Information Requests from the CRA that make you go Hmm

Every year after income tax season, I can count on several clients calling to inform me they have received an information request from the Canada Revenue Agency (“CRA”). One of the most common requests is a request for back-up information in regard to child care expense claims made for nanny's employed by my clients.

The CRA states the following in the information request: “to support your claim, please provide the following information: Either receipts, cancelled cheques or your Business Number (if you have issued a T4 slip to a caregiver)”.

Each time a client who has employed a nanny receives such a request, I shake my head. That is because where my client has hired and paid a nanny for childcare services, they are required by law to issue the nanny a T4 and when my clients file their income tax returns and make their childcare claims, they must provide the nanny’s name and SIN# on the childcare Form T778.

One would think that rather than wasting taxpayer’s time and CRA resources, the CRA would simply just punch the nanny's name and SIN# into their computers to cross-check that the nanny has reported the income provided on their T4 on their income tax return. This would seemingly confirm (a) the taxpayer actually paid the childcare costs and (b) the nanny has reported the income.

I have asked CRA agents numerous times why the CRA undertakes the above process and does not simply cross-check the child care claim instead of wasting my client’s time and the CRA’s resources. All I get is I agree with you, I don’t know why.

Maybe there is a more nefarious reason for the information request; however, no one has yet been able to provide such a reason or maybe they are not willing to do so.

Another information request my clients constantly receive is a request to provide the tuition receipt form T2202a for Canadian students and the T11A form for foreign students, typically, students attending University in the United States.

Where a client has e-filed, I understand the request for support of the tuition claim.

However, for those few clients who still prefer to paper file and the numerous Canadians that still paper file, this request is another head scratcher (especially since it has been a common request for years, even before e-filing became the norm). Why these information requests make you go hmm is that the CRA specifically states that you should only complete schedule 11 and not attach the T2202a form to your income tax return. You would think that if the CRA is going to consistently ask for the form, they would just make it a requirement to attach the form to save both taxpayer’s and the CRA’s time and resources.

 I could go on, but I will let any reader who wishes to pipe in to add to this list of things the CRA does that makes you go hmm.

Financial Blogger Michael James recently set forth his views on CRA Processing Reviews in this blog post.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The Blunt Bean Counter Nominated for Plutus Award

I have just returned from an awesome Mediterranean cruise celebrating my 25th anniversary and in my jet lagged haze, today started reading through my favourite bloggers Friday Roundups.

I was somewhat shocked when Mark at My Own Advisor noted some Canadian blogs he knew that were nominated for Plutus Awards; The Blunt Bean Counter being one such blog. My blog was nominated in the category for the Best Tax-Focused Personal Finance Blog.

Being my usual oblivious self to the blogging world, I was not really aware of the Plutus Awards, which are an American based award handed out to the best blogs amongst North America’s community of personal finance and investing bloggers. The awards are handed out at the Financial Blogger Conference in Denver on September 6th.

I am the only Canadian blog in my category and I am thankful for the recognition.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Governance Issues Private Corporations need to Review on an Annual Basis

I recently asked a corporate lawyer acquaintance of mine (who wishes to remain anonymous) which legal issues he suggests my corporate clients review and discuss with their lawyer on an annual basis. According to the publicity shy lawyer, if you own shares in a private corporation or are responsible for corporate governance, you should ensure you consider the following issues each year:

Updating Annual Minutes, Including a Minute Book Review

Upon the completion and issuance of a client’s financial statements, my firm Cunningham LLP includes in our client financial statement package, a minute’s letter addressed to the client’s lawyers. This minute’s letter reflects the date the financial statements were issued, the type of accounting report (audit, review or notice to reader), whether any dividends were declared and any bonuses declared and/or paid.

If you have a keen eye, you will note I said we provide a letter addressed to the client’s lawyer, not that we send the letter to the lawyers directly. Several clients have informed us that they do not wish to pay to have their minutes updated yearly, so we let each client make their own decision about whether they want their minutes updated.

Our firm strongly urges clients to update their minutes; however, as noted above, many do not. Most lawyers recommend on the strongest possible terms, that clients have annual minutes prepared by their corporate lawyers and executed by all directors and shareholders each year as soon as possible.

