Canadian Taxes A to Z (2018): "E" is for Employment Income

Today, E for for Employment Income. Five letters down, 21 to go!

WHY THE DIFFERENCE BETWEEN EMPLOYMENT & SELF-EMPLOYMENT IS SO FUNDAMENTAL

The concept of what is, and is not, "employment" income may be the most fundamental tax concept of all for most Canadians. When I was an employed lawyer I couldn't deduct much against my employment income, because my employer was supposed to be paying for all my expenses. Once I became self-employed, I could claim all sorts of deductions like home office use or computer purchase.

Confusing the employment income and self-employment income concepts can lead to great mischief at tax time. In a world of increasing "independent" contractors, you need to avoid the CRA coming after you claiming that you are in fact an employee not entitled to deductions, or that you're an employer with employees who isn't taking source deductions like you are supposed to be doing. 

The four principal factors examined by the CRA in determining employee versus self-employed status are:

1. control;
2. chance of profit/risk of loss;
3. integration (with larger business unit);
4. tool & equipment ownership and repair.

Many perceive this difference between employed and self-employed deductions to be unfair, but like a lot of things under the Income Tax Act the best that can be said is that's just the way it is.

Regardless of whether you are an employee or self-employed, you need to be working from a position of knowledge to take advantage of all the deductions that are available to you. 

SELF-EMPLOYMENT LOSSES CAN OFFSET EMPLOYMENT INCOME

An example of what you need to know is that sometimes being both employed and self-employed can work in your favour. Even if you only earn a small amount of self-employment income, you can usually apply any losses you incur in self-employment against employment earnings to reduce you overall net income.

There are technical rules around how great those losses can be, but what this practically means is that you may be better off reporting a few thousand dollars in side income, rather than just "forgetting" about it and hoping no one notices because it is so small.

DO I NEED AN ACCOUNTANT & WHAT IS AN ACCOUNTANT

Some employees may not need a designated accountant to do their taxes for them (though it's never a bad idea), whereas most of the self-employed definitely need a designated accountant.

Everyone should be very clear on the reality that the simple term "accountant" (without any initials attached at the end) does not imply any designation (unlike lawyer, where we prosecute you if you use the term without being properly qualified). You should look for an accounting firm with a designation, as those without designations may not carry any insurance and definitely aren't subject to professional regulation. Accountants in Canada are increasingly switching to a common CPA designation (from CA/CMA/CGA). 

AT LEAST USE GOOD TAX PREPARATION SOFTWARE

Everyone, employee or self-employed, can benefit from good tax preparation software. For years now I've been using http://www.taxfreeway.ca/, which I love. It's cheap, they offer great support (I've emailed them esoteric questions 24 hours before tax deadline and received an answer within the hour), and Mac and iPad versions are available (in addition to Windows). No, they aren't paying me to say that, they just deserve some appreciation. 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "D" is for Deemed Disposition

Today, D is for Deemed Disposition. Four letters down, 22 to go!

THE MAGIC OF SELLING WITHOUT SELLING

When can you be considered to have sold property, when you didn't actually sell it? Under the Income Tax Act, of course!

You might know that you're subject to capital gains tax (or can claim a capital loss) when you sell a piece of property, and that property has either gone up in value from its original purchase price, or dropped in value below its depreciated (capital cost allowance) value.

What not everyone realizes is that such gain or loss tax rules kick in for many circumstances when you don't actually sell the property. These are called deemed dispositions.

THE FIVE DEEMED DISPOSITION SITUATIONS

Such sales that aren't really sales apply in principally five situations.

1. You transfer securities from a non-registered investment account to a registered account like an RRSP, RDSP, TFSA or RRIF. Deemed proceeds will be market value of securities at time of transfer. Thus trying to save tax can cost you tax.

2. You make a gift of the property to someone else. Deemed proceeds are fair market value of property at time of transfer. Thus a "free" gift could become very costly for the giver.

