TAX I CAN – KROFT DECEMBER 2008, ERICA OLMSTEAD
I. INTRODUCTION TO THE FORMLTION OF TAX LAWS AND TAX POLICY ................... 6
1. What is Tax? ........................................................... 6
3. Fundamental Elements of a Tax System ................................... 6
Total Tax Payable = (Tax Base x Tax Rate) – Tax Credits ................. 6
4. Type of Taxes (Tax Bases) .............................................. 7
5. What Factors Influence Taxation? ....................................... 7
6. Who Makes the Federal Tax Laws? ........................................ 8
7. When were taxes created? History of the ITA System ..................... 8
8. Tax expenditures: ...................................................... 9
II. SOURCES OF INCOME – TAX LAW .............................................. 10
III. INCOME TAX ACT
& CALCULATION OF TAXES PAYABLE (RSC 1985) ............... 11
1. Framework of the ITA ...................................................... 11
2. Most Common Parts Used by Advisors/CRA .................................... 12
Income tax Calculation *Part I - Section 3 [Tax Base and Tax Rates] Table
p.150 ........................................................................ 12
Eg 1a) Is X’s salary is taxable? (aka is X’s income “salary”?) ........... 13
3. Tax Rate and Tax Base - Part I ............................................ 14
4. Tax Credits (General Knowledge) .......................................... 14
4.1 Types of individual credits: ......................................... 14
4.2 Types of corporate Tax credits ....................................... 15
4.3 Credits v. Deductions ................................................ 15
IV. JURISDICTION TO TAX UNDER ITA ............................................ 15
1.
2.
3.
4.
5.
of
6.
7.
Who is taxed? Taxable nexus ........................................... 15
Individual, Resident S 2(1), s. 114, s.250(2) - (3) ................... 15
Residence of Corporations ............................................. 17
Residence of Trusts ................................................... 18
Non-Residents (Subject to tax Treaty) (ITA s. 2(3), 115, 116, 212-218, Role
Treaties) ............................................................. 18
Part Year Resident (ITA S.114) Pt I & XIII ............................ 20
Exempt Taxpayer (ITA s.149) & Indian Act (reserves) ................... 21
V. THE CONCEPT OF INCOME **Q how to calculate income: ........................ 21
1. Economic Concepts of Income & the Comprehensive Tax ................... 21
2. Legal Concept of Income ............................................... 21
3. Statutory Concepts of Income Do eg.p159-64!! .......................... 22
4. CL Concept of income (UK) ............................................. 22
5. Exempt Income ......................................................... 23
5.1 CL Cases on S3 ..................................................... 23
VI. THE MEASUREMENT OF INCOME ***S3(a) Laid out*** ........................... 23
VII. INCOME FROM BUSINESS AND PROPERTY (Revenue) S9 – S37.1 .................. 24
1. Business Income ........................................................... 25
1.2 Hobby Distinction (personal use gains) ............................... 25
2. *Calculation - Income & loss from business (& property) ................... 25
Canderel LTD v. Canada (SCC 1998) - Accountant books are a mere reference 26
2.2. Related Damages (of Business) ....................................... 27
3. Income from business, is distinct from income from property: .............. 27
3.1 Income From Property S 9*, 12, 123, 18, 20 ............................ 28
4. Investment Income, or a Capital Gain - Profit from Property Sale .......... 30
4.1 Capital gains - not defined in the ITA ................................. 30
4.2 Income vs. capital gains: .............................................. 30
4.3 Taxpayer’s Intention ................................................... 32
VIII. DEDUCTIONS IN COMPUTING BUSINESS/PROPERTY INCOME (*heavily litigated)
1.General Limitations on deductibility S 9, 18(1)(a) ......................... 34
2. Purpose, of gaining or producing income 18(1)(a) .......................... 34
Royal Trust Case – purpose of spending, not actually result of expenditures.34
Reasonableness of Expense, (ITA s. 67)
Personal and living expenses (ITA s. 248(1), paragraph 18(1)(h)
3. Current or Capital Expense? 18 (1)(b) ..................................... 35
3.1 Fight of repair ...................................................... 36
3.2 Lawyers fees? Depends on effect (Kellogg, Evans) ..................... 36
4. Other Statutory Prohibitions/Permitted Deductions ......................... 36
** a cost is deductible if isn’t indicated as not deductible ............. 38
5. Interest (ITA ss. 18(2), (3.1), 20(1)(c) and 21) .......................... 38
5.1. Capital/current expense? ............................................ 38
8. Capital Cost Allowance ITA 18(1)(b), 20(1)(a), Reg. 1100, Schedule II ..... 39
8.1 General .............................................................. 39
8.2 Structure of system .................................................. 39
> E.g., “sale of lemonade “ ............................................ 40
8.3 Eligibility (allocation of price between capital) .................... 40
8.4 Classes of Property .................................................. 42
8.5 Determination of capital cost ........................................ 42
8.6 Un-depreciated capital cost .......................................... 43
8.7 Recapture *TQS** ..................................................... 43
8.8 Terminal loss (opposite of recapture) ................................ 44
9. Cumulative Eligible Capital (ITA s. 20(1)(b), 14(5)(a) & (b)) ............. 45
9.1 Capital expenditures - doesn’t fit into S20 deductions ................. 45
9.2 Cumulative eligible capital (CEC) ...................................... 46
9.3 “Eligible capital property/amount” ..................................... 46
9.4 Eg. Goodwill C.B. 327-328 ............................................. 46
9.5 Recapture of negative balances ......................................... 46
10. Taxation of Non-residents (ITA s. 2(3), 115, 116, 212-218, Role of Treaties46
2
10.1 Carrying on business in Canada (Part I) C.B. 1369-1381 ............... 46
10.2 Passive income (Part XIII) C.B. 1405-1417 ............................ 47
10.3 Treaty overrides for Part I and Part XIII (see relevant articles of tax
treaty) .................................................................. 47
IX. EMPLOYMENT INCOME AND DEDUCTIONS ......................................... 48
1. Significance of Characterization of Employment or Business Income ......... 49
2. Employment Income S5 – 8 .................................................. 49
2.2 Concept of Employee-Independent contractor C.B. 222-227 ............. 49
2.4 Salary/wages/remuneration (ITA ss. 5, 248) C.B. 227-228 ............. 50
2.5 Legal issues & Benefits - S6 ......................................... 50
2.6 Allowances S6(b) ..................................................... 52
2.8 Car benefits (not tested on calulating) .............................. 53
2.15 Directors fees S6(1)(c) ............................................. 53
2.13 Signing Bonus ....................................................... 53
2.12**Prizes ............................................................. 54
2.11 Payment in lieu of reasonable notice ................................ 54
2.9 Advances ............................................................. 55
2.10 Loan: a debt with provision for repayment within some reasonable time55
2.10 TQ**Stock Options ................................................... 55
3. Employment Income Deductions .............................................. 57
4. Taxation of non-residents ................................................. 57
5. Other deductable income
> Registered Retirement Savings Plans (RRSPs) (ITA s. 146(5))
> Scholarships and Prizes (ITA paragraph 56(1)(n))
XI. CAPITAL GAINS – 3(B) ..................................................... 58
1.1 Structure ............................................................ 58
1.2 Inclusion Rates ...................................................... 58
1.3 Difference between capital gains/allowable losses and Business
income/loses ............................................................. 59
2. Capital Property C.B. 444-447 (not from class) ........................... 60
3. Capital Loss/Gain Computation ............................................. 61
**Capital loss = (ACB + expenses) – POD*** ............................... 61
4. Proceeds of Disposition – ITA ............................................. 61
4.1 Deemed Disposition ....................................................... 62
“Departure Tax” S 128.1(4), Related to death. S70(5)(a) or Gifts
S.69(1)(b)(ii) ........................................................... 62
> Inadequate consideration – tax consequences? ........................... 63
5. Reserves – where don’t receive full payment ............................... 63
6. Adjusted Cost Base: (ITA ss. 53(1), 53(2)) C.B. 474-477 .................. 64
10. Principal Residence – exempt from formula ................................ 65
7. Personal-use Property C.B. 481-485 ....................................... 66
8. Listed personal property .................................................. 66
3
11. Losses Deemed to be Nil
(ITA s. 40(2)) C.B. 488-492 ................... 66
b) Listed personal property – special rule for losses .................... 66
11. Capital Loses ............................................................ 67
12. Transitional Rules ....................................................... 68
13. *Stock Options as Capital Gains AND employment benefit ................... 68
15. Taxation of Non-residents and Capital Gains .............................. 69
XXI. ADMINISTRATION AND ENFORCEMENT OF THE ITA ............................... 70
1.
2.
3.
4.
Who are the Players? ...................................................... 70
Federal officials of CRA .................................................. 70
Responsibility of Tax Payers S150 ......................................... 70
Collecting Remedies S 222 – 227.1 ......................................... 72
4.1 Limitations periods .................................................. 72
4.2 Garnishment/third party demands, seizure, judgments C.B. 927 ........ 73
4.2* Transfers of property (s160) - Debts of Delinquent Tax-payers ....... 73
4.3 Directors liability S227.1 ........................................... 74
XXI ENORCEMENT OF THE ITA .................................................... 74
1. CRA Investigatory Powers [Supplementary Material] ......................... 74
1.1 Demand to file return ................................................ 74
1.2 Audit and examination ................................................ 74
1.3 Power of CRA Audit & Information Collection: S231.1 – 321.4 .......... 74
1.4 Inquiry .............................................................. 76
1.5 Search and Seizure ................................................... 76
Defenses ..................................................................... 77
1. Solicitor Client Privilege (supplement) ................................... 77
2. Charter - sucky ........................................................... 78
3. What to do if CRA Comes Calling? - S.M. (Kroft) .......................... 78
XIV. DISPUTE RESOLUTION IN TAX MATTERS** ....................................... 78
1. Government’s Response S152 (when tax is filed) ........................ 78
2. Objecting to the Assessment/Reassessment and Dealing with appeal ...... 79
3. Litigation in the Tax Court of Canada S 169 ........................... 80
4. Settlements S220(3.1) C.B. 989 ........................................ 80
5. Remission Orders C.B. 39 ............................................. 81
6. Federal Court Relief/Judicial Review: ................................. 81
7. Appeals to Federal Court of Appeal/Supreme Court of Canada C.B. 34-35,
990-991 .................................................................. 81
8. Overview of Limitation Periods - S.M. (Kroft) ......................... 82
9. Access/Privacy Act Application ........................................ 82
10. Payment of Taxes in Dispute – S 225.1/.2 ............................. 82
> Stop CRA Collection .................................................... 82
XV. PRINCIPLES FOR TAX PLANNING (S.M. Kroft!) ................................ 82
4
1. Objectives of Tax Planning: ............................................... 83
2. Techniques for Tax Planning? .............................................. 83
2.1 Tax base planning .................................................... 83
2.2 Tax rate planning .................................................... 83
2.3 Tax Credit Planning .................................................. 83
2.4 Tax Payment Planning ................................................. 84
3. Tax Deferral: Importance of the Time Value of Money C.B. 42-49 ........... 84
XVI. TAX AVOIDANCE: LIMITS ON TAX PLANNING, STATUTE/JUDICIAL ................. 85
1. Tax Avoidance, Tax Mitigation and Tax Evasion ............................. 85
General and Criminal Offense ............................................. 86
Voluntary disclosure program (Discretion given via 223.1) ............... 86
2. Specific Statutory Rules .................................................. 87
2.1 Judiciary - Canada Trust Co SCC 2005, McLaughlin and Major JJ. ....... 87
2.2 Gifts & Non-arms length disposition ................................. 88
3. Attributions Rule *EQ** - SPOUSE ......................................... 89
5. Circumvention - Easy to get around these rules! .......................... 90
6. General Anti-Avoidance Rule (“GAAR”) (ITA, s.245) C.B. 1013-1077 ......... 91
4. The Role of the Judiciary - S.M., C.B. 1001-1007 ......................... 92
Canada TrustCO. , Lipston (Oct 2007 SCC), 2001 Case Singleton ........... 92
XVII. EQUITTABLE ISSUES ........................................................ 94
1.1 Professional Negligence .................................................. 94
2. Ways to Combat Concerns ................................................... 95
5
TAX I CAN – KROFT DECEMBER 2008, ERICA OLMSTEAD
I. INTRO TO THE FORMLTION OF TAX LAWS AND TAX POLICY
> Tax minimizes resources, lawyers try to assist
clients to maximize resources (indicates importance of
tax to lawyers)
1. What is Tax?
 A compulsory levy, used to generate revenue
needed by Governments to provide services government forces people (firms or property) to
pay
 How else does government get money?
o TAXES, but also - Resources, Tariffs,
penalties (censure conduct), borrowing,
business, 649/gambling, selling licenses and
permits




2. What are its Objectives?
Finance public sector goods and services
Economic and regional incentives
Redistribute wealth
Instrument of social and economic policy - Impose
taxes to affect people’s behaviour. Acts as a
deterrent to certain actions, to curb behaviour
(Liquor, Carbon Tax/Gas, home owning).
 + ensure procedural fairness in administration and
access to the judicial process to resolve disputes
> Different political parties have different
objectives with spending – what they will use money for,
and how they will get this money. (Promises made are not
free!). Objective of governments is to maximize
resources.
3. Fundamental Elements of a Tax System
*Total Tax Payable = Tax Base x Tax Rate – Tax
Credits
Tax Base – What is taxed “Gross income – expenses
incurred to earn the income (= net income) – deductions
for policy reasons”
 People will change behaviour based on what is taxed
- want to be excluded from the tax base  find
loopholes. eg. Medieval tax on windows
 Federal = taxable income; provincial = federal
“taxable income” Or “federal tax payable”
Tax Rate – How much will be subject to tax (.1% to
100%); people want this to be as low as possible. 3
choices  uniform or varying:
1) Flat (consistent regardless of income earned)
2) higher percent on more income (progressive*)
3) lower percent on more income (regressive*)
o Different theory behind each one (those who work
harder deserve more money, those who earn money
can carry the burden more easily, all people
should be treated equally, easily administered)…
Evaluate based on ‘Factors of taxation’
o Government decides based on the demographic of
the voters, and how they might influence people
to vote
o Tax rates are the most apparent in Canada – in
the media and general discussion; Tax Base isn’t
so visible – social v. individual unit
 Marginal tax rates – level of tax that applies to
taxpayer’s top dollar
 Average tax rates – tax payable ÷ tax base
 Effective tax rates – total tax payable ÷ net
income (before exclusions/exemptions) – useful only
for international comparisons
Tax Credits – to negative from tax payable; good
things for tax payers;
 Gov’t rewards people for behaviour they deem
desirable (incentive for people to do something);
refund where person has over-paid
 Tax credits are useless if one doesn’t have taxes
to pay (whether or not taxes are refundable or nonrefundable(*?)
Tax Unit – Who has to pay the taxes – social groups
(individual v. family), ages, businesses, charities,
partners, students etc.
Time period - 1 year tax audits – why this amount
of time? S9 - smaller time period – lower earnings may be
taxed at a lower rate; rather than incorporated into
newly acquired higher income bracket)
4. Type of Taxes (Tax Bases)
- Income taxes
- Property (school taxes based on amount owned)
- Sales (Goods and Services Tax, property
transfers)
Mineral
Gas
Health premiums
Employment Insurance
Canada Pension
Hotel Room Tax, Horse Racing Tax, Logging Tax,
Tax
5. What Factors Influence Taxation?
 Constitutional limits - Federal and provincial
government are constitutionally constrained in some
respects on taxation.
o Federal 91(3) any mode or system of taxation (for
national economy, and distribution among
provinces); provincial 92(2) direct (demanded
from the person who should pay it), taxation
within the province for provincial purposes
o Determine by pith and substance, or primary
purpose of tax
 Fairness – Equity – means different things to
different people; how people are treated relative
to others (When in the same or in different
circumstances than others)
o Horizontal equity- 2 people in the same
situation, same ability to pay taxes (only one
person pays - lottery v. wages)
o Vertical equity – promoting a fair distribution
of income, those with a higher income pay more
tax
o Relative Fairness – People with different
abilities to pay; pay proportionately or
progressively more (tax 1x or 10x more where
people earn 10x as much as another)
 Simplicity – simple laws inspire confidence in the
government (v. lawyers prefer complexity due to
self-interest, and complexity also affects the
economic efficiency of the system, cost of
compliance and administration)
 Neutrality – to what extent does passing a law,
make artificial distinctions between identical, or
nearly, transactions; and thus influence a
individual’s behaviour, motivated by tax
considerations, to minimize their burden (where not
neutral = evasion incentives)
 Ease of administration –eg. Canada wants 100%
income tax on all residents of Ghana – how would we
collect it?
 Territorial limits – tough to impose taxes on
residents and citizens of other countries (requires
physical or economic nexus)
7
 Presumption against retrospective tax, limited here
(right to certainty of the law, but this is subject
to the statute deeming otherwise, in clear
language)
 Efficiency – Balances objectives; Government Must
sacrifice certain objective at the expense of
others, therefore some are not fair, some are
unfair but easy to administer, some are complex but
fair
> Raise money, insure compliance by tax payers
(people can still cheat and break the law, this costs the
government more money and decreases ease of
administration); this is driven by votes/elections
> Corporations don’t vote – people do,  taxes
said to be aimed at people (during election times –
reelected with their policies); .. skeptical reasoning.
> Tax becomes payable when budget bill is actually
enacted, per the date set out in legislation; regardless
of Royal Assent (can be retrospective)
> Non-confidence vote - where this budget doesn’t
pass, and gov’t falls.
> Budget changes may be proposed in the Fall as
well (+ or - ), surplus or deficit, to raise or lower
taxes
Old Test Q - Here is a proposal, evaluate it from a tax
policy perspective. Eg. Why do you think this section
was enacted and being used?
> How government will make people happier, how the
policies will work for the people. Some intentions are
never fulfilled, must be realistic.
Provinces also have the right to levy indirect
taxes (incl income taxes):
6. Who Makes the Federal Tax Laws?
 Parliament, Originate in the House of Commons and
the Senate
 Legislature has the power to enact laws
 Ministry of Finance creates/formulates BC tax
policy and tax laws
 Department of Finance – determines policy of
financial affairs that fall within the authority of
federal power (facilitates tax law)
 Administration not necessarily done by the
provinces ~ deal with the Canada Revenue Agency
(QC, AB and previously ON are exceptions)
 Canada Revenue Agency (Minister of National
Revenue) – collect, enforce and administrate law,
but do not make it. Verify tax submissions, conduct
audits, formulate policies with respect to law
interpretation.
> Governments are supposed to act in a fiscally
responsible manner, but often spend more than they have.
Feb/Mar, government must formulate and asses
expenditures/purposes, they table a budget.
7. When were taxes created? History of the ITA
System
 Prior to WWI Canada was a protectionist society
(custom duties/tariffs/excise taxes/levies), and
collected revenue this way
 Sir Robert Borden enacted temporary measures to
fund the war
 Income War Tax Act of 1917 (personal income and
business profits)
 Provincially, taxes were enacted before this
8
 Very simple act originally – 10 pages, amendments
were created continually as people found ways to
get around the rules until 1952, when a new
consolidation was created.
 Conflicting policies existed in this act – a mess
 Deifenbaker in 1963/62, Conservatives created a
commission on Taxation, in order to rationalize
income tax law system  workable fair, neutral etc.
 Chair Kenneth Cardo & royal commission,
commissioned studies from various authors – 6
volumes were produced, and still remain treasured
pieces of tax policy around the world.
 1966/67 findings were reported to new government
(Pearson), people viewed reports as terrible,
socialist etc.
 1969, Trudeau made changes based on this report;
“White paper” – viewed as scandalous
 1971, Carter Commission - New income tax act, 8-9
year process for radical changes to happen
 Since this time, only one major tax reform exercise
in 1987
Important to know when and why major changes
occurred
>All statues should be interpreted in a certain way
(Canada Trustco Mortgage Co., TCP analysis), according to
3 things:
 Context, harmony and Purpose (within scheme of the
legislation)
 BUT Plain and ordinary meaning of the words are
first and foremost – even where they produce an
unfair result (must be resolved by parliament)
 Test “The words of an act are to be read in their
entire context and in their grammatical and
ordinary sense, harmoniously with the scheme of the
Act, the objective of the Act and the intention of
Parliament”
8. Tax expenditures:
- Government ‘expenditure’ to to influence social
and economic policy
- In contrast to “Budgetary expenditure”; where
government provides grant and subsidies to programs
directly, though its annual budget (+ funding)
- Tax expenditure is the government ‘costs’ of
exemptions, deductions, credits and deferrals on tax
payments; Stanley Serve developed the concept, 1960. (funding)
 Disguise spending through methods to lower
Income taxation
 Government can spend money and everyone can see how
$ is spent (eg. Olympics/medals) - Transparently
spend on people and groups, and bear the criticism
of this spending
 OR, subsidize people and activities through tax
deductions  may be economically equivalent to
amount spent, BUT is less transparent (tax rate on
Olympic athletes in 5%, instead of donating 500
million dollars, equivalent = less transparent).
 Disguising subsidies through the income tax system;
to influence behaviour and affect social and
economic policies (funding Canada movies,
encouraging people to buy housing instead of rent –
such policies would never have made it through
parliament had they instead been passed as an
expenditure program)
Future Classes:
9
> Tax Conventions – people subject to double taxation
(various countries); tax treaties reduce the burden of
taxation in one country or the other – Canada US Tax
Treaty;
> No common law of taxation – not imposed unless done so
by a statute, judges merely interpret words of statute –
how do they make this interpretation; Canada Revenue
Agency, enforcement arm.
> NB: Study of Tax law cannot occur in a vacuum –
must understand the nature of legal relationships and
when they do or do not exist; as well as the rights and
obligations that people have with respect to each other.
B/ Tax laws are declaratory (of consequences that exist
by virtue of legal relationships); consequences
identified will be wrong, if relationship identified is
wrong.
 > What is a guarantee, loan, sale, lease,
partnership, corporation etc.? Other statutes may
have an impact on this one (eg. Interpretations act
– dates, times, definitions, etc)
II. SOURCES OF INCOME – TAX LAW (review me)
1. *Statutory Law (ITA, ITAR, Regulations and
schedules)
Who passes a regulation? (Cabinet by order-incouncil)
2. International Tax Treaties (US)
a. Canada - U.S. Income Tax Convention
b. Income Tax Conventions Interpretation Act
3. The CL – The Canadian Judicial Structure Affecting
Taxation C.B. 33
a. Record of common Law (interpretation by judges)
i. Dominion Tax Cases (“DTC”),
ii. Canada Tax Cases (“CTC”)
iii. Cases published electronically by Tax
Court, Federal Court, Supreme Court of
Canada and Superior and Provincial Courts
b. General Principles of Interpretation C.B. 6677
c. Res Judicata C.B. 80
d. Estoppel C.B. 81
4. Administrative Policy Department of Finance
Technical Notes
a. Information Circulars (“IC”)
b. Interpretation Bulletins (“IT”)
c. Advance Rulings (“AR” or “ATR”) C.B. 965-968
d. Published speeches and roundtable questions
(published in hard copy or electronically by
various organizations or publishing houses)
5. Department of Finance Technical Notes
6. Relevance of other Law
a. Interpretation Act C.B. 65-66
b. The Charter of Rights and Freedoms
c. Provincial laws (e.g. partnership, trusts, real
property, corporate)
10
d. Other federal laws (e.g. bankruptcy, corporate)





III. INCOME TAX ACT & CALCULATION OF TAXES PAYABLE
Tax Systems & the Act address:
Who is taxable?
What is Taxable?
At what Rate is tax payable?
When is tax payable?
What are the procedures for administrative
compliance and judicial review?
*Each should be evaluated in the context of the tax
policy objectives
> One of the basic objectives of tax planning is to
convert income that is taxable at a high marginal rate
into income that is either tax-exempt or taxable on a
differed basis. Income conversion, and Tax deferral (eg.
business income v. capital gains)
1. Framework of the ITA
Parts 
[Most parts have Tax base, Tax rate, Tax
credits and Tax unit]
Divisions  (listed on top right page)
Subdivisions 
Sections  NB: Sections also
been added in (i.e., 66.1, 66.2)
Subsections 
subsection 67 brackets four
e.g., 67(4)
Paragraphs  e.g.,
2(1)(a) paragraphs 2 brts 1 brts a
Subparagraphs  e.g.,
2(1)(a)(v) subpara2 br1 br a br5
clauses e.g.,
2(1)(a)(v)(a) clause 2 brckts 1..
subclauses: e.g.
2(1)(a)(v)(A)(i) – subcl 2 br..
11

Part I - contains most provisions
I.1 – XIV – Special situations and taxes
XV – XVI – Administration, enforcement and tax
evasion





