Fall
Taxation
Christopher Scott
Outline for LAW 345 A01, as taught by Professor Mark Gillen
University of Victoria Faculty of Law
2010
Taxation
Table of Contents
BACKGROUND
1
Policy
History
Statutory Interpretation
Structure of the Income Tax Act
1
1
2
2
RESIDENCE
3
Policy
Worldwide Taxation
Residence of Individuals
Common Law Residence
The Sojourning Rule and Part-Year Residency
Residence of Corporations
Residence of Trusts
Provincial Residence
Change in Residence – Departure Tax
Deemed Non-Residency
3
3
3
3
4
5
5
5
5
5
THE CONCEPT OF INCOME
6
Policy and Definitions
Income from a Source
Enumerated Sources
Unenumerated Sources
Characteristics of Sources of Income
6
6
6
6
6
Specific Situations – Gifts, Windfalls, Illegality, Imputed Income and More!
Damages and Settlements – The Surrogatum Principle
Computation of Income
7
7
7
INCOME FROM EMPLOYMENT
8
Legislative Scheme and Policy
Characterization
Distinguishing Business and Employment
Timing
Benefits and Allowances
General Scheme
Allowances
Specific Benefits
Compensation for Loss of Employment
Deductions from Employment Income
8
8
8
9
9
9
10
10
11
11
INCOME FROM BUSINESS OR PROPERTY
12
Profit
Characterization of “Business” and “Property” as a Source
Computing Profit
Inclusions
12
12
13
14
i
Taxation
Characterization
Timing – Generally
Timing – Specific Items
Deductions
Deduction Rules – Basic Questions
Policy Goals
Income Earning Purpose and the Reasonableness Requirement
Personal and Mixed Expenses – The Tests
Personal and Mixed Expenses – Specific Situations
Illegal or Unethical Activities
Timing of Deductions
14
14
15
16
16
16
16
16
17
18
18
CAPITAL EXPENDITURES
19
“Capital Expenditure” Defined
Common Law Tests
Types of Capital Assets
Repair or Improvement of Tangible Assets
Protection of Intangible Assets
Other Issues – Domain Names, Corporate Takeovers, and Goodwill
Expenses with Respect to a New Business
Capital Cost Allowance (“CCA”)
Eligible Capital Expenditures
19
19
19
19
20
20
20
20
21
CAPITAL GAINS
22
Statutory Framework
Basic Concepts
Computation of Gain or Loss
22
22
22
INDEX OF CASES
23
ii
Taxation
Background
Policy


Roles of income tax:
o Revenue: Income tax is the primary component (>50%) of federal and provincial revenue
o Redistribution of Income: The Canadian income tax uses a progressive rate structure
o Regulation of private activity: Tax breaks encourage activities, tax penalties discourage them.
o Economic policy roles: Stabilize the economy, correct market failures, pursue economic
growth, promote international competiveness.
Criteria for Evaluation:
o Equity
 Horizontal: Two people in the same position should be taxed in the same way
 Vertical: Two people in substantially different positions should pay differently. i.e., those
with a greater ability to pay should bear a greater burden
o Neutrality: A neutral tax system is one that is designed to bring about the minimal change in
the allocation of resources within the private sector of the economy.
 NB: Tax policies that are intended to influence behaviour (e.g. tax breaks for
environmentally friendly activity) should not be criticized for being non-neutral.
o Simplicity: Maintain a low administrative cost, both for the government and for the taxpayer
 Breaks down into several components: Comprehensibility, Certainty, Compliance (or
convenience), and Administrative [fiscal] costs.
History

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
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Confederation:
o The federal government may use “any mode or system of taxation”
(Constitution Act s. 91(3))
o The provinces may to “direct” taxation and license fees
(Constitution Act ss. 92(2), 92(9))
Introduction of Income Tax:
o Provincial Adoption: BC/PEI pre-WWI; 5 others in 1923-1939; the last 3 in 1962.
o Federal Adoption: Income War Tax Act (1917), amended to Income Tax Act (1948)
o Federal-Provincial Agreements:
 “Tax Rental Agreements” (1947-1961): Provinces forego taxation, federal government
provides grants (“rent”). Agreements are renewed every 5 years.
 “Tax Collection Agreements” (1962-Present): Federal government collects federal and
provincial taxes, remits provinces their portion. Provinces originally pegged their rates to a
percentage of the federal rate, but post-1997 have their own rate structure and credits.
1971 Tax Reform:
 1966 Carter Commission Recommendations:
 Big Picture: All gains in wealth should be taxed ("A buck is a buck is a buck"), so tax
capital gains, inheritances, gifts, and windfalls
 Other Suggestions: (1) Tax families as a unit, (2), Full integration of corporate and
personal taxes, (3) Ensure tax-neutrality (i.e. don't affect the behaviour of taxpayers)
 1969 White Paper: Accepted some of the 1966 ideas, including fully taxing capital gains
 1971 Tax Reform: Three major changes
 Base broadening: Capital gains taxed at ½ rate; fully taxed research grants, EI benefits,
scholarships and adult training allowances (and others)
 Rate structure adjustments: Lower tax rates; basic and spousal deductions
 Integration of corporate/personal income tax (only partial for non-CCPCs)
Indexing: To respond to inflation, the tax brackets became indexed to increase with inflation.
1
Taxation

o During 1986-2000, the system was partially de-indexed (to raise revenue without raising rates).
1988 Tax Reform:
o n.b.: A White Paper was released in 1987; the 1988 amendments adopted most of it
o Rate Structure: Flattened down to 3 brackets (from 10, formerly), rolling average abolished
o Base Broadening: Capital gains taxed at 2/3, then 3/4, eliminated/reduced deductions
o Deductions Converted to Credits: Where the deduction varies based on expenditure, the credit
is usually applied at the lowest tax rate. Lowest earners see no change, top earners get less back.
 Exception: Charitable donations are credited at the highest tax rate.
o GAAR (General Anti-Avoidance Rule): Made it harder to avoid taxes? (c.f. Advanced Tax)
Statutory Interpretation



Non-Binding Materials: The CRA is not bound to follow their own interpretation bulletins
(Strickel) or advance income tax rulings (Woon) if they are deemed to be incorrect. (Strickel, Woon)
Driedger Approach: As with all other statutes, the words of the ITA “are to be read in their entire
context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the
object of the Act, and the intention of Parliament”
(Stubart Investments v. R. (SCC 1984))
Tips for Interpretation:
o Effectivity: Every word has a meaning, different words have different meanings.
o Definitions: Most are found in s. 248(1), although most Parts have their own definitions as well
o Word Patterns:
 Subtraction: “The amount by which [A] exceeds [B]” means A – B
 Proportions: “The proportion of … that is [A] is of [B]” means A ⁄ B (or B ÷ A)
 Max or Min: “The lesser of [A] and [B]” is a max.; “The greater of [A] and [B]” is a min.
Structure of the Income Tax Act
2
= Total Income Tax
+ Provincial Income Tax
= Part I Federal Tax
– Other federal tax credits
= Basic Federal Tax
– Tax Credits
(Division E)
= Tax
Subdivision a
(Income from Office or Employment)
+ Subdivision b
(Income from Business or Property)
+ Subdivision c
(Net taxable Capital Cains)
+ Subdivision d
(Other sources of income)
– Subdivision e
(Other deductions)
× Tax Rates
(Division E)

= Taxable Income

– Deductions
(Division C or D)

= Net Income
(Division B)

Liability for Tax: "An income tax shall be paid, as required by this Act, on the taxable income for
each taxation year of every person resident in Canada at any time in the year."
(ITA s. 2(1))
o "Person" includes corporations (s. 248(1)) and trusts are deemed to be individuals (s. 104(2))
o n.b.: A partnership is not a person (or even a legal entity); the partners are taxed directly.
Tax Base: The majority of the rules determining “income” are found in Division B (ss. 3-109)
o The “taxable income” of residents is computed in Division C (ss. 110-114)
(ITA s. 2(2))
o The “taxable income” of non-residents is computed under Division D (ss. 115, 116) (ITA s. 2(3))
Taxation Period: A “taxation year” is a fiscal period for a corporation, and a calendar year for an
individual. A fiscal period can be any 12-month period.
(ITA s. 249(1))
Tax Payable: Tax payable on income is calculated under Division E (ss. 117-127)
o Tax rates are progressive for individuals (s. 117) and flat for corporations (s. 123)(ITA s. 117, 123)
o Personal Tax Credits: Found in ss. 118-118.95.
Tax Administration: There is a self-assessment system, but the CRA isn’t bound by filed tax
returns and is valid despite any errors, subject to reassessment or judicial varation (ITA ss. 152(7),(8))
How to calculate tax
under s. 2

Taxation
Residence
Policy


Theoretical Justifications:
o Economic Allegiance Theory: If the activity occurs here, or the consumers are here, they owe
“economic allegiance” to us and should pay accordingly
o Benefit Theory: Activities in Canada benefit from Canadian public services; they should pay
o Ability to Pay: This is why we charge tax on worldwide income (at least for Canadian citizens)
o Enforcement: It's a lot easier to collect from people who are connected with Canada.
Approaches to Jurisdiction:
o Residence: Tests whether the person has sufficient connection to the country to be a taxpayer.
o Citizenship: Used in the US (which also taxes on source). Hard to enforce on non-residents.
o Domicile: Formerly used in the UK; used odd and archaic meanings from the jurisprudence.
o Source: Taxes on the basis of the source of income; this makes it hard to assess ability to pay.
Worldwide Taxation




Residents must pay tax on their worldwide income.
(ITA s. 3(a), c.f. s. 2(1))
Non-Residents are taxed on their income from employment, business or property disposition in
Canada. This parallel system of taxation is handled by Part XIII of the ITA.
(ITA s. 2(3))
Double-Taxation: The usual rule applies unless there is a treaty or the like overriding it.
o Usual Rule: You can deduct the foreign tax you pay from your Canadian tax.
o Canada-US Tax Treaty: Tie-breaker rules: (c.f. Student’s Annotated ITA, pp. 71-72, Art 4 para 2)
1. The state in which the taxpayer has a permanent home gets the tax
2. Otherwise, the state in which his personal and economic relations are closest gets the tax
3. Otherwise, the state in which he has a habitual abode gets the tax
4. Otherwise, the state in which he is a citizen gets the tax
5. Otherwise, the states will settle it by mutual agreement
Anti-Deferral Rules: Foreign investment income earned by Canadian residents is taxable in
Canada, even when earned through an investment in a non-resident corporation or trust (ITA ss. 91-95)
Residence of Individuals
Common Law Residence
 Everyone is resident somewhere at all times, and they may be resident in multiple places. (Thomson)
 Residence depends where in the "settled routine" of their life they customarily live.
(Thomson)
 Primary factors to consider in assessing the residence of an individual:
(c.f. IT-221R3)
o The location[s] of a person's home[s] is a “substantial consideration”
(Beament, c.f. Thomson)
o The location of one's spouse is a substantial consideration.
(Russell)
o The location of one’s children/dependents is a substantial consideration
(Russell)
 Other factors to consider in assessing the residence of an individual:
(c.f. IT-221R3)
o Intention is relevant, but not determinative.
(Thomson, Baement)
o Personal property in Canada (e.g. furniture, clothing, vehicles)
(McFayden)
o Social ties with Canada (e.g. memberships in Canadian social organizations)
(Allchin)
o Economic ties with Canada (e.g. employment with a Canadian employer, involvement in a
Canadian business, Canadian bank accounts, RRSPs, credit cards, investments)
(McFayden)
o Hospitalization and medical insurance coverage from a province or territory of Canada (Allchin)
o A driver's license from a province or territory of Canada
(McFayden)
o A Canadian passport
(c.f. IT-221R3)
o Memberships in Canadian unions or professional organizations
(McFayden)
3
Taxation

