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Archive for April 2008

Canada’s senior judges want 10% raise, citing workload

April 12, 2008 by Dan White.

Note: It is interesting to note how everyone has a different perspective on the income of others. This proves we are all special. even judges.

Janice Tibbetts , Canwest News Service

Published: Tuesday, April 08, 2008

OTTAWA - Canada’s senior judges are seeking a 10-per-cent pay raise from the federal treasury, asserting that the Canadian economy remains strong, despite the downturn in the United States sparked by the subprime mortgage crisis.

The 1,050 judges say they deserve the increase because they are working harder than ever; are increasingly called upon to rule on contentious issues that governments leave to the courts, and need to keep pace with senior bureaucrats and private-sector lawyers.

The requested raise, spread over four years, would be in addition to automatic annual cost-of-living increases, bringing the salary for the vast majority of federally appointed judges to $307,170. Chief justices and the nine judges on the Supreme Court of Canada would earn more.

Canada’s senior judges are seeking a 10-per-cent pay raise, asserting that the Canadian economy remains strong.

Yoon Kyoung Wook/Bloomberg News

The judges claim that the country is awash in cash, so there is no financial impediment to handing out an increase.

“Robust economic growth and federal budget surpluses are expected to continue for the foreseeable future,” the Canadian Superior Court Judges Association and the Canadian Judicial Council say in a submission to a federally appointed commission examining judicial remuneration.

The organizations also point out that The Economist magazine has predicted Canada should successfully weather a recession in the United states, should one occur.

The judges’ last four-year pay and benefits package expired last week, setting the stage for the latest round in an ongoing battle between the judiciary and legislators.

The government, noting that federal judges have enjoyed a 48-per-cent pay hike since 1999, is offering five per cent over four years, in addition to annual cost-of-living increase, a proposal that would cost an estimated $30 million.

“There can be no serious suggestion that judicial salaries have fallen below an acceptable minimum,” says a government submission to the commission. Government lawyers also warn that although the economy is robust, developments in the United States and the rapid appreciation of the Canadian dollar have created uncertainty.

The government also contends there are many other demands on the federal surplus, including tax cuts, environmental preservation, health care, and supporting Canadian troops and farmers.

The commission, consisting of Toronto lawyer Sheila Block; former Privy Council clerk Paul Tellier, and retired Ottawa bureaucrat Wayne McCutcheon, must make its recommendation by the end of May. Justice Minister Rob Nicholson is required by law to make a decision by the end of November.

It was only 16 months ago that the Conservative government settled a protracted remuneration saga with federal judges by giving them giving them a 7.25-per-cent pay hike, plus cost-of-living increases, retroactive to April 1, 2004.

Judges are still bruised by the government’s rejection of the commission’s recommendation of a pay increase of more than 10 per cent, a move they say amounts to political interference in the process and one they say threatens the independence of the judiciary.

The judges also argue they must keep pace with senior deputy ministers. According to the judicial organizations, senior deputies earned an average of $260,730, plus $30,505 in bonuses last fiscal year.

The government counters the salaries cannot be compared, since judges are eligible for a lucrative retirement package, worth two-thirds of their salaries, after serving on the bench for as little as 15 years.

Deputy ministers, on the other hand, have no job security and can be discarded at the will of the government in

The government also rejects the judges’ contention that they should keep pace with senior private-practice lawyers in order to attract the best candidates. Federal lawyers argue there is no problem either recruiting or retaining judges at the current salary level.

The judges’ salary request is considerably more modest than the previous two times around. The judges asked the commission - set up in 2003 - for a 17 per cent raise, and in 1999, they sought 26 per cent, both exclusive of cost of living increases.

The commission, in both cases, adopted a middle ground, meeting the judges and the government halfway.

© Canwest News Service 2008

Posted in Tax Topics | Print | No Comments »

To be taxed now or to be taxed later. That is the question, is it nobler in the mind to take your real estate expense deductions now or to take them later?

April 5, 2008 by Dan White.

Tax Deductions in Real Estate Properties. By Dan White

When it comes to deducting real estate expenses, there is a lot of confusion in the minds of many. In reality it is all pretty simple and makes sense so long as you don’t listen to those who would have you believe otherwise.

The spirit of the law is that you can write off all expenses related to the business of real estate. The only real question is; Is it sooner or is it later?

The sooner or later depends on which side of the line in the sand the scenario appears to be. On one side you have capital expenses and on the other side of the line there are current expenses.

Where do current real estate expenses cross the line and become capital in nature? The line in the sand is not that obscure if you look to the spirit of the law.

On one side of the line you have current expenses which are fully deductible in the current year. On the other side of the line in the sand you have the capital expenses which are deductable over time by way of depreciation.

Maintenance and Repair is a current expense; so long as it does not improve the property to better than it was when it was new or if it is an addition to what was part and parcel of the original new condition edifice.

