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Written by Kim Ming Ho for 2007/2008
Edited by Mike Drouillard for Fall 2009 (added a table of contents, substantially updated and clarified content)
Introduction ..................................................................................................................... 13
What is a tax.................................................................................................................. 13
Attributes of Taxes ........................................................................................................ 13
General Terminology .................................................................................................... 14
Policy Considerations – equity, neutrality, simplicity, expenditures............................ 15
Canada’s Tax System ..................................................................................................... 15
Constitutional Basis of Taxation................................................................................... 15
Federal – s.91(3) – Plenary taxation power – Complete and full powers to tax (non-provincial matters) ................................. 15
Provincial – s.92(2) – Exclusive direct taxation power within province for provincial purposes (provinces cannot impose
indirect taxes except pursuant to s. 92(4)) ................................................................................................................................ 15
s.92(9) – Licenses, shops, auctioneer, saloons, taverns, other licenses (interpreted broadly) (provinces may raise revenues
with licenses) ............................................................................................................................................................................. 16
s.92(4) – Provinces may use any mode or system of taxation w.r.t. non-renewable resources and energy production ........... 16
s.121 – Common market – No taxes (no provincial customs) on transport between provinces ................................................ 16
s.125 – Provinces don’t tax federal objects, federal does not tax provincial objects – Does not apply to fees ......................... 16
s.53 – Any taxation bill must originate from the House of Commons (no taxation without representation) ............................ 16
s.90 – Any provision of the Act respecting the Parliament of Canada apply to provinces as well ............................................. 16
s.53 – Becomes ‘must originate from the Legislative Assembly’................................................................................................ 16
Tax Collection Agreements – How feds collect on behalf of provinces ...................... 16
Tax Adjudication Structures ......................................................................................... 16
Placer Dome (SCC 2006) – Interpretative Approach to ITA which applies ................................................................................. 17
s.152(7) and (8) of the ITA ......................................................................................................................................................... 17
(7) – Minister can assess notwithstanding what you say on your tax return (or lack of return) ............................................... 17
Siftar – Up to the TP to show that the allocation by the Minister is wrong ............................................................................... 17
(8) – Assessment is deemed valid and binding .......................................................................................................................... 17
Source Concept of Income: Definition of Income ....................................................... 17
s.2(2) ITA – Taxable income is TP’s income plus additions and minus deductions permitted .................................................... 17
s.3 ITA – Calculate your general income – Other deductions and stuff come later ................................................................... 18
s.4 ITA – Calculation of income from the different types of sources – Formulas ....................................................................... 18
How income is calculated ............................................................................................. 18
s.3(a) ITA – Start with aggregate income from positive “sources” ............................................................................................. 18
s.3(b) ITA – Add capital gains to amount ................................................................................................................................... 18
s.3(c) ITA – Uncommon deductions from the amount .............................................................................................................. 18
s.3(d) ITA – Deduct losses from sources .................................................................................................................................... 18
s.56 – There is another list of sources of income Consider these items to be income (ie. Pension, Benefits, Scholarships,
Bursaries) ................................................................................................................................................................................... 18
Retiring allowances – s.56(1)(a)(2) ............................................................................................................................................ 18
s.248(1) – Amount received on or after retirement from an office or employment OR received in respect to a loss of an
office or employment ............................................................................................................................................................... 18
Bellingham v. The Queen (FCA 1996) – Background of the source concept ............................................................................... 18
However, see Cransbrook – payment was made a minority shareholder to induce him not to sue. Court recognized that a
payment given in exchange for not suing may be taxable ......................................................................................................... 19
Curran v. MNR (SCC 1959) – Income from an unenumerated source – s. 3(a) is not an exhaustive list..................................... 19
Canada v. Fries (SCC 1990) (Strike pay does not constitute income under s. 3(a) – if we don’t know if it’s income, residual
benefit of doubt to TP................................................................................................................................................................ 20
Surrogatum Principle .................................................................................................... 20
London and Thames Surrogatum principle – Amounts received by a taxpayer in the place of income from a source may be
included in income as if such amounts were income from that source – .................................................................................. 20
Schwartz v. The Queen (SCC 1996) – Main statement on unenumerated sources, surrogatum in Canada, also specific vs.
general provisions...................................................................................................................................................................... 20
ITA Provisions Relating to Schwartz ........................................................................................................................................... 20
s.6(3) – Payment passed from employer to employee (while employed or payment before and after) It shall be deemed
income: (Does not apply to Schwartz – No employment relationship) ...................................................................................... 20
s. 6(1)(a)(2) Retiring allowances are taxable .............................................................................................................................. 21
s.6(3)(c) – Signing bonus – Curran: Does not apply because payment was not from the employer, it was from a third party.
Doesn’t apply in Schwartz as he was never employed in the first place .................................................................................... 21
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s.6(3)(d) – Back pay, advance on your salary ............................................................................................................................. 21
s.6(3)(e) – Confidentiality agreement – Paid to keep mouth shut – Non-competition agreement ............................................ 21
Savage (SCC) (facts not caught by a specific provision shouldn’t then fall under a general provision) ...................................... 21
Tsiaprailis v. The Queen (SCC 2005) – Reaffirms that the surrogatum principle is alive and well in Canada, includes a test to
find if surrogatum applies .......................................................................................................................................................... 21
The Queen v. Antonija Siftar (FCA 2003) (burden on TP to show that no part of lump sum is replacement for something
taxable) ...................................................................................................................................................................................... 22
Nexus ................................................................................................................................ 22
Buckman v. MNR (Tax Court 1991) – Nexus (embezzled funds one did not intend to
repay) ............................................................................................................................ 22
Nigro v. The Queen (TCC 2003) (onus is on TP to show the CRA assessed TP
incorrectly) .................................................................................................................... 22
Residence as Primary Basis of Canadian Tax Liability .............................................. 23
s.2(1) ITA – If resident at any time of year, worldwide income is taxable for the entire year ................................................... 23
s.2(3) ITA – If not resident during a year, pay tax on Canadian sources (employment, business, property) ............................ 23
s.250(3) – General provision on residence: A person who is resident includes, not limited to: A person who is ordinarily a
resident (implies does not have to be an actual present).......................................................................................................... 23
Thomson v. MNR (SCC 1946) – Test of where person is ordinarily resident, definition
of sojourn ...................................................................................................................... 23
Dennis M Lee v. MNR (TCC 1990) – Immigration and citizenship are not
determinative, list of various factors determining residency ........................................ 23
Deemed Residence ........................................................................................................ 24
s.250(1)(a-c) May be considered resident by virtue of the deeming provisions ........................................................................ 24
a) Deems to be resident for entire taxation year if sojourned in Canada for 183 days or more ................................................ 24
b) Any person who is a soldier abroad – Deemed resident even though physically gone ......................................................... 24
c) Ambassadors, servants of Canada abroad – If resident immediately prior to appointment ................................................. 24
R&L Food Distributors Limited v. MNR (TRB 1977) – Over the word “sojourn” If
you do not stay overnight, there is no sojourn .............................................................. 24
Interpretation Bulletin IT-221R3 – Determination of Residence Status ...................... 24
s.250(1) – If deemed resident – Then entire worldwide income is liable for tax for entire year ............................................... 25
Part Year Residence ....................................................................................................... 25
s.114 – Calculating taxable income of an ordinary resident in Canada during only part of the tax year – divides year in two .. 25
s.249(1) – Definition of the taxation year .................................................................................................................................. 26
Schujahn v. MNR (Exchequer 1962) (cannot be sojourning and ordinarily resident –
categories do not overlap) ............................................................................................. 26
The Queen v. KF Reeder (Federal Court-Trial Division 1975) (long time Canadian
resident leaving temporarily for a job).......................................................................... 26
Departure Tax ............................................................................................................... 26
s.128.1 – Deemed disposition on immigration and emigration ................................................................................................. 26
Avoidance of Dual Tax Residence ................................................................................. 27
s.250(5) – Person is deemed not to be a resident if would be resident in the other country .................................................... 27
Article 4 – US-Canada Tax Convention – if res of both countries – the tie breaker rules ........................................................... 27
Salt v. The Queen (TCC 2007) (no longer a permanent home when rented to an arms
length tenant) ................................................................................................................ 27
Article 4 – Canada UK Convention – Slightly different from USA ............................................................................................... 27
Provincial Residence ....................................................................................................... 27
Income Tax Regulation 2607 – Where an individual was resident in more than one
province on the last day of the taxation year, he is deemed to have resided only in that
province which may be reasonably regarded as his principal place of residence ......... 27
BC ITA s. 2(1)(a) – Income tax must be paid as required by this Act for each tax year by every individual who was resident in
BC on the last day of the tax year .............................................................................................................................................. 28
Mandrusiak v. The Queen (2007 BCSC 1418) (application of reg 2607) .................... 28
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Residence of Corporations ............................................................................................. 28
ITA – s.250(4) – Deeming provisions for corporation residence (common law can modify this) ............................................... 28
ITA – s.250(5) – Respect for tax treaty – Deemed non-resident if tiebreaker falls for other country ........................................ 28
De Beers Consolidated Mines Limited v. Howe (1906) – Common law residence of a
corporation .................................................................................................................... 28
USA Treaty: If incorporated in the USA – Trumps central management and control rules in Canada ....................................... 29
UK Treaty: Go straight to the competent authorities, determine by mutual agreement -- Have regard to incorporation,
management ............................................................................................................................................................................. 29
Source as Basis of Canadian Tax Liability (discusses withholding provisions too).. 29
s.2(3) -- Non-residents are subject to Canadian tax on income from a Canadian source – ........................................................ 29
s.212(1) of the ITA When resident of Canada makes payment to a non-resident – Payment subject to 25% withholding tax.
Payment types: .......................................................................................................................................................................... 29
s.212(2) of ITA – Dividends paid by Canadian corporations subject to withholding tax to non-residents ................................. 29
s. 215(1) imposes a duty on the Canadian resident the obligation to withhold and remit the tax on behalf of the non-resident
................................................................................................................................................................................................... 30
s.215(6) : Makes Canadian resident jointly and severally liable for the tax if they do not remit it (enforcement mechanism) . 30
Income from Office or Employment ............................................................................. 30
Introduction ................................................................................................................... 30
ITA s.5(1) – Salary, wages, other remuneration including gratuities – Received in the year...................................................... 30
ITA s.5(2) – Loss from office or employment – Rare, really rare (hard to “lose money” in employment. Perhaps a
commissioned salesperson may experience this) ...................................................................................................................... 30
ITA s.6(1) – Amounts to be included in the income from office or employment ....................................................................... 30
ITA s.8 – Deductions – Very, very limited (in fact, s. 8 is an exhaustive list) .............................................................................. 30
s.8(2) ITA – Deductions restricted to what is specifically set out in s.8 (s. 8 is an exhaustive list) ............................................. 31
s.248(1) ITA -- Definitions (office, officer, employment, employed, employee, employer, individual, person, tax payer): ....... 31
s.153(1)(a) – Withholding of tax by employer – From your pay check, salary ........................................................................... 31
Characterizing Working Relationship – employee or independent contractor? ...... 31
Control test – R. v. Walker – Fallen into disuse (from employer perspective) ............ 31
Wiebe Door (FCA 1986) – The test for determining employee or independent
contractor ...................................................................................................................... 32
Sagaz Industries Canada (SCC 2001) – Test in WB was affirmed by SCC ................. 32
Corporations and Personal Services Business .............................................................. 32
s. 125(7) definitions -- Active business carried on by a corporation – any business carried on by the corp other than
investment businesses or personal services businesses ............................................................................................................ 32
s. 125(7) definitions -- Specified investment business – A business carried on by the corp the principal purpose being to derive
income from property (some exceptions for labour sponsored venture capital corps, etc) ...................................................... 32
s. 125(7) definitions -- Canadian controlled private corporation – for the purposes of the course, it is a corporation resident in
Canada, shares not listed on a stock exchange, not controlled by non-residents or by a corporation whose stock is listed on a
stock exchange or a combination of these ................................................................................................................................ 33
Personal services business -- s.125(7) – Personal services business is carried by a corporation providing services where ....... 33
Consequences of being found a personal services business: ........................................ 33
Related and non-arm’s length persons ......................................................................... 33
s. 251(1)(a) – related persons are deemed not to deal at arm’s length even if their interests conflict ..................................... 33
s. 251(1)(c) – 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 ................................................................................................................................................................. 34
s. 251(2) defines related persons – individuals connected by blood, marriage, common-law partnership, and adoption. For
our purposes blood relationship means one person is the child or descendant of the other (e.g., child is related to parent and
grandparent, etc) ....................................................................................................................................................................... 34
s. 251(1)(c)) -- However, aunt/uncle to nephew/niece and cousins are not included (they still can be non-arm’s length though,
see ............................................................................................................................................................................................. 34
s. 251(6)(b) and (b.1) spouses and common law partners are related to each other and to persons who are blood relations of
their spouse or CLP. This means “in-laws” are related.............................................................................................................. 34
Corporations and arm’s length/non-arm’s length ......................................................... 34
s. 251(2)(b)(i) -- Corporations are related to persons who hold voting control, meaning enough shares to elect a board –
normally over 50% ..................................................................................................................................................................... 34
s. 251(2)(b)(ii) – a corporation is related to a person who is a member of a related group that controls the corporation. A
related group means a group of persons, each member of which is related to each other. ..................................................... 34
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s. 251(2)(b)(iii) – a corporation is related to any person related to either the person who controls it, or any member of the
relate group that controls it. ...................................................................................................................................................... 34
s. 251(2)(c)(i) – Corporations can be related to each other if they are controlled by the same person or group of persons
(which could mean an individual and/or corporation)............................................................................................................... 35
Benefits ............................................................................................................................. 35
s.5(1) – Taxable income includes Salary, wages, (courts use ordinary meaning, includes compensation for services rendered
by employees in the course of their duties) gratuities, (voluntary payments made in consideration of services rendered in the
course of the TP’s office or employment) .................................................................................................................................. 35
s.6(1)(a) – Tries to catch non-cash benefits from employment, stating that their value is taxable -- Board, lodging, other
benefits of any kind whatever enjoyed in respect of or by virtue of employment/office .......................................................... 35
s.6(1)(a)(i) – Contributions from the TP’s employer to or under a registered plan for sickness, accident insurance, etc are not
taxable when the contributions are made ................................................................................................................................. 35
The gov’t is not going to tax you until you actually receive the benefit (s.6(1)(f)) ..................................................................... 35
s.6(1)(c) – Director’s fees – Are included as income .................................................................................................................. 35
s.6(1)(f) – Amounts payable to the TP on a periodic basis in respect of the loss of income from office or employment –
Disability insurance, etc, payments made by the employer in that regard – this is TAXABLE .................................................... 35
Savage (SCC 1983) (What constitutes a benefit) ......................................................... 35
Lowe v. The Queen (FCA 1996) (court has power to apportion value of trip into
business and pleasure)................................................................................................... 36
The Queen v. Huffman (FCA 1990) (Was there a material acquisition conferring an
economic benefit on TP?) ............................................................................................. 36
Bure v. The Queen (paying for a hockey player employee’s agent is a benefit because
agent fees are not deductible for employees) ................................................................ 37
Ransom v. MNR Legislatively overruled – good policy case about when loss incurred
when moving is tax deductible ..................................................................................... 37
The Queen v. Phillips (narrowing of Ransom – is it a material acquisition conferring
an economic benefit) ..................................................................................................... 37
Legislative limitation of Ransom case (read this first!) ................................................ 38
s. 6(23) -- eliminates all exemptions in case law for subsidies provided by employer to assist employee to acquire a house –
all such assistance is considered a taxable benefit .................................................................................................................... 38
6(19)-(20) – Preserves Ransom for the first $15,000. Employees who must relocate and suffer a loss from selling a home at a
reduced price are subject to tax on one half of the compensation received for any amounts over $15,000. The loss must be
actual ......................................................................................................................................................................................... 38
6(19) – A housing loss payment is deemed a benefit of employment. To qualify for the above exemptions, it must be an
“eligible relocation” ................................................................................................................................................................... 38
s. 248(1) -- “eligible relocation” (for our purposes) is defined as a relocation that enables the TP to be employed at a location
in Canada or to be a full-time student in Canada, with a distance greater than 40 kilometers from the previous Canadian
location to the new Canadian location ...................................................................................................................................... 38
If it is a non-arm’s length person doing the eligible relocation, a partial exemption may still be available in 6(20) – this covers
the situation when one spouse had to move, but it was the other spouse who actually owned the home. The payment
doesn’t have to be made by the employer of the person who receives it. Only one residence may be designated for this
exemption.................................................................................................................................................................................. 38
6(21) “housing loss” for the course’s purposes is defined as when the adjusted cost base exceeds the selling price (proceeds
of disposition) of the home ....................................................................................................................................................... 38
Valuation of a Taxable Benefit ...................................................................................... 38
UK Law – Wilkins v. Rogerson – What the employee can immediately convert it to
cash for = taxable value. The amount paid by the employer is irrelevant ................... 39
Canadian law – Fair market value of the benefit, meaning the amount someone not
obligated to buy would pay to a person not obligated to sell: Steen v. The Queen ..... 39
Giffen et al v. The Queen (TCC 1995) (proper measure of value is price one would
have to pay to receive the same thing with all the pros/cons) ...................................... 39
Dunlap v. The Queen (a benefit is a benefit even when unilaterally conferred, it’s a
benefit if not extraneous or collateral to the employment) ........................................... 39
Allowances, Reimbursements ........................................................................................ 39
s.6(1)(b) – Requires the inclusion of allowances in taxable income – Personal or living expenses or any other purposes ........ 39
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What is an allowance? .................................................................................................. 40
The Queen v. Macdonald -- Leading case on what an allowance is under s. 6(1)(b): .. 40
What’s the difference between an allowance and reimbursement? .............................. 40
Remember that employers must abide by s. 8(10) and provide a certificate showing agreement that the employee paid the
expense as part of his employment. .......................................................................................................................................... 41
Motor vehicle expenses for non-sale employees possible per s. 6(b)(v) – Must be in connection with duties of employment 41
s. 6(b)(vii) reasonable allowances for travel expenses other than for selling of property or negotiating contracts when
travelling away from (a) the municipality where the employer’s establishment is located and where the employee normally
works and (b) the metropolitan area, if there is one, where that establishment is located ...................................................... 41
s. 6(b)(vii.1) reasonable allowances for the use of a motor vehicle in connection with the performance of the duties of the
office or employment ................................................................................................................................................................ 41
s. 6(1)(b) – assumes that employee provides own vehicle. But this section says it applies to “any motor vehicle” ................. 41
A motor vehicle allowance will not be accepted as exemption (will be deemed not reasonable) unless: ................................. 41
18(1) – Limiting provision – No deductions in business ............................................................................................................. 42
18(1)(r) – For motor vehicle deductions against business or property income, deductions are prohibited when they’re beyond
the specified allowance given at a predetermined rate............................................................................................................. 42
Regulation 7306 – For purposes of 18(1)(r) ............................................................................................................................... 42
s.6(1)(b) – Assumption is that the employee supplies their own vehicles – But it says “any motor vehicle” ............................ 42
s.6(6) – Special and remote worksites ....................................................................................................................................... 42
During the time at the special work site, TP must have maintained another place of residence that was available (was not
renting it out) and was of such distance that could not reasonably return there at the end of the day (s. 6(6)(a)(i)(A)(B)) ...... 42
The Board and lodging at the special work site must be a remote place – So remote from community that not expected to
establish a domestic establishment there s. 6(6)(a)(ii) .............................................................................................................. 42
s. 248(1) defines domestic establishment as a dwelling-house, apartment, or other similar place of residence in which place a
person as a general rule sleeps and eats ................................................................................................................................... 42
If away a minimum of 36 hours s. 6(6)(a) payments by the employer to the employee for transportation between the
principal place of residence and the special work site are also not included if the employee is also receiving board and lodging
(s. 6(6)(b(i) and (ii)) .................................................................................................................................................................... 42
IT-91R4 says an established community has essential services – grocery store, clothing
store, etc. To be remote, one must be 80 km away from a community or it must take
an inordinate amount of time to reach that community (e.g., if ferry travel is required
and the ferry comes only infrequently) ......................................................................... 42
Deductions ....................................................................................................................... 43
Note: s.67 – Not restricted to employment income – General for the whole act Reasonableness requirement – deductions
must be reasonable in the circumstances -- Would probably require to show receipt ............................................................. 43
No allowance or reimbursement for costs incurred while performing duties of
employment Huffman – Plain clothes officer – Clothes were considered by the Court
to be a uniform – Those only worn on the job, buying on behalf of the employer –
Deductible expense ....................................................................................................... 43
s.8 – Authorizes a number of deductions that may be claimed against employment/office income ........................................ 43
s.8(2) – General limitation – No deductions unless found in this section (the result – seriously limited as to what you can
deduct against your employment/office income)...................................................................................................................... 43
s.8(1) – Lists various deductions permitted – generally, if the expense is for personal use, cannot deduct it – Must be wholly
applicable (relates) to the source of income ............................................................................................................................. 43
s.8(1)(b) – Legal expenses to collect salary or wages (or establish the right to collect) are deductible – Usually legal expenses
are deductible ............................................................................................................................................................................ 43
Tsiapraillis – Collection from insurance company – Not a salary or wage, but would be
included as income from employment .......................................................................... 43
CRA Interp bulletin IT-99R5 says you must be successful in establishing an amount
was owed but you don’t have to actually collect .......................................................... 44
s.8(1)(e) – Meals and lodging for railway workers ..................................................................................................................... 44
s.8(1)(f) – Traveling and motor vehicle expenses – Sales expenses of commission employee .................................................. 44
s.8(10) applies – Provision (Huffman) – Employer provides proof that employee pays expenses and that they are incurred as
part of employment – Must be filed by employee .................................................................................................................... 44
s.8(1)(g) – Transport (person or goods) employee expenses – Crawford .................................................................................. 44
Crawford/Renko – About ferry employees wanting to deduct amounts paid for meals at
work – one must get meals AND lodging to get a deduction ....................................... 44
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s.8(1)(h) – Travel expenses ........................................................................................................................................................ 44
s.8(1)(h.1) – Motor vehicle expenses ......................................................................................................................................... 45
Martyn v. MNR – Claimed deduction for travel from home to airport – Pilot –
employment doesn’t start moment you get in car ......................................................... 45
Hogg – Provincial court judge in Ontario – Chambers in a particular courthouse –
driving to work is expense incurred in order to allow you to perform your duties and
not an expense incurred in the course of your duties .................................................... 45
s.8(1)(i) – Other expenses paid by the TP that may be deductible such as ................................................................................ 45
s.8(13) – Home office................................................................................................................................................................. 46
s.67.1 – Expenses for food or enjoyment of entertainment shall be deemed 50% deductible of amount actually paid (a) or
amounts reasonable in the circumstances (b) ........................................................................................................................... 46
Exceptions to s.67.1: .................................................................................................................................................................. 46
s. 67.1(2)(a) – it doesn’t apply when amounts paid were for an expectation of compensation, e.g., a theater can deduct full
amount of cost of renting movie – the theater is in the business of entertainment ................................................................. 46
s. 67.1(2)(f) – it doesn’t apply when the amount was paid in respect of 6 or fewer special events for employees – can deduct
entire amount in that case ........................................................................................................................................................ 46
Income from Business ..................................................................................................... 47
s.3(a) – Business and property – These are enumerated sources of income ............................................................................. 47
What’s the difference between property and business income? ................................... 47
s.9(1) – Income from business or property is a calculation of profit of the TP .......................................................................... 47
Act specifically requires certain items to be included as income, for example: ........... 47
Profit for tax purposes – Question of law, not accounting principles. Examples of
difference between GAAP and what is accounting for tax purposes............................ 48
s.20(1)(c)(i) – Can deduct interest on borrowed money used to generate income from business or property ......................... 48
What is a Business? ...................................................................................................... 48
s.248(1) – Profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in nature
of the trade, but does not include an employment/office ......................................................................................................... 48
Smith v. Anderson (1880) – Often used as a starting point for considering what
constitutes a business. Business is anything that occupies the time, attention and
labour of a man for the purpose of profit ...................................................................... 49
Gambling Cases – Windfalls versus Businesses ........................................................... 49
Graham v. Green (1925 UK) – Windfalls are not taxable – Claims gambling is a
windfall ......................................................................................................................... 49
Walker v. MNR (1951) – Focus on the organization of the TP’s activity to determine if
there is a business.......................................................................................................... 49
MNR v. Morden (1961) (constant and continuous betting does not amount to business)
....................................................................................................................................... 49
Luprypa v. The Queen (TCC 1997) (games that require skill and risk management are
taxable).......................................................................................................................... 49
LeBlanc v .The Queen (TCC 2007) (no organized system of betting = untaxable) ..... 50
Moldowan – In order to have a source of income, the TP must have a profit or a
reasonable expectation .................................................................................................. 50
Stewart v. The Queen (2002 SCC) – Leading case both for establishing when business
losses are deductible and application of 20(1)(c)(i) [interest deductions] .................... 51
Two stage approach to s.9 (profit is the calculation of income for business source): .. 51
Distinguishing Business income From Property income and the realization of capital
gains.................................................................................................................................. 52
An adventure or concern in the nature of trade is specifically included in the statutory definition of business. So s. 9(1) ...... 52
Lois Hollinger v. MNR (1972) – TP received share of partnership income – how to
distinguish business income from property income...................................................... 52
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Walsh and Micay v. MNR (1965) – Level of services generally determine whether
rentals are from a property source or a business source ............................................... 53
Etoile Immobiliere SA v. MNR – Rental and other types of income earned by a
corporation pursuant to the objects of its incorporation are generally presumed to be
income from a business (the corporation is in the business of holding property for its
revenue)......................................................................................................................... 53
Adventure in the Nature of Trade ................................................................................. 53
MNR v. Taylor – Most influential case on the difference between capital gains and an
ANT .............................................................................................................................. 53
Comment: Bulletin IT-346R states that TP’s who trade in commodities/futures as pat
of their business or where the TP has special (insider) information about the
commodity will have their activities treated as business income. ................................ 54
Regal Heights Ltd. v. MNR (SCC 1960) – Leading case, but sometimes distinguished
– primary objective of earning rental income but second objective of selling land for
profit = ANT if sell land for profit ................................................................................ 54
Riznak – In this case, a developer doing land assembly decided to cancel the project
and sell the assembly upon receipt of an unsolicited offer – Regal Heights doesn’t
apply when offer is unsolicited ..................................................................................... 55
Hughes v. The Queen – the TP bought the property as a rental. Court accepted that
only intention at time of acquisition was as a rental. When that became frustrated,
there was a change of intention to one of selling for profit. Apportionment ordered.. 55
Irrigation Industries Limited v. MNR – (SCC 1962) - Buying and selling shares –
What is treated as investment and what is an ANT ...................................................... 55
Arcorp Investments – when TP is behaving identical to a trader = ANT ..................... 56
Interpretation Bulletin IT-459 – Has a little more credibility because it was given SCC
approval as a summary of law – That it accords with the law, however, proceed with
caution as the SCC didn’t adopt everything ................................................................. 56
Income from Property .................................................................................................... 58
s.248(1) – Definition of property ............................................................................................................................................... 58
s.12 – Brings into income certain items that are typically derived from a property source ....................................................... 58
MNR v. Minden (1963) – Money is property – Now in the ITA specifically .............. 58
Fasken Estate v. MNR (1948) – Property includes contingent right to receive income
from a trust .................................................................................................................... 58
No. 481 v. MNR (1957) – No ownership over freedom to carry on business .............. 58
Non-Residents and Property Income – Withholding Tax ............................................. 58
s.212 – 25% tax on non-residents .............................................................................................................................................. 58
s.215 – Withholding responsibilities on the payer, the Canadian resident ................................................................................ 58
s.9(3) – Any capital gain from the disposition of the property is not income from a property .................................................. 59
ITA – s.12(1)(c) – Interest amounts are included in income ....................................................................................................... 59
What is interest? – No definition of interest in the ITA Two leading cases – Farm
Security Act and Barfried ............................................................................................. 59
Timing of the Interest Inclusion .................................................................................... 59
s.12(1)(c) – Seems to allow calculation of interest when it is received or receivable ................................................................ 59
s.12(3) & (4) – Ensures interest is included on a regular basis – On an accrual basis................................................................. 59
s.12(3) – Applies to Business associations (corporations, partnerships, etc) ............................................................................. 59
