1998 Fourth Quarter, Issue No. 44

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...

Past Issues - more tips

Year-end Tax Planning

44(1)

Some 1998 yearend tax-planning tips include:

  1. If the following expenditures are made by individuals by December 31, 1998 they will be eligible for 1998 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.
  2. 1998 eligible RRSP contribution amounts are noted on the 1997 personal income tax return assessment notices. You have until March l, 1999 to make tax deductible RRSP contribution for the 1998 year.

    Consider contributing to a spousal RRSP to achieve income splitting in the future. The maximum 1999 addition to deductible RSP contribution room is $13,500. Therefore, $75,000 of 1998 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, 1998.
  5. An individual whose 1998 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 1998 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 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.
  8. 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, 1998.
  9. The 1998 Federal Budget (Budget) proposes to allow individuals to claim a non-refundable federal credit of 17% on the interest portion of student loan payments.
  10. The Budget proposes to allow part-time students to claim the education credit and the child care expense deduction for 1998 and subsequent years.
  11. Registered Education Savings Plan (RESP)

    The Budget proposes a new Canada Education Savings Grant (CESG) for RESP contributions made after 1997. Subject to certain limits, the CESG will be equal to 20% of annual contributions for beneficiaries up to and including age 17 (maximum $400 per child per year).

    However, contributions for 16 and 17 year olds will only qualify for certain previous plans. Therefore, consider establishing a RESP for a 15-year-old before the end of the year.

  12. Health and dental premiums for the self-employed

    The Budget proposes that individuals will be allowed to deduct amounts paid for private Health Service Plan coverage in computing business income provided they are actively engaged alone, or as a partner, in their business, and either self-employment is their primary source of income or their income from other sources does not exceed $10,000.

1998 Remuneration

44(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. Bona fide dividends paid on one class of shares, to the exclusion of the other, may be accepted based on the recent Supreme Court decision in Neuman vs. H.M.Q..
  6. Some provinces have 'payroll taxes', thereby increasing the costs of paying salaries versus dividends.

Reasonability of Salary:

Revenue Canada has a general practice not to challenge the reasonableness of salaries or bonuses paid to a principal shareholder who is active in the corporation's business.

Revenue Canada may limit this position in bonuses paid out of a corporation's investment income, inter-corporate management fees, remuneration paid to spouses, other family members, or non-residents. Revenue Canada reserves the right to require evidence that the remuneration is reasonable.

Charitable Donations

44(3)

Gifting cash vs. Securities

Only 3/8 of a capital gain on charitable donations of qualifying securities, such as shares, debt obligations or rights listed on a prescribed stock exchange needs to be included in income. Also, the other 5/8 is eligible for tax-free payment out of the capital dividend account if the donor is a corporation.

Individuals also could consider donating qualifying securities rather than cash. For example, a share donation valued at $1,000 cash would result in a tax credit of up to $500 - at the top rates. If the share had a cost base of $200, there would be a taxable capital gain of $300 (3/8 x $800) with tax at say 50% for $150 for a net saving of $350.

However, if cash were donated, the savings of $500 would have to be offset by the tax on a subsequent taxable capital gain of $600 (3/4 x $800) at 50% or $300 for a net tax saving of $200. Therefore, in these circumstances, there is up to a $150 extra cash saving by donating shares, as opposed to cash, if the stock was going to be sold in the near future.

Life Insurance Policy

Revenue Canada notes that where a life insurance policy has been absolutely assigned to a charity and the charity has become the registered beneficiary of the policy, this will qualify as a charitable donation. The donor must transfer absolutely all rights, title, and interest in the policy.

Registered Canadian Amateur Athletic Association (RCAAA)

In a Court case, the Court found that "Maccabi" qualified for charitable donation purposes as it "promoted amateur athletics in Canada on a nationwide basis". Revenue Canada had argued that because only athletes from their religion were allowed to compete in these games, it did not qualify as an RCAAA because a nationwide basis is both geographical and demographic.

Good News! - The Court concluded that "nation-wide" is strictly geographical. Therefore, organizations that are nationwide but limited to a certain group of people may qualify for charitable donation status.

