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12 JANUARY 2005 ADVISOR’S EDGE REPORT www.advisor.ca

Schnurr was a successful investment to coordinate the annual Christmas advisor with a major brokerage firm. card mailing and purchase gifts for Keeping it in the Family Mr. Schnurr hired his wife as his clients. She also engaged in various If you’re an advisor hiring a spouse, assistant and paid her a fair salary, business development activities in making sure to make the appropriate the community that helped attract employ lessons learned from these two cases payroll deductions. Mrs. Schnurr’s new clients. role was to perform various secre- The judge did not question the ADVISORS WHO COURT REPORT common income-splitting tech- tarial duties with respect to Mr. validity of Mrs. Schnurr’s employ- nique utilized by advisors: hiring ARE EMPLOYEES Schnurr’s clients’ records, as well as ment by her husband. He found that JAMIE GOLOMBEK your spouse. It is more complicated for an advisor her salary was reasonable in relation Welcome to Court If you are an advisor who is con- who is considered to be an employee To be able to deduct to the services that she performed, Report, a space sidered self-employed, you should to hire a spouse or another family the cost of an assistant’s noting that “the amount paid to devoted to explor- have no trouble hiring your spouse or member to assist in his or her prac- salary, an employee Mrs. Schnurr in the overall context ing recent tax cases partner to help you with your practice, tice. An October 2004 Tax Court of must be “required” by of the high income and substantial of interest to finan- and gain tax advantages, as long as he Canada decision, Schnurr v. The Queen, business generated by Mr. Schnurr cial advisors and their clients. In this or she actually performs the work and 2004 TCC 684, dealt with whether the contract of his is, in fact, rather modest.” inaugural column, we’ll take a closer is paid a “reasonable” salary for the the investment advisor could deduct or her employment to look at a tax case released near work being done (I’ll talk more about a salary paid to his wife. pay for an assistant. REQUIREMENT the end of 2004 that deals with a what “reasonable” means a bit later). In the years in question, Grant TO HIRE AN ASSISTANT The main issue in the case was the Income Tax Act’s rules governing the deductibility of salaries paid to an assistant by an employee. In the terms of the legislation, to be able to deduct the cost of an assistant’s salary, an employee must be “required” by the If you contract of his or her employment to pay for an assistant. While the Canada Revenue build it, Agency’s administrative position is that the term “required” necessitates WIRELESS that there be an “express require- FEATURE RATE PLAN ment within the terms of a written RATE PLAN contract of employment,”the CRA you will WITH EVENINGS AND WEEKENDS acknowledges that such a require- FAMILY PLAN ment can still exist if the employee FAMILY PLAN save. WITH EVENINGS AND WEEKENDS can establish that it was “tacitly understood” by both parties (the employee and the employer) that the payment must be made and was CHOOSE 2 necessary, under the circumstances, OR MORE AND to fulfill the duties of the job. INTERNET SAVE 15% The CRA argued that the employment letter between the bro- EXTREME kerage firm and Mr. Schnurr was EXPRESS LITE silent about the hiring of an assis- TELEVISION tant and, therefore, it was not ULTRA LITE BASIC CABLE PLUS: “required.”The judge disagreed, and ULTIMATE TV PAK found Mrs. Schnurr’s salary to be DIGITAL CABLE PROGRAMMING fully tax-deductible, concluding that THE MOVIES PACKAGE it was “implicit in the relation- SPECIALTY CHANNELS ship with [his employer]…that if Mr. Schnurr is to generate the sort of business … that [his employer] expected him to, he is required to SAVE 15% WITH NEW ROGERS BETTER CHOICE BUNDLES. hire someone to perform the type of If you want something done right, you have to do it yourself. That’s the thinking behind services that his wife performed. our new and improved bundles. Introducing Rogers Better Choice Bundles. Just choose Such a provision need not be explic- one product from two or more circles above, and you’ll save 15%. For example, if you itly set out in the agreement between pick Rogers Yahoo! Hi-Speed Internet Extreme and Ultimate TV with Digital Cable, you’ll the employer and the employee.” get at least $13* off your monthly service fees. Plus, we’ll even help you save on long distance from your home phone virtually anywhere in North America at the special rate COMPLETION of just $5/month for 1000 minutes. That’s only 5¢ per minute for the first 100 minutes – OF FORM T2200 the next 900 minutes are free. While this decision may certainly sound like good news for advisors who are deemed employees, there is still one major stumbling block. In order to be able to claim a salary SHOP ONLINE AT ROGERS.COM/BUNDLES, 1-866-608-0601, A ROGERS™ WIRELESS, ROGERS PLUS OR ROGERS VIDEO STORE paid to an assistant, you must com- *Pricing based on rates. The Rogers Better Choice Bundle offer is available to new or existing customers (excluding bulk and business customers) and is subject to error, change or cancellation without notice. Offer available only within the territory served by . Minimum 24-month commitment is required. Customer will be required to commit to a 24-month term for each of the qualifying service categories. Early termination fees apply. Bundle discount applies to monthly recurring service fees of eligible services. prepaid plete CRA Form T2200, “Decla- services and corporate plans are not eligible for Rogers Better Choice Bundle. Bundle offer may not be combined with other offers or discounts, including other ‘Bundle’ offers and VIP,unless specified, and is only available to customers in good standing who sign up all Rogers services on “One Bill” consolidated billing. Discount applied before applicable taxes, after credits. Charges that are not recurring monthly service fees for the three core services are not eligible for this offer: they are not subject to the 15% discount. The more common of such excluded ration of Conditions of Employ- charges are: Cable pay-per-view and video-on-demand charges, Wireless one-time activation fee, $6.95 monthly System Access Fee, 911 monthly Emergency Service Access Fee, local airtime charges, pay-per-use Text Messaging, wireless long distance, roaming charges and any additional Rogers Wireless or Rogers Yahoo! Hi-Speed Internet service options selected, hardware/equipment (wireless, Internet or cable related) rentals or purchases. Services no longer sold to new customers are not eligible. Installation fees, connection or relocation fees extra. Other conditions and restrictions apply. Call 1-866-608-0601 for information about any particular service or fee eligibility. Rogers Cable subscription to Basic Cable only does not qualify for the Rogers Better Choice Bundle and is not discounted for such customers who otherwise ment.”You fill in the first part of qualify for the Rogers Better Choice Bundle. Rogers Wireless: Hardware offers for Rogers Wireless services may require a minimum 24- or 36-month service agreement. Other conditions and restrictions apply. Rogers home long distance service is available only to Rogers Better Choice Bundles customers. North America includes Canada and Continental USA. Rogers Cable: Channels/services included in Cable packages may vary by region. Cable and Digital Cable service not available in all areas. Basic Cable required to receive other levels of cable television the form and your employer fills service. Basic Cable and Digital Terminal required to receive digital programming. CRTC linkage rules apply. ™Rogers, Rogers Wireless, Rogers Cable, the Rogers Mobius Design, YOUR WORLD RIGHT NOW, and the other ROGERS and HI-SPEED INTERNET marks are trademarks of Inc., used under license. YAHOO!®, the Yahoo! logos, and other Yahoo! product and service names are the trademarks and/or registered trademarks of Yahoo! Inc., used under license. in the second part. Specifically, in question 9(b) of the form, your AER01_OFC-012 01/13/2005 01:21 PM Page 13

