Bruce Aitken - Certified Management Accountant

EXPENSES DISALLOWED

60(4)

CAPITAL GAINS DEFERRAL

In a July 30, 2002 Tax Court case, the taxpayer carried on a graphic arts business out of a 686 square foot condominium loft apartment which she shared with a friend. CCRA testified that they audited the business because of the large amount of expenses claimed against a small income. CCRA made a net overall increase to the income by disallowing a portion of the insurance, meals, business use of home, motor vehicle, travel and reference material expenses.

The Judge gave considerable weight to the auditor’s evidence who spent - can you believe it - upwards of 100 hours on the file, much of it at the Appellant’s premises, reviewing the records, viewing the premises and the equipment.

FINES AND PENALTIES

In a July 31, 2002 Committee Report, CCRA note that the Supreme Court has ruled that CCRA cannot disallow a deduction for fines or penalties incurred to earn income unless they are so "egregious or repulsive" that they could not be justified as being incurred for an income-earning purpose.

However, CCRA did note that Finance officials are aware of the Supreme Court decision and the need for an amendment to the Act to reduce its effect.

MEAL AND ENTERTAINMENT EXPENSES

In an August 22, 2002 Technical Interpretation, CCRA notes that the 50% add-back rule does not apply, "in respect of one of six or fewer special events held in a calendar year at which the food, beverages or entertainment is generally available to all individuals employed by the person at a particular place of business and consumed or enjoyed by those individuals".

CCRA notes that an annual Christmas party which is open to all employees is eligible for this exemption. However, an "Over-Twenty-Five Years of Service Club" party would not qualify unless the event was available to all employees.

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

YEAR-END TAX PLANNING

60(1)

Some 2002 year-end tax planning tips include:

1. If the following expenditures are made by individuals by December 31, 2002 they will be eligible for 2002 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.

2. 2002 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2001 personal income tax return assessment notices. You have until March 1, 2003 to make tax deductible RRSP contributions for the 2002 year.

Consider contributing to a spousal RRSP to achieve income splitting in the future.

The maximum 2002 addition to deductible RRSP contribution room is $13,500. $75,000 of 2002 earned income is needed to reach this maximum.

3. Persons turning age 69 in 2002 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31, 2002. Certain 2002 excess contributions may be deducted in the year 2003 if contribution room is available.

4. If you own a business, consider paying a reasonable salary to family members for their services rendered to the business.

5. Ensure that all deductible alimony or maintenance payments are made by December 31, 2002.

6. An individual whose 2002 net income exceeds $56,966 will lose all, or part, of their old age security.

Senior citizens will begin to lose their income tax age credit if net income exceeds $27,749.

Individuals facing these problems should contact their professional advisors for assistance in managing their 2002 personal income.

7. Consider purchasing assets eligible for capital cost allowance before the yearend. For example, employees may claim capital cost allowance on automobiles, aircraft and musical instruments required to be used in their employment.

8. If you had taxable capital gains in the year, or any of the preceding three years, consider selling capital properties with an underlying capital loss prior to the yearend. This capital loss may be offset against capital gains in the year, or in the three preceding years.

9. If income in an inter vivos trust is to be taxed on a beneficiary's return, the income must be paid or payable to the beneficiary by December 31, 2002.

10. Individuals may claim a tax credit related to the interest portion of student loan payments made in 2002.

11. Registered Education Savings Plan (RESP)

A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for beneficiaries up to and including age 17 (maximum $400 per child per year).

However, contributions for 16 and 17 year olds will only qualify for certain previous plans.

12. Health and dental premiums for the self-employed

Individuals will be allowed to deduct amounts payable in respect of the year for Private Health Service Plan coverage in computing business income provided they are actively engaged alone, or as a partner, in their business, and either self-employment is their primary source of income or their income from other sources does not exceed $10,000.

13. Tax on Split Income

The Income Tax Act applies the maximum marginal tax rate to certain passive income of individuals under the age of 18.

This includes:

1. Taxable dividends, and other shareholder benefits, on unlisted shares of Canadian and foreign companies (received directly or through a trust or partnership); and

2. Income from a partnership or trust where the income is derived from providing goods or services to a business carried on by a relative of the child or, of which the relative participates.

Therefore, consider minimizing this type of income in 2002.

14. The tax rate for higher income individuals is now significantly lower on capital gains than on dividends thereby presenting an incentive to receive capital gains.

15. Canadian resident shareholders receiving shares in foreign tax-free reorganizations will be able to treat the shares as a reduction in adjusted cost base, as opposed to a taxable dividend.

