TAXABLE INCOME
S. 4(1)(a) Calculate income and loss from each source separately
 Income is a net concept - this is because only net income will increase a taxpayer’s ability to pay
Take the taxpayer’s …
- s.3(a) Income from worldwide sources (office, employment, business and property, s.56 other
sources, and maybe non-listed sources – Curran and Schwartz)
S. 56(1) Other sources: (a) pension benefits, UI benefits, retiring allowances (h) RRSP
withdrawals, (n) non-exempt scholarships, (q) RESP withdrawals, (u) welfare benefits
- s.3(b) Add taxable capital gains (including net gains from LLP) minus allowable capital losses
s. 111(1)(a) Non-capital losses can be carried back 3 years and forward 20 years
s.111(1)(b) Net capital losses can be carried back 3 years and forward 20 years
s.111(2) In the year that T dies, net capital losses can be offset against all income for that year and
the preceding year
- s.3(c) Subtract deductions allowed by subdivision E (s.62 moving, s.63 childcare)
- s.3(d) Deduct losses from sources (office, employment, business, and property)
- s.3(e) This gives you taxable income for the purposes of s.2(2)
- Compute tax payable using applicable rates and subtracting credits (employment credit s.118(10))
Income from a Source
- Nexus: Generally T must be the actual person who owns the income or the loss from each specific
source in order to be taxed on it (Field – fraudulent RRSP withdrawals by wife – not taxable)
o But consider the circumstances – T may be liable to tax even if he doesn’t legally own the
income (Buckman – embezzled funds)
- Illegal businesses are equally subject to tax (Buckman)
- Personal gifts are generally not taxable but gifts in the course of business/employment are
o Gifts of property are deemed disposed of at FMV for calculating taxable gains
- Windfall gains are not income from a source. Consider the Cranswick factors:
o Enforceable claim to the payment; organized effort on T’s part to receive the payment;
sought after by T; expected by T; foreseeable element of recurrence; customary source of
income for T; made in consideration of property/services/anything else provided by T
o ‘Additional interest’ payment under Expropriation Act was punitive, not compensatory in
nature = not income from a source (Bellingham)
o Strike pay is not income from a source (Fries)
o Lottery is pure chance – not income from a source (LeBlanc)
- Punitive damages not income from a source: do not arise out of a market transaction, no
foreseeable element of recurrence since the award of punitive damages is out of the control of the
taxpayer, not likely to be a customary source of income to the taxpayer, could not receive such
payments through their own organized efforts, not expected since they depend on the behaviour
of others and usually on the award being made in the discretion of a court, and not received in
consideration for property, services or anything provided by T.
o Settlement for IP infringement similar to punitive damages (Cartwright)
- Unenumerated Sources
o Although s.3(a) is very broad (thus unenumerated sources are technically possible), the
case law has not treated it that way and it shouldn’t (Schwartz)
o S. 56 which lists specific inclusions outside the four listed sources opens with disclaimer
that this section “does not restrict generality of s. 3”
o Schwartz could have impliedly overruled Curran in terms of finding non-enumerated
sources (if that is what Curran did, which we can’t say for sure)
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Compensation for future services/lost benefits was considered ‘income from a
source’ under s.3(a) although the court didn’t specify a source (Curran)
 After Schwartz: Curran likely wouldn’t be decided that way today because the SCC
was pretty clear about not finding unenumerated source.
o Typically a court would try to squeeze a particular receipt into one of the enumerated
sources (office, employment, business or property). Reason: If they taxed the income as an
unenumerated source the taxpayer, the CRA and the courts would be left in a vacuum with
respect to the determination of income since there would be no rules for the determination
of income. This would lead to uncertainty for both the taxpayer and the CRA and
subsequent (and potentially expensive) litigation would be likely to occur.
Surrogatum Principle from London and Thames Oil Wharves (applied in Tsiapralis)
o The surrogatum principle is simply a judicial pronouncement – it is nowhere in the ITA
o 1. What was the payment intended to replace?
 In Tsiapralis the amounts were clear, compare to Schwartz
o 2. Would the replaced amount have been taxable in the recipient’s hands?
 Overdue disability benefits would have been taxable under s.6(1)(f)(Tsiapralis)
o T bears the burden of showing which part of the payment should be non-taxable (Siftar)
o Tsiaprailis – surrogatum principle is opened up for all types of payments (not just business
and property)
o Steps on exam: look at listed sources, s. 56, surrogatum, then mention possibility that it
could be income from an unenumerated source (use Cranswick factors) and note that this is
highly unlikely.
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Taxing Settlements
- Under the surrogatum principle, you would tax the part of the settlement that was for lost income
- Where the settlement is for out-of-pocket expenses incurred, this is not an accretion to wealth –
not taxed.
o Exception: If the amount is to compensate for the loss of capital property (e.g. destruction
of a building), it will be taxed as a disposition of property, and thus a capital gain. (this is
b/c you’re getting the FMV of the building – have to compare that to your ACB)
Interpretation Bulletin 365R2 Personal Injury Damages
 Excluded from income regardless of the fact that the amount may have been based on earning
capacity. Person is being compensated for the loss of the capacity to earn. But the amount that
could reasonably be considered to be income from employment rather than an award of damages
is included in income. (but note: they actually don’t tax it)
 Damages for pain/suffering/future life span are not compensation in a market environment –
these are not taxable.
 Earning capacity refers to lost opportunity for advancement: T will have to turn down opps to
earn more income (i.e. promotions where travel is required). So, the CRA can look at what they
probably would have earned if accident hadn’t happened and what they’d earn now, and that
amount is paid to them tax free because compensation for lost earning capacity.
 But amounts to compensate directly for income from employment, under the surrogatum
principle that is taxable income. BUT THE CRA STILL DOESN’T TAX IT. They just don’t. Thus ICBC
often only pays out your after-tax income.
 Tsiaprailis – T was getting disability benefits under the employer’s plan. Monthly benefits fall
under s.6(1)(f). So it would be better to get $ from the car driver who injured her in a personal
injury settlement (non taxable).
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NOTE the difference between a s.6(1)(f) payment (disability payment as in Tsiaprailis) and the fact
that there is no provision for taxing a personal injury settlement in the Act. If you are going to
include disability then why not personal injury damages (they are basically for the same thing). So
the Act is not perfect, this is a gap.
Tax Return Not Binding on CRA
s. 152(7) The Minister is not bound by T’s tax return or the info provided by T and can assess tax payable
notwithstanding the tax return (i.e. can conduct a net worth assessment)
s. 152(8) An assessment is deemed valid and binding notwithstanding any error/omission/proceeding
RESIDENCY
Canadian taxation is based on residence and source. Residence is used as a tax base because it
emphasizes economic association with a country and enforcing taxation is easier b/c jurisdiction and
more control over the source/person.
