September 25, 2009 by Dan White.

Business Investment Losses

ABIL

NUTSHELL: ABIL is a bit of a sham, to reduce the amount of loss a taxpayer can use to reduce his income.
If it is a business loss, then…
First the loss has to be a capital loss.
Then in certain circumstances the loss can be used to offset other income, instead of being just a capital loss.

Hence the term “Allowable” Business Investment Loss. In which case you can then use 75% of the business loss as an allowable business investment loss.
In most cases you can write off the interest you paid on your investment, so long as you did not make your investment a loan that would pay you interest.
This is all just an irritating way that CRA blocks you deducting your investment losses against your income, even whent he investment is in your own corporation.

These kind of tax problems, require tax planning to preplan solutions to these types of problems.

Dan White

Here is CRA’s position from their web site.

Summary:   CRA: NO: IT-484R2

A business investment loss is basically a capital loss from a disposition to which subsection 50(1) applies, or to an arm’s length person, of shares or debt of a small business corporation. Three-quarters of this loss is an allowable business investment loss.

Unlike ordinary allowable capital losses, an allowable business investment loss for a taxation year may be deducted from all sources of income for that year. Generally, an allowable business investment loss that cannot be deducted in the year it arises is treated as a non-capital loss which may be carried back three years and forward seven years to be deducted in calculating taxable income of such other years. Any such loss that is not deducted by the end of the seven-year carry-forward period is then treated as a net capital loss so that it can be carried forward indefinitely to be deducted against taxable capital gains.

Ordinary allowable capital losses for a taxation year may be deducted only from taxable capital gains realized in the year. If the allowable capital losses exceed the taxable capital gains, the difference is a net capital loss which may be carried back three years and forward indefinitely to be deducted only against taxable capital gains.

The purpose of the rules relating to the business investment loss is to encourage investment in small business corporations by giving such losses more generous tax treatment than that available for ordinary capital losses.

This bulletin discusses the various provisions of the Act relevant to determining what constitutes a taxpayer’s allowable business investment loss for a taxation year and the deductibility of such a loss.
Discussion and Interpretation
General

¶ 1. An “allowable business investment loss” is defined in paragraph 38(c) as 3/4 of a “business investment loss” defined in paragraph 39(1)(c). To qualify as a business investment loss, an amount must first be a capital loss. Thus when a transaction does not give rise to a capital loss, or when a capital loss is deemed to be nil (e.g., under paragraph 40(2)(g)), no business investment loss can result.

Although a business investment loss for a year must first qualify as a capital loss, a taxpayer does not have the option of treating it as a capital loss for the year rather than a business investment loss.

The portion of a business investment loss included in calculating a taxpayer’s allowable business investment loss has increased over the years. For example, in the case of an individual or a partnership, the above reference to “3/4″ should be read as a reference to “2/3″ if the taxation year or fiscal period in which the business investment loss arose ended after 1987 and before 1990, and “1/2″ if the taxation year or fiscal period ended before 1988.

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¶ 2. In calculating income pursuant to section 3, an allowable business investment loss is not deducted from taxable capital gains under paragraph 3(b) but is deducted from income from all sources under paragraph 3(d).

Generally, any allowable business investment loss that cannot be deducted in the year it arises is treated as a “non-capital loss” as defined in subsection 111(8). Such a loss may, under paragraph 111(1)(a), be carried back three years and forward seven years and deducted in calculating taxable income of such other years.

The amount of the allowable business investment loss that is included as a non-capital loss is determined in the taxation year in which the business investment loss arises. No adjustment to the amount of the allowable business investment loss is required if the loss is carried forward or back to a taxation year in which the allowable portion of the business investment loss would be different had the loss occurred in that year. For example, a business investment loss arising in a taxation year in which the allowable portion of the business investment loss is 2/3 will not be increased should that allowable business investment loss be deducted in a taxation year in which the allowable portion of business investment losses is 3/4.

Generally, an allowable business investment loss that is not deducted as a non-capital loss by the end of the seventh year of its carry-forward period becomes a “net capital loss,” as defined in subsection 111(8), in that seventh year. This treatment allows the loss to be carried forward indefinitely to be deducted against taxable capital gains beginning in the eighth year. For example, if an individual incurred an allowable business investment loss in 1989, and the individual was unable to use the loss by the end of 1996, the loss will become a net capital loss in 1996. The individual can then carry the loss forward indefinitely and deduct it against taxable capital gains realized in 1997 and subsequent years.

