If you haven’t seen this yet, you can thank me later.
Enjoy!!
Archive for December, 2009|Monthly archive page
More Than Five Means…..?
In Canadian Income Tax on December 23, 2009 at 5:02 pmThe phrase “more than five full time employees” is used in the Income Tax Act (“the Act”) mainly to establish whether an investment business is to be considered “active” for the purposes of the definitions of FAPI (foreign accrual property income) and, more commonly, for the purposes of claiming the small business deduction.
Until recently, the 1994 case of The Queen vs. Hughes & Co. Holdings Ltd. was the guiding precedent. In that case, the Tax Court interpreted the phrase to mean that all the employees considered must be full time, and there must be more than five, meaning at least six of them.
Enter the new millennium, and the interpretation has changed. In the recent case of 489599 B.C. Ltd. vs. The Queen, the Court has overturned the Hughes interpretation of the phrase, conceding that five full time employees plus one part time employee will satisfy the requirement. It all comes down to grammar, of course. The Court concluded that the word “more” modifies “than five”, and not, as Hughes suggested “full-time employees” (just play with the emphasis on different words and you’ll get the idea).
The Court goes on, however, to confirm the other principles set out in Hughes. There still must be five employees that are full time. You cannot, for example add up ten part-timers to meet the test. Nor can you allocate fractions of employees among co-owners or partners in a partnership. Each business must count its employees on its own.
At the recent Canadian Tax Foundation Conference, the CRA confirmed that it will abide by the more recent decision.
What’s Your Tax Issue?: Returning To Canada
In Canadian Income Tax, Non-residents on December 21, 2009 at 6:06 pmThe Tax Issue:
My first question to anyone who wants to move to Canada from the Bahamas: WHY?
My wife and I have been expats for 12 years. We would like to know if we come back to Canada can we keep our Bahamas IBC corporation that holds all our stock and bonds and pays us a yearly income? We presently only spend about 50% of our income, which is of course tax-free.
Or if we return to Canada, do we have to close the IBC and hold our investments personally,(or even keep the IBC) and still declare and pay taxes on all our annual income?
The Answer:
Well, it’s good that you only spend about 50% of your income, because, you may have to start paying just about that amount to Revenue Canada. From the time that you return to Canada, you will be subject to Canadian income tax on your world income.
There is no requirement to close your IBC when you return to Canada, but it may not be such a bad idea.
If you maintain your ownership of shares in your IBC as a Canadian resident, you will be subject to tax personally on all the income earned by the IBC, regardless of whether it is paid to you or not. This is known as “Foreign Accrual Property Income”, or “FAPI”. FAPI is what prevents a Canadian taxpayer from sheltering investment income through an offshore company.
On the other hand, if you wind up your IBC before entering Canada, all your investments may benefit from a “step-up” in cost, meaning that, for future capital gains purposes, the tax cost of each investment will be equal to its value at the time you enter Canada.
The annual income from your investments will be taxable to you either way as its earned, but holding them personally as a Canadian resident will likely be much simpler and less costly in the long run.
Before doing anything drastic, though, I would strongly recommend that you review your particular situation with a tax advisor.
Quebec Business Corporations Act
In Canadian Income Tax, Corporate Law on December 17, 2009 at 2:51 pmI just got back from a seminar on the new Quebec Business Corporations Act (“QBCA”). These proposals will replace the current Quebec Companies Act in its entirety. When the new law is enacted (probably within 1 year) all companies currently incorporated under Part 1A of the current law will automatically become QBCA corporations.
UPDATE: The new Act received royal assent on February 19, 2010, and will be in full effect by the fall. See the press release from Revenue Quebec.
The new act incorporates all the best features of the CBCA and other provincial statutes, billing itself as the most modern of Canada’s corporations acts.
The term “company” will no longer apply to Quebec charters; they will now be known as “corporations”.
Some of the features of this new act that are most interesting to me as a tax practitioner are:
Incorporation: The incorporation process will be much easier. Online incorporation will be available, and no name search report will be required.
Ability to issue par value shares: OK, this one already exists in the current law, but it will continue in the QBCA, which remains an advantage over the CBCA. This facilitates the use of “high/low” stock dividends in corporate reorganizations.
