CLARK
POLLARD
GAGLIARDI
FOR SECOND QUARTER
2005
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PERSONAL TAX
MEDICAL
EXPENSES
In
an October 21, 2004 CRA Document,
CRA notes that an amount paid in respect of a “medical service” provided by a licensed medical practitioner qualifies as a medical expense.
This includes a weight-loss program offered for therapeutic or rehabilitative
reasons.
Also,
a medical expense includes care at a school, institution or other place when a
qualified person certifies that the patient, by reason of a physical or mental
impairment, requires the equipment, facilities or personnel specially provided
by that place.
In
a February 10, 2005 Tax Court of Canada case, the Court permitted medical
expenses for the costs at a Kelowna retirement home (Hawthorn Park) of $21,270,
$20,912, and $28,055 for the years 2001, 2002 and 2003.
MOVING
EXPENSES
In
a November 26, 2004 Tax Court of Canada case, moving expenses were permitted
when the taxpayer moved from London, Ontario to Mississauga, Ontario including
packaging materials, temporary lodging, real estate commissions, legal fees,
taxes paid for registration of title on new residence, title insurance fees,
conveyance closing, mortgage registration and transfer fee, Hudac enrollment
fee, hydro and water meter, and household travel expenses.
In
a February 4, 2005 Tax Court of Canada case, even though the move occurred seven
years after the change of employment location, the Court permitted the moving
expense on the basis that the delay in moving was caused by business problems
and a lien registered against a Nanaimo property.
CAMP
FEES - CHILD CARE EXPENSES
In
a December 7, 2004 External Technical Interpretation, CRA note that a sports
camp for young children which is not of an ongoing nature and has a sufficient
degree of child care may be eligible as a child care expense even though the
program is enriched by sporting activities.
WELLNESS
PROGRAMS
It
was noted in “The Business Executive” that 83% of U.S. companies and
40% of Canadian companies have wellness programs in place for their
employees.
In
an independent evaluation of its wellness program over a ten-year period,
Canada Life reported a return of $6.85 for each dollar spent.
These findings are based on aspects such as reduced employee
turnover, decreased medical claims and greater productivity.
The
article notes that worldwide wellness programs produce a return of between
$1.95 to $3.75 per employee for each dollar invested.
FLEX
BENEFIT PLANS
In a November, 2004 Advance Income Tax Ruling,
the company provides its employees with a flexible benefit plan on which
an employee may choose from a menu of benefits such as medical and dental
insurance, disability insurance, and group life insurance.
The
company now proposes to introduce a Health Care Expense Account (HCEA) for
its employees.
CRA
Ruled that the allocation of credits to the HCEA will not be considered
taxable employment income.
CRITICAL
ILLNESS GROUP INSURANCE
In
a January 14, 2005 External Technical Interpretation, CRA notes that a
Critical Illness (CI) Group Insurance Policy does not constitute a taxable
benefit. Also, payment of a
lump-sum benefit under the Policy in the event of a critical illness may
not be a taxable benefit.
In
a February 10, 2005 External Technical Interpretation, CRA notes that
where a contract of employment is renegotiated to decrease the salary with
corresponding additional Private Health Service Plan premiums to be paid
by the employer, these premiums would probably not be taxable employment
income if the contract of employment is renegotiated after the expiry of
the former employment contract.
EMPLOYER-PROVIDED
PARKING
In
a November 26, 2004 External Technical Interpretation, CRA notes that
there is no taxable employment benefit when an employer provides free
parking if the employee is regularly required to use the vehicle to carry
out the duties of employment.
EMPLOYER-PROVIDED
SCHOLARSHIP PROGRAM FOR EMPLOYEES’ DEPENDANTS
In
a December 1, 2004 External Technical Interpretation, CRA notes that where
an employer has a scholarship program for dependants of employees, and
former employees, the amounts paid will be scholarship income to the
student (not income to the employee) if the program meets objective
criteria.
Editor’s
Comment
Generally
the first $3,000 of scholarship income is tax free.
GIFTS
AND AWARDS
In
a March 10, 2005 Fact Sheet, CRA reminds employers that they may make up
to two non-taxable gifts and two non-taxable awards to an employee but the
total cost of the gifts or the awards cannot be over $500 per employee
(including all taxes) per year.
Caution!
SHARE
SALES
In
a June 25, 2004 Tax Court of Canada case, the taxpayer had losses of $45,356
on security transactions. The
Court permitted the full business loss treatment and noted that the business
losses were claimed on share sales in three technology and computer
companies. The taxpayer was
seeking growth, not dividends, in the share investments.
The
taxpayer also did report “capital losses” (only one-half deductible and
only against capital gains) totalling $7,267 on other less speculative
shares such as Bell Canada.
SALARIES
TO CHILDREN
In a February 11, 2005 Tax Court of Canada
case, the taxpayer deducted from his business income salaries to two of his
children in 1999 of $7,600 and in 2000 to his five children totalling
$34,800.
