S P R I N G C H A R I TA BL E G I V I N G G E T S E A S IE R I N T H I S I S S U E

Transcription

1 S P R I N G C H A R I TA BL E G I V I N G G E T S E A S IE R I N T H I S I S S U E 1 Charitable Giving Gets Easier 3 A Broader Definition of Taxable Canadian Property 5 GST in Agency Situation 7 Employee Profit Sharing Plans T h e Income Tax Act (the Act ) offers tax credits for charitable giving during one s lifetime. Those credits are enhanced for charitable gifts made in the year of one s death, for they can offset up to 100% of the d o n o r s taxable income in the year of his or her death and, if any tax credits remain, they can offset up to 100% of the donor s taxable income in the immediately preceding ye a r. Happily, the Act does not require a taxpayer to be able to foretell the year of his or her death in order to enjoy those enhanced charitable tax credits. A charitable bequest made by a taxpayer in his or her will is deemed to have been made in the year of his or her death. Up until now, those enhanced charitable tax credits were not ava i l a b l e for a donor who wished to use life insurance, RRSPs or RRIFs to make a charitable contribution by means of a direct beneficiary designation. Such gifts, being made outside of the donor s will, would not meet the statutory criteria. To access that enhanced charitable tax credit, the donor who wished to make a charitable gift of life insurance or of an RRSP or RRIF would be required to designate his or her estate as beneficiary and then make his or her charitable bequest in an amount equal to those proceeds. In Ontario, naming one s estate as beneficiary would give rise to estate administration tax ($5 per $1,000 on the first $ 50,000 of estate va l u e, $15 per $1,000 on the estate value in excess of $ 50,000) on the value of the insurance money, RRSP or RRIF, as the case may be. (The price might be far worse than that, for designating o n e s estate might necessitate probate of the will which would not otherwise have been required. Estate administration tax is calculated on the value of the entire estate.) Furthermore, it would result in the loss of any creditor protection otherwise available for direct beneficiary d e s i g n a t i o n s.

2 2 S P R I N G This discriminatory tax treatment will be eliminated if recently introduced Bill C-22 is passed into law. For deaths after 1998, the Bill would give the enhanced charitable tax credits to individuals who make charitable gifts by direct beneficiary designations for life i n s u r a n c e, RRSPs and RRIFs. Based on the Bill s current wo r d i n g, there are some cave a t s : 1. For life insurance, the policy must have been issued to the life insured while he or she was a resident of Canada. F u r t h e r m o r e, the consent of the individual whose life wa s insured must have been required in order to effect a change of beneficiary designation. Under insurance law, the right to change the beneficiary designation on life insurance belongs to the insured which, in the case of an individual policy, is the owner of the policy and, in the case of a group policy, is the member whose life is insured. So, for example, if Joanne s life is insured under an individual insurance contract, the credit will not be available if her husband or her corporation is the owner of the policy. 2. A further requirement for insurance, RRSPs and RRIFs may represent a trap for the unwa r y. The proposed amendment requires the transfer from the insurer or from the RRSP or RRIF administrator, as the case may be, to be in the form of money or negotiable instruments. The policy rationale for this requirement is not readily apparent. Howe ve r, it may result in the unintended loss of the generous tax credit on death if the charity asks for a transfer in kind. For example, suppose Alan has a self-directed RRSP which is comprised of a portfolio of publicly traded shares, with a beneficiary designation in favour of Alan s favourite charity. If, upon A l a n s death, the charity requests the broker simply to reregister the account in the name of the charity, Alan will not

3 3 T A X L A W get the benefit of the charitable tax credit because the transfer to the charity will not h ave been in the form of cash or negotiable instruments. In order for Alan to get the charitable tax credit, the charity must ask for the portfolio to be collapsed before the transfer. While this expanded access to the generous charitable tax credits on death is we l c o m e, care must be taken firstly, by the donor who will want to ensure that he or she qualifies for that tax credit; and secondly, by the charity which must be satisfied that the statutory conditions have been met to entitle it to issue the tax receipt. A B R OA D E R D E F I N I T I O N O F T A X A BL E C A N A D I A N P R O PE R T Y The Income Tax Act (Canada) ( ITA ) taxes nonresidents of Canada on income from a business carried on in Canada and on gains from the sale of taxable Canadian property ( TCP ). The Canada Customs and Re ve n u e Agency ( CCRA ) enforces tax compliance for sales of TCP through the clearance certificate mechanism contained in section 116 of the I TA. Section 116 requires a purchaser of TC P to withhold a percentage (generally 25%) of the price paid to the non-resident ve n d o r unless the vendor obtains a clearance certificate from the CCRA. Clearance certificates are issued if the vendor makes a p ayment to the CCRA on account of its tax liability or if the CCRA is satisfied that any gain on the TCP is exempt from Canadian tax pursuant to a tax treaty entered into betwe e n Canada and the ve n d o r s country of residence. Clearance certificates are not required for excluded property. The ITA, as currently in force, defines TCP to include shares in Canadian corporations, certain interests in trusts and partnerships, and capital property used by a non-resident in carrying on a business in Canada. Capital property includes land and depreciable assets such as buildings, machinery, equipment, patents and software. However, capital property does not include (despite its name) so-called eligible capital property. Goodwill and various intangibles such as trade-marks, trade names and other unpatented intellectual property are examples of eligible capital property. The Department of Finance has proposed amendments to the ITA that will broaden the

