January 7, 2015
Principal Residence Designation, Taxation of Ponzi Schemes, Family Tax Cuts & More!
Principal Residence Designation
One of the most significant tax exemptions available can be obtained on the sale of your principal residence; particularly for those who acquired homes in the Vancouver area many years ago. On the sale of your home, there is a technical requirement to file form T2091 to designate the property as your principal residence. If the form is not filed on time with your tax return for the year of sale you could be denied the exemption.
Canada Revenue Agency (“CRA”) has adopted a long standing administrative policy that the form is only required to be filed if the principal residence exemption does not completely eliminate the capital gain. In fact, the instructions to form T2091 state that the form is to be attached to the tax return “only if a capital gain has to be reported”.
As the administrative policy is not binding on CRA it is conceivable that it could reverse its position at any time. Accordingly, it would be prudent to file the form; particularly in situations where there may be some doubt regarding whether the entire gain is exempt. For example, where the sale of property is in excess of one-half hectare or where there is uncertainty as to whether the taxpayer “ordinarily inhabited” the home during the period of ownership.
Taxation of Ponzi Schemes
In a recent technical interpretation, CRA provided some insight into the taxation of fraudulent investment schemes, such as a Ponzi scheme. Basically, any income received from such an investment should be included in income regardless of the source of the funds.
On the other side of the coin, a deduction may be claimed for a bad debt for an amount that was included in income but never received. In addition, a capital loss may be claimed to the extent that some or all of the initial capital investment is lost. The timing for recognition of the bad debt or capital loss is when the scheme is exposed or when charges are laid against the perpetrator.
There have been a number of cases where taxpayers have been assessed income on funds they never received and it has taken years before they can claim a bad debt or capital loss. As the old adage goes, “if it sounds too good to be true, it probably is”.
Family Tax Cuts
The Government of Canada has proposed a new Family Tax Cut of up to $2,000 for couples with children under the age of 18, effective for the 2014 tax year. The proposed Family Tax Cut will take the form of a federal non-refundable tax credit that will be calculated based on the tax savings that would be achieved if the higher-income spouse were to transfer up to $50,000 of taxable income to their lower-income spouse.
The Government also announced a proposed enhancement of the Universal Child Care Benefit (“UCCB”) from $100 per month to $160 per month for children under the age of 6 and a new UCCB benefit of $60 per month for children over the age of 5 and under the age of 18. While the change will be effective January 1, 2015, the increased payments will not be distributed until the proposals have been formally approved. The earliest the increased payments and retroactive amounts will be paid is July 2015. These enhancements will replace the Child Tax Credit which allowed a credit of $2,234 per child under the age of 18 in the 2014 taxation year.
Also, the maximum amount for the Children’s Fitness Tax Credit is proposed to be increased to $1,000 per child, effective for the 2014 tax year.
Lastly, the Government has proposed a $1,000 increase in the maximum claim available per child under the Child Care Expense Deduction effective for the 2015 taxation year.
Please contact Stephen Gable of the Manning Elliott Tax Team for further information.
Filing Due Dates – Deceased Taxpayers
The filing due dates for the final income tax returns of deceased taxpayers are as follows:
- If the death occurred between January 1 and October 31, the due date for the final return is April 30 of the following year.
- If the death occurred between November 1 and December 31, the due date for the final return is six months after the date of death.
- If the death occurred between January 1 and April 30 of the year, the due date for the previous year tax return is six months after the date of death.
- If the deceased or the deceased’s spouse or common-law partner was carrying on a business, the following due dates apply:
- If the death occurred between January 1 and December 15, the due date for the final return is June 15 of the following year.
- If the death occurred after December 15, but before December 31, the due date for the final return is six months after the date of death.
- Graduated Rate Estates (“GREs”)
Significant changes have been introduced regarding the taxation of trusts resulting in all trusts, with the exception of GREs, being subject to the highest marginal tax rate. The change will be effective for 2016 and subsequent years’ so early planning is critical.
- Incomplete Tax Returns
The Income Tax Act requires that tax returns are to be filed each year in prescribed form and contain prescribed information. If a taxpayer files a nil or incomplete return, the CRA can refuse to accept it and may assess late-filing penalties and even penalties for gross negligence.
- CRA Online Services
The Government of Canada is switching to direct deposit for all payments that it issues. This will include tax refunds and benefit payments. For more information, go to www.cra.gc.ca/getready.
- CRA Audit Activities
Recent CRA audit activity has included reviews of small businesses that may be involved in the “underground economy”, be personal services businesses, or claim expenses related to passenger vehicles.