January 12, 2010 by Dan White.

 everyone should take note that CRA is looking for money where ever they can.

The next time you enter a contest and the question on the ballot / ticket is a simple math question that could require skill,  then that winning will likely b
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IT-213R Prizes from lottery schemes, pool system betting and giveaway contests
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Income Tax Interpretation Bulletin
Prizes from lottery schemes, pool system betting and giveaway contests

NO: IT-213R

DATE: October 19, 1984

SUBJECT: INCOME TAX ACT
Prizes from lottery schemes, pool system betting and giveaway contests

REFERENCE: Paragraph 40(2)(f) (also subsections 52(4), 5(1) and 9(1), and paragraph 69(1)(c))

This bulletin cancels and replaces IT-213 dated May 12, 1975. Current revisions are designated by vertical lines.

Lottery Schemes

1. The amount or value of a prize received by a taxpayer from a lottery scheme is not taxable as either a capital gain or income unless, due to the circumstances applying to the lottery scheme, the prize can be considered to be income from employment, business or property or a prize for achievement referred to in paragraph 56(1)(n).

2. While paragraph 40(2)(f) specifies that no taxable capital gain or allowable capital loss results from the disposition of a chance to win or a right to receive an amount as a prize in connection with a lottery scheme, subsection 52(4) states that for the purposes of computing any tax consequences after receiving a prize a winner in a lottery scheme is deemed to have acquired the prize at a cost equal to its fair market value at the time of acquisition.

3. A lottery has been defined as a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance. If real skill or merit plays a part in determining the distribution of the prize the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal). Again, when the chances of a prize are obtained wholly gratuitously, as for instance, a prize awarded to the winner of a game, the scheme is not a lottery.

Pool System Betting

4. Paragraph 40(2)(f) also provides that no taxable capital gains or allowable capital losses arise from the disposition of a chance to win a bet or a right to receive an amount as winnings on a bet in connection with a pool system of betting referred to in section 188.1 of the Criminal Code. The nature of pool system betting is such that the only winnings are in the form of cash from the respective pool. Consequently, no additional capital gain or loss tax consequences could arise on subsequent disposition of the winnings and thus it is not necessary (as described in 2 above, in the case of a lottery) to deem the winnings to have been acquired at fair market value.

5. A “pool system” of betting is defined in the Athletic Contests and Events Pools Act as a pool system of betting on any combination of two or more professional athletic contests or events. The fact that a degree of skill is involved in the selection of the outcome of the contest or event in the pool betting distinguishes it from a lottery scheme as described in 3 above.

Other Schemes

6. Where a prize has been won otherwise than through a lottery scheme or a pool system of betting, neither paragraph 40(2)(f) nor subsection 52(4) will apply. The tax implications of receiving these other prizes will vary, depending on the following factors:

(a) When the prize has been received as a gift, it is not included in computing income at the time of receipt. However, the recipient will be deemed to have acquired the prize at its fair market value pursuant to paragraph 69(1)(c), so that a subsequent disposition of the prize will result in a capital gain on any increase in value since the time of its acquisition. A prize can be reasonably considered to be a gift from the viewpoint of the recipient, even though chance and/or skill may have been involved in the win. Ordinarily a gift is not considered to have been made until the donee has received delivery of the gift and accepted it in a completed and irreversible transaction.

(b) The prize will be received as income where it is received by virtue of the recipient’s employment pursuant to subsection 5(1) and paragraph 6(1)(a), received by virtue of the recipient’s business pursuant to subsection 9(1) or received in respect of an achievement in a field of endeavor ordinarily carried on by the recipient pursuant to paragraph 56(1)(n) (see IT-75R2).

(c) Where the prize is not received as income as described in (b) and is not a gift as described in (a), no amount will be included in income upon receipt of the prize and the provisions of paragraph 69(1)(c) will not apply. Such a situation would arise where the contestant has incurred a cost towards winning the prize such as purchasing a ticket or paying an entrance fee entitling the contestant to participation in the contest. In such a case, while there are no tax consequences resulting from receipt of the prize, any subsequent disposition of that prize may result in a capital gain or loss. In computing any such gain or loss the taxpayer’s cost of the prize will be the original cost of the ticket or entrance fee rather than the fair market value of the prize as used in (a) above.

