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Table of Contents
 
Also by Tim Cestnick
Title Page
Copyright Page
Dedication
Acknowledgements
Tax Planning Tip Sheet
Foreword
Discouraged? Why Be Discouraged?
Get in the Game
Making It Easy
Calling All Hitters
CHANGES MAKING THE HEADLINES
 
Chapter 1 - PRE-GAME WARM-UP: THE BASICS OF TAX PLANNING
 
Playing by the Rules
Knowing the Numbers Game
Timing Your Taxes
Fighting When You’re Right
 
Chapter 2 - HOME TEAM ADVANTAGE: TAX PLANNING FOR THE FAMILY
 
Splitting Family Income
Educating the Family
Heading for Home
Claiming Family Care Costs
Surviving Separation and Divorce
 
Chapter 3 - SIGNING WITH THE TEAM: STRATEGIES FOR EMPLOYEES
 
Optimizing Employment Benefits
Claiming Employment Deductions
Driving Automobiles on the Job
Deferring Compensation
Calling It Quits
 
Chapter 4 - BECOMING A FREE AGENT: STRATEGIES FOR SELF-EMPLOYMENT
 
Jumping on the Bandwagon
Choosing Your Business Structure
Claiming Business Deductions
Adding Up the Tax Hits
 
Chapter 5 - BULLS, BEARS, AND BASEBALL: STRATEGIES FOR INVESTORS
 
Investing in a Tax-Smart Manner
Understanding Tax-Smart Strategies
Sheltering Income with Life Insurance
Borrowing to Invest: Leveraging
 
Chapter 6 - EARNING THE GOLD GLOVE: STRATEGIES FOR RETIREMENT
 
Understanding RRSP Basics
Contributing to Your RRSP
Withdrawing from Your RRSP
Benefiting from RRIFs and Annuities
Understanding Registered Pension Plans
 
Chapter 7 - AMERICAN LEAGUE RULES: UNITED STATES’ CONNECTIONS
 
Reporting Your U.S. Income
Profiting from U.S. Real Estate
Cutting Your Gambling Losses
Staying Canadian
Considering U.S. Estate Taxes
 
Chapter 8 - A LEAGUE OF THEIROWN: PROVINCIAL TAX ISSUES
 
Walking to a Different Drummer
 
Chapter 9 - BOTTOM OF THE NINTH: PLANNING FOR YOUR ESTATE
 
Knowing What to Expect
Giving It Away Today
Giving It Away at Death
Providing Tax-Free Death Benefits
Planning for U.S. Estate Taxes
 
Glossary of Abbreviations
TAX FACTS
WATERSTREET
Index
ABOUT THE AUTHOR

Also by Tim Cestnick
A Declaration of Taxpayer Rights
Your Family’s Money
Death & Taxes
Winning the Education Savings Game
Winning the Estate Planning Game
The Tax Freedom Zone
Winning the Tax Game

001

Dedication
 
I dedicate this book to my wife, Carolyn, my son Winston (my Big Guy), my daughter Sarah (my Sweet Pea), my son Michael (my Little Guy), and Ginger, our dog.

Acknowledgements
There is something about reaching the twelfth anniversary of this book that makes me feel old. Okay, maybe old isn’t the right term. Let’s try seasoned. You know, experienced. It’s sort of like having a child who is on the cusp of their teen years. Actually, my son Win will be there soon. A lot has changed in the world of tax planning since the first edition of this book. In fact, a lot changed in 2009. The good news? This book reflects those changes.
It’s always the case that the people around me make me better at what I do. And this book is better today because of the work they do. We share challenges, ideas and develop strategies together. This book reflects some of those. I’m thinking specifically of my staff at the WaterStreet Group Inc.—a group of CAs, lawyers, CFAs, MBAs and CFPs who all “know their stuff.” I’d like to thank Leigh Vyn, Michael White, Audrey Robinson, Jacob Kim, Jeremy Nicholls and Mike Stulp. I’d also like to thank Mike Kray for the thought-provoking dialogue we regularly engage in. This is a high-octane group of professionals I can turn to for assistance. I must also thank my assistant, Kathy Stradwick, for being so organized that I can’t miss a deadline—although I often try.
I would also like to thank the staff at John Wiley and Sons Canada, Ltd. who have shown confidence in me as a financial professional and author. In particular I want to thank Karen Milner and Robert Harris for their enthusiasm and support in this work.
Finally, I want to thank my wife and kids. Carolyn continues with a willingness to see me locked away to work on this book and other things, and to be the brunt of many embarrassing—but mostly true—stories that I write in my regular column in the Globe and Mail. My kids also deserve a medal for the time I have spent away from them to work on this book.

Tax Planning Tip Sheet
This Tax Planning Tip Sheet has been designed to simplify your tax planning. It lists all the tax-saving tips that I discuss throughout the book. Start by reading a chapter, then come back here to review the tips for that chapter. For each tip, simply answer the question: Can this apply to me? That is, even though a strategy may not currently apply to your situation, can you make changes to your life to permit you to apply the strategy? Check Yes next to those strategies that either apply or could apply if you were to make certain changes to your life—your Fact Situation. If you’re not sure about a strategy, check Not Sure. Once you’re done, take a closer look at the Yes and Not Sure answers. These strategies will form the foundation of your tax plan.
Don’t worry about putting all the ideas into practice in a single year. It’s not going to happen. Choose up to four to implement this year. Keep the other ideas on file and think about setting them in motion next year or the year after. And by the way, I highly recommend that you visit a tax pro with your Tax Planning Tip Sheet, just to make sure you’re on the right track. A tax professional will help you to do things right.
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FOREWORD:
STEPPING UP TO THE PLATE
If you want to win the game, you’ve got to step up to the plate.
 
