CLARK
POLLARD
GAGLIARDI
FOR THIRD QUARTER
2004
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PERSONAL
TAX
DISABILITY
TAX CREDIT (DTC) - DIABETES
In
a June 14, 2004 and a September 11, 2003 Tax Court of Canada case, the Court
permitted a DTC for parents who had a seven year old daughter and a six year old
son respectively who suffered from Type 1 Insulin Dependent Diabetes.
A positive medical certificate noted that the children needed assistance
due to age.
In
a May 3, 2004 Tax Court of Canada case, the Court disallowed the DTC for a
parent who had a five year old child with Type 1 Insulin Dependent Diabetes
because a positive medical certificate was not provided by the taxpayer.
TUITION
FEES - FOREIGN INTERNET STUDIES
In
an April 21, 2004 Tax Court of Canada case, the Court disallowed the tuition fee
tax credit for foreign university Internet studies.
The Court noted that completing courses through the Internet is not the
same as physically travelling back and forth between Canada and the U.S. as
permitted under the Income Tax Act.
MEDICAL
EXPENSE - DEPENDANT
In
a May 3, 2004 External Technical Interpretation, Canada Revenue Agency (CRA)
notes that an individual may claim medical expenses in respect of specified
persons such as a dependent parent (including in-laws).
This requires that the individual has supplied necessary maintenance, or
the necessities of life, to the person on a regular and consistent basis.
MEDICAL
EXPENSE - AUTISTIC CHILD
PRIVATE
HEALTH SERVICE PLAN (PHSP)
CRA
noted in an External Technical Interpretation that a PHSP is a contract of
insurance to pay eligible medical expenses which are deductible to the employer
and not taxable to the employee.
A
Plan where a corporate employer reimburses its employees for medical expenses
may qualify as a PHSP. However,
where an individual, who is both a shareholder and an employee, receives a
benefit under a PHSP and equivalent benefits are not available to other
non-shareholder employees, the individual is generally considered to be in
receipt of a taxable shareholder benefit and contributions may not be deductible
by the corporate employer.
On the other hand, when equivalent coverage is
extended to all employees, the benefits are non-taxable to the employee and
deductible to the employer. This
also applies when all employees of a corporation are shareholders and it is
reasonable to conclude, based on the particular facts, that the PHSP coverage
has been provided as part of a reasonable remuneration package.
LUMP-SUM
LEASE PAYMENT
STOCK
OPTIONS
In a May 14, 2004 External Technical
Interpretation, CRA reviewed a situation where an independent contractor
is granted a stock option as payment for his consulting services.
The
fair market value of the option on the grant date, less any amount paid,
will be included in business income.
(Editor’s Comment - For example, if the option price is $10 and
the fair market value of the share is $17, the business income is $7.)
When
the option is exercised, the incremental value realized on the acquisition
of the shares may be a “business income” or a “capital gain”.
(Editor’s
Comment - Example, if the fair market value is $27 at the exercise date
the additional amount included in income/capital gain is $10 - ($27 -
$17).)
CRA
notes where the $10 is for services rendered it would be business income.
However, where the option is held as a capital property, the $10
may be a capital gain - only half of which is taxable.
RESERVE
FOR UNPAID AMOUNTS
In
a May 12, 2004 External Technical Interpretation, CRA note that where a
business sells inventory and all or part of the selling price was not due
for at least two years after the sale, a reasonable Reserve for the unpaid
amount may be claimed.
RESTRICTIVE
COVENANTS
New
rules propose to fully tax receipts for signing restrictive covenants.
The
Income Tax Act broadly defines a “restrictive covenant”.
For example, over and above the normal situations, where a parent
corporation sells shares of a subsidiary and undertakes that its other
subsidiaries will not compete with the target corporation, this is
considered to be a “restrictive covenant”.
Also, included is where a parent corporation sells a subsidiary
corporation and, after the sale, its other subsidiaries will carry certain
quantities of the sold subsidiary’s products.
SMALL-BUSINESS
SHARE ROLLOVER
In
a May 6, 2004 External Technical Interpretation, CRA notes that an
individual that has a capital gain from a qualifying disposition of shares
may claim a deferral on the capital gain if qualifying replacement shares
are bought.
CHILD
SUPPORT - AMENDMENT
In a May 3, 2004 Tax Court of Canada case, the
taxpayer signed a Child Support Payment Agreement on April 24, 1997.
Because it was signed prior to May, 1997 the child support amounts were
deductible/taxable. Unfortunately
for the payor, the Agreement was amended on January 3, 2000 and the child
support payments then became non-deductible/non-taxable because they were now
under a post-April, 1997 Agreement.
CHILD
SUPPORT - DEEMED INCOME
The
May 6, 2004 issue of the National Post noted that Mr. A was a farmer whose
income in 2002 was $12,692 when he had custody of his sixteen year old son.
His former spouse had custody of their thirteen year old daughter and
held down three jobs in earning $28,000 a year.
Mr.
A claimed child support from Mrs. A on the basis that her income was higher than
his.
The
Court concluded that Mr. A is underemployed and could also be earning $28,000
per annum. Therefore, neither
parent was entitled to receive child support payments from the other.
PENSION
INCOME
GIFT
AND LEASEBACK
In
a nine-page 2004 Advance Income Tax Ruling, CRA reviewed a proposed donation of
commercial property to a charity with a leaseback of the property to the donor.
The donor received a tax credit for the value of the commercial property.