Non-capital losses and net capital losses are discussed in the current version of IT-232, Non-Capital Losses, Net Capital Losses, Restricted Farm Losses, Farm Losses and Limited Partnership Losses — Their Composition and Deductibility in Computing Taxable Income.

¶ 3. A taxpayer’s business investment loss may arise from the disposition of:

(a) a share of a corporation that is a small business corporation, or

(b) a debt owing to the taxpayer (except as discussed in ¶ 5 below) by a Canadian-controlled private corporation.

For a loss on the disposition of such property to qualify as a business investment loss, the disposition must be to an arm’s length person or be deemed to have occurred under subsection 50(1) (see ¶ 6 below). For the meaning of “small business corporation” and more information regarding “Canadian-controlled private corporation” see ¶ 4 below.

¶ 4. The term “small business corporation” is defined in subsection 248(1). In general, a small business corporation is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which is attributable to assets used principally in an active business carried on primarily in Canada or shares or debts of connected small business corporations or a combination of the two. For the purposes of determining a business investment loss, a corporation that was a small business corporation at any time in the 12 months before the disposition of the share or debt, as the case may be, will be considered to be a small business corporation.

The Canadian-controlled private corporation referred to in ¶ 3(b) above and ¶ 6 below has to be:

* a small business corporation;
* a bankrupt (as defined by the Bankruptcy and Insolvency Act) that was a small business corporation when it last became a bankrupt; or
* a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made for that corporation.

The meaning of “Canadian-controlled private corporation” as defined in subsection 125(7) is discussed in the current version of IT-458, Canadian-Controlled Private Corporation.

¶ 5. A debt owed to a corporation by a non-arm’s length corporation is excluded from debts referred to in ¶ 3(b) above and therefore any capital loss resulting from a disposition thereof will never qualify as a business investment loss.

¶ 6. Subsection 50(1) deems a taxpayer to have disposed of a debt or a share of a corporation at the end of a taxation year for nil proceeds and to have reacquired it immediately thereafter at a cost of nil if:

* in the case of a debt (other than a debt from the sale of personal use property), the debt is owing to the taxpayer at the end of the taxation year and it is established by the taxpayer to have become a bad debt in the year; and
* in the case of a share (other than a share received as consideration from the sale of personal use property), the taxpayer owns the share of the corporation at the end of the taxation year and the corporation:
o has become a bankrupt (as defined by the Bankruptcy and Insolvency Act) in the year;
o is a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and for which a winding-up order under that Act was made in the year; or
o at the end of the year, is insolvent, and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share has a fair market value of nil and it is reasonable to expect that the corporation will be dissolved or wound-up and will not commence to carry on business.

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For taxation years ending after February 21, 1994, a taxpayer must elect to have subsection 50(1) apply in respect of a debt or a share. For taxation years ending before February 22, 1994, an election was not required in order to have subsection 50(1) apply in respect of a debt.

If subsection 50(1) applies, the taxpayer is deemed to have disposed of the property for nil proceeds and a capital loss will arise. If the debt is owed (except as discussed in ¶ 5 above) by a Canadian-controlled private corporation (see ¶ 4 above) or the share is a share of a small business corporation, the loss will be considered a business investment loss. Subsection 50(1), as it applies in respect of a capital debt, is discussed in the current version of IT-159, Capital Debts Established to Be Bad Debts.

¶ 7. The business investment loss from a disposition described in ¶ 3 above is the amount by which the taxpayer’s capital loss from the disposition exceeds the amount of any applicable reduction discussed in ¶s 8 to 11 below. The portion of the capital loss that does not qualify as a business investment loss (because of any reduction discussed in ¶s 8 to 11 below) remains a capital loss.

