The History of taxes in Canada Past to Present Lunacy

July 17, 2009 by Dan White.

Since ancient times, tax has been defined as a mandatory contribution, accepted willingly or unwillingly by the members of the country, known as “taxpayers.Taxes are believed to be for the purpose of funding the public expenditure of the state, for such things as roads, bridges, railroads, hospitals and schools.

In order for citizens to willingly accept paying income tax and consumption taxes, they must perceive that the taxes are necessary, fair and reasonable, and are being used to help ensure the taxpayers well-being and security.

More than 3,000 years ago, the inhabitants of ancient Egypt and Greece paid income tax, consumption taxes and customs duties. These payments were made in various forms, such as goods, days of unpaid labour and fines.

In ancient India, a tax was levied on livestock and precious stones. In Athens, grain was taxed. The Emperor Augustus (27 B.C.) introduced an excise tax on goods, including slaves, sold in the public markets of Rome.

The salt tax, dates back to the start of the Roman period, that is, to the 8th century B.C.

Upon the arrival of the first European explorers to North America, such as Christopher Columbus in 1492 and Jacques Cartier in 1534, North America was populated by native nations that had their own “taxation” system.
Certain Native groups that served as intermediaries in the fur trade claimed a toll or a tax in kind when they conveyed pelt bales from one place to another.

The Algonquians on the Ottawa River, for example, collected a percentage on furs, cornmeal, sunflower oil and medicinal herbs, in exchange for which they allowed travellers to portage in peace around the rapids. In 1636, the Jesuit Paul Le Jeune observed that this system, which he referred to as the “Law of the Land,” was strictly observed by all the native nations.
Around 1637, to encourage French immigrants to settle in the St. Lawrence Valley, then known as “Canada,” the king of France implemented the seigneurial system, by distributing large tracts of land to settlement agents called “seigneurs.” These agents had to subdivide the tracts of land into lots or pieces of land, each measuring approximately three arpents of frontage by 30 arpents in depth. These lots were granted at no cost to new arrivals. In return for this “free” land, a habitant was required to pay certain annual fees, which constituted the income tax and consumption taxes of that era.

Beginning in 1670, tenants under the seigneurial system were required to remit a tax, or tithe, to the Church. The tithe, equal to 1/26th of the wheat crop, was used to maintain the religious buildings and property that the tenants used, such as the chapel, the rectory and the cemetery. Finally, the obligation to provide days of unpaid labour, dating back to the Middle Ages, remained in effect. A habitant was required to provide three to five days of unpaid labour each year to the seigneur for the maintenance of bridges and roads and for the construction of various buildings or structures, such as the manor house, the mill, barns, stables and fences. In return, the habitant had access to the seigneury’s services and conveniences, and benefited from the security provided by the seigneury.

New France was turned over to England under the Treaty of Paris in 1763. At that time, and more specifically from 1791 on, the primary source of revenue for Lower Canada (Québec) was customs and excise duties on manufactured goods, wine, spirits and tobacco. In Upper Canada (Ontario), which has no seaports, revenue was derived from land (or property) taxes.

When the Canadian federation was formed in 1867, the British North America Act attempted to create a federal government with virtually unlimited revenue gathering abilities, except for modes of direct taxation (section 92(2) of the Income Tax Act), which were reserved exclusively to the provinces.

The federal government was entrusted with the high cost programs of the time, most notably defence and the building of railways. The provinces were given limited taxation power as they could only impose direct taxes such as sales taxes, property taxes, resource revenues and income taxes.

At the time, it was believed that the provinces had adequate revenue sources. This did not consider the future when governments would also be funding social assistance and Medicare. That is a responsibility which has been taken up by the Federal Government.
For the early part of Canadian history most federal government revenue came from tariffs on trade and as the major source of government funding.

The largest source of provincial funding was licenses, permits, and transfers of funds from the federal government. The first corporate taxes were introduced at the end of the nineteenth century.

In the 1880s, faced with an urgent need to bail out its finances, Québec exercised its right of direct taxation, not on inhabitants but on business corporations, such as banks and insurance companies. Thus begin a whole new source of tax revenue.

A crisis developed during the Great Depression largely because the provinces were responsible for skyrocketing welfare costs, but could not raise enough revenue to handle the enormous costs of social welfare.

