TAX TAXONOMY: DEFINITION, CLASSIFICATION & TERMINOLOGY.................................... 5
WHAT IS A TAX?......................................................................................................................................... 5
CLASSIFICATION OF TAXES ........................................................................................................................ 6
Five Components .................................................................................................................................. 6
Tax Base................................................................................................................................................ 6
The Rates of (Income) Tax .................................................................................................................... 7
Statutory Rates .................................................................................................................................................. 7
Marginal Tax ............................................................................................................................................... 8
Average Tax Rate ........................................................................................................................................ 8
Effective Tax Rate ....................................................................................................................................... 8
Calculation of Rates .......................................................................................................................................... 8
Progressive Tax: .......................................................................................................................................... 8
Proportional Tax: ......................................................................................................................................... 8
Regressive Tax: ........................................................................................................................................... 8
A Note on Calculation of Rates ................................................................................................................... 8
EXEMPTIONS, DEDUCTIONS, CREDITS ........................................................................................................ 9
Exemptions ............................................................................................................................................ 9
Deductions ............................................................................................................................................ 9
Credits ................................................................................................................................................... 9
ACCOUNTING PRINCIPLES .......................................................................................................................... 9
Cash Accounting Method .....................................................................................................................10
Accrual Accounting Method.................................................................................................................10
TAX POLICIES ..........................................................................................................................................10
TAX EQUITY ..............................................................................................................................................10
Vertical Equity .....................................................................................................................................10
Horizontal Equity .................................................................................................................................10
TAX NEUTRALITY......................................................................................................................................10
TAX SIMPLICITY ........................................................................................................................................11
TAX AVOIDANCE VS. TAX EVASION ..........................................................................................................11
TAX EXPENDITURES ..............................................................................................................................11
GOVERNMENT BODIES DEALING WITH TAXATION ...................................................................12
TAXATION FROM A CONSTITUTIONAL STANDPOINT ................................................................12
DIRECT VS. INDIRECT TAXATION .....................................................................................................13
TAX COLLECTION AGREEMENTS (WITHIN CANADA) ................................................................13
TAX ADJUDICATION SYSTEM .............................................................................................................14
TAX STATUTE INTERPRETATION ......................................................................................................14
COMPUTING INCOME ............................................................................................................................15
THE SOURCE CONCEPT OF INCOME ...........................................................................................................15
Defining Other Sources........................................................................................................................16
The Surrogatum Principle....................................................................................................................17
Interpretation Bulletins ........................................................................................................................19
IT-365R2: Damages, Settlements and Similar Receipts .................................................................................. 19
Concluding Points on the Source Concept of Income ..........................................................................19
NEXUS .......................................................................................................................................................19
WHO IS SUBJECT TO CANADIAN TAX LAW? ..................................................................................20
RESIDENCE ................................................................................................................................................20
Introduction to Residence ....................................................................................................................20
Individuals....................................................................................................................................................... 20
Deemed Residence .......................................................................................................................................... 21
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Part Year Residence .............................................................................................................................22
Ordinarily Resident ......................................................................................................................................... 22
IT-221R3 ..............................................................................................................................................22
Avoidance of Dual Tax Residence .......................................................................................................23
Tax Treaties .................................................................................................................................................... 23
Provincial Residence – Establishing Residency in One Province Over Another .................................24
Residence of Corporations and Trusts .................................................................................................24
NON-RESIDENTS: SOURCE AS A BASIS OF CANADIAN LIABILITY ..............................................................25
s. 212 – Non-resident withholding tax .................................................................................................25
Non-Residents Employed or Carrying on Business in Canada or Disposing of Taxable Canadian
Property ...............................................................................................................................................26
1. Employed in Canada ................................................................................................................................... 26
2. Carrying on Business .................................................................................................................................. 27
INCOME FROM OFFICE OR EMPLOYMENT ....................................................................................27
BASIC DEFINITIONS AND PROVISIONS .......................................................................................................27
EMPLOYEE VS. INDEPENDENT CONTRACTOR/CONSULTANT/SOLE PROPRIETOR ........................................28
INTERPOSING A CORPORATION IN THE EMPLOYMENT RELATIONSHIP: PERSONAL SERVICES BUSINESSES
AND INCORPORATED EMPLOYEES ..............................................................................................................29
INTRODUCTION TO BENEFITS, REIMBURSEMENTS AND ALLOWANCES.......................................................30
General Info .........................................................................................................................................30
Capitalization of Employment Benefit ............................................................................................................ 30
Amounts Included in Computing Income from Office or Employment .......................................................... 30
Benefits ...................................................................................................................................................... 31
What Constitutes a Benefit? ................................................................................................................. 31
Policy Considerations re Taxation of Benefits: .................................................................................... 32
IT-470R – Selected Provisions [Handout] ............................................................................................ 32
T4130 Employer’s Guide – Taxable Benefits and Allowances ............................................................ 32
Royal Commission on Taxation No. 16 → Tax Treatment of Benefits ................................................ 33
Valuation of Employment Benefits .......................................................................................................33
Allowances ...........................................................................................................................................34
Exceptions: Special and Remote Work Sites ........................................................................................34
Automobile and Travelling Allowances ...............................................................................................35
DEDUCTIONS IN COMPUTING INCOME FROM EMPLOYMENT ......................................................................36
General Limitations on Deductions  8(2) and 67/67.1 .....................................................................36
Travelling Expenses .............................................................................................................................36
Legal Expenses ....................................................................................................................................37
Deduction for dues or other expenses in performing duties.................................................................38
Home Office Expenses .........................................................................................................................38
INCOME FROM BUSINESS OR PROPERTY .......................................................................................38
BUSINESS AS A SOURCE OF INCOME: ORGANIZED ACTIVITY & PURSUIT OF PROFIT ..................................38
CARRYING ON BUSINESS VS. EARNING INCOME FROM PROPERTY & REALIZATION OF CAPITAL GAINS ....39
Income from Business or Property? .....................................................................................................39
BUSINESS...................................................................................................................................................40
Organized Activity ...............................................................................................................................40
For the Pursuit of Profit ......................................................................................................................41
Adventure or Concern in the Nature of Trade .....................................................................................42
IB IT-459  a Concise Summary of the Law ...................................................................................... 42
MNR v. James A. Taylor [1956, Exch. Ct.].......................................................................................... 43
Regal Heights Limited v. MNR [1960, SCC] ....................................................................................... 43
Irrigation Industries Limited v. MNR [1962, SCC] .............................................................................. 44
Carrying on Business vs. ANT vs. Investing in Capital Property ........................................................44
Arcorp Investments [2000, FCTD] ....................................................................................................... 44
INCOME FROM PROPERTY ..........................................................................................................................45
General ................................................................................................................................................45
Interest .................................................................................................................................................46
Groulx................................................................................................................................................... 47
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Rent & Royalties ..................................................................................................................................47
Spooner................................................................................................................................................. 47
Wain-Town Gas and Oil Company Ltd. ............................................................................................... 48
Dividends .............................................................................................................................................48
DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS AND PROPERTY .........................48
STRUCTURE OF THE ACT............................................................................................................................48
THE INCOME EARNING PURPOSE TEST ......................................................................................................49
Daley v. MNR [1950, Exch. Ct] ........................................................................................................... 49
Imperial Oil Limited v. MNR [1947, Exch. Ct] .................................................................................... 49
The Royal Trust Co. v. MNR [1957, Exch. Ct.] ................................................................................... 50
PERSONAL OR LIVING EXPENSES ...............................................................................................................50
Benton .................................................................................................................................................. 50
CHILDCARE EXPENSES ..............................................................................................................................51
Symes v. the Queen .............................................................................................................................. 51
TRAVEL EXPENSES ....................................................................................................................................51
Dr. E. Ross Henry ................................................................................................................................. 51
Moving Expenses .................................................................................................................................51
Home Office Expenses .........................................................................................................................53
DEDUCTION OF INTEREST EXPENSE ...........................................................................................................53
The Queen v. Bronfman Trust .............................................................................................................. 53
Singleton v. The Queen [2002, SCC] ................................................................................................... 54
Ludco Enterprises Ltd. v. The Queen [2001, SCC] .............................................................................. 55
POLICY REASONS FOR DENYING DEDUCTIONS ..........................................................................................55
MNR v. Eldridge [1964, Exch. Ct.] ...................................................................................................... 55
COMPUTATION AND TIMING ..............................................................................................................56
CAPITAL VS. CURRENT EXPENDITURES ......................................................................................................56
Shabro Investments .............................................................................................................................. 57
Gold Bar ............................................................................................................................................... 57
TIMING OF RECOGNITION OF REVENUE AND EXPENSE ..............................................................................57
Amounts Receivable .............................................................................................................................57
J. Colford Contracting .......................................................................................................................... 58
Benaby Realties [1960] ........................................................................................................................ 58
West Kootenay Power and Light v. The Queen .................................................................................... 58
Amounts Payable .................................................................................................................................59
J.L. Guay Ltée ...................................................................................................................................... 59
Losses ...................................................................................................................................................59
CAPITAL GAINS .......................................................................................................................................59
INTRODUCTION ..........................................................................................................................................59
Policy Evaluation of Preferential Taxation & Capital Gains ..............................................................60
DEFINITIONS ..............................................................................................................................................61
DEEMED DISPOSITIONS AND DEEMED PROCEEDS ......................................................................................63
On Ceasing to Be or Becoming a Resident of Canada.........................................................................63
On Death ..............................................................................................................................................63
Gifts and Sales Below FMV to Non-Arm’s Length Persons .................................................................64
Non-Arm’s Length Persons............................................................................................................................. 64
Gifts and Sales not at FMV ............................................................................................................................. 65
SPOUSAL TRANSFERS ................................................................................................................................66
Transfer of Inter Vivos Property to Spouse/CLP .................................................................................66
Spousal Rollover on Death, and Election Not to Have it Apply ...........................................................67
PERSONAL USE PROPERTY (PUP) AND LISTED PERSONAL PROPERTY (LPP) ............................................68
PRINCIPAL RESIDENCE EXEMPTION ...........................................................................................................70
TP must show excess beyond ½ hectare is necessary to use & enjoyment...........................................71
Spouses and CLPs ................................................................................................................................72
Determining TP Gain from Disposition of PR: ....................................................................................73
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DEPRECIABLE PROPERTY AND CAPITAL COST ALLOWANCE ................................................73
Ben’s Ltd. ............................................................................................................................................. 74
UNDEPRECIATED CAPITAL COST (UCC) ...................................................................................................74
Reg. 1100(2): The Half-Year Rule .......................................................................................................75
TERMINAL LOSS ........................................................................................................................................75
RECAPTURE ...............................................................................................................................................75
TAXATION AND ABORIGINAL PEOPLES ..........................................................................................76
Benoit ................................................................................................................................................... 76
S. 87(1)(B) .................................................................................................................................................76
Williams ............................................................................................................................................... 76
Recalma [1998, FCA] ........................................................................................................................... 77
Akiwenzie 2004 DTC 6007 (FCA) ....................................................................................................... 77
Southwind [FCA] ................................................................................................................................. 78
Bastien Estate v. Canada [2011 SCC]................................................................................................... 78
Dubé v. Canada [2011 SCC] ................................................................................................................ 78
INDIAN ACT S. 90.(1) .................................................................................................................................79
Kakfwi [FCA] ....................................................................................................................................... 79
INCOME TAX EXEMPTION FOR BANDS & CORPS OWNED THEREBY: .........................................................79
Otineka Development Corporation Limited ......................................................................................... 79
DIRECT TAXATION BY FIRST NATIONS ......................................................................................................79
4
Tax Taxonomy: Definition, Classification & Terminology
 Taxes reflect what the society (generally) thinks should be paid for collectively, and what
independently.
o Canada: public health care and education
o Social mores play a significant role
What is a Tax?
 Could be defined as “a compulsory transfer of money from private individuals or organizations
to the government not paid in exchange for some specific good or benefit.”
o Distinguished from other forms of gov’t charges in that taxes are compulsory
o Courts accept this idea of tax as basically a non-voluntary payment – an enforced
contribution demanded under legislative authority, payable in money and
collected for the purpose of raising revenue to be used for public or gov’t purposes
and not as payment for goods or services rendered. [Shawinigan Water & Power]
 Other amounts paid that aren’t classified as taxes include:
o Fines/penalties imposed by gov’ts to deter/punish unacceptable behaviour (though a
side effect is to raise revenue – can be seen as tax of bad behaviour)
 Generally imposed relative to gravity of offence, rather than wealth/income of
the offender
 Though some countries use a sliding scale based on income (e.g. Finland
charges for speeding based on a percentage of income)
o Royalty payments to compensate gov’t for right to extract natural resources from gov’towned land/resources
 Gov’ts charge royalties on private-sector enterprise for the right to exploit things
like oil, natural gas; stumpage on timber is essentially a royalty
 Usually Crown imposes royalty based on amount taken – right to exploit in
exchange for a share of what is produced
 (IP royalties are entirely different from this)
o Prices charged by gov’t for some goods and services sold to individuals
 Requited payments – pay a fee and get a specific (optional) benefit from gov’t
in exchange
 Fishing licenses, e.g. – pay for the right to fish.
 Bus tickets for right to ride the bus, etc.
 Prices for services provided by gov’t monopoly
 Complications arise when price is higher than the actual cost – should ferry
prices, for example, be higher than cost in order to offset other things that need
to be subsidized?
 Some things are difficult to distinguish from taxes; some things are both a charge and a tax
o E.g. if the amount paid to gov’t for a particular good/service is not performing the
economic function of a price (i.e. to bring supply/demand into balance), then some
argue that it should be regarded as a tax.
o Can’t rule out classification as tax just because it could be avoided – there is an
argument that all taxes are theoretically avoidable, either by not buying the associated
good/service, or not engaging in the activity to which the tax attaches.
 E.g. cigarettes, alcohol – gov’t taxes these goods and also regulates their
purchase. So we can see taxes as an adjunct to regulation: we may use one or
both in a given situation, based on policy reasons/social value.
o A price set above cost on a gov’t provided good/service may be considered a tax
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
o
E.g. lottery ticket – full price includes a premium above the cost of running the
lottery  this surplus (monopoly profit) could be considered a tax
It is a purely conceptual distinction – no way to empirically ascertain whether
something is a tax, and the only impact is generally in public opinion.
Classification of Taxes
Five Components




1. Base upon which the tax is levied
2. Tax-filing unit that is responsible for paying the tax
3. Rate that is to be applied to the base in arriving at the tax owing
4. (unless the taxes are imposed on individual transactions) a period over which the base is
measured and the taxes collected
o income tax – annual period (calendar year – some businesses have several actual years
in a calendar year)
o GST/HST – annual tax, in the sense that there is a base exemption for small suppliers
(>30,000/year), and after that must resubmit every year or every quarter, depending on
sales)
o Property transfer tax – pay when register title to land (transactional basis)
 A set of administrative arrangements for collection
o Someone must collect, assess, review, enforce
 CRA for GST/HST etc.
Tax Base
 The most common way to classify a tax is by reference to its base – the amount, transaction or
property upon which the tax is levied.
 Three obvious tax bases:
o Income (amount that an individual earns)
 Definition in the Act is complicated
 Mainly defined by sources, but could also be defined by uses  i.e. value
of consumption plus increase in net wealth
 Haig-Simons Theory suggests that everything a person gets should be taxed,
b/c put in better pos’n to pay.
 Difficulty of definition arises because there are all kinds of things that are not
taxed.
o Consumption (amount than an individual spends)
 Essentially an income tax that exempts the taxpayer’s savings.
 Consumption taxes favour saving over consuming
 GST is a value-added tax – tax rate is applied to the value added to
goods/services at each stage in their production.
 PSTs are single-stage taxes, collected by retailers when goods/services are sold
to consumers
 Excise taxes are consumption taxes that are only applied to certain
goods/services
 E.g. alcohol, cigarettes, lotteries, some luxury goods
 Normative justification: consumption of these goods creates social costs,
which are reflected in the price by the tax.
o Wealth (amount represented by an individual’s property)
 Most countries tax wealth as it is transferred (i.e. either as a gift or upon death)
6



Wealth transfer taxes are variously referred to as estate or inheritance taxes (or,
pejoratively, as death taxes)
Some justification arguments: need for more distribution of wealth, to increase
progressivity of tax system, to act as backdrop to income tax system, to
generally increase the efficiency of the tax system
 All contentious arguments.
Canada is one of three industrialized countries that do not have a general tax on
wealth. We do, however, have substantial partial wealth taxes
 All provinces or local gov’ts impose a tax on real property
 We don’t tax on net worth (i.e. we don’t ask ppl to declare what they
actually own)
 Tax incidence
o The person who is named as having to pay the tax is not always the one who actually
pays – e.g. corporations don’t pay taxes, they just advance money to the gov’t on behalf
of shareholders, employees and customers, and then collect it back
o So a corporation pays money for EI, for example, but if they didn’t have to pay that
then the employees or shareholders would get that money.
o So the incidence of EI is on the shareholders/employees, or possibly even passed on to
consumers in the higher price of goods from that corporation.
 Corporate and income tax are the biggest revenue-generators
o Personal income tax accounts for 51% of the federal budget
o Corporate income tax is 11% (but remember that they pass on all the taxes they pay in
some way)
 Businesses can carry losses forward and back some years.
The Rates of (Income) Tax
Statutory Rates
 The Act provides for a personal tax credit that offsets the tax liability on a taxpayer’s first
$10,527 of income
o S. 118 expresses this as a credit for 15% of $10,527, which zeroes out since the tax rate
is 15%.
o Brackets are set out each year based on indexing at an average inflation rate. For 2011,
the inflation rate is 1.44% (so each bracket had 1.44% added on to them)
 Corporations
o Corporations pay tax on first dollar of income – no personal exemption as for
individuals
o Two rates: small business rate and general rate
o BC & federal combined small business rate for a Canadian controlled private
corporation doing active business w/ income up to $500,000 is 13.5% [11% federal +
2.5% BC]
o BC & federal combined rate for other corporations’ income: 26.5% [16.5% federal +
10% BC]
 In 2012, the overall BC rate will be down to about 25%
 Federal tax schedule is set out in s. 117 of the Act
o 15% on taxable income up to $41,544
o 22% on additional taxable income up to $83,088
o 26% on add’l taxable income up to $128,800
o 29% on add’l taxable income over 128,800
7
Marginal Tax
 The rate of tax that applies to an additional dollar a taxpayer earns within each income bracket
 Additional money earned will not affect the tax on income in the lower tax brackets
 The top combined federal and BC marginal rate for individuals resident in BC is 43.7%
Average Tax Rate
 The average of the marginal tax rates paid on all income (i.e. the percentage of total income
that is actually paid in taxes)
Effective Tax Rate
 Similar to average tax rate – but usually computed by reference to some broader measure of the
taxpayer’s income than taxable income (i.e. includes tax-exempted income and deductions)
 Can be used to illustrate the effect of exemptions, deductions and tax credits on tax liabilities
Calculation of Rates
Progressive Tax:




Takes an increasing proportion of income as income rises
Not just that higher income pays higher rate – rate goes up as income increases
With each increase in income pay not just more tax, but tax at a higher rate
Reasoning:
o Those who can pay more should (ability to pay);
o Opportunity to redistribute wealth
Proportional Tax:
 Takes a constant proportion of income
Regressive Tax:
 Takes a declining proportion of income
 Sales taxes are inherently regressive
o 12% sales tax is a higher proportion of low-income person’s income than of a highincome person.
o HST rebate probably gave more back to very low income people than they paid.
o PST is far more regressive
o Both PST and HST exempt basic necessities (basic groceries, residential rent, medical
supplies, education (incl music lessons), child care)
A Note on Calculation of Rates
 The application of these definitions depends on who really pays the tax, how broadly their
income is defined, over what period of time their income is measured, and who is assumed to
benefit from exemption, deductions and credits in the tax base.
 In Canada, it has been found that generally, all taxes except income tax are regressive.
 In higher ranges, even individual income tax becomes regressive.
o Higher income individuals earn disproportionate amounts of income that gets
favourable tax treatment (e.g. capital gains)
 The Canadian tax system ends up being approximately proportional, with everyone –
regardless of income – paying 30-35% of their income broadly defined in taxes.
o The progressivity of income tax is completely offset by the regressivity of other taxes
8
Exemptions, Deductions, Credits
 All three operate to reduce amount of tax payable, either by reducing global income or by
reducing tax otherwise payable.
Exemptions
 Some examples of exemptions:
o GG’s salary
o Lottery winnings, gifts, money you find on the street
o Income not from a source
o Indian Act exemption for income of status Indians where income is “situated on a
reserve”
o Non-profits/charities (see s. 149)
o Strike pay
 If income is tax-exempt, don’t have to actively claim it, just don’t report the income.
o Ability to pay tax is increased because you have more money, but exempted income is
outside the tax net
Deductions
 Reduces the tax base on which the rate is applied
o So, creates portions of income on which no tax is levied
 Specifically provided for in the Act – must bring self w/in the req’mts of the deduction
provision to claim
 RRSP is a deduction
o Logic is that since you pay tax on the money when you take it out, should be a
deduction when it goes in.
o But inequality arises: higher income earners get a much bigger advantage in deduction,
because tax savings come off the top – save based on highest marginal rate at which
you pay tax.
Credits
 Reductions in tax otherwise payable
 Not removed in computing income. Calculate tax payable, then reduce the initial tax payable
by the flat amount of the credit.
 E.g. Basic personal amount
Accounting Principles
 CICA (Canadian Institution of Chartered Accountants) set out generally accepted accounting
principles (GAAP) – rules for financial accounting
o Reporting of a business’ financial results – every year businesses must produce
financial statements which truly and fairly represent their status
 Extremely conservative – financial accounting is meant to represent a
conservative view of the worth of assets
o Disconnect b/w ITA conception of financial results and actual financial results
 As lawyers, we care about the tax results, but accountants prepare the financial
statements first, then adjust GAAP to tax-appropriate info.
 So, can’t just say the results for financial purposes under the GAAP are the
results for tax purposes.
o ITA and case law override GAAP [See Iacobucci J in Canderel Ltd. v. The Queen]
9
 Timing is key – if can defer tax to a later year, it makes financial sense to do so  things may
change, and can find ways to deduct losses against earlier income.
Cash Accounting Method
 All that is accounted for is the revenues actually received and the expenses actually paid
 Employees, farmers and fishers are among the only parties allowed to use this method
 Don’t report an amount until you have received it, and don’t claim a deduction until you’ve
paid the amount you’re entitled to deduct
Accrual Accounting Method
 Includes amounts paid and payable, and amounts received and receivable
o So even if a client hasn’t paid yet, if they’ve been invoiced you are entitled to be paid
the amount as of the end of the year, even if you haven’t been paid it.
 All corporations/businesspeople other than farmers and fishers
 Only pay the tax once, obviously – if receive a previously declared amount the following year,
don’t have to pay again.
 A business who has been invoiced for an expense payable in year 1 will deduct it at that time,
even though it may not be paid until year 2.
Tax Policies
 Normative Theory Underlying the Taxation system: The Fundamental purpose of a tax system
is to raise revenue for a government’s purposes. The fairest, most neutral tax system of all
would be no tax system. that said, since we need revenue for gov’t, the tax structure should be
made as neutral, equitable, and simple as possible
Tax Equity
Vertical Equity
 Idea that those who have more should pay more
Horizontal Equity
 People who are similarly situated should be treated the same (i.e. pay the same amount of tax)
 Asserts that those who have the same amount of accretions to wealth, regardless of form,
should be subject to same levels of taxation.
 E.g. employee fringe benefits – such as a company car
o Argument that value of benefit should be treated as money
Tax Neutrality
 Taxes should avoid distorting market mechanism of personal decisions (i.e. influencing
people’s conduct in the market)  however, they always do this. Influence how people
structure finances, engage in transactions, and decide where and how to live.
 In Canada, for tax purposes we interpret common law, married couples etc. as being in the
same situation
 Tax credits for making films in the province  bringing in business; highly competitive world
market
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Tax Simplicity
 A. Comprehensiveness
 B. Certainty: taxpayer should be able to determine with some certainty what the consequences
will be of a given financial action/situation  shouldn’t be up to the discretion of the taxcollecting body
o NB: this is a problem with the Greek and Italian systems – too much ministerial
discretion  leads to a willingness to take bribes to exercise discretion in someone’s
favour
o The law/rules should be clear, and enforcement should be according to their tenets
 C. Compliance should be easy – shouldn’t be impossible for a reasonably well-educated person
to file their own tax return
o Too much is not obvious about the tax system
o Shouldn’t cost a high price to comply
 D. Administrative convenience
o Shouldn’t be too costly for the government to comply either
o If government has to spend a lot, will get less money and may not make sense to bother
with collection.
 Note: one big advantage of HST was the money saved in harmonized collection
o Canada has a highly efficient collection system
 E. Taxes should be difficult to evade
o Otherwise those who do pay are also paying for those who don’t – honest taxpayers
shouldn’t pay more to compensate for dishonest ones.
o System should impose tax at a level that is easy to collect
 E.g. directly taxing employment income through the employer – much easier to
go after established employer than track down evading employee.
Tax Avoidance vs. Tax Evasion
 Tax avoidance is legal – even supported.
o It means structuring your affairs to save money – it’s what people are supposed to do,
and it is facilitated by the government.
 If you are structuring your affairs within the rules of the Tax Act, this is perfectly appropriate.
 As long as you declare what you’ve done, fairly and openly, and keep records such that if CRA
comes asking then you can prove the situation, you are ok.
o You may be wrong, and if you are then you’ll pay more taxes, but as long as everything
is disclosed there is no criminal activity.
 Tax evasion is fraud.
o A criminal activity, prosecuted in criminal courts
o Falsifying documents, claiming deductions that have no basis, etc.
 When you encounter clients who are evading taxes
o Be careful: don’t have to report them, and probably can’t due to privilege, but probably
can’t/shouldn’t act for them
o If it’s beyond your judgment, confer with a senior lawyer etc.
 The line isn’t always obvious, but if a taxpayer is clearly disclosing everything, it’s on the level
– regardless of whether something turns out to be wrong, will only have to pay more taxes,
won’t be criminally charged.
Tax Expenditures
 Although the main purpose of the Income Tax Act is to increase revenue, it’s also designed to
11




