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Tax Outline
Tax is: (Shawinigan Water)
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Compulsorily and unrequited payment to government from the private sphere
o Unrequited: Not paid in exchange for specific goods and services
Enforced contribution by legislation
Creature of statute – no common law taxation
The taxing power must be within the legislative authority of the government that is demanding the payment
Generally proportional
Main purpose is to raise revenue for public purposes
Not imposed as a punishment or penalty designed to deter behaviour (raising of revenue with things like parking
tickets is secondary purpose compared to their deterrence purpose)
Components of Taxes
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Tax base: 3 main ones are: income, consumption and wealth
o Income: tax on business activity or labour
o Consumption: taxes on goods and services
o Wealth: any accruals to wealth should be taxed, would also include inheritances, gifts, contributions to
pensions (Haig - Simons principle) (property tax is a form of a wealth tax)
Rates of tax: statutory rate structure is in s 117
o Marginal rate of tax: the rate of tax that applies to the last (highest) dollar of income earned
o Average rate: the fraction of total income tax that is paid on taxable income as a whole
o Effective tax rate: the real average tax rate after considering total accretion to wealth, not just taxable
income
Tax filing unit that is responsible for paying the tax (taxpayer)
The period over which the base is measured
The set of administrative arrangements for the tax collection
Regressive / Progressive/ Proportional Taxes
Generally, most taxes in Canada other than income taxes, are regressive. Overall the tax system is close to being
proportional (we all pay 30-35 percent of our income)
Factors in classification: who really pays the tax, how broadly their income is defined, over what period of time their
income is measured, and who is assumed to benefit from exemptions, deductions and credits?
Regressive: Takes a declining portion of income as you move from lower to higher income earners
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Ex: consumption taxes, since lower earners consume a greater percentage of their income
Proportional: Takes a constant proportion of income as income rises
Progressive: Takes an increasing proportion of income as you move from lower to higher income earners (Federal
Income Tax)
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Tax terminology
Exemption: an amount which is not included in computing income under the ITA. There is nowhere to declare exempt
amounts on a tax return and it is therefore exempt from tax (gifts/lottery earnings)
Deductions: An amount which is subtracted from gross income under a provision in the ITA in order to arrive at taxable
income. Reduces the total gross income amount to taxable income (example: moving expenses) note: a deduction is
worth more in dollars to a person in a higher tax bracket that in a lower tax bracket
Credits: reduce tax payable after all deductions (example: personal credit amount) have been subtracted and “tax
otherwise payable” has been computed by multiplying taxable income by the applicable tax rates. A tax credit is
subtracted from the tax otherwise payable to arrive at:
= Actual tax liability
Tax incidence: who actually bears the tax. An example is property taxes, the cost of which is generally passed to the
renter
Tax expenditure: Provides implicit subsidies to certain types of people. They may be in the form of special tax
exemptions or deductions, credits, lower rates or provisions that allow taxes to be deferred.
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Evaluating tax expenditures: Three budgetary questions: what government objective is being served?
Are the benefits distributed fairly? Can the objectives served be better served by some other governing
policy instrument?
Direct vs Indirect tax
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Direct tax: incidence of tax is on the taxpayer. There is no opportunity to pass on the price of the tax to
another (ex: Income tax) (John Stuart Mill)
Indirect tax: demand from one person in the expectation that will be indemnified by passing on the costs of
the tax to another (ex: excise and import duties) (John Stuart Mill)
GST, PST and QST = direct because of court ruling in Canada even though value added sales taxes are considered indirect
elsewhere
GAAP: (Generally Accepted Accounting Principles)
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Rules for financial accounting in Canada. Contained in the Handbook of Canadian Institute of Chartered
Accountants
Profits, losses, cash flows etc have to be reported according to GAAP
Conservative approach, meant to give the true financial value of the company.
Tax accounting is calculated according to the ITA. The ITA trumps GAAP and tax accounting is a question of
law.
Cash method of accounting: calculates income and expenses based on actual amounts received and paid. Only
unincorporated farmers and fishers may calculate business income by this method.
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Language of “amount received/ amount paid” indicates cash method, while payable/receivable
indicates accrual method
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Accrual Accounting: Most businesses operate under this method. Accrual accounting requires a taxpayer to pay tax
amounts receivable. Expenses are also calculated as amounts payable.
Criteria for Evaluating Canadian Tax Measures
Equity:
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Vertical equity: The premise that those who have more should pay more. It involves an ethical requirement that
unequals be treated appropriately differently
o Simons (1938): argued that income should be conceived as the ability to consume. I
o It is debated whether income should be defined by reference to the economic resources taxpayers
benefit from or the economic resources the taxpayer controls. The control theory is generally the theory
informing Canada’s tax system
Horizontal Equity: Concept that taxpayers with the same level of income, despite its appearance in varying forms
should be taxed in the same way. The inclusion of “fringe” benefits to employment income should be taxed in
order to support horizontal equity
Neutrality:
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Taxes should theoretically avoid distorting the workings of market mechanisms or personal decisions. In
reality tax system is very persuasive, particularly in regards to time decisions
Simplicity: The desirable administrative attributes include:
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Comprehensible: it should be logical and understandable to those paying the taxes
Certainty: The applicability of taxes should be determinable, predictable and reasonably certain
Compliance convenience: Taxpayers should not have to devote undue time or costs to comply
Administrative convenience: The administrative costs should not outweigh the benefits of the revenue that
is raised
Difficult to avoid or evade: The system should not give opportunities or incentives that encourage
noncompliance.
Global competitiveness:
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With globalization increasing, it is easier for the wealthy to move money round the world. People will
put money where the taxes are lowest. Tax rates have dropped in the last ten years in order to increase
activity in Canada. System must remain efficient in order to retain foreigners
Taxes and Federalism
Federal Powers (exclusive)
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91(3): Federal Parliament has the exclusive authority for all matters assigned exclusively to the
Legislatures of the Provinces, including “the raising of money by any mode or system of taxation”
 Revenues raised through federal taxation that is then transferred to provinces to use for
provincial purposes is intra vires. It still qualifies as a federal purpose and does not infringe on
the provincial taxation powers
Provincial Powers (exclusive)
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92(2): Direct taxation within the province in order to raise revenue for provincial purposes
92(9): the provinces have exclusive authority over licences over shop, saloon, tavern, auctioneer and
other licences in order to raise revenue that is for provincial local or municipal purposes
 Allows provinces to set up regulatory schemes that regulates the business of taverns etc and
charge licensing fees that raise approximately the amount required to operate the scheme
Non-exclusive provincial taxation powers
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92A(4): Each province has authority to make laws that raise money through a system of taxation in respect of
non-renewable natural resources and forestry resources in the provinces and electrical energy generation and
production facilities, whether or not the production is exported outside of the province (only indirect method of
provincial taxation)
36(2): Parliament and the provinces have committed to making equalization payments in order to ensure that
provincial governments have sufficient revenues to provide reasonably comparable levels of public services at
reasonably comparable levels of taxation
o Provinces provide the highest cost services but have less ability to raise revenue in comparison to the
federal government
Federal and Provincial Tax Collection Agreements
Bilateral Tax Collection agreements (TCAs)
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All provinces except Quebec have entered into separate TCAs with the federal government that cover taxation
of individuals. Provinces set their own brackets and rates, basic personal exemption level, provide for provincial
tax credits, and apply annual inflation indexation rates which may differ from the federal one
All provinces, except Alberta and Quebec have entered into TCAs with the federal government with respect to
taxation of corporations
All provinces have agreed to determine residence of individuals according to the individual’s residence on
December 31 of the taxation year
Federal-Provincial Fiscal Arrangements Act
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Federal statute that enables the fed government to enter into tax collection agreements with the provinces,
territories and aboriginal governments
Tax Collection
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Provincial taxes are collected alongside federal taxes by the CRA and then returned back to the agreeing
provinces. The federal government is the sole collector, administrator and enforcer of income tax law. Quebec
collects its personal and corporate income tax through its own separate bureaucracy
Federal Department of Finance develops federal income tax policy and defines income, exemptions and
deductions for the calculation of income of corporations and individuals under the federal ITA and Regs. Federal
credits are usually matched by provincial credits under the relevant provincial acts.
The result is a highly harmonized national income tax system. In practice the non-agreeing provinces closely
follow the federal tax rules
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CRA Interpretation Bulletins Set outs the CRA’s position regarding a taxation issue. They are supposed to be reliable, but
they are not legally binding on either the tp or the CRA. Sometimes IT Bulletins are stricter, sometimes more generous
than the law. They are persuasive to some judges but not all.
Tax Adjudication System
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First, a taxpayer sends in a tax return. CRA checks it and may send a notice of assessment
o CRA may then ask for receipts / conducts an audit
The next step is to object to the assessment
o Must be done within 90 days of the notice of assessment
o The CRA appeals division will review a taxpayer’s arguments and either confirm the assessment or vary
it (will generally agree with the notice of assessment
If the taxpayer is still not satisfied, an appeal of tax assessment can be made to the Tax Court of Canada. From
the TCC an appeal can be made to the FCA, and then possibly the SCC
TCC: exclusive jurisdiction in income tax appeals. Hears ITA, GST, EI, CPP and other matters
Procedures at the TCC
General:
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Similar to normal civil procedure, normal pre-trial discovery and rules of evidence are followed. Costs are
awarded against the unsuccessful parties
Informal:
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Taxpayers may elect to follow the informal procedures where certain preconditions exist, most importantly, the
taxes and penalties at issue cannot exceed 12,000
No discovery or pre-trial examination
No appeal available, just judicial review
Taxpayer may be represented by person other than a lawyer
Decisions are not considered precedent, but may be taken into account by other TCC decisions
Interpretation of Tax Statutes
The Modern Approach (Placer Dome)
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Originally, taxes were perceived to be punitive, and therefore a strict approach to interpretation was applied
Now, the modern Dreidger approach has been adopted in tax cases (Placer Dome)
o The tax system is conceptualized as a public policy statute
However, since tax statutes are precisely drafted, judges place emphasis on textual interpretation
The words of the statute will apply unless there is ambiguity, in which case context, scheme and purpose of the
Act must be considered.
There remains a residual presumption in favour of the taxpayer.
Burden of Proof: is on the taxpayer (ITA ss 152(7), 152(8))
The Source Concept of Income: s 3 of the Act
Section 3 of the ITA sets out the macro-structure for the calculation of income for tax purposes.
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Non-Capital Income
S 3(a) requires a tp to determine the total of all non-capital income for a year
Capital Gains and Losses
S3(b) Requires the tp to determine the amount by which
i.
The total of: (A) the tp’s capital gains from disposition of property other than LPP, AND (B) the tp’s net
gain for the year from dispositions of LPP (must be a positive figure for LPP)
Exceeds
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The amount of tp’s allowable capital losses for the year from dispositions of property other than LPP
(c) Determine the amount of (a) plus (b) exceeds the allowable deductions permitted by 60, 62, 63
Non-Capital Losses
(d) Determine the amount (c) exceeds the total amount of T’s loss from the year from an office, employment, business
or property
S 4(1)(a) – requires income and losses from each source to be calculated separately,
Paragraph 3(a) - Sources
sets out the source concept of the income. In order to be taxable under s 3(a) of the ITA, the income must have been
accrued from a source within the meaning of s 3(a) (Bellingham). Although worded broadly, Courts are reluctant to
recognize sources of income other than those specifically enumerated in the ITA (Bellingham).
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The recognized excluded categories of sources are gambling gains, gifts and inheritances, and the residual
category of windfall gains (Bellingham). These categories are unified by the fact that they do not come from a
productive source ( a source that is capable of producing income)
Gambling Gains
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Unless the tp is in the business of gambling, gambling gains are not considered income from a source. Gambling
gains do not flow from a productive source (Bellingham).
Gifts and inheritances
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Are not income from a source since they involve non-recurring amounts and are a transfer of old wealth, rather
than the accumulation of new wealth. Income involves the creation of new wealth. A gift must be a voluntary
and gratuitous transfer of property that does not involve consideration (Bellingham)
Windfall Gains
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A payment that is unexpected or unplanned, and is not of a recurring nature is generally considered a windfall
gain (Bellingham)
A punitive damage award is considered a windfall gain as it has “no income feature” (Cartwright)
o A punitive damage award is not income from a source as it does not flow either from the performance
or breach of a market transaction (Bellingham)
Although an “ordinary interest” award is taxable, a payment of “additional interest” is not income from a source
Bellingham
o No consideration
o No element of bargain or exchange, simply a windfall gain
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o Analogized to a punitive damage award
The following indicia are relevant, though not exhaustive or any one determinative, in determining whether a
payment can be characterized as a windfall gain (Cranswick):
o The tp had no enforceable claim to the payment
o There was no organized effort on the part of the tp to obtain the payment
o The payment was not solicited by the tp
o The payment was not expected, whether specifically or customarily
o It is not foreseeable that the payment is likely to occur again
o The payor was not a customary source of income for the tp
o The payment was not in consideration for, or in recognition of property, services, or anything else
provided by the tp, meaning that it was not in any way “earned” by the tp
 Not enough connection between the payment received by the tp from the US parent company
