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be tempted to file on the basis that they are
2004 PERSONAL INCOME TAX IN THIS ISSUE
“single” - just roommates - to avoid losing
RETURN CHECKLIST certain benefits such as the GST credit,
69(1) provincial tax credits, child tax benefit, 2004 PERSONAL INCOME TAX
etc. RETURN CHECKLIST
Appendix A provides a checklist of
PERSONAL TAX
information that will be needed to CRA may challenge this “single status”.
complete your 2004 Personal Income The taxpayers must show that they are not EMPLOYMENT INCOME
Tax Return. in a common-law relationship. Seven BUSINESS/PROPERTY INCOME
factors indicative of a common-law rela-
MARRIAGE BREAKDOWN
tionship are:
PERSONAL TAX ESTATE PLANNING/CHARITIES
1. shared shelter,
FARMING
69(2) 2. sexual and personal behaviour,
GST
COMMON-LAW PARTNER 3. one partner performs services on be-
half of the other, WEB TIPS
A “common-law
partner” status 4. participation in social activities to-
must be disclosed gether, costs also include amounts for a room on
when filing a 5. societal perception, the main floor for his disabled spouse.
personal income
tax return. 6. economic support, and Also, in a September 17, 2004 External
7. the couple’s attitude toward any chil- Technical Interpretation, CRA agreed
This means a that a person who had suffered a stroke
dren they have together.
person who co- and was disabled was entitled to a medical
habits in a con- MEDICAL EXPENSE - expense for certain renovations to his
jugal relationship and has so cohabited RENOVATIONS house to allow access, mobility, or func-
throughout the previous twelve month In a September 1, 2004 Tax Court of Can- tionality within the home.
period or is the parent of a child of whom ada case, the Court permitted a medical
the taxpayer is a parent. OLD AGE SECURITY
expense for $10,531 on home renova-
Also, persons that have been cohabiting in tions. In a September 7, 2004 External Tech-
a conjugal relationship are deemed to con- nical Interpretation, CRA remind taxpay-
The taxpayer’s spouse had meningitis and ers that receive Old Age Security in 2004
tinue to be in a “common-law partner”
was confined to a wheelchair. To remain that there will be a clawback if the net
status unless they are living separate and in the family home she needed 24-hour
apart for at least ninety continuous days income exceeds $59,790.
care. Therefore, the taxpayer incurred the
because of a breakdown of their conjugal $10,531 to provide living accommoda- OAS payments will be subject to a “with-
relationship. holding” on the potential clawback. For
tions for his mother-in-law so that she
Two persons living in the same house may could provide care to his spouse. The example, OAS payments in January to
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 1
June, 2005 are subject to withholding employment income until the share is sold, mal manner and specific duties and hours
based on the net income in the 2003 Re- if the employee is an arm’s length employ- worked should be documented.
turn; July to December, 2005 - based on ee of a Canadian-controlled private cor-
In a June 23, 2004 Tax Court of Canada
the 2004 Return. Therefore, if the 2005 poration and holds the shares for two
case, salaries of $12,000 and $3,500 paid
income will be less than that in 2003 and years.
to a sixteen year old and twelve year old
2004, an application to have this withhold-
GARNISHMENT child were disallowed for reasons includ-
ing reduced could be made to CRA.
ing no evidence of actual payment or re-
An employer may be required by law to
CAREGIVER CREDIT porting.
enforce a garnishment, family support,
In a July 12, 2004 Tax Court of Canada maintenance order or wage assignment. In a July 16, 2004 Tax Court of Canada
case, the taxpayer lived periodically with case, the Court reviewed a number of ex-
For example, CRA may issue a Require-
her elderly parents in their apartment in penses which had been deducted in carry-
ment to Pay Notice with respect to an em-
2002 and, at the end of the year, one of the ing on the Watkins products for sale busi-
ployee. This Notice remains in effect until
parents lived with her prior to entering a ness. One of the items allowed as a
the CRA liability is paid in full or, until
nursing home. deduction by the Court was a salary of $25
CRA releases the employer from the obli-
per month to their 12 year old son and $15
The Court permitted the caregiver credit gations.
per month to their 7 year old daughter for
on the basis that Mrs. V was providing in-
If an employer has more than one order assisting them in various business func-
home care for her mother.
with respect to an employee, legal advice tions. The Court was satisfied that the
Editor’s Comment should be obtained as to “who gets what”. remuneration was paid and reasonable.