In my opinion, too many current expenses are not taken as a current expense because of timid tax preparers. Nowhere is it written in tax law that if you are in doubt about an expense, don’t take the deduction. If in doubt about it, you should get the facts. The facts usually make sense, it is the false stories that usually don’t make sense.

I have included below, the table from CRA’s web site that in my opinion it is pretty clear as to what is deductible and what is not.

A bit of a side note here; the down payment on a real estate property is capital in nature, so it is not tax deductable in your current year. Your down payment is your capital investment and is going to be tied up in the property until you sell it. So remember that the higher the down payment the greater the profit produced, by way of reduced mortgage interest. The greater the profit produced, the greater the tax implications to the businesses annual bottom line. Always keep in mind the purpose of investing is to grow long term wealth.

When purchasing a property, make sure you make as small a down payment as you can. A smaller down payment frees up more cash to do maintenance and repairs. Those maintenance and repairs will reduce your current year profits and generate a significant tax reduction in your current year.

Getting back to the Maintenance and repair expenses; the following is taken directly from The CRA web site.

Current or capital expenses?

Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. However, an increase in a property’s market value because of an expense is not a major factor in deciding whether the expense is capital or current. To decide whether an amount is a current expense or a capital expense, consider your answers to the questions on the following chart.

Criteria	Capital expenses	Current expenses
Does the expense provide a lasting benefit?	A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden house is a capital expense.	A current expense is one that usually recurs after a short period. For example, the cost of painting the exterior of a wooden house is a current expense.
Does the expense maintain or improve the property?	The cost of a repair that improves a property beyond its original condition is probably a capital expense. If you replace wooden steps with concrete steps, the cost is a capital expense.	An expense that simply restores a property to its original condition is usually a current expense. For example, the cost of repairing wooden steps is a current expense.
Is the expense for a part of a property or for a separate asset?	The cost of replacing a separate asset within that property is a capital expense. For example, the cost of buying a compressor for use in your business operation is a capital expense. This is the case because a compressor is a separate asset and is not a part of the building.	The cost of repairing a property by replacing one of its parts is usually a current expense. For instance, electrical wiring is part of a building. Therefore, an amount you spend to rewire is usually a current expense, as long as the rewiring does not improve the property beyond its original condition.
What is the value of the expense? (Use this test only if you cannot determine whether an expense is capital or current by considering the three previous tests.)	Compare the cost of the expense to the value of the property. Generally, if the cost is of considerable value in relation to the property, it is a capital expense. (*** Dan’s note: The definition of the word ‘considerable’is too vague to be useful.)	This test is not a determining factor by itself. You might spend a large amount of money for maintenance and repairs to your property all at once. If this cost was for ordinary maintenance that was not done when it was necessary, it is a maintenance expense, and you deduct it as a current expense.
Is the expense for repairs to the used property that you acquired made to put it in suitable condition for use?	The cost of repairing used property that you acquired to put it in a suitable condition for use in your business is considered a capital expense even though in other circumstances it would be treated as a current operating expense.	Where the repairs were for ordinary maintenance of a property that you already had in your business, the expense is usually current.

A very important consideration about real estate properties is that sometime people lose money on them and how losses are dealt with is a very important strategy. In the year of the disposal of a rental property, you do not have a capital loss on the sale of a rental property; you have a terminal loss or a rental loss. That is hugely different in terms of your tax scenario. A terminal or rental loss is obviously the better situation for the individual investor.

That is particularly interesting because if you have a capital gain, you only have to take half of the gain against your income.

The above is inconsistent with CRA reasoning, but hey! If they have it on their web site http://www.cra-arc.gc.ca/tax/business/topics/rental/about/report/line9948-e.html I certainly won’t argue with them on this point.

As the days go on, it becomes increasingly clear on just how important tax strategies are.

So go forth and multiply your real estate investments and populate the earth with your assets.

Best Investing Wishes

Dan White

Tax Specialist

Posted in Tax Tips For Real Estate | Print | No Comments »

April 4, 2008 by Dan White.

Article in National Post

by Vern Krishna,

Re: The Smith Manoeuver….

When this case if over, we will have the final answer From the Supreme Court of Canada, on this topic.

My Prediction is; The Judge will rule that such manoevers are outside the spirit of the law, and within the spirit of GAAR.

It will be pointed out that the process is nothing other than a shell game and the game of doing will end.

The next part of the game will be from CRA who will feast on all the reclaiming of deducted interest, penalties and interest.

For every dollar of tax saved from doing the shuffle, the participants will write a cheque to CRA for three times the amount ($3.00)

It will be very easy for CRA auditors to identify large interest amounts on all the past tax returns in the last 3 years.

