Canadian Taxes A to Z (2018): A is for Amortization

Thanks to Kelly Phillips Erb, aka @taxgirl and writer for Forbes, for originating the taxes A to Z idea, and giving me permission to adapt it to Canada. Her snappy, clear and cogent writing is capable of making anyone understand (and dare I say it, "like") tax. Like her, I took a tax course in law school, and loved it (much to my surprise). Now I help folks with Canada Revenue Agency (CRA) disputes, occasionally taking them as high as the Supreme Court of Canada.

I see Kelly's already up to the letter "R" (for Relief Funds) for the 2018 tax filing deadline in the U.S., whereas I'm stuck with the letter "A" for an April 30th deadline in Canada. I've clearly got some catching up to do! 

HOW AMORTIZATION IS A TAX CONCEPT

Today, A is for Amortization. You've probably heard about amortization when it comes to paying down your mortgage, but you might not have thought about it as a tax concept. 

You generally "depreciate" significant tangible property you purchase to earn income, like a vehicle or a building. The Income Tax Act refers to this as Capital Cost Allowance (CCA), and specifies a variety of rates depending on the type of property. 

For intangible property you acquire to earn income, like goodwill or intellectual property, you "amortize" it. The Income Tax Act calls this Eligible Capital Property, and again you can write it off at a certain percentage a year. 

You "amortize" intangibles rather than "depreciate" them, because they in theory can have an indefinite life that never wears out (unlike that orange Volkswagen camper van painted with flowers that you used to use in your outfitter business). 

HOW WHAT IS AMORTIZED IS A MOVING TARGET

Generally Accepted Accounting Principles (GAAP) rules have recently changed so that goodwill is now treated somewhat differently than other intangibles for write down purposes, so that it's tested each year for impairment, rather than simply (yes, perhaps I'm overly stretching the meaning of the word "simply" here) "amortized." But you still amortize other intangibles like patents, as they'll eventually expire.

The concept to get here is that if you've purchased something for the purpose of earning income, then you're allowed to gradually deduct its cost as it wears out - even if its not a tangible thing. But since goodwill (and supposedly diamonds) is forever, you might not be able to deduct it unless you can show some proof of its diminishing in value. 

HOW AMORTIZATION WINDS UP IN THE TAX COURT OF CANADA

You can get in all sorts of trouble with the CRA by trying to deduct something as a current expense at a 100% rate that should actually be amortized. But I also help clients where the CRA sometimes unfairly denies current expense deductions of something that the CRA claims requires amortization, but which in my opinion does not. Ultimately the Tax Court of Canada gets to decide. 

A Frankfurt team of accountants has come up with with this cool (at least for those of us fond of tax concepts) comparison of tax amortization rates by country and type of intangible: http://www.taxamortisation.com.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

5 Things to Never Do if you Hope to Successfully Appeal Your Income Tax Assessment

Every year around this time, I receive an increasing number of calls from prospective clients who have received assessments, requests for further information, or notices of audit from the Canada Revenue Agency. While all this correspondence needs to be dealt with in a timely manner, it's the assessments and reassessments that are the most sensitive because of the strict rules on how they can be challenged. Here are my top five things you should never do you if you hope to successfully contest your income tax (re)assessment.

1. Be Late in Objecting to the CRA

You only have 90 days from the date of the Canada Revenue Agency's Assessment or Reassessment to file an objection. While under exceptional circumstances you might be able to get an extension of that time, you can’t just ignore the deadline, or wait until you have gathered together all the information you think you might needed. Even if your objection is imperfect, file it anyway. You can always add additional information later. 

2. Miss Your Appeal Deadline with the Tax Court of Canada

If you lose your internal objection to the CRA, you’ll only have another 90 days within which to file your appeal to the Tax Court of Canada. The Court is completely independent of the CRA (unlike the internal objection procedure), but there are still strict (but different) rules on how you must craft, present and file your dispute of your (re)assessment. 

3. Hope Your Accountant or Tax Preparer Can Represent you Before The Tax Court

While you can appoint an accountant or tax preparer to represent you at the objection stage with the CRA, only a lawyer can represent you before the Tax Court. It can be any lawyer in Canada - there is no special sub-class of tax lawyers - but be aware that very few lawyers do work before the Tax Court because it has its own rules of procedure that are different from all other courts in Canada. The judges even wear purple sashes, which are very distinct from the usual red sashes of most courts in Canada. 

4. Fail to Sufficiently Explain Why the CRA is Wrong

As the taxpayer, the Income Tax Act puts the full burden of proof and argument on you to dispute any CRA assessment or reassessment. The CRA is presumed to be right, and it is up to you to prove them wrong. This burden is completely the opposite of criminal proceedings, where the burden always falls on the police and Crown. It doesn’t matter if you think this unfair, this is the way Parliament set up the tax system. 

5. Fail to Produce Compelling Evidence to Prove Your Case

Talk is cheap. What courts and the CRA objections branch like to see are documents. So saying you’re entitled to all sorts of deductions without any proof of your expenses, or saying all that money that flowed through your bank account isn’t taxable income even though you have no alternate explanation of where it came from, or arguing that your 10 million dollar mansion was acquired just by clipping coupons, without any proof of where you got the money to pay for it, won’t fly without hard proof.