6. An individual whose 2004 net income
YEAR-END TAX PLANNING IN THIS ISSUE
exceeds $59,790 will lose all, or part,
68(1) of their old age security.
YEAR-END TAX PLANNING
Some 2004 year-end tax Senior citizens will begin to lose their
planning tips follow. Contact 2004 REMUNERATION
income tax age credit if net income
us if you need more infor- exceeds $29,124. PERSONAL TAX RETURNS
mation. EMPLOYMENT INCOME
Contact your professional advisors for
1. If the following expendi- assistance in managing 2004 personal BUSINESS/PROPERTY INCOME
tures are made by indi- income.
CAPITAL GAINS AND LOSSES
viduals by December 31, 2004 they 7. Consider purchasing assets eligible
will be eligible for 2004 tax deduc- RETIRING ALLOWANCE
for capital cost allowance before the
tions: moving expenses, child care yearend. For example, employees CAPITAL COST ALLOWANCE (CCA)
expenses, safety deposit box fees, may claim capital cost allowance on MARRIAGE BREAKDOWN
charitable donations, political contri- automobiles used in their employ-
butions and medical expenses. RRSP/RESP/SBIT
2. 2004 eligible Registered Retirement ESTATE PLANNING
8. If you had taxable capital gains in the
Savings Plan (RRSP) contribution year, or any of the preceding three FARMING
amounts are noted on the 2003 per- years, consider selling capital proper- WEB TIPS
sonal income tax return assessment ties with an underlying capital loss
notices. You have until March 1, GST
prior to the yearend. This capital loss
2005 to make tax deductible RRSP may be offset against the capital DID YOU KNOW...
contributions for the 2004 year. gains.
Consider contributing to a spousal 9. If income in an inter vivos trust is to families commencing January 1,
RRSP to achieve income splitting in be taxed on a beneficiary’s return, the 2005.
the future. income must be paid or payable to Budget 2004 introduces a new Can-
3. Persons turning age 69 in 2004 must the beneficiary by December 31, ada Learning Bond from the gov-
mature their RRSP into cash, an an- 2004. ernment totalling $2,000 for each
nuity or a Registered Retirement In- 10. Registered Education Savings Plan child born on or after January 1, 2004
come Fund by December 31, 2004. (RESP) ($500 in the first year and $100 per
4. If you own a business, consider pay- year until age 15) if the family net in-
A Canada Education Savings Grant come is under the $34,000 range. An
ing a reasonable salary to family (CESG) for RESP contributions will
members for their services rendered RESP is needed for the deposit.
be permitted equal to 20% of annual
to the business. contributions for children (maximum 11. Health and dental premiums for the
5. Ensure that all deductible alimony or $400 per child per year). self-employed
maintenance payments are made by The 20% is proposed to be increased Individuals will be allowed to deduct
December 31, 2004. to 40% or 30% for lower income amounts payable in respect of the year
Tax Tips & Traps
2004 FOURTH QUARTER ISSUE NO. 68 PAGE 1
overall higher tax to pay when divi-
PERSONAL TAX RETURNS
for Private Health Service Plan cov- dends are finally paid out. Some
erage in computing business income companies may find it advantageous 68(3)
provided they meet certain criteria. to have greater than , say, $250,000
of active business income because of DISABILITY TAX CREDIT (DTC)
12. Tax on Split Income other federal and provincial tax incen- Type I Insulin Dependent Diabetes
The Income Tax Act applies the tives. - O.K.
maximum marginal tax rate to cer- 2. Elect to pay out tax-free “capital In a June 14, 2004 Tax
tain passive income of individuals dividend account” dividends. Court of Canada case, the
under the age of 18. Therefore, con- taxpayer successfully
sider minimizing this type of income 3. Consider paying dividends to obtain a
refund of “refundable dividend tax claimed a DTC for his sev-
in 2004. en year old daughter who
13. The tax rate for higher income indi- has Type I Insulin Dependent Diabetes.
viduals is now significantly lower on 4. Corporate earnings in excess of per-
sonal requirements could be left in the Epilepsy - O.K.
capital gains than on dividends
company to obtain a tax deferral. In a December 12, 2003 Tax Court of
thereby presenting an incentive to re-
The effect on the “Qualified Small Canada case, the taxpayer has epileptic
ceive capital gains.
