Residence ......................................................................................................................................... 3
1
Residence of Individuals............................................................................................................................................................... 3
1.1 When is Someone Resident in Canada? ................................................................................................................................... 3
1.1.1
1.1.2
1.1.3
1.1.4
2
3
General Common Law of Residence .............................................................................................................................................. 3
Examples of Residency ....................................................................................................................................................................... 4
Examples of Non-Residency ............................................................................................................................................................. 4
Special Case: Sojourning Rule and Part-Year Residency ..................................................................................................... 4
Residence of Corporations........................................................................................................................................................... 5
Residence of Trusts ........................................................................................................................................................................ 5
Concept of Income ............................................................................................................................ 6
4
5
6
Policy and Definitions .................................................................................................................................................................... 6
Enumerated Sources ...................................................................................................................................................................... 6
Unenumerated Sources ................................................................................................................................................................. 6
6.1 Do Unenumerated Sources Exist?............................................................................................................................................... 6
6.2 Factors that Suggest No Unenumerated Source ................................................................................................................. 7
7 Other Sources .................................................................................................................................................................................... 7
7.1 Gifts, Inheritances, Windfalls, Illegal Income, Imputed Income ................................................................................... 7
7.2 Damages and Settlements – The Surrogatum Principle.................................................................................................. 7
7.2.1
7.2.2
8
Contractual Damages ........................................................................................................................................................................... 8
Personal Injury Awarded ................................................................................................................................................................... 8
Computation of Income................................................................................................................................................................. 8
Income from Employment ................................................................................................................. 9
9 Distinction between Employment and Business ................................................................................................................ 9
10 Timing.............................................................................................................................................................................................. 10
11 What’s Included in Employment Income? ........................................................................................................................ 11
12 Benefits: General Scheme ........................................................................................................................................................ 11
12.1 Inclusion in Income ..................................................................................................................................................................... 11
12.2 Allowances ...................................................................................................................................................................................... 12
12.3 Home Relocation Benefits ........................................................................................................................................................ 13
13 Deductions from Employment Income .............................................................................................................................. 13
13.1 Specific Deductions ..................................................................................................................................................................... 13
Income from Business or Property: Profit ........................................................................................ 15
14 Characterization of “Business” and “Property” as a Source ...................................................................................... 15
14.1 Profit .................................................................................................................................................................................................. 15
14.2 “Business” or “Property” Defined .......................................................................................................................................... 15
14.2.1
14.3
Business vs. Property ..................................................................................................................................................................... 16
Personal Endeavors Distinguished ...................................................................................................................................... 16
Income from Business or Property: Inclusions ................................................................................. 18
15 What’s Included? ......................................................................................................................................................................... 18
16 Timing.............................................................................................................................................................................................. 18
16.1 Timing – “Realization Principle” .......................................................................................................................................... 18
16.2 Accrual Method of Accounting............................................................................................................................................... 18
17 Interest ............................................................................................................................................................................................ 19
17.1 Imputed Interest in Blended Payments.............................................................................................................................. 19
Income from Business or Property: Deductions ............................................................................... 21
18
19
20
21
Deduction Rules: Basic Questions ........................................................................................................................................ 21
Policy Goals ................................................................................................................................................................................... 21
Income Earning Purpose and the Reasonableness Requirement ........................................................................... 21
Personal and Mixed Expenses – The Tests ....................................................................................................................... 22
2
22
23
24
Personal and Mixed Expenses – Specific Situations ..................................................................................................... 22
Illegal or Unethical Activities ................................................................................................................................................. 24
Timing of Deductions ................................................................................................................................................................ 24
Income from Business or Property: Capital Expenditures ................................................................. 26
25 Is An Expense a Capital Expenditure? ................................................................................................................................ 26
25.1 Common Law Tests ..................................................................................................................................................................... 26
25.2 Types of Capital Assets .............................................................................................................................................................. 26
25.3 Repair or Improvement of Tangible Assets...................................................................................................................... 27
25.4 Protection of Intangible Assets .............................................................................................................................................. 27
25.5 Other Issues: Domain Names, Corporate Takeovers, and Goodwill...................................................................... 27
25.6 Expenses with Respect to a New Business ........................................................................................................................ 28
Capital Gains and Investing and Trading .......................................................................................... 29
26
27
28
Statutory Framework ................................................................................................................................................................ 29
Basic Concepts ............................................................................................................................................................................. 29
Computation of Gain or Loss .................................................................................................................................................. 30
3
Residence
1 Residence of Individuals
Objective: set out principles of residence for individuals citing relevant cases and provisions of
the ITA and apply those principles to a particular fact pattern to determine whether a person is
“resident” in Canada for the purposes of the ITA.
1.1 When is Someone Resident in Canada?
1.1.1 General Common Law of Residence
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Threshold: income tax is payable on the taxable income of “every person resident in
Canada at any time of the year”. (2(1))
“Residence” is not defined in the Act but has been interpreted in many cases.
Everyone is resident somewhere at all times, and they may be resident in multiple places.
(Thomson)
Residence “depends on the spatial bounds within which a person spends his or her life or
to which his or her ordered or customary living is related”. (Thomson)
o The CRA confirmed Thomson by referring to residence as the location of the “settled
