Tax Tip: The More Obscure Medical Expenses

Are you claiming all the medical expenses you or your clients might be entitled to? 

With the upcoming June 15th filing deadline for proprietorships around the corner, it's worthwhile to consider the implications of selling a business and encouraging a preparatory discussion between a business owner and their advisory team. Talking about succession planning with your business owner clients and what the future holds for them is a now conversation because planning can take several years.    In particular, a business sale will typically contain several layers of financial consideration, today we will discuss the earn-out. An earn-out agreement is a purchase and sale agreement in which the ultimate price to be paid is dependant in whole or in part on the economic results the business produces. An earn-out may be negotiated where the purchaser is unable to obtain sufficient information to be comfortable with the quality of the business's earnings, or where there are significant risks associated with operations that the purchaser is not willing to take on. Where an earn-out has been negotiated it is not possible at the date of closing of the sale to determine the exact proceeds of disposition the vendor is to account for. For this reason mechanisms must exist to adjust the tax accounting for the disposition as the proceeds become known. The treatment of an earn-out payment depends of whether it relates to the purchase of assets or the purchase of shares. This week we will review the earn-out payment where the purchase of shares is used. Share Purchase There are no rules in the Income Tax Act which deal specifically with accounting for an earn-out where shares are sold. CRA has an administrative policy, however, which can be applied and which permits the vendor to account for the disposition using the cost recovery method. Under the cost recovery method, the vendor applies sales proceeds as they become known against the adjusted cost base of the shares sold. Once the cost base has been fully recovered, any addition proceeds are accounted for as a capital gain. The CRA outlines its policies on this matter in IT-426. It provides that the cost recovery method can be used where: the vendor and purchaser are dealing with each other at arm's length; the gain or loss on the sale of shares of the capital stock of a corporation is clearly of a capital nature; it is reasonable to assume that the earn out feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale; the earn out feature in the sale agreement must end no later than 5 years after the date of the end of the taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earn out feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement; the vendor submits, with his return of income for the year in which the shares were disposed of, a copy of the sale agreement. He or she also submits with that return a letter requesting the application of the cost recovery method to the sale, and an undertaking to follow the procedure of reporting the gain or loss on the sale under the cost recovery method. Join us next week in the Knowledge Bureau Report when we discuss the implications of a purchase of assets when a business changes hands.       ADDITIONAL EDUCATIONAL RESOURCES: EverGreen Explanatory Notes Fundamentals of Succession Planning Accounting For Business Transitions

The Minister of Finance, The Honourable Jim Flaherty, has announced new regulations that will restrict Canadian banks, trust and loan companies from promoting non-authorized insurance on their web pages. Authorized products such as travel related insurance as well as credit insurance could still be sold under the new regime, but non-authorized products such as property and life insurance would no longer be allowed. Mr. Flaherty stated the following "We intend to prevent banks from using their web pages to promote non-authorized insurance products, which is not permitted in their branches. These measures were made necessary by the evolving use of technology by banks.î To view the full news release, click here.   <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />Educational Resources:  Now is a good time to review insurance considerations and strategies for your clients. Consider the following Educational Resource available from The Knowledge Bureau: Insurance Strategies for the Small Business Owner

In a war on the underground economy, an Atlantic-Canada wide campaign was launched on May 18 by the CRA and the Canadian Home Builders' Association to crack down on home reno cheats and their clients operating "under the tableî. The campaign urges homeowners to "get it in writingî as part of prevention, audit and enforcement activities. Advisors in the tax and financial services industries can be proactive in helping non-compliant service providers avoid penalties, interest and potentially jail by making themselves available to make adjustments to prior filed returns which may contain errors like understated income or overstated deductions. For more information see CRA links: Get it in Writing Campaign http://www.cra-arc.gc.ca/gncy/lrt/ndrgrnd-eng.html#q6 Voluntary Disclosures Oppportunities http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html Click on these links now for more information on the Knowledge Bureau's Tax Services Specialist programs or EverGreen Explanatory Notes.

