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CANADIAN INCOME TAX LEGAL TIPS BY TORONTO ONTARIO TAX LAWYER
WEEKLY INCOME TAX MINIMIZATION STRATEGIES FOR CANADIAN INDIVIDUALS &
CORPORATIONS
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Last updated
June 30, 2009
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If you have an offshore bank account with UBS or any Swiss bank or in any other country and have not declared your income you can avoid prosecution and penalties and often obtain an interest reduction by making a voluntary disclosure (tax amnesty application).
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If you miss the 90 day time period to file a Notice of Objection to a tax
assessment, you have 1 year to apply for an extension of time. If you don’t
you have no more appeal rights.
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The Canada Revenue Agency (the Canadian
income tax agency, "CRA") legal department issued a directive to voluntary
disclosure offices that they are not to issue letters with any comfort
statement regarding eligibility of taxpayers for no names voluntary
disclosure. There has been no formal announcement of this policy.
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The Canada Revenue Agency
(the Canadian income tax department, "CRA") has broad powers to require the
production of documents and information including the right to compel the
production of “third party information” under section 231.2 of the Income
Tax Act. The recent decision in eBay Canada
Limited et al v MNR 2008 FCA 348 demonstrates that taxpayers are
not afforded much protection under subsection 231.2(3) should the Minister
of National Revenue decide to conduct an “audit project” targeted at a
specific group of taxpayers, such as eBay Powersellers.
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The Canada Revenue Agency
(the Canadian income tax department, "CRA") has received details of
Canadians with bank accounts in the United Kingdom including England and
Northern Ireland and is investigating to see if those Canadians have
declared their interest income. Canadians who have not reported their
offshore income may still be eligible for the voluntary disclosure program
(tax amnesty or VDP) to avoid prosecution and penalties.
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eBay Canada has lost its
appeal in the Federal Court of Canada against the Canada Revenue Agency (the
Canadian income tax department, "CRA") in eBay Canada Limited et al v MNR
2008 FCA 348 and is required to release sales details of eBay Powersellers
to CRA. Powersellers who have not reported their online income may still be
eligible for the voluntary disclosure (tax amnesty) program to avoid
prosecution and penalties.
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In the Manitoba Court of
Appeal case of Therrien v The Queen the application for leave to appeal
summary convictions for Canadian income tax evasion and the making of false
or deceptive statements in tax returns, together with the sentence imposed
in the amount of a fine of $50,000, was denied.
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After a year of grace, commencing April 1, 2008, the Canada Revenue Agency
(the Canadian income tax department, "CRA") is now ready to apply an
indirect penalty to incorporated non-profit organizations which have not
filed their corporate tax returns. Failure by these entities to file T2
returns by their due dates for the taxation years ending April 1, 2008, and
forward will result in a compliance refund hold on their refunds or rebates.
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In Landrus v. The Queen, 2008 TCC
274, the Tax Court of Canada held that the general anti-avoidance rule (GAAR) did not apply to a
series of transactions whereby a terminal loss was triggered on the sale of
assets.
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The Canadian Federal
Court of Appeal has upheld a lower court ruling and ordered eBay Canada Ltd.
to comply with a request from the Canada Revenue Agency to produce the
names, addresses, phone numbers, e-mail addresses as well as gross sales
figures for all Canadian eBay PowerSellers.
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The Canada Revenue
Agency (the Canadian income tax department, "CRA") has extended theT1
(Canadian personal income tax return) filing deadline to May 6, 2008 for netfile (individual internet filers) and for efile (professional tax return
preparers). The deadline does not apply for paper returns. Furthermore any
taxes owing have to be paid by April 30 or will be subject to interest.
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The Ontario Estate
Administration Tax Act provides for probate fees of $5 tax payable for each
$1,000 in value of the estate up to $50,000 and a $15 tax for each $1,000
above $50,000. Section 73 of the Canadian Income Tax Act allows for the
creation of alter-ego trusts and joint partner trusts which would avoid
probate fees. These trusts cannot be created by will. The person who gifts
property to the alter-ego trust (i) must be alive and be at least 65, (ii)
must be entitled to receive all the income of the trust prior to their
death, and (iii) must be the only person able to receive income or capital
of the trust prior to their death.
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If you have
more than $100,000 (at cost) in foreign you are required to declare the
assets on your T1 Canadian personal income tax return and file a form
T1135. Foreign assets include US securities held in a Canadian brokerage
account. If you did not do so you are subject to penalties, which can be
avoided with a Voluntary Disclosure.
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In the recent Federal Court of Canada decision in Telfer v.
CRA, 2008 FC 218, the Court granted the taxpayer’s application and said
that she was entitled to a relief of 50% of the interest charged. CRA held
the Notices of Objection of the taxpayer in abeyance pending the outcome
of a tax shelter case in the Tax Court of Canada. Based on the test case
the taxpayer accepted a settlement offer from CRA. The taxpayer requested
interest relief which was refused by CRA.
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Under recent amendments to the Canadian
Income Tax Act, a Registered Retirement Savings Plan (RRSP) can now be kept
until the end of the year in which you turn 71, rather than 69 as was
previously the law.
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The federal government has announced plans to extend the
carryforward period for unused federal investment tax credits earned
before 2006 to 20 years from the current 10. This measure, which would
apply to credits earned in taxation years between 1998 and 2005, is good
news for corporations and individuals across Canada with SR&ED credits
that were set to expire in the next few years. Credits earned after 2005
are already eligible for a 20 year carryforward.
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Under the recent amendments to the
Bankruptcy and Insolvency Act, which are expected to take effect in December
2008, RRSPs will be exempt from seizure, with no upper limit. There will
however be a 1 year clawback.
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The Bankruptcy and Insolvency Act was recently amended, with the changes
expected to take effect in December 2008. Bankrupt individuals with more
than $200 000 in personal income tax debts representing 75 percent or more
of their total unsecured liabilities will not be eligible for an automatic
discharge from bankruptcy. They will have to seek a Court order to be
discharged and will have to convince the Court that the relief they are
seeking is justified on the basis of their efforts to repay their debts,
their financial situation when the debt was incurred and their future
financial prospects. The Court will be able to fix conditions on the
discharge.
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The Canada Revenue Agency (the Canadian
income tax department, "CRA") released new guidelines for the voluntary
disclosure program (tax amnesty) on October 22, 2007. The rules have become
more restrictive in some areas, especially with respect to CRA actions with
respect to a related party and enforcement actions by other authorities.
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In the case of The Queen v MacLean
[2007] B.C.J. No. 1844, the taxpayer who was the executrix of her mother’s
estate was acquitted of charges of failing to file returns for her late
mother on the basis that she exercised due diligence in relying on advice of
a lawyer, bookkeeper and accountant.
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The Canada Revenue Agency has won an
order in the Federal Court of Canada requiring eBay Canada to turn over
the names, addresses, phone numbers and e-mail addresses of all
high-volume sellers. EBay sellers who have not reported their online
income should consider making a voluntary disclosure (tax amnesty)
application before being approached by CRA.
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The legal representative of a deceased
taxpayer is required to obtain a clearance certificate from the Canada
Revenue Agency (the Canadian income tax department, "CRA") before
distributing any of the deceased person's property to the heirs. Note that
the legal representative can be held personally liable for paying the
deceased person's tax liability if such a clearance certificate is not
obtained. The legal representative can reasonably expect to be asked by CRA
to provide a copy of the will, if such a will exists and has not already
been submitted, when applying for the clearance certificate.
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Information Circular IC 00-1R, Voluntary
Disclosures Program, (Canadian Tax Amnesty) is currently being updated and
should be released this summer to reflect the implications of the changes to
the GST/HST penalties and interest, as they currently stand.
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CRA is
currently reviewing the implication on the VDP of the changes to the GST/HST
penalties and interest that are effective April 1, 2007. With the
elimination of the late payment penalties effective April 1, 2007, and their
replacement with higher interest charges, it appears that there is no longer
any mechanism in place to give registrants any protection should they wish
to voluntarily disclose their GST/HST liabilities, since the VDP provides
relief for penalties and not interest. The same problem also exists in wash
transaction situations, because effective April 1, 2007, the flat 4% wash
transaction penalty is being changed to a flat 4% interest charge.
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The Canada Revenue Agency (the Canadian
income tax department, "CRA") recently confirmed its view that subsection
18(12) of the Income Tax Act (which deals with home business expenses)
generally applies to Bed and Breakfast (B&B) businesses. The CRA recognizes
that an exception occurs in situations that fall within the same fact
pattern as that in Sudbrack (2000 DTC 2521), a decision heard under
the general procedures of the Tax Court of Canada, in which that Court ruled
that subsection 18(12) did not apply.
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The Canada Revenue Agency (the Canadian income tax department) has changed
the name of the discretion given to the Minister
of National Revenue to provide the following relief where warranted by the
taxpayer’s circumstances:
- cancel and waive
penalties and interest;
- accept certain
late-filed, amended, or revoked income tax elections; and
- issue income tax
refunds beyond the normal three-year period to an individual and a
testamentary trust.
from “fairness provisions” to “taxpayer relief
provisions”.
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The
Canada Revenue Agency
(the Canadian income tax department)
announced two
new initiatives, a
Taxpayer Bill of Rights and a
Taxpayers' Ombudsman, to ensure CRA is more accountable to
Canadians.
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The Federal Court of
Appeal just allowed the appeal by the Canada Revenue Agency (the Canadian
income tax department) in the case of Baxter v. The Queen, and held
that the taxpayer had acquired a tax shelter. Since the promoter of the
investment did not have a tax shelter ID number, all deductions were denied
to Mr. Baxter.
