67 by nuhman10


									PERSONAL TAX                                  MEDICAL EXPENSE - DEPENDANT
                                                                                                    IN THIS ISSUE
                                              In a May 3, 2004 External Technical
67(1)                                         Interpretation, Canada Revenue Agency         PERSONAL TAX
DISABILITY TAX CREDIT (DTC) -                 (CRA) notes that an individual may claim
                                              medical expenses in respect of specified      EMPLOYMENT INCOME
                                              persons such as a dependent parent            BUSINESS/PROPERTY INCOME
In a June 14, 2004 and a September 11,
2003 Tax Court of Canada case, the Court      (including in-laws). This requires that the   CAPITAL GAINS AND LOSSES
                                              individual has supplied necessary
permitted a DTC for parents who had a                                                       MARRIAGE BREAKDOWN
seven year old daughter and a six year old    maintenance, or the necessities of life, to
                                              the person on a regular and consistent        CHARITIES
son respectively who suffered from Type 1
                                              basis.                                        FARMING
Insulin Dependent Diabetes. A positive
medical certificate noted that the children   MEDICAL EXPENSE - AUTISTIC                    ESTATE PLANNING
needed assistance due to age.                 CHILD                                         WEB TIPS
In a May 3, 2004 Tax Court of Canada          In a May 6, 2004 External Technical           GST
case, the Court disallowed the DTC for a      Interpretation, CRA notes that the cost of
                                                                                            DID YOU KNOW...
parent who had a five year old child with     sending an autistic child to an integrated
Type 1 Insulin Dependent Diabetes             daycare could qualify as a medical
because a positive medical certificate was    expense if there was a medical certificate    reimburses its employees for medical
not provided by the taxpayer.                 which clearly indicates that the              expenses may qualify as a PHSP.
                                              daycare/facility has specialized equipment,   However,      where      an
TUITION FEES - FOREIGN                        facilities, or trained personnel to provide   individual, who is both a
INTERNET STUDIES                              care, or care and training, for this child.   shareholder     and     an
In an April 21,                                                                             employee,     receives a
2004 Tax Court                                                                              benefit under a PHSP and
of Canada case,                               EMPLOYMENT INCOME                             equivalent benefits are not
the         Court                                                                           available to other non-
                                              67(2)                                         shareholder employees, the individual is
disallowed    the
tuition fee tax                               PRIVATE HEALTH SERVICE PLAN                   generally considered to be in receipt of a
credit for foreign university Internet        (PHSP)                                        taxable shareholder benefit and
studies. The Court noted that completing      CRA noted in an External Technical            contributions may not be deductible by the
courses through the Internet is not the       Interpretation that a PHSP is a contract      corporate employer.
same as physically travelling back and        of insurance to pay eligible medical          On the other hand, when
forth between Canada and the U.S. as          expenses which are deductible to the          equivalent     coverage      is
permitted under the Income Tax Act.           employer and not taxable to the employee.     extended to all employees, the
                                              A Plan where a corporate employer             benefits are non-taxable to