NON-PROFIT
ORGANIZATION (NPO)
In a 2004 Advance Income Tax Ruling, CRA Ruled
that a change to the bylaws of the NPO to permit a distribution of profits to
its members will cause it to lose its NPO status.
Therefore, it will become subject to tax.
TRANSFER
OF FARM PROPERTY TO CHILD
In a May 7, 2004 External Technical
Interpretation, CRA approved a situation where Father (Mr. A) owned farmland for
sixty years - the first fifty of which he farmed on a principal basis.
The last ten years were rented. Mr.
A dies and bequeaths on a non-taxable basis the farmland to his spouse who then
transfers the farmland to their children, also on a non-taxable basis.
WITHHOLDING
TAX RATES
The
withholding tax rates when withdrawing funds out of an RRSP or RRIF are:
(i) less than $5,001 - 10%
(ii) $5,001 - $15,000 - 20%
(iii) more than $15,000 - 30%.
For
example, if Mr. A withdraws $20,000 from his RRSP he would be subject to a 30%
withholding tax. Alternatively, if
he took the funds out in four $5,000 increments, the withholding tax would only
be 10%. Of course, when he files
his tax return he will still have to report the $20,000 in income and pay tax at
marginal rates.
Therefore,
he will likely owe tax upon filing his tax return, however, he will have had the
use of the money in the interim period without interest.
RRSP
TRANSFER TO A CHILD
In a 2004 Head Office Memo, CRA notes that an
amount paid out of an RRSP as a consequence of the death of the annuitant to a
child or a grandchild of the annuitant who was financially dependent on the
annuitant for support may be included on the child’s Tax Return.
This could be achieved by designating the child as the beneficiary of the
RRSP.
Also,
when an amount is paid out of the RRSP to the Estate in which a child is a
beneficiary, a joint designation for all or a part of the payment may be made.
The amount so designated is deemed to be received by the beneficiary.
This amount may be used to acquire an eligible annuity payable until age
18 or included in income immediately.
CALCULATORS
Small
Business Banking -
If
you want to know which bank in Canada offers the best plan/rate for your
company, take a look at this calculator. By
answering a series of questions about the company’s banking activities, this
calculator can give you the rates under different plans that 10 of the largest
banks in Canada offer. After
comparing rates you can click on links that give specific details about that
specific plan. This tool is ideal
for comparing different types of accounts either within one bank or amongst
several.
Buy
vs. Lease -
This
calculator compares the costs involved in buying versus leasing assets.
The tool requires eleven pieces of information and can be completed with
relative ease and speed.
To
use either of these calculators go to:
http://strategis.ic.gc.ca/epic/internet/insof-sdf.nsf/en/Home
As
this is the Industry Canada website, it is relatively reliable.
The calculators are the seventh and eighth items in the left hand menu.
FUND
COMPANIES: PRICES AND DISTRIBUTIONS
INPUT
TAX CREDIT FOR TRAVEL ALLOWANCES
An employer may claim input tax credits for
non-taxable allowances paid to employees for motor vehicles.
This
was confirmed in a July 22, 2003 Tax Court of Canada case.
INTER-CORPORATE
CHARGES
Where
two corporations are engaged in commercial activities, inter-corporate charges
may not cause GST problems as GST may be avoided if the parties qualify for the
election under Section 156 of the Excise Tax Act. Otherwise, the GST paid will be eligible for an input tax
credit.
However,
corporations that are not involved in commercial activities may trigger extra
costs with inter-corporate fees because the GST paid is either not eligible for
exemption under Section 156 or, is not eligible for an input tax credit.
One
solution is to have one corporation acting as the “agent” for the other
corporation. However, it is a very
fine line as to whether a corporation is an “agent” for another corporation
and professional advice is needed.
For
example, in a March 12, 2004 Tax Court of Canada case approximately thirty
corporations that owned residential real property paid fees to KPMC for
superintendents and maintenance workers.
The
Court found that the payments made for the superintendents were of an
“agency” relationship and, therefore, were not subject to GST as the
superintendents were in fact employed by the owner corporations.
However,
with respect to the maintenance workers that went from apartment to apartment,
the “agency” argument did not work. They were considered to be employees of
the management company, not the owner companies.
Therefore, GST was successfully charged.
INVESTMENT
CLUBS
Investors
may elect to report their income under a simplified basis as if the investment
club was a partnership. However,
this method is only available where, among other things, all of the club members
are individuals.
In
an April 28, 2004 External Technical Interpretation, CRA note that an investment
club which includes corporate members may not elect to use this modified
partnership method to report the income.
CANADA
PENSION PLAN/EMPLOYMENT INSURANCE (CPP/EI)
In
an April 28, 2004 External Technical Interpretation, CRA notes that where an
employer makes contributions to an employee’s RRSP, these payments are taxable
and are generally subject to CPP and EI.
However,
the contributions will not be EI insurable if the employee cannot withdraw the
amounts from a group RRSP until the employee retires or ceases to be an employee
of the employer.
RRSP
- ARTIFICIAL ARRANGEMENT
In a May 28, 2004 Tax Court of Canada case,
the Appellant acquired through her self-directed RRSP shares of a corporation
and then obtained a loan, guaranteed by her RRSP, from a related corporation of
the first corporation.
Taxpayer
Loses
The
Court found that the shares acquired were not qualified investments and that the
whole arrangement was an artificial financial arrangement to obtain liquid
assets from an RRSP without having to pay income tax.
| 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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