s.12(4) – Anniversary day accrual rule for individuals holding investment K’s........................................................................... 60
Blended Payment or Capitalized Interest ...................................................................... 60
s.16(1) – Requires that the interest component be segregated and included in the TP’s income ............................................. 60
Page 8 of 106
s.16(1)(a) – The part of the amount of the blended payment that can reasonably be regarded as interest shall, regardless of
the terms of the contract, be deemed to be interest on a debt obligation held by the person to whom the amount is paid or
payable ...................................................................................................................................................................................... 60
Groulx v. MNR (SCC 1967) – Blended payments; hiding interest payments .............. 61
s. 20(14) – When the transferee of the debt instrument becomes entitled to the interest accrued and entitled to interest
accrued for a past period when he did not own the obligation, the accrued interest is included as income to the transferor to
the extend that it is not otherwise included. The same amount may be deducted from the transferee’s income .................. 61
Rents and Royalties....................................................................................................... 61
S. 12(1)(g) – Included in income are any amounts received (not receivable) by the TP in the year where payment was
dependent on the use of or production from property whether or not that amount was an installment of the sale price ...... 62
Spooner v. MNR (amount received by TP depending on the use of or production from
property, even if an instalment payment on sale price of property is income) ............. 62
Examples of what amounts have been included in s.12(1)(g): ..................................... 62
Wain Town Gas & Oil Company Ltd (1952) (accepting sale of franchise in
installments of gross receipts is income) ...................................................................... 62
s. 212(1)(d) deems certain types of payments to be rents or royalties but also specifically excludes some payments such as: 63
Copyright payments in respect of production or reproduction of any literary, dramatic, musical or artistic work, INCLUDING
computer software – sale of goods exempt from withholding tax – s.212(1)(d) ....................................................................... 63
Application of Tax Treaties .......................................................................................... 63
s.212(1)(d) – Seems to say that you have to withhold tax (it’s a source of income within Canada) If you have a US owner of a
patent, license to Canadian manufacturer, has to pay 5% of gross sales, $1M in sales, have to pay royalties of $50K ............. 63
US-Canada Tax Treaty says royalties from patent are exempt from withholding tax ................................................................ 63
Dividends ...................................................................................................................... 63
s.12(1)(j) – Includes as income dividends from Canadian corporations ..................................................................................... 63
s.12(1)(k) – Includes as income dividends from non-resident corporations .............................................................................. 63
s. 82(1)(b) and s. 121 – gives individuals a dividend tax credit to minimize double taxation ..................................................... 63
s. 112 – gives corporate shareholders a dividend tax credit to minimize double taxation ........................................................ 63
s.248(1) – Definition of dividend is vague – Only says dividend includes stock dividend........................................................... 64
s.84 – Deems a dividend to be paid ........................................................................................................................................... 64
s. 83(2) Dividends paid by certain private corporations out of tax-free income (e.g., the tax free portion of a capital gain) are
exempt from tax ........................................................................................................................................................................ 64
s.15(1) Shareholder may receive economic benefits from a corporation (such as interest-free loans or using corporate
property for personal purposes) – Value of benefits must be included in shareholder’s income.............................................. 64
Deductions in Business / Property ................................................................................. 64
s.9(1) – The basis in which one can deduct from business/property income – Defines income from business as profit – Implies
a net concept – Contains primary rule for deductions ............................................................................................................... 64
General Approach – Daley v. MNR: An expenditure properly deducted under
accounting principles will be deductible for tax purposes unless prohibited by some
provision of the Act ...................................................................................................... 64
s.18 – Specifically prohibits deduction for certain expenses (listed below) – What cannot be deducted from business/ppty
income ....................................................................................................................................................................................... 64
s.20 – Overrides s.18 – Specifically allows a deduction of capital cost allowance (depreciation), interest, and other amounts 65
s.67 – Denies deduction to the extent that the amount of the expense is unreasonable ......................................................... 65
s.18 – Restrictions No deduction in respect of: ......................................................................................................................... 65
18(12) – No deduction for amounts involved in a business in a self-contained home (will be treated as an employee at home)
unless:........................................................................................................................................................................................ 65
Imperial Oil Limited v. MNR (1947) (income earning purpose test) ........................... 65
Royal Trust Co v. MNR (1957) – Now overturned by s.18(1)(l) – social clubs are tax
deductible (were) .......................................................................................................... 66
Daley (non-recurring expenses with enduring benefits are capital outlays) ................. 66
Personal and Living Expenses ....................................................................................... 66
Deduction of these expenses are prohibited by general requirements of s.9(1) and s.18(1)(a) ................................................ 66
18(1)(h) specifically prohibits deductions of personal and living expenses other than travel expenses incurred by the TP while
away from home in the course of carrying on the TP’s business ............................................................................................... 66
s.18(1)(l) – No deductions for club memberships, use or maintenance of golf course, yachts, lodges, etc ............................... 67
s.62 – Moving expenses; s.63 – Child care expenses ................................................................................................................. 67
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IT-470R paras 35 and 36: Employer reimbursements for employee moving expenses
because of a transfer or because of a new job (with the employer) are not taxable. Also
no tax paid when employer moves the employee out of a remote location at the
termination of the employment there ............................................................................ 67
s.67.1 – An amount paid or payable in respect of the human consumption of food, beverages or enjoyment of entertainment
– Deemed only 50% of: .............................................................................................................................................................. 67
Thomas Harry Benton v. MNR (1952) (rejects the “but for” test for deductions) ....... 67
Child Care Expenses ..................................................................................................... 67
Symes v. The Queen (SCC 1994) – Child care deductions – s.63 (General deduction)
....................................................................................................................................... 67
Commuting Expenses ................................................................................................... 69
MNR v. Doctor E Ross Henry (1969) – (normal commuting is not deductible as a
business expense unless it’s between two “bases of operation”) .................................. 69
Moving expenses – s.62 ................................................................................................ 69
s.62(1) – Can deduct, in computing TP’s income, amounts of moving from an eligible relocation (see def’n below) ............... 70
(a) But if employer pays for it, you do not get deduction – Not considered a benefit of employment if employer pays it (see
IT-470R) ..................................................................................................................................................................................... 70
(b) Cannot have previously deducted it in the year before – Can only deduct to the extent that they were not deductible in
the year before due to s.62 (notably: the limits in part c) ......................................................................................................... 70
(c) (i) Amount deducted cannot exceed more than you can earn from new work location....................................................... 70
(c) (ii) Amount deducted cannot exceed taxable amounts included by s.56(1)(n) and (o) – Which are scholarships and
bursaries .................................................................................................................................................................................... 70
(d) – If do get payment for moving from someone, call it as part of income if you are going to try to get deduction under s.62
................................................................................................................................................................................................... 70
s.62(2) – Moving expenses of student -- For a student – Either or both of the residences have to be in Canada to be able to
deduct (for employees, BOTH have to be in Canada) ................................................................................................................ 70
s.248(1) – Eligible relocation ...................................................................................................................................................... 70
What are moving expenses – s.62(3) ......................................................................................................................................... 70
s.67.1 – Does not apply to s.62 – 50% limit does not apply ....................................................................................................... 71
Home Office Expenses ................................................................................................. 71
s.18(12) – In claiming deduction, you cannot create an actual loss ........................................................................................... 71
Entertainment Expenses and Business Meals ............................................................... 71
s.67.1(1) – Limit deduction of food and entertainment expenses to 50% of the lesser of actual cost or reasonable amount .. 71
Scott v. MNR (analogy drawn between a motor vehicle and “human” vehicle to let a
courier deduct food costs above what people normally eat at work) ............................ 71
Deduction of Interest Expenses...................................................................................... 72
s.20(1)(c) – Allows deduction for interest payments paid in the year or payable in respect of the year pursuant to legal
obligation:.................................................................................................................................................................................. 72
Bronfman Trust – Leading case on requirement that the borrowed funds be used for
income earning purpose and on direct vs. indirect use of borrowed money................. 72
Attaie – Have to be direct use of the fund .................................................................... 73
Singleton v. The Queen (SCC 2002) (look simply at the form of the transaction and not
the substance – tax avoidance is OK if not sham transaction) ...................................... 73
Ludco Enterprises Ltd. Brian Ludmer, David Ludmer and Cindy Ludmer v. The Queen
(SCC 2001) (income from the investment need only be an ancillary purpose) ............ 74
Policy Reasons for Denying Deductions ...................................................................... 75
Can you deduct expenses of illegal business? Yup. .................................................... 75
Exceptions to the general rule about deducting expenses for an illegal business ......... 75
s.67.5 – Denies deduction for bribes paid to public officials – Part of Canada’s international agreement to stop bribing foreign
officials and domestic officials – No deductions for illegal payments ........................................................................................ 75
s.67.6 – Fines and penalties are not deductible (anything, includes parking tickets) ................................................................ 75
Capital Expenditures Versus Current Expenditures .................................................. 75
s.18(1)(b) – No deductions for outlays, losses, and replacement of capital............................................................................... 75
Page 10 of 106
British Insulated and Helsby Cables Limited v. IRC (1926 HL) – The “enduring
benefit test” -- One of the clearer ones on what is a capital outlay and therefore not
deductible ...................................................................................................................... 75
Canada Steamship Lines Ltd. v. MNR (1966) (floors and walls are repairs, new boiler
is capital outlay) ............................................................................................................ 76
The Queen v. Shabro Investment Ltd. (FCA 1979) (second case in capital outlay/repair
trilogy)........................................................................................................................... 76
Gold Bar Developments Ltd. v. The Queen (1987 FCTD) (third case) ...................... 77
Computation and Timing ............................................................................................... 77
s. 12(1)(a) – amounts received Any amount received by the TP in the year that is ................................................................... 77
s. 12(1)(b) – amounts receivable Any amount receivable with respect to property sold or services rendered in the course of
business in a year, even if the funds are due in a subsequent year, are taxable in the current year, unless the TP uses the cash
method of accounting................................................................................................................................................................ 77
s. 12(2) The above provisions are created for greater certainty and shouldn’t be construed as implying that amounts not
included in those paragraphs are not to be included in computing income from a business for a taxation year whether
received or receivable or not ..................................................................................................................................................... 78
MNR v. J. Colford Contracting Co. (1960 Ex. Ct.) To be an account receivable, there
shouldn’t be a mere precarious right to receive the amount; there should be a legal
right, not necessarily immediate. .................................................................................. 78
MNR v. Benaby Realties Ltd. (1967 SCC) At the moment of expropriation, the TP
acquired a right to receive compensation. But a right is not an account receivable. ... 78
West Kootenay Power and Light Company Limited v. The Queen (1992 FCA) In this
case, the amounts were sufficiently ascertainable to be included as an amount
receivable. ..................................................................................................................... 78
Amounts Payable ............................................................................................................ 79
JL Guay Ltee v. MNR (1971 FCTD) Court says that all “condition precedents” must
be removed before deduction can be made. .................................................................. 79
Carrying forward and back of Non-Capital Losses .................................................... 79
s.111 of the ITA – Losses deductible .......................................................................................................................................... 79
Capital Gains and Losses ............................................................................................... 79
Review: s.3(a) – Calculate income (only positive amounts) from the four sources of income (s.3a), those other ones in the ITA
(s.56), and unenumerated sources ............................................................................................................................................ 80
s.3(b) of the ITA makes capital gains a source of income – the provision in particular requires computation of capital gains
and losses in the ITA .................................................................................................................................................................. 80
s.3(c) – Add the amounts of 3(a) and 3(b) – Then claim deductions out of Subdivision E ......................................................... 80
Distinguish Capital Gains from Income from Property: ............................................... 80
s.9(3) – Income or loss from a source that is property does not include capital gains or losses from the disposition of that
property ..................................................................................................................................................................................... 80
Definition of Capital Gains/Losses ............................................................................... 80
s.39(1)(a) – Taxable capital gains Gain from disposition of any property that’s not included income from a source ................ 80
s.39(1)(b) – Capital losses .......................................................................................................................................................... 80
Calculation of Capital Gains/Losses ............................................................................. 81
s.40(1)(a)(i) – TP’s capital gain is the proceeds of disposition of the property minus the adjusted cost base (what you paid to
acquire it, unless there are specifics in the ITA) and any outlays or expenses incurred to make the disposition ...................... 81
s.40(1)(b) – Capital loss is the ACB plus the outlays of making disposition, minus the POD of the property ............................. 81
s.38(a)
Only half of your capital gains are included in income ............................................................................................. 81
s.38(b) – Taxable capital losses – Only half your capital losses included ................................................................................... 81
s.111 of the ITA – Losses deductible .......................................................................................................................................... 81
(1)(a) – Non-capital losses – Losses from a source (office, employment, business, etc) ............................................................ 81
(1)(b) – Net capital losses – Only deductible against capital gains, not other sources ............................................................... 81
s.111(2)(a) – In the year the TP dies, or the year before the TP’s death, net capital losses may be deducted against income
from sources .............................................................................................................................................................................. 82
s. 54 – contains most definitions regarding capital gains........................................................................................................... 82
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What is property? s.248(1) – Extremely broad definition – Property of any kind whatever whether real or personal,
immovable or movable, tangible or intangible, or corporeal or incorporeal ............................................................................. 82
s.54 -- Capital property – Any depreciable property and any property (other than depreciable property) that would give
capital gain or loss from disposition .......................................................................................................................................... 83
s.54 -- Adjusted Cost Base (ACB) -- Where property is depreciable, the capital cost to the TP of the property as of that time
(time it was paid for) and;.......................................................................................................................................................... 83
s.43(1) – ACB of part of a property – the ACB of part of a property is the portion of the ACB of the whole property that can
reasonably be regarded as attributable to that part ................................................................................................................. 83
Identical Properties ....................................................................................................... 83
Bonds, shares (can be identical) – s.47(1)(a) and (b) ................................................................................................................. 83
s.47(1)(a) – Computing ACB for identical properties (after 1971).............................................................................................. 83
s.47(1)(b) – TP is deemed to acquire that property (finding the ACB) equal to the quotient of the ACB of the previously
acquired property and the cost of the newly acquired property divided by the number of identical properties he owns (in
other words, average the cost of the different units of property) ............................................................................................. 83
s.47(1)(b) – At any time (of disposition), have to add up all the ACBs of the identical property and divide it by the number of
identical properties – Basically averages the ACB before the sale ............................................................................................. 84
Disposition .................................................................................................................... 84
What is disposition – s.248(1)? .................................................................................................................................................. 84
Exceptions – What does not qualify as disposition: ..................................................... 84
The list in s.24(1) of what qualifies as a disposition is not exhaustive ....................................................................................... 84
Compagnie – SCC – Read disposition as widely as possibly can ................................ 84
Proceeds of Disposition ................................................................................................ 85
What are proceeds of disposition? – Definition in s.54 – Not exhaustive list .............. 85
Deemed Disposition and Deemed Proceeds of Disposition ......................................... 85
On ceasing to be or becoming a resident of Canada ..................................................... 85
Income of non-residents – s.2(3) (c) – non-residents must pay tax where applicable when disposing of Canadian property ... 85
Deemed dispositions on becoming resident in Canada – s.128.1(1)(b) and (c) ......................................................................... 85
Deemed dispositions on ceasing to be a resident – s.128.1(4)(b) and (c) .................................................................................. 86
Gifts and Sales below FMV to a Non-Arm’s Length Person ....................................... 86
s.69(1) – Inadequate or excessive considerations – Unless specified elsewhere in the ITA....................................................... 86
Deemed Disposition on Death ...................................................................................... 87
s.70(5)(a) and (b) ....................................................................................................................................................................... 87
s. 40(2)(f) – Selling a right to win a prize or bet (arguably a form a property), or the right to receive an amount as a prize or
bet is not taxable (no capital gains, no income) – gains/dispositions “deemed nil” .................................................................. 87
s. 52(4) – Where property is acquired by a TP after 1971 as a prize in connection with a lottery scheme, the TP is deemed to
have acquired the property at its current FMV ......................................................................................................................... 87
Rollovers ....................................................................................................................... 87
s.73(1) – Inter vivos transfers by individuals – When subsection 1.01 applies and both individual and transferee are resident
in Canada at the time, and if the transferor does not elect out of this provision, property transferred is deemed .................. 87
s.73(1.01) Qualifying transfers (transfers that qualify for the rollover provisions) .................................................................... 87
s.73(1) – No gain, no loss for the spouse giving (regardless of whether there was a gain/loss) ................................................ 88
s.74.2(1)(a) – Spousal attribution rule – Anti-avoidance rule – To stop shifting of gains – capital gains shift back to transferor
unless spouses were separated, relationship breaks down, or transferor dies between time of transfer and disposal ............ 88
Electing Out of Spousal Rollover ................................................................................. 89
Spousal Rollover on Death – s.70(6) ............................................................................ 89
s.70.6(a) – Property that would apply under normal deemed dispositions upon death that was transferred to a spouse or CLP
(must be resident in Canada) – Following rules apply: .............................................................................................................. 89
s.70(6.2) – However, you can elect out of 70.6(a) to have normal deemed disposition rules on death (s.70(5)) apply (In that
case, the ACB becomes the FMV – you are deemed disposed of the property on death) ......................................................... 89
Reminder: Capital losses on death ............................................................................... 89
Personal Use Property and Listed Personal Property ................................................. 89
s.54 – Definition section for capital gains and losses that also defines PUP .............................................................................. 89
s. 54 – Listed Personal Property -- LPP – Subset of PUP ............................................................................................................. 90
No loss rule – No losses can be claimed on PUP – s. 40(2)(g)(iii) ............................................................................................... 90
LPP losses and gains – Can only be set off against each other – s. 3(b)(i)(B) ............................................................................. 90
s. 46(1)(a) and (b) -- The $1000 Rule – ACB and POD are deemed $1000 if less than $1000 ..................................................... 90
Loss from PUP disposition is deemed to be nil – Prevents deduction of capital losses attributable to personal consumption –
s.40(2)(g)(iii) – Unless it is a LPP ................................................................................................................................................ 91
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A $1K exemption applies to dispositions of PUP (including LPP) – s.46(1)................................................................................. 91
If you dispose part of PUP, the ACB of the part disposed of is deemed to be the greater of the ACB determined in s.43(1) (the
amount that can be reasonably regarded as attributable to that part) or the proportion of $1K that the ACB of the part
disposed bears to the ACB of the whole property (s.46(2)(b)) .................................................................................................. 91
Similarly – Proceeds of disposition are deemed to be the greater of the actual proceeds or the same proportion of $1K
(s.46(2)(b)) ................................................................................................................................................................................. 91
s.46(3) – Deems number of PUPs sold separately to be a single transaction of a sale of PUP when: ........................................ 91
s.41(1) – Definition of Net taxable LPP gains are ½ the amount of net gains from LPP ............................................................. 91
s.41(2) -Taxable net gains from LPP – ............................................................................................................................. 91
s. 41(2)(a) -- Determine total gains minus losses for the current year if excess net gains remain, proceed .............................. 91
Can carry losses 7 years forward and 3 years back – s. 41(2)(b) ................................................................................................ 91
If have net gain, can look back and find a loss in the previous 7 years – s. 41(2)(b) .................................................................. 92
Have to deduct oldest losses first – s. 41(2)(b)(ii) ...................................................................................................................... 92
Can only use amounts still left over – s. 41(2)(b)(i) .................................................................................................................... 92
s.41(3) – The negative counter part to s.41(2)(a) ...................................................................................................................... 92
Summary: Anti Avoidance Rules for PUP .................................................................. 92
Principal Residence Exemption ..................................................................................... 93
s.54 – Definition of ‘principal residence’.................................................................................................................................... 94
s. 54(a) Must be ordinarily inhabited by the TP, spouse, former spouse, CLP, former CLP, or child .......................................... 94
Yates (1983 FCA) – Most important – Leading case on how to determine if property is
necessary to use and enjoyment of residence as principal residence – Bought ten acres,
using one, rented rest to farmer..................................................................................... 95
Carlile (1995 FCA) – Objective test – Can house can be legally occupied on a smaller
piece of land .................................................................................................................. 95
Stuart Estate (2004 FCA) – Could not successfully apply for subdivision – Was
dismissive of the subjective test .................................................................................... 96
How to Calculate – 40(2)(b) – The formula for calculating what portion (some or all) of the capital gains receive the personal
residence exemption ................................................................................................................................................................. 96
s. 40(4) – When one spouse transfers personal residence to another in a way in which the rollover on death (70(6)) or inter
vivos (73(1)) roll over applies, .................................................................................................................................................... 96
Depreciable Property and Capital Cost Allowances.................................................... 97
Capital outlays, per 18(1)(b) are not a deductible expense ....................................................................................................... 97
20(1)(a) – Capital Cost Allowance, another specific deduction allowing one to deduct capital cost of property Allows you to
deduct part of the capital cost – Specifically permits you to deduct ......................................................................................... 98
Definition of “depreciable property” – s.13(21) ........................................................................................................................ 98
ITA – Separates property into classes of property – Regulations – Reg. s. 1100(1) ................................................................... 98
Reg. s.1102(1) – Property that cannot claim a CCA deduction .................................................................................................. 98
Reg. s.1102(2) – Land is excluded – Even land upon which building is situated on ................................................................... 99
Ben’s Ltd v. MNR (1955) – Cost is undefined in Act, but ordinarily the amount
expended to acquire it ................................................................................................... 99
Reg. s. 1101(1) – Different business – Have to separate capital properties into separate classes for each business/property
income source, namely: ............................................................................................................................................................. 99
Reg. 1100(1)(a) – CCA is the amount equal to the appropriate percentage of the UCC of each class of depreciable assets ..... 99
A+B-(E+F)  Only part of formula we need to know ................................................ 99
Half-Year Rule – Reg. s.1100(2) – Formula for determining a particular policy adjustment to the UCC of the class ............... 100
Step by step, the procedure to follow: ........................................................................ 100
Terminal Loss ............................................................................................................. 101
s. 20(16) – Only occurs at end of a tax year – Deductible under this section ........................................................................... 101
s.39(1)(b)(i) – No capital loss is permitted for the disposition of depreciable property .......................................................... 101
Recapture – Negative amount of UCC – s.13(1) ........................................................ 101
Rental and Leasing Property Restrictions – Reg. 1100(11)....................................................................................................... 102
A rental property – Definition – Reg. 1100(14) – Building used principally for purpose of producing gross revenue that is rent
................................................................................................................................................................................................. 102
Timing: When is an asset (depreciable property) acquired? ....................................... 102
Aboriginal Taxation ...................................................................................................... 102
Indian Act – s.83(1)(a) – Note: Discussed in the Westbank case The band can tax land on reserve (as if a municipality) ....... 102
Page 13 of 106
ITA – s.81(1)(a) – An amount declared to be exempt from tax by any other enactment of Parliament is not included in income
................................................................................................................................................................................................. 102
Exemption on the basis of Right ................................................................................. 103
Mitchell v. MNR (SCC 2002) ..................................................................................... 103
Exemption on the basis of Treaty ............................................................................... 103
Benoit v. The Queen (FCA 2003) ............................................................................... 103
R v. Johnson (Saskatchewan Court of Appeal, 1966) ................................................ 103
s.88 of the Indian Act – Provides Provincial laws of general application will apply to Indians subject to the terms of any treaty
(including tax) .......................................................................................................................................................................... 103
Exemption under the Indian Act ................................................................................. 103
s.2 – Must qualify as an Indian; Registered or entitled to be registered as an Indian under the Indian Act ............................ 104
s.87(1) –Following property is exempt from taxation .............................................................................................................. 104
Nowejigick (SCC 1983) – Decided income can be personal property (but it is
incorporeal property .................................................................................................... 104
Williams (SCC)........................................................................................................... 104
Recalma v. The Queen (FCA 1998) ........................................................................... 104
R. v. Kinookimaw Beach Association ........................................................................ 105
Akiwenzie (FCA 2003) ............................................................................................... 105
Southwind (FCA 1998) (Income from a business) ..................................................... 105
Indian Act – s.90(1) – For the purposes of section 87 and 89, personal property that is ......................................................... 105
Kakfwi (FCA) ............................................................................................................. 105
Greyeyes (FCTD 1978) – Involves s.90(1)(b) – An exemption granted by a treaty .. 106
Taxation by First Nations............................................................................................. 106
Indian Act s.83(1)(a) Can pass by-laws for purpose of imposing local taxation on land or interests in land on reserve .......... 106
Yukon Agreement – First Nation Self-Government Agreement ................................ 106
Introduction
What is a tax: (SCC) Tax is a compulsory and unrequited (not a gift or donation) payment to the gov’t
Raising revenue for government functions, TP gets NOTHING in return, nothing specific
Distinguish tax from other charges:
1) Penalties and fines – Intended to deter
2) Royalties – Charge for the right to exploit these resources
3) Prices –Goods, services, benefit exchanged for payment – Example: Licenses, fees
There should be a nexus to the service, good, or benefit provided
Tax may act as regulation – Used to create disincentive (ie. Cigarettes, gas tax, alcohol – Excise taxes)
Attributes of Taxes
Tax base: Defines what is going to be taxed. It could be income received, or it could be the dollar amount paid for a
good or service
Tax filing unit or taxpayer: Purchaser (GST), manufacturer (old MST), income earner (Income Tax)
Tax rate: Percentage applied to the base, associated to tax brackets
Marginal rates – Tax on the additional dollar the taxpayer earns. E.g., the “tax bracket” the tax payer is
presently in
Page 14 of 106
Note: There are no marginal rates for corporations except for the small business rate of 13.5% (11% federal
plus 2.5% BC) for income up to $400,000. Otherwise, all corporations pay the same flat tax of 30% (19
+11). Also, corporations have no personal exemption.
Average rates – Average tax rate over the entire taxable income amount. Tax paid / Taxable income
Effective rates – Tax paid / total accretion to wealth (including exempt amounts)
Proportional – Place an equal burden on rich and poor, a flat tax that hits everyone at the same percentage
rate
Progressive – Heavier tax burden on those with the greater ability to pay – found prominently in Income Tax
Regressive – Heavier burden on those with lower ability to pay. Consumption taxes are a good example and
tend to proportionately hit low income people harder
Tax period: Timeframe for which base is measured and tax is collected (Income tax – Calendar year)
General Terminology
Taxable Income – Total accretion to wealth – exemptions – deductions (though on a tax return, one wouldn’t even
input exempt amounts in the first place
Exemptions: If amount is exempt, do not have to declare on the tax forms – it’s as if you did not receive the money
Exemptions are claimed – Report/declare income
Deductions: Expenses of earning income
Operates like exemptions in terms of arithmetic – Difference: Is included in income
Amounts deducted from your gross income to arrive to the taxable income
Deductions are claimed – Must fit in rules
Tax Credits: Amount offset against taxpayer’s tax liability
Reduction in tax payable; NOT a reduction in taxable income
Value does not depend upon marginal tax rate like deductions
Credits are claimed
Nearly all credits are non-refundable – Exceptions: Child tax benefit, medical expense credit, GST credit
Example: Personal tax credit – Removes tax for first $10,320 dollars (at bottom marginal rate). Calculated by
taking $10,320 * 15% (lowest marginal rate) = $1548 (subtract this amount in federal tax from tax payable)
Deductions and exemptions: More valuable to the wealthy (because of higher marginal tax rate)
Credits: Same value for poor and wealthy
GAAP – Generally Accepted Accounting Principles
-
these are the rules for financial accounting, used by CA’s for instance
rules that determine profit and loss
conservative, the rules try to avoid overstating income
crucial to understand that income tax calculations don’t necessarily follow GAAP principles and net income
under GAAP could be different from net income pursuant to the ITA
Cash Accounting (Cash Received and Paid) – Pay tax on amounts actually received, not on amounts owed
used by individuals and employees and certain small unincorporated businesses primarily engaged in
farming/fishing
Accrual Accounting (Income earned and spent, including amounts not yet received/spent) – Essentially means
including accounts receivable and accounts payable
- used by most businesses
Avoidance – Legal, structure affairs to avoid tax in a legal manner
Evasion – Criminal offence (fraud) – False reporting, failure to report
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Policy Considerations – equity, neutrality, simplicity,
expenditures
Broad objectives – Equity, neutrality, simplicity
We want a progressive system – Rich ought to pay more, and more proportionately
Tax incidence: Where the tax actually hits – Sometimes, tax is meant to be passed on
Equity
Horizontal – Those with the same income should pay the same amount of tax
Vertical – Those with different incomes should pay tax that requires them to make the same sacrifice to gov’t
Neutrality
Avoid distortions in the market. Taxes shouldn’t unduly affect personal and economic choices – Example: Reducing
incentive to work – Deadweight loss
Should not unduly affect the decisions that people make in their lives. Example: shouldn’t be a tax benefit to
being married versus simply living together
Simplicity/Efficiency
Compilation of desirable administrative attributes
Comprehensibility – Person should be able to understand it (not expected to be lay person)
Certainty – Should not be vague, should not be up to the discretion of the tax collector
Convenience – No undue costs in complying with the system and administering
Compliance – Easy to enforce, encourage honesty, captures everyone fairly
Tax Expenditures – Criteria
These are found in the ITA and provide direction to act in a certain way by offering subsidies for certain activities
using tax deductions/credits – e.g., homeowners renovation credit.
Deductions and credits, preferential rates – Create incentives in tax for TP to act in particular ways
Implicit subsidies – Where government deems to encourage activities or provide relief
Benefits: Less bureaucratic than direct subsidies, less paperwork
Disadvantage: Little control (individuals claim on their own), non-refundable
Canada’s Tax System
Constitutional Basis of Taxation
Concurrent jurisdiction of federal and provinces to impose income tax
Federal – s.91(3) – Plenary taxation power – Complete and full powers to tax (non-provincial matters)
Provincial – s.92(2) – Exclusive direct taxation power within province for provincial purposes (provinces
cannot impose indirect taxes except pursuant to s. 92(4))
Difference Between Direct and Indirect Taxation
A direct tax is one that is demanded from the very person who pays
Example: Income tax
An indirect tax are those demanded from one person which are expected to be passed on
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Example: Import duties/excise tax. Interestingly however, consumption taxes like GST are considered direct
tax. Courts tend to find most taxes to be direct
s.92(9) – Licenses, shops, auctioneer, saloons, taverns, other licenses (interpreted broadly) (provinces may
raise revenues with licenses)
s.92(4) – Provinces may use any mode or system of taxation w.r.t. non-renewable resources and energy
production
s.121 – Common market – No taxes (no provincial customs) on transport between provinces
s.125 – Provinces don’t tax federal objects, federal does not tax provincial objects – Does not apply to fees
Populace governed by one level of gov’t should not be subject to taxes of
another gov’t – Westbank
s.53 – Any taxation bill must originate from the House of Commons (no taxation without representation)
s.90 – Any provision of the Act respecting the Parliament of Canada apply to provinces as well
s.53 – Becomes ‘must originate from the Legislative Assembly’
Tax Collection Agreements – How feds collect on behalf of
provinces
All provinces have entered intergovernmental agreements on tax collection
Except Quebec and Alberta (for corporate tax)
Pursuant Reg.
