2000 4th Quarter, Issue No. 52
YEAR-END TAX PLANNING
52(1)
Some 2000 year-end tax planning tips include:
- If the following expenditures are made by individuals by December 31, 2000 they will be eligible for 2000 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.
- 2000 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 1999 personal income tax return assessment notices. You have until March 1, 2001 to make a tax deductible RRSP contribution for the 2000 year.
Consider contributing to a spousal RRSP to achieve income splitting in the future.
The maximum 2001 addition to deductible RRSP contribution room is $13,500. Therefore $75,000 of 2000 earned income is needed to reach this maximum.
- Persons turning age 69 in 2000 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31, 2000. Certain 2000 excess contributions may be deducted in the year 2001 if contribution room is available.
- If you own a business, consider paying a reasonable salary to family members for their services rendered to the business.
- Ensure that all deductible alimony or maintenance payments are made by December 31, 2000.
- An individual whose 2000 net income exceeds $53,960 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 $26,284.
Individuals facing these problems should contact their professional advisors for assistance in managing their 2000 personal income.
- 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.
- 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.
- 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, 2000.
- Individuals may claim a non-refundable federal credit of 17% on the interest portion of student loan payments made in 2000.
Registered Education Savings Plan (RESP)
A Canada Education Savings Grant (CESG) for RESP contributions will be permitted 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.
Health and dental premiums for the self-employed
Individuals will be allowed to deduct amounts payable in respect of the year 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.
Tax on Split Income
The Income Tax Act applies the maximum marginal tax rate to certain passive income of individuals under the age of 18 commencing in the year 2000.
This includes:
- Taxable dividends, and other shareholder benefits, on unlisted shares of Canadian and foreign companies (received directly or through a trust or partnership); and
- Income from a partnership or trust where the income is derived from providing goods or services to a business carried on by a relative of the child or, of which the relative participates.
Therefore, consider minimizing this type of income in 2000.
Lump-Sum Payments
The Income Tax Act allows an individual to deduct a portion of a qualifying amount received in the year.
This includes lump-sum spousal or child support, superannuation or pension benefits, employment insurance benefits, benefits paid under wage loss replacement plans, and income received from an office or employment under a court order or judgment, an arbitration award or in settlement of a lawsuit that related to a prior year and is $3,000 or more.
The tax payable on the deducted amount is based on the prior year's tax rate.
This applies to amounts received after 1994.
Same-Sex Common-Law Couples
The Income Tax Act extends benefits and obligations to same-sex couples effective 2001 unless the couple elects, in which case it may be effective for the years 1998, 1999 and 2000.
2000 REMUNERATION
52(2)
Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning "active business income" include:
- Bonus down active business earnings in excess of $200,000.
- Elect to pay out tax-free "capital dividend account" dividends.
- Consider paying dividends to obtain a refund of "refundable dividend tax on hand".
- 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:
- Salary payments require source deductions to be remitted to Revenue Canada on a timely basis.
- Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create "earned income".
- Salaries paid to family members must be reasonable.
- 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.
PERSONAL TAX
52(3)
CANADA CHILD TAX BENEFITS (CCTB)
In a Tax Court case, Alain and Nicole were separated and the Court granted shared custody of the minor child - one week in Alain's home and the next week in Nicole's home. Both parents applied for the CCTB and CCRA determined, and the Tax Court agreed, that Alain was the person who mainly cared for the child even though, the female parent is usually presumed to be the one eligible for the CCTB benefit.
Also, remember that Form RC65 should be completed where marital status changes. For example, if the new status is married or common-law, and you or your new spouse have children who are residing with you, CCRA will move all the children to the female spouse's account. To receive CCTB, both spouses have to file a tax return.
If a taxpayer is recently widowed, separated or divorced, CCRA will recalculate the benefit so it is based only on your income.
MEDICAL EXPENSES
In Technical Interpretations Canada Customs and Revenue Agency (CCRA) noted that:
- Wheelchairs, including scooters and wheel-mounted geriatric chairs, qualify as medical expenses. Also included are electric scooters if acquired in substitution for a wheelchair.
- Beds normally found in hospitals may qualify as a medical expense however, this may not include the cost of a chiropractic bed.
- Orthopaedic shoes or boots made in accordance with a prescription to overcome a physical disability will be eligible medical expenses.
