Table of Contents – Tax Law
Chapter 1: Income Tax Law .......................................................................................................................................5
Miscellaneous .........................................................................................................................................................5
Income Tax Terminology .......................................................................................................................................6
Income Tax Concepts .............................................................................................................................................7
Tax Policy Making .................................................................................................................................................8
Rules of application ................................................................................................................................................8
Structure of the act..................................................................................................................................................9
Purposes of Income Tax ...................................................................................................................................... 11
1)Raise revenue ............................................................................................................................................... 11
2)Redistribution of income .............................................................................................................................. 11
3)Regulate private activity............................................................................................................................... 11
Evaluation criteria of Income Tax ....................................................................................................................... 12
1)Equitable ...................................................................................................................................................... 12
2)Neutral .......................................................................................................................................................... 12
3)Simple .......................................................................................................................................................... 12
Other ................................................................................................................................................................ 13
Application of Y Tax ........................................................................................................................................... 13
Sources of Tax Law and Practice ........................................................................................................................ 13
Legislative Process .......................................................................................................................................... 13
Legislative Decisions....................................................................................................................................... 13
Executive Decisions ........................................................................................................................................ 14
Administrative Decisions ................................................................................................................................ 14
Judicial Decisions ............................................................................................................................................ 15
Structural Elements of all Tax Systems ............................................................................................................... 16
Liability for tax – Who? .................................................................................................................................. 16
Tax Base – What?............................................................................................................................................ 16
Taxation Year – When? ................................................................................................................................... 16
Tax rates and credits – how much? ................................................................................................................. 17
Administration – How? ................................................................................................................................... 18
Chapter 2: History and Policy ................................................................................................................................. 19
Chapter 3: Residence – Jurisdiction to Tax ............................................................................................................. 21
Background ......................................................................................................................................................... 21
Cdn Law .............................................................................................................................................................. 22
STEP 1: General rules (then skip to types of Rez and non-Rez): .................................................................... 22
Rez juri for Provinces .......................................................................................................................................... 22
Rez Juri for Feds.................................................................................................................................................. 23
INDIVIDUAL residence: ................................................................................................................................ 23
CORPORATION residence............................................................................................................................. 26
TRUST residence ............................................................................................................................................ 26
Other Residence Considerations.......................................................................................................................... 28
Chapter 4: Concept of Income ................................................................................................................................. 31
Legislative Framework ........................................................................................................................................ 31
Concept of Income .......................................................................................................................................... 31
Statutory Inclusions and Exclusions ................................................................................................................ 31
Chapter 5: Income from Employment ..................................................................................................................... 39
Introduction ......................................................................................................................................................... 39
Step 1: Compare E/Y vs B/Y (see chart in SC) ............................................................................................... 39
Step 2: Compare cash vs accrual accounting (see chart in SC) ....................................................................... 39
Step 3: Consider the tax criteria justifying the diff approach to E/Y .............................................................. 39
Step 4: Note the basics of E/O Y ..................................................................................................................... 39
DISTINGUISHING B/W EEs and INDP K’ers .................................................................................................. 40
Step 1: Common law ....................................................................................................................................... 40
Step 2: Special statutory rules for incorporated EEs ....................................................................................... 41
Statutory Inclusions in E/Y ................................................................................................................................. 42
Step 1: Basics .................................................................................................................................................. 42
Step 2: Specific rules for Benefits ................................................................................................................... 42
Step 2: Includes compensation for loss of employment (56(1)(a)(ii) .............................................................. 47
Step 3: Includes stock options ......................................................................................................................... 47
Step 4: Includes an Allowance s. 6(1)(b) ........................................................................................................ 49
Deductions for E/Y .............................................................................................................................................. 49
Income from Business or Property .......................................................................................................................... 51
Profit from Biz/Property ................................................................................................................................... 51
Step 1: Consider basics ................................................................................................................................... 51
Step 2: Compare cash vs accrual methods of accounting (see SC chart for basic characteristics of accrual)
......................................................................................................................................................................... 51
Step 3: Need to distinguish whether prop or biz (don’t apply REOP here) ................................................... 51
Step 4: CL guidance in distinguishing b/w biz and other activities .............................................................. 52
Step 5: APPLY REOP WHEN DISTINGUISHING BETWEEN BUSINESS AND….(see below, b/c even if
not biz, may be tx’d as CG) ............................................................................................................................. 53
Step 6: Can it be tx’d as a CG? ........................................................................................................................ 54
Step 7: Concept of profit ................................................................................................................................. 55
Inclusion Rules for Biz/Prop Y ........................................................................................................................... 57
Step 1: Basics .................................................................................................................................................. 57
Step 2: Is it Y from property/biz? .................................................................................................................... 57
Step 3: Note the general timing principles of annual accounting (see SC chart) ............................................ 57
Step 4: Provide details on accrual accounting (see SC chart) ......................................................................... 57
Step 5: When is it receivable according to s 12? ............................................................................................. 58
Step 6: When is it recv’able under CL? ........................................................................................................... 61
Deductions from Biz/Prop Profit ......................................................................................................................... 62
Principle 1: The expense must be incurred to earn taxable Y ......................................................................... 62
Principle 2: Personal Expenses Should Not Be Deductible............................................................................. 62
Principle 3: Only Current Business Expenses Should Be Fully Deductible in the Year Incurred .................. 67
Principle 4: Capital Expenses Should Be Amortized Over Their Useful Life ............................................... 68
Principle 5: Unreasonable Expenses Should Not Be Deductible .................................................................... 68
Principle 6: Some Expenses not deductible on grounds of Public Policy ....................................................... 68
Principle 7: Expenses incurred solely to Avoid Taxes Should Not Be Deductible ......................................... 69
Timing of Expense Deductions ........................................................................................................................... 73
Step 1: Basics .................................................................................................................................................. 73
Step 2: Different timing principles for Capital vs Current .............................................................................. 73
TIMING FOR CURRENT EXPENSES.............................................................................................................. 73
Step 1: Are the expenses incurred?................................................................................................................. 73
Step 2: Is it a running expense? ....................................................................................................................... 74
Step 3: Is it a prepaid expense? ....................................................................................................................... 74
Step 4: Is it a reserve? ...................................................................................................................................... 74
Step 5: Is it inventory? ..................................................................................................................................... 76
Capital Expenditures ............................................................................................................................................... 77
Step 1: Rational for amortization..................................................................................................................... 77
Step 2: Elements of a system for depreciation (see below for details on application, incl provisions) ........... 77
Step 4: Distinguishing between Current and Capital expenses: ...................................................................... 78
Capital Cost Allowance Scheme ......................................................................................................................... 81
Step 1: Uses the pooling method ..................................................................................................................... 81
Step 2: What are the rules? .............................................................................................................................. 81
Step 3: When does the asset begin depreciating? ............................................................................................ 83
Step 4: What are proceeds of disposition?....................................................................................................... 83
Step 5: What is the timing of dispositions? ..................................................................................................... 83
Step 6: How does the half-year convention apply? ......................................................................................... 83
Step 7: Limitations on CCA deductions .......................................................................................................... 84
Eligible Capital Expenditures (intangible) .......................................................................................................... 84
Step 1: What is non-depreciable? .................................................................................................................... 84
Step 2: What is DEPRECIABLE? ................................................................................................................... 84
Step 3: Application .......................................................................................................................................... 84
Chapter 1: Income Tax Law
Miscellaneous
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3 reasons the govt subsidizes higher education:
o Positive externalities
 Grads = more engaged citizens (same applies to lower level schooling)
o Force ppl to make the right decision
 Ppl aren’t good at discounting future benefits
o Social mobility
 Right to have a higher education that’s accessible to more ppl
Canada is a low tax country relative to other countries?
o Measured by taking a % of tax and expressing it as a size of GDP
o CAN: taxes = 31% of GDP
o OECD avg: taxes = 36% of GDP
o Denmark (greatest): taxes = 48% of GDP
o US (lowest): taxes = 27% of GDP
FAPI rules
o BEFORE: ppl were setting up corps offshore and earning $ w/o paying taxes (e.g. family
investment corps and trusts)
o NOW: FAPI rules (implemented in 1976) attributed passive Y of closely-held entities to Cdn
shareholders/beneficiaries, even if not distributed
 ONLY applies if Cdn investor has > 10% interest
 CP: Cdn investors just created mutual funds w/o a 10% interest
Correlation b/w high taxes and social indicators
o Country w/ highest quality of life = Denmark which has highest taxes
o High tax countries overwhelmingly do better on a variety of indexes and DON’T do worse on
econ indicators
Perspective on Symes:
o Wanted the deduction
 Rich self-employed women → deduction more valuable to them
 BUT MEN would be biggest beneficiaries b/c they fit into this category most
often
o Worried about the deduction
 Social conservatives →Both spouses working rep’d the erosion of traditional family
values
 Social activists → concerned about further privatization of child care thru demand-side
subsidies and erosion of powerful constituency for universal and accessible day care
 Professional men → worried b/c ↑ competition for high-paying jobs if women less
encumbered by child care responsibilities
o Didn’t care about the deduction
 Poor self-employed people → deduction had little benefit for them
 Employees→ deduction didn’t apply to them
Income Tax Terminology
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Business entities:
o Trusts: one person holds and invests property for benefit of another person
 More of a relationship than an entity
 Settler = person who puts property in trust
 Beneficiary = person who receives benefit
 Trustee = given legal title but manage for beneficiary
o Partnerships: 2 or more ppl carry on business for profit in common (or as co-owners)
 NOT a separate taxpaying entity
 Y or loss allocated to partners
o Sole proprietor: Person who owns business solely and directly
 Any Y or loss treated as that of the ind
Business expense:
o Current: allowed to deduct every year
 E.g. inventory is fully deductible when sold (car dealer bus and sells car)
o Capital: deduct over time
 E.g. taxi driver buys car
Capital receipt: amount you receive that you don’t have to pay tax on
Characterization: based on legal form of transactions, NOT economic substance
Direct Tax: demanded from person intended/desired should pay (e.g. Y tax b/c normally can’t pass it on)
Estate freeze: issue common shares for value of 0 and put them in trust. Convert other common shares
into preferred shares with a ‘frozen’ max value. As company grows, the value goes to the common shares.
The trustees put in Barbados to avoid tax.
Indirect tax: demanded from someone in expectation and intention that she’ll indemnify herself at
expense of others (e.g. customs or excise tax b/c passes thru price of goods)
Offshore freeze: Same as estate freeze except owners of common shares are not Rez in Cda + goal is to
have CG on sale of common shares not tx’d in Cda.
Personal expense: Not deductible (e.g. car)
Prescribe: Minister has authority to specify more clearly, so check regulations
Realization: when you do or could earn Y
Recognition: when taxpayer has legal right to be paid or is paid (usually when $ earned)
Tax haven: country w/ bank secrecy rules to prevent ppl from knowing who has bank accounts there; low
rates of Y tax (e.g. Switzerland, Cayman islands)
Undepreciated capital cost (UCC): Amount that is left when you subtract the deductions permitted
under the scheme from the original cost of the asset; only incl the value of the asset, not extras like
goodwill
Income Tax Concepts
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Time value of $: dollar today is worth more than a dollar next year
o Based on impact of investment which leads to exponential growth from compounding interest
 + impact of inflation
 Reason why ppl contribute to RRSP b/c only pay tax when they take it out + interest no
tx’d
 FV = PV (1 + r)n
o N = years in bank/FV = future value/PV = present value
o Rule of 72 = R/72 shows you how often (in years) your money will
double
 PV = FV/(1 + r)n
o Determines what FV is worth in today’s dollars
 Application →in circumstances where trying to determine whether a bond that was sold
after holding it for less than 1 year had gained interest or a capital gain
Tax deferral
o Equivalent to r-free loan in amount of foregone tax
 i.e. deferral = extra $ in pocket + tax-free interest
o Adv > the higher the rate of return and length of time deferred
o Cary Brown Theorem: deferral = tax on wages [don’t need to know]
 i.e. if you allow people to defer tax (e.g. RRSP) it’s equivalent to not taxing Y)
Tax minimization
o Old principle that everyone is entitled to minimize tax (e.g. Duke of Westminster, 1936)
 CP: It IS immoral b/c adverse consequences (e.g. misallocation of resources)
Tax Policy Making
- Debates on tax = debate of govt role (Morality of unequal society + importance of collective goods)
General influences:
- Determined according to prevailing ideologies at time
- Influence of marginal voters who can swing either way
- Enviro factors (e.g. demographics, structure of econ, increased globalization, proximity to US)
- Distribution of econ power
- Interest groups (e.g. >65 often vote and are well-organized)
- Self-interest of politicians, civil servants
Progressive vs Flat taxes:
- Pro-progressive taxes:
o Redistributes Y (high Y undeserved; inequality is detrimental to society)
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 tax)
o Savings behavior (u/c the effect)
o Risk-taking
o Forestalling political unrest b/c poor get some access to resources
 Otherwise poor would revolt b/c rich receive enormous benefit in the protection of
wealth/power
- Pro-flat rate:
o Neutral, simple, ↓ incentive for tax avoidance
o Often concede exemption for lowest earners (bit progressive)
o > sense of shared responsibility for govt spending
o Unfair that rich pay for govt services (i.e. shouldn’t be based on ability to pay)
 Rich receive less than fair share b/c they purpose private alt and don’t need Y support
Rules of application
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Establish:
o Goals to be achieved
o Policy alternatives and instruments for achieving goal
o Criteria for evaluation
o Predict consequences
o Choose preferred policy alternative
Structure of the act
Format
- Parts (17)
o Div B
 Subdiv a
 Section 23
o Subsection (1)
 Para (a)
 Subpara (i)
o Clause (A)
 Subclause (I)
2 types of provisions:
- Technical tax laws
o Role: Determine who has to pay, what base, accounting rules, who y, what rates are, admin rules
o Purpose: raise R + redistribute Y
o Objectives: ENS + international compatibility
o Evaluated thru: ENS (see below)
- Tax expenditures
o Implicit govt spending programs as substitute for direct spending
 Reduction in your tax liability (identical to govt writing a cheque)
 NOTHING to do w/ tax system (e.g. daycare subsidy)
o Tax Expenditure Account – prepared by govt in 1979
 Accounts for all tax “cuts” (e.g. cost of RRSP, tuition tax credit, charity, etc)
 MacEachen budget tried unsuccessfully to get rid of them all in 1981
 NOT published from 1981-1984, but continuously since 1992
 Only best efforts estimates b/c in preparing:
 Hard to know when it’s a legitimate tax policy or whether it serves other policy
objective (e.g. should child care deduction be an expenditure or a business
deduction incurred to enable ppl to work)
o In those situations DoF lists in misc expenditures
 Hard to know amt of expenditure b/c if concession were removed ppl would alter
their consumption patterns
o Evaluating tax expenditures:
1. What govt obj is being served?
2. Is it a legitimate obj?
3. How well designed is it?
4. Could the obj be achieved another way?
o Argument against expenditures:
 Upside down effect of deductions (i.e. the richer you are, the > the deduction)
 Odd that Tax dept is managing billions in public programs
 Alter horizontal and vertical equity of basic tax system by allowing exemptions, deductions or
credits to select groups or specific activities
 EXAMPLE 2 people who earn the exact same income can have different effective tax
rates if one of them qualifies for certain tax expenditure programs by owning a home,
having children (Prof supports subsidy by cutting a cheque to a family), or receiving
employer health care & pension ins
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Failure of either deductions or credits to help those w/o taxable Y
Difct to estimate cost and effects
Impossible to limit size of expenditure
Admin problems in using CRA rather than other depts or agencies
 complexity in the Act and the tax returns inds must prepare
Erosion of public confidence in fairness given that many are allowed concessions or
loopholes
Arguments against DIRECT programs:
 Not easy to control effectively
 Costly bureaucracy
 Discretionary - in establishing program and choosing applicants
 Tax laws are administered w/o much discretion on part of officials
Purposes of Income Tax
1)Raise revenue
- Y tax is the govt’s largest revenue source (introduced in WWII and became fed legi in 1972)
- Fed $
o 2010-11 = $231 bill
o Income tax = 50%
o GST = 12%
o Corporate income tax = 11%
o Em’yment insurance premium = 8%
2)Redistribution of income
- Progressive income tax = > the income, the > the % of your income you pay
o E.g.1 corporate tax, IF assume that tax is paid by shareholders [not on exam]
o E.g.2 income tax (ONLY prog tax in CAN), and it becomes regressive for those w/ > $300,000
due to impact of CG
 In 2007:
 Top 10% of income earners PAID 53% of total personal income tax (and earned
35% of total income)
 Top 50% of income earners PAID 96% of all personal income tax (and earned
86% of total income)
- Regressive income tax = > the income, the less % of your income you pay
o E.g. GST/Sales tax (b/c rich save their income)
- In CAN, OVERALL, tax = flat
o Everyone pays around 30% of their income tax
o Top 1% of Cdns have a lower % of their Y tx’d than the bottom 10%
3)Regulate private activity
- Taxes can  relative prices of G/S
- Tax expenditures
to consume
- Tax penalties (in the form of excise taxes),  the P of G/S that the govt wants to discourage (e.g. gas,
liquor, cigarettes and lottery tickets)
o PT: Tx on lottery tickets is problematic b/c we only tax on the purchase which is generally low
income people, but then the winnings aren’t tx’d
 If issue is addiction, better ways to regulate it
Evaluation criteria of Income Tax
1)Equitable
- Based on ability to pay principle
o Equalize sacrifice of providing collectives G/S, Carter therefore said:
 Comprehensive tax
 Progressive rates
 Levies on familes Not inds
 AVOID concessions for some industries
 Integrate shareholder and corporate tax
o Horizontal equity
 If 2 ppl have same Y, they should pay same tax (i.e. same sacrifice)
o Vertical equity
 If 2 ppl have diff Y hen pay diff amounts (b/c dollar means less for someone w/ more)
2)Neutral
- Law shouldn’t influence ppl’s choices; e/ ind best able to make own choices in regards to:
o Timing decisions (e.g when they realize their Y)
o Financial decisions (e.g whether to invest)
o Real decisions (e.g. consumption choices, production decisions, where to live, work vs leisure,
saving vs consumption)
 On work vs leisure, debate about how responsive ppl are to Y tax
 Right wing says ppl will stop working w/ high Y tax; bad b/c they’re the wealth
creators, will lead to job loss
- Optimal taxation – fairest amt of taxes recovered w/o discouraging ppl from purchasing
o Efficiency cost (aka deadweight loss/excess burden)
 Economists want to maximize producer and consumer surplus, based on measure of the
Harbinger triangle which illustrates the loss of consumer surplus
 Also means there’s a marginal cost to public funds b/c ppl ∆ their behavior so it costs
govt more than the numerical amt spent
 BUT, economists only really concerned when taxes lead some ppl NOT to BUY
something and therefore CHANGED their behavior
- Unintended consequences – hard to predict the impact of any tax
- EXCEPTIONS: deliberate policies to affect ppl’s choices; tax expenditures (e.g. RRSP deduction)
3)Simple
- Comprehensibility (i.e. clear language, logical structure, transparency of underlying principles)
- Certainty (i.e. well-defined concepts)
- Compliance convenience (b/c costs of research/planning/keeping records/filing returns + reconciling book
and tax accounts)
- Administrative convenience (tax policy design/drafting, costs of: processing
returns/collection/enforcement/resolving disputes)
- Certainty of Application (i.e. difficult to evade and Avoid)
Other
International Competitiveness and Compatibility
- Taxes and economic growth
o Job Creation
- Location of investments
- Labor mobility
Misc
- Revenue adequacy
- Revenue certainty
- Flexibility
- Stability
- Transparency
- Public perception of fairness
- Balance
- International competitiveness
- Political order
- Tax Expenditure Analysis
Application of Y Tax
Taxable income = income (div b) – deductions + additions (div c)
Sources of Tax Law and Practice
Legislative Process
Department of Finance
- Tax legi introduced by thru 2 ways:
o Budget (Feb)
 For big 
o Technical amending bill
 For small 
 Even before it’s passed, CRA forms  and if passed, becomes retroactive
 “Ways and means” process:
 Notice of process is introduced into the H of C as a motion to amend the ITA
o 1st, 2nd and 3rd reading, followed by Royal assent
o Bill given a new name and becomes a chapter in Statute
- Tax Policy Branch (DoF)
o 5 divisions
o Role = devt and evaluation of fed taxation policies/legi in areas of personal y tax, business y tax,
sales and excise tax
Legislative Decisions
- Income Tax Act, RSC 1985
o Periodically updated, but keep the #s the same
- Income Tax Application Rules (ITARs)
o Assists w/ transition from old to new Act
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o Still a bit helpful for calculating CG on disposition of property acquired before ‘72
Tax Treaties
o BEFORE – you could get tx’d in two countries if earned Y in one
o NOW – double tx removed thru foreign tax credit that will reimburse you for tax in other country
(CAN has approx 90 treaties)
 See SC for details on tax treaties
Executive Decisions
Regulations
- S 2211 = enacting provision:
o Regs can be made by Governor in Council where Act says something is to be prescribed or
determined or regulated
 S 248 defines prescribed2 → If it refers to a form you look to the annotation of forms
authorized by the Minister; in most other cases you look to the regulations.
 GovCon acts on advice of fed cabinet
 Allows them to  details and make small  w/o having to amend the act
- Process = DoF drafts regulations, cabinet passes them
- Application = regs have FORCE of LAW
Prescribed forms
- Exec arm produces the tax return forms, etc
Remission orders
- Definition = fed cabinet can forgive taxes b/c of peculiar hardship or unfairness
- Authority = Financial Administration Act
- Published in Canadian Gazette
- Only country that does this
Administrative Decisions
Canada Revenue Agency
- Structure = agency, NOT govt dept
- Role = collection of taxes + administration of Act
- Oversight = feds thru management board of private sector reps nominated by prov and territories; MNR
accountable to PArl for delivery of tax, customs and trade programmes
o BUT day to day tasks performed by CRA, not Minister
- Reports:
o Income Tax Interpretation Bulletins
 Role = interpretational tool for the Act
 Often relied upon, but DON’T have force of law, and NOT regulations
 Formatting is ing, being replaced by folios; allow easier search
o Income Tax Information Circulars
“The Governor in Council may make regulations . . . prescribing anything that, by this Act, is to be preseribed or is to be
determined or regulated by regulation”
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248 – “prescribed” means
(a) in the case of a form, the information to be given on a form or the manner of filing a form authorized by the minister
(a.1) in the case of the manner of making or filing an election, authorized by the minister, and
(b) in any other case, prescribed by regulation or determined in accordance with rules prescribed by regulation
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 Provide info on admin and procedural matters, incls CRA’s procedures
Advance Income Tax Rulings
 At request (and cost) of tax payer, CRA will provide opinion on taxation
 Attractive b/c secure opinion, b/c policy is they’ll follow it
 BUT not technically bound by decision
 ASLO other taxpayers should be careful in relying on it b/c material facts may
not have been included
Judicial Decisions
- BEFORE: Tax Admin Tribunals
o E.g. Income Tax Appeals Board, Tax Appeal Board, Tax Review Board, Exchequer Crt
o CP: Switched b/c a lot of ppl from DoJ wanted to be judges
- NOW: Federal Tax Court
o Informal Procedure
 <$12,000
 Intended to be disposed of w/i 6 mos of filing notice of objection
 NO precedential value
 Appeal thru judicial review
o General procedure
 REAL crt – rules of evidence and procedure apply
 Appeal: FCCA/SCC
- Role of judges:
o Attribute a usage to the words in the statute
o Characterize the taxpayer’s transaction (e.g. sale vs lease)
o Minimize tax avoidance (thru GAAR)
- Statutory interpretation
o General approach = read in context, based on grammatical and ordinary sense in a manner that’s
harmonious w/:
1. scheme of the act
2. object of the act
3. intention of parliament (Stuart Investments)
o Other approaches:
 Literal rule (strict construction), plain meaning, avoidance of absurd results (golden rule),
mischief rule, legi intent, purposive approach, modern approach, etc
o CP: Alternative approach = decide the options, the consequences and decide which ones are more
ENS
 Can’t know parl intent b/c big # of ppl, many haven’t read it + words don’t have
meanings, only uses derived from context
 Senseless to try and determine sense of words and intention b/c words only have uses that
are derived from contet and can’t i
 At end of day judges can defend w/e they want and will be influenced by policy
o Difficulties in intp ITA:
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Size, lack of defs, complex reality, supremacy of legi, elusive legi intent, use of price
language rather than formulas, drafting conventions that say e/ prov should be one
sentence long
Structural Elements of all Tax Systems
Liability for tax – Who?
- 2(1)3 = general definitional section saying we tax persons who are residents
o Non-residents, only tx’d on Y that has a source in Cnd
o Person = inds, corps, trusts (s 248)
- PT: By tx’ing inds, > tx for single earner families b/c the earner gets charged at the higher tax bracket
o IF family, then you avg earnings b/w spouses and so both pay lower amount
 US bases on families; Conservatives want this
Tax Base – What?
- 2(2)4 = general definitional section
o Taxable Y = Y for the year (calculated under div b) + additions = deductions (under div c)
- 3(a)5 – non-exhaustive list of Y incl office, e’ment, biz and property
- Concept of Y (economic vs legal)
o See SC chart for legal vs econ def of Y
- Measurement of Y
o Timing issues – legal vs accounting
 Accounting helps determine tax liability
- Assignment of Y – whose Y is it?
o General
 Y from services (the person who renders the service)
 Y from property (owner)
 Y from business (person who renders service + owns business property)
Taxation Year – When?
- Taxation year (249(1) 6, for:
o Corporation/Cdn resident partnership = fiscal period (still 12 mos)
o Ind = calendar year
2 (1) Tax payable by persons resident in Canada — An income tax shall be paid, as required by this Act, on the taxable
income for each taxation year of every person resident in Canada at any time in the year.
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2(2) Taxable income — The taxable income of a taxpayer for a taxation year is the taxpayer's income for the year plus the
additions and minus the deductions permitted by Division C.
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3. The income of a taxpayer for a taxation year for the purposes of the Part is the taxpayer’s income for the year determined
by the following rules:
a) Determine the total of all amounts each of which si the taxpayer’s income for the year (other than a taxable capital gain
from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the
foregoing, the taxpayer’s income for the year from each office, employment, business and property
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249(1) Definition of taxation year. For the purpose of this Act, a taxation year is
(a) in the case of a corporation or Cdn resident partnership, a fiscal period, and
(b) in the case of an ind, a calendar year,
And when taxation year is referred to by reference to a calendar year, the reference is to the taxation year or years coinciding
with, or ending in, that year.
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PT: Taxation year = arbitrary
Income fluctuations means that heavier total tx for that ind than if based on multi-year period in even
amounts
o Two solutions:
 Averaging (allowed UNTIL 1988)
 Loss carryovers (still used)
 See timing expense deductions for more details
Tax rates and credits – how much?
Rates
- Federal (117)
Taxable brackets Marginal tax rate7
0%
$0 – 10,8229
15%
$10,823-42, 707
$42,708-85,414
$85,415-132,406
$132,407+
-
22%
26%
29%
Tax paid
$0
$4,783
Avg tax rate8
0%
8.9%
$11,189
$23,226
13.1%
17.5%
Provincial
o Tend to be about ½ of fed rates (adds onto fed amnt)
 Highest rate in Ont = 46.4%
Credits
- General info
o Definition: deduction in computing tax payable
o Calculation: based on % of Y
o Purpose: social/econ policy
o 3 most sgnfct credits:
 Basic personal credit
 Spouse/common law partner credit
 Equivalent to spouse (or eligible dependent) credit
- Federal (118)
-
Alternative min tax [not on exam]
o If rich ppl get a really low rate thru loopholes, still subject to an alt min tax
 15% of broad Y – carried forward 10 years and credited against Y taxes payable
Calculation of Tax Liability
7
Means that the $ you earn above the previous tax bracket, you pay the > rate
Avg tax rate = what the ind pays avg’d over all tax brackets. Not indicated for final income level b/c no limit
9
Technically there is a 15% tax BUT tax credit means you don’t pay anything
8
1. Compute Y from e/ source
2. Compute net Y under sec 3
a. Y from e/ source added together + subdivision e amounys, current year loss + investment
business losses to be deducted
3. Compute taxable Y under subsec 2(2) by – additional amounts specified in div C from s 3
4. Compute tax payable by multiplying applicable rates to taxable Y and subtracting credits
Administration – How?
- Departmental responsibilities
o DoF/CRA
o DoJ responsible for crim prosecution of tax evaders
- Self-assessment system
o Quick check, if needed, request dif amount
o CRA has 3 years to re-audit return
o Random audits
- Resolution of tax disputes
a. Notice of objection filed by taxpayer (must be w/I 90 days of CRA notice)
b. Notice is considered b Appeals branch (possible decisions = confirm/vary/vacate)
c. If confirmed or varied, taxpayer may appeal to Crts
i. Onus is on taxpayer to disprove factual assumptions
d. Appeal 1st heard at FCCA
e. Leave to appeal to SCC
Chapter 2: History and Policy
-
-
-
-
-
-
-
10
11
Confederation (1867)
o Provinces
 BNA, s 92(2) 10 – powers of direct taxation
 BUT initially shied away from Y tax b/c unpopular
 Levied taxes before feds
o Feds
 BNA s 91(3)11 – general powers to tax (grants concurrent juri)
 Initially relied on customs + excise taxes
1917
o Y tax introduced as temp war measure to raise R for war + shift burden from Western farmers
(who bore burden of custom and excise duties) to Eastern industrialists
o Based on US and UK legi
o Modern tax on the rich
1930s-40s
o Exemption form tax was decreased + rates increased (to 80%!) = progressive mass tax
o Feds + provs had Y tax
 Resulted in admin + compliance burdens
1941
o Provs abandoned Y tax in return for grants from feds thru “tax rental agreements”
 Prov tax = % of fed tax owed but feds still collected for all
 Meant that provs couldn’t determine what the rate structure was
1940-48
o Maturing of modern Y tax
o Discretions removed and legi reformed
1962
o “Tax rental agreements” REPLACED w/ “tax collection agreements” (which had said who
collects taxes when there’s a dispute)
 Personal tax – all except Quebec
 Corporate tax – all except Quebec + Alberta
1967
o Royal Commission on Taxation (Carter Commission)
 Most comprehensive tax reform commission ever, anywhere
 Operationalized Henry Simon’s econ def of Y (i.e. comprehensive tax base)
 Would’ve substantially increased tax on rich b/c tax CG + remove loop holds
from corporate tax base
 But made some concessions for admin practicality:
o E.g. incl CG but not accrued gains; DID recommend several deemed
realizations (e.g. gifts, death, igration)
 Rich HATED it, sgct political debate
1969-1970
92(2) – “Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.”
91(3) – “The raising of Money by any Mode or System of Taxation.”
o
-
-
-
-
-
White Paper + Parliamentary Committees
 Watered down Carter recommendations
1970s
o Intro of a LOT of personal and corporate tax expenditures
1972
o Tax Reform Act
 Created the basis of present Act
 Broadened tax base, incl ½ tax on CG
 Partially integrated corporate and shareholder tax thru gross up and credit
mechanism
1974
o Fixed-dollar amounts in legi indexed for inflation
 Partially suspended from 1986-2000 where indexed for inflation > 3%
1981
o Liberal MacEachen Budget that attempted to close over 165 loopholes – unsuccessful
1988
o Conservative tax reform
 White Paper
 Top rate decreased + reduced # of brackets + broadened tax base + (some)
deductions converted to credits + GAAR
o Lower rates designed to increase incentive to work and save
o Simplified bracket system
o Changed to credits b/c deductions more advantageous to rich
1991
o Introduction of GST
Post- 1988
o Conservatives introduced new tax cuts (aka expenditures)
 E.g. TFSA, public transportation
 Purpose: make Canada internationally competitive
 w/ globalization high taxes might lead to wealth shifting to other juris
1997
o Tax collection agreements changed to allow provs to levy taxes on fed “taxable y” (i.e. prov tax =
% of fed taxable Y)
 Allowed for their own rate structures and tax credits b/c no longer based on what feds
tx’d, > scope by using all fed taxable Y as base
Chapter 3: Residence – Jurisdiction to Tax
Background
-
-
-
What do we want?
o Determine normative concepts
 Open-ended legal concept to apply the normative concepts
 Analogical reasoning (in applying open-ended legal concept)
 Need for bright line tests to define boundaries of legal concept
 flexible legal concepts to account for ing econ conditions
Constraints on tx’ation:
o Constitutional limitations
o International norms and conventions (which say only tx ppl w/ connection to your cntry)
Possibilities of tx’ing personal juri + underlying normative principle:
o Citizenship (e.g. US)
 Reasons:
 Based on poli allegiance; citizens get protection regardless of where they reside
 Discourages tax avoidance by ∆ing residence
 Application: If give up citizenship to avoid US taxes, still liable for 10 years + can be
barred from entering US
 CP:
 Incls ppl whose econ/social links are weak
 Excludes many ppl living permanently in the taxing country
o Domicile (e.g. England)
 Definition: Based on country intended to live in/where perm home
 CP:
 Element of intention is dfct to prove
 Can excludes ppl who are longstanding Rez (support tax haven, e.g. London)
o Residence (e.g. Cda)
 For definition, see below
 Theoretical reasons for tx’ing inter’l Y on basis of Rez and source of Y
 Economic allegiance
o Based on:
1. Where is the value-added econ activity taking place?
 b/c we tax even if not residing in Cda if you’re em’yed
here or carrying on a biz here
2. Where are suppliers of capital located?
3. Where are consumers of G/S located?
 Benefit theory - benefit from public services
o justifies taxation of residents as well as domestic source income earned by non
residents

