YEAR END TAX PLANNING Some year end tax planning tips by mrsnoble


									                                                    of their old age security.                         IN THIS ISSUE
                                                    Senior citizens will begin to lose their
76(1)                                               income tax age credit if net income        YEAR-END TAX PLANNING
Some 2006 year-end                                  exceeds $30,270.
tax planning tips in-                                                                          2006 REMUNERATION
                                                    Contact your professional advisors for
clude:                                                                                         PERSONAL TAX RETURNS
                                                    assistance in managing 2006 personal
1.   If the following                               income.                                    EMPLOYMENT INCOME
     expenditures are                          6.   Consider purchasing assets eligible        BUSINESS/PROPERTY INCOME
     made by individu-                              for capital cost allowance before the      ESTATE PLANNING
     als by December                                year-end. For example, employees
     31, 2006 they will                                                                        MARRIAGE BREAKDOWN
                                                    may claim capital cost allowance on
     be eligible for 2006                           automobiles used in their employ-          FARMING
     tax     deductions:                            ment.                                      GST
     moving expenses,
     child care expenses,                      7.   If you had taxable capital gains in the    WEB TIPS
     safety deposit box                             year, or any of the preceding three        DID YOU KNOW...
     fees, charitable do-                           years, consider selling capital proper-
     nations, political                             ties with an underlying capital loss
     contributions, medical expenses, and           prior to the year-end. This capital
                                                                                                   sider minimizing this type of income
     alimony.                                       loss may be offset against the capital
                                                                                                   in 2006.
2.   2006 eligible Registered Retirement                                                       11. A refund of Employment Insurance
     Savings Plan (RRSP) contribution          8.   Registered Education Savings Plan
                                                                                                   paid for non-arm’s length employees
     amounts are noted on the 2005 per-             (RESP)
                                                                                                   may be available upon application to
     sonal income tax return assessment             A Canada Education Savings Grant               CRA.
     notices. You have until March 1,               (CESG) for RESP contributions will
                                                                                               12. Taxpayers that receive “eligible”
     2007 to make tax deductible RRSP               be permitted equal to 20% of annual
                                                                                                   dividends from private and public
     contributions for the 2006 year.               contributions for children (maximum
                                                                                                   corporations will have a significantly
     Consider contributing to a spousal             $400 per child per year).
                                                                                                   lower tax rate on the dividends.
     RRSP to achieve income splitting in       9.   Health and dental premiums for the
                                                                                               13. Eligible tools acquired after May 2,
     the future.                                    self-employed
                                                                                                   2006 in excess of $1,000 will be enti-
3.   Persons turning age 69 in 2006 must            Individuals will be allowed to deduct          tled to a tax deduction to a maximum
     mature their RRSP into cash, an an-            amounts payable in respect of the year         of $500.
     nuity or a Registered Retirement In-           for Private Health Service Plan cov-
                                                                                               14. Eligible public transit passes ac-
     come Fund by December 31, 2006.                erage in computing business income
                                                                                                   quired after July 1, 2006 will be enti-
4.   If you own a business, consider pay-           provided they meet certain criteria.
                                                                                                   tled to a tax credit.
     ing a reasonable salary to family         10. Tax on Split Income
     members for services rendered to the           The Income Tax Act applies the
     business.                                      maximum marginal tax rate to cer-
                                                                                               2006 REMUNERATION
5.   An individual whose 2006 net income            tain passive income of individuals         76(2)
     exceeds $62,144 will lose all, or part,        under the age of 18. Therefore, con-

