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
41(1)
Appendix A provides a checklist of information that will be needed to complete your 1997 Personal Income Tax Return.
The 1997 Budget proposes that the list of medical expenses be broadened to include certain costs related to:
The Budget also proposes to introduce a $500 refundable tax credit based on eligible medical expenses but, reduced by 5% of family net income above $16,069.
Revenue Canada notes that where an employee is required to pay for tools such as hammers, saws, pliers, wrenches, squares, ratchets, screwdrivers, hand-held power tools, etc. as a condition of employment, the taxpayer may not deduct these expenses. The only deductions available to an employee are acquisitions of "supplies" and this is limited to materials that are used up in employment.
This includes items such as gasoline and oil used in the operation of power saws by employees in woods operations, dynamite used by miners, bandages and medicines used by salaried doctors and various stationery items (other than books) such as pens, pencils, paper clips, charts, etc., used by teachers.
However, it does not include special clothing worn by employees nor tools which fall into the category of equipment.
In a Court case, Mr. S moved in 1990 but could not sell his house until 1992, even though a new house was purchased at the new employment location in 1990. The taxpayer deducted the mortgage interest on the old residence as a moving expense. Revenue Canada reassessed.
The Court permitted the deduction for amounts paid for the year of the move (1990) and the following year (1991) as moving expenses. The amounts paid in 1992 were not allowed.
Mr. F had been assessed by Revenue Canada taxable benefits of $374,000 and $446,000 in 1988 and 1989 respectively for the use of a $2.2 million corporate-owned condominium - based on a rate of return method.
The Tax Court overturned this decision and applied a benefit of $23,000 and $7,500 on the basis that the condominium had been acquired for a business purpose. Therefore, only the personal use portion based on fair market rent should be the benefit.
The Federal Court allowed Revenue Canada's appeal on the basis this was not a bona fide business transaction and noted that:
On October 2, 1997 the Government announced that they will delay the requirement to report foreign investment property costing over $100,000 U.S. from the first reporting date of April, 1998 to April, 1999. In the Interim, the Auditor General will examine this reporting requirement as to its appropriateness, including alternative mechanisms and, may recommend other alternative measures.
However, the Trust and Foreign Affiliate tax reporting requirements are still in effect.
Significant penalties apply for failure to report.
The new Child Support Guidelines permit the Court to "impute" income to a spouse - for example, where the spouse's property is not reasonably used to generate income. A farmer had nominal "income" for tax purposes but, $700,000 invested in farm equipment. The Court found that an appropriate return would be 6% and that the taxpayer's income for purposes of the Child Support Guidelines should be $42,000.
Child support payments pursuant to pre- May 1, 1997 agreements are deductible/taxable - assuming the child is in the custody of the spouse.
In a Court case, the taxpayer made monthly support payments for the children and, paid their tuition. The children lived with the spouse and attended university.
Even though the children had reached age 18, and therefore were not in the legal custody of the spouse, Judge Bell noted that "custody" does not require legal custody. Custody connotes an arrangement where someone has the care and responsibility for the children, as in this case. Therefore, the taxpayer was entitled to deduct the support payments.
The Canada Pension Plan Act (CPP) permits a spouse to apply for a share of the CPP credits of the former spouse to provide for an equal sharing of pension credits earned while the taxpayers were married. The CPP credits earned by both spouses during the marriage will be aggregated and then split equally.
This is important because future CPP benefits include retirement benefits, disability benefits, a lump-sum death benefit, survivor benefits and benefits for children of disabled or deceased contributors.
In a Technical Interpretation, Revenue Canada considered the taxation of pension income which had been divided between spouses as a result of a marriage breakdown in Alberta. Revenue Canada noted that where spouses agree voluntarily, rather than through a Court Order, on a division of pension income, the income would be taxed to the spouse who technically owned the pension. However, in British Columbia where each spouse is entitled to a one-half interest in each family asset, a 50/50 split of the pension could result in each spouse reporting their share of the pension income.
Care must be taken to comply with provincial regulations on the division of pension income to ensure that the recipient will be the one that reports the income. An Advance Tax Ruling may be desirable.
In a Tax Court of Canada case, Mrs. W signed a separation agreement with her former husband, Mr. W, under the Ontario Family Law Act. Mr. W assigned one-half of his annual pension income to Mrs. W. The Court required Mr. and Mrs. W to each report one-half of the pension for income tax purposes.
Under certain circumstances, Revenue Canada may permit a waiver of interest and penalties under the Fairness Package. Some examples include:
It is important that the waiver application be presented properly to Revenue Canada. This waiver is at the discretion of Revenue Canada. If they say no, an appeal to Court is often fruitless.
In a Court case, the Court found director Mr. S, personally liable for unremitted source deductions, but noted that non-business/financial directors may have an easier time using the "due diligence" defence. Some Court comments include:
This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it may be permissible to rely on the day to day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty.
Revenue Canada has taken a much harder line in Information Circular 89-2R. However, this Information Circular was released on the same day as this case and, therefore was written without benefit of these comments.
