TAX JEOPARDY

Personal Tax

100

This is T1 return filing deadline for a self-employed individual. There are taxes owing on this T1 return and is due on this date.

What is June 15th

What is April 30th

200

You are preparing a T1 return and notice that the address on Practice Engine does not match the address on the client’s PBC documents. Assuming this is not the result of us forgetting to update Practice Engine, what is the potential tax issue of this?

What is a possible sale of the client’s home and possible principal residence disposition reporting required

300

You notice on the client’s investment statements that a security/stock is sold at a loss. However, the same security/stock is then purchased within 30 days of the disposition. Name and describe the tax consequence resulting from this scenario

• This is a superficial loss which occurs when a capital property is disposed of at a loss but is repurchased or has the right to be repurchased within 30 days of the disposition.
• CRA will not allow you to claim the capital loss from the disposition when you calculate your income for the year.
• The capital loss is also added back to the ACB of the repurchased property.
• Note there are some exceptions to the superficial loss rules 

400

You are preparing a 2019 T1 return for a client and confirm the client’s home address has not changed and has not been disposed/sold. However, your client advises you that he no longer lives there and has been renting the property throughout the 2019 year. What are the tax consequences of this scenario? What are some possible ways to bypass the tax consequences?

• There is a “Change in Use” of the property and the client will have been considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount.
• This results in a capital gain for the year that the change in use occurs and the amount must be included on the client’s T1 return.
• Possible strategies: If the property was the client’s PR for any year he owned it before the change in use, you do not have to pay tax on any gain that relates to those years. Client only has to report gains that relate to the years the property was not their PR.
• ITA s.45(2) – When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use.
• ITA s.45(3) – When you change your rental or business property to a principal residence, you can elect to postpone reporting the disposition of your property until you actually sell it.

Both elections allow for the corresponding designation for up to 4 years.

500

Your T1 client advises you that he will be leaving Canada to reside in another country. Assuming the criteria to be considered an emigrant of Canada is met, what is a tax issue relating to the client’s property?

• There is a deemed disposition of the client’s property (sold at the FMV and immediately reacquired, any capital gain must be reported on the emigration T1 return).
• Property can include shares, jewelry, and personal use property valued over $10,000.
• Some exceptions to the deemed disposition of property on emigration include Canadian real or immovable property, business property, and other Taxable Canadian Properties.
• Note that if the FMV of all property you are deemed to have disposed of is greater than $25,000, you must complete Form T1161 – List of Properties by an Emigrant of Canada and attach it with the T1 return.

Corporate Tax

100

Describe the potential tax consequences of a debit shareholder loan balance at yearend. What is the corresponding ITA section?

• ITA s.15(2)

• The loan amount will be included in the income of the person for the year in which the loan is made. An exception is if the entire loan is repaid within one year after the end of the taxation year of the lender.
• Note that the repayment cannot be a part of a series of loans or repayments.
• Under ITA s.80.4(2), there may also be a deemed benefit received by the shareholder unless interest has been paid on the loan in an amount greater than or equal to the interest calculated at the CRA prescribed rate.

200

You are preparing a T2 return for a company with a 2019 fiscal yearend and noticed that there were new capital asset additions in the month of November 2018. What is a potential tax issue with these capital asset additions?

• New capital assets may qualify as Accelerated Investment Incentive Property (AIIP) if they are acquired after November 20, 2018 and become available for use before 2028.
• These capital assets will be eligible for enhanced first-year capital cost allowance.

300

This term is used to remove assets that may threaten a company’s QSBC Status. These are two potential NON TAXABLE and TAXABLE techniques used.

What is Purification

Techniques that will not trigger tax (that is, they are non-taxable) include:

• using excess cash to pay existing short- or long-term liabilities
• using excess cash to purchase active business assets

Techniques that will be taxable include:

• paying dividends to the shareholders
• paying salaries or bonuses to owner-managers

400

These 4 criteria must be met in order for the shares to be considered QSBC (Qualified Small Business Corporation Shares) and Define the First Criteria.

