2001 PERSONAL INCOME TAX RETURN CHECKLIST  
57(1)  

Appendix A provides a checklist of information that will be needed to complete your 2001 Personal Income Tax Return.

FEDERAL BUDGET
57(2) 
 
On December 10, 2001, the Honourable Paul Martin reported a budgetary surplus of $17.1 billion dollars in 2000-01 and expects a 2001-02 balanced budget - the fifth in succession.  Any surplus in the 2001-02 year will be dedicated to the Strategic Infrastructure Foundation and the Africa Fund, rather than paying down the public debt.

Net public debt has declined from $583 billion in 1996-97 to $547 billion today.

Also, all provinces and territories of Canada, with the exception of Newfoundland, Prince Edward Island and Nunavut, reported budgetary surpluses in 2000-01 for a cumulative total surplus of $12 billion.  The aggregate federal-provincial-territorial government surplus for 2000-01 is therefore $29.1 billion.

Some tax items include:

1. Apprentice Vehicle Mechanics’ Tools Deduction  Beginning in 2002, apprentice vehicle mechanics may deduct the cost of new tools, to the extent that those costs exceed the greater of $1,000 and 5% of their apprenticeship income.
   
   

2. Adult Basic Education - Tax Deduction for Tuition Assistance  The Budget proposes to exempt from income tax any tuition assistance received after 1996 for adult basic education provided under certain government programs, including employment insurance.

   
   

3. Extending the Education Tax Credit The Budget proposes to extend the education tax credit, beginning in 2002, to people who receive taxable assistance for post-secondary education under certain government programs, including employment insurance.

   
   

4. Donations of Certain Publicly Traded Securities to Charities On October 12, 2001, the Government announced its intention to make permanent the 1997 Budget measure that provides a 25% taxable capital gain (not 50%) for donations of certain publicly traded securities to public charities.  This measure was originally scheduled to expire on December 31, 2001.

   
   

5. Goods and Services Tax Credit (GSTC) Responsiveness  The GSTC offsets the impact of the GST on low- and modest-income Canadians.  The GSTC is paid quarterly over the 12-month period (the benefit year) beginning each July.  Currently the GSTC is calculated on the basis of income and family information provided as of the end of the previous calendar year, six months before the beginning of the benefit year.  As a result, the GSTC for a particular benefit year does not respond to changes in family circumstances (such as births, deaths, marriages and reaching the age of 19 years) that occur after the end of the previous calendar year. Beginning with benefits payable for July, 2002, an individual’s GSTC entitlement for a quarter will be based on the circumstances at the end of the preceding quarter.

   
   
   

6. Deferral of Corporate Tax Installments for Small Businesses  To provide a cash flow benefit to small corporations, the Budget proposes to defer payment of federal corporate tax installments for January, February and March, 2002 for a period of at least six months, without payment of interest or penalties.

PERSONAL TAX
57(3) 

MINING TAX CREDIT
The 2000 Federal Budget provides a 15% non-refundable investment tax credit to individuals investing in flow-through shares on certain surface exploration (flow-through mining expenditures) incurred after October 17, 2000 and before January 1, 2004.


DISABILITY TAX CREDIT (DTC)
The 2001 DTC is based on $6,000 ($4,293 in 2000) and is available to an individual who has a severe and prolonged disability which markedly restricts his/her activities of daily living.

The DTC is also available to persons who need life-sustaining therapy to support a vital function such as clapping therapy to help in breathing or, kidney dialysis.

To qualify, a Form T2201 Disability Tax Credit Certificate must be completed and signed by a medical practitioner.

The unused DTC may be transferred to a supporting parent or child or, for 2000 and subsequent years, to a supporting brother, sister, aunt, uncle, niece or nephew.

MOVING EXPENSES
The Income Tax Act permits a deduction for moving expenses if a taxpayer moves from one residence where he/she ordinarily resides to another residence where he/she ordinarily resides to carry on business, to be employed or to be a student.

In an October 26, 2001 Tax Court of Canada case, the taxpayer received a teaching job in Keyano College in Fort McMurray from January 3, 1998 to April 30, 1998.  He therefore relocated to a residence in the college even though his wife continued to live in his house in Delta, British Columbia and to work in British Columbia.

The Court permitted the moving expenses from Delta to Fort McMurray and back on the basis that the taxpayer was taking up a new residence where he would ordinarily reside.

EMPLOYMENT
57(4) 

EMPLOYMENT EXPENSES

In a September 10, 2001 Technical Interpretation, CCRA note that the Income Tax Act provides a deduction from employment income for supplies consumed in employment.  Because tools do not fall into this category, they are not eligible for a deduction by employees.

