Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 1
Tax Outline
(O’Brien, Fall 2013)
I like to pay taxes. With them, I buy civilization.1
1 Oliver
Bachelors should be heavily taxed. It is not fair that some men should be happier than
Wendell Holmes
others. 2
2 Oscar
Wilde
Supplementary Definitions
Vocabulary
Term
Definition
adventure in the
nature of trade (ANT)
capital cost
when a person does a thing that is capable of producing a profit (e.g., carrying on a trade or business) on an
infrequent or sole basis as opposed to a habitual basis (which is the nature of trade or business)
capital cost of the property is what you pay for it, including items such as delivery charges, the GST and
provincial sales tax, or the HST.
statements where the CRA asserts how they view the law to be; non-binding on CRA/taxpayer (therefore while
likely to be a correct statement of the law, they may be more or less strict in a case)
interpretation bulletin
ITA s. 54 Definitions
Term
Definition
“adjusted cost base”
(ACB)
“personal use
property” (PUP)
(a) for depreciable property, the capital cost to the taxpayer
(b) for other property, the cost of the project adjusted in accordance with section 53
(a) taxpayer’s property that is “primarily for the personal use or enjoyment” of the taxpayer, or one or more
individuals each of whom is i) the taxpayer; or ii) a person related to the taxpayer
(b) debt owed the taxpayer for the disposition of PUP
(c) any property that the taxpayer has the option to acquire and, if acquired, would be PUP
“principal residence”
“proceeds of
disposition” (PoD)
“listed personal
property” (LPP)
“capital property”
PUP of a partnership is partnership property that is used primarily for personal use or enjoyment of one or
more members of the partnership
a property (housing unit, leased unit, share in a co-op) owned by the taxpayer (jointly or otherwise) in the year
if
(a) ordinarily inhabited in the year of the taxpayer, the taxpayer’s (former) spouse, or the taxpayer’s
(former) common law partner
PoD includes
(a) sale price of sold property;
(b) compensation for unlawfully taken property;
(c) compensation for destroyed property, and any amount payable under insurance;
(d) compensation for expropriated property;
(e) compensation for property injuriously affected;
(f) compensation for property damage, and any amount payable under insurance except to the extent
that insurance proceeds has been used to repair the damage
personal property that is all or any portion of an interest in / right to
(a) print, etching, drawing, painting, sculpture, or other similar work of art
(b) jewellery
(c) rare folio, rare manuscript, or rare book
(d) stamp, or
(e) coin
(a) any depreciable property of the taxpayer
(b) any property (other than depreciable property) where the gain or loss from disposition would be a capital
gain or capital loss
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ITA s. 125(7) Definitions
Term
Definition
“active business
carried on by a
corporation”
“Canadian controlled
private corporate”
any business carried on by the corporation other than a specified investment business or a personal services
business and includes an ANT
“personal services
business”
“specified investment
business”
Law 345 definition: a corporation that is resident in Canada, its shares are not listed on a stock exchange, and
it is not controlled by non-residents of Canada, by a corporation whose shares are traded on a stock
exchange, or a combination of these.
a business providing services where
(a) an individual who performs services on behalf of the corporation [incorporated employee], or
(b) any person related to the incorporated employee
is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as
an officer or employee of the person or partnership to whom or to which the services were provided but for the
existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than 5 f/t employees, or
(d) the amount paid or payable to the corporation for the services is received or receivable by it from a
corporation with which it was associated in the year
a business with a principal purpose of deriving income (including interest, dividends, rents and royalties) from
property, unless
(a) the corporation employs in the business throughout the year more than 5 f/t employees, or
(b) any other corporation associated with the corporation provides services to the corporation and if such
services were not provided, the corporation could reasonably be expected to require more than 5 f/t
employees
ITA s. 248(1) Definitions
Term
Definition
“business”
includes a profession, calling, trade, manufacture or undertaking of any kind whatever, and an adventure in the
nature of trade
excludes an office or employment
a person who cohabits with the taxpayer in a conjugal relationship
(a) has cohabited throughout the 12 month period
(b) is a parent of a child of whom the taxpayer is a parent
disposition of any property, unless expressly provided otherwise, including
(a) any transaction entitling a taxpayer to proceeds of disposition
(b) any transaction
(i)
where the property is a share, bond, debenture, note, certificate, mortgage, agreement of
sale or similar property, or an interest in it, the property is redeemed in whole or in part, or is
cancelled
(ii)
where the property is a debt or any other right to receive an amount, the debt or other right is
settled or cancelled
[…]
“common-law
partner”
“disposition”
but does not include
(e) any transfer of the property where there is no change in the beneficial ownership of the property,
except where the transfer is
(i)
from a person or a partnership to a trust for the benefit of the person or the partnership,
(ii)
from a trust to a beneficiary under the trust
[…]
(j) any transfer of the property for the purpose only of securing a debt or a loan, or any transfer by a
creditor for the purpose only of returning property that had been used as security for a debt or a loan
[…]
(l) any issue of a bond, debenture, note, certificate, mortgage or hypothecary claim, and
(m) any issue by a corporation of a share of its capital stock, or any other transaction that, but for this
paragraph, would be a disposition of a corporation of a share of its capital stock
Law 345: Tax
“eligible relocation”
“employee”
“employer”
“employment”
“office”
“property”
“retiring allowance”
“specified
shareholder”
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relocation of a taxpayer where
(a) the relocation occurs to enable the taxpayer
(i)
to carry on a business or be employed at a location in Canada [the new work location], or
(ii)
to be a student in f/t attendance enrolled in a program at a post-secondary level at a location
of a university, college or other educational institutional [the new work location]
(b) both the old residence and the new residence are in Canada, and
(c) the distance between the old residence and the new work location is not less than 40 km greater than
the distance between the new residence and the new work location
Exception: where the relocation if a taxpayer who is absent from but resident of Canada (e.g., a member of the
Canadian Forces), the old or new location does not have to be in Canada
includes an officer
for an officer, means the person from whom the officer receives the officer’s remuneration
means the position of an individual in the service of some other person, and “servant” or “employee” means a
person holding such a position
position of an individual entitling the individual to a fixed or ascertainable stipend of remuneration, and includes
a corporate office holder, judicial officer, member of Parliament
means real, personal, corporeal or incorporeal property, including
(a) a right of any kind whatever, a share [which is a bundle of rights] or a chose in action
(b) unless a contrary intention is evident, money
(c) a timber resource property, and
(d) the work in progress of a business that is a profession
an amount (other than a superannuation or pension benefit, etc.) received
(a) on or after retirement in recognition of long service
(b) in respect of a loss of an officer or employment for damages or settlement
a taxpayer who owns, directly or indirectly, at least 10% of the issued shares of any class of the corporation or
a related corporation
(a) a taxpayer shall be deemed to own each share owned at that time by a person with whom the
taxpayer does not deal at arm’s length
Other ITA Definitions
Term
Definition
“allowable capital
loss”
section 38: allowable capital loss = ½ of capital loss
section 39(1)(b): capital loss = the loss from the disposition of property unless that loss is deductible when
computing income from a source
Section 38: taxable capital gain = ½ of capital gain
Section 40(b)(a): capital gain = the amount by which the tax payer`s proceeds of disposition exceed the total
of the adjusted cost base of the tax payer immediately before making the disposition and any outlays or
expenses incurred to make the disposition
Law 345 definition: shares of the same class of a particular corporation, and units of the same class of a
particular mutual fund trust or income trust
section 253: (a) produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves
or constructs, in whole or in part, anything in Canada whether or not the person exports that thing without
selling it; or (b) solicits orders or offers anything for sale in Canada through an agent or servant, whether
the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada
“taxable capital gain”
“identical properties”
“carrying on
business”
Law 345: Tax
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The Big Picture
Policy and Other Considerations in Tax Law
Consideration
Details
Objectives of tax system
Tax system indicates how a society divides up personal and communal expenses; what types of
investments a society encourages;
Examples: health care primarily paid by the state; K-12 education paid by the state; post-secondary
education paid 1/3 by student and 2/3 by state
Intrusiveness
Tax Power
Tax and Politics
Taxation without
representation?
No taxation without representation? Canada taxed women before they had the vote; children under 18 pay
taxes on income without the vote; and non-residents pay taxes on Canadian-source income
Tax law is one of the most intrusive interactions between the individual and the government given the level
of mandatory disclosure about financial matters, which most individuals (and corporations, for that matter)
consider personal (and therefore the disclosure is invasive.)
Most transactions and major life events (e.g., birth, change in employment, purchase of house, marriage,
divorce, retirement, death) have tax implications.
The taxation power is a powerful tool for government in that is empowers the government to act in the best
interests of citizens and residents by acquiring revenue that then funds capital expenditures.
Taxation intersects with major political concerns (e.g., carbon tax, HST, tax equity).
Political and social decision on what to tax, how much to tax and how to spend revenue.
Canada taxed women before they had the vote; children under 18 pay taxes on income without the vote;
and non-residents pay taxes on Canadian-source income
Law 345: Tax
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Introduction to Taxation
Basic Concepts and Terminology
Term
Definition of Tax
Details
Key Concepts
“The essential characteristics of a tax are that it is not a voluntary payment or donation
 compulsory
but an enforced contribution exacted pursuant to legislative authority in the exercise  legislative
of the taxing power, the contribution being of a proportional character and payable in
authority
money imposed, levied and collected for the purpose of raising revenue to be used for
 revenue raising
public or government purposes and not as payment for some special privilege or service
rendered”
(Shawnigan Water and Power Co.)
Key features:
 constituted by law
 enforceable by law
 (generally) proportionate
 payable in money
 imposed for the purposes of raising revenue for public services (e.g., not for a
special privilege, good or service)
“a compulsory transfer of money from private individuals or organisations to the
government not paid in exchange for some special good or benefit”
(Brooks, Materials on Canadian Income Tax, 14th ed)
Key features:
 compulsory
 unrequited
Political and policy Taxation is a way to limit or restrict access,
decisions: tax as a or to function as a regulatory brake on
tool for restriction or consumption.
encouragement
Alternative to taxation: regulation or
banning
Fines and penalties
Taxation can also be used to encourage or
incentivize some behaviour
 incentive
 disincentive
Alternative to taxation: direct subsidy
Example: education and textbook credits
Examples: carbon tax; tobacco taxes
Definition: amounts owing to government as punishments for disobeying the law
Key features:
 intended to deter behaviour
 apply according to the gravity of the offence as opposed to the wealth of the
offender (however, some countries have fines bracketed by income)
Lottery
Old rule of strict interpretation of tax statutes was drawn from the criminal law (e.g., tax
statutes as a penalty).
Lottery tickets are purchases for the chance to win a prize  is it a price or a tax?
marginal rate
average rate
effective tax rate
regressive tax
Lotteries appear more like a tax as 40% goes into government revenues with only 60%
being returned to players (regressive tax as only the poorest purchase lottery tickets).
Vocabulary
the rate of tax that applies to the last (highest) dollar of income earned
the fraction of total income tax that is paid on taxable income as a whole
the real average tax rate after considering total accretion to wealth, not just taxable income
taxation that imposes a higher tax burden on lower income earners
 punishment
 deterrent
 calibrate to
offence not
wealth
 regressive tax
Law 345: Tax
progressive tax
proportional tax
exemption
deduction
tax credit
basic personal
amount
actual tax liability
tax incidence
direct tax
indirect tax
Five Attributes of
Taxes
(1) Tax Base
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taxation that proportionally increases tax rate to greater proportion of higher income earners’ income compared
to lower income earners’ income
taxation that takes a constant proportion of income as income rises
n.b.: often can appear as a regressive tax as flat rates like sales taxes and carbon taxes that apply at the same
rate regardless of income result in an effective burden that is higher on those with lower incomes
an amount which is not included in computing income under the ITA
n.b.: exempt amounts are not reported on a tax return, but they increase a person’s wealth or ability to pay
an amount that is subtracted from gross income, under a provision in the ITA, to arrive at taxable income
n.b.: a deduction is worth more dollars to a person in a higher tax bracket than in a lower tax bracket; RRSPs are
a significant deduction as it promotes savings by taxing on the withdrawal not the input
an amount deducted from tax otherwise payable
n.b.: most former deductions have been converted to credits as fairer from a tax policy point-of-view to reduce
tax (e.g., each taxable tax payer gets the same value for the credit)
tax-free band of income that every taxpayer is entitled (also indexed to inflation and increases with the CPI)
income minus exemptions minus deductions minus credits
person or corporation that actually bears the tax burden
incidence of taxation is on the taxpayer and there is no opportunity to pass on the price of the tax to another
n.b..: in Canada, precedent finds that GST, PST, HST and QST are direct taxes despite the fact that they are
indirect taxes in other jurisdictions
incidence of taxation is passed on to another who thereby indemnifies
e.g.: property taxes where the cost is passed on to renters, or import/export taxes where the cost is passed on to
the consumer
Attributes of Taxes
(1) tax base