The corporation must be an SBC

• used primarily (at least 50%) in an active business carried on in Canada by either the corporation or a related corporation; or
• invest in shares or debt of an SBC corporation that was connected with the particular corporation.
• 90% of assets must be used in active business at the time of Sale.

The shares must be owned by the taxpayer, the taxpayer's spouse or common-law partner, or a partnership related to the taxpayer.

The shares must not have been owned by anyone other than the taxpayer or a related person during the 24 months before the shares are disposed of.

Throughout the 24-month holding period, more than 50% of the fair value of the assets must have been used primarily in an active business carried on in Canada.

500

What are some key factors to consider when determining whether a Company is allowed to deduct management fees?

What is:

• Reasonability – amount charged must be reasonable when compared to the work performed. Amount paid should also be similar to what would be paid to another third party source.
• Purpose and legal obligation – fees must be paid for specific services performed and not based on the results of a business. There should also be a written agreement that describes the services to be provided and the fees to be charged.
• Documentation – this will often be required in the case of a CRA review (i.e. copy of the contract/agreement). Note that management fees are considered taxable services so GST/HST should be charged unless the entity receiving the fees is a small supplier or if the RC4616 – Election or Revocation of an Election for Closely Related Corporations and/or Canadian Partnerships to Treat Certain Taxable Supplies as Having Been Made for Nil Consideration for GST/HST Purposes election is filed.

Special Elections

100

Which election form allows a married/common-law couple to split their pension income? List the common type of pensions that are not eligible for income splitting.

• Form T1032 – Joint Election to Split Pension Income
• Not eligible: OAS pension, CPP or QPP, income from USA IRA’s, foreign-sourced pension that is tax free in Canada due to a tax treaty, and any lump-sum pensions

200

Which election form allows a non-resident employer to waive its requirement to withhold taxes from the salary/wages it pays to its non-resident employees? When must the election form be filed?

• Form RC473 – Non-Resident Employer Certification
• The CRA must receive the form 30 days before a non-resident employee starts working in Canada.
• This election cannot be filed late – currently, there are no exceptions.

CRA will issue a letter approving or denying the request. The employer must continue to withhold and remit tax on payments made to employees until the letter is received

300

Name the five conditions that must be met in order for a VDP application to be valid.

Be voluntary

There cannot be any previous CRA enforcement action (such as audits, demands to file, any direct contact with a CRA employee regarding non-compliance, etc.)

Be complete.

Involve the application or potential application of a penalty or interest

This can include late filing penalties, failure to remit penalties, instalment penalties, omission penalties, etc. 

Include information that is at least one reporting period past due.

Include payment of the estimated tax owing.

400

These 5 requirements must be satisfied when filing a section 85 election.

• The assets must be transferred to a taxable Canadian corporation.
• The assets transferred must be eligible assets
• The transferor must take back a share (or shares) of the corporation as consideration for the transfer of the property to the corporation.
• The transferor may also take back NSC, which is often referred to as "boot." NSC is normally made up of promissory notes of the corporation or proprietorship debt assumed by the corporation. If NSC is greater than the elected amount then a taxable disposition may be triggered.
• Consideration for the transfer must equal the FMV of the property transferred and can include both shares and NSC.

500

Under Section 85 - Determine the following:

• Floor and Ceiling Transfer amounts of each asset.
• Tax Impact on Transfer of Asset #1
• Maximum NSC that must be taken of Asset #1

• The minimum is equal to ACB of 10,000. No Tax effect of transfer at 10,000.
• NSC is 5,000, which is less than the ACB of 10,000 which means NSC may increase to 10,000 without adverse tax consequences.

Estate Tax

100

What is the purpose of applying for the TX19 Clearance Certificate?

This certificate provides confirmation (up to the date the certificate is issued/dated) that all amounts for which the deceased individual is liable to the CRA have been paid.

The certificate covers all tax years to the date of death and protects the Executor from being personally liable for any unpaid tax debts.

