MARCIL LAVALLÉE Tax Letter Marcil Lavallée November 2010 In this issue: TFSA OVERCONTRIBUTION PENALTIES FOR 2009 TFSA OVERCONTRIBUTION PENALTIES FOR 2009 UNIVERSAL CHILD CARE BENEFIT FOR SINGLE PARENTS EMPLOYEMENT- RELATED FREQUENT FLYER POINTS SHAREHOLDER LOANS DONATIONS OF PUBLICLY-LISTED SECURITIES RRSP HOME BUYER S PLAN NEW CRA USER ID AND PASSWORD SERVICE AROUND THE COURTS 500-214 ch. Montreal Rd. Ottawa ON K1L 8L8 Telephone : 613 745-8387 Fax : 613 745-9584 Last year was the first year in which TFSAs were allowed, and a general $5,000 limit for contributions applied for the year. Withdrawals from the TFSA are added back to the contribution room, but not until the year following the year of withdrawal. Therefore, if you contributed the full $5,000 and withdrew an amount during 2009, your withdrawal would not add further contribution room to the TFSA until 2010. Many individuals did not understand this rule. They withdrew amounts in 2009 and thought that the withdrawn amounts could be re-contributed in 2009 to the same or another TFSA (in addition to the general $5,000 limit). Individuals who "over-contributed" in this manner are liable to a penalty tax, equal to 1% of the excess amount per month in which there remains an over-contribution. The Canada Revenue Agency (CRA) mailed over 72,000 proposed TFSA returns on June 1, 2010 to individuals who may have over-contributed to their TFSA in 2009, seeking more information about their situation. The CRA initially gave these individuals until August 3, 2010 to respond by either agreeing to pay the penalty tax (and sign and send back the return) or to send the CRA a letter to request a review of their file and possible relief of tax based upon their situation and related circumstances. If a person who received a TFSA return did not respond by August 3, 2010, the CRA indicated that it would assess the person "based on the information available" and issue a TFSA notice of assessment. Not surprisingly, this caused a storm of complaints, which attracted the attention of the media. People who had done what they thought was normal for TFSA take money in and out were being hit with severe penalties. Given the very low interest rates over the past couple of years, a 1% per month penalty would dwarf most taxpayer's "tax-free" returns in the TFSA. All the media attention had an impact. The CRA effectively extended the August 3 deadline, stating: If you did not respond by the August 3, 2010 deadline, you can still send CRA a letter to request a review of your file based upon your situation and related circumstances." The CRA stated that it may waive the penalty tax based on the circumstances. The June 2010 letters and proposed TFSA returns were not notices of assessment; they are not legal documents that create a formal deadline to respond.
Page 2 Marcil Lavallée - Tax Letter TFSA OVERCONTRIBUTION PENALTIES FOR 2009 (CONTINUED) However, if you have not responded with a request to review the TFSA return, or if you signed and sent back the TFSA return without a request for the review, the CRA indicates that it will assess the return and send you a notice of assessment. If you disagree with the TFSA notice of assessment, the CRA states that it strongly recommend that you first call the CRA individual income tax enquiries line at 1-800-959-8281 to discuss the matter. Many disputes are resolved this way. If that does not resolve the issue, you can file a notice of objection by the later of one year after the original deadline for filing the return and 90 days after the date of the notice of assessment. UNIVERSAL CHILD CARE BENEFIT FOR SINGLE PARENTS Having children would be useless if their little heads and tiny hands would not be ever-present with their smiles and caresses in The Universal Child Care Benefit (UCCB) pays families $100 a month for each child under the age of 6 years. In a two-parent family, the UCCB is included in the income of the lowerincome spouse or common -law partner. For a single-parent, the UCCB is normally included in the single parent's income. However, effective for 2010, a single parent can designate, in his or her tax return for the year, that all UCCB payments are to be included in the income of the parent s dependent child for whom the wholly dependent person credit ("equivalent-to-spouse" credit) is claimed. If that credit is not claimed, the single parent can designate that UCCB be included in the income of any one of the children for whom the benefit is paid. This new measure will obviously help single parents since their children will typically be in lower tax brackets, and in most cases there will be no tax payable on the UCCB because of the child s basic personal credit. our minds and in our hearts. Hervé Biron