     Tax Tips & Traps
2006 FOURTH QUARTER                                          ISSUE NO. 76                                                        PAGE 1
Some general guidelines to follow in re-             salaries versus dividends.
munerating the owner of a Canadian-
controlled private corporation earning                                                       INCOME
“active business income” include:               PERSONAL TAX RETURNS
1.   In general, bonus down active busi-        76(3)                                        SPECIAL WORKSITE
     ness earnings in excess of the annual
                                                PENSION TAX CREDIT                           In a July
     business limit. However, leaving cor-
     porate active business income over         The 2006 Federal Budget increased the        17, 2006
     this amount presents a tax deferral.       Federal Tax Credit to pension income of      External
     The disadvantage of the additional         $2,000 commencing January 1, 2006.           Technical
     tax on dividends has been signifi-         With the Provincial Tax Credit this could    Interpreta-
     cantly reduced with the new lower tax      be in the 25% range.                         tion, CRA
                                                                                             notes that
     rates on “eligible” dividends.             Pensions that qualify include:               where an
2.   Elect to pay out tax-free “capital divi-                                                employee
                                                1.   An annuity from a pension plan,
     dend account” dividends.                                                                is assigned
                                                2.   For persons aged 65 or older, annuity   to a location other than the normal em-
3.   Consider paying dividends to obtain a
                                                     payments from an RRSP, a RRIF, or       ployment location for a temporary period,
     refund of “refundable dividend tax
                                                     a deferred profit-sharing plan.         payments made by the employer in respect
     on hand”.
                                                3.   For persons aged 65 or older, the       of the employee’s eligible relocation and
4.   Corporate earnings in excess of per-
                                                     taxable portion of annuities pur-       living expenses are deductible to the em-
     sonal requirements could be left in the
                                                     chased from an insurance company.       ployer and not taxable to the employee.
     company to obtain a tax deferral.
     The effect on the “Qualified Small         However, a person under age 65 would         The requirement that the duties be of a
     Business Corporation” status should        also get the pension credit if they were     “temporary nature” will occur if the pe-
     be reviewed before selling the shares.     receiving annuity payments inherited         riod is less than two years. However,
                                                from a deceased spouse.                      CRA notes that there are situations where
5.   Dividends, as opposed to salaries, will
     reduce an individual’s cumulative net                                                   the employment period extends beyond
                                                AFTER-SCHOOL RECREATIONAL                    two years which will also be considered of
     investment loss balance thereby pro-       PROGRAM - CHILD CARE
     viding greater access to the capital                                                    a “temporary” nature.
     gain exemption.                                                                         In a June 14, 2006 External Technical
                                                In a September 8, 2006 Tax Court of Can-
6.   Excessive personal income affects          ada case, the taxpayer paid fees to a gym-   Interpretation, CRA notes that where a
     receipts subject to clawbacks, such as     nastics club of $984 for after-school        company which is taking on temporary
     old age security, the age credit, child    classes and $431 for summer and spring       logging work on a six-month renewable
     tax benefits, and GST credits.             break gymnastics camps for her 12 year       contract pays for the board, meals and
                                                old daughter.                                travel of its employees to carry out the
7.   Salary payments require source de-
                                                                                             work, this will likely qualify as a special
     ductions to be remitted to Canada
     Revenue Agency (CRA) on a timely           Taxpayer Wins!                               worksite. The value of board, lodging and
     basis.                                     The essential question is what is the pri-   other benefits related to it would be tax-
                                                mary reason for enrolling the child in the   free to the employee.
8.   Individuals that wish to contribute to
                                                activity. In this case, the primary reason
     the Canada Pension Plan or a Regis-                                                     LEGAL EXPENSES
                                                was to provide child care so that the tax-
     tered Retirement Savings Plan may                                                       In an August 11, 2006 External Technical
                                                payer was able to perform duties of em-
     require a salary to create “earned in-                                                  Interpretation, CRA notes that the Income
                                                ployment. Therefore, the taxpayer’s de-
     come”.                                                                                  Tax Act permits a deduction in computing
                                                duction for child care expenses was
9.   Salaries paid to family members must       allowed.                                     income from employment for legal ex-
     be reasonable.                                                                          penses paid in the year to collect, or to
10. Some provinces have “payroll taxes”                                                      establish a right to, employment income.
    thereby increasing the costs of paying                                                   Therefore, if the income received from a