Ability to pay → Y is inherently global, so both domestic and foreign sources should
be tx’d

CP:



Non-citizens don’t get to vote but pay taxes
Concept of Rez is imprecise
Huge loss of $ from Cdns living overseas who still derive benefits (such as govt
rescue in conflict areas)
Cdn Law
STEP 1: General rules (then skip to types of Rez and non-Rez):
- S. 2(1)12 is general definitional section that says we tax residents (VERY LITTLE explanation in Act Thomson13)
o Must be ‘person’ (i.e. corp, ind, trust)
 Tax corps and trusts b/c Y accumulating for someone’s benefit, just u/c who
- B/c very LITTLE in Act defining a residence, Crts have applied the concept in 2 ways:
o Open-ended legal concept that’s applied thru analogical reasoning; and
o Bright line tests/factual presumptions to define boundaries (e.g. sojourner rule)
- Subsection 2(2) says that Y is from source inside or outside Cda
o Allowed to eliminate double taxation to extent that foreign tax isn’t > Cdn tax otherwise payable
(based on tax treaties → see above)
 So if you paid more in US than you would have to pay in Cda, Cda will still only rebate
that amt you would’ve paid here
- Anti-deferral rule and foreign reporting rules are designed to ensure that foreign investment Y earned by
Cdn citizens is tx’able in Cd whether or not earned thru investment in non-Rez Corp or trust
- > ONUS if looks like a tax avoider
o “If you are going to play the avoidance game, it is not enough to have brilliant strategy, you must
have brilliant execution.” (Antle, TCC, 2009)
- Steps:
o Consider case law
o Review Interpretation Bulletin
Rez juri for Provinces
-
-
-
12
Rule INDS: based on where Rez at end of year (reg. 2601)
o That’s where ind is tx’d for entire Y of year
o Irrelevant if majority of year spent elsewhere
o Irrelevant if Y earned elsewhere EXCEPT if Y from a biz w/ perm estb’ment outside prov of
last-day Rez (reg 2601) (see below)
o CP: not fair b/c students may not be where they’re normally residing at the end of year
Rule BIZ: where you have permanent estb’ment
o Not enuf to be selling goods in other provs
o IF multiple perm estb’ments then pay to both according to payroll and revenue in e/ juri (reg.
2603)
Rule CORPS: allocates Y to prov where corp had perm estb’ment in tx year (reg 402)
o If multiple perm estb’ments, then apportioned
o Result: Foreign accrual rule – tax Cdn shareholders of non-Rez corp if accumulating Y
S. 2(1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person
resident in Canada at any time in the year.
13
-
Rule TRUSTS – nothing in regs but prob same as for inds b/c under 104(2) trust = inds
o 248(1) says ind = person other than a corp
Rez Juri for Feds
INDIVIDUAL residence:
Step 1: Are they deemed residents?
Options:
1. Sojourned in Cda for period(s) 183+ days as per s 250(1)(1)14?
a. Something < Rez; physically present in Cda but more transient
b. NEVER a part-year Rez for purposes of s 114 SO has to pay tx as Rez for entire year
c. If YES, deemed to be Rez
i. Rationale → develops stake in Cda similar to that of Rez
d. If NO, can still found to be Rez, skip to legal test
e. Case law
i. Sojourn can’t just be coming to work for one day b/c it means “to make a temporary
stay” which should be overnight (R&L Foods15)
ii. Transient character of sojourning means visits = unusual, casual or intermittent
(Thomson)
iii. CP: Crts come up w/ def based on meaning of word rather than what makes most sense.
Couldn’t temp mean for one day?
f. Interpretation Bulletin (221R3) at Para 21
i. NOT automatically considered “sojourning” for every day (or part day) present in Cda
ii. Nature of e/ stay must be determined separately
iii. Temp stay in sense of estb’ing temp residence, even if short-term
1. Ex. NOT sojourning IF commuting to Cda for em’yment, returning e/ night
outside of Cda
2. Ex. YES sojourning IF vacation in Cda
2. Int’l convention that for Ambassadors tax country they work for, not where they’re physically located
250(1)16
3. PT Rez under 250(2)?
a. If YES, tx’d BUT special tax rules under s 11417 and only tx’able for part of year
S. 250(1)(a) For the purposes of this Act, a person shall…be deemed to have been resident in Canada throughout a taxation
year if the person
(a) sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more;
15
R&L Foods (1977, TRB) – Facts: Taxpayers lived in Detroit but had business in Windsor. Wrk’d in Cda > 183 days
throughout year.Wanted 1) Rez in Cda for purposes of small business credit only avail to Cdn Rez (therefore lower corporate
tax in Cda) 2) Rez in US for worldwide Y purposes and they thought they’d get it b/c they had a house in US → tax treaty
only looks at where you should pay on worldwide Y. Decision: Not Rez in Cda b/c sojourn means “to make a temp stay”.
Temp stay would assume overnight.
16
S. 250(1) For the purposes of the Act, a person shall…be deemed to have been resident in Canada…if the person
(b) was, at any time in the year, a member of the Canadian forces,
(c) was…(i) an ambassador, minister, high commissioner, officer or servant of Canada...
17
S. 114 Notwithstanding subsection 2(2), where an individual is resident in Canada throughout part of a taxation year, and
throughout another part of the year is nonresident, the individual’s taxable income for the year is the amount, if any, by which
the total of
(a) [as if resident during period resident]
14
i. Under subsection 2(1) it would permit part-year Rez to be taxable on worldwide Y earned
during entire year, too harsh, so use s 114
b. Part-time Rez can never be a sojourner b/c that would mean full Rez
STEP 2: Do they have sufficiently close social and economic ties?
a) Case law - Open-ended legal TEST based on facts/circumstances
o Home, available for use (HUGE consideration)
 In Thomson this was big reason he was deemed to be a resident
 Also factor in Lee18, Allchin19
 Maybe could keep home if long term leave so not available for use
o Family (e.g. dpdnt children?)
 Ex. In Lee, Allchin
o Settled routine (from intp bul)
o Business connections (e.g. Hauser20)
o Social connections (from Intp Bul)
o Length of time physically in Cda (Thomson)
 Also, Hauser where spent 1/3 year in Cda
o Ties to another country (i.e. if not Rez elsewhere, then Rez in Cda if has ties) (Ferguson)
 Principle that everyone has a residence (Thomson21)
 BUT can have MULTIPLE residence (Thomson)
- BUT, in some cases, even HOME + DPDTS still non-Rez where there’s limited reason fam is still in Cda
(Shih22, Schujahn23)
o Possible explanation = cases where taxpayers were non-Cdn Rez, came to Cda temporarily vs in
Allchin, trying to abandon Cdn Rez
- NOT based on intention/state of mind b/c only care about obj facts in determining econ allegiance,
matters for domicile (Lee)
o This is why Schujahn is an outlier
b) Interpretation bulletin (221R3) at paras 4-9
- Factors considered in determining Rez while abroad
1. Sgnfct rez-ties (e.g. dwelling house still available for use, spouse/common law partner, dpdts)
2. Secondary rez-ties24, considered collectively, not enuf for just one
(b) [as if nonresident during period nonresident]
18
Lee – Facts: Taxpayer, British subject, worked outside Cda but married a Cdn resident dpdt on him. She purchased a home
in Cda and he guaranteed mortgage. Never spent > 183 days in Cda/year. Decision: Residence of Cda on date of his marriage.
19
Allchin – Facts: Taxpayer’s husband and children lived in Windsor, but she worked and had apt in Detroit (spent whole
week there). Had other connections w/ both cities. Decision: Resident in Cda and US. She had home and famil in Windsor.
BUT tie breaker rule in tax treaty deemed her tx’able in US b/c that’s where she habitually abode.
20
Hauser – Facts Moved fam to Bahamas but cont’d to work as pilot in Pearson. Lived 1/3 e/ year in CdaDecision: Rez b/c
em’yment ties.
21
Thomson – Facts: Taxpayer sold home in Cda in 1920s and declared himself domicile in Bermuda. Spent mos of his time
in Us, then bought house in Cda which he spent about 150 days e/ year. Decision: Resident in Cda
22
Shih – Facts: Immigrant from Taiwan, had HOME + DPDNTs (wife/children), returned to Taiwan to wrk. Decision: NOT
Rez in Cda, children only here for school.
23
Schujahn – Facts: Transferred from Cda to US, left wife/children in Cda to sell their house. Decision: Not Rez. Family
only here to sell house (odd b/c intent should be i/r)
24
3. Other ties that are of limited importance except when considered w/ other rez ties25
Step 3: Are they “ordinarily resident” here as per 250(3)26?
- Definition: Where ind hasn’t severed all ties but is physically absent for long periods of time
a) Case law
- Application:
o Maybe YES, if: maintained family ties, real property, bank accounts, credit cards, and a
provincial driver’s license in Canada, even if you’ve been living in another cntry for 3 years (as
per McFadyen27)
o Maybe NO, if: work in UK for 1.5 years, separated from Cdn spouse and your other fam is in UK
(Nicholson28)
- CP: in Thomson, Crt says if CL concept of Rez is given full meaning, “ordinarily rez” becomes
superfluous
b) Interpretation bulletin (221R3) at para 10
- Application of “ordinarily Rez”
o Intention to permanently sever ties w/ Cda29
o Regularity/length of visits to Cda
o Rez ties outside Cda
Step 4: Have they given up residence?
a) Case law
- Depends on facts, NOT intention (see above: Shujahn where deemed Rez given up when left b/c spouse
and children only stayed to sell the house and he’d only come to take charge of company
Step 5: Are they deemed a non-rez?
- Occurs based on terms of treaty which says if rez somewhere else then that applies for all purposes of
250(5) Act30
-
personal property in Canada (such as furniture, clothing, automobiles and recreational vehicles),
social ties with Canada (such as memberships in Canadian recreational and religious organizations),
economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian
business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts),
landed immigrant status or appropriate work permits in Canada,
hospitalization and medical insurance coverage from a province or territory of Canada,
a driver's license from a province or territory of Canada,
a vehicle registered in a province or territory of Canada,
a seasonal dwelling place in Canada or a leased dwelling place referred to in paragraphs 6,
a Canadian passport, and
memberships in Canadian unions or professional organizations.
25
- Canadian mailing address
- post office box, or safety deposit box
- personal stationery (including business cards) showing a Canadian address
- telephone listings in Canada
- local (Canadian) newspaper and magazine subscriptions
26
S. 250(3) “In this Act, a reference to a person resident in Canada includes a person who was at the relevant time ordinarily
resident in Canada.”
27
McFadyen (2000)– Facts: Wrk’d in Japan for 3 years but maintained fam ties, real property, bank accounts, credit cards
and driver’s licence in Cda. Decision: Ordinarily rez in Cda
28
Nicholson (2003) – Facts: Wrk’d in UK for 1.5 years, separated from Cdn wife and had fam in UK. Decision: Non-Rez.
29
IT says that this in itself isn’t sufficient to determine Rez w/o other ties
Step 6: See other considerations for taxation below
CORPORATION residence
Step 1: Consider case law and statute
a) Case law (replaced by statute)
- Test: where there’s Central management and control (De Beers31)
o OLD: where board meets (De Beers/Sifneos)
 CP: unlike w/ inds, corps could reside anywhere they chose
o NEW law: central mgmt and control is place of rez of who dictates the Bd’s decision e.g. if Board
is controlled by another parent corporation or shareholders, than that’s where control is (Unit
Construction32)
b) Statute
- According to 250(4)(a), AFTER 1965, incorporated here = Rez here (prevented Cda becoming tax haven)
o Anyone who’s operating here then will be rez here – get rid of avoidance
- If incorporated BEFORE 1965, then if Rez (determined by CL test) OR carried on biz here (s
250(4)(a)(c))
Policy note
- According to Robert Couzin, NOT conceptually coherent to talk about Rez of corp b/c they’re all over the
world and corp = piece of paper
o Better to just determine worldwide Y and where e/ portion of sales came from, then allocate taxes
based on those sales (aka formulary apportionment)
Step 2: See other considerations for taxation below
TRUST residence
a) Original enacting statute
- Under 104(1-2)33 there is very little description of how to determine Rez of trusts
o Altho 104(1) says reference to a trust should include reference to trustee, this provision was in
regards to filing tax returns, wasn’t intended to determine Rez
 ALSO it says ‘include’ so it wasn’t exhaustive
 This was reasoning of SCC in Garron
- Given vague details, there were 3 possible tests:
1. Where trustees reside
2. Where person in control resided
S. 250(5) “Notwithstanding any other provision…a person is deemed not to be resident in Canada at a time if, at that time,
the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a
tax treaty with another country, resident in the other country and not resident in Canada.”
31
De Beers – Facts: Incorporated in South Africa, head office there and carried on biz there. Majority of Board lived in
England, always met in England and policy decisions made there. Decision: Corp was Rez in Eng.
32
Unit Construction v Bullock (1959) – Facts: 3 corps were incorporated in Kenya, carried on biz there, directors resided
there. They were subsidiaries of Eng corp. Decision: Board was effectively controlled from Eng by directors of parent corp.
Rez = Eng.
33
S. 104(2): “A trust shall…be deemed to be in respect of trust property and individual…”
S. 104(1): “…a reference to a trust…shall, unless the context requires otherwise, be read to include a reference to the
trustee…”
30
3. All circumstances test (as done w/ Inds)
b) Case law (replaced by statute)
- OLD: Where majority of trustees reside (Thibidoeau34)
o Problem: easy to manipulate
- NEW: Where central management and control is (Garron35)
o Rationale → Appropriate to apply same test as w/ corps b/c very similar36
o Application → Factors to support finding of control (Garron):
 Trustee ONLY executed docs and incidental admin services and little else
 More likely than not that trustee had agreed from outset that it would defer to
recommendations of beneficiaries
 Beneficiaries had power to replace trust’s “protector”37
o Advantage: CRA had to control problem that ppl were just conducting estate freezes and making
location of trustees in tax havens, this makes it harder to avoid (Garron)
-
Ideal (Brooks): Look to all the facts and circumstances (as CRA suggests) and ask → Does this trust have a
sufficient tie to Canada to tax it as world wide income?
o Department should have does this in Garron. However did not look at it because too much work, have to
evaluate all the facts.
 SCC just made a policy decision
c) Interpretation bulletin – 447 (crt rejected this)
- Recommended the all facts/circumstances test → Central management/control – person w/ most:
o
o
o
o
o
(a) control over changes in the trust’s investment portfolio,
(b) responsibility for the management of any business or property owned by the trust,
(c) responsibility for any banking, and financing, arrangements for the trust,
(d) control over any other trust assets,
(e) ultimate responsibility for preparation of the trust accounts and reporting to the beneficiaries of the trust,
and
(f) power to contract with and deal with trust advisors, e.g. auditors and lawyers.
o
- BUT REJECTED in Garron prob b/c appears to create too much uncertainty
d) PROPOSED statute
- S 94 would set new results (??catches all trusts and says Rez based on where beneficiary or settlor is??)
e) Policy → what’s most sensible test?
- Concept of residency for tax purposes only makes sense as it applies to inds
The concept measures the strength of the social and economic ties of the individual to the jurisdiction.
Thibidoeau Family Trust v R, 1978, Fed TD – Facts: 3 trustees, 2 lived in Bermuda, 1 in Cda. Cdn trustee was member of
family for whom trust had been estb’d, chief exec officer of corp owned by the trust, was active and influential in investment
program of the trust. Decision: Central management and control = Bermuda b/c 1) authorized majority of trustees to make
decisions 2) day to day admin carried out in Bermuda 3) Bermuda trustees didn’t always follow wishes of Cdn trustee 4)
meetings held in Bermuda.
35
Fundy Settlement (Garron et al) v The Queen, 2009 TCC – Facts: 2 shareholders engaged in off-shore freeze. Trustee in
Barbados was a corp Rez in Barbados. 2 trusts were controlled by beneficiaries (Dunin and Garron) who were Rez in Cda.
Trust realized $450 mil CG. Decision: Central management and control of e/ trust was in Cda, trusts were Rez in Cda.
36
Examples of similarities b/w trusts and corps (Garron at para 14)
1) Both hold assets that are required to be managed;
2) Both involve the acquisition and disposition of assets;
3) Both may require the management of a business;
4) Both require banking and financial arrangements;
5) Both may require the instruction or advice of lawyers, accountants and other advisors; and
6) Both may distribute income, corporations by way of dividends and trusts by distributions.
37
Protector = person appointed under the trust instrument restrain the trustees relation to their administration of the trust.
34
-
This does NOT make sense when applied to legal constructs.
ALSO trusts are only taxed as a proxy for taxing inds for whose benefit the income in a trust might be
accumulating but who might be unknown.
SO the most IMP consodieration is adopting a test that makes it difficult for Cdn inds to move their assets
offshore for tax purposes.
Central mgmt/cntrl test does this b/c few ppl are willing to move assets offshore and abdicate cntrl + the
don’t want to give up their Cdn residency
ALSO some admin advantages to having same test for corps and trusts
Other Residence Considerations
Step 1: Are they a dual rez?
- 3 typical ways this happens:
o Rez in other country but sojourned in Cda
o Maintains strong Rez ties w/ Cda and other country
o Incorporated in Cda after 1965 but management in foreign country (and vice versa)
- Tie-breaker rule: see SC chart for details
Step 2: Are they working overseas?
- OLD law:
o If out of country for 6 mos = non-rez BUT lead to tax avoidance, particularly of doctors and
academics
- Then:
o Required to be out of cntry for 2 years, BUT hard on telecommunication companies who
wouldn’t be competitive anymore
- NEW law:
o Tax Expenditure thru Overseas Employment Credit (s 122.3)
 Tx credit if Cdn EE working abroad for >6mos in connection with certain resources,
construction, installation, agricultural engineering projects
