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Archive for April 2007

Child Care Expenses

April 27, 2007 by Dan White.

Claiming child care expenses

Did you know…

That you can claim child care expenses on your income tax return if your child is cared for at home or in nursery school, daycare, day camps, boarding schools, and sports schools? You can claim these expenses if you or your spouse or common-law partner incurred the expenses in order to work, carry on a business, or attend school.

If you qualify and your child is under the age of 7, you could claim up to $7,000 a year. If your child is over 7 but under 16 years of age, you may be able to claim up to $4,000. There is no age limit if you have a disabled child, and you could be able to claim up to $10,000.

Posted in Tax Tips | Print | No Comments »

GARR has lost its teeth, like a toothless grr from a canine.

April 10, 2007 by Dan White.

Supreme Court of Canada Releases Groundbreaking

Decisions on the General Anti-Avoidance Rule

Supreme Court of Canada Releases Groundbreaking Decisions on the General Anti-Avoidance Rule

Here’s an important, timely update for you from the Tax & Trusts Group at Cassels Brock.

Supreme Court of Canada Releases Groundbreaking Decisions on the General Anti-Avoidance Rule

The Supreme Court of Canada has released two groundbreaking decisions on the general anti-avoidance rule (GAAR) set forth in section 245 of the Income Tax Act (Canada) (the “Act”). Since its enactment in 1987, GAAR has cast a shadow over all Canadian tax planning. The mere threat of its use often resulted in otherwise viable tax planning being abandoned. There were no clear rules for applying GAAR, often making it impossible to know what the tax consequences of a transaction might be, and giving the Canada Revenue Agency a very strong hand to play with taxpayers. The unanimous decisions of the Supreme Court of Canada in Canada Trustco and Mathew have cast much of this uncertainty aside and have reintroduced clarity and certainty to tax planning.

The Court has said that three requirements must be established before GAAR will be applied to a transaction or a series of transactions:

1) a tax benefit must result;
2) the transaction must be an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken or arranged primarily for a genuine purpose other than to obtain a tax benefit; and
3) there must be abusive tax avoidance, such that the tax benefit received would be inconsistent with the object and spirit of the provisions relied upon by the taxpayer.

While the burden is on the taxpayer to refute the first two prongs of the test, the Canada Revenue Agency must establish the third prong. If the existence of abusive tax avoidance is unclear, the Court said that the benefit of the doubt goes to the taxpayer.

These two cases have established that GAAR must be interpreted and applied in a manner that preserves the values of consistency, predictability and fairness in tax law. GAAR does not permit courts to rewrite the provisions of the Act or impose their own view of object and purpose; the courts must only interpret and apply the Act. Taxpayers are allowed to take full advantage of the provisions of the Act conferring tax benefits, provided their transactions do not defeat the underlying rationale of these provisions. GAAR cannot be used to set aside the provisions of the Act simply because the Canada Revenue Agency does not agree with the tax benefits obtained by the taxpayer.

In determining whether a transaction is abusive, the Court said that reference must be made to the relevant statutory provisions to discern their object, spirit and purpose and to decide whether the transaction frustrates any of these. A transaction cannot be found to be abusive on the basis of “artificiality,” “lack of substance” or “economic substance” independent of the relevant statutory provisions. Although such matters may be relevant as part of the factual background in determining whether the object, spirit or purpose of the relevant tax provisions has been frustrated, they are not independently determinative of the nature of a transaction. The rejection by the Court of an “economic substance” test is perhaps the most important element of these two truly remarkable decisions. Taxpayers can now rely on the provisions of the Act without having to second guess the motivations of the transactions being entered into.

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What should go under “Other Expenses” ?

April 9, 2007 by Dan White.

Dear Editor,

What is your suggestions as to when to use the catch all category called ‘other expenses’ in the BKS.

SL

Dear SL,

This brings up the same topic we were involved with in regards to “petty cash.”
 

While the category is a good catch all… it needs to be outlined “How to Minimize, ‘other’  in the training manual add on…(because in reality there is no such expense as ‘other’ therefore all other expenses have to be moved to something other than other… J having fun with words… sorry..
 

E.G… Actors clothes could be called ‘Business Supplies.’ There could be a number of items in this particular category… Face powder, makeup, costume jewellery, hair styling,,, etc… Our argument is that actors have to buy attire that they don’t use in their personal lives, they have to make themselves look differently, therefore there is no personal benefit. (And yes I know people have been doing this for years, but that is like a fishing lure when fishing for a spouse. Fishing is not tax deductable unless you are doing it for a living. Not that some people don’t go looking for a spouse to support them,,,, for a living so to speak…. which would make spouse hunting tax deductable…. just having fun here…. J
 

In the end with a properly completed BKS, there should be nothing left in either ‘petty cash’ or the ‘other category.’
 

Because we are training the Bookkeepers to know where things should go, it reduces the required time for the tax preparer to do a tax return.
There will be less modifications to the BKS… Ideally there would be no BKS adjustments and the data would just go straight to the corresponding category in the T2124 Business Activity Form.  To get the BKS to this state of perfection is our goal.
 