At that time, the federal government still had considerable revenues and it became necessary to institute a system of transfer payments between the two levels of government. The transfer payments are still in place today and are used by the Federal Government for purposes they believe in their own best interest.

The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war. That was War Measures Act and is still going strong, although it is no longer called the War Measures Act. Now it is simply called the Income Tax Act. (ITA)

The income tax has since become a permanent feature of the Canadian tax system. The Second World War led to dramatic change in the tax system. Wars have always been a good time to introduce new taxes because the population buys into the need for these “temporary” taxes.
The percentage of Canadian government revenue from indirect taxes fell from 90% in 1913 to less than 40% by 1946. As a result massive tax sytem change was brought about and Canadians began to pay income taxes and direct taxes. Direct taxes have now become the largest source of government revenue. There is a reason CRA is called “Canada REVENUE Agency.”

In Québec, Premier Maurice Duplessis, a staunch defender of provincial autonomy, had the Québec National Assembly enact the Provincial Income Tax Act in 1954, to retain more spending power for the province. Since then, Quebecers have been required to complete two income tax returns, one federal and one provincial. The Government of Quebec has long seen itself as independent of the rest of Canada. One can certainly understand why they feel that way.

Today both the federal and provincial governments have imposed income taxes on individuals, and these are seen as the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue.

The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage. Income taxes throughout Canada are progressively higher depending on amount of income with the high income residents paying a higher percentage of taxes than the lower income residents.

Where income is earned in the form of a capital gain, only half of the gain is included in the yearly income for income tax purposes; the other half is not taxed. Very often Canadians end up paying more in taxes from such gains then if they structured themselves for business gains and losses. Interetingly and unfortunately capital losses can not be used as a deduction against income. Capital Gains Game (GGG) can be a trap, so taxpayers need to beware of the Capital Gains Game trap.

Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP) and tax sheltered savings accounts that are intended to help individuals save for their retirement. The operative work here is “deferred.” There is a very real possibility that the taxpayer will pay more tax in the end than what they deferred in the beginning.

Corporate taxes in Canada are … shall we say a complex and interesting game. The common perception among taxpayers is that incorporation is better because Corporations pay less tax. While it is true their tax rate is lower, they still follow the same income tax act, so in many cases the total tax paid between the owner of the corporation and their own personal taxes is in fact higher than if they were a sole proprietor.
Companies and corporations pay tax on profit income and on capital.(in economics, capital or capital goods or real capital refers to factors of production used to create goods or services that are not themselves significantly consumed (though they may depreciate) in the production process. Capital goods may be acquired with money or financial capital. In finance and accounting, capital generally refers to financial wealth especially that used to start or maintain a business. )

These capital purchases in themselves make up a relatively small portion of total tax revenue for the tax man. Corporate Tax is paid on corporate income at the corporate level, before it is distributed to individual shareholders as dividends. Dividends are not tax free income. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed. But the big but in this is that capital losses can not be deducted against business income.)

Trusts have become a favourite tax strategy. Personally I don’t like anything where the government can change the rules at whim. The best example of trusting trusts lies with “Income Trusts.” Starting back in 2002, several large companies converted into “income trusts” in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. I guess you could say that Canadians are truly looking for ways to save taxes. This mere fact is proof that the taxpayer does not feel they need to pay as much tax to be good citizens. They feel “OverTaxed.”

Conversions to Income Trusts were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.

Sales taxes in Canada; The federal government levies a multi-stage sales tax of 5% (6% prior to January 1, 2008), that is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is similar to a value-added tax.
All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswick and Newfoundland and Labrador are harmonized with the GST. That is, a rate of 13% HST is charged instead of separate PST and GST. Both Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories do not charge provincial sales tax.

Property taxes have long been the method the municipal levels of government use to support their infrastructure.
Property is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada.

Excise taxes; Both the federal and provincial governments impose excise taxes on  goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $100 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are often referred to as “sin taxes.”

Payroll taxes; Ontario levies a payroll tax on employers, the “Employer Health Tax”, of 1.95% of payroll. Eligible employers are exempt on the first $400,000 of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in 1989.
Quebec levies a similar tax called the “Health Services Fund”. For those who are employees, the amount is paid by employers as part of payroll. For those who are not employees such as pensioners and self-employed individuals, the amount is paid by the taxpayer.

Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers’ Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they are considered insurance payments, versus taxes which are used to fund government activities.
Employment Insurance is unlike private insurance because the individual’s yearly income impacts the received benefit. Unlike private insurance, the benefits are treated as taxable earnings and if the individual had a mid to high income for the year, they could have to repay up to the full benefit received. In other words, employment insurance is a premium we are forced to pay that if things go well, we can’t collect on the insurance.
Ontario charges Health and Prescription Insurance Tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligibility for public health care. The Ontario Health Premium is an additional amount charged on an individual’s income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt.
Municipalities charge business tax on businesses that are located in their municipality.

Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada.
Other provinces, such as British Columbia, charge premiums collected outside of the tax system for the provincial Medicare systems. These are usually reduced or eliminated for low-income people.
Alberta does not levy any taxes or premiums for its provincial medicare.
We tax the dead by way of Estate Taxes. Since the government of Pierre Trudeau repealed Canada’s inheritance tax in 1972, estates have been treated as sales (a “deemed disposition”) upon death, except where the estate is inherited by a surviving spouse or common law partner.
Estate Tax owing is paid by the estate, and not by the beneficiaries. Registered Retirement Savings Plans and Registered Retirement Income Funds are wound down, and the assets are distributed to beneficiaries are treated as withdrawals, i.e., they are taxed as part of the income of the estate at the normal applicable personal income tax rates with no reduction for capital gains. (Dead people cannot complain.) Non-registered capital assets are treated as having been sold, and are taxed at the applicable capital gains tax rates. Interest or other income from non-registered non-capital assets that is accrued up to the date of death is taxed on the final tax return of the deceased as the normal tax rates, and is not included on the tax return of the estate.
International taxation: Canadian individuals and corporations pay income taxes based on their world-wide income.
Canadians are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries.
A citizen who is currently not a resident of Canada may petition the CRA to change his status so that income from outside Canada is not taxed, by becoming a “Non Resident.” One does not lose their citizenship by becoming non resident and can regain their residency.

Revenue Canada became Canada Customs and Revenue Agency (CCRA) and later became what it is known as today; Canada Revenue Agency; (CRA). The CRA costs billions of Canadian Dollars to run. We wonder why when we already have a flat tax in the form of GST… why we need income tax. Why not just have a higher HST and no income tax? It would take all the complications of accounting away.  I guess that is so simple that it could never be here in Canada. I think Canadians would support a flat tax, however to support the concept endangers one to ridicule.
So for now at least, we carry on with incredible complexity for the sake of complexity. All the while building more and more resentment in Canadians to what is perceived as an unfair tax regime.
By law, all taxpayers are equal when it comes to taxation. This does not mean that all are subject to the same tax rate, but rather that everyone that owes tax must pay it. The income tax rates are graduated according to taxpayers’ different levels of income.
Tax evasion and the underground economy have replaced the salt smugglers and pirate-smugglers of yesteryear. These offences call into question the fairness of direct taxation because the amounts not remitted by tax evaders must be borne by other taxpayers. So to level the playing field more and more Canadians move underground with some or all of their businesses.
The government has legal remedies to enforce tax legislation but these differ, from the sanctions imposed in 1565 by the Parliament of London. The latter included cutting off the left hand of a person guilty of tax fraud and nailing it to the most visible place in Market Square! If that were the case today, there would be a lot of one handed Canadians. On one hand you would pay tax, but on the other missing hand you would not be able to pay tax.
In days of yore, if you were a tax evader, you would be scorned by your fellow citizens; today your fellow Canadians would want to know how the tax evader is getting way with it.
Today being that the average Canadian sees the tax regime as intolerably unfair, unreasonable and hugely punitive; they no longer see tax evasion is bad unless you get caught.
Canadians are angry about the amount of penalties and interest they are charged on taxes they already can not afford to pay. They don’t understand how it makes sense to charge penalties of up to 100% of the tax owed of which they can’t even pay that. It does not seem like a kinder gentler Canada to those caught in a tax mess and are facing losing their homes and even going bankrupt.

