Rolfe, Benson LLP Chartered Accountants

Spring 2012

rbadmin — Thu, 17 May 2012 16:33:21 +0000

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Personal Tax
Employment Income
Business/Property Income
Owner/Manager Remuneration
RRSP/TFSA
International
Not-for-profit Organizations (NPO)
Firm News

Personal Tax

MEDICAL EXPENSES – COSMETIC PROCEDURES

In an 31 August 2011 Technical Interpretation, Canada Revenue Agency (CRA) noted that medical expenses paid after 4 March 2010 for purely cosmetic procedures are ineligible for the Medical Expense Tax Credit (METC).

This generally includes surgical and non-surgical procedures purely aimed at enhancing an individual’s appearance, such as liposuction, hair replacement procedures, botulinum toxin injections, and teeth whitening. The CRA has posted on its website some examples of procedures that will generally be ineligible as medical expenses at www.cra.gc.ca/gncy/bdgt/2010/mdcl-eng.html.

CHILDREN’S ART TAX CREDIT (CATC)

Commencing in 2011 a non-refundable CATC will be available to parents of children who are under age 16 at the beginning of the year, or age 18 if the child is disabled. The CATC is based on 15% of eligible expenses paid for the cost of registration or membership in a prescribed program of artistic, cultural, recreational, or development activity. The maximum 15% CATC is based on $500. This is similar to the Fitness Credit introduced in 2010. Therefore, a parent is eligible for a maximum $150, 15% tax credit (arts, $500 and fitness, $500) for each child.

Eligible CATC programs include:

• a weekly program of a minimum of eight consecutive weeks duration in which a minimum of 90% of all activities are eligible activities or, offered by an organization where a 50% eligible activity test is met; and

• a program of a minimum of five consecutive days in which more than 50% of the activities are eligible.

A program that is part of a school curriculum will not be eligible.

Eligible CATC activities will include development of creative skills or expertise in artistic or cultural activities; providing a substantial focus on wilderness and a natural environment; helping children develop and use particular intellectual skills; structured interaction among children where supervisors teach or help children develop interpersonal skills; and providing enrichment or tutoring in academic subjects.

For more information see the Children’s Arts Tax Credit (CATC) Questions and Answers on the CRA website.

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Employment Income

HIRING CREDIT FOR SMALL BUSINESS (HCSB)

The 2011 Federal Budget created a one-time hiring credit for small business. The HCSB gives small businesses relief from the employer’s share of Employment Insurance (EI) premiums paid in 2011 by paying up to $1,000, based on the increase in an employer’s EI premiums paid in 2011 over those paid in 2010.

Eligibility

You are eligible for this credit if you meet all of the following conditions:

• you deducted EI premiums from the remuneration you paid to your employees, or paid the worker’s share of EI premiums for barbers, hairdressers, fishers or drivers of taxis and other passenger-carrying vehicles, and you remitted these premiums (along with your share of EI premiums) to your payroll (RP) account;

• you reported the income and deductions on a T4 Slip and filed this information on your RP account for 2010 and 2011;

• the total of employer EI premiums you paid for 2010 was $10,000 or less; and

• your total employer EI premiums increased in 2011.

If you are eligible, the CRA will automatically calculate the amount of your HCSB using the EI information from the T4 Slips you filed with your 2010 and 2011 T4 Information Returns. The amount to be credited to your payroll account will be no more than $1,000.

INDEPENDENT CONTRACTOR VS. EMPLOYEE – TRUCK DRIVERS

In a 22 September 2011 Federal Court of Appeal case, the Tax Court had previously concluded that 43 of the truck drivers were independent contractors because they signed Agreements that indicated this intent. However, the other 53 truck drivers were considered to be employees.

Taxpayer Loses

The Federal Court found that 39 of the 43 independent contractors were in fact employees. Therefore, of the 96 truck drivers, the Federal Court concluded that 92 of them were in fact employees. A significant loss for the Corporation.

EMPLOYMENT INSURANCE FOR NON-ARM’S LENGTH EMPLOYEES

In a 20 October 2011 Tax Court of Canada case, the major shareholder’s daughter worked for the corporation and the corporation successfully argued that the salary was not subject to Employment Insurance because the Employment Insurance Act excludes non-arm’s length situations where the terms and conditions of the employment are not substantially similar to contracts of employment with arm’s length people.

In a 3 October 2011 Tax Court of Canada case, the individual was the spouse of the owner of the corporation and claimed that her employment was subject to EI and, therefore, made an application for Employment Insurance.

The Court again concluded that her employment was not insurable on the basis that her terms and conditions of employment were not the same as an arm’s length person.

CPP CHANGES FOR 2012

In 14 July and 7 October 2011 Releases, CRA discussed the 2012 CPP changes and notes that if you are under age 65 and you work in Canada, you and your employer will have to make CPP contributions. Also, working individuals who are at least 65 years of age but under 70 will be subject to the CPP, even if you are receiving a CPP or QPP pension, unless you elect to stop contributing by filing Form CPT30.

Some other CPP changes include:

1. A person who delays receiving their CPP until after age 65 will receive a larger increase than was available prior to 2012. Under the old rules, the CPP would be increased by .5% per month after age 65. From 2011 to 2013 this percentage will increase from .5% per month to .7% per month.

2. Individuals that elect to receive their CPP before age 65 will have a larger reduction. Previously it was .5% for each month before age 65. The change is a phased-in reduction that will increase the early CPP reduction to .6% per month.

3. Under the old rules, an individual had to stop working for two months before they could apply to receive CPP between the ages of 60 and 65. Commencing in 2012, this requirement will no longer apply.

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Business/Property Income

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED)

In December 2011, CRA issued Guide RC4467 which notes that:

• In 2010 the SR&ED Program provided approximately $3.5 billion of tax assistance for over 21,000 claimants. Of these, 75% were small businesses.

• The SR&ED Program provides financial assistance through the form of refundable investment tax credits, and a reduction of taxes payable, or both.

• The SR&ED Program is available to any business operating and doing SR&ED in Canada. Any business that is involved in basic or applied research, or in developing new or improved materials, devices, products, or processes may be eligible under the SR&ED Program.

• To determine if your work meets the SR&ED requirements, see the CRA Eligibility Self-Assessment Tool at www.cra.gc.ca/sred-assessment.

• Also, CRA has a First Time Claimant Service; a Pre-Claim Project Review Service (provides a preliminary opinion on the eligibility of projects for SR&ED tax incentives); and the Account Executive Service (provides a designated contact person who will be available to answer your questions on SR&ED).

For more information see www.cra.gc.ca/sred.

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Owner/Manager Remuneration

DIRECTOR LIABILITY

In a 21 April 2011 Federal Court of Appeal case, the Federal Court reviewed the “due diligence defence” and found the taxpayer/director personally liable with respect to unpaid GST/HST and source deductions and noted that:

• The director’s efforts should be to prevent failures.

• There is a need for stronger corporate internal controls and director’s meetings to ensure that the statutory obligations under the Income Tax Act and the Excise Tax Act are met.

• This is a warning to directors that they must meet statutory obligations with respect to source deductions and GST/HST remittances.

INDIVIDUAL PENSION PLANS

An Individual Pension Plan (IPP) could be used as a replacement retirement savings vehicle for, say, a Registered Retirement Savings Plan (RRSP). Some points to consider include:

1. An RRSP may work well for younger employees however, older employees that have corporations may prefer a defined benefit type of Pension Plan such as an IPP to provide current contributions that are in excess of the RRSP deduction limit.

2. An IPP may also allow the employer to make significant past service contributions.

3. An employee must receive T4-type (T4 or T4PS) employment income from an employer as compensation for IPP pension contribution purposes. For example, self employment, dividend and interest incomes are not pension eligible.

4. An ideal IPP candidate is between age 50 and 71, is a shareholder of an owner-managed corporation or a senior executive, is of high net worth and highly compensated, desires significantly higher contributions than an RRSP, has significant profits and cash flows to meet corporate-funded IPP obligations, has no need to access the IPP fund except in the form of a pension, and has no need to borrow against IPP assets.

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RRSP/TFSA

RRSPs/RRIFs – ANTI-AVOIDANCE RULES

The 2011 Federal Budget enhances the existing RRSP/RRIF Anti-Avoidance Rules. For example, the new rules would require the income received by an RRSP/RRIF (including capital gains) from a “prohibited investment” (for example, shares in which the annuitant or a related person owns 10% or more) to be 100% taxed.

Also, the Budget proposes a special tax equal to 50% of the fair market value of a “prohibited investment”.

Caution

This is complicated legislation and needs a special review before application to a fact situation. A special election could be made before July, 2012 for pre-22 March 2011 prohibited investments.

RRSP SCAM

In a 23 November 2011 Tax Court of Canada case, the issue was whether CRA was correct in reassessing the Appellants to include in income the amounts that they paid for corporate shares acquired using funds in their self-directed RRSP accounts for 2001 and 2002.

The Appellants were defrauded by being persuaded to transfer their existing registered funds into new, self-directed registered accounts, and then purchase corporate shares that were not qualified investments and that had no value at the time of purchase.

Taxpayer Loses

The amounts were required to be included in income. However, the Court deleted the gross negligence penalties on the basis that the Appellants were innocent victims.

In the Fall of 2011, many taxpayers received a TFSA over-contribution package concerning their 2010 TFSA contributions. For example, if a person made a contribution in 2010, withdrew it, and then re-contributed it in the same year or, withdrew funds and contributed them into another TFSA, there could have been a 1% per month penalty.

If a taxpayer has received a TFSA over-contribution package, they may ask the CRA to review the file and consider waiving the penalty.

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International

U.S. CITIZENS IN CANADA – AN UPDATE

On 7 December 2011 the IRS released a fact sheet entitled “Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.”. This seven point release provides a commentary and examples on the filing obligations, processes, and related penalties for U.S. Citizens residing abroad that are delinquent in their filings (example, in Canada).

The release can be found at: http://www.irs.gov/newsroom/article/0,,id=250788,00.html

Editor’s Comment

These filing requirements could apply to persons born in the U.S., or, in some cases, children of people born in the U.S., and Green Card holders.

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Not-for-profit Organizations (NPO)

TAX EXEMPT STATUS UPDATE

The general circulation of several queries by non-profit organizations as to their tax exempt status and the resulting responses of the Canada Revenue Agency has created an increased awareness of this issue in the non-profit community. In order to be exempt from income taxes under paragraph 149(1)(l) of the Income Tax Act, a non-profit organization (or “NPO”), which is not a registered charity, must generally be “organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof”.

There are three key issues in this description:

(i) the organization must not be a charity,

(ii) the organization must not be organized or operated for profit, and

(iii) no portion of the (current or accumulated) income must be available for the members.

Charity

It is the opinion of the Canada Revenue Agency that it is not necessary for an organization to be registered with the Agency in order to technically be a charity, and the Agency confirmed in a 2011 interpretation that an unregistered charity cannot qualify as a tax-exempt NPO (it can only be tax-exempt by formally registering as a charity). At the moment there is no formal definition of charity in Canada but the government recognizes as charitable, activities in the areas of: the relief of poverty, the advancement of education, the advancement of religion, other purposes which are beneficial to the community as a whole, the making of gifts to other qualified donees. Thus it would be advisable for any NPO to ensure that its formal objects are not solely confined to activities which in law would be considered to be charitable.

Earning a Profit

The Agency concedes that an NPO may earn a profit as long as that profit is only incidental to the activities undertaken to meet its non-profit objectives. This would be the case for example where an NPO realized an unanticipated profit in a particular year by incurring actual expenditures which were less than the budgeted amounts (provided that the budget was reasonable).

However, the Agency noted in several 2010 interpretations that the activities of the NPO must be considered both independently and in the context of the organization as a whole in determining whether profit is a motive for those activities. It is not allowable for one set of activities of an NPO to earn a profit even if the net proceeds from those activities are meant to fund other activities of the NPO. For example, the Agency was asked if it would be allowable for a person to give an endowment to establish an NPO where the donated principal would be maintained and invested, with the resulting investment income used to fund the NPO’s objectives. The Agency noted that the investment activities by their nature would have profit as their motive, and thus the organization would not be tax-exempt as an NPO. The Agency gave a similar answer to a strata corporation which asked if it could earn a profit from the rental of a suite in its building if the rental profits were then used to reduce its members’ annual fees. The Agency noted that in this case not only would the corporation be intentionally earning a profit, but it would be making that income available for the use of its members – two separate contraventions of the requirements above.

However the Agency commented that it is allowable for a NPO to undertake limited fund-raising activities (i.e. lotteries, bake sales, etc) without the Agency determining that the NPO has a profit motive.

Each NPO should thus periodically review its activities to ensure that each of its distinguishable (or potentially distinguishable) activities are budgeted on a cost-recovery basis.

Benefitting its Members

As an extension to the comments above, if an NPO has accumulated profits in the form of reserves, then there will generally be an presumption by the Agency that such reserves will be for the benefit of its members. However the Agency does allow an organization to build reserves which are designated for specific purposes required as part of its objectives, such as the funding for a particular capital expenditure, or to establish a (reasonable) operating reserve. However such reserves must be accumulated by either having specific capital contributed from the members, by receiving gifts or grants, or by the accumulation of small incidental profits (as described above). The reserves cannot be accumulated from other-than-incidental profits (such as might be the case if a strata corporation intentionally charged annual member fees in excess of its annual operating expenses in order to accumulate a capital reserve fund).

The Agency has commented that it will be particularly likely to infer a profit motive when accumulated net assets are not used directly in meeting the non-profit objects of the NPO. This might be the case when long-term funds are either: invested to earn property income (though this is allowed for the long term reserves mentioned above, and for funds to be used in normal operations), used to make loans to members or shareholders, or used to make capital expenditures for commercial operations.

Reserves should be raised directly from specific contributions from members (as opposed to budgeting operating profits towards building such reserves), and each such reserve should have a specific purpose which can be linked to the objects of the NPO.

FEDERAL TRANSITION

The new Not-for-Profit Corporations Act came into force on 17 October 2011 and will replace the old Canada Corporations Act as it applied to all non-share corporations incorporated under that federal act. While most non-profit organizations and registered charities in BC are incorporated under the BC Societies Act and will not be affected by this change, there will be a number of federally-incorporated organizations which will need to transition under this new legislation. If an organization does not make a successful transition under the new legislation within three years (by 17 October 2014), it will be automatically dissolved.

We note that the transition process is not simply a matter of having the organization’s lawyers file some simple forms with Corporations Canada; it may also be necessary for a transitioning organization to amend its bylaws, to prepare new Articles of Continuance, and to make changes in its governance. In identifying which changes need be made, an organization must first determine whether it is a “soliciting corporation” – that is, one which receives more than $10,000 in any year from either government grants or private donations. We would expect that most non-profit organizations and charities will be soliciting corporations.

Some of the changes under the new legislation are:

- a soliciting corporation must have at least three directors, all elected by its members, of which no more than two can be officers or employees of the organization, and none can be ex-officio directors (holding their position by virtue of their position in another organization),

- all organizations may need to prepare new bylaws which comply with the new legislation and have these approved by their members,

- all organizations (or their lawyers) must prepare Articles of Continuance and have these approved by their members,

- all organizations must file the required documents with Corporations Canada,

- all organizations will be required to have their financial statements audited, except that a non-soliciting corporation may elect to have its statements reviewed if its annual revenues are less than $1,000,000 while a soliciting organization may elect for a review if its annual revenue is less than $250,000, and to have neither an audit nor a review if its annual revenues are less than $50,000,

- a soliciting corporation must distribute its assets – after its creditors have all been satisfied – to a “qualified donee” (normally a registered charity) when it winds up.

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Firm News

We often call ourselves a family firm partly because there are some family members here but also because of our larger family made up of partners, staff and our clients. The family members include Margaret Rolfe who was office manager for 32 years and still comes in to prepare tax returns, Sue Tufts who is now a Senior Manager who joined the firm temporarily as a junior switchboard operator some 30 years ago. We also have Natalie Chadwick our current office manager who has also been with us for nearly 30 years. At tax time, we have former partners who come in and help including Ken Mitchell after 40 years with the firm and Greg Lonsbrough after 30 years with the firm. Margot Magee also comes in at tax time and she has been with us for 40 years. Our more recent family include Rob Watts and Tim Saxvik who joined the firm as students 25 years ago and are now senior partners with the firm. Some of our other long term staff include Sumako Rankin 29 years, Geoff Bree 19 years, Azita Yeganegi 19 years, Sherry Dunn 18 years, Rosemary Murchison 14 years, Aaron Kuzik 12 years and Kate Prusova 11 years. Our newer partners Rebecca Lem and Todd Lilley have been with us for 10 and eight years respectively. They are all part of the family that help us to call ourselves “a family firm”. Our other category of family are our clients without whom we would not exist. We still have a significant number of clients who started with us on day one 54 years ago and we are very proud of those relationships. We are starting to have grandchildren of clients as our new clients. We like to think that when we have a new client that they are joining a family and will build up relationships with our staff and partners. Thank you all for making our firm a better place.

We also dwell sometimes on the change in technology. When we started there were dial phones, typewriters, a Gestetner, a protectograph, wet copiers and red underlining and people actually smoked in our office. Nowadays we have probably 70 or 80 computers, some in the office and some portable, we have a network which ties it all together, switchboards, file rooms and copier rooms and nobody smokes in our office or in fact anywhere within 50 feet of the front of the building. Progress is now heading us towards the paperless office, a technology that we are learning at this time. I guess the next step is a people-less office with everybody working from a different location which is possible today with the technology.

What has not changed is our general location. We started in the Credit Foncier Building on the corner of Hornby and Hastings and we are now in what used to be called the Bank of Canada Building which is across the street at Hornby and Hastings. What has changed is that we now have Fairmont Hotels, Waterfront Centre, Terminal City Club Building, two convention centres and the Shaw tower to partially block our views but we still have the Marine Building standing there in charge of Hastings Street. We still enjoy some of Vancouver Harbour, the views of the Lions Gate Bridge, the Second Narrows Bridge, part of Stanley Park and the major dry dock at the foot of Lonsdale.

Our transition to a mid-sized firm in downtown Vancouver has been slow and steady made entirely possible by our greater family of partners, staff and clients.

DRLR

Winter 2011

rbadmin — Wed, 14 Dec 2011 00:02:30 +0000

Help Us Protect the Environment

If you would like to receive our newsletters by e-mail (in Adobe PDF format), please e-mail to Sherry Dunn at admin@rolfebenson.com. Please include in your request the name (individual and/or corporate) which appears on the newsletter mailing label.

Clients

Located on our website (rolfebenson.com) is a link SEND THIS FILE. Please use this secure form of data transfer when sending us your files by email.

Year End Tax Planning
Remuneration
Employment Income
Business/Property Income
Estate Planning
GST/HST
Did You Know . . .
Firm News

Year End Tax Planning

Some 2011 year-end tax planning tips include:

1. Certain expenditures made by individuals by 31 December 2011 will be eligible for 2011 tax deductions or credits including: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expenses, certain public transit amounts, and children's fitness and arts amounts.

2. You have until 29 February 2012 to make tax deductible Registered Retirement Savings Plan (RRSP) contributions for the 2011 year. Consider contributing to a spousal RRSP to achieve income splitting in the future.

3. If you own a business, consider paying a reasonable salary to family members for services rendered to the business.

4. An individual whose 2011 net income exceeds $67,668 will lose all, or part, of their old age security. Senior citizens will begin to lose their income tax age credit if net income exceeds

$32,961.

5. Consider purchasing assets eligible for capital cost allowance before the year-end.

6. Consider selling capital properties with an underlying capital loss prior to the year-end if you had taxable capital gains in the year, or any of the preceding three years. This capital loss

may be offset against the capital gains.

7. Consider donating to charities marketable securities with accrued gains, so that you can receive a full donation receipt without paying tax on the security's capital gain.

8. Registered Education Savings Plan (RESP) – a Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for children

(maximum $500 per child per year).