shape people’s behaviours, and to incentivize certain behaviours over others.
o Gov’t support for post-secondary education;
o Canada Child Tax Benefit – subsidy to help raise children  recognition that children
are a benefit to society as a whole, but are expensive while they are young
The Tax Act is both a tax collecting and a government spending statute
o Technical tax provisions establish the rules and structure of the tax system
o Tax Expenditures provisions provide implicit subsidies for those who behave in a way
that the government wishes to encourage
o Deductions, credits, preferential rates  encouraging taxpayers to act in a certain way
Methods of distinguishing Tax Expenditures from Technical Tax Provisions:
o (1) construct a benchmark system using the traditional tax policy criteria – anything
that deviates from this benchmark is a Tax Expenditure
o (2) Tax Expenditures are anything that can be justified by reference to a government
spending objective (used in place of direct government spending)
Arguments for Tax Expenditures rather than Direct Spending:
o Less complex and bureaucratically costly than direct spending programs
o Encourage private decision making
o Use an established administrative framework
o Less stigma than direct government hand-outs
Arguments against:
o Tax expenditures can turn into open-ended programs with limited government control
o Upside-down effect – the higher the income the greater the implicit subsidy
o Increase the complexity/opacity of the tax system
o Subject to more abuse than direct spending
o Increase the perceived unfairness of the tax system
Government Bodies Dealing with Taxation
 CRA: Canada Revenue Agency
o Supposed to be the neutral enforcement body  run by Board of Directors
o CRA is an independent body who collects separately from government
o The CRA sees every taxpayer as their client.
 DNR: Department of National Revenue
o Ministerial department of taxation
o The Minister of National Revenue is ultimately responsible for the CRA
 Department of Finance
o Sets tax policy, makes legislation
o The Department of Finance is the primary setter of tax policy. They study the way our
system works, take proposals and make them into legislation, work on budget every
year
 DOJ: Department of Justice
o Legal branch of enforcement
o The CRA is a client of the DOJ
Taxation from a Constitutional Standpoint
 91(3): Federal Parliament has exclusive legislative authority for “all Matters not coming within
the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces;”
including “The raising of Money by any Mode or System of Taxation”.
 92: Provincial legislatures have exclusive legislative authority for
o (2) “Direct Taxation within the Province in order to the raising of a Revenue for
12
Provincial Purposes”;
 36(2) Parliament and the government of Canada are committed to the principle of making
equalization payments to ensure that provincial governments have sufficient revenues to
provide reasonably comparable levels of public services at reasonably comparable levels of
taxation.
 Both the federal and provincial governments have direct taxation powers
o 91(3) gives the federal government carte blanche on raising money – “by any mode or
system of taxation”
o Provincial taxation – exclusive jurisdiction of province to levy taxes in the province for
provincial purposes
o The federal government raises money through federal income tax act and transfers
money  technically, that is unconstitutional because the feds are raising money for a
provincial purpose. However, courts have said this is co-operative federalism, not a
provincial purpose
 Provinces can also raise revenue through requiring licenses for different activities
o These fees should generally be accorded to the cost of running the program from which
the fees are raised
Direct vs. Indirect Taxation
 Courts generally refer to taxes as indirect if they are taxes on a unit of a marketable commodity
that are ‘passed on’ to a final consumer.
 “Is the tax related or relatable, directly or indirectly, to a unit of the commodity or its price,
imposed when the commodity is in the course of being manufactured or marketed?” – Rand J
in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan [1952, SCC]
 Does the tax attach to the goods in such a way that the purchaser is just going to add it to the
price when they resell it?
 A direct tax is one which is demanded from the very person who it is intended or desired
should pay it. Indirect taxes are those which are demanded from one person in the
expectation that he shall indemnify himself at the expense of another. – John Stuart Mill
 Indirect taxes: Excise taxes and customs duties
o Excise taxes are imposed at manufacturer level, but it just gets factored into the price of
the goods and passed on
o Before GST, Canadian goods had a 12 % mark up built into the price.
 Direct tax: Taken from the earner/investor/employee, etc. who is intended to pay it. Individuals
do actually pay it, because they don’t have anyone to pass it on to.
o The SCC has called the GST a direct tax, but in international parlance it would be
considered an indirect tax
 Direct vs. indirect tax litigation often goes to the Supreme Court. It’s not something you can
ignore when a new tax is introduced
 s. 36(2) – Constitutional provision that provides for equalization among the provinces
 Federal government ensures that provincial governments have sufficient revenue to provide
comparable levels of service at comparable levels of taxation
Tax Collection Agreements (Within Canada)
 One of the main methods of harmonizing systems
 All provinces except QC have a tax collection agreement with the federal government
 Ceding of primary taxing power began in the late 30s when provinces sort of rented their tax
room to the federal government
13
 Provinces didn’t want to give up their tax room to the feds – renegotiated in 1962 and 1996.
 AB still runs its own corporate tax directorate, so it’s not collected by the CRA
 All provinces (even Quebec) determine provincial residence based on where the person was
resident on the last day of the tax year
 Provinces agree to adopt the federal tax base
 Although Quebec has a separate tax statute and tax administration, its tax base is almost
identical
Tax Adjudication System
 File tax return in April, get a notice of assessment, and usually you’re done.
 If there are errors, they will reassess and fix it for you. They have up to three years to reassess.
 If you get a notice of assessment, you can file a notice of objection within 90 days to the CRA
appeal branch.
o Get advice from a lawyer
o Give reason for objection
o Need to convince them – low success rate at objection level, but there is room to
negotiate
o Avoid tax court if you can!
 If you’re not happy with your reassessment, you have to appeal to the Tax Court of Canada.
 Appeals from there go to Federal Court of Appeal, then SCC
o Court of inherent jurisdiction
o Can make constitutional judgement
 Applying to TCC is similar to going to BCSC, but the rules are different
o Difference between general and informal procedure
 General procedure is very similar to regular civil litigation. Formal rules of
evidence are followed and costs are available.
 Informal procedure:
 Felt there should be some less expensive way of challenging tax
assessment.
 If penalties are less than $12,000 you can use informal procedure.
 Tax court rules aren’t applied.
 The taxpayer frequently represents themselves.  Informal procedure decisions are not regarded as precedent. You can
present them but because the rules of evidence are relaxed, they’re not
regarded as precedent.
 Problem re access to justice?
o No effective taxpayer advocates
Tax Statute Interpretation
 S. 111: How to Compute Income
 Rely on Placer Dome for the approach to interpreting tax statutes
 The modern rule of statutory interpretation is where you start
o But, often textual interpretation takes precedence because of the importance of the
language.
 Even when it appears unambiguous at first sight, sometimes in a particular context the words
can’t be clearly applied/disapplied, in which case you must take a purposive, contextual
approach. [Canada Trust Co.]
o If the language is clear, don’t try to create a purposive interpretation
14
 Residual presumption in favour of taxpayer [Canada Trust Co.]
o If there is no way to tell whether or not the Act catches a particular situation,
presumption is in favour of the taxpayer.
Computing Income
 Income ≠ defined in the Income Tax Act.
o But there are rules and a method for computing income.
 1. Income is computed by counting up the taxpayer’s income from all sources
o Four sources are enumerated in s. 3(a)
 Office
 Employment
 Business
 Property
o s. 56(1) includes some other amounts
 (a) Pension benefits, unemployment insurance benefits etc.
 (h) RRSP
 (n) scholarships, bursaries etc.
 except that 56(3) essentially exempts all scholarships and bursaries.
 (q) education savings plan payments
 (u) social assistance payments
 (v) workers’ compensation
o May be further unenumerated sources, per Curran.
 2. Add taxable capital gains minus allowable capital losses – s. 3(b)
o Capital is a thing you own that makes money. The money you make is income, but the
capital is the property from which income is generated.
o Adjusted Cost Base less Proceeds of Disposition equal Capital Gains if positive (50%
of which are taxable), or Capital Losses if negative (which can only be set off against
CGs, at 50%)
 3. Deductions
 4. Subtract losses from sources
o i.e. from office, employment, business and property
The Source Concept of Income
 The Canadian system is based on the idea that to have income subject to a tax, it has to come
from a source.
 3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s
income for the year determined by the following rules:
o (a) determine the total of all amounts each of which is the taxpayer’s income for the
year (other than a taxable capital gain from the disposition of a property) from a
source inside or outside Canada, including, without restricting the generality of the
foregoing, the taxpayer’s income for the year from each office, employment, business
and property,
 So s. 3 enumerates four sources
o Office: being a judge, an MP – usually elected or appointed positions that are different
from being an employee, but are taxed the same.
o Employee: an employee. Not an independent contractor.
o Business: the carrying on of a commercial enterprise with a view of profit.
o Property: rental properties (whether commercial or residential), intellectual property
 S. 56 includes a list of things the Act calls sources
15
o
o
Main items are pension income, RRSP income, workers’ comp payments
Only need to know the items set out in the student edition of the Act
Defining Other Sources
 There has been judicial consideration of what constitutes a source other than those enumerated
in the ITA (see e.g. Robertson J. in Bellingham)1
 Punitive damages are not income from a source [Bellingham]
 Windfall gains do not count as a source.
o Taxpayer in Bellingham was fully compensated for land and rights on the debt 
payment was an award designed to censure inappropriate conduct, not income from
business/employment/property. It is a windfall gain, and thus not income from a
source.
 A voluntary payment in compensation for infringement of copyright has been interpreted as an
apology payment for use – sort of voluntary punitive damages – and as such is not income
from a source. [Cartwright]
 If a taxpayer is sent an unsolicited cheque to convince him not to sue corp, this is a windfall
gain and not income from a source. [Cranswick]2
 Sources may extend beyond the enumerated grounds, but courts have not yet specifically stated
a new unenumerated ground [Curran]3
 Strike pay isn’t income from a recognized source [Fries]4
o Though this is anomalous, because in other cases the surrogatum principle would
apply, because strike pay replaces employment income.
 Some things are outside the market economy – i.e. when you get a payment, it’s not a market
transaction. [Bellingham]
o Personal injury damages, e.g.  compensatory payment for pain & suffering
 Not taxable, b/c it’s compensation for something you didn’t bargain with.
 In a normal market situation, we don’t bargain our pain for money.
1
Bellingham: taxpayer bought land with intent to resell (adventure in the nature of trade); land
expropriated before could sell, and taxpayer was given a settlement. Issue: how to tax settlement? Held:
Split settlement into value of land, ordinary interest, and “additional interest” under the AB Expropriation
Act for the fact that the town had initially given a weak offer of compensation. The additional interest was
the issue – this was determined to be a windfall gain, not income from a source. Since she was fully
compensated for her loss of the land and her rights on the debt by the rest of the award, this was a portion
designed to censure inappropriate conduct. Not compensatory  windfall gain. Robertson J points out that
in ’66 it was proposed that the income tax base be expanded to be closer to Haig-Simons model and include
windfalls, but Canada expressly chose not to do so.
2
The Queen v. Cranswick: a corp sold undervalued shares of another company in which taxpayer was a
minority shareholder. Corp then sent taxpayer a cheque (w/ no explanation – presumably so that he
wouldn’t sue, which he had a right to do). Held: windfall gain – taxpayer had no enforceable claim to the
payment, no organized effort to receive, didn’t seek/solicit the payment, didn’t expect payment (either
specifically or customarily), no foreseeable element of reoccurrence, payer wasn’t a customary source of
income, payment wasn’t in consideration for/in recognition of property etc., and wasn’t earned by the
taxpayer.
3
Curran: Taxpayer was given a lump sum by a 3rd party to induce him to leave current employment, but
never ended up working for them. Held: Taxable as income from a source, under s. 3(a), but court does not
specify what source, or specify that it is unenumerated, but perhaps an analogous source? Unclear.
4
Fries: Issue: unusually high strike pay – taxable? Nothing in the Act. Fed CA held strike pay was a
payment under a unilateral K. SCC held strike pay doesn’t count as income from a recognized source.
Employees don’t pay tax on their union dues each month; union can invest $ and doesn’t pay tax on
anything, even when they pay out strike pay. It could be argued to be a source from the union, or the
union’s commitment to pay, but the SCC decided not to do this.
16