16. A refund of Employment Insurance paid for non-arm’s length employees may be available upon application. (See 60(5).)

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

EMPLOYMENT INSURANCE

60(5)

The Employment Insurance Act notes in Subsection 5(2) that insurable employment does not include:

(i) employment if the employer and the employee are not dealing with each other at arm’s length.

However, if the employer is related to the employee, they are deemed to deal with each other at arm’s length if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length.

Refunds

Upon application, EI Premiums paid on the son, parent, brother, sister, spouse, in-laws and common-laws of a person controlling the business may be eligible for a refund. The process is not simple as a CCRA Ruling will likely be needed.

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

2002 REMUNERATION

60(2)

Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning "active business income" include:

1. In general, bonus down active business earnings in excess of $200,000. Leaving corporate active business income over $200,000 may present a tax deferral but there will likely be an overall higher tax to pay when dividends are finally paid out. Some companies may find it advantageous to have greater than $200,000 of active business income because of other federal and provincial tax incentives.

2. Elect to pay out tax-free "capital dividend account" dividends.

3. Consider paying dividends to obtain a refund of "refundable dividend tax on hand".

4. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral. The effect on the "Qualified Small Business Corporation" status should be reviewed before selling the shares.

5. Dividends, as opposed to salaries, will reduce an individual’s cumulative net investment loss balance thereby providing greater access to the capital gain exemption.

6. Retaining income in the corporation may effect provincial and federal capital tax and certain provincial clawbacks.

7. Excessive personal income affects receipts subject to clawbacks, such as old age security and the age credit.

8. Salary payments require source deductions to be remitted to Revenue Canada on a timely basis.

9. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create "earned income".

10. Salaries paid to family members must be reasonable.

11. Some provinces have "payroll taxes" thereby increasing the costs of paying salaries versus dividends.

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

EMPLOYMENT

60(3)

TRUCKERS

In an August 23, 2002 Tax Court case, the Court found that this long-distance truck driver was entitled to deduct transport employee meal and lodging expenses. The taxpayer and his wife worked together driving a transport between California and Ontario. The Court noted that the taxpayer’s claim for meals based on U.S. $40 per day (subject to the 50% addback for meals and entertainment) should be allowed, even though no supporting documents were submitted, because this was reasonable and the evidence was strong that he incurred the meal expense.

NO TAXABLE BENEFIT

Some examples of non-taxable employment benefits include:

Example 1

In a recently released Technical Interpretation, CCRA note that the following reimbursements and allowances payable to employees who are temporarily working outside Canada will be non-taxable.

1. Housing allowance provided that the individual maintains a self-contained domestic establishment in Canada that is available for his/her use throughout the period of the secondment and is not rented out - a "special worksite".

2. Reimbursement for transport costs provided to and from the "special worksite" at the commencement and completion of employment.

Example 2

In a September 5, 2002 Technical Interpretation, CCRA notes that where additional child care expenses are incurred because an employee is required to travel out of town on employment, a reimbursement of these costs by the employer would be a non-taxable benefit.

Example 3

In an August 30, 2002 Technical Interpretation, CCRA notes that where an employer reimburses an employee for the reasonable expenses incurred in moving the employee, either because the employee has been transferred from one establishment of the employer to another, or because of having accepted employment at a place other than where the former home was located, this reimbursement is not taxable.

Example 4

In a September 12, 2002 Technical Interpretation, CCRA notes that where an employer pays the fees or reimburses an employee for membership in a fitness club, the employee is in receipt of a taxable benefit.

Editor’s Comment

Although this was not mentioned by CCRA in the Technical Interpretation, CCRA’s Interpretation Bulletin 470R, Paragraph 34, notes that where an employer pays the fees required for an employee to be a member of a social or athletic club, this is not a taxable benefit where the membership was principally for the employer’s advantage.

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

CHARITIES 60(7) REGISTERED CHARITIES NEWSLETTER NO. 13 On August 29, 2002, CCRA released *Registered Charities Newsletter No. 13* and noted that: 1. A new Form *T3010, reduced from thirteen pages to four, will be used for fiscal periods that end on, or after, January 1, 2003. 2. Charities are subject to audit, similar to other taxpayers, on a purely random* basis or to follow up on *non-compliance* or *tips* or other information gathered from third parties. (See *www.ccra-adrc.gc.ca/tax/charities/disclaimer-e.html* and Guide T4118, "*Auditing Charities".) 3. In a recent Federal Court of Appeal* case, the charity had its *registration revoked* because of improper documentation, lack of control over fund disbursement, payroll issues, and a problem with reconciling donation receipts to the Form T3010. The Court noted that the *onus of proof* is on the *charity* to show that it’s status should not be revoked. 4. Guidelines describing *business activities* which a charity may, and may not, legally engage in can be found at Website *www.ccra-adrc.gc.ca/tax/ charities/consultation_policy-e.html*.
DONATION OF REWARD POINTS In an August 8, 2002 *Technical Interpretation, CCRA notes that most, if not all, reward point plans* do *not permit* the transfer of points. Only the person who is a member of the reward points plan, and who earned the points, can redeem the reward points.
However, if a particular reward points program *does permit* the transfer of reward points from a plan member to a charity, such that the charity could redeem the reward points, the *fair market value* of the reward points on the date that they are transferred to the charity would have to be determined so that a *tax receipt* could be *issued*.