Taxation of residents and non-residents
s. 2(1) Every person resident in Canada at any time during the year has to pay income tax on all taxable
income for the year (Note: the effect of this is reduced by s.114 for part-year residence)
s. 2(2) Taxable income is calculated according to the Act
s. 2(3) Non-residents pay tax if employed in Canada; carried on business in Canada (s.253); disposed of
taxable Canadian property
s. 249(1)(b) The taxation year for individuals is the calendar year
Ordinary Residence
s. 250(3) Resident includes people ‘ordinarily resident’ in Canada (broader than just full-time residents)
 This can cover individuals who are absent from Canada for months or years who have not severed
residential ties
 T is a resident of the place where, in the settled routine of T’s life, he regularly, normally or
customarily lives. (Thompson)
o Contrast to special, occasional or casual (temporary) residence. (Thompson)
 T’s intention can be relevant but not determinative (Thompson – intended to be
resident of Bermuda)
o Residence is based on the factual circumstances (Schujahn – T not resident even though wife
and children stayed in Canada to facilitate sale of house)
o Where residence is long-established, it is more difficult to show severance (Reeder)
 Factors to consider when determining ordinary residence include: (Lee)
o Past/present habits of life; length of visits; ties within the jurisdiction vs. ties elsewhere;
permanence; ownership of dwelling in Canada/vacation property; residence of
spouse/children; membership with churches/professional organizations; registration of
automobiles; etc
 IT-221R3 Temporary absence vs. severance of residential ties to Canada
o Main factors: dwelling in Canada where T has a right to stay; spouse or CL partner in
Canada; dependents in Canada
o In evaluating the significance of these ties, consider: evidence of intention to permanently
sever, regularity and length of visits, residential ties outside Canada
o Secondary ties: personal property, social ties, economic ties (RRSP, credit cards, accounts,
employment), immigration status, medical insurance, driver’s license, vehicle registration,
seasonal dwelling place, passport, membership in unions/prof organizations
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o Other ties: mailing address, post office box, business cards/stationary, newspaper
subscriptions, etc
o Just the intention to return to Canada is not itself enough to be considered ordinarily
resident for the time that the person is abroad
o If there is evidence that an individual’s return to Canada was foreseen at the time they left,
more significance will be attached to the remaining residential ties
S.128.1(4)(b) Did T pay the departure tax? (shows intention to sever, can be used against T if
they did not pay it)
o Purpose: This ensures that accrued capital gains (or losses) are recognized for tax
purposes during their period of Canadian residence. After departure, it can be difficult to
tax the capital gains – enforcement issues.
Did T inform those making payments to T that they are becoming non-resident (and so
withholding tax could apply)?
Deemed Resident
s. 250(1) Deemed resident of Canada if (a) sojourned for 183+ days; (b) armed forces; (c) public servant
of Canada who was resident before their appointment
 If you are deemed, you are deemed a resident for the whole year (so taxable on whole year’s
worldwide income)
 For sojourning, the nature of the stay must be considered (not just total # of days) (IT – 221R3)
o Commuting doesn’t count (R&L Food Distributors) (note: will still be taxed on Canadiansource income!)
o If you stayed overnight that would count as 2 days of sojourning (R&L Food Distributors)
 IT-221R3 Nature of temporary stay must be established to be akin to temporary residence in
order to count as sojourning
 Sojourning a temporary stay. It is thus something less than “residence.” It involves a presence in
Canada but on a more transient basis. A sojourner lacks settled home in Canada. Thus if you are a
resident in Canada for more than 183 days in the year, and you sever on day 205, you are a partyear resident and not a deemed resident. (Schujahn)
 Rationales:
o Person spending so much time in Canada has a stake in the country not unlike a resident
which also entails expenditures/benefits from government (benefit theory)
o Administrative convenience of deeming provision
 Remember that you can be ordinarily resident in Canada even if you stay for less than 183 days.
Part-Year Residence (where T severs residency partway through year)
Can never have a “deemed part-year resident” – if you’re deemed, it’s for the whole year! So if you
sojourn in Canada for more than 183 days, but then you sever the ties, you are a part-year resident.
s. 249(1)(b) For individuals the taxation year is a calendar year
s. 114 But where T is only a resident for part of the year T is taxed on worldwide income only from that
part of the year
 For part of the year that you are non-resident, still taxable on income from Canadian sources
 Use the factors outlined in “Ordinary Residence” to determine whether ties were severed
 NOTE easier to cease being a Canadian if previously resident elsewhere and presence in Canada
was always temporary (not born here, no intention to call home, temporary job, always foresaw
return)
o Reeder: Eight months in France for a particular job, found to be a resident
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Dual Tax Residency & Treaties
 First determine if T is a resident using “ordinary residence” and “deemed residence.” (error in
Salt) If dual residency:
 Article IV Can-US: place where there is a permanent home, if both or neither - centre of vital
interests; habitual abode (this is not fully fleshed out in the case law; courts will look at how much
time you spent in each place); citizenship; mutual agreement of the contracting states (tax
purgatory - you don’t want this!)
o If T’s house is leased to a 3P on a fixed term – not considered a permanent home available
to T (Salt)
 Article 4 Can-UK: place where there is a permanent home; if in both, then centre of vital interests.
If cannot determine centre of vital interests or no permanent home in either state, habitual abode;
nationality; determined by competent authorities of the contracting states
 s. 250(5) If the treaty says that T is a resident of the other country for tax purposes, they are
deemed not to be a resident of Canada
O If you are deemed not resident (and you were previously resident) must pay departure tax
Deemed Dispositions/Acquisitions upon Immigration and Emigration
s. 128.1(1) Deemed disposition and reacquisition of property at FMV prior to becoming a Canadian
resident, except for real property located in Canada or shares in private Canadian companies
The policy goal of these provisions is to ensure that Canada effectively subjects to tax capital gains which
accrue on all capital property while a person is a resident of Canada, as well as all gains on certain other
property, notably real property situated in Canada and shares of private Canadian corporations, of both
residents and non-residents. It also allows an exemption for capital gains that accrue on property that is
not taxable Canadian property while a taxpayer is not resident in Canada.
s. 128.1(4) When T loses their Canadian residency, T is deemed to have disposed of each property
owned by T at FMV, except for real property located in Canada
 If permanent residence has been severed; apply PRE s. 40(2)(b) b/c no PRE if not resident
Corporate Residence
s. 250(4) Deemed resident if incorporated in Canada after 1965 OR (c) incorporated in Canada before
1965 and at any time after 1965 it carried on business in Canada (see s. 253)
The corporation can also be a CL resident in Canada
 Same provisions of the Can-US and Can-UK treaties apply.
 A corporation is a CL resident wherever "the central management and control actually abides"
(DeBeers) This is usually where the board of directors meets. (DeBeers)
 The directors’ location is always determinative, unless their power has been "usurped" (Wood)
o When the shareholders dictate the directors' actions (e.g. where there is a majority
shareholding parent company), the test is where the shareholders reside.
Withholding Tax for Passive Income Payments to Non-Residents
s. 212(1) 25% withholding tax on (a) management fees, (b) interest, (c) estate or trust income, (d) rents
or royalties, (h) pension benefits, (j.1) retiring allowances (judgment for wrongful dismissal), (l) RRSP
payments (A lot of corp-to-corp stuff here. Tax treaties often reduce this amount & override ITA)
s. 212(2) 25% withholding tax for dividends
s. 215(1) The Canadian resident making the payment to the non-resident is responsible for withholding
the 25% and remitting it to the CRA on behalf of the non-resident.
s. 215(6) Failure to comply makes the Canadian resident jointly and severally liable for the amount
Provincial Residence
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BC ITA s. 2 Income tax must be paid for each taxation year for people resident in BC on the last day of the
taxation year. Corporations are resident in the province(s) where they have a permanent establishment.
IT Reg 2601 Provincial residency is determined by T’s residence on the last day of the tax year
IT Reg 2607 Where T has more than one place of residence on the last day of the calendar year, the
province which can reasonably be regarded as T’s principle place of residence prevails
 T is ordinarily resident in the place where in the settled routine of his life he regularly, normally or
customarily lives. (Mandrusiak applies Thomson to provincial residency) Use the factors above.
EMPLOYMENT VS BUSINESS INCOME
Employees vs. Independent Contractors: why it matters
- Tax withholdings: persons do not need to withhold tax from ICs (ICs are to remit taxes
themselves; whereas s. 153(1) requires employer to do this for employees)
- Income from employment = cash basis whereas business income = accrual basis
- s. 249 individual’s tax year is the calendar year, whereas businesses can have an off-calendar year
end s. 249.1
- Deductions for employees limited to enumerated items in s. 8; as a business, ICs have wider scope
under s. 9 and s. 20
TEST (Wiebe Door)
1. Is T engaged on his/her own account? If yes, then it is a K FOR service (IC) If no, then it’s a K OF
service (employee)
2. Factors to consider when answering the above question are:
a. Control – more control over the worker is indicative of an employee role (Sagaz)
b. Ownership of tools/equipment – indicates IC
c. Hire own helpers – indicates IC
d. Opportunity for profit/assuming risk of loss – indicates IC
e. Intent of the parties should be considered (Wolf); Question of how much weight (Lang)
f. O’Brien: is the ‘independent contractor’ charging GST?
