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MONTHLY TAX UPDATE SEMINAR

Edited by Thomas B. Devaney, CA

Issue No. 353

January 2011

GOVERNMENT RELEASES

353(1) Consider

FINANCE RELEASES (www.fin.gc.ca) 1. December 16, 2010 - In a Letter that Finance

Minister Flaherty sent to Provincial Ministers

before the Federal-Provincial Meeting on

December 20 in Kananaskis a new initiative was

proposed called the Pooled Registered

Pension Plans (PRPPs). This option pools

contributions from employees and independent

workers who do not otherwise have access to a

private defined contribution pension plan. The funds would be

managed by insurance companies.

An employer offering the PRPP would not have to make

contributions. Finance Minister Flaherty hopes that he and the

provincial ministers will be able to agree on a “framework” for

PRPPs with implementation to occur by Summer 2011.

“these Releases”

WHAT’S INSIDE

1. Government Releases

2. CPP and Employee Profit Sharing Plans

3. Business/Property Income

4. Capital Gains and Losses

5. Farming/Partnership

6. Charities

7. Tax Court of Canada

8. CRA

9. Corporate Tax

10. Estate Planning

11. International

12. GST/HST

13. Web Tips

14. Did You Know…

mailto:[email protected]

http://www.videotax.com/

http://www.fin.gc.ca/


MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 2

Minister Flaherty noted that expansion of the Canada Pension

Plan is not a Government priority.

2. December 15, 2010, 2010-122 - Bill C-47 received Royal

Assent - including the remaining portions of the 2010 Federal

Budget.

Some provisions include:

(i) Allows two eligible individuals to receive Canada Child Tax

Benefit and Universal Child Care Benefit in a particular

month, and two eligible individuals to receive GST/HST credit

amounts in respect of a particular quarter in respect of a

child if the recipients would be eligible to receive amounts

under the CRA existing shared-eligibility policy - effective

July 2011. To qualify submit RC66.

(ii) Allows a rollover of a deceased individual’s RRSP proceeds

to the Registered Disability Savings Plan (RDSP) of a

financially dependent infirm child or grandchild.

(iii) Provides new rules with respect to charities’ disbursement

quotas.

(iv) Includes proposals to require the reporting of certain tax

avoidance transactions.

(v) Allows for the electronic issuance of Notices under the

Income Tax Act, Excise Tax Act, Air Travellers Security

Charge Act, Canada Pension Plan, and Employment

Insurance Act if authorized by a taxpayer. However,

Notices that are specifically required to be served personally

or by registered or certified mail will not be eligible to be

transmitted electronically. This is effective as of Royal

Assent, December 15, 2010.

Editor’s Comment Caution: See Subsection 244(14.1) for the technicalities.

3. November 25, 2010, 2010-113 - Eligibility for the Disability Tax

Credit and Registered Disability Savings Plan. The

Department of Finance intends to introduce legislative

amendments so that individuals can, in every case, appeal a

determination concerning their eligibility for the Disability Tax

Credit. This is to offset a recent Tax Court of Canada case which

concluded that an individual may not appeal a determination

concerning their eligibility for Disability Tax Credit unless that

determination affected the individual’s tax payable.

4. November 23, 2010, 2010-112 - The Government is releasing a

Paper entitled The Taxation of Corporate Groups. The

Government requests comments on the Paper by February 25,

http://www.parl.gc.ca/

http://www.cra-arc.gc.ca/E/pbg/tf/rc66/README.html

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/menu-eng.html

http://www.fin.gc.ca/n10/10-113-eng.asp



Page 3 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011

2011.

The Paper describes current mechanisms for transferring losses

and tax attributes between related corporations and provides

new approaches.

5. November 17, 2010, 2010-107 - Canada signed Tax

Information Exchange Agreements (TIEAs) with San Marino

and Anguilla.

A TIEA is a bilateral agreement to which two countries undertake

to exchange tax information that is relevant to the

administration or enforcement of the domestic tax laws of each

country.

In return, Canada will extend the treaty exemption available

on dividends paid by foreign affiliates to any jurisdiction in

which Canada has a TIEA. This could make TIEA jurisdictions

more attractive for Canadian investment.

CRA RELEASES (www.cra.gc.ca) 1. December 13, 2010 - It was noted in the Edmonton Journal on

December 13, 2010 (page A4) that figures tabled this week in the

House of Commons show that the Canada Revenue Agency (CRA)

is owed $25 billion in overdue taxes as compared to the

roughly $358 billion in taxes and duties which were processed last

year by CRA. CRA notes that they contacted

roughly 100,000 taxpayers between

November 2 and December 10, 2010 to

remind them to pay their instalments. Last

year $12.5 billion was collected through

legal action by the CRA.

2. December 13, 2010 - It was noted on page A11 of the Globe &

Mail on December 13, 2010 that a censored draft paper and

related documents were obtained by The Canadian Press under

the Access to Information Act which noted that:

(i) CRA is considering changing the way charities issue

donation receipts after studies found wide spread

scamming.

(ii) Standard paper receipts issued by charities are too easily

faked, forged or finessed so some CRA officials are proposing

rules requiring charities to electronically track and account

for their receipts.

3. December 10, 2010 - Information Circular IC82-6R8 provides

information on obtaining clearance certificates related to

individuals, estates or trusts, corporations, and GST/HST.


http://www.cra-arc.gc.ca/

http://www.cra-arc.gc.ca/E/pub/tp/ic82-6r8/README.html



4. December 8, 2010 - The prescribed interest rates for the first

calendar quarter of 2011 are the same as the preceding seven

calendar quarters at 5% (interest paid to CRA on overdue taxes,

CPP and EI); 3% (interest rate paid by CRA on non-corporate

taxpayer overpayments); 1% (interest rate paid by CRA on

corporate taxpayers’ overpayments); and 1% (interest rate used

to calculate taxable benefits from interest-free and low-interest

loans).

5. December, 2010 - CRA introduced 9-page Guide T4117, Income

Tax Guide to the Non-Profit Organization (NPO) Information

Return - Form T1044. The Release discusses what is a NPO

and the completion of the Form T1044 which is due no later than

six months after the end of its fiscal period.

The Form T1044 must be filed if:

• the NPO received taxable dividends, interest, rentals,

or royalties totalling more than $10,000 in the fiscal

period;

• the book value of the assets of the organization were

more than $200,000 at the end of the immediately

preceding fiscal period based; or

• it had to file a NPO Information Return for a previous

fiscal period.

However, corporations operating only to provide low-cost

housing for the aged where no income is available for the benefit

of any proprietor, member or shareholder may not have to file

Form T1044. Also, registered charities, registered Canadian

amateur athletic associations, and registered national arts service

organizations do not have to file Form T1044.

Once an Organization has had to file a NPO Information Return for

a fiscal period, it must file an Information Return for all

subsequent fiscal periods regardless of the dollar value of its

revenues or the book value of its assets in those later years.

An Organization that has to file a Form T1044 may also have to

file other returns such as a T2 Corporation Income Tax Return or

a T3 Trust Income Tax and Information Return.

There is a minimum penalty of $100 and a maximum penalty of

$2,500 for each failure to file based on the penalty of $25 a day.

Editor’s Comment If Form T1044 has not been filed in the past, a Voluntary

Disclosure should be considered. See IC-001R2 for details.

6. December, 2010 - CRA Guide RC4110 - provides information on

whether a person is an employee or a self-employed worker

and related matters.

http://www.cra-arc.gc.ca/nwsrm/rlss/2010/m12/nr101208-eng.html

http://www.cra-arc.gc.ca/E/pub/tg/t4117/README.html

http://www.cra-arc.gc.ca/E/pbg/tf/t1044/README.html






http://www.cra-arc.gc.ca/E/pbg/tf/t2/README.html?=slnk

http://www.cra-arc.gc.ca/E/pbg/tf/t3/README.html?=slnk



http://www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html



7. November, 2010 - 53-page Guide T4001 - Payroll Deductions

and Remittances - provides payroll information on CPP

contributions, EI premiums, pensionable and insurable earnings

reviews, deducting income tax, special payments such as

advances, bonuses, director fees, employee profit-sharing plans,

vacation pay, and special situations such as barbers and

hairdressers, drivers of taxis, emergency volunteers, and

temporary health service firms.