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If you are assessed for
income tax by
the Canada Revenue
Agency (the Canadian income tax department) and do not pay the amount
assessed or file a Notice of Objection, CRA can seize your assets, including
your bank account, without a court order.
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ALISTAIR JOHN CAMPLIN was found in contempt of court for refusing to comply
with a Compliance Order issued by the Federal court of Canada pursuant to
subsection 231.2(1) of the Canadian Income Tax Act (ITA). The court
held that the Tax Act does not carve out a distinction, for the
purposes of a Compliance Order, between a natural person and the legal
representative of the taxpayer, which was the basis of Mr. Camplin’s
argument and his refusal to comply with the order.
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The recent Canadian federal budget contains a proposed
amendment to the Excise Tax Act that would grant Web site owners GST
relief for their foreign customers, both in the future, and retroactively to
1990 (when GST came into effect). This effectively overturns Dawn’s
Place v. R 2006 FCA 349, where the Federal Court of Appeal ruled against
Dawn's Place, an adult-oriented Web site, for failing to collect GST from
non-residents for fees earned in 2001.
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As of March 5, 2007,
the St. Catharines Tax Services Office, Enforcement Division will be the
initial point of contact and intake centre for all Ontario and Nunavut
voluntary disclosures (Canadian Tax Amnesty) and related enquiries. Overall,
the Voluntary Disclosures Program for Ontario and Nunavut will be handled by
the St. Catharines, London and
Peterborough-Kingston-Belleville Tax Services Offices - Enforcement
Divisions.
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The
Canada Revenue Agency (CRA) advised that some computer applications related
to personal income tax filing are temporarily halted. These applications
include online services like Efile, Netfile, and My Account. There are
indications that CRA computer systems have run into infrastructure problems.
The CRA will provide daily updates to the media on the steps they are
taking.
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In the Canadian income tax case of
McMullen v. The Queen,
2007 TCC 16, the decision of the Tax Court of Canada was that a split up of
a corporation by two shareholders did not violate the anti-surplus stripping
provisions found in subsections 84(2) and 84.1(1) of
the Canadian Income Tax Act, and was not caught by GAAR (the general
anti-avoidance rule).
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Tax
filing season is here. If you are worried about filing your 2006 Canadian
personal income tax return because of unfiled returns in previous years, you
may qualify for the Voluntary Disclosure Program (VDP) also called Tax
Amnesty, which eliminates penalties and prosecution and may result in a
discounted interest rate. It is important not to file the back returns
without making a VDP application, or you will be charged penalties and full
interest.
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According to the Canada Revenue Agency (the Canadian income tax
department) in 2005-06, Canadian taxpayers were convicted in 293 cases of
income tax evasion or fraud. Taxpayers had to pay close to $14.4 million in
fines, and were sentenced to more than 33 years in jail. Even if someone
else prepares the tax return, the taxpayer is responsible for all the
information on the return. Stay away from return preparers who offer you
false tax claims. This could include false charitable donations or false
child care expense claims, or maybe even false business expenses or losses.
If you have filed a false tax return, you can make a Voluntary Disclosure
(Tax Amnesty Application) and avoid prosecution and penalties.
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December 31 is the last day to undertake
2006 tax planning including charitable donations, realization of losses,
RESP contributions and tax shelter acquisitions. December 22, 2006 is the
last day for tax loss selling of publicly traded securities.
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In 236130 British Columbia v. The
Queen, the Federal Court of Appeal upheld the Tax Court’s decision that a
reassessment was not properly issued where it was mailed to the taxpayer’s
books and records address, rather than mailing address, on the basis that
the mailing address is the only one authorized and adopted for mailing
purposes. Therefore, the Court concluded that the reassessment had not been
issued at all.
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In Ceco Operations Ltd. (2006 TCC
256), the Tax Court of Canada applied the general anti avoidance rule (GAAR)
to a partnership asset rollover. A sale of a business contemplated two years
before the transactions was structured via a partnership with the purchaser
in 1998. Ceco rolled business assets to the partnership under subsection
97(2) for cash and a partnership interest. The purchaser injected cash equal
to the value of Ceco's partnership interest and the partnership used the
cash to invest in preferred shares of a company; that company and Ceco were
owned indirectly by the same holding companies. The court said that the
series of transactions was a patent abuse of subsection 97(2) and that GAAR
applied to deny the partnership asset rollover.
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In the Canadian Income
Tax decision Anchor Pointe Energy Ltd. (2006 TCC 424), the Tax Court
of Canada concluded that the reverse onus (that requires the taxpayer to
disprove Canada Revenue Agency’s assumed facts) did not apply to facts
assumed by the minister subsequent to the expiration of the reassessment
period. The court concluded that the normal-course rules relating to the
reverse onus of proof do not apply where the Minister of Revenue first
raises the factual assumptions at the confirmation stage. The Minister has
the onus of proof for such assumptions of fact.
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Canadian income tax
shelters are now being sold for the 2006 taxation year. Be sure you
understand the risks, both business and tax, before making any decision to
invest in a tax sheltered investment or charitable donation gifting
arrangement.
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Canadian residents are taxable in
Canada on their world income. This includes income or capital gains earned
offshore, such as through the rental or sale of a foreign property such as a
vacation condominium in the Caribbean or elsewhere. Failure to report such
income is tax evasion and is punishable by a fine or even a jail term.
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When computing Canadian
income tax students can deduct moving expenses from the taxable amount of
scholarships, bursaries or research grants that they receive, or against
employment or business income, so moving expense receipts should be kept.
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Canadian taxpayers need to have transfer pricing documentation in place to
support their inter-company transfer prices and this documentation must
adequately address the contributions of the parties, in particular the
Canadian entity. The CRA (the Canadian income tax department) indicated that
deficiencies have resulted in penalties being applied.
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The
deadline for self-employed taxpayers to file their T1 Canadian income tax
returns for 2005 is June 15. If you missed the deadline, and are
behind in filing other years, do not file your returns without making a
voluntary disclosure (tax amnesty application) in order to avoid penalties
and reduce interest.
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The Ontario Ministry of
Finance has recently published a Land Transfer Tax Bulletin entitled
“Determining the Value of the Consideration for Transfers of New Homes, Land
Transfer Tax Act”. The Bulletin contains information on how to calculate the
value of consideration in the purchase of a newly constructed home and
indicates that in certain circumstances the value of extras, are to be
included in determining the value of consideration. The Bulletin may be
obtained from the
Ontario
Government, Ministry of Finance.
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Money lost
investing in a small business corporation may be claimed as a “business
investment loss”. It is like a capital loss in that only one-half is
deductible however, it can be claimed against any income in the year, not
just capital gains.
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In most, if
not all, cases transfer pricing documentation prepared for the requirements
in other jurisdictions, including the U.S., will not meet the Canadian
documentation requirements. Taxpayers need to have transfer pricing
documentation in place to support their inter-company transfer prices and
this documentation must adequately address the contributions of the parties,
in particular the Canadian entity. Failure to provide transfer pricing
documentation within 3 months of the CRA's request, even by one day, will
give rise to the 10% transfer pricing penalty.
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If
you missed the April 30th Canadian income tax return filing
deadline due to missed filings in past years, do not file your returns
directly with Canada Revenue Agency (the Canadian income tax department).
If you do you will be charged penalties and full interest. Instead you
should contact a Canadian tax lawyer to make a voluntary disclosure
(Canadian Tax Amnesty) application that will eliminate all penalties and
reduce interest.
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The
lower-income spouse should claim all medical expenses on behalf of the
entire family for Canadian Income Tax. The lower your net income, the more
you can claim in eligible medical expenses. But since the credit is
nonrefundable the spouse who is making the claim should have sufficient
income to absorb the entire credit.
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Changing the ownership
of a life insurance policy is considered to be a disposition of the contract
for Canadian Income Tax purposes and can result in an income inclusion for
tax purposes to the policyholder if the proceeds of disposition, often the
cash surrender value, exceed the adjusted cost basis of the policy. However
there is tax free rollover to spouses.
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While the Voluntary
Disclosure program (Canadian Tax Amnesty) of the Canada Revenue Agency will
be moved from Appeals to Audit effective April 1, 2006, a transitional team
has not yet been put into place and it appears that Appeals may continue to
handle the files until August 2006.
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Canada Revenue Agency
(the Canadian income tax department) employees do not have the right to
enter taxpayer premises, home or business, without a search warrant. If
they do show up a taxpayer does not have to admit them or speak to them. If
they refuse to leave the police can be called to remove them.
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If you have established
an RESP (Registered Educational Savings Plan) and made tax deductible
payments, if a child does not pursue post-secondary education, one of your
options, if the RESP has existed for at least 10 years and all beneficiaries
are over the age of 21 and not pursuing a post-secondary education, is to
transfer up to $50,000 to your RRSP (or your spousal RRSP) provided you have
the contribution room available.
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There
is no solicitor-client privilege for communications between an accountant
or an investment banker and client. Any such communications, including
audit and tax working papers, can be seized and used by
the Canada Revenue Agency (Canadian income tax department) as part of an
audit. The only exception is where the accountant prepares the documents
for a lawyer to facilitate the rendering of legal advice.
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The Tax Court of Canada
confirmed in the recent case of Scavuzzo et al v The Queen 2005 TCC
772, that dealt with director liability for unremitted GST and payroll
source deductions, that the concept of de facto director is of very
limited application.
