TAX TIPS & TRAPS

FOR FIRST QUARTER 2003

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IN THIS ISSUE:

 

PERSONAL TAX

EMPLOYMENT INCOME

CAPITAL GAINS AND LOSSES

BUSINESS AND PROPERTY INCOME

CORPORATE TAX

CCRA

RRSP AND PENSION

FARMING

GST

DID YOU KNOW

2002 PERSONAL INCOME TAX RETURN CHECKLIST

2002 PERSONAL INCOME TAX RETURN CHECKLIST

Appendix A provides a checklist of information that will be needed to complete your 2002 Personal Income Tax Return.

To go to checklist please click here

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PERSONAL TAX

MEDICAL EXPENSE - HOT TUB

In a September 12, 2002 Tax Court case, the taxpayer suffered neck injuries in a motor vehicle accident and was prescribed by a physician to acquire a hot tub to assist with the movement of her upper body, primarily her neck.

CCRA permitted the costs to renovate the house to install the hot tub but did not permit the cost of the hot tub ($7,500) as a medical expense.

The Court agreed with CCRA and noted that to qualify the hot tub must be to assist in walking where the individual has a mobility impairment.  In this case, the primary benefit of the hot tub was improved  upper body movement.  Therefore, even though CCRA permitted the renovation costs, the cost of the hot tub itself was not permitted.

MEDICAL EXPENSE - SENIOR CITIZEN S’ HOME

In an October 7, 2002 Tax Court case, the Court noted that a taxpayer may be eligible for a medical expense for the full-time care in a nursing home.

The Court was impressed that the doctor did provide a letter that specified the taxpayer’s ailments.  However, the letter was lacking in the particulars of the “equipment, facilities or personnel” required for the taxpayer’s care or training.  Therefore, the letter did not satisfy the requirements of the Income Tax Act.

Editor’s Comment

If the doctor’s letter had been specific with respect to the “equipment, facilities or personnel” required, which the institution provided, the $2,480 per month cost may have been an eligible medical expense.

MEDICAL EXPENSES OUTSIDE CANADA - REIMBURSED

Medical expenses incurred outside Canada, as well as the related travel expenses, may be creditable medical expenses.

Alternatively, these costs may be eligible for reimbursement.  It was noted in the March 20, 2002 issue of the National Post that the Ontario Hospital Insurance Program (OHIP) must pay Mr. Smith’s $17,000 medical bill incurred when he went to England for prostate cancer surgery.  Mr. Smith had waited nine months for treatment and surgery in Ottawa.  In a written decision, the Ontario Health Services Review Board ordered OHIP to pay the bills as Mr. Smith risked irreversible tissue damage or death had he waited any longer for surgery in Ontario.

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EMPLOYMENT INCOME

DAMAGES

In a September 11, 2002 Tax Court case, the taxpayer received from Ontario Hydro $488,000 for general damages and $388,000 for pre-judgement interest, both of which were found to be non-taxable.  The Court noted that the general damages (tort damages) were in respect of the wrong done to Dr. A - not in the ultimate loss of his job - but in the stripping of his responsibilities as a nuclear researcher.  The breach was in the shift from a responsible researcher to an employee without responsibilities.  To be taxable, there must be some closer tie between the damages and the loss of employment.  Also, the pre-judgement interest has the character of damages, and not a separate “interest” income item.

Taxpayers that are in legal disputes with employers should consider this judgement to determine the fine line between taxable receipts for damages “in respect of loss of employment” and non-taxable receipts for general damages.

INVALID T4

In a May 1, 2002 Tax Court case, the Court found that the T4 Slip given to Mrs. F by her husband’s business for $18,000 should be taken off her return because she had never received any employment income.

TRUCKING

A class-action lawsuit is proceeding on behalf of truckers, bus drivers and other people who have been using CCRA’s simplified method of claiming meal allowances of $11 per meal to a maximum of $33 at one-half or $16.50 per day.  This is being compared to government workers who received non-taxable allowances of $62.00 per day for their “meal allowance”.

Over 1,500 people have sent in their application fee of $100 by the deadline of November 30, 2002.

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CAPITAL GAINS AND LOSSES

SHARE SALE BY EMPLOYEES

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BUSINESS AND PROPERTY INCOME

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED)

On October 10, 2002, CCRA introduced Interpretation Bulletin IT-151R5 which explains SR&ED which, provides a 35% refundable investment tax credit to Canadian-controlled private corporations, and a 20% investment tax credit to others.

It was noted in the March 30, 2002 issue of the Financial Post that a study indicates that only 40% of eligible corporations have claimed their SR&ED.  This may be because of the old prejudice that it is hard to obtain a credit.  However, the study notes that the process is now streamlined and easier than in the past.  Often, CCRA’s SR&ED employees will actually help with the application.

It was also noted that 12% of eligible companies did not even know that SR&ED credits existed.

Editor’s Comment

Remember, this is a valuable credit and provinces - with the possible exception of Alberta and P.E.I. - also provide SR&ED credits.

INTEREST EXPENSE - DEBT CONVERSION - O.K.

In an October 9, 2002 Technical Interpretation, CCRA reviewed a situation where an individual owns an investment portfolio with a market value of $200,000 and has a mortgage of $100,000 on his personal residence.  The individual will sell $100,000 of his investments and use the proceeds to pay off the mortgage.  The individual would then re-borrow the $100,000 and acquire the same or other interests thereby converting non-deductible interest to deductible interest.

