68 by nuhman10


									                                                  December 31, 2004.
YEAR-END TAX PLANNING                                                                               IN THIS ISSUE
                                             6.   An individual whose 2004 net income
68(1)                                             exceeds $59,790 will lose all, or part,    YEAR-END TAX PLANNING
Some 2004 year-end tax                            of their old age security.
planning tips follow. Contact                                                                2004 REMUNERATION
                                                  Senior citizens will begin to lose their
us if you need more                                                                          PERSONAL TAX RETURNS
                                                  income tax age credit if net income
information.                                                                                 EMPLOYMENT INCOME
                                                  exceeds $29,124.
1.   If     the      following                    Contact your professional advisors for     BUSINESS/PROPERTY INCOME
     expenditures are made by                     assistance in managing 2004 personal       CAPITAL GAINS AND LOSSES
     individuals by December 31, 2004             income.
     they will be eligible for 2004 tax                                                      RETIRING ALLOWANCE
                                             7.   Consider purchasing assets eligible
     deductions: moving expenses, child                                                      CAPITAL COST ALLOWANCE (CCA)
     care expenses, safety deposit box            for capital cost allowance before the
                                                  yearend. For example, employees            MARRIAGE BREAKDOWN
     fees, charitable donations, political
     contributions and medical expenses.          may claim capital cost allowance on        RRSP/RESP/SBIT
                                                  automobiles       used    in    their      ESTATE PLANNING
2.   2004 eligible Registered Retirement          employment.
     Savings Plan (RRSP) contribution                                                        FARMING
     amounts are noted on the 2003           8.   If you had taxable capital gains in the
                                                  year, or any of the preceding three        WEB TIPS
     personal income tax return
     assessment notices. You have until           years, consider selling capital            GST
     March 1, 2005 to make tax                    properties with an underlying capital      DID YOU KNOW...
     deductible RRSP contributions for the        loss prior to the yearend. This capital
     2004 year.                                   loss may be offset against the capital
                                                  gains.                                         to 40% or 30% for lower income
     Consider contributing to a spousal                                                          families commencing January 1,
     RRSP to achieve income splitting in     9.   If income in an inter vivos trust is to        2005.
     the future.                                  be taxed on a beneficiary’s return, the
                                                  income must be paid or payable to              Budget 2004 introduces a new
3.   Persons turning age 69 in 2004 must          the beneficiary by December 31,                Canada Learning Bond from the
     mature their RRSP into cash, an              2004.                                          government totalling $2,000 for each
     annuity or a Registered Retirement                                                          child born on or after January 1, 2004
     Income Fund by December 31, 2004.       10. Registered Education Savings Plan               ($500 in the first year and $100 per
                                                 (RESP)                                          year until age 15) if the family net
4.   If you own a business, consider
     paying a reasonable salary to family         A Canada Education Savings Grant               income is under the $34,000 range.
     members for their services rendered          (CESG) for RESP contributions will             An RESP is needed for the deposit.
     to the business.                             be permitted equal to 20% of annual        11. Health and dental premiums for the
                                                  contributions for children (maximum            self-employed
5.   Ensure that all deductible alimony or        $400 per child per year).
     maintenance payments are made by                                                            Individuals will be allowed to deduct
                                                  The 20% is proposed to be increased