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If a corporation has unpaid corporate income taxes, and a
dividend was paid, then the Canada Revenue
Agency (Canadian income tax department)
can claim that dividend from the shareholder who received it
using subsection160(1) of the Income Tax Act.
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Businesses often want to retain
independent contractors instead of hiring employees to avoid payroll taxes.
The Canada Revenue
Agency (Canadian income tax department) recognizes four tests for the
determination of the nature of the work relationship between a business
entity and the worker who provides services to it, as established by case
law. They are: “control” test, “ownership of tools” test, “chance of profit
or risk of loss” test, and the “integration” test. The risk of taking the
position that a person is not an employee is that the business will be
reassessed and will have to pay amounts that should have been withheld, as
well as penalties and interest.
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The
Canada Revenue Agency (Canadian income tax department) has just issued
another press release warning Canadian taxpayers about participating in
“gifting trust arrangements” and “leveraged cash donation” “tax shelter”
plans. The position of CRA is that these plans are contrary to the Canadian
Income Tax Act and that CRA will deny deductions to participants. While CRA
may or may not be correct, and many of the plans being offered have
supporting tax opinions, any participant should expect to be reassessed and
have a fight with CRA, possibly in the Tax Court of Canada of Federal Court
of Appeal, before the deductions are ultimately allowed or disallowed.
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The
Supreme Court of Canada has released 2 cases dealing with the general
anti-avoidance rule (GAAR) in the Canadian Income Tax Act,
The Queen v Canada Trustco Mortgage Compan and
Kaulius et al v The Queen It has ruled that the application of
the GAAR involves three steps. It must be determined: (1)whether there is a
tax benefit arising from a transaction or series of transactions within the
meaning of s. 245(1) and (2) of the Income Tax Act; (2)whether the
transaction is an avoidance transaction under s.245(3), in the sense of not
being “arranged primarily for bona fide purposes other than to obtain
the tax benefit”; and (3)whether there was abusive tax avoidance under
s.254(4), in the sense that it cannot be reasonably concluded that a tax
benefit would be consistent with the object, spirit or purpose of the
provisions relied upon by the taxpayer. The burden is on the taxpayer to
refute points (1) and (2), and on the Minister to establish point (3).
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The position of
the Canada Revenue Agency
(Canadian tax department) is that a voluntary disclosure (tax amnesty) must
be substantially complete in order to be accepted as valid. However a
taxpayer must only make his reasonable best efforts to ensure that his
disclosure is substantially complete, rather than meet some arbitrary test
as to what constitutes completeness.
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In
Ontario Land Transfer Tax normally has to be paid when transferring
property to a corporation. Regulation 697(3) under the
Ontario
Land Transfer Tax Act
exempts transfers of land to a family corporation to enable it to continue
an active business. A recent Divisional Court case (Upper Valley Dodge
Chrysler Limited v Minister of Finance, 73 OR (3d) 146) considered the
regulation. In Upper Valley the individual owned the land and the
corporation operated the dealership on it. He then transferred the land to
the corporation. The taxpayer won under that regulation.
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The
Tax Court held in the decision of Brouillette v. The Queen, 2005 DTC 1004,
that the anti surplus stripping rules in section 84.1 are not applicable
where the buyer corporation and the seller have separate economic interests,
and they carry out a purchase and sale in accordance with those separate
interests, effectively overruling the position of the Canada Revenue Agency
in Technical Interpretation 2002-0166655.
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The
Canadian Income Tax Act was amended effective April 1997 so that child
support payments are no longer deductible to the payor or taxable to the
recipient. While payments made under a written agreement or court order
made before May 1997 are subject to the old rules (deductible to the payor
and taxable to the recipient), any change to that agreement or court order
will mean that the new rules apply.
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In the case of Ottawa
Senators Hockey Club, 73 OR (3d) 737, the Ontario Court of Appeal
decided that the Canada Revenue Agency has priority over other creditors for
collected but unremitted GST, but not for penalties and interest on GST or
unremitted payroll deductions for income tax, CPP or EI.
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The
disposition of Canadian property by a non-resident of Canada is usually
subject to income taxation in Canada, and the purchaser is normally required
to withhold funds and remit them to the Canada Revenue Agency, unless a
certificate is provided under section 116 of the Canadian Income Tax Act.
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There
are income tax treaties between Canada and numerous countries, including the
United States and United Kingdom, that affect the treatment of taxpayers
with ties to, or sources of income in, both treaty countries.
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In the recent Tax Court of Canada income tax case of
Aprile v The Queen the court allowed the taxpayer to deduct $7,000 in
expenses paid to his 11 and 13 year old sons. The taxpayer testified as the
exact duties performed by each son, including the number of hours worked. He
also testified that he paid his sons in kind rather than by way of cheque.
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For self employed individuals and their spouses or
common law partners, the tax filing deadline is June 15. Regardless of your
filing deadline, you had to pay amounts owing by May 2, 2005, or incur
interest charges.
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If you
are hesitating about filing your 2004 Canadian personal income tax return
(T1) by the deadline of May 2, 2005 because you have not filed returns for
previous years, you should make a voluntary disclosure (tax amnesty
application) with the Canada Revenue Agency (the Canadian income tax
department) and file your 2004 return on time.
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A Canadian personal income tax
return (T1) can be filed over the internet using the Revenue Agency (the Canadian
income tax department) Netfile program. Commercial tax return preparation
software is required, along with a 4 digit access code. The access code is
on the label sent out to previous netfile users, or can be obtained over the
internet or by phone. To netfile go to
http://www.netfile.gc.ca.
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Once
the Canada Revenue Agency (the Canadian income taxation department) commences an
investigation to look for evidence of tax evasion, the protections afforded
by the Canadian Charter of Rights are applicable and CRA can no longer use
its statutory audit and investigation powers such as the requirement to
provide information set out in the Income Tax Act.
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A
recent Tax Court of Canada decision confirmed that an individual who
withdraws money from an RRSP as part of the Home Buyer’s Program must still
make the required annual repayments to the RRSP even if the house has been
acquired by a spouse as part of marriage dissolution, or be taxable under
the Canadian Income Tax Act.
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The
Ontario Court of Appeal, in Amherst Crane Rentals Ltd. V. Perring,
(2004) D.T.C. 6584 has ruled that in certain circumstances proceeds of an
RRSP are excluded from the estate of an owner and therefore protected from
the creditor’s estate.
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As of
Jan 1, 2005, charitable tax receipts issued by registered Canadian
charitable organizations under the Canadian Income Tax Act must include
the name of the Canada Revenue Agency and its website
http://www.cra.gc.ca/charities.html.
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The Tax Court of Canada confirmed in the case of
MICHAEL MELNYCHUK v. HER MAJESTY THE QUEEN that vitamins, even if
prescribed by a physician for a patient undergoing chelation therapy, are
not deductible medical expenses for purposes of the Canadian Income Tax
Act.
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An employee who receives stock options for a public
company and elects to defer the taxable benefit of up to $100,000 per
annum (under subsection 7(8) of the Canadian Income Tax Act) until the
shares are disposed of must report the taxable benefit (receipt of the
stock option) at the time of disposition (on form T1212) and must pay
Canadian income tax at that time.
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The Canadian federal government has extended the
deadline for Canadians to claim contributions for the tsunami relief effort
on their 2004 income tax returns to Tuesday, January 11th, and
has also agreed to match all donations, dollar-for-dollar, up until that
date.
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The
Canada Revenue Agency (the Canadian income tax department) has announced
that effective May 25, 2004 it will no longer accept a single purpose
Canadian corporation that would previously been set up to hold United
States personal use real property with the objective of avoiding US estate
tax on death of the individual. The previous policy will continue to apply
to arrangements in place on May 25, 2004.
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Employee stock options
for a public company are subject to Canadian income tax, and Canada Pension
Plan levies, when they are exercised and acquired and it is the employer’s
obligation to withhold CPP and income tax on the amount of the benefit at
that time. However if the employee elects to defer the taxable benefit
(under subsection 7(8) of the Canadian Income Tax Act) until the shares are
disposed of, the employer is only required to withhold CPP.
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The Canada Revenue
Agency (the Canadian income tax department) issued a press release on
November 25, 2004 advising that it will reassess taxpayers who make
charitable donations through leveraged donation programs. While CRA may not
be correct in its analysis of the programs, any taxpayer who participates in
such plans should do so knowing a CRA challenge will inevitably follow.
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In the Canadian income
tax case of 9044-2807 Québec Inc. v The Queen, 2004 FCA 23, the
Federal Court of Appeal held that corporations were associated under
subsection 256(5.1) of the Income Tax Act by virtue of de facto control
based on the controlling influence of one corporation on the other.
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The Canada Revenue
Agency (the Canadian income tax department) has wide powers of inquiry and
investigation under the Canadian Income Tax Act, including the power to
demand records and information. A person who refuses to comply with the
requirement to provide information is subject to prosecution under section
238 of the Tax Act. Consider retaining
a Canadian taxation lawyer for assistance.
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The taxation of an
award of damages in a law suit will depend on the nature of the payment.
Generally, damages that replace income receipts are taxable for Canadian
income tax purposes and damages for capital are not. To maximize favourable
tax treatment tax advice should be obtained when the pleadings are first
being drafted.
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Claw backs of the age
exemption, which reduces your Canadian income taxes, start at $26,941. If an
individual over 65 earns over $55,309 a portion of the Old Age Pension is
taken back.