routine” of their life they customarily live. (IT-221R3)
Primary factors to consider in assessing the residence of an individual: (IT-221R3)
o The location[s] of a person’s home[s] is a “substantial consideration” (Beament,
Thomson)
 The TP must have a right to stay there (e.g. not the home from a broken
marriage). (Beaument, Russell)
o The location of one’s spouse is a substantial consideration. (Russell)
o The location of one’s children/dependents is a substantial consideration. (Russell)
Other factors to consider in assessing the residence of an individual: (IT-221R3)
o Intention is relevant, but not determinative. (Thomson, Beament)
o Personal property in Canada (e.g. furniture, clothing, vehicles) (McFayden)
o Social ties to Canada (e.g. employment, involvement in Canadian business, bank
accounts, RRSPs, credit cards, investments, etc.) (McFayden)
o Hospitalization and medical insurance coverage from a province or territory of
Canada (Allchin)
o A driver’s license from a province or territory of Canada (McFayden)
o A Canadian passport (IT-221R3)
o Memberships in Canadian unions or professional organizations (McFayden)
o NB where D wasn’t originally a resident in Canada (e.g. Taiwanese/American
worker), the court may give that weight in finding non-residency. (Shih, Schujahn)
“Ordinarily Resident”: this term from 250(3) just means “resident”. (Thomson)
o NB Thomson, McFayden, and Nicholson were in the context of “ordinarily resident”.
The CRA will assume that you are still resident if you leave Canada for less than two
years. (IT-221R3)
4
1.1.2 Examples of Residency
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D intends to be resident in Bermuda, owns houses in USA and Bermuda, stays in Canada for
a few months every year with his family. (Thomson)
D away from Canada from some years, but his wife and children live in a house in Canada.
(Russell)
Ontario student goes to school in the US, stays with friends. Gets bills sent to US address,
gets a US immigration lawyer, attempts to move family to US. Spouse and children still live
in ON, she still has ON health insurance and an ON club membership. (Allchin)
Air Canada pilot leaves Canada to live in the Bahamas. Moves everything he owns there,
opens a bank account there. He only visits on a limited basis personally, but continues to be
an Air Canada pilot and has a variety of Canadian work-related interests (clothes at his
parents’ place, bank account for Air Canada to deposit info, pilot’s license, etc). (Hausser)
D goes to Japan for 3 years. Leaves with wife, but leaves property in Canada (rentals,
furniture), kept professional membership, RRSP, credit card, ON driver’s license, etc.
(McFayden)
1.1.3 Examples of Non-Residency
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D away for the war, left no home in Canada. Lived for a time with wife and child in UK.
Ultimately returned to Canada (though not his original plan). (Beament)
D has house/spouse/kids in Canada. D is an American working in Canada for part of the
year, then leaves. Spouse and kids stayed behind in order to facilitate the sale of the house.
(Schujahn)
D visits Canada for short stays (< 59 days per year). Works in Taiwan, but his wife and
children move there for the kids’ school. D just visiting “temporarily”. (Shih)
D transferred to UK by employer for 1.5 years – no intent to return, but company transfers
him back. Collapsed his RRSP on departure, has girlfriend in UK, only returned to Canada
once. Has a (separated) wife and children in Canada; has his name on the title of a
matrimonial home for mortgage purposes but doesn’t live there. Still has OHIP coverage for
his children; has a bank account so that his wife can withdraw support payments for their
children. (Nicholson)
1.1.4 Special Case: Sojourning Rule and Part-Year Residency
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Sojourning Rule: if you sojourn in Canada for a total of 183 days or more over the course
of the year, you are deemed to be a resident for the whole year. (250(1)(a))
Sojourning is a “temporary stay” (or series of stays). Thus, you may be a resident in Canada
even if you stay for less than 183 days. The rule only deems residency, it doesn’t deny it.
(Thomson)
If the time spent in Canada is not transitory, you may be a part-year resident instead.
(Schujahn)
o Example: D lives in Canada until 2 Aug 1957 (214th day of the year), when he moves
to the US for work. D’s stay in Canada was non-transient; he was a part-year
resident. (Schujahn)
Foreign Workers: coming into Canada for the day (usually from the US) is not sojourning,
so long as you don’t spend the night. (Arnell Food Distributors)
o NB you will still be taxed on Canadian source income – just not worldwide.
A part-year resident pays tax as a resident (on worldwide income) for that part of the
year for which they are resident, and as a non-resident for the rest of the year. (114)
5
o This applies only to individuals; corporations are plum out of luck. (114)
2 Residence of Corporations
Objective: set out principles of residence for corporations citing relevant cases and provisions of
the ITA and apply those principles to a particular fact pattern to determine whether a corporation
is “resident” in Canada for the purposes of the ITA.
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Deemed Residency: corporations incorporated in Canada on or after 27 Apr 1965 are
deemed to be resident in Canada. (250(4))
o A corp incorporated in Canada before is resident in Canada if: (250(4)(c))
 It has carried on business in Canada after that date, OR
 It is resident under the common law rule.
A corporation is resident wherever “the central management and control actually
abides”. (DeBeers)
o This is usually where the board of directors meets. (DeBeers)
 The directors’ location is always determinative, unless their power has been
“usurped”. (Wood)
o When the shareholders dictate the directors’ actions (e.g. where there is a majority
shareholding company), the test is where the shareholders reside. (Unit
Construction)
Comments on the central management and control test:
o This is a de facto test. Where does control actually reside? (not merely de jure)
(Unit Construction)
o Even when the location is selected for tax avoidance and the corp does all of its
business in Canada, if the directors are non-Canadian and non-usurped, it’s not a
Canadian resident. (Wood)
 This indicates a high degree of formalization of the test.
3 Residence of Trusts
Objective: set out principles of residence for trusts citing relevant law and apply those principles
to a particular fact pattern to determine whether a trust is “resident” in Canada for the purposes of
the ITA.
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When the ITA refers to a “trust”, it’s referring to the trustee. (104(1), 248(1))
Trusts are deemed to be individuals (and taxed accordingly). (104(2))
General Test: the trust resides wherever the trustee resides.
Multiple Trustees: the law here is presently unclear – NB the CRA uses the same test as
Garron.
o The central management and control test has been applied to trusts. (Garron)
6
Concept of Income
4 Policy and Definitions
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Haig-Simons: income is the accretion to economic wealth and power between two points
in time.
Carter Commission: “a buck is a buck is a buck” – all accretions to wealth are income.
Carter Commission “Comprehensive Tax Base” contained several concessions to
practicality:
o Capital gains taxed at 50% (formerly 0%).
o Due to neutrality concerns, taxes on capital gains are deferred until realization
(since taxing them on an accrual basis would force taxpayers to liquidate their
capital assets).
Source theory: the fruit-tree analogy: the source is the tree that produces income, the
fruit. Fruit without a tree is not from a source.
5 Enumerated Sources
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There are four sources of income: office, employment, business, and property. (3(a))
o 5-8 has rules on office and employment; 9-37 on business and property.
o S.56(1) includes additional sources, including pension benefits and EI benefits.
o Note that income from property does not include capital gains; they’re separate
(9(3), 3(b)).
6 Unenumerated Sources
Objective: using the cases of Canada v. Fries; Schwartz; Fortino; Manrell demonstrate the
reluctance of courts to find unenumerated sources of income.
6.1 Do Unenumerated Sources Exist?
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s.56 states “without limiting… s.3”, which supports the existence of unenumerated sources.
Unenumerated sources do exist, we just haven’t recognized any yet. (Swartz)
Potential sources that have been rejected at common law:
o A contract alone is not a source (need some additional connection to a source)
(Swartz)
 Damages for breach of employment contract before it has started are
sourceless. (Swartz)
o Non-competition covenants (not listed under s.42, which lists other kinds of
covenants) (Fortino)
o Payment received for waiving a right that is not enforceable against others (and
thus not really “property”) is not income from a source or capital gains, e.g. noncompetes. (Fortino, Manrell)
o Strike pay is not income from a source. (Fries)
Policy: the ITA has no rules for such sources, so courts are unlikely to find them (too
complex).
7
Objective: apply the cases of Cranswick; Bellingham; and Stewart to assess whether a particular
item may, or may not, be considered “income from a source”.
6.2 Factors that Suggest No Unenumerated Source
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NB the more of these that are found, the less likely that it will be a source.
D had no enforceable claim to the payment. (Cranswick)
There was no organized effort by D to receive the payment. (Cranswick)
The payment was not sought after or solicited by D in any manner. (Cranswick)
The payment was not expected by D, either specifically or customarily. (Cranswick)
The payment had no foreseeable element of recurrence. (Cranswick)
The payor was not a customary source of income to D. (Cranswick)
The payment was not in consideration for or in recognition of property, services or
anything else provided or to be provided by D (i.e. not earned by D’s or another’s
activities). (Cranswick)
Not a productive source (i.e. a source that can produce income) (Bellingham)
o Example: D underpaid for expropriated land, awarded damages against city that
include statutory-imposed “additional interest”. Not a productive source. This is
penal in nature; it is infeasible to do this (i.e. get underpaid for expropriation) to
produce income. (Bellingham)
The activity was not in the pursuit of profit (i.e. no intent to earn money). (Stewart)
o The taxpayer’s intention is determinative if reasonable (evidence to support)
o Example: D buys property, takes yearly losses, sells for capital gain. No intent to
profit. (Stewart)
Example: D owns shares in company A; parent company B pays out all of A’s shareholders
to avoid litigation. Payment of “an unusual and unexpected kind”, no source. (Bellingham)
7 Other Sources
7.1 Gifts, Inheritances, Windfalls, Illegal Income, Imputed Income
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Gifts and inheritances: personal gifts are not taxable, but gifts received in the course of
business or employment are seen as benefits and thus included (see below).
o Gifts of property are deemed to be dispositions at fair market value, and thus may
incur capital gains. There are rollovers for gifts between spouses or shareholders
and their companies. (69(1))
o Inheritances are not taxed.
Windfalls: are not taxable as long as they don’t constitute a business (e.g. horse racing
example below).
Illegal income is taxable as an accretion to wealth. (Buckman, Poynton, Eldridge)
o NB if the proceeds are seized during a criminal investigation then there is no
accretion to wealth and thus no income.
Imputed income is just an expense avoided (e.g. avoiding rent by owning a house). Not
taxed.
7.2 Damages and Settlements – The Surrogatum Principle