Business Corporation” status should seizures in which she losses complete
14. Canadians receiving shares in foreign be reviewed before selling the shares. physical control.
tax-free reorganizations can apply
5. Dividends, as opposed to salaries, will
for favourable tax treatment. The Court permitted the DTC.
reduce an individual’s cumulative net
15. A refund of Employment Insurance investment loss balance thereby pro- STRUCTURED SETTLEMENT
paid for non-arm’s length employees viding greater access to the capital
may be available upon application to In a 2004 Advance Income Tax Ruling,
CRA. the taxpayer was injured in a motor vehi-
6. Retaining income in the corporation cle accident and reached an out-of-court
16. Taxpayer-Requested Adjustments may affect provincial and federal settlement with the Defendant’s Insurers to
Currently an individual may request capital tax and certain provincial receive tax-free payments for life.
an adjustment to a tax return back to clawbacks.
1985. 7. Excessive personal income affects MEDICAL EXPENSES
It is proposed that after 2004, adjust- receipts subject to clawbacks, such as In a June 29, 2004 Technical Interpreta-
ments will be limited to ten years old age security, the age credit, child tion, CRA notes that an amount paid to a
back. Therefore, adjustments for tax benefits, GST credits, etcetera. medical doctor normally qualifies as a
1985 to 1995 should be requested by medical expense even if it is for cosmetic
8. Salary payments require source de-
December 31, 2004. or elective surgery.
ductions to be remitted to Canada
Revenue Agency (CRA) on a timely This includes cosmetic eyelid surgery,
2004 REMUNERATION basis. botox and artecoll injections.
9. Individuals that wish to contribute to
68(2) the Canada Pension Plan or a Regis-
Some general guidelines
tered Retirement Savings Plan may
to follow in remunerat- require a salary to create “earned in- 68(4)
ing the owner of a Ca- come”.
nadian-controlled pri- EMPLOYER-PAID PROFESSIONAL
10. Salaries paid to family members must MEMBERSHIP INITIATION FEES
vate corporation earning
“active business income” include: In an April 14, 2004 Tech-
11. Some provinces have “payroll taxes” nical Interpretation, CRA
1. In general, bonus down active busi- thereby increasing the costs of paying notes that the payment of
ness earnings in excess of the annual salaries versus dividends. annual professional mem-
business limit - $250,000 for a De-
bership fees by an employ-
cember 31, 2004 yearend. Leaving
er on behalf of an employee is not a taxa-
corporate active business income
ble benefit IF the employer is the primary
over this amount may present a tax
beneficiary of the payment.
deferral but there will likely be an
Tax Tips & Traps
2004 FOURTH QUARTER ISSUE NO. 68 PAGE 2
CAPITAL COST ALLOWANCE
Also, the amount is a deductible business (ii) There was not sufficient documenta- (CCA)
expense. tion and,
(iii) The children did not declare any 68(8)
TUITION FEES REIMBURSED
amounts on their tax returns. In a June 21, 2004
In a June 7, 2004 Technical Interpreta- Federal Court of Ap-
tion, CRA notes that employer-paid tui- PRIVATE HEALTH SERVICES peal case, the taxpay-
tion (and related costs) may not be a taxa- PLAN (PHSP) er had an October 31 yearend and, pur-
ble benefit to the employee. This includes Where an employer enters into a PHSP for chased a “new fleet” of cars to replace
courses in a field related to the employee’s an employee, the expenses are generally the “old fleet” as at October 31.
responsibilities as well as courses not di- deductible to the employer and not taxa-
rectly related to the employer’s business However, the “old fleet” remained in the
ble to the employee. This deductible/non-
such as stress management, employment ownership of the taxpayer until November
taxable status may not apply if the PHSP
equity, first aid and language skills. 1. Therefore, CCA was allowed on both
is only available to shareholders.
the “old fleet” and the “new fleet” at the
MOTOR VEHICLE EXPENSE In a June 24, 2004 Tax Court of Canada October 31 yearend.