¶ 8. In determining a taxpayer’s business investment loss, the capital loss resulting from the disposition of a share of a small business corporation in the circumstances described in ¶ 3 above is reduced:

(a) under subparagraph 39(1)(c)(v), by the amount of any increase after 1977, from the application of subsection 85(4), in the adjusted cost base to the taxpayer of either that share or any “replaced share” (see ¶ 12 below);

(b) under subparagraph 39(1)(c)(vi), by the amount of the taxable dividends received after 1971 and before or upon the disposition of the share (as well as such dividends receivable upon the disposition) by

(i) the taxpayer,

(ii) the taxpayer’s spouse, or

(iii) a trust of which the taxpayer or the taxpayer’s spouse was a beneficiary

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if the share was issued before 1972 or was a “substituted share” (see ¶ 12 below), other than a share or a substituted share that was acquired after 1971 from a person with whom the taxpayer was dealing at arm’s length; and

(c) under subparagraph 39(1)(c)(vii), if the taxpayer is a spouse trust referred to in paragraph 104(4)(a), by the amount of all taxable dividends received after 1971 or receivable at the time of the disposition by the settlor (as defined in subsection 108(1)) or by the settlor’s spouse on the share if the share was issued before 1972 or was a substituted share, other than a share or a substituted share that was acquired after 1971 from a person with whom the spouse trust was dealing at arm’s length.

Note: The Notice of Ways and Means Motion of June 20, 1996, proposes to repeal subsection 85(4). In general terms, subsection 85(4) applies to deny a loss on a taxpayer’s transfer of property to a corporation that is controlled by the taxpayer, the taxpayer’s spouse or a person or group of persons by whom the taxpayer is controlled. Instead, the amount of the loss is added to the adjusted cost base of shares of the corporation owned by the taxpayer right after the transfer. As mentioned in ¶ 8(a) above, in determining a taxpayer’s business investment loss, the capital loss resulting from the disposition of a share of a small business corporation is reduced under subparagraph 39(1)(c)(v) by the amount of any increase after 1977, from the application of subsection 85(4), in the adjusted cost base to the taxpayer of either that share or any “replaced share.” If enacted as proposed, subsection 85(4) will not apply to dispositions of property occurring after April 26, 1995, subject to certain exceptions. Generally, the exceptions exclude transactions in progress before April 27, 1995.

¶ 9. In determining the business investment loss of an individual or a trust from a disposition of a share or debt described in ¶ 3 above, the capital loss resulting from such disposition is reduced under subparagraph 39(1)(c)(viii) by the amount determined in ¶ 10 below in the case of an individual or ¶ 11 below in the case of a trust.

¶ 10. An individual (other than a trust) is required under subsection 39(9) to reduce the amount of a business investment loss for a taxation year otherwise determined by the total of amounts each of which is 4/3 (except as noted below) of the amount, if any, deducted under section 110.6 as a capital gains deduction in a prior taxation year, to the extent that such an amount has not previously been applied in this manner in respect of other dispositions.

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The above reference to “4/3 of the amount” should be read as a reference to:

* “3/2 of the amount” if the prior year ends after 1987 and before 1990 (except if the capital gains deduction was in respect of a deemed taxable capital gain included in income under subparagraph 14(1)(a)(v), in which case the reference to “4/3 of the amount” is applicable); and
* “twice the amount” if the prior year ends before 1988.

¶ 11. A trust is required under subsection 39(10) to reduce the amount of a business investment loss for a taxation year otherwise determined by the total of amounts each of which is 4/3 (except as noted below) of the amount, if any, designated under subsection 104(21.2) in respect of a beneficiary for a prior taxation year for the purpose of the capital gains deduction under section 110.6, to the extent that such an amount has not previously been applied in this manner in respect of other dispositions.

The above reference to “4/3 of the amount” should be read as a reference to:

* “3/2 of the amount” if the prior year ends after 1987 and before 1990 (except if the amount designated was in respect of a deemed taxable capital gain included in the trust’s income under subparagraph 14(1)(a)(v), in which case the reference to “4/3 of the amount” is applicable); and
* “twice the amount” if the prior year ends before 1988.

¶ 12. The term “replaced share” in ¶ 8(a) above refers to any share, in a line of exchanges or substitutions, that was replaced by another share. For purposes of ¶ 8(a) above, only go back as far as any replaced share that existed on January 1, 1978. A “substituted share” for the purpose of ¶ 8(b) above, refers to any share acquired in a line of exchanges or substitutions which commences with a share issued before 1972 and ends with the share which is the subject of the disposition. Replaced and substituted shares are those that are disposed of or acquired, as the case may be, as a result of corporate reorganizations and rollovers and would include those share exchanges or substitutions to which sections 51, 85, 85.1, 86, and 87 are applicable.

