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MAY
2014
TAX TIPS, TRAPS... and other financial facts




April 9, 2014 - After learning on April 8, 2014 about the Internet security vulnerability named the
Heartbleed Bug, the CRA temporarily shut down public access to online services.

E-Services were resumed April 14, 2014. CRA confirmed that interest and penalties will not be applied to individual taxpayers filing their tax returns up until the new deadline of May 5, 2014.

CRA noted that Social Insurance Numbers of approximately 900 taxpayers were removed from CRA systems by someone exploiting the Heartbleed vulnerability.

CRA wil send a registered letter to taxpayers affected to inform them of the breach. CRA will not be calling or emailing individuals to inform them that they have been impacted so that their communications cannot be exploited through phishing schemes.

CRA will provide those affected with access to credit protection income services at no cost.

It is only the federal individual income tax deadline that has changed. For example, if a self-employed individual is an annual filer for GST/HST purposes, April 30 remains as the due date even though the income tax is effectively due on May 5.

Also, other deadlines do not change such as the April 30 deadline for a corporation that has an October 31, 2013 year-end.
In a December 10, 2013Technical Interpretation (2013-0490621E5, Ruttan-Morillo, Bonnie), CRA noted that an amount is generally considered to be received in a person's capacity as an individual
(not taxable), as opposed to their capacity as an employee, where the amount is:
  • Philanthropic;
  • Voluntary;
  • Not based on employment factors such as performance, position, or years of service; and
  • Not made in exchange for employment services.
An amount received by virtue of an office or employee is taxable (unless exempt under the gifts, awards and social policy), while amounts received in the capacity of an individual are not taxable (see IT Bulletin IT-334R2). 

 

Also, an amount received by an individual as a windfall is not taxable. See IT-334R2 for a list of factors indicative of a windfall.
In a March 4, 2014 Technical Interpretation (2014-0519051E5, D'Angelo, S.), CRA discussed whether meal costs uncured in a business were subject to the 50% limitation on deductibility. CRA discussed two exceptions to the limitation, as follows:
  • Subsection 67.1(2)(a) allows 100% deduction of food, beverages or entertainment provided for "compensation in the ordinary course of a business", citing the example of a restaurantand noting it was a question of fact whether such costs form art of the taxpayer's product or service provided to paying customers".
  •   Subsection 67.1(2)(d) provides the limitation does not apply to meals included in an employee's income, or which would be included but for Subparagraph 6(6)(a)(ii), dealing with costs related to work at a remote location. CRA noted that this exception would not be available in respect of meals paid to non-employees such as independent contractors.
In a January 7, 2014 Tax Court of Canada case (1591141 Alberta Ltd. vs. M.N.R., 2013-153(CPP)), the Court considered whether a newly formed numbered company immediately succeeded another employer in respect of the employee, due to the formation of a corporation. If so, the taxpayer would meet the  requirements in Subsection 9(2) of the Canada Pension Plan and avoid paying the employer portion of CPP twice. In this case, the individual, who had previously been employed at Teamco, incorporated his own numbered company (the Appellant), and became an employee of the Appellant. The Appellant then entered into a contract for services with Teamco.
 

This occurred three months after the beginning of the year, such that Teamco's and the Appellant's CPP contributions had been paid twice.

 

Taxpayer loses

The Court dismissed the Appeal noting that the mere creation of a numbered corporation did not result in the numbered company succeeding Teamco as the employer due to the incorporation. The incorporation did not cause the change in the employment relationship.

 
In a March 6, 2014 Tax Court of Canada case (Adnan Arif vs H.M.Q., 2012-4694(IT)I), the Court reminds that taxpayers are required by law to keep records to support their business income. The Court specifically  noted that just because a business may be small is no excuse for failing to comply with the legislative requirements.

 

See http:www.cra-arc.gc.ca/records/ for CRA's discussion on recordkeeping.
In a January 30, 2014 French Technical Interpretation (2013-0515761ES, Seguin, Marc), CRA note that a
dividend/salary is taxed at the individual shareholder level when received.

