EMPLOYER ISSUES – GST/HST FOR PENSION PLANS

Effective for years beginning after September 23, 2009 employers will be required to treat all GST/HST paid that is related to pension expenses as a re-supply to employees. Simply put this means that employers will claim the GST/HST paid on the pension expenses as an input tax credit but then will be required to submit it as a re-supply, effectively making it a transaction in which the employer will be out of pocket for the ITC.

DEMAND LOANS STATUTE-BARRED

In 2003 Ontario revised the limitation period for loans. The Ontario Court of Appeal has confirmed that the rules apply to demand loans and that the time limit begins running from the date of the loan and note from the date of demand. The time limit resets every time there is a payment or an acknowledgement of the loan. This should be a concern for loans within family or corporate groups where the debtor dies or declares bankruptcy and the lender finds the note to be unenforceable. Lenders should ensure that a mechanism is put in place to renew or acknowledge the loan on a timely basis.

PERSONAL TAX - CAPITAL GAINS DEDUCTION LIMITATIONS

When a taxpayer has claimed the capital gains deduction in prior years it in important that they keep track of the amounts claimed because they can impact on future returns. One of the restrictions is when a taxpayer claims an Allowable Business Investment Loss (ABIL) as the result of the disposition or insolvency of a small business corporation in which they have shares or debt. The ABIL claim results in one-half of the loss being deductible against other income and is not restricted as a capital loss. In the event that the taxpayer had previously claimed the capital gains deduction, the ABIL claim will be clawed back and converted to a capital loss to the extent of the previous deduction claimed.

Another, less recognized limitation is related to the final return of a taxpayer in the year of death. Generally speaking capital losses carried forward from prior years plus those reported in the year of death can be claimed against other income for the year of death and the immediately preceding year. However, once again, a previously claimed capital gains deduction will reduce the capital losses that can be claimed.

 

ONTARIO HST

Ontario’s new HST regime comes into full force on July 1, 2010. In preparation for the coming transition we will be offering some updates as more issues become known.

NEW HOUSING REBATE

The current GST new housing rebate up to $450,000 for the cost of a new house or major renovation will remain the same. The Ontario HST rebate will be 75% of the HST on the first $400,000 of the cost of a new house or major renovation. The difference between the two programs is that the Ontario rebate is not clawed back over the $400,000 ceiling unlike the GST component.

Progress payments after October 14, 2009 for work to be completed after June 30, 2010 are subject to HST and HST is also required on all holdback amounts after June 30, 2010.

INPUT TAX CREDITS RESTRICTED

In discussing the transition and new HST rules the Ontario government has glossed over a very substantial issue that restricts the claim for ITCs for businesses with taxable sales over $10 million (including associated companies) as well as all financial institutions. The restrictions are for input tax credits on the following expenditures:

• Energy (natural gas, hydro etc.);
• Telecommunications (except internet and toll-free);
• Purchase or lease of vehicles under 3,000 kg;
• Maintenance and fuel related to vehicles over 3,000 kg;
• Food, beverage and entertainment expenses.

If a business is incurring the above expenses for resale, such as a car dealer, then they are exempt from these restrictions.

After 5 years the input tax credits for the above items will be allowed over a 3-year phase-in. Companies that are over the $10 million dollar threshold in the year preceding the start of HST will likely be stuck in this regime even if sales fall. It is assumed that businesses under the threshold that exceed it at anytime during the next five years will enter the regime for the remainder of time that it exists.

ELECTRONIC FILING

All filers with taxable sales greater than $1.5 million will be required to file electronically.

N THE COURTS – CHILD CARE EXPENSE GOOD ANYTIME

In a decision of the Tax Court (Labrecque v The Queen), the court was asked to address child care expenses paid for services provided on Saturdays, a day when neither parent normally worked. CRA disallowed the claim on the basis that the fees were not paid “to enable the taxpayer … to perform the duties of an office or employment” as defined in the Act.

The court found in favour of the taxpayer stating that there is nothing in the Act requiring the activities to correspond to the time when the parents are working.