 
Let me tell you about Renee. She visited my office for the first time not long ago. And from the moment she sat in the chair across from me, even before she said a word, I assumed two things. First, I assumed that she was feeling the weight of a tax burden that only Canadians can truly understand. Second, I assumed that she was in my office to learn what she could do to fix the problem. I was only half right.
While it was true that Renee was discouraged about the level of taxes she had come to expect as a Canadian taxpayer, she wasn’t in my office to learn how to lighten the load. The fact is, Renee and her husband Gerrald had already decided to leave Canada, and they were looking for me to explain the tax implications of making the move.
I couldn’t resist asking the question: “Renee, before we talk about leaving the country, what is it that you and your husband have done in the last couple of years to save income taxes?” Her response didn’t surprise me.
“Tim, there’s really nothing we can do. We’re claiming the $2,000 pension credit and a deduction for our safety deposit box fees. But big deal—these things save us next to nothing each year.”
You see, this couple had come to the conclusion that their only hope for a prosperous retirement was to get up and leave Canada. Given their net worth, level of income, and our Canadian tax burden, Renee and Gerrald were convinced that they were bound to run out of retirement savings before running out of retirement.
Here was a woman who was truly discouraged. You could see it in her eyes. It was as though someone had left her a hundred kilometres from shore in a canoe without a paddle. If you had checked the dictionary on that day under the word “discouragement,” you might have found the family’s name with a picture of Renee and Gerrald.

Discouraged? Why Be Discouraged?

It was the day after my meeting with Renee that I learned a lesson about discouragement—and from an unlikely source, I might add. I was driving down Lakeshore Road in Oakville, Ontario, where I grew up, and I saw some kids playing baseball at Bronte Park. I grew up playing baseball at that same park, and I was reminiscing a little, so I got out of my car and walked over to the baseball diamond.
The kids were having a great time. They were laughing and cheering. They were even shouting the same insults that we used to shout as kids. You know, things like: “Batter needs a beach ball” and “Pitcher has a rubber nose, wiggles every time he throws.” The point is, you couldn’t find a glum face at that park.
I leaned over and asked one of the kids what the score was. A little boy smiled up at me and said, “Fourteen-nothing!” Impressed, I replied, “Fourteen-nothing, that’s great, you’re killing them!” “Nope,” the boy corrected me. “We’re losing fourteen-nothing!” Surprised me for sure. From the way the kids were laughing, you’d never know they were down for the count. I had to ask the question: “If you’re losing fourteen-nothing, how come you’re so happy? Why aren’t you discouraged?”
I’ll never forget what that little boy said next: “Discouraged? Why should we be discouraged? We haven’t even been up to bat yet.”
Good point. There’s no use being discouraged if you haven’t been up to bat.
Renee and Gerrald are like many Canadians: They had not yet stepped up to the plate.
If you want to save significant tax dollars, you’ve got to step up to the plate.

Get in the Game

It’s frightening to think of how many Canadians have done little or nothing to reduce their income taxes. Here’s what I mean: According to Statistics Canada, just 34.5 percent of taxpayers who were eligible to contribute to RRSPs in 2006 (the most recent year for which data is available) actually contributed. This means that almost two-thirds of Canadians who could have contributed did not bother. These stats don’t faze you? Try this on for size: There was $330 billion in available RRSP contribution room in 2006, and Canadians contributed just $28.8 billion to RRSPs in that year. Yikes! Do you think that Canadians who are not even putting money into their RRSPs are likely to implement other, more intricate, tax planning strategies? Don’t count on it.
You should realize that the odds are against you. Seventy percent of the people who read this book cover to cover will simply file the information in a drawer at the back of their mind labelled “interesting tax stuff.” Thirty percent will actually use the information to create tax savings. If you’ve read this far, then you’ve shown up at the ball park. The question is, will you choose to be part of that 30 percent who actually get into the game?

Making It Easy

I’ve made it very easy to get into this game we call tax planning. Throughout this book, you’re going to find tip after tip of good tax ideas. I want to encourage you to make note of more than simply the strategies that apply to you today. While you’ll certainly want to implement those strategies, I’d like you to also consider those strategies that could apply if you were to make certain changes to your life. For example, you may otherwise choose to ignore Chapter 4 since you’re not currently self-employed. But rather than bypassing the tips in that chapter, I’d like you to consider making certain changes to your life—your Fact Situation—to allow you to implement some of those strategies. Perhaps part-time self-employment makes sense for you.
This approach is the result of my belief that you can save much more tax over the long run if you’re willing to make certain changes to your life. This is really the theme of my book The Tax Freedom Zone, which explains how to go beyond paying the least amount of tax you’re currently required to pay and shows you how to pay even less. I call this moving into the Tax Freedom Zone.
At the front of this book, you’ll find your own Tax Planning Tip Sheet, listing all the tax-saving tips from each chapter. As soon as you’ve read a chapter, flip to the front of the book and review the tips for that chapter. Ask yourself, “Can this tip apply to me?” Then check ❍ Yes, ❍ No, or ❍ Not Sure for each tip. Follow me? When you’ve finished this book, all those Yes and Not Sure answers on your Tip Sheet will form a complete list of tax-saving measures, ready for your use or further research. A visit to a tax pro will often make sense once you’ve finalized your list.
There’s one more thing to keep in mind: Tax rules are always changing. The advice I offer here is current as of October 31, 2009. A good tax pro will be able to bring you up to date on late-breaking developments from the Department of Finance or the Canada Revenue Agency (CRA).