In a Court case, six unpaid defacto directors of a non-profit organization were personally assessed for the liability for unpaid source deductions. As mentioned, directors may avoid personal liability if they exercise the "due diligence" required to ensure that source deductions are made on a timely basis.
The Court noted that because the Corporation was non-profit and the directors were unpaid volunteers, the standard demanded should not be as rigorous as that applied to directors of normal corporations. In this case, the appellants met these reduced standards.
Revenue Canada may appeal this decision.
The Income Tax Act prevents a deduction for an expense incurred for the use, or maintenance, of property that is a yacht, a camp, a lodge or a golf course or a facility.
B Inc. was a general insurance broker which had golf and fishing related expenses incurred on behalf of clients fully disallowed in the years 1990, 1991 and 1992. For example, in 1990 the expenses included $1,678 for tournaments, $1,254 for green fees, $3,044 for meals and beverages at the golf club, $971 for purchases at the pro-shop relating to prizes to be won in tournaments, $660 for a membership in a golf club and, fishing lodge expenses of $1,650 for the services of a guide at the fishing lodge, $94 for fishing equipment, $12 for gas and $975 paid to a hunting outfitter. Similar expenses were disallowed in 1991 and 1992.
The Court noted that the legislative intent is to disallow these expenses because abuses were most likely to occur at these locations. The fact that some may view these distinctions as unfair does not permit the Court to rectify that injustice - this is up to Parliament.
The Court also concluded that all related costs, direct or indirect, were caught. This includes the cost of related meals, transportation, permits and related expenses.
Revenue Canada's recent success in the Tax Court on GAAR applications has caused concern that, even if a tax plan is onside technically, if Revenue Canada does not like the results they may apply the GAAR rules - with some success.
As of September 30, 1997, 237 cases have been referred to Revenue Canada's GAAR Committee. Revenue Canada will proceed using GAAR on 158 of these cases. The balance will be reassessed using other provisions of the Act or, will not be reassessed.
In a Court case, Mr. S contended that his share sale was eligible for the capital gain exemption because his Company S was a "qualified small business corporation" (QSBC) because "all or substantially all" (usually considered as a 90% test) of the assets, including large cash reserves, were used in the active seedling nursery business. Even though the cash reserves ranged from 38% to 50% of the assets, Mr. S argued that there were good reasons to hold these cash reserves including:
Mr. S argued that the term deposits were employed and risked in the business and linked to a definite obligation, or liability, of the business.
The Court found that the cash reserves were not active business assets and, therefore, the share sale was not tax exempt.
In light of significant concerns raised regarding the "Generally Accepted Accounting Principle" to show certain preferred shares as liabilities, it has been concluded these issues require further study.
All enterprises, other than public companies, co-operative organizations, deposit-taking institutions and life insurance enterprises, may defer reporting preferred shares as liabilities until fiscal years beginning on or after January 1, 2000.
Co-operative organizations may defer until fiscal years beginning on or after January 1, 1997.
The Excise Tax Act permits certain Registrants to calculate GST by multiplying the taxable sales by a prescribed rate (say 4% or 5% - rather than the 7%) and, not claiming most input tax credits. This makes sense for qualifying businesses that do not have many input costs.
A Registrant may elect to use this quick method if the tax included taxable supplies in four of the five previous quarters did not exceed $200,000. Excluded from the calculation are sales of real and capital property and all supplies which are not subject to a 7% rate.
Businesses involved primarily in manufacturing of goods, or providing of services (other than accounting, legal or financial) may remit 4% on the first $30,000 of revenues and 5% on the remainder but may not deduct most input tax credits. Businesses involved primarily in the resale of goods, such as retailers, may remit 1½% on the first $30,000 and 2½% on the remainder.
Businesses must monitor their eligibility to use the quick method at the beginning of each fiscal year based on sales from the previous fiscal year. The quick method is not available to lawyers, accountants, listed financial institutions, bookkeepers, financial consulting professionals, actuaries, tax return preparers, charities, selected public service bodies or qualifying non-profit organizations.
When applying for Canada Pension Plan, the spouse (usually the mother) could apply for the "child rearing dropout" for those years in which she was not employed and had a child that was seven years or under. This may substantially increase the amount of CPP that is available.
For example, if the children were born in the years 1964, 1967 and 1972, Mom would receive up to fourteen years of "child rearing dropout" - the years 1966 to 1979. (CPP only commenced in 1966.)
Remember to apply for a refund of "employment insurance" if your 1997 employer premiums exceed 1996 - review the T4 Summaries.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a commentary such as this, a further review should be done. Every effort has been made to ensure the accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or firm involved in the distribution or preparation of this commentary accepts any liability for its contents or use.
Information Required Includes:
An election to use the unutilized portion of your $100,000 capital gains exemption was available on the 1994 Personal Tax Return. However, a late election may have been made by April 30, 1997 or a revocation of the election by December 31, 1997. If you have late filed, or revoked, please provide details.