Also discussed are issues related to employing a caregiver,

babysitter or domestic worker, employment outside Canada,

fishers, placement and employment agency workers, seasonal

agricultural workers programs, and Status Indian employees.

Also, Appendix 6 in Guide T4001 has a special payments

chart.

CRA NEWSWIRE 1. December 9, 2010 - as of January 24, 2011,

EFILE service providers will have the

capability to electronically submit the

Form T1013, Authorizing or Cancelling a

Representative, to CRA using certified EFILE T1 Tax Preparation

Software. The Form(s) may be submitted in batches from 1 to 30

and the filing option will be available year round.

For this year only, T1013s submitted electronically will be

stockpiled from January 24, 2011 to February 14, 2011 at which

point they will be processed. When you submit your Form, you

will get a message to indicate whether the submission was

successful or not.

When electronically submitting a T1013 for processing, there will

be a 4 day delay to gain access to your client`s accounts via

CRA`s online services. The current service standard for

processing Form T1013 during peak periods is 20 business days.

More CRA information will follow in January 2011.

2. December 6, 2010 - CRA notes that you can use the CRA

Charities Listing to confirm charities’ registration status, review

charities’ financial information, locate charities in your

neighbourhood, and learn about charities activities and programs.

3. December 1, 2010 - see Appendix A for the 2011 Indexation

Adjustments for Personal Income Tax and Benefit Amounts.







http://www.cra-arc.gc.ca/nwsrm/fctshts/2010/m12/fs101201-eng.html



CPP AND EMPLOYEE PROFIT SHARING PLANS

353(2) Consider

CANADA PENSION PLAN The maximum pensionable earnings for 2011 are

$48,300 with a basic exemption of $3,500 and an

employer/employee rate of 4.95% leaving a maximum

employer/employee contribution of $2,218, or a

maximum self-employed contribution of $4,436. One

approach to receive compensation that is not pensionable is to use an

Employee Profit Sharing Plan.

However, some taxpayers chose to have CPP payments to retain

eligibility for CPP disability payments.

EMPLOYEE PROFIT SHARING PLANS (EPSP’s) EPSP’s have become an increasingly popular structure for owner-

managers in recent years. An EPSP is defined as a plan under which an

employer sets aside a portion of its annual profits in trust for employees.

It is not necessary that all employees receive allocations from an EPSP,

or even that they all be beneficiaries. In a small business context, it is

common for only the owner-manager to receive allocations, although

employed family members are often also included, and sometimes key

employees are as well.

The EPSP requires a binding agreement requiring the employer make

payments on the basis of profits earned, with a minimum of 1% of prof-

its. Alternatively, Subsection 144(10) permits an employer to elect

that an arrangement which provides that payments to a Trustee shall be

made “out of profits”, and be an arrangement under which payments

are made by reference to the employer’s profits. This election is com-

monly used to avoid a strict formula for annual contributions, preserving

flexibility.

There is no requirement that the EPSP be registered with the CRA. Mul-

tiple related employers may participate in a single EPSP, permitting a

single plan to be established for a corporate group.

Payments to an EPSP are deductible to the employer if they are made

during the year, or up to 120 days following the end of the employer’s

taxation year. While this allows payment after year end, the timeframe is

shorter than the 179 day period permitted for bonuses to employees.

The EPSP itself is exempt from taxation. However, it must designate all

income, including employer contributions, received in the calendar year to

be payable to employee beneficiaries. The employees are taxable on

this income in the year of allocation. Most allocations are taxed as em-

“the 2011 CPP costs”

“an EPSP for owner-

managed businesses”

“filing this election”

“one plan for the group”

“the impact of this reduced

deferral period”



ployment income, however some types of income, such as capital gains

and dividends, retain their character for purposes of taxes payable by the

employees.

Allocations can be contingent. For example, payment could be contingent

on the employee remaining with the business for at least ten years, creat-

ing a “golden handcuff”. Reversed allocations are deductible to the em-

ployee in the year they cease to be payable to him, and must be reallo-

cated to, and taxed to, other beneficiaries in that year.

Allocations to the employees are required to be reported on T4PS slips

annually, for the calendar year.

So why have these become popular? There are a few advantages:

(a) The CRA has concluded that source deductions are not re-

quired on EPSP payments. As such, there can be a tax deferral

advantage, although this can also leave taxes payable at filing

time, and result in installment requirements.

(b) EPSP allocations are not pensionable earnings for CPP, or in-

surable earnings for EI purposes, so EPSP’s are sometimes

used to “opt out” of these programs.

(c) These are unregistered plans, and can therefore be unrestricted

in their investment choices.

(d) Because income flows out as employment income, participants

still generate RRSP deduction room, and can deduct such ex-

penses as child care and moving expenses which require em-

ployment income to be deducted against.

(e) The EPSP can provide an added layer of confidentiality. They

can be administered separate from the payroll system, and thus

be kept confidential from the payroll staff.

The CRA has challenged some EPSP’s. In particular, they seem inclined to

challenge the use of EPSP’s to “opt out” of the CPP and EI systems. There

have been a few court decisions in this regard.

In the DNS Signs case (2006 TCC 407), the Tax Court held that the EPSP

was not valid. This resulted from the owner admitting in Court that two

of the four beneficiaries (his children) were not employees of the compa-

ny, so the arrangement fell outside the definition of an EPSP, whose bene-

ficiaries must all be employees.

A subsequent case, Greber (2007 TCC 78), concluded that the use of an

EPSP to avoid withholdings, including CPP, withholdings was a “new and

different” use, and may be a loophole, but that it is not for the Court to

close loopholes. The Court also noted that the DNS Signs case stands as

a precedent to deny EPSP’s which do not meet the definition of such

plans, or are otherwise defective in their implementation.

“this possible EPSP use for

key employees’ retention”

“the potential for tax defer-

ral”

“opting out of the CPP sys-

tem”

“enhancing confidentiality

of bonus payments and al-

locations”

“ensuring all EPSP benefici-

aries are employees”

http://www.cra-arc.gc.ca/E/pbg/tf/t4ps/README.html

http://decision.tcc-cci.gc.ca/en/2006/2006tcc407/2006tcc407.html




Both of these cases dealt with EPSP’s which made distributions only to the

owner-manager and related parties.

The J.R. Saint & Associates Insurance Agencies Ltd. case (2010 TCC

168) addressed an EPSP which received, and distributed, both annual

amounts to the owner-manager of the corporation and regular bi-

weekly amounts to unrelated employees. The Tax Court held that the

payments to the owner-manager were not subject to CPP. However,

the substitution of EPSP payments for regular remuneration earned by the

unrelated employees was held by the Court to be a sham, and CPP

and EI contributions were upheld on these amounts. From the case

facts, the employees’ regular bi-weekly remuneration was flowed through

the EPSP, while the owner’s remuneration was only determined and paid

annually.

Taken together, these cases appear to indicate an EPSP can be used to

permit the owner-manager to opt out of the CPP system, but cannot

remove employees from the CPP and EI systems in respect of their regu-

lar remuneration.

Thanks to Hugh Neilson, BComm, FCA, TEP, an independent contractor

to Ernst & Young LLP for this information.

BUSINESS/PROPERTY INCOME

353(3) Consider

UNPAID AMOUNTS Subsection 78(1) notes that where a deductible

expense is owing to a non-arm’s length person

and, at the end of the second following taxation

year remains unpaid, either the amount so unpaid

shall be included in computing the taxpayer’s

income for the third taxation year or, where the

taxpayer and that person file an agreement in prescribed form (Form

T2047) before the due date for the third succeeding taxation year, the

amount so unpaid shall be deemed to have been paid by the taxpayer

and received by the person on the first day of that third taxation year

and that person shall be deemed to have made a loan to the taxpayer on

the first day of that third taxation year.

It is important to make this election to avoid the double taxation

resulting in the disallowed expenditure with the income still remaining in

the recipient’s hands.

See IT109R2 for more information.

“not using EPSP’s to avoid

CPP or EI on routine

wages”

“this unpaid amount elec-

tion”




http://www.cra-arc.gc.ca/E/pub/tp/it109r2/README.html



Subsection 78(3) permits the late filing of the Agreement but, 25% of

the expense will still be disallowed to the payer without any reduction in

the amount included in income by the recipient. Therefore, there is still

some element of double taxation.

