Time’s Up: CRA’s 100 Day Mandate for Improvement

After years of frustration on the part of tax professionals and taxpayers alike, the Finance Minister ordered the Canada Revenue Agency to clean up its act in 100 days. Specifically, the improvement plan was to run from September 2 through December 11. Finance Minister and Minister of National Revenue, Francoise-Phillippe Champagne instructed CRA to fix “unacceptable wait times and service delays.” Time’s up this week and CRA has released an update on progress. What gets measured, gets done. Let’s see what CRA’s metrics show. 

by John Mill LL.M.   Last year CRA announced that seniors could split Registered Pension Plan (RPP) income with their spouses. Splitting pension income provides the following benefits: Income is taxed at lower rate; access to an additional pension credit; reduces OAS clawback. For a senior couple on a fixed pension income with one spouse receiving a $100,000 annual pension and the other spouse receiving no income; the tax savings arising simply from splitting the pension income could be an additional $14,000 a year, tax free. For those with lower pensions, the savings are equally impressive.  For example, a pensioner living in Ontario earning $40,000 in pension income annually could save just over $2,300 per year in tax by taking advantage of pension splitting available for spouses and common law partners.1   Small business owners and professionals should note a difference between RPPs and RRSPs. RRSPs allow income splitting through the transferring of RRSP contributions to the spouse, this rule however does not allow RRSP income to be split. While RPP periodic pension recipients can start splitting pension income at any age, RRSP pension income recipients must wait until age 65. Unfair, particularly in view of the significant tax savings, which can build the couple's capital pool. A solution for the incorporated business owner is an Individual Pension Plan (ìIPPî). An IPP is a provincially registered pension plan often described as a super size RRSP available to corporate owner managers and professionals. But does an IPP qualify for pension income splitting? A quick survey of the internet indicates many different points of view with respect to the ability to split pension payments received from an IPP. Some say you cannot split IPP income, some say you can split IPP income if you annuitize the IPP, and others simply say you can split IPP income without any explanation. The correct position is this: - payments made directly from an IPP (a withdrawal) cannot be split; - if you annuitize an IPP, the annuity payments can be split; - if you have attained the age of 65, and transfer the IPP to a registered retirement income fund (ìRRIFî), the RRIF payments can be split. For the technically minded it appears confusion arises from ITA s. 118 which sets out the differing treatment depending on age and s. 118 (e) which tells what pension payments are not eligible to be split: (e) a payment received out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or a prescribed provincial pension plan; The confusion may arise because retirement compensation payments (ìRCAsî) are excluded and IPPs are registered provincial pension plans. However, IPPs are not RCA's or prescribed. ITA Reg. 7800 tells us what a ìprescribed provincial planî is: 7800.(1) For the purposes of clause 56(1)(a)(i)(C), subsection 56(2), paragraph 60(v), subsection 74.1(1) and paragraph 118(8)(e) of the Act, the Saskatchewan Pension Plan is a prescribed provincial pension plan. Saskatchewan has the only prescribed provincial pension plan, and that pension plan has nothing to do with IPPs. The ITA confirms that an IPP pension payment qualifies in the two circumstances set out above: 118(7)(a) (i) a payment in respect of a life annuity out of or under a superannuation or pension plan,   Ö (iii) a payment out of or under a registered retirement income fund or under an ìamended fundî as referred to in subsection 146.3(11), 1 Calculation courtesy of the Tax Efficient Retirement Income Calculator available through The Knowledge Bureau     EDUCATIONAL RESOURCES: Readers are invited to learn more about retirement income planning, income splitting and simulations for planning scenarios with The Knowledge Bureau's RIS program and projection software; summer school enrolments now possible.   ABOUT THE AUTHOR John Mill LL.M. has practiced corporate law for more than 20 years. Ten years ago he decided to take his tax expertise to a new level; he completed a Master's degree in International Taxation and then wrote the text for a Knowledge Bureau certificate course entitled Cross Border Taxation. In the course of his taxation studies he noticed consistent references to life insurance which is a tax free product. Consequently he obtained an life insurance licence. He is currently working on his second book regarding the most effective use of retained earnings.

