|
Presented to you by Frank C. Weyer, C.M.A. Our Services ~ Tax Tips ~ Our Clients ~ Year End Info ~ Links Of Interest ~ Contact Us ~ Home copying and/or redistribution of 'Tax Tips & Traps' is prohibited |
 |
2006 3rd Quarter, Issue No. 75
| In This Issue |
|---|
|
Personal Tax Employment Income Business/Property Income Owner-Manager remuneration Farming Estate Planning Marriage Breakdown GST Web tips Did You Know... |
| Past Issues |
The Income Tax Act requires a student to be in full-time attendance at a university outside Canada to claim a tax credit for tuition fees.
In a March 9, 2006 Tax Court of Canada case, the taxpayer took a post-graduate degree on an online basis from Open University in England. Although there are no lectures, visual presentations are provided in CD format. Students are given access to a dedicated online connection similar to a “chat room” so that issues can be discussed among the students and with the tutors.
Exams were written at the University of British Columbia.
Taxpayer Wins!
The Judge found that the Income Tax Act does not necessarily require physical presence at a university. The expression “full-time attendance” is ambiguous and should be interpreted literally to include programs that require the “attention” of the student on a full-time basis, such as the online program taken here.
In an April 11, 2006 External Technical Interpretation, Canada Revenue Agency (CRA) notes that the Income Tax Act permits “reasonable moving expenses” of up to $2,000 as a medical expense tax credit for a person who lacks normal physical development or has a severe and prolonged mobility impairment, where the move is to a dwelling that is more accessible by that person or in which the person is more mobile or functional.
For example, this may apply to a person who has to move because they have Multiple Sclerosis if the new dwelling is more accessible or you are more mobile or functional within the new dwelling.
In a 2005 Advance Income Tax Ruling, CRA Ruled that when part of a bonus allocation is credited to the HCEA, this will not be taxable income.
Unused balances in the HCEA at the end of the year may be carried over and used to reimburse eligible medical expenses in the subsequent year. Unused balances will not be payable in cash.
In a 2006 Advance Income Tax Ruling, CRA noted that a company compensates its management employees with a base salary and incentive pay.
The company permits the employee to elect to allocate the incentive pay to an HSA which qualifies as a Private Health Services Plan (PHSP).
CRA Ruled that the allocation of credits to the HSA will not be considered taxable income.
In an April 18, 2006 External Technical Interpretation, CRA notes that where tips are controlled by the employer, payroll deductions must be met and the amounts reported on the employee’s T4.
Controlled tips include tips the employer pays or that pass through the employer’s books before the employee receives them.
In a May 12, 2006 British Columbia Court of Appeal case, the Court found that this class-action suit that truck drivers should be allowed deductions for meals, without receipts, at the rates the Federal government pays its employees when they travel on business was not allowed by the Court.
Editor’s Comment
Therefore, truck driver employees are required to keep receipts for travel expenses unless they use CRA’s simplified method of claiming $15 per meal to a maximum of $45 per day. However, deductions are subject to a 50% limitation under the Income Tax Act.
In a May 29, 2006 External Technical Interpretation, CRA notes that where an employer pays for reasonable meal expenses incurred while the employee is required to work overtime, a taxable benefit does not result where:
(a) the employee works three or more hours of overtime right after his/her regularly scheduled hours of work, and
(b) the overtime is infrequent and occasional in nature (less than three times a week).
In a March 2, 2006 Federal Court of Appeal case (The Royal Winnipeg Ballet (RWB) vs. M.N.R.), the Court found that dancers with the RWB are independent contractors - not employees.
The Federal Court noted that the uncontradicted evidence of the parties as to their common understanding of the legal relationship as being that of an independent contractor should have been considered. This common understanding is borne out by the contractual terms and the other relevant factors.
In an April 18, 2006 External Technical Interpretation, CRA reviewed the replacement property rules whereby a motel business is sold and the funds used to acquire a recreational vehicle park to defer the capital gain on the sale of the motel.
The replacement property rules generally allow a taxpayer to defer recognition of capital gains and recaptured capital cost allowance on the disposition of a capital property when the replacement property is acquired by the end of the following fiscal period (voluntary dispositions) or the second fiscal period (involuntary dispositions).
In a May 5, 2006 Tax Court of Canada case, the taxpayer purchased a house in Toronto. From 1981 to 1994 the house was rented out to family members. From 1994 on, it was rented out to arm’s-length persons. The taxpayer claimed losses from 1987 through to the year 2000 ranging from $4,000 to $14,000 each year.
CRA disallowed losses in the years 2001, 2002, 2003 of $14,655, $14,865, and $16,385 on the basis that there was a personal aspect to the house.
Taxpayer Wins on this Point!
The Court noted that there was no sentimental attachment to the premises nor was there any evidence that the taxpayer might put the property to some non-commercial use in the future.
Taxpayer Loses on this Point!
CRA successfully argued that many of the expenses were not deductible because they were not supported by receipts.
A common issue in private corporations is the remuneration which can be paid to family members who are not active in the day to day operations of the business. Such salaries are deductible only to the extent they are reasonable in relation to the services provided.
