TaxMatters@EY – April 2011

Carryforward amounts
Review your prior-year return and 2009 notice of assessment, or access your records online to determine if you have any carryforward balances that may be used as deductions or credits for your 2010 return. Such carryforward amounts could include net capital losses or other losses of prior years, unused RRSP contributions, unused tuition education and textbook amounts, interest on student loans, resource pool balances and investment tax credits.

Pension income-splitting
If you received pension income in 2010 that’s eligible for the pension income credit, remember that up to half of this income can be reported on your spouse’s or common-law partner’s tax return. You’ll reap the greatest benefits when one member of the couple earns significant pension income while the other has little or no income. However, benefits may also be available in other, less obvious circumstances. In some cases, transferring income from a lower-income pension recipient to a higher-income spouse can carry a tax benefit.

Charitable donations
There are a number of filing suggestions relating to donations. The federal tax credit for donations is available in two stages ― a low-rate credit on the first $200 of donations and a high-rate credit on the remainder. To benefit from the high-rate credit and save a small amount of tax, only one spouse or partner should claim all of the family donations. If your family’s annual donation amount is not high, consider accumulating donations over a few years, and claim them all in one year to increase your benefit from the high-rate credit. The donation credit is available for donations made within the five preceding years. And finally, remember that if you donated stocks, bonds or mutual funds to a charity, none of the related accrued capital gain is included in your income.

Medical expenses
The claim for medical expenses is limited by an income threshold. In other words, the lower your net income, the more you can claim in eligible medical expenses. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, it’s generally beneficial to claim all expenses in the lower-income spouse’s return. Remember, this is a non-refundable credit, so the individual who makes the claim should have sufficient income tax payable to absorb the entire credit. In addition, you might be able to claim the medical expenses of other dependent relatives such as elderly parents or grandparents.

Claim all your credits
Remember to take advantage of the various family-related tax credits that might apply to you. These include the following:

• Child tax credit for children under 18
• Child fitness credit
• Public transit credit (for you, your spouse/partner or minor children)
• Adoption expense credit
• Tuition and education credits transferred from a child

Business owners
If you’re self-employed, there are a number of business-related expenses that you can claim. Ensure that you take advantage of all available deductions, including automobile expenses, parking, business association fees, home-office expenses (if you qualify), entertainment, convention expenses (a maximum of two per year), cell phone, depreciation on your computer and salaries paid to assistants, including family members. Remember that, in most cases, you can deduct private health-care premiums as a business expense instead of a medical expense, and one-half of Canada Pension Plan paid in respect of self-employed earnings is deductible instead of creditable.

A word of caution: if you claim home-office expenses, you’re likely better off not to claim the depreciation on the home-office portion of your home. Although this will give you a deduction in the current year, you will lose some of the capital gains protection available from the principal-residence exemption.

Old receipts
In gathering your information, you may stumble across older receipts that may have value in your 2010 return. Specifically, charitable donations can be carried forward and used in any of the five years after the year the gift is made. You can claim medical expenses for any 12-month period that ends in that year if they have not been claimed previously. In addition, under the fairness provisions, the Canada Revenue Agency (CRA) has the discretion to make adjustments to previously filed returns (10 years back) in relation to certain errors or omissions, on request by a taxpayer.

Moving
If you moved in 2010 to start a new job or a new business, or to go to university or college, you may be able to claim expenses relating to the move. In addition to the actual cost of moving your personal effects, you can claim travel costs, including meals and lodging while en route. Lease-cancellation costs, as well as various expenses associated with the sale of your former residence, are also deductible, including up to $5,000 in costs associated with maintaining a former residence that was not sold before the move. The expenses are only deductible to the extent of income from the new work or business location. If this income is insufficient to claim all the moving expenses in the year of the move, the remaining expenses may be carried forward and deducted in the following year.

Home purchasers
If you acquired a home in 2010, you may qualify for a credit based on an amount of $5,000 if neither you nor your spouse owned a residence from 1 January 2006 to the date of purchase of your new home.
Alternatively, if your new home was acquired for the benefit of a family member eligible for the disability tax credit — to provide a home where that person could be more mobile or functional, or which is better suited to their personal needs or care — the credit is available regardless of your history of home ownership.

Filing returns for children/students
Although often unnecessary, in many cases there may be benefits to filing tax returns for children. If your children had part-time jobs during the year or earned some money for small jobs, such as babysitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of making RRSP contributions, which they can make in a future year.

Another advantage in filing a return for teenagers is the availability of refundable tax credits. Several provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid to the taxpayer. There is also a GST credit available for low- or no-income individuals over age 18 that is generally only paid if an income tax return is filed.