In a Tax Court case, the Court permitted as a medical expense special tuition fees paid by the taxpayer for her fifteen year old son who sufferred from a learning and attention deficit disorder. After the Toronto school system determined that they could not handle this case, a doctor was engaged to provide care and training.
Also, the Court permitted as a medical expense renovation costs of $77,667 incurred with respect to another child who had cerebral palsy and was confined to a wheelchair with the loss of the use of both legs and his right arm. The renovation was to construct a modest addition occupied solely by the child.
For greater certainty, the February 28, 2000 Federal Budget proposes to expand 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.
SAME-SEX COMMON-LAW COUPLES
Bill C-23 received Royal Assent on June 29, 2000 extending benefits and obligations to same-sex couples effective 2001 unless the couple elects, in which case it may be effective for the years 1998, 1999 and 2000.
Benefits of electing include:
- claim the spousal credit for a low-income partner,
- make spousal RRSP contributions,
- transferring property on death or breakup tax free to the surviving partner,
- transferring donations, medical expenses and other items from one partner to the other,
- receiving a $10,000 tax-exempt employment death benefit.
Some disadvantages include:
- combining income for purposes of the Canada Child Tax Benefit, the GST credit and other provincial tax benefits and income supplements based on family net income,
- non-spouses may take advantage of income transfers without being subject to the attribution rules,
- non-spouses may each have a principal residence eligible for the exemption,
- child care expenses are limited to the income of the lower income partner.
These pros and cons should be considered before electing prior to the year 2001.
PRINCIPAL RESIDENCE EXEMPTION
In a Technical Interpretation, CCRA note that even where a taxpayer is required by law or regulation to acquire land that exceeds one-half hectare, all the land may be considered necessary for the use and enjoyment of the residence and eligible for the principal residence exemption.
EMPLOYMENT
52(4)
GOLD RING
In a Tax Court case, the employer gave a gold ring to Mr. W upon reaching fifteen years of service. CCRA assessed a taxable benefit of $562 based on the cost of the ring to the employer. The Court agreed that this was an employment taxable benefit however, they reduced the benefit to $73 based on two independent evaluations which concluded that, because of the corporate logo, the value is its scrap value.
EMPLOYER-PAID EDUCATIONAL COSTS
In a Technical Interpretation, CCRA note that where an employer pays for courses of an employee for maintenance or upgrading of employer-related skills and it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the course, the benefit will generally be non-taxable. This may include fees and other costs such as meals, travel and accommodation.
However, these Guidelines do not necessarily apply in non-arm's length relationships or where the benefit was primarily for the employee. For example, where the employee and the employer agree to reduce salary in exchange for tax-free training costs.
AUTOMOBILE STANDBY CHARGE
In a Technical Interpretation, CCRA note that an employee's requirement to take an employer-provided automobile home, for reasons of security of the automobile, does not diminish the personal use aspect of travelling from the home to the office and vice versa. However, where the employee proceeds directly from home to a point of call other than the employer's place of business (e.g. to make repairs at customers' premises), or returns home from such a point, these trips are not considered to be personal.
Also, in a Ministerial Letter, CCRA note that even when an employer provides an older company-owned vehicle to an employee, the standby charge is based on the original cost of the vehicle. The Letter notes that many practitioners recommend avoiding any benefit by having the employee purchase the vehicle and the employer compensate them for the use of the vehicle.
HAIRCUTS
In a Tax Court case, the Court disallowed employment expenses for haircuts of $182 and cleaning and repairing military uniforms of $140. The taxpayer testified that he had to have his hair cut every two weeks to comply with the Army's haircut requirement and that the clothing allowance received of $17 a year was inadequate.
MARRIAGE BREAKDOWN
52(5)
SAME RESIDENCE
In a Technical Interpretation, CCRA note that it is possible for spouses to be living "separate and apart" for alimony deduction purposes while still occupying the same residence. The Court looks to see if the customary behaviour of spouses is present, such as joint social ventures, communication and discussion of family problems, and so on. Of somewhat less importance is whether either spouse performs domestic services for the other such as cooking meals or doing laundry. The Courts may also look as to why both spouses continue to reside in the same residence if they intended to live "separate and apart".
For example, where one spouse agrees to let the other spouse live with them during the winter because she has difficulties walking and is unable to leave the house during the winter, they may still be considered to be living separate and apart even though they are in the same residence. In this example, they had separate quarters and maintained each other's privacy.