    Tax Tips & Traps
2004 SECOND QUARTER                                        ISSUE NO. 67                                                       PAGE 1
                                               capital property, the $10 may be a capital     the individual (treasury share).
the employee and deductible to the             gain - only half of which is taxable.
employer. This also applies when all           RESERVE FOR UNPAID AMOUNTS                     MARRIAGE BREAKDOWN
employees of a corporation are
shareholders and it is reasonable to           In a May 12, 2004 External Technical           67(5)
conclude, based on the particular facts,       Interpretation, CRA note that where a
that the PHSP coverage has been provided       business sells inventory and all or part of
as part of a reasonable remuneration           the selling price was not due for at least
package.                                       two years after the sale, a reasonable
                                               Reserve for the unpaid amount may be           CHILD SUPPORT - AMENDMENT
LUMP-SUM LEASE PAYMENT                         claimed.                                       In a May 3, 2004 Tax Court of Canada
In an April 26, 2004 External Technical                                                       case, the taxpayer signed a Child Support
                                               RESTRICTIVE COVENANTS
Interpretation, CRA notes that employees                                                      Payment Agreement on April 24, 1997.
may deduct up-front lease payments for         New rules propose to fully tax receipts for    Because it was signed prior to May, 1997
leased vehicles used in employment             signing restrictive covenants.                 the child support amounts were
provided that the total amount deducted        The Income Tax Act broadly defines a           deductible/taxable. Unfortunately for the
does not exceed the allowable $800 per         “restrictive covenant”. For example, over      payor, the Agreement was amended on
month.                                         and above the normal situations, where a       January 3, 2000 and the child support
                                               parent corporation sells shares of a           payments       then     became      non-
                                               subsidiary and undertakes that its other       deductible/non-taxable because they were
BUSINESS/PROPERTY INCOME                                                                      now under a post-April, 1997 Agreement.
                                               subsidiaries will not compete with the
67(3)                                          target corporation, this is considered to be
                                               a “restrictive covenant”. Also, included is    CHILD SUPPORT - DEEMED
STOCK                                          where a parent corporation sells a             INCOME
OPTIONS                                        subsidiary corporation and, after the sale,    The May 6, 2004 issue of the National
In a May 14, 2004                              its other subsidiaries will carry certain      Post noted that Mr. A was a farmer whose
External Technical                             quantities of the sold subsidiary’s            income in 2002 was $12,692 when he had
Interpretation,                                products.                                      custody of his sixteen year old son. His
CRA reviewed a situation where an                                                             former spouse had custody of their thirteen
                                               However, where a joint election is made        year old daughter and held down three
independent contractor is granted a stock      between the grantor and the grantee on a
option as payment for his consulting                                                          jobs in earning $28,000 a year.
                                               disposition of an eligible capital property,
services.                                      a partnership interest or a share of a         Mr. A claimed child support from Mrs. A
The fair market value of the option on the     corporation the gain may only be half          on the basis that her income was higher
grant date, less any amount paid, will be      taxed.                                         than his.
included in business income. (Editor’s                                                        The Court concluded that Mr. A is
Comment - For example, if the option
                                               CAPITAL GAINS AND LOSSES                       underemployed and could also be earning
price is $10 and the fair market value of                                                     $28,000 per annum. Therefore, neither
the share is $17, the business income is       67(4)                                          parent was entitled to receive child
$7.)                                                                                          support payments from the other.
                                               SMALL-BUSINESS SHARE
When the option is exercised, the              ROLLOVER                                       PENSION INCOME
incremental value realized on the
                                               In a May 6, 2004 External Technical            In an April 30, 2004 External Technical
acquisition of the shares may be a
                                               Interpretation, CRA notes that an              Interpretation, CRA notes that if there is a
“business income” or a “capital gain”.
                                               individual that has a capital gain from a      division of pension benefits on a
(Editor’s Comment - Example, if the fair       qualifying disposition of shares may           marriage breakdown under the Pension
market value is $27 at the exercise date the   claim a deferral on the capital gain if        Benefits Legislation of a province, the
additional     amount       included      in   qualifying replacement shares are bought.      portion received by each former spouse is
income/capital gain is $10 - ($27 - $17).)                                                    included in the income of that spouse.
                                               There are many restrictions and
CRA notes where the $10 is for services        conditions to be met. For example, the
rendered it would be business income.          share must usually be a common share
However, where the option is held as a         issued by an active business corporation to

     Tax Tips & Traps
2004 SECOND QUARTER                                          ISSUE NO. 67                                                        PAGE 2
                                              three years, the taxpayer (Mrs. A) may         If the child has a physical or mental
                                              have to pay tax based on a disposition of      infirmity the amount may be rolled over to
                                              the property at fair market value to the       their RRSP.
67(6)                                                                                        WEB TIPS
GIFT AND LEASEBACK                            ESTATE PLANNING
In a nine-page 2004 Advance Income Tax        67(8)
Ruling, CRA reviewed a proposed                                                              CALCULATORS
donation of commercial property to a          WITHHOLDING TAX RATES
                                                                                             Small Business
charity with a leaseback of the property to   The withholding tax rates when                 Banking -
the donor. The donor received a tax credit    withdrawing funds out of an RRSP or
                                                                                             If you want to know which bank in
for the value of the commercial property.     RRIF are:
                                                                                             Canada offers the best plan/rate for your
                                              (i) less than $5,001 - 10%                     company, take a look at this calculator.
                                                                                             By answering a series of questions about
                                              (ii) $5,001 - $15,000 - 20%
                                                                                             the company’s banking activities, this
NON-PROFIT                                    (iii) more than $15,000 - 30%.                 calculator can give you the rates under
                                              For example, if Mr. A withdraws $20,000        different plans that 10 of the largest banks
                                              from his RRSP he would be subject to a         in Canada offer. After comparing rates
In a 2004 Advance                             30% withholding tax. Alternatively, if he      you can click on links that give specific
Income Tax Ruling, CRA Ruled that a           took the funds out in four $5,000              details about that specific plan. This tool
change to the bylaws of the NPO to permit     increments, the withholding tax would          is ideal for comparing different types of
a distribution of profits to its members      only be 10%. Of course, when he files his      accounts either within one bank or
will cause it to lose its NPO status.         tax return he will still have to report the    amongst several.
Therefore, it will become subject to tax.     $20,000 in income and pay tax at marginal
                                              rates.                                         Buy vs. Lease -
The purpose of the amendment was to
allow the NPO to distribute excess funds                                                     This calculator compares the costs
                                              Therefore, he will likely owe tax upon         involved in buying versus leasing assets.
to its members.                               filing his tax return, however, he will have   The tool requires eleven pieces of
                                              had the use of the money in the interim        information and can be completed with
FARMING                                       period without interest.                       relative ease and speed.

