ZS – Tax – Spring 2015 – Prof. Martha O’Brien
Table of Contents
Introduction to Tax .......................................................................................................................................... 2
Constitutional Division ............................................................................................................................................... 2
What are Taxes? ............................................................................................................................................................ 2
Interpreting Tax Legislation ..................................................................................................................................... 3
Terminology ................................................................................................................................................................... 3
Tax Policy ......................................................................................................................................................................... 3
Tax Expenditures .......................................................................................................................................................... 4
Calculating Income and the Source Concept ........................................................................................... 4
Surrogatum Principle .................................................................................................................................................. 6
Interpretation Bulletin IT-365R2 – On Lump Sum Award for Future Earnings ............................................... 8
Losses ................................................................................................................................................................................ 8
Nexus ................................................................................................................................................................................. 8
Residence............................................................................................................................................................. 9
Deemed Residence .................................................................................................................................................... 11
Part-Year Residence ................................................................................................................................................. 11
Tax Treaties ................................................................................................................................................................. 12
Canada-US Tax Treaty Article IV – On Residence ....................................................................................................... 13
Canada-UK Tax Treaty, Article 4 on Fiscal Domicile ................................................................................................. 13
Income Tax Folio S5-F1-C1 .................................................................................................................................................. 14
Departure Tax (Consequences of Immigration and Emigration) ............................................................. 14
Provincial Residents ................................................................................................................................................. 15
Residence of Corporations ..................................................................................................................................... 15
Canadian Taxation of Non-Residents.................................................................................................................. 16
Income from Office or Employment ........................................................................................................ 17
Employee vs. Independent Contractor ............................................................................................................... 18
Using a Corporation to Avoid EME/IKor Problem and the PSB Rule ................................................................. 20
Benefits, Reimbursements, and Allowances .................................................................................................... 21
IT-470R – Fringe Benefits vs. Privileges ........................................................................................................................ 22
Valuation of Employment Benefits ................................................................................................................................... 23
Allowances – s. 6(1)(b).......................................................................................................................................................... 24
Special and Remote Worksites Exemption – s. 6.6 & IT 91-R4 .............................................................................................. 25
Automobile and Travelling Allowances Exemption ................................................................................................................... 25
Deductions for Employment Income .................................................................................................................. 26
Income from Business/Property.............................................................................................................. 29
Canadian Controlled Private Corporations ...................................................................................................... 29
Organized Activity and Gambling ........................................................................................................................ 30
Pursuit of Profit .......................................................................................................................................................... 31
Adventure of Concern in Nature of Trade – Business vs. Capital Gain.................................................... 32
IT-459 – ACNT ........................................................................................................................................................................... 34
Income from Property.............................................................................................................................................. 35
Interest Income ........................................................................................................................................................................ 36
Rents and Royalties – s. 12(1)(g) ...................................................................................................................................... 37
Dividends .................................................................................................................................................................................... 38
Deductions for Income from Business or Property ....................................................................................... 39
Income Earning Purpose Test ............................................................................................................................................ 40
Deduction of Personal or Living Expenses .................................................................................................................... 41
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Deduction of Interest Expense ........................................................................................................................................... 44
Policy Reasons for Denying Deductions (Illegal/Unethical Conduct) ............................................................... 46
Capital vs. Current Expenditures ...................................................................................................................................... 47
Capital Gains & Losses.................................................................................................................................. 49
Policy for Preferential Taxation of Capital Gains ........................................................................................... 51
Identical Properties .................................................................................................................................................. 52
Part of a Property....................................................................................................................................................... 52
Disposition and Proceeds of Disposition .......................................................................................................... 52
Deemed Dispositions and Deemed Proceeds .................................................................................................. 53
Lottery Winnings ..................................................................................................................................................................... 53
Ceasing/Becoming Resident of Canada .......................................................................................................................... 53
Gifts and Sales Below FMV to Non-Arm’s Length Persons ..................................................................................... 53
Deemed Disposition on Death ............................................................................................................................................ 55
Rollovers for Spouses/Common Law Partnerships....................................................................................... 55
Inter Vivos Transfers............................................................................................................................................................... 55
Transfer and Rollover Upon Death – s. 70(6) .............................................................................................................. 56
Personal Use Property and Listed Personal Property .................................................................................. 56
Principal Residence Exemption ............................................................................................................................ 58
Depreciable Property and Capital Cost Allowance ............................................................................ 60
Undepreciated Capital Cost – s. 13(21) .............................................................................................................. 61
Half-Year Rule – ITR 1100(2) ................................................................................................................................ 61
Recapture: s. 13(1) – Inclusion in Computing Income.................................................................................. 62
Terminal Loss – ss. 20(16) & 39(1)(b)(i) .......................................................................................................... 62
Introduction to Tax
Constitutional Division
1) federal – s. 91(3) – general power to tax
2) provincial – s. 92(2) gives taxing in province for raising revenue for prov.
purposes, and s. 92(9) gives authority for shop, salons, and other licences to raise
revenue for prov./local/municipal purposes; only allowed to set direct taxes
a) direct tax = demanded from the person who it is intended to pay it
b) indirect tax = demanded from one person in the expectation that he shall
indemnify himself at the expense of another
What are Taxes?
1) things other than tax
a) fines and penalties – punishments for acting contrary to the law and are
meant to deter; while this can be seen as a tax, the goal is not to generate
revenue, but to deter certain behaviour
b) royalties – charges by gov. in exchange for the right to exploit property – ex.
royalties on gas and minerals extracted from land; acts like a licence, but is not compulsory
c)
fees – sometimes taxes are disguised as fees – ex. medical services premium, which is
really a regressive tax
d) prices – you get something in return, and thus is not really a tax
2) attributes of taxes
a) base – ex. income, wealth, consumption
b) TP or tax filing unit
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c) rate
d) period
e) collection and administration
3) progressive vs. regressive taxation
a) progressive = higher you go, the more you pay
b) regressive = opposite of progressive; very rare
i) however, taxes can have a regressive effect – ex. 5% tax for a person who makes $5000
is very high, but very low for someone making half a million and who saves most of that income
c) flat = the % charged does not change
Interpreting Tax Legislation
1) “Taxpayers are entitled to rely on the clear meaning of taxation provisions in
structuring their affairs. Where the words of a statute are precise and
unequivocal, those words will play a dominant role in the interpretive process” –
LeBel J. in Placer Dome Canada Ltd v Ontario (Minister of Finance), SCC 2006, at
para. 21
2) but if meaning is ambiguous, then context and purpose begin to play a bigger role
3) there is still a presumption in favour of TP, but it is residual and only applies in
exceptional cases where the ordinary principles of SI do not resolve the issue (ex.
Fries: SCC held strike pay not income and therefore not taxable b/c statute was ambiguous)
Canada v Fries, SCC 1990 - income from unenumerated sources was taxable under the general
provision of ITA s. 3(a)
Held: strike pay is not income; SCC said they could not interpret anything in the ITA and applied residual
presumption in favour of TP and excluded strike pay from income
Terminology
1) GAAP (“Generally Accepted Accounting Principles”), now integrated with IFRS
(“International Financial Reporting Standards”), are rules for financial accounting
in Canada, and are contained in the Handbook of the Chartered Accountants of
Canada  courts not bound by them
2) cash vs. accrual accounting
a) cash = TP includes the amounts they have actually received
b) accrual = include not just amounts received, but amounts receivable; also
applies to payables and paid amounts
3) notice of assessment = what you get if you file your taxes
4) normal reassessment period = 3-4 years
Tax Policy
1) equity
a) vertical equity: redistribution of wealth; that non-equals be appropriately
treated differently
b) horizontal equity: those who have the same amount should pay the same
amount of tax
2) neutrality: tax shouldn’t affect too much of your personal decisions; gov. should
tax every dollar the same
3) simplicity: which means it should be….
a) comprehensible
i) ex. while ITA is not simple, most people understand income tax in general
ii) a tax system that is irrational is bad b/c it is hard to administer, and it is
hard to get people to comply with it
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b) certain
i) imposed by law
ii) should be able to determine in advance the consequences of your
commercial/economic/other decisions
iii) it should not be within the tax collector’s discretion to decide what the tax
consequences of TP’s actions are
c) convenient
i) for the TP
(1) if too difficult to comply, people will just stop trying
(2) the costs of compliance should not be so exorbitant so that it takes a
huge part of the tax cake – since TP allowed to deduct accounting legal
fees and what TP pays accountant
ii) for administration
(1) should not be too costly to administer tax system – if gov. spends too
much time employing/training auditors  waste of time and money
(2) taxes should be difficult to avoid or evade, b/c for everyone who cheats,
those who do not cheat have to pay more
(a) n.b. avoidance ≠ evasion
(i) avoidance = tax minimization; structuring affairs to minimize tax
liability, which is perfectly legal
(ii) evasion = fraud; not reporting income that is taxable
4) global competitiveness
a) Canada thrives upon trade and so we have to respond to what other countries
are doing
b) having capital in the countries grows the economy, and thus you want people
to keep their money here
Tax Expenditures
1) tax expenditures = provisions that, rather than measuring income in an objective
way, are meant as an incentive to certain behaviours/expenditures
2) evaluating tax expenditures
a) what gov. objective is being served by the tax expenditure?
b) assuming it is serving some valid gov. goal, are the benefits distributed fairly?
c) is the program target efficient?
d) does the program avoid causing any unintended distorting effects?
e) are the admin. and compliance costs of the program reasonable?
f) can the objective be better served by some other gov. policy, such as a direct
spending program, or gov. reg., or public provision?
i) those who favour the tax system to deliver subsidies argue that tax
expenditures tend to be simpler in design, involve less bureaucratic
discretion, encourage private decision-making, use an established
framework of admin., and involve less stigma than direct gov. hand-outs
ii) those who oppose the tax system to deliver subsidies argue that all the
advantages claimed are instead advantages of automatic cheque-writing
programs
Calculating Income and the Source Concept
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1) calculating income – s. 3 – take the TP’s
a) income from all sources [enumerated/unenumerated, inside/outside Canada]; +
i) net income from employment and office (s. 5) = inclusions (s. 6) – limited
deductions (s. 8)
ii) net income from every business (s. 9) = inclusions (s. 12) – deductions (s. 18)
iii) net income from property (s. 9) = inclusions (s. 12) – deductions ( s. 18)
iv) net income from other sources (s. 56)
v) excluded income is ignored (s. 81)
(1) s. 81(1)(a) – statutory exemptions
(2) s. 81(1)(g) – compensation by Germany for Nazi war crimes
b) TCG (s. 38(a)) + net gain from LPP (s. 41(1) (cannot be negative, s. 41(2)(b)(iii))
– ACL (only if it is a positive amount, s. 38(b))
i) CG = POD – ACB  CG × 50% = TCG
c) deduct anything that TP may claim under subdivision (e) – these include
moving expenses (s. 62), child care expenses (s. 63), legal expenses in respect of
retiring allowances (s. 60(o.1)(i)(B)), and others (total cannot be negative)
d) deduct losses from sources: employment – s. 5(2); business/property – s. 9(2)
(total cannot be negative)
…positive amount is taxable income for the year
…negative amount is deemed to be zero
2) s. 4(1)(a) – calculate income & deductions from each source independently
3) residents are taxed on worldwide income; non-residents are taxed on Canadian
source income
4) source concept = income that has no recognized source is not subject to tax, and a
loss not from a recognized source is not deductible
a) taxable income must have a source (Bellingham); but while the sources in s.
3(a) are not exhaustive, the courts have been reluctant to recognize
unenumerated sources
b) the source does not have to come from the income payor (Bellingham)
c) to be taxable, should have some “income feature” (Cartwright and Sons)
5) the following indicia show no source: (Cranswick)
a) TP had no enforceable claim to the payment
b) no organized effort on the part of TP to receive the payment
c) the payment was not sought after or solicited by TP in any manner
d) the payment was not expected by TP, either specifically or customarily
e) the payment had no foreseeable element of recurrence
f) the payor was not a customary source of income to TP
g) the payment was not in consideration for or in recognition of property, services,
or anything else provided or to be provided by TP; it was not earned by the TP,
either as a result of any activity or pursuit of gain carried on by the TP or
otherwise
6) what is a source?
a) s. 3(a) gives the 4 enumerated sources: 1) office 2) employment 3) business 4)
property
b) s. 56(1) sets out the other sources of income (under subdivision D)
i) some of these other sources are not really a traditional source – such as a
pension benefit (i.e. it is not really a salary or an investment, but something
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you get after employment), and scholarships and bursaries
ii) these are revenue that people become entitled to, but may not be connected
to any traditional activity for earning income
7) source/income vs. CG/CL
a) the capital is the source
b) the income may come from the source
8) recognized excluded categories of income
a) gambling gains (unless business of gambling) (LeBlanc; Luprypa)
b) punitive damages (Bellingham)
c) gifts and inheritances
d) residual category of windfall gains
e) strike pay (Fries)
Bellingham v The Queen, FCA 1996 – the source of income does not have come from the payor
Facts: T sees land she thinks is being sold for too cheap, so she buys it; Town expropriates the land; Town offered
money but T said it was too low; went to land compensation board, who gave her 6× the amount Town offered;
since the Town owed her money – that is debt – which is treated as income from property; but extra $114k money
was the problem, b/c it was not compensation to T
Issue: what is the $114k classified as?
Held: the $114k is not taxable, as it is not viewed as income from a source – it is instead a punishment on the
Town for trying to rip T off; this kind of money is more like a punitive damage award, which puts it in the
category of a windfall; “The critical factor is that the punitive damage award does not flow from either the
performance or breach of a market transaction”; s. 3 clearly says there may be other sources of income other than
the ones enumerated
O’Brien: ex. of gambling – not a steady source of income as it is not productive, and thus it has never been taxed;
ex. gifts and inheritances – also a transferable money, and thus it is not productive
Cartwright and Sons Ltd v MNR, TAB
Facts: Cartwright and Sons sued Carswell; Carswell had been printing Cartwright’s law list; one year Carswell
had its own law list (competing with Carwright); Carwright sued for CR infringement; settled out of court and
made an extra $7k payment unidentified
Issue: what was the $7k?
Held: it was punitive payment, which is not taxable as it “has no income feature”
The Queen v Cranswick, FCA 1982 – set out several indicia which could be applied when assessing
whether a receipt constitutes income from a source
Facts: US company had a Canadian subsidiary, and the US co. controlled more than 50%; Cranswick has shares
in the Canadian co. (probably under 0.1%); one day Cranswick gets cheque from US co.; CRA wants to tax that
income, but Cranswick argues that money is a windfall as he has no relations to the US co.
Held: the payment is a windfall
Curran v MNR, SCC 1959
Facts: T received $¼ million from Brown; Brown wanted T to leave his job and come to work for Federated
Petroleum, controlled by Brown; the funds were provided by another company that Brown controlled, called Culta
Assets; T never became an EME of Brown at either Federated or Culta; Brown and T had 2 Ks: 1) consideration of
loss of pension rights with old company and other employment opportunities, gave $250k; 2) employment
agreement between T and Federated
Issue: what is the $250k? (T argues $250k is non-taxable, as it is like a capital payment to compensate T for
giving up rights that he is in the process of accruing related to his personal capacity to earn income)
Held: the $250k is taxable within the meaning of s. 3(a), as it is a quid pro quo for T coming to work for Federated
Dissent: the $250k can be divided up  compensation for T losing the capital advantages; services that T was
going to provide to Federated
O’Brien: at this point, T was not EME of Federated, and it was also paid from Culta (not Federated) – and yet
the majority said it came from a source
Surrogatum Principle
1) Surrogatum Principle = if you receive an amount that is replacement for a taxable
amount, then that amount will be taxed the same way as what it replaced
2) test for applying Surrogatum Principle: (Tsiaprailis)
a) what was the payment intended to replace?  provided the answer is
sufficiently clear…[n.b. “clear” = must be able to apportion the amount; if don’t
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know what amount is taxable/not  none of it would be taxable (Swartz)]
b) would the replaced amount have been taxable in the recipient’s hands?
3) TP bears the burden of establishing which portion of a lump sum is not taxable
under the Surrogatum principle (s. 152(8)); it is up to TP to report their income
correctly and TP has the burden of proof in a tax appeal and disprove the tax
assumptions of the Minister (Siftar)
Schwartz v The Queen, SCC 1996 – first case to recognize Surrogatum in obiter
Facts: T was lawyer in law firm; offered in-house in Dynacare; salary and benefits agreed upon; once T
withdrawn from the partnership, got letter from Dynacare saying they will not hire T; T retained counsel who got
a settlement payment from Dynacare totaling $360k + $40k for retaining counsel
Issue: how much of the settlement payment is taxable?
TC: all of the $360k was primarily for inconvenience, embarrassment, anxiety of having the employment agreed
breached before it even started – i.e. it is one lump sum for hurt feelings; cannot apportion them into categories
FCA: you could allocate the $360k based on what the employment agreement had been  $70k for salary, $267k
for stock options at the time they were offered, leaves $18k – which is the portion that is non-taxable as
compensation for hurt feelings
SCC: it was wrong for FCA to say the TC made wrong finding of fact; TC judgment restored; we do not see pain
and suffering awards as being taxable, as we do not recognize a bargain that exchanges pain/injury for income
SCC on the tax issue, in obiter:
 Crown argued 2 things, relying on the Surrogatum principle
 the $342k was to be treated as income from unenumerated source – it would an amount that would have
been paid on K for future employment; i.e. the source = the future employment; thus, this was
surrogatum for income he was going to make in the future from Dynacare
 the money was retirement allowance, which is included under s. 56(1)(a)(ii); “retiring allowance” defined
in ITA and s. 248(1)(b) says damages for loss of office/employment will be retreated as retiring allowances
 majority says the Act clearly says unenumerated sources are included, and yet to be found – i.e. leaves it open
that other sources can be found, whether or not legislatures adds them
 but rather than reasoning if the money can be Surrogatum, the majority gets into if the amount paid to T was
a retiring allowance – held that it was not
 def. of “retiring allowance” is examined and says this is money paid due to loss of office or employment
 the question becomes if T had “employment”
 in the Act, “employment” is defined – means the position of an individual in such a service; b/c the day T
was supposed to work at Dynacare had not occurred when Dynacare terminated the K unilaterally, T was
never an EME of Dynacare
 since he never had employment, could not lose employment  therefore this was not a retiring allowance
 since the retiring provision does not catch this situation, should not use the general provision, s. 3(a), to
tax this amount
O’Brien: this entire case is wrong; unrealistic to say the majority of $360k was pain/mental suffering; using the
general rule to override the specific is also not logical [c.f. Savage]; this was inappropriate place to apply
Surrogatum
The Queen v Savage, SCC 1983 – the specific provision overrides the general provision
Facts: Savage got $300 from EMP; said this was prize for achievement for passing exams (she took her own time
on her own decision); in ITA, prizes over $500 are taxable, but under $300 are not; Crown said this was not prize
but benefit of employment
Held: this is both, as “benefit” is defined very broadly under the Act; but if we include “prize” under “benefit,” the
provision on “prize” would be meaningless; thus, prizes shall be excluded under benefits
Tsiaprailis v The Queen, SCC 2005 – the test for Surrogatum
Facts: T in car accident, badly injured and could not work anymore, had to go on long-term disability insurance;
insurance plan is group policy paid by EMP; after a year, insurance company said they do not think she is
disabled any longer and she was cut off from benefits (was receiving $746 a month); T argued she was still
disabled; ultimately they settle for lump sum of $105k
Issue: is T taxable on the part of $105k that is supposedly replacement for accumulated insurance payments?
