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 Tax Tips and Traps

2002 3rd Quarter, Issue No. 59
In This Issue
personal income tax return checklist
personal tax
employment income
business income
stock options
marriage breakdown
RRSP/RRIF/RESP
farming
international
GST
did you know
Past Issues

PERSONAL TAX
59(1)

DISABILITY TAX CREDIT

Individuals that qualify for the Disability Tax Credit (DTC) save between $1,300 and $1,700 per year, depending on your province of residence.

Under the Fairness Provisions of the Income Tax Act, CCRA may issue refunds for an individual back to 1985 for missed deductions or credits.

However, in an April 19, 2002 Tax Court case, the taxpayer suffered a brain injury in an accident in 1975 and filed a Notice of Objection in 2000 to claim the DTCs for the years 1985 to 1998. Unfortunately, CCRA did not permit the application of the Fairness Provisions. Only 1998 was not statute barred.

In a June 24, 2002 Tax Court case, the Court found that the taxpayer's bipolar affective disorder met the three requirements to claim a DTC. (i) was a severe and prolonged mental or physical impairment; (ii) the impairment markedly restricts the taxpayer's ability to perform a basic activity of daily living; and (iii) the taxpayer provides a doctor's certificate certifying (a) and (b) above. However, in other bipolar affective disorder cases the individual was not sufficiently impaired to qualify for the DTC.

In a May 28, 2002 Tax Court case, a taxpayer who suffered from Celiac Disease was entitled to the DTC.

In a January 16, 2002 Tax Court case, the Court found that the taxpayer was eligible for a DTC with respect to his fourteen year old daughter who was markedly restricted in her ability to think, perceive and remember. The daughter attends a private school for those with learning disabilities.

Unfortunately, the Court could only permit the DTC for the year which was not statute-barred, 1999. Therefore the DTC was not permitted for the years 1987 through to 1998. As mentioned above, under the Fairness Provisions, CCRA may permit a taxpayer to go back to 1985 however, in this case CCRA did not agree to this adjustment.

MEDICAL EXPENSES

In an April 25, 2002 Tax Court case, the taxpayer paid $9,266 as tuition fees for his eleven year old son to attend a special education school as prescribed by a psychologist to correct specific learning disabilities.

The Court permitted the amounts as medical expenses because the facilities at the school included special equipment and personnel for the care and training of individuals suffering from this handicap.

Also, in a Technical Interpretation CCRA notes that a credit for medical related travelling expenses is allowed if certain criteria are met, including that substantially equivalent medical services are not available in the person's locality.

GUARANTEED INCOME SUPPLEMENTS (GIS)

Every year many low income seniors lose GIS benefits because they either fail to renew their application or they do not make an initial application. The GIS benefit is available for low-income persons aged 65 or over upon an annual application.

In the year a person turns age 65, the person must apply for the Old Age Security and Guaranteed Income Supplement. After this initial application, in most cases, but not all, the annual filing of the tax return on time will usually generate the monthly cheques. If the senior has missed the application, CCRA generally only allows them to go back one year to claim the lost amounts.

The GIS is based on a person's annual income, or the combined annual income of the person and their spouse or common-law partner. If a person marries or separates, or if the spouse dies, you must let Human Resources and Development Canada (HRDC) know as it will affect your benefits. Also, if you and your spouse or common-law partner are separated for reasons beyond your control (for example, if one of you has to live in a hospital or nursing home), you can each be considered as a single person if that will give you a higher monthly payment.

For very low income seniors, the maximum GIS payment is $528 a month. The average monthly GIS benefit for a single eligible retiree is $373. The GIS benefits fall to zero for persons with annual income above $12,672.

It was also noted in the National Post that HRDC recently paid a five-year GIS back payment for $20,000 to an elderly woman in 1999 even though they normally just go back one year. In this case, HRDC decided that they had made an administrative error by not making sufficient efforts to inform her of her eligibility. The Article notes that approximately 300,000 seniors who qualify for GIS, but have not applied, could benefit by this precedent to a total of $2.5 billion.

The GIS is discussed at www.hrdc-drhc.gc.ca/isp/oas/ispb184.shtml or call 1-800-277-9914.

CONJUGAL RELATIONSHIP

The term "spouse" has been extended to include a "common-law partner" which is "a person who cohabits in a conjugal relationship with the taxpayer and has so cohabited with the taxpayer for a continuous period of at least one year, or would be the parent of a child of whom the taxpayer is a parent..." Also, where there is a conjugal relationship, this status will continue unless they are not cohabiting for a period of at least ninety days.

In a June 11, 2002 District Office Memo, CCRA notes that the characteristics of a conjugal relationship include shared shelter, sexual and personal behavior, social activities, economic support and children, as well as the societal perception of the couple. However, these elements may be present in varying degrees and not all are necessary for the relationship to be found to be "conjugal".

A couple may, after many years together, be considered to be in a conjugal relationship even though they have neither children nor sexual relations.