of a Canadian subsidiary the tp held shares in (at the time it was thought that the tp did not
have an enforceable right against the US corp)
Questionable Legal Right: A payment made in consideration for giving up an even questionable legal right may
constitute income (Mohawk Oil)
An inducement to leave employment, even where it does not come directly from a future employer, is
considered income from a source (Curran)
o Payment made by individual who owned the corporation that was to be the future employer of the tp,
employment contract and bonus (for loss of pension rights, future opportunities with old employer)
essentially split into two payments – courts do not like this
o Majority didn’t specify which source the payment fell under, but considered both payments taken
together to be inducements to get the tp to leave his prior employment and work at the employer
corporation
Strike pay is not considered income from a source (Fries)
o Justified on basis of residual presumption in favour of the tp, even though union dues are deductible
from income
Surrogatum Principle
Amounts received as civil damages, or amounts paid in settlement of claim are taxable as they are received in place of
income from a source (London & Thames Haven Oil)
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Compensation received must be analyzed to determine whether the payment was intended to replace a taxable
or non-taxable source.
o The portion of the settlement paid to compensate for lost profits was taxable, however the portion paid
to repair wharves was not, since it was money paid to restore capital assets
If a settlement or award is received in order to replace an amount that would otherwise be taxable than it is
taxable. But if the payment cannot be apportioned in such a way that determines which portions are in
replacement of income from a taxable source and which are not, than the payment is not taxable (Schwartz)
o An award paid after a contract for future employment was breached is taxable if it was paid to replace a
taxable source of income
o Since the undisturbed finding of fact was that the payment was made to compensate for
embarrassment the amount was not taxable under the surrogatum principle
In order to determine whether the surrogatum principle applies,
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the first question to be asked is what was the payment intended to replace?
Provided this answer is sufficiently clear, the second question is: would the replaced amount have been taxable
in the recipients hands? (Tsiaprialis)
o Disability/sickness insurance plans: Benefits received from the contributions made by the tp’s employer
to a EE life insurance/disability plan are excluded from amounts to be included in income from office or
employment under 6(1)(a). They are taxable as a benefit of employment once they are paid (s 6(1)(f))
o Lump sum settlement amount received in place of entitlement to past disability insurance payments is
taxable under the surrogatum principle as amounts received in place of income from a taxable source under
6(1)(f) (Tsiaprialis)
o This was true even though the s contemplated amounts payable on a “periodic basis” and the amount was
paid in a lump sum
o Result was higher tax burden to the Tp than if she had received the payments as she should have
under the plan.
o Distinction with Schwartz is that the apportionment of the settlement amount was clear
o It is up to the Tp to self-assess how a settlement amount should be allocated among sources. If the CRA is
not satisfied, then the burden is on the tp to show that an amount is not taxable (Siftar)
o IT Bulletin 365R2: Compensation for pain/suffering, loss of years of life and future earnings are not taxed.
Considered to be a part of a person’s “human capital”, so this assessing policy is likely the law. Although lost
wages for time off work in the past are likely taxable under surrogatum principle in Tsiaprialis, the CRA
doesn’t tax them when they are part of a general damage award. However, an amount which can
reasonably be considered to be income from employment rather than an award of damages will not be
excluded from income (so periodic disability payments are taxable)
Other possible sources other than those already enumerated?
o Section 3(a) should not be applied to capture payments which nearly, but do not fit within any of the
enumerated sources of income (Schwartz)
o As the award was not caught within the definition of a “retiring allowance” ( a further enumerated
source under s 56(1)(a)(ii)), it could not be included as income from a source under s 3(a)
o “retiring allowance” (s 248(1)): payment received by the tp as a consequence of death of an ee or a
benefit received (a) on or after retirement, in recognition of the tp’s service or b) in recognition of a loss
of employment, including damages or settlement of a wrongful dismissal action
o A retiring allowance is an additional source of income under s 56(1)(a)(ii)
o “employment” (s 248(1)): means the position of an individual in the service of some other person
o Section 3(a) cannot be applied in a way that results in the general s 3(a) overriding a specific exemption (Savage)
o (A prize for achievement given by employer was not taxable under income from employment since the
amount (300) was exempted from taxable income under s 56(1)(n) – *NOTE: Act has since been revised)
o The majority in Schwartz has not closed down the possibility of s 3(a) capturing unenumerated sources,
however non have been held to exist since one was (arguably) found in Curran
Payments made to EEs not directly related to employment duties
S 6(3): Payments by employer to employee: amounts received by a tp a) during the time the tp was in the employment
of the payer or b) was an amount received in lieu of a payment or obligation arising out of an agreement made during,
prior to, or immediately after the time the tp was an employee of the payer, are deemed to remuneration for services
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Unless, the tp can show that the amount cannot reasonably be regarded as: c) a signing bonus, d) remuneration or
partial remuneration for services, or e) consideration for a covenant given by the ee to do or not to do anything before
or after the termination of employment (covers confidentiality agreements)
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S 6(3)(c) did not cover Schwartz cuz he was never employed
Receipt and Enjoyment of an Amount as Income or “Nexus”
Nexus: In order for a person who is being taxed on income has to have a sufficient connection to the amount. The tp
must have some right to the income
Amount must be “received” by the tp in some way (Field). If a tp is deprived from receiving what would have been
income from a source due to fraud, that income is not taxable (Field)
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Tp was defrauded out of RRSP funds by his ex-wife. Tp did not pursue recovery of funds on advice of lawyer
during the settlement agreement. Informal procedure case, not binding.
Although in this case it is questionable that the tp did not actually receive benefit of the income, he presumably
received an indirect benefit from it in the family law settlement
In this case the court interpreted “received” to mean enjoyment in a direct way
Funds that are not yours
The normal rule is that amounts that are being held by the tp but don’t actually belong to the tp are not part of the tp’s
taxable income (Buckman).
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However, income from fraud is taxable as it is income from an illegal business (Buckman)
o GAAP principles considered the amounts liabilities – as the tp owed them to the clients he had
“borrowed” the funds from
o Under Income tax law however, where there is no intention to repay the funds the amounts are taxable
(Buckman)
 Distinguished from US case where tp who had embezzled funds immediately repaid the money
Net Worth Assessments
Under s 152(7) the Minister has the power to conduct their own net worth assessment based on an evaluation of the
tp’s accounts. A net worth assessment is deemed valid and is legally binding unless the tp can prove that it is incorrect
(burden on the tp) (s 152(8))
Residence as the Primary Basis of Canadian Tax Liability
S 2(1): Residents of Canada are required to pay income tax on their worldwide income
2(3): Non-resident persons are required to pay income tax on their taxable income earned in Canada where the person
was:
a) employed in Canada, b) carried on a business in Canada, or c) disposed of taxable Canadian property
at any time during the taxation year
 Canada taxes income on the basis of residence and the location of the source. It recognizes economic, rather
than political ties to Canada. This is in contrast to the US, where citizens are taxed on their worldwide income
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Ordinarily resident
A reference to a person resident in Canada includes persons who were “ordinarily resident” in Canada at the relevant
time (250(3)
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There is no special or technical meaning to the term “ordinarily resident”. It refers to residence in the course of
the customary mode of life of the person concerned, and is contrasted with special or occasional or casual
residence (Thomsen)
 There is a presumption that everyone has a country of residence. Ordinary residence refers to the place where a
person normally lives (Thomsen)
 A person can still be considered an ordinary resident of Canada, even if the time spent in Canada is a minority
portion of the year (Thomsen)
o Although tp only lived in Canada about 150 days of the year, he settled in when he moved to Canada
and had community and family ties in the area
 There is not one determinative factor that definitively determines when a person becomes a resident of Canada
(Lee). Indicia of residency include:
o Ownership or rental of a dwelling
o Location of spouse, children other dependent family
 Intention is not a determinative factor when it does not reflect the actual circumstances(Lee)
o For three years Lee came and went from Canada to visit his girlfriend/later wife
o Deposited paychecks into Canadian account (more determinative at the time since interbank transfers
were at their infancy)
o Guaranteed a mortgage taken out by his wife where he swore that he was not not a resident – definitely
was a resident then
o In this case Court used date of marriage as the point when the tp became a resident in Canada.
 But marriage is not always determinative (Shih)
 Although wife and sons were in Regina and Shih was personal resident in Canada, he
had still had strong ties in Taiwain and spent most of his time there. The only reason the
family came to Canada was so that the son had a western education
Person deemed resident
S 250(1): a person is deemed resident in Canada throughout a taxation year if the person:
a) sojourned in Canada for a total period of at least 183 days
b) was at any time of the year a member of the Canadian Forces
c) was at any time of the year i) an ambassador, minister, high commissioner, officer or servant of Canada or ii) an
agent-general, officer or servant of a provice and was resident in Canada immediately prior to the appointment
or employment
“Sojourning”
o
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Applies to presence in Canada that is outside the range of residence, it could have been foreseen at the time of
arrival that the stay was going to be passing (Thomsen)
The meaning of sojourn refers to a temporary stay in a place and does not include coming to one country for
work during the day and returning at night to a permanent residence in another country (R &L Food Distributors)
o Shareholders of a small corporation wished to claim the small business tax rate for Canadian controlled
private corporations (CCPC). In order to gain it, two of the three shareholders had to establish that they
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o
were resident in Canada. These shareholders commuted from the US to Canada for work and very
occasionally slept in the store or in a hotel in Canada for work.
 Also, although belonged to a social club in Windsor, the family and religious ties of the shhs
were in the US. They were not deemed to be resident in Canada
Soujourners (IT – 221R3): This is a question of fact, commuting to Canada for work is not sojourning, but
otherwise every part of the day spent sojourning is considered to be a full day for the purpose of calculating
whether the person sojourned in Canada for long enough. Sojourners have to pay tax on worldwide income for
the full year.
Part-time residence
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s 249(1)(b): the taxation year for individuals is the calendar year
Under s 114, a taxpayer is taxed as a resident for the portion of the year in which they were resident and are
taxed as a non-resident for the portion of the year in which they were not resident in Canada
o Note: does not apply to “deemed residents” if you qualify under sojourning rule than you are deemed
resident for the whole year
A person ceases to be resident in Canada when...
A person will not be considered to have ceased to be a resident in Canada where material ties continue to be in Canada
(Reeder):
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If the only reason certain ties to Canada are maintained is to facilitate the ending of ties to Canada, then
residency will have ceased when the tp leaves with the intention of not coming back permanently (Schujahn)
o Tp was American who had been transferred to Toronto for work. Bought house in Toronto, wife and son
came with him. After tp was transferred back to the US, his wife and son stayed in Toronto until the
house was sold. During this time the tp only made a few short trips to Toronto to visit his family.
Reeder:
o Tp was young and mobile, married a Canadian and had always lived in Canada
o Went to France for training of work for a period that was to last at least 6 months (ended up being 8)
 Stay in France was only ever intended to temporary – Court held that he was essentially
“sojourning in France”. Real ties remained in Canada
It is much easier to sever ties and cease to be a resident of Canada if the person was previously a resident
elsewhere (Schujahn and Reeder contrasted)
Application of Tax treaties
o
o
Brought in force through Act of Parliament, which always states that in cases of inconsistencies it takes
precedence over the ITA
Treaties are usually attached as schedules to the ITA
A person is deemed non-resident: where a person is would have been deemed a resident of Canada, but by virtue of
a tax treaty with another country, the person is resident in the other country instead of Canada (s 250(5))
Under the Canada-US Tax Treaty & Canada-UK Tax Treaty: Series of tie-breaker rules
1. The treaty applies where a tp, had it not been for this treaty would have been liable to taxation in both
contracting states as a resident of both contracting states
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2. If para 1 applies,
a. a person shall be deemed to be resident of the contracting state in which s/he has a permanent home
available to him/her. If no permanent home or a permanent home is available in both states, then
Deemed resident of contracting state with which his personal and economic relations are closer (centre
of vital interests)
i. A “permanent home” is one that is available to the tp to stay permanently, A home leased out
commercially and that cannot be retaken without 6 months notice is not a permanent residence
(Salt)
b. If centre of vital interests cannot be determined, residency will be the contracting state where the tp
has a “habitual abode”
i. Habitual abode is the place where you habitually live – could involve counting up the nights
spent in each place (Allchin)
ii. If this is not determinative, then residency will be determined on the basis of in which
contracting state the tp is a citizen
c. If the tp is a citizen of both states or neither states, then the competent authorities of the contracting
states will settle the issue through a process of mutual agreement
i. Not good! Since there is no time limit, a tp may be liable for dual taxation for an ongoing period
of time
Salt:
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Executive of large corporation originally from the UK. Came to Canada but then moved to Australia for
work. Rented out home unfurnished on commercial terms and was required to give the tenant at least 6
months notice before resuming possession
ER provided furnished home in Australia and his family came with him while he was there. Resigned
from all Canadian Clubs, cancelled all Canadian credit cards
Not all ties severed: most salary and all rent from home paid to Canadian bank account; the rest went to
an Australian bank account; retained a Que. Pension plan; came back to Canada for 15 days; wife spent
2 weeks in Canada; still has Que driver’s license; returns to Canada for 3 months, then goes back to
Australia for another 19 months (back and forth); retires permanently in Canada
Court did consider whether he was an ordinary resident in Canada and went straight to the treaty:
deemed Australian resident because of lack of permanent residence in Canada
Summary of the law determining an individual’s Residence Status (Interpretation Bulletin IT-221R3)
Although not legally binding, the bulletin provides a fairly accurate statement of the law
Determining Residence or Ordinarily Resident:
The most important factor is whether the individual maintained residential ties while they were abroad