In some jurisdictions the employer is
The income threshold for the elderly par- KEEP RECEIPTS
permitted to deduct an administrative fee
ent at which point the credit is reduced is
from the funds they forward to the Court. In a September 20, 2004
$12,921 for 2004.
(Alberta, Manitoba, Newfoundland, Lab- Tax Court of Canada
rador, Northwest Territories, Nunavut, case, the taxpayer was
EMPLOYMENT INCOME Ontario, Prince Edward Island, and the reassessed by CRA for the
Yukon Territory) 1993, 1994 and 1995
69(3) years to disallow most of
the interest expense, en-
TRAINING TRUST FUND BUSINESS/PROPERTY INCOME tertainment expense, busi-
In a July 29, 2004 CRA Document, CRA
69(4) ness use of residence, and
note that “Training Trust Funds” general- farm expenses.
ly fall under the non-taxable categories SALARIES TO FAMILY MEMBERS
for employer-provided training outlined in Taxpayer Loses
In a September 2, 2004 Tax Court of Can-
Income Tax Technical News No. 13.
ada case, the taxpayer’s salaries to his The Tax Court also disallowed the ex-
sixteen/seventeen-year old son in 1999 penses and noted that the taxpayer did not
STOCK OPTIONS
and 2000 of $4,279 and $4,090 respective- keep receipts.
In an August 13, 2004 External Technical
ly were disallowed by the Court because: The best evidence would have been an
Interpretation, CRA note that where a
corporation agrees to sell its shares to an 1. There was no evidence of cheques invoice, a cancelled cheque, a receipt or
employee, the employee generally includes being made for those amounts - just other proof of payment. Instead, only
in employment income a taxable benefit an indication by the father that he had schedules in the handwriting of the Appel-
equal to the fair market value of the bought items for the son which were lant with his oral explanation were provid-
shares acquired minus the amount paid. reflected in the salary. ed.
However, where an employee pays an 2. Hours of work were not kept. TAX REGISTRATION
amount for the shares that is not less than
the fair market value of the shares at the 3. The son did not report the amounts in Registrations for a new business or part-
time the agreement to issue the shares is income. nership may be done over the internet at
established, a deduction in computing The Court noted that business transactions www.businessregistration.gc.ca.
taxable income of 50% of the benefit is between related persons must have their
“i’s” dotted and their “t’s” crossed. OUT-OF-COUNTRY TRAINING
permitted.
COSTS
Also, there is a 50% deduction in compu- For salaries to be allowed to family mem- In an October 20, 2004 External Tech-
ting taxable income, and a deferral of the bers, the amounts must be paid in a nor-
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 2
nical Interpretation, CRA notes that and the man is earning a salary of $90,000 university in the United States at a cost of
where training in respect of a business is and his wife is earning $30,000, the $127,000. The Court noted that the par-
taken to maintain, update or upgrade an spousal support figure that the man would ents should only be required to pay the
already existing skill or qualification, the pay his ex-wife ranges between 1.5% and equivalent costs for a degree in Canada,
related costs (course fees, travel, food, 2.0% of the difference ($60,000) times the which the Court determined to be $40,000
beverages and lodging) are deductible as a number of years the couple were married. ($22,800 for the father and $17,200 for the
current business expense. However, the This is between $18,000 and $24,000 a mother based on their respective incomes).
food and beverage portion may be re- year or $1,500 to $2,000 a month.
stricted to the 50% deduction in Section
67.1.
