PERSONAL TAX  
51(1)  

Medical Expenses
In a March 13, 2000 Technical Jnterpretation, Canada Customs and Revenue Agency (CCRA) notes that medical expenses include amounts paid for "fulI-time care in a nursing home", where the patient has a severe and prolonged mental or physical impairment that has been certified by a medical doctor.

This implies constant care and attention by qualified medical personnel who are avail- able on a twenty-four-hour basis.

Therefore, in certain circumstances, a retirement home may qualify as a nursing home for purposes of the medical tax credit.

Home Renovations
In a May 5,2000 Tax Court case, the Court permitted a medical expense for home renovations of $68,386 and noted that:

1. The previous house was not suitable to the taxpayer's needs arising from multiple sclerosis (MS).

2. The tearing down of the old house and rebuilding it from the foundation up qualifies as "a renovation or alteration" for purposes of the Income Tax Act.

Also, in a May 30, 2000 Tax Court case, the taxpayer had a daughter who suffered from a serious medical condition thereby obliging the taxpayer to sell his existing house and build a new one that was free of environmental and other problems that affected his daughter's condition. A doctor noted that the home must be specially constructed with very exacting specifications. The taxpayer felt that the incremental costs were in the range of 25%. Therefore, he conservatively based his claim on an additional cost of 15% ($29,949).

The Court permitted the medical expense and noted that the creation of a new structure where there must be changes and additions to conventional plans to incorporate special features to accommodate medical needs should qualify.

Editor's Comment
For greater certainty, the February 28, 2000 Federal Budget expands medical expenses to include new home incremental costs enabling access to, or mobility within, for individuals with severe mobility impairments commencing in the year 2000.

EMPLOYMENT
51(2) 

Director Fees - Deferred Share Units
In a January I, 2000 Advance Tax Ruling, CCRA notes that where director fees are paid in the form of Deferred Share Units (DSUs), this will not be subject to tax until cash is paid.

Under this Plan, a notional account is established for each director who elects to receive DSUs instead of cash. The DSUs will be credited to the notional account and the director will also be credited with a "dividend equivalence" in the form of additional DSUs in respect of ordinary cash dividends paid by the Company on its common shares. The DSU cannot be redeemed until the director terminates his/her director position. 

Also, in another January I, 2000 Advance Tax Ruling, CCRA note that benefits that have accrued under a Stock Appreciation Right (SAR) may be used to acquire DSUs that qualify for the tax deferral. 

The SAR Plan provides an incentive for key employees related to the achievement of the Company's financial objectives as reflected through the increase in shareholder value.

Employee vs. Independent Contractor
In an April 14, 2000 Tax Court case, Mr. and Mrs. B's partnership was paid $37, 100, $42,842, $54,078, and $9,157 as an independent contractor for the. taxation years 1990 to 1993 by Delvee Inc. (Delvee) -a company that operated a treatment pro- gram for learning disabled young people. The partnership also charged GST on the services rendered. Mr. B noted that when they were engaged by Delvee (a company owned by his mother-in-law), they were advised that they were independent contractors.

Ouch!
The Court did not agree that the taxpayers were independent contractors, rather they were employees of De!vee, and noted that:

1. They were not engaged under "con- tracts of service".

2. All the so-called contractors (workers and managers) were ultimately answerable to Ms. M, the owner of the corporation.

3. Ms. M decided which worker would work with a particular client.

4. Neither of the appellants had risk of loss or chance of profit. The fact that Delvee reimbursed the taxpayers for expenses eliminated the opportunity to earn income by controlling expenses.

5. Delvee provided all equipment and tools.

6. None of the traditional tests of control, ownership of tools, chance of profit or risk of loss or integration favour the appellants.

Gifts and Awards
In a March 6, 2000 CCRA Roundtable, CCRA note that since 1981 it has been their policy that if a gift is for a wedding, Christmas, or similar occasion (such as birthdays, birth of a child) and is valued at $100 or less, no amount is included in the employee's income if the employer does not claim the gift as an expense. This generally allows one gift per employee per year. Two gifts are permitted in the year of marriage, as long as one of them is a wedding gift.

Stock Options
OPTIONS In an April 10,2000 District Office Memo, CCRA notes that the Income Tax Act permits the reporting of the income inclusion on a stock option benefit given by a Canadian-controlled private corporation ( CCpC) to an arm's length employee, when the shares are sold, as opposed to when the stock option is exercised. The employer reports the taxable benefit on the employee's T4 for that year.