 

CRA also noted that a journal entry recording a credit to the loan account of a shareholder does not, in and of itself, constitute a payment of a salary or dividend. Accounting records or entries serve only to reflect the transactions. However, other evidence, such as the proper documentation of the minutes of a meeting of directors, and a T4-T5 indicating the appropriate amount could show that a payment was made.

 

 

Where there is a credit to the loan account of a shareholder representing the payment of a salary or dividend, the amount is deemed to be received by the shareholder as a dividend or bonus equal to that amount.


The facts and realities of each case determine whether a dividend or salary is paid. This Technical Interpretation provides details and examples.
When paying salaries to family members, it is often preferable to utilize the standard payroll process - withhold source deductions, issue a T4, provide a cheque or direct deposit, etc.

In certain scenarios, however, taxpayers may choose to provide family members with alternative  compensation. In a January 23, 2014 Tax Court of Canada case (Rogers vs H.M.Q., 2013-1695(IT)I), the Appellant provided her two sons each with a used car as compensation for their work in the Appellant's
business. The business deducted the value of the cars provided to the sons as a 'salary expense'. Both sons provided the Court with a detailed explanation and chart of the work done in the business.
 

Taxpayers wins, in part

The Court allowed the expense for the car payment salaries for the year that adequate support was  available. Expenses claimed in the second year were disallowed due to insufficient documentation. Various other expenses were disputed in this case.
In a December 6, 2012 Technical Interpretation (2012-0458401I7, Godson, Dillian), CRA noted that missing information with regards to Forms such as the T1135 may subject the taxpayer to Subsection 162(7) or 162(5) penalties.

 

Where a timely filed Form is missing information that does not affect the substance of the Form, a penalty provided by Subsection 162(5) is applicable for the failure to provide information required on a prescribed Form. This penalty equals $100 for each such failure. Where a taxpayer has failed to provide multiple pieces of required information on one prescribed Form, the CRA considers this to be one failure.

Where the lack of information is such that the Form is considered substantially incomplete, it would be considered invalid and, therefore, the penalty provided under Paragraph 162(7)(a) may be applied. This penalty equals the greater of $100 and $25 multiplied by the number of days, not exceeding 100, during which the failure continues.
On April 7, 2014, CRA announced that employers may electronically request to transfer a misallocated  credit within a payroll program account or from a payroll program account to another program account. Also they may now request a search for a payment that has been made but has not been credited to the account.
A March 19, 2014 Special Report issued by the Taxpayer's Ombudsman addresses charitable donation tax shelters which offer "official donation tax receipts several times higher than the amount contributed  resulting in tax credits greater than the amount the donor is out of pocket".

While briefly discussing the technical issues in respect of such tax shelters, and exposure to the gross  negligence penalty, the report focuses on complaints received by donors alleging CRA provided insufficient information to warn them of the consequences of such donations.

The Report, titled "Donor Beware", notes that the CRA has posted warnings about tax shelters in general since 1998, and donation shelters specifically since 2003. The Report asks the question, "Is the CRA meeting its obligations pursuant to the Taxpayer Bill of Rights to warn Canadians of questionable tax schemes?".  After an extensive analysis, the Report recognizes CRA has "made many efforts", and that the majority of potential donors are getting the message, with a decrease of 82% in participants since 2006 (from 50,000 annually to 8,200).

However, the Report also opines that "more could and should be done", such as Members of Parliament including warnings about tax schemes in the "householder" newsletters they distribute to their constituents. Enlisting the help of associations representing seniors and retired people in distributing warnings is also suggested, given that the complaints suggest many seniors are caught up in these schemes.
The Business Development Bank of Canada (www.bdc.ca) , a Crown Corporation, provides a wide range of free information, tools, calculators, guides, ebooks and a blog, for entrepreneurs and businesspersons
in Canada.

The advice centre of the website, https://www.bdc.ca/EN/advice_centre/Pages/default.aspx, information into various categories such as: Start of Buy Expand your Sales, Technology and Manage your Assets.
 
Some interesting free tools and guides, include the recently released publication, Master your Cash Flow: A Guide for Entrepreneurs and a short website assessment examining accessibility, experience, marketing and technology.


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