CLARK
POLLARD
GAGLIARDI
FOR FOURTH QUARTER
2003
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YEAR END TAX
PLANNING
Some
2003 year-end
tax planning tips
include:
1. If the following expenditures are made by individuals
by December 31, 2003 they will be eligible for 2003 tax deductions: moving
expenses, child care expenses, safety deposit box fees, charitable
donations, political contributions and medical expenses.
2. 2003 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2002 personal income tax return assessment notices. You have until March 1, 2004 to make tax deductible RRSP contributions for the 2003 year.
Consider contributing to a spousal RRSP to achieve income splitting in the future.
The maximum 2003/2004 additions to deductible RRSP contribution room
are $14,500 and $15,500 respectively. The
2004 contribution requires 2003 earned income of $86,111 ($86,111 x 18% =
$15,500).
3. Persons turning age 69 in 2003
must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund
by December 31, 2003. Certain
2003 excess contributions may be deducted in the year 2004 if contribution room is available.
4. If you own a
business, consider paying a reasonable salary
to family members for their services rendered to the business.
5. Ensure that all
deductible alimony or maintenance payments
are made by December 31, 2003.
6. An individual whose 2003 net income exceeds $57,879 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 $28,193.
7. Consider purchasing
assets eligible for capital cost allowance
before the yearend. For
example, employees may claim capital cost allowance on automobiles,
aircraft and musical instruments
required to be used in their employment.
8. 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 capital gains in the year, or in the three
preceding
years.
9. 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, 2003.
10. Individuals may claim a tax credit related to the interest portion
of student loan payments made in 2003.
11. 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).
12. 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 are actively engaged alone, or as a partner, in their business, and either self-employment is their primary source
of income or their income from other sources does not exceed $10,000.
13. 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.
This
includes:
-
Taxable dividends, and other shareholder benefits, on unlisted shares of Canadian and foreign companies (received directly or through a trust or partnership); and
-
Income from a partnership or trust where the income is derived from providing goods or services to a business carried on by a relative of the child or, of which the relative participates.
Therefore,
consider minimizing this type of income in 2003.
14. 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.
15. Canadian resident
shareholders receiving shares in foreign tax-free
reorganizations
will be able to treat the shares as a reduction in adjusted cost base, as
opposed to a taxable dividend.
Some
general guidelines
to follow in remunerating the owner
of a Canadian-controlled
private corporation earning "active business income"
include:
1. In general, bonus down active business earnings in excess of the annual business limit -
$225,000 for a December 31, 2003 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, $225,000
of active business income because of other federal and provincial tax
incentives.
2. Elect to pay out
tax-free "capital dividend account"
dividends.
3. Consider paying
dividends to obtain a refund of "refundable dividend tax on
hand".
4. 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.
5. Dividends,
as opposed to salaries, will reduce an individual’s cumulative net
investment loss balance thereby providing greater access to the capital gain exemption.
6. Retaining income in the corporation may effect provincial and federal capital tax and certain provincial clawbacks.
7. Excessive personal income affects receipts subject to clawbacks,
such as old age security, the age credit, child tax
benefits, GST credits, etcetera.
8. Salary payments
require source deductions to be remitted to Revenue Canada on a timely basis.
9. Individuals that wish
to contribute to the Canada Pension Plan or a Registered Retirement
Savings Plan may require a salary to create "earned income".
10.
Salaries paid to family members must be reasonable.
SPECIAL
WORKSITE
An
employer may make non-taxable board and lodging payments to an employee at a
special worksite.
Caution!
In
an August 14, 2003 Tax Court of Canada case, the taxpayer was employed to
work at a “special worksite” but, did not receive payments from the
employer for his board and lodging. The
taxpayer took the position that had he been paid these amounts they would be
tax-free. Therefore, the
incurring of expenses related to this “special worksite” should be
deductible.
Unfortunately,
the Court did not agree.
Editor’s
Comment:
It may have
been better to have part of the remuneration paid separately as “board,
lodging and transportation” expenses at the special worksite.
COMMISSION
SALESPERSON
In
a July 14, 2003 Internal Technical Interpretation, CCRA concluded that a
commission salesperson may deduct internet fees if the fees are paid to earn
commission income. However,
internet fees were not deductible by regular employees.