Also, the February 28, 2000 Budget pro- poses to defer the reporting of a stock option benefit where publicly traded shares are sold, similar to the above-mentioned CCPC rules, if:

1. the employee is dealing at arm's length with the employer,

2. the shares are common shares,

3. the share purchase price is not less than the fair market value at the date the option is granted, and

4. the deferral applies only to the first $100,000 of options granted to the employee.

Reasonableness Of Management Fees
In an April 10, 2000 Technical Interpretation, CCRA con finned their long standing practice that they will not challenge the reasonableness of salaries paid to the principal shareholder/managers of a corporation when:

1. the general practice of the corporation is to distribute profits of the company to its shareholder-managers in the form of additional salaries; or

2. the company has adopted a policy of declaring bonuses to the shareholders to remunerate them for profits attributable to the special know-how, connections or entrepreneurial skills of the shareholders.

However, bonuses paid to shareholders, other than the principal shareholders, will be subject to reasonableness tests. Also, where the shares are owned by a holding company and the salary is paid to the individual who owns the shares of the holding company, the bonus paid to the individual will be subject to reasonableness tests because the recipient is not the shareholder of the corporation.

SORRY - NO PRINCIPAL RESIDENCE EXEMPTION (PRE)
51(3) 

In an April 11, 2000 Tax Court case, Mr. and Mrs. D claimed four PRE sales in three years, 1993,1994 and 1995, as well as another sale on account of capital. The Court found that the properties were on account of income and not eligible for the exemption.

1. The evidence provided by the appellants was inconsistent and argumentative. The Court placed very little weight on their evidence.

2. The appellants had either a primary or secondary intention to sell the proper- ties at a profit.

3. The appellants had a history of dealing in properties, had many transactions over a relatively short period of time and, had a special knowledge and interest in the real estate market (they were realtors).

4. When the appellants acted to change the numbers on the houses to correspond with 8 and 88, to make them more attractive to persons of an oriental background who found these numbers lucky, this indicated that they were making the properties more attractive for sale.

MARRIAGE BREAKDOWN
51(4) 

Third-Party Payments
In a May 16, 2000 Tax Court case, Mr. K made third-party alimony payments for his former spouse's condo mortgage interest, taxes, insurance, fees, hydro, cable TV, clothing, and car insurance, licence and maintenance. The amounts were not deductible as the specific wording required by Subsection 60.1 (2) was not part of the Agreement or the Judgment.

Child Support Payments
Based on Ontario Child Support Guide- lines and his substantial income, Mr. T was ordered to pay $17,000/month for child support for his two-year old son. The Ontario Court of Appeal unanimously rejected this Order and referred the case back to the Ontario Superior Court for a new determination .

The Court found that following the strict formula in the Guidelines resulted in child support which was just too high.

Also, in a March 21, 2000 District Office Memo. CCRA note that the new Child Support Provisions eliminate both the requirement to report child support in income and, the deduction available to payors. Generally, the new rules apply to agreements made after April, 1997. However, the new rules may apply to agreements made before May, 1997 if a joint election is filed by the parties, if the child support amounts change, if another agreement is made after April, 1997, or if the agreement specifically provides that the new tax rules will apply after April, 1997.

CCRA also note that a "child support amount' is any support amount that is not identified in the agreement as being solely for the support of the former spouse. Therefore, a payment which is for both child and spousal support is deemed to be entirely child support and, none of the amount is deductible.

Legal Fees
In a June 2, 2000 Tax Court case, Mrs. M incurred $10,950 of legal fees in obtaining a separation agreement paying $1,200 per month for child support and $2,500 per month spousal support. All of the legal expenses were incurred to determine her husband's income to enforce the pre- existing right to a support amount for the chi/d. Mrs. M acknowledged that she benefited from the final agreement but the costs incurred were primarily directed at enforcing the child's pre-existing rights to maintenance payments.

The Court noted that:

1. Legal costs incurred to enforce a pre- existing right to support are deductible.

2. The right of the child to child support is a pre-existing right under the Family Law Act of Ontario. Therefore, legal expenses incurred to enforce that right are deductible.

CHARITIES
51(5) 

Charitable Remainder Trust (CRT)
CCRA note in a February 8, 2000 Technical interpretation, that real estate may be legally divided into separate interests, such as a lifetime interest and a residual or remainder interest, and the taxpayer may, for example, gift the residual interest to a charity and receive a donation receipt.

With respect to property other than real property, a residual interest can be transferred to another person by means of a Trust.

