Table of Contents
Sources of Income Tax Law: ..........................................................................................................................................................................7
Legislative Process.............................................................................................................................................................................................8
Stickel v MNR 1972 .................................................................................................................................................................................................. 8
Advance Income Tax Rulings.........................................................................................................................................................................9
Woon v MRN 1950 ................................................................................................................................................................................................... 9
INTERPRETATION OF THE ACT ..................................................................................................................9
Problems with Interpretation: ........................................................................................................................................................................... 9
How to assess what words mean? ..................................................................................................................................................................... 9
WHO ...................................................................................................................................................... 10
What: the tax base: ................................................................................................................................ 10
When: the taxation year. ....................................................................................................................... 10
How Much?............................................................................................................................................ 10
Corporate Tax Rates/Abatements........................................................................................................... 10
Small Business Deduction –Canadian controlled Private Corporations earning active business income. ... 11
How to collect Tax? ................................................................................................................................ 11
Who Bears the Burden of Proof? ............................................................................................................ 12
Johnson v MNR 1948 ............................................................................................................................................................................................ 12
Smerchanski v MNR 1976 .................................................................................................................................................................................. 12
Cohen v The Queen 1980 .................................................................................................................................................................................... 12
Galway v MNR 1974 ............................................................................................................................................................................................. 12
Civil Penalties.................................................................................................................................................................................................... 13
Criminal Prosecutions ................................................................................................................................................................................... 13
Income Tax Terminology and Concepts ................................................................................................... 13
Realization and recognition – ......................................................................................................................................................................... 13
Cost and Expense ................................................................................................................................................................................................... 13
Business Entities .................................................................................................................................................................................................... 13
Characterization.................................................................................................................................................................................................... 13
Timing......................................................................................................................................................................................................................... 13
Time value of Money ............................................................................................................................................................................................ 14
Tax Deferral ............................................................................................................................................................................................................. 14
HISTORY................................................................................................................................................. 14
1971 Tax reform!............................................................................................................................................................................................. 14
Post 1988 Changes: ........................................................................................................................................................................................ 15
POLICY: Objectives and Evaluative Criteria for the Income tax system: .................................................... 15
Objectives: .......................................................................................................................................................................................................... 15
Evaluative Criteria: ......................................................................................................................................................................................... 16
Neutrality: .......................................................................................................................................................................................................... 16
Simplicity: Tax should be workable and simple:................................................................................................................................ 16
TAX EXPENDITURES ................................................................................................................................ 16
JURISDICTION TO TAX ............................................................................................................................ 17
WORLD WIDE TAXATION ........................................................................................................................ 17
International Double Taxation................................................................................................................................................................... 18
1
Avoiding Canadian Tax through use of Foreign Corporation or Trust ..................................................................................... 18
RESIDENCE OF INDIVIDUALS ................................................................................................................... 18
Common Law Residence – IT 221R2....................................................................................................................................................... 18
Thomson v MNR 1946 - definition of resident ........................................................................................................................................ 18
Beament v MNR 1952 – not resident from 1941-1946 ........................................................................................................................ 18
Russell v MNR 1948 – kept matrimonial home ....................................................................................................................................... 18
Allchin v R 2003...................................................................................................................................................................................................... 19
Shih v R 2000 ........................................................................................................................................................................................................... 19
Schujahn v MNR 1962 ......................................................................................................................................................................................... 19
Hauser v R 2005 ..................................................................................................................................................................................................... 19
IT-221R3 .................................................................................................................................................................................................................... 19
Other 8 gajillian factors in IT 221R3: .......................................................................................................................................................... 19
Ordinarily Resident ........................................................................................................................................................................................ 20
McFayden v R 2000............................................................................................................................................................................................... 20
Nicholson v R 2004 ............................................................................................................................................................................................... 20
Temporary Absence ....................................................................................................................................................................................... 20
Sojourning for 183 Days ............................................................................................................................................................................... 20
Part Year Resident .......................................................................................................................................................................................... 20
RESIDENCE OF CORPORATIONS .............................................................................................................. 21
Residence of Directors .................................................................................................................................................................................. 21
De Beers Consolidated Mines v Howe 1906 ............................................................................................................................................... 21
Residence of Controlling Shareholders .................................................................................................................................................. 21
Unit Construction Co v Bullock 1960............................................................................................................................................................ 21
Evidentiary Difficulties with Shareholder Control – proof! ........................................................................................................... 21
Wood v Holden 2005 ............................................................................................................................................................................................ 21
Incorporation in Canada- statutory ......................................................................................................................................................... 21
RESIDENCE OF TRUSTS ................................................................................................................................................................................ 21
Thibodeau Family Trust v Queen 1978 ....................................................................................................................................................... 22
Garon v the Queen 2012 ..................................................................................................................................................................................... 22
Provincial Residence ...................................................................................................................................................................................... 22
CHANGE IN RESIDENCE STATUS: DEPARTURE TAX ....................................................................................................................... 22
Immigration to Canada ................................................................................................................................................................................. 22
DUAL RESIDENCY ........................................................................................................................................................................................... 23
IMPORTANCE OF THE CONCEPT OF INCOME ........................................................................................... 23
Policy: ................................................................................................................................................................................................................... 23
HOW THE ACT DEFINES INCOME: ........................................................................................................................................................... 23
SOURCE THEORY OF INCOME ................................................................................................................................................................... 23
SURROGATUM PRINCIPLE OF INCOME ................................................................................................................................................. 24
Tsiaprailis 2005 SCC ............................................................................................................................................................................................ 24
ENUMERATED SOURCES ............................................................................................................................................................................. 24
UNENUMERATED SOURCES ....................................................................................................................................................................... 24
Canada v Fries 1990 SCC.................................................................................................................................................................................... 24
Schwartz v Canada 1996 SCC .......................................................................................................................................................................... 24
Fortino v The Queen 1997 FCA........................................................................................................................................................................ 25
Manrell v The Queen 2002 FCA ....................................................................................................................................................................... 25
Proposed s.56.4:...................................................................................................................................................................................................... 25
So, is this income from a source? .............................................................................................................................................................. 25
R v Cranswick 1982 FCA ..................................................................................................................................................................................... 25
Bellingham v R 1996 FCA .................................................................................................................................................................................. 25
Stewart v the Queen 2002 ................................................................................................................................................................................. 26
CAPITAL GAINS....................................................................................................................................... 27
Damages and Settlements ...................................................................................................................... 27
2
IMPUTED INCOME .......................................................................................................................................................................................... 27
ILLEGAL INCOME ............................................................................................................................................................................................ 28
Buckman v Canada 1991 ................................................................................................................................................................................... 28
The Queen v Poynton 1972 ONCA .................................................................................................................................................................. 28
Eldridge...................................................................................................................................................................................................................... 28
INCOME FROM EMPLOYMENT................................................................................................................ 28
Distinctions between Employment or Business income................................................................................................................. 28
Gifford v R 2004 SCC............................................................................................................................................................................................. 28
CHARATERIZATION – Office or Employment (O/E) .................................................................................. 29
Sagaz Industries Canada v 671122 2001 SCC .......................................................................................................................................... 29
Wolf v The Queen 2002 FCA ............................................................................................................................................................................. 29
Weibe Door Services v MNR 1986 FCA ........................................................................................................................................................ 30
Pletch v R 2005 TCC.............................................................................................................................................................................................. 30
Royal Wpg Ballet v R 2006 FCA ...................................................................................................................................................................... 30
INCORPORATED EMPLOYEES ................................................................................................................................................................... 31
So how to structure Professional Business structure? .................................................................................................................... 31
TIMING – CASH METHOD ............................................................................................................................................................................ 31
Vesgo v MNR 1956 ................................................................................................................................................................................................ 31
WHAT IS “RECEIVED?”.................................................................................................................................................................................. 31
Jean-Paul Morin v The Queen 1974............................................................................................................................................................... 32
Markman v MNR 1989 ........................................................................................................................................................................................ 32
Blenkarn v MNR 1963 ......................................................................................................................................................................................... 32
SALARY WAGES REMUNERATION........................................................................................................................................................... 32
BENEFITS – GENERAL SCHEME................................................................................................................................................................ 32
2. Economic Advantage or Material Acquisition that confers economic benefit: ................................................................. 32
The Queen v Savage 1983 .................................................................................................................................................................................. 32
3. Benefits to Employees? ............................................................................................................................................................................ 32
Huffman v The Queen 1990 FCA.................................................................................................................................................................... 32
4. Convertible into Money?.......................................................................................................................................................................... 33
Tennant v Smith 1892 HL .................................................................................................................................................................................. 33
Waffle v MNR 1968 ............................................................................................................................................................................................... 33
BENEFITS IN RELATIONSHIP TO EMPLOYMENT ............................................................................................................................. 33
The Queen v Savage 1983 SCC ......................................................................................................................................................................... 33
How to VALUATION OF BENEFIT: ........................................................................................................................................................... 33
ALLOWANCES for income from Employment ..................................................................................................................................... 33
Distinguishing Reimbursements from Allowances ........................................................................................................................... 34
Selected Items of Benefits:........................................................................................................................................................................... 34
Home Relocation Benefits............................................................................................................................................................................ 34
Ransom v MNR 1967 ............................................................................................................................................................................................ 34
R v Phillips 1994 FCA ........................................................................................................................................................................................... 34
Canada v Hoefele 1996 FCA .............................................................................................................................................................................. 34
Legislative response: ..................................................................................................................................................................................... 35
COMPENSATION FOR LOSS OF EMPLOYMENT .................................................................................................................................. 35
NON TAXABLE AMOUNTS ........................................................................................................................................................................... 35
DEDUCTIONS FROM EMPLOYMENT INCOME .................................................................................................................................... 35
Delancy v The Queen 2004 TCC ...................................................................................................................................................................... 35
Hogg v R 2002 FCA ............................................................................................................................................................................................... 35
Legal Expenses 8(1)b..................................................................................................................................................................................... 36
Loo v Canada 2004 FCA ...................................................................................................................................................................................... 36
Blackburn v The Queen 2004 TCC ................................................................................................................................................................. 36
INCOME FROM BUSINESS OR PROPERTY: PROFIT.................................................................................... 36
Importance of Characterization of Income as Business or Ppty as a Source –mostly not distinguished ................... 36
Statutory Definition of “business” or “ppty” ........................................................................................................................................ 36
3
Manrell v R 2003 FCA – definition of ppty is very broad: ................................................................................................................... 36
Common Law Definition of Business: (time, attention, labour) .................................................................................................. 36
Smith v Andersons UK adopted by SCC in Stewart: ............................................................................................................................... 36
Stewart v Canada 2002 SCC ............................................................................................................................................................................. 36
How to Determine the Intention to Make a Profit? [Stewart test] .............................................................................................. 37
Walls v Canada 2002 SCC decided same day as Stewart ................................................................................................................... 37
Ludco Enterprises v Canada 2001 ................................................................................................................................................................. 38
Personal Endeavors (Hobbies) distinguished from Busi/Ppty .................................................................................................... 38
Landry v The Queen 1994 FCA Pursuit of personal pleasure........................................................................................................... 38
Hobbies: .............................................................................................................................................................................................................. 38
Payette v MNR 1978 ............................................................................................................................................................................................. 38
Cree v MNR 1978 ................................................................................................................................................................................................... 38
Sirois v MNR 1987 ................................................................................................................................................................................................. 38
Knight v MNR 1993............................................................................................................................................................................................... 39
Chequer v R 1988................................................................................................................................................................................................... 39
RENTAL PROPERTIES personal? Or commercial? ............................................................................................................................ 39
Maloney v MNR 1989 ........................................................................................................................................................................................... 39
Gambling as a Regular Activity .................................................................................................................................................................. 39
MNR v Morden 1961 ............................................................................................................................................................................................ 39
Walker v MNR 1951 ............................................................................................................................................................................................. 39
Luprypa v R 1997 .................................................................................................................................................................................................. 39
Leblanc v R 2006 TCC .......................................................................................................................................................................................... 39
Include Gambling Income in Tax Revenue?.......................................................................................................................................... 40
DISTINGUISH EMPLOYMENT FROM BUSINESS INCOME: ............................................................................................................. 40
CAPITAL GAINS DISTINGUISHED FROM PPTY ................................................................................................................................... 40
BUSINESS DISTINGUISHED FROM PPTY............................................................................................................................................... 40
Concept of Profit in Business/Ppty ......................................................................................................... 40
Financial Accounting [Generally Accepted Accounting Principles GAAP] vs Tax ................................................................ 40
JUDICIAL GUIDELINES FOR BUSINESS AND PROPERTY PROFIT ............................................................................................... 41
Key Points from: Canderel v The Queen 1998 SCC about determining profit for purposes of s.9(1) ............................. 41
So what are well-accepted business principles? ..................................................................................................................................... 41
Symes v Canada 1993 SCC ................................................................................................................................................................................. 41
Canderel v The Queen 1998 .............................................................................................................................................................................. 41
METHOD OF PROFIT COMPUTATION – METHODS OF ACCOUNTING...................................................................................... 41
INCOME FROM BUSINESS OR PROPERTY – INCUSIONS IN INCOME .......................................................... 42
INCLUSION RULES: ......................................................................................................................................................................................... 42
TIMING OF INCLUSIONS – “realization principle” ............................................................................................................................. 42
Ikea............................................................................................................................................................................................................................... 42
Cash method for timing to include income ........................................................................................................................................... 43
Sale of Property: when is an amount receivable from sale of goods and sale of real ppty? ............................................. 43
Services................................................................................................................................................................................................................ 43
Maritime Telegraph and Telephone FCA ................................................................................................................................................... 43
West Kootenay Power and Light Co 1991.................................................................................................................................................. 43
Hourly Basis services: .......................................................................................................................................................................................... 44
Modified Accrual Method:............................................................................................................................................................................ 44
Professional Services ..................................................................................................................................................................................... 44
Dividends ............................................................................................................................................................................................................ 44
Rent and Royalties .......................................................................................................................................................................................... 44
Sale v Rent or Royalty? ....................................................................................................................................................................................... 44
Interest ................................................................................................................................................................................................................ 44
Groulx v MNR 1967 SCC ...................................................................................................................................................................................... 45
Wood v MNR 1969 ................................................................................................................................................................................................ 45
Satinder v The Queen 1995 FCA ..................................................................................................................................................................... 45
4
INCOME FROM BUSINESS OR PROPERTY – DEDUCTIONS......................................................................... 45
1. Whether an Expense is Deductible: .................................................................................................................................................... 45
2. Timing: ............................................................................................................................................................................................................ 46
Income Tax Logic: ability to pay, equity and neutrality: (review of damn principles) ...................................................... 46
Equity .......................................................................................................................................................................................................................... 46
Neutrality .................................................................................................................................................................................................................. 46
Savings and Capital Expenditures ................................................................................................................................................................. 46
Accurate measurement of profit: ................................................................................................................................................................... 46
Certainty and Predictability ............................................................................................................................................................................. 46
Controlling the Abuse of Business Deductions ......................................................................................................................................... 46
Tax Policy as Public Policy ................................................................................................................................................................................ 47
EXPENSES MUST BE AN INCOME EARNING PURPOSE ................................................................................................................... 47
Non-Income Earning Expenses ....................................................................................................................................................................... 47
Definition of Personal or Living Expenses.................................................................................................................................................. 47
Personal and Mixed Expenses: .................................................................................................................................................................. 47
Common law tests: ................................................................................................................................................................................................ 47
Child Car Expenses: ........................................................................................................................................................................................ 48
Symes v Canada 1993 SCC - child care expenses as a business expense ..................................................................................... 48
Food and Beverages ....................................................................................................................................................................................... 48
Scott v MNR FCA .................................................................................................................................................................................................... 48
Entertainment Expenses .............................................................................................................................................................................. 49
Royal Trust Co v MNR 1957 ........................................................................................................................................................................ 49
Mixed Business and Personal Purpose ................................................................................................................................................... 49
Meals or Entertainment ................................................................................................................................................................................ 49
Stapley v Canada 2006 FCA .............................................................................................................................................................................. 49
Commuting Expenses .................................................................................................................................................................................... 49
Cumming v MNR 1967 ........................................................................................................................................................................................ 49
Housekeeping Expenses ............................................................................................................................................................................... 49
Thomas Harry Benton v MNR 1952 .............................................................................................................................................................. 49
Home Office Expenses s.18(12)................................................................................................................................................................. 49
Logan v MNR 1967................................................................................................................................................................................................ 50
Mallouh v MNR 1985 ........................................................................................................................................................................................... 50
COST OF ILLEGAL OR UNETHICAL ACTIVITIES ................................................................................................................................. 50
Kickbacks, Bribes and other Illegal payments 67.5 .............................................................................................................................. 50
Fines and Penalties 18(1)t and 67.6 ............................................................................................................................................................. 50
Damages and Similar Payments 18(1)a;b;e, 67 .................................................................................................................................. 50
Imperial Oil v MNR 1947.................................................................................................................................................................................... 50
65302 v The Queen 1999 SCC Poultry case –fines are deductible .................................................................................................. 51
McNeill v The Queen 2000 FCA- damages are deductible .................................................................................................................. 51
Summary on Deductibility of Damages .................................................................................................................................................. 51
REASONABLE REQUIREMENT for deduction S.67 ............................................................................................................................ 51
1. Unreasonable Amount attributable to Personal elements ........................................................................................................ 51
2. Unreasonable amount in non-arms length payments ................................................................................................................. 51
Mulder Bros v MNR 1967 ................................................................................................................................................................................... 51
Costigane v R 2003 TCC (went over in detail ........................................................................................................................................... 51
Aessie v R 2004 TCC .............................................................................................................................................................................................. 51
TIMING OF DEDUCTIONS ............................................................................................................................................................................ 52
Capital v Current Expenditures 18(1)(b), 20(1)(a)(b) .................................................................................................................... 52
Guay Ltee v MNR 1971 ........................................................................................................................................................................................ 52
Contingent Liabilities: ................................................................................................................................................................................... 52
Wawang Forest Products 1999 ................................................................................................................................................................. 52
CPR v MNR ONCA 1999 ................................................................................................................................................................................ 52
General Motors of Canada v R 2004 FCA ............................................................................................................................................... 52
Contested Amounts or Non-incurred Liabilities ................................................................................................................................ 53
Northwood Pulp and Timber 1998 ............................................................................................................................................................... 53
5
CAPITAL EXPENDITURES ......................................................................................................................... 53
How to Determine whether an expense is a Capital Expenditure? ............................................................................................ 53
1. Enduring Benefit Test- the main one ................................................................................................................................................. 53
British Insulated v Atherton 1926 ................................................................................................................................................................. 53
Johns Mansville Canada v R 1985 .................................................................................................................................................................. 53
BP Australia 1966 ................................................................................................................................................................................................. 53
Vallambrosa Rubber co 1910 .......................................................................................................................................................................... 53
Acquisition of Assets:..................................................................................................................................................................................... 53
Problems In Determining Whether An Expense Is A Capital Or Current Expenditure: ..................................................... 54
1. Small recurring expenditures: .............................................................................................................................................................. 54
2. Repair of Tangible Assets ........................................................................................................................................................................ 54
Earl v MNR 1993 .................................................................................................................................................................................................... 54
Canada Steamship Lines v MNR 1966 ......................................................................................................................................................... 54
Shabro investments v The Queen 1979 ....................................................................................................................................................... 54
3. Protection of Intangible Assets ............................................................................................................................................................. 54
Canada Starch Co v MNR 1968 ....................................................................................................................................................................... 54
Kellogg v MNR 1943 ............................................................................................................................................................................................. 54
MNR v Dominion Natural Gas 1941.............................................................................................................................................................. 54
Explaining the discrepancies between Canada Starch, Kellogg, Dominion Gas .................................................................... 55
Websites and Domain Names: ................................................................................................................................................................... 55
Corporate Takeover ....................................................................................................................................................................................... 55
Neonex V MNR 1978............................................................................................................................................................................................. 55
Goodwill .............................................................................................................................................................................................................. 55
Expenses with Respect to New Business ............................................................................................................................................... 55
Firestone v R 1987 FCA ....................................................................................................................................................................................... 55
Bowater Power v MNR 1971 ............................................................................................................................................................................ 55
Depreciation and Capital Cost Allowance Compared:...................................................................................................................... 55
Two methods of calculating depreciation:............................................................................................................................................ 55
Capital Cost Allowance and Depreciation: ............................................................................................................................................ 55
AN OVERVIEW OF CAPITAL COST ALLOWANCE............................................................................................................................... 56
Key Terms.................................................................................................................................................................................................................. 56
1. Capital Cost ......................................................................................................................................................................................................... 56
2. Capital Cost Allowance .................................................................................................................................................................................. 56
3. Un-depreciated Capital Cost........................................................................................................................................................................ 56
4. Proceeds of Disposition .................................................................................................................................................................................. 56
5. Recapture ............................................................................................................................................................................................................. 56
6. Terminal Loss ..................................................................................................................................................................................................... 56
7. Class Concept ...................................................................................................................................................................................................... 56
Retirement of Depreciable Property ....................................................................................................................................................... 56
Capital Gains .......................................................................................................................................... 57
Adjusted Cost Base: ........................................................................................................................................................................................ 57
Computation of Gain or Loss....................................................................................................................................................................... 57
Deemed Dispositions –.................................................................................................................................................................................. 57
Stop Loss Rules................................................................................................................................................................................................. 58
Superficial Losses: 54........................................................................................................................................................................................... 58
Personal-use property ......................................................................................................................................................................................... 58
Listed personal property .................................................................................................................................................................................... 58
PRINCIPAL RESIDENCE EXEMPTION......................................................................................................... 58
CHANGE OF USE .............................................................................................................................................................................................. 59
ROLLOVERS ............................................................................................................................................ 59
A. Transfer of Assets to a Corporation (or Partnership) ................................................................................................................. 59
B. Exchange of Securities.............................................................................................................................................................................. 59
C. Transfer to Spouse ..................................................................................................................................................................................... 59
6
D. Transfer of Farm Property to a Child................................................................................................................................................. 59
E. Transfer to a Capital Beneficiary of a Trust ..................................................................................................................................... 60
INVESTING AND TRADING: ..................................................................................................................... 60
Frequency of Transactions .......................................................................................................................................................................... 60
Scott v MNR:............................................................................................................................................................................................................. 60
Wood v. M.N.R. ........................................................................................................................................................................................................ 60
Forest Lane Holdings v. M.N.R ......................................................................................................................................................................... 60
Relationship to the Taxpayer’s Other Work......................................................................................................................................... 60
Cooper v. Stubbs ..................................................................................................................................................................................................... 60
Morrison v. M.N.R .................................................................................................................................................................................................. 60
Whittall v. M.N.R .................................................................................................................................................................................................... 60
Depreciable Property and Inventory ...................................................................................................................................................... 60
AN ADVENTURE OR CONCERN IN THE NATURE OF TRADE ........................................................................................................ 61
Intention to Trade:.......................................................................................................................................................................................... 61
Intention on Acquisition:.................................................................................................................................................................................... 61
Secondary Intention:............................................................................................................................................................................................ 61


Depends on how it is defined
“a levy enforceable by law, imposed by legislature for public purpose” or “a compulsory transfer of money from private
individuals/organizations to the gov not paid in exchange for some specific good or benefit”

Definitions are missing:
o Public purpose
o Imposed by legislature

“Fine”/penalty
o a fine is compulsory, imposed by publc body probably for public purpose – not generally called a tax
o intention is to deter behavior and not raise revenue – this not caught in definition above
o is CPP a tax or a benefit? Does the fee correlate with benefit received?
Tax Classification – 8 types.
1. Income tax – tax on income of tax unit
2. Excise tax – tax on qty/value of output of production ie gas, cigs, booze,
a. Sales tax on consumer
b. VAT – ie GST – tax on the actual value to the consumer
3. Wealth Tax – ie estate/succession duties or capital gains tax, capital tax
4. Tariffs – customs tariffs on imported goods
5. Head tax – set amount applied to individuals
6. Ppty tax – taxed on regular basis on real ppty owned by taxpayer
7. Transfer tax – ppty transfer tax on transactions or stamp duty on registration of shares
8. User tax/user fee – individual tax on use like hwy toll
Role and Purpose of Income Tax
1. Revenue - main purpose and primary source of revenue
2. Redistribution of income – tax from rich redistributed via social programs
a. From 2007: top 10% earners earn 35% total income and pay 53% of the income tax
3. Regulation of Private Activity – ie to encourage use of environment friendly tech for tax benefit or taxing environmentally bad techs.
Sources of Income Tax Law:
1. ITA – primary source enacted Dec 23 1971, in force Jan 1 1972. Very detailed provisions (not usually general). Interpretation per
Interpretation Act
A. History

Started in 1917 with War Measures Income Tax Act – supposed to be temporary but 1948 renamed Income Tax Act. Now almost 2500
pages

Originally simple, general, now specific detailed, technical b/c more complex transactions, income achieves social objectives,
legislative override of cl and rules to fight tax avoidance.
Structure of the Act
•
Part I contains the provisions that deal with the imposition of ordinary income tax on individuals, corporations, trusts and
partnerships
•
Part I.1 to Part XIV levy special taxes
•
Part XV deals with administration and enforcement
•
Parts XVI and XVI.1 deal with tax avoidance
•
Part XVII contains definitions used throughout the Act
•
Part I divided into 10 divisions A through J, Divisions B and E are divided into subdivisions
7
•
•
•
•
•
•
Division A deals with who pays tax and on what
Division B deals with the calculation of income
Division B subdivision a deals with income from office or employment; subdivision b deals with income from business or property;
subdivision c deals with capital gains; subdivisions D and D deal with other sources of income and other deductions
determine net income under Division B then make certain permitted deductions under Division C
Division D deals with income earned by non-residents
Division E sets out the rules for the calculation of tax payable
Legislative Process

Department (Minister) of Finance – implements tax policy; amendments to act/regs
o Amendments are announced in the budget
o The Budget is presented by Min of Finance to Parliament yearly q February. An estimate of anticipated revenue and
expenditures for the year.
o Proposed changes to income tax rules are announced in budget b/c major source of revenue
o Budget is secret to prevent tax avoidance
o Effective date of change is the date of the budget announcement.

