54(1)

CHILD CARE EXPENSES

In a Tax Court case, Mr. Bell claimed $4,184 of child care expenses with respect to Little League, Mad Science Club, soccer club, swim club, speech and language therapy, etc.  The Court disallowed the child care expenses on the basis that they were to develop the physical, social and artistic abilities of the children, even though the activities were carried out while the parents were working.  The Court found that, to be deductible, the overwhelming component must be guardianship, protection and child care.

Also, in a Technical Interpretation, CCRA notes that where two parents are divorced and only one parent is the custodial parent, child care expenses will be allowed only to the custodial parent - the person who “resided with the child at the time the expense was incurred”.

If the non-custodial parent directly pays the child care expenses, neither the non-custodial nor custodial parent may deduct those expenses.

In the case of shared custody, since each parent resides with the child, each parent could claim child care expenses incurred in a taxation year for an eligible child.

EMPLOYER-PAID EDUCATION COSTS

In a District Office Memo, CCRA notes that where employer-paid training is taken primarily for the benefit of the employer, there is no taxable benefit whether or not the training leads to a degree, diploma or certificate.

In two, Advance Tax Rulings, CCRA Ruled that the lease of a number of computers to be provided to employees, along with internet access, would be deductible to the company and a non-taxable benefit to the employees on the basis that it meets the guidelines in Income Tax Technical News No. 13.

The programs were to improve employees’ electronic, computer and internet skills for employment purposes, even though there would also be some personal use.  The programs also address the urgent need for the employees to become fully PC literate and to develop and maintain the electronic communication skills required to improve productivity, create more mobility in the work force and overall reduce costs in an increasingly wired environment.

FREE PARKING

In an Informal Tax Court case, the employer provided free parking to employees in its parkade which, was also available on a fee basis to the general public.  The Court found that the free parking was not a taxable benefit and noted that the employee was not economically enriched by the free parking.

The free parking gave the employer many extra hours of employment.  Also, it was cheaper for the employer to provide a parking space than to pay taxi fares.  Therefore, the employer was the primary beneficiary of the benefit.

Caution:  Regardless of this decision, CCRA may reassess certain “free parking” as taxable employment benefits.

TAXABLE BENEFITS

In the 2001 Employer’s Guide, CCRA advised of a change to the procedure for calculating the taxable benefit where there is a combination of flat-rate and reasonable per-kilometre travel reimbursements.

Previous Procedure

Previously, if the allowance paid to an employee was a combination of flat-rate and reasonable per-kilometre allowances, only the flat-rate portion was taxable.

Amended Procedure

Starting January 1, 2001, if the allowance is a combination of flat-rate and reasonable per-kilometre allowance that covers the same use for the vehicle, the total combined allowance is taxable.

GROUP SICKNESS OR ACCIDENT INSURANCE PLAN

In a Technical Interpretation, CCRA notes that the Income Tax Act permits deductible/non-taxable payments by an employer to a “group sickness or accident insurance plan” for an employee.  However, where the plan is for a shareholder/employee, it is a question of fact whether the benefit is employment or shareholder related.

CCRA will presume it to be shareholder related unless it is comparable to benefits generally offered to employees who perform similar services.  Unlike employment benefits, shareholder benefits are non-deductible/taxable.

SHAREHOLDER LOAN

In a Technical Interpretation, CCRA note that where a shareholder receives a loan from a corporation, the loan is to be included in income of the shareholder for the year in which the loan was received unless a specific exception is met, such as a loan to enable the individual to acquire a dwelling, treasury shares or a motor vehicle and the loan was received because of the individual’s employment, rather than shareholding.  Also, bona fide repayment arrangements must be made at the time the loan was incurred.

Whether or not a loan was received in the shareholder or employee capacity, is a question of fact.

 

54(3)

INDEPENDENT CONTRACTOR VS. EMPLOYEE

In a Tax Court case, Company A desired its workers to be independent contractors, not employees, to avoid EI and CPP.

The Court found that the workers were employees, not independent contractors, and noted that:

1.     The tests of control, ownership of tools, chance of profit and risk of loss and integration caused the Judge to conclude that this was an employment arrangement.

2.     Control - Corporation A set the hours, detailed the work to be done and oversaw and inspected the work.

3.     Tools - Corporation A provided the main tools (lathe and welders) whereas the workers only provided minor tools such as a welding helmet, shield, gloves, hard boots and some small tools including wrenches.

4.     There was no chance of additional profit or risk of loss.

5.     With respect to integration, it was obvious that this was Corporation A’s business.

ADVERTISING EXPENSE

In an Informal Tax Court case, Mr. Harris was the president and sole shareholder of a corporation operating a construction business in New Brunswick.  The corporation advertised by promoting stock car and snowmobile racing and, in fact, owned a stock car and snowmobile which Mr. Harris drove in competitions. CCRA disallowed the expenses on the basis that these were personal in nature.

