TaxMatters@EY – April 2012

Carryforward amounts

Review your prior-year return and 2010 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 2011 return. Such carryforward amounts could include net capital losses or other losses from 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 2011 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. If you’ve overlooked this opportunity in a previous year, you should be aware that the Canada Revenue Agency (CRA) is generally willing to accept a request to file a late election up to three years after the assessment date of the returns in question.

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 remember that if you donated stocks, bonds or mutual funds to a charity, none of the related accrued capital gain is generally included in your income, although a recent change subjects some gains on flow-through shares to taxation.

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.

As a result, it’s generally beneficial to claim all family medical expenses in the lower-income spouse’s/partner’s return. Remember, though, this is a non-refundable credit, so the individual who makes the claim should have sufficient income tax payable — both federal and provincial — to absorb the entire credit.

Family medical expenses include those for you, your spouse/partner and your minor children. Expenses for other family members who are dependent on you for support, including adult children, parents, grandparents, siblings, aunts, uncles, nieces and nephews, can also be claimed, subject to reductions based on their income. In the past, such claims were limited to $10,000 per family member, but that limitation has been eliminated starting in 2011.

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
• Children’s fitness credit and the new children’s arts credit (see page 5, “Arts tax credit: piano lessons pay off in more ways than one”)
• Public transit credit (for you, your spouse/partner or minor children)
• Adoption expense credit
• Tuition and education credits transferred from a child
• New in 2011, costs of exams for accreditation as a professional or tradesperson
• Also new in 2011, a credit for individuals performing at least 200 hours of volunteer firefighting services

Business owners

If you’re self-employed (that is, you carry on an unincorporated business, the income from which is reported directly on your personal tax return), there are a number of business-related expenses 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 many 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 2011 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 you haven’t claimed them previously.

In addition, under the taxpayer relief provisions, the CRA has the discretion to make adjustments to previously filed returns (10 years back) in relation to certain errors or omissions, on the taxpayer’s request.

Moving

If you moved in 2011 to start a new job or a new business, you may be able to claim expenses relating to the move.

In addition to the actual cost of moving your furniture, appliances, dishes, clothes and so on, 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, you can carry forward the remaining expenses and deduct them in a later year.

See our case commentary on page 9, “You may be able to claim the moving expense deduction — without even moving to a new workplace.”

Home purchasers

If you acquired a home in 2011, you may qualify for a credit worth $750 of federal taxes if neither you nor your spouse/partner owned a residence from 1 January 2007 to the date you purchased your new home.

However, if you bought your new home for the benefit of a family member eligible for the disability tax credit so they could be more mobile or functional in an environment that’s better suited to their personal needs or care, the credit is available regardless of your history of home ownership.

Filing returns for children/students

In many cases, there may be benefits to filing tax returns for children even when it’s not required.

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- and 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- and no-income individuals over age 18 that is generally only paid if an income tax return is filed.

The 2011 return will determine credits for July 2012 to April 2013, so anyone who will turn 19 prior to April 2013 should file their 2011 return. Individuals age 18 and older also generate room to contribute to a tax-free savings account, but must file returns to have this reflected in the CRA’s records.

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 offers 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.

File on time

Generally, your personal income tax return has to be filed on or before 30 April. For the self-employed and their spouses/partners, the return deadline is 15 June, but any taxes owning must be paid by the 30 April deadline. Note that, if all of your business operations are undertaken through a corporation, the CRA does not consider you personally “self-employed,” so the usual 30 April deadline applies.

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 three 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 you expect a refund, it’s 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 30 days after the later of the 30 April due date (even for the self-employed) and the date the return is actually filed. Late filing could mean a loss on the potential refund interest.
• In the worst case, delaying too long can result in the refund being lost. Filing more than three years after the end of the year (later than 31 December 2014 for a 2011 return) means the refund is not payable, although the CRA has discretion to issue the refund provided the return is filed within 10 years (by 31 December 2021 for the 2011 return).

Speak to your Ernst & Young advisor for additional advice or assistance regarding claims available on your personal tax return or its preparation.

