CRA Story of the Week

Tax breaks for the home office crowd :CRA SOTW

This article taken from CBC News but they did not supply the author’s name – my apologies to them.

Home-based entrepreneurs

Tax breaks for the home office crowd

Hundreds of thousands of Canadians keep an office in their home that can legitimately qualify for some kind of tax break.

You probably know someone in this category — your uncle Irving with the home-based consulting business, your cousin Mary the freelance writer, or your neighbour Fred the telecommuting employee. Each of these people may be able to reduce their tax bill by deducting all or part of the costs of earning income from work they do in their own home.

But beware: the tax policies in this area can be tricky and the tax benefits only go to those who successfully manoeuvre their way through the intricacies of the Canada Revenue Agency. Even after those conditions are met, other rules kick in to limit how much can be deducted in any one year.

Simply having a home office isn’t enough to generate some favourable tax treatment. Getting a break from the tax department depends entirely on what you use your home office for, as well as the nature of your work status. Most employees, for instance, can’t deduct home office expenses unless they are required to maintain a home office by their employer (more on that later).

It’s far more advantageous, at least from a home office tax perspective, if you are self-employed.

Self-employment and the home office
Self-employment is the fastest growing category of employment in this country, with more than two million people falling into this category. Statistics Canada estimates that about a third of all self-employed people work from home. For some Canadians, the journey into self-employment was launched after their previous job disappeared in the recession. For others, the freedom of being their own boss was the main driver. But no matter what the reason, the ability to claim home office expenses is a big selling point for the home-based entrepreneur.

But not every home office qualifies for tax breaks.
The Canada Revenue Agency will allow you to deduct eligible home office expenses from home-based business income if one of the following two conditions is met:

  • The home office must be the “principal” place of business. That means more than 50 per cent of the time.
  • The home office is used exclusively for earning income and “on a regular and continuous basis” for meeting customers and clients.

Once either condition is satisfied, then eligible home expenses related to that home office can be deducted from business income. But there’s a big catch: The home expense deduction relating to the cost of living in the home cannot be used to create a tax loss (or increase a loss) for tax purposes.

So if your home business had a net profit of $10,000 (before home expenses are taken into account) and you have $12,000 in eligible home expenses, you can’t report a $2,000 loss. What you can do, however, is report a zero income from the home-based business (applying $10,000 of the expenses to the $10,000 of income) and carry forward the excess $2,000 loss to the following tax year, providing you still have a qualifying home-based business.

What kind of expenses can be deducted?

Self-employed individuals pay a price for their freedom They aren’t eligible for employment insurance and they have to pay twice the CPP premiums that employees do. But unlike employees, they also enjoy a wide range of reasonable home expense deductions that can be claimed. The key word here is “reasonable.” Claiming home office expenses that are out of line with other tax filers in the same line of work invites an audit.

How much you can deduct depends on how much of your house your home office occupies. If the home office occupies a tenth of the square footage of the total home area (excluding hallways, bathrooms and kitchens), then a tenth of the home’s expenses can be deducted. (In Quebec, only 50 per cent of eligible home maintenance expenses can be deducted). Some of the eligible expenses for the self-employed crowd include:

  • Utilities (heat, electricity, water, gas).
  • Property taxes.
  • Home insurance.
  • Mortgage interest (but not principal).
  • Condo fees and rent.

Home office expenses that are specifically related to the home-based business don’t need to be pro-rated; they can be deducted in full. A business phone, printer paper, and toner cartridges would fall into this category. Those are some of the more obvious business expenses. But there are others.

“If you increase your mortgage to help finance the start-up of your business, that portion of the mortgage interest that relates to the business is a business expense which you can deduct regardless of whether or not your business is profitable,” writes accountant Stephen Thompson in his 167 Tax Tips for Canadian Small Business 2009 (John Wiley & Sons).

And remember to keep your receipts to back up all expense claims. The CRA doesn’t like rough guesses.

Form T2125 has a part that deals with the calculation of what it calls “business-use-of-home expenses”.

What about furniture and computers?

The cost of big-ticket items like desks or computers normally can’t be entirely written off in one year since they provide an ongoing benefit to the business. They must be depreciated over several years through a process called capital cost allowance.

The speed of the writeoff depends on the class of asset. For instance, office furniture has a CCA rate of 20 per cent. So that $1,000 desk normally results in a $200 deduction (except in the year of purchase, when only half of the normal CCA rate applies.)

Tax tip

If your home insurance goes up because of your home-based business, you can deduct 100% of the increase.

Source: 167 Tax Tips for Canadian Small Business by Stephen Thompson

Computer hardware usually has a CCA rate of 45 or 55 per cent. But under a special provision in the Jan. 27, 2009, budget, computers bought after budget day and before Feb. 1, 2011, have a 100 per cent CCA rate.

Can I claim depreciation on my house?

Yes, but most tax experts say you shouldn’t. Claiming capital cost allowance on that portion of one’s home that is occupied by the home office risks a potentially bigger tax bill later on.

“If you claim CCA, the CRA will take the position that that fraction of your home is not part of your principal residence and will disallow your claim for the principal residence exemption for that portion of the home,” according to KPMG’s Tax Planning For You and Your Family (Carswell). “Any CCA you claimed can also be ‘recaptured’ into income when you sell your house.”

KPMG outlines only one scenario where it might make sense to claim CCA on your principal residence: where you bought your home at the top of the market and expect to sell at a loss.

What about telecommuters?

Many Canadians work from home but are not self-employed. They are employees who work for companies that have either encouraged or allowed them to work from home instead of travelling to an office to work. Can they deduct their home office expenses?

Yes, but only if a few conditions are met. For one thing, you must satisfy the same workplace conditions that self-employed workers are. That means the home office must be where more than 50 per cent of work is done, or the workspace is used exclusively to earn income and is used on a regular basis for meeting clients or customers.

But for employees, there’s more fine print. Your employer must require that you work from home. Your employer is also required to fill out

Form T2200 (Declaration of Conditions of Employment). The first question asks employers if “this employee’s contract requires the employee to pay his or her own expenses while carrying out the duties of employment?” If the answer is no, the employee can’t claim employment expenses. The second question asks if the employer requires the employee to “work away from your place of business.”

But let’s assume that your employer has signed the T2200. You can then deduct many of the same home expenses that self-employed individuals can. That includes pro-rated shares of the home’s utilities costs, cleaning materials and minor repairs. But employees are not allowed to deduct CCA, taxes, insurance or mortgage interest costs. Commission sales employees with qualifying home offices have a little more leeway; they can deduct “a reasonable portion of the taxes and insurance paid,” according the CRA.

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Shelter Inc.? :CRA SOTW

Shelter Inc.?

Jaime Golombek National Post,

If you operate your small business through a corporation, no doubt you are fully aware of the two main potential tax advantages: a preferential corporate tax rate on the first $500,000 of “active business income” as well as access to the $750,000 lifetime capital-gains exemption, which may be used to shelter from tax some or all of the capital gain on the ultimate sale of your business.

These are significant advantages, so much so that some investors are tempted to transfer their investments into a corporation to take advantage of them. But be aware, the tax rules only grant these advantages to corporations that earn active business income (ABI).

In general, the definition of ABI excludes investment income as well as rental income. But that’s not always the case. Corporations that do earn such income, but that are sufficiently active that they employ more than five full-time employees, can still qualify for these tax advantages.

While this phrase “more than five full-time employees” seems ostensibly straightforward, it was the subject of a recent Tax Court decision that directly reverses a long-standing Canada Revenue Agency administrative policy. The case involved a private company that had five full-time employees and two part-time employees. The issue was whether the company employed “more than five full-time employees.” The CRA has always maintained, as articulated in its Interpretation Bulletin, “The Small Business Deduction,” that “more than five full-time” means the company must employ at least six full-time individuals. The Court disagreed and concluded that having some part-time employees can put you over the “more than five full-time” test.

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Teachers, CRA in dispute over housing: CRA SOTW

Teachers, CRA in dispute over housing

Is First Nation’s low rent a subsidy?

CBC News

Some teachers working on a Saskatchewan First Nation say that when it comes to assessing on-reserve housing, the Canada Revenue Agency needs a lesson in fairness.

The teachers work at a school on the Waterhen Lake First Nation, near Meadow Lake, about 300 kilometres north of Saskatoon.

Some of them live in accommodations supplied by the reserve and pay $250 per month in rent, a rate that is below market level for housing in nearby communities such as Meadow Lake.

The CRA says the low rent amounts to a housing subsidy which, in their books, is a taxable benefit.

Teachers who did not report the benefit have been assessed back taxes, in some cases amounting to thousands of dollars.

It is not known how many teachers are facing a tax arrears bill.

One kindergarten teacher, however, gives low marks to tax officials.

Rent reflects conditions, teachers say

Jessica Wolff has been teaching on the reserve for two years.

She told CBC News that, while the rent is low, it reflects the condition of the housing.