It should be noted that where “personal use property” is involved, the $1,000 exemption contained in subsection 46(1) may eliminate any capital gains on disposition of a prize as described in (a) and (c) above.

7. In some instances, a ticket (or entrance fee) of the type described in 6(c) above entitles the holder to something in addition to a prize, for example, some entertainment value. Where, in such a case, the portion of the ticket that relates to the prize is considered insignificant in relation to the total cost of the ticket, the fact that a portion of the cost has been incurred towards the prize may be ignored and the prize will be treated as a gift to the taxpayer as described in 6(a) above.

8. Where the winner referred to in any of the paragraphs above is a syndicate, the income tax consequences to the individual members of the syndicate are the same.

9. Some examples of the manner in which the rules in 6 to 8 above apply are given in the paragraphs which follow.

Employer-promoted Contests

10. Where an employer who was accustomed to awarding employees with a bonus has provided a scheme or giveaway contest in which the bonus or some amount in lieu of a bonus is divided among the employees as prizes following a draw, the scheme would not be a lottery and the prizes are considered to be employment income under subsection 5(1). However, if the employees and their families account for only a small percentage of the participants in a scheme, are not given a favoured position in relation to the other participants and they are subject to the same contribution requirements (if any) towards the scheme as other participants, the value of any prize won by chance is not employment income but is considered a win from a lottery scheme. Therefore, paragraph 40(2)(f) and subsection 52(4) will apply. IT-470, “Employees’ Fringe Benefits - After 1980″ and Special Releases to IT-470 discuss holiday trips and other prizes.

Television and Radio Programs

11. The value of a prize or other award received by a person for being at or participating in a radio or television program is generally not included in income when the person is not party to an employment or business contract, and

(a) it is awarded through a draw because, for example, the person is in a “lucky” seat or has a certain brand of merchandise at home, even though the person may have to demonstrate some minor degree of skill or knowledge before being eligible to receive the prize, or

(b) the prizes that go to winning contestants, the consolation prizes that go to losing contestants or the merchandise gifts given to all participants are all that the person receives for appearing in the program. On the other hand, if a contract exists, such as may be the case where a professional actor, an entertainer or some other person appears on a television show as a celebrity and receives a giveaway prize or wins a prize by skill or chance for appearing or participating in a contest on the show, the prize will be subject to tax as business or employment income.

In all cases cited in this paragraph, the capital gains implications will be established on the basis of the particular circumstances in each case through application of the rules given in 6 or 7 above.

Free Tickets in Lieu of Volume Rebates or Bonuses

12. Volume bonuses or rebates from suppliers are included in computing a purchaser’s business income. However, where a supplier provides customers with free tickets for a draw for a prize with the winning ticket to be drawn strictly by chance, the prize is ordinarily considered a gift. Its value is not included in the recipient’s business income and the application of paragraph 69(1)(c) to the deemed cost of acquisition of the prize is as set out in 6 above. On the other hand, if real skill or merit is involved in the win, it will be a question of fact to be determined in accordance with the circumstances in each case whether the prize is a gift or whether its value is business income to the recipient.

Annuities as Prizes

13. Where the prize in a lottery scheme is an annuity, for the purposes of determining the amounts to be brought into income, the initial adjusted cost basis of the annuity is considered to be the fair market value of the annuity when it was acquired in accordance with subsection 52(4). Should the annuity be a prescribed annuity contract, as defined in Regulation 304, the adjusted purchase price of the annuity will be its fair market value at the time it was acquired. For prescribed annuity contracts and those other annuity contracts not subject to the accrual rules, annuity payments are brought into income under paragraph 56(1)(d) and a deduction from income is allowed under paragraph 60(a) for a portion of the adjusted purchase price as determined under Regulation 300. For other annuity contracts, which are subject to the accrual rules, the income from the annuity is determined according to the provisions of paragraph 56(1)(d.1) and section 12.2 in which the adjusted cost basis is a determining factor. In the case of the application of paragraph 56(1)(d.1) and section 12.2, the income calculation should be furnished by the issuer.