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Surrogatum: tax damages and settlements are intended to replace something. Tax them in
the same manner as you would the thing they are replacing. (London & Thames)
8
7.2.1 Contractual Damages
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Expectation damages: where damages for lost income are awarded, tax those damages as
income.
o Exception: where a breach of contracted has resulted in the loss of the whole
business (e.g. breach of franchise license), that is compensation for the loss of the
source, and thus a capital gain.
Reliance damages: this is not an accretion to wealth (just replacing wealth) – not taxed.
o Expectation: if the amount is to compensate for the loss of property (e.g. a
destruction of a building), it will be taxed as a disposition of property, and thus a
capital gain.
Restitution damages: like reliance damages, not taxed – just compensation for loss.
7.2.2 Personal Injury Awarded
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These usually have no source. You are being compensated for the loss of physical ability or
the infringement of the right not to be injured. Really non-contractual restitutionary
damages. (Schwartz)
Cost of care: not taxed (no accretion to wealth).
Compensation for lost earning capacity: (Tsiaprailis)
o Post-judgment damages: not taxable. Replacing a source, to be invested. Pay tax on
interest.
o Post-injury, pre-judgment lost income: also not taxable.
Punitive damages: like a windfall, not taxed. Victim’s gain is only incidental to the policy
decision to penalize the wrongdoer. (Bellingham)
8 Computation of Income
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Income is determined by totaling all of the amounts from each source. (3(a))
Income from sources is included in income and must be (a) calculated source-by-source,
and (b) territorially (province-by-province and country-by-country). (3(a), 4)
Next taxable capital gains are included n income (but are calculated under a different
scheme, presented in Part I, Division B, subdivision c). (3(b))
Policy-based deductions: deductions under subdivision e are allowed (e.g. RRSP, s.60,
moving expenses, s.62, partial child care expenses, s.63). (3(c), 60, 62, 63)
Loss recognition: current year losses from enumerated sources can be deducted. (3(d))
o If the amount produced under 3(d) is negative, income is deemed to be 0. (3(f))
The amount calculated by 3(d) or 3(f) is a person’s net income. (3(e))
9
Income from Employment
9 Distinction between Employment and Business
Objective: analyze, in a given fact pattern, citing relevant authority, whether a person is an
employee or an independent contractor.
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Employment is defined as “the position of an individual in the service of some other
person”, whereas a business involves a “contract for services”. (248(1))
The fundamental test: “is the person who has engaged himself to perform these services
performing them as a person in business on his own account?” (Weibe Door)
o If yes – contract for service (business). If no – contract of service (employment).
(Weibe Door)
The Control Test – The Main Test Today: Today, the control test is the most significant.
Its factors are non-exhaustive. (Sagaz)
o This test is not determinative; the three Weibe Door tests can override it. (Pletch)
o Control Test: assessing degree of control by the engager of services over the
worker. (Weibe Door)
o Non-exhaustive factors indicating an independent contractor (IC) relationship
(“Sagaz factors”): (Sagaz)
 Worker determines how work is performed, engager of services gives
specified result.
 Worker can choose other persons to delegate the work to.
 Worker specifies his own start and stop times
 Worker provides equipment.
 Worker has opportunity for profit or risk of loss (including financial risk).
 Worker giving direction more than he is given direction. (Pletch)
 If an IC were hired, the same degree of control would be needed. (Winnipeg
Ballet)
 Example: ballerinas have extensive control exercised over them, but
they’re ICs since the same degree of control is exercised on guest
dancers (who are ICs). (Winnipeg Ballet)
o Non-exhausting factors indicating an employee-employer relationship:
 The agreement provides for full-time engagement of the worker. (Pletch)
 Travel: the worker having to go where he is sent. (Pletch)
 The opposite of any of the IC factors will suggest an employee-employer
relationship too.
o Critique: even where the person who engages the services tells them how it is
supposed to be done, the person doing it may have a lot of control over how it is
done, or vice versa. (Pletch)
o NB the factors and other tests developed in earlier case law are still relevant. (Wolf)
Other tests:
o NB these tests can override the control test even if the person is found to be an IC by
the control test. (Pletch)
o Integration Test: two ways to apply the test (Lord Denning prefers the first):
(Weibe Door)
10
1. Is the person’s work essential to the engager’s business? Then it’s
employment.
 Critique: isn’t almost everyone an employee under this test? Over
inclusive.
 2. Could the worker’s business succeed without providing the services to
this person? (Pletch)
o Economic Reality Test: consider the chance of profit and risk for loss. (Weibe
Door)
 Whether the worker had other clients is a relevant factor. (Pletch)
 Ownership of tools is a relevant factor, particularly where it’s a large
expense. (Weibe Door)
 The Sagaz factors for the control test are also relevant here. (Sagaz)
 Example: a worker with specialized skills in a 5-year contract with no job
security or benefits (bought his own health insurance) had “financial risk”
and is an IC. (Wolf)
o Specified Result Test: (Sagaz, Weibe Door)
 Does this person place his services at the disposal of the employer for a
period of time, without reference to a specified result? If so, employment.
 If the worker is to provide a specified result, but can decide how and when to
perform the work, then they are likely an independent contractor.
o Total Relationship Test: in addition to the other tests, look at the “total
relationship”. No one test is determinative; need to look at them together, in the full
context. (Weibe Door, Pletch)
 Example: where company C wanted to hire D as president, he suggested that
he incorporate and they hire his management company. Control test => IC,
but integration test and surrounding circumstances => employee. (Pletch)
Form of Contract: where there is “no clear result” from all of those tests, defer to the
parties’ characterization of the relationship. (Wolf, Winnipeg Ballet)
REMEMBER: APPLY ALL THE TESTS!
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10 Timing
Objective: be able to determine, in a given fact pattern, citing relevant authority, whether a
particular amount is to be included as income from employment at a particular time.
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Income from employment is taxed at the time received by the taxpayer (cash method).
(5(1))
o Prompt receipt is incentivized: if an employer doesn’t pay an employee within 120
days of the employer’s year’s end, they cannot include those wages as an expense in
that year. (78(4))
Receipt: courts are relatively strict about applying the cash method:
o Example: D works on the family farm for $800/year. Dad pays her $100/year, with
the rest to be paid upon her marriage. By that time, the withheld amount was $8000.
Assessed in the year received, taxing the total amount of $8000 (even though
$800/year would pay $0 tax). (Vegso)
o Mailed Income: receipt of income is deemed to occur at the time of mailing, not
actual receipt.
11
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Constructive Receipt: it is not necessary for an employee to “touch or feel” earned
income; the employee need merely have enjoyed the benefit to have received it. (Morin)
o Example: Quebec gov’t withholds $2000 from D’s income. Constructive receipt.
(Morin)
o Example: when an employer is contractually obliged to make a payment to
someone other than an employee for the employee’s benefit, it is “received” by that
employee when paid. (Markman)
o Example: D is the paymaster for a business, defers his payment into the next year. D
had the ability to be paid at will – deemed to receive it as soon as he could demand
payment. (Blenkham)
11 What’s Included in Employment Income?
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The rules in ss.5-8 govern income from employment.
Salary: income for a taxation year from an office or employment is the salary, wages or
other remuneration received by the taxpayer. (5)
Benefits: the taxpayer must include in income “the value of board, lodging and other
benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of,
in the course of, or by virtue of an office or employment”. (see below) (6(1)(a))
Allowances: must include “all amounts received by the taxpayer in the year as an
allowance for personal or living expenses or as an allowance for any other purpose.”
(6(1)(b))
12 Benefits: General Scheme
12.1 Inclusion in Income
Objective: analyze, in a particular fact situation, citing relevant authority:
a. whether there is a benefit to an employee;
b. if there is a benefit to an employee, whether the benefit is likely to be considered a benefit
in respect of employment; and
c. if it were considered a benefit in respect of employment, how the benefit would be valued.
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Benefits are included in income from office or employment. (6(1)(a))
Definition: benefit = “material acquisition which confers an economic benefit on the
taxpayer. (Savage)
o Example: employee given $100 by employer for completing a training course.
Benefit. (Savage)
o Example: employees buy suits for work, reimbursed by employer. Not a benefit –
suits not suitable for personal use, only for employment. (Huffman)
o Historical Test: only a benefit if it is convertible into money (Tennant – UK)
 This is not the test in Canada (but still is in the UK). (Waffle)
 Example: bank provides employee with lodging. Not a benefit (no
subleasing/etc). (Tennant)
12
Example: D gets free cruise by Ford for good sales. Not convertible, but still a
benefit. (Waffle)
The benefit does not have to be convertible into cash. (Waffle)
“In respect of” should be given “the broadest possible meaning in terms of connecting the
benefit to the employment”. (Savage)
Relationship to Employment: benefits with a small relationship to employment are
taxable. (Savage)
o ASK: is this a personal gift (Christmas, wedding, birthday, etc.)?
o Intent of the Employer: is the benefit a “personal gift” (not taxable) or is it a
contribution that is expected to get some business quid pro quo? (Savage)
 Don’t have to be the employer – a benefit from a 3rd party can have this
relationship. (Waffle)
 Example: free cruise from 3rd party to reward good sales of their product.
Taxable. (Waffle)
Valuation: choose employer’s cost or market value method, then apportion taxable/nontaxable.
o Cost to Employer: the benefit is worth whatever the employer paid for it. (Giffen)
 Example: D has airline points from flights bought by employer. Hard to
assess – worth less than the price of a ticket (too many restrictions on
points). Court’s creative assessment: Value = (discount economy price / full
economy price) X full business price. (Giffen)
 CRA: airline points acquired on your personal credit card aren’t taxable
unless they can be converted into cash, are part of an employer’s benefits
program, or are tax-avoidance.
 NB this is a policy of convenience.
o Fair Market Value: the benefit is worth whatever the employee can sell it for.
(Wilkins)
 Example: employer pays $14 for a suit, employee sells for $5. Assessed value
is $5. (Wilkins)
o Apportionment: where the benefit is only partly taxable, apportion it reasonably.
(Zakoor)
 Example: D gets a Cadillac from his employer; 1/5 of its use is personal, but
the extra cost of its “luxurious character” (i.e. the difference between the cost
of a Cadillac and a reasonable car) is apportioned to D. Ultimately assessed at
1/3 of its original cost. (Zakoor)