Some family members are made Directors of the corporation to support payment of higher salaries. A recent case indicates that the additional remuneration a Directorship may support is fairly small. In that case, the Tax Court denied the deduction of a large portion of Directors’ fees paid to adult children who were Directors of the corporation, but provided no other services. The Tax Court allowed a deduction of only $1,500 per child per year. A greater deduction ($11,600) was allowed for one child who was more active in the business.
Caution!
Prospective Directors should carefully consider the legal ramifications and risks of Directorship, and consult with their legal counsel. Directors can be held personally liable for unremitted GST and source deductions and can also be at risk of liability for items such as environmental damages, improperly issued shares, improper payments to shareholders and wages not paid to employees.
On March 31, 2006 the Agriculture and Agri-Food Canada Department announced that the CAIS deposit has been eliminated and will be replaced by a fee for the 2006 CAIS Program. CAIS participants will receive a letter with details on how to join the Program for 2006 and how to pay the fee.
Producers will pay $4.50 per $1,000 of Reference Margin protected. The Administrative Cost Share (ACS) of $55 per account will remain in place and will be collected at the same time as the fee.
Producers do not have to pay a fee for participating in CAIS for the 2003, 2004 or 2005 program years.
The Canadian Federation of Independent Business released a report in March, 2006 entitled “The Case Against CAIS”.
Some points mentioned include:
1. Only 49% of farmers surveyed received a CAIS payment.
2. 43% said the payment did not cover their margin losses.
3. 45% said the paperwork involved is a major problem while 62% found the paperwork too complex.
4. 25% reported a low level of understanding about CAIS even though they had gone through the application process.
5. 68% used an outside professional firm to do the work.
6. Even with outside help, the average farmer still spends about ten hours a year while 10% of the applicants spent thirty hours or more on the CAIS application.
7. The average farmer spent nearly $1,000 to have the CAIS work done whereas 9% spent more than $5,000 to participate and a few people spent over $9,000.
Even though there are problems with the effectiveness of the CAIS Program, Agriculture Minister Chuck Strahl noted that it will remain in place for 2006.
In a March 16, 2006 External Technical Interpretation, CRA reviewed a situation where the individual’s father owned land that he farmed on a full-time basis for many years until he ceased farming operations. The land has been rented out on a crop-share basis ever since. Upon her father’s death, the individual’s mother inherited the land but she did not farm the land either. Upon her mother’s death, the individual inherited the land but she also did not farm the land.
CRA noted that the land was still “qualified farm property” eligible for the capital gain exemption because the father satisfied the required farming test.
In a Tax Court of Canada case, the taxpayer claimed charitable donations of $9,000, $9,500, $10,100 and $10,000 for the years 1990 to 1993 on the basis that art was purchased and donated to charities. However, evidence indicates that the taxpayer never saw the paintings, never had them in his possession and did not choose the charitable organizations that were to receive the donations.
Taxpayer Loses
CRA was successful in disallowing the charitable donation tax credits for all the years, including the years thought to be statute-barred because the Court found that there was a “misrepresentation attributable to neglect, carelessness or willful default”.
When a parent owns the shares of a corporation, he/she may wish to freeze the value of their shares in favour of children who will subscribe for future growth common shares, perhaps through a Trust. This could reduce tax on the death of the parents.
CRA Ruled positively on an Estate Freeze in a 2006 Advance Income Tax Ruling.
In a May 4, 2004 Ontario Superior Court case, the issue involved who was entitled to the life insurance and assets in the deceased person’s RRSP - the designated beneficiary or the Estate.
In this case, Mr. and Ms. G entered into a Separation Agreement in 2004 in which Ms. G released her entitlement to all assets as part of the settlement of all claims between them. However, Mr. G died before he changed the designated beneficiary on his RRSP and life insurance policy.
The Court determined that Ms. G was entitled to receive the assets in the RRSP and the life insurance proceeds on the basis that the Separation Agreement did not revoke Ms. G’s rights as the named beneficiary in both the RRSP and the insurance policy.
There have been other cases where the rights of a named beneficiary have been revoked because of a proven intention of the deceased, but this did not occur in this case. Therefore, if the intention is to have the RRSP and insurance not go to your former spouse, it is important to change the beneficiary.
The marginal tax rate system permits taxpayers who can redirect income to lower income family members to enjoy considerable tax benefits as a family unit. Unfortunately, the attribution rules often frustrate income splitting with spouses and minor children or grandchildren.
However, the attribution rules do not apply to transfers where the recipients of investment capital pay fair value for the funds they receive such as through properly structured loans.
The loan must bear interest at a rate no lower than the CRA prescribed rate at the date the loan is advanced (9% until September 30, 2006); and
the interest for every year must be paid no later than January 30 of the following year.
The borrower (commonly a Trust for minor children or grandchildren) can then invest the borrowed funds and earn income. Because the borrowed funds are used to earn income, the borrower is entitled to deduct the interest incurred as a carrying charge. To the extent the return on their investments exceeds the interest, the difference will be taxable to the lower-income borrower. Of course, the lender must report the interest received each year.