3. Express intent drawn into the employment K should be given weight (Royal Winnipeg Ballet)
a. In characterizing the relationship, the form of the legal relationship is relevant unless
the legal form does NOT reflect the true relationship between the parties or there is
a sham
b. Where K is not an appropriate reflection of the legal relationship, K intention ignored
3(a) OFFICE/EMPLOYMENT INCOME
s. 5(1) Income from employment is T’s salary, wages and other remuneration, including gratuities
s. 5(2) Loss from employment is T’s loss, as calculated by the ITA, for the tax year (difficult to have a loss)
Canada Employment Credit
S. 118(10) There may be deducted the amount determined by the formula AxB, where A is the set
percentage for the taxation year and B is the lesser of $1000 and the total of T’s income from employment
Withholding of Tax by Employer
S. 153(1)(a) Every person paying at any time in a tax year salary, wages or other remuneration
withholds the tax and remits it to the CRA on behalf of the employee.
Inclusions in Employment Income
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If a benefit is in the nature of personal or living expenses, it should be taxable; if it is in the nature
of expenses incurred in the course of carrying out employment duties, the benefit should not be
taxable.
- An amount will not be a benefit to the employee if the employer is the recipient of the advantage
secured by the expenditure
s.6(1) Include in income from employment (a) value of board, lodging, and any other benefits of any kind
whatever received or enjoyed by T in respect of, in the course of, or by virtue of an office or employment
(very broad) except contributions by the employer to T’s insurance or pension plan
- Is there a measurable economic benefit to the employee? If so, is the primary benefit to the
employer or employee? (Lowe - business trip had merely an incidental benefit for T, not taxable)
- Benefit need only be a material acquisition which confers a benefit upon the employee, no
requirement for employment service in return for the benefit (Poynton, Savage - prize for taking a
course included in employment income)
- May be a payment of cash, or an item of property, a party, meal, or other non-cash advantage
- It does not have to be a quid pro quo for the performance of employment duties (Savage)
- Gifts in kind (such as a gift card) are fully taxable as benefits of employment (Laidler v. Perry)
- Valuation: “the amount a person not obligated to buy would pay a person not obligated to sell”
(Giffen, Steen)
IT470R
 IT-470R provides administrative guidance on what an employer must include in reporting an
employee’s income from employment; it is significantly less demanding than the law, strictly
applied.
 Non-cash gifts/awards to arms-length employee, regardless of number not taxable up to $500
(employer can deduct)
 No longer taxed on work social functions where all employees invited. The amount in excess of
$100 per employee per event would generally be considered taxable.
 Don’t have to include the value of loyalty points in employment income as long as they are not
converted to cash; the plan is not indicative of another form of remuneration; AND plan or
arrangement is not for tax avoidance
 Trip where employee acts as host will be viewed as a business trip (not taxable) provided the
employee is engaged directly in business activities during a substantial part of each day (e.g., as
organizer of activities); otherwise it will be viewed as a vacation and a taxable benefit, subject, of
course, to a reduction for any actual business activity.
 Where a spouse accompanies employee on business trip the payment of the spouse's travelling
expenses is a taxable benefit to the employee unless the spouse was, in fact, engaged primarily in
business activities on behalf of the employer during the trip.
 If employer pays all or part of the employee’s provincial health care premiums = taxable benefit
 Subsidized meals not considered a taxable benefit provided the employee is required to pay a
reasonable charge (covers the cost of food, its preparation and service). Where less than a
reasonable charge is paid, the value of the benefit is taxable.
 Uniforms and dry-cleaning of uniforms is not considered a taxable benefit
 Transportation from pick-up points to the location of the employment at which, for security or
other reasons, public and private vehicles are not welcome or not practical is not a taxable benefit.
However, a reimbursement or allowance paid to the employee for transportation to and from the
location of employment must be included in income. *exception for special/remote worksites
 Employees permitted to use company rec facilities for free or small fee = not a taxable benefit
 If employer pays the fees required for an employee to be a member of a social or athletic club =
not a taxable benefit where the membership was principally for the employer's advantage rather
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than the employee's. (Note: employer can’t deduct this)
Reimbursement for moving expenses where employee transferred or takes first job with
company in a place other than where they were living = not a taxable benefit
Employer pays the expense of moving an employee and the employee's family and household
effects out of a remote place at the termination of the employment there = no taxable benefit
Include Allowances for Personal and Living Expenses
s. 6(1)(b) Include in employment income any allowances for personal living expenses except reasonable
allowances for travel expenses (see the provision)
- An allowance is an arbitrary amount in that it is predetermined sum set without specific
reference to any actual expense or cost – may be set through a process of projected or average
expenses or costs. Spending is at the discretion of the recipient, don’t need to submit receipts.
- Reimbursement: A cash payment by employer to employee to repay employee for an expense
incurred on behalf of the employer; the employer will normally require the employee to produce a
receipt for the expense. Such amounts are not taxable in the hands of the employee; the employee
incurred the expense on behalf of the employer, and the employer is merely repaying a debt owed
to the employee.
 A payment in satisfaction of an obligation to indemnify or reimburse someone or to
defray his or her actual expenses is NOT an allowance and doesn’t have to be
included in employment income (Huffman)
IT Reg 7306 (actually for s.18(1)(r) but also applied to s.6 to assess the reasonableness of an
allowance): vehicle allowance max deduction: $0.52/km up to 5000km; $0.46/km after 5000km,
premium for driving in Yukon, NWT, Nunavut of $0.04/km
Include Any Payments Related to the Employment Whether Before or After Employment
S. 6(3)(a) Include payments made to T while T was in the employment of the payer, OR (b) payments
arising from an agreement between T and the payer immediately before, during, or after the employment
of T by the payer UNLESS the payment cannot reasonably be regarded (c) as consideration for accepting
the office/contract/employment, (d) remuneration for services under k for employment; OR (e) in
consideration for a covenant with reference to what the officer/employee is or is not to do before/after
termination
- This provision couldn’t apply in Curran b/c the payment received was not from the same company
that Curran ended up working for
Exception for Allowances re: Special or Remote Work Sites
s. 6(6) You don’t have to include in employment income allowances for board and lodging expenses (see
provision for qualifications)
IT470R Consider available means of transportation, distance, time – if 80k from nearest 1000 pop
location, then remote
Deductions from Employment Income
s. 8(2) Except as expressly permitted, no deductions shall be made against income from employment
s. 8(1) Listed deductions are deductable from employment income in so far as they are reasonable
- Deduction must be “wholly related to employment” meaning that if a vehicle is used for
employment where the employer doesn’t give allowance, and you use it for other things too, you
claim a deduction only for the % of the expense that is wholly related to the employment.
s. 67 No deduction shall be made except to the extent that the outlay or expense was reasonable in the
circumstances
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s. 67.1(1) Food and entertainment are only deductable at 50% of the actual value or 50% of a reasonable
value whichever is lower
- Martyn: Travel to and from work is not deductible; this applies even where work-related security
concerns exist (Hogg)
- Swingle: Once a professional is recognized by statute, possible that other dues not strictly required
to maintain the professional status will be deductible
- McCreath: Home office to primary office travel is not a deductable transportation cost
Process if T’s allowance from employer doesn’t cover all expenses:
1) Note that s.8(1)(h)(iii) could pose a problem if interpreted strictly (Renko)
2) Argue that the allowance was for a special work site, thus T can still deduct under s.8(1)(h)
3) Argue that the allowance was unreasonably low, thus allowance should be included in T’s income,
and all expenses deducted (subject to s.67.1) T would need certificate under s.8(10) Employer
would still deduct allowance subject to s.67.1. T’s still only saving excess amount * marginal rate.