 BIG credit = 80% of net overseas em’yment Y tx’able in Cda up to max of $80,000
Step 3: Have they lost rez?
- If yes, there’s a DEPARTURE tax
o DEEMED to have disposed of all property owned by inds for FMV (s 128.1(1)(b))
 Rationale: if don’t do it then, Cda loses juri to tx
- EXCEPTIONS (128.1(4)(b):
o Real property still situated in Cda after leaving (i)
 Rationale: Even non-Rez get tx’d on selling property
o Property of business carried on in Cda by tx’payer (ii)
o An excluded right or interest of the TxER (iii)
o Property owned or inherited if Rez for < 5 years over a 10 year period (iv)
 Rationale: Encourage US biz ppl who briefly come to manage subsidiaries
Step 4: Are they a non-rez?
- If yes, tx’d on Y from Canadian source (NOT tx’d on worldwide Y )
- Conditions (Part I) s 2(3):
o Em’yed in Cda and physically delivering services (u/c what to do w/ pilots)
o Carried on biz in Cda; or
o Disposed of tx’able Cdn property
- ALSO tx’d on (PartXIII, s 212):
o Y from property (s 212-218.1)
 Very SGFCT to non-Rez
 Flat rate withholding tx e.g. for Rental Y, must withhold 25% and give to CRA
-
 BUT thru tx treaties, this often gets ↓
Justification: benefit from public infrastructure
Step 5: Are they Aboriginal?
- Exemption under Indian Act (s 87(1))38 but MUST be personal property situated on a reserve
- U/c purpose of s 87(1)
o FN say should be exempt from all tx’s
o In Union of New Brunswick Indians39 crt said it was to preserve entitlements of Indians to
reserve lands, ensure use of property on reserve lands was not eroded by ability govt to tax,
or creditors to seize. NOT to confer a general economic benefit upon the Indians.
- What is situated on a reserve? Common law →
o
o
o
o
Nowegijick, 1983
 HELD: Wages were tax free, when situated on a reserve: TEST if individual is paid by a person
on the reserve, tax free.
 POLICY: FN started incorporating their own corporations on the reserve, so receive payment on
reserve regardless of where they worked.
Williams, 1992
 ∆es TEST all facts and circumstances must be looked at to see if wages were situated on a
reserve
NOW → Union of New Brunswick Indians40
 Buy item on the reserve or off and gets it delivered
 Rationale  good for reserves because it encourages local businesses
 Note → case also shows the importance of statutory interpretation
 Two other possible interpretations:
o 1) FN tells the store owner that they are going to use it on the reserve
1. Good idea, but impossible to enforce. If a tax law is not enforceable,
it’s not a rule
o 2) Exempt all FN from sales tax regardless of what they are going to use it for
1. Over reach
Interpretation of “situated on a reserve”
 Big issue, particularly around salaries earned by FN on reserve b/c not subject to Y tx
S. 87(1) Notwithstanding any other Act…the following property is exempt from taxation…(b) the personal property of an
Indian situated on a reserve
39
Union of New Brunswick Indians, SCC, 1998 – Facts: Prov changed law so Fn no longer exempt fro prov sales tx. ONLY
exempt if sale took place on reserve, or store delivered to reserve (latter b/c then sale happens on reserve). Judgment: Crt
gets into convoluted discussion on whether it’s a tx on sale or consumption. Note: Prof says consumption doesn’t make sense
b/c can’t know where consumed. Case shows how hard statute intp is.
40
Union of NB: Before 1993, at any store, just need to show your Indian card and have to pay no sales tax. NB changes the
law. Exempt from sales tax if buy the item on the reserve OR the company delivers the product to the reserve. Question. If a
FN buys a product and brings it to their home on the reserve, does that count at personal property for a tax benefit?
38
Chapter 4: Concept of Income
Legislative Framework
Concept of Income
- NO universally accepted def of Y for Y tx purposes
- See SC chart for legal vs econ def of Y
Background
-
-
Income for tax purposes is a net concept
o All expenses incurred in earning the income should be deductible
o Only amounts that can be used in consumption should be taxed
Source by source
o S. 3(a) - each source of income(inside and outside of Canada) must be calculated separately – both in terms
of its source and territory –
o s. 4 requires source-by-source calculation. If the business is carried in different locations, source must
be determined seperately
Regular income v taxable capital gains
o S. 3(b) provides for the taxation of net capital gain – generally capital losses can only be offset against
capital gains
Policy-based deductions
o S. 3(c) requires TPs to add amounts under (a) nad (b) and subtract deductiosn allowed under (c) –
o Policy based deductions RRSP contributions, child care expenses etc.
Loss recognition
o S. 3(d) allows for the netting of gains and losses from office or employment and business or property
Income
o S. 3(e) provides that balance is the taxpayer’s income for the year
Statutory Inclusions and Exclusions
Step 1: Is it specifically excluded as Y?
- S 81 – subdiv g of Div B
o Amounts exempt under Indian Act
o Income from disposition of certain property received as compensation for injuries
o Expense allowance of elected officials
o Income of the Governor-General
- Benefit of ERs contribution to private health plan (s6(1)(a)
- ½ of all CG (38(a))
- Tax expenditures enacted as exclusions (employer provided health care) deductions (social assistance
payments) or covered by tax credits (pension income credit)
- Section 149 exemption of certain taxpayers – Division H (e.g. charities)
Step 2: Is it specifically included under section 3?
- S 341 – general enacting provision that says we tax based on Y for year
Section 3. Income for taxation year – “The income of a taxpayer for a taxation year for the purposes of this Part is the
taxpayer’s income for the year determined by the following rules:
(a) determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain
from the disposition of a property) from a source inside and outside Canada, including, without restricting the generality of
the foregoing, the taxpayer’s income for the year from each office, employment, business and property,
(b) [net taxable capital gains]”
41
o
3 (a) says Y determined based on office, employment, business and property, but NOT
EXHAUSTIVE
 BUT crts don’t include anything here b/c keep saying it has to fit the sources
 Therefore not volunteering, non-competes
 Does NOT incl compensation for volunteering b/c not a source
o This includes illegal income
 Tx’d (incl stealing from clients, embezzlement or prostitution)
 In defence, of it Crt says:
 “[The State] are not partners; they are not principlas in the illegality, or sharers in
the illegality; they are merely taxing a man in respect of those resources.” (Mann
v Nash, 1932; quoted in Eldridge at para 25)
o No reason illegal Y shouldn’t be taxed, but legal Y is
 They are also NOT deductible (see principle 6)
o 3(b) says add CGs
 CG are NOT Y from source in traditional sense b/c they’re Y from disposition of a source
 Y from property does NOT incl CG
 Kept separate b/c can only deduct capital losses from CG, NOT from other sources of Y
 Otherwise you’d be able to offset our losses and let gains accrue
 CG is calculated under subdiv (c) of Div B
 ONLY at ½ rate b/c crude estimate for inflation
Step 3: Is it included under the surrogatum principle?
- Definition → taxed in same way as they are designed to substitute
o Requires asking (Tsiaprailis42):
 (1) what was the payment intended to replace? And, if the answer to that question is
sufficiently clear,
 (2) would the replaced amount have been taxable in the recipient's hands?
Step 4: Is it included as Y under section 56?43
All following amounts are TAXED
- Pensions benefits, unemployment insurance benefits, etc (56(1)(a)
Tsiaprailis v R, 2005, SCC – Facts: TxER injured on job. Taxpayer had sued insurance company that had terminated
benefits and had recv’d lump sum settlement which released insurance company from oblg to pay unpaid past or future
benefits. Issue: tax treatment of compensation for ER provided disability insurance benefits that would’ve been tx’able under
s 6(1)(f) had they not been terminated. Decision: payment for past benefit are tx’able but NOT future benefits. Dissent 
Nothing should be tx’able b/c none paid pursuant to disability insurance plan. CP: silly
43
56. (1) Amounts to be included in income for year — Without restricting the generality of section 3, there shall be included
in computing the income of a taxpayer for a taxation year,
(a) Pension benefits, unemployment insurance benefits, etc. — any amount received by the taxpayer in the year as, on
account or in lieu of payment of, or in satisfaction of,..
(n) Scholarships, bursaries, etc. — the amount, if any, by which (more general)
(i) the total of all amounts (other than amounts described in paragraph (q), amounts received in the course of
business, and amounts received in respect of, in the course of or by virtue of an office or employment) received by
the taxpayer in the year, each of which is an amount received by the taxpayer as or on account of a scholarship,
fellowship or bursary, or a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer, other
than a prescribed prize,
exceeds
(ii) the taxpayer's scholarship exemption for the year computed under subsection (3);
42
-
Scholarships, grants and similar amounts (56(1)(n)
o
Taxable, but can go around and fill it under taxable exemption (must relate to merit 56(1)(n)
 Result → only tx’d if exceeds certain amt (see 56(3))
o Condition → must relate to merit, can be periodical or a lump sum
- Interest free or low interest loans (56(4.1))
- Prizes and award, IF related to field of endeavor ordinarily carried on by the taxpayer (e.g. author)
(56(1)(n))
o Also tx’d under regular rules if:
 Business-related (e.g. athletes/architects)
 Em’yment related (e.g. for exceeding sales quotas)
o Must be DISTINGUISHED from:
 Hobbies (e.g. photographers/gardeners)
 See biz section for how to determine whether hobby
 Meritorious services for public in arts and sciences (reg. 7700)
 Note → doesn’t exempt Olympic athletes
- Support payments between spouses → recipient incl in Y (giver gets deduction)
- Government transfers and subsidies (e.g. welfare and social insurance payments)
o Included in Y (56(1)(v))
 BUT then deducted in determining tx’able Y (110(1)(f)(ii) (div C))
o Effect → NOT tx’d
 Note → still included in b/c of Y-tested transfer payments that ∆ value of support
depending on what you earn (e.g. GST tax credit)
 CP: you should be tx’d b/c getting services in kind
o EXCEPTION → biz subsidies
 Tx’able IF related to profits (e.g. govt provides help w/ biz) or related to acquisition of an
asset (e.g. buy tractor)
Step 5: Is it miscellaneous?
- Cancellation of indebtedness → tx’d
o Definition → if ER loans you $ and then says you don’t have to pay back anymore (6(9))
 also applies in Biz context
- Amounts not to compete
o Definition: amt paid not to open similar biz over set area and time after selling
o BEFORE → not tx’d
o NOW → tx’d as Y or CG (s56.4)
 Could be biz or e’ment Y
Step 6: Is it NOT under charging provisions OR under 56? Then it WON’T be incl under 3a, examples →
Gratuitous transfers (gifts/inheritance)
- Def: voluntary and gratuitous transfer of property w/ no strings attached (i.e. no valuable consideration
from recipient) (Bellingham)
- NOT Tx’d = PERSONAL gifts (incl inheritances and distributions from estates)
o Definition: love, affection and disinterested generosity = motivation
 Test = facts/circumstances
o Reasons for NO tax:
 CL reason: not from productive source; doesn’t look like legal Y

o
-
-
Policy reasons (terrible):
 Admin difficulties (particularly when in-kind)
 Not to discourage redistribution of wealth
 Donor is tx’d on any CGs (69(1))
 Controversial b/c rich ppl like to pass $ to children
Reasons TO tax:
 According to Carter, should be incl b/c ↑ ability to pay
o In theory, NO difference if CASH or PROPERTY
 Include them and abolish gifts and estates tax
o BUT b/c received as lump sums, hard to incorporate in progressive tax
rate
 Severity of incl large gift in Y of single year could be mitigated by forward
averaging + would allow exemption of small gifts
 CP: NO country taxes this under Y tx BUT some have a wealth transfer
tax (aka inheritance tax)
o Cda one of few countries that don’t tax at all
EXCEPTION: Gifts of Property → Treated as a deemed disposition
o While the value of gifts is tax-free to the donee, the donor may be liable to income tax on
any capital gain realized at the time of gifting according to s.69(1), which deems the
donor to have sold the property for FMV and the donor is forced to recognize any
gain/loss for tax purposes (see footnote for alternatives44)
 EXCEPTION → Property acquired by rollover
 E.g. Spousal rollover says you can transfer w/o any tax consequences
(73(3))
o i.e. transferred at the original cost, which prevents transferor from
having to re-capture amt or incl as CG, and the recipient gets it at
the original cost and not FMV
EXCEPTION: COMMERCIAL gifts (tx’d)
o Definition: motivation = return for services, not under K oblg to provide
 Test = facts/circumstances
 E.g. tips (sometimes CRA will deduct from salary based on estimate), gifts
to generate goodwill
o Tx’d as E or B income
 B/c of dfcty in calculating, can only deduct ½ the cost of the gift and can’t deduct
anything for golf memberships (indirect way to tax person who receives value)
Windfalls (e.g found property, lottery/gambling winnings)
- NOT tx’d b/c NO source
o CP: Reasons to tx: equity (b/c  ability to pay), neutrality, simplicity (trouble in distinguishing,
prevents tax evaders)
44
Alternatives to deemed disposition rule: 1) Carry-over basis so pay when sold (rollover) BUT can create locked in problem
where incentive never to sell. ALSO gives even > break to ppl who should have to pay tx every year as it’s accruing just as
we do w/labour. We don’t b/c of admin reasons 2) Step-up in cost – don’t pay tx on gain and receives at value
-
Have to distinguish b/w windfalls and business
o TEST:
1. Considering, facts/circumstances, is it for personal pleasure or for Y?
2. Is there a reasonable expectation of making $?
o Note
 If you win a car and sell it then it’s tx’d as CG
 Odd – b/c makes you want to hold rather than sell
-
Reasons to tax
o Equity
o Neutrality
o Simplicity
 Don’t have to distinguish between windfalls and business income
 Prevents tax evaders from arguing they purchased assets with windfall gains
Damages and settlements
- Personal injury damages→ NOT tx’d (IT 365 R2)
o EVEN the investment Y earned from investing a structured settlement is NOT tx’d (IT 365R2)
 CP: Odd b/c getting tax-free interest which you don’t get if lump sum
o Possible rationale → offensive, no accretion to wealth if for expenses, recovery for human capital
shouldn’t be tx’d, not from productive source; wouldn’t be whole if damage payments were
subject to tax b/c receive < damages incurred
 CP: Odd b/c some if it is for lost Y
- Biz damages for broken K → tx’d according to surrogatum principle
o Taxed
 Lost profits (Tsiaprailis)
 Wage Loss Replacement Plans (Tsiapriailis)
 Under 6(1) Act describes the types of replacements that are tx’d
 Value of benefits, any kind w/e, is recv’d by virtue of office or E’ment (6(1)(a)),
EXCEPT if derived from contribution to RRPS, insurance plan, etc (6(1)(a)(i))
 E’ment insurance benefits recv’d that were payable to TxER on periodic basis in
respect of loss pursuant to 6(1)(f), sickness/accident insurance plan (i)
o NOT tx’d =
 Future profits (b/c it’s akin to capital payment) (Tsiaprailis)
 CP: Odd b/c traced to E/Y just like lost profits
 Punitive damages
 No compensatory element + = windfall (Bellingham45)
 CP: clearly ↑ ability to pay
-
Punitive Damages –NO TAX
o Intended to punish wrongdoer and not to compensate victim, though may be incidental beneficiary (may
put victim in better economic position)
o Not considered income, analogized with a gift (Bellingham46)
Non-market transaction benefits (e.g. leisure, consumer surplus) → NOT tx’d
Bellingham – Facts: Land expropriated by town. Under Expropriation Act, taxpayer awarded $114,272 as payment for
additional interest since town’s initial offer was too low (also warded value of land and accruing interest). Decision: Tax-free
windfall.
46
Bellingham
45
-
Reasons:
o Not govts proper redistributive role
o Everyone has about same amount
o Admin reasons – impossible to measure
o Raises liberty concerns
o Not taxing them doesn’t give rise to economic efficiency concerns
Imputed Y (from services + property) → NOT tx’d
- PROPERTY:
o Definition: own property + use it + use doesn’t diminish value + don’t pay tax
 E.g. by owning an entire house you’re receiving a tax-free benefit b/c if you rented it
you’d have to pay tax on it
o Reasons to tax :
 Equity: some earn a lot from it, others nothing
 Neutrality: not taxing it leads to over investment in housing and other consumer durables
 Simplicity: admin problems are surmountable (e.g. done in Sweden thru flat rate based on
assessed value)
 Policy reasons:
 Upside down effect(serves ppl who are richer)
 Encourages big houses b/c larger house, larger subsidy
o Housing is unequally distributed across gender and race lines
o Larger houses, not necessarily more housing
 Leads to economic distortions – reduces GDP
o Would’ve invested in other industrial mechanisms
- SERVICES
o Definition: services you provide to yourself
o Reasons not tx’d:
 Equity: everyone has about same amount of imputed services
 Neutrality: likely doesn’t distort choices too much,
 Simplicity: admin dfcty
 Threat to liberty
 Repugnancy
o CP: BUT sometimes used to justify child care expenses deduction b/c one-earner families then
have it easier b/c they don’t pay taxes then on child care services
Breach of work K damages → NOT tx’d
- Crt rejected all 3 possibilities (Schwartz47)
o Under 5(1)48 as em’yment Y
Schwartz, SCC, 1966 – Facts: Tx’payer entered into em’yment K but was terminated before starting. Agreed to pay him
$360,000 in damages for breach of K. Issues: Are the damages tx’able as em’yment Y? Decision: TCC – award was to
compensate for embarrassment. FCA – big portion was for loss of salary and lost stock options. SCC – restored trial judge
decision, said FCA couldn’t overrule finding of fact of trial Note: shocking b/c evidence that it was calculated for stock
options.
48
5. (1) Income from office or employment — Subject to this Part, a taxpayer's income for a taxation year from an office or
employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year.
"employment" means the position of an individual in the service of some other person (including Her Majesty or a foreign
state or sovereign) and "servant" or "employee" means a person holding such a position;
47