(2) tax filing unit
(3) rate of taxation
(4) period of taxation
(5) collection or administrative system
Three primary tax bases:

(1) income
(2) consumption
(3) wealth
Different approaches to tax bases
 Carter Commission: tax everything; a buck is a buck is a buck
 Haig-Simons principle: every increase in wealth should be taxed
Note: Canada excludes all kinds of accretions of wealth (e.g., gifts, inheritances,
lottery winnings)
Broad base taxes
(1) income taxes
(2) HST/PST/GST (tax on consumption of goods and services, which encourages
saving over consumption
Limited-base wealth tax
(1) property taxes (ownership of property is a proxy for wealth)
(2) property transfer taxes
(3) probate fees
Labour taxes
(1) EI?
(2) CPP and WCB premiums paid by employers
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Note: in Canada, personal and corporate income tax (together with GST/HST) are the
biggest revenue generators.
2010/10 federal government revenue
 personal income tax = $117 billion (51%)
 GST = $27 billion (12%)
(2) Tax Filing Unit
Typically the taxpayer, the tax filing unit is the entity responsible for paying the tax.
(3) Rate of Taxation Section 117: statutory rate structure


Federal Tax Rates 2013
Income bracket
Statutory rate
up to $43,561
15%
$43,562 - $87,123
22%
$87,124 - $135,054
26%
over $135,054
29%
Income brackets are indexed to the CPI (consumer price index) at the average inflation
rate. Provincial tax rates are indexed to their CPI, which varies.
(4) Period of
Taxation
(5) Collection or
Administration
System
Financial
accounting systems
Types of tax rates:
 marginal rate: the rate of tax that applies to the last (highest) dollar of income
earned
 average rate: the fraction of total income tax that is paid on taxable income as a
whole
 effective rate: the real average tax rate after considering total accretion to
wealth, not just taxable income
Taxation, unless imposed on individual transactions, requires a period over which a) the
base is measured, and b) the taxes are collected.
Administrative arrangements are required for the collection of taxes. In Canada, key
administrative bodies are the Canada Revenue Agency, the Department of Finance and
the Department of Justice.
Accounting Practises
Two systems of rules for financial accounting:
(1) traditional model: Generally Accepted Accounting Principles (GAAP)
(2) new model: International Financial Reporting Standards (IFRS)



n.b.: financing accounting rules are not tax accounting rules
Cash vs. accrual
accounting
Generally, more than one way to fairly report financial results. For tax purposes,
however, the law governs (e.g., not GAAP or IFRS)
Two methods to report income:
(1) cash-method = methodology used by individuals where the tax payer reports the
income that was received and what deductible expenses were paid (e.g., income
received – deductible expenses paid)
(2) accrual-method = methodology used by business where the tax payer reports
both amounts received and receivable and what deductible expenses were paid
(e.g., income received and receivable – deductible expenses paid)
amount receivable = monetary obligation owed to an
n.b.: not everything is receivable (e.g., condition precedent met on a sub-trade
contract; expropriated land is not receivable until ascertainable)
Expenses incurred to earn income (for business or property) become deductible when
they become payable. It is a factual determination: have all the legal requirements been

Law 345: Tax
Three Main Tax
Policy Criteria
Equity
Neutrality
G. Morgan (O’Brien, Fall 2013) | Page 8
met to make the amount payable?
Criteria for Evaluating Canadian Tax Measures
Primary tax objective: to raise revenue to provide the goods and services that the
population expects (and the associated administrative expenses with delivery and
collection)
Three tax policy criteria:
1. equity
2. neutrality
3. simplicity (or efficiency)
Equity = tax system or a tax in general should respect vertical and horizontal equity (e.g.,
those with less ability to pay should pay less, and proportionately less)
Two types of equity:
(1) vertical equity = ability to pay; some of the purpose of the tax system is
redistribution of wealth
(2) horizontal equity = those will the same ability to pay should pay the same
amount (therefore tax “fringe benefits” such as company car)
Neutrality = tax system should not unduly effect person and economic; tax system should
not distort reality (e.g., force individuals to do specific things)



Example: change to treating married couples the same as common-law couples to not
privilege those who are married, or not
Simplicity
n.b.: tax policy is split on the efficacy of incentives vs. direct subsidies; this split also
raises a broader issue (is what the government trying to “incentivize” you to do “good”?)
Simplicity =
(1) people should have a sense of what is taxable and what is not (e.g., understand
the broader strokes of the tax system);
(2) certainty or predictability of consequences of a tax transaction (transaction that
attracts tax consequences) although this may involve expert (tax lawyer)
assistance;
(3) compliance convenience (it should be possible to file your own tax return); and
(4) administrative convenience means that taxes should be difficult to *not* pay
(e.g., no incentives for non-compliance as that results in honest tax payers
carrying more of a burden)
Global
Competiveness
Problem: discretion reduces certainty/predictability
With globalization increasing, it is easier for the wealthy to move money round the world.
People will put money where the taxes are lowest.
Tax Avoidance vs.
Tax Evasion
Accordingly, tax rates have dropped in the last ten years in order to increase activity in
Canada. The Canadian tax system must remain efficient in order to retain foreigners
Tax avoidance = legal structuring of personal/business affairs to minimize taxes / avoid
incidences of tax liability
Section 245(2)
General anti-avoidance rule (GAAR) = discretion to remove the tax advantage; test varies
but tends to be a threshold of abusive / aggressive avoidance
Tax evasion = illegal; fraud (crime in the ITA); typically involves not reporting income
and/or claiming deductions without foundation and/or hiding money in off-shore accounts



Law 345: Tax
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Canada’s Tax System
Term
Details
Key Concepts
Division of Powers
Constitutional Authority for Taxation
Federal and provincial government have overlapping authority to impose direct taxation
(e.g., income taxes, sales taxes)

In international tax law, VATs are considered indirect taxes but in Canada it was
reasoned that GST/HST would be direct taxes (e.g., promotes validity under the
Constitution Act)
If the tax is designed to be paid directly by the target, it is a direct tax.
 s 91(3) federal authority for raising revenue through any type of taxation
 s 92(2) provincial authority for direct taxation for “Revenue for Provincial
Purposes”

Indirect vs. Direct
Taxes
If the tax is designed to be “passed on” (e.g., embedded in further sale), it is an indirect
tax.
 s 91(3) federal authority for raising revenue through any type of taxation
 s 92(9) provincial authority for licensing revenue raising—provinces can regulate
and issue licenses (e.g., require licensing) with fees that raise revenue
Example: Manufacturer Sales Tax imposed on the value of goods produced; import
duties; “sin” taxes on alcohol, tobacco
Equalization
payments
Direct or indirect? development fees levied by municipalities are not either but rather part
of a regulatory system by which the municipality (provincial delegate) raises funds.
These fees were frequently challenged but likely settled now that they are not provincial
indirect taxation and therefore not constitutionally problematic.
Charter s 36(2): constitutional authority for equalization payments
 Canada’s equalization system used to calculate “have” and “have not” provinces
to ensure that poorer provinces can deliver essential services without exceeding
the tax base of the have not provinces
 distribution of federal tax revenue based on an equalization formula instead of
source (e.g., have provinces receive a smaller proportion back than the amount
that their tax bases contribute)

n.b.: the 1982 Constitutional reforms gave the provinces the capacity to indirectly tax
natural resource productions
Tax Authorities
Roadmap of the
Tax Adjudication
System
n.b.: despite significant variations between Quebec and the other provinces (e.g., Quebec
collects provincial taxes where other provinces allow the CRA to collect their income
taxes), all provinces (including Quebec) have confirmed that provincial residency is
determined by province of residence as of December 31st.
Features of the Tax Adjudication System
CRA = enforcement of ITA
Department of Finance = policy driver
Department of Justice = represents CRA in court
A tax return is filed annually by April 30th. It is an annual report of incomes and credits.
A tax return can be reviewed (produce receipts) or audited (check for what’s not
reported).
A notice of assessment is a statement from the CRA notifying the tax payer to tax that is
owed. A tax refund is issued when too much tax was withheld.