Held: can apportion the payment – taxable
 the lump sum includes
 past benefits + interest – she admitted this was part of the settlement
 all benefits she would be entitled to until age 65 (when insurance ends), discounted to the time of lawsuit
 s. 6(1)(f) – if you receive period payment of benefits under a sickness/accident/disability insurance plan, it is
included as an income and is not an insurance benefit
 argument = $36k is replacement for amounts payable periodically under a disability insurance plan, and
thus tax authorities say this is taxable
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The Queen v Antonija Siftar, FCA 2003 – TP, who has the greater knowledge of his/her own affairs,
bears the burden of establishing which portion of a lump sum is not taxable under Surrogatum,
which is same as ITA s. 152(8) – it is up to the TP to report their income correctly; TP has the burden
of proof in a tax appeal and disprove the tax assumptions of the Minister
1)
2)
3)
4)
5)
Interpretation Bulletin IT-365R2 – On Lump Sum Award for Future Earnings
not taxable
but you will probably invest that award, and the income on that money will be
taxable, as it is income from property
even if you are compensated penny for penny for lost wages up until the time of
your trial/settlement, you probably will not be taxed on it
case law says it is lost capacity to earn that is compensated for
O’Brien: here, does not make sense – Surrogatum should be applied
a) the problem is if you have EMP-provided disability insurance, and you lose
wages and start to receive periodic payments – you get taxed on them
b) yet if you do not have EMP insurance and you claim against ICBC, and you get
compensated for lost wages/future earnings – you are not taxed on the amount
c) this is problematic as you would surely rather sue in court than claim
disability insurance
Losses
1) losses also must have a source to be deductible
2) loss carryovers
a) carryover period and deductibility rules differ depending on the source of loss
b) non-CLs (i.e. income losses): s. 111(1)(a) – can carry over back 3 years or
forward 20 years
c) farm losses and restricted farm losses
i) ss. 111(8) and 31 – may be carried back 3 years and forward 20 years in
accordance with para. 111(1)(d) & (c)
ii) farm losses may be deducted against income from any source
iii) restricted farm losses are only deductible from farming income
d) net CLs: s. 111(8) – can carry back 3 years and forward indefinitely, but are
deductible only from TCGs (s. 3(b))
Nexus
1) no nexus between income and TP = not taxable
2) nexus = control, enjoyment, or ownership of the amount
a) normally, the person who receives the money is the person taxable on it – but
there are exceptions
b) the TP must have some right to that income/control over it or to have
enjoyed/spent it
3) illegal acts
a) TP must have personally received and benefited from the amount to have a
nexus; where TP is a victim of an unauthorized act by a person from which
improper conduct has received a benefit, the T cannot be have said to have
“received” amount and thus he does not get a taxable benefit (ex. Field – n.b. this
case is not precedent b/c it was an informal procedure case)
b) fraudulently acquired funds, not only through EMP/EME relationship, but also
as income from an illegal business may be taxable; one would look at the
circumstances considering the behaviour of the TP, the intention to repay
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funds, and the manner in which the amount was held by the TP (Buckman)
c) CRA determines illegal income via net worth assessments (s. 152(7))
d) that assessment is binding until the TP overturns it on appeal (i.e. burden on
TP to prove otherwise) (s. 152(8))
Peter D Field v The Queen, TCC 2001 – T must have personally received and benefited from the
amount to have a nexus; where the T is a victim of an unauthorized act by a person from which
improper conduct has received a benefit, the T cannot be have said to have “received” amount and
thus he did not get a taxable benefit
Facts: estranged wife fraudulently withdraws RRSP funds into joint account and then pockets money; T fights
the assessment as he did not “receive” (s. 146(8)) any of the funds and should not be taxed
Held: where T is a victim of defalcation by another, it cannot be the law that the victim in the meantime must
pay the applicable amount of income tax on the unauthorized withdrawal and be compelled to pursue the offender
in the courts over a period of years; T did not receive any benefits out of or under the RRSP
O’Brien: T did receive a benefit in a way – he received the deduction from the funds
Buckman v MNR, TCC 1991 – fraudulently acquired funds, not only through EMP / EME relationship,
but also as income from an illegal business may be taxable (realities of the situation and not the
principles of GAAP determine whether unauthorized amounts are taxable)
Facts: T was a lawyer who embezzled funds from his clients and was assessed income for his unreported
misappropriations; T argues embezzled funds were not from a particular source and thus not income; argues that
embezzled funds would not show as profit under GAAP (liabilities rather than assets) and therefore would not be
applicable as business income; he is not strictly the legal owner (argues he “borrowed” the funds instead of
stealing them) so he should not have to pay taxes – argues no nexus
Held: there is a nexus and T should pay the taxes
 The Queen v Poynton (ONCA) held that fraudulently obtained funds from employment income are taxable
 strict legal ownership is not the exclusive test of taxability; court in determining what is income for taxation
purposes must have regard to the circumstances surrounding the actual receipt of the money and the manner
in which it was held (it may not be taxable if there is an intention to repay)
 here, T clearly wished to use the funds for his own purposes and never had an intention to repay them
Residence
1) Canada taxes on basis of residence and source upon worldwide income (s. 2(1))
a) c.f. non-residents taxed on Canadian source income (s. 2(3)) and passive
income (s. 212)
2) from an international law and comity basis, Canada limits itself to what it can
collect – thus ITA defines TP as resident of Canada, and in tax treaties, Canada
agrees how it will allocate the tax between the country of residence and country of
source to avoid double taxation
3) s. 250(3) – resident means “ordinarily resident”
a) ordinarily resident = not present physically on a day to day basis currently, but
would in ordinary circumstances be resident in Canada
4) residence is usually a QOF – the more ties a TP has within Canada, the more
likely TP will be considered a resident (Denis M Lee)
a) residency is chiefly a matter of the degree to which a person in mind and fact
settles into or maintains or centralizes his ordinary mode of living with its
accessories in social relations, interests and conveniences at or in the place in
question; it is possible to be a resident of multiple countries and be subject to
taxes by both (Thomson)
i) but intention of TP does not matter in determining residence (Denis M Lee)
b) immigration status is not determinative of tax residency (Denis M Lee)
c) indicia that could indicate residency in Canada (Denis M Lee)
i) regularity and lengths of visits in the jurisdiction asserting residence
ii) ties with the jurisdiction vs. ties elsewhere
iii) permanence or otherwise of purposes of stay
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iv) ownership of a dwelling or rental of one in Canada on a long-term basis
v) residence of spouse/children/dependent family (although TP can establish
residence elsewhere even if wife/children in Canada – Shih)
vi) membership within Canadian churches or synagogues, clubs, unions, and
professional organizations
vii)holding credit cards issued by Canadian financial institutions and other
commercial entities
viii) telephone listing in Canada, mailing address, and stationary, including
business cards, showing address in Canada
ix) Canadian bank accounts other than non-resident account
x) driver’s licence
xi) frequent trips to Canada for social or business purposes
xii)filing income tax return as a Canadian resident
xiii) ownership of Canadian vacation property
xiv) employment in Canada
Thomson v MNR, SCC 1946 – residency is chiefly a matter of the degree to which a person in mind and
fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social
relations, interests and conveniences at or in the place in question; it is possible to be a resident of
multiple countries and be subject to taxes by both; a person must always be resident somewhere
Facts: T born in NB in 1872, lived there until age 51; had dispute over tax assessment; in 1923 sold his home and
headed off to Bermuda (no income tax) to get UK passport; then went to US; in 1932 he started coming back to
NB every summer for a long period of 5-6 months (his argument was that his wife wanted to come back); he built
a nice house, and when came to Canada would bring his wife, children, servants, cars etc.; when he was not in NB
he kept the house ready for him
Held:
 for purposes of income tax legislation, there is a presumption that every person has at all times has a
residence – assumed abode somewhere
 he never established a real residence in Bermuda – was only there to get passport
 n.b. this is an ex. that his Bermuda passport did not make him resident of Bermuda
 US regarded him as non-resident from 1940-1941, and taxed him as resident in 1942
 ordinarily resident means in the course of the customary life of the person concerned, and is contrasted with
occasional/casual residence
 T was ordinarily resident in both NB and US during a period in the 1940s, as that where he resided – nothing
in Canadian law that prevents him from being ordinarily resident in 2 places
 distinguishes sojourning vs. residing
 sojourn = nature of the stay is outside the range of resident/temporary residence/residence for a
temporary purpose
 if you are sojourning, you are not resident at all
 there is a presumption that you are resident somewhere
Denis M Lee v MNR, TCC 1990 – immigration status is not determinative of tax residency; residence is
a QOF and depends on the specific facts of each case – the more ties a T has within Canada, the more
likely they will be considered a resident
Facts: Lee was electronic engineering; born in UK, holding UK passport; during years at issue, was employed in
oil rig outside Canada by non-Canadian company; came and went from Canada as a visitor during this time, as he
had a visitor’s visa permitting him to stay from 5-45 days; he deposited his paycheques into Canadian bank
account (this is more significant then than now); married a Canadian resident who was wholly dependent upon
him for support; his fiancé purchased a house that he gave her money for; he had to guarantee the mortgage debt,
as she had no income, even though house was in her name; at this time, he swore an affidavit that he was not a
non-resident of Canada at the time the mortgage was given (this is a key fact); he also told the court he had been
charged with failure to file a tax return for 1981 (which is criminal charge of evasion) and had been acquitted – he
argues that he did not have any of the rights that Canadians should have (ex. stay in Canada as long as they
wanted, health insurance, come and go as they please)
Held:
 most critical factors are where you have a home and where your immediately family are
 while there are other factors like where he attends church, none of them are conclusive
 intention is not a factor in residence
 after considering all the relevant factors, T at beginning of 1981 was not a resident, but 1982 T was obviously
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resident, when he swore he was not a non-resident
although marriage can be a neutral factor, in case it is the additional factor that tips the scales – thus, the
day T got married was the day he became resident of Canada (which was partway through 1981)
 he already had home available to him
 he moved from being engaged to married
O’Brien: the judge can look with hindsight and the TP, who is trying not to be a resident, may be in a hard
position; cannot assume that everything that happened after 1981 was planned (at the time, he might not have
planned to stay and be a resident)  makes it an uphill battle sometimes for TPs trying to argue non-residence
Shih v The Queen, TCC 1962 – T can establish non-residence even where his spouse and dependent
children live in Canada
Facts: T lives and works in Taiwan even though his wife and children live in family home in Regina; spent 20% of
his time in Canada; his aged parents lived in Taiwan and had membership in tennis club and church in Taiwan

Deemed Residence
1) s. 250(1) – deemed residence as a matter of law if was resident in Canada
immediately prior to appointment/employment in Canada +…
a) if sojourning in Canada 183 days or more (and they add up each stay) (s.
250(1)(a))
b) was, at any time in the year, member of Canadian forces  does not matter if
you were stationed abroad ( s. 250(1)(b))
c) was ambassador, minister, servant of Canada (i.e. employed by prov. or feds)
(s. 250(1)(c))
2) sojourning
a) being present for the day but returning home at night does not count – to
sojourn, must stay overnight (R&L Foods)
b) includes
i) holiday trips in Canada
ii) unexpected and unusual stays – ex. miss a flight
iii) n.b. S5-F1-C1 1.32-1.33: sojourning = overnight stay, but if you come to
Canada on Saturday and go back Sunday, CRA will count that as 2 days
R&L Food Distributors Limited v MNR, TRB – commuting and working in one country but returning
to one’s permanent residence daily is not sojourning as it is not making a temporary stay
Facts/Background: real issue = status of the corporate TP; this is the corp. challenging the status assigned to it
by the MNR; if R&L were a CCPC, it would have been allowed a very beneficial rate of tax; TPs wanted to argue
that they held the majority of shares, and if they were resident, R&L would be a CCPC; for CCPC, we look at who
has control of the shareholding; in R&L, there were 3 issued shares (small company), and they all have votes; if
more than 50% of votes held by Canadian residents, it will be CCPC; 2 of the shareholders, Ben and Joseph,
commute everyday to work in Windsor, and so they spend more than 183 days in Canada every year; they file
income tax return in both Canada and US, and did not move to Canada due to family decision to stay in Michigan;
no business interest in Canada; no home in Canada; argument = b/c they spend more than 183 days in Canada,
they are deemed to be Canadian residents in Canada throughout the year  thus R&L is a CCPC
Issue: is returning to home at night and journeying to work at day count as sojourning?
Held: not sojourning – being present for the day but returning home at night does not count; probably the night
when they stayed overnight, and their holidays in Toronto could count as sojourning; i.e. to sojourn, must stay
overnight
O’Brien: if deemed residence, it is irrelevant if they are ordinarily resident; so deemed resident is totally different
from ordinarily resident; under ordinary resident, do not count the days but use Thomson test; if not ordinary
resident, must count the days; n.b. one of things CRA looks at is if you have a prov. health care card – to be
entitled, must be resident in the prov.
Part-Year Residence
1) s. 114 – sets out a rule for someone who becomes/ceases to be a Canadian resident
sometime during the year  take the individual’s income for the whole year, but
for the period they were non-resident, only count the income they would have been
taxed as a non-resident
2) taxation year for an individual is Jan. 1-Dec. 31 ( s. 249(1)(b))
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3) TP has burden of proof to establish a factual severance of residency (Schujahn)
4) in order to establish part-time residency in Canada, the facts must disclose either
that the individual commenced/ceased to reside in Canada (Schujahn)
5) physical presence not necessary for TP to be ordinarily resident; where one has a
temporary absence from Canada, even for an indeterminate length of time, may
not sever his ordinarily resident ties to Canada for tax purposes (KF Reeder)
Schujahn v MNR, ExCt 1962 – TP has the burden of proof to establish a factual severance of
residency; per s. 114, in order to establish part-time residency in Canada, the facts must disclose
either that the individual commenced to reside or ceased to reside in Canada
Facts: T came to Canada, sent by US company with subsidiary in Canada, on an indefinite cases; so wife and
child went with T, and T became ordinary resident; however, on Aug. 2nd 1957 was transferred back to
Minneapolis, and yet left his wife and son in Toronto, only for the purposes of selling the house before they joined
him; left small sum of money and a car with his wife; between Aug. and end of 1957, he passed through Toronto
for business trips, and spent Christmas in Toronto; T argues: as of Aug. 2nd 1957 he ceased to be resident of
Canada, and therefore should not be taxed on worldwide income from that date on; if he is successful, then will
only be taxed on worldwide income from Jan. 1-Aug. 2, after which could only tax on Canadian income, which he
was have none
Issue: did T sever all ties since Aug. 2nd 1957? [n.b. courts tend to be more open to the idea that someone severs
ties to Canada if they were not always a Canadian resident – as it is the case here]
Held: yes, T severed all ties on Aug. 2nd; although T’s wife and son stayed in Toronto, it was for a limited purpose;
T’s returns to Canada after Aug. 2nd were minimal
O’Brien: notice he was not deemed to be resident in Canada throughout the year although more than 183 days –
he was not sojourning, he was resident for part of the year; normally having a home means a very significant tie,
but in this case the court was open to the idea that T had moved in every significant way back to the US
The Queen v KF Reeder, FCTD 1975 – physical presence not necessary for TP to be ordinarily resident;
where one has a temporary absence from Canada, even for an indeterminate length of time, may not
sever his ordinarily resident ties to Canada for tax purposes
Facts: year in issue is 1972; T born in Canada, trained in Canada as civil engineer and married to Canadian;
lived in Ontario until March 1972, but then got job with Michelin Canada and was transferred to France for
initial training period potentially for more than 6 months (and if he stayed for more than 6 months, company
would pay for his family to join him overseas); stored car in NB, stored stuff in Ontario; had bank account in New
Glasglow, but not in France; Michelin Canada paid his salary into account in New Glasglow; child born in France
in July; went to Germany to work for a month since plant in France was closed in Aug.; at end of Nov. went back
to Canada; so overall absent from Canada for a little over 8 months; he paid no income tax to France or Germany;
T’s argument: while he was in France and Germany he was a non-resident in Canada, and so does not have to pay
tax in Canada
Issue: did he cease to be resident in Canada when he headed France? so was he a part-year resident?
Held: no – T remained a Canadian resident throughout the time he was in France and Germany, as he was going
abroad for a temporary period, even though the exact amount of time was not established; the job he had in
Canada was the only reason he went to France
O’Brien: this illustrates how it is more difficult for someone who was always a Canadian to demonstrate they
severed ties, although the main reason for the decision was that the trip was always meant to be temporary
Tax Treaties
1) tax treaty must be enacted by parliament, given royal assent and brought into
force
2) if inconsistency between law in Canada and law in tax treaty, tax treaty prevails
3) there is a tiebreaker rule in each of the treaties, which would arise if you were
resident in Canada under ordinary resident rule, and deemed to be US resident
under rule similar to sojourning rule  would pay double tax on worldwide
income
4) most of our treaties follow one formula, and the US one is the most idiosyncratic
5) n.b. you can apply for tax credits to deduct between 2 countries, but that is if you
are a non-resident in 1 country – the “avoiding dual tax” problem is to deal with
situations where you might be decided as a resident of both countries
6) s. 250(5) – if you are non-resident under a treaty (i.e. treaty tiebreaker has
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applied to make you a resident of another country), then you are not a resident of
Canada (this is a backup rule b/c there were arguments made that you can be
resident in Canada for some purposes, and be non-resident for treaty purposes)
Canada-US Tax Treaty Article IV – On Residence
1) resident = person liable to tax on that state due to criteria met, like
domicile/resident/citizenship etc. [n.b. US uses citizenship]
2) if individual is resident by both states…(the tiebreaker rule) – listed in
descending order of importance
a) step 1: permanent home in Canada or US? (permanent = place TP can go back
to if TP wants, at anytime; does not mean forever) (ex. if sublease your apartment to
someone, you do not have permanent home, even if you own that apartment)
b) step 2: if both, look at centre of vital interests
i) close family members very important (spouse)
ii) where dependent children are
iii) other family members are not that important
iv) source of income, place of job
v) place of personal assets
vi) where investments are
c) step 3: if cannot determine center of vial interests, look at habitual abode
i) habitual abode not def., but often comes down to “where do you spend more
time?”
d) step 4: if habitual abode in both or neither state, look at citizenship
e) step 5: if citizen of both or neither, authorities of contracting states (i.e. the
IRS and CRA) will decide by mutual agreement
i) danger is that TP could be treated as resident of both countries, b/c both
countries will want TP to pay taxes
Canada-UK Tax Treaty, Article 4 on Fiscal Domicile
1) UK uses domicile
2) if resident under both, go to tiebreaker [very similar to the US-Canada]
a) step 1: look at permanent home
b) step 2: if permanent home in both, look at centre of vital interests
c) step 3: if cannot figure out centre, or no permanent home in either state,
deemed to be resident where habitual abode
d) step 4: if habitual abode in both or neither, look at nationality (i.e. citizenship)
e) step 5: if cannot decide from nationality, let tax authorities aside with mutual
agreement
Salt v The Queen 2007 TCC 118 – one only applies the tax treaty analysis where T is found to be a
resident of 2 countries
Facts: Alcan had home in Canada sent to Australia indefinitely but for at least 2 years; however, terminated
after 18 months; him and his wife had leased his QC home and needed to provide 6 months notice to return to
home; separated most ties in Canada but maintained driver’s license and bank accounts; claimed AUS tax
resident and CAN non-resident; CRA concedes he is AUS resident but also claims he was a CAN ordinary resident
so tax treaty rules apply
Issue: was he a Canadian resident for tax purposes from Sept 1, 1998 – April 1, 2000?; T submits that even if this
Court should conclude that he was ordinarily resident in Canada, he should be deemed not to have been resident
in Canada but to have been resident in Australia by virtue of the tie-breaker rules found in Article 4 of the
Canada-Australia Tax Convention
Held: non-resident of CAN; under the tie-breaker rule T is deemed to have been a resident solely of AUS b/c that
is the country in which he had a permanent home available to him; the evidence does not suggest that T had a
permanent home available to him in CAN during his stay in AUS; court assumes his CAN residency and applies
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s.250(5); as T could not access QC home, court determined no permanent home so he was deemed non-resident of
CAN
O’Brien: judge made a reasoning mistake here – you only go straight to the treaty when under domestic law T is
resident of both countries – cannot go to the treaty right away
Income Tax Folio S5-F1-C1
1) resident: leading decision on the meaning of resident is Thomson
2) ordinary resident: in Thomson, Estey J. held that, “one is ‘ordinarily resident’ in
the place where in the settled routine of his life he regularly, normally or
customarily lives”
3) 1.10 factual residence – are you resident as a QOF? [not a legal term, but a term
CRA made up to explain to layman ordinarily resident]
4) 1.11 most significant residential ties:
a) dwelling place (or places);
b) spouse or CLP; and
i) but if separated from them, this is not a significant tie
c) dependents
i) but if children grown up, not a significant tie
5) 1.14 secondary residential ties
a) personal property in Canada
b) social ties with Canada (friends, clubs, siblings etc.)
c) economic ties
d) immigration status
e) hospital insurance and coverage
f) driver’s licence
g) a car registered in Canada
h) a seasonal dwelling place
i) Canadian passport (i.e. citizenship)
j) memberships in Canadian unions or professional organizations
6) 1.17 – 2 year rule gone – used to be that if you left for 2 years or more, you severed
your ties; this was not said ever in case law, but CRA took the position
7) 1.23 – if TP was resident in another country prior to coming to Canada, and leaves
to re-establish that residency, then date TP becomes non-resident is date TP
physically leaves Canada
8) 1.32 and 1.33 – the sojourning rule
a) sojourning = to be temporarily present
b) the CRA considers any part of the day to be a day, in counting the 180 days
c) agree with R&L Foods that commuting and going back to place of dwelling is
not sojourning
9) 1.46 – on permanent house test to use during tiebreaker rule in treaties
10) 1.50 – on centre of vital interest test
Departure Tax (Consequences of Immigration and Emigration)
1) only applies to individuals, not corporations
2) emigration
a) when you emigrate from Canada, for tax purposes immediately before you
cease to be a resident, there is a deemed disposition and reacquisition at FMV
of all your property other than real property situated in Canada (s. 128.1(4)(b)(c))
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i) real property is exempt because CRA is not worried about not being able to
tax that property when it is actually disposed of
b) goal = tax accrued CGs as a resident of Canada and ignore anything that
happens as a non-resident
c) n.b. need to ensure you pay departure tax and file it accordingly in last tax
return when leaving Canada, as CRA views you as having no intention to leave
Canada if you haven’t paid the departure tax
d) problem = you have to pay tax on realized CGs but you never actually get the
cash which results in cash flow issue
3) immigration
a) when you immigrate to Canada for tax purposes there is a deemed disposition
and reacquisition at FMV of all your property other than taxable Canadian
property (s. 128.1(1)(b)-(c))  deems your ACB at FMV so it encourages
immigration if you have unrealized CGs
b) “taxable Canadian property” includes real property situated in Canada and
shares of private corporations (not listed on a stock exchange) that derive their
value primarily (50%+) from real property situated in Canada
Provincial Residents
1) most prov. piggyback their rules onto the fed. rules, with exception of Quebec
2) BC ITA s. 2(a): must pay tax if resident of BC on last day of tax year – Dec. 31
a) test = wherever TP was resident on the last day of taxation year
b) n.b. resident ≠ physically present (ex. TP could be sojourning)
c) income tax must be paid for every individual who is a resident in BC on the
last day of the taxation year + for non-residents that have earned income in BC
d) similar to international residency, TP can be a resident in 2 prov.
3) Federal ITA Reg., which applies for prov. taxes
a) 2601 – if an individual resides in a prov. on the last day of a tax year, will be
taxed on 100% of Canadian income by that prov.
b) 2607 – a tiebreaker rule  where individual resident in more than 1 prov. on
last day of tax year, will be deemed to be resident in the prov. that may
reasonably be regarded as his principal place of residence
Mandrusiak v. The Queen 2007 BCSC 1418 – determination of provincial principal place of residency
based on Thomson factual determination
Facts: chartered accountant from AB starts to work in BC; MNR conceded he was a resident of Alberta
Issue: was T also a resident of BC and where the tie-breaker puts him (where is his principal place of residence,
per Regulations 2607)?