9. Health and dental premiums for the self-employed – individuals will be allowed to deduct amounts payable for Private Health Service Plan coverage in computing business income provided they meet certain criteria.

10. A refund of Employment Insurance paid for non-arm's length employees may be available upon application to CRA.

11. Taxpayers that receive "eligible" dividends from private and public corporations may have a significantly lower tax rate on the dividends. Notification from the corporation to the shareholder is required.

12. Eligible public transit passes will be entitled to a tax credit.

13. A tax credit for children under 16, at the beginning of the year, enrolled in certain organized activities is available.

14. A Registered Disability Savings Plan may be established for a person who is eligible for the Disability Tax Credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted which are eligible for tax-deferred grants and bonds. Please contact your professional advisors for details.

15. If required income or Forms have not been reported in the past to the CRA, a Voluntary Disclosure to the CRA may be available to avoid penalties. Contact us for details.

16. U.S. Citizens and green card holders have U.S. filing obligations.

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Remuneration

Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning "active business income" include:

1. Bonusing down active business earnings in excess of the annual business limit may reduce the overall tax. However, leaving corporate active business income over this amount presents a tax deferral.

2. Notification must be made to the shareholders when an "eligible" dividend is paid – usually in the form of a letter dated on the date of the dividend declaration. If all shareholders are directors, the notification may be made in the Directors' Minutes.

3. Elect to pay out tax-free "capital dividend account" dividends.

4. Consider paying dividends from your company to obtain a refund of "refundable dividend tax on hand".

5. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral. However the effect on the "Qualified Small Business Corporation" status hould be reviewed before selling the company shares.

6. Dividend income, as opposed to salaries, will reduce an individual's cumulative net investment loss balance thereby providing greater access to the capital gain exemption.

7. Excessive personal income affects receipts subject to clawbacks, such as old age security, the age credit, child tax benefits, and GST credits.

8. Salary payments require source deductions to be remitted to the Canada Revenue Agency on a timely basis.

9. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create "earned income".

10. Salaries paid to family members must be reasonable.

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Employment Income

CELLULAR PHONE ALLOWANCE

In a 8 June 2011 Technical Interpretation, CRA notes that CRA Guide T4130 provides that where an employer reimburses an employee for the cost of a cellular phone service plan and the primary use is for business purposes, the reimbursement would generally not be considered a taxable benefit if:

• the Plan's cost is reasonable,

• the Plan is a basic Plan with a fixed cost, and

• the employee's personal use of the service does not result in charges that are more than the basic Plan cost.

However, CRA notes that a taxable benefit may arise where additional charges are incurred as a result of the employee's personal use of air time minutes or personal long distance calls.

Also, when a reimbursement by an employer relates to an asset purchased and owned by an employee, a taxable benefit may apply.

AUTOMOBILE STANDBY CHARGE

In a 12 July 2011 Technical Interpretation, CRA notes that an automobile ceases to be subject to the automobile standby charge only when the employee is required by the employer to return both the automobile and its keys. Therefore, where an employee voluntarily surrenders the keys during a period of absence from work, CRA feels that those days must be counted in the calculation. (For calculation see CRA Form RC18).

PER DIEM ALLOWANCES

An employer may pay reasonable tax-free per diem allowances for board and lodging to an employee while at a special worksite if the employee otherwise maintains a principal place of residence and is away for at least 36 hours and the distance was such that he/she could not reasonably return daily from the special worksite to the principal place of residence.

BUSINESS TRAVEL/LOG

In a 3 November 2010 Tax Court of Canada case, the taxpayer was a self-employed Remax residential real estate agent who received commissions of $81,440 and $79,552 in the 2005 and 2006 years.

The taxpayer did not keep a log of her business kilometres but she claimed that she had driven 31,185 kilometres and 23,693 kilometres in 2005 and 2006 for a business percentage of 95%.

CRA reassessed on the basis that only 55% of her kilometres were for business purposes.

The taxpayer appealed to the Tax Court of Canada and the Court noted:

1. That keeping a log book for automobile expenses is not specifically required by the ITA. However, by not doing so, she faces a heavier burden in proving that she used her motor vehicle almost exclusively for business purpose.

2. The Court understood that keeping a log book may be tedious and may not always be practical; however, it would be useful in determining the actual business use.

4. The Court noted that if she did not have time to report all her business driving, which they seriously doubt, she could have reported her personal driving.

CRA countered with a proposal to allow 75% and the Court agreed.

Editor's Comment

See www.cra.gc.ca/whtsnw/lgbk-eng.html for CRA's comments on "Documenting the Use of a Vehicle".

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Business/Property Income

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED)

Many taxpayers when hearing the phrases "scientific research and experimental development" or "SRED" say ‘That doesn't apply to me or my company. We don't do any cutting-edge research.' However, the baseline for determining what is cutting edge research and development is the information and processes which are available in the public domain. One doesn't need to consider proprietary knowledge and techniques which have been developed by other competitors elsewhere in the world in order that one's own work can be considered to be new. In fact the Canada Revenue Agency has in the past been fairly generous in giving taxpayers access to tax credits in these areas. The SRED program was introduced by the government in 1985 and is designed as an financial incentive to Canadian taxpayers to innovate in business. More than 20,000 taxpayers claim more than $4 billion in tax credits each year in Canada.

These tax credits are generous. In addition to the normal tax deductions for a SRED expenditure incurred in the course of one's business, a company may also be able to claim refundable federal tax credits for SRED expenditures equal to 35% of those expenditures, and claim refundable provincial tax credits for research and development done in BC of an additional 10% of those SRED expenditures. For example, if a company reported taxable income of $200,000 which included deductions of $50,000 for amounts which qualified as SRED expenditures, then the company's total taxes payable would be reduced to less than $7,000 – an effective tax rate of about 4%.

SRED is any systematic investigation or search that is carried out in a field of science or technology that is: (a) basic research: work without a practical application designed to advance scientific knowledge), (b) applied research: work designed to advance scientific knowledge but with a specific application in mind, and (c) experimental development: work done to chieve technological advancement in order to create or improve existing materials, products, or processes - even improvements which are only incremental. It is this last area of work that most taxpayers utilize in making their SRED claims. The work must be undertaken in Canada, by or on behalf of the taxpayer. Such work does not include market research or sales promotion, changes in style, quality control or other routine testing, research in social sciences, commercial production after the research has been completed, or routine data collection.

In general SRED must have three basic characteristics: (i) there must be an advancement beyond information or standard practices publicly available to the taxpayer, (ii) there must be uncertainty as to the success or failure of the work, and (iii) the investigation must be undertaken in a systematic manner through well-documented experiment and analysis by qualified personnel. In reading these characteristics one can see that a taxpayer does not need a high tech laboratory or be undertaking cutting edge research in order to perform qualifying work. One merely needs to be taking risks in trying to improve one's products or processes in ways that do not guarantee success, and doing so in a systematic way. Note that one's efforts do not necessarily need to lead to success; a taxpayer can learn as much from efforts and trials which fail, as from such efforts which succeed.

Many taxpayers are involved in fields in which some of their work could qualify for a SRED claim including: manufacturing, software development, electronics, printing and digital media, medical and dental services, food processors, chemicals and plastics, forestry and wood products, biotechnology, etc, etc. In addition, many types of work in these areas might potentially qualify including: development and testing of new products, making changes to existing products or processes (for example, by increasing efficiency in the form of reduced time or waste in production).

• A manufacturer for example may ask himself: Have I developed any new products or changed designs of existing products? Did I experiment with new suppliers or materials? Did I improve any production processes? Did I work to improve product quality? Did I apply for any new patents? Did I modify any production machinery or change my packaging?

• A medical or dental practitioner might ask himself: Have I performed any research (published or unpublished)? Have I developed any new protocols or participated in any clinical trials for new treatments, medications, or devices? Have I changed my practice or clinical techniques?

• The owner of a food processor or winery might ask: Have we developed any new recipes or products? Have we altered any production processes? Have we altered any soil chemistry or pruning or harvesting techniques?

Looking back over a financial reporting period one can examine the various jobs that one undertook. Examining the margins of those various jobs and identifying jobs which ran significantly over budget might provide an indication that something out of the ordinary happened in regard to that job which might in turn indicate that some work might have been performed in respect of that job which might qualify for a SRED claim.

There are three main steps in submitting a SRED claim. First, bearing in mind the general characteristics of SRED expenditures described above, a taxpayer must ask himself the various questions above and review his recent activities to try and identify any activities and expenditures which might qualify for a SRED claim. Second, with ourselves or a specialized SRED consultant, he must spend some time in documenting and describing the qualifying work which was done, and identify the financial resources (in terms of both materials, employee time, and subcontracted work) used in such activities. Third, we could assist the taxpayer in assembling the information in the appropriate SRED tax claims. Note that one has 18 months after the end of a fiscal year to make a SRED claim (an additional year after the income tax return for the year is normally due).

We would be glad to discuss with you any work that you have done in the last year or two which you believe might be eligible for a SRED claim and help you to take the next steps in completing such a claim.

Also, CRA released "The SR&ED Technical Review: A Guide for Claimants – 25 July 2011". CRA notes that this outlines CRA's internal procedure manual, called the Claim Review Manual.

The two main aspects of a CRA Technical Review are to determine if the definition of SR&ED has been met and to resolve any issues associated with eligibility.

The Claim Review Manual is used by all CRA Research and Technology Advisors (RTAs) when they conduct the Technical Review of the SR&ED claims.

CRA notes that all SR&ED claims are risk assessed upon filing. Based on the risk assessment, some claims are accepted as filed, some are selected for a desk review, while others may be selected for a more detailed technical and/or financial review.

PARTNERSHIP INCOME DEFERRAL ELIMINATED

Until the passing of the 2011 federal budget, corporate taxpayers which invest in a partnership which has a different fiscal year end date than that corporate partner were allowed to include in their income for a particular taxation year, their share of the partnership income for the partnership's fiscal year which ended in that taxation year. In other words, if a corporate partner with a tax year ending on 30 June 2011 invests in a partnership with a fiscal year ending on 31 December 2011, then the corporation would have reported its share of the partnership income for the December 2011 partnership year on its corporate tax return for its own tax year ended 30 June 2012. A number of taxpayers have taken advantage of this deferral of reporting of partnership income by utilizing partnerships with fiscal years ending just after their own tax years (and in some cases, stacking partnership on top of other partnerships, each with staggered fiscal years).

The government, feeling that such taxpayers are abusing this practice, has passed legislation in the 2011 budget which will prevent this income deferral. Under the new legislation, for tax years of corporate taxpayers ending after 22 March 2011, such taxpayers will now be required to report their share of the income of any partnership in which they have a significant investment (to more than 10% of the partnership's income) right up to their own tax year end – irrespective of when the partnership ends its fiscal year and issues its T5013 tax reporting slips.

The mechanics of this are complicated since many partnerships will continue to maintain their records and issue tax slips using their same fiscal years. A corporate investor will thus be required to estimate its share of the partnership's earnings for the "stub period" from the end of the partnership's fiscal year to the end of the taxpayer's taxation year, and to add this estimate to its taxable income. This would usually be done by prorating the partner's share of the partnership income from the partnership's previous fiscal year by the number of days in the stub period, though one can adjust this additional accrual income if one knows that the actual partnership income for the next period will be lower than in the previous year (if for example the partnership is winding down its operations). In the next year, the corporate partner will claim a deduction from its income for its stub period accrual income from the previous year, will include in its taxable income its share of the partnership's income for the partnership's fiscal year (which will include that prior year stub period accrual), and will add a new accrual amount for the stub period after the end of the partnership's last fiscal year (to the end of the corporate partner's tax year).

Obviously there is an initial disadvantage in the case of the corporate taxpayer above who would be including partnership income in its tax year ended 30 June 2012 equal to its normal share of the partnership income for the partnership's fiscal year ended 31 December 2011 as well as an estimated amount of income from the partnership for the six months ended 30 June 2012 – a total of 18 months of partnership income. To this end, the government has allowed a corporate partner to claim a series of reserves in order that this additional accrued income from its partnership investments can be gradually phased in over 5 years. Since the allowed reserve is 100% of the stub period accrued income, corporate partners will not be required to actually pay taxes on any stub period partnership income until their tax year ended after March 2012.

In addition to partnership, some taxpayers carry on limited activities through "joint ventures" or "co-ownerships" which are similar in some ways to partnerships. It had been the government's policy until 2011 to allow such a joint venture to establish a fiscal period which is different from that of its investors, provided that there is a valid business reason for such a difference. With the implementation of the new rules above limiting the deferral of income in the case of partnership investments, the government announced in June 2011 that it will no longer allow joint ventures to have fiscal years ended at different times from that of their investors. Taxpayers will now be required to compute their income as if any joint ventures of which they are a participant have the same taxation year end. As above, this will create an initial hardship for any taxpayers which have until now been reporting their joint venture income on a fiscal year basis (and will now be required to report more than 12 months of venture income), so the government has announced that it will provide guidance shortly to allow transitional relief to venturers similar to that available to corporate partners as described above.

PARTNERSHIP INFORMATION RETURNS – T5013

On 17 September 2010, CRA announced that, effective for fiscal periods ending after 31 December 2010, a Partnership that carries on a business in Canada must file a T5013 Partnership Information Return where one of the following conditions are met:

• At the end of the fiscal period the revenues plus expenses are greater than $2 million or, the Partnership has more than $5 million in assets'

• at any time during the fiscal period the Partnership was either in a tiered Partnership, had a Partner that was a Corporation or a Trust, invested in flow- through shares of a principal business corporation that incurred Canadian resource expenses and renounced these expenses to the Partnership or had received a Written Request from CRA to file a T5013 Information Return.

The due date for filing the T5013 Return depends on the type of Partners.

If, throughout the fiscal period, all Partners are individuals (CRA considers a Trust to be an individual), the T5013 Form should be filed no later than 31 March after the calendar year in which the fiscal period of the Partnership ended.

If all Partners are corporations throughout the fiscal period, the T5013 Return should be filed no later than 5 months after the end of the Partnership's fiscal period.

If any of the members of the Partnership are a combination of individuals (including Trusts) and corporations, and if the Partnership is not a tax shelter, file the T5013 Form no later than the earlier of:

• March 31 after the calendar year in which the fiscal period of the Partnership ended; or

• the day that is five months after the end of the Partnership's fiscal period.

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Estate Planning

CHARITIES

The 2011 Federal Budget proposed many changes to charities including:

1. Previously Registered Canadian Amateur Athletic Associations (RCAAAs) were precluded from the rules that govern charities. The Budget ends that and compels RCAAAs to comply with regulatory requirements including filing annual reports to the CRA. They will also have to follow specific rules for charities related to bookkeeping, tax receipts, and the value of the donated property. If they do not comply, they will face sanctions.

2. Previously RCAAAs were only required to promote amateur athletics as a "primary purpose". Therefore, they often engaged in other unrelated activities. Under the proposed changes, the promotion of amateur athletics must now be the "exclusive purpose" of RCAAAs.

CHARITY TAX SCHEMES

It was noted in the 24 August 2011 issue of the Globe & Mail (page B8) that the CRA has reassessed more than 130,000 donors in charity tax schemes in the last year for more than $4.5 billion. For example, it notes that the Burlington, Ontario based Parklane Financial Group Ltd. was promoting a charity tax scheme in which a donation receipt for $10,000 would be provided for every $2,500 of contribution.

In one example, Mr. D had made over $75,000 in cash contributions which were totally disallowed and now owes the CRA $180,000 in taxes and interest. Mr. D is involved in a potential Class-Action Lawsuit in the Ontario Superior Court against the Plan's promoters. CRA noted that it has revoked the charitable status of participating charities.

CHANGES TO THE CANADA PENSION PLAN (CPP) FOR INDIVIDUALS WHO ARE AT LEAST 60 YEARS OF AGE BUT UNDER 70

In a 14 July 2011 Release, CRA discussed these CPP changes and notes that:

1. As of 1 January 2012 the rules for contributing to the CPP will change.

2. Individuals under 65 years of age – starting on 1 January 2012, will now have to contribute to the CPP if you are working, even though you may be receiving CPP.

Individuals at least 65 years of age but under 70 – starting on 1 January 2012, unless you elect to stop contributing to the CPP, you will now have to contribute to the CPP if you are working.

3. To stop contributing to the CPP:

• Employee – an employee who is at least 65 years of age but under 70 and receiving a CPP or QPP retirement pension, can elect to stop contributing to the CPP by completing Form

CPT30, giving a copy to all your employers, and sending the original to the CRA.

• Self-Employed – If you are self-employed, at least 65 years of age but under 70 and receiving a CPP or QPP retirement pension, you can elect to stop contributing to the CPP. To do so, complete the applicable section of Schedule 8, CPP Contributions on Self-Employment and Other Earnings for 2012 and file it with your income tax return for 2012. Do not use Form

CPT30.

The Election stays in effect until you turn 70 years of age or until you revoke the Election.

4. Individuals receiving both pensionable earnings and self-employed earnings who are at least 65 years of age but under 70 and receiving a CPP or QPP pension can elect to stop contributing to the CPP by completing Form CPT30, giving a copy to all your employers, and sending the original to the CRA.

5. If you want to start contributing to the CPP again, you need to revoke your Election to stop contributing to the CPP. However, you cannot revoke an Election in the same calendar year that you elected to stop contributing to the CPP. For example, if you elected to stop contributing to the CPP in 2012, you cannot revoke this election before 2013.

Since you cannot revoke an Election until 2013, Service Canada will provide information about this at a later date.

To get details, search for "changes to the Canada Pension Plan" on the CRA website.

Other changes that come into effect in 2012 include a person aged 60 or older will not have to cease working to qualify for early CPP. Also, the reduction to benefits when a person collects CPP before age 65 and the increase in benefits for delaying the receipts past 65 will both be increased over the next several years.

OLD AGE SECURITY (OAS) APPLICATION

A taxpayer may apply to receive OAS payments at the age of 65. Failure to apply means a taxpayer could lose OAS payments because the Government only has to pay retroactive payments back to the 65th birthday for a maximum of 11 months, plus the month of application.

In a 29 June 2011 Federal Court case, the taxpayer argued that he was given incorrect information from Service Canada and, therefore, did not make an application for the OAS. Therefore, he was applying for retroactive payments past the 11 months.

Taxpayer Loses

The Court found that the information provided by Service Canada was not erroneous. Therefore, the taxpayer was limited to a retroactive payment of 11 months.

ECOENERGY RETROFIT-HOMES PROGRAM

The Federal Government renewed the ecoENERGY Retrofit- Homes Program in the 2011 Federal Budget. From 6 June 2011, until 31 March 2012, homeowners are eligible to receive Grants of up to $5,000 to make their homes more energy efficient.

There are two important changes to the Program. First, there is a requirement for participants to register directly with the Program before booking their evaluation. Second, homeowners will now be required to provide receipts to their energy advisor at the time of the post-retrofit evaluation to confirm eligibility for the Grant.

Google ecoENERGY Retrofit-Homes for more information.

Only products purchased after 6 June 2011 and installed after a pre-retrofit evaluation are eligible for an ecoENERGY Grant. All energy retrofits and post-retrofit evaluations must be completed by 31 March 2012. The homeowner must also sign the Grant application by this date.

When you apply for ecoENERGY Retrofit-Homes, you may be eligible for complementary or matching funds from Provincial, Territorial and Municipal Governments, as well as from certain energy utilities and non-government organizations that use the EnerGuide Rating System. You should consult with these regional organizations directly to ensure you are meeting their respective guidelines and deadlines.

Google "complementary regional programs with ecoENERGY Retrofit-Homes".

RRSP PLANNING

An individual must collapse the RRSP by 31 December of the year in which they turn 71. Because of the current low interest rates, most taxpayers choose to purchase a Registered Retirement Income Fund (RRIF), rather than an annuity which would result in lower payments throughout the person's retirement years.

