DAVID WILKENFELD, CA, canadian tax CONSULTANT

Archive for 2012|Yearly archive page

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Support Payments Redux

In Canadian Income Tax, Personal Tax on February 13, 2012 at 1:46 pm

So you’ve split up with your significant other, and you’re forced to make support payments. The first thing you’ll be asking me is, “are they deductible?” Well, just like your relationship, it’s complicated. That’s what The Tax Issue is here for.

There are two basic requirements before you even consider taking a deduction. First, the payments must be based on a written agreement or a court order. Second, they must be periodic payments. Lump sums or payments based on a mutual, non written understanding are not deductible.

Once you’ve passed these hurdles the rules are different depending on when your agreement or court order was signed. We’ll tackle them one at a time, but before we do, you should be aware of one more thing: any amount that is deductible to the payer is also taxable to recipient.

Written Agreement or Court Order After April 1997

If your document is dated after April, 1997, only payments made in support of your spouse (or common law partner) are deductible. Child support is not.

Your agreement must clearly specify which payments are exclusively for spousal support. If no mention is made of the purpose of the payments, they are deemed to be for child support and are not deductible.

Payments made to a third party qualify as long as they are for the benefit of your spouse and he or she has control over them. For example, if a court order specifies that payments are to be made to a landlord for your spouse’s rent, it must also be made clear that your spouse may at any time have those payments made to her instead if he or she so desires.

If you qualify for a deduction under the above rules, you must register your agreement or court order with the CRA by filing form T1158.

Written Agreement or Court Order After April 1997

If your document is dated prior to May, 1997, then payments for spousal support and child support are deductible.

However, if the agreement was amended after April, 1997 and the amount of child support payments is modified, then you fall into the new rules, and they will no longer be deductible.

You can also choose, if your spouse agrees, to have the new rules apply to make the payments non-deductible (and non-taxable to the recipient) by filing an election on Form T1157.

Those are the basic rules. If you need more information, try the CRA guide P102. That should answer most of your questions.

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Employment Insurance for the Self-Employed

In Canadian Income Tax on February 2, 2012 at 4:47 pm

Did you know that self-employed individuals can now apply for Employment Insurance?

Changes in the Employment Insurance Act recently enacted have made it possible for self-employed taxpayers to opt in to the EI program. Since January 1, ,2010, if you are a Canadian citizen or a permanent resident you can register with the EI program and pay premiums. In order to qualify for benefits you must earn a minimum of $6,222 per year.

The premiums are identical to those paid by employees. For 2012 they are equal to 1.83 percent of your self-employed earnings (1.47 percent in Quebec). The maximum annual premium is $839.97 ($674.73 for Quebec), based on maximum annual earnings of $45,900.

Self-employed individuals are not required to pay any employer portion of EI premiums, and the amounts paid are eligible for a non-refundable tax credit.

If you opt in to the program you would be eligible for maximum benefits of 15 weeks for maternity leave, 35 weeks of parental/adoptive  benefits, 15 weeks of sickness leave and 6 weeks of compassionate care benefits.

You must be registered and paying premiums for at least one year prior to making any claim for benefits. In order to qualify for benefits you must have an “interruption of earnings” which is defined as a more than 40 percent reduction in the time devoted to your business activities as a result of pregnancy, illness, injury, quarantine, the need to care for certain children or the need to provide care or support to certain family members. The 40 percent reduction is based on your “normal level” of time devoted to your business.

You would be entitled to benefits of up to 55 percent of your average weekly earnings to a maximum for 2012 of $485 per week.

If you register, you can decide to opt out at any time in the future, provided you have never made a claim for benefits. Otherwise, you must remain in the program for as long as you remain self-employed.

In Quebec, self-employed taxpayers are automatically required to participate in the Quebec Parental Insurance Plan (QPIP) which provides additional benefits to self-employed persons who sustain an interruption of earnings due to maternity leave, paternity leave, parental leave or adoption leave.

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Introducing The Tax Issue Tax Organizer for 2011!!

In Canadian Income Tax, Personal Tax, Uncategorized on January 17, 2012 at 2:06 pm

Organizing tax information for your tax preparer can be a daunting task. Do you use a shoebox? a shopping bag? Despite your best intentions, you may not have the time or the knowledge necessary to provide a complete and organized dossier.

Those of use who prepare your taxes just don’t have the time or energy to instruct their clients on how to properly prepare their income tax papers.

