the amount of these benefits and tax withheld in 2020.
Individuals who received support payments from the government may find they are required to repay some benefits where the benefits overlap with other remuneration received and reported on the individuals T4 in Box 57 through Box 60.
New T3 reporting requirements
In the past, CRA administratively relieved, in certain circumstances, a Canadian resident trust of its T3 filing obligation where a trust had no activity during the year or had no tax payable. However, certain criteria outlined by CRA could disqualify a trust from this administrative position and CRA could and has retroactively requested that these inactive trusts file returns back to the date of settlement.
As announced in budget 2018, personal ‘express’1 trusts (with some exceptions including Graduated Rate Estates) with taxation years ending on Dec. 31, 2021 or later will now be required to file a T3 return and disclose additional information in excess of what has historically been disclosed to the CRA in a T3 return. CRA considers a trust an ‘express’ trust to be one created with the settlor’s express intent, usually in writing. As most personal trusts are express trusts, these trusts will need to meet one of the below exceptions to avoid annual filing and disclosure requirements:
- Designated a Graduated Rate Estate;
- Designated as a Qualifying Disability Trust;
- If an express trust, holds only certain types of assets totaling less than $50,000 of value during the year;
- Be in existence for less than three months (logically this would only apply in year of settlement);
- Be a lawyer’s general trust account;
- Be a trust governed by a registered plan such as, but not limited to, an RESP or Tax Free Savings Account;
- Be a mutual fund trust; or
- Be a trust that qualifies as a non-profit or a registered charity.
If a trust is unable to meet one of the above exceptions, CRA will require a T3 return to be filed including the disclosure of the settlor(s), trustee(s), beneficiaries (including their address and SIN). Additionally, a trust must disclose information relating to any person who can exert influence over a trustee’s decision of appointment, or of allocation of income or capital, such as a protector.
Interestingly, some of these new reporting requirements appear to be redundant. In cases where a trust has historically been filing a T3 return, this “additional” information has already been disclosed because the trust is required to include a copy of the trust indenture or deed with the initial return filing or the application for a trust number. So in actual fact, this will only be a new disclosure for trusts that were administratively exempted from filing in the past. For trusts that have been filing returns, it may simply be a change in the way the information is disclosed, or re-disclosed.
Finance has indicated it is looking to improve the collection of beneficial ownership information with respect to trusts and help CRA assess the tax liability of trusts and its beneficiaries. With the information entered into a standardized form that CRA can upload into its system, it stands to reason they will be able to more effectively mine data from these forms to determine which trusts will be selected for review and audit. The new reporting form has yet to be released by CRA.
Many trustees may view this as a loss of privacy for the beneficiaries of trusts who, until now have enjoyed relative anonymity. While the information was previously disclosed for some trusts by providing the deed with the initial return, it was unlikely to be in a format useful to the CRA. Other trusts that may not have filed a T3 in the past will now be burdened with an annual filing and disclosure requirement.
1A constructive trust or a deemed trust arising under the provision of a statute would not be an express trust according to CRA.