Personal Tax

The Income Tax Act requires a student taking courses at a university outside of Canada to be in full-time attendance at the university outside Canada to claim a tax credit for tuition fees.

In a 9 March 2006 , informal procedure before the Tax Court of Canada, the taxpayer took a post-graduate degree on an online basis from Open University in England . Although there are no lectures, visual presentations are provided in CD format. Students are given access to a dedicated online connection similar to a “chat room” so that issues can be discussed among the students and with the tutors.

Exams were written at the University of British Columbia .

Taxpayer Wins!

The Judge found that the Income Tax Act does not necessarily require physical presence at a university. The expression “full-time attendance” is ambiguous and should be interpreted literally to include programs that require the “attention” of the student on a full-time basis, such as the online program taken here.

Moving Expenses As A Medical Expense Tax Credit

In an 11 April 2006, External Technical Interpretation, Canada Revenue Agency (CRA) notes that the Income Tax Act permits “reasonable moving expenses” of up to $2,000 as a medical expense tax credit for a person who lacks normal physical development or has a severe and prolonged mobility impairment, where the move is to a dwelling that is more accessible by that person or in which the person is more mobile or functional.

For example, this may apply to a person who has to move because he or she has Multiple Sclerosis and the new dwelling is more accessible or the person is more mobile or functional within the new dwelling.

Employment Income

Health Care Expense Account (HCEA) - Bonuses

In a 2005 Advance Income Tax Ruling, the CRA ruled that when part of a bonus allocation is credited to the HCEA, this portion will not be taxable income.

Unused balances in the HCEA at the end of the year may be carried over and used to reimburse eligible medical expenses in the subsequent year. Unused balances will not be payable in cash.

Health Spending Account (HSA)

In a 2006 Advance Income Tax Ruling, the CRA noted that a company compensates its management employees with a base salary and incentive pay.

The company permits the employee to elect to allocate the incentive pay to an HSA which qualifies as a Private Health Services Plan (PHSP).

The CRA ruled that the allocation of credits to the HSA will not be considered taxable income.

Payroll Deductions on Tips

In an 18 April 2006 External Technical Interpretation, CRA notes that where tips are controlled by the employer, payroll deductions must be met and the amounts reported on the employee’s T4.

Controlled tips include tips the employer pays or that pass through the employer’s books before the employee receives them.

Business/Property Income

Replacement Property

In an 18 April 2006 External Technical Interpretation, the CRA reviewed the replacement property rules whereby a motel business is sold and the funds used to acquire a recreational vehicle park and the company wished to defer the capital gain on the sale of the motel. The CRA considered the two businesses to be similar.

The replacement property rules generally allow a taxpayer to defer recognition of capital gains and recaptured capital cost allowance on the disposition of a capital property when the replacement property is acquired by the end of the following fiscal period (voluntary dispositions) or the second fiscal period (involuntary dispositions).

Rental Loss

In a 5 May 2006 Tax Court of Canada case, the taxpayer purchased a house in Toronto . From 1981 to 1994 the house was rented out to family members. From 1994 on, it was rented out to arm’s-length persons. The taxpayer claimed losses from 1987 through to the year 2000 ranging from $4,000 to $14,000 each year.

The CRA disallowed losses in the years 2001, 2002, 2003 of $14,655, $14,865, and $16,385 on the basis that there was a personal aspect to the house.

Taxpayer Wins on this Point!

The Court noted that there was no sentimental attachment to the premises nor was there any evidence that the taxpayer might put the property to some non-commercial use in the future.

Taxpayer Loses on this Point!

The CRA successfully argued that many of the expenses were not deductible because they were not supported by receipts.

Owner-Manager Remuneration

Family Members As Directors

A common issue in private corporations is the remuneration which can be paid to family members who are not active in the day to day operations of the business. Such salaries are deductible only to the extent they are reasonable in relation to the services provided.

Some family members are made Directors of the corporation to support payment of higher salaries. A recent case indicates that the additional remuneration a Directorship may support is fairly small. In that case, the Tax Court denied the deduction of a large portion of Directors’ fees paid to adult children who were Directors of the corporation, but provided no other services. The Tax Court allowed a deduction of only $1,500 per child per year. A greater deduction ($11,600) was allowed for one child who was more active in the business.

