Tax Tips & Traps

RRIF/RRSP On Death: Rollover to a Child or Grandchild’s RDSP

Normally we think about rolling RRIFs and RRSPs to the surviving spouse upon death, however, there are other options.  One such option is to roll it on a tax-deferred basis to a child or grandchild’s Registered Disability Savings Plan (RDSP). A June 26, 2020 Technical Interpretation...

Normally we think about rolling RRIFs and RRSPs to the surviving spouse upon death, however, there are other options.  One such option is to roll it on a tax-deferred basis to a child or grandchild’s Registered Disability Savings Plan (RDSP).

A June 26, 2020 Technical Interpretation discussed the ability to roll funds from a deceased taxpayer’s RRIF to an RDSP for a financially dependent child or grandchild eligible for the disability tax credit. This results in the RRIF funds not being taxable to the deceased and only being taxable to the beneficiary when funds are withdrawn from the RDSP.

CRA noted that there is a rebuttable presumption that the child is not financially dependent if their income for the year prior to the parent’s death exceeds the basic personal amount plus the disability amount.  For 2020, the basic personal amount ranges from $12,298 to $13,229, while the disability amount is $8,576.  Where the child’s income exceeds the threshold and/or the child did not reside with the deceased, they may still qualify, depending on all of the facts and circumstances.

Based on the facts of the specific case CRA reviewed, they indicated that it was reasonable to consider this child to be financially dependenton the taxpayer, such that the rollover would be available.  The facts included:

  • the child suffered from a mental impairment which made him unable to work;
  • the child previously resided with the parents but now resided in a group home, as the parents’ advancing age made it difficult for them to provide necessary care;
  • the child resided with the taxpayer on weekends and holidays;
  • the child’s sole income, from provincial disability support, did not exceed the basic personal amount plus the disability amount (that is, the income test was met);
  • the child’s income covered only basic room and board, with all other financial needs provided by the taxpayer;
  • the financial support provided by the taxpayer was provided on a regular and consistent basis and consisted of more than merely enhancing or supplementing an adequate lifestyle for the child; and
  • the child received no other financial support.

CRA noted that, in addition to funds from a RRIF, an RRSP or a pooled registered pension plan (PRPP), and some registered pension plan(RPP) receipts, can be similarly transferred to an RDSP for a financially dependent child on the death of the taxpayer.

ACTION ITEM: If you have a child or grandchild that is financially dependent on you and eligible for the disability tax credit, consider leaving your RRIF/RRSP to them in their RDSP.

Unremitted GST/HST Or Source Deductions: Directors can be Personally Liable

Directors can be personally liable for employee source deductions (both the employer and employee’s portion of CPP and EI, and income tax withheld) and GST/HST unless they exercise due diligence to prevent failure of the corporation to remit these amounts on a timely basis.  As...

Directors can be personally liable for employee source deductions (both the employer and employee’s portion of CPP and EI, and income tax withheld) and GST/HST unless they exercise due diligence to prevent failure of the corporation to remit these amounts on a timely basis.  As many businesses are struggling with cashflow, it may be attractive to direct these amounts held in trust for the government to satisfy other creditors, such as suppliers.  However, in doing so, directors may unknowingly expose themselves to personal liability if the entity is not able to remit the required source deductions and GST/HST.

Director liability can extend beyond directors of a corporation to other directors, such as those of a non-profit organization.

The following recent court cases highlight some of the issues related to this liability exposure:

  • In a July 20, 2020 Tax Court of Canada case, the use of trust funds (employee withholdings and GST/HST collected on revenues) to pay other creditors resulted in the directors being personally liable for the unremitted amounts. Their significant contributions of personal assets to pay other creditors and efforts to remedy the failure after it has occurred could not offset the lack of steps taken to prevent the failure to remit.
  • However, in another July 20, 2020 Tax Court of Canada case, the director was not personally liable as due diligence to prevent failure to remit was demonstrated. In this case, there was no evidence GST/HST funds had been diverted to other expenses, and significant efforts to make remittances was conducted, including prioritizing remittances over opportunities to benefit the business. Racial discrimination and sexual harassment by its customers impeded the business’s efforts to collect revenues including GST/HST.

Care should also be provided to properly resign as a director to limit future exposure.  CRA must issue the assessment against the directors within two years from the time they last ceased to be directors.

In another July 23, 2020 Tax Court of Canada case, failure to comply with all resignation requirements under the relevant provincial corporate law meant that the director’s resignation was not legally effective, even though he had submitted a signed letter of resignation to the corporation. As he was still a director, he was still personally liable for unremitted GST/HST and source deductions.

ACTION ITEM: Ensure all source deductions are made in a timely manner.  Failing to make source deductions may expose directors personally to the liability.

Unreported Income: Statute-Barred Periods

In a June 10, 2020 French Court of Quebec case, the taxpayer had been assessed with unreported income of $68,162, $66,192 and $31,540 for 2004, 2005 and 2006, respectively, all beyond the normal reassessment period (generally 3 years). The amounts were computed using the cash...

