Understanding the KiddieTax, Part 2

Another common plan prior to January 1^st, 2000 was to have a partnership whereby the child (or a trust of which the child was a beneficiary) would be a partner and have the partnership receive income from a related entity.  For example, the partnership could provide consulting services to a corporation owned by the parents.  The income received by the partnership could then be allocated to the partners, including the minor child, thus providing for simple yet effective income splitting.

Now both of these income splitting plans are subject to the “Kiddie Tax” to the extent that the income is received by a minor child.  As with most tax rules, many people do not know or understand these rules so it is best to educate yourself (such as you are in reading this blog) and plan with professionals, such us Kustom Design.

One of the typical types of income that is not split income and therefore not subject to the “kiddie tax” is capital gains.  Many plans were set up that involved related corporations that were structured to realize capital gains income.  These plans mainly involved having shares of the corporation being sold to a related corporation and resulting in a capital gain that is taxable in the child’s hands.  Prior to the 2011 Federal Budget, such a plan was often used to the extent that the accountant and/or tax lawyer and their client believed that the general anti-avoidance rule (“GAAR”) would not apply.  The Canada Revenue Agency(CRA), however, was not amused and would often times apply the GAAR to such a plan (with many cases still in the system).  New legislation was then introduced through the 2011 Federal Budget.

We’ll continue our discussion on this new legislation as well as how the Kiddie Tax applies to partnerships and trusts next week.  

Understanding the Taxpayer Bill of Rights Part 3: Commitment to Small Business

The next section of the Taxpayer Bill of Rights deals with Small Business.  We will now review these 5 items on the Taxpayer Bill of Rights.

1.The Canada Revenue Agency (CRA) is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses:

As much as they say they try to minimize the costs of compliance for a small business, it is not an easy task.  CRA must balance this with their responsibility to administer and collect.  It is not advisable for a small business owner not to have an accountant who can advise them in the area of tax and reporting responsibilities.  Although CRA says they want to minimize it, it definitely seems to be heading the other direction!

2. The CRA is committed to working with all governments to streamline  service, minimize cost, and reduce the compliance burden:

The best example we can see of this is when the CRA collects taxes and gives the provinces their portion.  This is not the case in Alberta.  Although we don’t see great evidence of this, we can assume they do work with other governments to streamline things.  They do want to collect their taxes quicker, which hopefully makes it simpler for the small business!

3. The CRA is committed to providing service offerings that meet the needs of small businesses:

The CRA offers various online services for electronic filing and accessing information through an online CRA account.  As with any electronic service it can bring technical difficulties, however it can still be effective once in place and running smooth, particularly the access to your information online.

4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer:

This mostly means they put on courses and put out publications for people to understand their opinions and methods.  Sometimes this can assist, but never just take it as fact!  It is always better to have your own tax advisors, accountants and lawyers that don’t work for the CRA!

5. The CRA is committed to explaining how we conduct our business with small businesses:

In my experience they sometimes do explain very well and other times they don’t.  I’ve worked with some auditors who are quite thorough and explanative, while I’ve worked with others who do their thing, won’t really answer your questions, and they just send a Reassessment.  It really depends on who you are dealing with as to what explanation you will get! 

So as you can see, the Taxpayer Bill of Rights is an important piece of legislation.  It is imperative that you know your rights, otherwise how will you know if they are trampling your rights and what to do about it.  If you believe that CRA is not staying in honor of any of these Rights, then lodge a complaint and go to the Ombudsman.  If we don’t do something to hold them accountable, who will? 

CRA also publishes a guide to explain this Taxpayer Bill of Rights from CRA’s side…( http://www.cra-arc.gc.ca/E/pub/tg/rc17/rc17-09e.pdf).   If you have any questions on the Taxpayer Bill of Rights or my blogs, please do contact me!

Understanding the Taxpayer Bill of Rights Part 2

Here’s the continuation of my discussion on the Taxpayer Bill of Rights.  We ended the previous blog with the 5^th taxpayers’ right so let’s move on to #6.

6. You have the right to complete, accurate, clear, and timely information:

This is another tough one as there is not a clear definition of what timely information is!  This is typically up to the Ombudsman or a judge to decide.  Getting it in writing ensures the information should be complete and accurate.  The word clear is also an issue here as a lot of things put out by the CRA are not clear to taxpayers! 

7. You have the right, as an individual, not to pay income tax amounts in dispute before you have had an impartial review:

This is a very important one!  If you have an amount in dispute through the appeal or Notice Of Objection then you do not have to pay it, until or unless it is resolved as owing.  However, interest may continue to accrue if the amount in fact has to be paid later. Also, if you are waiting for a refund for something else or another year they cannot hold it due to other amounts in appeal!

8. You have the right to have the law applied consistently:

In all my years doing accounting, I have rarely seen this to be true.  If you find this to be an issue, the Ombudsman must be notified in writing with the facts and details.

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings:

Pretty self explanatory.  To lodge a complaint follow this link -- http://www.cra-arc.gc.ca/gncy/crsc/menu-eng.html

10. You have the right to have the costs of compliance taken into account when administering tax legislation:

So yes, if you hire accountants, lawyers or advisors you can deduct the cost.  Our motto at Kustom Design is that when you hire us, we’ll save you more in tax than you pay us for our accounting fees!

11. You have the right to expect us to be accountable:

Notice the wording on this – we have the right to expect them to be accountable…but do we have the right for them to be accountable?  Seems to be trick wording here!  If we look at the actual definition of accountability we can see clearly that they are not always accountable.  That being said, they usually are as clear as they can be why they have made a decision on tax matter, right or wrong.  They also do publish some annual reports to both public and parliament.

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances:

This is a good one as there is sometimes the possibility to have things like penalty & interest waived, to allow you to file late returns without being penalized, and even to get refunds past 3 years back in some circumstances.  The details of applying for this relief can be found here (http://www.cra-arc.gc.ca/gncy/prgrms_srvcs/txpyrrlf/menu-eng.html).   If you are denied the first time, you can even file a further request.

13. You have the right to expect us to publish our service standards and report annually:

This one is pretty straight forward.  The annual service standard report can be found at www.cra.gc.ca/agency or (http://www.cra-arc.gc.ca/gncy/nnnl/menu-eng.html)

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner:

This one is more for their benefit than yours.  They will warn you about things that are good and bad and you won’t know the difference.  They actually use this as a tactic to scare people from tax planning as tax planning and using tax programs can significantly reduce their revenues.  Keep in mind they are a collection agency and are paid to collect as much money as they can, which includes discouraging people from planning to save tax!

15. You have the right to be represented by a person of your choice.

Many times it is advisable to have a lawyer or accountant represent you when dealing with CRA, particularly when it comes to audits.  To give rights to a representative to handle your CRA matters you will need to fill out and submit a RC59 to CRA (http://www.cra-arc.gc.ca/E/pbg/tf/rc59/README.html). 

Tips when Dealing With CRA Part 6

In my previous blogs, I have discussed 9 tactics used by the CRA and how to deal with them.  There are a few more that you should know about. Read on . .

10. Notional Assessments – If you don’t file for  a period of time CRA may come up with an amount that you owe.  The amount that they come up with is typically much more than you would owe.  You must contest these amounts and get your filing up to date so CRA has accurate numbers and don’t go off of the ones they made up!

11. Corporate Director’s Liability – A shareholder of a corporation does not take the liability, but the director does.  By signing on as a director you are taking the responsibility of all CRA debts even if the corporation closes.  To avoid this, the director of the corporation can be someone who doesn’t own title to any assets that CRA can lien, nor have any income that CRA can garnish.

12. Loss of Documentation – Occasionally CRA loses documentation.  If you have given them originals it is too late at this point.  If you have to prove your case you now can’t because you don’t have original documents.  To solve this issue, never give CRA original documents instead give them copies when they request documentation from you.  Alternatively you could meet them somewhere with your documentation so they can review it on the spot, without taking it.  Even better, let them meet with your accountant!

CRA does have a lot of power and can access all kinds of information on you.  You must know your rights, which are found on the taxpayer bill of rights.  You must know how to deal with them.  You must also know that you can have an authorized representative that can deal with them on your behalf.  And again, do everything in writing with them!

Tips when Dealing With CRA Part 5

We have been discussing some of the tactics used by CRA and how to deal with them. So far we’ve gone through 5 of them. Here are some more:

6. Confusion – Because the CRA is so big and has so many departments in different cities, you may find that more than 1 person is dealing with your file or you may find your file gets passed from one department/city to another without you even knowing it. You also may find that one CRA agent will tell you one thing, but another CRA agent tells you something different. This is yet another reason to deal with CRA in writing. Putting things in writing clarifies things and can assist in holding parties accountable.

7. Coercion – CRA may Coerce you to pay even when you don’t think you owe anything. A CRA collector is just doing their job – collect from people. If you don’t agree with their assessment, appeal! If your file is in appeal, they are not allowed to collect the amount from you as it is not confirmed as owing until the appeal is completed. You can utilize the Taxpayer Bill of Rights to help in understanding your rights here.

8. Garnishees – If amounts are confirmed as owing CRA could garnish your pay cheques. If you do owe an amount to CRA, then make arrangements with them. If you make arrangements and stick to your arrangements then they will not typically garnish you. This is mostly for people on payroll (employees)

9. Liens on property – CRA may go as far as putting a lien on your property so if you ever sold it, they would get paid. To avoid this don’t own properties in the name that has the liability. If you do work that can incur liability then have your spouse own the property or own it in a trust.

