DAVID WILKENFELD, CA, canadian tax CONSULTANT

Posts Tagged ‘Canadian Income Tax’

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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…..

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CRA Weighs In On J.V.’s

In Canadian Income Tax on December 16, 2011 at 2:15 am

 

Last week I attended the Canadian Tax Foundation’s annual conference in Montreal. It’s a 3-day event where accountants, lawyers and government officials get together, sing Irish drinking songs, try on each others’ bow ties, and get into all sorts of wild shenanigans.

My favourite time is CRA round table day. That’s when representatives from the government let us tax practitioners know that they’re on our side, they’re here to help and taxpayers have rights. Then they answer a series of pre-determined questions on tax policy confirming that they are not on our side, help is a four-letter word, and whatever rights we have are readily accessible – in a court of law. Anyway, we forgive them because they’re usually the ones who spike the punch every year at the Arthur Anderson reception.

This year, the CRA was asked about the new partnership year-end rules and joint ventures. As we reported in an earlier post, new rules were introduced in the 2011 budget that will essentially eliminate any tax deferral to a corporation whose year-end does not coincide with that of any partnership in which it holds a significant interest.

A joint venture is not a partnership; however, they are often accounted for on a similar basis, with a year-end being established and each participant picking up its share of income annually. This has always been tolerated by the CRA.

With the new rules in place, the CRA stated that joint ventures will now be treated similar to partnerships. Administratively, they will also allow companies with joint venture interests to take advantage of the same transitional relief afforded to partnerships under the new rules. That is, they will be allowed to include 15% of additional stub-period income in 2012, 20% in 2013, 2014 and 2015, and 25% in 2016.

In a technical bulletin released on the same day, the CRA also stated that, going forward, for taxation years ending after March 22, 2011, income from a joint venture will have to be reported for each participant based on that participant’s fiscal period. For participants with different year-ends that don’t coincide with the joint venture, this will likely create some onerous compliance issues.

Those guys at the CRA always keep us on our toes!

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Mr. CA Goes To Tax Court

In Canadian Income Tax on October 26, 2011 at 11:36 am

Years ago, the Tax Court of Canada introduced its informal procedure, a type of “small claims” court for tax cases. I was intrigued at the time, because it allowed for non-lawyers such as myself to represent taxpayers, under certain conditions. So, I did some research and wrote an article on the topic which was published by CA Magazine. At the time, I hadn’t ever been to Tax Court (I’m confessing this now, years later, having successfully represented 3 clients since). My article was based strictly on research, and some anecdotes from a colleague. Anyhow, I thought I’d reprint an abridged version of that article for old times sake, so here it is:

Entering the courtroom I was less than impressed. It was smaller than I had imagined. And although there was a generous amount of oak trim surrounding me, it somehow felt cold and clinical. Perhaps my expectations were too high. I’ll admit to being a bit zealous. After all, here I was, about to plead a case in the Tax Court of Canada, and I was not even a lawyer.

As a chartered accountant, I was within my rights to represent my client in a tax case. The Informal Procedure Rules were established in 1991 to provide a “small claims court” environment where an individual taxpayer could represent himself without the need to adhere to strict rules of procedure and evidence. A lawyer or an agent, such as an accountant, may also represent an individual in an Informal Procedure case.

Under the rules of the Tax Court, the Informal Procedure may be invoked in an appeal where, for each assessment, the amount of federal tax involved, plus applicable penalties, is equal to or less than $12,000. In the case of a loss determination, the amount in dispute must not be more than $24,000, and where the dispute is in respect of an amount of interest only, the threshold is $12,000.

I explained to my client that the objective of these rules was expediency. Her case would be heard relatively quickly, within a few months of her application. The hearing would be short and a decision would be rendered quickly, usually in the same day, but generally not later that 90 days after the hearing. She would not be subjected to examination by the opposing counsel prior to the hearing. Her risk in the case of an unfavourable judgement would be reduced by the fact that costs could not be claimed against her by the Crown.

After our objection was denied, I had filed a timely Notice of Appeal on behalf of my client with the Registrar of the Tax Court. Since I was a layman, the strict rules of format regarding such a document were relaxed. The court had accepted my Notice, which was prepared in a letter style. However, I had still made certain that the letter contained all the necessary elements. Similar to what you might find in a Notice of Objection, the letter indicated the name of the taxpayer, the details of the assessment and the issues surrounding the appeal.

