1999 First Quarter, Issue No. 45
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...
- 1998 Personal Income Tax Return Checklist
- 1998 Budget Reminders
- Labour-Sponsored Venture Capital Funds (LSVCF)
- Employment versus Independent Contractor
- Reasonable Expectation of Profit
- Tax Shelters - Revenue Canada Warning
- Pension Adjustment Reversals
- Employment
- GST
Past Issues - more tips
1998 Personal Income Tax Return Checklist
45(1)
Appendix A. provides a checklist of information that will be needed to complete your 1998 Personal Income Tax Return.
1998 Budget Reminders
45(2)
Some 1998 federal Budget provisions related to education include:
- Tax free RRSP withdrawal for education.
Individuals may withdraw up to $10,000 per year from an RRSP (other than a locked in RRSP) after 1998, provided they, or a spouse, are enrolled in a qualifying education program. Withdrawals are permitted for up to four years provided that the total amounts withdrawn does not exceed $20,000.
The withdrawals will be repayable to the RRSP in equal installments over a ten-year period. The first repayment must be made after completion of the course. Amounts not repaid on time will be included in income. Repayments are without interest and cannot be deducted from income.
Certain other criteria must be met.
See Revenue Canada Guide RC 4112 for details.
Remember:
It may be better to withdraw R.R.S.P. funds on a taxable basis when going back to school because income is usually lower and tuition and education credits are available resulting in minimal tax payable. To borrow and repay it later misses these advantages.
- Employment Insurance Relief
The Budget proposes to give employers an employment insurance (EI) premium holiday for hiring additional Canadians, between the ages of 18 and 24, in the years 1999 and 2000. As with the New Hires Program, which was in operation in 1997 and 1998, employers will be allowed to stop paying these EI premiums, or they can claim a rebate when filing their returns.
See Revenue Canada Guide RC 4113 for details.
- Youth Service Canada
The Budget proposes more than doubling the funding for hiring youth at risk.
For details, contact Human Resources Development Corporation.
- Credit for Interest on Student Loans
For the 1998 and subsequent taxation year, an individual will be entitled to a non-refundable 17% federal tax credit on interest paid on a loan under the Canada Student Loans Act or a provincial statute governing the granting of financial assistance to students at a post-secondary school level. There is a five-year carry-forward for unused credits.
Due to the resulting reduction in provincial taxes this 17% will reduce over all taxes by about 26%.
- Canada Millennium Scholarships
$2.5 billion will be provided to the Canada Millennium Scholarship foundation to provide more than 100,000 scholarships annually to Canadians from low and middle-income families commencing in the year 2000. The scholarships will be awarded to individuals who need help in financing their studies and demonstrate merit. Scholarships will average $3,000 per year for full and part-time study. The scholarships will be available for up to four academic years of study (32 months) towards under graduate degrees, diplomas, or certificates. The scholarships will be available to persons of all ages, studying in publicly funded universities, community colleges, CEGEPs and technical institutions.
- Canada Student Loans Program Improvement
Currently, the government pays interest on the loan while the student is in school and all payments are deferred until the completion of studies. For six months after graduation, interest accrues but the graduate is not required to make payment.
After the six-month grace period, the graduate is responsible for paying off the loan, usually over the next nine and one-half years. For persons in financial difficulty, the federal government pays all interest costs for up to thirty months (previously eighteen months) over the five years after the student has left school.
The 1998 Budget raises the income threshold for interest relief by 9%, effective April 1998. Beginning in 1999, graduates facing financial hardship will receive extended interest relief.
Labour-Sponsored Venture Capital Funds (LSVCF)
45(3)
On August 31, 1998, the federal government announced increased annual investments eligible for the 15% federal grant from $3,500 to $5,000 for the 1998 and subsequent years thereby increasing the grant from $525 to $750. Also, most, if not all, provinces that issue the 15% credit have also increased the annual investment eligibility. Some provinces, such as British Columbia, give extra credits.
