Revenue Canada conducts desk audits, field audits and special Investigations.
- Desk audits are usually less stressful as Revenue Canada is simply requesting documentation to justify a claim such as child care expenses, rental losses or automobile expenses.
- Field audits result in a visit from Revenue Canada auditors and usually involve a more detailed examination of the records of the business.
- Special investigations apply when
Revenue Canada believes that a criminal prosecution may be
required.
Processes that Revenue Canada uses to select taxpayers for audit include:
- Review of tax returns and statistical analysis including random sampling - a higher review applies to cash businesses (e.g. restaurants), businesses where receipts may not be needed (e.g. home improvements), businesses whose gross margins do not appear to be within the industry norms, individuals claiming rental or business losses and individuals who have been audited successfully in the past.
- Audit projects - this targets groups that have a high level of non-compliance such as scrap metal dealers, rental losses, specific tax shelters and restaurant employees receiving tips.
- Secondary files - even though the main audit may be on an individual or company, a secondary review may be done on, say, the spouse, investors, suppliers, subsidiary companies etc.
- Leads generated by Revenue Canada - such as payments to subcontractors, cheques made payable to an individual rather than a business, persons travelling to exotic locations discovered in the audit of a travel agency etc.
 Informers - chief sources of leads include former spouses, ex-business partners, employees, neighbours, business competitors and others who have financial information.
- Police leads - Revenue Canada receives
information from law enforcement agencies on persons who have
received proceeds of crime.
 In a recent court case, a grandparent set aside funds "in trust for" a grandchild. The grandchild was notified and the grandparents were the trustees. The trust was to distribute the funds to the grandchild when she reached aged 18. For some reason, the account was closed prior to that date and the funds were taken by the grandparent. When the grandchild reached age 18, she successfully sued the grandparent for return of the funds, plus interest. The Court did not award punitive
damages. Also, it should be noted that when funds are gifted to a non-arm's length minor, the property Income earned thereon, such as dividends and interest, must be reported by the transferor until the child turns age 18. However, capital gains may be reported by the minor, not the transferor.
 In a recent court case, the owners of a restaurant corporation incorrectly paid unemployment insurance premiums from 1986 to 1996 - they were exempt because of their share ownership. Refunds were provided by Revenue Canada for 1994, 1995 and 1996 but not for previous years because the Unemloyment Insurance Act (now called the Employment Insurance Act),just provides for refunds within three years. The taxpayers applied for refunds for those previous years under the "Revenue Canada Fairness Package" but, the Court refused the application on the basis that the Employment Insurance Act precludes the use of fairness legislation.
As an alternative, the applicants used the "unjust enrichment" argument. Unfortunately, this was not accepted by the Court because it was not raised in a timely manner. However, it appears that unjust enrichment applications may be accepted by the court if made on a timely basis.
Caution: This is a complicated legal process and professional advice is needed.
 In 1996, the Human Resources Department (HRD) began using Customs Declaration forms to track employment insurance recipients who were not available for work because they were travelling outside Canada. HRD used these dec1arations as the basis for recovering EI payments. The Federal Court recently ruled that the Customs Act does not permit this practice. The Government has appealed the decision but in the meantime has suspended this program. 30,000 to 40,000 investigations are now on hold and 6,000 appeals have been suspended pending the appeal of this decision. Using this matching program, 136,000 investigations resulted in the collection of $70 million in overpayments and $28 million in penalties for a total of $98 million in savings. The Government has said that it has no plans to repay money collected under the matching program.
Life Insurance Donation
 If a donor gives a life insurance policy to a chatity and also names the charity as the beneficiary, a donation receipt may be provided for the value of the policy. Any gain on the policy will be included in income. Also, any future premiums paid by the donor will be eligible for a donation credit.
Donation Without Conditions
Revenue Canada notes that a donation must not result directly or indirectly in a right, privilege, material benefit or advantage to the donor or to a person designated
by the donor. The donation must be made without conditions, from detached and disinterested generosity, out of affection, respect or charity like impulses, and not
from the constraining forces or any moral or legal duty.
