Alastair Murdoch & Company Inc.
Formerly Best, Reimer, MacLean & Co.
Chartered Accountants in Merritt, British Columbia
Chartered Accountants in Merritt, British Columbia
Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.
Corporate:
Personal:
While it didn’t get a lot of attention in the coverage of the 2012-13 federal Budget (brought down at the end of March), one of the budget announcements was definitely good news for the small business sector, as the EI hiring credit which had been available during 2011 was extended for another year.
One of the perennial concerns of small businesses is the number and variety of levies which they pay to governments at all levels and the effect of those payments on the bottom line. At the federal government level, businesses must pay, in addition to income tax, Canada Pension Plan contributions and Employment Insurance premiums on behalf of their employees. Where an employee earns in excess of about $50,000 per year, the employer’s share of those levies reaches almost $3,500 for the year.
In last year’s budget, the federal government proposed and implemented a “hiring credit” for small business, which provided a non-refundable credit of up to $1,000 against any increase in the employer’s EI premiums payable over the previous year’s amount. As the EI premium rate did not increase substantially on a year-over-year basis, any significant increase in an employer’s EI premiums liability for the current year over the previous one would generally arise as the result of taking on new employees. In effect, the credit covered up to the first $1,000 of EI premiums payable by the employer for new hires during the year.
As the intent of the credit was to benefit small and medium sized businesses, limits were placed on the size of the companies which could claim the credit. Specifically, the credit was available only to companies whose total EI premiums for the immediately previous year were less than $10,000.
In this year’s budget, the federal government announced that the credit will similarly be made available during 2012 to employers whose EI premium liability during 2011 was less than $10,000. As was the case last year, the credit will cover up to the first $1,000 of any year-over-year increase (i.e., from 2011 to 2012) in the EI premiums payable by the employer.
Any such increase in premiums must be paid “up front”, when the employer business remits its source deductions in the usual way. However, there is no need to make an application for the hiring credit, as any credit will automatically be calculated by the Canada Revenue Agency (CRA) and applied as a credit on the employer’s payroll account with the Agency. More information on the credit for 2012 can be found on the CRA Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/hwpyrllwrks/stps/hrng/hcsb-2012-eng.html.
As gas prices across Canada climb past the $1.30/litre mark, and some predictions are for $1.50/litre (or higher) gas costs by the summer, consumers are looking for just about any way to reduce their cost of getting around.
For most of us, the purchase of gasoline is, for all practical purposes, a non-discretionary expense. Since the money has to be spent, the question becomes this: Does our tax system offer any relief by way of a deduction or credit for the cost of driving? The answer, as it usually is in tax, is yes … and no. The bad news for most employee taxpayers is that the cost of driving to work and back home, and the cost of most non-work driving is considered a personal expense, for which no deduction or credit is allowed, no matter how high the cost gets. The news is not, however, uniformly bad. The self-employed, of whom there are an increasing number, can claim a deduction for business-related driving expenses. As well, all taxpayers are permitted to claim a deduction for driving or travel expenses incurred for certain specific purposes, like moving to take a job or travelling to obtain medical care. And, finally, for those who decide that the daily commute has just become too costly and turn to public transit (which includes everything from subways to suburban commuter trains to ferries) as an alternative, a tax credit is available to help offset the cost of that transit.
Where employees are required, as part of their terms of employment, to use their own vehicle for work-related travel (e.g., someone who is required to visit clients at their own premises for the purpose of meetings or other work-related activities), tax relief is available for the related costs. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own travelling expenses and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred (including the cost of gas) for such work-related travel. It goes without saying that the employee must, in order to claim that deduction, keep a record of work-related travel done as well as records of travel-related expenses incurred.
The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use (summarized on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html), can be complicated. However, given the recent run-up in the cost of gasoline, as well as the anticipated increase ahead, it’s likely worth ensuring that every possible dollar of eligible expenses incurred as a result of employment-related car use is claimed.
Our tax system also permits a deduction for driving or other travelling costs incurred where a taxpayer moves to take a job (which would include students moving to take up a summer job) as well as for travelling costs which are incurred in order for the person or a member of their family to receive medical treatment.