XVII – Interpretation; general definition
2. Most Common Parts Used by Advisors/CRA
* deal with taxes imposed under Part 1 and Part 13
Part I - Tax Base and Tax Rates
Part XIII – Non-Residents
Part XVI – Tax Avoidance
Part XV – Administration and Enforcement
Part XVII – Interpretation
o also, Index in the back
Part I - Income tax Calculation [Tax Base and Tax Rates]
Division A – Liability for Tax
Section 2 (1) Tax payable by residents in Canada –
An Income tax shall be paid (as required by this act on
taxable income) ea yr/every resident
tax payable in any part = (tax base x tax
rate) – tax credits
taxable income – def’n S248 refers to 2(2),
“income” – defined in section 3… (Index: Income:
defined) = circular.
EQ*Section 3
144/5 = Table p.150)
(know inside and out! P
- Income not defined – it’s a series of
computational rules, which must be assembled by virtue of
reading many rules in the ITA
- S3 deals with the computation of income – gives
general CALCULATION for income, based on formulas found
elsewhere in the book (see: “Determine Income )
 Paragraph 3(a)
o income = taxed on income from a source inside or
outside Canada
o some income sources are (“including”): (holding)
office, employment, business and property.
+
o important S because it requires every person
resident in Canada to report worldwide income
earned each taxation year
 tax base - taxable income of persons
 tax rate - % taxed over period of each taxation
year
 Paragraph 3(b)
o deals with calculation of taxation of capital
gains of personal property (and net gains from
Listed Personal Property) +
o & if this exceeds allowable capital loses (other
than LPP losses)
-
Definitions – S 248 (Interpretation)
 person –p.1943
o “includes” is not finite so other things might
qualify as persons
o “means” would be all-inclusive
 Paragraph 3(c)
o combine all positive in 3(a) and 3(b)
+
o and subtract amounts you spent in sub(e)
-
 tax payable (income tax by persons resident in
Canada)
 Paragraph 3(d)
12
o Determine amounts, if any, of losses under those
sources (do amounts calculated in (c) exceed
these)
o “if any” means a + number, if there, is being
referred to
*the amount determined is the tax-payer’s income ~
and otherwise (if negative) their income is deemed
to be 0.
Eg. if you have a salary of $5, and you pay spousal
support of $3:
o 3(a) - $5
o 3(b)
o 3(c) – spousal support - $3
income is $2
… More = P.147/148
*Determine Income:
1. Characterize receipts as being on account of
income or capital
2. If income, classify income by source – P 150
3. Deduct expenses applicable to each source to
determine net income
4. Aggregate the various sources of net income in
the sequence set out in S 3!
S5 “Income from Employment/office” is “Salary,
wages or other remuneration..”
Eg 1a) Is X’s salary is taxable? (aka is X’s income
“salary”?)
 look up salary in the index (not) great, found the
right section (5)
obligations associated with what they’re telling
you
 Is this salary? what is the source, nature of the
job (DON’T assume, unless you’re asked to assume,
what the relationship is)
Eg 1b) X received a prize - the Nobel Prize – is it
taxable?
 look up prize in the Index
 Prize – “included as income” – S56(1)(n)
o when you’re reading a para go to the beginning of
the S
 Include in income what is in 56 (1)(n)
o when trying to determine what a S says, look for
a noun and look for a verb - try to use simple
sentence structure; read statute the way people
talk
 Here “prize” is included in income
o what is a prize? look in definitions,
Interpretation Act, CL, dictionary, related
legislation
o “...other than a prescribed prize” - maybe this
is “other than” flips you into a good zone (i.e.,
not taxable)
o “prescribed” means it’s a reference to the
regulations – “related provisions” - prescribed
prizes under regulation 7700
 also have to make sure what they had was indeed
salary
o salary and wages: subject to this part (might
mean something else elsewhere in statute)
 Regulation 7700
o Prescribed if can be regarded as for meritorious
achievement… but not as compensation for services
rendered.
o If it can be regarded as employment income, not a
pres. prize
  when someone asks you a Q about taxability –
always ask: what is the nature of the rights and
 Likely that Nobel Prize is a prescribed prize so is
not taxable as income
13
(So if farming is a salary, and  taxable
income..)
Eg2) Is a boarding horses considered farming?
 farming – in def’n section
o “includes” maintaining horses for racing
o does the definition contemplate WHO is racing
them?
o is the definition of farming broad enough to
include someone who BOARDS horses?
Eg 3) Deductions from taxable income - Does a
taxpayer get a deduction for payments to a lawyer to
defend a tax appeal?
 S60(o) – deductions: tax appeal
 ITA gives a subsidy to taxpayers – you can reduce
income to the extent of the amount paid for
defending yourself against us
 Section helps people who earn income
o If you don’t have any income, you can’t use the
deduction, but could still get in trouble with
the department. If you don’t have money to pay it
~ doesn’t really help
o May encourage people to go out and get access to
justice, to the extent that they can afford it in
the first place
o When you fight the government, often you don’t
get help with expenses
 Use words specifically in the section
 “bills paid” - difference between paid and payable;
received and receivable
3) Part I - Tax Rate and Tax Base
Tax Base - Individuals, Corporations, Inter vivos
trusts
Tax Rate – Progressive or Flat - Division E and
E.1;
 Provinces have own rates (and statute) to tax on
income, which is calculated the same as in the
federal Act (rather than taxing on federal tax,
which allows for less flexibility)
(a) Individuals, s.117-122
 Progressive tax system on individuals - Higher %
taxed (rate) on higher bracket of and individual’s
(base) taxable income
 P.
S.
o
o
VII – Current Tax Rates and Credits (synopsis of
117)
Federal personal income tax components
Provincial tax rate imposed shown in chart as
well (Provincial ITA’s not in this book)
o  Total Tax Rate = federal + provincial
 “Marginal rates” – at the MARGIN of x $’s, the tax
rate increases
o i.e., on the first $37,000 – 15%, then jumps to
22%, then 26%, then 29%
(b) Corporations tax rate, s.123-125 – Flat Rate
(c) Inter Vivos trusts, s. 122 – Flat Rate
4) Tax Credits (General Knowledge)
4.1 Types of individual credits:
(a) Personnel – s. 118
 dependents, married
(b) Pension – s. 118
(c) Tuition – s. 118.5
(d) Education – s. 118.6
(e) Medical – s. 118.2
(f) Disability - s. 118.3
(g) Dividend – s. 121
(h) Overseas Employment – s. 122.3
14
(i) Charitable - s. 118.1
 people are encouraged to do this
 may be able to deduct amount in future years if
just donating a large amount in one year
(j) CPP/EI
(k) Foreign – s.126
(l) Political - s. 127
(m) Investment (Scientific Research and
Experimental development) s. 127.5
4.2
(a)
(b)
(c)
(d)
(e)
(f)
Types of corporate Tax credits
Provincial – s.124
Small Business – s. 125
M&P s.125.1
foreign – s.126
Investment (SRED) s.127.5
Logging – s. 127
4.3 Credits v. Deductions
 Credits reduce the total amount of tax payable
(regardless of income, save x amount on x income)
o Credit – direct reduction of taxes payable
(dollar for dollar)
o 500 dollars less taxes paid
 Deductions gives X amount tax free,  savings
depends on (X amount x Marginal tax rate) - thus
those in a higher bracket save more)
o Deduction reduces income (save % of tax you would
pay on this amount of income
o save more $$ if have a higher % of tax to pay)
o 500$ less to be taxed (bottom maginal rate saves
20% of 500, tax that would be paid, and top rate
saves 29% of 500)
o If no tax to pay, deduction would be worthless
o Distinction for marginal income rates
IV. JURISDICTION TO TAX UNDER ITA
1. Who is taxed? Taxable nexus
 Territorial source of income*,
o Administrative ease, but may be contrary to
the principle of measuring a taxpayer’s
ability to pay.
o However due to avoidance, such as by corps,
source taxation is only used as an adjunct to
full liability based on other connection
(residence, carrying on business in Canada, or
deriving a capital gain form the disposition of
taxable Canadian property)
 Legal status of person: citizenship, domicile or
residence*
o Persons who benefit from their economic and
social affiliation with a country have an
obligation to contribute to its public finances
(where they are most closely connected)  Legal
and economic nexus
o Administratively practical and convenient
o pertains to indv’s and corps
o Easier to assume than relinquish residency status
(P109)
 Non-residents may be taxed as well, using
territorial nexus (subject to tax treaty), on
Canadian-source of income
o Taxed where manages activities and carries on
business in Canada
2. Individual, Resident S 2(1)
15
2.1 Statutory
S 250 (1) Person deemed resident - For the purposes
of this Act, a person shall, subject to subsection
250(2), be deemed (creates an irrebutable presumption of
what X is) to have been resident in Canada throughout a
taxation year if the person:
(a) sojourned in Canada in the year for a period of, or
periods the total of which is, 183 days or more;
 sojourn – a temporary stay, where one stops when
moving; where staying 183 days or more (half yr),
of total in a calendar year.
 Sojourning 183 days is sufficient, but not
necessary
* Resident - Intention to be connected
(b) Canadian forces re:250(2)
(d) Prescribed Canadian government agency
(assistance program)
(c) Canadian government personnel “was, at any time
in the year:”
(i) an ambassador, minister, high commissioner,
officer or servant of Canada, or
(ii) an agent-general, officer or servant of a
province,
* no physical presence required in Canada to be
‘deemed’ a resident
S250 (2) Deemed to be a resident for tax purposes,
until point in time where they cease to be so (pay taxes
on world wide income until the day their residency
changes) + (S114)
S250 (3) Resident includes person who was at the
relevant time, ordinarily resident in Canada
> What connection does an ‘ordinary resident’ have
v. a tourist? 
2.2 CL rules (apply in the absense of statutory
provisions) - determine an individual’s links with
Canada, and corresponding nexus for tax purposes (p.103 106):
 Center of vital interest – social and economic ties
 Intention to be tied to somewhere – is the test
(series of things make up these ties)
 Question of Fact; Facts created by documents,
assertions and relations to the taxpayer.
 Eg. ownership of property or dwelling in Canada,
Nationality and background, social connections by
birth or marriage, physical presence, location of
family home, presence of business interests and
social interest, mode of life and family ties.
Foreign tax credits (III. 4.)
 a credit is given to residents for taxes paid to
another country to avoid double taxation
 If this credit is not available, one might look at
conventions ‘Canada/US income tax
convention/treaty’
2.3 Tax Treaties - LXI (61)
Missing: Camen Islands, Afghanistan, Columbia
(negotiations), Guatemala, Grenada, Saudi Arabia, el
Salvador, Hong Kong, Bahamas, Bermuda, Antigua, Gorgia 
Types of countries and why?
 Some countries may not tax internationally, and
some have 0 rates of tax
 Countries may not want to have an agreement with
Canada
16
 Don’t want to sign mutuality of information
provisions
 Attracting foreign investment without fear of
exchanging info (Hong Kong)
 Some countries have no investment of Canadians, or
it all goes one way
**Canada/US Tax treaty, P.2787
 Most widely read
 Created 1942, new one in 1980 – 5 amendments
(protocols)
 Covers possible double taxation
Article II - Taxes Covered
 This Convention shall apply to taxes on income and
on capital imposed on behalf of each Contracting
State, irrespective of the manner in which they are
levied.
 Article I – applicable to residents of one or both
contracting state (defn’ in article III) Canada and
the US
Article IV – “Residence”
1. "Resident" of a Contracting State means any
person that, under the laws of that State, is
liable to tax therein by reason of that person's
domicile, residence, citizenship, place of
management, place of incorporation or any other
criterion of a similar nature,
*hope treaty gets rid of your resident status, to
only pay one tax
*2. = Tie Breaker rule – breaks the tie as to which
country you are a resident of – shall be deemed to be a
resident of a contracting state where:
 by reason of the provisions of para 1 an individual
is a resident of both Contracting States, then his
status shall be determined as follows:
 he shall be deemed to be a resident of the
Contracting State in which he has a permanent home
available to him (can rent or own); if he has a
permanent home available to him in both States or
in neither State, he shall be deemed to be a
resident of the Contracting State with which his
personal and economic relations are closer (centre
of vital interests);
+ OECD Article 4(2) on Double Taxation:
 Habitual abode; and Nationality
 Resident of both, or neither, competent authorities
can settles the question through mutual agreement
(or administrative resolution)
3. Residence of Corporations
> Creatures of statute; talk of them as if their
alive – aggregate of people; affords people protection of
liability against creditors. It is a business vehicle.
Governed by directors. Owners are shareholders who elect
directors/who don’t always manage the company on a daily
basis (those people are officers, and are picked by the
directors ~ these actors can be the same people)
> Rules implemented to tax certain types of corp
income, earned abroad (not tested!)
S2 (1) “Person” – legal definition = individuals
and corporations (Federal and Provincial Corporations
Act);
- Can be a resident and  taxable on its worldwide
income
17
- Or non-resident, and taxable on Canadian-source
income
 Non-resident corporation must be carrying on
business through a permanent (fixed) establishment
in Canada, to be liable for tax;
3.1 Statutory Rules
250 (4) Corporation is deemed resident if meet test
of any listed category:
(even if may have otherwise not been resident
through 250(1)a – g)
 **(a) Incorporated after April 1965 in Canada
(automatically); Any corporation established in
Canada now (very easy rule)
(Day upon which law was changed or
implemented.)
 Prior to this day if became a resident at any time
under CL rules, or carries on business in Canada
 Deemed residence of jurisdiction where business is
carried on into (whether from X to Canada, or from
Canada to X)
3.2 CL Rules - Residence of directors = “central
management and control”, which in turns focuses on
residence of directors and where they do their
management.
- Factors considered by CRA, to determine if Corp
in resident in Canada:
 Eg. “Here’s what I want you to do, vote this way”;
From Bahamas?
3.3 Treaty - Determinative Tie Breaker Rule - Where
two countries want to tax a corporation – Article IV(3) =
Place of incorporation (originally).
4. Trust
> a legal relationship between certain people;
fiction created by law, equity [settlor, beneficiary] –
where don’t trust the beneficiary, trustee holds property
on certain terms and conditions established by the
settlor until a certain age or status is reached.
 Trust also pays tax, and files a tax return.
Relationship is considered as a ‘person’ for
taxation reasons
 Whenever there’s a reference to the word trust –
refers to the trustee; residence is therefore
dependant on the trustees.
 Inter vivos trust – created while alive,
testamentary trust (dead/death bed)
 Tax treaties often apply to trusts; break ties with
respect to double taxation.
 What if two trustees? Majority of trustees.
 Look at all competing factors to determine resident
of trust.
o Where property located (object of the trust)
o Where settlor was
 Want to tax the corporation as resident – argue
central management and control is located in Canada
 Residence of
instructions
who’s really
following or
desires..
directors, meetings held where? What
the owners are giving in Canada, and
running the company? Are directors
acting independently of the owner’s
5. Non-Residents (Subject to tax Treaty)
5.1 Part I - Employment Income, CoB and Capital
Gains
S2(3): Must pay taxes on their (active) Canadian
source income:
18
 S115(a)(i) People employed in Canada, on their
income
o Salary, wages, employment benefits (incl. stock
options), taxable allowances amd directors’ fees
(with allowable deductions)
 S115 (a)(ii) Business income, from carrying out
business in Canada (1370/71)
o Word ‘ busy’, associated with busy-ness
o Subject to existence of at least a minimal
“permanent establishment” in Canada, to which
profits are attributable. (higher threshold for
this where Canada has a tax treaty with country
x)
 115(a)(iii)//S116 Taxable Capital gains from
dispositions of Canadian property - When they sell
Canadian based property; shares in a company (other
than of a public corporation* p.1402/03)
5.2 Part XIII: Passive Income Taxes
> S 212 - Non-resident/Canadian Source income is
subject to withholding of tax by resident (list 1406/07):
 Management fees
 Interest income, from bank in Canada? Or a Royalty?
 Investment in Canadian company – which pays
dividends
 Rent to foreign landlord
 Etc.
5.3 Difference between part 1, and part 13
1. Non-residents must file a tax return, on
funds/income under part 1
2. Do not file a tax return for part 13
3. 212(1) – flat rate – 25% payable by non
residents 212(1) (V. Normal rates - 48%/Corp
22.12%) p.1360?
4. Tax is collected by the Canadian who is supposed
to pay them, and sent to the government for them.
Pays out .75 to source, and .25 to government (for
enforcement measures) S215(1)/(6)
S 212(1) – Every non-resident person (depositing $$)
shall pay an income tax of 25% on every amount that a
resident (Financial Institution) pays or credits to the
non-resident
 (b) Interest – Non-Resident receives interest as
compensation for use of funds (must pay tax on this
- tax to be withheld by FI)
 Difference between pay and credit (notation, in
bank account, reflecting the fact that you own
additional $)
*Primary liability rests on every non-resident
person; ease of collection
S 215(1) Withholding or remittance of Tax Provision directed to the financial institution.
 Person paying the amount (F I), is liable for tax
remittance under this part (of non-resident)
 The person (Canadian) shall.. deduct or withhold
from the amount.. on behalf of the non-resident
person.. payable to the Receiver General (25%)
> How to avoid taxation? Advice to non-resident,
for liability
1) Gross up clause – impose financial burden on the
person paying them the money, to effectively bear the
tax.
19
2) Look for an exemption – Are they legally
responsible for the tax?
Look to 212(1)b  imposes the burden
 1) Is this Interest?? (look at statute provison)
 That  Point to what each ‘that’ is… falls within
the section. i) or ii)… used to be drafted with
exceptions, but was amended (per: history note)
 *Am I caught by the words in the section??
 2) Do I care if Canada taxes me?.
o More than one country may want to tax me on my
income (reduce US tax, but amount of Canadian
taxes paid) Foreign tax credits
o Country in which their primarily liable, may give
them a credit/offset for the applicable foreign
taxes.
o Clients will care if no credit exists here 
care about net $$ going out of pockets – not
where the $$ is going.
 3) If I do care – look at applicable tax treaty to
see if Canadian tax can be eliminated or reduced.
(more relevant articles?)
o US/CAN Art 11 – Interest (def’n), para 1, 2 –
reference to a tax rate (10% max of the gross
amount)
o Where income would pass tax free, more money
would be put into Canada
(provisions and amendments are geared towards economic
implications)
Eg. Instead of resident being a financial Institution
Non-Res owns apartment building in Canada (resident
tenants who pay rent), landlord provides property, or
space.
- Rent is a form of Income: 212 (1)(d) Rents, Royalties
etc.
 Pay 25% Tax
 1) Is the landlord actually receiving rent?
o Can rent be exempt from the section?
 2) Do I care if Canada taxes me? Credit?
 3) Tax treaty? Is rent exempt?
215(6) Liability protects Gov, where a person fails
to deduct or withhold full amount paid to non-resident.
Resident liable to pay the whole amount that should have
been paid (by non-resident). Enforcement ease.
Part I - 2(3)
> Are we caught by the section imposing the tax on
the income
> Not income – if there is no permanence to their
activities
What is the role of technology?
> Are we Caught by the Act? Credit Available? Tax
Treaty?
6. Part Year Resident (ITA S.114) Pt I & XIII
 Where x gives up, or takes up residence part way
through the year
 Resident up until departure, and non-resident for
remainder of time away.
 As a resident – taxable on global income, wherever
earned (from date one becomes a resident, till day
one ceases to be a resident)
 As a non-resident, taxed where Canadian sources are
involved -where employed, carrying on a business,
or realized a capital gain from taxable Canadian
property
20
7. Exempt Taxpayer (ITA s.149) & Indian Act
(reserves)
V. THE CONCEPT OF INCOME **Q how to calculate
income:
Pt1, S 149 – No tax is payable on the taxable
income of.. Rated 0!.. Doesn’t say income is not
taxable.. rate is simply 0, v. excluded from tax base.
Tax
1. Economic Concepts of Income & the Comprehensive
1.1 Haig-Simons, Economic understanding of the net
accretion of wealth:
 1) Change in value in the store of property rights
b/w begin and end of period
 2) + Market value of rights exercised in
consumption
o Value of goods on hand at end minus at beginning,
with accounting for consumption
 Deviations from the ‘gospel’ formula as inherently
unjustifiable among tax policy makers – Department
of finance publishes these deviations from the norm
in its “Tax expenditures” from time to time
 Debate around preference for Taxable capital gains
 The concept of income must be formulated by a
simple formula that is easy to administer
1.2 Imputed Income
 Income derived from thee personal use of one’s own
assets and from the performance of services for
one’s own benefit.
 Canada – does not generally impute income to a
taxpayer (problem of valuation, administration… but
does bias principles of neutrality, eg.
homeownership)
2. Legal Concept of Income
2.1 Less comprehensive than economic theory:
1) Exclusion of unrealized gains
 must have been realized in a market transaction not simply accretion
 trades equity for admin convenience
21
 incentives such as to invest = not neutral
2) and the classification of income by source
 Economic theory is not concerned with the source of
income, income= net accretions of wealth
 Equity requires that we tax all gain equally,
regardless of source
 ITA system – calculate income from each source
separately and aggregate income according to rules
applicable to that particular source
 Rigid structure of sources is the cause of
substantial complexity
 Sources are not exhaustive and can arise from any
other unnamed source (inside or outside of Canada)
– justified by horizontal ability to pay, realized
enrichment, regardless of source.
2.2 Income as a Net Gain - Cost/Capital Recovery
 IT is a tax on the net gains or the increment in
realized value
 Ie. Net income = Taxable income
 Measurement of gain (accuracy necessary for
fairness):
o Recovery basis of costs
o Matching of income flows against capital
 Different calculations will yield different tax
obligations (See: Capital Gains below)
Definition – “A realized gain from a Source” (not tax on
capital or wealth)
 Act identifies what is included or excluded, though
no characteristics are given
 P. 131** Classification Table!
 ITA identifies four specific sources:
o 1. Employment Income
o 2. Business income
o 3. Investment (property) income
o 4. Capital gains
*When is it taxable? Go through ITA ()
3. Statutory Concepts of Income
Do eg.p159-64!!
*To Determine Income: (S3, remember):
1. Characterize receipts as being on account of
income or capital
2. If income, classify income by source – P 150
3. Deduct expenses applicable to each source to
determine net income
4. Aggregate the various sources of net income in
the sequence set out in S 3!
- Determine “taxable income”; then apply tax rate to
taxable income = basic federal taxes payable; Then
negative tax credits and surcharge to determine net
federal taxes payable.
Part 1, S3 offers at least 6 major categories for the
classification of income and losses. Some categories
further divided into subcategories – Tax planners attempt
to re-classify income from higher rate, to lower rate
categories [eg. Business income v. taxable gains].
S 3(a) Income for a yr, for purposes of this part
(1), determined as follows:
 The total of all amounts (of the taxpayer’s income
for the year) from a source inside or outside of
Canada
 Including taxpayers income from each office,
employment, business and property … and capital
gains
S56(1) Other Sources of (taxable) Income
4. CL Concept of income (UK)
22
 Legal Income derived from UK statute – existed
specific sources of taxation, which required
separate returns
o Strike pay (x Fries), though could be easy to
tax, people are just as able to pay.. other
reasons..
o Damage awards (x),
o Compete-able income (x Schwartz*) not listed as
taxable under the ITA, but S3(a) should still be
read in an expansive matter; Require
administrative and revenue considerations
o Insurance
o Barter (Y – Value of medium of exchange, or
services rendered)
 Type of UK economy, Agrarian, Industrial
revolution, ‘windfalls’ is not a source or creation
of income
 P132 K – Income – “Incoming, or what comes into a
person”, Gain which proceeds from labour, from
effort, from business, property or capital..
5. Exempt Income
5.1 CL Cases on S3
 Judges have been asked to determine whether or not
amounts can be included as income from a source
under S3(a) even if Act doesn’t refer to a specific
amount as being taxable.
 These things could be made taxable by parliament,
but Policy reasons exist against it
o Windfall gains/Findings (x) – Unexpected or
unplanned; not likely to recur; unrelated to any
of the named sources of income; even though can
pay and can spend, wealth.
o Gambling (x), Cost of trying to enforce the law;
One-off windfall (v. the conduct of a gambling
business), difficulty with allowing deductions,
and such would affect net revenue gains =
minimal. (fairness though – those with the
ability to pay should have taxable income)..
o Gifts X – Transfer w/o consideration (gov’t used
to tax, no more) notion that they are capital
transfers (not income), enforcement..
documentation doesn’t exist, difficult to trace.
o Inheritance (x),
 *Where there’s no legal entitlement to the money
(no expectation, one-time income) ~ Derive from
labour or capital
 Adjective: Expected, recurring  No source, no
insurance of existence (more of a redistribution of
funds than a source)
5.2 Statutory Rules for Exemption of Income Table p
157
S81: Amounts not included in Computing Income:
 Many receipts (of income) are very, very specific
items
 Damage awards, reparations, office of governor
general, Part-time employee traveling expenses etc.
23
VI. THE MEASUREMENT OF INCOME
1. Income and Accounting
 Difference between “Book” Profit and “taxable”
income or profit
 ITA creates tax law and overrides accounting
concepts - relating to the realization and
recognition of income, and the deductibility of
expenses, for calculating net income under the ITA.
 GAAP does not govern income calculation for tax
purposes (Only a reference for calculating profit
for S9 of the ITA)
2. Statutory Income
- capital loss can only offset a capital gain
- losses from any source other than capital gains
can offset income from any - source and can also offset
capital gains
- amounts in para 3(d) can offset amount in
paragraphs a and b
S3(a) Income from various sources
income from:
employment, business, office etc. (Offset against taxable
gains)
 if total of a and b exceed the deductions from (e)
you can deduct any other deductions
 e.g., If you have to fight the tax department
 Want this to be high! (though that means you’ve
lost money = bad)
(c) Misc. deductions, unrelated to a source – RRSP,
60(o) fighting Tax courts,
For lowest taxes:
a (want as low as possible) + b (low), can deduct d
(high) and c (high)
*Distinction between Income and Capital gains
 Income derives from trading or the periodic yield
of an investment; CG derive from sale or
realization of the investment (Income is derived
from capital; capital gain in the capital itself)
- Includes of