Can divide into taxable and non-taxable amounts, though.
 E.g. in Bellingham, the amount covering the value of the land and the
amount covering ordinary interest were taxable, but the additional (perhaps
punitive) interest was not.
The Surrogatum Principle
 The surrogatum principle applies to amounts that can be received in lieu of compensation or
other payments.
o Test: is the payment compensation for a source of income that would have been
taxable?
o Can be compensation for performance of K, breach of K, voluntary obligation,
involuntary obligation (such as some tort liability)
 The principle isn’t in the ITA, but it’s a well-established judicial principle.
o English case: London v. Thames Haven Oil Wharves Ltd., cited in Schwartz
 One payment is seen as a surrogate for another, which was taxable, thus making the surrogate
payment taxable.
 Must determine what part replaces a taxable payment and what doesn’t.
o E.g. in a personal injury claim:
 Repairs to car probably wouldn’t be taxable
 Lost wages should be taxable, but in reality CRA doesn’t go after them (seen as
loss of earning capacity, and thus loss of a personal capital asset of skills/energy
etc., such that compensation for their loss isn’t taxable.)
 Broken leg: not a market transaction – not compensation for monetary loss.
 The surrogatum principle was adopted into Canadian law in obiter in Schwartz5
o SCC in obiter cites London v. Thames: sources of income aren’t exhausted by
enumerated sources in 3(a) and 56.
o Academic opinions:
 Harris (long-time leading tax prof in Canada): while the act recognizes that
there could be other sources, case law accepts that the only sources that would
be accepted are those that are enumerated. Shouldn’t start expanding now.
 Krishna says the better view is that the named sources aren’t exhausted, and
income can arise from any other unnamed source.
 Justifiable both on basis of language of statute and on policy grounds
 All accretions to wealth increase a person’s ability to pay, based on HaigSimons theory, and thus should be taxed.
o Wrongful dismissal payments are taxable under s. 56(1)(a)(ii), as part of the definition
of retirement allowances.
o However, settlement payments in compensation for breach of offer of employment are
not taxable.
 Because the payment doesn’t fit under the specific provision (i.e. ≠ a retirement
allowance), La Forest J held that it couldn’t be found taxable under the broader
5
Schwartz v. the Queen: Taxpayer partner at law firm, left for new job. Shortly before job was supposed to
start, it fell through. Action against employer, settled. TJ considered it as one lump sum, b/c wasn’t broken
down in settlement discussions – TJ somehow found it was basically all for inconvenience/embarrassment,
and thus not taxable. Fed CA held: part was replacement for salary, and thus taxable. Part was replacement
for stock options he would have been granted if he were employed, and thus taxable as income from
employment. The rest was for inconvenience/embarrassment etc. SCC held that it was a lump sum and not
taxable b/c not included under 56(1)(a)(ii) and thus couldn’t be included under 3(a). Note dissent, which
argues that established jurisprudence doesn’t limit the existence of unenumerated sources.
17
3(a). This logic doesn’t really make sense, but it’s what they did.
 So: specific sections trump general.
 The surrogatum principle was officially adopted (i.e. non-obiter) in Tsiaprailis6
o Periodic payments converted into a lump sum in a settlement process: taxable under s.
6(1)(f) per surrogatum principle.
 S. 6(1)(f): Employment insurance benefits – the total of all amounts rec’d by TP
on periodic basis in respect of the loss of income from office/employment,
pursuant to
 (i) a sickness or accident insurance plan
to or under which the TP’ employer has made a contribution, not exceeding
the amount, if any, by which
 (iv) the total of all such amounts rec’d by the TP in the year
exceeds
 (v) the total contribution made by TP under the plan before the end of the
year
o Once allocation of a lump sum is determined, test to decide application of surrogatum
principle:
 1) What was payment intended to replace?
 2) Would the replaced amount have been taxable in the recipient’s hands?
 A Note on Payments by Employer to Employee
o 6(3) expands the things that can be included as income b/w employer and employee
 Consideration for accepting the office/entering into K of employment
 Meant to catch situations where someone is headhunted, and takes a
signing bonus before starting employment (e.g. sports players)
o S. 6(3) – An amount received by one person from another
 (a) during a period while the payee was an officer or, or in the employment of,
the payer, or
 (b) on account, in lieu of payment or in satisfaction of an obligation arising out
of an agreement made by the payer with the payee immediately prior to, during,
or immediately after a period that the payee was an officer of, or in the
employment of, the payer.
o Shall be deemed, for the purposes of section 5., to be remuneration for the payee’s
services rendered as an officer or during the period of employment, unless it is
established that, irrespective of when the agreement, if any, under which the amount
was received was made or the form or legal effect thereof, it cannot reasonably be
regarded as having been received
 (c) as consideration or partial consideration for accepting the office or entering
into the contract of employment
 (d) as remuneration or partial remuneration for services as an officer or under
the contract of employment, or
 (e) is consideration or partial consideration for a covenant with reference to
what the officer or employee is, or is not, to do before or after the termination of
the employment.
o So, to avoid being taxed, the employee must show that a payment was not a signing
bonus, employment contract, or agreement for post-contract conduct.
 Note: 6(3) was in exactly this form in Curran, but it did not apply, because
6
Tsiaprailis: Car accident, had to go on long-term disability. Group policy covered her, but insurer stopped
payments and she had to sue to get the money. CRA wanted to tax her on the lump sum she was paid in
settlement. Held: portion covering the back payments not paid out was taxable under s. 6(1)(f) per the
surrogatum principle.
18
taxpayer wasn’t paid by the actual employer, but rather by a 3rd party, and
Curran never became an employee of the person who paid him.
 Didn’t apply to Schwartz b/c he never became an employee of the company.
 The surrogatum principle can be applied where there is no allocation of the settlement [Siftar]7
Interpretation Bulletins
 Statements by CRA on its assessing policy and administrative position, but they are not
binding on either CRA or taxpayer.
 Not a statement of the law – just a general statement of how CRA looks at things; but they may
change their mind.
IT-365R2: Damages, Settlements and Similar Receipts
 Survivor payments for lost earnings from a spouse/parent are not taxable
o Neither are payments for loss of future earnings for a person who was injured
o Compensation in such cases is for loss of a capacity to earn – loss of a particular asset.
 Note: since Tsiaprailis applied the surrogatum principle to employment income (for the first
time), this bulletin is probably more generous than the CRA may need to be in the wake of
Tsiaprailis.
 This is almost certainly not going to be followed.
Concluding Points on the Source Concept of Income
 Only taxable on income from sources
o Enumerated sources under s. 3(a)
o S. 56
o Potential unenumerated sources, which arguably exist per Schwartz and Curran
o Capital gains/losses
 S. 4(1)(a): calculate income and loss on a source-by-source basis.
 3(d) allows a taxpayer to deduct loss from all sources against income otherwise calculated
o Losses that aren’t from sources are not part of the tax net.
 e.g. money spent on hobbies, etc.
Nexus
 Once established that income is from a source, have to establish who must pay the tax on it.
 Taxpayer who is liable to pay must enjoy the benefit, etc.
o If taxpayer can prove they are a trustee/agent, should not be taxable (but then
beneficiary/principal would be)
o If someone else derives the benefit from money taxpayer would otherwise be taxed
upon, does not have to pay tax. [Field]8
 Typical rule is that you don’t pay tax on money that isn’t yours, but note that illegally using
other people’s money will not protect you from tax liability. [Buckman]9
 Taxpayers can be found guilty of evasion for failing to declare income from embezzled funds.
[The Queen v. Poynton]
7
Siftar: Companion case to Tsiaprailis; similar facts but no allocation in the settlement. Held: can assess
appropriate portioning of settlement and apply surrogatum.
8
Field: Wife forged TP’s signature and stole his money. In their divorce proceedings, he didn’t claim it
back. CRA tried to tax him on RRSP removal. Held: Can’t req’ tax since didn’t derive benefit.
9
Buckman v. MNR: Lawyer, clients gave $ to invest, systematically defrauded and was taxed on his illegal
gains.
19
Who is Subject to Canadian Tax Law?
Residence
Introduction to Residence
 Most nations tax residents. Canada taxes residents for all income, under s. 2(1)
 Non-residents are taxed on sources of income from within Canada, under s. 2(3)
o (a) Employment Income
o (b) Business Income
o (c) Also taxed on certain capital gains from certain capital properties – such as real
property in Canada
 Canada limits assertion of tax & jurisdiction according to the above categories, and enters into
tax treaties w/ other countries to ensure we don’t overly double tax people
 Residence
o For tax purposes, residence has a special, unique definition
o Being a permanent resident for immigration purposes may be evidence of residence for
tax purposes, but not conclusive
o S. 250(3) – a reference to a person resident in Canada includes… a person who was at
the relevant time ordinarily resident in Canada
Individuals
 Residence does not require permanency or continuous residency throughout the entire tax
period [Thomson v. MNR]10
 Everyone has a country of residence, and may have more than one. [Thomson]
 Note: an individual can be considered resident in Canada and in another jurisdiction, and thus
could theoretically be taxable on same income in both countries. However, this is often dealt
with by tax treaties.
 Some common indicia of residence: [Denis M. Lee v. MNR]11  Note that a number of these
factors together could establish residency, but none are individually conclusive.
o Past/present habits of life
o Regularity/length of visits in the jurisdiction asserting residence
o Ties w/in jurisdiction
o Ties elsewhere
o Permanence or otherwise purposes of stay
o Ownership of a dwelling in Canada or rental of a dwelling on a long-term basis (e.g. a
lease for one or more years)
o If you have access to it whenever you want to go there, a strong indicator
o Residence of spouse, children and other dependent family members in a dwelling
maintained by the individual in Canada
10
Thomson v. MNR: TP assessed taxes for 1940, argued not resident then. Held: he was a resident, based
on maintaining home in Canada which he resided in when in Canada, and paid non-resident taxes in US in
the year in question. Also his passport listed Bermuda as place of residence, but hadn’t lived there for 20
yrs. Court found the home in NB to be the primary home.
11
Denis M. Lee v. MNR [1990, TCC]: TP treated by Immigration Canada as a visitor, worked/earned
income outside Canada (oil rig), married Cdn woman who lived here and was wholly dependent on TP. TP
guaranteed mortgage on house for wife. Held: TP resident as of date of his marriage. Marriage wasn’t the
deciding factor, but he was definitely resident by time of mortgage, and marriage tips the scale in terms of
deciding the exact point at which TP became resident.
20
o
o
Young children and dependent spouse are important
Memberships with Canadian churches or synagogues, recreational and social clubs,
unions and professional organizations
o Registration and maintenance of automobiles, boats and airplanes in Canada
o Holding credit cards issued by Canadian financial institutions and other commercial
entities including stores, car renal agencies, etc.
o Rental of Canadian safe deposit box or PO box
o Subscriptions for life or general insurance (incl. health insurance) through a Canadian
company
o Mailing address in Canada
o Telephone listing in Canada
o Stationery (incl. business cards) showing address in Canada
o Magazine/periodicals sent to an address in Canada
o Canadian bank accounts other than a non-resident acct
o Cdn driver’s licence
o Membership in a Cdn pension plan
o Membership in Cdn P/Ps
o Frequent visits to Canada for social or business purposes
o Will prepared in Canada
o Legal documentation indicating Canadian residence
o Filing an income tax return as a resident
o Ownership of a Cdn vacation property
o Active involvement in business in Canada
o Em’ment in Canada
o Maintenance/storage in Canada of personal belongings including clothing, furniture,
family pets, etc.
o Obtaining landed immigrant status or appropriate work permits in Canada
o Severing substantially all ties with former country of residence
 Taxpayer’s intention doesn’t matter [Thomson and Lee]
Deemed Residence
 S. 250
o (1) Person deemed resident if the person
 (a) sojourned in Canada for period or periods totaling 183 days or more.
 (b) was at any time in the year a member of the Canadian Forces
 (c) was at any time in the year
 (i) an ambassador, minister, high commissioner, officer or servant of
Canada, or
 (ii) an agent-general, officer or servant of a province.
and was resident in Canada immediately prior to appointment or
employment by Canada of province or rec’d representation allowances in
the past year
 An individual not resident in Canada under case law principles may be considered resident by
virtue of the deeming provisions in the Act.
o Note: if you’re deemed resident for sojourning for more than 183 days, you are taxed
on the entire year. Not to be confused with part-year provisions, to be discussed below.
 NB: for the purposes of this course, it is understood that a “Canadian controlled private
corporation” (s. 125(7)) is a corporation that is resident in Canada, its shares are not listed on a
stock exchange, and it is not controlled by non-residents of Canada, by a corporation whose
shares are traded on a stock exchange, or a combination of these. (The statutory definition is
21
somewhat more complicated, but a simplified definition is sufficient for this course.)
 CCPCs receive a tax benefit, but controlling shareholders must be resident in Canada.
Commuting to Canada from US does not count, even if spending the night in Canada a few
times a year. [R&L Food Distributors]12
o Note: this means that something more is required to fulfill the “sojourning”
requirement, since visiting during the day for more than 183 days was insufficient.
Part Year Residence
 S. 114
o Applies to someone who is resident/ordinarily resident, but only for part of the year.
 Residence and sojourning are mutually exclusive – if taxpayer is resident for
part of the year, even if that part amounts to more than 183 days, would only
pay tax on that part.
o NB: For the part of the year that a person is a resident, they pay tax on global income;
for the period where that person is a non-resident, they are only taxable for income that
has its source in Canada (i.e. the income that would be taxable under s. 2(3))
 To show that residence ended partway through a year, must show that taxpayer severed ties
with Canada. [Schujahn v. MNR]13
Ordinarily Resident
 See s. 250(3): A person counts as having been resident if they were ordinarily resident in
Canada at the relevant time.
 Taxation based on where the taxpayer “regularly, normally or customarily lives” [Reeder]14
IT-221R3
 Primary considerations:
o Dwelling place
o Spouse or common law partner
o Dependents
 Some secondary residential ties that may be considered in assessing residence status of an
individual while outside Canada:
o Personal property in Canada (e.g. furniture, clothing, automobiles/recreational vehicles)
o Social ties
o Economic ties
o Landed immigrant status or appropriate work permits in Canada
o Hospitalization and medical coverage from prov/territory in Canada
 Para 12: CRA can assess residency based on whether person filed their last income tax return
as though they were severing their ties
o Provisions for ppl to (technically) dispose of all assets immediately before they cease to
12
R&L Food Distributors: TP corp was denied CCPC rate b/c alleged non-resident shareholders. They
lived in Michigan and commuted daily to Windsor, spending the night in Canada a few times a year. Held:
Not deemed residents. Sojourning req’d something more than traveling to work in Canada during the day.
13
Schujahn v. MNR: TP moved to Toronto, lived there for 3 years then recalled to US. Wife and son
remained in Toronto to facilitate sale of house etc., and TP made a few visits to them in the tax year. Held:
Ceased to be resident when he moved. Residence severed and visits back were transitory.
14
The Queen v. K. F. Reeder [1975, FCTD]: TP moved to France for job training, then came back.
Claimed he had severed residency. Held: absence intended to be temporary – if asked while away where
primary resident was, he would have said Canada. Didn’t matter that he didn’t have a home in Canada
during the time.
22
be resident  deemed to dispose of investments, e.g., which would thus have capital
gains. So if don’t report capital gains (i.e. don’t report tax pos’n as if severed), may not
be held to have severed.
 Sojourners
o Part of a day counts as a full day, in terms of counting up the period of sojourn
 i.e. don’t require you to be there for full 24 hours to count as a day of sojourn
o But not automatically considered to be sojourning every day they’re in Canada
o If they’re just commuting for work for the day and going home to the US each night,
e.g., not sojourning  see R & L.
Avoidance of Dual Tax Residence
Tax Treaties
 Can be resident in more than one country at once – how do you avoid paying taxes in two
countries on world income?
 Canada has mostly bilateral treaties w/ other countries
 Negotiated w/ foreign nation, then enacted in Canada as federal legislation
o To give each tax treaty the force of law in Canada, we must adopt it as an Act
 Tax treaty takes precedence over other Canadian law (i.e. overrides Income Tax Act, among
others)
 Article IV of Canada-US Tax Treaty
o (US law is same as Cdn on the deeming of residence once set somewhere else)
o a) taxpayer resident in the state in which he has a permanent home available
o b) If no permanent residence (or in both), resident of the state with which his personal
and economic ties are the closest
 Basically you’d look at the Lee factors
o c) Habitual residence
o …If no other way to decide – the competent authorities may decide
 a. This is very undesirable for the taxpayer (authorities take their time, they
are not bound to decide, and taxpayer is taxed globally by two countries in the
meantime)
 Article 4 of Canada-UK Tax Treaty
o a) taxpayer resident in the state in which he has a permanent home available
o b) centre of vital interests (personal and economic ties are the closest)
o c) Habitual abode
o …If no other way to decide – the competent authorities may decide
 S. 250(1)(5)
o If someone (who would otherwise be considered resident in Canada) is considered by a
tax treaty with some other country to be resident there and not resident in Canada (i.e.
tiebreaker rules make a person resident of the other country), then that person will not
be considered resident in Canada.
 This applies both for the treaty and under domestic laws – can’t pick and choose
purposes, must be resident in the other country for all purposes.
 For an application of tiebreaker rules, see Salt [2007, TCC]15
Salt: TP lived in Canada for several years, then took a pos’n w/ his company that moved him to
Australia, planned for 2 years. Came back to Canada for a year, then back to Aus, then eventually retired to
Canada. CRA claims also resident in Canada during the time resident in Aus. Tiebreaker looks at
permanent home and closest personal/economic rel’ns. Held: not ordinarily resident in Canada at that time.
Note, though, that Court jumps over the decision on Canada and goes straight to the tiebreaker rules, which
15
23
 Note deemed disposition rules on departure, below (s. 128.1(4))
Provincial Residence – Establishing Residency in One Province Over
Another
 Reason for issue: marginal rates:
o In 2000/2001 the top marginal rate was around 54%, and it set in at around $80,000.
o AB had a much lower rate, and b/c have flat tax, never got higher
o So strong differential in tax rates for higher income individuals
o Now, until about 125,000 BC taxes lower than AB
o Above this, AB is still lower, and is in fact the lowest in Canada
 Federal gov’t collects personal tax, and doesn’t really care, so they used to just go with
whatever province the taxpayer claims to be resident of, and remits the appropriate share to the
province
 CRA came into existence in late 90s, w/ input from provincial finance ministers etc.
o Issue of inappropriate shifting of income came to foreground
o CRA got requests to reassess on basis of claiming residency in the wrong province
 Rule: resident in the province in which you were resident on the last day of the year. (Income
Tax Regulation 2601 – pg. 68 in Student Edition of ITA)
 BC ITA para 2(1)(a): Individual deemed resident of BC for tax purposes if were resident on
the last day of the year.
 Income Tax Regulation 2607 – Dual residence
o If resident in more than one province on the last day of the taxation year, assumed that
taxpayer resided in the province that would reasonably be regarded as their principal
place of residence
 A taxpayer can be resident in more than one province – but then tiebreaker rules would have to
be applied to determine province of principal residence [Mandrusiak v. The Queen]16
 S. 128.1(4)(b):
o Where a person at a particular time ceases to be a Canadian resident, deemed to have
disposed of all property immediately before the time immediately before that particular
time (of ceasing to be a resident)
o Canada is trying to capture increases in a person’s capital assets that accrue while they
are resident in Canada
o This is addressed in the IB – if you don’t show your intent to cease residence in
reporting all deemed capital gains, will take pos’n that you are still resident.
Residence of Corporations and Trusts
 NB: not tied to BoD, officers, shareholders etc.  separate entities as a matter of law.
o So don’t talk about shareholders when asked about corp’s deductions/residency etc.
 S. 250(4) – Corporation deemed resident
o Will be deemed resident in Canada throughout the year if
 (a) incorporated in Canada after April 26th, 1965 (i.e. under a Cdn incorporation
don’t need to be decided if you find not ordinarily resident. But, probably had sufficiently severed ties to
not be ordinarily resident, though close to the line. But tiebreaker rules applied correctly, so not a resident
in any case.
16
Mandrusiak v. The Queen [2007, BCSC]: Issue of TP residency in AB or BC. Spent New Year’s in AB,
but physical location is irrelevant. Oddly, court applies the test for ordinary residence in Canada to
determine provincial residence. Not necessarily wrong – no other/better suggestions were available. Held:
Resident in both, but principally resident in AB based on property and long-term residency.
24
act)
 Probably the date of the budget of that year, which would have put the rule
in the Act
 (c) incorporated before April 27th 1965, if inc’d in Canada and resident in
Canada or carrying on business in Canada
 So we know there must be a test for corporate residence, and for
carrying on business [see below]
 S. 253 – extended meaning of “carrying on business” 
o (a) anyone who produces, mines, creates, etc., in whole or in part, anything in Canada
whether or not the person exports that thing without selling it before exportation,
o (b) solicits orders or offers anything for sale in Canada through the agent or servant,
whether the contract or transaction is to be completed inside or outside Canada or
partly in and partly outside Canada, or…
The person shall be deemed, in respect of the activity or disposition, to have been carrying
on business in Canada in the year
 NB: don’t have to be present in Canada to be carrying on business in Canada.
 Common law residence test for corporations: [De Beers Consolidated Mines Limited v.
Howe (1906, HL)]
o Where is central management and control?
o If BoD abdicates control to someone else who is really managing, then wherever
management and control actually resides is the location of residence
 i.e. CRA won’t recognize a fictitious BoD.
Non-Residents: Source as a Basis of Canadian Liability
 s. 2(3): non-residents are subject to Canadian tax if they earn or receive income in Canada
 s. 217: non-residents don’t generally file a tax return with respect to this income, though they
may do so in some circumstances.
o E.g. carrying on business, CGs, etc. – would have to file.
s. 212 – Non-resident withholding tax
 Where certain payments are made by a resident of Canada to a non-resident (e.g. interest,
royalties, rent), a withholding tax must be paid on the gross amount by the payer on behalf of
the recipient non-resident.
o Taxing gross amount means the effective rate is higher – no deductions even if had
expenses related to earning the income.
 Non-residents are subject to tax on certain investment income derived from Canadian sources.
 Part XIII (ss. 212-218.3) deals w/ property income as opposed to income from business,
em’ment and taxable capital gains
o A flat rate (usually 25%) is imposed on the gross amts specified
 Often reduced by tax treaties
 A 2008 amendment to the Canada-US Tax Convention eliminated withholding
tax on interest payments b/w residents of Canada and US
 Three main aspects of Part XIII
o Non-resident must be (or be deemed to be) paid or credited an amount by a person
resident in Canada
o The amount must be paid or credited as (or on account of/in lieu of payment of/in
satisfaction of) specified types of amounts incl mgmt fees, some interest payments,
dividends, rents, royalties, pension benefits, annuity payments, and estate or trust
income
25
o