I will discuss more on my next blog!

Tips when Dealing With CRA Part 4

In my next 2 blogs I would like to discuss some of the tactics that CRA uses. Some of these tactics are in phone calls and conversations with CRA, some are even done in writing. For example when CRA is going to reassess a tax shelter, they will write in the letter to the taxpayer that they are going to audit the taxpayer’s participation. Of course people will read this as if they are going to get audited, when in reality the CRA has all the details of their tax shelter participation. Tax Shelters are monitored by CRA through the Tax Shelter Identification number. This allows the CRA to monitor every tax shelter and who is participating, how much and when! People who participate in tax shelters sometimes get scared when CRA uses their tactics, but others that don’t continue on saving tax year after year. The CRA can be tricky so you must watch out for the potential tactics they try and use.

Here is a short list of some of the tactics to look for and what do to do about them:

1. Ignorance – If you don’t know the rules, too bad! This seems to be how all of our regulators work in today’s day and age, so before you start a business, acquire an asset or do anything that has a potential larger tax consequence, seek professional advice. (Kustom Design is here to assist you, so please do come consult with us)
2. Fear – They will say things to you and provide written correspondence in ways that will keep you in fear of trying to do anything that saves tax! It seems that much of our system is now keeping people living in fear. Don’t live in fear, know your rights and always stand up for yourself! Surround yourself with others that are living in freedom of fear! We are here to help you stand up for your rights!
3. Intimidation – The CRA will try and intimidate you with their position of authority. Don’t let them! They are just people like you and I. If you know your rights and know that you haven’t done anything wrong, then don’t let them intimidate you.
4. Threats – CRA collection agents may threaten you with what they will do to you if you don’t pay. If you are in this position then you must communicate with them. Typically if you communicate with them in this position you can negotiate a deal with them that will hold back any potential of threats becoming reality.
5. Delay – CRA does their work after the fact. So if you incurred income in 2007, CRA may not contact you about this year until 2009. Then they can drag it out for months and even years as they do not always have the manpower to chew everything they’ve bitten. If they are delaying things, this may or may not be good for you. In precedent setting cases where CRA has really delayed and won in court, the taxpayer typically doesn’t pay more than a 1-3 years of interest because CRA took so long in dealing with the issue. If you determine that the delay is not good for you, like if you are waiting for a refund, then contact them regularly until it gets taken care of. Contacting them regularly puts the pressure on!

Watch for my next blog as we will go through some more of the tactics that CRA uses and how to deal with them.

Tips when Dealing With CRA Part 3

In reading my prior blogs you should now understand that CRA is a collection agency for the government and that if you don’t agree with their decisions they make when “administering tax” then you can appeal their decision to the authorities (courts). The CRA never does have the final decision, unless you let them! You should also now be clear that you can’t believe everything they state on their website because of the disclaimer, and you can’t take what you get from them on the phone as fact. If you need a ruling on something that does not have a precedent set, then get it in writing. Because tax law is so complicated, you should almost always seek professional help. Kustom Design is always up to date on the current tax laws and we are here to work with you on structuring your assets and transactions. The bottom line is that you do not have to be scared of dealing with CRA, you just need to know how to deal with them.

If CRA calls you by telephone you are not obligated to speak with them. You can have them deal with your authorized representative, or just tell them to put their request in writing. As a matter of fact it is typically better that you don’t speak to them as they are under a protocol to assess any tax amount owing and charge penalty and interest…and then of course collect it. Some CRA agents may try and trap you in what they say, so again it is better not to speak with them, unless you have no other option. If you do speak with them it would typically only be in regards to something specific, like a payment plan. If you do have to speak with CRA, ensure you get their full name and badge number. If you are having difficulty dealing with the agent assigned to you, you can ask to speak with their supervisor. The majority of CRA agents are bonded and they can bring trouble upon themselves if they trample on your rights found in the taxpayer bill of rights. Unfortunately, as mentioned prior, many CRA agents do not even know the taxpayer bill of rights and neither do the people, so CRA sometimes gets away with trampling on people’s rights!

Right now Canada is in a major deficit position, which means they are spending more than they are taking in. Because of this issue we have seen the CRA become more aggressive with people while raising some penalties through the roof, creating new penalties, freezing bank accounts, putting liens on assets and more. All we see on the news is how the Government is handling the financial situation quite well compared to the rest of the world, but what we don’t see in the media is how they are doing it. The Bank of Canada is printing more currency and the government is forced to collect more and new taxes! Do we think it’s going to get any better as our government is projecting more deficits for the coming years? We must know our rights and how to deal with CRA so we can protect ourselves, our assets and our future generations. Watch for my next blogs where we will share more on dealing with the CRA!