The judge gave me a curt nod and asked me to begin. I rose from my seat, thanked him respectfully, and gave my opening statement. I tried to avoid showing my anger at the injustices heaped on my poor, suffering client by the cold-hearted tax department. I would be better off, I figured, with a brief and logical summary of my case.

I guided my client logically through the sequence of events, ensuring that she stayed to the point at all times. As we went along, I introduced documents to support the testimony. In the Informal Procedure, the rules governing the introduction of evidence are markedly relaxed.

After cross-examination, I was asked to give my closing argument. I reviewed the evidence and referred to a court case as an authority to support our position. I came to a conclusion based on the facts and the law surrounding the issues, and I once again concluded with a request to have the Minister’s assessment altered. I thanked the court and sat down, hoping no one had seen me sweat.

I was done. I had presented a concise and forceful case. Although I was feeling exhilarated, I wasn’t sure whether I would give up my accounting practice just yet to pursue a law degree. The judge had been lenient with me, knowing I was a layman. The Informal Procedure was designed with non-lawyers in mind…

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What’s Your Tax Issue? Home Built By Company

In Canadian Income Tax, Shareholder Benefits on October 3, 2011 at 10:12 am

The Tax Issue

I recently built our “dream” home for 2.50M$. However, not having sufficient funds personally, my professional corporation financed the construction of the house for me, writes off the maintenance, utilities and taxes, and I rent the house from my company at a market value rent, having researched comparable rents in the neighbourhood. Apart from forgoing the principal residence exemption – are there any other detriments to this strategy?

The Answer

Could be. I’m assuming, since you are paying rent, that you’re aware of the shareholder benefit rules. That is, by virtue of the fact that the company has financed your house and pays expenses on your behalf, you are exposed to tax on the value of the benefit you are receiving from the company.

What you may not be aware of is how the CRA might establish the value of the benefit. It could be the market value rent as you have researched, and if so, the rent you’re paying would be enough to offset the taxable amount completely.

In your case, however, it may not be so simple. There is a line of jurisprudence, starting with the case of Youngman v. The Queen, that suggests that the benefit or advantage conferred on you is not merely the right to use or occupy a house; it is the right to use or occupy a house that the company, at your request, had built specially for you in accordance with your specifications. How much would you have had to pay for the same advantage if you had not been a shareholder of the company?

So what is this “alternative” calculation? Generally, the value of the benefit could be calculated by reference to the income the corporation would have earned if its capital had been productively employed and not based on the fair market rental value (which might be considerably lower).

As an example, on a $2.5M capital outlay, the company could have been expected to earn interest in a relatively risk-free investment of, say anywhere from 2% to 5%. This would mean an annual rent of $50,000 to $125,000, plus expenses. If you are paying any less than this in rent, despite what the market rents are in the area, then you could be exposed to a greater taxable benefit than you thought.

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Harassment, Conflict and Litigation – Part Three

In Business Expenses, Canadian Income Tax on September 21, 2011 at 9:50 am

In the final instalment of this series on what creates the most HCL with the CRA in our SAS (“harassment, conflict and litigation” with the “Canada Revenue Agency” in our “self-assessment system”), we cover the granddaddy of disputable expenses – automobile costs. Any tax auditor worth his salt will zero right in on auto expenses like my tee shots to water. Why? Because everybody loves to drive and everybody loves to deduct car expenses. The problem is that the rules in this area are so onerous and complex, few taxpayers under investigation ever come out of it with no HC or L. It’s the record-keeping burden that gets most people into the HCL zone. So heed the following, and minimize your grief.

First, let’s summarize the basic rules for deductibility. As with any expense, the costs deducted must be in connection with your business. So how do we identify the business portion of the cost of something we regularly and continuously use for both personal and business purposes?

Kilometres.

Anyone who uses a car for business should keep track of the total amount of kilometres driven during the year, and a detailed account of which of those kilometres were driven in the performance of their business or employment functions.

Keep receipts and a detailed account of all your auto expenses, such as gas, repairs and maintenance, insurance, licence, registration, car loan interest and leasing costs. If you own your car, you may be able to claim depreciation (CCA).

Now you’re almost there, but you should be aware of certain limits that apply. If you lease your vehicle, deductible payments are restricted to $800 per month (or less, based on a formula, if the value of the car exceeds $30,000).

If you’ve borrowed to purchased your car, loan interest is limited to a maximum of $300 per month. For CCA purposes, there is a maximum on the capital cost of $30,000.

Finally, if you receive a non-taxable per-kilometre allowance from your employer, then you are not entitled to claim any auto expenses personally.