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The British Columbia Supreme Court upheld the dismissal of tax evasion
charges due to problems with document disclosure by the prosecution in the
October 2004 decision of
Regina, v. Jeffrey Robert Wilson
and Christopher David Wilson, 2004 BCSC 1220.
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In the October 2004 case
of Quinn v The Queen, 2004 TCC 64, the Tax Court of Canada ruled that
the taxpayer was entitled to a Canadian income tax credit for art prints
acquired at a wholesale price and then donated to a charity for their retail
value.
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September 30, 2004 is the end of the opportunity to arrange for loans
between spouses at the low Canada Revenue Agency prescribed rate of 2%,
thereby allowing some income splitting to take place. The rate will be
increased to 3% for the last quarter of 2004.
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If a Canadian is
transferring to a country with which Canada has a Social Security
Totalization Agreement, he or she may be exempt from contributions to the
host country pension plan and continue to pay into CPP/QPP. (Quebec has its
own agreements with certain countries.) For a country with which Canada (or
Quebec) does not have an agreement, it may be possible, if beneficial, to
voluntarily pay into both pension plans although it does increase
contribution costs.
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CRA (the Canadian income
tax department) has the right to serve third party demands, without a court
order, on debtors or potential debtors of a taxpayer who owes money to CRA.
If you receive such a third party demand you must make payments directly to
CRA, and not to your creditor.
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Effective after 2003 and
for future taxation years, a preferential manufacturing and processing (M &
P) tax rate is no longer available federally and is available provincially
only in Ontario, Saskatchewan, Newfoundland and Labrador, Prince Edward
Island, and Yukon.
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In the case of Perring
the Ontario Court of Appeal held that RRSPs do not form part of the estate
of a deceased but instead devolve directly to the designated beneficiary
and that a creditor has no recourse to repayment from the RRSP proceeds in
the designated beneficiary’s hands when the estate cannot pay its debts.
There has been a divergence of judicial opinion on the issue between Ontario
and other provinces. RRSPs in Ontario are now treated in the same way as the
proceeds of a life insurance policy, that is to say they both devolve
directly to the designated beneficiary, not via the estate, and are thereby
beyond the reach of creditors.
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In order for
a corporation to claim a deduction for a bonus paid to an employee, or a
shareholder, it must validly document the bonus. Once it does so it
is required to withhold and remit source deductions.
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In the Tax Court of
Canada decision of Baker et al v The Queen 2004 TCC 375 the judge
ruled that employees who work four hours per day, five days per week were
not engaged in full- time employment, and that as a result their corporate
employer did not carry on an active business for Canadian Income Taxion
purposes.
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The Supreme Court of
Canada has established the standard of review to be applied by Appellate
Courts in reviewing decisions of the Tax Court of Canada. For questions of
law, the standard is correctness while for findings of fact, inferences or
conclusions of fact and conclusions of mixed fact and law, the standard is
palpable and overriding error. There is, however, an exception in regard to
conclusions of mixed fact and law. If a clear legal error can be isolated
from the facts, the error will be reviewed on a correctness standard.
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In the recent Tax
Court of Canada case of Burleigh (2004 TCC 197), the TCC said that an
individual’s loss that was not reported in his income tax return in the year
incurred was deductible in a later year. Therefore an individual is entitled
to a loss deduction for a previously unreported loss, subject to carryover
time limitations.
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Draft
technical amendments to the
Income Tax Act,
released on February 27, 2004 provide CRA (the Canadian Income Tax
department) with the ability to reallocate amounts to a non-competition or
other restrictive covenant. Last fall, the Department of Finance released
proposals whereby non-competition and other restrictive covenants could be
fully taxable, thus reversing the former tax advantage, based on case law,
which was available in certain circumstances.
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In
Gifford v The Queen 2004 SCC 15 the
Supreme Court of Canada ruled that in circumstances where interest is not a
payment “on account of capital”, it may be deducted as long as it meets the
other requirements for deductibility set out in the Canadian Income Tax Act
and the deduction is not precluded by some other section of the Act.
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There appears to be a new CRA
(the Canadian income tax department) administrative policy with respect to
the voluntary disclosure program, relating to ‘‘No Name’’ disclosures. A No
Name disclosure is not a valid disclosure until such time as the taxpayer is
named. If a No Name disclosure is made and an enforcement action is taken
before the taxpayer’s name is disclosed to the CRA, the disclosure will not
be treated as a voluntary disclosure, even if the person’s name is disclosed
within 90 days of the filing of the No Name disclosure.
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The recent Klotz
decision was the first determination by the Tax Court of Canada of a case
involving an art donation tax shelter. The Court found in favour of the
taxpayer that the art work acquired and then donated to a charity was
personal use property, and that penalties were not appropriate. The Court
found in favour of CCRA (the Canadian income tax department) on the issue of
valuation, rejecting the valuation of the taxpayer’s art appraiser and
limiting the donation amount to the actual cash spent.
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In the case of Boucher v.
The Queen, 2004 FCA 46, the Federal Court of Appeal held that penalties can
be applied for unreported income even if the unreported income is offset by
losses of previous years.
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In the case of Boucher v.
The Queen, 2004 FCA 47, the Federal Court of Appeal held that disputes
regarding whether source deductions were withheld on behalf of a taxpayer
need to be adjudicated in the Federal Court of Canada rather than the Tax
Court.
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On December 12, 2003, the
Canada Customs and Revenue Agency (CCRA) (the Canadian tax authority) became
the Canada Revenue Agency (CRA). However, until it’s officially modified by
an act of Parliament, CCRA remains the only name that can be used on
documents of a legal or contractual nature.
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In
Airport Auto (2003 GTC 899-105), CCRA (the Canadian Income Tax Agency) attempted to
force a purchaser to pay GST again after the vendor did not
remit the tax. The court dismissed CCRA’s argument and held that, based on
simple agency law, the payment of the tax to a vendor as
the Crown’s agent extinguishes the payer’s liability to pay
the tax in the absence of fraud or collusion or explicit statutory
language to the contrary; any other outcome would be “ludicrous.”
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Certain
extended cab pick-up trucks and SUV’s may not be subject to the Canadian income
tax rules limiting capital cost allowance (tax depreciation) or to the employee
benefit rules.
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If you dispose of capital assets and provide financing to the purchaser,
you are entitled to a reasonable reserve for Canadian Income Tax purposes in
computing your capital gain. The maximum amount of the reserve is 20%,
meaning the capital gain has to be recognized over 5 years.
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The
merger of an existing operating corporation with a shell corporation is sometimes
undertaken solely for the purpose of triggering a new year end. CCRA (the
Canadian income tax department) views this type of transaction to be a misuse of
the Act and the general anti-avoidance rule (GAAR) would apply.
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On December 5, 2003 the Minister of Finance made a press release with respect to
Canadian income tax shelters. The press release is available at
http://www.fin.gc.ca/news03/03-061e.html. If you enter into a tax shelter
transaction after December 5, 2003 6:00 PM EST make sure that the shelter has not been
adversely affected by the new rules.
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- Tax shelters are transactions structured in such a way as to provide a tax benefit in
excess of the cash investment. For the first time in 2003 there is a tax shelter that has
insurance from Lloyd’s that will pay any taxes, interest or penalties arising as a
result of a reassessment by CCRA (the Canadian income tax department).
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- A private Canadian corporation that has at least 50% Canadian shareholders is entitled
to a lower rate of taxation on its active income of up to $200,000. If non-residents of
Canada own more than 50% of the shares the corporation loses its entitlement to this lower
rate of tax.
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- If CCRA (the Canadian income tax department) serves you with a formal written demand for
information or returns you must comply or risk prosecution under the Income Tax Act.
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- A business owner who pays service providers as independent contractors rather than as
employees runs the risk of being assessed for penalties and interest if CCRA (the Canadian
income tax department) finds that the individuals were in fact employees.
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- After a Canadian taxpayer has filed a Notice of Objection an Appeals Officer is assigned
to the file. The Appeals Officer is mandated to look at the file from an objective point
of view to try to come to a fair (in accordance with the Income Tax Act) resolution of the
dispute.
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- Once CCRA (the tax department) commences a criminal investigation of a taxpayer they
must act in accordance with the Canadian Charter of Rights and Freedoms.
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- It is important to consider income taxation when creating a will to ensure that you
properly allocate your estate among your beneficiaries on a post tax basis.
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- If you have missed the deadline to file a Notice of Objection to a Canadian Income Tax
assessment you can apply for an extension of time. However there are strict time limits
for the application and there must have been a valid reason to have missed the deadline.
We are Toronto, Ontario tax lawyers but can assist in any Canadian
province.
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- If you have made a mistake in filing your Canadian income tax return you should file a
Notice of Objection, if you are within the allowable time period, to protect your rights.
We are Toronto, Ontario taxation lawyers but can assist in any
Canadian province.
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- In certain limited cases when you wind up a subsidiary into a parent, for Canadian
income tax purposes you can receive an increase, or bump, in the cost base of the shares
of the parent.
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- American citizens with Canadian Registered Retirement Savings Plans (RRSP) who have not
elected under the Canada - US Income Tax Treaty to defer tax on income earned by the RRSP
have until October 15, 2003 to file an amended US return with the IRS claiming the treaty
exemption.
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- The reimbursement of legal fees incurred to establish a right to a retiring allowance or
salary in lieu of notice is included in income but there is a corresponding deduction.
