DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Archive for 2012|Yearly archive page

What’s Your Tax Issue – Fathers and Daughters

In Canadian Income Tax on November 1, 2012 at 9:51 pm

The Tax Issue

I live in Quebec and I purchased a home in 2000. At the time my income would not support the mortgage and therefore my father signed with me and is named as 50% owner. He has never lived at this residence and doesn’t own any other properties. I have made all the mortgage payments myself and have been the only one to declare any personal taxes on it. I have been approved for a new mortgage and he would like to transfer back 50% of the property back to me. Will he be subjected to capital gains tax after he transfers the home to me or is there a way for us to override this. No one seems to have this answer.

The Answer

At some point in their lives most Canadians will sell their home. Generally speaking the sale of your home is tax-free because we have a deduction known as the “principal residence” exemption. A principal residence is defined as a home in which either you, your spouse or your child ordinarily lived in.

So, the answer to the question is that the 50% interest that your father owned in your home qualifies under the definition of principal residence because you, his child, lived there.

As long as he doesn’t have any other home that would qualify for the period in question, he can claim the exemption on the transfer of his share of the home back to you.

You should also refer to my previous post on the topic of whether he needs to file the necessary forms on his income tax returns for the year.

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Foreign Reporting Redux

In Canadian Income Tax on September 5, 2012 at 9:53 pm

In this issue of The Tax Issue, we go around the horn of foreign reporting requirements of the CRA. These forms were first introduced back in 1995 and have been filed on a rather inconsistent basis by taxpayers in the past. That is, until the CRA in 2006 decided to enforce the onerous penalty provisions in place for late filers.

If you are required to file any of these forms and haven’t been, I would suggest you get cracking. There is a chance the CRA will waive the penalties if you come forward through the voluntary disclosures program before they make a request.

Form T106 should be filed by anyone who carries on a business and has transactions with related non-resident persons. An example would be a corporation who regularly charges management fees to its foreign parent, or has borrowed money from a related foreign entity.

Luckily for most of us, there is an exemption from filing if the total amount of the transactions does not exceed $1,000,000. If you are required to file this form, it is due with your income tax return.

File form T1134-A for a taxpayer with a non-controlled foreign affiliate (a non-resident corporation in which the taxpayer’s equity is not less than 1% and the total equity percentage of the taxpayer and related persons is not less than 10%)

File form T1134-B for a taxpayer with a controlled foreign affiliate (a foreign affiliate that is controlled by not more than 4 Canadian residents with or without the taxpayer, or persons not at arm’s length with the taxpayer)

Because of the onerous amount of information requested on these forms, they are due within 15 months after the end of the fiscal year. Where applicable, they must be filed by corporations, individuals and trusts.

If you have ever transferred funds or made a loan to a foreign trust, you may have to file form T1141. If you have received a distribution or a loan from a foreign trust, you may be required to file form T1142. A foreign trust is a trust not resident in Canada and has at least one Canadian resident beneficiary or a beneficiary that is a controlled foreign affiliate of a Canadian resident. These forms are due on the filing due date for the Canadian filer.

Form T1135 is what many individuals see on their personal returns each year. It is required from any Canadian resident taxpayer (including corporations and trusts) who owns foreign investments with a cost of more than $100,000 at any time in the year.  The form applies to “specified foreign property” which includes money deposited outside Canada, shares of foreign corporations, foreign rental property, loans to non-residents, interests in non-resident corporations, trusts, and partnerships. Exclusions include property held in the course of carrying on an active business, and personal use property (such as a vacation property).

Returns are due on the filing due date of your income tax return.

Penalties for non-filers can be heavy. For simple non-compliance the fine is $25 per day (maximum $2,500), or $500 per month (maximum $12,000) for non-compliance due to gross negligence. If Revenue Canada requests the information and does not receive it, they will charge $1,000 per month (maximum $24,000). If forms remain unfiled for more than 24 months, an additional 5% fine will be added to the above.

If you do not have a drawer full of the above forms, you can download them (and any others, for that matter) from the CRA site on the world-wide web.

How Not To Defraud The Taxman

In Canadian Income Tax on August 15, 2012 at 4:01 pm

Have you ever watched Jay Leno’s bit on the world’s stupidest criminals? Like the woman who stole $56 worth of merchandise from the store, then fled, leaving her mother and the merchandise behind?

Well, the accounting community is not immune to such criminal underachievers. In a recent case, two taxpayers were reassessed when they were accused of purchasing donation receipts at a discount. Unfortunately, they were working with a fraudster who kept proper records!