The payments continue to be tax deducti- ESTATE PLANNING/CHARITIES
ble to the payor and taxable to the recipi-
ent. 69(6)
MARRIAGE BREAKDOWN Unlike the child support guidelines which CHARITY REIMBURSEMENTS
do have the effect of law, the spousal A person who incurs expenses while vol-
69(5)
guidelines are just a starting point in ne- unteering for a charity could consider hav-
CHILD SUPPORT - gotiations. ing the expenses reimbursed by the chari-
COMMENCEMENT DAY ty. The volunteer could then donate the
SPOUSAL SUPPORT amounts back to the charity. This will
In a July 13, 2004 Tax Court of Canada
case, the taxpayer signed a Separation It was noted in the National Post on Sep- provide a tax credit for the donation. It is
Agreement in 1988 which required a $225 tember 27, 2004 that the British Columbia important to cross cheques.
per child per month child support pay- Court of Appeal was asked to cancel or
ment. reduce Mr. L’s Court-ordered $2,250 per PUBLIC BENEFIT
month spousal support to his 57 year old Organizations that want to be registered as
After May 1, 1997, the taxpayer moved former wife on the basis that she had not a “Charity” must have purposes directed
from Manitoba to British Columbia. A made reasonable attempts to obtain em- to the “public benefit”.
new Order of the Income Security Divi- ployment.
sion in British Columbia retained the Man- On September 30, 2004, CRA issued a 27-
itoba Order but had a top-up of the child The Court rejected the Appeal on the basis page Guide “Consultation on Proposed
support from $225 per month to $425 per that Ms. L’s family and medical problems Guidelines for Registering a Charity:
month. were exacerbated by the breakdown of her Meeting the Public Benefit Test”.
marriage. Ms. L’s inability to achieve
Taxpayer Loses! financial self sufficiency resulted, (at least CANADA PENSION PLAN (CPP)
The Tax Court not- in part) from the emotional devastation as In a Government of
ed that the deduc- well as from her age, a lingering back Canada Income Se-
tion is lost because problem, and a string of death and illness- curity Program sem-
a new or amended es in her close family. inar it was noted that:
agreement was
made after April PAYING FOR CHILD’S MASTERS 1. In applying to
1997. DEGREE collect a person’s
It was noted in the July 15, 2004 issue of CPP, it is possi-
SPOUSAL SUPPORT the National Post that the Ontario Supe- ble to drop out
In the August 23, 2004 issue of the Globe rior Court held that divorced parents of a certain years:
and Mail it was noted that the Federal 25 year old daughter must pay for her (i) periods of CPP disability,
government is proposing to release Feder- Masters Degree. (ii) periods during which children
al Guidelines for negotiating income- In the past, it has been common for Judges were raised up to age 7,
sharing agreements between divorced to require divorced parents to pay for a (iii) 15% of the lowest earning years
couples. child’s first post-secondary degree. How- in your contributory period.
The Guidelines include formulas for cal- ever, this case found that where the parents
See the “Canadian Retirement In-
culating reasonable settlements. Factors are highly educated and have high expec-
come Calculator” at www.hrdc.gc.ca.
such as the length of the marriage and the tations for their child, the costs for the
presence of dependent children are in- Masters Degree are also required to be 2. CPP credits may be divided upon
cluded. For example, if a couple married paid. divorce, legal annulment or separation
for twenty years has no dependent children of spouses or common-law partners.
The daughter took the Masters Degree at a
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 3
The applicant’s ex-spouse or ex- A. Alternatively, where the land was acquired
partner is to be notified of the request before June 18, 1987, the land will qualify
CRA agreed that this payment is a non-
in writing. For divorces after January where it was used by the individual, the
taxable gift to Brother B from the Estate.
1, 1987, there are no time barriers for spouse, child or parent principally in the
applying. RRSP/RRIF TESTAMENTARY course of carrying on the business of
3. Spouses or common-law partners may TRUSTS farming in Canada, either in the year the
apply to share CPP entitlements if property is disposed of, or in at least five
In a June 20, 2003 Technical Interpreta-
they are both at least age 60. years during which it was owned by such a
tion, CRA notes that where a taxpayer
person.
