CPP Death Benefits- Caution- CRA has automatically included CPP death benefits on terminal return of some deceased persons (on assessment and when Auto-fil is used). Corrective action may be req'd.

CPP DEATH BENEFIT – AUTOMATIC UPLOAD

It has been reported by subscribers that CRA has recently included death benefits in terminal returns when using “Auto-fill my Return”, and in some cases, automatically included them when assessing this return. CPP death benefits are generally taxable to the receiving beneficiary. Where amounts are not made payable to the beneficiary from the estate in the year, such amounts are to be reported as income on the T3 return of the estate.

In either scenario, the benefit should not be reported on the final return. Tax preparers should remain vigilant for these automatic assessments and make adjustments as appropriate.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 442

Court finds that a false bookkeeping entry which laid the groundwork for disguising a future appropriation by a shareholder, was not, in and of itself a shareholder benefit.

SHAREHOLDER BENEFIT – RECORDING OF A JOURNAL ENTRY

In a September 27, 2017 Tax Court of Canada case (Chaplin vs. H.M.Q., 2014-3670(IT)G), at issue was whether the taxpayer was subject to a shareholder benefit. The taxpayer paid $163,898 of legal expenses related to a shareholder dispute. While the taxpayer fully paid the legal fees personally, the corporation recorded the fees as a legal expense and credited the shareholder loan account of the taxpayer.

Taxpayer loses – legal bills personal
The Court opined that the legal fees did not benefit the corporation, were not paid by the corporation, and were simply a benefit to the taxpayer and her personal expense. As such the payment by the taxpayer did not constitute a loan to the corporation. The bookkeeping entry which indicated something else had occurred was false, and the entry did not match the reality.

Taxpayer wins – no shareholder benefit from journal entry alone
The Court, however, was not convinced that simply making a false bookkeeping entry, even knowingly, confers a benefit on a shareholder. The Court noted that a benefit is transferred when something of value is conferred on a shareholder. The Court contrasted this case from others (Chopp vs. H.M.Q., A-87-95, and Franklin vs. H.M.Q., A-635-00) where there was a transfer of property from the corporation, but the transfer was not charged against the shareholder loan account.

At most, the Court noted that a false bookkeeping entry lays the groundwork for disguising a future appropriation or hiding an outstanding debt owed to a company by a shareholder. It is not, in itself, a benefit. As such, the recording of a false bookkeeping entry did not confer a benefit on the taxpayer.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 435

 

Current or capital expense - Could a $4,000,000 expenditure to replace much of a parking garage roof be considered a current expense, fully deductible in the year?

CAPITAL PURCHASE VS. REPAIR

In an August 31, 2017 Tax Court of Canada case (AON Inc. vs. H.M.Q., 2015-1043(IT)G), at issue was whether over $4,000,000 spent replacing much of a parking garage roof was a current or capital expense

The case discussed 12 common considerations, however, turned on the following key items:

  1. An enduring benefit would be provided: 20-30 years of worry free roofing would be obtained. This suggested a capital expense.
  2. The roof could not exist on its own. It is inseparable from the rest of the building. Therefore, the cost must be considered in context of the complex as a whole. It cost approximately $4 million in comparison to an estimated replacement cost of $59 million for the complex as a whole. This suggested a repair.
  3. The work simply allowed the garage to be used in the same way as before. This suggested a repair.
  4. New technology and techniques were used, the visual appearance was improved, and the roof was better in relation to the original version. This suggested a capital expenditure. However, the same functionality and income earning/profitability potential existed (same number of parking spaces were provided and there was no ability to charge more), and there was no significant increase in value as compared to its value were it in a good state of repair. This suggested a repair.

Taxpayer wins
On one hand, indications of a capital expenditure were demonstrated by the large cost, the improved lifespan, and the fact that the new roof was simply better. However, the Court opined that the expectation of consistent profitability and value, in combination with the small cost in relation to the building as a whole, were more significant indicators that expenditures were not capital in nature. The expenditures were determined to be current deductible expenses, and not required to be capitalized to the cost of the building.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 435

 

 

Life in the Tax Lane - July 2018 (Episode 38)

This FREE 10-minute video for Canadian Tax Professionals includes rapid-fire discussion of select recent developments in the wonderful world of Canadian tax presented by the Video Tax News Team. 

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GST/HST Input Tax Credits - Is the claimant responsible for verifying their supplier's GST/HST registration status?

INPUT TAX CREDITS (ITCS) – DUE DILIGENCE

In a January 29, 2016 Tax Court of Canada case (SNF S.E.C. vs. H.M.Q., 2013-1207(GST)G), CRA had denied over $500,000 of ITCs, and assessed penalties and interest, in respect of GST and QST paid to twelve suppliers. Unknown to the taxpayer, the suppliers did not remit the tax.

The taxpayer, a scrap metal dealer, obtained evidence of prospective suppliers’ GST and QST registration prior to accepting them as suppliers.

Taxpayer wins – mostly
The taxpayer must use reasonable procedures to verify that suppliers are valid registrants, their registration numbers actually exist and are in the name of that person. The Court held that the taxpayer’s procedures (reviewing the suppliers’ registrations, stamped by Revenue Quebec) were generally sufficient to meet the documentation requirements (Excise Tax Act Subsection 169(4)). It was not relevant that some suppliers did not have scrapyards and/or vehicles to carry on scrap businesses, nor that payment was often made in cash, making it difficult to verify the suppliers’ revenues. The taxpayer could not be expected to query government officials to ensure that GST registrations were properly issued.

However, in respect of one supplier, the facts showed that the taxpayer had been sloppy to the point of gross negligence in accepting evidence of registration where it was clear that the registered supplier was not acting on their own account. Those ITCs were properly denied, and the related gross negligence penalty upheld.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 434