All provinces extend an equivalent 15% provincial grant, except for Alberta, Newfoundland and Prince Edward Island. The provincial grant is available for provincially accepted LSVCFs only.
The purpose of this increased investment eligibility and, also the proposal to eliminate the "cooling off" period which prevented individuals from claiming a credit in the two years following redemption, is to increase the funding in these plans. In 1996, restrictions were applied because of excess money in LSVCFs. However, LSVCFs are now in a position to take more capital.
Most individuals invest through their RRSPs however, some choose to hold the investments outside the RRSP.
Some other points include:
- The LSVCF cannot be cashed in for eight years.
- The grants received are not taxable. For example, the grants may be received personally even though the investments are put into an RRSP.
- Investments made in the first sixty days of a year are eligible for a credit in either the preceding year or the current year.
- Each province has a slight variation to the plan.
Employment versus Independent Contractor
45(4)
New Revenue Canada pamphlet RC 4110 includes checklists determining employer/employee versus independent contractor status. This is important because of the significant trend for employers to engage independent contractors, as opposed to employees, to save on payroll costs such as employment insurance (EI), Canada Pension Plan (CPP), and vacation pay. Recipients may be in favour of this status to avoid source deductions and to access deductions available to self-employed people, which are not available to employees.
Revenue Canada's concern peaks when independent studies conclude that "under-reporting'' on self-employment income is one of the motivating factors for becoming self-employed. (Globe and Mail, October 5, 1998, Page A2) Of course, this is tax evasion and Revenue Canada has targeted audit programs to catch the underground economy and, specifically independent contractors.
Problems
There is even more down-side to a corporation that engages independent contractors who are subsequently determined by Revenue Canada to be employees. Revenue Canada may assess for CPP and EI causing significant financial hardship to the payer. Also, expenses of the recipient may be disallowed. Therefore, it is essential to ensure that the relationship meets these Revenue Canada Guidelines.
Also, Revenue Canada reviews whether a person who owns less than, or equal to, 40% of the shares of a corporation may avoid EI because of their non-arm's length relationship with the employer. To qualify, not only do they have to lie non-arm's length, but the terms and conditions of their employment must be different than arm’s length employees, Revenue Canada has seventeen questions to review this status.
See Appendix B for the checklist,
Reasonable Expectation of Profit
45(5)
There are still many disallowed losses on the basis that there is no reasonable expectation of profit.
Some principles include:
- Where there is a personal element (such as a rental property in Florida or Hawaii used for personal purposes), it may be difficult to establish a reasonable expectation of profit to permit the losses.
- If there is no personal element, the Court will not generally question the taxpayer's business judgement, especially if there are sophisticated analysis which show that there was a potential for profit.
- If the projections show that there is no reasonable expectation of profit in the foreseeable future, Revenue Canada will likely disallow the loss even if there is no personal element - subject to permitting a few grace years before reassessing.
- If the losses are created by interest expense and there is a plan to reduce the interest expense, the loss may be permitted by the Courts even if there is an interim lack of reasonable expectation of profit.
Court Case
In a Court case, the Court noted that in applying the "reasonable expectation of profit" test the most relevant point is, "is there, or is there not, truly a business?''. Considerations include capitalization, knowledge of the participant, time spent, and businesslike, orderly approach.
The Court found that the losses in this case (buying and selling antiques and collectibles) should be disallowed because of a lack of commerciality. Also, many of the expenses were not supported by proper documentation.
Tax Shelters – Revenue Canada Warning
45(6)
In a November 24, 1998 Release, Revenue Canada warned investors in tax shelters that:
- Losses will be disallowed where there is no real business activity, no expectation of profit, inflated expenses or, investment exceeds the amount "at risk".
- An investor may face a 30% gross negligence penalty payment if they knowingly, or under circumstances amounting to gross negligence, make a false statement or omission pertaining to the tax shelter investment.
- Revenue Canada reviews all tax shelters. In the
last four years, investors in approximately 1,000
tax shelters were reassessed for additional taxes
owing over $250 million.