The three most important factors will be whether the following primary ties have been severed:
o Dwelling place,
 Renting out a dwelling place to a third party at arms-length may make the dwelling
place no longer a significant residential tie with Canada
o Location of spouse/common-law partner (unless the tp left the country because of a breakdown
of the relationship
13


o Location of dependants
 The following secondary residential ties will also be considered collectively:
o Personal property in Canada
o Social ties (memberships in recreational and religious organizations
o Economic ties with Canada (employment with Canadian employer active in Can business,
Canadian bank accounts, RRSPS, credit cards)
o Landed immigration status or appropriate work permits in Canada
o Medical insurance coverage
o Driver’s licence
o Registered vehicle
o Seasonal or leased dwelling place
o Canadian passport
o Memberships in Canadian unions or professional organizations
o Whether the person complied with the departure tax requirements (s 128.1(4))
Vague idea that you may return to Canada is not determinative, but where there is an intention to return after
an extended absence, and all significant ties have not been severed, than it is more likely that the CRA will not
consider the person to have ceased to be a resident
Period of the time of absence is not determinative
Departure Tax
Under s 128.1(4) persons who cease to be resident are deemed to have disposed of all property at FMV a moment
before ceasing to be a resident. Then, the person is deemed to have reacquired theme at the same price.
o
o
Point of policy is to tax capital gains that have accrued while a person was resident in Canada
Whether or not person complied is evidence that goes to whether the person really considered themselves to
cease being a resident
Provincial Residence
(All agreeing provinces plus Quebec have agreed to this)
-
-
ITA Reg 2601(1)
Provincial residency: a person is subject to tax in the province where they are resident on December 31st of the
taxation year
ITA Reg 2607 dual residence
o Where an individual was resident in more than one province on last day of taxation year, he shall be
deemed to have resided on that day only in that province which may be reasonably be regarded as his
principle place of residence
BC Income Tax Act s. 2(1)(a) – affirms ITA Regulations above
o Income tax must be paid by every individual (a) who was resident in BC on last day of taxation year
Application: The factors considered when determining ordinarily residency in Canada apply when determining residency
provincially (Mandrusiak)
o
When a tp is resident in more than one province determining where the principle residence is a factual question
that involves weighing the person’s cultural, family and economic ties (Mandrusiak)
14
o
o
o
TP grew up in Alberta and purchased farm there, children are there. Later moved to BC for work, this
move was only intended to be temporary but tp and wife ended up staying longer.
Upon retirement the tp continued to do some consulting work in Bc but got a greater amount of income
from the farm
Spent about 5 months a year in Alberta, social ties in both provinces, more bills went to BC, burial plots
were in Alberta
 The tp had slightly stronger ties to Alberta than BC, so therefore although he spent slightly more
time in BC, his principal residence was determined to be Alberta
Residency of Corporations
o
o
Under the common law, corporations are resident of the country where the central management and control is
carried out (De Beers)
o Although regular meetings were held at the head office in South Africa, most of the directors lived in
England and company business was conducted in London
o Generally, the place where the board of directors makes its decisions it the place of resident (notedifficulty in modern era where it is not necessary for directors to meet in person)
o In rare cases, the board of directors may have abdicated control of the corporation to the controlling
shareholders, in which case the residency of the corporation will be determined by where the
controlling shareholders make their decisions (Unit Construction)
S 250(4) also deems corporations (only applies to corporations incorporated in Canada)
o a) that have been incorporated in Canada since April 26, 1965 to be residents in Canada.
o B) In the case of corporations incorporated before April 27, 1965, the corporation is considered a
resident in Canada if it was incorporated in Canada and at any time since that date it was resident in
Canada or carried on business in Canada to be resident in Canada
Dual Residency tie-breaker rules
o
o
Under the Canada/US tax treaty (bright-line test) the state of residence of a corporation will be deemed to be
the state where the company is incorporated (if it is incorporated in one of the two contracting states), if this
does not solve the issue, then it will be determined by the competent authorities by mutual agreement
Under the Canada/UK treaty the competent authorities will determine based on its place of effective
management, the place where it is incorporated, and any other relevant factors
Source as a basis of Canadian tax liability for Non-residents
Under s 2(3), non-residents are taxed by Canada on their income from the following “active” income sources:
a) Employment in Canada
b) Carrying on a business in Canada
c) Disposable of taxable Canadian property
Canada also taxes non-residents on “passive” income under Part XIII of the Act (see below).
*Many of these taxes will eventually be reduced or eliminated through tax treaties.
“carrying on a business in Canada”
15
For non-residents, the extended definition of “carrying on a business” applies, pursuant to s 253. This means that
anyone who solicits orders or offers anything for sale in Canada through an agent, no matter where the contract or
transaction is completed, is deemed to be carrying on a business in Canada (s 253 (b)). Also anyone that produces,
manufactures etc anything in Canada, even if it is exported before being sold, is deemed to be carrying out a business in
Canada (s 253(a)).
Taxation of passive sources of income from non-resident persons
o
o
A 25% tax is charged on certain payments made by a person resident in Canada to the non-resident person (s
212(1))
Canadian residents are under the obligation to withhold and remit this tax on behalf of the non-resident (s
215(1)). Canadian residents are jointly and severally liable for the tax if it is not withheld and remitted
What type of payments are covered under s 212:
212(1): [paraphrased] Non-residents must pay 25% tax on every amount that a person resident in Canada pays or
credits to the non-resident person as, on account or in lieu of payment of, or in satisfaction of:
(a) management fees or administration fees or charges. Example: Canadian corporation pays its U.S. subsidiary
a fee for handling all the Canadian corporation’s foreign exchange transactions. Canadian corporation must
withhold 25% of the fee and pay it as tax to the Canadian government.
(b) Canadian resident company pays interest on a loan from its Australian parent company: Australian parent
company is subject to 25% withholding tax that must be withheld and remitted by Canadian company.
(c) estate or trust income. An example would be a resident of the UK receiving a share of the income from a
Canadian resident estate or trust (perhaps resulting from the will of deceased Canadian resident), or a nonresident investor in a Canadian income trust who receives a distribution of the trust’s income.
(d) Rents and royalties. Canadian mining company operating a Canadian mining venture pays a royalty to a US
company under a contractual obligation, based on production from the Canadian mine.
(h)
pension benefits – a payment of a superannuation or pension benefit. Canadian pension plan for
former employees of BC government pays pension benefits to retired employee now resident in New Zealand.
(j.1) retiring allowance. Example: Individual employed for 15 years in Canada; employment wrongfully
terminated. Individual severs ties with Canada to live in Bahamas. Later receives wrongful dismissal damage
award from Canadian former employer.
(l) a payment out of or under a registered retirement savings plan.
Note that a retiring allowance is not income from employment in Canada (which would be taxed under 2(3)) – it’s
income from another source under s. 56.
212(2) – Canadian resident corporation paying a dividend to non-resident shareholder must withhold 25% of the
dividend.
16
Office or Employment
Overview
s 5: Charging provision: what is subject to tax
s 6(1)(a): basic inclusions
s 8: Deductions. 8(2): except as permitted by this section, no other deductions shall be made in computing EE
income
“office” (s 248(1)): captures situations where a person is appointed to a position of government service, including
elected legislative positions. Also includes persons appointed to be a director of a corporation
“employment” (248(1)): the position of a human being in the service of another person (including corp)
“employee” (248(1)): Includes an officer
“individual” means a person other than a corporation
“person”: drafted in very broad way
Requirement to Withhold tax
Under s 153(1)(a) employers must withhold tax for employees and remit it on behalf of employees.
Canadian Employment Credit s 118(10)
A credit for personal consumption expenses related to going to work may be deducted by the formula A*B, where A
is a set percentage for the taxation year and B is the lesser of 1000 and the total of the tp’s income from office or
employment.
o
Token acknowledgment of employee’s expenses related to going to work. Going to work is more expensive
than staying at home (and getting welfare)
Employees versus Independent contractors
Differences in taxation:
o
o
o
ERs must also withhold CPP and EI. Independent contractors must charge gst.
Employment income is calculated on a cash basis, income of independent contractors is calculated on an
accounts receivable/payable basis
Employees have restricted deductions, deductions are only allowed for those things specified in s 8(2).
Independent contracts are entitled to deduct any expenses incurred for the purpose of earning income
(unless there is a specified limitation).
17
Distinguishing between employees and Independent contractors
Question of Fact:
o
Is the tp acting in business for their own account (Weibe Door) – affirmed by SCC in Sagaz
o The control test is no longer solely determinative, but remains a factor
 Court critiques the modern relevancy of this test. Often many ees have fluid work schedules
and are highly skilled (so the ER does not really control the work that they are doing)
o Ownership of tools and equipment
o Opportunity for profit/risk of loss
o The degree to which a worker is integral/ integrated into ER’s business
o Intention of the parties should be considered (Wolf)
 Express intention that can be drawn from the contract should be given weight, however
where the terms are not an appropriate reflection of the legal relationship, than the
intention in the contract will be ignored (Royal Winnipeg Ballet)
 Intent of the parties cannot be ignored, however the degree to which it will be considered
has not yet been definitely determined (Lang)
Case Law Facts
Weibe Door
o
FCA held that the installers hired by the tp were independent contractors:
o Tp gave 1 year guarantee, but if work was faulty, it was the installers that had to guarantee their work.
The installers also got paid per job
o Control test inconclusive: work came through Weibe but workers could turn it down and had control
over the work itself
o Supplied their own tools
o Profit/losses depended on how much and how well the installers worked
o Integration test suggests that workers were integral to the business, but the problem with this test is
that this will always be the conclusion
Wolf
o
Aeronautic engineer, kept extending his contract, some but not all equipment was provided, would invoice
Canada Air every few weeks
o FCA considered intention of the parties, neither party intended the tp to be an EE
Royal Winnipeg Ballet
o
Dancers provided their own shoes; production provided costumes, might stay with company for 4-5 years but
could be let go/leave after any production, no severance pay after they left company (held they were
independent contractors)
o Company had lots of control, but dancers had the final decision on what production company
18
Interposing a corporation in the employment relationship: Personal services businesses and “incorporated EEs”
Interposing a Corporation
- You might want your money to go into a corporation, because it will be taxed at 13.5% (CCPC) rather than the
graduated marginal rates that you were taxed at
- Marginal rates:
o 13.5% BC tax rate for CCPCs (active business income)
o 25% combined business rate
o 38% for persona service income
o 43.7% - combined marginal rate (highest income rate)
o Want to get the income taxed in the corporation, so you can reduce the amount of income taxed at the
top marginal rate
Sazio
-
Was the coach of the Hamilton Tiger Cats, no doubt he was an employee; incorporates a company in which he is
the sole shareholder; K is remade between FootballCorp and RalpCo; RalphCo agrees to provide coaching
services and that Ralph Sazio will provide those services in return for an annual salary and all bonuses paid to
RalphCo; the directors (Ralph) will then decide when to pay these dividens
- Court: can’t ignore Salomon principle: it is a validly incorporation corporation and all agreements between the
players were fully legal and carried out according to their terms; he is now an employee of his corporation
 Legislative response is the new personal services and business rules
CCPCs
o
o
Are Canadian resident corporations, whose shares are not listed on a stock exchange and is not controlled by:
non-residents of Canada, a corporation that is publicly traded, or a combination of these (125(7))
Beneficial tax rate for CCPCs is limited to the active business income of CCPCs, so when a corporation is
interposed into the employment relationship, the CCPC rate is not available
“active business carried on by a corporation” – s 125(7)
o
Any business carried on by a corporation other than a specified investment business or a personal service
business (includes an adventure or concern in the nature of trade)
“specified investment business”: Are businesses who employ less than five full-time EEs and whose principal purpose of
the business is to derive income from property (s 125(7)).
“personal service business”(125(7)): is a business where a) an individual performs services on behalf of the corporation (
referred to as an incorporated EE) OR b) any person related to the incorporated EE:
is a specified Shh (they or any person with which they do not deal at arms-length, own at least 10% of the shares –
248(1)) and the incorporated EE would reasonably be regarded as an officer or EE of the person or partnership to whom
the services of the corporation were provided BUT FOR the existence of the corporation, UNLESS:
o
o
C) The corporation employs more than five full-time EEs or
D) The amount paid or payable to the corporation in the year for the services is received or receivable from a
corporation with which it was associated in the year
19
Restrictions on Personal Service Businesses – s 18(1)(p)
o
No deductions other than those specified in s 18(1)(p) are permitted: the salary and wages paid out and certain
legal expense are deductible, but many other expenses are not allowed. The result of this provision is that
incorporating into a personal service business does not provide tax benefits beyond what would be gained
through and individual employment relationship.
Policy behind these CCPC/ Personal Service Business Restrictions
o
o
The purpose of CCPC special rates is to encourage entrepreneurship where there are employment benefits to
others
The personal service business deduction limitations are an anti-avoidance measure
Capitalization of Employment Benefits
o
o
Refers to methods intended to convert what would otherwise be income from office or employment into
income from a capital source. Opportunities arise at the end of employment where a large sum is paid and the
tp has attempted to characterize it as something other than income from employment (EXAMPLE: Curran)
These attempts are generally caught by either s 56(1)(a) – retiring allowances, or s 6(3)(c, d, and e) – Curran
avoided these provisions because the payor was not his ER
Benefits, reimbursements and allowances
Benefits of office or employment
S 6(1)(a) is very broadly worded and captures most benefits received in respect of employment (Savage), except for
deferred benefit-sharing plans, which under s 6(1)(a)(i) are not included in income until the EE actually enjoys the
benefit of these plans (then taxed under 6(1)(f) – see Tsiaprailis)
o
o
o
A benefit is a material acquisition that confers an economic benefit on the tp (Savage)
o There does not have to be a direct quid pro quo relationship
o Savage: prize from ER from passing a course is a benefit paid in respect of Employment
No part of something that is paid for by an ER should be considered a benefit to the EE unless it represents a
material acquisition to the EE of something of value in an economic sense (Lowe).
If the ER was actually the recipient of the advantage conferred by the expenditure, then it will not be considered
a benefit to the EE (Lowe)
S 6(1)(c): directors or other fees received in respect of office or employment are also included as income
Any other forms of benefits under 6(1)(a)