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- The Ontario Ministry of Finance has recently issued a ruling that subscription fees paid
for the right to access certain online databases are not subject to retail sales tax. An
application for a refund of taxes paid can be submitted. The policy of CCRA (the Canadian
income tax department) is that pre-judgment interest on an award of damages for wrongful
dismissal is not taxable.
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- If you have not filed Canadian income tax returns for a number of years there is no
reason to be worried about severe penalties. CCRA (the Canadian income
tax department) has a policy designed to encourage taxpayers to come
forward and make a voluntary disclosure about unfilled tax returns, known
as voluntary disclosure or tax amnesty. They will not charge any
penalties, just the normal interest due. We are Toronto, Ontario,
Canada income tax lawyers who have assisted numerous taxpayers with
voluntary disclosures, and can assist in any Canadian province.
- A taxpayer who suffers from severe physical or mental impairment
is entitled to a tax credit for Canadian income tax. A form T2201 must be
filled out by a physician and submitted to the tax department.
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- CCRA (the Canadian income tax department) has released a proposed guidelines dealing
with charities and political activities. The guidelines can be viewed and commented on at the CCRA
charities web site .
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- CCRA (the Canadian income tax department) is aggressively auditing taxpayers who
purchase art at a discounted wholesale price and soon afterwards donate it to a charity at
an increased retail value.
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- If CCRA (the Canadian income tax department) believes that a taxpayer may dispose of
assets and it may not be able to collect amounts owing to it, it can apply to a court
without notice to the taxpayer for a “jeopardy order” allowing it to take
collection action at the same time as it issues an assessment.
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- The Federal Court of Appeal has stated in the June 2003 Benoit decision that denied
exemption from all taxation to certain native groups based on a treaty exemption that
native oral histories must be given proper weight in evaluating them as evidence.
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- June 15 is the deadline to file Canadian personal income tax returns for individuals
with self employment income.
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- If you fail to keep proper books and records CCRA (the Canadian income tax department)
may do a net worth assessment, which looks at the increase in your assets over time and
assesses income tax on that increase. We are Canadian
taxation lawyers with experience in handling net worth assessments, and
can assist in any Canadian province.
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- The Province of Ontario is in the midst of a crackdown on Ontario corporations that have
not filed corporate income tax returns or exempt from filing declarations. Failure to
respond, even where there are no taxes owing, may result in penalties including revocation
of the corporate charter.
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- CCRA (the Canadian income tax department) has extensive powers of enforcement to ensure
that taxpayers comply with the Income Tax Act. These include the power to inspect and the
power to require a person to produce information or documents.
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- Tax planning is an ongoing process. Having just filed your 2002 Canadian income tax
returns, now is the time to start planning for 2003.
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- If you are grossly negligent in failing to report income on your Canadian income tax
return you can be assessed a penalty equal to 50% of the tax owing.
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- April 30 is the deadline for individual taxpayers (except for those who are self
employed) to file their T1 personal Canadian income tax returns. The return should be
filed even if there is an unpaid balance of taxes owing in order to avoid the late filing
penalty.
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- An amalgamation is the combination of 2 or more existing corporations into one.
Amalgamations can generally take place without any adverse income tax consequences.
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- Canada has entered into an extensive series of Income Tax Treaties designed to prevent
double taxation. If you have foreign source income be sure to review the relevant treaty.
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- In the recent Manrell decision the Federal Court of Appeal confirmed that payments
received for a non-competition covenant as part of the sale of shares are non-taxable.
This is a confirmation of the court’s decision made in 2000 in the Fortino case.
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- Investing in a labour sponsored investment fund through your RRSP will give you a 15%
tax credit in Ontario, in addition to the RRSP deduction.
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- The Supreme Court of Canada has just decided in the Markevich decision that CCRA
can’t collect funds owing to it if has failed to take enforcement action within the
times set out in provincial and federal limitation periods.
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- The Supreme Court of Canada held in the Jarvis decision that where the purpose of a tax
inquiry is the determination of a penal liability, CCRA auditors must warn the taxpayer in
order to avoid infringing the Canadian Charter of Rights.
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- The Tax Court of Canada held in a recent case that part of the cost of installing
hardwood floors as required for the health of a severely asthmatic child on the advice of
a physician are deductible for Canadian Income Taxation purposes.
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- You can hold a maximum of 30% foreign content in your RRSP.
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- As a result of the Supreme Court of Canada decision in 65302 British Columbia Limited
vs. The Queen, CCRA now recognizes that most fines or penalties can be deducted (or
capitalized) for Canadian income tax purposes.
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- An owner/manager of a corporation will have to include as a taxable benefit for Canadian
income tax purposes the personal use of corporate property and most loans received.
Certain specific loans, such as housing loans, may not have to be taxed.
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- Losses incurred in an RRSP cannot be deducted against other income for Canadian Income
Tax purposes.
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- An owner/manager of a corporation will have to include as a taxable benefit for Canadian
income tax purposes the personal use of corporate property and possibly any loans
received.
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- CCRA (the tax department) has issued a statement allowing an employee to attend an
employer provided party that is generally available to all employees as long as the cost
is reasonable (up to $100 per person is their guideline) without having to report a
taxable benefit for Canadian income tax purposes.
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- The tax department (CCRA)’s policy is that employers are allowed to give two
non-cash gifts a year to employees without the employee having to include the gifts in
income for Canadian income tax purposes provided that the gifts total less than $500.
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- An employee who earns sales commissions and incurs sales related expenses is permitted
to deduct those expenses, including related reasonable automobile expenses, in computing
income for Canadian Income Tax purposes. The employer must provide the sales rep with a
completed form T2200.
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- The Canadian Income Tax Act has “stop loss” rules that limit a taxpayer’s
ability to claim losses in certain specific situations.
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- A non-arm's length disposition of capital property such as a rental property, for
example a transfer to a child, is deemed to take place at fair market value for Canadian
Income Tax purposes. If you transfer property that has appreciated in value you will have
to report a capital gain of fair market value less cost.
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- If you appeal a Canadian income tax dispute with CCRA (the tax department) to the Tax
Court of Canada and lose, a further appeal to the Federal Court of
Appeal is available. We are Toronto income tax lawyers who act on
behalf of taxpayers in tax litigation.
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- The Supreme Court of Canada has just determined that section 232 of the Income Tax Act,
which sets out a procedure for potentially privileged client documents to be seized from a
lawyer’s office, is unconstitutional.
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- If separated or divorced parents have joint custody of a child, only one of them may
claim the equivalent to married credit under the Canadian Income Tax Act. If they cannot
agree on who will claim the exemption, neither may claim it.
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- Canadian residents are required to report worldwide income from all sources for Canadian
Income Tax purposes. If you fail to do this, or if you choose an offshore structure that
violates the intention or spirit of the Canadian Income Tax Act, you could face a battle
with the Canada Customs and Revenue Agency, and if you lose you will be subject to
interest and penalties. We are a Toronto income tax law firm
who can advise taxpayers in any Canadian province and assist
non-residents immigrating to Canada.
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- You are generally entitled to receive a tax credit on your Canadian Income tax return
for the amount of foreign withholding tax paid on amounts received from other countries.
In effect CCRA recognizes the foreign tax that you have paid as a reduction of your
Canadian income tax liability.
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- The "kiddie tax" applies to certain income received by a trust from a related
business where minors are beneficiaries of the trust. If a family trust is established for
the benefit of a spouse or children who have reached age 18 in the year, the kiddie tax
won't apply on income taxed in the hands of these beneficiaries.
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- Disability insurance receipts will be free of Canadian income tax only if an employee
has paid the insurance premiums personally, or if the premiums for all employees were paid
by the employer, and included as a taxable benefit of each employee. If the employer pays
the premiums and they are not treated as a taxable benefit for all employees, then any
disability insurance benefits will be taxable to the individual recipient.
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- If you disagree with the tax department' income tax assessment you need to file a Notice
of Objection to protect your rights. We are income taxation
lawyers in Toronto who act on behalf of taxpayers in tax litigation
including filing a Notice of Objection for individuals or corporations.
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- Changing the use of a capital property from personal to business or vice versa gives
rise to a deemed disposition for Canadian Income Tax purposes.
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- Interest on money borrowed for investment purposes is deductible for Canadian Income Tax
purposes for as long as you own the investment or a replacement investment. Once you
dispose of the investment the interest ceases to be deductible.
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- The latest Ontario budget has delayed scheduled income tax cuts by one year.
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- If you formally appeal a Canadian Income Tax assessment by filing a
Notice of Objection, CCRA (the Tax Department) is
obliged to suspend collection action until the appeal is settled. No such end to
collection action occurs with a GST appeal. We are an income tax law
firm in Toronto, Ontario who act on behalf of taxpayers in tax litigation
including filing a Notice of Objection for individuals or corporations.
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- The Supreme Court of Canada has just released two cases rejecting the “Reasonable
Expectation of Profit” test and confirming that tax motivated transactions are not
prohibited.
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- If you are leaving the country and want to determine your tax status, the Canada Customs
and Revenue Agency provides form NR73 Determination of Residency Status (Leaving Canada)
if you want to obtain an official determination. This is essentially a questionnaire in
which you provide details of your residential ties or lack of them. To become a
non-resident of Canada you must divest yourself of as many residential ties as possible.
Proper pre-departure planning is essential.
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- The Home Buyers’ Plan allows a first time homebuyer to withdraw up to $20,000 from
an RRSP to buy or build a principal residence. The funds can be repaid over 15 years.
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- Transactions in stock options are treated in the same way as stocks for Canadian income
tax purposes. In most cases they will give rise to a capital gain or loss.
