DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

What’s Your Tax Issue? – Negative Retained Earnings

In Canadian Income Tax on April 4, 2013 at 2:58 pm

Questions

The Tax Issue

I am the only owner of a Canadian corporation with a year ending Dec 31. I regularly pay an annual dividend at the end of each year equal to my corporate profits.

Last February I started preparing the corporate tax return and after estimating income and expenses, issued a T5 slip for a dividend that I estimated would bring the retained earnings  balance to zero.

Two days ago I finalized my company’s year-end and found that I missed about $2,000 of expenses to be claimed for the year. Can I still claim the expenses which will drag retained earnings balance to negative scale? Should I expect any consequences from CRA side?

The Answer

This is a question that comes up from time to time, and it’s more a legal issue than a tax question. The ability to pay any dividend is governed buy the relevant corporation statute that your company was incorporated under. The rule is, however, generally similar among all the statutes. Under the Canada Business Corporations Act,  Section 42, a corporation is prevented from legally declaring or paying a dividend if there are reasonable grounds for believing that

(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.

So, as long as you don’t run afoul of the above rule at the time the dividend was paid, there should be no problem. If you do, however, find yourself with a small deficit, the CRA should not have a problem with it. The rule is there to protect your creditors and shareholders and to ensure that you do not strip the company of its assets in an illegal manner. A deficit of $2,000 is probably not going to attract a law suit.

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Information for Disabled Persons

In Canadian Income Tax, Disability, Personal Tax on February 26, 2013 at 1:01 am

Disability

In a previous article we discussed the way in which an individual must establish proof of a disability in order to claim certain tax credits. In this article we touch on some of what is available for disabled persons under the Income Tax Act.

The rules in this area are very complex (OK, downright confusing!!) and we will hit the highlights here, but for a more detailed discussion with examples, the CRA offers an excellent guide in its publication RC4064-Medical and Disability Related Information.

Disability Tax Credit

The most common credit is the disability amount ($7,546 for 2012) available to all persons who qualify. An additional supplement of up to $4,402 may be available if you are under 18 years old at the end of the year. Any unused credit can be transferred to your spouse, or to another relative under certain circumstances if you lived with them and you were dependent on them for support.

The disability amount cannot be claimed, however, if you are claiming as a medical expense credit, either the cost of a full-time attendant or full-time care in a nursing home (see below). If you are in this situation, you must make a choice to determine which claim would be more beneficial to you.

Full-Time Attendant or Nursing Home

If you or your spouse pay the costs of a full-time attendant or full-time care in a nursing home, these costs may be claimed as medical expenses.

Other Attendant Care Expenses

There is a separate rule that allows you to claim up to $10,000 of attendant care expenses (full or part time) as a medical expense credit without hampering your ability to claim the disability amount (this claim could overlap with the full-time care credit described above). So if you want to claim the disability tax credit, this rule gives you the opportunity to claim some (if not all) your attendant care costs in combination with the disability tax credit. (Didn’t I warn you about the confusing thing?). Take care to ensure that the amounts paid to a group home are broken down on your annual receipt between eligible medical costs (such as salaries paid for food preparation, laundry, housekeeping and medical care services) and non-eligible costs (such as rent, food and operating costs of the home).

Don’t Forget the Registered Disability Savings Plan

If you or your child is disabled and under the age of 60, then you should consider starting a Registered Disability Savings Plan. The amounts you contribute can earn income tax-deferred (similar to an TFSA), and you may also be eligible for additional government grants that would supplement your contributions.

Family Caregiver Amount

Finally, for 2012 and future years, a new $2,000 “Family Caregiver Amount” is available as a supplement to certain amounts you may be eligible to claim for dependents. For example, if you claim a personal tax credit in respect of your dependent spouse or child, and that person is also disabled, then you may add $2,000 to that claim.

 

 

 

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Love Conquers CRA

In Canadian Income Tax, Personal Tax on February 14, 2013 at 1:38 am

LovewifeLast year, during my travels through Jordan, our tour guide, Ali, who was about to leave us after 2 days in the southern part of the country, mentioned to me that he had a long drive ahead of him. He was not going home. He was making the 3 hour drive back up north to Amman, as he had been doing every evening, to visit his wife in the hospital. Each morning, he would drive back to the south for 3 hours to resume his duties. I found this type of dedication to be remarkable and, with a shy smile, he replied simply, “I love my wife”.

Later, after drying the mist from my eyes, I asked myself whether the cost of such a commute, if made by a Canadian taxpayer, would be considered eligible for the medical expense tax credit. (This paragraph was added as a dramatic segue. Everything else in this post is true. :-) )

Eerily, the answer recently came across my desk in the form of the Tax Court case of Jordan v. R. (I kid you not!). Terri Jordan, a resident of Weyburn Saskatchewan was struck by an aneurysm at age 48 and suffered brain damage. She required treatment in a rehabilitation centre in Regina. Her husband Bill commuted 120 kilometres to visit his wife daily, over a period of 102 days during 2010. His auto and meal costs totaled more than $15,000 and he sought to claim these as medical expenses.

The law provides that travel costs qualify as medical expenses if they are reasonable outlays incurred in respect of the patient and, where the patient has been certified by a medical practitioner to be unable to travel without the aid of an attendant, in respect of one person who accompanied the patient, to obtain medical services in a place that is at least 80 kilometres from the locality where the patient dwells and equivalent services cannot be obtained in that locality.

In the Jordan case this provision was interpreted by the CRA as applicable only to the transportation of the patient, and they allowed only the cost of one round-trip.

Judge Woods, however, interpreted the rule as applying not simply to the cost of moving the patient, but to those additional travel and accommodation expenses incurred by an attendant during the period of rehabilitation.

The court noted further that Ms. Jordan was required to receive medical treatment in Regina for a protracted length of time and that Mr. Jordan’s daily presence contributed significantly to her recovery. The appeal was allowed.

Now go hug someone you love, and………..

happy-valentine-day-wallpaper

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