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.

What’s it worth?

Parents may claim a maximum of $500 per year for eligible fees paid for registration or membership in a prescribed program of artistic, cultural, recreational or developmental activity for each child who is under 16 at any time during the year.

The non-refundable credit is calculated by multiplying the eligible amount by the lowest federal marginal tax rate, resulting in a maximum credit per child of $75.

A number of the provinces have also implemented arts tax credits.

Eligible activities

To qualify for the arts credit, an eligible program of activity must be supervised, suitable for children and extracurricular (i.e., not part of a school’s curriculum).

Eligible programs are defined as follows:

• A weekly program that lasts a minimum of eight consecutive weeks and in which at least 90% of the activities qualify as eligible activities
• A program that lasts at least five consecutive days (e.g., a children’s camp) and in which more than 50% of the daily activities qualify as eligible activities
• A program that lasts at least eight consecutive weeks and is offered to children by a club, association or similar organization if:
  • More than 50% of the activities offered are eligible activities (a prorated portion of the fees may be eligible if the 50% test is not met), or
  • More than 50% of the time scheduled for activities is for eligible activities (a prorated portion of the fees may be eligible if the 50% test is not met).
• A membership in an organization for a minimum of eight consecutive weeks if more than 50% of the activities qualify as eligible activities (a prorated portion of the fees may be eligible if the 50% test is not met).

An eligible activity is an artistic, cultural, recreational, or developmental activity that is defined as an activity (other than a physical activity) that meets one or more of the following criteria:

• Is intended to contribute to a child’s ability to develop creative skills or expertise, acquire and apply knowledge or improve dexterity or coordination in an artistic or cultural discipline (e.g., literary arts, visual arts, performing arts, music, media, languages, customs and heritage)
• Provides a substantial focus on wilderness and the natural environment
• Assists with the development and use of intellectual skills
• Includes structured interaction among children where supervisors teach or assist children in developing interpersonal skills
• Provides enrichment or tutoring in academic subjects

While the Canada Revenue Agency (CRA) has not provided an exhaustive list of eligible activities, it has issued several income tax ruling documents indicating the following activities as credit-eligible: piano and vocal lessons, music therapy, mathematics tutoring programs and specialized arts programs.

As indicated above, an eligible activity does not include a physical activity. Therefore, an activity such as dance lessons that qualify for the fitness credit would not qualify for the arts credit.

Eligible expenses

Eligible expenses must be paid to a person (e.g., an individual, a corporation, an association or other entity) or partnership offering one or more eligible programs and must relate to the cost of a child’s registration or membership in an eligible program.

Registration and membership costs include the following:

• Administration
• Instruction
• Uniforms and equipment that are not available to program participants at less than fair market value
• Rental of required facilities

The following are specifically excluded from eligible expenses:

• Amounts paid to an individual under the age of 18
• Amounts paid to the spouse or common-law partner of an individual claiming the credit in respect of his or her child
• Costs relating to accommodation, travel, food or beverages (e.g., room and board at a camp)
• An amount that is deductible in computing any person’s income for the year, such as a child care expense
• An amount that has been claimed for another tax credit, such as the fitness tax credit

If an individual receives a reimbursement for the program fees — for example, from his or her employer — the fees are not eligible for the credit unless the amounts are included in the recipient’s income (e.g., as a taxable benefit).

Organizations that provide programs are responsible for determining the portion of the expenses that qualify for the arts credit.

Children with disabilities

The age limit for the arts credit is raised to under 18 years for children eligible for the disability tax credit. An additional $500 may be claimed for a disabled child, provided a minimum of $100 in eligible expenses is paid in the year. This amount recognizes the extra costs often associated with programs for disabled children.

Claiming the credit on your 2011 return

Either parent may claim the credit for the year in which the expenses are paid, regardless of the year in which the activities take place. Parents can also share the credit, provided the total amount claimed by both parents does not exceed the maximum amount that would be allowed if only one parent were claiming the credit.