www.advisor.ca ADVISOR’S EDGE REPORT JANUARY 2005 13

employer is required to respond insurance legislation protecting insur- his creditors even though there is no to the following: “Did you require Creditor Proof? ance RRSPs from creditors. legislation in that specifi- this employee under a contract of BY CHARLEY TSAI Two recent court decisions may cally protects RRSPs from creditors. employment to … pay for a substi- affect the creditor-proofing sta- Until the Amherst Crane case, the tute or assistant?” Recent court decisions may alter case of a deceased RRSP tus of RRSPs in the prevailing view from courts was that If your employer refuses to the status of non-insurance RRSP annuitant. British Colum- It is possible future. First, in May, RRSPs can be seized by creditors of complete the form, you will not be accounts when it comes to credi- bia and PEI, for exam- that the the Supreme Court of a deceased annuitant even if the successful in claiming a salary paid tor protection. For now, however, ple, have legislation that courts in other Canada in Bank of Nova RRSP had named beneficiaries. to an assistant. The judge explained whether your clients’ RRSPs are exempts RRSPs from provinces Scotia v. Thibault ruled that The impact of this decision may the purpose of the form in his protected by creditors depends on forming part of the estate. creditors in Quebec can extend to clients living in other decision as follows: “The filing of where they reside and whether they PEI’s legislation goes fur- may take seize a debtor’s RRSP provinces as well. All common-law Form T2200 serves a dual function: are alive or not. ther, specifically excluding guidance from because the terms of provinces and territories have bene- it is a statutory condition precedent Generally, a creditor can seize a RRSPs from being sub- the Ontario the RRSP failed to meet ficiary designation legislation that to the claiming of an employment debtor’s assets unless they are declared ject to claims by creditors decision. the conditions necessary is quite similar, and it is possible expense deduction under … [the exempt in that province or territory. of the deceased annuitant. under Quebec legislation that the courts in other provinces Act] … and it provides evidence of But to date, only and Alberta, which currently has no to exempt these assets from creditors. may take guidance from the Ontario the terms of employment. I doubt Prince Edward Island have enacted legislation protecting clients’ non- Then in June, Ontario’s top court decision. AER that the form is conclusive or deter- laws to exempt non-insurance RRSPs insurance RRSPs from creditors, in Amherst Crane Rentals Limited v. Arlene minative if the evidence showed it and RRIFs from creditors while the has insurance legislation protecting Clare Perring upheld a lower court Charley Tsai, LL.B., CFP, TEP, is assis- to be wrong but it is at least prima annuitant is alive. insurance RRSPs from creditors. decision exempting a deceased annu- tant vice-president, tax and estate planning, facie evidence.” The rules change slightly in the Almost, if not all, provinces have itant’s RRSP from being seized by for AIM Trimark Investments.

