Archive for August, 2016

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Campgrounds Back In Tax News

The dreaded CRA audit letter. It can appear in the mail at any time. If you are concerned about CRA’s audit approach to small business corporations and their access to the Small Business Deduction in particular, check this out: CRA has provided an update to its audit position on the matter and specifically for campgrounds when there are fewer than five full time employees in the business.

You may recall the story we covered in May, when $250,000 owing in back taxes by a campground in Ontario, because its income was considered to be rental income, which does not qualify for the SBD rather than service income, which does. CRA has clarified last week, what some of those additional services might be:

  • Coin operated laundry
  • Swimming pool and lifeguard
  • Playground
  • Garbage disposal
  • Retail outlets which sell food and other supplies

For campground owners in particular, then, the degree to which significant additional services are “integral to the success of its business operations” will make the difference for campgrounds which do a bit of both: in fact the more services provided, the better the chances that the SBD may be allowed.

Income qualifying for the small business tax rate is income that stems from capital employed or risked in the business, and that this does not include income from “property” which is not connected to, or necessary to, sustain the corporation’s business operations. Also excluded is income from a specified investment business carried on in Canada.

These definitions are outlined in CRA’s IT 73 R6, which interprets Section 125, subsections 14(1), 123.4, 129(4), and 129(6), the definitions “active business” and “specified shareholder” in subsection 248(1), paragraph 18(1)(p), subparagraph 12(1)(e)(ii) of the Income Tax Act and section 6701 of the Income Tax Regulations.

In its August 23, 2016 posting CRA notes “Generally, the business of a campground involves the renting of property and providing basic services typical to that type of rental operation. In such a situation, the principal purpose of that business would be to earn rental income from real or immovable property and the corporation would not be eligible for the small business deduction, unless it employs more than five full-time employees in that business throughout the year.

That’s where the trouble begins with qualifying for the small business deduction, as many campgrounds do not employ more than five full-time employees throughout the year.

The property must be “incident to” an active business, or held primarily to gain or produce income from an active business, in order for the income to qualify for the small business tax rate. Otherwise it is a question of fact whether the property is used primarily in an active business, and the onus of proof is on the taxpayer.

The guidelines provided by CRA will help to determine the factors to be considered in whether or not the property is used in an active business. Each case, however, will determined on its own merits.

Additional Educational Resources: Tax Services Specialists who train through Knowledge Bureau are required to add a research component to their studies through access to EverGreen Explanatory Notes, an 800-topic online research library that is connected to all the relevant sections of the Income Tax Act for each topic, as well as to CRA’s publications on the matters.


Five Reasons to Get CRA Penalties and Interest Waived

It’s back to school time and families are spending money getting ready for the big day; registration for sports activities seems to be more expensive that ever; and now this: you find you owe money to CRA! That can certainly be an expensive way to end the summer. But in certain circumstances, penalties and interest owed to CRA may be waived. You may qualify in the following instances:

  1. CRA has made an error or has had significant delays in responding to you
  2. You have suffered a natural or man-made disaster, such as a fire or flood
  3. There has been a death or a serious illness in the family in which you have suffered physical, mental or emotional distress
  4. There has been a civil disturbance that delayed your compliance, such as a postal strike
  5. Financial hardship: personally, there has been a circumstance that has affected your ability to pay for the necessities of life or reasonable non-essentials; or in business, the continuity of business operations has been jeopardized so significantly that it threatens jobs and the community at large.

To request taxpayer relief requires completion of a newly updated form, RC4288 Request for Taxpayer Relief – Cancel or Waive Penalties or Interest, and lots of documentation to support the claim. But it can be well worth it.

Often the penalties and interest can be more than the taxes owing. Late filing penalties, for example, are 5% of the amount due (10% if there is a second late filing within three years). An interest penalty is also applied to late filers: that’s 1% a month for 12 months in the first instance; 2% per month for 20 months in the second. Often gross negligence penalties are also applied: 50% of the amount owing. In cases of deliberate fraud, the penalties added can be up to 200% of the taxes sought to be evaded. Monthly interest rates charged at the prescribed rate plus 4% are added on top of all of this.