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CORPORATE TAX

PERSONAL SERVICE BUSINESS (PSB)

In a September 13, 2002 Tax Court case, the taxpayer was employed as the accountant and chief financial officer of Clearly Canadian Beverage Corporation (CCBC).  However, he also provided other services to CCBC through his corporation (S&C).  CCRA took the position that the income received by S&C was PSB income and, therefore, taxed at top rates, rather than the very beneficial small business deduction rate.

G ood News!

The Court found that the income was not PSB income and noted that:

1.   The consulting fees paid to S&C were for out-of-the-ordinary duties that normally consultants would be hired to perform.

2.   The employment activities of Mr. Ross did not involve these activities.

3.   S&C rented the necessary business tools from CCBC.

4.   S&C incurred operating costs which created a risk of loss.

Editor’s Comments

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CCRA

DETAXERS - NAILED AGAIN

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RRSP AND PENSION

SELF-DIRECTED RRSPs AND MORTGAGES

In an October 8, 2002 Technical Interpretation, CCRA notes that an RRSP may hold a mortgage on real property owned by the annuitant, or by a non-arm’s length person.  Conditions under which a mortgage may be a qualified investment for an RRSP include following commercial practices regarding mortgage terms, interest rates and insurance.

Also, in an October 16, 2002 Technical Interpretation, CCRA notes that where a minority shareholder’s RRSP lends funds to the employer corporation as a mortgage in respect of real property administered by an approved lender under the National Housing Act (NHA), and insured under the NHA or by a corporation offering its services to the public in Canada, it may qualify as an eligible investment assuming that the individual is dealing at arm’s length with the corporation.

GUARANTEED INCOME SUPPLEMENTS

It was noted in the November 13, 2002 issue of the National Post that a class-action suit has been filed in Quebec Superior Court to force the Federal government to pay possibly several billion dollars in retroactive Guaranteed Income Supplement benefits to more than 300,000 seniors on the basis that the government was negligent in failing to contact seniors who might qualify for this assistance.  The Old Age Security Guaranteed Income Supplement is available to low income pensioners.

FARMING

FARM LOSSES

In a September 17, 2002 Tax Court case, the Court awarded costs of $25,000 against CCRA, in favour of the taxpayer.

The issue in the Federal Court was whether this was a proper awarding of costs.  The Court agreed that it was and noted that the restriction to the farm losses against Mr. F should never have occurred.  Mr. F was clearly a full-time farmer who had to rely on other sources of income to finance the farm - as opposed to the “gentleman” farmer that Section 31 is designed to restrict.  The $25,000 is a reasonable amount as this was likely lower than the legal costs incurred.

The Court noted that the farm depression, which is general public knowledge and surely known to the Government of Canada, should have been considered before this assessment was issued.

MORE GOOD NEWS

In an October 17, 2002 Federal Court of Appeal case, the Federal Court overturned the Tax Court and permitted Mrs. K a full farm loss from her interest in the farming partnership with her husband, rather than the “restricted farm loss”.

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GST

ELECTRONIC COMMERCE

In July, 2002, CCRA released a Technical Information Bulletin on the topic of GST/HST and Electronic Commerce (B-090).  The Bulletin includes many examples of the application of GST to Internet sales.  This is important because it determines whether the sale is subject to the 7% GST.

SALE OF PASSENGER AND MOTOR VEHICLES

Corporations registered for GST must collect GST on the value of passenger vehicles or motor vehicles traded in where the commercial use is greater than 50%.

When the customer is not required to charge GST, the dealer charges GST on the net amount of the sale or lease.  For example, an individual goes to a registered car dealer to trade in his car for a new one.  The selling price of the new car is $25,000, and the dealer allows $10,000 for the individual’s used car.  The dealer will charge GST on $15,000.

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CCRA notes that they will now consider legal costs incurred to obtain spousal support under the Divorce Act or under the applicable provincial legislation in a separation agreement to be deductible because it is incurred to enforce a pre-existing right to support.  CCRA also accepts that legal costs of seeking to obtain child support, an increase in child support or make child support non-taxable under the Guidelines are also deductible.

T4 SLIPS - GUIDE RC4120filing of the T4 Slip and the Summary Form and notes that:

1.   In February, 2003 CCRA will start accepting cancellations and amendments in electronic format for information slips.

2.   T4 Electronic Filing is an option which allows you to create, save, print, and transmit your electronic T4 information.

3.   Construction businesses have to report amounts paid or credited to construction subcontractors on a T5018, Summary of Contract Payments, Information Return.  The amounts can be filed on either a calendar or fiscal-year basis within six months from the end of the reporting period.

WITHHOLDINGS

In a recent case, the taxpayers were required to withhold on payments for services rendered in Canada even though the recipient had no Canadian permanent establishment.  Penalties were also successfully applied against the Canadian payor.

NATIVE TAX EXE MPTION

In a 172-page March 7, 2002 Federal Court - Trial Division case, Justice Campbell found that the Federal taxation provisions had no effect with respect to beneficiaries of Treaty 8 which was entered into between aboriginals of Northern British Columbia, Alberta, Saskatchewan and the Southern Northwest Territories.

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2002 PERSONAL INCOME TAX RETURN CHECKLIST

APPENDIX A 2002 PERSONAL INCOME TAX QUESTIONNAIRE

This is a comprehensive list of possible information require in order to complete your 2002 Personal Income Tax return

• Tax instalments made during the year .
• Direct Deposit for refunds. If you had direct deposit last year, then Canada Customs & Revenue Agency will continue depositing your refunds until you tell them otherwise. If you have changed banks or account number, or you would like to start direct deposit this year, please indicate the following information:
• Name of Bank
• Bank Branch Number
• Account Number
• Property taxes or rent paid in 2002
• Did you own or hold foreign property at any time in 2002 with a cost of more than CAN$100,000?

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