Finally, university students should always file tax returns and report eligible tuition, education and textbook amounts. Students can use these credits, once established, in a future year.

Use software
Using software to prepare your tax return has many benefits. Return preparation is generally quicker, easier and less prone to mechanical error. Plus, the programs often allow you to optimize credit or deduction claims between spouses or common-law partners, and include helpful tax-filing hints based on the information you input.

Using software may also give you the option to file your return electronically. The processing time of electronically filed returns may be shorter than that associated with paper returns. Electronic filing options include NETFILE, EFILE and TELEFILE. In order to NETFILE, you will have to use approved tax return software. Alternatively, you can have your return filed electronically, for a fee, by an approved EFILE agent. TELEFILE is available for simple returns.

Even if you file electronically, keep your receipts. The CRA routinely asks taxpayers to provide support for various deductions or credits claimed on their tax returns.

For the 2010 return and final tax payments, the deadline is extended to Monday, 2 May 2011 (as 30 April is a Saturday). To be filed on time, the return or payment must be either received by the CRA or postmarked no later than 2 May 2011.

Failure to file a return on time can result in penalties and interest charges. However, since these charges are based on the amount of tax owing, many people who expect refunds may not feel compelled to meet the deadline. This is unwise for two reasons:

• If a tax liability does arise, perhaps as a result of an error in the return or a denial of certain deductions, you may suddenly be in a position where penalties and interest apply.
• If a refund is indeed expected, it is in your best interest to file as early as possible to get your refund. Although the CRA does pay interest, the interest clock does not start until the later of 30 days after the filing due date and the date the return is actually filed. Late filing could mean a loss on the potential refund interest.

For many more helpful tax-saving ideas and handy tips throughout the year, download your copy of our annual guide Managing Your Personal Taxes: a Canadian Perspective.

Topics covered by this well-written pamphlet include:

• Residential ties and residence under the Canada–US income tax treaty
• US tax status – resident alien vs. non-resident alien
• Income reported on your Canadian tax return (Form T1)
• Do you have to file a US tax return? (Form 1040)
• State and local tax obligations
• Ownership of US real property
• Obtaining a US Individual Taxpayer Identification Number

Visit the CRA’s website for a copy of Canadian Residents Going Down South.

The information in the pamphlet is not intended for US citizens or green card holders.

Individuals with a net asset value in excess of $50 million, and related groups comprising 30 or more entities, were noted as the target of this project.The CRA is reportedly requesting completion of a 20-page questionnaire asking for information about a variety of related economic entities, including corporations, partnerships trusts, joint ventures and private foundations.Requested information includes copies of the minutes of corporate board of directors’ meetings, corporate minute books, listings of legal and accounting firms used, correspondence files and tax-planning documents.

As with all communications with the CRA, it would be prudent to consult with your Ernst & Young professional advisor before responding to any such enquiry.

Why this initiative now?

Wealthy individuals may comprise only a small proportion of society, but there are several important reasons why governments around the world are targeting them as a source of increased revenues.

First, the wealthiest members of society already pay a relatively large proportion of the income tax that governments collect. In Canada, for example, the top 1% of taxpayers account for more than 22% of total federal personal income tax paid.

Second, clamping down on the wealthy is often a politically expedient way of increasing the overall revenues from income taxes. With unemployment still stubbornly high in many developed economies, governments can argue that increasing taxes for the wealthy is a fair way of dealing with wealth inequality and supporting the poorest members of society.

Third, high-net-worth individuals generally have more complex financial affairs than other people and so require more attention. The wealthy are often internationally mobile, have multiple business interests and spread their assets across a range of trusts, partnerships or foundations.

This presents a real challenge to tax administrations, which have typically looked at individual components of wealth in “silos” across different departments that don’t communicate with each other.

Fourth, the wealthy are more likely than others to engage in aggressive tax planning, simply because they have more complex financial affairs and are more likely to be able to access these services. In its Study into the Role of Tax Intermediaries, the Organisation for Economic Co-operation and Development (OECD) noted: “High-net-worth individuals are the second principal market for aggressive tax planning.” This is not to say most wealthy individuals pursue aggressive tax planning — it’s just that they have greater opportunity to use these techniques should they choose to do so.

Faced with this potent combination of factors, tax administrations around the world are re-examining the way in which they engage with high-net-worth individuals. By focusing their attention on this relatively small group, the authorities recognize that they can make more efficient use of their limited resources and can increase their overall revenues by placing the tax affairs of wealthy individuals under greater scrutiny.

