60(1)

Some 2002 year-end tax planning tips include:

1.  If the following expenditures are made by individuals by December 31, 2002 they will be eligible for 2002 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.

2.  2002 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2001 personal income tax return assessment notices.  You have until March 1, 2003 to make tax deductible RRSP contributions for the 2002 year.

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

The maximum 2002 addition to deductible RRSP contribution room is $13,500.  $75,000 of 2002 earned income is needed to reach this maximum.

3.  Persons turning age 69 in 2002 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31, 2002.  Certain 2002 excess contributions may be deducted in the year 2003 if contribution room is available.

4.  Ensure that all deductible alimony or maintenance payments are made by December 31, 2002.

5.  An individual whose 2002 net income exceeds $56,966 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 $27,749.

Individuals facing these problems should contact their professional advisors for assistance in managing their 2002 personal income.

6.  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.

7.  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.

8.  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, 2002.

9.  Individuals may claim a tax credit related to the interest portion of student loan payments made in 2002.

10.  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.

11.  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.

12.  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.

60(3)

TRUCKERS

In an August 23, 2002 Tax Court case, the Court found that this long-distance truck driver was entitled to deduct transport employee meal and lodging expenses.  The taxpayer and his wife worked together driving a transport between California and Ontario.  The Court noted that the taxpayer’s claim for meals based on U.S. $40 per day (subject to the 50% addback for meals and entertainment) should be allowed, even though no supporting documents were submitted, because this was reasonable and the evidence was strong that he incurred the meal expense.

NO TAXABLE BENEFIT

Some examples of non-taxable employment benefits include:

Example 1

In a recently released Technical Interpretation, CCRA note that the following reimbursements and allowances payable to employees who are temporarily working outside Canada will be non-taxable.

1.  Housing allowance provided that the individual maintains a self-contained domestic establishment in Canada that is available for his/her use throughout the period of the secondment and is not rented out - a “special worksite”.

2.  Reimbursement for transport costs provided to and from the “special worksite” at the commencement and completion of employment.

Example 2

In a September 5, 2002 Technical Interpretation, CCRA notes that where additional child care expenses are incurred because an employee is required to travel out of town on employment, a reimbursement of these costs by the employer would be a non-taxable benefit.

Example 3

In an August 30, 2002 Technical Interpretation, CCRA notes that where an employer reimburses an employee for the reasonable expenses incurred in moving the employee, either because the employee has been transferred from one establishment of the employer to another, or because of having accepted employment at a place other than where the former home was located, this reimbursement is not taxable.

Example 4

In a September 12, 2002 Technical Interpretation, CCRA notes that where an employer pays the fees or reimburses an employee for membership in a fitness club, the employee is in receipt of a taxable benefit.

Editor’s Comment

Although this was not mentioned by CCRA in the Technical Interpretation, CCRA’s Interpretation Bulletin 470R, Paragraph 34, notes that where an employer pays the fees required for an employee to be a member of a social or athletic club, this is not a taxable benefit where the membership was principally for the employer’s advantage.

60(4)

EXPENSES DISALLOWED

In a July 30, 2002 Tax Court case, the taxpayer carried on a graphic arts business out of a 686 square foot condominium loft apartment which she shared with a friend.  CCRA testified that they audited the business because of the large amount of expenses claimed against a small income.  CCRA made a net overall increase to the income by disallowing a portion of the insurance, meals, business use of home, motor vehicle, travel and reference material expenses.

The Judge gave considerable weight to the auditor’s evidence who spent - can you believe it - upwards of 100 hours on the file, much of it at the Appellant’s premises, reviewing the records, viewing the premises and the equipment.

MEAL AND ENTERTAINMENT EXPENSES

In an August 22, 2002 Technical Interpretation, CCRA notes that the 50% add-back rule does not apply, “in respect of one of six or fewer special events held in a calendar year at which the food, beverages or entertainment is generally available to all individuals employed by the person at a particular place of business and consumed or enjoyed by those individuals”.

CCRA notes that an annual Christmas party which is open to all employees is eligible for this exemption.  However, an “Over-Twenty-Five Years of Service Club” party would not qualify unless the event was available to all employees.

 EXPENSES RELATING TO PETS

In an August 13, 2002 Tax Court case, the farmer testified that wild animals, such as deer, rats and mice, love to eat his blueberry crop.  Therefore, a cat and dog were acquired to, and were able to, keep them away.  The Court believed this and permitted deductions with respect to the dog and cat for veterinary bills, pet food, etc.

CCRA questioned why the taxpayer had to acquire pet food - “can’t they eat the mice and the rats?”.  The Court did not swallow this argument and noted that the “frightening” aspect of the animals on a small berry acreage warranted their business use to help preserve the berry crop.

60(10)

GROSS NEGLIGENCE PENALTIES

CCRA appears to be applying the 25% gross negligence penalty under the Excise Tax Act if, after making a mistake and being warned, the taxpayer makes the same mistake again.

Even though the Court may throw out the penalties on an appeal by the taxpayer, there is still a time and money cost involved.  Therefore, it is usually best to be diligent to avoid making the same GST mistake twice.

GST NOT IN THE CONTRACT

In a British Columbia Court case, a construction contract did not refer to GST.

Even though there have been cases going both ways on this issue, the majority of the cases, and this case as well, concluded that when a contract does not refer to GST, GST should still be considered to be an addition to the purchase price.

SELF-SUPPLY RULES

Where a taxpayer acquires a newly constructed residential property for lease to others, GST applies on the purchase price.  Therefore, when a property is constructed by the owner, the property is deemed to have been acquired at fair market value and the builder is, therefore, subject to GST on the fair market value of the property at the time it is put into rental use.  However, the builder may claim input tax credits for the GST paid on his/her input costs.

60(11)

NIGERIAN FRAUD

This fraud, which usually originates in Nigeria, generally involves a taxpayer receiving a letter which requests assistance in helping a person to extract large sums of money from a foreign country.  The letter usually implies that there is a crooked element to this and that the Government of Nigeria would not approve if it knew.  The taxpayer is asked to send their banking information so that a massive sum can be moved into their bank account.  The fraudsters then claim that they need a small amount for administration purposes - and these requests continue and continue.

For more information about the Nigerian Fraud mechanics see the National Post, Wednesday, August 21, 2002, for a full-page analysis, including a discussion with Paul B who admits he has thrown away $500,000, lost his life savings, his marriage and his tile business, is in trouble with Revenue Canada and still, over coffee in a Calgary hotel, dials his cell phone and sends off another $2,500.  According to police, the Nigerian scam has taken $10 million from Westerners, including $2 million from a dozen people in Moose Jaw, Saskatchewan.

In another case, Mr. D had sent over $1.9 million for items such as “chemical decoding of cash funds” and bail for a participant who had allegedly been detained in Germany.  In fact, he had to steal from his employer to finance these expenditures for which he was told he would eventually get over $10 million U.S.

With respect to the theft from the employer, the Court of Appeal in Ontario noted that persons in positions of trust, who breach that trust (such as employees), will receive jail terms in the range of three to five years even if it is a first offence and even if there were personal circumstances involved.  The main purpose is to deter, not sympathize.

A NEW TWIST

Some ads promise a guaranteed loan for persons with a poor credit history or no credit rating.  Once contacted, the fraudsters request an up front processing fee.  If paid, it will be gone, along with the company, forever.

The RCMP advise you to call 1-888-495-8501 (toll free) for more information or to report a possible fraud.