Tax Tips and Traps

CLARK
POLLARD
GAGLIARDI

TAX TIPS & TRAPS FOR 1ST QUARTER 2001

BUSINESS INCOME

PRIVATE HEALTH SERVICES PLAN (PHSP)
In a Committee Report, CCRA notes that proprietors may deduct certain PHSP premiums in calculating business income. However, an arrangement under which a sole proprietor (who has no employees) pays an administrator a fee to be reim-bursed for the medical expenses is not considered to be a "plan of insurance" and is, therefore, not an eligible PHSP. It was also noted that if the Plan provides coverage for other employees, this may constitute a "plan of insurance".

INCORPORATION - A PROBLEM
In a District Office Memo, CCRA note that where mutual fund and insurance sales people are earning commission income in their own name due to provincial legislation and, subsequently assign the income to a non-arm's length corporation, the amounts should also be included in income by the individual resulting in dou-ble taxation.

CONTRACTOR REPORTING
All individuals, partnerships and corporations whose primary business activity is construc-tion must report payments made to subcontrac-tors whose primary business is construction. This may be provided on a T5018 Information Return or, in an internally generated format, as long as the amount paid, the name of the recipient, and the social insurance number or business number are included.

LOSSES - O.K.
In a Tax Court case, Mr. and Mrs. K car-ried on a business of maintaining and showing horses but, incurred losses of $22,352, $24,380 and $22,519 in the years 1993, 1994 and 1995.
CCRA disallowed the losses on the basis that there was no expectation of profit but, the Court permitted the losses, noting that there was a strong connection between this horse business and their insurance busi-ness. Mrs. K testified that the insurance business maintained and obtained clients through the horse shows. This was all part of the "nest prospecting" and "general prospecting" referred to in the Life Under-writers Association Training Course.

BACK TO LIST OF TOPICS

OCTOBER 18, 2000 FEDERAL MINI-BUDGET

On October 18, 2000 Finance Minister Martin introduced a Mini-Budget including:
1. Personal Tax Rates: Effective January 1, 2001 the lowest and middle tax brackets will drop from 17% and 24% to 16% and 22% and, taxable income between $61,509 and $100,000 will drop from 29% to 26%. The top rate of 29% will continue to apply to taxable incomes exceeding $100,000.
2. Surtax: Effective January 1, 2001 the 5% surtax will be eliminated.
3. Canada Child Tax Benefit (CCTB): The National Child Benefit will be increased by $300 per child and the family income threshold increases to $32,000 in 2001.
4. Mental and Physical Impairment: This tax credit will increase to $960 from $730 in 2001.
5. Caregivers: This tax credit will increase from $406 to $560 in 2001.
6. Education Tax Credit: The monthly tax credit for full-time students will increase from $34 to $64 and, for part-time students, from $10 to $19 in 2001.
7. Capital Gains: The inclusion rate will drop from 75% to 66 2/3% from February 28 to Octo-ber 17, 2000 and to 50% after October 17. The tax rate on capital gains is now significantly lower than on divi-dends.
These rates will also apply to stock options, eligible capital property and allowable business investment losses.
Net capital losses carried forward or back will be based on the inclusion rate of the year to which they are ap-plied.
Also, mutual funds and segregated funds will have the option to treat their capital gains and losses as though they were earned evenly throughout the 2000 taxation year.
In addition, the capital gains inclusion rate on donations of publicly traded securities and ecologically sensitive property will continue to be based on one-half the relevant inclusion rate.
8. Small Business Investment Rollover: The 1999 Federal Budget provision allowing a rollover for capital gains on certain small business share invest-ments will have an increased rein-vested amount of $2 million from $500,000 and an increased asset limi-tation from $10 million to $50 million.
9. Corporate Tax Rates: The general corporate rate tax rates for the years 2001, 2002, 2003 and 2004 will be 27%, 25%, 23%, 21% respec-tively. This does not apply to income benefitting from other tax incentives.
10. Mining: A 15% non-refundable investment tax credit will be provided to individu-als investing in flow-through shares on certain surface exploration.
11. Foreign Spin-offs: Canadian shareholders receiving shares in foreign tax-free reorgani-zations will be able to treat the shares as a reduction in adjusted cost base, as opposed to a dividend.
12. Share-for-Share Exchanges: After draft legislation has been devel-oped, Canadians exchanging Cana-dian shares for foreign shares will be eligible for a rollover without having to go through the exercise of receiving "exchangeable shares".
13. GST Credit: Each adult will receive an additional $125, to a maximum of $250 per fam-ily, if they are eligible for the GST credit.
14. Canada Pension Plan/Quebec Pen-sion Plan Deduction for the Self-Employed