Category: Insurance Journal

Whether a motor home qualifies for the RRSP Home Buyers’ Plan

At issue

The RRSP Home Buyers’ Plan (HBP), allows individuals to withdraw some of their RRSP funds to buy or build a qualifying home.  Presently a person may access up to $25,000 for the HBP, with payback of the borrowed funds to the RRSP required within a 15 year time period following property occupancy.

While there are many rules as to when and how to make use of the HBP, the threshold issue is whether the property under consideration actually constitutes a “housing unit” for the purposes of the program. The Canada Revenue Agency (CRA) issued a clarification letter in March 2013 revoking comments it had made in an earlier letter that purported to extend the definition to include a motor home. 

Income Tax Folio S1-F3-C2: Principal Residence

A “mobile home” is among the list of property types in Folio section 2.7 that the CRA has accepted a housing unit that can then qualify as a principal residence.  A principal residence does have to be in Canada.

(For those unfamiliar with Folios, in 2012 CRA began revising and consolidating its commentaries onto its website in the form of its Income Tax Folios.  This Folio was published in early 2013, replacing Interpretation Bulletin 120-R6 Principal Residence.)

RC4135 Home Buyers’ Plan (HBP)

There are two components to the definition of a qualifying home in the CRA’s HBP Guide: what type of property is it, and where is it located? 

As with the principal residence definition, it is likewise accepted that a mobile home may be a housing unit.  But unlike a principal residence, a qualifying home for the HBP must be located in Canada.

2011-0423971E5 Home Buyers’ Plan – Qualifying home

This CRA letter is in response to a taxpayer inquiry as to whether a “motor home” would qualify for the HBP.  It appears from the brief factual outline that the taxpayer intended to purchase a small motor home chosen or designed to accommodate for a person with disability needs. The home would be driven south for the winter months, returning to Canada for the warmer months.

After referencing the foregoing definitions for a housing unit, the writer stated that “a motor home is a type of mobile home that is considered a housing unit.” [My emphasis added.]  But based on the intended travel plans, in the CRA’s opinion it would not be located in Canada and therefore not qualify for the HBP.

The letter includes the standard lead phrase: “Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.”

2013-0482291I7 Home Buyers’ Plan – Motor Home

This is an externally published memo between CRA departments regarding the above stated conclusion that a “mobile home” includes a “motor home.”   

As there is no definition of either term in the Income Tax Act, resort is taken to the Concise Canadian Oxford Dictionary, which defines:

  • a mobile home as “a large transportable structure equipped with living accommodations, permanently parked, and used as a residence”, and 
  • a motor home as “a large motor vehicle equipped as a self-contained home for camping or long trips.”

As a motor home is not affixed to land, it is viewed as a vehicle, and thus not eligible for the HBP.  The interpretation on that point in the previous technical letter is thereby revoked – with apologies expressed for any confusion or misunderstanding caused. 

Practice points

  1. Be reminded that technical letters issued by the CRA are not legally binding on courts, not legally binding upon the CRA itself, and are subject to revocation.
  2. A non-vehicular mobile home remains qualified for the HBP.
  3. A property that does not qualify for the HBP because it is outside Canada, may nonetheless qualify for the principal residence exemption.

Some RCA payments may now qualify for pension income splitting

At issue

In recent years, the federal government has taken steps to address concerns it has about the inappropriate use of some retirement income plans and other registered vehicles.  This includes the introduction of ‘advantage’ and prohibited investment rules applying to RRSPs, TFSAs, IPPs and RCAs.

The 2012 Budget took direct aim at abusive practices associated with some RCAs – retirement compensations arrangements.  New rules were prompted by certain RCA practices that lead to unintended tax benefits.  Impugned activities included large contributions being stripped out of an RCA while claiming tax refunds, and the use of insurance products to allocate costs to an RCA while benefits arose outside the plan.

Somewhat lost in those policing measures (at least to this writer, though I suspect I’m not the only one) was a favourable change for some RCA beneficiaries, enabling pension income splitting in some circumstances.

Pension amount credit – ITA 118(7) “eligible pension income”

Section 118 of the Income Tax Act is a definitional section for personal tax credits, including “eligible pension income” for the purposes of determining the pension amount tax credit.  This in turn rests on the definitions of “pension income” for those 65 and over, and “qualifying pension income” for those who have yet to reach age 65.

Pension income splitting was introduced for the 2007 taxation year, allowing a recipient to allocate up to 50% of certain income to a spouse for tax purposes.  The foregoing definitions for pension credit qualification (with some amendments) were effectively shared with the new pension income splitting election.  (And see ITA s.60.03 below.)

Income from an RCA is not included in any of these definitions.

2013-0497761E5 – Income splitting for RCA income

A letter sent to the Minister of National Revenue in June, 2013 sought clarification whether distributions out of or under an RCA may be eligible for pension income splitting.  In response, the CRA representative recounted the general rules for pension income splitting, and specifically the absence of RCA income from the definition of eligible pension income.  