Taxable benefits are so important to the payroll cycle that CRA has written a separate payroll guide to explain them, T4130, Employers Guide - Taxable Benefits and Allowances. Every payroll clerk should have this guide at hand to determine income reporting and statutory deduction withholding requirements on an ongoing basis. In all cases, where a taxable benefit arises the value of the benefit to be included in income is reduced by any payment the employee makes to the employer with respect to the benefit. There are four basic facts about taxable benefits to remember in processing a payroll: 1. Add their Value to Gross Pay. The taxable benefit must be added to the employee's cash compensation each pay period and normal statutory deductions must be withheld from the total amount. Remember that the value of the taxable benefit is reduced by any payment the employee made to compensate the employer for providing the benefit. 2. Annualized Tax Withholding is Possible. Where a non-cash benefit is very large so that withholding of income tax will cause undue hardship, the value of the benefit and the related withholdings can be spread over the remainder of the year. 3. CPP Deductions Required. If the benefit or allowance is taxable, it will also be pensionable. Therefore Canada Pension Plan (CPP) contributions will be required to be withheld, as will income tax. 4. EI Deductions May Be Required. If the taxable benefit is paid in cash and relates to insurable employment, it is insurable. Employment Insurance (EI) premiums will therefore be required. However, if the employment is not insurable under the Employment Insurance Act, taxable benefits paid in cash are not insurable and are not subject to EI premiums. Finally, if the taxable benefit is a non-cash benefit, it is not insurable. In that case, the benefit does not attract EI premiums. The T4130 Guide is also available in EverGreen and it contains a chart which clearly identifies, in alphabetical order, the various types of taxable benefits and their source remittance. This table is also reproduced electronically on the CRA web site. Excerpted from Advanced Payroll for Professionals, one of the courses that comprise the Bookkeeping Services Specialist program.

A fiscal period is any period of time for which an enterprise prepares its accounts. Most business enterprises have a fiscal year, and many report more frequently and also have fiscal months and fiscal quarters for internal reporting purposes. Strictly from an accounting perspective, there are no constraints on the fiscal period an enterprise can choose. Thus, accounting records can be maintained and financial statements can be prepared for any period of time that provides useful information to the owners and managers. There are often government-imposed regulations which restrict an enterprise's flexibility in choosing its fiscal periods. Most of these arise under the Income Tax Act. Some of these restrictions apply generally; some vary with the type of organization. General Restrictions The Income Tax Act provides: a new fiscal period starts immediately after the end of the prior fiscal period, a new fiscal period must generally end 12 months after it began, a corporation is permitted to have a fiscal period that is up to 53 weeks long, a professional corporation must use a calendar fiscal period, the general rule is that the fiscal period for a proprietorship must end on the last day of the calendar year in which it began. However, see the more detailed commentary below, once a fiscal period has been established, it cannot be changed without the prior written consent of the taxation authorities. Permission will only be granted where the change is requested for business and not tax-planning reasons. Corporations Corporations have the greatest flexibility, in that they can basically choose any fiscal period end that suits the business ñ save only that a professional corporation must use a calendar fiscal year. Each fiscal period can be up to 53 weeks long. Generally, only corporations engaged in retailing choose to vary their year ends, using the 53-week rule, so that each fiscal year has the same number of business days in it as the year before. The vast majority of corporations have their fiscal periods end on the same day each year. Example ñ Fiscal Period for a Corporation Acme Corporation was incorporated on June 13, 20X8, when Articles of Incorporation were filed. What flexibility do the officers of Acme have in selecting its first year end? Acme can choose any year end it likes, so long as the first does not end more than 53 weeks after June 13, 20X8. Normally, a corporation will choose a year end that coincides with a slow period in its business cycle. Such a year end may free up time for the bookkeepers, accountants and management to prepare year-end financial statements and other reports. Excerpted from Basic Bookkeeping for Business, one of the courses that comprise the Bookkeeping Services Specialist program.

Tax and financial advisors beware: soon you may be required to report certain transactions. The Minister of Finance, The Honourable Jim Flaherty, has announced that consultations with Canadians with regard to implementing a reporting regimen for tax avoidance transactions will take place over the next two months. Federal Budget 2010 indicated that tax avoidance transactions that were indicative of aggressive tax planning would become reportable to the Canada Revenue Agency.  The consultation proposals released by the Government of Canada provides details with respect to the following: Reporting rules and the persons who would be subject to these rules Disclosable transactions Form, content and timing of the disclosure required Consequences for failing the disclose a transaction Comments received by the Government during the public consultations will be reviewed and the measures introduced in the 2010 Budget will be adjusted as necessary.  Submissions may be made to the Tax Legislation Division at the Department of Finance at consultations245@fin.gc.ca. For the complete news release including Backgrounder information and Description of Proposal, link here.   ADDITIONAL EDUCATIONAL RESOURCES: EverGreen Explanatory Notes Basic Bookkeeping for Business Advanced Bookkeeping for Business Profiles