Held: court went straight to Thomson, which drew heavily on English law for determining residence in an
international context, for determining prov. residence; court then examines the facts; where is his money? – in
AB, b/c you save money on taxes; overall, looked at where his economic assets were  thus, resident of AB
Residence of Corporations
1) corp. has separate legal personality, and thus is a separate TP
2) however, corps. do not have permanent homes/family etc. that allow you to tie
then to particular country as a resident
3) 2 ways for corps. to be resident of Canada
a) common law rule = De Beers
i) where central management and control abides (where board of directors
meet and exercises power (make decisions) – De Beers
ii) in rare cases, it is possible for the board of directors to abdicate the exercise
15
of its power, so it is actual place of management is where residency is
determined – Unit Construction Co Ltd v Bullock, UKHL 1959
iii) a corp. can be located in multiple jurisdiction and have to pay applicable
taxes in each – Swedish Central Ailway Co Ltd v Thompson, UKAC 1925
iv) where dual residency, apply Tax treaties, if applicable – s. 250(5)
b) deeming rule = s. 250(4)
i) (a) incorporated in Canada after April 27th, 1965
ii) (c) for those before April 27th, 1965, it was incorporated in Canada and
resident or carried on business in Canada (s. 253 – means incorporated
under either prov. or fed. statute and a certificate of incorp. established)
4) tiebreaker rules for Canada-US Treaty for corporation
a) look at place of incorporation, place of management
b) under US law, tax residence for corp. is solely where they are incorporated
(they do not have place of effective management)
c) if resident of both states, (central management and control in Canada, but
incorporated in US) then look at
i) created under the laws in force in a K’ing state  i.e. if control in Canada
but incorporated in US, the rule says it is a US resident
ii) if cannot decide by rule, then use mutual agreement, but usually the first
tiebreaker rule solves it
5) tiebreaker for Canada-UK Treaty for corp.  mutual agreement
Shih v The Queen, TCC 2002
Facts: Taiwan family came to Regina and was joint owner of home; T went back to Taiwan to work but would
visit family on regular basis, but never enough to make him a sojourner (i.e. never hit the 183 days limit); his
parents were in Taiwan and he as the eldest son were to look after them; he was member of the church and tennis
club in Taiwan; he bought a house in Taiwan
Issue: is Mr. Shih resident in Canada? (it was clear his wife and 3 sons were resident in Canada, as they had
citizenship and was almost never in Taiwan)
Held: he was resident only in Taiwan
O’Brien: no reason why the court could not have said that T was also resident in Canada, as his residential ties
and family are in Canada (he is a permanent resident so he can come and go as he pleases); however, if the court
did find this, Canada has no treaty with Taiwan, and thus T would have had to pay tax on his worldwide income
in 2 places
Canadian Taxation of Non-Residents
1) tax liability for non-residents is based on Canadian source of income – (usually
income from passive sources – i.e. TP does nothing to earn the income) (s. 2(3)) +
passive income (s. 212))
2) active taxation of non-residents who was s. 2(3)(a) employed in Canada; (b) carried
on business in Canada through a permanent establishment; or (c) disposed of
taxable Canadian property on Canadian-source income
3) s. 212 passive property withholding tax: statutory 25% income tax on the recipient
of certain types of payments made by Canadian residents to non-residents (s.
212(1))
(a) management fees or administration fees or charges
(b) interest – ex. when a Canadian resident company pays interest to its Australian parent
company in respect of a loan from the Australian parent: the Australian parent company is subject to
25% withholding tax that must be withheld and remitted by Canadian company [here, arms’ length
[i.e. if non-arms’ length  pay the tax ]
(c) estate or trust income – ex. a resident of the UK receiving a share of the
income from a Canadian resident estate or trust (perhaps resulting from
vs. non-arms’ length matters
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a)
b)
c)
d)
the will of deceased Canadian resident)
(d) rents and royalties
(h) pension benefits
(j.1) retiring allowance [n.b. a retiring allowance is not income from
employment in Canada (which would be taxed under s. 2(3)) – it’s income
from another source under s. 56]
(l) payment out of or under a registered retirement savings plan
resident corporation paying a dividend to non-resident shareholder must
withhold 25% of the dividend (s. 212(2))
cannot claim expenses against the 25%
responsibility on the Canadian resident to withhold and remit the tax on
behalf of the non-resident (s. 215(1))
the Canadian resident is jointly and severally liable for the tax if it is not
withheld and remitted (s. 215(6))
Income from Office or Employment
1) def.: s. 248(1): office, EME, EMP, employment
a) office = the position of an individual entitling the individual to a fixed or
ascertainable stipend or remuneration
i) an office-holding may include an elected official, director, executor, or
executrix, judge, tribunal member, chairperson or union officer
b) employment = the position of an individual in the service of some other person
(including the Queen or foreign state)
c) “servant” or “EME” = a person holding such a position
i) an individual who is retained to provide services to another person = “EME”
or “IKor”
ii) IKor = business person, self-EME, and freelancer
2) office and employment are taxed identically under s. 3(a) – relevant are ss. 5-7
a) s. 5(1) – the charging section; TP’s income from office/employment = salary,
wages, and other remuneration (including gratuities)
b) s. 5(2) – loss from office or employment
i) but it is really hard to come up with a loss for office or employment
ii) not only do you get paid more than you can deduct, but the Act specifically
limits amount of deduction, which usually ends up as nil
c) s. 6 – amounts to be included in income from office/employment
i) s. 6(1)(a) – value of benefits
ii) s. 6(1)(b) – personal or living expenses
iii) s. 6(1)(c) – directors’ or other fees
iv) s. 6(1)(d) – allocations etc. under profit sharing plan
v) s. 6(1)(e) – standby charge for automobile
vi) s. 6(1)(f) – periodic payment of employment insurance benefits
vii)s. 6(1)(g) – EME benefit plan benefits
viii) s. 6(3) – payments from EMP to EME, including (partial) payments in
consideration of agreeing to serve as officer or under K of employment, and
(partial) payments for stipulating what EME/officer is not/allowed to do
before or after the termination of employment
ix) s. 6(3.1) – amount receivable for covenant
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d) s. 8 – deductions in computing income from employment; no deductions are
allowed unless can specifically fit into one of the s. 8 provisions
Employee vs. Independent Contractor
1) key differences
a) EMEs are taxed at source; IKors are not
b) basis of measurement
i) income from office  calculated on cash basis; recognized when “received”;
permitted EME expenses deductive when “paid”
ii) income from business  calculated on accrual basis; business income is
“earned”; business expenses recognized when “incurred”
c) withholding of tax by EMP in s. 153(1)(a) vs. s. 156 no withholding obligation
on payments to IKor
i) an EMP must withhold and remit source deductions for each EME
ii) EME have their deductions done at source by their EMP
iii) includes EI, and other benefits
iv) if you are an IKor, you have to charge GST/HST on your invoices and it is
an indicator that you are an IKor rather than an EME
v) IKors have to pay double CPP
d) EMEs have almost no deductions (only those permitted under s. 8 allowed) vs.
IKors have wider scope to deduct under ss. 9 & 20
i) for EMEs, expenses are considered personal consumption decision – ex. if you
get to work, you can either drive an expensive car or walk – one is very expensive and one is free 
idea is just b/c a person can afford the expensive car, he/she should not get to deduct more
ii) whereas IKor is someone in business for themselves, and thus may have
many deductions  generally, presumption is that all expenses incurred for
purpose of earning income from the business is deductible, unless excluded
iii) does not mean IKor can deduct commuting to work, or cost of their clothing
and lunches etc.; however, what is perceived as expense for business is
much more relaxed
e) EME gets s. 118(10) – the Canada Employment Credit
i) credit received = A × B
ii) A = % for the tax year = always the lowest marginal rate = 15%
iii) B = the lesser or $1000 or TP’s income from office/employment for the year
iv) i.e. can get max $150 of deduction for EME income
v) n.b. this is only available for employment, and not income from other source
f) reporting period: taxation years
i) s. 249 – taxation year of an individual is the calendar year
(1) income from office/employment calculated on calendar year basis
ii) business income calculated and reported on fiscal year basis
(1) s. 249.1 – defines “fiscal period
2) 2-step test to distinguish between EME or IKor (Connor Homes, affirming Wiebe
Door)
a) Determine the subjective intent of each party to the relationship. (Royal
Winnipeg Ballet; Wolf) Determined either by the written K relationship the
parties have entered into or by the actual behaviour of each party, such as
invoices for services rendered, registration for GST purposes and income tax
filings as an IKor. If both parties have a common intention, apply 2nd step but
18
giving weight to 1st step as an influence (Wolf). If no common intention, then
2nd step but no influence.
b) Determine whether the objective reality sustains the subjective intent of the
parties. Objective reality by applying Wiebe Door affirmed by Saguz: whether
the person engaged to perform services is performing them as a person in
business on their own account, considering the control over the activity and
other factors such as whether the worker: provides own equipment, hires their
own helpers, has a degree of financial risk, has a degree of responsibility for
investment and management, and the ability for profit in performance of tasks
– whose business is it?
c) old test
i) control of master over servant (still important)
ii) ownership of tools and equipment + where is it performed
iii) opportunity of profit or loss; and [EMEs can work more hours to make more
money, but IKors can raise his/her rate to earn more]
iv) organization / integration test (problem is that it usually indicates EME) –
work is done as an integral part of the business (no longer important)
3) n.b. highly skilled or specialized person in an industry likely to be an IKor (Royal
Winnipeg Ballet; Wolf)
Wiebe Door Services Ltd v MNR, FCA 1986 – established updated EME test: ultimate question = whose
business is it? (affirmed by 671122 Ontario v Saguz Industries, SCC)
Facts: assessment of EI and CPP for door installers; individual Ks with door installers and repairers that did not
usually go into the office and had most of their own tools; pay was based on how many jobs they wanted to do
themselves
Held: installers were EMEs because without the installers, there would be no business; “In many cases the
question can only be settled by examining the whole of the various elements which constitute the relationship
between the parties. In this way, it is in some cases possible to decide the issue by raising as the crucial question
whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of
carrying it on for himself or on his own behalf and not merely for a superior.”
Wolf v The Queen, FCA 2002 – intention of the parties has to be given some weight
Facts: Aeronautical engineer (standard IC industry) from US worked for 5 years in Montreal
Royal Winnipeg Ballet v MNR, FCA 2008 – intention of the parties should always be taken into
account
Facts: ballet dancers on K, but ballet shoes owned by Ballet Company
Held: when interpreting a K, what is sought is the common intention of the parties rather than the adherence to
the literal meaning of the words; this does not mean that the parties’ declaration as to the legal character of their
K is determinative, nor does it mean that the parties’ statements as to what they intended to do must result in a
finding that their intention has been realized; the way K set up was recognizing that this was short term
relationship, and that although during the time they were providing services the ballet dancers had to listen to
the company, in fact the nature of their skills gives them leeway to leave the company; thus, distance between the
ballet dancers and the Winnipeg Ballet was maintained
Connor Homes (1392644 Ontario Inc.), FCA 2013 – new 2 step test to determine worker relationship
Facts: workers in foster and group homes in Ontario; was about EI and CPP contributions rather than income
tax, but applies equally to s. 153(1)(a) [that EMP withhold and remit income tax]; T is the corporate EMP; CRA
argues T has not complied with obligations to contribute employment insurance contributions and withhold it
from EME’s paycheque; each worker had a written K; worker paid on hourly rate and had to submit invoices to
get paid + flat rate if worker had to stay overnight, and also paid weekend relief; K was for indefinite time but
could be terminated by worker with 2 weeks notice and EMP with cause; each worker responsible for their own
CPP, EI and provincial taxes; workers allowed to take on other work other than from Connor Homes – i.e. K made
them IKors
Held: affirms Wiebe Door and Sagaz’s “whose business is it” test
 some things indicated EME
 hourly rates set by the EMP
 normally, a K for services is for a short term and not an indeterminate period
 Connor Homes could only terminate the K for cause, which suggests there could be opportunity to sue for
breach of K if they terminated any of these workers, which is a mark of employment
19
and the mention of being required to contribute their own EI premiums is weird b/c IKors cannot qualify
for EI and you must be arm’s length from your EMP, and you cannot be arm’s length from yourself
Connor Homes had been found to be an EMP in very similar circumstances in earlier cases
2 step test, with overall question being: whose business is it?
since Wolf in 2002, the courts are more willing to look at the K between parties and try to determine the
relationship from it
 however, it is the facts on the ground that matter – that the K says you are an IKor does not mean you
actually are one
 the CRA is not bound the K, and if the CRA says you are an EME then they will tax according to the
reality
test applied
 under 1st step, there was subjective intention that the workers would be IKors
 under 2nd step, the significant degree of control that Connor Homes exercised on the workers – ex. lack of
having to provide own tools, every step of what they were supposed to do being set out in guidelines –
meant that they were actually EMEs





Using a Corporation to Avoid EME/IKor Problem and the PSB Rule
1) one of the techniques to avoid the EME/IKor problem, is to interpose a corp., b/c
generally a corp. cannot be an EME
2) b/c of this tax planning technique, ITA was amended to include s. 125(7)
a) definition of active business specifically excludes a PSB carried on by a corp.
b) CCPC = resident in Canada, shares not listed on stock exchange, not controlled
by non-residents in Canada  get special tax rate
c) here, we are really talking about CCPCs carrying on PSB
3) test for PSB = s. 125(7)
a) an individual performs services on behalf of the corp. (incorporated EME) or
any person related (s. 251(2)) to the incorporated EME
i) related (s. 251) means
(1) an individual  related if connected by blood, marriage, CLP or
adoption (s. 251(2)); blood relationship means 1 person is the child or
descendant of the other (i.e. a child is related to parent, grandparent,
great-grandparent etc., and vice versa) or 1 person is the brother or
sister of the other (s. 251(6)(a)); in-laws also considered related (s.
251(6)(b) + (b.1))
(2) a corp.  related if
(a) the person holds voting control, meaning enough shares to elect the
board of directors, normally over 50% (s. 251(2)(b)(i))
(b) a person is a member of a related group that controls the corp. (s.
251(2)(b)(ii)) – a related group means a group of persons, each
member of which is related to each other member
(c) any person related to either the person controls it, or any member of
the related group that controls it (s. 251(2)(b)(iii))
b) is a specified shareholder (10% or more individually or collectively with nonarms length persons) (s. 248(1)) of the of the corp., and
i) all related persons are deemed not to deal at arm’s length (s. 251(1)(a))
ii) for non-related persons it is a QOF whether persons are dealing at arm’s
length – s. 251(1)(c)  requires an examination of all of the facts and
circumstances existing between the persons at the relevant time; unrelated
parties have been held not to deal at arm’s length when
(1) there is “a common mind” which directs or controls the bargaining for
both sides (ex. a person and a corp. of which he is a less than 50% shareholder, but a director
20
or
(2) the persons act in concert without separate interests
c) the incorporated EME would reasonably be regarded as an officer or EME of
the person (Wiebe Door/Connor Homes test for EME vs. IKor [see p. 18]) to
which the services were provided but for the existence of the corp., unless…
d) the corp. employs in the business throughout the year more than 5 full-time
EMEs
4) consequences of being a PSB
a) no deduction can be on outlay/expense if corp. gained it for a PSB other than
salary/wages paid in a year to an EME of the corp. (s. 18(1)(p))
b) cost of benefits/allowances provided can also be deducted
c) negate any advantage of trying to interpose a corp. as it removes CCPC 13.5%
tax rate, increasing the rate to 38%
5) n.b. the court can sometimes hold that someone is an EME even though a corp.
cannot be an EME
and officer with influence over the other directors/officers)
Benefits, Reimbursements, and Allowances
1) s. 5 – includes in the TP’s income any amounts received as salary, wages,
gratuities and “other remuneration” (by TP and persons not at arm’s length (s. 6))
a) salaries and wages = given their ordinary meaning
b) gratuities = voluntary payments made in consideration of services rendered in
the course of a TP’s office/employment
c) other = includes honoraria, commissions, bonuses, gifts, rewards, and prizes
2) s. 6 outlines further specific inclusions for income from office/employment such as
a) amended s. 6(1)(a): inclusion in income of benefits  cash and non-cash such
as board, lodging, and other benefits received by TP or a non-arm’s length
person in relation to TP (i.e. family) in respect of the TP’s employment
3) benefits = a material acquisition conferring an economic benefit on the EME in
TP’s capacity as an EME (Savage)
4) 2 part test for determining taxable benefit (Lowe) under s. 6
a) whether the item under review provides the EME with an economic advantage
or something of value that is measurable in monetary terms?
i) reimbursements are not taxable benefits as they do not confer an economic
benefit on the TP but rather restore his economic situation he was in before
his EMP ordered him to incur the expenses (Huffman)
b) if so, does the primary advantage ensue for the benefit of the EME or EMP?
i) was benefit provided in respect of, in the course of, or by virtue of
employment? (Savage)
ii) does not have to be in exchange of services and can be voluntary action such
as outside courses
iii) if it is determined to be a benefit and is not statutorily exempt s.6(1)(a)(i), it
is included in employment income (Savage)
5) note that you can catch many things under “benefits” that are not necessary
coming directly from the EMP (ex. Waffle: Waffle took the trip when the president was unable to
take it; he was taxed on the value of the trip as benefit from employment b/c if he had not been an EME, he
would never have had the trip; the benefit did not come from his EMP but came from Ford Canada, a
separate entity – court says this does not matter)
6) policy
21
1)
2)
3)
4)
a) we tax non-cash benefits as if they were income from employment b/c
otherwise people would bargain for non-cash benefits – and we are looking for
horizontal equity
b) prevents erosion of the tax base
c) some things will not be taxed at all – ex. free coffee at work – and the policy
reason is b/c enforcing such a rule will cost more than what CRA will get
IT-470R – Fringe Benefits vs. Privileges
distinguishes between “fringe benefits” and “privileges” (but this is not the
language used by the courts)
amounts to be included in income
a) board and lodging
b) rent-free and low-rent housing
c) travel benefits [unless an allowance or otherwise excluded from income]
d) gifts (including Christmas gifts) [note exceptions below]
e) holiday trips, other prizes and incentive awards
f) travel expenses for employee’s spouse
g) premiums under provincial medical insurance plants
exceptions for prizes and gifts
a) non-cash gifts and non-cash awards to an arm’s length EME will not be
taxable to the extent that the total aggregate value is < $500 annually (value
in excess of $500 annually will be taxable)
b) non-cash long service/anniversary award may qualify for non-taxable status to
the extents its total value is < $500 (value in excess of $500 will be taxable);
anniversary awards may not be for less than 5 years of service, or 5 years since
the last long service award.