4 4 S P R I N G definition of TCP to include both eligible capital property and inve n t o r y. Inventory will be excluded from the section 116 requirement, but eligible capital property will not. The a m e n d m e n t s, when enacted, will be retroactive to December 24, The inclusion of eligible capital property as TCP, coupled with the requirement for a clearance certificate on its sale, strengthen the CCRA s ability to monitor claims for treaty relief. Many of Canada s tax treaties exempt a non-resident from Canadian income tax on business income if the non-resident does not carry on business in Canada through a permanent establishment as defined in the treaty. Permanent establishment is typically defined as a fixed place of business, including a branch or office. As well, a non-resident is deemed to have a permanent establishment in Canada if the nonresident hires Canadian sales representatives (except independent agents) who have and habitually exercise authority to contract on behalf of the non-resident. It has been common for non-residents who sell goods to Canadians to hire Canadian sales r e p r e s e n t a t i ve s, but also maintain that they h ave no Canadian permanent establishment and therefore are not subject to Canadian tax on sales made in Canada on the basis that the sales representatives have no authority to conclude contracts. Now if the Canadian business is sold and a portion of the sale proceeds is allocated to Canadian goodwill, the non-resident will be required to obtain a section 116 certificate from the CCRA. This will open up the opportunity for the CCRA to examine whether the non-resident does in fact h ave a permanent establishment and to tax not only the goodwill, but also to reassess business income of prior taxation years if it believes a permanent establishment did exist. In informal discussions with the CCRA, we have been told that on section 116 applications for goodwill, the CCRA intends to scrutinize c l o s e l y, sales representative arrangements and m ay be expected to question the existence of a permanent establishment in all cases where the r e p r e s e n t a t i ves are employees or exclusive r e p r e s e n t a t i ve s. The broadened definition of TCP has therefore enhanced the CCRA s ability to tax not only gains on the sale of goodwill, but to scrutinize whether prior ye a r s business profits should have been taxed in Canada. In cases where non-residents have never filed Canadian tax returns, no limitation period applies to restrict the number of prior ye a r s that the CCRA can investigate and reassess. In view of these deve l o p m e n t s, non-residents who h ave a Canadian sales force and take the position that they nevertheless have no Canadian permanent establishment may wish to consult with legal counsel to determine whether in their circumstances the position is t e n a b l e.

5 5 T A X L A W G S T I N A G E N C Y S I T U AT I O N Re c e n t l y, our firm has been invo l ved with GST reassessments involving large real estate owners who use the services of third parties to manage their properties. Included among the services provided by the property managers is the collection of rent from the tenants as we l l as the GST thereon. Some of these property managers do not follow very closely the rules set out in, or implied by, section 177 of the Excise Tax Act (Canada) ( ETA ) which is the statute that imposes the GST. Subject to the application of ETA section 177, the obligation to collect and remit GST remains with the principal even if the agent makes the supplies in question. Under this rule, the owner of the real estate (who is registered for GST) is considered to be the entity making the taxable supply of renting premises to tenants. As a result, the owner should be collecting and remitting the GST associated with the rental payments it receives from tenants. It should also be the entity claiming the input tax credits available in connection with the supply of premises. If the property manager remits the GST of the owner and claims the GST input tax credits of that owner under its own GST registration number, the owner has technically not made its appropriate remittances and could be held liable for the GST remitted in error by the property manager together with interest and, possibly, penalties. Some confusion may be explained by the fact that section 177 of the ETA has been amended four times since its introduction in 1991, each amendment limiting the scope of application of subsection 177(1), which provides an exception to the general rule explained above. As a result of these amendments, subsection 177(1) now applies only when the owner/supplier is not registered for GST p u r p o s e s. In this event, a complicated set of rules deems the agent to be the supplier of the property to the client. This confusion may also be partly attributed to the election that is available under subsection 177(1.1) of the ETA. Pursuant to this election, the real estate ow n e r, as the principal, and the property manager, as the agent, may elect to depart from the general rule explained above and to have the agent collect and remit, on behalf of the ow n e r, the GST directly to the g overnmental authorities using the property m a n a g e r s own GST registration number. This election must be made on a prescribed form, but it does not have to be filed with the Canada Customs and Re venue Agency. Once