Where it’s necessary to move to take up employment or self-employment, the costs of that move can be deducted from income earned at the new job. When it comes to travelling costs, the taxpayer has the option of either itemizing the various costs incurred (including operating expenses such as fuel, oil, tires, license fees, insurance, maintenance, and repairs and ownership expenses such as depreciation, provincial tax, and finance charges) for the year and then claiming a pro-rated amount which reflects the percentage of kilometres driven which relate to the move. Such an approach requires a fair amount of record keeping and many taxpayers choose instead to claim the standardized per kilometer rate provided by the federal government. For 2011 (the 2012 rates will be posted on the Canada Revenue Agency Web site early in 2013), that standardized rate ranges from 49.0 cents per kilometer in Manitoba to 63.5 cents per kilometer in the Yukon Territory. Where the standardized rate is claimed, no receipts are required, but the taxpayer is required to keep a record of the number of kilometers travelled in relation to the move.
The same approach (itemized approach or standardized rate claim) applies where a taxpayer is claiming travelling expenses related to medical care. The basic rule for claiming travel expenses in such circumstances requires the taxpayer to travel at least 40 kilometres (one way) from his or her home to obtain medical services which were not available any closer to home. Where that requirement is met, the taxpayer may claim the public transportation expenses paid (for example, taxis, buses, or trains) as medical expenses. Where public transportation is not readily available, the taxpayer may be able to claim a pro-rated share of vehicle expenses (both operating expenses and ownership expenses, with receipts, as outlined above) or opt for claiming the standardized per-kilometre rate. As is the case with all medical expense claims, a claim is available only where the total amount claimable exceeds the lesser of 3% of net income or (for 2012) $2,109.
Finally, where a taxpayer decides that driving is just too expensive and opts instead for public transit, a tax credit for the cost of using that public transit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.
The public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass (e.g., high school or university students who use transit to get back and forth from school) can be aggregated and claimed on the return of either parent for the year. So, a family of four that incurs $600 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $300 a month and city transit passes, even for students, can cost up to $100) can claim $7,200 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,600.
No amount of tax relief is going to make driving, especially for a daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.
By now, most Canadian taxpayers (except the self-employed and their spouses, who have until June 15) will have filed their 2011 income tax returns. It’s quite often the case that a taxpayer will realize, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was sent, or even that claims have been made for deductions or credits to which the taxpayer is not actually entitled.
In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right solution. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a Notice of Adjustment with the Canada Revenue Agency (CRA), making the necessary corrections. A Notice of Adjustment can be filed in a number of ways. The easiest and quickest way of doing of so is through the CRA Web site’s “My Account” feature, but that option is available only to taxpayers who have registered to obtain a CRA ID and password. While doing so isn’t difficult (the steps to be taken to do so are outlined on the Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html, it does take a few weeks to complete the process. Taxpayers who don’t want to deal with the CRA through the Web site, or who don’t think it’s worth registering just to deal with the Agency on a single issue can obtain hard copy of the T1 Adjustment form from the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-11e.pdf or by calling the CRA Forms request line at 1-800-959-2221. The use of the actual form isn’t mandatory—a letter to the CRA signed by the taxpayers is an acceptable alternative—but using a standardized form has two benefits. First, it makes it clear to the CRA that an adjustment is being requested, and two, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure anymore where that was can go on the CRA Web site at http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre (not the Tax Services Office) to which the adjustment request should be sent.
Sometimes it’s the CRA who discovers that a return is incomplete or that further information is needed to properly assess the return. In such circumstances, the Agency will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can often resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.
Of all the measures announced in the 2012-13 federal Budget brought down on March 29, it was the changes to Canada’s Old Age Security (OAS) system which will likely have the greatest impact on the largest number of Canadians. Under pre-budget rules, Canadians become eligible to receive OAS the month in which they turn 65, although the first payment is actually received the following month.
Changes to the OAS system were widely expected to be included in the budget, and the announced changes were, for the most part, as predicted. Specifically, the federal government announced that the eligibility age for receipt of OAS benefits would be raised from the current age of 65 to age 67. The change will, however, be deferred until 2023 and then implemented over a six-year period between April 2023 and January 2029.
The Budget also included an unexpected announcement that OAS recipients would, effective July 1, 2013, have the option of deferring their receipt of OAS benefits for up to five years. Such an option already exists for Canada Pension Plan (CPP) benefits and, as is the case with CPP benefits, deferral of OAS benefits will mean a larger monthly amount when benefits are received.
While the announced changes are, on their face, relatively straightforward, the combination of the lengthy phase-in period and the new option to defer receipt of OAS benefits can cause some difficulty in determining just how the changes will apply in an individual situation. An explanation of how the changes will apply to different age groups follows.
Canadians who are currently receiving OAS benefits are completely unaffected by the changes announced in the budget. Both the timing and the amount of their monthly benefits will continue without change.
Those born between these two dates will be eligible to receive OAS benefits once they turn 65—they are not affected by the increase in the eligibility age. However, as everyone in this age group will be eligible to begin receiving benefits in July 2013 or later, they will have the option of deferring receipt of those benefits for up to five years.
