55(2)

INTEREST ON STUDENT LOANS

In a Technical Interpretation, CCRA note that to obtain a tax credit for interest on a student loan, the loan must be made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary level.  Once an eligible loan is replaced with a new “ineligible” loan, the interest is not eligible for the tax credit.

55(2)

EMPLOYER-PROVIDED COMPUTERS AND INTERNET ACCESS

In an Advance Income Tax Ruling, CCRA Ruled that the provision of computer and internet services to an employee, where the primary beneficiary is the company, would not be a taxable benefit to the employee.

In this Ruling, the company is providing a computer, a printer and unlimited internet access to employees to achieve its goal of company-wide computer literacy and to accelerate the technological capabilities of its employees, develop their computer skills, link them closer to the customers and open a new communicational channel with its employees.  However, each participating employee must pay a nominal fee to cover their incidental personal use.

Other aspects of the policy include that where an employee leaves the company before the end of a prescribed period, they must keep the hardware and software and make pro-rata payments for the full cost of the computer and internet access fees.  However, after the period, the employee will have unrestricted ownership of the computer.

PHANTOM STOCK PLAN

There are a number of Advance Income Tax Rulings where CCRA concludes that directors’ fees paid in the form of “deferred share units” would not be taxable until cash is received for the units - usually on ceasing to be a director.  For example, in one case, each director has a right to be a member of the plan and receive his/her annual retainer/fee either as cash, one-half in deferred share units and one-half in cash or, entirely in deferred share units.

A deferred share unit is a unit equivalent to the value of a common share of the corporation.  The purpose of the plan is to promote a greater alignment of interest between the directors and the shareholders through stock appreciation.

In another Ruling, the deferred share unit plan was used by a public corporation to provide bonuses to certain of its officers and key employees so as to attract and retain talented individuals and to promote a greater alignment of interest between these employees and the shareholders.

Again, tax is not payable until cash is paid on the deferred share unit at which time the employee will be required to include this amount as employment income.

EMPLOYER-PROVIDED PARKING

In a Technical Interpretation, CCRA notes that there is no taxable benefit when the employer provides employees with free parking and the employees are regularly required to use their vehicles in their employment.

This is consistent with a Tax Court case which found that the employer was the primary beneficiary of the benefits derived because the employees were required to use their vehicles for business purposes.

55(3)

RESERVE ALLOWED

The Income Tax Act permits a reserve deduction in respect of goods and services that have to be delivered after the year end related to business sales.  However, this does not include a reserve in respect of guarantees, indemnities or warranties.

In a Tax Court case, the taxpayer provided an extended power train warranty (five years or 5,000 hours) on new graders.  However, the taxpayer also agreed to carry out, on a semi-annual basis, an inspection of the graders and deducted a reserve based on costs of $5,000 per grader per year to do these inspections.

The Court permitted the estimated costs as a reserve because this did not constitute a warranty, indemnity or a guarantee.  Also, the estimated cost of $5,000 per grader was reasonable.

LEASES

On June 14, 2001, CCRA cancelled Interpretation Bulletin IT-233R, Lease-Option Agreements; Sale-Leaseback Agreements.  CCRA note that the IT was intended to curb abuses in leases where the substance of the transaction was in effect a sale.  However, the Supreme Court recently ruled that the economic realities cannot be used to recharacterize the bona fide legal relationships.  Unless there is a sham, the taxpayer’s legal relationships must be respected.  Thus, generally, and subject to the “General Anti-Avoidance Rule” (GAAR), rechacterization is permissible only if the label attached by the taxpayer to the transaction does not properly reflect its legal effect.

In a recent Technical Interpretation, CCRA reviewed a situation where a lessee has the right at the expiration of the lease (a forty-eight month term) to acquire the leased property for $1.  The taxpayer’s view was that this would be a capital lease.

CCRA note that the determination of whether a contract is a lease or a sale is based on the legal relationship created by the terms of the agreement, rather than on any attempt to ascertain the underlying economic reality.  Therefore, in the absence of sham, it is CCRA’s view that a lease is a lease and a sale is a sale.