Because
the taxpayer’s bookkeeping was deficient and, certain of the letters from
the children with respect to the hours worked and the hourly rates were not
signed and, two of the children did not testify and, there was some doubt as
to whether the full amounts were actually paid, the Court reduced the
deductions by one-half. The
children were ages 16, 16, 18, 20 and 21 and were allegedly paid at the
rates of $10 to $15 per hour worked.
LIFE
INSURANCE COMMISSIONS
In
a February 24, 2005 Tax Court of Canada case, Mr. M was employed by London
Life Insurance in 1998 when he allocated $30,000 of commissions to his
corporation on the basis that the corporation earned this commission income.
Taxpayer
Loses!
CAPITAL
GAIN DEFERRAL
Where
an individual sells shares of a qualified small business corporation and
uses the proceeds to invest in Treasury shares of another qualified small
business corporation there may be a deferral of the capital gain.
However,
there are many technicalities that must be met.
BUSINESS
INVESTMENT LOSS
In
a January 7, 2005 Tax Court of Canada case, the taxpayer had losses when she
loaned funds to her husband’s corporation on a non-interest bearing basis
and guaranteed the debts of her husband’s corporation for no
consideration.
Bad
News - Loans
The loans by Mrs. E to her husband’s
corporation were not eligible for capital loss treatment because they were
not incurred to earn income. They
were non-interest bearing and, she did not own any shares in the
corporation.
Good
News - Personal Guarantees
On
February 23, 2005, the Honourable Ralph Goodale presented his 2005 Budget to the
House of Commons.
Some
of the proposals include:
Qualified
RRSP Investments
Add to the list of qualified investments, investment-grade gold
and silver bullion coins and bars, and certificates on such investments
purchased on or after February 23, 2005.
Foreign
Property Rule
The
30% limit of foreign property that may be held by pension funds and other
deferred income plans is proposed to be eliminated.
Canada
Deposit Insurance Corporation Coverage
To
be increased from $60,000 to $100,000.
Medical
Expense Tax Credit
There
will be added to the list of eligible expenses amounts paid for certain
phototherapy equipment, oxygen concentrators, deaf-blind intervening services,
reading services, drugs and medical devices obtained under Health Canada’s
Special Access Programme, and certain medical marihuana.
Adoption
Expense Tax Credit
An individual will be
entitled to deduct in computing tax payable 16% of the lesser of $10,000
(indexed after 2005) and amounts paid in respect of eligible adoption expenses.
Agricultural
Cooperatives
Introduces
a tax deferral for eligible shares issued after 2005 in respect of patronage
dividends paid by an agricultural cooperative corporation until the cooperative
shares are disposed.
International
Tax Enforcement
REWARD
POINTS
It
is possible to donate retail reward points to a charity and receive a charitable
donation tax credit. Some companies
that encourage such donations include Hudson’s Bay Company, Shoppers Drug Mart
Corp., Royal Bank of Canada (RBC) and Petro-Canada.
Also,
Royal Bank of Canada Visa cardholders can donate points to Hope Air - a
registered charitable organization.
Editor’s
Comments
Total
donations in excess of $200 trigger a personal income tax credit at top marginal
rates.
DONATION
RECEIPTS
In
a January 18, 2005 Release, CRA notes that registered charities now have to
include the website address of CRA (www.cra.gc.ca/charities) on donation
receipts as of January 1, 2005.
However,
CRA will honour receipts that do not contain the new information and will not
penalize for not including this new information in 2005.
Editor’s
Comments
Donors
should check the validity of questionable organizations by referring to
www.cra.gc.ca/charities and clicking on “list of Canadian Registered
Charities”.
NON-PROFIT
ORGANIZATIONS (NPO) - RENTAL INCOME
In
a November 25, 2004 External Technical Interpretation, CRA notes that where a
NPO rents out its excessive space, this may jeopardize its non-profit status.
CANADA
PENSION PLAN
The November 23, 2004 issue of the Globe and
Mail notes that there is an estimated under-payment of CPP benefits in the $1
billion range. About 90% of the
errors were blamed on improperly completed applications such as incomplete
disclosure about the Child Rearing Dropout Provision and other dropout
provisions.
Also,
the report notes that many seniors are not aware that CPP benefits may be split
after separation or divorce, or be split between spouses who have reached age
60.
DEATH
Where
Mr. A dies his RRSP is terminated at that time. However, if he did have RRSP contribution room, the legal
representative can make a contribution to the surviving spouse’s RRSP in the
year of death, or within sixty days after the yearend, and claim a deduction on
the husband’s final tax return.
LEAVING
CANADA
It
is usually best not to cash in your RRSP before giving up Canadian residence.
If the amounts are withdrawn after leaving Canada, they will only be
subject to a 25% withholding tax, or 15% if received on a periodic basis in
certain Treaty countries.
Also,
it may be important to crystallize the cost base of RRSP assets before leaving
Canada as the cost base can be taken out tax-free in the United States.
CANADIAN
AGRICULTURAL INCOME STABILIZATION PROGRAM (CAIS)
Cattle
One
problem with CAIS is the way it values cattle.
For example, a bred cow worth $1,200 on January 1, 2005 may only be
worth, say, $800 at December 31, 2005.