Proposed Amendment to s.8(1)(b) Regarding Legal Expenses *this applies since 2001!
- Allows a deduction for legal expenses for when employee has to sue to collect any amount
required by this subdivision to be claimed by the employee. This has been the case since 2001.
- I.e. if Tsiapralis happened again then she could deduct her legal expenses (it wasn’t salary or
wages in that case)
- Schwartz: The compensation was not included in his income - it was considered exempt…so he
wouldn’t be able to claim a deduction for the legal expenses under s.8.
3(a) BUSINESS OR PROPERTY INCOME
TEST for business/property income vs. non-source (hobby) income (Stewart)
1. Look at the commerciality of the activity in question. Is the activity of the T undertaken in pursuit
of profit, or is it a personal endeavour?
a. Where the activity contains no personal element and is clearly commercial, no
further inquiry needed (Stewart – T clearly not renting apartments for personal pleasure)
b. Where there is a personal element, it must be determined whether or not the activity is
being carried on in a sufficiently commercial manner to constitute a source of income
i. Subjective and objective test
1. Subjective: T must show they were trying to earn money
a. A tax motivation doesn’t mean that you don’t have a commercial
motivation and doesn’t override the commercial motivation (Stewart)
2. Objective: T must show that they took reasonable steps in an attempt to earn
income. Use the Moldowan factors:
a. Past performance of the activity: continuous losses indicate a hobby
b. T’s expertise: less expertise makes expectation less reasonable
c. Business planning: T's intended course of action to convert losses into
profits.
d. Financial assessment: The capacity of the venture to make a profit
given its capitalization (heavy debt = high interest) and after
deduction of CCA
Policy
- Hobbies may incidentally turn a profit, but generally make losses. CRA doesn’t want to lose money.
- Wealthy businesspersons could use side businesses for personal pleasure and deduct losses!
s. 9(1) T’s income for a tax year from business/property is T’s profit from that business or property
 Profit is not defined, understood to be net profit, use GAAP except where overridden by the ITA
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s. 9(2) T’s loss for a tax year from business/property is T’s loss from that business or property
s. 9(3) Income/loss from property does not include capital gain/loss from disposition of that property
Income from Business
s. 248(1) Business = profession, calling, trade, manufacture or undertaking of any kind whatever, ACNT,
but does not include employment income
- A business is anything which occupies the time, attention and labour of a man for the purpose of
profit (Smith)
- Gambling winnings not income from business (LeBlanc)
o BUT specific expertise or system to minimize risk makes it a business (Luprypa)
- ACNT (included in business income) or capital gain (preferential tax rate)
o If you have a gain, you want it to be a capital gain = only 50% taxed. But if you have a loss,
you want it to be an ACNT = can deduct your expenses in full (can only deduct 50% of a
capital loss and only against capital gains)
o ACNT: purchaser acquires property with the sole intent of making profit from it on a quick sale
o True ACNTs are usually intermittent – T does not carry on the practice like a normal
business would
o Where there is a primary or secondary objective to “flip” the property – that will be an
ACNT (Regal Heights – land purchased in speculation of shopping center)
o Where a single transaction is carried out like that of a regular business, it is an ACNT
(Taylor)
o Does the item purchased produce income on its own? (Taylor – lead – no)
o Can you do anything with the item except simply resell it? (Taylor – lead – no)
o Capital Property: T acquires property to hold it, earn income, and later sell for a capital gain
o By nature it creates income: shares, real property, etc
o Very strong presumption that an investment in shares of a company is a capital investment,
NOT ACNT (Irrigation Industries) Unless it’s a securities trading business (Arcorp
Investments) or you purchase all the shares, overhaul the business, and then flip it
o Interpretation Bulletin 459 for determining ACNT vs. capital investment
o More authoritative bulletin – praise from SCC and follows Taylor
o Where T habitually engages in an activity capable of producing profit, T is carrying on
trade/business as opposed to making a capital investment. Where only done infrequently,
issue is whether the activity was an ACNT
o Test: A) Whether T dealt with the property acquired in the way a dealer would ordinarily
deal with it? (points to ACNT) B) Whether the nature/quantity of the property excludes the
possibility that its sale was capital in nature? (i.e. toilet paper – Rutledge) AND C) Whether
T’s intention is consistent with a trading motivation (rather than capital investment)?
o Lists 12 factors used to determine whether is a capital transaction or ACNT: feasibility of
venture; zoning; extent to which the venture has been carried out; evidence of a change of
intention; nature of the experience of those involved; reasons for selling; etc
Income from Property
s. 248(1) Property = any kind of property whether real/personal/corporeal/incorporeal, right of any
kind whatever; money; work in progress of a business, etc.
- Property usually creates income through rent, royalties, interest, dividends (passive income)
- If income derived principally from ownership of property, generally considered to be income from
property; if it involves a significant amount of activity, the income is often income from a business
- Just because you are an inactive partner does not mean that the income produced from the
partnership is property income. Look at how the income is produced. (Hollinger)
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o
o
o
o
Rental properties generally seen as income from property, not business (Walsh and Micay)
o But it might be considered a business if there is a lot of effort put in
Rent is generally a fixed payment; periodic; for the use of property for a given period of time
Royalties are amounts paid for the use and production of intangible property (copyright, trademarks,
patents, scientific knowledge, trade secrets, licensing fees, etc)
Where all legal rights are transferred, the transaction constitutes a sale of property
If less than all rights transferred, transaction is a lease or licence and payments are rent or royalties
Why does the distinction between income from property vs. income from a business matter?
o For an individual, generally both are treated the same (exception: dividends)
o For businesses, the distinction is important because CCPCs have a special low rate on active business
income under s.125. (combined rate of 13.5%) Low rate is not available for property income.
(26.5%)
o Active business income is income from a business carried on by the corporation other than a
specified investment business or a personal services business and includes an ACNT
o The tax liability of non-resident taxpayers is tied to the source of income. Income from a business in
Canada is taxable under Part I of the Act on a net basis, whereas income from property is generally
subject to a 25% withholding tax on a gross basis under Part XIII.
Inclusions in Income from Business or Property
s. 12(1) Amounts received and receivable are to be included in income for a tax year from business or
property
- Amount is receivable when you have a legal (even if not immediate) right to payment (Colford)
- Amount must be ascertained (Benaby Realties), sufficient certainty OK (West Kootenay Power)
Interest
s. 12(1)(c) Include as income from business/property any amount received/receivable as interest
s.12(3) Corps must report interest accrued to the debt obligation that accrues by the end of the tax year.
s.12(4) For individuals, look at the anniversary date of the contract, and you include the interest up to
the anniversary date in your income from business or property for that year.
s. 16(1) Where, under a K, an amount can reasonably be regarded as part interest and part capital: (a)
The part reasonably regarded as interest shall be deemed to be interest for the lender AND (b) The part
reasonably regarded as an amount of income, other than interest, shall be included in income of the T
o A lists property for $450,000. B offers $350,000 in cash for it, A counteroffers $395,000, B rejects.
A offers $395,000 over the course of 6 years. B accepts. Court: This is effectively a loan with
$45,000 in interest. Must be included in income from property (rather than capital gains) (Groulx)
o If the purchase price is at or below FMV, it would be hard to show that part of the payment price is
interest
Rent and Royalties *tiny exception to normal accrual method for business
s. 12(1)(g) Payments based on production or use must be included in income from business/property
when received whether or not the amount was an instalment of the purchase price of the property
o Wain-Town Gas and Oil: After-sale share of profits are royalties and subject to income tax (not
capital payments)
Dividends *tiny exception to normal accrual method for business
s. 12(1)(j) Dividends from resident corps must be included in income from business or property when
received
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s.12(1)(k) Dividends from other corps must be included in income from business or property when
received
Deductions from Business/Property
o The expenses are deducted on the basis of recognized accounting principles except where the ITA
provides a timing rule or some other rule (like s.67.1 – food and beverages limitation)
s.9 provides permission to deduct the expenses of the business or property.