There are thousands of tax auditors out there auditing the books and records of Canadians. As a result of this activity, there are many thousands of Canadians, stressed out wondering if they will need to go bankrupt over unmanageable tax debt. Receiving one of those brown envelopes from CRA often strikes fear and dread in the minds and hearts of Canadians, they are even afraid of opening the brown envelope containing letter the letter of doom.
The tax system is complicated and gets more and more so every year. It is not possible for the vast majority of Canadians to know how to keep their books and records so as to not need to fear the tax man.  It is not part of our educational system to teach personal finance and taxation in a meaningful way.
The greatest fear in the world is “the fear of the unknown.” Not knowing one’s rights, what to do or what to expect is a scary situation for Canadians. They don’t know where to turn and often are in such bad shape financially that they can not afford help.
Very often Canadians feel shame and embarrassment because they have tax problems and don’t realize they have many thousands of fellow Canadians going through the same thing.
Canadians are usually afraid to fight the tax department for fear they will be on the Governments target list for the rest of their lives. So they live in silent tax loneliness.
Many Canadians turn to the underground economy to survive financially. We don’t advocate such activities but we certainly understand why it happens.
With the advent of HST (Harmonized Sales Tax) in Ontario, there is a greater pressure to avoid taxes and go underground. When you consider adding 8% to an already expensive service the total of 13% wipes out even the tax credits for home improvements.
The underground economy in Ontario is so big and so in your face, that small businesses forget that it is illegal. The language of “If you don’t need a receipt, I won’t charge you tax” is part of our everyday experience.
What this means is that the government has lost the respect and support of the average Canadians. Now the movement is to get away with as much as you can. While tax evasion is alluring, it is not the wisest answer.
What we here at Tax Audit Solutions (TAS) recommend; is stay above board in your tax liabilities, learn how to keep perfect business records. All good businesses need to learn how to structure their business affairs and to back up documentation is such a way that they pay a minimal amount of tax. Audit ready bookkeeping is a better solution than the underground economy. To learn more about Audit Ready Bookkeeping contact your local TAS representative.
Dan White

 

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Interesting issue around ‘Gross Negligence’ and CRA errors

July 15, 2009 by Dan White.

Category: Federal Income Tax/Court Decisions/Tax Court of Canada

Document Excerpt:
Sarwari v. The Queen (General Procedure), Tax Court of Canada, July 6, 2009. Neutral Citation: 2009 TCC 357. Court File No. 2007-623(IT)G. Webb, J. Net worth reassessments - Penalties - The taxpayer operated his business as a mechanic through a corporation of which he was the sole shareholder. In reassessing the taxpayer beyond the normal reassessment period for 2000, 2001, and 2002, the Minister added to his income unreported business income of $163,600.62 for 2000 and $38,559.93 (rounded to $38,560) for 2001. Penalties for gross negligence wee also imposed. On appeal, the Minister conceded that the reassessment for 2002 should be vacated - Appeal allowed in part - The TCC concluded that: (a) by overstating the amount of a mortgage, by failing to deduct a tax exempt gain on the sale of a principal residence, and by failing to take into account gifts, loans, and a line of credit obtained by the taxpayer, the Minister had made serious miscalculations for 2000, so that the only amount that could justifiably be added to the taxpayer’s income for 2000 was $17,000; (b) the Minister was justified in adding the $38,560 to the taxpayer’s income for 2001; (c) the Minister’s reassessment for 2000 was statute-barred since, under the circumstances, the taxpayer had not made misrepresentations attributable to neglect or carelessness in filing his return for 2000; (d) the Minister’s reassessment for 2001 was not statute barred, because the taxpayer had made misrepresentations attributable to neglect or carelessness in filing his return for 2000; and (e) the taxpayer, although careless or neglectful with respect to his 2001 return, had not recklessly or intentionally failed to report income for that year, and hence did not have the mens rea to justify the imposition of the penalties for gross negligence for 2001. The Minister was therefore ordered to reassess on the bases that the reassessments for 2000 and 2002 were vacated, and the penalties for gross negligence for 2001 were to be deleted - I.T.A. ss. 152(7), 163(1), 163(2).

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You really need to have good advice on Employment Expenses, at the beginning of the year.

July 15, 2009 by Dan White.

 Note:

There are very specif guidelines regarding employment expenses. One should not go down a dangerous road without a guide.

In this case, the conditions of employment did not indicate a need to incur expenses, there was no paper trail to prove a need for incurring the expenses, the T2200 form did not reflect the actual circumstances.

If you claim employment expenses have the situation appraised by a tax specialist.