DEDUCTION case, CRA disallowed the deduction to the
company and taxed the shareholder on
In a July 15, 2004 Technical Interpreta-
the basis that this was a benefit given to MARRIAGE BREAKDOWN
tion, CRA notes that where an employee
him in his capacity as a shareholder, not
receives a reasonable per kilometre reim- 68(9)
bursement for the use of his/her personal an employee.
motor vehicle in connection with employ- LIVING
ment duties, the reimbursement is general- CAPITAL GAINS AND LOSSES APART
ly excluded from employment income.
68(6) In a January 5, 2004
Tax Court of Canada
PRINCIPAL case, the Court considered the taxpayers to
RESIDENCE be living separate and apart because of a
BUSINESS/PROP In a June 3, 2004 breakdown in their relationship even
ERTY INCOME Technical Interpreta- though they continued to live in the same
tion, CRA notes that house. Therefore, their incomes were not
when a taxpayer con- combined for purposes of the GST credit.
LOSSES ON verts a principal resi-
SHARE SALE dence to an income-producing use, the EQUIVALENT-TO-SPOUSE
taxpayer may, within limits, elect to defer CREDIT (ETSC)
In a June 25, 2004
French Tax Court of recognition of any gain to a later year. In a January 8, 2004 Tax Court of Canada
Canada case, the taxpayer was permitted a case, the Court noted that it is impossible
business loss, not a capital loss, on the for a taxpayer to claim an ETSC for a
sale of shares which were speculative in RETIRING child where the individual is required to
nature. ALLOWANCE pay a support amount for that person.
SALARIES PAID TO CHILDREN - 68(7) FORM RC 65(04)
DISALLOWED In a 2004 Advance Income Tax Ruling, Taxpayers may use this Form to advise
In a June 23, 2004 Tax Court of Canada six non-arm’s length individuals were CRA of a change in marital status. This
case, the Court disallowed a deduction for employee/shareholders of a corporation. could affect the Canada Child Tax Benefit
salaries to his sixteen and twelve year old The corporation wishes to sell all of the and GST/HST payments.
children against his self-employed busi- assets and then wind up.
ness income for reasons including:
CRA Ruled that a retiring allowance paid
(i) The amounts were either not paid to to each employee within prescribed limits
them or, upon being paid, were im- is deductible to the corporation and eligi-
mediately redeposited in bank ac- ble for a rollover by the employees to a
counts of either the business or the Registered Retirement Savings Plan.
Tax Tips & Traps
2004 FOURTH QUARTER ISSUE NO. 68 PAGE 3
This is a non-taxable gift to Brother B deduction for all their farm losses, rather
from the Estate. than the restricted farm loss treatment pro-
vided by CRA.
RRSP/RESP/SBIT ELDERLY TAXPAYERS
68(10) Some considerations for elderly taxpayers
follow. Contact your professional advisors
RRSP - HOME BUYERS’ for details.
1. Sign a Power of Attorney for man- 68(13)
The HBP permits an individual to borrow
agement of property and personal BUSINESS
up to $20,000 from his/her RRSP to pur-
care matters. VALUATION
chase a home in Canada. To qualify, the
borrower, or his/her spouse, cannot have 2. Avoid probate fees by naming benefi- CALCULATOR
an owner-occupied home in the four pre- ciaries to life insurance policies and This website has a seven step calculator
ceding years. Each spouse may withdraw pension plans, joint ownership and by that allows you to make a quick business
up to $20,000 from their RRSPs to jointly multiple wills. valuation.
purchase a home. Also, assets could be rolled over to an http://www.cdnbx.com/valuations/quick
Alter Ego Trust or a Joint-Spousal or Valuation1.asp
REGISTERED EDUCATION Common-Law Partner Trust.