3. You change the property's use from personal to business, or from business to personal. For example, you change a personal residence into a rental property. Thus trying to generate more income leads to paying your existing income in taxes.

4. You die. All of your capital property is deemed to have been disposed of at the time of your death.

5. You cease to be a resident of Canada. While some people go to a lot of effort to sufficiently cut their ties to Canada so as to be free of its tax regime, that cutting could cost them dearly in deemed disposition taxes.

TOP REASON TO AVOID DEEMED DISPOSITIONS

The reason you need to be very wary about triggering deemed dispositions is that you could get hit with a huge tax bill that might have been deferred until the much later date of the time you actually sell the property (and thus have cash available to pay all those taxes). 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "C" is for Capital Cost Allowance

Today, C is for Capital Cost Allowance. Three letters down, 23 to go!

WHY DID THEY HAVE TO INVENT THE CCA TERM

Capital Cost Allowance (aka CCA to its friends) is a perfect example of why the drafters of the Income Tax Act sow needless confusion by using three legal words to describe one accounting term: depreciation. Because that's exactly what CCA is, tax deductible depreciation which will reduce your net income due to you having purchased capital items for the purpose of earning income. 

It takes long enough for any of us to learn accountant-speak. Why should we then have to learn yet another language: tax law-speak? Because the government says so, full stop. 

Don't ask me why the government in its wisdom decided to change the name of depreciation to CCA for tax purposes. There was probably some meeting in some Ottawa boardroom at the Department of Finance (bereft of even coffee and muffins, because we in government were always told such things were an extravagance, notwithstanding other waste). A few plain language folks with common sense may have been fighting a rear guard action in defence of using the term "depreciation," but alas the Assistant Deputy Minister had his heart set on Capital Cost Allowance. He thought it sounded modern, and sexy, and unique. And so CCA was born. 

WHY CAPITAL VERSUS OPERATING EXPENSES ARE DEBATED AT THE TAX COURT

You'll mostly have two kinds of expenses to claim on your tax return to reduce your self-employed income: operating and capital. Operating expenses you can usually claim at 100% in the tax year they're incurred. They constitute things like rent, utilities, pencils and salaries. 

By contrast, capital expenses need to be depreciated, because they're supposed to last you for longer than just the year you bought them in. Vehicles, computers and desks are all capital items.

There are lots of CRA fights over whether expenses are capital or operating. Fights that can means hundreds of thousands of dollars of difference in business taxes payable. Fight caused by issues like the taxpayer claiming engine replacement in mining trucks as an operating expenses fully deductible in the year incurred because it was simply a repair, and the CRA claiming them an improvement which required multi-year CCA. 

WHY BOATS OUTLIVE PLANES WHICH OUTLIVE CARS

The most important thing to know about CCA is that it varies greatly by "class" of asset. For instance, you get 15% per year CCA on boats placed in Class 7, an improved 25% on aircraft residing in Class 9, and a princely 30% on automobiles. The theory is that planes last longer than cars, but shorter than boats. Not sure if that's true, but that's what the government's decided, so we're stuck with it. 

WHY BUYING IN DECEMBER IS ALWAYS BETTER THAN JANUARY

The second most important thing to know about CCA is that you only get to claim half of it in the year you acquire the capital item. This is known as the Half Year Rule. So that 25% deduction on your new Learjet becomes only 12.5% in its first year. Thus picking up capital items in December (where you can effectively claim for six months but only own for one month) is a far better idea than in January (where you're again stuck with a six month claim, even though you'll own for the entire year). 

WHY DEFERRING TAX IS BETTER THAN PAYING IT

Last in the CCA greatest hits list is that you need to beware of "recapture," where if you sell a capital item for a value greater than its remaining undepreciated value, you'll have to pay tax on the difference between the remaining undepreciated value and the sale price up to a maximum of the original acquisition price.

