53(3)

HOME OFFICE AND TRAVEL EXPENSES

In a Technical Interpretation, CCRA notes that where 40% of the employment duties are carried out in the home office, the taxpayer would not be entitled to deduct home office expenses because the Income Tax Act requires the individual to principally (generally considered to be 50%) perform the duties of employment from the home office.

However, where more than 50% of the duties are performed in the home, the taxpayer may be eligible for home office expenses if there is a contract of employment requiring the taxpayer to provide the home office although, this may be satisfied even without a written contract where it is tacitly understood by the employer and the employee that the home office is required to fulfil the duties of employment.

However, where the employee is required to regularly and habitually attend staff or other meetings at a main office, travel between those locations may be viewed as personal in nature.  The regularity of the reporting and the nature of the duties carried on at this location are more important than the fact that an employee may only report to the work location once or twice a month.

PAYROLL DEDUCTIONS

On October 23, 2000, CCRA introduced RC4163 (Employers’ Guide to Remitting Payroll Deductions in 2001) which notes that:

1.     Regular remitters must pay payroll deductions by the fifteenth day of the month following the deductions.  Also, if the remittance was due on, say, January 15, 2001, they will be considered late if they are paid with the T4 Return after January 15.  Late penalties will be subject to a 10% or 20% penalty depending on whether it is a first, or subsequent failure.

        However, small employers have the option of remitting source deductions quarterly if they have an average annual monthly withholding amount of less than $1,000 in either the first or second preceding calendar year and, have a perfect compliance history in the previous twelve months and, have no outstanding GST/HST Returns or T4 Information Returns.

2.     If the employer has an average monthly withholding amount of CPP, EI and tax of $15,000 to $49,999 in the second preceding calendar year, the amounts deducted in the first 15 days are due by the 25th of the month and the amounts withheld from the 16th to the end of the month are due by the 10th of the following month.

3.     If the average monthly withholding amounts are $50,000 or more in the second preceding calendar year, the amounts must be remitted by the 3rd working day after the end of the following periods, from the first to the seventh, from the eighth to the fourteenth, from the fifteenth to the twenty-first, and from the twenty-second to the last day of the month.

        All remittances of associated corporations are considered in applying these thresholds.

Court Case

In an October 24, 2000 Tax Court of Canada case, the August and December, 1998 payroll remittances were each late by 6 days and 4 days respectively.  CCRA applied the penalties to the late remittance for December, 1998.

MOTOR VEHICLE ALLOWANCE

In a District Office Memo, CCRA notes that where an employee’s expenses exceed the travel allowance received from the employer, CCRA will permit the employee to include the allowance in income and deduct the expenses.

PRIVATE HEALTH SERVICES PLAN (PHSP)

In a Technical Interpretation, CCRA note that where a PHSP makes a payment that is not an eligible medical expense, the entire plan will be disqualified.  For example, premiums paid under the B.C. Medical Services Plan are not qualified medical expenses.  Therefore, if paid by a PHSP, this disqualifies the plan.

53(4)

PRIVATE HEALTH SERVICES PLAN (PHSP)

In a Committee Report, CCRA notes that proprietors may deduct certain PHSP premiums in calculating business income.  However, an arrangement under which a sole proprietor (who has no employees) pays an administrator a fee to be reimbursed for the medical expenses is not considered to be a “plan of insurance” and is, therefore, not an eligible PHSP.

It was also noted that if the Plan provides coverage for other employees, this may constitute a “plan of insurance”.

INCORPORATION - A PROBLEM

In a District Office Memo, CCRA note that where mutual fund and insurance sales people are earning commission income in their own name due to provincial legislation and, subsequently assign the income to a non-arm’s length corporation, the amounts should also be included in income by the individual resulting in double taxation.

CONTRACTOR REPORTING

All individuals, partnerships and corporations whose primary business activity is construction must report payments made to subcontractors whose primary business is construction.  This may be provided on a T5018 Information Return or, in an internally generated format, as long as the amount paid, the name of the recipient, and the social insurance number or business number are included.

53(5)

On October 18, 2000 Finance Minister Martin introduced a Mini-Budget including:

1.     Personal Tax Rates

        Effective January 1, 2001 the lowest and middle tax brackets will drop from 17% and 24% to 16% and 22% and, taxable income between $61,509 and $100,000 will drop from 29% to 26%.  The top rate of 29% will continue to apply to taxable incomes exceeding $100,000.

2.     Surtax

        Effective January 1, 2001 the 5% surtax will be eliminated.

3.     Canada Child Tax Benefit (CCTB)

        The National Child Benefit will be increased by $300 per child and the family income threshold increases to $32,000 in 2001.