The first line of defence for getting out of potential trouble is to contact CRA before they contact you to charge the penalties in the first place. Through a “voluntary disclosure” you can often save yourself a lot of stress and money. However, if you are already facing the music, a request for taxpayer relief can be an important financial savior.

Be prepared to describe all the events leading up to the hardship that affects you or your business, and any steps you have taken to avoid the hardships or correct the issues with CRA. Supporting documents must include details of CRA delays or errors, fire/flood reports, doctor’s certificates, insurance claims, financial statements including loans, mortgage statements, bank accounts, credit card bills, rental statements, or balance sheets and income and expense statements.

In cases like these, it’s important to get assistance from an experienced DFA-Tax Services Specialist™ who can represent you to CRA.

©2016 Knowledge Bureau Inc. All Rights Reserved.


RDSP: Take a New Look at RDSP to Help The Disabled

Is there a new disability in the family for someone under the age of 49? Astute tax and financial advisors will want to introduce the RDSP (Registered Disability Savings Plan) as a savings option to shore up support for the future. But, who is eligible and what can be contributed? A primer on this very lucrative plan should be discussed with your clients.

The RDSP may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the Disability Tax Credit during the year of the plan’s establishment. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. In that case the plan must be terminated by the end of the year following the year in which the beneficiary ceases to be DTC-eligible. However, if the beneficiary is likely to become DTC-eligible again in the near future, an election may be made to postpone closing the plan for up to five years.

Contributions to an RDSP may not exceed $200,000 in a beneficiary’s lifetime. Mutual funds are qualified investments for RDSP purposes and as a trust arrangement are similar to RESPs, in that contributions to the plans are not deductible and investment income accrues on a tax-deferred basis. However, each payment made from an RDSP is considered to consist of grants, bonds and investment income, and each such part is included in the beneficiary’s income when received.

The federal government will provide direct financial assistance to RDSPs in two ways, based on the size of family net income:

1. Canada Disability Saving Grant. The CDSG will match RDSP contributions as follows:

Family Net Income

Up
to $90,563*

Over
$90,563*

First
$500 – 300% (max. $1,500)

Next
$1,000 – 200% (max. $2,000)

Therefore:
$1,500 contributed to RDSP generates $3,500 CDSG

First
$1,000 – 100% (max. $1,000)

 

Therefore,
$1,000 contributed to RDSP generates $1,000 CDSG

 *2016 levels; to be indexed in subsequent years.

Family income is calculated in the same manner as it is for Canada Education Savings Grant purposes, except that in years after the beneficiary turns 18, family income is the income of the beneficiary and their spouse or common-law partner.

There is a lifetime maximum of $70,000 that will be funded under the CDSG and an RDSP will not qualify to receive a CDSG from the year in which the beneficiary turns 49.

2. Canada Disability Savings Bond. Unlike the CDSG, there is no requirement that a contribution be made to an RDSP before a savings bond contribution is available. The maximum annual CDSB contribution is $1,000 and is earned where family income does not exceed $26,364 (2016). The CDSB amount is phased out completely when family income is $45,282 (2016).

There is a lifetime maximum of $20,000 for CDSBs. Like the CDSG, CDSBs will not be paid after the beneficiary of the RDSP turns 49.

Note: Repayments of all CDSGs and CDSBs will be required if there is a loss of eligibility for the DTC or in certain cases when there is a withdrawal or death of the beneficiary. Professional assistance should be sought.

Catch-up of RDSP Grants and Bonds. When an RDSP is opened, CDSG and CDSB entitlements will be calculated for the 10 years prior to the opening date (but after 2008) based on the beneficiary’s family income in those years. CDSB entitlements from the catch-up period will be paid into the plan in the year the plan is opened. The annual maximums for grants and bonds in the catch-up years on unused entitlements are:

  • $10,500 for grants; and
  • $11,000 for bonds.

The contributions into the RDSP are invested and will later be used to make payments to the beneficiary. Earnings within the plan are tax deferred until that time. The arrangement can be entered into with a qualifying person under certain circumstances.

For help in planning a worry-free retirement for disabled loved ones, speak to a qualified specialist, such as a DFA-Tax Services Specialist™ or MFA-Retirement and Estate Services Specialist™.