¶ 13. If a shareholder is dealing at arm’s length with a small business corporation, a business investment loss may arise when the shares of that corporation are redeemed or purchased for cancellation. Subsection 84(9) provides that shares are disposed of by the shareholder to the corporation at the time they are redeemed, acquired or cancelled by the corporation. Any deemed dividend on a redemption, acquisition or cancellation of a share may reduce the business investment loss as indicated in ¶ 8(b) above.

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¶ 14. In the case of a payment made by a taxpayer under a guarantee in respect of a corporation’s liabilities, a debt does not arise between the corporation and the taxpayer until the payment is made. In some cases, this payment may be made subsequent to the time the corporation was a small business corporation and this may otherwise preclude any resulting capital loss from being a business investment loss. Under subsection 39(12), a payment made by a taxpayer under a guarantee of the debts of a corporation is deemed to be a debt owing to the taxpayer by a small business corporation if:

* the payment was made to an arm’s length person; and
* the corporation was a small business corporation both at the time the corporation’s debt in respect of which the payment was made was incurred and at any time in the 12 months before the time any amount first became payable under the guarantee.

When these conditions are met, the taxpayer may be eligible to claim a business investment loss on any amounts owing to the taxpayer for payments made under the guarantee even if the corporation has ceased to carry on an active business.

A taxpayer may also be entitled to claim a capital loss if the taxpayer suffers a loss as a result of honouring a guarantee of the debts of certain corporations or from loaning money in the circumstances outlined in paragraph 6 of IT-239R2, Deductibility of Capital Losses From Guaranteeing Loans for Inadequate Consideration and From Loaning Funds at Less Than a Reasonable Rate of Interest in Non-Arm’s Length Circumstances. In such a case, if paragraph 50(1)(a) applies to the debt or the loan, and the other requirements outlined in ¶ 3 above are met, the capital loss will be considered a business investment loss.

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September 25, 2009 by Dan White.

Here is a great article by don Cayo,
There seems to be no end to tax problems crated by CRA rather than by the abused Canadian tax payer.

Dan White

________
By Don Cayo, Vancouver SunSeptember 25, 2009

I don’t know if Burnaby contractor Ken Mah actually mailed the information concerning his part-time helpers’ T-4 forms to Canada Revenue Agency last February when he was supposed to. But I do know he says he did.

I don’t know if the CRA actually received Mah’s forms by the April 30 deadline. But I do know the agency can’t find them now, and it presumes he is at fault.

So, sent or not sent? If I were asked to rule on this, I’d throw my hands in the air. This is a classic he-said, she-said dispute with no credible way to determine the rights and wrongs. Could be Mah didn’t send the forms. Could be they were lost in transit. Could be CRA lost them and, if so, this might be due to unavoidable happenstance, or to negligence, or — not likely, but possible — maliciousness.

However, I’m not being asked to arbitrate, and neither is any other neutral party. CRA isn’t just the accuser in this case, it’s also the judge. And its policy, in the words of agency spokesman Bradley Alvarez, is to assign automatic penalties in such cases.

Mah did, of course, send CRA copies of the information as soon as they told him the papers were missing. But this was in mid-May, already too late for him to avoid the penalty.

So, this month, he was fined $200 for late filing, notwithstanding the lack of any evidence — or even any investigation — to determine if he was at fault. And if he doesn’t pay right away — if he waits while he goes the only route left open to him and launches a formal process to ask no lesser authority than the CRA itself to forgive him — he’ll face the prospect of being assessed interest for however long it takes. And if you know beans about how the CRA works, you can bet it will take a long time.

Only $200 is at stake, and many of us would just pay and get on with life. But the principle — penalties imposed with no onus on the guys who stand to gain to meet any standard of proof whatsoever — is odious.

Indeed, think about the incentives built into this policy. In theory, the more CRA staff screw up, the more money CRA collects. And lots of people — I can’t say if it’s CRA staff or the tax filers themselves, but likely it’s some combination of the two — obviously do screw up. The CRA was unable to tell me the total amount of money it rakes in each year from these “automatic” penalties, but it’s substantial.

Indeed, more than 63,000 taxpayers a year go through the humiliating process that is Mah’s only option now. They apply for “relief” from a penalty imposed by CRA.

The good news for Mah is that a little over half these applicants — or do I mean supplicants? — do win at least a partial reprieve. And he can pay now to avoid further potential penalties, yet still have his case heard.

