TAX TIPS & TRAPS FOR 1ST QUARTER 2001

FARMING

LOSSES
In a Tax Court case, the Court permitted a full deduction for farm losses against other income and noted that:

1. Mr. and Mrs. D are true and genuine Saskatchewan farmers.
2. The Income Tax Act was not intended to destroy the spirit of such people. The Court viewed the years 1992 to the present as startup learning years and permitted a full deduction for the farm losses against the employment income.
3. Commencing in 1992 Mr. and Mrs. D commenced farming but Mr. D continued to work at IPSCO in Regina because he needed the money to be-come a full-time farmer.
4. The losses from 1992 to 1997 ranged from $18,000 to $28,000.
5. The Court accepted the taxpayer's projections which show them earning over $50,000 per year after the year 2010.
6. The entire family earnings went into the farm, after maintaining their family.

Case Study 1
A seed grower recovered about $40,000 per year since 1994 on agronomic research related to test plots for various trials on seed varieties, chemicals, etc. The R&D costs include shareholder wages based on time spent on the research, wages paid to work-ers for their time, cost of seed, chemicals, pesticides, etc., new equipment for the research operation and other related costs.

Case Study 2
A hog finishing operation recovered $10,000 on the development of a new device to vaccinate livestock.

Case Study 3
A forage processing company conducted a qualifying experiment to determine if cir-culation of natural air in a storage shed could assist to dry baled forage.

Case Study 4
A greenhouse company recovered a sig-nificant portion of costs incurred to conduct an experiment to improve produce quality. The company was trying to develop a growing protocol to control the bacteria growth that caused root rot.

Case Study 5
Several farm operations made successful claims in the field of developing new or improved breeding stock.

FAMILY FARM CORPORATION SHARES
In a Technical Interpretation, CCRA note that to qualify as a share of the capital stock of a family farm corporation (eligible for up to a $500,000 capital gain exemption), all, or substantially all, of the fair market value of the property owned by the corpora-tion must be attributable to property used by the corporation or, another eligible person, principally in the course of carrying on farming in Canada in which the person (i.e. the shareholder) or a spouse, child or parent of the person was actively engaged on a regular and continuous basis.

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REMUNERATION PAID TO CANADIAN FOR WORK IN THE UNITED STATES

In a Technical Interpretation, Canadian resident employees provided services in the U.S. to third parties. The Canadian em-ployer bills the U.S. clients.
Provided that the Canadian employee is not present in the U.S. for more than 183 days, and his/her remuneration is not borne by an employer who is a resident of the U.S., nor by a permanent establishment of his/her employer in the U.S., the employee will not be taxable in the U.S.

ARTICLE XIII
In a Federal Court of Appeal case, the Court noted that the Canada-U.S. Tax Treaty makes United States and Canadian residents liable for capital gains tax on dispositions of real property in the other country but, only for gains arising after December 31, 1984. The 1980 Convention provides for either valuing property as of December 31, 1984, i.e. "safe start" date or, at the taxpayer's option, calculating the amount by which proceeds of disposition are to be reduced for tax purposes by appli-cation of a formula the scheme of which is to exclude gains up to December 31, 1984.

BANK INTEREST
A Canadian with a deposit in a U.S. bank must complete and file Form W-8BEN with the U.S. Bank commencing January 1, 2001 to avoid U.S. withholding tax on interest paid to a Canadian resident by a U.S. bank. If the bank does not receive this Form, technically it is required to withhold tax on interest payments.

WITHHOLDING TAX
In certain instances, interest payable by a resident of Canada to an arm's length non-resident, where they did not have to pay more than 25% of the principal amount within five years, is exempt from withhold-ing tax.
In a Federal Court - Trial Division case, the notes were substantially altered thereby creating new obligations the terms of which did not meet the exemption. Therefore, the withholding tax was required to be paid.

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SELF-SUPPLY RULES

Where a taxpayer acquires a newly-constructed residential property for lease to others, GST applies on the purchase price. However, when the property is constructed by the owner, the owner is subject to GST on the fair market value of the property at the time it is put into rental use. (self-supply rules) However, input tax credits for the GST paid may be claimed. The self-supply rule is to attract GST on the profit element and other costs which would not normally be subject to GST such as interest expense and salaries.
In a Tax Court case, the taxpayer con-structed five rental buildings and reported GST under the self-supply rules as at Janu-ary 31, 1996 based on a value of $36,757 per unit. However, CCRA argued that the value was $42,000 per unit and assessed GST accordingly. This fourteen page Decision reviewed the various valuation methods, concluded that the taxpayer was correct and, allowed the taxpayer's appeal.

DUE DILIGENCE DEFENSE
In a Federal Court of Appeal case, the Court found that if a person has exercised due diligence, the GST penalty is not exigible. CCRA has now issued a Policy Statement P-237 which notes that a person must show that a sincere attempt to comply with the law has occurred in accordance with the "reasonably prudent person" test. There must have been genuine uncertainty regarding the application of the GST which prevented compliance, not just a calculation error or error because of failure to maintain adequate records. CCRA also note that there is no defense for late remittance, or reliance on incorrect advice from a third party, unless sufficient uncertainty occurred.

NEW RESIDENTIAL RENTAL PROPERTY REBATE
The February 28, 2000 Budget proposes to introduce a new residential rental property rebate, generally equal to a maximum of 2.5% of tax for newly constructed, substan-tially renovated or converted residential rental accommodations. (36% x 7% = 2.52%) The rebate will be available on rental accommodation including single unit and multiple unit rental housing, additions to multiple unit rental housing and, land leased for residential purposes - provided the rental accommodation or land is used, or intended to be used, as an individual's primary place of residence on a long-term basis.
The rebate could also apply to a temporary rental unit where the taxpayer is intending to sell the unit as soon as possible. How-ever, if the unit is sold to a purchaser who will not be occupying it as a place of resi-dence, the rebate will have to be repaid.
The rebate is also for co-operative housing units and land leased for residential pur-poses.
The deadline for claiming the rebate will be two years from the month where the GST is triggered - or two years after the legislation is enacted.
The rebate application form may be filed together with the GST return thus, in effect, you will be remitting GST of only 4.48%, instead of 7%.
Even though the rebate will apply to costs incurred after February 27, 2000, we understand that CCRA will not make any payments until the legislation has received Royal Assent.

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CCRA RELEASES

November 28, 2000 - This CCRA Fact Sheet reminds investors of risks associated with tax shelters and notes that:

1. (i) If no real business activity is carried on, or there is no reasonable expectation of profit, losses will be disallowed.
2. (ii) If losses claimed by an investor exceed the amount at risk, the losses will be reduced to the at-risk amount. November 28, 2000 - CCRA warns Cana-dians against tax myths and challenges assertions made by "detaxers" and "untaxers".

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