Marcil Lavallée - Tax Letter Page 3 EMPLOYMENT-RELATED FREQUENT FLYER POINTS The CRA historically took the position that personal frequent-flyer points or similar loyalty points collected by employees when booking employmentrelated travel (e.g. with the employee s personal credit card) were taxable benefits. The CRA was of the view that it was the responsibility of the employee to determine and include in income the fair market value of any benefits received or enjoyed with the points. However, effective 2009, the CRA changed its administrative position and stated (in Income Tax Technical News #40) that such points will no longer give rise to taxable benefits. Therefore, for example, if you book employment travel with your personal credit card (which your employer then reimburses) and collect and redeem the frequent flyer points, you will not have a taxable benefit. the plan or arrangement is not for tax avoidance purposes. If any of the above applies, the new CRA position does not apply and the CRA will assess on the basis that the value of the resulting benefits is taxable. As an indication of when such points would give rise to taxable benefits, the CRA provided the following example: Example Personal Credit Card Pauline's employer has allowed her to use her personal credit cards whenever possible to pay for business expenses, which the employer subsequently reimburses to Pauline. To maximize the points earned, Pauline used her personal credit cards to pay for various employer business costs, including travel expenses of other employees. In this case, Pauline must determine and include in income on her personal income tax return, the value of benefits received or enjoyed. Lastly, if the employer rather than the employee controls the points (for example, a company credit card is used to book the travel), and the employer allows points to be used by the employee, the CRA takes the view that the points give rise to taxable benefits. In such case, the CRA notes that employer is required to report the fair market value of any benefits received by the employee on the employee's T4 slip when the points are redeemed. (Based on the 1995 Tax Court decision, the value of the benefit of a free flight is the lowest price paid by a paying passenger for an equivalent seat on that flight.) I think crime pays. The hours are good and you travel a lot. Woody Allen However, the new CRA position regarding the nontaxability of the points is subject to the following conditions: the points are not converted to cash, the "plan or arrangement is not indicative of an alternate form of remuneration", and The CRA would not consider such an arrangement to qualify as a non-taxable amount under the administrative policy. The arrangement is indicative of having been made in order to provide a benefit to the employee as an alternate form of remuneration (because Pauline is effectively manufacturing rewards by paying for other employees' travel).
Page 4 Marcil Lavallée - Tax Letter Never marry for money, you can borrow for much less trouble. Scottish Proverb SHAREHOLDERS LOANS If you are a shareholder of a corporation or a person not dealing at arm s length with a shareholder and you receive a loan or otherwise become indebted to the corporation, a rule in the Income Tax Act (subsection 15(2)) provides that the full principal amount of the loan is included in your income. Fortunately, there are various exceptions, where this rule does not apply. First, the shareholder-loan rule does not apply if the loan is repaid within one year after the end of the taxation year of the corporation in which the loan was made (unless the repayment was part of a series of loans and repayments). For example, if the corporation s taxation year is the calendar year and it provided you with a loan at any time during 2010, you have until December 31, 2011 to repay the loan to fall within this exception. Another exception applies where you receive the loan in your capacity of employee with the corporation rather than in your capacity as shareholder. More specifically, it must be reasonable to conclude that you received the loan because of your employment and not because of any person's shareholdings, and, at the time the loan was made bona fide arrangements were made to repay the loan within a reasonable time. If you are not a specified employee (see below), you can use the loan for any purposes and still fall within this exception. However, if you are a specified employee, the loan must be used to either (i) (ii) purchase a dwelling in which you will live, purchase new shares from the employer corporation (or a related corporation), or (iii) purchase a motor vehicle to be used in your employment duties. For the above purposes, a specified employee is generally one who does not deal at arm s length with the employer corporation or who owns at least 10% of the shares of any class of the corporation or a related corporation. Another exception to the shareholder-loan rules generally applies to loans made by employers who are in the business of lending money. This exception applies to a debt that arose in the ordinary course of the corporation s business or a loan made in the ordinary course of its business of lending money if, at the time the debt arose or the loan was made, bona fide arrangements were made for repayment of the debt or loan within a reasonable time. In all cases, if the shareholder loan is included in your income, but you later repay the loan, you get a deduction in the year of the repayment. Possible imputed interest benefit if shareholder loan rule does not apply If the shareholder loan rule does not apply, you may be subject to an imputed interest benefit if the loan is interest-free or carries a rate that is below an arm s length rate of interest. The benefit will equal the prescribed rate under the Act applied to the amount of the loan outstanding in any particular period in a taxation year. (The prescribed rate is set quarterly for these purposes, and has been 1% throughout 2010.) However, the benefit for the year is reduced by any interest paid in the year or by January 30 of the following year. Therefore, for example, if you received a $10,000 loan from your corporation on January 1, 2010 (and the shareholder loan rule did not apply), you would have no imputed interest benefit if you paid $100 interest on the loan in 2010 or by January 30, 2011.