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

o Where ∆ wasn’t originally a resident in Canada (e.g. Taiwanese/American worker), the court
may give that weight in finding non-residency.
(Shih, Schujahn)
“Ordinarily Resident”: This reference in s. 250(3) is superfluous, it just means “resident” (Thomson)
o Thomson, McFayden, & Nicholson were in the context of “ordinarily resident”. Point this out.
Examples of residency in Canada:
o ∆ intends to be resident in Bermuda, owns houses in USA and Bermuda, stays in Canada for a
few months every year with his family. Resident in Canada.
(Thomson)
o ∆ away from Canada for some years, but his wife and children live in a house in Canada. (Russell)
o Ontario student goes to school in the US, stays with friends. Gets bills sent to US address, gets a
US immigration lawyer, attempts to move family to US. Spouse and children still live in ON,
she still has ON health insurance and an ON club membership.
(Allchin)
o Air Canada pilot leaves Canada to live in the Bahamas. Moves everything he owns there, opens
a bank account there. He only visits on a limited basis personally, but continues to be an Air
Canada pilot and has a variety of Canadian work-related interests (clothes at his parents' place,
bank account for Air Canada to deposit into, pilot's licence, etc.).
(Hausser)
o ∆ goes to Japan for 3 years. Leaves with wife, but leaves property in Canada (rentals, furniture),
kept professional membership, RRSP, credit card, ON driver's licence, etc.
(McFayden)
Examples of non-residency in Canada:
o ∆ away for the war, left no home in Canada. Lived for a time with wife and child in UK.
Ultimately returned to Canada (though this was not his original plan)
(Beament)
o ∆ has house/spouse/kids in Canada. ∆ is an American working in Canada for part of the year,
then leaves. Spouse and kids stayed behind in order to facilitate the sale of the house. (Schujahn)
o ∆ visits Canada for short stays (less than 59 days per year). Works in Taiwan, but his wife and
children there move there for the kids' schooling. ∆ just visiting “temporarily”.
(Shih)
o ∆ transferred to UK by employer for 1.5 years (no intent to return, but company transfers him
back). Collapsed his RRSP on departure, has a girlfriend in the UK, only returned to Canada
once. Has a (separated) wife and children in Canada; has his name on title of a “matrimonial
home” for mortgage purposes (can’t live there). Still has OHIP coverage for his children; has a
bank account so that his wife can withdraw support payments for their children.
(Nicholson)
The CRA will assume that you are still resident if you leave Canada for less than 2 years. (IT-221R3)
The Sojourning Rule and Part-Year Residency
 Sojourning Rule: If you sojourn in Canada for a total of 183 days or more over the course of the
year, you are deemed to be a resident (for the whole year, not just part of the year) (ITA s. 250(1)(a))
 Sojourning is a “temporary stay” (or series of stays). Thus, you may be a resident in Canada even if
you stay for less than 183 days. The rule only deems residency, it doesn’t deny it.
(Thomson)
 If the time spent in Canada is not transitory, you may be a part-year resident instead.
(Schujahn)
o Example: ∆ lives in Canada until 2 Aug 1957 (the 214th day of the year), when he moves to the
US for work. ∆’s stay in Canada was non-transient; he was a part-year resident
(Schujahn)
 Foreign Workers: Coming into Canada for the day (usually from the US) is not sojourning, so
long as you don't spend the night
(Arnell Food Distributors Ltd, [1977] CTC 2589)
o Of course, you will still be taxed on Canadian source income – just not worldwide.
 A part-year resident pays tax as a resident (i.e. on worldwide income) only for that part of the
year for which they are resident, and pays tax as a non-resident for the rest of the year.
(ITA s. 114)
o This applies only to individuals; corporations are plum out of luck.
(ITA s. 114)
4
Taxation
Residence of Corporations



Deemed Residency: Corporations incorporated in Canada on or after 27 Apr 1965 are deemed to
be resident in Canada
(ITA s. 250(4))
o A corporation incorporated in Canada before then is resident in Canada if:
(ITA s. 250(4)(c))
 It has carried on business in Canada after that date, or
 It is resident under the common law rule.
A corporation is resident wherever "the central management and control actually abides" (DeBeers)
o This is usually where the board of directors meets.
(DeBeers)
 The directors’ location is always determinative, unless their power has been "usurped" (Wood)
o When the shareholders dictate the directors' actions (e.g. where there is a majority shareholding
parent company), the test is where the shareholders reside.
(Unit Construction)
Comments on the central management and control test:
o This is a de facto test: Where does control actually reside? (not merely de jure)(Unit Construction)
o Even when the location is selected for tax avoidance and the corp. does all of its business in
Canada, if the directors are non-Canadian and non-usurped, it’s not a Canadian resident. (Wood)
 This indicates a high degree of formalization of the test (Wood is post-Unit)
Residence of Trusts




When the ITA refers to a "trust", it is referring to the trustee.
(ITA s. 104(1), c.f. 248(1)[“trust”])
Trusts are deemed to be individuals (and are taxed accordingly)
(ITA s. 104(2))
General Test: The trust resides wherever the trustee resides.
Multiple Trustees: The law here is presently unclear (nb – the CRA uses the same test as Garron)
o The central management and control test has been applied to trusts
(Garron)
 Note: This case is presently under appeal – do not rely on it without stating this!
o The FCTD has said in dicta that this test is likely not appropriate for trusts (because trustees
can't delegate due to fiduciary duty, unlike corporations)
(Thibodeau)
Provincial Residence



Individuals are resident for the year in the province they were resident in on the year’s last day(ITR 2601)
o If there’s a tie, deemed to be resident only in the province of principle residence
(ITR 2607)
Individuals with multiple permanent establishments apportion that business income between the
provinces that those establishments are located in. (Particular rules in the regulations)
(ITR 2603)
Corporations are resident in the province with their permanent establishment, and have
apportionment rules similar to those of individuals.
(ITR 402)
Change in Residence – Departure Tax


Departure Tax: When a resident of Canada loses residency, they are deemed to dispose of their
capital assets at fair market value as a resident and acquire it as a non-resident at the same price.
Thus, they must pay tax on the accrued value of capital assets before actual disposition (ITA s. 128.1)
o Exceptions: Some property (e.g. real property) is excluded; taxed on actual disposition.
An individual can be a part-year resident, so the change in residence can be any time. (ITA s. 114)
o Since residency is a yearly thing for corporations, departure tax is assessed at year’s end.
Deemed Non-Residency

A person can be deemed non-resident under a tax treaty.
(ITA s. 250(5))
o nb – This may engage the departure tax (s. 128.1) if you were previously resident.
5
Taxation
The Concept of Income
Policy and Definitions




Haig-Simons: Income is the accretion to economic wealth and power between two points in time.
Carter Commission: "A buck is a buck is a buck" – all accretions to wealth are income.
Carter Commission "Comprehensive Tax Base" contained several concessions to practicality:
o Capital gains taxed at 50% (formerly 0%)
o Due to neutrality concerns, taxes on capital gains are deferred until realization (since taxing
them on an accrual basis would force taxpayers to liquidate their capital assets)
Source theory: Uses the tree-fruit analogy. To obtain fruit, there must be a tree. In the same way,
sources produce income; revenue without a source is not income.
Income from a Source
Enumerated Sources
 Section 3 identifies four sources of income: office, employment, business, and property. (ITA s. 3(a))
o ITA ss. 5-8 has rules on office and employment; ITA ss. 9-37 has rules on business and property
o Section 56 includes additional sources, including pension benefits and EI benefits. (ITA s. 56(1))
o Note that income from property does not include capital gains; they’re separate(ITA ss. 9(3), 3(b))
Unenumerated Sources Note: s. 56 states “without limiting … s. 3”, which supports the existence of unenumerated sources
 Unenumerated sources do exist, we just haven't recognized any yet.
(Swartz)
 Potential Sources That Have Been Rejected at Common Law:
o A contract alone is not a source (need some additional connection to a source)
(Swartz)
 Damages for breach of employment contract before it has started are sourceless.
(Swartz)
o Non-competition covenants (not listed under s. 42, which lists other kinds of covenants) (Fortino)
o Payment received for waiving a right that is not enforceable against others (and thus not really
“property”) is not income from a source or capital gains. e.g. non-competes
(Fortino, Manrell)
o Strike pay is not income from a source
(Fries)
 Policy: The ITA has no rules for such sources, so courts are unlikely to find them (too complex)
Characteristics of Sources of Income
 Indicia that there was no unenumerated source (the more found, the less likely it will be a source):
o ∆ had no enforceable claim to the payment
(Cranswick)
o There was no organized effort by ∆ to receive the payment
(Cranswick)
o The payment was not sought after or solicited by ∆ in any manner
(Cranswick)
o The payment was not expected by ∆, either specifically or customarily
(Cranswick)
o The payment had no foreseeable element of recurrence
(Cranswick)
o The payor was not a customary source of income to ∆
(Cranswick)
o The payment was not in consideration for or in recognition of property, services or anything
else provided or to be provided by ∆ (i.e. not earned by ∆’s or another’s activities) (Cranswick)
o Not a productive source (i.e. a source that can produce income)
(Bellingham)
 Example: ∆ underpaid for expropriated land, awarded damages against city that include
statutorily-imposed “additional interest”. Not a productive source. This is penal in nature; it
is infeasible to do this (get underpaid for expropriation) to produce income.
(Bellingham)
o The activity was not in the pursuit of profit (i.e. no intent to earn money)
(Stewart)
 Thus, the taxpayer’s intention is determinative, if it is reasonable (i.e. evidence to support it)
 Example: ∆ buys property, takes yearly losses, sells for capital gain. No intent to profit(Stewart)
o Example: ∆ owns shares in company A; parent company B pays out to all of A’s shareholders
to avoid litigation. Payment "of an unusual and unexpected kind", no source.
(Bellingham)
6
Taxation
Specific Situations – Gifts, Windfalls, Illegality, Imputed Income and More!



Recall: Reliance damages are awarded
where you are out of pocket for an expense
incurred in reliance on the contract.