c) items of an immaterial or nominal value (ex. coffee, tea, t-shirts with EMP
logo, mugs, trophies) are non-taxable; no monetary threshold but rather a
consideration of value, frequency and administrative practicability
non-taxable amounts
a) an EMP-provided party or social event available to all EMEs if cost is
reasonable in the circumstances (typically, less than $100) (Dunlap)
b) trips where the EME’s presence is for business purposes (Lowe)
c) loyalty points provided that not converted to cash; not indicative of an
alternative form of remuneration
d) subsidized meals provided that the EME pays a reasonable amount
e) distinctive uniforms, special clothing and cleaning costs (Huffman)
f) transportation to the work site that the EMP provides directly (e.g., not
reimbursement or allowance)
g) recreational facilities
h) social or athletic club membership where the benefit is principally to the
employer (Rachfalowski)
i) moving expenses – thus may not need s. 62 deduction for moving expenses
The Queen v Savage, SCC 1983 – taxable benefits need to be received in a capacity as an EME and not
as a person; the payment does not need to have the character of remuneration; if it is a material
acquisition which confers an economic benefit on the TP and does not constitute an exemption then
it is a taxable benefit
Facts: Mrs. Savage was an insurance research assistant that completed 3 voluntary courses to improve her
knowledge of insurance field and EMP gave her $300; was policy that EMEs get prize – policy designed to
22
encourage self-upgrading of staff members; EMP included $300 as other income indicating it was a prize for
passing LOMA exams; EME excluded it in her tax income
Held: not a benefit; payments were in respect of employment to encourage self-upgrading to improve her
knowledge and efficiency in the company business; however, General Provision includes but there was a specific
exemption that excludes prizes under $500; statutory interpretation that specific overrules general so not a
benefit
Lowe v The Queen, FCA 1996 – 2 part test for determining taxable benefit
Facts: insurance account executive travels to New Orleans with wife for four days to wine and dine clients; CRA
assessed 62% of trip for Lowe and 75% for wife was personal; as they were actually 14 hour days entertaining, the
TJ says only 20% for Lowe and 75% for wife
Held:
 rationale of s.6(1)(a) = it is intended to equalize the tax payable by EMEs who receive their compensation in
cash with the amount payable by those who receive compensation in cash and in kind
 in the absence of the rule, the tax system would provide incentive for EMEs to barter for non cash benefits
and result in a capricious and irrational tax system based on bargaining power rather than fairness
 test applied:, b/c T was playing host the entire time, any personal benefit was incidental – thus entire trip
was excluded
O’Brien: why would T’s wife’s trip been taxable to T if the court held the trip was for enjoyment?  b/c the s. 6
catches benefits to individuals not at arm’s length with the TP
The Queen v Huffman, FCA 1990 – reimbursements are not taxable benefits
Facts: plain clothes police investigator was required to buy a large overcoat to house police equipment and under
Collective Agreement would be reimbursed up to $500 for clothing purchases; deals with reimbursement of funds,
which are not benefits as the worker has acted as an agent for the EMP
Held: not a benefit b/c EME was simply being restored to position he was in before  i.e. EMP should have paid
for the clothing anyways, as agreed to under the Collective Agreement, and the EME merely paid for it first, and
then asked for the proper reimbursement
O’Brien: n.b. IT-470R para. 29-30 – CRA states uniforms and other special clothing are not taxable benefits; if
the EMP pays for the dry-cleaning or reimburses the EME for dry-cleaning of such clothing, this is not a benefit to
the EME either
1)
2)
3)
4)
Valuation of Employment Benefits
under Canadian law, s. 6(1)(a), the value of a material benefit received of enjoyed
= FMV of the benefit
a) it is up to the EME to argue the benefit was worth significantly less (Dunlap)
b) “material” does not have to mean that the benefit has to last a long time, as TP
may have “received” the benefit without having anything to keep or take home
(Dunlap)
placing a value on a taxable benefit is difficult where the item provided to the
EME has a work-related purpose and also provides a personal benefit
a) the % attributed to work vs. personal is a QOF, differing in each case (Philip;
Ferguson; Richmond)
sometimes, a benefit may not be used but whether TP uses the benefit is of no
consequence, as benefit is determined based on that it was available which was
the benefit (Richmond)
a) however, other cases say valuation of benefit under s. 6(1)(a) should be
determined based on actual use (Rachfalowski)
n.b. IT-470R para. 10-12 on holiday trips, other prizes, and incentives/awards
a) if it really is a vacation, then there is a benefit
b) if person is there for partly business reason, then can apportion between
pleasure & business time
Dunlap v The Queen, TCC 1998 – an interpretation bulletin is only a declaration of policy, where it is
in conflict with plain meaning of ITA, ITA rules
Facts: T and his guest attended Christmas parties in 1992-1993 provided by the EMP; the EMP also offered free
accommodation at the hotel, where the party was after; the Minister assessed T for the value of the meal, drinks,
and enjoyment of amenities, and the hotel room, which came to around $300 per year; the EMP deducted the cost
of the party for all the EMEs, but did not include any amount on T4s of EMEs as a benefit of employment; the
23
CRA audited the EMP and then probably counted how many EMEs attended the party, and averaged the amount
of liquor consumption and gratuities taxable; IT-470R was brought into arguments
Held:
 court rejects any suggestion that the IT should be followed – they cannot determine the result of an appeal or
trial, especially if it is direct conflict with the economic policies expressed by Parliament in the Act
 T argued he did not drink as much, and he should not have to pay as the rest for tips to the servers, and thus
he is disputing the inclusion of an average amount for liquor and gratuities
 T also argued that he did not have a material acquisition – i.e. he has the enjoyment of the party, but that
enjoyment ends with the party
 however, the wording in s. 6(1)(a) says “received or enjoyed” – and thus includes “received” without having
anything to keep or take home
 T could not prove that he and his guest had drunk less than the average, and thus the average amount was
included in his income
Philip et al v MNR, ExCt 1970
Facts: company paid for 6-day trip to Caribbean if sales exceeded quota; only scheduled event were 3 2-hour
business sessions and a dinner
Held: benefit conferred on each T was ½ of the EMP’s cost of each T’s trip
Ferguson v MNR, 1972 – only 10% of the value of the trip was a benefit b/c T attended convention in Greece to
meet prospective customers, but did take a number of planned tours of Athens
Richmond v The Queen, TCC 1998 – whether T uses the benefit is of no consequence, as benefit is
determined based on that it was available which was the benefit
Facts: T provided parking spot at no charge for his EMP but CRA assessed a taxable benefit of $1800; T argued
that he only used the spot 20% of the time and the valuation should be reduced accordingly
Held: no diminishment in valuation, so taxable
Rachfalowski v The Queen, TCC 2009 – valuation of benefit under s. 6(1)(a) should be determined
based on actual use
Facts: T received golf club membership but hated golf and tried to declined but was persuaded to use it for
dinners with wife
Held: the value to a particular T of such a benefit under s. 6(1)(a) should be determined on an individual basis of
actual use as opposed to availability
O’Brien: Rachfalowski was probably not appealed b/c of para. 34 of the IT – where EMP requires EME to be part
of social club, the EME is not deemed to have received a taxable benefit where membership was principally for the
EMP’s benefit Lowe supports this interpretation – if the membership is really for the EMP’s benefit in attracting
clients, then you can argue the TP should not be taxed on that benefit, or that it was not really a benefit to TP
1)
2)
3)
4)
Allowances – s. 6(1)(b)
allowances are always cash to the EME; taxable in income from employment
concern is that these things called “allowances” are really just additional
remuneration and therefore should be taxed
allowances = amounts that EMP wants to give to EME b/c the EME, by nature of
the employment or location, will have to bear some expenses, such as increased
personal/living costs; it is a pre-determined amount set without any view to actual
costs or expense (MacDonald)
but there are exemptions
a) special and remote worksites
b) certain automobile and travel allowances
The Queen v MacDonald, FCA 1994
Facts: T was RCMP officer that transferred from Regina to TO and received a $700 month subsidy for rent
Held: an allowance is a limited predetermined sum of money paid to enable the recipient to provide for certain
kinds of expenses, its amount is determined in advance and, once paid, it is at the complete discretion of the
recipient who is not required to account for it; a payment in satisfaction of an obligation to indemnify or
reimburse someone or to defray his or her actual expenses is not an allowance (it’s a reimbursement) – it is not a
sum allowed to the recipient to be applied in his or her discretion to certain kinds of expenses
The Queen v Huffman, FCA 1990
Facts: Huffman was reimbursed the full $500 but only had receipts for $420; the Ministry argued that the extra
$80 was not a reimbursement, but an allowance
Held: here, Huffman spent more than $500 on his jacket and overcoat in the year, and the court accepted this
despite the lack of receipts, b/c at the time he bought the coat, the policy was for up to $400 – and thus he only
kept receipts for $400; thus, the $80 will not be treated as an allowance
24
Special and Remote Worksites Exemption – s. 6.6 & IT 91-R4
1) s. 6(6) – where EMP provides EME with reasonable allowance for
food/transportation/housing when working at remote location or special worksite,
that amount is exempt
2) 2 situations under s. 6(6) where you do not include in employment income any
amount received/enjoyed by TP
a) special: where you are staying somewhere special for a temporary period,
under which you can have allowances for accommodation and meals if,
i) location too far away to return daily
ii) it was made available to T and not rented out
(1) n.b. “special workplace” need not be a remote site – ex. TO can be a special
worksite if you normally work and live in VAN
b) remote: where you stay away in a remote period, perhaps for long periods of
time b/c TP cannot reasonably be expected to maintain self-contained domestic
establishment b/c place is too remote
i) s. 248(1) “self-contained domestic establishment” = dwelling house, or other
similar place of residence where person sleeps and eats
ii) IT 91-R4 defines remoteness from an established community – basically, an
established community should be a place where you can live with a normal
household, where people have access to necessities of life and where you can
enjoy a life with family
(1) factors to consider:
(a) the availability of transportation;
(b) the distance from an established community; and
(c) the time required to travel that distance
(2) essential services include:
(a) a basic food store;
(b) a basic clothing store with merchandise in stock (not a mail-order
outlet);
(c) housing; and
(d) access to certain medical assistance and certain educational facilities
(3) main issue = how far is the workplace from the established community?
(4) remote = nearest established community with population of 1000+ is
80km away using the most direct route normally travelled
iii) IT-470R distinguishes transportation to a remote location (s. 6(6)) vs.
transportation to a job where EMEs would not be expected to take their
own cars (ex. if private vehicles not allowed or welcome)
(1) under the 2nd category, it does not qualify as remote location, but this is
not considered as a benefit of employment
(2) transportation to and from work are usually paid for by EMEs and are
not deductible anyways
Automobile and Travelling Allowances Exemption
1) s. 6(1)(b)(v) – salesman travel expense exemption
a) here, we are thinking about the travelling salesperson
b) note that sometimes benefits of employment do not have to directly flow from
EMP to EME, but for the exceptions, do need to flow directly
2) s. 6(1)(b)(vii) – non-salesman travel expense exemption except MVs
25
3)
4)
5)
6)
7)
a) if it is part of your job to go from place to place away from where you normally
report for work
b) non-MV includes ground transportation, planes, trains, boats
c) travel expenses would include meals and accommodations while you are away,
and even incidentals
d) MV usually refers to EME’s vehicle, although sometimes EMP supplies it
s. 6(1)(b)(vii.1) – non-salesman travel expense exemption for MVs
for purposes of (v) and (vii.1), any allowance that is not based on a per km driven
during employment is not reasonable  i.e. measure MV use by km, or else not
exempt
s. 6(1)(b)(xi) – cannot be both reimbursed and given allowance
what is a reasonable price per km for an allowance? – CRA’s policy is to look to
Reg. 7306
a) 52 cents/km for first 5000kms; +
b) 46 cents/km for every km after that; +
c) additional 4 cents/km for the territories (b/c roads are generally rougher)
s. 18(1)(r) – the EMP can pay up to the Reg. 7306 amount; if they pay more, they
cannot deduct unless it is included in EME’s income
Deductions for Employment Income
1) deductions apply where EME pays out of his/her pocket, and EMP does not
provide allowance or reimbursement
a) s. 8(1) – sets out the deductions
b) can only deduct amounts wholly applicable to the office/employment, or parts
of the amounts (ex. if part of the expense is personal and part is for
employment, can only deduct part for employment)
c) s. 8(2) – you must fit yourself into s. 8(1), or else cannot claim a deduction
2) general limitations in ss. 67 and 67.1
a) s. 67 – deductible expenses must be reasonable
i) this issue usually comes up if the expenses are clearly exorbitant – ex. choosing
an especially expensive hotel for business trips that are far out of proportion to what you will get
from that trip
b) s. 67.1(1) – limits how much money you can spend and deduct on
beverages/food/entertainment to 50% of the expense
i) this is a policy decision
ii) originally, 100% was deductible for client development expenses, but people
were spending huge amounts of money and abusing the deduction, so much
so that there was a personal aspect to it – people were doing it more for fun
than business
iii) exceptions to s. 67.1(1)
(1) s. 67.1(2)(a) – for restaurants, grocers, airlines, food processors etc. –
people who provide food/entertainment as part of their incoming earning
process
(a) ex. if you are running a restaurant, you can deduct the full amount of the food/beverages you
buy to prepare for the business, or deduct the amount of money you pay for movie showing
rights if you are running a theatre
(2) s. 67.1(2)(f) – EME party expenses can be deducted at full provided they
only hold up to 6 parties per year
3) deductions that EMEs can claim
26
a) s. 8(1)(f) – sales expense for commissioned salesperson
i) deduction for travel and other expense for selling property or negotiation Ks
for EMP
ii) requirements
(1) under the K of employment, which may or may not be written, EME is
required to pay own expenses
(2) ordinarily required travel to carry out employment duties
(3) EME has to be remunerated in whole or in part by commission in
similar amounts
(4) cannot have also received an allowance that was exempt under s.
6(1)(b)(v)
iii) s. 18(1)(l) restricts s. 8(1)(f)(vi)
(1) cannot deduct the cost as a business person of yachts, camps, golf
courses etc. or other expensive recreational activities
(2) public policy = these are luxuries, and we should not be allowing people
to ask other TPs to pay for those luxuries (b/c when 1 person deducts,
others have to pay)
iv) s. 8(10) – do not get to claim the deduction unless EMP provides a form that
says you were required to pay your own expenses, and you met all other
conditions of the provision
b) s. 8(1)(g) – transport EME’s expenses
i) meals and lodging (the “and” is important) deductible if worker works on
passenger or goods transport vehicle, and meals and lodging sometimes on
the vehicle
ii) s. 8(1)(g) requires incurring both meals and lodging expenses for the worker
to claim the deduction under this provision (Crawford)
iii) the deduction for meals under s. 8(1)(g) is not intended to be available to
workers who return to their homes each night as a matter of course
(Crawford)
c) s. 8(1)(h) – non-sale person travel expenses; allowed to deduct when
i) travelling is ordinary part of job
ii) TP is required to pay own expenses for travel
iii) then, can deduct unless received allowance that is not taxable under ss.
6(1)(b)(v), (vi) or (vii) or deductions claimed under ss. 8(1)(e)-(g)
(1) ex. sales expenses would come under (f), but if did not receive income on commission, might be
able to deduct under (h)
(2) i.e. if did receive commission, try (f), if no commission, try (h)
d) s. 8(1)(h.1) – MV travel expenses
i) can only deduct if travelling during the course of employment/office
(Martyn)
ii) the travelling has to be part of TP’s workday to be deductible (Hogg)
e) s. 8(4) – meals rule: you do not get to buy lunch just b/c you are on duty; TP
who is an officer/EME can only deduct meal under ss. 8(1)(f) or 8(1)(h) unless
the meal was consumed during a period while the TP was required by the TP’s
duties to be away, for a period of not less than 12 hours [n.b. 50% rule in s.
67.1(1) applies]
i)
n.b. this provision helps explain the result in Renko – the ferry EMEs were going home every night
and so the meals should not be deductible unless they were really going to be away from home for
27
more than 12 hours
f) s. 8(1)(b) – legal expenses: if you were suing for anything from your EMP that
you think you had right to, entitled to deduct legal expense
g) s. 60(o.1)(i)(B) – the parallel deduction for including retiring allowance
i) if have to sue for wrongful dismissal and recover, either damages or
settlement amount, must include the wrongful dismissal under s.
56(1)(a)(ii), but then can claim the deduction under s. 60(0.1)(i)(B)
ii) this is becomes retiring allowance is another source – it is not employment
income, and thus have to find a separate deduction provision to match it
iii) here, your deduction may exceed your remuneration – b/c the amount you
recover may be more less your legal fees
h) professional and union dues – ss. 8(1)(i)(i), (iv), (v) and 8(5)
i) b/c the dues must be annual in nature, the payment of an additional fee on
entry into a profession is not deductible employment expense
ii) despite the restrictive language of s. 8(1)(i)(i), Ts often claim annual dues
paid to organizations that do not involve a professional status of any sort –
such claims are often “successful,” b/c the deductions were not audited
i) cost of supplies: s. 8(1)(i)(iii)
j) home office expenses: s. 8(13)
i) under (a) cannot deduct, unless…
(1) you are a home-based EME and perform more than 50% of work at
home; or
(2) the space is used exclusively for the purpose of earning income from the
office/employment and used on regular basis for meeting customers, and
other people in the ordinary course of performing duties
ii) under (b) where above 2 conditions are met, cannot generate a loss from
employment from this – if your income from home is more than income for
employment, you can deduct down to nil, but not negative
iii) under (c) can carry forward deductions that could not be included under (b)
if employment/office carries onto following year
k) moving expenses for EMEs and students (s. 62) [see pp. 41-43]
Crawford v The Queen, TCC 2002 – the deduction for meals under s. 8(1)(g) is not intended to be
available to workers who return to their homes each night as a matter of course; the “and” in s.
8(1)(g) is conjunctive and so workers must incur both meals and lodging expenses to be able to
deduct under s. 8(1)(g)
Facts: 4 ferry workers of BC Ferries attempt to make deductions for food under s. 8(1)(g); was a test case for all
other ferry workers; CRA had advised in letter that meals were deductible
Held: statutorily interprets s.8(1)(g)(ii) the “and” as requiring both meals and lodging not only meals
Martyn v MNRI, TAB 1962 – commuting is not a deductible travel expense unless it is in the
performance of the duties of the office or employment
Facts: pilot T attempted to deduct the cost of commuting between his home and the airport
Held: driving to and from work is not deductible unless the driving was work duties
Hogg v The Queen, FCA 2007
Facts: Judge had base court in Etobicoke and would receive a travel deduction when travelling to other
courthouses 15 km+ away, argued that security concerns converted the commute to base court as deductible; T
claimed to fear assaults while commuting so he needs the car
Held: commuting for a judge is not deductible
The Queen v Swingle, FCTD 1977 – courts do not recognize chemists as a professional under statute
Facts: T was a chemist was a gov. worker in a number of different professional societies to keep abreast of rapidly
changing developments
Held: status recognized by statute is a professional status that is dependent upon membership in the professional
society
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Income from Business/Property
1) s. 3(a) – business is a source of income for tax
2) s. 9(1) – a TP’s income for a tax year from business/property is TP’s profit from
that business/property for the year
a) profit = revenue – expenses
b) def. of profit is a QOL, thus no reference to accounting principles is relevant
3) s. 9(2) – loss = revenue-minuses when expenses > revenue
4) s. 20(1)(c)(i) (the latter in connection with Stewart) – deductions permitted in
computing income from business or property include interest on borrowed money
used for the business/property in earning income
a) deduction must be from expense incurred for the business, not from personal
activities
5) s. 248(1) “business” = a profession, calling, trade, manufacture, or undertaking of
any kind whatever, but not including office or employment
6) s. 248(1) “property” = property of any kind whatever, and includes
a) a right of any kind whatever
b) unless a contrary intention is evident, money,
c) a timer resource property, and
d) the work in progress of a business that is a profession
7) s. 9(3) – income or loss from a business/property does not include any CL/CG
Canadian Controlled Private Corporations
1) distinction between income from property and income from business is significant
when the income is earned by a CCPC
2) CCPC means
a) Canadian resident
b) may not be controlled by persons who are non-residents or public corporations
i) public corporations = class of shares listed on stock exchange
3) to be eligible for the special low tax rate, or “small business deduction” (it is
actually a credit, that results in a rate of 11% federally, plus 2.5% in BC, for a
total of 13.5%), the CCPC’s income must be income from an “active business
carried on by a corporation” (s. 125(7))
a) this excludes income from a “specified investment business” (SIB) or a PSB
[see p. 20 for PSB test]
i) s. 125(7) SIB = a business with purpose to derive income from property but
not including business where
(1) the corp. employs in the business more than 5 full time EMEs
throughout the year
(2) any other corp. associated with the corp. provides managerial, admin,
financial, maintenance or other similar services to the corp. in the year
and the corp. could reasonably be expected to require more than 5
fulltime EMEs if those services had not been provided
ii) i.e. ITA only allows income of CCPC from a SIB/PSB to benefit from the
13.5% rate if it employs in the SIB/PSB more than 5 full time EMEs
throughout the year
iii) otherwise, CCPC engaging in PSB and SIB taxed at 38%
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iv) policy = individuals should not have access to the special low tax rate by
using a corporation to perform their employment, or to invest their capital
to earn income from property
b) the small business rate is to encourage entrepreneurialism for start-ups, but
soon as corporation has more than $500k in profits in a year, the corporation
will start to pay the 26% general rate (15% federally and 11% in BC)
c) recall that a non-resident is subject to Canadian taxation if it carries on
business in Canada (through a branch operation) or disposes of taxable
Canadian property (s. 2(3)), and is subject to Part XIII tax on amounts paid or
credited to it by a Canadian resident – but such a corp. can never be a CCPC
4) pay attention to cash vs. accrual method of calculating income
a) recall EMEs always cash method – income/allowance/benefits received
deducted by amounts paid during the year
b) if income from business, always accrual method [accrual = amounts received +
receivable]
5) n.b. corps. must withhold EME portion and pay the EMP portion of CPP – s.
153(1)(a)
Organized Activity and Gambling
1) business = “anything that occupies the time, attention and labour of a man (or
corporation) such that it requires an organized, ongoing, commercial activity with
the objective of earning a profit” (Smith v Anderson, 1880 UKCA)
2) in general, common law says business = organized activity that is carried on for
the purpose of profit (Graham v Green, KB 1925)
a)
ex. bookkeeper running horseracing betting is carrying on a business, but the people continuously betting
on the horses are not carrying on a business (facts from Graham)
3) gambling cases fall into 3 categories
a) cases involving the gamblers for whom gambling is a pleasurable pursuit 
not taxable even though they do it regularly, even compulsively and with some
sort of organization or system (LeBlanc; Epel v The Queen, TCC 2003)
b) where the gambling was an adjunct or incident of a business carried on 
taxable (ex. casino owner who gambles in his own casino or an owner of horses who trains and races
horses and who bets on the races)
c) where a person uses his own expertise and skill to earn a livelihood in a
gambling game in which skill is a significant component  taxable (ex. the pool
player who, in cold sobriety, challenges inebriated pool players to a game of pool (Luprypa))
i) test for whether gambler is a professional or not = whether it was to
conduct an enterprise of a commercial character or whether it was
primarily to entertain himself
(1) where a TP gambler has a system and a REOP, it is likely they are in
the gambling business and thus their winnings are taxable (Luprypa)
(2) one cannot be considered a professional gambler where betting on
lotteries in a risk maximizing way (LeBlanc)
Luprypa v The Queen, TCC 1997
Facts: T is in business of hot dog stands, but at the time, he was a pool shark; T filed 0 income for 2 years, and
prepared but did not file for the next year – this was intended to support a mortgage application (i.e. he tried to
pretend he had an income); 1991 a CRA EME prepared his tax return for him using net worth assessment; T
argued most of it was not taxable b/c most of it came from pool sharking
Held: gambling can be a source of income if it amounts to a business; in a business, the owner tries to minimize
risk and maximize profit, and has a system to do that – as long as the gambler has such a system, he is
30
conducting a business; T basically bet somebody that he could beat them at pool, and he beat them; T
systematically chose opponents, and was playing Monday to Friday; T never drank when played and relied on the
game as a steady source of income
LeBlanc v The Queen TCC 2006
Facts: brothers LeBlanc and LeBlanc were buying massive dollars worth of tickets per week in sports lottery;
won $5 million in 4 years; they were buying so many tickets that they had to carry them around in garbage bags;
had 15 helpers (friends) to help them buy tickets (b/c there is a limit as to how many tickets each person can buy)
Held:
 LeBlanc argued that under s. 40(2)(f) [in the CG section of the Act] gain or loss from lottery tickets is deemed
to be nil
 however, this is a CGs idea – what matters is whether LeBlanc had a business, since business can be a source
of income (i.e. see it as business, and not CGs)
 s. 52(4) [this is a companion to s. 40(2)(f)] – when you win something other than cash on a lottery, your cost is
its value at the time of winning
 ex. won house worth $1M, sold house for $1.2M, your increase is $200k
 expert testified that they maximized the risk and LeBlanc brothers were just very lucky – so even though
there was some organization to it, there was no skill/plan involved – it was just pure luck  cannot call it a
business
O’Brien: problem for gov. is if judge had held that the winnings were taxable, everyone who tries this out of luck
and loses will be able to deduct
Pursuit of Profit
1) pursuit of profit/intention to make profit necessary to constitute a business
2) old test = Moldowan v MRN – the REOP test (reasonable expectation of profit) =
T’s expectation of profit from his/her activities must be reasonable
3) new test = Stewart v The Queen, SCC 2002 – determination of source of income
from business/property test
a) is the activity of the TP undertaken in pursuit of profit, or is it a personal
endeavour?
i) where activity is completely commercial go to step 2 (no need to continue
step 1 analysis)
ii) where the TP’s venture at least suggests hobby or personal pursuit,
determine if it is undertaken in a sufficiently commercial manner, to be
considered a source of income by considering:
(1) does the TP have an intention (subjective) to profit?