“I think they are not understanding that we don’t live in Meadow Lake, that our living conditions and cost of living just isn’t comparable,” Wolff said. “So while they think we should be paying the same rent on a three bedroom house in Waterhen Lake as Meadow Lake, we strongly disagree.”

The teachers have written to the CRA and say the agency has promised to look at their concerns within the next four to six months.

Wolff said she was hopeful that once officials actually looked into the situation, they would change the tax assessments.

“I’d like to see the CRA kind of see the situation we are in, and I guess tear up the bills,” she said.

Wolff added that the tax treatment could be to blame for the school’s losing teachers.

CRA officials declined to answer questions about the specific case.

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Are instant tax refunds worth the cost? : CRA SOTW

More than 800,000 Canadians pay up front to get their tax refunds right away

By Tom McFeat, CBC News

It’s a familiar scene at tax preparation services across the country. A client is told they’re entitled to a refund and that they should get their money in a few weeks.

Then they learn they have the option of getting it right away. That same day, in fact. By cheque or loaded onto a debit card.

It’s a deal that 817,727 Canadians took in 2013, according to the Canada Revenue Agency.

But it comes with a catch — a fee that can be as high as 15 per cent of the refund.

Tax discounting

People assume that tax discounting services are mainly used by poor people, but that’s a misconception, says Cleo Hamel, a senior tax analyst with H&R Block, which had 620,000 of its clients sign up for instant tax refunds last year. (Evan Mitsui/CBC)

At H&R Block, 620,000 clients signed up for instant refunds in 2013 — about 25 per cent of the 2.5 million returns the company processed. At the No. 2 tax preparation chain in Canada, Liberty Tax Service, instant refunds are also a big part of the business.

These instant refunds come at a cost, of course. The Tax Rebate Discounting Act of 1985 spells it all out.

Discounters are allowed to charge no more than 15 per cent on the first $300 of the refund and five per cent of anything above that.

So, those getting a $300 refund would be charged $45 to get instant access to their money. A $1,000 refund would attract a fee of $80. A $1,600 refund — close to the average refund last year, according to the CRA — would result in a fee of $110.

Discounting fees

CRA refund Fee Instant refund

$1,600 $110 $1,490

$1,000 $80 $920

$500 $55 $445

$200 $30 $170

Who agrees to pay $110 to get their tax refund instantly, given that the CRA can process and deliver a refund in as little as two weeks?

By the same token, why don’t people do their own taxes or, if they’re eligible, use free or inexpensive online tax programs or the services of one of the many free income tax clinics offered by community centres or accounting volunteers?

Those who work in the field say there are several answers to these questions. For one, they say the income tax return isn’t an easy form to negotiate for many Canadians. A 2013 survey commissioned by a tax software company found that among the majority of people who didn’t like the process of filing their taxes, the main reason cited was that people found it confusing.

But the other reason is more of a pocketbook one: filing yourself or going to a free tax clinic means having to wait for your money. To get an instant refund, you have to pay a tax preparation service that offers discounting.

Instant cash

The big tax discounters acknowledge that many of the people who’ve taken advantage of instant refunds need the money right away.

‘It’s a misconception that it’s just poor people [who use discounters].’

– Cleo Hamel, H&R Block

“Sometimes, it’s a case of, ‘If I don’t get an instant refund, I don’t make my rent’,” says Cleo Hamel, a senior tax analyst at H&R Block in Calgary.

But she also says that those who choose the instant refund route do so for a wide range of reasons — they are paying back an RRSP loan, for example, or going on a trip, or simply want cash in their pocket right away.

“I think it’s a misconception that it’s just poor people,” Hamel said.

The fine print

Discounters typically won’t give instant refunds if:

The refund is less than $75 to $100.

The client is bankrupt.

The client is self-employed.

The client hasn’t filed a tax return before.

The client is filing a first-time disability claim.

And while $110 does seem to be a hefty charge for what can amount to a two-week loan of $1,490 (a $1,600 refund less the fee), the discounters point out that the fee does include the cost of preparing the return.

Liberty Tax Service, like the other tax discounters, discounts a $300 refund by $45, but that includes the cost to prepare and file the return. The client walks out with $255 that day, and the $45 is less than most firms charge just to prepare a return.

Sometimes, clients will agree to wait the 10 days to two weeks to get their refund from the Canada Revnue Agency. But about a third of the time, they will choose the “get-it-now” option.

‘When you’re desperate’

The tax refund has become a big part of the income stream for many low-income Canadians. Many tax credits are distributed through the tax system. And it’s the least well-off who are eligible for a lot of those credits.

‘When you’re desperate, 15 days can make a big difference.’

– Rick Eagan, St. Christopher House

Low-income Canadians can get their tax returns prepared for free at the many free income tax clinics set up across the country during tax season. But because the clinics can’t give instant refunds, it can be a tough sell to have people wait a couple of weeks to get all their money.

“We try to tell them that they don’t need to pay $40 or $50 to get their taxes prepared, they can get it done here for free,” says Viji Naguleswaran, a community financial worker at St. Christopher House, which caters to lower-income residents in Toronto.

Still, it often comes down to personal circumstances. Are these people willing to give up some of that precious refund to get their hands on money now?

“The issue is cash flow,” says Rick Eagan, community development co-ordinator at St. Christopher House. “When you’re desperate, 15 days can make a big difference.”

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Sell Now! (How The 2014 Budget May Impact Business Owners’ Exit Strategies) : CRA SOTW

Article by Michael Goldberg

Minden Gross LLP

Although to most of the world the 2014 federal budget (“Budget”) may have seemed to be of limited consequence, there are a lot of taxpayers who will be significantly impacted by its content. For example, business owner’s exit strategies may become much less tax effective if the proposed changes to the taxation of eligible capital property (“ECP”) are enacted. In this regard, while at first glance, a move from the current ECP regime (“Current Regime”) to co-ordinate it with the existing capital cost allowance regime seems completely logical and relatively innocuous, it is the change to how ECP is taxed upon its disposition that should cause owner-managers who may be considering selling their businesses to start thinking about selling a lot more seriously.

The reason for this is that for many clients, ECP and, in particular, goodwill, will be the single biggest asset that they will have to sell, and the shift from the Current Regime of taxing such income at 50% of the active business rate to the traditional capital gains regime applicable to other depreciable property (“New Regime”) will result in a significant loss of tax deferral in situations where the owner-manager has no personal need for the full amount of the proceeds of sale.

To better understand the impact of tax changes assume that an individual named Ely has been carrying on a hat business through a corporation named Ely’s Caps Limited (“Ely Cap” for short). Ely wants to sell his interest in Ely Cap but he can’t find a purchaser who will buy his shares. However, he has received an offer to buy all of Ely Cap’s goodwill for $10,000,000.

Under the Current Regime, if Ely Cap agrees to accept the offer, the sale would give rise to $10,000,000 of taxable income. Assuming this income will all be subject to the general corporate tax rates in Ontario about $1,325,000 of tax will be payable by Ely Cap. In addition, after the end of Ely Cap’s current taxation year, the sale will give rise to a $5,000,000 addition to Ely Cap’s capital dividend account (“CDA”), which will allow Ely to remove $5,000,000 of cash from Ely Cap for his personal use with no additional taxation.

Under the New Regime, the full $10,000,000 of proceeds would be taxed at corporate capital gains tax rates, which would give rise to a total corporate tax liability in Ontario of slightly more than $2,300,000. As was the case under the Current Regime, this sale would immediately generate a CDA in Ely Cap of $5,000,000, which could be distributed to Ely tax free.

Assuming Ely is happy living off the $5,000,000 of CDA and is willing to leave any remaining after-tax proceeds in Ely Cap, then the result of the change from the Current Regime to the New Regime is that Ely Cap would lose its ability to “defer” $1,000,000 of taxes.

The “cost” of the loss of this deferral should not be understated since, as a practical matter, most owners in Ely’s situation and in situations involving more modest sales than Ely’s would likely not draw more than the CDA balance out of Ely Cap for a very long time if ever. So, in many cases the loss of the corporate deferral under the New Regime will really amount to an effective 10% tax on Ely Cap, which is nearly 45% more tax than Ely Cap would have paid under the Current Regime.

Assuming the New Regime becomes law, then it would certainly appear that given the massive transition of wealth that is set to occur over the next number of years this new and previously unannounced 10% tax will likely be a significant revenue generator for the Canada Revenue Agency.

Of course the New Regime is not yet law and some practitioners might take comfort that the proposal to create the New Regime in the Budget has been put forward as a “consultation” process. However, based on the results of prior “consultation” processes and the streamlined approach to legislation generally taken by the current government, it seems that business owners should view the Budget announcement as fair notice that the New Regime will more than likely be enacted in the manner proposed – without grandfathering. As a result, business owners who were already thinking about selling would be advised to carefully reconsider the timing of their exit because now may be a very good time to sell.

A prior and more detailed version of this article was published in Tax Notes No. 614, March, 2014 as well as in the Estate Planner No. 230, March, 2014, both published by Wolters Kluwer (CCH) Limited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Income Tax Act Doesn’t Require a Logbook :CRA SOTW

By Jim Maroney – Maple Ridge News

If you love your car, you can rest assured that the Canada Revenue Agency loves your car, too.

