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!
It’s Christmas time, and that’s got the CRA thinking about gifts – taxing them, that is. The recent case of Shaw v. R. is a cautionary tale for anyone who believes that a gift of cash is never taxable to the recipient.
When a taxpayer tries to take advantage of technicalities in the Income Tax Act (“ITA”) to his advantage, it’s called an abuse of the provisions of the ITA. If the taxpayer is successful, the law is usually changed.
When the CRA taxes an amount of income twice, using the provisions of the law to its benefit, well, that’s just the way it is, end of story. In a previous article, we described a case where the CRA unsuccessfully attempted to tax the same amount of income twice. In the case of Shaw, they succeeded.
Mr. Shaw was a long time employee of a private company called Robert Ltd. Mr. Robert, the owner, apparently did very well and sold the assets of the company to CEDA International. At the time of the sale Mr. Robert had substantial amounts owing to him by his company which had been taxed as bonuses in previous years and credited to his shareholder loan account.
After the sale, Mr. Robert wanted to reward his long-time managers. He sent them each an amount of cash from Robert Ltd., representing $10,000 for each year of service, along with a letter thanking them for their loyal service, and assuring them that these amounts were tax-paid gifts that would be charged to his shareholder loan account and therefore not taxed in their hands. Only one condition was attached to the gift, and that was that they remain employees of CEDA International. Mr. Shaw received $140,000.
Section 6(1)(a) of the ITA provides that all “benefits of any kind whatever” are to be included as employment income if they were received “in respect of, in the course of, or by virtue of an office or employment.”
In this case, the court explained that subsection 6(1)(a) is a broadly worded provision and that the amounts received by Mr. Shaw fell into the category of a taxable employee benefit. The amount was calculated based on his number of years of service, and also came with the condition that he remain employed by the purchaser. Accordingly, the payment, regardless of who made it and what form it took, was made by virtue of Mr. Shaw’s employment.
What is unfair in this scenario is, of course, the fact that the amounts paid had been taxed previously; so in assessing Mr. Shaw, the CRA was essentially successful in taxing the same amount of income twice. It didn’t matter that the person who paid the amount was not the employer, nor did it matter that Mr. Shaw was no longer an employee of Robert Ltd. at the time the amount was paid.
This case should be seen as a warning to those who believe they can avoid tax by directing funds to another person on the premise that it is a gift. The CRA will always look to the underlying reason for any payment and apply the provisions of the ITA accordingly, regardless of whether or not it seems fair to the parties involved.
And no, don’t expect the law to be changed to prevent such an unfair result in the future.
In the last edition of Fiscalitems, we dealt with the deadlines and procedures involved in making an application for an extension of time to file a Notice of Objection. Although it seems harsh, the Minister of Revenue and the courts show little leeway in allowing late objections without justification, regardless of the amount of time involved. In this issue, we discuss reasons that may be set forth and whether they would result in acceptance of a late objection
Essentially, the law requires the taxpayer to establish that he was unable to act or to instruct another to act in his name, or that he had a bona fide intention to object to the assessment. A successful request for extension must either show that the taxpayer missed the deadline through no fault of his own, or that he never agreed with the assessment and has always intended to object. Both criteria do not have to be met. However, he must show that he filed an objection as soon as circumstances permitted.
What situations will find sympathy from the courts? Here are some examples:
Physical or Mental Disability: Where a taxpayer has had an accident before the assessment was made, and remained incapacitated for some period of time thereafter, or where the taxpayer suffered an illness during the relevant time, there is clear case law and Revenue Canada commentary that would suggest an extension would likely be granted. The application should highlight the unusual nature of the disability and be precise as to the timing involved.
The above situation would fall under the category of “exceptional” or “unusual” circumstance rendering the taxpayer unable to act in accordance with the law. Other such circumstances which have been accepted by the courts include natural disasters, absence from the jurisdiction and inability to communicate in either of the official languages.
Address Problems: Often, the taxpayer argues that he moved and that he never received the assessment due to an address change. Revenue Canada’s only duty is to send an assessment at the last address made available to the department by the taxpayer. If this address is used, the taxpayer has no recourse. It is his responsibility to notify Revenue Canada of an address change immediately.
Ignorance of Time Limit: Often, a taxpayer may argue that he was simply not aware of the statutory time limit involved, and that he acted as soon as he was informed. The case law here is clear: ignorance of the law is not grounds for allowing an extension. All taxpayers are informed on the actual assessment of the time limit for objection. The courts, therefore afford little sympathy to this excuse.