Department of National Revenue (MNR) – administers the act
o CRA

Department (Minister) of Justice – they litigate the Act

Notice of Ways and Means – prepared by Dept of Finance to list and describe proposed amends, then followed by draft legislation.
Draft leg comes with technical notes to explain purpose of amendments. It is released with draft notes to allow for commends

Bill: comments received and considered then bill introduced in house then goes through normal parliamentary process (HofC and
Senate)

Time may elapse over a year but tax forms contain amendment b/c usually pass. Taxpayers don’t have to comply but they comply b/c
assume it will become law and apply retroactively.
Reliance on General Law:

Whether a person is an employee, independent contractor, partner, agent, beneficiary of trust, shareholder is all dependent on
general law and some provincial law
Provincial Income Tax Law:

Each province has income tax act but taxes are collected by federal gov (except QB); tax base determined by federal income tax law

Corporate tax is also collected by feds except QB and AB
B. ITARs – Income Tax Application Rules –

deals with disposition of ppty and stuff prior to 1972 to merge the Acts.
C. Income Tax Regulations –
a. s.221 anything “prescribed” means there are regs for it.
D. Tax Treaties
a. More than 80 of them! To avoid double tax and tax avoidance.
b. If ppl have residence, income or other connections with more than 1 country
c. Where there is inconsistency between the ITA and the Treaty, the treaty prevails.
E. Tax Cases ie CTC or DTC most litigated issues are:
a. Residence
b. Income from employment or business
c. Whether profit from sale of home is income from busi or capital gain
d. Are certain expenses deductible from income
e. Whether GAAP apply to income from business
f. Whether losses from unprofitable businesses are fully deductible from income.
CRA Publications:

CRA issues secondary source forms and guides, information circulars, interpretation bullegtins, advance tax rulings.

Do not have force of law but very reliable secondary source

Forms – T1 T2

Guides – General Income Tax and Benefit Guide; Corporation Income Tax Guide

Information Circulars – intended to provide info to general public (non-tech language) but NOT the law! CRA does not make the
law!

Interpretation bulletins: (IT) – directed at accountants and lawyers to provide CRA interpretation of tax law; CRA should assess
returns accordance to ITs and are kept up to date.
o Taxpwyer is usually safe to rely on IT but DO NOT HAVE FORCE OF LAW – courts look at them as persuasive to interpret
tax law but not binding.
o CRA can change IT – no doctrine of estoppel precluding them from changing it. (Stickel)
o CRA also not bound to assess a return consistent with IT - only if IT is consistent with the law.
Stickel v MNR 1972

Taxpayer assessed in way that contradicted the IT; taxpayer said relied on IT

Argument that Crown was estopped from deviating from IT was shot down – if the IT is incorrect, CRA not bound to follow it.
8
Advance Income Tax Rulings

CRA assesses in advance at request of taxpayer to see how the tx will be taxed and if they need to change the structure or do it at all.

When started this in 1970, CRA said they would regard advance tax rulings as binding.

The rules are individualized to facts so get your own!
Woon v MRN 1950

Case before advanced tax rulings but generally the same

Minister made assessment far in excess of what was suggested in advance ruling

Court held that assessment was correct in law and Minister was not estopped by previous ruling

This may be varied bc of 1970 CRA declaration to be bound by rulings
Private Publications

Looseleaf services from Carswell, Canadian Tax Reporter – updated weekly

CD Rom Carswell

Online – Taxnet, Protos, TaxCast

Textbook

Canadian Tax Foundation Publication
INTERPRETATION OF THE ACT

Previously a strict interpretation

Now a modern rule: “The words of the act 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” –

But some recent case law has seen a return to a strict interpretation

Canada Trustco 2005 SCC McL and Major
o A textual, contextual, purposive interpretation:
o “The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a
meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words plays a dominant role in the interpretive process. On the other hand, where the words can
support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of
ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the
provisions of an Act as a harmonious while.”
Problems with Interpretation:
A. size of act
B. no statutory definitions
C. real world complexity where taxes are imposed
D. doctrine of legislative supremacy
E. elusive legislative intent
F. lack of language precision
G. single sentences
How to assess what words mean?

Look for statutory definition

Ordinary, technical or legal meaning

Context

Purpose and intent – look at either the Act as a whole or the individual provision that may impose tax, allow expenditure, antiavoidance etc
TIPS:

Watch for “and” and “or”

Look for MAIN CLAUSE

Word patterns: “the total of … and …” (addition)
“the amount by which … exceeds …” (subtraction)
“that proportion of X that A is of B” (multiply X by A divided by B)
“the lessor of” (indicating a maximum)
“the greater of” (indicating a minimum)
Basic Questions:
1. Who – who is subject to the tax/ tax unit
2. What is the tax base? Ie income tax is tax on income duh
3. When?
4. How much? – tax rates
5. How?
9
WHO







Persons: S. 2(1): Persons pay tax
defined in 248(1) – includes corporation and executors and administrators of the person
o “individual” is a person not a corporation
o “taxpayer”: any person (indiv or corp) whether or not liable to pay tax
Trusts: s.104(2): trusts – deemed to be an “individual” – trust is a person for the purpose of the Act b/c of definition of “individual” in
248(1) means they are a person via 2(1) so they pay tax.
Partnership -not a person/legal entity, not a taxpayer itself. Individual partners may be taxed.
Residents s.2(1): residents are required to pay tax; read it with s.3 that income includes worldwide income (sources inside and
outside Canada).
Non-Residents: s.2(3) –
o must pay tax when person was employed in Canada, carried on business in Canada or disposed of taxable Canadian ppty at
any time in the year. {s2(3) applies to ppl who were not included in s2(1) therefore non-residents)
o Part XIII: non-residents must pay tax on income from ppty in Canada (Rent, royalties, interests, dividends)
Family as a tax unit: family is not taxed as a unit but there are some parts of Act that family shares benefits and impacts:
o Attribution rules
o Kiddie tax?
o Rollover of capital gains between spouses or parents children for farm ppty
o Tax credits for dependent spouse and children
o Transfers of credits between spouses and children (tuition)
o RRSP contribution for spouse/common law partner
What: the tax base:

S 2(1) tax is based on taxable income

S.3: what kinds of things are included in income.

Measured generally GAAP but varies and hard to see what constitutes income.
When: the taxation year.

S.2(1): income shall be payable on the taxable income for each taxation year

S.249(1) defines taxation year as:
o The calendar year for an individual - up to 12 months 241.1(4) and if they are a proprietor of business, the end of the fiscal
year. S.11(1) subject to 34.1 and 34.2
o The fiscal year for a corporation – up to 53 weeks for corporation 241.1(1)(a)

Yearly calculation may be arbitrary if person makes uneven income year over year

There is allowance for “loss carry-forward”
How Much?

S.117 sets out individual rates and s.123 sets out corporate rates
Individual Tax Rates

the federal tax rates for individuals for 2012 are:

0 to 42,707
15%

42,708 to 85,414 22%

85,415 to 132,406 26%

132,407 and up
29%
B.C. individual tax rates are:

0 to 37,013
5.06%

37,014 to 74,028 7.70%

74,029 to 84,993 10.50%

84,994 to 103,205 12.29%

103,206 and up
14.07%
Corporate Tax Rates/Abatements

38% via s.123

10% abatement via s.124(1) leaves 28% federal tax rate

the Act sets up rate reductions to increase international competitiveness
10


o manufacturing and processing reduces by 13% so 15% for them in 2012
s.123.4 if not manufacturing, then a 13% abatement
BC corporate tax is 10% so total for corporate income earned in BC is 25%
Small Business Deduction –Canadian controlled Private Corporations earning active business income.

On first $500k of income/profit of a small business, federal tax rate is 11%(17% abatement) [38-10-17=11%]
Tax Credits: s.118-118.95
Alternative Minimum Tax
•
S.127.5 it is calculated by adding back the various exemptions into income (e.g. include an additional 30% of capital gains) then
deduct $40,000 (to make sure that the alternative minimum tax only applies to persons making over $40,000 (i.e. wealthier) then
recalculate tax – compare this to the tax as initially calculated – then pay the higher of the two

purpose: b/c wealthier ppl were paying less tax
How to collect Tax?
Tax returns, payment, assessment, examination audits, reassessments, objections, appeals, the burden of proof and settlements, penalties,
process of investigation and prosecution.
CRA:

Tax Collection s.248(1) as minister is responsible for tax collection, administration of system of returns, assessments, refunds, audits
and enforcement.

Defined as MNR but almost all functions are performed by CRA

CRA has tax centres that deal with public to audit, collect, investigate, prosecute, send returns here, process and store files. 30
offices/head in Ottawa
Department of Justice

Provides legal advice and services for other dept of gov

Litigation in Tax Court of Canada, FC and SCC on behalf of CRA

Tax evasion prosecution done in provincial courts by counsel in regional offices of DoJ
Collection Procedures
Tax Return: s.150(1), 150(2), 150.1, 151, 156.1(4)

S.150(1) Taxpayer required to fill out form and return

S.150(1.1): individual only files if made enough income to be liable to pay tax

S.150(2) minister can demand that anyone pay tax even if not liable

Individuals must file by April 30th
Corporations

150(1) Required to file whether or not liable to pay tax unless registered charity 150(1.1)

due six months after corporations year end
The return

must be in the prescribed form T2 Corp or T1 individual

s.151: estimated tax payable on the return

s.156.1(4) payment must be included when filed

153.(1): tax withholding at employment source

s.227 penalty for failure of ER to withhold tax and failure to remit

s.227.1 if employer is corporation, directors are personally liable for failure to withhold and remit.

S.156: if tax not withheld at source, must pay in quarterly installments and pay balance on April 30

S.157(1) corporations required to pay 12 monthly installments based on estimate of liability – balance due w/in 2 months of end of
tax year

Interest is due on any shortfall at the two month due date.
Assessment

s.152(1): Minister (CRA) req’d to assess with all due dispatch

taxpayer may be entitled to refund

s.158 – notice of assessment sent back and if still owing must be paid forthwith otherwise pay interest

s.152/161 interest is paid at the prescribed rate – rate on 90 day treasury bills sold in the first month of the previous quarter plus four
percentage points (reg 4301); interest paid by CRA is same t-bill rate + 2 percentage points.
Examinations

after assessment, CRA does cross-checking between EE and ER
Audit

less than 5% of returns audited, mostly small business/self employed/corps/trusts

231.1(1) audit done at place of business; auditor can enter premsies w/o warrant, inspect books and records and require
owner/manager to provide all reasonable assistance and answer Qs.

S.231.2 – auditor requires warrant to enter a dwelling house

After completion of audit, may reassess
11
Reassessment

S.152(4) Minister can reassess a return again w/in 3 yrs of original mailing – cant reassess after this unless misrepresentation or fraud
or waiver; sometimes taxpayer may get favourable reassement so then you waive.

Or if subsequent losses for a taxpayer, can get reassessment for earlier years and deduct it?

S.162 163 if Minister feels there is a breach of the Act and needs civili penalty

If reassessment results in more tax, then its paid with interest from date it would have been due
Objection:

May resolve by discussion

165(2) Formal Notice of Objection: taxpayer disagrees with assessment and files + reasons 165(1)

Deadline is one year after due date of the return and 90 days after date of mailing of notice of assessment

Process: notice servied with chief of appeals in district tax office
o Taxpayer given oppty to make representations, the CRA will decide whether to confirm or vary assessment and then notify
taxpayer

Appeal:
o 169: If taxpayers STILL pissed, can appeal to TCC – has 90 days from CRAs decision to file appeal via informal procedure or
general procedure.
Informal Procedure

taxpayer elects when:
o amount of tax is less than $12 000
o amount of loss claimed is less than $24 000
o interest is the only issue

can appear in person or represented; costs may not be awarded, judgment rendered in 60d, no appeal allowed – decision is FINAL!
General Procedure

applies when:
o amt is great than $12k
o lsos is greater than $24k
o taxpayer does not elect informal procedure

has to be represented by lawyer; more formal; costs may be awarded against TP; no time limit on judgment; appeal to FCA then SCC
Criminal Matters:

tax evasion prosecutions via provincial courts as per criminal code.
Who Bears the Burden of Proof?
Johnson v MNR 1948

BOP is on the taxpayer to show that the assessment is wrong

BUT minister must disclose facts upon which assessment was made and onus is to rebut those facts

Reasons onus on taxpayer:
o 152(8): assessment is deemed to be valid and binding notwithstanding any error, defect or omission
o taxpayer is the one who has to establish that there is a basis of appeal
o taxpayer has access to the evidence to prove them facts wrong
Exceptions to burdens:
i.
Civil penalties: imposed on taxpayer when they 1. Repeatedly fail to report income or 2. Knowingly/negligently make false
statement/omission in return
a. 163(3) onus on Minister to prove the facts that the penalty was based on
ii.
Reassessment outside 3 yr period for fraud or misrep
a. 152(4) Minister has burden to prove fraud/misrep b/c assessed outside 3 yr period
iii.
Criminal Offence:
a. BOP on Crown as per usual if taxpayer charged under s.238 or 239
Settlement – CRA makes settlement agreements and both sides bound by terms of it.
Smerchanski v MNR 1976

Taxpayer agreed to waive appeal and was held bound to settlement agreement
Cohen v The Queen 1980

Minister not held bound to settlement agreement b/c Minister said he’d assess against the law – so cant be held to an illegal
settlement agreement

Overall effect is that the taxpayer is bound but the Minister is not
Galway v MNR 1974

The parties wanted to settle in a way inconsistent with the act then get a court order to enforce it.

But nope – first have to agree on application of law to facts

Discourages settlements?
Remission Order s23(2) of Financial Administration Act
12

Gov in Council can order a tax waived; only rarely used for hardship
Confidentiality

241: ppl working now or previously working prohibited from releasing taxpayer info

exception: for criminal proceedings, formulation of gov policy, enforcement of fed/prov laws
Civil Penalties

162, 163 civil penalties provided for:
i.
late filing of return
ii.
failure to file a return
iii.
repeated failure to file a return
iv.
failure to provide info on a prescribed form
v.
failure to report an item of income or making of false statement/omission in a return
vi.
misrep of someone else’s tax matters

prosecution under 239/9 is a judgment from CRA that civil penalty is inadequate punishment
Criminal Prosecutions

s.238 offence to fail to file a tax return or to fail to comply with other provisions of the Act
o strict liability but have defense of due diligence

239: offence to falsify records or to evade compliance with Act

Five investigatory powers
o 231.1: can enter business w/o warrant
o 231.2 can enter dwelling with warrant and can demand docs
o 231.3 judge can issue warrant for surrender of docs s/sz
o 231.4 allows “inquiry” to be held by hearing officer appointed by Tax Court
Income Tax Terminology and Concepts
Realization and recognition –
a. a cost is not recognized and included in taxable income until it is realized.
b. Revenue is realized (and recognized under ITA) when it is “earned” – ie a legal right to be paid or when it is received
c. A cost or expense is realized (and recognized under ITA) when it is payable or has been paid
Cost and Expense
d. Income and loss timing is different depending on the purpose of the cost
e. Cost incurred on ppty that is used over several years is a capital expense and cant be deducted in year it is incurred. Only if
cost is current it is used up and deducted in the same year.
Business Entities
f.
g.
h.
i.
Corporation: treated in law as a separate person and has all powers of individual person; treated as separate taxpayer under
ITA; business corporation tax rate is a flat rate not progressive like individuals
Partnership: 2 or more persons carrying on business in common with view to profit. Not a separate legal entity, and not
under ITA either. Income/loss of partnership business allocated to partners for tax purposes via person/corporate income
tax return
Sole Proprietorship – carrying on business w/o partner and corporation. Any income is SP’s personal income
Trust: not a separate legal entity but treated as a taxpayer for ITA. Treated differently than corporation
Characterization

Character of amount is only taxed if “income from a source” for tax purposes

Gains, losses, regular, capital gains, regular losses, capital losses, current expenses, capital expenses, income from employment,
income from business all different.

Litigation has to do with the characterization of income!
Timing



Generally want to defer income and recognize losses
Two methods:
1. Cash Method – revenue is included in income when received and expense is deducted when paid. Used for employment, office,
ppty and farming income
2. Accrual Method – item included when receivable (legal right to be paid), expense deducted when payable. Used for income from
business.
Capital gains (or losses) recognized when ppty is disposed and proceeds are receivable.
13
Time value of Money

The amount that a future cash flow is worth today is called “present value”. Ie $100 received 5 yrs from now is worth $78 now – b/c if
you had $100 now you’d invest at %5.

The process of determining present value of future cash flow is called “Discounting”

The present value ($78) is the discounted value of the future cash flow ($100 5 yrs from now)

The interest rate use to calculate present value is the “discount rate”
Tax Deferral

It is in taxpayer interest to pay tax later than sooner. Tax deferred is money that can be invested rather than giving it to the gov and
you get to keep the interest! (less the tax on the interest)

Recognition of an expense or loss reduces tax payable – so recognizing a loss/expense now reduces tax now and saves money that can
be invested to earn interest for you. Like RRSP, RESP
Marginal Tax Rate: the rate a person pays on the next $1 of income. b/c tax rates are progressive
Average tax rate – total tax divided total income.
HISTORY

Tax collection assigned to feds via Constitution Act s. 122

Feds raise funds 91(3); raise by any mode or system of taxation

Provinces via 92(2) – direct tax only within the province for provincial purpose
What is direct vs indirect tax?

Direct is demanded from the very person who should pay it. Indirect are demanded from one person to indemnify another.

Income tax is direct b/c can’t pass on tax; excise/customs is indirect b/c taxpayer can pass on to consumer.
Provincial Income Tax

Direct tax like property tax, corporate tax, inheritance tax (rather than income tax)

BC, PEI got income tax early 20thc and rest between ’23-’39. Last 3 in 1962.
Federal Income Tax

First taxes in 1917; intended to be temporary but rate just went down after the war.
Federal Provincial Agreements
1. Tax rental agreements
a. Provinces agreed to let feds collect in 1941 and they were compensated by fed grants.
b. Then feds convinces the provs for 5 yr rent agreement.
2. Tax collection agreemnts – replaced renting in 1962
a. Provinces imposed own income tax at own rate but feds collect as percentage of fed tax
b. So the ITA was the basis for all taxing – single document.
c. Ontario is in for personal income, not corporate, AB out of corporate; renewed q5 years
d. 1997: provinces allowed to compute tax directly on taxable income rather than percentage
e. QB still does own corporate tax
1971 Tax reform!
1. Carter Commission Report – accountant from Toronto, 6 volume report
a. Philosophy is that all gains in wealth should be taxed (incl capital gains, gifts, inheritances, windfalls)
b. Opposition so led to White Paper 1969 and House and Senate reports that accepted only SOME of Carter recco’s. But
committees said White Paper went too far too!
c. Finally ITA 1971 – in effect January 1, 1972:
i. Broadened the tax base
ii. Restructured the tax rates
iii. Altered the taxation of corpos and sharehodlers
2. Base Broadens!
a. Major: inclusion of ½ capital gains + adult training allowance, research grants, scholarships, EI benefits [but most
scholarships are exempt]
b. Deductions increased for pensions, savings plans, capital losses, EI, child care, moving etc
3. Rate Structure:
a. Increased personal and spousal exemption to reduce rate at top end
b. Slight increase in overall rates but increased deductions/exemptions
c. Taxable income rose only for the highest tax bracket b/c of CG inclusion
4. Integration of Corporate and Personal Tax through gross-up
Actual Income Earned Through Corporation:
Income (Revenues less expenses)
$100
Tax at 50%
50
_____
After-tax Income to Corporation
$50
Dividend to Sole Individual Shareholder
$50
14
Gross up
50
_____
Taxable Income of Shareholder
Tax on individual shareholder at 30%
Less Dividend Tax Credit
(that represents an estimate of the tax the
corporation would have paid income that
would have allowed a dividend of $50 to
the individual shareholder)
Net Tax Due / (Refund)
5.
6.
$100
$30
$50
($20)
Indexing
a. Granting credits instead of deductions; partial de-indexing b/c of inflation over 3% - gov revenues increased w/o increasing
tax rates.
1988 tax reform: 1987 White Paper Recommendations:
a. Flatten Rate Structure:
i. Number of tax brackets reduced; bottom two rates are higher but changed deductions to credits; top rate lower
by 5% than pre 1988
ii. Rates were supposed to increase incentive to work and save
b. Base Broadening:
i. Capital gains went to 2/3 then ¾ and elimination of deductions and business expense deductions.
c. Convert Deductions to Credits
i. Deductions that changed to credits were: basic personal exemption, dependent spouse, other dependent, CPP, EI,
charities, tuition.
ii. Supposedly changing to credits improves equity.
d. General Anti-avoidance Rule:
i. Introduced in 1988 that was codification of previous case law; application of the provision is uncertain b/c
language is vague.
Post 1988 Changes:
added fourth bracket, lowered capital gains tax to 50% from 3/4; covers same-sex spouses, added GST and child tax benefit; doubled
penalties for failure to file a return; added kiddie tax to reduce income splitting with children
7. 2006-now:
a. GST reduced, lowest bracket reduced, increased persona/spousal credits; under-18 credit back, corporate tax rate further
reduced for corps and CCPC small business deduction
b. Increase in tax depreciation rates for bldgs., equipment
c. Increase in lifetime capital gains exemption for small business and farms to $750k
d. exemption for capital gains on public company shares donated to charities and on employee stock options
e. fixed up the dividend gross-up and tax credit to fully integrate it for publicly-held companies
f. for seniors they increased the age credit, increase pension credit, added income splitting for pension (i.e. transfer unused
credit to spouse) and increased age when income must be received from RRSPs
g. introduction of a $100 per month child care benefit for children under 7
h. tax relief for low income earners
i.
increased the textbook credit; increased RESP limits, and tax exemption for scholarships
j.
higher depreciation rates for environmentally friendly energy generation equipment
POLICY: Objectives and Evaluative Criteria for the Income tax system:
Objectives:
1. Raise revenue – main purpose. Major sourse for both feds and provs. 61% of gov revenues, GST and EU 13% ; customs 7%; Provs
income tax is 31% of revenues; PST 22%; Federal tx payment 16%
2. Other objectives:
a. Redistribute income
b. Stabilize economy
c. Pursue economic growth – to lower tax rate or give concessions
d. Correct market failures – envinomrnetal pollution by producer – tax the producer who polluted the river!
e. Promote international competitiveness – to compete with low US corporate rates
f. Balance between diff sources of revenue like GST
g. Promote activities or industries – like film industry
h. There are tonnes others and some are incompatible with others.
3. Once you have the objective, you evaluate it to find a way to do it equitably, neutral and simple:
15
Evaluative Criteria:
1. Equity: Carter Commish says that equity should be the major secondary objective of the tax system
a. Horizontal –ppl in similar circumstances should be treated the same way. Difficulty is figuring out what is “same position”
b. Vertical – ppl with greater ability to pay, pay more. Difficult to measure ability to pay/equality of sacrifice. Hard to take into
acct family situation. Also hard to get vertical equity b/c must look at rate of tax higher that a rich person should pay, the tax
unit (family v indiv) etc
c. How to measure ability to pay or equality of sacrifice? – must evaluate the tax on the benefit provided by the income
i. Benefit Theory: that ppl in relationship share benefits, so family unit of tax – add up all income and divide by # of
ppl benefiting.
ii. Legal Control Theory: you get taxed on the income that you have legal control over. Carter Commish says: equity
requires:
a. Tax levied at progressive rates;
b. Tax be levied on a comprehensive tax base;
c. Tax be levied on families as opposed to individuals;
d. Tax concessions to particular industries or activities be avoided; and
e. Corporate and personal income tax on corporate profits be integrated to avoid double
taxation [neutrality]
Neutrality:
b.
c.
d.
e.
Definition: one that is designed to bring about minimum change in the allocation of resources w/in private sector of
economy (per Carter)
i. Tax system should interfere as little as possible w/ market operations. If neutral, then how ppl work, invest,
consume are the same as if there were not taxes.
ii. If behavior IS influenced, the allocation of resources is different and thus inefficient.
iii. A tax-induced change in behavior is desirable but changing behavior can be done more effectively w/o tax policy
changes.
Different betw neutrality and equity:
i. Neutrality does not achieve equity. Ppl still have different ability to pay a neutral tax
ii. BUT, neutrality violations often also violate equity (like charity deductions – non-neutral contribution means they
pay less tax therefore inequitable)
iii. So that’s why deductions were changed to credits.
Deliberate Policies: RRSP to make savings
Unintended effects:
i. No deductions for income from employment, lower rate for small business corps means that more ppl
incorporate, deductions for business related travel food etc subsidizes restos
Simplicity: Tax should be workable and simple:
f. Comprehensible – do ppl know how to do their taxes?
g. Certainty – predictable/determinable
h. Compliance convenience – low costs make easy to comply with,
i.
Administrative convenience – cost of collection and enforcement low so don’t lose revenue
j.
Difficult to evade and avoid.
TAX EXPENDITURES

Tax expenditure is a tax concession that costs gov.

Until 1979 tax expenditures not accounted for in budget; no examination to see if a concession was doing what it was supposed to be
doing

Then attempted to measure and ID tax expenditures and take into acct along with other expenditures.

1981 budget to reduce tax concessions, thus increasing tax base and allowing for reduction in tax rate. Started publishing the
expenditures.

Not easy to figure out what an expenditure is so hard to assess them
How should Tax Expenditures be Assessed?
1. Identification: some deductions/credits are expenditures for generating income and not really preferences but just to determine
income
2. Negative tax expenditures
a. Some taxing is to discourage some behavior by taxing that behavior more heavily (pollution control) this is an OFFSET to
positive tax expenditures.
b. Noted separately from tax expeditures
3. Estimating the cost of tax expenditures.
a. Cost is estimated by simulating the change in fed revenues if that specific provision was eliminated and everything else the
same
b. But removing provisions affects behavior and cant measure that!
16
Tax expenditures, neutrality, equity

TE should be analysed in terms whether their objective was achieved. (how much did it cost, was objective fulfilled, who benefits
from it, does it do it in most cost-effective way)
Problems with Tax Expenditures
•
generally an assistance program delivered through the tax system should be discouraged because:
i.
of the “upside-down” effect of tax deductions and the failure of either deductions or credits (except refundable credits) to
help those without any taxable income;
ii.
the difficulties involved in measuring the costs and effect of a tax measure;
iii.
the difficulty of limiting the size of a tax expenditure by placing a cap on it;
iv.
administrative problems of having CRA administer a wide range of social assistance programs instead of more appropriate
departments or agencies;
v.
the resulting complexity of the Act and the tax returns; and
vi.
erosion of public confidence in the income tax system when so many groups are allowed tax loopholes
Problems with Direct Subsidies
•
but direct subsidy programmes have their flaws as well:
i.
can be hard to control and target effectively;
ii.
administratively costly to administer;
iii.
discretionary – allows allocation where needed but risk of officials succumbing to pressures from Parliament and lobbyists
iv.
Negative Income Tax
•
negative income tax system could replace a variety of assistance programmes with a single income-tested basis for the programmes
JURISDICTION TO TAX
Theories on how to justify paying tax:
1. Economic allegiance theory: tax on sufficient connection to the country based on:
a. where income is taking place
b. where supplies of capital are located
c. where consumers of goods and services are
2. Benefit theory:** those who benefit from public services of a country should pay tax for costs.
3. Ability to pay: - tax Canadian residents on worldwide income – have ot measure ability to pay based on worldwide
4. How to Enforce?
a. Residence = taxpayer here
b. Source – get at funds before they leave the country
Jurisdiction approaches to tax:
1. Residence as a tax jurisdiction – this is principal factor in Canada
a. Benefit theory: largest class of taxpayers with strong social/economic connection; moral obligation b/c of services;
enforcement is easier b/c ppl live here so easier to enforce physically.
b. Disadvantage: hard to figure out residence
2. Citizenship – US uses this only. Benefit Theory: All citizens get benefits from gov even if not in country. Enforcement happens b/c ppl
are threatened with losing their citizenship. Problems? Excludes ppl who live in the country but aren’t citizens
3. Domicile: mostly abandoned.
a. Domicile of origin = determined at birth usually fathers domicile, women assumes domicile of husband;
4. Source – most countries tax this way. Taxed on where the income comes from. May resolve dblt taxation if all countries did this.
a. If your income comes from within the country, then you are using the services of that place
b. Easy to enforce b/c tax before the $ leaves the country
c. Ability to pay is tough b/c rich ppl could have their income come from many different sources.
WORLD WIDE TAXATION
Taxation of residents

2(1): taxable income by every person resident in Canada at any time of year.