12.2 Allowances
Objective: be able to assess, in a given fact pattern, citing relevant authority, whether a particular
amount paid by an employer is an “allowance” and whether the allowance must be included in
income from employment.


Allowances are 100% included in income absent an exception (out-of-town travel, etc).
(6(1)(b))
Definition: an allowance is “any periodic or other payment that an employee receives from
an employer in addition to salary or wages without having to account for its use”. (IT522R)
13


Reimbursements: “a payment in satisfaction of an obligation to indemnify or reimburse
someone to defray his or her actual expenses”; this requires an accounting of expenses.
Not taxed. (IT-522R)
Example: D given $500 up front, but employer did want receipts for the amount spent. D
showed that he spent more than $500, so his expenses had merely been defrayed. Not an
allowance. (Huffman)
12.3 Home Relocation Benefits
Objective: be able to assess, in a given fact pattern, citing relevant authority, whether or not an
amount paid by an employer in respect of home relocation is a benefit that must be included in
income from employment.

When relocating for employment, special statutory rules overrule the case law.
o If relocating your home at least 40km closer to your work, up to $15k may be
reimbursed by the employer tax-free. The rest goes into income at a ½ rate. (6(19)(22), responding to Ransom)
o If an employer pays the interest on part of a larger mortgage, that is included in
income. (6(23), responding to Hoefele)
o Example: D moves, buys identical house for $10k more; employer pays difference.
Taxed. (Phillips)
o Example: employer rescinds contract with D to buy house at set rate if he moves,
pays D an amount in compensation. This is a benefit from employment – taxable.
(Blanchard)
13 Deductions from Employment Income
13.1 Specific Deductions
Objective: be able to assess whether travel expenses, legal expenses, home office expenses, or
other expenses permitted in those paragraphs of s.8(1) set out in the statutory supplement can be
deducted from income from employment citing relevant authority.


No deductions from office/employment income are allowed other than those in s.8. (8(2))
o Must look in 8(1) to find the deductions that are specifically allowed.
Permitted Deductions: all deductions must be reasonable in the circumstances. (67)
o Travel (and motor vehicle) expenses: allowed where the taxpayer is ordinarily
required to travel away from the place of business to carry on employment, and is
required, under the contract of employment, to pay travel or motor vehicle
expenses. (8(1)(h), (h.1))
 Example: American football player stays in hotel in team’s city during
football season. No deduction for travel expenses – didn’t travel away from
place of business. (Delancy)
 Example: Judge has sensitive case, buys bulletproof car. No deduction for the
extra expense of the bulletproofing – not travelling away from the workplace.
(Hogg)
o Meal expenses: allowed where the employee is away from the municipality where
employment is located for more than 12 hours. (8(4))
14
Meals required by employment (due to travel or otherwise) are only ½
deductible. (67.1)
o Home office expenses: only deductible if (1) it’s where the duties of
office/employment are principally carried out, or (2) it’s exclusively used for
earning income and used continuously and regularly for meeting clients. (8(13)(a))
 This is also an issue under income for business (handled by 18(12)
instead).
 Rent: only deductible if the expenses are required by the contract of
employment. (8(1)(i))
o Supplies: supplies consumed in the performance of duties of employment are
deductible only if they are required by the contract of employment. (8(1)(i))
o Legal expenses: deductible if incurred to recover salary or wages. (8(1)(b))
 Example: D engaged in a legal proceeding against his employer in an attempt
to show that he was entitled to a higher wage. Legal expenses deductible.
(Loo)
 Example: D convicted of dangerous driving; gets no pay while suspended. D
appeals. Legal expenses deductible – overturning suspension was essential to
earning wages. (Blackburn)

15
Income from Business or Property: Profit
14 Characterization of “Business” and “Property” as a Source
14.1 Profit

Profit is not defined in the Act, but it is a net concept: revenue less expenses. Therefore,
the revenues of a business are included in income from business. (Canderel, Symes)
14.2 “Business” or “Property” Defined
Objective: be able to assess, with reference to relevant authority, whether a taxpayer’s endeavor
involves a “business” or “property”.