Usually, an arrangement is made with the financial institution to directly transfer the RRSP into a RRIF thereby avoiding the inclusion in income.

A RRIF requires that funds be withdrawn on an annual basis other than in the year the RRSP is converted to the RRIF. An RRIF can be self-directed and may hold investments similar to those held by the RRSP. The minimum withdrawals range from 7.38% at age 71 to, say, 8.99% by 81 to 14.73% by 91, and 20% by 94 and older. These rates increase each year.

An individual may use either their own age or that of their spouse in determining the minimum withdrawal amounts. The advantage of using the age of a younger spouse will be to extend the period that the funds remain in the RRIF earning tax sheltered income.

When a taxpayer dies owning an RRIF, there will be a tax deferred rollover if a spouse is the "successor annuitant" and will continue to receive the monthly RRIF payments.

However, if the RRIF goes to the Estate and the spouse is the beneficiary, the spouse will receive the funds in the RRIF at the time of death; however, these may be transferred tax-free to the spouse's RRIF. Also, the RRIF may be transferred to a spouse's RRSP if the spouse is under the age of 72.

Where there is no spouse, and the beneficiary is a dependent child or grandchild, the funds may be taxable to the child; however, the child may purchase an annuity that must expire by age 18. If the child is dependent under a mental or physical infirmity, an annuity may be purchased that does not have to end by age 18.

Otherwise, the amounts in the RRIF are taxable in the deceased's Estate on the final tax return.

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GST/HST

ALLOWANCES AND REIMBURSEMENTS

Where a Registrant pays an allowance to an employee or partner for supplies, the Registrant may be entitled to a GST/HST Input Tax Credit (ITC). For example, in a GST province, the Input Tax Credit (ITC) would be based on 5/105 of the amount paid. In HST provinces, the amount would be based on 12/112, 13/113 or 15/115, depending on the particular HST rate in that province.

A taxpayer may also claim ITCs for GST/HST on reimbursements paid to employees for expenses incurred in Canada either on the Actual Method or the Factor Method.

The Actual Method permits the claim based on the actual GST/HST. The Factor Method may be used if the GST/HST was charged on 90% or more of the total amount reimbursed for expenses. The main advantage is that the documentary requirements are lessened.

With respect to reimbursements, the Factor for GST only is 4/104, or 11/111 (British Columbia), or 14/114 (Nova Scotia), or 12/112 in Ontario, New Brunswick and Newfoundland.

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Did You Know . . .

UNIVERSAL CHILD CARE BENEFIT (UCCB)

A parent may deposit the UCCB receipts in a bank account for the child such that the investment income is the child's, not the parents', for income tax purposes.

The UCCB pays the parent $100 per month for each child under the age of 6. Also, the attribution rules will not apply to investments made using the Canada Child Tax Benefit which is paid to certain low-income families depending on the family's income and the amount of the children, if the amounts are deposited in a bank account for the child.

The deposit should be made using the child's Social Insurance Number.

BRITISH COLUMBIA (B.C.)

B.C. will reinstate the combined 12% PST and GST tax system following the Referendum decision to extinguish the HST in B.C. The PST will be reinstated at 7% with all permanent PST exemptions. The province may make some administrative improvements to streamline the PST.

The transition period is expected to take a minimum of 18 months consistent with the report of the Independent Panel on the HST.

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Firm News

We are again accepting our responsibility to the community in a variety of ways. We have been raising funds for the United Way for over 25 years and this year was no exception. The staff and partners make cash commitments and then we raise additional funds with a variety of fun activities. These activities include: a silent auction, a costume day, a 50/50 draw and very very popular bake off. It is surprising that accountants are also good bakers – something to fall back on if the accounting profession doesn't work. This year we increased our contribution to the United Way by over 20% which is a credit to the involvement of our staff and partners.

We made our annual visit to the Salvation Army Harbour Lights on November 28, where our staff served an evening meal to over 400 of the Downtown Eastside's neediest people. This has been a tradition for a number of years – we sponsor the dinner and staff look forward to it each and every year. The dinner is always a special meal for them and their appreciation is evident. We also treat them as they leave with a candy cane and a "Merry Christmas" – many of these people are invisible to so many, and to be treated as special means a lot to them. We continue our practice of donating to three charities instead of sending out Christmas cards.

We have some new staff members which we would like to introduce to you:

• Nicole Grunberg will be joining us as an articling CA student in January 2012. Nicole has a BA degree from

UBC and recently completed the DAP program also at UBC. She was referred to us by a client and we do

appreciate receiving these referrals.

• Fei Han – Fei has a BBA from Simon Fraser University and has experience in a CA firm in West Vancouver.

She joins our client accounting group.

• Anne Huang – Anne is also is a CGA student with a BBA in accounting from Trinity Western University as

well as a BA prior to that and joins our client accounting group.

• Phata Chan – Phata joins us in December with 14 years of public practice experience. She is a CGA with a

Bachelor of Applied Business Administration from Alberta and is a Certified Consultant in Simply

Accounting and Quickbooks.

• Jennifer Louie – Jennifer is a CA with six years experience with a national firm. She has a B.Sc and a

Diploma in Accounting from UBC. She will join our audit group.

The partners and staff will celebrate our 53rd Christmas Party at the Royal Vancouver Yacht Club on December

2nd. We recognize not everyone celebrates Christmas, but may celebrate other religious/cultural customs, it is

always a wonderful way to start December and enjoy each other's company and to see old friends who have

retired or moved on to other workplaces.

DRLR

Summer/Fall 2011

rbadmin — Mon, 26 Sep 2011 21:36:37 +0000

Help Us Protect the Environment

Clients

Located on our website (rolfebenson.com) is a link SEND THIS FILE. Please use this secure form of data transfer when sending us your files by email.

Personal Tax
Employment Income
Business/Property Income
Owner-Manager Remuneration
Relationship Breakdown
Estate Planning
GST/HST
Federal Budget
Did You Know . . .
Firm News

Personal Tax

MEDICAL EXPENSE – IN-VITRO FERTILIZATION

In a 9 March 2011 Technical Interpretation, CRA notes that the cost of in-vitro fertilization qualifies as a medical expense, as do the related travel costs, as long as certain criteria are met.

MEDICAL EXPENSE – SLEEP EVALUATION STUDY

In a 9 March 2011 Technical Interpretation, CRA notes that a sleep evaluation study meets the medical expense conditions which includes diagnostic procedures for maintaining health.

MEDICAL EXPENSE – COSMETIC PROCEDURES

In a 4 April 2011 Technical Interpretation, CRA notes that eligible medical expenses exclude amounts paid for purely cosmetic purposes, unless necessary for medical or reconstructive purposes.

CRA opined that expenditures such as liposuction, hair replacement procedures, botulinum toxin injections, and teeth whitening would generally not qualify for the medical expense tax credit (METC).

A cosmetic procedure will qualify for the METC if it is required for medical or reconstructive purposes such as expenditures that would ameliorate a deformity arising from a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

CRA notes that a general statement on a receipt indicating that the procedure was "not purely for cosmetic procedures" would not, by itself, be determinative. It may be necessary to provide additional information to determine that a cosmetic procedure qualifies for the METC such as a description of the nature and purpose of the procedure.

MOVING EXPENSES – NEW SALES TERRITORY

In a 12 May 2011 Technical Interpretation, CRA reviewed a situation where the employee's sales territory was expanded such that the individual's most southerly point in her sales territory was now over a two hour drive from her home.

CRA concluded that the expansion of the sales territory was significant enough to conclude that it resulted in a new work location for purposes of the moving expense deduction. Even though there was a two year gap between the time the individual began servicing her new expanded territories and her move, there was a sufficient nexus between the move and the commencement of employment at the new work location to qualify as an eligible relocation. Therefore, the moving expenses would be deductible.

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Employment Income

INSURABLE EMPLOYMENT

The Employment Insurance Act (EIA) notes that insurable employment does not include the employment of a person who controls more than 40% of the voting shares of the corporation.

It also excludes employment if the employer and employee are not dealing at arm's length and they do not have a substantially similar contract of employment as other arm's length employees. (Professional advice may be needed in this area.)

Also the Employment Insurance Regulations deem certain persons to be involved in insurable employment including stevedores, lumbering or logging, placement or employment agency, barbering or hairdressing establishments, and passenger vehicle operators.

Each of the categories has their own specific details.

MOTOR VEHICLE EXPENSES

In a 4 April 2011 Technical Interpretation, CRA notes that employees may deduct motor vehicle travel expenses if required to carry out his/her employment duties away from the employer's regular place of business and the employee is required by the contract of employment to pay such expenses. A completed Form T2200 is also required.

TAXABLE BENEFITS

CRA Guide T4130 provides information on taxable and non-taxable employment benefits and allowances including board and lodging, cellular phone service, child care expense, counselling services, disability related employment, discounts on merchandise, education benefits, gifts and awards, group term life insurance policies, housing, interest-free and low interest loans, internet use, loyalty and other "points programs", meals, medical expenses, moving expenses, municipal officers' expense allowance, parking, power saws, premiums under provincial hospitalization, private health service plans, professional membership dues, recreational facilities and club dues, RRSPs, security options, social events, spouse's or common-law partner's travelling expenses, TFSAs, tool reimbursements, transit passes, transportation to and from home, travel allowances, uniforms and special clothing, and wage-loss replacement plans or income maintenance plans.

The Guide also has a benefits chart, which lists the benefits and the applicability of CPP, EI and GST/HST.

SOCIAL EVENTS

In an 8 October 2010 Technical Interpretation, CRA notes that where an employer provides free of charge to all employees, a party or other social event, there is no taxable benefit if the cost per employee does not exceed $100. This limit is per occurrence. More than one event per year may be offered by the employer if it is reasonable in the circumstances.

Where the event is offered to all employees and their spouses, the average cost of $100 is calculated based on the total number of guests and not only by the number of employees.

The $100 is an average based on the total amount paid by the employer for the reception or social event, including room rental, food and entertainment expenses. Thus it is necessary to include the GST/HST paid by the employer in calculating the average cost of the evening.

Additional costs such as transportation home, taxi fare, and overnight accommodation are not included in the $100 per person. If the cost is greater than $100 per person, the entire amount, including the additional costs, is a taxable benefit.

SCHOLARSHIPS FOR THE CHILDREN OF EMPLOYEES

In a 29 September 2010 External Technical Interpretation, CRA notes that they now accept that where an arm's length employer provides a post-secondary scholarship, bursary or free tuition to family members of an employee under a bona fide program, the amount may be non-taxable.

EMPLOYMENT VS. INDEPENDENT CONTRACTOR STATUS

Case 1 – Independent Contractor

In a 16 November 2010 Tax Court of Canada case, the Court found that the workers were independent contractors, not employees, and noted that:

1. A mutual intention to create an independent contractor relationship indicates that the individuals were independent contractors, not employees.

2. The workers were able to set their own hours of work, although within certain limits.

3. The workers were able to work for other clients without consent of the payer.

4. The workers used their own vehicles to pick up supplies and charged an hourly rate for the use of their vehicles.

5. The workers carried on their business under a business name, for example, "Cleaning with Care", and had their own liability insurance coverage.

Case 2 – Employee

In a 22 November 2010 Tax Court of Canada case, the Court found that the workers were employees and noted that:

1. The parties did not share a common understanding that the worker was to be self-employed and not an employee. Where the intention of the parties cannot be ascertained, it is necessary to look at all the facts to see the legal relationship.

2. The payer provided all the tools and equipment, except for a keyboard.

3. The worker had no responsibility for investment in management.

4. The worker had no expenses and no liability exposing her to a risk of loss and there was no opportunity for her to increase her income.

5. The worker received instructions and directions from the payer on a daily basis.

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Business/Property Income

ACQUISITION OF AUTOMOBILE

In a 2011 Technical Interpretation, CRA commented on the tax implications of purchasing an automobile which is made available to an employee.

They noted that the taxable standby charge to the employee is based on 2% of the original cost of the automobile per month or, in the case of a leased automobile, two-thirds of the lease cost, excluding insurance, minus amounts paid by the employee to the employer for the use of the automobile.

A reduced standby charge is available if the vehicle is used primarily for business purposes (a 50% test) and the employee's personal use does not exceed 20,004 km per year.

CRA noted that the original cost of the vehicle is the purchase price including options, accessories, GST/HST and PST, but does not include, obviously, the trade-in. Additions made to the automobile after it is purchased which are capitalized are also included (including the GST/HST and the PST). Also included are the tire and battery levies.

SIMPLIFIED LOG BOOK

CRA recently announced the introduction of a new simplified log book for motor vehicle expense provisions.

Self-employed individuals can now choose to maintain a full log book for one complete year to establish the business use of a vehicle in a base year. After one complete year of keeping the log book to establish a base year, a three-month sample log book can be used to establish business use for the entire year, providing the usage is within the same range (within 10%) of the results of the base year.

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Owner-Manager Remuneration

DIRECTOR LIABILITY FOR PAYROLL WITHHOLDINGS

In a 26 October 2010 Tax Court of Canada case, the taxpayer was a director of a corporation that failed to remit payroll source deductions and the director was assessed personally. The taxpayer argued that he had resigned more than two years before CRA assessed him and, therefore, was statute-barred. He also argued that he exercised due care and diligence by hiring a bookkeeper to deal with the payroll.

Taxpayer Loses

The Court noted that a resignation does not become effective until the provisions of the Business Corporation Act are met.

With respect to due diligence, the fact that he hired a bookkeeper to handle the payroll was not enough. The taxpayer had not shown that he took action to prevent the bookkeeper's failure to remit the source deductions.

DIRECTOR LIABILITY FOR GST/HST

In a 8 February 2011 Tax Court of Canada case, the taxpayer was a director of a corporation which had not remitted its GST. Therefore he was personally liable, and paid $57,202 and incurred legal fees of $3,196 in defending himself.

Taxpayer Loses – Again!

The Court found that the payment for the GST on behalf of the company was not a deductible expense and the legal expenses were also not deductible. Legal fees paid in relation to an Objection or Appeal under the Excise Tax Act are not deductible whereas legal fees to object under the Income Tax Act are deductible.

However, legal fees to contest a GST Assessment may be deductible under ordinary business principles if the taxpayer is carrying on a business. In this case, he was not. Therefore the legal fees with respect to the GST were not deductible in computing business income.

The payment for the director's liability is not deductible because it is not incurred to earn income.

Legal fees with respect to GST may also be deductible as an amount paid in making a representation relating to a business carried on by the taxpayer. However in this case, the taxpayer was not carrying on a business.

SALARY PAID TO FAMILY MEMBERS – EMPLOYMENT INSURANCE (EI)

In a 20 April 2011 Tax Court of Canada case, the taxpayer was the son of the owner of the corporation and received a salary from that corporation. The Court found that the salary was not subject to EI on the basis that the employment conditions were different than that which would have been provided to an arm's length employee.

The Court noted that it is difficult for individuals who work for family members to have insurable employment because the personal relationship almost inevitably manifests itself in some way in the employment relationship.

Also, in a 6 April 2011 Tax Court of Canada case, the Court determined that the salary paid by a corporation to the owner's spouse was not subject to EI on the basis that it was not reasonable to conclude that the payer and the Appellant would have entered into a substantially similar contract of employment if they had been dealing with each

other at arm's length.

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Relationship Breakdown

LIVING IN THE SAME RESIDENCE

In a 27 July 2010 External Technical Interpretation, CRA notes that it is possible that both spouses can "live apart" because of a breakdown of their marriage for deductible/taxable alimony purposes even if they still live under the same roof if, for example, the following circumstances are present:

they occupy separate bedrooms;
there is a lack of sexual relations;
there is little or no communication;
there are no domestic services to each other;
the spouses receive their mail separately; and
the spouses have no common social activities.

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Estate Planning

2012 CANADA PENSION PLAN

In a 20 February 2011 Release, Service Canada mentioned that starting in 2012:

If you are under age 65 and you work in Canada while receiving your CPP retirement pension, you and your employer will have to make CPP contributions.
Between the ages of 65 and 70, you can either chose to make contributions or opt out. If you chose to make contributions, your employer will also have to contribute.
These contributions will increase your CPP retirement benefit through the post-retirement benefit.

If you are an employee or self-employed person who has contributed to the CPP and are thinking about retirement:

Starting in January 2011, your monthly CPP retirement pension will increase by a larger percentage if taken after age 65.
If you start receiving your monthly CPP retirement pension in January 2012 or later:

- your monthly benefit amount will decrease by a larger percentage if taken before age 65;

- you can take your CPP retirement pension without any work interruption; and

- a longer period of low or zero earnings may be automatically dropped from the calculation

of your pension.

OLD AGE SECURITY PENSION (OAS)

The OAS is available to Canadians aged 65 or over who have lived in Canada for at least ten years after age 18. If a Canadian is living outside Canada, the OAS may still be available if they were residents of Canada for at least 20 years after age 18.

Seniors must apply to receive the OAS. This could be done six months before turning age 65 to allow Service Canada time to process the application for payment on the month that the person turns age 65.

OLD AGE SECURITY (OAS) – CLAWBACK

The maximum monthly OAS benefit is $533.70 for the third quarter of 2011. The 2011 clawback of OAS benefits starts at 15% of net income over $67,668 and is completely eliminated at income of $110,038.

In addition, there will be a repayment of "clawed back" OAS for the next year based on 1/12 of the total estimated repayment on the previous year commencing in July of the next year. If the next year's income is going to be significantly less, a waiver for this clawback could be requested.

This repayment is called a Recovery Tax. The Recovery Tax is indicated in Box 22 of the T4-OAS and this can be claimed as a tax payment on the return for that year.

TAX FREE SAVINGS ACCOUNTS (TFSAs)

In a 11 January 2011 CRA Newswire Release, CRA notes that if a person contributed to a TFSA $5,000 in 2009 and only $2,000 in 2010, then you could contribute $8,000 in 2011. This includes the $3,000 unused contribution room from 2010 plus $5,000 for 2011.

In another example, CRA notes that if you contributed $5,000 in both 2009 and 2010 and then withdrew $10,000 in November 2010, your contribution room for 2011 would be $15,000. This is calculated using your annual dollar limit of $5,000 for 2011 plus the $10,000 withdrawal made in 2010. Note that withdrawals are not added back to your contribution room until after the end of the year.

Caution!

CRA also notes that if you have more than one TFSA, you can transfer funds directly from one of your TFSAs to another of your TFSAs without affecting your contribution room. The direct transfer must be completed by your financial institutions.

However, if you withdraw funds on your own from one TFSA and contribute those same funds to another TFSA, the re-contribution will be considered to be a new contribution. As a result, your TFSA contribution room will be affected and you may be subject to a tax on excess contributions.

If your contributions in a year exceed your TFSA contribution room, you will be subject to the TFSA tax on excess contributions of 1% per month on your highest excess TFSA amount in each month. This tax will accumulate until the excess amount is withdrawn.

FLOW-THROUGH SHARES

An investor who acquires flow-through shares of a corporation, usually involved in mining or oil exploration, may be entitled to receive up to a 100% deduction for the exploration costs through a flow-through from the corporation. If, for example, the entire cost of the investment is passed on through tax deductions, the adjusted cost base of the investment would be nil.

If the shares are publicly traded securities, a donation to a charity will result in a charitable donation credit equal to the fair market value of the donation, and the resulting capital gain will be considered to be reduced to nil.

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GST/HST

BC HST REFERENDUM

The results of the BC HST referendum indicate that 54.73% of voters chose to extinguish the HST.

As a result, BC will transition back to its former provincial sales tax (the PST/GST regime), which may take a minimum of 18 months. However, the government is aiming to do so by 31 March 2013 or earlier if possible. The Province has, however, indicated that it will provide quarterly updates on the progress of the transition.

Until further notice, the 12% combined tax rate will continue to apply.

GST/HST PLACE OF SUPPLY RULES

Clients often ask which sales tax, GST or HST, will apply in a particular situation. To answer them, we look to the GST/HST "place of supply" rules. While these rules can get very complex, the best place to start is to look at the most basic rules for sales of goods and/or services.