S.3: taxable income is world wide income

S.114 part time resident not taxable on part of year for which person is not resident

S.126 foreign tax credits/deduction for tax paid in another country + tax treaty
Taxation of non-residents:

Limited to certain types of income

S.2(3) – person who was
a) Employed in Canada
b) Carried on business in Canada
c) Disposed of taxable Canadian ppty
o At any time in the year or previous year must pay income tax on taxable income earned in Canada
17






“previous year” is for income from employment
non-residents not taxed on world-wide; only Canada source
115: “taxable income earned in Canada” is: employment income, business income, taxable capital gains/losses from taxable Canadian
ppty.
248(1): “taxable Canadian ppty” = ppty that has a reasonably permanent connection to Canada and it is administratively feasible to
collec the tax:
i.
real ppty in Canada – tax must be paid by purchaser if vendor is non-resident (s.116)
ii.
capital ppty used by non-resident to carry on a business in Canada
iii.
share of capital stock corpo that is resident in Canada not listed on stock exchange
iv.
share of non-resident corpo….???
v.
share of listed Canadian corpo if >= 25% owned by non-resident person.
This income taxed same as resident and same rates as s.117. but JUST on Cdn source.
212 (Part XIII): “taxable Canadian ppty” EXCLUDES investment income like divideds, interest, rent, royalties, trust income,
maintenance, pension, alimony, annuities. Pay 25% on that.
i.
215: resident must deduct and withhold tax from payment to the non-resident. b/c hard to enforce and collect otherwise.
International Double Taxation

dbl taxed when resident of more than 1 country, taxes are imposed on non-residents and some countries like US tax based on
citizenship.

126: foreign tax credit- can deduct foreign tax paid but limited to the amt of Cdn tax.

Treaties:
o With over 80 countries; in law b/c legislation that treaties overrides ITA
o Tie breaker rules – for tax evasion so countries exchange information
o Promotes investment by reducing withholding taxes for investments by non-residents.
o S.212 taxation on investment incomes is sometimes reduce to 10 or 15% by treaties.
Avoiding Canadian Tax through use of Foreign Corporation or Trust

There are tax havens that impose little or no tax so income can be diverted either by having corporation there or making residence
there

Can use foreign corporation/trust to earn income so it is low-taxed and can income split and tax deferral.

FAPI Rules – Foreign Accrual Property Income Rules s.233.2 – Canadians must report ownership of investments outside Canada with a
total cost exceeding $100k
o Tax investment income derived outside Canada by a corporation controlled by a taxpayer resident in Canada (controlled
foreign affiliate)
RESIDENCE OF INDIVIDUALS
Common Law Residence – IT 221R2
Thomson v MNR 1946 - definition of resident

T announced Bermuda as residence after selling house in NB but spent not time in Bermuda

Spent all time in US; had house available for occupancy year-round; 9 yrs later started returning to Canada x 5 mos q yearly and built a
house.

Wife and children came with him.

Held: living in Canada was deep rooted as it was in the US – more time in US was only b/c it was the primary residence – was a dual
resident so:

Key points:
o For purpose of income tax, every person has a residence at all times
o Do not actually need a place of abode/shelter
o May have more than 1 residence
o Residence is spatial bounds where a person lives
o Intention is relevant but NOT determinative. (T’s intention was Bermuda residence)
Beament v MNR 1952 – not resident from 1941-1946

Posted overseas w/army; 1 short visit x weeks; married in England and had kids and house there.

Held not resident b/c absence of a HOUSE in Canada where he could return – intention not determinative even if he knew absence
was temporary, he was still not a resident til he came back in 1946.
Russell v MNR 1948 – kept matrimonial home

Absent from Canada b/c of war but maintained matrimonial house + family here

Held: resident b/c physical presence not necessary to be found resident.
18
Allchin v R 2003
•
A worked in US 1992-1997; stayed with friends/relatives in US; set up US bank acct, bills sent to US address, hired a US immigration
lawyer to move family to US BUT
•
Hubs and kids live in Canada from 1993-1995; ON DL; OHIP: club membership; hubs swore affidavit when they bought ppty; also US
accommodation was temporary
•
Held: Resident from 1993-1995
Shih v R 2000
•
S immigrated w/wife + kids + bought house in Canada but returned to Taiwan; visited with total 59 day/year; residential ties to
Taiwan; other family there; job in Taiwan; lived x 25 yrs in house he owned; Taiwan DL and bank acct. Wife and kids here for
education
•
Held: wife and kids not strong enough in light of other factors; said link to Canada was tenuous
•
This sounds sexist vs Allchin.
Schujahn v MNR 1962
•
Transferred to US Aug 2 1957 and put house up for sale but kids/wife stayed til house sold Feb 1958
•
Held: Not resident even though home/kids.
•
Was the taxpayer resident for whole of 1957 or just until 2Aug? Court said he gave up residence on 2Aug and wife and kids were
there only to reasonable facilitate sale.
•
[on the other hand, could argue no dwelling place in Canada but substantial ties]
Hauser v R 2005
•
Air Canada pilot 1992-1995; worked in Florida, rented apt in Canada, moves to Bahamas
•
Shipped all his shit to Bahamas (car etc) and opened a bank acct there but spent Xmas and hurricane season in Canada and he
remained an Air Canada pilot, held Transport Canada license, belong to a Canadian flight union, joint bank acct in Canad where his
salary was deposited. Had to be at Pearson 24 hrs before each flight and two hours from Pearson when on stand-by. Clothes kept at
MIL’s in Canada; in Canada x many days 1997-2001
•
Held: Nice try – still a resident. Can be a resident of two places at once (Thomson)
•
So you don’t look at the place where the person has the greatest ties, just that substantial ties remain.
Remember:
•
Proof of residence elsewhere does not mean one is not a Canadian resident (more than one country resident – Thomson)
•
BUT limited ties to Canada and settled routine elsewhere may be relevant (cause still have to have a residence somewhere Thomson)
IT-221R3

Residence: a place where a person in the settled routine of life normally or customarily lives.

Consider all relevant facts.
i.
Main: place where taxpayer has a right to stay (parents, wife, inlaws)
ii.
Residence of taxpayers spouse and children.
Other 8 gajillian factors in IT 221R3:
•
frequency and duration of visits
•
past and present habits of life
•
purposes of stay in Canada
•
presence of social and business connections to Canada vs. ties elsewhere
•
ownership of dwelling house in Canada or rental of dwelling house on long-term basis
•
residence of spouse, children and other dependent family members
•
memberships with religious, recreational or social clubs, unions or professional organizations
•
registration and maintenance of cars, boats, airplanes in Canada
•
credit cards issued by Canadian financial institutions, stores, etc.
•
local newspaper subscriptions sent to a Canadian address
•
rental of safety deposit box or post office box in Canada
•
insurance through Canadian insurance company
•
mailing address in Canada
•
telephone listing in Canada
•
stationary with Canadian address
•
Canadian bank accounts
•
membership in a Canadian pension plan
•
will prepared in Canada
•
burial plot in Canada
•
ownership of Canadian vacation property
•
employment in Canada
•
maintenance or storage of personal belongings in Canada
•
severing of ties with former country of residence
•
personal property in Canada (such as furniture, clothing, automobiles and recreational vehicles),
•
(b) social ties with Canada (such as memberships in Canadian recreational and religious organizations),
19
•
(c) economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and
Canadian bank accounts, retirement savings plans, credit cards, and securities accounts),
•
(d) landed immigrant status or appropriate work permits in Canada,
•
(e) hospitalization and medical insurance coverage from a province or territory of Canada,
•
(f) a driver’s license from a province or territory of Canada,
•
(g) a vehicle registered in a province or territory of Canada,
•
(h) a seasonal dwelling place in Canada or a leased dwelling place referred
•
a Canadian passport, and
•
(j) memberships in Canadian unions or professional organizations.
And also considered per IT-221R3:
•
the retention of a Canadian mailing address,
•
post office box, or safety deposit box,
•
personal stationery (including business cards) showing a Canadian address,
•
telephone listings in Canada, and
•
local (Canadian) newspaper and magazine subscriptions
Ordinarily Resident
•
s. 250(3) residence means “ordinarily resident”
•
Thomson suggested “ordinarily” is superfluous but really if taxpayer maintains ties to Canada then will be considered ordinarily
resident of Canada.
McFayden v R 2000
•
M was engineer posted to Japan x 3-4 yrs; sold matrimonial house, 2 cars and motorcycle here
•
No fixed plan to return here; found employment Sept 1994 but job didn’t last so came back to Canada 1995; lived with mom, then
moved to another house he owned all along but rented out.
•
2 joint bank accts, APEG ON; furniture stored there; safety deposit box; RRSP, credit card, ON DL
•
held: resident for all years – ties x 3 yrs were significant
Nicholson v R 2004
•
N worked for a US co in UK Jan 1995; came back to Canada position in 1996
•
Divorced wife earlier in 1993 but they stayed in Canada in family home; owned joint title in division of ppty. BUT got 36 month work
permit in UK (tie to UK); salary in UK bank acct; used ON DL; OHIP; Cdn bank acct to make support payments but collapsed Cdn RRSP;
only 1 visit limited duration
•
Held: not a resident – had no intention to return to Canada except to visit; settled nature of life in UK; ordinarily resident there;
presense was not temporary
•
In this case, Gillen says he wasn’t getting any Canadian taxpayer benefits.
Temporary Absence
•
CRA says if you leave Cdn for less than 2 yrs, you are presumed to continue to be resident unless you can clearly establish all
residential ties are severed. [not the law, just what CRA says- they’ll challenge ya]
•
Date of departure: is important for figuring out end of obligation to pay worldwide tax and that they gotta pay departure tax.
Sojourning for 183 Days
•
s.250(1)(a): deemed resident if sojourns in Canada 183 days or more and taxed on world-wide income.
•
250(1)(b)-(f): deems armed forced, fed/prov civil servants stationed outside Canada as resident.
•
“soujourn” means less than resident but more than visit – vacation or business trip
•
compare to residence? Less than 183 can still make you a resident; soujourning has no relevance for tax purposes unless greater than
183.
Part Year Resident
•
114: corps resident of Canada for part year are taxed on worldwide for whole year!
•
114 for individuals gives relieve b/c only pay world-wide income tax on part of the year you were in Canada; the rest of the time, you
only pay tax on the income you earned in Canada.
•
BUT: problematic when you are in Canada for greater than 183 days then 250(1)(a) applies and deemed resident for the whole year.
•
Part year resident explained…
•
Eg: in Schujahn had taxpayer been found not to be resident his stay from January 1, 1957 to Aug. 2, 1957 would have meant he would
have sojourned in Canada for more than 183 days and he would be deemed to be resident for the whole year
•
s. 114 would not applied and he would had to pay tax on world-wide income for the whole year
•
as it was, he was found resident for only part of the year to August 2, 1957 and thus s. 114 would apply and he would be entitled to
be taxed on his world-wide income for only that part of the year that he was resident
•
the text says that s. 114 and s. 250(1)(a) [the sojourning rule] don’t interact well
•
the argument is that if one is sojourning in Canada for 184 days then one is taxed for the whole year on worldwide income but if one
is resident for a 184 day period only in the year then one is taxed on one’s worldwide income for only roughly one-half a year
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RESIDENCE OF CORPORATIONS
Incorporation residence: Common Law
•
s.2 and 3 say tax on persons, s.248(1) say corporation is a person therefore need to determine residence of corporation.
•
Primary Q is “where the central management and control actually resides” ie where the directors meet b/c directors manage and
control the affairs of corpo.
Residence of Directors
De Beers Consolidated Mines v Howe 1906
•
Corpor inc’d in South Africa/ H/O in SA; mining business in SA; majority of board of directors lived in England, met in England, made all
policy decisions in England.
•
Held: corpo is resident of England – nice try bros. must have control and management residing.
Residence of Controlling Shareholders
•
Shareholder residence normally irrelevant (b/c directors residence matters)
•
BUT some shareholders are major controllers b/c they can elect and remove directors and influence decisions.
Unit Construction Co v Bullock 1960
•
3 corpos in Kenya, carried on business, directors lived and met there but the corpos were subsidiaries of English and were effectively
controlled by English parent directors.
•
Held: location of central management is a Q of fact – here in England.
•
The one sharehold of the Kenya corps was a British corpo with directors who all lived in England and controlled the Kenyan board.
•
They were the “operating mind”
Evidentiary Difficulties with Shareholder Control – proof!
•
Hard to tell if director is influenced by shareholder b/c hard to get evidence
•
De facto shareholder control vs de jure control – courts appear unwilling to conclude de facto shareholder control…..
Wood v Holden 2005
•
Transfer of shares that would not get capital gains tax if between non-resident corpos
•
Transfer between BVI and Netherlands corpos – scheme to shelter capital gains tax
•
Held: management and control of Netherlands corpor was in England and thus resident in UK
o Basis: resolutions passed by Dutch directors were based on instructions from English accounting firm and by themselves
theyw ere probably insufficient informationto make decisions.
•
Appeal overturned and said that the decisions were made by the Dutch directors – just b/c they were ill-advised is too tenuous to say
that someone else told them what to do.
•
Must distinguish between cases when management control was exercised via a corpos OWN board or when that board’s functions
were usurped.
Incorporation in Canada- statutory
•
common law control and management test too uncertain and makes it easy for corpos to change shit around.
•
S.250(4)(a): all corpos incorporated in Canada after 26Apr1965 are resident of Canada.
•
250(4)(c): incorporated pre-1965 April 26/7 deemed resident of Canada if they were resident in Canada and carried on business after
26Apr1965.
•
So basically most corpos incorporated in Canada are resident of Canada. (statutory) and if they are not incorporated here, then if
there management/control is here they are resident (common law)
•
This makes it possible for corpo to be resident in more than one country.**
RESIDENCE OF TRUSTS
•
s. 104(2) trust is deemed to be an individual
•
s. 248(1) “individual” – defined to mean a person other than a corporation
•
thus a trust is a person and thus a taxpayer per ss. 2 & 3 and need to determine the residence of the trust BUT Act does not supply
rules for determining residence of trust
•
CRA position per IT-447 (1980) is that a trust resides where the management and control of the trust resides - see moodle site for
the IT
•
Support per s. 104(1) that provides that a reference to a trust is to be read as a reference to “the trustee … having ownership and
control of the trust property”
•
e.g. with individual trustee it will depend on the residence of the individual
•
but the control doesn’t necessarily reside with the one trustee
But what about more difficult cases for trustee residence: two scenarios
(i) trustee is individual who is not resident in Canada but where most of the business of the trust is in Canada – thus strong economic link to
Canada and thus arguably should contribute to the expense of government (i.e. benefit theory approach suggests trust income should be taxed
in Canada)
(ii) trust with several trustees resident in different countries
21
Trustees Resident in Different Countries
•
s. 104(1) – “ownership or control of the trust property”
•
if there is more than one trustee and the trustees reside in different countries, then which of the trustees owns or controls the trust
property?
•
trustees jointly own the trust property per law of trusts and, unless the trust instrument provides otherwise, the trustees must act
unanimously – thus no trustee, or even a majority of trustees, owns or controls the trust property
•
perhaps one could use the corporate law approach from the Bullock case and look to the residence of the de facto control of the trust
– [does this fit with the s. 104(2) notion of trust as an individual?]
Thibodeau Family Trust v Queen 1978
•
3 trustees; 2 in Bermuda, 1 in Canada; minister assessed that trust is resident of Canada.
o b/c Canadian trustee was member of family of trust beneficiary , was CEO of corpo owned by trust and involved with
investment of the trust $
•
trust instrument allowed majority of trustees to make binding decisions; de facto management in Bermuda and dint always listen to
Canadian trustee
•
Held: applied the de factor central management and control test – did not lead trust to be resident of Canada b/c central
management control was in Bermuda! Meetings there, lived there, decisions by majority, didn’t always follow the Cdn.
•
Dicta: this test doesn’t work well with trustees b/c trustees cant delegate their work b/c of fiduciary duty and is not supposed to take
director from the settlor or the beneficiary!
Garon v the Queen 2012
•
2 ppl each hold 50% shares in holdCO; exchanged those common shares for fixed value preferred shares (redeemable and retractable
at set price); then holdCO issued new common shares to 2 new corpos and then these two issued common shares to Bermuda family
of original 2.
•
Trustee was Bermuda TrustCO, managed by PWC (Bermuda).
•
Capital gains would accrue in Bermuda until sold; sold in 2000 for $450m!
•
If resident of Bermuda, then taxed there! BUT original 2 could replace protectors of the trustee and the stupid accountantas had an
internal memo that TrustCO was only administrative.
•
SCC HELD: noted similarities between corpos and trusts
•
Test of residence for trust should be determined by where its real business is carried on – and that is where the central management
and control of the trust actually takes place.
•
So, trustCO had limited responsibility and the mangment and control was with protector who the original 2 could replace whenever
THEREFORE, resident of Canada. Tough cookies.
Provincial Residence
•
Reg 2601: where individual was resident in on last day of taxation year, can tax that individuals entire income for the taxation year.
Doesn’t matter where else they lived or where their income came from.
•
2601: same with individuals with business income – wherever they were on the last day of taxation year. If established in more than
one province then 2603 apportions income.
•
402: income to province where corpor had permanent establishment. More than one, apportions.
•
Trust treated as individuals so 104(2) applicable.
CHANGE IN RESIDENCE STATUS: DEPARTURE TAX
•
Imposed on ppl who give up Canadian residence and deems disposition of capital ppty.
•
Purpose is to tax accumulated capital gains before they leave cause cant get it after!
•
115(1)(b) Some ppty is excluded from departure tax b/c can collect the tax later.
o Prior to October 1996 shares of Private Canadian corpos were included in exemption, but b/c of treaties cant collect the tax
later on so amended .
o Shares of non-listed Canadian Corpos are not excluded from the deemed disposition.
•
Exceptions are:
o Real property in Canada
o Capital ppty used in business in Canada
o Rights to receive payments from an RRSP, CPP etc
o No deemed disposition for residents who were resident for 60 months or less during the previous ten years for any ppty
they owned or any ppy acquired by inheritance. [exempts employees temporariliy transferred to Canada]
•
Deemed disposition is harsh!
o S.128.1(4)(b)(iv): taxpayer can postpone tax by posting acceptable security.
•
Return to Canada w/in 60 months? Can undue the deemed disposition for ppty that is still owned when they return.
Immigration to Canada
•
128.1(1) deems immigrants to have disposed of their ppy (except Cdn ppty) right before arriving and reacquired at cost equal to fair
market value – so capital gains are only on disposition to the capital gains accrued while in Canada.
•
So immigrants pay capital gains when they sell old-country ppty. The “purchase price” is the value it was when you entered Canada.
22
•
Problems with 128.1? its damn complex and we’re the only country to do it.
DUAL RESIDENCY
•
Person is found resident of Canada and another country:
1. S.250(1)(a) 183 day+ sojourn deemed resident of Canada
2. Found resident of Canada as well as another country (Thomson)
3. Corporation incorporated after 26April 1965 is found to have management and control in another country.
•
Treaty tie-breaker rules address:
o Place of abode
o Habitual abode
o Center of vital interest
o Mutual agreement
o For corporation look at place of management/control, place of incorporation,
•
250(5): deemed non-resident by tax treaty for purposes of ITA – they are subject to deemed disposition departure tax. Like if a corpo
is not a resident via treaty, but has dividends and interest on ppty in Canada, they still have to pay departure tax!
IMPORTANCE OF THE CONCEPT OF INCOME
•
importance for tax base – what to tax on
•
income calculates for credits. Important for equity.
•
Haig Simons Theory
o Haig: He said that income for tax purposes should be measured by ability to pay. “The money value of the accretion to one’s
economic power between two points of time”
o So for him, any accretion is income regardless of source
o Simons: income should be “personal income is the sum of

Market value of rights exercised in consumption and

The change in the value of the ppty rights between two points in time.

Carter Commission Definition of Income: “The comprehensive tax base has been defined as the sum of the market value of the goods
and services consumed or given away in the taxation year by the tax unit [the taxpayer], plus the annual change in the market value of
the assets held by the unit.”
•
Ie income = consumption (incl gifts) + gain in net worth over the year (salary, wages, gifts , vegetables). Apparently best way to
measure ability to pay.
•
Carter Commission approach to Comprehensive tax base: that the definition of income should be suited to purpose – the purpose to
measure ability to pay in vertically equitable tax system
Policy:





Carter wanted ALL goods and sevices purchased on market or supplied by own efforts – to make it easier, only things that could be
measured in dollars.
Did not include imputed income for caring for your kids or doing laundry.
Did not include capital gains until sold (b/c how would you pay the tax unless u sold it?)
Key inclusion: capital gains.
Argument for a wider base and lower rates rather than narrow base with high rates is fairness.
HOW THE ACT DEFINES INCOME:

Statute definition: not defined in the act!

S.3 sources: office, employment business or property “without restricting the generality of the foregoing” means can be other than
these four things too.

For something to be income, must have a source.

FYI: capital gains are not a source of income. They are income from the disposition of a source.

Some things are not considered income from a source but added anyway for policy reasons.
Net concept of income:

Income from each source is net of related deductions; CG is net of allowable capital losses.

“net” does not include return of capital; just pay on interest CG b/c this is what increases ability to pay.
SOURCE THEORY OF INCOME
Three origins for source theory:
1. originates when economy was mostly agricultural – land was the source.
2. May have originated from law of trusts
3. UK 1803 Addington Act – schedule theory. They wanted to retain confidentiality of income. That is why gifts and capital gains were
not initially taxed b/c they were not seen as fruit of a tree
23
SURROGATUM PRINCIPLE OF INCOME

Comes from UK case London and Thames Haven where Diplock describes compensation for a lost source of income as also being
income. [compensation is the surrogate]. He said that the compensation should be treated as the same way that income would be
treated for income tax purposes.
Tsiaprailis 2005 SCC

T injured in car accident and received disability payment from employer

The insurance made payments 1985-1993 but then said not entitled and she sued and settled for:
o $105 000 compensation for previous payments not made, future payments might have been obligated to make and to cover
costs and GST

s.6(1)(f): income from employment “all amt payable on period basis in respect of loss of income from office/employment…(ii)
disability insurance plan

she argued it is not from a source, but from a court action [but is it a surrogate????] lum sum is not periodic but previously held that
lump in lieu of periodic = s.6(1)(f)

Held: taxable lump sum! b/c surrogatum principle applied from London Thames. If we took T’s points, then wtf is surrogatum? So it’s
a surrogate.

Determinative surrogate Qs are:
1. What was the payment intended to replace? – if this answer is clear then,
2. Would the replaced amt have been taxable in the recipients hands?

In this case, the court said the compensation for past was taxable, but the future was a tree in the fruit analyogy (ie a source, not
income???)
ENUMERATED SOURCES

S.3 is the closest to a definition of income. “income from a source inside or outside of Canada” from office, employment business or
ppty and courts are reluctant to expand on this.

The court would rather cram stuff into an enumerated source b/c there are rules about it.

Text says income from a source:
o Recurs on a periodic basis
o Involves organized effort, activity or pursuit on part of the taxpayer
o Involves a marketplace exchange
o Gives rise to an enforceable claim to the payment by the taxpayer
o For business/ppty source, there is a pursuit of profit
UNENUMERATED SOURCES

S.3(a) + s. 56 say that the listing of sources of income do not restrict the generality of s.3 so Act not limited in potential sources of
income BUT courts are reluctant to extend beyond….see cases.
Canada v Fries 1990 SCC

F received strike pay equal to normal net take home pay – they knew this when they voted to strike.

Held: SCC said not income from a source per s.3; did not say that it was an accretion to wealth, not from a source, not from office,
employment, business or ppty. Not from employment b/c he was not working. And court didn’t want to add it as an unenumerated
source.

Court did recognize that there COULD be unenumerated sources.
Schwartz v Canada 1996 SCC
1. Explicit recognition that there CAN be unenumerated sources.
2. Payment for damages for breach of contract was NOT income for a source caught by the Act BUT could be income via
Surrogatum principle (from Tsaipraillis case) [but the k and damages are not a source.

S took senior job with written k but before he started work, k terminated. Got lump sum damages $360k +$40k legal cost; MNR said
compensation was a retiring allowance.

FCA decision was flawed b/c court previously ruled that damages for wrongful dismissal were NOT income from source/surrogate and
then new provision for payments on termination s.56(1)(a)(ii)

S.248(1) = definition of employment have to be employed for s.56 to work SO, this guy never worked.

Crown says: surrogatum + unenumerated source. That the compensation was from the employment k source. (an unenumerated
source) also that s.3(a) does not restrict generality

Schwartz says: the unenumerated sources in s.3(a) are limited to those in subdivision b [but they ignored opening words of 56(1)
generality}

SCC says: s.3(a) is not exhaustive and unenumerated sources are included BUT the Act deal with this situation in a specific provision
and did not include this as a source of income.