Specified percentages of the amts are payable by the resident person as a withholding
tax on behalf of the non-resident.
 A recipient of certain payments covered by Part XIII (e.g. rent) may file a
separate tax return for these, as though the taxpayer were a resident of Canada.
Note that active and some passive income sources are taxed
S. 215(1) – req’s resident to withhold from non-resident and remit the appropriate taxes. (if ≠
withhold, become liable w/ non-resident)
o Because the resident is easier/cheaper to collect from – so CRA imposes the obligation
to withhold and remit on the Canadian resident
Two levels of applicable tax for corporations that carry on business in Canada through a
resident corp: once on income earned by non-resident corp, then again on any dividends paid to
non-resident shareholder
o This can be reduced by tax treaties
S. 212(1) non-residents pay 25% (amt can be changed in tax treaty) on every amount credited
to them by a Canadian resident for:
o (a) A management or administration fee or charge
o (b) Interest that
 (i) is not fully exempt interest, and is paid or payable
 (A) to a person with whom the payer is not dealing at arm’s length, or
 (B) in respect of a debt/other obligation to pay an amount to a person with
whom the payer is not dealing at arm’s length
 (ii) is participating debt interest
 …(and so on)
o (c) Estate or trust income
o (d) Rent, royalties etc.
o …
o (h) Pension benefits
o (j.1) Retiring allowances
 e.g. awards for wrongful dismissal, awarded after someone has become a nonresident
 Note: not income from employment – income from an “other source” under s.
56
o (l) RRSP payments
 interestingly, US is one of the only countries whose tax treaty w/ Canada
recognizes RSPs as pension plans – other jurisdictions interpret it as straight
income when you stop being a resident.
s. 212(2): tax on dividends – non-residents pay 25% on every amt that a corp resident in
Canada pays (etc.) to the non-resident, for:
o (a) a taxable dividend
o (b) a capital dividend
Non-Residents Employed or Carrying on Business in Canada or
Disposing of Taxable Canadian Property
1. Employed in Canada
 Employment requires that the non-resident be employed and carry out at least some part of that
employment in Canada
 Residence of employer is irrelevant
 The part of income allocated to Canada is included in the non-resident’s income earned in
26
Canada for the particular tax year.
 S. 153 requires employers to withhold the relevant portion from all employees’ wages, and
applies to non-residents and residents alike.
2. Carrying on Business
 S. 248(1) “Business” includes a profession, calling, trade manufacture or undertaking of any
kind whatever and, except for the purposes of 18(2)(c), 54.2, 95(1) and 110.6(14(f), an
adventure or concern in the nature of trade but does not include an office or employment.
o Carrying on Business  Meaning in reference to Canada is expanded in s. 253
 Must be determined that a non-resident was carrying on a business and that the business was
carried on in Canada
 A non-resident found to be carrying on business in Canada may be exempt from paying Cdn
tax b/c of a tax treaty with their jurisdiction of residence
 Canada’s (and most bilateral) tax treaties generally req non-resident to be carrying on business
through a “permanent establishment” for the income derived therefrom to be taxable
Income from Office or Employment
Basic Definitions and Provisions
 S. 248(1) Definitions:
o Office
 A position of an individual entitling him/her to a fixed or ascertainable stipend
or remuneration
 Includes judges; holders of pretty much any public office (elected or appointed
in representative capacity); directors of corps, etc.
o Employee
 Includes officer
 Employed means performing the duties of office or employment.
o Employer
 The employer of an officer is the person who provides remuneration
o Employment
o Taxpayer includes any person whether or not liable to pay tax.
 S. 249(1)(b): Taxation year is a calendar year
 S. 5: charging section
o Defines taxable income from office/employment as salary, benefits, wages and other
remuneration
o (2) Losses from employment  perhaps from legal expenses, or someone with high
up-front costs and low commissions. But generally, it’s hard to run a loss from
employment.
 Tax implications of distinguishing b/w income from employment and income from business
o Employers have to withhold employees’ income tax from paycheque (per s. 153(1)) 
so employers need to know who are employees (and who are simply independent
contractors, e.g.) so they know whose paycheques they have to withhold from
o Cash vs. accrual accounting:
 Note the distinction between received and receivable
 Employees’ taxes are calculated on amounts actually received and actually paid
(cash method)
 “received and enjoyed by the taxpayer during the year”
 Independent contractors are taxed on accrual calculation method
27
Deductions for ICs are broader – so ppl may want to characterize themselves as such
over employees.
 S. 6(1)(a): Basic inclusions in income from employment
o Includes value of benefits of all kinds
o Also includes allowances
 S. 8: limitations on deductions in computing income from employment
o (1) Deductions allowed from TP income from office/employment:
 Not a lot of deductions available for employment income
o See especially s. 8(2): if the deduction isn’t listed here, you can’t have it.
o Idea is partly to ensure horizontal equity
 Argument that CEO who has the cash flow to pay for a chauffeur shouldn’t get a
deduction for that while their poor employee has to walk to work.
o Used to be a deduction that everyone could claim w/o receipts, just for claiming
income from em’ment  but this was eliminated in 1980
 Now, instead, we have s. 118(10)
 S. 118(10): Canada Employment Credit (~2006)
o Tax credit of either 15% of $1000, or [if you make less than $1000] 15% of your
income from employment.
o Not really an incentive to get a job if you don’t have one, but taken well by voters
anyway.
o
Employee vs. Independent Contractor/Consultant/Sole Proprietor
 Note: CRA is not bound by the contract between the parties in interpreting the role of
employee/independent contractor.
 The Central Question is best enumerated in the test from Market Investigations:
o “the fundamental test to be applied is: “Is the person who has engaged himself to
perform these services performing them as a person in business on his own
account?”
o To determine, court will look to all the circumstances and factors listed below
 Courts Will Consider all the Facts  the case law has established some important factors, but
emphasis is always reserved for the “whole scheme of operations”
o Wiebe Door17
 1) Degree of Control
 2) Ownership of Tools
 3) Chance of Profit
 4) Risk of Loss
o Sagaz (affirmed and adopted Wiebe Door)
 1) Control
 2) Who provides equipment
 3) Has the person engaged hired helpers of their own?
 4) Degree of responsibility
 5) Degree of Financial Risk
 6) Opportunity for Profit
 Highly fact-driven assessment. See also Wolf v. the Queen18 and Royal Winnipeg Ballet v.
Wiebe Door Services Ltd. v. MNR [1986, FCA]: Company hired ppl to install electric doors – issue of
whether they were employees or independent contractors. Discussed previous tests and set out factors to
consider in assessing the relationship. Held: referred back for new trial, at which court held that doorinstallers were independent contractors.
17
28
MNR19, which indicate courts’ willingness to recognize a consensual contractual rel’ship
between independent contractor and service purchaser.
Interposing a Corporation in the Employment Relationship: Personal
Services Businesses and Incorporated Employees
 S. 125(7) Definitions:
o Active business carried on by a corporation
 Any business carried on by the corporation other than a specified investment
business or a personal services business  includes adventure or concern in the
nature of trade.
 Note: if you have 5 or more full-time employees, it’s an active business, not a
personal services business.
o Specified investment business
 A business…, the primary purpose of which is to derive income (including
interest, dividends, rents and royalties) from property but, …does not include a
business carried on by the corporation in the year where
 (a) the corporation employs in the business throughout the year more than
5 full time employees,
 (b) any other corporation associated with the corporation provides, in the
course of carrying on an active business, managerial, administrative,
financial, maintenance or other similar services to the corporation in the
year and the corporation could reasonably be expected to require more than
5 full-time employees if those services had not been provided.
o Personal services business
 A business of providing services where
 (a) an individual who performs services on behalf of the corporation (in
this definition and paragraph 18(1)(p) referred to as an “incorporated
employee”), or
 (b) any person related to the incorporated employee
 is a specified shareholder of the corporation and the incorporated employee
would reasonably be regarded as an officer or employee of the person or
partnership to whom or to which the services were provided but for the
existence of the corporation, unless
 (c) the corporation employs in the business throughout the year more than
5 full-time employees, or
 (d) the amount paid or payable to the corporation in the year for the
services is received or receivable by it from a corporation with which it
was associated in the year.
 Note: Personal services businesses and specified investment businesses are not entitled to the
special low rate for Canadian controlled private corporations.
18
Wolf v. the Queen: American aerospace engineer. Worked in Canada on a very long-term K. Could take
time off when he wanted; charged a fee for services (hourly wage w/ potential for bonuses if finished
early). Worked for 6 months to a year at a time, with several renewals. Paid own CPP, reported as
independent businessperson. FCA held that he wanted the freedom, and the parties characterized their
rel’ship in that way, so he was not an employee.
19
Royal Winnipeg Ballet v. MNR: Company had lots of control over dancers – decided plays, assigned
parts and choreography etc., but obligations were over at end of season. Had to supply their own point
shoes, but not outfits etc. Entered into Ks agreeing to dance in particular production for the season.
Responsible for own CPP/income tax issues. Held: independent contractors.
29
 Deductions for PSBs are basically restricted to those available to employees.
 S. 18(1)(p) Limitation re personal services business expenses (restrictions on deductions
available to corporations carrying on a personal services business)  No deductions for
payments made by corp for purpose of income from a PSB, other than:
 (i) the salary, wages or other remuneration paid in the year to an incorporated
employee of the corporation
 (ii) the cost to the corporation of any benefit or allowance provided to an
incorporated employee in the year
 (iii)  sales expenses that would have been allowed for a sales employee
 (iv)  legal expenses incurred in collecting amts owed for services rendered
That would, if the income of the corp were from a business other than a PSB, be
deductible in computing its income.
 So this section substantially restricts the deductions available
o Paired with the removal of the small business rate, the benefits to personal
services corps are limited.
 NB: distinguish personal services business from independent businesses where the employee
(i.e. the person providing the service – even if it’s the owner) wouldn’t be an incorporated
employee
o Distinguishing feature of personal services business is whether there are other clients,
or whether they are just doing what they previously did for their previous employer,
except that they’ve interposed a corporation between them.
o Assess: are they providing services to the person who would have been their employer,
if they hadn’t incorporated, or are they providing services generally to the public?
o E.g. personal law corporation – individual who used to be employee of law firm is now
in business on own account, but it’s not a personal services business.
 A lawyer who incorporates is now an independent professional working for
clients, no longer working for employer (law firm).
o One distinction – employees don’t charge employers GST/PST  independent
contractors have to (if gross billing is over $30,000)
Introduction to Benefits, Reimbursements and Allowances
General Info
Capitalization of Employment Benefit
 Recall retiring allowances, per Curran.
 Notice payments for wrongful dismissal
o Idea that income from employment was an amount paid in exchange for services from
employee  but notice payments fall outside the salary, benefits and remuneration
description.
o So basically what we now call retiring allowances weren’t originally taxed  the
reason they were brought in as another source under s. 56
 This is the logic behind the all-inclusive benefits taxation rule  more accretions to wealth
means a taxpayer is in a better position to pay taxes.
Amounts Included in Computing Income from Office or Employment
 Historically, only money or something convertible into money was included in taxable income
 S. 5 includes salary, wages, gratuities (defined in text as “voluntary payments made in
consideration of services rendered in the course of a taxpayer’s office or employment”), and
30
other remuneration (which includes honoraria, commissions, bonuses etc.)
Benefits
 “Other remuneration” is broad enough to cover most benefits.
 S. 6(1)(a) was intended to ensure that the value of all benefits would be included in a
taxpayer’s computed income.
 Recall 6(1)(f) and Tsiaprailis.
What Constitutes a Benefit?
 CRA must show that the benefit was given in respect of, in the course of, or by virtue of
office or employment [Savage]20
o The rule used to be that CRA had to show the employer gave something to an
employee as a benefit in exchange for services, otherwise ≠ taxable. Savage relaxed
this previous rule.
o Now, almost anything an employer provides to an employee will count if it is in any
way connected to employment. (i.e. basically anything covered by the idea that if they
weren’t an employee they wouldn’t get it.)
 Test from Poynton, adopted in Lowe21
o (1) Does the item under review provide the employee with an economic advantage
that is measurable in monetary terms?
o (2) If there is an advantage, is the primary advantage for the employee or the
employer?
 So, when the alleged benefit is for the employer and not aimed at benefiting the employee, then
it’s not a benefit on which the employee must pay tax. [Lowe; see also Hart22 and Philp]23
 It isn’t enough that something is received in employment (Savage test)  must also satisfy
Poynton test, so there must also be a material acquisition conferring an economic benefit on the
taxpayer. [See Huffman]24
 Payment to a sports agent by a sports team can constitute a taxable benefit, on basis that it is an
amount that sports player had contracted to pay the agent, and if the new employer pays it on
behalf of the employee, it’s a benefit. [Bure]25
The Queen v. Savage [1983, SCC]: ∆’s employer gave payments totaling $300 to ∆ for completing
courses relevant to work. ∆ argued a prize for achievement, which would only be taxable over $500. Held:
money “was rec’d or enjoyed by ∆ in respect or, in the course of, or by virtue of her employment.”
Employer paid in accordance w/ company policy to encourage self-upgrading of employees – so employer
benefits, and not extraneous to employment.
21
Lowe: TP & wife were sent on a trip by employer corp, to entertain brokers and thus bring in more
business. Minister assessed tax based on business days ∆ was on trip, taxing 62% of his and 75% of his
wife’s trip. Held: Lowe’s appeal allowed such that 80% of his trip ≠ taxable (wife still 75%). Primary
benefit was for employer, not for employee.
22
Hart: TP went on 23 day trip to Aus on company dime, tried to say it was only a business trip. Court
apportioned b/w business and pleasure since there were some meetings, and company paid for & claimed as
deduction. In the end, wife had to claim 100% as income, and husband employee 50%
23
Philp: All-expenses paid trip for employees to Bahamas as a result of a competition.
24
The Queen v. Huffman [1990, FCA]: Plainclothes policeman reimbursed for clothing worn on the job
(uniformed officers were supplied clothing, which doesn’t count as a taxable benefit per IT-470R). Held:
not taxable – clothes were only worn on duty, money was pure reimbursement of expense employer
required employee to make.
25
Bure v. The Queen: When Pavel Bure renegotiated his K w/ the Canucks, the team agreed to pay fee
directly to his agent instead of Bure paying the agent. Held: taxable benefit – payment made on behalf of
employee.
20
31
Policy Considerations re Taxation of Benefits:
 Don’t want to erode gov’t’s tax income  if benefits weren’t taxable, employees could shift
their income to benefits and avoid paying as much tax.
 Equity concern  a taxpayer who is able to shift income to benefits shouldn’t be allowed to
pay less in tax than a person who has to take straight cash?
 Tax authorities must be satisfied that the cost of administering the tax system doesn’t outweigh
the revenue gained
o E.g. subsidized meals  can be difficult to determine which employees took advantage
of a particular benefit, and/or how much subsidization has occurred
 Political considerations  e.g. unions hold sway, so no tax on free railway passes provided to
railway employees.
 Some things aren’t taxed because it’s very difficult for the CRA to track/enforce them
IT-470R – Selected Provisions [Handout]
 Introduction
o This IB covers employee-employer relationship, but is not necessarily applicable if
employee is also a shareholder or related to owner of business
o Unless specified otherwise in the Act, presumption that taxpayers are taxable on the
value of all benefits they receive by virtue of their employment
 What can and can’t be deducted?
o Some things discussed are obvious, and are even mentioned in the Act
o Board and lodging provided to employee
o Rent-free/low-rent housing
o Meals (other than meals employee pays for  i.e. restaurant meals etc.
o Travel benefits
o Business trips – para 11 & 12
 If there’s a holiday and business element, you can apportion the trip accordingly
for tax purposes
 This policy was adopted from Lowe
o Uniforms and special clothing are not considered benefits of employment
 Note policy on gifts in part 9
o Relaxes the law somewhat
o When the value of a gift for certain occasions (wedding, Christmas, or similar
occasion) doesn’t exceed $100, it’s not required to be reported as income by the
employee
 So long as employer doesn’t deduct the cost of the gift
 This will only apply to one gift per year, unless the employee gets married that
year, in which case 2/year.
T4130 Employer’s Guide – Taxable Benefits and Allowances
 An employer can give any number of tax-free non-cash gifts and awards to an employee, up to
a maximum total value of $500/year
o Policy concern: simplicity  reducing compliance cost
o The exemption only applies if gift is for a special occasion (i.e. Christmas, Hanukkah,
birthdays and marriages); or if award is for an employment-related accomplishment,
but not performance-related
o Employer can deduct the fair market value of the gifts
 Where cost exceeds $500, employee’s income is increased by the difference (i.e. the amount
over $500 is considered a taxable benefit)
32
 Example: taxpayer’s employer held Christmas party, provided dinner, open bar and
accommodation at a hotel. Court upheld minister’s assessment of this as taxable benefit (equal
to per person cost of event). [Dunlap v. the Queen, (1998, TCC)]
 Where an employee receives a benefit from a third party (i.e. one that provides services to
employer company), the issue is whether or not the benefit is from office/employment. [Waffle
v. MNR]26
Royal Commission on Taxation No. 16 → Tax Treatment of Benefits
 Traditional Rule → Only money or something capable of being turned into money can
constitute income for tax purposes (Tennant v. Smith)
 Income tax came from the benefit that went into the employee’s pocket, not the benefit that he
saved in his pocket
 New Rule in Canada → The language in 6(1)(a) overrides the traditional rule in Tenant (Waffle
v. MNR)
o “value of board, lodging, and other benefits of any kind whatsoever”
Valuation of Employment Benefits
 Benefits can be paid in cash or in kind
o Cash is easy to value
o It can be very difficult to value non-cash benefits
 In Canada, in principle, we value a non-cash benefit by the fair market value, which is the cost
to the employer
o CP to UK, where value of non-cash benefits is typically the resale value for the
employee
 Fair market value may be negatively impacted if, for example, merchandise given to the
employee is personalized with a corporate logo, the employee’s name or a message. [Wisla;27
IT-470R s. 9]
 Non-cash benefits of employment will be assessed in a fluid way, and you can make different
arguments as to the “real” value, especially where CRA has admitted that it will not apply the
“fair market value” standard
o This principle comes out of a ruling that the value of an airline flight paid for in points
is equal to the most heavily discounted ticket of that class on the same flight. [Giffen]28
 Though note that now:
 (a) frequent flyer rewards are easier to value since you can buy and sell
points, so maybe this wouldn’t be necessary, and
 (b) IT-470R at para 14 says that frequent flyer points are no longer a
taxable benefit, so long as they aren’t converted into cash.
 A benefit does not have to be tangible – remember that the Act says “any amount received or
enjoyed” [Dunlap v. the Queen]29
26
Waffle v. MNR: Taxpayer officer of a Ford dealership, whose president became eligible to take cruise at
Ford’s expense, but couldn’t go, so taxpayer went instead. Minister assessed as taxable benefit from
office/employment – Exch. Ct agreed.
27
Wisla v. The Queen: Gold ring w/ corporate logo. Held: value of benefit was value of the ring as scrap.
This is accepted in the IB in s. 9
28
Giffen: Employer paid for TP flights with air miles. Held: benefit was assessed at what TP would have
had to pay for the tickets at FMV.
29
Dunlap v. The Queen:  and guest attended annual Christmas parties and stayed in hotel room provided
by employer. CRA assessed for meal, liquor, enjoyment of amenities and hotel room. Employer had
33
 Employer-provided parties or social events will be accepted as non-taxable social benefits if
the cost is reasonable [IT 470R]
o As a guideline, those events costing up to $100 per person will be non-taxable.
 Ancillary costs such as transportation home will increase this amount.
o Parties costing more than this may constitute a taxable benefit.
 Business trips: Ferguson30
 It doesn’t matter how much employee utilizes the benefit – the important part is that it is made
available at all. Richmond31
 If employer is deriving the primary benefit, employee is not taxable. Rachfalowski32
Allowances
 Generally, not benefits.
o Benefits are non-cash or in-kind transfers and allowances are cash. They have different
purposes.
 ITA 6(1)(b): allowances for personal or living expenses or any other purpose should be
included in income.
 An allowance is “an arbitrary amount as it is a pre-determined amount set without any specific
reference to any actual expense or cost” [The Queen v. McDonald]33
 Allowances must be taxed  could too easily be converted into salary increases, b/c employee
doesn’t have to show that they have increased expenses, or that increased expenses were
related to anything.
 Allowances vs. Reimbursements:
o See Huffman, supra.34
o Allowances are a fixed, general amount. They will not require the employee to spend
that amount on whatever the expense is. They are taxable unless they fit within an
exception.
Exceptions: Special and Remote Work Sites
 6(1)(a) includes benefits of employment in income
 6(1)(b) includes allowances
 6(6) says they’re not including amounts received by the employer that is an allowance in
respect of:
o Special work site (i) board and lodging for a period at a special work site, defined as a
claimed deduction for cost of party and hotel rooms but did not report it as a benefit on the employee’s T4.
Held: Taxable benefit. Per Act’s req’mts, doesn’t matter that there’s nothing tangible.
30
Ferguson: President & CEO went to Greece to introduce company to prospective customers. Assessed
for 10% of cost. He said if it was personal he would have taken his wife.
31
Richmond: Parking space provided to employee for no cost. Assessed taxable benefit $1800. Argued
only used 20% of time, so should only be assessed 20% of value. Held: time of usage irrelevant; ultimate
significance is just that he got the benefit.
32
Rachfalowski: Employer provided golf membership. Tried to ask for cash instead and tried to refuse
outright, b/c hated golf. TCC held: Not taxable. Club membership primarily benefited employer, even
though employee occasionally used it to entertain clients. Value of benefit minimal at best.
33
The Queen v. McDonald: TP is RCMP officer, transferred cities and given a monthly payment to
compensate for higher cost of living. CRA assessed this as an allowance. Held: Taxable. Important:
McDonald didn’t have to show any expenditures; not a re-imbursement – a presumptive payment.
34
Huffman: Crown argued that TP’s reimbursement was an allowance, because the receipts he turned in
totaled less than the amount paid to him. However, the prior cap had been $400 in reimbursements, which
was raised to $500 in the interim. TP testified orally that he’d spent $500, and court accepted this credible
evidence. ≠ allowance.
34
location where the duties performed were of a temporary nature (room,
accommodation, meals) and the employee maintains a “self contained domestic
establishment”
 where the employer requires an employee to work at a different location than
their principle place of residence that is maintained while they’re away and is
farther away than you could return from daily.
 “self-contained domestic establishment” – a dwelling house, apartment or other
place of residence where a person, as a general rule, sleeps and eats.
o Remote work site (ii) doesn’t have to be temporary but has to be a place where
employee probably couldn’t get their own house
 Anything less than 36 hours doesn’t fall in 6(6)
 The employer can provide transportation between work and work site and that’s
not a benefit either.
 To determine what constitutes remoteness from established community, see IT 470R
o Defines “established community” (para 15)
 Has basic services: grocery store, clothing store with clothes in stock, access to
medical and education facilities. A community that doesn’t have those four
things ≠ established community.
o “Remote location”
 Arbitrary rule in IB: 80 km away, by the most direct route, to the nearest
established community of more than 1,000 people.
 You can still show remoteness for other reasons – e.g. if there’s no road to the
community.
 If your work location isn’t in an established community and is remote from the nearest
established community, then you will qualify for remote location provisions in s. 6(6).
 So: where employer pays for employees to work for more than 36 hours at a special work site
or requires them to work at a remote location, then amounts paid for transportation, board and
lodging OR allowances paid to cover these things ≠ taxable.
Automobile and Travelling Allowances
 S. 6(1)(b) has some exceptions for travel/automobile expenses incurred by the employee.
o (v) reasonable allowances for traveling salespeople
o (vii) non-motor vehicle non-salesperson reasonable allowances for performing
employment duties away from the municipality where employer is established and
employee works
o (vii.1) reasonable allowances for motor vehicle expenses received by a non-sales
employee for traveling in performance of the duties of an office/employment
 Limitations of exceptions:
o An allowance received in respect of any of the above motor vehicle exceptions is
deemed not to be a reasonable allowance where the use of the vehicle is not based
solely on a per kilometer amount.
 The employee has to keep a record of number of kilometers. This is different
from a re-imbursement, because receipts don’t have to be submitted. An
allowance is meant to cover gas, wear and tear, insurance, etc. The figure that
you’re allowed is not meant to just compensate you for gas.
o In regulation 7306 @ p. 69: Allowable per kilometer rates. Applies to 18(1)(r) which is
a provision restricting a deduction by an employer. When an employer is computing
income for its employees, an amount paid to an individual for a car that is more than is
prescribed in 7306 cannot be deducted.
o The employee could argue in a particular circumstance they deserve more money under
35
o
certain conditions. Employees are not bound by reg. 7306, employers are.
If an employer pays more than the regulations in 7306, the employer can deduct it as
long as you require the employee to include the amount in their income.
Deductions in Computing Income from Employment
General Limitations on Deductions  8(2) and 67/67.1
 S. 8
o
o
Amounts that an employee is required to pay out of pocket and ≠ reimbursed
(1): amounts paid
 Deductions can only be claimed against employment income to the extent that
the expense is wholly applicable to the employment.
o (2): General limitation  if the deduction isn’t listed in s. 8, it’s not available.
 S. 67 and s. 67.1 are general limitations in the Act re expenses and deductions.
o They are in Subdivision F, which is a general section that can apply to other sections.
o The CRA has been very unsuccessful in applying this provision to employees, though.
Best they’ve done is taxing family businesses where husband pays a wife salary to
answer home phone for business.
 However, these principles are sexist and the cases are old, so things might be
different now.
o S. 67: The amount of the expense otherwise deductible must be reasonable
o 67.1 restricts deductions for food, beverages and entertainment to 50%
 Theory: can be too expensive to other taxpayers when a business gets a luxury
box at a sports arena, e.g.
 (2) Exceptions to this 50% limitation:
 When the food is compensation
 When there are six or fewer special events where the food is generally
available to all employees
Travelling Expenses
 The traveling salesperson deduction
o Sales expenses for commissioned employees. Has a lot of conditions.
o S. 8(1)(f)
 (i) must be req’d to pay own expenses
 (ii) must be req’d to travel on regular basis for work
 (iii) must be remunerated in whole or in part by commissions
 (iv) can’t get travel expense allowance that was exempted from income by
6(1)(b)(v)
 Note: You can deduct up to the amount of the conditions you earn – so can’t
create a loss from employment.
 (v) Can’t deduct capital outlays (e.g. the cost of buying a car)
 (vi) Can’t deduct anything that would be excluded under s. 18(1)(l) if this were
a business instead of employment.
 So can’t deduct use of recreational facilities (e.g. yachts, camps, lodges,
golf, memberships/dues in sport/dining/recreational clubs)
o So: commissioned sales employees are allowed deductions, so long as they meet the
criteria set out in i-iii.
o The permitted deductions are limited by specific and general restrictions, but are not
limited to travel expenses (even though the provision only applies to people who travel)
36
o




Generally, to claim this you need a certificate from employer that you are required to
pay your own expenses and that you meet the conditions as req’d by s. 6(1)(b)(v)
S. 8(1)(g): transport employee’s expenses
o Available where employer’s principal business was passenger or goods transport
o Duties of employment must require employee to travel away from municipality and
away from employer on vehicle
o Deduction is allowed for meals and lodging to the extent that TP ≠ reimbursed
o Ferry workers do not fulfill the requirements [Renko]35  have to be away long
enough to incur meals and lodging expenses, per (ii).
S. 8(4)
o Meals can only be deducted for sales employees, or non-sales employees if they’re
away from employer’s place of business for at least 12 hours.
S. 8(1)(h) – Travel Expenses
o Available where employee
 Req’d to carry out duties of employment away from employer’s place of
business and away from employer, and
 Req’d by K to pay travel expenses directly, and
 Didn’t receive non-taxable allowance
 ≠ otherwise compensated
o Requires certificate.
o Can deduct non-motor vehicle expenses.
o This likely doesn’t come up often.
8(1)(h.1) – Motor Vehicle Travel Expenses
o Same requirements as (h), except covers motor vehicle expenses.
o A lot of people do drive their cars for their employment.
o Traveling to and from work does not count as a travel expense made for work
[Martin]36.
o May be required to use a personal car to travel, but if ≠ part of duties of office, ≠
deductible. [Hogg]37
Legal Expenses
 S. 8(1)(b) – Deductions for expenses of collecting or establishing a right to collect salary
o If you have to sue to recover your wages or salary, you can deduct legal expenses.
o Note: proposed amendment makes this provision more general. This has been policy
since 2001.
 Proposed amendment expands to cover not just salary/wages but anything that
counts as income for the ITA under subdivision A.
 Note that retiring allowances still wouldn’t be covered here, as s. 56 is not
Renko (2002, TCC, aff’d FC): BC Ferries employees were allowed to buy meals on board ferry at half
price. Appeared to meet req’mts of 8(1)(g), except no disbursements for lodging. CRA policy was that
$11/meal was reasonable, restricted to 50% by s. 67.1, so employees claiming $5.50 for each meal. Held:
No deductions allowed. Act says “meals and lodging” – must have both or not entitled to any deduction.
36
Martin: TP pilot claimed deduction for traveling to and from work. Held: not deductible – not carrying
out duties of employment while traveling. TP, like any other employee, can’t claim personal expenditure
decision of travel to/from work as an expense of employment.
37
Hogg: TP judge, frequently went to mtgs away from his chambers. When employment req’d him to be
present at other locations than his base courthouse, non-taxable allowance given for anything over 15km.
Claimed deduction under 8(1)(h.1) for travel past home courthouse, b/c security req’mts meant he had to
use his own car. Held: Using personal car to travel isn’t part of duties of office, which are to dispense
justice. The security concerns are irrelevant to tax deduction.
35
37
o
part of subdivision A. However, they are covered (along with pension plan
benefits) under s. 60(o.1).
IT-99R5: the action must be successful to be covered here.
Deduction for dues or other expenses in performing duties.
 S. 8(1)(i)
o (i) Can deduct professional membership dues where membership is req’d by statute
(e.g. doctors/lawyers who are req’d to be members of professional society in order to
practice in that profession.
 See also Swingle.38
 ≠ apply to law professors, since ≠ have to be members of the bar to be
professors.
 Note: first-time bar call fees, e.g., are not deductible  capital outlay (applies to
equivalents in all professions)
o (ii) office rent or salary for assistant or substitute that the employee was req’d by
contract to pay for.
o (iii) cost of supplies the employee was req’d to pay for.
o (iv) Trade union dues are deductible
Home Office Expenses
 S. 8(13) – Workspace in the home
o (a) no deduction for any part of a workspace in a domestic establishment [defined in s.
248(1)]. Except if the workspace is either:
 (i) place where the individual principally performs duties of office/employment
 (ii) used exclusively for the purpose of earning income from office/employment
and must be used on regular/continuing basis for meeting customers or other
persons in ordinary course of performing duties of office/employment
o (b) no deduction exceeding income from office/employment
 So, can’t create a tax loss from a workspace, even if one exists.
o (c) But can carry forward deductions excluded under (b) to the next year
 Only one year forward.
 How to calculate?
o Deduction of portion of the home
o Take whole value of the home, and calculate the portion of total square footage
 If renting, that proportion of rent is deductible – or deduct that % of mortgage
interest.
 Utilities, insurance, property taxes  all are proportionately calculated in
relation to workspace to get annual deduction, then take portion of the year it
was used.
 This deduction is often claimed, not necessarily successful
o Aimed at businesspeople, professionals who run business from home
Income from Business or Property
Business as a Source of Income: Organized Activity & Pursuit of
Swingle: TP employee of federal gov’t as chemical analyst (PhD). Claiming deductions for annual dues
to professional societies – all clearly related to employment and allowed him to keep up with developments
in the field. Denied deduction b/c dues weren’t necessary to be considered a professional.
38
38
Profit
 S. 9
o




(1) A taxpayer’s income from business or property is their profit from said business or
property for the year.
o (2) Loss is the loss from said business/property
 Note: no bar to creating loss w/ respect to business/property
o (3) Income/loss doesn’t include any capital gain/loss.
 Usually comes up in relation to income from property
“Profit” is not defined in the Act
o Courts have generally interpreted profit as a net amount
 (i.e. the difference between receipts and expenses necessary to produce those
receipts)
o Determination of profit is a question of law
 Test is of “well-accepted principles of business (or accounting) practice)” or
GAAP  except where these are inconsistent w/ specific provisions of the
Act/principles of law.
S. 12: in addition to the req’mts of s. 9, the Act sets out specific items to be included in
computing income from business or property, including:
o 12(1)(a): amts rec’d for goods and services to be rendered in the future
o 12(1)(b): amts receivable for property sold or services rendered in the course of
business
o 12(1)(c): interest
o 12(1)(d): amts deducted in a preceding year as a reserve for doubtful debts
o 12(1)(g): amts rec’d based on production or use of property
o 12(1)(j) or (k): dividends
o 12(1)(l): income from p/ps
o 12(1)(m): income from trusts
o 12(1)(n): benefits from profit-sharing plan and employee trust to employer
o 12(1)(x): inducement or assistance payments
o 12.1: cash bonus on Canada Savings Bonds
S. 20: things that might not otherwise be deductible
S. 18: restrictions on deductions
Carrying on Business vs. Earning Income from Property &
Realization of Capital Gains
Income from Business or Property?
 Mostly, income from business/property is treated the same (see ss. 9, 18, 20). However, in a
few cases the Act deals with business income or property income differently (hence it may be
necessary to characterize a receipt as one or the other).
o Active business income of a Canadian-controlled private corporation (CCPC) is taxed
at a special low tax rate because of a tax credit under s. 125  “small business
deduction”
 This low rate ≠ available for property income
 Might be rare to have a CCPC that stays under the limits in s. 125(7)
 Differential in taxation: small companies with active businesses can pay low
rate, but if only holding rental properties, for example, must pay regular rate of
26.5%
o Tax liability of non-resident taxpayers is tied to source income.
39