The CRA has issued a news release advising all taxpayers that there are opportunities for recourse available if they aren't in agreement wiith assessment notices received from the Agency. The Canadian tax system is based on self assessment and voluntary compliance. It is also a system which strives for fairness and equity. In fact, taxpayer's rights are enshrined in a "Declaration of Taxpayer Rights", which includes the following basic rights: Fair treatment: application of the law fairly and impartially. Courtesy and consideration: the right to be treated with courtesy, respect, and consideration. Privacy and confidentiality: the right to expect that personal and financial information is protected against unauthorized use or disclosure. Bilingual service: the right to be served in the official language of your choice at designated bilingual offices. Information: the right to get complete, accurate, and clear information about your rights, entitlements, and obligations. Entitlements: the right to every benefit allowed under the law. Formal review: the right to a formal review of a taxpayer's file and then the right to appeal to the courts if taxes in dispute cannot be resolved. Taxpayer Protection Provisions are also provided to Canadian taxpayers through the Income Tax Act. It features a number of provisions designed to protect the taxpayer's rights, as described below: Taxpayer's Right to Appeal. Taxpayer's Right to Fairness and Leniency. Taxpayer's Right to Privacy: An employee or official of CRA may only provide information about the taxpayer to that taxpayer or to another person provided the taxpayer has given written consent. This is done on Form T1013 Authorizing or Cancelling a Representative. Under S. 241(1), no CRA employee may communicate taxpayer information knowingly to any other person or allow another to have access to taxpayer information. Should this happen, S. 239(2.2) provides for a fine not exceeding $5000 or imprisonment for a term not exceeding 12 months or both. Taxpayers can file an objection to most assessments and reassessments issued by the CRA, and there are various avenues for completing the objection. They can use the online My Account service, or contact their local tax services office via phone or mail. Appeals officers who were not involved in the original decision will conduct a review of the individual's tax return. In a majority of cases taxpayers don't have to pay outstanding income tax amounts that are in dispute until the formal review is completed by CRA. To resolve a dispute with the CRA or for more information on objections and appeal rights go to www.cra.gc.ca/resolvingdisputes.     Join us next week in Breaking Tax and Investment News for Taxpayer's Rights regarding undue hardship rules and Directors' Rights.     Educational Resources: For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.

As discussed in last week's issue of Breaking Tax and Investment News, the Canadian tax system applies tax to individuals, not households. Taxpayers are, in general, prohibited from splitting income with family members. That is, if a taxpayer gifts or transfers money or other property to his or her spouse or common-law partner or minor children, resulting income is usually attributed back to the taxpayer and added to his or her income.   With summer upon us and the prescribed rates for inter-spousal loans at historic lows, it is timely to review the attribution rules so that tax planning opportunities are used to their best advantage.  Some areas to review for exceptions to the attribution rules as follows: Transfers for fair market consideration: The Attribution Rules will not apply to any income, gain or loss from transferred property if at the time of transfer, consideration was paid for the equivalent of fair market value for the transferred property by the transferee. Transfers for indebtedness: The Attribution Rules will not apply if the consideration received by the transferor included indebtedness, providing that interest was charged to the transferee at a rateof at least the lesser of the prescribed interest rates in effect at the time the indebtedness was incurred and the rate that would have been charged if the parties had been dealing with one another at arm's length. Payment of Interest on Inter-Spousal Loans: Where the transfer was for indebtedness, interest must actually be paid on the indebtedness incurred by the spouse (or minor child) at the prescribed interest rate by January 30 of each year, following the tax year, or the loan will be subject to attribution. Election Not to Have S. 73(1) Apply. The general rule under S. 73(1) is that property transfers between spouses and common-law partners at its tax cost (undepreciated capital cost (UCC) or adjusted cost base (ACB)), so that no gain or loss arises. When property is transferred to the spouse for fair market consideration, the transferor can elect to have S. 73(1) not apply. Where this election is made, the transferor will realize a gain or loss on the transfer. Income resulting from assets transferred to an adult child (over 18). Such income will, in general, not be subject to attribution. However, see S. 56(4.1), which applies specifically to inter-family loans, but not transfers, made to adult children, but not spouses and minor children. This provision applies when income splitting is the main reason for the loan to an adult