An individual with a child enrolled in an eligible program should retain receipts for fees paid. The receipts do not have to be submitted with the T1 return, but they may be required if the CRA asks the individual to verify the claim.

The CRA has stated that a receipt should contain the following information:

• Organization’s name and address
• Name of the eligible program
• Total amount received
• Amount that is eligible for the arts credit
• Payment date
• Payor’s full name
• Child’s full name
• Child’s year of birth
• Authorized signature (unless electronically generated)

The CRA has also indicated it will accept a handwritten receipt as long as it contains the required information and is legible.

Background

Prior to the announcement of the deferral partnership rules, the CRA’s administrative policy was to allow participants in a JV with different year ends to establish a separate fiscal period for the JV, provided there was a valid business reason for doing so. In such a case, a participant in the JV was entitled to include in its income for a taxation year its share of the JV’s income for the fiscal period ending in the participant’s taxation year.

Revised CRA administrative positions

Technical interpretations 2011-0431461E5 and 2011-0431271E5 confirm the CRA’s new administrative positions for the computation of a JV’s income in light of the deferral partnership rules.

The CRA’s new administrative positions can be summarized as follows:

• Participants in a JV will no longer be able to compute their income as if the JV had a separate fiscal period. Rather, a participant must include in income its share of the JV income for the period that matches the participant’s taxation year.
• Where a participant of a JV previously computed income as if the JV had a separate fiscal period, the participant will be required to include in income in the participant’s first taxation year ending after 22 March 2011 the JV income that had been deferred as a result of the separate JV fiscal period (the deferral income).
• The CRA will allow transitional relief for the deferral income in the same manner as for members of partnerships under the deferral partnership rules.

Example of deferral income inclusion

Technical interpretation 2011-0431461E5 illustrates the computation of deferral income as follows:

• Corporation A and Corporation B are participants in JV.
• Corporation A has a taxation year end of 30 November.
• Corporation B has a taxation year end of 31 January.
• JV was previously treated as having a fiscal period end of 31 December.

Based on the above facts:

• Before the change in the CRA’s administrative position, Corporation A would be required to include in income for its 30 November 2011 taxation year its proportionate share of JV’s income for the period 1 January 2010 to 31 December 2010. Corporation B would be required to include in income for its 31 January 2012 taxation year its proportionate share of JV’s income for the period 1 January 2011 to 31 December 2011.
• Now, under the CRA’s new administrative position, Corporation A would be required to also include in income for its 30 November 2011 taxation year its proportionate share of JV’s income for the period 1 January 2011 to 30 November 2011 (the deferral income for Corporation A). Corporation B would now be required to also include in income for its 31 January 2012 taxation year its proportionate share of JV’s income for the period 1 January 2012 to 31 January 2012 (the deferral income for Corporation B).

Transitional relief

Corporation A and/or Corporation B may be entitled to claim transitional relief for its respective deferral income, provided the corporation meets the conditions for transitional relief under the deferral partnership rules (applied as if the JV were a partnership).

Generally, the transitional relief, where available, would allow the deferral income to be included in the participant’s income gradually over five years, with none of the deferral income being included in the participant’s first taxation year ending after 22 March 2011.

For a participant in a JV to be eligible for transitional relief, the participant must have relied on the previous CRA administrative position for allowing a separate fiscal period for the JV, and the participant must include in income the full amount of the relevant deferral income in the participant’s first taxation year ending after 22 March 2011.

Transitional relief is not available for income for which a deduction is available under section 112 or 113 of the Income Tax Act, or income that would otherwise have been included in the participant’s income before the new rules.

In order to qualify for transitional relief, the JV participant must also file an election (in the form of a letter) with its return of income on or before the filing due date of the participant’s first taxation year ending after 22 March 2011. Where a return of income has already been filed, the CRA will allow the election to be made by sending the letter to the participant’s Taxation Centre, provided the letter is filed on or before 22 September 2012.

Other considerations

The revised CRA administrative positions described above for the computation of JV income may put JVs at a disadvantage relative to partnerships for purposes of the deferral partnership rules.