Calling All Hitters

Have you heard of Charlie Grimm? Charlie was a baseball manager—he used to manage the Chicago Cubs. There’s a story about a scout who called Charlie up one day. The scout was so excited he could hardly utter the words. “Charlie! I’ve just discovered the greatest young pitcher I have ever seen! I watched him pitch a perfect game. He struck out every man who came to bat. Twenty-seven stepped up to the plate, and twenty-seven struck out! Nobody even hit a foul ball until the ninth inning. I’ve got the kid right here with me. Do you want me to sign him?”
“No,” replied Charlie. “Find the kid who hit the foul ball in the ninth inning and sign him. I’m looking for hitters.”
Charlie Grimm was looking for hitters. And so am I. With these pages, I’m going to get you off the bench and put a bat in your hands.
But remember: If you want to win the tax game, you’ve got to step up to the plate.

CHANGES MAKING THE HEADLINES
In the world of tax, change is the only constant.
 
 
If you’re looking for a quick summary of what’s changed in Canadian tax rules in the past year, you’ve come to the right place. Here’s a summary of key changes and proposed changes up to October 31, 2009. Some of these were introduced in the federal budget of January 27, 2009, but some changes relate to press releases, government pronouncements, or court cases. Keep in mind that proposed measures are generally enforced by the Canada Revenue Agency (CRA) even before they’re passed into law.
Topic What’s New
Tax Calculations
Federal tax brackets and rates Federal tax brackets for 2009 were adjusted upward by an amount greater than inflation, which is a welcome change. The brackets for 2009 are: $40,726 ($37,885 in 2008); $81,452 ($75,769 in 2008); and $126,264 ($123,184 in 2008). The tax rates that apply to these brackets remain unchanged for 2009 at the following percentages: 15, 22, and 26 percent respectively. The rate on taxable income over $126,264 remains at 29 percent. (See the federal personal tax rates table on page 303.)
Basic personal credit The basic personal amount for 2009 has been increased to $10,320 ($9,600 in 2008). The basic personal credit is 15 percent of this amount for 2009.
Other personal credits The following personal credits for 2009 were indexed upward (generally by 2.5 percent) and are based on the following amounts: Spouse and eligible dependant amounts - $10,320 ($9,600 for 2008); child tax credit - $2,089 ($2,038 for 2008); age amount - $6,408 ($5,276 for 2008); disability amount - $7,196 ($7,021 in 2008); supplement to disability amount - $4,198 ($4,095 in 2008); caregiver and infirm dependants amounts - $4,198 ($4,095 in 2008); and the Canada employment amount $1,044 ($1,019 in 2008). The actual credit in each case is 15 percent of the respective amount for 2009. Also new for 2007 and later years: The threshold above which a dependant’s income will cause a clawback of the spousal and eligible dependant amounts has been eliminated so that the clawback applies from the first dollar of the dependant’s net income.
Family Care
Canada Child Tax Benefit The amount of the Canada Child Tax Benefit (CCTB), National Child Benefit (NCB) Supplement, and the income threshold at which these benefits are clawed back was increased effective July 1, 2009. The basic CCTB base amount has been increased to $1,340 ($1,307 in 2008) for the first child, and the NCB Supplement has been increased to $2,076 ($2,025 in 2008) for the first child. See Tip 22 for more.
Home Measures
Home Renovation Tax Credit (HRTC) The 2009 federal budget introduced a non-refundable tax credit worth 15 percent of all eligible home renovation expenditures. The HRTC will apply to expenditures made after January 27, 2009, and before February 1, 2010, in excess of $1,000 but not more than $10,000. And so, the maximum tax relief will be $1,350 ($9,000 x 15%). Family members will be subject to a single limit, but two or more families that share ownership of an eligible dwelling will each be entitled to their own credit. An eligible housing unit is any place that qualifies to be designated as a principal residence, including a house, condo, cottage, mobile home, trailer, live-aboard boat, including any of these in a foreign jurisdiction. Sorry, but routine repairs and maintenance don’t qualify for the credit, nor do appliances or audiovisual electronics, or financing costs. But the list of eligible expenditures is long, and includes costs related to land around your residence (examples include renovating a kitchen, bathroom, or basement; new carpet or hardwood floors, building an addition, deck or fence; a new furnace; a new driveway; painting of the interior or exterior of a residence). For more information, go to www.cra.gc.ca and type “HRTC” into the search field.
Home Buyer’s Plan You may be able to make a tax-free withdrawal from your registered retirement savings plan (RRSP) to help in purchasing a first home. The withdrawal limit was increased from $20,000 to $25,000 after January 27, 2009, thanks to the 2009 federal budget.
First-Time Home Buyers’ Tax Credit The 2009 federal budget introduced a new non-refundable tax credit based on $5,000 (so the tax credit is 15% x $5,000 = $750) for first-time home buyers who acquire a qualifying home after January 27, 2009. You’ll be considered a first-time home buyer if neither you nor your spouse or common-law partner have owned and lived in another home in the calendar year of purchase or in any of the four preceding calendar years. Where more than one individual is entitled to the tax credit (where two individuals jointly purchase a home, for example) only one credit will be allowed. Any unused portion of this tax credit can be claimed by a spouse or common-law partner. Finally, if you’re eligible for the disability tax credit, you may be eligible for this tax credit even if you’re not a first-time home buyer.
Eco-Energy Retrofit Program This is not an income tax issue, but it could put dollars back in your pocket, and may relate to home renovations you might be undertaking. Basically, the Canadian government is offering cash back to homeowners who undertake certain “green” or “eco-friendly” renovations to their homes. The amount of the grants varies depending on the changes you’re making to your home. The types of renovations or changes that qualify are broad and varied. Check out www.ecoaction.gc.ca for more information.