S.18 then applies the restrictions. (Daley)
s. 67 All expenses that T is claiming a deduction for must be reasonable in the circumstances
- S.9 Test: Was the expense occurred for the purpose of incurring income in accordance with
ordinary principles of commercial trading (what does a businessperson think is necessary to
maintain the business?) (Royal Trust)
- Expenses that are part of normal business (i.e. paying damages b/c of negligence on the part of
Imperial’s employees) are to be treated as deductible, even where amounts are large (Imperial Oil)
- No specific causal connection to income earning is required, just needs to be part of the overall
business
- Not a “but for” test – the expense has to be directly connect to the income earning (Benton - but
for the housekeeper...I would have had to hire a farmhand...rejected)
- Expenses for illegal businesses are deductible, but only insofar as they can be proven (Elridge –
call girl business, Buckman – embezzling funds)
- Expenses for bribing public officials (s. 67.5) and fines/penalties (s.67.6) are not deductible
- Damages and contractual penalties are generally deductible (Imperial Oil and IT-467R2)
- No deduction for contingent liabilities (JL Guay)
Restriction on Deductions
s. 18(1) Lists things that are NOT to be deducted from computing income from business/property
s.18(1)(a) Can only make a deduction if it was incurred for the purpose of producing income from
business or property
Outlays on Account of Capital Generally Not Deductible
s.18(1)(b) Can’t deduct outlays on account of capital. Note interest exception in s.20(1)(c)(i)
o Capital expenditure vs. current expenditure (business expenses):
o Current expenditures are immediately deductible; capital expenditures are deductible over
time using CCA s. 20(1)(a)
o Current expenditures (business expenses) generally occur continuously
o Capital outlays are added to the overall ACB of the larger capital asset, or held as a distinct
capital asset
o CL Test: Does the expenditure result in an enduring benefit or advantage to the business
or property source beyond the particular tax year where it was spent? (British Insulated)
o General but not decisive: Capital expenditure – spent once and for all. Current expenditure –
recurs every year.
o Daley: one-time expense of passing the Bar exam found to be an outlay on account of capital
(one-time expense)
o Royal Trust: initial club fees for employees deductible as a business expense b/c from corp’s
perspective it is a recurring annual expense
o Examples of capital expenditures:
o Equipment (capital property – provide an enduring benefit to business)
o Lump sum payment to create nucleus for an employee pension fund (British Insulated)
o Shipbuilding firm dredged a canal for ships to go through (Vickers)
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o Is a repair of a tangible asset an outlay on account of capital or a current expenditure?
o Generally, replacement of worn or damaged parts, even though substantial, are repairs and are
to be contrasted with changes designed to create an enduring addition or improvement to the
structure. (Shabro)
o Improvement of the asset alone is not determinative. Repairs generally improve the asset
o An outlay that replaces a capital asset will be capital outlay (Canada Steamship)
o An outlay that merely repairs or maintains a capital asset will be a deductible expense (Canada
Steamship)
o Must look to whether the repair was actually necessary (points to current expenditure)
 However it may be a capital asset even if required by the main asset (Canada
Steamship)
o Part of an expenditure may be a capital expense (i.e. an upgrade) and part of it a repair
expense (Shabro)
o However, new technology can be used to effect a repair without it being considered an outlay
on account of capital (Shabro, Gold Bar)
o If there is both capital outlay and current expenditures in a single operation it may be deemed
all capital outlay (Shabro)
o New walls and floors for ship = current expenditure, new boilers = outlay on account of capital
(Canada Steamship)
Personal and Living Expenses Not Deductible
s.18(1)(h) No deduction for personal and living expenses
- Benton: large portion of house-keeper expense is a personal expense and therefore not deductible
- Henry: travel to/from home is not deductible against income from business/property
- McCreath: home office to primary office is not a deductable transportation cost
o 70% of duties performed at home. Lived 55km from corp office. CRA argued that it was a
taxable commuting allowance. Court agreed, said T worked at home for own convenience.
Thus, “is the home office for business purposes or is it merely for the convenience of the
taxpayer?” will be considered.
- If the home office qualifies under s.18(12), argument could be made that this should be deductible. T
will argue that they are commuting from two places of business/bases of operation which was
accepted in Ross Henry. (no case law on this yet)
s. 248(1) Personal living expenses include (a) Expenses of properties maintained by any person for the
use/benefit of T or any person connected with T by blood relationship, marriage, CLP, or adoption, and
NOT maintained in connection with a business carried on for profit (b) insurance policy etc...
Club Memberships Not Deductible
s.18(1)(l) no deduction after 1971 for club, lodge, golf course or membership fees to any rec club
Home Office Expenses
s. 18(12)(a) No deduction for income from business in respect to any part of a home office EXCEPT to
the extent that home office is either the principle location of the duties OR it is used exclusively for
earning income from business AND used on a regular basis for meeting customers in respect of business
- Amount deducted should be based on reasonable allocation of costs attributable to the home office
determined by the amount of space occupied by the office against the total home area
s. 18(12)(b) Deduction shall not exceed the profit from that business AND
s. 18(12)(c) Losses can be carried forward until the business is profitable and deductions can be used
Steps: 1) Look at the income from the business. Deduct the regular business expenses. If there is any
income left, then deduct the home office expenses (but can’t create a loss using these expenses)
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Expressly Permitted Deductions from Property/Business Income
s. 20 Notwithstanding s. 18, there are some special deductions that are specifically allowed
s. 67 In computing income, no deduction shall be made unless that outlay or expense was reasonable
s. 20(1)(c)(i) Interest paid on amounts borrowed for the purpose of earning income from a business or
property is deductable from income from business or property
- Normally at CL interest is considered an outlay on account of capital and thus wouldn’t be deductible
if it weren’t for this provision. Consider: timing (accrual vs. cash accounting) of the deduction;
requirement for a legal obligation; income earning purpose requirement; limitation where income
which is earned is exempt; deduction permitted (ii) where interest is charged on unpaid purchase
price rather than money borrowed; “unreasonable” interest charges will not be deductible.
- 20(1)(c)(i) can apply when a taxpayer uses borrowed money to make an investment for more than
one purpose, provided that one of those purposes is to earn income. (Ludco) Income doesn’t
necessarily mean net income or profit.
- The proper “test to determine the purpose for interest deductibility under s. 20(1)(c)(i) is whether,
considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the
investment is made.” This provides an objective standard, apart from the taxpayer’s subjective
intention, which is relevant but not conclusive. (Ludco)
- Requirement that borrowed funds be used directly for an income earning purpose to claim interest
expense (Bronfman Trust) (note: sole purpose can’t be capital gains b/c capital gains are not income
from property according to s.9(3))
- If the income-producing asset is sold, then you don’t get to deduct the interest on the loan that you
took out to buy the asset unless you re-invest the funds in another income-producing asset that
qualifies. (Tennant)
- Deduction of interest expense found to be legit even though a series of transactions had been done
(Singleton)
o Court rejected true economic purpose approach – cannot ignore true legal relationships
o “This court has never held that the economic realities of a situation can be used to recharacterize
a taxpayer’s bona fide relationships. To the contrary, we have held that, absent a specific
provision of the Act to the contrary or a finding that they are a sham, the taxpayer’s legal
relationships must be respected in tax cases.”
