56(1)

Some 2001 year-end tax planning tips include:

1.     If the following expenditures are made by individuals by December 31, 2001 they will be eligible for 2001 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.

2.     2001 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2000 personal income tax return assessment notices.  You have until March 1, 2002 to make tax deductible RRSP contributions for the 2001 year.

        Consider contributing to a spousal RRSP to achieve income splitting in the future.

        The maximum 2001 addition to deductible RRSP contribution room is $13,500.  $75,000 of 2001 earned income is needed to reach this maximum.

3.     Persons turning age 69 in 2001 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31, 2001.  Certain 2001 excess contributions may be deducted in the year 2002 if contribution room is available.

4.     If you own a business, consider paying a reasonable salary to family members for their services rendered to the business.

5.     Ensure that all deductible alimony or maintenance payments are made by December 31, 2001.

6.     An individual whose 2001 net income exceeds $55,309 will lose all, or part, of their old age security.

        Senior citizens will begin to lose their income tax age credit if net income exceeds $26,941.

        Individuals facing these problems should contact their professional advisors for assistance in managing their 2001 personal income.

7.     Consider purchasing assets eligible for capital cost allowance before the yearend.  For example, employees may claim capital cost allowance on automobiles, aircraft and musical instruments required to be used in their employment.

8.     If you had taxable capital gains in the year, or any of the preceding three years, consider selling capital properties with an underlying capital loss prior to the yearend.  This capital loss may be offset against capital gains in the year, or in the three preceding years.

9.     If income in an inter vivos trust is to be taxed on a beneficiary's return, the income must be paid or payable to the beneficiary by December 31, 2001.

10.   Individuals may claim a tax credit related to the interest portion of student loan payments made in 2001.

11.   Registered Education Savings Plan (RESP)

        A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for beneficiaries up to and including age 17 (maximum $400 per child per year).

        However, contributions for 16 and 17 year olds will only qualify for certain previous plans.

12.   Health and dental premiums for the self-employed

        Individuals will be allowed to deduct amounts payable in respect of the year for Private Health Service Plan coverage in computing business income provided they are actively engaged alone, or as a partner, in their business, and either self-employment is their primary source of income or their income from other sources does not exceed $10,000.

13.   Tax on Split Income

        The Income Tax Act applies the maximum marginal tax rate to certain passive income of individuals under the age of 18.

        This includes:

1.       Taxable dividends, and other shareholder benefits, on unlisted shares of Canadian and foreign companies (received directly or through a trust or partnership); and

2.       Income from a partnership or trust where the income is derived from providing goods or services to a business carried on by a relative of the child or, of which the relative participates.

          Therefore, consider minimizing this type of income in 2001.

14.   Same-Sex Common-Law Couples

        The Income Tax Act extends benefits and obligations to same-sex couples effective 2001. If the couple elects, it will also be effective for the years 1998, 1999 and 2000.

15.   The tax rate for higher income individuals is now significantly lower on capital gains than on dividends thereby presenting an incentive to receive capital gains.

16.   Canadian resident 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 taxable dividend.

56(4)

LONG-TERM DISABILITY INSURANCE SETTLEMENT

In a Tax Court case, the taxpayer was injured in a motor vehicle accident and had to sue the insurer for the long-term disability benefit payouts.  He received a Court-ordered settlement of $82,500.

The settlement was based on $1,389 per month, minus $516 for CPP disability, leaving $873 per month for 6.5 years plus $15,000 as a contribution to legal expenses.

Good News!

The Court found that the lump-sum settlement was not taxable because the Income Tax Act only taxes amounts received on a periodic basis under a disability insurance plan.  This was a lump-sum payment.

REDUCED STANDBY CHARGE

In a Tax Court case, the taxpayer claimed a reduced automobile standby charge on the basis that his business use of the vehicle was more than 90% even though he did not maintain a log for the period in question.  The Court allowed the reduced standby charge and noted that even though the appellant does not have any records pertaining to the use of his company car for the years under audit (1996, 1997 and 1998), this does not necessarily bar him from claiming a reduced standby charge.  Corroborating oral and other evidence, if credible, can discharge the Appellant’s evidentiary task of proving on a balance of probability that he used the car more than 90% for employment purposes.

The taxpayer prepared a travel log for 1999 and stated that his work duties and travel schedules in 1999 were the same as in the years under audit.

Editor’s Comment

Keeping a log for the year under audit may prevent the cost, time, inconvenience and uncertainty of a Court case.

56(5)

INTEREST

Individuals are required to report accrued interest annually on the anniversary date of the investment.  For example, if an August, 2001 Treasury Bill is acquired for $89,000 to mature in November, 2001 for $90,000, the $1,000 of interest must be reported in 2001.  However, if the Treasury Bill matured in January, 2002, the reporting of the interest could be delayed until 2002.

If, say, a five-year term deposit is acquired for $80,000 in October, 2001 and accrues interest of $4,000 a year, the $4,000 must be reported in income each year beginning with the 2002 year.