Business
Property/Investment
Offices and Employment
Want this to be low!
S3(b) Net Taxable capital gains; allowable
(permitted to be deducted or offset)
 Not permitted to deduct capital loses
 Only eligible for offset against capital gains
 Want this to be low!
(d) Loses from non-capital sources - Permits to
deduct loses from various sources incl. loses from
24
VII. INCOME FROM BUSINESS AND PROPERTY (Revenue) S9
– S37.1
1. Business Income – Sale of Goods and Services,
generates revenue, requires expenses etc.
S.248(1) “Business” – includes profession, calling,
trade, manufacturer or undertaking of any kind
whatever... for most purposes also includes an adventure
or concern in the nature of trade.
 ‘busy’ activity/time/labour, Erichsen v. Last
 “business” generally refers to economic, industrial,
commercial, or financial activity

‘trader’ – business of selling goods with a view
to profit that the trader has either purchased or
manufactured - Graiger & Sons v. Gough 1896
 S18 1 (a) Profit motive; - as opposed to a hobby
o (Stewart v. Canada 2002 – overruled reasonable
expectation of profit test in determining
business or hobby)
o Better test is the to have the pursuit of profit
test to determine whether business or hobby, then
once determined to be business, can move on to
whether income from business or property
 Amount of money invested to make money ~ commercial
risk; Matter in which they organize;
information/experience; frequency of transactions;
Enterprise, entrepreneurship
 quintessential characteristics of business:
o activity
o enterprise
o entrepreneurship
o commercial risk
o pursuit of profit
Hobby Distinction (personal use gains)
 Want to say hobby is a business - hobbies expenses
generally exceed revenue (not a large amount of
sale, devaluation), generate loses; here can deduct
loses (d) to offset (a/b)
 If money is made, taxers will probably say you are
in a business (though they would like to say they
are in a hobby)
 Hobby won’t be a business, contrast
characteristics.
 S18 1 (a) - restates the necessity of the profit
motive test:
o taxpayer is not entitled to deduct an expense
unless he or she incurs the expenditure for the
purpose of gaining or producing income from a
business or property
 what differentiates a business from a hobby (i.e., comic
book collecting):
o manner of organization
o information they have to run the business
 past experience
o frequency of transactions
o money put into activity in order to make money
o need to identify legal relationships (ie.
Partnerships), but business is an activity as opposed
to an entity.
2. Calculation - Income & loss from business (&
property)
> Is this a business? (Business includes Adventure
in the nature or trade; but is distinct from Hobby, and
Capital Gains; similar to but distinct from investment
income)
> Calculate Income/loss from a business (or the
year)  No detailed rules
25
 Expense need to be incurred, or have to pay even if
there’s a loss
 Timing for use of deduction is dictated by lasting
or fleeting value
> looking at SOURCE OF INCOME.
> People earn revenue by:






selling goods
selling services
renting
leasing (long or short term)
licensing
If you’re carrying on a business, income derived
from these categories counts as income from
business
S9 – S37.1
 Distinct from employment income; S9 is for
income from business or property ** gets lots of people
in trouble
Section 9 – starting point
Section 12 - inclusions
Section 18(1) – can’t deduct certain types
 even if the computation of profit would have
permitted the deduction of certain expenses you are
prohibited from deducting certain amounts
Section 20 – ray of hope
 permits certain expenses as being deductions
> S9(1) Taxpayer’s Income = profit in a taxation
year (Insert into S3a).. just a starting point for
calculations

(1)(a) Relates to a ‘deposit’ that you have not
yet earned (eg. retainer)
 + S 12 - Earned, Received and Receivable (future
income) >S12 – Rules governing - require you to
ascertain amounts into your business/property;
which would not otherwise be considered profit
12(1) - income inclusions from business or property
 on account of services NOT rendered or goods not
delivered before the end of the year (e.g.,
lawyer’s retainer)
12(1)(c) - any amount received or receivable by the
taxpayer in the year in lieu of interest
 i.e., if you lend someone money and get interest
> S9(2) loses from a taxation year (Insert into
S3d)
 Can Sell or Rent/Lease or license to make money,
services
 Expenses
o salaries, utilities and rent, equipment, interest
on the borrowings for mortgage, inventory (goods
available for retail), advertising, accounting,
legal expenses, insurance, cleaning services
o Don’t necessarily give owner any lasting value
(value may last, or be limited – when calculate
profit, may not be able to deduct cost for one
year period.. eg. If has 10 year value)
 Character of expenses which are made –
o lasting value or
o fleeting value
Canderel LTD v. Canada (SCC 1998) - Accountant
books are a mere reference for the calculation of profit
and loss; Financial statements tend to be simple in their
calculations (accountants meant to give a conservative
caclulation)  *the calculation of profit in section 9
26
is not dependent solely on financial statements.
Computation of profit for purposes of ITA is based on
commercial principles and practices
 Expenses re: business: incurred or paid
> S18(1) – NO deduction shall be made in respect
of, even if computation of profit would have permitted
the deduction of certain expenses (overrides ability to
deduct amounts)
 Tsiaprailis decision – payments in substitution for
lost profits take on the character of the amounts
they’re replacing.
C) Tort damages incl. loss for personal injury
 Equivalent to loss of capital (don’t have character
of income)
> S20 – Ray of Hope – permits certain expenses
which you incurred to be deducted
Income from business, is distinct from income from
property:
What makes them different? Does income flow from
property, or business?
> Back to S248 – “Business” incl. adventure or
concern in the nature of trade; (v. capital gains)
- Different incentives for tax purposes, thus
treats each differently
2.2. Related Damages (of Business)
 Must take into account taxability of amount being
sued for.
 Determine what loss damages are equivalent to? (You
argue windfall)
 Attribution rules in S 74.1 and 74.2 only apply to
investment income and capital gains/losses, X to
businesses
 Small business deductions available only to
businesses
 lost profit should be taxed, because if they were
working, they would’ve been taxed
income from property:
 individual invests in land, stocks, bonds, or
intangible property and collects investment income
therefrom without doing much more than holding the
property
 Surrogatum – substitution/replacement payment (of
business)
 generally, this is the investment yield on an asset
(rent, dividends, interest, royalties)
 To the extent that you sue for lost profit –
damages are treated in the same way as had you
earned the profit
 yield on investment is earned by relatively passive
process
A) Lawsuit for lost profits from running lawpractice
 Taxable! As business income (SCC Tsaiprailllis)
B) Breach of K – what was the breach of K for?
 What did x sue for? Lost profits?
income from business: (*reputable presumption
against it being BI)
 implies activity in the earning process
 business generates from use of the property as part
of a process that combines labour and capital
 e.g., taxpayer may actively trade in bonds to earn
a profit from trading activities
27
- The degree of services provided to the tenants as
a supplement to the rental of the real property
 Difference between a hotel and an apartment
building in which you live; provision of something
other than the space
- Profit is a net concept – computation of income
from property and business income – deduct certain types
of expenses
- Profit is determined under accounting principles
(which are not determinative, but are a factor)
 Greater the services, the more likely it’s business
income
o not based on time spent
 e.g., tenants pay rent if you own an apt
o expenses: maintenance , administrative, buy a
 Rent - Property itself isn’t the sole reason for
the generation of the revenue ~ something
collateral (activity, which is a hallmark of
business generation)
o people carrying on a business are providing
something more than the space - activity
associated with the provision of property
o property itself is not the sole reason for
generating income
o Eg. trailer park case – must look at the degree
of other amenities and service provided.
 when calculating income or loss from property you go
through the same stuff as income for business
building
S248 “Property" – No Def’n
- Money, Share, Chose in action, Resource,
Dividends, space etc.  Virtually every type of economic
interest (Stewart v. Canada)




- Investment income is the yield from property
Shares yield dividends
Binds yield interest
IP yields royalties
Real property yields rent etc
 Interest – bank pays compensation for use of their
money
S 12 Property Income Includes (Income from the use
o Depends on person’s plan for income in the bank
of property):
o If intended to be used regularly for business, is
 Interest, rent; look at revenues and expenses
bus. income
 Etc.
o If it is superfluous to their needs, and not
really needed for their business – it’s income
S9(3) Important exclusion from PI = capital
from property
gain/losses from the (disposition of the) property itself
o Is the money used in the course of business? Or
are not included.
plans for future use?
 Gains and losses from selling property = separate
 Only the yield that comes from the
property/investment.
3. Income From Property  9, 12, 123, 18, 20
Section 9(1) - taxpayer’s income for a taxation
year from a business or property is the taxpayer’s profit
Calculate Profit ~ income from property
from that business or property for the year.
28
S9  Includes interest 12(1)(c), deposit 12(1)(a),
Inducements (x), payments – production or use (g)
 (x)Inducement (eg. vacant space, landlords will
induce tenants to rent through payments to them) 
Income, not windfall (where business rents space
from landlord – their inducement is taxable)
 (g) P. 49 – any amount received by taxpayer, in the
year – dependant on use or production of property.
o Actors receiving profit form gross of movie
o Owner – cubic meter value of trees, or minerals
derived from property – how much one derives from
property
o Exploitation of IP
S 9 + 12 + 13 + 14 (inclusion)
- 18 – 20 (reductions) If these are great, X has a
loss.
 interest from the same debtor on the same type of
obligation
o individual may report interest income on a cash or
accrual basis
 Section 16(1)
o interest may be blended into principal, in which case
it must be segregated and included in income for tax
purposes
o blended payment is a single payment in which interest
and principal are blended into one amount on repayment
of a loan
 compensation for use of funds (interest) – is this income
from business or property?
 depends on what your plans are for the cash in the bank what were the funds used for?
o **exam: we will be tested on the application of the
 Look at each activity as a separate source; b/
ITA makes distinctions
anti-avoidance, which is it relevant for, is it
business or property?
 need to know the distinction between the 2
Property Income Inclusions
3.2 Interest (ITA s. 12(1)(c), 16(1))
 interest: the return or material consideration given for
the use of money belonging to another person
 must be referable to a principal sum of money or an
obligation to pay money
 in business and commerce, interest is merely the
equivalent of a “rental” charge for the use of someone
else’s money
 the courts consider interest as an expenditure on account
of capital, so ITA specifically provides for the
treatment of interest as an income or expense item
 Section 12(1)(c)
o requires that interest from the same source be
reported on a consistent basis
3.3. Payments based on production or use (ITA
s. 12(1)(g))
 Section 12(1)(g) provides that a taxpayer must include in
income all amount that he or she receives and that depend
upon the use of or production from property
 prevents taxpayers from converting what would otherwise
be fully table rent or royalty income into capital
3.4 Rent
 rent from property is income from property
 investment yield of the property asset
3.5 Dividends (ITA s. 12(1)(j))
 dividends: income from property in the hands of a passive
investor and income from business in the hands of a
taxpayer who is in the investment business
29




 included under s. 12 are stock dividends – the
capitalization of retained earnings into share capital –
transformation of one type of equity capital into another
type
o no income effect


3.6. Inducements (ITA s. 12(1)(x))
 inducement payment is an economic incentive that is
intended to lead or persuade a person to perform a
particular action or decision


