Why Don’t You Write Me?

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.

Love Conquers CRA

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

What’s Your Tax Issue? Travel For Medical

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.

An Unexpected Penalty for Unsuspecting Taxpayers

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

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

What’s Your Tax Issue? Quebec Business Income

The Tax Issue

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

The Answer

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

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

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

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

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

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

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

Support Payments Redux

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.

Introducing The Tax Issue Tax Organizer for 2011!!

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!

What’s Your Tax Issue? Residence in a Trust

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 or used the 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 the trust sells the home you are living in and 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 in. 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).

Also, if a trust claims the principal residence exemption on home, then all beneficiaries of that trust who may have used the home are deemed to have used their own principal residence exemptions on that property. So, for example, if a summer cottage is owned by a trust and is used by all the family members, some of whom own their own homes, they could lose their exemptions if the trust claims the cottage as a principal residence.

Taxpayers thinking about placing personal homes in a family trust should always seek professional tax advise.

Tax Court Rules On Ponzi Scheme Victims

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…..

Mr. CA Goes To Tax Court

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…