2008 CAPITAL LOSSES (top of the page)

In view of the economic downturn and stock market losses, you should consider crystallizing any unrealized losses in non-registered accounts before the end of the year. Such losses can be carried-back three years (to 2005, 2006 and 2007) or forward indefinitely. Care should be taken to avoid triggering the “stop loss” rules.

YEAR-END TAX PLANNING (top of the page)

Some 2008 year-end tax planning tips include:

1. Certain expenditures made by individuals by December 31, 2008 will be eligible for 2008 tax deductions or credits including: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expenses, certain public transit amounts, and children's fitness amounts.

2. You have until March 2, 2009 to make tax deductible Registered Retirement Savings Plan (RRSP) contributions for the 2008 year.
Consider contributing to a spousal RRSP to achieve income splitting in the future.

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

4. An individual whose 2008 net income exceeds $64,718 will lose all, or part, of their old age security.

Senior citizens will begin to lose their income tax age credit if net income exceeds $31,524.

Contact your professional advisors for assistance in managing 2008 personal income.

5. Consider purchasing assets eligible for capital cost allowance before the year-end. Assets purchased for manufacturing or processing between March 19th, 2007 and December 31st, 2008 will be eligible for special capital cost allowances of 50% on a straight-line basis.

6. Registered Education Savings Plan (RESP)

A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for children (maximum $500 per child per year).

7. Health and dental premiums for the self-employed

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

8. A refund of Employment Insurance paid for non-arm's length employees may be available upon application to CRA.

9. Taxpayers that receive “eligible” dividends from private and public corporations will have a significantly lower tax rate on the dividends. Notification from the corporation to the shareholder is required.

10. Eligible public transit passes will be entitled to a tax credit.

11. A fitness tax credit for children under 16 enrolled in certain organized sports is available.

12. A Registered Disability Savings Plan may be established for a person who is eligible for the Disability Tax Credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted which are eligible for tax-deferred grants and bonds. Please contact your professional advisors for details.

2008 REMUNERATION (top of the page)

Some general guidelines to follow in remunerating the owner of a Canadian-controlled private corporation earning “active business income” include:

1. Bonusing down active business earnings in excess of the annual business limit may reduce the overall tax. However, leaving corporate active business income over this amount presents a tax deferral.

Professional advice is needed in this area.

2. Notification must be made to the shareholders when an “eligible” dividend is paid - usually in the form of a letter dated on the date of the dividend declaration. If all shareholders are directors, the notification may be made in the Directors' Minutes.

Please contact your professional advisor for advice before paying an eligible or ineligible dividend.

3. Elect to pay out tax-free “capital dividend account” dividends.

4. Consider paying dividends to obtain a refund of “refundable dividend tax on hand”.

5. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral. The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares.

6. Dividend income, as opposed to salaries, will reduce an individual's cumulative net investment loss balance thereby providing greater access to the capital gain exemption.

7. Excessive personal income affects receipts subject to clawbacks, such as old age security, the age credit, child tax benefits, and GST credits.

8. Salary payments require source deductions to be remitted to the Canada Revenue Agency on a timely basis.

9. Individuals that wish to contribute to the Canada Pension Plan or a Registered Retirement Savings Plan may require a salary to create “earned income”.

10. Salaries paid to family members must be reasonable.

MARRIAGE BREAKDOWN (top of the page)

WHOLLY DEPENDENT PERSON

In an April 30, 2008 Tax Court of Canada case, the Court confirmed that a divorced person is not entitled to a tax credit for a wholly dependent person if he/she is required to pay a child support amount for the person - whether or not they in fact pay the amounts, or it is fair that they should have to pay the amounts.

SPOUSAL SUPPORT

In a June 4, 2008 Alberta Court of Appeal case, the Judge initially ordered Mr. S to pay spousal support indefinitely. However, the Alberta Court of Appeal has now limited the payments to eight years from the date of the marriage breakdown. Mr. S' lawyer successfully argued that, in some cases, ongoing spousal support payments are not warranted.

CHILD SUPPORT

An Ontario Court ordered the father to pay $1,068 a month for two teenage sons he had out of wedlock and that he barely knows.

The taxpayer had argued that this would impose “undue hardship” on him since he was already supporting children that he had with his wife.

The Court noted that there is no reason to prefer the children born within the marriage to those born outside it. Children in both families should be treated equally.

ARREARS

Sometimes, the payer does not pay alimony on time. Alimony, like most forms of personal income, is taxable on the cash basis. Alimony which is due, but not paid, is neither taxable nor deductible.

When alimony arrears are paid, any amount that would have been taxable/deductible spousal support if paid on time is taxable/deductible at the time of payment. This assumes, however, that the amounts are payable on a periodic basis and are, in fact, paid. Where an agreement is made to pay some different, normally lesser, amount in lieu of arrears, the status of the payment may be lost.

Consider: Perhaps a written agreement setting out the expected status of the arrears payment should be prepared. If the payments do not ultimately realize the expected tax status, an adjustment could be made between the parties.

