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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…
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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,
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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.
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 4
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.
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Page 5 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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.
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 6
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”
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Page 7 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 8
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”
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Page 9 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 10
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.
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Page 11 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 12
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”
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Page 13 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 14
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”
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Page 15 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 16
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”
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Page 17 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 18
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”
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Page 19 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
(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).
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 20
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”
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Page 21 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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.
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 22
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
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Page 23 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 24
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”
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Page 25 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 26
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”
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Page 27 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 28
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”
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Page 29 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 30
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
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Page 31 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
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”
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 32
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.
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Page 33 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
APPENDIX A
2011 INDEXATION ADJUSTMENT FOR PERSONAL INCOME TAX
AND BENEFITS AMOUNTS
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 34
APPENDIX A (Continued)
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Page 35 MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011
APPENDIX A (Continued)
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MONTHLY TAX UPDATE SEMINAR NO. 353 – JANUARY 2011 PAGE 36
APPENDIX B
http://www.irs.gov/taxpros/article/0,,id=218611,00.html