For the sale of tangible personal property ("TPP"), the general rule is that a supply takes place in the province to which the vendor delivers the TPP, or where the vendor makes the TPP available to the purchaser.

If the vendor ships the TPP to a province on a common carrier that it has arranged itself, the destination province is the place of supply. But if the vendor ships the TPP to a province on a common carrier that the purchaser has arranged, the province where possession of the TPP is given to the common carrier is the place of supply.

Also, if a vendor sends the TPP via mail or courier to an address in a province, it is that province that is the place of supply.

This is why we often say that both GST and HST are "destination-based" taxes, and why it is important to determine that destination.

For a supply of a service, the general rule is that a supply takes place in the province noted in the customer's address. In many ways, it will not matter where the service provider is located – the place of supply will be the province in the purchaser's address.

Complexities arise if you have more than one address for a customer (such as a head office address as well as a branch office address), or if the service is performed in more than one province.

Keep in mind that the GST/HST place of supply rules are not integrated with provincial sales tax rules. It is possible that both GST/HST and PST can apply to some services!

Remember these are the most basic "general" rules for sales of goods and supplies of services. There are many scenarios that will fall outside the general rules. For a detailed discussion of these, look to CRA's Technical Information Bulletin B-103, "Harmonized Sales Tax Place of supply rules for determining whether a supply is made in a province".

SOME GST/HST POINTS TO CONSIDER

Even though GST has been around for 20 years, there are still a few areas that CRA always seems to assess upon audit as mistakes and oversights often occur in these areas.

Supporting Documentation for ITCs

There are rules that require certain pieces of information be obtained (usually from the invoice) before you can claim an Input Tax Credit (an "ITC") for the GST/HST that you pay.

Meals and Entertainment

Where meal and entertainment expenses are subject to a 50% limitation for income tax, the GST/HST is also limited to 50%.

Reimbursement of Employee Expenses

Don't forget that when you reimburse an employee for business expenses, you may be eligible to claim an ITC for the GST/HST that was paid by the employee.

Professional advice may be needed in these GST/HST areas.

CHARITIES

CRA Guide GI-067 provides basic GST/HST guidelines for charities including special charity GST/HST rules, registration details, and small supplier rules.

CRA Guide GI-066 provides information on how a charity calculates the net GST/HST tax.

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Federal Budget

On 6 June 2011 a new Federal Budget for the 2011 fiscal period was presented.

On 22 March 2011 the original edition of the Budget was presented. However, on 26 March 2011 Parliament was dissolved and, therefore, the Budget was not adopted.

Most items included in the 22 March 2011 Federal Budget were kept fully intact.

The Government's fiscal positions include deficits in the years:

2010/2011 ($40.5 billion),

2011/2012 ($29.6 billion),

2012/2013 ($19.4 billion),

2013/2014 ($9.5 billion),

2014/2015 ($0.3 billion), and a surplus in

2015/2016 ($4.2 billion).

The Federal Government notes that it will:

provide $80 million in new funding over three years to help small and medium-sized businesses accelerate their adoption of key information and communications technologies,
provide nearly $870 million over two years to address climate change and air quality, including the extension of the ecoENERGY Retrofit-Homes program,
introduce a 15% Children's Arts Tax Credit, provided on up to $500 of eligible expenditures,
provide a temporary Hiring Credit for Small Business of up to $1,000 against a small firm's increase in its 2011 Employment Insurance (EI) premiums to encourage hiring,
limit deferral opportunities for corporations with investments in partnerships,
enhance the Guaranteed Income Supplement (GIS) via a top-up benefit of up to $600 annually for single seniors and $840 for couples.

There were no new corporate or individual tax rates introduced.

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Did You Know . . .

NEW FILING REQUIREMENTS

On 17 September 2010, CRA announced that, effective for fiscal periods ending after 31 December 2010, a Canadian Partnership, or a Partnership that carries on a business in Canada, must file a T5013 Partnership Information Return where one of the following conditions are met:

At the end of the fiscal period the revenues plus expenses are greater than $2 million or, the Partnership has more than $5 million in assets.

At any time during the fiscal period the Partnership was either a tiered Partnership, had a Partner that was a corporation or a Trust, invested in flow-through shares of a principal business corporation that incurred Canadian resource expenses and renounced these expenses to the Partnership or had received a written request from CRA to file a T5013 Information Return.

HIGH-NET-WORTH INDIVIDUALS

In February, 2011 CRA introduced a new audit program called the "related party initiative" (RPI) which identifies high-net-worth individuals and their related economic entities for CRA risk assessment reviews.

Individuals with net asset value of over $50 million, and related groups comprising 30 or more entities, were the target of this project.

CRA is asking for the completion within 30 days of a 20-page questionnaire asking for information about related economic entities, Corporations, Trusts, Joint Ventures, and Private Foundations. Information requested includes copies of the Minutes of Corporate Board of Directors Meetings, correspondence, legal and accounting firms files used, and tax-planning documents.

U.S. SOCIAL SECURITY BENEFITS

Changes made to the Canada-U.S. Tax Convention beginning in 1996 increased the inclusion rate for U.S. Social Security benefits to 85% from 50%. The 2010 Federal Budget reinstated the 50% inclusion rate for Canadian residents who have been in receipt of U.S. Social Security benefits since 1 January 1996 and for their spouses and common-law partners who are eligible to receive survivor benefits. These changes apply to benefits received on or after 1 January 2010.

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Firm News

Since our previous Newsletter, we have added a few new faces to the Firm and we would like to introduce you to these individuals.

Jessica Barnett joins us from Cranbrook, BC where she worked in a smaller accounting firm. Jessica joins our Client Accounting group.
Julie Enos is a CGA who joins us from another mid-size firm in Vancouver and has settled into working closely with our clients.
Sarah Kwon joins us as she starts her career as a CA student. Sarah attended McGill University where she obtained her BSc. before going into the CA program.
Yan Wang has joined our Client Accounting group from another CA firm in Vancouver and prior to that was the accountant with the Art Institute of Vancouver.
Reena Lawy joined us in early September as a CA student after obtaining her BA in psychology from UBC followed by further education at Capilano University.

We are also pleased to announce additions to our Administrative Department in Dessie Legaspi who has taken on the secretarial role for a few of the partners and we are quite sure that some of you will become familiar with Dessie. In addition, Rob Watts has a new secretary in Kathleen Murray replacing the recently retired Marie Casey. We also have added Janet Kennedy to keep us in line with our filing and administrative support.

Other happenings include David Rolfe recently being recognized with the Georgian Lifetime Achievement Award from St. George's School. As well we are happy to announce that Andrew Westman was married to one of our previous receptionists on Saturday 10 September. Natalie Chadwick celebrates her 30th year with the firm in 2011 (she is only 35 years old).

We have always been proud of our staff and the ability to have continuity of our staff working with you to ensure a continuity of knowledge. While this is not always possible, we strive for this consistency and over the years have had positive feedback from our clients on this policy.

Rob Watts

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Winter 2010

rbadmin — Wed, 15 Dec 2010 21:08:52 +0000

Help Us Protect the Environment

Clients

Located on our website (rolfebenson.com) is a link SEND THIS FILE. Please use this secure form of data transfer when your files are too large to be sent via regular email.

Year End Tax Planning
2010 Remuneration
Personal Tax Returns
Employees vs. Contractors
Automobile Business Usages
Business/Property Income
Owner/Manager Remuneration
Estate Planning
Firm News

Year End Tax Planning

Some 2010 year-end tax planning tips include:

1. Certain expenditures made by individuals by 31 December 2010 will be eligible for 2010 tax deductions or credits including: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expenses, certain public transit amounts, and children’s fitness amounts.

2. You have until 1 March 2011 to make tax deductible Registered Retirement Savings Plan (RRSP) contributions for the 2010 year.

Consider contributing to a spousal RRSP to achieve income splitting in the future.

3. If you own a business, consider paying a reasonable salary to family members for services rendered to the business.

4. An individual whose 2010 net income exceeds $66,733 will lose all, or part, of their old age security.

Senior citizens will begin to lose their income tax age credit if net income exceeds $32,506.

5. Consider purchasing assets eligible for capital cost allowance before the year-end.

6. Consider selling capital properties with an underlying capital loss prior to the year-end if you had taxable capital gains in the year, or any of the preceding three years. This capital loss may be offset against the capital gains.

7. Registered Education Savings Plan (RESP)

A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for children (maximum $500 per child per year).

8. Health and dental premiums for the self-employed

Individuals will be allowed to deduct amounts payable for Private Health Service Plan coverage in computing business income provided they meet certain criteria.

9. A refund of Employment Insurance paid for non-arm’s length employees may be available upon application to CRA.

10. Taxpayers that receive “eligible” dividends from private and public corporations may have a significantly lower tax rate on the dividends. Notification from the corporation to the shareholder is required. In BC the tax rate on eligible dividends will increase by about 15% in 2011. Consider paying such dividends before the end of the year.

11. Eligible public transit passes will be entitled to a tax credit.

12. A tax credit for children under 16 enrolled in certain organized physical activities is available.

13. A Registered Disability Savings Plan may be established for a person who is eligible for the Disability Tax Credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted which are eligible for tax-deferred grants and bonds. Please contact us for details.

14. If required income or Forms have not been reported in the past to the CRA, a Voluntary Disclosure to the CRA may be available to avoid penalties. Contact us for details.

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2010 Remuneration

Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning “active business income” include:

Professional advice is needed in this area.

2. Notification must be made to the shareholders when an “eligible” dividend is paid – usually in the form of a letter dated on the date of the dividend declaration. If all shareholders are directors, the notification may be made in the Directors’ Minutes.

Please contact us for advice before paying an eligible or ineligible dividend.

3. Elect to pay out tax-free “capital dividend account” dividends.

4. Consider paying dividends to obtain a refund of “refundable dividend tax on hand”.

5. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral. The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares.

6. Dividend income, as opposed to salaries, will reduce an individual’s cumulative net investment loss balance thereby providing greater access to the capital gain exemption.

7. Excessive personal income affects receipts subject to clawbacks, such as old age security, the age credit, child tax benefits, and GST credits.

8. Salary payments require source deductions to be remitted to the Canada Revenue Agency on a timely basis.

9. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create “earned income”.

10. Salaries paid to family members must be reasonable.

11. Remember that one can make non-cash holiday gifts of $500 each year to employees which are deductible to the employer but not taxable to the employees.

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Personal Tax Returns

TUITION AND EDUCATION CREDITS – SCHOLARSHIP

CRA notes that the Income Tax Act expands the scholarship exemption so that most scholarships and bursaries received by students are exempt from income tax subject to certain criteria.

Also tuition, education and textbook tax credits are available to students enrolled at a “designated educational institution” in a “qualifying educational program”.

MEDICAL EXPENSES – COSMETIC PROCEDURES

In a 16 June 2010 Technical Interpretation, CRA notes that the 2010 Budget precludes the medical credits for expenses incurred after 4 March 2010 for purely cosmetic purposes, including any related services and other expenses such as travel. Both surgical and non-surgical procedures for enhancing one’s appearance will be ineligible. However an expense will continue to qualify as a medical expense if it is required for medical or reconstructive purposes, such as surgery to address a deformity related to a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

Editor’s Comment

Also GST/HST may apply to the ineligible cosmetic expenses.

MEDICAL EXPENSE – WEIGHT-LOSS CLINIC

In a 25 June 2010 Technical Interpretation, CRA notes that fees paid to a weight-loss clinic by an individual in respect of a weight-loss program for the treatment of obesity would qualify as a medical expense where the services are provided by a medical practitioner who is authorized to act as such in the province in which the services are rendered.

DISABILITY TAX CREDIT (DTC) – PRIOR YEARS

In a 7 June 2010 Technical Interpretation, CRA notes that there is no provision in the Income Tax Act that precludes an individual from requesting to have a prior year tax return reassessed for the DTC where the certificate was signed in one year certifying that the impairment started in an earlier year.

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Employees vs. Contractors

In a 22 June 2010 Tax Court of Canada case, the Appellant was found to be engaging the truck driver in insurable/ pensionable employment income, not as an independent contractor.

The Court noted that factors which suggest that the trucker was an employee of the Appellant include:

1. Tools/equipment – The Appellant provided all the tools and equipment, including the truck.

2. Chance of profit/risk of loss – The trucker had no expenses and no liability exposing him to a risk of loss. There was no opportunity for him to increase his income.

3. Control – The trucker received instructions from the Appellant and reported to the Appellant on a daily basis for work assignments.

Also, in a 30 June 2010 Tax Court of Canada case, CRA took the position that the 43 incorporated and 53 unincorporated truck drivers were employees of the payer and subject to EI and CPP.

The Court concluded that the 43 incorporated truck drivers were independent contractors because the intent of the incorporated workers and the Appellant was that of being independent contractors.

However, based on the evidence presented, the Court found that the remaining 53 workers were employees.

Also, in a 4 May 2010 Tax Court of Canada case, the Court found that a professor at the University of British Columbia was engaged as an independent contractor not an employee and noted that the professor honoured the contract which defined the independent contractor status by becoming a GST Registrant, invoicing his time with GST and bidding on new contracts as existing contracts expired.

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Automobile Business Usage

In 2010 the CRA announced a new policy in regard to documenting the business use of an automobile when it is used for both business and personal purposes. The new rules allow for reduced record keeping. The new rules require the maintenance of a log of business usage for a full 12-month base year, after which one would only record a sample three-month period in each subsequent year.

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Business/Property Income

EMPLOYMENT INSURANCE ACT (EIA)

In a 25 September 2008 Tax Court of Canada case, the Court concluded that the relationship between Brother 1 and Sister 1, who each owned 30% of the Corporation, was such that the salary paid to them was not subject to EI under the EIA. (Individuals that control more than 40% of the voting shares are automatically exempt from EI.)

The EIA notes that insurable employment also does not include employment if the employer/employee are not dealing with each other at arm’s length. However this requires that the terms and conditions of their employment are different from those of other arm’s length employees.

The Court noted that the Brother and Sister stated that they had a great deal of autonomy and freedom in carrying out their tasks. They both assumed their responsibilities, knowing very well that they did not need to obtain any approval. Decisions were made during dinners at their mother’s home or at other locations.

The Court concluded that the familial aspect of the business had a marked influence on its operation to the point that some important decisions were made based on the familial connection rather than on the economic reality of the business. The Brother and Sister also received a salary that was different and not comparable in terms of hours worked to other employees. They both received generous bonuses when the business was flourishing.

GENERAL PURPOSE ELECTRONIC DATA PROCESSING EQUIPMENT (GPEDPE)

GPEDPE (computers and ancillary equipment) are eligible for a 100% tax deduction in the year if acquired after 27 January 2009 and before February 2011.

Keep this 31 January 2011 deadline in mind.

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Owner/Manager Remuneration

NATIONAL JOINT COUNCIL TRAVEL DIRECTIVES

Owner-managers are often looking for objective, reasonable travel allowances to pay themselves, and employees, so as to reduce or avoid disputes with CRA. The kilometric rates paid by the Government of Canada for privately owned vehicles driven on authorized government business and for private non-commercial accommodation and meal allowances and incidental expenses are at www.njc-cnm.gc.ca/directive/index.php?sid=97&lang=eng (or Google National Joint Council Travel Directives).

For example, the total for meals and incidentals is $85.20 per day – only 75% of this is paid from the thirty-first consecutive calendar day of travel status while at the same location when corporate residences and/or apartment hotels are available, or the traveler chooses to stay in private accommodations. The Territories have higher rates.

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Estate Planning

DONATED ARTWORK

In a 23 November 2009 Tax Court of Canada case, CRA successfully reduced the donation tax credit on artworks donated by the Appellants to a museum in 1999 and 2000 by successfully challenging the fair market value of the artworks.

CLEARANCE CERTIFICATES

In a 16 June 2010 Technical Interpretation, CRA notes that where a legal representative distributes the deceased person’s assets without first obtaining a Clearance Certificate, the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act permit the CRA to assess the representative personally for unpaid tax debts.

TRANSFERRING CAPITAL LOSSES BETWEEN SPOUSES

Typically, a loss must be claimed by the individual who owned the asset while it declined in value. However, CRA has confirmed that they accept transactions which transfer capital losses between spouses. This could be useful where one spouse owns appreciated assets, or has realized a capital gain, while the other has capital losses.

Careful planning is required to ensure all technical requirements are met. Please contact us for details.

In most cases that transfer must happen before the end of November if the loss is to be transferred in the current tax year.

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Firm News

This is the time of the year when we do some work for the community. For probably 25 years we have raised funds for the United Way and this year was no exception. Firstly, the majority of our staff make cash commitments and then we raise other funds through some fun activities in the firm. These activities include a 50:50 draw, a very popular bake-off silent auction, and a costume day. This year we increased our firm giving by over 20% and we are very proud of our staff in this connection. On the 6th of December we will make our annual visit to the Salvation Army at which time we not only serve an evening meal but also pay for it. We are encouraged to smile at all of the recipients of this meal as so often they don’t get a smile from anyone. There is no question that this evening does as much for us as we are able to do for others. Many years ago, we decided to donate to three suitable charities instead of sending out greeting cards and we will continue this policy again in 2010.

In another vein, we are trying to do things which qualify as “green”. We have numerous Shred It boxes in the office to accumulate all of our unneeded paper (not your client records) and Shred It advised us that we saved 127 trees in 2009 and it will probably be more this year. Each office has a blue box to accumulate this paper and then from time-to-time the Shred It people come and pick the paper up.

We are doing our part to keep up the birth rate and can announce that Anna Pipa has a new daughter and Ian Brown just two weeks ago announced that his wife had a baby daughter. Rob Watts and Tim Saxvik both have children that have graduated from high school and are moving on to University and careers and yours truly has seven grandchildren, one of whom has graduated from high school and is now attending Capilano University.

Christmas is a wonderful time of the year but we have to appreciate that over 50% of our staff are from other religious and racial backgrounds which may or may not be Christian. They all celebrate with us at our annual Christmas dinner at the Royal Van Yacht Club when we recognize and appreciate the other cultures and backgrounds.

DRLR

Fall 2010

rbadmin — Wed, 29 Sep 2010 20:47:39 +0000

Personal Tax

CAREGIVER CREDIT

The Income Tax Act (ITA) provides a caregiver federal tax credit of up to $633 for 2010 ($4,223 x 15%) plus a provincial tax credit for individuals residing with and providing in-home care to a parent or grandparent (including in-laws) 65 or over or an infirm dependent relative. The federal credit is reduced by 15 cents for each dollar of the dependant’s net income over $14,422 in 2010.

MEDICAL EXPENSE – WEIGHT LOSS PROGRAM

In a Technical Interpretation, CRA notes that fees charged for a weight loss program qualify as medical expenses if the services are diagnostic, therapeutic, or rehabilitative and are provided by medical practitioners.

A “medical practitioner” is a person who is authorized by a province or other jurisdiction to act as a “medical practitioner”.

MEDICAL EXPENSES – COSMETIC PROCEDURES

The 2010 Federal Budget notes that purely cosmetic procedures are no longer eligible to be claimed as medical expense tax credits. This generally includes surgical and non-surgical procedures purely aimed at enhancing one’s appearance such as liposuction, hair replacement procedures, botulinum toxin injections, and teeth whitening.

MEDICAL EXPENSES – TRAVEL – AEROPLAN FREQUENT FLYER POINTS

In a Tax Court of Canada case, the taxpayer “purchased” an airline ticket from Thunder Bay to Chicago to obtain medical treatment by redeeming Frequent Flyer Points. In addition, the Appellant paid taxes of $220 on the ticket.

The value of the Frequent Flyer Points plus the $220 was allowed as a medical expense.

UNIVERSITY OUTSIDE CANADA

The ITA also provides a tuition credit where the individual is a student in full-time attendance at a university outside Canada in a course leading to a degree.