Disability Measures
Child Disability Benefit The Canada Child Tax Benefit has three components: the CCTB base benefit, the National Child Benefit (NCB) supplement, and the Child Disability Benefit (CDB). The CDB is payable in respect of children in low- and modest- income families who meet the eligibility criteria for the disability tax credit. The maximum annual CDB is increased to $2,455 ($2,395 in 2008). The phase-out of CDB benefits will begin at $40,726 in 2009 ($37,885 in 2008), at the rate of two percent of income over that amount, for one eligible child.
Registered Disability Savings Plan (RDSP) Certain provinces announced in 2009 that assets held in a RDSP will not affect the calculation of income support benefits paid by those provinces to people with disabilities. Specifically, British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Newfoundland and the Yukon made this announcement.
Employment Measures
Automobile limits The ceiling on the cost of a vehicle for purposes of capital cost allowance remains at $30,000 plus federal and provincial taxes for 2009; the limit on deductible lease costs remains at $800 per month plus taxes, and the limit on interest deductions on amounts borrowed to buy a vehicle remain at $300 per month. The limit for deductibility of tax- exempt allowances paid by employers to employees remains at $0.52 per kilometre for the first 5,000 kilometres, and $0.46 per kilometre thereafter ($0.56 and $0.50 respectively for the Yukon, Northwest Territories, and Nunavut). Finally, the general prescribed rate to determine the taxable benefit relating to the personal portion of vehicle operating expenses paid by employers remains at $0.24 per kilometre for 2009. See Tips 31 and 32 for more.
Taxable Employee Benefits The CRA changed its administrative policy in 2009 with respect to certain taxable employee benefits:
Overtime meals and allowances: Starting in 2009, where an employer provides a meal or meal allowance, it will not be a taxable benefit to the employee if: (1) the value of the meal or allowance is reasonable (generally less than $17 per meal), (2) the employee works two or more hours of overtime right before or after his or her scheduled hours of work, and (3) the overtime is infrequent and occasional (generally less than three times per week). It used to be that CRA required three or more hours of overtime, and it wasn’t clear what a “reasonable” allowance meant.
Municipality and metropolitan area: Starting in 2009, CRA will accept that employer-provided allowances paid for travel within the municipality or metropolitan area in which the employee works may be excluded from the employee’s income if the allowance is paid primarily for the employer’s benefit, as opposed to being an alternate form of compensation.
Loyalty programs: Starting in 2009, CRA will no longer require loyalty program points (such as frequent flyer points) earned on the employee’s credit card but related to business expenses to be included in income, provided: (1) the points are not converted to cash, (2) the plan or arrangement is not indicative of an alternate form of remuneration, or (3) the plan or arrangement is not for tax avoidance purposes.
Employer-provided vehicles: the CRA now provides relief to employees who have employer-provided vehicles where the employer requires the employee to use the vehicle for business use only. By implication, the employee must have their own vehicle for personal use. In this case, the ugly stand-by charge that normally applies will not apply (see Tips 31 and 32).
Non-cash gifts and awards: Starting in 2010, employees can receive, tax-free, non-cash gifts and awards of up to $500 in aggregate in a year (it used to be that $500 in non-cash gifts plus another $500 in non-cash awards was available). In addition, a separate tax-free non-cash award for long service of up to $500 is available to employees (not more frequently than every five years). Finally, gifts and awards that are cash or near-cash (such as gift certificates) are taxable to the employee; employees that are non-arm’s length to the employer are not eligible to receive these non-cash gifts and awards, and gifts of an immaterial value (such as company t-shirts, mugs, plaques, etc.) are not taxable to the employee.
Surface transit passes: Starting in 2010, free or discounted transit passes provided to employees of transit businesses will be tax-free if the passes are for the employee’s use only. Free or discounted passes for family members of employees will be taxable to the employee (not so in prior years). Finally, passes provided to employees who work in functions separate from the transportation operations of these businesses will be taxed on the value of the passes.
Retirement Issues
RRSP and Pension Limits A prior federal budget introduced changes that increased contribution limits to registered pension plans (RPPs), registered retirement savings plans (RRSPs), and deferred profit sharing plans (DPSPs). For money purchase RPPs, the annual contribution limit for 2009 and 2010 respectively are as follows: $22,000, and indexed to inflation thereafter. For defined benefit RPPs, the maximum pension benefit per year of service is $2,444 for 2009, and indexed thereafter. RRSP annual contribution limits for 2009 through 2011 respectively are: $21,000, $22,000, indexed thereafter.
Reduced RRIF Withdrawals Since the last publication of this book, CRA had announced that, for the 2008 tax year, RRIF annuitants could have reduced the minimum amount required to be withdrawn for the 2008 tax year by 25 percent, or could have re-contributed an amount to reflect the reduced withdrawal requirement. Annuitants had until April 14, 2009, to make a re-contribution.
RRSP Losses After Death The 2009 federal budget introduced a measure that will allow decreases in the value of an RRSP or RRIF after an individual’s death to be carried back and deducted against the amount included in the income of the deceased individual in respect of that RRSP or RRIF. The amount carried back will generally be the difference between the amount of the RRSP or RRIF included in the income of the deceased person as a result of their death, and the total of all amounts paid out of the RRSP or RRIF after the death of the annuitant. This provision will apply where the final distribution from the RRSP or RRIF occurs after 2008.
