2004 4th Quarter, Issue No. 68
YEAR-END TAX PLANNING
68(1)
Some 2004 year-end tax planning tips follow. Contact us if you need more information.
- If the following expenditures are made by individuals by December 31, 2004 they will be eligible for 2004 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.
- 2004 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2003 personal income tax return assessment notices. You have until March 1, 2005 to make tax deductible RRSP contributions for the 2004 year.
Consider contributing to a spousal RRSP to achieve income splitting in the future.
- Persons turning age 69 in 2004 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31, 2004.
- 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, 2004.
- An individual whose 2004 net income exceeds $59,790 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 $29,124.
Contact your professional advisors for assistance in managing 2004 personal income.
- Consider purchasing assets eligible for capital cost allowance before the yearend. For example, employees may claim capital cost allowance on automobiles used in their employment.
- If you 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 the capital gains.
- 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, 2004.
- Registered Education Savings Plan (RESP)
A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for children (maximum $400 per child per year).
The 20% is proposed to be increased to 40% or 30% for lower income families commencing January 1, 2005.
Budget 2004 introduces a new Canada Learning Bond from the government totalling $2,000 for each child born on or after January 1, 2004 ($500 in the first year and $100 per year until age 15) if the family net income is under the $34,000 range. An RESP is needed for the deposit.
- 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 meet certain criteria.
- 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. Therefore, consider minimizing this type of income in 2004.
- The tax rate for higher income individuals is now significantly lower on capital gains than on dividends thereby presenting an incentive to receive capital gains.
- Canadians receiving shares in foreign tax-free reorganizations can apply for favourable tax treatment.
- A refund of Employment Insurance paid for non-arm's length employees may be available upon application to CRA.
- Taxpayer-Requested Adjustments
Currently an individual may request an adjustment to a tax return back to 1985.
It is proposed that after 2004, adjustments will be limited to ten years back. Therefore, adjustments for 1985 to 1995 should be requested by December 31, 2004.
2004 REMUNERATION
68(2)
Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning "active business income" include:
- In general, bonus down active business earnings in excess of the annual business limit - $250,000 for a December 31, 2004 yearend. Leaving corporate active business income over this amount may present a tax deferral but there will likely be an overall higher tax to pay when dividends are finally paid out. Some companies may find it advantageous to have greater than , say, $250,000 of active business income because of other federal and provincial tax incentives.
- 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.
- Dividends, as opposed to salaries, will reduce an individual's cumulative net investment loss balance thereby providing greater access to the capital gain exemption.
- Retaining income in the corporation may affect provincial and federal capital tax and certain provincial clawbacks.
- Excessive personal income affects receipts subject to clawbacks, such as old age security, the age credit, child tax benefits, GST credits, etcetera.
- Salary payments require source deductions to be remitted to Canada Revenue Agency (CRA) 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.
PERSONAL TAX RETURNS
68(3)
DISABILITY TAX CREDIT (DTC)
Type I Insulin Dependent Diabetes - O.K.
In a June 14, 2004 Tax Court of Canada case, the taxpayer successfully claimed a DTC for his seven year old daughter who has Type I Insulin Dependent Diabetes.
Epilepsy - O.K.
In a December 12, 2003 Tax Court of Canada case, the taxpayer has epileptic seizures in which she losses complete physical control.
The Court permitted the DTC.
STRUCTURED SETTLEMENT
In a 2004 Advance Income Tax Ruling, the taxpayer was injured in a motor vehicle accident and reached an out-of-court settlement with the Defendant's Insurers to receive tax-free payments for life.
MEDICAL EXPENSES
In a June 29, 2004 Technical Interpretation, CRA notes that an amount paid to a medical doctor normally qualifies as a medical expense even if it is for cosmetic or elective surgery.
This includes cosmetic eyelid surgery, botox and artecoll injections.