To keep petty cash and other to zero amounts, would be one more item in audit risk protection.
Dan

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Petty Cash needs to be ‘rethunk.’ new word invented… :-)

April 7, 2007 by Dan White.

Dear Editor,

What kind of stuff is included in Petty Cash?

I really don’t think B. has a petty cash float – but there were receipts already setup in a petty cash file –
The receipts consist of blank receipts with no vendor name, just an amount and/or receipts for small foods items.

How do I handle this.

Thanks

S

Hi S,
 

Just like in everything else around audit ready bookkeeping;  thoughts and perspectives continue to evolve.
 

I had an auditor say to me one day. “How I see the topic of Petty Cash is; there is no such expense, I want to see what the business expense is.”
 

This caused me to stop and rethink my concept of petty cash.
 

In the old days, my thinking was that the various small expenses that could be put in petty cash saved detailed story writing for small expenses and was a good catch all for things that we did not have an official category for.
 

My new thinking is. There is nothing that does not fall into categories that we already have. (If I am wrong, just let me know and I will add the category to ARBooks.)
 

Petty cash is now in my mind a box where we keep cash  (A cash float)  for little things that need cash to pay for. One either writes a cheque made out to petty cash and does no entries in BKS for the expenses. Or they put a cash deposit in the box and record that amount of dollars in Income in ARBooks.
 

Then what ever the expenses are they are entered into the correct category in ARBooks.   This is a shift in thinking to bring Petty Cash into alignment with the purpose of ARBooks which is to make a user fully aware of how they spend money.
 

Consider this…. John spends $400 a year in pizza and $200 on coffee and $300 on bottled water for the office…. but his petty cash recordings show $900 in what way is John wiser? The answer is that Petty Cash does not inform the user, and when petty cash gets too high, it needlessly attracts the attention of CRA.
 

So let’s LL move away from promoting the use of small amounts go into Petty cash. “All expenses are real and none are petty when they are added up.”
 

Best Regards
 

Dan
 

 

Posted in Letters To The Editor | Print | No Comments »

The law is clampling down on Charitable Donation Schemes.

April 6, 2007 by Dan White.

The next time someone tries to get you into a tax deferral scheme, or charitable donation scheme where you get a tax recept for greater than the donation. Consider that CRA makes a lot of money going after these things.
Now CRA has increased the fines to 125% of the amount of the gift. It used to work out to 3 times the amount of tax saved. This will be a real cash cow for CRA.
CRA is going after improperly issued donation receipts covering the cases where a receipt is deliberately falsified, perhaps as to the date when the gift was received but more frequently as to the amount of the gift (for example, inflated value of receipt with respect to actual value of gift). If the person responsible is an officer, employee, official, or agent of a charity, the charity is subject to the penalty. But the penalty also applies to people who:

  • counterfeit the receipts of a legitimate charity; or
  • issue false receipts on behalf of an organization that has no right to issue official donation receipts.

For any infraction, the penalty is 125% of the eligible amount of the gift as it appears on any false receipt, plus a year’s suspension of the charity’s tax receipting privileges if the total of all such penalties exceeds $25,000. If by issuing false receipts, the person is also subject to a penalty under section 163.2 of the Income Tax Act (the section that provides for penalties for those who help or encourage others to make false claims on their tax returns, usually as part of a tax-shelter promotion), the person is subject to whichever penalty is larger.
If you participate in one of these schemes, you would fall under pretty much the same scenario as the promoters of the scheme.

IN SUMMARY:

If you get a receipt for larger than the amount of your real donation, you are being wilfully blind, very foolish and have a very low chance of success.

Dan White

 

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Question on promotional expenses

April 4, 2007 by Dan White.

Dear Editor,

 

I have some promotional items to claim 2006 Air Photography business.
 
In previous return years I may not have understood or done it properly in BKS. For example, For a donated photograph and frame; in addition to the material costs can I also claim costs for completing the photograph, such as my aircraft operational cost/hr and my hourly rate for editing and photo preparation ?
 
Thanks in advance for your help with an answer.
K

Hi K

 

Nice to hear from you.
 

In respect to promotional costs.
 

All your hard costs (money you actually spent) can be claimed.
… this would include aircraft costs…
 

But when it comes to your labour, you cannot deduct that. The way it is looked at is you would have to include that amount of labour value as income from your business, so when you donated it would have an assigned value. However that defeats the purpose of claiming your labour as it ends up a wash.
 

If you paid a family member to develop the photos that would be tax deductable.
 

And certainly all your little costs on top of the aircraft cost are business expenses.
 

The key here is that the promotional expense has to have a business reason for you doing it… such as increasing the chances of future business or as a reward for business that is done, or in a barter situation.  Your costs to produce the item are similar to cost of goods for resale… only this case you are business gifting the goods.
 

Best Regards
 

Dan

 

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