TAX TIPS & TRAPS FOR 1ST QUARTER 2001

MARRIAGE BREAKDOWN

LIVING SEPARATE AND APART
In a Tax Court case, Mr. and Mrs. R signed a separation agreement in 1993 but continued to live in the same house. CCRA disallowed Mrs. R's GST tax credit on the basis that Mr. R's income must also be considered.
The Court disagreed with CCRA and found that they met the requirement of living separate and apart, even though they resided in the same house and noted that:

1. Mrs. R had advised her employer of her change in marital status with respect to superannuation and medical benefits.
2. Mrs. R had changed her RRSP benefi-ciary to her son.
3. Mrs. R continued to live in the lower part of the home because they could not agree on the value of the house. Her premises consisted of a bedroom, bathroom, family room and she had the use of the kitchen, telephone and laun-dry, had her own refrigerator, kept her food separately labeled and they never sat together for meals. Mrs. R per-formed no domestic services for Mr. R whatsoever.
4. Mrs. R testified that she could not afford to move out of the home prior to receiving her money for the house. Also, her son would not want to stay with her during alternate months if she had only a one bedroom apartment.
5. Since the parties had agreed to joint custody, each became responsible for the preparation of their son's meals and meeting his needs during alternate months.
6. When having surgery in 1995, she listed her son as her next of kin.
7. One witness testified that there appeared to be limited communication between them. When they were invited to the same party each was invited separately and, each attended in a different car with separate gifts.

1. occupy separate bedrooms,
2. absence of sexual relations,
3. little, if any, communication between spouses,
4. spouse performs no domestic services for other spouse,
5. eating meals separately, and
6. no social activities together.

LEGAL FEES
In a Tax Court case, the taxpayer incurred $4,176 in legal fees to alter a 1994 Child Support Agreement to increase the amounts and to bring it under the post-1997 system whereby the amounts would not be taxable, nor deductible. The Court noted that expenses incurred to quantify child support amounts may be deducted even if incurred to amend a previous child support agreement.

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RRSP - U.S. WITHHOLDING TAX

If a Canadian RRSP owns U.S. securities and dividends are paid to the Canadian RRSP, the U.S. payor may have withheld a 30% withholding tax. However, the Canada-U.S. Tax Convention exempts RRSPs, RRIFs and pension funds from this withholding tax. Therefore, the RRSP trustee should request a refund of the tax.

QUALIFYING SHARE INVESTMENT
In a Technical Interpretation, CCRA notes that shares may qualify as RRSP invest-ments if, immediately after the time the shares were acquired by the Plan, the annuitant was not a "connected shareholder" and the shares were shares of a "small business corporation".
A "connected shareholder" includes a person who directly, or indirectly, holds 10% or more of the shares of any class of shares of the corporation, or of any corpo-rations related to the corporation, unless the annuitant or related person either deals at arm's length with the corporation, or the related corporation, or the cost amounts to the annuitant and related persons of all the shares of the corporation, or related corporations, total less than $25,000.
To qualify as a "small business corporation" all, or substantially all, (90% or more) of the fair market value of the corporation's assets must be attributable to assets that are:

1. used principally (50% of the time or more) in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
2. shares or indebtedness of other small business corporations that are con-nected with the particular corporation, or
3. assets described in (a) and (b) above.

GETTING REMARRIED
In a Technical Interpretation, CCRA note that where a RRIF annuitant gets married to a spouse fourteen years younger, the prescribed factor for the minimum amount cannot be changed to reflect the spouse's age. However, the existing RRIF may be transferred to a new RRIF which may use the spouse's age in determining the mini-mum payment.

RESP
Guide RC4092 CCRA discuss RESPs including:

1. HRDC will pay a 20% Canada Edu-cation Savings Grant (CESG) on the first $2,000 of annual contributions made to eligible RESPs of a qualifying beneficiary. The maximum CESG that a beneficiary may receive is $7,200 ($400 x 18 years). For more informa-tion contact 1-888-276-3624.
2. An Educational Assistance Payment (EAP) is any distribution made under certain conditions, of an RESP's ac-cumulated income and CESG amounts to a beneficiary of the RESP, to help finance post-secondary education. To qualify as an EAP, the beneficiary has to be:
   1. (i) enrolled as a full-time student in a qualifying educational pro-gram at a post-secondary educa-tional institution (includes distance education courses and correspondence courses) or,
   2. (ii) enrolled in a qualifying educa-tional program at a post-secondary educational institution and have a mental or physical impairment.
3. Subject to the terms and conditions of the RESP, all contributions made to the RESP by the subscriber can be re-turned to the subscriber when the contract ends or at any time before. Because they were not deductible when made, they will not be taxable when returned.
4. The maximum amount of EAPs that can be paid to a beneficiary initially is $5,000. After the beneficiary has completed thirteen consecutive weeks in the qualifying educational program, there is no limit on the amount of EAPs that can be paid if the beneficiary continues to qualify to receive EAPs. The Minister of HRDC may increase the $5,000 limit where, for example, the cost of tuition for a program is sub-stantially higher than the average. Such requests have to be made to the Minister by the RESP promoter in writing.
5. An Accumulated Income Payment (AIP) may be made to a subscriber where each beneficiary has died, or reached 21 years of age, and is not eli-gible to receive EAPs and the RESP has existed for at least ten years. However, the last two conditions may be waived if the beneficiary has a mental or physical impairment. These payments are subject to regular income tax plus an additional 20% tax. How-ever, up to a maximum of $50,000 may be contributed to his/her RRSP within sixty days following the year to avoid this tax.

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