General v specific provision: if there is a specific provision dealing with a source of income, then cannot revert back to general
provision b/c then the specific one is meaningless.

argument that since Parliament chose to deal with amounts paid on termination of employment under a specific provision saying
certain amounts are to be included in income on termination then if the court included other amounts on termination of employment
using the general provision under s. 3(a) it would have the effect of rendering the specific provision meaningless
24




s.56(1)(a)(ii) Interpretation: provision requires employment (none here) b/c employment as defined under 248(1) says you have to be
in the service of someone.(this dude hadn’t served yet)
so $360 is NOT a retiring allowance; it could be an unenumerated source under s.3(a) but the specific provision in 56 iplicity excluded
its inclusion under an unenumerated source.
Minority says: prior tax jurisprudence has limited sources of income to those enumerated and the Carter commish recommended
including all accretions to wealth but the gov didn’t do it and us doing it now is a fundamental change that the gov better do, not the
court.
Finallyif a
Fortino v The Queen 1997 FCA

Fortino sold his supermarket to Loblaws and entered into non-competition agreement x 5 yrs

MNR assessed NCA payment as payment for the shares [capital gains] but then changed and said it was income from an independent
source.

Held: s.42 deals with covenants on sale of ppty and include covenants as proceeds for sale of ppty.

NCA payment but is not included! So cant override specific s.42 by s.3(a) general provision.

Reviewed Haig-Simons and Carter comprehensive tax base and noted that income under s.3 is narrowing

Here: NCA $ is not money for services, so not income from employment. It may be a payment for ppty but not included in s.3 b/c s.42
specifically deals with covenants and this kind not covered. So cant overrule specific with general

MNR did not argue capital gains but the could have? (bc it was proceeds from sale of ppty)
Manrell v The Queen 2002 FCA

M sold shares and also entered into NCA; payment was $4m; M filed returns thinking he had to include the amount but then asked for
reassement following Fortino.

M said his right to compete is not “property” and thus he did not dispose of ppty and have to pay CG

TCA said it was ppty per s.248(1) any kind whatsoever but FCA said no – it is something that everyone has and that M’s NCA was not
ppty within the ordinary meaning of the word

Nothing in the Act that says having a non-exclusive, commonly held right to carry on a business as “property”
Proposed s.56.4:

In response to Manrell, propose that NCA covenants should be included in income.

If selling shares in non-arms length tx, then NCA can be proceeds of disposition as long as the CAN increased the value of shares

If SP, can include payment of NCA in eligible capital expenditures.
So, is this income from a source?
R v Cranswick 1982 FCA

This guy owned shares in a company, Westinghouse. They were trying to tax evade probably, so they sold their shares for $6m less
than they were worth (Breach of fiduciary duty). To prevent shareholder from litigating, they paid him $2144

Held: the payment was a complete surprise, unusual, unexpected and did not set out to earn as income.

List of Criteria: none determinative to figure out if income from source, but use to assess:
i.
The taxpayer had no enforceable claim to the payment;
ii.
There was no organized effort on the part of the taxpayer to receive payment;
iii.
The payment was not sought after or solicited by the taxpayer in any manner;
iv.
The payment was not expected by the taxpayer either specifically (i.e. In the specific circumstances) or customarily (people
would not normally expect in similar circumstances);
v.
The payment had no foreseeable element of recurrence;
vi.
The payor was not a customary source of income to the taxpayer;[like you wouldn’t go an do something in anticipation of
receiving income]
vii.
The payment was not in consideration for or in recognition of property, services or anything else provided or to be provided
by the taxpayer, or was not earned by the taxpayer either as a result of any activity or pursuit of gain carried on by the
taxpayer.
AND then add from Stewart and Bellingham:
viii.
in the case of a business or property there is a pursuit of profit (Stewart)
ix.
must be a productive source (Bellingham) (a source that is capable of producing income)
•
•
This analysis will be on the exam – he went over it for ten minutes. To figure out if something is a source or income.
Analysis:
•
4 sources s.3, define employment 248? then
•
s.56 unenumerated source
•
then these 9 criteria
Bellingham v R 1996 FCA

town expropriated B’s land and made expropriation offer. B challenged to the Land Compensation Board and they awarded him 6x
what the town offered.
25



Town and B settled for $377k compensation, $181k interest, $114 addition interest. [all of them make sense b/c accretion to wealth
from selling land BUT the $114k – is it from a source?]
HELD: FCA said proceeds of disposition = income; but the $114 was statute that required extra interest be charged to the town to
discourage giving lower offers to owners. So its like a punative damage against the town and not income from business under 9(1) or
source from 3(a).
Income as “productive source” – a source capable of producing income and a punitive award is not productive.
Stewart v the Queen 2002

S bought 4 condos for rentals with only $1k down and was going to declare a loss for ten years

Turns out the investment was worse than thought and huge losses he wanted to deduct.

The Minister disallowed the deductions via 3(d) b/c the losses have to come from a source and MNR said no source of income (he
didn’t intend to make profit) and so couldn’t deduct

Held: the term “source” is not defined so court have to figure out nature and scope

Here the source WAS pursuit of profit? And he could deduct b/c it was from a source.

The appellant, an experienced real estate investor, acquired four condominium units from which he earned rental income. The
properties were part of a syndicated real estate development, and were sold on the basis that the purchaser would be provided with
a turnkey operation, that management would be provided, and that a rental pooling agreement would be entered into. All units were
highly leveraged with the appellant paying only $1,000 cash for each unit. The appellant was provided with projections of rental
income and expenses in respect of each of the properties. The projections contemplated negative cash flow and income tax
deductions for a ten‑ year period. However, the actual rental experience ended up being worse than what had been set out in the
projections. For the taxation years 1990 to 1992, the appellant claimed losses, mainly as a result of significant interest expenses on
money borrowed to acquire the units. These losses were disallowed by the Minister of National Revenue on the basis that the
taxpayer had no reasonable expectation of profit and therefore no source of income for the purposes of s. 9 of the Income Tax Act,
and that the interest expenses were not deductible pursuant to s. 20(1)(c)(i) of the Act. Both the Tax Court of Canada and the Federal
Court of Appeal upheld the decision.

Held: The appeal should be allowed.

The “reasonable expectation of profit” test should not be accepted as the test to determine whether a taxpayer’s activities constitute
a source of income for the purposes of s. 9 of the Income Tax Act. In recent years, this test has become a broad‑ based tool used by
both the Minister and courts independently of provisions of the Act to second‑ guess bona fide commercial decisions of the taxpayer
and therefore runs afoul of the principle that courts should avoid judicial rule‑ making in tax law. The test is problematic owing to its
vagueness and uncertainty of application; this results in unfair and arbitrary treatment of taxpayers.



The following two‑ stage approach should be employed to determine whether a taxpayer’s activities constitute a source of business
or property income: (i) Is the taxpayer’s activity undertaken in pursuit of profit, or is it a personal endeavour? (ii) If it is not a personal
endeavour, is the source of the income a business or property? The first stage of the test is only relevant when there is some
personal or hobby element to the activity. Where the nature of an activity is clearly commercial, the taxpayer’s pursuit of profit is
established. There is no need to take the inquiry any further by analysing the taxpayer’s business decisions. However, where the
nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, the
venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner. In order for an activity to
be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of
businesslike behaviour which supports that intention. Reasonable expectation of profit is no more than a single factor, among others,
to be considered at this stage.



The deductibility of expenses, which presupposes the existence of a source of income, should not be confused with the preliminary
source inquiry. Once it has been determined that an activity has a sufficient degree of commerciality to be considered a source of
income, the deductibility inquiry is undertaken according to whether the expense in question falls within the words of the relevant
deduction provision(s) of the Act. To deny the deduction of losses on the simple ground that the losses signify that no business (or
property) source exists is contrary to the words and scheme of the Act. Whether or not a business exists is a separate question from
the deductibility of expenses. To disallow deductions based on a reasonable expectation of profit analysis would amount to a case
law stop‑ loss rule which would be contrary to established principles of interpretation which are applicable to the Act. As well, unlike
many statutory stop‑ loss rules, once deductions are disallowed under the “reasonable expectation of profit” test, the taxpayer
cannot carry forward such losses to apply to future income in the event the activity becomes profitable.


In sum, whether a taxpayer has a source of income from a particular activity is determined by considering whether the taxpayer
intends to carry on the activity for profit, and whether there is evidence to support that intention. In this case, the taxpayer
purchased four rental properties which he rented to arm’s length parties in order to obtain rental income. A property rental activity
which, as here, lacks any element of personal use or benefit to the taxpayer is clearly a commercial activity. As a result, the appellant
satisfies the test for source of income and is entitled to deduct his rental losses. Section 20(1)(c)(i) of the Income Tax Act, which
permits the deduction of interest on borrowed money for the purpose of earning income from a business or property, is not a tax
avoidance mechanism and, in light of the specific anti‑ avoidance provisions in the Act, courts should not be quick to embellish
provisions of the Act in response to tax avoidance concerns. In addition, since a tax motivation does not affect the validity of
26
transactions for tax purposes, the appellant’s hope of realizing an eventual capital gain and expectation of deducting interest
expenses do not detract from the commercial nature of his rental operation or its characterization as a source of income.
CAPITAL GAINS

Carter commish said increase wealth and ability so should be included. BUT CG are big huge part of high earners and not very big in
low-earners.

Rationale is that if you include CG can have a wider base and overall rate is lower.

Ultimately taxed at 50%
Statutory Inclusions and Exemptions

Some things included in s.56 are justified as inclusions sine they are things that would increase a person’s ability to pay
Gifts and Inheritances

Should be included b/c increase ability to pay but not included b/c of CG tax and deemed disposition at death.
Windfalls

Not taxed even though there is an accretion to wealth b/c unexpected, unplanned, not recurring.

Gambling if in an organized way could be income from business

Or could use Cranswick factors to see if it is an income from source.
Damages and Settlements

Apply surrugatum principle b/c replaces income from source.

Tsiapralis determinative Qs are:
o What was the payment intended to replace? If this answer is clear then…
o Would the replaced amt have been taxable in the taxpayers hands?

Examine enumerated sources then s.56 items THEN consider if the replaced amt would have been from an
unenumerated source.
1. Expectation Damages: put person in place they would have been if promise fulfilled.
a. Source: use surrogatum principle – source is income they would have had.
b. EDs from breach of k for employment of business.
c. Even if k not business or employment but there was expectation of profit, likely satisifies Cranswick factors. If not
bus/empl/ppty then unenumerated source.
2. Reliance damages- put person in place he would have been but for the act of dx
a. Source: not included unless amt deducted as an expense.
b. Damages compensating for lost of ppty is treated as proceeds of disposition = capital gain
c. Ability: Restore to place they were before so no net increase in wealth so should not be included
3. Personal injury awards
a. Source: Not considered income from source, not enumerated, not unenumerated b/c you don’t really set out to get income
from getting injured.
b. Ability: does not increase ability
4. Damages for medical care
a. Source: nope – don’t really get ppl to injure you to get money
b. Ability: nope b/c just restores to prior position – no increase
5. Pain and suffering
a. Source: no. same as above – don’t get ppl to hurt you to make $
b. Ability: no. just restores. No incrase in ability to pay
6. Compensation for lost earning capacity**
a. Source: not generally considered ppty, even though the payment is compensation for lost future earnings.
b. Ability: could tax lump sum b/c it is future earnings BUT it just restores income earning capacity.
c. The damages amt usually takes into acct reduction of earnings from tax
7. Compensation for accrued lost earnings between date of injury and date of judgment
a. Source: this compensation is from what would have been from employment and employment is a source of income so apply
surrogatum principle.
b. Ask what was the payment intended to replace – employment
c. This is confusing. Tsiapralis case uses surrogatum to disability that replace lost employment. This is sort of the same thing.
d. Ability: increases ability. b/c not restoring earning capacity or compensating for expeses due to injury. It is compensation for
something that is a net gain.
8. Punitive damages
a. Not considered income from source under 3(a) Bellingham
b. Not a market transaction, more like a windfall and not something you can go out and plan to do to make money BUT it is an
accretion to wealth!
IMPUTED INCOME
Definition:

Benefit from personal services and ppty do increase ability to pay so technically should include
27

Whatever the benefit is, must be valued and imputed BUT no included in income b/c practically impossible.
Imputed Income from Property

The benefit from use of own ppty?? Basically there are tax savings if you live in your own house and you might pay more tax if you
rent out your house and rent to live in your own + ppl who rent….?
Imputed income from Services

Making dinner and fixing your own car

Not included in imputing income b/c violates principles of equity and neutralty but figuring it all out is really hard so not worth it.
ILLEGAL INCOME

Case law says illegal income is taxable! Ie income from stealing, embezzlement but a person pays for crime through fine or jail and
then you get a double penalty to pay the tax so basically the gov would be benefitting from criminal act.
Buckman v Canada 1991

Lawyer used trust money for own use but paid interest to clients.

MNR said misappropriated trust $ is income from business and allowed him to deduct interst payments to clients.

Trustee in bankruptcy said that it was NOT income from business and tax should not have been paid on those amounts.

Held: appeal dismissed – the lawyer had a business of misappropriating funds and even though he was a thief to get the money, it is
stil included b/c it was derived from his lawyer work through business.
The Queen v Poynton 1972 ONCA

P was director of a contracting company and fraudulently got $21k in fake invoices for work
o Subcontracors kept 10% and he kept the rest

Did not report this fraudy income on his return in 1966, 1967

Held: this is income! Under the Act and the $ came to him “in respect of or by virtue of his office or employment” ; it was a material
acquisition that conferred $ benefit and it came via his work
Eldridge

Ran a call-girl service

Income held to be from business
INCOME FROM EMPLOYMENT

S.3(a) – income from office/employment included

S.5: basic inclusion of salary

S.6-7 include other benefits from employment (parking gym, )

S.8 are permitted deductions.
Key Issues:
1. It is income from employment or from business?
2. Has the taxpayer received remuneration or taxable benefits?
3. What is the value of the remuneration or benefit?
4. WHEN did they receive the remuneration or benefit?
5. Is the taxpayer entitled to statutory deductions from employment income?
Distinctions between Employment or Business income
1. Employment calculated on calendar year and business on fiscal year
2. Tax withheld at source for employment but business income gives quarterly installments based on estimate
3. Employment taxed on cash basis (when received) rather than accrual basis (when earned even if not received) *critical difference
4. Deductions are tightly controlled s.8(2) prohibits deductions unless specified (business/ppty more open ended deductions)
Policy for limited deductions:

Largest source for gov income is from employment; so small “leak” has big effect like “fringe” benefits of employment.

Gov says it could lose a lot of revenue if ER and EE converted payment into non-taxable benefits.

Neutrality: ppl would change their behavior if certain things were deductible.

Equity: some EEs depending on jobs could get more dedutions b/c they travel more
Administrive efficiency:

Why TIGHTLY controlled? Efficient – EE has to keep track of receipts, CRA has to check up on those small amounts; some items are for
personal consumption

Administrative cost: not worth it to track down minor perks
Social Policy:

S.8 deductions are policy driven – like exemptions for pensions, insurance etc makes ppl do that.
Gifford v R 2004 SCC

Was an employee and wanted to deduct the interest on the $100k he took out to buy someone’s client list

Court said no but its bad b/c may violate horizontal equity – business who makes same could deduct but employee cannot.

So employees just get a credit
28
CHARATERIZATION – Office or Employment (O/E)

S 5(1) – income from office or employment is salary, wages and other incl gratuities received/yr

S.248(1): “office” position of an INDIVIDUAL entitling that indiv. to fixed/ascertainable remuneration
o Also includes judicial office, office of Minister of Crown, office of Senator or HoC, MP, MLA or any elected
o Corporate director
o “employment” in 248(1) – the position of AN INDIVIDUAL in the service of some person

s.5(1): says taxpayer but b/c def’n refers to individual, only applies to individuals for O/E
What’s the diff between Office and employment?

“office” means fixed amount for stipend [“profit” means uncertain amount]

Key Diff: “in the service of some person” means that is usually be a k of service.
o But b/c office can be created by statute, don’t need to depend on the k of service.

Importance of the distinction?: not really important but only when need to distinguish income from O/E from business b/c they diff
rules for dat
What’s the diff between Office and Business?

Business = profit; office = fixed, ascertainable stipend
What’s the diff between Employment and Business?

use five tests to figure out if someone is employee or IC

Why is this litigated? B/c want to characterize as business to get more deductions, also ER may want ot avoid payment of CPP, EI and
obligation to withhold tax.

Definition of Employment: - contract of service of some other person per 248

Problems are: taxpayer gives services to one person or very few ppl
Important to NOTE:

K OF service vs k FOR services (IC)
Control Test from Sagaz + non-exhaustive list of factors + Weibe
1. Does worker provide own equipment
2. Worker hire his own helpers?
3. Degree of financial risk taken
4. The degree of responsibility for investment/management
5. His oppty for profit when doing his task

BUT in FCA Wolf case, says that the older Weibe factors are valid and relevant:
1. The control text
2. The integration test
3. The economic reality test
4. + total relationship like Sagaz

Pletch considered the other factors + total relationship

Royal Wpg Ballet - when examination of the whole thing gave inconclusive results, the Court took the parties word for it.
Sagaz Industries Canada v 671122 2001 SCC

Omg facts! Sagaz’s guy (AIM) caused money loss to 671122 and they want Sagaz to be vicariously liable BUT they cant be vicarious if
he’s an IC! So..is he an IC?

Held: “central Q is whether the person doing the services is performing them as in business on his own account” look at:
o Control by ER, own equipment, own helpers, financial risk, degree of responsibility, oppty for profit. Are all non-exhaustive

Analysis: Aim had own offices in diff place, paid own costs when conducting business, were free to do other business that did not
compete, Sagaz didn’t control how much time AIM could spend on them or clients; Aim worked on commission and thus risked loss
and oppty of profit; Sagaz controlled what was done, but AIM controlled HOW it was done.
Wolf v The Queen 2002 FCA

W was a aerospace engineer. Found a job as consultant – hired when work was high, terminated when low. Got paid certain amount,
got more pay if contract completed; 4% gross pay vacation pay; no office, no computer, no company newsleter.

MNR disallowed business expenses

Held: used Sagaz + Weibe non-exhaustive. That he was master of how to do work, could not delegate but not conclusive; worked at
their place but not conclusive; did not own tools; [neutral]; no health care protection; took risk; no job security; no union; no hope
for promosion; profit and risk were his; completion bonus streses independence; once work was done, he was out; if tests are
inconclusive can put weight on parties agreement b/c no tax avoidance evident.

Didn’t say how many other companies he worked for – would he have been able to make money w/o Candadair? (does that matter?)
How to solve this problem if on an exam:
•
1. Where is Wolf resident?
•
Lives in pt in Mtl and works there. Yes probably
•
He may also be found to be resident of US b/c of permanent home there – but can be resident of more than one place
•
Then look to the treaty (article 4) and work through the tie breaker rules.
•
Given that he is here but that he might be terminated the minute the project is done.
•
Treaty tie breaker rules, Gillen says, he was found resident of US and taxed in US.
29
•
•
•
•
So Canada cannot tax him as a resident b/c of the treaty.
2. But Canada can tax him on his Canadian source income! (business or employment!)
•
as an IC he can be taxed on carrying on business in Canada EXCEPT that you have to look at the treaty again.
•
Article 7 “permanent establishment therein” in Canada ie a place that he has that he carries on business. Therefore he
cannot be taxed on business b/c he’s not got a place in Canada
3. He cant be taxed on his employment b/c he was found not to be an employee
4. So he did not have to pay tax on his work in Canada!
Weibe Door Services v MNR 1986 FCA

W hired many ppl to install doors and told these ppl they are running their own business and to do their own CPP, EI

Issue: does Weibe have to contribute their deductions?

Held: contract for or of service? Organized all the tests:
1. Control Test
•
looks at the degree of control of employer over the work to be performed – controls what work and how to be done
•
specifies the start and stop times for work,
•
equipment to be used, and
•
employees who will assist in the work
•
independent contractor – principal says what to do; IC says says how the work will be accomplished
Problems with the control test
•
little control over senior management employee, can’t really control the work of special skill employees such as pilot or engineer
2. Integration Test
•
Is this person is an integral part of the employer’s business (i.e. economically dependent on the employer’s business)
•
but judge says that it should be looked at from perspective of whether worker’s (ex.Wolf) alleged business could survive without
engagement by person who has engaged workers’ services (ex Canadair)
3. Economic Reality (Entrepreneur) Test
•
whether chance of profit and risk of loss; look to ownership of tools
•
in this context the judgment noted the test adopted in Montreal v. Montreal Locomotive Works Ltd. [1947] 1 D.L.R. 161 taken
from W.O. Douglas, “Vicarious Liability and the Administration of Risk” (1928-29) 38 Yale L.J. 584 based on four factors:
1. Control;
2. Ownership of tools;
3. Risk of loss; and
4. Chance of profit
1) Specified Result Test
•
whether person has
•
(i) placed his or her services at the disposal of the employer for a period of time; &
•
(ii) without reference to a specified result (ie just do the work and the result not specified)
•
versus. specified result to be produced by an independent contractor
2) Total Relationship Test
•
basically none of the other tests are decisive so look at all the tests
•
notes approach of the court in Montreal v. Montreal Locomotive Works Ltd. [1947] 1 D.L.R. 161 of taking a total relationship or
multiple criteria approach – “examining the whole of the various elements which constitutes the relationship between the parties”
o [Decision in the case – the Tax Court erred in application of integration test – matter referred back to Tax Court for
consideration consistent with reasons of F.C.A.]
Pletch v R 2005 TCC

P has a farm company with his wife + employee of elevator company

The elevator co was to contract with PletchCO to get services of P

P chose own hours, made all business decisions, received general instructions from board only

P claimed a small business deduction

125(7): Small business deduction not allowed if “personal services business”
o “a business providing services where
a. an individual who performs services on behalf of the corpo (in this definition and paragraph 18(1)(p) referred to as an
“incorporated employee ) or
b. any person related to the incorporated employee
is a specified shareholder of the corp and the incorporated EE would reasonably be regarded as an officer or employee of
the person or partnership to whom or to which the services were provide but for the existence of the corp…”

translation: if the person doing the services is regarded as an officer or employee and not IC, then business is personal
services business

Held: degree of control – P prescribes the time he is available to work; gives direction more than he takes direction so they find him
an IC per control test but also look to the integration test and on the basis of other shit, they say he is NOT an IC
Royal Wpg Ballet v R 2006 FCA

K says dancers are IC – they can accept other jobs as long as don’t conflict with Wpg job; dancers bear certain costs (like fitness,
rehearsal, gym membership), makeup etc
30

Wpg provides pointe shoes, costumes

HELD: goes through Sagaz and Weibe and says that intention of parties is not to be ignored but not determinative.

Control: control is high but no more than is needed to put on a ballet show

Ultimately the tests were inconclusive so they looked at the intention of the parties to determine the outcome.
DO PROBLEM ON PAGE 81 DR HAUSER
INCORPORATED EMPLOYEES
Temptation:

B/C employment income is treated differently, so EEs wish to make a corpo between them and their ER; so the corpor engages the EE
to work for the ER; ER pays corpor and then this is income from business b/c coropr is NOT an individual and cannot per s.5 earn
employment income from office or employment and 248(1) says individual is person OTHER than corpo
Benefits to both ER and EE

EE can deduct expenses b/c now its business income!

EE corpo can get s.125 small business deduction to reduce tax to 21%

EE corpo can split income with family by issuing shares

ER benefits
o Does not have to deduct tax (saves admin money)
o Does not have to do CPP EI
But this is restricted in the Act!

Restricted via 125(7) “personal services business” not entitled to small business deduction.

+ attribution rules to deal with this
So how to structure Professional Business structure?

Before, lawyers, doctors, dentist could not incorporate b/c of licensing req’s

Now the former partners are employees of of their own consulting corpos?
•
since the former partners were not employees they would not, under s. 125(7), be considered employees of the management
corporation were it not for the existence of their consulting corporation (i.e. ask under s. 125(7) whether the person would be an
employee of the management corporation if he or she did not have a consulting corporation that entered into a consulting services
contract with the management corporation – and the answer is no, he or she would have been partner)
•
consequently, the former partners can claim the small business deduction for their consulting corporations
•
this allows them to defer a substantial amount of tax and control the timing of the distributions from the corporation so that the
timing of tax at their personal marginal rate (the additional tax over and above the small business deduction rate) can be controlled
•
they can have the consulting corporation issue shares to family members so that the income of the consulting corporation can be
distributed among family members in a way that splits income so that the income can be taxed. They can also have family members
provide services to the consulting corporation as another method of splitting income.
TIMING – CASH METHOD

5(1) – Income from office or employment must be received by taxpayer in the year

s.6&7: requires benefits to be included in income when it is received.

s.8 allows deductions to be claimed when paid so this is a cash basis trmt of income.

Cash basis has significant tax consequences – see VesgoVesgo v MNR 1956

dad paid daughter to work on farm for $800/yr and entitled to be paid only $100 and the balance when married.

When she got married, she got $8282 of income and they taxed the entire amt for that year

Held: b/c income from employment, it is taxable in the year of receipt, not the year it was earned.
WHAT IS “RECEIVED?”

It is not always clear what it means if an amout has been received

248(7) – items mailed are deemed to have been received on the day they are mailed; ie paycheck mailed Dec 31 but received Jan 2
would be received in January 2012

for employment, when you actually receive the payment is the year you are supposed to claim it in. Ie worked Christmas 2012 but
paid after Jan 1, 2013, the income is included in 2013.
Opposite true of Advance of Income

if payment made in advance of work on Dec 15, 2012, for work done until Jan 15,2013 the income is included in 2012.

This happens if an employee asks the employer for a advance payment/paycheque. For tax reasons better to ask for a “loan” but be
careful b/c an interest free loan from your boss is a benefit in respect of employment
Contrast with Income from Business:

While the EE doesn’t get payment until year 2, the employer deducts in year 1 for Dec 16-jan1

Tax may be avoided if the employee accepts a long deferral of payment – the ER deducts payroll when income earned and then two
years later the EE deducts when they get it.

S.78(4): requires any remuneration deducted must be paid before 180 days
Constructive Receipt.

If the EE directs his pay directly to a service (like car payment/roof fixing) then it is called “constructive receipt”
31
Jean-Paul Morin v The Queen 1974

Not necessary to actually “receive” via touch/feel it or have in his bank acct. it means that he gets to derive benefit from it or enjoy
advantages w/o having in hands.
Markman v MNR 1989

EE wanted his back pay paid in 1985 even though it was paid Jan 2 1986 – ER intended to pay it earlier.

Held: constructive receipt is only when a payment has been make by a payor to a 3rd party for the benefit of the payee in satisfaction
of obligation.

This is not constructive receipt!
Blenkarn v MNR 1963

EE paid portion of 1960 wages in 1961 but he voluntarily chose not to get a cheque in 1960.

Held: payment is received as soon as EE has unconditional right to be paid; different than earning it

Ie: if EE asks ER to pay him in January instead of Dec 31, that is “constructive receipt” in Dec 2012.
SALARY WAGES REMUNERATION

5(1): “The salary, wages and other remuneration incl gratuities and income from office/employment” but salary/wage not defined
there.