 Example of a provision to the contrary: Blended payments section that specifically
overrides what the agreement is between the parties s.16(1)
 Sham = fraud, i.e. false docs for CRA and real docs for business
CCPCs, Active Business Income, Personal Services Businesses, and Specified Investment
Businesses
s.125(7) A CCPC is a corporation resident in Canada whose shares are not listed on the stock exchange
and which is not controlled by non-residents, by a corp whose shares are listed on a stock exchange, or a
combo of these. They are entitled to the special low rate of 13.5% on active business income.
s.125(7) Active business income is any income other than that from a personal services business or a
specified investment business (this includes income from ACNT)
Personal Services Business
s.18(1)(p) No deductions for personal services business except a few listed deductions
S.248 A personal services business is where (a) An individual who performs services on behalf of the
corp (“incorporated employee”), OR (b) Any person related to the incorporated employee is a specified
shareholder and would reasonably be regarded as an employee of the company/person they are
providing services to but for the fact of incorporation (use Wiebe Door) UNLESS: (c) The corporation
employs in more than five full-time employees throughout the year
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Who is T providing services to? Is it a person who would be their employer if they hadn’t
incorporated?
S. 248(1) T is a specified shareholder when they own more than 10% of the stock (Any stock owned by
person with whom T does not deal at arm’s length is considered to be owned by T for the purposes of this
definition, but for the personal services business definition they must be related)
- This is an anti-avoidance mechanism to protect against ‘employees’ incorporating themselves to take
advantage of independent contractor taxation and the lower tax rate received by CCPCs
- Ensures that only bona fide CCPCs involved in active business have access to the preferential rate
Specified Investment Business
s.125(7) A business, the principal purpose of which is to derive passive income from property (rents,
royalties, dividends, interest) but DOES NOT INCLUDE a business that has more than 5 full time
employees or would require more than 5 full time employees if they were not paying another business
for admin, financial, or managerial services
o Basically, specified investment businesses don’t get the CCPC rate
UNIVERSAL DEDUCTIONS
Child Care Expense Deduction s. 63
o For each child under 7 – max deduction of 7k per year
o Children between 7 and 16 – max deduction of 4k per year (child must be under 16)
o Must be able to produce receipts to claim deductions (i.e. you have to actually spend the amount)
o Deduction cannot exceed 2/3 of the lower income spouse’s earned income
o Earned income refers to income from employment or business but not property – the expenses
must be to allow business or employment
o Why? Income from property is passive and you could look after your children
o Payments to the child’s own parent, the taxpayer’s dependent or a relative under 18 do not qualify
o This is a deduction, not a credit. Therefore, it’s worth more to high-income earners. Because a
high-income earner has a higher tax rate, they are saving more when you give them a $7000
deduction (i.e. $7000 X 0.40 rather than $7000 X 0.29)
Moving Expenses & Scholarships
s. 62(1) – Deduct from income expenses incurred for moving in respect of an eligible relocation that was:
(a) not paid by employer; (b) not included in a previous year; (c) total does not exceed amount earned
from employment or business in the new location; and (d) all reimbursements and allowances in respect
of the expenses are included in income
s. 62(2) – for students, removes requirement for move to be within Canada and allows the deduction
even if the purpose of the move was not to carry on business
s. 62(3) – Moving expense includes: travel costs; transportation of goods; meals up to 15 days; cancelling
old lease; selling old residence; legal fees and transfer taxes for new property; interest/utilities/taxes for
old place up to $5000 where left empty for sale; revision of legal docs to reflect new address; does NOT
include costs to acquire new home
- This section is not limited by 50% food costs rule in s. 67.1(1) – fully deductible for 15 days
- S. 62 + s. 248(1) + s. 56(1)(n) = these are the provisions that add up and mean that you can only
deduct your moving expenses as a student from non-exempt scholarship income. If you don’t have
non-exempt scholarship income, you can get a job at the new place, just earn enough to add up to your
moving expenses, deduct the moving expenses, and then you won’t pay tax on the part-time income.
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56(1)(n) includes scholarships, bursaries and other amounts in income to the extent the amounts exceed T’s
scholarship exemption from s. 56(3) (which exempts all scholarships/bursaries in connection with enrolment
in an educational program that qualifies for the educational tax credit (118.62) which requires that T be
enrolled in a “qualifying educational program” at a “designated educational institution”.
o “qualifying educational program” – minimum 3 consecutive weeks, 10 hrs per week
o “designated educational institution” – Canadian and foreign universities and colleges, provided, if
foreign, the program is at least 13 weeks long
s. 248(1) Eligible Relocation = relocation to carry on a business or be employed in Canada, OR to be a
full-time student, where both locations are in Canada AND distance between old home and new home visa-vis the new work location is at least 40km (shortest normal route open to travelling public)
- EXCEPT where taxable Canadian residents live abroad, then this can apply for when they move
houses abroad too or move back to Canada for their job
- Bayett – a move at a later date to the date of employment in the new location is fine so long as you’re
moving to a place closer to new work location than your old residence
- If you move your home office from one place to another, the expenses are not allowed – missing the
four essential elements: old work; new work; old home; new home
- Public policy: We want people to move to make more money because then they’ll pay more tax and
we won’t have to pay them EI
s.6(1)(b) Moving allowances have to be included in income (largely a personal expense) It is NOT an
exempt allowance under s.6(1)(b)!! Include it in your income, and then deduct your expenses.
o If it’s a reimbursement, then you don’t have to report anything. The only time you would is if you
were only reimbursed for part of the expense (i.e. if you incurred $5000, and your employer only
reimbursed you $1000, then you would report the $1000 and deduct the $5000) or if you didn’t
have enough income from employment at the new job for that year such that you would lose the
ability to deduct the expenses (i.e. if you only made $4000 in income, you have expenses of $5000,
and the employer reimbursed you $1000, you would report the income, the $1000
reimbursement, and then you could deduct $5000.)
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CAPITAL INCOME
s. 3(b) – Determine the amount by which: (i) capital gains from disposition of property (other than LPP),
AND taxable net gain for the year from disposition of LPP (positive figure only – because losses from LPP
can only be set off against gains from LPP - s. 41(2)); EXCEEDS (ii) allowable capital losses from the
disposition of property other than LPP (no losses from PUP other than LPP – s. 40(2)(g)(iii))
Calculation of Capital Gains
s. 39(1)(a) and (b) Capital gains and losses are gains and losses from disposition of any property,
excluding gains and losses from dispositions of property that are taxed as income from a source
(1)(b)(i) Exception for depreciable capital property – set schedule for depreciation
Except as otherwise provided in this part....
s. 40(1)(a)(i) Capital Gain = POD – (ACB + expenses of disposition)
s. 40(1)(b) Capital Loss = ACB – (POD + expenses of disposition)
- No express provision for the inclusion of acquisition expenses in ACB, but generally accepted that ACB
includes property taxes, fees and other expenses incurred to complete the acquisition – IT285R2
para 8: the term “capital cost of property” generally means the full cost to the T of acquiring the
property and include legal, accounting, engineering and other fees incurred to acquire the property.
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s. 38(a) and (b) Taxable capital gains are ½ total capital gains; Allowable capital losses are ½ total
capital losses
s. 111(1)(b) Net capital losses may be carried back 3 years and carried forward indefinitely
- Note, can only be used against capital gains
s. 111(2)(a) Where T dies, remaining capital losses can be used as non-capital losses in year of death and
preceding year
s. 43(1) Part Dispositions: Use the ACB of the part that was disposed of that could reasonably be
regarded as attributable to that part immediately before disposition
s. 47(1) Identical Properties: Overall ACB becomes the average of the total combined ACBs
- Rationale: don’t wan people to have undue control over when they realize gains and losses.
