Tax Tips _ Traps 50 by leader6



 AL J. COCHRANE, DIPL., T., C.G.A.                                                                                  33264 OLD YALE ROAD

---------------------------------------------------------                                                          ABBOTSFORD, B.C. V2S 2J5

 SANDRA E. PARKER,                      C.G.A.                                                                      TELEPHONE:604-853-7607




                                                                   of their old age security.
 YEAR-END TAX PLANNING                                                                                                 IN THIS ISSUE
                                                                   Senior citizens will begin to lose their
 84(1)                                                             income tax age credit if net income         YEAR-END TAX PLANNING
 Some 2008 year-                                                   exceeds $31,524.
 end tax planning                                                                                              2008 REMUNERATION
                                                                   Contact your professional advisors for
 tips include:                                                                                                 BUSINESS/PROPERTY INCOME
                                                                   assistance in managing 2008 personal
 1.       Certain ex-                                              income.                                     MARRIAGE BREAKDOWN
          penditures                                          5.   Consider purchasing assets eligible         ESTATE PLANNING
          made by indi-                                            for capital cost allowance before the       WEB TIPS
          viduals by December 31, 2008 will                        year-end.
          be eligible for 2008 tax deductions or                                                               GST/HST
                                                              6.   Consider selling capital properties
          credits including: moving expenses,                                                                  FARM
          child care expenses, safety deposit                      with an underlying capital loss prior
                                                                   to the year-end if you had taxable          DID YOU KNOW...
          box fees, charitable donations, politi-                                                                                                              s
          cal contributions, medical expenses,                     capital gains in the year, or any of the
          alimony, eligible employment ex-                         preceding three years. This capital            may be available upon application to         a
          penses, union, professional, or like                     loss may be offset against the capital         CRA.                                         t
          dues, carrying charges and interest                      gains.                                                                                      e
                                                                                                              10. Taxpayers that receive “eligible”
          expenses, certain public transit                    7.   Registered Education Savings Plan              dividends from private and public
          amounts, and children’s fitness                          (RESP)                                                                                      P
                                                                                                                  corporations will have a significantly       l
                                                                   A Canada Education Savings Grant               lower tax rate on the dividends. Noti-       a
 2.       You have until March 2, 2009 to                          (CESG) for RESP contributions will             fication from the corporation to the         n
          make tax deductible Registered Re-                       be permitted equal to 20% of annual            shareholder is required. See 84(2) -         n
          tirement Savings Plan (RRSP) contri-                     contributions for children (maximum            #2.                                          i
          butions for the 2008 year.                               $500 per child per year).                                                                   n
                                                                                                              11. Eligible public transit passes will be       g
          Consider contributing to a spousal                  8.   Health and dental premiums for the             entitled to a tax credit.
          RRSP to achieve income splitting in                      self-employed                                                                               a
                                                                                                              12. A fitness tax credit for children under      r
          the future.                                              Individuals will be allowed to deduct          16 enrolled in certain organized             r
 3.       If you own a business, consider pay-                     amounts payable for Private Health             sports is available.                         i
          ing a reasonable salary to family                        Service Plan coverage in computing                                                          a
                                                                                                              13. A Registered Disability Savings Plan
          members for services rendered to the                     business income provided they meet                                                          g
                                                                                                                  may be established for a person who          e
          business.                                                certain criteria.                              is eligible for the Disability Tax
 4.       An individual whose 2008 net income                 9.   A refund of Employment Insurance               Credit. Non-deductible contributions         B
          exceeds $64,718 will lose all, or part,                  paid for non-arm’s length employees            to a lifetime maximum of $200,000            r