 e.g., government subsidies to business to locate in a
particular place, landlord inducements to tenants to sign
a lease in a shopping plaza, etc.
 Section 12(1)(x):
o an inducement receipt, whether from governmental or
private organization, is taxable as income
o whether payment is as grant, subsidy, forgivable load,
deduction from tax, or other allowance
 Section 53(2.1): taxpayer may elect to treat an
inducement payment as a reduction in the cost or capital
cost of any property that he or she acquires with the
payment – allows taxpayer to defer recognition of the
income until such time as he disposes of the property
 Section 13(7.4)
Investment Income, or a Capital Gain - Profit from
Property Sale
Nature of Property
Use of property
Holding period
Background, education, experience of person
(eg. Real estate agent, lawyer)
Frequency of sales/transactions
Funding? Use own money, or borrow money
(more dependant on financing = bought to
sell and pay back quickly)
Look at entire course of conduct
Activity associated with value? (Only time,
increase in value)
 Speculative - common for taxpayer to try to say
they have a business if they lose money; But if
gain = capital gain.
 **Determine Business loss from capital loss,
business gain from capital gain.
Capital gains - not defined in the ITA
 treated preferentially and taxed at lower effective tax
rates
 usually transactions you entered with operating
motivation of holding the property
 Profit from investments themselves
o to earn income from property held for period of time
 Motive of taxpayer for buying property (to sell or
to hold) , at the time of purchase (profit motive
in itself is not enough to distinguish between the
two)
 income from shares – dividends
 Operative Intention at the time of acquisition:
o Intending to Invest (hold property)?
o Or intending to Trade (Do Business)? .. where
taxpayer also has a secondary intention to trade
= business income/loss
 income derives from trading or the periodic yield of an
investment
o what you get from corporations when you own shares
Income vs. capital gains:
o the fruit or the crop, the yield
o profit derived from selling the fruit
o outlet stream
30
 capital gains derive from sale or realization of the
investment
o the tree or the land
o reservoir supplied by springs
 a building is capital, the money from rent is income
 shares are capital, dividends on the shares are income
 bonds are capital, interest payments on the bonds are
income
 so, if you own property you earn rent as income
o when people buy real estate and it goes up in value,
they may have a capital gain because market forces
have increased the value of that property
o they didn’t do anything to the property the market
pushed up the property
o capital gain because no activity associated with
o only for disposition of a “Canadian security”
o “Canadian security” means issuer must be Can
resident and security must be either equity or
debt
o once elected, all subsequent dispositions of
“Canadian securities” by tax payer are similarly
characterized (all losses would be capital
losses)
o election not available to trader or dealer in
securities
 person who participates in promotion or
underwriting of securities is a trader or
dealer
o election must be made on prescribed form and
filed with tax return for the year
making it more valuable
o no intention at the time of acquisition to go and sell
the property as soon as possible, just to earn income
from the property
 capital gains derive from disposition of invstments that
constitute capital property
 income gains derive from a sale of trading assets or as
the yield from investments
 have we traded assets (income gain) or sold an investment
(capital gain)
Guaranteed capital gains? (ITA s. 39(4))
C.B. 292-
293
 to reduce uncertainty with question of whether gain
is on account of income or capital, ITA allows
taxpayers to elect “guaranteed” capital gains or
capital loss treatment on disposition of certain
types of properties
E.g., for working through fact pattern re: business
 capital gain or capital loss?
 business loss or income loss?
 what facts would you try to illicit for determining
o long holding period
o intention at time was to hold
o nature of property was such that you could derive
income
o person had no specialized experience
 not in real estate business
o shares were the property
 based on common sense
 judges have to decide if they’re going to believe
what taxpayer is saying
 for exam: need to know how to determine business
loss from capital loss and business income from
capital gain
 rules:
31
 need to look at intention at the time of
acquisition
 this secondary intention to trade exists if the
possibility of early resale at a profit was a motivating
consideration at the time of acquisition of the property
o while subjective, this is based on conduct and
circumstances determined by judges
o mere awareness of possible future profit is not enough
Taxpayer’s Intention (repeats above)
to say that the transaction is an adventure in the
- profit motive is not the only distinction between
nature of trade
business income and capital income
o neither does changing investment climate – if just
 courts look at the taxpayer’s operative intention at the
time he or she acquires the property
responding to after, not trade, but if actively
 was the taxpayer intending to trade (do business) or
invest (hold property)?
motivating consideration, suggesting secondary
- investment: is an asset or property that one acquires
with the intention of holding or using to produce income
 a means to an end
- if you acquire property with an intention to trade (to
purchase and resell property at a profit) any gain or loss from
the trade is business income
- how do you evaluate intentions?
 no single factor is determinative, question of fact, must
look at conduct
- many factors considered for primary intention
 look to taxpayer’s conduct, circumstances
- To show capital gain was his intention, taxpayer must
show:
contemplating the potential of profit on resale, then
intention to engage in adventure in nature of trade
Factors going to taxpayer’s intention to trade,
whether primary or secondary:
 number of similar transactions
o goes to proof of trade
 nature of the asset
o raw land looks like trading, so does buying/selling
shares of corporations incorporated solely for the
purpose of holding raw land
o transactions involving corporate shares seems as on
account of capital
 related activity
o profits or losses from transactions closely related to
taxpayer’s other ordinary business activities are
1)primary intention at the time of entering the
transaction was to make an investment
2) he or she had no secondary intention at that time to
trade in the property
 secondary intention to trade? if so, any gain or loss
resulting from the trade is business income (or loss)
 look at conduct here as well, question of fact
usually strongly presumed to be business income or
losses
o evidence of transaction not part of taxpayer’s
ordinary business, actual use of the property as an
investment asset over period of time, OR plausible
reason for selling may rebut the presumption
 corporate objects and powers
32
o corporate income is characterized according to
intention tests and not according to stipulations in
constating documents
 degree of organization
o if taxpayer deals with property in same way as dealer
would with similar property, profit is likely
characterized as business income
33
VIII. DEDUCTIONS IN COMPUTING BUSINESS/PROPERTY
INCOME (*heavily litigated section - deduction for
business, not for employment!)
Credit v. Deduction (See above)
 Credit – direct reduction of taxes payable (dollar
for dollar)
 Deduction reduces income (save % of tax you would
pay on this amount of income
1.General Limitations on deductibility
Q  IS THIS EXPENDITURE DEDUCTABLE? ~ not
prohibited under S18 (1)(a)
 Must be on account of income and not a capital.
 1) Incur expense to make a profit/Income? Spend
that $, to make $?
 2) Spend money for purpose of getting or producing
income?
 3) IS it a personal or living expense? 18(1)(h) –
prohibited
o Or otherwise expressly prohibit by this act?
o allows legislators to foster socio-economic and
public policies
o S20 gives permission for deductions
 4) was this expense reasonable? S67
o constraint to protect government’s taxable base
 Mustn’t be “abusive” tax avoidance
 5) Was the expense relevant to current, or some
future period? Where relevant in future, must be
deducted in future
2. Purpose, of gaining or producing income
Royal Trust Case – send managers to join a country
club to meet clients – but couldn’t demonstrate got
business directly from the expenditures.. court said ok
to deduct – purpose of spending, not actually result of
expenditures.
 See if expense was “made or incurred by the
taxpayer in accordance with the ordinary principles
of commercial trading or well accepted principles
of business practice”  Then move to S 18
S 18(1)(a) – In computing the income of a taxpayer
from a business or property, no deduction made for:
 Outlay (money you spent, expense).. except where it
was made or incurred for purpose of gaining or
producing income from business or property (not
result)
o Must prove it is for the purpose of earning
income – can’t be hobby, must demonstrate tie of
generating income.
o focus on primary purpose - as an expenditure
doesn’t have to be wholly or exclusively extended
for business purposes in order to be deductible
o If landlord puts new roof on an apartments
building – to the extent its to produce income
(rent) from tenants.
o Nexus – connection ~ must not be too remote. Must
have to spend this money to make money.
 Has been adversely interpreted for expenses that
really seem to be personal in nature … are you
using for any reason other than business?
o Eg. Actors - suit, deodorant, mouthwash,
toothpaste.. OK.. because of purpose, to gain or
produce income.
o broad catch-all clause for expenses that the
legislator didn’t proscribe more specifically
What stops from deducting these expenses? Limit?
34
3. 18 (1)(h) NO DEDUCTION of personal and living
expenses
 Criteria of business v. personal
 Wouldn’t include mortgage payments or clothes etc.
 BUT - deduction of clothes from costume; deodorant
not to offend other actors?
 Distinguish personal from business calls on a cell
phone
 How do we draw a line for frivoulessness?
4. Reasonableness of expenses S 67
 “Can’t make deduction unless their reasonable in
the circumstances”
 Is expense above and beyond what you would pay to a
stranger?
 Incremental costs, which would otherwise not be
necessary (certain costs, above an ordinary cost)
o Comes up – when people pay salaries to family
members
o Doug Burns Excavation Contractor Ltd. v. MNR –
Court disallowed the taxpayer’s deduction for a
bonus of $100,000 it paid to the president’s wife
who worked as a clerk in the office
3. Current or Capital Expense? 18 (1)(b)
Section 18(1)(b):
 (1) In computing the income of a taxpayer from a business
or property no deduction shall be made in respect of
 (b) an outlay, loss or replacement of capital, a payment
on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as
expressly permitted by this Part
Three broad criteria for determining (Purposive
approach):
 1) character of the advantage, duration of the
benefit
 2) recurrence and frequency of the expenditure
(more frequent expenditures = less enduring the
benefits),
 3) identification of the payment as a surrogatum
for expenditures that would be on account of
capital or revenue
Capital outlay = expenses that have lasting value
beyond the year
- Benefit more than one accounting period –
Incurred for the purpose of bringing into existence an
asset of enduring value
 e.g., long-enduring assets, such as goodwill,
incorporation fees, patents, and trademarks are
generally capital expenses
 “Will not deduct expense on account of capital, in
one year, Except as permitted here”
 Capital expenses are not deductible – repairs, land
goods, machinery, equipment
Or is it current expense? No lasting value –
deductible in the year  Incl. wages, rent, advertising
(generally)
 one-time expenditure for which it’s intended that
one consume the entire benefit of it in one fiscal
period
 Bias for business owners to incur as current
expense
 Many CE have enduring benefits in that advantages
arise from the expenditures and continue for a long
time
Eg. discharge of obligations
35
 payment to discharge unsatisfactory employee is a
current expense (even if this has lasting value)
 payment to discharge a capital liability is a
capital expenditure
 grey area situations: emphasis on permanency of
advantage secured by discharging the liability
 factual ambiguity is resolved in the taxpayer’s
favour
3.1 Fight of repair - Unclear line between capital
expenditures and current expenses due to routine
maintenance
- (enhance value of what was there before) v.
maintenance (maintains standard that something is at)
 Eg. Window breaks – fix it = capital.. unless
experience shows it will occur regularly, and may
require replacement again within the year.
- Repair vs. renewal
 repair: restoration by renewal or replacement of
subsidiary parts of the whole
 renewal: reconstruction of the entirety, meaning
not necessarily of the whole - go beyond the
replacement of worn-out parts, are capital
expenditures
 Deductible expense depends on the magnitude of the
replacement in the context of the complete unit of
which it forms a part
o e.g., capital outlay: replacement of entire
engine
o e.g., routine maintenance: replacement of small
parts in car
 the higher the cost of replacement as compared to
the cost of the unity, the more likely the repair
is actually on account of capital
3.2 Lawyers fees? ** Can this be deducted? Depends
on effect.
- If help acquire asset of enduring nature, to
contribute to revenue – land and buildings = capital
- OR If it’s to preserve a capital asset in a capital
aspect = current expense
 Kellogg: taxpayer successfully deducted substantial
legal fees incurred defending an allegation of
trademark infringement – ordinary legal expenses,
deductible in ordinary course of business
 Evans: taxpayer entitled to 1/3 of an estate
incurred legal fees when right to the income was
challenged – SCC held these fees were current
expense, not paid on account of capital
6. Other Statutory Prohibitions/Permitted
Deductions
S20 – Alphabet of joy - Many deductions in
connection with earning income from business or property
– scope for deductibility is the broadest under this
category (employees cannot deduct many expenses)
(1) Deductions permitted.. goes on to (zz, at
least 52)
 .. would otherwise not be permitted to be deducted.
 economic or policy reasons, has decided to permit
the deduction in whole or in part, (and some in
subsequent years)
(n))
6.1 Reserves (ITA paragraphs 18(1)(e), 20(1)(m) and
C.B. 347-353
6.2 Conventions (ITA subsection 20(10))
C.B. 404-
406
36
 S20(10) Convention Expenses - notwithstanding
18(1)(b), you can deduct up to two conventions
carrying on business (not employee) AT location
consistent with the territorial scope of that
organization
o E.g., CBA convention in London England – can you
deduct this?
o S9 – is it to promote business? You might meet other
lawyers who will give you referrals, need counsel,
help you with your business
o Issue: Is England within the territorial scope of the
organization?
o There have been challenges under this as to
territorial scope of the organization - but there is a
tendency to hold conventions in fun places so people
will come
 Definitions:
o incurred – legal obligation to pay
o VS. paid – you actually paid cash, regardless of legal
obligation
 Business or Property (not employment income)
6.3 Entertainment expenses (ITA paragraph 18(1)(L),
s. 67.1)
S18(1)(l) Use of recreational facilities and club
dues - Can’t deduct payments for the use of property
that is a lodge, or yacht
 Brought in to limit your ability to deduct certain
types of entertainment expenses that some people
might not be able to deduct
 Idea that ITA doesn’t want to reward bad behaviour
6.4 Fines/penalties (ITA s. 67.5) C.B. 335
- Taxpayer may deduct expenses incurred from
illegal acts to the extent that they were incurred to
earn income, but this does NOT extend to the payment of
fines and levies
e.g., if you spend a lot on fines and penalties for
getting rid of effluent for business
 Section 9 – expense incurred to produce profit? yes
 18(1)(a) – expense to gain or produce income? Yes
o (h – not person)
 18(1)(b) – capital expenditure? lasting value? no
- Court: Quota for egg production, worth it to go
over quota, pay fine, and deduct.
 Morality has no place in Tax - if we don’t give
deductions b/ of morality, then can’t tax proceeds
of illegal sales either – nothing in the ITA
restricts deductibility of product of illegal
behaviour, including fines and penalties.
 So long as nexus can be shown b/w business and
expense incurred
 ITA also taxes illegal income
- BUT then Parliament added to ITA restrictions
 Section 67.5 – non-deductibility of illegal
acts/payments
o can’t deduct certain outlays or expenses that are
illegal
o bribery, corruption, fraud, conspiracy
 Section 67.6 – non-deductibility of fine or
penalties
o imposed under law by someone with authority to
impose fine
o but only if imposed by government body – not if
private company (i.e., Impark gives you a fine,
not the City giving you a fine)
 Sometimes ITA rewards them for breaking the law, if
expenses incurred from illegal acts in order to
earn income
37
**remember, a cost is deductible if isn’t indicated as
not deductible
 There must be a legal obligation to pay interest,
within the terms of the agreement (that’s why you
need to Id the legal relationship);
7. Interest
7.1. Capital/current expense? held to be a current
 The interest must be an amount paid or payable by
borrower in the year.. pursuant to the legal
obligation
-S20 C was brought in to override B – interest is
really a capital expenditure, with extended value; this
sections creates an exception to the capital rule
- Borrowed money accumulating interest, must be
traced to an eligible use
* S20(1)(c) authority to deduct interest in pursuit
of certain “for profit” activities
 The #1 expense that taxpayers want to deduct – b/
they owe money to financial institutions –
interest.
 s. 20(1)(c)(i) *Taxpayer borrowed money, and used
for purpose of earning income or property (can’t be
used for personal expenditure)
 S(i) creates incentive to accumulate incomeproducing capital by allowing taxpayers to deduct
interest costs associated with its acquisition
o creates wealth and increases income tax base
o allows deduction for interest as a current
expense to earn business and investment income in
circumstances that judge-made law would not
(i.e., Canada Safeway)
o NOT an anti-avoidance provision
- But the ITA treats lenders and borrowers
differently, so you have to identify the nature of the
different legal obligations, and the corresponding
interest obligation:
 is payable on borrowed money - used for the purpose
of earning income from a business or property
o use to which borrowed amount is put is critical
element
o amount payable for property acquired for the
purpose of gaining/producing income
o seller -> purchase, for sale of goods/services
o can you deduct the interest on your student
loans?
 is reasonable in amount
o where an interest rate is established in a market
of lenders and borrowers acting at arm’s length
from each other, it’s generally reasonable
7.2 Legal obligation to pay
 interest is deductible ONLY if the lender has LEGAL
rights to enforce payment of the amounts due
 depends on unconditional and legally enforceable
obligation to pay interest
 obligation must be actual and not contingent
 section 18(1)(e) prevents deduction if no legal
obligation to pay
7.3 Current eligible use
 phrase in s. 20(1)(c): “used for the purpose of”
incorporates two separates tests: USE and PURPOSE
 use test traces the direct flow of funds to determine how
one applied the borrowed money
38
o actual, not alleged, uses of borrowed money that
determines the deductibility of interest payable on
the funds
o Sinha: student borrowed from student loans at low rate
of interest and reinvested borrowed funds at a higher
rate
ITA 18(1)(b), 20(1)(a), Reg. 1100, Schedule II
 Kroft will give hints re: capital assets – i.e., he might
put class 12 or class 1 beside the item - this tells you
it’s a capital asset, an expenditure
 but he might also ask what class a particular item falls
into – to tell that we know the List of Assets table on
 allowed the taxpayer to deduct his interest
expense since he actually used the borrowed money
for investment purposes
o current not original use determines deductibility of
interest expense
o change of use can affect deductibility – interest
expense ceases to qualify as a deduction from the date
of the change of use of the borrowing
7.4 Purpose – Must be to gain/produce income
page xxv
8.1 General
Capital cost allowance: an allowance in respect of the
capital cost of depreciable property
 CCA is a deduction from income that is intended to
allocate the approximate cost of capital asset over
their useful lives
 basically CCA system is statutory depreciation at
pre-determined rates
 taxpayer must use the funds for the purpose of earning
income from business or property
 allows a taxpayer to deduct the actually cost of
depreciable assets over a period
 must have a bona fide intention to use the borrowed money
for an income-earning purpose
 May claim a deduction for capital cost allowance,
according to prescribed rules! (not the
depreciation calculated for financial statement
purposes):
 need not be the primary or dominant purpose for borrowing
 whether the income purpose is actually realized is
irrelevant – about INTENTION (and must use for this
intention)
 trace the direct and immediate USE of the borrowed funds
into the income-earning process
o interest is deductible only if sufficiently direct
link between the borrowed money and the current
eligible use
 doesn’t matter if borrowed funds are commingled with
funds used for another purpose, as long as they can in
fact be traced to a current eligible use
7.5 Proposed section 3.1 (Oct. 31, 2003 – draft
legislation)
8. Capital Cost Allowance
8.2 Structure of system
a) Classification
b) Permissive
c) General structure
S18(1)(b): a taxpayer cannot deduct expenditures on
account of capital outlays, depreciation, obsolescence,
or depletion… except as permitted by this part.
S.20. Notwithstanding paragraphs 18(1)(a), 18(1)(b)
and 18(1)(h), in computing a taxpayer’s income for a
taxation year from a business or property, the following
may be deducted:
S.20(1)(a): in computing income from a business or
property, a taxpayer may deduct such part of the capital
39
cost to the taxpayer of property, or such amount in
respect of the capital cost of property, as is allowed by
regulation
 Deduction of CCA is permissive – i.e., you MAY
claim CCA in a particular taxation year
 Whether an asset is eligible for CC allowance
depends on whether it’s described in the classes
listed in the Regulations – classes list most
tangible assets that are expected to depreciate
over time
> E.g., “sale of lemonade “claim a deduction for
$200 table bought to sell lemonade?”
 S9 – Profit, means deduction are permitted
o concept of NET is very important – you shouldn’t
pay tax on money you don’t have - only should pay
tax on the residual
 Exceptions:
o 18 1(a) – Purpose must be to gaining/producing
income
o 18 1(h) – Not a personal or living expense
o 18 1(b) – Current or capital expense? – capital
outlay, lasts throughout the year (This section
is a prohibition on outlay; can’t deduct except
as permitted by this part)
 Except as permitted  S 20, deduction of
current/capital
o S20(1)(a) Deduction of property, as allowed – if
it has capital cost (indicates rules elsewhere):
o Go to Pt II of Regulations 1100 - Capital (P2172)
 Class and Rate
 Difference Rate of deductibility will apply
to difference types of property
 Because revenue generated will occur over a
number of years, so capital will offset
these costs for a number of years.
 Eg. $100 table, deducted over a number of
years; not all at once
Regulation 1100
 ITA says that if an asset is a capital asset – has
value beyond the year - you are not entitled to
deduct the FULL amount of the cost of that
acquisition, unless the regulations permit you to
do so
 regulations also stipulate that a different rate of
deductibility will apply to different types of
property
 depending on what you buy/acquire/construct (type
of property), the rate at which you may deduct your
expenditures in respect of capital assets will be
different (over a # of years)
 based on concept that capital asset expected to
last over the course of a number of years is
expected to generate revenue over those years - it
would be inappropriate to have that imbalance.
- ITA affords the taxpayer a great deal of
flexibility
 Rules goes on for pages and pages
 Parliament doesn’t pass regulations, cabinet does
through Order in Council –given statute regulationmaking powers by parliament.
 Convenient ways of amending laws and allowing for
flexibility
8.3 Eligibility (allocation of price between
capital)
40
- Buildings are in class 1 - deduction of 4% for
the cost of the building – what are the costs of the
building?
 purchase price, realtor fees, ptt
 construction costs if you’re not buying the
building
 e.g., put a roof on the building – is it a current
expenditure or capital expenditure? capital expected to last over a long period of time
 Roof - under capital additions to a building – part
of the capital cost
 Is land a building? No
 Land - Never buy a building without the land
(unless leased) – usually buy the underlying land But CANNOT claim CCA for the cost of land
Example: What if someone buys a building and wants
to deduct the cost of the building? How do you interpret
the attached land?
 If you pay $500 for land and buildings, and you
want to deduct the cost as much as possible, the
purchaser wants to say the $500 as much as possible
is for the building, b/ you get NO deduction for
the cost of the land
Example 2: How do you allocate components of a
business transactions between various elements of a
price?
 Must allocate different things to a price ratio
(price attached to each thing, then a dif. CCA
deductions rate associated for each thing)
 Taxpayer wants to buy all the assets of Lehman
Bros. for $500 – they have a building, computers,
tables, computer software
 purchaser has to decide how to allocate the $500
for various components
 different assets are treated differently and can
deduct at different rates
o computer software - Class 12 deduction of 100%
from taxable income
o Since you want the faster deduction of the cost,
you want to say more of the $500 is for computer
software
- But people who sell the assets have different
interests than the people who buy
 SELLERS are worried about recapture – will try to
allocate the sales price of assets to those assets
which will give rise to the least amount of
recapture of previously claimed CCA
 Need to understand WHY there is a need for
allocation consideration and why the needs of the
buyer and seller different with cost allocation
o There will usually be a fight between parties as
to allocation, and much money will be at stake,
depending on the allocation
o Agreements will be drafted: sell building hotel
for 2 billion dollars, but in agreement for
allocation, leave blank how much of that cost is
allocated to land, computers, paving for parking,
landscaping, computer software, furniture,
lighting, linens, etc.
o it would be best to allocate most of the cost to
cutlery, catering linens, etc, because they’re
deducted at 100%
 Buyer wants most $ to deduct – class of 100%
o **allocation to higher deduction classes
accelerates speed at which you get the
deduction***
 But seller want lowest %, so as to avoid recapture!
41
> Kroft, trying to get across: what are capital
costs, how to calc, how to recognize recapture
8.4 Classes of Property
- Need to know how assets go into class, and the
associated rate – which uses a declining balance method
(take the remaining value and multiply by class rate)
Schedule II of the regulations p. 2702 – lists what
goes into each class
 different classes for deductions
o Common theme of stuff in Class 1
 They are infrastructure items so they last a
really long time
 the longer something is expected to last,
the smaller the deduction should be in each
year
o people focus on the current year: motivation is
to maximize deductions and minimize revenue per
year.
o Highest Deduction – Class 12, 23 and 25
o Lowest – 4%
Alphabetical List of Assets - page xxxv (35) of the
ITA**
 e.g., looking for “table”? X, but furniture is in
Class 8 – 20%
Use declining balance equation to calculate deductions
for capital cost allowance (per CCA rules)
 (Total amount – amount deducted) x % ea year
 First year deduction: if table is $100 and falls
into Class 8, you get a deduction of $20 of the
table in the first year
 Second year deduction: (Don’t deduct $20 again even method of calculation)
o So 80% is left as value of the table ($80)
o whatever is left you multiply by 20%
 Deduct $16 (declining balance), leave you
with $64
 Third year deduction: 64x 20% = 12.8
 First year get to deduct the most – then gets less
and less
 Assets aren’t going up in value, but are continuing
to go down
Multiple items:
 you pool multiple expenditures in a class, to the
extent they belong to that class
 if you buy another table or any other assets in
class 8 POOL expenditures for assets IN THE CLASS
AS LONG (AS USED FOR THE SAME BUSINESS)
o At the end of the year, claim the balance for the
costs of the pooled assets
o e.g., after year 1, have table, took $20 of
deduction and had 80 left
 after year 20, buy kiln for $120, so in
Class 8 you have totally costs of $200
o $200 x 20% = $40 is your deduction for the year
8.5 Determination of capital cost
 CCA is based on “capital cost” of an asset – This
is purchase price of the asset, and includes any
legal, accounting, engineering, or other fees that
the taxpayer incurs to acquire the property
 “cost” refers to the actual cost of the property to
the taxpayer (in money or some other property) –
entire laid down cost
42
 if gift, the cost is equal to its fair market value
at that time
 (how to calculate?)
o government assistance received or entitled to receive
and investment tax credits claimed, subsequent to the
disposition by the taxpayer of the property to which
such assistance or credit related
8.5 Un-depreciated capital cost
a) General meaning
- when you deduct the CCA from the capital cost of
property, the residue is the undepreciated capital cost (UCC)
of the property
- For the purposes of calculating CCA in a year an asset
is acquired, only ½ of the net additions to the class is
generally added to the UCC balance
 i.e., Year 1, $40,000 asset acquired (Class 8 - 20%),
first use $20,000 at 20% to determine balance ($16,000,
- in accounting terms: the net book value of the asset
then add $20,000 back on) to get UCC at the end of the
- can never be a negative amount – if amount of
year: $36,000
inclusions is less than the amount of deductions, the negative
balance becomes income for the year and is then added back into
-The remaining half is added to the UCC after
calculating CCA for the year of acquisition
the calculation of UCC of that class, increasing the balance to
zero
8.7 Recapture***TQ usually tests these by FILL IN
THE BLANK QS**
b) Technical meaning/Method of Determining
Method of determining UCC of a class of depreciable
property:
 Add:
o capital cost of depreciable property of the class
o government assistance repaid by the taxpayer
subsequent to the disposition re: acquisition of which
received assistance
o any amount recaptured in respect of the class
o repayment contributions and allowances taxpayer
received that were previously deducted from the
capital cost of that class
 Deduct:
o total capital cost allowance and terminal losses the
taxpayer claimed for the property of the class
o proceeds of disposition of any property of the class
disposed of (but not exceeding the capital cost of the
property)
 *Recapture = “price sold for” - “remaining value
(amt left to deduct at the end of the yr)”.
 When receive an amount on sale of asset in excess
of amount available to deduct = recapture.
o Eg. Con’t - What if taxparyer sells table in 2nd
year for $90
o Bought for $100, but only worth $80, because you
claimed $20 in CCA.
o $90 - $80 = $10 recapture
 Idea is that taxpayer can claim too much CCA on
assets – over-deducted in first yr
 if ITA allows deduction for a portion of the cost,
and in a subsequent year you’re able to sell the
asset for more than the asset’s remaining value,
ITA gave you too much of a deduction in year one.
 **year in which you sell an asset for amount
greater than the cost left to deduct, this creates
recapture of CCA**
43
 Recapture is the amount you have to funnel back.
 S.13(4): taxpayer can defer the recapture of CCA by
acquiring replacement property for the same or similar
(a) Max amount of Recapture - Limited to capital
cost
- S. 13(21): the ITA limits recapture to the capital
use as property being replaced
 must make election when filing a return for the year
you’re acquiring - so part of the proceeds of disposition
cost of the particular depreciable property in the class,
of the former property are effectively transferred from
so that proceeds in excess of the capital cost do not go
into recapture
the year in which the disposition occurs, to the year the
- have to give back no more than cost deduction of
item ($20 for the table.. not more than you bought it
for, $100)
- excess proceeds of disposition over the capital
cost of an asset is a capital gain
important because recapture of CCA is fully taxable
as income, while only half of capital gains are taxable
- If you sell it next year for $101, then you get
back $20 in recapture and $1 in CG
(b) Effect of negative balance
 Where a class has a negative balance at the end of the
replacement property is acquired.
8.8 Terminal loss (opposite of recapture)
 Money you will not be able to get credit on – sell for
less than $ available to deduct.
 When taxpayer disposes of property of a class for less
than its UCC, suffers shortfall in depreciation claimed –
can recoup the amount through claim for a terminal loss
 S20 (16) have to claim it or you lose it forever – not
permissive
 what you can deduct against your income – e.g., if you
bought table for 100, in first year had 80%, then in
second year sell table for 79 dollars, value left was 80,
year, the amount of the balance is recaptured into income
so you didn’t get credit for $1 of it – this is a
for that year
terminal loss
 Any amount recaptured into income is added back to UCC of
that class
 You can reduce the amount of recapture from particular
class by acquiring additional assets in that class
 E.g., capital cost is $10, CCA is $5, UCC is $5, proceeds
of disposition are $11, terminal loss is nothing (because
proceeds made up for amount reduced by UCC, recapture is
$5, capital gain is $1
(c) Deferral
8.9 Special rules XX
(a) First year half-rate rule - Regulation 1100(2):
 ITA limits in the first year the CC allowance, on assets
acquired during the year, to ½ the allowance that is
otherwise deductible
 prevents tax avoidance by discouraging taxpayers from
acquiring property at the end of a year to claim full
year’s allowance
 half of the net additions to the class is excluded, then
added back to the UCC of the class, after CCA determined
 the act effectively defers CCA on this amount until
future years
44
(b) Available for use
 ITA doesn’t consider a taxpayer to have acquired a
property until it becomes available for use OR until 24
months after acquisition
 first restriction matches income and expenses, second
accommodates long-term construction projects
(b) Short years
 where the taxpayer’s taxation year is less than 12
months, CCA is limited, in certain cases, to a
proportional amount, determined by:
o (No. days in the taxation year/365) x maximum CCA
allowable
o no. days in taxation year refers to the number of days
incurs to earn income from a business, but not
otherwise deductible under the ITA
 reputation may rest on honest dealing, hard work,
advertising, trademark etc.
 ultimately means a premium sales price on the
disposition of a business, compensation for the
“excess” earning power of the business because of
its goodwill
o purchased goodwill is an enduring asset, and the
purchase price is a capital outlay
o eg. Prior to 1999, there was no provision for
these
Eligible capital expenditures
the business is in operation, not period of ownership
o Permitted goods, such as above
of the asset
o Section 20(1)(b) allows you to deduct 75% of costs,
but can only deduct at 7% on a declining basis
9. Cumulative Eligible Capital (ITA s. 20(1)(b),
14(5)(a) & (b))
9.1 Capital expenditure - incurred by a person CoB,
which doesn’t fit into the classes contents in Schedule II (
not otherwise found in S20)
 e.g., lawyer legal fees to help them incorporate
 Good will – value of a business over and above the
aggregate of the value of the tangible items associated
with that business
o an asset, the advantage that accrues to a person as a
result of a reputation
o people will pay an amount for a business, over and
o e.g., spend $100 on lawyers’ fees to buy company, can
deduct 75% of fees at 7% on declining basis (so first
year – 7% of $75)
o So deduction under para. 20(1)(b) is NOT a speedy
deduction, but is one nonetheless available for
intangible capital expenditures not otherwise
covered off by 20(1)(a) or any other subsection
in section 20
o *Would rather deduct CCA (So only use where this
won’t apply)
o the act includes 75% of the proceeds from the
disposition of an eligible capital property in income,
above the value of the tangible assets of that
but only for amount that exceed the taxpayer’s
business
cumulative eligible capital amount (?again)
o intangibles, known as goodwill, such as location –
o certain expenditures are excluded - para. 14(5) a & b
which help business make money
 the Coca-Cola name, list of names of customers,
reputation, location, clients - that taxpayer
> Schedule 2, Class 8t
 A catch all Paragraph, for
“other tangible property”
45
 things not listed but are generally tangible
 if you spend on certain (other) properties you get a
special deduction, as it is listed.
capital eligible property
 exceed the amounts required to be added to the pool, the
excess (negative balance) must be included in the
9.2 Cumulative eligible capital (CEC)
 The amount by which the aggregate of 75% of the eligible
capital expenditures made in respect of the business, and
amounts previously included in income under s. 14(1),
exceed
o amount previously deducted in computing income
 where, at the end of taxation year, amounts required to
be deducted from taxpayer’s pool of expenditures re:
AND
o 75% of the proceeds of sale, less selling expenses
from a disposition of eligible capital property
 the balance of CEC at the end of the year can be
amortized against business income at rate of 7% on
declining basis
 any negative amount is recaptured and included in the
taxpayer’s income for the year
“Eligible capital property” - any property that, if
sold, would require the inclusion, in computing the taxpayer’s
income, of 2/4 of the proceeds under subsection 14(1)
“Eligible capital amount” S14(5):
 75 % of the proceeds of disposition from eligible capital
properties are credited to the cumulative eligible
taxpayer’s income for the year
10 Taxation of Non-residents
10.1 Carrying on business in Canada (Part I)
C.B. 1369-1381
 S2(3)(b) Person is taxable for carrying on a
business in Canada
o a non-resident is subject to Part I tax if he or
she carries on a business in Canada
o s248 “business”: includes a profession, calling,
trade, undertaking of any kind and an adventure
in the nature of trade
 in the absence of treaty protection, a non-resident
is liable for Canadian income tax simply by
soliciting orders or offering goods for sale in
Canada
o just advertising is NOT an offer though
o one isolated event may not be “carrying on”
capital account
 75% of outlays on account of eligible capital
expenditures are included in cumulative eligible capital
account
Characterization of expenditures and receipts
 amounts that a taxpayer incurs or receives on the
purchase and sale of property are not necessarily
characterized as mirror images of each other
 Eg. Goodwill
C.B. 327-328
Recapture of negative balances
S253: Extended meaning of “carrying on business”
 (a) produces, grows, etc. in Canada
 (b) solicits orders for sale in Canada whether or
not transaction is to be completed in or out of
Canada
o e.g., Time Life offering things on TV to you here
and saying call this number now, but just have
building in NY
o info-marketing things are structured so no one is
carrying on business in Canada – sale is
46
occurring outside of Canada - but this doesn’t
matter
o carrying on business in Canada – dictionary
definition
o SEE SUPPLEMENT MATERIALS - case law on
jurisdiction to tax
 judges look at where activities arise and
where profit emanates from – what work is
being done in Canada, someone giving credit
card number
 Factors that indicate whether non-resident is
carrying on business in Canada:
o location of contents
o location where goods delivered and payments made
o location of business assets
o whether uses an agent or IC
o location where it derives profits
o nature of its activities
o location of its bank accounts, phone numbers,
addresses
o location where business purchases assets
o degree of supervisory or other activity in Canada
o substance of transactions
o whether activities in Canada are integral or
merely ancillary to its main business
o whether individuals in Canada help the business
in its endeavours
 if you are carrying on business in Canada under s.
253 or dictionary definition, can you escape double
taxation?
o look at tax treaty 
10.2 Passive income (Part XIII) C.B. 1405-1417
 Part XIII: - levies tax on non-resident’s nonbusiness income (investment income)
 Section 212(1)(d) in Part XIII – withholding tax on
rent of 25% that you are supposed to hold to pay
for landlord
o if non-resident owns an apt building in Kits and
you are the tenant and have to pay rent
o there is no relieving provision dealing with
rents
 Tax on investment income is withheld at source of
payment - Unlike business income tax (taxpayer
assesses own level of liability),
 so Canadian resident who pay or credits an amount
to a non-resident withholds 25% of the gross amount
owing to the non-resident (liable to pay this
amount(
 policy:
o allows compromise between providing means of
enforcement of tax for CRA against people who may
not have any property at all in Canada and being
fair
o flat rate – practical for administration – payer
can’t possibly know how much the taxpayer should
owe
 S215: withholding tax applies to certain types of
passive income payments (e.g., dividends,
management fees, rents, interest)
10.3 Treaty overrides for Part I and Part XIII (see
relevant articles of applicable tax treaty)
Tax treaties help non-resident escape double
taxation
47
 International tax treaties almost always provide an
important exception to domestic rule (s. 253) that
non-resident be taxed for carrying on business in
Canada
 usually restrict the source country’s power to tax
the business profits of a foreign enterprise to
circumstances where the enterprise has a permanent
establishment in the country
 need to check: is there a particular treaty that
helps you out of taxation?
o place of business that is fixed
o nexus between the enterprise and the foxed place
of business
**Need to recognize if taxpayer is resident or nonresident; if non-resident, what they have to be taxed for
(Canada jurisdiction to tax them for); and is there a
corresponding provision in the tax treaty which gets them
out of having to pay?
 Yes, if business is US resident: US-Canada Tax
Treaty
Article V, Article VII of the US –Canada Tax
Treaty: Business Profits
 OECD Model Convention
 Article 5 taxed to the extent that there is a
permanent establishment in Canada
o definition: fixed place of business – office,
mine, quarry, construction site
o so people beaming in infomercials, are not COB in
Canada, if they’re beaming in from outerspace b/
they’re located elsewhere
o tax laws have NOT caught up with technology
o issues that came up in late 1990s when technology
really started to take hold in commercial
transactions
o so they don’t pay Canadian tax because of the USCanada Tax Treaty
 Article 7(1) of Model Convention has 4 essential
conditions for taxation of business profits in
Canada of non-resident business enterprise:
o existence of enterprise
o carrying on business by enterprise
48
IX. EMPLOYMENT INCOME AND DEDUCTIONS
1. Significance of Characterization of Employment
or Business Income
- Office or Employment – Def’n – employee,
employer, employment, office
- Employment v. independent K’er (carrying on a
business)
 System favours those carrying on a business
o greater deductions
o Tax not taken at source (CPP EI and Fed/Prov
Income Tax from employees).. cash-flow advantage
 employees have little scope for deductions, so most
prefer not to be employees, but in independent
contracts for service
- office: position that entitles an individual to a
fixed or ascertainable stipend or remuneration
 office, as opposed to employment, doesn’t require
the person to be in the service of some other
person, which would imply an employment
relationship (judges are example of officer)
2.2 Concept of Employee-Independent contractor
C.B. 222-227
2. Employment Income S5 – 8
 S5(1) money received by the tax payer – salaries,
wages, gratuities, remuneration etc.
- Independent K’or: person engaged by another to
perform services in order to achieve a prescribed
objective for a fee
 Most Canadians earn their income through employment
 Single largest source of revenues and accounts for
the majority of the federal government’s total
income
- What distinguishes someone as an employee and
someone who is an independent contractor?
Wiepe Dour,
Sagaz
 individuals generally prefer the independent
contractor status for tax purposes
 corporate income is taxed preferentially
 employers have an obligation to take money for
taxes
o paternalistic view: these people would pay their
taxes normally
2.1 Office or employment, s. 248(1), “employee”,
“employer”, “employment”, “office”
- employee: individual in an employment
relationship
- employment: the position of an individual in the
service of some other person
 NOT DEPENDANT on what people call you
 determining employment relationship is a question
of fact, no absolute formula
 many cases go to court on the issue of employee vs.
IC
Factors courts look at to distinguish:
 Degree of supervision and control over the service
provider (v. independence)
o Nowadays harder to see supervision or not, so
this is a factor, but it’s not as determinative
as it once was
o highly skilled persons may not have as much
control by employer…
o employer usually selects employees, sets
wages/benefits, evaluates employee and can
terminate with notice,
49
o gives medical coverage and sets out policies in
terms of travel, sick, vacation
o How and when is work done?
o Regulation of hours
o Method of remuneration
 benefits: provisions for holidays, sick
leave, medical coverage, compensation for
travel (more the better the benefits, the
more likely it is employment relationship)
o opportunities for outside employment
o nature of the termination clauses
 Assuming risk of loss - risks associated with
making money
o if employee, you get paid if you’re sick,
independent contractor does NOT
 Organization or Integration Test:
o how integral are the people to the income-earning
process?
o is the person an intrinsic part of the
organization (employee) or merely an adjunct to
it (IC)
 IC – renders services to third party but not
part of fabric of business
 employee – comes to work and is there on
daily basis
 do you spend money to make money?
o people who COB are people entrepreneurial in
nature and try to spend money to make money
o only certain circumstances where employees have
to spend money to make money
2.3 Timing of inclusion
 Cash-basis accounting: Salary wages and other
remuneration – taxed in a year, upon receipt
 Tax when paid! (Constructively or actual)
o not tax on earned, as business income – and
distinct from receivable.
 Employment taxes are withheld at source - s. 5(1)
2.4 Salary/wages/remuneration (ITA ss. 5, 248)
C.B. 227-228
- S5: an employee (or person who holds office) is
taxable on salary, wages, and other remuneration received in
the year
 remuneration: compensation for services from an
employment relationship, whether past, present, or future
 received: an employee does not get taxed on the basis of
earned income – different from business income
calculation
o with employment income, employees are earning it, but
haven’t necessarily gotten paid yet
o Employee has entitlement to payment, per relationship
with the employer – eg. every two weeks
 there is a difference between earned, received, and
receivable income
o receivable: the right to demand payment
o so receivable every two weeks
o entitlements to be paid – important
 you want to get paid sooner than entitled otherwise
o sometimes you want to get paid before businesses fail
 S5(1) taxes are withheld at source, for administrative
convenience
2.5 Legal issues & Benefits - S6
- Employers don’t always have the cash to pay
needed employees
50
 Benefits – phone, use of vehicle, bonuses,
memberships, health insurance, parking, tuition,
housing etc.
- Push to provide employees with non-taxable
benefits (which employees would otherwise pay for, and be
taxed on)
 concept of reducing income entirely, in favour of
benefits and abolishing tax
 Represent taxpayer’s ability to pay – horizontal
equity
- S6(1)(a) Subjects benefits, from office or
employment, to taxability; includes in income for the
year
 taxable and non-taxable – hard line to draw
- What is a “benefit”? Something that makes you
better off
 Economic advantage, measurable in monetary terms,
that an employer confers on an employee in his/her
capacity as an employee
 No distinction b/w cash and in kind
 Do you have a benefit? “Received”, or “enjoyed”
o Rachfallowski – Person required to join a golf
club; anti-social person hated golfing and did
not enjoy golfing; was to meet client for
business… had 50 000 put in income, rationale:
would have paid for it from his income as any
other person, and therefore should be taxed.
o No benefit – argued there was no benefit for him
(the recipient), it was to the benefit of the
employer.
o Did not have to be included in income, because it
was not enjoyed. No benefit.
o Would you have paid for this on your own?
 e.g., employer is paying for parking so you can
drive around to get clients, or just so you can
park there?
 Use of toilets; provision of water.. Macdonalds
Uniform  Yes, but 
- “Value” – how do we value the benefit?
 Employee or Employer interpretations; market value;
operational value  look at facts
o eg. ring from store, v. melted down scraps, belt
buckle with name of company on it
o Eg. Macdonalds Uniform, no value
 ITA prescribes valuations for some of the more
contentious benefits, such as those from:
o automobiles (s.6(2))
o stock options (s. 7)
o low-cost loans (s. 80.4
s. 6(1)(a) “In respect of or in course of office or
employment”
 has broad scope
 issue of “nexus” or “connection” with office or
employment
 Legal relationship of the gift (love and affection,
v. employment)
 Did the employer confer the economic advantage on
the employee as an employee OR in his own personal
capacity?
o as employee – may be taxable
o in personal capacity – no taxable as employment income
 e.g., Professor Kroft gives us Canucks tickets
o Students here, not employment - legal relationship is
gift
 case: taxpayer given shares by other taxpayer who worked
for him
51
o argued given to her by love and affection rather than
by office or employment – successful in court
 Benefits summary:
o 1) is it a benefit to employee?
o 2) if so, what is the value?
o 3) was it received by virtue, in course of, office or
employment?
CRA Policy and Procedure
- CRA only taxes perks that are selective and that
it can value by commercial standards
- also, trying to encourage employers to engage in
certain activities, providing services that are
subsidized (i.e., health care)
 S6 excludes from taxable benefits any economic
advantage derived from - e.g., of non-taxable
o private health services plan
o contributions to registered pension plan
o retirement compensation arrangement
o benefit re: use of an automobile
o benefits derived from counselling services
o benefits under a salary deferral arrangement
- To reduce litigation surrounding benefits &
taxability - expensive and difficult to police + Admin
abilities, cause CRA to deviate from the law and its
interpretation.
- So bulletin published – certain types of benefits
won’t be taxable, or will be taxable only in a certain
way
 social or athletic club fees where it’s an
advantage to the employer for the employee to be a
member
 $500/year of non-cash gifts, for employees not to
be taxed on
 Policy on merit awards (50 years of work)
 Subsidize other benefits: 6(1)(a) (i – v)
2.6 Allowances S6(b) taxpayer must include in
income all amounts received in year as “allowance for
personal or living expenses or for any other purpose”
Allowance:
 limited and predetermined sum of money paid to an
individual
 amount is at the disposal of the recipient, free to
spend without any accountability
Without accounting for expenditures (include in
income)
 eg. travel allowance – employer gives you $200 a
day, don’t have to account for how they spend the
money
 Policy – no different than salary, really could
spend it on anything
 vii - reasonable travel away from place of
employment (must account for!)
Where it has to be spent and accounted for (don’t
include)
 Eg. Uniforms, if only worn at employment, not
treated as taxable benefit
 Eg. Food, lodging and photocopies
 Policy: Not like salary, not an allowance here, not
economically better off (as concept of income
dictates)
 Subsidized lunch at a firm, not taxed
 transportation to job
 DON’T have to include money given in your income
if:
52
o e.g., employer gives you an amount of money to
spend on something in particular - tells you what
to spend it on
Exceptions whereby certain allowances are NOT
taxed:
 Employees in receipt of a per diem travelling
allowance are not taxable on the allowance if the
amount of the allowance is reasonable
 statute:
o clearly apply to certain types of people
o ITA won’t tax people on allowances because trying
to encourage people
o if you travel away from municipality and the
performance of duties involved employer
Personal and living expenses
 allowances for personal and living expenses are
taxable as income under s. 6(1)(b) unless ITA
specifically excludes them
 reimbursement of personal or living expenses is
also taxable as income as a benefit under s.
6(1)(a)
o basically, doesn’t matter if is allowance or
reimbursement
 exclusions:
o allowances fixed by act of parliament
o travel allowances for Canadian Forces
o representation paid to diplomats, Canadian
officials
o reasonable allowances for travel to employee
employed to sell property, negotiate Ks
o reasonable allowances for travel expenses paid
where employee has to travel away
o reasonable allowances for use of motor vehicles
received by employee for travelling in
performance of duties of office/employment
2.8 (NO TQ) Car benefits (not tested on calulating)
- Employees are generally taxable on the benefit they
derive from employer-supplied automobiles
 many rules in ITA dealing with car benefits
 i.e., gives you a car for your use, but not given to
employee.. available at premises to be driven any time
 Only
need to know that if we’re provided with automobile
or LOAN to buy automobile, or employer pays for car
expenses (gas, maintenance, oil etc.), these are ALL
taxable benefits.
2.15 Directors fees S6(1)(c)
- fees received for conducting work as an officer
of the Co, taxable under this section
 D Holds an office, so directors fees are taxable as
income from an office (if immediately turned over
to a 3rd party, taxable by the third party)
2.13 Signing Bonus
S. 6(3) ~ one of worst drafted S’s of ITA – “an
amount paid to an employee on account of a contractually
agree settlement (signing bonus) is taxable as income
regardless of whether the employers makes the payment
pursuant to a legal agreement entered into before,
during, or immediately after employment”
- policy: before this section it was common for
people to accept huge signing bonuses
- extends taxable remuneration – elongates the
manner in which employment income is to be taxed, because
it taxes stuff before and after
53
 Inducement payment to sign (Sundin)
 non-employee (not being paid salary wages or other
remuneration; not enjoying benefit by virtue of
employment)
 If it was salary employee would have paid tax on
income.
 6(3)(a) “Amount received, A from B, while A was
officer/in employment.. X
 Court finds child should be taxed on money as a
prize
 Prize (contest, for going to university) – tax
child!
 3(b)“Amount paid, arising out of agreement made,
whenever.. for employment” Y
Re: 56(3), scholarship exemption - scholarships are
included in taxable income, then ALL deducted.
- shall be “deemed” to be (makes it something that
it otherwise was not)
 Argument: But for employment relationship, child
wouldn’t get prize. Would have been income, and
should not be included as a prize ~ rather
employment income.
 remuneration, for the purpose of S5.
 “unless established… it cannot reasonably be
regarded as having been received as”:
- Taxable if in c, d or e (elongates the manner in
which employment income is to be taxed, before and after
employment K exists)
- (c) consideration for accepting $ to enter into
K, singing bonus,  taxable; Remuneration to enter K of
employment
- (d) as remuneration or partial remuneration for
services as an officer or under the contract of
employment, or
- (e) Instead of payment to join the team, amount
paid after leaving not to join another team (to noncompete)
2.12**Prizes
S 56(1)(n): generally, scholarships, fellowships,
bursaires, and prizes for achievement are included in
taxable income (to the extent that the amount received in
the year exceeds $3000_
2.11 Payment in lieu of reasonable notice
Wrongful dismissal and retiring allowance
- Taxable as employment income?
 Not paid by virtue of office and employment, so not
employment income (legal relationship) - Paid
because you lost employment, not because you have
it
 Economic point of view - $ for working, or not
working, should be treated the same (historically
these were not taxed, or only taxed in part)
- 56(1)(a) Any amount.. (retiring allowance) is
taxable as other inome
 S56, doesn’t deal with income from office or
employment – but from other sources.
 Eg Employer gives tuition for employer’s student Who should be taxed?
 Dismissals are treated as retiring allowance
- S248 “a retiring allowance?”
 Amount received, on or after retirement of tax
payer, or in compensation for loss of an office or
employment
 Nexus? – work related and business related prized
do not qualify for this exemption (Benefit)
- Wrongful dismissal?
 back in the 1970s, these damages were not taxable
54
 Really a payment in lieu of notice of termination
(breach of K, resulting in lost income)
> Strike pay
C.B. 260
 agency exempts certain types of financial assistance paid
by unions to their members during a strike
 SCC held that strike pay not taxable as income
 however, union dues are deductible as expenses from
employment income
2.9 Advances
 ITA has rates for charging interest
Regulation 4300, prescribed rate, fluctuates every
3 months
 P. xxxi, first column, every 3 months, rate
 To avoid tax for employee – fluctuate with CRA
prescribed rate
 To avoid tax – lend per CRA rate
 BUT -- effective after-tax cost of a low-cost load
is considerably lower than the cost of commercial
loans
advance: payment on account of future salary or wages
 advances against salary taxable in the year in which the
employee receives the advance
2.10 Loan: a debt with provision for repayment
within some reasonable time
 capital transfer, so not income
- S6(15) Forgiveness of loan = taxable
 Must include principal amount of the loan in income
at the time the employer forgives the loan
 impute interest benefit is then NOT included in
income in the year that the employer forgives the
loan (80.4(3)(b))
 S 6 (9), Interest on employee debt - Where the
loan is deemed to be a benefit, is taxable (difference b/w what
 Income – value or benefit, perceived or enjoyed by
employee
2.10 TQ**Stock Options
**(calculate stock option under S7, and 7.1 –
understand difference b/w two, and when benefit is
recognized in each case)
 loan with no interest, benefit of less than prime,
and no security given (would normally command a
higher interest rate)
- S 6(1)(a) could tax granting of shares to
employees, but due to issues of valuations – S7 was
brought in:
FI would charge)
S 80.4 (1.1) – Loan is a benefit where but for the
employment, the loan would not have been made to the
employee.
S7 Benefit:
 Give cheap shares, where they don’t have cash to
pay employees
80.1(1)– Benefit is taxable, equal to interest
imputed on the loan, determined Quarterly (every 3
months).
 benefit is recognized when shares are acquired at a
prices less than their value