In fact, if a CRA auditor pays you a visit it’s a virtual certainty that an interest will be expressed in your vehicle and, more specifically, the logbook you are expected to maintain.

Interestingly enough, the Income Tax Act doesn’t actually specify the necessary documentary evidence required to record the usage of a vehicle. Indeed, no mention is made of a logbook at all.

In a perfect world, CRA expects all taxpayers to keep a detailed logbook documenting every kilometre they’ve ever driven for business or employment purposes. In the real world, that rarely happens.

In tacit admission of this fact, late last month, CRA updated its administrative position regarding documenting the use of a vehicle. This update first appeared in the 2008 federal budget with a 2009 implementation date, so this administrative change is a bit late but certainly better than nothing.

The CRA still touts the benefits of a full logbook for each year, however, the update states that “the CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year’s usage of a vehicle if it meets the following criteria:

  • the taxpayer has previously filled out and retained a logbook covering a full 12-month period that was typical for the business, as a “base year” (the 12-month period is not required to be a calendar year).
  • a logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the sample year period).
  • the distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year;
  • the calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.

Expecting all taxpayers to be mathematicians, CRA provides a formula designed to calculate the business use of a vehicle in any year subsequent to the base year. The calculation takes the ratio of the sample period to the “base year period” and multiplies this amount by the base year.

Fortunately, an example is provided to make some sense of it all, at least that’s the intent.

An individual has completed a logbook for a full 12-month period, which showed a business use percentage in each quarter of 52/46/39/67 and an annual business use of the vehicle as 49 per cent. In a subsequent year, a logbook was maintained for a three-month sample period during April, May and June, which showed the business use as 51 per cent. In the base year, the percentage of business use of the vehicle for the months April, May and June was 46 per cent. The business use of the vehicle would be calculated as follows:

(51% ÷ 46%) × 49% = 54%

In this case, the CRA would accept 54 per cent business use of the vehicle “in the absence of contradictory evidence.” In other words, all of the taxpayer’s other support had better fit. This 54 per cent business use also falls within the required 10 per cent of the 49 per cent “base year” (i.e., it’s not lower than 39 per cent or higher than 59 per cent) satisfying the third criteria described above.

Finally, the CRA sees fit to remind taxpayers that even though records and supporting documents are only required to be kept for a period of six years from the end of the tax year to which they relate, the “base year” logbook must be kept for six years following the last year for which it is last used to establish business use.

So does this change really simplify the logbook requirement? Yes, to some degree, but taxpayers will still be expected to maintain a logbook for at least three months in any given year.

I don’t anticipate this administrative change to cause any rush to compliance as far as vehicle logbooks are concerned.

Jim Maroney is a chartered accountant with Meyers Norris Penny in Maple Ridge.

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Death, taxes and a tangled life insurance case: CRA SOTW

Published On Tue Nov 17

By James Daw Personal Finance Columnist

The good thing about life insurance is the death benefit is tax-free

Somehow, though, the Canada Revenue Agency got confused about who was entitled to that fundmental benefit a few years after the owner of a small Markham company died in April 2002.

Starting with a reassessment in 2006, tax collectors put Rod Peacock’s widow through years of emotional stress trying to collect an onerous penalty tax from her as the new majority owner of Innovative Installation Inc.

But last week Justice C.H. McArthur of the Tax Court of Canada put things right. He ruled the CRA’s position “defied common sense and natural justice.”

Markham lawyer Robin Mac-Knight of Wilson Vukelich LLP said after reading the ruling he was surprised by the CRA’s position. But the details could be useful to other owners of Canadian-controlled private corporations.

Before his death, Peacock had signed to have his company buy $196,000 worth of insurance on his life when he arranged a business loan with the Royal Bank.

This type of insurance is called creditor life insurance and is the only type of life insurance banks may sell at branches. Buying the coverage from the bank, or a more complete policy of life insurance from another agent or broker, was not a condition of the loan.

Peacock’s father-in-law Dennis Lawson of Bracebridge, a retired executive and accountant by training, stepped forward to help his daughter, Michele Lawson-Peacock, after Peacock’s death. He said Monday that Royal would not acknowledge having acted as agent in the sale of the policy. But months later when the family found proof of the coverage, an arm of Sun Life Financial Corp. did pay $175,500 to Royal to discharge the remaining loan balance, and $21,422 to Innovative’s bank account.

Lawson said two of Peacock’siblings were both shareholders, had worked with their brother at the company and, like him, owed money to the company. But neither Peacock’s wife nor his siblings wanted to run the company.

So an accountant at McGovern, Hurley, Cunningham LLP in Toronto suggested the siblings propose to have Innovative treat the insurance payment as a tax-free contribution to its capital dividend account.

The company could then pay a $160,000 tax-free dividend, which had the effect of wiping out the insiders’ debts to the company.

Lawson says he researched the proposal using the Internet and discovered that life insurance proceeds received by a company do indeed qualify for the capital dividend account.

But the CRA ruled in 2006 the dividend payment was improper, claiming Royal Bank was the beneficiary of the insurance proceeds, not the company. The policy does not actually use the term beneficiary with regard to anyone, but the tax agency demanded a 75 per cent penalty tax that applies to improperly declared capital dividends.

“We felt all along the company was the beneficiary of the life insurance,” said Lawson, who drafted an objection. “I didn’t have any money to pay that (penalty),” said Lawson-Peacock. “And it was getting bigger and bigger with the interest charges.”

Using the Internet she found lawyer Stephen Du of Du Markowitz LLP, who last week won the favourable court ruling. (Du is now in China and did to reply to an email Monday.)

The judge agreed there should be no difference between life insurance that directs payment to a bank and life insurance that pays the borrower first.

The bank was going to make money by charging interest, and had security guarantees from Lawson and Lawson-Peacock. So it was the Peacocks’ company, and its shareholders, who were the true beneficiaries of the policy.

jdaw@thestar.ca

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Olympic Tax? :CRA SOTW

Article by Lisa Handfield

Moodys Gartner Tax Law LLP

We here at Moodys Gartner are caught up in the Olympic fever (Go Canada Go!)…but like always we are thinking about tax! One controversial aspect is the tax that Olympic athletes pay on their prize money. Yes, Canadian and American athletes are given prize money from their country’s Olympic governing committee for winning an Olympic medal. In Canada, the Canadian Olympic Committee awards athletes with $20,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal. The Minister of National Revenue has disclaimed the right to tax the value of the medal itself. Similarly, in the United States, Olympic athletes are awarded $25,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal from the U.S. Olympic Committee. Surprisingly, athletes in both Canada and the US are subject to taxation on this prize money at their own marginal tax rate. In Canada, the prize money is subject to tax as it is not exempt by Regulation 7700 of the Regulations to the Income Tax Act (the “Act”). In the US, the prize money is considered earned income abroad and at the federal level an athlete in the top tax bracket will pay close to $10,000 for a gold medal win. Texas GOP Rep. Blake Farenthold has re-introduced the TEAM Act (Tax Exemptions for American Medalists Act) which would exempt US Olympic athletes from paying taxes on the medals and accompanying prize money. Many countries do not tax athletes on their Olympic winnings, for example India, so why do we?

From a technical perspective, Regulation 7700 of the Act exempts certain prize money from taxation. This provision was added to the Act so that Nobel Prize winner Dr. John C. Polanyi would not face tax on his prize. The provision appears to have been added due to public sentiment. Is there not similar public sentiment for Olympic athletes? Regulation 7700 only exempts those monies awarded in relation to meritorious achievement in the arts, sciences or service to the public, not sports. Some have raised the point that Olympic athletes may provide a public service as they indirectly promote a sense of nationalism; however, that is not the current view of the Canada Revenue Agency (see CRA document 2008-0300071M4).

One argument could be that athletes are already getting money in the form of funding from the various levels of government. The federal government provides about $62 million in annual funding to the Own the Podium program. Provincial governments contribute varying amounts to sports programs, for example Quebec provided approximately $2.6 million to amateur sports in 2012-13 while Alberta provided only about $159,000. In addition, Quebec provides a tax credit of $6,000 to carded athletes. Given that many athletes devote their life to training and have numerous expenses such as equipment, coaches and the like, it is likely that if athletes were running a business, they would be bankrupt! Not convinced this argument is very compelling.

Interestingly, Canada passed a provision in the Act, specifically subsection 115(2.3), that exempted income earned in Canada in connection with the 2010 Vancouver Olympic and Paralympic Winter Games for athletes from countries other than Canada, games officials and foreign media. Why would Canada give up the right to tax income of non-residents earned in Canada but tax its own athletes on the nominal prize money?

How much tax is the Canadian fisc really losing? In Vancouver, Canada won 26 medals, although granted some of these are team medals (i.e, hockey and curling), so for easy figuring let’s assume that there were 100 medals awarded to Canadian athletes at an average of $15,000 – that’s $1.5 million of revenue. Most athletes are not fortunate enough to be a household name and a professional sports star like Sidney Crosby, so let’s assume they are on average in a middle tax bracket, say 22%, then the fisc is out approximately $330,000 – not a whole lot of money in the big scheme of things!