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A notice of assessment is objected to by the taxpayer. An objection is an
administrative review by the CRA.
A re-assessment can be issued. This re-assessment can be objected to as well.
If you disagree with the outcome of an objection, the next course of appeal in the Tax
Court of Canada (the “TCC”).
At the TCC, taxpayer may elect an informal procedure where certain conditions are met,
including that the tax and penalties in issue are less than $12,000.
Interpretation of
Tax Rules
Features of the informal procedure:
 no discovery of documents
 no pre-trial examination for discovery
 no appeal from a judgment (but there is still judicial review for jurisdiction;
fairness; error in law; error of fact made in perverse, capricious manner or
without regard for the evidence; decision based on fraud or perjured evidence;
otherwise contrary to law)
 representation by an agent other than a lawyer (general procedure = lawyer)
Interpretation of Tax Rules
Traditional approach = taxes were considered punitive therefore there was a strict
approach to interpretation
Modern approach = Placer Dome Canada, 2006 SCC 20
Issue: definition of hedging profits in the Ontario tax act
Key features of interpretation of tax rules:
 modern rule of interpretation = Driedger
 where the words of the statute are precise and unequivocal, the text prevails
 there can, however, be latent ambiguities. There is a residual presumption in
favour of the tax payer
 burden of proof is always on the tax payer to refute the position taken by the
CRA

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Sources of Income
Source Conception of Income
Term
Framework in
Section 3
Details
Part 1 of the Act covers all sources of income. Taxation attaches to income from sources
therefore key determination is whether an amount of income is from a source.
n.b. residents are taxed on worldwide income. Non-residents are taxed on
Canadian source income.
Key Concepts

Section 3: macro formula for how the system works
(a) all amounts of income from Canadian and foreign sources excluding capital
gains on the disposition of property and including, without restricting the
generality of the foregoing, income from office, employment, business and
property
(b) taxpayer calculates the amount by which (i)(A) capital gains from the disposition
of property other than LPP and (i)(B) taxable net gain from the disposition of
LPP exceed (ii) allowable capital losses from the disposition of property other
than LPP
(c) determine the extent to which the amount of (a) plus (b) exceeds the allowable
deductions under sections 60, 62 and 63
(d) determine the amount (c) exceeds the total amount of the taxpayer’s loss from
the year from an office, employment, business or property
Recognised
Inclusions and
Exclusions
To be taxable under section 3(a), the income must be accrued from a source. While the
list of sources in section 3 is non-exhaustive (Bellingham), the Court has been reluctant
to recognise sources of income other than those specifically enumerated in the ITA.
Included and Excluded Sources of Income
Recognised excluded categories (Bellingham):
 gambling gains (unless business of gambling)
 gifts and inheritances
 residual category of windfall gains
 strike pay (Fries)
n.b.: residual presumption in favour of the taxpayer (Fries)

Recognised inclusions:
 payment made to give up a questionable legal right may constitute income
from a source (Mohawk Oil)
 inducement to leave employment, even when it is not directly from a future
employer, is considered income from a source (Curran)
 generally, amounts received from expropriating authorities taxable either as
proceeds of a disposition of a capital amount, or proceeds of a business
Residual Category
of Windfall Gains
No pattern to the enumerated sources or excluded sources to allow for a purposive
determination of “source” therefore must consider the case law.
Indicia of a payment falling within the residual category of windfall gains (Cranswick):
 no enforceable claim to payment
 no organised effort on the part of the taxpayer to obtain the payment
 payment was not solicited by the taxpayer
 payment was not expected (either specifically or customarily)
 payment unlikely to be recurring
 payor was not a customary source of income for the taxpayer
 payment was not in consideration for, or in recognition of, property, services or
anything else provided by the taxpayer (e.g., not earned)

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Examples:
 punitive or additional awards in court cases (Cartwright & Sons)
 unsolicited payments (Curran, as MNR conceded TP did not have claim in US)

Statutorily Included
Sources
Surrogatum
Principle
General Inclusions
vs. Specific
Inclusions
Framework for
Deemed
Remuneration
Lump-Sum Awards
n.b.: indicia are relevant but not determinative nor exhaustive
Section 56(1): without restricting the generality of section 3, the following sources must
be included
(a) pension benefits, unemployment insurance benefits, etc. including retiring
allowances
[…]
(h) registered retirement savings plans (RRSPs), etc.
[…]
Surrogatum Principle
If the taxpayer receives an award of damages or a settlement pursuant to an action and
the amount replaces an amount that would have been taxable, the damages or
settlement are taxable.
To determine taxability, the compensation must be analysed to determine whether the
damages or settlement were intended to replace a taxable or non-taxable source.
 if a settlement or award is replaces an amount that would otherwise be taxable,
it is taxable.
 however, if the payment cannot be apportioned to determine which portions
replace income from a taxable source and which are not, than the payment is
not taxable (Schwartz)
General provisions such as section 3(a) cannot be used to include amounts that are
exempt under specific provisions, or are almost but not quite include under specific
provisions (Schwartz).
Section 6(3): deems remuneration as payment for the taxpayer’s services unless it is
established that it is not reasonably related to several enumerated grounds
Purpose: capture payments made before or after the employment relationship when they
are reasonably related to the employment relationship (e.g., signing bonuses or
compensation for covenants to limit employment after the end of the employment
relationship)
When a lump-sum award is received for damages or settlement, the taxpayer bears the
burden of establishing which portion of the lump-sum award is non-taxable (Siftar).





Under the surrogatum principle, either the whole lump sum or the part established (by
implication) as taxable will be included as replacement income from the included source
that it replaces (Tsiaprailis).
Losses and the
Source of Income
Analysis of Lump-Sum Awards:
(1) What was the lump sum payment intended to replace?
(2) If the intended replacement is clear, would the replaced amount have been
taxable in the recipient’s hands?
For losses to reduce tax liability, they must be losses from taxable sources.
e.g.: income from employment of $30,000 (included as taxable income under s. 3(a) and
s. 5); retiring allowance (income from another source under s. 56(1)); rental revenue
(income from property); new business owner with losses under s. 3(d)
The loss reduces taxable income despite being a different source than the taxable

Law 345: Tax
Damages for
Personal Injury or
Death
Relevant Nexus
Nexus for Illegal or
Immoral
Businesses
Net Worth
Assessment
G. Morgan (O’Brien, Fall 2013) | Page 13
amounts (but still need to calculate income separately for each).
Interpretation Bulletin IT-365R2:
No taxation on amounts received by a taxpayer or a taxpayer’s dependent as special or
general damages for personal injury or death unless it can be reasonably considered
income from employment rather than an award of damages
Nexus between a Taxpayer and a Source of Income
There needs to be a nexus relevant for tax purposes between the taxpayer and the
amount from a source of income
 nexus = control, enjoyment, ownership of the amount
Examples:
 receipt of RRSP funds in order to be taxed on their withdrawal (Field)
Income from an immoral or illegal business is just as taxable as income from a more legal
source (Buckman).



The logic for imposing tax liability seems to be preventing individuals from benefiting from
not paying taxes on illegal sources (Buckman).
The liability for tax has also seemed to be assessed on an intention basis
e.g., where there was no intention to repay embezzled funds to employer (Poynton)
section 152(7) = Minister not bound by a return or information supplied by the taxpayer

Step 1: calculate assets and liabilities at the beginning of the year
Step 2: calculate assets and liabilities at the end of the year
Step 3: determine the difference, and attribute the increase to income
Step 4: estimate a value of personal consumption
Step 5: assess the total of the increase in assets, and the value of personal
consumption, as income for tax purposes
Section 152(8) = burden on the taxpayer is to disprove the amount through the objection
process
Who is Subject to Canadian Income Tax?
Term
Categories of
Taxpayers
Approaches to
Determining
Taxpayers
Details
Three categories of taxpayers:
(1) individuals
(2) corporations
(3) trusts and partnerships
Generally, countries make decisions to tax based on residence and source of income,
which recognizes economic ties to a jurisdiction.
 rationale: taxation is based on residence as the most government benefits
confer to residents (e.g., education, health care, legal services).
However, the US taxes on the basis of citizenship as opposed to residency.
 rationale: wealthy landowners moved to the UK and were not paying property
taxes in the US (as property taxes were based on residency) therefore
citizenship was used as the determining factor when the income tax was
introduced
However, residency can result in conflicts between taxation jurisdictions as it is relatively
easy to be a resident of more than one jurisdiction. There is effort as an international
community to set up a system that tries to reduce the situations in which income would be
doubly taxed.
Two approaches: (1) tax treaties to solve conflicts; and (2) domestic tax policies
Key Concepts


Law 345: Tax
ITA Provisions
Determining
residence
Presumption of
residence
G. Morgan (O’Brien, Fall 2013) | Page 14
Residency-based Taxation
Section 2(1): worldwide income of taxpayers who are resident in Canada at any time
during a taxation year is subject to tax
Section 2(3) non-resident taxpayers are liable to tax only on income from Canadian
sources (c.f., Part XIII)
Residency for taxation purposes is not conclusive with immigration.