And so, as a public service to those beleaguered tax preparers, and to those of you who want your accountant to love you at tax time, The Tax Issue introduces the Tax Issue Tax Organizer.

The Tax Issue Tax Organizer is a free PDF file that you can download and use as an accountant, to give to your client, or as a client to use yourself to help organize the information you give to your tax preparer and make his or her life a little easier.

How to use the Tax Issue Tax Organizer

Simply download and print the Organizer. Each page represents a section that will let you organize the information for that topic. It starts with a list of the relevant documents you should submit to your tax preparer. Attach each page to a separate envelope or file folder containing the documents for that section.

Each page has a list of Do’s and Don’ts to help ensure that you help your tax preparer by including all the necessary documents and receipts he needs to efficiently prepare your taxes.

Finally, each page contains a few tax tips to help guide you through the process.

Even if you prepare your own tax returns, The Tax Issue Tax Organizer is a great tool to help you prepare.

Have a great tax season and enjoy using the Tax Issue Tax Organizer!

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What’s Your Tax Issue? Residence in a Trust

In Canadian Income Tax, Personal Tax, Principal Residence on January 7, 2012 at 8:19 pm

Our House is a very very very fine house

                  –Crosby, Stills, Nash & Young

The Tax Issue

I am a member (beneficiary) of a family trust that was set up years ago by my Dad. The trust currently owns two houses. I live in one, and my sister, who is also a member of the trust, is married and lives in the other. We were told that we will have taxes to pay we sell our homes. Can this be true? Please help, as no one seems to know the answer.

The Answer

The principal residence rules that apply to personal trusts are surprisingly restrictive and can be a trap for the unwary.

A trust is treated as a person for tax purposes. As such, it does have access to the principal residence exemption on the sale of a home. But here’s the kicker: if a trust designates a home as a principal residence for a given year, then every beneficiary of that trust who lived in a home owned by the trust is deemed to have made the designation. And remember, a person can only designate one property as her principal residence. This applies to a trust as well. This means that if you sell the home you are living in and the trust claims it as a principal residence, then when the trust sells your sister’s home, the trust is precluded from making the designation on the second home. Her home becomes ineligible for the exemption for those years even though it may be the only home she’s lived. This might come as a shock, and it seems unfair, but that is the way the law works.

So, let’s look at an example. Say the trust owned your home since 2000 and it is sold in 2012 at a gain of $500,000. Furthermore, let’s assume the trust owned your sister’s home since 1996, and sells in 2012 at a gain of $400,000. If the trust claims the full principal residence exemption on your home, then it will be precluded from claiming the exemption for the years 2000 – 2012 on your sister’s home. In fact, for the 16 years the trust owned your sister’s home, only 4 will qualify, so only 4/16 of the gain will be exempt. (Actually, the formula generously adds 1 year to numerator, so technically 5/16, or $125,000 of the total gain will be exempt).

Taxpayers thinking about placing personal homes in a family trust should always seek professional tax advise.

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Tax Court Rules On Ponzi Scheme Victims

In Canadian Income Tax, Losses on January 3, 2012 at 2:00 am

The Tax Court of Canada has recently confirmed the tax treatment of Ponzi scheme victims as I feared they would in the very first issue of The Tax Issue.

In a Ponzi scheme, taxpayers unwittingly entrust funds to a promoter, who, rather than investing them, uses them to make payments to other investors. The flow of funds continues this way until enough people finally ask for their money back, at which point, the fraud is exposed.

The taxpayer in the case of Johnson (2011 TCC 540) was a winner because the court ruled that in a Ponzi scheme, there is no investment and thus no source of income. The good news for this taxpayer, a victim of Andrew Lech, was that she was one of the few who cashed in her capital after a few years of receiving what she thought was a great return on her investment. The “income” she dutifully reported over the years was held not to be “income from a source” and thus not subject to income tax.The court stated that “the net receipts were nothing more than the shuffle of money among innocent participants.”

The bad news for those who have lost their investment, however, is that there is no tax relief available for the loss of their capital.  In a normal investment, the loss would be considered a capital loss, 50% of which can be used to offset capital gains. For these victims of fraud, since no income source existed, no tax deduction is available on the loss of the investment.

The only consolation is for taxpayers who reported income in past years to amend their returns and request refunds on the tax they paid on the payments received from fraudulent schemes.

Update: The CRA has decided to appeal this decision….To be continued…..