Ten criminal convictions against tax shelter promoters for tax fraud have resulted in fines of over $9 million and some jail terms.
Revenue Canada note that investors may avoid problems by:
- Know who you are dealing with.
- Pay attention to statements or professional opinions that discuss the income tax consequences. This may hint at a problem and suggest independent legal advice.
- Get assurances from the promoter in writing.
- Ask the promoter for any Advance Income Tax Ruling from Revenue Canada.
- Seek competent professional advice.
Pension Adjustment Reversals
45(7)
The 1997 Budget introduced a "Pension Adjustment Reversal" (PAR) which creates additional RRSP contribution room for an individual who left a registered pension plan (RPP) or a deferred profit sharing plan (DPSP) after 1996 and, the pension benefits are less than the amount attributed to them for purposes of the "Pension Adjustment" (PA).
The plan administrator will have until March 31, 1999 to report on Form T10 the PAR for employment terminations in 1997 and 1998. Also, the RRSP deduction deadline for the PAR amount is proposed to be April 30, 1999.
Depending on the type of plan, age, and salary, the amount of the PAR can vary considerably from no PAR to many thousands of dollars.
For more information on PAR, call 1-800-267-4100.
Employment
45(8)
Teachers' Convention Expense Deductible
In a Court case, Mr. I attended an annual two-day "teacher's convention'' as required by his employment. The Court permitted a deduction against employment income of $157, $141, and $145 in the 1986, 1987 and 1988 years. For example, the $157 was made up of $50 for the hotel, $57 for meals (Alberta Government rate) and $0.25 per kilometer for the car travel.
Unremitted Source Deductions
In a Court case, Mr. M noted that he received $3,500 net in wages per month (gross wage of $5,000 minus $1,500 of source deductions). Even though the T4 slips did not reflect this, Mr. M claimed a credit of $1,500 per month for the source deductions. Revenue Canada disallowed this credit and Mr. M appealed.
Good News
The Court allowed the credit and noted that:
- Revenue Canada's contention that the taxpayer was an independent contractor and the $3,500 per month was the gross pay was not accepted.
- Mr. M was in an employer/employee relationship and was in receipt of net salary even though it does not appear that there was actual physical withholding of source deductions.
- A Mr. N testified that he was present at a meeting and he had hand-written notes to the effect that Mr. M was to receive a gross salary of $5000 per month
- While Revenue Canada may not have actually received the tax withheld, they were in constructive receipt as soon as they were withheld at source. The employer is the agent of the Crown for purposes of remittance.
- It would cause undue hardship on taxpayers to demand that they assure that source deductions withheld by the employer are remitted to the Crown.
- Revenue Canada is in a much better position than the taxpayer to enforce the remittance of the source deductions.
Northern Resident Deduction – Travel Expenses
In a Technical Interpretation Revenue Canada note that an individual living in a prescribed northern zone, or intermediate zone, may deduct the cost of a trip, up to the amounts received from the employer in respect of travel expenses for the year.
However, if the individual takes the trip in year one but receives reimbursement in year two, the trip expenses are not deductible because the reimbursement did not occur in the same year as the trip. We also understand that in some instances Revenue Canada has argued that the portion of the salary that is designated to be for travel is, in fact, employment. Therefore, travel expenses were not permitted. This, apparently, is a question of fact.
GST
45(9)
GST - Due Diligence Defense Works
In a Court case, the Court agreed that the automatic 6% GST penalty on all GST assessments may be set aside with a legitimate "due diligence'' defense. Revenue Canada had previously taken the position that this was an automatic penalty and that the due diligence defense would not apply.
Appendix A
1998 Personal Income Tax Return Checklist
Information required includes:
- All Information slips such as T-3, T-4, T4A, T4A (OAS), T4F, T4PS, T4RIF, T4RSP, T4U, T-5, T-10, TA1, T101, T600, CTB1, T5003, T5013 and corresponding provincial slips.