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January 12, 2010 by Dan White.

TAX CRISIS MANAGEMENT

While the gist of this article is about the risks of evading taxes offshore, the key thing here also is relevant for whenever you are contacted by CRA. A phone call or a brown envelope means you have a tax problem and you need to treat is seriously.

When you get one of those phone calls or letters it is too late for a voluntary disclosure which in itself is a risk maneuver.

You need to be aware that CRA matters are not to be treated as anything less than a major wake up call.

The most important thing you need to know is that talking to CRA is asking to have what you say used against you. CRA has a data management system where CRA takes electronic notes that will be compared to whatever further information they collect from you.

Understand that you are talking to a very money hungry agency when you are dealing with CRA. They will go after any angle they can and will most definitely use intimidation on you.

Normally there is nothing you say that can help you and everything you say can and will be used against you. CRA does not look for reasons to leave you alone, they look for angles to get money.

Don’t think because you are an honest upright citizen who believes in paying your fair share of taxes, that you will be treated fairly. The Tax System in Canada is anything but fair.

Why do we give you this harsh warning? We do so because we deal with CRA every day in our business and we know what they are like, first hand. There are some great people who are auditors, and it is the luck of the draw whether you get a reasonable auditor or some small minded snake taking their venom out on Canadian Tax Payers because they suffer from their personal lack of self esteem.

Be honest, you are not a tax expert, so don’t act like you are. Tax Audits are a mission critical financial survival exercise where you engage the opposition in a battle for your money. So if you think you are equipped to fight the pros, you better govern yourself accordingly.Herein is an excellent summary taken from www.proinvests.com  What ti does is demonstrate the level of agression by CRA into any possible area to collect taxes.

We are not saying that you should evade paying taxes. To the contrary, we have been saying for years that using offshore to evade taxes, thinking privacy will protect you is not astute.

Offshore is great for tax avoidance, but you better be transparent to CRA or you are going to be getting some interesting calls and brown letters, from people you don’t even know.

You could be contacted by CRA for any suspicious numbers on your tax return, a disgruntled spouse, a jelous co worker or neighbor. So treat the contact seriously.

For more information visit www.taxauditsolutions.ca

 Dan White

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Tax collectors and the Bank of Nova Scotia BNS-T

are locking horns in federal court over access to the names of investors – including “six prominent Canadian business families” – behind a $1.1-billion offshore investment fund.

For about three years, the Canada Revenue Agency (CRA) has been engaged in a high-stakes to-and-fro with the bank. Tax collectors are trying to pierce the layers of a British Virgin Islands investment fund, while the bank insists it can’t force its own foreign subsidiaries to name names.

The battle escalated last autumn when, in a sworn affidavit, a CRA auditor alleged that the bank was effectively defying a 2008 judicial order. “The Bank of Nova Scotia has not provided to the CRA the information and documents it was required to pursuant to the order of this court,” Pierre C. Leduc, one of the CRA officers overseeing the probe, said in the sworn statement, which was filed in federal court in October.

The bank disputes the contention that it has not fully complied, court filings show, and it is opposing the CRA’s latest application. The bank has not been accused of any criminal wrongdoing.

None of the investors have been accused in the court filings of any wrongdoing, and CRA has merely said it is seeking to “verify” their “compliance.”

The spat is another sign of the tax agency’s ramped-up efforts to target the use of offshore investments by wealthy Canadians, tax lawyers and experts say.

During the past year, CRA auditors have zeroed in on Canadians suspected of disguising their holdings in the principality of Liechtenstein.

Just last week, Revenue Minister Jean-Pierre Blackburn threatened again to sue Swiss bank UBS AG unless it hands over the names of its Canadian clients.