Rationale → em’yment under 248 is defined as being in the service of another person
CP: Could argue damages for em’yment you were going to receive
 Amount which can be reasonably considered to be income from employment rather than
damages award is income/taxable (IT 365 R2)
o
Under 56(1)(a)(ii)49 as a retiring allowance
 Rejected by SCC b/c he hadn’t started and didn’t have office or em’yment yet
o Under 3(a)
 Rejected in SCC b/c basic statutory rule that specific sections take precedent over general
sections
 If retiring allowance doesn’t apply, can’t use 3(a)
o CP: odd b/c diff is whether he stepped into office or not; arbitrary
Barter transactions (sometimes tax’d)
- Tx’d b/c there’s value BUT, requires asking:
o TEST: If not tx’d is it likely other ppl will set them up?
 CRA says if X∆ing services and they’re potentially professional, they’ll be tx’d, but if
they’re not professional, then no
- Reasons to tax:
o Equity  ppl should be tx’d on incoming benefits
o Neutrality  will not benefits, will it lead to econ distortion
- Reasons not to tax: Admin problems
Prizes/awards/hobbies
- Depends on distinction from biz/e’ment activity (see biz + e’ment section)
Strike pay
- CRA interpretations:
o BEFORE: ONLY tx’d if working for the union b/c then E/Y
o THEN: b/c members getting full amount of Y, took a diff approach and argued it should be
tx’able (but rejected in Fries)
 CP: reveals how CRA isn’t bound by IT
- RULE: strike pay non-tx’able b/c doesn’t fit category, upheld in Fries50
 CP: odd b/c if you pay union fees they’re deducted from your Y, yet if you get strike pay
it’s not counted as Y
 + no tx on investment Y of union
Loans → NOT tx’d
- Rationale → net wealth hasn’t ∆
49
S. 56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a
taxation year,
(a) any amount received by the taxpayer in the year as, on account of or in lieu of payment of, or in satisfaction of,
(ii) a retiring allowance…
S. 248 “retiring allowance” means an amount…received…(b) in respect of a loss of an office or employment of a taxpayer,
whether or not received as, on account of, or in lieu of payment of, damages or pursuant to an order or judgment of a
competent tribunal…by the taxpayer…;
50
Fries – Facts: Union goes on strike and agrees to pay members full salaries. Issue: was strike pay tx’able? Decision: TRB –
non-tx’able b/c not Y fro e’yment relationship w/ union. RCTD/FCA – Income from source, presumably caught under 3(a).
SCC overturns FCCA and says isn’t income from a source w/I s 3 and benefit of doubt must go to taxpayer. Note: Should’ve
set up some principle
- Effect →No deduction for when loan is paid back
Ponzi scheme
- u/c whether tx’d right now
o Tx crt said NOT tx’able b/c no source
o FCA said YES b/c source is Y from property (i.e. entering into a K)
o SCC – hasn’t responded yet
Chapter 5: Income from Employment
Introduction
Step 1: Compare E/Y vs B/Y (see chart in SC)
Step 2: Compare cash vs accrual accounting (see chart in SC)
- In particular, note that it follows cash flow model, when it’s recv’d
Step 3: Consider the tax criteria justifying the diff approach to E/Y
Employment Income
Majority of Tx’ERs file as EEs, so huge revenue consequences
Tax base
protection
All forms of E/Y should be tx’d (incl fringe benefits)
Equity
Admin
efficiency
Social policy
For residents:
- DON’T deduct expenses, leads to some inequities BUT,
- Administratively impossible to have EEs filing taxes, better to shift burden to
ER
- ALSO, in Aus you can deduct, but there’s rampant dishonesty
Non-residents
- The source of E/Y is based on physical presence, not stronger econ nexus,
whereas for biz you’ll pay where you live
- Treaties, usually require a fixed base
Justifies w/holding, limitation of expenses, and exclusion of small fringe benefits (e.g.
uniforms, EE discounts generally avail to all EEs if at least cost is charged, subsidized
meals if at least the cost of the food and preparation is recovered, a maximum of $500
of non-cash gifts)
Exclude some benefits to encourage ERs to provide them
Step 4: Note the basics of E/O Y
- Definition of office or employment income have same computation rules b/c deductions are justified in
both cases
o Basic charging section, include all → salary (long-term), wages (short-term) and other
remuneration, including gratuities, recv’d by TxER in the year (catch-all provision) (5(1))
- Defintion of e’ment =
o position of an ind in service of another person (248)
- Definition of office = elected or appointed (not created by K of service)
o Position of ind entitlement them to fixed and ascertainable stipend or remuneration (unlike biz
profit)
 e.g. judge, member of senate or HoC, corporate director
DISTINGUISHING B/W EEs and INDP K’ers
Step 1: Common law
- MAIN QUESTION:
o Contract of service (EE) vs contract for service (indp K’er)
 Is the person who has engaged himself to perform these services performing them as a
person in biz on his own account? (market Investigations v Minister of Social Security)
- No test is conclusive (Sagaz51)
o Crts have used a variety of tests in the past, e.g. form of K test, cntrl test, economic realities test,
o It basically results in ONE factoring test
 Control (Sagaz)
 Arose from purposive approach in Sagaz, where Crt considered the policy
rationale underlying VL to determine what test should be used
o Found that considerations were compensation, deterrence and loss
internalization SO decided control test was imp
 Application:
o EE where all details est’d by owner
o Indp K’er where result est’d but not details
 BUT, no longer decisive b/c there can be same level of control but one group is
EE and another is indp K’er (Winnipeg Ballet52)
 Economic reality and other factors (Wiebe Door Services53)
 Considerations:
o Control (knock down factor)
 Hrs of wrk; where wrk is done; manner and supervision of work
o Ownership of tools
o Hiring helpers
o Other clients
o Chance of profit; risk of loss
 Application:
o Wiebe Doors  ind K’er based b/c almost all factors suggested so
o Wolfe v R, 2002 → worker w/ specialized skills under 5-year K w/ Cdn
company was self-employed on grounds that he had financial risk b/c
TxER had no job security or benefits and agreement entered into by
parties indicated intent to have an indp K’er relationship
 Form of contract test (i.e. how parties viewed their relationship) (Winnipeg ballet)
671122 Ontario Inc (Design) v Sagaz Industries, SCC, 2001 – Facts: Lost K to supply covers to company b/c competitor
hired someone who bribed purchaser. Sued company for VL for the person who made the bribe. Decision: Ind was an indp
K’er Judgment:
52
Winnipeg Ballet, 2006 – Facts: Control exercised over dancers hired for the entire season was extensive, but it was the
same as the control exercised over guest hartists (hired to do similar work) who were regarded as indp K’ers.
53
Wiebe Door Services, 1986, FCA – Facts: TxER in biz of installing and repairing overhead doors, used other ppl to install.
Wkrs choose whether to accept, provided own materials, paid/job; accepted risk of 1 year guarantee period. Issue: were
wrkers EEs or ind’ K’ers?
51


-
-
“manner in which the parties viewed their agreement must prevail unless they
can be shown to have been mistaken as to the true nature of their relationship.”
(Wolfe)
CP: CLEARLY wrong, can’t let parties decide what category
Application
o Sagaz  Indp K’er based on purposive approach + others, b/c had own office, paid own
expenses, free to pursue other clients, risk of loss and profit; little control
ALTERNATIVES
o In US, the IRS just estb’d a 20 factor list54 + in South Africa, have a ranked list55
o FUNCTIONAL TEST for tax purposes
 In tort, for VL, cntrl is essential b/c that dictates whether it makes sense to hold someone
accountable, but NOT the same in tax
 Weight factors differently for tax purposes, ask questions like:
 Can someone conveniently w/h?
o Easier where fix amt, set schedule, one person
 What’s the effect of denying someone the ability to deduct expenses?
o Before the s 8 exemption, musicians got scewed b/c they had to buy their
own instruments, even tho strict e’ment conditions at an orchestra
 Is the person at risk of personal loss?
o Loss should be deductable)
Step 2: Special statutory rules for incorporated EEs
- BEFORE:
o Incorporated EEs
 i.e. create a corporation such that it delivers the service, and you receive salary there
 HUGE adv b/c corp CAN’T be an EE, therefore:
 Whatever you leave in the corporation is tx’d at corporate rate
o Which, w/ small biz credit (125) means 20%, rather than income tax rate
which could be 46%
 Deduct biz expenses
 NOT as big an adv for indp K’ers b/c they can already deduct expenses, but will get
benefit of paying corp tax rate and income splitting
- NOW
o If incorporated EE, in absence of corp, would be EE of the payor (125(7))56 essentially
IGNORED for tax purposes
 NO deductions (18(1)(p))
 NO small biz credit (under 125)
o Result  ↓ benefit of setting up corp if not actually earning B/Y, but some benefit if making a
profit (and so don’t need the deductions) b/c tx’d at low rate
 ALSO ppl can still create a trust and try and split Y that way but there is a kiddie tax if
you’re giving $ to someone under 18, then taxed at highest rate
54
Instructions, training, integration, services rendered personally, etc
Top is control of manner of working, then payment regime, person who has to render service, etc
56
Personal service biz - if ind performs service on behalf of or related to corp, or corp employs 5+ EEs (125(7))
55
Statutory Inclusions in E/Y
Overview
- Includes: fringe benefits, compensation for loss of e’ment, stock options, allowances
Step 1: Basics
- Cash base accounting
- Definition = salary, wages and other remuneration, including gratuities, recv’d by the TxER in the year
(5(1))
o See SC chart for when recv’able
o The Act provides a list of inclusions under 5, 6, 7
 Gross Employment Income  Any amt recv’d for tax payer subject to any conditions of
employment or for termination, loss or retirement from emp’ment

o
CP: preferable approach would be, ANYTHING that you receive by virtue of e’ment
 I.e payments by ER to EE under 6(3) should’ve picked up everything
Payments by ER to EE (6(3)) picks up a lot of the amts recv’d before or after e’ment (e.g. signing
bonus)
 UNLESS it wasn’t consideration for e’ment
 CP: shouldn’t have put these conditions b/c now doesn’t catch damages for
wrongful dismissal and so parl had to create 56(1)(a)(ii) to capture retiring
allowances (damages for breach of K once you’ve started up e’ment (Schwartz))
Step 2: Specific rules for Benefits
General scheme (6(1)(a))
- Act TAXES FRINGE BENEFITS:
o Specifies board and lodging, but incl “any kind whatever” and so catches anything, not just what
is similar to the examples
- Rationale
o Theoretical:
 Equity (vertical + horizontal)
 Neutrality
o Protect revenue base  otherwise ppl would get paid in-kind benefits instead of $
- Problems
o Perceptions they’re not Y
o Become built into compensation packages
o Hard to distinguish from condition of E’ment
o Allocated to ind EEs
o Hard to value
- Methods of taxing
o Direct incl value in Y of EE
 Problems:
 Might not affect public sector, rate might be inappropriate, cost might differ from
FMV, wash-out under integration, mis-states EEs Y, creats international double
tax problems
 CP: in Aus they have arbitrary 45% tax on all fringe benefits
 Had attempted to fully tax free flights for airline EEs, but they all refused to fly
o Indirect  deny ER a deduction; separate tax on ERs
 Equity problem b/c all EEs then pay for it, and not the ind who’s ability to pay is 
- Exceptions based on tax policy criteria:
o Would not taxing the benefit give rise to serious inequities? (equity)
o Would not taxing the benefit likely lead to distritions in the forms of compensation (neutrality)
o Is taxing the benefit admin practical? (simplicity)
 This is reason that small gifts on appropriate occasions, subsidized meals and rec
facilities are excluded
Calculating a FRINGE BENEFIT
a) Has it been….?
- In return for services, or
- Would not receive “but for” e’ment (based on motivation of payer) (Savage)
 Presumption that any benefit recev’d by an EE from ER is derived from e’ment
relationship (Savage)
 Can be rebutted but only if rec’vd in personal capacity, requires asking:
  For love and affection? NOT tx’able
  For service performed? Then tx’able
o If you weren’t an EE, would you have got the benefit? (Savage57)
 Application ↑bonus recv’d for taking a course is txable
(Savage)
 If meets the test, then $500 exemption under 56(1)(n) doesn’t
apply (in order to ensure ppl don’t character Y as a prize)
 In Savage, the DoF hadn’t ed the law yet so it was
found to apply
o Was it immediately prior to, during or immediately after a period that the
payee was employed? Still a benefit under 6(3)
o Gifted from a 3rd party?
 No presumption that it’s in respect of e’ment but can found to be
such, such as in Waffle where ER was Ford Dealer but Ford
Motor Company provided a cruise to EE
b) Is it a fringe benefit?
- Does NOT have to be convertible into $
o In Waffle v MNR, crt affirmed that this was appropriate intp of 6(1)(a) (overruled Tennant v
Smith)
- FMV is the proxy for ind value
o Rationale – ind value would be too dfct to administer, FMV is obj
- FMV = the price that would be willingly paid by a buyer who does not have to buy to a seller who does
not have to sell (based on a fictional market)
Savage, 11983, SCC – Facts: TxER recv’d $300 from ER for passing an exam for a course related to her work that she
voluntarily took. Issue: Was it a benefit she received by virtue of her E’ment Judgment: Lower crt said it was indp of her
service so not E’ment. SCC said txable based on but for test.
57
MAY also be based on resale value (e.g. a ring w/ a logo is valued as scrap b/c can’t be re-sold
(Wisla); or a suit only valued as second-hand item (Wilkins)
SOMETIMES, will use cost to ER b/c can still reflect the FMV to the EE
o Examples:
 Benefits derived from Christmas parties (Dunlop)
 Education of an EE’s children (Detchon)
 Meals in an ER-subsidized cafeteria (IT-470R)
o BUT, it might not measure the benefit if it costs the ER nothing (e.g. use of ER-provided home
where operating costs to the ER is less than the rent that could be charged OR airmiles
accumulated thru biz travels)
SPECIFIC CATEGORIES:
o Board and lodging (from words of section)
 ALWAYS personal b/c everyone needs them
 TEST  must NOT be DE MINIMAS(Sorin58)
 E.g. cleaner who occasionally slept in a storage room (Sorin)
 Rationale: dfct to value, not sgfct inequities, and not concern over tax base, then
NOT txable (Sorin)
o Trips
 TRICKY where mixed personal and biz
 RULE → look at the trip and carve out/apportion trip according to diff purposes
 CP: IN US, IRS divides days according to purpose
 Note  while traveling you can deduct personal or living expenses (18(1)(h)
o CP: odd b/c personal benefit
o Clothing
 Test (Huffman) 
 Required to wear them
 Not suitable for general use
 Not worn as part of general use
o Note → this is to cover situation where it’s not suitable, but ind still
wears it
 Application:
 Doesn’t matter if they’re way too expensive and fancy b/c too admin dfct
 In Huffman police officer went undercover in oversized clothing, not tx’d
o CP: questionable whether that passed the test
 CP: Other countries tougher than us
 Aus only allows registered uniforms to be exempt
 Sweden only allows deduction of outer or extra clothing
 Netherlands doesn’t allow any deduction
o Moving expenses
 All home expenses related to a move are non-deductible (6(23))59
o
-
-
58
Sorin, 1964, TAB


o
Parl created this rule after mixed approaches by the crt:
Ransom, 1967 – EE reimbursed for loss in value of house b/c EE required to
move – NOT tx’d
 Phillips, 1994 - EE reimbursed b/c of higher cost of housing in Winnipeg –
TAX’D
 Hoefele, 1995 – EE reimbursed for ↑ interest expenses b/c required to buy more
expensive home after move – NOT Tx’d
 Blanchard, 1995 – EE reimbursed for cancellation of housing policy – TX’d
 EXCEPTION: where ER reimburses your for loss in value of house (not for cost of
buying a more expensive house) by moving locations, then e’ment related expense (akin
to Ransom) (6(19)-(22))
 And $15,000 + ½ excess of reimbursement is exempt from tax
 Apply here TxER moves at least 40 km closer to a new work location
 CP: wrong b/c personal decision, he could’ve rented, akin to commuting expense
Education 

o
o
o
o
Employment-related education is deductible, but education for personal benefit is not
Use of luxury items (e.g. car)
 ASSUME some personal benefit
 RULE: can only depreciate up to $30,000 (indexed to rate of inflation) (13(7)(g))
Club membership/yachts (18(1)(l))
 ASSUMED personal benefit BUT you don’t have to incl in Y (wherever there’s a biz
reason) b/c, as a proxy, the dept has chosen to ban deductions by the ER
 Dept has taken a lenient approach b/c otherwise it looks like double tax to require
inclusion and not allow a deduction
Provision of meals and entertainment (67.1)
 ASSUMED personal benefit BUT, as with memberships/yachts, you don’t have to incl in
Y but ER can only deduct ½ of the value (same if self-employed)
 CP: 50% = arbitrary number
 EXCEPTIONS (67.1(2)
 Where EE incl value of meal in Y, then ER can deduct whole amt
 CP: this is the correct approach but there’s no similar provision for memberships
Other:
 Fringe benefit
 Free parking
o Now even try to tax scramble parking (i.e. # of parking spaces is < EEs
and so not guaranteed spot)
 TTC pass = fringe benefit
 Off-premise daycare subsidy
 Not fringe benefit
 Providing coffee/meals offered at cost = de minimas
“For greater certainty, any amount paid…in respect of…an individual’s …employment in respect of the cost of, the
financing of, the use of or the right to use, a residence is, for the purposes of this section, a benefit received by the individual
because of the…employment”
59