2607 of the ITA, residence depends on where you reside on the last
day of a tax year –Which province gets it
CRA/Feds – Sole regulator, collector, and enforcer of provincial and federal income tax
Feds collect on behalf of province
Individuals send only one income tax form in (except Quebec which collects its tax through a separate bureaucracy)
In exchange – ITA is the governing statute which defines everything – income, exemptions, deductions, etc
Federal credits are usually matched by provincial credits – Makes it more uniform (objective)
Provinces set on brackets, rates (and adjust them according to CPI), and exemptions, but usually match the federal
rules
Tax Adjudication Structures
Send in tax return – CRA sends notice of assessment (refund or owe extra tax)
May audit and issue new assessment or reassessment
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Can ‘appeal’ assessment – Send notice of objection in 90 days
First, CRA Appeals Division – Confirms or varies the assessment
Then, Appeal to TCC  FCA  SCC
TCC has two procedures: informal or formal
1. Informal  under $12,000, can be self-represented or represented by non-lawyer agent. No discovery or
pre-trial examination, simpler rules, NO APPEAL, no cost awards
2. Formal  must be either self-represented or represented by a lawyer. Formal rules, cost awards, etc
Department of Finance – Drafts policy – Defined income, brackets, rates, exemptions, and deductions
CRA – Actual enforcement, collection, etc
Department of Justice – Deals with tax law – Tax litigation
Placer Dome (SCC 2006) – Interpretative Approach to ITA which
applies
Held: Modern rule (Driedger) – Statute must be read in entire context, grammatical and ordinary sense – contextual
approach
TP should be able to rely on clear meaning of the words of the Act
When ordinary meaning is insufficient TCP Approach – Textual, then Contextual, and then Purposive
Residual presumption in favor of the taxpayer – Not applied often
Only when there is no resolution for the interpretation problem using modern approach
Note: Where more than one reasonable interpretation (i.e., ambiguity) greater emphasis on context and lower
emphasis on the ordinary meaning of words
Burden of Proof – TP bears burden of proof on appeal of assessment on BOP
Show on BOP that the facts on which the assessment of the CRA is based is wrong
s.152(7) and (8) of the ITA
(7) – Minister can assess notwithstanding what you say on your tax return (or lack of return)
Siftar – Up to the TP to show that the allocation by the
Minister is wrong
(8) – Assessment is deemed valid and binding
Assessment can be objected or appealed – Burden on TP
Source Concept of Income: Definition of Income
No definition of income under the ITA!
s.2(2) ITA – Taxable income is TP’s income plus additions and minus deductions permitted
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s.3 ITA – Calculate your general income – Other deductions and stuff come later
s.4 ITA – Calculation of income from the different types of sources – Formulas
How income is calculated
s.3(a) ITA – Start with aggregate income from positive “sources” – Example:
Employment source
Enumerated sources – Employment, office, business, and property
Not an exhaustive list – “income … from a source”
Income received from an unrecognized source is not subject to tax (just as losses from an unrecognized
source are not deductible)
s.3(b) ITA – Add capital gains to amount (this is calculated separately because it is conceptually not
income; it’s a gain on increase in value on property the taxpayer owns; it’s the difference between the proceeds of
disposition and the adjusted cost base. Only 50% of the gain or loss is taxable)
s.3(c) ITA – Uncommon deductions from the amount
s.3(d) ITA – Deduct losses from sources
 Example: Business losses for the tax year. Each
income/loss from each source must be calculated separately because different rules apply
s.56 – There is another list of sources of income Consider these items to be income (ie. Pension, Benefits,
Scholarships, Bursaries)
Retiring allowances – s.56(1)(a)(2)
Taxable and any amount received as or in satisfaction of a retiring allowance
s.248(1) – Amount received on or after retirement from an office or employment OR received in respect
to a loss of an office or employment
Bellingham v. The Queen (FCA 1996) – Background of the source
concept
Facts: TP bought land on speculation – Land expropriated by the Town
After litigation, compensation was awarded
1) Compensation for land value
2) Ordinary interest – Interest accrued on the amount owing while litigating
3) ‘Additional interest’ under Alberta Expropriation Act
Held: Award of additional interest was Punitive (not compensation)
Additional interest – Not income from a source – Not income from a business – Windfall gains not taxable
Things that fall outside the definition of income from a source
Gambling – Irrational behaviour
Gifts and inheritances – Non-recurring amounts – Wealth transfer, not creation
Must be gratuitous, without consideration
Windfall gains – Residual category – Unexpected, unplanned, non-recurring
Robertson J. goes on to discuss what constitutes income from property:
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-
the additional interest does not really fit into any of the known sources of income both within the ITA and
case law
the income did not come from a productive source: makes an analogy with inheritance – somebody else’s
wealth (old wealth) is being transmitted to a new owner. “new wealth” is what’s taxable, not old
it was a one time occurrence not likely to be repeated in the future
essentially adopts a narrow definition of income – an ongoing productive activity. The broader definition –
any accretion to wealth – was rejected
that said, the money to buy the land (not including the punitive damages) came from a productive source
and was taxable
critical factor: punitive damage awards don’t flow from the performance or breach of a market transaction
List of relevant but non-conclusive indicators of windfall:
1) No enforceable claim to the payment
2) No organized effort to receive payment
3) Unsolicited/Not sought after
4) Not expected (specifically or customarily)
5) No foreseeable element of recurrence
6) Not a customary source of income
7) No consideration for the payment/No market exchange
However, see Cransbrook – payment was made a minority
shareholder to induce him not to sue. Court recognized that a
payment given in exchange for not suing may be taxable (in the instant
case, it was not because it was payment for loss of share value and shares are capital
holdings and capital holdings back then were not taxable)
Curran v. MNR (SCC 1959) – Income from an unenumerated source –
s. 3(a) is not an exhaustive list
Facts: Received $250K from a majority shareholder as inducement to leave current employment
Gave up pension at old job – Employed by a corporation (did not pay the inducement – the majority
shareholder paid it in a separate contract)
Payment was in consideration of the loss of pension rights, chances for advancement, an unenumerated
source
Held: Income from a source – s.3(a) is not an exhaustive list
Consideration was paid so that those services would be available (by TP quitting)
Did not say specifically what source
Court rejected the idea that the majority shareholder’s payment agreement was separate from the new
employment agreement – this was a ruse to avoid taxes – the courts combined the transaction
The court also held that the entire payment was to induce him to work and not compensation for loss of capital
benefits
The payment thus fell under 3(a) note this is the closest courts have come to finding an unenumerated source
Dissent: Sees substantial portion of the payment as a capital receipt – Not taxable
What about s.6(3)(c)? – Signing bonus – Curran: Does not apply because payment was not from the
employer, it was from a third party (might not hold up today because Curran agreed to become an employee under
Brown’s control)
Total amount was not paid as consideration for loss of benefits
Portion was for personal services to the new employer, while the other portion was the capitalized amount
of his pension
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Canada v. Fries (SCC 1990) (Strike pay does not constitute income
under s. 3(a) – if we don’t know if it’s income, residual benefit of
doubt to TP
Facts: Strike pay – Weekly pay equal to normal net take-home pay
Strike fund accumulated from tax deductible dues paid by members
Unilateral K was the source of the payment – Promise to pay for support of the strike
s. 149(1)(K) Labour unions are untaxable
Held: Strike pay does not constitute income under s.3(a)
Why? We don’t know if striking employees are providing a service. The ITA is silent about this as is the case
law. Thus, benefit of the doubt must go to the TP – Residual benefit
Surrogatum Principle
London and Thames Surrogatum principle – Amounts received by a
taxpayer in the place of income from a source may be included in
income as if such amounts were income from that source –
Example: civil damages, or amounts paid in settlement of a claim for breach of contract
or tort
Schwartz v. The Queen (SCC 1996) – Main statement on
unenumerated sources, surrogatum in Canada, also specific vs.
general provisions
Facts: TP accepts lump sum in settlement of claim for breach of employment K – Never litigated
Never worked, never performed part of the K
Assessed – Included settlement amount as a retiring allowance
Held: TP wins because appellate court overturned a finding of fact inappropriately
BUT, Strong obiter from the majority: TP wins; No determination as to the proper split of the lump sum
Surrogatum principle is law in Canada. In this case, could not use surrogatum: It was paid as a lump sum, $360K was
not split into capital and income amounts like in Bellingham
Retiring allowance – s.56(1)(a)(ii) – Received in respect of loss of employment
But in this case, no service performed, so not a retiring allowance, not caught by this provision because
he never started work he only had a contract to start work
Argued the employment K (signed but not performed) was an unenumerated source (s. 3(a))
This argument is CORRECT in that 3(a) isn’t restricted to enumerated sources, but it fails on the facts: Given
the foregoing, If it doesn’t fall under specific provision of retiring allowance, cannot resort to the general provision
(s.3(a))
Contrary to Parliament intention to deal with taxability of such payments in specific provisions for wrongful
dismissals
ITA Provisions Relating to Schwartz
s.6(3) – Payment passed from employer to employee (while employed or payment before and after) It
shall be deemed income: (Does not apply to Schwartz – No employment relationship)
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s. 6(1)(a)(2) Retiring allowances are taxable
s.6(3)(c) – Signing bonus – Curran: Does not apply because payment was not from the employer, it was
from a third party. Doesn’t apply in Schwartz as he was never employed in the first place
s.6(3)(d) – Back pay, advance on your salary
s.6(3)(e) – Confidentiality agreement – Paid to keep mouth shut – Non-competition agreement
subsection 248(1) – defines retiring allowance and employment – amount received on or after retirement
or loss of office (includes wrongful dismissal) – assumes you actually started work
Savage (SCC) (facts not caught by a specific provision shouldn’t then
fall under a general provision)
The TP received a $100 gift from her employer for completing a course. Is it a benefit
(general) or a prize for achievement (specific provision)? If a prize, there was an
exemption – no tax until the gift is over $300. Court said it had to be a gift and exempt,
otherwise the specific provision would have no point.
Tsiaprailis v. The Queen (SCC 2005) – Reaffirms that the surrogatum
principle is alive and well in Canada, includes a test to find if
surrogatum applies
Facts: Getting disability insurance, cut off, sued, reach settlement with provider
TP argues that it is a settlement agreement, payment for settlement
Held: Surrogatum principle – Substitute for employment source (benefits) – Test:
1) What was payment intended to replace? If sufficiently clear, move to next stage
2) Would the replaced amount have been taxable in the recipient’s hands?
Payment intended to replace disability benefits which the insurer stopped paying (arrears) – Which would
be taxable under s.6(1)(f)
Now the TP has to pay a lot of tax all at once on her settlement!
Dissent: Payment made pursuant to a settlement agreement – Payment to release insurer from liability
More on how s. 6(1)(f) works:
Per 6(1)(a) any benefit received is income, except (i) benefits derived from the
contribution of the employer for a group sickness or accident plan
In other words, employees don’t have to include in taxable income any amount their
employer contributed to a plan that covers them. UNTIL the employee receives the
benefit of the plan (becomes disabled or ill) then:
6(1)(f) The periodic payments now received to replace income from employment from
the group plan are included in income.
Note, however: The employee, once he starts receiving these benefits, may deduct the
total of his contributions to the plan. The idea is that the contributions the employee
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made were not deductible when he made them, so he shouldn’t be taxed now on them
(that would be double taxing).
Also note: If employee pays 100% contributions, there is no employment benefit –
employer is not contributing. See 6(1)(f)(iii)
Note: The above is relevant for periodic payments. If the insurance pays a lump sum
there is no tax – it’s a pure windfall – a receipt of a capital sum.
The Queen v. Antonija Siftar (FCA 2003) (burden on TP to show that
no part of lump sum is replacement for something taxable)
Facts: No allocation, just got a lump sum
Held: Failure to establish an allocation cannot be determinative of the issue (like it was in Schwartz)
Does not preclude an inquiry into the makeup of the settlement amount
Burden is on the TP to show that no part of the lump sum is replacement for something taxable
TP is the person who has the facts, makes the self-assessment in the first place
Burden on TP to prove why his assessment was reasonable if reassessed
Does not overturn Schwartz – Ratio: FCA should not overrule a finding of fact
Rewriting obiter dicta
Nexus
TP must have some right to the income, must belong to the TP – Nexus between TP and source/income – To be taxed
Example: Trustee or agent – No right to the funds, just holding it – Not taxable
S. 152(7) – Minister not bound by return supplied by TP, may make its own assessment (can assess you
based on your lifestyle)
s. 152(8) – Assessments made by the Minister are deemed valid and binding subject to an objection or an
appeal
Buckman v. MNR (Tax Court 1991) – Nexus (embezzled funds
one did not intend to repay)
Facts: Client gave money to lawyer, lawyer embezzled, paid little back, but kept mostly to himself
Claim: TP argues he is just a borrower, never had right to money, intended to repay
Held: Never intended to repay – Used the money for his own benefit. Can’t use wrongful conduct as defence to a tax
liability. TP had possession and enjoyment of funds with no intention to repay = nexus established.
Refuses argument from dissent in a SCOTUS decision that taxing illegal acts means the gov’t takes part in them.
Crown argued unenumerated source but that was unnecessary. It was a source from a business – Law firm
and illegal embezzling
Nigro v. The Queen (TCC 2003) (onus is on TP to show the CRA
assessed TP incorrectly)
What: Saying money in his bank account was not his, declared a nil income
Net worth income assessment – Difference between wealth at beginning and end of year
2.7 million flowed from bank accounts – 150K remained in account
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Held: Onus on TP to show the CRA has assessed him incorrectly. However, per s. 163(3), burden of establishing facts
justifying a penalty is on the Minister. Minister was justified penalizing TP – failing to declare such a large amount
cannot be attributed to ordinary negligence.
Ultimately, no credible or cogent evidence to show the lack of nexus between him and the money
Residence as Primary Basis of Canadian Tax Liability
Residence – Present ties to a jurisdiction – Do not need physical presence
Note: Domicile – Intention to maintain permanent home in jurisdiction
Intention is irrelevant in determination of residency – Based on actions
s.2(1) ITA – If resident at any time of year, worldwide income is taxable for the entire year
s.2(3) ITA – If not resident during a year, pay tax on Canadian sources (employment, business, property)
s.250(3) – General provision on residence: A person who is resident includes, not limited to: A person
who is ordinarily a resident (implies does not have to be an actual present)
Thomson v. MNR (SCC 1946) – Test of where person is ordinarily
resident, definition of sojourn
Facts: Claims he was not a resident nor did he sojourn for a specific number of days (half the year)
Built house in Canada, had servants there – Servants stayed at the house for the whole year
Had possessions at house
Held: Residence is a general term – Highly flexible definition
Ordinarily resident – Residence in the customary mode of life of the person concerned
Contrasted with special, occasional or casual residence (vacation home)
Distinguished from a visit or stay
Location of family, property, social connections, central aspects of life (employment, etc), etc
Court finds residence in both Canada and the USA – A strip along the east coast
When he is living in NB, carrying on his general mode of life
Everyone is assumed to have residence for tax purposes
Burden on the TP to show residence or lack of it
Dual residence is possible
Intention of residence must be shown by action to be established as residence
“Sojourn” – Nature of the stay is outside range of residence or temporary residence
Sojourn (in Thomson) – Stay in Canada where the person is not putting down roots, temporary stay
Commonly understood as temporary residence or residence for a temporary purpose
Dennis M Lee v. MNR (TCC 1990) – Immigration and citizenship
are not determinative, list of various factors determining
residency
Facts: Immigration Canada treated him as a visitor (could not stay for extended period of time)
Married and had mortgage in Canada
Held: Intention (swearing an affidavit) does not determine residency
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Factual determination of residency – Look at the whole – List of indicia – Each has own weights
Past and present habits of life
Regularity and length of visits in jurisdiction
Ties with the jurisdiction; Ties elsewhere
Permanence or otherwise purposes of stay
Ownership of a dwelling or rental for long term
Residence of spouse, children, or other dependents in a dwelling maintained by the TP
Memberships in organizations, religion, etc
Registration and maintenance of transport vehicles
Credit cards, bank accounts by Canadian financial institutions or businesses
Newspaper/magazine subscriptions to Canadian address
Rental of safe deposit box or post office box
Life or general insurance through Canadian insurance company
Mailing address, telephone listing, stationary on business cards
Membership in a Canadian pension plan
Partner in partnership, director of Canadian corporation
Burial plot, wills prepared
Filing income tax return as Canadian resident
Employment
Driver’s license
Obtaining landed immigrant status
Severing all substantial ties with form country of residence
Deemed Residence –
s.250(1)(a-c) May be considered resident by virtue of the deeming provisions –
s.250(1)
a) Deems to be resident for entire taxation year if sojourned in Canada for 183 days or more
Corporations don’t sojourn
b) Any person who is a soldier abroad – Deemed resident even though physically gone
c) Ambassadors, servants of Canada abroad – If resident immediately prior to appointment
R&L Food Distributors Limited v. MNR (TRB 1977) – Over the
word “sojourn” If you do not stay overnight, there is no sojourn
Facts: TP is a company, employees sojourn in Canada for more than 183 days in course of employment
Want to be deemed residents for tax breaks; declare as Canadian Controlled Private Corporation
Both commuted daily, had family homes, social connections and basic lives in Michigan
Held: Not deemed resident – If you do not stay overnight, there is no sojourn
Bad reasoning: The judge said that even if sojourning were counted and he was “deemed” resident, one would still
have to do the ordinarily resident test. But that’s not true according to prof – if you are deemed resident then you
are resident and no further test is required.
Interpretation Bulletin IT-221R3 – Determination of Residence
Status
* Remember, these bulletins are CRA’s assessing practice, an administrative position on what the law is, not binding
on anyone
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Para.1 –Provincial residence – Depends on residence at December 31 (residential ties)
Resident in more than one province – Look for the most significant residential ties
Factual residence – Resident on the facts
Para.4 – Primary Residential Ties:
1) Dwelling place – Less significant if leasing to arm’s length person
2) Spouse or common-law partner – Less significant if breakdown
3) Dependents
Para.8 – Secondary Residential Ties – Most from the Lee case:
1) Personal property
2) Social ties
3) Economic ties (includes credit cards, accounts, etc)
4) Landed immigrant status, appropriate work permits
5) Health insurance coverage
6) Driver’s license
7) Registered vehicle
8) Passport
9) Membership in union or professional organization
Para.10 – Severing connections
Factors in evaluating significance of those ties:
1) Evidence of intention to permanently sever residential ties
2) Regularity and length of visits
3) Residential ties outside Canada
Para.11 – No particular length of stay abroad that will make you a non-resident
Para.12 – Pay departure tax to show you have severed connections with Canada
Para.20 – Sojourn – Any part of a day, counts as a full day, if the nature of the stay is of the sojourning type –
Commuting is not sojourning
s.250(1) – If deemed resident – Then entire worldwide income is liable for tax for entire year
Sojourn is not simply counted by days in Canada
Look to the nature of each particular stay, it means a temporary stay in the sense of establishing a
temporary residence (vacationing is sojourning for instance, whereas commuting is not)
Sojourn means to make a temporary stay in the sense of establishing a temporary residence
Part Year Residence
s.114 – Calculating taxable income of an ordinary resident in Canada during only part of the tax year –
divides year in two
Applies to person who was resident of Canada ceases to be a resident – Sever their ties
Applies to person who comes to Canada and establishes residency
Does not apply to deemed residents
Divides year in two: Part you are residence and not
While resident – Tax on world-wide income
Not resident – Tax only on Canadian sources
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s.249(1) – Definition of the taxation year
(a) Corporation – Fiscal years
(b) Individual – A calendar year
Schujahn v. MNR (Exchequer 1962) (cannot be sojourning and
ordinarily resident – categories do not overlap)
Facts: American transferred to Toronto to head up operations of Canadian subsidiary
Moved family – Purchased house – Recalled to Minneapolis (Aug 2 1957)
Wife and kid remained in Toronto for a while to sell house
Held: When recalled, he severed all connection to Canada – Brought his property back to USA
Remained only to sell the house – Property left was necessary companions to selling the house
Not a resident after Aug 2 1957
Could not be deemed a resident for the entire year – He was ordinarily resident until Aug 2 1957
Cannot be sojourning and ordinarily resident – Categories do not overlap (TP in this case was not
sojourning. He was ordinarily resident)
The Queen v. KF Reeder (Federal Court-Trial Division 1975) (long
time Canadian resident leaving temporarily for a job)
Facts: Born and raised Canadian training in France – Was absent from Canada for 8 months
Held: Maintained residential ties to Canada – Made ties to other jurisdictions to maintain lifestyle
Those could be easily abandoned on his return to Canada; Foreseen that he would return
Court lists factors from Thomson case as pointing towards/against residency
Always resident in Canada before, no indication that he left Canada forever or for an indefinite time
(the time in France was temporary; hard for a Canadian to sever residency if one is a long time Canadian resident
leaving the country only temporarily)
Departure Tax
s.128.1 – Deemed disposition on immigration and emigration
(4) Emigration – “Departure tax”
Deals with a resident who has left before disposing it, prevents them from avoiding payment of tx
on their properties
Deemed disposition of all property at FMV (triggering tax liability) – Does not apply to land
Deemed to have reacquired each property at fair market value (this acquisition cost is used to
calculate gains/losses on a subsequent disposition of property)
Applies to individuals
(1) Immigration
Before becoming a resident
Deemed disposed all property at fair market value other than taxable Canadian property
Deemed reacquired the same property at fair market value
Note: Pay your departure tax – Helps convince you have severed your residential ties
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Avoidance of Dual Tax Residence
s.250(5) – Person is deemed not to be a resident if would be resident in the other country
Depends on tax treaty signed
Since treaties overrule the ITA, if treaty says you are a resident, you can’t argue that you are not a resident
Article 4 – US-Canada Tax Convention – if res of both countries – the tie breaker rules
If found resident of BOTH Canada and USA – Tie-breaker rules – Applies to natural persons (individual)
1) Deemed resident of state where his permanent home is
2) If no permanent home or in both – Center of vital interest – Personal/economic interests
3) If cannot be determined – Habitual abode location (law is unclear as to what this means, perhaps add
up days spent in each country)
4) If has both or neither – Citizenship
5) If has both or neither – Let the authorities handle it (IRS and CRA) they will decide for you
Salt v. The Queen (TCC 2007) (no longer a permanent home
when rented to an arms length tenant)
Facts: Australia and Canada
Held: CRA said he was resident of Australia, but also resident here – Tie-break rules to come up
Deemed not a resident by virtue of Article 4 of Canada – Australia Tax Convention
Permanent home available to him there during the time
The home in Canada – No furnishings, arms-length tenant
Permanent home: A place where TP can go right away – and the TP couldn’t go into his Canadian home as it was
rented. No longer a permanent home when rented to an arms length tenant
Article 4 – Canada UK Convention – Slightly different from USA
If only taxable on basis of having earned income within a state, that by itself does not make this treaty
applicable to you
Tie breaking rules – Occurs when resident under both States
1. Permanent home
2. If permanent home in both – Center of vital interest – Economic/social interest
3. If no permanent home or you could not figure out center of vital interest – Habitual abode
4. If have abode in each or neither – Which country he is a national in
5. If national in both or neither – Competent agencies settle with mutual agreement
Provincial Residence
Income Tax Regulation 2607 – Where an individual was resident in more than one province on the last
day of the taxation year, he is deemed to have resided only in that province which may be reasonably
regarded as his principal place of residence
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BC ITA s. 2(1)(a) – Income tax must be paid as required by this Act for each tax year by every individual
who was resident in BC on the last day of the tax year
Mandrusiak v. The Queen (2007 BCSC 1418) (application of reg
2607)
The TP lived in BC slightly more than he did in Alberta. But the number of days spent in
either location is not determinative of the issue.
The TP had stronger family contacts in Alberta. He bought a burial plot for himself in
Alberta. His reason for living in BC was primarily work related. His roots were in
Alberta and he had stronger social contacts there. He had a home in Alberta much longer
than he did in BC.
All of this pointed to the conclusion that Alberta was his “chief or more important place
of residence” and that Alberta was his principal place of residence. Thus, Alberta tax
was payable, not BC tax.
Residence of Corporations
ITA – s.250(4) – Deeming provisions for corporation residence (common law can modify this)
(a) Corporation deemed Canadian resident if it was incorporated in Canada after Apr 26 1965 whether
federally or provincially incorporated
(c) Before Apr 27 1965 – Resident if it is incorporated in Canada and carried business in Canada or through
application of common law, found to be resident in Canada in the preceding tax year ending after Apr 26
1965
ITA – s.250(5) – Respect for tax treaty – Deemed non-resident if tiebreaker falls for other country
Corporate residency remains a relevant issue for corporations incorporated BEFORE Apr 27, 1965 and corporations
incorporated or continued OUTSIDE OF CANADA.
De Beers Consolidated Mines Limited v. Howe (1906) – Common
law residence of a corporation
Common law test of residence applies independent of deemed residency rules
Corporation is resident where its central management and control is located
Usually refers to board of directors – Kind of can be slippery, directors may not manage
Actual location of control (Bullock)
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One test merely requires some part of the superior and directing authority be present in the country and that it’s not
necessary that the final and supreme authority be located there. E.g., majority of directors meet in country A,
minority in country B = dual residency
Another test requires the location of the final and supreme authority apply. So using the above example, residency
would only be found for country A.
USA Treaty: If incorporated in the USA – Trumps central management and control rules in Canada
UK Treaty: Go straight to the competent authorities, determine by mutual agreement -- Have regard to
incorporation, management
Corporations can be resident in more than one jurisdiction if central management and control is located in two or
more jurisdictions
CCPC – Corporation must not be public
Must be controlled by resident individuals
Source as Basis of Canadian Tax Liability (discusses
withholding provisions too)
s.2(3) -- Non-residents are subject to Canadian tax on income from a Canadian source –
If employed physically in Canada – Residence of employer is irrelevant. If TP s employed and carries out at least some
part of employment in Canada, it is considered a Canadian source of income.
Employer is carrying on business – Business defined in s.248.1
What about Internet/worldwide sales? Depends on the treaty. Canadian tax treaties generally require the business
be carried on through a “permanent establishment.” So an American company selling something online to a
Canadian likely wouldn’t pay Canadian tax on the sale.
s.212(1) of the ITA When resident of Canada makes payment to a non-resident – Payment subject to 25%
withholding tax. Payment types:
Payment types:
a. Management fees, administration fees, and charges
b. Interest – Bank interest
c. Estate or trust income – Example: Will
d. Royalty fees and rents
h. Pension benefits
j.1 Retiring allowance – Example: Wrongful dismissal award (this is not income from
employment, it’s income from another source under s. 56)
l. Payments out of or under an RRSP
s.212(2) of ITA – Dividends paid by Canadian corporations subject to withholding tax to non-residents
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s. 215(1) imposes a duty on the Canadian resident the obligation to withhold and remit the tax on behalf
of the non-resident
s.215(6) : Makes Canadian resident jointly and severally liable for the tax if they do not remit it
(enforcement mechanism)
Note: Tax is placed on receiver, but obligation on payer to remit
Other comment: No provincial withholding taxes. Failure by the Canadian resident to
remit could even lead to criminal charges.
Income from Office or Employment
Introduction
Office vs. employment – technically different in that there is no master/servant rel’ship in holding an Office, but the
two are taxed identically
Who is an employee – Must be differentiated from an independent contractor (business)
Tax implications of independent contractor versus employee:
Payment and withholding of tax – Employer must withhold tax (s. 153(1)(a))
Cash basis is measure for employment – Businesses operate on accrual method (payables)
Reporting income – Employment (calendar), business (fiscal period)
Deductions – Many more available for businesses
Basic Inclusions in Income from Employment
ITA s.5(1) – Salary, wages, other remuneration including gratuities – Received in the year
Cash basis of accounting – Does not include amounts owed to the person
A check in hand that is not post dated – Counts as cash in hand
ITA s.5(2) – Loss from office or employment – Rare, really rare (hard to “lose money” in employment.
Perhaps a commissioned salesperson may experience this)
ITA s.6(1) – Amounts to be included in the income from office or employment
(a) Include benefits – Board, lodging or any other benefits received or enjoyed by the TP by virtue of an
office or employment except:
i)
Benefits from contributions of TP’s employer benefits or insurance plans
ii)
Retirement compensation arrangement – Employee benefit plan or trust
iii)
Benefit in respect to the use of an automobile
iv)
Counseling services (mental or physical health or reemployment or retirement)
Limitation on Deductions
ITA s.8 – Deductions – Very, very limited (in fact, s. 8 is an exhaustive list)
Legal expenses of the employee (to collect or establish right or salary or wages owed)
Amounts for meals and lodging while employed by a railway company (not reimbursed)
Expenses of a sales commission employee (requires TP to pay expenses)
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Travel from location of work – Meals and lodgings (same as railway employees)
Motor vehicle expenses – If ordinarily required travel (not reimbursed by employer)
Union dues
Professional fees (e.g., law society dues)
Meals when the TP consumed them while away for a period of more than 12 hours from the city where the
employer’s establishment to which the TP normally reports for work was located and away from the
metropolitan area (if there was one) where it was lcoated
s.8(2) ITA – Deductions restricted to what is specifically set out in s.8 (s. 8 is an exhaustive list)
Why so limited? For example, if a wealthy person buys expensive clothes, he will get larger deductions than someone
who cannot afford them – not fair.
s.248(1) ITA -- Definitions (office, officer, employment, employed, employee, employer, individual,
person, tax payer):
Office – Position of the individual entitling the individual to a stipend or remuneration
Includes MLA, Senate, judicial office
Officer – Means an individual holding such an office
Employment – Position of an individual in the service of some other person
Servant or employee means a person holding such a position
Employed – Performing the duties of an office or employment – Implies current
Employee – Must be an individual, includes officer
Employer – Where remuneration comes from in situations of office
Individual – Person other than a corporation – A human being
Person – Includes corporations, tax exempt entities (municipalities, public group performing government function)
Tax Payer – Includes any person whether liable or not to pay tax
s.153(1)(a) – Withholding of tax by employer – From your pay check, salary
Failure to do so by the employer can be prosecuted for tax evasion
Independent contractor – Can deduct a bunch of things – Not limited by s.8(2) ITA
Employee has less deductions
Characterizing Working Relationship – employee or
independent contractor?
