In a September 12, 2002 Technical Interpretation, CCRA notes that where an employer pays the fees or reimburses an employee for membership in a fitness club, the employee is in receipt of a taxable benefit.
Editor's Comment
Although this was not mentioned by CCRA in the Technical Interpretation, CCRA's Interpretation Bulletin 470R, Paragraph 34, notes that where an employer pays the fees required for an employee to be a member of a social or athletic club, this is not a taxable benefit where the membership was principally for the employer's advantage.
BUSINESS INCOME
60(4)
EXPENSES DISALLOWED
In a July 30, 2002 Tax Court case, the taxpayer carried on a graphic arts business out of a 686 square foot condominium loft apartment which she shared with a friend. CCRA testified that they audited the business because of the large amount of expenses claimed against a small income. CCRA made a net overall increase to the income by disallowing a portion of the insurance, meals, business use of home, motor vehicle, travel and reference material expenses.
The Judge gave considerable weight to the auditor's evidence who spent - can you believe it - upwards of 100 hours on the file, much of it at the Appellant's premises, reviewing the records, viewing the premises and the equipment.
FINES AND PENALTIES
In a July 31, 2002 Committee Report, CCRA note that the Supreme Court has ruled that CCRA cannot disallow a deduction for fines or penalties incurred to earn income unless they are so "egregious or repulsive" that they could not be justified as being incurred for an income-earning purpose.
However, CCRA did note that Finance officials are aware of the Supreme Court decision and the need for an amendment to the Act to reduce its effect.
MEAL AND ENTERTAINMENT EXPENSES
In an August 22, 2002 Technical Interpretation, CCRA notes that the 50% add-back rule does not apply, "in respect of one of six or fewer special events held in a calendar year at which the food, beverages or entertainment is generally available to all individuals employed by the person at a particular place of business and consumed or enjoyed by those individuals".
CCRA notes that an annual Christmas party which is open to all employees is eligible for this exemption. However, an "Over-Twenty-Five Years of Service Club" party would not qualify unless the event was available to all employees.
EMPLOYMENT INSURANCE (EI)
60(5)
The Employment Insurance Act notes in Subsection 5(2) that insurable employment does not include:
- employment if the employer and the employee are not dealing with each other at arm's length.
However, if the employer is related to the employee, they are deemed to deal with each other at arm's length if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length.
Refunds
Upon application, EI Premiums paid on the son, parent, brother, sister, spouse, in-laws and common-laws of a person controlling the business may be eligible for a refund. The process is not simple as a CCRA Ruling will likely be needed.
ESTATE PLANNING
60(6)
LEAVING ASSETS TO CHILDREN
Where Mr. A owns the shares of OPCO (which owns business assets valued at $100,000 and investments valued at $50,000) and Mr. A wishes to leave the investment assets to Child 2 and the business assets to Child 1 but, also wishes to have an equal distribution of $75,000 each, Mr. A could transfer the $50,000 investments to INVESTCO, along with a $25,000 receivable from OPCO such that Child 1 receives INVESTCO worth $75,000. Child 2 will receive OPCO worth $75,000 (business assets of $100,000 minus $25,000 payable to INVESTCO).
This requires specific procedures, agreements and tax elections.
CHARITIES
60(7)
REGISTERED CHARITIES NEWSLETTER NO. 13
On August 29, 2002, CCRA released Registered Charities Newsletter No. 13 and noted that:
- A new Form T3010, reduced from thirteen pages to four, will be used for fiscal periods that end on, or after, January 1, 2003.
- Charities are subject to audit, similar to other taxpayers, on a purely random basis or to follow up on non-compliance or tips or other information gathered from third parties.
(See www.ccra-adrc.gc.ca/tax/charities/disclaimer-e.html and Guide T4118, "Auditing Charities".)
- In a recent Federal Court of Appeal case, the charity had its registration revoked because of improper documentation, lack of control over fund disbursement, payroll issues, and a problem with reconciling donation receipts to the Form T3010.
The Court noted that the onus of proof is on the charity to show that it's status should not be revoked.
- Guidelines describing business activities which a charity may, and may not, legally engage in can be found at Website www.ccra-adrc.gc.ca/tax/charities/consultation_policy-e.html.
DONATION OF REWARD POINTS
In an August 8, 2002 Technical Interpretation, CCRA notes that most, if not all, reward point plans do not permit the transfer of points. Only the person who is a member of the reward points plan, and who earned the points, can redeem the reward points.
However, if a particular reward points program does permit the transfer of reward points from a plan member to a charity, such that the charity could redeem the reward points, the fair market value of the reward points on the date that they are transferred to the charity would have to be determined so that a tax receipt could be issued.
PARTNERSHIPS
60(8)
INCORPORATION OF MEDICAL PARTNERSHIP
In a 2002 Advance Income Tax Ruling, CCRA ruled positively on the incorporation of a medical partnership and the use of separate corporations by the doctors to provide services to the new corporation.
