DIRECTORS: Can They Be Liable for Corporate Income Taxes?

DIRECTORS: Can They Be Liable for Corporate Income Taxes?

A December 11, 2017 Tax Court of Canada case examined whether a taxpayer was liable for unpaid income taxes of the corporation of which he was a director. CRA’s assessment was based on the assertion that the taxpayer was a legal representative of the corporation and had distributed assets of the corporation without having first obtained a clearance certificate from CRA.

A clearance certificate essentially confirms that the corporation has paid all amounts of tax, interest and penalties it owed to CRA at the time the certificate was issued. Legal representatives that fail to get a clearance certificate before distributing property may be liable for any unpaid amounts, up to the value of the property distributed.

Taxpayer wins

The Court examined whether the taxpayer was a legal representative and personally liable for the corporation’s unpaid taxes. The definition of a legal representative does not specifically include directors, despite naming many other persons (e.g. a receiver, a liquidator, a trustee, and an executor). While a director could become a receiver or liquidator for a corporation, carrying out the usual activities of a director, such as declaring dividends, would not result in the director being a “legal representative”.

A director could become a legal representative where:

  1. additional powers beyond directorship have been legally granted or, if not legally granted, were available and assumed;
  2. these additional powers allowed the legal representative to legally and factually dissolve (wind-up) and liquidate the corporation; and
  3. by virtue of these powers, the director liquidated the assets of the corporation.

In this case, no such legal powers had been conferred or exercised. The taxpayer was not considered to be the corporation’s legal representative. Also, the corporation had not been dissolved. As such, the taxpayer was not personally liable for unpaid corporate income taxes.

Action Item: If you are a director and legal representative of a corporation, ensure that you are properly protected if distributing assets.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

INTEREST ON DELINQUENT ACCOUNTS: Proper Disclosure on Legal Documents

INTEREST ON DELINQUENT ACCOUNTS: Proper Disclosure on Legal Documents

 

In a November 10, 2017 Alberta Court of Queen’s Bench case, the amount of a creditor’s claim was challenged after an uncontested default judgment. The claim included interest calculated at 1% per month as stated in the contract. However, where a rate is not stated in per annum terms, the legal maximum is capped at 5% annually under the Canada Interest Act. Therefore, the interest payable was legally capped at 5% per year, rather than the 1% per month specified by the contract.

 

Action Item: If stating interest rates in legal contracts, ensure to also state them in per annum terms.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

DONATION RECEIPTS: How Complete Is Complete?

DONATION RECEIPTS: How Complete Is Complete?

Charities should ensure that any donation receipts issued are fully compliant with the tax rules. Failure to do so may result in the donor being denied a charitable donation if reviewed by CRA. This could cause operational and goodwill problems for the charity.

Receipts for cash gifts must have the following:

  • a statement that it is an official receipt for income tax purposes;
  • the name and address of the charity as on file with CRA;
  • a unique serial number;
  • the registration number issued by CRA;
  • the location (city, town, municipality) where the receipt was issued;
  • the date or year the gift was received and the date the receipt was issued;
  • the full name, including middle initial, and address of the donor;
  • the amount of the gift;
  • the amount and description of any advantage received by the donor;
  • the eligible amount of the gift;
  • the signature of an individual authorized by the charity to acknowledge gifts; and
  • the name and website address of CRA.

 Receipts for non-cash gifts must also include:

  • the date the gift was received (if not already included);
  • a brief description of the gift received by the charity; and
  • the name and address of the appraiser (if the gift was appraised).

The amount of a non-cash gift must be the fair market value of the gift at the time the gift was made.

Effective March 31, 2019, charities and qualified donees must include the new website address of CRA, www.canada.ca/charities-giving on all donation receipts. This follows the move of various old Federal Government websites to the new official www.canada.ca website.

 

Action Item: If you are involved with a charity, ensure properly completed donation receipts are being distributed.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

INTEREST DEDUCTIBILITY: Returns of Capital

INTEREST DEDUCTIBILITY: Returns of Capital

In an April 20, 2018 Tax Court of Canada case, at issue was whether the taxpayer could deduct interest incurred in 2013, 2014 and 2015 related to $300,000 borrowed in 2007 to purchase mutual funds. From 2007-2015, the taxpayer received a return of capital from the funds, totalling $196,850 over the period. A return of capital is essentially a return of the taxpayer’s original investment. The taxpayer used some proceeds to reduce the loan principal, but the majority was used for personal purposes.

 Taxpayer loses

The Court examined whether there was a sufficiently direct link between the borrowed money and its current use in respect of gaining or producing income from the investments.

As much of the returned capital was used for personal purposes, there was no longer a direct link to the income earning purpose. The Court upheld CRA’s denial of interest expense.

 

Action Item: Where funds are borrowed to invest, one may need to track any return of capital which is not reinvested to determine interest deductibility.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

U.S. CITIZENS: Risks of Tax Non-Compliance

A brief article on the risks associated with not complying w

 

Commencing January 1, 2016, the U.S. State Department was able to deny or revoke passports to U.S. citizens having a “seriously delinquent tax debt” or no Social Security Number associated with their passport. A “seriously delinquent tax debt” is one where the taxpayer owed more than $51,000, after January 1, 2018 (indexed going forward), in tax, interest and penalties.

An Alert on the IRS website recently noted that commencing January 2018 the IRS will begin certifying tax debts to the State Department. After receiving certification from the IRS, the State Department will not generally issue a passport.

In addition to passport denial and revocation, several states impose non-monetary non-criminal sanctions for certain taxpayers who are sufficiently delinquent on their taxes.  For example, New York, California, Louisiana and Massachusetts may revoke driving privileges.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

TAX BRIEFS… some quick points to consider…

 Here are some brief points to consider regarding your income tax reporting:

  • CRA has required PayPal to disclose sales and other transaction records for Business Account Holders from January 1, 2014 to November 10, 2017. It is expected CRA will review records for unreported sales.
  • Employers can now provide a tax-free party or social event to employees where the cost per person is $150 or less (the limit was previously $100).
  • Although such cases are rarely successful, two taxpayers were awarded nearly $1.7 million in relation to CRA’s malicious prosecution.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Marsha MacLean Professional Corporation