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Travel logbook – highly recommended
Deductible meal expenses and gift certificates
Truly self-employed? Be very careful!
Did you know that…

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Travel logbook – highly recommended

When an employer provides an employee with an automobile, it is important for the employee to keep a logbook of the kilometres travelled in the vehicle, so that the extent to which it is used for business purposes can be measured. For the purposes of federal income taxes, the law does not require keeping a logbook for automobile travel; however, the Canada Revenue Agency (CRA) does require that such a logbook be kept for purposes of proof.

In a recent decision by the Tax Court of Canada, rendered during an informal proceeding (Déziel v. The Queen), a taxpayer was able to contest the assessment of a taxable benefit relating to the personal use of a vehicle owned by the employer, despite the absence of a logbook.

The facts
A company provided an automobile to a related employee, Jean Déziel, for the entire 2003 taxation year. Mr. Déziel did not keep a kilometre logbook for this vehicle. He did, however, have other vehicles for his personal use. When determining Mr. Déziel’s assessment for the 2003 taxation year, the Minister included a taxable benefit in Mr. Déziel’s employment income, i.e., the personal use of an automobile provided by the employer. Mr. Déziel appealed to the Tax Court of Canada.

Decision
The judge ruled in favour of the appellant even though a logbook was neither kept nor provided to the employer. Mr. Déziel explained that the automobile – which, according to him was merely a service vehicle because of its interior design and the exterior writing to attract the attention of clients – was used almost exclusively for business. In his eyes, the vehicle was neither practical nor comfortable for personal use, and he had other vehicles for his personal use, including a motorcycle and a car that belonged to his spouse. In addition, the place of business of the company that employed Mr. Déziel was in the same area as his family residence, and he did not need to use the vehicle to go to and from work. Furthermore, the testimony of the Minister’s representative revealed that the assessment of Mr. Déziel’s personal use portion of 6,000 km was done subjectively and arbitrarily, and was not supported by anything other than that the automobile was at his disposal at all times. For all these reasons, the Court found that Mr. Déziel’s version was credible and cancelled the assessment of a taxable benefit.

It is therefore possible for a taxpayer to contest a Minister’s assessment by showing that a vehicle is used exclusively for commercial purposes, even though no logbook is kept. The judge correctly reminded the Court that it is "more than preferable to have such a logbook" in case of contestation. Keeping a logbook is undoubtedly the best way to prove how an automobile provided to an employee by an employer is being used.

Logbook mandatory in Quebec
It should be noted that for Quebec residents, a logbook for employees whose employer has provided them with an automobile is mandatory for Quebec income tax purposes, effective January 1, 2005. Furthermore, these employees must give the logbook to their employers no later than the tenth day of the following year. Employees who do not comply with this measure could face a $200 penalty.

A 2006 automobile logbook is available on our web site.

Michel Ostiguy, Montreal

Deductible meal expenses and gift certificates

We know that a taxpayer who, for business purposes, claims entertainment expenses for meals, drinks or events can generally deduct only 50% of the amount of these expenses. What happens when the taxpayer incurs expenses for meals clients consume and entertainment they enjoy when the taxpayer is not even present? Does the 50% limitation still apply? The Federal Court of Appeal recently answered this question in The Queen v. Mark Stapley.

The facts
Mr. Stapley is a real estate agent who, to generate goodwill among his clients, provided them with tickets for sports and concert events and gift certificates for meals. These tickets and certificates were strictly for his clients’ use alone, as Mr. Stapley neither consumed any food nor attended any entertainment events with them. Therefore, in computing his income, he deducted 100% of the cost of entertainment expenses that consisted of food, drinks or entertainment events rather than 50%, as required by the Income Tax Act (the Act). The Minister disallowed this interpretation of the law and denied the 50% deduction in respect of these expenses. Mr. Stapley appealed to the Tax Court of Canada.