Where receipt of OAS benefits is deferred, the amount of the benefit increases with each month of deferral. The budget papers provide the following two examples of the effect of a short-term and a long-term deferral on the amount of OAS benefit received.
Michael will be turning 65 in September 2013.
Instead of taking up his OAS pension at age 65, he plans to continue working a year longer and defer the pension until age 66.
When he takes up his OAS pension at age 66, his annual pension will be $6,948 instead of $6,481 (in 2012 dollars).
Rita will be turning 65 in December 2013.
She plans to continue working as long as she can. She prefers to forgo her OAS pension for the maximum deferral period of five years so that she can have a substantially higher annual pension amount, starting at age 70.
When she takes up her OAS pension at age 70, her annual pension will be $8,814 instead of $6,481 (in 2012 dollars).
This is the group of Canadians who will be affected by both the increase in the eligibility age for receipt of OAS benefits, and by the option to defer benefit receipt by up to five years. The following chart, taken from the federal Department of Finance Web site, outlines the age at which benefits may first be received by those born after March 31, 1958. It can be seen from the chart that Canadians born after January 31, 1962 will not be eligible to receive OAS benefits until they reach the age of 67.
Month of Birth | 1958 | 1959 | 1960 | 1961 | 1962 |
OAS/GIS Eligibility Age | |||||
Jan. | 65 | 65 + 5 mo | 65 + 11 mo | 66 + 5 mo | 66 + 11 mo |
Feb. – Mar. | 65 | 65 + 6 mo | 66 | 66 + 6 mo | 67 |
Apr. – May | 65 + 1 mo | 65 + 7 mo | 66 + 1 mo | 66 + 7 mo | 67 |
June – July | 65 + 2 mo | 65 + 8 mo | 66 + 2 mo | 66 + 8 mo | 67 |
Aug. – Sept. | 65 + 3 mo | 65 + 9 mo | 66 + 3 mo | 66 + 9 mo | 67 |
Oct. – Nov. | 65 + 4 mo | 65 + 10 mo | 66 + 4 mo | 66 + 10 mo | 67 |
Dec. | 65 + 5 mo | 65 + 11 mo | 66 + 5 mo | 66 + 11 mo | 67 |
Note: mo = months. | |||||
While this group will have receipt of their OAS benefits delayed beyond the age of 65, they will also be entitled, if they so choose, to defer receipt of the benefits for an additional period of up to five years past their eligibility date, as outlined in the examples above.
Canadians who receive OAS benefits may also be eligible to receive the Guaranteed Income Supplement (GIS), which is made available to lower-income seniors. The changes to the OAS system will also affect receipt of the GIS. Specifically, as GIS payments are tied to OAS, eligible seniors will not receive any GIS payments until payment of their OAS benefits begins.
In view of the number of Canadians who will be affected by the announced changes to the OAS system, the federal government has posted explanatory information, including an FAQ document, on its Web site, and that information can be found at http://www.servicecanada.gc.ca/eng/isp/oas/changes/index.shtml.
As gas prices across Canada look to set new records, the cost of getting to work (or getting just about anywhere) is likely a topic of conversation in nearly every home and workplace in Canada. Consumers are looking for just about any way to reduce their cost of getting around.
Does the tax system offer any relief? Yes … and no. The bad news for most employed taxpayers is that the cost of driving to work and back home, and the cost of any non-work driving is considered a personal expense, for which no deduction or credit is allowed, no matter how high the cost gets. The news for employees is not, however, all bad. Those who have a commuting alternative in the form of public transit (which includes everything from subways to suburban commuter trains to ferries) can both minimize their expenditures at the gas pump and claim the cost of travel on those transit systems on their tax returns for the year.
A tax credit for the cost of using public transit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.
The public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass—for example high school or university students who use transit to get back and forth from school—can be aggregated and claimed on the return of either parent for the year. So, a family of four which incurs $600 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $300 a month and city transit passes, even for students, can cost up to $100) can claim $7,200 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,600.
Where public transit isn’t a viable option and employees are required, as part of their terms of employment, to use their own vehicle for work-related travel—for example, someone who is required to visit clients at their own premises for the purpose of meetings or other work-related activities—tax relief is available for the related costs. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own travelling expenses, and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred (including the cost of gas) for such work-related travel. It goes without saying that the employee must, in order to claim that deduction, keep a record of work-related travel done as well as records of travel-related expenses incurred.
The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use can be complicated. But, given the recent run-up in the cost of gasoline, it’s likely worth ensuring that every possible dollar of eligible expenses incurred as a result of employment-related car use is claimed.