Editor’s Comment Subsection 78(4) has special rules for unpaid remuneration in respect

of employment - the 180 day rule.

EMPLOYEE VS. INDEPENDENT CONTRACTOR In a November 16, 2010 Tax Court of Canada case (Trinity Innovations

Inc. vs. M.N.R., 2009-2758(EI), 2009-2759(CPP)), CRA took the

position that the workers for Trinity were employees and, therefore,

Trinity was required to remit CPP and EI on their behalf.

Trinity Wins! The Court found that the workers were independent contractors, not

employees, and noted that:

1. A mutual intention to create an independent contractor

relationship indicates that the individuals were independent

contractors, not employees.

2. The workers were able to set their own hours of work,

although within certain limits, as they were to build units that had

to be ready for delivery at a specific date.

3. The workers were able to work for other clients without

consent of the payer.

4. The payer and the worker each provided some of the tools. The

payer had a truck and trailer that was used to deliver the finished

units to the customers and workers used their own vehicles to

pick up supplies and charged an hourly rate for the use of their

vehicles.

5. The workers carried on their business under a business name,

for example, “Cleaning with Care”, and had their own liability

insurance coverage.

Another Case - This Time Considered to be an Employee In a November 22, 2010 Tax Court of Canada case (Oldham Robinson

Integrated Technologies Inc. vs. M.N.R., 2009-3049(EI), 2009-

3050(CPP)), the issue was whether the workers were employees or

independent contractors.

Taxpayer Loses The Court found that the workers were employees and noted that:

1. The parties did not share a common understanding that the

worker was to be self-employed and not an employee. Where

the intention of the parties cannot be ascertained, it is necessary

“mutual intention is impor-

tant”





to look at all the facts to see the legal relationship.

2. The payer provided all the tools and equipment, except for a

keyboard.

3. The worker had no responsibility for investment in

management.

4. The worker had no expenses and no liability exposing her to a

risk of loss and there was no opportunity for her to increase her

income.

5. The worker received instructions and directions from the

payer on a daily basis.

CLASS 52 - GENERAL-PURPOSE ELECTRONIC DATA PROCESSING EQUIPMENT AND RELATED SYSTEMS SOFTWARE (GPEDPE) In an August 27, 2010 Technical Interpretation (2010-0375011M4,

Fitzgerald, Tim), CRA notes that desktop computers and ancillary

printers that are acquired for general office use by a business can be

included in Class 52 (100% CCA deduction). However, photocopiers

and fax machines are not eligible for inclusion in Class 52, but are

instead included in Class 8.

In a November 23, 2010 Technical Interpretation (2010-0376141E5,

Rafuse, Charles, 1-613-247-9237), CRA noted that a Dell Precision

T3500 Workstation used in an indoor golf simulator is excluded from

Class 52 as it can be regarded as “electronic process control or

monitor equipment” because it is used principally to monitor golf

swings.

In addition, the frame/screen assembly, 19 inch touch screen, video

projectors, high speed cameras, amplifier and microphones, and golf turf,

hitting matt, stance matt and a drapery package are tangible capital

property included in Class 8.

However, the Dell Precision T3500 Workstation used in the optional golf

centre management system would be Class 52 because the exceptions

mentioned above are not applicable.

The software package appeared to be application software falling into

Class 12.

Editor’s Comment GPEDPE must be acquired by January 31, 2011 to qualify as Class

52.

http://www.videotax.com/docs/techinter/353/2010-0375011M4.pdf


http://www.videotax.com/docs/techinter/353/2010-0376141E5.pdf




CAPITAL COST ALLOWANCE (CCA) - NON-ARM’S LENGTH TRANSFERS In an August 26, 2010 Technical Interpretation (2010-0365171M4,

Kim, Sam), CRA notes that where an individual transfers depreciable

assets to his/her corporation, the CCA in the corporation may not be

subject to the half-year rules as the asset was acquired from a non-

arm’s length party which met the 364 day test. See Regulation

1100(2.2) for details and exceptions to the half-year rule.

FOOD AND BEVERAGE EXPENSES OF TRUCK DRIVERS In a French Technical Interpretation (2010-0364751E5F, Allaire,

Lucie), CRA notes that proposed Subsection 67.1(1.1) will permit the

food or beverage expenses incurred by long-haul truck drivers during

an eligible travel period to be deducted at the higher rate (75% for

2010) by either the employer or by the driver for expenses after March

18, 2007.

Under current legislation, only the drivers are permitted to deduct the

expenses at the higher amount. CRA notes that taxpayers may file their

income tax returns under this proposed legislation. However, if a

taxpayer files the tax return under the existing legislation (50% for

employers) and then requests an adjustment under the proposed

legislation, CRA will deny the request.

PARTNERSHIP - BUILDING ADDITIONS In a November 9, 2010 Technical Interpretation (2010-0379751E5,

Cooke, Michael), CRA notes that Regulation 1100(1)(a.2) provides for

an additional 2% CCA (4% + 2% = 6%) in respect of an “eligible non-

residential building” that is included in a separate prescribed class

under Regulation 1101(5)(b.1).

This election must be made by attaching a letter to the taxpayer’s tax

return. If an election is not filed to put the building in a separate class,

the default rate of 4% will apply. There is no provision to allow any

taxpayer to late file such an election.

It is CRA’s view that where a building owned by a Canadian Partnership

meets the conditions described in Regulation 1100(1)(a.2) at the end of

the Partnership’s fiscal period, that Partnership is not prevented from

making an election under Regulation 1101(5)(b.1). CRA will generally

accept an election under Regulation 1101(5)(b.1) to be valid for a

Canadian Partnership where it follows the requirements set out in

Subsection 96(3) of the ITA.

PURCHASE VS. LEASE In an October 28, 2010 French Technical Interpretation (2010-

0376041I7F, Dagenais, Anne), as a result of the Shell Canada vs.

H.M.Q. case (99 DTC 5669(SCC)), CRA’s position is that in the absence of

“no half-year rule here”

“this truck driver food and

beverage expense change”

“this building election”

“the contractual legal rela-

tionship”



http://www.videotax.com/docs/techinter/353/2010-0364751E5F.pdf

http://www.videotax.com/docs/techinter/353/2010-0364751E5F.pdf



http://www.videotax.com/docs/techinter/353/2010-0376041I7F.pdf

http://www.videotax.com/docs/techinter/353/2010-0376041I7F.pdf

http://www.canlii.org/en/ca/scc/doc/1999/1999canlii647/1999canlii647.html



a sham, it will not re-characterize a legal relationship unless the

treatment of a transaction does not properly reflect its legal

consequences or when there is a specific provision in the Act that

requires this.

For example, CRA notes that when a motor vehicle is leased and the

contract provides that title to the motor vehicles will pass to the

corporation automatically upon payment of a certain amount of leasing

charges, the question of whether this is a purchase or a lease is

determined through a review of the nature of the contractual legal

arrangements.

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED) In a November 23, 2010 CRA Release (SR&ED 2010/11/23A - SR&ED

Policy Review Project), CRA noted that over the course of 2011 they will

be asking the public to provide feedback on draft policy documents

related to SR&ED. Once all the policy documents have been finalized,

they will be organized and posted on the SR&ED web pages. It is

expected that this will be completed by December 31, 2011.

For example, documents related to SR&ED filing requirements and

third-party payments, SR&ED salary and wages, shared-use

equipment capital expenditures and lease expenditures, proxy related

matters and overhead expenditures, investment tax credits and joint

financial/scientific topics will be posted throughout 2011.

CAPITAL GAINS AND LOSSES

353(4) Consider

PRINCIPAL RESIDENCE EXEMPTION - LAND EXCEEDING ONE-HALF HECTARE In a September 30, 2010 Tax Court of Canada case

(Cassidy vs. H.M.Q., 2008-630(IT)G), the taxpayer

sold a residence including the land consisting of

2.43 hectares for $1,230,000 with an adjusted cost

base of $231,200. CRA took the position that the

principal residence, as defined in Section 54, only

included 1/2 hectare as the additional land was not necessary to the

use and enjoyment. CRA reassessed on the basis that $1 million of the

proceeds was with respect to the land in excess of 1/2 hectares and did

not deduct any adjusted cost base or cost of disposition. Therefore,

CRA reassessed for a capital gain of $1 million and a taxable capital gain

of $500,000.

