2004 3rd Quarter, Issue No. 67
PERSONAL TAX
67(1)
DISABILITY TAX CREDIT (DTC) - DIABETES
In a June 14, 2004 and a September 11, 2003 Tax Court of Canada case, the Court permitted a DTC for parents who had a seven year old daughter and a six year old son respectively who suffered from Type 1 Insulin Dependent Diabetes. A positive medical certificate noted that the children needed assistance due to age.
In a May 3, 2004 Tax Court of Canada case, the Court disallowed the DTC for a parent who had a five year old child with Type 1 Insulin Dependent Diabetes because a positive medical certificate was not provided by the taxpayer.
TUITION FEES - FOREIGN INTERNET STUDIES
In an April 21, 2004 Tax Court of Canada case, the Court disallowed the tuition fee tax credit for foreign university Internet studies. The Court noted that completing courses through the Internet is not the same as physically travelling back and forth between Canada and the U.S. as permitted under the Income Tax Act.
MEDICAL EXPENSE - DEPENDANT
In a May 3, 2004 External Technical Interpretation, Canada Revenue Agency (CRA) notes that an individual may claim medical expenses in respect of specified persons such as a dependent parent (including in-laws). This requires that the individual has supplied necessary maintenance, or the necessities of life, to the person on a regular and consistent basis.
MEDICAL EXPENSE - AUTISTIC CHILD
In a May 6, 2004 External Technical Interpretation, CRA notes that the cost of sending an autistic child to an integrated daycare could qualify as a medical expense if there was a medical certificate which clearly indicates that the daycare/facility has specialized equipment, facilities, or trained personnel to provide care, or care and training, for this child.
EMPLOYMENT INCOME
67(2)
PRIVATE HEALTH SERVICE PLAN (PHSP)
CRA noted in an External Technical Interpretation that a PHSP is a contract of insurance to pay eligible medical expenses which are deductible to the employer and not taxable to the employee.
A Plan where a corporate employer reimburses its employees for medical expenses may qualify as a PHSP. However, where an individual, who is both a shareholder and an employee, receives a benefit under a PHSP and equivalent benefits are not available to other non-shareholder employees, the individual is generally considered to be in receipt of a taxable shareholder benefit and contributions may not be deductible by the corporate employer.
On the other hand, when equivalent coverage is extended to all employees, the benefits are non-taxable to the employee and deductible to the employer. This also applies when all employees of a corporation are shareholders and it is reasonable to conclude, based on the particular facts, that the PHSP coverage has been provided as part of a reasonable remuneration package.
LUMP-SUM LEASE PAYMENT
In an April 26, 2004 External Technical Interpretation, CRA notes that employees may deduct up-front lease payments for leased vehicles used in employment provided that the total amount deducted does not exceed the allowable $800 per month.
BUSINESS/PROPERTY INCOME
67(3)
STOCK OPTIONS
In a May 14, 2004 External Technical Interpretation, CRA reviewed a situation where an independent contractor is granted a stock option as payment for his consulting services.
The fair market value of the option on the grant date, less any amount paid, will be included in business income. (Editor's Comment - For example, if the option price is $10 and the fair market value of the share is $17, the business income is $7.)
When the option is exercised, the incremental value realized on the acquisition of the shares may be a "business income" or a "capital gain".
(Editor's Comment - Example, if the fair market value is $27 at the exercise date the additional amount included in income/capital gain is $10 - ($27 - $17).)
CRA notes where the $10 is for services rendered it would be business income. However, where the option is held as a capital property, the $10 may be a capital gain - only half of which is taxable.
RESERVE FOR UNPAID AMOUNTS
In a May 12, 2004 External Technical Interpretation, CRA note that where a business sells inventory and all or part of the selling price was not due for at least two years after the sale, a reasonable Reserve for the unpaid amount may be claimed.
RESTRICTIVE COVENANTS
New rules propose to fully tax receipts for signing restrictive covenants.
The Income Tax Act broadly defines a "restrictive covenant". For example, over and above the normal situations, where a parent corporation sells shares of a subsidiary and undertakes that its other subsidiaries will not compete with the target corporation, this is considered to be a "restrictive covenant". Also, included is where a parent corporation sells a subsidiary corporation and, after the sale, its other subsidiaries will carry certain quantities of the sold subsidiary's products.