Work related magazine
Gym in the firm (liberal approach, only need 2 show biz purpose)
Daycare facilitate on premises (for policy reasons) so long as it can be used by
EEs w/o disc (i.e. not just managers)
 Cell phone/laptop for both biz and personal
o Should be, but too big of an admin problem
 Free beer = u/c
c) Is there an exclusion for social policy reasons? (6(1)(a))
- Contributions to pension plans
o Most ERs provide it b/c allows EE to defer tax and get tx’d at lower rate when accessed
- Group accident insurance plans (e.g. dental, eye)
- Premiums for private health insurance
- Premiums for group term life insurance
- Employer-provided day care (if provided on non-discretionary basis) (see above)
d) Specific rules for calculating taxable benefits
- Parl est’d these b/c crts had problem w/ them and ppl were lying about personal use
- Automobiles (6(1)(e), 6(2)
o Where allowed to use a car personally, including the following amt (the standby charge) in Y as
the capital cost of the car (6(1)(e):
 Standby charge = 2% x Mos avail for your use x Cost of car
 car is primarily used for e’ment and car is used < 1667 kms/mo or 20,000/year
THEN two options:
o Formula is yearly personal kms divided 20,000, OR
o Include ½ standby charge
 If ER is also paying operating expenses, then also incl (6(1)(k)):
 Personal Km use x 24 cents
o Note → Standby charge is intended to arbitrarily account for the fact that you’re getting the
benefit of the depreciating value of the car by using it personally when if it was your car you’d
have to bear the cost of that ↓ value (see CCA for more on deprecation of automobiles)
-
-
Interest-free or low-interest loans (6(9)), 80.4(1)
o EE deemed to owe market rate of interest (the prescribed rate) and amt waived is a taxable benefit
(e.g. get loan to help you buy a house)
 Benefit will be treated as interest paid if the loan is used to purchase shares or an auto
used in the employment (80.5)
o Exceptions:
 Home purchase loan (80.4(7)
 When you BUY a house, keep the prescribed rate for 5 years, rather than allow it
to fluctuate (akin to a mortgage)
 Home re-location loan (110(i)(j))
 Exemption for 1st $25,000
E’ment at special work sites and remote locations (6(6))
o Don’t have to incl in Y if provided by ER b/c already paying lodging costs elsewhere
Moving expenses → taxed (see above)
-
Clergypersons residence (8(1)(c))
o Allowed to deduct rent, imputed rental value of home
o B/c ppl too many ppl were saying they were related to a religious org, CRA re-assessed them, and
said that you have to actually be preaching
 CP: bizarre, likely abused a lot by ppl getting salary in housing allowance instead of $
Step 2: Includes compensation for loss of employment (56(1)(a)(ii)
- Termination of Employment can result in termination pay (based on required period of notice)
o Usually characterized as income from employment TAX
- Retiring allowance special, s.248(1)60 TAX
o Catches damage awards and out of court settlements that would otherwise escape tax
HOWEVER, when EE recovers damages for defamation, or preach of “pre-employment
contract” (Scwartz) damages are not considered income NO TAX
Step 3: Includes stock options
a) STANDARD APPROACH
- Definition: a benefit in the form of an option to buy stock (strike price) in the company at a discount or at
a stated fixed price
o They can be from ER corp OR corp which ER corp does not deal at arm’s length w/ (e.g. parent,
subsidiary or sister corp)
- Rationale → EEs will work very hard to try and drive up value of stock
o CP: hard to determine value, so parl legislated the answer (s7)
- Conditions:
o Recipient = EE or officer
o Recv’d in respect of, in the course of, or by virtue of, e’ment (7(5))
- Method of taxation (s 7 = governing provision)
o Year you get the option → nothing incl in Y
o Year you buy the stock → incl the difference b/w the discounted price and current FMV as a
benefit (e.g. bought for 10, now worth 20, incl 10)
 Benefit is tx’d as E/Y
o Year you sell →
 Calculate the Adjusted Cost Base (ACB) (53(1)(j))
 ACB = Purchase Price + Benefit incl in Y already
 Selling Price – ACB = Capital Gain (tx’d)
b) SPECIAL DEDUCTION
- EE can have special 50% deduction of taxable benefit (110(1)(d)
- Conditions:
o EEs deal at arm’s length (i.e. can’t own big chunk of company/or fam biz)
60
s.248: retiring allowance" means an amount (other than a superannuation or pension benefit, an amount received as a
consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received
- (a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
- (b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of
payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer's death, by a dependent or a relation of the taxpayer or by the legal representative of the
taxpayer;
 Rationale → If you cntrl the corp, don’t need further incentive to work hard
o Must receive SHARE and NOT cash
 IF CASH, deduction can only be claimed if ER does NOT take the deduction for the cash
payment
 Rationale → otherwise corps were just paying cash instead of issuing the share,
but still got the deduction
o Share must be prescribed (usually common shares)
o Stock option price is > or equal to FMV of shares on date the option is granted
- Application
o Year you get the option → nothing incl in Y
o Year you buy the stock → incl the difference b/w the discounted price and current FMV as a
benefit THEN deduct 50%
 NOTE → Even though therefore AKIN to a CG b/c only ½ the gain is tx’d, under s.7 it is
treated as EMPLOYMENT income.
o Year you sell →
 Calculate the Adjusted Cost Base (ACB) (53(1)(j))
 ACB = Purchase Price + Benefit incl in Y already
 Selling Price – ACB = Capital Gain (tx’d)
c) ADDITIONAL BENEFIT
- Conditions:
o Cdn-controlled private corp (CCPC) (i.e. stocks aren’t publically traded) at time options were
granted
o Held the share for at least 2 years (110(1)(d.1)
- Benefit:
o The original stock price can be below FMV
o EE also doesn’t have to incl in Y until sold (7)(1.1)
- Application
o Year you get the option → nothing incl in Y
o Year you buy the stock → nothing incl in Y
o Year you sell →
 Calculate what should’ve been incl (i.e. Purchase price + benefit recv’d when purchased)
 Selling price – what should’ve been included = CG
- BEFORE: stock option price had to equal the FMV of shares at time the option was granted
o ∆ed b/c companies claimed this was a hardship b/c incl amt in Y, but might not have cash
o CP: They’re rich, could’ve made arrangements
 Problem is that if stock goes to 0, they don’t make anything but still have to incl 5 in Y
 Happened to JDS in Waterloo and they lobbied in Ottawa, and dept gave them a
REMISSION order (forgave tax)
 Shocking b/c it was already a concession that they pay later
 For other ppl, they said if this happens, you only have to pay
d) Pros/Cons to stock options (based on fact that’s it’s a tax EXPENDITURE, not a technical tax measure:
Pros
Cons
Counteracts brain drain (i.e. stop ppl from Discourages managers from paying dividends that
going to US)
might be in the interest of shareholders
Aligns interests w/ shareholders
Encourages exec to take risks b/c they don’t lose $
Assists small firms to pay highly skilled Often options become valuable b/c of general ↑ in
wrkrs w/o ↓ cash
share prices over which managers of individual
corporations have no control
Encourages execs to focus on short-term + overstate
profits (to drive up share price)
Managers already have s significant stake in the
company
if it were a good policy to align the interest of
shareholders and managers the market should take care
of it and there would be no need for a tax preference
Step 4: Includes an Allowance s. 6(1)(b)61
- Allowance for any purpose (e.g. personal/living) must be incl in Y
- 6(1)(b) includes NARROW EXCEPTIONS to inclusion rule, basically have to be a travelling salesperson,
not just at a conference out of town
o Examples:
 (i) travel, personal or living expense allowances (A) expressly fixed in an Act of
Parliament, or
 (v) reasonable allowances for travel expenses received by an employee from the
employee's employer in respect of a period when the employee was employed in
connection with the selling of property or negotiating of contracts for the employee's
employer,
- MUST distinguish b/w reimbursement and allowance
o Reimbursements do NOT have to be incl in Y if for e’ment related expenses
 Note → would be incl if personal expense
o Rationale → dept can’t audit allowances but they can audit reimbursements b/c receipts get given
to the ER so they’re all at the ER level
Deductions for E/Y
-
-
-
General
o Deny all (8(2))
 Rationale → simplifies withholding
 Auditing all EEs would result in large admin expense
 No inequity b/c costs can be shifted to ER
o BUT dual purpose expenses (e.g. edu, travel, clothing, entertainment) are dfct
Note →
o Diff Y losses can be offset against e/o (3(d))
o BUT the Act quarantines some losses for fear they might contain some personal benefits
 E.g. biz losses resulting from home offices expenses
 S 18(12)(b) provides that home office expenses can’t be > the income from the
biz for which they were incurred.
EXCEPTIONS (i.e. EEs DO get deduction)
6(1)(b) Personal or living expenses — all amounts received by the taxpayer in the year as an allowance for personal or
living expenses or as an allowance for any other purpose . . .
61
o
Specific employees who might normally incur large expenses and be unable to shift them to employers
 Transportation employees.
 Artists and musicians
o
Basic deduction or credit118(10)
 Credit of 15.5% of 1,000 or $155 and can only be provided in some circumstances
 Rationale  cover expenses that EE can’t claim
Salesperson’s expenses, s. 8(1)(f)
 E.g. if on commission, can deduct most of their expenses against their commission Y
Travelling expenses, s. 8(1)(h), if Tx ER (all of below):
 Where required under the K of e’ment to pay the travel expenses
 Was ordinarily required to carry on E’ment duties away from ERs place of business
 Requires that EE:
 Was NOT in receipt of travel allowance that was NOT incl in TxER’s Y under
6(1)(b)(v)
 Did NOT claim a deduction under (e)(f)or (g)
Legal expenses, s. 8(1)(b)
 i.e. those that were incurred to collect or estb a right to salary or wages owed to the TxER
by ER or former ER
Annual professional membership dues, s. 8(1)(i)(i)
 Dues that were necessary to maintain professional status recognized by status
 E.g. lawyers can deduct fees to LSUC, but not CBA or other legal associations
 Rationale → LSUC amt is big + easy to calculate
Office rent (but see 8(13)), or salary to an assistant 8(1)(i)(ii)
Annual dues to maintain membership in a trade union 8(1)(i)(iv)
Employee’s registered retirement pension plan contribution 8(1)(m)
 Limits on how much you can contribute
Cost of supplies (8)(1)(iii)
 Supplies = stuff consumed in year (often deducted by teachers)
 CP: Other countries provide a floor – can only itemize above some amount
o
o
o
o
o
o
o
o
Income from Business or Property
Profit from Biz/Property
Step 1: Consider basics
- Basic charging section (9)(1)) → Y from biz/prop = Profit from biz/prop
- See SC Chart: Distinguishing b/w types of Y
Step 2: Compare cash vs accrual methods of accounting (see SC chart for basic characteristics of accrual)
Step 3: Need to distinguish whether prop or biz (don’t apply REOP here)
- Effect of which type of Y
o Deductibility
 If B/Y, interest is DEDUCTIBLE under s. 20(1)(c)
 If P/Y and incurs a CG, then NOT deductible b/c Act expressly provides that CG are not
income from property (s. 9(3)).
o Other
 Attribution rules
 Non-residents
 Liable to part I, tax on Y from biz, but part 13, y from property
 Residence in a province
 Foreign income
 Some tax shelter rules only apply to income from property (CCA restrictions)
 Certain expenses only apply to business income (CEC)
 Certain tax expenditures are only available for business income (SBC)
Statutory guidance in distinguishing between the two:
- Prop = property of any kind w/e, which incl (very BROAD) (248)
o Incl
 (a) a right of any kind whatever, a share or a chose in action,
 (b) unless a contrary intention is evident, money,
 (c) a timber resource property, and
 (d) the work in progress of a business that is a profession;
o It is the passive return on your property where the gain is primarily derived from ownership rather
than the activity of owner
 E.g. rent is Y from property unless also providing services such as operating a hotel
o Can use cash or accrual basis



-
Used to be w/ interest income you could elect whichever you wanted but then
everyone elected cash method so accrued interest expense for years so now for
interest receipts virtually everyone’s being put on an accrual basis.
Dividend income is cash basis
Rental income is normally on cash basis
o E.g. Buying land and holding it (can incl renting it out) as an investment = prop
Biz = profession, calling, an adventure in nature of a trade (248)
o Adventure means that even if you only do it once, can still be a biz
o Incl when you buy something to be re-sold (e.g. gold)
 This is biz inventory and any Y is biz Y
 Distinguished from rental Y b/c no benefit to the gold itself beside to re-sell it
o E.g. Buying land, quickly re-selling it, and doing that again = biz (Fresen)
Step 4: CL guidance in distinguishing b/w biz and other activities
- REOP ONLY applies to distinguishing b/w personal and biz ventures, not to distinguish whether biz
venture at all (Stewart62)
o Rationale → too dfct for crt to decide whether someone making an investment had a REOP; Lead
to uncertainty; penalize ppl who capitalize investments w/ borrowed $
- Proxy TEST for DISTINGUISHING  Is there a reasonable expectation of making a profit (REOP)?
(Moldowan)
o Objective test based on facts/circumstance (Moldowan)
 Whether activity conducted in a business-like manner, good books and records
 Strategy: To make it look like a biz, have accounting books, make $, create
pamphlets, etc
 The expertise of the taxpayer
 The time and effort expended in carrying on the activity
 The history of profit or loss
 The amount of recreation or pleasure the taxpayer derives from the activity.
- In determining REOP, possibility of tax avoidance should NOT be considered (Ludco)
- Y does NOT have to be the principal motivator → just need to show REOP based on gross Y (Ludco)
o MEETS REOP if anticipated dividend income, and that was reasonably expected
- CanNOT be used to deny deductions, such as of interest under 20(1)(c)63 (Stewart/ Ludco64)
o CRA went after these investments b/c huge tax shelter65:
 Expense deducted from Y
 Gain taxed at 50% (as CG)
 Time value of $ means making deductions now, taxing it later
Stewart, SCC, 2001 – Facts: Experienced real estate investor purchased 4 condos as a tax shelter. Loaned $ to buy them.
Negative cash flows and Y tax deductions projected for 10 years but appreciation in value of property expected in future and
they would deduct interest along the way. Experienced > losses than expected b/c rental Y less than predicted.
63
S. 20(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such
part of the following amounts as may reasonably be regarded as applicable thereto:….
(c) Interest — an amount paid in the year or payable in respect of the year (depending on the method regularly followed by
the taxpayer in computing the taxpayer's income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed
money used to acquire property the income from which would be exempt or to acquire a life insurance policy),
64
Ludco, 2001, SCC – Facts: Borrows millions and invests it in Panamanian company that was investing in Cda and US.
Nothing tx’d in Cda. Interests payments > dividends so deducted the losses, then when cashed in, tx’d as CG. Sold shares at
huge profit. Judgment: TCA and FCA agreed w/ CRA. SCC rejected CRA. 1) The question of the correct legal test to apply
in interpreting s. 20(1)(c)(i) (what is the purpose of borrowing money) is a legal question not a factual question. 2) What is
the requisite income earning purpose – bona fide, dominant or reasonable expectation of income? Held – reasonable
expectation of income.
65
Typical situation: borrow 100, pay 10% interest, after 5 years, sell for 150. Investment is a wash b/ c expense = 50 and gain
= 50. BUT made $ for 3 reasons:
1. Expense deducted from Y
2. Gain taxed at 50% (as CG)
3. Time value of $ means making deductions now, taxing it later
62
o
o
-
SCC rejected CRA’s argument that interest shouldn’t be deducted where venture had no REOP
(Stewart)
 CRA argued that can’t incl CG in calculation of REOP b/c it isn’t P/Y under 9(3)
 CP: Dept argument wrong; you should have to deduct interest from taxable part
of CG at the end
o Govt had proposed this but backed down after biz community said it’ll
kill capital investment
SCC rejected CRA’s argument that income should be defined in net terms for the purposes of
20(1)(c) based on plain meaning of the section, purpose of the section (to encourage investment)
and b/c crt shouldn’t consider economic realities about whether they’re going to make $
[miscellaneous tax shelter info] Ownership of warehouses, structured as a tax shelter (Walls66)
o Losses denied by TC, accepted by FTC.
o SCC: investment was income source. “No evidence of any element of personal use or benefit in the
operation”
Application:
- Not biz (fail REOP)
o Horse-racing activities consuming few hrs/day for part of year (Moldowan67)
o Making gifts to ppl by charging low rent (Maloney68)
o Starting a biz of caring for elderly where it was unrealistic and poorly thought out (e.g. no
transportation access) (Maloney)
o Practicing law after 23 years but losing $, and no budget, no books of account, and he did not
systematically seek clients other than through the publication of his name in the annual telephone
book (Landry69 → applied Moldowan)
 BUT might be different post-Ludco b/c running firm prob doesn’t have a personal benefit
unless just providing services to friends and relatives
Step 5: APPLY REOP WHEN DISTINGUISHING BETWEEN BUSINESS AND….(see below, b/c even if not
biz, may be tx’d as CG)
a) Hobby
-
66
Hobby = activity undertaken for personal pleasure
Biz = use of labour and capital to earn Y
What’s at stake? →usually, imp issue is in relation to deductibility of losses
o Often fights over hobby farms b/c huge losses but if biz then you could deduct a
snowmobile
Walls: Taxpayer incurred losses from a mini warehouse operated by a limited partnership, which was structured as a tax
shelter. Losses denied by CRA. Accepted by SCC
67
Moldowan, SCC, 1977 – Facts: Engaged in training, boarding and racing horses. Incurred losses over a # of years. Issue:
biz or hobby of farming? Decision: Hobby
68
Maloney, FCA 1989 – Facts: Rented house to mother to allow her to support herself by caring for elderly ppl. Scheme
failed b/c mother got sick and house not serviced by public transportation. TxER earned $100 for rent Y one year, and $1,800
from mother next year. But expenses were much greater. Decision: No REOP + expenses were non-deductible b/c
personal/living expenses under 18(1)(h)
69
Landry, FCA 1994 – Facts: At 71, after 23 away from practice, started practicing law again w/o but had no budget, no
books of account, and did not systematically seek clients other than through the publication of his name in the annual
telephone book. In assessing the taxpayer for his 1987 and 1988 taxation years, the Minister disallowed the losses which he
had deducted in computing his income from his practice for those years. Decision: No deductions.
- Apply REOP test
b) Gambling winnings
- Sgfce: lottery/gambling winnings are NOT tx’d UNLESS amt to a biz
o CP: currently if you have to incl in Y you still don’t get to deduct losses
- Trend → where you can ↓ the chances of losing and carry on systematically, more likely biz (e.g.
insider info on horse racing, expert poker player)
- Application
o Biz
 Farmer found to be in business of betting on horses (Walker, 1951)
 Gambled full time, had system for minimizing risks (Luprypa, 1997)
o NOT biz
 Chronic gambler but not business (Morden, 1961)
 Won millions but activities were of a personal nature b/c no system for winning;
didn’t use own expertise and skill to earn a livelihood; fact that they had an
algorithm and had hired ppl to work for them didn’t cause crt to think winnings
were more than just chance (Leblanc (2007) (TCC)
c) A windfall
- TEST:
o Considering, facts/circumstances, is it for personal pleasure or for Y?
o Is there a reasonable expectation of making $?
d) Rent
- Capital investment + services =business
- Look at type of services and level of services to determine whether it is a business
- Renting out home to parent at subsidized price. No REOP (Maloney70)
o House was really for benefit of taxpayer’s mother, rent was not realistic
o (Reasonable)Income generating scheme was poorly thought out and unrealistic. No
REPO
o Essentially making a gift each month.
Step 6: Can it be tx’d as a CG?
- Even if windfall/hobby/gambling winnings MIGHT be tx’d as a CG
o Act defines CG as disposition of property the gain from which is not otherwise taxed in
Act (39)
o Act does NOT say cost of found property but provides that property received as a gift
(69(1)(c)) and property acquired as a prize (s. 52(4)) shall have a cost equal to its fair
market value
Maloney: “The taxpayer purchased a house for $53,000 late in 1984, and rented this to her mother with a view to enabling
the mother to support herself by taking in and caring for elderly people. The scheme failed due to the mother's own poor
health, as well as to the fact that the house was not serviced by public transportation. The taxpayer generated rental income of
$100 and $1,800 from her mother during 1984 and 1985 respectively, and against such income she sought to deduct expenses
totaling $4,608 and $11,068 respectively.
70
-
o Fact that there is no section providing that the cost of found property is its FMV suggests
it should be zero and the txER would realize a CG that must be incl in Y
CP: odd b/c makes you want to hold rather than sell
Step 7: Concept of profit
a) Compare GAAP vs Tax accounting (see SC chart)
b) How are accounting principles used?
- Used, but adjusted:
o Schedule I (reconciliation statement) →
 Calculate profits for accounting purposes
 Add back deductions for accounting purposes (that don’t apply for tax purposes)
 Make tax deductions
- What you use for FINANCIAL purposes does NOT have to be used for TAX purposes (Canderel)
-
Application
o Effect of Tenant inducement payments71 for LANDLORD (full deduction)
 According to GAAPs it’s a capital expense :
 Effect → deduct TIP against lease payments over years (amortize it)
o Rationale → expense relates to future Y recv’d from lease and so a more
accurate reflection of profit (Canderel72)
 According to TAX PRINCIPLES, it’s CURRENT
 NOT normally possible, but crt used old notion of a running expense (Canderel)
o 3 CONDITIONS:
 1) NOT a tangible asset
 2) No known useful life
 3) Not (directly) attributable to identifiable future cash flows
 Effect →Deduct upfront (note: huge tax benefit) as a running expense
 Rationale → Crt likely persuaded by fact that if it was capital it’d be ECE and
therefore deducted at a low rate over a long period of time rather than under the
life of lease
o ALSO, crt justified it by saying that a lot of benefits incurred in first year
o CP: judge could’ve just allowed them to write it off over 10 years
o Effect of TIP for TENANT (full inclusion in Y) (Toronto College Park73):
 TIP = biz income NOT capital receipt b/c relates to biz (Ikea74)
 TIP = incl in Y in that year b/c had quality of income when receive (College Park)

Before the decision in Ikea came out this had been solidified in statute
Tenant inducement payment →pay tenant to sign a lease; biz choice to do it over lowering rent. Idea is that you want to
keep lease price high so that new tenants don’t ask for a lower amt.
72
Canderel, SCC, 1998 – Facts: Paid tenants TIP to sign long-term lease in new building.
73
Toronto College Park v R, (1998) (SCC). Judgment: TIP – deducted in year of payment
74
Ikea Ltd., SCC 1998 – Facts: Mall paid Ikea to enter 10 year lease. Ikea argued TIP was tax-free capital receipt OR should
be incl in Y over life of lease
71

o
S. 12(1)x) – Requires all reimbursements, inducements, grants and subsidies received to
be considered income UNLESS the amount has already reduced the cost of property or
the amount of the expense
 Reasons this is right:
 Amts received by Ikea by virtue of its business
o but for its business Ikea would not have received the amounts
o Amt was NOT recv’d in relation to a capital asset.
 Amts have the quality of income as discussed in Robertson and other cases.
o Net wealth was ↑ by the full amt in year recv’d the TIP
 ALTHOUGH for GAAP amt might be over life of lease, OK if the result is diff in tax b/c
different purposes
CP: Preferably it would be that TIP for landlord is amortized over life of lease and for tenant it’s incl
immediately:

Okay if tax treatment of payer and recipient are asymmetrical
 For tax purposes the circumstances of each individual taxpayer matters + in tax
principles it’s consistent that the payer has to deduct over lease b/c that reflects ↓
in wealth and recipient incl in year b/c reflect ∆ in net wealth
 ALSO seen when TxER sells an asset, such as a vehicle to another. The seller
will have to include the profits in income in the year of the sale while the
purchase will only be able to depreciate the cost over future years.
 To the seller the asset will represent the sale of an inventory item, to the
purchase the asset will be characterized as depreciable property.
Inclusion Rules for Biz/Prop Y
Step 1: Basics
- Similar rules for biz and property → MUST pay tax on gross Y + allowed to deduct costs
- Inclusion rules
o S.9Charging section
 Y from biz is profit from biz
o S. 10Inventory
o S. 11Reporting income on a fiscal year basis
o S. 12 a long list of amounts that have to be included in income (main section what you have to include in
your income for business and property
o S. 13Recapture of excess deprecation claimed – and related rules
o S. 14Inclusion of amounts related to eligible capital property – and related rules
o S. 15Inclusion of shareholder benefits – and related rules
o S. 16Inclusion of disguised or imputed interest
o S. 17Amount owing by non-resident
Step 2: Is it Y from property/biz?
Characterization:
- Sale of property → can CG or Y
o Need to distinguish b/c CG NOT incl in Y
 Income → payment based on production or use of property (12(1)(g))
 E.g. Farmer who uses part of land for gravel pit, if you sell land and sale price is
dpdnt on use and production of gravel
 Capital gain →
 E.g. farmer who uses part of land for gravel pit. If you sell land for fixed price, profit
= CG
- Damages → surrogatum principle
o Effect → compensation will sometimes be incl in Y, depends on what it’s designed to replace
o All reimbursements incurred must be included
o Need to look at form and economic substance of it
 Income → compensate for loss profits
 TIP (Ikea)
- Any reimbursement in respect of the acquisition of an asset of the incurring of a deductible
expense is incl in Y, UNLESS it ↓ cost of the property. S. 12(1)x) 75 (Ikea)
o Overturns non-taxation of tenant inducement payments
Step 3: Note the general timing principles of annual accounting (see SC chart)
- i.e. tx’d when it gains the quality of Y
Step 4: Provide details on accrual accounting (see SC chart)
- Note that biz = default and based on when recv’able not billable (Maritime Telegraph)
- See SC Chart for 2 general principles of annual accounting
75
12(1)(x) - Any reimbursement in respect of the acquisition of an asset of the incurring of a deductible expense is included
in income, unless it reduced the cost of the property. S. 12(1)x) – overturns non-taxation of tenant inducement payments.
Step 5: When is it receivable according to s 12?
- Services (12(1)(a)
o Recv’able when you earn it NOT when you bill person (Maritime telegraph76 interprets 12(1)(b)
77
not to incl billing even tho billing is incl in the statute)
 ALSO have to estimate value of work in PROGRESS
o EXCEPTION  if in a professional business (e.g. accountant, dentist,
lawyer, Dr, vet, chiropractor) DON’T have to incl value of work in progress
in Y (s3478)
 Rationale  too dfct to estimate
o Advance payments (e.g. pay one amt for membership that gets allocated over 4 years)
 General
 GAAP → incl amt in Y for e/ year earned
 Claim a reserve for unearned amt to indicate that it will have to be repaid or
that there are future costs associated w/ it
 Tax purposes →
o It should be paid right away for tax principles
o In Canada the accounting treatment is followed, and advance payments are
treated like loans so they’re not tx’d until services are performed and
repayment is not possible b/c related expenses have been incurred
o CP: In other juris, advance payments are included in Y for tax purposes when
RECV’D b/c simplifies admin, ensures tax is collected and substitutes for
imputation of interest
 Are cash deposits loans or prepayments?
 Tax purposes → MUST be incl b/c it’s a service to be rendered (12(1)(a)79 BUT
then allow you to claim reserves under 20(1)(m)80 so that you deduct in year 1 but
you incl in year 2 so result is same as accounting
Maritime telegraph – Facts: Telephone company had delivered all services by end of year, but didn’t bill some customers
until the following year. Argued that 12(1)(b) mentions billing.
77
12. (1) Income inclusions — There shall be included in computing the income of a taxpayer for a taxation year as income
from a business or property such of the following amounts as are applicable:
(b) Amounts receivable — any amount receivable by the taxpayer in respect of property sold or services rendered in the
course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless
[taxpayer uses cash basis method of accounting]…and for the purposes of this paragraph, an amount shall be deemed to have
become receivable in respect of services rendered in the course of a business on the day that is the earlier of
(i) the day on which the account in respect of the services was rendered, and
(ii) the day on which the account in respect of those services would have been rendered had there been no undue delay in
rendering the account in respect of the services;
78
(a) where the taxpayer so elects in the taxpayer's return of income under this Part for the year, there shall not be included
any amount in respect of work in progress at the end of the year; and
(b) where the taxpayer has made an election under this section, paragraph (a) shall apply in computing the taxpayer's income
from the business for all subsequent taxation years unless the taxpayer, with the concurrence of the Minister and on such
terms and conditions as are specified by the Minister, revokes the election to have that paragraph apply.
79
12. (1) Income inclusions — There shall be included in computing the income of a taxpayer for a taxation year as income
from a business or property such of the following amounts as are applicable:
(a) Services, etc., to be rendered — any amount received by the taxpayer in the year in the course of a business
(i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason,
may be regarded as not having been earned in the year or a previous year, or
76
o
Note: you could decide not to claim it, but if the reason is b/c you’ll claim in
future year then = tax avoidance
 BUT you could treat it as a capital allowance, but then you can’t
choose when to claim it
 CP: we should tax the whole thing
- Sale of property (12(1)(b))
o Recv'able when title of property passes to the purchaser
 Delivery and passing is simultaneous, then it’s deemed to be receivable when passed
 Otherwise based on X
 If no date, then when attributes of ownership, primary possession
 Other options: a) A purchase and sale contract is concluded b) The property is delivered c)
The purchaser is billed d) Payment is received
- Income from property
o Dividends – s. 12(1)(j) recv’able in the year in which the dividend was paid
 Note → main concern is to minimize double taxation of income earned through corporation
o Rent and royalties“payments based on production or use” – s. 12(1)(g), included
 Proceeds of the sale price and royalties distinguished → In general if all legal rights are
transferred, it constitutes a sale otherwise it’s a lease and = rents or royalties
- Interest81 (12(1)(c)
o Special timing rules
 BEFORE:
 Only said incl when rec’d or recv’able (which is usually same date) (12(1)(c)82 and
so ppl would buy packages where interest wasn’t payable for 5 years (e.g. GIC) but
it’d be compounded and so only pay tax at the end
 NOW:
 Individuals  Left 12(1)(c) in act but just enacted 12(3-4)83 which really overrides
the former and says interest is tx’d e/ year as long as you’re receiving it e/ year
(ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of
articles in or by means of which goods were delivered to a customer;
80
S. 20(1)(m) Reserve in respect of certain goods and services — subject to subsection (6), where amounts described in
paragraph 12(1)(a) have been included in computing the taxpayer's income from a business for the year or a previous year, a
reasonable amount as a reserve in respect of
(i) goods that it is reasonably anticipated will have to be delivered after the end of the year,
(ii) services that it is reasonably anticipated will have to be rendered after the end of the year,
(iii) periods for which rent or other amounts for the possession or use of land or chattels have been paid in advance, or
81
Possible conceptualizations: a) rent for the use of money, b) compensation for inflation, c) compensation for risk of loss
(i.e. someone doesn’t pay you back) d) super-normal rate of return (i.e. profit)
82
S. 12(1)(c) Interest — subject to subsections (3) and (4.1), any amount received or receivable by the taxpayer in the year
(depending on the method regularly followed by the taxpayer in computing the taxpayer's income) as, on account of, in lieu
of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer's income
for a preceding taxation year;
83
S. 12 (3) Interest income — Subject to subsection (4.1), in computing the income for a taxation year of a corporation,
partnership, unit trust or any trust of which a corporation or a partnership is a beneficiary, there shall be included any interest
on a debt obligation (other than interest in respect of an income bond, an income debenture, a small business bond, a small
business development bond, a net income stabilization account or an indexed debt obligation) that accrues to it to the end of
the year, or becomes receivable or is received by it before the end of the year, to the extent that the interest was not included
in computing its income for a preceding taxation year.
o Based on anniversary date of instrument b/c that’s easier for ind
 Corporation  have to incl value at end of e/ calendar year (12(3))
o Blended payments → Interest Income vs. Capital Gains
 Imputed interest of blended payments  dept carves out the interest payment (16(1)(a)84)
(Groulx85)
 Rationale  otherwise, you’re deferring payment on the cost of a purchase, easy to
disguise interest payments as CG b/c you can just incl the interest in selling cost
o ALSO, whenever you defer payment there’s interest inevitably included
 BUT where the installments are “genuinely” interest free, then NO s 16 (Carter, IT 265R3)
 CP: although might apply if non-arm’s length parties, doesn’t make sense for arm’s
length parties b/c might assume that interest is always part of the cost
o Bonds at a Discount
 I.e. debt oblg where interest isn’t stated as an annual amt, but the bond is just offered at a
discounted rate
 Problem  dept needed rules to make sure that you paid tax on the accumulating interest
even tho there’s no interest stated
 BEFORE Crts thought the profit that the person who lent the $ got was just a CG but
this wasn’t right b/c essentially it’s rent, or interest
 Timing Rules (12(9)86):
 PRESCRIBED INTEREST  [deemed accrual] and regulation 7000 (dictates how you
accumulate the interest going interest rate)
o Effect → Accrued interest is incl in income under s 12(3) (for debt oblg) and
12(4) (for investment K)
 Year 1  Tax the principle based on the going interest rate
 Year 2  Tax the principle + interest earnings from Year 1
 Year 3  Tax the principle + interest earnings from Year 1 and 2
o Market discount (i.e. discount on secondary market)
S. 12 (4) Interest from investment contract — Subject to subsection (4.1), where in a taxation year a taxpayer (other than a
taxpayer to whom subsection (3) applies) holds an interest in an investment contract on any anniversary day of the contract,
there shall be included in computing the taxpayer's income for the year the interest that accrued to the taxpayer to the end of
that day with respect to the investment contract, to the extent that the interest was not otherwise included in computing the
taxpayer's income for the year or any preceding taxation year.
84
16. (1) Income and capital combined — Where, under a contract or other arrangement, an amount can reasonably be
regarded as being in part interest or other amount of an income nature and in part an amount of a capital nature, the following
rules apply:
(a) the part of the amount that can reasonably be regarded as interest shall, irrespective of when the contract or arrangement
was made or the form or legal effect thereof, be deemed to be interest on a debt obligation held by the person to whom the
amount is paid or payable; and
(b) the part of the amount that can reasonably be regarded as an amount of an income nature, other than interest, shall,
irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in the income of
the taxpayer to whom the amount is paid or payable for the taxation year in which the amount was received or became due to
the extent it has not otherwise been included in the taxpayer's income.
85
MNR v Groulx 1967 – Facts: TxER sold a farm to a purchaser, w/ part payable immediately and the rest over instalments.
No interest was payable on the o/s balance. Judgment: SCC held that amt paid in instalments could be regarded as partly a
payment of interest and purchaser had agreed to an above market price to forego interest. So carved out interest.
86
12(9) Deemed accrual — For the purposes of subsections (3), (4) and (11) and 20(14) and (21), where a taxpayer acquires
an interest in a prescribed debt obligation, an amount determined in prescribed manner shall be deemed to accrue to the
taxpayer as interest on the obligation in each taxation year during which the taxpayer holds the interest in the obligation.
 Def  Not an original issue discount, but discounted on the market b/c of Δing interest
rates
 Ind who bought original issue bond is getting a gain b/c of ↑ interest rate
o Note → it’s called a market disc b/c seller has to discount bond such that it
has a value equivalent to one with the going interest rate even tho it was
purchased at a lower rate
 Timing rules
 NOT tx’d  treated as CG
 Rationale  Same w/ original issue, still interest Y so should be tx’d e/ year but it
gets to complicated
Step 6: When is it recv’able under CL?
- Holdbacks (i.e. for completion or certification of project)
o Create a problem when initial and final payment straddle a year
o Crt has ruled → not recv’able until paid b/c NO legal right to it (Colford87)
o Incl in Y when get final amt, even if majority of payment made in Year 1
o CP: $ earned in Year 1, and small future liability, so should just offer a deduction if don’t end up
getting it
- Award for expropriated property
o Recv’able when DETERMINED by ARBITRATION
o Rationale  the contingency of the appeals aren’t sufficient to affect your treatment of it as your
Y (application of claim of right doctrine)
o Other possibilities for when recv’able → (a) the right to compensation is determined (b) when all
appeals from the award are exhausted.
87
Colford – Facts: In construction work, have a holdback until the project has been certified.
Deductions from Biz/Prop Profit
Rationale → ppl have diff expenses in earning same Y so for equity reasons need to allow deductions
7 principles of deductability, although not all of them are clearly stated, but are only implied
o CP: modern Y tax act would have a part that said this is what’s incld, this is what’s deductded and
these are the timing principles
- Effect →
o Diff Y losses can be offset against e/o (3(d))
o BUT the Act quarantines some losses for fear they might contain some personal benefits
 E.g. biz losses resulting from home offices expenses
 S 18(12)(b) provides that home office expenses can’t be > the income from the biz
for which they were incurred.
ALL PRINCIPLIES MUST BE MET TO DEDUCT!
-
1. Must be incurred to earn income
2. Cannot be a personal expense
3. Only current business expenses are deductible in the year
4. Capital expenditures must be amortized
5. Cannot be unreasonable
6. Cannot be against public policy
7. Expenses incurred solely to Avoid Taxes Should Not Be Deductible
Principle 1: The expense must be incurred to earn taxable Y
- Must have spent the $ or be in the processing of spending the $ in the course of earning biz/prop Y
o Rational  if didn’t allow a deduction for expenses incurred to earn Y, it’d lead to double tax b/c
typically resulting income is taxed
- Implied in s 9 b/c it says you pay tax on profit from biz or property (implicit in that is you deduct your
expenses in earning that Y)
- Characterization of things as incurred to earn taxable Y
o Damages and similar payments
 Deductable  carried on in biz context, activity was for the purpose of earning Y, and it
was a normal risk (Imperial Oil88)
 CP: makes sense under Haigs-Simon b/c clearly no personal benefit to paying
damages and net wealth has 
 Note  Old cases says that damage award for negligence didn’t result in earning
of any Y and so shouldn’t be biz expense
o Theft
 Deductable  expense you incur for purpose of earning Y and no personal benefit
(General Stampings of Canada, 1957)
 CP: makes sense
 Note  Dept may not allow deductions where it is a major shareholder who stole
because it would encourage managers to steal to get the deduction
Principle 2: Personal Expenses Should Not Be Deductible
- Definition → Expenses that:
o (a) provide personal satisfaction; or
88
Imperial Oil, 1947 – Facts: Collision of ships at sea and one owner had to pay damages.
o
(b) originate in a personal decision (e.g. commuting expenses b/c you choose were to live)
 Rationale → although person might incur expense to earn Y, it’s admin impossible to
decipher why a decision was made for e/ ind + the choice isn’t for biz reasons
- Rationale  Follows from the basic point made by Simons - income should include the value of the
taxpayer’s personal consumption
o CP: Gets a bit tricky w/ things like fancy meals b/c you could also argue that I wouldn’t have gne
to fancy resto but for the client, but that’s too complicated
- Provisions
o TxER’s Y from biz/prop = profit from biz/property (9(1))
 Effect is that Y is based on net amt, not a gross amt (i.e. before tax deductions) + allows
you to deduct
o THEN, general limitations under 18(1)89
 Can only deduct to extent that it’s incurred to earn B/P Y
 Personal/living expenses (besides travel expenses) cannot be deducted (h)
 Def of persona/living expenses → (248)90
- Special case: Application to a Corp
o Legal personalities (e.g. corp) CAN’T deduct personal expenses
 Rationale  can’t incur personal expenses b/c don’t make personal decisions or enjoy
personal consumption
o BUT if they provide personal benefit to someone, that person should icnl the value of that
personal benefit in their Y under either
 1) EE fringe benefit rules (6(1)(a)); or
 2) shareholder benefit rule which applies EE fringe benefit rule to shareholders 15(1)
o EXCEPTION → some expenses that are almost always result in personal benefit are
NONdeductible as a proxy for taxing the ind (e.g. yachts, 18(1)(L))
a) Personal decision expenses
- Costs of commuting
o Rationale → although you drive to get to work, you choose where to live
o CP: diff in other juris; u/c why, potentially b/c of lobby groups, cultural factors, etc
- Moving expenses
o Rationale → personal decision
o EXCEPTION:
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S. 18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or
producing income from the business or property;…
(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in
the course of carrying on the taxpayer's business;”
90
Personal or living expenses includes:
(a) the expenses of properties maintained by any person for the use or benefit of txER or any person connected /w the TxER
by blood relationship, marriage, or CL partnership or adoption, and not maintained in connection with a biz or carried on for
profit or w a reasonable expectation of profit
(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like K if the proceeds of the
policy or K are payable to or for the benefit of the txER or a person connected w/ the txER by blood relationship, marriage or
CL partnership or adoption, and
© expenses of properties maintained by a estate or trust for the benefit of the txER as one of the beneficiaries.
-
-
 Deductible if for new biz or e’ment and meet distance requirements (62(1)91) (tax
expenditure)
 Rationale → provide subsidy for ppl moving to take up work; providing a subsidy to
mitigate structural unemployment
 CP: it’s based on your tax bracket so had an upside down effect (more Y you earn,
more valuable the implicit subsidy)
 Biz moving expenses allowed in some countries (e.g. thru 10% standard deduction (France)
or if made exclusively for biz purposes (Germany))
Child care expenses (Symes92)
o Rationale →
 Assume no one has child for biz reasons (impossible to decipher in e/ situation)
 63 sets a cap on the amt that can be deducted and provides a complete code governing the
deduction so clearly parl didn’t intend it to be a biz expense b/c then it’d be unlimited
 CP: Dissent →
 the traditional intp of biz expenses reflects biz men (e.g. meals/entertainment)
 Child care is vital to a women’s ability to earn Y and should be deductible
 S 63 doesn’t preclude deduction as biz expense, just provides relief to all TxERs
 See policy for more discussion on different perspectives on the case
o BUT, for policy reasons to allow both parents to work, govt provides tax expenditure
 → ER-provided child care not tx’d + limited tax deduction (63(1) 93)
 Amt depends on whether child is < 7 or > 7
 CP: bad way to encourage parents to work b/c subsidy has an upside effect
Housekeeping expenses
“There may be deducted in computing a taxpayer's income for a taxation year amounts paid by the taxpayer as or on
account of moving expenses incurred in respect of an eligible relocation, to the extent that
(a) they were not paid on the taxpayer's behalf…
(b) they were not deductible because of this section..for the preceding taxation year;
(c) the total of those amounts does not exceed
(i) in any case described in subparagraph (a)(i) of the definition “eligible relocation” in subsection 248(1), the total of all
amounts, each of which is an amount included in computing the taxpayer's income for the taxation year from the taxpayer's
employment at a new work location or from carrying on the business at the new work location, or because of
subparagraph 56(1)(r)(v) in respect of the taxpayer's employment at the new work location, and
(ii) in any case described in subparagraph (a)(ii) of the definition “eligible relocation” in subsection 248(1), the total of
amounts included in computing the taxpayer's income for the year because of paragraphs 56(1)(n) and (o); and
(d) all reimbursements and allowances received by the taxpayer in respect of those expenses are included in computing the
taxpayer's income.
92
Symes, SCC, 1993 – Facts: Lawyer had nanny to care for children while she worked. Her expenses exceed the allowable
child care deduction at the time. Deducted wages as biz expense and argued to disallow it was a charter violation. Issues: (1)
Are child care expenses a personal or business expense? (2) Is a tax measure that disallows the deduction of child care
expenses contrary to the Charter in that it unfairly discriminates against women? Decision: Won at TCA, lost at FCA and
SCC Judgment: 1) s63 puts a cap and sets up regime for deductions so wasn’t parl’s intent to make it a biz expense 2) On the
Charter issue, although women do bear a disproportionate share of responsibility for child care, the taxpayer did not prove
they bore an unfair amount of the child care expenses
93
“Subject to subsection (2), where a prescribed form containing prescribed information is filed with a taxpayer's return of
income (other than a return filed under subsection 70(2) or 104(23), paragraph 128(2)(e) or subsection 150(4)) under this Part
for a taxation year, there may be deducted in computing the taxpayer's income for the year such amount as the taxpayer
claims not exceeding the total of all amounts each of which is an amount paid, as or on account of child care expenses
incurred for services rendered in the year in respect of an eligible child of the taxpayer…”
91
Rationale → expense incurred by all TxERs + personal choice to hire housekeeper (Benton)
CP: some odd results, such as in Benton (1952) where farmer would get deduction if he hired
farm help, but not housekeeper
b) Dual Purpose Expenses: Business Expenses That Provide a Personal Benefit
o
o
-
Definition: Expenses that are incurred in a business context for a business purpose, but that also provide a larger
personal benefits –separate out personal element
-
Examples
o Yachts and Private Camps and Clubs (18(1)(l))94 → NO deduction
 Note → correct approach would be to allow deduction (b/c corp can’t have personal
benefits) and then incl benefit in EEs Y
 BUT b/c it can be hard to calculate personal benefit, CRA doesn’t allow
deduction as a proxy for taxing the EE
 Provision overturns Royal Trust, 1957 where the crt said that they should be deductible
 CP: As with meals, Act should incl a section that allows deduction if EEs incl in Y
o Meals/entertainment →partial deduction
 BEFORE (Royal Trust, 1957)
 Any expense that has biz purpose is deductible, don’t need to point to specific Y
that was incurred, enuf to show incurred in biz context for biz purpose
 Means that yachts/memberships are deductible
 NOW: If some biz purpose, then deduct 50% of actual cost, or 50% of what’s reasonable
in the circumstances (67.1(1)) 95
 Rationale 
 equity reasons (benefits are mainly to biz ppl and execs, so
disproportionately to high Y earners)
 Full deductibility is open to abuse
 CP: probably HUGE fraud in this area, better to follow UK and
have no deduction
 Violates neutrality by stimulating consumption of meal/entertainment
 BUT if you’re a rickshaw person/courier you can deduct $17.50/day b/c extra
food you need to eat is equivalent to fuel (Scott, 1998)
 CP: ridiculous, same reasoning applies to a construction worker
o Cost of education → depends
 BEFORE:
S. 18(1)(l) No deduction for…”Use of recreational facilities and club dues an outlay or expense made or incurred by the
taxpayer after 1971,
(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made
or incurred the outlay or expense in the ordinary course of the taxpayer's business of providing the property for hire or
reward, or
(ii) as membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide
dining, recreational or sporting facilities for its members.”
95
Subject to subsection (1.1), for the purposes of this Act, other than sections 62, 63, 118.01 and 118.2, an amount paid or
payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per
cent of the lesser of
(a) the amount actually paid or payable in respect thereof, and
(b) an amount in respect thereof that would be reasonable in the circumstances.
94
o
o