PRIOR PAYMENTS

Often, spousal support is paid prior to preparation of a written separation agreement. As such, the payments are not made under a written agreement and would generally not be taxable or deductible. However, where a later agreement or order provides that an amount received and paid previously is to be considered paid and received under the agreement or order, the amounts may be taxable/deductible. The payments must have been made in the calendar year of the later order or agreement, or the immediately preceding taxation year. This sets a deadline on the completion of an agreement in this regard.

Consider: The agreement could indicate the parties' intent that the amounts will be deductible to the payer and taxable to the recipient.

CHILD SUPPORT

The Federal Child Support Guidelines are located on the federal Department of Justice website at
http://www.justice.gc.ca/eng/pi/sup-pen/grl/fcsg-lfpae.html. Further details on the Federal Child Support Guidelines are also available at
http://www.justice.gc.ca/eng/pi/sup-pen/index.html.

The Federal Child Support Guidelines first became effective May 1, 1997 and resulted in child support payments not being subject to tax to the recipient and not being tax deductible by the payor. The child support amount under the Guidelines varies by province to account for differences in provincial tax rates, cost of living, etc.

ESTATE PLANNING (top of the page)

DONATION SCHEMES

In a February 23, 2007 Tax Court of Canada case, the taxpayer received a donation receipt for five times the amount of the cash donation.

Taxpayer Loses

CRA successfully disallowed the charitable donations, even in statute-barred years, and applied gross negligence penalties.

Also, in a July 14 2008 Tax Court of Canada case, the taxpayers acquired original works of art from Canadian Art Advisory Services (CAAS) Inc. and shortly thereafter donated them at much higher values to charities identified by CAAS.

The Court noted that the value for donation purposes should be the amount paid by the taxpayer, minus the 15% retainer fee paid to CAAS.

EXECUTORS OF AN ESTATE

In a June 11, 2008 Tax Court of Canada case, the issue was whether $15,000 received for services rendered as Executors of the uncle's Estate is taxable as assessed by CRA.

Taxpayers Lose

The taxpayers' argument that the amount was a specific legacy that their uncle gave them under his Will, and not remuneration for services rendered, was not accepted by the Court. Given the way in which the Will was drafted, the Court found that the $15,000 constituted taxable income from employment.

This is not considered to be a non-taxable legacy because a legacy does not entail any obligation or responsibility of the legatee.

WEB TIPS (top of the page)

CALCULATORS

Have you ever wanted to determine what your monetary savings would be if you did not incur a routine expense? How about determining your current or even projected net worth?

For a list of calculators, as well as multiple other interesting facts and figures, go to the 'Calculator' page on Yahoo's Finance website at
www.finance.yahoo.com/calculator/index

The calculators are divided into categories such as Budget & Banking, Career &Work, Family & Home, Insurance, Loans, Real Estate, Retirement and Taxes.

Some examples of interesting calculators include: How much will I need to retire? How Much do I Need for Emergencies? and, The Value of Reducing or Foregoing Expenses.

LEARNING AND EDUCATION

A website of note is www.canlearn.ca, a Government of Canada website dedicated to learning and education for preschool aged children up to, and including, adults.

It provides information on financing education including government grants and programs, both federal and provincial, as well as tools for planning for education and multiple search engines. Links to useful references can also be found at this site.

One option is to check out this website to help with planning for yourself or your family or, simply, send it off to your tech savvy kids.

GST/HSTtop of the page)

LEGAL FIRM - DISBURSEMENTS

In a June 13, 2008 Tax Court of Canada case, CRA assessed the law firm as owing $77,350 in GST on legal disbursements which were paid on behalf of its clients and which were almost exclusively taken out of the law firm's Trust funds.

Law Firm Wins!

The evidence established that certain disbursements were not subject to GST, including appraisal reports, motor vehicle accident reports, courier fees, transcript fees, investigative reports, hospital records, security reports, medical reports, parking fees, travel expenses, security and search certificates, birth certificates, marriage certificates, and death certificates.

Legal disbursements for office expenses were subject to GST.

CREDIT CARD EXPENSES

CRA allows a Registrant who is an employer, partnership, charity or public institution to use factors to calculate Input Tax Credits (ITCs) in respect of the tax deemed paid by employees, partnership members or volunteers where credit cards have been used to make purchases.

This is an administrative policy of CRA and is not legislated. Some Registrants may prefer to use the exact calculation method.

Beginning January 1, 2008, when the rate of GST/HST became 5% and 13%, respectively, the factor allowed on credit card expenses became 4/104 or 12/112.

CRA will permit Registrants to use factors for calculating ITCs on expenses charged to company credit cards, provided the conditions in CRA Guide P-184 (July 31, 2008) are followed.

QUICK POINT top of the page)

Maximum RRSP limits:

2008 - $20,000 2009 - $21,000

Maximum automobile reimbursements for 2008:

First 5,000 km. - 52¢ per km.
Over 5,000 km. - 46¢ per km.

New tax-free savings, effective January 1, 2009:

Must be 18 years of age or older.
$5,000 per year limit.
Unused room to be carried-forward.
Can be withdrawn at any time with no tax implications.

Effective 2009 Ontario corporation tax returns will be combined with Federal filings.

Current prescribed interest rate on loans is at 3%, which may present certain planning opportunities.

(top of the page)


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