Trips
o
o
Enjoyment will not be considered a benefit if it was only incidental to the business purpose of the trip
Whether an ER paid trip is a benefit to an EE is a question of fact
 Lowe: point of trip was to cultivate relationships with insurance brokers, 14 hours a day hosting
brokers, tp enjoyed trip but it wasn’t a holiday, purpose of trip was to benefit ER’s business
20

o
o
Incidental pleasure aspect was only incidental and should not be taken into account for tax
purposes
o Where there is more than one purpose to a trip, the value may be apportioned between something for
the purpose of the ER or a benefit to the EE
o A benefit received from a third party, but one that was received by virtue of employment with the client
of the third party, is still a taxable benefit under s 6(1)(a) (Waffle)
 Helicopter ride provided as part of sales incentive program = taxable benefit, even though tp
was an officer substituted for president of the company when he was not available
Other non-monetary
o It is not necessary that the EE benefits economically from conferral of the benefit (Dunlap). A benefit is a
way in which an ER chooses to recognize and remunerate EEs beyond a trivial amount. There is no
difference between money and money’s worth.
 CRA assessed fancy Christmas party as a benefit to EEs
 Argument that tp drunk less than the portion assessed to him was not supported by any
evidence
 Value of what the ER spent per EE was the value of the benefit received to the tp, unless he
could show otherwise
 Policy argument that the tax system should encourage ERs to pay for the Hotel after a Christmas
party was rejected
CRA Policy IT-470R:
o Gifts/awards
 Non-cash gifts and awards given to arm’s length EEs will not be taxable to the extent that the
total value is less than 500 dollars a year. The value of the gifts and awards received above this
amount will be taxed
 Also, the first 500 dollars of the value of a non-cash long service award will not be taxed so long
as it is not awarded more than once every 5 years
 Items of immaterial or nominal value, such as coffee, tea, t-shirts with ER logos will not be
considered a taxable benefit to EEs
 A cash gift or a gift to a non-arms length EE will be taxed except for the first 100 dollars of a gift
given to commemorate an important event. Only one of these gifts may be given per year unless
one of the events is to celebrate an EEs marriage
 Where an ER logo is included in merchandise given to an EE this will be taken into account
when calculating FMV
o Parties
 An ER provided party that is available to all EEs will not be considered a taxable-benefit if the
costs are reasonable. As a guideline, up to 100 dollars/ per person plus the cost of
transportation home would normally be considered reasonable
o Holiday Trips
 Where an EE acts as a host for an incentive award trip it will be viewed as a business trip
provided the EEE is engaged directly in business activities (such as organizing activities) for a
substantial part of each day
o Awards/Prizes
 Where an EE receives a prize or other award that is not regarded as remuneration, the FMV of
this consideration is taxable (except for first 500 of a non-cash award – above),
21
o
o
o
o
Frequent Flyer program miles IT-470R
 The CRA’s new policy is to not treat frequent flyer points that are collected on EEs personal
credit cards as a taxable benefit so long as the points are not converted into cash, the
arrangement is not indicative of an alternate form of remuneration and it is not a form of tax
avoidance
 Where the ER controls the points, the ER will continue to be required to report the FMV of any
benefits received by the EE when the points are redeemed
Transportation to the Job site
 Where an ER provides transportation to the work location because public and private vehicles
are not welcome nor practical, it will not be considered a taxable benefit
Recreational Facilities
 Where EEs are permitted to use their ERs recreational facilities free of charge or for a nominal
fee, the value of received to the EE will not normally be taxed
 Where the ER pays for an EE’s social or athletic club membership, the fee will not be considered
a taxable benefit where the membership was principally for the ER’s advantage
Moving Expenses
 Reimbursements for moving expenses relating to moving an EE and their household because of
a move necessary for employment, the reimbursement will not be taxed as a benefit to the EE
 Laxer standard than Savage, likely to encourage people to move where the jobs are
Benefits provided but not used


Some disagreement in case law:
o Richmond: parking space only used 20% of time was still available to the EE, and therefore was a benefit
to the EE the whole time, therefore the full cost was included as a benefit
o Rachfalowski: Golf club membership paid for by company, tp resisted, hates golf, asked for cash instead,
only used membership occasionally to treat clients and occasionally take his wife there for dinner
 J held that the value of a particular benefit should be determined on the basis of the subjective
value of to the taxpayer
How to reconcile: in Rachfalowski the tp resisted the benefit and there was likely that the membership involved
a benefit to the ER (even though golf and country club memberships are not deductible business expenses under
s 18(1)(l)
Policy behind taxing benefits:
o
o
o
Seeks to avoid the tax base being eroded through ERs choosing to remunerate employees with material
acquisitions rather than monetary payments
Supports horizontal equity
These concerns are balanced in the CRA’s assessing policy by the concern that the cost of administration
for implementing 6(1)(a) does not outweigh the incremental revenue gained through the collection of
tax derived from these benefits
Reimbursement for expenses versus benefits
Whether a payment to a tp is a reimbursement (no tax consequences) or a benefit is a factual inquiry that must ask
whether the payment is a material acquisition which confers an economic benefit on the tp? (Huffman)
22
o
o
o
Plain clothes police officer reimbursed for cost of clothes that were only worn for work.
o Uniformed officers were provided uniforms free of change, and transfer to plains clothes division came
with no raise in pay but the requirement that own clothes must be provided
*Note: if tp had not been reimbursed he could have deducted the expense when computing income under s
8(1)(i)(iii): costs of supplies consumed directly in the performance of the duties of the office or employment that
the officer or employee was required by contract to supply and pay for
Where an expense related to employment that is normally paid by an employee is instead paid by the ER, the
amount must be included as a benefit (Bure)
o Agent fees were normally paid directly by the hockey player, since in Bure’s case the ER was paying the
fees, these amounts must be included in income
Valuation of Employment Benefits
o
Under s 6(1)(a) the “value” of the benefit is computed on the basis of FMV (Steen). This usually is calculated
based on the price paid by the ER (Dunlap)
o Wilkins: UK Approach – value of benefit was resale value
o Steen (FCA – 1988) – value computed based on what a willing buyer would pay a willing seller
o Giffen (TCC, 1995) –Issue was frequent flyer points received through trips paid by ER. Court held that the
value of the points is the amount the EE would have had to pay for the most heavily discounted ticket
possible on the same flight
Allowances
S 6(1)(b): With certain exceptions, all allowances (refers to cash amounts) for personal or living expenses must also be
included in EE income
Reimbursement versus Allowance


An allowance is a limited predetermined sum of money. Once received it is at the complete discretion of the
recipient on how it should be spent and the recipient is not required to account for how it was spent
(MacDonald)
A reimbursement is a payment in satisfaction of an obligation to indemnify or reimburse someone, it is not a
payment that the recipient is entitled to apply at their discretion (Hoffman)
o Hoffman: The fact that no receipts were needed for expenses for last 100 dollars was just an
administrative decision (because of the raising of the reimbursement) and didn’t change the general
nature of the payment
o MacDonald: allowance for higher living costs when RCMP transferred to Toronto. – not reimbursed for a
particular expense, the amount was not calculated in respect to the actual cost, - the money was to
cover personal living expenses, received money totally at his discretion
 Distinguished from Splane: in that case the ER reimbursed for the higher amount of interest paid
on an EE’s mortgage when he moved from Ottawa to Edmonton. The tp was required to present
receipts in order to receive reimbursement
Special and Remote Worksites
Special Worksites
23
Notwithstanding s 6(1), the value of board and lodging at a special worksite that the tp received or enjoyed, or a
reasonable allowance that was paid to the EE in respect to the cost of board and lodging at a special worksite, shall not
be included in a tp’s income (6(6)(a)(i). The duties at the special worksite must be temporary in nature and the tp must
have maintained a self-contained domestic establishment as the tp’s principal residence while the tp was at the special
worksite (6(6)(a)(i). A self-contained domestic establishment means a dwelling house, apartment or other similar place
of residence in which place a person as a general rule sleeps and eats (s 248(1)). The principal residence must not have
been rented out while the tp was away and it must have been available to the tp’s occupancy (6(6)(a)(i)(A). Also, in order
to qualify for the exemption, the tp could not have reasonably be expected to return daily from the special worksite to
the tp’s principal place of residence (6(6)(a)(i)(B).
As well, the tp must have been required to be away from the tp’s principal residence in order to perform duties of
employment for a period of at least 36 hours (6)(6)(a).
Remote Worksite

Notwithstanding s 6(1), the value of board and lodging at a special worksite that the tp received or enjoyed, or a
reasonable allowance that was paid to the EE in respect to the cost of board and lodging at a remote location,
shall not be included as part of an EE’s income (6)(6)(a)(ii). A location is considered remote where by virtue of its
remoteness from any established community, the tp could not reasonably be expected to establish and maintain
a self-contained domestic establishment there. A self-contained domestic establishment means a dwelling
house, apartment or other similar place of residence in which place a person as a generally sleeps and eats (s
248(1)). As well, the tp must have been required to be away from the tp’s principal residence in order to
perform duties of employment for a period of at least 36 hours (6)(6)(a).
o The CRA’s Policy is that when determining whether a work location is sufficiently remote enough from
an the availability of transportation, the distance from an established community and the time required
to travel that distance will be considered. As a general rule, a work location will be considered to be
remote if the nearest established community with a population over a thousand people is more than 80
km away from the worksite(IT-91R4).
o “established community” the CRA considers an “established community” to mean a permanent
settlement where essential services such as a basic food store, basic clothing store, housing and medical
and education facilities are located or available within reasonable commuting distance (IT-91R4)
Travel Allowances for Sales People

Reasonable allowances for the traveling expenses received by an EE from their ER do not need to be included in
the EE’s income if the allowances are in respect of a period of time the EE was employed in connection with the
selling of property or negotiating of contracts for the ER (6(1)(b)(v)).
Travel Allowances for Non Sales People

For those EEs not engaged in selling property or negotiating contracts for their ER, reasonable Allowances for
travel expenses, other than those relating to the use of a motor vehicle, that are received by an EE from their ER,
do not need to be included in the EE’s income, if the allowances were received in connection with travel away
from the municipality (and metropolitan area, if there is one) where the EE ordinarily worked or reported to, in
the course of performing the duties of employment (6(1)(b)(vii)).
24
Automobile Expenses


Reasonable allowances for the use of a motor vehicle for travelling in the performance of the duties of
employment that are received by an EE who is not engaged in the selling of property or the negotiating of
contracts for the ER do not need to be included in the EE’s income (6(1)(b)(vii.1).
Any allowances for the use of a motor vehicle will be deemed to be unreasonable where:
o the measure of the use of the vehicle is not based solely on the number of km driven in connection with
the employment (6(1)(b)(x)) or
o the EE was also reimbursed in whole or in part for those same expenses (6(1)(b)(xi))
o CRA Policy: also considers an allowance to be unreasonable where it exceeds the prescribed limits for
deductible automobile allowances that an ER can claim (without including the amounts as the EE’s
income) (s 18(1)(r)).
 These limits are: 52 cents a km for the first 5,000 km driven, 46 cents/km for all kms beyond
that, plus an extra 4 cents a km for travel in the Yukon, Nortwest Territories or Nunavut (Reg
7306).
Deductions
When calculating income from office or employment, certain deductions are permitted under s 8. However no
deductions other than those expressly permitted in s 8 are allowed (8(2)).



Any deductions are also limited by s 67, which requires that only reasonable expenditures may be deducted
As well, with certain exceptions, only 50% of expenses for food, beverages and entertainment, or a reasonable
amount (whichever is the lessor) may be deducted (s 67.1)
o Exceptions:
 Where the ER is in the business of providing food, beverages, entertainment (67.1(2)(a)) or
 In respect of one of six or fewer special events held per year at which the food, beverages or
entertainment is generally available to all EEs at that work location (67.1(2)(f)).
ALSO NOTE s 8(4): deductions for meals under s 8(1)(f) or 8(1)(h) where the meal was consumed during a period
when the tp was required to be away from the municipality (or metropolitan area) for a period of at least 12
hours
Sales Expenses

EEs who are employed in connection with the selling of property or negotiation of contracts for the ER may
deduct amounts that were expended for the purpose of earning income where the following conditions are met:
the employment contract required the tp to pay their own expenses, the tp was ordinarily required to carry on
their work duties away from the ER’s work location, the tp was remunerated, at least in part, by commission or
other similar amounts, and the tp did not receive an allowance for the same expenses (8(1)(f).
o Also, these expenses cannot be used to generate a loss from the employment (8(1)(f)
o And expenses relating to the use of recreational facilities or social clubs and yachts and golf courses may
not be deducted (8(1)(f)(vi)).
Expenses of Transport Employees
25

EEs of an ER whose principal business is the transport of people and/or goods, may deduct expenses for meals
and lodging if they have not been reimbursed already for these amounts (8(1)(g)). In order to qualify for the
deduction, the duties of the EE must have required them to regularly travel away from the municipality (and
metropolitan area if there is one) where the EE reported for work on vehicles used by the ER to transport the
goods or passengers (8(1)(g)(i)). As well, the EE, while away, must have been regularly required to make
disbursements for meals and lodgings (8(1)(g)(ii))
o “meals and lodging”: read conjunctively (Crawford) – example of strict interpretation of the Act
 The provision is not available to EEs who return home each night
 Ferry workers wanted to deduct cost of meals consumed while at work
 CRA had provided a letter to the Union saying that the deductions would be allowed, but the
Court held that the CRA is not bound by representations of its agents, which are not legally
binding
Travel Expenses – non motor-vehicle
Tps who are ordinarily required to carry on the duties of employment away from the ERs place of business or in different
places and are required under the contract of employment to pay the travel expenses associated with their work duties,
may deduct travel expenses incurred in the performance of their work duties, unless they have already received an
allowance for these expenses (8)(1)(h)

Remember 8(4) – must be away for 12 hours to deduct meals and 67.1 – 50% of food costs
Motor Vehicle Travel Expenses
Tps who are ordinarily required to carry on the duties of employment away from the ER’s place of business or in
different places, and are required under their employment contract to pay the motor vehicle expenses incurred in the
performance of their work duties, may deduct these amounts so long as they were incurred for travelling in the course
of office or employment (8(1)(h.1)).


Cannot be deducted if the tp already received a non-taxable allowance in regards to these expenses
(8(1)(h.1)(iii) or already claimed a deduction under 8(1)(f)
Commuting expenses do not qualify (Martyn). Travelling expenses must be incurred while performing the duties
of employment or office and driving to work is not a duty of employment (Martyn)
o Martyn: Pilot attemted to deduct commuting expenses he said were necessary because he had to be on
call 24 hours a day
o Hogg: Justification that he had to drive because of security concerns was rejected. Commuting by
vehicle was not in performance of his duties as a judge
Legal Expenses – 8(1)(b)
Legal expenses paid by the taxpayer in order to collect or establish a right to salary or wages owed to the tp by the ER or
former ER of the tp are deductible (8(1)(b)).

