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2005 1st Quarter, Issue No. 69
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2004 personal income tax return checklist personal tax employment income business/property income marriage breakdown estate planning/charities farming GST web tips |
| Past Issues |
A "common-law partner" status must be disclosed when filing a personal income tax return.
This means a person who cohabits in a conjugal relationship and has so cohabited throughout the previous twelve month period or is the parent of a child of whom the taxpayer is a parent.
Also, persons that have been cohabiting in a conjugal relationship are deemed to continue to be in a "common-law partner" status unless they are living separate and apart for at least ninety continuous days because of a breakdown of their conjugal relationship.
Two persons living in the same house may be tempted to file on the basis that they are "single" - just roommates - to avoid losing certain benefits such as the GST credit, provincial tax credits, child tax benefit, etc.
CRA may challenge this "single status". The taxpayers must show that they are not in a common-law relationship. Seven factors indicative of a common-law relationship are:
In a September 1, 2004 Tax Court of Canada case, the Court permitted a medical expense for $10,531 on home renovations.
The taxpayer's spouse had meningitis and was confined to a wheelchair. To remain in the family home she needed 24-hour care. Therefore, the taxpayer incurred the $10,531 to provide living accommodations for his mother-in-law so that she could provide care to his spouse. The costs also include amounts for a room on the main floor for his disabled spouse.
Also, in a September 17, 2004 External Technical Interpretation, CRA agreed that a person who had suffered a stroke and was disabled was entitled to a medical expense for certain renovations to his house to allow access, mobility, or functionality within the home.
In a September 7, 2004 External Technical Interpretation, CRA remind taxpayers that receive Old Age Security in 2004 that there will be a clawback if the net income exceeds $59,790.
OAS payments will be subject to a "withholding" on the potential clawback. For example, OAS payments in January to June, 2005 are subject to withholding based on the net income in the 2003 Return; July to December, 2005 - based on the 2004 Return. Therefore, if the 2005 income will be less than that in 2003 and 2004, an application to have this withholding reduced could be made to CRA.
In a July 12, 2004 Tax Court of Canada case, the taxpayer lived periodically with her elderly parents in their apartment in 2002 and, at the end of the year, one of the parents lived with her prior to entering a nursing home.
The Court permitted the caregiver credit on the basis that Mrs. V was providing in-home care for her mother.
The income threshold for the elderly parent at which point the credit is reduced is $12,921 for 2004.
In a July 29, 2004 CRA Document, CRA note that "Training Trust Funds" generally fall under the non-taxable categories for employer-provided training outlined in Income Tax Technical News No. 13.
In an August 13, 2004 External Technical Interpretation, CRA note that where a corporation agrees to sell its shares to an employee, the employee generally includes in employment income a taxable benefit equal to the fair market value of the shares acquired minus the amount paid. However, where an employee pays an amount for the shares that is not less than the fair market value of the shares at the time the agreement to issue the shares is established, a deduction in computing taxable income of 50% of the benefit is permitted.
Also, there is a 50% deduction in computing taxable income, and a deferral of the employment income until the share is sold, if the employee is an arm's length employee of a Canadian-controlled private corporation and holds the shares for two years.
An employer may be required by law to enforce a garnishment, family support, maintenance order or wage assignment.
For example, CRA may issue a Requirement to Pay Notice with respect to an employee. This Notice remains in effect until the CRA liability is paid in full or, until CRA releases the employer from the obligations.
If an employer has more than one order with respect to an employee, legal advice should be obtained as to "who gets what". In some jurisdictions the employer is permitted to deduct an administrative fee from the funds they forward to the Court. (Alberta, Manitoba, Newfoundland, Labrador, Northwest Territories, Nunavut, Ontario, Prince Edward Island, and the Yukon Territory)
In a September 2, 2004 Tax Court of Canada case, the taxpayer's salaries to his sixteen/seventeen-year old son in 1999 and 2000 of $4,279 and $4,090 respectively were disallowed by the Court because:
The Court noted that business transactions between related persons must have their "i's" dotted and their "t's" crossed.
For salaries to be allowed to family members, the amounts must be paid in a normal manner and specific duties and hours worked should be documented.
In a June 23, 2004 Tax Court of Canada case, salaries of $12,000 and $3,500 paid to a sixteen year old and twelve year old child were disallowed for reasons including no evidence of actual payment or reporting.