If annual minutes are not prepared on a timely basis, the death of a director or shareholder, or the development of litigation initiated by minority shareholders, may make having such annual minutes executed impossible.

In the case of litigation, minority shareholders may use the oppression  remedy to demand an audit for any year for which an audit waiver has not been signed as part of the annual minutes. Minority shareholder litigation is often expensive and by having the minute book up to date, this minority shareholder tactic is muted.

In addition, if your minute book is up to date, you will avoid the potentially lengthy legal delays that can occur when you are taking on new shareholders, buying or selling all or parts of businesses, or obtaining financing, when the minute book has not been updated for several years.

Where there is any change in the registered office, shareholdings, officers, directors or their respective addresses, these changes need to be properly reflected in the minute book and/or notice of change filings required by law must be filed with the appropriate governmental authority within relatively short time periods after the occurrence of such changes.

One other reason to update minutes is that when you are audited, one item always requested by the Canada Revenue Agency’s (“CRA”) is your minute book. Thus, you want to ensure your minute books are up to date and are consistent with your financial statements.

Proper Registration of Trade Names and Trade Marks

The corporate lawyer informed me that clients often assume that because they have been using a certain trade name and/or logo for an extended period of time, that they automatically have certain exclusive rights with respect to the use of such trade name and/or logo. This assumption is not necessarily true. The lawyer told me you run the risk of “trademark trolls” stealing your name and/or logo. While you may have certain common law trade mark rights, the level of protection from a practical perspective is next to nothing, and is far less than if the trade mark was registered with the Canadian Intellectual Property Office. Hence, even relatively small companies of modest means should have proper registration of their business name and also, in most cases, the registration of their trade name and/or logo as a trade mark in Canada. In certain select instances, such registrations are also advisable in the United States or other parts of the world.

Employment or Independent Contractor Agreements

A very controversial item with the CRA is whether a person is an employee or an independent contractor. This issue has both payroll and income tax implications. Despite the contentiousness of this issue, many corporations operate their businesses without any planning for the substantial contingent liabilities they are accruing. If you are treating an individual as an independent contractor, and the CRA determines that they are an employee, there could be amounts owing with respect to termination notice periods and the potential wrongful dismissal damages flowing from such notice periods.

The lawyer told me that many private corporations have not considered whether the CRA would characterize any of their workers as employees, although they may have been treating such workers as independent contractors. Certain employment problems may be reduced, or in certain instances, entirely avoided by the proper use of employment agreements or independent contractor agreements. For example, a structured payout termination provision in an employment agreement will be of great assistance in avoiding a claim by a recently terminated employee for wrongful dismissal damages.

An additional benefit to the corporation is that, by participating in the exercise of reviewing the organizational structure of the corporation with the corporate lawyer on an annual basis and thereafter having employment or independent contractor agreements professionally prepared, the client is forced to consider many aspects of their relationship with their employees or independent contractors that they may not have otherwise considered, sometimes resulting in an alteration in the underlying relationship.

Doing Business Outside of your Province

Another potential issue is if a corporation does business outside of Canada, or in any Province other than their province of residence, the client may be required to register in such other Province or State. This matter requires review on a case by case basis and should be reviewed each year. A non-registered entity may not have legal standing in another province if they have not registered in that province.

If you own shares in a private corporation or are responsible for corporate governance, you should proactively consider the issues noted above on an annual basis.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Choosing The Right Investment Advisor- Book Giveaway

The five winners of a free copy of Carol Santamaura's Choosing The Right Investment Advisor book Giveaway are:

John P.
Pat W.
Mike E.
July I.
John B.

You will be contacted shortly for your address information.

Thanks for all the entries.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Tax Tidbits- From Online Poker to the Residence of Offshore Trusts

Many Canadians partake in online gambling, in particular, online poker. Therefore, today I thought I would review some recent comments made by the Canada Revenue Agency (“CRA”) in regard to whether online poker earnings are taxable. In addition, I will briefly discuss a very significant Supreme Court of Canada decision that deals with the determination of the residency of trusts.