E.g. income from business carried on in Canada = taxable on a net basis under
Part I of the Act, whereas income from property is generally subject to 25%
withholding tax under Part XIII on a gross basis.
Note: this distinction relates primarily to individuals; no longer as important as it used to be.
Income derived from a P/P carrying on active business constitutes business income  even if
TP is a silent or inactive partner . [Lois Hollinger v. MNR]39
While the objective question of the source of income is the “overriding consideration”, some
subjective criteria which may be indicative in distinguishing b/w income from business and
income from property include [Per Hollinger]:
o (1) Whether the income was the result of efforts made or time and labour devoted by
the taxpayer
o (2) Whether there was a trading character to the income
o (3) Whether the income can be fairly described as income from a business within the
meaning of that term as used in the Act;
o (4) The nature and extent of services rendered or activities performed
Rental income is income from property, even when it includes payments for things like heat,
water and maintenance. However, if enough activity were involved it could be considered a
business. [Walsh and Micay]40
Note, though, that rental income earned by a corp pursuant to the objects of its incorporation
are generally presumed to be income from a business. [See e.g. Etoile Immobiliere SA v. MNR
(1992, TCC); Burri v. The Queen (1985, FCTD)]
Business
 “Business”
o s. 248(1): “Business” includes a profession, calling, trade, manufacture or undertaking
of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2,
subsection 95(1) and paragraph 110.6(14)(f), an adventure of concern in the nature of
trade but does not include an office or employment.
o Statutory definition is not exhaustive – supplemented by lots of case law.
o “Anything which occupies the time, attention and labour of a man for the purpose of
profit” is a business [Smith v. Anderson (1880, Eng CA)]
o Generally established by case law that a business is an organized activity, carried on for
purpose of profit.
Organized Activity
o
o
Distinction b/w business as organized activity and hobby is particularly important in
gambling income.
 Gambling earnings sometimes count and sometimes don’t count as income from
business. Largely fact-driven distinction.
Where TP worked to minimize risk, control outcome, it will be considered income from
39
Lois Hollinger v. MNR (1972, FCTD): inactive partner in P/P carrying on bottling business. Argued not
business income b/c not personally taking part in business. Held: P/P is carrying on active business, and
thus all partners are earning business income.
40
Walsh and Micay (1965, Exch. Ct.): TPs had interest in some rental properties. Issue of whether extent
and nature of the services provided to tenants pushed rental income out of property and into business. Held:
Rent payments = income from property. Extra services provided (i.e. heat, water, maintenance etc.) are
what tenants expect, and are insufficient to make rent payments business income.
40
o
o
o
o
o
business. [See Luprypa41]
Where winnings can be attributed solely to a run of good luck with no significant element of
risk mgmt, ≠ taxable. [Epel]42
Gambling does not constitute a business if profit results from pure luck, regardless of whether
a business-like system is applied to it [Leblanc]43
Broad categories of betting games: [Leblanc]
 Pleasure Pursuit
 May be regular, even compulsive, but never gets to the point of being an
organized commercial process for purpose of profit
 Business
 Betting against the public – casinos, bookies, etc.
 Activities w/ high risk associated, but whose results tend to require a level of
skill/expertise, which TP will use to minimize risk
40(2)(f)  gain/loss from disposition of
 (i) a chance to win a prize or bet, or
 (ii) a right to receive an amount as a prize or as winnings on a bet
in connection with a lottery scheme or a pool system of betting referred to in section
205 of the Criminal Code is nil.
S. 52(4)
 Where any property has been acquired by a taxpayer … as a prize in connection with a
lottery scheme, the taxpayer shall be deemed to have acquired the property at a cost to
the taxpayer equal to its fair market value at that time
 So if you sell the house at fair market value instead of moving in, e.g., no
gain/loss recorded
For the Pursuit of Profit
 Historical rule: in order to have a source of income, TP must have a profit or reasonable
expectation of profit [Dickson J in Moldowan v. MNR (1977, SCC)]
o Can’t deduct losses w/o a reasonable expectation of profit
o This evolved into REOP test (judicial req’mt that TP have reasonable expectation of
profit from activities) [See Landry]44
 This led to problems where TPs set out in good faith on purely commercial ventures but ended
up failing.
 REOP test is no longer the standard  Now a two-stage test [Stewart]45:
41
Luprypa v. The Queen (1997, TCC): TP tried to show that difference b/w his reported income and
assessed income was due to gambling on pool, and thus ≠ taxable income. Held: pool = TP’s business.
Cites Balanko. Worked to minimize his risk (practiced/played frequently, played inebriated opponents at
night and abstained from drinking while playing), and playing pool was primary source of income.
42
Epel v. The Queen (2003, TCC): Regular poker winnings ≠ taxable, b/c attributed to a run of luck by TP,
w/ no significant risk mgmt.
43
Leblanc v. The Queen (2007, TCC): TP brothers regularly made large bets on sports parlay games in ON
and QC. Held: betting did not constitute a business. No possibility of minimizing risk, since pure chance.
44
Landry: 71 yr old TP resumed practicing law after 23 years, but didn’t update his practice and lost
money every year. Held: no reasonable expectation of profit, because of the inefficiency.
45
Stewart: TP bought pre-developed condos – purchaser had to put up money (cash and borrowed), and no
other work involved on his part. Ran a loss b/c paying more in mortgage fees, mgmt fees, maintenance etc.
than collecting in rent (so no REOP). TP took over, fired property mgr and did work himself, so personal
element. Held: TP’s intent was to gain tax deductible income, but if that didn’t work then to derive capital
gains. TP has actually lost money, and he derived no enjoyment from payments, so it counts.
41
o
(1) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a
personal endeavour?
 Not a purely subjective analysis
 If not immediately clear, consider all the REOP factors (from Moldowan) for
evidence of commerciality or personal nature
 Profit/loss in the past
 Capacity of venture to show profit
 Intended course of action
 Training of TP
 Amount of time TP devotes to activity
o (2) If it is determined to be pursuit of profit, move on from REOP test and assess
whether the source of income is a business. If it is clearly personal, it does not fall
under income from business.
 20(1)(c)(i)
 (1)(c) allows deduction of an amount paid/payable pursuant to a legal obligation
to pay interest on…
 (i) borrowed money used for the purpose of earning income from a nonexempt business or property
Adventure or Concern in the Nature of Trade
 Part of the definition of business in s. 248(1). Very fact-driven assessment.
IB IT-459  a Concise Summary of the Law
 1. Where a person habitually does something thing that is capable of producing a profit, even if
it is apart from his ordinary occupation, that person is carrying on a business.
 2. Even when such a thing is done infrequently, or only once, it is possible to say that the
person has engaged in a business transaction if it can be shown that he engaged in an ANT
 3. Test to determine whether a particular transaction is an ANT: (mirrors the test from Taylor)
o (1) Taxpayer’s Conduct
 Primary Consideration:
 whether the taxpayer’s actions in regard to the property were essentially
what would be expected of a dealer of such property
 Factors that Presume ANT:
 Evidence that an effort was quickly made to find purchasers
 Steps taken with the intended result of improving the marketability of the
property
 In some circumstances, the fact that an appellant has a relevant commercial
background will be significant
o (2) Nature of the Property
 Primary Consideration:
 Whether the nature and quantity of the property excludes the possibility
that its sale was the realization of an investment or was otherwise capital in
nature
 Factors that Presume ANT:
 The property is of such a nature or magnitude that it could not provide
income or personal enjoyment
 The taxpayer is not in a position to operate the property for personal
enjoyment or income
42

o
o
The taxpayer can operate the property for enjoyment or income but does
not
 Note: Shares are very strongly presumed to be a capital investment [Irrigation
Industries], but this presumption can be rebutted when transactions are carried
out in the same way as a securities trading business [Arcorp]
(3) Taxpayer’s Intention
 Primary Consideration:
 Whether the taxpayer’s intention is consistent with other evidence pointing
to a trading motivation
 Factors:
 Intention to sell for a profit is not sufficient, on its own, to establish an
ANT
 However, it can be an added factor in favour of ANT when coupled with
another factor
 Secondary Intention:
 There can be more than one intention when a property is acquired – if sale
for a profit is not the primary intent, then a court should examine whether it
was a secondary intent
 A secondary intention, present at the time of purchase and ultimately acted
on, can indicate ANT [Regal Heights]
(4) Factors that cannot prevent a finding of ANT:
 Single or isolated transaction (Rutledge)
 Taxpayer did not create an organization to carry out the transaction
 Transaction was totally different from other activities carried out by the
taxpayer
MNR v. James A. Taylor [1956, Exch. Ct.]
 TP buys lead, resells to corp.
 Argued it was a capital transaction, and therefore non-taxable (b/c at the time capital gains
weren’t taxable)
o Characterization: bought lead, resold once inc’d in value – realized investment.
 Held: Business – adventure in the nature of trade.
o Distinction b/w carrying on a business (connotation of ongoing/continuous/repetitive
basis) and an adventure in the nature of trade: a one-off/isolated transaction that is
carried out in a similar way to how a trader in that area might carry on a business.
o Follows Rutledge – bought toilet paper in Germany after WWII, imported to Britain
and sold cheaply there. Held: element of speculation – despite having another business
purpose in Germany, he made the one isolated transaction for toilet paper. Can have an
adventure in the nature of trade without continuity – the word ‘adventure’ implies that
it can be an isolated transaction. Also implies that an element of speculation is often
present in ANT – buy sthg in expectation it will increase in value, but could be wrong.
o Note: the intention to make profit is not all that relevant, because in reality profit was
made.
Regal Heights Limited v. MNR [1960, SCC]
 Note: land is one of the most difficult things to categorize.
o Could be used to earn income (e.g. farming, production etc.)
o Could also be used for capital gain (sell after increase in value)
 If a secondary intention of selling for profit was present at time of purchase, often the sale will
be deemed income from ANT, not capital gains.
43
 Facts:
o Land purchase. Individual TPs wanted to build a shopping mall, but then a bigger nat’l
company announced plans to build one 2 miles away which made TP plan less
practical.
 Express intention at time of purchase: develop land, build shopping centre,
derive income from rent and share of profits from tenants
o So they subdivided the land and sold it for profit, which they claimed as a capital gain.
o Minister argued TP bought land w/ intention of selling for profit.
 Held: ANT, not CG. Had secondary intention at time of purchase that if couldn’t build mall
would sell property for profit.
o Court finds venture was speculative, and that although TP hopeful of putting land to
capital use, had always intended to resell at profit if that became unworkable.
o Knew could get profit, b/c expected to increase in value due to new highway)
Irrigation Industries Limited v. MNR [1962, SCC]
 Facts
o TP bought lots of shares, sold almost all of them in three weeks and then sold the rest
shortly after.
 60% profit in 3 weeks, and a bit more profit on the rest as well.
 Looks like speculation
o Explanation: borrowed overdraft from their bank, to invest in company w/ mining
claims (but no mines)
 Bank found out, insisted they pay back the overdraft immediately, which forced
them to sell.
 Luckily they made a profit, but argued not speculation – just an investment cut
short.
 Held: Not ANT.
o Even if you argue that intent was to buy shares and sell when had gone up in value,
that’s technically always what’s done in investment, so not sufficient to make ANT
o Notable: shares are capable of rendering a stream of income
o Court says shares weren’t dealt with in the way a trader or dealer would have done,
 Martha disagrees – not underwriting for a client, but still buying and selling. She
says if there was ever ANT w/ respect to shares, this is it.
o Martland: shares will always be the property of the acquirer, and thus generate income
as such, unless the purchaser is a trader/dealer acting as agent for someone else.
Carrying on Business vs. ANT vs. Investing in Capital Property
Arcorp Investments [2000, FCTD]
 Example of a situation where corp that bought and sold shares was found not to be investing,
but trading (i.e. carrying on business as a trader would)  not ANT, just business.
 Facts:
o All shares of TP held by one individual (H), who was essentially a broker/dealer for a
big investment house.
o All assets were securities, but only licensed to buy/sell for own account.
 H was licensed to buy/sell securities, and decided as sole controller of the corp
that it would buy when he had opportunity.
o So, shares issued in private placement, bought cheaply w/ expectation of future IPO
(and commensurate increase in value of shares)
o High frequency of trading
44

H argues would have held longer, but for unforeseen financial circumstances –
H divorce, purchase of home, etc.)
 Issue: what kind of income?
 Held: income from business.
o Court looks at frequency of trades, assesses H’s/Arcorp’s behaviour as carrying on a
business.
o Court found TP was trading in the shares w/ H’s inside knowledge of the system.
o Profit from business.
Income from Property
General
 “Property”:
o Earnings from income-generating property
 Interest from loans, mortgages; rent from residential or commercial property,
etc.
 If you own the debt obligation then you hold an asset (property), the right to be
repaid with interest, and the income from the debt obligation accrues to you
simply by virtue of being the lender (i.e. no action req’d)
 Note that the Stewart analysis regarding source of income and reasonable expectation of profit
applies to property income as well as business income.
 S. 12: certain things typically derived from a property source are expressly brought into
umbrella of income.
 S. 248(1) defines property
o Property of any kind whatever whether real or personal or corporeal or incorporeal and,
without restricting the generality of the foregoing, includes
 (a) a right of any kind whatever, a share or a chose in action
 (b) unless a contrary intention is evident, money;
o This broad definition means that basically anything of value is considered property for
the purposes of the Act
 S. 9(3): Gains and losses not included
o “Income from a property” does not include any capital gain from the disposition of that
property and “loss from a property” does not include any capital loss from the
disposition of that property.
 Property means almost everything except services. A person who gives a covenant gives the
covenantee a right that has value and is enforceable. Though note that negative covenants
aren’t intended to be included in property, b/c can’t give up own right (though Martha thinks
this is wrong). [481 v. MNR]
 Comparing income from property to imputed income
o Some things avoid personal expense by putting own labour into them instead.
 E.g. growing own vegetables, mowing your own lawn, etc.
o It may make sense to buy a capital asset off of which you may have no income but
derive a benefit
 Advantage to person putting money into a home as opposed to into a market
income-generating investment
o Interesting: why does the Canadian tax system encourage home-ownership over
investment?
o Issue: Women in the home caring for children instead of working  not being paid, but
not taxed
45
o
Can be difficult to distinguish between what is personal and what is “market”
Interest
 Specifically included in income per s. 12(1)(c), though the actual inclusion of interest in
income for tax purposes probably isn’t necessary.
 If an amount is interest, it accrues daily – even if it’s calculated annually, we assume a portion
of the annual rate accrues daily [Barfried Enterprises]
 Debt obligation: no definition in the act that applies for all purposes
o For our purposes: any obligation to repay funds, or any extension of credit that req’s a
repayment
o Includes bonds, bank accounts (b/c lending money to the bank), treasury bills/Canada
savings bonds,
o Capital property to the holder (lender)  investment of funds, which generates income
in the form of interest
o Right to be repaid your capital with interest  so income will be interest on the capital
 Late payment charges: effectively an amount in lieu of interest, and thus is taxed in the same
way as interest.
 Special Timing Rules
o Interest can be deferred easily, so ITA imposes some restraints on timing
o 12(1)(c)  adjusts to include interest only when interest is received.
o But 12((3) and (4) override part of (1)(c).
 (3) applies to corporations  must include in income an amount of interest
accrued on most debt obligations held by corp to each tax year end, to the extent
not included in income in a previous year.
 (4) anniversary day accrual rule for individuals  individuals who hold
investment contracts must include in income each year the interest accrued on
the investment K to each “anniversary day” in respect of the investment K,
except to the extent already included in income in a preceding year.
 S. 12(11) defines “anniversary day”:
o (a) the day that is one year after the day immediately preceding the
date of issue of the contract
o (b) the day that occurs at every successive one year interval from
the day determined under (a), AND
o (c) the day on which the contract was disposed of.
 For our purposes, investment contract is a broad term encompassing all
debt obligations held by individuals.
 Note 12(11)(i) definition of investment contract: would exclude a debt
obligation on which TP was reporting interest accrued daily. This is what
would happen if TP reported accrued interest as of Dec. 31st each year
instead of deferring it to the first anniversary day.
 S. 16(1) Income and capital combined – Where, under a contract or other arrangement, an
amount can reasonably be regarded as being in part interest or other amount of an income
nature and in part an amount of a capital nature, the following rules apply:
o (a) the part of the amount that can reasonably be regarded as interest shall, irrespective
of when the K or arrangement was made or the form or legal effect thereof, be deemed
to be interest on a debt obligation held by the person to whom the amount is paid or
payable; and
o (b) the part of the amount that can reasonably be regarded as an amount of an income
nature, other than interest, shall, irrespective of when the K or arrangement was made
or the form or legal effect thereof, be included in the income of the taxpayer to whom
46
the amount is paid or payable for the taxation year in which the amount was received or
became due to the extent that it has not otherwise been included in the taxpayer’s
income.
Groulx
 Note: this would now be governed by s. 16
 Facts
o TP sold property and took payment in installments while charging no interest. Claimed
all installments were just part of purchase price  proceeds of disposition of capital
property, making them capital gains and thus not taxable (at that time)
o CRA: no reasonable buyer would pay that much for property unless TP was subsidizing
interest.
 TP extending credit, withholding a debt obligation.
 Buyer owed $ for 7 yrs, but didn’t compensate TP for use of what was really his
money over that time.
o Price agreed on w/ buyer wasn’t low enough until TP offered to forego interest on
outstanding installments.
o CRA evidence that the price was above FMV  but this was tough to argue, since an
arm’s length deal w/ strong bargaining b/w parties.
 Held: TP had to be considered as having rec’d a portion of the price as interest, and thus that
portion ≠ capital gain.
o Blended payment – part as interest, meaning he should have been reporting it each
year, w/ each installment.
o Though, it would be difficult to calculate the interest, since installments varied each
year.
Rent & Royalties
 Rent: amounts paid for tangible property – whether real or personal
o If you own it, lease it to someone, they pay you for the use/possession
o Generally a fixed payment for the use of property for a given amount of time, after
which the right to use the property expires.
 Royalty: amounts paid for use of intangible property (e.g. patented info etc.)
 12(1)(g) Specifically includes payments based on production or use
o Any amt rec’d by the taxpayer in the year that was dependent on the use of or
production from property whether or not that amount was an installment of the sale
price of the property, except that an installment of the sale price of agricultural land is
not included by virtue of this paragraph;
 Distinguishing royalties from purchase price of property
o If all the rights of ownership in a property are transferred, then transaction is seen
as sale of property
o If not all of the ownership rights are transferred, it’s a lease/license and any
payment is rent/royalty
o Difference: sale of property is taxed differently than income in form of rents/royalties
o Characterization can be very difficult
 Gravel  selling by the ton
 Perceived as sale of property, b/c payment rec’d for production from property
and thus taxable under 12(1)(g)
Spooner
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 Why 12(1)(g) was added to the Act
 Mrs. Spooner owned a ranch, sold 20 acres to oil company and asked for cash, shares an a
percentage share in the production from the land (which is a royalty).
 She sold the whole land, so it was a capital gain  so saved a lot of money, which CRA didn’t
like.
Wain-Town Gas and Oil Company Ltd.
 Selling monopoly right to supply a particular municipality for a set rate over 5 years
 12(1)(g) would apply to include the amount in rel’n to production/use of franchise
 Conceive of as a right – to produce income.
Dividends
 12(1)
o (j) dividends received from resident corps
o (k) dividends received from non-resident corps
o Again – received, not receivable. Moving away from accrual method.
o Just know that dividends are taxable against the recipient as income from property.
 Definition
o Usually a distribution in cash of a share of the after-tax profits of a corp
o Can also be in kind – i.e. in the form of property other than cash  Uncommon.
o 212(2): if resident corp pays dividend to non-resident, withholding tax applies
o ITA includes stock dividends in the definition of dividends. Very clear.
o When you have accumulated profits after paying tax, directors make decision on
whether to pay dividend, will determine whether sufficient financial strength overall to
declare a dividend
 NB: Dividend is included in shareholder income.
 NB: If a Canadian shareholder became a non-resident, still receiving dividends from Canada,
would be subject to withholding tax.  Observe this fact on an exam.
Deductions in Computing Income from Business and Property
Structure of the Act
 S. 9
o
o
Income from property is net profit derived from property in the tax year
Determined by general business/commercial practice, except where case law provides a
articular legal or timing rule.
o 9(1) has an impliedly broad scope, but this is limited by s. 18
 Everyday recurring expenses that are dispersed in the course of earning income from a business
are deductible  “current” or “running” expenses
o Expenses incurred on regular basis, necessary to keep business running  heat;
employee salaries, benefits, etc.; rent of location
 Inventory has a separate tax treatment under s. 10  don’t worry about definition of inventory
o Basically inventory costs (simplified) are treated as an expense of the business, but we
won’t talk about it anymore
 S. 18(1) General limitations – In computing the income of a TP from a business or
property, no deduction shall be made in respect of:
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(a) general limitation – an outlay or expense except to the extent that it was made or
incurred by the TP for the purpose of gaining or producing income from the business or
property
o (b) capital outlay or loss – an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of depreciation, obsolescence or depletion
as expressly permitted by this Part;
 Note: this is why you wouldn’t be able to deduct the interest, except that
20(1)(c) allows you to.
o (h) personal and living expenses – personal or living expenses of the TP, other than
travel expenses incurred by the TP while away from home in the course of carrying on
the TP’s business.
o (l) use of recreational facilities and club dues  no deduction allowed after 1971 for
golf club memberships, visits to hunting/fishing lodges etc.
o (p) limitation re personal services business expenses – an outlay or expense to the
extent that it was made or incurred by a corp in a tax year for the purpose of gaining or
producing income from a personal services business, other than [listed exceptions], that
would, if income of corp were from a business other than PSB, be deductible in
computing its income.
o (r) – Amount payable to employee per/km for gas expenses. Can’t deduct more than
prescribed in reg. 7306 unless employee includes in income
o (t) You can’t deduct your income tax. Seriously.
 S. 20 governs specific deductions permitted
 S. 67.1(1)  limitation on food expenditures
o Can deduct 50% of the lesser of
 (a) the amount actually paid/payable in respect thereof
 (b) an amount in respect thereof that would be reasonable in the circumstances
o This applied in relation to employment deductions, but also in relation to deductions in
computing income from business.
o
The Income Earning Purpose Test
Daley v. MNR [1950, Exch. Ct]
 Facts:
o TP lawyer in NS, did 1 yr Masters in USA, went away for WWI and then moved back
to Canada and settled in ON
o Paid flat fee of $1500 to join ON bar, and claims deduction of $500/year over 3 yrs
o Argued outlay to allow him to carry on business – deducts over a period of time he
thought reasonable
 Held: No deduction. Capital outlay.
o One-time payment for an enduring right to carry on business in ON
 Annual dues were deducted elsewhere, and not challenged.
o At the time, no system existed for deducting outlays on account of capital that don’t
result in a physical asset  i.e. those that derive an intangible ‘enduring benefit’
o Court confirms that s. 9(1) is where you claim your general expenses of earning income
from business/property  if it isn’t for the purpose of gaining income from business or
property, then it’s not included in profit under 9(1)
 So, theoretically 18(1)(a) probably isn’t even necessary.
Imperial Oil Limited v. MNR [1947, Exch. Ct]
 Collision at sea – TP ship hit another ship, TP pays owner for damage
49
 Issue: can TP deduct that amount in calculating its income from business of transporting
petroleum products?
 Held: Deductible.
o Expense is deductible since it’s linked to the income process – as bad as it sounds, this
payment is a normal expense of a petroleum transfer business.
o No need to demonstrate that a particular expenditure resulted in income – no causal
connection req’d, just has to be incurred in the course of and for the purpose of earning
income from the business.
o Satisfying a legal obligation that arose in the ordinary course of business – though an
extraordinary event in the ordinary course – is legitimately deductible.
 Enunciates a global purpose test for deductibility:
o “The deductibility of a particular item of expenditure is not to be determined by
isolating it. It must be looked at in the light of its connection with the operation,
transaction or services 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.”
The Royal Trust Co. v. MNR [1957, Exch. Ct.]
 Income-Earning Purpose Test
 Facts
o TP paid for employees to join social clubs, and deducted a lump sum including annual
dues and also money for one-time admission fee for a new membership.
o Evidence was that memberships allowed employees to develop rel’ships to garner new
business  basically asking senior officers to use leisure time to network
 Issue: Annual dues deductible? One-time admission fee?
 Held: both deductible
o Analysis: ordinary commercial principles/business practice  would these be the kinds
of expenses a business like this would incur in the normal course of business?
o Expenditures for dues were for an income-earning purpose
 Basically used social club premises to expand business interests
 Payments made in accordance w/ principles of good practice for a trust
company
o One-time admission fee is actually just one of several – recurring expense
 TP corp paid for new officers to join on a regular basis – every few years when
officers reached the rank at which TP wanted them to be networking
 NB: in 1972 Parliament overruled – deductions for social clubs etc. are no longer allowed, per
s. 18(1)(l)  but the principles behind the case are still relevant.
Personal or Living Expenses
 S. 18(1)(h) and (l); s. 67.1
Benton
 TP farmer had a stroke, unable to live alone – engaged a housekeeper to cook meals etc., who
also did some farm work. Sought to deduct full wage he paid her.
 Minister reassessed portion for lodging as non-deductible, and allowed deduction on 40% of
salary for the farm work she helped with. TP appealed.
 Held: not deductible.
o She was helping w/ personal chores, living expenses, and thus $ not deductible.
50
o
Not a but for test (“if I didn’t spend this money, I wouldn’t have made money”) 
rather, a req’mt that the expense be related to the income-earning process.
Childcare Expenses
 S. 63 – childcare expenses are deductible from income from employment or business
o Lower income-earning spouse is entitled to deduct $7000/year/child under 7, and
$4000/yr/child under 16.
o Capped at 2/3 of TP income for year.
 Can’t deduct payments to spouse or older children for childcare.
o Note: this means that spouse, or perhaps more importantly older child, thus doesn’t
have to claim the income if you pay them to babysit.
Symes v. the Queen
 Court recognizes the argument for an expanded child care deduction, but refuses to go beyond
the specific provision of s. 65
 Facts: TP partner in law firm hired a full-time nanny for her kids and deducted the entire
expense as a business expense. Minister reassessed, based on the specific deduction in s.65.
Taxpayer appealed, arguing that the entirety of child-care expenses are a legitimate business
expense and that denial of such deduction was a breach of s.15 of the Charter
 Held:
o Appeal dismissed – Parliament has already provided a deduction in s.65, which cannot
be lightly disregarded
 General section 9(1) permits the deduction, but specific provision 65 limits the
deduction  specific rule presides
o Arguments for allowing a broader deduction: (recognized but not followed)
 Expenses are incurred solely for work
 Choice to have children should not be viewed as a personal consumption choice:
kids benefit society as a whole, people who have them should not be punished
Travel Expenses
Dr. E. Ross Henry
 Commuting to place of business
 Anesthetist in Victoria shared office w/ other doctors, joint assistant to do their billing.
 TP dropped off billing cards a couple of times a wk, driving b/w home and hospital and
downtown and office for various medical visits as well.
 Held: traveling from home to business every day is a personal expense – just as it would be for
employees.
Moving Expenses
 248(1) defines “eligible relocation”
o A relocation where
 (a) relocation occurs to enable a TP
 (i) to carry on business or to be employed, at a new work location, or
 (ii) to be a student in fulltime attendance enrolled in a postsecondary
program at a college or university also referred to as a new work location.
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