EMPLOYER PROVIDED COMPUTERS
In a January 1, 2001 Advance Income Tax  Ruling, an international corporation wished to provide its employees with a personal desktop computer (including monitor, mouse, keyboard, printer, speakers, and internal 56K modem) or a laptop computer (including printer, mouse, and internal 56K modem), pre-installed internet access free for at least one year, Microsoft software and access to the company’s internal network.

One of the advantages to the company is that this allows employees to better balance their work and personal lives thereby increasing the company’s staff retention.  Also, by being part of a worldwide program, the participants are able to communicate with their parent company and its subsidiaries at any time, from home, or work.

CCRA ruled that the employees will not have a taxable employment benefit.

REIMBURSEMENT OF COMPUTERS
In a November 9, 2001 Technical Interpretation, an employer proposed to reimburse of a portion of the employees’ costs to purchase personal computers and software, for the use in their homes, that are compatible with equipment used by the employer.

CCRA note that this will be a taxable employment benefit notwithstanding that the assets may be used for employment-related purposes.


ALLOWANCES

Commencing January 1, 2001, where a travel allowance paid by a employer is a combination of a flat-rate and a reasonable per-kilometre rate that covers the same use for the vehicle, the total combined allowance must be included in the employee’s income for tax purposes.

Therefore, the employer cannot claim a GST Input Tax Credit for these combined allowances.  However, the employee or partner may deduct motor vehicle expenses and, therefore, be eligible for a GST rebate.


GIFTS AND AWARDS
CCRA has a new policy effective January 1, 2001 to permit up to $500 of tax deductible, non-taxable gifts (maximum two) and up to $500 tax deductible, non-taxable awards (maximum two) to an employee.

These positions do not apply to cash or near-cash gifts and awards such as gift certificates, gold nuggets, and any items that can easily be converted to cash.

 

CAPITAL GAINS AND LOSSES
57(5) 

TRANSFER OF CAPITAL LOSS TO A SPOUSE

If one spouse has an underlying loss on shares, and the other spouse has capital gains, it may be possible to transfer the loss to the other spouse to offset his/her gains.

Caution:  This is a complicated area and requires professional assistance.

EXCHANGE OF MUTUAL FUND UNITS
Where a mutual fund trust unit is redeemed and the proceeds are used to buy units of another mutual fund trust, this will result in a disposition for tax purposes.  On the other hand, a “change” of units may occur where units of one class of a mutual fund are reclassified or redesignated as another class of the same mutual fund trust.  Whether this results in a disposition will depend on the circumstances.  For example, where the trust agreement provides that more than one class may be issued by the Fund and makes provision for changes between the classes, a change of units generally will not result in a disposition.

 

BUSINESS AND PROPERTY INCOME
57(6) 

OFFICE-IN-THE-HOME EXPENSES
In a September 27, 2001 Tax Court of Canada case, the Court permitted a deduction for office-in-the-home expenses incurred by a physician.  The Income Tax Act permits a deduction if:

1. the office is the principal place of business or, 

2. is used exclusively to earn income and, is used on a regular and continuous basis for meeting clients, customers or patients.
    

RENTAL LOSS
In a September 19, 2000 Tax Court of Canada case, the taxpayer acquired a rental property in a major ski resort area in 1989 and incurred losses from 1989 to 1994 of approximate $6,500 per year on gross revenues each year of approximately $6,000.  CCRA disallowed the loss in 1994 on the basis that there was no reasonable expectation of profit.

GOOD NEWS!
The Court allowed the loss and noted that the decision to purchase was taken for business, not personal, reasons The Court must not substitute its business judgment for that of the purchaser’s.  The taxpayer did what he could to minimize the losses in a difficult market.

INTEREST EXPENSE
57(7) 

In two September 28, 2001, Supreme Court of Canada cases, the Court allowed a deduction for interest expense.
 

LUDCO
In this case, the taxpayer borrowed funds to purchase shares in two offshore companies in which the dividend income of $600,000 was significantly less than the $6 million of interest expense.  Upon redemption, the taxpayer realized a capital gain of $9.2 million.  CCRA disallowed the interest expense deduction on the basis that the funds were borrowed for the purpose of earning a capital gain, not for the purpose of earning “income” from property.

The Court noted that interest on money borrowed to invest in shares, or property, is deductible if it is incurred to earn amounts that must be included in the computation of “income”.