Dan White

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Category: Federal Income Tax/Court Decisions/Tax Court of Canad

Document Excerpt:

Fitzgerald v. The Queen (Informal Procedure), Tax Court of Canada, July 3, 2009. Neutral Citation: 2009 TCC 321. Court File No. 2008-2731(IT)I. Angers, J. Deductions - Employment-related expenses - The taxpayer was employed as a commissioned automobile salesperson. The taxpayer sought to deduct the accounting, legal, advertising, promotion, motor vehicle, supplies, parking, telephone, cell phone, workspace in home, and meals and entertainment expenses incurred during 2005 and 2006 (the “Expense Deductions”). In reassessing the taxpayer for 2005 and 2006, the Minister disallowed all of the Expense Deductions claimed - Appeal dismissed - The TCC concluded that: (a) the taxpayer was not ordinarily required to carry out his employment duties away from his employer’s place of business; (b) he was reimbursed by his employer for his employment-related expenses and was not required to pay these himself; (c) the T2200 Forms prepared by his employer were erroneous, unreliable, and of no assistance; and (d) as a result of the foregoing findings, he did not qualify under ss. 8(1)(f), 8(1)(h), 8(1)(h.1), 8(1)(i), 8(4), 8(10), or 8(13) of the Act for the Expense Deductions claimed. The Minister’s reassessments were affirmed accordingly - I.T.A. ss. 8(1)(f), 8(1)(h), 8(1)(h.1), 8(1)(i), 8(4), 8(10), 8(13).

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Running a business in today’s world.

July 14, 2009 by Dan White.

A man owned a small farm in Ontario.  HRDC claimed he was not paying proper wages to his help
and sent an agent out to interview him.

“I need a list of your employees and how much you pay them”, demanded the Agent.

“Well,” replied the farmer, “there’s my farm hand who’s been with me for
3 years.  I pay him $400.00 a week plus free room and board.  The cook
has been here for 18 months, and I pay her $300.00 per week plus free
room and board.  There’s the half-wit.  He works about 18 hours every
day and does about 90% of all the work around here.  He makes about
$10.00 per week, pays his own room and board, and I buy him a bottle
of Bourbon every Saturday night.  He also sleeps with my wife
occasionally.”

“That’s the guy I want to talk to…..the half-wit”, says the Agent.

“That would be me”, replied the farmer.

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GAAR takes a beating.

July 10, 2009 by Dan White.

 Further to the Lipson case and the Lanrus case, GAAR is considered to be losing teeth.

Dan White

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Corporate Tax - Canada

 

Landrus: Specificity Ousts GAAR

Contributed by Borden Ladner Gervais LLP

June 05 2009

On April 16 2009 the Federal Court of Appeal affirmed the decision of the Tax Court of Canada in The Queen v Gary Landrus,(1) holding that the general anti-avoidance rule (GAAR) did not deny the deduction of a ‘terminal loss’ under Section 20(16) of the Income Tax Act.(2)

Landrus involved a reorganization in which two partnerships transferred buildings that had declined substantially in value to a new partnership comprising the same partners. The transfer triggered a terminal loss, which the minister of finance disallowed by invoking the GAAR on the basis that the transactions were abusive. Since the partners had continued to own an interest in the property through the new partnership, they did not realize a ‘true’ loss.

The court took into account the object, spirit and purpose of Section 20(16), the scheme of the ’stop loss’ rules in the Income Tax Act and the overall result of the transactions to conclude that the object, spirit and purpose of Section 20(16) were not frustrated. Therefore, the transactions were not abusive transactions for the purposes of the GAAR, even though they were avoidance transactions.

This case is notable for its use of an ‘overall results’ analysis for the purposes of applying the GAAR based on the Supreme Court of Canada’s decision in Lipson v The Queen.(3) The case also provides guidance on the application of the GAAR in circumstances where the taxpayer, although engaged in an avoidance transaction, will not be considered to have misused or abused the provisions relied upon to claim the tax benefit. In particular, the existence of detailed and carefully crafted specific anti-avoidance provisions in the Income Tax Act may preclude the application of the GAAR to a transaction which falls outside the scope of these rules.

For further information on this topic please contact Elinore J Richardson, Larissa V Tkachenko or Maria Anzola at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email (erichardson@blg.com or ltkachenko@blgcanada.com or manzola@blgcanada.com).

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Voluntary Disclosure Procedures

July 10, 2009 by Dan White.