EMPLOYMENT INCOME
68(4)
EMPLOYER-PAID PROFESSIONAL MEMBERSHIP INITIATION FEES
In an April 14, 2004 Technical Interpretation, CRA notes that the payment of annual professional membership fees by an employer on behalf of an employee is not a taxable benefit IF the employer is the primary beneficiary of the payment.
Also, the amount is a deductible business expense.
TUITION FEES REIMBURSED
In a June 7, 2004 Technical Interpretation, CRA notes that employer-paid tuition (and related costs) may not be a taxable benefit to the employee. This includes courses in a field related to the employee's responsibilities as well as courses not directly related to the employer's business such as stress management, employment equity, first aid and language skills.
MOTOR VEHICLE EXPENSE DEDUCTION
In a July 15, 2004 Technical Interpretation, CRA notes that where an employee receives a reasonable per kilometre reimbursement for the use of his/her personal motor vehicle in connection with employment duties, the reimbursement is generally excluded from employment income.
BUSINESS/PROPERTY INCOME
68(5)
LOSSES ON SHARE SALE
In a June 25, 2004 French Tax Court of Canada case, the taxpayer was permitted a business loss, not a capital loss, on the sale of shares which were speculative in nature.
SALARIES PAID TO CHILDREN - DISALLOWED
In a June 23, 2004 Tax Court of Canada case, the Court disallowed a deduction for salaries to his sixteen and twelve year old children against his self-employed business income for reasons including:
- The amounts were either not paid to them or, upon being paid, were immediately redeposited in bank accounts of either the business or the parents.
- There was not sufficient documentation and,
- The children did not declare any amounts on their tax returns.
PRIVATE HEALTH SERVICES PLAN (PHSP)
Where an employer enters into a PHSP for an employee, the expenses are generally deductible to the employer and not taxable to the employee. This deductible/non-taxable status may not apply if the PHSP is only available to shareholders.
In a June 24, 2004 Tax Court of Canada case, CRA disallowed the deduction to the company and taxed the shareholder on the basis that this was a benefit given to him in his capacity as a shareholder, not an employee.
CAPITAL GAINS AND LOSSES
68(6)
PRINCIPAL RESIDENCE
In a June 3, 2004 Technical Interpretation, CRA notes that when a taxpayer converts a principal residence to an income-producing use, the taxpayer may, within limits, elect to defer recognition of any gain to a later year.
RETIRING ALLOWANCE
68(7)
In a 2004 Advance Income Tax Ruling, six non-arm's length individuals were employee/shareholders of a corporation. The corporation wishes to sell all of the assets and then wind up.
CRA Ruled that a retiring allowance paid to each employee within prescribed limits is deductible to the corporation and eligible for a rollover by the employees to a Registered Retirement Savings Plan.
CAPITAL COST ALLOWANCE (CCA)
68(8)
In a June 21, 2004 Federal Court of Appeal case, the taxpayer had an October 31 yearend and, purchased a "new fleet" of cars to replace the "old fleet" as at October 31.
However, the "old fleet" remained in the ownership of the taxpayer until November 1. Therefore, CCA was allowed on both the "old fleet" and the "new fleet" at the October 31 yearend.
MARRIAGE BREAKDOWN
68(9)
LIVING SEPARATE AND APART
In a January 5, 2004 Tax Court of Canada case, the Court considered the taxpayers to be living separate and apart because of a breakdown in their relationship even though they continued to live in the same house. Therefore, their incomes were not combined for purposes of the GST credit.
EQUIVALENT-TO-SPOUSE CREDIT (ETSC)
In a January 8, 2004 Tax Court of Canada case, the Court noted that it is impossible for a taxpayer to claim an ETSC for a child where the individual is required to pay a support amount for that person.
FORM RC 65(04)
Taxpayers may use this Form to advise CRA of a change in marital status. This could affect the Canada Child Tax Benefit and GST/HST payments.