[248(1): salary wages defined there does not apply to s.5 or 63.]

salary and wages mean different things commonly (hourly wage and yearly salary) but doesn’t matter for ITA b/c treated the same.

6(1) includes specific type of remuneration for greater certainty. [if 5(1) too general]
i.
benefits in respect of employment [6(1)(a)],
ii.
amounts received by the taxpayer as an allowance for personal or living expenses [6(1)(b)],
iii.
director’s fees or other fees received by the taxpayer in the year in respect of employment [6(1)(c)], amounts that cover for
losses to income from office or employment pursuant to a sickness or accident insurance plan or a disability insurance plan
[6(1)(f)], etc.
iv.
also s. 6(3) brings in signing bonuses and non-compete payments to employees.
BENEFITS – GENERAL SCHEME
1. Inclusion in Income

6(1)(a) included in O/E – board, lodging or any other benefit received due to in course of O/E

s. 6(1)(e), 6(2), (2.1) - company car

s. 6(1)(k), (l) - company pays car expenses

s. 6(9) - interest free loan the interest amt at prescribed rate per s. 80.4(1).

There are three main issues that are often litigated in the context the taxation of benefits under s. 6(1)(a):
i.
When is something considered to be a benefit to an employee?
ii.
When are benefits considered to be in respect of employment?
iii.
If it is a benefit in respect of employment, what is the value of the benefit?

Two major issues arise when determining if something received is a taxable benefit:
o Whether the item is convertible into money
o Whether the benefit is actually conferred on the employee

Whether the amt is an allowance or a reimbursement of expense.
2. Economic Advantage or Material Acquisition that confers economic benefit:
The Queen v Savage 1983

SCC defined benefit as “material acquisition conferring economic benefit on taxpayer”

The EE here received awards for taking insurance courses. It was a material acquisition and conferrd an economic benefit (she could
spend it!)

Note: “benefit of any kind whatever” is very very broad.

Policy: good to make it broad b/c EE and ER would keep trying to make up benefits free of tax

Affects horizontal equity b/c varies from one job to another, affects vertical b/c higher paid ppl more likely to seek out untaxed
benefits.
3. Benefits to Employees?
Huffman v The Queen 1990 FCA

Taxpayer was a cop who needed loose fitting clothes so his gun could fit under – ER gave him $500 but only had to acct for $400 with
receipts. MNR said that the extra $100 was taxable benefit to be included in income

BUT taxpayer gave evidence he spent more than $500 and that the clothes could not be used for personal use

Held: not income b/c no economic benefit to the EE b/c could not make personal use of the clothes.
32
4. Convertible into Money?
Tennant v Smith 1892 HL

Bank Ee required to live in bank housing and could not assign or sublet. This was a benefit b/c he did not have to pay for housing BUT
he could not convert that benefit to money to spend it!

Held: a person is taxed on not what he saves, but on what goes into his pocket ie the benefit has to be convertible to money before it
is taxable.
Waffle v MNR 1968

Tennant principle above rejected by Canada!

W car salesman got a cruise from Ford (not ER). Could not convert cruise to cash and could not assign.

Held: Tennant principle does not apply to s.6(1)(a) [but I don’t understand why]
BENEFITS IN RELATIONSHIP TO EMPLOYMENT

6(1)(a) so when is a benefit considered to be “in respect of, in the course of, or by virtue of O/E” ?

From old English cases, look to whether the benefit was for remuneration for services OR look to intentions of ER and whether
benefits is mere personal gift not quid pro quo

Not entirely followed in Canada:
The Queen v Savage 1983 SCC

SCC said to look to if a benefit is in respect to E/O:
i.
whether the benefit was provided as an employee or as a person. Ex: gift given by boss to an employee as a wedding gift is
not a benefit to the employee in respect of employment but is a gift arising out of their personal relationship.
ii.
The court did not accept the requirement of earlier English case law that the benefit be provided by way of remuneration
for services. The English legislation on which that test was based was different than s. 6(1)(a) of the Income Tax Act.
iii.
The words “in respect of” in s. 6(1)(a) have, the court said, “the broadest possible meaning in terms of connecting the
benefit to the employment.”

Here, the EE was getting courses paid for by ER. Court said they were to improve EEs skills and that is enough for it to be “in respect
of”

Court also looked at ER/EEs reasons: 1. To encourage self-upgrading and 2. To improve knowleges of the business and better oppty
for promotion.
Notes on “relation to employment”:

Effectively a presumption created that a benefit received by EE from ER is a benefit in respect of employment.
i.
Presumption rebutted by EE showed that the benefit was of a personal nature.

S.6(1)(a) also clearly can include a benefit from a 3rd party (Waffle-Ford company)
How to VALUATION OF BENEFIT:

Once benefit is included in income from E b/c it provides benefit to EE, have to determine value of benefit b/c 6(1)(a) calls for
inclusion of value.

So really need fair market value (according to Haig-Simons) ie market value of rights exercise is the accretion to wealth or increase in
economic power.
1. Cost to the Employer: Cost to ER is not necessarily fair market value. Must assess what is fair on market!
2. Fair Market Value – the price a buyer is willing to pay. Hard to figure out duh

Determined by how much the EE actually sold it for Wilkins v Rogerson 1960 ER gave EE new suit. Cost to ER was $14 but EE
sold for $5. Held that value of the benefit was $5

The value of benefit is the “disposable value” to the EE
3. What if not convertible to money?

Look at the hypothetical market of the item with a price estimate a willing buyer would pay to a willing seller.

Example: a gold ring stamped with the company logo is hard to sell, so would value based on the price of the gold melted
down.

How to value frequent flier points??

Giffen v R 1995 EE travelled by air a lot and the ER allowed him to use the points for personal travel. The cost to the ER was
that the points weren’t used for the work travel. The court gave it the value of the most restrictive economy fare.
4. Apportionment

Dual character expenses (part ER/EE) like a conference for work with personal time

Include portion of cost of trip income from employment

Luxury facilities: it is all a work related event but they put you up at the Ritz with 1st class airfare.

Zakoor v MNR 1964
i. EE got a Cadillac and a portion was included as income due to luxurious character that was an added benefit to
the EE
ALLOWANCES for income from Employment
Inclusion in Income
33







6(1)(b): includes allowances in income except for specific exceptions listed there.
“allowance” not defined in act so
IT 522-R says: “…any periodic or other payment that an EE receives from an ER, in addition to salary/wages w/o having to account for
its use”
Courts call allowance
o “…an arbitrary amt paid in lieu of reimbursement to EE w/o them having to acct for it” (Ransom)
o Pascoe: contrasted allowance with reimbursement – defraying a cost is not an allowance b/c the EE can’t use it at their own
discretion.
Key Q: is whether the recipient had discretion about how to spend it.
Policy: allowances aren’t good b/c ER can not required the EE to acct for the $ so it may be a way to giving tax free income
But some allowances are allowed: 6(1)(b)
o Allowance fixed by Act of Parliament or Treasury Board
o Travel allowance from Canadian Forces
o 6(1)(b()(v) travel expense paid to EE who sells ppty or negotiates k for ER
o 6(1)(b)(vii) travel expense paid to EE who must travel away from municipality where ER is established
o 6(1)(b)(vii.1) allowance for use of car when travelling for performance of duties of O/E
Distinguishing Reimbursements from Allowances
1. reimbursement of expenses incurred on behalf of ER not included in income. Where EE gets no benefit
2. reimbursements of living expenses ARE included in income and taxed
3. Accountable Advance: an amt paid in advance to EE who is required to pay for something and acout for its use and must return the
unspent amount.
Selected Items of Benefits:

6(1)(a) + (b) are general provisions about inclusion of benefits and allowances for personal and living expenses.
1. Automobiles – Act provides formula to determining the value of the benefit.
a. If EE also uses for personal use then per Savage it is a benefit in respect of employment and included in income under
6(1)(a).
b. Determine value: how much car used for personal vs business; how much of the capital cost of the car to include in income;
also cost of operating expenses.
c. 6(1)(b)(vii.1) allowance for use of car when travelling for performance of duties of O/E
2. Loans – interest free or low interest loans to EEs are set out in Act about how to calculate the value of this benefit in respect of
employment. If the loan is interest free or low interest is a benfit conferred upon the EE.
a. S.6(9) : interest free/low interest loan benefit included income
b. S.80.4(1): benefit is calculated to be deemed to be a prescribed interest rate (T-bill + 4%)
c. Can be a loan from a 3rd party (ER gets loan from bank for EE0
i. Deemed b/c difficulty in determining rate of interest if ER hadn’t guaranteed/obtained it b/c rates vary depending
on income stability, assets, collateral etc
Home Relocation Benefits.
Lots of inconsistency and litigation about relocation by ER costs. So, Act has “bright line” rules about benefits that had to be included in income
for compensation for housing losses on the sale of a house prior to relocation and subsidies/financial assistance when buying a new house at
new location. Cases show difficulty
Ransom v MNR 1967

R transferred from Sarnia to Mtl for job. Housing market sucked in Sarnia so he suffered a loss and ER reimbursed him.

Held: not a benefit b/c he was just compensated for a loss caused by his transfer

(but he sort of did get a benefit b/c everyone else in Sarnia has to take a loss in a bad market)
R v Phillips 1994 FCA

P transferred from Moncton NB to Wpg; ER gave him $10k as relocation payment to compensate for higher cost of similar house in
Wpg.

Held: said this was different than Ransom b/c that was a compensated loss and thus no benefit to the EE; here, P the payment was
not compensation for a loss but $$ to get a better house.

Comment: P is not better off – same type of house as Moncton BUT now had a house that was worth more. So if he quits Wpg, back
to Moncton and buy a new house and have $10k spare.
Canada v Hoefele 1996 FCA

H relocated from Cgy to TO; TO housing 55% more expensive at that time. ER instead of compensation, reimbursed the EE the interest
cost on the difference in the principal sum of the mortgage that would be required in TO

Held: not a taxable benefit b/c net worth of EE had not increased.

Comment: H got a better house than he otherwise could afford. Could sell it later for higher.
34
Legislative response:

Cases above are confusing outcome so:

S 6(23): for greater certainty, the value of financial assistance for home relocation in included in income from employment. BUT there
is a interest deduction s110(1)(j) of the rate x $25k x 5 years

248(1): must be a “home relocation home” defined here – a loan for a house at least 40k closer to new work location.

6(19)- 6(22) allow compensation for housing loss limited to $15k; half of the amt above that must be included in income.

Like cars and low interest loans, Act has bright line rules – leads to inaccurate inclusion of benefits but avoids the Q of whether there
even is a benefit.(b/c Act deems that there is a benefit) + avoid litigation.
COMPENSATION FOR LOSS OF EMPLOYMENT

Damages or settlement for wrongful dismissal use to NOT be subject to tax (Atkins 1976) but lump sum payments were. Ppl abused it
so…:

S.56(1)(a)(ii) inclusion of retiring allowance in income

S248(1) defines “retiring allowance” to include an amt received.
NON TAXABLE AMOUNTS

Like the exemption for gifts less than $500/yr is for administrative simplicity

S6(1)(a): exempts inclusion from income
o Employer provided group health care
o Group accident/sick plans (disability)
o This is all to keep ppl in the plans so ppl will keep contributing so rich EEs pay for sick EEs!
DEDUCTIONS FROM EMPLOYMENT INCOME

Why are deductions so damn tightly controlled?

8(2) limits deductions to specific amts in s.8/8(1)

67 says that the deductions have to be reasonable.

Deductions specifically permitted include:
o
deductions for travel expenses (s. 8(1)(h) and (h.1);
o Legal expenses incurred to collect salary or wages (s. 8(1)(b));
o Union dues and professional dues (s. 8(1)(i));
o E.I. and C.P.P. contributions (s. 8(1)(l.1));
o Contributions to a registered pension plan (s. 8(1)(m));
o Supplies (s. 8(1)(i)(iii)); and
o Office rent or salary to an assistant (s. 8(1)(i)(ii))

there are some special deductions for sales personnel who are paid by commission

there is also a deduction for the capital cost of an automobile supplied by the employee used in the employer’s business (s. 8(1)(j))
Specific Deductions
1. Travel expenses: 8(1)(h) “where the taxpayer, in the year,
i.
was ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in
different places; and
ii.
was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of
the duties of the office or employment

No Deduction if claiming an allowance that is exempt from tax ie no deduction if got allowance for travel that was NOT included
in income under 61bv,vi, vii

8(4) 67.1 Meal expenses when traveling: cannot deduct unless EE required by ER to be away from the municipality where ER is
for longer than 12 hours. 67.1 cost of meal must be reasonable and can only deduct ½ of the cost.

Car expenses when traveling: 8(1)(h.1) same as 81h above: 1. Req’d to carry on duties away 2. Under k of employment to pay.

Expense to travel to and from work are not covered.
Delancy v The Queen 2004 TCC

US resident who stayed in hotels in Canada during football season in TO, Cgy. He was reimbursed for away games, but own
expenses when at home. He tried to deduct hotel expense for home games and said they were travel under 8(1)h [b/c he
said his home in US]

Held: 8(1)h not applicable b/c he was at ER’s place of business during home games and not req’d to travel away from ER’s
place for those home games. Away games were covered by ER.
Hogg v R 2002 FCA

Judge who drove car to work and said that was for protection and it was essential to drive to earn his income.

Held: um, no. not a deduction. 8(1)h is for travel away from ER’s place of business; he didn’t need to travel away from there
– he was travelling TO there
35
Legal Expenses 8(1)b
a. legal expenses allowed to be deducted in the year incurred for “to collect or establish a right to salary or wages owed” by ER
or former ER
Loo v Canada 2004 FCA

Loo employed by DOJ Vanc and sued that they were entitled to same salary as TO lawyers

L deducted legal expenses; MNR disallowed b/c he was receiving all the salary he was entitled to under k. and that no
money was owned to him so 8(1)b did not apply

Held: FCA said he was trying to say that he was owed more than he was paid ie trying to establish a right to salary
Blackburn v The Queen 2004 TCC

Cop charged with dangerous driving off duty; if convicted could have serious impact on career. He was convicted and
suspended from job

Deducted legal expenses b/c it was not to establish a right to wages or collect wages

Held: entitled to deduct most of fees – he was suspended and thus winning the appeal was necessary for him to get wages
for the improper suspension so legal fees to overturn were allowed, not for the bail hearing. DUH
INCOME FROM BUSINESS OR PROPERTY: PROFIT

S3(a) includes income from business or ppty as enumerated source

S9-37 sets out rules for determining income from business or ppty

S 9(1): starting point- income is profit from business or ppty for that year

S10-37 modify, reinforce, allow, disallow inclusions and deductions

S.12 sets out items that MUST be included

S.18 limitations on deductions

S.20 list of expenditures that may be deducted.

First start with is it income from businesss or ppty and note the distinction

Then look at the concept of profit under the Act.
Importance of Characterization of Income as Business or Ppty as a Source –mostly not distinguished

Income must be characterized as from a source or not taxable per 3(a)

Loss has to be a loss from an enumerated source or not deductible para 3(d) [no unenumerated sources losses allowed]

Loss from personal endeavors are NOT deductible under 3(d) unless characterized as loss from B/P

Employment v Business characterization is for what deductions are available

Income v capital gain charac is important b/c affects how much is included in income for tax purposes; income is all included and CG is
½ included.
Statutory Definition of “business” or “ppty”

248(1) Business is a profession, calling, trade, manufacture or undertaking of any kind and…and adventure or concern in the nature
of trade but does not include an office or employment
o “business” = a profit-motivated activity; NON-EXHAUSTIVE DEF’N so must look to plain meaning of the word
o “adventure in trade” = isolated/speculated tx like flipping houses.

248(1) Property: “ppty of any kind whether real, personal, corporeal, incorporeal and w/o restricting the generality of the foregoing
includes:
o a right of any kind whatever, share, chose in action
o unless a contrary intention is evident, money.
Manrell v R 2003 FCA – definition of ppty is very broad:

same case from earlier – sold business then entered into NCA for $1m

Q: Is $1m a CG from sale of interest in “ppty”?

Held: “ppty” is a legally enforceable right to exclude others; a right to do something that any one had is not ppty under common
law; so not subject to CG.

Ppty of any kind whatever includes only that which is ppty under common law.
Common Law Definition of Business: (time, attention, labour)
Smith v Andersons UK adopted by SCC in Stewart:
“anything which occupies the 1. Time 2. attention and 3. labour of a person in the pursuit of profit.

9(1): income from bus/prop is “profit”

basically, if lots of time, attention and labour then business. If Passive, then ppty.
Stewart v Canada 2002 SCC

bought 4 condos for $4000 – knew there would be losses for many years but was a tax shelter
36



wanted to post losses each year and deduct from income so taxable income yearly was low. Then sell the condos later for profit
and only pay tax on ½ CG
TCC and FCA said that there was no intention to profit and tx was not a business or pty
Held by SCC on determining whether the source is business or property:
(i) Assess whether the activity is clearly commercial or if it has a personal element. If it is clearly commercial then it is
business or property.
(ii) If there is a personal element then ask, based on the objective evidence, whether there was a predominant
intention to profit.
“It is clear that in order to apply s. 9, the taxpayer must first determine whether he or she has a source of either business or
property income. As has been pointed out, a commercial activity which falls short of being a business, may nevertheless be
a source of property income. As well, it is clear that some taxpayer endeavors are neither business, nor sources of property
income, but are mere personal activities. As such, the following two-stage approach with respect to the source question can
be employed:
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavor?
(ii) If it is not a personal endeavor, is the source of the income a business or property?
… it is logical to conclude that an activity undertaken in pursuit of profit, regardless of the level of taxpayer activity, will be
either a business or property source of income. …
Where the nature of an activity is clearly commercial, there is no need to analyze the taxpayer’s business decisions. Such
endeavors necessarily involve the pursuit of profit. As such, a source of income by definition exists, and there is no need to
take the inquiry any further.”

thus where an activity is said to be in pursuit of profit it is assumed that the source is business or property

further, where the activity is commercial in nature (i.e. there is no personal element to the activity) the assumption is
that it is in pursuit of profit

put another way, if it is clearly commercial in nature with no personal element then it is assumed to be in pursuit of
profit and therefore related to a business or property source
How to Determine the Intention to Make a Profit? [Stewart test]
1. Subjective and Objective Intent
a. If activity is clearly commercial = then business or ppty pursuit of profit
b. If some personal aspect/mixed commercial, then ask was there a predominant intention to profit?
i. Notion of profit is ordinary business person’s idea of profit incl CG UNLESS predominant intention was ONLY CG
b/c 9(3) excludes CG
ii. [can have more than 1 intention but court will look at predominant one]
iii. is the intention to profit reasonable?
iv. Ask: “Does the taxpayer intend to carry on an activity for profit and is there evidence to support that intention”
(Stewart)
v. This requires the taxpayer to prove intention to make profit + that it was business like behavior. [cant just assert
intention; gotta have obj evidence]
vi. Five factors that are considered: (4 from Moldowan)
1. Profit and loss in previous years
2. Taxpayer’s training
3. Taxpayer’s plans to turn present loss into future profit.
4. The capacity of the venture to show profit after deduction of capital cost allowance.
5. The amount of time taxpayer spends on activity (Sipley) [wknds and evenings means hobby; heavy time
commitment = profit expectation]
2. Predominant Intention
a. Can have more than one intention for engaging in an activity but court will look at the PREDOMINANT one.
3. Reasonableness of Expectation of Profit
a. Some ppl start something w super over optimistic profit projections.
b. BUT this is only a factor considered, not determinative to figure out intention to make profit
4. Notion of profit INCLUDES potential Capital Gains
a. Intention to profit is what ordinary business person’s sense but it MUST include capital gains.
b. BUT if motivation is ONLY to make capital gains, it is not income from bus/ppty b/c CG distinguished from income Bus/prop
(s.9(3) excludes CG)

Application of this test in Stewart:
o Buying condos in London and Surrey he didn’t want to live in was clearly commercial and therefore was business or ppty.
b/c no personal aspect, no need to ask about intention to profit.
o So basically, there was a source for that income, that source was bus/prop and losses were therefore deductible under 3(d)
Walls v Canada 2002 SCC decided same day as Stewart
o W was a partner in a storage facility warehouse ops that was set up as a tax shelter
o TCC said there was no expectation of profit and so on deducted losses.
37
o
o
o
FCA said that b/c it was clearly a commercial activity with no personal element, it was clearly business or ppty source and
therefore loss was bus/prop and could be deduced via 3(d)
Held SCC: applied Stewart and said that it was “self evident” that activity was commercial in nature and no evidence of
personal use
And did not matter that there was a desire to reduce taxes.
Policy Concerns about potential abuse/tax avoidance and shelters.

Tax shelters will almost always have commercial and no personal element

Basically tax shelters like this – ppl are getting away with it. So what.
Ludco Enterprises v Canada 2001

Tax shelter scheme to set up losses via deduction of interest expenses against only $600k income

After the scheme wound up, taxpayer sold shares and earned CG of $9.2m

So overall, it was profitable b/c of CG on the ppty

Minister said b/c there was no bus/prop that could not deduct the interest losses.

Held SCC: allowed the deduction under 29(1)(c) w/o dealing with the source of bus/prop [assume it was bus/prop?] the Q was
whether the interest expense was for the purpose of earning income from bus/prof per 20(1)c

They said:
1. courts should not be quick to embellish the provisions of the ITA in response to concerns about tax avoidance when it was open to
Parliament to be precise and specific with respect to any mischief to be prevented;
2. absent a provision to the contrary, taxpayers are entitled to arrange their affairs for the sole purpose of achieving a favourable
position regarding taxation; and
3. income for the purpose of s. 20(1)(c) is the gross income not net income.
•
therefore taxpayer had an expectation of earning dividend income and that was all that was required to be entitled to take
the deduction

So, tax shelters were left open b/c didn’t want to penalize ppl who legit lost money and couldn’t deduct

So the gov proposed a new provision s.3.1 but really didn’t want to risk genuine ppl not being able to deduct losses for bad business.
Personal Endeavors (Hobbies) distinguished from Busi/Ppty

Pre-Stewart, courts disallowed deductions for things that were kind of hobbies/personal pursuits because of the “reasonable
expectation of profit” test

Now, deductions can still be disallowed if under the Stewart test argue that it is a personal element to the activity and then figure out
intention
Landry v The Queen 1994 FCA Pursuit of personal pleasure

Lawyer started to practice law again after 23 yr break; continued to have losses, did not keep good records, no budget, no advertising,
did not always bill clients

Held: used reasonable expectation of profit test and that was not engaged in business and could not deduct the losses
o In Stewert, SCC suggested Landry case was decided wrongly b/c there was no personal element [unless there was personal
satisfaction in practicing
Hobbies:

Amateur Oil painting example it’s a high cost hobby vs the jogger with a low cost hobby so it engages horizontal equity

Used to be dealt with under reasonable expectation of profit test. If there was not RE of prfot, then source was not business or py so
could not deduct expenses per 18(1) and even if you could, couldn’t deduct 3(d)
Payette v MNR 1978

P was author of 6 books and had losses on all 6

Held: under the reas. Exp. Of profit test at that time, he had none, so could not deduct.

Hypo: if stewart test was applied: 1. Ask if personal element then as 2 intention to profit. BUT it could be that writing books was
clearly commercial and then he gets the deductions.
Cree v MNR 1978

C was FT EE and claimed $11k losses for car racing; said he turned pro in 1974; owned a trailer, van, race car, went to events and had
some winnings $1250 but expenses of $12k

He got an expert who said he was licensed professional auto racer but also said that they cant make a living doing itg

Held: the activity and the nature of racing in Canada means that he could not have been carried out with a reasonable expectation of
profit.
Sirois v MNR 1987

S had a restaurant with capacity of 20 open 4 days/week;; 1982 dbled seating and open 6d/week

Held: no reasonable expectation of profit for 1981 before expansion but 82-84 expansion means expectation of profit incrased.

Questions:
38



Do we expect people who start a business to have sufficient business savvy to recognize that their business does not make sense?
Do we expect, in the case of Sirois, that Sirois should have known that the limited capacity and lack of advertising made his business
unprofitable?
Does the reasonable expectation of profit test, applied with the objective criteria suggested in Moldowan, effectively mean that
persons with a genuine intention to engage in a business or property endeavor but with poor business savvy may end up paying taxes
even when they have had a decretion, not accretion, in their wealth?
Knight v MNR 1993

K was schoolteacher interested in metal work and acquired machines and built a shop on his ppty

Machines cost $200k; no product to sell, no business and no source of income so not entitled to deduct losses for those year

Question: sort of asking whether you can only deduct losses if your business turns out successful or you cant deduct in the
development stage
Chequer v R 1988

C bought a boat and wanted to charter it full-time but had another FT job in 1981-82; he claimed net losses in 81-82 of $31k and 24$k

Held: said he failed to establish reasonable expectation of profit
RENTAL PROPERTIES personal? Or commercial?

Rental ppty may seem personal element; like they rent it out to friends OR it is a resort and they occasionally use it.
Maloney v MNR 1989

M rented his house to his mom for low rent; total rent less than mortgage/tax/maintenance

Claimed losses on rental ppty against other sources of income

Held: no reasonable expectation of profit and the annual losses were gifts and thus non-deductible consumption expenses.

Apply Stewart: 1. Personal element involved? 2. Intention to make profit?
Gambling as a Regular Activity

Even if something is illegal, income from that will be taxed if it is income from a source of bus/ppty

Casual bets are hobby and not deductible under 3(d) but bookies and betting shops are engaging in a business and they set the odds
so they make a profit.
MNR v Morden 1961

M was a gambler betting on sports

Held: he was not so organized to make an enterprise of commercial character or a business or vocation. They were mere windfall
gains.

**this is a source question? Like Cranswick

first ask whether gambling is a source from business or profit THEN see if it is personal endeavor or business. Or just a windfall?
Walker v MNR 1951

W was a farmer and part owner of horses and raced them; bet substantially and successfully

Held: his gambling was more than a hobby and sufficiently extensive/systematic to be a business

Test appears to be whether the activities are organized, extensive and systematic to be a business

That is the ‘source’ question. Then ask per Stewart if there was a personal element then predominant intention based on objective
evidence.
Luprypa v R 1997

L reported no income 89-90, no T1; officer filled it out based on net worth and said $62k income

L said after his divorce in 89 no longer employed but played pool M-F to improve skills and then play ppl who were drunk after 11pm.
He would not drink so that he could maintain advantage

Said he made $16k in 89, $20 in 90 and $40 in 91; won $2-300/day!

His accountant said that he was a gambler and that his proceeds from gambling were not taxable.

Held: court looked at all gambling cases and asked “are the betting activities an enterprise of commercial character or organized to
make them a business or vocation?”