The proposed amendment will also allow legal expenses incurred by the tp to recover any amounts that would,
if received, have to be included in income under this subdivision (Income from Office or Employment)
26
o



CRA in Tsiaprailis applied the proposed amendment and allowed legal expenses incurred to recover
amount in place of disability benefits to be deducted from income
Only place where a tp could have a loss in income – since it may take several years of legal fees before lost
wages are recovered
Are you required to be successful in order to deduct legal fees?
o CRA’s policy is that if the tp is not successful in court or otherwise fails to establish that some amount is
owed, the legal fees are not deductible (IT-99R5)
o However, the FCA in Loo: tp was allowed to deduct expenses though not successful
Legal expense incurred to protect one’s livelihood (such as those incurred to defend one’s competency) are not
deductible (Blagdon)
Retiring Allowance – Legal Fees
Legal fees incurred in order to collect damages for wrongful dismissal or severance (except those related to a breakdown
of a marriage or common law relationship) are deductible under 60(o.1)(i)(B)

Important to keep retiring allowances separate from income from office or employment – they are distinct
sources of income
Pension Fund – Legal Fees
Legal fees (except those relating to a division of property upon a breakdown of a relationship) that were incurred by the
tp in order to collect or establish a right to a benefit under a pension fund (other than a benefit of CPP) are deductible
under s 60(o.1)(B)
Professional and Union Dues – 8(1)(i)
Annual professional membership dues paid by the EE are deductible where the dues were necessary to maintain a
professional status recognized by statute (8(1)(i)(i))


Strict, difficult test to meet
Necessary to maintain: means legally necessary under a statute
o Swingle: Although professional designations are for practical purposes required for a tp to remain
employable, they are not deductible unless the designations are legally required under statute
 Law Society dues would qualify but CBA dues would not
Annual dues paid in order to maintain membership in a trade union or to maintain membership in an association of
public servants, the primary object of which is to promote the improvement of the worker’s working conditions are
deductible (8(1)(i)(iv)
Annual dues paid by the tp’s ER, as per a collective bargaining agreement, to a trade union that the EE is not a member
of may be deducted under (8(1)(i)(v)
Dues not deductible – 8(5)
Notwithstanding anything in 8(1)(i), dues are not deductible to the extent that they are , in effect, levied:
27



For a superannuation fund or plan (pension fund)
For or under a fund or plan for annuities, insurance (other than professional or malpractice liability
insurance that is required to maintain a professional status recognized by statute) or similar benefits
For any other purpose not directly related to the ordinary operating expenses of the committee or
similar body, association, board or trade union, as the case may be
Cost of supplies
The cost of supplies that were consumed directly in the performance of the duties of office or employment that the
officer or EE was required by the k of employment to supply and pay for are deductible (8(1)(i)(iii))

If Hoffman had been required to include the costs of clothing in income, they could likely be deducted under this
section
Certificate of ER – 8(10)
Amounts deductible by an EE or officer as director fees (8(1)(c)), sales expenses (8(1)(f)), travel expenses (8(1)(h)), or
motor vehicle expenses (8(1)(h.1)) shall only be deductible if a certificate is filed with the tp’s return that states that the
requirements of the relevant provisions were met
Deductions for Workspace in the Home – 8(13)
No deductions are permitted for work spaces contained within a self-contained domestic establishment in which the EE
tp resides, except where either 8(13)(a):


The place is where the individual principally performs the work duties
Or the place is used exclusively during the taxation period for the purpose of earning income from office or
employment and is used on a regular and continuous basis for meeting customers or other persons in the
ordinary course of performing the duties of employment
Also, the amounts deductible for a workspace in a home shall not exceed the individual’s income for the year from
the office or employment before the home workspace deduction (8(13)(b)
Expenses for a home workspace that exceed the tp’s income that year may be carried forward to the next year
(8(13)(c))

The most common way to determine workspace deductions is to determine the amount of square footage
occupied by the office and determine what percentage of the total useable area of the home it occupies. A
proportionate amount of home expenses (things like percentage of rent, utilities, mortgage interest,
property tax) can then be deducted.
28
Income or Loss from Business or Property
A tp’s taxable income includes income from business and property (3(a)). Profits earned by a tp from business or
property must be reported as income (9(1))



Unlike income from office and employment, income from business or property is calculated on the accrual
(receivable/payable) basis. The exception to this is unincorporated farmers and fishers may use cash
accounting for determining income from business
GAAP principles may apply, but they do not override the Act and principles under the Act may differ
Structure: s 9: income/loss from business/property, s 12: special timing rules and special inclusions, s 20:
series of deductions that would arguably not otherwise be deductible, s 18: restrictions on deductions
Income of non-residents from income from business or property
Under 2(3) non-residents are required to file income tax returns and pay income tax on income from carrying on a
business of Canada. The extended and very broad definition of “carrying on a business” under s 253 applies.
For non-residents who make income from Canadian property, the Canadian payor of the income must withhold and
remit 25% as tax on the non-resident’s income from Canadian property.
Business


Includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except in certain
specified exceptions, includes an adventure or concern in the nature of trade (ANT) (248(1))
It is anything that occupies the time, attention and labour of a person for the purpose of profit (Smith) and
refers to active, for-profit activity.
Property


Income from property is passive, it does not require the owner of the property to devote time and energy in
order to earn the income. Under s 248(1) it is defined broadly to mean “property of any kind whatever whether
real or personal or corporeal or incorporeal”. (also see specific inclusions under def)
Income from property does not include gains or losses made on dispositions of property, which are taxed
separately as capital gains (9(3))
The distinction between income from Property and income from Business
Is important when the income is earned by a Canadian controlled private corporation (CCPC). To be eligible for the
special small business rate of 13.5%, the CCPC’s income must be income from an “active business carried on by a
corporation” (s 125(7)). This means that income from specified investment businesses (SIB) or personal services
businesses (PSB) are excluded from the low rate.
Distinction with business
Depends on the extent of activity of the owner in earning the income. If income is derived mostly from the ownership of
property, the increase is generally considered income from property (Hollinger). If the earning involves a significant
amount of activity, the income is income from business (Walsh)
29
Policy for excluding PSBs and SIBs from the low rate:
The policy is that individuals should not have access to the special low rate by using a corporation to perform their
employment or to invest their capital to earn income from property.
Rates for businesses



Income from a PSB is taxed at 38% and deductions are limited by 18(1)(p).
Income from a SIB is also taxed at 38%.
For Canadian resident corps that are not CCPCs the total Fed/BC rate is 25% (15 federal + 10% BC)
Business as an organized activity and pursuit of profit
Gambling
Gambling activity is a business if it is conducted as an organized activity for the purpose of earning income rather than
personal pleasure and has a system for managing risk (Leblanc). Gambling may be a business where a person uses their
own expertise and skill to earn a livelihood in a gambling game in which skill is a significant component (Luprypa).



Luprypa: pool-sharking: tp was skilled and had an organized system for managing risk (did not drink, practiced
during the day)
o Distinction between person with organized activity for the purpose of earning income versus someone
who has no insider skill or knowledge
Leblanc: although sports-betting arrangement had a structure that appeared to be an organized commercial
activity, the Court held that it was not a business, since their system did not manage risk and actually increased
risk. It was pure luck that they won more than they lost.
Epel: regular online poker winnings of man who gave up his job and devoted 40 hours a week to playing poker
online was determined to not be taxable as winnings were attributed to a run of luck rather than skill
Lotteries


a tp’s gain or loss from the disposition of a chance to win a prize or bet or a right to receive an amount as a prize
or winnings on a bet as part of an illegal (ponzi) scheme is nil( s. 40(2)(1)(f))
Where a tp acquires property as a prize in a lottery scheme the tp shall be deemed to have acquired property at
FMV (s 52(4))
Distinguishing Business/property from personal hobbies
When determining whether an activity qualifies as a business, the reasonable expectation of profit (Moldowan) test is
no longer applied. Instead, a two step test must be applied (Stewart):
1. Is the activity of tp undertaken in pursuit of profit, or is it a personal endeavour?
a. if there is no personal element and the motive is purely commercial, there is no need for further inquiry
(will be income from business or property)
2. If there is no personal element to the motive, than the next question will be whether the income is from
business or property? Will consider the definitions in s 248(1) as well as the CL definition of business (Smith)
30
if there is a personal element involved, a court will also look at objective factors to determine whether there
is evidence to support the assertion that the tp was subjectively motivated by the pursuit of profit?
i. Are there sufficient badges of commerciality? – Court will look at non-exhaustive factors listed in
Moldowon:
1. The history of profit and loss in past years
2. The tp’s intended course of action
3. Tp’s skills and training
4. The capability of the of the venture to show a profit
a. This step should not be used to second guess the business plan of a tp though.
This REOP test is only one factor and is not conclusive
b. The overall assessment at issue is whether the tp is carrying on the activity in a
commercial manner
Stewart: no personal element involved in rental properties, they were all rented at arms-length and there was
no evidence of personal use. Therefore, the court did not need to consider the badges of commerciality.


Fact that properties were heavily mortgaged does not mean there was no profit motive
Although the tp may also be motivated by a desire to realize capital gain, this does not mean that there
was not also a desire to earn rental income from the property as well
Deductions from capital outlay or loss - 18(1)(b)
 When computing income from business/property no deduction shall be made in respect of outlay on
account of capital
 Note: interest is an outlay on capital because it is an expense on amassing capital
 Under s. 20(1)(c), deductions of interest expenses are permitted where the borrowed money was used
for the purpose of earning income from business or property (sought by tp in Stewart)
Comparison between carrying on a business to earn income from property and the realization of capital gains
Adventure or concern in the nature of trade (ANT): when is tp disposing of property versus engaging in ANT?
An ANT occurs where a purchaser acquires property with the intention of selling it and making a profit from that sale
(Taylor). In contrast, a property acquired for investment purposes and the intention of receiving income from the
property is not an ANT (Taylor). It is a singular or intermittent endeavour whereas a business of trade is ongoing activity
(Taylor). However, for the purpose of the ITA, An ANT, except in certain specified contexts, is considered a business
under s 248(1). The realization of a profit from a speculative venture is in the nature of trade (Regal Heights). In
contrast, the disposition of property that was bought with the intention of personally using it or collecting rental income
for a while and then selling it, is really a capital disposition.
Test (Irrigation Industries)


Whether the person dealt with the property purchased in the same way as a dealer would ordinarily do?
Whether the nature and quantity of the subject-matter of the transaction may exclude the possibility that is sale
was the realization of an investment, or otherwise of a capital nature, or that it could have been disposed of
otherwise than as a trade transaction?
31
o
o
o
Even 1 transaction can qualify as an ANT if the reason for transaction were business reasons of a trading
nature (Taylor)
In Taylor: although there was no intention to make a profit, the trade was motivated and transacted in
the same manner that a person in the business of trading would have gone about it.
Taylor: President of a company bought a three year supply of lead himself and then sold it back to the
company because the company could not acquire the lead itself and he wanted to secure a future
supply for the company. Ended up making a big profit, even though that was not his intention = ANT
IT-459 –
Has more weight than other bulletins, since the SCC has approved of it as a convenient summary of the law, but it is not
clear that each point separately is good law.
Principal tests
1. Whether the tp dealt with the property in the same way a dealer would
2. Whether the nature and quantity excludes the possibility that it’s sale was the realization of an
investment
3. Whether the tp’s motivation/intention is evidence of a trading motive. If it is established that the tp’s
intention was to sell the property at the first suitable opportunity, intention will be viewed as
collaborative evidence. But the inability to establish this intention does not in itself preclude a finding of
an ANT
Multiple motives – Real Estate



The speculative motive does need to be the sole motive, an ANT includes a situation where the speculative
motive in acquiring the property was a secondary intention (Regal Heights)
o Although first intention was to construct shopping mall, the property was bought with the knowledge
that the property would likely increase in value and a profit on resale could be quickly realized if the
shopping mall plan didn’t work out.
For an acquisition of a capital property to qualify as an ANT, the possibility of reselling must have been an
operating motivation for the acquisition, meaning that the purchaser contemplated that upon the arrival of
certain circumstances she/he would resell it at a profit instead of using if for the purposes of capital
(Saskatchewan Wheat Pool)
o Whether it was an “operating motive” depends more on the circumstances surrounding the acquisition
rather than direct evidence (Happy Valley).
o Where there is no real chance that the property would have produced income then the inference will
be that the purchase part of a business or ANT (Happy Valley Farms)
 Tp was real estate lawyer when property was acquired,
 Other of the plots were subdivided and sold quickly
 Asserted that it was intention to farm it and use it for family purposes but heart attack made
him change his mind, court did not believe that this was his real intention
Factors to look at:
 The quality and nature of the product will be considered. The relevant considerations include whether it is
an investment property, and whether it could be used for personal enjoyment (Taylor)
32



Length of ownership will be significant, a property that is resold quickly is generally indicative of an ANT,
although there are exceptions
What does the tp do with the property immediately after acquiring it?
o If it was sold were there intervening events that explain why it was a capital disposition rather than
an ANT?
Motive: secondary intention to sell must have been an operating motive, not just a thought in the back of
one’s mind (Happy Valley)
Acquisitions of shares: ANT?
There is a presumption that the buying and selling of shares in a company is a capital transaction rather than an ANT
(Irrigation Heights)





Whether borrowed funds were used to acquire shares is not significant
Buying shares where there is little prospect of receiving dividends in the near future is not determinative
A key factor is whether the shares were acquired in the same manner that a trader in securities would acquire
shares
The average person who invests in income producing shares or bonds, even if they are sold again quickly is more
likely to be characterized as long term investments rather than speculation trading
However, where a person buys and sells securities in the same way that a trader would, that person may be
engaged in an ANT or a business of trading shares (Arcorp)
o Sole shh of corporation was a person who was employed as a licensed trader
o Arcorp conducted transactions in the same way a trader would, although all trades were on behalf of
Arcorp
o Made up to 4 trades a day, bought and sold penny stocks, court did not agree that selling was due to
personal reasons
Income from Property
Distinction with Capital gains
Gains from Disposition of property are not considered income from property (9(3))
Interest
Interest received or receivable by the tp is to be included as income from property (s 12(1)(c)). However, there are
timing rules for the inclusion of interest that also apply:
12(3) requires a corporation to include in income an amount of interest accrued on most debt obligations held by the
corporation (with a few exceptions) to each tax year end of the corporation, to the extent not included in income in a
previous year.

This means that even if there is no right to enforce payment until the following year, the amount accrued must
be included in income
33
12(4) requires an individual who has interest payable to them pursuant to an investment contrast (encompasses all debt
obligations held by individuals) to include in income each year the interest accrued on the investment contract to each
anniversary day in respect of the investment contract, except to the extent already included in a preceding year.