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- As a general rule, the receipt of a stock option in a Canadian corporation will not have
any Canadian income tax consequences while the exercise of the stock option will be a
taxable event.
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- If you earn income from your principal residence, for example from renting a room, your
principal residence will still be exempt from Canadian income tax on any capital gain
rising on disposition provided the income is incidental to your use of the property, you
make no structural changes to the property and you don’t claim capital cost allowance
(depreciation) on the property.
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- All amounts that you incur as current expenses related to the business are deductible
for Canadian income tax purposes. Capital expenditures can be depreciated. If your
business never earns a profit the deductions may be challenged on the basis that you have
no reasonable expectation of profit.
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- If you owe money to the tax department and can't pay the full amount, file your Canadian
income tax return on time to avoid the late filing penalty and be sure to negotiate an
acceptable payment arrangement with them so that they don't seize any of your assets.
We are Canadian taxation lawyers in Toronto who act on behalf of
taxpayers in negotiating with the Canadian tax department.
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- If you fail to file Canadian income tax returns the tax department may arbitrarily
assess you and you have the burden of disproving the arbitrary assessment.
We are a Toronto taxation law firm who act on behalf of taxpayers in
challenging the Canadian taxation department when they make arbitrary
assessments..
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- When buying or selling the assets of a business be sure to allocate the purchase price
among the different asset types, as this will determine the values for Canadian income tax
purposes.
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- The Ontario Court of Appeal has confirmed in the Juliar case that the principle of
rectification, obtaining a court order to retroactively correct a written agreement that
does not properly record what the parties had intended, is applicable to transactions with
Canadian Income Tax implications.
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- If you operate a business from home you are entitled to deduct the cost of your home
office for Canadian Income Tax purposes only if a separate part of your home is used to
carry out the business.
- An amalgamation under the Canadian Income Tax has the effect of combining 2 or more
corporations into a new corporation with no adverse tax consequences to the shareholders
or the combining corporations.
- In the 1999 Canadian Income tax case of McFadyen v. The Queen, the taxpayer moved to
Japan with his wife, not knowing when and if he would return. He stored his furniture and
appliances in Canada and maintained two bank accounts in Canada, owned two houses which he
rented out, maintained his membership with a professional association in Ontario, rented a
safety deposit box, and maintained an RRSP, credit card and Ontario driver's licence. The
Tax Court of Canada concluded that these ties were significant enough to make him
ordinarily resident in Canada for the years in question.
- A voluntary disclosure, also known as tax amnesty or tax pardon, is a method to allow you to deal with unfilled Canadian income
tax or GST returns, or unreported income, without incurring penalties or
income tax evasion charges or prosecution.
We are Toronto taxation lawyers with extensive
voluntary disclosure experience, can assist in any Canadian province, and
can meet on a confidential basis to discuss your personal or corporate
situation.
- Prior to 1995, self-employed businessmen and professionals were allowed to report their
income for Canadian income tax purposes on a non-calendar year basis. Starting in 1995
they have been required to report their income on a calendar year basis. Taxpayers were
permitted to claim a reserve for the additional income. A decision to leave a professional
practice, or close down a business, and become an employee can trigger unexpected taxes
payable if part of the 1995 reserve is outstanding.
- A director can avoid liability under the Canadian Income Tax Act if he can demonstrate
that he exercised the degree or care, diligence and skill necessary to prevent the failure
to deduct, withhold or remit that a reasonably prudent person would have exercised in
comparable circumstances.
- Starting with the 2001 tax year, same sex couples can make spousal RRSP contributions
for Canadian income tax purposes and can make tax free RRSP rollovers in the same way that
opposite sex couples can.
- In order to become a non-resident of Canada for Canadian income tax purposes you must
sever most ties with Canada, including your residence. Proper pre-departure planning is
essential to avoid future Canadian taxation.
- The Canadian Income Tax Act renders a director jointly and severally liable with his
corporation for failure to deduct, withhold or remit income tax, payroll or GST amounts
required, along with any related interest or penalty. Legal or accounting fees incurred to
challenge a tax assessment are a deductible expense for Canadian income tax purposes.
- Assets of a business, or shares of a corporation, can be transferred on a tax deferred
basis by a taxpayer to a corporation by electing under section 85 of the Canadian Income
Tax Act. Failure to prepare and file the election can result in a tax liability.
- On death of a Canadian individual there is a deemed disposition of all capital property
giving rise to Canadian income taxation on the capital gain. An estate freeze is a way of
postponing some of the potential capital gains tax liability.actions, other than RRSP
contributions, need to be completed prior to December 31, 2001.
- If you own real estate (other than a principal residence) which has gone up in value
since purchase, you have an inherent capital gain that will be taxed when you dispose of
the property or die. If you plan to leave the property to your children then gifting it to
them before death will trigger the tax. As an alternative you can consider an estate
freeze.
- A testamentary trust is entitled to the benefits of marginal tax rates when computing
its Canadian income tax liability while all income of an inter-vivos trust is taxed at the
top marginal income tax rate.
- Legal fees incurred in respect of a child support application are deductible for
Canadian income tax purposes.
- If CCRA (the Tax Department) has challenged any Canadian income tax returns that you
have filed, be sure that you keep all original documents related to the year being
challenged until the matter is finally settled. In order to claim a Canadian income tax
deduction for an allowable business investment loss (ABIL) for money lent to a Canadian
Controlled Private Corporation (CCPC), the debt must have been established to have gone
bad at the end of the year.
- The Supreme Court of Canada has recently confirmed that it has never held that the
economic realities of a situation can be used to recharacterize a taxpayer's bona fide
relationships. It has held that, absent a specific provision of the Income Tax Act to the
contrary or a finding that they are a sham, the taxpayer's legal relationships must be
respected in income tax cases.
- The recent Supreme Court of Canada decision in the income tax case of Singleton
confirmed the principal that in determining whether interest is deductible, if a direct
link can be drawn between the borrowed money and an eligible use, the interest expense is
deductible.
- Most legal fees incurred in family law situations are not deductible for Canadian income
tax purposes. The main exception is for fees incurred to enforce a maintenance order. The
status of fees incurred to obtain a spousal support order is less clear.
- A corporation is a separate legal entity, so losses that it incurs can't be claimed by
it's shareholders. Loans advanced to a corporation by a shareholder may be deductible as
an Allowable Business Investment Loss (ABIL).
- Attribution rules don't apply to earned income on investments bought in a child's name
with the Child Tax Benefit provided an account was established for the child.
- If you deliberately falsify your Canadian income tax return, or are grossly negligent in
preparing it, you may be subject to a penalty of 50% of the additional tax liability.
- If you earn more than $30,000 per annum you are required to register for GST.
- If moving expenses have been incurred by a student to move from school back home either
for the summer or permanently, these expenses can generally be deducted for Canadian
income tax purposes by the student against income earned at the moved-to location.
- If you run a business, your spouse and children can be paid reasonable salaries which
become a business expense that is deductible for Canadian income tax purposes.
- The Canadian income taxation of child support payments changed as of May 1, 1997. If you
amend a written support agreement made before that date the tax treatments of payments
which were deductible to the payor and taxable to the recipient can change.
- If you transfer money to a minor child earns and it earns capital gains instead of
interest or dividends, the capital gain would be reported on your child's tax return, not
on yours, thereby reducing the family’s overall Canadian income tax liability.
- Offshore income earned by a Canadian resident is fully taxable in Canada and must be
reported for Canadian income tax purposes. Failure to do so is tax evasion.
- The use of spousal RRSPs during working years permits the higher income spouse to get
the tax benefit of the RRSP income tax deduction, while incurring tax on a lower income
when the amounts are withdrawn on retirement.
- If you have income which is not subject to deductions at source you may have to pay
quarterly income tax installments. If you fail to pay the installments when due you will
be charged interest.
- A loss realized on shares of a small business corporation or debt owed by a small
business corporation may give rise to an allowable business investment loss (ABIL), 75% of
which is deductible in computing your Canadian income tax liability.
- If you owe money to CCRA (Revenue Canada) and can't pay the full amount be sure to
negotiate an acceptable payment arrangement with them so that they don't seize any of your
assets.
- If you are the owner of a corporation and pay yourself a salary, you are not eligible
for Canadian Employment Insurance as an owner-manager so you should not make any
remittance when you complete your personal Income Tax return.
- If you’re incorporating your existing business you will have to carry out a tax
free rollover of the assets into the corporation and elect to defer income tax under
section 85 of the Canadian Income Tax Act to avoid an immediate tax liability.
- All amounts that you incur as current expenses directly related to your business are
deductible for Canadian income tax purposes. Capital expenditures can be depreciated at
the prescribed tax depreciation rates. If your business never earns a profit the
deductions may be challenged on the basis that you have no reasonable expectation of
profit.
- A car allowance is taxed as regular income for Canadian income tax purposes. If you
require the car for work and your employer gives you a form T2200 you may be able to
deduct travel expenses.
- Interest, dividend and most other payments made to a non-resident of Canada are subject
to withholding tax under the Canadian Income Tax Act.
- Reasonable expenses for meals and entertainment incurred for the purpose of earning
business income are deductible for Canadian income tax purposes. However, only 50 per cent
of these costs are allowed as a deduction for tax purposes. The costs of restaurant gift
certificates used for promotion are also subject to this limitation.
- If your liabilities for unpaid Canadian Income Taxes are too high for you to pay you can
consider either a formal Proposal under the Bankruptcy and Insolvency Act or going
bankrupt.