CHILD CARE EXPENSE (CCE) – PAYMENT TO YOUR SISTER

In a Technical Interpretation, CRA notes that where a taxpayer pays his sister (age 18 or over) to take care of his child while he is working, the amounts paid will likely be CCEs on the basis that they are only prohibited with respect to payments to the child’s father or mother, a supporting person of the child, or a person who is under eighteen years of age and related to the taxpayer, or a person in respect of whom the taxpayer or supporting person has deducted a tax credit.

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Employment Income

EMPLOYEE BIRTHDAY GIFTS

In a Technical Interpretation, CRA notes that gifts to employees from employers of up to $500 are tax-free as long as they have not been given to non-arm’s length employees and are not performance-related awards (e.g. sales targets) or cash and near-cash awards.

Birthday gifts of up to $500 would qualify for the non-taxable amount.

If the value of the gift is over $500 then the excess would be taxable.

SPORT FACILITY PAID BY THE EMPLOYER

In a Technical Interpretation, CRA notes that a benefit related to the payment or reimbursement of sports facility dues by an employer, must be included in the employee’s income if the employee, not the employer, is the primary beneficiary.

Editor’s Comment

Membership in a facility, which is mainly for client promotion, may be considered as primarily to the advantage of the employer and may not be a taxable benefit.

HOME PURCHASE LOAN

An employee may borrow funds from an employer to acquire a home, or to repay a loan or debt (refinance) that was received to acquire a home. There will be no taxable benefit as long as the interest charged by the employer is equal to the prescribed interest rate at the time the loan is taken out by the employee (currently 1% until at least 30 September 2010).

PRIVATE HEALTH SERVICES PLAN (PHSP)

In a Technical Interpretation, CRA notes that an employer may deduct its contributions to a PHSP and the benefits received by employees will not be included in income.

A PHSP is a contract of insurance for expenses that would normally qualify as medical expenses. A Cost-Plus Plan can be considered a PHSP if it contains the basic elements mentioned above.

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Business/Property Income

EMPLOYMENT INSURANCE BENEFITS FOR SELF-EMPLOYED PEOPLE

Self-employed persons will be able to enter into an agreement with Service Canada to access four types of special Employment Insurance (EI) benefits:

• maternity benefits;

• parental benefits;

• sickness benefits; and

• compassionate care benefits.

To enter into an agreement with Service Canada, you may register online using My Service Canada Account. If you enter into an agreement after 1 April 2010, you will have to wait twelve months before you will be able to make a claim for EI special benefits.

Self-employed persons also include persons that own more than 40% of the voting shares of a corporation and are, therefore, otherwise, exempt from participating in the Employment Insurance Program.

Self-employed persons just pay the employee portion of EI premiums.

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Owner/Manager Remuneration

EMPLOYEE PROFIT SHARING PLAN (EPSP)

In an Employment Insurance (EI)/Canada Pension Plan (CPP) case, the Court found that payments made through an EPSP for the owner-manager were not subject to EI or CPP.

PERSONAL LIABILITY

In a CRA Release, CRA warned that businesses are required to hold source deductions and GST/HST amounts in trust for the Government.

CRA can collect these unremitted amounts through garnishments, assessment of the directors, seizure and sale of assets, and any other means of recovery allowed under Federal Legislation.

CRA notes that taxpayers that have not complied may make a Voluntary Disclosure and will not be penalized or prosecuted if they make valid disclosures before they become aware of any CRA compliance action against them. Taxpayers may only have to pay the taxes owing, plus interest.

DIRECTOR LIABILITY – DE FACTO DIRECTOR

In a Tax Court of Canada case, CRA assessed the taxpayer for the corporation’s unpaid GST of $14,455 because she was listed as a director in the records of the company.

The taxpayer noted that she was never elected as a director and this was all a mistake. However, CRA said that, in any event, she was still a de facto director because she was acting as a director.

Taxpayer Wins!

The Court found that the taxpayer was not elected as a director of the corporation and did not act as a de facto director.

DIRECTOR LIABILITY – DUE CARE AND DILIGENCE

In a Tax Court of Canada case, Antonio, the father of Tony, was assessed personal liability for unpaid source deductions, interest and penalties of over $651,000 and unpaid GST of over $191,000.

Taxpayer Wins!

The Court noted that Tony, the son, was the one who controlled the company and intimidated his father Antonio with respect to the directorship role. The Court concluded that Antonio, with his limited commercial experience, reasonably trusted, and relied on, his son. Therefore, Antonio was held not to be liable on the basis that he exercised the required due care and diligence.

DIRECTOR LIABILITY

In an Ontario Superior Court of Justice case, Mr. Adams took action for indemnity against various Defendants for $217,243 he was required to pay to CRA as a director for unpaid GST and source deductions on behalf of the corporation.

Mr. Adams alleged that the Defendants were officers and directors of the corporation and that they failed to ensure the corporation made the proper remittances to CRA.

Mr. Adams Loses

The Court found that the Defendants were not directors at the time the debts arose and, even if they had been, the Court noted that they exercised due diligence under the Act and would not be liable in any event.

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Estate Planning

TRANSFER OF CAPITAL LOSSES BETWEEN SPOUSES

In a Technical Interpretation, CRA confirmed that it still accepts the transfer of latent capital losses between spouses.

HOME BUYERS PLAN (HBP)

In a Technical Interpretation, CRA notes that up to $25,000 may be withdrawn from an individual’s RRSP to buy or build a qualifying house (first-time buyer – a four-year test).

CRA also notes that if an individual buys a qualifying house with his/her spouse, they can each withdraw up to $25,000 from their RRSPs for a combined amount of up to $50,000.

Under the HBP, the individual has to repay all withdrawals to his/her RRSP within fifteen years.

RRSP/RESP/RRIF – QUALIFIED INVESTMENTS

In a Technical Interpretation, CRA notes that shares of small business corporations may be qualified investments provided that certain conditions are met including, immediately after the acquisition of the share, each person who is an annuitant, a beneficiary or a subscriber is not a connected shareholder (a 10% test).

FAMILY TRUSTS

Recently CRA have been auditing Family Trusts.

A Family Trust may be used to provide control of the assets to the Trustees rather than the beneficiaries, reduce probate fees by getting the assets out of the Estate, preventing the assets from being part of the public record in a death, and providing income splitting with family members. However, Family Trusts must be properly established and operated, hence the CRA audits.

TAX-FREE SAVINGS ACCOUNTS (TFSA) – OVER-CONTRIBUTIONS

Taxpayers must be careful not to inadvertently subject themselves to TFSA penalties. For example, if a taxpayer put $5,000 into Bank 1 in January, 2009 and withdrew that amount and then put $5,000 into Bank 2 in February, 2009, the penalty is 1% per month ($50 per month or $600) because the taxpayer had excess contributions of $5,000 for the twelve months. This is because the withdrawal does not get credited until the following year. If it is considered deliberate, there is an additional penalty of 100% of any income or gains resulting from the deliberate over-contribution.

CRA TFSA PENALTY RELIEF

CRA announced that they will consider waiving the tax on excess TFSA contributions if the taxpayer genuinely misunderstood the operation of the rules.

CRA sent out over 70,000 letters to persons who have technically had over-contributions in 2009.

If a taxpayer receives a Notice of Assessment, they may object or request a waiver of the taxes on excess contributions under Taxpayer Relief.

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GST/HST

CREDIT CARD EXPENSES REIMBURSED

CRA introduced a Guide which notes that where expenses are reimbursed by an employer, the employer may claim an Input Tax Credit (ITC) for the GST/HST. CRA allows a Registrant who is an employer, partnership, charity or public institution to use factors to calculate ITCs in respect of the GST/HST deemed paid by the Registrant on purchases made by the Registrant’s employees, partnership members, or volunteers where credit cards have been used to make purchases.

The use of factors is to simplify the administrative burden Registrants have because credit card receipts are often a one-sum total and include gratuities, PST, etc. This is an administrative policy of the CRA and is not legislated. The choice of the factor method is an option for a Registrant. Some Registrants may prefer to use the exact calculation method.

INPUT TAX CREDITS (ITCs)

In a Tax Court of Canada case, the taxpayer filed a GST Return on 28 August 2007 and claimed Input Tax Credits of $8,129 which were related to expenses that were incurred prior to 1 January 2003.

CRA successfully disallowed the ITCs on the basis that they were not claimed within the four-year time limit.

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BC Harmonized Sales Tax

PROPOSED NEW PLACE OF SUPPLY RULES

With the introduction of the harmonized sale tax in BC and Ontario on 1 July 2010, the government has taken the opportunity to revise and substantially update the “place of supply” rules of the Excise Tax Act which determine where a supply of goods and services takes place – and hence whether the Goods and Services Tax (“GST”) or the Harmonized Sales Tax (“HST”) applies to a particular transaction.

For the full article, please visit Resources, Publications, BC HST Proposed New Place of Supply Rules.

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International

MOVING TO THE UNITED STATES

Canadians that become non-residents (including moving to the United States) are deemed to dispose of certain assets such as marketable securities, private company investments, or real property. (Departure Tax)

This deemed disposition can create double tax when an individual moves to the U.S. and then disposes of such assets in an actual transaction, because the cost basis of the assets under the U.S. rules is based on the original, historical cost.

However, an election related to the deemed disposition reduces the incidence of double taxation.

WITHHOLDING TAX

In a Technical Interpretation, CRA notes that the requirement to withhold or deduct tax applies to payments for services rendered, or to be rendered, in Canada by a non-resident person. The Regulation includes payments to a non-resident person of a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever.

TRANSFER PRICING

CRA is auditing and assessing more cross-border transactions between related parties. Caution is needed in this area.

U.S. CITIZENS AND RESIDENTS

There is a significant compliance burden to U.S. citizens and residents if they own Canadian (or other non-U.S.) mutual funds.

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Did You Know . . .

CORPORATION FILINGS

Corporations with gross revenues over $1 million must file their Federal Income Tax Return electronically for all taxation years ending after 2009 – unless they are specifically exempt. However, the penalty only applies for taxation years ending after 2010.

NATURAL PERSON – LOSES AGAIN

In a Federal Court case the Plaintiff’s claim that he was not subject to income tax because he was a “natural person” was dismissed. The Court noted that this argument has been analyzed and dismissed in many other Canadian court cases.

The Plaintiff’s efforts to use the Court to advance this untenable theory were “forlorn and doomed” from the outset.

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Firm News

Fall is always a quiet time in a CA office but with 50 staff in our stable, there is always something happening. We have three students writing their Uniform Final Exams including Ian Brown, Brenda Lee and James Smeaton. We wish them well and hope that we will have three new CA’s around the beginning of December. New students usually start at this time of year and our first one has the remarkable name of Michael Jordan (I think he is 5'6" not 6'5" like the other one). Anna Pipa, one of our long-time client accounting people has just had a baby girl and will be away for a year. Rob Watts will be attending the Annual AGN conference in Lisbon, Portugal during the last week of September. David Rolfe will attend the bi-annual Sovereign Council Meeting of the Order of St. John in Budapest , Hungary. Fall entertainment in the office has included groups attending the Vancouver Canadians baseball game and a B.C. Lions game at Empire Stadium. Our growth brings many challenges to structure and organization but among the good things is the expansion of our tax unit which now includes Geoff Bree who has been with us for 15 years and new-comers Warren Mui and Daniella Sin. This gives us broader coverage of our important tax field and some extra expertise in areas of HST and SR&ED Claims.

An area where we try to help our clients is in making sure they have the best advisors in a variety of areas. We do not practice law and we don’t recommend stocks but we do discuss performance in these areas with our clients and often have the opportunity to recommend professional services. Under no circumstances do we receive any reward for this service other than the fact that our clients are satisfied. We often do a simple form of analysis of our clients security portfolios and will discuss them with their brokers. We feel this type of relationship with the legal and investment community provides added value to our service and theirs.

Serving our clients is what gives all of us the satisfaction that we look for in a profession and we still enjoy getting a new client as much as we did many years ago. The referral of business to us is the greatest compliment that we can receive. To our clients, we thank you for helping us to become the Firm we are today.

DRLR

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Summer 2010

rbadmin — Fri, 11 Jun 2010 21:09:24 +0000

Newsletter by E-mail

Personal Tax
Employment Income
Business/Property Income
Owner/Manager Remuneration
2010 Federal Budget
Estate Planning
Employee vs. Independent Contractor
GST/HST
Firm News

Personal Tax

APPRENTICESHIP GRANTS

Apprenticeship Incentive Grant (AIG)

The AIG is a taxable grant of $1,000 per year up to a maximum of $2,000 per person, available to registered apprentices once they have successfully completed their first or second year/level (or equivalent) of an Apprenticeship Program in one of the Red Seal Trades. There is a deadline to apply.

Apprenticeship Completion Grant (ACG)

The ACG is a $2,000 taxable grant to encourage apprentices registered in designated Red Seal Trades to complete their Apprenticeship Program and receive their certification. Eligibility is retroactive to 1 January 2009.

The ACG is offered to apprentices who complete their training, become certified journeymen/journeywomen in a designated Red Seal Trade and who obtain either the Red Seal Endorsement or a provincial or territorial Certificate of Qualification.

There is a deadline to apply.

Trades Included in the Red Seal Program

To date, there are fifty trades included in the Red Seal Program on a national basis. For a list of Red Seal Trades, Google “Red Seal Trade”.

Editor’s Comment

BC also offers Provincial Apprenticeship Grants.

MEDICAL EXPENSE – TUITION COSTS

In a 20 January 2010 External Technical Interpretation, CRA notes that where, due to a physical or mental handicap, a student who is certified to require specialized care, or care and training, at a school or institution, may claim a medical expense tax credit for the cost of such care, or such care and training.

MEDICAL EXPENSES

In a 2 February 2010 Tax Court of Canada case, the taxpayer had progressive Multiple Sclerosis and successfully deducted as a medical expense the amount paid to the Huron Lodge (a home for the aged) in Windsor, Ontario.

NURSING HOME

The Income Tax Act provides a medical expense for full-time care in a nursing home if the patient has been certified by a medical practitioner to lack normal mental or physical capacity, and in the foreseeable future will continue to be dependent on others.

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Employment Income

OVERTIME MEAL ALLOWANCES

Starting 1 January 2009 where an employer provides overtime meals or an allowance for overtime meals to its employees, the CRA will not assess a taxable benefit where:

the amount of the overtime meal allowance, or the cost of the meal, is reasonable;
the employee works two or more hours of overtime right before or right after his/her scheduled hours of work; and
the overtime is infrequent and occasional in nature. (CRA generally considers less than three times a week, or more in special circumstances, as being infrequent and occasional.)

CRA will generally consider an amount not exceeding $17 as being reasonable.

IN-SERVICE PROGRAM WHICH PROVIDES A LAPTOP COMPUTER

In a 6 January 2010 External Technical Interpretation, CRA notes that it has considered several programs where employers have provided their employees with personal computers, printers, software and/or Internet access for developing their employees’ computer and Internet skills.

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Business/Property Income

TRUCKS OR TRACTORS FOR HAULING FREIGHT

The Income Tax Act provides a 40% Capital Cost Allowance rate for a truck or tractor designed for hauling freight and that has a “gross vehicle weight rating” in excess of 11,788 kilograms.

In a CRA Technical Interpretation, CRA notes that this may apply to a taxpayer that hauls its own freight.

Also, in an 9 October 2009 Technical Interpretation, CRA notes that garbage trucks used for the collection and hauling of residential and industrial waste would normally also qualify.

EVENTS AT A GOLF CLUB

In a 22 January 2009 Technical Interpretation, CRA notes that where a business holds a day of golf for all employees and the company pays for the green fees, rental of golf equipment, and food provided to the employees, the Income Tax Act does not allow a deduction in respect of any expenditure for the use of a golf facility.

However, with respect to the meals, CRA notes that a golf club facility does not include the dining room, reception hall, conference room, lounges or a bar of a golf club so the deduction of expenses incurred to buy food and beverages is not restricted by the golf facility rules.

Also, assuming that the food was offered to all employees, and it is one of six special events held in the year by the company, the Income Tax Act allows a 100% deduction for the food and beverages, as opposed to the 50% which is normally allowed.

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Owner/Manager Remuneration

THE TWO-YEAR LIMIT

In a 5 March 2010 Tax Court of Canada case, CRA assessed Mr. M. as the “de facto director” of the corporation, for the unpaid GST (plus interest and penalties) owed by a company.

The taxpayer had resigned as a director on 15 January 2004 and the assessment was not issued until more than two years later, 29 June 2006.

Taxpayer Wins!

The Court noted that, even though the Excise Tax Act provides a two-year statute of limitations, a person who is not a director may be considered a “de facto director” if they hold himself/herself out as a director such that a third party relies upon that person’s implicit authority as a director. In this case, the taxpayer was not a “de facto director” of the company.

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2010 Federal Budget

On 4 March 2010 the Honourable Jim Flaherty, Minister of Finance, presented his fifth Budget to the House of Commons.

Some proposals include:

A. PERSONAL INCOME TAX

1. Medical Expense Tax Credit – Purely Cosmetic Procedures

Budget 2010 proposes that expenses incurred for purely cosmetic procedures (including related services and other expenses such as travel) be ineligible to be claimed under the Medical Expense Tax Credit. This generally includes surgical and non-surgical procedures purely aimed at enhancing one's appearance such as liposuction, hair replacement procedures, botulinum toxin injections, and teeth whitening.

These expenses will also become subject to GST/HST.

This will apply to expenses incurred after 4 March 2010.

2. Charities: Disbursement Quota Reform

Budget 2010 proposes to reform the disbursement quota for fiscal years that end on or after March 4, 2010.

3. Employee Stock Options

Budget 2010 proposes to prevent both the stock option deduction to the employee and a deduction by the employer from being claimed for the same employment benefit.

Budget 2010 also proposes to repeal the stock option tax deferral election to employees of public corporations.

Budget 2010 also proposes to introduce a special elective tax treatment for taxpayers who elected under the current rules to defer taxation of certain public share stock option benefits until the disposition.

B. OTHER TAX

Online Notices

Budget 2010 proposes that the Income Tax Act, Excise Tax Act, Excise Act, 2001, Air Travellers Security Charge Act, Canada Pension Plan and Employment Insurance Act be amended to allow for the electronic issuance of those notices that can currently be sent by ordinary mail if authorized by a taxpayer.

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Estate Planning

VOLUNTEERS

In a 11 March 2007 External Technical Interpretation, CRA notes that where an individual is a volunteer without remuneration, or at most minimal remuneration, reimbursements of automobile expenses, airline tickets, and payment of allowances for meal expenses to attend meetings of the Board of Directors (including allowances to cover meals for their spouses) are not considered income for tax purposes.

TURNING AGE 71 IN 2010

Taxpayers turning age 71 in 2010 could consider making one year advance contributions to their RRSP. For example, by making the 2011 contribution in December, 2010 (just before the RRSP is wound-up), this over-contribution may be deducted in January, 2011 if there is sufficient 1% penalty for the month of December on the excess contributions over $2,000. However this penalty is minor compared to the large tax deduction in 2011.

Professional advice is recommended.

TAX-FREE SAVINGS ACCOUNT

On 16 October 2009, Finance News Release 2009-099 provided technical amendments to the TFSA rules including a 100% tax on the income under the “advantage” rules, in addition to the existing 1% per month penalty tax on over-contributions.

GIFT OF ECOLOGICAL PROPERTY

In an 9 October 2009 Technical Interpretation, CRA notes that when a taxpayer makes a gift of land which is ecological property, in addition to being able to claim a donation tax credit (in the case of an individual) or a deduction for gifts (in the case of a corporation), the capital gain, resulting from the disposition of the land is cancelled.

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Employee vs. Independent Contractor

In a 23 December 2009 Court of Appeal for Ontario case, the Court found the Agreement between Elizabeth McKee and Reid’s Heritage Homes (RHH) was one of employment, not independent contractor.