Investment Measures
Tax-Free Savings Account (TFSA) The 2008 federal budget introduced the Tax-Free Savings Account (TFSA). Starting in 2009, Canadian residents age 18 or older are entitled to contribute up to $5,000 annually (indexed after 2009) to a TFSA. The contributions will not be deductible (as with an RRSP), but income earned in the TFSA will be tax free. In addition, there will be no tax on any amounts withdrawn from a TFSA. The contribution room will be cumulative and can be carried forward indefinitely. Any amounts withdrawn can be added to the contribution room available, so that you can “re-contribute” at a later date those amounts withdrawn. On October 16, 2009, the Department of Finance announced some changes to the TFSA rules to prevent three particular abuses: (1) deliberate over-contributions, (2) asset transfers from registered and non-registered plans, and (3) the holding of prohibited or non-qualified investments in TFSAs. See Tip 55 for more on TFSAs and these changes.
Taxation of Dividends In the fall of 2007, the Department of Finance announced reductions to general corporate taxes payable, to 15 per cent through 2012. As a result, the 2008 federal budget proposed to bring the dividend gross-up and dividend tax credit (DTC) in line with the reduced level of general corporate income tax payable. These changes are worth reviewing again for 2009 since they impact 2009 and later years. On an “eligible divided,” the gross-up amount will be as follows: 2008 and 2009 - 18.9655%; 2010 - 17.9739%; 2011 - 16.4354%; later years - 15.0198%. And, on an “eligible dividend,” the gross-up will be as follows: 2008 and 2009 - 45%; 2010 - 44%; 2011 - 41%; and later years - 38%.
Mineral Exploration Tax Credit The 2006 federal budget re-introduced the mineral exploration tax credit for flow-through share agreements entered into on or after May 2, 2006 and before April 1, 2007. This credit has been extended to flow-through share agreements entered into on or before March 31, 2010. This extension has become something of an annual event.
Foreign Investment Entities and Non- Resident Trusts It has been a few years since the first introduction of new rules around Foreign Investment Entities and Non-Resident Trusts. Those proposed rules have been revised a few times. The rules are intended to ensure that Canadian residents do not defer tax on investment income earned outside of Canada through foreign entities and trusts. The draft rules are now effective for tax years after 2006. The details of these pro posed rules are beyond the scope of this book, but you’ll find a good summary of them at PricewaterhouseCoopers’ website: www.pwc.com/ca/taxmemo. Look for the tax memos: “New Rules for Foreign Investment Entities” and “New Rules for Non-Resident Trusts” (February 2007). The government has reiterated its intention to enact these changes introduced in the past.
Specified Investment Flow-Through Entities “Specified Investment Flow-Through” trusts and partnerships (SIFTs)—publicly traded income trusts (including business and energy trusts) and partnerships—are subject to draft legislation introduced on July 14, 2008 which permits SIFTs to convert to a taxable Canadian corporation without any negative tax implications for the SIFT or its unitholders. These rules are temporary in that they apply to transactions that occur on or after July 14, 2008 and before 2013 by a trust that was, before July 15, 2008, a SIFT and, to a real estate investment trust (REIT) or a trust of which the only beneficiary is a SIFT or a REIT. More specifically, the rules allow for the SIFT to wind-up into a taxable Canadian corporation, or alternatively, to distribute shares of an underlying Canadian corporation to its unitholders without tax consequences.
Charitable Issues
New Registered Charity Information Return This won’t impact individuals per se, but if you’re involved with a registered charity, you should be aware that CRA has developed a new information return that registered charities are required to complete annually. A package is available from CRA on their website containing new Form T3010B, Form T1235, and Form T1236. The new forms must be used when filing annual information returns for fiscal periods ending on or after January 1, 2009.
Disbursement Quota Rules On November 28, 2008, CRA announced new rules whereby all charities must spend 3.5 percent of the value of their property not used directly in charitable activities or administration (unless this value is $25,000 or less, in which case the 3.5 percent quota will not apply). It used to be that this 3.5 percent disbursement quota applied only to charities that were “foundations.” Starting in 2009, this will apply to all charities, including charitable organizations.
Canadian Athletes
Amateur Athletic Trusts On December 29, 2008 the Department of Finance introduced legislation to allow eligible Canadian amateur athletes to defer income tax on income from endorsements, prizes, and other remuneration. This applies to athletes who are eligible to compete in international sporting events. The income can be contributed to a qualifying account and taxes will be deferred until the earlier of the date of distribution to the athlete or eight years after the last year in which the athlete was eligible to compete as a Canadian national team member.
Administrative Issues
CRA Call Agents On May 19, 2009, the Minister of National Revenue announced a new policy that will allow taxpayers who call CRA for information to find out the identity of the CRA call agent on the phone. This is helpful to ensure that, if you need to follow-up on a previously discussed issue, you know who you were dealing with. In addition, if CRA ever calls you, you can ask for the proper identification number of the caller to verify he or she really does work for CRA. The employee will have an I.D. number and a regional suffix that can be requested. The number, for example, might look like 12345QC, for a call at the Quebec region call centre.
Business Measures
Online Earnings On July 30, 2009, CRA reminded Canadians that the income they earn online is taxable. As a result of a Federal Court of Canada decision, eBay Canada has provided the CRA with the names of certain eBay sellers as well as their contact information and sales records. CRA can use this to determine if the eBay sellers have properly reported their income. The audits that result from this information were to have begun at the end of the summer 2009.
