16 August 1989 Income Tax Severed Letter 7-4172 - Review of guide and form T7B-WS(E)

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.

This is in reply to your memorandum of July 24, 1989. Our review of the Guide and form T7B-WS(E) was based on the provisions of the Income Tax Act taking into account the proposed amendments in Bill C-28 (first reading, June 20, 1989). Unless otherwise stated, the references to sections, subsections, etc., are to the Income Tax Act. We have assumed that the line references to the T1 return are correct and have ignored grammatical and typographical errors, language style and layout, unless they clearly result in incorrect or misleading information being given to taxpayers. Title references of departmental publications, other than interpretation bulletins or information circulars, and addresses of taxation centres or offices have not been verified.

IMPORTANT MESSAGE

• 1. Fifth paragraph. The Guide incorrectly suggests that only the minimum tax carry-over from 1988 or 1989 can be deducted in the calculation of taxes for 1990. As the minimum tax carry-over can be carried forward 7 years under subsection 120.2(1), the 1986 minimum tax carry-over, which is the earliest one that may be available, and the 1987 minimum tax carry-over could also be applied to the 1990 tax calculation for determining tax instalments.
• 1. 1 First paragraph. The reference to "by the fifteenth of each quarter" at the end of the paragraph is unclear and probably incomprehensible. We suggest replacing the phrase with "on or before the dates noted above".

CONTENTS

• 2. The caption "Prior year (1989) option work sheet "does not correspond to the heading on page 9.

WHY ARE INSTANT PAYMENTS REQUIRED

• 3. The last paragraph does not set out all the instalment payment requirements which are dealt with in the next following paragraph under a separate heading. In our view, it should either set all the requirements or be recorded more generally (e.g., by deleting "three-quarters of " and by replacing "you are required" with "you may be required").

INSTALMENT PAYMENT REQUIREMENTS

• 4. With respect to the first and second conditions, we note that, contrary to what is implied in the Guide, residents of Quebec are not required to make instalment payments if the taxes do not exceed $1,000 plus the abatement determined under subsection 120(2) of the Act.

WHEN WILL AN INSTALMENT GUIDE BE HAILED TO YOU?

• 5. Page 3, First Paragraph. The first sentence states that the Department identifies who should be paying tax instalments, incorrectly suggesting that all those identified are required by law to make instalment payments. In fact, all the Department can do is identify those who potentially may be required to make instalment payments, if it is considered that instalments can generally be based on either the prior year taxes or the current year estimated taxes.
• 6. Second Paragraph. The last sentence incorrectly indicates that interest on late/deficient instalments will be charged (only) once the taxpayer has previously been identified as a probable instalment remitter. In effect, the Guide incorrectly implies that interest on late/deficient instalments is not exigible for the first year for which instalments are required in accordance with the conditions set out under "instalment payment requirements" on page 2, since the taxpayer could only be identified as a probable remitter when the tax return for such (first) year is assessed in the subsequent year. The Guide also incorrectly implies that interest on late/deficient instalments will be exigible for the mentioned first year if the taxpayer had been identified as a probable instalment remitter on any previous year even though the taxpayer was not required by law to make instalments payments in prior years (i.e., incorrect identification by the Department)

PRIOR YEAR (1988) OPTION

• 7. First paragraph. Although the Guide indicates that the taxpayer can use - the greater of his 1989 and 1990 tax withholdings at source, there is no support in the Act for the deduction of tax withholdings at source in order to compute the instalment base. In this regard, see comment 12 below. If tax withholdings are to be considered, only the current year's estimated tax withholdings appear to be justified; the choice of the greater of the two years' tax withholdings appears to be arbitrary.
• 8. Third paragraph. Replace "use" with "you may wish to use" since the two options referred to in subsection 156(1) for calculating instalments are also available to the taxpayer who claims a minimum tax carry-over in 1990.
• In addition, the paragraph incorrectly suggests that a taxpayer is entitled to deduct a minimum tax carry-over in 1990 only if he was subject to minimum tax in 1989, ignoring the 7 year carry-over period in subsection 120.2(1). There could be minimum tax carry-over for 1986, 1987, 1988 or 1989.

INCOME TAX DEDUCTED AT SOURCE

• 9. Second paragraph. We assume that the reference to, and description of, line 18 of form TD1 is correct. However, we note that the description differs from that reported in the Farmers and Fishermen Instalment Guide for 1989 (under the same heading) which was reviewed in our Memorandum of July 20, 1989.

INSTALMENT INTEREST

How is it calculated?

• 10. Second paragraph. Change the third sentence as indicated:

"The maximum amount charged is the difference...".