(2) is there evidence (objective) to support that intention? (consider
objective Moldowan factors, listed below)
iii) if you can get arms length financing it means the banks think it is a
reasonable business investment where you will be able to pay the interest,
this is indication of commercial viability
b) if it is not a personal endeavour, is the source of income a business or property?
i) non-exhaustive objective factors for determining if activity is in pursuit of
profit (the Moldowan factors):
(1) the profit and loss experience in the past years;
(2) the TP’s training;
(3) the TP’s intended course of action; and
(4) the capability of the venture to show a profit (REOP test)
4) goal of courts = stop CRA from saying that if you do not earn profit, you did not
have REOP, and so you cannot deduct
5) secondary question of whether expenses are deductible come under s. 67
Stewart v The Queen, SCC 2002
Facts: condos for rent did not make profit, but was unprofitable for a long time
Held: REOP is a sufficient requirement for there to be a source, but it is not necessary
31







under old test = if TP failed at investment/business after a couple of years, TP would not get deduction
you can still have a source of income even if the facts demonstrate the business was never going to successful
i.e. REOP should not be a stand-alone test
the old test was too often used to second guess bona fide business choices
the REOP was vague, unfair and arbitrary in the way it was applied to TPs
thus, old test is overruled
test applied
 no personal element and no personal enjoyment
 the whole package of what he invested in was all done at arm’s length – everybody involved (ex.
financiers, developers etc.) had put together a package that was meant to have value and was meant to
lead to profits – the fact that it did not was nobody’s fault (it was a change in the market)

it was a reasonable risk that the financial institution thought it was taking by lending money to
Stewart – thus it must have been a reasonable decision for him to invest in and rent-out the condos

T should be able to deduct under s. 21(c)
Adventure of Concern in Nature of Trade – Business vs. Capital Gain
1) ACNT is used to distinguishes whether something is business income or CG
2) ACNT = what could be a source of income is disposed of, but is not
held/acquired/disposed of as a capital asset
a) so not treated as a CG, but an income or loss from business
3) why is this distinction important?  if a TP makes a gain, they want it
characterized as a CG – taxed at ½ of business income; if they make loss, they
want it characterized as business, as business losses are fully deductible against
all sources of income (where as CL only deductible against CG)
4) general principle = when a person habitually does a thing that is capable of
producing profit, they are carrying on a trade or business even if it is not their
ordinary occupation (see also s.1 IT-459) (Taylor)
a) determination between business income vs. CG turns on whether the single
transaction can be characterized as an ACNT
b) where the subject matter is a commodity such that it excludes the possibility of
investment income, it will be an ACNT
c) shares are usually, except in extreme situations or if you are trader/dealer in
securities, a capital asset (Irrigation Industries)
5) capital investment vs. business/ACNT
a) whether the gain accrued to an owner of securities depends whether the gain is
a mere realization or a change of investment (in which case it falls into the
capital category) or whether the gain is attributable in what is truly the
carrying on, or carrying out, of a business (where it would be classified as
income); it is a QOF to determine whether one’s activities amount to carrying
on a trade or business (Arcorp)
b) factors for determining capital investment or business (ACNT) are:
i) manner: TP’s conduct compared to ordinary dealer of same property
(1) if comparable to ordinary dealer, it can be an ACNT (Taylor)
(2) considerations: duration of the holdings (whether, for instance, it is for a
quick profit or a long-term investment), frequency of the transactions,
time spent on the activity (Arcorp), steps taken to increase
marketability such listing of sale, and TP’s commercial background (ss.
7-8 IT-459)
ii) nature: whether the nature and quantity of the subject-matter of the
transaction may exclude the possibility that its sale was the realization of
an investment or otherwise capital in nature, or that it could have been
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disposed of otherwise than as a trade transaction
(1) where the subject matter is a commodity such that it excludes the
possibility of investment income, it will be an ACNT (Taylor)
(2) presumption that the purchase of shares is a capital transaction rather
than ACNT unless in the business of securities (Irrigation Industries),
but it is rebuttable if manner of a securities trading business (Arcorp)
(3) where property cannot produce passive income or personal enjoyment it
is indication of business transaction (s. 9 IT-459 )
(4) if property can produce income only if TP operates or leases it and can
only make use by selling, then it is a business transaction (s. 10 IT-459)
iii) intention: was there intention to sell at a profit?
(1) not determinative, but influential towards ACNT (Taylor)
(2) if any intention of profit, even secondary, then transaction will likely be
ACNT (perhaps just for land) (Regal Heights)
(3) secondary intention requires not only the thought of a sale at a profit at
moment of purpose (Saskatchewan Wheat Pool) but that the prospects of
such a sale be an operating motivation in the acquisition of the capital
property (Snell Farms v The Queen, FCTD 1990) [i.e. “if this investment
goes bad we can always sell the property”  ACNT]
iv) factors that do not preclude ACNT
(1) single or isolate transaction (Routlege)
(2) outside normal income earning activities
(3) no organisation to carry out transaction
6) special rules for real property
a) land transactions are difficult as land can be capital asset/investment, used to
carry on a business (operations), object of speculation, traded as part of
ongoing business (housing)
b) factors you consider if land is ACNT
i) intention (and secondary intention) of the TP at time of purchase (Regal
Heights)
ii) feasibility of TP’s intention (IT-218R)
iii) geographical location, zoning (IT-218R)
iv) extent to which the TP and his/her associates carry out the initial or
primary intention (IT-218R)
v) evidence of change of intention (IT-218R)
vi) nature of the business, profession, trade, experience of the TP and his/her
associates (IT-218R)
vii)extent to which the purchase is made with borrowed money (IT-218R)
viii) length of time the property is held by the TP (IT-218R)
(1) if TP buys with intention of selling nearly immediately at a profit 
ACNT (Taylor)
ix) whether TP made the purchase alone or with others (IT-218R)
x) reasons for selling (IT-218R) – cases where TP has been successful in
characterizing something as capital investment is when they buy it, start
work on it, and the unsolicited offer that is unbelievably good arises out of
the blue – here, court says it is capital transaction, even though there was
no income from it
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xi) extent of TP’s (and associations) previous and subsequent dealing in real
estate (IT-218R)
IT-459 – ACNT
1) general principle = when a person habitually does a thing that is capable of
producing profit, they are carrying on a trade or business even if it is not their
ordinary occupation
a) TP can carry on more than one business
2) where it is infrequent or a single transaction it is still possible that it is a business
transaction if it can be shown to be an ACNT; factors to consider include:
a) TP’s conduct compared to ordinary dealer of same property
i) consider if steps taken to increase marketability, such listing of sale, as this
indicates business transaction
ii) consider TP’s commercial background
b) nature of the property – where property cannot produce passive income or
personal enjoyment, it is indication of business transaction; if property can
produce income only if TP operates or leases it and can only make use by
selling, then it is a business transaction
i) some property such as securities are prima facie investment in nature
c) whether TP’s intention is consistent with trading motivation
i) intention to sell at a profit is not enough to be considered a business
transaction but can influence the decision
ii) TP may have more than one intention
iii) secondary intention to sell if significant if circumstances suggest little
likelihood of retention b/c lack of financial resources
d) isolated transactions – the following facts, in and of themselves, are not
sufficient to prevent a finding that a transaction was an ACNT
i) that transaction was single or isolated (Taylor)
ii) TP did not create any organization to carry out transaction
iii) the transaction is totally different from any of the other activities of the TP
and he has never entered into such a transaction before or after (Taylor)
e) losses – a TP who embarks on what is established as an ACNT may suffer a
loss rather than the anticipated gain; such a loss constitutes a loss from
business and enters into the calculation of the TP’s non-capital loss for the
year
MNR v James A Taylor, Exch Ct 1956 – general principle = when a person habitually does a thing that
is capable of producing profit, they are carrying on a trade or business even if it is not their ordinary
occupation (see also s.1 IT-459); determination between business income vs. CG turns on whether the
single transaction can be characterized as an ACNT; where the subject matter is a commodity such
that it excludes the possibility of investment income, it will be an ACNT
Facts: T is running the Canadian subsidiary of US company; he thinks the Canadian should be able to acquire
greater amounts of material used in its production; US company says no – keep acquisition of raw materials to a
minimum; so T decides to buy some lead to resell to the company, b/c he could get a good price; T buys 22 carloads
of lead in his personal capacity, with the intention of making sure his company has access to it later; T was right,
value of lead increases and he sold it to his company at a profit; the profit he made is assessed as income from
business; T argues he is not in business of buying lead, and he did it for his company – thus it is a capital
transaction (n.b. before 1972 capital transactions not taxable at all)
Held: ACNT
 it may be true that what T does for living is run the company, and not buy/sell lead, but T does not have to be
carrying on a business for a transaction to constitute a business transaction
 carrying on a trade/business is one thing – but you can also have an ACNT, and income from ACNT will be
treated as income from business
34
when you buy with intention of reselling as soon as possible to make a profit  ACNT
test = was the TP’s transaction conducted in a way that a trader would?; if undertaken similarly to the trader
(who is in business of selling/buying such goods), then ACNT
 applied: ACNT, so T taxed on it; T was not going to do anything with the lead other than sell it to the
company; when the lead sits there, it does not generate income – must sell it to make income; T carried out
the transaction in same way a trader of lead would normally do; even though it is an isolated transaction,
does not make it not a business transaction
Regal Heights Limited v MNR, SCC 1960 – if any intention of profit, even secondary, then transaction
will be ACNT (perhaps just for land)
Facts: businessmen planned to develop a site for a shopping mall near proposed Trans-Canada Highway, but
then a national company announced plans to build a shopping mall 2 miles away so T scraps plans and sells
property for a profit of $140k
Held: secondary intention of speculation made ACNT; court accepted that they had a primary intention to buy
the land as a capital investment (a capital asset to generate income); however, they also had a secondary intention
from the outset to sell the land for profit if unable to build shopping mall; no evidence of any intention on the part
of the promoters to build regardless of outcome of major retailer tenant negotiations
O’Brien: overall, land is difficult to categorize b/c it depends somewhat on credibility of the TP when he testifies
his intentions in court
Irrigation Industries Limited v MNR, SCC 1962 – shares are investments by very nature and lack of
immediate prospect of dividend is not critical
Facts: corporation was incorporated, but did not do anything; it bought mining shares of another company (new
company); of the shares, it held them for 3 weeks – sold for profit of 60%
Held: this was a capital investment – nature and quality of the shares does not exclude it from being a capital
investment (unless you show them to be something else – strong presumption), they are an income generating
asset by their very nature
 CRA argued T had to borrow to buy the shares – means they had to make profit quickly to pay back the loan
 court: that you have to borrow to buy does not alone make it ACNT; it does not matter that there was no
prospect of receiving any dividends, b/c new companies have no profits yet, so they have no possibility of
paying dividends
 CRA argued if the shares were acquired with intention of selling at profit, that makes it an ACNT
 court: even capital acquisitions are made with hope or intention that eventually they will be sold at a
profit
 apply Taylor test: nature and quantity of subject matter – shares are an investment in the corp. itself,
which is different in nature to things like commodities; the shares were not dealt with in a way a dealer
in securities would deal (prof. thinks this is false – court is only thinking of dealer’s underwriting
function)
Arcorp Investments, FCTD 2000 – capital investment vs. ACNT test
Facts: sole shareholder was Robert L. Hodgkinson who was employed as a commission securities salesman by
Canarim Investment Corp., a licensed securities brokerage firm in BC
Held: the net profits so derived by Arcorp are to be classified as income earned by Arcorp in carrying out the
business of a trader or dealer in securities b/c its operations are the same kind and were carried out in the same
way as those which are characteristic of ordinary trading in that line of business; this case is distinguish from
Irrigation Industries b/c trading in stock traded as business income b/c carried on as business rather than capital
investments
Saskatchewan Wheat Pool v MNR, TCC 2008 – for a secondary intention to have ACNT with primary
motivation as capital asset, the purchaser must have in his mind, at the moment of the purchase, the
possibility of reselling as an operating motivation for the acquisition; that is to say that he must have
had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it
at a profit instead of using the thing purchased for purposes of capital
Facts: the transaction carried out by S resulted in loss, so S wants it to be treated as an ACNT (b/c then loss fully
deductible from income from other sources)
Held: not enough to know that you could sell at profit if things do not work out; must be motivated at potential of
re-selling of profit


Income from Property
1) almost anything that can be given a value can be property for tax purposes
a) s. 248(1) “property” = property of any kind whatever
2) s. 9(3) – distinguishes income from property vs. income from disposition of
property  income from property does not include a CG from the disposition from
that property
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3) note that the same analysis (Stewart [see p. 31]) for source of income and REOP
applies to property income as well as business income, b/c all income needs a
source
4) CGs are treated more favourably than income from business
a) only ½ of CGs is included in income
b) TPs want to characterize a transaction as capital transaction if it is profitable
c) TPs want to characterize as ACNT if it incurs losses, so the loss is fully
deductible in computing income
5) based on common law, the distinction generally depends on the extent of activity
of the owner in earning the income
a) criteria include (Lois Hollinger v MNR, FCTD 1972)
i) whether the income was the result of efforts made or time and labour
devoted by the TP
ii) whether there was a trading character to the income
iii) can the income be fairly described as income from a business within the
meaning of the term as used in the Act, and
iv) the nature and extent of services rendered or activities performed
b) therefore
i) if income is derived principally from the ownership of property  income
from property
ii) if earning of the income involves significant amount of activity  income
from a business
6) case law
a) contingent right to receive income from a trust is property income (Fasken
Estate v MNR) but benefit obtained by convenantee under a non-compete
covenant was not considered property as incapable of ownership (O’Brien:
decided wrongly as right can be valued when business was sold) (No. 481 v
MNR)
b) rental income where some services provided to tenants has been found to
property income (based on extent of activity) (Walsh and Micay v MNR)
c) rental income earned by corporation pursuant to objects of incorporation are
generally presumed to be business income (Etoile Immobiliere SA v MNR)
7) n.b. s. 212(1)(d) – cross-border computer software tax will not be examined, but
this is the provision to look for computer software tax
Interest Income
1) the asset on which interest is earned is essentially a debt obligation
2) the lender has the asset, the debt obligation, which includes right to be paid
interest and the principle amount
a) legal meaning of interest = compensation for the use of money belonging to
another person; it must be referable to a principle amount and must either
accrue daily or be allocable on a day-to-day basis (Miller v The Queen, FCTD
1985)
b) n.b. late payment charges have been considered to be interest as extending
credit (Wenger’s Ltd v MNR, TCC 1992)
3) debt obligation is not well defined in the ITA, but is a form of property to the
person who is owed the money and can take many forms (ex. a bank account is a debt
where bank owes the depositor – it is a demand loan b/c you can demand the bank any time; bond issues on
36
corporations is you making loan to a corporation, and the bond holder has a debt obligation)
4) s. 12(1)(c) – you have to include interest when calculating income
a) you calculate interest based on received or receivable depending on whether
you are using cash or accrual basis
b) imports Surrogatum rule b/c it says anything that is replacement interest is
taxable
5) timing
a) although “any amount received or receivable” 12(1)(c) indicates timing of
including interest amount is base on normal timing, s. 12(3)-(4) provides
special timing rules and doesn’t let you defer income, which overrides 12(1)(c)
b) s. 12(3) – applies to corporations = corps. must include in income for the year
interest that accrues by the end of its taxable year, or amounts
received/receivable by the end of its taxable year that have not been included
in income in a preceding year  calculate immediately
c) s. 12(4) – applies to interest payable to an individual pursuant to an
investment K = must include in income each year the interest accrued on the
investment K to each “anniversary day”  calculate with year grace
d) investment Ks (s. 12.(11)) = any debt obligation, except a debt obligation on
which the taxpayer reports interest as it accrued daily
e) anniversary day (s. 12(11)) = if the invest K was made on June 1st, the
anniversary day will be May 31st of following year
f) goal of the timing rules = not allowing you to defer income to an abusive extent
6) blended payments = where a TP receives a single payment both for repayment of
capital and interest this is considered a blended payment
a) s. 16(1) – does not matter what K says, Act will deem the part that can be
considered to be interest to be interest, and therefore fall under s. 12(1)(c) with
the timing rules of s. 12(3)-(4), such that the interest would be included in
income from property and be taxable
b) repayment of principle is not taxable
c) where a single payment is above FMV, the amount greater than FMV will be
considered as the capitalization of interest and will be included in the TP’s
income from property (Groulx)
d) where payment not above FMV, there may be no interest (Vanwest Logging
Co)
7) s. 20(1)(c) – borrower may be entitled to deduct interest
Groulx v MNR, SCC 1967 – agreement to forgo interest for higher price was a capitalization of interest
Facts: T was farmer, trying to avoid tax on outstanding amount still to be paid for his farm; T tried to capitalize
interest (instead of receiving it as income, he was treating it as purchase price of his farm); T sold his farm for
$395k, and accepted $85k immediately, with rest to be paid in 7 installments; only if an installment was late did
interest arise; MNR said the installments he received were really blended payments – partly the purchase price
for his farm and partly interest on the part of the purchase price that hadn’t been paid yet
Held: $395k was above FMV, so there must have been interest built in – on evidence, purchase price would have
been lower if T had been paid in full at once; furthermore, if installment was late, had to pay 6% interest – more
proof that interest was built into the purchase price
Rents and Royalties – s. 12(1)(g)
1) rent = fixed payment for physical use of real or personal property for a given time
period (The Queen v Saint John Shipbuilding & Dry Dock, FCA 1980)
2) royalty = a share in the profits or a share or % of profits based on the use of the
number of units, copies, or articles sold or rented of intangible property; based on
37
the degree of use or duration of usage (Vauban Productions v The Queen, FCTD
1975)
a) ”use” is very broadly interpreted – can mean control of property, exploitation of
IP, franchise fees etc.
3) when an amount is paid, is it to purchase a portion of a property or is it a royalty?
 s. 12(1)(g) – expands what might otherwise be a royalty
a) if all the legal rights in property are transferred  sale
b) if less than all rights transferred  lease with rent or royalties
4) s. 12(1)(g) – if you sell interest in property, it is taxable (i.e. royalty)
a) n.b. Spooner – the case that got s. 12(1)(g) included in the Act
5) if within Canada, recipient must pay tax when received
Spooner v MNR, UKPC 1928-34
Facts: T owned ranch in AB, sold 20 acres to Vulcan Oil for $5k, 25k shares and royalty of 10% of all oil products
from land
Held: court considered oil and gas rights (had subsurface rights at the time) as a capital payment and therefore
not taxable; T had simply sold her property and realized CGs
n.b. result of this case was the inclusion of s. 12(1)(g) – purpose of which is to prevent TPs from converting what
would otherwise be fully taxable rent or royalty income into CGs
Wain-Town Gas & Oil Company, 1952
Facts: company had monopoly K with municipality for exclusive right to sell gas to municipality and company
sold off for amount based on 10% of gross receipts
Held: transferring a property right in exchange for 10% gross receipts is based on use or production – considered
a royalty
1)
2)
3)
4)
5)
6)
Dividends
dividends = return (yield) on equity investment in a corporation
any pro rata distribution from a corporation to shareholders is a dividend unless it
is make in liquidation of company or on an authorized reduction of corporation
capital (Hill v Permanent Trustee of New South Wales, UKPC 1930)
s. 84 deems a dividend to be paid where a corporation:
a) increases the paid-up capital in respect of the shares of any class of its capital
stock;
b) distributes funds or property on the winding-up, discontinuance or
reorganization of its business;
c) redeems, or purchases for cancellation, its shares; or
d) reduces the paid-up capital in respect of shares of its capital stock otherwise
than by way of a redemption, acquisition, or cancelation of the shares
dividends from both resident / non-resident corporation are included in income
from property – s .12(1)(j) + (k)
a) s. 12(1)(j) – when Canadian company pays a dividend to a Canadian recipient
b) s. 12(1)(k) – when a foreign company pays dividend to a Canadian recipient
but the Act contains a number of special rules designed to provide relief from
double taxation of income earned through a corp.
a) double taxation = the corp. earning the income pays corp. income tax and the
shareholding receiving the dividends paid out of the corp. earnings pays
income tax on the dividends received
b) the Act allows individual shareholders a dividend tax credit in computing tax
payable and allowing corp. shareholders to receive dividends on a tax-free
basis
there are special treatment rules for dividend [don’t need to know them for this
course]
38
7) recall s. 212(2) requires the withholding tax of 25% when Canadian corp. pays
dividend to non-resident
a) a non-resident of Canada is not subject to tax on all their income – only taxed
on income from Canadian sources
b) the non-resident is not carrying on business in Canada, nor employed in
Canada
Deductions for Income from Business or Property
1) s. 9(1) – a deduction is based whether it is deducted under ordinary principles of
commercial trading or accepted business to earn income [see IEP test, p.40]
2) then you look at applicable provisions of ITA to see if any restriction on deduction
(ss. 18) [n.b. s. 62 and 67 are also deductions, but s. 18 is the main one]
a) s. 18(1)(a) – must show deduction is related to producing income from business
or property (general limitation)
b) s. 18(1)(b) – outlay to acquire a capital asset – it is non-deductible; its under
CG
c) s. 18(1)(h) – personal and living expenses cannot be deducted except travel
expenses when travelling away from home in the course of business [see p. 41]
i) s. 67.1(1) limits food/beverages/entertainment deduction to 50%
ii) n.b. this is for the EMP, not the EME
d) s. 18(1)(l) – cannot deduct recreational facilities maintenance unless the
business is recreational facilities or as the club (yacht, camp, lodge, golf course,
etc.); cannot deduct EME club membership dues if main purpose is dining /
recreation / sport
e) s. 18(1)(p) – deductions for PSB are very limited to salary, selling costs, etc.