67(7)                                                                                        To use either of these calculators go to:
                                              RRSP TRANSFER
TRANSFER OF FARM PROPERTY                     TO A CHILD                                     http://strategis.ic.gc.ca/epic/internet/ins
TO CHILD                                      In a 2004 Head Office Memo, CRA notes          of-sdf.nsf/en/Home
In a May 7, 2004 External Technical           that an amount paid out of an RRSP as a        As this is the Industry Canada website, it
Interpretation, CRA approved a situation      consequence of the death of the annuitant      is relatively reliable. The calculators are
where Father (Mr. A) owned farmland for       to a child or a grandchild of the annuitant    the seventh and eighth items in the left
sixty years - the first fifty of which he     who was financially dependent on the           hand menu.
farmed on a principal basis. The last ten     annuitant for support may be included on
years were rented. Mr. A dies and             the child’s Tax Return. This could be          FUND COMPANIES: PRICES AND
bequeaths on a non-taxable basis the          achieved by designating the child as the       DISTRIBUTIONS
farmland to his spouse who then transfers     beneficiary of the RRSP.                       www.fundlibrary.com
the farmland to their
                                              Also, when an amount is paid out of the        If you are looking for fund prices,
children, also on a non-
                                              RRSP to the Estate in which a child is a       distributions, graphs or company news for
taxable basis.
                                              beneficiary, a joint designation for all or    any day, or series of days, this site has the
(Editor’s Comment - If                        a part of the payment may be made. The         information you need. This website
one of the main purposes                      amount so designated is deemed to be           contains information for hundreds of fund
of the transfer to the                        received by the beneficiary. This amount       companies and their respective funds.
children is to obtain a tax                   may be used to acquire an eligible annuity
benefit, and a subsequent                     payable until age 18 or included in
disposition occurs by the children before     income immediately.

    Tax Tips & Traps
2004 SECOND QUARTER                                         ISSUE NO. 67                                                         PAGE 3
                                               However, with respect to the maintenance
GST                                                                                         CANADA PENSION
                                               workers that went from apartment to          PLAN/EMPLOYMENT INSURANCE
67(10)                                         apartment, the “agency” argument did not     (CPP/EI)
                                               work. They were considered to be
INPUT TAX CREDIT FOR TRAVEL                                                                 In an April 28, 2004 External Technical
                                               employees of the management company,
ALLOWANCES                                                                                  Interpretation, CRA notes that where an
                                               not the owner companies. Therefore, GST
An employer may                                                                             employer makes contributions to an
                                               was successfully charged.
claim input tax                                                                             employee’s RRSP, these payments are
                                               Because of the complexity in this area, it   taxable and are generally subject to CPP
credits for non-
                                               may be advisable to obtain a Ruling from     and EI.
allowances paid to                             CRA on cost-sharing or agency
                                                                                            However, the contributions will not be EI
employees       for                                                                         insurable if the employee cannot
motor vehicles.                                                                             withdraw the amounts from a group RRSP
This was confirmed in a July 22, 2003 Tax      DID YOU KNOW...                              until the employee retires or ceases to be
Court of Canada case.                                                                       an employee of the employer.
INTER-CORPORATE CHARGES                                                                     RRSP - ARTIFICIAL
                                               INVESTMENT CLUBS
Where two corporations are engaged in          Investors may elect to report their income
commercial activities, inter-corporate                                                      In a May 28, 2004 Tax Court of Canada
                                               under a simplified basis as if the
charges may not cause GST problems as                                                       case, the Appellant acquired through her
                                               investment club was a partnership.
GST may be avoided if the parties qualify                                                   self-directed RRSP shares of a
                                               However, this method is only available
for the election under Section 156 of the                                                   corporation and then obtained a loan,
                                               where, among other things, all of the club
Excise Tax Act. Otherwise, the GST paid                                                     guaranteed by her RRSP, from a related
                                               members are individuals.
will be eligible for an input tax credit.                                                   corporation of the first corporation.
                                               In an April 28, 2004 External Technical
However, corporations that are not             Interpretation, CRA note that an             Taxpayer Loses
involved in commercial activities may          investment club which includes corporate     The Court found
trigger extra costs with inter-corporate       members may not elect to use this            that the shares
fees because the GST paid is either not        modified partnership method to report the    acquired were not
eligible for exemption under Section 156       income.                                      qualified
or, is not eligible for an input tax credit.
                                                                                            investments   and
One solution is to have one corporation                                                     that the whole
acting as the “agent” for the other                                                         arrangement was an artificial financial
corporation. However, it is a very fine                                                     arrangement to obtain liquid assets from
line as to whether a corporation is an                                                      an RRSP without having to pay income
“agent” for another corporation and                                                         tax.
professional advice is needed.
For example, in a March 12, 2004 Tax
Court of Canada case approximately thirty
corporations that owned residential real
property paid fees to KPMC for
superintendents     and    maintenance
The Court found that the payments made
for the superintendents were of an
“agency” relationship and, therefore, were
not subject to GST as the superintendents
were in fact employed by the owner

     Tax Tips & Traps
2004 SECOND QUARTER                                         ISSUE NO. 67                                                     PAGE 4
       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 SECOND QUARTER                                       ISSUE NO. 67                                                            PAGE 5

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