DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Archive for the ‘Personal Tax’ Category

Sold your House? Make Sure You Report It!

In Canadian Income Tax, Estates and trusts, Non-residents, Personal Tax, Principal Residence on November 18, 2016 at 8:31 pm

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If you have sold your home recently, you should take note of the new reporting rules announced by the CRA regarding the principal residence exemption (“PRE”).

The PRE applies on a pro-rata basis based on the number of years you are claiming the house as your principal residence. Form T2091 is technically required to report and claim the PRE on the sale. If you were claiming the exemption for the full period of ownership, then the gain on the sale is fully exempt from tax. The CRA’s policy until now has been that no reporting was required in such a case.

However, for 2016 and future years, this administrative policy has changed. Form T2091 is still not required if the full exemption is claimed, However, the sale must be reported on Schedule 3 of your tax return for the year. You will need to report a description of the property,  the year of acquisition and  the proceeds of disposition. Failure to report the sale will result in the denial of the PRE. However, you may go back and amend your return to report the sale and claim the exemption, subject to possible penalties of $100 per month to a maximum of $8,000.

For Quebec tax reporting, there has never been any administrative policy regarding a fully exempt sale of a principal residence and form TP-274 continues to be required.

Changes for Trusts

If your principal residence is owned by a trust, new rules will apply to you. I outlined the current rules in a previous post.

Under the new rules, only certain specialized trusts are now eligible to claim the PRE. They are alter-ego trusts, certain spousal or common law partner trusts, certain protective trusts or certain qualified disability trusts.

Starting in 2017, any trust that owns a home and does not fit within any of the categories above, will no longer be eligible for the PRE on the sale of the home. Therefore, if the house is sold before the end of 2016, the PRE can still be claimed.

For 2017 and later years, a home that was owned by a trust that no longer qualifies for the PRE will be allowed to calculate the exemption based on transitional rules that would require a valuation of the property as at the end of 2016. The PRE will be available for the “notional” gain up to the end of 2016, while the future growth in value will be subject to capital gains tax.

Anyone who currently lives in a home owned by a personal trust should consult their tax advisor.

Changes for Non-Residents

New rules will also apply to anyone who was a non-resident at the time they purchased a residential property in Canada. Under the current rules, the pro-rata formula that is used to calculate the PRE allows for an extra year (the plus 1 rule) in calculating the exemption. This generally allows for the fact that in a year where someone sells their home, they may own two properties, both of which should qualify for the exemption.

For a non-resident, the plus 1 rule allowed them to claim a portion of their gain as exempt, even though they never qualified since they were non-residents of Canada. Accordingly, for all sales on or after October 3, 2016, the Plus 1 rule will no longer be available to any taxpayer who was a non-resident of Canada in during the year in which he or she acquired the property. There are no transitional rules to this provision.

Death of Testamentary Trust Rules

In Canadian Income Tax, Estates and trusts, Personal Tax on November 16, 2015 at 6:01 am

Turkey-Estate-Plan

The favourable tax rules enjoyed by estates and testamentary trusts until now are almost dead.  Major changes that were introduced in the 2014 federal budget are about to come into effect on January 1, 2016. Don’t be caught off guard.

Estate vs. Testamentary Trust

Until now, most of us have viewed a testamentary trust in basically the same way we would an estate. They both essentially were included in the definition of a “Testamentary Trust”, meaning a trust arising as a consequence of the death of an individual. As such, they were treated in similar fashion under the law, both benefiting from graduated tax rates and both able to have an off-calendar fiscal period for tax purposes.

But now, we must make a distinction between an estate and a testamentary trust.

A testamentary trust is generally a trust that is created by the will of the deceased person. Assets from the deceased’s estate are transferred to the trust for the benefit of named beneficiaries. These assets are then administered by designated trustees. Such a trust could go on for an indefinite period of time, depending on the terms of the trust.

On the other hand an estate is essentially the bundle of assets owned by an individual at the time of death, which is to be distributed by the liquidator to the beneficiaries pursuant to the will within a relatively short period of time. The CRA likes to refer to the “executor’s year”, implying that it should take a year or so to clear the estate and distribute the assets. In many cases it may take longer.