Business is an “adventure in the nature of trade…” (248(1))
Property means property “of any kind whatever”, whether corporeal or incorporeal, etc.
(248(1))
o “Property” entails an exclusive and legally enforceable claim. A right to carry on
business does not fit this, so the right to receive non-competition payments is not
property “of any kind”. (Manrell)
Pursuit of Profit Test: a business is an activity undertaken in pursuit of profit: (Stewart)
o Assess whether the activity is clearly commercial, or whether there is a personal
element.
 If it’s clearly commercial, then you’re done – it’s either business or property.
o If there’s a person element, ask, based on objective evidence, whether there was a
predominant intention to profit. If so, then it’s business/property. Otherwise not.
 “Profit” here is used in the ordinary, business person’s sense (so it includes
capital gains).
o Example: a rental property structured to take losses is commercial.
Business/property. (Stewart)
o Example: D is a partner in a partnership P that buys a corp C for $2.2M; gives C $1
and the rest sits on IOU. High rate of interest, plus yearly service fee means that P
(and thus D) loses money each year. Commercial – these are business losses. (Wall)
o Example: D buys tax shelter investments, pays $6M in interest and only makes
$600k in dividends. D makes a capital gains profit on disposition of the shares. The
investment wasn’t personal, so court allows deduction of the losses as coming from
business/property. (Ludco)
Old Test: need a “reasonable expectation of profit” (REOP) to be business/property.
(Moldowan)
o This is still relevant to today’s test, but is no longer determinative (Stewart)
o Factors: (Moldowan)
 Past Performance: profit and loss experienced in previous years.
 Expertise: the taxpayer’s training (less expertise makes expectation less
reasonable).
 Business Plan: the taxpayer’s intended course of action to convert losses
into profits.
16
Financial Assessment: the capacity of the venture to make a profit given its
capitalization (i.e. the financing; heavy debt = high interest) and after
deduction of capital cost allowance.
 Time: the time that a taxpayer expends on the activity (i.e. avoid mere
hobbies). (Sipley)
o Proposed Amendment (31 Oct 2003): restrict deductibility of losses from interest
and other expenses based on a reasonable expectation of profit test (“profit” doesn’t
include capital gains).

14.2.1 Business vs. Property


Level of Activity test: income from property is passive (buy a debenture/realty, then sit
back and wait for returns), whereas income from business is active.
o E.g. income from a rental property is generally income from property, but if enough
services are added (housekeeping, laundry, grounds keeping, etc) then it may
become income from business.
Differences in Statutory Treatment: keep the following in mind when differentiating:
o Attribution rules: only apply to income from property, not business. (74.1, 74.2)
o Non-residents are taxed normally on income from business and dispositions of
property (i.e. capital gains). Income from property is taxed under a different regime
in Part XIII. (2(3))
o Allocation of Income for Provincial Tax: property is taxed in the province of the
owner’s residence, whereas business is taxed in the provinces of permanent
establishment.
o Foreign Accrual Income Rules: if a foreign company only holds your investments,
and doesn’t carry on other business, you are taxed for that income. Only applies to
property.
o Capital Cost Allowance: a capital cost allowance cannot be applied against income
from property to induce a loss; (just draws profit to 0). It can induce a loss for
business.
o Small Business Deduction: only applies to business, not property held by the
business.
14.3 Personal Endeavors Distinguished
Objective: be able to apply the Stewart approach to “business” or “property” to possible personal
endeavors including hobbies, rental properties, and gambling.


Pursuit of Personal Pleasure: even if there is a personal element, still need to determine
whether it’s in pursuit of a profit or a personal endeavor. A gain from a personal endeavor
is a windfall. (Stewart)
o Example: retired lawyer goes back to practice. Takes no courses, keeps almost no
records, often doesn’t bill clients, doesn’t advertise, yearly losses. FCA: personal,
SCC: commercial. (Landry)
Hobbies: no deduction for a hobby (NB all of these are pre-Stewart and thus use the REOP
test)
o Example: author publishes 6 books – no REOP, just a hobby. (Payette)
o Example: D is a professional auto racer. Best-ever winnings: $500. Yearly losses:
approx $12k. Expert: “every professional auto racer in Canada loses money”. Hobby.
(Cree)
17


o Example: D operates a restaurant with a seating capacity for 20, open 4 days/week.
Loses money for several years, but then increases seating capacity, advertises, and
opens for 6 days/week (but still takes losses). Pre-reno, just a hobby. After:
commercial. (Sirois)
o Example: D has a startup that writes computer software to operate machining
equipment (which D buys). D takes losses. TCC: no business conducted, so no source
for income/loss: hobby. (Knight)
o Example: D buys 48ft boat, says he wants to charter it out. Substantial losses. Hobby
(Chequer)
Rental Properties: these are usually commercial, but there can be personal elements.
o Example: D rents house to his mother, but collects less than he spends on
upkeep/etc. Court rules that this is not really a business on the basis of the REOP
test. (Maloney)
Gambling: must be systematic/extensive/organized to be a business (pre-Stewart!).
(Walker, Luprya)
o Example: D gambles on everything, loses. Not organized; no “commercial
character”. (Morden)
o Example: D is involved in horse racing, owns his own horses, has extensive
knowledge, and typically makes money on the track. Systematic and extensive – this
is a business. (Walker)
o Example: D practices pool daily, returns to the hall at night and challenges others to
games after plying them with drinks. Makes $63k/year. Organized – this is a
business. (Luprya)
o Example: Ds make $5.5M in 4 years by investing heavily in sports lotteries. Watch
sports all day. Lose 95% of their bets, but profit overall. Bet $200k-$300k weekly,
had to hire runners to go buy the tickets. Got bulk discounts from retailers. Spent
about $50M on lottery tickets in that time. TCC: not business. No risk management,
no intent to profit. (Leblanc)
 Prof: this is just the TCC, and it looks like it was wrongly decided.
 NB this is the only post-Stewart gambling case.
18
Income from Business or Property: Inclusions
15 What’s Included?

Profit: income from business is calculated under s.9-37, starting with 9(1) that says “a
taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit
from that business or property”.
o Profit is not defined in the Act, but it is a net concept: revenue less expenses.
Therefore, the revenues of a business are included in income from business.
(Canderel, Symes)
o See profit section above for more.
16 Timing
16.1 Timing – “Realization Principle”
Objective: assess when an amount is likely to be included in income from business or property.

Realization: an amount is not realized until it has the “quality of income”. (Ikea)
o An amount is included in income when the taxpayer’s right to the amount is
absolute and unrestricted, by contract or otherwise, as to its disposition, use, or
enjoyment. (Robertson)
o Am amounts may have the quality of income even when it is not yet received by the
taxpayer; an amount must be included in income when you have the right to be
paid (in accrual method). (Ikea)
16.2 Accrual Method of Accounting
Objective: assess when an amount will be considered receivable including how it would apply to
holdbacks and expropriation compensation.