ASSIGNMENT OF PENSION
In a Technical Interpretation, a Court Order required Mr. A to pay $X to Mrs. A to equalize the net family assets. Pension entitlements were taken into consideration in this Order.
CCRA confirmed that Mr. A would still be required to pay tax on 100% of the pension receipts unless there was a formal "division of pension benefits".
CHILD SUPPORT
In a 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 payment which is for both child and spousal support is deemed to be entirely child support and, none of the amount is deductible or taxable.
In a Tax Court case, Ms. C received a lump-sum child support payment in 1997 for arrears related to a 1983 Agreement. The Court found that the amounts must be included in income because the new non-taxable/non-deductible child support rules only apply to agreements that have a commencement day after April, 1997 or, where there is a joint election or, a payment variance.
LEGAL FEES
In a District Office Memo, CCRA permitted a deduction for legal fees incurred to enforce a right to child support.
In a 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 child support. Mrs. M acknowledged that she benefitted 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 the legal costs incurred to enforce a pre-existing right are deductible.
RRSP/RRIF
52(6)
SECURITY
In a Tax Court case, Mr. D gave the bank as security for a personal loan a Certificate of Deposit of $85,380 which was part of Mr. D's Registered Retirement Savings Plan.
Ouch!
CCRA successfully included the $85,380 in Mr. D's income.
DECEASED ANNUITANT
In a Technical Interpretation, CCRA notes that a deceased annuitant must include in income an amount equal to the fair market value of all property of the RRSP at death unless the amounts are rolled over to a spouse or, in certain circumstances to a financially dependent child or grandchild. The amount may then be rolled over to the recipient's RRSPs.
DONATIONS
52(7)
LIFE INSURANCE
Where a donor gifts a life insurance policy to a charity who becomes the new owner and beneficiary of the policy, the premiums paid by the donor are eligible charitable donations. A donation will also be available based on the value of the policy. There would be a deemed disposition of the policy possibly resulting in a taxable gain.
Also, the Federal Budget 2000 extends the charitable donation tax credit to donations of RRSPs, RRIFs and insurance proceeds that are made as a consequence of direct beneficiary designations for deaths after 1998. The donation credit is on the terminal return of the deceased taxpayer.
GIFTS TO ORGANIZATIONS OUTSIDE CANADA
Taxpayers may make charitable donations to organizations outside Canada provided the federal government, or its agents, have already made a gift to them in the year or, in the previous year. Also, Canadians may receive a donation tax credit for donations to over 400 listed foreign universities. To get on the list, the university must be able to grant degrees at least at the bachelorate level and must establish that the student body normally includes students from Canada in each of the last ten years. The list is in Schedule VIII of the Income Tax Act.
The Charities Division of CCRA has a list of charitable organizations outside Canada to which the federal government has made gifts. (1-800-267-2384)
FARMING
52(8)
TRANSFER OF FARM PROPERTY TO A CHILD
In a Technical Interpretation, CCRA note that to satisfy cash bequests to other beneficiaries, a Will might specify that a mortgage equal to a stated percentage of the estate is to be placed on the farm property prior to the transfer to a particular beneficiary.
QUALIFIED FARM PROPERTY
In a Technical Interpretation, CCRA note that where Mrs. X and the children inherit farm property upon Mr. X's death, the farm property may be qualified farm property for purposes of a future capital gain exemption if a gross revenue test is met by the taxpayer, parent, spouse, grandparent or great-grandparent.
TRIP TO NEW ZEALAND
In a Technical Interpretation, CCRA responded to a question regarding the deductibility of expenses incurred by a group of farmers who visited New Zealand.
They note that the tax deduction is limited to expenses incurred to earn income, excludes personal or living expenses and must be reasonable. In most cases an allocation on a reasonable basis to eliminate non-deductible expenses is necessary.
SALE OF LIVESTOCK
In a Technical Interpretation, CCRA note that when livestock is sold by a livestock auction mart it is usually done as an agent for the vendor. Therefore, the farmer may be taxable based on the date of the purchaser's cheque to the auction mart, even if the farmer requests the auction mart to issue a post-dated cheque to him/her.
FARM LOSSES
In a Tax Court of Canada case, the taxpayer was permitted a full deduction for farm losses, rather than the restricted farm loss applied by CCRA, even though they were also full-time employees. The off-farm work was a direct result of Farm Credit Corporation's requirement that Mr. F obtain off-farm income.
The Court noted that this assessment should never have occurred and the farmer was awarded costs.