Reliance on a Professional: In many cases taxpayers plead that they relied on their professional advisor. Here the case law is less clear. In one case, a taxpayer returned from a vacation to find a pile of documents, including a tax assessment, on his desk. Without reading them, he simply delivered the pile to his accountant. The court dismissed the application for extension, citing a lack of special circumstances that rendered the taxpayer unable to act. Furthermore, the simple admission of fault by a professional does not automatically absolve the taxpayer of responsibility.
In order to be successful in placing reliance on a professional, the taxpayer must show that he at all times had the intention to object, was aware of his circumstances, and exercised a reasonable degree of diligence in following up his objection with his advisor. This is particularly true where the taxpayer is a businessman or someone who should be “sophisticated” in his income tax affairs.
Imagine this: One fine day, your favourite client enters your office and hands you a tax assessment he found in pile on his desk after returning from vacation. Upon close examination of the date, you realize that the time for issuing a Notice of Objection has expired. Suddenly, you are faced with the problem of filing a late appeal. Besides demoting your client to your less-than-favourite list, what do you do?
Most of us are familiar with the deadlines involved for objecting to an assessment, but let’s go over them again for good measure: An individual taxpayer must file an objection on or before the later of 90 days from the date of the assessment and one year after the balance due date of the taxpayer for the year. For a corporation or a trust, only the 90-day limit applies.
If the deadline is missed, the first step is to request an extension of time from the Minister of Revenue. This would consist of a letter addressed to the Chief of Appeals in a District Office or Taxation Centre, outlining the facts and reasons why the extension should be granted. You must also enclose the actual proposed Notice of Objection that the taxpayer wishes to file. The request for extension must be made within one year from the time the objection was otherwise due.
To be successful, the taxpayer must show that he was unable to act or to instruct another to act on his behalf within the relevant time period, or he must prove that he had a bona fide intention to object to the assessment within the normal time period. He must also show that the application was made as soon as the circumstances permitted, and that it would be just and equitable for the Minister to grant the extension.
The time periods involved can be a bit confusing. For example, in one case, the taxpayer’s lawyer failed to file a Notice of Objection on time. When he realized his mistake, rather than sending in his request for extension as soon as the circumstances permitted, he waited almost one year, because he thought that he had this amount of time to make the request under the rules described above. His request was denied, due to his misinterpretation of the law.
Should 90 days expire after making a request to the Minster without a response, or if the request for extension is denied, the next step is to request the extension from the Tax Court of Canada. This application must be filed within 90 days following a refusal of the application (if any) by the Minister. The taxpayer must send three copies of: (a) the request made to the Minister, (b) the proposed Notice of Objection, and (c) the Minister’s Notice of Refusal (if any) to the Registry of the Tax Court of Canada. It is also advisable to include a covering letter briefly explaining the facts and reasons for the request.
The Tax Court has the power to grant the application only where the first application was made with the Minister of Revenue within the one-year time period discussed earlier. The criteria used to determine whether the request will be granted are basically the same as those set out above. The only difference here is that the review will be made by the Tax Court, which is a body independent of Revenue Canada.
The Tax Court will, after receiving the application, fix a date for a hearing under the Informal Procedure Rules. This means that a taxpayer may be represented by an agent (such as an accountant) other than a lawyer.
Finally, we come to the question everyone is asking (I can hear you all now): What are the circumstances under which an extension of time will be granted? The case books are filled with some very interesting tales. For the answers, you are invited to wait by your laptops for the next edition of The Tax Issue.
In the case of CIBC v R., the CRA disallowed a deduction for expenses solely on the basis that the taxpayer’s conduct was morally reprehensible. The tax court agreed, and The Federal Court of Appeal was asked to rule on this question.
The issue in this case was the deductibility of $3 billion in payments made by the CIBC to settle litigation in the U.S. relating to the bankruptcy of Enron Corporation. The CIBC was named as a co-defendant in the case, and the settlement was paid to avoid being jointly and severally liable with Enron for its part in the dissemination of misleading financial information.
In disallowing the settlement amount as a tax deduction, the CRA argued:
The misconduct of [CIBC and its affiliates] was so egregious and repulsive that any consequential settlement payments […] cannot be justified as being incurred for the purpose of gaining or producing income from a business or property …. The [CIBC affiliates] knowingly aided and abetted Enron to violate the United States’ federal securities laws and falsify its financial statements. The misconduct of [the CIBC affiliates] in enabling Enron to perpetrate its frauds, known to [CIBC], or the misconduct of [CIBC] itself, was so extreme, and the consequences so dire, that it could not be part of the business of a bank.
