CLARK
POLLARD
GAGLIARDI
FOR FIRST QUARTER
2005
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PERSONAL TAX
COMMON-LAW
PARTNER
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:
1. shared shelter,
2. sexual and personal
behaviour,
3. one partner performs
services on behalf of the other,
4. participation in
social activities together,
5. societal perception,
6. economic support, and
7. the couple’s
attitude toward any children they have together.
MEDICAL
EXPENSE - RENOVATIONS
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.
OLD
AGE SECURITY
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.
CAREGIVER
CREDIT
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.
Editor’s
Comment
TRAINING
TRUST FUND
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.
STOCK
OPTIONS
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.
GARNISHMENT
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.
SALARIES
TO FAMILY MEMBERS
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:
1. There was no evidence
of cheques being made for those amounts - just an indication by the father that
he had bought items for the son which were reflected in the salary.
2. Hours of work were
not kept.
3. The son did not
report the amounts in income.
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.
KEEP
RECEIPTS
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.
Taxpayer
Loses
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.
TAX
REGISTRATION
Registrations
for a new business or partnership may be done over the internet at
www.businessregistration.gc.ca.
OUT-OF-COUNTRY
TRAINING COSTS
CHILD
SUPPORT - COMMENCEMENT DAY
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.
Taxpayer
Loses!
The
Tax Court noted that the deduction is lost because a new or amended agreement
was made after April 1997.
SPOUSAL
SUPPORT
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.
SPOUSAL
SUPPORT
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.
PAYING
FOR CHILD’S MASTERS DEGREE
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.
CHARITY
REIMBURSEMENTS
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.
PUBLIC
BENEFIT
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”.
CANADA
PENSION PLAN (CPP)
In a Government of Canada Income Security
Program seminar it was noted that:
1. In applying to
collect a person’s CPP, it is possible to drop out certain years:
(i) periods of CPP disability,
(ii) periods during which children were raised up to age 7,
(iii) 15% of the lowest earning years in your contributory period.
See
the “Canadian Retirement Income Calculator” at www.hrdc.gc.ca.
2. CPP credits may be
divided upon divorce, legal annulment or separation of spouses or common-law
partners. The applicant’s
ex-spouse or ex-partner is to be notified of the request in writing.
For divorces after January 1, 1987, there are no time barriers for
applying.
3. Spouses or common-law
partners may apply to share CPP entitlements if they are both at least age 60.
4. Disability CPP
benefits must be applied for in writing. The
person must have a severe and prolonged disability including a condition which
prevents the person from doing any work on a regular basis.
SPOUSAL
TRUST
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.
GIFT
FROM AN ESTATE
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.
RRSP/RRIF
TESTAMENTARY TRUSTS
In a June 20, 2003 Technical Interpretation,
CRA notes that where a taxpayer designates a Trust as the beneficiary of his/her
RRSP or RRIF upon his/her death, if this is a testamentary instrument provided
for in the Will, then the transfer of the property would be considered as
occurring as a “consequence of death”.
Therefore, the recipient Trust would be a “Testamentary Trust”
eligible for advantageous tax implications such as filing Trust returns using
the regular marginal income tax rates.
TAX
SHELTER DONATION ARRANGEMENTS
CAPITAL
GAIN EXEMPTION
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.
LAND
SALE
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.
Vendor
Loses!
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.
DIRECTOR
LIABILITY
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.
OOPS
- Taxpayer Loses!
Even
if the assessment is incorrect, if it is not objected to by the company, the
directors are still personally liable.
Editor’s
Comment
Always
object to incorrect GST assessments even if the corporation is insolvent.
NON-PROFIT
ORGANIZATIONS
FINDING
INFORMATION FOR/ABOUT SENIORS
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.
LIFE
EXPECTANCY CALCULATOR
If
you would like to see how long you will have an opportunity to be a senior,
check out this site:
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.
STARTING
A NEW BUSINESS
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.
GOOGLE
DESKTOP SEARCH
http://www.google.ca/about.html
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.
2004 PERSONAL INCOME TAX QUESTIONNAIRE
APPENDIX A 2004 PERSONAL INCOME TAX QUESTIONNAIRE
This is a comprehensive list of possible information require in order to complete your 200
4 Personal Income Tax returnINCOME
- Employment - T4
- Employment Insurance T4U
- Business or Professional - Financial Statements or T5013
- Old Age Security - T4A(OAS)
- Canada Pension Plan benefits - T4A(P)
- Dividends - T5 Interest - Bank, Trust, Bonds - T5/T3/T600
- Limited Partnership - T5013
- Rental Property (attach details of income, expenses, purchases and sales)
- Capital Gains/Losses
- Did you dispose of any capital properties this year? (attach copies of sales detail and original purchase documentation)
- Other Income (e.g. stock options, alimony, pensions, annuities, research grants and bursaries, lump-sum pension receipts, R.R.S.P.'s - attach T4RSP)
DEDUCTIONS
- Registered Retirement Savings Plan (attach receipts)
- Annual union, professional dues (attach receipts)
- Child care expenses (attach receipts)
- (a) for live-ins, include S.I.N. and address
- (b) for summer camps, indicate number of weeks that were in-residence
- Attendant care expenses (attach receipts)
- Allowable business investment losses (refer to Capital Gains/Losses above)
- Moving expenses (attach receipts) Indicate distance moved to new employment
- Alimony or separation allowances paid (include name(s) and address(es) of recipients
- Commission expenses (detail and form T2200 or TL2)
- Carry charges (interest on money borrowed to earn dividend and interest, investment counselling fees, interest for limited partnerships, safety deposit box)
- Other deductions and expenses(attach receipts)
- Federal & Provincial political contributions (attach receipts)
- Charitable donations (attach receipts)
- Medical expenses (attach receipts)
- Tuition fees (attach T2202/T2202A including amounts which can be transferred from dependents)
WHOLLY DEPENDENT CHILDREN
- Name of Child
- Relationship
- Birth Date
ADDITIONAL PERSONAL EXEMPTIONS
- If you are supporting other relatives who are living with you, provide the following information:
- Name of Relative
- Relationship
- Birth Date
- Net Income
- Disability Deduction (if first time, attach T2201 signed by physician)
ADDITIONAL INFORMATION
- 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 200
| 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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