4. Disability CPP benefits must be ap- designates a Trust as the beneficiary of
plied for in writing. The person must his/her RRSP or RRIF upon his/her
have a severe and prolonged disabil- death, if this is a testamentary instrument GST
ity including a condition which pre- provided for in the Will, then the transfer
vents the person from doing any work of the property would be considered as 69(8)
on a regular basis. occurring as a “consequence of death”. LAND SALE
Therefore, the recipient Trust would be a
SPOUSAL TRUST “Testamentary Trust” eligible for advan- In an August 20, 2004 Tax Court of Can-
Assets may be rolled over on death to a tageous tax implications such as filing ada case, the vendor sold land and a
Spousal Trust which is a Trust created in Trust returns using the regular marginal building to the “Heart of Trail Society”
the Will under which the taxpayer’s income tax rates. for $100,000. The Society advised the
spouse or common-law partner is entitled vendor that they were registered for GST.
to receive all of the income of the Trust TAX SHELTER DONATION Therefore, the vendor did not charge
that arises before the spouse’s or common- ARRANGEMENTS GST on the basis that the purchaser would
law partner’s death and, no person except On November 25, 2004 CRA introduced a self-assess.
the spouse or common-law partner may, Fact Sheet which notes that CRA is aware However, the GST Registration of the
before their death, receive or otherwise that donation arrangements continue to be Society had been cancelled prior to the
obtain the use of any of the income or promoted using Trusts and leveraged cash sale.
capital of the Trust. donations. CRA’s position is that the
2003 Income Tax Act changes will signif- Vendor Loses!
In a second marriage situation, persons
icantly reduce tax benefits. The Court noted that even though the
that wish to ensure that their assets will
eventually go to their children, not their Vendor was misled by the fraudulent
new spouse’s children, upon their new statement made by the agent for the Socie-
FARMING ty, the Act is clear. The Court found that
spouse’s death, may wish to establish a
Spousal Trust in which the new spouse 69(7) the Vendor is responsible for the $7,000 of
receives all the income during his/her life GST plus a penalty of $1,140 and interest
CAPITAL GAIN EXEMPTION of $604.
but, there can be no encroachment on
capital until the spouse’s death at which To qualify for the $500,000 capital gain
exemption on “qualified farm property” DIRECTOR LIABILITY
time, the capital will go to beneficiaries
chosen by the deceased taxpayer, such as bought after June 17, 1987, a gross- Directors may be held personally liable
his/her children. revenue test must be met. Two years for unremitted GST and source deduc-
while the property was owned the gross tions unless they exercised due care and
Expert legal advice is needed here. revenue of the individual, spouse, child or diligence or the assessment is more than
parent of the individual from the farming two years after the person has ceased to be
GIFT FROM AN ESTATE a director.
business carried on in Canada in which the
In a June 11, 2004 External Technical property was principally used, and in
Interpretation, CRA reviewed a situation In an August 13, 2004 Tax Court of Can-
which such a person was actively engaged ada case, the taxpayer ran a Tim Horton
where, prior to the death of Brother A, on a regular and continuous basis, must
Brother B took care of his personal needs franchise which did not remit GST. CRA
exceed the person’s income from all other assessed penalties and interest of $37,430
and managed his finances. sources. which were not objected to by the corpora-
Brothers B, C, D and E are the beneficiar- The person meeting the gross-revenue test tion. Upon being assessed personally, the
ies of Brother A’s Estate. Brothers C, D need not be the person who owns the directors did not argue “due diligence”
and E agree that the Estate should pay property. For instance, it may be the but did argue that the amount of $37,430
Brother B for the care provided to Brother spouse, child or parent of such a person. was incorrect. This was based on a rough
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 4
calculation done by their accountant total- computers and education, end of life, fi- ness. Various reports can be obtained
ling $14,190. nancial and legal, health, housing, seniors’ including 3 year financial projections,
networks, travel and leisure, veterans, cash flows, and project costs.