- When making your calculations to determine your Canadian income tax deductions for RRSP
contributions, remember that certain deductions, such as net losses from rental properties
or employment-related expenses including union dues or traveling expenses will reduce your
"earned income" which reduces your RRSP contribution limit for 2001. Also
excluded from "earned income" are certain types of income including interest,
dividends, capital gains, and most pension income.
- To make changes to previously filed personal Canadian income tax returns, individuals
should not file an amended tax return. Canada Customs and Revenue Agency (CCRA) prefers
that individual taxpayers who wish make changes to returns, use form T1-ADJ (Adjustment
Request), available at local tax services offices or on the CCRA Web site.
- There are no immediate Canadian income tax consequences as a result of the transfer of
capital property to former spouses where the transfer arises from divorce or separation
settlements.
- All amounts received as a consequence of termination of employment, even if received as
damages, are fully taxable for Canadian income tax purposes in the year received. However,
a portion of the payment may be eligible for transfer to an RRSP.
- Hair transplant costs paid to a doctor will generally qualify as medical expenses and
will give rise to tax credit for Canadian Income Tax purposes. However only medical
expenses in excess of 3% of income will be eligible for the tax credit.
- If a relative wins a lottery and decides to share the winnings with his family, the
person who receives the gift from the family member will not have to pay tax on what he
receives since there is no gift tax in Canada. Any amounts arising from any source,
including lottery winnings, can be gifted to any person without Canadian tax implications.
- New Canadian income tax rules provide for a tax-free rollover of capital gains on
disposition of shares of certain active Canadian corporations where the proceeds are used
to invest in shares of another active Canadian corporation.
- Individuals with grown children who own their own homes or with no children should
consider donating an interest in a personal residence to a charity. If the donor wishes to
continue to have use of the property for the remainder of his or her lifetime, a residual
interest in the property could be gifted to the charity currently without the use of a
trust. The donor will receive an income tax receipt for the value of the residual interest
transferred. Provided that the home is a principal residence, there will be no taxable
capital gain
- If you owe money on account of unpaid Canadian Income Taxes you will be contacted by a
Canada Customs and Revenue Agency collections officer. If you are unable to make
satisfactory payment arrangements your salary may be garnished or your back account
seized. No court authorization is required for these collection actions.
As tax lawyers in Canada we can assist taxpayers in dealing with CRA.
- The October 17, 2000 mini-budget reduced the capital gains inclusion rate for Canadian
income tax purposes from 66 2/3% to 50% effective immediately.
- A recent Federal Court - Trial Division decision decided that Article XXVI A of the
Canada - U.S. Income Tax Convention offends subsection 15(1) of the Charter of Rights and
Freedoms. The article in question provides for co-operation between the Canadian and U.S.
tax authorities for the purpose of collecting taxes owing.
- Canada Customs and Revenue Agency (CCRA) recently changed its position relating to the
determination of the adjusted cost base (ACB) for Canadian income tax purposes for shares
acquired under employee stock option agreements and then immediately sold. CCRA will
accept identification of specific securities acquired under the option agreement as being
the securities disposed of by the employee, where it is obvious that the securities sold
are the ones that were acquired under the agreement. As a result, only the ACB of the
securities acquired under the agreement would be used in determining the gain or loss on
that particular sale.
- An Ottawa Superior Court judge has ruled that retired Ottawa school teacher Thomas
Kennedy is not exempt from Canada’s Income Tax Act. Kennedy argued unsuccessfully
that the Income Tax Act applies only to corporations and not to natural persons, that
income tax is voluntary, and that the form requiring his employer to withhold amounts to
cover tax is not valid. The arguments rejected by the court were essentially the same as
claims made by anti-tax campaigners who say they know of lawful ways for individuals to
exempt themselves from income tax.
- New voluntary disclosure rules have just been announced by the Canada Customs and
Revenue Agency. A taxpayer who makes a voluntary disclosure of a Canadian income tax
liability will not be charged penalties. The new policies also now allow for a
cancellation of interest in some cases.
- The increase in Registered Retirement Savings Plan (RRSP) foreign content from 20% to
25% proposed in the February 28, 2000 budget has now been implemented.
- If you’re immigrating to Canada, it may be to your advantage to sell investments
with accrued losses before you become a Canadian resident. Otherwise you will probably not
be able to utilize the foreign capital loss to offset other gains after you arrive in
Canada and any gains that accrue on the investments after immigration will be taxable in
Canada when you dispose of them. We are tax lawyers in Ontario and
can provide assistance.
- If you own property in the U.S., your estate may have to pay U.S. estate tax on the
property after your death. The U.S. imposes its estate tax on all assets owned by
Canadians that it considers to be U.S. property, which includes real property such as
vacation homes and may include other items such as furniture. In addition, shares in U.S.
corporations and U.S. Government Savings Bonds are considered U.S. property even if the
certificates are kept in Canada.
- If you're thinking of immigrating to Canada you should know that your income earned
anywhere in the world would become subject to Canadian income tax once you establish
residence in Canada. We are Ontario tax lawyers and can provide
assistance.
- From a Canadian income tax perspective, you don’t have to make a trip to the altar
to be considered married, since the meaning of spouse includes a common law spouse. This
could affect the amount of your GST credit and other credits, and restrict your ability to
claim the equivalent -to-married credit for a dependent family member.
- If you turn 69 this year you'll have to decide what to do with your RRSP before the end
of this year. If you wish to have some control over the investments, you should purchase a
registered retirement income fund (RRIF). If you'd rather have a steady monthly income,
consider purchasing an annuity.
- If you earn more than your spouse, one way to transfer funds to him or her for
investment without having the investment income subject to Canadian income tax in your
hands is to directly pay your spouse's tax liability, including tax installments that come
due during the year. Funds that your spouse would otherwise use to pay income taxes can be
invested and any income earned would be taxed at your spouse's lower tax rate.
- There are no estate or gift taxes in Canada, so gifts may be given with no tax
implications. The attribution rules may, however, apply in certain circumstances to cause
the income to be taxed in the hands of the gift giver. A taxable capital gain can also
arise on a gift.
- If you are self employed and work out of your home and move to a new home more than 40
kilometres away, a recent Tax Court decision means that you may be able to deduct your
moving expenses for Canadian income tax purposes in the same way as an employee who moves
to take a new job or an employment transfer.
- All amounts which you incur as current expenses related to the business are deductible
for Canadian income tax purposes. Capital expenditures can be depreciated. If your
business never earns a profit the deductions may be challenged on the basis that you have
no reasonable expectation of profit.
- You can extract income from your corporation in one of 2 ways. You can take a salary or
bonus, which is deductible to your corporation. Or you can declare a dividend out of after
tax profits.
- For a home based corporation to write off rent related expenses you have to charge
"rent" to your corporation. The amount is taxable to you, but will be offset by
the equivalent amount which you have paid such as utilities or property taxes.
- Tuition fees deductible for Canadian income tax purposes include fees paid to attend a
Canadian university or college; fees for courses taken to obtain or improve occupational
skills at an institution approved by the Minister of Human Resources Development (if
you're 16 years or older); fees paid for full-time attendance at most universities outside
of Canada if the course is more than 13 consecutive weeks long and leads to a degree; fees
paid to post-secondary institutions in the United States if you lived in Canada near the
border and commute to the university or college.
- The February 28, 2000 Federal budget reduced the rate of inclusion of capital gains for
computing Canadian income tax from 75% to 66 2/3% effective from the budget date.
- An Ontario Superior Court judge has ruled that a class action suit brought by a taxpayer
against Revenue Canada can proceed to an application to certification. This ruling, if not
successfully appealed, means that class actions may be brought against Revenue Canada by
taxpayers.
- The purchase price paid for a domain name (URL) may not be immediately deductible for
Canadian income tax purposes. It may constitute an eligible capital expenditure (ECE) in
which case only 75% of the purchase price can be deducted at a rate of 7% per annum.
- When making your calculations to determine your Canadian income tax deductions for RRSP
contributions, remember that certain deductions, such as net losses from rental properties
or employment-related expenses including union dues or traveling expenses will reduce your
"earned income" which reduces your RRSP contribution limit for 2000. Also
excluded from "earned income" are certain types of income including interest,
dividends, capital gains, and most pension income.
- Post-budget consultation has led the Department of Finance to reconsider the application
of the proposed civil penalties to third parties. Revenue Canada will continue to consult
with private sector professionals as it acquires experience with these new measures. The
new culpable-conduct standard is intended to ensure that civil penalties apply only to
third-party advisers who make or participate in making a false statement, and--unlike the
budget's proposed gross negligence test--will prevent an honest error of judgment or an
honest difference of opinion from attracting penalties. It is also specified that a
penalty is not levied solely because the third party relied in good faith on information
provided by another person, for example, to prepare or file that person's tax return.
Explanatory notes contain specific examples of the rules' application. Revenue Canada
indicates that it will assess such penalties only after a Head Office review. Several
court decisions on income splitting and the use of management service family trusts and
partnerships raised concerns over leakage in tax revenue. The 1999 Canadian federal income
tax budget curtailed income splitting with minors via taxable dividends paid on private
company shares and business income earned by management partnerships that provide
administrative and other services to related businesses. Draft legislation was recently
released.
- To maximize the $500,000 capital gains exemption from Canadian income tax on sale of
qualifying small business shares available to every individual, consider having your
spouse invest in the corporation to multiply the availability of the exemption.
