Here's a puzzle with a warning:
On Schedule 6, the working income tax benefit (WITB), at line 5 you are to enter:
Total self-employment income reported on lines 135, 137, 139, 141, and 143 of the return (excluding losses and income from a communal organization)
Read that over a few times and using your knowledge of the English language figure out what it means. Specifically, what does "excluding losses" mean? Let's say at line 141 you have a farming loss of $500 (negative 500 is entered) and at line 135 you have $1,000 entered, which is the total income from two businesses. One business at line 135 had a loss of $1,000 and the other had a profit of $2,000. What would you put down at line 5?
I phoned CRA's toll-free number four times and talked to four different people — and received four different answers. Which I thought was miraculous because I didn't think that four different interpretations were even possible (can you come up with all four?).
The first agent agreed with my understanding of the instructions. But after that, in total frustration, I couldn't get anyone else to agree with us. The next two agents didn't know and had to ask their supervisors, so they can't be blamed (yet if you're on the help desk, surely you've been instructed on and read through Schedule 6 plenty of times). And the last guy had a hard time pronouncing "communal" and he sounded like he'd never seen a Schedule 6 before, but he didn't need any help. His non-Canadian accent led me to believe that English wasn't his mother tongue. Yet here I was quoting from a tax textbook and the Income Tax Act, arguing syntax with him. It seemed as if CRA had moved the help desk overseas. He came up with the most obviously wrong interpretation of the lot and I was lucky when the phone line went dead and I didn't have to plunge on with him.
I should have kept phoning just to see how many interpretations they could come up with. But I was beating myself up talking to these guys. Even if I could get someone to agree with me, it wouldn't have helped. No one so far had shown any desire to solve my problem over the phone. CRA agents love to hear your problem, love to give advice, but they're loath to do any work to actually solve that problem for you. Even though I had, to no avail, already sent in a letter, in the end I would have been told to write it all down again and stick it in the mail (passing the buck). And how many letters would it take before I hit upon the one guy who not only believes me but is willing to help me too? I could see spending the rest of my life in this Kafkaesque nightmare.
So, let's get rid of the last man's explanation first: He said that the word "losses" refers only to losses from a communal organization. This means, if you had a customer that was a communal organization, you would have to somehow proportion all the expenses to that customer and then subtract them from the related income. If there's a loss, you would have to recalculate the business's net income removing the communal income and expenses. That's a lot of effort — who would want to do business with a communal organization? And don't the instructions already tell us to exclude communal income? Surely, the income doesn't comes out twice. Nor can it be that CRA expects us taxpayers to figure out profit or loss on a per customer basis.
Now on to the remaining interpretations, leaving communal organizations out of the picture. I've mixed up the order just to keep you guessing.
The last three are variations on a theme. One agent said you add up lines 135 to 143 and if the total was a negative amount (a loss) then you enter zero. So in the example given, you would put down $500 at line 5. Another agent said that if on lines 135 to 143 a negative amount was entered, you make that negative amount zero and then add the lines up. So you would put down $1,000. The final answer was to look at each business, regardless of what line it was entered on, and add up all the ones that made a profit and ignore the rest. So you would put down $2,000.
To sum, "losses" either refers to the total of the lines; or it relates to what's entered at each individual line; or it pertains to each business.
Just to confuse you a bit, let's see how the Income Tax Act puts it:
122.7(c) the total of all amounts each of which would ... be the individual's income for the taxation year from a business carried on by the individual otherwise than as a specified member of a partnership
Doesn't help all that much, does it? You have to read it four times just to get a grip on it. Surely they could have used clearer language. I would have thought the word "loss" would have been in there somewhere. And what exactly do they mean by "amounts" ? Legalese is so opaque that I can only guess at its meaning. The legal profession seems to go out of its way to make English incomprehensible.
So what's the right answer? Any obvious clues?
Though the girl was adamant, if the total of all the lines was all that mattered the text would read "excluding a loss" not "excluding losses". Focusing on what's entered at each line is what I believe CRA's computer does (there's the rub!), but that too must be wrong because the Income Tax Act doesn't differentiate between different types of businesses (which is all lines 135 to 143 do). It just talks about business income (and a loss is not business income so it's never mentioned). And it would be unfair for one taxpayer to get a bigger refund just because his businesses were entered at different lines and not combined in one. That troubled the agent, but it didn't change his mind.
All that's left is the businesses themselves, lines be damned. In the words of Wolters Kluwer's tax guide, Preparing your Income Tax Return, in reference to the WITB:
if one or more businesses carried on in the year have a net loss, those losses are not subtracted from the income of other businesses which have net income
In reference to the refundable medical supplement which also excludes losses (but doesn't care about communal income):
if [a business's] net income is negative it is included as zero; that is, business losses (and for that matter employment losses) do not reduce aggregate income from other businesses or employment
This is what I took the meaning to be when I first read Schedule 6. And that's the way Taxman has always done it. The correct number to enter at line 5 is $2,000. But if you mail in a paper return, CRA's computer will throw out the $2,000 and put in $1,000 instead. Though you are required to send in statements of income and expenses for each business you own, nothing from these statements gets entered in CRA's computer. The data-entry folks are only entering into CRA's computer what's on lines 135 to 143. If one of those lines hides a business with a loss, CRA's computer won't know about it.
So if the circumstances are similar, check past returns that you received the correct amount of WITB and refundable medical supplement. And be forewarned that CRA has a bug in the system. As a workaround, put businesses with a loss at a different line from the money makers. Inch'Allah, this will allow CRA's computer to come up with the right number. If not, then you're in the same boat I'm in. At least you know phoning them won't help.
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