Oh well….Go Canada Go!

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients’ special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
Alan Baggett – http://www.taxcollectorsbible.com/ – Tax Collector’s Bible

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Three Smart Ways To Tap Into Your RRSP

Article by Samantha Prasad

Minden Gross LLP

We all know the cardinal rule relating to RRSP withdrawals before maturity: DON’T DO IT! The tax hit on withdrawals from your RRSP has always been a huge obstacle for using it as a source of cash.

However, there are three strategies that effectively allow your RRSP to make a “loan” to you, rather than an actual with- drawal: the Home Buyers’ Plan, the Lifelong Learning Plan and the RRSP mortgage.

These strategies may not always make sense; however, com- pared to an out-and-out withdraw- al, they usually do, since you have a chance to restore the withdrawal to your RRSP without penalties.

The Home Buyers’ Plan

If you are buying a home and need money, there is an alternative to a straight with- drawal from your RRSP: the Home Buyers’ Plan (HBP). Up to $25,000 can be withdrawn tax-free under the plan, although it’s important to note that it only applies if you (and your spouse, if married legally or common-law) are first-time home buyers. A five-year look- back rule also applies – see below for more details.

Moreover, your RRSP con- tributions must remain in your RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible.

The withdrawal must be repaid in equal installments over 15 years; if a minimum repayment for a year is not made, the shortfall is taxed on your income.

The 15-year repayment peri- od commences in the second cal- endar year following the year of the RRSP withdrawal, but pay- ments made in the first 60 days of a year count as repayments for the preceding year. For example, if you make a withdrawal in 2014, you must start making RRSP repayments under the HBP by March 1, 2017.

There’s no specific restric- tion on “doubling up” on the withdrawal e.g., where a home is held in co-tenancy. For example, a husband and wife may togeth- er withdraw up to $50,000 (up to $25,000 each).

Generally speaking, those eligible for the plan will have:

Never participated in the program before;

Signed an agreement to build or purchase a qualifying home;

Bought or built the home (or a replacement property) by October 1 of the year following the year in which they’ve received the funds from the RRSP (extensions are available in some instances);

Intentions to occupy the home as their principal place of residence within one year of buying or building the home.

Finally, a “look-back” rule prohibits ownership of an owner-occupied home by you or your spouse (including a common-law spouse) for a period of five years or so.

Essentially, you are not considered a first-time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of the withdrawal and ending 31 days before the date of withdrawal, you or your spouse or common-law partner owned a home that you occupied as your principal place of residence.

There are some exceptions to the “first time home buyer” condition that apply only if you are a person with a disability and require funds to acquire a home to better suit your needs (or if you are doing so on behalf of a person with a disability who is related to you).

The big problem with the HPB? You could be caught in a cash-flow crunch that may lead to tax penalties down the road. First, the cash-flow drain (due to repayments) may impinge on your ability to make your regular, tax-deductible RRSP contributions in the future. So, without the RRSP write-off, your tax bill could go up.

Worse still, if the required Home Buyers’ Plan repayment – which is not deductible – is not made on a timely basis, you’ll suffer a further taxable benefit.

Even harsher rules may apply if you pass away or cease to be a Canadian resident. (Note: Restrictions apply to deductions for ordinary RRSP contributions if made less than 90 days before the withdrawal.)

If you or your spouse are about to drop into a low tax bracket, possibly when you retire from the workforce, the Home Buyers’ Plan may make more sense.

For example, the taxable benefit from non-repayment may result in little or no adverse tax consequences under these circumstances.

Having said this, participating in a Home Buyers’ Plan is usually a better bet than an out- right withdrawal from your plan, which is a straight add-on to your taxable income in the year of withdrawal.

The Lifelong Learning Plan

Tax-free withdrawals from RRSPs are also allowed to sup- port what the government calls “lifelong learning.”

Taking a page from the Home Buyers’ Plan, withdrawals of up to $10,000 per year can be made from your RRSP (to a maximum of $20,000 over a four year period) if you or your spouse is enrolled in a qualifying educational or training program (normally full- time for at least three months during the year).

Withdrawals are repayable to the RRSP over a period of 10 years in equal installments; otherwise there will be a tax- able benefit.

Repayments must normally commence in the year following the last year of full-time enrolment, or in the sixth year after the first withdrawal, if earlier.

Is a Lifelong Learning withdrawal a good idea? The answer is similar to the HBP. Having to fund RRSP repayments will, no doubt, interfere with your ability to make regular, tax-deductible RRSP contributions.

This problem could come at a time when you’re in a higher tax bracket than when the RRSP withdrawal was made.

If this is the case, it often makes sense to pass up the “lifelong learning” opportunity and make an ordinary taxable withdrawal from your RRSP to fund education, then make a regular tax-deductible contribution when the workforce is re-entered. The basic personal exemption will now cover off $11,038 (for 2013) of taxable income, not to mention tuition and education tax credits which may also be available to shelter the withdrawal.

The RRSP Mortgage

The Home Buyers’ and Life- long Learning Plans are not true loans. Rather, tax penalties apply if you don’t restore the funds to your RRSP within applicable time limits. But the RRSP mortgage is.

You can take out a loan from your RRSP provided that it is insured by the CMHC or a public mortgagor insurer (such as Genworth Financial Canada or AIG United Guaranty Canada). This is an exception to the rule that an RRSP cannot hold the mortgage of the plan-holder or a family member.

You might use your loan to pay down your mortgage. So instead of paying mortgage interest to the bank, you pay yourself. In this case, your benefit is largely based on the difference between the interest rates you’d otherwise pay on your mortgage (i.e., this is what you “save”) and the return you’d make on your RRSP if you didn’t follow this strategy.

In addition, if you are paying more into your RRSP than the return you would make on a conventional investment, you will have more money com- pounding in your plan on a tax deferred-basis.

There is no tax rule that you have to use your RRSP loan to pay down your mortgage, or even put the money into your home, for that matter. The tax rules only require that the loan must be secured by Canadian real estate.

So the loan might be used, for example, to provide financing for a new business (but the mortgage insurer must first approve of the use). What’s more, if the money is used for business or investments, the interest should generally be tax- deductible to the borrower.

The CMHC does not allow these “equity take out” loans, so when it comes to this sort of thing, you’re best is to go with Genworth or AIG. According to CanRev, the “RRSP mortgage” – secured by Canadian real estate – must have normal commercial terms, including market interest rates.

Tax Tip #1. One interesting use of an RRSP mortgage could be to make a catch-up contribution to your RRSP – that is, if you haven’t maxed out on your RRSP contributions in the past. It works like this: your RRSP makes you a mortgage loan.

Then you put the proceeds right back into your RRSP (as a catch-up contribution) and get a tax deduction based on the amount of your contribution.

Tax Tip #2. It is possible to make an RRSP mortgage loan to another family member.

It is also possible (theoretically, at least) to do the RRSP mortgage manoeuvre based on a second mortgage or even a vacation or rental property. However, it may not always be possible to get mortgage insurance in these circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
Alan Baggett – http://www.taxcollectorsbible.com/ – Tax Collector’s Bible

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Morality And Tax : CRA SOTW

Article by Kim G. C Moody

Moodys Gartner Tax Law LLP

“…there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands… To demand more of mortals is mere cant.”

Learned Hand in Commissioner v. Newman, 159 F2d 848 (1947).

Everywhere you look lately, the press seems to be reporting another group or person that is pontificating about the “evils” of tax avoidance and tax planning. The usual rhetoric is that corporations or individuals who plan to reduce their taxes are engaging in immoral practices since they should be paying their “fair share”. Large corporations like Google, Apple, Starbucks and now Twitter have been roasted for their tax strategies. The pressure got so heated that Starbucks agreed to make a voluntary payment to the UK Treasury notwithstanding they were under no legal obligation to do so. And to top it off, the International Bar Association has recently released a report stating that the facilitation of tax avoidance strategies could constitute a violation of international human rights law. Let’s take a moment to reflect on the magnitude of that assertion: tax avoidance strategies are tantamount to the denial of life, liberty, property, education, etc. It appears to me that the International Bar Association needs to update its hyperbole filter.

Thankfully, there have been some voices of reason that offer counter views. However, sometimes it is not easy to hear these voices over the din of populous prattle. Sadly, it is not surprising that reasoned analysis is often difficult to find given how popular and easy it is to state that tax avoidance is immoral. Let me offer some simple counterpoints.

To begin with, I understand governments’ need to raise revenues to provide services (one might say “to address the ‘human rights’ of”) to their residents. I am also sympathetic to the fact that the world is still reeling from one of the worst recessions in modern history. Most countries have been dramatically impacted by that recession and many have been forced to make difficult decisions about their delivery of fundamental services that are generally expected from government.