Gifts and Inheritances: Personal gifts are not taxable, whereas gifts received in the course of
business or employment (“commercial gifts”) are generally treated as income from those sources.
o Gifts of Property are deemed to be dispositions at fair market value, and thus may incur capital
gains. There are rollovers for gifts between spouses or shareholders and their companies(ITA s. 69(1))
o Inheritances are not taxed. They used to be taxed under their own statutes, which are repealed
Windfalls: Windfalls (e.g. lottery prizes, valuable finds) are not taxable, so long as they don’t
constitute a business (see Distinguishing Personal Endeavors, page 12)
Illegal income is taxable as an accretion to wealth.
(e.g. Buckman, Poynton, Eldridge)
o Note: Now, 100% of proceeds may be seized, so there may be no accretion to wealth.
Imputed income is just an expense avoided (e.g. avoiding rent by owning a house). Not taxed.
Damages and Settlements – The Surrogatum Principle
 Surrogatum: Tax damages and settlements are intended to replace something. Tax them in the same
manner as you would the thing that they are replacing.
(London & Thames)
Contractual Damages



Expectation Damages: Where damages for lost income are awarded, tax those damages as income
o Exception: Where a breach of contract has resulted in a loss of the whole business (e.g. breach
of franchise license), that is compensation for the loss of the source, and thus a capital gain.
Reliance Damages: This is not an accretion to wealth (just replacing wealth) – not taxed.
o Exception: If the amount is to compensate for the loss of property (e.g. destruction of a
building), it will be taxed as a disposition of property, and thus a capital gain.
Restitutionary Damages: Like reliance damages, these are not taxed. Just compensation for loss.
Personal Injury Awards




These usually have no source. You are being compensated for the loss of physical ability or the
infringement of the right not to be injured. Really non-contractual restitutionary damages. (Schwartz)
Cost of Care: Not taxed (no accretion to wealth)
Compensation for lost earning capacity:
(Tsiaprailis)
o Post-judgment damages: Not taxable. Replacing a source, to be invested. Pay tax on interest.
o Post-injury, pre-judgment lost income: Also not taxable (nb: isn’t this expectation damages?)
Punitive Damages: Like a windfall, not taxed. Victim’s gain is only incidental to the policy
decision to penalize the wrongdoer.
(Bellingham)
Computation of Income






See Structure of the Income Tax Act, page 2, for the process of calculating income (and tax).
Income from sources is included in income and must be (a) calculated source-by-source, and (b)
territorially (i.e. province-by-province and country-by-country).
(ITA ss. 3(a), 4)
Net taxable capital gains are included in income (but are calculated under a different scheme,
presented in Part I, Division B, subdivision c of the ITA)
(ITA s. 3(b))
Policy-Based Deductions: Deductions under subdivision e are allowed (e.g. RRSP contributions [s.
60], moving expenses [s. 62], partial child care expenses [s. 63])
(ITA ss. 3(c), 60, 62, 63)
Loss Recognition: Current year losses from enumerated sources can be deducted.
(ITA s. 3(d))
o If the amount produced under s. 3(d) is negative, income is deemed to be 0.
(ITA s. 3(f))
The amount calculated by s. 3(d) (or s. 3(f)) is a person’s income – this is a net concept. (ITA s. 3(e))
7
Taxation
Income from Employment
Legislative Scheme and Policy


Statutory Provisions:
o "income from an office ... [or] employment" is included in income
(ITA s. 3(a))
o Office/employment income includes salary/wages/gratuities/etc received in the year (ITA s. 5(1))
o A variety of specific benefits are included in income (nb: also some exclusions here) (ITA ss. 6, 7)
o A limited number of specific deductible expenses are allowed.
(ITA s. 8)
Policy: Deductions are limited for the following reasons:
o Tax Base Protection and Neutrality: To prevent employers from giving non-taxable benefits
in lieu of wages (non-neutral and a loss of tax revenue)
o Equity: Some employers would be better able than others to offer non-taxable benefits (horiz.
equity), and the wealth are better able to structure their affairs to do so (vertical equity)
o Administrative Efficiency: Tracking many small receipts is inefficient for the taxpayer & CRA
o Social Policy: There are exemptions for pension benefits (to encourage retirement savings), etc
o Balancing Policy Concerns: Even where there are policy concerns, courts err on the side of
administrative simplicity and efficiency.
(Gifford)
 Example: ∆ is an employee stock broker who buys a client list. Can’t deduct as a business
expense because he’s an employee; could have deducted if he were self-employed. (Gifford)



Note: After this section, assume that “employment” includes “office” in these notes
Office: The position of an individual that entitles that individual to a fixed stipend. (ITA s. 248(1))
o This includes a corporate director, but not, e.g., a law partner (fluctuating business profits)
Employment: The position of an individual in the employ of another person.
(ITA s. 248(1))
Incorporated Employees are not entitled to the small business deduction.
(ITA s. 125(7))
o Test: But for the corporation, you would effectively be an employee who provides services.
Distinguishing Business and Employment
 The fundamental test: “Is the person who has engaged himself to perform these services
performing them as a person in business on his own account?"
(Weibe Door)
o If yes – contract for service (business). If no – contract of service (employment)
(Weibe Door)
 The Rule: Today, the control test is the most significant. Its factors are non-exhaustive.
(Sagaz)
o The control test is not determinative; the other three Weibe Door tests can override it.
(Pletch)
o Total Relationship Test: In addition to the other tests, look at the “total relationship”. No one
test is determinative; need to look at them together, in the full context. (Weibe Door, aff’d Pletch)
 Example: Where company C wanted to hire ∆ as president, he suggested that he incorporate
and they hire his management company. Control test => independent contractor, but
integration test and surrounding circumstances => employee.
(Pletch)
o Form of Contract: When there is “no clear result” from all of those tests, defer to the parties'
characterization of the relationship.
(minority in Wolf, aff’d Winnipeg Ballet)
 Control Test: Assessing degree of control by the engager of services over the worker: (Weibe Door)
o [Non-exhaustive] Factors indicating an independent contractor (“IC”) relationship:
 Worker determines how work is performed, engager of services gives specified result (Sagaz)
 Worker can choose other persons to delegate the work to
(Sagaz)
 Worker specifies his/her own start and stop times.
(Sagaz)
 Worker provides equipment
(Sagaz)
 Worker has opportunity for profit or risk of loss (incl. financial risk)
(Sagaz)
 Worker giving direction more than he/she is given direction
(Pletch)
 If an IC were hired, the same degree of control would be needed
(Winnipeg Ballet)
The opposites of these
factors support an
employee relationship (i.e.
they’re useful either way!)
“Personal Services
Corporations”
Characterization
8
Taxation



 Example: Ballerinas have extensive control exercised over them, but they’re ICs since
the same degree of control is exercised on guest dancers (who are ICs) (Winnipeg Ballet)
o [Non-exhaustive] Factors indicating an employee-employer relationship:
 The agreement provides for full-time engagement of the worker.
(Pletch)
 Travel: The worker having to go where he/she is sent
(Pletch)
o Critique: Even where the person who engages the services tells them how it is supposed to be
done, the person doing it may have a lot of control over how it is done. Or vice-versa.
(Pletch)
 e.g. senior manager of a company is told to manage a particular way. Still has discretion.
Integration Test: Two ways to apply the test (Lord Denning prefers the first one):
(Weibe Door)
o Is the person’s work is essential to the engager’s business? Then it’s employment.
 Critique: Isn’t almost everyone an employee under this test? Overinclusive.
o Could the worker’s business succeed without providing the services to this person?
(Pletch)
Economic Reality Test: Consider the chance for profit and risk for loss.
(Weibe Door)
o Whether the worker had other clients is a relevant factor
(Pletch)
o Ownership of tools is a relevant factor, particularly where it’s a large expense.
(Weibe Door)
o The Sagaz factors for the control test are also relevant here.
(Sagaz)
o Example: A worker with specialized skills in a 5-year contract with no job security or benefits
(bought his own health insurance) had "financial risk" and is an IC
(Wolf)
Specified Result Test:
(Sagaz, Weibe Door)
o Does this person place his/her services at the disposal of the employer for a period of time,
without reference to a specified result? If so, employment.
o If the worker is to provide a specified result, but can decide how and when to perform the work,
then they are likely an independent contractor.
Timing