The CRA’s row with Scotiabank also offers an inside look into how difficult it can be for tax officials to unmask taxpayers who are less inclined to be identified, even when the bank handling their funds is headquartered in Canada.

Scotiabank declined to make a bank official available for an interview with The Globe and Mail, and said it could not respond to a detailed list of questions because the matter is currently before the court.

Many of the identities of the Canadians behind the Caribbean-based investment fund, which is known as St. Lawrence Trading Inc., are still a mystery to federal auditors. Internal fund documents circulated to investors show that, as of 2001, “six prominent Canadian business families” owned as much as $900-million (U.S.) of the fund, which held investments in hedge funds and mutual funds around the world. CRA auditors say they have unearthed the names of 120 of the estimated 180 Canadians behind St. Lawrence Trading, and are still in pursuit of the unidentified investors.

Caitlin Workman, a spokeswoman for the CRA, said auditors have completed reassessments of 49 investors and the agency believes those people failed to report a total of $70-million in income. However, the CRA was unable to say how many investors are disputing those reassessments. One source close to the dispute said a number of investors have responded to the department with notices of objections about the amount the agency says it is owed.

“Somebody in the CRA has a bee in their bonnet and thinks they’re going to bring a fortune into the treasury and somebody’s going to make a name for themselves,” the source said.

The roots of the agency’s fight with Scotiabank can be traced back to 2002, when the bank entered into a convoluted agreement with St. Lawrence Trading.

At that time, the then-Liberal federal government had proposed changes to the Income Tax Act that would have resulted in “adverse Canadian tax consequences” for the fund’s investors, according to an internal fund memorandum that auditors have filed in court. In the end, the rules were not enacted into law, but the prospect of changes sparked a flurry of behind-the-scenes manoeuvrings.

According to the internal fund literature, the investors and their advisers devised what they thought was a solution to ensure that their investments maintained their “exclusion from Canadian tax” – the Canadian investors agreed to sell half of St. Lawrence Trading to Scotiabank in return for a note. The note is set to mature in 2016, at which point the bank would likely sell St. Lawrence Trading on the market and hand the proceeds back to the Canadian investors. An internal fund memorandum shows that investors expected to pay Scotiabank an annual “seven figure” fee in return for the bank temporarily taking the investments off their hands.

The CRA’s efforts to lift the veil on the investors via Scotiabank, however, have been met by repeated obstacles. The first barrier, court records show, was that the sale of St. Lawrence Trading to the Bank of Nova Scotia was made through subsidiaries of the bank in the Bahamas and Ireland.

When the CRA obtained its first federal court order in 2008 for the list of investors, a Dublin lawyer for the bank’s Irish subsidiary declared that the subsidiary could not hand any information because of Irish law. Scotiabank Ireland had “a duty of secrecy with regard to the information,” the lawyer, William Johnston, said in a Sept. 11, 2008, letter.

Undeterred, the auditors tried other channels. Given the vast fortunes involved in this transaction, the bank was required to perform anti-money-laundering checks on the investors, so the tax collectors asked for that material and the names of any outside firms involved in the checks.

The bank responded that, yes, Scotiabank Ireland performed such checks, and it enlisted the services of a firm in Bermuda, another country outside the jurisdiction of the court.

Auditors persisted, arguing that because the bank’s Canadian parent guaranteed the note provided to investors, there must be information somewhere in Canada about these people.

Chris Purkis, the bank’s managing director of equity derivatives, responded in an affidavit that, unless Scotiabank Ireland defaulted on the note, Canadian bankers “would not, and did not, know who the shareholders were.”

However, as part of its most recent application, CRA has brandished internal Scotiabank e-mails that show at least one Canadian bank official was part of an e-mail exchange with a Montreal businessman with an interest in St. Lawrence Trading.

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January 12, 2010 by Dan White.

Hello world, the TaxMan Cometh to those who overly complicate their tax affairs.

The more complicated things are the more complicated they become.
I am wonder struck on how complex our world has become.
In today’s world, tax planning has become such a complex matter that it requires a ton of expertise to achieve tax savings that may well be overshadowed by the cost of setting up, defending and reporting on.