Foreign Reporting

44(4)

On August 20, 1998 Revenue Canada introduced the "Foreign Income Verification Rule" which requires that taxpayers report specified foreign assets costing over $100,000 for years beginning after 1997. There is no requirement to file for the 1996 and 1997 taxation years.

Excluded is property used exclusively in an active business, funds invested in registered pension plans, personal-use property, and shares in foreign affiliates.

Where the total cost does not exceed $100,000, taxpayers will still be required to include any income earned from the property.

Penalties for late filing, failing to file and for under-reporting of income may be applied.

Contract Payment Reporting System

44(5)

On May 27, 1998, Revenue Canada tabled a Discussion Paper on the mandatory Contract Payment Reporting System (CPRS) proposed in the 1998 Federal Budget.

Which Payments?

Payments made after 1998.

Who Reports?

A business (individuals, partnerships, corporations) whose principal business is the construction (erection, installation, alteration, modification, repair, improvement, demolition, dismantling or removal) of any structure, or part thereof (e.g. buildings, roads, bridges).

What Information is reported for each subcontractor?

Name: The name, business address, business number (BN), or in the case of an individual without a BN, the Social Insurance Number (SIN).

Amount: The amount paid or credited to the subcontractor for the calendar year for construction services, (i.e., Jan. 1/99 to Dec. 31/99) unless the total amount is less than $500 for an individual subcontractor.

How is it reported?

On a modified T4A Information Slip.

When is it reported?

By the last day of February - same as T4's and T5's.

What sanctions are there?

The same penalties as currently in effect for late T4 and TS forms.

Employer Paid Education Costs

44(6)

On May 7, 1998 Revenue Canada provided good news on employer-paid educational costs for employees.

Specific Employer-Related Training

Courses for maintenance or upgrading of employer-related skills will generally be non-taxable. For example, fees and other associated costs such as meals, travel and accommodation paid for courses leading to a degree, diploma or certificate in a field related to the employee's current or potential future responsibilities in the employer's business will not be a taxable benefit.

General Employment-Related

Training

Other business-related courses, although not directly related to the employer's business, will also generally be considered non-taxable. Examples include stress management, employment equity, first aid and language skills. Normally, in-house training will not be considered a taxable benefit.

Taxable Benefit

Employer-paid courses for personal interest or technical skills that are not related to the employer's business continue to be taxable. For example, fees paid for a self-interest carpentry course.

Effective Date

These guidelines are effective immediately.

Non-Arm's Length

The new guidelines do not necessarily apply in non-arm's length relationships or, where the benefit was primarily for the employee. For example, where remuneration ordinarily paid to the employee is reduced in recognition of training costs incurred by the employer.

Year 2000 Computer Problems (Y2k Problems)

44(7)

When the 21st century begins at midnight December 31, 1999, there is a chance that you will be affected by the millennium computer bug. Every person using computers or equipment with computer chips should consider remedial measures.

Revenue Canada proposes tax relief to small and medium sized businesses (i.e., incorporated firms with taxable capital of less than $10 million and unincorporated businesses) by providing an immediate write-off of 100% of the cost of computer hardware and software acquired to address their Y2Kproblems.

The computer hardware and software must be year 2000 compliant and replace non-compliant hardware and/or software acquired before 1998. Only expenditures from January 1, 1998 to June 30, 1999 will be eligible. (The deadline to buy is June 30, 1999 - not December 31, 1999 - to encourage a timely solution to the problem.)

The claim is made by filing an information letter with the tax return. The maximum additional deduction will be limited to $50,000 per taxpayer/partnership. There will be special rules for corporate groups and partnerships that have corporate members.

Business Trip

44(8)

Business/Pleasure Trip

In a Tax Court case, B Ltd. deducted 80% of the travel expenses of $9,425 ($7,540) incurred by its owners, Mr. and Mrs. B, on a business trip to the Orient sponsored by the Association de la Construction du Quebec. B Ltd. was unable to benefit from the knowledge acquired by Mr. and Mrs. B because of Mr. B's massive heart attack on the way back from the Orient and the resulting wind-up of B Ltd. Revenue Canada disallowed the deduction and included it in Mr. B's income.

Good News!