Income from employment is taxed at the time received by the taxpayer (cash method) (ITA s. 5(1))
o Prompt receipt is incentivized: If an employer doesn’t pay an employee within 120 days of (the
employer’s) year’s end, they cannot include those wages as an expense in that year. (ITA s. 78(4))
Receipt: Courts are relatively strict about applying the cash method:
o Example: ∆ works on the family farm for $800/year. Dad pays her $100/year, with the rest to
be paid upon her marriage. By that time, the withheld amount was $8000. Assessed in the year
received, taxing the total amount of $8000 (even though $800/year would pay 0% tax)
(Vegso)
o Mailed Income: Receipt of income is deemed to occur at the time of mailing, not actual receipt.
Constructive Receipt: It is not necessary for an employee to "touch or feel" earned income; the
employee need merely have enjoyed the benefit to have received it.
(Morin)
o Example: Quebec gov't withholds $2000 from ∆'s income. Constructive receipt.
(Morin)
o Example: When an employer is contractually obliged to make a payment to someone other than
an employee for the employee’s benefit, it is “received” by that employee when paid. (Markman)
o Example: ∆ is the paymaster for a business, defers his payment into the next year. ∆ had the
ability to be paid at will – deemed to receive it as soon as he could demand payment. (Blenkham)
Benefits and Allowances
General Scheme
 Benefits are included in income from office or employment.
(ITA s. 6(1)(a))
 Definition: Benefit = "material acquisition which confers an economic benefit on the taxpayer"(Savage)
o Example: Employee given $100 by employer for completing a training course. Benefit. (Savage)
o Example: Employees buy suits for work, reimbursed by employer. Not a benefit – suits were
not suitable for personal use, only for employment.
(Huffman)
9
Taxation
o Historical Test: Only a benefit if it is convertible into money
(Tennant (UK 1892))
 This is not the test in Canada (but still the test in the UK)
(Waffle)
 Example: Bank provides employee with lodging. Not a benefit (no subleasing/etc) (Tennant)
 Example: ∆ gets free cruise by Ford for good sales. Not convertible, but still a benefit (Waffle)
 Relationship to Employment: Benefits with a [small] relationship to employment are taxable(Savage)
o Intent of the Employer: Is the benefit a "personal gift" (not taxable) or is it a contribution that
is expected to get some business quid pro quo?
(Savage)
rd
 Don’t have to be the employer – a benefit from a 3 party can have this relationship. (Waffle)
 Example: Free cruise from 3rd party to reward good sales of their product. Taxable. (Waffle)
 Valuation: Choose employer’s cost or market value method, then apportion taxable/non-taxable
o Cost to Employer: The benefit is worth whatever the employer paid for it.
(Giffen)
 Example: ∆ has airline points from flights bought by employer. Hard to assess –worth less
than the price of a ticket (too many restrictions on points). Court’s creative assessment:
Value = (discount economy price / full economy price) × full business price
(Giffen)
This is a policy  CRA: Airline points acquired on your personal credit card aren’t taxable unless they can be
of convenience
converted into cash, are part of an employer’s benefits program, or are tax-avoidance.
o Fair Market Value: The benefit is worth whatever the employee can sell it for.
(Wilkins)
 Example: Employer pays £14 for a suit, employee sells for £5. Assessed value at £5 (Wilkins)
o Apportionment: Where the benefit is only partly taxable, apportion it reasonably.
(Zakoor)
 Example: ∆ gets a Cadillac from his employer; 1/5 of its use is personal, but the extra cost
of its “luxurious character” (i.e. the difference between the cost of a Cadillac and a
reasonable car) is apportioned to ∆. Ultimately assessed at 1/3 of its original cost.
(Zakoor)
Allowances
 Allowances are 100% included in income absent an exception (out-of-town travel, etc) (ITA s. 6(1)(b))
 Definition: An allowance is "any periodic or other payment that an employee receives from an
employer in addition to salary or wages without having to account for its use"
(IT-522R)
 Reimbursements: "A payment in satisfaction of an obligation to indemnify or reimburse someone
to defray his or her actual expenses"; this requires an accounting of expenses. Not taxed. (IT-522R)
 Example: ∆ given $500 up front, but employer did want receipts for the amount spent. ∆ showed
that he spent more than $500, so his expenses had merely been defrayed. Not an allowance. (Huffman)
Specific Benefits
 Automobiles: See C 132-133 for more detail.
o Exemption: Allowances for reasonable travel expenses (two provisions) (ITA ss. 6(b)(v), (vii.1))
 Not reasonable if not based only on mileage or there’s also reimbursement (ITA s. 6(b)(x), (xi))
o Include in income a "reasonable stand-by charge" for employer-provided autos.
(ITA s. 6(e))
 Deemed to be 2% (or 1.5%) of car's capital value per month you have the car(ITA s. 6(2), (2.1))
 If the employer also pays the operating costs, assess the benefit differently: 24¢/km
o If used primarily (>50%) for employment, reductions or alternate scheme may be available(C 133)
 Loans: Low- or no-interest loans confer a benefit that is included in income
(ITA s. 6(9))
o Deemed Benefit: (Treasury loan rate + 4%) – (interest you paid), assessed quarterly(ITA s. 80.4(1))
 Housing Benefits: When relocating for employment, special statutory rules overrule the caselaw
Deals with o If relocating your home at least 40km closer to your work, up to $15,000 may be reimbursed by
Ransom
the employer tax-free. The rest goes into income at a ½ rate.
(ITA s. 6(19)-(22))
o
If
an
employer
pays
the
interest
on
part
of
a
larger
mortgage,
that
is
included
in
income(ITA
s. 6(23))
Deals with
Hoefele
o Example: ∆ moves, buys identical house for $10k more; employer pays difference. Taxed(Phillips)
o Example: Employer rescinds contract with ∆ to buy house at set rate if he moves, pays ∆ an
amount in compensation. This is a benefit from employment – taxable.
(Blanchard)
10
Taxation
Compensation for Loss of Employment


“Retirement allowance” includes any amount received in respect of a loss of employment(ITA s. 248(1))
Retirement allowances are not taxable as income from employment
(ITA s. 56(1)(a)(ii))
o This doesn't include allowances that are part of employee benefit plans/etc.
(ITA s. 56(1)(a)(ii))
Deductions from Employment Income


No deductions from employment income are allowed other than those in s. 8
(ITA s. 8(2))
Permitted Deductions: All deductions must be reasonable in the circumstances
(ITA s. 67)
o Travel [and motor-vehicle] expenses: Allowed where the taxpayer is ordinarily required to
travel away from the place of business to carry on employment, and is required, under the
contract of employment, to pay travel [or motor-vehicle] expenses.
(ITA ss. 8(1)(h), (h.1))
 Example: American football player stays in hotel in team’s city during football season. No
deduction for travel expenses – didn’t travel away from place of business.
(Delancy)
 Example: Judge has sensitive case, buys bulletproof car. No deduction for the extra expense
of the bulletproofing – not travelling away from the workplace
(Hogg)
o Meal expenses: Allowed where the employee is away from the municipality where employment
is located for more than 12 hours.
(ITA s. 8(4))
 Meals required by employment (due to travel or otherwise) are only ½ deductible (ITA s. 67.1)
o Home Office expenses: Only deductible if (1) its where the duties of office/employment are
principally carried out, or (2) is it’s exclusively used for earning income and used continuously
and regularly for meeting clients
(ITA s. 8(13)(a))
 This is also an issue under income from business (handled by s. 18(12) instead; see p. 17).
o Legal expenses: Deductible if incurred to recover salary or wages
(ITA s. 8(1)(b))
 Example: ∆ engaged in a legal proceeding against his employer in an attempt to show that
he was entitled to a higher wage. Legal expenses deductible.
(Loo)
 Example: ∆ convicted of dangerous driving; gets no pay while suspended. ∆ appeals. Legal
expenses deductible – overturning the suspension was essential to earning wages (Blackburn)
11
Taxation
Income from Business or Property
Profit
Characterization of “Business” and “Property” as a Source
Defining Business or Property





Business is an "adventure in the nature of trade..."
(ITA s. 248(1))
Property means property “of any kind whatever”, whether corporeal or incorporeal, etc.(ITA s. 248(1))
o "Property" entails an exclusive and legally enforceable claim. A right to carry on business does
not fit this, so the right to receive non-competition payments is not property “of any kind”(Manrell)
Pursuit of Profit Test: A business is an activity undertaken in pursuit of profit:
(Stewart)
o Assess whether the activity is clearly commercial, or whether there is a personal element.
 If it's clearly commercial, then you’re done – it's either business or property.
o If there is a personal element, ask, based on objective evidence, whether there was a
predominant intention to profit. If so, then it’s business/property. Otherwise not.
 "Profit" here is used in the ordinary, business person's sense (so it includes capital gains)
o Example: A rental property structured to take losses is commercial. Business/property (Stewart)
o Example: ∆ is a partner in a partnership (P) that buys a corporation (C) for $2.2 million; gives
C $1 and the rest sits on IOU. High rate of interest, plus yearly service fee means that P (and
thus ∆) loses money each year. Commercial – these are business losses.
(Wall)
o Example: ∆ buys tax shelter investments, pays $6 million in interest and only makes $600,000
in dividends. ∆ makes a [capital gains] profit on disposition of the shares. The investment
wasn't personal, so Court allows deduction of the losses as coming from business/property (Ludco)
Old Test: Need a “reasonable expectation of profit” [“REOP”] to be business/property (Moldowan)
o This is still relevant to today’s test, but is no longer determinative
(Stewart)
o Factors:
(Moldowan)
 Past Performance: Profit and loss experienced in previous years.
 Expertise: The taxpayer's training (less expertise makes expectation less reasonable)
 Business Plan: The taxpayer's intended course of action to convert losses into profits.
 Financial Assessment: The capacity of the venture to make a profit given its capitalization
(i.e. the financing; heavy debt = high interest) and after deduction of capital cost allowance
 Time: The time that a taxpayer expends on the activity (i.e. avoid mere hobbies)
(Sipley)
Proposed Amendment (31 Oct 2003): Restrict deductibility of losses from interest and other
expenses based on a reasonable expectation of profit test (“profit” doesn’t include capital gains)
Distinguishing Personal Endeavors – Hobbies, Rental Properties, and Gambling


Prof: This is
a bit harsh...
Pursuit of Personal Pleasure: Even if there is a personal element, still need to determine whether
it’s in pursuit of profit or a personal endeavor. A gain from a personal endeavor is a windfall (Stewart)
o Example: Retired lawyer goes back to practice. Takes no courses, keeps almost no records,
often doesn't bill clients, doesn't advertise, yearly losses. FCA: Personal, SCC: Commercial(Landry)
Hobbies: No deduction for a hobby (nb – all of these are pre-Stewart, and thus use REOP)
o Example: Author publishes 6 books – no REOP, just a hobby.
(Payette)
o Example: ∆ is a professional auto racer. Best-ever winnings: $500. Yearly losses: approx.
$12,000. Expert: “every professional auto racer in Canada loses money”. Hobby.
(Cree)
o Example: ∆ operates a restaurant with a seating capacity for 20, open 4 days/week. Loses
money for several years, but then increases seating capacity, advertises, and opens for 6
days/week (but still takes losses). Pre-reno., just a hobby. After: commercial.
(Sirois)
o Example: ∆ has a startup that writes computer software to operate machining equipment (which
∆ buys). ∆ takes losses. TCC: No business conducted, so no source for income/loss. Hobby(Knight)
12
Taxation

This is the only
post-Stewart
case of the lot.

o Example: ∆ buys 48ft boat, says he wants to charter it out. Substantial losses. Hobby (Chequer)
Rental Properties: These are usually commercial, but there can be personal elements
o Example: ∆ rents house to his mother, but collects less than he spends on upkeep/etc. Court
rules that this is not really a business on the basis of the REOP test.
(Maloney)
Gambling: Must be systematic/extensive/organized to be a business (pre-Stewart!) (Walker, Luprya)
o Example: ∆ gambles on everything, loses. Not organized; no “commercial character” (Morden)
o Example: ∆ is involved in horse racing, owns his own horses, has extensive knowledge, and
typically makes money on the track. Systematic and extensive – this is a business.
(Walker)
o Example: ∆ practices pool daily, returns to the hall at night and challenges others to games
after plying them with drinks. Makes $63,000/year. Organized – this is a business.
(Luprya)
o Example: ∆s make $5.5 million in 4 years by investing heavily in sports lotteries. Watch sports
all day. Lose 95% of their bets, but profit overall. Bet $200,000-$300,000 weekly, had to hire
runners to go buy the tickets. Got bulk discounts from retailers. Spent about $50,000,000 on
lottery tickets in that time. TCC: Not business. No risk management, no intent to profit. (Leblanc)
 Prof: This is just the TCC, and it looks like it was wrongly decided.
Distinguishing Capital Gains

Capital gains are excluded from the definition of income (and loss) from property
(ITA s. 9(3))
Distinguishing Business and Property