However, the obligation to pay tax (ignoring for the moment the challenges of the developing world) ultimately arises from the obligations enshrined in statutes. Tax avoidance involves planning one’s affairs to ensure that the quantum of tax owed is minimized according to, and in compliance with, applicable laws. Accordingly, tax avoidance is legal in that it is in compliance with applicable laws (as opposed to tax evasion which is deliberate non-compliance with taxing statutes and is illegal).

However, can planning or avoidance not be in the “spirit” of the law? Certainly. Over the years, many countries have responded to inappropriate tax avoidance by introducing “general anti-avoidance rules” (as codified in section 245 of Canada’s Income Tax Act) or “substance over form” rules (as codified in section 7701(o) of the US Internal Revenue Code). Such legislation attempts to shut down planning that is otherwise in compliance with the law but may not be in the “spirit” of the law. As long as such legislation exists, then governments possess the tools to counteract planning that may not be in the “spirit” of the legislation.

I realize that the above counter argument is simplistic but so are the arguments that taxpayers should “pay their fair share,” and that failure to do so constitutes a grave injustice. What exactly is someone’s “fair share”? Should one taxpayer suffer moral derision because it pays more (or less) tax than another taxpayer when the first taxpayer has acted in accordance with applicable laws?

When companies like Starbucks make voluntary payments to a country, notwithstanding their tax planning was in compliance with applicable laws, how are such payments characterized? Clearly such voluntary payments cannot be considered a payment of tax. Are they charitable donations? Marketing payments? In my view, such a payment by one of my favorite coffee companies was short sighted and dangerous. If such payments become the norm, what will become of the “rule of law”? In other words, a person can be in compliance with all tax laws but it might not be “good enough” because they haven’t paid their “fair share”. Thus we descend the slippery slope that results from mixing morality and tax policy.

In my opinion, politicians, media and others who trumpet easy-to-make moralistic comments about tax planning and avoidance should direct their efforts in a more positive fashion which could result in legislation that “shuts down” inappropriate tax planning. This is much easier said than done but ultimately it is much more analytical, logical, and appropriate than simply trumpeting that people should “pay their fair share”.

The OECD has taken such an analytical approach of this issue in addressing the manner by which certain taxpayers shift their profits from a high-tax jurisdiction to a low-tax jurisdiction. In July 2013, the OECD released a report discussing base erosion and profit shifting (“BEPS”) in which it identified certain abusive practices that need to be addressed. Member countries seem intent to act quickly to implement such principles. My personal opinion is that we will likely see some significant changes in this particular area of tax avoidance but ultimately the implementation of specific legislation in each member country of the OECD will be difficult. Notwithstanding, the engagement and discussion of what is appropriate tax planning and the subsequent introduction of laws to enforce such principles is the proper way to address these issues. The use of a pillory to shame taxpayers who engage in legal tax avoidance is simply not an effective method of addressing the issue.

In the meantime, taxpayers should not feel guilty for properly planning their affairs which results in tax minimization within the confines of the law. If one does feel guilty, perhaps they could redirect their guilt by making sufficient charitable contributions to their favorite charities. My thoughts… not yours.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients’ special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
Alan Baggett – http://www.taxcollectorsbible.com/ – Tax Collector’s Bible

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Don’t Forget to Take Credit for Your Tax Credits! :CRA SOTW

Most taxpayers leaving money on the table

By Bruce Johnstone, Canwest News Service

REGINA — Nearly three out of four Canadians are leaving money on the table when they fill out their annual income tax returns, according to H&R Block Canada.

Cleo Hamel, a senior tax analyst with the country’s leading tax preparation firm in Calgary, said most Canadians can claim at least one tax credit, but only one out of four actually did on their 2007 tax forms.

“According to a survey we had conducted (in December), three-quarters of the population either didn’t take advantage or weren’t aware they could take advantage (of new tax credits on the 2007 tax return),” Hamel said in a recent interview.

“How can you leave that kind of money on the table?” Hamel said, adding the survey results were “quite shocking.’’

After all, Hamel said the Canada Revenue Agency (CRA) isn’t exactly hiding the information on tax credits from taxpayers. “The CRA has put a lot of effort into advertising these credits — television ads, ads in the paper — it’s amazing.”

For whatever reason, Prairie residents were more likely to claim the new tax credits (42 per cent), versus Quebec residents, who were least likely to claim them (18 per cent).

The most popular tax credit was the child tax credit, which was claimed by 18 per cent of survey respondents, followed by the pension income splitting tax credit (16 per cent) and transit pass credit (15 per cent).

The children’s fitness credit (14 per cent) and the working income tax credit (11 per cent) were also mentioned by respondents.

New this year are the first-time home buyers credit of $750, the $5,000 increase in allowable withdrawal from RRSPs to $25,000 for home purchases, and the home renovation tax credit of $1,350.

Hamel said the home renovation tax credit can be used for just about any type of repair or renovation job, including painting, building a fence or deck, to replacing a furnace.

“The technical definition (of renovation) is anything that adds value to your home,’’ Hamel said. And while $1,350 probably won’t cover all or most of the cost of a typical renovation job, every little bit helps.

And do-it-yourselfers can also claim the credit, as long as they show receipts for the materials and supplies used in the project, she added. “It doesn’t have to be something that a contractor does. Whatever it costs you in terms of materials, supplies, permits, keep your receipts.”

While the uptake on the renovation tax credit should be fairly high, Hamel said taxfilers frequently forget to claim expenses that are less obvious, like health care premiums.

“If you’re currently paying a health or dental (plan) premium through payroll deduction, that is included as a medical expense. A lot of people forget about it because it’s included on the T-4 (statement of income and deductions),’’ she said. “That adds up to a lot of money.”

Similarly, receipts for donations to charities can be accumulated over a few years and submitted for an even bigger deduction, she said.

“Unfortunately, (some) people are unable to donate a lot of money. Maybe they can donate $50 or $60 a year. Know how to maximize it? Just save (the receipts) and you can get more money back. You get a 15-per-cent credit on the first $200 and you get 29 per cent for every dollar over $200 that you donate.”

As with medical and dental expenses, donations made by other family members can be deducted by one taxfiler to maximize the tax savings, she said.

The Canada employment tax credit is another tax break that has little awareness among taxpayers, H&R Block says.

Only seven per cent of respondents reported claiming the $1,000, non-refundable tax credit. That’s like throwing away money, Hamel says.

“If you have a T-4 for employment income, you qualify to get the credit. It translates into $150 in federal tax savings. How many coffees can you buy in a year for $150?”

The transit pass credit is another frequently unclaimed tax break, with only a few rules to follow. “It’s got to be a monthly pass or four consecutive weekly passes. Keep those passes and the receipts, and keep them for the whole family.”

Even if your child has a subsidized bus pass, the remaining amount can be claimed under the transit tax credit, she added.

The child tax credit, which provides $300 per child under the age of 18, is the most popular tax credit. But the children’s fitness credit may get overlooked. “If the kids are in hockey, soccer, or dance, you can claim up to $500.”

While each tax credit may not seem like much, taken together they can add up to significant savings.

“If you take each these (tax credits) on their own, it might not be a lot. But when you consider the fact that most families can probably take advantage of a couple of them, it could become significant.”

Regina Leader-Post

© Copyright (c) The Regina Leader-Post

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Is the babysitter an employee or a contractor? : CRA SOTW

By Jamie Golombek, Financial Post

If you regularly hire the same babysitter to look after your kids, week after week, are you obligated to withhold and remit CPP contributions and EI premiums?

This was the issue in a case before the Tax Court last month in which a Judge had to decide whether Ms. Mikhaylovskaya, a part-time babysitter with no set hours or availability, was an employee or a self-employed independent contractor for Tatiana Iarutina, a mother of two.

Both the Ms. Iarutina and Ms. Mikhaylovskaya intended from the outset and throughout the relationship that Ms. Mikhaylovskaya was to be self-employed. At no time did she seek to collect EI or CPP benefits. The assessment of EI and CPP by the Canada Revenue Agency, along with penalties, appears to have been triggered by the fact that Ms. Mikhaylovskaya reported her babysitting income on her tax return as “Other Employment Income” as opposed to self-employment business income.

Ms. Iarutina is an accountant with an office in the basement of her home, who was also required to meet regularly with clients outside her home. In 2008, she placed an ad looking for babysitter, to which Ms. Mikhaylovskaya, who was 67 years old at the time and retired, responded.

While Ms. Mikhaylovskaya looked at several potential babysitting positions, she took this job because “she was able to set her own hours to the needs she had, and it provided her enough for her financial needs.”

It was up to Mrs. Iarutina to either arrange for Ms. Mikhaylovskaya’s next work time as she left the current sitting time, or to telephone her and inquire as to her availability. Both women testified that it was, in fact, Ms. Mikhaylovskaya who decided if she would come and that Mrs. Iarutina had to work her schedule around her babysitter’s availability.

While most of the time, Ms. Iarutina’s children were babysat in their own home, from time to time, to accommodate the babysitter, they were cared for at Ms. Mikhaylovskaya’s home.

The Judge reviewed the standard tests for determination of employee versus independent contractor, which include both the intent of the parties and control over the work performed.