Ability to issue different classes of identical shares: The CBCA currently allows this, although few people are aware of it. This feature will facilitate the payment of discretionary dividends.
Corporate incest allowed: The QBCA will allow shares of a parent company to be held by its subsidiary for a period of 30 days. This will be a big help to those of us doing corporate spinoffs and other internal reorganizations.
Fractional shares permitted: Very often, when performing a reorganization, shares are split up into fractions. The old law did not allow such shares to exist. Now it will, but not upon an issue from treasury.
Amalgamations: Short-form amalgamations will be much easier, and will include sister companies where the shares are owned by an individual.
Dissolutions: There will be a much more streamlined method for dissolution, including the elimination of the need to put an ad in the newspaper.
Directors: There will be no requirement for directors to resident in Canada.
That’s just a small sampling of the more interesting features of the coming law. Of course, the list is by no means exhaustive. If you are truly interested in this topic, you can read the entire text of Bill 63, either in English or in French.
CRA Exposes More Offshore Shenanigans
In Canadian Income Tax, Tax Avoidance on December 14, 2009 at 1:50 pmIf you’ve been following the UBS scare in the U.S. (see my previous post on this topic) please add the tiny state of Liechtenstein and the relatively large Canadian institution known as RBC Dominion Securities to the list of names associated with offshore shenanigans.
The CBC reports that the Canada Revenue Agency is investigating 13 taxpayers who set up offshore accounts with LGT Group in Liechtenstein. These accounts were set up with the aid of Colin Ross, a former investment adviser at the Victoria branch of RBC.
Liechtenstein: Small, beautiful, and one of the tax community's best kept secrets
The CRA’s investigation, launched last year, found that certain foundations were set up and used by taxpayers to “masquerade as non-residents.” The agency says the taxpayers were “hiding their investments and other income” and “evading their obligation to pay Canadian tax.”
Of the 13 taxpayers implicated, some have made voluntary disclosures, and will therefore likely escape criminal charges and penalties. Others are under the gun for tax evasion, including one Victoria woman who told investigators she felt having an offshore account was “glamorous”.
RBC has released a statement disavowing any wrongdoing as a firm. The CRA is now investigating whether more Canadians are doing the same thing through RBC advisers across the country. But it won’t stop there. Revenue Minister Jean-Pierre Blackburn is quoted as saying “We will go after every other bank to obtain the list of their clients who do business abroad and to see if those clients declare their income.”
Put On Your Yamakah!
In Uncategorized on December 13, 2009 at 12:36 amNo tax issues today.
I’d like to take this opportunity to wish everyone a happy Chanukah and in that spirit let’s all share in one of the well-known rituals of this festive holiday. It’s a traditional Chanukah song, but with a bit of a twist. That’s right, it’s the excellent rockin’ cover of Adam Sandler’s Chanuka song by the fabulous (and Jewish) Neil Diamond.
Enjoy! And have a happy happy Chanukah!
Deducting Business Losses? Make Sure You’re In Business!
In Canadian Income Tax, Losses on December 10, 2009 at 12:36 pmIt is said that everyone has at least one great song inside of them. Thinking of going into the music business? Got that CD in the works? Got a few good songs to record? Those costs can add up. Studio time, CD packaging, travel expenses, etc. Would you like to deduct your expenses for tax purposes? Consider the case of Singh Binning.
The recent case of Binning v. The Queen (2009 DTC 1311) highlights the logical notion that in order to deduct business losses, you must have an actual business.
More specifically, the law has always been predicated on the idea that, to deduct losses, there must be a business and a reasonable expectation of profit.
In Binning’s case, he was employed full time as a supervisor in a lumber mill in Ontario, but managed the less-than-bourgeoning music career of his brother back in India. He financed the production of an album and two music videos in New Delhi, paying close to $100,000 which he reported as business losses over five years from 2001 to 2005. A good chunk of these expenses were for travel, and there were ostensibly no revenues to speak of during that period.