This can be a particularly touchy issue for buildings. While they depreciate at a few percent per year, in reality their resale price may keep going up and up, meaning you'll pay tax later on all that depreciation you've claimed - but deferring tax until later is still a good thing, even if you can't avoid ultimately it. 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "B" is for Business Investment Loss

Today, B is for Business Investment Loss. Two letters of the alphabet down, and 24 to go!

We all know that the key to tax happiness is maximizing your deductions, and minimizing your income. The more your deductions, the lower your income, and usually the lower your payable taxes will be. Generally speaking, business gains may eventually be taxable as income, and business losses may eventually be deductible to reduce income.

WHY BUSINESS LOSSES ARE MORE COMPLICATED THAN THEY SEEM

Unfortunately like lots of aspects of the Income Tax Act, things are a little more complicated than they should be when it comes to business losses. But that's why accountants and lawyers (and tax blogs) were put on earth to help you with your taxes.

A "business investment loss" (in the tax sense) can be used to reduce ALL sources of income (unlike other more limited capital losses), however it must relate to shares of a small business corporation (SBC) or a debt owed to the taxpayer by the small business corporation.

A SBC is defined by the Income Tax Act as a Canadian controlled private corporation using substantially all of its assets in an active business carried on in Canada. This type of claimable loss doesn't apply to public companies, companies not controlled by Canadian residents, or companies mostly operating abroad.

Fifty percent of the business investment loss can be used to reduce taxable income as an Allowable Business Investment Loss (ABIL). The loss is claimed on line 217 of a personal tax return.

HOW YOU CAN COMPLETELY WRITE OFF A LOSS & STILL OWN AN ASSET

Under s-s. 50(1) of the Income Tax Act you may be able to elect to have disposed of nil value shares or bad debts of a SBC and then have reacquired the shares or debt immediately after the end of the year for no cost. This could let you write off an investment, while still retaining ownership of the investment. Thus you could use a SBC later to start another business, while benefitting from the tax deductions now.

The CRA has a handy Interpretation Bulletin on Business Investment Losses called IT-484R2. Since there are quite a few hoops to jump through to benefit from this loss claim, I'd suggest you consult your friendly neighbourhood accountant about whether you're able to claim it.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): A is for Amortization

Thanks to Kelly Phillips Erb, aka @taxgirl and writer for Forbes, for originating the taxes A to Z idea, and giving me permission to adapt it to Canada. Her snappy, clear and cogent writing is capable of making anyone understand (and dare I say it, "like") tax. Like her, I took a tax course in law school, and loved it (much to my surprise). Now I help folks with Canada Revenue Agency (CRA) disputes, occasionally taking them as high as the Supreme Court of Canada.

I see Kelly's already up to the letter "R" (for Relief Funds) for the 2018 tax filing deadline in the U.S., whereas I'm stuck with the letter "A" for an April 30th deadline in Canada. I've clearly got some catching up to do! 

HOW AMORTIZATION IS A TAX CONCEPT

Today, A is for Amortization. You've probably heard about amortization when it comes to paying down your mortgage, but you might not have thought about it as a tax concept. 

You generally "depreciate" significant tangible property you purchase to earn income, like a vehicle or a building. The Income Tax Act refers to this as Capital Cost Allowance (CCA), and specifies a variety of rates depending on the type of property. 

For intangible property you acquire to earn income, like goodwill or intellectual property, you "amortize" it. The Income Tax Act calls this Eligible Capital Property, and again you can write it off at a certain percentage a year. 

You "amortize" intangibles rather than "depreciate" them, because they in theory can have an indefinite life that never wears out (unlike that orange Volkswagen camper van painted with flowers that you used to use in your outfitter business). 

HOW WHAT IS AMORTIZED IS A MOVING TARGET

Generally Accepted Accounting Principles (GAAP) rules have recently changed so that goodwill is now treated somewhat differently than other intangibles for write down purposes, so that it's tested each year for impairment, rather than simply (yes, perhaps I'm overly stretching the meaning of the word "simply" here) "amortized." But you still amortize other intangibles like patents, as they'll eventually expire.