Bequests
Revenue Canada notes that a bequest made in a Will is considered a donation on the terminal return of the deceased if the charitable organization and the amount is actually stated in the Will. However, many Wills are drafted such that the residue of the estate is to be divided among such registered charities as the trustees determine. Revenue Canada takes the position that these donations may not be eligible for the terminal return.
|
Source Deductions Not Remitted
In a Tax Court of Canada case, Mr. A was employed by a corporation that did not remit the source deductions. The Court permitted a credit on Mr. A's personal tax return for the unremitted source deductions. The Court was satisfied that even though records were non-existent, in fact a portion had been withheld for income tax by the employer but not remitted. The director's of the employer corporation may be personally liable for these unremitted source deductions.
Directors - More Bad News
 The Federal Court of Appeal recently overturned a Tax Court decision which had found that directors of a non-profit corporation escaped liability on unremitted source deductions for a number of reasons including a lower standard of care for directors of a non-profit corporation. The Court found the directors liable and noted that:
- persons acting as de facto directors are also liable for unremitted source deductions even though they may not technically have the status of directors;
- the obligation on directors is to prevent a failure;
- volunteer directors are held to the
same standard of care as directors in commercial entities.
Caution!
Because of this broad interpretation of the word "director", persons who are responsible for making source deductions should be aware that they may be potentially liable if the source deductions are not remitted.
Employer-Paid Education Costs
Revenue Canada notes that where an employer hires high school graduates and agrees to pay the education costs to obtain a degree or diploma in return for the student working for the employer during the summer and for a certain time after graduation, this is not a taxable benefit to the student. This is based on a Revenue Canada pronouncement that, "courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the courses, would generally be considered to primarily benefit the employer and therefore be non-taxable". This includes, fees and other associated costs.
Employee Award Program
Revenue Canada notes that where an employer awards credits to employees for making suggestions to improve the business, for demonstrating extraordinary customer service, for outstanding job performance, etc., there will be no taxable benefit until the award credits are redeemed for gift certificates, merchandise and travel.
 Canadian seniors that are facing cash flow problems but own a home may consider a reverse mortgage. Rather than sell the home, the homeowner may place a reverse mortgage on the home, normally to a maximuim of approximately 50%, and receive the money either as a lump sum or as a monthly payment. At the end of the term, which may be for a fixed period or at the death of one, or both spouses, the loan must be repaid - usually through the sale of the home. No payments are due before that time. Because there is a reduction in the equity in the home, the reverse mortgage may be discussed with potential beneficiaries if the inheritance of the home is an important factor for them. Usually the income earned on the cash or the monthly payment is tax-free because it is offset by the interest expense which is accruing on the mortgage. Therefore, it is not likely that the reverse mortgage would affect income-related plans available to seniors such as the guaranteed income supplement, old age security, the age credit and GST credits. The largest provider reverse mortgages is the Canadian Home Income Plan (CHIP). Some of the rules relating to CHIP include:
- Borrowers must be age 62 and over. Couples must both be over this age.
- The home must be paid off. If there is a mortgage, it must be retired with the proceeds of the reverse mortgage.
- The home must be in an urban area - farms do not qualify.
- clients may borrow up to 40% of the
appraised value of their homes.
Some costs involve an appraisal on the house and a requirement to obtain independent legal advice.
Information on the CHIP program is available at 1-800-563-2447.
Tuition Fees
A personal tax credit is available for an individual's tuition fees including ancillary fees. Revenue Canada confirmied that fees paid by students for food supplies in a chef program would qualify as ancillary rees. Also, where students pay a deposit of two-thirds of the value of their books under a mandatory text book leasing program, the lease payments may qualify as ancillary fees if the student returns the book for a refund of the deposit. Revenue Canada also notes that the annual charge automatically levied as part of tuition fees for a fund to acquire library books may be considered an ancillary fee.
Moving Expense
 Revenue Canada confirmed that where an individual commences enployment in another city but there is, say, a three year delay before moving, he/she would still be entitled to deduct moving expenses. Revenue Cananda notes that where the move is because of a new employment position, even though the move was delayed, in this case, because of the individual's health, the depressed real estate market, and the difficulty in selling the old residence, these circumstances are reasonable. Therefore, the moving expenses are deductible.
Child Tax Benefit
To receive the child tax benefit, both spouses must file a tax return every year. If only one parent files a return, payment may be advanced by Revenue Canada for a while, with warnings. Repayment will be requested if the other spouse fails to file.