     Tax Tips & Traps
2006 FOURTH QUARTER                                           ISSUE NO. 76                                                     PAGE 2
disability claim is taxable, legal expenses    LANDSCAPING                                     flow-through share is usually nominal or
incurred would be deductible.                  The Income                                      nil because of the immediate write-off of
                                               Tax     Act                                     deductions, the donation for a tax credit
REIMBURSEMENT OF HEALTH                        permits a                                       based on fair market value is advanta-
PREMIUMS BY EMPLOYER                           deduction                                       geous because the otherwise large capital
In a July 25, 2006 External Technical          for amounts                                     gain is not taxable.
Interpretation, CRA notes that medical         paid by a
and hospital insurance plans covered by        taxpayer for                                    REGISTERED EDUCATION
Blue Cross and various other medical in-       landscap-                                       SAVINGS PLAN (RESP)
surers would be considered Private Health      ing grounds                                     A person may contribute up to $42,000 to
Service Plans (PHSPs). Therefore, the          around the building or other structure of       an RESP in the lifetime of a beneficiary at
reimbursement of premiums for health           the taxpayer that is used primarily for the     a maximum of $4,000 per year. Also, a
and dental benefits by an employer for         purpose of gaining or producing income          Canada Education Savings Grant (CESG)
employees would be excluded from em-           from a business.                                is available at $400 per year at a rate of
ployment income.                                                                               20% per contribution to a maximum of
                                               Therefore, prepaid landscaping costs may
                                                                                               $7,200 (18 years times $400 per year).
                                               be eligible for a deduction even if the ac-     Therefore, a $2,000 RESP contribution
BUSINESS/PROPERTY INCOME                       tual work has not been started. Alterna-        will net the maximum $400 CESG for the
                                               tively, work that has been done, but not        year.
76(5)                                          paid - just a payable, will not be deducti-
                                               ble until it is paid.                           RRSP SCAMS
(PHSP)                                                                                         In a
In a July 14, 2006 Technical Interpreta-       ESTATE PLANNING
tion, CRA notes that when a sole proprie-
                                               76(6)                                           ber 9,
tor implements a Cost-Plus Plan, it must
                                                                                               2005 Tax Court of Canada case, a lady
provide coverage for at least one em-          AIRPLANE TICKETS                                who needed money to finance her return to
ployee other than the sole proprietor. Oth-
                                               In a June 2, 2006 External Technical In-        school responded to a newspaper adver-
erwise, it is not in the nature of insurance
                                               terpretation, CRA notes that where an           tisement that proposed to allow her to
as the proprietor has not undertaken to
                                               individual redeems reward points to ac-         withdraw her RRSP tax-free through an
indemnify another person.
                                               quire an airplane ticket and then donates       investment of $48,200 in Company
ASSOCIATION - DE FACTO                         the airplane ticket to a Registered Cana-       3563545 which would be used to guaran-
CONTROL                                        dian Charity, the individual will be consid-    tee a loan back for a similar amount, net
                                               ered to have made a gift for Income Tax         of 36% in fees ($17,360). CRA included
In a February 28, 2006 English translation
                                               Act purposes.                                   in her income the $48,200 on the basis that
of a French Tax Court of Canada case, the
                                                                                               this was a non-qualified investment.
Court concluded that the spouse of the         PRIVATE FOUNDATION
sole shareholder of Company A exercised                                                        Taxpayer Loses
                                               In a June 27, 2006 Internal Technical
de facto control over Company A thereby                                                        The Court found that these shares were not
                                               Interpretation, CRA note a revocation of
associating Company A with the spouse’s                                                        “qualifying investments” as the transac-
                                               charitable status could occur if the charity
corporations which had already been allo-                                                      tion was a sham since the perpetrators
                                               acquires a limited partnership interest
cated the annual business limit. This re-                                                      never genuinely intended for the tax-
                                               because it is now considered to be carrying
sulted in no small business deduction for                                                      payer’s RRSP to hold an investment.
                                               on a business.
Company A.
The Tax Court felt that Company A’s sole       FLOW-THROUGH SHARES
shareholder, Mrs. S, was not involved in       Taxpayers that donate publicly listed secu-
the daily decisions of the Company. Also,      rities after May 1, 2006 do not have to
Company A was economically dependent           report the capital gain if the securities are
on Mr. S’s Corporations.                       donated to a registered charity - but not to
                                               a private foundation. As the tax cost of a

   Tax Tips & Traps
2006 FOURTH QUARTER                                          ISSUE NO. 76                                                        PAGE 3
                                             CRA restricted the taxpayer’s losses on         on purchases for which the invoices did
                                             farming activities to $8,750.                   not include a valid GST Registration
76(7)                                                                                        Number.
                                             Taxpayer Wins!
CHILD SUPPORT                                The Court permitted a full deduction for        Taxpayer Loses
In an August 24, 2006 Tax Court of Can-      the farm losses and noted that:                 The Court noted that a Registrant may not
ada case, Mr. P paid child support under a                                                   claim an Input Tax Credit unless he/she
1993 Ontario Court Divorce Judgment of       1.   Mr. G had built up a law practice and
                                                                                             has obtained prescribed information
$650 per month per child.                         a farming business. The law practice
                                                                                             which includes the valid GST Registration
                                                  required a relatively modest invest-
                                                                                             Number of the supplier.
On August 31, 1998, the Appellant and             ment of capital and has been profit-
former Spouse signed an Agreement vary-           able. The farming business required        Editor’s Comment - GST/HST Web
ing the child support payable to $500 per         a greater capital investment but has       Registry
month in compliance with the May, 1997            resulted in operating losses.              A person’s GST/HST Registration status
Child Support Guidelines.
                                             2.   Mr. G’s day-to-day life involved both      may be checked at www.cra-
Taxpayer Loses                                    the practice of law and farming and
                                                  the contacts he made in farming be-        gistry/menu-e.html.
The Court noted that this new agreement
                                                  came valuable to his law practice.
changed the status of the child support                                                      After entering a GST/HST number, busi-
                                                  The “synergy” between the farm and
payments from deductible/taxable to non-                                                     ness name and date of transaction, the sys-
                                                  law practice should have given more
deductible/non-taxable.                                                                      tem will tell you whether the person was
                                                                                             registered for GST/HST on that particular
DIVISION OF A PENSION                                                                        date. Keeping this confirmation for re-
In an April                                  GST                                             ceipt purposes is a good idea.
6,     2006
External                                     76(9)                                           RESIDENTIAL RENTAL
Technical                                                                                    PROPERTY REBATE
                                             NON-PROFIT ORGANIZATIONS
Interpreta-                                                                                  In August, 2006, CRA introduced 18-page
tion, CRA                                    20-page Guide RC4081 discusses the              Guide RC4231 which discusses the
notes that if                                GST/HST implications for non-profit or-         GST/HST New Residential Rental Prop-
there is a                                   ganizations including Registering, exemp-       erty Rebate including Forms GST524 and
division of pension benefits on a mar-       tions, input tax credits, public service body   525.
riage breakdown, the portion received by     rebates, simplified accounting, and real
each spouse is the income of that spouse     property issues.                                DENTISTS
even if the administrator issues one                                                         Most dental services are “exempt” sup-
cheque to the Plan member. The inten-        GST/HST REFUNDS AND
                                                                                             plies. Therefore, purchases related thereto
tion of the parties in the Separation        REBATES
                                                                                             are not eligible for Input Tax Credits.
Agreement is the key when determining        The May 2, 2006 Federal Budget notes            However, cosmetic dental services (GST
the income tax treatment.                    that GST/HST refunds will only be paid if       rate 6%) and sales and installation of arti-
                                             all returns required under the Excise Tax       ficial teeth and orthodontic appliances
                                             Act, the Income Tax Act, and the Excise         (zero-rated) are eligible for Input Tax
FARMING                                      Act have been filed.                            Credits on purchases related thereto.
76(8)                                        These changes commence April 1, 2007.