Elimination of Benefits to Testamentary Trusts

Now that we have our terms of reference, the first thing to note is that beginning in 2016, most testamentary trusts will no longer benefit from graduated tax rates, and they will have to switch to calendar taxation years. The only exception will be for “Qualified Disability Trusts”, which essentially is a testamentary trust with a beneficiary that qualifies for the disability tax credit.

There are no grandfathering rules. All existing testamentary trusts will have to cut off their taxation years on December 31, 2015. This could result in many trusts having two tax years in 2015. You should note that the due date for the first of these calendar taxation years will be March 30, 2016.

Furthermore, beginning in 2016, these trusts will:

  • be subject to the highest marginal tax rates
  • will have to make quarterly tax instalments
  • will lose the $40,000 alternative minimum tax exemption
  • will lose the ability to object to an assessment within one year (i.e. the 90 day deadline will apply)
  • will lose the ability to transfer investment tax credits to its beneficiaries
  • will lose the right to apply for a refund after the normal reassessment period
  • may become subject to part XII.2 tax on certain types of income where non-resident beneficiaries exist

Graduated Rate Estates

On the other hand, estates may continue to benefit from graduated rates and off-calendar fiscal years, under certain conditions. Estates that meet the requirements will be known as “Graduated Rate Estates” (“GRE”).

A GRE will qualify only under the following conditions:

  • no more than 36 months have passed since the death of the individual
  • the estate otherwise meets the definition of a “Testamentary Trust” under the law
  • the estate designates itself as a GRE in its tax return for the first taxation year ending after 2015
  • the deceased individual’s social insurance number is provided in the tax return
  • no other estate is designated as the GRE with respect to that individual.

Once 36 months has expired, the estate will no longer be a GRE and will become subject to the less favourable rules described above.

Charitable Donations by a GRE

Currently, a charitable gift made by an estate that was designated by the will of an individual is deemed to have been made by the deceased, and is not deductible within the estate.

Beginning in 2016, a GRE will benefit from new and more flexible rules regarding the claiming of charitable donations. If the estate is a GRE, then such donations may be claimed by:

  • the deceased in the year of death or the preceding year
  • the estate in the year in which the donation is made, or
  • the estate in an earlier taxation year or subsequent 5 years.

Other Changes

Other more complex changes regarding testamentary trusts are coming into effect as well, but a detailed description of these is beyond the scope of this short summary. Briefly, the election to pay tax within a trust, notwithstanding that income is paid to beneficiaries, will be virtually eliminated, unless certain conditions apply.

Finally, for testamentary life interest trusts, such as spousal trusts, upon the death of the beneficiary, a year-end will occur, and any gains or income triggered upon death will be deemed to have been paid to the beneficiary’s estate, making it liable for the taxes on death. This may create a mismatch between the liability for taxes and the ownership of the assets in cases where trust capital is to be paid out to persons who are not beneficiaries of the deceased beneficiary’s estate. A common circumstance where this issue could become a problem is in a case such as a second marriage where children from the first marriage are to receive the capital of a spousal trust upon the death of the beneficiary spouse.

 

What’s Your Tax Issue? Credit Card Rewards

In Business Expenses, Canadian Income Tax, Employment benefits, Employment Income, Personal Tax on February 5, 2014 at 4:17 pm

Questions3The Tax Issue

What is the policy for using a personal rewards credit card to pay business expenses? Do I get taxed if I use the points I earned for business only. Will this raise red flags with CRA if I start spending 50k/month on this personal card?

The Answer

Believe it or not, the CRA has put so much thought to this question and changed their policy so often, I don’t blame anyone, including me for needing a quick refresher, so I’m glad you brought this up.

Basically, the CRA’s position is rooted in section 6 of the Income Tax Act, which essentially taxes an employee on the value of any employment-related benefit received in any manner whatever.

Regarding your question, the CRA’s general position has historically been as follows:

Where an employee accumulates points while incurring employment-related expenses which are reimbursed or paid for by the employer, the employee will be in receipt of a taxable benefit if the points are redeemed by the employee for personal travel or to obtain other personal benefits.

It is the employer’s responsibility to quantify the value of the benefits received by the employee, and include that amount on the employee’s T4 slip each year.