Financing a music star in India - There has to be some semblance of a business
The Supreme Court of Canada, in the case of Stewart v. The Queen (2002 DTC 6983) set out a twofold test to determine the deductibility of business losses, as follows:
Where the activity contains no personal element and is clearly commercial, no further inquiry is necessary. Where the activity could be classified as a personal pursuit, then it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income…
The Tax Court in Binning summarized this case as follows
…there is an absence of the businesslike conduct that one would expect if this were a profit-seeking venture. There is no plan. There is no evidence of efforts to try to make sure the business becomes profitable or to ensure that royalties are in fact being received. All of this is incompatible with there being a source of income…
Binning’s tax losses were denied.
So if you’re a parent of a child who wants to make it in the entertainment industry, instead of deflating his ego by telling him he lacks the talent, you can try discouraging him by presenting a dissertation on the law on tax losses. That should bring him to his senses!
GST Rebates for Non-Profit Organizations
In Canadian Income Tax, Goods and Services Tax on December 8, 2009 at 2:49 pmOne of the most asked questions in the area of GST concerns the rebate available to non-profit organizations (“NPO”). In general, where a GST registrant makes taxable supplies, it is entitled to a full input tax credit on purchases that relate to its commercial activities.
All of an NPO’s activities that are not commercial are in the realm of “non-profit”. All supplies of goods or services that are not for profit are considered exempt supplies under the Excise Tax Act (“the Act”). Exempt supplies are supplies on which the NPO may not charge GST and is not entitled to any ITC on expenses that relate thereto.
In the case of expenses that may relate to both the commercial and exempt operations of the NPO, these expenses must be apportioned on a reasonable basis to determine what percentage of the total is used in commercial activities in order to determine their ITC entitlement. For example, if 40% of the NPO’s activities involves the supply of taxable goods and services, then 40% of its office supplies may be allocated to the commercial activity and an ITC may be claimed for that portion.
The tax on the portion of the NPO’s expenses used in exempt activities may qualify for a special rebate under section 259 of the Act, which provides for a rebate of GST for certain NPO’s.
The rebate is available to the following organizations:
- Charities
- Qualifying NPO’s; and
- Selected public Service Bodies
Each of the above has its own definition:
Charity: is a registered charity or registered Canadian amateur athletic association as defined in the Income Tax Act;
Qualifying NPO: is an NPO that receives at least 40% government funding;
Selected public service body: is:
(a) a hospital;
(b) a non-profit school authority;
(c) a non-profit university;
(d) a non-profit public college or
(e) a municipality.
The current GST (QST) rebate rates available to these organizations are as follows:
(a) Charities and qualifying NPO’s: 50%
(b) Hospital: 83% (55%)
(c) School authority: 68% (47%)
(d) University or public college: 67% (47%)
(e) Municipality: 100% (0%)
To make the claim in Quebec, separate forms for the federal and Quebec governments must be filed as follows:
- Federal: form FP-66-V
(Guide: form FP-66.G-V) - Quebec: form VD-387-V
The above forms may be found over at Revenue Quebec.
If an NPO is not registered for GST purposes, there is no requirement to do so to claim a rebate. For current registrants, the claim must be made within four years from the deadline date for the GST/QST return for the period in question. For non-registrants, the claim must be made within four years from the end of the year in question.
What’s Your Tax Issue?: Vicarious Tax Liability
In Canadian Income Tax on December 2, 2009 at 10:09 pmThe Tax Issue:
I recently sold my half of our house to my spouse. Can it still be seized by the government if I owe them any tax?
The Answer:
One of the many tools in the CRA toolbox that gets quite a bit of use is section 160 of the Act. This rule provides that if you transferred any property to your spouse, a child or any person with whom you do not deal at arm’s length, and if you owe taxes to the CRA in respect of the year in which the transfer is made, or any previous tax year, then that person may be liable for your debt to the government.
So, in your case, if you have a tax liability outstanding, or will be liable for tax this year, then the CRA will calculate the value of the property you sold, reduced by the amount your spouse actually paid you for it, and your spouse may have to pay to the CRA whatever amount you owe, up to that value.
So, for example, if you owe $20,000 in taxes for 2009 and previous years, and your share of the house is valued at $80,000, if your spouse paid you $65,000 for your share, then she is liable for your tax bill up to a maximum of $15,000.