Decision
The Tax Court of Canada found in favour of the taxpayer. In the judge’s view, these expenses were incurred by the taxpayer for purposes of earning business income, and therefore should be treated as fully deductible marketing expenses. Since the taxpayer did not participate in the consumption of the meals or enjoyment of the entertainment, the expenses were devoid of any personal element, and were thus strictly incurred for business purposes, meaning that these expenditures did not fall within the scope of the limitation provided in the Act. The Minister appealed to the Federal Court of Appeal.

Appeal
The Federal Court of Appeal finally reversed the decision by the Tax Court of Canada judge by concluding that the expenses incurred by the taxpayer were to be limited by the 50% rule even if they were devoid of personal element. Because these expenses were incurred to pay for meals and entertainment “in respect of human consumption,” as the law indicated, they were clearly subject to the limitation under the Act, even though they were not consumed by the taxpayer. The judge noted that this result seemed unfair to the taxpayer, because if he had offered other types of gifts to his clients, such as books or flowers, he could have fully deducted those expenses. It seems, therefore, that the judge of the Federal Court of Appeal applied the 50% limitation to the expenses incurred by Mr. Stapley because these expenses were clearly expenses in respect of meals and entertainment, while recognizing that in this particular case the limitation should perhaps not have applied.

So taxpayers, beware! If you intend to offer clients gift certificates for meals or tickets for entertainment events, remember that these will be subject to the 50% rule even if you are not present to enjoy the food or the entertainment. You may want to choose gifts of another sort.

Pierre Giguère, Montreal

Truly self-employed? Be very careful!

Some people who wish to render services as independent entrepreneurs are under the impression that by rendering their services through a company, they have a better chance of escaping the conditions applicable to employment contracts. While the incorporation of a company can sometimes achieve this goal, this manner of proceeding can prove to be ineffective for income tax purposes. Recently, the Tax Court of Canada once again applied the rules applicable to personal services businesses to a company incorporated by a computer consultant.

The facts
In the case Carreau v. The Queen, Mr. Carreau was a computer consultant who rendered his services through a company that he had incorporated for this sole purpose, and of which he was the sole shareholder, director and employee. His company entered into a sub-contract agreement with another company that was an information services provider for purposes of rendering exclusive services to Hydro-Québec (Hydro). The contract was initially for one year, but was renewed several times.

The Minister reassessed Mr. Carreau’s company for the taxation years 1998, 1999 and 2000, and disallowed the small business deduction (SBD) claimed on the grounds that he was operating a personal services business (PSB). Mr. Carreau appealed to the Tax Court of Canada.

Decision
To establish whether Mr. Carreau’s company was indeed a PSB, the judge set out the issue to be resolved as follows: "Were it not for the existence of Mr. Carreau’s company, would it have been reasonable to consider the appellant as an employee of Hydro, to whom the services were rendered?" In order to answer this question, the judge had to determine whether de facto control existed between Mr. Carreau and Hydro, and whether Hydro, the client, exercised control over how Mr. Carreau was performing his duties.

Given that Mr. Carreau possessed expertise and skills that surpassed those of the client, he could decide for himself as to how he would proceed. However, even if Hydro could not exercise control over how Mr. Carreau would conduct his work, it does not mean that no de facto control existed. In fact, Hydro imposed rules of conduct on Mr. Carreau; Hydro had to provide the place where and the time in which the services had to be rendered. In addition, Mr. Carreau had to notify a supervisor when he was sick and before taking any holiday. According to the judge, this would not be the case of someone who is self-employed, as, in general, someone who is self-employed does not have to ask a client for permission or authorization to be absent or take vacation.

The judge determined that Mr. Carreau was largely integrated into Hydro’s activities since, like Hydro’s employees, his presence was mandatory at the locations assigned and at the times decided by the client. In the judge’s eyes, this showed that there was a subordinate link between Hydro and the appellant. Consequently, although Mr. Carreau, unlike an employee, did not have paid illness or vacation privileges, and did not participate in a pension plan, it would have been reasonable to consider him as a Hydro employee were it not for the existence of his company. His company was therefore a PSB, and consequently, was not eligible for an SBD.