Accrual method: amounts receivable that are actually received in another year are
included in income in the year in which they were earned, not received. (12(1)(b))
o 12(1)(b) is enacted “for greater certainty”; items it doesn’t list aren’t excluded.
(12(2))
o Receivable: an amount is “receivable” when one has a clearly legal (though not
necessarily immediate) right to receive it. (Colford)
 This is determined by private law and will vary depending on the situation;
it is normally on completion of the services or delivery of the goods
contracted. (Colford)
o Example: a construction company cannot receive “construction holdback” until
their work has been certified. Thus, that amount is receivable at the time of
certification (not completion). (Colford)
o Example: as soon as an expropriation occurs, the party expropriated from has a
right to be paid, but it is not receivable until the amount is clear (e.g. through
arbitration). (Benaby)
19

o Advance Payments for Unearned Items: under accrual accounting, inclusion in
income is deferred until the work is completed (subject to splitting across the years
work occurred in).
 Advance payments are included in income in the year paid (not completion).
(12(1)(a))
 This includes deposits.
 This income may then be deducted and re-included in income in the
following year, thus restoring the accrual method (and creating a record of
the payments). (20(1)(m), (m.2))
Cash Method: income from property can generally use the cash method. (12)
17 Interest
17.1 Imputed Interest in Blended Payments
Objective: be able to assess in a given fact pattern, with reference to relevant authority, whether a
particular payment on a loan consists partly of principal and partly of interest and how the
payment is to be treated under the ITA.



Interest: accounted on a cash or accrual basis, subject to some modifications: (12(1)(c))
o Corporations: if the lender is a corp/partnership/etc, interest “accrued, received or
receivable” is to be included in income. Thus, interest that becomes receivable in
one year and is received in another must be included in income in both years.
However, the taxpayer may deduct the interest from the later year’s income.
(12(3))
o Individuals: interest on an “investment contract” (any debt obligation, with certain
exceptions) accrued to the “anniversary day” of the contract is reported annually.
(12(4))
 “Anniversary day”: the day before the issue of the contract, repeating
annually.
 E.g. if the contract starts on Nov 1, 2010 then the period of Nov 1, 2010 – Oct
31, 2011 is included in income for 2011 (thus avoiding the headache that
corporations deal with).
Sale of Property: CRA policy: a clearly legal right to property occurs at the date of
exchange, or (where that is not clear) where possession or the right to use passes. (IT170R)
o Real Property: receipt generally occurs at the closing date. Note also that realty is
not a good or service, so 12(1)(a) doesn’t apply (so its scheme for advance
payments doesn’t apply).
Services: payments for services are receivable when the services are rendered. (Maritime
Telegraph)
o Example: D provides telephone services, bills December’s long-distance calls in
January. Included in income in December, when the calls were made. (Maritime
Telephone)
o Example: power company must include payments for power at date delivered, not
date billed. (Kootenay)
20



o Professional Services: lawyers, doctors, dentists, accountants, vets, and
chiropractors may choose not to include works in progress in income. If they do so,
they must keep doing so. (34)
Dividends:
o “Dividend”: A pro rata distribution of income by a corporation to its shareholders.
(248(1))
 Does not include: liquidation of the company or a repayment of capital.
 Does include: A “stock dividend” (a dividend paid in shares of the
corporation, not cash)
o These are income from property and are accounted on a cash basis. (12(1)(j), (k))
Rent and Royalties: included on a cash basis. (12(1)(g))
o This prevents resource extraction (paid in “installments”) from being taxed as a
capital gain.
Anti-Avoidance Rules: include in income the following:
o Certain benefits received by virtue of shareholding (e.g. shareholder loans) (15)
o “Imputed” interest in blended payments and indexed or discounted debt
obligations. (16)
 Imputed Interest in Blended Payments: if part of the payment can
reasonably be considered to be interest, then it will be deemed to be interest.
(16(1))
 Example: D lists property for $450k. P offers D $350k in cash. D
counteroffers $395k, P rejects. D offers $395k over 6 years – P
accepts. Court: this is effectively a loan with $45k in interest. Imputed.
(Groulx)
 Debt Obligations Issued at a Discount:
 Example: D buys a $10k debt for $6k. The extra $4k is a capital gain.
(Wood)
o NB this was a legit market transaction, so the court didn’t
impute interest.
 Example: D loans $6k in return for promise to pay $10k in 10 years
(plus 5% interest). Imputed interest – goal was to structure loan to
avoid tax (quasi-fraud). (Satinder)
 Recall: interest on a loan incurred for the purpose of earning income from
business or property is deductible, so s.16 doesn’t necessarily increase one’s
tax liability. (20(1)(c))
o Canadian companies: imputed interest in amounts owed to related foreign
companies (17)
o Interest-Free Loans: interest is deemed to accrue annually (at a rate prescribed
under Reg. 7000). (12(9))
21
Income from Business or Property: Deductions
Objective: be able to assess in a given fact pattern with reference to relevant authority whether:
i.
ii.
iii.
an expense is deductible in determining income from business or property;
whether the amount of an expense is reasonable; and
when an expense can be deducted.
18 Deduction Rules: Basic Questions



Deductability: is this expense a permitted deduction?
o Ask: what does GAAP say? Does the ITA say otherwise? If not, follow GAAP.
Timing: when can the deductions be recognized?
Cite the general principles below (#20).
19 Policy Goals





Ability to Pay: business expenses aren't an accretion to wealth (they just earn you the
ability to earn revenues) so they should not be included in income.
Accurate Measurement of Profit: accounting has an objective of accurately measuring
profit, which is a goal shared by tax laws. So generally allow GAAP deductions (subject to
the ITA).
Certainty and Predictability: some arbitrary rules avoid costly assessment or litigation.
Controlling Abuse of Business Deductions: some deductions are hard to monitor (e.g.
entertainment expenses). These deductions may be (partially) excluded.
Tax Policy as Public Policy: should fines, damages, or illegal payments be deductible?
20 Income Earning Purpose and the Reasonableness Requirement


An expense must be incurred for the purpose of gaining or producing income from a
business or property in order to be deductible. (18(1)(a))
o There are no deductions for personal or living expenses. (18(1)(h))
 Non-exhaustive definition: expenses relating to property maintained for
the use or benefit of the taxpayer (or their relations) and not involved in
business. (248(1))
All deductions must be reasonable in the circumstances. (67)
o Unreasonable due to personal elements:
 Example: D sponsors a baseball team for $22,500, calls it an advertising
expense. It came to over 50% over the company’s expenses. D’s owner was a
big baseball fan. Deduction limited to $5k, the cost of a reasonable
advertising campaign. (No. 511)
o Unreasonable due to non-arm’s-length payments:
 Example: company owned by A and B, pays A $20k, B $13k, and B’s wife (C)
$13k. C’s services not worth $13k – B/C attempting to get favorable tax
22


treatment via income splitting. Deduction for C’s wages limited to $6k ($8500
on appeal). (Mulder)
Example: D, a dentist, has family doing his accounting. They form a separate
company, who he then pays more (in line with market rate). Deduction
limited to former rate. (Costigane)
Example: accountant with revenues of $55k could deduct the $34,500 he
paid to his wife’s management company (for secretarial services – typing,
reception, record keeping). This was “a common and reasonable business
deal”. (Aessie)
21 Personal and Mixed Expenses – The Tests