Measure benefit on the loan – as the difference
b/w CRA’s prescribed rate, and the rate being
charged by the employer
 Substitute for salary (shares worth 100)
 No difference from an economic point of view
 If shares given worth 100, then taxable on $100 as
a benefit
55
Problems:
 Would want cash- because then could pay tax
associated
 Brought in to encourage Canadian control
 Benefit that would otherwise arise under S7, is
postponed until stock is sold.
 Could sell share publicly traded, market for
shares; but if in a private company with no
publicly accessible market
 "the taxation year in which the employee disposed
of or exchanged the securities”
 If shares go down in value a week later to 0 –
still taxed (“phantom income”).. might then argue
shares were worthless when you got them.
 So then have cash to pay for tax associated with
benefit
 (1.3) Order of disposition of securities
S. 7(5): an employee is taxable on stock option
benefits only if derives the benefits by virtue of
employment
 Valuation still arising from time shares were
acquired (Co. may have been worthless, or may have
been equal to fair market value)
o Private value.. may require calculating when sold
(eg, for $9 = $900 benefit), but should be valued
at time acquired.
S. 7(1)(a): Securities are sold/issued to an
employee who receives a benefit equal to:
 Eg. $6 x 100 = $600 benefit, if got shares for free
(public value)
 the value of the securities at the time the
employee acquired them -- exceeds the amount
paid/worth
7(1.1)??where’s this? the taxable benefit acquired from
a Private Corps’s stock plan in an arm’s length transaction is
 benefit = cost of the option to the employee (any
amount paid for the shares) (minus) the value of
the shares at the time they are acquired from the
plan.
– delays the point of income recognition and defers the tax
 value = fair market value
- S7(1)(a)Timing – “is deemed to have been
received, in the taxation year in which the employee
acquired the securities, by the employee because of the
employee’s employment”;
 Value of the benefit is determined when the shares
are acquired or the option exercised, and the
benefit is taxed the year you received the shares
- S 7(1.1) – for Canadian controlled private
corporation (not listed on stock exchanges, and
controlled primarily by Canadians)
reduced if the taxpayer holds the shares for at least two years
 the longer the employee holds onto the shares, the
greater the value of the tax deferral
 when the employee disposes of the shares, he is taxable
only on ½ of the value of the benefit derived,
transferring half of the benefit into exempt income
 if the employee disposes of his shares in CCPC within two
years from date of acquisition, then usually taxable on
the FULL value of any benefit derived in the year that
the employee disposes of the shares
E.g. of exam question: In 2000, someone gets 100 shares
worth $6, and in 2008, sells 100 shares now worth $9. What are
the tax consequences in 2000? What are the tax consequences in
the year 2008?
 Answer:
56
 $600 is the benefit
 Is it public or private?
o if public, taxed in 2000
o if private, taxed in 2008 when it’s sold
3. Employment Income Deductions
S8(2)  If deductions not this section, can’t deduct limits the deduction of expenses form employment income
to those that the ITA
s. 67: further, even authorized expenses may not be
deductible for tax purposes if they are unreasonable in
the circumstances - this is a question of fact
 Can’t deduct very much (hence preference for
business income)
S8(1): In computing a taxpayer’s income for a
taxation year from an office or employment, there may be
deducted such of the following amounts as are wholly
applicable to that source or such part of the following
amounts as may reasonably be regarded as applicable
thereto:

(1)(b) Lawyer fees in collecting or establishing
right to salary or wages
 (c) generates tons of case law – clergy residence
o Whose clergy?
 (h) Travel expenses for sales
 (g) travel for transport
 (i) dues and expenses of performing duties –
amounts paid for annual professional membership and
trade union dues (necessary to maintain status
recognized by statute)  people often try to deduct
o Law society fees
o *Still want employer to pay – even if it’s
deductible for you!
 (i) dues and expenses during performance of office
duties
o trade union, professions
o Assistants, supplies consumed directly
 (j) car expenses
 (m) pension plan contributions
 (p)/(q)/(r) - musician, artist, apprentice mechanic
4. Taxation of non-residents
2(3)(a) non-residents are taxable in Canada only on
their Canadian-source income
 Taxable to the extent that you earn employment
income derived from employment carried on in Canada
 an individual is considered EMPLOYED in Canada if
he or she performs the duties of an office or
employment in Canada, whether or not individual’s
employer reside in Canada
 Drive from Wa to Vancouver every day – subject to
taxation in both places (non-residents subject to
tax for employment income as well)
 subject to tax by US and Canada? look at treaty
 Article 14 gives some relief, but not full relief
5. Misc. Income and Deductions
 **not examinable** Support Payments, (RRSPs), Child
Care, and Moving Expenses
 *Scholarships and Prizes
o (ITA paragraph 56(1)(n))
C.B. 530
 Retiring Allowance
o (ITA paragraph 56(1)(a)(i) and 60(j.1))
C.B. 530
***EQ?: how do we deal with food he’s buying for makeup
class?***
 for the food to be deductible
57
 want to claim your status was IC if relating to his
working only at the university
o because if employee
 what does he do for a living when not here? tax lawyer
o carries on business as a partner in a law practice
o part of that is to deal with advertising and
reputation
 always ask: why is person incurring these expenses?
o if trying to earn for business or property, the range
of possible deductions is greater
 could be a gift too, so not deducting it at all
 or firm is paying for it so not deducting it
XI. Capital Gains – 3(b)
1.1 Structure
3(b) - Taxable capital gains – allowable capital
losses (Included in income)
 Determine taxable capital gains, and allowable
taxable losses
 Arise on the disposition of certain typed of
property
 Receipts determined under rules of S38-55
 “taxable” and “allowable” are important – indicate
that a portion of the capital gain is taxable and a
portion is deductible
Paragraph 3(b)
- we bring capital gains into income according to
paragraph 3(b), which includes:
 NET taxable capital gains from dispositions of property
other than listed personal property (LPP)
 taxable NET gains from dispositions of LLP
 net = the excess of gains over losses
 Only include ½ of gains in income and only deduct 1/2 for
capital losses
- capital losses may be subtracted only from capital
gains
 can’t use excess of capital losses over capital gains to
reduce income from other sources
 may apply business investment losses against “ordinary”
income
1.2 Inclusion Rates
S 38 – How much Capital Gain is taxable? One half
of CG = taxable
 How much allowable as a Capital loss, for
deduction? One half
58
 Capital losses are ONLY taxable against capital
gains.
 *taxable gains aren’t fully taxable
 *taxable losses aren’t fully deductible
Taxed preferentially (only 1/2 included in income)
- why?
 appreciation of capital isn’t necessarily income
 form of mitigating the effect of progressive rates
on “bunched income” (i.e., sell after 5 years, make
huge gain that didn’t necessarily just happen that
year)
 reduces deterring effect of the “locking-in” from
switching investments: makes it less costly for
investors to switch investments when economic
interest dictates to do so
1.3 Difference between capital gains/allowable
losses and Business income/loses
 = Huge amount; Sale of capital property, OR
Business (inventory)  gives rise to different
taxation and offsets
 Taxable capital gains/allowable capital losses only
applicable to the extent of half of their values
 Business loses can offset income from any source;
S3(d)  permits deductibility of losses in the
preceding 3 paragraphs.
 Capital losses, can only offset capital gains
(3(b), can only offset 3 (b))
 Certain taxpayers can claim a complete exemption
from tax for certain capital gains
 Sale of capital property (1/2) or sale which gives
rise to a business income/los (fully)
- look at intention of time of acquisition to
determine if gain or loss is fully taxable, or party
taxable, as CG or COB***EQ!! Heavily litigated
> Would one rather a *capital gain, over business
Income.
 CG, because only have to pay tax on one half
 Preferential item in the ITA (as are gifts,
windfalls, scholarships and certain taxable
benefits; are actually better, because no taxes)
 what is better than a capital gain?
o getting a gift
o a windfall, such as lottery
o scholarships
o benefits
 Section 81(1)- receipts which aren’t taxable
> Business loss preferred over Capital loss
 1) Business losses are fully deductible (CL, only ½
can be deducted)
 2) and Business loss can offset income from any
source
 Though Tax payer doesn’t want losses of any kind.
Eg. Would a Share loss be business or Capital?
 $10 shares, go down to $1 = loss of $9
 Jurisprudence: What was the state of mind at the
time of acquisition from a tax payer – what was
their intention for property at the time of buying?
 Look at objective criteria because Court is
concerned about the self-interest of a tax payer –
and that they would argue a business loss,
regardless.
 So, to determine intention at time the property was
acquired:
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o Nature of the property acquired (Shares)
o Does the property have the capacity to produce
income (Y – Dividend income) .. neutral
o Period of time the property was held (holding
period, when were shares sold, and bought) –
quick sale may indicate just wanted to get rid of
shares
o Frequency of transactions (frequent transaction
may point to ventures in the nature of trading)
o Reasons for the sale? Forced sale, where needed
money (wasn’t intention to sell, when it was
purchased… subsequent events required on to do
so)
o Operating motivations?
o How did you finance the acquisition of the
property (money on hand, or from a financial
institution)
 People borrow money to make money, because
loan needs to be repaid. (creates an
expectation of sale,  for business)
 Having to sell at first available
opportunity
o Experience and character of the taxpayer –
vocation?
 Stock Broker? Expertise? Financial Analyst?
 > Business motive inferred with property
transfer closely related to one’s vocation.
o no one factor is determinative
 EXAM: may ask: what facts do you need to know to give
advice?
 EXAM: may say: you’re acting on behalf of the Crown to
charge this guy who is saying it’s an income loss – argue
2. Capital Property C.B. 444-447 (not from class)
2.1 Specific exclusions -- 39(1)(a)
 exclusions of special types of property –
dispositions of which DO NOT give rise to capital
gains/losses:
o if disposition gives rise to income from
business, property, or adventure in the nature of
trade
o eligible capital property
o cultural property (do give rise to losses, only
one of this list)
o Can, foreign resource properties, which include
mineral, oil, and gas rights
o insurance policies
o timber resource properties
o interest of beneficiary under qualifying
environmental trust
generally, a capital gain or loss arises from the
disposition of an investment acquired for the
purposes of producing income, rather than as a
trading asset
2.2 Types of capital property
 personal-use property
 listed personal property
 business investment property
 other capital properties
- you calculated the gain or loss of each of these
subcats. of capital property separately, according to
rules applicable to each
- definitions are in s. 54 (definitions section for
capital gains and losses)
it’s a capital loss
2.3 Deemed capital property (shares)
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 s. 54.2 rule that, when person disposes all or
substantially all of the assets used in an active
business to a corporation, any SHARES he/she receives in
consideration for the assets are capital property, thus
their disposition results in capital gains/losses
o as long as taxpayers disposes of “all or substantially
all” of the assets of the business AND
o the business is an “active” business
3. Capital Loss/Gain Computation
S 40 – Formula for calculation, CG from the
disposition of property is the difference between the
“proceeds of disposition” (POD) taxpayer receives from
the property and then sum of (its “adjusted cost base”
(ACB) and the expenses of the disposition)
**CG = Proceeds of Disposition – (Adjusted Cost
Base + Expenses of Disposition)**
 POD – how much you sell it for (e.g., 10)
 ACB – how much you bought it for (e.g., 5)
 Expenses of disposition - To account for the
expenses of sale
o e.g., paying a real estate agent, stockbroker
 CG = What profit you get for the property
(accounting for what it cost you. and for expenses
of Sale)
 $10 (sale) – [$5 (cost)+ $1 Real Estate Agent
expense]
 CL = (ABC + EoD) – Proceeds
o [$5cost + $6 Agent fee] - $10 Sale
**Capital loss = (ACB + expenses) – POD***
- Remember: TAXABLE capital gain/loss are half
 gain/loss X inclusion rate ~ (1/2)
“Selling expenses”
 can deduct expenses incurred in disposing of
capital property, in calculating a capital gain or
loss
 but only those in connection with the disposition
of capital property
 not those pertaining to earning income from capital
property for calculating capital gain or loss
o i.e. expenses incurred to enhance capital
property to saleable condition or connected
directly with the disposition are also deductible
from the proceeds of disposition
4. Proceeds of Disposition – ITA
- Disposition of capital property - is generally
taxable event giving rise to a capital gain or loss
- “Property” (ITA s. 248)
 ITA defines property to include real and personal
property, shares, choses in action – virtually everything
a person could have
- “Disposition of property” (S248) “Includes”:
 (a) Any transaction or event entitling a taxpayer
to proceeds of disposition of property, including
proceeds from: (eg. compensation from sale,
expropriation, lost, destroyed, injuriously
affected etc.)
 a disposition is any event that is an alienation of
property or a loss of ownership
o may be voluntary or involuntary action on owner’s
part
 Courts have said that a disposition can arise when
transfer of possession, ownership, risk, and
enjoyment of property
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o but the ITA doesn’t just deal with dispositions
within S248, there are other sections.
-“Proceeds of Disposition” “Includes” (S 54):
 The sale price of property that has been sold (must
be a SALE)
o Sale – Change of ownership (property – title,
possession, use, bearing of risk, timing),
consideration passes between parties (K).. Tax
result follows commercial law. !Important to
understand the legal relationship b/w parties!
 “Anytime you receive compensation for property you
willfully give up, or was taken from you
(insurance)”.. goes beyond sale price
 fixing up expenses, finder’s fee, sales
 So - don’t have the money associated with the
“deemed” disposition, to pay the taxes associated.
B) S70(5)(a)– Related to death; deemed to have
disposed of capital property, at fair market value,
immediately prior to death.
 when you die, you’re treated as though you have
sold your property immediately prior to your death,
for what it’s worth.
 i.e., what an arm’s length person would pay you for
your property
 Depreciable capital property
o Act deems taxpayer to dispose of depreciable property
at its fair market value the full amount of any gain
commissions, brokers’ fees, transfer taxes, title
accrued on depreciable property is included in the
reg fees, legal expenses
proceeds of disposition
o s. 70(5)(b): a beneficiary who inherits property is
4.1 Deemed Disposition
deemed to acquire the property at an amount equal to
- Other parts of the ITA deems certain transactions
and events to be dispositions of property
the deceased’s (deemed) proceeds of disposition (fair
market value)
o s. 70(5)(c): special rule if deceased’s capital cost
A) S 128.1(4) “Departure Tax” – Emigration from
Canada; ITA deems taxpayer to have disposed of capital
property at fair market value immediately before giving
up residency.
 Residency affects this - where Canadian ties are
cut (economic, social etc.); A person’s nexus to a
location determines residency (see above)
s. 128.1(4)(b): deemed disposition may give rise to
a capital gain, resulting in a “departure tax” on the
taxpayer
 if you sell something, people pay you cash, but
when you’re “deemed” to dispose of something, you
get paid nothing
exceeds the beneficiary’s deemed acquisition cost, for
the purposes of CCA and recapture ONLY, beneficiary
assumed deceased’s original cost and any difference
between them is deemed to have been claimed as CCA by
beneficiary
 Other capital property
o s. 70(5)(a): capital properties other than depreciable
capital properties are also deemed to be disposed of
immediately before death for proceeds equal to the FMV
of the property
C) Gifts
S.69(1)(b)(ii) – Whenever one disposes of property
by way of gift, inter vivos – deemed disposition at fair
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market value & (c) deemed to acquire to acquire at POD
(where no change in beneficial owner?)
 Act recognizes capital gains and losses WHEN THEY
ARE RELIZED (i.e., when disposed of)
 form of disposition - Change of ownership,
possession, risk and use
 What if payment is delayed – won’t pay for 5 years
(always better to get money asap *Want security!)
 Legal elements of a gift, parallel the above
 Inter Vivos or Inheritance – family
member/stranger/friend = no distinction.
 When $1 is put on tax return – triggers obligation
to pay tax (commercial problem - have no cash)
 Voluntary transfer of property, willingly accepted
by the donee, who pays no consideration to the
donor
- Inadequate consideration – tax consequences?
 POD = Fair market Value (Generally = COST), for
gifts in Gains and Losses formula – deemed to have
received fair market value
 *May be tax consequence where property has
appreciated in value
 Person who gets the gift – tax free
 person who gives - is deemed to have received POD =
FMV
 Commercial problem – no money to pay tax associated
with deemed gain
o maybe have to sell the property they got as
inheritance
o some people buy insurance to fund the tax
liability on death
(Computation of CG/Loss)
5. Reserves – where don’t receive full payment
- Deferred payment – may have tax liability that
arises, w/o ability to fund this payment
 Sell for $5, cost $3 = CG $2, Taxable on $1
(HALF!!)
 Purchaser must pay Vendor $5 = their cost
- Act is merciful to a degree 40(1)(a)(iii) –
permits you to exclude a portion of the gain, to the
extent you haven’t gotten paid (“your reserve”), from
your CG calculation
 IF you do not get paid POD in full, doesn’t matter
for purposes of calculating CG< because you must
include at least 1/5th of the CG that you realized,
in your income calculation. ()
 Must include 1/5th of $2 in income
  Need to get cash to fund your tax liability at
minimum
 Reserves – Reserve out/eliminate, a portion of your
capital gain, to the extent you haven’t been paid
in full.
o By year five, will have to pay taxes in full
 Amounts “not payable” – may only claim reserve on
portion of sale proceeds that are “not payable” to
the taxpayer until after the end of the year whether or not actually paid or collected
(b) Subsequent years
 you can claim a further reserve in each of the
following years to the extent that part of the
proceeds of sale remain outstanding at the ends of
the year
 can’t claim more in following years than did in
preceding year (so if didn’t go to maximum before,
can’t claim larger reserve re: same property in the
next year
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(c) Limitation Period (as per above)
 s. 40(1)(a)(iii): the actual amount a taxpayer can claim
for a reserve is limited to the lesser of a reasonable
amount OR an amount determined by reference to a formula
o “A reasonable reserve” - CRA
considers a reserve
to be reasonable if it’s proportional to the amount
that is not payable to the taxpayer until after the
end of the taxation year
o Formula: amount of CG not payable / total proceeds
 Maximum reserve limitation
o Restricts period during which a taxpayer may claim a
reserve, to max. 5 years,  NOT less than 20% of the
total gain per year.
 Special reserves
o S.40(1.1): extends the max 5 year allowance reserve
period to 10 years, in the event that the property the
taxpayer transfers is:
 land and depreciable property in family farm
 share in family farm corp
 interest in family farm corp
 share in small business corp
 transfers property to taxpayer’s child (S.252(1))
5. Adjusted Cost Base: (ITA ss. 53(1), 53(2))
477
C.B. 474-
S.54 – Adjusted Cost Base – (a) For Depreciable
property (can claim Capital Cost allowance), it’s the
Capital cost of the property, as of that time
 b) in any other case, the cost to the taxpayer of
the property adjusted, as of that time, in
accordance with s53
 “Cost” – is what you give up to get something
(property) ~ according to commercial usage of the
word, not ITA def’n
o including incidental acquisition costs such as
brokerage, legal, accounting, engineering, and
valuation fees
o interest expense is NOT part of the cost of the
asset
o Or What ITA says it is in another S
o As Adjusted under S53
S.53 – Adjusts costs upwards or downwards (**not
tested)
 Why adjust? There to prevent double taxation, or to
ensure you are taxed at a later time under the ITA
 Eg. Adjusted Cost base of Gifts S.69(1)(c)
 What if person sells or disposes of property – but
had no cost
o If no consideration passes b/w parties, 0 cost to
the donee
o In order to create symmetry, Cost to the person
receiving the gift is fair market value, for tax
purposes
 *Tax payer wants a high cost! Because will
eventually be a disposition of the property, and
will have to be pay tax on CG.
 *Deemed to dispose of Property at fair market
value, and Inheritor is deemed to receive value at
fair market value (adjusted cost base)
Disposition upon death
worry as to how to fund tax liability arising
(loans, sell property, insurance etc.)
6. Part Dispositions
(ITA s. 43)
C.B. 480-481 (no
class notes)
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 where taxpayer disposes of only a part of a capital
property, one calculates the ACB of that part by taking a
“reasonable” proportion of the cost base of the part to
the whole
 the ACB of the part of the property that was disposed of
is then deducted from the ACB of the whole property (S
53(2)(d))
 s. 43: balance becomes the cost base of the remaining
part
 exception when the property qualifies as LPP or is a POP
debt referred to in s. 50(2)
10. Principal Residence – exempt from formula
S40(2)(b) generally, Canadian resident is NOT
taxable on a capital gain from his/her own principle
residence
 Exempt Capital gains derived on the sale of a
principal residents
 *Formula – So long as a property has been your
principle residence, do not have to pay tax
 “Principle Residence”
unit, etc…
S54 – Property, housing
 Must be:
o housing unit, leasehold interest in housing unit,
or share in coop housing corp
o owned by the taxpayer (solely or jointly)
o occupied by the taxpayer during the year
o ordinarily inhabited at some time during the year
by the taxpayer, spouse, former spouse, common
law partner, former CL partner, or child
o designated by taxpayer or spouse as sole
principal residence for the year
b) Included Land:
For purposes of this def’n, (e) includes, the land
subjacent to the housing unit, immediately contiguous
land – contributing to use and enjoyment of housing unit
as a residence
 Sub = land underneathor jut below
 Contiguous = around; touching
 *Limited to half a hector – unless you needed the
excess for the use and enjoyment of the housing
o automatically doesn’t qualify, but onus is on TP
for showing use an enjoyment)
o eg. Is there only one way to get to the house?
o If there are government (any level) restrictions
on cutting the property into smaller sizes
(severance or subdivision) – then by very nature
must be for the use and enjoyment of the house
 Policy – tax expenditure, gives to those with
property (as opposed to a budget expenditure).
Drives people to buy houses instead of renting
(neutrality problem). Likely property owners who
are voting (Unfair policy arguments) – rewards
those who unduly invest in their homes.
 Litigated a lot as income v. capital – build
houses, live in it, sell it etc… becomes an issue
of credibility as to ordinarily inhabit v. selling
at first available opportunity (3 transactions
looking the same, looks like a trader in real
estate)
 Exempt gains - the exempt portion of a capital gain,
determined by
o ((1 + number of taxation years after acquisition while
principal residence) / number of taxation years ending
after acquisition date during which TP owned the
property)) X capital gain realized
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o e.g., ((1 + 6)/7) x $150,000 (capital gain otherwise
determined)
o so subtract this formula from the capital gain
otherwise determined = no capital gain
o eligible if property was principal residence at any
time in the year
 Limits on exemptions
o Two exempt residences
o Extended family unit
o
o assets acquired for two purposes: personal
consumption and investment value
 Gains from LPP are taxable (and offset by losses)
o Section 46(1) - if actual cost and actual
proceeds of disposition of a personal-use
property are under $1000, the transaction does
not give rise to any capital gain or loss
o no gains on sale of property that is less than
$1000 dollars - gains deemed to be zero
“Ordinarily inhabited”
7. Personal-use Property C.B. 481-485
 Common feature in person-use property is that it
depreciates (goes down in value)
 S54 definition: property owned by a taxpayer that
is used primarily for personal use or enjoyment of
the taxpayer, a person related to the TP, or if TP
is trust, beneficiary and related under the trust
o basically, stuff you own (books, skis, anything)
 Generally depreciate quickly in value (no profit!)
 Proceeds not usually greater than cost ~ can’t
claim capital loss – loss is deemed to be 0, so
can’t deduct consumption, value depreciating,
expenditures
 Can’t deduct capital loses – 40(2)(g)
8. Listed personal property
 a special category of personal-use property that
does not depreciate but goes up in value
 Section 54 definition: subset of personal-sue
property that is specifically listed in the Act,
including prints, etching drawings, paintings,
sculptures, and other art; jewellery; rare folios,
manuscripts, books; stamps; coins
11. Losses Deemed to be Nil
C.B. 488-492
(ITA s. 40(2))
 Some capital losses can’t be deducted
 Generally to prevent TP from creating or
accelerating “artificial” capital loss by
structuring transactions within a group of related
economic entities
a) Listed personal property
 40(2)(g) Losses derived from disposition of
personal use property, can’t be deducted – deemed
to be 0
o it was bought for personal use/enjoyment, and not
to gain or produce income, so it’s personal-use
property – you can’t claim loss
o Eg. Steal my book – stolen, with no compensation;
loss is deemed to be 0; if do get insurance,
provided compensation is only $999… no deemed
gain.
B) Listed personal property – special rule for
losses
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 S 41 – When a taxpayer loses money on a disposition
– can use losses of LPP to offset gains from this
category (LPP only)
 Losses from LPP are deductible only against gains
from LPP
 One thousand dollar rules – S 41 – When you sell
PUP, that costs less than 1,000 – has automatic
cost of 1,000 (+)
 Where proceeds of less than 1,000, deemed to
receive proceeds of 1,000  Eliminates book keeping
required, for item sold less than 1,000.
  FORMULA; (POD, 1,000) – (Cost 1,000); even if
costs $100, and make $200 – both deemed to be 1,000
o Computational rules (no class notes)
o Identical Properties (ITA s. 47) C.B. 485-488
(no class notes)
c) Lotteries
 s. 40(2)(f): a TP who doesn’t win the lottery
cannot claim a capital loss in respect of the cost
of the ticket (or gain)
 all losses incurred on lottery tickets are deems to
be nil
d) Superficial losses
 Section 40(g)(i) individuals can’t claim superficial
losses
 section 54: “superficial loss”: arises when an
individual, or certain affiliated parties, disposes of
property and replaces it with “substituted property”
within a period of 61 days
 s. 53(1)(f): can increase the cost base of the
“substituted property” by the amount of his/her
superficial loss, so that when the TP disposes of the
“substituted property”,
can reduce capital gain on the
property
o alternatively, can increase the actual loss by the
amount of the superficial loss
e) Charity, gifts
 if you give away your stuff to a charity, what are the
tax consequences?
 even when you give something away you have proceeds of
disposition
 s. 40(2)(g)(iii):
o losses arising from the disposition of personal-use
property are deemed to be nil
10. Capital Loses
s. 3(b): capital losses can only be used to offset
capital gains
unused capital losses MAY be carried forward
indefinitely and applied against capital gains in future
years
LLP & Current year losses
 1. capital gains and losses from Listed personal
property are calculated separately from capital
gains and losses on all other types of capital
properties
 2. TP then includes in taxable net gains from
dispositions of LPP for the year, with capital
gains
 3. Losses from dispositions of LPP are deductible
only to the extent of gains for the same year from
dispositions of LPP
o in other words, if LPP losses > LPP gains, the
excess cannot be deducted in computing TP’s
income for that year, even if other net taxable
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gains from dispositions of other types of capital
property
 4. TP may also deduct allowable capital losses (net
of allowable business investment losses) from
dispositions of property for the year - to the
extent of the TP’s taxable capital gains from
dispositions of property - and taxable net gains
from dispositions of LPP
o i.e., works the other way around – can deduct
other losses from LPP gains, but not LPP losses
from other capital gains
Allowable business investment losses (ABIL) (ITA
paragraph 39(1)(c))
 S39(1)(c): a business investment loss: special type of
capital loss that receives preferential treatment for
income tax purposes
 arise on the disposition of shares or debt of a “small
business corporation” which qualified as such within the
preceding 12 months
 disposition of shares triggered by actual or through
deemed dispositions
 s. 38(c): ABIL is 50% of a business investment loss
 ABILs may be deducted against income from ANY SOURCE
“Small business corporation” (no class notes)
 a CCPC that uses substantially all (as measured by fair
market value) of its assets in an active business in
Canada
 a corporation may also qualify as a SBC is all or
substantially all of it assets are invested in shares of
another SBC with which it is connected
o Deemed disposition (no class notes)
12. Transitional Rules
- Prior to 1972 – Taxable gains were not taxable
- 1971 Rules – people were worried about capital
which had increased in value up until this time
- So rule said gain insured until 1971 was tax-free
(Policy – to prevent people from all selling shares off)
- Date of valuation in 1972 (V-day) – FMV of
property as of Dec 21,1971, except publicly traded shares
(Dec 22 – allowed 5 days for trade to finalize)
 Look at comparable evidence (similar properties);
some tax payer deliberate sold properties
 Want property value to be HIGH on this day!  lots
of litigation
** Q with selling property acquired before 1972 –
take gain between acquisition and disposition with
respect to if there’s a V-day (then is the ‘date of
acquisition’, and  adjusted cost base)
  Vday Value = Adjusted Cost Base
13. Stock Options as Capital Gains AND employment benefit
 53(1)(J) ACB of CG as a benefit
 How capital gains rules tie into stock options
 $1 Purchase Price - $10 Value ~ Better off by $9,
which is ordinarily the capital gain
 Double taxes - $9 Capital gain, half taxable; on
top of $9 taxable benefit (income)
 Adjusted Cost Benefit = $10 (So Capital Gain is
anything on top of $10… IF Sell for $12, CG of $2)
 If not an employee – share bought in open market;
These rules don’t apply (Pay price – Sale Price =
Capital Gain)
 **When calculating income, remember HALF of capital
gain comes into income.
14. Rollover**
68
 With a disposition of property; recipient is deemed
to have a cost at FMV – but at non-arms length,
property effectively hasn’t changed as a socialunit, not fair to hit Taxpayer with an extra charge
  POD are = to Adjusted cost base (price paid, not
FMV)
  There’s a Deferral of income tax (i.e. Rollover)
- The tax effect of the transaction on the transferor is
deferred and assumed by the transferee.
 X Gifts to Y (Spouse/CL Partner)
o S248 – “CL Partner” p.1923 - Sex doesn’t matter;
1 year live together or if have children together
o S252 – “Spouse” – Party to a voidable marriage
(On top of dictionary definition)
o Rules upon death and on life, between these
partners
 Eg. ACB = 1, Fair Market Value = 10
 73(1)*Important – people transfer tax w/o any
regard for the ITA
o Where any particular capital property of an
individual, and both Individual and transferee
are residence in Canada.. property is deemed to
have been disposed of… for proceeds = to
AdjustedCostBase, and acquired by receivee at
this price.
o Deemed Proceeds of disposition Cost = 1
o No gain for transforor; FMV = Cost of 1 and FMV =
ACB
 70(6) On Death – deemed to transfer property at MFV
15. Taxation of Non-residents and Capital Gains
2(3)(c) – Non-residents only taxable on… and gains
derived from the disposition of taxable Canadian property
 S248 – “Taxable Canadian Property” – Sales of
Canadian real estate, and public/private shares.
 Foreigner measures Capital gains by standard
formula, and must file Canadian tax return
S 116 (**negligence not to know about this S) –
When a non-resident of Canada disposes of taxable
Canadian property – resident must give notice to CRA or
Sale, or intention to sell
 S116 (5) – Purchaser is liable for Vendor
(transaction with non-resident)
 Vendor must obtain a clearance certificate, showing
all tax has been paid on the gain ~ otherwise
purchaser is liable to pay tax
 25% of purchase price (even if no taxable gain
received by seller, thus otherwise warranting 0
tax)  Done to police the dispositions of property
by none-residents
o Seller has a commercial imperative to get $
o Purchaser uses stick to ensure notice has been
filed by Seller - won’t pay unless satisfied
person is a non-resident, or clearance
certificate is received.’
o Not liable where satisfied vendor is a nonresident; Purchaser should get affidavit or such
to show this.
 Other way around – Non-resident buyer required to
get CC from Canadian owner?
Tax Treaty, Article 13
 s2(3)a/b/c/ - Must file Canadian tax return
 *Taxable gains may be exempt from Canadian Tax.
Liberal article, exempts non-Canadian residents,
when selling shares of Canadian private company.
 …
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Admin of the ITA, CRA powers, tax returns etc.
XXI. ADMINISTRATION AND ENFORCEMENT OF THE ITA
How the tax system enforces ITA and regulates
people
1. Who are the Players?
 Role of the provinces and its tax officials
 Tax collection on behalf of certain provinces by
CRA (agreeing/non-agreeing provinces)
 agreements with provinces let CRA
administer/enforce all provincial ITAs
2. Federal officials of CRA – Enforces and
administers Canadian ITA (Quebec and somewhat Ab w/ corps
IT = non agreeing provs), administer Agreeing Provincial
ITA as well.
 Self-assessment system, whereby you have the first
opportunity to figure out your taxes, and this is
regulated by auditors
 Looks at tax returns to see if they’ve been
correctly completed
 CRA needs information from people to administer ITA
o This right to info must be properly provided, and
remedies exists to ensure it is acquired properly
- Trying to collect taxes from delinquent taxes 
- Verification of forms and returns and make
assessments, reassessments and determinations C.B. 910,
915-921
- Gathering of information and enforcement of ITA
obligations 
- Assistance with compliance
- CRA will refund taxes and other amounts already
paid, or over-paid (with interest, penalties)
 when you under pay your taxes, you may be charged
interest on outstanding amounts and may be punished
or penalized for failing to pay on time
3. Responsibility of Tax Payers S150
3.1 Filing returns and calculation of tax (ITA
s. 150) C.B. 905-909, 915, S.M. (Kroft)
 s. 150(1)(d): an individual must file an income tax
return in respect of a taxation year if the
individuals is taxable in the year
 Return of income with prescribed information shall
be filed with the Minister
o Subject to S 1.1 – Obligation, without being
prompted, to have a return filed (can be filed on
your behalf)
 (1)(d) – When? By April 30 of the following year,
for individuals (of calendar year)
o But when carrying on business (Sole practitioner
lawyers) – have until June 15th
o Corps (w/i 6 months after end of Taxation year –
S 249)
 need not be at coincidence with a calendar
year – because corps have different cycles
of income
 (eg. ski business) – Many Dec 31, or July 31
Not Required to file 150(1.1) – Does not apply to:
 .. if corporation was a registered charity
throughout the year,
 or if an individual (doesn’t have to file a tax
return! UNLESS):
o .. unless taxes payable under this part of the
year
70
o Otherwise individuals file because they want
refund – overpaid
 Generally good idea for individual to file annual
tax returns regardless of whether they believe they
will have tax payable. Merits of filing and notfiling:
o tax refunds
o get the limitation period for reassessment
o may be subject to penalties if individual was
liable for tax
 Corps file regardless of whether they owe taxes
3.2 Payment of Tax
actually go and pay tax
- after filing, individual must
 S151 – all those required to file a return shall
 Estimate the taxes payable – must then actually go
and pay tax (April 30)
o Eg. Employment tax per tables in Regs 100-110
(government rigs tables)
 Policy: Enforcement; they get to use your money;
cashflow.
3.4 Installment Payments S 156
 156(1) Employees, COB and Investors – must pay
installments through-out the year – Every 3 months
in accordance with tax liability
o payable on the 15th of March, June, Sept, & Dec
in each taxation year
o 25% of tax payable for the year, or taxpayer’s
“installment base” for preceding year (the tax
they paid for the preceding year)
 One reason for preference of being one of these 3
(every 3 months, rather than every pay period) –
Have more access to use of own money
 Take into account installments at the end of the
year
3.3 Withholding of tax owing by others (s. 153)