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

PARTNERSHIP 60(8) INCORPORATION OF MEDICAL PARTNERSHIP
In a 2001 *Advance Income Tax Ruling, CCRA ruled that where Farmer A employed his spouse* in the farming operation, even though *salary* was *not paid* in *all* the years, Farmer A may pay the spouse *a retiring allowance* to be rolled over to an RRSP within the prescribed limits for pre-1996 employment.
The *purposes* of the incorporation include eliminating joint and several liability, permitting independent contractor status and increased control for each individual, better congruence between effort and financial return, provide a vehicle for the partner to provide professional services external to the practice, provide increased efficiency through individual management of personal practice preferences and expenses, control over expenditures reflecting personal practice preferences, estate planning and ease of entry to the practice. Caveat Not all provinces permit the incorporation of professionals.

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

FARMING

60(9)

CHECKOFFS - RESEARCH TAX CREDITS

An investment tax credit may be claimed on the portion of checkoff contributions used for research and development at a rate of 20% for individuals and 35% for Canadian-controlled private corporations.

For 2001, a total of 41% of the wheat checkoff and 61% of the barley checkoff administered by Western Grains Research Foundation (WGRF) is eligible to earn the investment tax credit.

For more information see the WGRF website at www.westerngrains.com or the CCRA website at www.ccra-adrc.gc.ca/sred/.

NET INCOME STABILIZATION ACCOUNT (NISA)

NISA is a voluntary program developed jointly between producers, the Government of Canada and participating provinces. Producers deposit money annually into their NISA account and receive matching government contributions. For more information, see www.agr.ca/nisa/.

Fund 1 holds the participant’s matchable and non-matchable deposits under the NISA program. Fund 2 holds government contributions (federal and provincial) and all interest earned on both funds, including bonus interest.

Withdrawals are first taken from Fund 2 and are taxable. Once Fund 2 is depleted, withdrawals come from Fund 1 on a non-taxable basis.

NEW FEDERAL PLAN

The Federal Government will distribute approximately $600 million in risk management funding in October, 2002 through NISA accounts. Farmers will receive a payment into their NISA accounts equal to 4.25% of their five-year average eligible net sales (ENS).

However, once the funds are in NISA, they may be stuck there until the funding formula triggers a payment.

EXPENSES RELATING TO PETS

In an August 13, 2002 Tax Court case, the farmer testified that wild animals, such as deer, rats and mice, love to eat his blueberry crop. Therefore, a cat and dog were acquired to, and were able to, keep them away. The Court believed this and permitted deductions with respect to the dog and cat for veterinary bills, pet food, etc.

CCRA questioned why the taxpayer had to acquire pet food - "can’t they eat the mice and the rats?". The Court did not swallow this argument and noted that the "frightening" aspect of the animals on a small berry acreage warranted their business use to help preserve the berry crop.

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

GST 60(10) GROSS NEGLIGENCE PENALTIES CCRA appears to be applying the *25% gross negligence penalty* under the *Excise Tax Act* if, after making a mistake and being warned, the taxpayer makes the *same mistake again*.
Even though the Court may throw out the penalties on an appeal by the taxpayer, there is still a time and money cost involved. Therefore, it is usually best to be diligent *to avoid* making the *same GST mistake twice*.
GST NOT IN THE CONTRACT In a British Columbia Court case, a construction contract *did not refer to GST. Even though there have been cases going both ways* on this issue, the majority of the cases, and this case as well, concluded that when a contract does not refer to GST, *GST* should still be considered to be an *addition to the purchase price*.
SELF-SUPPLY RULES Where a taxpayer acquires a newly constructed *residential property* for lease to others, *GST applies* on the purchase price. Therefore, when a property is *constructed* by the owner, the property is deemed to have been acquired at *fair market value* and the builder is, therefore, subject to *GST* on the *fair market value* of the property at the time it is put into rental use. However, the builder may claim input tax credits for the GST paid on his/her input costs.

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