(b) both old and new residences have to be in Canada [though there are
exceptions to this requirement for residents of Canada who are absent from
Canada, and for students], and
 (c) the new residence is [i.e. must be] at least 40 km closer to the new work
location than the old residence was (by the shortest normally traveled route).
S.62(1) Moving expenses – deductions for eligible relocations are available to the text that:
o (a) they were not paid on the TP’s behalf by an employer,
o (b) they were not deductible in computing the TP’s income for the preceding year
o (c)
 (i) amts deducted as moving expenses can’t exceed total of all amounts earned
at the new work location in that year  note the same restriction on creating a
loss from income/business that we saw in rel’n to the home office
 (ii) for students, can’t exceed the total of scholarships, grants, bursaries etc.
o Note that you can deduct moving expenses indefinitely into future years
Employer allowances
o S. 62(1)(d) all reimbursements/allowances in respect of the expenses are included in
computing the TP’s income.
Students
o S. 62
 (2) moving expenses that are otherwise deductible may be deducted for students
if either the new residence or the old residence is in Canada.
 (3) lists specific moving expenses that are deductible
o Altered definition of eligible relocation in 248(1).
o Depends on s. 56(1)(n)
 To the extent that you receive scholarships/bursaries in excess of your
exemption for the year, can deduct moving expenses
o Problem: under 56(3) normal scholarships/bursaries are exempt
 Carefully excludes the Savage situation – carving 6(1)(a) benefits out of it so
they can be taxed
 56(3) exempts all scholarships and bursaries under 56(1)(n) in connection with
enrolment in an educational program that qualifies for the educational tax credit
(118.62) which requires that the TP be enrolled in a “qualifying educational
program” at a “designated educational institution”.
 If scholarship rec’d in connection to qualifying educational program at
designated institution, it’s fully deductible.
 “qualifying educational program” – minimum 3 consecutive weeks, 10 hrs
per week
 “designated educational institution” – Canadian and foreign universities
and colleges, provided, if foreign, the program is at least 13 weeks long
s. 62(3) Moving expenses includes:
o (a) travel costs (incl. reasonable amts expended for meals & lodging) in the course of
moving the taxpayer and members of the taxpayer’s household from the old residence
to the new residence
o (b) transporting goods/household effects
o (c) meals/lodging near old residence for TP & household for not more than 15 days
 Note that 67.1 doesn’t apply to limit the percentage of deduction on
food/etc. here.
o (d) the cost to the taxpayer of canceling the lease by virtue of which the taxpayer was
the lessee of the old residence
52
o
o
o
o
o
(e) selling costs of old residence  note, not a loss incurred b/c price has gone down;
cost of selling includes realtor fees, GST, legal fees etc. that are incurred around selling
the house.
 We think a penalty on a mortgage would be deductible
(f) If sold house as result of move, legal costs of purchasing new residence, and of any
tax, fee or duty (other than GST or VAT) imposed on the transfer or registration of title
to the new residence
(g) expenses related to old house up to $5000, i.e. while not living in it or renting it
(h) cost of revising documents to reflect new address, cost of connecting/disconnecting
utilities.
But, for greater certainty, does not include costs (other than those referred to in (f))
incurred by the taxpayer in respect of the acquisition of the new residence
Home Office Expenses
 S. 18(12)  this is for business; s. 8(13) was for personal/employment expenses
 High bar for proving it’s a separate home office  not for any personal use or use by other
members of household
Deduction of Interest Expense
 20(1) Deductions permitted in computing income from business or property – notwithstanding
paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a
business or property, there may be deducted such of the following amounts as may reasonably
be regarded as applicable thereto:
o (c) Interest – an amount paid in the year or payable in respect of the year (depending
upon the method regularly followed by the taxpayer in computing the taxpayer’s
income), pursuant to a legal obligation to pay interest on
 (i) borrowed money used for the purpose of earning income from a business or
property (other than borrowed money used to acquire property the income from
which would be exempt or to acquire a life insurance policy).
 (ii) an amount payable for property acquired for the purpose of gaining or
producing income from the property or for the purpose of gaining or producing
income from a business (other than property the income from which would be
exempt or property that is an interest in a life insurance policy),
 20(3) if you borrow money to pay down money previously borrowed or an amount payable on
property under 20(2)(c)(ii), it will be deemed to have been borrowed for the same purpose as
the original money borrowed.
 Arm’s length interest won’t tend to be found unreasonable.
o Recall Stewart, in which minister argued unreasonable rate of interest, but court held it
was a marketplace-accepted amount, negotiated at arm’s length.
The Queen v. Bronfman Trust
 Leading case on req’mt that borrowed funds be used for an income-earning purpose
 Also leading on the direct vs. indirect usage of borrowed money
 Note: this case relies on bad precedent, but the principles that come out of it are ok.
 Facts
o A trust made distributions of capital to the beneficiary, but instead of selling capital
assets to make payments, trustees decided to retain the trust investments and borrow to
make the capital distributions.
 Maybe they didn’t want the share price to drop.
53
o So, a discretionary distribution of capital to the beneficiary.
 Issue: Was the interest on the borrowed funds deductible by the trust?
 Held: Not deductible – sham.
o Must be an eligible use. Consider current use and look to direct (not indirect) use to
determine.
o Eligible and ineligible uses of borrowed money
 Borrowed funds must be used for an income earning purpose: no deduction is
allowed for interest on funds used to produce exempt income, purchase life
insurance, for personal consumption or to produce capital gains. The taxpayer
must be able to trace the borrowed funds to an eligible use. A purpose of
distributing capital to the beneficiary is not an income earning purpose.
o Original vs. current use of borrowed money
 It is the current use of the borrowed funds which is relevant in assessing
deductibility, not the original use. The taxpayer must be able to show that the
funds which were borrowed are still being applied to an eligible use.
o Direct vs. indirect use of borrowed money
 It is not sufficient for the taxpayer 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 (here, to distribute capital). There is no deduction permitted for interest paid
on borrowed funds which indirectly preserve income-earning property but
which are not directly used for the purpose of earning income from property.
 The trust would have been entitled to a deduction if it had sold income
producing capital assets to obtain cash make the capital distribution, and then
borrowed funds to replace the income generating assets. However, the courts
must assess the effect of what the taxpayer actually did, not what he or she
might have done.
 NB: Court won’t look at what you could have done indirectly, but what you did
do, directly – can’t ignore direct use in favour of an indirect use that would be
eligible
Singleton v. The Queen [2002, SCC]
 Facts
o TP took money out of his firm capital investment account to purchase a house, and
replenished the money he took from the acct with a bank loan on the same day.
o Capital acct was generating interest, income from business, so TP argued loan was
going to generate income from business.
o Minister argued true purpose of loan was to pay for the house.
 Held: Deductible. Court won’t inquire into true economic purpose – direct use is what matters.
o Four elements of 20(1)(c)(i), per Shell Canada Ltd. v. Canada [1999, SCC]
 (1) The amount must be paid in the year or be payable in the year in which
it is sought to be deducted
 (2) The amount must be paid pursuant to a legal obligation to pay interest
on borrowed money
 (3) The borrowed money must be used for the purpose of earning nonexempt income from a business or property
  This is the issue in this case
 Focus must be on taxpayer’s purpose in using the money – not the purpose
of borrowing per se  so look to the use to which the borrowed funds
were put.
54

o
o
If there is a direct link between the borrowed funds and the eligible use,
this element is satisfied.
 (4) The amount must be reasonable, as assessed by reference to the first
three req’mts
Court must not search for economic reality – just apply 20(1)(c)(i).
 So, moving away from what Bronfman seemed to be open to.
So long as there is no sham (i.e. full-on fraud), follow 20(1)(c)(i).
 TPs are entitled to minimize taxes so long as they do it w/in the Act and report it
honestly.
Ludco Enterprises Ltd. v. The Queen [2001, SCC]
 Facts:
o TPs borrowed money and used it to purchase shares in two companies resident in
Panama and operated out of the Bahamas (both of which are tax haven countries)
o The companies invested the funds in Canadian and US gov’t debt obligations (which
were exempt from withholding tax by Canada or US), and earned tax-exempt interest.
o TPs earned minimal dividends, covering about 10% of their loan interest. Claimed
deduction annually for interest expense.
o Later, ITA amended to eliminate the tax benefits of this scheme, so TPs sold shares and
realized large capital gain.
o Minister reassessed, denying deduction on basis that interest was actually incurred for
purpose of deferring tax and converting income into capital gains.
 Held: Deduction allowed. TP had reasonable expectation of income derived from nature of
investment, investment strategy and companies’ dividend policy.
o Although income wasn’t the primary purpose of investment, it was a purpose, and a
reasonable one  ancillary income-earning purpose is sufficient.
o Income was actually received (though small in comparison to CG and interest charges,
court won’t inquire into sufficiency of income, absent sham/window-dressing)
o Majority is concerned w/ emphasizing tax certainty  a TP should be able to act w/in
the rules and know what tax liability will be, w/o expectation that gov’t will
recharacterize their actions.
Policy Reasons for Denying Deductions
 Expenses of illegal business: recall Buckman.
 S. 67.5: Bribery of certain officials
o (1) Non-deductibility of illegal payments – In computing income, no deduction shall be
made in respect of an outlay made or expense incurred for the purpose of doing
anything that is an offence under section 3 of the Corruption of Public Officials Act or
under any of sections 119 to 121, 123-125, 393 and 426 of the Criminal Code, or an
offence under section 465 of the Criminal Code as it relates to an offences described in
any of those sections.
 This is Canada complying w/ treaty obligations to make sure payments made to
gain favours from foreign officials aren’t deductible.
 S. 67.6 Non-deductibility of fines and penalties – In computing income, no deduction shall be
made in respect of any amount that is a fine or penalty (other than a prescribed fine or penalty)
imposed under a law of a country or of a political subdivision of a country (including a state,
province or territory) by any person or public body that has authority to impose the fine or
penalty.
MNR v. Eldridge [1964, Exch. Ct.]
55
 Income from illegal businesses is still taxed. Deductions are claimable, but onus on TP to
prove. Certain types of expenses will never be recognized, but regular expenses will be.
 Facts
o Madam, assessed taxes for illegal call-girl operation
o Then claimed deductions for expenses made for the purpose of earning said illegal
income.
o Note: at the time, prostitution was illegal, but now everything surrounding it is illegal,
so it’s impossible to form a business around it.
 Held:
o Illegal businesses are taxable just like legal ones.
o Some expenses were deductible, if she could prove them
o Some not: expenses of bailing herself out of prison (argued needed her out to continue
business, but business had stopped.); and others.
o Allowed: rent on the apartment used in the business, except for an add’l amount that
couldn’t be proven to be for business.
o Bribes of police: not deductible
o Whisky: not deductible
o Bail bond to get herself out of prison: not deductible, b/c no more business so not for
purpose of earning income from business.
o Payment to buy out an entire issue of a newspaper so people wouldn’t see a story about
her: not deductible, b/c judge thought it couldn’t have hurt her business, but Martha
thinks it should have been b/c courts shouldn’t be making decisions on what will help
or hurt the running of the business
Computation and Timing
Capital vs. current expenditures





Current expenses (i.e. non-capital expenditures) are generally deductible.
18(1)(b): Outlays on account of capital (i.e. capital assets) are not deductible
Determining which category an expense falls under may be difficult.
The court must look to all the facts [British Insulated]46
The size of a particular expenditure is not usually decisive.
o See e.g. Imperial Oil, in which the large legal expense incurred by colliding ships was
found to be in the course of business.
 Capital outlays can be made to incur an enduring benefit [see British Insulated]
o Compare running expenses with expenditures in securing a capital advantage.
 Note difference b/w capital outlays and inventory: purchases of items/commodities either for
resale or for incorporation into things that company would then sell. [British Insulated]
o Bought/sold as part of business  whereas capital assets are bought and used in the
course of earning income from business.
 Repairs/maintenance are considered current expenditures, but substantial upgrades are capital
outlays. [Canada Steamship]47
46
British Insulated and Helsby Cables, Limited, v. IRC (1926, HL): Company set up pension plan and
paid in a lump sum as the base amount. Claimed it as a current expenditure, in the course of business, but
court held it was a capital outlay. Though ongoing payments into fund might be running expenses, the lump
sum was not deductible as the nucleus of a capital fund. Payment wasn’t made as gift/bonus to servants of
company (though technically it was, since those closest to retirement would get a better pension as a result)
47
Canada Steamship: Minister argued new boilers was a new acquisition, making the expenditure a capital
outlay. TP argued repairs/maintenance (current expenditure). Held: Capital outlay. Boilers were multi-
56
 To distinguish between upgrades and repairs, fact-driven assessment exemplified in Shabro
and Gold Bar.  canvas both because they conflict.
Shabro Investments
 Did TP make a material/significant improvement/upgrade, adding substantially to the
capital asset?
 Facts
o Concrete floor of bldg wasn’t properly supported, so it subsided and cracked.
o Lower floor of bldg became unusable, all kinds of problems in drains/wiring etc.
connected to the floor was destroyed and had to be replaced.
o TP removed whole concrete slab floor, inserted steel piles into floor to support and then
put in new concrete floor, and replaced all related parts of bldg that had been damaged.
o Claimed as deductible expense, but minister said it was a capital improvement to the
property
o TJ rejected drains etc., b/c not damaged due to wear and tear or deterioration.
 Held: New Trial – TJ erred. Martha thinks probably would be deductible.
Gold Bar
 Look to the purpose of the expenditure by TP: is it to improve (make different or better)
or to return to pre-damaged state?
 Apt bldg w/ brick veneer exterior, and the bricks started to fall off. Took it all off and replaced
with metal siding.
 Since cause of damage was faulty work 10 years before, work now wasn’t undertaken to
increase the value overall, but rather to maintain value by keeping it usable
 In the end they allowed the whole deduction
 Martha finds this really difficult to distinguish from Shabro with the concrete floor.
Timing of Recognition of Revenue and Expense
Amounts Receivable
 S. 12(1) Income Inclusions – the following amounts are included in a TP’s income from
business or property:
o (a) services, etc., to be rendered [or goods to be delivered] – any amount received in
the course of a business
 (i) that is on account of services not rendered or goods not delivered before the
end og the year or that, for any other reason, may be regarded as not having
been earned in the year or a previous year, or
 (ii) under an arrangement or understanding that it is repayable in qhole or in part
on the return or resale to the TP of articles in or by means of which goods were
delivered to a customer;
o (b) amounts receivable – any amount receivable by TP in respect of property sold or
services rendered in the course of a business in a given year, notwithstanding that the
full amount isn’t due until the following year.  Even though K says amt isn’t to be
paid until later, if have fulfilled the req’mts to be paid, must claim as rec’ble. Amount
shall be deemed to be rec’ble in respect of services rendered in the course of a business
on the day that is the earlier of. For the purposes of this paragraph, an amount shall be
purpose, had separate classification for depreciation from ships, and thus could be seen as separate from the
ship. So taking boiler out and replacing with a new one was a capital outlay.
57
deemed to have become receivable in respect of services rendered in the course of a
business on the day that is the earlier of
 (i) the day on which the account in respect of the services was rendered, and
 (ii) the day on which the account in respect of those services would have been
rendered had there been no undue delay in rendering the account in respect of
the services.
 12(2) – paras 1(a) and (b) are enacted for greater certainty and shall not be construed as
implying that any amount not referred to in those paragraphs is not to be included in computing
income from a business for a taxation year whether it is rec’d or rec’ble in the year or not.
J. Colford Contracting
 Facts
o Plumbing and HVAC installer. Fiscal year end March 31st.
o Subcontractor in a construction K – to install things like plumbing, heat, AC, etc.
o Under K, entitled to payment for up to 85% of value of K, and contractor entitled to
hold back final 15% until architects issue Certificate of Substantial Completion 
condition precedent to payment. Once issued, final payment due w/in 30 days.
o Issued on March 9th, payment of holdback rec’d April 11th.
 Issue: which year did the payment count in? Can TP include it in year 2, or must it be included
in year 1?
 Held: Year 1. Receivable on issuance of Certificate.
o Test: must be entitled to payment as of the relevant date. If there is nothing more
that TP must do, and all conditions precedent are fulfilled, the amount is
receivable and must be included.
o So even though payment ≠ received until next fiscal year, receivable on March 9th
because work was completed and all conditions precedent to payment were fulfilled.
o Entitlement to payment is the key – doesn’t matter that TP couldn’t sue for nonpayment yet.
Benaby Realties [1960]
 Amount must be ascertainable to be claimed as receivable
 Facts
o Jan 1954, fed crown announced that they would expropriate land.
o Payment came in 1955
 Issue: TP argues it had a receivable payment as of 1954, and thus that the payment should
count in that tax year
 Held: 1955. Not receivable in 1954.
o Per Minister argument: amt was not ascertained until after April 30th 1954 – no clear
amount that could be pointed to and say that it had to be included in income as
receivable.
o Valuation had occurred after the fiscal 1954 year had ended.
West Kootenay Power and Light v. The Queen
 Court wants ppl to report income in a manner that provides the best picture of actual
income for the year.
o If a company clearly has a legal right to the payment and the amount, though not
absolutely certain, can be reasonably ascertained based on estimates from the past
billing and the current rates, then the amount is receivable.
 Facts
58
Until 1979, TP hadn’t included estimates of non-billed deliveries in annual income –
only amounts actually billed, which were either received or receivable.
o Accountant told them they should include an estimate of the amount they will be billing
for as of the end of December, because this gave a truer picture of their financial
standing at the end of the year. So they did this, for accounting and tax purposes.
o 1983: continued to provide estimates of billing for goods delivered in financial
statements, but not in taxes. CRA became suspicious.
 Issue: TP has legal right to it, but is it receivable? S. 12(1)(b) requires goods that have been
delivered, and an amount receivable though not yet due.
 Held: Receivable.
o TP can estimate very accurately how much electricity has been delivered (i.e. value of
goods delivered) and thus how much they will be owed/paid.
o
Amounts Payable
J.L. Guay Ltée
 Facts
o 10% holdback  didn’t have to pay until engineer’s certificate issued
o In 1965, TP claimed a large deduction that company was keeping as holdbacks 
owed to subcontractors
o As of end of 1965, the certificates hadn’t been issued.
 Held: Not receivable.
o Certificates would probably be issued, but until they are, no obligation to pay
Holdbacks are contingently payable, but not legally payable yet. Portions, probably
high portions, will be owed at some point, but not until certificate is issued.
Losses
 S. 111(1)(a) – carry forward and back of non-capital losses
o Losses from a source are non-capital losses. 111(1)(a) allows these losses to be carried
forward 20 years and back 3 years.
o Useful for cyclical interest rates – where have big profits then big losses.
Capital Gains
Introduction
 Note: the inclusion rate for CGs has fluctuated, but we just peg it at 50% regardless.
 Taxation of capital gains and losses:
o S. 3 Income for taxation year – The income of a TP for a tax year for the purposes of
this Part is the TP’s income for the year determined by the following rules:
 (b) determine the amount, if any, by which
 (i) the total of
o (A) All of the TP’s taxable capital gains for the year from
dispositions of property other than listed personal property, and
o (B) TP’s taxable net gain for the year from dispositions of listed
personal property
exceeds
59






(ii) the amount, if any, by which TP’s allowable capital losses for the year
from dispositions of property other than listed personal property exceed the
TP’s allowable business investment losses for the year.
o See also Subdivision C
Distinguish income from property (taxed under Subdivision B):
o S. 9(3) Gains and losses not included – in this Act, “income from property” does not
include any capital gain from the disposition of that property and “loss from a
property” does not include any capital loss from the disposition of that property.
39(1): Meaning of capital gain and capital loss
o (a) Gain from disposition of any property other than listed exclusions.
 Main exclusion: if you include the gain in computing income from a source, it’s
not a capital gain.
 We won’t look at any of the exclusions in the small subparagraph
o (b) Loss from disposition of any property of the TP other than
 (i) depreciable property
40(1) General rules – except as otherwise expressly provided in this Part
o (a) TP’s gain from disposition of any property is the amount, if any, by which
 (i) POD [proceeds of disposition] of the property, exceed the total ACB
[adjusted cost base] immediately before the disposition and any outlays or
expenses incurred to make the disposition
o (b) The taxpayer’s capital loss is
 (i) ACB plus the outlays or expenses of making the disposition, minus the POD
of the property.
 So the amount by which ACB plus expenses exceeds POD
o Although there is no express provision to this effect in the Act, according to
Interpretation Bulletin IT-285R2 para. 8-9 the ACB of capital property includes taxes,
fees and other expenses incurred to complete the acquisition.
Taxable capital gain and allowable capital loss: s. 38(a) and (b)
o The 50% inclusion rule.
o 38(a) Taxable gain from disposition of property is ½ of the capital gain from the
disposition of the property
o 38(b) allowable capital loss is ½ of capital loss from disposition of property
o So that makes the top marginal rate on capital gains technically only 21.85 (because
taxed at 43.7%, but only on 50% of capital gains)
S. 111(1)(b) and 111(2)(a)  carry forward and back of net capital losses.
o S. 111(1)(b): can carry capital losses forward indefinitely, and back three years.
Policy Evaluation of Preferential Taxation & Capital Gains
 Equity
o Idea that those who have more wealth than others should pay progressively higher amts
 preferential treatment of capital gains tax clearly favours higher-income earners, and
is thus not horizontally or vertically equitable
 Neutrality
o Distorts how people invest  preferential policy skews toward ppl seeking capital
gains and delaying disposition
 Simplicity/Certainty
o Hasn’t really led to certainty  it’s the most litigated area of tax law.
o Gains aren’t taxed until realized – not until property disposed of; so taxpayer has a lot
of control over when to recognize capital gains/losses
o Note that this is all part of a nice system:
60