 Even if biz course, incl in Y b/c assume personal benefit = cost of degree
 NOW
 ASSUME that’s it’s biz/e’ment related b/c NO personal benefit, BUT different
results depending on whether EE or self-employed →
 Employee:
 NO deduction b/c it’s an e’ment expense and s 8(2) says no deduction
unless expressly permitted (educ isn’t expressly permitted)
 BUT you could get firm to reimburse you for it, then wouldn’t
be in your Y b/c it’s e’ment related expense (not fringe benefit
b/c not enuf personal benefit)
 Justification → admin reasons; impractical to audit ind EEs to
verify expenses but if EE is reimbursed the receipts will be w/
ER and can be audited when the ER is audited.
 Self-employed:
 If personal course, incl in Y
 If biz course, do NOT incl in Y
 Rationale – personal benefit isn’t as great
 CP: peculiar result b/c means that if you do LLM immediately after LLB,
no deduction, but if you start practicing (and are self-employed) then
start an LLM, it would be deductible
Clothing → depends
 Test (same as for fringe benefits):
 Required to wear
 Not suitable for general use
 Not warn as part of general use (i.e. not suitable, but still wear)
 If yes, then personal and non-deductible
 CP: possible to take advantage (e.g. plumber puts name tag on outfit)
 Other countries are tougher (e.g. In Austria, uniforms must be registered)
Trips (part business, part personal) →
 Test → carve out personal aspect and apportion it
 Allowed to deduct 50% of cost of meals
 CP: hard to enforce
 Can only deduct 2 conventions a year + convention must be w/I reasonable geographical
area (20(1) )
Home office expenses → partial deduction
 BEFORE →ppl were characterizing a room in their house as biz, then could deduct a
portion of house expenses (incl property tax, mortgage, utility, etc)
 SO judicial test created that it had to be necessary, exclusive and reasonable,
BUT, dfct to apply (Logan, Mallouh, Cummings96)
 NOW (18(12)97)→
Cummings v MNR, 1967 – Facts: Dr rendered all his professional services at hospital but had no office there, so est’d office
at home exclusively for bookkeeping, paperwork or read medical journals. Judgment: Crt held that home office was base
from which practice was operated and so journeys to and from the hospital were not commutes but journes made in the
cource of the practice.
96

o
Must be either
 1) ind’s principal place of biz; OR
 2) used exclusively for biz
 Which requires that it be used on a regular and continuous basis
for meeting clients, customers or patients (i) OR usd exclusively
for purpose of earning biz Y (ii)
 Rationale →otherwise likely you’re deriving personal benefit
 Result → prevented a lot of ppl who had principal place at the firm
 APPLICATION
 IF a room is used exclusively for biz then allowed a deduction based on floor
area of room compared to size of house (incl utility, etc)
 BUT never deduct the fixed price of a phone because if you’re using it at all for
personal use the it means you’re deriving some benefit and the biz use doesn’t
detract from that
 Only exception might be if you had to make long distance calls for biz
Hobby → no deduction
 Applies the REOP test (see above)
 If you can show it’s a biz, you can deduct expenses
 BUT, if not chief source of income losses are restricted
 E.g. where neither farming, nor a combination of farming and some other
source of Y is the chief source of Y then the max deduction is $8,750
(31)
 BEFORE: crts ignored second part and said farming has to be
chief source and so applied to lawyers w/ horse farms
 NOW (Craig): Crt said that as long as farming is one source,
limitation doesn’t apply
 Result → horse farms can have losses deducted
Principle 3: Only Current Business Expenses Should Be Fully Deductible in the Year Incurred
Rule –
- Deduct if incurred to earn Y (18(1)(a))
- Except as expressly permitted by this part (18(1)(b) 98)
97
S. 18(12) Work space in home
Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,
(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as
the “work space”) of a self-contained domestic establishment in which the individual resides, except to the extent that the
work space is either
(i) the individual's principal place of business, or
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting
clients, customers or patients of the individual in respect of the business;
(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in
computing the individual's income for the year from the business shall not exceed the individual's income for the year from
the business, computed without reference to the amount and sections 34.1 and 34.2; and
98
s. 18(1) In computing the income of a taxpayer from a biz or property no deduction shall be made in respect of . . .
(b) Capital outlay or loss “an outlay, loss or replacement of capital, a payment on account of capital or an allowance in
respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;”
Why not capital expenditure?
- Taxpayers should only be able to deduct ↓ in net wealth
- If expense has value at the end of the year the taxpayer has not incurred the expense but simply ∆ed the
form of assets and the expense represents savings (e.g. ∆ed from asset in $ to asset in car)
What is a capital expenditure?
- See chart below in CCA section
How do we know it’s a capital expenditure?
- See CCA below
Principle 4: Capital Expenses Should Be Amortized Over Their Useful Life
 Rationale → represents ↓ in net wealth
 Provisions that reference scheme:
 If tangible, depreciable property s. 20(1)(a), s. 13
 Residual category, eligible capital property s. 20(1)(b), s. 14
 See below for exact scheme
Principle 5: Unreasonable Expenses Should Not Be Deductible
- Rationale → Not related to tax principle, but assists in enforcement of legi and can be used to implement
public policy
- Provision → Expenses must be reasonable in the circumstances (6799)
- Application:
o Disallow wasteful expenses – advertising
o Deny business expenses that contain a large personal element – luxury vehicles
o Prevent income splitting b/c can say that wages paid to family member is unreasonable (Mulder
Bros, 1967100)
o Management fees paid to trust or service corporation – usually allow 15% of cost of services
(Costigane, 2003; Aessie, 2004)
 This is b/c before lawyers would get incorporated, charge all expenses to the firm and add
a very admin charge for it which could then be deducted
 ALSO w/e was left in corp would be taxed at low rate and you could split your Y
o Prevent deductibility of gifts – spend one-half of company profits on local baseball team –
unreasonable (No. 511, 1958)
- Note →Could use general principles (e.g. can’t deduct a gift), but proof is often easier under 67
o CP: We shouldn’t be using tax system to make ppl operate biz effectively
Principle 6: Some Expenses not deductible on grounds of Public Policy
- Rational → Tax system rules should complement values underlying legal system
o BUT crts want parl to determine public policy (65302
- Examples:
o Illegal payments (67.5101)
General limitation re expenses. “In computing income, no deduction shall be made in respect of an outlay or expense in
respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was
reasonable in the circumstances.”
100
Mulder Bros, 1967 – Fcts: 2 brothers + wife worked for corp. Wife was paid excessive amt as y-splitting measure.
99
Note → Some confusion around which aspects are not deductible:
 In Eldrige, 1964, the Crt held that biz expenses such as rent, legal expenses,
assistance, bail bond and casual wages could be deduct against a call girl biz
 BUT in Neeb, 1997, the Crt said that the cost of 15,000 lb of weed seized by
authorities weren’t deductible
 They are included in income because Crt says:
 “[The State] are not partners; they are not principals in the illegality, or sharers in
the illegality; they are merely taxing a man in respect of those resources.” (Mann
v Nash, 1932; quoted in Eldridge at para 25)
 No reason illegal Y shouldn’t be taxed, but legal Y is
Fines and penalties
 BEFORE → NOT deductible b/c could’ve been avoided and so not incurred to earn Y +
public policy grounds
 THEN →
 deductible where resulted from day 2 day operations of biz + not an outrageous
transgression of public policy (Day and Ross, 1976102)
 Deductible where imposed by egg market bd for overproduction of eggs (65302
BC Limited, 2000)
 Crt held that the goal of the tax system is to tax taxpayers on the basis of
their net income.
 This goal should only be overridden for the most compelling reasons.
 NOW → b/c of huge revenue consequences of being deductible, parl put in 67.6103 which
specifies the non-deductibility of fines and penalties
 MUST be a governmental fine/penalty

o
Principle 7: Expenses incurred solely to Avoid Taxes Should Not Be Deductible
- Rationale →
o Preserve the integrity of the tax system – otherwise perception of unfairness
o Equity – unfair to TxERs who can’t take adv to loopholes
o
o
Creates inefficiencies in the economy as taxpayer re-arrange their affairs to take advantage of loopholes
Leads to socially wasteful activity on part of taxpayers and their advisors
- Provision: s. 245 (general anti-avoidance rule)
o To apply 245, the action must:
 Results in a mis-measurement of the taxpayer’s economic income - results in a tax benefit
 Be incurred primarily for purpose of obtaining a tax benefit – has no business purpose; and
“In computing income, no deduction shall be made in respect of an outlay made or expense incurred for the purpose of
doing anything that is an offence under section 3 of the Corruption of Foreign Public Officials Act or under any of sections
119 to 121, 123 to 125, 393 and 426 of the Criminal Code, or an offence under section 465 of the Criminal Code as it relates
to an offence described in any of those sections.”
102
Day and Ross, 1976 – Decision: fines imposed for driving overweight trucks were deductible since “resulted from the day
to day operations of the business”; and permits could have been obtained to operate the trucks and thus it was not an
“outrageous transgression of public policy.
103
“In computing income, no deduction shall be made in respect of any amount that is a fine or penalty (other than a
prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state,
province or territory) by any person or public body that has authority to impose the fine or penalty.”
101
 Be that the transactions was not contemplated by the legislation - results in an abuse of the
tax legislation.
- Specific cases of tax avoidance →interest expenses
o Possible tax savings based on:
 TIMING:
 Interest expense: deductible in computing income
 Dividends: taxable when received
 Capital Gains; taxable only when realized through a disposition of shares
  annual deduction of interest resulted from loss, used to offset income from other sources
 PREFERENTIAL TREATMENT OF CAPITAL GAINS
 While interest expense is deducted in full, CG taxable in half
o Ppl try to characterize interest as incurred for B/P b/c then deductible under (20(1)(c) 104 and can
be used to offset other losses
 Includes: SHARES → assume that shares give a dividend so allowed to deduct even if
minimal compared to expected CG (Ludco)
 Allowed deduction b/c admin impossible for dept to look at every case and
determine whether the principle purpose was to earn Y from prop
o CP: Sensible rule is if you borrow $, the interest Y can only be deducted
against the investment Y, and if it exceeds investment Y, then carry it
forward and deduct in future years
 Corp lobby prevented this from happening
 Does NOT include: CG’s b/c NOT property (9(3))
 CP: don’t need a separate section b/c also just under s 9
o ALSO, ppl try to manipulate them to look like B/P
o Sample case →
 Shell Canada (1999)105 interest earned by the offshore comp. was not subject to Cdn income tax or
foreign income taxes. Taxpayers’ Cdn tax exposure was limited to dividends received and capital
gains realized on ultimate disposition of the shares.
o TEST for determining whether it was incurred for B/P → trace use of borrowed $
 See where $ is spent and whether it’s a B/P purpose
 Need a “reasonable” expectation of earning GROSS income
 Rules:
 (i) money is fungible
o Therefore can’t determine w/ certainty what $ was used for
 (ii) current use
o If you take it out for one purpose, and then it ∆s, deductibility will ∆
S. 20(1)(c) Interest “an amount paid in the year or payable in respect of the year (depending on the method regularly
followed by the taxpayer in computing the taxpayer's income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to
acquire property the income from which would be exempt or to acquire a life insurance policy),
(ii) an amount payable for property acquired for the purpose of gaining or producing income from the property or for the
purpose of gaining or producing income from a business (other than property the income from which would be exempt or
property that is an interest in a life insurance policy),…
or a reasonable amount in respect thereof, whichever is the lesser;”
105
Shell Canada: FACTS: Want to invest 100m in Canada. Instead told to invest 150m in NZ, convert it into Canadian (it’ll
give you your 150 CN). But, in 5 years, forward exchange rate in Canada will be 1.7, so in 5 years, you’ll be able to pay that
150 back with only 80 Canadian. Buy it forward contract, want to buy 150M NZ 5 years for now, that will cost you 80 M
today. Shell had no risk, knew in the end make 20 (100-80). HELD: Deductible. (Before GAAP)
104
 So doesn’t matter what org purpose was
o History
 Crts had it wrong for years, so amended act under 20.1
 SCC got it right in Tenant case
 (iii) direct use
o Direct use is determinable (Singleton)
 Don’t look at economic impact, just physically tract the use of the $
o Ex. If use $ from a trust to pay a family member instead of using investment
$ then it’s not direct use (Brothman family)
 Correct approach is to sell investments and re-borrow $ to buy them
back, then the interest is deductible
 Note → fam didn’t want to sell the investment b/c there were
accrued CGs and so they’d have to pay CG tax
 Application →
 In Singleton the Crt held that amt borrowed to fund a law firm was deductible even
tho previous assets had been removed from the law firm to pay for a house
o Logical approach. Crt uses tracing in other circumstances to ensure that
people can deduct business expenses. If you use it then, you have to always
use it and not be selective in application by looking at intentions.
 Strategy → never borrow for personal purpose, instead sell investments and buy a house,
then borrow from the house to re-purchase the investments
- Other costs of financing [don’t need to know this]
o Debt distinguished from equity
 Equity is share in company
 Debt is debt oblg
o Borrowing cost
 Interest is always a current expense in theory b/c no value at end of year BUT some
borrowing costs are capital expenses
 E.g. legal fees from debt oblgs (e.g. hiring an investment banker) (20(1)(e))
 Depreciation rate = 20% a year on a straight line basis
o Market discounts of issuance of debt
 Arise where someone sells debt oblg at a slightly lower rate than originaly planned b/c of
∆ing interest rate
 Application (20(1)(f))
 If SHALLOW discount = CURRENT expense
 If DEEP discount (i.e. < 97% of face value of debt oblg) = DEDUCT at ½ the
DISCOUNT
 CP: Peculiar b/c now we have original discount rule
o Foreign exchange losses
 Biz expense
 E.g. borrow US $ and when convert back to Cdn it’s ↓ in value resulting in a loss
 Current vs capital → depends on use
 Capital if borrowed to make capital investment
 Current if borrowed to run biz on day-to-day basis
- Mismatch and tax arbitrage
o Taxpayers may take advantage of mismatch between full deductible expenses & preferably taxed capital
gain (Ludco—shares)
 EX: Invest 100, get 150 at end of 5 years and deduct interest every year—if its taxed—it's a capital
gain. Can arbitrage opportunity by borrowing money & deduction from salary & other income from
realizing your investment (which is a CG)
Timing of Expense Deductions
Step 1: Basics
- Standard time period = usually calendar year but biz can sometimes use dif 12 mo period
o Annual = arbitrary
 To RELIEVE arbitrariness + negative impact on those w/ diff Y b/w years:
 Loss carry-over rule → if realize loss in a year, can carry it back 3 years + forward
20
 BEFORE, also had:
o Averaging rules
 Takes  in Y and allocates over period of years
 Abolished b/c broader tax brackets and lower rates of tax were
o Anti-bunching rules
- Based on TAX PRINCIPLES (not GAAP) → see SC chart on comparing the two
- Use ACCRUAL accounting principles for timing (see SC chart comparing the two)
o Particularly that accrual = comprehensive def, that itit’s based on when incurred/receivable +
when the expense is deductible (i.e. when no more contingencies)
Step 2: Different timing principles for Capital vs Current
- CAPITAL → amortized under s. 20(1)(a)(tangible property) or (b) (intangible property)
- CURRENT → deductible when incurred
TIMING FOR CURRENT EXPENSES
Step 1: Are the expenses incurred?
- TEST – expenses are incurred when 1) fixed + 2) reasonably certain
o Determining whether it’s reasonably certain requires asking whether there’s a contingent liability
 Reasonably certain (i.e. no contingent liability) =
 Non-recourse debt (i.e. payment based on expected royalties + production + value
of product) (McLarty106)
 Deferred liability
o Worker’s compensation liability where all payments made upfront and put
in a fund to be dispensed over person’s life (Canadian Pacific)
 CP: contingency of how long someone will life is sgfct
 NOT reasonably certain (i.e. contingent liability) =
 Holdback that straddles two years and isn’t yet payable
o E.g. in Guay Ltee where holdback recv’d once engineer certifies
 Accruals to special fund pursuant to a collective agreement to be used for specified
programs and excess carried into next CA (General Motors of Canada)
McLarty, 2009 – Facts: TxER acquired data from oil/gas corp. Paid $15,000 cash and 85,000 promissory note w/ interest.
Repayment terms were that it would come from royalties + production + value of data. TxER treated purchase cost as full
amt. Dept said promissory note was contingent liability. Judgment: Limited-recourse debt NOT a contingent liability.
106
o
Rationale → amt depend on the occurance of an event (use of funds for
specific programs) that might not occur
- Specific EXCLUSIONS:
o TxER who contests liability (e.g. damage awards not deductible in year of incident, instead year
that award is finally determined)
o Not reasonably determinable
 Estimated liabilities (e.g. cost of reforestation after logging) (Northwood Pulp and Timber)
Step 2: Is it a running expense?
- If YES, deductible in year incurred (b/c treated as current expense)
o History → concept dev’d in 60s to help in situations where otherwise it wouldn’t be deductible
- What is a running expense?
o 3 CONDITIONS:
 1) NOT a tangible asset
 2) No known useful life
 3) Not (directly) attributable to identifiable future cash flows
o Does NOT relate to a particular item of revenue, DOES relate to running of biz as a whole
 E.g. expense incurred to pay a municipality to improve roads into mall (Oxford Shopping
Centres)
 Rationale → although it has value at end of year, it’d be unfair to only allow
deprecation on ECE rate
 E.g.2 tenant inducement payment (see Canderel, above)
Step 3: Is it a prepaid expense?
- If YES, deduct on straight line basis (class 13) (18(9)107)
o Rationale → it should be spread out on specific basis, but no way to do that under the act
- Incl leases, cost of advertising over 3-year period (Tower investments)
- Advance payment (12(1)(a) brings it into your income, s.20(1)(c)
Step 4: Is it a reserve?
- If YES, NOT deductible b/c s 18(1)108 says not unless expressly permited
107
S. 18(9) Limitation respecting prepaid expenses
Notwithstanding any other provision of this Act,
(a) in computing a taxpayer's income for a taxation year from a business or property…no deduction shall be made in respect
of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred
(i) as consideration for services to be rendered after the end of the year,
(ii) as, on account of, in lieu of payment of or in satisfaction of, interest, taxes…rent or royalties in respect of a period that is
after the end of the year,
(iii) as consideration for insurance in respect of a period after the end of the year, other than…
(b) such portion of each outlay or expense (other than an outlay or expense of a corporation, partnership or trust as, on
account of, in lieu of payment of or in satisfaction of, interest) made or incurred as would, but for paragraph (a), be
deductible in computing a taxpayer's income for a taxation year shall be deductible in computing the taxpayer's income for
the subsequent year to which it can reasonably be considered to relate;
108
S. 18. (1) General limitations — In computing the income of a taxpayer from a business or property no deduction shall be
made in respect of
(e) Reserves, etc. — an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as
expressly permitted by this Part..
o Rationale → 1) net wealth ↑by the full amt 2) can’t trust accountants to calculate accurate
contingency
- EXCEPTIONS:
o Reserves for doubtful debts (20(1)(l)109)
 Definition → Amt held back based on how much unlikely to recover from loaning $
 Application → Reserve is incl in Y in following tax year under 12(1)(d) + reserve may be
claimed in that following year if debt remains doubtful. If debt becomes a bad debt, final
deduction allowed under s 20(1)(p), subject to any subsequent recovery and inclusion of the
debt under 12(1(i)
o Reserves for deferred payments (20(1)(n))110
 Definition → done everything, but agree to accept your proceeds over specific # of years
 THREE CONDITIONS MUST BE MET
 a) the amount from the sale of the property must be included in income;
 b) the property must be an inventory property;
 c) except where the property is real property, all or part of the purchase price
must not be due until at least 2 years after the time of the sale. Amount of
reserve is the amount that “can reasonable be regarded as a portion of the
profit from the sale”. This required computation of the profit from the sale,
and then reasonable apportionment of such profit
 Application → [gain MULTIPLIED amt of proceeds not yet received] DIVIDED by total
proceeds
 Continue doing this until all recv’d
 CP: essentially you’ve loaned someone back the $, so why should you be able to spread out
the cost?
o Reserves for unearned amounts (20(1)(m))111
 Definition → receive all the $ but later will have to pay for future services under 12(1)(a)
 Application →amts recv’d for future services have to be incl in Y in year you receive it
(12(1)(a)
 BUT under (20)(1)(m) you can claim a reserve that’s reasonably anticipated will
have to be rendered after that year
 Effect → reserve offsets inclusion under 12(1)(a) and no profit is tx’d until year in
which Y is earned
o Year 1 – incl full amt in Y, then deduct reserve for services not yet rendered
S. 20(1)(l) Doubtful or impaired debts “a reserve determined as the total of (i) a reasonable amount in respect of doubtful
debts…that have been included in computing the taxpayer's income for the year or a preceding taxation year, and…”
110
S. 20(1)(n) Reserve for unpaid amounts “where an amount included in computing the taxpayer's income from the business
for the year or for a preceding taxation year in respect of property sold in the course of the business is payable to the taxpayer
after the end of the year and, except where the property is real property, all or part of the amount was, at the time of the sale,
not due until at least 2 years after that time, a reasonable amount as a reserve in respect of such part of the amount as can
reasonably be regarded as a portion of the profit from the sale; “
111
S. 20(1)(m) Reserve in respect of certain goods and services “subject to subsection (6), where amounts described in
paragraph 12(1)(a) have been included in computing the taxpayer's income from a business for the year or a previous year, a
reasonable amount as a reserve in respect of
(i) goods that it is reasonably anticipated will have to be delivered after the end of the year,
(ii) services that it is reasonably anticipated will have to be rendered after the end of the year,
(iii) periods for which rent or other amounts for the possession or use of land or chattels have been paid in advance, or”
109
Year 2 – incl reserve from previous year in Y, then deduct services not yet
rendered, etc
 BUT, NOT avail for oblg w/ respect to a warranty, indemnity or guarantee (20(7)(a))
o
Step 5: Is it inventory?
- Definition → goods being sold by biz person, whether raw materials, finished goods or goods grown or
manufactured
- Problem → need to determine cost of goods sold during the taxation year but don’t when you bought
what and what e/ item cost
- Application → must assess inventory at beginning and end over every tax year
o Cost of goods sold = (opening inventory + cost of purchases) – (closing inventory)
o Valuation of inventory based on FMV or actual cost, whoever is lower (10(1)112)
o Tracing inventory:
 If unique products, then can be identified and cost determined
 If identical items then presumptive tracing rule needed
 First in first out (FIFO) method → goods first acquired are sold first
o Rationale → results in most accurate results + when used w/ cost method it’s
the simplest
 Reject other two possibilities:
 LIFO – goods last acquired were goods sold first, so value of closing inventory –
goods first purchased
o Effect → more favorable to TxER during inflation b/c cost of closing
inventory will be higher, thus costs of goods higher, profits lower and taxes
lower
 BUT usually it understates profits
o NOT used in most juris, but IS used in US
 Average cost – take total inventory and divide by # of products remaining
112
10(1) Valuation of inventory - For the purpose of computing a taxpayer's income for a taxation year from a business that is
not an adventure or concern in the nature of trade, property described in an inventory shall be valued at the end of the year at
the cost at which the taxpayer acquired the property or its fair market value at the end of the year, whichever is lower, or in a
prescribed manner.
(1.01) Adventures in the nature of trade - For the purpose of computing a taxpayer's income from a business that is an
adventure or concern in the nature of trade, property described in an inventory shall be valued at the cost at which the
taxpayer acquired the property.
Capital Expenditures
Step 1: Rational for amortization
- Comprehensive definition of Y
o Requires re-evaluation of all assets and oblgs to take into account accumulated gains and losses at
end of every tax period + ALLOWS deduction of estimates of loss
o Justification:
 Property has a determinable useful life so reasonable estimates are possible
 This is unlike appreciating value, b/c that depends on market
 Required to avoid mismatching of Y w/ unrealized loss
 i.e. declining assets are a major expense
Step 2: Elements of a system for depreciation (see below for details on application, incl provisions)
Details
Property that
can be
depreciated
Amt that can be
depreciated
Year of
depreciation
Various methods
of depreciation
- Tangible property
o Non-depreciable → assets that don’t lose value over time (e.g. land, shares,
art work)
 EXCEPTION: Cdn artists (tax expenditure)
o Depreciable → useful life is definite and predictable (e.g. buildings,
equipment)
- Intangible property
o Non-depreciable → non-wasting and w/o specific time limits on use (e.g.
goodwill)
o Depreciable → wasting or time-limited rights (e.g. leases, copyrights)
- Depletable property → minerals
- Whatever you paid for asset
- LIMITATIONS:
o The depreciation allowance should be limited in total to the taxpayer’s
historical cost of the property
o Plus costs of self-creation
o Plus costs of all improvements (e.g. improved new roof)
- Year available for use, i.e. delivered and ready to use
- Alternatives
o Year title passes → old rule, but problem b/c everyone would buy equipment
in December, but take delivery earlier in year, allowing them to write it off
for the entire year
o Year put in use → used in other countries, but hard to prove (e.g. what does
use mean?)
- Sinking Fund or Discounted Cash-Flow Analysis
o Method
• Value of asset is PV of expected cash flows over useful life
• Economic loss in a year is measured by ↓ in PV of expected receipts
of useful life from beginning to end of year
•
-
-
Rate of
depreciation
-
-
Accelerated
depreciation
-
↓ is due to difference in loss in value of asset in current year and ↑ in
PV of remaining years’ earnings
o NOT used for PHYSICAL properties b/c:
• Assumes property produces same amt of y for 5 years and then stops
completely
• Usually impossible to determine precise yearly cash flows of
physical assets
• Physical property usually tends to lose a greater amount of value
early in its life
Straight Line
o Used by accountants + for tax purposes that fall under CCLA
o Assumes that the property will lose an equal amount of value each year
during its useful life
Diminishing Balance
o Used for tax purposes
o Assumes physical property ↓ more rapidly in first years
 SO allows > amt of depreciation in 1st year, then in subsequent years
apply % to declining balance, not to org cost
Accelerated Depreciation (See below)
Look in Act for all listed rates (examples113)
Considerations:
o Assets should be depreciable over useful life at a rate that corresponds w/
annual loss in value
 Too short an estimate of useful life will result in tax deferral (i.e. tax
exemption)
 Too long an estimate of useful life will result in tax anticipation
Result → tax dept created 46 prescribed classes (10 major ones) in Schedule II of
regs
o Even when asset is destroyed, keep writing it off at an arbitrary rate (i.e. as if
you sold it at 0)
Definition → biz can defer current Y tax liability by getting an immediate deduction
(i.e. not depreciation over time) that is taxable in a future year
Purpose → tax expenditure to provide incentive for investment in equipment
o CP: huge impact b/c of time value of $
Step 4: Distinguishing between Current and Capital expenses:
- Common law test for capital expense
o Enduring benefit test → have value at the end of the year (British Insulated)
113
Class 1 = buildings
= Software = 50%
* tax expenditure to encourage upgrading software
= computer equipment = 45% on diminishing basis
Class 8 = residual category (furniture, any other tangible property not mentioned in other classes) = 20%
Class 10 = vehicles = 30%

