Winter 2005

Newsletter by Email

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Personal Tax

Medical Expense - Medications

In a 29 July 2005 Tax Court of Canada case, the taxpayer purchased “over-the-counter” medications, as advised by his doctor, with respect to throat cancer.

These expenditures were denied as a medical expense because they were not “recorded by a pharmacist”.  The Court noted that there are laws throughout Canada that describe the records that a pharmacist is required to keep.  Medications purchased off the shelf do not meet these requirements.

Adoption Expense Tax Credit

The Income Tax Act now provides a tax credit for eligible adoption expenses to a maximum of $10,000 during the adoption period.

An eligible child means a child under age eighteen at the time the Adoption Order is issued.

Disability Tax Credit (DTC)

In a 7 July 2005 Tax Court of Canada case, the Court permitted a DTC for a taxpayer with a number of health problems including:

(i)    rheumatoid arthritis which restricted her from performing her daily functions;

(ii)   severe diabetes; and

(iii)  a psoriasis skin disorder.

The Court noted that the DTC is also available to a person who has a cumulative disability creating a severe and prolonged impairment.

Employment Income

Deductions

In a 5 August 2005 Tax Court of Canada case, an investment advisor represented herself in Tax Court with respect to disallowed employment expenses for compensation to clients who lost money, workspace in the home, office equipment, and transportation.

The Court disallowed the $10,772 and $1,800 in 2000 and 2001 paid to unhappy clients because she did not have formal documentation for the payments.

The Court accepted the CRA’s position that only 8% of the home was used for the home office, rather than the 25% claimed by the taxpayer because the taxpayer did not prove that the 25% was correct.

The CRA permitted all of the claims for the equipment leasing payments made to her husband’s company in 2000 but only one-half in 2001 because of a lack of documentation.

The claim for transportation expenses was disallowed because of a lack of documentation.

Moral

Documentation is important!

Business/Property Income

Truckers

In a 8 June 2005 Supreme Court of British Columbia class-action suit, the truckers argued that the trucker option to claim deductions for unreceipted meal expenses of $15.00 per meal to a maximum of $45.00 per day, subject to the 50% addback, should be increased to the federal government travel rate ($73.10 per day at the time) without any 50% addback.

Truckers Lose

The taxpayers’ claim was dismissed by the Court on the basis that it had no reasonable cause of action.

Moral

Keep receipts.

Capital Gains/Losses

Capital Gain Exemption - Two-year Holding Rule

In general, an individual must hold shares for two years to obtain the $500,000 enhanced capital gain exemption on the sale of the shares of an active private corporation.  However, the Income Tax Act permits an individual to transfer all, or substantially all, of the assets used in a proprietorship to a corporation and then sell the shares immediately and still get the capital gain exemption.

In a 21 March 2005 External Technical Interpretation, the CRA notes that this is also available to an individual who sells all, or part, of a partnership interest to a corporation.

Restrictive Covenants

On 18 July 2005, a Department of Finance Release introduced amendments which propose to tax amounts received for signing a “restrictive covenant”.  These rules have a very broad definition of “restrictive covenant” and are not just limited to non-compete arrangements.

Under certain circumstances the receipt may only be half taxed if a joint election is signed between the seller and the purchaser.  These new rules are complicated and require professional assistance.

Owner/Manager Remuneration

Retirement Compensation Arrangement (RCA)

The normal procedure when a Canadian-controlled private corporation has active business income in excess of $300,000 is to declare a bonus to the owner-managers such that the corporate active business income is reduced to, say, $300,000 and the bonus is taxed as employment income to the owner-managers.

Alternatively, the corporation may bonus down to the provincial small business deduction amount which is $400,000 in some provinces.

An alternative to the bonus arrangement is to pay that amount to a pension vehicle - a RCA.  The payment is subject to a 50% refundable tax to the CRA.  When funds are distributed from the RCA, the 50% is refunded and the amounts are taxable to the individual.  The advantage is that the corporation may use the assets of the RCA and the refundable tax as collateral to obtain a bank loan thereby increasing the capital available to the company.

The RCA may make sense to owner-managers who already have personal income taxed at top rates.

Caution:  This is complicated, requires special professional advice, and is not for everybody.

Marriage Breakdown

Retroactive Support

An article in the Globe and Mail notes that the Supreme Court of Canada will hear an appeal from four Alberta fathers about the fairness of having to make large retroactive child-support payments.

Also, an Ontario taxpayer has appealed an Ontario Court of Appeals decision to the Supreme Court of Canada in which his former wife successfully applied to reinstate her spousal support payments that were terminated by the Manitoba Courts in 1992.  The taxpayer faces the prospect of paying hundreds of thousands of dollars of retroactive support.

Lump-sum Retroactive Support Payments Deductibility

In a 12 July 2005 CRA Release, the CRA notes that its  position in respect of the deductibility to the payor and income inclusion to the recipient of a lump-sum retroactive support payment is set out in Paragraphs 21 and 22 of their Interpretation Bulletin IT-530R which is available on the CRA website (www.cra.gc.ca).

Estate Planning

Clawbacks on Seniors

Taxpayers aged 65 or over who have higher income on their personal tax returns are subject to a clawback of the Old Age Security.  For example, the clawback rate in 2005 is 15% of net income in excess of $60,806.  The clawback is based on individual income.  Therefore, if each spouse has, for example, $55,000 of net income, there will be no clawback.

Also for 2005, the age credit for persons aged 65 and over is reduced by 15% of net income in excess of $29,619.