Tests:
(1) Section 250(3) = person who was “ordinarily resident in Canada”
(2) Section 250(1) = deemed residency
(a) sojourned in Canada for a period/periods totalling 183 days or more
(b) member of the Canadian Forces
(c) resident of Canada immediately prior to appointment as (i) an ambassador,
minister, high commissioner, officer or servant of Canada, or (ii) agentgeneral, officer or servant of a province
However, no technical definition of “resident” or “ordinarily resident” therefore must turn to
case law.
Residence = “spatial bounds within which he spends his life or to which his ordered or
customary living is related” (Thomson)

Assumption that every person has a residence at all times because residence does not
require a home or particular shelter (Thomson).
Two features of residency (Thomson):
(1) always a resident of somewhere (does not require property)
(2) can be resident in 2+ countries at the same time
Ordinarily resident
Factors in
Assessing
Residence
Intention is “entirely absent in residence” (Lee)
Ordinarily resident = “residence in the course of the customary mode of life of the person
concerned, and it is contrasted with special or occasional or casual residence” (Thomson)
No single test for residence: “The gradation of degrees of time, object, intention,
continuity and only relevant circumstances shows, I think, that in common parlance
“residing” is not a term of invariable elements, all of which must be satisfied in each
instance” (Thomson)
A number of non-exhaustive and non-determinative factors could be considered,
including (Lee):
 past and present habits of life
 regularity and length of visits in the jurisdiction asserting residence
 ties within jurisdiction
 ties elsewhere
 permanence or otherwise of purposes of stay
 ownership of a dwelling in Canada or a rental of a dwelling on a long-term basis
 residence of spouse, children and other dependent family members in a dwelling
maintained by the individual in Canada
 membership with Canadian churches or synagogues, recreational and social
clubs, unions and professional organisations
 credit cards issued by Canadian financial institutions and other commercial
entities
 local newspaper subscription to a Canadian address
 rental of a Canadian safe deposit box or post office box
 subscriptions for life or general insurance including health insurance through a


Law 345: Tax
Sojourning
Canadian
Controlled Private
Corporations
G. Morgan (O’Brien, Fall 2013) | Page 15
Canadian insurance company
 mailing address in Canada
 telephone listing in Canada
 stationery including business cards showing a Canadian address
 magazine and other periodical subscriptions sent to a Canadian address
 Canadian bank accounts other than a non-resident bank account
 active securities accounts with Canadian brokers
 Canadian driver’s license
 membership in a Canadian pension plan
 holding directorship of Canadian corporations
 membership in Canadian partnerships
 frequent visits to Canada for social or business purposes
 burial plot in Canada
 will prepared by Canada
 legal documentation indicating Canadian residence
 filing a Canadian income tax return as a Canadian resident
 ownership of a Canadian vacation property
 active involvement in business activities in Canada
 employment in Canada
 maintenance or storage in Canada of personal belongings (clothing, pets)
 obtaining landed immigrant status or appropriate work permits in Canada
 severing substantially all ties with former country of residence
Definition of “sojourn”
 OED = to visit, to reside temporarily
 TRB: spend non-work hours as well as work hours in Canada
 Thomson: “as applying to presence in Canada where the nature of the stay is
outside the range of residence, or what is commonly understand as temporary
residence”
For the purposes of the course, sojourning means being in Canada for a period of time
without establishing residence (e.g., working out of the Toronto office for a month
when you usually work from the New York office; holidaying in Lake Louise and
Muskoka). A taxpayer likely needs to stay overnight to count sojourning (but the day of
arrival and departure would count).
Simplified definition of Canadian controlled private corporation (“CCPC”)


Section 125(7) corporation is resident of Canada and a CCPC when
 shares not listed on the stock exchange
 not controlled by non-residents of Canada, by a corporation whose shares are
traded on a stock exchange, or a combination of thses
Section 125: “small business deduction” allows CCPCs pay a lower tax rate (13.5%
combined fed/BC) versus non-CCPCs (26% combined fed/BC).
Calculating taxation
when individual
only part-year
resident
Why lower tax rate for CCPCs? avoid disincentizing incorporation; encourage local
entrepreneurship; foster competiveness of Canadian companies (usually just at the startup stage); small companies have limited capital
Part-Year Residence
Section 249(1) “taxation year”
(a) fiscal period for corporations
(b) calendar year for individuals
[…]

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 16
Section 114 = method to calculate tax for part-year residence
Severing residential
ties
Step 1: divide year into 2+ periods (divide based on whether a Canadian resident or a
non-resident)
Step 2: tax period(s) when Canadian resident on worldwide income (e.g., as a
Canadian resident taxpayer)
Step 3: tax period(s) when non-resident on Canadian-sourced income (e.g., as a nonresident taxpayer)
If ordinarily resident for part of the year, a resident would need to sever residential ties to
Canada to qualify for part-year residence.

Factors considered (Schujahn, Reeder):
 club memberships
 physical presence in Canada
 location of personal belongings
 location of bank accounts and credit cards
 filing of income tax in other jurisdiction as resident
Conflicts with Dual
Tax Residence
n.b.: courts tend to be less stringent on severing all residential ties when returning to
“primary residence” (e.g., Schujahn likely would have been a different story if he had
been a Canadian resident primarily as opposed to primarily a US resident)
Tax Treaties
It is very possible to be a resident tax payer in more than one country. Accordingly, there
are tax treaties between countries to resolve conflict to avoid taxpayers from being taxed
on worldwide income by more than one jurisdiction.

section 250(5): tax treaty determines residency for tax purposes
Tax Treaties
Canada – United
States Tax
Convention (1980)
Problem: if Canada does not have a tax treaty with the other country, there may not be a
tie-breaker to resolve the dual taxation issue
 Canada does not have tax treaties with Taiwan, Hong Kong (has a treaty with
China but at the time HK was not part of China; new treaty has been signed by
is not yet in force) and a few other trading partners.
 Even if there is a tax treaty, some older treaties with countries like Brazil may not
fit contemporary usages/practices
Bilateral agreements between two jurisdictions in order to divide up the pie between the
two countries (and therefore override the national tax legislation to the extent of conflict
with the tax treaty).
Features of Canadian tax treaties:
 tax treaties are brought into force by enacting them as federal legislation that
gives them priority over all other Canadian treaties (including the ITA).
 Canada’s tax treaties all have residency tie-break rules in Article 4
Tests:
(1) location of permanent home
(2) if more than one permanent home, centre of vital interests test (e.g., location of
family, location of membership, long-term residence, children’s school)
(3) if still unclear, deemed resident of location of “habitual abode”
(4) if still unclear, decision by mutual agreement of the CRA and the IRS
Issue: no incentive for CRA and IRS to reach a quick decision to (4)
Current reform: moving to a system where the decision in 4 must go to binding arbitration
after a certain period of time but the taxpayer does not have a voice in the process


Law 345: Tax
Canada-United
Kingdom Tax
Convention
G. Morgan (O’Brien, Fall 2013) | Page 17
In the UK, domicile has an importance for tax purposes that does not exist in Canada
(e.g., distinguish between domicile and non-domicile residents, as well as residents and
non-residents)

Tests:
(1) location of permanent home
(2) if more than one permanent home, centre of vital interests test (e.g., closest
personal and economic relations)
(3) if still unclear, deemed resident of location of “habitual abode”
(4) if still unclear, decision by mutual agreement of the component authorities
Salt v. The Queen
(TCC 2007)
For corporations, UK does not use place of incorporation as a test (whereas Canada
does).
Facts: Salt was a British citizen who worked for Alcan around the globe, including
Canada. He bought a house in Quebec in 1984. From 1998 to 2000, he was living in
Australia and working for Alcan South Pacific. The job was for a minimum of 2 years
(Australian work visa for 3 years). Salt leased the house unfurnished to an arm’s length
tenant for 22.5 months. Some things were left in storage in Canada, and Salt and wife
moved to Brisbane with dog. Salt lived in a company home that was furnished. The
family cancelled all but one credit card, all subscriptions and all memberships in Canada.
Salary and rental income were paid into a Canadian account (with some salary diverted
to an Australian account). Only return to Canada was a 15 day business trip for Mr. Salt
and a 2 week vacation for Mrs. Salt. Investment portfolio remained with a Canadian
company (as well as an investment condominium.) Salt filed taxes as a resident of
Australia and a non-resident in Canada.
 EXAM NOTE:
make finding on
Canadian
residency (can
assume dual
residence
provided that you
refer to the facts
sufficiently to
build a prima
facie case)
Issue: CRA conceded that Salt was an Australian resident for the period. The issue was
whether Salt was also ordinarily resident in Canada (therefore triggering the tax treaty).
Salt’s residence in Canada was his longest residency in his adult life.
Decision: TCC avoided making a decision on whether ordinarily resident and applied the
tax treaty
Determining an
Individual’s
Residency
Reasons:
 some important ties were severed but not all (para 19)
 did not reach a decision on whether he was ordinarily resident in Canada
 Australia-Canada tax treaty only triggered if one is a resident in both countries
(likely an error in reasoning given that his Canadian residency was not
determined)
 likely easier to apply the tie breaker rules than to determine whether he was
ordinarily resident under the Thompson test
 tie breaker resulted in Australian residency as he had a permanent home
available there but not in Canada at the time
 permanent home = entitled to live there and stay there (e.g., do not need to
own); any type of home (rented/owned) is fine; permanent = continuous
occupancy (e.g., can come and go unlike a hotel room or other temporary
accommodation)
Residency of Individuals (Leaving Canada and Provincial Residence)
Income Tax Folio S5-F1-C1
Residential ties (1.11): most significant residential ties are the location of dwelling
place(s), spouse, children and other dependents (at least, until the children move out
or the relationship ends)

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 18
However, location of children can remain a relevant indicator (e.g., parents who move to
a sunny location but return home frequently to spend time with adult children).
Secondary residential ties (1.14)
 personal property in Canada
 social ties with Canada (e.g., memberships)
 economic ties for Canada (e.g., employment, involvement in Canadian business)
 landed immigrant status or appropriate work permits in Canada
 hospitalization and medical insurance coverage from a Canadian province
 driver’s license from a Canadian province
 vehicle registered in a Canadian province
 seasonal dwelling place in Canada or a leased dwelling place
 Canadian passport
 membership in Canadian unions or professional organisations
Other residential ties (1.15): Canadian mailing address; PO box or safe deposit box;
personal stationary; telephone listing in Canada; local newspaper and magazine
subscriptions
Departure Tax
Sojourning
CRA policies that haven’t been conclusively settled at law: counting the day of arrival and
the day of departure as sojourning days; excluding of day entry/exit (e.g., commuting)
Capital gain calculated when a resident ceased to be a resident for tax purposes
Provincial
Residency
Section 128(4): capital gains/losses calculated based on the deemed value (fair market
value) at the time that residency ends; typical application = investment portfolios (but
does not apply to real property)
Regulation 2607: tie-breaker rule for interprovincial dual residency = principal place of
residence