SINGLETON
This case involves a Vancouver lawyer who withdrew funds from his partnership account to acquire a house and, on the same day, borrowed funds against the house to redeposit into his partnership capital account.  Mr. Singleton took the position that the funds were now being borrowed to finance his partnership capital account and the interest expense was deductible.  CCRA argued that the debt was really related to the acquisition of the house and the interest should not be deductible.


GOOD NEWS!
The Court permitted the interest expense deduction and rejected CCRA’s contention that the “economic reality” should be considered in interest expense deduction cases.

EDITORS COMMENTS:
On October 18, 2001, officials in the CCRA Rulings Directorate advised that they are reviewing the Ludco and Singleton decisions with respect to their interpretive and administrative positions.

In This Issue...

• 2001 Personal Income Tax Return Checklist

• Federal Budget

• Personal Tax

• Employment

• Capital Gains and Losses

• Business and Property Income

• Interest Expense

• Leases

• Marriage Breakdown

• Farming

• GST

• Did You Know

Past Issues - more tips

LEASES
57(8) 

On June 14, 2001 CCRA issued Income Tax Technical News 21 which noted that recharacterization of a lease as a capital lease is permissible only if the transaction does not properly reflect the actual legal effect.  Therefore, in the absence of a sham or a General Anti-Avoidance Rule application, a lease is a lease and a sale is a sale.  This applies to all leases including financing leases.

MARRIAGE BREAKDOWN
57(9) 

ARREARS
In an April 26, 2001 District Office Memo, the taxpayer was in arrears and the spouse agreed to take his 50% interest in the home as a settlement of the arrears.

CCRA note that where arrears are settled for an amount less than the total amounts due, the amount paid is not deductible to the payor or taxable to the recipient.
Also, in an October 12, 2001 Tax Court of Canada case, the Court found that a $40,000 lump-sum payment on arrears of $50,318 was not taxable because it was a one-time payment in full satisfaction of the outstanding amount.

ATTRIBUTION
When property is transferred on a marriage breakdown between spouses, the capital gain on the subsequent sale of the  property will attribute back to the transferor if the property is sold before the divorce is finalized unless a joint election is made under Subsection 74.5(3).

AMOUNTS PAID DIRECTLY TO CHILDREN
In a February 10, 2000 Tax Court of Canada case, the Court noted in an August 10, 2001 Written Judgment that amounts paid by the taxpayer directly to minor children (ages 15 and 13) should not be included in income by the custodial parent.

CHILD SUPPORT - COMMENCEMENT DAY
In a November 16, 2001 District Office Memo, CCRA notes that where a pre-May, 1997 Child Support Agreement is altered by a Post-April, 1997 Amendment, this changes the status of the subsequent child support payments from deductible/taxable to non-deductible/non-taxable.
 

FARMING
57(10) 

CLICK-A-VALUE

Farm Credit Corporation is planning to launch an internet-based product which will generate reports on the average value for a given area and type of land.

This will be available to be purchased on-line sometime prior to Spring 2002.

This should be a valuable tool for farmers who need backup documentation for various farmland valuations.

NISA
In a November 19, 2001 Technical Interpretation, CCRA notes that farmers’ NISA deposits are held in Fund No. 1.  Fund No. 2 includes government matching contributions and accumulated interest.  Withdrawals from Fund No. 1 are non-taxable whereas withdrawals from Fund No. 2 are taxable.

If an amount is withdrawn from Fund No. 2 in error, CCRA would not object to reversing the transaction with an adjustment to the AGR-1 Information Slip.  However, this is a question of fact.

Errors made by a financial institution or NISA administration may be corrected.  However, it is more difficult to determine whether there is an error when the participant has actually requested the withdrawal.  In these situations, it must be determined whether the request was made in error and that the participant has not merely changed his/her mind.
 

GST
57(11) 

LAND AND ASSOCIATED REAL PROPERTY
On October, 2001 CCRA introduced GST/HST Memoranda Series 19.5 which notes that all supplies of land situated in Canada are taxable, unless explicitly exempted.  This Memoranda reviews adventures or concerns in the nature of trade, expropriated property, real property sold back to a vendor, farmland, residential complexes, residential trailer parks, land allowances, options, land swaps and joint tenancy of farmland.

THE QUICK METHOD
In a November 6, 2001 Technical Interpretation, CCRA note that certain Registrants may elect to use the quick method.  Under the quick method, registrants remit an amount lower than the actual GST collectible, thereby experiencing experiencing an overall net gain that is retained in the business, in lieu of claiming ITCs for their current expenses and inventory.