Because CAIS uses a one-price system, based on the end-of-the-year
price, it will value that cow at $800 for the entire year.
Ideas
to Help Minimize the Stress of CAIS
Farmers should keep records of information
needed by CAIS but not readily available after the fact.
For example, the number of calves born, number of animals died,
amount of production during the year like hay/straw bales produced by field,
bushels of crop produced by field, an inventory count at yearend, and
details of any barter transactions (i.e. a hay crop is baled and the custom
operator receives a share of the bales as payment).
The other information needed for the CAIS program is found in sales
and purchase invoices (i.e. crops sold and seed purchased, feed bought and
sold, cattle bought and sold).
SEASONAL
AGRICULTURAL WORKERS
In
February, 2005, CRA released Guide RC4004 which discusses how seasonal
agricultural workers are taxed, employer withholdings, and related matters.
JOINT
OWNERSHIP
In
a February 9, 2005 External Technical Interpretation, CRA notes that where
farmland is put into joint ownership, there will not be a disposition if
there is no change in the beneficial ownership of the property.
CHILD
SUPPORT
In
a December 16, 2004 Federal Court of Appeal case, Ms. K was entitled to
receive child support payments under a 1991 Minutes of Settlement.
However, a portion of the amounts were not paid.
Therefore, on September 24, 1997 the Ontario Court issued a Judgment
providing for the payment of child support on the same terms and conditions
as the 1991 Minutes of Settlement. Ms.
K took the position that this was a post-April, 1997 Judgment and,
therefore, receipts were non-taxable.
Taxpayer
Loses
The
1997 Judgment did not alter this obligation.
It simply made collection procedures simpler for Ms. K.
Therefore, the receipts were taxable.
SPOUSAL
SUPPORT
The
Federal Department of Justice has released Spousal Support Guidelines which
provide formulas suggesting a range of spousal support under certain
circumstances. These Guidelines
range generally between 1.5% and 2% of the difference between the salary
earned by the payor and that earned by the recipient times the number of
years the couple were married. These
Guidelines include 160 pages of detail.
RETROACTIVE
PAYMENTS
An Alberta Court of Appeal unanimous Ruling
held that when the income of a person paying child support goes up, the
obligation to pay higher support for the children would generally commence
at that time. Therefore, a
child support payor could owe substantial amounts for retroactive child
support if the payor’s income has increased since the original settlement
date.
Other
Appeal Courts, such as Ontario and British Columbia, have been moving in the
same direction but this Alberta Decision is the clearest and most
comprehensive to date.
LEGAL
FEES
Recipient
In
a February 2, 2005 External Technical Interpretation, CRA confirms that
legal fees to obtain support amounts may be deducted on an accrual basis.
Payer
TRAVEL
ALLOWANCES AND REIMBURSEMENTS
The Excise Tax Act provides input tax
credits/rebates in respect of non-taxable travel allowances and
reimbursements paid to employees.
CONSIGNED
GOODS
WEB
SEARCH ENGINE
If
you are looking for an alternative search engine to use, try dogpile.com.
This engine also contains the feature of a short list of similar
“search word” suggestions.
DESKTOP
SEARCH ENGINE
A
desktop search engine is a tool that searches your computer for files.
Blinkx.com
offers a free search tool that instantaneously returns results without even
having to hit the enter key.
The
first advantage of this search engine over others is that you can quickly
sort your results based on file type.
The
second advantage is that this program does not have the same bias towards
Microsoft products that the Google search engine does.
RADIO
ON THE NET
If you work
in an environment that allows for sounds or music, consider using your
computer to connect to a radio station via the Internet.
DUE
DILIGENCE DEFENSE
In
an October 6, 2004 Tax Court of Canada case, Mr. F was one of three
directors who was assessed with personal liability for unpaid GST ($38,000)
and source
deductions ($92,000).
The Court noted that to successfully use the due diligence defense,
the director usually must take active steps to ensure that a corporation
makes its remittances.
An outside director will not be held to the same standard as an
inside director. Also,
a director’s background and experience in business will be given great
weight in determining whether the director has met due diligence.
Taxpayer
Wins!
The
Court accepted the due diligence defense and noted that:
1.
Mr. F was born in Italy, came to Canada at the age of thirteen, had
education limited to grade 3 in Italy and eight months in Canada, had
limited reading and writing skills and spent most of his working life as a
carpenter.
2.
Mr. F rarely went into the head office in Toronto.
3.
Mr. F took no active steps to ensure the corporation made its
remittances because he was involved in the out-of-town field work and relied
on the financial director to make remittances.
Mr. F did not have the experience, ability or know-how to do anything
else.
The Court noted that, “He could no more remit deductions than most
of us could split the atom”.
Taxpayer
Loses!
In
another Tax Court case, the financial director, Mr. D, was found to be
personally liable for the unremitted source deductions and GST as he was
involved in the financial administration of the corporation.
COMPARISON
OF INDUSTRY STANDARDS
CRA may target
a company for an audit if their financial information (for example, cost of
goods sold) varies significantly from industry norms.
| 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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