February 17, 2011 by Dan White.

The following article is a good news story for business owners who also operate farms that may lose money.

In the following case of Craig versus the Queen,  the taxpayer wins his appeal at the Federal Court.
What this means is that taxpayers can now have both a farm and additional business without needing the farm to make the larger income in order to qualify for all the losses.

In a landmark ruling lawyer and horse owner John Craig has won his appeal to the Federal Court to deduct more than the $8,750 currently allowed under Section 31 of Canada’s Income Tax Act.

The Minister of National Revenue had appealed the Tax Court of Canada’s ruling in favour of Craig, claiming that (a) the lower court judge applied the wrong legal tests in determining whether his farm income could be combined with his legal income and (b) if he did not apply the wrong tests, the tests were not correctly applied to the facts.

The Federal Court did not agree. In the ruling, Justice John A. Evans stated that he was “not persuaded that the Judge made any error of law in applying the somewhat more flexible and generous test in Gunn for determining the circumstances in which section 31 permits farming and non-farming income to be combined so that farming is a taxpayer’s chief source of income.”

John Craig is a lawyer in Toronto whose primary income is from his law practice. Mr. Craig is also an enthusiastic standardbred owner with a business comprised of the buying, selling, breeding, and racing of standardbred horses. Mr. Craig deducted losses from that standardbred business in the taxation years 2000 and 2001 against his income generated as a lawyer.

The Minister of National Revenue (“Minister”) restricted the losses deducted by Mr. Craig to $8,750 for each year relying on Section 31(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), which maintains as follows:
31. (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 the taxpayer’s loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of
(a) the lesser of
(i) the amount by which the total of the taxpayer’s losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by the taxpayer exceeds the total of the taxpayer’s incomes for the year, so determined from all such businesses, and
(ii) $2,500 plus the lesser of
(A) 1/2 of the amount by which the amount determined under subparagraph 31(1)(a)(i) exceeds $2,500, and
(B) $6,250, and
(b) the amount, if any, by which
(i) the amount that would be determined under subparagraph 31(1)(a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1” were deleted,
exceeds
(ii) the amount determined under subparagraph 31(1)(a)(i).
It was agreed that Mr. Craig’s horse activities constitute “farming” for the purpose of section 31 and was a business and a source of income for tax purposes. It was also clear that the horse business was a much smaller source of income than his law practice. Because of this fact, the Minister argued that Mr. Craig was caught by Section 31.

The Minister relied on the seminal decision of the Supreme Court of Canada in Moldowan v. Canada, (1978) 1 S.C.R. 480 (“Moldowan”) which held that a taxpayer could only escape from the restrictive tax treatment in section 31 if the taxpayer’s chief source of income was a combination of farming income and some other subordinate source of income. Under this interpretation, Mr. Craig clearly would be caught by Section 31.

Moldowan, decided in 1978, has been criticized by later Courts. Moldowan was attempting to make sense of the apparent nonsensical provision in Section 31(1) that states, “Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income”, the taxpayer’s farming losses would be caught by section 31. On its face, this would mean that the limitation of section 31 would never apply and in every case, the taxpayer could deduct the full amount of farming losses. Clearly, this was not the intent of the legislature.

In Moldowan, the Supreme Court decided to insert (read in) a word into this phrase in an effort to understand it. The Supreme Court inserted the word ‘subordinate’ so that it now read “Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other subordinate source of income”, the horse business would be caught by the restrictions in section 31.

This interpretation of section 31 by the Supreme Court created its own problems and for the last 40 years, farmers  have been hit by section 31 restrictive loss deduction limits. If a farm did not generate more income, or at least a similar amount of income, as the taxpayer’s other businesses, the farm business was unable to escape from section 31.

In 2006, Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57 (Gunn) moved away from the Moldowan interpretation of section 31 and stated that a taxpayer’s chief source of income for a taxation year could be a combination of income from farming and some other source of income even if the income from the farm operation was less than the income from the other business. In other words, Gunn removed the word “subordinate” inserted by the Supreme Court of Canada in Moldowan. As such, it no longer mattered whether or not the farm operation had the larger income.

Gunn looked at the amount of income generated as one of several factors to determine the application of section 31 such as the amount of capital invested in the business, the time spent, the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations. These other factors were always considered in previous cases but their importance had been overriden by the income issue.

The Craig decision has taken Gunn and applied it squarely to a standardbred horse business. The Tax Court allowed Mr. Craig to avoid Section 31 by combining farming and non-farming income even when the farming income was much less than the income generated by the law practice. The Court considered other factors to indicate the importance of Mr. Craig’s horse business as a chief source of income, including the time spent, capital invested, and the prominence of this business in the taxpayer’s every day activities. The Tax Court also affirmed Gunn’s rejection of a city slicker/country farmer distinction when applying section 31 – all taxpayers are held to the same standard whether or not a taxpayer does the work or hires someone else to do it.

