Jamie Golombek: Also specifies that $ 500 is the maximum reimbursement for each employee, not for each piece of equipment

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At the annual conference of the Canadian Tax Foundation held at the end of October, the Canada Revenue Agency announced good news by answering a few questions put to it during its annual roundtable. The first concerned the reimbursement of computer and office equipment by employers and the second concerned the refinancing of a prescribed rate loan. Let’s take a look at what the CRA said about each issue.

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Material reimbursement

You may remember that in April, CRA issued a technical interpretation addressing taxable employee benefits that employees may have received as a result of now having to work from home due to COVID-19. The CRA was asked whether an allowance paid by an employer to an employee for the purpose of acquiring equipment to enable him or her to work from home would be considered a taxable benefit for the employee. The CRA was also asked if its response would be different if the amount paid by the employer was conditional on the employee showing proof of purchase.

The CRA has indicated that a general allowance paid to an employee would be considered a taxable benefit but that, in the context of the COVID-19 pandemic, the CRA would be “willing to accept that reimbursement of an amount n ‘not exceeding $ 500 for the purchase of personal computer equipment will not be taxable if it is primarily for the benefit of the employer.

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At the CTF roundtable, the CRA was first asked if the reimbursement amount of $ 500 would be increased. The CRA said there are currently no plans to increase the reimbursement amount by $ 500, but that it “would continue to closely monitor all developments related to the COVID-19 pandemic and take further measures if necessary ”.

The CRA was then asked if its position on the amount reimbursed for the purchase of personal computer equipment would be broadened to include the purchase of home office furniture, such as desks, chairs, etc. At the roundtable, the CRA announced that it was expanding its administrative position to include reimbursements from employers for home office equipment purchased by employees.

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He also clarified that the reimbursement amount of $ 500 is the maximum for each employee, rather than for each piece of computer or office equipment an employee can purchase. For example, if an employee purchases a large screen monitor for $ 400 and an office chair for $ 250, the employer can reimburse the employee up to $ 500 without the employee receiving a taxable benefit under the new. CRA administrative post. If, however, the employer chooses to reimburse the employee for the full $ 650, the amount greater than $ 500 (i.e. $ 150) will have to be included in the employee’s income.

Refinancing of prescribed rate loans

As of July 1, the CRA prescribed rate is 1%, potentially opening up a lucrative opportunity for some Canadians to implement an income splitting strategy.

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The prescribed rate is set quarterly by the CRA and is directly linked to the yield on Government of Canada three-month treasury bills. In light of recent historically low Treasury bill rates, the prescribed rate fell to one percent on July 1, 2020 and will remain at at least one percent until March 31, 2021.

Lowering the prescribed rate can provide some Canadians with an important opportunity to split their income with a spouse or common-law partner, (grand) children or other family members. Income splitting is the transfer of income from a high income family member to a low income family member. Since our tax system has progressive and progressive tax rates, by taxing income on the lowest income, the overall tax paid by the family can be reduced.

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The “attribution rules” in the Income Tax Act prevent certain types of income splitting by generally attributing the income or gains earned on money transferred or offered to a family member to the original transferor. There is an exception to this rule if funds are loaned rather than offered, provided the loan rate is set (as a minimum) at the prescribed rate in effect at the time the loan was taken out and the interest on the loan is paid. annually no later than January 30 of the following year.

Thus, if the loan is made at the prescribed rate of 1%, the net effect will generally be that any investment return generated above 1% will be taxed on the low-income family member. Note that although the prescribed rate varies from quarter to quarter and may eventually increase, it is sufficient to use the prescribed rate in effect at the time the loan was originally extended. In other words, if the loan is extended by the end of March 2021, the lower 1% rate would be locked in for the life of the loan without being affected by any future rate increases.

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But, let’s say you took out a prescribed rate loan with a family member when the rate was 2% (or more) and you wanted to refinance the loan to 1%. The CRA said that simply paying off a higher prescribed rate loan with a lower rate loan could trigger the attribution rules on investment income.

Instead, the low-income family member would have to sell the investments (which could trigger a capital gains tax, depending on the market value of the investments relative to their tax cost) and repay the loan. They can then enter into a brand new loan agreement using the new prescribed rate of one percent. But do they need to sell all of the investments or just enough to pay off the loan? The CRA addressed this issue during the roundtable.

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Let’s say Lisa, a high-income person, loaned her husband, Harvey, who is in a lower tax bracket, $ 100,000 (“Loan 1”) when the prescribed rate was 2%. The borrowed money was used to buy securities for $ 100,000. These securities are now worth $ 200,000. The couple want to refinance the loan at one percent. Harvey would sell half of the securities and use the proceeds to pay off Loan 1. Harvey would then borrow $ 100,000 from Lisa at the current lower prescribed rate of one percent (“Loan 2”). The proceeds from Loan 2 would then be used to purchase new securities for $ 100,000.

During the roundtable, the CRA confirmed that the attribution rules will not apply to securities which are still held and which were purchased with loan 1 and, moreover, that the attribution rules will not apply. ‘will not apply to investments purchased with Loan 2. This allows Lisa and Harvey to take advantage of the new lower prescribed rate for years to come by only triggering half of the accumulated gains on the portfolio.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is Managing Director, Tax and Estate Planning at CIBC Private Wealth Management in Toronto.

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