Module 7 - Other Income and Deduction

pension benefits - inclusion in income

payments received from pension plans (ex. RPP, CPP) are to be included in income in the year received

death benefits - inclusion in income

when a surviving spouse/common-law partner receives death benefits, the first $10,000 can be received tax-free. Any portion not used by the partner can be used by children.

• i.e. the family (spouse and children) can decide amongst themselves how to allocate the $10,000 deduction (up to $10,000)

scholarships, bursaries, and research grants - inclusion in income

in general, these amounts can be received tax-free if received by a full-time student at an educational institution

life insurance policy payout - income inclusion

generally tax-free

spousal support payments - inclusion and deduction

Spousal support payments will be included in the income of the individual receiving the payment

Spousal support payments will be deductible from taxable income for the individual making the payments

child support payments - inclusion and deduction

Child support payments will not be included in the taxable income of the individual receiving the payments

Child support payments will not be deductible from taxable income for the individual making the payments

What qualifies as an eligible relocation

(1) moving to a new work locations as an employee, independent contractor, or after finishing school at a post secondary institution (as a full time student)

(2) moving to start a full-time school at a post secondary institution

(3) unemployed individual who moves to a new location for a new job

Conditions to be able to deduct moving expenses

(1) move must be an eligible relocation

(2) both homes (before/after move) must be located in Canada

(3) the new home is 40 km closer to the work location

eligible moving expenses

(1) travel costs (reasonable amounts for meals and lodging) in the course of moving the taxpayer and members of the taxpayer’s household

(2) the cost to the taxpayer of transporting/storing effects in the course of moving

(3) the cost of the taxpayer’s meals and lodging near the old or new residence, for the taxpayers and members of the taxpayers household (for a period not exceeding 15 days)

(4) the cost to the taxpayer of cancelling the lease (if the taxpayer was the lessee of the old residence)

(5) the taxpayer’s selling costs in respect to the sale of the residence

(6) (if the previous residence was one they owned and sold by the taxpayer or their spouse) the cost of legal services in respect to the purchase of the new residence and of any tax/fee/duty (other than GST or value added tax) imposed on the transfer or registration of title to the new residence

(7) interest, property taxes, insurance premiums, and the cost of heating and utilities for the old residence (some extra rules for this one)

(8) the cost of revising legal documents to reflect the address of the taxpayer’s new residence, or replacing driver’s licenses and non-commercial permit vehicles. and of connecting/disconnecting utilities

• excludes vehicle insurance

for the interest, property, insurance premiums, etc. on the former residence, what are the additional rules for these to be deductible

• can only deduct the lesser of the total expenses for the period or $5000

Old residence must not be occupied by the taxpayer or by any other person who ordinarily resided with the taxpayer at the old residence immediately before the move, nor rented by the taxpayer to any other person

reasonable efforts must be made to sell the old residence

what happens if moving expenses > employment income

the amount that is greater than the income from new employment can be carried forward and deducted in subsequent years

general moving allowances

if the taxpayer receives a general moving allowance (NOT a reimbursement) this will be included in their employment income with the deduction being calculated separately

moving expense reimbursements

any reimbursements will not be taxable to the employee, but they will not be able to deduct a moving expense for something that the employer has reimbursed

tax planning opportunity for moving expenses

since reimbursements are not taxable, the taxpayer should arrange with their employer for them to reimburse items that would not qualify for the deduction (i.e. the expenses not included in the eligible expenses)

which spouse claims the childcare deduction

the lower income spouse

what is included in childcare expenses?

babysitting, boarding schools, camps, etc.

what is not included in childcare expenses

medical expenses, clothing, transportation, education, etc.

what qualifies an eligible child for childcare expenses

• under 16 or disabled

• earn less than $13,000 per year

Childcare deduction

a deduction from taxable income if taxpayer is require to pay for childcare in order to earn employment, business, or other earned income

the higher income partner will be allowed to claim childcare if…

• the spouses are separated

• the lower income spouse is confined to a prison for at least two weeks

• the lower income spouse is infirm and incapable of caring for the children (requires doctor’s note)

• the lower income spouse is a student for at least 3 weeks

  • Requires at least 10 hours per week or 12 hours per month

further limitation if the higher income spouse is the one deducting

the sum of periodic children expense amounts times the number of weeks the lower income spouse is infirm in prison, etc.

• i.e. they can only deduct the weekly childcare expenses for the amount of weeks the lower income spouse meets one of the exceptions

Who does not deal at arm’s length?

(1) related persons

(2) an individual and a corporation they control

related persons

people connected by blood, marriage, or adoption. Includes:

• parents and parents-in-law

• grandparents and grandparents-in-law

• siblings and siblings-in-law (sibling’s spouses)

• spouse and siblings-in-law (spouse’s siblings)

• children (includes adoption and step-children)

• grandchildren

• other descendants or direct parental ancestors

who is not a related persons

nieces, nephews, aunts, uncles, or cousins

What occurs if property is transferred for proceeds greater than Fair Market Value?

Implications for transferor: proceeds will be amount received

implications for transferee: ACB = FMV

• double taxation occurs

What occurs if property is transferred for proceeds less than Fair Market Value?

implications for transferor: proceeds are deemed to be FMV

implications for transferee: ACB = amount paid

• double taxation occurs

What occurs if property is transferred for no proceeds (aka a gift)?

implications for transferor: proceeds deemed to be FMV

implications for transferee: ACB = FMV

• this is not ideal but better than selling for proceeds greater or less than FMV because there is no double taxation, but still must pay taxes despite not receiving cash

attribution

occurs when a property has been transferred at a value less than FMV, the income earned by the property after the transfer will still be included in the transferor’s income

• only certain income is subject to attribution

Income that may be subject to attribution

• capital gains from future sale of asset to an unrelated party (only when transferred between spouses)

• passive income earned during the related party’s period of ownership, like interest and dividends. (applies both when transferred between spouses or to a related minor)

Spousal rollover

section of the ITA that allows spouses/common law partners to transfer properties without having any tax consequences → transfer will occur at ACB

• attribution rules apply

Electing out of 73(1)

occurs when property is transferred between spouses at a value other than ACB (i.e. no spousal rollover)

• if sold for FMV, the transfer would be treated like a normal disposition and attribution rules will not apply

• if sold for proceeds not equal to FMV (section 69 will apply) and the transfer will be deemed to be at FMV → no attribution

who is considered a related child for attribution

under 18

includes children, grandchildren, nieces, and nephews (note: nieces and nephews are not normally considered related persons)

attribution tax planning - related minors

(1) purchase the property for consideration equal to the FMV of property (or using promissory note if minor does not have sufficient funds)

• for the CRA to allow the use of promissory note as consideration interest must be charged at (a) prescribed rates and (b) paid within 30 days of year end

(2) minor deducts interest from property income from the transferred property and pays taxes in a lower bracket on remaining taxable income

(3) taxpayer receives and pays taxes on the interest in their higher tax bracket

if the amounts are right, taxpayer still collects the funds from the child but they may have been taxed less

attribution tax planning - spouses

purchase the property for consideration equal to the FMV of the property AND elect out of 73(1) or use the same planning with the promissory note as for minor

if a taxpayer loans a related minor money to purchase the investments themselves (as opposed to transferring the investments)

attribution rules would still apply