S. 248(1) “Disposition” INCLUDES:
- (a) Any transaction or event entitling a taxpayer to proceeds of disposition of the property
- (b)(i) Any transaction where property is a share, bond, debenture, note, certificate, mortgage,
agreement of sale or similar property, the property is redeemed in whole or in part or is cancelled
- (b)(ii) where property is a debt or any right to receive an amount, the debt is cancelled or settled
BUT DOES NOT INCLUDE
- (e) Transfer of property as a consequence of which there is no change in the beneficial ownership
EXCEPT:
o Trust transfers (listed)
- (j) Transfer of the property for the purpose only of securing a debt/loan or transfer by creditor for
purpose of returning property used as security for a debt/loan
- (l) Issue of a bond, debenture, note, certificate, mortgage AND
- (m) Issue by a corporation of a share or its capital stock, or any other transaction that would be a
disposition by a corporation of a share of its capital stock
S.54 Proceeds of Disposition = Price of property sold; compensation of property stolen; compensation for
property destroyed; compensation for expropriation; compensation for property injuriously affected;
compensation for property damaged and any amount payable in respect of damage
- Companie Immobiliere = Disposition has a very broad meaning and is not to be restricted by
“proceeds of disposition” def’n, it has “the broadest possible meaning”, and even applies to the
destruction of tangible property. If you stop owning it, it’s been disposed of; any money you
receive constitutes “proceeds” (which may be 0, e.g. uninsured destruction)
- Due to neutrality concerns, taxes on capital gains are deferred until realization (since taxing them
on an accrual basis would force taxpayers to liquidate their capital assets to pay the capital gains
taxes)
Deemed Dispositions
s. 128.1(1) – Immigration – (b) deemed to have disposed of properties (shares, bonds, mutual funds, real
property situated outside Canada) at FMV (except for taxable Canadian property); (c) deemed to have
acquired the property again at the FMV (becomes the new ACB for the property)
- Taxable Canadian Property = real property or shares in a private Canadian corporation
- This adjusts your ACB for when you enter so that you are only taxed on gains while a Canadian
resident
- You don’t actually pay any tax at this point
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s. 128.1(4) – Emigration – deemed to have disposed of all your property at FMV (except for real property
situated in Canada)
Gifts and Sales Below FMV to Non-Arm’s Length Persons
For purposes of s.69(1)
S. 251(1)(a) Related persons shall be deemed not to deal with each other at arm’s length (applies
whether estranged or not)
S.251(1)(c) It is a question of fact whether persons not related to each other are at a particular time
dealing with each other at arm’s length
- Requires an examination of all the facts and circumstances existing between the two persons
- Unrelated parties have been found not to be dealing at arm’s length when there is “a common mind”
which directs or controls the bargaining for both sides OR when two persons act in concert without
separate interests (i.e. to help one get a particular tax result)
S.252(2) Definition of “Related Persons”
- (a) Individuals connected by blood relationship, marriage or common-law partnership or adoption;
o For our purposes, blood relationship means one person is the child or descendant of the other
(i.e. a child is related to parent, grandparent, great-grandparent etc., and vice versa) or one
person is the brother or sister of the other (251(6)(a)). However, the relationship of aunt or
uncle to nephew or niece, and cousins are not included in related persons. (but can still be
non-arm’s length)
- (b) A corporation and
o (i) A person who controls the corporation, if it is controlled by one person; (enough shares to
elect the Board - over 50% of shares);
o (ii) A person who is a member of a related group that controls the corporation (i.e. if Ralph and
Wife each own 30% of the corp) OR
o (iii) Any person related to a person described in (i) or (ii)
- (c) Any two corporations if they are controlled by the same person/group of persons
S.251(6)(b) and (b.1) make spouses and common law partners related to each other, and to the persons
who are blood relatives of their spouse or CLP. This means a spouse is related to their “in-laws.”
Common law partnership: (proposed amendment to the definition): a person who cohabits at that time
in a conjugal relationship with T and has so cohabited throughout the previous 12 months, OR would be a
parent of a child of whom T is a parent (either a biological or adopted child)
- This means you don’t have to live together for the full 12 months prior if you already have a child
with them (you become CLPs as soon as you cohabit). Once you have cohabit in a conjugal
relationship, it’s considered to continue unless you live apart for 90 days because of a breakdown
of the relationship.
S.69(1) Inadequate Consideration – Gifts and Below FMV Sales
- Except as otherwise provided within the Act,
o (a) Where T acquires something when not dealing at arm’s length at an amount more than
FMV, then T is deemed to have acquired it at FMV (i.e. can’t increase your ACB by paying more
to your bro)
o (b) Where T disposes of property for no proceeds or proceeds less than FMV not at arm’s
length, or to any person by way of gift inter vivos, T is deemed to have received POD of FMV
(potential trap***)
o (c) Where T acquires a property by gift/bequest/etc, T is deemed to acquire the property at
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FMV
Double taxation problem: When transferring at less than FMV, transferor is deemed to have disposed
for FMV, but there’s nothing that deems the recipient to have acquired the property at FMV (unless it was
an inheritance s. 70(5)(b) or a gift s.69(1)(c)) Thus if son pays $1 for family cottage, mom will have
POD of $50,000, son will only have ACB of $1 – so when the son disposes of the property, the value up to
$50,000 will be taxed again! If you want to give a gift, make it an actual gift.
Inheritances: Ignoring the spousal rules, inheritances are deemed to be acquired at their FMV (s.70(5))
Spousal Rollover On Death:
Normally s.40(1) would apply to a disposition. But...
s. 70(5)(a) all properties deemed disposed of at POD equal to FMV; (b) deemed acquired by beneficiary at
ACB of FMV
- Allows CRA to fully tax the deceased, and boosts up the beneficiary’s ACB
EXCEPTION: S.70(6) Where the inheritance is for a spouse or CLP, s.70(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/losses) BUT YOU CAN ELECT OUT OF THIS
s.70(6.2)
- 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) This is because losses from the deceased
spouse have to be used up when they die – can’t transfer losses to the surviving spouse
o Losses can be used against the deceased’s other income for that year and the preceding year (s.
111(2)(a))
- S.70(6) recognizes the couple as an economic unit and that the assets that the couple have were
accumulated together
o Typically everything was in husband’s name and the husband usually died first, so the wife
would have to pay all the taxes and the gov would have to step in to support the wife. So CRA
defers the tax consequences until the death of the second spouse .
- This rollover is also automatic unless you elect out AND you can elect out on an asset-by-asset basis
- Where electing out of s. 70(6), then the rules under s.70(5) apply and spouse acquires at FMV
instead
Why Use the Spousal Rollover
- S2 gets an inherent gain if the property of the husband has gone up in value. So that’s why there is a
choice. S2 can have the rollover and the estate pays less tax, but if the estate has other properties with
losses, you may want to elect out of the rollover for the property with the loss and the property with
the gain. They may cancel each other out, and tax paid by estate is minimized! (and S2 doesn’t have to
pay as much tax later.)
- Also, if S2 has some losses that they haven’t been able to use (that are going to expire), they may want
to elect out of rollover in order to offset the gains with their losses (that you couldn’t otherwise use).
- NOTE THIS IS BECAUSE THE LOSSES from the estate CAN’T BE CARRIED FORWARD by S2. You need
to soak them up either with gains in the estate, or the deceased’s income from other sources for the
year of death and immediately prior.
- If you have a lot of inherent cap gains, you’ll probably elect out sparingly. You don’t want the estate to
pay tax now if you can put it off till later. (always better to put off taxes) This is especially true if it’s
income earning property, i.e. shares that pay dividends, because if you have to pay tax on the capital
gain when the spouse dies, probably will have to sell half the shares to pay the tax, which means you
won’t get the income from those shares over time.
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Use the rollover to minimize taxable gains.