General Corporate Tax Rate and Surtaxes Previous announcements by the government will reduce the general corporate income tax rate (after the 10 percent provincial abatement) to 15 percent by 2012. Specifically, the rate will be reduced to the following rates on January 1st of the following years: 19 percent (2009), 18 percent (2010), 16.5 percent (2011), and 15 percent (2012). Also, the elimination of the 1.12 percent corporate surtax took place January 1, 2008 for all corporations (as announced in the 2006 federal budget).
Small Business Limit and Tax Rate The annual amount of taxable income eligible for the Small Business Deduction—generally referred to as the “Small Business Limit”—was increased in the 2009 federal budget to $500,000 federally (up from $400,000). This change is effective as of January 1, 2009. This deduction provides a reduced effective tax rate on the first $500,000 of active business income of Canadian Controlled Private Corporations.
Enhanced Capital Cost Allowance (CCA) The 2008 federal budget proposed a temporary 50 percent straight line accelerated CCA rate for eligible machinery and equipment acquired on or after March 19, 2007 and before 2010. The 2009 federal budget extends this deadline to machinery and equipment acquired before 2011. In addition, the 2009 federal budget announced a temporary 100-percent CCA rate for eligible computers and software (currently described in Class 50) acquired after January 27, 2009 and before February 2011. This includes most types of computer and ancillary equipment, with some exceptions. The 100-percent rate also applies to assets currently included in Class 29 that would otherwise be described in Class 50.
Electronic Filing Corporations that have annual gross revenues in excess of $1 million for a taxation year will generally be required to file their income tax returns in electronic format for taxation years that end after 2009. Also, certain other information returns (such as T4 or T5 summaries) will have be filed electronically where the number of T4s T5s or similar slips exceeds 50 (formerly 500). This is required for returns filed after 2009.
Sales Tax Harmonization The federal government is committed to harmonizing the GST and provincial sales taxes as the provinces agree to this harmonization. Ontario and British Columbia move to a combined Harmonized Sales Tax (HST) effective July 1, 2010. These provinces will join New Brunswick, Nova Scotia and Newfoundland who adopted the HST in years past.
Court Decisions
Debt Restructuring The Supreme Court of Canada (SCC) rendered a decision in the case Lipson v. Canada, on January 6, 2009. In this case, Mrs. Lipson borrowed about $560,000 from the bank and used the funds to purchase shares from her husband in a private company that he owned. Now, since she was borrowing to purchase shares, she was entitled to a deduction for her loan interest. Next, Mr. Lipson used the $560,000 to purchase a home for the couple. Immediately after purchasing the home, Mr. and Mrs. Lipson borrowed another $560,000 secured by the home, and paid back the original loan that had been taken out by Mrs. Lipson. Mrs. Lipson was entitled to a tax deduction for the interest on her initial loan since she used the money for an income-producing purpose. Then, when that loan was paid off, the interest on the replacement loan was also deductible since subsection 20(3) of our tax law allows this when the interest had been deductible on the original loan. So far, so good. Next, there was no tax on the sale of the shares by Mr. Lipson to Mrs. Lipson. You see, transfers between spouses are always deemed to have taken place at adjusted cost base, not fair market value, unless you elect otherwise. Mr. Lipson did not opt out of subsection 73(1) of our tax law, and therefore the sale took place at his adjusted cost base, and no tax was owing. Finally, when assets are transferred between spouses at adjusted cost base instead of fair market value, the attribution rules (section 74.1 of our tax law) will apply so that all income and losses on the assets (the shares transferred to Mrs. Lipson in this case) will be attributed back to the transferor (Mr. Lipson). The bottom line? The interest costs paid by Mrs. Lipson, which represented a loss to her, were attributed back to Mr. Lipson. That’s right, Mr. Lipson claimed the deduction, not Mrs. Lipson. The SCC didn’t appreciate the transfer of the interest from Mrs. Lipson to her husband, and applied the general anti-avoidance rule (GAAR) as a result of this “abusive” transfer. The good news, however, is that the SCC did suggest that the interest deduction itself, which arose on the debt restructuring, was just fine; it’s just that Mrs. Lipson should have been the one to claim it. The Lipson case, then, lends credibility to the idea that restructuring debt in order to make interest costs deductible is fair game in tax planning. This is the silver lining in this cloud.
Moving Expenses In the case Trigg v. The Queen, the Tax Court of Canada (TCC) ruled that car rental expenses incurred to drive from Alberta back to Quebec to facilitate the sale of the house in 2006, after moving to Alberta in 2005, were eligible moving expenses. The trip was required to remove asbestos in the Quebec home and replace it with insulation - a condition of the sale. In a prior case, Faibish v. The Queen, the court disallowed the cost of removing mould from, and repairs to, the old residence prior to its being listed for sale, since these repairs were not a condition of the sale.
In another case, Gelinas v. The Queen, the taxpayer was employed part-time in the Oshawa hospital on the seventh floor. She was offered a full-time position in the same hospital on the sixth floor. As a result, she moved from her old residence which was 62 kilometres from the hospital to a new residence which was only a few kilometres from the hospital. CRA disallowed the moving costs on the basis the there was not a new work location.
The taxpayer won this case. The court noted that there was a change in work status from part-time to full-time and from the seventh floor to the sixth floor, even though the location was the same. The requirements for moving expenses were technically met.