Yes, Dan White has been attacked and villified by my assertions; If it looks like a duck, quacks like a duck, walks like a duck then it is a duck……

So my prediction has been written. Be it right or wrong. Now we shall let the courts decide. My conscience is clear, I have advised many people to stay away from doing this kind of stuff.

Dan White.

Vern has done a great job of writing his article. Be sure to read it closely.

Homeowners, tax lawyers alike will watch Lipson case

Court to consider whether couple violated tax rules

Vern Krishna, Financial Post Published: Wednesday, April 02, 2008

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Canadian income-tax law has matured in the past 91 years. It has grown from 20 pages in 1917 to more than 2,000 pages in 2008. Notwithstanding its lengthy development, it is still all but impossible for taxpayers today to predict whether the legal form of transactions prevails over economic substance or vice versa. Interest deductions are the classic — and most recent — example, which the Supreme Court of Canada will soon consider in a case called Lipson.

Joe Clark won the 1979 federal election by promising that he would allow Canadians the same rights as Americans to deduct home-mortgage interest for tax purposes. Unfortunately for homeowners, the Clark government fell in nine months before passage of the bill enacting the legislation. Since then, taxpayers have resorted– with varying degrees of success — to arbitrage interest payments and make their personal mortgage interest-deductible for tax purposes.

Interest arbitrage occurs where a taxpayer exchanges non-deductible interest for deductible interest through a series of transactions that allow form to prevail over substance. In the simplest case, for example, an individual sells stock worth $500,000 to buy a house and then borrows $500,000 to repurchase identical stock. The interest on the borrowed money should be deductible because the taxpayer uses the funds directly to purchase investments.

Canadian tax law has long recognized this type of tax planning. The Westminster principle — named after the 1935 decision of the House of Lords in the Duke of Westminster case — is that a taxpayer can legally arrange his affairs to minimize the tax payable regardless of his motive. The principle is simply one aspect of the doctrine that taxpayers should be governed by the rule of law, preferably clear and certain laws.

Westminster has been part of Canadian tax law for six decades. In a landmark decision in 1984, the Supreme Court of Canada rejected the government’s argument in a case called Stubart that a transaction must have a valid business purpose. The court also rejected any requirement of economic substance — a doctrine long used in the United States.

Following Stubart, Parliament enacted the general anti-avoidance rule (GAAR) in 1988 to curb so-called “abusive” tax avoidance.

GAAR is a clumsy provision even by the standards of tax legislation. It defines an “avoidance transaction” as one that a taxpayer undertakes for tax benefits and that does not have a primary bona fide non-tax purpose. Thus, GAAR has an objective and a subjective component. One must evaluate the taxpayer’s motive for undertaking commercial transactions to determine whether they are primarily tax-driven or have an independent non-tax purpose.

However, there is an important exception to GAAR: It does not apply to tax-motivated transactions — even if they have no bona fide non-tax purpose — provided the transactions do not:

(1) Misuse specific provisions of the Income Tax Act; or

(2) Abuse the underlying policies of the Act read as a whole.

Thus, virtually every GAAR case must analyze whether the taxpayer misused or abused the Income Tax Act. Income tax law has many different policies and they are not a coherent whole. They are a patchwork of rules that can pull in different directions.

The appeal to the Supreme Court of Canada in Lipson illustrates the complexity of GAAR in tax planning. Earl and Jordanna Lipson — a married couple — engaged in a series of transactions intended to arbitrage what would have been non-deductible interest on their home mortgage into deductible interest for tax purposes. The purpose of the transactions was to convert non-deductible personal interest on a home into deductible interest solely for tax purposes. The transactions purported to finance the purchase of investment property. In substance, however, the arrangement financed a personal residence.

The form of each step of the series of transactions was legal. They applied specific deeming provisions of the act. The cumulative effect of the provisions deemed the interest deductible for tax purposes. The arrangements were lawful tax minimization under the Westminster principle.

However, GAAR looks at whether the taxpayer misuses any of the provisions of the Income Tax Act or abuses the statute read as a whole. The economic substance of the Lipson transactions was to circumvent the underlying policy of the Income Tax Act, which clearly prohibits the deduction of personal mortgage interest for tax purposes. Transactions that abuse the underlying policies of the Income Tax Act are avoidance transactions and subject to recharacterization for tax purposes. The substantive economic effect of the Lipson financing was to convert non-deductible personal interest into deductible business interest.

Parliament, however, did not write GAAR as a notwithstanding rule that is paramount over all other rules. Thus, the question in tax planning is: To what extent does GAAR trump the Westminster principle?

There is only one absolute in tax planning: Legal form prevails over substance, except in those circumstances where a court determines that substance prevails over form. Look to the Supreme Court for the definitive answer to resolve the dilemma for the next decade.

— - Prof. Vern Krishna, CM, QC, FCGA, is counsel at Borden Ladner Gervais LLP and executive director of the CGA Tax Research Centre at the University of Ottawa.

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