Control test – R. v. Walker – Fallen into disuse (from employer
perspective)
1)
2)
3)
4)
Power of selection of the servant
Payment of wages
Control over the method of work
Master’s right of suspension or dismissal
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Wiebe Door (FCA 1986) – The test for determining employee or
independent contractor
Facts: Business (alleged employer) – Had a list of people
Workers had fair amount of autonomy – Each had understanding would be running own business and thus
responsible for premiums (employment insurance, CPP, etc) – But an agreement between employer and TP is not
determinative
Supplied own tools and trucks
Held: Prefers test of Montreal Locomotive – Examines the whole of relationship between the parties:
Is person carrying it on for himself (on his own behalf and not merely for a superior)
1) Employer Control – Not conclusive (highly skilled employees often operate w/o supervision)
2) Ownership of tools, equipment, assets
3) Chance of profit
4) Risk of loss
Weighing them up – Most likely a case-by-case situation
Basically, were they in business on their own account?
Sagaz Industries Canada (SCC 2001) – Test in WB was affirmed
by SCC
Must be a search for the total relationship of the parties
Held: Performing services in a business on his own account – Central question
Factors INCLUDE: Control over activities, ownership of equipment, hire own helpers, degree of financial risk
taken by worker, degree of responsibility for investment and management, opportunity to profit in
performance of tasks
Another important factor: Many clients vs. only one? Someone with only one client and working in that
client’s office runs the risk of being labeled an employee
Not exhaustive list of factors, weights will vary with case
Corporations and Personal Services Business
Ralphco Problem – Interposing Corporation
Facts: Ralph incorporates RalphCo (Corporation) – Employee of Ralphco, K services to Hamilton
First $400K of a CCPC is taxed at a preferential rate (17.6%)
Can deduct salary it pays to Ralph, sets investments up to defer taxes
Held: Corporation is a corporation – Ks are in order – Incorporated properly
Gov’t amended the ITA 20+ years later to stop this – Used the personal services business definition
s. 125(7) definitions -- Active business carried on by a corporation – any business carried on by the corp
other than investment businesses or personal services businesses
s. 125(7) definitions -- Specified investment business – A business carried on by the corp the principal
purpose being to derive income from property (some exceptions for labour sponsored venture capital
corps, etc)
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s. 125(7) definitions -- Canadian controlled private corporation – for the purposes of the course, it is a
corporation resident in Canada, shares not listed on a stock exchange, not controlled by non-residents or
by a corporation whose stock is listed on a stock exchange or a combination of these
Personal services business -- s.125(7) – Personal services business is carried by a
corporation providing services where:
(a) An individual who performs services on behalf of the corporation (an incorporated employee) or
(b) Any person related to the incorporated employee (see below for definition of arms length)
Is
1. a specified shareholder of the corporation and
2. the incorporated employee would reasonably regarded as an employee (Wiebe Door Test) of the person OR
partnership to whom services were provided but for the existence of the corporation
unless:
Corporation employs in the business throughout the year more than 5 full-time employees
10 half-times would not do it – Looking for a degree of activity
Specified shareholder definition: TP who owns, directly or indirectly, any time of the year, not less than 10% of the
issued shares of any class
Deemed to own the capital stock of a corporation owned by a person with whom the TP does not deal at
arm’s length at the time
Consequences of being found a personal services business:
You will be found to be not carrying on active business, you will not be a CCPC, you will be a personal
services business
Personal services business – Do not qualify for the preferential rate of 17.6%
Also lose right to make deductions most businesses would be able to do – s.18(1)(p)
Only able to deduct salary, benefits, and expenses in selling of property or negotiating K
Can also make employee deductions (limited – s.8(2))
Loses – Office rent deductions, meals deductions, small business deductions
Corporation responsibility to pay CPP and EI and premiums – Their responsibility to withhold
Example: Lawyer, decides to incorporate in BC – MJ Corp
Clients – Advised they are now dealing with MJ Corp
Issue: Is it a personal services business?
No – Never an employment relationship with her clients
Cannot be reasonably regarded as an employee
Same for doctor
Related and non-arm’s length persons
Definition of non-arm’s length:
s. 251(1)(a) – related persons are deemed not to deal at arm’s length even if their interests conflict
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s. 251(1)(c) – 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
All facts and circumstances are examined. Unrelated parties have been held not to be
dealing at arm’s length when:
1. there is a “common mind” directing or controlling the bargaining for both
sides (i.e., a person and corporation which the person is less than 50%
shareholder, but also a director and officer with influence over the other
directors and officers) or
2. the two persons act in concert without separate interests
s. 251(2) defines related persons – individuals connected by blood, marriage, common-law partnership,
and adoption. For our purposes blood relationship means one person is the child or descendant of the
other (e.g., child is related to parent and grandparent, etc)
s. 251(1)(c)) -- However, aunt/uncle to nephew/niece and cousins are not included (they still can be nonarm’s length though, see
s. 251(6)(b) and (b.1) spouses and common law partners are related to each other and to persons who are
blood relations of their spouse or CLP. This means “in-laws” are related.
Corporations and arm’s length/non-arm’s length
s. 251(2)(b)(i) -- Corporations are related to persons who hold voting control, meaning enough shares to
elect a board – normally over 50%
s. 251(2)(b)(ii) – a corporation is related to a person who is a member of a
related group that controls the corporation. A related group means a group of
persons, each member of which is related to each other. So if Mike holds all
shares of XYZ, and Mike holds 25% of ABC and XYZ holds the remaining 75% of ABC,
ABC is related to Mike.
s. 251(2)(b)(iii) – a corporation is related to any person related to either the
person who controls it, or any member of the relate group that controls it. So
Mike’s mother is related to ABC and XYZ in the above example
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s. 251(2)(c)(i) – Corporations can be related to each other if they are controlled by the same person or
group of persons (which could mean an individual and/or corporation)
Benefits
s.5(1) – Taxable income includes Salary, wages, (courts use ordinary meaning, includes compensation for
services rendered by employees in the course of their duties) gratuities, (voluntary payments made in
consideration of services rendered in the course of the TP’s office or employment)
“other remuneration” – Things received (cash in hand) honoraria, commissions, gifts, rewards, prizes – Can be
benefits of employment as well as remuneration
Term – “Other remuneration” – Sufficiently broad to include most benefits
s.6(1)(a) – Tries to catch non-cash benefits from employment, stating that their value is taxable -- Board,
lodging, other benefits of any kind whatever enjoyed in respect of or by virtue of employment/office
Reason to tax benefits:
Stop a shrinking tax base (bartering shouldn’t be exempt from the tax system)
Ensure horizontal equity
There are some small benefits that are difficult to catch and which the gov’t doesn’t bother to catch – consider the
cost of administering the tax system
Exceptions:
s.6(1)(a)(i) – Contributions from the TP’s employer to or under a registered plan for sickness, accident
insurance, etc are not taxable when the contributions are made
The gov’t is not going to tax you until you actually receive the benefit (s.6(1)(f))
s.6(1)(c) – Director’s fees – Are included as income
s.6(1)(f) – Amounts payable to the TP on a periodic basis in respect of the loss of income from office or
employment – Disability insurance, etc, payments made by the employer in that regard – this is TAXABLE
Savage (SCC 1983) (What constitutes a benefit)
Facts: Took courses on own initiative (English cases would say this is not taxable) – Gets $300 for the completion of
the courses was not taxable
Held: SCC changes the English law – Finds it to be a taxable benefit
Payment does not have to be in the character of remuneration for services
“Benefit of whatever kind” is broad language – Read very broadly, connection to employment or office can
be quite tenuous – Compared to the UK statutes, our act goes further
In respect of – Means in relation to, with reference to, or in connection with
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Intended to convey some connection, does not have to be a strong link
What constitutes a benefit – Poynton
A material acquisition which confers an economic benefit (from employer to employee)
Largely soaks up anything that falls out of remuneration
Applied to facts:
Intention of prize – Encourage self-upgrading, more valuable employees, promotions
In relation to or in connection with her employment -- TAXABLE
Interpretation
bulletin on fringe benefits (for gifts under $500 –
read) – (Remember court is not bound to follow)
Employers can give employees two tax-free non-cash gifts per year for special occasions (does not include stuff like
gift certificates which are “almost cash”)
Total cost must not exceed $500
Also, a separate non-cash long service/anniversary award may also qualify for nontaxable status to the extent that its total value is $500 or less
Long service award – cannot be for less than 5 years of service or 5 years since the last
long service award was granted
The above gift and reward policy does not apply to non-arm’s length employees
Items of immaterial or nominal value such as coffee, tea, t-shirts, etc are not considered
taxable
Frequent flyer points collected by employees while on employer business are taxable (see
para. 14)
Lowe v. The Queen (FCA 1996) (court has power to apportion
value of trip into business and pleasure)
Facts: Executive, responsibility in maintaining and developing relationships – Took clients to trip
Employee not there on volition, there to serve employer
Held: Not a personal benefit unless represents a material acquisition of value in an economic sense
Primarily business trip, any pleasure was incidental – Should not be regarded as taxable benefit
Ask: Was the trip for the benefit of the employer or the benefit of the employee? Is the trip “part of the
job?”
Erred in finding that the spouse expenses were a taxable benefit
She had attended all the same meetings, same objectives in mind
Court has power to apportion the value of the trip into business and pleasure (pleasure taxable)
Did not since pleasure was incidental
The Queen v. Huffman (FCA 1990) (Was there a material
acquisition conferring an economic benefit on TP?)
Facts: Officer – Purchased clothing (out of own pocket), required to be worn while on duty
Necessarily a size larger than what he’d normally buy for clothing – To carry equipment underneath
Is reimbursed for expenses of clothes – $500 as benefit
Held: Was there a material acquisition conferring an economic benefit on the TP?
Restored to an economic situation he was in before his employer ordered him to incur the expenses
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Not a benefit – it was like buying a uniform. TP showed that clothes had no value to him outside the job
and he wouldn’t normally have bought them
(See below on what’s better – reimbursement, deduction, allowance?)
Bure v. The Queen (paying for a hockey player employee’s agent
is a benefit because agent fees are not deductible for
employees)
Facts: Canucks paid Bure’s agent
Held: That was taxable benefit – Material acquisition conferring an economic benefit
They paid what he would otherwise have to pay himself
Note: Bure was an employee of the Canucks. Employees are seriously limited by what they can deduct
through s. 8(2)) perhaps if Bure was independent contractor this would have been handled differently. Bure’s
income + agent fee – agent fee = taxable income?
overruled – good policy case about
when loss incurred when moving is tax deductible
Ransom v. MNR Legislatively
Facts: Appellant was transferred from Sarnia to Montreal. Had great difficulty selling
his home and had to sell at a loss. Employer reimbursed him for his loss. Was this
reimbursement taxable?
Holding: This was a pre-savage case and focused on whether the amount paid was
remuneration for services rendered (now overruled – material acq. is the current test)
Court distinguishes between remuneration which is paid for services rendered (taxable),
reimbursement which has no benefit to employee and was an employer expense paid
upfront by employee (no tax), and allowance which is an arbitrary amount paid in lieu of
reimb with no need to account for it (generally taxable)
Court holds that the move was a result of the employment relationship, and that the
employee’s financial position was adversely affected by reason of the employment
relationship. Court draws an analogy between reimbursing for the loss in home value
with ordinary travelling expenses – no tax is owed as a result
Criticism: Was the loss on house wholly caused by the move? What if he overpaid in the
first place? What if he owned a mansion – should he enjoy a substantial reimbursement
while another employee who rents gets nothing?
The Queen v. Phillips (narrowing of Ransom – is it a material
acquisition conferring an economic benefit)
(This case narrows Ransom to its facts)
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Facts: CNR employee, gets money to compensate for higher living expenses in
Winnipeg. Cash is paid
Holding: Post-savage case. Employee gets money in capacity as employee. No loss
suffered on sale of home. This is compensation for expected additional living expenses.
Ransom doesn’t apply
Court says the employee’s net worth increased. This is a material acquisition conferring
an economic benefit on the TP. TP gains an advantage – he can purchase an asset of
greater value. Taxable
(Good policy – if this was not taxable, then where is the line drawn? Can employers pay
for increased insurance rates? Increased food costs?)
Legislative limitation of Ransom case (read this first!)
s. 6(23) -- eliminates all exemptions in case law for subsidies provided by employer to assist employee to
acquire a house – all such assistance is considered a taxable benefit
6(19)-(20) – Preserves Ransom for the first $15,000. Employees who must relocate and suffer a loss from
selling a home at a reduced price are subject to tax on one half of the compensation received for any
amounts over $15,000. The loss must be actual
6(19) – A housing loss payment is deemed a benefit of employment. To qualify for the above exemptions,
it must be an “eligible relocation”
s. 248(1) -- “eligible relocation” (for our purposes) is defined as a relocation that enables the TP to be
employed at a location in Canada or to be a full-time student in Canada, with a distance greater than 40
kilometers from the previous Canadian location to the new Canadian location
If it is a non-arm’s length person doing the eligible relocation, a partial exemption may still be available in
6(20) – this covers the situation when one spouse had to move, but it was the other spouse who actually
owned the home. The payment doesn’t have to be made by the employer of the person who receives it.
Only one residence may be designated for this exemption
6(21) “housing loss” for the course’s purposes is defined as when the adjusted cost base exceeds the
selling price (proceeds of disposition) of the home
Valuation of a Taxable Benefit
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UK Law – Wilkins v. Rogerson – What the employee can
immediately convert it to cash for = taxable value. The amount
paid by the employer is irrelevant
Canadian law – Fair market value of the benefit, meaning the
amount someone not obligated to buy would pay to a person not
obligated to sell: Steen v. The Queen
Giffen et al v. The Queen (TCC 1995) (proper measure of value is
price one would have to pay to receive the same thing with all
the pros/cons)
Facts: Earned air miles which could be redeemed for reward tickets on trips paid by employer
Held: Proper measure – Price had to pay for a ticket entitling him to travel on the same flight in the same class and
subject to the same restrictions as found in a reward ticket
Economy class reward ticket unlikely to be worth more than =heavily discounted economy ticket
(Note: See previously mentioned interpretation bulletin
Dunlap v. The Queen (a benefit is a benefit even when
unilaterally conferred, it’s a benefit if not extraneous or collateral
to the employment)
Facts: Annual Christmas party provided by employer – Each employee assessed cost of event per person
Employee argues there was no increase in net worth. But court finds he received a non-trivial advantage; a material
economic advantage. The party was not wholly “extraneous” or “collateral” to the employment, nor was it
reimbursement for costs actually incurred. A benefit is a benefit even when unilaterally conferred.
Held: Looked at interpretation bulletin IT-470R – Supposedly there are concessions for parties, e.g., no tax for parties
up to $100 per person, no tax when the benefit was granted as good public policy – e.g., paying for a hotel room
prevents the employee from driving home drunk, analogous to providing employees counseling programs
However, court holds that legislative provision, s. 6(1)(a) takes precedence; administrative bulletin is not
binding
Allowances, Reimbursements
s.6(1)(b) – Requires the inclusion of allowances in taxable income – Personal or living expenses or any
other purposes
General rule – Given allowance to cover a particular expense by employer which does not require to be
accounted, then you will have to pay tax on it (as explained in Ransom case)
Series of exceptions:
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Travel, personal and living expenses (as stated in legislation or part of a gov’t inquiry)
Travel and separation allowances of Canadian Armed Forces
Travel expenses of sales people
Selling property or negotiating K for the employer
Clergyman expenses (don’t worry about it) (s. 6(b)(vi))
Travel expenses for non-sales persons (excludes expenses of an automobile)
Requires travel away from municipality or metropolitan area – Must be going out of
town from where the employer is based – Travel has to be related to performance of
the duties (s. 6(b)(vii))
What is an allowance?
Leading case under the old Income War Tax Act: Samson v. MNR
Facts: Assessed $20 a day living allowance
Kept no vouchers, did not produce accounts
Held: Allowance was not taxable – Involved no element of remuneration or net gain or profit or gratuity
Was paid and received only as reimbursement to the TP of living expenses over and above ordinary
personal and living expenses
Part of job kept him out of residence for some time
Situations in which a fix amount is paid – TP may result in net gain through spending less
Could be properly assessed on the net gain or profit
Essential character of the payment was reimbursement
Assessing for income tax purposes of any particular amount did not depend upon what it was
called, but rather upon what it really was
Doctrine of Beneficial Receipt
Amount received by TP will have quality of income only if right to it is absolute and under no restriction as
to its disposition, use or enjoyment
Where cash is supplied to employee who is under a duty to apply it according to employer’s needs and
objects is not income of the employee
The Queen v. Macdonald -- Leading case on what an allowance
is under s. 6(1)(b):
“An allowance is an arbitrary amount in that it is a predetermined sum set without
specific reference to any actual expense or cost. S. 6(1)(b) specifies that taxable
allowances include those for personal or living expenses, or for any other purpose, so that
an allowance will usually be for a specific purpose. An allowance is in the discretion of
the recipient in that he or she need not account for the expenditure of funds.”
What’s the difference between an allowance and
reimbursement?
See Huffman again:
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With a reimbursement, there is no discretion. It is paid to defray someone’s actual
expenses.
In Huffman, there was an administrative decision not to require receipts for expenses
over $400, with an allowance paid of $500. But normally, receipts were required. This
administrative decision did not change the nature of what the $500 actually was –
reimbursement.
With an allowance, the amount is determined in advance and expenditure is at the
complete discretion of the TP. In Huffman, payment was only made upon presentation of
receipts. It was not an allowance.
Remember that employers must abide by s. 8(10) and provide a certificate showing agreement that the
employee paid the expense as part of his employment.
Motor vehicle expenses for non-sale employees possible per s. 6(b)(v) – Must be in connection with duties
of employment
s. 6(b)(vii) reasonable allowances for travel expenses other than for selling of property or negotiating
contracts when travelling away from (a) the municipality where the employer’s establishment is located
and where the employee normally works and (b) the metropolitan area, if there is one, where that
establishment is located
s. 6(b)(vii.1) reasonable allowances for the use of a motor vehicle in connection with the performance of
the duties of the office or employment
s. 6(1)(b) – assumes that employee provides own vehicle. But this section says it applies to “any motor
vehicle”
A motor vehicle allowance will not be accepted as exemption (will be deemed not reasonable)
unless:
Must produce a log for km travelled (s. 6(b)(x)
And the employer multiplied an amount for that allowance
Cannot receive both an allowance and be reimbursed in whole or in part for expenses in respect
of that use (s. 6(b)(xi)
What is a reasonable rate per km? – CRA policy – Regulation 7306 – Sets amount that CRA finds to
be reasonable
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18(1) – Limiting provision – No deductions in business
18(1)(r) – For motor vehicle deductions against business or property income, deductions are prohibited
when they’re beyond the specified allowance given at a predetermined rate
Regulation 7306 – For purposes of 18(1)(r)
52 cents per km < 5000 km
46 cents per km > 5000 km
(extra 4 cents in territories)
If employer isn’t deducting more than these amounts then the employee doesn’t have to include them as
income (duh)
Note: CRA is never bound by published policy – Only about what the employer can deduct
s.6(1)(b) – Assumption is that the employee supplies their own vehicles – But it says “any motor vehicle”
Travel expenses – Includes meals, lodging – Goes beyond plane/bus ticket
s.6(6) – Special and remote worksites
Amounts are not included for:
Board and lodging for a period at the special work site (temporary nature)
During the time at the special work site, TP must have maintained another place of residence that was
available (was not renting it out) and was of such distance that could not reasonably return there at the
end of the day (s. 6(6)(a)(i)(A)(B))
The Board and lodging at the special work site must be a remote place – So remote from community that
not expected to establish a domestic establishment there s. 6(6)(a)(ii)
s. 248(1) defines domestic establishment as a dwelling-house, apartment, or other similar place of
residence in which place a person as a general rule sleeps and eats
If away a minimum of 36 hours s. 6(6)(a) payments by the employer to the employee for transportation
between the principal place of residence and the special work site are also not included if the employee is
also receiving board and lodging (s. 6(6)(b(i) and (ii))
IT-91R4 says an established community has essential services –
grocery store, clothing store, etc. To be remote, one must be 80
km away from a community or it must take an inordinate amount
of time to reach that community (e.g., if ferry travel is required
and the ferry comes only infrequently)
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Deductions
Note: s.67 – Not restricted to employment income – General for the whole act Reasonableness
requirement – deductions must be reasonable in the circumstances -- Would probably require to show
receipt
No allowance or reimbursement for costs incurred while
performing duties of employment Huffman – Plain clothes officer
– Clothes were considered by the Court to be a uniform – Those
only worn on the job, buying on behalf of the employer –
Deductible expense
s.8 – Authorizes a number of deductions that may be claimed against employment/office income
s.8(2) – General limitation – No deductions unless found in this section (the result – seriously limited as to
what you can deduct against your employment/office income)
s.8(1) – Lists various deductions permitted – generally, if the expense is for personal use, cannot deduct it
– Must be wholly applicable (relates) to the source of income
s.8(1)(b) – Legal expenses to collect salary or wages (or establish the right to collect) are deductible –
Usually legal expenses are deductible
Proposed bill – Expands deduction to “amounts that would be required to be included as income in this
section” and not just salary or wages as of 2001
It doesn’t have to be salary or wages owed – It is an amount if recovered will be included as income from
employment/office (of which legal expenses will be deductible)
Tsiapraillis – Collection from insurance company – Not a salary
or wage, but would be included as income from employment
Retirement allowances – They aren’t income from employment. So if you sue to collect, you
cannot deduct your legal fees under s.8(1)(b). Instead, there is a separate provision, s. 60(0.1)
which allows one to deduct legal fees incurred in establishing a right/collecting retirement
allowances.
The point: The ITA is rigid in categorizing income.
Does an action have to be successful?
Some judges said you would have to win your case
Most recent decisions – You do not have to win your case
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CRA Interp bulletin IT-99R5 says you must be successful in
establishing an amount was owed but you don’t have to actually
collect
s.8(1)(e) – Meals and lodging for railway workers
(i) Away from ordinary residence (as station agent, repair work, telegrapher)
(ii) Away from municipal and metropolitan area (home terminal) and cannot reasonably be expected to
return the same day – Have to have spouse or partner or dependent – Singles do not apply
s.8(1)(f) – Traveling and motor vehicle expenses – Sales expenses of commission employee
Must be employed in selling of property or negotiating of K (sort of common with s.6(1)(b)(iv))
More restrictions than allowance:
Must pay expenses under employment K – No reimbursement (i)
Must be part of ordinary job to travel – Cannot be a one-off trip – Common and habitual (ii)
Must be remunerated in whole or in part by commission (iii)
Cannot receive an exempt allowance, cannot deduct more than income/commissions (iv)
Amounts excluded from this deduction heading
Capital expenditure – Made to acquire an item that has enduring benefit (ie. Car, computer) – Not
deductible (v)
Outlays – 18(1)(l) – Use or maintenance of golf courses, fishing lodges – Not deductible (vi)
s.8(10) applies – Provision (Huffman) – Employer provides proof that employee pays expenses and that
they are incurred as part of employment – Must be filed by employee
s.8(1)(g) – Transport (person or goods) employee expenses – Crawford
Regularly required to travel away from municipality and metro area where the employee reported to work
While away from that area, expenses for food _and_ lodging are deductible
Crawford/Renko – About ferry employees wanting to deduct
amounts paid for meals at work – one must get meals AND
lodging to get a deduction
Facts: Want to deduct meals on trips between terminals
Issue: Said meals should be deductible
Note: Never had lodging expenses (dropped off at home port) – TP’s argued s. 8(1)(g) really means “meals or lodging”
Held: “And” means “and” – It is expected that one will obtain meals and lodging to obtain a deduction
Provision meant to capture trips of such length that you could not go home and eat
In this case, the ferry employees were able to return home to their residences each night. Buying a meal on
the ferry wasn’t necessary – pack a lunch instead
s.8(1)(h) – Travel expenses
Ordinary employment requires travel outside employer’s base (i)
Required under K of employment TP was to pay for expenses (ii)
No deduction if received exempt allowance (iii) or claims deduction elsewhere (iv)
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Important connection – s.8(4) – Meals – Cannot deduct meals unless gone for 12 hours from municipality of
employer’s establishment – Must be for business purposes (employment duty)
s.8(1)(h.1) – Motor vehicle expenses
Same requirements as travel expenses (i) and (ii) and (iii) and (iv) follow the same way
Martyn v. MNR – Claimed deduction for travel from home to
airport – Pilot – employment doesn’t start moment you get in car
Claimed deduction $400 per year
Held: Nature of employment – Duties did not begin until he got to the airport – Employment did not start at the
moment he got into the car
So commute to work was not an expense incurred in course of performing duties of employment
“Every employee must accommodate his lace of residence to his work”
Commuting to work is considered a personal expense – a consumption decision
Hogg – Provincial court judge in Ontario – Chambers in a
particular courthouse – driving to work is expense incurred in
order to allow you to perform your duties and not an expense
incurred in the course of your duties
Facts: When went to other courthouses or go to judge meetings, travelled in own car
Wanted to claim deduction for travel
Received allowance for travelling between courthouses
Held: Unsuccessful in claiming deduction
If you want to claim deduction, traveling has to be part of your duties of employment/office
Going to and from home and office – Not deductible
Travelling in the course of office or employment – Must involve the performance of some service
as compared to simply getting oneself to the place of work
In the judge’s case, this was an expense incurred in order to allow him to perform his duties and not an
expense incurred in the course of his duties. Essential difference.
Security concerns – Irrelevant to tax deductions
s.8(1)(i) – Other expenses paid by the TP that may be deductible such as
professional memberships (i),
office rent or salary to another employee the employee had to pay as part of the K of employment but receive no
reimb for (ii),
the cost of supplies consumed directly in the performance of the duties as part of the K of employment but receive no
reimb for (iii),
annual dues to maintain membership in a trade union (iv)
dues to an advisory committee where payment was required under the laws of the province (vi)
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dues to a professions board where payment was required under the laws of the province (vii)
(iii) – Cost of supplies and office rent -- need certificate under s.8(10) otherwise not deductible – Cost of
supplies connected to employment/office that TP by K was required to pay for
s.8(10) – Applies to (c), (f), (h), and (h.1) – Certificate certifying conditions were met (signed by employer) –
Submitted with tax return
s.8(13) – Home office
a) No deduction for home offices except when:
i) TP spends more than half their time at the home office – Principally performs duty of employment
ii) Or used on regular and continual basis for meeting customers and others during employment – Used
for purpose of earning income
b) Cannot generate loss from workspace at home
c) If precluded from deducting full expense – Then you can deduct it in subsequent years – Can carry it
forward
What are expenses from a home office?
What is the cost of an office in your basement, expense incurred
Can claim a proportionate amount
Renting – Percentage of rent paid, utilities, insurance, etc
Own – Mortgage interest, insurance, property taxes, maintenance fees, utilities, etc
Problem with Entertaining Clients
Note: s.67 – Not restricted to employment income – General for the whole act
Reasonableness requirement – deductions must be reasonable in the circumstances -- Would
probably require to show receipt
s.67.1 – Expenses for food or enjoyment of entertainment shall be deemed 50% deductible of amount
actually paid (a) or amounts reasonable in the circumstances (b)
Exceptions to s.67.1:
s. 67.1(2)(a) – it doesn’t apply when amounts paid were for an expectation of compensation, e.g., a
theater can deduct full amount of cost of renting movie – the theater is in the business of entertainment
s. 67.1(2)(f) – it doesn’t apply when the amount was paid in respect of 6 or fewer special events for
employees – can deduct entire amount in that case
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Income from Business
s.3(a) – Business and property – These are enumerated sources of income
What’s the difference between property and business income?
Generally they are treated the same (see sections 9, 18 and 20) but sometimes the Act
treats them differently and so it’s necessary to characterize a receipt either as property
income or as business income. For example
1. Active business income of a CCPC gets a preferential tax rate. Property
income does not get this treatment
2. For non-residents, income from business is paid on a net basis, whereas
income from property is subject to a 25% withholding tax
s.9(1) – Income from business or property is a calculation of profit of the TP
Profit is net profit (after deducting relevant expenses). But what is profit?
It is determined according to “well-accepted principles of business (or accounting) practice” except where
these principles are inconsistent with the specific provisions of the Act or principles of law.