A partnership, even under the deferral partnership rules, is permitted to have a fiscal period separate from the taxation years of its members. Although significant members would be required to compute a stub-period accrual in such circumstances relating to the deferral period, the members may still be able to defer taxation on the incremental income earned by the partnership from year to year. This deferral opportunity will now not be available for participants of a JV.

Furthermore, a JV’s income may need to be computed for multiple fiscal periods where the participants have different taxation year ends. In this regard, the revised CRA administrative positions for JVs may be an incentive for participants in a particular JV to adopt the same year end.

JV’s and/or their participants should contact their Ernst & Young advisor for help in assessing the impact of these changes, properly reporting their activities, making a (late) election, achieving the benefits of transitional relief and assessing whether these changes mandate a change in their business structure.

Facts

The taxpayer lived in Toronto when he started working for a new employer in Burlington, Ontario, on 1 June 2004. In February 2007, he accepted a promotion and decided to move closer to his office in order to be better able to fulfil his duties. In 2008, he and his family moved to Oakville, Ontario, 50 kilometres closer to his workplace.

In determining his income for 2008, the taxpayer claimed moving expenses of $33,160. The Canada Revenue Agency (CRA) denied the claim, however, on the basis that the taxpayer did not have a new work location as it is defined in the Income Tax Act.

The law

Subsection 62(1) of the Income Tax Act allows a taxpayer to claim moving expenses for an “eligible relocation,” which is defined in subsection 248(1) as follows:

“(E)ligible relocation” means a relocation of a taxpayer where
(a) the relocation occurs to enable the taxpayer
(i) to carry on a business or to be employed at a location in Canada (in section 62 and this subsection referred to as “the new work location”), or...
(b) both the residence at which the taxpayer ordinarily resided before the relocation (in section 62 and this subsection referred to as “the old residence”) and the residence at which the taxpayer ordinarily resided after the relocation (in section 62 and this subsection referred to as “the new residence”) are in Canada, and
(c) the distance between the old residence and the new work location is not less than 40 kilometres greater than the distance between the new residence and the new work location….

Tax Court of Canada decision

Counsel for the Minister pointed out that the wording of this definition specifically refers to a “new work location,” and cited the case of Bracken v Minister of National Revenue (84 DTC 1813) and decisions that followed, including the decision in Jaggers v the Queen (97 DTC 1317).

The taxpayer cited the Tax Court’s decision in Gelinas v the Queen (2009 TCC 111). In that case, the court found that the change in the taxpayer’s job from a part-time job to a full-time job was sufficient to allow her to claim moving expenses, even though she was employed by the same employer in the same location.

In the Wunderlich case, Tax Court Justice Wyman W. Webb reasoned that the term “new work location” was simply a label used for purposes of convenience, and originated from a previous version of section 62 that also required an “old work location.”

In his view, the new work location, as used in the definition of eligible relocation in subsection 248(1), is simply a location in Canada where the taxpayer is employed. He agreed with the taxpayer that the Gelinas case supported this position.

In the alternative, Justice Webb pointed out that the current version of section 62 and the definition of “eligible relocation” in subsection 248(1) do not stipulate a specific time period within which a move must occur following the commencement of employment at a new work location. He cited the case of Beyette v Minister of National Revenue (89 DTC 701) in support.

As he wrote in his decision, there is no finite time period in which the move must occur:

If a move within one month of commencing such employment enables a person to be employed at that location, then a move within two months of commencing such employment would also enable the person to be employed at that location, as would a move within one year or two years and so on. Therefore the Appellant’s move in 2008 could be considered to have occurred to enable him to be employed, even though the employment commenced in 2004.

The CRA has not appealed the decision. However, since the case was heard under the informal procedure, it is not a binding precedent. The CRA sometimes continues assessing against informal procedure decisions, so the next claimant may also be required to appear before the Tax Court to get a similar result.