Provincial residence = where the taxpayer was resident on December 31 of a given tax
year
Residency is based on significant residential ties (Income Tax Folio S5-F1-C1)
Key question for dispute resolution: which location was the principal place of residence
(e.g., which is the more “principal” of the two residences) (Mandrusiak)
Introduction
n.b.: insufficient to have spent New Year’s in one province each year (e.g., not physical
location on December 30th but rather residency, which it is possible to have in more than
one place including a place where you are not)
Residency of Corporations
Two tests for corporate residency:
(1) common law test of central management and control (DeBeers)—where the
board of directors meet and make decisions
(2) statutory test in section 250(4)

n.b.: corporate residency is distinct from status as a CCPC (which is based on the
location of shareholders)
Statutory corporate
residence
Why is it important to avoid dual residence for corporations? the Canada-UK tax treaty
does not have tie-breaking provisions for corporations
Section 250(4): rule of deemed residence of corporations
 incorporated in Canada (e.g., CBCA, BCBCA)

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 19

if incorporated before 1965, and carried on business in Canada after 1965 or
was resident in Canada at common law after 1965 (common law test of
residence = UK law)
Section 250(5): deemed non-resident if would be a resident of Canada but under a tax
treaty is resident of another country and not resident of Canada
Section 253: carrying on business = (a) produces, grows, mines, creates,
manufactures, fabricates, improves, packs, preserves or constructs, in whole or in
part, anything in Canada whether or not the person exports that thing without selling it; or
(b) solicits orders or offers anything for sale in Canada through an agent or servant,
whether the contract or transaction is to be completed inside or outside Canada or partly
in and partly outside Canada
Common law
Common law residence test = where the central management and control is (but not
corporate residence control by voting shareholders) (DeBeers Consolidated Mines)

Factors:
 meeting and decision places of the Board of Directors (DeBeers Consolidated
Mines)
 where it is actually managed not where it is purportedly managed (e.g., can use
the residency of the controlling shareholder if the board of directors are just
puppets) (Unit Construction)
Contemporary issues:
 mobile group of directors
 whether the directors actually make the decisions
Dual residence and tie breakers are often less of an issue as the location of management
(e.g., board of directors or primary shareholder) can be identified/distinguished
(exception: Swedish Central Railway)
Taxation of Non-Canadian Residents
Term
Taxing nonCanadian residents
Details
Tax liability for non-residents is based on source of income
Key Concepts

An individual carrying out duties in Canada is taxable on
 Canadian source income
 capital gains realized on taxable Canadian property (e.g., real property situated
in Canada)
Active taxation
section 2(3): non-resident who was (a) employed in Canada; (b) carried on a business in
Canada; or (c) disposed of a taxable Canadian property, is taxable on Canadian-source
income
Withholding tax
Passive taxation
ITA Part XIII: Tax on Income from Canada of Non-Resident Persons
Withholding tax = tax that a resident withholds in a sale to a non-resident, and then
remits to the CRA
n.b.: obligation is on the Canadian resident
Section 212(1): 25% withholding rate on certain types of payments made by Canadian
residents to non-residents
Section 215(1): imposed responsibility on the Canadian resident to withhold
Section 215(6): Canadian resident jointly and severally liable for withholding/remitting

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 20
Types of payments:
Section 212(1): interest on a loan to a Canadian resident company from a non-resident
company; estate or trust income; rents and royalties; pension benefits; retiring
allowances; RRSP payment
Section 212(2): dividend from a Canadian resident corporation to a non-resident
shareholder
Issue: what is the connection to Canada? what about servers hosting online retailers?
Canada thus far has not found it to be sufficient to have online hosting in Canada (e.g.,
there must be more of a connection under carrying on a business)
Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 21
Income from Employment and Office
Basic Definitions and Provisions
Term
Definitions
Details
Section 248(1)
“office” = position of an individual entitling the individual to a fixed or ascertainable stipend
of remuneration, and includes a corporate office holder, judicial officer, member of
Parliament
Key Concepts

e.g., no master-servant relationship but an appointed or elected position that entitles
the holder to remuneration
“employment” = position of an individual in the service of another person, including the
government or a foreign government
“employer” = in relation to an office, the person from whom the officer receives his or her
remuneration
Key Provisions
“employee” = includes an officer
Sections 5 and 6(1)(a): basic inclusions of income from office and employment

5(1) taxpayer’s income from office or employment = salary, wages and other
remuneration (including gratuities)
5(2) taxpayer’s loss from office and employment is the amount of the loss, if any, from
that source calculated in accordance with the Act
6(1)(a) value of benefits in respect of, in the course of, or by virtue of an office or
employment is included as income from office or employment
Section 8: limitation on deductions in computing income from employment
(1) allowed deductions: (b) legal expenses of employee; (f) sales expenses; (g)
transport employee’s expenses; (h) travel expenses; (h.1) motor vehicle travel
expenses
(2) general limitation: no deductions unless permitted by section 8
[…]
(4) meals not deductible unless during a period that the employee was required to
be away from the municipality of the employee’s ordinary location
[…]
(13) work space in home
Section 153(1)(a): withholding of tax by employer
Subsection 118(10): Canada Employment Benefit
Employee vs. Independent Contractor/Consultant/Sole Proprietor
Term
Traditional
Approach
Details
Common law distinction: employee, engaged in a contract of service; and independent
contractor, performing a contract for service
“It seems to me that the difference between the relations of master and servant and of
principal and agent is this: A principal has the right to direct what the agent has to do; but
a master has not only that right, but also the right to say how it is done” (Re Walker)
Common law test of control:
(1) the power of selection of the servant
Key Concepts

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 22
(2) the payment of wages
(3) control over the method of work
(4) the master’s right of suspension or dismissal
Modern Approach
Other tests from existing jurisprudence (Wiebe Door Services):
 ownership of tools and equipment necessary for the work test
 entrepreneur test (control, ownership, losses and profits)
 organisation and integration test (e.g., is the worker integral to the alleged
employer’s business?)
Evaluate the whole scheme of operations to determine whose business is the person
carrying on (Wiebe Door Services).

Key questions (Wiebe Door Services):
 what is the relationship between the parties?
 is the person who performs the services performing them as a person in
business on his own account?
Modern test: are the services being performed as the person’s own services on his or her
own account? (Sagaz Industries)
Factors (non-determinative and non-exhaustive) (Sagaz Industries):
 level of control held by the employer over the worker’s activities
 whether the worker provides his own equipment
 whether the worker hires his helpers
 whether the worker manages and assumes financial risks
 whether the worker has an opportunity of profit in the performance of his tasks
Intention:
 Sagaz Industries: emphasis on the shared intention of the parties
 Wolf: individuals should be able to decide to be independent contractors but
coloured by highly skilled aeronautical services being provided
 Royal Winnipeg Ballet: intention of the legal relationship will be considered
when objective reality and intention align
Two stage test:
1. subjective intent of each party to the relationship (e.g., written contract, facts on
the ground/pattern of conduct)
2. Wiebe Door factors (and other factors as the list is non-exhaustive)
Interposing a Corporation in the Employment Relationship
Term
Statutory
Provisions
Details
Generally, corporation ≠ employee
Active business carried on by a corporation = any business carried on by a corporation
other than a specified investment business or a personal services business and includes
an adventure or concern in the nature of trade
Personal services business = a corporation (not an individual) providing services where
(a) an individual who performs services on behalf of the corporation or (b) any person
related to the incorporated employee is a specified shareholder of the corporation and the
incorporated employee would reasonably be regarded as an officer or employee of the
person or partnership to whom or to which the services were provided but for the
existence of the corporation, unless (c) the corporation employs in the business
throughout the year more than five full-time employees [arbitrary test of how active the
Key Concepts

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 23
corporation is during the year], or (d) the amount paid or payable to the corporation in
the year for the services is a received or receivable by it from a corporation with which it
was associated in the year [not relevant to this course]
How to determine whether the person is an employee? control tests from Wiebe Door /
Connor Homes
Consequences for
Personal Services
Businesses
n.b.: courts are not bound by the terminology used in the contract and can characterize
the source of income on the basis of the “substance” of the relationship (Boardman)
Two key reasons to avoid the personal services business designation:
(1) higher taxation rate
(2) limitation on deductions

Personal services business taxation rate (38%) is higher than the rate for foreign
corporations and public corporations because the alternative rate would have still made it
cost-effective to arrange businesses in such a fashion.
Professional
corporations
Capitalization of
employment benefit
Arm’s Length
Deductions are limited to the corporation under section 18(1)(p) to salaries/benefits/other
remuneration paid to employees (which the individual pays tax on). No other deductions
are permitted.
A corporation that provides legal services will never be seen as supplanting an employee
(e.g., legal services are not considered employee services typically).
Capitalization of employment benefit = methods to convent what would otherwise be
income from an office or employment into income from a capital source, which would
either be exempt or only partially taxed as a capital gain.
Example: lump sum $250,000 payment (Curran)
Related Persons
section 251(1)(a) and (c)
(a) related persons shall be deemed not to deal with each other at arm’s length;
[…]
(c) where paragraph (b) does not apply, it is a question of fact whether persons
not related to each other are at a particular time dealing with each other at arm’s
length.