Complexity opens up a great opportunity for CRA to bully their way to your money.

A basic survival rule is that you need to be able to understand what it is you are doing and why you are doing it, not to mention does it really make sense in the grand scheme of things.

Often there are better answers.

The big problem with getting involved with Trusts and Corporations as an asset and tax management strategy as the fact that the Dark Forces can and do change the rules… (Remember income trusts?)

Often tax planning ignores that what works for the goose, may not work for the gander, in other words, you may find yourself unable to have tax benefits from losses.

Anyway, unless you have great gobs of cash to throw at tax planning, you may find yourself under a tax assult by CRA. You may find that instead of being a tax winner, you are a tax loser.

If you are in a mess because you got involved with a complex structure, then contact us at info@tax-audit-solutions.com also please visit our web site. www.taxauditsolutions.ca

Dan White

The following article illustrates what I am talking about. Consider how people who set up complicated structures based on blind faith in their advisors, become vulnerable to the tax man.

Purchase of US vacation properties by Canadians
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Miller Thomson LLP
Nathalie Marchand

Canada, USA
December 22 2009
Miller Thomson LLP logo

Given the attractive U.S. real estate market, the strong Canadian dollar and low interest rates, more and more Canadians are purchasing U.S. vacation properties.

Canadians should be aware, however, of the potential exposure to U.S. Estate Tax on death. Simply stated, a Canadian owning assets in the U.S. on death (such as real estate) is liable to U.S. Estate Tax on the value of all U.S. “situs” assets and benefits only from a limited tax credit, proportionate to the value of the U.S. assets over the worldwide estate. Hence, if the U.S. property represents only a small percentage of a large worldwide estate (over $3,500,000 U.S.), the tax credit will be minimal. The U.S. Estate Tax rates range is from 18% to 45% and may create a substantial tax bill on death.

It is possible, with proper planning, to eliminate exposure to U.S. Estate Tax and it is usually preferable to implement such planning prior to the acquisition of the vacation property.

One technique involves the use of a Canadian trust. Under this plan, the Canadian would settle a Canadian discretionary trust and transfer to the trust the funds necessary for the purchase of the U.S. property. The Canadian contributor, however, may not be a beneficiary nor a trustee of the trust. Typically, the beneficiaries would include the spouse of the contributor and his or her children. If properly implemented, this structure eliminates U.S. Estate Tax exposure both on the death of the Canadian contributor and on the death of his or her spouse. It also permits the gain on a sale of the U.S. property to be taxed in the U.S. at the favourable federal long-term capital gains rate applicable for individuals (currently 15%). From a Canadian point of view, it minimizes Canadian taxation on death as the property is owned by the trust and not by the Canadian contributor and would not be subject to a deemed disposition at fair market value on the death of the Canadian contributor or his or her spouse. The trust would, however, be subject to the deemed disposition of all of its assets at fair market value 21 years after its creation, unless steps are taken to avoid this result.

Another alternative may be to minimize U.S. Estate Tax exposure by purchasing the U.S. property through a Canadian limited partnership. This planning is more complicated and raises various issues to consider (such as the need to have the partnership treated as a corporation in the U.S. and hence, subjecting any gain on a sale of the property to the higher corporate tax rate).

Finally, another option would be to use a Canadian corporation to purchase the property. The Canada Revenue Agency considers that if the property is made available to the shareholder, a taxable benefit will arise, that may not be limited to fair market value rent and might be based on the cost or value of the property. The benefit would, however, be reduced if the funds to purchase the property are provided interest-free by the shareholder to the corporation. The property being owned by a corporation, any gain on a disposition of the property would be taxed in the U.S. at the corporate rate. At the Canadian level, the shareholder (or the shareholder’s spouse, as the case may be) will be deemed to have disposed of the shares of the corporation at fair market value on death.

Purchasing a U.S. vacation property is an important decision that should not be taken lightly. Canadians contemplating such purchase should consult their tax advisors in order to properly implement a structure meeting their particular needs and situation. We can help you with this.

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