Waters & Meredith

Serving Niagara..

Client Information Newsletter: 2nd Quarter 2003

CONTENTS

  • FAST and NEXUS
  • Cross Border Movements of Currency
  • Art Donation Schemes
  • Deductibility of Fines and Penalties
  • Interest Rates for the Second Calendar Quarter
    		•

    FAST AND NEXUS

    1. The Canadian and U.S. governments have expanded the two (2) programs facilitating secure and efficient traffic flows across the Canadian/U.S. borders.


    2. Free and Secure Trade (FAST) allows commercial shipments to clear customs faster at the border. This program will be increased to twelve (12) commercial crossings from the present six (6). The closest borders presently using FAST are Queenston, Fort Erie and Windsor.


    3. NEXUS, a program for travellers, is also being expanded. It is currently operating at seven (7) major land border crossings, with six (6) more to open, including Queenston and the Rainbow and Whirlpool bridges.


    4. A FAST/NEXUS joint enrolment centre is to be opened at the Canadian side of the border at Fort Erie by July 2003.


    5. Both programs are built on the principle of risk management, where applicants must meet the requirements for admission to both countries and undergo security checks prior to approval for enrolment. This security foundation in turn enables Canadian and U.S. customs and immigration authorities to concentrate their efforts on potentially high-risk travellers and goods.

    Back to Contents

    CROSS BORDER MOVEMENTS OF CURRENCY

    1. As of January 6, 2003, all persons and entities will be required to report the importing and exporting of currency and monetary instruments of $10,000 or more to the Canada Customs and Revenue Agency (CCRA).

    Back to Contents

    ART DONATION SCHEMES

    1. Taxpayers should be aware of the risks associated with certain art donation schemes - often referred to as "art flipping" - which are sometimes tax evasion schemes.


      2. What is an art donation or "art-flipping" scheme?

      Step 1
      A promoter gives a person the opportunity to purchase one or more works of art or another item of speculative value, at a relatively low price. The proposal is that the promoter will work with the person to make arrangements for donating the works of art or other items to a Canadian registered charity or other specified institution.

      Step 2
      The person donates the art or other item and receives a tax receipt from the charity or other specified institution that is based on an appraisal arranged by the promoter. The appraised value of the art is substantially higher than the cost paid by the person.

      Example
      A person purchases three (3) paintings at $200 each for a total of $600, on the assurance that the paintings' actual market value is substantially higher. As arranged by the promoter, the person donates all three (3) paintings to a registered charity. The receiving charity accepts the paintings and issues tax receipts at $1,000 for each painting based on the appraisal arranged by the promoter.

      When the person claims the $3,000 on his or her next tax return, the tax savings generated will be approximately $1,500 (depending on the marginal tax rate) or about $900 more than the initial purchase cost of $600.

      There are potential penalties
      Penalties vary, depending on the role played in the art-donating scheme:

      Individuals
      If the CCRA determines that an individual's donation is not a true gift or that the work or art's appraised value is inflated, the donation claimed will be disallowed or adjusted.

      Depending on the circumstances, the CCRA may also apply penalties.

      Third parties (promoters, appraisers, etc.)
      On June 29, 2000, the CCRA instituted new penalty provisions to deter third parties from making false statements or omissions.

      Charities or other specified institutions
      In addition to third-party penalties, a charity or other institution may face loss of its registered status.

    DEDUCTIBILITY OF FINES AND PENALTIES

    1. The characterization of a levy as a "fine" or "penalty" does not make it any less deductible because the income tax system does not distinguish between fines and penalties.


    2. The deduction of a fine or penalty cannot be disallowed solely on the basis that to allow it would be considered contrary to public policy.


    3. Prohibiting the deductibility of fines and penalties is inconsistent with the practice of allowing the deduction of expenses incurred to earn illegal income. In order for a fine or penalty to be deductible in computing income from a business or property, paragraph 18(1)(a) of the Income Tax Act requires that it be incurred for the purpose of gaining or producing income from that business or property. Notwithstanding that a fine or penalty may have been incurred for the purpose of gaining income from a business or property within the meaning of paragraph 18(1)(a), its deductibility can nevertheless be disallowed by another provision of the Income Tax Act.


    4. To summarize, some fines and penalties will be deductible.

    INTEREST RATES FOR THE SECOND CALENDAR QUARTER

      The prescribed interest rates that will apply to amounts owed to CCRA, and to amounts the CCRA owes to individuals and corporations, effective from April 1, 2003 to June 30, 2003 will be:

    1. The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums will be 7%.


    2. The interest rate paid on overpayments will be 5%.


    3. The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 3%.

    We welcome comments you may have on this newsletter as well as suggestions for future topics.

    The information herein is provided for your general information and action should not be taken on the basis of this newsletter, but only on the advice of your own individual advisor, applying this advice to your individual situation. Please call if you have any questions.

    Waters & Meredith
    Chartered Accountants
    Telephone: 905-356-4324
    Fax: 905-356-0964
    E-mail: wm@watersmeredith.com

    © 2003 Waters & Meredith. All rights reserved.
    Website designed by: Stockton Web Designers, Niagara Falls, Ont.
    ---