This revised approach among individual governments must be viewed in the much broader context of the fundamental transformation of the way jurisdictions co-ordinate with each other on tax affairs. After years of faltering progress in facilitating greater exchange of tax information between jurisdictions, the financial crisis served as a massive catalyst for change.

Under the auspices of the G20 and the OECD, co-operation between tax administrations has become the rule rather than the exception, and there’s now zero tolerance for tax evasion.

Be sure to get a clearance certificate

The first technical interpretation serves as a useful reminder to executors of the importance of obtaining a clearance certificate prior to distributing property from an estate — regardless of whether or not the estate has been assessed a tax liability.

Subsection 159(2) of the Income Tax Act (ITA) requires an executor to obtain a clearance certificate from the Minister before distributing the estate’s assets. If an executor fails to obtain a certificate, subsection 159(3) gives the Minister the power to assess the executor for the estate’s outstanding tax liability.

The CRA was asked whether a taxpayer’s debt needs to be established through an assessment in order for the taxpayer’s legal representative to be held liable under subsection 159(3).

In its interpretation, the CRA outlined its view that the taxpayer’s debt does not need to be established through an assessment in order to assess the taxpayer’s legal representative.

The CRA states that paragraph 159(2)(a) of the ITA provides that the legal representative’s liability is not only for amounts for which the taxpayer was liable under the ITA, but also for amounts for which the taxpayer is, or can reasonably be expected to become, liable under the ITA at or before the time the distribution is made from the estate.

Further, the CRA states that the legal representative must obtain a clearance certificate, or they will be liable for the payment of the taxes, interest and penalties owing by the taxpayer to the extent of the value of the property distributed.

The circumstances under which a clearance certificate is required are outlined in Information Circular (IC) 82-6R8, which was issued on 10 December 2010. This latest version includes a small but significant change in paragraph 9 that executors should be aware of: the CRA is now asking for the names, addresses and SIN numbers of the recipients of assets, together with their relationships to the deceased. Previously, the CRA only asked for a list of recipients.

In summary, to avoid any potential liability, executors should make sure to obtain a clearance certificate from the CRA before distributing estate property.

Fairness relief from interest and penalties

In the second technical interpretation, the CRA was asked whether the legal representative of a taxpayer’s estate would be liable for interest and penalties if the deceased’s tax return for the year prior to death is filed late due to a late appointment of the estate trustee.

The CRA confirmed that interest and penalties would apply to any unpaid tax owing when the return was required to be filed, and the legal representative may be jointly and severally liable (if no clearance certificate is obtained) for the unpaid taxes, interest and penalties.

While the legal representative could request that the Minister extend the time for filing the return, the CRA cautioned that such relief is rarely granted to individuals. However, the CRA indicated that if the legal representative could not reasonably have filed the returns and remitted the taxes on time because of a late appointment, a waiver of interest and penalties may be warranted under the taxpayer relief provisions.

Therefore, in addition to understanding their duties and obligations under the ITA, executors and other legal representatives should be aware of the taxpayer relief provisions and the circumstances in which such relief may be granted.

To find out how to make a taxpayer relief request, see CRA IC 07-1, Taxpayer Relief Provisions.

The facts

Delta Credit Union and First Heritage Savings Credit Union were amalgamated under the provisions of the CUIA as First Heritage Delta Credit Union effective 1 January 2001. On 30 November 2001, the company changed its name to Envision Credit Union.

The parties intended to structure the merger in a manner that would fail to meet the definition of amalgamation in subsection 87(1) of the ITA. To this end, each of the predecessor credit unions transferred an interest in certain real property to 619547 B.C. Ltd. at precisely the time of the amalgamation. Therefore, not all of the predecessor credit unions’ property became property of the merged entity, putting it offside section 87.

The issues

The taxpayer’s position was that the amount of its UCC at the beginning of the first taxation year following the amalgamation was the predecessor credit unions’ capital cost of the assets of the various classes, as opposed to their closing UCC balances.

In filing its tax returns for its 2001 to 2004 taxation years, the taxpayer claimed capital cost allowance (CCA) in each year based on a total opening balance of UCC of all classes of property of $50,979,759. The Minister reassessed to reduce the amount of CCA allowed for each year to the amount that could be claimed if the opening balance of UCC of all classes of property was $20,103,228.

The Minister offered the following basis for the reassessments:

• The merger was an amalgamation to which section 87 of the ITA applied.
• Even if it was not such an amalgamation, the tax attributes of the assets of the various classes of depreciable property of the predecessor credit unions flowed through to the taxpayer.
• The general anti-avoidance rule (GAAR) applied to reduce the UCC of the assets.