4.     Mental and Physical Impairment

        This tax credit will increase to $960 from $730 in 2001.

5.     Caregivers

        This tax credit will increase from $406 to $560 in 2001.

6.     Education Tax Credit

        The monthly tax credit for full-time students will increase from $34 to $64 and, for part-time students, from $10 to $19 in 2001.

7.     Capital Gains

        The inclusion rate will drop from 75% to 66 2/3% from February 28 to October 17, 2000 and to 50% after October 17.  The tax rate on capital gains is now significantly lower than on dividends.

        These rates will also apply to stock options, eligible capital property and allowable business investment losses.

        Net capital losses carried forward or back will be based on the inclusion rate of the year to which they are applied.

        Also, mutual funds and segregated funds will have the option to treat their capital gains and losses as though they were earned evenly throughout the 2000 taxation year.

        In addition, the capital gains inclusion rate on donations of publicly traded securities and ecologically sensitive property will continue to be based on one-half the relevant inclusion rate.

8.     Small Business Investment Rollover

        The 1999 Federal Budget provision allowing a rollover for capital gains on certain small business share investments will have an increased reinvested amount of $2 million from $500,000 and an increased asset limitation from $10 million to $50 million.

9.     Corporate Tax Rates

        The general corporate rate tax rates for the years 2001, 2002, 2003 and 2004 will be 27%, 25%, 23%, 21% respectively.  This does not apply to income benefitting from other tax incentives.

10.   Mining

        A 15% non-refundable investment tax credit will be provided to individuals investing in flow-through shares on certain surface exploration.

11.   Foreign Spin-offs

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

12.   Share-for-Share Exchanges

        After draft legislation has been developed, Canadians exchanging Canadian shares for foreign shares will be eligible for a rollover without having to go through the exercise of receiving “exchangeable shares”.

13.   GST Credit

        Each adult will receive an additional $125, to a maximum of $250 per family, if they are eligible for the GST credit.

14.   Canada Pension Plan/Quebec Pension Plan Deduction for the Self-Employed

        Under the CPP and QPP, self-employed individuals cannot deduct the employer share of CPP but must, instead, claim a credit at the lowest tax rate.

        Commencing January 1, 2001, self-employed individuals may deduct this employer portion.  The portion of CPP that represents the employee’s share will continue to qualify for a tax credit.

TRANSFER TO DEPENDENT CHILD

In a Technical Interpretation, CCRA notes that, on death, a RRIF may be transferred to a financially-dependent child and will be deducted from the income of the deceased and included in the income of the dependent child.  The child may then transfer all, or a portion, of the amount to an RRSP, RRIF or an annuity under which the child is the annuitant.  Information Sheet RC4178, entitled “Death of an RRIF Annuitant” provides information.

GETTING REMARRIED

In a Technical Interpretation, CCRA note that where a RRIF annuitant gets married to a spouse fourteen years younger, the prescribed factor for the minimum amount cannot be changed to reflect the spouse’s age.  However, the existing RRIF may be transferred to a new RRIF which may use the spouse’s age in determining the minimum payment.

RESP

Guide RC4092 CCRA discuss RESPs including:

1.     HRDC will pay a 20% Canada Education Savings Grant (CESG) on the first $2,000 of annual contributions made to eligible RESPs of a qualifying beneficiary.  The maximum CESG that a beneficiary may receive is $7,200 ($400 x 18 years).  For more information contact 1-888-276-3624.

2.     An Educational Assistance Payment (EAP) is any distribution made under certain conditions, of an RESP’s accumulated income and CESG amounts to a beneficiary of the RESP, to help finance post-secondary education.  To qualify as an EAP, the beneficiary has to be:

(i)      enrolled as a full-time student in a qualifying educational program at a post-secondary educational institution (includes distance education courses and correspondence courses) or,

(ii)     enrolled in a qualifying educational program at a post-secondary educational institution and have a mental or physical impairment.

3.     Subject to the terms and conditions of the RESP, all contributions made to the RESP by the subscriber can be returned to the subscriber when the contract ends or at any time before.  Because they were not deductible when made, they will not be taxable when returned.

4.     The maximum amount of EAPs that can be paid to a beneficiary initially is $5,000.  After the beneficiary has completed thirteen consecutive weeks in the qualifying educational program, there is no limit on the amount of EAPs that can be paid if the beneficiary continues to qualify to receive EAPs.  The Minister of HRDC may increase the $5,000 limit where, for example, the cost of tuition for a program is substantially higher than the average.  Such requests have to be made to the Minister by the RESP promoter in writing.

