December 2010 eNewsletter

Notice To Reader

The following commentary has been prepared by Parker Garber & Chesney, LLP based on information available to the public on the date of publishing. Readers are cautioned that this commentary is informational only and that any issues specific to the reader’s needs be addressed with the appropriate tax professional. The reader is cautioned that this document is not meant to provide advice specific to the reader’s particular situation and that advice cannot be given in such a manner.

In This Issue

• INCOME SPLITTING
• IN THE COURTS – RECEIPTS ARE NECESSARY BUT NOT REQUIRED

INCOME SPLITTING

This is one of the most popular subjects when tax planning is discussed and is an area where doing it right can be profitable and doing it wrong can be very expensive.

Personal

Income splitting allows individual taxpayers to achieve one or more of the following benefits:

1. Use of lower personal tax rates;
2. Distribution of lower taxed income such as dividends to low-income family members;
3. Availability of the capital gains exemption.

Use of Dividends – A properly designed corporate structure can result in dividends being paid to low-income family members who can benefit from the dividend tax credits. If these family members are attending post-secondary school and have substantial tuition costs then the payment of dividends can fund the tuition and still provide tax-free or low tax income (see rates above).

Capital Gains Exemption – If the shares of the corporation qualify as a small business corporation or family farm corporation then the shares are eligible for a tax exemption on up to $750,000 of capital gain. If the corporate structure is in place this exemption can be multiplied by the number of family member included in the structure.

Corporate – Corporate tax rates are being reduced to a level where most Canadian provinces are very competitive compared with other industrialized countries. In particular small business tax rates in Canada are less than half the comparable rate in the US. For 2010, Ontario small business tax rates on the first $500,000 of active business income is 16%. For 2011 that rate will be 15.5%.

Corporate structures can be designed to multiply the $500,000 annual small business income by carefully organizing additional corporations. CRA is well aware of this strategy and considers it aggressive. They have challenged many attempts to increase the small business income among corporations in a group with mixed results. Planning in this area must be done carefully and be well-documented.
 

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IN THE COURTS – RECEIPTS ARE NECESSARY BUT NOT REQUIRED

In an interesting judgement in Tax Court in Allott v The Queen the Court again upheld the previous decisions in Senger-Hammond and Dominguez that the child care expense rules in the Income Tax Act requiring receipts is “directory” rather than mandatory and the court was quite willing to accept the evidence of the taxpayer that he had paid the babysitter who refused to provide a receipt. These decisions are contrary to CRA’s insistence that receipts are required. We wonder how many other sections of the act have the same “directory” rather than mandatory wording.

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