The concept to get here is that if you've purchased something for the purpose of earning income, then you're allowed to gradually deduct its cost as it wears out - even if its not a tangible thing. But since goodwill (and supposedly diamonds) is forever, you might not be able to deduct it unless you can show some proof of its diminishing in value. 

HOW AMORTIZATION WINDS UP IN THE TAX COURT OF CANADA

You can get in all sorts of trouble with the CRA by trying to deduct something as a current expense at a 100% rate that should actually be amortized. But I also help clients where the CRA sometimes unfairly denies current expense deductions of something that the CRA claims requires amortization, but which in my opinion does not. Ultimately the Tax Court of Canada gets to decide. 

A Frankfurt team of accountants has come up with with this cool (at least for those of us fond of tax concepts) comparison of tax amortization rates by country and type of intangible: http://www.taxamortisation.com.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

How to Move with Your Child or Stop a Move of Your Child After a Divorce or Separation: Top 5 Factors Favouring a Move and Top 5 Arguments to Oppose a Move

When courts were more focussed on parental “rights” rather than “best interests of the child,” it seemed they were more reluctant to let one parent move with a child such a distance away that regular access of the other parent would be logistically challenging. But more recently, it appears courts have had a reality check realizing that Canadians are more mobile than ever for work, study and family reasons, and that trapping both parents in one spot - often a spot they aren’t originally even from - until all their children are grown is simply not in the best interests of those children. 

Not surprisingly, the parent who doesn’t want to move often fights such moves by the other parent. Sometimes successfully. There is a significant rate of family court contested hearings on mobility issues because of the dramatic way that each parent will be impacted by a move of one of them away from the geographic spot of their split. 

You can generally break moves with children down into short, medium and long distance. The short moves - under 100 km - are really no brainers. Looking at the caselaw, courts will almost always agree that one parent can move that distance. It will lengthen the duration of access transitions, but not overly frustrate weekly transitions. So fighting a move like that might mostly get you hit with a large costs award.

Medium and longer distance moves are more controversial, but their court results will be factually specific. Courts have often authorized what I would called medium distance moves of 500 km or so, seeming to think that regular access is still possible even though it will be a bit of a hike. Moves across the continent or to a different continent become more challenging still, but courts have even regularly authorized those when deemed to be in children’s best interests. 

THE SUPREME COURT OF CANADA'S TAKE ON PARENTAL MOVES WITH CHILDREN

Over 20 years ago, the Supreme Court of Canada in the seminal case of Gordon v. Goertz, [1996] 2 S.C.R. 27 found: "While a legal presumption in favour of the custodial parent must be rejected, the views of the custodial parent, who lives with the child and is charged with making decisions in its interest on a day-to-day basis, are entitled to great respect and the most serious consideration. The decision of the custodial parent to live and work where he or she chooses is likewise entitled to respect, barring an improper motive reflecting adversely on the custodial parent’s parenting ability.”

As courts are now drifting away from inflexible concepts like “custody” versus “access,” whether a move should be authorized in a truly shared parenting arrangement may be a more challenging question to resolve. But the same principles will apply regardless of the custodial arrangements: it’s all about the best interests of the children. 

IT'S MOSTLY ABOUT THE FACTS, NOT THE LAW, SO PRESENT COMPELLING HARD EVIDENCE OF BEST INTERESTS

Like a lot of family law, whether a move is or is not approved by a court has a lot more to do with the weight of the presented evidence, than with some magical legal authorities. Best interests of the child start with maximum contact with both parents. So if that contact is going to be lessened with one parent - perhaps significantly lessened - there needs to be a significant counter weight of best evidence to show why there will be an overall net gain to best interests with a move that ultimately involves reduced frequency of contact with one parent. Uncertainty on the court's part as to whether or not a move is a good thing will likely result in preserving the status quo, and no move being approved. 