Marcil Lavallée - Tax Letter Page 5 SHAREHOLDERS LOANS (CONTINUED) If the imputed interest benefit does apply and is included in your income, you will get an offsetting deduction if you used the loan for the purpose of earning income from property or business. For example, if you received a $10,000 interestfree loan on January 1, 2010 and therefore did not pay any interest, 1% of the loan ($100) would be included in your income for 2010. However, if you used the $10,000 loan to purchase an income-producing property, you would get an offsetting deduction of the same $100. DONATIONS OF PUBLICLY-LISTED SECURITIES If you make a donation to a Canadian registered charity, your donation qualifies for the charitable tax credit. The federal credit is 15% of the first $200 of donations in a year plus 29% of any donations over that $200 amount. The provinces each offer a corresponding tax credit, which varies by province. The total value of the credit is usually in the range of 40-50%. Most people donate cash, in which case the only tax issue is the calculation of the credit. However, if you donate property, you are disposing of the property by way of gift, which normally creates a capital gain for tax purposes if the fair market value of the property exceeds your cost of the property. However, if you donate a property that is a share, debt obligation or right listed on a designated stock exchange, a share of the capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund trust, or certain cultural property, your taxable capital gain, if any, on the disposition is deemed to be nil. At the same time, the fair market value of the property will still qualify for the credit. Example You own shares in XCorp, which is listed on the Toronto Stock Exchange. You decide to donate the shares to a registered charity (and you have not made any other donations this year). Your cost of the shares was $1,000 and the fair market value of the shares at the time of the donation is $10,200. Your taxable capital gain will be nil, so you will pay no tax on the disposition of the shares. Nobody needs a smile as much as the person who has none to give. Dale Carnegie
Page 6 Marcil Lavallée - Tax Letter RRSP HOME BUYER S PLAN The RRSP Home Buyer s Plan has proven to be very attractive for first-time buyers of homes. Under the plan, you and your spouse (or common-law partner) can each withdraw $25,000 from your own RRSP, taxfree, and use the proceeds to purchase a home. Thus, a total of $50,000 per couple can be withdrawn for this purpose. There are some conditions that must be met. First, you and your spouse must not have owned an owner-occupied home in the period beginning with the start of the fourth calendar year before the year in which you acquire the new home and ending 31 days before the acquisition of the new home. (The 31-day rule allows you to acquire your new home up to 30 days before the withdrawal). This condition is waived if you are disabled or you are purchasing a home for a disabled person related to you (you or the related person must generally be eligible for the disability tax credit). You must acquire the home by October 1 of the year following the year in which you withdraw the amount. You must intend to occupy the home as your principal place of residence no later than one year after acquiring it. However, once you live in the home, there is no minimum period of time that you have to live there. To withdraw from your RRSP under the plan, you need to file the Form T1036, for each RRSP withdrawal you make. You do not have to withdraw the whole amount (e.g. $25,000) at once; you can withdraw it at separate times during one taxation year and up to the end of January of the following year. Your financial institution will not withhold any tax on the withdrawal. You must repay the withdrawals by contributing them back to your RRSP, beginning with the second year following the year of withdrawal. The repayments are not deductible. The repayments are made like regular contributions in the year or within 60 days after the end of the year. Then, when you file your tax return for that year, you designate the amount of the contributions that are the repayments, and your contributions, if any, that are regular deductible RRSP contributions. Interest is not payable on the repayments. You must repay a minimum of 1/15 per year for up to 15 years. To the extent you do not pay the minimum amount in a year, the unpaid amount is included in your income. You can repay more than the 1/15th amount in any year. Human beings are the only creatures on earth that allow their children to come back home. Bill Cosby
