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					                                               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
                                                    ment.
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
                                                    on hand”.
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,
                                                    gain exemption.
    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
                                                                                              EMPLOYMENT INCOME
                                                    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
                                                   be reasonable.
“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
                                                   parents.
                                                                                             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
                                                                                             SEPARATE AND
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
68(5)
                                               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.
                                                                                           WEB TIPS
PLAN (HBP)
                                            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-
come tax.
                                                 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
                                            FARMING
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
                                            FARMLAND
                                            BETWEEN
ESTATE PLANNING                             SPOUSES
                                            In a June 25, 2004                             GST
68(11)
                                            Technical Interpreta-
                                                                                           68(14)
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.
                                                     pany
                                                                                                     • 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-
                                                                                                     family members.
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.
PROOFING
                                                     • 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-
er-managed
                                                     ness owner




          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

				
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