Donna Mazerolle & Associates Newsletter

Issue 4 – AUGUST2011

When challenging the CRA

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While you’re busy managing your business other business owners are being challenged by CRA (Canada Revenue Agency) on any number of issues relating to how they report revenue and claim expenses. Being challenged by CRA is not a place you want to be.
While tax rulings may not interest you, you can learn from the situations other business owners find themselves in when being challenged by CRA. The examples in this months newsletter deal with Employment Insurance not paid by a family member and deducting legal fees as an expense.

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In an January 20, 2011 Tax Court of Canada case, CRA, took the position that the salary paid to Dion (the son of the shareholders of the corporation wassubject to el on the basis that his terms and conditions of employment were roughly similar to those that would have occurred if there was an arm’s-length relationship.

Taxpayer Wins!

The Court noted that theexception for EI under the Employment Insurance Act was met on the basis that:

1. Dion had much more freedom with regard to working hours than an arm’s-length shop supervisor would have had.
2. He was paid for periods during which he took off and he provided substantial assistance for questions related to the operations of the company.
3. Even if nothing is cast in concrete, Dion and his parents had agreed that in a few years he would purchase the company from his parents when they retired.
4. It would not be reasonable to conclude that the terms of employment were roughly similar to those that would have occurred if there was an arm’s-length situation.
5. It was clear that his relationship with the company was very different from what CRA had assumed.

Editor’s Comment

It is important on the initial enquiry by CRA that the proper information is provided to CRA so that they may make a proper decision without the taxpayer having to file an Appeal to the Tax Court before receiving an equitable result.

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DIRECTOR LIABILITY FOR GST/HST

In a February 8, 2011 Tax Court of Canada case, the taxpayer was a director of a corporation which had not remitted its GST. Therefore, he was personally liable, and paid $57,202 and incurred legal fees of $3,196 in defending himself.

Taxpayer Loses – Again!

The Court found that the payment for the GST on behalf of the company was not a deductible expense and, the legal expenses were also not deductible. Legal fees paid in relation to an Objection or Appeal under the Excise Tax Act are not deductible whereas, legal fees to object under the Income Tax Act are deductible.

However, legal fees to contest a GST Assessment may be deductible under ordinary business principles if the taxpayer is carrying on a business. In this case, he was not. Therefore the legal fees with respect to the GST were not deductible in computing business income.
The payment for the director’s liability is not deductible because it is not incurred to earn income.

Legal fees with respect to GST may also be deductible as an amount paid in making a representation relating to a business carried on by the taxpayer. However, in this case, the taxpayer was not carrying on a business.

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Should you have any questions about the topics above, or need guidance on strategy, bussiness plans, accounting or bookkeeping for your business, call Donna Mazerolle at 506-657-067 or contact us.