August 2016 Newsletter

Some moving expenses disallowed

As discussed earlier in this letter, you can deduct certain moving expenses incurred in an “eligible relocation”. The Income Tax Act sets out specific expenses that qualify for the deduction, but the list is not exclusive.

In the recent Nazih case, the taxpayer moved in an eligible relocation and thus was entitled to deduct qualifying moving expenses. Many of her expenses were those specifically set out in the Act, and were therefore allowed. However, since she did not have all of the receipts relating to her meals, she was required to use the CRA flat rate method of $17 per meal per day per person.

In addition, Ms. Nazih attempted to deduct househunting costs, the cost of a new central vacuum, fees paid to the Canada Mortgage and Housing Corporation in respect of her mortgage, and inspection fees for the new residence. The CRA disallowed the deduction of these fees, and she appealed to the Tax Court of Canada.

The Tax Court sided with the CRA and disallowed the additional expenses. Basically, the Court held that these expenses were only “incidental” to the move and were not incurred in respect of the eligible relocation. Accordingly, they were not eligible moving expenses.

Rectification order allowed capital dividend

A capital dividend paid by a Canadian private corporation and received by a Canadian resident is tax-free. The capital dividend is paid out of the corporation’s “capital dividend account”, which reflects, among other things, the non-taxable portion of capital gains previously realized by the corporation.

In the recent Non Corp Holdings case, the corporate taxpayer sold its assets in 2012 and realized capital gains. On November 1, 2012, it paid a dividend to its shareholders, which was intended to be out of the capital dividend account (CDA) and therefore a tax-free capital dividend.

However, because of error, the director’s resolution declaring the dividend and the appropriate CRA election form were dated October 31, 2012. The corporation did not have sufficient CDA balance on that day. As a result, the corporation was subject to a penalty tax in respect of the dividend. In contrast, the dividend would have been a tax-free capital dividend if it had been payable on November 1, 2012.

The taxpayer applied to the Ontario Supreme Court for a rectification order, to amend the date of the director’s resolution and CRA form to November 1, 2012. The Court agreed that the intent was always to pay a capital dividend once the CDA account had been increased, and that the directors simply chose wrong date by accident. In particular, the Court held:

“There was a specific intention to allocate specific proceeds of a specific transaction to a specific tax account − the capital dividend account – to achieve a specific tax goal. A very minor mistake, in human terms at least, was made. The date chosen to insert on the resolution and the election form was the wrong date from the point of view of the intended plan. There was a clear and specific intention throughout and a simple mistake as to the correct means of implementing that intent.”

As a result, the Court provided the rectification order and amended the date such that the dividend was a tax-free capital dividend. This effectively becomes binding on the CRA, which for tax purposes must accept the Order determining that the dividend was not payable until November 1, 2012.

This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.

Last modified on August 10, 2016 12:00 am
Subscribe to the monthly newsletter