But the fact the deck may not be totally stacked against him doesn’t disguise the arrogance or soften the heavy-handedness of CRA’s presumption of guilt.

It’s not clear to me how the agency gets away with this. When I asked Alvarez for the legal justification for imposing a penalty without any process to establish guilt, he simply gave me a copy of the act that covers people who “fail to file.” When I asked how CRA determines when it’s really failure to file, not just the agency itself losing a document that was sent on time, I got no answer.

But maybe they don’t need formal authority to presume guilt when most of their clients lack the time, the money and/or the courage to take on even their most arbitrary decisions, especially when the sums are small.

So, whether it’s your mistake or theirs, you seem to have two choices. You can pay up and shut up. Or you can pay up and then beg for forgiveness.

dcayo@vancouversun.com
© Copyright (c) The Vancouver Sun

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September 25, 2009 by Dan White.

HST is coming for sure. You can bet on it. Not to mention that it is pretty much an impossible task to make HST go away.

For starters, HST is not a problem. The amount of tax is the problem.

HST will simplify accounting dramatically. It could reduce the cost of government, although likely the existing PST auditors, will just become another form of auditors.

Rather than fight the HST, lets look at reducing the harmonized rate down from the expected 13% to 11%.

Anyway…. I like the harmonized idea. I especially like that the savings to business can be used to build our economy. If business is not prosperous, there are no jobs.

So lets not resist the HST as a tax problem, lets look at solutions to get the government to look at ways to reduce the cost of government.

See article below from Chirs Young,

Dan White

Ontario can’t drop new tax
CHRIS YOUNG/CP PHOTO
Finance Minister Dwight Duncan delivers the Ontario Provincial Budget for 2009 at the Ontario Legislature, as Premier Dalton McGuinty looks on. (March 26, 2009)
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Robert Benzie
Queen’s Park Bureau Chief

Ontario’s controversial harmonized sales tax is here to stay – no matter who wins the next federal or provincial elections, documents confirm.

Buried in the fine print of the accord signed last March between Ottawa and Queen’s Park is a clause that ensures the new 13 per cent tax, which takes effect July 1, remains at that rate until at least 2012.

Premier Dalton McGuinty said yesterday he was not up on the minutiae of the four-page memorandum of agreement, which also stipulates the HST must be in place through 2015.

“I’m actually not familiar with that stuff,” McGuinty said. “I’m sure that (Finance Minister Dwight Duncan) will be of help.”

He said it was important for both levels of government to give the levy, which blends the 8 per cent provincial sales tax with the 5 per cent federal goods and services tax, a strong foundation.

“Our intention is simply to put in place a tax system that is modern and efficient and that enhances our competitiveness and enables us to create more jobs – that’s what it’s all about,” the premier told reporters.

“In no jurisdiction that they have put this into place have they ever repealed it.

“There’s a broad consensus among economists and, in their hearts of hearts, politicians as well, that this is the right thing to do,” he said.

Duncan, who co-signed the pact with federal Finance Minister Jim Flaherty, said Ottawa insisted upon the provisions that entrench the business-friendly HST.

“That was something the federal government wanted. The Canada Revenue Agency will now collect the tax and it’s enormously complex,” said Duncan.

“We agreed to it. Ontario political parties, if they choose, … can start changing it – either raising it or lowering it, frankly –in 2012,” he said, noting that any modifications would have to wait until nine months after the October 2011 election.

In exchange, the federal government is giving Ontario $4.3 billion in transition funds, most of which will be passed along to lower- and middle-income families in the form of rebate cheques.

Duncan’s comments came after federal Liberal Leader Michael Ignatieff finally admitted Monday he would not repeal the tax if his party defeats Prime Minister Stephen Harper’s Tories.

Ignatieff’s view of the tax has national implications since an almost-identical deal with British Columbia means that province will have a 12 per cent HST as of next July 1 in exchange for $1.6 billion in federal funding.

Designed to be business-friendly, the streamlined HST will raise the price of a slew of goods and services in Ontario that are not now subject to the provincial sales tax, including gasoline, fast-food value meals, tobacco and funerals.

Progressive Conservative Leader Tim Hudak expressed alarm at the emerging details in the Flaherty-Duncan accord.

“It certainly sounds like Dalton McGuinty is trying to lock Ontario taxpayers into a bad deal – a deal that will see some $2.5 billion sucked out of their pockets and into the government treasury,” Hudak said.