Test for Personal vs. Business Expense: Apply the Symes test, which has these factors:
(Symes)
o 1. Whether the expense is deductible according to accounting principles or practices
(e.g. GAAP)
o 2. Whether the expense is normally incurred by other taxpayers carrying on
similar businesses.
o 3. Whether the expense would have been incurred if the taxpayer were not engaged
in the pursuit of business or property income (or if it would be there regardless, e.g.
food, shelter)
o 4. Whether the taxpayer could have avoided the expense without affecting gross
income.
o 5. Whether the expense is an expense “of the trader” or “of the trade” (i.e. if the
expense was an incident of the trade – part of the business operation itself – it is an
income-earning expense)
o 6. Whether a particular expense was incurred in order to approach the incomeproducing circle (e.g. clothing, child care, housekeeping, commuting), or was
incurred within the circle itself.
Alternative Test: The Scott test focuses on the subset of the Symes factors (NB: apply
Symes): (Scott)
o What does the expense address?
o Would the need exist apart from business?
o Is the need intrinsic to the business?
Mixed Expenses: an expense that is partly necessary for business but also partly personal
consumption (e.g. business lunches or travel expenses). Two approaches: (Cormack)
o Apportionment: deduction to the extent that it was for the purpose of earning
income.
o If the dominant purpose was business or personal, then classify the whole expense
as such.
22 Personal and Mixed Expenses – Specific Situations

Child Care Expenses: may only be deducted from the lower income parent. The deduction
is capped (amount depends on age, set by regulation) and may be no more than 2/3 of
income. (63)
23





o Example: female litigator hires a live-in nanny. Not deductible as a business
expense – incurred to enter the income-earning circle. (Symes)
Food and Beverages: only deductible if it meets the food/fuel analogy. (Scott)
o Example: D is an independent courier – runs about 150km per day with a backpack,
so he needs to consume extra food and beverage. Applies Scott test- extra food costs
are deductible. (Scott)
Entertainment Expenses: deduct ½ of reasonable entertainment/food/beverage
expenses. (67.1)
o After 1971, membership fees/dues for recreation, dining or sporting clubs and
expenses for use or maintenance of a yacht, camper, lodge, or golf course aren’t
deductible. (18(1)(l))
o Example: D buys club membership for its employees to meet potential clients.
Purpose was to raise revenue – deductible. (Royal Trust Co)
 NB this was decided under 18(1)(a), pre-18(1)(l).
o Example: D provides his clients with certificates for food/beverages, gave away
tickets to sporting events. D does not consume it himself. Only ½ deductible – 67.1
applies. (Stapley)
Commuting Expenses: commuting between work and home is not generally deductible,
although commuting to and from the workplace in the course of work is deductible.
(Cumming)
o Example: D is a doctor with a home office. Commuting from his home to the
hospital was in the course of work (because he was already at work!), so is
deductible. (Cumming)
Housekeeping Expenses: not deductible at all – purely personal. (Benson)
o Example: D, a 62 year-old farmer, is in poor health, can’t be left alone. D hires B to
be a housekeeper part of the time and help out on the farm the other part of the
time. B’s wages are only deductible in proportion to the time B spent on the farm
(and not housekeeping). (Bensom)
 Prof says: if D had hired B to do all of the farm work he could have deducted
it all.
Home Office Expenses: no business deductions for an individual’s principle place of
residence except to the extent that it is their principle place of business or it is used
regularly and continuously for meeting clients, customers or patients. (18(12))
o CRA: if you use your home as your personal place of business, that use does not
need to be exclusive to meet the statutory requirements (more lenient than the
ITA). (IT-514)
o Since 18(12)(a) only applies “in respect of an otherwise deductible amount” the
case law prior to the enactment of 18(12) may still be relevant.
o Principle: means first in rank or importance and would generally mean that it’s
used more than 50% of the time.
o Example: D is a Dr. with a home office who uses that room exclusively for his
business (meets with other doctors, etc). Deduction permitted. (Logan)
o Example: D is a Dr. with a home office. Meets clients/etc there, but it’s also used for
personal reasons (i.e. not exclusively business uses). No deduction allowed (NB –
pre-18(12)). (Mallouh)
24
23 Illegal or Unethical Activities




Bribes: no deductions for bribes punishable under various statutes incl. CC. (67.5)
o Old law: bribes incurred to earn income from business or property are deductible.
(United Color)
Fines: no deductions for fines imposed by any province/state/country/etc. (67.6)
o Old law: fines incurred to earn income from business or property are deductible.
(Poultry Cases)
 Exception: the deduction should be denied if the breach was “egregious” or
“repulsive”.
o Example: fines are “virtually impossible” to avoid in the trucking business (gov’t
uses to repair the road). They are incurred in order to obtain income from business.
Deductible. (Day & Ross)
o Example: directors of the company were not guilty of any “moral turpitude”, so the
fines against the company are deductible. (Rolland Paper)
Damages: as long as they are incurred for the purpose of earning income from business
(i.e. they are part of the “operation, transactions or services” by which the taxpayer
earns income), they are a deductible business expense. (Imperial Oil)
o Example: D (an accountant) leaves his firm to start his own; many of his clients
follow him. But D signed a non-compete. Old firm sues him, gets $465k in damages.
Deductible. (McNeill)
o Damages are not deductible if the activity was “egregious or repulsive”. Rare in civil
cases. (McNeill)
Expenses of Illegal Business: these are generally deductible (ability to pay rationale).
(Eldridge)
o Example: call girl agency’s rent, legal expenses, assistance for call girl, cost of bail
bonds, and casual wages are deductible. (Eldridge)
o Example: cost of 15,000 pounds of marijuana seized by police – not deductible.
(Neeb)
 NB this was pre-Poultry. Now we might call this “egregious”.
24 Timing of Deductions



Current vs. Capital Expenditures: current expenditures are immediately deductible,
whereas prescribed capital expenditures have the capital cost allowance (20(1)(a)) or the
cumulative eligible capital amount (20(1)(b)). However, non-prescribed capital
expenditures cannot be deducted at all (18(1)(b)), leading courts to err on the side of
recognizing current expenditures.
Current Expense: an “expense” under 18(1)(a) is an obligation to pay a sum of money, so
current expenses are deductible when you have a legal obligation to pay the amount.
(Burnco)
o Example: construction holdbacks are not incurred until a certificate is issued and
the holdback becomes payable, even if the work is already complete. (Guay,
Colford)
o NB this is symmetric with the test for inclusion in income.
Contingent Liabilities: no deductions. (18(1)(e))
25
o NB Guay also demonstrates this: a construction holdback is a contingent liability,
and thus not deductible, until a certificate has been issued – it is contingent on the
issue of the certificate).
26
Income from Business or Property: Capital
Expenditures
25 Is An Expense a Capital Expenditure?
Objective: be able to determine, with reference to relevant authority, whether an expenditure
that is incurred for the purpose of earning income from business or property is a capital
expenditure or a current expenditure.
25.1 Common Law Tests
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Enduring Benefit Test: an expenditure that provides benefits beyond the taxation year
provides an “enduring benefit” and is a capital expenditure. (British Insulated)
o Example: D puts $32k into a pension scheme, deducts it as an expense. D is buying a
“lasting advantage” (future benefits: a happy staff) – capital expenditure. (British
Insulated)
o Business Structure Test: if the expenditure is part of the income-earning process,
it’s current. If it builds the business structure (i.e. expands or establishes the
business), it’s capital. (John-Manville)
 NB this is really just the enduring benefit test reformulated.
 Example: D buys neighbouring land, cuts it away so as to prevent landslides
on their workers. Current expense (which is highly unusual for land). (JohnManville)
 Example: D pays a lump sum to service providers to enter into exclusive
service contracts. Part of the money-earning process, so it’s a current
expense. (BP Australia)
 Example: D makes an up-front payment for a non-compete clause.
Preventing a person from competing in subsequent years builds the business
structure. Capital expense. (Sun Newspapers)
Recurring Expenditure Test: a capital expenditure is something that will be spent once
and for all, whereas a recurring expenditure will recur yearly (and is a current expense).
(Ounsworth)
o NB this test is problematic. Consider a case where D buys new busses every year.
This is a recurring expense, but the busses last several years – the business is
growing!
Residual Test: where there are two possible interpretations, one of which allows a
deduction and one of which does not, accept the interpretation that allows the deduction.
(John-Manville)
o Thus, if there is no applicable capital deduction, call it a current expense (if
possible).
25.2 Types of Capital Assets