The practice is not uncommon. An unscrupulous charitable organization might essentially issue a false donation receipt in exchange for a discounted amount of cash, while the taxpayer benefits from a donation tax credit worth more than the price he paid for the receipt.

In this particular case, the receipts were sold through an “accountant” facilitating the deal. (I use this term loosely, as nowhere in the case do they mention a professional designation) For a fee of 10% of the face value of the receipt, the accountant would sell these tax credits to his clients. The scheme was easily uncovered, however, when the CRA seized his records. They found invoices made out to taxpayers for tax preparation work, showing the tax return preparation fee, the face value of the charitable receipt and a fee equal to 10% of that amount. They also found pre-signed blank donation receipts from various charities that were involved in the scheme.

Needless to say, the taxpayers, who tried to claim that they made their donations using cash or furniture, were unsuccessful in their appeal.

As for the accountant, he plead guilty to selling false charitable donation receipts for the 2002 through 2005 taxation years to clients to enable them to fraudulently reduce their income tax payable. He admitted that he provided false donation receipts with a total face amount of over $39 million during that period.

This case illustrates that we accountants should stick to counting beans. Our compulsion to keep proper records will always prevent us from becoming truly successful scofflaws. !

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What’s Your Tax Issue? Travel For Medical

In Canadian Income Tax, Personal Tax on April 22, 2012 at 2:28 pm

The Tax Issue

Last year, I was vacationing in Florida and experienced some shortness of breath. I went to the hospital and they suggested I return home to Canada on an emergency basis for further workup. My flight back home cost $1,198. Can I claim this as travel for medical attention?

The Answer

According to the law, transportation costs to receive medical attention are only allowed in very restricted circumstances. First of all, the travel must be from your home to wherever you seek attention, and only if substantially equivalent medical services were not available near your home. The distance traveled must be at least 40 kilometres from your home, and it must be reasonable to expect that you would travel to that place for attention.

If you had to travel at least 80 kilometres (one way) from your home to obtain medical services, you may be able to claim accommodation, meal, and parking expenses in addition to your transportation expenses as medical expenses.

In your case, since the travel was not from your home I would suggest that your plane fare would not qualify as a medical expense.

For more information, visit the CRA’s web page on this topic.

Erratum – Exam Fees

In Canadian Income Tax on April 18, 2012 at 5:24 pm

In my last post I stated that exam fees paid to a professional order were not eligible for the tuition tax credit. In fact, for 2011 and future years, the law was changed and these fees will qualify.

The post has been corrected and my thanks go out to my attentive readers for pointing this out.

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What’s Your Tax Issue? Exam Fees

In Canadian Income Tax, Personal Tax on April 18, 2012 at 1:44 pm

The Tax Issue

I am a physician doing my residency at McGill Unversity. Last year, I paid $3725.00 to the Royal College of Physicians and Surgeons in respect of exam fees required for my professional designation. I have a very official looking receipt but I’m being told that these fees may not be deductible. I’m getting different opinions everywhere. Do these fees qualify as tuition for tax purposes?

The Answer

Prior to 2011, the short answer was no. Only exam fees paid to a an educational institution were considered eligible for the tuition tax credit. As a small consolation, the CRA did suggest that if you are a self-employed professional, the exam fees might qualify as an eligible capital amount if they are paid in respect of your business or profession.

However, the 2011 federal budget contained amendments that will allow examination fees paid to a professional association, provincial ministry, or other institution for an examination required to obtain a professional status recognized by federal or provincial statute, or to be licensed or certified to to practice a trade or profession in Canada. These amendments apply to examinations taken in 2011 and subsequent taxation years.

 

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What’s Your Tax Issue? Sale of Estate Assets

In Canadian Income Tax, Personal Tax on April 13, 2012 at 8:08 pm

The Tax Issue

I am in the midst of settling my mother’s estate and my accountant has told me I have to sell her house within one year or else I’ll have to pay capital gains tax. He is also telling me that all my mother’s possessions such as jewellery, furniture and  and artwork may be subject to tax. I’ve never heard of this. Can you tell me if he is right?

The Answer

OK, the first thing you must know is that generally, upon the death of an individual, she is deemed to have disposed of all her capital property immediately before her death for proceeds equal to fair market value at that time.

First, let’s deal with the house. I’m assuming your mother lived in the house for the full time she owned it and it is eligible for the principal residence exemption. That means there will be no tax on the gain at death, but you will still inherit the place at a tax cost to you equal to the fair market value of the house at the time of her death.