child, and the income will be attributed back to the transferor, unless the loan is a bona fide loan with interest paid as described above, by January 30 of the year following the end of the calendar year. Attribution When Spouses Living Apart. If spouses are living separate and apart due to a relationship breakdown, they can jointly elect to have attribution rules not apply to the period in which they were living apart. Spouses can choose not to have this section apply, with the result that any property sold in the time the spouses were living apart will be taxed in the hands of the transferor. Spousal RRSP. Investments made in a spouse's name, as a contribution to a spousal RRSP will not be subject to attribution. Wages paid to spouse and children. Where a spouse or children receive a wage from the family business, attribution rules will not apply. The major issue with family salaries is whether the amount is reasonable in light of the services rendered, as S. 67 denies a deduction for an unreasonable amount. If the wage is reasonable, it is deductible to the payor. Interest income from Child Tax Benefit (CTB) payments or Universal Child Care Benefit (UCCB) payments. If these amounts are invested in the name of a child, the interest income will not be subject to attribution. Income earned in a TFSA. S. 74.5(12)(c) excludes income earned within a Tax-Free Savings Account so long as there is not an excess amount in the TFSA. Example: Child Tax Benefit Investment Income Issue: The Smiths have always taken their monthly Child Tax Benefit payments and invested them in their children's names. This year, their children, Tom (15), and Mary (12) earned $5,000 and $3,500 respectively in interest from these investments. How much income must be reported by their parents, under on attribution rules? Answer: Nil. Interest on investments from CTB payments invested in the name of minor children is specifically excluded from the attribution rules. Kiddie Tax. The Attribution Rules will not apply when an amount is included in the calculation of tax on Split Income on line 424 on Schedule 1 Federal Tax, using Form T1206Tax on Split Income. This special tax was introduced in tax year 2000 on specific types of income earned by minor children.   Educational Resources: For more information on topics pertaining to compensation planning for owner managers and tax planning information, register for Tax Planning for Corporate Owner-Managers, a certificate course by self study from The Knowledge Bureau.  

A Defined Framework Sets The Stage For Global Participation in Disciplined Action For The Worst Crisis Since The Great Depression A Report By Evelyn Jacks, President, The Knowledge Bureau At this weekend's meeting of the G8 Finance Ministers, there was a breath of good news in the air for investors badly bruised by the effects of the economic downturn. The G8 Finance Ministers have confirmed there are signs of stabilization in the global economies, including a recovery of the stock markets and a decline in interest rate spreads. And the bad news? We are clearly still in the middle of the worst financial crisis since The Great Depression and must manage the ongoing significant risks of this global crisis including impending increases in global unemployment. Investors, their professional advisors and financial leaders within families would be well advised to reflect on these significant issues, and discuss courses of action required, if any, to protect family wealth from uncertainty and to be poised to benefit from the impending recovery. Following are highlights of the Ministers' discussions and agreed strategies, including principles and standards for financial propriety, integrity and transparency in The Lecce Framework. The action plans outlined signify a collaborative plan to address ongoing risks to global economies: Addressing Global Unemployment Increases. Should unemployment continue to rise in the short term while global economies recover, the G8 Ministers agreed on the following four-part strategy to help those devastated by job loss: Promotion of targeted active labor market policies, Enhancement of skills development, Ensuring effective social protection systems and Assistance in enabling labour markets to respond to broader structural changes. Addressing Restoration of Consumer and Investor Confidence. To put the global economy on a strong, stable and sustainable growth path, the ministers pledged to: continue to provide macroeconomic stimulus consistent with price stability and medium-term fiscal sustainability and restore lending. address the liquidity and capital needs of banks, as necessary, and to take all necessary actions to ensure the soundness of systemically important institutions. Addressing Exit Strategies. The ìextraordinary policy measuresî employed during this crisis must be unwound with precision to negate future burdens in the longer term including taxes and inflation. The IMF will undertake the necessary analytical work. Understanding Future Challenges. The Ministers agreed that the future stewardship over sound financial economies must include standards of propriety, integrity and transparency. To that end they pledge to develop The Lecce Framework, which is a set of common principles and standards regarding the conduct of international business and finance. This Framework will build on existing initiatives and lay the foundation for