Level of Activity test: Income from property is passive (buy a debenture/realty, then sit back and
wait for returns), whereas income from business is active.
o e.g. Income from a rental property is generally income from property, but if enough services are
added (housekeeping, laundry, grounds keeping, etc.) then it may become income from business
Differences in Statutory Treatment: Keep the following in mind when differentiating:
o Attribution rules: Only apply to income from property, not business
(ITA ss. 74.1, 74.2)
o Non-residents are taxed normally on income from business and dispositions of property
(i.e. capital gains). Income from property is taxed under a different regime in Part XIII.(ITA s. 2(3))
o Allocation of Income for Provincial Tax: Property is taxed in the province of the owner’s
residence, whereas business is taxed in the provinces of permanent establishment
o Foreign Accrual Income Rules: If a foreign company only holds your investments, and doesn't
carry on other business, you are taxed for that income. Only applies to property.
o Capital Cost Allowance: A capital cost allowance cannot be applied against income from
property to induce a loss; (just draws profit to 0). It can induce a loss for business.
o Small Business Deduction: Only applies to business, not to property held by the business.
Computing Profit
 “Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year.”
(ITA s. 9(1))
o The determination of profit is a question of law under ITA s. 9, not accounting.
(Canderel)
o The profit of a business for a taxation year is: Revenues – Expenses (net concept)
(Canderel)
o Taxpayers are generally free to choose any accurate method of accounting profit, subject to
the provisions of the ITA and relevant case law.
(Canderel)
 Example: Mall owner pays B to become a tenant. ∆ chooses amortization over course of
tenancy for financial statements and lump sum for tax filings. Both allowed by GAAR.
Lump sum gives "accurate picture of profit" (no revenue to apportion with)(Toronto College)
o Well-accepted business principles are useful interpretive aids, but are not determinative. They
include (but are not limited to) GAAP.
(Symes, aff’d Canderel)
o Burden of proof: The taxpayer must show that their chosen method of calculating profit is
accurate. The Minister may then show that it’s inaccurate or a better method exists
(Canderel)
13
Taxation

Methods of Accounting: (nb: This just addresses types of income. For the methods, see below)
o Cash Method: Income is included when received, expenses deducted when paid.
 Rent and Royalties are included on the cash method.
(ITA s. 12(1)(g))
 Dividends paid by resident corporations are included on the cash method.
(ITA s. 12(1)(j))
 Farming or Fishing Businesses may elect to use the cash method
(ITA s. 28)
o Accrual Method: c.f. Timing – Generally, p. 14
 This is the default for business income from sale of goods and services
(ITA s. 12(1)(b))
 CRA: Taxpayers must generally use the accrual method for business, unless the
ITA provides otherwise, and then just for those specific items.
(IT-261R)
 Prof: This makes sense; GAAP says that the cash method is rarely accurate.
 Example: Business gets payment to be a mall tenant. They had a right to the whole sum
immediately, so include it all in income right away (accrual method is most accurate). (Ikea)
o Interest may be included in income on either the cash or accrual basis, so long as that system
is regularly used by the taxpayer. c.f. Timing – Specific Items, p. 15.
(ITA s. 12(1)(c))
 Individuals: Interest from an “investment contract” (any debt obligation, with some
exceptions) is included in income annually on the “anniversary day” (the day before the
contract began, repeated annually). e.g. a contract begun on 1 Nov 2009 will have all of the
interest earned between 1 Nov 2009 – 31 Oct 2010 included in 2010 income.
(ITA s. 12(4))
 Corporations, partnership, etc.: Interest "accrued, received or receivable" is included in
income. This forces the accrual method, except that income receivable in one year and
received in the next is included twice. There’s a deduction for the later inclusion. (ITA s. 2(3))
o Capital Assets: No deductions are permitted (except as allowed under s. 18(1)(a))(ITA s. 18(1)(b))
 Depreciation is handled by the capital cost allowance; it is not otherwise accounted for.
Inclusions
Characterization
 Income vs. Capital Receipt: Income from property does not include return on capital (although
profits generated from disposition may be either capital gains or business income)
 Form and Substance of Transactions: The form of a transaction is generally binding, unless it is a
sham or the ITA provides otherwise. Anti-avoidance rules (ss. 15-17) use substance over form.
Timing – Generally
 Realization: An amount is not realized until it has the “quality of income”
(Ikea)
o An amount is included in income when the taxpayer’s right to the amount is absolute and
unrestricted, by contract or otherwise, as to its disposition, use or enjoyment
(Robertson)
o An amount may have the quality of income even when it is not yet received by the taxpayer; an
amount must be included in income when you have a right to be paid (in accrual method) (Ikea)
 Accrual Method: Amounts receivable that are actually received in another year are included in
income in the year in which they were earned, not received.
(ITA s. 12(1)(b))
o s. 12(1)(b) is enacted “for greater certainty”; items it doesn’t list aren’t excluded
(ITA s. 12(2))
o Receivable: An amount is "receivable" when one has a clearly legal (thought not necessarily
immediate) right to receive it.
(Colford)
 This is determined by private law and will vary depending on the situation; it is normally
on completion of the services or delivery of the goods contracted.
(Colford)
o Example: A construction company cannot receive "construction holdback" until their work has
been certified. Thus, that amount is receivable at the time of certification (not completion)(Colford)
o Example: As soon as an expropriation occurs, the party expropriated from has a right to be
paid, but it is not receivable until the amount is clear (e.g. through arbitration).
(Benaby)
14
Taxation

o Advance Payments for Unearned Items: Under accrual accounting, inclusion in income is
deferred until the work is completed (subject to splitting across the years work occurred in)
 Advance payments are included in income in the year paid (not at completion)(ITA s. 12(1)(a))
 This includes deposits: amounts received that are to be returned to the customer.
 This income may then be deducted and re-included in income in the following year, thus
restoring the accrual method (and creating a record of the payments) (ITA ss. 20(1)(m), (m.2))
Cash Method: Income from property can generally use the cash method
(ITA s. 12)
Timing – Specific Items
 Interest: Accounted on a cash or accrual basis, subject to some modifications:
(ITA s. 12(1)(c))
o Corporations: If the lender is a corporation/partnership/etc, interest "accrued, received or
receivable" is to be included in income. Thus, interest that becomes receivable in one year and
is received in another must be included in income in both years. However, the taxpayer may
deduct the interest from the later year's income.
(ITA s. 12(3))
o Individuals: Interest on an “investment contract” (any debt obligation, with certain exceptions)
accrued to the “anniversary day” of the contract is reported annually.
(ITA s. 12(4))
 “Anniversary day”: The day before the issue of the contract, repeating annually.
 e.g. if the contract starts on Nov 1, 2010 then the period of Nov 1, 2010 - Oct 31, 2011 is
included in income for 2011 (thus avoiding the headache that corporations deal with).
 Sale of Property: CRA Policy: A clearly legal right to property occurs at the date of exchange, or
(where that is not clear) where possession or the right to use passes.
(IT-170R)
o Real Property: Receipt generally occurs at the closing date. Note also that realty is not a good
or service, so s. 12(1)(a) doesn’t apply (so its scheme for advance payments doesn’t apply)
 Services: Payments for services are receivable when the services are rendered. (Maritime Telegraph)
o Example: ∆ provides telephone services, bills December’s long-distance calls in January.
Included in income in December, when the calls were made.
(Maritime Telegraph)
o Example: Power Co. must include payments for power at date delivered, not date billed(Kootenay)
o Professional Services: Lawyers, doctors, dentists, accountants, vets and chiropractors may
choose not to include works in progress in income. If they do, they must keep doing so. (ITA s. 34)
 Dividends:
o “Dividend”: A pro rata distribution of income by a corporation to its shareholders (ITA s. 248(1))
 Does not include: Liquidation of the company or a repayment of capital.
 Does include: A “stock dividend” (a dividend paid in shares of the corporation, not cash)
o These are income from property and are accounted on a cash basis.
(ITA ss. 12(1)(j), (k))
 Rent and Royalties: Included on a cash basis.
(ITA s. 12(1)(g))
o This prevents resource extraction (paid in “instalments”) from being taxed as a capital gain.
 Anti-Avoidance Rules: Include in income the following:
o Certain benefits received by virtue of shareholding (e.g. shareholder loans)
(ITA s. 15)
o “Imputed” interest in blended payments and indexed or discounted debt obligations
(ITA s. 16)
 Imputed Interest in Blended Payments: If part of the payment can reasonably be
considered to be interest, then it will be deemed to be interest.
(ITA s. 16(1))
 Example: ∆ lists property for $450,000. P offers ∆ $350,000 in cash for it, ∆
counteroffers $395,000, P rejects. ∆ offers $395,000 over the course of 6 years? P
accepts. Court: This is effectively a loan with $45,000 in interest. Imputed.
(Groulx)
 Debt Obligations Issued at a Discount:
 Example: ∆ buys a $10,000 debt for $6,000. The extra $4000 is a capital gain.
(Wood)
 Prof: This was a legit market transaction, so the court didn’t impute interest.
15
Taxation
 Example: ∆ loans $6,000 in return for promise to pay $10,000 in 10 years (plus 5%
interest). Imputed interest – goal was to structure loan to avoid tax (quasi-fraud) (Satinder)
 Recall: Interest on a loan incurred for the purpose of earning income from business or
property is deductible, so s. 16 doesn’t necessarily increase one’s tax liability (ITA s. 20(1)(c))
o Canadian companies: Imputed interest in amounts owed to related foreign companies (ITA s. 17)
o Interest-Free Loans (e.g. "strip bonds", "zero coupons"): Interest is deemed to accrue annually
(at a rate prescribed under reg. 7000)
(ITA s. 12(9))
Deductions
Deduction Rules – Basic Questions
 Deductability: Is this expense a permitted deduction?
o Ask: What does GAAP say? Does the ITA say otherwise? If not, follow GAAP.
 Timing: When can the deduction be recognized?
Policy Goals
 Ability to Pay: Business expenses aren’t an accretion to wealth (they just earn you the ability to
earn revenues) so they should not be included in income.
 Accurate Measurement of Profit: Accounting has an objective of accurately measuring profit,
which is a goal shared by tax laws. So generally allow GAAP deductions (subject to the ITA)
 Certainty and Predictability: Some arbitrary rules avoid costly assessment or litigation.
 Controlling Abuse of Business Deductions: Some deductions are hard to monitor (e.g.
entertainment expenses). These deductions may be [partially] excluded.
 Tax Policy as Public Policy: Should fines, damages, or illegal payments be deductible?
Income Earning Purpose and the Reasonableness Requirement
 An expense must be incurred for the purpose of gaining or producing income from a business or
property in order to be deductible.
(ITA s. 18(1)(a))
o There are no deductions for personal or living expenses.
(ITA s. 18(1)(h))
 Non-exhaustive definition: Expenses relating to property maintained for the use or benefit
of the taxpayer (or their relations) and not involved in business.
(ITA s. 248(1))
 All deductions must be reasonable in the circumstances.
(ITA s. 67)
o Unreasonable due to personal elements:
 Example: ∆ sponsors a baseball team for $22,500, calls it an advertising expense. It came to
over 50% of the company's expenses. ∆'s owner was a big baseball fan. Deduction limited to
$5000, the cost of a reasonable advertising campaign (in newspapers/radio)
(No. 511)
o Unreasonable due to non-arm's-length payments:
 Example: Company owned by A and B, pays A $20,000, B $13,000, and B’s wife (C)
$13,000. C’s services not worth $13,000 – B/C attempting to get favourable tax treatment
via income splitting. Deduction for C’s wages limited to $6000 ($8500 on appeal)
(Mulder)
 Example: ∆, a dentist, has family doing his accounting. They from a separate company,
who he then pays more (in line with market rate). Deduction limited to former rate (Costigane)
 Example: Accountant with revenues of $55,000 could deduct the $34,500 he paid to his
wife’s management company (for secretarial services – typing, reception, record keeping).
This was “a common and reasonable business deal”.
(Aessie)
Personal and Mixed Expenses – The Tests
 Test for Personal vs. Business Expenses: Apply the Symes test, which has these factors:
(Symes)
o Whether the expense is deductible according to accounting principles or practices (e.g. GAAP)
o Whether the expense is normally incurred by other taxpayers carrying on similar businesses.
16
Taxation