These rules are fairly detailed and objective, so where does the HCL come in? Problems normally arise in two areas – record-keeping, and what constitutes business mileage.

Most people by nature do not keep records as meticulously as the CRA would love to see. If you are audited, and need to justify the amount of kilometres you drove in a year for business purposes, the best evidence you could have would be a logbook where you keep track of where you drove, the number of kilometers, and the business purpose. Compare that to the total kilometres driven for the year, and you have pretty well justified your calculation. In most cases, however, a logbook does not exist, and the taxpayer is left to plead, cajole, regale and negotiate with mostly unsympathetic auditors to have them accept his ad-hoc percentage of business use.

In Quebec, the law requires that you keep a logbook if you drive a company car. Employees must provide their employer with a logbook within ten days after the end of the year, or face a fine of $200.

The second issue of concern is that sometimes it is not clear whether a trip qualifies as business use. Some taxpayers are unaware that travel from home to the place of work does not constitute business travel. However, here’s a tip: if you start out at home, make a stop for business purposes, say at a client’s premises, then proceed from there to your office, then the entire trip would qualify.

What about the case where home is the regular head office and work is carried out at remote sites, such as in the case of a self-employed contractor? If you can establish that your home is your center of operations, then all travel to a work site should be considered for business.

In this series of posts, we touched on some of the most common areas where taxpayers find themselves in hot water with the CRA. Our SAS requires good record-keeping and knowledge of the law. Hopefully, these articles have helped you with the SAS and your HCL level should go down from here.

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Harassment, Conflict and Litigation – Part Two

In Business Expenses, Canadian Income Tax on September 13, 2011 at 9:06 am

This series of articles deals with a topic that often gets taxpayers into conflict with the taxman, what a client of mine described as “harassment, conflict and litigation”, which I have shortened to the easy-to-spell HCL. In our self-assessment system (SAS) of tax reporting, we are required to be aware of the rules, and honestly provide the CRA with correct information about our taxes. Most often, tax auditors like to zero in on those deductions that are most easily “miscalculated” by us SAS-ers. That’s because of the strict rules surrounding them, and their potential personal component. I am speaking, of course of meals and entertainment, and automobile expenses (MENTA). This article will discuss the rules surrounding meals and entertainment expenses.

Taking a client out for a meal is a long-standing and acceptable business practice. Traditionally, business-related meals have been deductible in our system. However, there is a 50% restriction on the deduction, in recognition of the fact that there is at least one person (you) enjoying a personal benefit from the arrangement. (In Quebec, there is a further restriction based on a percentage of gross sales.)

What constitutes a business meal to a taxpayer may not always pass muster with the CRA, and here’s where the HCL comes in. For example, there are some tax auditors who simply make the assumption that any meal consumed on the weekend is non-business related and automatically disallowed. Evidence that a meal is business related should include a copy of the restaurant bill, the name of the guest and the business reason for the meal. The burden is on the taxpayer to prove his case on a balance of probabilities.

There are similar rules for entertainment expenses. Sports and theatre tickets are good examples. If you purchase season tickets to a sporting event, for example, you must show the business purpose for the purchase by keeping track of who uses them and their business relationship to you.

Golf is pretty popular in the business world, and the CRA has always known this. That’s why there is a special rule for golf and other such club dues and fees. It’s a simple one: they are not deductible.

But what about business meals at a golf club? Back in 1997, the CRA came up with a policy that meals consumed at the club in conjunction with a game of golf were not deductible. So, as long as you weren’t playing golf, you could go there for a meal. If you played, you had to go somewhere else afterwards to enjoy a nice tax deduction with your meal. The CRA has since seen the silliness of this policy and now allows business meals at a golf club to be deductible (subject to the 50% restriction). Club dues and green fees, however are still off limits.

The meals and entertainment rules have been great fodder for HCL for many years. In one case, the CRA applied the 50% restriction to an investment advisor who routinely gave donuts to his clients to thank them for referring business. The Tax Court of Canada held that donuts did not constitute a “meal”, and allowed the deduction in full. Personally, I can’t imagine the staggering number of Timbits it would take to justify the cost of going to court over this issue, but at least the judge was able to show he was familiar with the basic food groups :-) .

In another case, a food critic, whose sole job it is to eat meals at restaurants was told by the CRA that the 50% restriction applied to her. This illustrates that there are no exceptions to the 50% rule (except, of course the exceptions, which include employee parties and charitable events – but I digress).

In our next article, more HCL with automobile expenses.