a stable growth path over the long term for not only the G8 countries but in time, the G20 and beyond. Implementing Regulatory Reform. The Ministers are swiftly implementing the decisions taken at the London Summit to ensure an international level playing field and called on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions. Trading Tax Information. The Ministers pledged to continue their negotiations of agreements on the exchange of information for tax purposes, to make further progress in the implementation of the OECD standards, to involve the widest possible number of jurisdictions, including developing countries, and develop a peer-review for compliance with the same standards. The Ministers also pledged to discuss tax havens in the G20 countries at the next OECD Ministerial meeting. Fighting Money Laundering. To improve the fight against money laundering and the financing of terrorism by working with the G20 countries and FATF on improving and implementing international standards by, amongst other things, identifying uncooperative jurisdictions, like Iran and North Korea. End Engagement in Protectionism. The leaders reaffirmed their commitment to refrain from protectionism. Excess volatility of commodity prices poses risks to growth and the ministers will consider ways to improve the functioning and transparency of global commodity markets, including considering IOSCO work on commodity derivative markets. More Resources for the IMF. Additional resources will be provided to expand lending capacity and in particular for concessional lending through the sale of gold or other means. Additional elements to be considered include a clearer division of labor and collaboration among institutions, enhanced balance sheet flexibility, good governance, better risk management, effective use of aid, progress on promoting innovation, and an adequate focus on the world's poorest. Sustainable Food and Health Systems Security. The ministers in particular pledge to reiterate their commitment to address medium and long-run food security in poor developing countries by raising sustainable agricultural productivity and food security, with a particular focus on assisting small-scale farmers, protecting natural resources, supporting infrastructure, innovation and catalyzing private investment. Possible joint initiatives by the World Bank, the African Development Bank and IFAD were discussed. The Ministers also noted the publication of the report by the High Level Task Force (HLTF) that presents proposals to accelerate progress in the health systems of the world's poorest countries. The Effects of Climate Change. Finally, the ministers discussed the economic, financial and developmental aspects of climate change, noting that financial and investment needs will be substantial in the future. Against this impending threat, all resources should be used in the most effective way to achieve true emission reductions, the use of market-based mechanisms to drive private finance, and the Ministers recommended: ìall but the least developed countries should commit to measurable, verifiable and reportable mitigation actions and financial participation. Adaptation is a development challenge and, therefore, international financing should primarily target the poorest countries, be fully integrated in their development strategies and follow the principles of aid effectiveness.î For a full text of the prepared announcement on the Lecce Framework see below.   EDUCATIONAL RESOURCE: For Advisors: The Economic Policies for Canadian Investors Stemming from The Global Financial Crisis will be discussed at DAC (Distinguished Advisor Conference) hosted by The Knowledge Bureau in Tucson, Arizona November 8-11. Fifteen speakers will address leading tax and financial professionals on the technical and soft skills required to embrace Leadership and Opportunity in Turbulent Times. For Advisors and Their Clients: The MASTER YOUR PERSONAL FINANCE Series of Books provide financial education for decision makers. Published by The Knowledge Bureau, they help investors and their advisors have better conversations about their money and the decisions required to accumulate, grow, preserve and transition it to the next generation.   THE LECCE FRAMEWORK: Common Principles and Standards for Propriety, Integrity and Transparency<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> We are in the middle of the worst crisis since the Great Depression. The breadth and intensity of the prolonged downturn have revealed the importance of strengthening our commitment to standards of propriety, integrity and transparency. Excessive risk taking and the violation of these basic principles contributed to undermine international economic and financial stability. This occurred both in areas that relied on self regulation and market discipline and in fields with formal rules and oversight, revealing flaws in the functioning of markets. For the market economy to generate sustained prosperity, fundamental norms of propriety, integrity and transparency in economic interactions must be respected. The magnitude and reach of the crisis has demonstrated the need for urgent action in this regard. Reform efforts must address these flaws in international economic and financial systems with resolve. This will require promoting appropriate levels of transparency, strengthening regulatory and supervisory systems, better