Automobile Limits: (top of the page)

The automobile expense deduction limits for 2003 are:

The ceiling on the allowable purchase price of an automobile for CCA (depreciation) purposes will remain at $30,000 (plus federal and provincial sales taxes).

The limit on deductible leasing costs is $800 per month (plus federal and provincial sales taxes) for leases entered into after 2002.

The limit on the deduction of tax-exempt allowances paid by employers to employees in Ontario is 42 cents per kilometre for the first 5,000 kilometres and 36 cents for each additional kilometre.

The maximum allowable interest deduction for amounts borrowed to purchase an automobile is $300 per month.

The general rate for the taxable benefit on the personal portion of automobile operating expenses paid by employers is now 17 cents per kilometre. Alternatively, the operating cost benefit may be calculated as 1/2 of the standby charge if the automobile is used more than 50% for business.

Extended Cab Pick-up Trucks, Vans and SUVS: (top of the page)

Pick-up trucks, vans and SUVs having a seating capacity of not more than a driver and two passengers are excluded from the definition of automobile (and thereby the restrictions on expense deductibility) if they are used primarily for the transportation of goods or equipment in the course of earning or producing income. Vehicles having a seating capacity of more than a driver and two passengers are also excluded from the automobile definition, but only if all or substantially all of the driving is for the transportation of goods, equipment or passengers in the course of earning or producing income.

Interesting New Service: (top of the page)

The tax department has introduced a new on-line (website: www.ccra-adrc.gc.ca) service entitled "My Account" for viewing personal income tax data including Canada Child Tax Benefit and GST information.

Penalties for Late Filing or Payment: (top of the page)

Canada Customs and Revenue Agency will apply the Fairness Provisions to individuals and businesses in the aftermath of the August 2003 power outage in Eastern Canada. On August 19, 2003, the Ontario government announced that no interest or penalties will be charged on late tax payments or tax installments during the August state of emergency. If you have a personal emergency the Fairness Provisions may also apply.

Registered Pension Plan and RRSP Limits: (top of the page)

The money purchase Registered Pension Plan limit will be increased to $15,500 for 2003, $16,500 for 2004 and $18,000 for 2005.

The RRSP limit will also be increased to $14,500 for 2003, $15,500 for 2004, $16,500 for 2005 and $18,000 for 2006.

Capital Gains Rollover on Sale of Business: (top of the page)

Currently, an individual is allowed to defer the taxation of capital gains realized on the sale of common shares issued to the individual by an eligible small business corporation. This deferral was available with respect to investments of up to $2 million, to the extent that the proceeds from the sale are reinvested in treasury common shares of other eligible small business corporations.

The capital gains rollover are expanded:

-Eliminating the $2-million limit on the amount of the original investment;
-Eliminating the $2-million limit on the amount that can be reinvested in shares of eligible small business corporations; and
- Allowing a reinvestment to be made at any time in the year of disposition or within 120 days of the end of that year.

Remuneration of Shareholders/Owners: (top of the page)

A travel allowance of $150 per day paid to a shareholder and director for travelling on business away from the employer's municipality is reasonable and allowed.

The failure of the employee to produce vouchers for the expenses is irrelevant.

The $150 per day is an allowance and, appears reasonable on the basis that it is designed to cover hotels, meals, parking and incidental travelling expenses.

Private Health Services Plan (PHSP) - For An Owner/Manager: (top of the page)

A PHSP may be established for a sole shareholder/employee of a corporation - as well as his family. It is a question of fact whether the benefit is derived by virtue of the individual's shareholdings (taxable/non-deductible) or employment (non-taxable/deductible).

Provided that the individual is actively engaged as an employee and the benefits are reasonable it is the government's general view that the PHSP benefit would be employment (not shareholder) related.

Life Insurance : (top of the page)

It is possible to have a universal life insurance policy acquired by the employer and the employee such that the employer owns the "death benefit" while the "investment component" of the policy is owned by the employee. (Split-Dollar Insurance). The employer pays the portion of the premium related to the "death benefit" while the employee pays the "investment component" portion. If the employer pays the employee's portion of the premium, this will be a taxable benefit to the employee and, deductible to the employer. On the death of the employee, the employer receives the death benefit tax-free while the employee receives the investment component tax-free.

Unemployment Insurance: (top of the page)

Unrelated persons may be considered to be non-arm's length for purposes of employment insurance (EI). Therefore, they may be exempt from EI even though they own less than, or equal to, 40% of a voting class of shares.

Non-arm's length persons have income tax implications such as a requirement to deal at fair market value. Also, the reasonability of the salary is subject to more review.