In a February 15,2000 Technical Interpretation, CCRA notes that a person may transfer property to a CRT where a charitable organization has an equitable interest in the CRT entitling them to receive the capital when there are no further income beneficiaries. To qualify for a charitable donation, the transfer must be irrevocable and the right of the charity to receive the property at a future date must vest, such that the right may not be taken away at a future date.

The value of the gift includes factors such as the nature of the property, the age of the income beneficiaries, interest rates, mortality tables, anticipated future economic conditions, etc. The charity may not issue a donation receipt unless it can reasonably determine the value of the gift.

Donations To Foreign Post Secondary Schools
Canadians may receive a donation tax credit for donations to over 400 listed foreign universities. To get on the list, the university must be recognized by the educational authorities from that country and be able to grant degrees at least at the bachelorate level.

Also, the institution must establish that the student body normally includes students from Canada in each of the last ten years. The list in Schedule VIII of the Income Tax Act includes many U.S. universities as well as universities in the United Kingdom, France, Austria, Belgium, Switzerland, Israel, Lebanon, Ireland, Germany, Poland, Spain, China, Jamaica, Czech and Slovac Federal Republic, Australia, Croatia, South Africa, Netherlands, and Hong Kong.

REGISTERED RETIREMENT SAVINGS PLAN (RRSP)
51(6) 

Lifelong Learning Plan (LLP) 
In a February 24, 2000 District Office Memo, CCRA note that a taxpayer may borrow an amount tax-free from his/her RRSP under an LLP if, among other things, he/she or the spouse is, at the time of withdrawal, enrolled as a full-time student in a qualifying educational program. A pro- gram will qualify if it is not less than three consecutive months and the student spends not less than ten hours per week on the program.

Mortgage Investment
In a March 16, 2000 Technical lnterpretation, CCRA notes that a mortgage on real property situated in Canada is a qualified investment for an RRSP. However, if the mortgagor is the annuitant of the RRSP or at non-arm 's length with the annuitant, the mortgage must be insured under the NationaI Housing Act or by a corporation offering its services to the public as an insurer of mortgages.

In addition to the insurance, the interest rate and other terms of the mortgage must reflect normal commercial practice and be administered as if it were a mortgage on property owned by a stranger.

CORPORATE TAX RETURNS
51(7) 

Personal Service Business Corporations
In an April 10, 2000 Technical Interpretation, the taxpayer noted that individuals providing equipment, driving trucks, or providing labour in the resource industry as independent contractors are often asked to use a corporation to provide some comfort to the payor that they will not be required to remit CPP , El, and income tax on the basis of employment, rather than independent contractor, status.

CCRA reminded the taxpayer that the In- come Tax Act defines a "personal services business" (PSB) corporation as a business of providing services where the shareholder could be regarded as an employee of the entity to whom the services were provided. However, if in the absence of the company, there is no master/servant relationship and the individual is viewed as self employed, the corporation is not considered to be a PSB corporation. When a corporation carries on a PSB it will not be entitled to the "small business deduction" tax credit. As well, deductions are limited to wages and benefits paid to the incorporated employee.

CCRA referred the writer to the CCRA Guide "Employee or Self Employed" for a review of the employee vs. independent contractor tests.

Canadian-Controlled Private Corporations (CCPC)
On May 31, 2000, CCRA released IT-458R2 which discusses CCPCs and notes the advantages of the small business deduction, an additional month to pay taxes payable, enhanced Scientific Research & Development investment tax credits, shareholder entitlement to the capital gains exemption on the disposition of qualified small business corporation shares and, deferral of an employee's taxable benefit on the exercising of stock options.

The IT notes that it is not necessary that a CCPC be controlled by Canadian residents. For example, if an individual resident in Canada controls 50% of the voting rights of the shares, usually no other person or group of persons (i.e., public corporations and/or non-residents) control the corporation for purposes of the definition of a CCPC. However, this may not be the case if the public company or the non-resident held a share purchase right unless the share purchase right is not exercisable until death, bankruptcy or permanent disability. 

Condominiums
On June 2, 2000, IT -304R2 was introduced by CCRA and provides an overview of the condominium system in Canada, returns that must be filed and capital cost allowance issues. It notes that a residential con- dominium corporation that qualifies as a non-profit organization must also file Form T1O44 with its T2 corporate tax return.

TAX LIABILITY
51(8) 

Director Liability
Good News -Case 1 
In an April 28, 2000 Tax Court case, the Court allowed the appeal of the taxpayer from personal liability for unremitted GST.

The taxpayer did everything that a reason- able person could do. He sought legal ad- vice, prepared a proposal which recognized the corporate insolvency and met with the banker and secured creditor to make full disclosure.