If gov’t is paying down debt in good times when taxes are coming in, then has
capacity to borrow during harder times when ppl are deducting/not paying taxes
b/c lose money
So can use revenue-collection system as offsetting ups and downs in the
business cycle
There is a sense that having a robust, rational tax system does a lot for a society.
Martha thinks the Canadian tax system weathered the downturn well – we were
able to pay some em’ment insurance, and didn’t run a deficit for the following
year (we’re w/in 3% of GDP)
Definitions
 S. 248(1): “Property” means property of any kind whatever whether real or personal or
corporeal or incorporeal and, without limiting the generality of the foregoing, includes
o (a) a right of any kind whatever, a share or a chose in action
o (b) unless a contrary intention is evident, money,
o (c) a timber resource property, and
o (d) the work in progress of a business that is a profession
o Recall Regal Heights, Taylor Irrigation Industries, Arcorp Investments
 S. 54: Capital Property of a TP means:
o (a) any depreciable property of the TP, and
o (b) any property (other than depreciable property), any gain or loss from the disposition
of which would be a CG/CL of the TP
 Cost and Capital Cost are not defined in the Act
 Adjusted Cost Base (ACB)
o Definition in s. 54: For non-depreciable capital property it’s the amount laid out to
acquire the property
o We’re not doing any adjustments, but we’ll still use the term ACB because it’s the
correct one.
o ACB of cash is equal value
o S. 43(1) ACB of part of a property
 Capital cost of a portion of a property  intuitive
 Allocate on reasonable basis – the ACB of that part before the disposition is the
portion of the ACB of the whole property that will be considered to relate to
that part.
o 47(1)(a) and (b): ACB of “identical properties”
 Average the ACB of all identical properties that a TP owns at the same time
 Disposition
o A disposition need not be voluntary
 So includes where property is destroyed w/o compensation/insurance
 Stolen and not recovered
 Even abandoned property can be considered disposed of
 Don’t have to have proceeds of disposition, though their presence is a strong
indicator
 Gifts are dispositions of property
o S. 248(1): “disposition” includes
 (a) any transaction or event entitling TP to proceeds of disposition of the
property
 (b) any transaction or event by which,
61

o
o
(i) where the property is a share, bond, debenture, note, certificate,
mortgage, agreement of sale or similar property, or an interest in it, the
property is redeemed in whole or in part or is cancelled.
 (ii) Where the property is a debt or any other right to receive an amount,
the debt or other right is settled or cancelled.
But does not include:
 (e) Any transfer of the property as a consequence of which there is no change in
the beneficial ownership of the property, except where the transfer is
 (i) from a person or a partnership to a trust for the benefit of the person or
partnership
 (ii) from a trust to a beneficiary under the trust, or
 (iii) from one trust maintained for the benefit of one or more beneficiaries
under the trust to another trust maintained for the benefit of the same
beneficiaries
 Basically transfer of bare legal title but no change in beneficial interest
o ITA is concerned w/ economic interests
o So if you transfer your title in a home to your mother when you
leave the country, just as a titular move, doesn’t count.
 (j) any transfer of property for purpose only of securing a debt or loan, or any
transfer by a creditor for the purpose only of returning property that had been
used as security or loan
 if corp borrowing in markets, lender will acquire a debt obligation
 (l) any issue of a bond, debenture, note, certificate, mortgage or hypothecary
claim, and
 corp hasn’t disposed of anything – borrowed in markets and granted
property right to someone else. When lender disposes of bond they’ve
disposed of property, but corp hasn’t acquired – just released from req’mt
to pay b/c fulfilled that covenant
 (m) any issue by a corporation of a share of its capital stock, or any other
transaction that, but for this paragraph, would be a disposition by a corporation
of a share of its capital stock.
 Person who acquires shares gets sthg, but corps don’t dispose of anything.
 Creation and distribution of add’l shares also not a disposition of shares
S. 54: “Proceeds of disposition” [this applies only to this Part, whereas general
definition of disposition applies to entire Act] includes:
 (a) sale price of property that has been sold
 (b) compensation for property unlawfully taken
 (c) compensation for property destroyed, and any amount payable under a
policy of insurance in respect of loss or destruction of property
 (d) compensation for property taken under statutory authority or the sale price of
property sold to a person by whom notice of an intention to take it under
statutory authority was given
 Expropriated property, generally
 (e) Compensation for property injuriously affected, whether lawfully or
unlawfully or under statutory authority or otherwise
 (f) compensation for property damaged, including insurance proceeds except if
insurance used to fully repair the damage  so, would have been able to deduct
the costs, but insurance covered anyway so it’s a wash.
See Compagnie Immobilière BCN Ltée
 Definition of disposition given very broad interpretation
62


Transaction in which an interest in real property disappeared and merged with
someone else's interest, question was if disposition occurred
Held:
 Disposition will likely occur whenever someone loses control over, or right
to, an asset for whatever reason
 Definitions of "disposition of property" and "proceeds of disposition" are
not exhaustive - expressions bear normal and statutory meaning
Deemed Dispositions and Deemed Proceeds
 Recall Leblanc:
o 40(2)(f) lottery winnings not taxable;
o 52(4): cost of property acquired as lottery prize (after 1971) is deemed to have been
acquired at FMV at the time.
On Ceasing to Be or Becoming a Resident of Canada
 S. 128.1(4) Emigration – where at any particular time a taxpayer ceases to be resident in
Canada,
o (b) deemed disposition – the taxpayer is deemed to have disposed, at the time (in this
paragraph and in paragraph (d) referred to as “the time of disposition”) that is
immediately before the time that is immediately before the particular time, of each
property owned by the taxpayer other than, if the taxpayer is an individual,
 (i) real property situated in Canada, a Canadian resource property or a timber
resource property,
for proceeds equal to its fair market value at the time of disposition, which proceeds
are deemed to have become receivable and to have been received by the taxpayer at
the time of disposition
o Note: not worried about losing ability to tax gain on taxable Canadian property –
because if it’s in Canada, we retain right to tax gains on real property situated in
Canada no matter what (even under tax treaties)
 128.1(1) Deemed disposition on immigration
o (b) taxpayer deemed to have disposed, at time immediately before becoming resident,
of each property owned other than, if an individual:
 (i) property that is a taxable Canadian property
for proceeds equal to its fair market value at the time of disposition
o (c) deemed acquisition
 deemed to repurchase it just before becoming resident
o so bumped up to market value  take account of gains and losses accrued while
resident in Canada
o Includes shares, bonds, mutual fund units, property outside of Canada
 Two classes of property ≠ deemed disposed for immigration  included in taxable
Canadian property:
o Shares in Canadian private companies (Doesn’t have to be CCPC – just private;
no issue of who controls)
o Real property situated in Canada
On Death
 Note: when Canada brought in capital gains taxes we got rid of estate taxes in all provinces
 s. 111(2)  In the year of death and the year immediately preceding death, capital losses turn
into losses from a source (so, income)
63
 70(5) Capital property of a deceased taxpayer – Where in a taxation year a taxpayer dies,
o (a) the taxpayer shall be deemed to have, immediately before the taxpayer’s death,
disposed of each capital property of the taxpayer and received proceeds of disposition
therefor equal to the fair market value of the property immediately before the death;
 so deceased recognizes capital gains/losses
o (b) any person who as a consequence of the taxpayer’s death acquires any property that
is deemed by paragraph (a) to have been disposed of by the taxpayer shall be deemed to
have acquired it at the time of the death at a cost equal to its fair market value.
 Inheritor acquires at FMV
 This corresponds to 69(1)(c)
Gifts and Sales Below FMV to Non-Arm’s Length Persons
Non-Arm’s Length Persons
 S. 251(1) and (2) define arm’s length and related persons.
 251(1) Arm’s length – For the purpose of this Act,
o (a) related persons shall be deemed not to deal with each other at arm’s
length
 Even if in fact their interests are in conflict.
o (c) In any other case, it is a question of fact whether persons not related to
each other are, at a particular time, dealing with each other at arm’s length.
 This requires an examination of all of the facts and circumstances
existing between the two persons at the relevant time. Unrelated
parties have been held not to deal at arm’s length when
 (a) there is “a common mind” which directs or controls the
bargaining for both sides (i.e. a person and a corporation
which he is a less than 50% shareholder, but a director and
officer with influence over the other directors and officers)
or
 (b) the two persons act in concert without separate interests.
 Business partners may or may not be at arm’s length, depending on
the circumstances of the transaction. Employees are normally at
arm’s length from their employer, unless they control, or are
members of a family, that control the corporate employer.
 (2) definition of “related persons” – For the purpose of this Act, “related persons” or
persons related to each other, are
o (a) individuals connected by blood relationship, marriage or common-law
partnership or adoption
 (6) Blood relationship, etc. – For the purposes of this Act, persons are connected by
o (a) blood relationship if one is the child or other descendent of the other or
one is the brother or sister of the other;
 Note: the relationship of aunt/uncle to nephew/niece, and cousins are
not included in related persons.
 BUT – may not be dealing at arm’s length anyway, so
careful to note whether provision says “related” or “arm’s
length”
o (b) marriage if one is married to the other or to a person who is so connected
by blood relationship to the other; and
o (b.1) common-law partnership if one is in a common-law partnership with
the other or with a person who is connected by blood relationship to the
64
other; and
(c) adoption if one has been adopted, either legally or in fact, as the child of
the other or as the child of a person who is so connected by blood
relationship (otherwise than a brother or sister) to the other.
 S. 248(1) “common law partner” [but note from amendment]
o “Common-law partner”, w/ respect to a taxpayer at any time, means a person who
cohabits at that time in a conjugal relationship with the taxpayer and
 (a) has so cohabited throughout the 12-month period that ends at that time, or
 (b) would be the parent of a child of whom the taxpayer is a parent, if this Act
were read without reference to paragraphs 252(1)(c) and subparagraph
252(2)(a)(iii)
 (is the parent of either a biological or adoptive child)
o And, for the purpose of this definition, where at any time the taxpayer and the person
cohabit in a conjugal rel’ship, they are, at any particular time after that time, deemed to
be cohabiting in a conjugal rel’ship unless they were living separate and apart..for at
least 90 days
 This way it isn’t relevant to prove a couple were no longer having a conjugal
relationship
o *so the definition isn’t elective, but it’s typically only applicable where trying to use
benefits of the rel’ship.
 Corporations
o S. 251(2) “Related Persons” includes:
 (b) a corporation and
 (i) the person who controls the corporation, if it is controlled by one
person,
o Person who holds voting control, meaning enough shares to elect
the board of directors, normally over 50%.
 (ii) a person who is a member of a related group that controls the
corporation
o A related group means a group of persons, each member of which is
related to each other member.
 (iii) any person related to a person described in subparagraph (i) or (ii);
and
o 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
 c) any two corporations
 (i) if they are controlled by the same person or group of persons
o
Gifts and Sales not at FMV
 S. 69(1) Inadequate considerations – Except as expressly otherwise provided in this Act,
o Note: recall 40(1)(a) same idea, but 69(1) is more specific, and we’ll later go even
more specific  have to follow the more specific provision.
o (a) where a taxpayer has acquired anything from a person with whom the taxpayer was
not dealing at arm’s length at an amount in excess of the fair market value thereof at
the time the taxpayer so acquired it, the taxpayer shall be deemed to have acquired it at
that fair market value.
 Can’t increase ACB of property by paying too much to a non-arm’s length
person. So basically the person you bought it from will get the profit, but you
won’t get a better ACB
o (b) where a taxpayer has disposed of anything
65

o
o
(i) to a person with whom the taxpayer was not dealing at arm’s length for no
proceeds or for proceeds less than the fair market value thereof at the time the
taxpayer so disposed of it, or
 (ii) to any person by way of gift inter vivos,
The taxpayer shall be deemed to have received proceeds of disposition therefor
equal to that fair market value; and
 **so 69(1)(b) is a trap in situations where consideration < FMV and not a gift.
(c) where a taxpayer acquires a property by way of gift, bequest or inheritance or
because of a disposition that does not result in a change in the beneficial ownership of
the property, the taxpayer is deemed to acquire the property at its fair market value.
 So gets ACB of FMV, regardless of the fact that they spent nothing, and
regardless of the cost to the donor/testator etc.
*if you’re gifting something, don’t just transfer for below FMV consideration  b/c
ultimately will get taxed twice – once on gain, and once when sell, on the difference
b/w what paid and what sold for.
Spousal Transfers
Transfer of Inter Vivos Property to Spouse/CLP
 S. 73(1) Inter vivos transfers by individuals – For the purposes of this Part, where at any time
any particular capital property of an individual (other than a trust) has been transferred in
circumstances to which subsection (1.01) applies and both the individual and the transferee are
resident in Canada at that time, unless the individual elects in the individuals return or income
under this Part for the taxation year in which the particular property was transferred that the
provisions of this subsection not apply, the particular property is deemed
o (a) to have been disposed of at that time by the individual for proceeds equal to,
 (i) where the particular property is depreciable property of a prescribed class,
that proportion of the undepreciated capital cost to the individual immediately
before that time of all property of that class that the fair market value
immediately before that time of the particular property is of the fair market
value immediately before that time of all of that property of that class, and
 (ii) in any other case, the adjusted cost base to the individual of the particular
property immediately before that time; and
o (b) to have been acquired at that time by the transferee for an amount equal to those
proceeds.
 *So ACB of transferor spouse goes to transferee spouse. No gain/loss to
transferor – rec’d proceeds equal to ACB
 *this is an automatic rollover – unless transferor spouse applies to have it not
apply, it will always apply.
 Note that this overrides s. 69(1)(b) (and thus also the general rule in
40(1)(a)). If transferor elects out of 73(1) then 69(1)(b) pops back up.
 S. 73(1.01) Qualifying transfers – Subject to subsection (1.02), property is transferred by an
individual in circumstances to which this subsection applies where it is transferred to
o (a) the individual’s spouse or common-law partner
o (b) a former spouse or common –law partner of the individual in settlement of rights
arising out of their marriage or common-law partnership;
 The Attribution rule: s. 74.2(1)(a)
o 74.2(1) Gain or loss deemed that of lender or transferor – Where an individual has
lent or transferred property [this is the part we care about] (in this section referred to
as lent or transferred property), either directly or indirectly [indicates this is an anti-
66
o
o
o
avoidance rule], by means of a trust or by any other means whatever, to or for the
benefit of a person (in this subsection referred to as the “recipient”) who is the
individual’s spouse or common-law partner or who has since become the individual’s
spouse or common-law partner [so catching anticipatory moves], the following rules
apply for the purposes of computing the income of the individual and the recipient for a
taxation year:  note that this will apply regardless of whether 73(1) has been elected
out of.
 (a) the amount, if any, by which
 (i) the total of the recipient’s taxable capital gains for the year from
dispositions of property (other than listed personal property) that is lent or
transferred property or property substituted therefor occurring in the period
(in this subsection referred to as the “attribution period”) throughout which
the individual is resident in Canada and the recipient is the individual’s
spouse or common-law partner
exceeds
 (ii) the total of the recipient’s allowable capital losses for the year from
dispositions occurring in the attribution period of listed personal property
that is lent or transferred property or property substituted therefore
shall be deemed to be a taxable capital gain of the individual for the year
from the disposition of property other than listed personal property;
 *so take all gains that transferee spouse rec’s, and if they have allowable capital
losses from other transferred properties net those out, and the gain is said to be
that of the transferor spouse
 can have a rollover at the time when you first transfer it, but if still spouses
(etc) at time recipient spouse disposes and realizes capital gain/loss, then
the CG/L is attributed to the original owner.
 BUT: if no longer together, or if transferor has died, no attribution back.
 Purpose: to allow couples who are separating to divide their marital assets
– either on a rollover basis so that when recipient spouse sells there’s no
attribution back, or to elect out of it and divide property (incl accrued tax
liabilities) b/w them in a fair way.
o If have joint assets can transfer share to each other to pass on tax
attributes on separation – but can’t do that if they’re staying in the
relationship.
Note: the rollover for property transferred b/w spouses/CLPs in settlement of property
division rights on the breakdown of the rel’ship allows them to divide their property on
a rollover basis and defer realization for tax purposes of the gain or loss on the property
until the recipient ex-partner disposes of it.
74.2(1)
 (b) if losses – get transferred back as well
 (c) gains from LPP
 (d) losses from LPP
 (e) these amounts are deemed not taxable capital gains?
The attribution rule applies while rel’ship is intact, but ceases to apply once it is over.
Spousal Rollover on Death, and Election Not to Have it Apply
 May make sense to preserve the value in an estate.
 Normal rule: 70(5) – when someone dies, deemed to have divested everything immediately
before death; realize all gains/losses in year prior to death. Person who inherits is deemed to
acquire at fair market value. So ACB is FMV at time of deceased’s death.
67
o




However, where on death property passes to spouse/CLP (or trust for benefit of
spouse/CLP)
70(6) Where transfer or distribution to spouse [or common-law partner] or spouse trust –
Where any property of a taxpayer who was resident in Canada immediately before the
taxpayer’s death that is a property to which subsection (5) would otherwise apply is, as a
consequence of the death, transferred or distributed to
o (a) the taxpayer’s spouse or common law partner who was resident in Canada
immediately before the taxpayer’s death, or
o (b) a trust, created by the taxpayer’s will, that was resident in Canada immediately after
the time the property vested indefeasibly in the trust and under which
 (i) the taxpayer’s spouse or common-law partner is entitled to receive all of the
income of the trust that arises before the spouse’s or common-law partner’s
death, and
 (ii) no person except the spouse or common-law partner may, before the
spouse’s or common-law partner’s death, receive or otherwise obtain the use of
any of the income or capital of the trust,
if it can be shown, within the period ending 36 months after the death of the taxpayer or, where
written application therefor has been made to the Minister by the taxpayer’s legal
representative within that period, within such longer period as the Minister considers
reasonable in the circumstances, that the property has become vested indefeasibly in the spouse
or common-law partner or trust, as the case may be, the following rules apply:
o (c) paragraphs 5(a) and (b) do not apply in respect of the property
 so deemed disposition/acquisition don’t apply.
o (d) subject to paragraph (d.1), the taxpayer shall be deemed to have, immediately
before the taxpayer’s death, disposed of the property and received proceeds of
disposition therefor equal to
 (ii) in any other case, its adjusted cost base to the taxpayer immediately before
the death, and the spouse or common-law partner or trust, as the case may be,
shall be deemed to have acquired the property at the time of the death at a cost
equal to those proceeds
Policy: basically saves the state from having to support a needy widow/er b/c they taxed the
inheritance from deceased spouse.
o Martha: as equality in income between couples increases, and things like RRSPs and
pensions applying to joint lives, this probably doesn’t have as strong a role now. But
it’s still relevant, and no one wants to repeal it because it’s used in estate planning.
Rollover in 70(6) is automatic unless opted out under 70(6.2).
o s. 70(6.2) Election – subsection (6) or (6.1) does not apply to any property of a
deceased taxpayer in respect of which the taxpayer’s legal representative elects, in the
taxpayer’s return of income under this Part (other than a return of income filed under
subsection (2) or 104(23), paragraph 128(2)(e) or subsection 150(4)) for the year in
which the taxpayer died, to have subsection (5) or (5.4), as the case may be, apply.
o You can elect out in each – recognize loss and gain and set off against each other.
Personal Use Property (PUP) and Listed Personal Property (LPP)
 Expenditures/losses on PUP aren’t deductible, but any gain would be a capital gain (i.e. from
disposition). Expenditures/losses on LPP are deductible and gains are included in income as a
subset of capital gain.
 S. 54: “Personal-use Property” of a taxpayer includes
68
o




(a) property owned by the taxpayer that is used primarily for the personal use or
enjoyment of the taxpayer or for the personal use or enjoyment of one or more
individuals each of whom is
 (i) the taxpayer
 (ii) a person related to the taxpayer
 *so it can be owned by a corporation.
 e.g. recreational property, etc.
o Test: is it used for personal use/enjoyment or is it used to earn income? (e.g. rented
out)
 Can be depreciable property
 Have to distinguish property used to earn income
 Investments etc  even if income from these is spent on personal enjoyment,
they are a source of income, which personal-use property is not. So these are
capital property.
S. 54: “Listed Personal Property” of a taxpayer means the taxpayer’s personal use property that
is all or any portion of or any interest in or right or, any
o (a) print, etching, drawing, painting, sculpture, or other similar work of art
o (b) jewellery
o (c) rare folio, rare manuscript or rare book
o (d) stamp, or
o (e) coin
o Because it says “means” and not “includes”, can’t expand these categories. (Though,
can have academic arguments about what fits into these categories – e.g. what is “art”?)
 applying ejusdem generis principle.
Loss on PUP other than LPP deemed nil: 40(2)(g)(iii)
o 40(2)(g) a taxpayer’s loss, if any, from disposition of a property, to the extent that it
is…
 (iii) a loss from the disposition of any personal-use property of the taxpayer
(other than listed personal property or a debt referred to in subsection 50(2))
is nil.
o *Note: although may use LPP for personal enjoyment, it is a stored value in many cases
 although it doesn’t generate income, it does increase or decrease with markets, and
ppl buy these items as an investment (in a sense)
o Can have losses and gains on LPP; can have gains on PUP
s. 46(1): The $1000 Rule:
o (i) ACB to taxpayer immediately before disposition of PUP is the greater of the actual
ACB or $1000.
o (ii) proceeds of disposition also greater of actual ACB or $1000
o So small PUP transactions are excluded  policy: simplicity – would be too difficult to
chase down low value PUP transactions
o Martha thinks it should be indexed, since the $1000 cap hasn’t been raised in at least 10
years
Loss on LPP:
o 3(b)(i)(B)
 Disconnects LPP from other income
 LPP losses can only be used to offset LPP gains.
o Note: dealers who buy and sell LPP as part of business don’t quarantine these
gains/losses, b/c the aren’t using them for personal enjoyment.
o 41(2)
69