6 6 S P R I N G the election is in force, the owner and the property manager are jointly and seve r a l l y liable for the full amount of GST that is to be collected and remitted in respect of the rental p r o p e r t y. This would be quite simple, but in GST matters nothing is simple. The further complication arises over a controve r sy as to the ability of the agent to claim GST input tax credits on behalf of the owner when the election has been filed. Some authors believe that the owner is the only one who may claim its own input tax credits even when an election under ETA subsection 177(1.1) has been completed. We are not certain that this is the correct interpretation. Indeed, we fail to see the purpose of such an election if the property manager has to file a GST return remitting the gross amount of GST collected and the ow n e r has to file a separate GST return under which it would claim its GST input tax credits. This would be a very foolish way to proceed from a cash flow perspective especially when there are large GST input tax credits to be claimed. U n f o r t u n a t e l y, the wording of the ETA is too imprecise to defeat the argument that separate returns must be filed. We were worried further when Re venue Quebec (which administers GST in the Province of Quebec) took this position in the draft reassessments. Ac c o r d i n g l y, we advise against the filing of such an election until this controve r sy has been fully resolved. The owner should be filing its own GST returns. If the owner wa n t s the property manager to prepare such returns and to keep all accounts for the managed property separate from the rest of its affairs, this could be achieved by the owner obtaining a separate branch number for that property. The returns for this separate branch number would be completed by the property manager, but filed by the ow n e r. This would eliminate the uncertainties associated with the input tax c r e d i t s, while achieving the desired result of keeping the accounts of a property separate.

7 7 T A X L A W E MP L O Y E E P R O F I T S H A R I N G P L A N S More and more professional corporations and other owner-manager businesses are setting up employee profit sharing plans (EPSPs). An EPSP is an unregistered arrangement defined under the Income Tax Act as an arrangement whereby an employer contributes a portion of its profits to a trust for the benefit of its employees who are members of the EPSP. An EPSP is very flexible in terms of who can be a member of the EPSP. Contributions can be made on behalf of all employees, a select group of employees or even for one employee being the owner-manager. Further, there is no requirement to treat employees equally under the EPSP as allocations from the EPSP are discretionary. Contributions made by an employer to an EPSP in the year or within 120 days after the year end are deductible in computing the employer s taxable income. Employees are required to include, as income, allocations from the EPSP in the year the contribution is made to the plan. months. A deferral exists from the time the employer makes a contribution to the EPSP until the employee is required to include the contribution in income. Further, contributions to the EPSP are not subject to withholdings for income taxes and are not subject to employment insurance premiums or CPP contributions. An EPSP can also provide some opportunity for income splitting with family members. If other family members are active in the business, such family members may be included as members of the EPSP. There are a number of potential benefits of using an EPSP. Traditionally, EPSPs have been used as an alternative to declaring a bonus to the ownermanager. Specifically, an EPSP can be used to defer income taxes on the owner-manager s compensation for a period of up to fourteen

8 S P R I N G TA X L A W G R O U P Calgary Office Ross Freeman (*) Nancy Golding Derek Kurrant Ruth Spetz Lauren Warrack Montreal Office Virginia Chan Rosie Dikeakos Charles Marquette François Morin Brian Schneiderman (*) Ottawa Office Boyd Aitken Pamela Cross Kent Howie Bill Johnson Bernie Roach (*) (*) Regional Contacts Toronto Office Jodene Belsey Barry Corbin Heather Cormier Arthur Fish Kevin Fritz Stephen Fyfe Stephen Heller (*) Eva Krasa Salvatore Mirandola Maria Scullion Terry Sweeney Larissa Tkachenko John Tobin Tony Vacca Craig Webster Jonathan Willson Vancouver Office Wendy King Otto-Hans Nowak Max Weder (*) Borden Ladner Gervais LLP Lawye r s Pa tent & Trade-mark Ag e n t s C a l g a r y 1000 Ca n terra Tow e r 400 Third Avenue S.W. C a l g a r y, Alberta, Canada T2P 4H2 tel: (403) fax: (403) M o n t r é a l 1000 de La Gauchetière Street We s t Suite 900, Montréal, Québec, Canada H3B 5H4 tel: (514) fax: (514) O t t a w a 60 Queen Street, Suite 1000 Ottawa, Ontario, Canada K1P 5Y7 tel: (613) legal fax: (613) IP fax: (613) To r o n t o Scotia Plaza, 40 King Street We s t Toronto, Ontario, Canada M5H 3Y4 tel: (416) fax: (416) The Borden Ladner Gervais LLP Tax Law Update is necessarily of a general nature and cannot be re g a rded as legal advice. The firm would be pleased to pro v i d e additional details and to discuss the possible application of these matters in specific situations. Va n c o u v e r 1200 Wa t e rfront Centre 200 Burrard Street, P.O. Box Va n c o u v e r, British Columbia, Canada V7X 1T2 tel: (604) fax: (604) w w w.b l g c a n a d a.c o m Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership