Ascend Financial
It's not what you earn... It's what you keep

PERSONAL TAX &n...

PERSONAL TAX  UPDATES 2013


MEDICAL EXPENSES - TRAVEL

In a November 8, 2012 Tax Court of Canada case, CRA disallowed as a medical expense $14,883 of travel costs related to 101 round trips that Mr. Jordan made from Weyburn to Regina to assist his wife in recovering from an aneurysm. 

Taxpayer wins

The Court allowed the deductions on the basis that they were incurred while his wife was receiving medical treatment and, therefore, should not be restricted to just the initial trip from Weyburn to Regina.

DISABILITY TAX CREDIT

In a December 18, 2012 Tax Court of Canada case, the Court determined that the Appellant was not entitled to a Disability Tax Credit for the 2010 taxation year in respect of her diagnosis under Attention Deficit-Hyperactive Disorder and DSM-IV Learning Disability.

The Court noted that there is no doubt that the difficulties experienced by the Appellant are not insignificant, however, they are not sufficiently serious to meet the definition of mental or physical impairment required to claim the credit.

MOVING EXPENSES AND REIMBURSEMENTS

When taxpayers move, they commonly incur significant costs, many of which are deductible as moving expenses, including:

· Transportation and storage costs (packing, hauling, in-transit storage and insurance) for possessions and household contents;

· Reasonable travelling costs (vehicle expenses, meals, accommodation) to move you and your family;

· Temporary living costs near the old or new location (meals, accommodation) for up to 15 days;

· Lease cancellation costs;

· Temporary home costs while trying to sell your vacant residence (interest, property taxes, insurance premiums, heat and utilities) after you have moved out to a maximum of $5,000;

· Transaction costs of selling of your old house (real estate commissions, advertising, legal fees, and mortgage penalties);

· Transaction costs of buying a new house (legal fees and land transfer taxes excluding GST/HST) if the old house is sold due to the move;

· Costs incidental to the move (connecting and disconnecting utilities, changing legal documents such as a driver's license or automobile registration).



EMPLOYMENT INCOME

102(2) 

TAXABLE BENEFIT - EMPLOYER PROVIDED MOTOR VEHICLES REQUIRED TO BE TAKEN HOME AT NIGHT

It was noted by the CRA in Income Tax Technical News No. 40 (June 11, 2009), that travel from home to the office for some employer provided motor vehicles may still be considered taxable benefits even if the vehicles are required to be taken home and prohibited from any other personal use.

It should be noted that when calculating the benefit, the use of these vehicles is not considered personal if the employee proceeds directly from home to a point of call or returns home from that point of call.

RENTAL OF TOOLS AND MOTOR VEHICLE

In a November 29, 2012 Technical Interpretation, CRA indicates that they may consider rental payments made to an employee for the use of his or her vehicle and tools to be income from employment, and not from property, on the basis that the payments are received by virtue of an employer/employee relationship.

DOOR PRIZES

In a February 4, 2013 Technical Interpretation, CRA was asked about door prizes received by attendees at a company social event where every attendee received a door prize.

CRA indicated that their tax-free $500 gifts and awards policy would apply to gifts received by the employee, the employee's spouse, and any other non-arm's length person.

The questioner suggested that gift cards may be given.  CRA noted these near cash gifts would not be included under their gifts policy.  Therefore, the value would be taxable to the employees.  CRA referred to the detailed discussion of their gifts and awards policy at www.cra.gc.ca/gifts.





102(3)

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED)

In an October 25, 2012 Tax Court of Canada case, the Court found that CRA had incorrectly denied SR&ED expenditures of $387,000 in 2008.  CRA unsuccessfully argued that the company was only reproducing existing technology when it incurred expenses to develop a new Heating, Ventilation, and Air Conditioning system for multi-storey residential townhomes.

The Court found for the taxpayer on the basis that the Company had to make modifications to the system to make it work at the level necessary for commercial success.