However, for the 2013 taxation year and onward, amendments to the Income Tax Act now allow for RCA payments to qualify for pension income splitting in limited circumstances.  “In general, the conditions that must be satisfied are the following:

  • the taxpayer is at least 65 years of age,
  • the RCA payments must be in the form of life annuity payments and be supplemental to a pension received out of a RPP, and
  • the RCA payments to be split cannot exceed a limit specified in the Act ($94,383 for 2013) minus the taxpayer’s other eligible pension income.”

Pension income splitting – ITA 60.03

This section provides definitions and the effect of making a pension splitting election.  It includes its own definition of “eligible pension income”, which since enactment in 2007 had been merely a direct importation of the s.118(7) definition.  An amendment proposed in the 2012 Budget and later enacted that year amended the definition in 60.03, as summarized generally in the foregoing CRA letter.  

Very importantly, note that the amended section does not extend this favourable treatment of RCA income to individual pension plans (IPPs) with fewer than four members where at least one of them is related to a participating employer in the plan.  

Practice points

  1. Generally, RCA income continues to be ineligible for pension income splitting except in these limited circumstances where the plan supplements RPP income.
  2. Non-arm’s length IPPs will likely not qualify for pension splitting under this exception.
  3. Be careful as some government sources may continue to show the general exclusion of RCA income from pension income eligibility (without reference to this exception), including for example the CRA’s own webpage explaining “eligible pension income” (at time of writing in October 2013).

Employee or independent contractor

At issue

The distinction between being treated as an employee or independent contractor is a frequently contended issue between taxpayers and the Canada Revenue Agency (CRA), and in turn a matter that often proceeds to court.  It has implications on both sides of the contracted relationship, including:

  • Tax rates and reporting obligations of the respective parties, 
  • Generation of RRSP contribution room,
  • Premium obligations for employment insurance and Canada Pension Plan, and entitlement to associated EI and CPP benefits, 
  • Requirement to collect, report and remit GST/HST, and 
  • Entitlement to and constraints upon tax deductions.

Though independent contractor characterization may more often be viewed from the working party perspective, it may also affect tax cost and administrative burden to the otherwise employer party.  Furthermore, that working party may be able to receive payments through a corporation, enabling a greater degree of flexibility in ultimately distributing net receipts into personal hands.

But being treated as employment or an independent contract is not merely a matter of the parties saying so.  The CRA or the courts may concur, but often will see it otherwise.

Gomez Consulting v. R., 2013 TCC 3

Gomez Consulting provided information technology (IT) consulting services to two federal agency clients: the Canada Revenue Agency and the Canada Mortgage and Housing Corporation (“the Clients”).  In reporting its taxes for the relevant years, it claimed entitlement to the small business deduction, as well as certain deductions in calculating its tax liability.

On reassessment, the Minister of Revenue treated the corporation as a personal services corporation, but for which Mr. Luis Gomez Almeida (shareholder and employee of Gomez Consulting) was simply an employee of the Clients in his personal capacity.

In appealing the reassessment, Gomez Consulting relied heavily on the intentions of the parties, suggested to be inferred in part from the business contracts.  As well, another IT consultant was called as a witness, testifying that he had been recognized as an independent contractor by the CRA appeals division.

The judge reviewed and adopted the position of a number of cases expressing the view that intent is not a relevant consideration in the personal services business analysis. On the facts, given the hourly pay rate, provision of tools and work space, and requirement to complete the work personally, the judge concluded that it was a personal services business.  Small business rate and all deduction claims denied.

Wiebe Door Services Ltd v. M.N.R., 87 DTC 5025

This is the oft-cited and followed case from the Federal Court of Appeal that lays out a test for determining whether a person is an employee or an independent contractor.  

The case was cited with approval by the Supreme Court of Canada in 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59.  The summary in this latter case affirms that each situation must be evaluated on its own facts, within a framework that considers:

  • Control the employer has over the worker’s activities,
  • Whether the worker provides his or her own equipment,
  • Whether the worker hires his or her own helpers,
  • Degree of financial risk taken by the worker,
  • Degree of responsibility for investment and management held by the worker, and 
  • Worker’s opportunity for profit in the performance of his or her tasks.

Though detailed, this is not necessarily an exhaustive list, and the weight to be accorded to each factor depends on the facts in issue. 

Practice points

  1. Facts matter, and substance trumps form.  Where an employment arrangement is dressed up to appear as something else – whether intentionally or inadvertently – the tax system will inquire and attempt to treat it in accordance with its true nature.  
  2. Whether or not rendered into a written contract, the intentions of parties may very well bind them vis-à-vis one another.  The parties should not however assume that this will thereby bind the taxing authority.   
  3. The interposition of a corporation as the working party contractor in no way assures availability of the small business rate and deductions.  The personal services business rules may apply as a look-through to effectively treat the individual as an employee.