A number of circumstances and developments have come together over the past few years to make working from a home office, once almost unknown, a common fact of business life. First and foremost, of course, is the technology, particularly communications technology, which enables the home-based worker to have access to all of the information and services available to his or her in-office counterpart. Given the right technology, it’s nearly as easy for an employee working from home to send and receive e-mails through the employer’s communications network and access the people, information, and services needed to do his or her job in the same way as it would be if he or she was at the office.
While technology has made it possible to work from home on a regular basis, other developments have made the daily commute to the office, and the maintenance of large offices in major urban centres, less and less appealing. The continuing increase in fuel costs has made the cost of that daily commute prohibitively expensive in some cases. As well, there is an increased awareness of the environmental cost of having most major highways clogged each morning and evening with hundreds of thousands of cars sitting in traffic gridlock. And finally, the cost of renting office space in most major Canadian cities means that most employers are at least willing to consider the cost savings which might be realized from work-at-home or telecommuting arrangements for their employees.
Along with the greater availability of work-from-home arrangements for employees, there has been a significant increase in the number of self-employed Canadians. Statistics Canada has reported that, between October 2008 and October 2009, self-employment in Canada increased by more than 100,000. And while not all of the self-employed work from home, it’s fairly common for those venturing into the world of self-employment for the first time to save costs by operating their business, at least initially, out of a home office.
One of the things which make a telecommuting or work-from-home arrangement attractive, aside from avoiding the daily commute, is the tax deductions which can be claimed. While those benefits, especially for employees, are not necessarily as generous as is popularly believed, it is the case that working from home can make costs which would be incurred in any event deductible for tax purposes.
As is usually the case in tax matters, the rules differ for employed taxpayers and for the self-employed, as the latter enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:
A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2124(E) (Statement of Business Activities)) expenses such as property taxes, rent or mortgage interest (but not mortgage principal amounts), insurance, utilities costs, etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 15% of available floor space and who incurs $2,000 each year in qualifying expenses would be entitled to deduct $300 ($2,000 times 15%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It’s not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.
Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:
Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities and maintenance costs. An employee is not, however, entitled to claim any portion of mortgage interest, property taxes, or home insurance costs paid, and cannot claim capital cost allowance (see paragraph on capital cost allowance, below).
Employees working on commission, who usually occupy the tax territory somewhere in between employees and the self-employed, have slightly more latitude in claiming deductions with respect to the use of their own homes for work purposes. Such employees may claim, in addition to the costs outlined above for employees, a portion of property taxes and insurance paid on the home. Mortgage interest and capital cost allowance remain non-deductible.
As is the case with self-employed taxpayers, an employee’s deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.
One of the tax benefits which is commonly supposed to exist for home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one’s home for tax purposes. For employees, however, such a claim is simply not allowed. And, while the self-employed may be entitled to claim CCA on a home, making such a claim can create a short-term benefit with long-term costs. Making a CCA claim on one’s home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable, in monetary and tax terms, than any CCA claim which might have been made.
Being able to claim home office expenses doesn’t result in the huge tax benefits that some popular tax myths claim. However, it can and does permit qualifying taxpayers to claim a portion of home ownership (or rental) expenses which would have been incurred in any case while also avoiding the dreaded daily commute, making it a win-win scenario.Millions of Canadians take over-the-counter (OTC) products and drugs, both to treat illnesses and in the hope of preventing them. As the use of OTC medications and other similar products has increased, so too have attempts by Canadian taxpayers to claim a medical-expense tax credit for the cost of such products. And in some cases, the courts have allowed such claims, notwithstanding the contrary position taken by the Canada Revenue Agency.
Until earlier this year, the wording in the Income Tax Act (the Act) was such that the cost of drug, medication, or other products purchased by a taxpayer would be eligible for the medical-expense tax credit if the medication:
That wording was broad enough for the courts to decide, in one case, that the cost of vitamins qualified as a medical expense. In another case, a taxpayer successfully made a claim on his tax return for the cost of a prescription for aspirin, as the Tax Court found that the requirements of the Act been met with respect to his purchase of the aspirin.
Faced with a rising tide of such claims, and with the certainty that their numbers would only increase, the federal government took action. As part of the 2008 Budget, a change was introduced to the wording of the provisions of the Act governing claims for the medical-expense tax credit for medication costs. While the wording change appears slight, it will, in fact, have a major impact on taxpayers' ability to claim a medical expense tax credit for such costs.
