2022 was certainly another year for the record books when it comes to the amount and complexity of new tax legislation. New rules for businesses have been introduced, expanded, clarified, or amended concerning interest deductibility, required disclosures to the Canada Revenue Agency (CRA) for trusts, mandatory reporting to CRA of certain transactions undertaken for tax planning, the general anti-avoidance rule, and more.
Keeping on top of these changes can be more than a full-time job. Today, we’ll summarize some of the relevant updates that employers and their employees may be concerned with as we head into 2023.
COVID-19 Benefits and Programs
The various COVID-19 benefits introduced during the pandemic and aimed at employees who experience job loss or illness have all been closed to new applications either before or during 2022, including the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Caregiving Benefit (CRCB), Canada Recovery Sickness Benefit (CRSB), and Canada Worker Lockdown Benefit (CWLB). Employers may want to consider the lack of government assistance when developing new policies for sick time.
Programs intended to assist businesses with ongoing costs through the pandemic have also ended. The Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) have been closed to applications since April 2022, while the Canada Recovery Hiring Program (CRHP) and the more targeted support through the Tourism and Hospitality Recovery Program (THRP) and Hardest-Hit Business Recovery Program (HHBRP) have been closed to new applications as of November 3, 2022. The CRA has discretion to accept late applications under these programs, but generally only in exceptional circumstances where a late application was a result of CRA error or delay, natural disasters, and other situations.
Remote Work Tax Deductions
Since shortly after the COVID-19 pandemic began, some employees have been eligible to take a flat-rate deduction of $2 per day they work from home due to the COVID-19 pandemic, to a maximum total deduction of $400 in 2020 and $500 in each of 2021 and 2022. There is currently no proposal to extend this flat-rate deduction into 2023, and there is no ability for employees whose roles are inherently work-from-home (not due to the pandemic) to make use of the flat-rate method. For 2023 onward, all employees who meet the criteria to deduct home office expenses must calculate their expenses using the detailed method and obtain a signed form T2200 from their employer which certifies the employee meets certain conditions.
Requests To Reduce Withholdings at Source
Employees may request that the income tax withheld from their pay in 2023 is reduced on account of various deductions they may be entitled to take in 2023, including registered retirement savings plan (RRSP) contributions outside of an employer plan, employment expenses, spousal support payments, and more.
New in 2023, the First Home Savings Account (FHSA) may provide certain individuals the ability to save $8,000 per year toward the purchase of a new home and, similar to an RRSP, take a deduction for the payment but, similar to a TFSA, withdraw the amount tax-free if certain conditions are met. The additional deduction available with this new account may allow certain employees to request a reduction to their taxes withheld using form T1213. Employees will need to wait until financial institutions begin offering the FHSA before applying for the reduced tax withholdings on account of FHSA contributions.
Prescribed Rate on Employee Loans
Does your organization make interest-free or low-interest loans to employees as a benefit of their employment?
The CRA generally requires that a taxable benefit equal to the prescribed rate of interest is included in the employee’s income and reported on their T4 to the extent that the employee does not pay an equivalent amount of interest to the employer. More details can be found at this link. The prescribed rate has been very low, at 1 percent, since the third quarter of 2020, but as of October 1, 2022, it is now 3 per cent. Consider the impact this has on loans currently outstanding and whether some employees are aware of the increased taxable benefit. Note that some loans, including certain home-purchase loans, use the prescribed rate in effect at the time the loan is made, which is locked-in for a period of time.
Personal Services Businesses
Businesses who hire workers as subcontractors should be aware that, if the CRA considers the worker to be an employee based on various criteria, including control, supervision, provision of tools, risk and opportunity for profit, and regardless of their title in a contract, the business may be liable for any tax, CPP, and EI that it did not withhold from payments to the worker. Some businesses are aware of this risk and mitigate it by requiring that subcontractors incorporate a company and invoice the business through that company. The risk to the business is reduced this way since a corporation is not considered an employee and so no payroll withholdings could be required.
However, tax risk may be shifted to the worker in this scenario. If an individual, but for their corporation, would be considered an employee of the business that pays them, in most cases their corporation is considered to have a personal services business which may result in punitive levels of taxation to those who are caught unaware. The CRA has recently announced that between June and December 2022 it will lead an educational outreach project by contacting Canadian businesses that potentially hire personal service businesses in order to “help determine whether or not these companies are fulfilling their tax obligations”. We can expect that, if the CRA is successful in this initiative, this may lead to an increase in audit activity in the coming years. Employers who hire workers in this type of relationship may want to consider proactively discussing the issue with them and find ways to reduce the risk to both the employer and worker.
Labour Mobility for Tradespeople
The 2022 Federal budget included a welcome tax break available to tradespersons and apprentices employed in the construction industry. Effective for 2022 and future years, these individuals may be entitled to a deduction of up to $4,000 for certain travel and relocation expenses required to earn their employment income to the extent they do not receive a tax-free reimbursement from their employers. Eligible expenses may include transportation, meals, and temporary lodging if the employee is required to be away from home for at least 36 hours and the distance between their home and temporary work location is 150 km or more than the distance between their temporary lodging and temporary work location.
The rate at which our tax laws evolve seems to be increasing fast over the last few years, and tax compliance has become increasingly complex for employers and employees alike. Please reach out to your trusted professional advisors for assistance with these topics or any other matters.