“these SR&ED changes”

“The time of disposition”




Taxpayer Loses - Mostly The Court agreed with CRA that the land in excess of 1/2 hectare

should be a capital gain. However, it reduced the $1 million by the

appropriate adjusted cost base and the costs of disposition thereby

reducing the capital gain to $866,000 and the taxable capital gain to

$433,000. The Court noted that:

1. The relevant moment for determining whether the land in

excess of 1/2 hectare was necessary for the use and

enjoyment of the property is at the time of disposition.

2. At the time of disposition, the Appellant could have applied

for the subdivision of the property as a result of a rezoning

amendment to multi-family medium density residential. The

Appellant did not take such a course of action. Therefore, the

minimum lot size at the time of disposition was 850 square

meters and the Appellant was not allowed the principal

residence exemption on the $866,000 capital gain.

3. The portion of the land in excess of 1/2 hectares was not

otherwise necessary for the use and enjoyment of the property

- it was only used in a very limited way for a garden in the

summertime and for snowmobiling in the winter.

4. At the time of acquisition, the minimum lot size was 22

hectares and the Appellant had no choice but to purchase the

entire property of 2.43 hectares if he wished to occupy his home.

PRINCIPAL RESIDENCE - TWO UNITS In a September 23, 2010 Technical Interpretation (2010-0364711E5,

Dagenais, Anne), CRA reviewed a situation where the taxpayer

purchased a home which included a small “parental home” in the

basement with a separate entrance and separate street address.

The small “parental home” was occupied by the son-in-law. Even though

a residence includes a dwelling occupied by either spouse or the children,

in this case, CRA successfully took the position that because there were

two different street numbers that there are two housing units.

Other factors include the existence of separate entrances, separate

heating systems, separate hot water tanks, and a separate tax bill citing

several street addresses. Therefore, CRA argues that this home has two

units of housing and the principal residence designation can only be

made on one of the units.

For additional information see IT120R6: Principal Residence and CRA

Guide T4037, Capital Gains 2010.

PRINCIPAL RESIDENCE - CHANGE IN USE In a February 6, 2008 Technical Interpretation (2008-0265741I7,

Parnanzone, Sandy), CRA reviewed a situation where a taxpayer lived in

“PRE on only one unit”

“a late filed election”





http://www.videotax.com/docs/techinter/353/2008-0265741I7.pdf

http://www.videotax.com/docs/techinter/353/2008-0265741I7.pdf



his principal residence until Year X at which time he moved out, but still

retained the residence. Subsequently, he died and the Executor would

now like to make a late Subsection 45(2) election (it was due when

the change-in-use occurred) such that the former principal residence

will continue to be his principal residence for four years thereby

significantly reducing the capital gain on the terminal return of the

deceased.

CRA noted that certain conditions must apply before they would

consider accepting a late Subsection 45(2) election such as there

being no CCA taken on the property since the change in use. CRA noted

that assuming that the terms in Subsection 220(3.2) and the reference in

IT120R6, Paragraphs 25 to 27, are met, they may consider accepting the

late filed election.

Editor’s Comment Subsection 220(3.5) has a late filing penalty of $100 per month to a

maximum of $8,000.

PRINCIPAL RESIDENCE - PERSONAL TRUST In a December 7, 2010 Technical Interpretation (2010-0384891E5,

Boyle, Andrea), CRA notes that a housing unit may be designated as a

principal residence of a Personal Trust resident in Canada if the

property is ordinarily inhabited by a “specified beneficiary” of the Trust

or by the spouse, or former spouse, or a child of the specified beneficiary.

A “specified beneficiary” is a person who is “beneficially interested”

in the Trust. This includes any person that has a right as a beneficiary

under a Trust to receive income or capital of the Trust, including a person

who has the right to reside rent-free in a housing unit owned by the Trust.

The person beneficially interested also has to ordinarily inhabit the

housing unit or have a spouse or common-law partner, former spouse or

common-law partner, or a child who ordinarily inhabits the housing unit.

Where a Personal Trust designates the property as its principal

residence for a particular taxation year, the property is deemed to be

designated as the principal residence of each specified beneficiary

of the Trust. The specified beneficiary, or a person who was a member of

such a beneficiary’s family unit, cannot designate another property as

his/her principal residence for that year.

Page 28 of the T3 Trust Guide discusses principal residences and

indicates that the Personal Trust only has to file the principal residence

designation Form T1079 with the Trust’s return for the year in which the

disposition, or deemed disposition, of the principal residence occurs.

BUSINESS INVESTMENT LOSSES In a November 3, 2010 Technical Interpretation (2010-0382361E5,

D’Angelo, Sandro, 1-613-952-5803), CRA reviewed a situation where an

“ouch - each specified

beneficiary used the PRE”










individual advanced funds on a non-interest bearing basis to a

corporation which acquired a hotel which was subsequently sold and the

mortgage taken back became uncollectible. Therefore, the company

could not repay the individual on the promissory note.

CRA noted that this may be a “business investment loss” assuming

that the taxpayer establishes that the debt has become a bad debt in

the year and elects in his/her return of income for the year to have

Subsection 50(1) apply.

Also, for the debt to qualify as a “business investment loss”, it must be

from a “small business corporation” at any time in the twelve months

before the disposition. This requires that all, or substantially all, of the

fair market value of the assets were used principally in an active

business carried on primarily in Canada by the corporation or a related

corporation.

CRA also notes that the debt forgiveness rules in Section 80 may

apply to the debtor corporation.

MISSING DOCUMENTATION REGARDING ADJUSTED COST BASE In an October 22, 2010 Technical Interpretation (2010-0380771M4,

Fitzgerald, Tim), CRA notes that where the taxpayer lost all receipts in

connection with her acquisition of gold at various times during the

seventies and could not recall the amount she paid for these purchases,

they will not set the cost at nil since the taxpayer paid the going market

rate for the purchases. CRA will accept a reasonable estimated cost

for the gold.

FARMING/PARTNERSHIP

353(5) Consider

FARMING/GST/HST In a 2010 Tax Court of Canada case (9056-2059 Quebec

Inc. vs. H.M.Q., 2010 CCI 358), the Court reviewed a

situation where a beekeeping business also received

revenues by providing access to its trails by selling a

coupon to clients for $12.50 which entitled the clients to a

small quantity of honey, maple syrup or related products and access to

the trails on the basis that this would be zero-rated because it is of a

farming nature.

“this criteria and the debt

forgiveness rules”

“a reasonable estimated

cost”

“beekeeper gets stung”



http://decision.tcc-cci.gc.ca/fr/2010/2010cci358/2010cci358.html



Taxpayer Loses The Court noted that even though Section 138 of the Excise Tax Act

states that where a service is supplied together with property, and it may

reasonably be regarded that it is incidental to the property or service, it

shall be deemed to form part of the particular property or service so

supplied, in this case, the supply of access to the trails was not

incidental to the beekeeping and, therefore, was a taxable supply for

GST/HST purposes.

TRANSFER OF FARMLAND FROM A PARTNERSHIP TO A CHILD In a November 2, 2010 Technical Interpretation (2010-0383601E5,

Cooke, Michael), CRA noted that the fact that the deed to the land is

registered in the father’s name would not, in and of itself, mean that

the land is not held, by the Partnership for the purposes of the Act.

If the parents have been consistently reporting the income or loss from

their farming activities as a farming Partnership, then the

presumption (rebuttable by appropriate evidence) would be that any

land used by that Partnership would be Partnership property for the

purposes of the Act, especially if deductions for capital cost allowance

on any buildings situated on such land and/or other deductions related

to the ownership of the land (e.g. property taxes) have been made in

computing the net income, or loss, of the Partnership.

Accordingly, if the land to be transferred is property of the

Partnership, CRA agrees that such land cannot be rolled over to the

child under Subsection 73(3).

However, there is a rollover of an “interest in a family farm

partnership” to a child under Subsections 73(4) and (4.1).