protecting investors, and strengthening business ethics. Today, we, the G8 Finance Ministers, discussed the need for a set of common principles and standards for propriety, integrity and transparency regarding the conduct of international business and finance. We have agreed on the objectives of a strategy, ìthe Lecce Frameworkî, to create a comprehensive framework, building on existing initiatives, to identify and fill regulatory gaps and foster the broad international consensus needed for rapid implementation. The Lecce Framework recognizes that there is a wide range of instruments, both existing and under development, which have a common thread related to propriety, integrity and transparency and classifies them into five categories: corporate governance, market integrity, financial regulation and supervision, tax cooperation, and transparency of macroeconomic policy and data. Specific issues covered include, inter alia, executive compensation, regulation of systemically important institutions, credit rating agencies, accounting standards, the cross-border exchange of information, bribery, tax havens, non-cooperative jurisdictions, money laundering and the financing of terrorism, and the quality and dissemination of economic and financial data. International institutions and fora have already developed a significant body of work addressing a number of important issues in these areas, but, in many cases, the initiatives suffer from insufficient country participation and/or commitment. Today, we agreed to create a coherent framework which builds on work done by the IMF, World Bank, OECD, FSB, FATF, and other international organizations, to strengthen the global market system. To ensure effectiveness, we will make every effort to pursue maximum country participation and swift and resolute implementation. We are committed to working with our international partners to make progress with the Lecce Framework, with a view to reaching out to broader fora, including the G20 and beyond.

The CRA has announced changes to their administrative policy regarding employee taxable benefits, resulting in reduced administration for employers. For most employees, the value of all benefits accruing to them as a result of employment is included in their income under Section 6 of the Income Tax Act. Taxable benefits are included in income in Box 14 of the T4 Statement of Remuneration Paid (slip), so need not be added to income again. Some benefits also qualify for certain deductions: Housing, Board and Lodging: which can include a cleric's housing allowance, rent-free or low-rent apartments provided to caretakers, or subsidized meals or travel in a prescribed zone or for medical travel. Offsetting deductions may be included for clerics or those who qualify for the northern residents deduction. Amounts for employee's personal use of employer's auto: It is possible that the employee may offset this benefit with a claim for Employment Expenses using Form T777 Statement of Employment Expenses. Interest-Free Loans and Low Interest Loans: A deduction for carrying charges may be possible if the loan is used for investment purposes. Employee home relocation deduction: a deduction may be possible on Line 248. Security Options Deductions: a deduction may be possible on Line 249. Other taxable benefits, including amounts included for health or educational benefits may qualify for non-refundable credits like medical expenses or Tuition, Education and Textbook Amounts. Employment Commissions included in income may qualify for Employment Expenses on Line 229. As part of the Government's 2007 Federal Budget, changes were to be implemented regarding tax-free gifts and awards to employees, lowering the work hours required for tax-free meal allowances for employees and a reduction in reporting for employee allowances for travel. We will review the CRA administrative policies regarding the updates to the current gift and awards policy beginning in 2010. Non-cash gifts and awards to arm's length employees will be considered non-taxable if the value of all the non-cash gifts and awards to the employee total less than $500 annually. Values in excess of the $500 annual amount will be taxable. Non-cash anniversary or long service awards will also qualify for the non-taxable status if they are under the $500 threshold amount, but any excess amount will be taxable. The award must be for service of more than five years, or it must have been more than five years since the last service award was presented to the employee. Employee gifts such as coffee or tea, coffee cups, company logoed T-shirts, plaques or trophies with nominal value will not be included as a taxable benefit to employees. The CRA's administrative policy with regard to the qualifying nature of gifts will remain unchanged, so that performance related awards and cash or near cash gifts (gift cards or certificates) will be included in employees' taxable income. The Canadian Payroll Association is supportive of the changes by the Government with respect to the administrative relief provided by the changes in employee taxable benefit treatment, while the Federal government believes the changes will reduce the paperwork of small business and ìallow Canada's entrepreneurial advantage to be developed.î To see the full news release, click here. Educational Resources: For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.