For example, Generally Accepted Accounting Principles – used to create financial statements – are often
relied upon
For tax purposes – Start with GAAP – Adjust according to ITA
Act specifically requires certain items to be included
as income, for example:
s. 12(1)(a) – amounts received for goods and services to be rendered in the future
s. 12(1)(b) – amounts receivable for property sold or services rendered in the course of business
s. 12(1)(c) – interest
s. 12(1)(d) – amounts deducted in a preceding year as a reserve for doubtful debts
s. 12(1)(g) – amounts received based on production or use of property
s. 12(1)(j) or (k) – dividends
s. 12(1)(l) – income from partnerships
s. 12(1)(m) – income from trusts
s. 12(1)(n) – benefits from profit sharing plan and employee trust to employer
s. 12(1)(x) – inducement or assistance payments
s. 12.1 – cash bonus on Canada Savings Bonds
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Profit for tax purposes – Question of law, not accounting
principles. Examples of difference between GAAP and what is
accounting for tax purposes
s.67.1 – Can only deduct half of treating clients to lunch
GAAP – Deduct the whole thing
s.18(1)(p) – Personal services business – Limited deductions available for tax purposes
GAAP – More deductions
s.18(1)(l) – Cannot deduct company yacht, golf course fees, etc
GAAP – Can deduct if developing business
s.18(1)(r) – Motor vehicle use of employees – Limits what is deductible
GAAP – Not limited
Profit is net amount – Difference between total receipts and the costs and expenses to produce receipts
Key sections relevant to business income: s.9(1-3), s.12, s.18 (restriction on deductions), s.20 (specific deductions)
s.20(1)(c)(i) – Can deduct interest on borrowed money used to generate income from business or
property
Distinction between property and business – Usually determined by amount of activity
Specified investment business – Passive collection of rents, royalties, etc from property
Does not include businesses with more than 5 workers
What is a Business?
s.248(1) – Profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure
or concern in nature of the trade, but does not include an employment/office
Broad definition
Cannot make personal deductions
Issues with Business categorization:
Question of whether the person is doing is sufficiently commercial in nature/character
Attempt to distinguish business from hobbies
Generally, attempt to deduct losses from those activities
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Smith v. Anderson (1880) – Often used as a starting point for
considering what constitutes a business. Business is anything
that occupies the time, attention and labour of a man for the
purpose of profit
Gambling Cases – Windfalls versus Businesses.
Graham v. Green (1925 UK) – Windfalls are not taxable – Claims
gambling is a windfall
Facts: Lived off betting off horse racing
Gambling is not rational, it does not produce
Bookie – Application of mathematical odds to bets and making a living and profit -- taxable
But if you are the public who is betting, then historically a windfall
Held: TP was addicted to betting. It was his habit. However, it did not add up to a trade, adventure, or vocation
In Canadian law – If fixing odds to your favour (in a system, i.e., you are a bookkeeper), then would be treated as a
business
Walker v. MNR (1951) – Focus on the organization of the TP’s
activity to determine if there is a business
Facts: Farmer, part owner of horse, stayed around the stables, 53 days a year
Benefit of inside information as result of running horses he owned
Held: CRA was successful in showing a person’s winning on horses was income from a business
Was there an intention on the bettor’s part to make profit
Factors: Inside information, Systems (organization)
MNR v. Morden (1961) (constant and continuous betting does
not amount to business)
Gambling activities were so organized and occupied so much time and attention – They are business
No evidence that it was that organized
Gambling in his blood, provided excitement, but remained a hobby
Constant and continuous betting does not amount to business
Luprypa v. The Queen (TCC 1997) (games that require skill and
risk management are taxable)
Facts: Assessed on a net worth base – Increases in net worth is income + personal expenses
Would have to disprove assessment
Income came from playing pool – A pool shark (Main argument)
Held: If it really was gambling (game of chance, irrational agreement) then it may not be taxable
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Cites Bulanko – It is the management of risk (organized system to minimize risk) is character of business –
Recognition of professional gambling
“He had a system and a reasonable expectation of profit.”
Carefully managed risk, skilled player, played Monday to Friday, played drunk players (minimized
risk) – He organized the activity and had a profit intention. He played a lot – it was not a mere
hobby
In that regard, what is online poker? It could be income from a business; depends on the facts:
Online poker winnings
Income from business or gambling in chance
Roughly equivalent to pool shark
Minimize risk, organized system
LeBlanc v .The Queen (TCC 2007) (no organized system of
betting = untaxable)
Facts: Sports lottery winners
Had a massive operation – People running around picking up tickets, could get discounts for bulk purchases,
agree to split winnings
Key piece of evidence from expert – Odds against winning were astronomical
Lottery winnings are never taxable – s.40(2)(f) – Essentially says lottery winnings are not taxable, since prizes won are
deemed nil by the section
CRN has burden to displace that ITA statement – To show that the brothers had a system
Held: If betting on lottery as a business, can still be held as income from a business
Gambling gains are taxable (owner trains and races own horses and gambles on that)
Incident to formal type of business
Gambling gains are taxable if using skill
Application: Betting on massive scale and with organization v. the astronomical odds
Pure chance rather than having some skill or knowledge
Indicators of a business:
Did not have jobs
Lived off the profits
Only chose long shots (maximized risk) – An indication of a system, as irrational as it may be
Indicators of not being a business:
Lost 95% of their bets
No organized system – just because one bets a lot doesn’t mean it’s a business
Court described them merely as compulsive gamblers
Pursuit of Profit – Reasonable Expectation of Profit
Not as important now (after Stewart)
Important to finding a source of income – Do not want person to get intentional loss to deduct
Example: Yacht renting business – But have it for personal use – reasonable expectation of profit -- You can
deduct losses
Example: Losses from past times and hobbies – No reasonable expectation of profit – no deductions
Moldowan – In order to have a source of income, the TP must
have a profit or a reasonable expectation
If not, cannot have losses to deduct on other sources – Old law
REOP – Determined by all facts – Some examples given by judge:
Profit/loss experience in past years
TP’s training
Intended course of action
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Out of Moldowan came the REOP test – Used to deny recognition of losses on basis there was no business, no source
of income
Landry (reasoning now overruled) – TP was lawyer, dinosaur, did not adjust to modern legal practice, losses
Conducting practice so inefficiently that there was no REOP
Stewart v. The Queen (2002 SCC) – Leading case both for
establishing when business losses are deductible and
application of 20(1)(c)(i) [interest deductions]
Facts: Bought condo units – Expected loss for the first few years, but as he paid mortgage down, it would be
profitable – Was an experienced real estate investor – Earned rental income
Things turn out badly – Could not find renters
Renting was done by management company to arms-length renters
Finally having loss for several years – Sold a unit to reduce debt on other units
Held: There has been a divergence from Moldowan
Clear that it is sufficient that if there is a REOP, then it is a business
But not a necessary condition
Cites Smith v. Anderson – Anything which occupies the time and attention and labour of a man for the purpose of a
profit is a business
The common law principle as to what a business is
Unsuccessful businesses – Does not mean they did not expect profits or did things to get profits, courts
shouldn’t evaluate a TP’s business acumen
Two stage approach to s.9 (profit is the calculation of income for
business source):
First part of the test – Is the activity of the TP undertaken in pursuit of profit, or is it a personal endeavor?
To determine if commercial or personal activity
There must be subjective intention to profit but objective evidence of it
Show that predominant intention is to make profit
Factors: Training, past loss/profit. Intended course of action, etc
REOP to be considered – But not deciding factor
Factors pointing against commercial activity include personal benefits (like a yacht rental business
where the business owner often uses the yacht himself)
Court asked the question: For what purpose would the TP have spent his time and
money in this activity if not for profit?
Sipley v. The Queen – the amount of time a TP devotes to the activity in question is a factor
If activity carries no personal element and is clearly commercial, no further inquiry, go to step 2
If activity could be classified as personal pursuit, determine if sufficient commercial manner
Is profit the primary motive for the activity – consider Moldowan list – Not exhaustive
Do not need to have net profit
Motivation for capital gains realization does not detract from profit motivation
REOP is a factor that may be taken into account
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Second part of the test (going to this step isn’t always necessary; court didn’t go to this step in the instant
case for example) – if not a personal endeavor, then categorize the income: is the source business or
property?
Generally business income requires an additional level of taxpayer activity than property income. Refer to
cases in the following sections to completely assess this.
Application to facts: No evidence of personal pursuit – Arms-length renters – Clearly commercial – no personal
benefit.
Anticipated capital gain – Helps establish that it is commercial
Financing (and resultant interest charges TP wanted to deduct) – this adds to the commerciality of the
venture
Rental activities – Source of income – Entitled to deduct losses
Referred to Ludco case – s. 20(1)(c)(i) does not require net profit in order for interest to be deductible
Distinguishing Business income From Property income
and the realization of capital gains
An adventure or concern in the nature of trade is specifically included in the
statutory definition of business. So s. 9(1) applies even if the TP did not conduct a “business” in
the ordinary sense of the word and made cash from an isolated one time speculative transaction. While the TP was
not a trader, he is taxed as one – as business income.
The distinction between income from business versus income from employment is very important (see foregoing
reasons discussed, different deductions allowed, withholding taxes, etc)
Capital gains – broadly speaking, when one is in the business of buying and selling property, the TP is taxed on the
profits as full business income. But one buys for investment purposes and eventually sells the property at a gain, that
is a capital gain and taxed at a different rate (only 50% of the gain is included as income).
Income from property compared to business income
Lois Hollinger v. MNR (1972) – TP received share of partnership
income – how to distinguish business income from property
income
Wanted to characterize money as property income
Held:
The court articulates various factors pointing to business versus property income:
1. whether the income was the result of efforts made or time and labour devoted
by the TP
2. whether there was a trading character to the income
3. can the income be fairly described as income from a business within the
meaning of that term as used in the Act
4. the nature and extent of services rendered or activities performed
Therefore, if income is derived principally from ownership of property, the income is generally considered income
from property. But if the earning of the income involves a significant amount of activity, the income is often income
from a business.
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Applied to facts: Partner, by definition, is engaged in business
Example: Bank – Business is lending money, so interest is income from a business
Compared to individual lending money – Property – Debt obligation
Dividends – income from property, although may be business income to an investment dealer in some
circumstances
Walsh and Micay v. MNR (1965) – Level of services generally
determine whether rentals are from a property source or a
business source
Facts: Lawyers owned rental property – Wanted to be perceived as carrying on property
Held: Character is of passive ownership, provided little service
Did not provide services – Like breakfast, maid, linen, laundry
Did provide heat, electricity, janitor, common hallways, carpeting, snow removal, drapes
Was income from property
Etoile Immobiliere SA v. MNR – Rental and other types of income
earned by a corporation pursuant to the objects of its
incorporation are generally presumed to be income from a
business (the corporation is in the business of holding property
for its revenue)
Adventure in the Nature of Trade
Specifically included in definition of business
So s.9(1) applies even if TP did not conduct a business in the usual sense
Example: A single speculative transaction – Intended to yield a profit, but TP is not a trader
Profit would be taxable
First – Distinction of business from capital gains
Sale of property – May be characterized as either a capital gain or income from a business
Capital gains – Treated more favorably than business income
So when profitable – Characterize as capital gains
When not, call it an ANT so that the loss is fully deductible in computing income
Second – Distinction from property
Property – Income that flows through ownership – Not through activity
Distinction comes through extent of activity of owner or owner’s agent in earning income
In a sense, it is a deeming provision
If you dispose property and do it in a particular way, will be treated as a trader of the property
MNR v. Taylor – Most influential case on the difference between
capital gains and an ANT
Facts: President and GM of Canadian subsidiary
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TP decided to buy a large amount of lead and sell it to the subsidiary – Sold through brokers
In the course of the dealing, made a profit
Minister assessed as an ANT and taxable as business income in the definition of s.9(1)
Held: Court distinguishes carrying on a business (continuous activity) from an ANT
Can have an ANT without carrying on the business
Nature of a business transaction
Acted in the same way as a trader would do – Reason to find taxable – It is business (trading motivation)
Had all the indicators – Transported it to the company
Nature and quantity of the good – Precludes the nature of investment
Buying lead is not an investment of itself – capital assets tend to produce income to owner – lead
just sits there waiting to be sold
Cannot personally use
Bought in the similar manner as buyers on the international market (Buy low, sell high)
TP bought the lead solely for the purpose of selling it to the Company
Test – Whether the operations involved are of the same kind and carried on in the same way as those which are
characteristic of ordinary trading in the line of business in which the venture was made
Single transaction could be classified as an ANT
Not necessary to set up an organization to deal with those transactions or to have intention to make profit
Note: Gold – Treated as a capital property AND a commodity
For gold – A whole lot depends on the nature of the transaction
Comment: Bulletin IT-346R states that TP’s who trade in
commodities/futures as pat of their business or where the TP
has special (insider) information about the commodity will have
their activities treated as business income. However, other TP’s, referred to as
“speculators” may treat these activities as capital in nature provided the TP does so on a consistent basis.
Interesting – is this position consistent with the jurisprudence? Doesn’t appear that way.
Regal Heights Ltd. v. MNR (SCC 1960) – Leading case, but
sometimes distinguished – primary objective of earning rental
income but second objective of selling land for profit = ANT if
sell land for profit
Facts: Wanted to buy land for shopping center – Prime real estate near the Trans-Canada HWY
Partnership formed, bought land, transferred to corporation
Never managed to sign an anchor tenant
So it subdivided the land, sold it
Primary objective – Earning rental income which is recognized as income from a business
Found a second objective – To sell for a profit (a plan B)
Held: Characterized getting shopping center up as only promotional in nature – the “real work” of setting up the
shopping centre wasn’t going to begin until they secured an anchor tenant and they never did so
Shopping mall venture was speculative, and selling the land for profit was always within contemplation
Question – When does secondary intention have to be present
Court finds that it was always a plan B, that there was always an intention to sell for profit if the
mall did not pan out – Was an ANT
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Riznak – In this case, a developer doing land assembly decided
to cancel the project and sell the assembly upon receipt of an
unsolicited offer – Regal Heights doesn’t apply when offer is
unsolicited
Distinguished on the fact that an unsolicited offer was received and accepted whereas in Regal Heights, they went out
to list and sell the land. Also in Riznak, there was no evidence of a secondary intention to just sell the land at the time
of acquisition whereas this intention existed in Regal Heights.
Hughes v. The Queen – the TP bought the property as a rental.
Court accepted that only intention at time of acquisition was as
a rental. When that became frustrated, there was a change of
intention to one of selling for profit. Apportionment ordered
Unlike previous case law, the judge in this case ordered an apportionment between income and capital so that only
the gain accrued after the change in intention was treated as ordinary income. The other part was treated as a
capital gain.
Irrigation Industries Limited v. MNR – (SCC 1962) - Buying and
selling shares – What is treated as investment and what is an
ANT
Fact: TP bought shares from company treasury – (Did not buy from a broker)
60% were held for three weeks – Very quick buy/sell – To pay off the overdraft
Bank was worried – So they sold the shares
Held: Transaction is completely different from the business of the corporation (It was mining stock)
No dividends from the stock
Heavy borrowing to buy (maybe need to realize profit quickly)
Despite this – Was a capital gain, not an ANT
The court considered various factors as pointing towards/against a capital gain:
The fact that he borrowed to buy the stock – Not an indicator that leans either way
The fact that he bought stock in a new company – Anticipate shares don’t give dividends – That by
themselves is not indicative of ANT – Dividends do not hold much significance
Cannot distinguish ANT from investment of intention of profit (both have it)
Comment: The judge took each factor individually and dismissed them. Arguably, he should have taken the
totality of the circumstances – that would have pointed more strongly towards a finding that this was
income
1.
2.
Applying the test in Taylor – the court derives a two part approach
whether the person dealt with the property purchased by him in the same way as a dealer would ordinarily
do and
whether the nature and quantity of the subject matter of the transaction may exclude the possibility that its
sale was the realization of an investment
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Applied to facts:
Shares are capital by their nature (investment in a business) and are not like commodities
Recognized method of investing capital
Shares were not bought/sold like a trader (like a broker)
Traders are underwriters for IPOs – Not the case here
Intention to sell for profit as soon as opportunity presented itself – Not a sufficient test
Legacy: Court will tend to find selling shares as a capital gain
Arcorp Investments – when TP is behaving identical to a trader =
ANT
Facts: TP, owned by one shareholder, securities broker – TP was an investment company
Bought penny-stocks in resources
Shares were held for less than a year
1M turnover of shares (buying and selling)
Undertook as many as 4 transactions in a day
Held: Finds TP’s intention was not to earn investment income but to trade securities, to carry on the business of
buying/selling stocks – Arcorp’s securities activities exhibited a “badge of trade”
Way TP was behaving was identical to what a broker would do own his own account
Volume of transactions and the marketable nature of the securities – Factors in finding business
Interpretation Bulletin IT-459 – Has a little more credibility
because it was given SCC approval as a summary of law – That
it accords with the law, however, proceed with caution as the
SCC didn’t adopt everything
ANT’s
Para.1 – Person can have more than one business (dentist who has side business of real estate)
Para.2 – List a series of 12 factors that indicate whether it is ANT or capital gain
Intention to hold or flip
Geographical location for zoning (possibility for development?)
Feasibility of the intention
Reasons for selling (sought to sell at profit or unsolicited offer)
Para.3 – ANT does not mean carrying on a business – Just included in the definition
Para.4 – Sounds like Taylor – No single criterion – All circumstances – Principal tests:
a) Did they deal with it like a trader?
b) The nature and the quantity of the property exclude possibility of capital nature (e.g., buying a bunch of
lead)?
c) Whether the TP’s intention as established or deduced is consistent with other evidence pointing to a
trading motivation.
A) TP’s Conduct
Para.5 – Are they essentially doing what would be expected of a dealer in such a property
Para.6 – Efforts to find or attract purchasers or flip property soon after acquisition points to trading intention
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Para.7 – Steps taken to improve marketability and then listing the property soon after taking those steps – points to a
dealer in business/trading intention
Para.8 – TP has commercial background in similar areas or previous experience
B) Nature of the Property
Para.9 – Large quantity of property – Leans to ANT
Only purpose of acquisition was subsequent sale – Leans to ANT
Cannot produce income or enjoyment to the owner by virtue of ownership – Leans towards ANT
Para.10 – Can produce income only if operate the property but TP is not in the position to do so and could only use it
by selling – Leans towards ANT
Para.11 – Prima facie investment – Securities
Governing factors as to whether it was an ANT depends on manner in which property was dealt with and
intention – did the TP want to operate or hold the investment?
C) TP’s intention
Para.12 – Intention to sell at profit at first suitable opportunity is not sufficient to establish an ANT (everyone wants
to sell their investment at a profit)
On the other hand, inability to establish an intention to sell at first suitable opportunity does not preclude a
finding of an ANT
Para.13 – Deals with intention of the TP – Summary of the secondary intention from Regal Heights
Must be recognized that there may be more than one intention at the time of acquisition
If primary intention is investment, consider if at time of acquisition, TP had secondary intention to sell
Secondary intention is significant when the circumstances suggest there was little likelihood of the property
being retained by the TP because of a lack of financial resources or some other reason (in other words, buy
to develop but sell land quickly after purchase instead is probably an ANT, while buying apt building renting
and holding for 7 years then selling at profit likely means no ANT)
TP intentions are not limited to the purposes for acquiring the property, but extend to the time at which
disposition was made
TP intentions at time of acquisition may change at any time during ownership and up to disposition
When change your mind, then it will no longer be treated as a capital gain
Buy land – Intend to develop ($1M)
Decide to drop idea ($2M in value now)
Decide to sell – Then it transfers into ANT
Para.14 – The following factors, in and of themselves, are not sufficient to prevent a finding that a transaction was an
adventure or concern in the nature of trade:
a) Single/isolated transaction
b) No organization to carry out transaction
c) Transaction completely different from the other activities of the TP and he never entered into such a
transaction either before or since
Para.15 – A TP who engages in an ANT and loses money deducts the loss as business income for the year the loss was
incurred
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Income from Property
s.248(1) – Definition of property
Very broad definition – Includes rights to shares and choses in action
“Property of any kind whatever whether real or personal, immovable or movable, tangible or intangible,
corporeal or incorporeal”
s.12 – Brings into income certain items that are typically derived from a property source
MNR v. Minden (1963) – Money is property – Now in the ITA
specifically
Fasken Estate v. MNR (1948) – Property includes contingent
right to receive income from a trust
No. 481 v. MNR (1957) – No ownership over freedom to carry on
business
Agreement not to compete
Benefit obtained by the covenantee under a covenant not to compete was not property
No character of ownership, prof thinks this judge is wrong
The right against the covenantee has value, the right the covenantor loses does not
Non-Residents and Property Income – Withholding Tax
Business carried on by non-resident is taxed normally
However, income from source of property in Canada to non-resident falls under withholding tax regime
Non residents who receive passive types of income
s.212 – 25% tax on non-residents
s.215 – Withholding responsibilities on the payer, the Canadian resident
(In other words, the non-resident pays the tax. It is the non-resident’s tax. But it is the resident Canadian agent’s
responsibility to see to it that the tax is paid)
Four Classic Incomes from Property – Rents, royalties, interest, and dividends
Comparison with Capital Gains:
Property income is fully included as taxable income, capital gains have 50% exempt. Capital gains are a separate
source of income.
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s.9(3) – Any capital gain from the disposition of the property is not income from a property
Problems often arise in selling a property and payments are installments or payment is dependent on the use or
production of the property
Note that the same analysis (Stewart) regarding source of income and reasonable expectation of profit applies to
property income as well as business income.
Income from Interest – Part of Income from Property
ITA – s.12(1)(c) – Interest amounts are included in income
Also includes things that aren’t specifically interest but assimilated or substituted for interest (surrogatum
principle)
What is interest? – No definition of interest in the ITA Two
leading cases – Farm Security Act and Barfried
If it is interest, it accrues daily
It is compensation for the use of the principal amount
Needs to be linked to a principal amount and a rate
What is a Debt obligation? – Any obligation to repay money – Includes bank accounts
Anything representing lending and borrowing will be a debt obligation
Lending – Gives you a right to be repaid – Right is property
Own a debt obligation – The right to be repaid and receive interest
Can engage in a business of buying/selling obligations – Like a bank
Would be income from a business in that case
Late payment of charges – Supplier who has not received payment will levy a late payment charge
Generally calculated as percentage of the amount outstanding
Equivalent to loan by the supplier to the buyer– Charges are considered to be interest
See Lebern Jewelry Co. Ltd
Timing of the Interest Inclusion
s.12(1)(c) – Seems to allow calculation of interest when it is received or receivable
Depends upon method regularly followed by the TP
However, the following sections contain special mandatory rules for including interest in income; they essentially
override the above section and require a form of the accrual method for everyone:
s.12(3) & (4) – Ensures interest is included on a regular basis – On an accrual basis
s.12(3) – Applies to Business associations (corporations, partnerships, etc)
Requires the association to include in come the amount of interest accrued on most debt
obligations to each tax year end of the corporation, to the extent not included in income in a
previous year
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Even if it may not be received or receivable until years later
Example: corp X loans $1000 to Y on June 1 2001. Loan is repayable in full on May 2003. All
interest and principal payable at May 2003. Corp X has a year end at Dec 31. Corp X must include
in income on a per diem rate interest accrued during 2001 and a year’s worth of interest in 2002.
s.12(4) – Anniversary day accrual rule for individuals holding investment K’s (for
our purposes, investment K means all debt obligations held by individuals except obligations where the TP reports the
interest as it accrues daily, i.e., when the TP reports accrued interest as of Dec 31 each year rather than deferring
reporting any interest until the first anniversary day)
Definition of anniversary day – One day before the anniversary of the advance = 1 year
Use end of calendar year
This section requires the individual to include in income each year the interest accrued on the
investment K to each anniversary day in respect of the investment K
When the loan is outstanding for a year, include interest accruing to that date
This means that if corp X in the above example was an individual who normally reports interest income only when
actually received (on a cash basis), this requires income to be reported as follows:
In 2001: Nothing (no anniversary day)
In 2002: One anniversary day has arrived so 365 days of interest must be included
In 2003: Another anniversary day elapsed plus payment was made. Individual X reports total interest received for
the term of the loan with deductions for amounts already reported in previous years.
Another Problem:
X is an individual – Principal amount of $10K which pays simple interest rate of 10%
Not payable until date of maturity – 5 years later
Include in income $1000 as interest accrued to the anniversary day in each of the years 2, 3, 4, 5
Upon maturity, can deduct the $4K already paid in previous years
Blended Payment or Capitalized Interest
TP receives a single payment which includes repayment of capital and interest
Whether it is a blended payment is a question of fact
s.16(1) – Requires that the interest component be segregated and included in the TP’s income
An amount can be reasonably be regarded as part interest and part capital
Part that can be reasonably regarded as interest will be taxed so
Classic example of blended payment – Mortgage payment – Borrow money to buy a house
Agree to pay fixed interest for 25 year term – Pay interest and sliver of principal
Payment does not vary from month to month, it is blended – Interest and principal
Interest is income to the bank, but part is repayment of capital
s.16(1)(a) – The part of the amount of the blended payment that can reasonably be regarded as interest
shall, regardless of the terms of the contract, be deemed to be interest on a debt obligation held by the
person to whom the amount is paid or payable
This means for corps and indivs, would have to apply s.12(3) and (4) – Would have to report on the
anniversary date or days accrued to the end of the year
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Groulx v. MNR (SCC 1967) – Blended payments; hiding interest
payments
Facts: TP sold farm – Accepted $85K down payment - $310K was to be paid in installments over 7 years
No interest was charged on the $310K
Evidence that he had negotiated away the interest component of the transaction
Price of $395K – Was over fair market value
However, if payments were late – Interest of 6% would kick in
If early payment – There would be a discount
Held: That the negotiations put the interest into the sale amount
Included part of the sale price as income from property (interest)
Factors:
Was familiar with real-estate transactions
TP was the one that proposed the non-payment f interest
Weakness of reasons for making the no-interest proposal
Sale price was greater than fair market value
Discount for early payment
May be able to avoid s.16(1) if distinguish Groulx
VanWest Logging – Installment K, but no interest on installments
None of the factors in Groulx
No discussion of interest in negotiations
No practice in timber business to charge interest on sales
No discount for early payment
Note on sale of obligations with accrued interest:
What about the situation when the obligation with accrued interest is transferred and the interest becomes payable
after the transfer?
s. 20(14) – When the transferee of the debt instrument becomes entitled to the interest accrued and
entitled to interest accrued for a past period when he did not own the obligation, the accrued interest is
included as income to the transferor to the extend that it is not otherwise included. The same amount
may be deducted from the transferee’s income
Rents and Royalties
Rent – Amount paid for use on a tangible, real or personal property
Rent for tangible property was always included in income
What is use? A property is used when the oner allows the person to take possession or make use of the proprety.