This means that CRA will have to look at SR&ED claims in their entirety and not try and break them down into component sections as they have done in the past.

SALE OF FAMILY HOMES

In a September 6, 2012 Tax Court of Canada case, the taxpayer was a police officer who had three unreported sales of family homes built in 2004, 2005 and 2007 in which CRA assessed business income of $31,068, $44,729 and $29,872 and also assessed gross negligence penalties.

For the three properties, the ownership period between the date of purchase of the land and the date listed for sale varied between 67 and 110 days.

Taxpayer loses

The Court found that these homes were acquired and built with the intention of selling and were, therefore, business income and, that there was gross negligence in not reporting the income.

BUSINESS/PROPERTY INCOME

2013 FEDERAL BUDGET

102(4)

Some of the provisions in the 2013 Federal Budget include:

First-Time Donor's Super Credit (FDSC)

Budget 2013 proposes a temporary FDSC providing an additional 25-per-cent tax credit for a first-time donor on up to $1,000 of donations. 

A first-time donor will be entitled to a 40-per-cent federal credit for donations of $200 or less, and a 54-per-cent federal credit for the remaining portion, not exceeding $1,000.

An individual will be considered a first-time donor if neither the individual nor the individual's spouse or common-law partner has claimed a Charitable Donation Tax Credit in any taxation year after 2007.

The FDSC will be available in respect of donations of cash made on or after Budget Day (March 21, 2013) and may be claimed only once in the 2013 through 2017 tax years.

Taxes in Dispute and Charitable Donation Tax Shelters

Budget 2013 proposes to allow the CRA to collect 50 per cent of the disputed tax, interest or penalties where an objection has been filed with regards to a disallowance of a deduction or tax credit claimed in respect of a tax shelter that involves a charitable donation.  Normally, collection action cannot be taken while amounts are under objection or appeal.

This measure will apply in respect of amounts assessed for the 2013 and subsequent taxation years.

Leveraged Insured Annuities (LIA) and 10/8 Arrangements

A LIA involves the use of borrowed funds in connection with a lifetime annuity and a life insurance policy, both of which are issued on the life of an individual.

A 10/8 Arrangement generally involves the borrowing of funds secured by a life insurance policy, or investment account under the policy, whereby the rates on the loan and the investment are tied to each other.

Budget 2013 proposes to eliminate unintended tax benefits by introducing rules for "LIA policies" and "10/8 arrangements".

Budget 2013 also proposes to alleviate the income tax consequences on a withdrawal, from a policy relating to a 10/8 arrangement, if the withdrawal is made before January 1, 2014.

Restricted Farm Losses (RFL)

Budget 2013 proposes to codify the chief source of income test whereby other income must be subordinate to farming in order for farming losses to be fully deductible against income from those other sources.

Budget 2013 also proposes to increase the RFL limit to $17,500 of deductible farm losses annually, being the first $2,500 loss plus half of the next $30,000.

These measures will apply to taxation years that end on or after Budget Day.

The Canada Job Grant

Businesses with a plan to train Canadians for an existing job or a better job will be eligible to apply for a Canada Job Grant.  The Grant will provide access to a maximum $5,000 federal contribution per person towards training at eligible training institutions.

As there are various bodies involved, negotiations must still take place to finalize the detailed design of the Grant.

Extension and Expansion of the Hiring Credit for Small Business

Budget 2013 proposes to expand and extend for one year the temporary Hiring Credit for Small Business.  This credit would offset up to $1,000 of the increase in an employer's 2013 Employment Insurance (EI) premiums over those paid in 2012.  Only employers with total EI premiums of $15,000 or less in 2012 qualify.

Stop International Tax Evasion Program

The CRA will pay rewards to individuals providing information on major international tax non-compliance to the CRA of up to 15 per cent of federal tax collected if reassessments exceed $100,000 in federal tax.

Canada - U.S. Information Exchange & FATCA

Budget 2013 confirms the Government is engaged in negotiations with the U.S. for an agreement to enhance reciprocal information exchange under the Canada - United States Tax Treaty.