Rent Charged to a Corporation: (top of the page)

There is no provision preventing a shareholder from charging his company a reasonable amount of rent for its use of space in the shareholder's home. The rent is included in income by the shareholder and expense incurred related to that income are deductible. Reasonability is based on the square footage of the portion of the total area used for income-earning activity divided by the square footage of the total area of the house.

Remuneration of Employee/Shareholders: (top of the page)

Some salary must be taken to cover Canada Pension Plan and RRSP eligibility. Generally, active business income of Canadian-controlled private corporations will be bonused down to an annual business limit - $225,000 at December 31, 2003. Leaving corporate active business income over the annual business limit but less than $300,000 may present a tax deferral but there will be an overall higher tax to pay when dividends are finally paid out. Consider paying dividends to obtain a refund of "refundable dividend tax on hand". Excessive personal income affects the clawbacks, of old age security. Also, large dividends may trigger alternative minimum tax. Salary payments require source deductions to be remitted to the government on a timely basis. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create "earned income". Salaries paid to family members must be reasonable.

Individual Pension Plans (IPP): (top of the page)

An IPP is a defined benefit pension plan for an owner-manager. This comes as a substitute to a registered retirement savings plan (RRSP). Contributions to an IPP result in "pension adjustments" which reduce RRSP contribution limits.

The IPP contribution is made on a tax-deductible basis by the corporation for the owner. It provides, generally, higher annual contributions than RRSPs, based on actuarial evaluations. At retirement, the owner-manager may transfer the accumulated money to a Locked In Retirement Fund or acquire an annuity and take income as needed within the boundaries set in these accounts. To implement a plan, an actuary will be required. The fees could be in the range of $1,000 - $2,000 per year with initial setup fees of $2,500 to $3,500 and fees for valuation reports of approximately $1,000 every three years. Also, an asset manager or pension consultant may be involved in the investment of the funds and required paperwork.

The advantages of IPP contributions include: Additional creditor protection, IPP contributions are not subject to payroll tax, and loans taken to make IPP contributions create tax-deductible interest.

IPPs are complicated and require ongoing consultation with advisors, such as actuaries. One of the major differences between an IPP and an RRSP is that the IPP funds are locked in. The owner-manager cannot liquidate the account arbitrarily. At retirement, the owner-manager will have a minimum and a maximum withdrawal each year from the funds.

It makes the most sense for individuals aged fifty-five having annual personal earnings of $100,000 or more to establish an IPP.

Past service contributions provide the best opportunity to fund the pension. The actuary will base it on a formula considering age, length of time served with the employers and annual earnings. Early retirement is possible at age fifty-five.

Employee Profit-Sharing Plans (EPSPs): (top of the page)

An employee profit-sharing plan is defined as an arrangement under which payments from an employer's profits are made to a trustee for the benefit of employees.

Selected groups of employees may be included in the employee profit-sharing plan. However, the government indicates that there must be more than one employee.

There should be a legal obligation on the employer to make the contribution. This is usually found in an employment contract and/or the employee profit-sharing plan documents.

Payments are to be made to a trustee each year.

The trust deed must provide for allocating all amounts to the participants by the end of each calendar year.

Amounts paid by an employer to the employee profit-sharing plan within 120 days of the end of the taxation year are deductible in that taxation year.

Source deductions are not required to be paid by the employer or the trustee.

Employer-Paid Gym Memberships: (top of the page)

Generally, the payment or reimbursement of club dues or membership fees by an employer is a taxable benefit to the employee. However, if it is clearly to the employer's advantage for the employee to be a member of a club, the employee will not have a taxable benefit.

The explanation that the gym program is meant to increase job performance is not sufficient. Where the primary beneficiary of the membership is the employer (such as getting new customers in the gym), then it may not be a taxable benefit to the employee.

Internet Access: (top of the page)

High-speed internet access provided to an employee at home to facilitate their work assignments is not taxable to the employee.

Short-term Disability Insurance: (top of the page)

When an employer provides a short-term disability insurance plan for its employees that meets certain criteria, the employer can apply for a reduction of employment insurance (EI) premiums. If this is approved, 5/12 of the reduction must be given back to the employees.

Travel Home to the Office: (top of the page)

When a taxpayer leaves home to go to work, and she or he are acting in the performance of their duties as they drive and, for example, are required to respond to their employer's direction while driving to work and, have calls on their cell phone, there will be no personal benefit for the portion of the trip from home to the office.

(top of the page)

See previous issue

Fall 1999
Summer 2000
January 2001
Fall 2001
December 2003
February 2004
December 2004
December 2005
June 2006
December 2006
August 2007
December 2007