TIPS
In a June 30, 2003 Tax Court of Canada case,
CCRA included tip income on the taxpayer’s return of $918 for 1993 and
$4,785 for 1994 rather than the $102 and $2,214 that the taxpayer claimed
were the actual amounts of the tips. CCRA’s
calculation was based on the taxpayer’s pro-rata percentage of the tips
received by the restaurant based on her percentage of salary as compared to
the total salaries paid. The
tips received by the restaurant were based on the average percentage of tips
paid to waitresses on sales at the restaurant of 11.24%.
The
Court agreed with CCRA and noted that they found the taxpayer’s evidence
evasive and did not discharge the onus of proving CCRA’s assessment
incorrect.
INDIVIDUAL
PENSION PLANS (IPPs)
EMPLOYEE
VS. INDEPENDENT CONTRACTOR
In
a June 26, 2003 Tax Court of Canada case, the taxpayer was a “supervisor”
with a construction company but filed his tax return as an independent
contractor and deducted expenses accordingly.
CCRA argued that the individual was an employee and his deductions were
restricted.
Good
News!
The Court found
that the individual was an “independent contractor”, not an “employee”,
and noted that:
1. Control Test - There
was very little control over the services provided by the taxpayer
- “Not once did they check to see if I was there, or told me to be
there at any set time or date.”
2. Ownership of Tools -
The taxpayer owned his own hand tools, forms, scaffolding, and provided his own
truck.
3. Chance of Profit and
Risk of Loss - Even though the taxpayer had responded to a question from the
field auditor that he had, “no chance of profit”, upon investigation in
Court, it was determined that he “wasn’t thinking properly” when he
answered this question. In fact,
there was evidence that a profit or loss did apply in his case.
4. Integration - The
taxpayer was providing the services as a person in business on his own account.
The
Court was also influenced by:
1. The wording of the
actual contracts between the construction company and the taxpayer.
2. The taxpayer had
income from other sources in previous years.
3. The taxpayer paid
salaries to other persons - a further indication of the limited degree of
control exercised by the construction company.
Editor’s Comment There are serious implications for the payer if CCRA successfully challenges the “independent contractor” status. A CCRA Ruling could be considered.
GUARANTEEING
CHILD’S DEBTS - OUCH
In
a June 10, 2003 Tax Court of Canada case, the mother had guaranteed the debts of
her son’s corporation. The
son’s corporation was unsuccessful and the mother paid off the loans over the
years 1989 to 1993 and claimed business investment loss deductions.
The
sole motivation for the guarantee was to help her son.
No guarantee fee was charged and no possibility of income was available.
Therefore,
the Court disallowed the mother’s business investment loss on the basis that
the guarantees were not incurred to earn income.
Editor’s Comment Charge a guarantee fee next time.
ASSOCIATION
The
Income Tax Act has rules that “associate” two corporations that have the
same de facto control. Therefore,
they have to share the small business deduction.
For
example, if Mr. A and Mrs. A each own a corporation and there is no signing
authority, or business transactions, or shareholdings between the two
corporations, it is arguable that the companies are not associated.
Therefore, the family could have two small business deductions.
The
corporations should strive for separate and distinct financing, customers,
employees, offices, business licenses, Workers Compensation registration, GST
registrations, CPP and EI and source deduction registration and any other
stand-alone issue.
Professional
advice is needed in this area.
DISSOLUTION
FOR FAILURE TO FILE ANNUAL RETURNS
In a June 10, 2003 Tax Court of Canada case,
the corporation was struck in the late 1980s for failing to file Annual Returns
but was revived in February, 1999 under an Application for Revival.
Bad News! The Court noted that the Certificate of Revival did not have the effect of reviving the corporation retroactively. The corporation was simply non-existent at this time. The income earned belongs to the owner who generated that income through his activity.
DISABILITY
TAX CREDIT (DTC) - NEWBORN
In
a July 9, 2003 Tax Court of Canada case, the taxpayer’s son was born on
November 27, 1993 without a left hand. The
Court found that a missing left hand is a disability that qualifies for the DTC
transfer to the parent.
MOVING
EXPENSES
In a June 12, 2003 Technical Interpretation,
CCRA reviewed a situation where a taxpayer moved and, because of employment
commitments, the spouse joined the taxpayer three years later.
Therefore, three years after the change of employment, the old house was
sold and the taxpayer successfully deducted the selling cost as a moving
expense.