        Tax Tips & Traps
 October 2008                                               Compliments of Cochrane & Associates, CGA                                                 PAGE 1   a
     are permitted which are eligible for             mulative net investment loss balance      but, did not charge rent for the use of the
     tax-deferred grants and bonds. Please            thereby providing greater access to       garage.
     contact your professional advisors for           the capital gain exemption.
     details.                                                                                   The Problem
                                                 7.   Excessive personal income affects
                                                      receipts subject to clawbacks, such as    The       Court
                                                                                                found that the
2008 REMUNERATION                                     old age security, the age credit, child
                                                                                                garage was no
                                                      tax benefits, and GST credits.
                                                                                                longer used to
84(2)                                            8.   Salary payments require source de-        earn income
Some general guidelines                               ductions to be remitted to the Canada     from a business
to follow in remunerat-                               Revenue Agency on a timely basis.         or property by Mr. and Mrs. Evans.
ing the owner of a Cana-                         9.   Individuals that wish to contribute to    Therefore, there was a change of use and
dian-controlled private                               the Canada Pension Plan or a Regis-       a deemed disposition at fair market value
corporation earning “ac-                              tered Retirement Savings Plan may         triggering significant recaptured capital
tive business income”                                 require a salary to create “earned in-    cost allowance.
include:                                              come”.                                    The Court noted that had the sons paid
1.   Bonusing down active business earn-         10. Salaries paid to family members must       Mr. and Mrs. Evans rent for the property,
     ings in excess of the annual business           be reasonable.                             this problem would not have occurred.
     limit may reduce the overall tax.
     However, leaving corporate active                                                          TERMINAL LOSS UPON THE
     business income over this amount            BUSINESS/PROPERTY INCOME                       CESSATION OF A BUSINESS
     presents a tax deferral.                                                                   In a July 22, 2008 External Technical
     Professional advice is needed in this                                                      Interpretation, the Canada Revenue
     area.                                       MANUFACTURING AND                              Agency (CRA) notes that if a business is
                                                 PROCESSING (M&P) PROPERTY                      discontinued, the taxpayer is not entitled
2.   Notification must be made to the
     shareholders when an “eligible” divi-       M&P property acquired after March 18,          to claim a terminal loss for the undepreci-
     dend is paid - usually in the form of a     2007 and before 2010 will be eligible for      ated capital cost of a class of depreciable
     letter dated on the date of the divi-       enhanced Capital Cost Allowance deduc-         property until all the assets in the class are
     dend declaration. If all shareholders       tions (50% straight-line method).              disposed of.
     are directors, the notification may be                                                     Furthermore, the taxpayer is not entitled to
     made in the Directors’ Minutes.             BUILDINGS
                                                                                                claim capital cost allowance on the prop-
                                                 An enhanced Capital Cost Allowance rate        erty in any subsequent year unless it is
     Please contact your professional ad-
                                                 is available for M&P buildings (10%),          used in that year to earn income from a
     visor for advice before paying an eli-
                                                 and other non-residential buildings (6%).      business or property.
     gible or ineligible dividend.
3.   Elect to pay out tax-free “capital          To qualify, the building must be brand
     dividend account” dividends.                new. Used buildings are not eligible.
                                                                                                MARRIAGE BREAKDOWN
4.   Consider paying dividends to obtain a       CHANGE IN USE
     refund of “refundable dividend tax                                                         84(4)
                                                 In a May 16, 2008 Tax Court of Canada
     on hand”.                                                                                  WHOLLY DEPENDENT PERSON
                                                 case, Mr. and Mrs. Evans operated an
5.   Corporate earnings in excess of per-        electrical business partnership in which       In an April 30, 2008 Tax Court of Canada
     sonal requirements could be left in the     they owned a garage which was used as a        case, the Court confirmed that a divorced
     company to obtain a tax deferral.           workshop and storage facility. The busi-       person is not entitled to a tax credit for a
     The effect on the “Qualified Small          ness was then turned over to their sons        wholly dependent person if he/she is re-
     Business Corporation” status should         who had been working as employees for a        quired to pay a child support amount for
     be reviewed before selling the shares.      number of years. However, Mr. and Mrs.         the person - whether or not they in fact pay
6.   Dividend income, as opposed to sala-        Evans retained ownership of the garage,        the amounts, or it is fair that they should
     ries, will reduce an individual’s cu-       which was used by the sons in the business     have to pay the amounts.