CRA also notes that Subsection 69(11) could apply to deny the benefit

of a rollover where there is a subsequent disposition of the property

within three years by the child if one of the main purposes of the

transactions was to transfer a benefit to the child.

CHARITIES

353(6) Consider

LOANBACKS In November 24, 2010 CRA Release (CSP-L07,

Loanbacks), CRA notes that these provisions apply

when a donor makes a gift to a qualified donee

(charity), and within 60 months of making the gift

“this land/partnership

thing”

“no loanbacks”



http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/csp/csp-l07-eng.html

http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/csp/csp-l07-eng.html



either of the following situations occurs:

• The charity holds a non-qualifying security of the donor. In

this case, the fair market value of the gift is reduced by the

amount of consideration given by the charity to acquire the non-

qualifying security.

or

• The donor (or a person or partnership not dealing at arm’s length

with the donor) uses the property of the charity. In this case,

the fair market value of the gift is reduced by the fair market

value of the property being used.

This applies even if the donor is paying rent or giving the charity

consideration for the right to use the property.

DONATION TO A U.S. CHARITY In a November 4, 2010 Technical Interpretation (2010-0380811E5,

Trang, Elsey), CRA notes that a qualified donee includes a charitable

organization outside Canada to which Canada has made a gift in the

year, or in the 12 months immediately preceding that year. A list of such

organizations is available in IC84-3R.

Also, the Canada-U.S. Tax Convention provides relief with respect to

gifts made by Canadian residents to U.S. organizations under

Paragraph 7 of Article XXI. This includes gifts made to an organization

that is resident in the U.S. that is generally exempt from U.S. tax, and

that could qualify in Canada as a registered charity if it were created or

established and resident in Canada. Generally, a Canadian may claim a

deduction for the eligible amount of such gifts up to 75% of its income

from U.S. sources.

TAX COURT OF CANADA – ISSUES FOR ACCOUNTANTS

353(7) Consider

The CRA Appeals Division is often confirming or

slightly varying Notices of Reassessments

thereby leaving a decision for the taxpayer as to

whether they will Appeal the case to the Tax Court

of Canada.

In many assessments, the tax involved is less than $12,000 and,

therefore, the issue could be heard in the Informal Tax Court of

Canada. An agent may assist the taxpayer in the Informal Tax Court of

Canada however, there are many legal and administrative issues

which must be considered.

“a U.S. charity”

“appealing to the Tax

Court”



http://www.cra-arc.gc.ca/E/pub/tp/ic84-3r-attach/README.html



Some recent cases with respect to the payment of costs include Groulx

vs. H.M.Q. (November 26, 2010, Docket: A-391-08); Manship Holdings

Ltd. vs. H.M.Q. (Federal Court of Appeal, November 22, 2010, Docket: A-

109-09); Lougheed vs. H.M.Q. (Tax Court of Canada, November 4, 2010,

Docket: 2006-2031(GST)G); and H.M.Q. and Donato (Federal Court of

Appeal, November 18, 2010, Docket A-47-10).

Appealing to the Tax Court Informal gives a client three options:

• CRA/Department of Justice will “cave” or settle;

• Taxpayer will “cave” or settle;

• Taxpayer will get to tell his/her story to an independent person - the

judge.

For information on the Tax Court of Canada Costs see the following:

COSTS GENERALLY Parties to any Court proceeding incur expenses prosecuting or

defending a legal dispute: these include filing fees, travel ex-

penses, lawyer fees, witness expenses, etc.

When rending judgment, a Court may require that one party

pay all (or part) of the other party’s expenses. These are referred

to generically as “costs”.

They exists for two reasons. First, to take some of the financial

burden off the successful party and second, to deter meritless

claims or appeals.

Generally, costs are divided into two categories:

o firstly, legal fees incurred prosecuting the appeal, called

“Fees”; and

o secondly, disbursements, which are the out-of-pocket

expenses incurred by the litigant.

The provisions relating to costs in tax matters are generally set

out in the Tax Court of Canada Act, General Procedure Rules, In-

formal Procedure Rules and Informal Procedure Rules (GST).

The law of costs is vast and complicated.

COSTS UNDER THE INFORMAL PROCEDURE Cost under the Informal Procedure are found in Section 11 of

the Informal Procedure Rules.

Very generally speaking, costs are awarded to the successful

party of an appeal. So if you win - you get the costs. If the CRA

wins - they get the costs.

As a benefit to Taxpayers in Informal Procedure hearings, costs

may only be awarded against the Taxpayer if the Taxpayer, “un-

duly delayed the prompt and effective resolution of the appeal.”

This makes the Informal Procedure a more friendly and less cost

conscious environment for self-represented parties.

Generally, a Taxpayer will be awarded costs for the services of a

lawyer as set out in Section 11, which is very limited in amount.

For example, Section 11 provides for the following costs:

“these cost issues”

http://www.canlii.org/en/ca/fca/doc/2010/2010fca321/2010fca321.html








(a) for the preparation of a notice of appeal or for advice

relating to the appeal, $185;

(b) for preparing for a hearing, $250;

(c) for the conduct of a hearing, $375 for each half day

or part of a half day; and

(d) for the taxation of costs, $60.

Costs are NOT intended to pay all your lawyer’s fees; just a por-

tion considered reasonable by the Court.

If you rely upon a representative who is not a lawyer, the costs

are limited to ½ of those amounts set out in Section 11.

Costs under the Informal Procedure are very limited.

COSTS IN THE GENERAL PROCEDURE The Court has a must broader discretion under the General Pro-

cedure.

As stated in Section 147 of the General Procedure Rules, costs

are solely within the discretion of the Court.

As stated in Subsection 147(3), the Court should consider a

number of factors when awarding costs including: the result,

amounts in issue, importance of issues, volume of work, conduct

of party, etc.

A schedule of costs is provided under Schedule II of the General

Procedure Rules, where proceedings are divided into 3 classes.

o Class A - for tax assessed less than $50,000 (or a de-

termination of loss less than $100,000);

o Class C - for tax assessed between $50,000 and

$150,000 (or a determination of loss between $100,000

and $300,000);

o Class C- for tax assessed over $150,000 (or a determi-

nation of loss greater than $300,000).

Under Schedule II, the successful party, will typically be

awarded a lump sum amount for each material step taken in the

proceeding.

There is a chart at the end of the General Procedure Rules which

you can refer to in order to estimate the costs you may recover if

successful with your Tax Court Appeal.

However, keep in mind that the Court does not need to follow

Schedule II. The Court has a wide discretion with respect to

costs.

The Court can even award, in exceptional circumstances, costs

on the “full indemnity” basis.

Although rarely granted, it does show that the Court has a wide

discretion as to costs in General Procedure appeals.

SETTLEMENT PROPOSALS As a final note, parties should consider that pre-trial settlement

offers are often persuasive to the Court when awarding costs

under the General Procedure (and even the Informal Procedure,

to a lesser extent).



If a taxpayer has made a very reasonable settlement propos-

al, which was not accepted by the Minister, the Court may con-

sider this when awarding costs - and as a result, award a greater

amount.

However, be certain to never mention a settlement proposal

during the course of an appeal hearing. A settlement proposal can

only be referred to after the judge has made his/her decision,

and the parties are speaking specifically to the issue of costs.

Referring to a settlement proposal during the course of a hearing will

result in a mis-trial and a very angry judge.

Thanks to Chad J. Brown of Felesky Flynn LLP for this information.

CRA

353(8) Consider

Taxpayers should be careful to avoid CRA net worth

and arbitrary assessments by keeping proper

records and filing on time. See RC4409 (Keeping

Records), IC05-1R1 (Electronic Recordkeeping), and

IC78-10R5 (Books and Records

Retention/Destruction).

Some points to consider include:

1. A net worth assessment is often preceded by CRA requesting

personal banking records, credit card statements, details of

personal living expenses, personal habits such as gambling,

personal debts, large gifts, etc. This is followed up by an

assessment for unreported income based on assumptions

made by CRA with respect to the bank deposits and expenditures

and estimated personal expenses. Also, a 50% penalty

(Subsection 163(2)) is usually applied along with non-

deductible interest.