200

This criterion must be met in order for an Estate to qualify for the GRE tax rates.

The Estate has to be a testamentary trust (which is generally a trust that is created as a result of an individual’s death; the terms of the trust also need to be established by the will or by court order, cannot be intestate)

The Estate arises as the result of the death of an individual on or after December 31, 2015 and cannot exceed a 36-month period.

300

What criteria must be met in order to apply for the TX19 Clearance Certificate?

All required tax returns of the deceased individual must be filed and assessed by the CRA (including both T1 and T3 returns).

All tax balances owing must be paid, including any related interest and penalties.

400

These three certainties must be present for a trust to exist and are normally written into an agreement.

• Certainty of intention — The individual who transfers title to the property to the trustee must have the intention to set up a trust.
• Certainty of subject matter — The written agreement must be specific with respect to the property to be transferred to the trustee.
• Certainly of objects — The written agreement must specify who the income and capital beneficiaries of the trust are.

500

An Estate is distributing funds that qualify as “treaty-protected property” to a non-resident beneficiary. What form is required to be filed in order to report this disposition? What are the consequences if this form is not filed within 30 days from the date of disposition?

The Form T2062C is required to be filed. This form is for non-arm’s length parties and must be submitted within 30 days of the disposition in order for the property to be treaty exempt

If not filed on time, the property will not be considered treaty exempt and the regular Form T2062 must be filed instead, meaning that withholding taxes of 25% will be required to be remitted. Late filing penalties/interest and failure to remit penalties will then also be applicable on the late remittance.

T2062 filing deadline is within 10 days from the date of disposition. Late filing penalty is $25/day up to max $2,500. Failure to remit penalty is an additional 10% of the amount owing if the amount owing outstanding for more than 7 days.

Did you know?

100

This Tax Preparation firm helped clients evade nearly $2 million in federal tax from 2009 to 2013 by generating false donation credits as well as fictitious business and rental losses

Golden Capital Management – 25 preparers/promoter sentenced to $2.5 million in fines and 38 years of jail time.

200

This law firm helped incorporate offshore in the British Virgin Islands in order to evade taxes in the Panama Papers scandal.

Who is Mossack Fonseca

300

These 3 methods are acceptable transfer pricing methods under the OECD transfer pricing guideline.

• comparable uncontrolled price (CUP) method — in most cases, this is preferable to all other methods
• resale price method (RPM) — this is commonly applied to parties performing distribution activities
• Cost-plus method — this is commonly used for parties performing manufacturing activities or providing services

400

In Canada Trustco Mortgage Co. v Canada (2005), the Supreme Court of Canada determined these 3 requirements in determining if the anti-avoidance rule applies.

• A tax benefit must arise as a result of the transaction or series of transactions. This requirement alone will not make a tax-planning arrangement an avoidance transaction, as most tax-planning arrangements result in a tax benefit or benefits.
• The transaction or series of transactions is an avoidance transaction. If the transaction or series of transactions have been arranged mainly for bona fide purposes other than to obtain a tax benefit, the arrangement is generally not considered to be an avoidance transaction. If there are both tax and non-tax purposes, the courts consider whether the non-tax purpose is the primary purpose of the transaction. Bona fide non-tax purposes include business, family or investment purposes.
• The transaction or series of transactions is an abusive tax-avoidance arrangement. A tax-avoidance arrangement is considered abusive if it cannot be reasonably concluded that allowing a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.

500

This section of the ITA would define if two corporations are related and list 2 situations:

ITA 251(2)(b)

• i)     they are controlled by the same person or group of persons;
• (ii)     each of the corporations is controlled by one person, and the person who controls one corporation is related to the person who controls the other corporation;
• (iii) one of the corporations is controlled by one person, and that person is related to any member of a related group that controls the other corporation;
• (iv) one of the corporations is controlled by one person, and that person is related to each member of an unrelated group that controls the other corporation;
• (v)     any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation; or
• (vi) each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.