The Court then noted that it is an implied term in an employment situation that the employee is entitled to reasonable notice of termination.

In this case Mrs. McKee worked exclusively for RHH. She was also under the control of RHH as to where she was to sell, the promotion methods, what she was to sell, and how much it was to sell for. With respect to the “tools”, Mrs. McKee performed her sales functions in model homes provided by RHH and RHH supplied her stationery and forms. Also, Mrs. McKee was financially dependent on RHH and had no expectation that she might earn a profit as distinct from the fixed commissions. Also, the sales force of which Mrs. McKee was a member was a crucial element of RHH’s business organization.

Editor’s Comment

It is important to have the terms of the engagement in writing and that the relationship meets the required tests if independent contractor status is to be obtained.

Also, another downside for the payer is that when a recipient is considered to be an employee, the payer may be subject to penalties for failing to withhold and remit source deductions for income tax, CPP, EI and Workers Compensation. The payer may also have liability if the worker was to have received other benefits.

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GST/HST

PLACE OF SUPPLY RULES

On 25 February 2010, Finance Release 2010-014 introduced new Place of Supply Rules related to where the recipient of a service or an intangible property is located with respect to the GST/HST rules.

For example, Ontario (13%) and British Columbia (12%) are proposing to introduce HST on 1 July 2010.

DIRECT SELLING INDUSTRY

On 13 January 2010, CRA introduced GST/HST Info Sheet GI-052 – Direct Selling Industry – The Network Sellers Method for Network Sellers and Sales Representatives. This eight-page Release reflects proposals from the 27 January 2009 Federal Budget for any fiscal year of a Network Seller that begins on or after 1 January 2010.

INPUT TAX CREDITS

In a 28 January 2010 Tax Court of Canada case, the issue was whether Comtronic was entitled to Input Tax Credits (ITCs) where the GST Registration Number of the supplier shown on the invoice was not that of the supplier but was a validly issued number belonging to someone else as part of an identity theft operation.

Taxpayer Loses

The Court noted that under the Excise Tax Act an ITC cannot be claimed unless the claimant has obtained prescribed information including the name of the supplier and the registration number assigned to the supplier.

CREDIT CARD EXPENSES AND THE REGISTRANT’S USE OF FACTORS FOR CLAIMING INPUT TAX CREDITS

In an 28 April 2010 CRA Release P-184, CRA discussed the use of the Factor Method, instead of the Exact Calculation Method, to compute the eligible Input Tax Credits (ITCs) in relation to credit card reimbursements for expenses incurred by employees.

ELECTRONIC FILING

On 4 January 2010, CRA proposed mandatory electronic filing requirements for certain GST/HST Registrants beginning 1 July 2010.

Under the measures, the following groups will be required to file their GST/HST Returns electronically:

GST/HST Registrants with greater than $1.5 million in annual taxable supplies (except for charities);
Registrants required to recapture Input Tax Credits for the provincial portion of the HST on certain inputs in Ontario or British Columbia; and
builders affected by the transitional housing measures announced by Ontario or British Columbia.

CHARITIES

Charities and certain non-profit organizations already file requests for rebate of a portion (usually 50%) of the GST which has been paid each year which is not eligible for input tax credits. After the implementation of the HST in BC on July 2010, 57% of the provincial portion of the HST will also be eligible for this rebate. In the case of a registered charity the total rebate percentage for HST paid in BC will thus be 54.08%

(being 5 x 50% + 7 x 57%)

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Firm News

Now that we have a total staff of 50, it is interesting to look at ourselves and see what we are. It is so important this days to be inclusive (as opposed to exclusive) and in that direction we find that 18 of our staff speak 15 languages other than English, including Farsi, Slovak, German, Punjabi, Hindi, Mandarin, Cantonese, Japanese, Czech, Russian, French and Spanish. Some of our staff were born in other countries and others have learned their language from their parents who came to Canada from other countries. It gives us a wonderful tapestry of life and does offer our clients the ability to converse with somebody in our office who speaks their language. We are involved internationally as part of an association of separate and independent accounting firms in 462 locations in 103 countries. From time-to-time our language skills are useful in dealing with our associates. Some of our clients may find it useful to know that we do have these connections.

As accountants, we love statistics and one of them is that in our 52 years of practice we have been 33 years at 900 West Hastings and before that, 19 years in the Credit Foncier Building. In the Credit Foncier Building we took over space previously occupied by Russell & DuMoulin one of the oldest law firms in Vancouver who subsequently moved to the MacMillan Bloedel building and now Bentall Five. At 900 West Hastings we followed Campbell Sharp Nash & Field (now Grant Thornton) and Peat Marwick (now KPMG) in the premises we now occupy. Although we have not moved very much, what is around us has changed significantly. Our wonderful view of the harbour is now impaired by Waterfront Centre, the Trade & Convention Centre, the Fairmont Waterfront, the Daon Building (now Axa), the new Fairmont Hotel and the Shaw Tower leaving a small view of Stanley Park, the Lions Gate Bridge and the second narrows bridges (and for a while the fast ferries). We have 15 staff members who have been with us for more than 10 years and Natalie Chadwick, Susan Tufts, Sumako Rankin and yours truly have been here for more than 25 years. Would you believe that our two young partners, Tim Saxvik and Rob Watts have been here for 23 years and they claim to be 39. To some lack of change is stability to others it indicates lack of progress. From one hand adding machine, one manual typewriter and the liquid photocopier, we now have 65 computers, a state-of-art network system, voice mail, emails and we still have snail mail.

The cornerstone of a firm is its clients and reputation. We have some clients who have been with us since we started and many, many clients who have been around for 30 and 40 years. To add to these, we have many new clients who seem to appreciate the mixture of tradition, service, stability and state-of-the-art processes.

The magic words in the English language are “Thank you” and Canadians are respected worldwide for using these words with regularity. We are no exception and would like to thank all of you who have been part of our history for helping to make us a better firm.

DRLR

Federal Budget Commentary 2010

admin — Sat, 13 Mar 2010 00:05:57 +0000

On 4 March 2010 the Honorable Jim Flaherty, Minister of Finance, presented his fifth Budget to the House of Commons.

The Government’s fiscal positions include deficits in the years 2009/2010 ($53.8 billion), 2010/2011 ($49.2 billion), 2011/2012 ($27.6 billion), and 2012/2013 ($17.5 billion).

The Federal Government notes that it will:

save approximately $6.8 billion by restricting the operating costs of the public service including a freeze on salaries of MPs and Senators for the next three fiscal years;
close certain tax loopholes such as those who receive certain stock options;
freeze Employment Insurance premiums at $1.73 per $100 in insurable earnings to the end of 2010;
consult on proposals to report aggressive tax planning schemes;
subject to further discussion, consider a system of loss transfers between corporate groups;
permit rollovers from a deceased person’s RRSP to a Registered Disability Savings Plan;
provide a single parent with the option of including the Universal Child Care Benefit in the income of certain dependants;
provide $44 million over two years for the development of elite athletes; and
prevent certain cosmetic expenditures incurred after 5 March 2010 from being eligible for the medical expense tax credit.

There were no new corporate tax rate changes. However, the Government’s intention to eventually have a top combined federal-provincial corporate income tax rate of 25% remains.

Although the opposition parties were not in favour of the Budget, the Liberals did indicate that they would not force an election on this issue.

	Actual	Projection (in billions of $)
	2008-09	2009-10	2010-11	201-12	2012-13
Budgetary revenues	233.1	213.9	231.3	249.0	266.5
Program expenses	207.9	237.8	249.2	241.3	245.1
Public debt charges	31.0	29.9	31.3	35.3	38.9
Total expenses	238.9	267.7	280.5	276.6	284.0
Balance	(5.8)	(53.8)	(49.2)	(27.6)	(17.5)
Federal Debt	463.7	517.5	566.7	594.3	611.8

A. Personal Income Tax

B. Business Income Tax

G. Previously Announced Measures

Some highlights of the Budget relevant to our clients include:

Personal Income Tax

1. Benefits Entitlement – Shared Custody

Under existing rules, only one eligible individual can receive the Canada Child Tax Benefit and Universal Child Care Benefit in respect of a qualified dependant each month. Similarly, the child component of the Goods and Services Tax/Harmonized Sales Tax Credit (GST/HST credit) is payable in respect of a qualified dependant to only one eligible individual each quarter.

To improve the allocation of child benefits between parents who share custody of a child, Budget 2010 proposes to allow two eligible individuals to receive Canada Child Tax Benefit and Universal Child Care Benefit amounts in a particular month, and two eligible individuals to receive GST/HST credit amounts in respect of a particular quarter, in respect of a child if the recipients would be eligible to receive amounts under the Canada Revenue Agency’s existing shared eligibility policy.

This measure will apply to benefits payable commencing July 2011.

2. Universal Child Care Benefit (UCCB) for Single Parents

Budget 2010 proposes to allow a single parent the option of including the aggregate Universal Child Care Benefit amount received, in respect of all of his or her children, in the parent’s income or in the income of the dependant for whom an Eligible Dependant Credit is claimed. If a single parent is unable to claim an Eligible Dependant Credit, he or she will have the option of including the aggregate Universal Child Care Benefit amount in the income of one of the children for whom the Universal Child Care Benefit is paid.

This measure will apply to the 2010 and subsequent taxation years.

3. Medical Expense Tax Credit – Purely Cosmetic Procedures

Budget 2010 proposes that expenses incurred for purely cosmetic procedures (including related services and other expenses such as travel) be ineligible to be claimed under the Medical Expense Tax Credit. This generally includes surgical and non-surgical procedures purely aimed at enhancing one’s appearance such as liposuction, hair replacement procedures, botulinum toxin injections, and teeth whitening.

A cosmetic procedure, including those identified above, will continue to qualify for the Medical Expense Tax Credit if it is required for medical or reconstructive purposes, such as surgery to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

This measure will apply to expenses incurred after 4 March 2010.

4. Rollover of RRSP Proceeds to a Registered Disability Savings Plan (RDSP)

Budget 2010 proposes to extend the existing RRSP rollover rules to allow a rollover of a deceased individual’s RRSP proceeds to the RDSP of a financially dependent infirm child or grandchild.

The amount of RRSP proceeds rolled over into an RDSP will not be permitted to exceed the beneficiary’s available RDSP contribution room. The lifetime contribution limit for RDSPs is $200,000.

These measures will be effective for deaths occurring on or after 4 March 2010.

Transitional Rules

Where the death of an RRSP annuitant occurs after 2007 and before 2011, special transitional rules will allow a contribution to be made to the RDSP of a financially dependent infirm child or grandchild of the annuitant that would provide a result that is generally equivalent to the proposed measures.

RDSP contributions benefitting from the proposed rollover measure cannot be made before July 2011.

5. Carry Forward of RDSP Grants (CDSG) and Bonds (CDSB)

In recognition of the fact that families of children with disabilities may not be able to contribute regularly to their plans, Budget 2010 proposes to amend the Canada Disability Savings Act to allow a 10-year carry forward of CDSG and CDSB entitlements.

The carry forward will be available starting in 2011.

6. Provincial Payments into RESPs and RDSPs

Budget 2010 proposes to clarify that all payments made to a Registered Education Savings Plan or a Registered Disability Savings Plan through a program funded, directly or indirectly, by a province or administered by a province will be treated the same way as federal grants and bonds and will therefore not themselves attract or reduce federal grants and bonds.

7. Scholarship Exemption and Education Tax Credits

Budget 2010 proposes to clarify that a post-secondary program that consists principally of research will be eligible for the Education Tax Credit, and the scholarship exemption, only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree (or an equivalent degree). Accordingly, post-doctoral fellowships will be taxable.

Occupational training programs certified by the Minister of Human Resources and Skills Development will continue to qualify for the Education Tax Credit.

Budget 2010 also proposes that an amount will be eligible for the scholarship exemption only to the extent it can reasonably be considered to be received in connection with enrolment in an eligible educational program for the duration of the period of study related to the scholarship.

Special rules will apply to scholarships for part-time programs.

The measures will apply to the 2010 and subsequent taxation years.

8. Charities: Disbursement Quota Reform

Budget 2010 proposes to reform the disbursement quota for fiscal years that end on or after 4 March 2010. Specifically, Budget 2010 proposes to:

Repeal the charitable expenditure rule requiring that a charity spend on charitable activity 80% of the amount of receipted gifts received in the prior year.
Eliminate several concepts relating to disbursement quotas: enduring property and capital gains pool.
Modify the rules and capital accumulation.

Gifts from related charities, and a notional return (3.5% on investments not used for charitable or administrative purposes will continue to be subject to expenditure requirements.

Budget 2010 also proposes to amend the existing rule that provides the Canada Revenue Agency with the discretion to allow charities to accumulate property for a particular purpose, such as a building project.

9. Employee Stock Options

Budget 2010 proposes to prevent both the stock option deduction and a deduction by the employer from being claimed for the same employment benefit. To this effect, the stock option deduction will generally be available to employees only in situations where they exercise their options by acquiring securities of their employer. An employer may continue to allow employees to cash out their stock option rights to the corporation without affecting their eligibility for the stock option deduction provided the employer makes an election to forgo the deduction for the cash payment.

Budget 2010 also proposes to amend the income tax rules to clarify that the disposition of rights under a stock option agreement to a non-arm’s length person results in an employment benefit at the time of disposition (including cash out). Although the Government considers that these benefits are taxable in these circumstances under existing tax rules, the Government also believes that clarification of these rules is warranted.

These measures will apply to dispositions of employee stock options that occur after 4:00 p.m. Eastern Standard Time on 4 March 2010.

Tax Deferral Election and Remittance Requirement

Budget 2010 proposes to repeal the tax deferral election and to clarify existing withholding requirements to ensure that an amount in respect of tax on the value of the employment benefit associated with the issuance of a security is required to be remitted to the government by the employer.

The repeal of the tax deferral election will apply to employee stock options exercised after 4:00 p.m. Eastern Standard Time on 4 March 2010.

The clarifications to remittance requirements will apply to benefits arising on the issuance of securities after 2010, to provide time for businesses to adjust their compensation arrangements and payroll systems.

Budget 2010 proposes to introduce a special elective tax treatment for affected taxpayers who elected under the current rules to defer taxation of their stock option benefits until the disposition of the optioned securities. In effect, the special elective treatment will ensure that the tax liability on a deferred stock option benefit does not exceed the proceeds of disposition of the optioned securities, taking into account tax relief resulting from the use of capital losses on the optioned securities against capital gains from other sources.

10. U.S. Social Security Benefits

Changes made to the Canada-U.S. Tax Convention effective beginning in 1996 increased the inclusion rate for U.S. Social Security benefits to 85% from 50%.

Budget 2010 proposes to reinstate the 50% inclusion rate for Canadian residents who have been in receipt of U.S. Social Security benefits since before 1 January 1996 and for their spouses and common-law partners who are eligible to receive survivor benefits.

This measure will apply to U.S. Social Security benefits received on or after 1 January 2010.

11. Eco-ENERGY Retrofit Program

Even though the Home Renovation Tax Credit Program expired on 31 January 2010, the Government is allocating another $80 million to the eco-ENERGY Retrofit Program.

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Business Income Tax

1. Interest on Overpaid Taxes

Budget 2010 proposes that, effective 1 July 2010, the interest rate payable by the Minister of National Revenue to corporations will be set at the average yield of three-month Government of Canada Treasury Bills sold in the first month of the preceding quarter, rounded up to the nearest percentage point. This represents a 2% decrease in refund interest paid by the government.

2. SIFT Conversions and Loss Trading

The Income Tax Act includes provisions intended to allow specified investment flow-through (SIFT) trusts and partnerships – commonly referred to as income trusts and partnerships – to convert their structures into corporate form on a tax-deferred basis. Aggressive schemes have been designed to use these provisions to achieve inappropriate tax loss trading that would not be allowed as between two corporations.

In particular, the ability of a corporation to utilize its tax losses is constrained where control of the corporation has been acquired. In the case of a "reverse takeover" of a public corporation, an existing rule in the Income Tax Act generally deems there to be an acquisition of control of the public corporation in situations where shares of the public corporation are exchanged for shares of another corporation. Budget 2010 proposes to extend this rule to ensure that it also applies to impose restrictions on the use of losses in situations where units of a SIFT trust or SIFT partnership are exchanged for shares of a corporation.

It is proposed that these amendments apply to transactions undertaken after 4:00 p.m. Eastern Standard Time on 4 March 2010, other than transactions that the parties are obligated to complete pursuant to the terms of an agreement in writing between the parties entered into before that time.

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International Tax

1. Section 116 and Taxable Canadian Property

Budget 2010 proposes that the definition of taxable Canadian property in the Income Tax Act be amended to exclude shares of corporations, and certain other interests, that do not derive their value principally from real or immovable property situated in Canada, Canadian resource property, or timber resource property (subject to the 60 month rule). This measure will eliminate section 116 compliance obligations for these types of properties.

2. Refunds under Regulation 105 and Section 116

Budget 2010 proposes an amendment to section 164 of the Income Tax Act to also permit the issuance of a refund of an overpayment of tax under Part I of the Income Tax Act if the overpayment is related to an assessment of the payor or purchaser in respect of a required withholding under section 105 of the Income Tax Regulations or section 116 of the Income Tax Act and the taxpayer files a return no more than two years after the date of that assessment.

This measure will be effective for applications for refunds claimed in returns filed after 4 March 2010.

3. Foreign Investment Entities and Non-Resident Trusts

Budget 2009 stated that the Government would review the outstanding proposals before proceeding with measures in this area. As a result of this review, the Government has developed revised proposals to replace the outstanding proposals for public consultation with a view to developing revised legislation, which will then also be released for comment.

Date of Application

It is proposed that the measures regarding foreign investment entities apply for taxation years that end after 4 March 2010. A taxpayer who voluntarily complied with the outstanding proposals in previous years will have the option of having those years reassessed. If the taxpayer does not wish to be reassessed for those years, and had more income than would have been the case under the existing rules, the taxpayer will be entitled to a deduction in the current year for the excess income.

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Sales Tax

1. GST/HST and Purely Cosmetic Procedures

Budget 2010 proposes to clarify that GST/HST applies to all purely cosmetic procedures, to devices or other goods used or provided with cosmetic procedures, and to services related to cosmetic procedures. Taxable procedures would generally include surgical and non-surgical procedures aimed at enhancing one’s appearance such as liposuction, hair replacement procedures, botulinum toxin injections, and teeth whitening.

A cosmetic procedure will continue to be exempt if it is required for medical or reconstructive purposes, such as surgery to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. As well, cosmetic procedures paid for by a provincial health insurance plan will continue to be exempt.

This applies to supplies made after 4 March 2010 and to supplies made before that time if GST/HST had been charged.

2. Simplification of the GST/HST for the Direct Selling Industry

The direct selling industry distributes goods to final consumers through a large number of contractors and sales representatives, rather than through retail establishments.

Budget 2010 confirms the Government’s intention to implement the Budget 2009 proposals for simplification of the GST/HST for the direct selling industry and proposes certain enhancements with clarifications to the previously announced measure.

Budget 2010 proposes that these enhancements apply in respect of fiscal years of a network seller that begin after 2009, matching the timing of the Budget 2009 proposals.

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Other Tax

1. Specified Leasing Property Rules

Budget 2010 proposes to extend the application of the Specified Leasing Property rules to otherwise exempt property that is the subject of a lease to a government or other tax-exempt entity, or to a non-resident. However, such a lease will continue to be exempt if the total value of the property that is the subject of the lease is less than $1 million. In this regard, an anti-avoidance rule will apply if it may reasonably be considered that one of the purposes of dividing property (or a class of property) among separate leases is to meet the $1 million exception.

These measures will apply to leases entered into after 4:00 p.m. Eastern Standard Time 4 March 2010.

2. Information Reporting of Tax Avoidance Transactions – Public Consultation

Budget 2010 announces a public consultation on proposals to require the reporting of certain tax avoidance transactions.