As to intent, the Judge wrote: “I am satisfied that the relationship in fact maintained between Ms. Iarutina and the babysitter was consistent with the self employment they both intended and understood it to be.”

In addition, the Judge concluded there was very little control over the babysitter and how and when she cared for Ms. Iarutina’s children, which tilts the scale again toward an independent contractor service since the hours were based on Mikhaylovskaya’s availability or discretion.

As a result, the Judge concluded that Ms. Mikhaylovskaya was not, in fact, Ms. Iarutina’s employee and that the CPP and EI assessments should be cancelled.

Jamie.Golombek@cibc.com

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax & estate planning, with CIBC Private Wealth Management in Toronto.

© Copyright (c) The Calgary Herald

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RRSP scenarios change for teens, low-income retirees : CRA SOTW

By Terry McBride,

The Starphoenix January 20, 2014

For most Canadians, a Registered Retirement Savings Plan (RRSP) is a very good way to save money for retirement. However RRSPs require special consideration by three types of Canadians – teenagers, low-income earners and U.S. citizens.

Teenagers Are you eager to teach your teenager about the benefits of starting to save money at a young age? Suppose your child received wages from babysitting or mowing lawns, for example. That means your child can file tax returns to report this income, without paying tax, to generate RRSP contribution room for the following year. If your child opens an RRSP, he or she could make RRSP contributions even before reaching the age of majority (18 in Saskatchewan). Parents or grandparents should not try to help out by making additional gift-contributions to the RRSP. There is a stiff penalty charged on contributions that exceed the teenager’s RRSP limit.

If a low-income teenager is not even taxable, don’t waste the RRSP deduction by claiming it immediately. Defer claiming the RRSP deduction until years later when your child is earning enough (more than $43,953) to create second-bracket tax savings.

Low-income retirees The ideal, most tax-efficient scenario is to make RRSP contributions in a high tax bracket while you are working, and, years later, make withdrawals in a low tax bracket while retired.

However, the worst-case scenario is for someone to make contributions in the lowest tax bracket while working, and, years later, make withdrawals in a higher tax bracket while retired. If you are a worker in a lowwage job, contributing to a small RRSP, but hardly likely to have a retirement income over $20,000 per year, you could find yourself eligible to receive some Guaranteed Income Supplement (GIS) at age 65.

The income test for GIS means your GIS benefits are reduced by 50 cents for every dollar of taxable income from RRSP or RRIF withdrawals that you report. That 50 per cent “clawback” is on top of the 26 per cent lowest bracket rate (in Saskatchewan). It is not tax efficient to deduct RRSP contributions at 26 per cent and later pay tax at 76 per cent on withdrawals.

In that scenario, using a tax free savings account makes more sense than contributing to an RRSP.

U.S. citizens Are you a dual citizen, born in the U.S., who resides in Canada? Was one of your parents a U.S. citizen when you were born in Canada? In any case, if you are a U.S. citizen, you should know that the Internal Revenue Service (IRS) has rules, requiring you to file special forms, when you have a Canadian RRSP.

First, you cannot claim an RRSP deduction on your U.S. 1040 tax return. Second, interest

and dividends earned inside your RRSP are taxable annually, unless you file a form 8891 with your U.S. tax return to defer the tax. You must also file form 8938 to declare the value of your RRSP when it reaches a certain size. In addition, you would normally need to file form TDF 90-22.1 (FBAR) each year, separately from your U.S. 1040 tax return.

Onerous penalties apply if you fail to file these forms each year.

Calgary lawyer Roy Berg expects that by July 1, Canada will execute an intergovernmental agreement with the U.S. to administer the U.S.’s Foreign Account Tax Compliance Act (FATCA). Many non-tax-compliant U.S. citizens are “playing ostrich” and purposely not filing tax returns and the various reporting forms. Basically, FATCA will impose

U.S. filing obligations on Canadian financial institutions that have U.S. citizen clients. Therefore, if U.S. citizens living in Canada want to continue to hold financial accounts such as RRSPs, they will need to comply with the U.S. tax system.

Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through

Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.

© Copyright (c) The StarPhoenix

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Selling tax-evasion software is legal, B.C. Court of Appeal rules : CRA SOTW

Vancouver — The Canadian Press

By: Nestor E. Arellano On: 18 Jul 2013 For: Computing Canada

A British Columbia company that created software allowing clients to under-report sales to the tax man has had its fraud conviction zapped by the province’s Court of Appeal.

The panel of three justices ruled Wednesday there was no evidence the software, known as a “zapper” and created by InfoSpec Systems Inc., was ever used by two Winnipeg restaurants.

The Appeal court said the Crown couldn’t prove the amount of the alleged fraud, which, according to the charge, was more than $5,000.

“I would allow the appeal, set aside the conviction for fraud and enter an acquittal,” said Justice David Frankel, in a decision written on behalf of Justice Mary Newbury and Justice Risa Levine.

The case dates back to an eight-year period between Oct. 4, 2000 and Aug. 28, 2008.

The B.C. company created and marketed point-of-sale software, known as Profitek, allowing restaurants to keep track of sales, but it also made available to clients software known as a zapper.

The zapper allowed clients to delete selected cash transactions from sales records and as a result, under-report their income.

According to the court’s ruling, InfoSpec Systems Inc.’s president Pius Chan sold zappers to two restaurants in Winnipeg, knowing the programs would be used to facilitate tax evasion.

There was no evidence, though, the restaurants installed the software.

InfoSpec Systems Inc. was initially charged with fraud over $5,000, four counts of evading income tax, and four counts of evading the GST, but was convicted only of fraud over $5,000.

InfoSpec Systems Inc. appealed the conviction, arguing the sale of software designed to help a third party commit fraud isn’t fraud itself. It also argued the Crown failed to prove the software was actually sold.

The Crown, however, argued the sale of the software was fraud and asked the court to substitute a conviction for attempted fraud.

But Justice Frankel said the zapper software is not illegal, noting he wasn’t sure if reasonable people would even consider its sale to be dishonest.

He said Parliament can always consider a prohibition on zappers to thwart tax evasion.

Justice Frankel also dismissed the Crown’s bid to have the company convicted for attempted fraud because selling a zapper was not a dishonest act.

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Top Ten Canada Revenue Agency Audit Flags : CRA SOTW

Last Updated: December 4 2013
Article by Stevan Novoselac and John Sorensen

Gowling Lafleur Henderson LLP

Taxpayers often ask why the CRA commenced an audit or whether taking a particular step might target them for a future audit. These are reasonable concerns, since the CRA’s approach to audit selection is generally not random, but rather based on risk assessment.

Research comparing the effectiveness of random versus targeted audits was conducted under the CRA’s Small and Medium Enterprises Research Audit Program (formerly the Core Audit Program), which utilized random auditing.1 According to the 2010-2011 CRA Report, in that year random auditing detected significant non-compliance in only 12.2% of audits, while targeted auditing based on risk assessment detected significant non-compliance in 46.7% of cases. Therefore, targeted auditing based on risk assessment has become the CRA’s preferred approach. In the 2012-13 year, the CRA commenced fewer audits than in the prior year, in part because of a strategic decision to focus resources on auditing high-risk taxpayers.2 This resulted in the CRA exceeding two of its important performance indicators, adjusting a higher percentage of tax returns audited (79%, well above the CRA’s target of 75%) and generating a higher fiscal impact per auditor ($423,000 per full-time equivalent, well above the CRA’s target of $350,000).3

Going forward the CRA may pursue audits even more aggressively: Budget 2013 stated that the CRA would make significant changes to its compliance programs to target high-risk areas of tax non-compliance, with the objective of raising additional revenues of up to $550 million per year by 2014–15.4

Here is a summary of ten common audit triggers or risks for getting or staying on the CRA’s “radar”.

  1. Inconsistencies between third party information and taxpayer’s filing position:
  2. The CRA’s “matching” program compares information from third parties, employers, financial institutions and other sources with taxpayer’s filing positions to confirm filing accuracy. The CRA’s ability to match this information has significantly improved in recent years, enhancing this type of risk assessment.

  3. Employer compliance:
  4. The CRA continues to aggressively pursue a range of issues pertaining to employer compliance, including the timely remittance of source deductions, the status of workers as either independent contractors or employees, taxable benefits and relocation Tcosts.
    Enquiries often arise when an independent contractor seeks employment insurance benefits, triggering a CRA ruling on the worker’s status. While an enquiry pertaining to a single worker would not trigger significant financial exposure, it can lead to rulings for similarly categorized workers and result in significant assessments for premiums under the Employment Insurance Act and the Canada Pension Plan. Payroll audits may also include enquiries into taxable benefits received by workers, including personal use of employer assets, allowances, free parking, interest-free or low-interest loans, stock options, incentives/gifts/prizes, relocation expenses, retiring allowances, termination payments and tuition fee assistance. Payroll audits may also reveal the presence of non-resident workers in Canada temporarily. Beware the disgruntled former independent contractor.