     Tax Tips & Traps
2004 FOURTH QUARTER                                         ISSUE NO. 68                                                       PAGE 1
                                                   over this amount may present a tax
                                                                                             PERSONAL TAX RETURNS
     amounts payable in respect of the year        deferral but there will likely be an
     for Private Health Service Plan               overall higher tax to pay when            68(3)
     coverage in computing business                dividends are finally paid out. Some
                                                   companies may find it advantageous        DISABILITY TAX CREDIT (DTC)
     income provided they meet certain
     criteria.                                     to have greater than , say, $250,000      Type I Insulin Dependent Diabetes
                                                   of active business income because of      - O.K.
12. Tax on Split Income                            other federal and provincial tax          In a June 14, 2004 Tax
     The Income Tax Act applies the                incentives.                               Court of Canada case, the
     maximum marginal tax rate to             2.   Elect to pay out tax-free “capital        taxpayer     successfully
     certain passive income of individuals         dividend account” dividends.              claimed a DTC for his
     under the age of 18. Therefore,                                                         seven year old daughter
     consider minimizing this type of         3.   Consider paying dividends to obtain a
                                                   refund of “refundable dividend tax        who has Type I Insulin Dependent
     income in 2004.                                                                         Diabetes.
                                                   on hand”.
13. The tax rate for higher income
    individuals is now significantly lower    4.   Corporate earnings in excess of           Epilepsy - O.K.
    on capital gains than on dividends             personal requirements could be left in    In a December 12, 2003 Tax Court of
    thereby presenting an incentive to             the company to obtain a tax deferral.     Canada case, the taxpayer has epileptic
    receive capital gains.                          The effect on the “Qualified Small       seizures in which she losses complete
                                                   Business Corporation” status should       physical control.
14. Canadians receiving shares in foreign          be reviewed before selling the shares.
    tax-free reorganizations can apply                                                       The Court permitted the DTC.
    for favourable tax treatment.             5.   Dividends, as opposed to salaries, will
                                                   reduce an individual’s cumulative net     STRUCTURED SETTLEMENT
15. A refund of Employment Insurance               investment loss balance thereby
    paid for non-arm’s length employees                                                      In a 2004 Advance Income Tax Ruling,
                                                   providing greater access to the capital
    may be available upon application to                                                     the taxpayer was injured in a motor
                                                   gain exemption.
    CRA.                                                                                     vehicle accident and reached an out-of-
                                              6.   Retaining income in the corporation       court settlement with the Defendant’s
16. Taxpayer-Requested Adjustments                 may affect provincial and federal         Insurers to receive tax-free payments for
     Currently an individual may request           capital tax and certain provincial        life.
     an adjustment to a tax return back to         clawbacks.
     1985.                                                                                   MEDICAL EXPENSES
                                              7.   Excessive personal income affects
     It is proposed that after 2004,               receipts subject to clawbacks, such as    In a June 29, 2004 Technical
     adjustments will be limited to ten            old age security, the age credit, child   Interpretation, CRA notes that an amount
     years back. Therefore, adjustments            tax benefits, GST credits, etcetera.      paid to a medical doctor normally
     for 1985 to 1995 should be requested                                                    qualifies as a medical expense even if it is
                                              8.   Salary payments require source
     by December 31, 2004.                                                                   for cosmetic or elective surgery.
                                                   deductions to be remitted to Canada
                                                   Revenue Agency (CRA) on a timely          This includes cosmetic eyelid surgery,
2004 REMUNERATION                                  basis.                                    botox and artecoll injections.
                                              9.   Individuals that wish to contribute to
68(2)                                              the Canada Pension Plan or a              EMPLOYMENT INCOME
Some general guidelines                            Registered Retirement Savings Plan
to       follow        in                          may require a salary to create “earned    68(4)
remunerating the owner                             income”.
of a Canadian-controlled                                                                     EMPLOYER-PAID PROFESSIONAL
                                              10. Salaries paid to family members must       MEMBERSHIP INITIATION FEES
private      corporation
                                                  be reasonable.
earning “active business income” include:                                                    In an April 14, 2004
                                              11. Some provinces have “payroll taxes”        Technical Interpretation,
1.   In general, bonus down active                thereby increasing the costs of paying     CRA notes that the payment
     business earnings in excess of the           salaries versus dividends.                 of annual professional
     annual business limit - $250,000 for a
                                                                                             membership fees by an
     December 31, 2004 yearend. Leaving
                                                                                             employer on behalf of an employee is not
     corporate active business income

