March 2017 Newsletter

A recent decision of the Supreme Court of Canada has seriously restricted the use of “rectification” to fix tax problems.

Here’s the background:

Tax planning sometimes goes wrong.

Transactions executed for tax purposes often involve corporate reorganizations, contracts, issuing new classes of shares, mergers, transfers, etc. What happens if someone forgets to sign the right document, or the lawyers do not draft the right documents to make the transaction work?

If you have a business or property loss that wipes out all of your income for the year, you report taxable income on your income tax return as zero.

What happens if the CRA audits you some years later and decides that you claimed too much loss?

If you have a self-directed Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account (TFSA), your financial institution likely charges you an annual administration fee — perhaps something like $125 per year plus GST or HST. If you have a “fee-based” account where your investment advisor charges you a percentage of the plan’s value in exchange for investment advice and in place of commissions, your annual fees may be much higher.

Tax-Free Savings Accounts, or TFSAs, have now been around for over eight years. One can easily lose track of the available contribution room, as the maximum that can be contributed has changed over the years.

Contribution room is cumulative. Once you are 18 or older in a year, you can contribute the maximum for that year, and if you do not, you can carry forward the excess room and contribute that amount in any later year.

If you volunteer for a charity, you may be able to make a little money at no cost to the charity.

The charity cannot give you a donation receipt for the services that you provide for free. A valid donation receipt for tax purposes can only be issued for a donation of money or property.

However, suppose the charity pays you for your services and you donate the money back?

A corporation can be deemed to have a year-end for income tax purposes, in the middle of its fiscal year, for a number of reasons.

One common reason is a change in control (or of 75% ownership) of the corporation (now called a “loss restriction event” in the Income Tax Act). If the corporation is sold to new owners, it will be deemed to have a year-end and start a new taxation year. (Business losses from previous years will then generally not be claimable unless the corporation continues to carry on the same or a similar business. Capital losses from previous years will not be claimable at all after the change in control.)

Former director still involved in running company was not a “de facto” director

The recent Tax Court of Canada decision in Koskocan has potentially changed the law on de facto directors.

The question of “who is a director of a corporation?” is very important in tax disputes, when a corporation goes out of business owing either GST/HST net tax, or payroll deductions (income tax source withholdings), or both. In most cases, the directors of the corporation are fully liable for its unremitted payroll deductions and GST/HST.