     Tax Tips & Traps
October 2008                                   Compliments of Cochrane & Associates, CGA                                            PAGE 2
SPOUSAL SUPPORT                                   rears payment should be prepared. If the
                                                                                                   ESTATE PLANNING
In a June 4, 2008 Alber-                          payments do not ultimately realize the
ta Court of Appeal case,                          expected tax status, an adjustment could         84(5)
the Judge initially or-                           be made between the parties.
                                                                                                   DONATION SCHEMES
dered Mr. S to pay
spousal support indefi-                           PRIOR PAYMENTS                                   In a February 23,
nitely. However, the                              Often, spousal support is paid prior to          2007 Tax Court
Alberta Court of Appeal                           preparation of a written separation              of Canada case,
has now limited the                               agreement. As such, the payments are not         the taxpayer re-
payments to eight years from the date of          made under a written agreement and would         ceived a donation
the marriage breakdown. Mr. S’ lawyer             generally not be taxable or deductible.          receipt for five
successfully argued that, in some cases,          However, where a later agreement or or-          times the amount of the cash donation.
ongoing spousal support payments are not          der provides that an amount received and
                                                  paid previously is to be considered paid         Taxpayer Loses
                                                  and received under the agreement or order,       CRA successfully disallowed the charita-
CHILD SUPPORT                                     the amounts may be taxable/deductible.           ble donations, even in statute-barred
An Ontario Court ordered the father to            The payments must have been made in the          years, and applied gross negligence pen-
pay $1,068 a month for two teenage sons           calendar year of the later order or agree-       alties.
he had out of wedlock and that he barely          ment, or the immediately preceding taxa-         Also, in a July 14 2008 Tax Court of Can-
knows.                                            tion year. This sets a deadline on the           ada case, the taxpayers acquired original
                                                  completion of an agreement in this re-           works of art from Canadian Art Advisory
The taxpayer had argued that this would           gard.
impose “undue hardship” on him since he                                                            Services (CAAS) Inc. and shortly thereaf-
was already supporting children that he           Consider: The agreement could indicate           ter donated them at much higher values to
had with his wife.                                the parties’ intent that the amounts will be     charities identified by CAAS.
                                                  deductible to the payer and taxable to the       Taxpayers Lose
The Court noted that there is no reason to        recipient.
prefer the children born within the mar-                                                           The Court noted that the value for dona-
riage to those born outside it. Children in       CHILD SUPPORT                                    tion purposes should be the amount paid
both families should be treated equally.          The Federal Child Support Guidelines             by the taxpayers minus the 15% retainer
                                                  are located on the federal Department of         fee paid to CAAS.
                                                  Justice website at
Sometimes, the payer does not pay alimo-             REDEEMER FOUNDATION
ny on time. Alimony, like most forms of           pen/grl/fcsg-lfpae.html. Further details on      The Redeemer Foundation operates a
personal income, is taxable on the cash           the Federal Child Support Guidelines are         forgivable loan program that finances the
basis. Alimony which is due, but not paid,        also available at                                education of students at an affiliated col-
is neither taxable nor deductible.                   lege. CRA was concerned that some
When alimony arrears are paid, any                pen/index.html.                                  charitable donations to the Redeemer Col-
amount that would have been taxa-                                                                  lege were not valid alleging that the do-
                                                  The Federal Child Support Guidelines first
ble/deductible spousal support if paid on                                                          nors’ contributions were made solely to
                                                  became effective May 1, 1997 and result-
time is taxable/deductible at the time of                                                          finance the education of their own chil-
                                                  ed in child support payments not being
payment. This assumes, however, that the                                                           dren. CRA served the Redeemer Founda-
                                                  subject to tax to the recipient and not be-
amounts are payable on a periodic basis                                                            tion with a requirement to report the iden-
                                                  ing tax deductible by the payor. The child
and are, in fact, paid. Where an agreement                                                         tity of each donor and the name of the
                                                  support amount under the Guidelines
is made to pay some different, normally                                                            related student.
                                                  varies by province to account for differ-
lesser, amount in lieu of arrears, the status     ences in provincial tax rates, cost of living,   On July 31, 2008, the Supreme Court of
of the payment may be lost.                       etc.                                             Canada concluded that CRA is entitled to
Consider: Perhaps a written agreement                                                              the donor information.
setting out the expected status of the ar-                                                         We understand that CRA did send Notices