MEDICAL
EXPENSE - HARDWOOD FLOORING
In
a June 17, 2003 Tax Court of Canada case, the taxpayer incurred expenses of
approximately $11,000 in 1999 to install hardwood flooring which was
successfully claimed as a medical expense.
The flooring was acquired because the taxpayer’s spouse suffered from
serious allergies. The doctor noted
that, “because of significant health impairment... the spouse was unable to be
functional in his home until the carpets were removed and replaced with
hardwood...”.
MEDICAL
EXPENSES - ATTENDANT CARE
In a July 3, 2003 Technical
Interpretation, CCRA notes that where a senior citizen pays for various homecare
services, such as meal preparation and laundry, these expenses could qualify as
“attendant care expenses” and be eligible as medical expenses if the
taxpayer is entitled to the disability tax credit.
Only attendant care expenses that do not exceed $10,000 for the year
($20,000 in the year of death) qualify for the credit.
Depending
on the situation, eligible tasks could include meal preparation, housework,
transportation, and personal services such as banking and shopping.
However, attendant care expenses would not normally include a payment to
a person employed to do a specific task, such as a drycleaner.
MEDICAL
EXPENSE - SCHOOL TUITION FEES
In
a July 8, 2003 Tax Court of Canada case, in the year 2000 the taxpayer paid
tuition fees and room and board to an Academy for his two attention deficit
children and successfully claimed a medical expense credit of $42,662.
A
doctor certified that the children required the equipment, facilities and
personnel specially provided by this Academy.
INTEREST
ON A STUDENT LOAN
Interest
paid on a student loan made under the Canada Student Loans Act or a provincial
statute is eligible for a tax credit.
In
a June 27, 2003 Tax Court of Canada case, the taxpayer took out a “new loan”
to repay a loan subject to the Canada Student Loans Act.
Bad News! The interest on the “new loan” is not eligible for the tax credit.
RRSP
TRANSFER
The
Income Tax Act permits a tax-free transfer of an RRSP from one spouse to another
as a division of property in a “settlement of property or support rights” in
a marriage breakdown.
RETROACTIVE
CHILD SUPPORT
GRAVEL
SALE
In
a 2003 Advance Income Tax Ruling, CCRA Ruled that where a farm corporation owns
land with gravel, when the corporation sells all the gravel for a lump sum the
proceeds received will be a capital gain not regular income.
Capital gains are only 50% taxed.
However,
in an August 29, 2003 Technical Interpretation, CCRA note that where an
individual receives an amount based on the shale extracted from the property,
the amount received will be considered income because it is based on production.
SALE
OF TREES
In
a July 22, 2003 Technical Interpretation, CCRA notes that where a farmer
receives an amount for allowing someone to cut and remove timber from his/her
farm, the gain on the sale may be a capital gain, not regular income, if all of
the following conditions are satisfied:
(a) the taxpayer did not acquire the
property with the intention of selling the timber or land;
(b) the sale agreement is an
isolated transaction;
(c) the price is a fixed amount;
(d) the timber is removed over a
short period of time; and
USED
CAR VALUATIO
http://www.gmcanada.com/english/financing/fin_financ.html
AGENCY
GST
is payable on the selling price when a person is acting as an agent in making a
sale on behalf of a supplier.
On
August 18, 2003 CCRA introduced 17-page Publication P-182R - Agency which
discusses this. It also provides
four examples.
Example
1 reviews a property management company which manages a number of residential
apartment buildings for various landlords.
Example 2 reviews a cost-sharing arrangement where three professionals
share office space and operating expenses.
Example 3 and 4 reviews a contract which includes a reimbursement of
expenses.
INPUT
TAX CREDITS (ITC)- MILEAGE ALLOWANCES
In
a July 22, 2003 Tax Court of Canada case, Melville Motors Ltd. paid mileage
allowances to each of its employed vehicle salespersons.
The Excise Tax Act permits an ITC of 7/107th of the reasonable allowances
paid.
Good
News!
The Court
found that the allowances were based on kilometres driven and were reasonable.
Therefore, the ITCs were al
lowed.
I
NP
DID YOU KNOW
A
DMINISTRATIVE MONETARY PENALTY SYSTEM (AMPS)The
AMPS system was fully implemented by CCRA on October 7, 2002 to assess penalties
for non-compliance with Customs laws.
These penalties are significantly higher than previous.
A
non-compliant taxpayer could face increased monetary penalties, increased audit
activity, inspections and seizures, as well as loss of importing privileges.
| 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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