Unrelated parties may not be at arm’s length when
1. “common mind” that directs or controls the bargaining for both sides
2. two persons act in concert without separate interests
Definition of related
persons
Business partners may or may not be at arm’s length (factual analysis). Employees are
generally at arm’s length from their employer unless the employees control or are
members of a family that controls the corporate employer. Friends may or may not be at
arm’s length (factual analysis; is on doing a “tax favour” for the other?)
Section 251(2): individuals connected by blood, marriage, common-law relationship or
adoption
Section 251(6)(a): blood relationship
 one person is the child or descendant of the other (e.g., child, parent, grandparent, etc.)
 one-person is the sibling of the other
n.b. the definition of blood relationship does not include aunts/uncles, nieces/nephews or
cousins (but may still not be at arm’s length given (c) above)

Law 345: Tax
Corporations
G. Morgan (O’Brien, Fall 2013) | Page 24
Section 251(6(b) and (b.1): spouses and common-law partners related to each other,
and to the persons who are blood relations of their spouse or common-law partner (e.g.,
includes the “in-laws”)
Section 251(2)(b)(i): a corporation is related to the person who holds voting control (i.e.,
the person who holds enough shares to elect the board of directors, typically over 50%)

Section 251(b)(ii): a corporation is related to a person who is a member of a related
group that controls the corporation
 related group = a group of persons who are related to each other member
Section 251(b)(iii): a corporation is related to any person related to either the person
who controls it, or any member of the related group that controls it
Benefits, Reimbursements and Allowances
Topic
Introduction
Notes
Section 5(1) Subject to this Part, a taxpayer’s income for a taxation year from an office or
employee is the salary, wages and other remuneration, including gratuities, received by
the taxpayer in the year.
 other remuneration = commission; honoraria; bonuses
Key Concepts

Section 6(1) outlines further specific inclusions to ensure that the value of all benefits
(including non-cash benefits) would be included in income
ITA Provision
Benefits
Benefits, Reimbursements and Allowances
Section 6(1) There shall be included in computing the income of a taxpayer for a taxation
year as income from an office or employment such of the following amount as are
applicable:
(a) the value of board, lodging and other benefits of any kind whatever received
or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue
of an office or employment, except any benefit
(i)
derived from the contributions of the taxpayer’s employer to or under a
deferred profit sharing plan, an employee life and health trust, a group
sickness or accident insurance plan, a group term life insurance policy,
a private health services plan, a registered pension plan or a
supplementary unemployment benefit plan,
(b) all amount received by the taxpayer in the year as an allowance for personal or
living expenses or as an allowance for any other purpose, except
[see exceptions in Act]
(c) director’s or other fees received by the taxpayer in the year in respect of, in the
course of, or by virtue of an office or employment
[…]
n.b. ITA does not specify that the payment must be received from the employer
Definition:
“A material acquisition that confers an economic benefit on the employee” (Poynton,
Savage)
 something given in respect of, in the course of, or by virtue of office or
employment (section 6(1)(a))
 does not have to be received in exchange for the employee performing his or
her employment (Savage)
 will not be a benefit if the employer is the recipient of the advantage secured by
the expenditure (Lowe)
Examples: payment of cash; item of property; party; meal

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n.b.: there must be some way to put a dollar amount on the benefit (e.g., a benefit must
be measurable, quantifiable)
Test for
Determining a
Benefit
Policy
Considerations
What about gifts? while gifts are generally non-taxable (Bellingham), it appears that it
would be very difficult for an employer to give an employee a non-taxable gift (Savage)
Test (Poynton, Savage):
(1) does the item under review provide the employee with an economic advantage
that is measurable in monetary terms?
(2) If there is an advantage, is the primary advantage for the employee or the
employer?
Why do we tax non-cash payments? to prevent the erosion of the tax base by allowing
parties to avoid taxation when it is possible to negotiate other forms of remuneration


“The purpose of para. 6(1)(a) is simple: it is intended to equalize the tax payable by
employees who receive their compensation in cash with the amount payable by those
who receive compensation in cash and in kind. In the absence of this rule, the tax system
would provide an incentive for employees to barter for non-cash benefits. The result
would be a capricious and irrational tax system where tax burdens would be
determined more by fortuitous circumstances of bargaining power than by principles
of fairness” (Lowe)
IT-470R
Two general limitations:
(1) administrative cost to CRA and employer to determine which employees
received a benefit (e.g., difficult to determine the benefits of subsidized meals in
a cafeteria)
(2) political considerations in terms of benefits such as railway passes, ferry passes
and airlines benefits
IT-470R distinguishes between “fringe benefits” and “privileges” (but this is not the
language used by the courts). Also note that this administrative guidance is significantly
less demanding than a strict interpretation of the law.
Amounts to be included in income:
 board and lodging
 rent-free and low-rent housing
 travel benefits [unless an allowance or otherwise excluded from income]
 gifts (including Christmas gifts) [note exceptions below]
 holiday trips, other prizes and incentive awards
 frequent flyer program
 travel expenses for employee’s spouse
 premiums under provincial medical insurance plants
Exceptions for prizes and gifts:
 non-cash gifts and non-cash awards to an arm’s length employee will not be
taxable to the extent that the total aggregate value is less than $500 annually
(the value in excess of $500 annually will be taxable)
 non-cash long service/anniversary award may qualify for non-taxable status to
the extents its total value is less than $500 (the value in excess of $500 will be
taxable). Anniversary awards may not be for less than 5 years of service, or 5
years since the last long service award.
 items of an immaterial or nominal value (e.g., coffee, tea, t-shirts with employer
logo, mugs, trophies) are non-taxable. No monetary threshold but rather a
consideration of value, frequency and administrative practicability.
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n.b., shortfalls in one category do not offset excesses in others, and the policy
exemptions do not apply to non-arm’s length employees or their related persons
Allowances
Non-taxable amounts:
 an employer-provided party or social event available to all employees if cost is
reasonable in the circumstances (typically, less than $100) (Dunlap)
 trips where the employee’s presence is for business purposes (Lowe)
 loyalty points provided that not converted to cash; not indicative of an alternative
form of remuneration
 subsidized meals provided that the employee pays a reasonable amount
 distinctive uniforms, special clothing and cleaning costs (Huffman)
 transportation to the work site that the employer provides directly (e.g., not
reimbursement or allowance)
 recreational facilities
 social or athletic club membership where the benefit is principally to the
employer (Rachfalowski)
 moving expenses
n.b., keep allowances and benefits separate, although benefits are so broadly drawn that
it could capture certain allowances

Allowances are typically values that do not have to be accounted (e.g., do not submit
receipts for reimbursement) (Ranson)
 fixed, general amount
 arbitrary sum (pre-estimate) with no relationship to actually incurred expenses
(MacDonald)
Exceptions:
Section 6(1)(b) allowances for personal or living expenses except
(v) reasonable allowances for travel expenses when employee selling or negotiating
contracts for employer
[…]
(vii) reasonable allowances for travel expense where employee travelling away from
(A) municipality where ordinary location of work, and
(B) metropolitan area, if there is one, where location of work is
Exemptions for
Benefits or
Allowances at
Special/Temporary
Work Sites or
Remote Work Sites
Policy Consideration: if allowances are not taxed, it would be too easy to create nontaxable salary increases
Section 6(6) = exemption for either a benefit or allowance for
meals/travel/accommodation when the employee is at a special temporary work site, or a
remote work site.
Two exemptions are encompassed:
(1) (special) temporary work site
(2) remote work site
Requirements:
 value of the benefit or the allowance
 special temporary work site = not the normal/permanent location for
employment duties; taxpayer maintained a self-contained domestic
establishment at normal location during time at temporary work site; too far a
distance between normal location and special work site to reasonably commute
 remote location = a location where, due to its remoteness from an established
community, the taxpayer could not reasonably be expected to commute
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n.b.: “taxpayer” likely includes temporary foreign workers and Canadians working abroad
temporarily
IT-91R4
Employment at
Special Work Sites
or Remote Work
Locations
Examples of
Special Work Site /
Remote Work
Location Problems
section 248(1)
“self-contained domestic establishment” = a dwelling-house, apartment or other similar
place of residence in which place a person as a general rule sleeps and eats
Factors considered in determining remote work location:
(1) availability of transportation
(2) distance from an established community
(3) time required to travel distance

Established community = has basic services
(1) grocery store
(2) clothing store with clothes in stock
(3) housing
(4) access to medical and educational facilities
Arbitrary rule: CRA considers the location to be remote if more than 80 km (by the most
direct route normally travelled) from the nearest community of 1000+ residents
Example: X (a lawyer) is employed by a law firm

Two options: (1) exempt under 6(6) because it was 36+ hours; (2) business trip per Lowe
Example: T works on Baffin Island in employer-provided accommodation
Accommodation, meal and transportation expenses likely exempt under section 6(6) as
the site is remote (more than 80 km
Allowances exempt
under section
6(1)(b)
Special down clothing is not a uniform but para 29 of IT- allows for employers to provide
safety/protective gear without incurring a tax liability for the employee
Section 6(1)(b) exempt allowances
(v) reasonable allowance for travel expenses for a salesperson
(vii) reasonable allowance for travel expenses (other than motor vehicle expense’s) by a
non-salesperson employee
(vii.1) reasonable allowance for the use of a motor vehicle by a non-salesperson
employee
Travel expenses = expenses incurred during the travel
 plane ticket, train ticket, ferry fare
 accommodation (hotel, motel)
 car rental
 meals
Allowances = per diems for meals, etc. (e.g., not receipted) = not reported as a benefit
under the exemption
However, the ITA carves out exceptions to the exemptions for motor vehicle expenses:
(x) allowance deemed unreasonable if the measurement of the use of the vehicle for the
purpose of the allowance is not based on the number of km’s travelled
(xi) allowance deemed unreasonable if both allowance and reimbursement granted for
the use of the motor vehicle
Regulation 7306 = cap on per km reimbursement for mileage (what the CRA has
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determined to be a reasonable rate)
 2013: 54 ¢ on the first 5,000 km / 48 ¢ on the remaining km’s (additional 4 ¢ for
the territories)
General rule
Section 8(2): only deductions are the deductions listed in section 8