Now the question is, how do you determine what the fair market value was at the time of death? Well the best way is to actually sell the house immediately. The closer the date of the sale to the date of death, the better estimate you have of the value at death. The longer you wait to sell, the more you will have to rely on an estimate of the value at the time of death based on valuation methods. Whatever the difference is between the value at the time of death (i.e., your tax cost) and the actual sale proceeds when you sell will become a capital gain or loss in your hands.

If you feel the value will be going up in the future, then if you plan to sell, do it sooner rather than later if you want to avoid having to report a capital gain on the increase in value from the time of death.

If the value goes down, then selling within the first year of death allows you to make a special election to use the capital loss against any gains reported on your mother’s final tax return.

Now to the other stuff. Technically speaking, all personal belongings are referred to in the law as “personal use property”, and they are subject to special rules. They are also deemed disposed of at the time of death at fair market value. The only difference is that each item has a deemed minimum cost base and minimum value for tax purposes of $1,000. So, any item that is worth less than $1,000 will not be taxed.  Gains will be taxed, and losses, if any, may be applied only against gains from other personal use property.

Items such as jewellery and artwork are another subset of personal use property called “listed personal property”, and are also subject to the above rules. Losses on this type of property, however, can only be applied against gains from other listed personal property.

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An Unexpected Penalty for Unsuspecting Taxpayers

In Canadian Income Tax on April 10, 2012 at 8:17 pm

My son Victor who is hard at word assisting me with tax returns this year, today learned of a little known penalty that hits many average Canadians who file their returns honestly and in a timely fashion every year. If you’d like to know what it is, just visit his blog.

Thanks for reminding everyone about this Vic. Now get back to work!!

What’s Your Tax Issue? What’s a Full-Time Course Load?

In Canadian Income Tax on April 9, 2012 at 10:10 pm

The Tax Issue

I am enrolled as a part-time student at Ryerson University.  I have an issue in which I was listed for full-time status for a semester for which I took 3 classes (9 hours a week).

My Student Fees office claimed that 9 hours a week is considered a full-time course load, but from what I have found on the Canadian Revenue Agency website is a 10 hour benchmark.  I am only inquiring as there is a huge difference in money for this switch for my tax return.

When enrolled as a part-time student, can the number of classes in a semester affect your taxes?

The Answer

A “full-time” student may be entitled to claim a tax credit based on $400 per month as an education amount and $65 per month as a textbook credit. For a part-time student, those amounts drop to $120 and $20, so your status will definitely make a difference.

The term “full-time” is not defined in the law. You could, for example be considered as a full-time student taking a 9-hour course load as your school suggests.

Your confusion stems from the fact that access to the tax credit requires a two-fold test. Not only must you be a full-time student, you must also be enrolled in a “qualifying educational program”.

A qualifying educational program is defined as a program at a post-secondary level of not less than 3 weeks in duration that requires at least 10 hours of per week on courses or work in the program. The hours must be part of the course, not home study.

So, the short answer is the 10 hour requirement must be met in order for you to claim the full-time credits. Certainly a roundabout way of getting there, but that’s our government hard at work to simplify the tax Act.

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What’s Your Tax Issue? Quebec Business Income

In Canadian Income Tax, Personal Tax on April 2, 2012 at 8:21 pm

The Tax Issue

I live in Ontario. I have $130K  of self employment income earned in Ontario and $12K  of  self employment income earned in Quebec. Do I have to file a Quebec return? Will I have any balance of taxes owing given the amount I earned in Quebec?

The Answer

Every self-employed person resident in Canada may have to perform an allocation of income if their income is earned through a permanent establishment (“PE”) in a different province. If you don’t have a PE in another province through which you earn your business income, then no allocation is necessary.

A PE is defined as a “fixed place of business”, and includes an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse. You will also have a PE if:

(a) You have an employee or agent established in the province if he has the general authority to contract on your behalf or if he has a stock of merchandise from which he regularly fills orders; or

(b) You have made use of substantial machinery or equipment in the province at any time during the year.

If you have a PE in another province, you must make an allocation of your income among the provinces in which you do business. There is a specific formula you must use to make the allocation, which is done on form T2203. The allocation you make will affect your provincial tax payable.

And yes, if you have PE in Quebec, which has its own tax return, then you must file a Quebec tax return. Report the full amount of your income on the Quebec return. Then the provincial allocation is made and the Quebec tax payable is apportioned based on the allocation.

So, to answer your question, if you have a PE in Quebec, you will have a Quebec tax return to prepare and you will likely have some Quebec tax to pay, based on the formula.