OOPS - Taxpayer Loses! work and volunteering.
Even if the assessment is incorrect, if it is GOOGLE DESKTOP SEARCH
Also, check out the “My Province or Ter-
not objected to by the company, the direc- http://www.google.ca/about.html
ritory” section on the left hand toolbar of
tors are still personally liable.
the page for information that is specific to Have you wondered how those Internet
Editor’s Comment your province. search engines like Google can search
millions of websites and in a split second
Always object to incorrect GST assess- LIFE EXPECTANCY CALCULATOR return thousands of site matches … while
ments even if the corporation is insolvent.
If you would like to see how long you will it can take over 100 times as long to use
NON-PROFIT ORGANIZATIONS have an opportunity to be a senior, check your computer’s search button to find lost
out this site: files?
In September, 2004, CRA introduced a 20-
page Guide RC4081 which discusses who www.livingto100.com Google has just developed a desktop tool
should register, exemptions for non-profit that not only searches your computer for
Most people realize that eating, exercising
organizations, special issues, input tax files, but searches inside of files (MS
and living in an unpolluted environment
credits, public service bodies’ rebates, Word, Excel, PowerPoint etc.). Not only
can increase your life expectancy, but do
simplified accounting methods, and real does it search for files but it also returns a
you know by how much? Also, did you
property implications. list of relevant websites that you have re-
know that something as small as flossing
cently visited. The fun doesn’t stop just
your teeth could add two years to your
there - the tool can also search your
WEB TIPS life?
email! At the moment, this last feature
69(9) This website gives an estimated life ex- works best with users of MS Outlook but
pectancy based on one’s habits, genetics, is still extremely useful for other users.
FINDING health and environment. The user simply
When downloading the file, please note
INFORMATION fills out the 41 question multiple response
that it takes a while for the engine to
FOR/ABOUT SENIORS worksheet and is then presented with an
fully catalogue your files. However,
expected age and an explanation of the
www.seniors.gc.ca this is done while you are not using
results.
You will find federal infor- the computer. Once the files are cata-
mation about senior pro- STARTING A NEW BUSINESS logued, you are ready to get split sec-
grams, initiatives, forms and ond responses.
www.vpspro.com
contact information at this
website. This website contains a 12 step planner
that looks at numerous items that need to
Subjects covered include care for seniors, be considered when starting a new 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
2005 FIRST QUARTER ISSUE NO. 69 PAGE 5
APPENDIX A
2004 PERSONAL INCOME TAX RETURN CHECKLIST
INFORMATION REQUIRED INCLUDES:
1. All information slips such as T3, T4, T4A, T4A(OAS), T4A(P), T4E, T4F, T4PS, T4RIF, T4RSP, T5, T10, T2200,
T2202, T100, T101, T600, T1163, T1164, TL11A, T5003, T5007, T5008, T5013, T5018 (Subcontractors) and cor-
responding provincial slips.
2. Details of other income for which no T slips have been received such as:
- other employment income (including stock option plans and Election Form T1212),
- business income,
- partnership income,
- rental income,
- alimony, separation allowances, child maintenance,
- pensions,
- interest income earned but not yet received - example Canada Savings Bonds, Deferred Annuities,
Term Deposits, Treasury Bills, Mutual Funds, Strip Bonds, Compound Interest Bonds
- professional fees,
- director fees,
- scholarships, fellowships, bursaries,
- replacement properties acquired.
3. Details of other expenses such as:
- employment related expenses - Provide Form T2200 - Declaration of Conditions of Employment,
- tools acquired by apprentice vehicle mechanics,
- business and employment purchases like vehicles, supplies, etc.,
- interest on money borrowed to purchase investments,
- investment counsel fees,
- moving expenses - including costs of maintaining a vacant former residence,
- child care expenses,
- alimony, separation allowances, child maintenance,
- safety deposit box fees,
- accounting fees,
- pension plan contributions,
- film and video production eligible for tax credit,
- mining tax credit expenses,
- business research and development,
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 6
APPENDIX A (continued)
- clergy residence deduction information, including Form T1223,
- disability supports expenses (speech, sight, hearing, learning aids for impaired individuals and at-
tendant care expenses).