A regime under which a tax "avoidance transaction" that features at least two of three "hallmarks" would be a "reportable transaction" that must be reported to the Canada Revenue Agency. The proposed hallmarks would reflect certain circumstances that commonly exist when taxpayers enter into tax avoidance transactions, such as contingent remuneration, confidentiality protection and contractual protection.

These proposals, as modified to take into account the consultations, would apply to avoidance transactions entered into after 2010, as well as those that are part of a series of transactions completed after 2010.

3. Online Notices

Budget 2010 proposes that the Income Tax Act, Excise Tax Act, Excise Act, 2001, Air Travellers Security Charge Act, Canada Pension Plan and Employment Insurance Act be amended to allow for the electronic issuance of those notices that can currently be sent by ordinary mail, if authorized by a taxpayer. However, notices that are specifically required to be served personally or by registered or certified mail will not be eligible to be transmitted electronically.

The necessary legislative amendments will be effective as of the date of Royal Assent of the implementing legislation. However, the application of these measures will commence at such time as will be announced by the Minister of National Revenue.

4. Tax Evasion and the Proceeds of Crime and Money Laundering Regime

Budget 2010 proposes to rationalize the rules concerning the application of the proceeds of crime and money laundering regime, and provide further support for international efforts to counter criminal and terrorist activities, by repealing the exclusion for indictable tax offences under the Income Tax Act, the Excise Tax Act, the Excise Act, and the Budget Implementation Act, 2000 from the definition of "designated offence" under the Criminal Code, such that the Crown will be able to prosecute these tax offences using that regime, regardless of whether prosecuted under the Criminal Code fraud provisions or the tax statutes. Budget 2010 also proposes consequential amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act consistent with the proposal above with respect to the Criminal Code.

5. Taxation of Corporate Groups

The Government will explore whether new rules for the taxation of corporate groups – such as the introduction of a formal system of loss transfers or consolidated reporting – could improve the functioning of the tax system. Stakeholder views will be sought prior to the introduction of any changes.

6. Aboriginal Tax Policy

The Government of Canada supports initiatives that encourage the exercise of direct taxation powers by Aboriginal governments.

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Custom Tariffs

Tariff Reductions on Manufacturing Inputs and Machinery and Equipment

Budget 2010 proposes to eliminate the remaining tariffs on manufacturing inputs and machinery and equipment. The Department of Finance consulted extensively with stakeholders in preparing this measure, including through the publication of a notice in the Canada Gazette on 19 September 2009.

The tariff reductions will be applicable to goods imported on or after 5 March 2010.

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Previously Announced Measures

Budget 2010 confirms the Government’s intention to proceed with previously-announced tax measures, as modified to take into account consultations and deliberations since their release, including:

Improvements to the application of the GST/HST to the financial services sector released on 23 September 2009;
Modifications to the rules governing Tax-Free Savings Accounts, announced on 16 October 2009;
Technical legislative proposals addressing recent court decisions on the GST/HST and financial services, announced on 14 December 2009;
Measures released in draft form on 18 December 2009 relating to the income taxation of shareholders of foreign affiliates, as well as the remaining measures released in a previous draft relating to foreign affiliates. In addition, the Government intends to reintroduce Bill C-10 from 2007.

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Spring 2010

admin — Wed, 03 Mar 2010 00:58:34 +0000

Newsletter by E-mail

Personal Tax
Employment Income
Business/Property Income
Owner/Manager Remuneration
Marriage Breakdown
Estate Planning
Did you know
Firm News

Personal Tax

Medical Expenses – Travel

In an 1 October 2009 Tax Court of Canada case, the taxpayer lived in Nanaimo, British Columbia but had bypass surgery in Victoria and claimed medical expenses totaling $12,248. The taxpayer was certified to be incapable of travelling without the assistance of an attendant.

Initially, CRA disallowed $3,912 of medical expenses pertaining to expenses incurred by his accompanying wife for accommodations and meals in Victoria during the eighteen days that he was hospitalized for bypass surgery.

Taxpayer Wins!

The Court noted that medical travel expenses embrace not simply the cost of movement from one place to another, but also the attendant cost of living away from home during the treatment period.

Common-law Relationship

In a 13 November 2009 Tax Court of Canada case, the issue was whether Ms. B was in a common-law relationship with Mr. V which would have adversely impacted her GST credit and her Child Tax Benefit amounts. Both incomes of common-law partners are considered in determining if they qualify for these amounts.

The Court noted that the definition of common-law partner turns entirely upon whether the persons cohabited in a conjugal relationship.

The characteristics of shared shelter, sexual and personal behaviour, services, social activities, economic support, children and societal perception are relevant, but not all are necessary. The weight given to each factor varies on a case-to-case basis.

Taxpayer Loses

The Court noted that she was in a common-law relationship because:

1. they regularly made meals for one another and did one another’s laundry;

2. Ms. B did household tasks, they dined out together and went to functions such as bowling, and mini golf;

3. they had sexual relations on occasion and neither was seeing anyone else;

4. they exchanged gifts at Christmas and birthdays;

5. they shared personal discussions and he assisted her with considerable personal and financial difficulties;

6. he was named on her car insurance as a driver of her car;

7. he provided financial support to her, and the neighbours regarded them as a couple; and

8. she sent letters to government authorities indicating that they were a common-law couple.

Post-secondary Students Outside Canada

CRA’s December 2009 Guide RC190 provides information and forms to make a claim for the tuition, education, and textbook tax credits for post secondary education outside Canada.

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Employment Income

Travel Expenses

In a 9 September 2009 Tax Court of Canada case, the teacher claimed motor vehicle employment expenses of $5,272 in 2005 while employed as a substitute teacher with Catholic and Public School Boards in Peterborough. He travelled to various schools throughout the districts in that year.

The taxpayer received a Form T2200 from the Catholic School Board, but not from the Public School Board.

Taxpayer Wins – Sort Of!

The Court found that the Catholic School Board travel expenses were tax deductible on the basis that he was required to work away from the employer’s place of business, and did not receive an allowance, and did receive a Form T2200 – Declaration of Conditions of Employment.

However, the expenses related to the Public School Board were not deductible because the Public School Board did not provide a Form T2200.

Scholarship/Free Tuition

In a 1 September 2009 External Technical Interpretation, CRA notes that as a result of several recent Court Decisions, CRA now accepts that where an arm’s length employer provides a post-secondary scholarship, bursary or free tuition to family members of an employee under a scholarship program, the amount will be included in the student’s income, not the employee’s income.

If the student is eligible to claim the education tax credit (post-secondary education) the entire amount may be exempt from tax.

With respect to employer-paid training or educational assistance for arm’s length employees, CRA states that when the training is taken primarily for the benefit of the employer, there is no taxable benefit whether or not this training leads to a degree, diploma or certificate.

When an employee must resume his/her employment for a reasonable period of time after completion of the courses, CRA generally considers that the employer is primarily the one to benefit and, therefore, the amounts are non-taxable to the employee.

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Business/Property Income

General Purpose Computer Equipment

A 100% Capital Cost Allowance (CCA) deduction rate applies to certain general-purpose computer equipment, including related system software and ancillary data processing equipment that:

• is acquired after 27 January 2009 and before February 2011;

• is situated in Canada; and

• is acquired for the purpose of earning income in Canada.

In addition, the property must be new. An example of ancillary data processing equipment is a printer that is connected to a general-purpose computer such as a desktop or laptop.

Also, in a 13 July 2009 External Technical Interpretation, CRA notes that a restaurant Point of Sale Computer System generally qualifies.

Tax-Deductible Interest Expense

A procedure of selling non-registered securities, using the proceeds to pay off a personal debt, and then re-borrowing to purchase securities may create tax deductible interest on the new debt.

However, remember that capital losses realized on the sale of securities will be denied if the same securities are repurchased within 30 days.

This conversion of non-tax deductible interest into tax deductible interest has complexities which may require professional assistance.

Bonuses Payable and Payroll Remittances

It is sometimes difficult to remember to make appropriate and timely source deductions for remuneration received from your corporation. However, failure to do so can carry significant costs.

Also, any remuneration not paid within 179 days of the end of the fiscal year in which it was accrued is non-deductible until it is paid.

The best evidence of such payment is to ensure that the source deductions are remitted on a schedule that demonstrates full payment of the bonus within 179 days of the fiscal year end.

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Owner/Manager Remuneration

Director Liability

Under the Income Tax Act, where a corporation has failed to remit source deductions or GST/HST, the directors at that time may be jointly and severally liable to pay that amount plus any interest or penalties to CRA.

However, a director is not liable where the director exercises the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

In addition, no CRA action may be made against the director if more than two years has expired after the director last ceased to be a director of that corporation.

Management Fees

In a 30 June 2009 Tax Court of Canada case, $80,000 in management fees paid by the Appellant to a related company were considered not to be deductible on the basis they were not incurred to earn income from a business and were not reasonable.

The Court noted that the lack of any written or verbal agreement stating the terms and conditions of the services to be provided to the Appellant and the absence of the formalities required to create real legal obligations between the companies led to the disallowed deduction.

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Marriage Breakdown

Disclosure of Assets

In a breakdown of a marriage where one of the spouses is a beneficiary of a Discretionary Family Trust, the details of the Trust interest may have to be disclosed to the other spouse. This obligation may override the Trust’s claim of privacy and confidentiality.

In one example, a Discretionary Family Trust, in which a daughter is a beneficiary, acquired a class of shares in the family corporation. Upon the divorce of the daughter, the parent Trustees have been in a battle with the other spouse with respect to the disclosure of the Trust assets, including the family corporation shares.

Arrears

In an 14 October 2009 Tax Court of Canada case, the issue was whether a payment for spousal support arrears is deductible to the payor and taxable to the recipient.

The Court noted that a payment of spousal support arrears, whether in a lump sum or over time, generally continues to be deductible.

However, the result is different if the payment is not simply a payment of arrears. A recent example of this is where the taxpayer agreed to make a payment of $100,000 at a time when there were arrears in the amount of $370,000. The Court concluded that the lump sum amount was paid to obtain a release from the liability to pay the arrears and that the character and the nature of the payment were, therefore, altered.

Whether a payment retains its character as a payment of arrears or something else is largely a factual question that depends on the circumstances.

Change of Relationship Status

The end of a marriage or a common-law relationship has significant income tax effects including support calculations, and property settlements, in some cases.

It is fairly easy to determine when a legal marriage ends – the date of the divorce decree is stated in the legal documentation. The end of a common-law relationship can be more difficult to determine, or to plan around.

For income tax purposes, a common-law relationship comes into existence when two individuals cohabit in a conjugal relationship and either have a child together or have cohabited for at least a year. The relationship is deemed to continue thereafter unless they were living separate and apart at the particular time for a period of at least 90 days because of a breakdown in their conjugal relationship. Common-law partners are, therefore, effectively “divorced” on the 91st day after a separation.

Also when a relationship changes, individual income instead of family income becomes relevant for determining eligibility for such programs as the GST Credit and the Child Tax Benefit. Depending on the couple’s relative incomes, this could significantly enhance the entitlement to program payments.

The above definition of common law status, like many other income tax definitions, applies only for income tax purposes. Different statutes apply different definitions, often under provincial rather than federal law.

Pension Benefits

In a 20 November 2009 External Technical Interpretation, CRA notes that if a division of the pension rights occurs and each spouse has a proprietary interest in the pension benefits and is legally entitled to a portion of the pension income, then each spouse is required to include in income their respective share of the pension benefits.

This applies whether pension benefits are received by separate cheques to each or by one cheque to the pension plan member with a distribution of half to the former spouse.

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Estate Planning

Registered Disability Savings Plan (RDSP)

An RDSP is a Trust arrangement to which contributions (up to $200,000) can be made for the benefit of an individual who qualifies for the Disability Tax Credit (DTC) and is under age 59.

In addition, amounts are paid by the Government into an RDSP including grants (up to $70,000) and bonds (up to $20,000) under The Canada Disability Savings Act (CDSA) and the Canada Disability Savings Regulations (CDSR).

(For information search “RDSP” @ www.cra.gc.ca)

Tax-Free Savings Accounts (TFSAs)

TFSAs have been available since 1 January 2009 at $5,000 per year. Income earned in these plans is not-taxable nor are any withdrawals from the plans. (For more information search “TFSA” @ www.cra.gc.ca or request a copy of our information sheet.)

Generally, an individual’s TFSA will lose its tax-exempt status upon death. However, if a spouse or common-law partner is the “successor account holder”, the account will maintain its tax-exempt status.

Even though TFSAs provide for the designation of a spouse or common-law partner as the “successor account holder”, many financial institutions did not provide this on the initial application forms in early 2009. Today, every person can name the spouse or common-law partner as a “successor account holder” for their TFSA to obtain the rollover treatment on death. Therefore persons that acquired TFSAs earlier in 2009 should consider going back to the financial institution and completing the required Forms.

Acquiring a Mortgage in an RRSP

A benefit of acquiring a person’s mortgage in an RRSP is that the bank may charge, for example, a 4% interest rate on a five-year mortgage while only paying 1% on guaranteed investment certificates. This spread of 3% could be saved if a self-directed RRSP purchases the person’s mortgage as an eligible investment with, say, a 4% rate of return. On a $50,000 investment, the benefit would be $1,500 per year.

For example, a taxpayer could acquire their own mortgage, or a child’s mortgage, in an RRSP but they must first open a self-directed RRSP. Costs include mortgage appraisal fees, legal fees, mortgage insurance under Canada Mortgage and Housing Corporation, annual mortgage administration fees, and annual self-directed RRSP fees. Also, an approved lender from the National Housing Act must administer the mortgage and there may be additional costs in paying off a current mortgage.

Specific professional assistance may be needed.

Registered Retirement Saving Plan (RRSP) Over-contribution

Where an individual has contributed a “cumulative excess amount” in respect of an RRSP, the individual must pay a tax equal to 1% per month on the portion of that amount which is more than $2,000. Therefore eligible contribution limits should be reviewed before making any RRSP contribution.

Donation Programs

In a 12 November 2009 Tax Court of Canada case, the issue was whether the taxpayer was entitled to a charitable donation tax credit in respect of a $100,000 payment made under an arrangement known as the 2001 Donation Program for Medical Science and Technology (The Program) marketed by Trinity Capital Corporation (Trinity).

The Program involved “leveraged donations”.

For example, based on a pledge of $100,000, the Trinity Program would require a payment of $20,000 to Trinity, an agreement to borrow, on a non-interest bearing basis, $80,000 from a wholly-owned subsidiary of Trinity (Capital Ltd.), and an additional payment of $10,000 to Capital Ltd. as security for a loan, a fee for arranging the loan, and a premium in respect of an insurance policy.

Taxpayer Loses

The Court noted that it is clear that the Appellant did not make a “gift” to the Foundation because a significant benefit flowed to the Appellant in return for the Donation. Therefore, the entire donation tax credit was disallowed.

Non-Profit Organization (NPO) – Earning a Profit

In a 5 November 2009 External Technical Interpretation, CRA notes that an NPO may only earn a profit if it is incidental and generally unanticipated.

An NPO must be organized and operated “exclusively” for “any other purpose except profit”, to be exempt from tax.

Ten-Year Gift

In a 4 December 2009 CRA Release, CRA notes that receiving gifts with a ten-year direction can be a useful way for a registered charity to accumulate a capital fund, with the intention, for example, of using only the interest income to carry out its activities. The donor will receive a receipt for the full amount in the year of gifting. The charity must ensure that each ten-year gift it receives is tracked separately, since it must ensure that it does not spend any portion of the capital of the gift for at least 10 years.

A Written Direction must accompany the gift. The Direction must be signed and dated by the donor at the time the gift is made.

Example

I hereby give $… to ABC Charity with the specific instructions that this gift, or any property substituted for it, be held by ABC Charity for a period of not less than ten years.

Signature of Donor

Date

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Did you know . . .

Taxation of Olympic Prizes

In a 26 June 2009 Technical Interpretation, CRA notes that prizes awarded to an athlete for winning at the Olympic Games (other than the medals) are taxable. This also applies to the prize money that the Canadian Olympic Committee pays to Canadian athletes who win medals at the Games.

However, an amateur athlete who is a member of a registered Canadian Amateur Athletic Association and eligible to compete in International sporting events will be able to defer paying tax on this income.

Federal Government Employee – Contact Information

You can search for an employee within the Federal Government by visiting the Government Electronic Directory Services. It lists the names, titles, telephone numbers, fax numbers and mailing addresses of departmental employees. http://sage-geds.tpsgc-pwgsc.gc.ca

Tax Evasion

In December 2009, National Revenue Minister Jean-Pierre Blackburn said that 90 people have Voluntarily Disclosed their Swiss Bank UBS accounts to Ottawa. The government has reached deals with 44 of them raising an extra $15.3 million in tax revenue in the process. CRA are still discussing with UBS and other authorities trying to obtain a list of Canadians who have accounts in tax havens abroad.

As of 2 December 2009, 6,798 Canadians have made Voluntary Disclosures to CRA since 1 January 2009 disclosing $1.66 billion of assets.

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Firm News

The Olympics

We’re all proud that Vancouver is hosting the Olympics; we wish our athletes every success in their endeavours. However it does create some communication difficulties for all of us. Our office is right across the road from the Vancouver Club which has been taken over for the month of February by Vanoc. We are right in the middle of things. The parking lot that we use with the entrance on Cordova Street between the Vancouver Club and the Terminal City Club is available but is severely restricted. During the month of February if you have something to deliver to our office or perhaps something to be picked up from our office, we would suggest that you call our switchboard or your partner and we can probably arrange for a drop off or a pickup at one of our staffs’ homes.

We definitely have partners or staff in Vancouver, West and North Vancouver, Richmond, New Westminster, Burnaby, Surrey, White Rock, Tsawwassen, Port Moody and Coquitlam and we can certainly make arrangements for you. The mail should not be a problem although often the size of the packages we have are not suitable for the mail.

We should also tell you that our Managing Partner, Rob Watts, was one of the torch bearers and he and his wife Theresa ran in Langley. Theresa was recently inducted into the Canadian Sports Hall of Fame for her leadership in junior hockey and through this connection they were chosen to be torch bearers. In addition, their son also applied and was accepted as a torch bearer in Vancouver.

LLP Update

In common with most professional practices the firm has converted to an LLP which you will see in the enclosed insert. This will not change who you will be working with and will not impact on your ongoing arrangements with us. It is simply a change in our business model. If you have any questions or concerns regarding this, please contact your partner.

We hope you all enjoy the activities in the Olympics and if you have any questions about service, please give us a call.

DRLR

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Winter 2009

admin — Fri, 04 Dec 2009 00:43:48 +0000

Newsletter by E-mail

Clients

Located on our website (rolfebenson.com) is a link SEND THIS FILE. Please use this secure form when sending us your data.

Table of Contents

Year End Tax Planning

2009 Remuneration

Employment Income

Estate Planning

GST/HST

Firm News

Year End Tax Planning

Some 2009 year-end tax planning tips include:

1. Certain expenditures made by individuals by 31 December 2009 will be eligible for 2009 tax deductions or credits including: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expenses, certain public transit amounts, and children’s fitness amounts.

2. The 2009 Federal Budget proposes to introduce a temporary Home Renovation Tax Credit for expenditures made after 27 January 2009 and before 1 February 2010 in excess of $1,000, to a maximum of $10,000, resulting in a maximum Federal credit of $1,350 ($9,000 x 15%).

Please provide details of renovation costs (example – carpets, landscaping, additions, fences, painting, etc).

For details, see www.cra.gc.ca and click on Home Renovation Tax Credit.

3. You have until 1 March 2010 to make tax deductible Registered Retirement Savings Plan (RRSP) contributions for the 2009 year.

Consider contributing to a spousal RRSP to achieve income splitting in the future.

4. If you own a business, consider paying a reasonable salary to family members for services rendered to the business.

5. An individual whose 2009 net income exceeds $66,335 will lose all, or part, of their old age security.

Senior citizens will begin to lose their income tax age credit if net income exceeds $32,312.