 S 153 – Deduct income at source
o every person paying salary, wages and other
remuneration – shall deduct or withhold amount in

accordance with prescribed rules, and submit to
CRA (in accordance with tables in part 1 of the
ITA – and send $$ in on your account)
C.B.
 employers withhold salaries and wages; payments out
of deferred income plans, and payment to nonresidents
 and send money in for your account – must remit to
the Receiver General of Canada - otherwise strict
liability offence.
 Individual files return with account for taxes
withheld throughout the year
Some people don’t make installment payment (no one
is forcing them to, penalties, but might not offset
advantages)
Then everyone (mostly) has to make payments before
April 30th
3.5 Keeping books and records (ITA s. 230)
938-940
 S 230 – Obligation to keep track of records
o every person carrying on a business, or obliged
to pay, or withhold, taxes …must keep books and
records of accounts at a place of business or
residence in Canada
o you have to prove with records showing nature of
WHAT YOU DID so minister can determine tax
payable or tax witheld
3.6 Obligation to pay interest (ITA s. 161)
71
 Interest is calculated daily (compounds daily) b
CRA
 Deterrent, to stop using CRA as a creditor; tons of
penalties as well
 Can get interest charged on monetary penalties,
overdue amounts, installments
3.7 Payment of penalties (ITA s. 162 - 163)
 LIII, p. 53 = Penalties under the ITA
o
o
o
 Practice Point: clients often feel that they are in a
hole
 *Penalties often don’t have the deterrent effect
its expected to have – chronic offenders being
targeted don’t feel remorse (or often don’t realize
their offending)
 but “paying penalties is like lighting money on fire and
watching it burn”
XLV – Deadlines, limitation periods etc. CHART
S 162 – If don’t file tax return – first offence
failure to file
 [penalty of 5% tax payable, + 1% each month]
 Not paying max penalty fee ends up being [17% over
first year; of amount of tax to be paid that year]
  Forgot they received amount; weren’t given
deductions they were expecting (eg. Child support
received)
S 162(2) – repeated failure to file returns
 Penalty goes up to 10%, + 2% per month, of unpaid
tax, for 2nd year or subsequent offenses ~ for
default of up to 20 months
Penalty for failure to file forms ($20, for 100
days)
163(1) Failure to put something ON a return
 S 163(1) Failure to put information on a return
(i.e. I think it’s a windfall…) Liable for a
penalty of 10% for the amount.. unless liable for a
bigger penalty under (2)
 163(2) 50% penalty, for failure to include amounts,
if engaged in culpable conduct (intention or gross
negligence)
- Burden of proof for penalties = on Tax Payer
(because they have all the information);
- 163(3) but crown bears burden of proof with
respect to penalties (negligence or knowingly) – this is
why penalties are sometimes dropped by the crown.
4. Collecting Remedies S 222 – 227.1
4.1Limitations periods
 S222(3) – Limitations periods
o good if you’re being pursued, bad if you want a
remedy
o LP for the collection of tax debts is 10 years.
 If you had a tax debt from to Mar 2004, deemed to
have arisen on Mar 03 2004.
o SCC Ruling – Crown liability proceeding act
limiting government to 6 year period – so passed
this provision to extend limitation period to
2014
 s. 222(6) – acknowledgment refreshes debt - If pay one
dollar towards the tax debt, refreshes tax debt
o Debtor director law – admission of liability to
pay – If promise to pay, purported payment etc…
concept of acknowledgment
 (= 50% for repeat offenders)
72
 222(8) – Extension of LP shall be added as soon as
the above happens (extends by 10 years, from the
new date)
4.2 Garnishment/third party demands, seizure,
judgments C.B. 927
 S 222 – Debts to her Majesty (2) Tax debt can be
sued for; but ITA has self-help remedies, to
collect $ w/o haven’t to go to court
 222(3) – CRA can get a judgment against a
delinquent tax-payer; get the debt certified and
registered in the federal court; has the effect of
a judgment – can be rendered against property
 certificate can be used as a judgment to garnish
debts by third party or seize TP’s goods and
chattels
- 224(1) Garnishment – Where debtor has no $$ - 3rd party
notice for payment to CRA, instead of debtor
(embarrassing)
- 225 – Seizure of chattels (property seized and
auctioned off)
 can happen very quickly
 Tax payers often able to make deals with CRA, but
in current economic times, may be more ansy to get
$$
4.2* Transfers of property (s160) - Debts of
Delinquent Tax-payers
 If can’t get $$ from you, get money from people who
they loved or once loved (Spouse, CL Partner,
children)
 Principle: that tax-payer made money, and money
must be somewhere (sometimes said they spent it all
– don’t believe them)
- S160**TQ** p .1577 –Rule apply Where a person has
transferred property, by any means to one of 3 people
(spouse, cl partner, person under 18 years of age – any
children), or who has since become… or unrelated person
with whom taxpayer was not dealing at arm’s length.
 S251 – “At arms length” - related persons do not
deal at arms length; is a question of fact.
 “Related persons” 251(2) – deemed by blood,
marriage or adoption (certain linear relationships
parent, children, brothers, sisters grads).. not
aunts, uncles or cousins.
o Irrebutable (even if hate siblings)
 CL – when people deal at non arms length –
generally when parties do not deal with each other
independently (can be cousins, aunts, co-workers)
160(d) & (e) Victim liability - Transferee
(victims) and transferor (tax debtor) Jointly and
severably liable to pay to the lesser of:
 Automatic strict liability - Don’t require mens
rea, intention to fraud, or move assets away from
CRA.
o If Victim has not gotten any property from tax
debtor – should they owe CRA anything? NO
o Only where victim has been enriched by the tax
debtor
o Victim Can’t owe more than.. up to the amount of
property transferred (May be victim or in
cahoots); OR cannot owe more $ than tax debtor
owes himself
 Amount by which fair market value of property,
exceeds consideration for the property
o Sale or gift
o IF spouse transferred 100 to tax debtor, and
property was worth 100 - not liable for debt
73
o to the extent that victims give back
consideration to the tax debtor, that limits
their liability
o Love and affection is not consideration
 *Transfer that occurred prior to the dissolution of
the relationship (Doesn’t include - Separation
settlements and alimony; though such are often
concluded without these tax issues in mind, and
create problems)
--4.3 S227.1 – Directors liability
 Garnish money from employees for CRA, but what if
Corp keeps money and spends it – loses it.
 CRA wants to deter this activity – so impose
director’s liability for failure to impose payroll
taxes, or to remit taxes if withheld
o *”Have all employee remittances been paid??”
o Includes charities, NGO, non-profits
 (2) *Director is only liable if Corporation can’t
pay debts first
XXI ENORCEMENT OF THE ITA
1. CRA Investigatory Powers [Supplementary
Material]
1.1 Demand to file return
 S150(2) – CRA can demand tax return
 methodical
1.2 Audit and examination
 Enforcement to verify information – tax audits
 Sometimes done in the centre where tax return in
sent in (desk audit), CRA sends out letters
 Sometimes field audit as well
 What prompts and audit?
 earned more in one year than previous several (CRA
is losing/making more money)
o Deductions or tax credits – made aggressively,
and  on the watch
o Sometimes audited, because people hate them
(victims – SH, spouses, children etc.) – people
do go and give 3rd party information
o Informer privilege (CRA isn’t supposed to tell)
 Defenses:
o (2) I wasn’t a director (not properly appointed)
 if audited CRA will propose to make adjustments to
- Must be a director at the time the remittances
your tax liability for the year – and assessment
should have been made, or withheld
and re-assessment notices
o (4) I resigned as a director
 [Limitation periods]
o (3) Due diligence – exercised care diligence and
skill, recognized by a comparable person in these 1.3 Power of CRA Audit & Information Collection: S231.1 –
circumstances.
321.4
S.231.1 Inspection - An authorized person may, at all
 Inside v. Outside directors (glory) – Higher
standard for the former – but there is a greater
reasonable time, for administration of the act.. do
onus on all directors to make inquiries regarding
certain things:
these pay-roll deductions (e.g lawyer), when Corp.
 Reasonable time (time of day)
is in financial difficulties.
 + amount of time needed to comply in reference to
the sections
74
(a)(b) Can inspect audit, inspect or examine the
records of a tax payer.. including property in inventory
of TP
 May also audit information of another person (3rd
party), which ought to be in the information of the
taxpayer.. and such to determine the accuracy of
other info
o books and records of TP
o documents include money, security, and records
(c) Enter into any property or place where
business is carried on, property is kept, or anything is
done… (business premise); subject to (2)
 (2) NOT If this place is a “dwelling house” - Kept
or occupied as a permanent or temporary residence;
could be a tent ~ building in a “curtalage” storage space outside
 if CRA wants to go into your house, they have to
get your permission or a court order
 people need to understand what their rights are
(d) Require owner, manager or people on premise –
to give reasonable assistance and answer all proper
questions (“Weazle words – gives great flexibility in
interpretation to a judge) related to the administration
and enforcement of the act
Taxpayers don’t want to argue over procedural
issue, because want fight to be about substantive Q’s
but..
 Hesitance about giving a Document over – worried
about document demonstrating their substantive case
is going to be lost (eg. invoice for pool supplies,
deducted as a business expense; memo admitting
guilt)
 Would have such docs in their possession because
their careless – only books and records are
required to be kept for a certain period of time
(careful about what they create, and examine what
they carelessly created)
 People generally have a low expectation of privacy
– and has thus been interpreted overly broad in
favour of the Government (McKinley Transport)
 Tax department is an adversary
o adverse in interest to the interests of the tax
payer, who wants his or her interests maintained
v. verify or enforce docs
o .. Parties are engaged in a conflict when CRA
contacts person
 practice point: the job of the lawyer or tax
professional is to make sure the INTERESTS of the
TP are served, and generally, these interests are
NOT coincident with the interests of the CRA
231.2 Not satisfied with information..
 CRA says you have to keep books and records for a
time
 permits CRA to demand information and documents
from you, pursuant to a requirement letter
o must be for purposes of enforcement and
administration of the Act (broad)
 (1) Requirement.. to ask taxpayer and 3rd party (eg.
Bank, law firms, accounting firms), for any info or
docs
o So CRA can find out why money has been borrowed
or deposited
o Borrow so they can buy and sell piece of property
quickly; people will tell banks this.
 Procedural is connected to substantive.
75
 CL (Admin and enforcement) – Courts have been
generous towards scope of CRA power
 Doesn’t violate s. 7 or s. 8
 (2) Information on Unnamed persons
1.5 Search and Seizure
o If CRA wants to know whether or not all real
- S 231.3: CRA can enter and search any building or
estate agents have reported all their commission
place and seize thereof any document or thing that may
from the Sale of real estate - Don’t know names
afford evidence as to the commission of an offence under
of all them
the ITA
o Go to real estate board – give names of those
 Only exercised if prosecution is to occur
who’ve filed commissions in 2008
 Jarvis & Ling SCC – found these powers were only to
o Can’t do this under (1), because not for relevant
be exercised for that purpose (only where criminal
records of a taxpayer
liability is found)
o Can’t go “on a fishing expedition”
 Only exercised on the basis of search warrant
o Requires court order, to get names of unnamed
issued by superior court or Federal Court judge
person
 Usually coordinated to occur in different place all
at once
 if unnamed person is ascertainable and
demand for info is made for purpose of
 S.M.
compliance with the Act

(3) Must convince judge that group is
ascertainable, and requirement is made to verify
compliance of persons with an obligation under the
act.
o CRA does need a court order, if the employer is
under audit (verifying amounts relate to the
employers activities under 231.1) Redeemer Case
SCC – split; If party is under audit, and
information is obtained about other people, then
CRA is permitted to get it.
1.4 Inquiry
Section 231.4: CRA can also conduct inquiry or
private hearing into TP’s affairs
 Inquiry power is LIMITED though
o Delzotto – CRA was interested in investigating
him for ITA compliance
231.7 Compliance order
 Up and comer power
 CRA can make applications before judge to order
access, assistance, info or docs sought by
ministers under 231.2 or 231.
 Order a person to provide access to docs and info
sought by Minister, if judge is satisfied that
person was required to do so under 231.1; and did
not do so
 (4) Found in contempt of court, and can land in
jail
231.6(2) Requirement to provide foreign-based
information – from a person resident in Canada - where
they require foreign-based information on TP
 5(c), requirement is not unreasonable if
corporation not controlled by that person
76
 231.6 Penalty (8) – If notice is not set aside, and
information is not provided – then you can’t use
the information in any civil proceeding (at a later
time)
 CRA will ask client to waive solicitor-client
privilege
o Can generally waive for one thing, but not all
 Seen with foreign companies fairly often
 For “related” persons: parents, grandparents, kids,
but NOT not cousins, uncles, aunts
Document that aren’t privilege
 Letters b/w lawyers in a litigation lawsuit –
because they are to the public (not the client)
Defenses
1. Solicitor Client Privilege (supplement!
Checklist)
 What privileges attach in connection with work with
lawyers
 Substantive right available to a client.. for
communication to not be compellable.. in
association with legal advice
 Difference b/w confidentiality – Express or implied
terms; lawyers will keep info and secrets
confidential (even ID.)
 Subset of confidentiality – to have certain
communications, kept so they aren’t compellable by
a regulatory body (court of law).. free so they
don’t have to disclose it (e-mail, notes, legal
bills etc.)
o legal bills reflect service rendered by lawyers

Genisis – Issue of freedom/jail – people should be
free to get advice to maintain their liberty
 Includes drafting and review of letters (by 3rd
parties)
 Unless special exceptions arise.
Litigation privilege
 Solicitor privilege – never waived unless expressly
done
 Idea here is that privileged client has to
communicate things in contemplation of litigation
 What are my chances.. “If I get sued”?
 Once prospect of litigation is over, privilege is
done.
Accountant Client Privilege
 Have great skill and knowledge with respect to taxmatter
 Courts have not thought it appropriate to accord
privilege on the basis of this , Generally – such
is compellable.
 With a retainer!
 Exception: Way to try to make dealings subject to
solicitor/client privilege
o Have accountant act as an agent of tax payer –
what advise would lawyer render.
Disappears
 When the client waives the privilege
 Oral, publishes, hand over communications
 Accountant like an agent – precedent showing this
is an acceptable relationship, for purpose of
keeping relations b/w accountant and client/lawyer
non-compellable.
 Right which should be preserved at all costs, for
tax-payers too
77
2. Charter – Has not been very effective as a
weapon in tax litigation, in preventing CRA form getting
information
XIV. DISPUTE RESOLUTION IN TAX MATTERS**
> When tax return is filed under s. 150 , CRA has
to respond
 Has only been useful in preventing info from going
to CRA is when:
o Under audit, documents suggest person has not
accounted for all their income – problem of tax
evasion (where misfiling becomes a crime)
o Hand information over to the investigation
section (tax police)
o Right against self-incrimination - Asking taxpayer for more documents; asking for information
o As soon as decision to prosecute is pursued, taxpayer must be warned of charter rights – further
pursuit, information is illegal (Jarvis, Ling)
1. Government’s Response S152 (when tax is filed)
S152(1) “Notice of Assessment”
 Minister shall, will due dispatch, assess a
taxpayer’s tax return
o Elastic term – 8 months, 10 years
o We’ve waited so long, we should owe no taxes
(Won, then lost appeal – can only force minister
to act more quickly)
 Has not been useful against any unreasonable
search/seizure
 Eg. Tax return filed April 30, 2009 (for 2008) **
o Or in limited cases June 15, 2009
3. What to do if CRA Comes Calling? - S.M. (Kroft)
 checklist in supplementary materials – have handy
for **exam** and in career
 And issue a notice of assessment – it will indicate
the tax, interest, penalties owing
 May indicate that no tax is payable.. or result in
a refund
 Minister will look at tax-return and issue you a
notice of assessment (usually within a few month) –
May 01, 2008
S152(4) Assessment and Reassessment
 The minister may at any time, make an assessment,
reassessment or additional assessment of a tax for
a taxation year.. except .. up to the tax-payers
normal reassessment period
 152 (3.1) 3 years after the earlier of – day of
mailing of a notice of the original assessment (May
01 2012) or of assessment notification that no tax
is payable.
o 244(14) – Presumed to be mailed on the date of
that notice or notification (per S152(3.1))
78
o May want to argue to date on the notice isn’t the
2.Objecting to the Assessment/Reassessment &
day of mailing (CRA postdates the notice) –
Dealing With Appeals Division
Envelop, postmark.
2.1 Filing notice of Objection S165 – setting out
o Don’t throw this out!
the reasons for the objection and all the relevant facts
issues, reasons, reliefs sought
 (a) Can only go beyond this date if:
o S152(4)(a)(i)Taxpayer has made a
 Eg. object to any reassessment of your return
misrepresentation attributable to neglect,
 Tell us facts reasons, issues, relief sought
carelessness or willful default;
 Large Corporation, has a duty or obligation to
expressly outline in a clear, detailed fashion –
 or has committed any fraud in filing the
return
the issues being objected to
 Lie, leave out expenses, 4% use of car but
2.2 Extensions of Time
filled for 100%
 90 days limitation period – must file objection,
within 90 days from the date of notice of
 Standard of conduct may be less than neglect
or carelessness
assessment or reassessment (mailing date)
o e.g., notice of assessment is April 30, 2012, you
 In which case.. its open forever, no
limitation period
could have until July 29th
o S152(4)(a)(ii) - TP has filed a waiver with the
o Falling on holiday, or Sunday – can go to next
Minister, within the normal reassessment period
day; Saturdays, go to day before.
 Want to give CRA more time, because you’re
2.3 Confirmation and reassessment
sanguine they will not reassess you in an
 165(3) Independent colleague/peer review – Shall
adverse way
reconsider assessment and vacate, confirm or vary
the assessment or reassess, and thereupon notify
 Open indefinitely unless you revoke it
the TP in writing of the Minister’s action.
 152(4.1) Open 6 months after the date on
which a notice of revocation of the waiver
o Reviewers - acting objectively and independently
is filed.
o Could take a year
o Notification of confirmation – upon confirmation
 Sometimes revoked the same day it’s issued.
 “Waiver roulette” to see if Auditor can beat
 Vacate (say TP is right, get rid of it, and issue
deadline.
reassessment)
o 152(4)(b) Minister can make it an additional 3
 Vary (alter, change, issue reassessment)
years for more reasons:
 Confirm (so minister will issue a notification of
confirmation*)
 related to a foreign bad guy
 etc.
 Reassess (issue reassessment)
More recourse?
79
o Must have stamina, desire and proof to
3. Litigation in the Tax Court of Canada S 169
substantiate claims
 Go to Tax Court of Canada (only!)
o 90 days from date of reassessment to file a
notice of appeal in the tax court of Canada to
Burden of Proof:
fight merits of reassessment
 Burden is on the tax payer – because they best know
o Minister must have confirmed the CRA’s
their stories and facts
reassessment, and you want to fight the merits of
 CRA has burden when:
this
o Penalties involved, must prove these are
justified
 Tax Court can only give certain relief:
o can order the reversal of taxes, interest and
o When limitation periods are to be exceeded (must
show culpable conduct justifying this extension)
penalties only as permitted under s. 171 
2 procedures:
 General – Used when lots of $ is in dispute, over
$12,000
o Probably need a lawyer
o No pre-determined time for completion of appeal
process
o May take a couple years for courts to hear case
 Eg. 2 years – Sept 29, 2015
 Informal – Used when less $ is in dispute
o Difference is usually between paper work and
process (requirement of lawyer v. not)
o Appeal must be submitted in writing – set out
reasons for appeal and relevant facts
o general requirement for Minister to reply within
60 days
o appeal must be heard within 180 days of reply
o judgment must be issues within 90 days of hearing
appeal
 Tax payer files notice of appeal, and DOJ/Crown
files the reply
o Basics of the proceedings used by the parties to
find the fact/issues in dispute
Statutory Court – not equity
 Judge is decider of facts, may need to decide
credibility of facts
 Sometimes may need to decide how to apply the law
to the facts (eg. hot tub for medical expense)
 S171 – Defines their jurisdiction:
o Disposal of appeal (dismissing it – bad, tax
payer is always the appellant)
o Allowing appeal
 Vacating the assessment (yay!)
 Varying the assessment (may be good or bad)
 Referring the assessment back to the
minister for reconsideration and
reassessment - principle has been decided
by the judge, CRA is to work out the numbers
 Tax court cannot:
o Waive interest (CRA)
o Must go to Federal Court of Canada for an
injunction, writ of mandamus, declaration for
abuse of power
o **need to recognize which court to go to in order
to get the remedy you want**
4. Settlements S220(3.1) C.B. 989
80
 only 1% of cases end up in Tax Court of Canada–
most get dealt with at the audit or objection leave
 TP who enters into settlement with CRA is generally
bound by the terms of the settlement and may not
appeal the same assessment
 there has to be a legal basis for settlement,
parties must find creative ways to mitigate the
damage
 usually this is done by working backwards
o Trade taxation years; CRA waive interest
 220(3.1) – fairness and relief – minister may waive
interest and relief
o Waiver of penalty or interest – discretion of the
minister
o Eg. Amount is capital gain; rather than nontaxable.
o e.g., your people said they couldn’t come out
because of 1 day snow storm but didn’t come out
for 3 months, your people lost my documents, etc.
o Bargain to get to a commercial result that the
tax-payer finds palpable.
5. Remission Orders C.B. 39
 TP’s liability under the ITA is a statutory
liability and, in most circumstances, the Minister
doesn’t have discretionary power to waive taxes
that are payable under the act
 SOME discretionary relief in exceptional
circumstances where obvious injustice is done to a
TP:
o ask Cabinet to remit or forgive your taxes
o very rare and controversial
 Federal Court Trial division
o 30 Day time limit to file appeal (crown or TP)
o commenced by filing a Notice of Appeal
 Federal Court of Appeal
o Can be granted leave for SCC, 60 days to file a
leave application (crown or TP)
 Next – SCC, by leave (not right)
6. Federal Court Relief/Judicial Review:
 *Challenge minister improper exercises of power –
trial division of federal court is the sole place
this can be done (“judicial review” S18.1 of
Federal Court Act)
o Improper exercise of collection remedies,
investigative powers, or improper exercise of
discretion to waive interest or penalties under
the fairness package
o Challenge privilege claims (against CRA taking
docs)
o Contest information subject to a charter
challenge
 Not acting with due dispatch – get cracking CRA!
 Assessment, or reassessment on the merits goes to
tax court
7. Appeals to Federal Court of Appeal/Supreme
Court of Canada C.B. 34-35, 990-991
 if you lose or the Crown loses, you go to Federal
Court of Appeal
 if you win or lose at Federal Court of Appeal, the
appellant goes to the SCC by leave, not as an
automatic right.
> After the Tax Court of Canada?
81
o Leave from Federal Court or by SCC involves a
matter of public importance or should hear for
any other reason
o panel of three judges
o low likelihoods of leave granted – 12% of
applications




8. Overview of Limitation Periods - S.M. (Kroft)
Assessment C.B. 916
Reassessment C.B. 921-922
Filing a Notice of Objection C.B. 930, 985
Filing a Notice of Appeal in the Tax Court of
Canada C.B. 986
 Filing a Notice of Appeal in the Federal Court of
Appeal C.B. 991
9. Access/Privacy Act Application
 Can get disclosure through freedom of information
process
 Access to information Act – Corps
 essential tool in combating CRA and tax litigation
 always consider freedom of information
10. Payment of Taxes in Dispute – S 225.1/.2
- Stop CRA Collection
 225.1 – Ministers ability to collect only after
certain things have happened
o Can’t collect while TP is in court filing
Objections – can be done to stall collection
(because don’t have $)
o Exception = Withholding taxes (payroll taxes)
 *Pay if have money! Because interest compounds
daily… CRA will pay you back with interest on your
money (pay taxes on the interest!)
82
 itemize employment income as benefits
instead of income
XV. PRINCIPLES FOR TAX PLANNING (S.M. Kroft!)
- Once the tax planning objectives have been
determined, certain planning techniques can be used,
subject to the limits learned in Part XVI.
 categorize as prizes, windfalls (mainly
gifts)
1. Objectives of Tax Planning:
 Tax Deferrals, Tax Savings, Splitting and Shifting
 People’s objectives: to save money; Reduce taxes
payable
2. Techniques for Tax Planning?
Tax Base x Tax Rate – Tax Credit = Federal Tax
Payable/Prov.
2.2 Tax rate planning
 want to reduce the tax rate to reduce tax payable
 how do we get a lower tax rate, other than government
just decreeing tomorrow, “you get lower tax rate”
 to get lower tax rate:
o if you split money into 2 elements and give to someone
in social or economic circle (e.g.,
members), you could get lower rates on each element