(goal = so you cannot get more deductions by becoming an incorporated EME
rather than just as a standard EME) (ex. if a incorporated person purchases a duplex, can he
deduct the interest?; yes, as the purchase of the duplex would be as a SIB in addition to the PSB; no
restrictions on deductions from SIB)
f) s. 18(1)(r) – limits on EMP deduction of allowance to EME of a MV; reasonable
amount limit; anything in excess of Reg. 7306 is not deductible, unless
included in the EME’s income from employment
g) s. 18(1)(t) – cannot deduct your tax (penalties or interest of unpaid tax) in
computing your tax
i) s. 60(o) – tax liabilities not deductible, but legal expenses incurred while
appealing/litigating over a tax assessment is deductible
3) s. 20 – specific deductions permitted
a) Capital Cost of Property CCA (capital cost allowance) – s. 20(1)(a)
b) Cumulative Eligible Capital Amount, Interest – s. 20(1)(c)
c) CCA Terminal Loss – s. 20(16)
4) s. 67(1) – general “reasonableness” limitation (i.e. the reasonableness test) – 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
5) profit = net profit after expenses; an expenditure properly deducted under
accounting principles will be deductible for tax purposes, unless prohibited by
some provision of the Act (Canderel)
Canderel v Canada, SCC 1998 – an expenditure properly deducted under accounting principles will
39
be deductible for tax purposes, unless prohibited by some provision of the Act, and an amount not
deductible pursuant to accounting principles will not be deductible for tax purposes, unless the Act
provides a specific deduction
Income Earning Purpose Test
1) overall, permissibility of a business deduction is based on 4 steps (IEP test):
a) is it deductible under s. 9(1) considering its deductibility by the ordinary
principles of commercial trading or accepted business Daley?
i) accounting practices reference omitted from IEP test (The Royal Trust Co)
ii) the expenditure does not need to match a specific revenue, but must be
considered in the light of its connection with the operation, transaction, or
service in respect of which it was made, so that it may be decided whether
it was made not only in the course of earning the income but as part of the
process of doing so (Imperial Oil)
iii) where income is earned from certain operations all the expenses, wholly,
exclusively, and necessarily incidental to such operations must be deducted
– costs include not only ordinary operations costs, but also all monies paid
in discharge of its liabilities normally incurred in the operations
b) was expenditure made or incurred for the purpose of gaining or producing
income from the business or property (s. 18(1)(a))?
c) if so, is deduction prohibited by s. 18 or if so, specifically allowed in s. 20?
d) is the deduction reasonable? (s. 67)
2) IT-470R
a) para 33 – if EMP has recreational facilities and lets EMEs use it for free or for
little payment  not taxable for the EME
b) para 34 – where EMP requires EME to be part of social/athletic club, while not
deductible for EMP under s. 18(1)(l), EME may not be taxed on it (EMP will
wish to pay b/c they feel such membership is still beneficial for the business)
Daley v MNR, TCC 1950 – established IEP test: whether a business deduction is permissible should
consider ordinary principles of commercial trading or accepted business
Facts: T was called to bar in NS, but was war time and so joined the Navy; Ontario wanted T to pay $1500 for T
to be called to bar in Ontario; T paid it and starting practicing; in computing his income tax, he spread the $1500
over 3 years to deduct
Held: not allowed to deduct his Bar fee; while it is true that T has to be called to Bar in Ontario to practice, but
the fee is not incurred in the course of earning income on an ongoing basis of the business; instead, the fee is a
one-time thing
O’Brien: T’s annual fees will be deductible, b/c that is on-going and is incurred as part of practice of law
Imperial Oil Limited v MNR, EXCH 1947 – need not match revenue to expenditure to meet IEP
Facts: Imperial Oil pays other company for ship accident; Imperial Oil deducted that settlement amount;
Imperial Oil’s business was partly transportation of petroleum products by sea
Held: the accident that occurred was part of the ordinary business – whenever you go out to sea, there is a chance
you will hit a boat; part of Imperial Oil’s business is transporting stuff by sea – and if in doing such business they
incur liabilities due to an accident, that money is deductible; that the amount was extraordinary in amount
should be irrelevant; liability for boat accidents was reasonably foreseeable; you do not have to match a deduction
to an expenditure – look at it holistically
The Royal Trust Co v MNR, EXCH 1957 – clarified 2-steps of IEP test
Facts: RTC increases its business by country club memberships by its executives; encourages executives to
network at the club and encourage clients to invest in RTC; claimed deduction for those memberships
Held:
 Minister argues it may have been incurred for earning income, RTC must prove that paying for these club
fees actually gained RTC income
 on the facts, there were several clients who moved their money to RTC b/c of contacts made at the club
 judge says, contrary to what he said in Daley and Imperial Oil, he is not bound by accounting practices –
commercial practice is what guides the courts
 s. 18(1)(a) is not even inferential authority for deductions – s. 9(1) is where you look to deduct, and then you
40
look to s. 18(1)(a) to see if that deduction is permitted
 but s. 18(1)(a) is not a huge restriction either
 here, RTC effectively expanded their office to the club – the club served as a venue to solicit clients
n.b. this case is overruled in part by s. 18(1)(l) – club membership not deductible for the EMP
1)
2)
3)
4)
Deduction of Personal or Living Expenses
s. 18(1)(h) – personal or living expenses are not deductible, except travel expenses
when travelling away from home in the course of business
a) s. 67.1 – for applicable travel expenses, food, beverages, and entertainment
expense is deducted at lesser of 50% of actual/reasonable cost
domestic work  primary domestic duties are not fully deductible even where
income producing work is secondary in nature, but a portion of the portion of
business expense can be deducted (Benton)
commuting  usually a personal or living expense that are restricted from
deductions (Ross Henry)
moving expenses – s. 62
a) for moving expenses to be deductible, you have to have an “eligible relocation”,
defined in s. 248(1)
b) an eligible relocation occurs (s. 248(1))
i) to enable a TP
(1) to carry on a business or to be employed, at a new work location that is
in Canada (unless TP is absent from but resident in Canada), or
(2) to be a student in fulltime attendance enrolled in a postsecondary
program at the location of a college or university, (also referred to as a
new work location);
ii) the TP has to have resided at an old residence and after the relocation must
reside at the new residence
iii) the old and new residences both have to be in Canada, unless the TP is
absent from but resident in Canada (not for students s. 62(2)); and
iv) the new residence must be at least 40km closer to the new work location
than the old residence was (40km by the shortest reasonable normally
travelled route (Nagy; Gianakopoulous)
c) if all these conditions are met, can deduct as long as…s. 62(1)
i) they were not paid on the TP’s behalf in respect of, in the course of, or b/c of
the TP’s employment, (can’t deduct if EMP paid or reimbursed you (unless
included in income))
(1) n.b. no mention of it being paid “by the EMP” – i.e. does not matter if it
was not your EMP who paid for the moving expense, you cannot deduct
it (ex. a related corporation may have paid for the moving expense)
ii) they were not deductible under s. 62 in computing the TP’s income for the
preceding year (i.e. not previously claimed),
iii) they do not exceed income from employment/business at the new work
location or the amount of scholarships/bursaries included in computing
income for the year under (s. 56(1)(n)); and
iv) all reimbursements/allowances in respect of the expenses are included in
computing the TP’s income
d) specific moving expenses which are deductible – s. 62(3):
(a) travel costs, in course of moving
(b) transport and storage costs of household goods
41
(c) cost of meals and lodging for 15 days while moving (n.b. s. 67.1(1)
50% food limitation does not apply so you can deduct the full amount
on food when moving)
(d) cancelling old lease
(e) cost of selling old residence
(f) legal fees (including GST) and property transfer tax; but you cannot
deduct the GST payable on the new home
(g) interest, property tax, insurance premiums, utilities costs up to
$5000 while old house empty and left for sale – you have to be
making reasonable efforts to sell old property [however, will not
allow you deduct mortgage interest and cost of actually buying your
new house]
(h) cost of revising legal docs – ex. drivers licence address + costs of reorganizing
utilities – ex. connection fees for internet
e) you do not need to know moving expense cases, but you need to get a sense
that the CRA is pretty generous with moving expenses due to the policy of
promoting labour mobility
f) timing problems for moving
i) what if you moved and then found a job? – that is OK  can still deduct
(Abrahamsen)
ii) even if your EMP asked you to move, but you waited 5 years before you
moved, that is OK too
iii) no time limit of how long to move when claiming moving expenses (James D
Beyette v MNR, TCC 1990)
iv) ITA allows moving expenses where the TP moved 16 months before he
found employment (Abrahamsen v The Queen, TCC 2007)
g) IT-470R para. 35 and 36: Employee Fringe Benefits
i) where an EMP reimburses an EME for the expenses incurred by the latter
in moving the EME and his/her family and household effects either b/c the
EME has been transferred from one establishment to another or b/c of
having accepted employment at a place other than where the former home
was located  this reimbursement is not considered as conferring a taxable
benefit on the EME
ii) where the EMP pays the expense of moving an EME and the EME’s family
and household effects out of a remote place at the termination of the
employment there, no taxable benefit is imputed
5) students and scholarships – virtually all scholarships and bursaries are now
exempt (i.e. no tax on it) – so cannot deduct moving expenses associated with it
a) s. 62(2) – moving expenses of students that are otherwise deductible may be
deducted if either the new residence or the old residence is in Canada; as long
as one is in Canada, it’s sufficient
b) s. 56(1)(n) – includes scholarships, bursaries and other amounts in other
income to the extent the amounts exceed the TP’s scholarship exemption
c) s. 56(3) – exempts all scholarships and bursaries under s. 56(1)(n) in
connection with enrolment in an educational program that qualifies for the
educational tax credit (s. 118.62) which requires that the TP be enrolled in a
“qualifying educational program” at a “designated educational institution”
42
i) qualified educational program = min 3 consecutive wks, 10 hrs per wk
ii) designated educational institution = Canadian and foreign universities and
colleges, provided, if foreign, the program is at least 13 weeks long
6) home office expenses
a) not deductible unless the workspace is where:
i) TP principally performance work duties (s. 18(12)(a)(i)); or
(1) TP cannot deduct expenses incurred in travelling between his home and
his place of employment where the TP’s decision to conduct most of his
employment-related activities from his home was made for his own
convenience and not the EMP’s benefit (McCreath)
ii) exclusive home office use where TP regularly meet clients (s. 18(12)(a)(ii))
b) TP cannot get a current year loss by deducting work space expense as it is
limited to the income for the year from business – s. 18(12)(b)
c) TP can carry over the loss for 1 year if not deductible in current year for the
same business – s. 18(12)(c)
d) deductible amount should be based on a reasonable allocation of costs (s. 67)
attributable to the home office
i) this is usually determined by the amount of space occupied by the office
compared to the total usable area of the home and taking a proportionate
amount as a business deduction
e) what if you work completely from home and you move?
i) Bracken – cannot deduct
ii) Templeton – can deduct
iii) the outcome today is ambiguous
iv) perhaps if you can show you had a good reason to move – ex. moving to an
economic centre – you have a better argument to deduct
7) overall policy = encourage unemployed peoples to move to a place where they can
be employed
Thomas Harry Benton v MNR, 1952 – primary domestic duties are not fully deductible even where
income producing work is secondary in nature, but a portion of the portion of business expense can
be deducted
Facts: farmer had health problems, was able to manage his farm but hired house keeper, who did some work
milking and washing milk utensils; Thomas tried to deduct her wages
Held: cannot deduct; she provided personal services; that is primarily what she did and that is non-deductible;
those relating to milking and washing milk utensils are deductible; Thomas argued that he could have done the
housekeeping and hired someone to do farm work – and that wage would have been deductible, but Act looks at
what you did, not what you could have done
n.b. this case shows how difficult it can be to distinguish personal expenses from work expenses
MNR v Dr. E. Ross Henry, EXCH 1969 – commuting is usually a personal or living expense that are
restricted from deductions
Facts: Henry performed his services at the Jubilee hospital; he also had office shared with other doctors
elsewhere with a secretary that organized their billings; he would drive between the hospital and the office; he
never saw patients at his home, nor at the office; MNR allowed him the cost of driving between hospital and office,
and emergency trips to the hospital; but he wanted to deduct more
Held: cannot deduct the back and forth between home and hospital; the home was not a place where he carried
on business; thus travelling between home and hospital was not in course of carrying on business – it was simply
commuting to his place of work
McCreath v The Queen, TCC 2008 – TP cannot deduct expenses incurred in travelling between his
home and his place of employment where the TP’s decision to conduct most of his employmentrelated activities from his home was made for his own convenience and not the EMP’s benefit
Facts: chairman of NS Liquor Corp performed 70% of his duties at his home office which was 55km from the
NSLC office; T received per km allowance from EMP for travel expenses incurred in travelling between home and
office
43
Deduction of Interest Expense
1) s. 20(1)(c) – specific deduction for interest expense
a) s. 20(1)(c)(i) – allows a TP to deduct amounts paid or payable pursuant to a
legal obligation to pay interest on borrowed money used for the purpose of
earning income from a business/property
b) s. 20(1)(c)(ii) – permits deduction of interest payable on the unpaid balance of
the purchase price of an asset used by the TP to earn business or property
income
2) 4 part test (Singleton)
a) the amount must be paid in the year or be payable in the year in which it is
sought to be deducted;
b) the amount must be paid pursuant to a legal obligation to pay interest on
borrowed money;
c) the borrowed money must be used for the purpose of earning non-exempt
income from a business or property – Bronfman criteria….; and
i) eligible uses of borrowed funds
(1) borrowed funds must be used for an IEP: no deduction is allowed for
interest on funds used to produce exempt income, purchase life
insurance, for personal consumption (personal residence) or to produce
CGs
(2) TP must be able to trace the borrowed funds to an eligible use
(3) a purpose of distributing capital to the beneficiary is not an IEP
(Bronfman Trust)
(4) TP use for borrowed money can be for more than one purpose, provided
that one of those purposes is to earn income
(a) an ancillary purpose of earning income is sufficient (Ludco)
(5) test to determine the purpose for interest deductibility = whether,
considering all the circumstances, the TP had a reasonable expectation
of income at the time the investment is made; sufficiency of the income
is not a matter for the court absent a sham or window-dressing (Ludco)
ii) direct and current use
(1) it is the current and direct use of the borrowed money that is relevant in
assessing its deductibility (Bronfman Trust)
(2) indirect use (and economic realities of a situation) are irrelevant unless
a sham can be shown (Singleton)
(3) current use – when the income earning source ceases to exist or the
direct use changes, the related interest expense is no longer deductible
(Attaie)
d) the amount must be reasonable, as assessed by reference to the first 3
requirements
3) note in particular
a) timing (accrual vs. cash accounting) of the deduction;
b) requirement for a legal obligation to pay the interest;
c) IEP requirement;
d) limitation where income which is earned is exempt;
e) deduction permitted (subparagraph ii) where interest is charged on unpaid
purchase price rather than money borrowed;
44
f) “unreasonable” interest charges will not be deductible; if within commercial
reality (going interest rate and arms length transaction) MRN will have hard
time saying interest amount is unreasonable (Ludco)
4) in sum: if T can demonstrate he is within the Bronfman/Singleton criteria  the
amount and the fact that T is also hoping to have a CG is not going to impeded T’s
ability to deduct the interest, even if T generates an overall loss
5) policy reason for allowing deduction of interest is to allow accumulation of capital
that would produce taxable income
The Queen v Attaie, FCA 1990 – the court will look to the direct use of the borrowed funds not the
indirect use
Facts: T moved from Iran to Canada and borrowed funds to purchase a house where the house was initially being
rented out; interest was deductible as it was used for earning rental income; T and family then moved into house;
he had $200k that could have used to pay off mortgage, but he could make a higher rate of return in investment
them in term deposits than paying the lower mortgage rate; T argued that he was using interest to gain income
through investment of $200k
Held: mortgage interest not deductible; mortgage became to finance personal residence which was ineligible for
deductions
The Queen v Bronfman Trust, SCC 1987 – it is the current use of the borrowed funds which is relevant
in assessing deductibility, not the original use; it is not sufficient for the T to show that it used the
funds indirectly for the purpose of earning income if the direct use of the funds was not an eligible
use; one must consider the direct and current use of borrowed funds to determine if they have an
income earning purpose in order to have the interest expense be deductible
Facts: Bronfman had family trust for all their children and grandchildren; wanted to make a distribution of
capital to a beneficiary, Phillip Bronfman; Trusts are taxed as individuals even though they are not persons; the
Trust held a large number of shares in companies that were controlled by the Bronfman company; the Bronfmans
borrowed from a bank, and gave it to P; wanted to deduct the interest
Held: not deductible
 the interest deduction was introduced to encourage the gaining of capital, to earn income
 onus on TP to trace funds to identifiable use – i.e. must show that the borrowing occurred and was used for
the purpose of earning income from business/property
 in IDing which interests are deductible
 must be used for IEP – here, purpose of distributing money to beneficiary is not an IEP
 the relevant purpose is the purpose for which borrowed funds are currently being used for (b/c you may
borrow for one purpose and then after a time use the funds for something else) – current use must be for
income (does not matter if it was not originally for earning income)
 has to be direct, not indirect, use of money to earn income

Bronfman argued that they could have sold the shares, paid cash to the beneficiary, borrowed money
from bank and then buy the shares back again  interest would have been deductible – so why can’t
they deduct it in this instance?

court said does not matter – the courts have to look at what TP actually did, not what TP might have
done
Singleton v The Queen, SCC 2002 – established s. 20(1)(c)(i) contains 4 elements; absent a specific
provision of the ITA to the contrary or a finding that the evidence is a sham, the TP’s legal
relationships must be respected in tax cases; if a direct link can be drawn between the borrowed
money and an eligible use, then the money was used for the purpose of earning income from a
business or property
Facts: Singleton was partner in law firm in Vancouver; he wanted to buy a house and financed the law firm with
at least $300k of tax paid contributions of his own money; he wanted to take out the $300k, and then borrow to
replace it; now Singleton has an interest expense at the bank, and he can deduct it from income from practice
Held: yes, can deduct; the problem is that the cheques flew back and forth from the bank, the company, and the
owner of the house – problem with tracing; court finds that making choice between buying house with tax-paid
savings or borrowing to buy the house should be the TP’s choice
Dissent: the true economic purpose of the borrowing was to buy the house – why should he get to deduct when
buying the house is not an IEP?
O’Brien: why this case questions Bronfman – you do not actually look at the economic realities of the transaction,
as Bronfman would have it; i.e. Singleton – look at the form of the transaction, unless it is a sham (false
documents)  the court will look at the legal relationships; this follows Shell – you cannot ignore the form unless
the Act says otherwise
Ludco Enterprises Ltd Brian Ludmer, David Ludmer and Cindy Ludmer v The Queen, SCC 2001 – s.
20(1)(c)(i) can apply when a TP uses borrowed money to make an investment for more than 1
45
purpose, provided that 1 of those purposes is to earn income; proper “test to determine the purpose
for interest deductibility under s. 20(1)(c)(i) = whether, considering all the circumstances, the TP had
a reasonable expectation of income at the time the investment is made
Facts: Ts’ taxes from 1981-1985; Ts borrowed $6.5M from Canadian Chartered banks, and used money to fund 2
companies operating out of tax havens (Bahamas); the 2 companies buys federal gov. bonds from Canada and US;
the gov. bonds are generally exempt from the withholding tax; the interest keeps building up in Bahamas tax free
(since Bahamas have no tax); however, the interests are being deducted by Ts in Canada, since they are paying
interest in acquiring interest in companies; dividends were paid, but were far lower than the interest expense
deducted in Canada; 1984 this scheme was eliminated, and so Ts sold their shares; realized a CG of over $9M;
MNR argued interest not allowed to be deducted, as the interest was not incurred to earn income from property
but for deferring taxes and converting income in CGs
Issue: can you deduct interest when you buy shares that pay a dividend?