• The suggested change would reflect the provisions of subsection 161(2.2) of the Act.

Exceptions

• 11. Contrary to what is Indicated in the first bullet, the Act provides for the charging of interest on late/deficient instalments whether or not it is the first taxation year for which instalments are required to be made.

THE PRIOR YEAR OPTION

• 12. Lines 10, 11, and 12. The deduction of the amounts at lines 10 (tax deducted at source), 12 (Federal Sales Tax Credit) and 11 (Child Tax Credit) are not supported by the legislation.
• The instalment base for 1990 is to be computed in accordance with Section 5300 of the Regulations. Generally speaking, the instalment base is equal to the federal taxes payable, not the balance of such taxes that are owing after deducting taxes withheld at source. The instalment is 1/4 of the federal taxes payable (instalment base). However, the amount remitted by the taxpayer would be the instalment mentioned less the 1990 tax withheld at source as of the due date of the instalment payment. The manner in which the tax deducted at source is applied would affect the interest calculation on late/deficient instalments.
• The Federal Sales Tax Credit and the Child Tax Credit are not considered - deductions (i.e. they are not "true" tax credits) in computing taxes payable. They are considered amounts of taxes paid by the taxpayer and therefore, their treatment should be the same as that accorded to amounts deducted at source.
• The above comment also applies to the refund of investment tax credit and the Part XII.2 tax credit mentioned in line 37 of the T7B-WS(E).

EXHIBITS I AND II

• 13. It should be made explicitly clear that both Jim Smith and Lise Chartrand meet the conditions in the Act that require them to make instalment payments.

In Exhibit II the amount $6,515.50 on line 9 should be $6,514.50

FORM T7B-WS (E)

• 14. As regards deducting in 1990 the minimum tax carry-over from 1988 or 1989, refer to comment 1 above.
• 15. Step 1. The fraction for calculating in 1990 taxable capital gains and allowable capital losses is 3/4 (not 2/3). Also, the simple notation "2/3" (3/4) after "net of allowable capital losses" is confusing in that it could be incorrectly interpreted as having to subtract from taxable capital gains only a fraction of the allowable capital losses.
• 16. Line 4. Two observations are warranted. First, the terminology "social benefits repayments" may confuse the deductions under paragraphs 60(n) and (p) for repayments of overpayments of OAS and FA benefits with the deduction (intended by line 4) under new paragraph 60(w) of the Part 1.2 tax. Second, as the deduction under paragraph 60(u) is in computing net income, we fail to see why its treatment is different than that accorded to the deductions mentioned in line 2.
• 17. Line 10. In view of the indexing required by section 117.1, the shown ranges of taxable income and related tax are incorrect.
• 18. Line 15. The amount could be understated by the amount of other tax adjustments such as the notch provision.
• 19. Lines 18 and 20. The additional amount of 52%. of taxes otherwise payable is to be multiplied by the proportion of the income not allocable to a province to total income, in accordance with subsection 120(1) and related regulations.
• 20. Line 30. Where is the Part 1.2 tax dealt with?
• 21. Line 33. It is impossible at this early date to comment on the correctness of the information disclosed below line 33.
• 22. Line 37. Refer to comment 12. In addition, contrary to what line 37 suggests, the rate of $70 of federal sales tax credit is not restricted to children but is also available in respect of persons claimed as dependants under section 118. See paragraph 122.4(1)(b) of the definition of "qualified relation".
• 23. Line 44B. The description does not properly reflect the provisions of paragraph 118(1)(b).
• 24. Line 49 The Note appears to be incorrect in indicating that the calculation of CPP Contributions does not apply to a person eligible for CPP benefits. Is a person under 65 years of age who is eligible to receive CPP benefits but does not receive them and is self-employed not obligated to make CPP Contributions?
• 25. Line 63. The line description appears to be both incomplete and confusing.

It is incomplete because of the incorrect assumption that "gifts to Canada or a province" always include all gifts falling within the definition of "total Cultural gifts" and "total Crown gifts", notwithstanding that the two definitions in subsection 118.1(1) refer to the respective donees in different terms Since subsection 26(2) of the Cultural Property Export and Import Act indicates that a donee of cultural property could be "any institution or public authority properly designated, it would appear that the donee of Cultural property is not necessarily Her Majesty in right of Canada or a province.

It is confusing because, on the one hand, part A suggests that "charitable donations" excludes "gifts to Canada or a province" and, on the other hand, indicates that "total donations" include both "charitable donations" and "gifts to Canada or a province". We suggest moving the bracketed 20% restriction in line 63A to immediately after the first reference to "charitable donations" in line 63.