However, where a joint election is made between the grantor and the grantee on a disposition of an eligible capital property, a partnership interest or a share of a corporation the gain may only be half taxed.
CAPITAL GAINS AND LOSSES
67(4)
SMALL-BUSINESS SHARE ROLLOVER
In a May 6, 2004 External Technical Interpretation, CRA notes that an individual that has a capital gain from a qualifying disposition of shares may claim a deferral on the capital gain if qualifying replacement shares are bought.
There are many restrictions and conditions to be met. For example, the share must usually be a common share issued by an active business corporation to the individual (treasury share).
MARRIAGE BREAKDOWN
67(5)
CHILD SUPPORT - AMENDMENT
In a May 3, 2004 Tax Court of Canada case, the taxpayer signed a Child Support Payment Agreement on April 24, 1997. Because it was signed prior to May, 1997 the child support amounts were deductible/taxable. Unfortunately for the payor, the Agreement was amended on January 3, 2000 and the child support payments then became non-deductible/non-taxable because they were now under a post-April, 1997 Agreement.
CHILD SUPPORT - DEEMED INCOME
The May 6, 2004 issue of the National Post noted that Mr. A was a farmer whose income in 2002 was $12,692 when he had custody of his sixteen year old son. His former spouse had custody of their thirteen year old daughter and held down three jobs in earning $28,000 a year.
Mr. A claimed child support from Mrs. A on the basis that her income was higher than his.
The Court concluded that Mr. A is underemployed and could also be earning $28,000 per annum. Therefore, neither parent was entitled to receive child support payments from the other.
PENSION INCOME
In an April 30, 2004 External Technical Interpretation, CRA notes that if there is a division of pension benefits on a marriage breakdown under the Pension Benefits Legislation of a province, the portion received by each former spouse is included in the income of that spouse.
CHARITIES
67(6)
GIFT AND LEASEBACK
In a nine-page 2004 Advance Income Tax Ruling, CRA reviewed a proposed donation of commercial property to a charity with a leaseback of the property to the donor. The donor received a tax credit for the value of the commercial property.
NON-PROFIT ORGANIZATION (NPO)
In a 2004 Advance Income Tax Ruling, CRA Ruled that a change to the bylaws of the NPO to permit a distribution of profits to its members will cause it to lose its NPO status. Therefore, it will become subject to tax.
The purpose of the amendment was to allow the NPO to distribute excess funds to its members.
FARMING
67(7)
TRANSFER OF FARM PROPERTY TO CHILD
In a May 7, 2004 External Technical Interpretation, CRA approved a situation where Father (Mr. A) owned farmland for sixty years - the first fifty of which he farmed on a principal basis. The last ten years were rented. Mr. A dies and bequeaths on a non-taxable basis the farmland to his spouse who then transfers the farmland to their children, also on a non-taxable basis.
(Editor's Comment - If one of the main purposes of the transfer to the children is to obtain a tax benefit, and a subsequent disposition occurs by the children before three years, the taxpayer (Mrs. A) may have to pay tax based on a disposition of the property at fair market value to the children.)
ESTATE PLANNING
67(8)
WITHHOLDING TAX RATES
The withholding tax rates when withdrawing funds out of an RRSP or RRIF are:
- less than $5,001 - 10%
- $5,001 - $15,000 - 20%
- more than $15,000 - 30%.
For example, if Mr. A withdraws $20,000 from his RRSP he would be subject to a 30% withholding tax. Alternatively, if he took the funds out in four $5,000 increments, the withholding tax would only be 10%. Of course, when he files his tax return he will still have to report the $20,000 in income and pay tax at marginal rates.
Therefore, he will likely owe tax upon filing his tax return, however, he will have had the use of the money in the interim period without interest.
RRSP TRANSFER TO A CHILD
In a 2004 Head Office Memo, CRA notes that an amount paid out of an RRSP as a consequence of the death of the annuitant to a child or a grandchild of the annuitant who was financially dependent on the annuitant for support may be included on the child's Tax Return. This could be achieved by designating the child as the beneficiary of the RRSP.