Finally, there are two court decisions that support the notion that there should not be a time restriction when defining “moving expenses” or “eligible relocation.” In the case Moodie v. The Queen, the taxpayer incurred moving expenses in 1997 but did not have any income at the new work location until 1999. CRA disallowed the 1999 deduction on the basis that the costs were not incurred in the year of the move or the subsequent year. The court sided with the taxpayer. The court concluded that moving expenses could be deducted in the year of the move, or any subsequent year, to the extent the employee has employment or business income at the new work location. In the second court case, Beaudoin v. the Queen, the taxpayer’s employer relocated from Nanaimo to Courtenay, British Columbia. Seven years later, the taxpayer sold his home in Nanaimo and relocated to Courtenay and incurred moving expenses which he deducted over two years. The court permitted the deduction on the basis that the delay in moving was caused by business problems and a lien registered against the Nanaimo property. The Income Tax Act is aimed at providing a deduction for moving costs where a move is occasioned by a change of job. Its purpose would be defeated if an unduly narrow and technical approach was followed.
Tuition Fees as Medical Expenses In the case MacDuff v. The Queen, the taxpayer’s daughter suffered from dyslexia and her education could be handled more adequately in small class sizes. The taxpayer paid for her to attend the Laureate Academy, and he claimed the tuition fees as a medical expense. The taxpayer lost this one. Even though his daughter did have a disability, the school did not possess the required certification to allow for the claim of a medical expense.
In a similar case, Vita-Finzi v. The Queen, the taxpayer claimed school tuition fees paid in 2005 and 2006 for his learning disabled daughter to attend private school. The court denied the claim because the school did not provide medical services as a main focus, and therefore the school did not meet the requirements under paragraph 118.2(2)(e) of the Income Tax Act.
Disability Tax Credit In the case Hutchings v. The Queen, the Tax Court of Canada handed down a ruling on July 21, 2009 with respect to a disability tax credit claimed by the taxpayer for his daughter who has Type 1 diabetes. The taxpayer lost this case because subsection 118.3(1) of our tax law requires that the therapy be administered at least three times each week for not less than 14 hours each week. The average time spent by the taxpayer was seven hours per week and therefore the criteria was not met.
Rent from Family Members This court decision is not surprising. It simply serves as a reminder that, where you haven’t got a reasonable expectation of profit on a rental property when renting to a non-arm’s length party, you can forget about claiming losses. In the case, Rapuano v. The Queen, the taxpayer collected modest rent ($500 per month) from his son, who lived in the home with his wife and three children, and their daughter ($200 per month) after she finished school. The taxpayer claimed rental losses on the basis that 50 percent of home expenses were related to the rental operation in 2004 and 75 percent in 2005. The court found that the taxpayer did not intend to earn a profit from the rent charged to the children, and so the losses were denied.
Publicly Traded Share Losses In the case Baird v. The Queen, the taxpayer reported losses from the sale of marketable securities as business losses rather than capital losses. Business losses, of course, offer greater tax savings because they can be applied against any other income the taxpayer might have, whereas capital losses can only be applied against capital gains. The Tax Court of Canada concluded that the taxpayer failed to establish on a balance of probabilities that he was a “trader” in securities or was involved in an “adventure in the nature of trade.” The court noted that: (1) the taxpayer treated his transactions in an inconsistent manner (in the prior year, he had reported his profits as capital gains, but his losses were now being treated as business losses), (2) the accountant of the taxpayer could not explain why, in the prior year, the taxpayer was not considered a “trader” whereas in the year in question the expectation is that he’d be considered a trader and therefore be afforded business loss treatment, (3) filing on a business loss basis was opportunistic tax planning, (4) the taxpayer did not report any business expenses in this “trading” business, (5) the taxpayer’s wife did not give any evidence as to his “business” and therefore a negative inference was drawn by the court. The key in these situations is consis tency from one year to the next—don’t make it look so obvious that you’re being opportunistic.
Offshore Trusts Two recent Tax Court of Canada decisions considered the legitimacy and residence of trusts. Garron et al v. the Queen and Renee Marquis-Antle Spousal Trust v. The Queen, which both involved Barbados trusts, raised significant issues with respect to the residence of trusts, the role and powers of discretionary trustees, and the interaction of the general anti-avoidance rule with treaty provisions. In each of these cases, the court concluded that capital gains realized by the trusts were taxable in Canada, but for different reasons in each case. In Garron, the trust was found to be a resident of Canada because it was effectively managed by Canadian residents. The court did not simply look to where the trustees were resident, but rather looked to the residency of those who actually controlled the trust based on the facts. In Antle, the court determined that a valid trust had never been created because Mr. Antle never intended to establish a trust, so the gain was taxable in the hands of the Canadian tax- payer. These cases are important because they provide guidance to taxpayers and their advisors around the types of issues that can cause problems with offshore trusts. Advisors will undoubtedly not give up using offshore trusts where appropriate, but will look to these court decisions to do a better job at structuring the offshore trusts. It’s also clear that CRA does not look favourably at significant tax leakage through offshore tax planning and will go to great lengths to recover tax dollars if they are significant enough in value.