2. A typical target for net worth assessments is a person who has

a cash business (such as a retail store or restaurant), has poor

accounting records, has an apparent net worth which is not

represented by reported income, or is the subject of leads such as

from disgruntled employees or estranged spouses. CRA attempts

to determine the increase in the net worth to which personal

living expenses are added.

3. A net worth assessment is challenged by the taxpayer by

finding CRA calculation and assumption errors. The balance

may become negotiable and the penalties are, occasionally,

“these net worth/arbitrary

assessment issues”

http://www.cra-arc.gc.ca/E/pub/tg/rc4409/README.html





waived by CRA.

For example, CRA may agree to waive the penalties if the

taxpayer signs a waiver with respect to appealing to the Tax

Court. In one Court case, the taxpayer signed the waiver and

then attempted to renege on it and the Court concluded that the

waiver was valid. See Point 11.

4. Taxpayers should be cautioned that even if a Notice of Objection

has been filed with respect to the net worth/arbitrary assessment,

CRA Collections may still call even though the taxpayer

generally does not have to deal with Collections until after the

case is settled.

5. Cash businesses with insufficient records may be faced with an

audit where CRA uses bank deposits (both personal and

business) as the basis for the business revenues. Therefore,

taxpayers should keep deposit records as the onus of proof is

on the taxpayer to prove that the deposit is of a personal

nature.

6. Taxpayers should keep proper records with respect to motor

vehicles as outlined in IT521 and the above-mentioned Releases.

7. Taxpayers that have received net worth/arbitrary

assessments should consider filing a timely Notice of

Objection to keep their objection rights open.

8. Corporations that have not filed a return within three years

should be aware that any tax that they pay to CRA on an

arbitrary assessment may be kept by CRA even if the taxpayer

files a Notice of Objection and files a return proving the

assessment wrong. This is because of Subsection 164(1)

permits CRA to not credit or refund these amounts to a taxpayer.

Individuals have similar statutory problems however, they may

make an application for a refund under the Taxpayer Relief

provisions. (Subsection 164(1.5)) These do not apply to

corporate taxpayers.

Often net worth/arbitrary assessments have inflated assessed

incomes which the taxpayer must prove wrong. CRA make

assumptions in completing net worth/arbitrary assessments

which a taxpayer must attempt to disprove with respect to their

fact situation.

9. Taxpayers may lose GST/HST Input Tax Credits if they do not

have the proper receipts to support the GST/HST paid.

10. Often a net worth assessment is combined with a visit to the

home to determine lifestyle and personal expenditures.

http://www.cra-arc.gc.ca/E/pub/tp/it521r/README.html



11. In a French May 5, 2010 Tax Court of Canada case (Taylor vs.

H.M.Q., 20,091,297(IT)G), the taxpayer was challenging a

Settlement Agreement that he made with CRA not to Appeal

the case to the Tax Court of Canada on the basis that the

penalties were to be cancelled. (Subsections 165(1.2) and

169(2.2) of the ITA and Subsections 301(1.6) and 306.1(2) of the

ETA) For example, Subsection 169(2.2) notes that no Appeal can

be made to the Tax Court by a taxpayer where the taxpayer has

waived in writing his right to Appeal.

Taxpayer Loses The Court found that the Settlement Agreement was valid.

The concept of unfair contracts did not apply here as it would

have required the taxpayer to prove that CRA had dominated him

in the negotiations due to his ignorance of it or destitution or

helplessness, and the transaction is clearly favourable to the

government. None of these elements was present in this case.

12. In a December 6, 2010 Tax Court of Canada case (Medvedev vs.

H.M.Q., 2007-4705(IT)G), CRA used the deposit method to

assess unreported income in the amount of $81,570, $87,533

and $168,403 for the years 2001, 2002 and 2003 as well as

assessing gross negligence penalties under Subsection 163(2)

of the ITA. The Appeals for the 2002 and 2003 taxation years

were allowed on the basis that the funds were either reported in

the company’s business operations or were loans received from

his father-in-law.

13. In a November 26, 2010 Tax Court of Canada case (Swarbrick

vs. H.M.Q., 2009-2837(IT)I), the CRA’s assessment beyond the

normal reassessment period was disallowed by the Court on

the basis that the taxpayer satisfactorily explained the apparent

discrepancy between the reported income and the net worth

assessment of $32,000. Also, the gross negligence penalties

were waived.

14. In a November 29, 2010 Tax Court of Canada case (Zaki vs.

H.M.Q., 2010-763(IT)I), the taxpayer successfully challenged

the net worth assessment on the basis that CRA overstated the

gross revenue by failing to account for assets owned by the

individual in the base year used to calculate the taxpayer’s net

worth. Also, the Court waived the Subsection 163(2) penalties.

The Court noted that, “I believe the mindset of an auditor is

closer to that of a police officer... than to that of an ordinary

business person or public servant. It is not unreasonable to

believe that the auditor’s notes may be coloured by the

investigatory mindset imposed by the audit function and that

an adversarial relationship exists between the CRA and the

taxpayer. The purpose of the auditor’s notes is to document

http://www.canlii.org/en/ca/tcc/doc/2010/2010tcc246/2010tcc246.html

http://www.canlii.org/en/ca/tcc/doc/2010/2010tcc246/2010tcc246.html






his/her grounds for reassessment.”

Therefore, the Court did not place much weight on the CRA

auditor’s testimony with respect to the grounds invoked in

support of the imposition of penalties.

15. In a May 13, 2010 Tax Court of Canada case (Pelletier vs.

H.M.Q., 2007-4765(IT)G), the issue was whether CRA correctly

added $28,438, $15,268 and $6,520 to the 2000, 2001 and

2002 taxations years and whether CRA could assess statute-

barred years and apply the Subsection 163(2) penalty.

Taxpayer Loses The Court noted that the taxpayer was an experienced

businessman who was aware that it is important to keep

adequate accounts and that he had to report all of his income.

CRA was warranted in issuing assessments outside the normal

reassessment period and for the imposition of penalties.

16. In a November 17, 2010 Tax Court of Canada case (Hamilton vs.

H.M.Q., 2009-2304(IT)I), a self-employed business operator was

subject to a net worth assessment with respect to HST and

Income Tax.

The Court disallowed the HST Input Tax Credits in respect of

supplies where the taxpayer could not meet the statutory

requirements for information in respect of the supplier,

including the GST/HST Registration Number. The HST

penalties assessed on the unreported income continued to

apply. However, the penalties were waived with respect to the

disallowed Input Tax Credits on supplies that were documented

with invoices confirming payment but did not include the

supplier’s GST/HST Registration Number.

Also, the Court did not change the income tax assessment on

the basis that the taxpayer did not provide credible evidence

to challenge the CRA cash flows and changing net worth.

CRA AUTHORIZED REPRESENTATIVE Form RC59 is used to authorize a representative and/or cancel a

previous representative for Business Number accounts. For

individual tax and benefit accounts, you have to complete Form

T1013. RC59 and T1013 include Part 4 and 5 respectively which cancels

previous representatives. It is important when a taxpayer has a new

authorized representative that the RC59 and T1013 Forms are

properly completed to cancel all previous authorized representatives so

that CRA will not send information to a previous, rather than the current,

authorized representative.

“cancelling previous repre-

sentatives”











TAXPAYER RELIEF In a February 12, 2010 Federal Court of Appeal case (Tomaszewsky vs.

H.M.Q., Docket: T-831-09), the Court accepted the taxpayer’s

application for judicial review with respect to the request for relief of

interest charges on the basis of health reasons.

In this case, the taxpayer had made a first-level relief request based

on medical reasons and a second-level request on financial

reasons, both of which were not accepted by CRA. The Federal Court

accepted the medical reasons as a basis for reconsideration and

redetermination by CRA.

Editor’s Comment Taxpayers that are faced with penalties and interest in circumstances

where a “due diligence defence” is available should, firstly, file a

Notice of Objection; and, secondly, make a Taxpayer Relief

Application.

The problem of just making a Taxpayer Relief Application is that this

is discretionary on the CRA and, a decision not to reduce or waive

interest or penalties is very difficult to overturn.

NOTICE OF OBJECTION In a November 9, 2010 CRA Statement, CRA announced that they

accept the Ombudsman’s recommendation concerning the

requirement for CRA to provide written reasons for decisions with

respect to Notices of Objection decisions as mentioned in the

Ombudsman’s August 2010 Report, “The Right to Know”.