Caution!

Prospective Directors should carefully consider the legal ramifications and risks of Directorship, and consult with their legal counsel. Directors can be held personally liable for unremitted GST and source deductions and can also be at risk of liability for items such as environmental damages, improperly issued shares, improper payments to shareholders and wages not paid to employees.

Farming

Qualified Farm Property

In a 16 March 2006 External Technical Interpretation, the CRA reviewed a situation where the individual’s father owned land that he farmed on a full-time basis for many years until he ceased farming operations. The land has been rented out on a crop-share basis ever since. Upon her father’s death, the individual’s mother inherited the land but she did not farm the land either. Upon her mother’s death, the individual inherited the land but she also did not farm the land.

CRA noted that the land was still “qualified farm property” eligible for the capital gain exemption because the father satisfied the required farming test.

Estate Planning

Estate Freeze

When a parent owns the shares of a corporation, he/she may wish to freeze the value of their shares in favour of children who will subscribe for future growth common shares, perhaps through a Trust. This could reduce tax on the death of the parents.

The CRA Ruled positively on an Estate Freeze in a 2006 Advance Income Tax Ruling.

Designated Beneficiaries

In a 4 May 2004 Ontario Superior Court case, the issue involved who was entitled to the life insurance and assets in the deceased person’s RRSP - the designated beneficiary or the Estate.

In this case, Mr. and Ms. G entered into a Separation Agreement in 2004 in which Ms. G released her entitlement to all assets as part of the settlement of all claims between them. However, Mr. G died before he changed the designated beneficiary on his RRSP and his life insurance policy.

The Court determined that Ms. G was entitled to receive the assets in the RRSP and the life insurance proceeds on the basis that the Separation Agreement did not revoke Ms. G’s rights as the named beneficiary in both the RRSP and the insurance policy.

There have been other cases where the rights of a named beneficiary have been revoked because of a proven intention of the deceased, but this did not occur in this case. Therefore, if the intention is to have the RRSP and insurance proceeds not go to your former spouse, it is important to change the beneficiary.

Loans for Value

The marginal tax rate system permits taxpayers who can redirect income to lower income family members to enjoy considerable tax benefits as a family unit. Unfortunately, the attribution rules often frustrate income splitting with spouses and minor children or grandchildren.

However, the attribution rules do not apply to transfers where the recipients of investment capital pay fair value for the funds they receive such as through properly structured loans.

The loan must bear interest at a rate no lower than the CRA prescribed rate at the date the loan is advanced (4% until 30 September 2006 ; and the interest for every year must be paid no later than 30 January of the following year.

The borrower (commonly a Trust for minor children or grandchildren) can then invest the borrowed funds and earn income. Because the borrowed funds are used to earn income, the borrower is entitled to deduct the interest incurred as a carrying charge. To the extent the return on their investments exceeds the interest, the difference will be taxable to the lower-income borrower. Of course, the lender must report the interest received each year as income.

Marriage Breakdown

Legal Fees - Child Support

In a 9 March 2006 Tax Court of Canada case, the taxpayer had custody of the younger child and his former spouse had custody of the older child after the marriage separation. Upon applying the Federal Child Support Guidelines, the amount that he had to pay her based on his income exceeded the amount that she had to pay him. Therefore, the net amount payable by him for child support was $185 per month. CRA disallowed his legal fees related to the child support.

Taxpayer Wins!

The $8,265 of legal fees paid by the taxpayer with respect to his claim for child support from his former spouse was considered deductible even though he had to pay a net amount to her. The Court noted that the purpose in incurring the legal fees was in part to establish his entitlement to support for one child. Legal fees incurred to establish entitlement to child support are deductible.

Commencement Date - Child Support

Child Support Orders made after April, 1997 do not permit a deduction to the payor, or be income to the recipient because the “Commencement Day” is after April, 1997. Also, pre-May, 1997 Agreements that are changed after that date may also have a “Commencement Day” after April, 1997 thereby converting the status of the child support from deductible/taxable to non-deductible/non-taxable.