GST
52(9)
WASH TRANSACTIONS
In a GST Memoranda, CCRA note that a "wash transaction" occurs when a supply that is taxable at 7% or 15% (HST) is made and a supplier has not correctly remitted GST/HST and the recipient is a registrant who would have been entitled to claim a full input tax credit (ITC) if the tax had been correctly applied.
Where there is a wash transaction, CCRA will consider waiving or cancelling the portion of the penalty and interest in excess of 4%. Also, where the person has exercised due diligence, this remaining 4% penalty may be cancelled under the Fairness Provisions. In addition, where there is a Voluntary Disclosure, the 4% penalty will not apply and only the GST/HST that should have been collected originally by the supplier will be sought by CCRA.
SORRY NO INPUT TAX CREDITS
In a Tax Court case, the appellant operated a courier service in Toronto. The appellant used approximately seventeen subcontractors who were advised to register under the Excise Tax Act to collect GST. Documentation was provided to assist them in this registration.
Ouch!
CCRA successfully disallowed the input tax credit where the GST registration number was not included on the invoice. The reassessment imposed GST of $76,294 plus interest and penalties.
NEW HOUSING REBATE
In a 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 or making substantial renovations.
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% 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.
DIRECTOR LIABILITY
In a Saskatchewan Court of Queens Bench case, the corporation failed to file quarterly GST returns for two years (eight quarters) and, 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.
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 for GST. If the vendor does not collect GST/HST they will still be liable for the tax.
INTERNATIONAL
52(10)
SNOWBIRDS VISITING THE UNITED STATES
Most "snowbirds" that spend a few months in the United States continue to be residents of Canada and subject to Canadian income tax on their world income. However, snowbirds that have a "substantial presence" in the United States may also be considered to be a resident in the United States and taxed in the U.S.. This test applies if the individual spends more than thirty-one days in the United States in the current year and; the total days in the current year in the U.S. plus one-third of the days in the preceding years plus one-sixth of the days in the second preceding years exceeds 183 days. (approximately 122 days per year)
However, if a person meets this test, but did not spend 183 days in the United States in the current year, the person will not be considered a U.S. resident if they have a "tax home" in Canada thereby permitting most snowbirds to avoid being treated as U.S. residents. To claim this exemption the Canadian must file Form 8840 - Closer Connection Exception Statement for Aliens.
DOT-COM CORPORATIONS
Many new Canadian dot-com companies are managed from a Canadian office but have a U.S. parent corporation, usually in Delaware. This is because U.S. dot-com companies often command higher valuations and have easier access to cash.
TAX HAVENS
The Organization for Economic Co-operation and Development (OECD) has issued a black list of thirty-five tax havens that must change their tax policies within a year, or face economic sanctions. Most of the countries are in the Caribbean or Pacific but also include countries like Bahrain, Belize, Gibraltar, Liberia, Liechtenstein, Monaco, Panama, Channel Islands and the British Virgin Islands.
DID YOU KNOW...
52(11)
NIGERIAN SCAM
There are many variations of Nigerian scams, one of which may include the request to use your Canadian bank account to deposit ill-gotten gains (say $30 million) and your fee would be, say, $6 million, subject to providing, say, $250,000 to cover some administrative costs. Of course, this is a scam and the $250,000 will be lost if paid.
KIDDIE TAX
Dividends paid by a public company to a minor are not subject to the Kiddie tax, however, if the minor owns shares in a private holding company which owns shares in a public company and dividends are paid by the public company to the holding company and then out to the minor, the dividends paid to the minor will be subject to the Kiddie tax because they are from a private company.
CONTRACT PAYMENT REPORTING
There is a requirement to file an Information Return under the new Contract Payment and Reporting System for a taxpayer whose business income is derived primarily from "construction activities". For this purpose, "construction activities" include the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all or any part of a building, structure, surface or sub-surface construction, or any similar property.
DIRECTOR LIABILITY
In a Tax Court case, the corporation failed to remit income tax deductions, CPP and EI 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 formal resignation. Therefore, the taxpayer's only defense was due diligence. This was not accepted by the Court because the taxpayer was an inside director and, he knew of the financial difficulty and that amounts had not been remitted to CCRA.
PERSONAL INJURY
In a 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 as a consequence of a motor vehicle accident are non-taxable.
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.
Our Services ~
Tax Tips ~
Our Clients ~
Year End Info ~
Links Of Interest ~
Contact Us ~
Home
