REMINDER: YEAR-END TAX PLANNING (top of the page)

1. If the following expenditures are made by individuals by December 31st, 2005 they will be eligible for 2005 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions and medical expenses.

2. 2005 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2004 personal income tax return assessment notices. You have until March 1st, 2006 to make tax deductible RRSP contributions for the 2005 year.

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

3. Persons turning 69 in 2005 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31st, 2005.

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

5. Consider purchasing assets eligible for capital cost allowance before the year end. For example, employees may claim capital cost allowance on automobiles used in their employment. – Must have a T2200.

6. 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 year end. This capital loss may be offset against the capital gains.

7. 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, 2005.

8. Health and dental premiums for the self-employed

Individuals will be allowed to deduct amounts payable in respect to the year for Private Health Service Plan coverage in computing business income provided they meet certain criteria

PERSONAL TAX (top of the page)


MEDICAL EXPENSE – MEDICATIONS

In a July 29th, 2005 Tax Court of Canada case, the taxpayer purchased “over-the-counter” medications, as advised by his doctor, with respect to throat cancer.

These expenditures were denied as a medical expense because they were not “recorded by a pharmacist”. The Court noted that there are laws throughout Canada that describe the records that a pharmacist is required to keep. Medications purchased off the shelf do not meet these requirements.

ADOPTION EXPENSE TAX CREDIT

The Income Tax Act now provides a tax credit for eligible adoption expenses to a maximum of $10,000 during the adoption period.

An eligible child means a child under age eighteen at the time the Adoption Order is issued.

DISABILITY TAX CREDIT

In a July 7th, 2005 Tax Court of Canada case, the Court permitted a Disability Tax Credit for a taxpayer with a number of health problems including:

(i) (ii) (iii)

rheumatoid arthritis which restricted her from performing her daily functions; severe diabetes; and a psoriasis skin disorder.

The Court noted that the Disability Tax Credit is also available to a person who has a cumulative disability creating a severe and prolonged impairment.

INCORPORATION OF PROFESSIONAL PRACTICES

The rules affecting incorporation of professional practices have recently been relaxed. However, incorporating a professional practice may not be economically beneficial to all professionals as the anticipated tax savings may be minimal and outweighed by extra expenses and higher exposure to audit risk. If applicable, please contact our office to evaluate your particular situation.

EMPLOYMENT INCOME (top of the page)

DEDUCTIONS

In an August 5th, 2005 Tax Court of Canada case, an investment advisor’s claim with respect to employment expenses for compensation to a client who lost money, workspace in the home, office equipment, and transportation was dealt with as follows:

The Court disallowed the amount of the claim paid to unhappy clients because the advisor did not have formal recordkeeping as to the payments.

The Court accepted Canada Revenue Agency’s reassessment that only 8% of the home was used for the home office, rather than the 25% claimed by the taxpayer because the taxpayer did not prove the 25%.

Canada Revenue Agency permitted only partial claims for the equipment leasing payments made to the advisor’s spouse’s company due to a lack of documentation.

Also, the claim for transportation expenses was disallowed because of a lack of documentation.

MORAL: Documentation is important! Please note that an “automobile log” is required in order to substantiate the claim for the business travel.

CAPITAL GAINS/LOSSES (top of the page)

CAPITAL GAIN EXEMPTION – TWO-YEAR HOLDING RULE

In general, an individual must hold shares for two years to obtain the $500,000 enhanced capital gain exemption on the sale of the shares of an active private corporation. However, the Income Tax Act permits an individual to transfer all, or substantially all, of the assets used in a proprietorship to a corporation and then sell the shares immediately and still get the capital gain exemption.

In a March 21st, 2005 External Technical Interpretation, Canada Revenue Agency noted that this is also available to an individual who sells all, or part, of a partnership interest to a corporation.


OWNER - MANAGER REMUNERATION(top of the page)

RETIREMENT COMPENSATION ARRANGEMENT (RCA)

The normal procedure when a Canadian-controlled private corporation has active business income in excess of $300,000 is to declare a bonus to the owner-managers such that the corporate active business income is reduced to, say, $300,000 and the bonus is taxed as employment income to the owner-managers.

Alternatively, the corporation may bonus down to the provincial small business deduction amount which is $400,000 in some provinces.