The Ombudsman noted a discrepancy between CRA’s policy and their

practice and concluded that CRA’s refusal to provide written reasons

with respect to confirming or varying Notices of Reassessments in the

Appeals Division was inconsistent with a taxpayer’s right to complete

and timely information and right to expect CRA to be accountable,

contrary to Articles 6 and 11 of the Taxpayer Bill of Rights. In addition,

CRA’s requiring taxpayers to obtain this information through an Access

to Information Request is inconsistent with the taxpayer’s right to

complete and timely information under Article 6 of the Taxpayer Bill of

Rights.

The Ombudsman recommended that once CRA Appeals Division has

reviewed a taxpayer’s Objection and made a decision, it should

provide the taxpayer with written reasons for that decision. Those

reasons should include a description of the decision, the authority

under which it was made, and the factual basis for the decision. The

Ombudsman recommended that this either be included in the body of the

decision letter or in a report in the CPT110 CRA Report which should be

enclosed with the decision letter.

“these Taxpayer Relief is-

sues”

“CRA should provide writ-

ten reasons”

“this Bill of Rights issue”

http://www.canlii.org/en/ca/fct/doc/2010/2010fc145/2010fc145.html




Editor’s Comment Presumably Article 6 of the Taxpayer Bill of Rights could also be used

in many other cases where CRA advises taxpayers to obtain information

through the Access to Information Act, rather than simply providing it.

CORPORATE TAX

353(9) Consider

CAPITAL DIVIDEND ACCOUNT (CDA) When a corporation disposes of an Eligible

Capital Property, the non-taxable portion

increases the CDA. This CDA increase occurs

on the first day of the next fiscal period.

However, if an eligible election is made under

Subsection 14(1.01) to be a disposition of a

capital property, this capital property election only affects the CDA

election under Subsection 83(2) once the Subsection 14(1.01) election is

filed.

Therefore, to avoid the excessive CDA assessment in the year of the

disposition, the Subsection 14(1.01) election could be made together

with the CDA election and, not in the subsequent year when the tax

return is filed.

Editor’s Comment Subsection 14(1.03) notes that Subsection 14(1.01) does not apply to

property that is goodwill or to property that was acquired by the

taxpayer in circumstances where an election was made under Subsection

85(1) or (2) and was acquired from a person with whom the taxpayer did

not deal at arm’s length.

GRIP/ELIGIBLE DIVIDENDS The calculation of the General Rate Income Pool (GRIP) for Eligible

Dividend purposes has, at best, been confusing under many fact

situations, especially with respect to the carryover period to 2005 and in

the first year, 2006.

In some cases, CRA, taxpayer and/or software calculations are incorrect.

Because of the application of penalties on excessive Eligible

Dividends, caution should be exercised in this area.

It is usually prudent to compare your GRIP calculations with CRA’s

before paying an Eligible Dividend.

“this Eligible Capital Prop-

erty/CDA election issue”

“GRIP calculation issues”



ESTATE PLANNING

353(10) Consider

EXCESS RRSP CONTRIBUTIONS In a July 22, 2010 Federal Court decision (Gagne vs. Attorney General

of Canada, Docket: T-1685-09), the taxpayer applied for relief from the

1% per month penalty for making excess contributions to an RRSP

under Subsection 204.1(4) which permits CRA to provide relief under

certain circumstances.

Taxpayer Loses CRA’s refusal to grant relief was not overturned by

the Court which noted that Subsection 204.1(4) imposes

a twofold test that the excess is based on a

reasonable error and that reasonable steps are taken

to eliminate the excess.

In this case, the Court noted that it was not the result of a “reasonable

error” because the Applicant made this error repeatedly for seven

consecutive years and it was only when his income fell in 2003 that he

stopped making excess contributions to his RRSP.

ESTATE LAWSUIT SETTLEMENT In an August 27, 2010 External Technical Interpretation (2010-

0377131E5, Posadovsky, Tom, 1-613-952-8283), CRA reviewed a

situation where the Estate received a settlement as compensation for

the loss in share price after there was a delay in selling the shares

caused by the Estate’s financial advisor. CRA notes that this would be a

capital gain to the Estate as it is considered “compensation for

property injuriously affected” under Section 54 of the definition

“proceeds of disposition”. (Also, see Income Tax Technical News No. 39,

Settlement of a Shareholder Class Action Suit)

TRUSTS - PAYABLE TO A BENEFICIARY In a June 8, 2010 Technical Interpretation (2010-0363071C6, Skulski,

Katharine, 1-613-957-8976), CRA notes that for the income of a

Discretionary Trust to become payable in a taxation year to the

beneficiaries of the Trust, the Trustees are required to irrevocably

exercise their discretion before the end of the Trust’s taxation year

with no conditions attached to the beneficiaries’ entitlement to enforce

payment of the amount in the year. The apportionment of the Trust’s

income to each beneficiary (e.g., all the income, a fixed percentage of the

income, or a set amount) must also be established.

CRA also notes that the beneficiaries must be advised before the end of

the Trust’s taxation year of the Trustees’ decision, including the

“sorry - no relief here”

“this compensation is a

capital gain”

“these Trust income pay-

able issues”





http://www.cra-arc.gc.ca/E/pub/tp/itnews-39/README.html

http://www.videotax.com/docs/techinter/353/2010-0363071C6.pdf




apportionment of the Trust’s income, even if the actual amount is not

known. In CRA’s opinion, this should be in writing (e.g., a Resolution

signed by the Trustees, Minutes of the Trustees’ Meeting) otherwise the

Trustees and the beneficiaries would have to provide CRA with other

satisfactory evidence to support their claim that amounts became

payable to the beneficiaries in the year.

With respect to issuing a promissory note to the beneficiary, as

acknowledgement of and/or the conditional payment of a debt, the note

may be non-interest bearing but, if so, it must be payable on

demand without restriction.

Where it is not possible to determine the actual amount that is payable to

a beneficiary until after the end of the Trust’s taxation year, the

promissory note should be delivered to the beneficiary as soon as the

amount is quantified.

Editor’s Comment We understand that CRA has a special project to audit Intervivos

Trusts. In some instances, CRA is concerned that the Trusts have paid

the beneficiaries with promissory notes that may be unenforceable

and the Trustees have taken cash out of the Trust for their own use. The

unenforceability may arise, for example, if the debt has not been

acknowledged within two years. Legal advice is needed.

TRUSTS - QUARTERLY INSTALMENTS Trusts are taxed as individuals and, therefore, may be required to

make instalment payments if the conditions in Section 156 of the ITA are

met. However, notwithstanding this, CRA notes that under current

administrative policy, the CRA does not assess instalment interest

and penalties where an Intervivos Trust does not make instalment

payments required under Section 156. Also, a Testamentary Trust is

allowed to pay its tax payable for the year within 90 days from the end

of the taxation year by virtue of Paragraph 104(23)(e) as opposed to

making instalments.

This was discussed in a September 20, 2010 Technical Interpretation

(2010-0363181C6, Bernards, Sebastien, 1-613-957-2139).

INTERNATIONAL

353(11) Consider

TAXATION OF ROTH IRAs In a September 24, 2010 Income Tax Technical News (ITTN No. 43,

September 24, 2010), CRA discusses the Canadian taxation of a ROTH

“no quarterly instalment

here”

“this info on ROTH IRAs”


http://www.cra-arc.gc.ca/E/pub/tp/itnews-43/README.html



IRA. A ROTH IRA is an Individual Retirement Plan in the United States

whereby contributions for U.S. purposes are not deductible from income

and withdrawals are generally not included in income.

U.S. ESTATE TAX Late Release

On December 17, 2010 the U.S. House of

Representatives passed “The Tax Relief, Unemployment

Insurance Reauthorization and Job Creation Act of 2010”

which had many changes including, U.S. Estate Tax

changes for 2010, 2011 and 2012 as follows:

Even though the U.S. Estate Tax has been retroactively applied

to 2010 deaths, 2010 deaths can elect to use a “carryover

basis” rather than the Estate Tax rules.