Royalties – Broader term for tax purposes than in ordinary day use of the word
Ordinary use – Share of profit from an activity or amount paid to use the right of intangible property
(copyright, invention, trade-name, design, etc)
Also includes owner of a mineral property – May enter into a joint venture – Collect royalties from the
actual operator
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S. 12(1)(g) – Included in income are any amounts received (not receivable) by the TP in the year where
payment was dependent on the use of or production from property whether or not that amount was an
installment of the sale price
Exception: Sale price installment from agricultural land is not included in this paragraph
When is this relevant? See below cases (Spooner)
Right to use property (patent) – Can be selling it (complete assignment of the property) – sale of capital asset in that
case
Leasing it – Royalty
Difficulty in determining if it was a sale or rent/royalties – Turns on the extent of the rights transferred
If all legal rights have been transferred – Usually constitutes a sale giving rise to sales profits or capital gains
If less than all, transaction is a lease or license and payments are rents and royalties
Example: transfer of exclusive right to exploit a copyright in all fields of use and media for the remainder of the life of
the copyright is a sale and not a license
A grant of non-exclusive right in the above case may be a license (smaller bundle of rights transferred)
Spooner v. MNR (amount received by TP depending on the use
of or production from property, even if an instalment payment
on sale price of property is income)
Facts: TP had owned ranch in Alberta
Sells 20 acres of it to Vulcan Oil for cash, shares, and royalty for oil extracted from the land
Royalty had produced a significant annual revenue – It was a royalty for the oil but she accepted cash
instead
Held: It was a proceed of disposition (it’s like buying something with part cash and part barter) and thus capital gain,
not income
Consequences: Amended
the ITA to include what is now s.12(1)(g) -- Any amount
received by the TP that is dependent on the use of, or production from,
property, even if the amount is an installment payment of the sale price of
property, it is income in the hands of the recipient
Provision is to stop conversion of royalties into capital gains
Examples of what amounts have been included in s.12(1)(g):
Sale of gravel where the purchase price is payable in fixed installments – Pallett
A sale of a franchise to supply natural gas in return for an amount based on gross receipts from all sales
under the franchise
Proceeds of an assignment by an author to publisher the right to publish and sell work
Wain Town Gas & Oil Company Ltd (1952) (accepting sale of
franchise in installments of gross receipts is income)
Facts: Selling franchise that supplies natural gas
New purchaser, under assignment of the franchise, agreed to pay pltf 10% of gross receipts
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s.12(1)(g) – Applied to the income – Rather than placing it under capital gains from proceeds of disposition
of capital asset (land)
s. 212(1)(d) deems certain types of payments to be rents or royalties but also specifically excludes some
payments such as:
Copyright payments in respect of production or reproduction of any literary, dramatic, musical or artistic
work, INCLUDING computer software – sale of goods exempt from withholding tax – s.212(1)(d)
Application of Tax Treaties
s.212(1)(d) – Seems to say that you have to withhold tax (it’s a source of income within Canada) If you
have a US owner of a patent, license to Canadian manufacturer, has to pay 5% of gross sales, $1M in sales,
have to pay royalties of $50K
US-Canada Tax Treaty says royalties from patent are exempt from withholding tax
Computer software – Payments may be characterized as licenses (royalties) or sales – Considered property, subject to
Canadian copyright – CRA policy is to treat software in two categories
Source code and custom software – CRA treats payments for source code as royalties (“custom software”)
Or software subject to a license agreement where it is clear the customer was aware of its terms (usually
verified by signing the license agreement) – this is custom software
Fees paid for custom software/source code are royalties
Shrink-wrap – Seems to be goods, but in fact is a license, a right to use the software, use property
Includes store bought software, and “web-wrap” downloads from internet
CRA treats this as sale proceeds even though it’s technically a license
Dividends
s.12(1)(j) – Includes as income dividends from Canadian corporations
s.12(1)(k) – Includes as income dividends from non-resident corporations
s. 82(1)(b) and s. 121 – gives individuals a dividend tax credit to minimize double taxation
s. 112 – gives corporate shareholders a dividend tax credit to minimize double taxation
Dividends – When corporation has retained earnings, pay it according to shares
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s.248(1) – Definition of dividend is vague – Only says dividend includes stock dividend
Not taxable until check arrives – On a receipt basis
Ownership of the share (property) – Dividends are income from property
Receipt requires nothing more than ownership, needs no skill or effort
Canadian Corporation – Withhold tax to non-resident shareholders
s.84 – Deems a dividend to be paid:
(a)When corporation increases the paid up capital in respect of the shares of any class of its capital stock
(b)Distributes funds or property on winding up, discontinuance, or reorganization of business
(c) Redeems or purchases for cancellation its shares
(d) reduces the paid up capital in respect of any class of shares of its capital stock otherwise than by a
redemption, acquisition, or cancellation of the shares
Dividends – Paid in cash, property, or new stock of the corporation. The amount of dividends received is included as
income.
s. 83(2) Dividends paid by certain private corporations out of tax-free income
(e.g., the tax free portion of a capital gain) are exempt from tax
s.15(1) Shareholder may receive economic benefits from a corporation
(such as interest-free loans or using corporate property for personal
purposes) – Value of benefits must be included in shareholder’s income –
Deductions in Business / Property
s.9(1) – The basis in which one can deduct from business/property income – Defines income from
business as profit – Implies a net concept – Contains primary rule for deductions
General Approach – Daley v. MNR: An expenditure properly
deducted under accounting principles will be deductible for tax
purposes unless prohibited by some provision of the Act
So, amounts not deductible using accounting principles are not deductible for tax purposes
Approach confirmed in Canderel v. Canada (1998)
Concept of profit in s.9(1) is a net concept
Other important sections:
s.18 – Specifically prohibits deduction for certain expenses (listed below)
– What cannot be deducted from business/ppty income. Note that the general
limit is that the expense must have been made for the purpose of generating income. So any deduction is
OK as long as it isn’t prohibited. This is in contrast to deductions from employment which state that NO
deduction is allowed unless specifically listed
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s.20 – Overrides s.18 – Specifically allows a deduction of capital cost
allowance (depreciation), interest, and other amounts – This section also imposes
limits on the availability and the amount of any deductions
s.67 – Denies deduction to the extent that the amount of the expense is unreasonable
s.18 – Restrictions No deduction in respect of:
(a) – Deduction must be related to the source of income – Purpose of carrying on a business – The general
limitation
(b) – Cannot deduct capital outlays – Expenses that are laid out to obtain an enduring advantage – Example:
A building, computer, software – Capital assets
(h) – Personal or living expenses – Other than travel expenses that are spent for the purpose of earning the
income from a business
(l) – (i) Maintenance of a yacht, golf course, lodge, or facility (unless actual owner and part of carrying on a
business of a golf course or yacht)
(ii) Club memberships and fees are not deductible
(p) – Limitations for personal services business
As seen in the RalphCo example
Only 4 categories of deductions for personal services business
(r) – Limitation on deductions for motor vehicle allowance – Only to the extent in the prescribed rules
(t) – Any payment made under the ITA is not deductible (can’t deduct your taxes paid of course!)
But can deduct sales taxes
18(12) – No deduction for amounts involved in a business in a self-contained home (will be treated as an
employee at home) unless:
Principal place where business is carried on, or
Used exclusively to carry on the business there (meet clients, etc)
Cannot generate a loss from deductions under this category
However, if you have more deductions than needed, you can carry losses forward
Income Earning Purpose Test – This test determines whether a general expense is deductible – In relation to s.18(1)(a)
– The general limitation that no expense is deductible unless it is related to the source of income
Imperial Oil Limited v. MNR (1947) (income earning purpose test)
Facts: Collision at sea – Damages award were $500K – Were damages paid deductible to IOL
Business of transporting petroleum
Claimed it was not an extraordinary or unusual event – Part of the risk in running a business
Held: Expenses that arise as ordinary manner of operating business – Expense is deductible regardless of quantum –
The size of the award does not matter
Risk of sea collision and paying damages – Part of carrying on the business – Hopefully rare, but not unheard
of – Cost of making good the wrong is part of an expense carrying on the business
In the process of earning income – Action itself does not have to earn income
In the process of transporting oil (an activity that earns income), the mishap occurs
Do not have to show that profit was to be had – Look at the overall course of business – no “causal link”
required
It is an expenditure made for the purpose of earning income, not condition that it should actually
earn income – Cannot isolate an expense
Do not use the ‘but for’ test – But for the expenditure, they would not earn income
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Legal liabilities and tort obligations that arise out the business are deductible expenses – satisfaction of legal
liabilities
Technically speaking all expenses are made primarily to satisfy legal liabilities
Summary: Deductibility of expenses was determined according to the ordinary principles of commercial trading or
accounting practices unless deduction was prohibited by express terms in the ITA
Comment: If United Steel, the party who received the damage award, were Canadian, would they have to pay tax on
the award? No because the award received was for damage to property. If it were for lost income, on the other
hand, it would be taxable – surrogatum principle.
Royal Trust Co v. MNR (1957) – Now overturned by s.18(1)(l) –
social clubs are tax deductible (were)
Facts: TP (company) – Policy requiring employees to join social clubs – Paid all fees involved
Evidence established memberships provided business advantages
Held: Finds expenses to treat clients to a club and develop business connections was deductible
Fact that accounting principles say it is deductible does not make it automatically deductible for tax
purposes – Must have been made (engaged in a business) for the purpose of gaining or producing income
Not necessary that it actually gains income
Was regular enough to not be a capital expense (which would mean not deductible)
Argument by MNR: For the single officer – It was a capital expense – One time payment
Argument rejected: A one time expense for the individual officer perhaps, but since the company
always brought in new officers, it was a regular expense and deductible by the company
Under s.9(1) – In determining whether an expense is normally deductible in the mind of business people –
Look at ordinary commercial and business practices
Claim deductions under s.9(1) – Then look at s.18 as to whether there is a restriction
Daley (non-recurring expenses with enduring benefits are capital
outlays)
Facts: A lawyer who wanted to deduct bar admission costs
Held: No – Capital Outlay – One time expense to get right to practice law
Acquiring an enduring benefit
General Issue: Is it a recurring expense in generating income?
Daly – Not a recurring expense, it was a capital outlay
RT and Imperial Oil – Normal and ordinary risk of carrying on business – Recurring expense
Personal and Living Expenses
Deduction of these expenses are prohibited by general requirements of s.9(1) and s.18(1)(a)
18(1)(h) specifically prohibits deductions of personal and living expenses other than travel expenses
incurred by the TP while away from home in the course of carrying on the TP’s business
Have to distinguish personal consumption decisions vs. expenses for generating income from business or
property
List of personal or living expenses in the definition in s.248(1) – Not exhaustive list
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s.18(1)(l) – No deductions for club memberships, use or maintenance of golf course, yachts, lodges, etc
s.62 – Moving expenses; s.63 – Child care expenses
Deductions for these are permitted even though not characterized as business expenses
IT-470R paras 35 and 36: Employer reimbursements for
employee moving expenses because of a transfer or because of
a new job (with the employer) are not taxable. Also no tax paid
when employer moves the employee out of a remote location at
the termination of the employment there.
s.67.1 – An amount paid or payable in respect of the human consumption of food, beverages or
enjoyment of entertainment – Deemed only 50% of:
1) The amount actually paid
2) The amount that should have been paid (reasonable amount)
Use the amount that is smaller
Exceptions – Does not apply to s.62 and 63
Thomas Harry Benton v. MNR (1952) (rejects the “but for” test
for deductions)
Facts: Trying to claim deduction for wages of housekeeper – Housekeeper did do some of the work in the farm,
washing dishes, etc – That she did some of work in running the farm
Minister reassessed – Did not allow deduction of entire wage – only allowed deduction for the part when
the housekeeper worked on the farm
Held: Can only deduct portion – For working on the farm in the income generating capacity
Rest of the work – Was for him since he was invalid – Primarily a housekeeper engaged in domestic duties
Rejected the ‘but for’ test
TP’s argument – But for the housekeeper taking on his personal duties, he would not be able to
carry on business
Argument rejected: She has to be working for the business for a deduction to be valid
Child Care Expenses
Symes v. The Queen (SCC 1994) – Child care deductions – s.63
(General deduction)
Falls under subdivision E of the Act – Deductions not tied to a particular source
Rules of s.63 (result of the Carter Commission):
Allowed to deduct child care expenses incurred (have to show receipts)
$7000 per child under 7 years
$4000 per child between 7 and 16 years
Must be deducted against the lower earner’s income (if in family)
Cannot be more than 2/3 of the TP’s income
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Goal of s.63 – To go out and earn income, to provide the TP with some relief but not 100% relief of childcare
costs
Facts: TP was a lawyer in Toronto – She was a partner – Source of business
Deducted expenses of a live-in nanny for children
Expenses deducted were in great excess of the available deduction
Husband – High-level employee – She made about the same
Made decision that wife would pay it all (nanny expenses)
TP argues – Entire cost should be deductible under s.9(1) and that the existence of a specific deduction in
s.63 did not affect her right to deduct the entire amount as an expense incurred for the purpose of earning
income
Held: Court divided on gender lines
First issue: Under s.9(1) – Are they personal expenses or expenses of carrying on a law business?
expenses were incurred to make her available to practice her profession
Child care – Not considered by accountants as deductible
Clear that
NOTE that: s.9(1) and s.18(1)(a) and (h) do not specifically prevent deduction of child care expenses as a
business expenses
s.63 – It is a specific provision, a limitation on the amount one can deduct for childcare – It is where you
deduct child care expenses
s.9(1) – It is a general provision – Specific trumps general
Only permitted amount in s.63 – Majority rests their decision on this, do not decide whether
s.9(1) and the s.18 provisions would classify child care as a business deduction
Dissent: Dube – Child care expenses are business expenses to women
Have to recognize current social and economic realities of women
No restricted by s.63 – Could be disapplied in the case of business women
Second issue (less important – this is a tax law course): s.15 of the Charter argument – That by restricting business
expense of women – Equality rights were being infringed
Because s.63 (according to majority) takes child care out of business deductions, does that discriminate
against women who have faced social and historical costs of raising children by not allowing them to deduct
the full cost?
-
comment: perhaps the court would have been more sympathetic if she didn’t claim the entire deduction
for herself and split it with her husband. By claiming it all for herself, she stood to receive considerable
financial benefit. This partially blurred the gender issue by inserting a question of class as well
Iaoccobucci – Majority – Did not find discrimination against women
Problems with s.63 – 2/3 cap
Because that may preclude some people from being able to deduct child care expenses – Especially the
lower end people – Single parents, etc
Employees are stuck with s. 63 and can’t use s. 9. If Symes won, wealthy business owners would get a
better deduction
Also, s. 63 favours two income families. One cannot pay income to a stay at home spouse (and receive a
deduction)
Page 69 of 106
Commuting Expenses
Recall Martyn (pilot) and Hogg (judge) (employee cases) – Deducting commute expenses – Considered as personal or
living expenses – Choice where to live is considered a personal consumption decision
Travel expenses in the course of doing business – Deductible s. 18(1)(h)
However, one is not able to deduct cost of commute
MNR v. Doctor E Ross Henry (1969) – (normal commuting is not
deductible as a business expense unless it’s between two
“bases of operation”)
Facts: Performed services at a hospital – Had an office with other doctors – Had hired someone to do billing for him –
Had to loci of business
Would drive down to office once or twice a week to drop off papers
Would make trips from home to hospital
No patients seen outside of hospital
Minister allowed trips from hospital and office to be deductible – Allowed emergency trips to hospital from
home
But did not allow ordinary commute – House is not a base of business operations
Held: Agrees with Minister
Normal commuting – Not deductible as a business expense
Problem 1 – p.385
X is a litigation lawyer – Has home office and downtown office
Travel between courthouse and downtown office – Deductible
Travel between home office and courthouse – Unsure, perhaps circumstantial
Travel between home and downtown office – Unsure
All depends on home office – Is home office a principal office?
If you are moving between bases of operation – Then you are okay
Moving expenses – s.62
Subdivision E – Not specifically related to a particular source
Have to show that you moved to earn income – At new location, got a job or started a business
It is a personal expense – In relation that you are moving a home
Policy reason – Encourage people to move – So that they can earn income and tax the shit out of them
Subsidize moving for the purpose of income or employment
Problems: May be able to take advantage – Hide moving for personal reasons underneath business – So
long as you are earning income
Moving expenses are deductible when TP commences to carry on business or be employed at a new
location but only to the extent of income earned at that location
Must be deducted in the year of the move from income earned at new location
Excess can be deducted in the following year again only to the extent that such income is earned
IT-470R paras 35 and 36: Employer reimbursements for employee moving expenses because of a transfer or because
of a new job (with the employer) are not taxable. Also no tax paid when employer moves the employee out of a
remote location at the termination of the employment there.
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s.62(1) – Can deduct, in computing TP’s income, amounts of moving from an eligible relocation (see def’n
below)
(a) But if employer pays for it, you do not get deduction – Not considered a benefit of employment if
employer pays it (see IT-470R)
(b) Cannot have previously deducted it in the year before – Can only deduct to the extent that they were
not deductible in the year before due to s.62 (notably: the limits in part c)
(c) (i) Amount deducted cannot exceed more than you can earn from new work location
(c) (ii) Amount deducted cannot exceed taxable amounts included by s.56(1)(n) and (o) – Which are
scholarships and bursaries
But if scholarship is exempt from tax – That means nothing can be deducted
(d) – If do get payment for moving from someone, call it as part of income if you are going to try to get
deduction under s.62
s.62(2) – Moving expenses of student -- For a student – Either or both of the residences have to be in
Canada to be able to deduct (for employees, BOTH have to be in Canada)
s.248(1) – Eligible relocation
What qualifies:
a) To carry on business or employment (i) in Canada in a new work location
Or to be a student (ii) – Full-time, post-secondary level
b) Old residence and new residence must be in Canada (except for student)
c) Have to move a new residence 40 km closer to the new job than your old residence
But if you are absent from Canada but resident in Canada (meaning taxable), then movement of residence
does not have to be in Canada nor does employment have to be in Canada. For example, a Canadian
diplomat to the USA can deduct moving expense of moving from Washington back to Ottawa.
Allow deduction even though not physically present in Canada
What are moving expenses – s.62(3)
(a)
(b)
(c)
(d)
(e)
(f)
Cost of moving – Motels, food, etc – In the course of travel – 50% limitation does not apply
Cost of transporting/storing household effects
Cost of lodging and board near the old/new residence – No more than 15 days
Cost of cancelling the lease
Selling cost in respect to sale of old residence – Lawyer fees, advertising, etc – even if you don’t own
the property but your partner does
If sold old residence – Legal costs of buying new residence (cannot deduct tax of buying the house) –
even if you don’t own the property but your partner does
But do not get to deduct cost of house itself or the loss incurred if sold for below what you paid
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(g) Interest, property taxes, insurance premiums of old residence – During period trying to sell – when it’s
vacant
Up to $5000
Cannot be residing in the residence
Have to make reasonable efforts to sell
(h) Cost of getting new driver license, connection fees (hydro, cable)
Does not include costs incurred to get new residence – Except for legal costs
s.67.1 – Does not apply to s.62 – 50% limit does not apply
So maybe you can go wild with the expenses – Probably not, reasonableness requirement
Home Office Expenses
s.18(12) – In claiming deduction, you cannot create an actual loss
(a) No deduction (for an otherwise business deduction) for any part of a self-contained domestic
establishment in which the individual resides unless
(i)
Principal place of business or
(ii)
Used exclusively for the purpose of earning income from a business (meeting clients,
patients, customers)
(b) Cannot create a loss with the deductions – Deductible only to income from business
(c) Can carry an amount forward to the following year
Implies that s.9(1) and s.18(1)(a) must also be met – Reference to “expenses otherwise deductible under the Act”
Deductible amount – Based on a reasonable allocation of costs attributable to the home office
Determine the amount of space occupied by the office compared to the total usable area of the home –
Proportion of square footage – Take that from expenses of the home as business deduction
Entertainment Expenses and Business Meals
s.67.1(1) – Limit deduction of food and entertainment expenses to 50% of the lesser of actual cost or
reasonable amount
Limitation is linked to s.18(1)(h) – Travel expenses in the course of business
Scott v. MNR (analogy drawn between a motor vehicle and
“human” vehicle to let a courier deduct food costs above what
people normally eat at work)
TP was a courier who made most of his deliveries on foot. The high level of physical exertion caused him to require
one extra meal per day. TP wanted to deduct the expense of this meal – Minister disallowed it.
Holding: The TP was entitled to deduct the cost of meals above what a person would normally eat at work. Normally,
food/water expenses are not deductible as “the human need for food and water exists apart from the business.” But
in this case, the court was able to draw an analogy between a vehicle courier (who may deduct the cost of gas) and
the TP who uses his body as the “vehicle” and food and water as “gas.” Thus, the TP was justified in deducting that
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portion of the “fuel” used solely as a business purpose (i.e., the food consumed above what a person would normally
consume in a normal business).
The Court claimed this case should not be read broadly. It so happened that an analogy could be drawn here
between a motor vehicle and a “human” vehicle. So a construction worker can’t deduct the extra cost of food even if
the work is physically demanding because there is no analogy like fuel in the form of food versus fuel in the form of
gasoline.
Comment: No other court cases use Scott.
Deduction of Interest Expenses
Interest – Payment for the use of capital theoretically not deductible due to s.18(1)(b) because it is a capital
outlay/expense
However
s.20(1)(c) – Allows deduction for interest payments paid in the year or payable in respect of the year
pursuant to legal obligation:
(i) – Amounts used for the purpose of earning income – Buy land, buy inventory, etc
Limitation – Cannot borrow to earn exempt income – Otherwise would be getting a deduction on
an exempt amount
(ii) – 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 – So something like an unpaid
purchase price and an interest obligation on that price
Limitation for a reasonable rate of interest – If rate is excessively high, will impose a lower interest rate and
therefore a lower deduction
Also, funds borrowed to pay off other deductible loans are also deductible – one form of deductible
borrowing merely replaces another – s. 20(3)
No deduction for interest where the borrowing was made to earn exempt income (gambling for example)
Things to note:
Timing of the deduction – Accrual v. cash accounting of the deduction – Depends on method regularly
followed by the TP
Requirement for a legal obligation
Income earning purpose requirement
Limitation on exempt income
Deduction permitted on interest charged on an unpaid purchase price
Unreasonable interest charges
Bronfman Trust – Leading case on requirement that the
borrowed funds be used for income earning purpose and on
direct vs. indirect use of borrowed money
Part of the case is still good, some of it has been pushed away
Facts: Part of a trust – Trust held shares in the family company
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For the purposes of this, consider the trust as an individual TP – ITA treats trust like an individual
Trust wants to give beneficiary some money for her personal use – Trustees did not want to sell shares – So
the trust borrowed money, gave the money to beneficiary
Trust decided to deduct the interest on the borrowed money – Borrowed it on the shares it
owned
Held: Not all borrowing is deductible – Borrowing to earn exempt income for example is not deductible
Borrowing to increase personal consumption – Not income producing purposes
Onus is on TP to trace funds to identifiable use to trigger the deduction
Eligible and ineligible uses of borrowed money
Must be to an income earning purpose – Must be able to trace funds to eligible use
Cannot be for:
Exempt income
Life insurance
Personal consumption
Produce capital gains
Capital distribution
Criteria for eligible use”
Current vs. original use of the funds – It is the current use, not the original use
Must show that funds are still being currently applied to eligible use
Direct vs. indirect use of funds – Funds must be used directly for the income earning purpose
Cannot be indirect use for the purpose of earning income if direct use of the funds was not an
eligible use
The trust argued that the borrowed money allowed it to retain shares – Thus it was for earning income
That is indirect use – Direct use of the funds was not income earning purpose
Comment: The court in this case wanted to look behind the commercial relationship and disregard tax avoidance
measures. This reasoning is no longer used by the courts. Courts, for tax cases, care most about form than the
relationship absent an obvious sham.
Zwaig – OVERRULED. Example where TP sold securities, used proceeds to by life insurance (ineligible use), then got
borrowed money (on the insurance) to buy the same securities
Today – Did it artificially, but borrowed money to direct eligible use – it would be a valid deduction
Legal relationships were real, not a sham – Should have been allowed to deduct interest
Court got it wrong in hindsight
Assess on what the TP did, not what they might have done
What is a “sham” – it means a fraudulent transaction where you didn’t do what you claim you did to CRA
Attaie – Have to be direct use of the fund
The TP in this case first rented out a property. Interest on mortgage was deductible. Then he moved into
the property. The interest was no longer deductible. TP then got his money back from overseas, invested cash in
term deposit and then tried to deduct mortgage interest against the term deposit. Court rejected this.
Can’t argue that your mortgage interest is deductible because not paying off the mortgage has allowed you
to earn income (from a term deposit for example)
The CURRENT use and not the original use is what matters
Singleton v. The Queen (SCC 2002) (look simply at the form of
the transaction and not the substance – tax avoidance is OK if
not sham transaction)
Facts: Partnership – 50/50 – One has the money, the other borrows money
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S took $300K out of the partnership, used it to by a house, borrowed money on the house. The borrowed
money then went back to partnership. All transactions actually occurred and were honoured. TP Calls this
deductible
Held: Accepted that the funds were to replenish the capital account – Deductible interest
Looking at true economic purpose is not the correct test – Look simply at the form, not substance
Do not search for the true economic purpose
Was found to be a direct current eligible use – There were binding legal relationships formed
Can trace the funds – Moving from one arms-length to another
May be complex, may be tax motivated, but not a sham – Not a false transaction
Cannot disregard legal relationship
TP entitled to structure their transactions in a manner that reduces taxes
Complexity does not break down the structure
Do not need to look at the true economic purposes
If the result is tax avoidance which the gov’t doesn’t like, then the gov’t should change the ITA and not the
courts
Absent a sham (see definition of sham above), TP does not have to demonstrate a bona fide purpose (true economic
purpose)
Irrelevant that TP structured transaction for tax purposes
Cannot search for the economic reality or the bona fide purpose of the transaction
Direct and eligible use of money to refinance capital account
Ludco Enterprises Ltd. Brian Ludmer, David Ludmer and Cindy
Ludmer v. The Queen (SCC 2001) (income from the investment
need only be an ancillary purpose)
Facts: $6.5M borrowed – Buy shares of two companies off-shore – Tax haven countries
Companies used the funds to invest in Canadian and US gov’t debt obligations – Exempt from withholding
tax – Earned interest on the debt
Shares themselves get more valuable
Decided to go for capital gains rather than dividends – Very minimal dividends paid out
Sell shares, capital gains realized
Denied interest deduction on the 6.5M loan
Said shares were not for purpose of earning income from property, but for purpose of
deferring taxes and converting income into capital gains
Held: What do we mean by income earning purpose? – It was a direct use of borrowed funds
Used funds to buy shares in company – Got dividends – But only a tenth of what they claimed as interest
deduction
Finds that s.20(1)(c)(i) – Can make deduction even when borrowed money goes to more than one purpose –
If one of the purposes is to earn income, then it is enough
Can even be an ancillary purpose to earn income to fit under s.20(1)(c)
To determine whether requisite income earning purpose is present, court should objectively determine the
nature of the purpose, guided both by objective and subjective purpose
Proper test – Whether the TP had a reasonable expectation of income at the time the investment
is made – Objective standard is relevant – Not conclusive
What do we mean by income – Profit or gross income (revenue)
Gross income is the measure – Need expectation of gross income
Was deduction reasonable?
Banks set the rate of interest – Not going to set the rate for the banks
Reasonable in the circumstances
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Were reluctant to use judicial innovation with the ITA – Courts should leave it to Parliament to be precise
and specific
Referred to Bronfman Trust – Eligible or ineligible, direct or indirect, original or current
Policy Reasons for Denying Deductions
Can you deduct expenses of illegal business? Yup.
Profits certainly are income and subject to tax – What about expenses
Eldridge – Was paying mayor $9K to bribe to keep running call girl business
Claims deduction for protection money to the police, bribes, wiretap detection
Court suggests that these payments ARE deductible. Hardest part however is proving the
expenses – No receipts in an illegal business – all of the TP’s deductions are denied.
Side comment: The court didn’t allow some expenses such as the TP’s purchase of an entire issue of a newspaper to
avoid bad gossip about her becoming widely known. Prof disagrees with this – courts shouldn’t second guess what a
business person thinks is needed for a business.
Exceptions to the general rule about deducting expenses for an
illegal business:
s.67.5 – Denies deduction for bribes paid to public officials – Part of Canada’s international agreement to
stop bribing foreign officials and domestic officials – No deductions for illegal payments
s.67.6 – Fines and penalties are not deductible (anything, includes parking tickets)
Reason: Commit logging offence – Fines are meant to be a deterrent
Capital Expenditures Versus Current Expenditures
s.18(1)(b) – No deductions for outlays, losses, and replacement of capital
How to separate the between capital expenses and current expenses?
Very difficult, very complex, nothing fits neatly to create an integral whole.
When it is not obvious – The arguments stop becoming legal
Be sure to make arguments and counter arguments either way
British Insulated and Helsby Cables Limited v. IRC (1926 HL) –
The “enduring benefit test” -- One of the clearer ones on what is
a capital outlay and therefore not deductible
Facts: Company makes lump-sum deposit to trust to establish pension plan
Company wants it all deducted this year – Minister says it is a capital outlay, not deductible
Criterion – Incur every year v. a single acquisition
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Some other criterion: Is there an enduring benefit?
Held: Capital outlay – Form nucleus of the pension plan – Not merely a gift to the older workers
Enduring benefit, establish a pension fund that will benefit future employees indefinitely and give enduring
benefit to the company of happy workers – Obtains a lasting and substantial advantage
After that – Yearly contributions to pension plan are deductible – Recurring
Comments: Like Daley – Fee to be called to the bar is a capital outlay
Canada Steamship Lines Ltd. v. MNR (1966) (floors and walls are
repairs, new boiler is capital outlay)
Facts: Two projects undertaken – Are they outlays for repairs of capital objects or ordinary expenses of a business?
Repairs and maintenance are deductible expenses – Ordinary expenses of a business
First project – Floors and walls of cargo hold repairs/replacement
Second project – Replacement of a boiler
Held: First project is deductible – Floors and walls within the ship are being replaced after being worn out – If they
had put in a new type of cargo carrying system, it may not be deductible
Replacing something that is worn out – Repairs and maintenance – Deductible expense
Keys in on that it is not something new, merely replacing – It is not a new benefit, already paid for it once –
No changes are being made, just replace what is damaged
Do not become capital expenses because they are extensive or cost is substantial
Second project is not deductible – Two recent cases that said engine replacement is a capital outlay
Case law says this is installing something new – Treated as capital outlay
The boiler is something separate and distinct. Relative to floors and walls, it can be easily removed and sold
Money laid out to acquire assets that earn income – Outlay of capital
Money laid out to upgrade such an asset – Outlay of capital
Repairing the physical effects of use of such an asset in the business – Not a capital outlay
The Queen v. Shabro Investment Ltd. (FCA 1979) (second case
in capital outlay/repair trilogy)
Facts: 2 story building – Concrete slab floor was built on garbage dump – Shifted, destroyed, had to be replaced – TP
had old floor removed and installed a new floor with steel piles underneath to support
$95K to sink piles and put in new floor
Held: First – Says no single test to distinguish current repairs v. improvements to be called outlays of capital
Sinking piles – Capital outlay – Clearly something new, clearly an upgrade – Permanent improvement, not recurring
expense during life of the building -- not deductible
Concrete slab – Hidden defect, vandalism, accident (which may cause the damage) – All those are repairs, can be
deductible
However, court found floor and piles were one thing – Called it all a capital outlay
With respect to the minor issues – Replacing pipes, electrical lines (secondary damage)
Those are sent back to the TJ
TJ had originally denied deduction on the basis that it was not normal use and wear and tear. But the court
said this was an improper test. Replacement due to wear and tear is not a determining factor.
CA – Decided no; deductibility has no link to the reason for the breaking of the item
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Gold Bar Developments Ltd. v. The Queen (1987 FCTD) (third
case)
The TP owned an apt building the exterior of which was constructed with brick veneer. Inspection revealed the wall
was unsound and dangerous due to inferior work. TP made necessary repairs using metal cladding instead of brick
veneer. TP claimed as business expense, Minister wanted to call it capital outlay.
Holding: The repair was an expense:
1.
2.
3.
4.
5.
According to this court, the fact there was no choice or option in the matter was an
important determinant
Even though the expense likely will not recur in the lifetime of the building, it was
fundamentally a repair
The cost of repair was expensive, but the sum represented less than 3% of the
value of the asset. Only outlays that are so substantial as to constitute a
replacement of the asset are capital outlays
A repair that greatly improves an asset beyond its original condition might be a
capital outlay. That being said, a TP shouldn’t be forced to use inferior building
techniques and technology. If it so happens that current techniques and
technology are superior then that shouldn’t be held against TP
Nothing in the repair attempted to change the structure of the building.