Said he had a system and a reasonable expectation of profit (since this was 1997 applied Moldowan) and that it was his principal
source of income, practised, played drunk players after 11pm

These measures paid off in minimizing his risk since we won most of the time.
Leblanc v R 2006 TCC

The gambling brothers; 1996 won a lot of money in lottery and started to invest in sports lotteries

They played lottery only, lived cheaply and put earnings back into games. They estimated that they lost 95% of their bets but bet
$200-300k/week and$10-13/yr and kept track of the odds of their bets

They bet heavily on long shots, purchased in high volume and negotiated 2-3% discounts and paid ppl to buy for them b/c had to buy
from many places.

Net winnings of $2.7m each [$650k/yr each] estimated to spend $50m total on lotteries!!!
39


Held: TCC said that there was no evidence of a system only that they won enough to come out ahead.
The court said there was no management of risk b/c they bet on long shots which is the opposite of minimizing risk
Include Gambling Income in Tax Revenue?

Might just cancel out b/c ppl would probably more consistently claim losses than report winnings so no point.

Carter Stupid Commission says increase in wealth by gambling = pay pay pay but they only would have allowed losses against
gambling winnings; not other income.
DISTINGUISH EMPLOYMENT FROM BUSINESS INCOME:

Income from business must be distinguished from income from employment but can be hard to do so especially if services provided
to single or few ppl so same as EE vs IC from earlier?
CAPITAL GAINS DISTINGUISHED FROM PPTY

S 9(3) says income from bus/ppty must be distinguished from CG b/c CG is only ½ tax and bus/ppty is full tax likewise losses are ½
deductible for CG and full for bus/ppty

If you flip land, that is not CG, it is income or loss from business

S.9(3) says “income/loss from a ppty does not include any capital gain/loss from disposition of that ppty”

Income from ppty is rent, interst, dividends; CG gain/loss arises from disposition of ppty.
BUSINESS DISTINGUISHED FROM PPTY
1. Level of activity
a. Not so good to distinguish bus a business has been held to be an “organized activity”
b. So the key different between bus/ppty depends on whether income comes from mere ownership of the ppty (income from
ppty) or income comes from owner or owners EEs (income from business)
c. Ppty income is passive holding of ppty usually; business is time, labour effort.

Rental ppty: how much activity makes it a business instead of ppty? If maintaining a building, heading etc would still be from ppty but
when you add more services like housekeeping, laudry, restaurant it becomes income from business. And where a landlord has a
bunch of buildlings and has a manager, then is income from business.

Banking Business: normally interest on loan is income from ppty BUT if lender is a bank that makes a business of lending money, then
the interest income is income from business.
2. Differential Tax Treatments

once one has determined that the source is business or property the next question is which of the two is it? for the most
part there is no distinction in treatment in the Act between income from business and income from property.

the rules for determining income from property or business are the same (namely those contained in subdivision b)
However, the Act does make some distinctions in various parts of the Act.
i.
(i) Attribution Rules: s. 74.1 and 74.2 apply to income from property
ii.
(ii) Non-Resident Income from Business Carried on in Canada: s. 2(3) requires that non-resident pay tax on income from
business carried on in Canada. Income from property earned by non-resident is subject to Part XIII tax (s. 212).
iii.
(iii) Income from Business Allocated to Provinces of Permanent Establishment: Income from business for purposes of
provincial taxation is allocated among the provinces in which the business had a permanent establishment whereas income
from property taxed in province in which the owner was resident on the last day of the taxation year. [Reg. 2601]
iv.
iv) FAPI Definition Excludes Active Business Income: The definition of “foreign accrual property income” excludes income
from “active businesses” [s. 95(1)]
v.
(v) Capital Cost Allowance Restrictions on “Rental Property”: The capital cost allowance provisions do not allow CCA to
result in losses from “rental property” [Reg. 1100(11) but these do not apply to income from business.
vi.
(vi) Cumulative Eligible Capital Deductions only in respect of a Business: Deductions from cumulative eligible capital are only
permitted “in respect of a business” and not for property [s. 20(1)(b)]
vii.
(vii) Small Business Deduction and Investment Income Refund: Distinction made between “active business” income for
which small business deduction available [s. 125] and “aggregate investment income” that excludes active business income
and for which a partial refund is available [s. 129].
viii.
(viii) Inclusion of amount received for goods not delivered or services not rendered is just for a business – s. 12(1)(a).
Concept of Profit in Business/Ppty
Net Concept:

profit is a net concept – revenues less expenses = profit and consistent with the “accretion to wealth” and “ability to pay” since
wealth only increases with net profit.
Financial Accounting [Generally Accepted Accounting Principles GAAP] vs Tax

GAAP are not set by legislation or rules and they are accepted if they:
o Are following in a significant number of similar situations
o Find support from professional accounting bodies.
o Find support in academic writing.

CICA Handbook – is just recommendations
40
o
CICA sets standards and publishes them but they are on recommendations so not a conclusive source of GAAP and the
handbook acknowledges that
o The handbook usually permits more than one trmt and financial statements usually note the method of trmt and to be
comparable have to use consistent trmt. So court looks at evidence to see what the trmt is and have to use accounting
experts.

So why does the Act and tax cases deviate from GAAP?
i.
GAAP variation in treatment – tax rules need to be more consistent; hard to administer and police different schemes
ii.
GAAP too conservative – accountants will chose a lower level of income b/c conservative
iii.
Pursuit of tax incentives- tax policy is to pursue policie objectives like pollution clean up, clean tech
iv.
Cash to pay the tax- some accounting methods will give a huge tax burden that the person hasn’t received the money yet so cant
pay the tax
v.
Accounts don’t want to have financial statements based on tax concerns- accountants don’t want their choices influenced by tax
considerations.
JUDICIAL GUIDELINES FOR BUSINESS AND PROPERTY PROFIT
Key Points from: Canderel v The Queen 1998 SCC about determining profit for purposes of s.9(1)

1. Determination of profit is a question of law – not by accounting principles. So remember legal determination of profit may not
accord with accounting.

2. Profit is a net concept (Symes also said this) for bus/ppty contrast with employment where only specific deductions allowed.

3. Taxpayer is allowed to adopt ANY method that provides an accurate picture of profit as long as:
o it is a well-accepted business or accounting principle method
o is not inconsistent with Act
o is not inconsistent with the relevant tax case law

4. Well-accepted business principles are interpretative aids only and not limited to GAAP, they are not rules of law.

5. Burden of proof: if taxpayer has accurate picture of income, consistent with act and common law, then burden SHIFTS to Minister
to prove that income-picture wrong. In Canderel, the court found that the taxpayer had used an accepted method and the picture
was accurate then the Minister had to prove that a different method provided a more accurate picture of profit.
So what are well-accepted business principles?

Courts avoid saying profits should be determined via GAAP. They say instaed “well-accepted principles of commercial trading” or
“well-accepted principles of business(or accounting) practice “ordinary commercial princples “well accepted-business principles. “
Symes v Canada 1993 SCC

Are child-care expenses deductible as a business expense?

SCC said no b/c they would not have been deductible under GAAP BUT in the discussion the Court said that it is not “appropriate” to
rely on GAAP only.

Court said that reliance should be on “well-accepted principles of business practice or commercial rtrading” and then did not define
these things. These phrases have no recognized meaning in business/accounting so gives no guidance. Thanks a lot.
Canderel v The Queen 1998

Court clarified a bit and said courts are unwilling to rely on GAAP to determine legal question of “profit” under s.9 because they
don’t want to delegate the criteria for the legal test to the accounting profession.

So basically “well accepted business principles” is the lawyerly way to call profit as a question of law vs GAAP is just an
interpretive aid.

Basically, profit for tax purposes is GAAP unless Act or case law modifies it b/c accountants use GAAP then adjust as required by
the Act.

Definition of “accurate picture of profit” is basically revenues against expenditures. But that sounds a lot like accrual method and
matching principle.
Outcome?

Taxpayer gets to choose a bit the accounting treatment – has to fit in GAAP [needs court-accepted expert evidence] + must not be
inconsistent with the Act or case law.

Determination of profit is a question of law using well-accepted business principles and those accounting principles are used as
interpretive aids where Act does not require a certain treatment and Act needs interpretation. (Symes, Canderel)
METHOD OF PROFIT COMPUTATION – METHODS OF ACCOUNTING.

Determining profit has two methods: cash is simple but extremely inaccurate; accrual method is complicated but more accurate. Its
hard to do it anyway while the business is ongoing.
1. The Cash Method
o Revenue only recognized when received (not just receivable) and expenses are only recognized when paid (not just payable)
2. Accrual method
o Revenue is recognized when earned even though payment is not received. That revenue is said to have accrued.
o Expenses are charges against income when incurred even if not paid for.
o Under this method, R and E may be deferred
41

3.
Matching Principle: is what accrual is all about
o Means that revenues are matched to the period they relate to and expenses matched to the revenue they generate.
o Ex: goods sold on credit is revenue accrued due but not yet received
The Cash Method and Income from Business

S.28 allows income from farming or fishing to be computed using cash method

If Act is silent, other businesses can use cash method if:
1. The cash method is appropriate under GAAP and
2. Cash method has been used consistently.

IT 261R: however – general rule is that taxpayers must use accrual method to calculate income from bus/ppty unless ITA
provides otherwise. Supported by s 12(1)b and 28 where receivable amounts for sale of goods/services other than farming or
fishing must be included in revenue.

Income from property can be either cash or accrual as long as
1. Either method produces appropriate statement of income
2. The method is used consistently

12(1)c- Interest income: Cash method is permitted for interest income but special rules not to use cash method when
postponing recognition of income 12(3) and 12(4)

12(1)(g): Royalties and dividend income: Cash method required.

No other specific provisions for other kinds of ppty.

Remember that office or employment is cash method

CG are separate and don’t use cash or accrual method but similar to cash b/c recognized CG when realized.
INCOME FROM BUSINESS OR PROPERTY – INCUSIONS IN INCOME
INCLUSION RULES:

s. 12-17 set out rules for inclusion from business or ppty

s 12: common transactions (i) the sale of goods, (ii) the provision of services, (iii) the receipt of interest, (iv) dividends, (v) rent, and (vi)
royalties

s. 13: depreciation of capital items or “capital cost allowance”

s.14: amortization of capital expenditures on intangible assets like patent/copyright/goodwill
o expenditures on intangible assets in the Act are “cumulative eligible expenditures”

15-17 anti-avoidance rules

16 disguised interest payments- imputes interest where a loan’s interest is disguished

15: low interest loan to shareholders or other benefits to shareholders – shareholder gets low interest loan instead of divided, so not
taxed under s.9 b/c not ppty
Income vs Capital Receipt: have to characterize income first, right?

9(1) taxes income from business or ppty – taxes the profit, not a return on capital or CG

Return on capital is not income (ie the $100k you loaned out when it comes back is the capital returned.

Income from Property does not include capital gains: s.9(3). b/c it is taxed separately under CG
o Income from ppty is rent etc; CG is when you sell the ppty

So is it income or CG? Even a single purchase of ppty that is meant to be resold for gain (speculating) can be income from business)
Form and substance of Transactions

The timing of when income is included can be different for business or ppty and generally it is the form of the transaction, not the
substance that determines.
TIMING OF INCLUSIONS – “realization principle”
Ikea

•
•
•
•


An amt is included when it has the quality of income and it has that quality when the following Q is answered yet [citing Robertson v
MNR]
o “Is his right to it absolute and under not restrictions, contractual or otherwise, as to its disposition, use or enjoyment?” Yes!
thus it has the quality of income if the taxpayer has an absolute right to it with no restrictions, contractual or otherwise as to its
disposition, use or enjoyment
also according to Ikea, an amount may be considered income even though it is not actually received by the taxpayer but only realized
as income
thus the Ikea case states that,
“[a]n amount may have the quality of income even though it is not actually received by the taxpayer, but only ‘realized’ in
accordance with the accrual method of accounting.”
the effect of this is that,
“… amounts received or realized by the taxpayer, free of conditions or restrictions upon their use, are taxable in the year
realized, subject to any contrary provision of the Act or other rule of law.”
Business income is accounted for on accrual basis
So things are included in income even though payment not received.
42







9(1): inclusion of profit in income + accrual method requires inclusion of amounts receivable
12(1)b requires inclusion in income of “any amt receivable in course of business in that year, notwithstanding that the amt is not due
until a subsequent year”
o Amts are deemed to have been receivable on the earlier of:

12(1)b(i): The day on which the account in respect of services was rendered and

12(1)b(ii):The day on which the acct of those services WOULD have been rendered had there been no undue delay
in rendering the acct
12(2) amounts NOT referred to in 12(1)b are still included in income per s.9
o so amts for services renered, but not yet billed might be included in income under 9(1) even if the bill has not been
rendered and the “undue delay” date has not passed.
12(1)b “receivable” means: a clear legal, not necessarily immediate, right to receive it. Not a precarious or tenuous right.
o This is determined by private law and varies on situation but usually when service is completed or goods have been
delivered. Then the amt is receivable and known.
Holdbacks:
o Work is finished but amt not receivable until certificate of satisfactory completion issued – that means they don’t have the
legal right yet to receive it, so not receivable. (Colford)
Expropriation Compensation
o Compensation for expropriated ppty is receivable when amt is fixed by arbitration or agreement even though the right to
compensation arose when ppty was expropriated. (MNR v Benaby)
o So need BOTH the right to compensation (land exprop’d) and settlement/judgment of court that determines the
amount.(how much $)
o Even if there are appeals, must be included in income b/c judgment has been given. even if delayed etc but that is a
problem bc don’t have money yet! – not resolved?
Inclusion of amounts receivable but unearned
o 12(1)a: includes amts received early even if service not yet rendered. [would not normally be included in accrual, but ITA
includes it when you get it!]
o for example: hockey season tickets – the Canucks have to include that in income for 2012 even though games are played in
2013.
o BUT THEN its deducted again via 20(1)(m) restoring the accrual method. This stupid thing is to keep track of things
Cash method for timing to include income
•
Income from property can also be either cash or accrual as long as:
(i) either method would produce an appropriate statement of income; and
(ii) the method chosen is used consistently.
•
the cash method is generally permitted for interest income [s. 12(1)(c)]
•
however, there are special rules to preclude use of cash method to postpone the recognition of income [ s. 12(3),(4)]
•
the cash method is required for royalties and dividend income [s. 12(1)(g)]
•
there are no specific provisions for other kinds of property.
Sale of Property: when is an amount receivable from sale of goods and sale of real ppty?

When ppty sold is inventory for business (car, books etc) receipt is income

When non-inventory ppty is sold, the receipt is either CG or CL

CRA says that amt is receivable from sale of goods on date of exchange OR when incidents of ownership pass to the purchaser
(possession, use, risk)

For sale of goods, this may be the date of delivery

For sale of real property, normally the closing date. [the day that title passes] note that 12(1)(a) advance payments does not apply to
real property, only goods or services.
Services
General Timing: Payment for services are usually receivable when services have been rendered.
Maritime Telegraph and Telephone FCA

M’s records show that the time services were rendered were together with the amt chargeable for those series so when to include
those amts in income

Held: although the services were in the last month of the year and the customers had not paid yet, the amt was to be included in
income b/c those servives had been rendered and M had an absolute right to the amts.
West Kootenay Power and Light Co 1991

Electricity provided in the taxation year but not billed until early in the next taxation year

Held: income was earned in the year in which the service was provided since W had done all needed to be done to have the right to
income.
43
Hourly Basis services:

When services is charged hourly/daily basis the amt is included in income even though the service under the k are not completed b/c
amt is due to be paid even though contract is not complete (like for legal services)
Modified Accrual Method:

12(1)b the word “services” is not qualified in any way, so applies to all services incl services that are performed at a discrete time or
times.
Professional Services

if an amt is receivable for work in progress, then that would be included under general accrual method of 12(1)b

s.34 when lawyer, doctor, dentist, vet, chiropractor is required to include in income that year for work in progress, they can elect
under s.34 to not include.

But if you make this election via s.34 you have to keep on doing it unless you have permission from the Minister.

“work in progress” not defined in Act – it is amt for which services have been partially rendered but not reached the stage where
taxpayer can bill the client
Dividends

“dividend” is a pro-rata distribution from corporation to its shareholders (EXCEPT when a distribution is made on a return of capital or
on liquidation)

a “stock dividend” per 248 is also a “dividend” and it is payment of shares of corpo instead of cash.

12(1)j: specifically includes dividends for resident corpo. They are income on ppty. [also for non-resident and foreign corpo]

Dividends are included in income on a cash basis (s.82(1)a “received” and s.91 for non-resident)
Rent and Royalties

Rents from leasing ppty is usually income but could be business if it is more than just collection of rent.

Usually rent is cash basis

If basic rental services: maint, elec, heat, a/c, parking water then income

If more like security, restau, mail, housekeeping = business
Payments based on production or use:

Rent and royalties are not defined in the act

12(1)g requires inclusion of income of any amt received in the year….cash basis.
Sale v Rent or Royalty?
o Where all rights transferred it is treated as a sale. Where less than ALL the rights it is treated as a lease or license and
payments on that are treated as rent or royalties
o Often royalty payment is used in sale of intangible ppty b/c hard to value the ppty.

The purchaser pays for the benefit received by paying a royalty
Installments based on use:

12(1)(g) also says that amts based on production or use are included whether or not that amt was an installment on the sale
price of the ppty.
Royalties on Assignment of Copyright

the installments as royalties on sales are treated as payments based on use of copyright and are included in income via 12(1)g
Interest

“interest” not defined in the Act. The price of borrowed money expressed as a percentage per annum although usually paid
more frequently

interest is income from ppty; the ppty is a chose in action
Inflation and Market Forces

obvs interest rates are affected by market forces and depend on creditworthiness of borrower, vaue of the security, the term of the
loan and inflation.

Lenders want compensation for inflation – interest rate is usually higher to compensate

The theory is that the portion that covers inflation should not be taxed b/c it is not an accretion but only a maintenance of wealth.
BUT Act taxes ALL of the interests!
Special timing of Rules

s. 12(1)(c) taxpayer must include in income “any amount received or receivable by the taxpayer in the year (depending on the
method regularly followed by the taxpayer in computing the taxpayer’s income) as, on account of, or in lieu of payment of or in
satisfaction of, interest to the extent that the interest was not included in computing the taxpayer’s income for a preceding taxation
year.”

b/c it says received or receivable, the taxpayer can treat it cash or accrual basis but just follow the same method year to year but can
use different methods for different sources.

12(3) + (4) limit the use of cash method to defer tax.

12(3) requires corporations or partnerships to include in income, interest accrued, received or receivable to the end of the year.

12(4) applies to individuals
o req’s all interest on an investment contract accrued to the anniversary day of the k be reported annually.
44
o
12(11) defines the anniversary day as the day one year after the day immediately preceding the date of issue of the k [ie
issued 1Nov05, then have to report interest accrued due to 31Oct06 for 2006 taxation year]
o 12(11) “investment contract” defined as any debt obligation [other that some limited exceptions]
Imputed Interest in Blended Payments

residential mortgages etc are partial payments of interest and principal so that the principal gradually reduces over the life of the loan
– called blended payments

16(1) – the part of the payment that can be reasonably be regarded as interest shall be deemed to be interest and thus included in
income per 12(1)(c) s

so if you have a blended payment, you have to unblend it to figure out what reasonably is interest
Groulx v MNR 1967 SCC

G sold a farm for $395k with $85k payable right away and $310 in installments over 6 yrs with no interest payable by purchaser.

G had been offered lower amt but refused, then the buyer offered higher amt but paid installments w/o interest

Held: that the payment over 6 yrs could reasonably be regarded as blended

The taxpayer converted what would have been interest income into a capital gain on the sale of the ppty.

Installments can be genuinely interest free when taxpayer and borrower are NOT at arms length (ie parent to child)
Imputed Interest in Deferred payments

Imputed interest from above Groulx could be applied to any deferred payment

I don’t get this.
Discounts

A debt obligation may be issued at a discount (T-bill or commercial paper)

Whether a bond is sold on discount or premium depends on market interest rates; if interst rates go up, bond prices go down.

Sometimes a discount on a debt obligation must be included in income b/c if the bond was sold at discount, when it is redeemed, the
value is more than just the interest, it is also the face value which is greater than what was paid. So what to do with that extra
redemption cash between the price paid and face value? Wood v MNR for answer!
Wood v MNR 1969

Court says that 16(1) [imputed interest from blended payments] does not apply when W bought a mortgage at a substantial discount
– did not have to report the redemption proceeds as interest income

At that time, the redemption extra was not taxed at all but now it would be CG (still ½ tax intead of it was interest income)

Where an obligation is traded a a discount as a result of market forces outside the control of the parites, 16(1) will not apply to the
discount.
Satinder v The Queen 1995 FCA

Held: the sale of a debt obligation at a discount at the time of issue (or creation of the debt obligation) is subject to 16(1) [unblending] and thus discount portion is interest income.

Here, the discount was set by the parties, not market forces so allows parties tax avoid
Non-Interest Bearing Bonds – strip bonds
•
there are so-called zero coupon bonds that are sold at a discount – nothing is received until maturity of the bond
•
there are also strip bonds created by assigning the interest portion and selling the principal portion separately
•
if the Act made no provision for interest-free obligations then arguably the discount would be treated as a capital gain (at least in case
of strip bonds; zero coupon bonds arguably by agreement of issuer and thus per Groulx and Satinder would be taxed under s. 16(1)
but s. 16(1) would still not apply since the amount must be “paid or payable” and no amount would be paid or payable until the
maturity of the bond) so 12.9 applies
•
however, s. 12(9) and Reg. 7000 deems the full amount of the discount on interest-free debt to accrue to the holder in annual
installments during the term of the bond – then per s. 12(3), (4) the holder is required to report interest income at a rate prescribed in
Reg. 7000(2)
•
s. 12(9) refers to a “prescribed debt obligation” and Reg. 7000 defines this as including a debt obligation on which no interest is
payable – Reg. 7000(2) provides the rules for computing the interest to be included
INCOME FROM BUSINESS OR PROPERTY – DEDUCTIONS
Fundamental Question with respect to deduction of expenses in determining income from busi/ppty
1. Whether an expense is deductible
2. Whether the amt of the expense is reasonable
3. When is it deductible
1. Whether an Expense is Deductible:

Two step process for deductions just like for inclusions:
o 1. Determine the treatment according to GAAP
o 2. See if trmt by GAAP is varied by Act or case law.

S.18 lists deductions that are NOT allowed

S.20 lists deductions that ARE allowed
45
2. Timing:
•
18(1)(b) disallows the deduction of expenditures on account of capital
•
such expenditures cannot be fully deducted in the year in which they are incurred but must be spread out over time
according the method provided by the Act
•
20(1)(a) and (b) provide for the method of taking deductions for capital expenditures
•
important to distinguish between current expenditures that can usually be deducted in the year of expenditure (thereby
reducing income and therefore reducing taxes) and capital expenditures that must be deferred (and therefore can only be
deducted mostly in future years leading to more tax in the current year and less tax in future years)
•
s. 18(9) prohibits the deduction of certain prepaid expenses and defers their deduction to the year to which they relate
•
s. 20(1) also permits reserves to be taken (i.e. allowing deductions for expenses in the year to which they relate but which will not be
paid or incurred until a later year)
Income Tax Logic: ability to pay, equity and neutrality: (review of damn principles)
Ability:
•
expenses incurred in producing income are not personal consumption – they do not contribute to wealth but are incurred to produce
an increase in income – the increase in wealth (or income) is the net amount – it is the increase in wealth that increases a person’s
ability to pay
•
personal expenses do not contribute to wealth – they are not, however, incurred to produce income – they are part of consumption –
they should thus not be deductible in determining a person’s income for tax purposes – personal consumption is an indicator of ability
to pay
Equity
•
•
allowing some persons to deduct personal expenses and not others would result in a horizontal inequity
this problem is more likely to arise with respect to income from business or property vs. income from employment since deductions
are limited to specific deductions provided in the Act in the case of employment
Neutrality
•
if persons could deduct personal expenses associated with a particular source of income but not with respect to other sources of
income then there will be a tendency for persons to prefer to earn the type of income that gives them scope for deducting personal
expenses
•
i.e., the tax would not be neutral – it would affect the behaviour of taxpayers
Savings and Capital Expenditures
•
if a person saves some of their income it increases their wealth
•
they will have consumed less so in terms of the Haig-Simons theory of income they will have less consumption added in the
calculation of their accretion to wealth but they will have an increase in the value of the property they hold between two points in
time that will add to their wealth
•
similarly, in the context of income from business or property, where there is a capital expenditure (i.e. an expenditure that will
provide benefits in subsequent periods) it is similar to savings
•
it should not be deducted in the period since only part of the expense contributed to income in the period
•
the rest will contribute to income in future periods and should be deducted at that time
Accurate measurement of profit:
•
a deduction of personal expenditures would also not lead to an accurate picture of profit
•
if an expense was not incurred for the purpose of gaining income from the business then deducting the expense against the revenues
of the business will underestimate the profit from the business
•
e.g., if you have a rug installed in your home (and the business is carried on at a separate location) the expense of installing the rug in
your home was not for the purpose of earning income from the business – so if you deduct that expense from the revenues of the
business it will underestimate the revenues of the business
•
generally accepted accounting principles would not allow the deduction of a personal expense (such as the installation of a rug in
one’s home) because that would not lead to an accurate picture of profit – therefore it is not permitted under s. 9 of the Act
Certainty and Predictability
•
some provisions in the Act exist b/c provide certainty
•
e.g., the deduction of capital cost allowance rather than using one of the various accepted accounting methods of calculating
depreciation provides for more certainty about what can be deducted (i.e. no litigation over whether the particular accounting
method used leads to an accurate picture of profit since the only permitted deduction is the specific one provided in the Act)
Controlling the Abuse of Business Deductions
•
the Act also limits deductions to control against abuse
•
the CCA approach in the Act is an example of this
•
also the specific but arbitrary rules for home office deductions are intended to limit abuse as is the limitation on meals and
entertainment expenses at 50% under s. 67.1
46
Tax Policy as Public Policy
•
there are questions of whether the deductions should be limited on broader principles of public policy
•
e.g., can you deduct bribes, fines, or damages or expenses for an illegal business [cannot deduct fines now?]
EXPENSES MUST BE AN INCOME EARNING PURPOSE

An expense must be incurred for the purpose of generating income from business or ppty for it to e deductible under s. 9. GAAP
calculations also require this when calculating income/profit

18(1)(a) explain what GAAP does anyway: “in computing the income of a taxpayer from a business or property no deduction shall be
made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property.”

s. 18(1)(h) provides that:
“in computing the income of a taxpayer from a business or property no deduction shall be made in respect of personal or living
expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying
on the taxpayer’s business.”
•
67 adds that expenses (whether with respect to income from employment or income from business or property) must be reasonable
in the circumstances
•
there arguably would be few, if any, expenses that would be valid under s. 9 that would be invalid per s. 18.1(a) and 18.1(h)
Non-Income Earning Expenses
•
non-income earning expenses are those that are incurred for:
(i) Personal consumption or personal purposes – for instance, food, shelter, clothing, personal entertainment
(ii) For the purpose of earning capital gains (since a different approach is taken to expenses with respect to capital gains)

there can be mixed personal and business expenses and can also be mixed ppty/CG income
Definition of Personal or Living Expenses

expense incurred for purpose of producing income from business or ppy is deductible under both GAAP and 18(1)(a).

if expense incurred for personal or living expenses it is not deductible under GAAP, 18(1)(a) or 18(1)(h)

but what about mixed expenses?