“anniversary day” is defined as:
o The day that is one year after the day immediately preceding the date of issue of the contract and the
day that occurs at every successive one year interval from the anniversary day, and the day on which the
contract was repaid(s 12(11))
Blended Interest/ Capital Payments - Refers to payments where a set dollar amount is paid each month that includes
payment of interest and payment of principal.
Where an amount can reasonably be regarded as being in part interest or other amount of an income nature and in part
an amount of a capital nature, the part that can be reasonably be regarded as interest shall be deemed to be interest on
the debt obligation (16(1)(a)). (anti-avoidance provision)

In determining whether a payment involves an interest payment as well as a payment on capital, the courts will
consider whether the payment was more than the FMV of the property (Groulx)
o Parties at arms-length, no one would really forgo interest for 7 years. Evidence of intense negotiations,
when parties were 5,000 apart the tp decided to forgo interest in order to make the whole payment
appear to be a capital gain.
o Court took notice of standard rate of interest, if payments were late interests payments were required
o Tp proposed the no interest, the court was not convinced that this was anything but an attempt to avoid
tax
Rents and Royalties
Rents: from real property, royalties: amount paid to use other forms of property
Payments of rents or royalty received by the tp are to be included in income (12(1)(g))

Includes profits a prendre (like trucking out gravel/taking oil from property) where it is unclear if the payment is
for use of capital or for disposition of capital
Dividends





Dividends are retained earnings that are distributed from after tax profits to shhs.
Dividends paid to tp from resident corporations must be included in income (12(1)(j)
Dividends paid to tp from non-resident corporations must be included in the income of the tp (12(1)(k)
Effective is that dividends as an income stream are effectively taxed twice: 1 when the corp pays taxes on its
profit, and again when the individual pays tax on them (that is justification for lower tax rate for dividends)
For our purposes, income from shares (dividends) are treated the same as other income from property
34
Deductions in computing income from Business and property
General business expenses (such as inventory, office space rent) can be deducted from revenues under s 9(1), which
requires net profit from business or property to be included in income. An expenditure properly deducted under GAAP
will be deductible under s 9(1) unless it is prohibited by some other provision in the Act (Daley).




Gains and losses from the disposition of property are not included in the calculation of profit under s 9(1) (9(3)).
o Daley: bar fee required to be paid before tp was not deductible because it was a capital outlay required
to be paid for tp was entitled to carry on business as a lawyer
Attention must be paid to s 18 however, which places limits on the expenses that can be deducted when
calculating profit, even though the expenses may be deductible under GAAP principles.
As well, s 67 places a general reasonableness limit on all deductions. Also, with certain exceptions, only 50%
expenses relating to food, beverages or entertainment can only be deducted when computing profits (67.1(1)).
Specific deductions that are to be included when calculating profit are listed in s 20.
o Legal expenses relating to preparing an objection or appeal relating to a tax assessment are deductible
(60(o)
S 18 specific limitations on deductions:







Only outlays or expenses that were made or incurred by the tp for the purpose of gaining or producing
income from the business or property may be included in the calculation of profit (s 18(1)(a))
An outlay, loss or replacement of capital, a payment on account of capital cannot be deducted from income
from business or property (18(1)(b))
Personal and living expenses of the tp, other than travel expenses incurred by the tp while away from home
in the course of carrying on the business, cannot be deducted (18(1)(h))
Expenses related to the use or maintenance of recreational facilities (including yachts and golf clubs) and
social and sporting club dues cannot be deducted (18(1)(l)
Expenses of personal services businesses cannot be deducted with the exception of those expenses relating
to payment of salaries and benefits, legal fees incurred in order to collect fees owed to the business, and
other expenses that would have been available to the incorporated EE if their income had been calculated
as income from office/employment (18(1)(p))
Allowances for motor vehicle expenses may only be deducted to the extent that they follow the restrictions
in place in ITA Reg 7306 (18(1)(r)
Income tax payable, Excise tay payable, and interest payable under the Air Travellers Security Charge Act are
not deductible (18(1)(t))
Income Earning Purpose Test
In order to be deductible expenses under 18(1)(a), it is not necessary that each expenditure looked at in isolation was
capable of producing income. If the expenses was made as part of the process of earning income from a business or
property than they will be deductible (subject to specific limitations in the ITA) (Imperial Oil)

Imperial Oil: price of settling a lawsuit that occurred as a result of a collision with another ship due to negligence
of EEs was deductible.
o The fact that the expense was paid in order to satisfy a legal liability is irrelevant
35

Evidence that others in the industry also considered the expenses to be good business practices may be
evidence that the expenses were made for the purpose of earning income (Royal Trust)
o Royal Trust: admission fees and annual memberships to a social club were deductible as there was
sufficient evidence that the purpose of the expenses was to gain clients.
Personal or Living Expenses
Personal or living expenses, other than travel expenses incurred while the tp is away from home in the course of
carrying on the tp’s business, are expressly precluded from being deducted by s 18(1)(h). What is or is not considered a
personal expense may evolve and is not limited to what was considered to be personal expenses in the past (Symes).
Benton
 F: farmer claiming deductions for wages and benefits of live in housekeeper; he operates a big farm, has
health problems, needed help taking care of the house and making meals so he could spend more time on
the farm
o Trying to deduct benefits (room and board) included in her income
 Court: No – housekeeping is a personal expenditure
 O’Brien: as sex roles blurr, and more women working; hiring housekeeper so you can earn income began to
attract more approval – though not necessarily in tax matters
Symes
 F: child care case – woman trying to deduct expense of full time live in nanny; w/o should would not be able
to work as a labour litigator in a downtown firm
 Court: we are not necessarily bound by old law that says child care is a personal expense
o HOWEVER, there is already a specific provision of the act that tells you how much you can deduct
for child care
o Specific provision overrides the general provision (deductions from business is general)
Scott
- Bike courier, claimed extra costs of meals, which are traditionally found to not be deductible
- Here: court allowed deduction for ‘extra’ meal that he claimed he would not have had but for job
o “food is like fuel”
Commuting Expenses



Expenses related to commuting from home to a place of business are personal expenses and are not deductible
(Dr. E. Ross Henry)
Generally, commuting between two places of business are deductible (Dr. E Ross Henry)
o Distinguished Cumming, where some expenses related to travel between hospital and home office was
allowed, questioned whether Cumming was good law
However, commuting from a home office to a primary office is likely not a deductable transportation cost where
home office exists for convenience’s sake (McCreath)
Moving Expenses –Not limited to one particular source
Moving expenses for employment/business (not property)
Moving expenses in relation to an eligible relocation are deductible to the extent that they were not paid on the tp’s
behalf by an employer, there were not deductible in computing the tp’s income for the preceding year, and they do not
exceed income from employment or business at the new work location (62(1)). As well, all reimbursements/allowances
in respect of the expenses must have been included in computing the tp’s income (62(1)(d)).
36

If moving expenses exceed income from employment or business at the new work location, the unused amount
can be carried forward to the following year
An “eligible relocation” is a relocation that occurs to enable a tp to carry on a business or to be employed at a new work
location in Canada (248(1)(a)(i)). Both the new residence and the old residences have to be in Canada [although there
are exceptions for deemed residents of Canada] (248(1)(b)) and the new residence must be at least 40 km closer to the
new work location than the old residence (248(1)(c)). The 40 km is measured by the shortest route normally travelled
(Gianakopoulos).




The date of the move and the start of the new employment or business do not need to be temporarily close, as
long as the move is causally connected to the new employment or business venture (Beyette)
o The move occurred 5 years after the new employment commenced, this is acceptable as long as the two
occurrences were causally connected
o Beaudoin: 8 years time lapse was still okay
It is acceptable if it takes a while to find a job after the move occurs (Abrahamsen)
Situations where the tp works out of a home office:
o The traditional approach was that the statute required for separate locations: new/old residence and a
new and old work location (Bracken). However, more recently the Court in Templeton took a more
permissive approach and allowed deductions for moving expenses where the new residence of a selfemployed person with a home office was closer to the economic centre where the tp normally did
business.
IT-470R: When an ER reimburses an EE for moving the CRA does not consider it a taxable benefit accruing to the
EE, even though it would be considered a benefit of employment according to Savage
o Policy: encourages people to move where the jobs are
Moving Expenses for students
Moving expenses incurred by students in relation to an eligible relocation are deductible (62).



For an eligible relocation to occur the tp must be a student in fulltime attendance enrolled in a post secondary
program at a college or university (248(1)(a)(ii)). For students, only one of the new and old locations needs to be
in Canada (62(2)). The new residence must be at least 40 km closer to the new work location (the postsecondary
program at a college or university)
However, moving expenses can only be deducted to the extent that the tp has taxable scholarships (62(1)(c)(ii).
56(1)(n) includes scholarships, bursaries and other amounts in income to the extent the amounts exceed the tp’s
scholarship exemption.
However, 56(3) exempts all scholarships and bursaries under 56(1)(n) in connection with enrolment in an
educational program that qualifies for the educational tax credit (118.62) which requires that the tp be enrolled
in a “qualifying educational program” at a “designated educational institution”.
“qualifying educational program” is one that is a minimum of 3 consecutive weeks, 10 hours per week
“designated educational institution” are Canadian and foreign universities and colleges, provided, if foreign, that the
program is at least 13 weeks longs
37
“moving expenses”
What qualifies as moving expenses are listed in 62(3). The list is not drafted as an exhaustive list, so there may be other
expenses that would qualify by analogy.









Travel costs (including a reasonable amount expended for meals and lodging), in the course of moving the tp
and members of the tp’s household (a)
The cost of transporting or storing household effects in the course of the move (b)
The cost to the tp of meals and lodging near the old residence or the new residence for the tp and the tp’s
household for a period not exceeding 15 days (c)
The cost to the tp of cancelling the lease by virtue of which the tp was the lessee of the old residence (d)
The costs involved in selling the old residence (e)
Where the old residence is sold by the tp or the tp’s spouse/common law partner as a result of the move, the
costs of the legal services in relation to the purchase of the new residence and transfer or registration of title (f)
Interest, property taxes, insurance and the cost of heating and utilities in respect of the old residence, up to
5,000, where it is not being occupied by the tp or the tp’s family and is not being rented out (g)
The cost of revising legal documents to reflect the change in address, replacing driving licences and connecting
and disconnecting utilities (h)
Other than those expenses listed in (f), does not include other costs relating to the acquisition of the new
residence
Home Office Expense
Expenses related to a work space that is located in the home of the tp are not deductible unless it is the individual’s (not
corporation) principle place of business (18(12)(a)(i)), or it is used exclusively for the purpose of earning income from
business and is used on a regular and continuous basis for meeting clients, customers or patients 18(12)(a)(ii).
As well, deductions for home office expenses cannot result in a loss in income from the business (18)(12)(b), although
the expenses may be carried forward indefinitely (18)(12)(c).
McCreath: received allowance per km for travelling from home office to other office (did this 30% of time). Deduction
for this commuting expense was not allowed, where the travel is from a home office that exists for convenience sake.

However, it is not clear whether, if the home office is the primary place of business, the travel between the
home office and a secondary work location may be deductible
Allocating home office Expenses:

Most common way is to determine the percent of space the home office represents in the home and then
proportion the costs and capital expenditures
Deduction of Interest Expenses

At common law, interest is normally considered to payment on account of capital and therefore would not be
deductible (18(1)(b)), however a specific deduction for interest expenses is provided by s 20(1)(c). In order to be
deductible the amount must be paid in the year or payable in respect of the year (depending on the method
regularly followed by the tp in computing income), pursuant to legal obligation to pay interest on:
38
(i)
(ii)
borrowed money that was used for the purpose of earning
income from a business or property (other than borrowed money
used to acquire property the income from which would be
exempt or to acquire a life insurance policy)
an amount payable for property acquired for the purpose of
gaining or producing income from the property or for the purpose
of gaining or producing income from a business (other than
property the income from which would be exempt or property
that is an interest in a life insurance policy)
or a reasonable amount in respect thereof, whichever is less
In order for interest to be deductible, it must be paid or payable in the year (depending on the method regularly
followed by the tp in computing income) and be pursuant to a legal obligation to pay interest on either: borrowed
money that has been used for the purpose of earning income from a business or property (20(1)(c)(i), or property that
was acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or
producing income from a business (20(1)(c)(ii).

In order to be deductible, the borrowed funds must be used directly for an eligible income earning purpose
(Bronfman). It is the current use of the borrowed funds which is relevant in assessing deductibility, not the
original use that matters (Bronfman)
o Ineligible uses are uses that produce exempt income, purchase life insurance, for personal consumption
or to produce capital gains. The tp must be able to trace the borrowed funds to an eligible use
o It is not sufficient that the funds were used indirectly for the purpose of earning income. The funds must
be used directly for an income earning purpose (Bronfman)
 Bronfman: borrowed money to make capital payments. Even though they could have sold
shares, given the money to the beneficiary, and then borrowed money to acquire the shares
back, which would have been an eligible use of the borrowed money = no deduction allowed
o It is the form of the use of the funds that matters, not whether the real purpose of the transaction was
to avoid taxes on another expenditure. As long as the legal steps were binding and actually carried out a
tp is entitled to minimize tax liability within the law (Singleton)
 Singleton: partner in law firm, took money out of capital partnership account to buy a house and
then borrowed funds to replace the amount in the capital fund instead of getting a mortgage
(would have been ineligible use (personal)) = valid to deduct interest on that money
 Attaie: tp had a mortgage on a house that he subsequently moved into. Then received 200,000
and instead of paying down mortgage invested it in term deposits. The interest on the mortgage
was therefore not deductible since the borrowed money was for personal use. If the borrowed
money had be used to invest in the term deposits instead of the purchase of the house, this
interest would be deductible.
o An ancillary income earning purpose is sufficient, “income” in 20(1)(c) means the potential to earn
revenue rather than the earning of net-profit (Ludco)
 Tps borrowed 6.5 million to buy shares in Panama company, minimal dividends were paid out,
when shares were sold the tps realized large capital gains. Interest on borrowed money was still
deductible as the shares had the ability to generate revenue
39
Policy Reasons for Denying Deductions
Since the government is not concerned that the taxing of illegal businesses amounts to participation in the illegality of
the business (Buckman), deductions for expenses of illegal business activities are generally are allowed so long as the
expenses can be substantiated (Eldridge).

