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.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
962474
XXXXXXXXXX B. Kerr
February 19, 1997
Dear XXXXXXXXXX:
Re: Newly Appointed Judges
This is in response to your letter of July 5, 1996, wherein you requested confirmation of the tax implications XXXXXXXXXX We also received a copy of your December 30, 1996, letter addressed to the Commissioner of Federal Judicial Affairs which has provided us with more details of your understanding of the applicable provisions of the Income Tax Act (the "Act").
XXXXXXXXXX You have expressed concerns regarding the repeal of section 24.1 and the loss of your ability to claim the ten-year reserve under section 34.2 of the Act and, in a telephone conversation (Kerr/XXXXXXXXXX) on January 31, 1997, you advised us that this was your main concern. In addition, you have asked us to confirm your views concerning the taxation year in which your professional income should be reported and whether you must continue to make instalment payments.
XXXXXXXXXX However, given the limited information you provided, we cannot confirm your views regarding the proper tax treatment of your professional income. For instance, it is not clear whether the partnership of which you were a member had a calendar year end, as required under paragraph 249.1(1)(b) of the Act, or whether you elected to use the alternative method provided under subsection 249.1(4) of the Act, in order to maintain an off-calendar fiscal period, such that subsection 34.1 would apply. Nor is it known whether the members of the partnership of which you were a member entered into an agreement to allocate income to you after you ceased to be a member such that paragraph 96(1.1)(a) would apply to deem you to be a member of the partnership. In addition, in your July 5, 1996 letter, you indicate that you will elect, however, you do not state under which provision of the Act. In any event, you should note that the review of actual past transactions falls within the responsibility of the Tax Services Offices. However, we can offer the following general comments based on the application of paragraph 249.1(1)(b) and section 34.2 of the Act.
As you pointed out in your December 30, 1996 letter, the election under section 24.1 was repealed for appointments to the bench made after 1995, consequential on changes to the definition of "fiscal period" in new section 249.1 of the Act. Former section 24.1 permitted a taxpayer that was appointed a judge in a particular taxation year to defer a portion of the taxpayer's income from a professional practice for a fiscal period commencing before, and ending in, that year to the subsequent year.
New paragraph 249.1(1)(b) of the Act generally provides that no fiscal period may end after the end of the calendar year in which the period began. As part of the new fiscal year end rules, section 34.2 was introduced in the Act and provides for a 10-year transitional reserve rule. The reserve was necessary since most affected taxpayers would otherwise have been required to report more than 12 months of business income in their 1995 income tax return. However, this transitional relief is restricted where a taxpayer discontinues or disposes of a business. Thus, according to subsection 34.2(6) of the Act, where a taxpayer ceases to carry on a business in a taxation year, the individual may claim a reserve at the end of that taxation year but not in the following year.
XXXXXXXXXX
As you are concerned with the repeal of section 24.1 and the new fiscal year end rules, we have attached an example which reflects that the allocation of income between the year of appointment and the year subsequent to the year of appointment would be approximately the same whether the appointment to the bench occurs in 1994, when the provisions of former section 24.1 and subsection 99(2) applied, or the appointment to the bench occurs in 1996 and the provisions of paragraph 249.1(1)(b) and section 34.2 of the Act apply.
As regards instalment payments under subsection 156(1) of the Act, paragraph 156.1(2)(b) provides that section 156 does not apply to an individual for a particular taxation year, where the individual's net tax owing for the particular year, or for each of the 2 preceding taxation years, does not exceed the individual's instalment threshold for that year. The terms "net tax owing" and "instalment threshold" are defined in subsection 156.1(1) of the Act. Given the lack of information regarding your "net tax owing", we cannot respond to your query regarding instalment payments.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Example of tax implications when a taxpayer is appointed a Judge
Section 24.1 and Subsection 99(2) vs. Paragraph 249.1(1)(b) and Section 34.2
Facts:
-Taxpayer practices as a member of a law partnership
-Fiscal period of the partnership is January 31
-Professional income is $15,000 per month or $180,000 annually
-Salary as a Judge is $10,000 per month or $120,000 annually
A - Appointment on April 1, 1994
Taxation year 1994 1995
Salary $ 90,000 $120,000
Professional income:
31-01-94: $180,000
24.1 election $ 45,000 $135,000
01-02-94 to 31-03-94: $30,000
99(2) election - 30,000
Total $135,000 $285,000
B - Appointment on April 1, 1996
Taxation year 1995 1996 1997
Salary - $ 90,000 $120,000
Professional income:
31-01-95 $180,000 - -
31-12-95 $165,000 -
31-03-96 - $ 45,000 -
Reserve - subsection 34.2(4)
95% x $165,000 ($156,750) - -
85% x $165,000 - ($140,250) -
NIL 34.2(6)(c)(i) - - -
Reserve - income 34.2(5) - $156,750 $140,250
Total $188,250 $151,500 $260,250
Note:
Total income for the 2-year period of comparison is $420,000. When the appointment is made in 1994 allocated as $135,000 in 1994 and $285,000 in 1995. When the appointment is made in 1996, the allocation is $151,500 in 1996 and $260,250 in 1997. The balance of $8,250 was the net additional amount included in 1995 as a result of the new fiscal period rules.
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