Waters & Meredith

Serving Niagara..

Client Information Newsletter: 4th Quarter 2002

CONTENTS

  • Fairness Provision - CCRA
  • Foreign Content in RRSP's
  • Remainder Interests in Lands
  • CCRA Interest Rates
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    FAIRNESS PROVISION - CCRA

    1. The Canada Customs and Revenue Agency (CCRA) maintains a "fairness and client rights" link on its website.


    2. The fairness provisions in Section 220 of the Income Tax Act describe that the Minister may cancel and waive penalties and interest and accept late-filed, amended or revoked elections.


    3. Subsection 152(4.2) provides that a taxpayer may apply for income tax refunds beyond the normal three-year period (individuals and testamentary trusts only).


    4. While the CCRA can cancel penalties and interest, it has no authority to accept a lesser amount of tax.


    5. As a result, a negotiated settlement means setting up an arrangement for payment, but not changing the amount of tax owed.


    6. Extraordinary circumstances that may give rise to the cancellation of interest and penalties include Department errors in providing information.


    7. It is important, however, for the taxpayer to provide CCRA with accurate and full information and have complete records of the dates, times and names of the persons from whom the information was received. Third-party error is generally not an extenuating circumstance.


    8. In cases of financial hardship, full financial disclosure based on total family income is required. Taxpayers should be aware that "ability to pay" includes the ability to borrow.


    9. CCRA cautioned that fairness submissions should not be used as a means to appeal assessments.


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    FOREIGN CONTENT IN RRSP'S

    1. The Income Tax Act restricts the amount of foreign property that can be held inside your RRSP or your registered retirement income fund (RRIF) to 30% of the plan's total assets, based on the cost of the property.


    2. For these purposes, foreign property includes stocks, bonds and other debt instruments held in foreign corporations, securities issued by foreign governments, and interests in foreign mutual funds.


    3. In spite of the restriction, there are legal ways to effectively get around the foreign property limit.


    4. There are various mutual funds and similar investments that technically allow you to stay within the 30% limit while effectively providing you with foreign investment exposure beyond the limit.


    5. These types of investments are usually described by their issuers as "100% RRSP-eligible", meaning that they do not count as foreign property (and therefore can comprise of up 100% of your RRSP) even though they effectively invest in foreign markets.

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    REMAINDER INTERESTS IN LANDS

    1. If you own real property, such as a cottage, that you plan to leave to your child or another dependent upon your death, it may make sense for income tax purposes to "divide" the ownership of the property into a "life interest" and a "remainder interest".


    2. After such a division of interests, the life interest will be held by you, meaning that you can continue to occupy and enjoy the property during your lifetime. You child will own the remainder interest, which means that your child will own the property outright upon your death.


    3. The reason why you might consider such a division of interests during your lifetime is that the property will not be subject to capital gains tax upon your death. In the absence of such a division, you will be deemed to have disposed of the entire property upon your death, meaning that any accrued capital gain will be subject to taxation at that time.


    4. As an added benefit, the division of interests should avoid any provincial probate fees upon your death.


    5. The only "catch" to this type of transaction is that you will be deemed to dispose of the property at its fair market value upon the division of interests.


    6. Any accrued capital gain up to that point in time will be subject to tax. However, the taxation of any further gain (after the division of interests) will be deferred beyond your death and will only be taxed when your child sells the property (or when your child dies, if your child does not sell the property).


    7. Generally speaking, what happens upon your death is as follows. You will be deemed to have disposed of the life interest at its adjusted cost base ("ACB"), which will normally equal its fair market value at the time of division of interests. This will result in a tax-free "rollover" at your death. Your child's ACB of the property will then equal the lesser of the fair market value of the property at the time of the division of interests and its fair market value immediately after your death.

    CCRA INTEREST RATES

    1. The 2002 fourth quarter interest rates are:

      - the interest rate charged on overdue taxes, CPP contributions and EI premiums is 7%

      - the interest rate paid on overpayments is 5%

      - the interest rate used to calculate taxable benefits for employees and shareholder loans from interest-free and low-interest loans is 3%

      - the interest rate on overdue and overpaid remittances for GST, FST and excise tax is 2.38%

    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

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