However, the Court permitted the deductions as advertising expenses but noted that when advertising has a significant personal element the taxpayer has a greater than normal onus to establish that the expense was truly incurred for the purpose of advertising the business.

RESORTS AND LODGES

In a Technical Interpretation, CCRA notes that Paragraph 18(1)(l) of the Income Tax Act disallows an expense made for the use or maintenance of a yacht, a camp, a lodge or a golf course or facility unless it was part of the taxpayer’s business of providing the property for hire or reward.  However, if a resort hotel or lodge is used for a genuine business purpose, which does not include the entertainment or recreation of clients, suppliers, shareholders or employees, the related expenses are not caught under Paragraph 18(1)(l).  However, the Paragraph would apply where some business meetings may be involved but the main activity is recreation or entertainment.

CCRA further note that where the employees or customers are taken to a resort to attend meetings but the main activity is business related, even though they did participate in some recreational activities, the use of the resort would be deductible, subject to the 50% meal and entertainment limitation.  However, if the main activity is recreation or entertainment, no portion of the costs is deductible.

 

54(6)

BANKRUPTCY

In general, a creditor may seize an RRSP if the person becomes bankrupt unless:

1.     The RRSP is issued by an insurance company that has the spouse or child as a beneficiary.

        In most provinces “spouse” is not defined in the insurance legislation.  Therefore, it is based on general law which usually provides that to qualify as a “spouse” the individuals must be legally married.  The status must be reviewed in each province.

2.     Locked-in RRSPs may be protected under provincial pension legislation.

        However, this creditor protection may not be valid if the RRSP is established when the person is in financial difficulty.

These are general guidelines and vary by province because Provincial Pension and Insurance Legislation is involved.

FOREIGN CONTENT

The 20% foreign content limit for 1999 was increased to 25% for 2000 and 30% for 2001 and future years.

However, a mutual fund that holds 30% or less foreign assets qualifies as 100% Canadian content. Therefore, if 70% of the RRSP is in this type of mutual fund and the other 30% is in foreign investments, this effectively provides up to a 51% foreign asset content in an RRSP.

Also, there are a number of “derivative funds” that purchase indexes of foreign stocks or bonds that qualify as 100% Canadian content.

In addition, by investing in certain active Canadian businesses, such as labour-sponsored funds, the RRSP is entitled to extra foreign investments of $3 for every $1 of investment to a maximum additional foreign content of 20%.  For example, a $5,000 labour-sponsored fund RRSP purchase could add another $15,000 of foreign investment.

PLANNING

1.     Since only 50% of capital gains held outside an RRSP are taxable, there is general preference to hold growth stocks outside of the RRSP.

2.     RRSP annuities, or payments out of a RRIF, received by persons 65 or older, are eligible for a tax credit on up to $1,000 of this income.  Therefore, consideration should be given to maturing at least a portion of an RRSP at age 65, which is prior to the mandatory crystallization age of 69.

3.        Non-taxable taxpayers with “earned income” (example, children with minor employment income) should consider filing tax returns to establish RRSP contribution room carryforward.

 

TAX EVASION CHARGE THROWN OUT

In an Ontario Court, tax evasion charges against a taxpayer who owned seven pharmacies and had received kickbacks from drug companies, such as Apotex Inc. and Novo Pharm Ltd., were thrown out on grounds that CCRA abused their powers.  CCRA gathered information from the taxpayer and the drug companies through the guise of an income tax audit without disclosing that they were from the Special Investigation Division and, that the information obtained would likely be used in a criminal tax evasion charge.

The Court noted that even though the taxpayer had clearly received kickbacks, because of the procedure used by Special Investigation, the tax evasion charges could not be upheld.  The Court did note however that the taxpayer still faces non-criminal tax reassessments including the back taxes plus interest and a 50% penalty.

In this case, the drug companies provided volume rebates to pharmacists to encourage them to sell their products.  The taxpayer had the rebates paid to him in a manner to avoid discovery by CCRA such as payments to U.S. bank accounts and U.S. suppliers.

TAX SHELTERS

There will be a number of tax shelter flow-through mining and oil and gas investments in the year 2001 to take advantage of the 50% taxable capital gain rules and the 100% deduction on flow-through exploration investments.  For example, if $100 is invested in a flow-through share, the $100 may be fully deducted and, the share would have a tax cost of zero, but would be considered capital property.  Therefore, if the share was subsequently sold for $100, there would be a $50 taxable capital gain, giving an overall extra deduction of $50 even though the selling price is equal to the cash input.

Caution:  Tax shelters should always be analysed for their investment potential.

The above information is of a general nature only. Please ensure that you contact Canham Rogers, Chartered Accountants before implementing any of the planning points outlined in this newsletter.  Also, please feel free to contact us for further information on how these items directly affect you or your business.