The purposes of the incorporation include eliminating joint and several liability, permitting independent contractor status and increased control for each individual, better congruence between effort and financial return, provide a vehicle for the partner to provide professional services external to the practice, provide increased efficiency through individual management of personal practice preferences and expenses, control over expenditures reflecting personal practice preferences, estate planning and ease of entry to the practice.
Caveat
Not all provinces permit the incorporation of professionals.
FARMING
60(9)
CHECKOFFS - RESEARCH TAX CREDITS
An investment tax credit may be claimed on the portion of checkoff contributions used for research and development at a rate of 20% for individuals and 35% for Canadian-controlled private corporations.
For 2001, a total of 41% of the wheat checkoff and 61% of the barley checkoff administered by Western Grains Research Foundation (WGRF) is eligible to earn the investment tax credit.
For more information see the WGRF website at www.westerngrains.com or the CCRA website at www.ccra-adrc.gc.ca/sred/.
NET INCOME STABILIZATION ACCOUNT (NISA)
NISA is a voluntary program developed jointly between producers, the Government of Canada and participating provinces. Producers deposit money annually into their NISA account and receive matching government contributions. For more information, see www.agr.ca/nisa/.
Fund 1 holds the participant's matchable and non-matchable deposits under the NISA program. Fund 2 holds government contributions (federal and provincial) and all interest earned on both funds, including bonus interest.
Withdrawals are first taken from Fund 2 and are taxable. Once Fund 2 is depleted, withdrawals come from Fund 1 on a non-taxable basis.
NEW FEDERAL PLAN
The Federal Government will distribute approximately $600 million in risk management funding in October, 2002 through NISA accounts. Farmers will receive a payment into their NISA accounts equal to 4.25% of their five-year average eligible net sales (ENS).
However, once the funds are in NISA, they may be stuck there until the funding formula triggers a payment.
EXPENSES RELATING TO PETS
In an August 13, 2002 Tax Court case, the farmer testified that wild animals, such as deer, rats and mice, love to eat his blueberry crop. Therefore, a cat and dog were acquired to, and were able to, keep them away. The Court believed this and permitted deductions with respect to the dog and cat for veterinary bills, pet food, etc.
CCRA questioned why the taxpayer had to acquire pet food - "can't they eat the mice and the rats?". The Court did not swallow this argument and noted that the "frightening" aspect of the animals on a small berry acreage warranted their business use to help preserve the berry crop.
GST
60(10)
GROSS NEGLIGENCE PENALTIES
CCRA appears to be applying the 25% gross negligence penalty under the Excise Tax Act if, after making a mistake and being warned, the taxpayer makes the same mistake again.
Even though the Court may throw out the penalties on an appeal by the taxpayer, there is still a time and money cost involved. Therefore, it is usually best to be diligent to avoid making the same GST mistake twice.
GST NOT IN THE CONTRACT
In a British Columbia Court case, a construction contract did not refer to GST.
Even though there have been cases going both ways on this issue, the majority of the cases, and this case as well, concluded that when a contract does not refer to GST, GST should still be considered to be an addition to the purchase price.
SELF-SUPPLY RULES
Where a taxpayer acquires a newly constructed residential property for lease to others, GST applies on the purchase price. Therefore, when a property is constructed by the owner, the property is deemed to have been acquired at fair market value and the builder is, therefore, subject to GST on the fair market value of the property at the time it is put into rental use. However, the builder may claim input tax credits for the GST paid on his/her input costs.
DID YOU KNOW...
60(11)
NIGERIAN FRAUD
This fraud, which usually originates in Nigeria, generally involves a taxpayer receiving a letter which requests assistance in helping a person to extract large sums of money from a foreign country. The letter usually implies that there is a crooked element to this and that the Government of Nigeria would not approve if it knew. The taxpayer is asked to send their banking information so that a massive sum can be moved into their bank account. The fraudsters then claim that they need a small amount for administration purposes - and these requests continue and continue.
For more information about the Nigerian Fraud mechanics see the National Post, Wednesday, August 21, 2002, for a full-page analysis, including a discussion with Paul B who admits he has thrown away $500,000, lost his life savings, his marriage and his tile business, is in trouble with Revenue Canada and still, over coffee in a Calgary hotel, dials his cell phone and sends off another $2,500. According to police, the Nigerian scam has taken $10 million from Westerners, including $2 million from a dozen people in Moose Jaw, Saskatchewan.
In another case, Mr. D had sent over $1.9 million for items such as "chemical decoding of cash funds" and bail for a participant who had allegedly been detained in Germany. In fact, he had to steal from his employer to finance these expenditures for which he was told he would eventually get over $10 million U.S.
With respect to the theft from the employer, the Court of Appeal in Ontario noted that persons in positions of trust, who breach that trust (such as employees), will receive jail terms in the range of three to five years even if it is a first offence and even if there were personal circumstances involved. The main purpose is to deter, not sympathize.
A NEW TWIST
Some ads promise a guaranteed loan for persons with a poor credit history or no credit rating. Once contacted, the fraudsters request an up front processing fee. If paid, it will be gone, along with the company, forever.
The RCMP advise you to call 1-888-495-8501 (toll free) for more information or to report a possible fraud.
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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