The agreement would include information exchange provisions in support of the United States Foreign Account Tax Compliance Act provisions.



OWNER-MANAGER REMUNERATION

102(5)

DIRECTOR LIABILITY

In an October 16, 2012 Tax Court of Canada case, the issue was whether the Appellant, as a director of the corporation, was personally liable for the unremitted GST of $2,512.

Taxpayer wins

The Court noted that he had effectively lost control over the corporation's affairs.

It was also noted that the individual is not necessarily personally liable if external constraints (such as psychological, economic and social control) were such that a reasonable person who was a victim of the same control would have done nothing.



ESTATE PLANNING

102(6)

ESTATE PLANNING

It is commonly advised that the RRSP/RRIF holder designate a beneficiary of the plan.  Advantages of this approach include:

· The funds transfer directly, avoiding probate.

· The status as a "refund of premiums" requires no elections.  Refunds of premiums allow a tax-deferred transfer of funds.

· Reporting on transfers to a surviving spouse or common law partner can be avoided.

· The funds are not exposed to liabilities of the deceased's Estate.

· It avoids the risk that a beneficiary will not sign the election, thereby requiring the Estate to pay tax on the account value or, that the opportunity is overlooked entirely by the Executor.

However, there may be advantages to leaving funds to the Estate itself, such as:

· Enhanced planning opportunities, as the elections can be used to determine the precise amounts to be reflected as a "refund of premiums", or reported on the terminal tax return.  

· The elections can also be used to allow the Executors flexibility to determine how any "refund of premiums", and other assets, will be allocated between eligible beneficiaries.  This could be used to direct the "refund of premiums" to lower income beneficiaries and/or beneficiaries best able to utilize rollovers while directing other assets to other beneficiaries.

· Funding a Testamentary Trust.  This may be especially desirable if no "refund of premiums" and/or rollovers are available (or if the plan holder does not want that amount of funds left to those beneficiaries).

Professional advice may be needed in this area.

DEFERRING OLD AGE SECURITY (OAS)

A person may defer receiving the OAS pension by not applying for it at age 65.  The pension amount will be increased by .6% per month of deferral after your 65th birthday or July 1, 2013, and stays in effect until your 70th birthday.

It also appears that a person that turns 65 before July 1, 2013 could consider delaying the receipt of OAS payments for up to five years beyond the 65th birthday.  However, the OAS increase of .6% per month will not commence until July 1, 2013.



WEB TIPS

102(7)

FINANCIAL CONSUMER AGENCY OF CANADA (FCAC) 

The FCAC is an independent body working to empower Canadians to expand their consumer education in the financial sector.

FCAC operates a website, www.fcac-acfc.gc.ca/eng/index-eng.asp, with a host of information on various financial products and services available in Canada such as mortgages, credit cards, insurance products, and other banking services.

Consumer education on the site comes in the form of toolkits and calculators, written commentary, pamphlets, and questions and answers, all of which are fairly simple to use and understand.  The website also provides an area devoted to education about fraud.

In addition, it provides direction for consumers on launching complaints against various federally regulated financial institutions and payment card network operators. 

As the FCAC is an independent body, information bias is reduced. 



GST/HST

102(8)

INPUT TAX CREDITS (ITCs) - TRAVEL ALLOWANCES

In a January 17, 2013 Tax Court of Canada case, ITCs of $126,339 were claimed with regards to travel allowances paid to employed sales representatives for the estimated number of kilometers driven.

Taxpayer loses

The Tax Court noted that:

1. The allowances paid were based on an estimate of the kilometres to be travelled and not on the actual kilometres driven for business.

2. The Excise Tax Act (ETA) permits ITCs related to non-taxable allowances, however, the allowance must be based on the actual number of kilometres driven.