- Details of other income For which no T slips have
been received such as:
- other employment income,
- business income,
- partnership income,
- rental income,
- alimony, separation allowances, child maintenance,
- pensions,
- interest income carried but not yet received - example Canada Savings Bonds, deferred annuities, Term Deposits, Treasury Bills, Mutual Funds, Strip Bonds, Compound Interest Bonds
- professional fees,
- Director fees.
- Details of other expenses such as:
- employment related expenses Provide Form T2200 "Declaration of Conditions of Employment",
- interest on money borrowed to purchase investments,
- investment counsel fees
- moving expenses - including costs of maintaining a vacant former residence,
- child care expenses,
- alimony, separation allowances, child maintenance,
- safety deposit box fees,
- accounting fees,
- pension plan contributions
- computer hardware and software replacement for non Y2K business assets,
- film and video production eligible for tax credit,
- business research and development.
- Details of other investments such as:
- real estate or oil and gas investments - including financial statements,
- labour-sponsored funds,
- registered education savings plans.
- Details and receipts for:
- Registered Retirement Savings Plan contributions,
- professional dues,
- tuition fees - including mandatory ancillary fees, and Form T2202,
- charitable donations,
- medical expenses,
- political contributions.
- Details of capital gains and losses realized in 1998.
- Details of previous capital gain exemptions claimed, business investment losses and cumulative net investment loss accounts.
- Name, address, date of birth, S.I.N., arid province of residence on December 31,1998.
- Marital/common-law status and spouse's income, S.I.N. and birthdate.
- List of dependents including their incomes and birthdates.
- If one of your dependents was in full time attendance at a college or university, details concerning name of institution, number of months in attendance, tuition fees, income of dependent, Form T2202.
- Are you disabled or are any of your dependents disabled? Provide Form T2201 - disability tax credit certificate.
- Details regarding residence in a prescribed area which qualifies for the Isolated Area deduction.
- Information regarding child tax credit receipts.
- Details regarding RRSP - Home Buyers' Plan withdrawals.
- Receipts for 1998 income tax installments or, payments of tax.
- Copy of 1997 personal tax returns, 1997 Assessment Notice and any other correspondence from Revenue Canada, Taxation.
- 1998 Personalized Tax information which Revenue Canada may have sent you.
- Do you want your tax refund or credit deposited directly to your account in a financial institution? Yes/No. To start direct deposit, or to change banking information, attach a "void" personalized cheque or your branch, institution and account number.
- Details of carry forwards from previous years including losses, donations, forward averaging amounts, registered retirement savings plans.
- Details of foreign property owned at any time in 1998 including cash, stocks, trusts, partnerships, real estate, tangible and intangible property, contingent interests, convertible property, etc..
- Details of income from, or distributions to, foreign entities such as foreign affiliates and trusts.
- Consider applying for a refund of a portion of the 1998 employer portion of Employment Insurance if it is in excess of 1996 premiums
- Details of your "Pension Adjustment Reversal" if you have ceased employment after 1996 and were in a Registered Pension Plan or a Deferred Profit sharing Plan. (T10 Slip)
Some Other Proposed 1998 Changes
- Do you provide in-home care for a parent or
grandparent (including in-laws) 65 years of age
or over, or an infirm dependent relative? A $400
federal tax credit is available but will be
reduced if the dependent's net income is in
excess of $11,500.
Also, the caregiver may claim related training costs as a medical expense credit.
- Emergency volunteers have a $1,000 exemption.
- All, or part, of a reimbursement on relocation for a loss in value of a former residence may not be taxed.
- Individuals carrying on a business may deduct amounts paid for Private Health Service Plan coverage
- Alternative Minimum Tax paid since 1994 on RRSP contributions will be refunded.
- Interest paid on qualifying student loans is now eligible for a tax credit.
Appendix B
RC 4110
Analysis of facts related to control
- Who is responsible for planning the work to be done?
- Who decides how and how much the worker is to be paid?