Although most "misconduct" is not supposed to count anymore in family law, that doesn't apply to breaches or agreements or court orders, so if one parent jumps the gun and moves anyway without consent or a court order, it might become a lot more difficult to get court approval after the fact.

HOW TO BEST PROMOTE A MOVE WITH YOUR CHILDREN

1. Demonstrate there is a tangible change in circumstances since the agreement or order. This is an official precondition to a court considering a motion to change custody, unless you've only got an informal agreement which doesn't really count for court purposes. 

2. Demonstrate that the children will be economically much better off after the move, such as by better parental job prospects or reduced housing costs. Don’t be vague or speculative. Actually get a better job first that is conditional on being able to take the children, as difficult as such a conditional offer might be. Present written evidence of the job. Present written evidence of the type and cost of accommodation. Produce economic statistics from the region to which the move is proposed.

3. Demonstrate that the children will be educationally, physically and mentally better off after the move. Show proof of better schools, perhaps with specialized education programs. Show proof of specialized medical treatment programs. Especially show proof of extended family support in new location, like grandparents, uncles, aunts, cousins. Don’t be vague. Include letters from real people identifying the children in question, and their admissibility to these programs. 

4. Demonstrate that the other parent won't be economically disadvantaged by the move by offering to pay all costs of travel of either children or non-custodial parent for access visits.

5. Demonstrate that the principle of maximum parental contact will still be honoured to the greatest degree possible after the move through describing in detail electronic means and timing of remote access with children, plus generous in-person access which might include all summer holidays, and even every Christmas and March break forever. The courts are receptive to proposals that the parent staying have longer terms of uninterrupted access, even if access won’t be as frequent as prior to the move. Do the math, counting hours and days of access under the current regime, and contrasting that to the numbers under the proposed regime. Produce detailed calendars.  

HOW TO BEST OPPOSE A MOVE OF YOUR CHILDREN

1. Assert there is no real change of circumstances since an agreement or order. The court will sometimes toss an entire motion to move on this basis. While it can be difficult to win on this argument alone, there is not really any downside to attempting to make it. 

2. Demonstrate how well the children are currently doing in their present environment. Be specific. Cite all the things they will be torn away from. Produce documentary proof. Produce contrary proof that those things won't be available in the new proposed home location. Demonstrate the speculativeness of the advantages cited in favour of the move: perhaps no job or housing has been secured yet, and perhaps an overly optimistic economic, educational and lifestyle view of the new location is being presented to the court by the parent seeking the move. 

3. Demonstrate the relative equality between the parents of current access/custody arrangements, and how lopsided that will become if the children move away with one parent. Courts will be more likely to approve a move for one parent already spending much more time with the children than the other parent. 

4. Demonstrate the lack of real ties of the children and either parent to the new proposed location, as compared to the current location. 

5. Demonstrate the great logistical difficulties presented by regular access between the old and new location, including the significant financial cost, tiring nature of travel for young children, time zone differences, that winter driving between locations is hazardous or that driving isn’t even possible because of distance. 

Even though parties might be able to represent themselves on minor changes to access or custody arrangements, like times or locations of pickup or drop off, or what school should be attended, the catastrophic consequences for one parent of winning or losing a geographic move motion means that you should always be considering retaining legal counsel to help you with it.

Such motions don't need to consume untold resources so long as you push them to a hearing date as quickly as possible, without too many preliminary case conference or settlement conference court appearances. Devoting lots of personal efforts to compiling and organizing a strong factual evidentiary record favouring or opposing a move will save you lots of money on a lawyer as a parent, as that will let the lawyer focus on the law part rather than the facts part of the court equation. 

Gordon S. Campbell is a Family Law Barrister practicing throughout Ontario. Lean more at www.nofearfamilylaw.com.