An alternative to the “bonus” is to pay that amount to a pension vehicle – an RCA. The payment is subject to a 50% refundable tax to the government. When funds are distributed (taken out by the employee) from the RCA, the 50% tax penalty withheld is refunded and the amounts are taxable to the individual. The advantage is that the corporation may use the assets of the RCA and the refundable tax as collateral to obtain a bank loan thereby increasing the capital available to the company.

The RCA may make sense to owner-managers that already have personal income taxed at top rates.

Caution: This is complicated, requires special professional advice, and is not for everybody.

MARRIAGE BREAKDOWN (top of the page)

RETROACTIVE SUPPORT

An article in the Globe and Mail notes that the Supreme Court of Canada will hear an appeal from four Alberta fathers about the fairness of having to make large retroactive child-support payments.

Also, an Ontario taxpayer has appealed an Ontario Court of Appeals decision to the Supreme Court of Canada where his former wife successfully applied to reinstate her spousal support payment that was terminated by the Manitoba Courts in 1992. The taxpayer faces the prospect of paying hundreds of thousands of dollars of retroactive support.

LUMP-SUM RETROACTIVE SUPPORT PAYMENTS DEDUCTIBILITY

In a July 12th, 2005 Canada Revenue Agency Release, Canada Revenue Agency notes that their position in respect of the deductibility to the payor and income inclusion to the recipient of a lump-sum retroactive support payment is set out in Paragraphs 21 and 22 of their Interpretation Bulletin IT-530R which is available on the CANADA REVENUE AGENCY website (www.cra-arc.gc.ca).

ESTATE PLANNING (top of the page)

CLAWBACKS ON SENIORS

Taxpayers age 65 or over who have higher income on their personal tax returns are subject to a clawback of the Old Age Security. For example, the clawback rate in 2005 is 15% of the excess when the person’s income reaches $60,806. The clawback is based on individual income. Therefore, if each spouse has, say, $55,000 of income there will be no clawback.

In addition, the age credit for persons reaching age 65 is reduced by 15% of the excess income in 2005 over $29,619.

In addition, there are clawbacks of the GST credit and other low income entitlements.

Consider this: If a taxpayer dies and leaves assets to a spouse, it may be advantageous if those amounts were left in trust so that the income is on a Trust Return and, not on the personal tax return of the beneficiary. Another option is to have a corporation, not the individual, earn income such as business income.

RECEIVING CANADA PENSION PLAN (CPP) EARLY

If a person qualifies, and take CPP early (for example, at age 60), rather than age 65, the CPP is reduced by 0.5% a month for each month under the age of 65. Therefore, the CPP received at 60 would be 30% lower than the age 65 amount.

If the individual has a private pension plan which will be reduced by CPP received at age 65, it may make sense to start receiving CPP at age 60.

REGISTERED EDUCATION SAVINGS PLAN (RESP)

For the first $2,000 contributed to an RESP in a year for a child, the federal government will contribute 20%, or $400, as a Canada Education Savings Grant (CESG) (to a total maximum of $7,200 per child).

The money contributed to the RESP grows on a tax-deferred basis although the initial contribution is not tax deductible. The investment income is taxed to the student when withdrawn for educational purposes. The RESP investments are the same as for RRSPs.

A Family RESP Plan may be established so that the funds could be used by any of the children. Also, a RESP may be established such that if the child does not attend a post-secondary institution, the funds may be rolled into the contributor’s RRSP, assuming the contributor has contribution room. If contribution room is not available, the contributor may withdraw the funds but is subject to a 20% penalty tax. In both cases, the CESG must be paid back.

Other ways to provide funds for a child’s education include Trusts where one parent contributes the funds and the other parent acts as the Trustee. However, these Plans miss out on the CESG.

REVERSE MORTGAGES

A Reverse Mortgage permits an elderly person to borrow a percentage of the equity in their homes. The money borrowed plus interest does not have to be repaid until the homeowner sells the home, moves, or dies. Since 1986, these mortgages have largely been provided by a company called Canadian Home Income Plan Corp. (CHIP).

The Canada Mortgage and Housing Corporation (CMHC) website warns that Reverse Mortgages can be expensive because of high fees and higher interest rates and will deplete the equity in the home.

The proceeds are tax-free as they represent loans. Therefore, they will not affect income-related plans available to seniors such as the Guaranteed Income Supplement, Old Age Security, the age credit, and GST credits.

(top of the page)


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