With provincial Conservative sources suggesting the party might campaign in 2011 on cutting the tax to 12 per cent, the Tories’ policy-making could be hamstrung by the agreement.

NDP Leader Andrea Horwath, who also opposes the tax but hadn’t studied the accord, said it is further evidence “why we have to stop the tax from even going in.”

“We have to become more vigorous in our opposition to the tax and we have to get the people of Ontario to join the campaign against it because … we have to make sure the tax never sees the light of day in Ontario,” said Horwath.

As opposition parties strive to derail the HST, proponents have formed the Smart Taxation Alliance to help sell it.

It is made up of tax boosters like the Ontario Chamber of Commerce, the Canadian Council of Chief Executives, the Canadian Manufacturers & Exporters Ontario, the Certified General Accountants of Ontario, the Ontario Road Builders’ Association, the Ontario Trucking Association, the Retail Council of Canada, TD Bank, and the Toronto Board of Trade.

The group said the tax would slash red tape and save businesses $500 million a year in administrative costs alone.

It notes that getting rid of the separate PST and GST will remove $5 billion in “layers of embedded taxes” and increase competitiveness.

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September 25, 2009 by Dan White.

Even thought this is a bit of a weird tax case, it is interesting that USA is more reasonable than Canada when it comes to medical expenses. And even more interesting is that “protection fees” are tax deductible in Canada.
See this article below written by Michael Herman.
Dan White

danwhite@danwhite.ca

Weird Cases: tax deductable sex

The US Tax Court has recently ruled that money spent on prostitutes and pornography is a not tax deductible expense, even for a New York lawyer.

William G Halby, an established Brooklyn tax lawyer, submitted to the Internal Revenue Services a range of expenses he wanted deducted from his tax liability as “medical expenses”. Under section 213 of the Internal Revenue Code, expenses for medical care can be deducted from a tax liability if the care was for the “diagnosis, cure, mitigation, treatment, or prevention of disease” or for the purpose of “affecting any structure or function of the body”.
Halby argued that his sex expenditure was made both to treat disease and to improve some aspects of his anatomical functionality. He did not skimp when buying his medicine. In 2002, for example, he sought to deduct $111,364 from his tax liability for money spent on “therapeutic sex” in order to “relieve osteoarthritis and enhance erectile function through frequent orgasm”.

In 2005, his claim for tax deductions included $5,005 for sex books, magazines and videos, and $42,152 for prostitutes. For tax purposes, Halby kept a record in his personal journal of all visits to his “service providers” and of all the literature and equipment he bought including a claim for condoms and - unprecedented in American tax law cases - a claim for “nipple clamps”.

When almost all of his claims were refused, Halby brought a case against the Commissioner for Internal Revenue in the Tax Court. Judge Goeke noted that none of the alleged sex therapy had been prescribed by a doctor. In any event, he ruled, patronising a prostitute is illegal in New York and you cannot claim tax deductions for illegal medical treatments. Similarly, the pornography was for Halby’s “general welfare” not on prescription for any specific ailment.

While lawyers cannot claim expenses when they hire prostitutes, prostitutes can claim expenses when they hire lawyers. In 1964, the Court of Exchequer in Canada had to decide which of the expenses of running a call girl business in Vancouver were tax deductible. A claim for $1,925 for the business paying its lawyers was allowed by the court. Law courts are good places in which to plead the universal necessity of lawyers.

However, the court did gently reject a separate claim from the call girl business to reduce its tax liability by another $16,500 – the money it had paid to police as “protection fees”.

Professor Gary Slapper is Director of the Centre for Law at the Open University. English Law, by Slapper & Kelly, is published by Routledge-Cavendish.

Posted by Michael Herman on September 25, 2009 in Weird Cases |

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September 25, 2009 by Dan White.

Voluntary Disclosure can be like voluntary financial suicide.

If you are one of those wondering what you should do about unreported income, make sure you get really good advice before you go blundering off to the Canada Revenue Agency looking for forgiveness for youre sins.

This is a tax problem, requiring a professionally prepared solution.

You need to be prepared to have a full audit, disclose all your banking and financial affairs, and there is no guarantee that you will not face criminal charges.

We have clients who wish they had never done the voluntary disclosure. They now have even bigger tax problems.

A Voluntary Disclosure (VD) is like Venereal Disease (VD)  A prophylactic for the mind that will not save you from the ensuing disaster.

