Limitations to Small Business Deduction - Specified Corporate Income - CRA says that allocation of expenses to determine income subject to small business deduction restrictions must be "reasonable".

SPECIFIED CORPORATE INCOME (SCI) – STREAMING EXPENSES

In a February 7, 2018 Technical Interpretation (2017-0706401E5, Couvrette, A.), CRA was asked about the streaming of expenses to offset income which would be ineligible for the SBD due to the SCI rules in preference to offsetting other income whose access to the SBD is not restricted. CRA indicated that the allocation of expenses to various revenue sources to determine net income from each source must be reasonable. The determination of a reasonable allocation would be a question of fact.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 440

Late appeal of a CPP or EI decision? The deadline for applying for a late CPP or EI appeal is only 90 days after the normal appeal deadline, unlike the 1 year window for an income tax appeal.

APPEALING CPP AND EI – FILING DEADLINES

In a December 8, 2017 Tax Court of Canada case (Neptune Service Ltd. vs. H.M.Q., 2016-589(IT)I), the Court reviewed the taxpayer’s application to add assessments of CPP and EI to their income tax appeal.

Taxpayer loses
The deadline for appeal is 90 days after a CPP or EI assessment is confirmed, the same as for an income tax appeal. However, unlike an income tax appeal, where an appeal filed up to one year after the deadline may be accepted, the last possible date to request a late CPP or EI appeal is only 90 days after the appeal deadline. The application for the late income tax appeals was already past this deadline, so the taxpayer was too late to appeal the CPP and EI assessments.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 439

Online Access to Federal Acts and Regulations - Income Tax Act, CPP Act, EI Act, Canada Labour Code, and others can all be found online at http://laws-lois.justice.gc.ca/eng/

ONLINE RESOURCES – LEGISLATION

The Government of Canada provides online access to the consolidated Acts and Regulations of Canada. This includes, for example, the Income Tax Act, Financial Administration Act, Pension Act, Employment Insurance Act, Canada Pension Plan, and Canada Labour Code.

The current and historical legislation and regulation is provided free of charge. While no annotation or commentary is provided, the above resource is useful, in particular, for Acts and Regulations which one may periodically reference, but not to the extent that one would purchase an annotated Act.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 438

,

Life in the Tax Lane - September 2018 (Episode 40)

,

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. 

Sources

Like what you are watching? Join our mailing list at videotax.com/mailing-list to stay in the know with new video releases, products and upcoming promotions.

Life in the Tax Lane is for general information purposes only and deals with dynamic, time-sensitive and complex matters that may not apply to particular facts and circumstances. The information provided should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. For more information visit videotax.com/disclaimer. ©Video Tax News Inc. 2018, All Rights Reserved.

Miscoding of revenues/expenses and other issues led to denied bad debt expense claim.

BAD DEBTS AND MISCODED REVENUES

In a December 11, 2017 Tax Court of Canada case (Groski vs. H.M.Q., 2009-2839(IT)G, 2009-2838(IT)I), several items were at issue. A key issue was whether bad debts of $217,959 were deductible against $539,217 of self-employed accounting income. A sub-point was that only $47,959 was reported as a bad debt, the remaining $170,000 was directly offset against gross revenues by not including management fee revenues of that amount.

Miscoding of Revenue
The taxpayer had received a management fee of $170,000, but simply did not include it in income to offset that portion of the bad debt. When asked why, the taxpayer indicated that the aggregate sum of $217,959 was “abnormally high” and reducing it by the $170,000 fee would “normalize” the figure. The Court noted that ignoring the statutory method of completing each line, provided that the “effective result” of net income is the same, makes the reporting of income non-compliant, misleading and absurd.

Editors’ Comment
Based on the Court’s comments, it appears as if such miscoding might provide a basis for opening up statute-barred years. Also, depending on the size and nature of the miscoding, it may also support a gross negligence penalty.

Bad Debt Expense
After establishing the actual bad debt claim to be $217,959 as opposed to $47,959, the Court examined whether it was an eligible deduction. To be deductible, “temporally proximate deliberation” is necessary to ascertain which accounts had become uncollectible for the year. In other words, a demonstration of sufficient work completed to determine specific accounts/amounts that had become uncollectible in the year is required.

The taxpayer provided an accounts receivable (A/R) listing with single word, hand notations regarding collectability or doubt. There was no other account specific evidence provided – no rendered invoice, demand letter, petition or assignment into bankruptcy of a debtor, legal demand letter, reminder statement, statement of claim, nor finalized A/R listing. Also, the A/R listing provided did not indicate invoice numbers, dates of rendering, or what portion reflected uncollected charges versus interest accrued.

As the taxpayer did not provide sufficient specific evidence, the bad debt claim was disallowed.

For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 438