In a March 9, 2006 Tax Court of Canada case, the taxpayer had custody of the younger child and, his former spouse had custody of the older child after the marriage separation. Upon applying the Federal Child Support Guidelines, the amount that he had to pay her based on his income exceeded the amount that she had to pay him. Therefore, the net amount payable by him for child support was $185 per month. CRA disallowed his legal fees related to the child support.
Taxpayer Wins!
The $8,265 of legal fees paid by the taxpayer with respect to his claim for child support from his former spouse was considered deductible even though, he had to pay a net amount to her. The Court noted that the purpose in incurring the legal fees was in part to establish his entitlement to support for one child. Legal fees incurred to establish entitlement to child support are deductible.
Child Support Orders made after April, 1997 do not permit a deduction to the payor, or income to the recipient because the “Commencement Day” is after April, 1997. Also, pre-May, 1997 Agreements that are changed after that date may also have a “Commencement Day” after April, 1997 thereby converting the status of the child support from deductible/taxable to non-deductible/non-taxable.
In a March 16, 2006 Tax Court of Canada case, Daniel was required to pay child support in a marriage breakdown situation to his former spouse under a July 14, 1993 Agreement. Therefore, this was a pre-May, 1997 Agreement and the child support payments were deductible.
However, on November 23, 1998 the Agreement was changed with respect to overall custody and child support amounts. The Court found that Amendment was a new Agreement. Therefore, it had a Commencement Day after April, 1997 and the child support payments were no longer deductible.
As part of their obligations under the GST/HST, Registrants are required to ensure that Input Tax Credits are claimed only where suppliers are registered for GST/HST. Previously, the sole means available to verify this was to contact Canada Revenue Agency.
The February 23, 2005 Federal Budget proposed a publicly accessible web-based GST/HST Registry. This has now been activated and the link is:
This could also be valuable for real property transactions where a vendor needs to confirm that the purchaser is registered so that the vendor will not be required to collect GST/HST on the sale.
Most exported services are subject to a GST rate of 0%. However, the taxpayer may claim Input Tax Credits as the supplies are zero-rated, not tax exempt.
GST/HST Memoranda Series 4.5.1 Exports - Determining Residence Status - includes a sample declaration that may be provided by a purchaser to a vendor with respect to their non-resident status.
If you have ever tried to email a file or document larger than 10 MB, you might have found your email provider reject the message because of messaging size limitations.
One way to avoid this is to use a free “drop and deliver” service. One simply goes to one of the websites listed below, upload the document, and then enter the email address of the intended recipient. A message will then be sent to the recipient containing a link. He/she would follow the link and download the file directly to his/her computer.
YouSendIt.com
DropSend.com
rapidshare.de
As a note, please be aware that in almost any Internet based data transfer, even in direct emails, there is the possibility that your message may be compromised.
Having a meeting at a restaurant you’ve never been to? Need directions to a printer? Trying to contact a paint shop?
If you are trying to do any of these things, there are a couple of options one could use: look in a phone book, check 411.ca, or search for the company/restaurant’s website. However, there is one option that in most cases works even better.
Go to google.ca, and enter both the organization’s name (or parts of it) and the name of the city it is in. (do this all within the same search box - ex: Search “Boston Pizza Toronto” Note: if you live in a smaller town, or one that has a name which is common to other countries (i.e. Kingston, London etc.) you will need to include the province as well (Boston Pizza Kingston, On).
In most cases, a section will appear at the top of the results entitled “local results” (usually a little compass icon will accompany this section). Within this section you will see a listing of all the organizations within the city which fulfill your search parameters. Each of the items listed includes the organization’s full-name, its address, and its phone number.
If you click on the listing that you want, you will then be directed to a map of its location. Within this page one may select the “directions” option. A window will pop up asking for your starting location. After entering this detail, almost instantly a report will appear listing the distance, estimated time of travel, written directions, and a picture of the route map. Note: when entering in the starting location, always use the postal code (it will save you time and frustration).
Canadians
that sell U.S. real estate at a profit will be subject to U.S. Federal and,
perhaps, U.S. State tax.
From the proceeds of disposition you are entitled to deduct your cost base which includes any permanent improvements. You also may deduct sale expenses such as real estate taxes, interest, insurance and maintenance.
Some other things to consider include:
1. There is a 10% U.S. withholding tax that applies at the time of sale as a prepayment of the income tax.
A vendor may be exempt from the withholding tax (but not the income tax) if the buyer certifies that they will use the property as a residence and the selling price does not exceed $300,000. Also, a Form 8288-B may be submitted to the IRS to authorize a reduction in the withholding tax below 10%.
2. A U.S. income tax return to report the sale is due by June 15 of the following year (April 15 if you had wages subject to U.S. withholding). The U.S. withholding tax is shown as a payment on that return.
3. State taxes also must be considered.
4. A United States Taxpayer Identification Number will be needed.
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.
Our Services ~
Tax Tips ~
Our Clients ~
Year End Info ~
Links Of Interest ~
Contact Us ~
Home