 Here is the scoop on VD (Note a disease, but feels like it)

I suggest getting help with this if there is a significant amount of money involved.

Dan White

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Voluntary Disclosures Program

The Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA, without penalty or prosecution.

A disclosure may be made for Income Tax and Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, as well as for charges under the Softwood Lumber Products Export Charge Act, 2006, or the Air Travellers Security Charge Act.
How to make a disclosure

Complete Form RC199, Taxpayer Agreement – Voluntary Disclosures Program, and attach it to your disclosure submission and any supporting documentation. You can complete and submit the form yourself, or you can have an authorized representative do so on your behalf. A submission must be in writing and mailed or faxed to the tax services office (TSO) that has jurisdiction over the area where the taxpayer resides. For businesses, this would be based on their operating address.
Conditions for a disclosure

A valid disclosure must meet four conditions. These conditions require that the disclosure be voluntary, complete, involve the application or potential application of a penalty, and generally include information that is more than one year overdue. If the CRA accepts the disclosure, the taxpayer will have to pay the taxes or charges owing, plus interest. However, the taxpayer will not be subject to penalty or prosecution for those amounts accepted as a valid disclosure.
Right of redress

If a taxpayer disagrees with a VDP decision, they may  request a second review of their file by contacting the Director of the TSO where the original decision was issued. In addition, the taxpayer may pursue further recourse through the judicial review process.
How to contact us

For more information about the Voluntary Disclosure Program, or to find the appropriate TSO, please use this link: Contact Us.

Additional information about the Voluntary Disclosure Program is also available from the following documents:

* IC00-1R2, Voluntary Disclosures Program
* Form RC199, Taxpayer Agreement – Voluntary Disclosures Program
* Making a Voluntary Disclosure on your Ontario Corporate Tax

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CRA News Release, re Voluntary Disclosure

July 10, 2009 by Dan White.

This was published as a news release by CRA.

While it is somewhat propaganda, there is truth to the point, that one should not evade taxes. However not being a tax evador does not mean not minimizing the tax you pay.

Our advice is play the game to win, which does include filing proper tax returns with legally defensible deductions.

If you are a non filer, you should check with an expert (call or email us) and find out your best strategy.

Dan White

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When it comes to your taxes, a clean slate means a clear conscience Ottawa, Ontario, April 6, 2009… Did you fail to file an accurate tax return or not file at all, but should have? Take advantage of the Canada Revenue Agency’s (CRA) Voluntary Disclosures Program and correct your tax information. By coming forward you may avoid being penalized, criminally investigated and prosecuted.

For the 2007-2008 fiscal year, the CRA processed approximately 8,400 disclosures for taxpayers who used the Voluntary Disclosures Program to get a second chance to comply with their tax obligations. Coming clean saved these taxpayers from an audit or a criminal investigation, which could have resulted in penalties, fines, and even jail time. These disclosures resulted in more than $373 million in assessed additional taxes.

By encouraging taxpayers to come forward and correct the information they filed with the CRA, the Voluntary Disclosures Program helps protect the tax base and puts all Canadians on a level playing field.

If you make a full disclosure before the CRA starts any compliance action or investigation, you may only have to pay the taxes owing plus interest, but not penalties or face prosecution.

For more information about how to come clean, see the Voluntary Disclosures Program at www.cra.gc.ca/voluntarydisclosures.

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Legal fees are deductible in the year you get results in respect to your situation

July 10, 2009 by Dan White.

 The idea of withdrawing funds from an RRSP or RRIF is good, but apparently you need to be careful. Somehow this case does not reflect the spirit of fairness in the law.

Dan White

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Bradley v. The Queen (General Procedure). Tax Court of Canada, June 26, 2009.

Neutral Citation: 2009 TCC 341. Court File No. 2006-2923(IT)G. Hershfield, J. Deductions - Legal fees and returns to RRSPs of excess withdrawals -

The taxpayer spent more than a decade disputing the refusal of the Veterans Review and Appeal Board (the “Board”) to acknowledge his entitlement to a disability pension.

As a result he incurred legal fees of $21,095 during 2005, and financed these by withdrawing $44,000 from his RRSP, but later returned $24,000 of this to the RRSP.