Decision rooted in legislation and precedent

The taxpayer’s appeal to the TCC was dismissed.

The taxpayer was able to satisfy the TCC that the beneficial interests in the properties were transferred to 619547 B.C. Ltd. at the exact time of the amalgamation, so that section 87 did not apply.

However, the TCC held that the tax accounts of the predecessor corporations flowed through to the taxpayer because of the rules set out in section 23 of the CUIA, which provided that the predecessor corporations were “continued as one credit union” and that “the amalgamated credit union is seized of and holds and possesses all of the property…of each amalgamating credit union.”

The TCC relied on the principles laid out by the Supreme Court of Canada in the Black & Decker case ([1975] 1 S.C.R. 411) to reach its conclusion that where the language of the underlying corporate statute is similar to the language considered in Black & Decker, all tax accounts “flow through” on amalgamation, even if section 87 does not apply.

The TCC declined to consider the application of the GAAR.

The reassessment issue

The TCC also dealt with a secondary issue: whether the reassessment of the taxpayer’s 2001 taxation year, which was issued after the end of the normal reassessment period, was valid. The Minister argued that the taxpayer could be reassessed after the expiration of its normal reassessment period as a result of the application of subparagraph 152(4)(a)(i), which allows the Minister to reassess an otherwise statute-barred year if the taxpayer has made any misrepresentation that is attributable to neglect, carelessness or wilful default in its return for the year.

The TCC noted that at the relevant time, the Canada Revenue Agency (CRA) published two technical interpretations that stated that tax accounts and other tax attributes do not flow through to the merged corporation if the amalgamation is not an amalgamation as defined in subsection 87(1) of the ITA. The TCC ruled thata “wise and prudent person” could, in filing their tax return, rely on statements made by the CRA that are in the public domain. Therefore, there was no neglect, carelessness or wilful default on the taxpayer’s part that would permit the opening of an otherwise statute-barred year.

While the taxpayer’s 2001 taxation year was statute barred, this was not the end of the matter. The TCC examined what would have been the appropriate starting UCC balance to the new credit union as of its 2001 amalgamation, less the CCA allowed for that year, in order to determine the closing balance for 2001 (and hence the opening balance for the 2002 taxation year, which was not statute barred).

What the decision means

This decision has potentially far-reaching effects, given that most Canadian corporate statutes governing amalgamations use similar language. And it’s another reminder to taxpayers that if there is a mistake made in computing a tax attribute in a statute-barred year, the amount may be adjusted when it is used in a subsequent taxation year.

This case has been appealed to the Federal Court of Appeal.

Tax Alerts

 2011 Issue No. 15 - Federal government defeated: what now for the budget?
With the defeat of the federal Conservative government and the dissolution of Parliament, all outstanding legislative measures officially “died on the order paper.” To become law, they must be reintroduced in the next Parliament by whichever party — or parties — forms the next government. So what does that mean for the outstanding corporate tax measures? 

 2011 Issue No. 11 - Federal budget
On 22 March 2011, federal Finance Minister Jim Flaherty tabled his sixth budget in the House of Commons. For details on the specific legislative measures, read our federal budget Tax Alert and related Economic analysis. 

 2011 Issue Nos. 10, 12, 13, 16, 17, 18 - Provincial budget series
Since our last issue, six provincial and territorial budgets were presented — Quebec, New Brunswick, Saskatchewan, Ontario, Nova Scotia and PEI.

For up-to-date information on the federal, provincial and territorial budgets, visit us at ey.com/ca/budget.

 2011 Issue No. 14 - Supreme Court of Canada grants leave to appeal of GlaxoSmithKline decision
On 24 March 2011, the Supreme Court of Canada (SCC) agreed to hear this important transfer pricing case. The Supreme Court’s ultimate decision on the appeals could be relevant to cases interpreting former and current transfer pricing provisions of the Income Tax Act, as well as dispute resolution under Canada’s treaties. 

A closer look at transfer pricing in today’s global marketplace
David Canale, Ernst & Young’s Director of Transfer Pricing Controversy Services in Washington, DC, provides his views on some of the particulars of transfer pricing and their implications for multinationals today. Read more.

Ernst & Young’s Guide to Preparing 2010 Personal Tax Returns
Internet Edition or eBook
Editors: Gena Katz, Maureen De Lisser, Yves Plante, and Vivian Leung

Business immigration alerts and updates
For the latest information on Canadian and US business immigration issues from Egan LLP, a business immigration law firm allied with Ernst & Young LLP in Canada, visit EganLLP.com.