   Tax Tips & Traps
October 2008                                    Compliments of Cochrane & Associates, CGA                                            PAGE 3
of Reassessments to some of the donors.          ple, information that is required on a re-     cation including government grants and
                                                 ceipt).                                        programs, both federal and provincial, as
Editor’s Comment                                                                                well as tools for planning for education
                                                 Also, you could get on the electronic
This appears to open up a charity’s donor                                                       and multiple search engines. Links to
                                                 mailing list by registering at www.cra-
list to CRA, upon request.                                                                      useful references can also be found at this
EXECUTORS OF AN ESTATE                           eng.html.
                                                                                                One option is to check out this website to
In a June 11, 2008 Tax Court of Canada
                                                                                                help with planning for yourself or your
case, the issue was whether $15,000 re-          WEB TIPS                                       family or, simply, send it off to your tech
ceived for services rendered as Executors
                                                                                                savvy kids.
of the uncle’s Estate is taxable as assessed     84(6)
by CRA.
Taxpayers Lose                                                                                  GST/HST
                                                 Have you
The taxpayers’ argument that the amount          ever                                           84(7)
was a specific legacy that their uncle gave      wanted to
them under his Will, and not remuneration        determine                                      LEGAL FIRM - DISBURSEMENTS
for services rendered, was not accepted by       what your                                      In a June 13, 2008 Tax Court of Canada
the Court. Given the way in which the            monetary                                       case, CRA assessed the law firm as owing
Will was drafted, the Court found that the       savings                                        $77,350 in GST on legal disbursements
$15,000 constituted taxable income from          would be                                       which were paid on behalf of its clients
employment.                                      if you did                                     and which were almost exclusively taken
                                                 not incur a routine expense? How about         out of the law firm’s Trust funds.
This is not considered to be a non-taxable
                                                 determining your current or even projected
legacy because a legacy does not entail                                                         Law Firm Wins!
                                                 net worth?
any obligation or responsibility of the
                                                                                                The evidence
legatee.                                         For a list of calculators, as well as multi-
                                                                                                established that
                                                 ple other interesting facts and figures, go
                                                                                                certain     dis-
REGISTERED CHARITIES                             to the ‘Calculator’ page on Yahoo’s Fi-
NEWSLETTER                                                                                      bursements
                                                 nance website at
                                                                                                were not sub-
In the Summer 2008 Special Edition No. 
                                                                                                ject to GST,
30, CRA notes that their Website                 x
                                                                                                including ap-
( has a new sec-         The calculators are divided into categories    praisal reports,
tion “Operating a Registered Charity”            such as Budget & Banking, Career               motor vehicle accident reports, courier
which includes over 50 pages of infor-           &Work, Family & Home, Insurance,               fees, transcript fees, investigative reports,
mation such as checklists, issuing receipts,     Loans, Real Estate, Retirement and Tax-        hospital records, security reports, medical
Form T3010, disbursement quotas, books           es.                                            reports, parking fees, travel expenses, se-
and records, audits and sanctions, making                                                       curity and search certificates, birth certifi-
requests that require approval, policies and     Some examples of interesting calculators
                                                                                                cates, marriage certificates, and death cer-
technical information, and frequently            include: How much will I need to retire?
asked questions.                                 How Much do I Need for Emergencies?
                                                 and, The Value of Reducing or Foregoing        Legal disbursements for office expenses
The checklists are available at www.cra-         Expenses.                                      were subject to GST.
The question and answer structure is ar-         LEARNING AND EDUCATION                         CREDIT CARD EXPENSES
ranged by areas of interest (for example,        A website of note is, a        CRA allows a Registrant who is an em-
applying for registration), and then is di-      Government of Canada website dedicated         ployer, partnership, charity or public insti-
vided by subject matter (for example, is-        to learning and education for preschool        tution to use factors to calculate Input Tax
suing receipts), and then subdivided to          aged children up to, and including, adults.    Credits (ITCs) in respect of the tax
answer the specific questions (for exam-          It provides information on financing edu-     deemed paid by employees, partnership

   Tax Tips & Traps
October 2008                                   Compliments of Cochrane & Associates, CGA                                            PAGE 4
members or volunteers where credit cards                                                        Government on April 21, 2008 to the Post-
have been used to make purchases.                                                               Graduation Work Permit Program that
                                                                                                will permit international students graduat-
This is an administrative policy of CRA
                                               PAYMENT TO NON RESIDENTS                         ing from eligible programs at certain post-
and is not legislated. Some Registrants
                                                                                                secondary institutions to have open and
may prefer to use the exact calculation        Payment of rent to non residents for rental      longer work permits. The previous dura-
method.                                        of land and on buildings is subject to with-     tion of one or two years has been extended
Beginning January 1, 2008, when the rate       holding tax. Canada has a tax treaty with        to an open work permit with no restrictions
of GST/HST became 5% and 13%, re-              the U.S.A. and most European countries.          on the type or location of employment and,
spectively, the factor allowed on credit       Canada requires you to withhold from             in certain cases, has been extended to
card expenses became 4/104 or 12/112.          10% to 25% (depending on the country) of         three years.
CRA will permit Registrants to use fac-        rent paid to non-residents. The non-             Do a Google search of “Post-Graduation
tors for calculating ITCs on expenses          resident may be able to file a tax return to     Work Permit Program” for details.
charged to company credit cards, provided      recover some of the withheld tax.
the conditions in CRA Guide P-184 (July
31, 2008) are followed.
                                               DID YOU KNOW...
                                               WORK PERMIT PROGRAM
                                               Changes were announced by the Federal

         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.

         COCHRANE & ASSOCIATES, C.G.A – provide a full range of accounting services and income tax related ser-
         vices including bookkeeping, personal and corporate income tax, farm taxation, estate planning and business con-
         sultation. For an appointment please call: (604) 853-7607.

         “This newsletter is for personal use only and may not be reproduced nor distributed.”

   Tax Tips & Traps
October 2008                                Compliments of Cochrane & Associates, CGA                                               PAGE 5

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