RRSP/RESP/SBIT
68(10)
RRSP - HOME BUYERS'
PLAN (HBP)
The HBP permits an individual to borrow up to $20,000 from his/her RRSP to purchase a home in Canada. To qualify, the borrower, or his/her spouse, cannot have an owner-occupied home in the four preceding years. Each spouse may withdraw up to $20,000 from their RRSPs to jointly purchase a home.
REGISTERED EDUCATION SAVINGS PLANS (RESP)
An RESP permits an individual to put funds with a Trust Company for the post-secondary education of one or more beneficiaries. The Trust is exempt from income tax.
Contributions to a RESP may also be eligible for a Canada Educational Savings Grant (CESG).
SMALL BUSINESS INVESTMENT TRUST (SBIT)
In a 2004 Advance Income Tax Ruling, CRA Ruled that the arm's length employees of a construction company may have their RRSPs invest in a SBIT which will provide loans to developers.
ESTATE PLANNING
68(11)
GIFT FROM AN ESTATE
In a June 11, 2004 Technical Interpretation, CRA reviewed a situation where, prior to the death of Brother A, Brother B took care of his personal needs and managed his finances. Brothers C, D and E agreed that the Estate should pay Brother B for the care provided to Brother A.
This is a non-taxable gift to Brother B from the Estate.
ELDERLY TAXPAYERS
Some considerations for elderly taxpayers follow. Contact your professional advisors for details.
- Sign a Power of Attorney for management of property and personal care matters.
- Avoid probate fees by naming beneficiaries to life insurance policies and pension plans, joint ownership and by multiple wills.
Also, assets could be rolled over to an Alter Ego Trust or a Joint-Spousal or Common-Law Partner Trust.
- A Will may be used to defer gains by transferring assets to a spouse or a Spousal Trust, to deem a charitable donation to have been made in the year of death, to establish a Testamentary Trust eligible for a separate yearend and graduated tax rates, to provide for a windup of a holding company, and to gift publicly traded securities to a charity to take advantage of the 25% taxable capital gain.
FARMING
68(12)
TRANSFER OF FARMLAND BETWEEN SPOUSES
In a June 25, 2004 Technical Interpretation, CRA confirmed that where Mr. A transferred farm property to his spouse on a rollover basis, the subsequent capital gain on the sale of the property by the spouse would be attributed back to Mr. A and would be eligible for a capital gain exemption if it met the criteria for qualified farm property.
FARM LOSSES
In a July 9, 2004 Tax Court of Canada case, the taxpayers were eligible for a full deduction for all their farm losses, rather than the restricted farm loss treatment provided by CRA.
WEB TIPS
68(13)
BUSINESS VALUATION CALCULATOR
This website has a seven step calculator that allows you to make a quick business valuation.
http://www.cdnbx.com/valuations/quickValuation1.asp
This website also contains a market comparison section, rules of thumb for valuing Canadian businesses, and a search tool to find brokers, advisors and other related professionals throughout Canada.
POST-SECONDARY INFORMATION
If you are looking for information on student financing, scholarships or awards, take a look at the following websites:
GST
68(14)
LAWYERS' DISBURSEMENTS
In a July 7, 2004 Policy Statement, CRA provided eleven pages of information with respect to how a lawyers' disbursements are taxed for GST/HST purposes.
SALES BY INDIVIDUALS OF OWNER-OCCUPIED HOMES
A GST Guide provides information on the GST/HST implications on the sale of owner-occupied homes by individuals.
DID YOU KNOW...
68(15)
CREDITOR PROOFING
Some creditor proofing strategies for owner-managed business follow. For details contact your professional advisor.
- Transferring assets out of a company
- By placing capital assets in a separate holding company, subsequent legal claims arising in the operating company may not affect these assets.
- Paying tax-free dividends to a holding company may protect assets from future claims.
- Securitizing the position of the business owner
- Shareholder loans may be secured by a general security arrangement to give the shareholder priority over all unsecured creditors.
- Consider an estate freeze such that the future growth will go to other family members.
- Transfer assets into a Discretionary Family Trust.
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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