Depreciable Property: the capital cost allowance applies to these. (20(1)(a))
o Schedule 2 of the ITA provides classes of depreciable capital expenditures. (ITR
800)
o NB these assets are mostly tangible, though some are intangible.
27
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Eligible Capital Expenditures: these capital expenditures have an associated deduction
scheme: 75% of the expenditure is added to a cumulative eligible capital account, and each
year 7% of the present balance of the account may be deducted. (20(1)(b))
o NB these are all intangible assets, excluding depreciable intangible assets.
Non-Depreciable Property: includes land, shares, and bonds, the cost of which is
recovered on sale.
o Natural resources get a depletion allowance instead of a depreciation allowance.
(65)
Nothings: no deductions permitted at all (e.g. a yacht – 18(1)(l)).
25.3 Repair or Improvement of Tangible Assets
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Test for whether the cost of repair or improvement of an asset is capital or current:
o Was it incurred for business (i.e. was it not a personal expense)?
o Is this a capital expenditure? Three-part test:
 Size of the expenditure (if it’s small, less likely capital)
 Whether the expenditure is recurring
 The effect that it has on the value of the asset repaired
Example: D replaces a flat roof with a sloped roof. It was substantial, it wasn’t recurring,
and it increased the value of the building. Capital. (Earl)
Example: replaced the hold of a ship. Sizeable expenditure, resulted from usual wear and
tear (so perhaps recurring?), but it didn’t change the nature of the ship. Current. (Canada
Steamship)
Example: D buys building with a flat floor. The floor sinks, so D puts in reinforced flooring.
Sizeable, not recurring, increased value (but not the nature of the building). Capital.
(Shabro)
25.4 Protection of Intangible Assets
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The enduring benefit test applies in determining whether an expense incurred in
acquiring or protecting an intangible asset is capital or current (see above).
Example: D’s legal costs for defending a regulatory license (to supply gas in a municipality)
conferred an enduring benefit, and thus were capital. (Dominion Natural Gas)
Example: D is in a dispute with P over their trademark, enters into a settlement to protect
their mark. Business structure test: this doesn’t expand/establish business. Current.
(Canada Starch)
Example: litigation over the right to use a brand name. Current. (Kellog)
NB these cases were all pre-1972, when most intangible assets were still “nothings” and
thus the residual test was a factor – these might be decided differently today.
25.5 Other Issues: Domain Names, Corporate Takeovers, and Goodwill



Domain Names: cost of acquiring (if one-time) is likely a capital expense.
Corporate Takeovers: costs of defending a company against a takeover (or costs
associated with completing a takeover) are capital expenditures (associated with an
investment transaction). (Neonex)
o NB the costs of facilitating a friendly takeover by a to-be-acquired company are
current.
Goodwill: the purchase of goodwill is capital, but the growing of it (e.g. via advertising) is
current.
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o Example: D buys a client list; treated as a capital expenditure. (Gifford)
25.6 Expenses with Respect to a New Business



Money spent in setting up a new business is a capital expenditure.
Example: D takes over business in financial difficulty. Costs of investigating the businesses
are capital expenditures, but the day-to-day costs of supervising the business are current.
(Firestone)
Example: engineering costs incurred in improving capacity of power plants – current.
(Bowater Power)
o NB this was pre-1972 and likely decided under the residual test; today it would
likely be capital.
29
Capital Gains and Investing and Trading
Objective: be able to determine in a given fact pattern referring to relevant authority whether a
taxpayer has a taxable capital gain or allowable capital loss and determine the amount of the
taxable capital gain or allowable capital loss.
26 Statutory Framework
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Capital gains are included in income: (taxable capital gains) – (allowable capital losses).
(3(b))
Capital Gains are any gains not caught by 3(a) (i.e. not from a source). (39(1)(a))
Capital Losses are any losses not caught by 3(a) (i.e. not from a source). (39(1)(a))
Taxable Capital Gains are 50% of capital gains. (38(a))
Allowable Capital Losses are 50% of capital losses. (38(b))
Realization: capital gains/losses are realized on disposition. This is supported by 9(3) –
income/loss from property does not include capital gains from disposition.
o NB income from property can include non-capital gains from disposition, e.g. of
inventory.
27 Basic Concepts




Capital Property: depreciable property and any property that can generate a capital
gain/loss. (54)
o Certain types of property are excluded from generating capital gains/losses.
(39(1)(a), (b))
Depreciable Property: property for which CCA can be claimed under 20(1)(a). (13(21))
o These are fully deductible, eventually, via the CCA (20(1)(a)) or as a terminal loss.
(20(16))
Disposition: any event entitling a taxpayer to proceeds of disposition of property.
(248(1))
o Proceeds of Disposition: this includes the sale price of the property (net of any
expenses incurred in selling it) as well as expropriation payments, payments from
insurance for loss of the asset, involuntary disposition of a corporate share or
debenture, etc. (54)
o Inter Vivos Gifts: proceeds of disposition are deemed to be the fair market value.
(69(1)(b))
o Timing of Involuntary Disposition: in the case of loss, destruction, or taking of the
property, the timing of disposition is deemed to be the earliest of (1) the day the
taxpayer agreed to an amount as full compensation for the property, (2) the day the
amount is determined by a court or tribunal, or (3) if there is no legal proceeding,
two years after the day of the loss/etc. (44(2))
Adjusted Cost Base:
o For depreciable property, the “adjusted cost base” is the capital cost of the
property. (54)
30
o For non-depreciable property, the adjusted cost base is the cost at the time of
disposition, adjusted as required by s.53. (54)
 Upward adjustments: some expenses associated with the property are
included at the time of disposition by adding them to the cost base, e.g.
interest on a loan taken to purchase it, property taxes, etc. This reduces
capital gains (or causes capital losses). (53(1))
 Downward adjustments: these do the opposite of upward adjustments.
(53(2))
28 Computation of Gain or Loss



Proceeds Due within the Year: if taxpayer is entitled to be paid in full in the year of
disposition: capital gain/loss = proceeds of disposition – (adjusted cost base + expenses of
disposition). (40(1))
Proceeds Due in a Future Year: if taxpayer disposes of property but is not entitled to
receive the proceeds in the same year, a “reasonable” reserve may be deducted from the
capital gain in each year. This reasonable reserve must be no less than the lessor of:
(40(1)(a)(ii))
o Gain*X/5 (where X = 4 – num. of years since disposition). (40(1)(a)(iii)(D))
o Gain*(proceeds not yet received)/(total proceeds). (40(1)(a)(iii)(C))
Loss: these are immediately deducted in the year of disposition. (40(1)(b))