  5. Not complying with CRA requests for information:
  6. This is not only damaging to a taxpayer’s position for a year being audited, it also likely flags the taxpayer for future audit enquiries. The CRA appears to be downloading greater responsibility to taxpayers in the course of audits, by making more comprehensive demands for documents and information to be supplied to the CRA, rather than scheduling time for field audits at a taxpayer’s place of business. Supplying information to the CRA should be carefully managed, to ensure that the CRA’s requirements are fulfilled without over-disclosing information, including protecting documents and information that would be subject to privilege.
    Similarly, if there were issues with a previous audit, the taxpayer would be more likely to be “on the radar” and subject to future audits.

  7. Requests to amend income tax or GST/HST returns:
  8. While amendments to returns or account closures may be necessary or desirable, these steps may attract audit scrutiny. Certain tax strategies that the CRA may challenge involve re-filing returns for past taxation years to take advantage of significant loss-carrybacks which may not be supportable.

  9. Unusual or notable changes in deductions or credits:
  10. The CRA compiles information about deductions and credits claimed by taxpayers over multiple years and significant changes from one year to another may attract CRA enquiries. Taxpayers with a viable explanation for significant changes need not worry. However, taxpayers who become involved in aggressive tax strategies may be flagged for audit.

  11. This criterion for risk assessment:
  12. It considers the year-to-year consistency of a range of deductions including management fees, interest on debt to non-residents and amounts paid in respect of intellectual property that has been “offshored”. Disallowance of management fees and interest payments may give risk to the severe result of double taxation, by which the amount is taxable in the hands of the recipient, but non-deductible to the payor.
    Contemporaneous and comprehensive documentation supporting these types of payments is essential to establish their underlying business purpose and commercial reasonableness, particularly for transactions between related parties or closely held groups of entities.

  13. Participating in aggressive or high risk tax strategies:
  14. The CRA has dedicated audit resources to detecting and reassessing a number of issues, including: artificial capital losses; loss trading transactions; surplus stripping; offshore investment accounts; donation arrangements; withholding tax; section 85 rollover transactions; permanent establishment/residency issues; interest deductibility; RRSP appropriations; and tax free savings accounts.

  15. Discrepancies between tax filing position and filing positions for similarly situated taxpayers or private corporations: The CRA may compare:
  16. corporate tax returns amongst similar businesses; the relationship of purchases, sales and GST/HST remitted to other businesses in the same industry to ascertain whether remittances are reasonable; and tax returns of shareholders of a private corporation to the corporation’s tax filings. Therefore, filing positions which are not consonant with expectations for an industry, or which are not consonant amongst shareholders and their private corporations, may attract an audit.

  17. Reported income low compared to residents in same neighbourhood:
  18. This suggests that an individual may have unreported income. Unreasonably low reported income is not only an audit trigger, but may cause the CRA to initiate a so-called “net worth” or arbitrary assessment, whereby various tools are deployed by the CRA to impute income to the taxpayer.

  19. Not using fair market value for residential real estate rentals:
  20. Where real estate rentals yield no income or losses, the CRA may suspect that the property is being rented for less than market-value rent to a non-arm’s length person. The CRA may rely on property tax and interest expense information to ascertain the value and market rent for a property.

  21. Referrals:
  22. The CRA may commence an audit based on information obtained during the audit of a third party, or because of a referral from another CRA department, other government organizations or informants. Sometimes estranged family members share information with the CRA, including estranged spouses seeking leverage in a family law dispute.

We help manage audits and recommend that counsel be engaged from the outset. Early engagement enables counsel to immediately begin managing critical issues pertaining to document disclosure, legal privilege, risks arising from any potential criminal proceedings and to ensure taxing provisions are correctly applied by auditors/p>

Footnotes

  1. See the CRA’s 2010-2011 Annual Report to Parliament (“2010-2011 CRA Report”), at p. 39.
  2. See the CRA’s 2012-2013 Annual Report to Parliament, at p. 43.
  3. Ibid.
  4. See Chapter 4.1 of Budget 2013.
  5. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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    How to take on the CRA without fear of reprisal : CRA SOTW

    The Canada Revenue Agency is supposed to explain the reasons behind its decisions, but when it fails to do so, you can complain without fear of reprisal

    By:Ellen Roseman On Your Side, Published on Sun Jun 30 2013

    Lawyer Marc Weisman was working with a company that had fallen behind on its taxes. He worked out a deal with the Canada Revenue Agency to pay the arrears over an extended period.

    I was preparing the postdated cheques when the CRA called a day later, saying it couldn’t agree to the deal. The client would have only half the time we agreed on,” he recalls.

    “When I asked why we couldn’t keep the longer payment period, I was told, ‘It’s our policy.’ I asked to be sent the policy. The supervisor said there was no policy available.”

    He said he would complain on his client’s behalf and got a shocking reply.

    “A CRA employee told me, ‘If you make a complaint, I’m going to enforce collection right now. I can do what I want,’” says Weisman, who works in the tax law group at Torkin Manes LLP in Toronto,
    In another case about interpreting a clause in the Income Tax Act, he wrote to the CRA, citing legal arguments and precedents.

    “The response was, ‘We disagree.’ I asked for more information, so I could explain to the client what the CRA’s position was. I got the same response.”

    Weisman met with me and Taxpayers’ Ombudsman Paul Dubé last week to talk about the need to strengthen the taxpayer bill of rights.

    Earlier that day, National Revenue Minister Gail Shea had announced measures to ensure that taxpayers could complain and request a review without fear of CRA reprisal.

    “People should feel free to speak up. We won’t tolerate any abuse of authority by employees,” she told reporters at a CRA office in Scarborough.

    While there was no direct evidence of misconduct, Shea said she takes such allegations seriously. The CRA will investigate them and apply penalties, including dismissal, to employees found to be threatening taxpayers.

    Dubé, a lawyer named as the first taxpayers’ ombudsman in 2008, called it “a significant step forward” for those who had reservations about complaining about poor service.

    In five years on the job, he’s talked to a wide cross-section of taxpayers and to recipients of government benefits tied into their tax returns.

    He’s heard many people express concern about consequences arising from a complaint to the CRA, saying they were reluctant to exercise their rights.

    That’s why he asked for a 16th right to be added to the taxpayer bill of rights, hoping to increase confidence that the system would be administered fairly.

    “Not only has the Minister heard and accepted my recommendation,” he told the news conference, “but the CRA is committed to implementing it.”

    Complaints about employee misconduct would go to a person’s supervisor, Dubé told me. This was unacceptable, given a common perception that bosses stick up for their staff.

    From now on, complaints about misconduct will be investigated by a separate office within the CRA, similar to the internal affairs department of the police.

    The taxpayer bill of rights has no legal force and does not cover tax policy. It talks about rights to privacy and confidentiality, timely information and relief from penalties and interest because of extraordinary circumstances.

    Under the 11th right, the CRA says it will be accountable for what it does: “When we make a decision about your tax or benefit affairs, we will explain that decision and tell you about your rights and obligations.”

    That didn’t happen to Marc Weisman’s clients. But if he runs into problems again, he can submit a reprisal complaintand know it will be investigated independently of the office associated with the complaint.
    There’s a toll-free number to call the Office of the Taxpayers’ Ombudsman, 1-866-586-3839. Those outside Canada and the United States can call 613-946-2310. “Please note that we accept collect calls,” says the website.

    Ellen Roseman writes about personal finance and consumer issues. You can reach her at

    eros…@thestar.ca or www.ellenroseman.com

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    Is Your Tax Refund Too High? Reducing Your Tax Deductions At Source

    Last Updated: November 26 2013

    Article by C. Alice Madolciu

    Crowe Soberman LLP

    You’re an employee. Your employer diligently withholds tax, Canada Pension Plan (CPP) and Employment Insurance (EI), and remits these to the Canada Revenue Agency (CRA) on your behalf throughout the year, as required. You have just completed filing your taxes for the previous year, and success; you are getting a refund!

    But hold the excitement; perhaps it’s time to stop and consider the facts. A tax refund could simply mean that you have overpaid your taxes for the year, and are effectively loaning money, interest-free, to the CRA. Then at tax time, the CRA repays this money to you under the disguise of a “tax refund”!

    How did you let this happen? Well, you likely claimed tax credits and deductions on your tax return which your employer did not know about when your taxes were withheld at source. These credits and deductions decreased your taxes payable so that when you filed your tax return, the amount owing was less than what was remitted, resulting in a refund.

    So, how does your employer decide how much tax to deduct from your pay cheque in the first place? When you begin employment, you complete Form TD1, Personal Tax Credits Return. Form TD1 assists your employer in calculating the amount of tax to deduct from your pay cheque based on your declaration of the non-refundable tax credits (tuition and education amounts, caregiver amount, spousal amount, amount for dependent children, etc.) to which you are entitled.

    Invariably however, your personal circumstances will change. Important life events like getting married or having a baby may increase your credit entitlement, and hence, the amount of tax required to be withheld from your pay can in fact be lower than when you first began your employment. You should always complete a new Form TD1 (within seven days) whenever your personal circumstances change such that you are entitled to additional credits, or are no longer eligible for certain credits (I.e. your child reaches the age of 18 and you are no longer entitled to the amount for dependent children.) In fact, not doing so can result in a penalty of $25 for each day the form is late, with a minimum penalty of $100, and a maximum penalty of $2,500.