- Who decides on the time frames?
- Who decides how the work is to be done?
- Who decides on the hours of work?
- Who decides on the work location?
- Who assigns the individual tasks?
- Who supervises the tasks?
- Who sets the standards to be met?
- Quality?
- Volume?
- Time frame?
- Who decides whether work must be redone?
- Who covers the related costs?
- Who is responsible for training?
- Who covers the related costs?
- Who decides on the territory to be covered?
- Who decides on periodic activity reporting?
- Who decides if the work is to be done by the worker himself?
- Who hires helpers?
If you answer "Payer" to most; of these questions, it means that the payer exercises control over the worker. An employer-employee relationship probably exists. Otherwise, it indicates that a business relationship may exist.
Analysis of facts related to ownership of tools
- Who supplies the heavy equipment or covers its rental costs?
- Who supplies the specialized equipment or covers its rental costs?
- Who covers equipment maintenance costs?
- Who supplies the large tools or covers their rental costs?
- Who supplies the specialized tools or covers their rental costs?
- Who supplies the small tools?
- Who covers tool maintenance costs?
- Who supplies the materials?
- Who has invested in the equipment and tools?
If you answer "Payer" to most of these questions, it means that by supplying the tools and equipment, the payer exercises control over the worker. There is no risk of loss for the worker An employer-employee relationship probably exists otherwise, it indicates that a business relationship may exist.
Analysis of facts related to chance of profit/risk of loss
- Who covers the costs of damage to equipment or materials?
- Who covers the costs of liability insurance?
- Who covers office expenses?
- Who covers rental costs?
- Who covers delivery and shipping costs?
- Who covers costs related to bad debts?
- Who assumes responsibility for ensuring that guarantees relating to materials are honoured?
- Who assumes responsibility for the performance of the work?
- Who guarantees the quality of the work?
- Who covers the costs incurred by the worker in carrying out the work?
- Who covers the costs of the worker's benefits (paid vacation, sick leave, life insurance premiums, etc.)?
If you answer ''Payer'' to most of these questions, it means that there is little involvement on the part of the worker, and that his income does not depend on the result achieved at the end of the contract. An employer/employee relationship probably exists, otherwise, it indicates that a business relationship may exist
Integration
- What was the answer to most of the questions related to the control factor?
- What was the answer to most of the questions related to the ownership of tools factor?
- What was the answer to most of the questions related to the chances of profit/risk of loss factor?
If you answer "Worker" to these questions, it indicates that the worker integrates the payer's activities to his own activities A business relationship probably exists otherwise, it is reasonable to conclude that an employer-employee relationship exists.
RC4110 - Non-Arms Length Terms of Employment - E.I. Exempt
- Is the employee's salary comparable to that of other employees with similar tasks in the business?
- Is the employee's salary comparable to that of employees with similar tasks in similar businesses in the area?
- Is the employee's salary reasonable given the tasks performed?
- Does the employee receive his salary regularly?
- Did the employee invest in the business? If yes, was it a major investment?
- Are the employee's hours of work comparable to those of other employees with similar tasks in the business?
- Are the employee's hours of work comparable to those of employees with similar tasks in similar businesses in the area?
- Are the employee's tasks comparable to those of other employees with similar jobs in the business?
- Are the employee's tasks comparable to those of employees with similar jobs in similar businesses?
- Are the employee's tasks necessary to the well-being of the business?
- Is the employee's work duration comparable to that of other employees of the business, considering low activity periods?
- Is the employee's work duration comparable to that of employees with similar jobs in similar businesses in the area, considering low activity periods?
- Does the employee perform tasks related to his employment (e.g. bookkeeping, public relations, attendance at conventions, sales) during his periods of inactivity?
- Is the employee's work duration related to the business's real operational requirements?
- Is the importance of the employee's work comparable to that of other employees of the business?
- Is the employment essential to the business?
- Is the nature of the employee's work comparable to that of other employees of the business?
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.