General limitations
Section 8(1): deductions can only be claimed against employment income to the extent
that the expense is wholly applicable to the employment. Accordingly, deductions are
calculated source-by-source, and reasonably proportionate if not wholly deductible.
Section 67: deduction can only be made if the deduction was both deductible under the
ITA and reasonable in the circumstances
 test: reasonable business person in the circumstances
 examples: business that paid 80% of revenue to sponsor a baseball team;
salaries paid to spouses/children employed by own business that were
perceived to be “generous”
Section 67.1(1): an amount paid for human consumption of food/beverages and/or the
enjoyment of entertainment is 50% of the lesser of a) the amount actually paid, or b) an
amount that is reasonable under the circumstances
- however, section 67.1(1) does not apply when (a) in the ordinary
course of business to provide food/beverage/entertainment or (f) the
food/beverage/entertainment was provided during one of up to 6
employee parties
Section 18(1)(l) does not permit a deduction for recreation or club dues, or the
use/maintenance of a yacht/cabin/camp/cottage/golf membership (unless in the OCB)
Deductible
expenses under
sections 8(1)(f)(h.1)
Section 18(1)(r) does not permit a deduction of an allowance for use of an automobile to
the extent that the allowance exceeds the prescribed rules, except where the amount
paid is required to be included in the individual’s income
n.b. section 8(10) restricts the deductible amount unless there is a certificate from the
employer supporting the deductions for sections 8(1)(f); 8(1)(h) and 8(1)(h.1)
Section 8(1)(f) sales expenses = deductible when i) employee responsible for own
expenses under contract; ii) ordinarily required to carry on duties away from place of
business; iii) remunerated in whole or by part on commission / by volume of sales; iv) no
allowance that was exempt under section 6(1)(b)(v); can only deduct up to the amount
earned on commission or similar amounts under section 8(1)(f)(iii); v) no outlays on
account of capital (e.g., a realtor purchasing a nice vehicle to be able to take clients
around town); and vi) no outlays considered non-deductible under section 18(1)(l)
Section 8(1)(g) transport employee’s expenses = taxpayer who is employed by a
person whose principal business is the transportation of passengers/goods, and the
duties of employment require the taxpayer to regularly i) travel away from the municipality
where the employer’s establishment
Section 8(1)(h) non-sales persons travel expenses = where the taxpayer was (i)
ordinarily required to work away from the place of business or in different places, and (ii)
was required to pay the incurred travel expenses by the employment K, the taxpayer may
deduct the amounts expended for travel (other than motor vehicle expenses) except
where (iii) an allowance was paid and was not included in income per section 6(1)(b)(v),
(vi) or (vii), or (iv) deduction claimed under section 8(1)(e), (f), or (g)
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Section 8(1)(h.1) motor vehicle expenses = where the taxpayer was (i) ordinarily
required to work away from the place of business or in different places, and (ii) was
required to pay the incurred motor vehicle expenses by the employment K, the taxpayer
may deduct the amounts expended for motor vehicle expenses except where (iii) an
allowance was paid and was not included in income per section 6(1)(b), or (iv) deduction
claimed under section 8(1)(f)
Legal Expenses
Section 8(4) meals are only deductible if the taxpayer was required by the taxpayer’s
duties to be away from the municipality where the employment’s establishment that the
taxpayer ordinarily reported for work was located
Section 8(1)(b) = amounts paid by taxpayer in the year to collect, or to establish a right
to, an amount owed to the taxpayer if the amount (if received) would be required to be
included in the taxpayer’s income
 did not have to be successful to deduct legal expenses (Loo)

n.b.: this is likely the one area where there could be a loss from employment
Dues and Other
Expenses of
Performing Duties
Other provisions:
Section 60(o.1)(i)(B): legal expenses paid to collect or establish a right to (A) a benefit
under a pension fund in respect to employment of taxpayer (incl. deceased), or (B) a
retiring allowance of the taxpayer (incl. deceased)
 limitation: not legal expenses related to relationship breakdown
 Section 56(1)(a)(ii): retiring allowances
Section 8(1)(i)(i) = annual professional membership dues the payment of which was
necessary to maintain a professional status recognized by statute

Target: employees that have to pay these fees themselves (e.g., not claimed as a
business expense, and not paid by employer)
Key question:
 whether the membership dues were necessary to maintain a professional status
recognised by statute (Swindle) not whether it was necessary/required by
employment
Home office
Section 8(1)(i)(iii) = the cost of supplies that were consumed directly in the performance
of the duties and that the taxpayer was required by the contract to supply and pay for
Section 8(13)
(a) no deduction unless
(i)
principal location where the duties take place, or
(ii)
exclusively used for earning income from the office or employment, and
some interaction with customers or other persons in the ordinary course of
duties
(b) amount of deduction cannot exceed the income (e.g., cannot create a loss)
(c) can carry over expenses from another year
“expenses otherwise deductible under the Act” implies that the business purpose test of
section 9(1) and section 18(1)(a) must be met, and that the deductions must comply
with sections 18(1)(h) and 67
Section 18(12): deduction = reasonable amount of household expenses (e.g., mortgage,
insurance, property taxes, etc.)
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Income from Business and Property
Introduction
Term
Introduction
Details
This is a complex area of law because there are so many ways to incur income as an
entrepreneur, and there are so many ways to calculate that income.
Key Concepts

Section 9(1): income from business/property is the profit from said business/property
Section 9(2): loss from business/property is the lost from said business/property
Section 9(3): income/loss does not include capital gain or loss
Definition of profit:
 not defined in ITA
 case law suggests that profit = net profit (e.g., revenue – expenses)
 determination of profit is a question of law
 test for profit is of “well-accepted principles of business (or accounting) practice”
or GAAP, except where inconsistent with specific provisions of ITA
Section 12: list of specific inclusions and timing rules related to those inclusions
 12(1)(a): amounts rec’d for goods and services to be rendered in the future
 12(1)(b): amounts receivable for property sold or services rendered in the course
of business
 12(1)(c): interest
 12(1)(d): amounts deducted in a preceding year as a reserve for doubtful debts
 12(1)(g): amounts rec’d based on production or use of property (e.g., rents and
royalties)
 12(1)(j) or (k): dividends
 12(1)(l): income from p/ps
 12(1)(m): income from trusts
 12(1)(n): benefits from profit-sharing plan and employee trust to employer
 12(1)(x): inducement or assistance payments
 12.1: cash bonus on Canada Savings Bonds
Section 18: specific limitations on deductions
Section 20: specific deductions that are permitted (e.g., deductions that would not be
deductible on general principles but are by virtue of section 20)
Business
Term
Definition of
Business
Details
Business = “anything which occupies the time, attention and labour of a man [sic] for
the purpose of profit” (Smith v Anderson)
 organised, on-going activity (n.b., distinct from adventure in the nature of trade,
although included in statutory definition)
 a commercial purpose (e.g., the intent to earn profits)
 historical test was reasonable expectation of profit but post-Stewart, it’s a twostage test
Section 248(1)
“business” includes a profession, calling, trade, manufacture or undertaking of any kind,
an adventure or concern in the nature of trade but not include an office or employment
Section 125(7)
“specified investment business” = a business carried on by a corporation in a taxation
Key Concepts

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year means a business (other than a business carried on by a credit union or a business
of leasing property other than real property) the principal purpose of which is to derive
income (including interest, dividends, rents and royalties) from property but, […] does not
include a business carried on by the corporation in the year where
a) the corporation employs in the business throughout the year more than 5 fulltime employees
[…]
n.b. arbitrary distinction between active business vs. specified investment business = # of
employees
Hobby vs. Business
Distinction
“personal services business” = a business providing services where
(a) an individual who performs services on behalf of the corporation [incorporated
employee], or
(b) any person related to the incorporated employee
is a specified shareholder of the corporation and the incorporated employee would
reasonably be regarded as an officer or employee of the person or partnership to whom
or to which the services were provided but for the existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than 5 f/t
employees, or
the amount paid or payable to the corporation for the services is received or receivable by
it from a corporation with which it was associated in the year
Hobby vs. Business
Principle: cannot claim a pleasurable pursuit as a business simply to offset
losses/expenses.

When someone wins big at gambling, tax authorities will allege that the gambling is a
business (n.b., in the US, winnings are taxable but in Canada they are typically not).
Other pursuits common for attempts to deduct expenses (and run a loss):
 hobby farms
 antique buyers
 yacht/vacation rentals
Gambling
[Duha Printers???] = reasonable expectation of profit to consider it a business
Gambling = Taxable
 to distinguish hobby gambling from gambling that is a source of income, the
case law suggests the key distinction is the degree of organised system to
manage or minimize risk
 when the gambling is managed by an organised system, the profit will be
considered income from business (Luprypa)
 organised system = where the taxpayer works to minimize risk and control
income (all business is risky so the presence of risk is not the issue—but rather
whether there was a system to manage it) (Luprypa)
Gambling ≠ Taxable
 where the winnings can be attributed sole from good luck with no significant risk
management, they are non-taxable (Epel)
 where the profit results from pure luck despite a business-like system being
applied to the process (Leblanc)
Broad categories of betting games (Leblanc):
(1) pleasure pursuit = non-taxable
 may be regular and compulsive but does not reach the point of organised
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activity for the purpose of profit
(2) business = taxable
 gambling in connection with a business that is carried on (e.g., casino owner,
bookies)
 activities with high risk associated but whose results tend to require a level of
skill/expertise that the taxpayer can use to minimize risk (Louprypa)
Lotteries (LeBlanc):
Section 40(2)(f): gains (and losses) from games of chance in connection with a lottery
are non-taxable (deductible).
Historical Approach
Modern Approach
Generally accepted that there is no system with sports lotteries to minimize risk
(LeBlanc).
n.b. at trial in LeBlanc, expert evidence indicated that they actually maximized their risk
and their system for betting was not based on a formula or something that would indicate
success (besides how it was borne out). However, these findings were undermine by a
Peter Mansbridge interview where the entire betting system was explained.
Source of Income Test
Rule: taxpayer must have a profit or reasonable expectation of profit to have a source
of income (Moldowan)
Criticisms:
 reasonable expectation of profit is not necessarily consistent with the law (e.g.,
the common law emphasizes the profit purpose, not the expectation of profits)
 unfair and arbitrary treatment of tax payers as excluded taxpayers who set out in
good faith on purely commercial ventures but failed
Two-stage test whether source of income (Stewart):
(1) whether the taxpayer activity is a personal endeavour (e.g., an activity
undertaken regardless of whether it earns profits), or whether the taxpayer
activity is run for profit
(2) if it is a source of income, the determination is whether it is from business or
from property


n.b. “pursuit of profit” source test only needs to be analyzed where there is some
personal or hobby elements to the activity in question (e.g., assess for a hobby farm
but not for a restaurant)
Stewart v. The
Queen, SCC 2002
Moldowan factors are relevant in the assessment of “pursuit of profit” as they are “indicia
of commerciality.” The assessment has both subjective (e.g., intention to profit) but also
objective (e.g. profit and loss experience in past years; taxpayer’s training; taxpayer’s
intended course of action; and the capability of the venture to show profit)
Facts: employee with Toronto transport commission; purchases 4 condo unit; condos are
syndicated (real estate company and financier put the package together based on an
analysis of the rental market); management company runs the upkeep; in the early years,
interest and other expenses exceed the rental income (which was expected in the
syndication documents); form of deferring income by purchasing highly leveraged
properties; problems with tenancy, etc. that reduced revenue below predictions;
attempted to minimize; re-assessed on the basis that there was no reasonable
expectation of profit (therefore could not claim the losses)
Decision:
 reasonable expectation of profit (Moldowan) is not a test of whether it is a source
of income (e.g., subject to deductions)
 consider whether there is a personal element (e.g., renting to a non-arm’s length
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
party)
if there is a personal element, focus is on whether there are “sufficient indicia of
commerciality” for there to be an intention of profit
Two-step analysis
(1) is the activity undertaken in pursuit of profit or is it a personal endeavour?
(2) if it is not a personal endeavor, is the source of income a business or property?
Adventure in the
nature of trade
CRA arguments:
(1) heavy borrowing was an indicator of non-commerciality—rejected on the
grounds that the borrowing at commercial rates may actually indicate
commerciality
(2) heavy borrowing was intended to realise a capital gain—rejected; tax
motivation does not change the nature of the activity (e.g., most people look
at the tax consequences of a particular business activity, and structure their
transaction in a manner than minimizes taxation)
Adventure in the nature of trade
Adventure in the nature of trade (ANT)= income from business (even thought a business
might not be carried out over time); distinguished from investment in a capital property