The Court permitted B Ltd. the deduction and excluded the income from Mr. B and noted that:

  1. The fact that the company was unable to benefit from the trip does not alter the fact that the expense was incurred to earn income.
  2. No amount should be included in Mr. B's income, including the expenses related to Mrs. B.
  3. Mrs. B had been actively involved in B Ltd. and her presence on the trip would have been beneficial to B Ltd. had it not been for her husband's heart attack.
  4. Mrs. B took notes on technical, legal and other points throughout the trip. Because of her experience in the construction industry, she was able to appreciate what was said and what she saw at the meetings.
  5. The Court was impressed with Mr. B's credibility during his testimony in which he spoke of nothing but construction.
  6. The purpose of the trip was to attend conferences offered by various construction associations.

Revenue Canada Investigation

44(9)

Informants

In a Tax Court case, the taxpayer was reassessed by Revenue Canada based on information provided to Revenue Canada by an unnamed informant. The informant contacted Revenue Canada Taxation, by making a telephone call to their hotline and provided information about possible fraudulent activity by the taxpayer.

The taxpayer argued that he needed the name of the informant to properly prepare his defense. Revenue Canada refused to provide this information based on "informant's privilege". The Court agreed with Revenue Canada:

  1. Common law recognizes certain types of privileged communication including communications between solicitor and client; communications between husband and wife; communications concerning the deliberations of a jury; and finally communications with government and government officials this privilege applies to informants.
  2. The only exception is where disclosure is needed to prove an accused's innocence in a criminal proceeding.

Farming

44(10)

Cash Basis

Revenue Canada recently reviewed the tax implications on the sale of inventory by a farmer to his daughter for a Promissory Note.

Both the Bill of Sale and the Purchase and Sale Agreement refer to the Promissory Note as the consideration given for the transfer of the inventory. Therefore, the Promissory Note constituted absolute payment -not just security. Revenue Canada concluded that the taxpayer should report the income at the time of sale - not at the time the promissory note is paid.

Qualified Farm Property

Revenue Canada recently concluded that this farm property would not be qualified farm property and therefore not eligible for the capital gain exemption.

The farm property was acquired in January 1996. The farmer met the requirements of "qualified farm property" until January 1997 when he received a substantial lump sum inheritance and, the interest from the inheritance exceeded his gross revenue from the farming business.

Farm property acquired after June 18, 1987 must have two years where gross revenue from farming exceeds net income from all other sources.

Federal Farm Debt Mediation

Two new counseling services for farmers with financial difficulties include:

  1. Farm Consultation Service - provides counseling to farmers experiencing financial difficulties. For a nominal fee, qualified counselors will assist in developing a Farm Operating plan.
  2. Farm Debt Mediation Service - appoints a mediator to assist the farmer and creditors through a mediation process to help reach a mutually satisfactory arrangement.

Applications for these services are available from the regional offices of Agriculture and Agri-Food Canada.

GST

44(11)

Forgot To Collect GST

In a recent Court case, the vendor did not charge GST because they thought the sale was GST exempt.

Subsequently, Revenue Canada reassessed the vendor for the GST plus interest plus penalty and the vendor sued the purchaser for the GST, plus interest and penalty. The Court required the purchaser to pay the GST. However, it did not require the purchaser to pay interest or penalties, except for interest after the date that the demand for payment was made by the vendor to the purchaser.

Electronic Filing

Registrants may file GST returns electronically by filing Form GST446 with Revenue Canada.

Electronic filers must also electronically remit tax.

For more information on electronic filing, call Revenue Canada at 1-800-279-5394.

Unfiled Returns

In a Tax Court case, Mr. A did not file GST returns or remit GST from the period July 1, 1992 to October 29, 1993. Therefore, Revenue Canada made an arbitrary assessment based on the gross revenues reported without permitting any input tax credits. This resulted in an assessment of tax of $6,412, interest of $1,350 and a penalty of $1,350 for a total of $9,112.

The Court found that the estimated calculation without input tax credits was correct because the taxpayer did not provide evidence to the contrary. Also, because the taxpayer did not act on any of the notices sent to him by Revenue Canada it would be difficult for the Court to find in his favour.

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.

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Last Updated: Monday, February 15, 1999
Reference: http://www.reach.net/~fweyer/tips.html