55(5)

ARREARS

In a Technical Interpretation, CCRA note that where spousal arrears are “settled” for an amount which is less than the total periodic amounts due, the amount paid and received, whether as a lump sum or by way of installments, would not be deductible to the payor or taxable to the recipient.

PAYMENTS MADE TO THIRD PARTIES

In a Tax Court case, the Court noted that the Income Tax Act permits deductible/taxable treatment on third party payments if the Order or Written Agreement provides that Subsections 60.1(2) and 56.1(2) apply to the amount.

Mr. F made $41,856 of third party payments under the Support Agreement for medical expenses, tuition fees, recreation expenses for the children, and the maintenance of the house including heating, electricity, gas, telephone, snow removal, lawn care, landscape maintenance and tenant’s repairs.  The Agreement noted that the payments would be taxable to Ms. B (the former spouse) and deductible by Mr. F.  However, when Mr. F asked for the inclusion of references to Subsections 56.1(2) and 60.1(2), Ms. B noted that this might add further confusion.  Therefore, the Section references were not put into the Agreement.

It appears that Ms. B then took the position that because the Section references were not in the Agreement, she should not have to pay tax on the $41,856.  The Judge was not pleased.  He noted that, “It is deplorable that Ms. B availed herself in such an abusive manner of a provision of the Act that was enacted to provide better protection for women’s interests.  I conclude that Ms. B abused the provision...”  Therefore, the appeal is allowed with costs for a fixed sum of $1,500.

Editor’s Comment

For greater certainty of the deduction for third party payments it is best to refer to Subsections 56.1(2) and 60.1(2) in the Agreement.

RRSP WARNING

On May 31, 2001, a warning about newspaper ads promising tax-free access to locked-in RRSPs and locked-in retirement account savings was issued by British Columbia’s Superintendent of Pensions.

To take advantage of the alleged loophole, the investor must use the RRSP to purchase shares in a company.  In return, the company advances the investor a loan of 60% to 70% of their share purchase.  The remaining 30% to 40% is held as security.

The release notes that there are a number of problems such as the shares not being qualified investments thereby triggering full taxable income.  Also, the taxpayer could be called upon to pay back the loan at any time.  If you don’t pay back the loan, you forfeit the 30% to 40% of your investment being held as security.

Also, locked-in RRSPs have to be used for retirement income.  Financial institutions that hold locked-in funds may be required to pay a pension to the owner if the money is used for other purposes and the pension income is lost.

55(7)

GIFT BACKS

In a Technical Interpretation, CCRA notes that where a volunteer has incurred reimbursable expenses on behalf of a charity and, of his own volition, chooses to give some, or all, of the reimbursement monies back to the charity (i.e., there can be no agreement or understanding, written or oral, that the volunteer will return the reimbursement to the charity), CCRA will accept that a gift eligible for a donation tax credit has been made.

However, where a charity has a policy that expenses incurred by a volunteer will only be reimbursed through the issuance of a donation receipt, it is CCRA’s view that the volunteer has not made an eligible gift.

NEW RATES

The Income Tax Act permits a 25% taxable capital gain (not 50%) on gifts of publicly-traded shares, mutual funds or government bonds to a charity up to December 31, 2001.  The donor receives a tax credit based on the full value of the gift.

55(9)

PERSONAL LIABILITY

In a Tax Court case, the Court found that the taxpayer/director was not personally liable for the unremitted GST of $66,442 in 1993 and 1994 and noted that:

1.     Even though the taxpayer was an “inside director” because he was involved in the day-to-day management of the corporation, he is eligible for the “due diligence” exemption.

2.     The Court believed that the reliance of the taxpayer upon his chartered accountant, a highly experienced person, helps meet the due diligence test.

3.     The taxpayer had given up control of the finances as all draws from his construction project went into a bank account over which only the monitors had signing authority.

Editor’s Comment

Caution:  If “due diligence” is not exercised, a director may be held personally liable for unremitted GST and income tax source deductions.

GST PAYABLE

In a Federal Court of Appeal case, the Court found that when a trucking corporation deducted amounts from payments to its owner/operators for insurance, licenses, oil and fuel, GST applied to the withheld amounts as a resupply.