S. 40(2)(f) No gains or losses from gambling
S. 52(4) Property acquired by T after 1971 as a prize in connection with lottery scheme is deemed to
have been acquired at FMV at that time (ACB is value of the house at the time you win it – not the cost of
the lotto ticket you bought)
Spousal Rollover *Automatic unless you opt out
S.73(1)(a)(ii) When one spouse transfers property to spouse under conditions of (1.01), both spouses
are resident in Canada, the property is deemed to have been disposed of at the time by S1 for proceeds
equal to the ACB of S1 immediately before the transfer
s.73(1)(b) The property is deemed to have been acquired by S2 equal to those proceeds
s. 73(1.01) These sections apply where the property is transferred to an individual’s spouse or CLP OR
former spouse or common-law partner of the individual in settlement upon breakdown
- S. 73(1)’s specificity overrides the generality in s.69 (inadequate consideration for ppl dealing not at
arm’s length) But where T opts out of this section, s.69 springs back up
S. 74.2(1)(a) Spousal Attribution Rule *Can’t elect out!
- Where a spouse has transferred property to another spouse, the following rules apply:
o If the spouse sells the property at FMV to a third party, you calculate the taxable gains from the
transferred properties (for S2), deduct the total allowable capital losses from the transferred
properties (from S2), and the net capital gain is deemed to be capital gain of the transferor (S1)
 Only applies where couple is still married/CLP and resident in Canada
o You can have a rollover at the time of the initial transfer, but if you’re still spouses at the time
that the recipient spouse disposes of it to a 3P at FMV, the gain is attributed back to S1.
o Idea is to allow couples who are separating to divide marital assets and their tax liabilities in a
fair way. Thus the rollover isn’t going to help you unless you are splitting up – because the
spousal attribution rule will apply if you are still together.
o You can’t elect out of this rule. Even if you opted OUT of the rollover, this section still applies.
o This was designed to prevent couples from shifting gains/losses to each other to avoid taxes.
But you do want spouses to be able to divide their property when they break up, hence why
this rule doesn’t apply if the relationship is over
Personal Use Property (PUP) and Listed Personal Property (LPP)
S. 54 PUP is property owned by T that is used primarily for the personal use or enjoyment of T or a
related person to T
S. 40(2)(g)(iii) T’s loss from disposition of any PUP, other than LPP, is nil
- Recognizes that PUP is generally worn out based on depreciation from use, or passing of time/style
s. 54 LPP consists of T’s PUP that is a print, etching, drawing, painting, sculpture, or other similar work of
art; jewellery; rare folio, rare manuscript, or rare book; stamp; OR coin
- Losses from LPP are only allowed to be set off against gains from LPP!
S. 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
s. 46(2) Where only part of the PUP is disposed of,
o (a) The ACB to T of the part so disposed is deemed to be the greater of the ACB of the part
disposed and the apportioned amount of $1000 that the part is to the whole of the property
o (b) The POD of the part disposed is deemed to be the greater of the POD of the part and the
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same apportionment under (a).
 Either the actual POD for the item, or deemed by 69(1)(b)(ii) if you sold to related
person
PUP Ordinarily Disposed of as a Set:
s. 46(3) Where a number of parts ordinarily sold as a set are disposed of by more than one disposition to
one person or a group of non-arms-length persons, and before the first disposition had a total FMV of
more than $1000, the properties shall be deemed to be a single PUP and each disposition shall be deemed
a part of that property (refer to method in s. 46(2))
- Determining whether the property falls into this category is a question of fact. Consider whether the
pieces match, are intended to be used together as a set, and are worth more as a set, etc.
Calculation of LPP Net Capital Losses and Gains
S.3(b)(i) Capital gains from all property including LPP is calculated, but net losses from LPP are not
included in calculation
S.41(1) T’s taxable net gains for tax year from disposition of LPP is ½ the amount determined to be T’s
net gain for the year from disposition of LPP
S.41(2) T’s net gain from disposition of LPP is the (a) Amount of T’s gains from disposition of LPP (b)
Deduct unused LPP losses from previous 7 years or following 3 years
S. 41(3) LPP loss for T for a tax year is the amount, if any, by which T’s total losses from disposition of
LPP exceeds the total of T’s gains for the year from disposition of LPP
Principle Residence Exemption
s. 54 Housing unit deemed to include immediately contiguous land up to ½ hectare around property
- Rode – if more than ½ hectare: objectively consider all relevant circumstances: has T established on
BoP that without the land, they could not practically have used and enjoyed the unit as a residence?
- Consider the mandatory min lot size immediately before time of disposition (Yates, Augard)
- Stewart Estate – It’s not a subjective test for determining whether the excess land is necessary
s.54(a) Must be ordinarily inhabited in the year (in a normal way through some part of the year)
- If you flip houses a lot, CRA will say that you’re not buying a property to live in, it’s your business
location. Each purchase and sale is an ACNT.
- Only one property qualifies for personal residence per year for a nuclear family. This is where the
changing definition of spouse over time comes into play
S.40(2)(b) – Calculation of Principle Residence Exemption (PRE)
1. First calculate the capital gain  A
2. B = 1 + # of years during which T was resident in Canada and living in the housing unit as a
designated principle residence
a. B carries the extra year to allow exemption to swap between new/old principle residence
b. The +1 does not have to be used here by the T if not needed
3. C = Total number of years T owned the housing unit
PRE = A x B / C
Capital Gains after Exemption = A – (A x B/C)
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DEPRECIABLE PROPERTY
s.18(1)(a) No deduction from business/property income except to the extent that the expense is to earn
income from business or property
s.18(1)(b) No deduction for capital outlays (compare to repairs which are deductible) BUT
s.20 Specific deductions from income from business/property allowed notwithstanding s.18
s. 20(1)(a) Allowed to deduct CCA from depreciable property.
o Eventually depreciable property is fully deductible via s.20(1)(a) and s.20(16) - terminal losses
S.13(21) Depreciable property is capital property where a deduction is available
- Prop acquired by T for use of carrying out an income, is of enduring benefit to the income earning
business, and is not consumed or re-sold (i.e. inventory would not qualify as depreciable property)
- Benz: requirement that the depreciable property you want to claim CCA for be used to earn
income (bakery expansion)
- Uses the declining balance method
Reg 1100(1) Provides CCA rates for the purposes of s.20(1)(a) depending on what type of property it is
- Group all the assets by class, total up each class, and apply this % to the UCC
- Then apply the half year rule, and that’s the max deduction you can claim under s.20(1)(a)
Reg 1101(1) Assets of each separate business source must be kept separately
Reg 1102(1) Inventory, an otherwise deductable expense, and property not acquired for purpose of
gaining or producing income are NOT depreciable property
Reg 1102(2) Land is not depreciable property
UCC = (A + B) – (E+F)
A – total cost of all amounts of depreciable capital assets (in the class)
B – total recapture in previous years (in the class)
E – total depreciation (CCA) claimed in previous years (in the class)
F – POD of property in the class (up to the ACB of the property – anything above is a capital gain)
CCA = UCC – half year rule (if applicable) X rate
Half Year Rule
Reg 1100(2) Limits the deduction for CCA in the year that you purchased the property
o applies whether you bought in January or in November; can unfairly deny a legitimate
depreciation expense, but prevents T from buying assets in Dec and claiming a full year’s
depreciation when they haven’t held them that long
Formula = 0.5 (capital cost of new assets in the class – POD of things in the class that you sold
during the year)
- In a year where POD of assets for that year is higher than the cost of new property, the half-year rule
doesn’t apply (the number produced by the formula would be negative)
Then apply the CCA rate specified in Reg 1100 and Schedule II, for a total maximum CCA deduction for
the year of $X.
Terminal Loss
o When CCA rates don’t match up with real-world depreciation in value, there is the potential for
terminal losses and recaptures.
S.20(16) When an asset depreciates in market value faster than you can claim CCA, and you empty the
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class, must claim the terminal loss as a deduction in that year.
o Note that it’s in section 20 which would be a cost of capital not otherwise allowed.
o Only when the class is empty and you have a positive UCC that you have a terminal loss
o A terminal loss occurs when you sell something for less than the outstanding UCC – the difference
is deductible
Recapture
- When the UCC calculation yields a negative number, you have recapture in that amount.
s.13(1) Recapture is included in as income from the business or property. The FOLLOWING year the
recapture shows up in B of the calculation. At that point the UCC calculation would be 0 - you get a clean
slate to start again.
- If you’re continuing the business you’ll try to soak up the recapture by replenishing the class with
other assets.
- When you sell for more than the outstanding UCC, you’ll have a recapture (b/c you deducted too
much/too fast)
- If you sell something for more than its ACB when you bought it, you have a capital gain on the extra
amount
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