GAAR, hiring family members and other taxing matters

(October 7, 2005) Jamie Golombek says advisors should be aware of a number of court cases that will affect future tax planning. The tax expert was speaking on Thursday at AIM Trimark’s annual road show in Toronto.

Two cases, Eugene Kaulius, et al. V. Her Majesty the Queen, and Her Majesty the Queen v. Canada Trustco Mortgage Company, address CRA’s general anti-avoidance rule, also known as GAAR. Both are currently before the Supreme Court.

GAAR is intended to apply to cases where client tax planning strategies have contravened the “spirit” of the Income Tax Act, regardless of whether or not any rules have actually been broken. One argument suggests the rule could reasonably apply to certain circumstances. The other, however, suggests that GAAR is too broad and abstract to be constitutional.

Golombek, vice-president, taxation & estate planning, at AIM Trimark, says an “avoidance transaction” is defined as a tax planning transaction or series of transactions that result in a tax benefit, unless carried out for genuine non-tax purposes. Decisions on the Kaulius and Canada Trustco cases are due out later this year and will likely provide some guidance on the use of GAAR in the future.

Golombek also discussed recent decisions that affect whether or not advisors can pay salaries to their spouses or children, deduct business expenses that are unrelated to their financial planning practice, and tax issues clients face if they are living in common law relationships.

For instance, advisors and brokers who pay salaries to family members are likely to be interested in one case where an advisor, technically a brokerage employee, hired his wife to help with the business. In this case, the courts ultimately decided that the wife’s salary was reasonable given the amount of business he was conducting.

The court ruled that his contract implied that he needed an assistant in order to maintain that level of business. Hiring other family members to help with the business is also allowed, as long as the kids have bank accounts, receive tax slips and actually get paid for the work that they do. Salaries paid to children are not deductible without proper documentation.

An April 2005 tax case found that an advisor could write off significant losses incurred by his thoroughbred horse racing business against his financial planning commissions because he was able to convince the judge that horse racing and the networking opportunities it provided was a key component of his business. Not surprisingly, CRA immediately appealed that decision.

Golombek also noted a case in Nova Scotia, where a court determined that the government was entitled to deny common-law couples some of the rights and responsibilities of married couples.

He points out that the rules are different across the country, but certain rights like equal property sharing when the relationship breaks down, dependent relieve, survivor pensions and intestacy where one partner dies without a will, are not automatically granted to common law couples, no matter how long they have been living together.

In planning for these and other cases, he says getting to know your client’s family and support network, notably their executor and beneficiaries, is important to continuing the relationship.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com