Under our system of personal taxation, Canadians are taxed as individuals, not households. Taxpayers are, in general, prohibited from splitting income with family members. That is, if a taxpayer gifts or transfers money or other property to his or her spouse or common-law partner or minor children, resulting income is usually attributed back to the taxpayer and added to his or her income.   With the low prescribed rates set by CRA that are currently available for inter-spousal loans, it is timely to review the attribution rules so that tax planning opportunities are used to their best advantage. The Income Tax Act covers these rules as follows:   Transfers and loans to spouse or common-law partner If an individual transfers or loans property either directly or indirectly, by means of a trust or any other means to a spouse or common-law partner for that person's benefit, any resulting income or loss from that property is taxable to the transferor (S. 74.1(1)). Transfers and loans to minors Where property is transferred or loaned either directly or indirectly to a person who is under 18 and who does not deal with the transferor at arm's length or who is the niece or nephew of the transferor, the income or loss resulting from such property is reported by the transferor until the transferee attains 18 years of age (S. 74.1(2)). Gain or Loss Deemed That of Transferor When property that is transferred to the individual's spouse or common-law partner generates a taxable capital gain (or loss), such gain or loss will be reported by the transferor (S. 74.2(1)). Deemed Gain or Loss When property that is transferred to a minor generates a taxable capital gain or loss, the capital gain or loss is deemed to be the income of the minor (S. 74.2(2)). These rules are in place largely due to the result of Canada's progressive tax system and graduated tax rates. That is, individuals with higher income levels are subject to higher marginal tax rates. In addition, different income sources are subject to varying tax treatment. Finally, each individual in Canada qualifies at least for the Basic Personal Amount (a "tax-free zone"). When taken together, these factors provide a financial advantage when several family members earn some income, as opposed to one family member earning all of it. If such rules were absent, the higher income family members could transfer some of their income to the lower income family members to take advantage of the lower tax brackets enjoyed by those persons. This would result in less total tax payable, and more after-tax funds for the family. For this reason, it is always best to look at tax filing from a "family" rather than an individual perspective, and to seek the best tax result for the household, as opposed to the individual. This can be attained despite the restrictions placed upon taxpayers as a result of the Attribution Rules. The Attribution Rules target two distinct categories - transfers or loans to a spouse and minor child. There are significant differences in the restrictions applicable to each. Transfers - Spouse Assets transferred to a spouse will result in the associated income and capital gains that are earned being taxed in the transferor's hands Where a spouse guarantees the repayment of a loan, for investment purposes, made to the other spouse, attribution will apply to any income earned from the funds whose repayment was guaranteed. Example: Guarantee of a Debt Issue: Joan is a medical doctor in the highest tax bracket, and her husband Billy is a student working on his Masters degree (lowest tax bracket). To attempt to reduce their total taxes, Billy takes a $150,000 loan from their bank and invests in interest bearing securities. Because Billy has no other earnings, the bank asks for Joan's guarantee. In the current year, Billy's investment earns $9,750 in interest. How will this income be treated under the Attribution Rules? Answer: The $9,750 of income must be reported as interest income in Joan's hands. This is because she provided a guarantee for Billy's investment loan. S. 74.5(7) treats the guarantee as if it were a loan from Joan to Billy. Transfers - Child Dividend and interest income resulting from assets transferred to a minor child will be attributed back to a non-arm's length transferor, but not capital gains or losses. Example: Loan to a Minor Issue: Bobby (16 years old) received $15,000 from his parents. He invested in shares of a publicly traded computer company. He sold the shares 2 months later for $45,000. What capital gain will need to be reported by his parents? Answer: Nil. Capital gains earned by minor children are not subject to the attribution rules.     See next week's edition of Breaking Tax and Investment News for details on Exemptions from the Attribution Rules.   Educational Resources: For more information on topics pertaining to compensation planning for owner managers and tax planning information, register for Tax Planning for Corporate Owner-Managers, a certificate course by self study from The Knowledge Bureau.