The Federal Court of Appeal upheld the Tax Court’s decision in Craig. This now opens the door for all farmers to claim full deduction of losses from their farming businesses against other income even where that other income is substantially greater than the horse business. They just have to qualify in the true sense of being a farmer.

Farmers still need to take care to structure themselves so as to not get caught by Section 31, which still exists and is a significant deterrent to all farming industries. In other words it has to be a real farm and not just a hobby or an investment.

For more information on Taxes go to www.taxauditsolutions.ca

Dan White

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February 10, 2011 by Dan White.

Hi Folks.

We have a new youtube video up. This is an “Everyone in Canada” needs to watch video converstation about the dangers involved in a tax audit.

Enjoy and please feel free to comment.

Entitled; “Be smart, protect yourself from an audit.

http://taxauditsolutions.ca/cms/index.php/utube-tax-videos/

Thanks

Dan White

Posted in Audits, Tax Topics | Print | No Comments »

February 6, 2011 by Dan White.

This was a long drawn out battle on behalf of the taxpayer, but in the end justice prevails and Tax Audit Solutions wins in Tax Court.

I offer the following disclaimer here. I know there are good and fair CRA auditors, it is just that no one ever comes to me complaining about the fair treatment they received. So I have the same level of bias that so many auditors have against business owners. I rarely meet the good auditors unless it is a situation where the client comes to us at the beginning of the audit … before the problems come up. In those cases we often do meet good auditors.

In this particular Tax Case it was a case of where is the the principle place of business located? CRA tries to be willfully blind to evidence and makes inappropriate assumptions, then hangs their hat on what they write in their own notes to file flying in the face of facts to the contrary or that the judges have already made it abundantly clear what constitutes a principle place of business.

What is appalling about this is that the courts have had enough cases that it leaves no doubt as to what is a principle place of business. CRA just chooses to ignore the law, appearing to think they are above the law.

When CRA claims that a taxpayer’s home office, is not his his principle place of business, one would think it would be an easy victory for the tax payer.  Not so as this taxpayer was to find out. That taxpayer who had at all times in the time in question, the same address. The address was clear in the following circumstances;  his registered business location, his GST license,  on the documents where he opened up a business bank account, he had his address preprinted on the cheques, and he put his address on his invoices.

To reinforce the principle place of business further it is noted that he can not provide his services without the tools in his office where his has all his own tools, including tools that his clients don’t have at their place of business, he stores his books and records in his home office, he keeps his office exclusively for business, he required a phone in his office to contact clients and co project worker…. even with all that evidence, CRA was hell bent to get the money that they just wanted regardless of right or wrong.

For CRA it is really quite annoying when a taxpayer wants to question their authority to come in and ramrod a tax bill to the taxpayer. One is led to the conclusion that CRA is biased in their thinking that all business owners are tax cheats.

Taking a CRA issue to court can be a long drawn out affair. One which very few people would ever look forward to. All too often the tax payer can not stand the pressure, or can not afford professional help and therefore they just gets slaughtered, they lose their homes, their marriages and eveything they have. When CRA is done with a small business all that is left is road kill. Another case of small furry animal versus a big Mack Truck.

W5 has a number of cases that they have featured of exactly this kind of thing happening. Check out  http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horrror-stories110205/

and

http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horrror-stories110205/

CRA abuse is a regular occurance and the following case is an example of how CRA conducts its afairs and how hard it is to stand up to them.
A couple of years ago we were retained by our client to deal with a CRA Tax Audit. This case took a long time but this past Friday we brought it to a good conclusion.

This case is in my opinion and experience, a case where CRA does their bully routine under the encouragement of the government of the day, with the Mantra of;  “The government is our client and Tax Payers are to do as they are told.”

Not only do they follow the mantra, they also set out to punish the taxpayer and their representative if they dare to try to stop the roller coaster. What the average taxpayer does not understand that the punishment for not standing up to them is greater than the punishment from standing up.

What Canadian Taxpayers need to know and understand is that if you don’t stand up to them, they know no limits as to what they can and will do. We see this all the time. Just check out those W5 documentaries noted above as well as all the other documentaries posted there and on the CBC site. Contrary to what many people may think,  CRA behaving in this abusive fashion is more the norm than the exception.

You need to know that CRA will violate your rights, to trick you into admitting things you don’t even understand and will try to get you to sign waivers you are not legally obligated to sign,  that will allow CRA to go for your financial jugular vein.

To think you have nothing to hide so nothing to fear is such a dangerous belief paramount to thinking a hungry lion will not eat you. You may think you have nothing to hide, but you do…. You need not have CRA find that you made mistakes. That will be really costly for you. You are much wiser to have a friendly tax representative find the mistakes and fix them in readiness for the audit than to have an auditor seize on that to terrorize you. Thinking you have nothing to fear is very foolish. You have a real need to fear the bullying tactics of CRA that could put you into bankruptcy.