- If you’re creating a stock option in your Canadian corporation for a shareholder,
be sure to grant the same rights to all of the other shareholders of the same class.
Otherwise, the stock option will be considered to be a taxable benefit for Canadian income
tax purposes to the shareholder.RRSP’s are normally available to be seized by your
creditors in satisfaction of your debts. If liability issues are of concern to you
consider a life insurance RRSP which is exempt from seizure by your creditors.
- A class action, Deanne Ho-A-Shoo, was recently commenced against the federal government
in the Ontario Superior Court, seeking recovery of interest paid under section 160 of the
Canadian Income Tax Act. Section 160 allows Revenue Canada to pursue family members and
others who receive property without paying fair market value(FMV), from a person who owes
tax at the time of the transfer. In the past Revenue Canada has sought to recover not only
the value of the property, but also interest on that amount. In the 1998 Algoa Trust case,
the Court held that interest could not be assessed on a section 160 liability based on the
FMV of the property transferred, but Revenue has not taken steps to pay back interest
collected improperly.
- In two recent technical interpretations, Revenue concedes that legal fees relating to
child support orders under the Divorce Act are deductible for Canadian income tax
purposes.
- An allowable business investment loss (ABIL) may be claimed as a Canadian income tax
deduction on a non-interest bearing loan to a Canadian controlled private corporation if
there are other reasons for the loan such as dividends or management fees. This principal
has been affirmed by the Federal court of Appeal in the Byram decision.
- A new taxation year for Canadian income tax purposes is deemed to have started when a
change in control of a corporation takes place. If your corporation is about to undergo a
change in control it will shorten the carryforward period of your unused losses and cause
their expiry. It may be possible to devise a mutually beneficial tax plan with the
purchaser by billing before the sale for services to be rendered after the change in
control in order to generate income to absorb the unused losses before they expire.
- If you have invested money with a private Canadian corporation
carrying on an active business, including your own corporation, and the debt becomes
uncollectible you can deduct 75% of the loss as an allowable business investment loss
(ABIL) in computing your personal Canadian income tax liability.
- Repayable income tax-free RRSP withdrawals can now finance full-time
training or education for a taxpayer or spouse. Students in full-time training or
post-secondary education or their spouses may withdraw up to $10,000 per year from their
RRSPs over a four-year period, as long as the total amount does not exceed $20,000. The
amount withdrawn from the RRSP must be repaid in equal instalments over 10 years or it
will be included in income for Canadian income tax purposes.
- If you're being temporarily transferred due to your employment and
receive a housing allowance to pay for your lodgings while you're away, the allowance will
normally be considered a taxable benefit for Canadian income tax purposes. However, the
allowance will not be included in your taxable income if it is for board and lodging at,
and transportation to, a temporary work site that is more than 80 km from your home or a
"remote work site" that is remote from any established community. To qualify
your regular home must be available for your occupancy. If you rent it out for the
duration of your posting the allowance will be subject to income tax.
- If your company owns or leases an aircraft for business purposes and
it makes a flight for the primary purpose of providing free or subsidized travel for the
personal benefit of an employee or shareholder, a taxable benefit for Canadian income tax
purposes will result for the employee or shareholder. The amount of the income tax benefit
is usually computed as the cost of a regular first class ticket to the same destination.
- If you are a Canadian citizen with a US greencard and both a US and
Canadian residence, electing to pay Canadian income tax under the Canada-US income
tax treaty may jeapordize your greencard status.
- Revenue Canada has announced a change in its policy on employer
payment of professional membership fees. Employers can pay such fees on behalf of
employees, without triggering a taxable benefit for Canadian income tax purposes, if the
employer is the primary beneficiary of the payment. Revenue Canada's previous policy was
that such payments were a taxable benefit unless the employee's membership was a condition
of employment.
- Repayable Canadian income tax free RRSP withdrawals can now finance
full-time training or education for a taxpayer or spouse.
- The child care expenses you can deduct on your Canadian income tax
return include more than day care costs and the nanny's salary. Also deductible are fees
for certain baby-sitting expenses, day camps, boarding schools and summer camps.
- Taxpayers who sue for wrongful dismissal, including damages for
mental distress and other non-financial matters, should try to ensure that the original
statement of claim, and minutes of settlement include a detailed breakdown of the
settlement's components to demonstrate that some of the settlement is not subject to
Canadian income tax.
- If you’re an employee and you expect to receive a large Canadian
income tax refund for 1998 because you’ll have substantial deductions to claim, you
may be able to obtain some of that refund early by arranging for your employer to reduce
the amount of tax withheld from your future pay cheques.
- If you're planning to contribute to a Registered Education Savings
Plan (RESP) for your child to take advantage of the new Canada Education Savings Grant
(CESG) program, your child will need a Social Insurance Number (SIN) before the RESP plan
administrator can apply for the CESG.
- If you're self-employed, you may be allowed to deduct from your
Canadian income tax return the costs of attending up to two conventions in a year in
connection with your business or profession.
- If you spend more than 183 days a year living in the United States
(with a portion of your time in the U.S. in the previous two years counting towards this
total) you could be deemed a U.S. resident for tax purposes and be required to file a U.S.
income tax return, however the Canada-US tax treaty may provide you with some relief.
- Parking provided to employees may constitute a taxable benefit to the
employee, requiring an inclusion on their Canadian income tax return. The taxable amount
is the fair market value of the parking less any amount the employee pays for the space.
If fair market value can't be determined, such as parking in a mall, no taxable benefit
results.
- Name your estate rather than a charity as an RRSP or RRIF beneficiary
otherwise no tax credit will be available to offset the Canadian income tax your estate
will have to pay for the amount of the donation. By leaving instructions in your will that
the money should be transferred to one or more named charities you will ensure that your
estate gets the benefit of the tax credit for your donation.
- If you own your own company and you are retiring to leave it for
others to carry on, you can arrange for the company to pay you a reasonable retiring
allowance which will be deductible to the company, and you may be able to transfer all or
a portion of the allowance to your RRSP and claim the tax deduction.
- If you're planning to move out of Canada and you'll be selling your
house, try to make the sale while you're still a Canadian resident. That
way, you'll still be able to claim the principal residence exemption and
avoid paying tax on the capital gain that will arise.
- If you make a spousal RRSP contribtion instead of a regular one, the
funds you contribute may be safe from attack by future creditors.
- Certain employer-paid training courses may no longer be taxable
benefits for employees, thanks to a recent Revenue Canada policy change. New guidelines
say that training taken primarily for the employer's benefit is not taxable, even if it
leads to a degree, diploma, or certificate. A taxable benefit still arises if the training
is primarily for the employee's benefit.
- If you drive an expensive company-owned car, especially if it's
older than three years, the amount of the associated taxable benefit may make it
more economical for you to buy the car from your employer and arrange for an offsetting
increase in pay because your taxable benefit is based on the car's original cost and not
its current value.
- If you're immigrating to Canada, your world income will
become subject to Canadian tax once you establish Canadian residence. Any foreign-source
income you receive after becoming a Canadian resident will be subject to Canadian tax,
although any foreign tax paid on this income may be eligible for a foreign tax credit in
Canada.
- If you're immigrating to Canada it is often advantageous to
sell investments with accrued losses before coming to Canada since you will be unlikely to
be able to use the foreign capital loss to offset other gains after you arrive in Canada,
while gains that accrue on the investment after immigration will be taxable in Canada upon
disposition.
- As a result of the recent Ontario budget, small Ontario
corporations will be entitled to a new 20% refundable tax credit based on qualifying
Ontario labour expenditures incurred after June 30, 1998 to create interactive digital
media products.
- RRSP and RRIF donations from estates can be transferred to a
charity without incurring any tax and can be claimed by your estate for a tax credit of up
to 100% of your income in that year.
- If you reside outside of Canada for part of the year but you
continue to file your Canadian tax return as a Canadian resident, you are not obliged to
pay non-resident withholding taxes on the income from your Canadian investments.
- If you are planning to sell all or a part of your business
try to structure the sale to be eligible for the small business capital gains exemption
available for the sale of shares of a qualifying small business corporation.
- If you are setting up a new business, start-up losses
incurred by a corporation will not be personally deductible. If you anticipate start-up
losses, and liability is not a concern, consider starting your business as a sole
proprietorship or partnership and only incorporate once you become profitable.
- If you are thinking of buying a house, you should be aware
that the Home Buyers Plan allows qualified taxpayers to use up to $20,000 from their RRSP
when buying a home. To qualify, neither you nor your spouse may have owned a home in the
last five years.
- When drafting your will you can carry out income splitting
for your beneficiaries by setting up multiple testamentary trusts.
- When commencing or settling a law suit consider whether
payments can be deductible, if you are the defendant, or non-taxable if you are the
plaintiff.
- If you have been charged interest or penalties for late tax
payments caused by reasons out of your control you can apply to have them waived under
Revenue Canada's "Fairness" doctrine.
- If you have have failed to file income tax returns for
several years there are no special problems with Revenue Canada or rules to follow. Just
prepare and file the returns in the usual way.
- Revenue Canada has a policy that if you make a voluntary
disclosure about unreported income they will not penalize you. However you must approach
them before any investigation is commenced.
- If you carry out research and development, including
software development, you may qualify for an income tax credit by filing the appropriate
form with Revenue Canada.
- Non-residents with Canadian resident children should leave
property to an offshore trust for their children, rather than directly to the Canadian
resident child.
- If you are planning to immigrate to Canada, consider having
a trust settled on your behalf before you become a Canadian resident
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