S.248(1) defines “personal or living expenses” as including: “The expenses of properties maintained by any person for the use or
benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or common-law partnership or
adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.”

This definition is about properties so it does not limit personal enjoyment stuff

So distinction between income-earning and personal-living expenses is case by case.
Personal and Mixed Expenses:
Common law tests:
1. SIX Tests for Whether an Expense is Personal
•
the majority in Symes cited six tests for whether an expense is personal or for business:
(i)
Whether the expense is deductible according to accounting principles or practices such as GAAP. [on test, note it then say it
requires expert evidence]
(ii)
Whether the expense is normally incurred by other taxpayers carrying on similar businesses. If it is, there may be an
increased likelihood that the expense is a business expense. [indicate that it requires investigation further]
(iii)
Whether a particular expense would have been incurred if the taxpayer were not engaged in the pursuit of business or
property income or whether, in absence of the business activity, the need to incur the expense (such as food, clothing and
shelter) would still be there. [This one you can try to apply on the exam] ie does person still have to incur this expense if you
take away the business?
(iv)
Whether the taxpayer could have avoided the expense without affecting gross income.
(v)
Whether the expense is an expense “of the trader” or “of the trade”. If the expense was an incident of the trade – part of
the business operation itself, it is an income-earning expense.
(vi)
Whether a particular expense was incurred in order to approach the income-producing circle (such as clothing, child care,
housekeeping or commuting) or was incurred within the circle itself. Only the latter would be deductible as income-earning
expenses. This test may be of limited assistance in cases where the “personal circle” and “income-producing circle” overlap,
such as in the case of home office expenses.
2. Dual-purpose, Mixed Expenses:

Expenses that are partly incurred to produce income from busi/ppty and party personal

Where part of a trip or other business expense is partly personal the personal portion cannot be deducted in determining income
from business or property under s. 9(1) (because G.A.A.P. would not allow it) or under section 18(1)(a) or (h) or s. 67

Apportionment: the part that is business is apportioned and deducted. For meals and entertainment, Act has arbitrary of 50% in
s.67.1

Principal (primary/dominant) Purpose: sometimes courts deduct the ENTIRE amt if the principal purpose of the expense was business
or disallowing the whole thing if principally personal

Cormack v MNR 1965 : a doctor was not allowed to deduct expenses incurred on a trip to Europe to study education b/c the principal
purpose was personal
47


Royal Trust Company : court allowed deduction of entire expense of club memberships for EEs b/c principal purpose was to earn
income by getting and keeping clients.
Court can either use GAAP to limit the deduction (b/c GAAP doesn’t allow any) but usually they use 18(1)(a) or (h) and 67 requiring
the expense to be reasonable.
Child Car Expenses:

S.63 allows partial deduction of child care expense but three important limits:
1. Only the lower income parent can claim the deduction [thus no deduction allowed if lower income parent has no income?]
2. Deduction cannot exceed 2/3 of “earned income” of lower income parent
3. Deduction capped at $7k/child under age 7 and $4k/child between 7-16
Symes v Canada 1993 SCC - child care expenses as a business expense

S was self-employed lawyer with 2 kids and paid a nanny to look after them. Said that cheaper forms of childcare were no good b/c
she had irregular hours.

She claimed $13 000 when the cap was $4000 – she claimed that it was a business expense b/c she could not have earned money
from business w/o the nanny cost.

(policy issue that gives incentive to stay home, violates neutrality and against women too)

HELD: Majority cites the 6 tests above and said that child care expenses are not deductible as a business expense according to
traditional tests of deductibility and were not incurred as part of income earning process but only to make her available for the
business.

The court said they could reconceptualize b/c of the changing workplace with more women but they didn’t need to b/c s.63 was
available that laid it all out for them.

it applies to “earned income” which includes income from business and thus limits the deduction from income from business

the cap in s. 63 and it’s limitation to the lower income parent would be undermined if a deduction was allowed with respect to
income from business

the minority judgment (written by L’Heureux-Dube and joined in by McLachlin) argued that s. 63 cannot preclude deduction of child
care expenses as a business expense. If it did then it would be contrary to s. 15 of the Charter re equality.
Comment:
•
the case created difficulties for the court
•
if one allowed deduction as a business expense then it would favour persons who earn business income over persons who earn
employment income since persons earning business income would be able to deduct child care expenses in full while persons earning
employment income would have limited child care expense deductions per s. 63
•
this would violate both neutrality and equity
•
there would be an advantage (or a further advantage) to earning business income thus encouraging persons to become self-employed
•
horizontal equity would be violated to the extent that a person earning business income would get a larger deduction for child care
expenses than a person earning the same level of employment income
•
further, vertical equity would also be violated to the extent that the self-employed tend, on average, to be wealthier taxpayers
•
thus a greater deduction would be made available to wealthier taxpayers
•
at the same time it arguably discriminated against women who tend to be the primary child-care providers
•
as a tax expenditure designed to lower barriers to entry to workplace for women allowing the deduction of child care expenses as a
business it is not very effective because:
(i)
it is a deduction and not a credit so it favours wealthier taxpayers; and
(ii)
it only helps those with business income not those with employment income
•
other policy instruments might be more effective
•
e.g., one might use direct subsidization directed at lower-income persons or a tax credit that is refundable and income-tested (which
is to some extent the approach that is taken now – i.e. the child tax credit)
Food and Beverages

s.18(1)(h) consumption of food generally is a personal expense and not deductible.
Scott v MNR FCA

Bike courier; travelled 150k/day; backpack of 50lbs; worked 10 hr/day. ER considered him an IC and did not provide break of meal
times.

He consumed an extra meal and extra water daily and claimed extra $11/day as a deduction in repect of his income as a courier
business – Minister disallowed b/c it was personal nature

Held: Court asked 3 questions:
o What is the need that the expense meets?
o Would the need exist apart from the business?
o Is the need instrinsic to the business?

If the need existed apart from the business, then held to be a personal expense

He only deducted the extra meal/drink that would not have been needed w/o the business.

This decision is rough b/c it could have been applied to Symes day-care too – she had extra expenses so that she could do HER job.
48
Entertainment Expenses

Entertainment have personal element

9(1), 18(1)(a) suggest that to the extent that expenses are peronsla, they cannot be deducted

they are also not expenditures incurred to produce income either b/c person so GAAP wouldn’t allow the either

18 1 h is explicit that personal expense cannot be deducted.
Royal Trust Co v MNR 1957

company has policy that EEs had to join clubs to meet prospective clients and co paid all fees

there was evidence that the club membership resulted in business advantage to the CO and that competitors did the same thing.

expert accounting evidence was that the expense would be deductible under accounting rules

HELD:
1. 1st look to accounting principles,
2. then see if it is restricted under the Act.
3. Doenst have to actually result in income-production, just that it was the purpose
4. Then look at principal purpose
o Court held it was all okay b/c principal purpose was to earn more business income.

Act amended after this s. 18(1)(l) prohibits the deduction of fees in social/rec clubs and expenditures for use and maintenance of
yacht, camp, lodge, golf course.

BUT general principles 1-4 still apply above
Mixed Business and Personal Purpose

GAAP + 18(1)(a) require apportionment when mixed.
Meals or Entertainment

S.67.1 limits deductibility of expenses for “food, beverages or enjoyment of entertainment” to 50% of the lesser of the amount
actually paid and the amt that is reasonable in the circumstances. [50% of reasonable entertainment expenses]

Arbitrary but whatever, its probably reasonslbe

Prior to this provision, open to abuve, violated neutrality (ppl ate out) and violated equity( benfited mostly higher earners)
Stapley v Canada 2006 FCA

S provided tickets and GCs to clients but did not attend events or consume any food and thus deducted 100% of expenses contrary to
67.1

Held: 67.1 applies via the plain meaning – does not specify if the person incurring the expense had to consume, simply that the
amount was in respect of consumption of food or entertainment.

It can be consumption by any human (although the point is that there is not personal benefit)

The judge said that he could have given other incentives but then 67.1 would interfere with business decisions. But this provision is
arbitrary anyway, right
Commuting Expenses

Commuting is dual-purpose – but courts say that commuting make taxpayer available for work,but not incurred in the course of
business. But once they get to work and have to travel, then it is a business expense.
Cumming v MNR 1967

Was an anesthesiologist who rendered all services near his home but no office available at hospy so he set up office at home

Held: The home office was base from which the practice operated and so the trips to the hospy were not commutes to work but trips
made in the course of his business

So expense was deductible.
Housekeeping Expenses

Similar to commuting in that it frees the taxpayer for work but is also partly personal consumption.

Not allowed b/c it would significantly erode tax base b/c there are tonnes of things that are said to be necessary to allow one to work.
Thomas Harry Benton v MNR 1952

Old farmer hired a housekeeper and wanted to deduct her housekeeping expense as expense of farm business; MNR allowed only
$325 and said rest was personal or living expense.

HELD: evidence was that she was primarily a housekeeper and court rejected the “but-for” analysis

Ironic b/c if he hired someone to do the farm work while he did the household stuff, it would be deductible.
Home Office Expenses s.18(12)

also a dual purpose expense- courts have been reluctant to permit any part of home expenses to de deducted unless a separate room
in house was maintained as an office and used exclusively for business.

The deduction is based on a proportion of floor space devoted to home office.e
49
Logan v MNR 1967

in Logan a doctor was permitted to deduct a proportion of the home expenses attributable to the room in the home that was used as
an office

the doctor was able to establish that the office was used exclusively for work-related activities such as medical writing, bookkeeping
and meeting with other doctors
Mallouh v MNR 1985

Doctor denied deduction for home office that was half the basement in the house b/c it was a general study/den where business
activity was not the exclusive activity
Amendment s.18(12)
•
s. 18(12)(a) provides that there is no deduction for a home office except to the extent that it is:
•
(i) the individual’s principal place of business, or
•
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for
meeting clients, customers or patients of the individual in respect of the business
(i)
s. 18(12)(a) only applies “in respect of an otherwise deductible amount” - thus the case law is still relevant –first satisfy the
requirements of the cases for deductibility and then, pursuant to s. 18(12)(a) the home office must also be either:
1. the principal place of business,
or, if not the principal place of business, then
2. it must be used exclusively for the purpose of earning income from business and used on a regular and continuous basis for
meeting clients, customers or patients …
(ii)
s. 18(12)(b) limits the deduction to the extent there is income from the business for which the home office is used
•
s. 18(12)(c) allows any unused deduction to be carried forward indefinitely to be applied to future income from the business for which
the home office is used as long as the office continues to qualify as a home office
•
(e.g. year 1 revenue of $10, home office expenses of $3, other expenses for business of $9 – then only $1 of home office expenses
deductible in year 1 – if revenue goes to $15 in year 2 with other expenses of $9 and home office expense of $3 then the full $3 will
be deductible as will the $2 carried forward from year 1)
COST OF ILLEGAL OR UNETHICAL ACTIVITIES

Should bribes, illegal business expenses, fines, penalties and damages be deductibe?

Under 18(1)(a) they fit the description but not much was said about it til 2004 when Act amended to prevent deduction of fines and
penalties
Kickbacks, Bribes and other Illegal payments 67.5

United Color and Chemicals v MNR 1992 held that a company could deduct it gave as bribes b/c it allowed them to make money
from business – they were an expense incurred

s.67.5 added to specifically disallow the deduction of bribes that are offences under the crim code:
o 119-121, and 123 dealing with bribery of judges (119), police officers, officers of the court (120), government officials (121)
or municipal officials (123) ;

124 purchase of an offic [“office” is defined as a government office, civil or military commission, or position in a public department] ;

125 payments to influence an office holder

393 collection of fine or toll, ticket fee or fare (take consideration for not collecting or give or offer consideration to a person who
collects fee, toll, etc.) and 426 (bribe to agent to favour briber – e.g. purchase agent).

bribes of foreign officials (s. 3 of the Corruption of Foreign Public Officials Act).
Fines and Penalties 18(1)t and 67.6

interest and penalties imposed under the ITA are not deductible [fines and penalties 162, 163, 238, 239] prior to 2004 nothing was
said about this then

65302 BC Ltd v The Queen 1999 [poultry case] held that fines were deductible as lng as they were for the purpose of earning income
from business or ppty

so then 67.6 was added: “In computing income, no deduction shall be made in respect of any amount that is a fine or penalty (other
than a prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state,
province or territory) by any person or public body that has authority to impose the fine or penalty.
Damages and Similar Payments 18(1)a;b;e, 67

damages are generally deductible if they are incurred as a part of earning income from bus/ppty
Imperial Oil v MNR 1947

2 ships collided at sea and IO had to pay damages of %26k – can they be deducted from income?

Minister’s argument was that the expense was not for gaining or producing income as required by 181a but to discharge a legal
liability

Held: deductible b/c the court said that MNR’s argument could be the case for every expense

An expense could never directly accomplish the purpose of gaining income so don’t take 18(1)a so literally!

TEST: is whether the expense came about “as part of the operations, transactions or services by which the taxpayer earned
income”
50


if it did then it was part of the income-earning process and was thus deductible
the transportation of petroleum products was part of Imperial Oil’s business and thus risk of collision at sea was part of that business.
The costs associated with that risk were thus part of the operations of the business and thus deductible
65302 v The Queen 1999 SCC Poultry case –fines are deductible

6 produced eggs under a quota for prov gov; high local demand so operated over the quota x 4 yrs b/c concerned he might lose his
major customer. No one else in the area would make up. The Egg Board found out and imposed a levy pursuant to regs and
negotiated to pay $269k + get rid of extra hens; taxpayer deducted the loss via 9(1) and 18(1)(a) and carried back his loss

then he deducted interest paid on unpaid balance of levy + legal expenses. Minister disallowed

Held: levy should be deductible.

Majority: test was simply whether the levy/fine/penalty was incurred for puprose of gaining or producing income from business. They
noted that a breach could be bad enough that the fine could not be justified as being incurred for the purpose of producing income. It
would be rare tho.
McNeill v The Queen 2000 FCA- damages are deductible

M ordered to pay damages of $465k for breach of NCA for accounting business sold. He claimed expense, but minister said nyet.

Held: the decision in Poultry case applies to damages as well!

So Damages are deductible if they were incurred for the purpose of gaining or producing income from business. The court also noted
that some wrongful actions may be so egregious that damages could not be justified for the purpose of gaining income.
Summary on Deductibility of Damages
i.
damages are deductible if they are incurred as part of the operations (or transactions or services) of the business [Imperial Oil ]
ii.
but damages are not deductible if not part of the operations of the business – i.e. if not part of the normal risks of the business [per
Imperial Oil case and the Poulin case]
iii.
s. 67 also requires that the expense be reasonable (therefore must satisfy the gaining or producing income test or the enduring
benefit test and be reasonable)
iv.
courts will not normally disallow deduction of damages on moral or public policy grounds BUT the damages could be said to be so
egregious or repulsive that it was not for the purpose of earning income from business or property [per the Poultry case and McNeill]
REASONABLE REQUIREMENT for deduction S.67

s.67 an amt is deductible only to the extent that it is reasonable in the circumstances.

S.67 applies to all deductions, not just income from busi ppty but most often arises in busi/pty

There is an overlap between s. 67 and ss. 9(1), 18(1)(a) and (h) in that it typically prohibits the portion of expense that is for personal
consumption

The portion that is for personal consumption would not be allowed under ss. 9(1), 18(1)(a) or 18(1)(h) – however, s. 67 is sometimes
referred to for convenience
Two Main Types of Cases:
1. Unreasonable Amount attributable to Personal elements

Expenses that are excessive in relation to the purpose of the expense (usually b/c there is a personal element

No. 511 v MNR
o 5 sponsored a baseball team and spent $22k, more than ½ profit on team; the principal shareholder appears to sponsor as a
hobby
o court accepted that expenses in sponsoring a team were legit as a form of advertising, having expenses that were more
than ½ the profit was excessive!
2. Unreasonable amount in non-arms length payments

Non-arms length management fees/rents/salaries paid to artificially reduce a taxpayers income or for some other tax avoidance
purpose
Mulder Bros v MNR 1967
o Two bros had a corpo and paid each other $20k but paid the wife of one $13k. MNR said that was excessive/unreasonable
and reduced it to $8500
Costigane v R 2003 TCC (went over in detail
o C was a dentist with a family trust that operated a business called C Financial services
o CFS provided management, banking and accounting to C;
o CFS hired 3 ppl to do this who were also employed by C’s dentist office
o C paid CFS $29k/yr
o MNR said that was 4x as necessary and only allowed $8k/yr
o C was paying his ppl $10/hr but based the amount on other firms charging $60/hr
o Held: It would have cost him $8k? I don’t understand this case.
Aessie v R 2004 TCC
o A was self-employed CA and worked from residence and spouse provided admin duties
51
o
o
o
A deducted fees for services provided by spouse as EE as $34k/yr
Minister disallowed by saying that management fees were not reasonable in the circumstances per s.67 – they say $8k was
reasonable.
Held: at p.8: “The deal with Mayday is a common and reasonable business deal that is not unusual or untoward in the
business world. It is not appropriate for the Court to interfere in such a transaction. Therefore the appeal respecting this
matter is allowed”
TIMING OF DEDUCTIONS
Capital v Current Expenditures 18(1)(b), 20(1)(a)(b)

Is the expense characterized as current?

Deduct only to the extend that there is a benefit realized in that year so must distinguish between benefits that accrue beyond the
year (enduring value expenses are called capital expenses).

Benefits that are consumed in the same year are called current expenses.

Also pre-paid expenses and running expenses also extend but not as enduring.

S.18(1)(b) capital expenses cannot be deducted BUT
o 20(1)(b) depreciable assets specific deduction rules
o 20(1)(b) intangible assets deduction.

The gaps are where an expense that is arguably capital does not fall inside these provisions and is not deductible b/c of 18(1)b
Current Expense
•
s. 18(1)(a) prohibits the deduction of an expense unless it was “made or incurred” by the taxpayer

Expense is considered incurred when the taxpayer has a legal obligation to pay that amount even though there is no immediate
obligation to pay.

Confirmed in R v Burnco Industries 1984: “… an expense, within the meaning of paragraph 18(1)(a) of the Income Tax Act, is an
obligation to pay a sum of money … an expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money
to anyone … [A]n obligation to do something which may in the future entail the necessity of paying money is not an expense.”
Guay Ltee v MNR 1971

A general contractor deducted an expense for construction holdbacks. – the contractor was not legally obliged to pay the
holdback until architects certification was filed.

He cant deduct expense if he was not legally obligated to pay until certi was issue.

This case is the opposite of Colford (inclusions)

Generally, the timing of expenses is the reciprocal of the timing of inclusions in income
Contingent Liabilities:

18(1)(e) prohibits deduction of reserves or contingent liabilities except as permitted under Part I

“contingency is an event that may or may not occur”

contingent liability “depends for its existence upon an event which may or may not happen”
Wawang Forest Products 1999
the question to ask when determining whether a liability was contingent was: “whether the legal obligation has come into existence at
that time or whether no obligation will come into existence until the occurrence of an event that may not occur”

Example: an obligation to pay a percentage of revenues is contingent on the revenues being earned
CPR v MNR ONCA 1999

in computing its income for tax purposes for its 1981 to 1984 taxation years, the taxpayer deducted from income, as expenses, certain
amounts in the years in which they were paid into the Deferred Liability account

a contingent account is one set up by a taxpayer to be used to pay debts, or other obligations, neither fixed nor absolute when the
fund is set up, but which may become so with the concurrence of some future and uncertain event

taxpayer's treatment (for tax purposes) of the amounts added to its Deferred Liabilities account gave the more accurate picture' of its
income

they were allowed to deduct b/c that amt to be paid out was fixed by WCB
General Motors of Canada v R 2004 FCA

GM req’d per collective agreement to give $2/hr/worker for an acct for various purposes (childcare, legal services, UI etc). After
allocation, money used for something GM and EEs agreed to.

Did not have to actually pay anything to anyone- just an accounting entry to keep track. No pot of$

Only after use of funds agreed to, $ out of GMs general accounts + legal obligation to pay

GM deducted and minister said nope b/c liability was contingent and not deductible 18(1)(e)

HELD: apply Wawang Test and the amt cannot be deducted. Paying out cash depended on agreement between EE and GM- a future
uncertain event

Deducting may have been okay per GAAP but not per 18(1)(e) b/c no one could demand the money from GM – no real liability
52
Contested Amounts or Non-incurred Liabilities

Contested amounts are not deductible; taxypayer cannot deduct an amount until it is determined.
Northwood Pulp and Timber 1998

Statutory obligation to do reforestation work; taxpayer wanted to deduc the estimated costs before the reforestation was complete –
not allowed!
CAPITAL EXPENDITURES

Review: s.18(1)(b) prohibits a deduction for an outlay, loss or replacement of capital, a payment on account of capital or an allowance
in respect of depreciation, obsolescence or depletion except as expressly permitted by part I

But SOME deductions permitted for capital outlays 20(1)(a)(b)

Step 1: is an expense deductible? Was it incurred for the purpose of earning income from bus/ppty 9(1) 18(1)(a) and is it reasonable
(67). If deductible and reasonable, then step 2: WHEN can the expense be deducted? 18(1)(b).

The value of capital outlay is not deducted to the extent that value remains. [Only the spent part can be deducted yearly]. The extra
bit that makes you 0.0001% richer is not deductible.
How to Determine whether an expense is a Capital Expenditure?

Capital outlay/expenditure is not defined in the Act but is an expenditure that will provide a benefit lasting beyond the year and for a
substantial period of time.

Many Tests:
1. Enduring Benefit Test- the main one
British Insulated v Atherton 1926

Co made a lump sum payment for a pensions for EEs and wanted to deduct entire amt that year.

HL said could not be all in one year – had to be spread out b/c the purpose of the payment was a “substantial and lasting advantage”

So if there is an enduring benefit deducted in one year, understates income first then overstates later. Deferring is consistent with
GAAP and more accurate measure of ability to pay.
Business v income-earning
Johns Mansville Canada v R 1985

Open pit asbestos mine business and bought land beside to prevent landslides

Deducted cost of land as current expense; Minster said it was capital expense.

If incurred for establishment/expansion of business = capital (basically same as enduring benefit)
BP Australia 1966

Referred to in Johsn Mansville – inducement payment made for exchange of exclusive agency agreement

Expense was curnt expense b/c was made part of the money-earning process
Recurring expenditures test – not ideal, but refer to it anyway
Vallambrosa Rubber co 1910
•
Capital exp. Occurs once and spent and income expenditure recurs yaerly
•
But hadr if you consider that delivery trucks are bought each year but each one lasts a long time.
Residual test
•
?
Acquisition of Assets:
1. Depreciable Property
•
29(1)(a): can deduct the depreciation of ppty also reg 1100
•
s. 13(1),(21), 20(16) rules for deduction of CCA
•
depreciable ppty is anything that you can claim a CCA for. Defined in 248(1) includes most types of tangible ppty and a few intangible.
2. Intangibles - Eligible Capital Expenditures [s. 20(1)(b); s. 14] “cumulative capital account”
•
s. 20(1)(b) permits a deduction of intangible properties -expenditures of this type are called “eligible capital expenditures”
•
¾ of these eligible capital expenditures are added “cumulative eligible capital” acct and then a deduction of 7% of the outstanding
balance of the cumulative eligible capital can be deducted Qyear
•
s. 14 provides rules on the cumulative eligible capital deduction.
3. Non-depreciable Property [e.g. Land]
•
non-depreciable property is property with no deduction under reg. Part XI
•
Land is the most common case of such an asset – it is said not to deteriorate and so there is no equivalent of depreciation
4. Natural Resources

For natural resources like an oil or gas well, mine or timber licence, the Act allows a deduction for depletion
5. Nothings [e.g., s. 18(1)(l) recreational facilities]
53

a final category is so-called “nothings” – these are expenditures that may provide benefits for future periods but which are not
deductible at all- expenses for recreational facilities or clubs may not be deducted per s. 18(1)(l)
Problems In Determining Whether An Expense Is A Capital Or Current Expenditure:
1. Small recurring expenditures:

like if the expense for tools that last a long time, you buy the same amt yearly – does not distort income and expensive to keep track
of depreciation of small things; Act doesn’t actually allow it but CRA lets it go
2. Repair of Tangible Assets

To determine if repair is capital or current, courts look at :
1. The relative size of expenditure
2. Whether the expenditure is recurring
3. The effect the expenditure has on the value of the asset repair – does it make it better? Example fixing the muffler on a car
may make it last much longer, but the cost is small in comparison to value of car

If repairs are small costs and recurring, then doesn’t matter if you deduct them yearly

But if large cost relative to value, not a recurring cost and gives substantial improvement of value the it should be treated as CAPITAL
expense so a deferred deduction.

Lots of grey area! So use the following cases to argue capital or current.
Earl v MNR 1993

E deducted the entire amount for a new roof on a commercial ppty and Minister said nu-uh

Held: capital not current in nature b/c most that it was a BETTER roof than what it was before and thus gave greater lasting value (an
improvement)
Canada Steamship Lines v MNR 1966

C replace floors and walls of cargo-hold; substantial in relation to value of ships and greater than previous years repairs but the
damages were due to normal wear and tear and restored to normal full operating capacity [exactly the same kind of ship it was
before as opposed to a better roof]

HELD: current expense and full amt allowed to be deducted in one year
Shabro investments v The Queen 1979

S replaced concrete floor in commercial bldg.; new and improved floor with reinforced concrete

Held: expense was substantial and improved quality of floor so capital expense [at odds with ship case? I don’t think so – the ship
stayed the same]
3. Protection of Intangible Assets

The cost of litigation for copyright, trademark, paten etc.