4. Details of other investments such as:
- real estate or oil and gas investments - including financial statements,
- labour-sponsored funds,
- Registered Education Savings Plans.
5. Details and receipts for:
- Registered Retirement Savings Plan (RRSP) contributions,
- professional dues,
- tuition fees - including mandatory ancillary fees, and Forms T2202, TL11A and TL11D,
- charitable donations (including publicly traded securities),
- medical expenses (including medical related modifications to new or existing home and travel expens-
es),
- political contributions.
6. Details of capital gains and losses realized in 2004.
Also, new rules now permit rollovers for foreign share spin-offs and various foreign share reorganizations.
7. Details of previous capital gain exemptions claimed, business investment losses and cumulative net in-
vestment loss accounts.
8. Name, address, date of birth, S.I.N., and province of residence on December 31, 2004.
9. Marital/common-law status and spouse/partner’s income, S.I.N. and birth date.
10. List of dependents - including their incomes and birth dates.
11. If you or one of your dependents was in full time attendance at a college or university, details concerning name
of institution, number of months in attendance, tuition fees, income of dependent, Form T2202.
12. Are you disabled or are any of your dependents disabled? Provide Form T2201 - disability tax credit certifi-
cate. This also includes extensive therapy such as kidney dialysis and certain cystic fibrosis therapy. Also, the
transfer rules include relatives such as parents, grandparents, child, grandchild, brothers, sisters, aunts, uncles,
nephews or nieces.
13. Details regarding residence in a prescribed area which qualifies for the Isolated Area Deduction.
14. Information regarding child tax credit receipts.
15. Details regarding RRSP - Home Buyers’ Plan withdrawals and repayments; RRSP - Lifelong Learning Plan
repayment.
16. Receipts for 2004 income tax installments or, payments of tax.
17. Copy of 2003 personal tax returns, 2003 Assessment Notices and any correspondence from Canada Revenue
Agency (CRA).
18. 2004 Personalized Tax information which CRA may have sent you.
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 7
APPENDIX A (continued)
19. Do you want your tax refund or credit deposited directly to your account in a financial institution? Yes/No.
To start direct deposit, or to change banking information, attach a void personalized cheque or your branch, insti-
tution and account number.
20. Details of carry forwards from previous years including losses, donations, forward averaging amounts, registered
retirement savings plans.
21. Details of foreign property owned at any time in 2004 including cash, stocks, trusts, partnerships, real estate,
tangible and intangible property, contingent interests, convertible property, etc..
22. Details of income from, or distributions to, foreign entities such as foreign affiliates and trusts.
23. Details of your Pension Adjustment Reversal if you ceased employment and were in a Registered Pension Plan
or a Deferred Profit Sharing Plan. (T10 Slip)
24. If you provided in-home care for a parent or grandparent (including in-laws) 65 years of age or over, or an
infirm dependent relative, a federal tax credit may be available.
Also, the caregiver may claim related training costs as a medical expense credit.
25. Interest paid on qualifying student loans is eligible for a tax credit.
26. Retroactive lump-sum payments
Individuals receiving qualifying retroactive lump-sum payments over $3,000 may be allowed to use a special
mechanism to compute the tax.
27. Changes in family circumstance that could affect the Goods and Services Tax Credit, such as births, deaths,
marriages, reaching the age of 19 years, and becoming or ceasing to be a resident in Canada.
28. Children born on or after January 1, 2004 to low or middle income parents may be entitled to a Canada
Learning Bond of $500 in the initial year and $100 per year until age 15. Please ask us for details.
Tax Tips & Traps
2005 FIRST QUARTER ISSUE NO. 69 PAGE 8