    If you know you are going to have significant deductions from your income in a certain year: RRSP contributions, child care expenses, rental losses, support payments, employment expenses, carrying charges, charitable donations, etc., you can complete and submit to the CRA Form T1213, Request to Reduce Tax Deductions at Source. This form requests permission from the CRA for your employer to use the deductions you will be entitled to, in order to reduce your tax withholdings in that particular year. If approved, the CRA will provide a Letter of Authority (typically within four to six weeks of submitting Form T1213) that would be provided to your employer as confirmation to reduce tax withholdings. You can also use Form T1213 to request a reduction in tax deductions at source for certain non-refundable tax credits that are not part of Form TD1, such as foreign tax credits, which Form T1213 does not provide implicitly for. Note that the CRA will not usually issue a Letter of Authority if you have a tax balance owing or have not filed outstanding income tax returns.

    Reducing your tax withholdings at source effectively increases your net amount of pay, so you get to take home more money every pay cheque throughout the year, when you’ve earned the money, and not at tax time, after the CRA has held this money on your behalf.

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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    Rogue Auditors Within the Canada Revenue Agency? : CRA SOTW

    published by David Davies on February 7th, 2013

    Imagine that you run a successful business and report a net income of tens of thousands on revenues of several hundred thousand dollars a year. You hire a respected accounting firm to prepare your financial statements and tax returns each year. All appears to be going well.

    Now imagine that a CRA “investigator” shows up on your doorstep intimating that you are under investigation for tax evasion. He suggests that you have intentionally under-reported your business income by $1.7 million over a three year period. However, he also says that you can reduce the civil reassessment of tax to less than $100,000, if you just plead guilty to tax evasion charges. You refuse, maintaining that you have done nothing wrong. The CRA later reviews the civil reassessment proposal, noting several manifest errors in it, but issues the reassessments as proposed, errors and all, forcing you to contest them in the Tax Court of Canada.

    Sound farfetched? Those are the facts alleged in Ereiser v. The Queen, a case decided by the Federal Court of Appeal (FCA) on February 4, 2012. Mr. Ereiser was reassessed and pleaded the facts above, and more. The Crown sought to strike virtually all his pleadings on the basis that the Tax Court’s jurisdiction is limited to merely reviewing the correctness of a valid assessment, not the process by which the assessment arose.

    The FCA agreed with the lower court in striking a portion of Mr. Ereiser’s pleadings. In doing so, it held that a civil servant such as a CRA auditor may act completely outside the scope of his authority – giving rise, perhaps, to the tort of misfeasance in public office – but the reassessment resulting from his actions is still subject to the same appeals process in the Tax Court as any other validly raised assessment. It matters not that the process by which the assessments were raised may have been corrupt.

    Does this mean that Mr. Ereiser has no recourse? The FCA suggested that it was still open to Mr. Ereiser to pursue a civil remedy such as a tort claim or an administrative law remedy in either a provincial superior court, or in the Federal Court, on the basis of the CRA’s wrongdoing. If Mr. Ereiser can prove his allegations, he will have a strong case in another court. Those facts will not, however, assist him in his Tax Court appeal.

    David Davies is a partner with Thorsteinssons LLP. He enjoys challenging CRA administrative practice and policy, preferring instead to rely on the law.

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    Save on capital gains with the best tax break in the country :CRA SOTW

    Garry Marr | Feb 16, 2013 8:00 AM ET

    Here’s a news flash for Canadian senators trying to justify where they live so they can claim a few perks from Ottawa.

    When it comes time to sell one of them could be the biggest break of all. The Canada Revenue Agency allows you to pick the property where you have the largest capital gain as your principal residence, and it could save you thousands in taxes.

    “I can’t think of any tax break of the same magnitude,” said Gurinder Sandhu, executive vice-president of Re/Max Ontario-Atlantic and a trained accountant.

    “The basic premise is that you designate the property with the largest gain as your principal residence,” he says.

    Jamie Golombek, managing director of tax and estate planning, says that means Canadians can escape all taxes on profits from their sale of that home.

    Typically, you pay tax on half of any realized capital again based on your individual tax rate. So a $100,000 gain could cost you almost $25,000 in taxes at the top marginal rate in Ontario.

    Avoiding that hit might be the biggest break in the Canadian tax code. Put a little sweaty equity into a house and it’s about the only way you won’t get taxed on your work.
    “At the time of sale you have to choose what you are designating as principal residence. You can only have one for a calendar year,” said Mr. Golombek, adding you only have to nominally inhabit the property.

    That will be good news for people like Mike Duffy, the Conservative senator who lists a home in Cavendish, P.E.I., as his primary residence. He has expensed taxpayers $33,000 for his living accommodations in Ottawa, which he says is his second home.

    Some reports suggests few have seen Mr. Duffy near his cottage home but that doesn’t mean much tax-wise because Mr. Golombek says you can spend as little as one day per year and still claim the exemption.

    The scenario of having two homes, each eligible for a capital gains break, is one that plays out for many Canadians, not just senators. Some may even have a cottage worth more than the home they reside in most of the year.

    Remember when you do sell one of your homes, you either report the gain or the government considers you claimed the exemption.

    “When you sell the next one you’d only get [a break on a portion] of the [capital] gain,” said Mr. Golombek.

    Don’t pay the tax on the second home and you could be guilty of tax evasion. And, if you think you can put one home in your name and the other your spouse’s, you can’t. There’s one capital gain for both parties and that goes for common-law couples too.

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    Beware CRA’s formidable audit powers : CRA SOTW

    By Vern Krishna, Financial Post January 3, 2013

    The Canada Revenue Agency has virtually unlimited powers to audit taxpayers, inspect and seize any document or thing, or demand information that may afford evidence as to the commission of an offence under the Income Tax Act.

    Except for requiring a search warrant approved by a Federal Court judge to enter a dwelling house, the CRA’s audit powers are formidable. The items to be searched for and seized do not have to be described with specific particularity in the application for the warrant.

    The courts will not supervise or prescribe the intensity of audit examinations, which is exclusively a matter for the minister of National Revenue. The Charter of Rights and Freedoms provides only minimal protection against the use of tainted evidence obtained through an improper or unreasonable seizure of tax documents.

    The minister can also demand from any person information for the purpose of administering the tax act, tax treaty with another country, or information exchange agreement. Under this power, the CRA can demand accountants’ and auditors’ working papers, which are not protected by privilege. To be sure, the demand must be for relevant information, but it is for the CRA auditor to determine what is relevant. Failure to comply with a demand for information can lead to prosecution.

    The charter only protects individuals against unreasonable seizures and then only in limited circumstances. Corporations cannot claim charter relief in tax appeals.

    What is unreasonable depends upon the particular circumstances. For example, a demand for information constitutes a “seizure,” but it is not unreasonable in the context of the administrative and regulatory scheme of the tax act. On the other hand, seizure of a restaurant’s records as part of an electronic records compliance research project that was not part of any audit was unreasonable.

    The person from whom the documents have been seized has the right to obtain a copy of all the seized documents, which the CRA must supply at its expense. In addition, the owner of the documents can access the documents at all reasonable times, subject to such reasonable conditions that the minister may impose.
    An official may also seize any documents in “plain view.” Thus, a CRA official may seize any document that he reasonably believes is evidence of the commission of an offence. Section 489 of the Criminal Code similarly enables a person executing a warrant to seize material that affords evidence of an offence for which the warrant was issued.

    To be sure, the charter protects against unreasonable seizures, but the protection is not absolute. The underlying value that the charter protects is the taxpayer’s interest in privacy. The test for “reasonable” search and seizure is fluid and depends upon the type of intrusion into the taxpayer’s privacy (for example, demand for information vs. physical seizure of documents), the type of taxpayer (for example, individual vs. corporate), the location where the seizure is executed (for example, business premises vs. personal residence), and the context (for example, criminal vs. regulatory/ administrative).

    The burden of proof for adducing evidence that charter rights have been infringed or denied depends upon the nature of the search. If the search and seizure was conducted pursuant to a warrant, the burden rests initially with the person making the allegation of infringement – that is, the taxpayer. He or she can discharge the burden on a balance of probabilities. Where, however, the search was conducted without the authority of a warrant, the onus is on the CRA to show that the search was, on a balance of probabilities, reasonable in the circumstances.

    Although the charter confers broad discretionary power on a court to provide relief from illegal conduct, it does not mandate the court to exclude the all tainted evidence from judicial proceedings. The court will exclude evidence only if it is also satisfied that its admission would harm the administration of justice. Thus, tainted evidence is prima facie admissible and the taxpayer must also show that its admission would bring the administration of justice into disrepute.

    Vern Krishna is counsel with Borden Ladner Gervais LLP and is executive director of the CGA Tax Research Centre at the University of Ottawa.

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