If you think you have nothing to fear you are financially dead wrong. What you need to understand is that when the Tax Man is asking you questions, it is just their appetizer and they will visit you for the feast later. The fest will be a many course delight where they find things wrong, that you did not know that you did not know about.

It is a nasty situation, and in this case, the client awoke in time to smell the bacon frying and not the burned toast being scraped.
It is difficult to believe that this kind of atrocity goes on in our country. You don’t believe this could happen to you until it does and then you cannot believe that it happened to you. That is when you learn the ropes and start doing audit ready bookkeeping. Audit ready bookkeeping puts an end to short notice of an audit being a problem. The best defense is always an offense.  Audit Ready Bookkeeping is the best offense to protect yourself against a greedy tax man.

The books being audit ready, gets the audit over in a very short period of time, as CRA knows that very few taxpayers have audit ready bookkeeping and those with ordinary bookkeeping are the ones who are the low hanging fruit. If you can not say that you are completely ready for an audit, then your bookkeeping system is tantamount to a set up for you to lose legitimate business expenses for lack of the software having a place to enter the information and to create an audit trail.

We use audit ready bookkeeping software that is so good that one auditor said to us; “That is the best set of books I have seen in all my ten years of being an auditor.

CRA knows they have broad powers of ignoring their code of conduct and ethics, the taxpayer’s bill of rights and the charter of rights.” So long as the government of the day allows (if not plain old encourages tax extortion) this improper behavior to go unpunished, the Tax Man will continue to enjoy the power of fear over the taxpayers of this land. We the taxpayers need to understand this situation and when the Tax Man comes to call we need to fight like two cats with their tales tied together and hung over the clothes line.

The vast majority of taxpayers fold under the pressure of CRA… and CRA knows that is a fact and counts on it to sooner or later get their way to the taxpayer’s pocket books and the shirt off his back.

The case began with the client contacting us to represent him. Our first communications with the auditor was nothing short of an outraged auditor who insisted on getting the books and records before they were prepared in an audit ready fashion.

The auditor lied to the taxpayer stating that it was required for the tax payer to have an interview with the auditor and to turn over all his books and records to the auditor before she would deal with the representative.

The taxpayer checked with us and we confirmed that he had the right to appoint a Tax Representative to deal with all his tax matters.
The taxpayer informed the auditor of said facts. She was furious about the taxpayer exercising his legitimate legal rights.

The auditor would not even communicate with us at first; she simply ignored us as long as she could. However we don’t take to being ignored and forced the issue.

We informed the auditor that we would prepare a perfectly done set of books and it would take a lot longer than the ten days she was demanding.

The auditor refused to give us the time we needed. So we told her… fine… just go ahead and assess the taxpayer, we will file a notice of objection and then you will have to review the full set of books and records.

Being a bully and not liking to be blocked from getting her way, she decided on an outrageous tactic of writing in her notes to file information that would indicate that the client’s place of business was not his principle place of business.

The client has no understanding of where or how the auditor would get such information. The auditor then took that incorrect information to take the position that the taxpayers home was not his principle place of business.

Taking that position, she then narrowed the scope of the audit to just the income and disallowed all expenses.

From that point on, the auditor refused to look at the audit ready bookkeeping that supported the tax return as filed.

This ignoring continued to the appeals officer, who rubber stamped a confirmation of the original assessment.

We appealed to the Tax Court of Canada where the Department of Justice continued with the same vein. Only to be fair to the lawyer for the Department of Justice, who by the way was both competent and reasonable, she was sold a bill of goods by the auditor as to the correct facts of the case.

The auditor swore out an affidavit that her written notes to file were both accurate and confirmed.

So we took the matter to court. It was an all-day case in front of Justice Boyle. The judge was fair, factual, and very professional in terms of the everyday meaning of the word “professional” and in terms of how he conducted the hearing.

I opened the case with identifying the issues, and stating what my objectives were. The DOJ did likewise.

In court I explained to the judge that it seemed clear that the taxpayer and the auditor must have been speaking different languages. The taxpayer, who is an engineer has one way of communicating and an accountant has another way… they both have their own language, and it seems that in this case there was a failure to communicate. ( This is a polite way of saying “Your Honor, the auditor is either unable to communicate or fabricates things” because what she wrote was…  at best gross errors.)

Our witness was the taxpayer and the DOJ did not have a witness because the client is from Calgary and CRA would have had to pay to have the auditor at the hearing, so instead there was a sworn affidavit by the auditor.

I called the witness to the stand, (the taxpayer) where he spent most of the day answering questions. What we did was lead him through our one exhibit which was our 24 tabbed sections in a booklet called book of documents, and authorities relied on.