In reassessing the taxpayer for 2005, the Minister disallowed the deduction of the $21,095 in legal fees, and of $23,000 claimed in respect of the return to the taxpayer’ RRSP of the $24,000 -

Appeal dismissed - The TCC concluded that: (a) by 2005, the taxpayer had never received any disability pension;

(b) as a result the legal expenses deductible by him for 2005 relating to his dealings with the Board were zero under s. 60(o.1)(ii)(A)(III);

(c) there is, however, a 7-year carryover rule in s. 60(o.1) which might enable the taxpayer to deduct the $21,095 in legal fees at some future time; and

(d) there was no provision in the Act that would justify the $23,000 deduction claimed by the taxpayer relating to his re-contribution to his RRSP of what turned out to be an excess withdrawal.

The Minister’s reassessment was affirmed accordingly - I.T.A., ss. 8(1)(b), 60(o.1), 146(1), 146(6.1), 204.1 - Income Tax Regulations, C.R.C. c. 945, s. 8307(7).

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CRA can err, but courts are not bound by CRA errors

July 10, 2009 by Dan White.

Kubbernus v. The Queen (General Procedure).
Tax Court of Canada, June 29, 2009. Neutral Citation: 2009 TCC 311. Court File No. 2008-3239(IT)
G. Angers, J. Appeals - Motions to quash - In an original assessment dated May 25, 2001 the Minister included in the taxpayer’s income for 2000 an amount of $1,997,525 relating to exercised stock options.
On June 29, 2006 the Minister received from the taxpayer an application for relief under ss. 152(4.2) or 164(1.5) of the Act with respect to his 2000 taxation year.
On October 16, 2006 the Minister reassessed the taxpayer permitting a capital loss carryforward of $545 for 2000.
On appeal from this reassessment (the “Reassessment”) the taxpayer objected to the $1,997,525 inclusion in his income for 2000.
The Minister moved for an Order quashing the taxpayer’s appeal from the “Reassessment” on the ground that it had been made under s. 152(4.2), so that no appeal therefrom was available under s. 165(1.2).
The taxpayer’s position was, in part, that: (a) the Reassessment was made under ss. 152(4)(b)(i) and 152(6), and not under s. 152(4.2) as the Minister had contended, so that the prohibition against an appeal in s. 165(1.2) was inapplicable; (b) under the doctrine of implied exception set out by the SCC, s. 169(1) of the Act does not specifically prohibit appeals from reassessments issued under s. 152(4.2); (c) the Minister was estopped from questioning the validity of the taxpayer’s Notice of Objection to the Reassessment; and (d) the Minister’s alternative motion for an order extending the time for filing a Reply should be dismissed because the Minister did not satisfy the test for granting an extension of time to file a Reply
- Appeal dismissed - The TCC concluded, in part, that:
(a) none of the taxpayer’s arguments was tenable;
(b) in a well-established line of cases (e.g. Groulx v. the Queen 2008 TCC 445 (TCC), affirmed 2009 FCA 10 (FCA)) it has been held that a taxpayer is precluded from appealing to the TCC from a reassessment made under s. 152(4.2) of the Act;
(c) s. 169(1) does not specifically prohibit appeals from s. 152(4.2) reassessments, because there is no need for this in light of the clearly worded prohibition in s. 165(1.2) against appealing from s. 152(4.2) reassessments;
(d) there was no evidence in the present case that the Reassessment was issued under s. 152(4)(b)(ii) or 152(6), as opposed to s. 152(4.2); and (e) although the Minister erred in considering the taxpayer’s Notice of Objection to the Reassessment,
the Court was not bound by this error,
and no estoppel arose in this case if the Minister’s conduct was not in accordance with the law.
The taxpayer’s appeal from the Reassessment was quashed accordingly - I.T.A., ss. 152(4)(b), 152(4.01), 152(4.2), 152(6), 164(1.5), 165(1.1), 165(1.2), 169(1), 169(2), 169(2.2).

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Federal Court of Appeal confirms late applications can be accepted. (By Wayne Tunny of KPMG)

July 9, 2009 by Dan White.

This is an important case to consider when you have to deal with needing to file a Notice of Objection that is past the 90 day time limit.

Well worth reading.

Dan White

Fairness Request Rehearing

The FCA recently found in the taxpayer’s favour in Lanno (2005 FCA 153), allowing his application for judicial review of the CRA’s refusal to grant relief under the fairness provisions for a late-filed notice of objection. The FCA overturned the FCTD’s decision, found that the CRA’s denial of the relief was not reasonable, and ordered that the fairness application be referred to a different CRA decision maker for reconsideration.