o Whether the expense would have been incurred if the taxpayer were not engaged in the pursuit
of business or property income (or if it would be there regardless, e.g. food, shelter)
o Whether the taxpayer could have avoided the expense without affecting gross income.
o Whether the expense is an expense “of the trader” or “of the trade” (i.e. if the expense was an
incident of the trade – part of the business operation itself – it is an income-earning expense)
o Whether a particular expense was incurred in order to approach the income-producing circle
(e.g. clothing, child care, housekeeping or commuting) or was incurred within the circle itself.
Alternative Test: The Scott test focuses on the subset of the Symes factors (nb: apply Symes) (Scott)
o What need does the expense address?
o Would the need exist apart from business?
o Is the need intrinsic to the business?
Mixed Expenses: An expense that is partly necessary for business but also partly personal
consumption (e.g. business lunches or travel expenses). Two approaches:
(Cormack)
o Apportionment: Deductible to the extent that it was for the purpose of earning income.
o If the dominant purpose was business or personal, then classify the whole expense as such.
Personal and Mixed Expenses – Specific Situations
 Child Care Expenses:
o Such expenses may only be deducted from the lower-income parent. The deduction is capped
(amount depends on age, set by regulation) and may be no more than 2/3 of income.
(ITA s. 63)
o Example: Female litigator hires a live-in nanny to take care of her children. Not deductible as a
business expense – incurred to enter the income-earning circle.
(Symes)
 Food and Beverages: Only deductible if it meets the food/fuel analogy
(Scott)
o Example: ∆ is an independent courier – runs about 150km per day with a backpack, so he needs
to consume extra food and beverage. Applies Scott test – extra food costs are deductible
(Scott)
 Entertainment Expenses: Deduct ½ of [reasonable] entertainment/food/beverage expenses(ITA s. 67.1)
o After 1971, membership fees/dues for recreation, dining or sporting clubs and expenses for use
or maintenance of a yacht, camp, lodge or golf course aren’t deductible
(ITA s. 18(1)(l))
o Example: ∆ buys club memberships for its employees to meet potential clients. Purpose was to
raise revenue – deductible. nb: This was decided under s. 18(1)(a), pre-18(1)(l). (Royal Trust Co)
o Example: ∆ provides his clients with certificates for food/beverages, gave away tickets to
sporting events. ∆ does not consume it himself. Only ½ deductible – s. 67.1 applies.
(Stapley)
 Commuting Expenses: Commuting between work and home is not generally deductible, although
commuting to and from the workplace in the course of work is deductible.
(Cumming)
o Example: ∆ is a doctor with a home office. Commuting from his home to the hospital was in
the course of work (because he was already at work!), so it is deductible.
(Cumming)
 Housekeeping Expenses: Not deductible at all – purely personal.
(Benson)
o Example: ∆, a 62-year-old farmer, is in poor health, can’t be left alone. ∆ hires B to be a
housekeeper part of the time and help out on the farm the other part of the time. B’s wages are
only deductible in proportion to the time B spent on the farm (and not housekeeping).
(Benson)
 Home Office Expenses: No business deductions for an individual's principle place of residence
except to the extent that it is their principle place of business or it is used regularly and
continuously for meeting clients, customers or patients.
(ITA s. 18(12))
o CRA: If you use your home as your personal place of business, that use does not need to be
exclusive to meet the statutory requirements. Prof: This is more lenient than the ITA.
(IT-514)
o Example: ∆ is a Dr. with a home office who uses that room exclusively for his business (meets
with other doctors, etc.). Deduction permitted.
(Logan)
17
Taxation
o Example: ∆ is a Dr. with a home office. Meets clients/etc there, but it's also used for personal
reasons (i.e. not exclusively business uses). No deduction allowed (nb: pre-s. 18(12)) (Mallouh)
Illegal or Unethical Activities
 Bribes: No deductions for bribes punishable under [listed statutes, incl. CC]
(ITA s. 67.5)
o Old Law: Bribes incurred to earn income from business or property are deductible (United Color)
 Fines: No deductions for fines imposed by any province/state/country/etc.
(ITA s. 67.6)
o Old Law: Fines incurred to earn income from business or property are deductible (Poultry Cases)
 Exception: The deduction should be denied if the breach was “egregious” or “repulsive”
o Example: Fines are “virtually impossible” to avoid in the trucking business (gov’t uses to repair
the road). They are incurred in order to obtain income from business. Deductible
(Day & Ross)
o Example: Directors of the company were not guilty of any "moral turpitude", so the fines
against the company are deductible.
(Rolland Paper)
 Damages: As long as they are incurred for the purpose of earning income from business (i.e. they
are part of the "operations, transactions or services" by which the taxpayer earns income), they
are deductible as a business expense.
(Imperial Oil)
o Example: ∆ (an accountant) leaves his firm to start his own; many of his clients follow him.
But ∆ signed a non-compete. Old firm sues him, gets $465,000 in damages. Deductible. (McNeill)
o Damages are not deductible if the activity was "egregious or repulsive". Rare in civil cases(McNeill)
 Expenses of Illegal Business: These are generally deductible (ability to pay rationale)
(Eldridge)
o Example: Call girl agency’s rent, legal expenses, assistance for call girls, cost of bail bonds and
casual wages are deductible (just like a legal business)
(Eldridge)
o Example: Cost of 15,000 pounds of marijuana seized by police – not deductible
(Neeb)
 nb – This was pre-Poultry. Now we might call this “egregious”.
Timing of Deductions
 Current vs. Capital Expenditures: Current expenditures are immediately deductible, whereas
prescribed capital expenditures have the capital cost allowance (s. 20(1)(a)) or the cumulative
eligible capital account (s. 20(1)(b)). However, non-prescribed capital expenditures cannot be
deducted at all (s. 18(1)(b)), leading courts to err on the side of recognizing current expenditures.
 Current Expense: An "expense" under s. 18(1)(a) is an obligation to pay a sum of money, so
current expenses are deductible when you have a legal obligation to pay the amount.
(Burnco)
o Example: Construction holdbacks are not incurred until a certificate is issued (i.e. until the
holdback becomes payable), even if the work is already complete.
(Guay, c.f. Colford, p. 14)
o nb – this is symmetric with the test for inclusion in income (which makes sense)
 Contingent Liabilities: No deductions for contingent liabilities
(ITA s. 18(1)(e))
o nb – Guay also demonstrates this (a construction holdback is a contingent liability, and thus not
deductible, until a certificate has been issued – it is contingent on the issuance of the certificate)
18
Taxation
Capital Expenditures
“Capital Expenditure” Defined

nb – Unless falling s. 18(1)(a), capital exps. are not deductible as current expenses
(ITA s. 18(1)(b))
Common Law Tests
 Enduring Benefit Test: An expenditure that provides benefits beyond the taxation year provides
an "enduring benefit" and is a capital expenditure.
(British Insulated)
o Example: ∆ puts £32,000 into a pension scheme, deducts it as an expense. ∆ is buying a
"lasting advantage" (future benefits: a happy staff) – capital expenditure
(British Insulated)
o Business Structure Test: If the expenditure is part of the income-earning process, it's current.
If it builds a business structure (i.e. expands or establishes the business), it's capital(John-Manville)
 Prof: This is really just a different reformulation of the enduring benefit test.
 Example: ∆ buys neighbouring land, cuts it away so as to prevent landslides on their
workers. Current expense (which is highly unusual for land)
(John-Manville)
 Example: ∆ pays a lump sum to service providers to enter into exclusive service contracts.
Part of the money-earning process, so it's a current expense.
(BP Australia)
 Example: ∆ makes an up-front payment for a non-compete clause. Preventing a person
from competing in subsequent years builds the business structure. Capital. (Sun Newspapers)
 Recurring Expenditure Test: A capital expenditure is something that will be spent once and for
all, whereas a recurring expenditure will recur yearly (and is a current expense)
(Ounsworth)
o Prof: This test is problematic. Consider a case where ∆ buys new busses every year. This is a
recurring expense, but the busses last several years – the business is growing!
 Residual Test: Where there are two possible interpretations, one of which allows a deduction and
one of which does not, accept the interpretation that allows the deduction.
(John-Manville)
o Thus, if there is no applicable capital deduction, call it a current expense (if possible)
Types of Capital Assets
 Depreciable Property: The capital cost allowance applies to these.
(ITA s. 20(1)(a))
o Schedule 2 of the ITA provides classes of depreciable capital expenditures.
(ITR 800)
o nb – These assets are mostly tangible (although some are intangible)
 Eligible Capital Expenditures: These capital expenditures have an associated deduction scheme:
75% of the expenditure is added to a cumulative eligible capital account, and each year 7% of the
present balance of the account may be deducted.
(ITA s. 20(1)(b))
o nb – These are all intangible assets (excluding depreciable intangible assets)
 Non-Depreciable Property: Includes land, shares and bonds, the cost of which is recovered on sale
o Natural resources get a depletion allowance instead of a depreciation allowance
(ITA s. 65)
 Nothings: No deductions permitted at all (e.g. a yacht – ITA s. 18(1)(l))
Repair or Improvement of Tangible Assets
 Test for whether the cost of repair or improvement of an asset is capital or current:
o Was it incurred for business (i.e. was it not a personal expense)?
o Is this a capital expenditure? Three-part test:
 Size of the expenditure (if it's small, less likely capital)
 Whether the expenditure is recurring
 The effect that it has on the value of the asset repaired.
 Example: ∆ replaces a flat roof with a sloped roof. It was substantial, it wasn't recurring, and it
increased the value of the building. Capital.
(Earl)
19
Taxation