Lessons learned

In cases where an employer does not reimburse an employee for moving-related expenses, the employee may deduct otherwise eligible expenditures for income tax purposes as long as the move is at least 40 kilometres closer to the workplace. Based on this decision, there is no finite time period within which the move must occur.

We can help

If you move residences to be closer to your workplace, but don’t actually change employers, be sure to contact your Ernst & Young or Couzin Taylor advisor to see if you, too, can take advantage of the moving expense credit.

Tax Alerts – Canada

• 2012 Issue No. 09 - Yukon budget 2012–13
  Yukon Finance Minister Darrell Pasloski tabled the territory’s budget on 15 March 2012. The budget contains no new taxes and no tax increases. The minister anticipates a surplus of $37.8 million for 2011–12 and a surplus of $80 million for fiscal 2012–13.
• 2012 Issue No. 10 - Quebec budget 2012–13
  Quebec Finance Minister Raymond Bachand tabled his third budget on 20 March 2012. This pre-election budget contains no new taxes and no tax increases. The minister confirmed his objective of restoring budget balance in 2013–14. The deficit for fiscal year 2011–12 is expected to be $3.3 billion. The deficit forecast for fiscal 2012–13 is $1.5 billion.
• 2012 Issue No. 11 - Saskatchewan budget 2012–13
  Saskatchewan Finance Minister Ken Krawetz tabled the province’s budget on 21 March 2012. The budget contains no new taxes and no tax increases. The minister anticipates a surplus of $95 million for 2012–13.
• 2012 Issue No. 12 - Ontario budget 2012–13
  Ontario Finance Minister Dwight Duncan tabled the province’s budget on 27 March 2012. The budget contains no new taxes, but it does contain certain tax rate reduction freezes that will be significant for businesses.
• 2012 Issue No. 13 - New Brunswick budget 2012–13
  New Brunswick Finance Minister Blaine Higgs tabled the province’s budget on 27 March 2012. Although the budget contains no new taxes, it does provide for two targeted tax increases.
• 2012 Issue No. 14 - Federal budget 2012–13
  Federal Finance Minister Jim Flaherty tabled the budget on 29 March 2012. A number of new tax and tariff measures have been introduced that will raise $3.5 billion of new revenue over the next five years.
• 2012 Issue No. 15 - OETC unexpectedly eliminated in federal budget
  The 2012 federal budget proposes to phase out the overseas employment tax credit (OETC) over four years, beginning in 2013. This important tax credit helps Canadian companies enhance their ability to recruit skilled workers, and its elimination will likely increase the cost of doing business as companies look for ways to compensate.
• 2012 Issue No. 16 - Ontario budget shortens period for claiming retail sales tax refunds and rebates
  In its 2012 budget, Ontario introduced a proposal to shorten the retail sales tax refund and rebate periods. Applications will now have to be made by 31 December 2012, rather than within the four years from the payment date of the tax.
• 2012 Issue No. 17 - Nova Scotia budget 2012–13
  Nova Scotia Finance Minister Graham Steele tabled the provinc’s budget on 3 April 2012.

Publications

• Indirect Tax in 2012
  Our annual guide provides a high-level overview of changes in value-added tax, GST, excise duties, customs duties and environmental taxes around the world. This year, for the first time, we examine the changes we’re seeing around the world in more detail to identify key trends and their implications for global businesses.
• Government incentives: leveraging the lode
  In the March 2012 issue of CAmagazine, Ernst & Young Partner Susan Bishop and Senior Manager Terry Lavineway discuss how the extensive landscape of government incentives makes it difficult to focus on what’s worth chasing to bring value to your business, and to weigh the efforts of pursuing incentives against the competing demands on your people’s time running the business.
• The use of holding companies in the private business context
  In an article published in the Canadian Tax Journal (Volume 60, Issue No. 1, 2012), Ernst & Young Senior Manager Byron Beswick and Manager Beau Young note that planning involving holding companies requires careful analysis of the anticipated benefits and the potential risks and pitfalls, including attribution rules, stop-loss rules, and ever-changing federal and provincial tax rates, before a particular plan or structure is recommended.

Articles

• 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.