-
NOT a capital expenditure if expenses are ordinarily substantially consumed in a year
(e.g. cleaning materials)
 Rationale → minimal amt and eases compliance problems
 Application:
 Crt held that a lump-sum payment to a pension plan was a capital expenditure b/c
enduring benefit (British insulated, 1926)
o EXCEPTIONS:
 Small tools (<$500) → deduct 100% under class 12
Specific rules (crts trying to figure out what a capital outlay is) → CURRENT vs CAPITAL
o Costs of acquisition (capital) (18(3.1))
 Every cost associated w/ tangible asset (e.g. legal fees) + purchase price itself = capital
 Rationale → associated costs originate in the acquisition of the asset
 EXCEPTION: Land CAN be current if it doesn’t have cont’d use b/c just used to get
deeper into a mine (Johns-Manville, 1985, SCC114)
 CP: wrong b/c purchase land incl rights below the surface
o Costs of constructing an asset (capital)
 All direct and indirect costs (e.g. equipment + wages of construction EEs) in constructing
an asset (e.g. a building) should be capitalized
 Rationale → otherwise it would create tax adv for ppl who constructed own
facilities rather than those who purchased them already constructed
o Costs of retirement and removal (current)
 Rationale → Removal relates to the old asset and should be treated as a current expense
 CP: other way to look at is that the cost of removal is the cost of constructing
something new and so should be capitalized
o Repair (current) or replacement (capital)
 Nothing in the act, so Crt has just made rules
 No theoretically correct answer b/c if repair is current then getting a tax
concession b/c it does have value over time
 BUT admin impossible to amortize all repairs + it would amoritized at
rate that is much lower than it is depreciating b/c based on life of the
overall asset, not of the specific item
 More likely to be improvement/replacement if: (Canada Steamship, 1966)
 Performance of the other property has been enhanced
 The useful life of the expenditure is closer to the life of the other property than
one year
 The property purchased can be used separately from the other property
 The amount of the expenditure is large in relation to the value of the other
property
 Application:
 Repair → replacing floors and walls b/c integral and cost was small relative to
ship itself (Canada Steamship, 1966)
Johns-Manville – Facts: Operated an open-pit mine. Land purchases solely for mining Had to get new land e/ year to dig
deeper. Didn’t use surface of land
114
Replacement/improvement → cost of replacing boilers in a steamship b/c major
cost (Canada Steamship)
Costs to defend and protect title (e.g. legal fees from protecting trademark)
 Problem → it should be treated as a capital expenditure b/c functionally equivalent to
acquisition costs (i.e. add to security of TxERs title)
 BUT hard to administer system on that basis
 BEFORE:
 Dominion Natural Gas (1940)115, – defending franchise was capital
 Kellogg Co. (1943) – defending right to use the trade name “shredded wheat”
was current
 NOW:
 TEST → if it’s to defend title, and not an acquisition, then it’s current (Canada
Starch (1968116)
 Cda Starch is currently the leading case, so if you can conceptually characterize expense
as being incurred in defending title, then it’ll be current.
Websites and domain names
 Domain names and costs of software, hardware and original graphics – capital
 Day 2 day operating expenses and expenses that have a limited life – current
Cost of luxury passenger vehicle (capital)
 BUT, most you can write off is $30,000 b/c assume large personal element (13(7)(g))
Corporate takeovers
 Legal fees incurred to oppose a hostile takeover – capital
 Legal fees incurred to facilitate a friendly take-over – current
 Expenses to complete a takeover – capital (Neonex International)
Goodwill
 On-going expenses that generate goodwill, such as advertising – current
 CP: odd b/c has value beyond the year and builds up good will
 The acquisition (i.e. specific purchase) of customer list or goodwill – capital
 E.g. pay for right to use the name of the biz
Pre-Operational and Start-Up Costs
 If it’s an ongoing biz and you’re incurring expenses b/c thinking about expanding →
current
 CP: it should be capital b/c provided future benefit but b/c only process for doing
that is thru ECE which has a very slow rate of amortization, Crt treats it as
current
 If NOT in biz, but deciding whether to enter biz, and you incur expenses but decide
against biz → non-deductible
 Rationale (presumably) →
 1) Conceptual: no source of Y so no deductible expenses
 2) Admin: dfcty in determining whether expenses were incurred for a biz
purpose when no biz est’d

o
o
o
o
o
o
115
Dominion natural gas - Facts: Franchise supplies natural gas to Hamilton. Someone challenges the legality of the
franchise. Incurred legal fees defending title.Judgment: held to be capital where you’re successful in your action
116
Canada Starch – decision: Payment to settle dispute about trade name was current
CP: it should be deductible b/c no personal benefit, net wealth ↓
 ALSO, equity → might not be a case for distinguishing b/w person who
incurs expenses investigating a new business and the person already in a
business who incurs expenses investigating the possibilities of expanding
it
 ALSO, neutrality → bad public policy to discourage potential
entrepreneurs from investigating new businesses.
Step 5: What is the value of the capital cost?
- Property acquired by gift (FMV) (69(1)(c))
 Note → allow it to be depreciated b/c otherwise it’d be equivalent to taxing gifts which
we don’t do
- Property acquired from non-arm’s length person for > FMV
 Treated as FMV (69(1)(a))
 Rationale →otherwise it’d be easy to avoid tax by charging more than it was worth
 EXCEPTION → Property acquired by rollover
 E.g. Spousal rollover says you can transfer w/o any tax consequences (73(3))
- Apportionment
o Minister can re-allocate amts of a purchase for land and a building according to FMV (68)
 Rationale → occasionally the purchaser and the seller won’t have opposite interests and
might agree to sell the building at > FMV b/c it can be depreciated
 However, typically, they have adverse interests where the seller wants to give
greater value to land b/c then only tx’d as a CG

Capital Cost Allowance Scheme
Step 1: Uses the pooling method
- All assets with the same rate are pooled together
- Rules →
o e/ new asset is added to the UCC of the pool
o when assets are sold, the sale price (up to the original cost) is subtracted from the pool
 if there was a CG, then only incl half in Y
o At end of e/ tax year, the rate is applied to the UCC and the appropriate amt is deducted
 Re-capture/claim as a loss where necessary
- Advantages → esp for small biz, much easier than single-asset depreciation
- Disadvantages → gains/losses aren’t claimed immediately b/c they’ll only ↑ or ↓ the balance in the pool
Step 2: What are the rules?
- According to the Act:
o Cannot make deductions in respect of a capital outlay or loss (18(1)(b))117
o BUT allowed to deduct capital cost of property (20(1)(a))118
117
S. 18 General Limitations
(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(b) Capital outlay or loss – “An outlay, loss or replacement of capital, a payment on account of capital or an allowance in
respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
118
S. 20 – Deductions permitted in computing income from business or property
- Majority of the scheme is in the regulations:
o Reg 1102119 states what you canNOT deduct (e.g. inventory, personal, allowed a deduction under
s 37 already, art work/antiques, etc)
 Rationale → these assets don’t ↓ in value
 EXCEPTION: Cdn artists
o Reg 1101(1)120 establishes what the rates are and says you apply that every year to the UCC
 UCC = undepreciated capital cost of depreciable property of a prescribed class based on the
formula → (A + B) – (E + F) (13(21)) (see FN121 for actual formula)
 A = total of all assets purchased in a pool
 B = total amt re-captured in a prior year (i.e. total incl in Y)
 E = total of all deductions previously allowed
 F = total amt recv’d from a disposition
o See below for what this incl
- APPLY DEPRECIATION RATE DEPENDING ON CLASS!
- Tax consequences disposing of depreciable property
o Depends on what happens when you deduct the sale price from the UCC:
 where (A+B) exceeds (E+F) (i.e. you get a NEGATIVE #) → must RE-CAPTURE (by
incl’ing in Y) b/c allowed deductions beyond the actual ↓ in value (13(1)) 122
 Only incl up to the original cost of the property (i.e. no CG)
 where (E + F) exceeds (A+B) (i.e. you get a POSITIVE#) →claim a TERMINAL LOSS
(allowed a deduction) b/c sold for less than what you were allowed to deduct (20(16))123
“(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income…from a business or property, there
may be deducted such of the following amounts….
(a) Capital cost of property – such part of the capital cost to the taxpayer of property, or such amount in respect of the capital
cost to the taxpayer of property, if any as is allowed by regulation.”
119
1102. (1) The classes of property described in this Part and in Schedule II shall be deemed not to include property
(b) that is described in the taxpayer's inventory;
(c) that was not acquired by the taxpayer for the purpose of gaining or producing income;
(d) that was acquired by an expenditure in respect of which the taxpayer is allowed a deduction in computing income under
section 37 of the Act;
(e) that was acquired by the taxpayer after November 12, 1981, other than property acquired from a person with whom the
taxpayer was not dealing at arm's length (otherwise than by virtue of a right referred to in paragraph 251(5)(b) of the Act) at
the time the property was acquired if the property was acquired in circumstances where subsection (14) applies, and is:
(i) a print, etching, drawing, painting, sculpture, or other similar work of art, the cost of which to the taxpayer was
not less than $200,….
(2) The classes of property described in Schedule II shall be deemed not to include the land upon which a property described
therein was constructed or is situated.
120
Reg. 1100(1) For the purposes of paragraphs…20(1)(a) of the Act, the following deductions are allowed in computing a
taxpayer’s income for each taxation year:
(a) subject to subsection (2), such amount as he may claim in respect of property of each of the following classes in Schedule
II not exceeding in respect of property
(vi) of Class 6, 10%… of the undepreciated capital cost to him..of property of the class;
121
(A+B+C+D+D.1) – (E+E.1+F+G+h+I+J+K)
122
13(1) Where, at the end of a taxation year, the total of the amounts determined for E to J in the definition “undepreciated
capital cost” in subsection (21)..exceeds the total of the amounts determined for A to D in that definition in respect thereof,
the excess shall be included in computing the taxpayer’s income for the year.
123
20(16) Notwithstanding paragraphs…18(1)(b)…where at the end of a taxation year,
o Note → According to Act supposed to start from opening biz and calculate everything, but ppl
just keep a running tally
 CP: some ppl will sell an asset even tho it can still be used b/c it will allow them to
generate a large deduction
Step 3: When does the asset begin depreciating?
- MUST be AVAILABLE for USE (13(26))
o 13(27) then interprets when it is ‘available for use’
 Under (a) it’s when first used for earning Y
Step 4: What are proceeds of disposition?
- Sale price of property, compensation, insurance payments, etc124 (13(21))
Step 5: What is the timing of dispositions?
- When proceeds are recvable
- Property  normally when title to the property passes to the purchaser.
o Hewlett Packard (2004) – under provincial legislation title to property was held to pass at a time
after it would pass under common law tests – held the provincial legislation applied.
- BUT, also involuntary disposition where deemed to have disposed of it if it’s taken from you (44(2))
Step 6: How does the half-year convention apply?
- Problem → not accurate to be given deduction based on deduction throughout the year when asset bought
in December b/c only used for 1 month
- Solution → assume all purchases only used for ½ the year (Reg. 1100(2)125
(a) the total of all amounts used to determine A to D in the definition of “undepreciated capital cost” in subsection 13(21) in
respect of a taxpayer’s depreciable property of a particular class exceeds the total of all amounts used to determine E to J in
that definition in respect of that property, and
(b) the taxpayer no longer owns any property of that class in computing the taxpayer’s income for the year
(c) there shall be deducted the amount of the excess determined under paragraph
124
Proceeds of disposition of property includes:
(a) the sale price of property that has been sold,
(b) compensation for property unlawfully taken,
(c) compensation for property destroyed and any amount payable under a policy of insurance in respect of loss or destruction
of property,
(d) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of
an intention to take it under statutory authority was given,
(e) compensation for property injuriously affected, whether lawfully or unlawfully or under statutory authority or otherwise,
(f) compensation for property damaged and any amount payable under a policy of insurance in respect of damage to property,
except to the extent that the compensation or amount, as the case may be, has within a reasonable time after the damage been
expended on repairing the damage….”,
125
Reg. 1100(2) Reg. 1100(2) The amount that a taxpayer may deduct for a taxation year under subsection (1) in respect of
property of a class in Schedule II is to be determined as if the undepreciated capital cost to the taxpayer at the end of the
taxation year (before making any deduction under subsection (1) for the taxation year) of property of the class were reduced
by an amount equal to 50 per cent of the amount, if any, by which
(a) the total of all amounts, each of which is an amount added
(i) because of element A in the definition “undepreciated capital cost” in subsection 13(21) of the Act in respect of property
that was acquired in the year or that became available for use by the taxpayer in the year, or…
exceeds
(b) the total of all amounts, each of which is an amount deducted from the undepreciated capital cost to the taxpayer of
property of the class …
Rationale → on avg it’ll work out b/c assume companies buy equipment throughout the year
Result →
 Year 1: add full cost of asset to the UCC, then subtract ½ of the price from the UCC, and
apply the rate to the amt left (i.e. UCC – 50% of cost)
Does NOT ∆ the UCC, just apply rate to a national amt
 Year 2: Subtract the notional amount from the UCC and that’s you’re starting UCC
- Effect → only half the cost of the asset is incl in Year 1 and in Year 2, the other half is included
o
o
Step 7: Limitations on CCA deductions
- Tax shelter losses
o CCA usually allows you to write off depreciation at a rate that’s quicker than they actually
depreciate
o In these circumstances it creates the potential for tax shelters
- Legi response:
o Rental property (reg 1100(11))
 Rule - Can’t offset the deduction of the CCA against all other Y, only against rental Y
 Rationale – otherwise ppl were buying a property and getting deductions on it, even tho the
vale wasn’t actually decreasing and they were claiming the deduction against their salary
o Leasing property, reg 100(15)
 Rule - In situations of a sale and lease back, dept will treat the ‘sale’ as if a loan was made
and the amt paid to the bank comprises of the prescribed interest and the repayment of the
loan
 Rationale – otherwise municipalities (b/c they’re not TxERs) were getting banks to buy
equipment for them and just paying them a lease pament
 This allowed bank to write off the amt giving them a huge tax break and therefore
charging the municipality less than what they’d otherwise pay
o Specified leasing property (reg 100(1.1)to(1.3))
Eligible Capital Expenditures (intangible)
Background
- Covers everything NOT in CCA
- Before 1972, couldn’t write these off
- Process for deducting the money you paid for it, not the actual amount that’s depreciating
Step 1: What is non-depreciable?
- Good will if in the form of advertising, b/c treated as a current expense (see above)
o Note → it should be capital, but too hard to keep track
Step 2: What is DEPRECIABLE?
- Customer lists, franchises, trademarks, know-how, non-compete covenants, residual part of purchase
price rep’ing going concern ALL = amortized under ECE
- Cost recovery should be postponed until goodwill is disposed of b/c goodwill doesn’t run out
Step 3: Application
- Every biz will have one account/class for ECE
- Steps:
o Year 1: Incl 75% of capital cost + write it off at a rate of 7% on a diminishing balance basis
(20(1)(b)(1)126
o Year sold: Deduct 75% of sale price from ECA
 If after sale you end up with a (+) # in the account…TERMINAL LOSS
 ONLY claim the loss once out of biz (24(1))127
o Rationale → w/ intangible property dfct to know whether the taxpayer has
disposed of all such property because it’s not easily separated from the biz
 SO TxER may still derive benefit until the biz ends
 If after sale you end up w/ a (-) # in the account….RECAPTURE 14(1)128
 If sold for > purchase price….
 Means you never incurred an expense THEREFORE:
o Deduct 75% of sale price from ECA, THEN subtract from the remaining
ECA the amt allowed to claim in prior years. This gives you the CG earned.
In order to claim the tax rate, need half of that, so MULTIPLY that # by
2/3rds
o THEN, elect whether to have that # tx’d as a CG:
 YES, if you have losses b/c can deduct them against the gain
 NO, if no losses. THEN treated as reg biz Y
126
Section 20(1)(b):1) Deductions permitted in computing income from business or property
Notwithstanding paragraphs 18(1)(a), (b) and (h), …there may be deducted…(b) Cumulative eligible capital amount such
amount as the taxpayer claims in respect of a business, not exceeding 7% of the taxpayer's cumulative eligible capital in
respect of the business at the end of the year except that, where the year is less than 12 months, the amount allowed as a
deduction under this paragraph shall not exceed that proportion of the maximum amount otherwise allowable that the number
of days in the taxation year is of 365;
“cumulative eligible capital” is 3/4s of all expenditures
S. 14(5) “cumulative eligible capital” of a taxpayer at any time in respect of a business of the taxpayer means the amount
determined by the formula (A + B + C + D + D.1) - (E + F)
where
A is 3/4 of the total of all eligible capital expenditures in respect of the business made or incurred by the taxpayer before that
time and after the taxpayer's adjustment time,
127
S. 24(1) - 1) Ceasing to carry on business.. notwithstanding paragraph 18(1)(b), where at any time after a taxpayer ceases
to carry on a business the taxpayer no longer owns any property that was eligible capital property in respect of the business
and that has value, in computing the taxpayer's income for taxation years ending after that time,
(a) there shall be deducted, for the first such taxation year, the amount of the taxpayer's cumulative eligible capital in respect
of the business at that time;
(b) no amount may be deducted under paragraph 20(1)(b) in respect of the business;
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S. 14(1) – Where, at the end of a taxation year, the total of all amounts each of which is an amount determined, in respect
of a business of a taxpayer, for E in the definition “cumulative eligible capital” in subsection (5) (in this section referred to as
an “eligible capital amount”) or for F in that definition exceeds the total of all amounts determined for A to D in that
definition in respect of the business (which excess is in this subsection referred to as “the excess”), there shall be included in
computing the taxpayer's income from the business for the year the total of
(a) the amount, if any, that is the lesser of
(i) the excess, and
(ii) the amount determined for F in the definition “cumulative eligible capital” in subsection (5) at the end of the year in
respect of the business, and
(b) the amount, if any, determined by the formula
2/3 × (A – B – C – D)
where
A is the excess…