Example: Replaced the hold of the ship. Sizeable expenditure, resulted from usual wear and tear
(so perhaps recurring?), but it didn't change the nature of the ship. Current.
(Canada Steamship)
Example: ∆ buys building with a flat floor. The floor sinks, so ∆ puts in reinforced flooring.
Sizeable, not recurring, increased value (but not the nature of the building). Capital.
(Shabro)
Protection of Intangible Assets
 The enduring benefit test applies in determining whether an expense incurred in acquiring or
protecting an intangible asset is capital or current (see “Capital Expenditure” Defined, p. 19)
 Example: ∆’s legal costs for defending a regulatory licence (to supply gas in a municipality)
conferred an enduring benefit, and were thus capital.
(Dominion Natural Gas)
 Example: ∆ is in a dispute with P over their trademark, enters into a settlement to protect their
mark. Business structure test: this doesn’t expand/establish the business. Current (Canada Starch)
 Example: Litigation over the right to use a brand name. Current
(Kellogg)
 nb – These cases are all pre-1972, when most intangible assets were still “nothings” (and thus the
residual test was a factor – these might be decided differently today).
Other Issues – Domain Names, Corporate Takeovers, and Goodwill
 Domain Names: Cost of acquiring (if one-time) is likely a capital expense.
 Corporate Takeovers: Costs of defending a company against a takeover (or costs associated with
completing a takeover) are capital expenditures (associated with an investment transaction) (Neonex)
o nb – The costs of facilitating a friendly takeover by a to-be-acquired company are current.
 Goodwill: The purchase of goodwill is capital, but the growing of it (e.g. via advertising) is current.
o Example: ∆ buys a client list; treated as a capital expenditure
(Gifford)
Expenses with Respect to a New Business
 Money spent in setting up a new business is a capital expenditure.
 Example: ∆ takes over businesses in financial difficulty. Costs of investigating the businesses are
capital expenditures, but the day-to-day costs of supervising the business are current.
(Firestone)
 Example: Engineering costs incurred in improving capacity of power plants: Current(Bowater Power)
o Prof: This was pre-1972, likely decided under the residual test; today it would likely be capital.
Capital Cost Allowance (“CCA”)



Depreciation of most capital expenses uses the declining balance method.(ITA s. 20(1)(c), ITR 1100(1))
o Straight Line Method: For an asset with a lifetime of X years, deduct 1/X of the cost each year
for X years.
o Declining Balance Method: For an asset with a lifetime of X years, deduct 2/X of the
“undepreciated capital cost” of the asset each year in perpetuity.
Undepreciated Capital Cost [“UCC”]: Normally just the amount you haven’t deducted yet
o Formula: (original capital cost + recapture) – (capital cost allowance taken so far +
terminal losses + min{proceeds of disposition, original capital cost})
(ITA s. 13(21))
o What This Means for Disposition:
 If you sell for less than the outstanding UCC, the difference is immediately and fully
deductible (as a “terminal loss” – s. 20(16)).
(ITA s. 20(16))
 If you sell for more than the outstanding UCC, the difference is fully included in income
(as “recapture” – ITA s. 13(1)), and the UCC is reset to 0 (it cannot be negative) (ITA s. 13(1))
 Recapture is capped at the total amount that you’ve deducted so far. If you sell for more
than the original capital cost, the extra amount is taxed as a capital gain, not recapture
o Class Concept: UCC is not calculated on a per-asset basis; it is calculated per-class.
CCA only applies to depreciable property (ITA ss. 248(1), 13(21), 20(1)(a), ITR 1100, ITA Sched. II)
20
Taxation






o Basically, look in Schedule II for the list of classes and their rates of deduction.
Capital Cost: This has its ordinary meaning – the actual cost of acquiring the asset, including the
legal, accounting, and engineering fees and reasonable material, labour and overhead costs.
o This only applies to purchases, and not leases. The form of the contract matters here; the court
does not look at the substance (unless it’s a sham), and just relies on the legal form.
(Trustco)
o Example: ∆ arranges a complex web of legal agreements to implement what was substantially a
lease in the form of a purchase. No anti-avoidance rules apply; eligible for CCA.
(Trustco)
o Apportionment: Where an asset belongs to multiple categories (e.g. land + building: nondepreciable and depreciable), apportion the capital cost between them.
(ITA s. 68)
 The parties’ agreement is usually deferred to by the CRA; the vendor wants high land value
(for 50% taxable capital gains) and the purchaser wants high building value (for high CCA).
Timing of Acquisition: CCA can only be claimed on property that is "available for use"(ITA s. 13(26))
o Availability for use is deemed in several circumstances (actual use, two taxation years after the
taxation year it was acquired in, immediately before disposition, etc)
(ITA s. 13(27))
o CRA: Current ownership (i.e. possession of title or the like) is also required.
(IT-285R2)
Proceeds of Disposition: This term 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) (BCN Ltée (SCC 1979))
o Specific items included as “proceeds of disposition” are set out in the ITA.
(ITA s. 13(21))
Timing of Disposition: Occurs when ownership passes under provincial law
(Hewlett Packard)
o Example: ∆ exchanges their old fleet of cars for a new fleet every October; new fiscal year
starts in November. Their contract says that title for the old fleet passes a month after the
exchange. Provincial law allows it, so disposition of old fleet occurs in the next fiscal year and
∆ is able to claim CCA on both new and old cars simultaneously, every year
(Hewlett Packard)
Half-year Rule: Only 50% of the CCA for an asset may be claimed in the taxation year it is
acquired in (this is to average out the effect of acquiring assets at different times of year)(ITR 1100(2))
o This regulation only applies where total cost of acquisitions exceeds total proceeds of
dispositions for the class in the year (remember the class concept – assets are lumped together)
Limitations on Deductions:
o Rental Properties: CCA cannot induce a loss on rental property (i.e. it is capped at rental
income – all other deductions)
(ITR 1100(11))
 A rental property is a building used “principally for the purpose of gaining … rent”(ITR 1100(14))
o Leasing Property: Similar restrictions to rental properties (plus some anti-avoidance
restrictions on “specified leasing property” – see C 303)
(ITR 1100(15))
Eligible Capital Expenditures


“Eligible Capital Expenditure” Defined: An expenditure “on account of capital for the purpose of
gaining or producing income from the business”, subject to statutory exclusions
(ITA s. 14(5))
o Property that can be purchased with such an expenditure is “eligible capital property” (ITA s. 54)
o nb – The most important of these expenditures is the cost of goodwill.
Amount of Deduction: A deduction of no more than 7% of the “cumulative eligible capital”
(“CEC”) account can be taken each year.
(ITA s. 20(1)(b))
o ¾ of each eligible capital expenditure is added to the CEC account, and ¾ of the proceeds of
disposition of eligible capital property is subtracted from CEC account.
(ITA s. 14(5))
o As with the UCC, there is a recapture that is included in income
(ITA s. 14(1))
o If the account has a positive balance when the taxpayer ceases to carry on business, that amount
is deductible as a “terminal allowance” (similar to the UCC terminal loss)
(ITA s. 24(1))
21
Taxation
Capital Gains
Statutory Framework






Capital gains are included in income: (taxable capital gains) – (allowable capital losses) (ITA s. 3(b))
Capital Gains are any gains not caught by s. 3(a) (i.e. not from a source)
(ITA s. 39(1)(a))
Capital Losses are any losses not caught by s. 3(a) (i.e. not from a source)
(ITA s. 39(1)(a))
Taxable Capital Gains are 50% of capital gains
(ITA s. 38(a))
Allowable Capital Losses are 50% of capital losses
(ITA s. 38(b))
Realization: Capital gains/losses are realized on disposition. This is supported by ITA s. 9(3)
(Income/loss from property does not include capital gains from disposition)
o Note: income from property can include non-capital gains from disposition (e.g., of inventory)
Basic Concepts




Capital Property: Depreciable property and any property that can generate a capital gain/loss(ITA s. 54)
o Certain types of property are excluded from generating capital gains/losses (ITA s. 39(1)(a),(b))
Depreciable Property: Property for which CCA can be claimed under s. 20(1)(a)
(ITA s. 13(21))
o These are fully deductible, eventually, via the CCA (s. 20(1)(a)) or as a terminal loss (s. 20(16))
Disposition: Any event entitling a taxpayer to proceeds of disposition of property
(ITA s. 248(1))
o Proceeds of Disposition: This includes the sale price of the property (net of any expenses
incurred in selling it) as well as expropriation payments, payments from insurance for loss of
the asset, involuntary disposition of a corporate share or debenture, etc.
(ITA s. 54)
o Inter Vivos Gifts: Proceeds of disposition are deemed to be the fair market value (ITA s. 69(1)(b))
o Timing of Involuntary Disposition: In the case of loss, destruction or taking of the property,
the time of disposition is deemed to be the earliest of (1) the day the taxpayer agreed to an
amount as full compensation for the property, (2) the day the amount is determined by a court
or tribunal, or (3) if there is no legal proceeding, two years after the day of the loss/etc.(ITA s. 44(2))
Adjusted Cost Base:
o For depreciable property, the "adjusted cost base" is the capital cost of the property. (ITA s. 54)
o For non-depreciable property, the adjusted cost base is the cost at the time of disposition,
adjusted as required by s. 53.
(ITA s. 54)
 Upward adjustments: Some expenses associated with the property are included at the time
of disposition by adding them to the cost base. e.g. interest on a loan taken to purchase it,
property taxes, etc. This reduces capital gains (or causes capital losses)
(ITA s. 53(1))
 Downward adjustments: These do the opposite of upward adjustments (gasp!) (ITA s. 53(2))
Computation of Gain or Loss