Online Poker

For you online poker players out there, the CRA was recently asked if income from playing poker online is taxable under the Income Tax Act.

The CRA responded in a technical interpretation (unfortunately, I have no link) that in general, online poker earnings are taxable only when earned from a business in the pursuit of profit. As with almost any CRA answer, there is always the caveat “that it is a question of fact” as to whether the poker profits related to a business.

Interpretation Bulletin IT-334R2 “Miscellaneous Receipts” discusses some of the factors to be considered in making the determination as to whether gambling winnings will be considered profits from a business. The CRA states:

“..an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; The issue of whether or not an individuals activities are such that he or she can be considered to be carrying on a gambling business is a question of fact that can be determined only by an examination of all of the circumstances and the taxpayer's entire course of conduct. Although no one factor may be conclusive, the following criteria should be considered in making the determination:

(a) the degree of organization that is present in the pursuit of this activity
by the taxpayer,

(b) the existence of special knowledge or inside information that enables the
taxpayer to reduce the element of chance,

(c) the taxpayer's intention to gamble for pleasure as compared with any
intention to gamble for profit as a means of gaining a livelihood, and

(d) the extent of the taxpayer's gambling activities, including the number and
frequency of bets.”

I would suggest that in respect to point (c) above, if a person has a full-time job, but plays online poker as a “hobby” at night, that would tend to be indicative that the income is not meant to provide a livelihood. However, if someone plays online poker all day and does not have a full-time job, that would tend to indicate that their online poker earnings are their way of making a living and thus is a business. Conversely, if you haven’t been successful in your on-line gambling activities, it will likely be very difficult to show that these losses are losses from a business and therefore deductible.

For a more detailed look at the issue, you may wish to download this paper on The Taxation of Poker Winnings in Canada by Benjamin Alarie.

Residency of Trusts

Wealthy Canadians have been utilizing offshore entities in tax havens for years in an effort to reduce their taxes. The CRA has been chipping away at the use of these types of entities in recent years by making it more and more difficult and burdensome to maintain, report and administer these entities. From subjecting Canadian taxpayers to foreign reporting requirements (for example, forms T1135, T1134A and T1134B) to never ending Canadian legislative changes applicable to non-resident trusts and foreign investment entities, the CRA has been able to preserve some of its tax base by making it less attractive to move money offshore. Most recently, the CRA challenged the conventional wisdom on the residency of a trust in a case, St. Michael Trust Corp v. The Queen (also known as Garron and Fundy Settlement v. The Queen).

Offshore planning often utilizes foreign trusts because for tax purposes, a trust is taxable as a separate person. In addition, pursuant to a 1978 case, Thibodeau Family Trust v. The Queen, it had been held that the residency of the trustees determines the trust’s residency for purposes of the Income Tax Act. In the Thibodeau case, the court held that a trust was a resident of Bermuda and not Canada because the majority of the trustees were resident at all material times in Bermuda and the trust agreement only permitted a majority decision on all matters of trustees’ discretion.

The court’s findings in the Thibodeau case (and the CRA’s acceptance of the Thibodeau decision) lead to many Canadians setting up offshore trusts, often in Barbados, with local trustees who were in many cases just paid to be trustees in order for the trust’s residency to be classified as offshore (i.e. non-Canadian).

However, as mentioned above, recently the Supreme Court of Canada accelerated the CRA’s chipping away process by taking a sledgehammer to Thibodeau. In Garon (aka St. Michael Trust Corp.), the Supreme Court of Canada dismissed the principle that a trust was resident where the majority of trustees resided and replaced it with a test for determining residency based on where the exercise of the central management and control actually takes place.

This decision has implications for offshore trusts as well as trusts that have been set-up out of province. For example, many Ontarians have set-up trusts in Alberta (to take advantage of the lower tax rate in Alberta) with local Albertan trustees, while the management decisions are made and control of the trust is held by an Ontario resident, who may be one of a number of trustees, one of the beneficiaries and/or the settlor.

For more details, you may with to read this article by Vern Krishna in the Financial Post or this KPMG TaxNews Flash.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.