Under the new wording, the credit will be claimable for the cost of drugs, medications, and other substances:
·that are manufactured or sold for use in the diagnosis, treatment, or prevention of illness;
·that can lawfully be acquired for use by the patient only if prescribed by a medical practitioner or dentist; and
·the purchase of which is recorded by a pharmacist.
The significant change lies in the second requirement. In effect, even where the first and third requirements are met and a prescription was obtained from a doctor or dentist for the drug or other substance, it will be possible to claim a medical expense tax credit for the cost only if the prescription was necessary to obtain the drug. In other words, if the drug or other product (like vitamins or aspirin) can be bought over the counter, then having a prescription for it won't change it into something for which a medical expense tax credit can be claimed. If the prescription wasn't needed to buy the drug or product, then no medical expense claim will be allowed for the purchase.
The change will apply to all drug and other medication expenses incurred by taxpayers after February 26, 2008.
In September of 2006, the Canada Revenue Agency issued a technical interpretation which seemed to provide taxpayers with a welcome degree of latitude when calculating the amount of interest paid on a line of credit (or other borrowed funds) that could be deducted for tax purposes. Essentially, the CRA indicated that, where a line of credit was used for both personal (and therefore non-deductible) purposes and for business or investment (and therefore deductible) purposes, the taxpayer would be able to use what the Agency termed a "flexible approach" in determining any available interest deduction. In more specific terms, the CRA took the position that the taxpayer could, in effect, allocate any payments made on that line of credit, or on other borrowing, to the reduction of borrowings made for ineligible (non-deductible) purposes, thereby maximizing the available interest deduction.
The CRA recently reconsidered its former position and, unfortunately for the taxpayer, has decided that a much more restrictive (and much less favourable) approach should be followed. Under the new policy, any payments made on a line of credit (or other borrowing) that has been used for both eligible and non-eligible purposes must be applied to reduce both the eligible and non-eligible portions of the line of credit. As well, the taxpayer will not be permitted to determine the portion to be applied to each; rather, the proportion must be based on the relative balances in the account when the repayment is made. Take, for example, a taxpayer who had a line of credit with a balance of $1,000, where $300 of that balance was attributable to eligible investment purposes and $700 to ineligible personal use. If the taxpayer makes a payment of $100 against the outstanding balance, he or she would formerly have been able to allocate the entire payment to the $700 ineligible portion of the outstanding balance. Now, however, the $100 will have to be applied proportionately; that is, $70 to the ineligible borrowing and $30 to the eligible borrowing, thus reducing the deductible interest expense that may be claimed by the taxpayer for that year.
The CRA's new technical interpretation does suggest that the taxpayer, in order to maximize interest deductibility, could sell the investments acquired with the original eligible borrowing, pay down the ineligible portion of the balance, and reborrow, using the newly borrowed funds only for eligible purposes. While that approach would work from a purely tax perspective with respect to the deduction of interest, the sale and repurchase of investments, particularly in the current volatile investment climate, is not without its costs and risks. The better approach (as it probably always has been) would be to keep personal and business or investment borrowings separate, through the use oflines of credit or loans specifically set up for each purpose.
Information in this article is current as of March 31, 2008.
A recent court decision underscores the importance of complying with strict legal requirements when making charitable donations. This is especially vital where, as is often the case with substantial gifts, the donation is to be made by means of a series of payments over a period of time.
The case involved a taxpayer who signed a pledge document in which she agreed to donate $1 million to the foundation of a local hospital over a five-year period, in five equal annual payments. After the first $200,000 payment was made, the taxpayer died, and her executor refused to pay the remainder of the pledged amount. The Court was asked to determine whether the pledge document was a legally binding contract.
The court decided that, although it was clear that the taxpayer had intended to give the full amount, neither that intent nor the pledge document itself was sufficient to make the gift legally enforceable, despite the fact that the first payment had already been made.
The Court based its decision on the fact that, under Canadian law, there could be no contract unless each party received something from the agreement. Clearly, the hospital stood to receive a substantial amount of money. However, there was no evidence that the donor received anything in return and, without that, the court could not find that a legally binding contract existed.
It would seem, therefore, that where donors and donees want to ensure that any agreements with respect to future donations will be legally enforceable, the best course of action is to structure the agreement as a true contract, in which each party receives something out of the bargain. For the charity the benefit received is, of course, the donated amount. For the person making the donation the benefit could be something like a plaque or notice displayed in acknowledgement of his or her generosity.
What matters, it seems, is not the significance of the benefit received, but rather that it be clear from the documentation that the donation is contingent on the donor receiving that benefit. Only then will there be a legally binding contract for the donation which may, if necessary, be enforced by the charity.