1997 Fourth Quarter, Issue No. 40

Presented to you by Frank C. Weyer C.M.A. at
http://www.reach.net/~fweyer/
290 Dundas Street West, Suite 1, Trenton, Ontario, K8V 351
Telephone (613) 392-2953, Fax (613) 392-2375

In This Issue...

• Year-End Tax Planning
• 1997 Remuneration
• RRSP - Turning Age 69, 70 Or 71 In 1997?
• Charitable Donations - Publicly Traded Securities
• This Case Hurts!
• Property Transfer
• Revenue Canada
• Transfer Pricing
• Food Concessions - Not Subject To GST

Year-End Tax Planning

40(1)

Some 1997 year-end tax planning tips include:

1. If the following expenditures are made by individuals by December 31, 1997 they will be eligible for 1997 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.
2. 1997 eligible RRSP contribution amounts are noted on the 1996 personal income tax return assessment notices. You have until March 1, 1998 to make the tax deductible RRSP contribution for the 1997 year.
   • Consider contributing to a spousal RRSP to achieve income splitting in the future.
   • The maximum 1998 addition to deductible RRSP contribution room is $13,500. Therefore $75,000 of 1997 earned income is needed to reach this maximum.
3. If you own a business, consider paying a reasonable salary to family members for their services rendered to the business.
4. Ensure that all deductible alimony or maintenance payments are made by December 31, 1997.
5. An individual whose 1997 net income exceeds $53,215 will lose all, or part, of their old age security.
   • Senior citizens will begin to lose their income tax age credit if net income exceeds $25,921.
   • Individuals facing these problems should contact their professional advisors for assistance in managing their 1997 personal income.
6. Consider purchasing assets eligible for capital cost allowance before the yearend. For example, employees may claim capital cost allowance on automobiles, aircraft and musical instruments required to be used in their employment
7. If the owner-managed corporation has paid sufficient salaries to the owner to maximize his/her RRSP, and the corporation's active business income is still in excess of $200,000, consider additional salary or interest on the shareholder loan. Interest is deductible to the corporation, if reasonable and pursuant to a legal obligation. The interest would be taxable to the owner but, would not be subject to provincial payroll taxes - where applicable.
8. If you have had taxable capital gains in the year, or any of the preceding three years, consider selling capital properties with an underlying capital loss prior to the yearend. This capital loss may be offset against capital gains in the year, or in the three preceding years.
9. Trusts may not make preferred beneficiary elections in 1997 unless the beneficiary is mentally or physically impaired. Therefore, if income in an inter vivos trust is to be taxed on a beneficiary's return, the income must be paid or payable to the beneficiary by December 31, 1997.

1997 Remuneration

40(2)

Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning "active business income" include:

1. Bonus down active business earnings in excess of $200,000.
2. Elect to pay out tax-free "capital dividend account" dividends.
3. Consider paying dividends to obtain a refund of "refundable dividend tax on hand".
4. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral. The effect on the "Qualified Small Business Corporation" status should be reviewed before selling the shares.

Some other considerations include:

1. Salary payments require source deductions to be remitted to Revenue Canada on a timely basis.
2. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create "earned income".
3. Salaries paid to family members must be reasonable.
4. Large dividends may trigger Alternative Minimum Tax.
5. Dividends paid on one class of shares, to the exclusion of the other, may be effected by the recent Neuman decision.
6. Some provinces have "payroll taxes" thereby increasing the costs of paying salaries vs. dividends.

RRSP

40(3)

Turning Age 69, 70 Or 71 In 1997?

Remember - taxpayers aged 69,70 or 71 in 1997 must mature their RRSP's by the end of 1997. See Issue Number 39(6), 1997 Third Quarter, for planning information.

Should An Individual Use His/Her RRSP To Finance A Home Purchase?

Considerations:

1. A self-administered RRSP may lend funds to the annuitant to finance a home purchase, or to refinance an existing mortgage.
2. The advantage is saving the interest spread between the rate of return on the investments in the RRSP (say 3% on a one-year guaranteed investment certificate) and the rate paid on the existing mortgage (say 5% for a one-year closed mortgage).
3. The mortgage must be administered by an approved lender, such as a bank or trust company, and must be insured by Canada Housing and Mortgage Corp. (federal agency) or a private mortgage insurer such as G.E. Capital Mortgage Co.
4. The terms of the mortgage must follow normal commercial markets such as interest rates and administration - for example prepayment of the mortgage must follow the normal terms of a mortgage loan.
5. Fees - a self-directed RRSP will have annual trustee fees in addition to a onetime setup fee. Mortgage application fees, legal and notarial fees will also be charged.
6. High ratio mortgages of more than 75% of the property value may have a one-time mortgage insurance premium in the 2% range.
7. An "arm's length" person could hold your mortgage in his/her RRSP without the mortgage having to be insured or administered by an approved lender. Arm's length is a factual determination. For example, two otherwise unrelated persons that each have their own RRSPs invest in the other person's mortgage could be considered to be acting in concert and, therefore, not dealing at arm's length.

Conclusion

In most cases use of a self-directed RRSP to fund a home purchase or refinancing would require a mortgage of at least $50,000 before it makes sense.

Good News - Rollover To Two Spouses

Revenue Canada confirmed that for tax purposes a person may have two spouses the person to whom he/she is legally married and, a common-law spouse. Revenue Canada note that if at the time of the taxpayer's death, he is both married and living common-law, either one, or both, of these spouses can be named as the RRSP/RRIF designated beneficiary for a tax deductible rollover.

Charitable Donations

40(4)

Publicly Traded Securities

The 1997 Federal Budget provided incentives to donate publicly traded securities by reducing the taxable portion of capital gains from 75% to 37.5% for donations to registered charities - other than private foundations.

Unfortunately, these advantages on publicly traded securities were offset by penalties on donations of private shares or debt. The original proposal was to establish a tax of 50% on the value of these gifts.