See C 325 for
an example


Proceeds Due within the Year: If taxpayer is entitled to be paid in full in the year of disposition:
capital gain/loss = proceeds of disposition – (adjusted cost base + expenses of disposition)(ITA s. 40(1))
Proceeds Due in a Future Year: If taxpayer disposes of property but is not entitled to receive the
proceeds in the same year, a “reasonable” reserve may be deducted from the capital gain in each
year. This reasonable reserve must be no less than the lessor of:
(ITA s. 40(1)(a)(ii))
o Gain*X/5 (where X = 4 – number of years since disposition).
(ITA s. 40(1)(a)(iii)(D)
o Gain*(proceeds not yet received)/(total proceeds).
(ITA s. 40(1)(a)(iii)(C))
Loss: These are immediately deducted in the year of disposition
(ITA s. 40(1)(b))
22
Taxation
Index of Cases
Short Name
Aessie
Allchin
B.P. Australia
Beament
Bellingham
Bellingham
Benaby
Benton
Blackburn
Blanchard
Blenkarn
Bowater Power
British Insulated
Buckman
Burnco
Canada Starch
Canada Steamship
Canderel
Chequer
Colford
Cormack
Costigane
Cranswick
Cree
Cumming
Day & Ross
De Beers
Delancy
Dominion Natural Gas
Earl
Eldridge
Eldridge
Firestone
Fortino
Fries
Garron
Giffen
Gifford
Gifford
Groulx
Guay
Hauser
Hewlett Packard
Hoefele
Hogg
Huffman
Ikea
Ikea
Imperial Oil
Ct./Year
Keywords
Page
TCC 2004
TCC 2003
Aus 1966
SCC 1952
FCA 1996
FCA 1996
SCC 1967
TAB 1952
TCC 2004
FCA 1995
TAB 1963
FCA 1971
UK 1926
TCC 1991
FCA 1984
ExCt 1968
ExCt 1966
SCC 1998
FCTD 1988
ExCt 1960
TAB 1965
TCC 2003
FCA 1982
TRB 1978
ExCt 1967
TCC 1976
UK 1906
TCC 2004
SCC 1940
TCC 1993
ExCt 1964
ExCt 1964
FCA 1987
FCA 2000
SCC 1990
TCC 2009
TCC 1995
SCC 2004
SCC 2004
SCC 1967
TCC 1971
TCC 2005
FCA 2004
FCA 1996
FCA 2002
FCTD 1989
SCC 1998
SCC 1998
ExCt 1947
Account contracts out secretarial work to wife. Deductible.
∆ lives in US for 3 years, leaves family in Canada; "resident"
Lump sums paid to induce contracts: current expense
Lawyer fights in WWII; finds a wife in UK; not "resident" in Canada.
Income from a source refers to a productive source.
Punitive damages are not taxable
Expropriation compensation isn't receivable until fixed
Housekeeping expenses are not deductible
Drunk driver suspended from job; legal expenses deducted.
Housing buy-back contract rescinded; benefit from employment.
Receipt happens when there's an unconditional right to be paid.
Engineering costs to improve capacity of power plants: Current
Enduring Benefit Test: benefits beyond taxation year?
Earnings from stealing from clients are taxable
Current expenses are deductible when you have a legal obligation to pay.
Settlement over â„¢ dispute is a current expense
Replaced the hold of the ship. Current
6-part test for finding profit under s. 9
∆ charters out his yacht. Just a hobby.
An amount is "receivable" when one has a clearly legal right to receive it.
Two approaches to mixed expenses: apportionment and dominant purpose
Dentist has family do the accounting. Non-arms-length unreasonableness
Shareholder gets a surprise payout – not income (source theory)
∆ drives racecars. Just a hobby.
Commuting between work and home is not generally deductible
"Virtually impossible" to avoid fines. Deductible.
South African company with UK directors. Company resides in UK.
Football player staying in hotels in Toronto. No deduction.
Legal costs for defending a regulatory licence are capital
∆ replaces a flat roof with a sloped roof. Capital
Earnings from prostitution are taxable
Expenses of Illegal Business are deductible
Investigating vs. running a business; capital vs. current
Non-compete payments aren't taxable
Strike pay is sourceless; benefit of the doubt goes to taxpayers
Trustee is a corp. resident in Barbados but trust is resident in Canada
Valuation – Cost to the Employer (freq. flyer points)
Employee insurance broker can't deduct cost of client list.
Purchase of goodwill is a capital expense
Imputed interest in a blended payment
Construction holdbacks are not incurred until certificate issued
Air Canada pilot lives in Bahamas; still resident in Canada.
Disposition occurs when ownership passes under provincial law
Petro-Can pays part of the interest on Toronto houses. Not taxable.
Judge's bulletproof car. No deduction.
Plainclothes cop can deduct suits for work; can't use at home.
Tenant gets an inducement payment. Symmetry.
An amount is not realized until it has the “quality of income”
Damages incurred to earn income are deductible
--C 66
-----C 88
C 101
------C 136
C 122
----C 91
------C 168
C 157
------C 88
C 157
----C 71
------C 91
----C 91
C 89
C 73
C 128
--------C 67
--C 136
--C 124
C 171
-----
23
Taxation
Short Name
Johns-Manville
Johns-Manville
Kellogg
Knight
Kootenay Power
Laudry
Leblanc
Logan
London & Thames
Loo
Ludco
Luprypa
Mallouh
Maloney
Manrell
Manrell
Maritime Telegraph
Markman
McFayden
McNeill
Moldowan
Moldowan
Morden
Morin
Mulder
Neeb
Neonex
Nicholson
No. 511
Ounsworth
Payette
Phillips
Pletch
Pletch
Poultry
Poynton
Ransom
Robertson
Rolland Paper
Royal Trust Co.
Russell
Sagaz
Satinder
Saunders
Savage
Savage
Schujahn
Schujahn
Schwartz
Schwartz
Scott
Ct./Year
Keywords
Page
SCC 1985
SCC 1985
SCC 1943
TCC 1993
FCA 1991
FCA 1995
TCC 2006
TAB 1967
UK 1967
FCA 2004
SCC 2002
TCC 1997
TCC 1985
TCC 1989
FCA 2003
FCA 2003
FCA 1992
TCC 1989
TCC 2000
FCA 2000
SCC 1977
SCC 1977
ExCt 1961
FCTD 1974
TAB 1967
TCC 1997
FCA 1978
TCC 2004
TAB 1958
UK 1915
TRB 1978
FCA 1994
TCC 2005
TCC 2005
SCC 2000
OCA 1972
ExCt 1967
ExCt 1944
TCC 1960
ExCt 1957
ExCt 1948
SCC 2001
FCA 1995
TRB 1980
SCC 1983
SCC 1983
ExCt 1962
ExCt 1962
SCC 1996
SCC 1996
FCA 1998
Business Structure Test: expands/establishes business?
Residual test for current vs. capital expenses
Litigation over the right to use a brand name: Current expense
∆ produces machine tools. Just a hobby.
Power Co. must include payments for power at date delivered
Old lawyer comes out of retirement (poorly). Business losses.
Brothers make $55m on sports lotteries. Business.
Dr. has home office exclusively for business. Deductible
Surrogatum principle – legal damages are taxed as what they're replacing.
Suing employee for higher wages. Legal expenses deducted.
Tax shelter investment; more interest than dividends.
Pool sharp gets primary income from gambling. Business.
Dr. has home office; not exclusively for business. Not deductible.
Property rented to relatives has a personal element.
Reverses Fortino
Defining property. Right to get non-compete payments is not property.
Payments for services are receivable when the services are rendered.
Constructive receipt on payment to 3rd party.
∆ moves to Japan with wife; is still ordinarily resident in Canada.
Accountant violates non-compete. Damages deductible.
Objective factors for the Stewart test.
Relevance of reasonable expectation of profit.
Gambling on everything? No deductions.
"Receive" = "to derive benefit from"; no handling needed.
Husband and wife splitting wages – non-arms-length unreasonableness
Cost of 15,000 pounds of marijuana seized by police not deductible
Corporate takeover expenses are capital (unless friendly?)
∆ moves to UK; gets new wife; not ordinarily resident.
Sponsoring a baseball team is unreasonable advertising expense.
Recurring Expenditure Test
Author publishes 6 books – hobby; no deduction.
∆ moves for work; employer chips in for pricier house. Taxable benefit.
The control test [for Ind. Contractors] is bad.
Adding to Sagaz: Having other clients is a factor
Fines incurred to earn income are deductible
Earnings from embezzlement are taxable
∆ moves for work; reimbursed for loss on house. Not taxable.
Realization occurs when you have an absolute right
Fines are deductible absent moral turpitude
Memberships at clubs are deductible entertainment expenses
YMCA staffer fights in WWII; has wife/kids in BC; "resident" in Canada.
Factors for the Weibe Door test [independent contractors]
Imputed interest in quasi-fraudulent loan scheme
Professor leaves Canada for a 1 year sabbatical; still resident in Canada.
"Benefit" = economic advantage or material acquisition
∆ paid by employer to take courses; benefit related to employment.
∆'s wife and kids only in Canada to sell house; ∆ not "resident"
Sojourner rule overridden by part-year resident rule
Payment of damages for breach of contract not taxable
No tax on personal injury damages
Courier eats a lot. "but for" test for deductibility
------C 157
--C 156
C 159
--C 98
--C 155
C 159
--C 158
C 91
C 151
--C 122
C 68
--C 153
C 154
C 158
C 122
------C 69
----C 157
C 135
C 118
C 118
--C 91
C 135
---------C 117
--C 86
C 123
C 126
C 66
---C 90
C 100
---
24
Taxation
Short Name
Shabro
Shih
Sipley
Sirois
Stapley
Stewart
Stewart
Stewart
Strickel
Sun Newspapers
Symes
Symes
Symes
Tennant
Thibodeau
Thomson
Thomson
Thomson
Toronto College
Trustco
Tsiaprailis
Unit Construction
United Color
Vegso
Waffle
Waffle
Walker
Walls
Walls
Weibe Door
Wilkins
Winnipeg Ballet
Winnipeg Ballet
Wolf
Wolf
Wood
Wood
Ct./Year
Keywords
Page
FCA 1979
TCC 2000
TCC 1995
TCC 1987
FCA 2006
SCC 2002
SCC 2002
SCC 2002
FCTD 1972
Aus 1938
SCC 1993
SCC 1994
SCC 1994
UK 1892
FCTD 1978
SCC 1946
SCC 1946
SCC 1946
SCC 1998
SCC 2005
FCA 2003
UK 1959
TCC 1992
TAB 1956
ExCt 1968
ExCt 1968
ExCt 1951
SCC 2002
SCC 2002
FCA 1986
UK 1960
FCA 2006
FCA 2006
FCA 2002
FCA 2002
UK 2007
SCC 1969
--C 66
C 153
C 157
--C 88
C 152
C 155
----C 165
----C 125
C 75
C 64
C 68
C 70
C 170
--C 99
C 71
----C 126
C 127
C 159
C 153
C 155
C 116
C 129
C 118
C 119
C 119
C 119
C 72
---
Woon
Zakoor
ExCt 1950
TAB 1964
∆ reinforces sinking floor. Capital
Wife and kids in Canada for schooling; ∆ not "resident"
Consider amount of time spent in Stewart analysis
∆ runs a restaurant. Just a hobby.
Giving clients food coupons and sports tickets? Not deductible.
Sources of income depend on intention to carry on an activity for profit.
"Pursuit of profit" 2-part test for income from business.
Rejecting reasonable expectation of profit test. Policy.
US Prof. teaches in Canada; tries not to get taxed via treaty; fails.
Up-front payment for a non-compete clause; capital
Laying the ground for Canderel. Use GAAR.
Test for personal/business expenses
Child Care expenses not deductible as business expense
"Convertible into money" doctrine of benefit.
Trust has three trustees; 2 in Bermuda, 1 in Canada. Resident in Bermuda.
∆ has homes in Bemuda, US & Canada; resident at common law?
"Ordinarily resident" is "superfluous"
∆ deemed a resident despite sojourning for less than 183 days
Tenancy inducement payments. Accurate picture of profit.
CCA only applies to purchases, not leases. Rely on contract's form.
Tax on disability benefits in arrears; surrogatum principle.
Kenyan companies controlled by UK parent; companies reside in UK.
Bribes incurred to earn income are deductible
Daughter works on farm; withheld till marriage. Taxed on receipt.
Ford gives ∆ a cruise, not convertible to cash.
Ford (3rd party) gives ∆ a cruise; benefit connected to employment.
Betting on horse races extensively/systematically? Business.
Tax-shelter warehouse. Pursuit of profit test.
Rejecting reasonable expectation of profit test.
Test for contracts of/for services.
Valuation – Fair Market Value (suit for a Christmas bonus)
Ballerinas aren't employees – control test is bad.
Ballerinas aren't employees – look at form of contract.
Special skills and no job security? Independent contractor.
Ind. Contractors: Contract form prevails (unless sham/error).
Holding co. incorp. in Netherlands to avoid UK tax. Resides in NL.
Purchase of discounted debt gets a capital gain
∆ relies on MNR's bulletin; MNR not estopped from assessing tax
differently.
Valuation – Apportionment
25
--C 130