Call girl business assessed on the basis of net worth. Expenses of call girl business were permitted so long as
they were substantiated, legal expenses occurring after the business was shut down by police were not
deductible because the business had ended by this point.
However, under s 67.5 expenses relating to the payment of bribes and public corruption may not be deducted from
income. Also, fines or penalties imposed by an official of any country are also not deductible (67.6)
Computation and Timing
Amounts receivable





Amounts that have been received in consideration for services not yet rendered or goods that have not yet been
delivered must be included in income (12(1)(a)(i))
o Amounts that have been received under an arrangement that they may be repayable in whole or in part
when the packaging is returned (bottle deposits) also need to be included (12(1)(a)(ii))
Amounts that are receivable are deemed receivable whichever of the two events occur first (12(1)(b):
o (i) on which the account in respect of the services was rendered (when the invoice was sent), or
o (ii) on which the account should have been rendered had there been no undue delay in rendering the
account
o Paragraphs 12(1)(a) and 12(1)(b) are included for greater certainty and do not limit what should be
included as accounts receivable or received in a year (12(2))
Amounts are considered receivable for the purposes of the ITA when the tp has a clear legal right to the funds,
even though the right may not be enforceable yet (J Colford Contracting)
o The right to amounts under a construction projects were receivable and needed to be declared under
the ITA when the engineering certificate was issued, not when holdback funds were due to be received
by the tp (subcontractor) from the head contractor.
An amount becomes receivable when the amount is known (Benaby Realties)
o The amount owed because of expropriation does not become receivable until the amount is fixed
through either arbitration or agreement
In order for an amount to become sufficiently “known” to qualify it as an amount receivable, it does not need to
be known with absolute certainty if it can be well estimated (West Kootenay Power and Light)
o Could estimate very accurately how much electricity had been delivered and how much was owed
o Accurate enough estimate to be sufficiently certain to be considered earned and receivable
Amounts Payable

Amounts are not considered payable under the ITA until there is a legal duty to pay them (J.L. Guag Ltee)
o Amount not receivable while it is still contingent on the occurrence of a condition precedent
o Holdbacks to subcontractors did not become payable until the architecture’s certificate had
40
Capital vs Current Expenditures – may argument about substantiality
When computing income from business or property pursuant to s 9(1), no deductions are permitted on account of
capital outlays (18(1)(b). Therefore while expenditures for repair and maintenance are deductible, capital outlays are
not.





An expenditure made in order to create an asset that has enduring benefit will be considered a capital outlay
(British Insulated)
o Payment was to form nucleus of pension fund for EEs – one time payment for enduring benefit of EEs
A replacement of a key part of an asset is a repair, even if it comes with a high cost (Canada Steamship).
o The high cost will not change the nature of the payment (Canada Steamship)
 Boilers of a ship are distinct enough assets on their own account that the purchase of them is a
capital outlay
 The replacement of the floors and walls of a ship though are only maintenance repairs of the
ship and therefore are current expenses
If the payments substantially upgrade the value of a capital asset than the improvement will be a capital
improvement (Shabro)
o The cost of repairing a latent defect and sinking steel pilings into the ground was a capital improvement
The replacement of the concrete floor was also sufficiently part of the capital improvement that it could
be separated and also was a capital outlay
The purpose of the expenditure may be considered, if the purpose was to improve or change the capital asset
than it is more likely a capital outlay, but where the genuine purpose was to repair (Gold Bar)
o Although the price of replacing the veneer brick with siding was substantial, it was still only 3% of the
worth of the building
o The replacement of the outside of the building was involuntary in the sense that the tp had no real
choice otherwise in order to continue earning income from the building
In repairing an asset, a tp is not bound to replace portions of the asset with the exact same materials that were
used before, advancements in building techniques and technology do not need to be ignored (Gold Bar)
Non-Capital Losses
Non-capital losses (generally losses from business or property) may be carried back three years and forward 20 years
(111(1)(a))
Capital Gains and Losses
By virtue of s 3(b), capital gains are taxed as income tax. Income from property does not include capital gains or losses
from the disposition of that property (s 9(3)). Section 3(b) requires that taxable capital gains from all property other than
LPP and the taxable net gains from LPP be added together. Then allowable capital losses from property other than LLP
are subtracted. This will result in a net taxable capital gain or net (allowable capital loss.


The net taxable capital gain is included in income, a net capital loss may be carried forward indefinitely and back
three years (111(1)(b))
On the year that the tp dies, the tp`s net capital losses that have not been used are treated as non-capital losses
and may offset other income (111(2)). They may also be carried back 1 year.
o Tax year ends when tp dies
41
Capital gains

Capital gains are the gains from the disposition of any property, with the exception of gains from dispositions of
property that will be included in another source (39(1)(a))
Capital Losses

A capital loss is the loss from the disposition of property unless that loss is deductible when computing income
from a source (39(1)(b))
Calculation of Capital Gains and Losses
Except as otherwise expressly provided in this Part of the ITA, a tp`s capital gain is
-
Capital gain is the amount by which the tax payer`s proceeds of disposition exceed the total of the adjusted cost
base of the tax payer immediately before making the disposition and any outlays or expenses incurred to make
the disposition (s 40(1)(a)
POD
- ACB + Expenses incurred for purpose of disposition
Capital Gain
- 41(1)(b): a capital loss is the ACB plus the outlays or expenses incurred to make the disposition, minus the POD
of the property
- Although not mentioned in the ITA, it is generally accepted that expenses or outlays associated with acquiring an
asset can be included in the ACB
Taxable Capital Gains / Losses


Taxable capital gains are half the tp`s capital gain for the year from the dispositions of property (38(a))
Allowable capital loss is half the tp`s capital loss from the year from the dispositions of property (38(b))
Background and Policy involved in taxation of Capital gains/losses
- Because of the 50% inclusion rate in BC, the effective rate of capital gains is only half of what it could be
- The top marginal rates is 43.7% on income from business, property and employment,
o But, on capital gains, the effective rate is only going to be 21.85% because you only have to include half
of it in taxable income
- Reason: until 1972, we did not tax capital gains at all; The Carter Commission in 1966 advocated the expansion
of the tax base to include 100% of capital gains and make no distinctions between employment and capital gains
(all accretions to wealth should be included in income)
o But that argument was rejected and 50% was the rate that was implements (has varied over time)
- How different countries treat capital gains varies wildly – in New Zealand, there is no tax on capital gains
- How does this measure up to the tax policy criteria of equity, neutrality, and simplicity
o Equity: vertical and horizontal
 Capital gains are mostly derived by high net worth individuals
 Not taxing capital gains at the ordinary rate is particularly inequitable because it gives a tax
preference to people who are already wealth
 Less well off people usually earn their income from employment, pensions, other subsidies and
they will have to pay higher progressive rates than people who gain their wealth from capital
gains
o Neutrality:
 Treatment of capital gains distorts people`s decision making in order to try to characterize a gain
as a capital gain as opposed to a gain from income
42

-
Probably causes stock market inflation – in December stock market always drops
because people are trying to realize their losses
o Certainty and Simplicity:
 A lot of litigation over whether property disposed of was capital or non capital
 Line between capital gain expenditures and revenue expenditures can be very fine
 Same with whether something is a primary or intention when buying property
Arguments in favour of preferential treatment of capital gains
o There should be a lower effective rate because some of the gain is represented by inflation
o Argument is that capital gain tax discourages investment, need to encourage risk taking
Disposition of Property
Property is defined very broadly in the (s 248(1)),
Capital property is either any depreciable property or any other property other than depreciable property that the
disposition of which would not be included as income or loss from business or property (s 54)
ACB of identical properties

Where a tp has acquired two or more identical properties the ACB of each of them is deemed to be an average
of the ACB of all of the identical properties (47(1)(a) & 47(1)(b))
Part dispositions


Applies where you are only selling part of the property
The ACB to the taxpayer immediately prior to disposition if the part or portion of the ACB that can be reasonably
regarded as attributable to the part (43(1))
o What is reasonable can very – are you selling the most desirable part
Dispositions and proceeds of disposition
Pursuant to s 248(1), a disposition is given a very broad meaning. As well the definition is not exhaustive (Compagnie
Immobiliere BCN Ltee). Any a person has lost the indicia of ownership, it is likely that a disposition has occurred.
Disposition includes – 248(1)
- Disposition triggers realization of capital gain or loss
- (a) any transaction that entitles taxpayer to proceeds of disposition of that property (incl. expropriation)
o Nb: don`t have to have proceeds of disposition in order to have a disposition
o Disposition includes destruction of the property unless you receive compensation of some sort through
insurance, or from the person who destroyed it; property that is lost or abandoned
(b)(i) any transaction where share, bond, debenture, note, certificate, mortgage, agreement of sale, or interest,
is redeemed in whole, part or cancelled
- (b)(ii) any transaction where the property is a debt and is settled or cancelled
Disposition excludes – 248(1)
- (e) a transfer of property where there is no change in the beneficial ownership of the property, except
o (i) from person or partnership to a trust for the benefit of person or partnership
o (ii) from a trust to a beneficiary under the trust
o (iii) from one trust to another trust that are both maintained for the benefit of the same beneficiaries
- (j) any transfer of property for the purpose of securing debt or a lone
- (l) any issue of bond, debenture, note, certificate, mortgage, or hypothecary claim
- (m) any issue by corporation of a share of its capital stock
43
Proceeds of disposition includes: s. 54
- (a) sale price of property that has been sold
- (b) compensation for property unlawfully taken
- (c) compensation for property destroyed (incl. amount payable under insurance)
- (d) compensation for property taken under statutory authority
- (e) compensation for property injuriously affected
- (f) compensation for property damaged, (incl. amount payable under insurance) – except to extent that the
compensation was used immediately to repair to repair the damage
But does not include:
 (j) a transfer of title as collateral for the purpose of getting a loan
Deemed Dispositions
Immigration into Canada
When a tp becomes resident in Canada they are deemed to have disposed of each property that is not taxable Canadian
property at FMV – 128.1(4)(b)
 Taxable Canadian property: for the purposes of this course is defined as real property situated
in Canada AND shares of corporations that derive their value primarily of real property in
Canada (aka more than 50% of assets are in Canada)
o Then, the taxpayer shall be deemed to have acquired the property at the cost equal to the proceeds of
disposition of the property – 128.1(1)(b)
Emigration out of Canada
o Where tax payer ceases to be resident in Canada, shall be deemed to have disposed of each property
owned by taxpayer other than real property situated in Canada at FMV – 128.1(4)(b)
 Real property: land an fixtures attached to the land – can still tax on that property after you
leave under s. 2(3)
o Then, the taxpayer shall be deemed to have reacquired the properties that were disposed of at the cost
equal to the proceeds of disposition to the taxpayer – 128.1(4)(c)
Policy:


Otherwise, when a person emigrated from Canada capital gains and losses that had accrued would escape
Canadian tax liability
The deem dispositions for almost all forms of capital property upon emigration prevents people from
moving to a Country where Canada has a tax treaty and then claiming an exemption from Canadian tax
under the treaty. Real property in Canada and capital property used to carry on business in Canada through
a permanent establishment remain subject to Canadian tax on disposition by no-residents located in treaty
countries
Gifts and Sales below FMV to non-arm`s length Persons
Non-arms length - Definitions

Related persons are deemed not to deal at arm`s length, even if their interests actually do conflict (251(1)(a)
o Related persons that are individuals are considered to be related where they are connected by
blood, marriage, common-law partnership or adoption (251(2)).
 For our purposes, blood relationship means direct descendents or siblings (251(6)(a)).
 Married persons and their blood relations (in-laws) are related to each other (251(6)(b)
44


 Common-law partners and their blood relations (in-laws) are related (251(6)(b.1))
o Corporations:
 A corporation is related to the person who holds voting control, meaning enough shares to
elect the board of directors, (normally over 50%) (251)(2)(b)(i))
 A corporation is related to a person who is a member of a related group that controls the
corporation (251(2)(b)(ii)).
 A corporation is related to any person related to either the person who controls it, or any
member of the related group that controls it (251(2)(b)(iii))
 So related individual of majority shh does not deal at arm`s length with the corp
For non-related persons: it is a question of fact whether they are dealing with each other at arms` length at
a particular time (251(1)(c)
o Unrelated parties have been held not to deal at arm`s length when:
 There is a common mind which directs or controls the bargaining of both sides
 (ex someone dealing with a corporation who owns 25% of the shares but is a
director and officer and has influence over the other directors and officers)
 The two persons act in concert without separate interests
 Business partners may or may not be at arm`s length
 EEs usually are at arm`s length, unless they control, or are members of a family that
control the corporate ER
Common-Law Partner:
o Person who cohabits at that time in a conjugal relationship with the tp; and either (248(1))
 (a) Has been cohabiting with a tp for at least 1 year continuously, or
 (b) Has a child with the tp
Once two people qualify as common law partners they are deemed to continue to be common law
partners until they stop cohabiting for a period of 90 days because of a breakdown of the
relationship (248(1))
Inadequate considerations – except where expressly provided for in the Act (see rollovers below)


When a tp acquires of something in a non-arm`s length transaction for more than FMV the tp is deemed to have
acquired it at FMV (69(1)(a))
A tp is deemed to have received FMV proceeds where s/he disposed of anything (69(1)(b):
o
o
o