Medical Expenses
Revenue Canada note that an amount paid to a medical doctor normally qualifies as a medical expense. Further, an amount paid to a medical practitioner for surgery of any kind, whether cosmetic or elective, generally qualifies as it is presumed that such surgery is beneficial to the patient's health. Also, an amount paid to a dentist for tooth bleaching would normally qualify. The writer had asked for comments on medical tax credit eligibility of amounts paid to doctors for hair transplants, facelifts, liposuction, rhinoplasty and breast augmentation.
Retroactive Lump-sum Payments
The 1999 Federal Budget proposes that individuals receiving qualifying retroactive lump sum payments of $3,000 or more after 1994 will be allowed a special mechanism to compute the tax. Revenue Canada note that requests for adustments will be handled by the Taxation Centre, upon request by the taxpayer. Draft Legisiation will probably be released in the fall of 1999 and adjustments will be made in the year 2000.
|
In This Issue...
 Taxpayers must disclose to Revenue Canada on Form T1135 foreign investments (with a few limited exceptions) having an aggregate cost of over S100,000 Canadian.
The penalties for failure to file Form T1135 include:
- Basic penalty $25 per day - minimum $100 and maximum $2,500; plus
- If the omission is made, "knowingly or under circumstances amounting to gross negligence" - $500 per month times a maximum of 24 months for a maximum of $12,000 minus the penalty in 1. above; plus
- Where 2. above applies, after 24 months
- 5% times the cost of the asset minus the penalties in items 1.
and 2. above.
For example, if an investor had knowingly not reported foreign assets costing $300,000 for, say, three years the penalty is $15,000. (5% of $300,000) Also, false statements or omissions on a filed T1135 made knowingly are subject to penalties of the greater of $24,000 and 5% of the omission.
Remember
An application may be made under the Revenue Canada Fairness Package for a waiver of penalties under certain exceptional circumstances.
Net Income Stabilization Account (NISA)
 The minimum income trigger for NISA is proposed to increase from $10,000 to $20,000 for an individual and from $20,000 to $39,000 for a family. Information on this is being sent directly by NISA to its 30,000 clients. For more information call 1 800 665 6472.
Retiring Allowance
In a Revenue Canada ruling, Mr. A sold a farm propietorship in which he had employed his spouse. Revenue Canada ruled that the farm business may pay a tax deductible retiring allowance to Mrs. A upon the cessation of her employment for the years employed. This may be rolled over to an RRSP by Mrs. A within prescribed limits - $3,500 per year employed prior to 1989, and $2,000 per year employed from 1989 to 1995.
GST
47(11)
Bad Debts
A supplier who has written off as a bad debt an account receivable on which GST has been paid may claim a deduction for GST purposes. Also, if a bad debt is subsequently recovered, GST must be recognized on the recovery.
Coin-Operated Devices
A Coin-Operated Device Remission Order was approved on March 4, 1999, granting tax relief to GST registrants who made sales through a mechanical coin-operated device that is designed to accept only a single coin of 25 cents or less. The Order provides for remission of the tax payable (and related interest and penalties paid) on supplies made after January 1, 1991.
Agency
In a Tax Court case, Evergreen Ltd, engaged tree planters and deducted from their earnings costs related to the engaging of cooks and the purchasing of groceries.
If the tree planter had paid these directly the amounts would not be subject to GST because of the exemption for salaries and basic groceries. However, because the arrangements were made by Evergreen and deducted from the cheques, Revenue Canada was successful in arguing that this was a supply offered by Evergreen to the planters, not an agency relationship, and therefore is subject to GST. Revenue Canada's Policy Statement P-182 (Determining the Meaning of 'Agency') notes that there are three essential qualities of 'agency') - consent of the parties, the agent's authority to affect the principal's legal position and the principal's control over the agent. The Court found that an Agency relationship did not exist because these three qualities were not met.
Refund of Federal Excise Tax on Gasoline
Registered Canadian amateur athletic associations, registered charities, and individuals with mobility impairments are eligible to claim a refund of Federal Excise Tax on gasoline of .015 cents per litre by completing form XE8-1(99).
Bribes
 Effective February 15, 1999, the Corruption of Foreign Public Officials Act (CFPOA) establishes a criminal offence for the bribery of foreign public officials in the course of business. The Income Tax Act disallows the deduction for payments which are an offence under the Criminal Code and, therefore, these payments are paid out of after-tax dollars. The deduction is prohibited only if the payment is illegal.
|