When the cash flow problem arose he remitted GST with post-dated cheques which were honoured until the last ten days of January, 1995. There was no failure to remit GST until February 28, 1995 by which time the secured creditor had made a formal demand on the company to pay $195,000, had seized all of the company's accounts and had effectively closed down the business. There was nothing that the directors could do on February 28, 1995. Each of the shareholders also lost approximately $190,000 which had been invested in the business.

Good News - Case 2
In a May 15, 2000 Tax Court case, the corporation failed to remit $30,000 of source deductions. Mr. D was a director of the company, but not an employee and did not receive a salary. The company was controlled by his uncle, who was not a director, but was the true beneficial owner of the shares. The Court found that Mr. D was not liable for the unremitted source deductions and noted that:

1. The uncle chose to hide behind Mr. D who trusted him and who could be intimidated by him.

2. Mr. D was a mere nominee director with no powers, no responsibilities and no say in running the corporation. He was a young family member who was bullied by a domineering patriarch.

3. CCRA should pursue the uncle who was the defacto director.

In This Issue...

• Personal Tax
• Employment
• Sorry - No Principal Residence Exemption (PRE)
• Marriage Breakdown
• Charities
• Registered Retirement Savings Plan (RRSP)
• Corporate Tax Returns
• Tax Liability
• Farming
• GST / HST
• Did You Know

Past Issues - more tips

Really Bad News - Case 3
In a March 15, 2000 Tax Court case, Mr. B was a director of a corporation that made payments to independent contractors" without withholding CPP, El, and income taxes. CCRA treated the payments as being to employees, not independent contractors, and assessed Mr. B with the unpaid CPP, El, taxes, penalties and interest.

Ouch!
The Court found that the individuals were employees, not independent contractors, based on the four tests of control, profit and loss, ownership of tools, and integration, and noted that:

1. the workers worked eight hours per day with overtime hours,

2. the taxpayer, in his capacity as the per- son in charge of the corporation, pro- vided direction to the workers, and

3. the corporation supplied all the equipment, including a computer, fax machines and adding machine.

Therefore, the Court found that CCRA had properly assessed the appellant as a director of the corporation for failure by the corporation to remit source deductions.

Editor's Comment
Editor's Comment In being assessed under Section 227.1 , usually the taxpayer will claim due diligence. In gray areas such as this, the due diligence defense may work. However, the taxpayer, upon representing himself; did not argue this.

Resign Formally
In an April 18, 2000 Tax Court case, the corporation failed to remit income tax deductions, CPP and El premiums for July, September, December, 1994 and February and March, 1995. Mr. W indicated that he sent a letter to the corporate lawyer on March 21, 1995 noting that he was resigning as a director and, because the assessment was not issued until July 21, 1997, he could not be assessed because of the two year Statute of Limitations.

Ouch!
The Court did not accept that the unsigned letter to the lawyer constituted a resignation. Therefore, the taxpayer's only defense was due diligence. This was not accepted by the Court because the taxpayer was an in- side director at the time the source deductions were not made and, he knew of the financial difficulty and that amounts had not been remitted to CCRA. When he was forced out of management in March, 1995 the business was already five months in arrears of remittances. Requesting the new management to pay the arrears does not constitute due diligence.

FARMING
51(9) 

Livestock Auction Mart Sale
In an April 10,2000 Technical Interpretation, CCRA notes that when a farmer sells livestock through an auction mart, and the auctioneer holds the proceeds in trust for the vendor, the proceeds should be included in income by the farmer when the auction mart receives payment from the purchaser. Also, depending on the particular province, the auction mart may be an agent for the farmer and income is to be reported when payments are received by the auction mart.

If it is not an agency or trust relationship, it depends on when the vendor has received the auctioneer's cheque in absolute payment of the debt.

Partition Of Property
In an April 5, 2000 Technical Interpretation, CCRA note that where Mr. A and Mr. B are tenants in common in farmland and, they each wish to go their own way, it possible to do a subdivision such that each person takes a divided piece of land without triggering a capital gain under the partition of land rules.

Farm Losses
In a June 14, 2000 Tax Court case, the taxpayer deducted full farm losses against other income and CCRA successfully reduced the losses to a restricted farm loss basis. The Court noted that:

1. The taxpayer had losses largely in excess of $20,000 in each year since 1990, with the exception of 1994 when there was a $5,000 profit, and these were deducted against optometry in- come usually in excess of $90,000 per year.