SALARY MUST PROVINCIAL CREDITOR PROTECTION FOR RRSPS BE “REASONABLE” Finally, ensure that the salary paid During annuitant’s lifetime Subsequent to annuitant’s death to your spouse is “reasonable” and reflective of the work being per- British Columbia Court decisions have confirmed RRSPs are not protected Provincial legislation excludes RRSPs from forming part formed. In other words, what would from creditors while the annuitant is alive. of the deceased’s estate. As a result, it is likely RRSPs will you pay an arm’s-length person for be exempt from creditors of the deceased annuitant. the amount of work you are hiring Alberta Creditors’ ability to seize RRSP assets has been confirmed There appears to be no reported court decision on this issue. your spouse or partner to do? by the courts in Alberta. However,an Alberta court has ruled an RRSP formed part of a deceased’s estate for purposes of a dependant relief claim. What would you pay an arm’s-length Saskatchewan The Registered Plan (Retirement Income) Exemption Act The above legislation does not appear to protect RRSPs person for the amount of Saskatchewan specifically exempts RRSPs from any of a deceased annuitant from his or her creditors. However, of work you are enforcement process except for support payments. a court ruling in Saskatchewan has disallowed creditors from seizing the RRSP assets of a deceased annuitant. hiring your spouse or partner to do? Court decisions have confirmed RRSPs are not protected The province’s highest court refused to protect assets held from creditors while the annuitant is alive. in an RRSP from a deceased’s creditors back in 1997. Another recent case decided in The same court was reluctant to follow its own ruling in a September of 2004, Hampson v. The subsequent decision involving the same issue, but did not Queen, 2004 TCC 623, involved a expressly overrule it. self-employed psychologist earning Ontario A number of Ontario court cases have held that RRSPs are The Amherst Crane case reversed several lower court just over $60,000, who attempted not protected from creditors during the annuitant’s lifetime. decisions that had held that RRSPs were available to credi- to deduct $16,000 in salary paid to tors of deceased annuitants. As a result of Amherst Crane, his wife to assist him in his work. RRSPs are now creditor-proof on the death of the annuitant In court, Mr. Hampson pro- so long as the annuitant’s estate is not the designated duced a list of tasks that made up beneficiary of the RRSP. the work for which he paid his wife. The list consisted of such things as Quebec Although Quebec law exempts fixed-term annuities purchased Based on Thibault and other prior decisions in the province, receiving and responding to phone from trust companies from seizure on the same terms and it is likely that most RRSPs will not be protected from calls and e-mails, scheduling appoint- conditions as annuities obtained from insurers, the Supreme creditors following the death of the annuitant. ments, paying bills and keeping Court of Canada decision in Thibault will make it very difficult receipts current. The CRA main- for most RRSPs to qualify. tained that these types of activities In essence, the Supreme Court said an annuity will not exist if the annuitant is allowed to retain control of the annuity really amount to “little or nothing capital. Since the terms of most RRSPs allow the annuitant more than any stay-at-home spouse to decide how the assets in a plan are invested, and to make would do without compensation … unrestricted withdrawals from the plan, it is likely that [and that $16,000 was] an unrea- most RRSPs will not generally qualify as annuities and, sonable amount to pay for those therefore, are not protected from creditors. services.”The judge agreed and dis- allowed the expense. New Brunswick Case law in this province has confirmed that RRSPs can New Brunswick does not appear to have any reported While hiring a spouse can still be be seized by creditors. court decisions on this issue. It is therefore unclear whether an effective income-splitting method, creditors can seize RRSPs of deceased annuitants. given these two cases you may wish to ensure that your employer is Prince Edward Island PEI legislation exempts an annuitant’s RRSP from creditors, PEI legislation also exempts RRSPs from creditors of onside and that the amount you pay provided a spouse, child, grandchild or parent is the named a deceased annuitant. beneficiary of the RRSP. is, indeed, reasonable. AER

Nova Scotia, There are no reported cases on this issue in these provinces There are also no reported cases on this issue in these Jamie Golombek, CA, CPA, CFP, CLU, Newfoundland, and territories. However given these provinces and territories provinces and territories. It is uncertain how the courts in TEP, is vice-president, taxation and estate Northwest Territories, do not have laws excluding RRSPs from seizure, it is quite these provinces and territories will deal with this issue. planning, at AIM Trimark Investments in Yukon likely creditors will be able to seize these assets. Toronto. Jamie can be reached at Jamie. [email protected].