Similar to tangible assets – expenses can be large and may just restore usefulness or increase value.
Canada Starch Co v MNR 1968

C made a payment to a competitor to settle dispute about use of TM

So C deducted the cost of the settlement and MNR said no deduction b/c it was a capital outlay – at that time there was no provision
for intangible assets so there would be no deduction

Held: Current expense b/c related to the “process” of carrying on business and did not provide “enduring benefit”

Today: would go from s.18  20(1)(a) 20(1)(b) and may then be deductible via the cumulative eligible capital account 7%/yr.
Kellogg v MNR 1943

K deducted cost of litigation for using the name “Shredded Wheat” – MNR said capital cost b/c no intangible deduction at the time.

Held: not a capital expense.


Rationale: by preserving the intangible TM asset, the expense only maintained the normal usefulness of it and did not add value,
extend life. Analogous to replacing a window.
Counter: Kellogg and Canada Starch were one time expenses, not likely to recur, did more than restore normal value – it removed a
cloud on validity and improved value/quality of the asset b/c you could actually use it (and for longer than the current year)
MNR v Dominion Natural Gas 1941

Different result than previous cases – D had legal fees in defending licnese to supply natural gas

MNR did not allow deduction in the year it was made.

Held: expenditure was an enduring benefit and thus not deductible – probably correct b/c the cloud was lifted off the license and
could use it.
54
Explaining the discrepancies between Canada Starch, Kellogg, Dominion Gas

Pre -1972 no deduction for intangibles; – they were nothings so the companies would have been left w/o a deduction for something
that decreased their ability to pay. At that time, only current expense deductions allowed.

Now, these expense are called “cumulative eligible expenditures” – ¾ are added to cumulative eligible capital then a deduction of 7%
of the outstanding balance of the CEC is taken in each successive year.
Websites and Domain Names:

Whether it is current or capital is: whether it has an enduring benefit.

If it is a well-known name that will give benefit for many years, it is a capital expense – ¾ added to CECEA and 7% deducted yearly
Corporate Takeover

The expense of defending hostile takeover is a capital expense b/c it defends the continued use of assets as they are now.

Friendly takeover is considered a current expense.
Neonex V MNR 1978

in Neonex it was held that expenses incurred by an acquirer in an effort to complete a takeover were capital expenditures – here
there will be a change in the business the benefits from which will likely accrue over many years
Goodwill

“goodwill” is the present value of future cash flows from carrying on business over and above the breakup value of the assets of the
business. Customer loyalty, expertise/training of management.

Treated as capital expenditure
Expenses with Respect to New Business

Normally capital expenditure (legal fees with setting up incorporation etc)

They are benefits that extend beyond the year in enduring benefit test or part of “establishment” in business structure test
Firestone v R 1987 FCA

F was venture capitalist and took over struggling business and improved them.

Expenses to investigate the businesses were capital; expenses to supervise them were current.
Bowater Power v MNR 1971

Electricity co w/ engineering costs to see if could increase capacity

Held: current expenses while the business was operating. Wtf?
Depreciation and Capital Cost Allowance Compared:

“Capital cost allowance” is the tax term for the accounting concept of “depreciation”

“Depreciation” is an accounting device for recognizing the cost of a capital asset as an expense in each year of the useful life of the
asset
o e.g., if one pre-pays rental expense for 10 years then one has a right to occupy for 10 years and thus a portion of the rental
expense should be recognized in each year – in the case of a capital asset like a building with a useful life of 10 years then
one should depreciate it over the 10 years to recognize expense in each year
Two methods of calculating depreciation:
1. the straight-line method is the one most often used by accountants
a. cost of asset divided by # useful years of asset – allocates a portion to each year of assets life
2. the Income Tax Act, however, has adopted a (double) declining balance method for most types of depreciable assets
a. 2xstraight line rate x book value
b. gives heavier depreciation in earlier years but lower in later years.

Declining balance used b/c:
1. Provides heavier write-offs in earlier years when benefits of asset are highest. Wear and teat reduces asset productivity as it
gets older.
2. Maintenance is more expensive in later years so declining balance may even costs
3. The realizable value is greater in the early years than later years. Better estimate of book value and of income.
Capital Cost Allowance and Depreciation:

Capital cost allowance rates are generous under ITA b/c use declining balance method which gets a higher deduction for CCA than
straight-line in the early yars

So reduces tax charged and defers tax over (a bit b/c straight line higher rate later)
Why?

Wanted uniformity b/c previously ppl could use whatever they wanted and see what the MNR said.

Allows for faster write-offs for some assets – promotes particular investments like scientific R&D so that a company can right off an
expense quicker.
55
AN OVERVIEW OF CAPITAL COST ALLOWANCE
Key Terms
1. Capital Cost
•
the “capital cost” is the price paid for the asset
2. Capital Cost Allowance
“Capital cost allowance” is the amount of a deduction one can take per year per s. 20(1)(a), Reg. 1100(1) and Schedule II
3. Un-depreciated Capital Cost
•
The “undepreciated capital cost” is the amount of the capital cost left after taking CCA (i.e. Capital Cost minus accumulated CCA)
•
the “undepreciated capital cost” is defined by s. 13(21) that basically says to add:
•
the capital cost of each asset of the class acquired
•
recapture taken in previous years
then deduct:
•
the CCA for the class taken in prior years
•
terminal losses taken in previous years
•
the lesser of proceeds of disposition or capital cost of each property disposed of in prior years
4. Proceeds of Disposition
•
the “proceeds of disposition” is the amount an asset is sold for
5. Recapture
•
recapture arises were there is only one asset in the pool of a particular type of asset and that last remaining asset is sold for more
than the remaining UCC in the pool
•
the difference between the proceeds of disposition and the UCC is called recapture
•
this amount is included in income (and therefore is not treated as a capital gain) – s. 13(1) requires the inclusion of recapture in
income
•
if one sells the last asset in a pool of assets of a particular type for more than the remaining undepreciated capital cost for the
particular type of asset then the capital cost allowance taken in the past is more than the actual cost or expense of the declining value
of the assets of the particular type (i.e., too much of a deduction has been taken)
6. Terminal Loss
•
if there is only one asset in the pool and that asset is sold then for less than its UCC then the difference between the UCC and the
proceeds of disposition is called a “terminal loss”
•
s. 20(16) allows for the deduction of a terminal loss
•
if the last asset in a pool of assets of a particular type is sold for less than the undepreciated capital cost for that pool of assets then
the capital cost allowance taken in the past was less than the actual decline in value or expense of the assets in the pool (i.e., too little
capital cost allowance was taken in the past)
7. Class Concept
•
assets grouped in classes (generally on basis of estimated useful lives of the assets but sometimes on other bases for policy reasons)
Retirement of Depreciable Property

When there is just one asset in the pool and it is sold
1. If proceeds of disposition are greater than CCA claim in prior years:
a. then too much CCA was claimed in prior years.
b. Correct this by adding the difference to income per s.13(1) [the difference is the recapture]
2. If proceeds of disposition are greater than original cost:
a. Then recapture is equal to all of the CCA claimed up to the amt of the original cost.
b. The excess is treated as a capital gain
c. This is captures by “undeprectiated capital cost” in s.13(21)f – b/c UCC is deducted from the lesser of proceeds of
disposition or original capital cost
3. Proceeds of disposition of depreciable asset are less than UCC:
a. Then too little CCA was taken in prior yers
b. S.20(16) says that the amt of the shortfall can be deducted from income.
4. Example with multiple assets in the pool:

consider a car rental business that buys 10 cars at $30,000 each and all of the cars would fall under the same class of assets in
Schedule II under the Act – the total amount of the assets in the pool is $300,000

also assume that the rate for that class of assets is 30%

after one year $90,000 deducted for CCA (30% of $300,000) leaving UCC of $210,000

then suppose one car is sold for $20,000

that amount is deducted from the UCC leaving UCC of $190,000
56



•
•
•
•
•
•
now suppose another car is sold for $35,000
only $30,000 would be deducted from UCC since one deducts the lesser of the proceeds of disposition ($35,000) and the capital cost
($30,000)
that would leave an UCC of $160,000 and the remaining $5,000 of the proceeds of disposition would be a capital gain
then suppose seven more cars are sold leaving just one car in the pool – suppose that after the sale of the seven cars the UCC for the
pool of assets has been reduced to $50,000
now if the last car is sold for $15,000 there will be $35,000 of remaining UCC but no cars left in the pool
this remaining UCC can be deducted as a “terminal loss” under s. 20(16)
suppose instead that after selling the seven cars leaving just one car in the pool, the UCC was just $5,000 – suppose also that the last
car in the pool was sold for $15,000
deducting from the UCC the lesser of the proceeds of disposition ($15,000) and the capital cost ($30,000) (which means a deduction
of $15,000) would leave an UCC of minus $10,000
this remaining negative amount of UCC is then included in income per s. 13(1) as “recapture”
Capital Gains
Basic Concepts

Capital Property: Depreciable property and any property that can generate a capital gain/loss(54)
Certain types of property are excluded from generating capital gains/losses. (39(1)(a),(b))


Depreciable Property: Property for which CCA can be claimed under s. 20(1)(a)(13(21))
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 (248(1))

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)

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:
For depreciable property, the "adjusted cost base" is the capital cost of the property.(54)

For non-depreciable property, the adjusted cost base is the cost at the time of disposition,

adjusted as required by s. 53. (54)

Upward adjustments: Some expenses associated with the property are included at the time
of disposition by adding them to the cost base. e.g. interest on a loan taken to purchase it, property taxes, etc. This reduces
capital gains (or causes capital losses)(53(1))

Downward adjustments: These do the opposite of upward adjustments (53(2))

Pre-72 adjustments for ppty acquired before 72 since CG were not taxed then.

Deemed Costs for deemed dispositions: when ppty is deemed to be disposed (inter vivos gifts) then the disposition is equal
to FMW for thatppty then deemds it acquired at FMV

Rollovers: disposition can happen w/o CG triggered.
Computation of Gain or Loss

Proceeds Due within the Year: If taxpayer is entitled to be paid in full in the year of disposition: capital gain/loss = proceeds of
disposition – (adjusted cost base + expenses of disposition)(40(1))

Sold for $100 – [acb $80 + expense $5] = $15 CG. $15x0.5% = $7.5 is taxable CG.

Proceeds Due in a Future Year: If taxpayer disposes of property but is not entitled to receive the proceeds in the same
year, a “reasonable” reserve may be deducted from the capital gain in each year. This reasonable reserve must be no
less than the lessor of: (40(1)(a)(ii)) o

Gain*X/5 (where X = 4 – number of years since disposition).(40(1)(a)(iii)(D) o

Gain*(proceeds not yet received)/(total proceeds). (ITA s. 40(1)(a)(iii)(C))

Capital Loss: ½ the capital loss is immediately deducted in the year of disposition (40(1)(b))
Deemed Dispositions –
 purpose: to disallow an indefinite lock-in of ppty. Problem: valuing the ppty and the taxpayer has no $ to pay the tax. But gov
says taxpayer can plan for the deeming so buy insurance. Lol
 Death: provides that on the death of a taxpayer the taxpayer is deemed to have disposed of all of his or her capital property for
57
proceeds of disposition equal to the fair market value of the property immediately before the taxpayer’s death 70(5)
 one can avoid the deemed disposition on death by giving the property away before death but there is a separate deemed
disposition at fair market value for such inter vivos gifts per s. 69(1)(b)
 Trust: s. 104(4) deems a trust to have disposed of the property in the trust every 21 years from the inception of the trust
•
Change of use: s. 45(1) provides for a deemed disposition at fmv where property acquired for a non-income producing use is
converted to an income producing use (45(1)(a)(i)) or from an income-producing use to a non-income producing use (45(1)(a)(ii)). an
election is available for change of use from non-income producing to income producing per s. 45(2) and also for a personal residence
from income producing to non-income producing
•
Departure from Canada s. 128.1(4), as we discussed earlier when dealing with residence, provides for a deemed disposition at fmv
when a taxpayer ceases to be a resident of Canada
Stop Loss Rules
 Where there is no actual loss, you cant claim it. Like if you transfer to RRSP or to a control corporation
Superficial Losses: 54

defines a “superficial loss” to be a loss from the disposition of property where within 30 days either before or after the disposition the
taxpayer acquired another property that is identical to the one disposed of and the taxpayer, or a person affiliated with the taxpayer,
still owns the substituted property at the end of 30 days after the disposition
•
affiliated persons per s. 251.1(1) are the taxpayer’s spouse or a corporation controlled by the taxpayer
•
s. 40(2)(g)(i) deems a “superficial loss” to be nil
Personal-use property

“ personal use property” is defined in s. 54 as property owned by a taxpayer “that is used primarily for the personal use or enjoyment
of the taxpayer” or of “a person related to the taxpayer”
•
it includes, for example, cottages, cars, bikes, boats, household appliances, furniture, and clothing – it also includes a principal
residence but the principal residence has a unique tax treatment
•
No-loss: s. 40(2)(g)(iii) provides that a loss from the disposition of personal-use property is deemed to be nil [but if gained, then
taxed]
•
$1000 rule: s. 46(1) deems the adjusted cost base and proceeds of disposition of personal-use property to be the higher of the actual
figures or $1,000
Listed personal property

“listed personal property” is defined in s. 54 to include print, etching, drawing, painting, sculpture, or other similar work of art,
jewellery, rare folio, rare manuscript, rare book, stamp or coin

capital losses on listed personal property are deductible only against capital gains on listed personal property

while one can therefore claim capital losses on listed personal property they can only be claimed against capital gains on listed
personal property and this is effect by s. 3(b)(i)(B) which brings into income the “taxable net gain for the year from dispositions of
listed personal property” determined according to rules in s. 41(1) and 41(2)

if there is a net loss on listed personal property can be carried back three years and carried forward seven years in accordance with s.
41(2)
PRINCIPAL RESIDENCE EXEMPTION

a person’s principal residence is “personal use property” and thus any capital loss on a principal residence is deemed to be nil as for
other personal use property BUT THERE IS AN EXCEPTION!
•
DEF’N: “principal residence” is defined in s. 54 as a property
(i) owned by the taxpayer either by themselves or jointly with another person;
(ii) is “ordinarily inhabited” in the year by the taxpayer or the taxpayer’s spouse (or former spouse) or child; and
(iii) the property must be designated by the taxpayer to be her or his principal residence for the year

The taxpayer has to own the ppty to receive proceeds of disposition and realized the CG

Co-ownership, the CG is shared.

Ordinarily inhabited: determined on the facts of the case IT-120R4 . “Where a housing unit is occupied by such a person for only a
short period of time in the year (e.g. a seasonal residence occupied during a taxpayer’s vacation or a house sold early or bought late in
the year), it is the CRA’s view that the person ordinarily inhabits the housing unit in the year, provided that the principal reason for
owning the property is not for the purpose of gaining or producing income.”

Surrounding Land: s54(e): land beside the house and contiguous that contributes reasonably to the use and enjoyment of the house
as a residence
o Land greater than ½ ha is deemed not to be included unless it is necessary for the use and enjoyment

the existence of a zoning by-law requiring a minimum lot size in excess of a half a hectare was one way to establish that the added
land was necessary to the use and enjoyment of the housing unit as a residence (Queen v Yates)

if you cant subdivide the lot any further, the entire amt is part of the principal residence (Carlile)

the relevant time for determining whether the adjoining land was necessary for the use and enjoyment of the property as a personal
residence was the time of sale (Cassidy) [6ac lot that subdivided – taxpayer claimed the whole amt, not just the1/2 ha around it)
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•
•
Designation part (c) of the definition of “principal residence” in s. 54 says that the taxpayer must designate the principal residence for
any particular year. Can designate one ppty/yr. You designate when you want to sell
Mechanism for Exemption - the formula is to reduce the gain by a fraction equal to the number of years designated divided by the
number of years since the acquisition
•
Gain x (1 + number of taxation years ending after the acquisition date for which the property was the taxpayer’s principal
residence and during which the taxpayer was resident in Canada) / (number of years since the acquisition date during which
the taxpayer owned the property)
CHANGE OF USE

Deemed Disposition: s. 45(1) deems a disposition at fair market value when property is converted from a non-income producing use
to an income-producing use or from an income-producing use to non-income producing use – this applies to a principal residence as
well
•
Election: s. 45(2) allows the taxpayer to elect not to have begun the use of the property for the purpose of gaining or producing
income
•
the taxpayer can continue to treat the property as a principal residence but only for four years (see s. 54 definition of “principal
residence”) – this allows the taxpayer to return to the property to a principal residence after a period of absence but limits this to four
years
•
Conversion from Income-earning Use to Principal Residence
•
the change of use from a rental property to a principal residence would trigger a deemed disposition at fair market value
under s. 45(1) and any capital gains would be taxed since the house was used as a rental property and could not be claimed
as a principal residence
•
s. 45(3) allows for the postponement of the change of useuntil the property is actually disposed of at which time any capital
gain can be apportioned between the time the property was used for rental (income-earning) purposes and the time it was
used as a principal residence THEN the taxpayer has cash for the TAX
•
Partial Change of Use - under s. 45(1)(c) there is a partial deemed disposition for a partial change of use and there is no election
allowing this deemed disposition to be avoided
•
Like if you take a roommate or change to an office for business.
•
The CRA takes the position that a change of use has not occurred if the change is just ancillary to the main use as a principal
residence and will not treat it as a partial deemed disposition unless the taxpayer claims capital cost allowance for a portion
of the property.
ROLLOVERS
•
there has technically been a disposition of property triggering a capital gain,BUT there has been no real change in the persons
benefiting from the property or no real change in the use
•
triggering the capital gain in these circumstances could lead to the liquidity problem for the taxpayer (the disposition won’t generate
the cash to pay the tax) and imposing a capital gains tax would either be hash on the taxpayer (forcing a transaction the taxpayer
would not have otherwise made) or discouraging the particular transaction
A. Transfer of Assets to a Corporation (or Partnership)
•
a simple example would be a person carrying on business as a sole proprietor who then decides to incorporate a corporation and
carry on the business through the corporation
•
the Act deals with this by allowing the transaction to occur without triggering a capital gain
•
instead, the individual (sole proprietor) taxpayer is deemed to have disposed of the property at its adjusted cost base (thus
yielding a zero gain) and the corporation is deemed to have acquired it at the individual’s adjusted cost base
•
that way when the corporation later sells the property it will recognize the full capital gain from the time the individual acquired the
property.
•
a similar rollover exemption applies where a taxpayer transfers property to a partnership.
B. Exchange of Securities
•
there is also a rollover for an exchange of securities in a corporation
•
there is a rollover with the same basic concept that the common shares are deemed to be disposed of at their adjusted cost base
(so that there is no capital gain) and the preferred shares are deemed to be acquired at the adjusted cost base of the common
shares
C. Transfer to Spouse
•
there is also a rollover on a transfer to a spouse
•
there is also a rollover on a transfer on death to a spouse – on the death of spouse A there is a deemed disposition leading to a capital
gain – if, however, the property is inherited by spouse B there is a rollover
D. Transfer of Farm Property to a Child
•
there is no general rollover for transfers of property to a child
•
there is, however, a rollover for transfers of farm property to a child
•
if the parents decide to give the farm to the child to keep the farm in the family the child might be forced to sell the farm in order to
help the parents pay the capital gains tax on the disposition of the property
59
•
to avoid this the Act provides a rollover for the transfer of farm property to a child.
E. Transfer to a Capital Beneficiary of a Trust
•
there is also a rollover for a disposition of property to the capital beneficiaries of a trust
•
under the trust the capital beneficiaries have the beneficial interest in the property
•
the transfer of the property to them does not change the beneficial interest in the property so the Act provides a rollover
INVESTING AND TRADING:

if one makes an investment such as in shares or debentures or other property to earn income from the property, then a subsequent
sale of the investment property at a gain or loss yields a capital gain or capital loss

the Act, however, does not say much about whether the gain or loss on a sale of property should be characterized as a capital gain or
capital loss as opposed to income or loss from business

s. 39(1)(a) simply says that a capital gain arises on the disposition of property that would not otherwise be taxed as income and s.
39(1)(b) makes a similar statement with respect to a capital loss

“business”, however, is defined in s. 248(1) as including a “trade” or “an adventure or concern in the nature of trade”

“trade” and “an adventure in the nature of trade” are not defined so it has been left to the courts to define these expressions
TRADE – “adventure in the nature of trade”
Frequency of Transactions
 more frequent transactions suggest that a person is involved in a trade (ie it is part of a person’s business
Scott v MNR:
o
a lawyer who had acquired 149 mortgages at a discount over an eight year period using partly his own money and partly
borrowed money was held to have been engaged in a “trade” of acquiring such mortgages. the gains on the mortgages
were therefore income not capital gains
Wood v. M.N.R.
o
•
the taxpayer, also a lawyer, acquired 13 mortgages at a discount over seven years using his own money was held to have
made a capital gain not income
the court noted that the relatively fewer number of transactions and the use of the taxpayer’s own money was more consistent with
a personal investment than the carrying on of a business
Forest Lane Holdings v. M.N.R
•
. it was held that the gain from transactions in corporate securities was income in part on the basis of the number of
transactions
•
other factors considered included the relatively short period for which the securities were held and the fact that the principal
shareholder of the corporation was an investment dealer
Relationship to the Taxpayer’s Other Work
•
if the transactions are related to the taxpayer’s ordinary business then they are more likely to be a trade (i.e., the earning of income
from business)
Cooper v. Stubbs
•
the taxpayer was a member of a firm of cotton brokers
•
he bought and sold about fifty cotton futures on his own account over a two-year period
•
he was held to have to have been in the business of trading in cotton
Morrison v. M.N.R
•
the taxpayer bought and sold grain on his own account about two hundred times in the year
•
he was a member of a firm of grain merchants
•
it was held that the transactions were, for him, part of a trade
Whittall v. M.N.R
the taxpayer was a stockbroker
•
he bought and sold securities and oil and gas rights on his own account
•
in trading on his own behalf he was held to be carrying on a business and the gains on the securities and oil and gas rights were held
to be income
Depreciable Property and Inventory
•
this happened in Canadian Kodak Sales v. M.N.R. [1954] C.T.C. 375 (Ex. Ct.) where Kodak was leasing out machines known as
“recordaks” and was therefore earning income from property with the recordaks being depreciable property used to earn that
income – Kodak then decided to sell the machines to the lessees – by doing so the recordaks were held to have been converted to
inventory and the gain on the sales was treated as income
60
AN ADVENTURE OR CONCERN IN THE NATURE OF TRADE
•
a “trade” in the sense of a business involves transactions in which a person sets out to earn a profit
•
an “adventure” in the nature of trade suggests an isolated single transaction or relatively few transactions in which the person intends
to earn a profit – i.e., it is speculative in nature – entered into with an intention to earn a profit
•
the key factor then is the intention of the taxpayer – did you want to do a speculative transaction? So when you sell it, it is income
from business. Time period is a key factor…
Intention to Trade:
Intention on Acquisition:
•
what was the taxpayer’s intention when the ppty was acquired?
•
If it was to resell at profit – then gain is income (and loss is lsos from business_
•
If it was to hold as investment or for personal use then any loss/ gain is CG CL
•
Intention is determined from objective evidence based on facts, how acquired, subsequent dealing with pty and eventual sale
•
Factors:
1. the period of ownership
2. efforts made to attract purchasers or to make the property more marketable
3. the nature of the property (whether it yields income);
a. MNR v Talor: the taxpayer bought 1500 tons of lead held in 22 railway cars – this kind of property would not yield income
from property such as rent, interest, dividends, or royalties – it is hard to imagine a personal use for 22 railway cars full of
lead – it was held that the acquisition of the lead was an adventure in the nature of trade and therefore it involved a
“business” and the gain on the sale of the lead was income from business
4. The skill and experience of the taxpayer
a. Dube v R : bought and sold 3 buildings quickly – said the first 2 sales were b/c he realied the money to repair them was too
great. TCC said no- you are experienced as an architect and you would know and inspect them yourself. So held to be
income from business
5. The relationship of the tx to the taxpayers ordinary business
6. The circumstances surrounding the sale, esp if it was unforeseen u nexpected
7. Whether the taxpayer borrowed the funds to acquire the ppty
Secondary Intention:
•
Taxpayer has more then one intention maybe?
•
Like they bought it for personal use but then – hey I’ll sell it if the primary intention doesn’t work out.
•
Regal Heights v MNR: where the taxpayer wanted to build shopping center but chose not to do so after learning that another
shopping center was being built nearby – the taxpayer sold the land and made a profit on the sale – it was held that the profit was
income from business on the basis that although there was a primary intention to build a shopping center the taxpayer had a
secondary intention to sell the land for a profit if the primary intention to build a shopping center did not work out.
•
So, Reicher v R: same sort of thing but the taxpayer acquired land and built an office building – he moved in to the building for his
own office as an engineer and leased out the remaining space – within the year he sold the build and leased back the office space he
was using – he said he had to sell due to unforeseen financial difficulties – the Federal Court of Appeal accepted his explanation and
held that the sale of the property was not a motivating reason for acquiring the land and building an office building on the land
•
Hiwako Investments: the taxpayer acquired apartment buildings and sold them for a profit within the year – the taxpayer said the
buildings were sold because they proved to be less profitable than had been anticipated and was in response to an unsolicited offer –
the Federal Court of Appeal accepted that the buildings were purchased to earn rental income and while the taxpayer may also have
had capital appreciation in mind at the time of purchase, the resale of the apartment buildings was not an operating motivation at the
time the apartment buildings were acquired
•
these case suggest that a secondary intention to sell for profit must have been a motivating reason for the acquisition at the time the
acquisition was made
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THE TAX ASSESSMENT PROCESS
•
•
File Return s. 150
•
•
[with payment s. 156.1(4)]
•
•
•
Assessment s. 152(1)
•
-CRA gives notice of assessment
•
•
-possible refund
•
-interest on additional amounts owing per s. 152, 161 and Reg.
•
4301
•
•
Examinations
•
•
[compare employer (T4) filing with employee (T1) filing;
•
compare corporate dividend distribution filing with
•
shareholder filing; compare trustee filing with beneficiary filing;
•
•
compare lender and borrower filings]
•
•
Audit s. 231.1(1), (3); 231.2
•
-focus area for particular year
•
•
-other filings that raise concerns
•
•
•
Reassessment [from examinations/
•
audits] s. 152(4)]
•
•
•
Objection s. 165(1), (2); s. 166.2
•
•
-possible resolution by discussion – no resolution then formal notice of objection
•
-Minister of National Revenue (CRA Chief of Appeals on Minister’s behalf)
•
confirms
•
•
or varies assessment – not satisfied then can appeal
Appealor varies
confirms
-until 1958 to Exchequer Court – from 1958 to1971 to Tax Appeal Board – 1971 to 1983 to
Tax Review Board – from 1983 on to Tax Court of Canada
-within 90 days from notice of decision on objection
-informal procedure
-formal procedure
-appeal from Tax Court of Canada to Federal Court of Appeal and then to the Supreme Court
of Canada
62