3. The requirements were not met, and the ITCs were not allowed.

DID YOU KNOW

102(9)

CAYMAN ISLANDS 

Effective September 1, 2012, the Cayman Islands have introduced a new 10% payroll levy on expatriates who earn more than $36,000 a year.  This would affect approximately 5,875 expatriates living and working in the Cayman Islands.













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Family Caregive...

Family Caregiver Amount (FCA).

If you have a dependent with an impairment in physical or mental functions, you may
be eligible to claim an additional amount of $2,000 for one or more of the following amounts:

 • spouse or common-law partner amount;
 • amount for an eligible dependent;
 • amount for children born in 1995 or later; and
 • caregiver amount.

The maximum amount for infirm dependents age 18 or older includes the additional amount of $2,000 for the FCA. The dependent with the impairment must be:

• an individual 18 years of age or older and dependent on you because of an impairment in physical or mental functions; or

• a child under 18 years of age, with an impairment in physical or mental functions. The impairment must be prolonged and indefinite and the child must be dependent on you for assistance in attending to personal needs and care when compared to children of the same age.

 You must have a signed statement from a medical doctor showing when the impairment began and what the duration of the impairment is expected to be. For children under 18 years of age, the statement should also show that the child, because of an impairment in physical or mental functions, is dependent on others for an indefinite duration. This dependence means they need much more assistance for their needs and care compared to children of the same age.

You can claim the FCA for more than one eligible dependent.

Please free to contact our office for further information at Ascend Financial 403-823-1212


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First-Time Dono...

First-Time Donor’s Super Credit (FDSC)

The 2013 budget proposes a temporary FDSC providing an additional 25-per-cent tax credit for a first-time donor on up to $1,000 of donations.

A first-time donor will be entitled to a 40-per-cent federal credit for donations of $200 or less,
and a 54-per-cent federal credit for the remaining portion not exceeding $1,000.

An individual will be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed a Charitable Donation Tax Credit in any taxation year after 2007.

As a first-time donor, the FDSC may be shared by you and your spouse or common-law partner in a particular taxation year. However, the total amount of donations that may be claimed under the FDSC by both individuals cannot exceed $1,000.

Only donations of money that are made after March 20, 2013 will qualify for the FDSC.
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Farm deferral program

The Livestock Deferral Program

The Government of Canada has announced that it will introduce legislation to extend the existing rules for prescribed drought regions to farmers carrying on a farming business in a prescribed region of flood or excessive moisture.

Eligible farmers who dispose of breeding livestock in a taxation year because of flood or excessive moisture will be permitted to exclude a portion of the sale proceeds from their incomes until the following taxation year. The Livestock Tax Deferral provision offers insight into this.

The Livestock Tax Deferral provision allows farmers who sell part of their breeding herd due to drought or excess moisture and flood conditions in designated regions to defer a portion of sale proceeds to the following year (see definition of breeding herd). Each year, a list of designated regions prescribed as drought and/or excess moisture and flood regions is announced.

How the Provision Works
To defer income, the breeding herd must have been reduced by at least 15 per cent. Thirty per cent of income from net sales can be deferred if the breeding herd has been reduced by at least 15 per cent, but less than 30 per cent. Where the herd has been reduced by 30 per cent or more, 90 per cent of income from net sales can be deferred.

Proceeds from deferred sales are included as income in the next tax year, when they may be at least partially offset by the cost of reacquiring breeding animals. In the case of consecutive years of drought or excess moisture and flood designation, producers may defer sales income to the first year in which the area is no longer designated.

How the Regions are Designated
Drought or excessive moisture and flood regions are designated on the advice of the Minister of Agriculture and Agri-Food Canada to the Minister of Finance. Canada Revenue Agency requires that designated areas have recognized geo-political boundaries (e.g. municipalities or counties) for administrative purposes.

Discussions with industry representatives in 1990 led to a decision that tax deferral would only be requested if impact was significant. "Significant" was defined as forage yields of less than 50 per cent of the long-term average, and an area that is large enough to have an impact on the industry. Impacts on individual municipalities would not result in a designation.