The fairness provisions in subsection 152(4.2) allow an individual to ask the CRA to accept a late-filed return for a taxation year or reassess a return (for tax, interest, or penalties) beyond the normal reassessment period to provide for an income tax refund or reduce an amount payable. Information Circular 75-7R3, paragraph 4, states that a reassessment to create a refund ordinarily is made on receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time, so long as certain conditions are met, such as a finding that the application is not based solely on another taxpayer’s successful appeal to the courts.

The taxpayer was one of many investors in a real estate project in respect of which he claimed losses in his 1993-95 tax returns. In 1997, the CRA disallowed those losses, saying that he had no reasonable expectation of profit (REOP). The taxpayer had intended to file notices of objection, but he thought that the accounting firm that represented the investors in the real estate project had filed the notices on his behalf; in February 2002, he learned that the objections had not been filed. In December 2002, the accounting firm applied on his behalf for fairness relief, but the application was denied in May 2003 on the ground that it was based solely on a successful appeal to the courts by another taxpayer: in May 2002, the SCC in Stewart ([2002] 2 SCR 645) had held that the REOP test should not determine whether a taxpayer’s activities were a source of income for the purposes of section 9. The accounting firm requested a review of the CRA’s May 2003 decision. This second-level fairness request was denied in July 2003 on the basis that no circumstances beyond the accounting firm’s control had prevented it from filing an objection on the taxpayer’s behalf: the CRA cannot assume responsibility for errors or omissions made by a taxpayer’s representative.

The taxpayer requested reconsideration of this second-level fairness response, but was informed in November 2003 that the decision remained unchanged. The CRA refused to change its decision because (1) the fairness provisions are discretionary and cannot be used to extend the time limit to file an objection; (2) there were no circumstances beyond the taxpayer’s control that prevented the timely filing of an objection; and (3) there was no evidence of error or delay by the CRA. The taxpayer’s application for judicial review of the CRA’s July 2003 decision was dismissed; the lower court concluded that the refusal was not “patently unreasonable.” However, the FCA concluded that the standard of review for a fairness application should be the less deferential standard of “reasonableness,” based on its decision in Hillier ([2001] 3 CTC 157). The FCA made three observations on the reasons given by the CRA for denying the fairness application. (1) It was incorrect to say that the fairness provisions cannot be used to extend the time limits for filing a notice of objection. Paragraph 4 of IC 75-7R3 says, “A reassessment to create a refund ordinarily will be made upon receipt of a written request by the taxpayer, even if a notice of objection has not been filed within the prescribed time” (emphasis added by the court). (2) The CRA misapprehended the facts when it stated that a refund could not be granted “based solely upon a successful appeal to the Courts by a taxpayer” (in this case, Stewart). The evidence showed that the taxpayer’s fairness application was based on a number of misunderstandings between him and the accounting firm that led to the late filing of the objections. (3) The CRA failed to address whether there was any reason to treat the taxpayer differently from three other individuals in the same position who had obtained relief; the CRA thus failed to take into account a relevant consideration. On the basis of those observations, the FCA said that the CRA’s denial of the application was not reasonable.

Wayne Tunney
KPMG LLP, Montreal

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The Importance of Written Contracts For Employment

July 9, 2009 by Dan White.

 The following decision by the Federal Tax Court of Appeals, makes it clear that contracts must be well worded to fall into the traps of having indpended coTax expert before hiring anyone.

TAX: Contract of services or contract for services
The Applicant Drosdovech, an unrepresented litigant, was a veterinarian operating a veterinary clinic as a proprietorship. Ms. Kilburn worked with her in the clinic from time to time. A Revenue Canada rulings officer, pursuant to a request made at the initiative of the Collections Division of the Canada Revenue Agency, determined Ms. Kilburn was employed by the Applicant Drosdovech under contracts of service and that her employment was both insurable and pensionable. The respondent Minister dismissed an appeal from that determination. The Tax Court of Canada dismissed an appeal from the Minister’s decision and the Federal C.A. upheld the Tax Court’s decision.
Moira Eileen Drosdovech v. Minister of National Revenue (Fed. C.A., February 25, 2009)(33143)  “The application for leave to appeal…is dismissed with costs.”

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