2. Even though the taxpayer had eighteen years of farming experience and had grown up on a farm, the time spent on farming was not greater than that spent on optometry, the capital in- vestment is about the same as optometry, and the taxpayer did not provide any evidence as to the profit he could expect from farming relative to optometry, when it might incur, or whether it would be substantial.

3. The taxpayer could not prove any sudden unforseen set-backs which pre- vented profits.

4. Most of the capital equipment was on pickup trucks and A TVs, as opposed to normal farm equipment.

5. Profitability quantum is relevant be- cause it provides a basis on which to compare potential farm income with that actually received from optometry. The taxpayer failed to provide evidence of a reasonable expectation of substantial profit from farming. Also, the tax- payer had a personal interest in financing his home, owning horses and operating some of the vehicles for hunting. Also, his startup period had ceased by 1995.

CCRA was correct in restricting the losses.

GST / HST
51(10) 

Not A Commercial Activity
In an April 4, 2000 Tax Court case, the taxpayer, a full-time teacher, carried on a sideline farming activity from 1992 to 1995 in which the total gross revenue did not exceed $3, 700. CCRA successfully disallowed the GST input tax credit\' on the basis that there was no commercial activity or expectation of profit. The Court noted that:

1. The land was too small to give hope of profits.

2. The appellant did not qualify for provincial fam1ing assistance.

3. The taxpayer did not demonstrate that he put enough time and energy into operating the fam1 to make it profit- able.

4. The taxpayer had only three cows and two calves in 1991 -increased to five cows and three calves by 1995 -and the gross revenue declined from $3,100 to $600 to$1 to nil in 1995 and the losses were $9,150, $10,395, $2,500 and $1,325 respectively.

New Housing Rebate
In a May 31, 2000 Tax Court case, the taxpayers were prevented from obtaining a "new housing rebate" because they did not make their application within two-years of acquiring a home.

In this case, the residential complex was completed on September 27, 1995 and the rebate was not applied for until December 27, 1997.

Director Liability
In a July 30, 1999 Saskatchewan Court or Queens Bench case, the corporation failed to file quarterly GST returns for two years (eight quarters), therefore, the corporation was fined the minimum fine of $1,000 per quarter for a total of $8,000. Also, Mrs. D was fined $1 ,000 per quarter as the director of the corporation thereby resulting in a double up of the penalty.

The Saskatchewan Court found that there was no evidence that Mrs. D was aware the corporation had received a Notice of Demand and, therefore, she was not guilty. However, the corporation continued to be liable for the $8,000.

New Residential Rental Property Rebate
The February 28,2000 Budget proposes to introduce a New Residential Rental Property Rebate, generally  equal to a maximum of 2.5% of tax for newly-constructed, substantially renovated or converted residential rental accommodation. This rebate will be available in respect of rental accommodation including single unit and multiple unit rental housing, additions to multiple unit rental housing, and land leased for residential purposes -provided the rental accommodation or land is used, or intended to be used, as an individual's primary place of residence on a long-term basis. The rebate will apply to costs incurred after February 27,2000.

Detax
CCRA advise that vendors should be aware that a number of individuals are claiming GST exemptions and, in some cases, presenting cards, such as "Corporation Sole" and "International Humanity House", in an attempt to avoid paying GST on their purchases. These people are not exempt from GST. If the vendor does not collect GST/HST he/she will still be liable for the tax.

DID YOU KNOW
51(11) 

Asset Transfer Void
In a recent Ontario Superior Court case, Mr. S's first wife died when they were in their fifties and Mr. S re- married and remained married for twenty-five years at which point he was advised that he had just a short time to live. Mr. S wished his as- sets to go to his children, and not to his second spouse or to her children and, there- fore, prior to death, transferred assets to his children.

Mrs. S successfully made a claim for her interest in the Estate as his spouse on the basis that the transfer was made without her consent and, effectively was a fraudulent conveyance.

Hepatitis C
In a March 14,2000 Technical Interpretation, CCRA note that amounts received by a taxpayer as damages for personal injury are excluded from income. This includes special or general damages as a result of having acquired Hepatitis C through a blood transfusion.

Also, income replacement indemnities received in respect of personal injuries from a province as a consequence of a motor vehicle accident are non-taxable.

Canada Council Awards
In a March 20, 2000 Technical Interpretation, CCRA reviewed the taxability of twenty-three prizes and awards administered by the Canada Council for the Arts. They noted that the first sixteen awards would qualify as tax-free prescribed prizes. However, awards seventeen, eighteen and nineteen are unclear. Awards twenty to twenty-three are likely not tax exempt.