In a July 16, 2004 Tax Court of Canada case, the Court reviewed a number of expenses which had been deducted in carrying on the Watkins products for sale business. One of the items allowed as a deduction by the Court was a salary of $25 per month to their 12 year old son and $15 per month to their 7 year old daughter for assisting them in various business functions. The Court was satisfied that the remuneration was paid and reasonable.
In a September 20, 2004 Tax Court of Canada case, the taxpayer was reassessed by CRA for the 1993, 1994 and 1995 years to disallow most of the interest expense, entertainment expense, business use of residence, and farm expenses.
The Tax Court also disallowed the expenses and noted that the taxpayer did not keep receipts.
The best evidence would have been an invoice, a cancelled cheque, a receipt or other proof of payment. Instead, only schedules in the handwriting of the Appellant with his oral explanation were provided.
Registrations for a new business or partnership may be done over the internet at www.businessregistration.gc.ca.
In an October 20, 2004 External Technical Interpretation, CRA notes that where training in respect of a business is taken to maintain, update or upgrade an already existing skill or qualification, the related costs (course fees, travel, food, beverages and lodging) are deductible as a current business expense. However, the food and beverage portion may be restricted to the 50% deduction in Section 67.1.
In a July 13, 2004 Tax Court of Canada case, the taxpayer signed a Separation Agreement in 1988 which required a $225 per child per month child support payment.
After May 1, 1997, the taxpayer moved from Manitoba to British Columbia. A new Order of the Income Security Division in British Columbia retained the Manitoba Order but had a top-up of the child support from $225 per month to $425 per month.
The Tax Court noted that the deduction is lost because a new or amended agreement was made after April 1997.
In the August 23, 2004 issue of the Globe and Mail it was noted that the Federal government is proposing to release Federal Guidelines for negotiating income-sharing agreements between divorced couples.
The Guidelines include formulas for calculating reasonable settlements. Factors such as the length of the marriage and the presence of dependent children are included. For example, if a couple married for twenty years has no dependent children and the man is earning a salary of $90,000 and his wife is earning $30,000, the spousal support figure that the man would pay his ex-wife ranges between 1.5% and 2.0% of the difference ($60,000) times the number of years the couple were married. This is between $18,000 and $24,000 a year or $1,500 to $2,000 a month.
The payments continue to be tax deductible to the payor and taxable to the recipient.
Unlike the child support guidelines which do have the effect of law, the spousal guidelines are just a starting point in negotiations.
It was noted in the National Post on September 27, 2004 that the British Columbia Court of Appeal was asked to cancel or reduce Mr. L's Court-ordered $2,250 per month spousal support to his 57 year old former wife on the basis that she had not made reasonable attempts to obtain employment.
The Court rejected the Appeal on the basis that Ms. L's family and medical problems were exacerbated by the breakdown of her marriage. Ms. L's inability to achieve financial self sufficiency resulted, (at least in part) from the emotional devastation as well as from her age, a lingering back problem, and a string of death and illnesses in her close family.
It was noted in the July 15, 2004 issue of the National Post that the Ontario Superior Court held that divorced parents of a 25 year old daughter must pay for her Masters Degree.
In the past, it has been common for Judges to require divorced parents to pay for a child's first post-secondary degree. However, this case found that where the parents are highly educated and have high expectations for their child, the costs for the Masters Degree are also required to be paid.
The daughter took the Masters Degree at a university in the United States at a cost of $127,000. The Court noted that the parents should only be required to pay the equivalent costs for a degree in Canada, which the Court determined to be $40,000 ($22,800 for the father and $17,200 for the mother based on their respective incomes).
A person who incurs expenses while volunteering for a charity could consider having the expenses reimbursed by the charity. The volunteer could then donate the amounts back to the charity. This will provide a tax credit for the donation. It is important to cross cheques.
Organizations that want to be registered as a "Charity" must have purposes directed to the "public benefit".
On September 30, 2004, CRA issued a 27-page Guide "Consultation on Proposed Guidelines for Registering a Charity: Meeting the Public Benefit Test".
In a Government of Canada Income Security Program seminar it was noted that:
Assets may be rolled over on death to a Spousal Trust which is a Trust created in the Will under which the taxpayer's spouse or common-law partner is entitled to receive all of the income of the Trust that arises before the spouse's or common-law partner's death and, no person except the spouse or common-law partner may, before their death, receive or otherwise obtain the use of any of the income or capital of the Trust.
