July 17, 2014
Tax News: Reporting Internet Business Activities & Private Health Service Plans
In December 2013, the Canada Revenue Agency (“CRA”) released a new form for businesses to file – Schedule 88: Internet Business Activities. This form is applicable for 2013 and subsequent taxation years and filing is now mandatory.
Who Must File?
Any corporation that earns income from one or more webpages or websites must file the new schedule. The CRA lists the following items as examples of when a corporation is earning income through the internet:
- The corporation sells goods and/or services on its web pages or websites. The sites may have a shopping cart and payments directly or through a third-party service.
- Where the website does support transactions the corporation’s customers place orders by phone, by submitting an order form or by email.
- The corporation sells goods and/or services on auction, marketplace or similar websites operated by third parties.
- The corporation earns income from advertising, income programs or traffic its sites generate.
Corporations required to file this new form must disclose the following information:
- The number of web pages or websites that the corporation earns income from
- The web address for the top five revenue producing websites
- The percentage of total revenue generated from internet business
Private Health Services Plans
It is generally well-known that an employer may offer a tax-free benefit to an employee in the form of a Private Health Services Plan (“PHSP”) for hospital and medical expenses. The PHSP must meet the nature of insurance and is commonly provided by an insurance company in exchange for premiums paid in whole or in part by the employer. However, these plans can be expensive to provide and private employers have sought out ways to offer coverage that is flexible and cost effective. This has led to plans that may be offered either directly or indirectly by the employer without the need to involve an insurance company offering traditional PHSP coverage.
The amount paid is deductible to the corporation and is not a taxable benefit to the employee where it is received in his/her capacity as an employee, rather than a shareholder. In the CRA’s view, the expenses covered must qualify for the medical expense tax credit (“METC”).
In a 2004 Tax Court of Canada case1, the court stated that whether the taxpayer received the benefit as a shareholder or employee is dependent on whether the corporation would have entered into such a contract with an arm’s length key employee as an employee and not a shareholder. In the case, the company reimbursed the majority shareholder over $35,000 in relation to US medical services, and there was no evidence that the PHSP was made available to other employees. The court agreed with CRA’s position that the taxpayer received the reimbursement by virtue of being a shareholder and not by virtue of employment.
The CRA has commented that if a shareholder is actively engaged as an employee of the company and it is reasonable to conclude that the benefit has been provided as part of a reasonable employee remuneration package, the benefit would be derived by virtue of employment.
Where the plan does not qualify as a PHSP, the reimbursement is fully taxable as an employment benefit or shareholder benefit to the recipient. The corporate deduction is only available following actual payment to a person in his/her capacity as an employee and not as a shareholder.