     Tax Tips & Traps
2004 FOURTH QUARTER                                          ISSUE NO. 68                                                       PAGE 2
                                              (i) The amounts were either not paid to      CRA Ruled that a retiring allowance paid
a taxable benefit IF the employer is the          them or, upon being paid, were           to each employee within prescribed limits
primary beneficiary of the payment.               immediately redeposited in bank          is deductible to the corporation and
                                                  accounts of either the business or the   eligible for a rollover by the employees to
Also, the amount is a deductible business         parents.                                 a Registered Retirement Savings Plan.
                                              (ii) There   was      not       sufficient
TUITION FEES REIMBURSED                            documentation and,
In a June 7, 2004 Technical                   (iii) The children did not declare any
Interpretation, CRA notes that employer-            amounts on their tax returns.          CAPITAL COST
paid tuition (and related costs) may not be   PRIVATE HEALTH SERVICES                      ALLOWANCE
a taxable benefit to the employee. This       PLAN (PHSP)                                  (CCA)
includes courses in a field related to the
                                              Where an employer enters into a PHSP for
employee’s responsibilities as well as                                                     68(8)
                                              an employee, the expenses are generally
courses not directly related to the                                                        In a June 21, 2004 Federal Court of
                                              deductible to the employer and not
employer’s business such as stress                                                         Appeal case, the taxpayer had an October
management, employment equity, first aid      taxable to the employee.           This
                                              deductible/non-taxable status may not        31 yearend and, purchased a “new fleet”
and language skills.                                                                       of cars to replace the “old fleet” as at
                                              apply if the PHSP is only available to
MOTOR VEHICLE EXPENSE                         shareholders.                                October 31.
DEDUCTION                                     In a June 24, 2004 Tax Court of Canada       However, the “old fleet” remained in the
In a July 15, 2004 Technical                  case, CRA disallowed the deduction to the    ownership of the taxpayer until November
Interpretation, CRA notes that where an       company and taxed the shareholder on         1. Therefore, CCA was allowed on both
employee receives a reasonable per            the basis that this was a benefit given to   the “old fleet” and the “new fleet” at the
kilometre reimbursement for the use of        him in his capacity as a shareholder, not    October 31 yearend.
his/her personal motor vehicle in             an employee.
connection with employment duties, the
reimbursement is generally excluded from
employment income.                            CAPITAL GAINS AND LOSSES                     BREAKDOWN
                                              68(6)                                        68(9)
                                              PRINCIPAL                                    LIVING SEPARATE AND APART
BUSINESS/PROP                                 RESIDENCE                                    In a January 5, 2004 Tax Court of Canada
ERTY INCOME                                   In a June 3, 2004                            case, the Court considered the taxpayers to
                                              Technical                                    be living separate and apart because of a
68(5)                                         Interpretation, CRA                          breakdown in their relationship even
                                              notes that when a                            though they continued to live in the same
LOSSES ON                                                                                  house. Therefore, their incomes were not
                                              taxpayer converts a
SHARE SALE                                                                                 combined for purposes of the GST credit.
                                              principal residence to an income-
In a June 25, 2004                            producing use, the taxpayer may, within
French Tax Court of                           limits, elect to defer recognition of any    EQUIVALENT-TO-SPOUSE
Canada case, the taxpayer was permitted a     gain to a later year.                        CREDIT (ETSC)
business loss, not a capital loss, on the                                                  In a January 8, 2004 Tax Court of Canada
sale of shares which were speculative in                                                   case, the Court noted that it is impossible
nature.                                       RETIRING                                     for a taxpayer to claim an ETSC for a
                                              ALLOWANCE                                    child where the individual is required to
SALARIES PAID TO CHILDREN -                                                                pay a support amount for that person.
DISALLOWED                                    68(7)
In a June 23, 2004 Tax Court of Canada        In a 2004 Advance Income Tax Ruling,         FORM RC 65(04)
case, the Court disallowed a deduction for    six non-arm’s length individuals were        Taxpayers may use this Form to advise
salaries to his sixteen and twelve year old   employee/shareholders of a corporation.      CRA of a change in marital status. This
children against his self-employed            The corporation wishes to sell all of the    could affect the Canada Child Tax Benefit
business income for reasons including:        assets and then wind up.                     and GST/HST payments.