In a June 10, 2020 French Court of Quebec case, the taxpayer had been assessed with unreported income of $68,162, $66,192 and $31,540 for 2004, 2005 and 2006, respectively, all beyond the normal reassessment period (generally 3 years). The amounts were computed using the cash flow analysis method, meaning that cash received was considered taxable income unless it could be shown that it  was from a non-taxable source, such as a gift or a loan.

Originally, the taxpayer’s son was under audit.  After it was noted that several transactions had occurred between the taxpayer and his son, the taxpayer came under audit.

The taxpayer argued that several items were not taxable. They included:

  • tax refunds gifted from the son to the taxpayer;
  • insurance and car payments by the son;
  • repayment of a loan following a condo purchase that did not go through; and
  • various cash deposits.

The taxpayer argued that he had safety deposit boxes with large sums of money which was deposited over time to prevent his first wife, who had struggled with mental health issues and addictions, from stealing the money and supporting her drug habit. He also noted that he continued to collect money in the boxes following the divorce of the first wife and on into the relationship with his second wife. It was implied that the cash deposits above came from these safety deposit boxes.

In order to assess outside of the normal reassessment period for Quebec purposes, similar to federal law, the taxpayer must have misrepresented the facts through carelessness or wilful omission, or have committed fraud in filing the statement or in providing information.

Taxpayer wins

The Court noted the following which indicated that the criteria for reassessment outside of the normal reassessment period were not met:

  • the taxpayer’s file was not identified as being a risk file, and was only a secondary file to that of his son;
  • the taxpayer provided good cooperation and provided the documents requested of him (over 700 pages were provided); and
  • the taxpayer’s testimony, along with those of his sons, were credible and never seriously shaken.

As Revenu Québec did not demonstrate that the requisite level of misrepresentation was present, their reassessments were overturned. Further, the Court noted that, even if the test had been met, using the cash flow method in such a case, where many of the receipts were reasonably explained, would not have been justified.

ACTION ITEM: An audit of one person can trigger audits of others around them.  Ensure to maintain proper documentation and comply with auditor requests as best as possible (with professional assistance) to conclude and contain the audit efficiently.

Commingling of personal expenses in the business: The Cost Could Be Very High

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporationand its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses...

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporationand its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses spanning 2007 and 2008 and assessed many of them as shareholder benefits.  That is, the amounts were taxable to the individual shareholder and not deductible to the corporation.

CRA also assessed beyond the normal reassessment period on the basis that the taxpayers made a misrepresentation attributable to neglect, carelessness, wilful default or fraud.  They also assessed gross negligence penalties which is computed as the greater of 50% of the understated tax or overstated credits related to the false statement or omission, and $100.

The following expenses were reviewed:

  • bonuses paid to family members who were not employees of the taxpayer;
  • payments to family members under an Employee Profit Sharing Plan (EPSP) where there was no evidence that the payments referred to profits;
  • salaries paid to family members (including the shareholder’s daughter who received a salary of $5,000 in 2007 and $400 in 2008);
  • salaries paid to the taxpayer’s children’s care providers;
  • salaries to the taxpayer’s former spouse, which the taxpayer argued was the same as personally paying spousal support;
  • travel costs for the taxpayer and his family to go on a cruise on which the taxpayer made business-related presentations (CRA conceded the taxpayer’s travel costs);
  • significant interest expense with very little support; and
  • many other costs such as clothing, toys, jewelry, personal items, lawncare, maid service, and pet care for the shareholder and family members.

CPP: When to Apply?

While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit: If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per...

While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit:

  • If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if started at age 60.
  • If the individual starts after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if started at age 70.

The decision as to when to commence CPP payments can be very complex, with extensive variables to consider, primarily related to personal factors and economic scenarios.  While 95% of Canadians have consistently taken CPP payments at normal retirement age (age 65) or earlier since the CPP introduced flexible retirement in the 1980s, a July 27, 2020 report (The CPP Take-Up Decision) by the Canadian Institute of Actuaries and the Society of Actuaries examined whether that is always the best option.

The report compared receiving CPP commencing at age 65 against pulling funds from RRSP/RRIF savings to replace the CPP payments and then commencing CPP at age 70. The two primary factors which influence the decision are life expectancy and rate of return. In particular, the report noted the following:

  • A major advantage of increasing CPP payments via postponement is that the increased CPP provides additional secure lifetime income that increases each year alongside the price of consumer goods, thus protecting against inflation, financial market risk, and the risk of outliving retirement savings.
  • Given today’s low-interest-rate environment and general population longevity expectations, the report noted that delaying CPP paymentsis often a financially advantageous
    • In the risk-free investment comparison, 75-80% of Canadians within this framework receive more income by delaying their CPP payments.
    • Even in an extreme case that favours not deferring CPP payments (low longevity expectations and very high expected investment returns), a person faces a 50% probability of receiving more income by delaying CPP payments, along with the risk-reduction benefits of a delay mentioned above.
  • Higher-income Canadians have longer life expectancies than lower-income Canadians, and females generally live longer than males; therefore, it would more often be in their best interest to delay CPP payments.

ACTION ITEM:  Consider whether starting CPP before, after, or at age 65, would be the most advantageous.