When we brought out that there seemed to be some unprofessional behavior on the part of the auditor, the judge called this “Bun Throwing” and would not affect his decision in any way. That is a great analogy because it describes a situation of a throwing of buns at each other in a fight that will not affect the outcome of the matter at hand in anyway, except it is cathartic rather than purgative. This is much better than describing it as a purgative pissing match, where after the fight; you both are wet and malodorous.

Past experience has taught us, that just because the issue seems simple and clear, you cannot count on wining unless you provide mountains of facts, evidence, case histories , legal arguments and then a bunch more of the same. I have learned that just making your points is not good enough; you have to hammer it home, over and over again in as many ways as possible.

It was gratifying to see that the DOJ used our book of documents to argue her case, as it was clearly better done than her own.
I am not a lawyer, so I have never had the luxury of formal training. Having been in court now for a reasonable number of times, I have learned on the go.

I find having my witness cross examined, rather irritating, but I have to accept that being hard and pressured is what the Respondent is supposed to do. At least as the Representative for the Appellant, I get to clarify anything that was misleading, or put words in the witness’s mouth.

We had all our records together, and our case was well put together. With each case, we get better and better.
Being prepared includes spending time with the taxpayer, on the day before, we spent all afternoon and up to 11PM that evening, reviewing the case and preparing the taxpayer on what to expect.

We don’t tell the taxpayer what to say, other than to say the truth, be very sure of what you are going to say and to not guess at things you don’t know for sure. We gave lots of examples of what he could expect to transpire during the day. I find that this goes a long way to distress the clients.

The DOJ put up a valiant fight but in the end the DOJ at the time for her summary, just admitted that we were right and that in fact the taxpayer’s home was clearly his principle place of business and his expenses should be allowed.

Naturally it was a high for us to have another win…. We are on a path of continuous improvement in every way we can. And Tax Court is a great classroom to learn how to improve how you keep books and records. It allows us to gain valuable insight into dealing with CRA before court regardless if it is informal or formal court. For the day in formal court we bring in a lawyer to represent the taxpayer.

The experience is incredibly useful for the continuous development of our audit ready bookkeeping software for doing audit ready books. We take this information and put it into the software help feature where it tells the user how to think about the huge variety of expenses and income.

It is really clear that under the government of the day, the CRA uses a myriad of ways to trip up unsuspecting taxpayers. More so if you are incorporated, but still very true for sole proprietors. The old days of take your books to an accountant and have your taxes done, send them in to CRA and don’t worry, are dead and gone.

Today if you are not always audit ready, and you get audited, you will learn a painful lesson. That lesson is get on board with audit ready bookkeeping now, or pay dearly for it later.

Without audit ready books, CRA’s computers and data mining, will trip you up and the Tax Man will come calling on you. When CRA calls, they don’t want to give you time to get audit ready, because they know full well audit ready books keeps more money for the taxpayer. So CRA likes to strike while the iron is hot. Shoe box accounting is a certain way to put a tax payer on the hot seat.

For more info on this topic go to www.taxauditsolutions.ca or click here.

Dan White

Posted in Tax Court Cases, Audits, Tax Topics | Print | 1 Comment »

February 6, 2011 by Dan White.

 W5 has again brought more CRA abuse to light.

I don’t know what it is going to take to turn this around, but sooner or later, change will come. Our great hope is that by way of the internet, tweets and all… as in Tunisia, Jordon, Egypt, etc.,  and in Canada over the Canadian Radio and Television Commission ( CRTC ) backing off from limiting the amount of data we can download to what we can afford to pay.

Change will come… however in the mean time, we help Canadians, one at a time to fight the CRA injustice. We had another court win this past Friday. Our client’s case background was just as outrageous. My next blog will be on this.

To win against CRA is now small task… for the average Canadian to do this on their own, it is nothing short of a nightmare, just to get simple justice.

In the following two videos, you can see what every day Canadians are dealing with. This type of thing is pretty normal for them to do. We see it all the time, but so far the light in Canada has not gone off.

W5 The Audit.

Part one.

Tax season can be a frustrating time for most Canadians, but what happens if the taxman decides to conduct an audit? For Eli Humby, his audit turned into a long fight with the Canada Revenue Agency that compromised his business and personal life. W5’s Paula Todd reports.

http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horrror-stories110205/

W5 Part Two.

Retired Master Cpl. Chuck Martinello went to war with the CRA for more than two years on behalf of his wife, who was audited in 2008 for repairs to a rental property damaged by Hurricane Igor in 2004.

http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horror-stories110205/

Change to CRA will come but it is going to take an awakening of Canadians to realize that just because this has not happened to them, it does not mean that it won’t.

To learn more about batteling CRA go to our web site www.taxauditsolutions.ca       or       click here…………….. 

Dan White

Posted in Audits, Tax Topics | Print | 1 Comment »