FARM LOSS CASE                               INPUT TAX CREDITS - REFUSED
In an August                                 In a March 17,
21,     2006                                 2006 Tax Court of
Federal                                      Canada case, the
Court of Ap-                                 taxpayer claimed
peal    case,                                Input Tax Credits

   Tax Tips & Traps
2006 FOURTH QUARTER                                        ISSUE NO. 76                                                         PAGE 4
                                                As the notes become no longer needed,
WEB TIPS                                                                                         DID YOU KNOW...
                                                they can easily be trashed.
76(10)                                          To download this program, go to:                 76(11)
POST-IT NOTES FOR YOUR                 and then search for             CORRECTION
DESKTOP                                         “Post-it Software Notes Lite 3.1.1”              Re: Tax Tips and
Post-it Software Notes Lite 3.1.1                                                                Traps Issue 75(6)
                                                CHANGING THE TEXT SIZE ON                        (2006 Third Quar-
If you find your office covered in Post-It
                                                YOUR SCREEN: (MOUSE WITH A                       ter) LOANS FOR
notes, or simply are looking for a way to
                                                WHEEL)                                           VALUE - third
keep little bits of information organized
                                                If you ever                                      paragraph.
and visible, consider downloading this free
item. Desktop Post-It Notes Lite 3.1.1,         have trouble                                     The CRA prescribed rate until September
published by the 3M Corporation, is a           reading                                          30, 2006 should be 4% - not 9%.
program that lets you post those little yel-    documents,
low notes that you know so well on your         web pages, or                                    RRSP - CREDITOR PROOF
computer desktop. This tool is great for        emails     be-
                                                                                                 Currently, RRSPs are subject to creditor
keeping track of phone numbers, ad-             cause the size
                                                                                                 attacks with the exception of certain life
dresses, email addresses, websites, task        of the font is
                                                                                                 insurance RRSPs. Also, Registered Pen-
lists etc.                                      too      small,
                                                                                                 sion Plans are creditor proof.
                                                take note of
These little notes can quickly be created,      this tip!                                        New Federal Bill C-55 (Royal Assent -
modified and moved around. Also in-                                                              November 25, 2005) puts RRSPs and
cluded in this feature is the ability to set    First, click
                                                once on the                                      RRIFs on a similar basis as life insurance
alarms and create hyperlinks.                                                                    RRSPs and Registered Pension Plans.
                                                open document that you want to expand.
                                                Hold down the CTRL key and then spin             However, RRSP/RRIF contributions in
                                                the wheel on your mouse. One direction           the last twelve months will not be exempt
                                                will increase the font size while the other      from seizure.
                                                direction will decrease it. You will also        Also, this exemption will only apply where
                                                note that this will work in various pro-         an individual “locks in” the RRSPs. There
                                                grams. Try it out and see which programs         will also be a cap on the exempt RRSP
                                                are compatible.                                  portion based on the bankrupt person’s
                                                                                                 age and the maximum RRSP contribution
                                                                                                 limit in the year of bankruptcy.

                                                                                                 The Problem
                                                                                                 Bill C-55 has not yet been proclaimed.

          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
2006 FOURTH QUARTER                                           ISSUE NO. 76                                                           PAGE 5

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