   Tax Tips & Traps
2004 FOURTH QUARTER                                         ISSUE NO. 68                                                      PAGE 3
                                             A.                                              FARM LOSSES
                                             This is a non-taxable gift to Brother B         In a July 9, 2004 Tax Court of Canada
RRSP/RESP/SBIT                               from the Estate.                                case, the taxpayers were eligible for a full
                                                                                             deduction for all their farm losses, rather
68(10)                                       ELDERLY TAXPAYERS                               than the restricted farm loss treatment
                                             Some considerations for elderly taxpayers       provided by CRA.
PLAN (HBP)                                   follow. Contact your professional advisors
                                             for details.
The HBP permits an individual to borrow                                                      WEB TIPS
up to $20,000 from his/her RRSP to           1.   Sign a Power of Attorney for
purchase a home in Canada. To qualify,            management of property and personal        68(13)
the borrower, or his/her spouse, cannot           care matters.
have an owner-occupied home in the four      2.   Avoid probate fees by naming
preceding years.      Each spouse may             beneficiaries to life insurance policies   BUSINESS VALUATION
withdraw up to $20,000 from their RRSPs           and pension plans, joint ownership         CALCULATOR
to jointly purchase a home.                       and by multiple wills.                     This website has a seven step calculator
REGISTERED EDUCATION                              Also, assets could be rolled over to an    that allows you to make a quick business
SAVINGS PLANS (RESP)                              Alter Ego Trust or a Joint-Spousal or      valuation.
An RESP permits an individual to put              Common-Law Partner Trust.
funds with a Trust Company for the post-     3.   A Will may be used to defer gains by       Valuation1.asp
secondary education of one or more                transferring assets to a spouse or a
beneficiaries. The Trust is exempt from           Spousal Trust, to deem a charitable        This website also contains a market
income tax.                                       donation to have been made in the          comparison section, rules of thumb for
                                                  year of death, to establish a              valuing Canadian businesses, and a
Contributions to a RESP may also be                                                          search tool to find brokers, advisors and
                                                  Testamentary Trust eligible for a
eligible for a Canada Educational                                                            other related professionals throughout
                                                  separate yearend and graduated tax
Savings Grant (CESG).                                                                        Canada.
                                                  rates, to provide for a windup of a
SMALL BUSINESS INVESTMENT                         holding company, and to gift publicly
TRUST (SBIT)                                      traded securities to a charity to take
                                                  advantage of the 25% taxable capital
In a 2004 Advance Income Tax Ruling,              gain.                                      If you are looking for information on
CRA Ruled that the arm’s length                                                              student financing, scholarships or
employees of a construction company may                                                      awards, take a look at the following
have their RRSPs invest in a SBIT which      FARMING                                         websites:
will provide loans to developers.
                                             68(12)                                          www.canlearn.ca (is an excellent starting
                                                                                             point for anybody thinking about pursuing
                                             TRANSFER OF
ESTATE PLANNING                              FARMLAND
                                                                                             a post-secondary education)

68(11)                                       BETWEEN                                         www.scholarshipscanada
                                             SPOUSES                                         .com
                                             In a June 25, 2004                              www.studentawards.com
In a June 11, 2004                           Interpretation, CRA confirmed that where
Technical                                    Mr. A transferred farm property to his          GST
Interpretation, CRA                          spouse on a rollover basis, the subsequent
reviewed a situation                                                                         68(14)
                                             capital gain on the sale of the property by
where, prior to the                          the spouse would be attributed back to
death of Brother A,                          Mr. A and would be eligible for a capital       LAWYERS’ DISBURSEMENTS
Brother B took care of his personal needs    gain exemption if it met the criteria for
and managed his finances. Brothers C, D                                                      In a July 7, 2004 Policy Statement, CRA
                                             qualified farm property.
and E agreed that the Estate should pay                                                      provided eleven pages of information with
Brother B for the care provided to Brother                                                   respect to how a lawyers’ disbursements

   Tax Tips & Traps
2004 FOURTH QUARTER                                         ISSUE NO. 68                                                        PAGE 4
                                               proofing strategies for owner-managed                • Shareholder loans may be
are taxed for GST/HST purposes.                business follow. For details contact your            secured by a general security
                                               professional advisor.                                arrangement to give the shareholder
SALES BY INDIVIDUALS OF                                                                             priority over all unsecured creditors.
                                               1.   Transferring    assets   out    of   a
OWNER-OCCUPIED HOMES                                company                                         • Consider an estate freeze such
A GST Guide provides information on the                                                             that the future growth will go to other
                                                    • By placing capital assets in a
GST/HST implications on the sale of                                                                 family members.
                                                    separate      holding      company,
owner-occupied homes by individuals.                subsequent legal claims arising in the          • Transfer      assets   into        a
                                                    operating company may not affect                Discretionary Family Trust.
DID YOU KNOW...                                     these assets.
                                                    • Paying tax-free dividends to a
68(15)                                              holding company may protect assets
                                                    from future claims.
PROOFING                                       2.   Securitizing the position of the
                                                    business owner
Some creditor

         The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances
         and exceptions in a commentary such as this, a further review should be done. Every effort has been made to ensure the
         accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or
         firm involved in the distribution or preparation of this commentary accepts any liability for its contents or use.

   Tax Tips & Traps
2004 FOURTH QUARTER                                          ISSUE NO. 68                                                           PAGE 5

To top