Also, when an amount is paid out of the RRSP to the Estate in which a child is a beneficiary, a joint designation for all or a part of the payment may be made. The amount so designated is deemed to be received by the beneficiary. This amount may be used to acquire an eligible annuity payable until age 18 or included in income immediately.
If the child has a physical or mental infirmity the amount may be rolled over to their RRSP.
WEB TIPS
67(9)
CALCULATORS
Small Business Banking -
If you want to know which bank in Canada offers the best plan/rate for your company, take a look at this calculator. By answering a series of questions about the company's banking activities, this calculator can give you the rates under different plans that 10 of the largest banks in Canada offer. After comparing rates you can click on links that give specific details about that specific plan. This tool is ideal for comparing different types of accounts either within one bank or amongst several.
Buy vs. Lease -
This calculator compares the costs involved in buying versus leasing assets. The tool requires eleven pieces of information and can be completed with relative ease and speed.
To use either of these calculators go to:
http://strategis.ic.gc.ca/epic/internet/insof-sdf.nsf/en/Home
As this is the Industry Canada website, it is relatively reliable. The calculators are the seventh and eighth items in the left hand menu.
FUND COMPANIES: PRICES AND DISTRIBUTIONS
www.fundlibrary.com
If you are looking for fund prices, distributions, graphs or company news for any day, or series of days, this site has the information you need. This website contains information for hundreds of fund companies and their respective funds.
GST
67(10)
INPUT TAX CREDIT FOR TRAVEL ALLOWANCES
An employer may claim input tax credits for non-taxable allowances paid to employees for motor vehicles.
This was confirmed in a July 22, 2003 Tax Court of Canada case.
INTER-CORPORATE CHARGES
Where two corporations are engaged in commercial activities, inter-corporate charges may not cause GST problems as GST may be avoided if the parties qualify for the election under Section 156 of the Excise Tax Act. Otherwise, the GST paid will be eligible for an input tax credit.
However, corporations that are not involved in commercial activities may trigger extra costs with inter-corporate fees because the GST paid is either not eligible for exemption under Section 156 or, is not eligible for an input tax credit.
One solution is to have one corporation acting as the "agent" for the other corporation. However, it is a very fine line as to whether a corporation is an "agent" for another corporation and professional advice is needed.
For example, in a March 12, 2004 Tax Court of Canada case approximately thirty corporations that owned residential real property paid fees to KPMC for superintendents and maintenance workers.
The Court found that the payments made for the superintendents were of an "agency" relationship and, therefore, were not subject to GST as the superintendents were in fact employed by the owner corporations.
However, with respect to the maintenance workers that went from apartment to apartment, the "agency" argument did not work. They were considered to be employees of the management company, not the owner companies. Therefore, GST was successfully charged.
Because of the complexity in this area, it may be advisable to obtain a Ruling from CRA on cost-sharing or agency agreements.
DID YOU KNOW...
67(11)
INVESTMENT CLUBS
Investors may elect to report their income under a simplified basis as if the investment club was a partnership. However, this method is only available where, among other things, all of the club members are individuals.
In an April 28, 2004 External Technical Interpretation, CRA note that an investment club which includes corporate members may not elect to use this modified partnership method to report the income.
CANADA PENSION PLAN/EMPLOYMENT INSURANCE (CPP/EI)
In an April 28, 2004 External Technical Interpretation, CRA notes that where an employer makes contributions to an employee's RRSP, these payments are taxable and are generally subject to CPP and EI.
However, the contributions will not be EI insurable if the employee cannot withdraw the amounts from a group RRSP until the employee retires or ceases to be an employee of the employer.
RRSP - ARTIFICIAL ARRANGEMENT
In a May 28, 2004 Tax Court of Canada case, the Appellant acquired through her self-directed RRSP shares of a corporation and then obtained a loan, guaranteed by her RRSP, from a related corporation of the first corporation.
Taxpayer Loses
The Court found that the shares acquired were not qualified investments and that the whole arrangement was an artificial financial arrangement to obtain liquid assets from an RRSP without having to pay income tax.
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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