50% LIMITATION FOR FOOD, BEVERAGES AND ENTERTAINMENT
Input tax credits for food, beverage and entertainment expenses are effectively limited to 50% where the expenses are subject to the 50% limitation for income tax purposes.
 

DID YOU KNOW
57(12) 

EI AUDITS
On December 7, 2001 the Supreme Court of Canada ruled that information obtained by Customs Officials and forwarded to Employment Insurance (EI) auditors for purposes of determining that an EI claimant was out of the country and, therefore, not eligible for EI does not breach a taxpayer’s privacy.

This Supreme Court decision overturns the previous decision in the Federal Court of Appeal.

Human Resources Minister Jane Stewart notes that EI auditors will continue the practise of seeking information from other branches of government.

2. Details of other income for which no T slips have been received such as:

• other employment income (including stock option plans and Election Form T1212),

• business income,

• partnership income,

• rental income,

• alimony, separation allowances, child maintenance,

• pensions

• interest income earned 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,

• scholarships, fellowships, bursaries,

• replacement properties acquired.

3. Details of other expenses such as:

• employment related expenses - Provide Form T2200 “Declaration of Conditions of Employment”,

• business and employment purchases like vehicles, supplies, etc.,

• 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,

• film and video production eligible for tax credit,

• mining tax credit expenses,

• business research and development,

• clergy residence deduction information, including Form T1223.

4. Details of other investments such as:

• real estate or oil and gas investments - including financial statements,

• labour-sponsored funds,

• Registered Education Savings Plans.
   

5. Details and receipts for:

• Registered Retirement Savings Plan (RRSP) contributions (note that eligible foreign content is increasing to 30% for 2001),

• professional dues,

• Tuition fees - including mandatory ancillary fees, and Forms T2202, TL11A and TL11D,

• charitable donations (including publicly traded securities),

• medical expenses (including medical related modifications to new or existing home and travel expenses),

• political contributions.

6. Details of capital gains and losses realized in 2001.
Also, new rules now permit rollovers for foreign share spin-offs and various foreign share reorganizations.

7. Details of previous capital gain exemptions claimed, business investment losses and cumulative net investment loss accounts.

8. Name, address, date of birth, S.I.N., and province of residence on December 31, 2001.

9. Marital/common-law status and spouse/partner’s income, S.I.N. and birthdate.  New rules which apply to same-sex couples in 2001 may also be used for 1998, 1999 and 2000.

10. List of dependents - including their incomes and birthdates.

11. If you or 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.

12. Are you disabled or are any of your dependents disabled?  Provide Form T2201 - disability tax credit certificate.  This also includes extensive therapy such as kidney dialysis and certain cystic fibrosis therapy.  Also, the transfer rules include relatives such as parents, grandparents, child, grandchild, brothers, sisters, aunts, uncles, nephews or nieces.

13. Details regarding residence in a prescribed area which qualifies for the Isolated Area Deduction.

14. Information regarding child tax credit receipts.

15. Details regarding RRSP - Home Buyers’ Plan withdrawals and repayments; RRSP - Lifelong Learning Plan repayment.

16. Receipts for 2001 income tax installments or, payments of tax.

17. Copy of 2000 personal tax returns, 2000 Assessment Notices and any correspondence from Canada Customs and Revenue Agency (CCRA).

18. 2001 Personalized Tax information which CCRA may have sent you.

19. 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.

20. Details of carry forwards from previous years including losses, donations, forward averaging amounts, registered retirement savings plans.

21. Details of foreign property owned at any time in 2001 including cash, stocks, trusts, partnerships, real estate, tangible and intangible property, contingent interests, convertible property, etc.

22. Details of income from, or distributions to, foreign entities such as foreign affiliates and trusts.

23. Details of your “Pension Adjustment Reversal” if you ceased employment and were in a Registered Pension Plan or a Deferred Profit Sharing Plan.  (T10 Slip)

24. If you provided in-home care for a parent or grandparent (including in-laws) 65 years of age or over, or an infirm dependent relative, a federal tax credit may be available.
Also, the caregiver may claim related training costs as a medical expense credit.

25. Individuals carrying on a business may deduct amounts paid for Private Health Service Plan coverage.

26. Alternative Minimum Tax paid since 1994 on RRSP contributions may be refunded.

27. Interest paid on qualifying student loans is eligible for a tax credit.

28. Retroactive lump-sum payments
Individuals receiving qualifying retroactive lump-sum payments over $3,000 after 1994 may be allowed to use a special mechanism to compute the tax.