However, in 2009, the CRA modified its position, recognizing that it would be difficult for employers to quantify the benefit where the credit card was a personal one controlled by the employee. So, unless it’s a company credit card, the employer is off the hook. But the employee is not.

Well, not entirely. The CRA does acknowledge that it would be difficult for an employee to track personal expenses vs. business expenses on his personal credit card, so their position is that no taxable benefit will arise on points earned on a personal credit card. However, there are conditions.

No taxable benefit will arise on points redeemed from the use of a personal credit card, as long as:

  • the points are not converted to cash
  • the plan or arrangement is not indicative of an alternate form of remuneration, or
  • the plan or arrangement is not for tax avoidance purposes

The CRA provides an example of an employee who is allowed by her employer to pay for business expenses whenever possible through her personal credit card, for which she is reimbursed. In order to maximize her points, she uses her personal credit card to pay for various employer business expenses, including travel expenses of other employees.

The CRA would view this arrangement as being indicative of an alternate form of remuneration and would therefore not allow their administrative concession. The employee would have to calculate the value of the benefit and add that amount to her taxable employment income.

So, to finally answer your question, if you use your personal credit card mostly for normal personal use, and for your own normal business expenses for which you are reimbursed, the CRA would likely not charge you with a taxable benefit; however, if you suddenly start putting $50K/month of your employer’s business expenses on your personal credit card, I would say that it appears this might be a plan to increase your remuneration as outlined in the above example. And yes, the CRA might come knocking on your door.

2013 Tax Issue Tax Organizer is Here!

In Canadian Income Tax, Personal Tax on January 27, 2014 at 9:00 am

Hey everyone, The Tax Issue Tax Organizer 2013 is up and running. This useful tax preparation tool is offered free of charge. Hope you enjoy it, and happy tax season!

Taxpayers Behaving Badly – Part 1

In Bankruptcy, Canadian Income Tax, Personal Tax on October 16, 2013 at 7:01 pm

According to The Superintendent of Bankruptcy Canada, “Bankruptcy is a legal process that can provide relief to honest but unfortunate individuals who are unable to pay their debts.”

 The case of Van Eeuwen proves that bankruptcy is not looked upon favourably by the CRA as a way of ignoring your tax responsibilities.

The taxpayer in this case declared bankruptcy at a time when he owed $770,000 in taxes, interest and penalties to the CRA, which made up 85% of his total debts. He had failed to file income tax returns from 1993 to 2004. Subsequent returns were filed late and payments to the CRA did not cover his liabilities. He was fined $101,000 in 2007 for tax evasion which he never paid.

The question to be answered is whether a person can simply ignore his tax responsibilities and expect to clear the slate by subsequently declaring bankruptcy.

The answer is a resounding no.

The court explained that this was a “tax-driven” bankruptcy, which should be treated differently than other bankruptcies:

A bankrupt who does not pay his tax liabilities is not an honest and unfortunate debtor. He is taking advantage of the fact that taxes are not collected by source deductions. This is misconduct. A taxpayer should not be permitted to not pay taxes when he incurs it, and when the liability reaches a large amount go into bankruptcy and piously say that he cannot now pay that large debt and it has caused his bankruptcy. Self-employed income earners cannot be allowed to evade their legal obligation to pay income tax through resort to the [ Bankruptcy and Insolvency Act ].

When a bankruptcy is tax-driven, the integrity of the bankruptcy system requires the courts to take into account not only the debtor’s interest and the creditor’s interest, but also the public interest in ensuring that every taxpayer makes an equitable contribution to the costs of operating the public sector.

This is not a case where a bankrupt incurs a liability expecting to pay it from future income which does not materialize. This is an income driven liability. It was supposed to be paid from the income as it was earned. This is not a case of cannot. It is a case of will not. The money was there to pay the taxes when they were incurred. In cases such as this, the overriding principle must be a message. The message is that tax cheaters are free riders and they are not to be absolved from that.

In the end, the taxpayer was given a discharge, conditional upon the payment of $180,000 to the CRA at a rate of $2,500 per month, which represented 60% of his tax debts, excluding interest and penalties.

And so, while declaring bankruptcy will certainly be a way to clear your debts in most cases, be aware that the courts may not grant an unconditional discharge where your debts are mostly owed to the tax authorities.

 

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.

 

 

 

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

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!!

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.

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.