In a 16 March 2006 Tax Court of Canada case, Daniel was required to pay child support in a marriage breakdown situation to his former spouse under a 14 July 1993 Agreement. Therefore, this was a pre-May, 1997 Agreement and the child support payments were deductible.

However, on 23 November 1998 the Agreement was changed with respect to overall custody and child support amounts. The Court found that Amendment was a new agreement. Therefore, it had a Commencement Day after April, 1997 and the child support payments were no longer deductible.

GST

GST/HST Web Registry

As part of their obligations under the GST/HST, Registrants are required to ensure that Input Tax Credits are claimed only where suppliers are registered for GST/HST. Previously, the sole means available to verify this was to contact the Canada Revenue Agency.

The 23 February 2005 Federal Budget proposed a publicly accessible web-based GST/HST Registry. This has now been activated and the link is:

https://www.businessregistration-inscriptionentreprise.gc.ca/ebci/brom/registry/registryPrompt_en.jsp

This could also be valuable for real property transactions where a vendor needs to confirm that the purchaser is registered so that the vendor will not be required to collect GST/HST on the sale.

Exports

Most exported services are subject to a GST rate of 0%. However, the taxpayer may claim Input Tax Credits as the supplies are zero-rated, not tax exempt.

GST/HST Memoranda Series 4.5.1 Exports - Determining Residence Status - includes a sample declaration that may be provided by a purchaser to a vendor with respect to their non-resident status.

Lawyers’ Disbursements

In May 2006, CRA released Policy Statement P-209R which addresses lawyers’ disbursements for GST/HST purposes.

Did You Know . . .

U.S. Real Estate Sales by Canadians

Canadians who sell U.S. real estate at a profit will be subject to U.S. Federal and, perhaps, U.S. State tax. From the proceeds of disposition you are entitled to deduct your cost base which includes any permanent improvements. You also may deduct sale expenses such as real estate taxes, interest, insurance and maintenance.

Some other things to consider include:

1. There is a 10% U.S. withholding tax that applies at the time of sale as a prepayment of the income tax.

2. A vendor may be exempt from the withholding tax (but not the income tax) if the buyer certifies that they will use the property as a residence and the selling price does not exceed $300,000. Also, a Form 8288-B may be submitted to the IRS to authorize a reduction in the withholding tax to a rate below 10%.

3. A U.S. income tax return to report the sale is due by 15 June of the following year (15 April if you had wages subject to U.S. withholding). The U.S. withholding tax is shown as a payment on that return.

4. State taxes also must be considered.

5. A United States Taxpayer Identification Number (TIN) will be needed.

Firm News

As we complete our 48 th year in business we recognize how fortunate we are to have many wonderful clients and staff who have supported us over this period of time. As we continue to grow, there are a few new faces in the firm we would like to introduce to you.

Firstly, Mr. Brent Zazubek is a Chartered Accountant who will be joining us on 1 December 2006 as a Senior Tax Manager. Brent brings with him a wealth of experience from a mid-sized firm in Calgary where he has spent the last seven years practicing exclusively in the area of taxation. Prior to that, he was with another mid-sized firm where he obtained his designation as a Chartered Accountant. Brent will be a welcome addition to our tax group and we look forward to his arrival.

We have recently hired Mo Mecklai as a CMA student who comes highly recommended by his wife, Sheryne, who articled with our firm and left a few years ago to pursue other interests. Our client accounting department has been bolstered by the addition of Ayano Murakami who joins us from another firm of Chartered Accountants. In the administration area, we have added Karen McWilliam and Anna Wong and our long term employee Rachel Kronlund has moved from the administration department to our client accounting group.

Many of you will have dealt with or know of Margaret Rolfe who has been with the firm for 40 years. Margaret has recently decided to pursue other interests and we know that she will be coming to the office on a regular basis just for the company. Margaret has recently undergone hip surgery, and obviously was well enough to travel with David for five weeks in Europe, returning in the first week of October.

We hope that you continue to enjoy these newsletters and that you find some useful tidbit of information. Should you require clarification or further details, please do not hesitate to contact us.

R. Watts