EMPLOYMENT INCOME
59(2)

EMPLOYEE'S SPOUSE

In a May 8, 2002 Technical Interpretation, CCRA notes that where an employee's spouse accompanies the employee on a business trip, the payment by the employer of the spouse's travelling expenses is a taxable benefit to the employee unless the spouse went on the trip at the request of the employer and, it can be established that the main purpose of the spouse's attendance was to assist in obtaining the business objectives of the trip.

In this Technical Interpretation, spouses of the President and CEO accompany them to meetings and, while there, participate in networking to foster respect and cooperation between the attendees. Therefore, there was no taxable benefit to the President and CEO.

SALES EXPENSES

In a June 19, 2002 Technical Interpretation, CCRA note that a commissioned salesperson may deduct expenses if required to incur the expenses under his/her contract of employment. CCRA also notes that where an amount paid to a substitute or assistant by a commission sales employee is reasonable, it would generally be deductible.

BUSINESS/PROPERTY INCOME
59(3)

REASONABLE EXPECTATION OF PROFIT (REOP)

In a May 23, 2002 Supreme Court case, the Court found that losses should not be denied to a taxpayer by CCRA under the REOP argument unless there is a personal element to the business and, only then if it is not clearly a commercial enterprise.

In this case, Mr. Stewart acquired four condominiums for a total of $280,000, having debt against them of $276,000, and incurred losses in the years 1990, 1991 and 1992 totalling $58,000. The Federal Court had previously found that the losses were not allowed but, the Supreme Court reversed this opinion and allowed the losses.

TRANSFER OF COMMISSIONS TO CORPORATION

In an April 11, 2002 Technical Interpretation, CCRA notes that a corporation may carry on a profession unless provincial law or the regulatory body for the profession provides that only individuals may carry on such a business.

CCRA note that where such individuals are legally precluded, either by statute or contractually, from assigning their commissions to a corporation, then the commission income must be reported by the individuals, and not their corporations.

In a May 17, 2002 District Office Memo, CCRA again note that if insurance agents, financial planners, or other professionals are legally, whether contractually or by statute, precluded from assigning their income to a corporation, then the income must be reported by the individual.

PROFESSIONAL EDUCATION

In a January 25, 2002 Tax Court case, the taxpayer, a licensed pharmacist in Ontario, attended five professional development courses in the year costing $2,084. CCRA disallowed the expenses on the basis that this was an excessive number of courses.

Good News!

The Court permitted the deductions and noted that:
  1. CCRA should say to the appellant, "Good for you. You are making sure that your qualifications are right up to snuff..."
  2. This concern for professionals to maintain proper standards is similar to that faced by lawyers, doctors, engineers, etc.
  3. All of the courses were recognized by the Ontario College of Pharmacy's continuing education program.

EXPENSE FOR ACCUMULATED VACATION PAY

In a February 23, 2001 Federal Court of Appeal case as at December 31, 1992 the amount of vacation pay payable for the year was$3,010,563 (8% of the 1992 salaries of $37,632,000). This was shown as an expense during 1992 and accepted by CCRA. The employer also deducted an estimated amount of the employer contributions on this vacation pay at a weighted rate for 1992 for all the Plans. (25% x $3,010,563 = $752,640) CCRA disallowed this deduction.

Good News!

The Federal Court of Appeal permitted the deduction and noted that the employer's obligation to pay these premiums occurs in 1992 when the vacation pay is earned. Payment of the vacation pay when the employee takes the vacation in 1993 is irrelevant as the "expense" has already been incurred in 1992.

CHARITIES
59(4)

FORM T3010

Form T3010 notes that all charities must complete Sections A to J (which are available to the public) and Schedules A to C (which are confidential). The problem is that it is the same thirteen-page form for large and very small charities. If a charity does not submit Form T3010 it could be deregistered by CCRA.

GIFTS IN KIND

In a June 4, 2002 Technical Interpretation, CCRA notes that gifts of cakes, pies or baking supplies constitute gifts in kind for which a registered charity could issue a tax receipt. However, the charity should consider the impact on its disbursement quota. For example, if a charity issues a tax receipt for $5 in respect of a gift of a pie, the charity's disbursement obligation for the following year would increase by $4 (80% of $5).

Also, CCRA note that a charity may pay a fee for services rendered and the taxpayer may then donate the amount back and claim a charitable donation credit. Of course, the amount received for the services would be taxable. However, the donation credit may more than offset the tax on the service income.

MARRIAGE BREAKDOWN
59(5)

THIRD PARTY PAYMENTS

In a May 24, 2002 Tax Court case, in 1997 and 1998 Mr. R paid third-party payments under a marriage breakdown agreement totalling $27,000 and $37,793 which were deducted by Mr. R and included in income by Mrs. P, his former spouse. However, in 1999 Mrs. P requested that the $27,000 and $37,793 be taken off her return on the basis that they were not taxable because the provisions of Sections 56.1 and 60.1 were not mentioned in the Agreement.

The Court agreed and noted that the Agreement did not use the statutory language required. Therefore, the amounts were not deductible to Mr. R or taxable to Mrs. P.