(a) calculate total gains from LPP and total loss from LPP  gross amounts,
after applying $1000 rule.
 (b) deduct LPP losses from gains from other years  carry fwd 7, back 3. (so
from up to 7 years ago, and up to 3 years in the future)
 these numbers are probably just a holdover from when they raised the
general rollover to forward 20 and CG to forward indefinitely
 Can only deduct LPP loss from LPP gains
o 41(3) LPP loss is excess losses over gains for the year.
o 41(1) Taxable net gain from disposition of listed personal property is half of the amt
determined under ss (2) to be TP’s net gain for year from dispositions of property
 so 50%, just like CGs
 Anti-avoidance rules: 46(2) and (3)
o (2) Where a TP has disposed of only part of a PUP,
 (a) ACB of the part immediately before disposition is deemed to be the greater
of
 (i) ACB at time of that part otherwise determined, and
 (ii) the amount determined in (i) as a proportion out of $1000 of the ACB
of full property.
 (b) proceeds of disposition deemed to be greater of
 (i) proceeds of disposition otherwise determined, and
 (ii) the amount determined under subpara (a)(ii)
o (3) PUPs ordinarily disposed of in a set [Note: not limited to LPPs]
 *e.g. encyclopedias etc.
 *people might be tempted to sell individual items in the set separately to the
same buyer/group of non-arm’s length buyers (i.e. non-arm’s length from each
other, so you could keep everything ticking up to $1000 under the Rule and
multiply the effect of the $1000 rule
 (a) if set disposed of in more than one disposition to one person/one group of
non-arm’s length persons, and
 (b) if total market value of set is greater than $1000 immediately before
disposition of first piece of set
 Then indiv pieces of set are deemed to be part of a single personal-use property,
and each such disposition shall be deemed to be a disposition of a part of that
property
Principal Residence Exemption
 Policy
o If we didn’t have this, no one would ever sell.
 Most people who are selling are likely going to buy back in to a market – if have
to pay tax on their gain, will have to buy back in at a lower cost, or get a loan to
buy back in.
 No one will move to a different market, then.
 (Plus there’s the problem of negative equity in the housing market right now)
o However, the exemption doesn’t bring things to neutral  perceived way of saving for
retirement – when retire move into smaller place, have difference b/w house and condo,
e.g., to live off of.
 Though, now kids aren’t moving out and parents have to keep their big houses
more often.
 Plus the rate of increase in housing values is slowing
 Baby boomers are a problem
70
o
o
So this exception makes sense but also distorts.
Plus gov’t is controlling ppl by getting ppl to take on obligations like mortgages,
making us less likely to rise up against them?
o Our system is probably why we don’t have such a housing crisis here as there is in the
US
 But it’s still bad.
 Renter’s credit exists, but you have to be really poor.
 TP’s home is PUP  PRE exempts taxable CGs on home proportional to number of years
you’ve owned it, lived in it as principal residence.
o The exemption is calculated in the year you dispose of the property
o One PRE per ‘nuclear’/immediate family
 s. 54 defines principal residence
o A particular property that is a housing unit, leasehold interest in a housing unit or a
share in capital stock of a co-operative housing corp acquired for sole purpose of
acquiring right to inhabit a housing unit owned by the corp and that is owned, whether
jointly or otherwise, by the TP, if
 NB: Housing unit – needs to be permanent (can’t move on and off)
 But see Flanigan – convinced court that mobile home parked on a set piece
of land constituted a housing unit
 Generally rare that you would have a gain on a housing unit on leased land,
b/c lease is declining profits, and house might be deteriorating as well
 But sometimes homes built on reserves – Musqueum, e.g.
 (a) where TP is an individual other than personal trust, housing unit was
ordinarily inhabited in the year by the TP, TP’s spouse/CLP or former
spouse/CLP or by a child of TP
except that, subject to s. 54.1, a particular property shall be considered not to be a
TP’s principal residence for a tax year
o (c) unless property was designated by TP in prescribed form and manner to be TP’s
principal residence for the year and no other property has been designated for the
purposes of this definition for the year
 (i) where the year is before 1982, by the TP, or
 (ii) where the year is after 1981,
 (A) by TP
 (B) by TP’s year-long live-in spouse/CLP
 (C) TP’s minor unmarried child
 (D) Where TP was at any point in the year not married/CLP or 18 years or
older, by TP’s
o (I) Mother or father, or
o (II) brother or sister, where that sibling was not at any time in the
year married/CLP or 18 years or older.
o (e) deems residence to include all the land of the property (except if it’s a co-op) if
under ½ hectare. But TP must show any excess beyond ½ hectare to be necessary to
use and enjoyment.
TP must show excess beyond ½ hectare is necessary to use & enjoyment.
 Test: “the proper approach…is to objectively consider all of the relevant circumstances
adduced in evidence which were in existence immediately prior to the disposition of the
property and in light of that…” TP must establish on BoP that s/he couldn’t practically have
used/enjoyed the unit as residence but for the surrounding area of land they’re trying to
include. [Rode].
71
o Lifestyle is more or less irrelevant.
 Sometimes zoning restrictions require a lot to be a certain minimum size, in which case
permissible. To determine what is eligible for PRE, look at zoning immediately before
disposition (zoning at time of purchase is irrelevant. [The Queen v. Yates. See also Augart48]
 Test is mainly objective, though courts will consider some subjective factors relating to the
property. [But see Carlile v. the Queen, which ostensibly approved a subjective test, though
didn’t apply it]49
o Courts will consider access to house, e.g.  if you need a long road to get to the house
and no other access by land, court may count more than ½ hectare, but only the extra
that is necessary to get to the house.
o If land is subdividable into legal sizes and TP doesn’t subdivide, won’t be given
deduction for the excess. [Stuart]50
Spouses and CLPs
 Note: text refers to extended definition of spouse in 252(4)  but this was repealed.
o This was the section that extended the definition to cover same-sex partners. When CL
partner definition was extended to include same-sex partners in 2001, the meaning of
spouse went back to only meaning legally married
o Because PRE identifies years where ordinarily owned/inhabited house as portion of
gain to exempt, you must consider whether the person living with you was a spouse or
CLP in each year  can get complicated.
 Must have been ordinarily inhabited by one of these people “in the year”
o Not for the full year, and not for a continuous period of time during the year
 E.g. a ski chalet etc. that you use for several weekends a year, keeping personal
belongings there etc.  could count.
 But if you rented out the ski chalet in between your visits, would have a hard
time proving it was a PR.
 Qualifying clause – bottom of pg. 32
o Until 1981, every TP could have a PRE, and a couple who owned two properties could
have two PREs
 This was unfairly favourable to wealthy people, so after 1981 if TP designated a
house as PR, then TP’s spouse (legally married spouse) couldn’t designate
another one.
o 1982 until 1993:
 Married couples and their children < 18: 1 PRE/yr.
 CL partners could still claim second exemption.
o 1993-2001
48
Augart: 9 acre lot. At time of TP purchase, min was 3 acres, but at time of disposition min was 80 acres,
so they were non-conforming. Court applied Yates to say you look to the min lot size immediately before
disposition to determine what’s eligible for PRE. So even though under the min now, base on 80 acres and
≠ tax.
49
Carlile v. The Queen: 32 ¾ acre property; zoning bylaw req’d min 25 acres, so couldn’t subdivide. Court
approved a subjective test (does this TP need this property), but determined on “rather equivocal evidence”
that there was a legal necessity and TP couldn’t occupy property below 32.75 acres. Dissent: objective test
not met, and would tax on excess beyond 25 acres. Lifestyle preferences could not have any impact.
50
Stuart: Min lot size was much lower than TP property, which was subdividable but she didn’t apply for
right. Sold land to developer, subject to the developer getting approval to subdivide. This took some time,
after which point TP had passed away, but her estate claimed the PRE. Held: no PRE for excess – TP could
have gotten subdivision approval herself. Also TP argued she needed the extra to grow vegetables etc., but
this didn’t fly – not actually necessary.
72

o
o
o
Opposite sex CL partners were redefined as spouses and thus couldn’t claim
second exemption
 Children included in family as well (i.e. can’t designate to child instead)
*1998??
2001: opposite sex CLPs are no longer spouses, same-sex included, and now no one
can claim second exemption
2004 (now): only one property per year can be designated in a nuclear family (i.e. can’t
designate it to your child instead.)  all CLPs, couples, children.
Determining TP Gain from Disposition of PR:
 40(2)(b)  A – [A*B/C], where
o A is total gain
o B is one plus the number of tax years that end after acquisition date for which the
property was PR and for which TP was resident in Canada
o C is the number of tax years that end after acquisition date during which TP owned
property (jointly or otherwise)
Depreciable Property and Capital Cost Allowance
 NB: depreciable property is included in the definition of capital property under s. 54
 Recall s. 18(1)(b): no deduction for capital outlays.
 Recall s. 20(1)(a): can deduct such part of capital cost of property as is allowed by regulation
o Capital cost of property isn’t defined, but for our purposes it’s essentially the ACB –
amt laid out to purchase (including taxes) on acquisition
o So this deduction is a Capital Cost Allowance (CCA)  terminology for depreciation
or amortization of capital assets
 Recognizes that some capital assets depreciate in value through time and
use/wear and tear, and this depreciation is a real expense of earning the income.
 So the system accepts that replacing is a cost of business, and while the
depreciation isn’t an outlay expense, the value of assets diminishes.
 Generally capital expenditures ≠ deductible, but 20(1)(a) makes it possible to
consider diminishing value of assets over time and deduct this.
 Definition of depreciable property
o S. 13(21)  Capital assets (almost always tangible) that a business/property owner
acquires for the purpose of earning income from business. Have enduring benefit to
business, not consumed in income-earning process, and not part of inventory (i.e. not
purchased to be resold.)
 e.g. ships and boilers in Canada Steamship, new pilings and concrete floor in
Shabro, office equipment/furniture in most firms
 Doesn’t include land – ITA specifies that land isn’t depreciable property. Can
diminish in value, but it doesn’t count.
 Patents are depreciable property – pay to get/develop it, but expires after a time.
But they have an atypical depreciation structure, so we won’t deal with them.
o Difference between deductible repairs and maintenance (e.g. changing oil in a car) as
opposed to buying a new asset
o See Reg 1100(1)(a) – determine how much capital cost allowance you are allowed in
the year
 Prescribes the rate of deduction for each listed class.
 (i) Class 1 = 4%  buildings
 (ii) Class 2 = 6%
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o
o
 (iii) Class 3 = 5%
 (iv) Class 4 = 6%
 (v) Class 5 = 10%
 (vi) Class 6 = 10%
 (vii) Class 7 = 15%
 (viii) Class 8 = 20%  residual/default class
 (ix) Class 9 = 25%
 (x) Class 10 = 30%  most vehicles
1102(1) Property not included – The classes of property described in this Part and in
Schedule II are deemed not to include
 (a) property that would be deductible except for s. 66-66.4
 (b) inventory
 (c) property that wasn’t acquired for purpose of gaining/producing income
 Applies to income from business and from property
1102(2) Land – Classes of property described in Schedule II deemed not to include
land on which property described therein was constructed/is situated.
 Buildings are depreciable, land is non-depreciable  so how do you value land
with a building on it – generally buy for one price. Have to spend a lot of time
dividing out the value of the real property from the depreciable.
 Essentially have to hive off capital cost of building to calculate deduction
Ben’s Ltd.
 Facts
o TP operated bakery; acquired land and sold off three houses on it for total of $1200
o When land was purchased, the zoning didn’t permit bakery but TP got it rezoned and
built an extension of factory and offices.
o When purchased, allocated loss $3000 to land and $38,600 to structures, less $1200
selling price.
 Wanted to claim deduction for CCA for value of houses, taking pos’n that they
were depreciable properties of the bakery business and claiming 10% against
business profits.
 CRA refused. Entire purchase price should be allocated to land, none to houses.
 Issue: Was the depreciable property acquired to gain/produce income?
 Held: No CCA
o Houses were actually an impediment to income. Never any intention to use the houses
for business, so ≠ qualified depreciable property – and thus no CCA.
o Plus, the distortion of reality in their division was ridiculous.
Undepreciated Capital Cost (UCC)
 Max can claim under 20(1)(a)
 1101(1): assets of each separate TP must be kept separate. Can pool assets of a class into
separate class of UCC
 CCA is a percentage of what’s left, so it will never hit zero
 S. 13(21)
o UCC = (A + B) – (E + F)
o A: total capital cost of all depreciable property which has ever been in that class
 i.e. includes property which is no longer in TP possession – any ever acquired.
o B: total recapture ever recorded  amt included in TP income in previous tax years
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
S. 13(1) defines recapture: when you sell a property of a class and proceeds of
disposition exceed UCC (usually the last property of a class), excess is included
in computing TP income for the year
o E: total CCA previously claimed (i.e. amount claimed under 20(1)(a) in previous
years)
o F: total proceeds of disposition of properties of the class disposed of up to their
original capital cost.
 Proceeds of disposition are defined in 13(21), but we just make it the same as
the proceeds of disposition of capital property.
 Normally the FMV of depreciable property is less when sold than when it was acquired.
However, some properties increase in value (either is became hard to obtain or it has some
cachet, such as antique status)
o So it’s possible to have CG at the end of a UCC calculation.
o Recapture counts as an income inclusion, so if possible it might be preferable to keep it
as a capital gain.
Reg. 1100(2): The Half-Year Rule
 Limits CCA in the year an asset is acquired  TP can only add half the cost of new
property to the class in the first year it is owned (and can only claim half the dispositions)
o So only get ½ the CCA in the year property is acquired.
o This applies regardless of when in the year it was acquired.
 So take half of [acquisitions in the year minus dispositions in the year] to calculate the
CCA
Terminal Loss
 Where
o (a) at end of tax year (A+B) exceeds (E+F) [i.e. there is a positive UCC], and
o (b) TP no longer owns any property of that class [empty class], then
o (c) TP must deduct the amount of excess determined under (a), and
 Note: whole amount is deductible – it’s a deduction in computing income, not a
capital loss.
 So: you can have a capital gain on depreciable property (i.e. if sell for more than
originally bought it for), but can’t have capital loss.
o (d) Can’t claim CCA [because no property left in the class]
 Rationale: req’mt to deduct likely exists b/c otherwise TP could indefinitely carry forward.
o Though, not clear in what circumstances someone would try this, since if a class is
empty like that the business is likely over.
Recapture
 You have recapture when year-end UCC is a negative amount – recapture of that amount
 13(1) requires you to include in a year the amount of recapture recognized in a year
 where total amts determined for E to F (from UCC definition) in respect of a TP’s depreciable
property of a particular prescribed class exceeds the total of the amounts determined for A to D
in that definition in respect thereof, the excess shall be included in computing TP income for
the year
 So, if sold off most expensive item in a class, such that remaining items were worth less in total
than the one sold, then you’d probably refill the class, unless terminating your business.
 Note: recapture can’t exceed CCA previously deducted, since F is proceeds of disposition up to
original capital cost, and thus could never include more than original CC.
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Taxation and Aboriginal Peoples
 ITA sections:
o 81(1)(a)  no need to report it. Amounts exempted by other Acts don’t need to be included in
income.
o 149(1)(c)  municipal authorities
o 149(1)(d.5)  municipal corporations
 Indian Act s. 83(1)(a) authorizes band councils to make by-laws for “taxation for local purposes of land,
or interests in land, in the reserve, including rights to occupy, possess or use land in the reserve”.
 S. 87(1)(a) Exemption for interest of an Indian or band in reserve lands or surrendered lands
 Bases of exemption: s. 87 of Indian Act; Treaty Rights; pre-contact Aboriginal rights, sovereignty
o Mitchell v. Canada
Benoit
 Idea that certain FN groups are exempt by reason of treaties signed by their forebears
 Treaty 8 was in play here
o Didn’t mention taxation, but at time of negotiation commissioners reported back to Ottawa
saying they’d assured FN that the treaty wouldn’t lead to imposition of any tax (among other
things)  so oral assurances given that it didn’t open the way to imposition of any tax
 Issue: So do we have to interpret treaty 8 as exempting all descendents from all taxes for all time?
 Held: Not everyone – exempts status Indians.
o So note that corps must be registered as Indians under the Indian Act to claim exemption
s. 87(1)(b)
 87(1)(b): “the personal property of an Indian or a band situated on a reserve.”
o Issue: what counts as situated on a reserve?
o Anything before 1983 – cases said income isn’t personal property and doesn’t fall w/in the
exemption. But things opened up after a case (Nowejegick)
Williams
 Bastien Estate and Dube say that Williams is the correct test.
o Between Williams and BE & D, lots of waffling on proper application of the test
 Issue: taxability of unemployment insurance benefits rec’d by Williams
 (1) Reaffirmation of Indian Act exemption – policy reasons
o Discusses Mitchell v. Peguis [it’s a g, not a q as in the text], cited in text at pg. 210
 all agreed that property not subject to seizure, but on different grounds
 In Williams, Gonthier confirms LaForest’s policy grounds from Peguis
 Exemption is not a mechanism for addressing less favourable economic status of
aboriginal people. It’s meant to ensure that lands that were set aside for FN ppl and
the personal property situated on those reserves which have been theoretically
granted by the Crown are not repossessed by gov’t through taxation powers.
Wouldn’t be a protected grant of reserve property if always subject to tax and
potential repossession on nonpayment of debts.
 (2) Connecting Factors test  to determine whether property is situated on reserve
o Physical property is simple: considered to be situated where paramount location is.
o Rights to receive streams of income – trickier.
 Early cases essentially applied conflicts of law test – where is the debtor? Normally
person seeking to enforce payment of a debt owing must take action where the debtor
lives. So if debtor not on reserve, no dice.
 But…this was determined not to be the appropriate method.
o Highly fact-driven assessment – is the property connected enough to the reserve to count?
o Job 1: W was a member of Penticton band, worked for non-Indian employer, doing
manufacturing work. Employment was performed on the reserve, though company head office
wasn’t.
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
We look to where em’ment was performed for most taxation purposes. Source of TP
income was on the reserve, would be exempt.
o Job 2: Administrative work, paid by band, designed to generate em’ment opportunities for FN
ppl.  Also exempt
o Then TP claimed UI benefits (now EI) on basis he’d qualified for it through these jobs
 Cheques were generated at a computer centre in Vancouver, and paid out of federal
funds by Fed Crown, collected from em’ers and em’ees across the country
 Assessed tax on UI benefits  easier to find b/c there’s a federal trail attached to his
SIN. If he didn’t report the income from the jobs, hard for CRA to find.
o Court applied connecting factors test
 Location of em’ment that led to him being entitled to receive the benefits was the
important factor. If em’ment had been performed off the reserve, then the benefits
would likely not have been sufficiently connected.
 Federal Crown is everywhere, permeating all of Canada
 Fact that cheques were printed in Vancouver is irrelevant
 Fact that TP lived on reserve wasn’t determinative – not req’d
o So, not just the location of the debtor – look substantively at connection to the reserve, and if
there is a concrete substantive connection then benefits will be exempt.
 Following Williams, seems to have been a sense that a greater range of income would be exempt.
o Many cases followed, lots of claims, but things swung back the other way.
Recalma [1998, FCA]
 TP had ~400,000 accumulated capital. Put in BMO at Park Royal, so technically not off reserve land.
But then invested in mutual fund trust (which invested in int’l companies w/ no connection to
Cdn/reserve etc.), which meant the funds were not in any way deposited in the PR bank branch
 So, argued that capital and income was linked to the reserve through the TPs connection to reserve. Had
earned most of the money through fishing, and lots invested in on-reserve assets; contributed to onreserve endeavours etc.
 Argued their connection, and using $ to pursue trad way of life
 Result: not exempt  Martha thinks this is right, but that the reasons are off the rails.
 Draw dividing line b/w two types of income
o (1) Income ‘integral to the life of the reserve’
o (2) Income earned in commercial mainstream
o Could have one or the other – no middle ground.
 So after Recalma courts would say “was this earned in commercial mainstream?” and if yes, not exempt.
Did it contribute to FN way of life? May be exempt.
 But Williams didn’t talk about this at all, and in that case TP’s income wasn’t particularly part
of trad way of life.  didn’t care about the type of activity or connection to the reserve; just
looked at where income was sourced from.
 Issue: is all income earned off the reserve going to be in the commercial mainstream, now?
Akiwenzie 2004 DTC 6007 (FCA)
 We can see Herschfield J and TCC being less strict on the Connecting Factors Test
 Still a leading case, but at least some judges are starting to look at it differently
 Facts
 TP claimed deduction for 45% of his salary from Indian Affairs Canada
o His T4 showed all income as taxable, of course, so he needed to claim it out framed
as a deduction. CRA denies deduction.
 On appeal to TCC, showed that 20% of duties were carried out on reserve, which was held to
be exempt
 TCC also found that all his income could be determined to be situated on each and every
reserve in Canada that he worked with, so 100% deductible
 FCA: Crown abandoned argument w/ respect to the 20%, but said other 80% was taxable.
 Basically TP argued he worked his entire adult life for FN ppl – born on reserve, still resides
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

on a (different) reserve and commuting to office. Leader in FN community, and all job was
about creating connections to improve life on reserve.
o 20% physically on reserve for work (i.e. talking to band leaders etc. – not counting
the time he resides there)
o but rest of work should count as well.
FCA found not situated on a reserve – standard isn’t to situate on every reserve affected by his
work
o Just b/c work was beneficial to reserves doesn’t make the cut
FCA said they wouldn’t have exempted the 20%, but by this point CRA had dropped that part
of the fight already anyway.
Southwind [FCA]
o
o
o
Business income – TP lived on reserve, had logging K business (SP)
 One client, an off-reserve company, and did work off-reserve, but had office/home on reserve.
Held: CF Test
 Also considered whether commercial mainstream or beneficial to reserve community
 Test sought to isolate those activities that benefit the reserve community  Martha
thinks this is really suspect, because tax liability shouldn’t be based on whether
you’re benefiting the community – it doesn’t pay your taxes.
Do see businesses that get caught in exemption – e.g. gas stations physically situated on reserves etc.
Bastien Estate v. Canada [2011 SCC]
o
o
o
o
o
Strongest case – heard w/ Dube and decided the same day in successive judgements.
B status Indian, lived whole life, operated moccasin making business and put $ in term deposits in a
credit union located on reserve (head office and only place of business)
Issue: is interest paid on term deposits taxable?
 Up until this time, courts had held that such income was taxable. Because the interest was
generated by the Caisse Populaire (credit union) by its acts off-reserve (i.e. investing in
commercial markets)
 So because CP earned in commercial mainstream, the interest is mainstream as well.
 This is TJ, and upheld by FCA
SCC: doesn’t rest on whether property integral to life of reserve/benefits way of life. Look at
connecting factors test and determine whether income is situated on reserve.
So, CF test:
 CP was on reserve; agreement was made on reserve; income arose from K’ual obligation
entered into on reserve; deceased TP resided on reserve, and capital investment used to earn
the income was earned on the reserve
 Note: didn’t matter that it was from moccasin-mftring; could be anything situated on
reserve.
 All connecting factors connect to reserve, so its exempt. Don’t care where CP earns its
income – in this case it’s on the reserve, and the K is on the reserve, and we care where TP
earned his income  where debtor earns income with which it pays debt is irrelevant.
 So opens possibility of banks beginning to operate on reserves and take deposits on an exempt
basis.
 Hard to see any way this was income off-reserve, except for CP’s income
Dubé v. Canada [2011 SCC]
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 Status Indian, born and registered on reserve, but …didn’t live on reserve?? I’m not positive what the
difference in issue was.
 Put money in a CP, and argued interest income was exempt.
 SCC still held exempt.
 Overall, interest-earning activities aren’t closely connected to the reserve, but SCC found exempt
because the K was b/w a FN person and the CP, it took place on reserve and the interest was payable on
reserve; debtor was present, est’d carrying on business on reserve
o Have to go to reserve to make deposit, K must be made on reserve and interest income must be
payable on reserve.
 Dissent: Deschamps and Rothstein
o Based on TCC findings (which whole court accepted), impossible to find sufficient concrete
connection b/w interest income and reserve.
Indian Act s. 90.(1)
 For the purposes of section 87 and 89, personal property that is
o (a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the
use and benefit of Indians or bands, or
o (b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty,
shall be deemed always to be situated on a reserve.
Kakfwi [FCA]
o
o
o
o
o
o
90(1) is exemption for property granted by treaty
Appeal from TCC holding that TP’s salary as Chief of band was exempt.
Paid by band, from a fund that supported band councils and their activities
 These funds were provided under an agreement b/w band and Crown under support funding
program.
 TCC found that since fund from Crown, salaries paid out of it were exempt
FCA said band support funding agreement isn’t the kind intended to be included in 90(1)(b)  this is
for treaties, and gov’t funding programs aren’t in the same category.
 So not simply funding arrangements that may be concluded by agreement.
 Oh, and they cited Mitchell v. Peguis, on something.
But, his salary should have been exempt since he was on reserve… not sure how it became off-reserve.
Also an issue as to whether money was personal property
Income Tax Exemption For Bands & Corps Owned Thereby:
 149(1)(c) and (d.5).
Otineka Development Corporation Limited
 Court found band had exercised on-reserve reg powers in such a way that it was undeniably a governing
body, and thus exempt under 149(1)(c), even if it wouldn’t have been exempt under 87(1).
 Also, band had inc’d a corp, of which band held all shares. Not clear exactly how the band can hold the
shares as an entity, but it did.
 CRA sought to tax corp on basis that it wasn’t a band or an Indian, but it was counted as a
municipal corp under 149(d.5)
o Note amendment to d.5
 So, doesn’t allow bands to take cash and invest it off-reserve and then claim
exemption – has to be from activities on the reserve. But in Otineka it
would have qualified.
 Can be unpopular b/c implies that FN gov’ts are equiv of municipalities.
Direct Taxation by First Nations
 This is becoming a potential source  some bands are asking for more taxation powers.
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