If you know your tax history, you will recognize the CRA’s words as stemming from the comments made by the Supreme Court of Canada in the case of 65302 British Columbia Ltd. v. R. In that case, the taxpayer deducted quota penalties it was charged for the over-production of eggs. The quotas were intentionally exceeded in order to maintain a major customer. The court in that case allowed the deduction, but also stated, with regard to penalties in general that:
It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income.
In the end, Finance enacted a provision which generally disallows the deduction of any government penalties. But, the CIBC case did not involve penalties, and there is no specific provision of the Income Tax Act that would disallow a settlement payment based solely on the moral conduct of the taxpayer. Indeed, it is a well known fact that income from all sources, including criminal activities is taxable in Canada.
So, in the end, the Court of Appeal overturned the decision of the Tax Court and did not disallow the deduction solely on the basis of the taxpayer’s conduct. The case will, however, resurface when the time comes to judge whether the deduction should be allowed on its merits as a business expense.
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.
Why don’t you write me I’m out in the jungle, I’m hungry to hear you
Send me a card I am waiting so hard to be near you….Paul Simon
If a person transfers capital property to his or her spouse, Income Tax Act (ITA) subsection 73(1) deems it be transferred at cost, unless the taxpayer elects in his return not to have the rollover apply.
A bad debt on a loan may be considered to be a disposition of that debt for tax purposes under ITA section 50, but only if the taxpayer elects in his tax return to have that provision apply.
On a change of control of a corporation, there is an automatic deemed year end. If that date is within 7 days after the normal year end, then that normal year end can be extended to the date of the change of control, but only if the taxpayer so elects in his return of income under ITA paragraph 249(4)(c).
I could go on and on, but point is, there are many provisions in Canadian tax law that require elections or designations in a taxpayer’s tax return. Some elections require specific prescribed forms to be filed. Others, however, have no form assigned to them. These are usually handled with a letter attached to the return stating that the taxpayer wishes to elect to have a certain provision apply.
So, how does a taxpayer wishing to make an election “in his tax return” do so if he is electronically filing? Currently, the CRA has no way of processing these “letter” elections electronically. However, they do make the statement in various guides and publications that a separate letter should be sent to the Taxation Centre, and even though it is not actually “in the return of income” as is required by law, if the letter arrives before the due date of the return, it will be valid. Furthermore, for corporate filers, the CRA states that an election may be included as part of the notes to the financial statements in the GIFI.
But what if no actual “letter” is produced? What if the taxpayer, in his return of income, simply takes advantage of the election? For example, isn’t it obvious that a taxpayer who makes a claim for a capital loss on the disposition of a bad debt under section 50 in his tax return has made the election in his return? Similarly, if a taxpayer shows a disposition at fair market value on a property transferred to his spouse, isn’t it clear that he has elected out of subsection 73(1)?
Clearly, the CRA’s polcies would suggest that a letter expressly making the election under the specific section of the law should always be prepared. However, for those who have not done so, the recent case of Dhaliwal may offer some support.
In Dhaliwal, the taxpayer failed to send a letter to the CRA and and claimed a loss under section 50 in his tax return. The loss was denied by the CRA, but the Tax Court of Canada had this to say:
The question thus becomes: Must a subsection 50(1) election be made with an express reference to electing to have subsection 50(1) apply, or is it sufficient that the taxpayer elects to report a loss in his or her tax return on a deemed disposition that results because he or she has chosen to avail himself or herself of subsection 50(1)? In an electronic-filing age, this takes on considerable importance as, if an election making a specific reference to subsection 50(1) is required, but no such choice is available in the CRA’s electronic tax returns, this would mean that subsection 50(1) is only available to paper-filers or that the CRA is derelict in its duties in administering the Income Tax Act .
…upon a proper interpretation of section 50, it is sufficient to communicate the taxpayer’s election by clearly communicating in his or her tax return that he or she wants to be allowed an ABIL in respect of particular debt or shares disposed of in that year. This same analysis applies equally to electronic and paper format tax return. In this case, Mr. Dhaliwal’s 2007 electronic tax return clearly claims an ABIL, using the CRA’s ABIL schedule, in respect of a $156,000 loan made in 2005 and disposed of in 2007. The matter could hardly be clearer.
Perhaps at some point in the future, the CRA will come up with a clearer procedure to make elections and submit written information within an electronically filed income tax return. For now, those who are vigilant should follow their guidelines, but those who are not should follow Dhaliwal.
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.
Last 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………..
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!!