In a second marriage situation, persons that wish to ensure that their assets will eventually go to their children, not their new spouse's children, upon their new spouse's death, may wish to establish a Spousal Trust in which the new spouse receives all the income during his/her life but, there can be no encroachment on capital until the spouse's death at which time, the capital will go to beneficiaries chosen by the deceased taxpayer, such as his/her children.
Expert legal advice is needed here.
In a June 11, 2004 External 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 B, C, D and E are the beneficiaries of Brother A's Estate. Brothers C, D and E agree that the Estate should pay Brother B for the care provided to Brother A.
CRA agreed that this payment is a non-taxable gift to Brother B from the Estate.
On November 25, 2004 CRA introduced a Fact Sheet which notes that CRA is aware that donation arrangements continue to be promoted using Trusts and leveraged cash donations. CRA's position is that the 2003 Income Tax Act changes will significantly reduce tax benefits.
To qualify for the $500,000 capital gain exemption on "qualified farm property" bought after June 17, 1987, a gross-revenue test must be met. Two years while the property was owned the gross revenue of the individual, spouse, child or parent of the individual from the farming business carried on in Canada in which the property was principally used, and in which such a person was actively engaged on a regular and continuous basis, must exceed the person's income from all other sources.
The person meeting the gross-revenue test need not be the person who owns the property. For instance, it may be the spouse, child or parent of such a person.
Alternatively, where the land was acquired before June 18, 1987, the land will qualify where it was used by the individual, the spouse, child or parent principally in the course of carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by such a person.
In an August 20, 2004 Tax Court of Canada case, the vendor sold land and a building to the "Heart of Trail Society" for $100,000. The Society advised the vendor that they were registered for GST. Therefore, the vendor did not charge GST on the basis that the purchaser would self-assess.
However, the GST Registration of the Society had been cancelled prior to the sale.
The Court noted that even though the Vendor was misled by the fraudulent statement made by the agent for the Society, the Act is clear. The Court found that the Vendor is responsible for the $7,000 of GST plus a penalty of $1,140 and interest of $604.
Directors may be held personally liable for unremitted GST and source deductions unless they exercised due care and diligence or the assessment is more than two years after the person has ceased to be a director.
In an August 13, 2004 Tax Court of Canada case, the taxpayer ran a Tim Horton franchise which did not remit GST. CRA assessed penalties and interest of $37,430 which were not objected to by the corporation. Upon being assessed personally, the directors did not argue "due diligence" but did argue that the amount of $37,430 was incorrect. This was based on a rough calculation done by their accountant totalling $14,190.
Even if the assessment is incorrect, if it is not objected to by the company, the directors are still personally liable.
Always object to incorrect GST assessments even if the corporation is insolvent.
In September, 2004, CRA introduced a 20-page Guide RC4081 which discusses who should register, exemptions for non-profit organizations, special issues, input tax credits, public service bodies' rebates, simplified accounting methods, and real property implications.
You will find federal information about senior programs, initiatives, forms and contact information at this website.
Subjects covered include care for seniors, computers and education, end of life, financial and legal, health, housing, seniors' networks, travel and leisure, veterans, work and volunteering.
Also, check out the "My Province or Territory" section on the left hand toolbar of the page for information that is specific to your province.
Most people realize that eating, exercising and living in an unpolluted environment can increase your life expectancy, but do you know by how much? Also, did you know that something as small as flossing your teeth could add two years to your life?
This website gives an estimated life expectancy based on one's habits, genetics, health and environment. The user simply fills out the 41 question multiple response worksheet and is then presented with an expected age and an explanation of the results.
This website contains a 12 step planner that looks at numerous items that need to be considered when starting a new business. Various reports can be obtained including 3 year financial projections, cash flows, and project costs.
Have you wondered how those Internet search engines like Google can search millions of websites and in a split second return thousands of site matches ... while it can take over 100 times as long to use your computer's search button to find lost files?
Google has just developed a desktop tool that not only searches your computer for files, but searches inside of files (MS Word, Excel, PowerPoint etc.). Not only does it search for files but it also returns a list of relevant websites that you have recently visited. The fun doesn't stop just there - the tool can also search your email! At the moment, this last feature works best with users of MS Outlook but is still extremely useful for other users.
When downloading the file, please note that it takes a while for the engine to fully catalogue your files. However, this is done while you are not using the computer. Once the files are catalogued, you are ready to get split second responses.
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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