6. Consider purchasing assets eligible for capital cost allowance before the year-end.

7. Consider selling capital properties with an underlying capital loss prior to the year-end if you had taxable capital gains in the year, or any of the preceding three years. This capital loss may be offset against the capital gains.

8. Registered Education Savings Plan (RESP):

A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for children (maximum $500 per child per year).

9. Health and dental premiums for the self-employed:

Individuals will be allowed to deduct amounts payable for Private Health Service Plan coverage in computing business income provided they meet certain criteria.

10. A refund of Employment Insurance paid for non-arm’s length employees may be available upon application to CRA.

11. Taxpayers that receive “eligible” dividends from private and public corporations will have a significantly lower tax rate on the dividends. Notification from the corporation to the shareholder is required when such dividends are paid.

12. Eligible public transit passes will be entitled to a tax credit.

13. A fitness tax credit for children under 16 enrolled in certain organized sports is available.

Please contact your professional advisors for assistance in any of these matters.

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2009 Remuneration

Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning “active business income” include:

1. Bonusing down active business earnings in excess of the annual business limit may reduce the overall tax payable. However, reinvesting within the company any active business income over this amount does allow one to defer income taxes.

2. Notification must be made to the shareholders when a company pays an “eligible” dividend – usually in the form of a letter dated on the date of the dividend declaration. If all shareholders are directors, the notification may be made in the Directors’ Minutes.

3. Elect to pay out tax-free “capital dividend account” dividends.

4. Consider paying dividends to obtain a refund of “refundable dividend tax on hand” by the corporation.

6. Dividend income, as opposed to salaries, will reduce an individual’s cumulative net investment loss balance thereby providing greater access to the capital gain exemption.

7. Excessive personal income affects receipts subject to clawbacks, such as old age security, the age credit, child tax benefits, GST credits and certain provincial incentives.

8. Salary payments require source deductions to be remitted to the Canada Revenue Agency on a timely basis.

9. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create “earned income”.

10. Salaries paid to family members must be reasonable.

Please contact your professional advisor for advice before paying an eligible or ineligible dividend.

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Employment Income

Canada Pension Plan Changes

In 2009 the Government has proposed several changes to the Canada Pension Plan (CPP) to be effective starting in 2012. First, individuals will be able to apply for CPP early (between ages 60 to 65) without the previously required two-month period of reduced earnings or cessation of employment. Second, employed individuals below age 65 will be required to contribute to CPP even if receiving CPP benefits, while employed individuals over age 64 can continue contributing to CPP on a voluntary basis. Third, the number of years dropped in computing one’s average contributions (used in calculating one’s pension) will increase over three years from 15% to 17% (from a maximum of seven years to a maximum of eight years). Fourth, the pension reduction in taking CPP before age 65 would be increased from 0.5% to 0.6% per month, while the pension increase for taking CPP after one’s 65th birthday would be increased from 0.8% to 0.7% per month (up to age 70).

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Estate Planning

Excess Contribution to RRSP – Tax and Interest

In a 18 June 2009 Tax Court of Canada case, the taxpayer made excessive contributions to an RRSP and was assessed a 1% per month tax plus interest.

The taxpayer’s waiver request was refused.

Director Liability – Unpaid GST/HST

In a 4 May 2009 Tax Court of Canada case, the taxpayer/ director was assessed for personal liability for unpaid GST/HST of $236,344 plus interest of $7,372 plus penalties of $9,651 for a total of $253,367.

Taxpayer Wins!

The Court noted that where the director has little understanding of financial documents, he may rely on others to handle the financial aspects without incurring personal liability for unpaid GST/HST.

Also, in a 12 May 2009 Technical Interpretation, CRA notes that directors cannot be assessed more than two years after they cease to hold office.

Editor’s Comment

Legal advice is needed in this area.

Superficial Losses

In a 22 January 2008 Technical Interpretation, CRA notes that a taxpayer’s loss from the disposition of property is deemed nil to the extent that it is a “superficial loss”.

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GST/HST

Discretionary Investment Management Services

A recent federal court of appeal decision ruled that discretionary investment management fees qualified as GST exempt financial services. Therefore clients may be entitled to claim a rebate for GST paid on these fees. Although CRA has not appealed the decision to the Supreme Court of Canada it is possible that the Federal government may amend the legislation to deem these types of investment management fees not to be exempt which could retroactively nullify any rebate.

Despite the Federal Court of Appeals decision, CRA maintains the position that fees for discretionary investment management services are still subject to GST. Accordingly, most investment managers are continuing to charge the GST.

As there is both cost and uncertainty of ultimate collection on any GST rebate claims, clients may decide to wait until the Department of Finance clarifies the GST status of such services before incurring professional fees to prepare the necessary rebate claims. Clients, however, should note that a rebate claim must be generally filed within two years after the day the amount was paid. Please contact your Rolfe, Benson advisor should you wish to proceed with a possible GST rebate claim on investment management fees paid.

Input Tax Credits (ITCs) – Caution

In corporate structures, it is important to ensure that it is the recipient of the supply that pays the expense and claims the ITC. CRA has made reassessments where the wrong person in a corporate group has claimed the ITCs.

Editor’s Comment

See your professional advisor for more information.

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Firm News

We have approached the Christmas and holiday season with great anticipation for all the joy it brings. We celebrate the completion of our 50 years in practice with a total of staff and partners that has also reached 50. We thank all our wonderful clients and staff for what success we have had. We try as a firm to think of those who are less fortunate than us and in particular we all go to the Salvation Army for one evening and supply and serve those who are less fortunate. We have been doing this for some years and has become part of our tradition. Shamash Valji who has now retired as a partner is on the Board of the Salvation Army and he tells us that this kind of assistance is much appreciated. We also continue our tradition of making significant donations to at least three charities in lieu of sending out Christmas cards. This too has become part of our tradition.

We recognize our staff at this time of the year with our long and well established profit sharing plan and it was interesting to note that we have not had any staff leave us in the last year. We have seen Greg Lonsbrough, Ken Mitchell and Brian Kerr all retire but we don’t allow them to really retire and they all will be back during tax time to help out along with former staff members Margot Magee and Margaret Rolfe. We describe ourselves as a family firm not just because we have family members here (Susan Tufts, Natalie Chadwick and the two Madrazo sisters) but also because we try to encourage a family relationship among our staff and our clients. Many of you drop in to see us from time-to-time even when we are not doing work for you (and we don’t send a bill). We have been in our building at 900 West Hastings for 32 years and are hoping to acquire some more space so that we can continue to remain in this excellent location.

Our newsletter a year ago talked about the rise in gas prices and the fall in the stock market. It would seem that gas prices have come down (particularly natural gas) and the stock market seems to have gone up. These encouraging changes along with the Olympics in 2010 would seem to set a stage for a good year and we would like to wish you all the Compliments of the Season and a Happy New Year.

DRLR

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Fall 2009

admin — Wed, 07 Oct 2009 17:46:08 +0000

Newsletter by E-mail

Clients

Located on our website (rolfebenson.com) is a link SEND THIS FILE. Please use this secure form when sending us your data.

Personal Tax
Employment Income
Business/Property Income
Home Renovation Tax Credit
Registered Charities
GST/HST
Firm News

Personal Tax

Medical Expense – Air Conditioner

In a 27 April 2009 External Technical Interpretation, CRA notes that a taxpayer may claim the cost of installing a central air conditioner as a medical expense providing certain tests are met.

In particular, the taxpayer needs a prescription from his/her doctor which indicates that he/she needs an air conditioner to help cope with an ailment which is both severe and chronic. Also, the medical expense claim for an air conditioner is limited to the lesser of $1,000 and 50% of its cost.

Medical Expenses – Out-of-country

In a 19 May 2009 External Technical Interpretation, CRA notes that the cost of stem cell therapy which is not available in Canada will qualify as a medical expense, including payments to medical practitioners and hospitals and the transportation and travel expenses for the patient and, where an individual has been certified as being incapable of travelling alone, for an accompanying individual.

CRA did note that certain requirements must be met such as substantially equivalent medical services were not available in the individual’s locality.

However, CRA also noted that even where medical services are available nearer to the individual’s locality, if, in the circumstances, it is reasonable for the individual to have travelled to the place where the medical services were obtained, the reasonability requirement would be met.

Medical Expense – Tuition Fees

In a 7 April 2009 Tax Court of Canada case, the taxpayer claimed tuition fees paid to Foothills Academy of $10,499 and $21,525 as a medical expense.

The Court noted that the taxpayer must provide a certificate from an appropriately qualified person (example, a doctor) certifying that:

(i) the person has a mental or physical handicap; and

(ii) by reason of which the person requires equipment, facilities or personnel specially provided by that school for care, or care and training, of people suffering from the same handicap.

Taxpayer Wins – Partially

The Court determined that there was no medical expense due to an inadequate certificate. CRA did say that if a proper certificate was provided they would reconsider the claim.

However, a portion could still be claimed (estimated to be 20%) as remuneration for tutoring services that are supplementary to the primary education of the patient who has a learning disability or mental impairment as certified in writing by a medical practitioner.

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Employment Income

CRA Administrative Changes

On 11 June 2009, CRA introduced administrative policy changes for taxable employment benefits. This is a brief summary of some of the changes.

Overtime Meals and Allowances Provided to Employees

For 2009, CRA will consider no taxable benefit to arise if:

- the value of the meal or meal allowances is reasonable; a value of up to $17 will generally be considered reasonable,

- the employee works two or more hours of overtime right before or right after his/her scheduled hours of work, and

- the overtime is infrequent and occasional in nature. Less than three times a week will generally be considered infrequent or occasional. However this condition may also be met where the meal or allowance is provided three or more times per week on an occasional basis to meet workload demands such as major repairs or periodic financial reporting.

If overtime occurs on a frequent basis or becomes the norm, CRA considers the overtime meal allowances to be a taxable benefit since they start taking on the characteristic of additional remuneration.

Municipality or Metropolitan Area

For 2009, CRA will accept that allowances paid for travel within a municipality or metropolitan area may be excluded from income if the allowance is paid primarily for the benefit of the employer. An allowance may be excluded from income when its principal objective is to ensure that the employee’s duties are undertaken in a more efficient manner during the course of a work shift, and where allowances paid are not indicative of an alternative form of remuneration.

Loyalty Programs

For 2009, CRA will no longer require loyalty points (e.g., frequent flyer points) that are controlled by the employee to be added as employment income by the employee as long as:

- the points are not converted to cash,

- the plan or arrangement is not indicative of an alternate form of remuneration, or

- the plan or arrangement is not for tax avoidance purposes.

Where an employer controls the points (e.g. a company credit card), the employer will continue to be required to report the fair market value of any benefits received by the employee on the employee’s T4 Slips when the points are redeemed.

Non-Cash Gifts and Non-Cash Awards

The current rules are that up to two gifts and two awards costing $500 or less are non-taxable to the employee and deductible to the employer.

For 2010, the following changes are being made to CRA’s gift and award policy:

- Non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number, will not be taxable to the extent that the total aggregate value of all non-cash gifts and awards to that employee is less than or equal to $500 annually. The total value in excess of $500 annually will be taxable.

- In addition to the above, a separate non-cash long-service/ anniversary award may also qualify for non-taxable status to the extent its total value is $500 or less. The value in excess of $500 will be taxable. To qualify, the anniversary award cannot be for less than five years of service or for five years since the last long-service award had been provided to the employee. For the purpose of applying the $500 thresholds, the annual gifts and awards threshold and the long-service/ anniversary awards threshold are separate. In other words, a shortfall in value under one policy cannot be used to offset an excess value on the other.

- The employer gift and award policy will not apply to non-arm’s length employees (e.g. relative of the proprietor, shareholders of closely held corporations) or related persons of the non-arm’s length employee.

- For clarification purposes, items of an immaterial or nominal value, such as coffee, tea, T-shirts with employer logos, mugs, plaques, trophies, etc. will not be considered a taxable benefit to employees. Also performance-related awards (e.g. sales targets) or cash and near-cash awards (e.g. gift certificates) will continue to fall outside the administrative policy and will be required to be included in the taxable income of the employee.

See www.cra.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gfts/menu-eng.html for more information.

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Business/Property Income

Restructuring of Borrowings

In a 31 March 2009 External Technical Interpretation, CRA was asked to review a situation where the taxpayer has a mortgage on a personal property (interest expense is non-deductible) and proposes to sell investments (such as shares and bonds), use the proceeds to repay the mortgage, and then secure a joint line of credit with the personal property as security in order to acquire investment assets to earn income.

CRA notes that a taxpayer may restructure borrowings and the ownership of assets so that the interest is deductible for tax purposes.

Caution: Professional assistance is needed in this area.

Deductible Life Insurance Premiums

Premiums payable by a taxpayer under a life insurance policy used as collateral for a loan may be deductible in computing income from a business or property where certain conditions are met including:

(i) the life insurance policy is assigned to a financial institution in the course of borrowing from that institution;

(ii) the assignment of the life insurance policy is required by the financial institution as collateral for the borrowing; and

(iii) the interest payable in respect of the borrowing is otherwise deductible in computing the taxpayer’s income for the year.

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Home Renovation Tax Credit

Under proposed changes a taxpayer can claim a non-refundable tax credit on the 2009 personal income tax return based on eligible expenditures incurred for work performed or goods acquired after 27 January 2009, and before 1 February 2010, in respect of an eligible dwelling. The HRTC applies to eligible expenditures of more than $1,000, but not more than $10,000, resulting in a maximum credit of $1,350 [($10,000 - $1,000) x 15%].

The CRA site at www.cra.gc.ca/hrtc notes that generally any dwelling that you own and is used personally by you or your family can qualify, including your home or cottage.

Examples of eligible costs include renovating a kitchen, bathroom, or basement; new carpet or hardwood floors; building an addition, garage, deck, garden/storage shed, or fence; re-shingling a roof; a new furnace, wood stove, boiler, fireplace, water softener, or water heater; a new driveway or resurfacing a driveway; interior or exterior painting; window coverings directly attached to the window frame and whose removal would alter the nature of the dwelling; laying new sod; permanent swimming pools; fixtures (lights, fans); associated costs such as permits, professional services, equipment rentals and incidental expenses.

Expenses that will not qualify include furniture, appliances, audio and visual electronics, tools, carpet or housecleaning, maintenance contracts, and financing contracts.

Also, CRA notes in a 19 May 2009 External Technical Interpretation, that any window covering, including blinds, shutters and shades, that is directly attached to the window frame and whose removal would alter the nature of the dwelling will qualify for the HRTC. However draperies or curtains would generally not be considered to be fixtures and will not qualify for the HRTC.

Also, in another 19 May 2009 External Technical Interpretation, CRA notes that the larger, heavier type of hot tub that needs to be hardwired directly to the homeowner’s electrical panel would qualify for the HRTC. However the “plug-and-play” type that comes with the cord connected and ready to use, without the need of a permanent electrical installation, would not qualify as it is not enduring in nature and integral to the eligible dwelling.

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Registered Charities

New Tax Return

The Registered Charity Information Return has been substantially revised by the CRA and the new forms (T3010B) must be used by all Charities for fiscal years ending in 2009. The new return is more than twice the length of the old form (four pages to nine pages), so Treasurers should be prepared to spend more time dealing with the return this year.

Disbursement Quota

Registered charities which are charitable organizations were given a holiday of several years in regard to a component of their disbursement quota relating to investment assets. The holiday is over in 2009! All charities must now add 3.5% of the average market value of their inactive investments to their disbursement quota (the minimum expenditures on charitable activity needed to preserve an organization’s charity status). Treasurers should speak to their accountants to determine the impact on their charity’s operations.

Expenses Incurred by Volunteers on Behalf of a Registered Charity

In a 28 April 2009 CRA Release, CRA notes that where a volunteer has a right to reimbursement from the registered charity for expenses incurred, the charity may treat the reimbursement waiver as a gift in kind and issue a receipt for income tax purposes.

A written direction from the volunteer should be obtained confirming the right to reimbursement and direct the registered charity to issue a receipt rather than provide reimbursement – for example, “I ____ direct that the funds to which I am entitled by way of reimbursement for ____, and would otherwise be forwarded to me by cash or cheque, be transferred to ____ as my gift.”.

The charity should also have a policy in place on reimbursing volunteers.

The charity should report the amount of the gift on the Registered Charity Information Return (Form T3010) both as revenue, and as an expenditure.

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GST/HST

BC New HST

The Premier announced in July that effective 1 July 2010, BC will combine its Provincial Sales Tax (PST) with the Federal Goods and Services Tax (GST) into a single Harmonized Sales Tax (HST) at a rate of 12%. Point-of-sale rebates will be made for a number of goods which are currently exempt from PST including: gasoline and diesel fuel, books, children’s clothes, and new homes (pre-owned homes are already exempt from HST). A BC HST credit will also be available to low-income individuals, similar to the existing GST credit and carbon tax credit.

GST/HST New Housing Rebates

In April 2009, CRA released a 27-page Guide RC4028, GST/HST New Housing Rebate, which provides information if you built or bought a new or substantially renovated house (including a condominium unit and a mobile home), if you built a major addition to your existing house or if you converted a non-residential property into your house. The Guide explains the New Housing Rebate including Forms GST190 and 191.

Sale of Real Property

Under the Excise Tax Act, sales of real property in Canada are generally subject to GST/HST unless the supply is eligible for a specific exemption such as where the sale is made by an individual, unless it was used primarily in a business carried on by the individual with a reasonable expectation of profit.

Input Tax Credits (ITCs) – Caution

In a 2009 Federal Court of Appeal case, Telus acquired business assets from EdTel and filed a joint election under the Excise Tax Act such that the purchase resulted in no GST. However, some of the business assets acquired had not yet been paid for by EdTel and, therefore, the Agreement stated that Telus would pay the unpaid liabilities plus the GST of $1.8 million.

CRA successfully disallowed the $1.8 million of GST ITCs on the basis that Telus was not the recipient of the supplies for GST purposes.

Editor’s Comment

Also, in corporate structures, it is important to ensure that it is only the recipient of the supply that claims the ITC. CRA has made assessments where the wrong person in a corporate group has claimed the ITCs.

Home Construction Industry

In a 41-page CRA Release (RC4052), CRA discusses the GST/HST information for the Home Construction Industry including who remits the tax, filing the return, claiming Input Tax Credits, substantial renovations, sales of real property, grants and subsidies, and special situations.

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Firm News

Your regular Firm News contributor, David Rolfe, is currently away from the office enjoying some well-earned vacation time. As previously reported, Greg Lonsbrough retired on 31 July however he continues to provide advice and ongoing support while allowing himself additional time to enjoy his Pender Island retreat and more time at home. In July, we were very pleased to announce the merging of another CA practitioner with our firm, Abdul Allibhai who joins us with his staff member, Gord Sing. Abdul has practiced in Vancouver for 30 years and brings with him a very loyal group of clients. We hope that you enjoy the continued relationship with Rolfe, Benson.

As David Rolfe is away from the office, we thought this would be a good time to give you a little information on him. David obtained his CA designation in 1955 and started this firm on 8 December 1958. Many of you might wonder if David will ever leave however we have come to realize that this is his second home and he is likely not going anywhere nor will we let him. Over the years, David’s involvement in many activities include: sporting, charitable, business and community events has kept him very busy doing the work that he seems to enjoy so much. When not in the office, David has a variety of outside interests that keep him so busy that we suspect he doesn’t actually sleep. Under David’s management for 40 of our 50 years, Rolfe, Benson has built a solid reputation providing good business advice with a strong moral grounding. The firm hopes to continue in that fashion well into the future and with a little nudging from David, we seem to be on the right track. Our profession continues to change and evolve and as we keep up with these changes, David is always around to provide his opinion, insight and direction. We’re not sure if he’ll be around in another 50 years, although the odds makers are suggesting that it might be a good bet.

Rob Watts

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