1
PRE-GAME WARM-UP: THE BASICS OF TAX PLANNING
Only fools come to bat without first tying their shoes.
 
 
To this day, I can still remember my first season—in fact, my first game—in the Oakville Minor Baseball Association. I was six years old, a pretty good hitter for a rookie, and knew next to nothing about running the bases. My first time at bat, I belted a line drive into left field, then proceeded to run as fast as I could directly to third base. I can still remember the umpire showing me which way to run after hitting the ball.
Eventually, I became a pretty good base stealer—but only after I learned the basics. Once I had the basics down, my playing improved to a whole new level. And so will yours.
In this chapter, we’re going to look at the basics of the tax game.

Playing by the Rules

Tim’s Tip 1: Avoid taxes like the plague, but don’t evade them.

There’s a big difference between avoiding taxes and evading them: One’s okay; the other’s a definite no-no.
Tax avoidance simply involves structuring your affairs legally so that you’re paying less tax than you might otherwise pay. You do, after all, have the right to pay the least amount of tax the law will allow. Avoiding tax could involve using loopholes, which are inadvertent errors in the Income Tax Act, but more commonly will involve using provisions of the law to your advantage.
Tax evasion, on the other hand, is an attempt to reduce your taxes owing or increase refundable credits by illegal means, such as making false statements about your income or deductions, or destroying records. Trust me, if the Special Investigations Unit of the Canada Revenue Agency (CRA) catches you in the act of evasion, you’re in for a rough ride. Here’s what happens: You’ll not only have to make good on the taxes you’ve evaded, but you’ll face penalties equal to 50 percent of those taxes. In addition, you’ll face interest charges from the year of the crime until the day you pay those taxes and penalties owing. To top it off, you could face criminal charges filed by CRA that may result in additional criminal penalties of 50 to 200 percent of the taxes evaded and up to five years in prison. Yikes!
If you’ve been evading taxes and haven’t yet been caught in the act, there’s some good news for you. The tax collector has said, in Information Circular 00-1R2, that if you come forward and correct deficiencies in your past tax affairs—through what’s called a voluntary disclosure—you’ll be given a break. No penalties will be levied, partial relief for interest charges may be available, and no prosecution will be undertaken. Folks, this is not such a bad deal. And by the way, once CRA has begun an audit or enforcement procedure, you can forget about making a voluntary disclosure—it’s too late at that stage.
 
TO MAKE A LONG STORY SHORT:
• Tax avoidance involves legally structuring your affairs to take advantage of provisions or loopholes in our tax law.
• Tax evasion is a no-no. It can bring civil and criminal penalties, and can mean up to five years in prison.
• A voluntary disclosure may be your best option to come clean if you’ve been evading taxes.
Caution!
A voluntary disclosure (VD) will allow you to come clean if you haven’t exactly been honest, but it may open a can of worms, too. You see, a VD could lead CRA to take a hard look at your financial affairs, including bank and brokerage account transactions. Sure, a VD may be your best bet if you’re talking about significant tax dollars, but a simple adjustment request (using Form T1-ADJ) to your prior years’ tax returns may be a better option if the dollars are minimal. Talk to a tax pro before deciding which way to go!

Knowing the Numbers Game

Tim’s Tip 2: Understand this thing called your marginal tax rate.

You’re going to hear a lot about marginal tax rates as you browse the pages of this book—and for good reason. Your marginal tax rate is used to calculate all kinds of things. In particular, if you want to know how much tax a deduction is going to save you, or what the after-tax rate of return on your investments happens to be, you’ll need to know your marginal tax rate.
Quite simply, your marginal tax rate is the amount of tax that you’ll pay on your last dollar of income. Suppose, for example, you’re living in Ontario and you earned $65,000 in 2009. How much more tax do you suppose you’d pay if you earned one more dollar of income? The answer is 32.98 cents. You’d keep just 67.02 cents for yourself. In other words, your marginal tax rate is 32.98 percent. Similarly, if your marginal tax rate happens to be 26 percent, then 26 percent of the last dollar you earn will disappear in taxes. For a list of marginal tax rates by province, check out the tables starting on page 297.
You’re going to discover that marginal tax rates really depend on three things: your province of residence, your level of income, and the type of income earned. Basically, the higher your level of income, the higher the percentage of that income the tax collector is going to take. Further, Canadian dividends and capital gains are taxed at lower marginal rates than interest, salaries, and other types of income.
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