L> 30%/50%
Taxable Income S2(2), S3 Income..
Reduce Taxes Payable - and a lower rate may then be
charged.
2.1 Tax base planning
 try to minimize tax payable by minimizing the tax
base
 part of tax base is taxable income (Also capital
gain)
o want taxable income to be low
o taxable income is a function of income from
sources (want low)





o how
o shift income from high rate taxpayer to a low rate
taxpayer
o move streams of income from one person to another –
assets, money
 start by disregarding the possibility of rules that don’t
let you do things....
 ways to reduce tax rate:
 who should pay expenses:
o people in the highest rates, to the extent that
expenses are deductible
 people who have non-deductible
o people who are also at the highest rates
o because it will leave more money within the family
employment
business
property
capital
other
do we make sources of income low?
 deductions
 choose the preferred items
other family
unit for others to earn income which can be subject to
tax at the lower rates
o you want to encourage people in the lowest tax
brackets to earn
2.3 Tax Credit Planning
Refundable Tax Credit* – Result in you getting $
back
83
 *Better to have this type of credit
 [source of fraud]]
Non-refundable – If you don’t owe taxes, get no
money back
Other Objective of Tax Planning:
3. Tax Deferral: Importance of the Time Value of
Money C.B. 42-49
 Person/Spousal tax credit – value = 0
Make use of Tax Credits: (2.5 Tax Unit Planning)
- ITA provides mechanism for shifting tax credits
to other people
- lots of tax planning involves shifting income for
utilizing tax credits, entitlement to tax credits, etc.
- People try to shift income to others, so they
will have tax payable – and can then use up their (nonrefundable) tax credits.
(allowed?)
- Shifting of tax credits – Family member can use
sometimes, because x (eg. student) has no tax payable.
2.4 Tax Payment Planning
- Use Status to reduce taxes payable
 Who pays taxes? Residents of Canada
o To be taxable must be a resident of Canada or
must have Canadian source income
 Become a resident of somewhere with a lower tax
rate (shift to the US in the 80’s and 90’s); Cut
economic and social ties
 If want to stay a resident:
o Shift assets and income to non-resident (2.5 Unit
Planning)
o Corporation in the Bahamas (1960’s Millions!)
 Move their assets and then income to
different places where tax rates are
lower
 Taxpayer then has no Canadian Source income,
when its all in a foreign corporation.
Post-pone paying taxes – If you can do this long enough
(3 years), it’s equivalent to saving money (where
interest rates are high enough)
 Tax-deferral – Defer paying taxes
 Shift income to subsequent years
o Pay on Jan 01, instead of Dec 31st  Wages are
taxed in the year of receipt. S5 salary and wages
are taxed in the year of receipt
o With use of money – can invest this money, and
earn interest
 Strategies – RRSP – contribution is only taxable
when you take money out of the RRSP (Don’t have to
pay for 10 years – endorsed by the ITA, to
encourage retirement savings)
 Tax rates are going down
o Lower rate in later years
o (esp. on the corporate side.. though ?able with
bail out)
 Take money out when not earning income = lower tax
rate
 + Interest compounds on invested money
* Why does this happen – ITA endorses this
 Every person is treated as a separate tax payer
 With consolidated returns – everyone would blend
income and deductions together – no shifting income
 The separation contributed to tax planning and to
its scope
- ITA encourages tax planning: encourages investing
84
 Why doesn’t everyone do these things?
 Detaxers and untaxers..
XVI. TAX AVOIDANCE: LIMITS ON TAX PLANNING,
STATUTE/JUDICIAL
1. Tax Avoidance, Tax Mitigation and Tax Evasion
> Will taxpayers be permitted to arrange their affairs to
minimize taxes payable?
 TPs can engage in tax avoidance: the reduction of
tax payable by lawful means
o legitimate and legally acceptable
 TPs are entitled to arrange affairs to minimize tax
 Parliament has created a series of rules to curtail
abusive tax avoidance
o behaviours on continuum from evil to misguided
 two categories of tax avoidance:
o 1) tax mitigation
 transactions achieve the desired result of
tax minimization and are effective
o 2) abusive avoidance
 these transactions may be ignored for tax
purposes and do not achieve the desired goal
of tax minimization
> What are the statutory and judicial impediments?
- Parliament has creates a series of Rules to stop
certain types of behaviour, from evil, to misguided
Statutory
 Specific Anti-avoidance rules
 Catch-all General Anti-avoidance Rule
Judicial: 
 tax evasion:
o mens rea criminal offence - commission of an act
knowingly, with intent to deceive, so tax
reported by TP is less than tax payable under the
law
85
Voluntary disclosure program (Discretion given via
 tax avoidance
o minimization of tax
223.1) –
o lawful or unlawful depending on manner and motive
- Administrative practice of CRA permits taxpayers
o only unlawful where it offends established
to come forward and confess their sins without punishment
judicial doctrines or legislation (GAAR)
prosecution or penalty:
 tax mitigation (Westminster principle) is allowed
o lawful tax planning
 “sham transactions” doctrine
 ineffectual transactions” doctrine
 “substance over form” doctrine
 “business purpose” test
> When does conduct go so far as to trigger criminal and
civil sanctions? (ITA ss 163.2, 238 and 239) C.B.
950-954
*Criminal Offense
 S 239* Tax Evasion - Unsuspecting, naïve, greedy;
and those looking to prey
o Making a false representation or return; dispose
of records; omit, willfully or evade in any
manner; conspired to do so
o Is guilty of an offense, and can go to jail for
or be fined
o Put $ in bank accounts outside Canada and don’t
declare income; declare personal expense and
business expenses; misrepresenting number of
children
o Mens Rea offense – must be guilt offense
(accident may result in an unsuccessful
prosecution 0 but other issues on their hand)
o Lawyers possibly held to a different standard**
 Aiding and Abetting S21 CC
 Burden of poof on the crown, etc.
- CRA bulletin for guidelines – administrative
program, grounded in the statute (fairness package,
taxpayer relief provisions, permits waiver in penalties)
 Where never paid income on accounts outside of
Canada
 Where CRA has not begun an investigation
 Paying taxes I should have paid – opening self up
to get CRA out of hair (will be closely followed…
but better tan harassment),
 Benefits:
o To confess their sins w/o fear; might not find
taxes otherwise, and gets taxpayers back into the
system
o Don’t get penalties & a break on interest
o doesn’t get nailed under s. 163.2 for gross
negligence
o Generally swift and merciful; ready to pay
amounts owing.
 Canada is the only country with this element
 Some countries have amnesties (certain days)
- Goes after income from crime through a special
mechanism (prostitution, crime) – this income is as
taxable as legal income
 Morality has no place in ITA
 Can’t get deduction for bribes and income
 But case where woman in the street trade was paying
protection money to pimp and police chief; fined
for various offenses.
86
 “If I’m getting taxed, I should get deductions” –
was able to for certain amounts; but couldn’t for
all expense because people she pad never showed up
to testify (were not receipts).
2. Specific Statutory Rules
- The ITA is filled with anti-avoidance rules and
ways of ensuring that the raising and collection of
revenues is more certain.
- Non-criminal rules for anti-avoidance; backstock
that government has for abusive tax avoidance
 1.1 Base broadening rules (which create a more
comprehensive tax base)
 1.2 Non-arm’s length relationships/transactions (s.251)
 1.3 Anti-splitting/shifting rules (ITA, ss.74.1 - 74.5,
251, 69, 56(4.1), 56(2), 120.4, 246, 15(1)) C.B. 552-582
2.1 Role of Judges with Statute
Canada Trust Co SCC 2005, McLaughlin and Major JJ.
9 – 0
- Principles of statutory interpretation outlined how taxpayers are to read and interpret the act
 Tax planning – dependent on how you read the
statute; to take advantage in the most favourable
way, the words in the act
 You are to interpret words in the act, based on the
text, the context and the purpose of the provision
you rely upon, to get your benefit (statutory
interpretation for all statutes)
 Eg. 20(1)(zz) – carrying on a business, you can
deduct the cost of landscaping – what about of
putting in a golf course?
o Need to look at text (actual words), & context
(how does it fit with any other sections within
the ITA).
o Also, why did parliament permit the deductions
under this section - Purpose?
 Judges - fill in blanks, insert words in the event
that words aren’t there; or read rules an interpret
them;
o Different philosophies from different judges and
courts
o Current SCC– words speak for themselves (not up
to judges to insert words) – Where taxpayers
benefit here, its up to parliament to fill in the
gaps
o Will not read words out of context (how words are
used elsewhere in the statute)
o Can’t read words in isolation – must be
consistent with meaning section was intended by
parliament
o Incumbent upon the crown to prove the purpose of
the provisions (their the ones who created the
act and should know)
 Judges are tryers of facts & appliers of the law
o Need to determine if stories of taxpayer are
true,
o Also need to apply law to the facts
o Will not let tax planning proceed – if the legal
relationships contemplated by the taxpayer are
not legally effective
o If documentation doesn’t create the legal
relationship the parties intended
 eg. creation of a partnership; sale from a
to b
87
o Judges have struck down tax results when legal
relationship are ineffective, or deceitful ~
inconsistent (a sham)
> Specific & General Anti-Avoidance Rules
 Even if get through all the specific rules, General
rule backstops.
Stubbard Case
 Scope of tax planning and ability of tax planners
to arrange their affairs to minimize tax-payable
 Meresy J. – there is a dynamic b/w tax-payers and
government (way to avoid, and rule to avoid ~ back
and forth)
 Navigate into rules that provide tax benefits, and
around the rules that prohibit  and government
tries to draft ITA plug this
2. Specific Statutory Rules, S69 – Every day rules
2.1 Anyone - Gifts
S69(1)(b)– Gifts - Whenever taxpayer disposes of
anything (property)
 (ii) To any person, by way of gift (inter-vivos,
bequest or inheritance) Taxpayer is deemed to have
received proceeds of disposition = to FMV)  i.e.
the transfer is deemed to go at fair market value
(FMV).
o Can’t give property away that has appreciated in
value, w/o recognizing tax consequences
o 69(1)(c) - cost of property to the donee –
receiver is treated as having received property
at a cost of FMV (cost at this price, even if
they haven’t paid)
o These two rules work in tandem to prevent double
taxation – treats as seller and buyer
2.2 Non-arms length, disposition
What if you sell valuable item for $1 (FMV - $100)?
 No such thing as bargain deals for related persons
 Treated as having sold at fair market value
- 69(1)(b)(i) p 467 – Disposition for less than FMV
 Where a taxpayer has disposed of anything, to a
person with whom a person was not dealing with at
arm’s length.. for proceeds, or not – deemed
proceeds at FMV.
o 251(1) p.1992 – “Non-Arms length” refresher:
Persons who are related, automatically deal at
non-arms length (blood, marriage, adoptions)
o Automatic anti-avoidance rules for people who are
related.
o Persons may as a question of fact deal at nonarms length
o Aunts, uncles, cousins – where there is no hardbargaining, and one party does not? exert
dominant influence over another party.
 This is the assumptions, unless there’s a provision
in the Act which says otherwise (S73)
 *This is a one sided rule – person who pays, has a
cost in the property, equal to what they pay
(unlike above)
 Deter people from doing transaction at non-market
value
 Directed at stopping bargain sales b/w related
persons
2.3 Opposite circumstance, in excess of FMV
88
 69(1)(a) Where a person at non-arms lengeth, has
acquired anything with amount in excess at FMV..
taxpayer is deemed to have acquired property at FMV
 (One sided again – person who sells, has a POD
equal to cost) right?
 Intended to prevent sales at inflated prices*
 Certain types of property – cost can be deducted
through CCA
 W/o this rules, companies might sell properties b/w
subsidiaries to offset income with deductions,
where they are experience losses.
2.4 Exception to FMV with non-arms length - SPOUSE
S 73 Special rules – deal with transfers of
property b/w spouses and CML partners – overrides S69
 Transfers b/w these persons can go at cost, rather
than FMV
Building blocks here:
1/ Transfer b/w family, and gifts = disposition at
FMV
2/ Spouses = disposition at Cost (overrides 1)
3/ Gain/Loss derived by spouse on property (get $9,
half is taxable)
goes to originial owner – rollover + attribution
3. Attributions Rule *EQ***
 Intended to strop attribution of income/capital
gains and losses – and put it back to the person who
should have had the gain/income/loss to start with!
*Rollover – GG- transaction whereby the attributes
of the transferor, are passed over, to the recipient of
the property – so when they deal with the property – the
same tax.
S74.1 – Attributions Rule
 Where an Individual has transferred or leant
property (S248 “property” – cash, shares, real)
TO.. (transfer/loaned, sale/gift) or for benefit of
spouse, CL partner or a future spouse/ CL partner
o Most common occurrence in Canada – people
transfer/exchange medium/property
 Any income or loss of that person, from the
property… that related to the period of the time
through-out the individual being resident in
Canada… shall be deemed to be income or loss, of
the individual and not of that person
o If spouse/CL partner puts money in bank – you’re
taxed, not them
o IF X had put cash in bank – would have earned
interest – and would have been taxed on the
interest.
o If X gives to persons above – than income earned
from property after the transfer – is attributed
to person who otherwise would have earned it (X)
o S160 – transferee liability – All income you gave
to person you dated… becomes attributed back to
you.
 *Not known by many Canadians – they commingle their
funds – joint bank-accounts  Interest is
attributed back, not split b/w the two
o What if this was shares, not money?
74.2 – Attributes capital gain/capital loss, from
disposition of property, back to the transferor
89
74.1(2)  Does not restrict itself to spouses or
CL partners – Income attribution - also applicable to any
transfer to persons under the age of 18 (parents would be
taxable on interest in your bank account)
 Is no comparable rule for capital
gains/losses(74.2) (don’t know why)
 Was common to put shares in the names of the
children – so they would be realized by the child,
and taxed by the child
 Special rules for farm property
 ** Again many persons file, and don’t know about
the attribution rules – think those who own the
money and are getting the yield, is the person who
should report the income.
the benefit.***** Part of tax-planning, and lawyers.
Details!
 Trick – read rules very strictly.
 Was very possible for people to do tax-planning, by
navigating.
- Stubbart 1984 SCC – Taxpayer was successful, in
being able to take advantage of transaction.
 Court: IF you don’t fall squarely w/i the rules –
you can take advantage of them, to minimize taxes
payable.
- Conclusion drew from – famous case of 1935 UK
(HL) – involving the duke of WM and his gardener
 F: Duke had a good gardener, and duke was very keen
to retain him.. didn’t want to give him more money
though
5. Circumvention - Easy to get around these rules!
 S 74.1 – Transfer to other persons.
 Cease to be a resident of Canada
 Focus on (above) distinction from business, and
income from property
 Wanted him to be able to keep more of what he was
given, that he could keep – tax free.
 Only apply with disposition of property – and
income from the property.
 Nuity – trustee arrangement – certain amount would
be paid out of this trust to the gardener – amount
was not taxable.
 Don’t apply to business income
 E.g. Transfer hotel to the spouse – business income
– no attribution of the income derived from the
property. (v. Apartment ~ degree of services that
makes the difference)
 Eg. Principle Residence – can avoid capital gains.
5.1 Judiciary & Circumvention
- *People read rules very strictly – to ensure they
fall outside the rules (if their anti-avoidance); and try
to fall squarely within the words, if their trying to get
 Happy to accept the same amount of money – cause
people care about what they have left over at the
end of the day.
 I: HL – watershed decision finds in favour of the
due and the gardener - every person is entitled to
arrange their affairs to minimize taxes payable, to
the extent permitted by law – if ITA permits them
to do this – it’s fine by us
 R: All people should be able to look at a book, and
plan their affairs accordingly.
 Not going to interpret the laws to create a heavier
burden, than that proposed by parliament.
5.2 Consequence for circumvention
90
- “Find me the good rules, and lets skate around
the bad ones”
- Transaction must be done in a legally effective
manner
 Can’t pretend things are not what they’re not.
 Judges would only interfere, where transactions
where not legally effective (Create legal
relationship intended by the parties – gift, sale
etc.)
 Judges – not as filler of gaps – but those who
evaluated efficacy of transactions, and interpreted
the words taxpayers relied upon to obtain benefits,
and of anti-avoidance rules that tax payer was
trying to avoid, while government was trying to
apply
- 1987 June 18 – Reform of ITA, p 1909
 Tax payers continuously found ways to skate around
the specific rules
 We need a back-stop – General rule
 In order to combat abusive tax-avoidance (245(4))
6. General Anti-Avoidance Rule (“GAAR”) (ITA,
s.245) C.B. 1013-1077
- **understand when the GAAR may be applied.
Knowledge of the ITA, its underlying policies, the
relevant case law and administrative practices is
important.
- Case law from the Supreme Court of Canada (Canada
Trustco**, Kaulius, Lipson).
- S245 – Introduced to do this – prevent abusive
tax avoidance.
- S245(2) – Where a transaction is an avoidance
transaction (something bad), tax-consequences shall be
determined as is reasonable in the circumstances, in
order to deny a tax benefit that would result form this
transaction (or a series of which include this)
 “Tax Benefit”
or a deferral
under the act
increase in a
425(1) – A reduction, and avoidance,
of tax, or other amounts payable
(postpone, reduce, eliminate etc.) OR
refund.
 Tax benefit might be denied by 245(2) per a
transaction – if it’s an avoidance transaction –
will be denied.
 245(3) “Avoidance transaction” –
o 1) Transaction (or part of a series of
transactions) that results directly or indirectly
in a tax benefit (broad)
o 2) Unless the transaction may reasonably be
considered to have been undertaken or arranged
for bona fide purposes, other than to obtain the
tax-benefit
- People have a bias to reduce their taxes, by any
lawful way possible, by planning – this is intended to
stop this.
 Argue – “this is not an avoidance transaction –
primary purpose is not to obtain a tax benefit.”
o How could this be proven? Evidence – not a sham
o Corroboration, documents – assertions of primary
purpose
o Can be one of the purposes, but not the primary
purpose
o BUT - even if done only for tax purposes.
Second defense  S245(4) P 1910 – (a) General AR – applies only if,
it may be reasonably considered that the
transaction would result in a misuse of the
provisions of:
91
o the ITA, the regulations, application rules, and
the treaties –
o or an abuse of the provisions read as whole
(directly or indirectly)
 So - Reading words in a way, they were not intended
to be read – so as to create a benefit, that was
not intended to be created
4. The Role of the Judiciary - S.M.,
C.B. 1001-
1007
> Judges interpret the words in the ITA but will be
asked to deny tax consequences sought based on a number
of principles.
4.1 Sham
C.B. 1008-1011
 “sham transactions” doctrine
 acts committed or documents executed by the parties to
the transaction attempt to give to third parties the
appearance of having created between the parties legal
rights and obligations different form those which the
parties actually intended to create
4.2 Ineffective transaction
C.B. 1012
 “ineffectual transactions” doctrine
o to have effective transactions to minimize tax, plan
must be completely and fully implemented according to
relevant law
o tax mitigation arrangements must be real, bona fide
and properly executed
4.3 Step transactions
4.4 Substance over form (economic reality)
C.B. 77-80; 1013
- Canada TrustCO.
 Para 28 – 34- Discussion of avoidance transaction –
when it is and is not – what judges and taxpayers
must do, to demonstrate when it is or is not.
o ** list..
o **
o Concept of Abusive Tax Avoidance
 Must look at the words in the ITA, the
context in which the provision was found
 In order to determine if the benefit being
obtained, is abusive of the provisions
 ITA is a complex book
 Crown must show intention of policy in the ITA
 Certainty, predictability and fairness
(consistency)*
 Tax-payers must be able to rely upon the rules as
they find them
 Can’t try to use a policy that can’t be discerned
from the ITA itself, a specific provision, and
surrounding provisions.
 59, 60, 61, 69 -> Not up to judges and CRA to recharacterize provisions to be what their not – must
look at transactions as their found – and apply the
law based on polices they see flowing form the
statute itself
 *Court rejected the idea that transaction should be
viewed based on their economic substance, as
opposed to their legal form.
 Pollius – sister case 2008
o General Anti-Aavoidance Rule, is just a
legislated smell test?
o OR - Rule is not intended to be or do this – must
follow dictates in Canada Trustco (two different
views).
92
Lipston (Oct 2007 SCC) argued in April 2008
- Case On GAR – may change tax-planning, and taxpractice.
- F: Lipston – Mr and Mrs. – Separate people
- Wanted to buy house in 1994 – $750,000 – needed
to borrow money to buy house ($562,500)
 ~ pay interest, can’t deduct (only for purpose of
earning income from business or property)
 Want to turn non-deductible interest, into
deductible interest.
 Mr. L – owns shares – worth more than $567,000 Sell these to spouse
 Disposition at cost (FMV> rollover – shares go over
at cost)
 Mrs. Got a loan to buy shares – can she deduct the
interest, when she borrows money to buy shares (YES
– borrowing money to earn property income 0-get
dividends)
 Mrs . has deductible interest – borrows $562,000,
and has deductable interest on this.
 Now – Mr. L has $562,000 – used to buy the house –
then put the house in both of their names.
 Take my house – as security for my loan.
- CRA - What really happened – interest expense is
not deductible – really used to purchase a house –
 NO – I own shares.
 CRA – deny interest deductibility under 20(1)(c)
- 2001 Case Singleton – borrowed money from law
firm to pay for house, won 5 – 2. (dissenters –
Bastarache – sick, and Mr J lebelle; CA – Rostine for
Singleton ~ McGlaugh. not sitting – so wont trash Canada
Trusco – she’s not there to help rewrite Canada Trustco)
 CRA gives up – will not challenge on whether
interest deductibility is legit
 but will challenge you on GAA Rule – abusive. ITA
doesn’t permit you to deduct money on a house
mortgage
o That’s not what I’m doing – deducted money for
shares – secured by my house – valid legal
relations
o But in substance – deducting house mortgage
purpose
 Where is this written – that you deduct Substance
of transactions – as opposed to their form?
 Goes to Tax court – tax payers loose
o + When tax returns were filed – MR. claimed the
interest expense. But MRS. had the loan!
o  Attribution rule – income or loss, gets
attributed back
o Just following the rules!
o Dividends also given to MR (CRA left this, but
denied abuse of interest expense.. in substance
related to the house)
 FCA – Every provision that tax payers relied upon –
used for the purpose it was intended to be used for
o Roll over intended
o Attribution rule intended
o Interest rule expenses intended
o All used for what they were intended – YES.
o However – overall purpose – convert interest that
was non-deductible into deductible  AA Rule
 SCC – April 2008
o To buy house?! Yes (admitted purpose of sales, to
avoid interest)
o BUT new owner of shares now too!!
 What if shares had been sold to a stranger?
Would be legit… But sold to wife!
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 Sold off an asset – and borrowed money to buy it!
People do this all this time
 Is this transaction abusive?
 Done the way it was supposed to be done
 Judges asked to look at the substance – the result.
o Idea that w/o these transactions – could do
something else
o Tax consequences of what they COULD have done –
and not what they actually did
 + 14 years – Tax & Interest – interest compounding
has probably doubled.
o Could have paid interest when they were re-assess
o May think they can do better with the money.
** If Lipston falls – how effective will people be
in doing their tax planning – will require more than
reading rules and following form – will have to look at
real substance of transactions
 Doesn’t give rise to the watch words in Canada
Trusco!
 2008/09 decision of this case will affect tax
planning
 Are people entitled to arrange their affairs to
minimize taxes payable?
**** know why GAA was enacted – what it was an
wasn’t intended to do - and how this interacts with the
role of judges – para (35-) 44 – 66!!!!
 Specific anti-avoidance rules – 74.1, .2
 245 general rule
 What judges do and don’t do
XVII. EQUITTABLE ISSUES
Ethics
Lawyers v. Accountants
 Lawyers - Dispute resolution
 More Accountants - tax planning
 Applicable to each
1.1 Professional Negligence
 When people make mistakes – shaming; damaging to
ego, to reputation (personal and profession)
 This is why we buy insurance – everyone makes
mistakes
 Worst thing = cover-up and compound mistake.
o Wrong advice
o Lack of knowledge of tax/other laws
o Failure to advise regarding other taxes (GST,
sales tax)
 May be reparable with money (harder to do with
mistake on someone’s life)
1.2 Backdating docs - Getting into worse shape
 Jan 01, 2005 – didn’t even know you then – could be
party to fraud.
 Show a current execution date, reflecting something
done at an earlier time.
 Computers – can show creation time
 Reputation could be hard to amend!
1.3 Complicity with tax evasion
 Lawyers can be complicit with this – to create
documents saying people did something , they never
did
 One accountant would do this – reflect losses where
clients never spent money
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 Clients saved hundred of thousands – CRA caught
them, no one was better off
 Conspiring and committing tax evasion
 Receipts and improper handling/reporting of money –
proceeds of crime and money laundering etc.
 *Know your clients (ask for documents – past
criminal records)
 As of Dec 31 – must ask all sorts of personal info
before taking clients on
 Concern – money laundering!
1.4 Improper/Untimely Destroying Documents
 CRA is coming!
 Solicitor client priviledge may not apply…
 Can only destroy things the law permits you to
destroy ie. Doesn’t require you to keep
 Search warrant – when there’s a demand for docs,
and you discard them = awkward situation
 Law Society Rules = over-link; act in a way to
promote integrity of legal system etc.
 People used to advice this way
 But now lawyers and accountant can be liable for
civil penalties
 If clients get nailed – they will point at you –
you told them to do it.
1.8 Violation of ethical codes of conduct (Eg.
Conflicts of Intest)
 In the above scenario
 Conflict of interest then – can’t act for this
client when they’ve been reassessed. Must send them
to someone else.
 In circumstances under S160 – can’t act for both
client (wife AND spouse)



 BE aware of Conflict of interest; rule violations
1.5 Failure to comply with Lobbyist Registration
Act
1.6 Inappropriately assisting taxpayers to defeat
creditors contrary to insolvency laws
1.7 **Civil penalties S 163.2 – imposes civil
liability on anyone for false statement made knowingly OR
where accused of culpable conduct** - when you act in a
knowing or indifferent fashion, to the breaking of laws
by clients



2. Ways to Combat Concerns
2.1 Secure Appropriately drafter Retainer letter –
sets out scope of engagement
People look for scapegoats/blame
Need proof of scope
2.2 Know when you need advice for expertise
Recognize limitations of skill and knowledge
If it were my money, who would I hire?
Recognize when you’re out of your depth – and when
there are others who could do it better?
2.3 Keeping/documenting appropriate record of
advice
2.4 Recognizing appriate record of advice
2.5 Recognizing styles and personalities of clients
2.6 Maintaining current knowledge o the relevant
laws and pratices
 Keep on top of the law!
 Eg. Personal expenses – but no one will ever catch
you.
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EXAM
- A lot of q’s
- 3.5 hours + reading time = 100 pts? = 2 minutes
per point ~ ish.
- T/F, MC, Fill in Blank = half.
- Problems (small)
- Wide range tested.
- Biggest problem is time – manage carefully!!
 Easier q’s first
 Marking scheme – if do out of sequence – WRITE on
exam!
 Don’t forget q’s!!
- Q – to read the ITA
 Answer it point form – of possible
 “Comment on…the following” – but still only 6 marks
max
o If you can write in point form - ok
o Show the ISSUES! And solve it!
o Substance!
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