Planning

A maturity or anniversary date in January, rather than, say, December, will defer the reporting for one year.

56(6)

EQUIVALENT-TO-SPOUSE CREDIT

In a Tax Court case, Mr. and Mrs. B di vorced and had joint custody of their daughter.  In 1998 Mr. and Mrs. B agreed that the daughter would live with Mr. B for all of the year, except for weekends, and Mrs. B would give up the $500 child support on the basis that Mr. B will be responsible for clothing, school and extracurricular activity expenses.  Both parents claimed the equivalent-to-spouse tax credit because they could not agree as to whom may claim the credit.

The Court permitted the credit to Mr. B on the basis that the daughter was wholly dependent for support on Mr. B and living in his residence.

56(8)

SALE OF TIMBER RIGHTS

In a Tax Court case, the farmer sold timber rights in 1992 thereby triggering a capital gain of $76,000 which was incorrectly not reported on the return.

Upon discovering the 1992 taxable capital gain, CCRA reassessed this and did not allow the capital gain exemption.

Good News!

Upon review, the Court found that the taxpayer should be allowed to claim the capital gain exemption because the omission of claiming the exemption was done innocently and not with the intent to defraud CCRA.

56(9)

TAX PROTESTER HIT

On August 30, 2001, CCRA announced that Mr. L and his corporation were fined more than $2.4 million after being found guilty of tax evasion.  Mr. L was also sentenced to more than five years in jail.  Mr. L failed to file both personal and corporate tax returns for the 1993 through 1998 tax years and failed to report more than $8 million of income.

Mr. L unsuccessfully argued that income tax was unconstitutional and that the Income Tax Act was invalid and unenforceable.

TAX SHELTERS

In an August 14, 2001 Publication, CCRA warned potential investors to be wary of any tax shelter promotion where the anticipated net return in the first few years comes mainly from projected income tax refunds, especially where:

(i)    no real business activity will be carried on,

(ii)   the business has no reasonable expectation of profit,

(iii)  the expenses are inflated or unreasonably high,

(iv)  losses for tax purposes will exceed the amount of the investment that is actually at risk, or

(v)   the promoter or others are making verbal assurances of income tax consequences that are different from, or are not confirmed by, professional opinions contained in the investment documents.

Even if the tax shelter has an Advance Income Tax Ruling, CCRA warn that they do not generally Rule on the above-mentioned items.  Therefore, the Ruling does not necessarily guarantee proposed deductions.

56(10)

REGISTERED CHARITIES NEWSLETTER NO. 11

This eight-page newsletter notes that:

1.     An example of charities that were challenged by CCRA involved Mr. J, the executive director of three religious charities.  Mr. J was found guilty of tax evasion when he unsuccessfully argued that he did not have direct knowledge of the donations tendered and that his wife filled out the particulars on the receipts.

        The evidence showed that he issued tax receipts far in excess of the amounts received from the donors.

        Mr. J was ordered to perform 240 hours of community work and was fined $32,000 (50% of the $64,000 in tax evasion).

2.     From the year April 1, 1999 to March 31, 2000 the CCRA Charities Directorate received 3,974 new applications for registration, registered 3,285 organizations, advised 885 applicants that they did not qualify, revoked 2,742 charities because they did not file their annual Registered Charity Information Return (Form T3010) in the six month period after their fiscal year-end, and audited 419 charities, most of whom had complied with the Income Tax Act.

        Some charities misunderstood the requirement to keep adequate books and records and were given a letter of explanation by CCRA.

CULTURAL PROPERTY

On August 22, 2001 CCRA introduced revised IT-407R regarding donations of cultural property (example, works of art, antiques) to designated Canadian institutions (example, art galleries, museums).

The advantages include an exemption from the capital gains realized on the disposition, and a donation for the fair market value.

56(11)

LOCKED-IN RRSP

Up to 10,000 investors in Ontario, Quebec and Western Canada were taken in by a scheme where locked-in retirement savings were swapped for near-worthless shares in private corporations for a fee of 30% or more of a pension’s value.

In another version, “loans” were given to the RRSP holder using the locked-in accounts as collateral.  CCRA notes that this triggers a deregistration of the RRSP.

Securities and pension authorities are co-operating with the RCMP and commercial crime divisions to attack these schemes.

56(12)

NEW RESIDENTIAL RENTAL PROPERTY REBATE

On August 7, 2001 CCRA introduced a twenty-nine page Guide RC4231 - GST/HST New Residential Rental Property Rebate.

The Guide provides information for landlords of residential rental properties on how to apply for the rebate and how to complete Forms GST524 and 525.

GST/HST TELEFILE

Businesses may now file GST/HST returns through TELEFILE offered to business clients on an invitation-only basis.

An Access Code will be printed on the business’ personalized GST/HST return.

The return must also have a nil balance or a refund of $10,000 or less, and cannot be making a rebate claim.

For more information, see www.ccra.gc.ca./gsthst-telefile