SAVINGS PLANS (RESP) This website also contains a market com-
3. A Will may be used to defer gains by
An RESP permits an individual to put parison section, rules of thumb for valu-
transferring assets to a spouse or a
funds with a Trust Company for the post- ing Canadian businesses, and a search
Spousal Trust, to deem a charitable
secondary education of one or more bene- tool to find brokers, advisors and other
donation to have been made in the
ficiaries. The Trust is exempt from in- related professionals throughout Canada.
year of death, to establish a Testa-
mentary Trust eligible for a separate POST-SECONDARY
Contributions to a RESP may also be eli- yearend and graduated tax rates, to INFORMATION
gible for a Canada Educational Savings provide for a windup of a holding
If you are looking for information on stu-
Grant (CESG). company, and to gift publicly traded
dent financing, scholarships or awards,
securities to a charity to take advan-
SMALL BUSINESS INVESTMENT take a look at the following websites:
tage of the 25% taxable capital gain.
TRUST (SBIT) www.canlearn.ca (is an excellent starting
In a 2004 Advance Income Tax Ruling, point for anybody thinking about pursuing
CRA Ruled that the arm’s length employ- a post-secondary education)
ees of a construction company may have 68(12) www.scholarshipscanada.com
their RRSPs invest in a SBIT which will
provide loans to developers. TRANSFER OF www.studentawards.com
ESTATE PLANNING SPOUSES
In a June 25, 2004 GST
GIFT FROM AN tion, CRA confirmed
ESTATE that where Mr. A transferred farm proper- LAWYERS’
In a June 11, 2004 ty to his spouse on a rollover basis, the DISBURSEMENTS
Technical Interpreta- subsequent capital gain on the sale of the In a July 7, 2004 Policy
tion, CRA reviewed a property by the spouse would be attribut- Statement, CRA provided eleven pages of
situation where, prior ed back to Mr. A and would be eligible for information with respect to how a lawyers’
to the death of Broth- a capital gain exemption if it met the cri- disbursements are taxed for GST/HST
er A, Brother B took teria for qualified farm property. purposes.
care of his personal needs and managed
FARM LOSSES SALES BY INDIVIDUALS OF
his finances. Brothers C, D and E agreed
that the Estate should pay Brother B for In a July 9, 2004 Tax Court of Canada OWNER-OCCUPIED HOMES
the care provided to Brother A. case, the taxpayers were eligible for a full A GST Guide provides information on the
Tax Tips & Traps
2004 FOURTH QUARTER ISSUE NO. 68 PAGE 4
business follow. For details contact your • Shareholder loans may be se-
GST/HST implications on the sale of professional advisor. cured by a general security arrange-
owner-occupied homes by individuals. ment to give the shareholder priority
1. Transferring assets out of a com-
over all unsecured creditors.
• Consider an estate freeze such
DID YOU KNOW... • By placing capital assets in a
that the future growth will go to other
separate holding company, subse-
68(15) quent legal claims arising in the oper-
ating company may not affect these • Transfer assets into a Discretion-
CREDITOR assets. ary Family Trust.
• Paying tax-free dividends to a
Some creditor holding company may protect assets
proofing strat- from future claims.
egies for own-
2. Securitizing the position of the busi-
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances
and exceptions in a commentary such as this, a further review should be done. Every effort has been made to ensure the
accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or
firm involved in the distribution or preparation of this commentary accepts any liability for its contents or use.
Tax Tips & Traps
2004 FOURTH QUARTER ISSUE NO. 68 PAGE 5