2014 Personal Tax Tips

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Tax Planning Considerations When Using Your Capital Gains Exemption

I am often asked for tax planning advice on the tax consequences of selling qualified farm lands or qualified business shares. On the surface, some people would expect a very generic one answer fits all response. This is not the case, and can be a rather complicated area that must dealt with on a case by case basis with a knowledgable accountant
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                  What are the Director's Liabilities? 

Our finance minister, Louis XIV's observed and stated that "the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing." The Canada Revenue Agency has recently stepped up it's collection efforts, which has been notable in the increased audits over the last few years and they don't seem concerned over the hissing.

As a corporation this pattern is concerning to it's directors, as they may be held personally liable for any failure to remit tax. These may include GST, Payroll remittances and corporate taxes as well as other. Most sitting directors are aware that they may be potentially liable for these shortfalls, however most are not aware that this liability may exist long after they resign.

Most of Canada Revenue Agency's director tax assessment are challenged on one of two things, due diligence or the two year rule. The former refers to directors that act improperly on behalf of the corporation where tax payments are concerned. The latter provides that former directors cannot be assessed more than two years after they have resigned. The application of the two year rule arises frequently in situations where every director has resigned and no one was replaced. In situations such as these courts have been asked to consider whether another person has acted as a deemed or de facto director.

In other situations, the court has recognized that even after a resignation, an individual may continue to act as a de facto director by performing functions that are typically reserved for directors. These would include giving instructions in the corporations name, making financial and administrative decisions on the corporations behalf. De facto directorship may even be assessed where a former director holds himself out to third parties as a director (although these situation are unusual).

The tax court has observed that there is no fixed rule for determining when de facto director ceases. However, they are looking at the persons course of conduct with relation to the corporation. 

Individual directors need to better understand their liabilities and when their potential liabilities end. Professionals should be consulted on a case by case basis to assess risks.
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       Tax Considerations when using your Capital Gains Exemption on Qualified Farm Property

I am often asked by farming clients to provide tax advice when they are considering selling qualified farm lands. Most individuals believe there is an easy, one solution fits all, response but this is not the case. In fact the one thing that I would caution clients on, is that for decisions of this magnitude they need to visit their tax advisor. With that out of the way I will try to outline some of the considerations.

  • While the capital gain exemption may be available to fully offset the capital gain, remember that the capital gain is included in net income, and the exemption is deducted in calculating taxable income. Therefore, items that depend on net income such as benefits for children, provincial senior’s benefits and the clawback of Old Age Security could be affected.
  • Alternative Minimum Tax (AMT) can also result when triggering a capital gains exemption. To avoid this result, you may wish to plan the transaction so that a capital gains reserve is available to reduce the amount of capital gain reported in the year by ensuring there are deferred proceeds. For example, a note payable due 30 days after demand vs. note payable on demand. No reserve is available on a sale to a controlled corporation.
  • Always consider the impact of the Goods and Services Tax on any proposed transaction. In the case of shares, there may not be a significant concern. However, for the transfer of other property, you may wish to ensure the purchaser is a registrant for GST purposes before proceeding with any crystallization.
  • The General Anti-Avoidance Rule (GAAR) is always a concern in tax planning. Information Circular 88-2 provides that the crystallization of a capital gain exemption is an avoidance transaction since it is undertaken primarily to achieve a tax benefit. However, it is not a misuse of the Act, nor is it an abuse with regard to the Act as a whole. Therefore the Canada Revenue Agency would not seek to apply GAAR to normal transactions undertaken to crystallize the capital gain exemption.   

  • Did a $100,000 capital gains election taint property for the purposes of the $800,000 capital gains election?
    • If a taxpayer used the $100,000 capital gains election on their 1994 personal tax return on property that would have otherwise qualified for the $800,000 Capital Gain Exemption, the taxpayer should be aware that the election could affect his/her ability to claim the enhanced capital gains exemption in the future.
    Use of the 1994 election resulted in a deemed sale and reacquisition of the property. Therefore, the farm property would have to meet the more stringent tests that apply for property acquired after June 17, 1987, to be eligible for the enhanced capital gains exemption in the future.

    Some uncertainty also exists over whether a new 24-month "holding period" would also need to commence on February 22, 1994. Since the answer is not clear, one might try to meet the 24-month test after February 22, 1994, before attempting to trigger the $800,000 exemption.
    • Can land be transferred to a company to crystallize the exemption followed by immediate transfer back out to the individual who owned the land originally?
      A strategy followed by some taxpayers would be the sale of land to a company at fair market value for a note. The land would then be withdrawn by the individual from the company against the note payable. The hope would be that that land would now have a higher cost base as a result. It is very likely that the Canada Revenue Agency would find this type of transaction offensive and treat it as a sham or use the General Anti-Avoidance
      Rule to remove the benefit of the transactions. In either case, the result would be no use of the exemption and no increase in the cost base.
    Note, however, situations do occur where there are bona-fide reasons for land to be sold to a company and then sold back to the original seller. The company should then report a gain if the land value increased while held by the company (with no offsetting exemption). The Canada Revenue Agency should not be able to attack this type of transaction with the General Anti-Avoidance Rule.
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    PURPLE GASThe A...


    The Alberta fuel benefit program is designed to offer fuel to Alberta farmers at prices competitive with those paid by farmers in other parts of North America. This allows Alberta farmers the ability to purchase gasoline and diesel at reduced prices. In order for farmers to qualify the must:

    A) Be actively and directly farming by controlling farming assets and making the day to day management decisions;

    B) Have annual farm commodity productions worth at least $10,000 (or $5,000 - $9,999, if the only other significant source of income are CPP or OAS).

    Eligibility must be renewed every three years.

    When incorporating operations, it is important to ensure that the individual revises applications to ensure receipt of benefit by corporate entity.

    For farming vehicles that are transferred to the corporation, maintaining farm plates is essential to maintaining access to purple gas. Registration of vehicles will need to be revised to the corporate name, and identification of eligibility for farming plates. The farmer also runs the potential loss of benefit on personal vehicles, as the individual is no longer an active registrant in the program.
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