5.     An Accumulated Income Payment (AIP) may be made to a subscriber where each beneficiary has died, or reached 21 years of age, and is not eligible to receive EAPs and the RESP has existed for at least ten years.  However, the last two conditions may be waived if the beneficiary has a mental or physical impairment.  These payments are subject to regular income tax plus an additional 20% tax.  However, up to a maximum of $50,000 may be contributed to his/her RRSP within sixty days following the year to avoid this tax.

FAMILY FARM CORPORATION SHARES

In a Technical Interpretation, CCRA note that to qualify as a share of the capital stock of a family farm corporation (eligible for up to a $500,000 capital gain exemption), all, or substantially all, of the fair market value of the property owned by the corporation must be attributable to property used by the corporation or, another eligible person, principally in the course of carrying on farming in Canada in which the person (i.e.  the shareholder) or a spouse, child or parent of the person was actively engaged on a regular and continuous basis.

53(9)

REMUNERATION PAID TO CANADIAN FOR WORK IN THE UNITED STATES

In a Technical Interpretation, Canadian resident employees provided services in the U.S. to third parties.  The Canadian employer bills the U.S. clients.

Provided that the Canadian employee is not present in the U.S. for more than 183 days, and his/her remuneration is not borne by an employer who is a resident of the U.S., nor by a permanent establishment of his/her employer in the U.S., the employee will not be taxable in the U.S.

ARTICLE XIII

In a Federal Court of Appeal case, the Court noted that the Canada-U.S. Tax Treaty makes United States and Canadian residents liable for capital gains tax on dispositions of real property in the other country but, only for gains arising after December 31, 1984.  The 1980 Convention provides for either valuing property as of December 31, 1984, i.e. “safe start” date or, at the taxpayer’s option, calculating the amount by which proceeds of disposition are to be reduced for tax purposes by application of a formula the scheme of which is to exclude gains up to December 31, 1984.

BANK INTEREST

A Canadian with a deposit in a U.S. bank must complete and file Form W-8BEN with the U.S. Bank commencing January 1, 2001 to avoid U.S. withholding tax on interest paid to a Canadian resident by a U.S. bank.  If the bank does not receive this Form, technically it is required to withhold tax on interest payments.

WITHHOLDING TAX

In certain instances, interest payable by a resident of Canada to an arm’s length non-resident, where they did not have to pay more than 25% of the principal amount within five years, is exempt from withholding tax.

In a Federal Court - Trial Division case, the notes were substantially altered thereby creating new obligations the terms of which did not meet the exemption.  Therefore, the withholding tax was required to be paid.

53(10)

SELF-SUPPLY RULES

Where a taxpayer acquires a newly-constructed residential property for lease to others, GST applies on the purchase price.  However, when the property is constructed by the owner, the owner is  subject to GST on the fair market value of the property at the time it is put into rental use.  (self-supply rules)  However, input tax credits for the GST paid may be claimed.  The self-supply rule is to attract GST on the profit element and other costs which would not normally be subject to GST such as interest expense and salaries.

In a Tax Court case, the taxpayer constructed five rental buildings and reported GST under the self-supply rules as at January 31, 1996 based on a value of $36,757 per unit.  However, CCRA argued that the value was $42,000 per unit and assessed GST accordingly.  This fourteen page Decision reviewed the various valuation methods, concluded that the taxpayer was correct and, allowed the taxpayer’s appeal.

DUE DILIGENCE DEFENSE

In a Federal Court of Appeal case, the Court found that if a person has exercised due diligence, the GST penalty is not exigible.  CCRA has now issued a Policy Statement P-237 which notes that a person must show that a sincere attempt to comply with the law has occurred in accordance with the “reasonably prudent person” test.  There must have been genuine uncertainty regarding the application of the GST which prevented compliance, not just a calculation error or error because of failure to maintain adequate records.  CCRA also note that there is no defense for late remittance, or reliance on incorrect advice from a third party, unless sufficient uncertainty occurred.

53(11)

CCRA RELEASES

November 28, 2000 - This CCRA Fact Sheet reminds investors of risks associated with tax shelters and notes that:

(i)    If no real business activity is carried on, or there is no reasonable expectation of profit, losses will be disallowed.

(ii)   If losses claimed by an investor exceed the amount at risk, the losses will be reduced to the at-risk amount.

November 28, 2000 - CCRA warns Canadians against tax myths and challenges assertions made by “detaxers” and “untaxers”.

CAPITAL LEASE VS. OPERATING LEASE

It was noted at the 2000 Canadian Tax Foundation Conference that CCRA are taking the position that leases should generally be treated based on their form, rather then substance.  Therefore, in most situations “leases” will be considered as operating leases - not capital leases.