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   BUSINESS/PROPERTY INCOME

   SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED)
Some things to consider when determining eligibility for SR&ED investment tax credits include:

  1. You do not have to have a scientist working in a laboratory to qualify.
    The business owner and staff may be carrying on SR&ED activities.

  2. A claim does not normally result in a CRA audit of other matters in the business. CRA will simply send a science consultant to determine if the claim qualifies as SR&ED. Next, they will send a financial reviewer to check the amount of the claim.

  3. The claim process includes writing a technical report for each SR&ED project and compiling the data (labour, materials, and overhead costs).

  4. Capital equipment, as well as labour, is eligible for the SR&ED investment tax credit.

  5. CRA is looking for evidence of technological advancement. Therefore, it is important to emphasize technological goals, not business objectives.

  6. Some CRA Guides with respect to SR&ED claims include Guide RC4290 (Refunds for Small Business SR&ED), Guide RC4270 (Introducing the SR&ED Program’s Account Executive Service), Guide RC4271 (Pre-Claim Project Review Service), Interpretation Bulletin IT-151R5, Form T661, Information Circulars 86-4R2 and 3, and 94-1 and 2, and 97-1, Income Tax Technical News 23 (List of Approved SR&ED entities), and the CRA website www.cra.gc.ca/sred.

  7. Most provinces also have tax credits for SR&ED expenditures.
    DIRECTOR FEES PAID TO ADULT CHILDREN

In a September 27, 2005 Tax Court of Canada case, CRA disallowed directors’ fees paid to adult children in 1997, 1998 and 1999 as being unreasonable.

The taxpayer admitted that the appointment of the children as directors was largely tax driven so that income earned in excess of the annual small business deduction limit could be expensed to the adult children. The disallowed expense to the company would result in double tax as the amounts had been included in income by the adult children.

The taxpayer argued that one motive to have the children as directors was to expose them to the business in the hopes that one day they would become more active in the business and ensure its continuity.

However, when the children were first appointed they were all in school and none of the children were employed during the subject period with the taxpayer, other than in their capacity as directors.

They did not participate in the day-to-day operations or management of the corporation.
The directors’ fees were determined based on the draws of the children and bore no relationship between the amount declared and the performance of duties.


    CRA and the Taxpayer Both Lose/Win
The Court found that director fees of $11,600 paid to one child who did have a possible interest in the business, signed documents, and had liability risks were allowed.

With respect to the other children, only $1,500 per child per year was allowed on the basis that they did have some liability risks as directors.
    RETIREMENT COMPENSATION ARRANGEMENTS

A corporation may consider declaring a deductible payment to a Retirement Compensation Arrangement (RCA) rather than a bonus payable to the shareholders. This is because, even though a 50% refundable tax is payable to CRA on the amount allocated to the RCA, it may be possible to borrow funds against this 50% and the amounts in the RCA. Therefore, funds may be available to the business which would not be available if the bonus had been declared and income tax paid to CRA.

    THEFTS

In an October 13, 2005 Tax Court of Canada case, Mr. G carried on a proprietorship grocery store. His spouse, who did much of the work, allegedly stole funds from the proprietorship. The taxpayer argued that this should be a deduction to the proprietorship.

    Taxpayer Loses!

The Court noted that this was likely a partnership and thefts made by a partner are not deductible to the business. Even if it was a proprietorship, thefts made by senior employees in a position to control or act as an owner are likely not deductible

    MUTUAL FUNDS
CRA Guide RC4169 provides information on the “Tax Treatment of Mutual Funds for Individuals” including what is a mutual fund, how income from mutual funds is taxed, how to report income from information slips, calculating capital gains on redemption and sale, adjusted cost base calculations and examples.
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