Marcil Lavallée - Tax Letter Page 7 NEW CRA USER ID AND PASSWORD SERVICE You may be aware that the CRA offers an online My Account and My Business Account service, which allows you to access significant amounts of personal or business information relating to your taxes, and do various transactions with the CRA online. For example, the services allow you to review your past returns, notices of assessment, your RRSP contribution room, and your instalments and other payments of tax. There is also a Represent a Client online service, which allows representatives of taxpayers to obtain authorization to act on behalf of the taxpayers in their dealings with the CRA. On October 4, 2010, the CRA replaced the existing Government of Canada epass system for these accounts with a new CRA user ID and password service. Therefore, if you try to access your account on or after that date, you will be required to reply with certain personal information and to create a new CRA user ID and password. The My Account, My Business Account, and Represent a Client Account, are all available on cra.gc.ca under Online Services. AROUND THE COURTS Certain moving expenses denied If you move to a new home to start a job at a new work location or a business at a new location, you are generally allowed to deduct moving expenses if your new home is at least 40 kilometres closer to the new work location than was your old home (to the new location). The deductible moving expenses are described in subsection 62(3) of the Income Tax Act, which states that moving expenses include a specific list of items. The courts have held that "moving expenses" can also mean other amounts under the ordinary meaning of the term, other than those explicitly included in subsection 62(3). In the recent case of Christian, one of the main issues was whether certain expenses not listed in subsection 62(3) were nonetheless deductible moving expenses. The CRA agreed that the taxpayer s move (from Alberta to Ontario) otherwise qualified for the moving expense deduction. The taxpayer took 10 days to drive to her new home and claimed meals and accommodation expenses incurred over those 10 days. The CRA accepted the claim for only 7 days of expenses, assuming 400 km per day and 4 hours of driving per day an amount that the CRA considered reasonable. The excess amount claimed was refused because there was some leisure time included in the claim. However, on appeal, the Tax Court allowed the deduction of all 10 days of expenses. The Court was of the view that, considering the distance travelled, the fact that the taxpayer was driving alone with her two young children and that she had certain problems, 10 days for the travel was reasonable in the circumstances. The taxpayer also attempted to deduct writ interest expense owing in respect of her old house. This interest expense related to a lien on the home resulting from a tax debt owed by The more memory a computer has, the faster it can produce error messages. Dave Barry
Page 8 Marcil Lavallée - Tax Letter AROUND THE COURTS (CONTINUED) her husband, for which she was jointly and severally liable, and which she had to pay off in order to sell the home. The Tax Court disallowed the deduction, on the grounds that it did not constitute a moving expense in the natural and ordinary meaning of that expression and was not directly and solely related to the move. Lastly, the taxpayer attempted to deduct certain freight/post costs in respect of the old home, and waste removal and costs of repairs of the old home (floor touch -up costs before the residence was listed for sale). The Tax Court disallowed the freight/post costs because no receipts were provided. The waste removal and repair costs were disallowed because they were incurred in preparation for the move rather than being actual moving expenses. Discounted tuition for teachers children was taxable benefit The value of benefits received in respect of, in the course of, or by virtue of employment are normally included in income. In the recent Spence case, taxpayers conceded that there was an employment benefit, but the amount of the benefit was at issue. The taxpayers were a married couple who were teachers at a Montessori school. The school offered them a 50% discount on tuition for their children. For income tax purposes, the school reported the difference between the discounted price charged by the school and the cost to the school of providing education at the school for each child (as calculated by the school). This cost was less than the actual 50% discount on the tuition. However, the CRA reassessed the taxpayers to include the entire 50% discount in their incomes. The Tax Court was of the view that the CRA position should be valid, given that the value of benefits should be included in income. However, the Court felt obliged to follow earlier case law on point, and held in favour of the taxpayers. Therefore, the smaller amount (the difference between the discounted tuition they paid and the school s cost of providing the education) was included in their incomes. This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements. MARCIL LAVALLÉE CERTIFICATION / ACCOUNTING / TAXATION / ADVISORY SERVICES