(i) To a person with whom taxpayer was not dealing with at arm`s length for no proceeds or less than
FMV
(ii) To a person by way of gift inter vivos
(iii) To a trust because disposition of property does not result in change of beneficial ownership
A tp is deemed to acquire property at FMV where s/he acquired the property by way of a gift, bequest,
inheritance, or because of a disposition that does not change beneficial ownership (69(1)(c))
Deemed Disposition on Death
-
In the year taxpayer dies, deemed to have disposed of all capital property immediately before death, and
received proceeds of disposition equal to FMV immediately before death – s 70(5)(a)
People who you bequeath your property to, are deemed to have a ACB equal to FMV immediately before the
death – 70(5)(b)
45
o
Where taxpayer acquires property by way of inheritance, deemed to acquire it at FMV s. 69(1)(c)
Lottery Gains and Losses
- Taxpayer`s gain or loss from disposition of (i) a chance to win a prize or bet, or (ii) a right to receive an amount
as a prize or as winnings on a bet is nil – s. 40(2)(f)
- Where you acquire property as a prize in connection with a lottery scheme, taxpayer shall be deemed to have
acquired property at a cost equal to FMV – s. 52(4)
o Means that there is no capital gain, if you sell it immediately
o ACB is calculated at time acquire property, not at the time you buy your ticket
Rollovers: transfer of capital property to spouse/CLP inter vivos and on Death
Rollovers inter vivos
Where there has been an inter vivos qualify transfer by individuals, the ACB of the transferor is rolled-over the
transferee, unless the individual has opted out in their tax return(73(1)).
o
o
o
o
The transferor`s POD will be deemed to be what their ACB was initially, and the person receiving it will
be deemed to have an ACB equal to the transferor`s ACB (so capital gain on the transaction is nil)
A qualifying transfer(73(1.01)): involves spouses or CLP(a), or former spouses of CLP in a settlement of
rights arising out of the marriage or relationship (b)
When the transferee goes to dispose of the property any resulting capital gain will be attributed to the
transferor (74.2(1)(a))
o If instead a capital loss is realized, then the capital loss will be attributed to the transferor
(74.2(1)(b)
o There will be no attribution where the relationship ended through death, divorce or break up of
a common law partnership
o Policy of attribution rule: prevent inappropriate income splitting between spouses and CLP who
may otherwise use the rollover provisions to minimize tax liability by moving capital assets to
the spouse who is in a lower marginal rate
Policy of rollover: recognizes marital economic interdependency and that souses may own property
jointly even though they may not legally share title
Spousal Rollover on Death – 70(6)
Spousal Rollover on Death
Recall: s. 70(5) – when someone dies, property is deemed disposed at FMV; and recipient acquires at FMV
Recall: s. 111(2)(a) – allows remaining capital losses to be used against income in death year or preceding year
Section 70(6) – Where Transfer or Distribution to Spouse or CLP
-
Where (5) would otherwise apply, but recipient is a spouse/CLP resident in Canada, then (5) does not apply and
recipient acquires property at the ACB of the deceased spouse; and the deceased spouse is deemed to have
disposed of the property at their original ACB (no gains/loss)
The legal representatives of the tp can elect out of having s 70(6) apply (70(6.2)
46
Note: This allows for post-mortem tax-planning; exception to the normal rules of rollover on death
-
Where deceased has some allowable capital losses, then may be better to experience the gains on this disposition –
may elect out of s. 70(6) under (6.2)
o Also note, if disposition creates capital losses, they can be used against other income (s. 111(2)(a))
Where electing out of s. 70(6), then the rules under (5) apply and spouse acquires at FMV instead
Personal Use Property (PUP) and Listed Personal Property (LPP)
Personal use property is property that is used primarily for the personal use or enjoyment of the tp or for the personal
use or enjoyment of one or more of the following people (54)(a):
o
o
o (i) the tp
o (ii) a person related to the tp
o (iii) where the tp is a trust, a beneficiary or person related to the beneficiary under a trust
Also debt obligations owing in regards to PUP (54(b))
Any property that is an option to acquire property that would if acquired be PUP (c)
Listed Personal Property
LPP is property owned by the tp that is print, etching, drawing, painting sculpture or other similar works of art (a),
jewelry (b), rare books or manuscripts (c), stamps (d) or coins (c)
1000 dollar Rule – 46(1)
-
Where T has disposed of PUP,
o (a) The ACB is the greater of 1000 or the actual ACB of the property
o (b) T’s POD of the PUP is deemed to be the greater of 1000 and T’s actual POD
Disposing of only one part of a property


46(2)(a): the adjusted cost base of the part being disposed, immediately before the disposition is deemed to be
the greater of:
o (i) the ACB to the tp that would otherwise be determined
(ii) a proportionate amount of 1000 the ACB of the part is of the whole property’s ACB
46(2)(B): the POD of the part being disposed of is deemed to be the greater of:
o (i) the POD that would otherwise be determined
o (ii) a proportionate amount of 1000 the ACB of the part is of the whole property’s ACB
Properties normally disposed of as a set
(46(3)): Property that would ordinarily be disposed of in one set will be treated the same way as a partial disposition if:


(a) they have been disposed of in more than one disposition but all the properties have been acquired by one
person or by a group of persons not dealing with each other at arm’s length and
(b) immediately before the first of these dispositions the total FMV would be greater than 1,000
Losses on PUP: other than LPP, are deemed nil (40(2)(g)(iii)
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Losses on LPP: LPP losses are only deductible against LPP gains:
Section 3(b)
- Total allowable taxable gains is calculated from the disposition of all property other than taxable LPP
o Means that it includes PUP gains that is not LPP property
- Then, that amount is added to net taxable gains from LPP (gains in a year from LPP minus losses from LPP
divided in half)
- Then deduct allowable capital losses against total allowable capital gains
Calculating LPP net gains
- Determination of net gain:
o Determine to what extent gains from dispositions of LPP exceed losses of LPP from that year 41(2)(a)
o Carry forward: can deduct LPP losses from another year 41(2)(b) – Carry forward 7, back 3
 (b)(i) can only deduct losses once
 (b)(ii) deduct your oldest losses first
 (b)(iii)can only deduct losses to the extent that you have gains
- LPP loss: means the amount if any by which total losses of disposition exceed total gains of the year from LPP
property – 41(3)
- THEN, once you have calculated net gain, divide it in half – 41(1)
Principle Residence Exemption
Policy: it would inhibit housing market otherwise; Almost everyone how is selling a home will buy another one, if they
have to pay tax on the home that they just sold, they will have to borrow more to buy the next one
o People would not move as much as they do now, resist moving to take a job or start a business
o Also, none of the other costs of acquiring a home are deductible
o Also element of community control – part of policy to encourage home ownership
- BUT, exemption probably distorts real estate market and boost market price of the home – harder for younger
people to enter the market
- NB: a home is a PUP, cannot deduct any money you lose – 40(2)(g)(iii) – loss from PUP is nil
“Principle Residence”
a housing unit that is ordinarily inhabited in the year by the tp, the tp’s spouse or CLP or former spouse or CLP or by a
child of the (individual) tp (54(a))


Ordinarily inhabited: not a strict test
Can also include leasehold interests and a share in the capital stock of a housing co-op
54(c): After 1981, a housing unit will not be considered the principal residence unless the tp designates it as the principal
residence and the tp’s spouse, CLP, child (under 18 and not married) or parent (if the tp is under 18 and not married) has
not designated another property for that year (54(c))
-
NB: if before 1982, restriction only applied to the taxpayer – taxpayer could not designate two properties as
principal residences, however his spouse could also designate 1- (c)(i)
NB: definition of spouse
o 1993: definition of spouse included opposite sex common law spouses
o 2001: definition of spouse now includes same sex partners
 Also had the option to be treated as spouses back to 1998
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54(e):The principle residence of a tp shall include up to a half hectare of adjoining land where it can reasonably be
regarded as contributing to the use and enjoyment of the housing unit as a residence. The principle residence exemption
will be deemed to not apply to any land adjacent to the principle residence exceeding the ½ hectare, unless the tp can
establish that the land was necessary for the use and enjoyment of the property.

“necessary”: the land that was necessary for the use and enjoyment is an objective test of what amount of land
was legally necessary to own and enjoy the property (Rode). There is no subjective element to the test of what
amount of land was necessary (Stewart). So what matters usually is the zoning and minimum lot size (could
also account for necessarily long driveway)
o The minimum lot size necessary is calculated on a year by year basis (Cassidy)
 Tp and CLP bought a house on 2.5 hectares in 1994, in 2003 made agreement to sell it on the
condition that it was first rezoned
 The rezoning was completed and then the property was sold.
 Tp was allowed to claim the PRE for the whole time as the Court calculated it year by year
 Overturned Yates, where the minimum lot size right before disposition was applied to the whole
time
The Calculation
When taxpayer disposes of principal residence
- Can designate it as a principal residence in order to try to shelter the CG you make from it from tax
Calculation Formula: 40(2)(b)
 CG – [CG x (1+ number of taxation years the property was designated the principle residence and tp was
Canadian Resident) /(# of taxation years after acquisition date during which the tp owned the property)]
-
-
Formula: A - A x B
C
A = CG from disposition of property
B = 1 plus number of taxation years after acquisition date for which property was principle residence, AND
during which tax payer is Canadian resident
o Residence does not have to be in Canada
o If immigrate to Canada, acquisition date is the deemed acquisition date
o 1 extra year allows taxpayer to sell the home, buy another, and live in both in the same year and not
lose part of the exemption (flexibility to sell one property and move into the next one)
C = number of taxation years after acquisition date, during which taxpayer owned property (could be jointly)
Notes:
o If there is an extra exemption (shelters more than the CG), you cannot deduct it as a loss because
the home is PUP and not an LPP
o Only has to ordinarily resided in at some point in the year so can be designated in the year you
bought it and the year you sell it
o Some fees associated with the sale can be either claimed as moving expenses or as part of the ACB
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Lunch Lecture – Dr. Kesselman – Income Splitting: The Politics, Economics, and Mathematics of Tax Policy
Income Splitting
 Where the taxing filing unit is normally the individual and the rate schedule is progressive, IS would allow
couples to split or average their incomes in order to minimize total tax
 Would not necessarily be an actual shift, could just be a notional shift for the purposes of tax computation
 Ostensible rational: horizontal equity for couples with equal total incomes
 Would also include CLP and SSP as they are treated the same as married couples in Canadian tax law
Who supports IS
 Canadian Alliance
 Essentially is allowed in flat tax systems likely Alberta
 Conservative Party
 Elizabeth May
 Ontario Conservative Party Promise
 Federal Conservative Party Promise – when the books are balanced
 Other Christian right-wing groups (like REAL)
Policy Evaluation Criteria
 Fairness
o Vertical equity
o Horizontal equity
 Incentives & efficiency
o Labour supply (hours worked)
o Labour force participation (work at all for pay)
o Economic efficiency (deadweight loss)
 Gender and marital/cohabitation effects
 Revenue cost (federal and provincial
How it Operates
 Involves a notional shift of income between partners
 Seeks to equalize marginal tax rates
 Tax savings only if the partners are in different marginal rates, with the largest savings going to couples where
one does not earn income and the other is in the highest bracket
 Essentially averages the partners income
 Flat tax rate: no effect
 Maximum tax savings occur where the income of one partner is 0 and the income of the second partner is twice
the threshold for the highest marginal rate
Summary

Not justified by horizontal equity
o
Fails to recognize the benefits a working spouse receives from having a partner at home
o
Does not take into account the costs associated with working

Very adverse for vertical equity – advantages the wealthy by far the most

Adverse effects on work incentives of the lower-earning partner

Would create more economic inefficiency

Adverse for gender equity
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
Large revenue costs
Federal Proposal
 Part of 2011 election promises: The Conservative Party promised to implement IS for couples with kids after the
budget was balanced. There would be a 50 k limit on the amount that could be notionally transferred to a
partner
Who would gain (federal proposal)
 85% of households would not gain
 6 % of HHs would gain less than 500, 9 % would gain more than 500

The biggest gain would be for high income, single earner couples with an income over 182,000 (top threshold +
50,000 cap), the tax gain would be 6,400
What does Horizontal equity mean

Equal treatment of equals: equals should be subject to equal tax burdens. It is the identical treatment of those
who are in all relevant senses identical (Atkinson & Stiglitz)

A starting point for considering who is equal for taxation purposes would measure well-being and real living
standards of different families

Income is measurable, but it does not accurately measure real living standards and needs to be adjusted for
several factors since there are additional costs associated with a working spouse

These factors include:
o
Commuting/transport costs
o
Clothing/meals away from home
o
Paid Child care expenses (often very large)

After child-care expenses are factored in, IS would advantage one-earner couples over two income couples

Also, splitting by couples assumes income sharing or pooling, and full sharing is not supported in empirical
research. There is heterogeneity across couples and a diverse pattern of sharing
Incentive and efficiency effects of IS

Would be a barrier to those partners entering the workforce, since they would have to make more money in
order to justify their higher marginal rate that they would be starting with. This would particularly be a
barrier for young mothers with children

Efficiency costs of taxation would also increase, because married women’s labour supply is otherwise more
elastic (responsive) than married men’s
Marital and Gender effects

Would have long-term adverse effects on the work experience and earnings of women, since they would
disproportionaley feed the barriers to the workplace

In Canada there would be the issue that IS could affect partner/cohabitation choices, with high earners attracted
to low earners. There would also be difficulty in determining which types of relationships would qualify
51

Since IS would require the lower-earning partner to agree to pay a higher tax, there could be bargaining and
pressure from the higher earning spouse. Also joint tax liability issues
Revenue Costs

Significant. If an IS program was implemented across Canada for couples with kids and had a 50k maximum, the
total cost to government revenues would be 9.1 billion
Alternatives

If the proposal is an attempt to achieve horizontal equity, then it is an all-round failure

If the fact that the proposal is limited to couples with kids an attempt to assist families then there are much
better ways to do this that result in benefits for those with the greatest needs, which are usually single parents
or lower earning couples

Some of these alternatives include:
o
Child tax credit
o
Universal Child Care Benefit
o
Canada Child Tax Benefit
o
EI provisions for parental leave
Virtues of individual taxation

Has withstood the test of time in Canada

Most popular method among OECD countries

Treats each individual as autonomous

Requires no pooling/ sharing assumptions

No disincentive effects for married women

More economically efficient than joint taxation

Neutral in its effect on marital, cohabitation choices

Retains effective tax rate progressivity

Best meets HE standards for most situations
“Income Splitting for Two-Parent Families: Who Gains, Who Loses, and at What Cost?” JRK with Alexandre Laurin,
Commentary No. 335, Toronto: C.D. Howe Institute, October 2011
“Income Splitting and the Taxation of Couples: What’s Fair?” JRK, IRPP Choices, 14:1, Montreal: Institute for Research on
Public Policy, February 2008