You can easily find yourself in the same trouble as you would be if you had not done the VD.

If you are considering a VD, make sure you get some very good advice beforehand, on how to do it, and what you need to prepare for…VD is not a ‘get out of jail easy card.’

These kind of difficult tax problems, require sophisticated tax solutions.

Below is an excellent article written by Tim Cestnick.

Dan White

Tim Cestnick

Last updated on Friday, Sep. 25, 2009 04:41AM EDT

It appears that the ripple effect has begun. When Swiss bank UBS agreed to disclose the names of 4,450 U.S. taxpayers to the Internal Revenue Service south of the border, you knew it was only a matter of time before the Canada Revenue Agency got in on the action. Turns out that the CRA has had discussions with UBS, and who knows how many other foreign financial institutions, to obtain the names of Canadians with money socked away offshore.

All of which leads to the question of the day: If you’re resident in Canada and haven’t been reporting all of your worldwide income to CRA, what should you do about it? There are a couple of ways to deal with this: The first is by way of an adjustment request, the second is by a voluntary disclosure. Adjustment request An adjustment request is the easier option. It’s a one-page form (form T1-ADJ) on which you tell the CRA which line on your tax return ought to be adjusted, and by how much. You’ll need to file a separate T1-ADJ for each tax year in question, but don’t file a T1-ADJ if you’ve failed to file a tax return for a particular year – you’ll need to file a complete tax return in that case.

The problem with an adjustment request is that you won’t avoid the penalties that can arise if the CRA figures out you’ve knowingly unreported your income. Since the penalties can be up to 50 per cent of the tax evaded, plus interest from the date the taxes were due, you need to count that cost first. By the way, if the dollar amounts are big enough, it’s possible that the CRA could file criminal charges that could mean additional penalties of between 50 and 200 per cent of the tax evaded, and up to five years in prison.

Your best bet is to use an adjustment request only where the tax balance owing is very small and the likelihood of criminal charges is remote. If you’re not feeling lucky, a voluntary disclosure might be better for you. V oluntary disclosure You might be glad to know that the CRA is willing to ignore all penalties and criminal charges where you’ve made a voluntary disclosure (VD). In this case, you’ll still be on the hook for the taxes owing, plus interest. The issue is that a VD involves making a detailed submission to the CRA to allow the taxman to verify all the facts surrounding your unreported income, or false deductions or credits.

You can be sure that a VD will cause the CRA to ask plenty of questions about your financial affairs. You may have to provide details regarding deposits and withdrawals from bank and brokerage accounts, among other things. For this reason, you have one chance to disclose all unreported income when you make a VD. If you fail to disclose everything, you could still face penalties, and possibly prosecution.

If you’re considering a VD, you have to contact the CRA before the CRA contacts you. Once the taxman has started an audit of your affairs, it’s too late; no disclosure will be considered voluntary at that point. In addition, your VD must be in writing, and you’d be wise to have a tax professional prepare the submission to ensure it’s complete. The CRA’s information circular IC00-1R2 (available online at cra.gc.ca) provides more information about voluntary disclosure. U.S. connectionsWhile we’re on the topic of coming clean, you should be aware U.S. citizens living in Canada, or anywhere else for that matter, are required to file tax returns – and potentially other forms – with the IRS each year. Green card holders and anyone resident in the U.S. also have the same filing requirements.

Sept. 23, 2009, was to mark the end of an amnesty period for U.S. taxpayers to come forward and file past tax returns and certain forms without the usual potential for criminal charges. The good news is that the IRS has now extended the amnesty period to Oct. 15, 2009. The IRS has not promised to waive criminal charges, but the likely result is that you’ll pay the taxes, interest and penalties only.

According to Mark Feigenbaum, a U.S. lawyer and chartered accountant practising in Toronto, there are a number of forms that may need filing south of the border, including the U.S. Individual Income Tax Return (Form 1040), Report of Foreign Bank and Financial Accounts (Form TD F 9-22.1 or FBAR) and the Controlled Foreign Corporations form, if you’re a U.S. person who is also a shareholder in a Canadian or non-U.S. corporation (also known as Form 5471), and potentially other forms. Failing to file these forms can result in significant penalties. According to Mr. Feigenbaum, the IRS is generally expecting forms for the past six years in order to get properly caught up.

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