Held: allowed to deduct
 court solved the problem using SI of s. 20(1)(c)(i)
 rejected judicial innovation in interpreting ITA; ITA has specific and general anti-avoidance provisions, and
so courts should not interpret the Act in a specific way, when it is open to Parliament to change the Act
 adopts Bronfman 3 tests of when you can deduct interest:
 use for which interest deduction came from must be eligible
 has to be current use that you look at
 it has to be a direct use
 so question here = is the purpose to earn income, or was there another purpose?
 here, there was $9M CG vs. $600k dividends
 MNR argues purpose of borrowing was not to earn income, but to generate CG
 s. 20(1)(c)(i) applies – TP can have more than 1 purpose – i.e. can intend to both earn income and CG

as long as 1 of the purposes is to earn income, that is OK

that income is an ancillary purpose is irrelevant

if Parliament wants the rule to be: “must have earning income as dominant purpose to allow
deduction” – they can write that in
 what do we mean by “income” (recall ITA does not define “income”)
 court applies principles of SI and finds that the “plain meaning” of “income” does not support income
meaning “net income”

O’Brien: this is surprising given s. 9(1) says your income is your profit from business or property 
if income in s. 9(1) is profit, why is income in s. 20(1)(c) not profit?
 court said there is no quantitative test implied, and there is no test for sufficiency of income – provided
there is income, and absent a sham (i.e. concealment or dishonest reporting), courts should not be
concerned over the sufficiency of income expected or received
 objective of s. 20(1)(c) = encourage economic growth by allowing TPs to deduct interest costs associated
with accumulation of capital
 it is sufficient for TP to have expectation of gross income, as opposed to net income

n.b. Ludco predates Stewart, where REOP was removed as test – but here we are talking about
deductibility, and so we do not have a question of source
 applied: Ts borrowed at reasonable rates, banks were willing to lend (so banks must have had confidence in
them) – so transaction must have been reasonable  interest allowed to be deducted
Stewart v The Queen, SCC 2002
 1st MNR argument: S could not deducted his losses from investments in the condos b/c he had no REOP
 court: we will not penalize TP for making bad businesses judgment; even if TP has losses, can still deduct
 2nd MNR argument: the condo market crashed and S’ losses were higher than he could sustain – can he
deduct the interest under s. 20(1)(c)?; MNR argued his primary purpose was get CG and not earn income, and
the interest expense was too high in the circumstances
 court: it was all arms length market rate interest; the people who put the investment package together
got the backing of the banks, meaning banks thought this investment was reasonable; the interest rate
was standard and therefore the interest claimed at deduction stage was not unreasonable

although one of his purposes was to realize a CG eventually, the other purpose was to have rental
income, or at least rental revenue
 thus, Stewart follows Ludco (albeit at a smaller scale)
Policy Reasons for Denying Deductions (Illegal/Unethical Conduct)
1) sometimes courts prohibited a deduction for public policy reasons but SCC in BC
Egg case held that it is Parliament’s place to expressly change the ITA to enact
public policy and not the courts place
2) ex. s. 67.1(1) foods/beverages 50% limit on deduction  this is a policy choice;
46
while 100% was actually incurred, policy thinks allowing 100% is too much
3) another policy issue argued many times is TP carrying on illegal business should
not be able to deduct the expenses – ex. Eldridge
a) in sum, in principle, no reason to allow not deduction for illegal businesses –
the problem is often one of evidence, as courts will not easily accept
testimonies from criminally charged individuals on how much they spent on
their business as credible
4) bribery of certain officials: s. 67.5 – no deduction of bribes
5) prohibited offences: bribery of judicial officers, MPs, MLAs – CC.119;
6) bribery of justice, peace officer, police commissioners – CC.120
7) frauds on government – CC.121
8) municipal corruption – CC.123
9) selling/purchasing office – CC.124
10) influencing/negotiating appointments or dealing in offices – CC.125
11) fraudulently obtaining transportation (bribing fare takers) – CC.393
12) secret commissions – CC.426
13) conspiracy – CC.465
14) s. 67.6 – no deduction of fines or penalties
a) however, damages and K penalties are generally deductible if they meet the
general test of deductibility (Imperial Oil)
15) s. 67.5 – no deductibility of illegal payments
MNR v Eldridge, EXCH 1964 – court will allow argument and evidence of deductible expenses even for
illegal businesses; expenses must be for during when illegal business was running not after the
business was closed down
Background: at this time, prostitution was completely illegal
Facts: E ran call girl operation in the late 1950s; when it was shut down, E was re-assessed for taxes; E made a
net worth estimate of what she had earned and what her expenses were; E said she had no records (but without
records, MNR will make an estimate, and it is up to the TP to disprove that estimate if TP disagrees) [background
policy issue = why should illegal business owner not have to pay tax when legal business owners do?]
Issue: which expenses from illegal business were deductible?
Held: where E could prove the expenses, court allowed it (but E, of course, had issues of credibility during his
testimony)
65302 BC v The Queen (BC Egg Case), SCC 2000
Facts: company over-produced eggs (and overproduction on quota means you have to pay an overproduction levy);
company claimed deduction for that levy they had to pay; was denied deduction for tax purposes
Held: deductible; over-producing eggs is not exactly the most immoral thing you can do; it is not up to court or the
TP to decide which side of the moral line a business decision falls; it is Parliament’s place to expressly change the
ITA to enact public policy and not the courts place
n.b. Parliament subsequently enacted s. 67.6 – there is a blanket prohibition: no deduction of fines or penalties
1)
2)
3)
4)
Capital vs. Current Expenditures
s. 18(1)(b) – general prohibition of deductions on outlays and capital
essentially whenever a business makes an expenditure that does not occur all the
time, the Q = is this outlay of capital that cannot be deducted under s. 18(1)(b), or
is it a current expense?
capital outlays are usually expected to last a long time, as opposed to things like
rent, utilities etc. (i.e. day to day expenses)
basic test = does the expenditure provide an enduring benefit to the business or
property source?
a) that the expense is large does not automatically mean it is an outlay of capital
(Imperial Oil)
b) creation of a new asset is likely capital expenditure (British Insulated)
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c) a repair is a current expense even if repairs are extensive, high cost, or take a
long time (Canada Steamship)
d) an upgrade, where the replacement causes the thing replaced to change in
character (different in kind), is a capital expenditure; upgrades are common
with physical assets (Canada Steamship)
e) repairs do not become disqualified as repairs b/c of technological changes
unknown when original structure built; repairs do not only have to be due to
wear, aging, or deterioration but can be due to hidden defect if not an upgrade
that has greatly improved asset from original condition b/c of its newly-found
resistance to those factors that caused its deterioration (Shabro Investments)
f) even if repair is so substantial it looks like replacement of the asset, does not
mean it is automatically not a repair (Gold Bar)
g) where repairs are forced on a TP, he does not have to ignore advancements in
technological changes in making repairs (Gold Bar)
5) in sum, judges are trying to distinguish getting something new and improved vs.
what was there already – how they come to that conclusion is suspect sometimes
a)
b)
c)
d)
ex. painting suites when tenants change – this is very commonly done and normally fully deductible
ex. replacing banisters, carpets and stairwells – these wear out all the time and need replacing every few
years – normally accepted as repair/maintenance
ex. painting gravel parking lot – seen as capital outlay, as one is significantly upgraded from the other
ex. new furnace – capital outlay, just like the boiler
6) s. 111(1)(a) – carry forward 20 and back 3 years of non-CLs
a) non-CLs can be used against all income  losses from once source reduce total
taxable from all sources – i.e. they set off each other at s. 3(d), but not until
then; before s. 3(d) calculation, must keep income/deductions of each source
separate
British Insulated and Helsby Cables Limited v IRC, UKHL 1926 – when an expenditure is made, not
only once and for all, but with a view to bringing into existence an asset or an advantage for the
enduring benefit of a trade, there is a very good reason for treating such an expenditure as properly
attributable not to revenue but to capital
Facts: in setting up a pension fund the EMP (IRC) makes a large lump sum into pension fund and tries to deduct
as a current business expense
Held: it was a capital expenditure; whether an expense is current or a capital expense is a QOF; here, lump sum
payment into was not a gift but to establish the pension fund so to obtain for the company a lasting and
substantial advantage to retain happy staff – thus capital expenditure; court gives another ex.: ship building firm
pays large amount to have a dredge (i.e. dig a large hole), which enhanced its ability to launch ships  this was a
large rare expenditure that provided an enduring advantage to the ship building business  capital outlay
Canada Steamship Lines v MNR, EXCH 1966 – one of the leading cases on capital outlay vs. current
expenditure
Facts: 2 types of expenditures that T claimed as current expenditure: 1) replacing floors and cargo dividers,
caused by wear and tear and 2) replacing boiler in ship
Issue: whether expenditures to fix ships and to replace boiler in a ship considered business or capital expenses
Held: expenditure to fix ships was expenditure, but boiler was capital expense
 ships themselves are capital assets
 large expenditures to fix floors and walls and other maintenance considered business expenditure
 cost of repairs are current expenses and would not be a capital outlay merely b/c the repairs required are very
extensive or b/c the cost is substantial
 money use to acquire an asset is an outlay of capital
 similarly, money laid out to upgrade an asset is an outlay of capital; upgrade is a replacement by something
so different in kind from the thing replaced that it constitutes a change in the character vs. repair of physical
effects resulting from wear and team or accident is business expense
 here, boiler as machinery would be usually capital asset by itself regardless of installation in ship; boiler
could have been installed in a factory as a distinct and separate capital asset
O’Brien: on the boiler, difficult to distinguish from wear and tear – you do not replace boilers every year, of
course, but how is it different from walls/floors?; court basically thinks b/c the boiler is something you can re-sell
48
as a whole (vs. you cannot really sell a “floor” or “wall”), it is capital
The Queen v Shabro Investments Ltd, FCC 1979 – repairs do not become disqualified as repairs b/c of
technological changes unknown when original structure built; repairs do not only have to be due to
wear, aging, or deterioration but can be due to hidden defect if not an upgrade
Facts: building initially rested on garbage fill; fill collapsed and caused lots of damage to building; replaced fill
with steel piles and replaced concrete slab floors; also had to put in new water lines, drain tiles due to damage; T
claimed this was repair for maintenance expense to his building (i.e. claims as current expense under s. 9(1)); gov.
held this was such a big repair that it amounted to acquisition of new asset
Issue: whether replacement of a substantial part of the lower floor in a 2-store building was a repair or upgrade
Held: it was an upgrade – not deductible
 court admits there is no single test to distinguish repair vs. new capital
 it is true that the steel piles is a capital outlay, but the concrete slab floor is also a capital outlay  the court
grouped the two into one thing and called whole thing a capital outlay
 faulty design that results in damage does not necessarily mean that every rectification of that design is going
to be a capital improvement, but hidden defects are no different from wear/tear requiring repairs
 however, must compare that to improving something
 the water lines, drain tiles etc. – sent back to trail for reconsideration (at trial, held not deductible)
O’Brien: court probably thought water lines, drain tiles etc. were deductible – they were there before, and only
needs to be replaced
Gold Bar Developments Ltd v The Queen, FCTD 1987 – where repairs are forced on a TP, he does not
have to ignore advancements in building techniques and technology in carrying out the work
Facts: T owned an apartment building where brick veneer was falling off due to inferior work of original
subcontractor; on advice of prof. engineers, T made repairs using metal cladding instead of brick veneer at cost of
$242k
Issue: if you repair to the point of replacing one entire wall, is it a repair or a replacement?
Held: repair (on the facts)
 capital improvement usually mean something knew that was not there before; so test of whether the asset is
“improved” is not necessarily the right way to phrase it
 another approach of “this will only happen once in a lifetime” is also not useful – it really depends on the
lifetime of the asset  ex. replacing a roof – you may not do it every year, but you will eventually have to; so
replacing a roof should be in principal a repair, but very often CRA sees it as so big, that they call it a
replacement
 what is the purpose of the TP’s action – is he trying to significantly upgrade the property vs. trying to keep
the property usable (which is more like repairs and maintenance)
 here, TP did not have any choice b/c the bricks were falling off, and eventually the whole building would
become unusable; that it was faulty workmanship in the beginning does not mean it cannot be a repair now
 Minister argued the cost of repair was too substantial, and so must be seen as an upgrade
 but court was not persuaded – they looked at the $242k relative to the value of the whole building, which
was $8M – not so significant in the big scheme of things
 the nature of what TP got did not really change
O’Brien: c.f. Shabro – saw replacement of floor as a package, but arguably you could have separated them
Capital Gains & Losses
1) CGs and CLs are realized when the capital property is disposed of
a) where the TP dies in a tax year, all his CGs and CLs are deemed to be realized
at FMV (s. 70(5)(a)), but can be rolled over to a spouse (s. 70(6))
2) context
a) s. 9(3) – specifies that income or loss from a source that is property does not
include CG or CL from the disposition of that property – this is probably set
out “for greater certainty”, since 3(a) & 3(b) already separate these 2 categories
i) thus, TCGs (net of ACLs) are brought into the calculation of taxable income
by 3(b)
b) n.b. for the purposes of this course, it is assumed that the CG tax rate has
always been, and will always be, 50%
3) def. of CG and CL – ss. 39(1)(a)-(b)
a) CG/CL is gain/loss from disposition of any property as determined under
s.39(c), but excludes some gains/losses
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b) CG – s. 39(1)(a)
i) first, must be a disposition (i.e. ceasing to own it)
ii) second, there are exclusions from def. of CG – if you dispose of property,
and the gain is included in coming income from business/property (could
never be employment)  excluded from CG
iii) thus, CG is a default basket to catch gains from property, other than gains
recognized in business/property
iv) ex. profits from ACNT, or disposing inventory  excluded from CG
c) CL – s. 39(1)(b)
i) excludes losses that would be losses from a source – ex. loss from ACNT
would be a loss from business
ii) important exclusion is also disposition of depreciable property  you
cannot have a CL from depreciable property
(1) depreciable property = tangible property used in carrying on business or
earning income from property
(2) if depreciable property is disposed of at a loss, you do not get CL, but
you get an income write-off
(3) you can get a CG on depreciable property – it is not common, of course
(but may occur if, for ex., the property has become rare and hard to get)
4) calculation of CG and CL – ss. 40(1)(a)–(b)
a) CG = POD – (ACB + expenses of disposition) [n.b. there will not be ACB in this
course] – s. 40(1)(a)(i)
b) CL = ACB – (POD + expenses of disposition) – s. 40(1)(b)
c) ACB = where it is depreciable property, amount taxable to TP = purchase price
of property = capital cost (the amount expended to acquire something) =
expenses directly related to the acquisition
i) i.e. actual price paid + expenses related to paying the price (ex. GST/PST, legal
fees directly associated with the acquisition – ex. you buy land for purpose of development; price of
land is $50k; property transfer tax is $8k; appraisal fee; title search; lawyer fee)
ii) there is no provision in the Act that says all these things are included in
ACB, but this has been the policy
d) POD = sale price
e) POD – (ACB + expenses of disposition) = if positive  gain; if negative  loss
5) TCGs and ACLs
a) ss. 38(a)-(b) – exclude 50% of the gain or loss from the tax system
i) i.e. dividing in half occurs after the calculation under s. 40(1)
b) ss. 111(1)(b) – carry forward forever and back 3 of net CLs (net CLs = the
amounts by which the ACLs for the year > TCGs for the year)
c) corps. do not die, but people do  on year of death, s. 111(2) – net CLs convert
into non-CLs (if after ACLs are offset against TCGs, there is still some ACL
left)  these can reduce TP’s income from sources for the stub year (year of
death) and previous year
6) property and capital property
a) s. 248(1) – “property” means property of any kind whatever
b) s. 54(b) – PUP (i.e. recreation homes/cabins) can be considered capital property
c) s. 54(a) – depreciable property is usually fixed physical property used by the
business to earn income (ex. ships, buildings, equipment); they have a
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usefulness over an extended period of time; depreciable property is capital
property
d) 2 big exceptions to capital property: 1) ACNT & 2) inventory
e) recall distinction between capital acquisition/disposition, ACNT, carrying on a
business of buying and selling property as inventory
Policy for Preferential Taxation of Capital Gains
1) can only set CLs against CGs, but the effective rate applied to net CGs is ½ what
it would have been if it was income from sources, as an individual
2) in BC, the top marginal rate, federal and prov., is 46.8% – income from
employment/business/property, but effective rate from net CG is only half of that,
23.4%
3) what justifies this rate?
4) until 1972, CGs were outside of the ITA and therefore exempt
5) 3 major policy concerns for changing the historical approach:
a) greater equity:
i) vertical – richer people tend to create higher CGs
ii) horizontal – CGs are treated more closely to equivalent income earned
b) neutrality: makes the system more neutral by reducing the incentive for T to
structure their transactions to look like capital transactions (still a benefit, but
less than historically)
c) certainty: TPs should be able to determine tax consequences and plan for it
i) n.b. tax is most commonly litigated area, so may not have achieved this
goal
6) disadvantages of CG from policy perspective
a) equity – offended as CG usually acquired by high net worth individuals
b) neutrality – offended as preferential treatment of CG is a distortion of market
forces as it causes stock market inflation, causes a lot of tax planning, and
encourages individuals to leverage themselves to seek CG
c) simplicity – not administratively efficient as it is the most litigated area of tax
law; continued problem of TP’s trying to capitalize income and trying to deduct
CL as business losses
7) advantages of CG
a) only ½ of it is taxed
b) not taxed until disposal – and yet you can borrow money against that property
i) ability of TP of when to dispose an asset and recognize a CG/CL is valuable
b/c you can match your CGs/CLs to ensure that you do not pay tax on the
years that you realize CGs (i.e. realize your losses at the time most useful
to you) (ex. usually stock market dips in Dec. – people want to get rid of their bad shares and use
those losses against their CGs for the year)
c) lifetime exemption for CGs – fishing/farming investments up to $750k
i) applies to shares of small private companies and farm property when
disposed of to the next generation – Canadian small business can be passed
on CGs free up to that $750k amount
8) full taxation of CGs would discourage investment by individuals and corporations
9) CLs receive less relief than other types of losses b/c generally CLs are deductible
only from CGs and not from other sources of income
10) main policy reason for CG = it encourages capitalism and investment in general;
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the accumulation of income producing capital is seen as desirable b/c it creates
wealth and increases the income tax base
Identical Properties
1) s. 47(1)(a)-(b) – the one place where the Act directs on how to calculate the ACB
2) s. 47(1)(a) = special rule of determining ACB of identical properties, which are a
type of capital property
a)
b)
ex. shares in a class – they are exactly identical to each other b/c they have the same rights and
restrictions
ex. mutual trust unit – each unit is issued to an investor who will buy it for a particular price; idea is to
diversify risk in securities markets by buying a unit (which is unit in all the underlying property)
3) the rule = ITA does not allow TP to choose which ACB to use – must average ACB
if bought the identical properties at different times and at different values
Part of a Property
1) s. 43(1) – ACB of part of a property  when disposing of part of a property, the
ACB immediately before the disposition of that part is the portion of the ACB of
the whole property that can reasonably be regarded as of the whole
2)
ex. parcel of land that is 2 acres and bought for $2k, if you sell 1 acre, ACB of that 1 acre is the reasonably
attributed portion of ACB of the whole that the 1 acre is of  so if each acre is reasonably the same, each
acre’s ACB is $1k
3) in sum, calculate the ACB of that part proportionately based on value, reasonably
apportioned
Disposition and Proceeds of Disposition
1) anytime you dispose of property and you are entitled to receive something for it –
that will be clearly a disposition
2) need not be voluntary – ex. could be an expropriation (Bellingham) or by operation
of law (Compagnie Immobilière)
3) you do not have to have proceeds of disposition to have a “disposition” (ex. if the land
is destroyed, if the property runs away – can be treated as disposed of)
4) SCC has said that meaning of “disposition” is to be construed very broadly; the
def. in s. 248(1) is not exhaustive; expressions must bear both their normal
meaning and statutory meaning (Compagnie Immobilière)
5) disposition (s. 248(1)) includes any sale or exchange for POD
a) (a), where a security is redeemed, acquired, or cancelled
b) (b)(i), where settlement or cancellation of a debt obligation
c) (b)(ii), where property is destroyed, lost, or abandoned (Compagnie
Immobilière), and
d) overall where possession, control, and all other aspects of property ownership
are relinquished (Bellingham; IT-460) with exclusions
i) exclusions = where change in legal title but no change in beneficial
ownership (e), transfer of property to secure a loan or returning property
that was used as security (j), where issuing a debt obligation such as a bond
(l), or issuing of shares (m)
6) “proceeds of disposition” – s. 54, it includes…
a) sale price of property sold
b) compensation for property unlawfully taken – ex. if something you own is
stolen, and you receive insurance proceeds
c) compensation for property destroyed or lost
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d) compensation for expropriation
e) compensation for property injuriously effected, lawfully or not – i.e. when
someone does something that affects your property, even though they do not
take your property
f) compensation for property damaged and any amount payable under policy if
insurance, except where the compensation has been used for repair
i)
ex. where Imperial Oil damages US Steel Ship; if US ship was a Canadian TP, the compensation
they received could be treated as proceeds of disposition of the ship, if the ship was really badly
damaged; but if ship was only partially damaged and used the money for repair – not treated as
disposition (b/c you can deduct the repair)
g) in principle, any right that is convertible into cash is likely to result in a
disposition when converted (RCI Environment Inc)
The Queen v Compagnie Immobilière BCN Ltée, SCC 1979 – ceasing to be owner by operation of law is
a disposition
Facts: a term of a lease came to an end; the interest in the property that a tenant held disagreed by operation of
law; the tenant no longer had any “property” so their interest in the property was gone; normally this is not CG
issue, but was in this case
Deemed Dispositions and Deemed Proceeds
1) deemed disposition = where Act deems TP has disposed property that TP has not
really disposed of
2) normally, gains on property are not taxed until realized (i.e. disposed)
3) deemed dispositions override this
4) the rules ensure that tax consequences occur b/c of a particular action
Lottery Winnings
1) s. 40(2)(f) – cash lottery winnings (and cost of tickets) are deemed to be excluded
from CG
2) s. 52(4) – lottery winning property is deemed to be acquired at FMV (= ACB)
Ceasing/Becoming Resident of Canada
1) deemed disposition/reacquisition of property, with some exceptions, upon
emigration and immigration [see p. 14]
2) n.b. exclusions from deemed disposition for immigration is on real property and
shares whereas emigration is only on real property; exception for real property as
s. 2(3)(c) states a non-resident is taxable for dispositions of taxable Canadian
property
Gifts and Sales Below FMV to Non-Arm’s Length Persons
1) gifts
a) gifts are real dispositions, even though no proceeds of disposition
b) they have deemed consequences
c) POD deemed at FMV (s. 69(1)(b)(ii))
d) ACB deemed at FMV (s. 69(1)(c))
e) a sale at an undervaluation is not a gift (The Queen v Littler, FCA 1978)
2) non-arms length sales
a) s. 69(a) – where TP acquires anything from person in non-arms length way in
amount excess of FMV, TP deemed to acquire at FMV
i) i.e. s. 69(1)(a) – where the selling price > FMV, the vendor’s POD is the
selling price but the purchaser’s ACB is deemed at FMV
b) c.f. s. 69(1)(b)(i) – where the selling price < FMV, the vendor’s POD will be
deemed FMV but the purchaser’s ACB will be actual selling cost
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c) thus, better to give it as a gift
d) parties may agree to “price adjustment clause” where they agree to accept the
ultimate determination of FMV (by CRA or appeal, for ex.) if it should be
different from their own
e) CRA’s guidelines on price adjustment clauses are in IT-169
f) if cannot agree on FMV  “battle of experts” (Nash v Canada, FCA 2006)
3) related individuals
a) s. 251(1)(a) – related persons are deemed not to deal at arm’s length, even if in
fact their interests are in conflict
b) s. 251(2)(a) – defines related persons as individuals connected by blood,
marriage, common law partnership (CLP) or adoption
i) blood relationship = one person is the child or descendant of the other (i.e. a
child is related to parent, grandparent, great-grandparent etc., and vice
versa) or one person is the brother or sister of the other (s. 251(6)(a))
ii) however, the relationship of aunt or uncle to nephew or niece, and cousins
are not included in related persons but may be a QOF under other nonarms length transactions
c) s. 248(1) – CLP = cohabiting in a conjugal relationship…
i) for 12 months or
ii) if you have a child together
(1) you remained a deemed CLP until you live apart for 90 days due to a
breakdown in the relationship (the fact that you are not living in same
house does not matter if it is for a reason other than relationship
breakdown)
(2) n.b. policies of neutrality and equality served by treating CLP same as
spouses
d) spouses (s. 251(6)(b)) and CLPs (s. 251(6)(b.1)) deemed related to each other,
and to the persons who are blood relations of their spouse or CLP
i) this means “in-laws” are related
ii) also, adopted individuals (s. 251(6)(c))
4) other non-arm’s length transactions
a) in cases other than related persons, it is a QOF whether persons not related to
each other are at a particular time dealing with each other at arm’s length
b) requires an examination of all of the facts and circumstances existing between
the 2 persons at the relevant time
c) unrelated parties have been held not to deal at arm’s length when:
i) there is “a common mind” which directs or controls the bargaining for both
sides (a person and a corporation of which he is a less than 50%
shareholder, but a director and officer with influence over the other
directors and officers) or
ii) the 2 persons act in concert without separate interests (i.e. close friends
that work together to create a tax result
iii) business partners may or may not be at arm’s length, depending on the
circumstances of the transaction and whether they have separate interests
iv) EMEs are normally at arm’s length from their EMP, unless they control, or
are members of a family, that controls the corporate EMP
5) related corporations
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a) s. 251(2)(b)(i) – a corporation is related to the person who holds voting control,
meaning enough shares to elect the board of directors, normally over 50%
b) s. 251(2)(b)(ii) – a corporation is related to a person who is a member of a
related group (each member in group is related to other members) that controls
the corporation
c) s. 251(2)(b)(iii) – a corporation is related to any person related to either the
person who controls it, or any member of the related group that controls it
d) s. 251(2)(c) – any 2 corps. if controlled by same person/group of persons
e)
f)
ex. A controls 100% of Xco but only controls 25% of Yco, and Xco controls 75% of Yco  A is deemed to be
related to Yco
ex. B is CLP of A  B is deemed related to both Xco and Yco
Deemed Disposition on Death
1) when a TP dies, they are deemed to have POD at FMV right before death of all
capital property (s. 70(5)(a))
2) anyone that acquires the deceased TP’s property has an ACB at FMV (s. 70(5)(b))
3) n.b. on death all capital property disposed so any other CLs should be claimed;
also any past net CLs would be claimed upon death (s. 111(2))
Rollovers for Spouses/Common Law Partnerships
Inter Vivos Transfers
1) s. 73(1) – transfer of capital property to a TP’s spouse or CLP will automatically
benefit from rollover treatment (POD deemed to be ACB of the transferred
property) unless the transferor elects otherwise
2) thus, ACB of transferor rollovers to transferee
3) acts as exception to non-arms length gift/sale deeming rules (s. 69(1)) per “For
purposes of this Part”
4) n.b. all transactions fall under s. 73, even if transferee pays FMV  so if
transferee pays FMV, transferee will want transferor to elect out, b/c transferee
wants full ACB
5) requirements
a) transfer of capital property (whether gift or sale) – s. 73(1)
b) both transferor and transferee are Canadian residents – s. 73(1)
c) transferee is the spouse / CLP or former spouse/CLP if the transfer is in
settlement of rights from marriage or CLP (divorce or separation) – s. 73(1.01)
i) recall CLP (s. 248(1)) = cohabiting in a conjugal relationship a) for 12
months or b) if you have a child together
(1) you remained a deemed CLP until you live apart for 90 days due to a
breakdown in the relationship
6) electing out
a) if sale for amount > than ACB to spouse  spouse ACB automatically deemed
to be the original transferor ACB unless electing out
b) however, when electing out, s. 69(1)(b) applies to make ACB FMV
i) this causes the transferor to realize a CG
ii) a prime reason for electing out is where there are unapplied past net CLs
that one wishes to apply to the CG
iii) this is b/c net CLs do not transfer
7) on marriage/CLP breakdown, s. 73(1.01)(b) allows them to divide their property
on a rollover basis and defer realization for tax purposes of the gain/loss on the
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8)
1)
2)
3)
4)
property until the recipient ex-partner disposes of it
spousal attribution rule – s. 74.2(1)(a) – idea is to keep spouses from shifting
capital properties with accrued gains between the couple
a) each member of the couple is taxed as an individual
b) the attribution rule attributes the entire gain back to the transferor, and the
transferee spouse is deemed not to realize that gain
i) in any given year, the net taxable CGs are all set off against each other
ii) the ACL is also attributed back to the original owner of the 2 spouses
iii) this occurs with LPPs as well
c) this rule does not apply if, when the transferee spouse disposes of the property,
the relationship is over, either due to death or breakdown of relationship (for
more than 90 days)
i) idea is to transfer property on deferred basis while the relationship exists
ii) if relationship ends, the transferee spouse will keep the gain/loss
iii) if relationship does not end, it is attributed back to transferor
d) policy = prevent wealthy spouse from transferring property to not wealthy
spouse in planning tax – i.e. prevent income splitting
Transfer and Rollover Upon Death – s. 70(6)
recall s. 70(5) – deemed disposition at FMV on death, and person who inherits
gets the ACB at FMV
s. 70(6) rollover rule = if the TP’s spouse receives the property, however he/she
receives it (ex. right of survivorship, or a will) – if it is really a consequence of the
death, ss. 70(5)(a)-(b) do not apply
therefore, the CG/CL is deferred to avoid paying tax if the spouse is to get the
capital property on death
policy = do not want widows paying tax and not have enough to live on, b/c then
the state will need to support them through subsidies; better to defer until the
surviving spouse dies to tax
Personal Use Property and Listed Personal Property
1) test for all personal property = is it for personal enjoyment?