FARMING
59(6)

LOSSES

In an April 30, 2002 Tax Court case, Mr. and Mrs. M commenced a llama farming partnership in 1992 and substantial losses were claimed each year. In the years 1995 and 1996, Mr. M's losses were restricted by CCRA to $8,750 on the basis that farming was not his principal preoccupation. In those years, Mr. M had T4 employment income of $52,816 and $52,860.

Good News!

The Court allowed the full deduction for Mr. M and noted that he was a legitimate startup farmer with a reasonable expectation of profits. He is entitled to a startup period of at least five years to build up a herd and have a few sales. The three-year period allowed by CCRA is too short in view of the maturity period that llamas require.

It was also noted in the May 23, 2002 issue of the Manitoba Co-operator that a Commons Agriculture Committee was told by tax experts that a full-time farmer who has to take an outside job to support the farm should be able to claim all the farm losses for tax purposes without application of the restricted farm loss rules.

This was generally agreed to by CCRA. CCRA noted that where a person who has been supporting himself/herself on the farm goes off-farm to support the farm, that person may continue to deduct full losses.

PENSIONS
59(7)

REGISTERED RETIREMENT INCOME FUND (RRIF) TRANSFER TO A DEPENDENT CHILD

In a June 14, 2002 Technical Interpretation, CCRA notes that upon the death of the last annuitant of a RRIF, the RRIF is included in the deceased annuitant's income for the year of death unless rolled over to a spouse.

However, this income inclusion may be reduced by RRIF allocations to a child or a grandchild who was financially dependent on the annuitant at the time of death. This amount would be taxable to the recipient child or grandchild. However, if the child or grandchild is physically or mentally infirm, a deduction may be allowed if the amount is transferred to an RRSP, RRIF or an annuity under which the child or grandchild is the annuitant.

Similar rules apply to bequests of RRSPs to dependent children or grandchildren.

INTERNATIONAL
59(8)

U.S. CITIZEN OR U.S. RESIDENT - RRSP

A U.S. citizen or U.S. resident who owns an RRSP or RRIF must either report the income earned in the RRSP/RRIF annually or, make a special election on a "timely" filed U.S. Form 1040 Personal Tax Return. Many of these individuals inadvertently assume that the income earned in the RRSP/RRIF was also deferred for U.S. purposes.

MOVING TO THE UNITED STATES - RRSP OR RRIF

If an RRSP or RRIF is withdrawn prior to moving to the U.S. (or to any country for that matter), the amounts will simply be included in income and taxed at the taxpayer's marginal rates.

However, if an amount is withdrawn after becoming a U.S. resident the payments are subject to a 25% Canadian withholding tax unless, the payment is a "periodic" amount requiring only a 15% withholding tax.

A "periodic pension payment" could apply to an annuity from an RRSP or small withdrawals from a RRIF.

Therefore, it is usually advantageous to leave the RRSP intact when moving to the United States.

For U.S. tax purposes, it is possible to avoid paying tax on the annual accrual of income in the RRSP by filing an Election with the U.S. tax return.

Upon withdrawal from the RRSP, the U.S. will consider each withdrawal to be a combination of capital and income. However, a foreign tax credit may be claimed on the United States return to offset the Canadian withholding tax of 15% or 25%.

Also, it may be important to crystallize the cost in an RRSP before leaving Canada so that the sum of contributions to the plan will be equal to the fair market value.

SNOWBIRDS

New United States legislation proposed that there would be a thirty-day cap on visits by foreign nationals to the United States. However, the head of the U.S. Immigration and Naturalization Service recently sent a letter to the President of the Canadian Snowbird Association noting that snowbirds are in fact eligible for six-month stays.

GST
59(9)

QUICK METHOD OF ACCOUNTING

A business may use the Quick Method of Accounting if the annual taxable sales (including zero-rated sales) and those of your associates are no more than $200,000 (including GST/HST) in four consecutive quarters in the five quarters immediately preceding the effective date of the election. The $200,000 limit does not include supplies of financial services, sales of real property, sales of capital assets, sales of eligible capital property and goodwill.

Under the Quick Method, the business charges and collects the 7% GST (or 15% HST) on taxable goods and services but the amount to be remitted is based on a lower remittance rate.

The most common remittance rates are:

DID YOU KNOW...
59(10)

THIRD PARTY LIFE ANNUITY CONTRACTS (TPLAC)

A TPLAC is a contract owned by and payable to one person but where the annuity payments are made throughout the lifetime of another individual. This could include annuities owned by charitable organizations or trusts, annuities owned by an individual on the life of a spouse or former spouse and corporate-owned annuities.

A TPLAC has very onerous tax implications such as income inclusions that are significantly higher than the interest element of the annuity contract.

The Conference for Advanced Life Underwriting (CALU) is meeting with the Department of Finance to attempt to rectify this anomaly. See website www.calu.com and click on June 19, 2002; Third-Party Life Annuity Contracts for details.

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.


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