One should also be aware of clawbacks of the GST credit and other low income entitlements.

Consider this

If a taxpayer dies and leaves assets to a spouse, it may be advantageous if those amounts are left in trust so that the income is reported in a Trust Return and not in the personal tax return of the beneficiary.  Another option is to have a corporation, not the individual, earn income such as business income.

Donation to Municipal Governments

In a 28 July 2005 External Technical Interpretation, the CRA notes that amendments to the Income Tax Act will permit gifts made after 8 May 2000 to a “municipal or public body performing a function of government in Canada” as charitable donations.

Receiving Canada Pension Plan (CPP) Early

If a person qualifies, and takes CPP early (for example, at age 60), rather than age 65, the CPP is reduced by .5% a month for each month under the age of 65.  Therefore, the CPP received at age 60 would be 30% lower than the age 65 amount.

If the individual has a private pension plan which will be reduced by CPP received at age 65, it may make sense to start receiving CPP at age 60.

Registered Education Savings Plans (RESP)

For the first $2,000 contributed to a RESP in a year for a child, the federal government will contribute 20%, or $400, as a Canada Education Savings Grant (CESG) (to a total maximum of $7,200 per child).

The money contributed to the RESP grows on a tax-deferred basis although the annual contributions are not tax deductible.  The investment income is taxed to the student when withdrawn for educational purposes.  The allowable RESP investments are the same as for RRSPs.

A Family RESP Plan may be established so that the funds may be used by any of the children.  Also, a RESP may be established such that if the child does not attend a post-secondary institution, the funds may be rolled into the contributor’s RRSP, as long as the contributor has contribution room.  If contribution room is not available, the contributor may withdraw the funds but is subject to a 20% penalty tax.  In both cases, the CESG must be paid back.

Other ways to provide funds for a child’s education include Trusts in which one parent contributes the funds and the other parent acts as the Trustee.  However, these plans miss out on the CESG.

Reverse Mortgages

A Reverse Mortgage permits an elderly person to borrow a percentage of the equity in their homes.  The money borrowed plus interest does not have to be repaid until the homeowner sells the home, moves, or dies.  Since 1986, these mortgages have largely been provided by a company called Canadian Home Income Plan Corp. (CHIP).

In July 2005, Canada Mortgage and Housing Corporation (CMHC) noted that it will be providing Reverse Mortgages.  However, the CMHC website warns that Reverse Mortgages can be expensive because of high fees and higher interest rates and will deplete the equity in the home.  The main advantage is to the homeowner while the main loser is the beneficiary who will now be inheriting a home which is not clear title and may bear a significant charge.

The proceeds of the Reverse Mortgage are tax-free as they represent loans.  Therefore they will not affect income-related plans available to seniors such as the Guaranteed Income Supplement, Old Age Security, the age credit, and GST credits.

Web Tips

Google Earth

Have you ever taken a look at your house from space?  It is now possible with Google Earth.  This newly released free program from Google allows users to view a collage of satellite photos.  One starts off by looking at a view of the globe (the view can be rotated to view from any angle).  From a macroscopic view of whole continents and ocean fissures, one can narrow down the view to focus on a single dwelling or possibly even a tree or vehicle.   In general, the views become more clear and accurate in areas that are more densely populated.

One handy feature of the program is the ability to measure distances.  If you like to jog, walk or bike on paths, the distances of which are not easily measurable, one could use the program to determine the distances.

A second feature is the ability to tilt the view so that one can gain a height perception of buildings and natural features.  Check out the Rocky Mountains or the Eiffel Tower to examine these features.  

A third useful feature is the ability to send a selected location or picture to a friend or colleague via email.  If you have a meeting at a location that is either difficult to get to or is difficult to locate based simply on the address, one could send a photo which details the streets leading to the final destination.

To download this program, go to:

http://earth.google.com/

Firm News

We are very pleased to congratulate Graham Robertson, one of our students, who ranked in the top 50 in Canada and the top 10 in British Columbia in the Uniform Examinations by the Institute of Chartered Accountants. This is a terrific  achievement  when  you   consider   the number  who  write the  exams.   Graham graduated  from St. Michael’s University school and then UVIC, both in Victoria.  Graham looks forward to a great future in the CA profession.

At this time of the year we try to reflect on what our firm can do for others.  A week ago 38 members of our firm and some family members attended at the Salvation Army on Cordova Street and served dinner to hundreds of people.  This is a very humbling experience and makes us aware that there are many sick and poor who need our help.  Shamash Valji, one of our partners, is a director of the Salvation Army and he arranged for this event.  Thank you Shamash for all your efforts in this direction.

During the year through our Charities Committee we have donated to 40 different charitable organizations and at this Christmas season we are again making three significant donations to the Salvation Army, the St. James Foundation and St. Paul’s Hospital “Lights of Hope”.  We make these donations instead of sending out Christmas cards.

Our firm has always had a policy of giving discounts to many of the charitable and not-for-profit organizations that we work for.  This has continued over the years and in 2005 represents in value 1,500 hours. 

In November and in every year for many years, we have raised money for the United Way.  We do it through partner and staff contributions but also through many other interesting ways of raising money.  We have a bake off (it’s surprising how many accountants can also bake), jeans day, 50:50 draw, and a pizza lunch.  We are very proud of our staff involvement in all of these activities.

Accounting and taxation are very intense activities and there is no question that our involvement in charities and other social responsibilities gives us a good balance. 

We would also like to compliment our many clients who generously support their charitable activities.

DRLR