The top estate tax rate for 2010, 2011 and 2012 deaths is

35% with an exemption amount of $5 million per person ($10

million per couple). The $5 million is prorated for Canadians

who are not U.S. citizens, based on the fraction of U.S. situs

assets divided by their worldwide estate.

Therefore, Canadians with a worldwide estate of less that $5

million may get a full exemption from U.S. Estate Tax.

These new changes expire after 2012 at which time the

exemption would drop to $1 million and the top tax rate

would be 55%, unless other changes are made.

These changes provide some U.S. Estate Tax relief for 2011

and 2012 while applying a tax to deaths in 2010 which would

otherwise have been exempt.

Information on reducing the U.S. Estate Tax, and various ownership

structures, is generally available at the Canadian Tax Foundation

through many articles which have been published including an article at

the 2010 Ontario Tax Conference by Carol Fitzsimmons of Hodgson Russ

LLP and Marina Panourgias of Deloitte LLP.

Editor’s Comment Specialized U.S. tax advice should be considered for larger Estates

which have U.S. situs assets.

RESIDENCE OF TRUST In a November 17, 2010 Federal Court of Appeal case (St. Michael

Trust Corp. et al (Garron) vs. H.M.Q., 2010 FCA 309), the Federal Court

agreed with the Tax Court that the Trust was resident in Canada and

noted that these two Barbadian Trusts, each of which had Trustees

resident in Barbados, were actually resident in Canada on the basis

that central management and control of the Trusts was exercised in

Canada.

“these U.S. Estate Tax

changes”

“central management and

control”

http://decisions.fca-caf.gc.ca/en/2010/2010fca309/2010fca309.html

http://decisions.fca-caf.gc.ca/en/2010/2010fca309/2010fca309.html



PREPARER TAX IDENTIFICATION NUMBER (PTIN) Please see Appendix B for an excerpt of the most recent version of the

IRS’ FAQ publication regarding the PTIN application process.

GST/HST

353(12) Consider

RESIDENTIAL RENTAL REBATE UNDER SECTION 256.2 In a November 12, 2010 Tax Court of Canada case (Liao vs. H.M.Q.,

2010-1861(GST)I), the taxpayer stated that they mailed the application

for the rebate on May 4, 2009, within the two-year limit from June 29,

2007. However, CRA informed the taxpayer that they did not have the

application and, therefore, the taxpayer sent in another one on August 8,

2009 which CRA rejected on the basis that it was not filed within the

two-year limit.

Taxpayer Wins! The taxpayer noted that Subsection 334(1) of the Excise

Tax Act states that anything sent by First Class Mail or its

equivalent shall be deemed to have been received by

the person to whom it was sent on the day it was mailed.

The Court accepted that the taxpayer sent the application by ordinary

mail on May 4, 2009. This is what used to be known as First Class Mail

and is now known as Letter Mail but is allowed under the First Class Mail

regulations.

The Court noted that it was just as likely that the letter was lost by

CRA as was the CRA comment that there may have been insufficient

postage and, therefore, was not received by CRA.

PLACE OF SUPPLY RULES In a June 3, 2010 52-page Release (Technical Information Bulletin B-

103), CRA provides information on the Place of Supply Rules for

purposes of GST/HST for determining whether a supply is made in a

province. In general, the place of supply is the address of the

recipient of the service or, where the good is delivered.

It is important to note that provinces which still have a Provincial Sales

Tax, such as Saskatchewan, Manitoba and Prince Edward Island have

different Place of Supply Rules. It is possible that, for example, a supply

rendered in Manitoba for a person in Ontario may be subject to both

Manitoba Provincial Sales Tax and the Ontario 13% HST.

“This PTIN information”

“this mailing issue”

“this place of supply issue”



http://www.cra-arc.gc.ca/E/pub/gm/b-103/README.html

http://www.cra-arc.gc.ca/E/pub/gm/b-103/README.html



WEB TIPS

353(13) Consider

ORGANIZING EVENTS Cozi.com –

This website is excellent for coordinating family life

and schedules. It consists of tools that let you

compile online task lists and calendars. This way

all of your childrens’ sporting events and special

occasions can be put in one place and anybody to

whom the administrator has allowed access will

be able to view it from any internet enabled location.

This is also available as an iphone application for a nominal fee.

Facebook.com – tip for using the “events” function more

effectively

When an event is set up on Facebook it is frequently missed by the

invitees as it is lost in a pile of random other invitations. To make yours

stand out and be noticed, make sure to send a message to “all

guests” via the event as soon as you post the event. (Note that you

have the option to send this email to different categories of guests

including those that have confirmed and those that have not yet

answered.) This way the potential guests will not only be alerted via an

“event invitation”, but also by an email.

TRAVEL TIPS In the cold days of winter, you may find yourself

pondering warmer destinations. To facilitate the

planning consider the following:

Thebesttimetovisit.com

This website allows the user to simply enter the time of year that

they would like to travel and whether there are any weather

specifications that they are looking for. The website then provides a

listing of the top locations to travel to!

International Cell Phones

Not everybody’s cell phone has the ability to be used globally. Therefore,

consider renting a global phone for your next trip. One example is

cellularabroad.com. This website allows you to rent a phone for a

period of time and then return it at the end of the trip. Upon

ordering the phone it is couriered to you. Charge rates and rental

costs are all posted online. Alternatively, consider putting your

iphone or Blackberry in “airplane mode” and then using Skype or

another similar service to call from Internet enabled areas. Note that

“airplane mode” allows you to use most functions of the phone without

“these web tips”

“to suggest a web tip of

your own, please send it to

[email protected]”

http://www.cozi.com/

http://www.facebook.com/

http://www.thebesttimetovisit.com/weather/

http://www.cellularabroad.com/



connecting to the cellular service network. This can both save your

battery and relieve roaming charges and additional costs relating

to receiving messages from abroad.

DID YOU KNOW…

353(14) Consider

BRITISH COLUMBIA In a November 17, 2010 News Release, British

Columbia suspended a planned 15% reduction in

the personal income tax rates for the first $72,293 of

income. This was to have taken effect on January 1,

2011.

ALBERTA - CORPORATE INCOME TAX REFUND INTEREST Effective February 10, 2010, the quarterly rates at which Corporate

Income Tax Refund interest is calculated will be reduced to 50% of the

rates previously in effect. Quarterly rates will be set at 50% of the 90-

day federal Treasury Bill rate.

ALBERTA - CHARITABLE TAX CREDIT In a December 10, 2010 Release, the Alberta Government notes that by

combining the provincial tax credit of 21% with the federal tax

credit of 29%, Albertans receive a 50% non-refundable tax credit

for every dollar donated over the $200 annual threshold.

PERSONAL TAX UPDATE COURSES See www.videotax.com for information on Personal Tax Update

Courses and videos.

“this B.C. change”

“this Alberta change”

“this 50% Alberta tax

credit”

“these courses/videos”




VIDEO NEWS INC. ©January 2011

Box 82036 GMO#2

Edmonton, Alberta T6J 7E6

Toll Free Phone: (877) 438-2057

Toll Free Fax: (877) 437-4455

Email: [email protected]

Website: www.videotax.com

Thomas B. Devaney, CA Tom is Director of Video News Inc. and

prepares monthly tax update videotapes for accountants, lawyers and

other professionals. Tom has lectured on many occasions for the

Canadian Institute of Chartered Accountants tax seminar program as

well as the Universities of Alberta, Calgary and McGill. In addition, Tom

consults with accountants and lawyers on income tax matters.

The preceding information is for educational purposes only. As it is impossible to include all

situations, circumstances and exceptions in a seminar such as this, a further review should be done

by a qualified professional.

Although every reasonable effort has been made to ensure the accuracy of the information

contained in this seminar, no individual or organization involved in either the preparation or

distribution of this letter accepts any contractual, tortious, or any other form of liability for its

contents or for any consequences arising from its use.

mailto:[email protected]




APPENDIX A

2011 INDEXATION ADJUSTMENT FOR PERSONAL INCOME TAX

AND BENEFITS AMOUNTS



APPENDIX A (Continued)



APPENDIX A (Continued)



APPENDIX B

http://www.irs.gov/taxpros/article/0,,id=218611,00.html

http://www.irs.gov/taxpros/article/0,,id=218611,00.html

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