Comments
The rules applicable to a PSB were implemented to disable the use of companies by taxpayers acting as employees and wishing only to benefit from reduced taxes and from deducting expenses they would not otherwise be allowed to deduct. It is common practice for independent computer workers to work as consultants. In general, this suits businesses because they can then hire highly specialized freelancers without being obliged to pay any employee benefits or indemnities upon their departure. This decision, however, confirms once again that there are no significant income tax benefits to incorporation for an individual who is rendering the same services as an employee.

Marielle Domercq, Montreal

Did you know that…

GST reduced by 1%. On July 1, 2006, the goods and services tax (GST) was reduced from 7% to 6%. On the same date, the harmonized sales tax (HST) was also reduced from 15% to 14%. The federal government is expected to take transitional measures (refer to our May issue of Canadian Indirect Tax News). The Quebec government elected not to increase its sales tax (QST), which remains at 7.5%, and will continue to apply it to the GST.

Reduced dividend rate. The federal government released draft legislation proposing amendments to reduce the effective tax rate on dividends received after 2005 by individuals and trusts (see our special July 2006 edition of TaxBreaks). Some provinces, such as Quebec, have announced plans to harmonize their measures with those of the federal government. Despite these plans for harmonization, the Quebec legislation stipulates, as it did before, tax credit rates for dividends that differ from those under the federal legislation. Thus for dividends paid after March 23, 2006, the tax credit rate applicable to an eligible dividend will be 11.9%, while that applicable to an ordinary dividend will be 8%.

Keep your monthly public transit passes. You must keep your monthly public transit passes and your receipts if you plan to claim a tax credit on your 2006 income tax return. This tax credit, announced as part of the May 2006 federal budget, will allow individuals to claim the cost of passes used to travel on buses, streetcars, subways, commuter trains and local ferries. The pass or receipt must display the following information to support a tax credit claim:

An indication that it is a monthly (or longer duration) pass
The date or period for which the pass is valid
The name of the transit authority or organization issuing the pass
The amount paid for the pass
The identity of the rider, either by name or a unique identifier

The credit can be claimed for the portion of the pass that is used on or after July 1, 2006, even if the pass was purchased before that date.

Tax evasion has consequences. The Canada Revenue Agency (CRA) has the power to use a number of tools to identify taxpayers who fail to file income tax returns, who omit to register their business account, or who provide the CRA with incomplete and inaccurate information. The CRA can launch a civil or criminal suit against a taxpayer that can lead to fines, penalties and even jail sentences. The Voluntary Disclosures Program allows taxpayers to disclose previously omitted or erroneous information. Providing they make a full disclosure before any compliance action or investigation is started, no penalties will be imposed; all that taxpayers have to do is pay the taxes owing plus interest.

Do you have to pay your taxes by instalments? If you receive pension benefits or rental, investment, or self-employed income, you might have to pay your taxes by instalments. You have to pay your income tax by instalments for the current year if your net tax owing to the federal government for 2006 exceeds $2,000, and if your net tax owing for 2005 or 2004 also exceeds $2,000. The tax ceiling for Quebec residents is $1,200 for 2006. The next tax instalment for the current year is due September 15, 2006. Individuals who may have to pay their taxes by instalments will receive a reminder from their government.

Partial QST rebate on certain hybrid vehicles. According to a press release recently issued by the Revenu Québec, owners of new hybrid vehicles may be entitled to a rebate of the Quebec Sales Tax (QST) paid on purchases or long-term leases (at least 12 months) that occurs after March 23, 2006, and before January 1, 2009. The vehicles for which the rebate may be claimed are the 2005 and 2006 Honda Insight, the 2005 and 2006 Honda Civic Hybrid, the 2005 Honda Accord Hybrid, the 2005 and 2006 Toyota Prius, and (a recent addition to the list) the 2007 Toyota Camry Hybrid.

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