Comment: Hard to reconcile with Shabro. Perhaps the steel piles in Shabro changed the structure of the building –
one cannot call the piles an “improvement” in techniques and technology – they were supposed to be there in the
first place.
Gold Bar was merely replacing one veneer with another. Like replacing the concrete alone in Shabro. Yes, the
concrete was included in Shabro as a capital outlay but steel piles alone without concrete are useless – arguably the
two components were tied in a way that couldn’t be separated.
Computation and Timing
s. 12(1)(a) – amounts received Any amount received by the TP in the year that is
i)
ii)
on account of services not rendered or goods not delivered (e.g., a lawyer’s retainer)
under an arrangement or understanding that it’s repayable in whole or in part on the return or resale
to the TP or articles in or by means of which goods were delivered to a customer
Are to be included as income for that year as income from business or property
s. 12(1)(b) – amounts receivable Any amount receivable with respect to property sold or services
rendered in the course of business in a year, even if the funds are due in a subsequent year, are taxable in
the current year, unless the TP uses the cash method of accounting
An amount is deemed receivable on the earlier of i) the day which the account for the services were rendered and; ii)
the day which the account for services would have been rendered had there been no undue delay in rendering the
account
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s. 12(2) The above provisions are created for greater certainty and shouldn’t be construed as implying
that amounts not included in those paragraphs are not to be included in computing income from a
business for a taxation year whether received or receivable or not
MNR v. J. Colford Contracting Co. (1960 Ex. Ct.) To be an
account receivable, there shouldn’t be a mere precarious right to
receive the amount; there should be a legal right, not
necessarily immediate.
TP did not include a holdback as an account receivable for which would have been taxable. Court holds this was not
OK.
To be an account receivable, there shouldn’t be a mere precarious right to receive the amount; there should be a
legal right, not necessarily immediate.
The TP had no legal right to the holdback funds until the architect’s certificate was issued. And, once issued, the TP
might not have been entitled to the whole amount any way. However, the certificate was issued and it was clear who
owed what. All “conditions precedent” on the funds were removed – doesn’t matter that the money wasn’t actually
going to be received until the following year.
MNR v. Benaby Realties Ltd. (1967 SCC) At the moment of
expropriation, the TP acquired a right to receive compensation.
But a right is not an account receivable.
The TP had his land expropriated. Expropriation order was made in 1954. Payment was made in 1955. Should it have
been on the 1954 or 1955 taxes?
Court says 1955 taxes. At the moment of expropriation, the TP acquired a right to receive compensation. But a right
is not an account receivable. In order to be an account receivable, the profit must be ascertainable. In 1954, it was
uncertain what the TP was to receive.
West Kootenay Power and Light Company Limited v. The Queen
(1992 FCA) In this case, the amounts were sufficiently
ascertainable to be included as an amount receivable.
The TP billed once every two months. It recorded income based on estimates of revenue anticipated to be received
on its financial statements and for tax purposes. Then the TP stopped doing this for tax purposes (letting it pay less
tax in the current year). Minister raised issue.
Court held that the TP had to continue with its previous practice. The bills were receivable in the current year, even if
not due. An estimate of what future remuneration will account to can be OK. In this case, the amounts were
sufficiently ascertainable to be included as an amount receivable. The TP had a clear legal right to payment.
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Amounts Payable
JL Guay Ltee v. MNR (1971 FCTD) Court says that all “condition
precedents” must be removed before deduction can be made.
TP was a building contractor. TP was entitled to withhold 10% of amount due to subcontractors until work was
completed. The amount became payable (creating a legal right to the funds) after 35 days after architect gives
certificate of acceptance. TP deducted holdbacks in 1965, Minister denied and TP appealed.
Court says that all “condition precedents” must be removed before deduction can be made. In this case, it was
uncertain how much exactly would be owed until the architect issues the certificate. The TP might have owed the
entire holdback or none of the holdback.
At the time of deduction, it was uncertain if 1. a certificate would be issued (meaning the subcontractors had no legal
right to the funds), and 2. what amount of the holdback would need to be paid. TP’s case fails for both reasons.
In general, the timing of “paid” and “payable” is related to the timing of “received” and “receivable.” An expense is
incurred in the year in which the TP has a legal and unconditional, though not necessarily immediate, obligation to
pay the amount.
Comment: What about the matching principle of GAAP accounting? When can that be used?
Carrying forward and back of Non-Capital Losses
Div C of the Act
s.111 of the ITA – Losses deductible
(1)(a) – Non-capital losses – Losses from a source (office, employment, business, etc)
Can carry back 3, forward 20
So if you have a loss 2000, you can still claim it in 2015
Can set losses from one source against gain from another source
If you have a loss in 2000, you can only claim it, at furthest back, in 1997
(1)(b) – Net capital losses – Only deductible against capital gains, not sources
Can carry back 3, forward infinite
Remember – Only ½ of capital losses are deductible
Restrictions – Earlier losses must be deducted before later losses
Each item of loss can only be deducted once
Capital Gains and Losses
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Review: s.3(a) – Calculate income (only positive amounts) from the four sources of income (s.3a), those
other ones in the ITA (s.56), and unenumerated sources
Separate calculation of revenue and deductible expenses as provided by the ITA for each separate
source
s.3(b) of the ITA makes capital gains a source of income – the provision in particular requires computation
of capital gains and losses in the ITA
s.3(c) – Add the amounts of 3(a) and 3(b) – Then claim deductions out of Subdivision E
Subdivison E deductions are deductions not based on the source of income (as to the nature of
the expense)
Examples: Moving expenses, child care, and others not covered by this course – s.62,63
Do not include any expenses deducted in computing income from a source in 3(a)
Distinguish Capital Gains from Income from Property:
s.9(3) – Income or loss from a source that is property does not include capital gains or losses from the
disposition of that property
Definition of Capital Gains/Losses – Default definitions (in that they define capital
gain/loss as gains/losses from the disposition of any property but exclude dispositions of property that are taxed as
income from a source – i.e., if it isn’t income from a source then it’s a capital gain):
s.39(1)(a) – Taxable capital gains Gain from disposition of any property that’s not included income from a
source
s.39(1)(b) – Capital losses
(i) Capital losses exclude losses of depreciable property
Depreciable property can be capital property
Ends up with a default definition:
If gain or loss from disposition is income from a source, then it will not be capital gain/loss
Examples of property excluded from capital gain/loss:
Inventory – Not capital property – Relevant to income from business (the calculation part)
Exception: an adventure or concern in nature of the trade is deemed to be income from a source
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Calculation of Capital Gains/Losses
s.40(1)(a)(i) – TP’s capital gain is the proceeds of disposition of the property minus the adjusted cost base
(what you paid to acquire it, unless there are specifics in the ITA) and any outlays or expenses incurred to
make the disposition
Suppose: ACB = 500; POD = 700
Capital gains is 200 – But if transaction costs are 30
Then gross capital gains is 170
s.40(1)(b) – Capital loss is the ACB plus the outlays of making disposition, minus the POD of the property
Comments: Tax (e.g., property purchase tax) and legal fees of the original transaction to acquire the capital asset –
Would considered cost of completing the transaction – Added to the ACB – Interpretation Bulletin IT-285R2
Taxable Capital Gains –
s.38(a) Only half of your capital gains are included in income
s.38(b) – Taxable capital losses – Only half your capital losses included
Carrying forward and back net capital losses:
Remember: LPP – Can carry forward and backward losses
Current year losses cannot be used in the year that they arise – No refund, may be carried to another year as a
deduction
s.3(b) of the ITA – Look at handout
Netting out capital losses from LPP (implicitly) and capital losses in general
Capital losses – Can be carried forward and back
s.3(d) of the ITA – Where you deduct non-capital (ordinary) losses
s.111 of the ITA – Losses deductible
(1)(a) – Non-capital losses – Losses from a source (office, employment, business, etc)
Can carry back 3, forward 20
So if you have a loss 2000, you can still claim it in 2015
Can set losses from one source against gain from another source
If you have a loss in 2000, you can only claim it, at furthest back, in 1997
(1)(b) – Net capital losses – Only deductible against capital gains, not other sources
Can carry back 3, forward infinite
Remember – Only ½ of capital losses are deductible
Restrictions – Earlier losses must be deducted before later losses
Each item of loss can only be deducted once
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s.111(2)(a) – In the year the TP dies, or the year before the TP’s death, net capital losses may be deducted
against income from sources
Policy evaluation of capital gains:
Policy: Why is capital gains taxed so favorably?
For long time (on or before 1971) – Did not tax capital gains
Carter Commission – Recommended the broadening of the tax base
Recommended the Haig-Simon Approach – All accretions to wealth should be taxed
Another benefit: Taxing capital gains makes it easier to track financial activity, thereby making taxpayers
easier to audit
Arguments against Favorable Treatment of Capital Gains
Equity – Treating similarly situated people the same – Reasons to tax capital gains
Why special rate for someone who gets $10K from capital gain vs. $10K from income from source –
Horizontal equity
Not taxing capital gains – Benefits the wealthiest who tend to own capital assets – Clustered at the top of
the income scale – Vertical equity
Neutrality – Idea tax should not distort economic activity
This good treatment to capital gains – Obviously distorts economic activity – for example, people may buy
more real estate than they normally would
Certainty – Difficulty to make distinction between capital gain and income or ANT – if capital gains were taxed the
same then making this distinction wouldn’t matter
Review: Regal Heights, Arcorp – TPs’ selling property that could be classified as a capital gain unless sold
like a broker
The Actual Benefits of Capital Gains:
1. Only 50% of capital gains is taxable
2. Not taxed until the gain is actually realized – Until it is disposed
Tax deferred is better than paying it now
Gives TP control to adjust income from one year to the next
Often see distortions in the market – Can realize losses with the gains (consider stock market activity in
December, before the tax year ends)
3. Various exemptions for various types of property
Have to declare the gain to get the exemption
Example: Life time capital gain exemption for a specified amount
Includes transfer of farm land – To ensure family farms stay in the family without the tax burden
Small business shares
See page 541-544 of course text for more information if needed on policy considerations
Definitions
s. 54 – contains most definitions regarding capital gains
What is property? s.248(1) – Extremely broad definition – Property of any kind whatever whether real or
personal, immovable or movable, tangible or intangible, or corporeal or incorporeal
Includes right of any kind whatsoever, share
Recall: Regal Heights, Taylor, Irrigation Industries, Arcorp Investments
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What is not property – Manrell v. The Queen (FCA 2003) – One small limitation
Limits the definition of property in s.248(1)
Facts: Paid in 4 installments for the non-competition clause – Consideration
Is ‘right to compete’ property you can dispose of?
Held: Promise to restrict a freedom – Not property – Cannot dispose of it (receiver of
promise does have property though; a chose in action)
Not like a patent right (something you can dispose of)
An extremely broad meaning for “right of any kind whatever”, but not an infinite one
s.54 -- Capital property – Any depreciable property and any property (other than depreciable property)
that would give capital gain or loss from disposition
Basically – Asset that you own that you can earn income from
Cost, Capital Cost – not defined in ITA, however the ordinary use of cost might be the “amount to acquire the
property and expenses required to complete the transaction”
s.54 -- Adjusted Cost Base (ACB) -- Where property is depreciable, the capital cost to the TP of the
property as of that time (time it was paid for) and;
In any other case, cost of the property (at purchase time) adjusted in accordance with s.53 (s. 53 not part of
this course)
Cannot be less than zero at any time
s.43(1) – ACB of part of a property – the ACB of part of a property is the portion of the ACB of the whole
property that can reasonably be regarded as attributable to that part
Identical Properties
Bonds, shares (can be identical) – s.47(1)(a) and (b)
For this course – Identical properties are limited to shares of the same class of a particular corporation and
units of the same class of a particular mutual fund trust
s.47(1)(a) – Computing ACB for identical properties (after 1971)
TP is deemed to dispose of previously acquired property immediately before a particular time (like
selling some of the property) for proceeds equal to the ACB immediately before a particular time
s.47(1)(b) – TP is deemed to acquire that property (finding the ACB) equal to the quotient of the ACB of
the previously acquired property and the cost of the newly acquired property divided by the number of
identical properties he owns (in other words, average the cost of the different units of property)
Explanation through example:
Bob makes the following purchases and sales of Class A common shares of X Corp
Identical property – Regardless of the seller – Same bundle of rights
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Purchase 200 Class A common shares for $1 in March 1 2004
Purchase 100 Class A common shares for $1.50 in September 15 2006
s.47(1)(b) – At any time (of disposition), have to add up all the ACBs of the identical property and divide it
by the number of identical properties – Basically averages the ACB before the sale
Comes out to an average of $1.17 ACB – Selling 100 at $1.60
Capital gains = ((1.60 – 1.17) x 100) / 2
Buying an additional 200 shares
Calculated $1.17 – So remaining shares all have ACBs of $1.17 – New ones have ACBs of $2
ACB = [(200 x 2) + (200 x 1.17)] / 400 – As per s.47(1)(b)
Disposition
What is disposition – s.248(1)?
A
B
Any transaction or event entitling the TP to proceeds of disposition of the property
Any transaction or event by which:
(i)
Where the property is a share, bond, debenture, mortgage, etc, 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
A disposition needn’t be voluntary and could even include when the property is destroyed and insurance
paid – when the nature of ownership changes, essentially (see below case)
Exceptions – What does not qualify as disposition:
(e) Transfer of property where there is no change in beneficial ownership of property
(j) Any transfer of property for the purpose only of securing a debt or a loan or transfer by a
creditor for the purpose only of returning property that had been used as security
(l) Any issue of bond, debenture, note, certificate
Borrowing money – Not seen as disposing of a bond or debenture
When settle bond, that is property is disposed of however
(m) Any issue by a corporation of a share of its capital stock
When redemption of shares – then it’s considered as shareholders disposing of property
The list in s.24(1) of what qualifies as a disposition is not exhaustive
Compagnie – SCC – Read disposition as widely as possibly
can
Normal meaning and its statutory meaning – Wrong to restrict the meaning because of the
statute
Definitions of disposition and proceeds of disposition are not exhaustive
Includes involuntary transfers such as expropriation
When unlawfully taken, destroyed or damaged, TP is treated as having disposed of it for
amount received by way of compensation or insurance
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(b)(i) – Redemption of shares, bonds, mortgage, … is disposition
On redemption – It ceases to exist
(b)(ii) – Settling of a debt or substantially changing its terms – Disposition
Debt ceases to exist
Example: Debt is 100 – Agree to pay back 50 – Settle the debt – That is a disposition – 50 is proceeds of disposition
(with a capital loss of 50)
Proceeds of Disposition
What are proceeds of disposition? – Definition in s.54 – Not
exhaustive list
(a) Sale price of property sold – Classic example
(b) Compensation for property unlawfully taken – Does not say it has to come from thief
(c) Insurance compensation for destruction or loss of property – Destruction of property can amount to
disposition
(d) Expropriation
(e) Compensation for injurious affect (usually statutory effect, like zoning changes) to property – Only
disposition if you receive compensation, otherwise just a loss
(f) Compensation for property damaged
Except, within reasonable time, that compensation has been used to repair the property
Then it is not proceeds of disposition
Also: When a corporation ends, when a gift is given
Timing of Disposition
s. 248(1) -- In real property, date of transfer/conveyance is the date of disposition
Shares, date when you actually relinquish shares is date of disposition, not the date you tell your broker to
sell
Deemed Disposition and Deemed Proceeds of Disposition
Generally, gains are not taxed until realized
However, deemed dispositions in the ITA override the general rule – you are deemed to have disposed of
the property
On ceasing to be or becoming a resident of Canada
Income of non-residents – s.2(3) (c) – non-residents must pay tax where applicable when disposing of
Canadian property
Deemed dispositions on becoming resident in Canada – s.128.1(1)(b) and (c)
(b) – TP deemed dispose of property immediately before leaving that is owned by the TP other than
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(i) property that is taxable Canadian property (real property and shares of Private Canadian
corporation Resident in Canada [PCRC]) …
(A PCRC is not publicly traded, has major
shareholders resident in Canada, created by
Canadian statute, somewhat different from a
CCPC)
for proceeds equal to FMV
(c) – TP deemed to have acquired at the particular time each property deemed to be disposed of in
paragraph (b) at cost equal to proceeds of disposition
The effect of the above is to “reset” one’s ACB of non-Canadian property – to update it to the current FMV
as of the time you become a resident. This also triggers capital gains liability on all non-Canadian property.
Deemed dispositions on ceasing to be a resident – s.128.1(4)(b) and (c)
(b) – TP is deemed to have disposed of each property owned by the TP other than
(i) real property situated in Canada (resource, timber included) …
for proceeds equal to FMV at time of disposition
(c) – TP deemed to have reacquired each property deemed to have been disposed of in paragraph (b) at
cost equal to proceeds of disposition
The effect of the above is to “reset” one’s ACB of Canadian and non-Canadian property – to update it to the
current FMV as of the time you become a resident. This also triggers capital gains liability on all Canadian
and non-Canadian property (except Canadian real property).
Comment on these rules: If leaving Canada – Usually have to follow the deemed disposition rules to show that you
are no longer a resident
Ensures Canada gets tax while person was resident in Canada
Only exception on emigration (Leaving Canada) – No deemed disposition for real property situated in
Canada
Reason: Cannot take real property (land) with you
Eventual purchaser can pay the tax for you or seize the land
A problem with the deeming rules is there may be lack of proceeds to pay the tax
As a result, one usually has to sell some property to pay taxes on other property you do not want
to sell
Gifts and Sales below FMV to a Non-Arm’s Length Person
s.69(1) – Inadequate or excessive considerations – Unless specified elsewhere in the ITA
(a) – TP has acquired from person (not dealing at arm’s length) at an amount in excess of FMV at the time of
acquisition, TP shall be deemed to have acquired at FMV (the lower cost)
(b) – Where TP has disposed of anything
(i) – To a person (not at arm’s length) for no proceeds or proceeds less than the FMV at time of
disposition
(ii) – To any person by way of gift inter vivos
(iii) – To a trust because there has been no change in beneficial ownership
TP is deemed to have received proceeds of disposition equal to that FMV
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(c) – Where TP acquires property by way of gift, bequest, or inheritance (or get something that does not
result in change in beneficial ownership), the TP is deemed to acquire the property at FMV
(Nothing is deemed if sold below FMV – Just applies to gifts, inheritances, etc)
Regarding definition of “non-arms length” – see PREVIOUS section of outline – already discussed
Deemed Disposition on Death
s.70(5)(a) and (b)
(a) Deemed disposition and receipt of proceeds at FMV right before death
(b) Anyone who acquires – Assumed to have acquired at FMV
The above provisions ensure capital gains are paid out at some point. The above provisions replace the concept of
“estate tax.”
Also recall the previous section on capital losses on death – deductible against other sources of income.
Property won through lottery
s. 40(2)(f) – Selling a right to win a prize or bet (arguably a form a property), or the right to receive an
amount as a prize or bet is not taxable (no capital gains, no income) – gains/dispositions “deemed nil”
s. 52(4) – Where property is acquired by a TP after 1971 as a prize in connection with a lottery scheme,
the TP is deemed to have acquired the property at its current FMV
Rollovers
Rollovers – Transfer of capital property to spouse or common law partner (CLP) inter vivos and on death
s.73(1) – Inter vivos transfers by individuals – When subsection 1.01 applies and both individual and
transferee are resident in Canada at the time, and if the transferor does not elect out of this provision,
property transferred is deemed
(a) To have been disposed of at the time by the individual for proceeds equal to
(i)FMV of the property at the time of acquisition (cost the person paid for it – the ACB)
(l) And the transferee acquires the amount equal to those proceeds (the original ACB)
s.73(1.01) Qualifying transfers (transfers that qualify for the rollover provisions)
(a) To spouse or common law partner
(b) To a former spouse or common law partner of the individual in the settlement of rights arising of their
marriage or common law partnership
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s.73(1) – No gain, no loss for the spouse giving (regardless of whether there was a gain/loss)
Transferee – Receives the ACB of the giver
Example: Acquired capital property at $5K – Now worth $10K – Give to wife as a gift
s.73(1) – Deemed to have disposed of it for $5K and spouse acquired at $5K
Even if sold to wife for $7500 – Deemed disposed of at that time for proceeds equal to $5K
If spouse now sells to arm’s length person for FMV of $10K, due to spousal rollover,
capital gain is $5K even though paid $7.5K for property
You can elect out of the provision. Suppose you do:
s.69(1)(b) applies – disposition to a non-arm’s length person
This means if given to spouse as gift – giver deemed to dispose at FMV = tax liability
If elect out and sold for $7500: You are deemed having disposed at FMV and pay full
capital gains as if sold for $10,000. In the meantime, the transferee’s ACB would be only $7500 (a
bad situation to be in for both parties)
Any transfer to spouse is deemed to be on a rollover basis
One must expressly elect out of the rollover
If you do elect out – Then s.69(1) applies
Either rollover or a non-arms length transfer (if at FMV, no problem, if not FMV, then problematic
with the deeming provisions)
All transfers (i.e., any type of property) are included in s.73(1) – Meant to deal with couples who are splitting up – Can
transfer without paying capital tax
Important: This provision truly covers all transfers. Not just gifts – Even sales at FMV will be hit by it unless one elects
out
s. 248(1) – common law partner (CLP) defined as a person who cohabits at that time in a conjugal relationship with
the TP and
a) has so cohabited with the TP for a continuous period of at least one year, or
b) would be the parent of a child of whom the TP is a parent, if this Act were read without reference to paragraphs
252(1)(c) and (e) and subparagraph 252(2)(a)(iii)
s.74.2(1)(a) – Spousal attribution rule – Anti-avoidance rule – To stop shifting of gains – capital gains shift
back to transferor unless spouses were separated, relationship breaks down, or transferor dies between
time of transfer and disposal
Applies between time of original transfer (even before becoming spouses)
Applies to spouses, common law partners, or people who have since become spouses/CLP
This rule attributes the entire gain back to the transferor spouse if the
Transferee spouse is deemed not to have realized the gain
To stop transfers to the lower income spouse and then selling it
Does not apply if spouses were separated, relationship breaks down, or the transferor dies between time of
transfer and disposal
In those cases, the transferee keeps the gain and no attribution back to the transferor
Attribution rule – s.74.2(1)(a)
Any gain exceeding the ACB of the spouse will be attributed back to you – Losses remain
with her
Attribution rule does not apply if you are dead or relationship is over
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Electing Out of Spousal Rollover
Why? When you have losses to offset gains
Assume you have disposed an investment on which you lost $50K – You now have an allowable capital loss of $25K
You can carry forward this loss indefinitely until death
The following year, another capital property of yours gains $50K – Taxable at $25K
Transfer this property to your spouse as gift and elect out of rollover
You will be deemed to received proceeds of disposition of $50K – s.69(1)(b)(ii)
Use the net allowable capital loss from before to offset the gain; you avoid paying tax on
the $50K
No tax paid, but now the Spouse is deemed to have the higher ACB = FMV due to
s.69(1)(c)
Spousal Rollover on Death – s.70(6)
Same idea as spousal rollover inter vivos
s.70.6(a) – Property that would apply under normal deemed dispositions upon death that was transferred
to a spouse or CLP (must be resident in Canada) – Following rules apply:
(c) – Disposition rules on death do not apply
(d) – Dead person deemed to have disposed the property and received POD equal to the ACB (Deemed no
gain)
Surviving spouse is deemed acquired property at cost equal to the proceeds
Policy: Both are using the capital property anyway, makes sense to rollover
Comment: Could technically keep rollover going on and on – Keep marrying young
s.70(6.2) – However, you can elect out of 70.6(a) to have normal deemed disposition rules on death
(s.70(5)) apply (In that case, the ACB becomes the FMV – you are deemed disposed of the property on
death)
Reminder: Capital losses on death
Normally, capital losses can only offset capital gains
Two special years – Year of death or year before death, allowable capital losses in previous years can be
carried forward against income from sources – s.111(2)(a)
Personal Use Property and Listed Personal Property
s.54 – Definition section for capital gains and losses that also defines PUP
PUP is defined as property used primarily for personal use or enjoyment of a TP, or personally use and
enjoyment of those related to the TP, or, where the TP is a trust, the personal use and enjoyment of the
beneficiaries of the trust, or the PUP of a partnership includes partners and their relatives who use the
property for personal use and enjoyment
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Note that the definition uses the word “Includes” – This denotes that the definition is not exhaustive
Includes personal property (including principal residence), usually depreciable property, physical
property, would also cover property owned by a corporation but used by a person owned by the
corporation
Also includes any debt owing to the TP in respect of disposition of property that was the TP’s PUP
Choses in action can be PUP if they relate to PUP
An option to acquire PUP
Unpaid balance of the sale price on the disposition of PUP
Does not include investments – Shares and bonds
PUP is part of capital gains and gets entered there – However, there is such thing as PUP losses (they are deemed to
be “nil”), not included in capital losses – this prevents the deduction of capital losses attributable to personal
consumption (s. 40(2)(g)(iii))
s. 54 – Listed Personal Property -- LPP – Subset of PUP
Defined – All listed personal property is PUP but PUP is not LLP
LPP – Means (exhaustive list) – Owns all or a portion or an interest in or rights to:
Print, etching, drawing, painting, sculpture or other similar works of art
Jewelry
Rare folio, rare manuscript, rare books
Stamps
Coins
LPP is personal use property that is a store of value and has an investment quality to it
Its value does not inevitably decline through use
As noted above, the list is exhaustive list although there is a place for possible expansion under
the category of “Other similar works of art”
No loss rule – No losses can be claimed on PUP – s. 40(2)(g)(iii)
However, you can have a loss on LPP – But is restricted:
LPP losses and gains – Can only be set off against each other – s. 3(b)(i)(B)
Look back to s.3(b)(i)(B) - LPP gets carved out in s.3 – it is separated from “normal” capital gains and losses
Subtract capital gains from LPP and add taxable net gains from LPP
Does not mention losses – Because LPP losses are not counted against other sources
Can have proceeds of disposition of PUP and LPP
s. 46(1)(a) and (b) -- The $1000 Rule – ACB and POD are deemed $1000 if less than $1000
Rationale – For simplicity, efficacy, some stuff is not worth the trouble
Includes LPP
PUP is subject to two restrictions
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Loss from PUP disposition is deemed to be nil – Prevents deduction of capital losses attributable to
personal consumption – s.40(2)(g)(iii) – Unless it is a LPP
Exception to the rule: LPP – s.41 permits losses on LPP
A $1K exemption applies to dispositions of PUP (including LPP) – s.46(1)
If both proceeds of disposition and ACB are less than 1K, capital gain is exempt
If ACB is less than $1K but POD is more than $1K – Gains are calculated POD less $1K
If both are greater than $1K – Calculated the normal way
If you dispose part of PUP, the ACB of the part disposed of is deemed to be the greater of the ACB
determined in s.43(1) (the amount that can be reasonably regarded as attributable to that part) or the
proportion of $1K that the ACB of the part disposed bears to the ACB of the whole property (s.46(2)(b))
Similarly – Proceeds of disposition are deemed to be the greater of the actual proceeds or the same
proportion of $1K (s.46(2)(b))
Example: If I sell part of a property that constitutes 40% of the whole ACB – Then the ACB of the part sold is
either the 40% of the actual ACB or 40% of $1K – Whichever is greater
s.46(3) – Deems number of PUPs sold separately to be a single transaction of a sale of PUP when:
Criteria:
1) Must be of type that is normally disposed of as a set
2) Whether parts constitute a set (do they match, produced at the same time, worth more collectively
than individually)
3) Even if purchased individually, if two or more owned at same time, constitutes a set
4) Disposed of all items through more than one disposition either to 1 person or to members of a group
who are not at arm’s length with each other
5) Aggregate FMV of the assets must be more than $1K – (Otherwise $1K rule kicks in)
s.41(1) – Definition of Net taxable LPP gains are ½ the amount of net gains from LPP
s.41(2) --
Taxable net gains from LPP –
TP net gain from LPP is determined as follows:
s. 41(2)(a) -- Determine total gains minus losses for the current year if excess net gains remain, proceed
Can carry losses 7 years forward and 3 years back – s. 41(2)(b)
Another way to say it is that you can look for losses 7 years in the past and 3
years in the future – For that particular year’s assessment of LPP
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If have net gain, can look back and find a loss in the previous 7 years – s.
