DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Archive for the ‘Canadian Income Tax’ Category

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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Tax Organizer 2012 Is Here

In Canadian Income Tax, Personal Tax on January 29, 2013 at 6:11 pm

Hey everyone, The Tax Issue Tax Organizer 2012 is up and running. I received many emails last year from accountants and individuals expressing their appreciation for this useful tool so I encourage you to try it and let me know how you like it.

Happy tax season!!

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To Charge Or Not To Charge

In Canadian Income Tax, Goods and Services Tax, Real Property on January 17, 2013 at 9:38 pm

Questions2

The Tax Issue

The place of supply rules that govern the rate at which the GST/HST should be charged contains a specific rule with regard to services performed that relate to real property situated in Canada.

The rule stipulates that the GST/HST rate that applies to services performed with respect to real property is determined by the location of the property.

This begs the question: what type of service is considered to be “in respect of” real property?

More specifically, this question comes from an accountant who performs the service of preparing tax returns on behalf of non-resident owners of real property situated in Canada. Every non-resident who earns rental income from real property in Canada must file a Canadian income tax return on which only income from the Canadian property is reported.

Are the services of an accountant to prepare tax returns on behalf of a non-resident subject to the GST/HST?

The Answer

Generally, services rendered to a non-resident person are considered to be zero-rate (not taxable) under the GST/HST. The rule relating to services in respect of real property is an exception.

The CRA describes a service as being in respect of real property in the following circumstances:

(a) the service is physically performed on the real property (e.g., construction and maintenance);

(b) the direct object of the service is the real property; that is, the service enhances the value of the real property, affects the nature of the real property, relates to preparing the real property for development or redevelopment or affects the management of the real property, or the environment within the limits of the real property (e.g., engineering, surveying, management services);

(c) the purpose of the service is: (i) the transfer or conveyance of the real property or the proposed transfer or conveyance of the real property(ii) related to a mortgage interest or other security interest in the real property; or(iii) the determination of the title to the real property.

The relationship between the service and the real property must be more direct than indirect in order for the service and the property to be considered “in respect of” each other. The direct object of the service is the real property in the sense that the service enhances the value of the property or affects the nature of the property.

Based on the above, the CRA has stated that accounting and tax services relating to the reporting of rental income from real property situated in Canada has an indirect relationship to the property, but is not directly in respect of the property as described above.

Therefore, the provision of these accounting services is zero-rated.

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.