Livestock producers have also indicated a strong preference for designation to take place as early as possible to provide them with the information needed to make fall and winter management decisions.

A preliminary designation can usually be done in September if it appears that the criteria will be met. Since forage yield information is not final until later in the year, preliminary designation is made primarily on the basis of spring moisture and summer rainfall, supplemented with estimates of forage yield. Assessments of areas are reviewed in discussions with federal and provincial staff. Final decisions and any needed adjustments are made when all forage yield information is available, usually in December.

Only drought or excessive moisture and flood-induced impacts are considered in the designation of eligible areas for tax deferral.

The 2013 zones have yet to be determined and will be disclosed on my blog at a later date. I have include the 2012 Alberta zones for reference purposes.

Alberta
Birch Hills County
Clear Hills County
Grande Prairie County No. 1
Mackenzie County
Municipal District of Fairview No. 136
Municipal District of Peace No. 135
Municipal District of Spirit River No. 133
Nothern Lights County
Saddle Hills County.

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Hanging AroundA...

Hanging Around

As our economy has began it's recovery process,  many businesses are going through a succession process or are currently trying to sell. From a purchasers perspective, consideration should be given to the seller's management and staff. Often a new broom approach is used to sweep  everyone clean - but in business,  not everyone should be discarded.  Previous owners and senior management are often asked to stay on as they offer a blend of new and old which can be contentious or cost-effective.

Keeping senior management on is an approach which offers benefits to both the new owner and the person who staying on. For the former, it provides access for a much needed level of experience as the previous owner has a wealth of knowledge on "how to grow the business best". For the Latter, it offers the seller continuous employment, with a tie to the business they created and a significantly reduced level of stress.

Obviously, from a purchaser's perspective growth is always a main focus, and growth is important. Typically, within the first three years after a corporation has been acquired, there is a 30% drop in sales and revenues. Keeping a key  player means a more successful  transition for a buyer.

Having someone around who knows the business well gives the new owner a chance to get their feet wet under the assistance of someone who knows the operations. This can greatly reduce the learning curve. Additionally, a new owner's stress level can be reduced by knowing that the have a great resource person close at hand. They will be also provide a great introduction for the new owner to all customers and suppliers.

Additional intangible benefits include the goodwill that will extend to any other employees who remain. Having the same senior person provides them with continuity and a person they know while they adjust to the new owner.

From the sellers perspective, often the sales agreement requires a down payment, with the remaining balance paid out of future years. The sales agreement may contain clauses that the net payout is tied to client retention or gross sales.  By staying on as an employee, past owners have a greater ability to impact client retention and gross sales to ensure they receive their full balance of their sales agreement. 

In many cases, saying goodbye to a business is extremely hard. Transitioning out of a business for many sellers provides them with the opportunity to adjust to the changes that have occurred.

Given the level of complexities and emotions associated with the sale of a business it is no wonder there often are problems. There needs to be a clear exit plan.  The purchase and sales agreement often defines timelines with two key factors: the previous owners plans for the future  and the purpose for the overlap. Both the new owner and previous owner should place firmly in their mind the goals that need to be accomplished during that time, and they  then they should focus on completing those tas

As a final thought remember that as a purchaser of a business you maybe acquiring future liabilities depending on how the acquisition occurs.  If for example, the purchase is done as a share acquisition, the purchaser is assuming the employees entitlement for vacation pay. That is to say that long standing employees, who have worked their way up to three or four weeks of vacation will still have that entitlement after the acquisition. This entitlement is an added annual cost that needs to be considered. Additionally these same employees would be entitled to a greater severance package on termination. Neither of these are applicable in an instance where there is simply an asset purchase. 

Obviously a purchase of a business is extremely complicated and requires a great deal of thought and planning. To help simplify your acquisition, contact an Accountant at Ascend Financial and discuss the same with your legal counsel. Please note  that this article touches only a few aspect and isn't meant to apply to everyones situation.  

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