41(2)(b)
Have to deduct oldest losses first – s. 41(2)(b)(ii)
Can only use amounts still left over – s. 41(2)(b)(i)
Cannot create losses with past amounts to refresh them in order to keep
losses from expiring after 7 years – Cannot deduct more than you have gained
By taking $10K loss in past to apply to gain in $5K now – Does not
create a $5K loss now – s. 41(2)(b)(iii)
s.41(3) – The negative counter part to s.41(2)(a)
Definition of LPP loss means the amount by which the TP’s losses for the year from sales of LPP exceeds the
total of TP’s gains for the year from dispositions of LPP
And remember, excess losses over gains – LPP losses – Cannot be used against other sources in that year –
s. 3(b)(i)(B)
Note: As with other capital losses, only half applies
Summary: Anti Avoidance Rules for PUP
s.46(1) – When disposed of a PUP – The $1K Rule applies
(a) – ACB to the TP of the amount shall be deemed to be the greater of $1K and the amount determined to
be the ACB at the time
(b) – POD shall be deemed to be the greater of $1K and actual POD at the time
s.46(2), (3) – Usually deals with sets
If you attempt to distribute sets by piecemeal to abuse the $1000 rule to result in no taxable gain
If total FMV of the set is greater than $1K immediately before the disposition of the first item, then it is
deemed to be a sale of the whole set
s.46(2) – If disposing part of a property and kept another part:
(a) – ACB of the TP is deemed to be the greater of (i) the ACB determined at the time of that proportion
(actual ACB) or (ii) the proportion of $1K that the ACB in (i) is of the ACB of the whole property
(c) – POD is deemed to be greater of (i) actual POD and (ii) the amount determined in (a)(ii)
Only occurs if selling pieces of the set to a single person or a group of persons not dealing at arm’s length
s.46(3) – If normally disposed of as a set:
(a) But have been disposed of in more than one disposition to a person or group of persons not dealing at
arm’s length with each other and
(b) The set had a FMV of greater than $1K
The propreties shall be deemed to be a single use PUP and each disposition will be deemed a disposition of
that part of the property
Properties deemed to be a single PUP and each disposition shall be deemed to be a disposition of part of that
property – Bringing down the wrath of s.46(2)
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Example Problem – p.592:
Facts: X purchased dining future – 4 chairs and a table – 100 per chair, 400 per table – Actual ACB of $800 –
Everything doubles in value (200 per chair; 800 for table) – As unit, they are worth $2400
Answer : Dining room – PUP as defined in s.54
FMV - $2400 as a set; $1600 as separate pieces
Dining room set – Likely a number of PUPs that would ordinarily be disposed of in one disposition
Question of fact – Worth more as a set – Likely considered a set for the purposes of s.46(3)
s.46(3) – Only selling to one person – Will deem set to be one PUP and each transfer of a chair or table will
be deemed to be part disposition of the single PUP
s.46(2) – Apportion the $1K rule where s.46(3) applies to properties disposed of as a set to a single person
s.46(2)(a) – Deems the ACB to be greater than ACB determined and proportion of $1K
s.46(2)(c) – Deems POD to be greater of POD or proportionate amount of $1K that the ACB (of the
part) is of the whole ACB
ACB and POD otherwise determined – Could be deemed FMV if falls under the
appropriate transactions (not at arm’s length, disposing as a gift)
Application to facts (gift transfer):
Chairs (as a group) will be the greater of 400 (100 per chair) or 500 (chairs make up half of the
cost of the entire dining set) – ACB
POD of the chairs – Greater of FMV of 1200 (since it is a gift to a person) and 500
Half of the FMV they are deemed to have received for the entire set
Capital gain of 700 – Same applies for table
Total capital gain of 1400, taxable is 700
If dealt in one single transaction
ACB is greater of 800 (actual ACB) and 1000 – s.46(1)
POD is greater of 2400 (FMV) and 1000
Total capital gain of 1400, taxable is 700
Same amount – Effect of s.46(3) – Where set is disposed in more than on transaction – Aggregates all
separate dispositions into one and apportion the 1K rule across all dispositions
Principal Residence Exemption
No tax is owed when people sell their personal residences; only one personal residence per family unit for the year is
permitted
If dwelling qualifies as the TP’s principal residence throughout the period of ownership, the entire capital
gain is exempt
The capital gain must correspond to the portion of the gain in the period that the dwelling was qualified as a
principal residence and person was resident in Canada
One cannot claim a capital loss on owner-occupied dwelling – it is essentially PUP
Rationale: Do not inhibit housing markets
When you sell your house, you need to buy a house – Tax on the gain you get, less money to buy an
equivalent house
Rationale: Necessity for living
Effect: Boosts housing markets – People are arguably willing to pay more because no tax on any gains they get
Effect: No deductions for expenses for buying a house (mortgage, depreciation)
Exception: Deductions permitted if part of the home is used as a home office
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Two main provisions
First provision
s.54 – Definition of ‘principal residence’ -- A property that contains a housing unit (broadly defined in case
law – unit in duplex, recreational place, houseboat, trailers), a leasehold interest, a share in housing co-op
s. 54(a) Must be ordinarily inhabited by the TP, spouse, former spouse, CLP, former CLP, or child
Definitions:
Spouse – Legally married
Common law partner – Cohabits in conjugal relationship and has cohabited for
at least 1 year at time of considering their status – 12 month period in the
time before applying
If you are parents of a child, do not have to be living for the
preceding 12 months
If living apart – Remain common law partner unless breakdown of
relationship (breakdown for at least 90 days)
Ordinarily inhabit – Not too difficult to do so
Does not say throughout the year, just says in a year – Does not
need to be entire year
What seems to be the test is inhabited in the ordinary way
TP can only designate a particular property for each year, but only
one
Ordinarily inhabited – Requires housing unit must be usually or commonly occupied as
an abode
Includes seasonal or recreational occupation
Vacant lot cannot qualify as principal residence until there is a housing unit
Until December 31, 1981, each spouse could claim a principal residence if each
spouse owned a property separately and not as joint tenants.
This was then restricted. From 1982 to 1992, each common law partner could
still claim separate principal residences.
This was further restricted. From 1993 to 2000, only same sex common law
partners could claim separate principal residences. However, from 1998 to
2000, same sex common law partners could elect to be treated as standard
common law partners.
Now, spouses living together who are not separated/divorced can only claim
one principal residence.
On marriage breakdown – If one spouse receives exclusive possession of
matrimonial home, other spouse (owner) may continue to claim exemption
for period during which he is not in possession
If child of TP occupies a dwelling, qualifies for exemption
Vacates and renting principal residence – May claim as principal residence for
up to a period of absence of four years
Longer absence – Permissible on work relocation
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If vacated for work relocation, if 40 km closer to new work location, may claim
PRE for duration of relocated job plus on year or until death during
employment
Would then elect to treat dwelling as PUP, but 4 year limit does not
apply
Question of Flipping:
Buy a lot, build a house, move family for few months
Then bought a new lot, did same thing
Consider if this is an ANT (a business of acquiring houses)
Becoming a trader of flipping houses – Usually when transactions become numerous and significant
Exemption applies to only one-dwelling for each taxation year
Has to be ordinarily inhabited by people of your family group
(e) Principal residence includes up to half hectare of surrounding land (including the land under the home) –
Automatically deemed part of principal residence – Reasonably regarded as contributing to use and
enjoyment – Accepted by the CRA – See Interpretation bulletin IT-120R6
If more than half a hectare around house it is deemed not to contribute to the use and enjoyment
of the home. In that case, the TP must prove that land was necessary to use and enjoyment of the
house to include it as part of the principal residence exemption – Hard to do
Test for necessity of excess land is primarily objective, lifestyle is almost irrelevant
Indispensable to use and enjoyment of the housing unit as a residence
Expert appraisal is not conclusive evidence of necessity
See following case law
Yates (1983 FCA) – Most important – Leading case on how to
determine if property is necessary to use and enjoyment of
residence as principal residence – Bought ten acres, using one,
rented rest to farmer
If at time sale, the law changed the minimum lot size and one could subdivide, the excess land would not be
part of principal residence
Because the zoning forbade the subdivision into smaller parcels, the excess was considered necessary
Carlile (1995 FCA) – Objective test – Can house can be legally
occupied on a smaller piece of land
If does not qualify on objective test, may find recourse in subjective test
Found that land could not be subdivided – Objective test – used vague and unclear evidence however
Minority – Noted the land had subdivision potential, that the TP only used 3 acres personally, and
leased the rest – Essentially used an objective test
The court applied only the objective test, but said there was a subjective test
“Where the land does not qualify on the objective test it may, however, qualify as part of the
principal residence by recourse to a subjective test”
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Stuart Estate (2004 FCA) – Could not successfully apply for
subdivision – Was dismissive of the subjective test
Subjective evidence is only marginally relevant
Court preferred objective evidence, said that subjective evidence was less persuasive
Other objective factors:
Accessibility to roads, utilities requiring a larger lot
Interpretation Bulletin IT-120R6 para. 15 – The CRA requires the TP to establish that excess land is “clearly necessary”
to the proper functioning of the residence and not merely desirable.
Second provision
How to Calculate – 40(2)(b) – How to Calculate -- The formula for calculating what portion (some or all) of
the capital gains receive the personal residence exemption
Property does not have to be in Canada, but person has to be resident in Canada for the year they designate
it
A – (AB/C)
A – Actual capital gain
B – 1+Actual number of years qualified (years deemed PRE and resident of Canada)
C – Years owned the property
s. 40(4) – When one spouse transfers personal residence to another in a way in which the rollover on
death (70(6)) or inter vivos (73(1)) roll over applies,
a)
b)
c)
the receiver is deemed to have owned the property throughout the period during which the giver owned it;
The property is deemed to be the receiver’s personal residence
i)
where it is a rollover on death, for any tax year for which the property would have been the
giver’s personal residence
ii)
where it is an inter vivos transfer, for any tax year where the property would have been the giver’s
personal residence
where the receiver is a trust, the trust is deemed to have been resident in Canada during each tax year the
giver was resident in Canada
Problem – House: Spousal rollover on death – ACB and enduring capital cost ($50K)
Facts: 1972 – H and W (spouses) purchase house as joint tenants for $40K
1983: Add $10K swimming pool – ACB is now $50K – Enduring capital cost benefit
1985: H dies, W becomes owner – Spousal rollover on death, acquires his half interest
2005: W sells for $500K – Gain of $450K
Assume resident throughout time of ownership
Calculate PRE: A – [(AxB)/C]
A = $450K – Capital gains
B = 1 + 34 (number of years deemed a principal residence) = 35
C = 34 – Years of ownership
Result – PRE of $463K
Smart thing to do – Designate it for 33 years – Do not designate for 2005
PRE of $450K – Covers all the gain
She buys new house in 2005 – Can designate that one as principal residence
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Problem – Cabin: Why gift? To give her full ACB of FMV
Facts: H and W marry in 1975 – Buy house in Victoria – Wife’s name - $50K
1980 – H inherits cabin on ½ hectare of land worth $30K
1985 – Sell house in Victoria for $65K – Start renting
1987 – Wife buys new house for $80K
1991 – H transfer cabin to 16 year old daughter by gift – Worth $75K
Daughter’s ACB – $75K
H – Deemed disposed at $75K
First House
Gain – $15K – Owned for 11 years
15K – [(15K x 12)/11] = 16,363 – More than necessary to eliminate the gain
Designate for 10 years – 1975 – 84
No capital gain on disposition of first house
Cabin – Gain (deemed disposition) - $45K – Owned for 12 years – 1980-91
Part of that time, first house was deemed to be principal residence – 5 years (1980-84)
But back in 1980 and 81 – Spouses could designate different property
9 years of possible designation of cabin as principal residence (if give full 10 to first house) (80, 81,
85-91)
45K – [(45K x 10)/12] = 37,500
Total gain after deducting PRE is 7500 – Divide by two and taxable gain is 3750
Planning issues: What about the new house
Should they use the designation years now or save them up – Depends on their plans
Normally – Advisable to claim maximum exemption as soon as you can
Especially since he did not receive cash for the cabin gift
Better planning – Suppose they knew cabin would appreciate more quickly
Designate fewer years on first house – 75 to 82 – Only 8 years, leaves 2 years for the cabin (83 and 84)
Gain on house: 15K – [(15K x 9)/11] = 12,272  Gain of 2728 – Taxable capital gain of 1364
For cabin – Now principal residence for 11 of the 12 years
Entire cabin is sheltered
Result of planning – Reduced taxable capital gains from 3750 to 1364
Note: Daughter cannot designate cabin for 1991 – Only for the year she turns 18 and after (can she start designating a
principal residence independent of parents and siblings) – Earliest possible is 1992 if she turns 18 then
Depreciable Property and Capital Cost Allowances
Depreciable property is always capital property by definition – s.54
Depreciation – Accounting term for loss in value of certain assets attributable to their use
Must account for depreciation for accurate statement of net income
Depreciation serves two purposes – Proper value at a given time; attribute wear and tear on assets
Cost of acquiring capital property in a business context is a real cost for the business
Capital outlays, per 18(1)(b) are not a deductible expense
However, for capital property, the following exception applies:
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20(1)(a) – Capital Cost Allowance, another specific deduction allowing one to deduct capital cost of
property Allows you to deduct part of the capital cost – Specifically permits you to deduct
This recognizes loss of value of asset over time – i.e., it’s a real cost
Notwithstanding 18(1)(a), (b) or (h), an amount which is allowed by regulations is deductible
But only for those assets that have a purpose of earning income and not of a personal
nature
CCA – A permitted deduction – TP may claim as a deduction any amount up to the maximum
May choose not to claim a CCA in a given year but rather defer deduction to subsequent years
ITA – Requires all assets in respect of a particular business that are within a particular class be pooled
CCA will be claimed on the entire class or pool
Exceptions – Passenger vehicles costing more than $30K – Treated separately (Reg. 7307)
Exceptions – Rental property costing more than $50K – Treated separately (Reg. 1101(1ac))
Certain property is not mentioned in Schedule II – No CCA is allowed
Tangible assets not in any other class are included in Class 8
The “declining balance” method (where a percentage of the capital cost is reduced each year) is used for most capital
property. The “straight line method” (where a flat even amount is deducted each year) is permitted only for certain
property such as leasehold interests, patents, concessions, franchises or licenses (Reg. 1100(1)(b) and (c))
Capital cost of property – Not defined in the ITA – Essentially the amount that is paid to acquire the property
Extremely and rigid system – Does not necessarily reflect the real world
Policy depends a lot – High depreciation rate for things like environment equipment
Definition of “depreciable property” – s.13(21)
Essentially – Property that allows deduction under 20(1)(a) is depreciable property
Property that earns income that is capital in nature (enduring benefit), not consumed in income earning
process (like supplies or inventory) – Forms fixed physical assets of the business
Physical assets in income earning process that wears out over time
Non-tangibles may qualify
Patents – Can depreciate patent over time
Example: Furnace in office building – Depreciable property – Physical asset, decorates, income purpose
If the furnace is located at home – It is a PUP
ITA – Separates property into classes of property – Regulations – Reg. s. 1100(1)
For s.20(1)(a) – Shows different maximum rates of depreciation for each class – Assigns different rates
Classes are defined by schedules
Sometimes influenced by social, political, or economic policy in placing the assets into a class
Property not included
Reg. s.1102(1) – Property that cannot claim a CCA deduction
a)
b)
c)
Property that had its costs deductible in the ITA
Inventory property
Property acquired that was not for purpose of earning income
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Reg. s.1102(2) – Land is excluded – Even land upon which building is situated on
Have to separate land from the building
Ben’s Ltd v. MNR (1955) – Cost is undefined in Act, but
ordinarily the amount expended to acquire it
Facts: TP owned bakery – Purchased property next to bakery which had houses on them. TP planned to demolish
houses to build a larger bakery
The TP Sold the houses and had them removed off the land
On tax return – Claimed deduction on capital cost allowance on the houses – Put the cost of houses much greater
than the land to claim a CCA (land has no CCA)
CRA denied on the basis that the purchase price of the property was for only the land
Also denied on the basis that the houses were not purchased for the purpose of income
Issue: Were houses acquired for the purpose of earning income
Held: No intention to use houses for bakery or any business
Small amount of rental on one of them did not affect real purpose of acquiring them
Reg. s. 1101(1) – Different business – Have to separate capital properties into separate classes for each
business/property income source, namely:
Where there are more than one property for a class and
(a) where one property is for one business
(b) and the other for another business,
(c) and (d) a separate class is prescribed for the properties for each business, even though the properties
would ordinarily be within the same class
Undepreciated Capital Cost (UCC) – Of the class of property at any given time
Reg. 1100(1)(a) – CCA is the amount equal to the appropriate percentage of the UCC of each class of
depreciable assets
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
Class 1, 4%
Class 2, 6%
Class 3, 5%
Class 4, 6%
Class 5, 10%
Class 6, 10%
Class 7, 15%
Class 8, 20%
Class 9, 25%
Class 10, 30%
Because UCC is calculated at the end of the tax year, timing for CCA is fixed at end of tax year
A formula under s.13(21) – Defines UCC
A+B-(E+F)  Only part of formula we need to know
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A – Entire total capital cost of every property that has ever been in that class
Even if it is no longer there – Total historical cost of that class
B – Total recapture up to that time historically for that class – Capital gain from depreciable property
When you are depreciating it faster in tax than in real world
E – Total historical capital cost deducted for that class at that time
Deductions claimed under 20(1)(a)
Includes terminal losses previously claimed when class was empty
F – Proceeds of disposition of all properties in the class that has been disposed off up to their original capital
cost (lesser of POD and capital cost)
Treat excess in a different way – More means it is a capital gain
Prevents recapture for sale in excess of original cost – Would be capital gain
Cannot have a capital loss for depreciable property (a negative amount, would be called
recapture)
Half-Year Rule – Reg. s.1100(2) – Formula for determining a particular policy adjustment to the UCC of the
class
Effectively only allows half the year of capital cost allowance in respect to capital property
acquired in year
Rationale: Don’t allow those who buy depreciable assets late in the year get the full CCA
Simplistic averaging approach was adopted – Deems assets are used only half the year
This creates a notional UCC that must be used in the first year of an acquisition
Notional UCC = Year-End UCC – [½ x (Acquisitions in Year – Dispositions in Year)]
Second part: Must be positive
Step by step, the procedure to follow:
First determine the year end UCC using A+B-(E+F)
Then determine the notional UCC taking the year end UCC – (1/2 * (Acquisitions in Year – Dispositions in Year))
Then take the figure produced and multiply it by the CCA rate for the given class to determine the CCA that may be
deducted for the year.
Example (only two years used because, per the prof, only two years will be required on the exam):
Facts: Buses and building – Only depreciable capital property
Buses – Acquired at $75K - $20K, $25K, $30K respectively
Building – Acquired at $100K
All used in purpose of earning income – Only depreciable capital assets
Two pools – Busses get 30% and building gets 10%
Calculate UCC:
Buses: UCC = ($75K+0) – (O+O) = $75K
Notional UCC = $75K – ( ½ x $75K) = $37.5K
CCA = $37.5K x 30% = 11,250
Building: UCC = ($100K + 0) – (0+0)
Notional UCC = $100K – ( ½ x $100K) = $50K
CCA = $50K x 4% = $2K
Total CCA = 11,250 + 2K = 13,250
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Notional UCC – Means when you have to apply the ½ year rule
Second Year: Sells bus originally costing $20K for $18K
Buses: UCC = ($75K+0) – (11,250 + $18K) = 45,750
Notional UCC – Does not apply, no new acquisitions for the class
CCA = 45,750 x 30% = 13,725
Building: UCC = ($100K+0) – (2K+0) = 98K
Notional UCC – Nothing sold
CCA = 98K x 4% = 3920
Total CCA = 17,645
Terminal Loss – Deductible expense – When the CCA rate hasn’t kept up with the actual rate of
depreciation
s. 20(16) – Only occurs at end of a tax year – Deductible under this section
When UCC is positive AND the class is empty (last asset is sold)
Mandatory to deduct the terminal loss – the FULL amount is deductible
Asset depreciated at a rate faster than relevant CCA rate
Empty class – Positive value – Terminal loss
Empty class – Negative value – Recapture
Example: Sold remaining buses (30K and 50K) at 24K each
UCC = (125K+0) – (13,725+11,250+14,857+18K+15K+24K+24K) = 4168
Buses declined by a total of 44K (125K cost and only recovered 81K in proceeds)
But only claimed 39,832 in CCA – terminal loss of $4,168
s.39(1)(b)(i) – No capital loss is permitted for the disposition of depreciable property
So, when one disposes of depreciable capital property, go to CCA calculations to see if a terminal
loss can be found which would allow a deduction
Recapture – Negative amount of UCC – s.13(1)
Required to include amount as income inclusion – Deducted too much in the past – Therefore have to
include the extra deducted earlier on to income – s.13(1)
This excess is taxed as a capital gain
Unlike terminal loss, you do not necessarily need an empty class – The recapture will then be part of B in
the formula
May occur if assets are left in a class – Difference from terminal loss
Example: Building is sold for $95K
UCC = (100K +0) – (2K+3920+3763 + 95K) = (4683)
In the definition of UCC, it cannot be a negative figure, so:
s.13(1) – Brings this negative balance into the TP income as recapture
Can avoid recapture if buy another asset that makes the UCC positive
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Rental and Leasing Property Restrictions – Reg. 1100(11)
Cannot create a loss through CCA – Amount deductible is limited to net income of such properties
A rental property – Definition – Reg. 1100(14) – Building used principally for purpose of producing gross
revenue that is rent
Timing: When is an asset (depreciable property) acquired?
Depends on intention – When was legal title passed, what events occurred (change in possession, delivery,
etc) (See Wardean Drilling Ltd.)
s. 13(26) “Available for use” – In order to claim a CCA
s.13(27) – Property other than a building acquired by a TP is considered available for use at earlier
of the following general times
a) First used for purpose of earning income
d) Delivered or made available for the use or benefit of the TP
c) Time immediately before disposal
s.13(28) – Similar rule for buildings – when is the starting time when CCA may be claimed?
a) Time used by TP for intended purpose
b) Time at construction complete
d) Time immediately before disposal
Available for use – Rules apply to property acquired after 1989
The above applies only for determining the maximum CCA available for deduction under s. 20(1)(a) and the
Regulations. For all other purposes such as recapture and terminal loss, UCC additions are made at the time the
property is acquired.
Aboriginal Taxation
Two topics:
Exemption on some types of property in some circumstances
Aboriginal governments impose taxes on their members and other non-aboriginals
Part of the Indian Act – Municipal-type taxes on real property
Indian Act – s.83(1)(a) – Note: Discussed in the Westbank case The band can tax land on reserve (as if a
municipality)
ITA – s.81(1)(a) – An amount declared to be exempt from tax by any other enactment of Parliament is not
included in income
Relevant because the Indian Act provides limited exemption for status Indians
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Exemption on the basis of Right
Arguments as to why Aboriginals should enjoy a general exemption from tax:
Sovereign people – Aboriginals are sovereign – Not subject to Canadian taxation
Problem – Not a complete argument (non-residents are taxed on Canadian source)
s.35 of the Constitution Act
Argument that tax impedes an existing aboriginal right
Mitchell v. MNR (SCC 2002)
Facts: Wants to enter Canada without paying customs or duties
Group traded with other groups across the St. Lawrence – s. 35 of the Charter -- Tax was an impediment of
the right
Held: Evidence insufficient to establish aboriginal right
No right to cross borders since borders did not exist at the time, the “right” was recharacterized as “the
right to bring goods across the St. Lawrence River for the purposes of trade”. The tax exemption claimed was only
ancillary to the exercise of the alleged aboriginal right.
Exemption on the basis of Treaty
Benoit v. The Queen (FCA 2003)
Argued, based on oral evidence, that Treaty #8 provided a general exemption from taxation.
Court said the evidence actually meant that Treaty #8 by itself wouldn’t impose taxes.
However, the court said that even if the evidence were accepted, this did not grant a general exemption forever from
all sorts of taxation
R v. Johnson (Saskatchewan Court of Appeal, 1966)
An unsuccessful argument that treaty terms should be interpreted to imply an exemption from taxes that are linked
to benefits the Crown has promised to provide under the treaty.
In the instant case, the treaty promised “a medicine chest” for every Indian agent. This was interpreted to still
require an Indian beneficiary to pay hospitalization tax.
s.88 of the Indian Act – Provides Provincial laws of general application will apply to Indians subject to the
terms of any treaty (including tax)
Exemption under the Indian Act
Limited exemption for status Indians on certain real property and personal property situated on reserve
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s.2 – Must qualify as an Indian; Registered or entitled to be registered as an Indian under the Indian Act
s.87(1) –Following property is exempt from taxation
s.87(1)(a) – Interest of an Indian or a band in reserve or surrendered lands
s.87(1)(b) – Personal property situated on the reserve (where litigation is)
Nowejigick (SCC 1983) – Decided income can be personal
property (but it is incorporeal property)
Has to be situated in the reserve
Williams (SCC)
Facts: EI benefits – Benefits were received in respect of previous employment with a logging company – Company
location and work on the reserve
Held: Two important things:
1) Reaffirmation in Mitchell v. Pequis Indian Band the purpose of the Indian Act exemption
Purpose to ensure that property and land is not clawed back by the government
Presumably, if taxes were unpaid, the crown would seize the land and property
However, the purpose is not to provide a general economic benefit to aboriginals
2) Connecting factors test – Determine whether property is situated on the reserve
Physical property – Easy to determine, paramount location – Look at the facts
Non-tangible income – Harder to determine, must look at a number of factors
Debt – Location of the debtor is the location of the debt
Have to look beyond where the check was cut, where the employer was located
Balance connecting factors to the reserve on a case-by-case basis
Situs of the debtor, creditor, where payment is made, where employment is
conducted
Factors should be analyzed in light of:
1) Purpose of the exemption under the Indian Act
2) Type of property in question
e.g., in the case, income replacement insurance
3) Nature of the taxation of that property
e.g., in the case, the unemployment benefits were based on premiums arising out of previous
employment on the reserve. There was a connection between the receipt of benefits and the
place where the employment which gave rise to those benefits was located – on the reserve
Recalma v. The Queen (FCA 1998)
Facts: Commercial fishing family –Put money in bank located in Squamish reserve
Bank Act – If put money in a bank account, that debt is situated where the account is situated
Only account for few days – Money was then invested into companies that had no connection to reserve
Held: Whether the income is integral to the life on the reserve
Have to show that the taxation will erode the property on the reserve
Whether income earned was integral and intimately connected to the life on the reserve
Problem – Difficult to be tax exempt – Because traditional way of life lacks cash
Investments were made in places off-reserve. The lack of connection to the reserve was too great
To create this tax haven for aboriginals is not in accordance with s.87 Indian Act
Result would be different if money invested were for loans to Natives in the community
When choosing to invest funds into the general mainstream of the economy, aboriginals cannot
shield themselves from tax by using a financial institution situated on reserve
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R. v. Kinookimaw Beach Association
Corporations cannot claim exemption under s.87
The corporation is being taxed, not the shareholders. Thus, not entitled to tax exemption of its Aboriginal
shareholders – Corporations cannot be registered/status Indians
Exemption for bands and corporations owned by bands – s.149(1)(c) and s.149(1)(d.5) – ITA
s.149(1)(c) Municipality exemption (Public body doing government function)
s.149(1)(d.5) Municipal corporation exemption
Provided 90% of shares held by municipality and 90% of income earned in geographical
boundaries of the municipality – Then income is exempt
Otineka Development Corporation – s.149(1)(d.5)
Facts: Indian band and Indian corporation – Municipal corporations?
Held: Not municipalities as such, but a band is a public body performing a governmental function
Exempt and since it was 100% owned by the band and the income was generated on the reserve
Suppose corporation invests in mutual fund – Becomes taxable – Source is off reserve (Recalma)
Akiwenzie (FCA 2003)
Facts: Worked outside reserve, lived in reserve – Liaison with government
Primary employment location was off reserve, but work involved contact with several reserves
Said that part was so closely to life on the reserve – Claimed deduction
Held: Vast majority of work was performed at off reserve
Work benefitting reserve does not mean your employment is situated on the reserve
Employment income was situated off reserve where he could legally claim payment of salary
Test: Where you physically perform your duties
Note: If 50% of time in reserve – Could get an apportioned exemption
Southwind (FCA 1998) (Income from a business)
Fact: Sole proprietor running a business – Contracted with one client (non-native logging company)
All actual logging was off-reserve, administrative work on reserve
Only one client – an off-reserve corporation
Was paid by off-reserve bank accounts
Held: Income generating activity is off-reserve (logging), payment off reserve
Suggests this idea that there has to be community benefit to the income. Otherwise, aboriginals entering
into “the commercial mainstream” must pay full tax like everyone else.
Suggests that an activity is only a Native activity if it benefits the community
Is this diverging from Williams? Perhaps, but the appellant did spend a lot more time off reserve
than the TP in the Williams case
Indian Act – s.90(1) – For the purposes of section 87 and 89, personal property that is
(a) purchased by gov’t with Indian moneys or moneys appropriated by Parliament for the use and benefit of
Indians or bands, or
(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)
-
agreement between Crown and band for the Crown to pay the Chief’s salary
Page 106 of 106
-
-
argument that this salary was not taxable under s. 90(1)(b) – i.e., an agreement between a band and the
Crown
argument fails: The meaning of s. 90 is that it be an agreement pursuant to a treaty. Treaties are written in
general terms and often contain many agreements within them – those agreements are what the provision
refer to
the TP got the money pursuant to an agreement, but not one under a treaty
because a s. 87 argument wasn’t made, the courts didn’t consider it – they left it open, however, that such
an argument may have succeeded were it pled
Greyeyes (FCTD 1978) – Involves s.90(1)(b) – An exemption
granted by a treaty
Facts: Beneficiary of Treaty #26 – Received scholarship money – Government required to assist band members in
their education under the treaty – Was taxed on scholarship money
Held: CRN conceded scholarship was an obligation under the treaty between band and Her Majesty
Scholarship personal property – Deemed always situated on a reserve
Taxation by First Nations
Indian Act s.83(1)(a) Can pass by-laws for purpose of imposing local taxation on land or interests in land
on reserve
Yukon Agreement – First Nation Self-Government Agreement
Bands run large tracts of land – Impose income tax
Agree with federal government – Government agree to collect and remit back to the First Nations – Tax
collection and sharing agreements with Feds and Yukon government
75% of the tax is given to the First Nations – After 10 years, 95%
(assuming you live on the reserve on the last day of the year, per Reg.2607 of the ITA, and
expressly agree to this form of taxation)
Guiding Principles:
Property of Indians situated on reserves – Remain exempt from non-Indian taxation
Decisions on taxation powers to be prerogative of First nations
Expand Indian tax powers to match federal and provincial
Overall integrity of tax system to be maintained