a) apportion if used partly for personal, partly for business
b) n.b. if you change the use of something from person to income earning, there is
deemed disposition and re-acquisition at FMV [no need to know this for exam]
2) PUP (s. 54) = capital property owned by a TP primarily used for personal use or
enjoyment of the TP or any individual related to TP (i.e. family home, recreational
property, clothes, personal effects, hobby effects, cars, boats, furniture, and LPP)
3) LPP (s. 54) = different from regular PUP as it is collectible so its value does not
decline with use
a) but dealing in LPP will make it a ACNT or a business as it is no longer
personal property but business property
b) LPP is
i) print, etching, drawing, painting, sculpture, or other similar work of art
(n.b. art can be ambiguous)
ii) jewellery,
iii) rare folio, rare manuscript, or rare book,
iv) stamp, or
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v) coin; (n.b. sports card collection likely is not LPP)
4) PUP CL deemed as nil except LPP
a) CL on PUP is deemed to be nil (so no deduction for personal consumption (s.
40(2)(g)(iii)) with 2 exceptions:
i) s. 41 – the LPP exception
(1) s. 41(2)(a) – a TP’s net gain from dispositions of LPP = total gains from
LPP – total loss from LPP; total = you can set off against different types
of LPP
(2) s. 41(1) – for LPP you net the amounts against each other first and then
divide by 50% [c.f. whereas for CG you take your TCG (50%) and setoff
against TCL (50%)]
(3) s. 41(2)(b)(iii) – limits the deductibility of LPP losses and the word
“exceeds” in s. 41(2)(a) ensure it is a positive amount
(a) LPP loss = excess of net loss for total disposition of LPP (s. 41(3))
(4) s. 41(2)(b) – a TP can carry forward a LPP loss for 7 years and back 3
(5) s. 41(2)(b)(ii) – you must use older LPP losses before newer ones
(6) s. 41(2)(b)(i) – can only claim a LPP loss amount that hasn’t already
been used
ii) s. 46(1) – a $1000 exemption applies to disposition of PUP (including LPP)
(1) where POD < $1000 and ACB > $1000, POD is deemed to be $1000 – s.
46(1)(b)  lessens the CL
(2) where POD > $1000 and ACB < $1000, the ACB is deemed to be $1000 –
s. 46(1)(a)  lessens the CG
(3) for disposition of PUP where both POD and ACB < $1000, both POD and
ACB is deemed to be $1000 (s. 46(1)(a)-(b))  the CG is nil
(4) effectively, any PUP/LPP transaction under $1000 out of the tax base
(5) policy = simplicity – if every time you sold something small you had to
calculate tax on it, it would be too cumbersome
b) n.b. a rare gain on PUP (other than LPP) would be taxable as a CG
c) policy for excluding loss = it is a personal loss and not an economic one;
however LPPs are considered a holding of wealth so losses and gains are
taxable / deductible
5) disposition as a set  anti-avoidance rules for PUP – s. 46(2)-(3)
a) ensures people do not abuse the $1000 rule (ex. claim $1000 ACB for item X by splitting X
up into many parts – this happened often with stamp and coin collections, or anything sold as a set)
b) s. 46(2) – where TP has disposed of part of PUP owned by the TP and has kept
another part of the PUP, you take a proportion of the $1000 and apply it to
calculating the ACB, if the ACB is under $1000
c) get this “part” from s. 46(3) – you can try to get out of this by selling piece of
stamp collection to a group of people, who agreed to amalgamate the stamp
collection by the end (i.e. not at arms’ length)  deemed to be a single PUP
and each disposition is a disposition of the part of the whole
d) how the CRA approaches this
i) first, property must be type that would be normally disposed of as a set
ii) whether a number of articles constitute a set is a QOF
iii) the set should
(1) be produced together
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(2) roughly produced at same time (with exceptions – ex. coins)
(3) ordinarily, if they are worth more as a set than they are individually 
most important factor
(4) more than one disposition
(5) aggregate FMV must be more than $1000
Principal Residence Exemption
1) the exemption = disposition of 1 housing unit is exempt from CG calculation for a
member of a family unit composed of family with children under 18, and
exemption is proportion to number of years inhabited/residence
2) what is a PR? (s. 54)
a) PR = particular property that is a housing unit (can include recreational
residences, and a mobile home), a leasehold interest in the housing unit, or
interest in shares of capital stock of co-op.
b) includes land underneath house
c) and includes the land immediately around the housing unit that can be
reasonably regarded as contributing to enjoyment of house
d) the ½ hectare rule  if more than ½ hectare, is not part of PR, and not eligible
for PRE unless TP establishes it was necessary for use/enjoyment
i) i.e. first ½ hectare assumed to be eligible for PRE; but if you have more
than ½ hectare, TP must show it was necessary for use/enjoyment of
housing unit as a residence
ii) test = is it necessary to the residence?
(1) test for necessity of excess land is to objectively (Stuart Estate v The
Queen, FCA 2004) consider all the relevant circumstances immediately
prior to the disposition property (year by year – Cassidy) considering:
whether the TP have established on BOP that without the area of land
for which they contend constitutes the subadjacent and immediately
continuous land component of their housing unit they could not
practically have used and enjoyed the unit as a residence (Rode v MNR
TCC 1985)
(2) where the zoning by-laws dictate a minimum parcel more than ½
hectare, the PRE can be taken on the entire parcel as the excess will be
considered necessary (Canada v Yates)
(3) where zoning bylaws change from a larger than ½ hectare to allow a ½
hectare, the excess will be calculated under the PRE for the period the
zoning bylaw considered the excess as part of the PR year by year
(Cassidy)
(4) where you have more than ½ hectare and excess changed you do the
calculation of the ½ portion and the excess separately (Cassidy)
iii) n.b. where you found TPs are successful is in rural areas where the house
has been built quite a long way from the road, and so the driveway is
necessary to use the house as a residence
3) requirements to get PRE
a) owned in the year by the TP of a PR (s. 54) which requires:
i) type of property such as
(1) a housing unit (s. 54), which the CRA has accepted could include (s. 2.7
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+ ITF S1-F3-C2)
(a) a house;
(b) an apartment or unit in a duplex, apartment building or
condominium;
(c) a cottage;
(d) a mobile home;
(e) a trailer; or
(f) a houseboat
(2) a leasehold interest in a housing unit (s. 54); or
(3) a share of the capital stock of a cooperative housing corporation (s. 54)
ii) n.b. for JTs, can each designate their undivided half interest for that PR for
that year – but one JT cannot claim PRE for one property and the other JT
claim a PRE for another one
b) TP must be individual, other than a trust
c) housing unit ordinarily inhabited in year by TP or his/her spouse/CLP/child –
s. 54(a)
i) ordinarily inhabiting does not require a huge amount of time spent in the
particular housing unit
ii) if you left your personal stuff there, and you have access to it at all time, it
is probably your ordinary place of residence
iii) n.b. changing def. of spouse/CLP over time makes application of this rule
tricky – always check what year the TP declared the PR and which def. of
spouse applies
d) within ½ hectare unless excess is necessary for use and enjoyment of land – s.
54(e) (Rode Test)
e) proper designation (s. 54(e))  only 1 property can be designated for PRE per
family
4) if a TP buys, renovates, occupies, and sells a series of PR over the years, the
houses may become a ACTN and no longer be exempt (Isaaks v The Queen, TCC
2001 + s. 2.6 Income Tax Folio S1-F3-C2 Principal Residence)
5) calculating PRE (s. 40(2)(b))
a) recall s. 40(1) tells you how to calculate CG
b) s. 40(2)(b) is one of the limitations – where TP is an individual, TP’s gain for
tax year from disposition of PR after Dec. 31 1971, the gain is the amount
determined by the formula:
i) PRE = (A × B)/C
ii) CG after PRE = A – (A × B)/C
iii) A = CG otherwise determined, s .40(1) POD – ACB
iv) B = 1 + the # of tax years ending after the acquisition date for which the
property was the TP’s PR and during (means at any time in and not
throughout) which TP was resident in Canada (note that both these
conditions must be satisfied for a particular year in order for that year to
qualify for inclusion in variable B)
v) C = # of tax years ending after the acquisition date during which the TP
owned the property (whether jointly with another person or otherwise)
(1) there may be some years where you owned property where you did not
ordinarily inhabit it, or you were not resident in Canada
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c) s. 40(4) – where there is a spousal rollover, a spouse is deemed to have owned
the property throughout the period in order to claim full ACB
6) policy = idea is that you do not invest in your house, you live in it; if there was CG
on sale of ordinarily residential property, it would inhibit the housing market
unduly; encouraging people to move for work or other reasons
a) however, has an indirect effect of increasing house prices – people more willing
to buy houses, b/c it is seen as kind of a tax-free investment
Cassidy v The Queen, FCA 2011 – in determining PRE for more than ½ hectares where zoning laws
have changed, one makes 2 separate calculations: 1) calculate ½ hectare for full PRE time and 2)
calculate excess for years up to when zoning changed
Facts: T acquired a house on 2.43 hectares, which due to zoning laws was the minimum sized lot until law
changed in 2003; with zoning law change and ability to rezone and subdivide, T sells property and claims CG
under PRE
Held:
 per Canada v Yates, FCTD 1983, a PRE can be taken on more than ½ hectare where zoning by-law imposes
larger size and the excess will be considered as necessary
 2 separate calculations for determining PRE for more than ½ hectares where zoning laws changed
 this way the PRE for the excess during the zoning restriction can be exempted
 the determination of variable B requires a determination, for each taxation year in which the TP owned the
property in issue, as to whether the property met the definition of “principal residence” of the TP for that
taxation year
Depreciable Property and Capital Cost Allowance
1) a TP has the option to deduct an amount to reflect depreciation under the title of
CCA for business or property – s. 20(1)(a) [n.b. CCA does not apply to PUP]
2) CCA recognizes that assets used to earn income from business/property depreciate
in FMV the longer you use/own them b/c of wear and tear, age etc., and that this
as an actual cost of carrying on the business
3) depreciation = accounting term for loss in value of certain assets attributable to
their use in the income-earning process
4) depreciable property (s. 54) = any fixed capital property that loses value through
use in the income-earning process and is not consumed immediately such as
inventory (see exclusions)
5) tax definition for depreciable property = that which can have CCA deduction (s.
13(21))
a) thus, if the depreciable property is included in Schedule II, CCA can be
claimed on them
b) maximum statutory rates of depreciation per class are found in ITR s. 1100
c) amounts allowed by the Regulations are deductible regardless of whether they
reflect the actual depreciation of the assets involved
6) CCA usually uses the declining balance method of depreciation, except for
leasehold interest, patent, concession, franchise, or license where straight line
method used
7) exclusions
a) inventory – ITR 1102(1)(b)
b) land – ITR 1102(2)
c) no deduction is permitted for expenditures that are not for the purpose of
earning income or that are of a personal nature – ITR 1102(1)(c)
i) to determine whether property is exempt under ITR 1102(1)(c), the court
will look to the TP’s intention with the property
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ii) where property is intended to be torn down for expansion purposes, they
will not be considered to be acquired for the purpose of gaining or producing
income and will not be subject to CCA (Ben’s Ltd)
iii) to determine whether property is for the purpose of gaining or producing
income, court will look to TP’s intention with the property (Ben’s Ltd)
8) pooling classes and separate classes
a) all assets in respect of a particular business that are within a particular class
are to be pooled together and the CCA is claimed on the entire class or pool
b) exceptions to the pooling requirement
i) different classes of assets within a single business are separate
ii) classes of assets that are the same but within different businesses must be
separated (ITR 1101(1))
9) UCC
a) as CCA is a permitted deduction, the TP does not have to claim it in a given
tax year and may defer it to subsequent year (but that will be limited to the
maximum % write down cost per the Regulations (UCC) and cannot double up
the CCA in a later year)
b) policy = incentive to invest in faster CCA rate property as businesses can claim
more depreciation expenses more quickly
Ben’s Ltd v MNR, EXCH 1955 – to determine whether property is for the purpose of gaining or
producing income, the court will look to the TP’s intention with the property; where property is
intended to be torn down for expansion purposes, they will not be considered to be acquired for the
purpose of gaining or producing income and will be excluded from CCA deductions
Facts: T owned and operated bakery in Halifax; purchased 3 residential properties, each with land and house; all
3 cost a bit less than $43,000; 6 months later, T sold the 3 properties for $1200 total; for T’s tax return, he
allocated the cost of the 3 properties $3000 to land, and the rest to houses; claims CCA on the houses; MNR
challenged that the entire purchase price was really for the land, and no portion should be allocated to the
building
Issue: were the houses and land deductible under CCA? was the houses acquired by T for purpose of gaining or
producing income from business?
Held: sole intention was to tear down houses, therefore the houses were not subject to CCA even though there
was some incidental rental income from existing leases
Undepreciated Capital Cost – s. 13(21)
1) amount of CCA deduction under s. 20(1)(a) is determined by Reg. 1100(1)(a) and is
equal to the appropriate % of UCC of each class of depreciable assets
2) timing of CCA deduction = end of the year
3) CCA = UCC × class % = the max. claim allowed under this Act
4) calculation of UCC (s. 13(21))
a) year end (unless half year rule applies) UCC = (A + B) - (E + F)
b) A = total historical CC of all assets ever in the class
c) B = total recapture from beginning of the class
d) E = all CCA ever claimed for the class
e) F = POD of assets in the class up to their original CC (cannot be over)
5) UCC is therefore cumulative and to calculate for a particular year, just take
previous years UCC – CCA claimed + cost of new purchases in that year – POD
(up to cost) of property disposed in that year
Half-Year Rule – ITR 1100(2)
1) the rule = UCC otherwise determined – ½(acquisitions-dispositions)
a) i.e. the 1st year you buy/own an asset, you can only claim 50% of depreciation
61
for that year
2) the rule only applies if you have a new acquisition in the year, and the
acquisitions > dispositions
3) as CCA is deducted at the end of the year, to overcome the inequality of claiming
assets late in the taxation year for the full year’s allowance, there is a half-year
rule in ITR 1100(2), which deems assets in the year of acquisition to be used for 6
months
4) thus, CCA on new assets in the class is only 50% of a usual full year deduction
where purchases > POD (up to cost)
ex. where one acquires a $100k building that is CCA class 1 (4%)
year 1 End UCC = (100k + nil) – (nil + nil) – ½ ($100k – nil) = $50k
CCA = $50k x 4% = $2k
Recapture: s. 13(1) – Inclusion in Computing Income
1) occurs in the rare situation where the depreciation claimed > actual depreciation
in value
2) when you get negative amount at end of year before claiming CCA, you know you
have a recapture
a) an over-allowance of deducting CCA is adjusted via recapture which is
included as variable B or as business/property income
b) an under-allowance is adjusted via a mandatory terminal loss deduction when
the class is empty
3) UCC can never be negative, so the negative balance is recaptured and included
into business/property income s. 13(1)
4) s. 13(1) applies where at the end of the tax year the aggregate of the total
depreciation allowed to the TP and the lesser of the POD and CC of the property >
the CC of the property
5) recapture may occur even if there are assets left in the class
6) recapture can be deferred by purchasing another asset of the same class for an
amount that > the recapture amount
Terminal Loss – ss. 20(16) & 39(1)(b)(i)
1) terminal loss is a required deduction (i.e. no option)
2) where an asset actually depreciates at a rate faster than the relevant CCA, the
terminal loss is fully deductible
3) terminal loss only can be deducted if there are no assets in the class at the end of
the year
4) deduction allowed under s. 20(16) where
a) A + B is > than E + F; and
b) the class is empty
5) n.b. TP cannot claim CL on depreciable property – s. 39(1)(b)(i)
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