Realisations on an investment will result in a capital gain (e.g., an increase in value on
property when the source is disposed of). In contrast, business suggests an organised,
recurring and productive activity (e.g., crops, tenants).
ANT rules are deeming (e.g., make an otherwise capital transaction into a business
transaction). The focus in on the intention of the taxpayer, the nature of the property
bought and sold (e.g., single transaction or a series of similar transactions).
Examples of classic ANTs: real estate flip; Bellingham (land purchased with the intention
of re-selling at a profit through expropriation)
Determining
whether a
transaction is an
ANT
n.b.: land can be a capital investment, a subject of an ANT, and a business of buying and
selling land.
Key question: was the transaction conducted in the manner of a business, even if it was a
single transaction? (Taylor)
Four Step Analysis:
(1) taxpayer's conduct
 was the transaction conducted in a way that a trader would have conducted
the transaction? (Taylor)
 factors that indicate ANT: quick effort to find purchasers; steps taken to
improve marketability or value of property; relevant commercial background
(if appropriate, such as Arcorp Industries)
(2) nature of the property
 did the nature and quantity of the property exclude the possibility of its sale
to realise an investment or otherwise capital in nature? (Taylor)
 factors that indicate ANT: nature or magnitude of property precluded income
or personal enjoyment (e.g., lead in Taylor or toilet paper in Routledge);
taxpayer unable to operate property for personal enjoyment or income
 shares are presumed to be a capital investment (Irrigation Industries) but
rebutted when transactions are carried out in the manner of a securities
trading business (Arcorp Industries)
(3) taxpayer’s intention
 was the taxpayer’s intention consistent with other evidence indicating a
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trading motivation?
 factors that indicate ANT: intention (but insufficient on own); secondary
intention that was present at the time of purchase and ultimately acted on
(Regal Heights)
(4) factors that do not preclude ANT
 single or isolate transaction (Routlege)
 outside normal income earning activities
 no organisation to carry out transaction
Secondary intention
 land will be an ANT (not capital gain) if there was a secondary intention of selling
for profit at the time of purchase
 limitation: to be an ANT, a property acquired for a capital purpose must have the
possibility of reselling as an operating motivation of the purchase (e.g.,
question is not whether there was a possibility of reselling but whether that
possibility was at the forefront of the taxpayer’s motivation) (Saskatchewan
Wheat Pool)
IT 218R (1986)
Modern approach to secondary intention = reselling at profit was an operating
motivation (Snell Farms)
Factors considered in determining whether profit or loss on a sale of land is income or
capital (e.g., ANT or investment)
(1) taxpayer’s intention at the time of the purchase of the property
(2) feasibility of taxpayer’s intention
(3) geographical location and zoning
(4) extent to which the taxpayer and his/her associates carry out the initial or
primary intention
(5) evidence of change of intention
(6) nature of the business, profession, trade, experience of the taxpayer and his/her
associates
(7) extent to which the purchase is made with borrowed money
(8) length of time the property is held by the taxpayer
(9) whether taxpayer made the purchase alone or with others
(10) reasons for selling
(11) extent of taxpayer’s (and associates) previous and subsequent dealing in real
estate

Income from Property
Term
Details
Definition of Income Income from property is more passive as simple ownership entitles a person to the
from Property
income generated by it.
Four classic types of income from property:
(1) rent
(2) royalties
(3) dividends
(4) interest
Section 248(1)
“property” means any property of any kind whatever real or personal or corporeal or
incorporeal and, without restricting the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a chose in action,
(b) unless a contrary intention is evident, money
[…]
Key Concepts

Law 345: Tax
Source of Income
and Pursuit of Profit
G. Morgan (O’Brien, Fall 2013) | Page 35
Recall: share = incorporeal bundle of rights that a shareholder holds with respect to a
company (rights typically include the right to vote, the right to share in profits, and the
right to share in excess property on company wind-up)
Two-stage test whether source of income (Stewart):
(3) whether the taxpayer activity is a personal endeavour (e.g., an activity
undertaken regardless of whether it earns profits), or whether the taxpayer
activity is run for profit
(4) if it is a source of income, the determination is whether it is from business or
from property

n.b. “pursuit of profit” source test only needs to be analyzed where there is some
personal or hobby elements to the activity in question (e.g., assess for a hobby farm
but not for a restaurant)
Interest
Moldowan factors are relevant in the assessment of “pursuit of profit” as they are “indicia
of commerciality.” The assessment has both subjective (e.g., intention to profit) but also
objective (e.g. profit and loss experience in past years; taxpayer’s training; taxpayer’s
intended course of action; and the capability of the venture to show profit)
Interest
Interest = rent on money (e.g., a percentage on the amount borrowed
 interest accrues daily (if it is interest, it accrues daily. Therefore, 2.5% per
annum is divided by 365 to determine what accrues each day).
 interest arises with respect to debt obligations

Debt obligation = any type of advance of money where the intention is that the money will
be repaid (e.g., bonds, debentures, bank accounts, loans from one taxpayer to another
taxpayer, loans with respect to the purchase price of property)
 debt obligation is an incorporeal asset to the holder (e.g., a right in the nature of
property—a right to be repaid)
 debt obligations are capital in nature (e.g., you’ve purchased a right to be
repaid).
Late payment charge (CB 335) is when a supplier extends credit (not money, per se, but
time before one has to pay for goods already procured). The late payment charge is
interest on the extended credit.
Section 16(1)
(1) Under a contract or other arrangement, an amount can reasonably be regarded
(objective test) as part interest and part an amount of a capital nature
(a) the part that is reasonable regarded as interest = deemed interest on a debt
obligation
Groulx v. MNR,
SCC 1967
Blended payments = payment towards the principal + payment of the interest owing
Facts: G negotiates with a land developer to sell his farm; purchase price $395,000
($85,000 on possession and the remaining $310,000 over seven years; no interest unless
an installment missed (e.g., an attempt to capitalize interest by rolling it into the price)
CRA: a reasonable person would have charged interest on the seven year loan; therefore
the installments were blended payments (e.g., included interest, which was taxable)
Normally negotiation yields the fair market value but the length of period to pay suggested
that it wasn’t (e.g., $395,000 was above the fair market value therefore the excess
payment was interest)
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Law 345: Tax
Special Timing
Rules
G. Morgan (O’Brien, Fall 2013) | Page 36
Critical factor = fair market value (now would be governed by section 16(1))
Section 12(3) applies to corporations for the purposes of this class. A corporation must
include in its income for the year interest that accrues by the end of its taxable year, or
amounts received or becomes receivable by the end of its taxable year that have not
been included in income in a preceding year.

Section 12(4) applies to interest payable to an individual pursuant to an investment
contract. The individual must include in income each year the interest accrued on the
investment contract to each “anniversary day”.
Section 12(11) investment contract = all debt obligations held by individuals
(i) exception: a debt obligation on which the taxpayer reports interest as it accrued
daily
Section 12(11) anniversary day is
(a) the day that is one year after the day before the investment contract was issued
(b) the day that occurs at every successive one year interval from the day determine
under (a), and
(c) the day on which the contract was disposed of.
Rents and
Royalties
n.b., these sections depart from accounting practises as they are prescriptive.
Rents and Royalties
Rent = amounts paid for tangible property where real or personal (e.g., payment for the
use/possession of property that the taxpayer owns)
 generally, a fixed payment for the use of a property for a set period of time

Royalty = amounts paid for use of intangible property (e.g., patented information or
mineral right)
 share in profits or share of profit based on proportion of use, sale or rental
(Vauban Productions)
n.b., if all the legal rights of a property nature in the intellectual property are transferred,
it’s a sale of a capital asset. If it’s a partial transfer, the payments are rents or royalties.
Payments Based
on Production or
Use
Section 12(1)(g) = inclusion of any amount received by the taxpayer that was dependent
on the use or production from property whether or not that amount was an installment of
the sale price of the property (exclusion: agricultural land)
Issue: how to distinguish a rent/royalty from a sales profit
 absent statutory provision, it’s a question of fact
 royalty = payment linked to consumption (Wain Town)
Payments for
Computer Software
n.b. section 212(1)(d) deems certain payments to be rents or royalties for the purposes
of the withholding tax
 payments for information or services of an industrial, commercial or scientific
nature where payment linked to use or benefits of the information or services
 payments for the use or right to use certain IP
 however, excludes rents and royalties related to copyright of any literary,
dramatic, musical or artistic work, and use of railway rolling stock or aircraft
Computer software payments can be either royalties or purchase prices although
software is considered a right to use (license to use) as opposed to a sale.
CRA distinction:
(1) “shrink-wrap software” (over-the-counter software with unsigned license
agreement) = sale
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Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 37
(2) custom software (customer aware of license agreement) = royalties
Dividends
Withholding tax
 if taxpayer holds license to sell software and the royalty holder is a non-resident,
must withhold tax on royalties per section 212(1)(d) (Syspro Software)
 primary issue in international tax is the location of the trademark/brand (and
therefore which jurisdiction receives the tax on the interest income.
Dividends
Section 12(1)(j) inclusion of dividends received from resident corporations
Section 12(1)(k) inclusion of dividends received from non-resident corporations

Dividend = distribution in case or property (rare) of after-tax profits to the shareholders
pro rata per share (Hill v Permanent Trustee of New South Wales)
n.b., if Canadian shareholder becomes non-resident but still receives dividends from
Canada, the dividends would be subject to withholding tax per section 212(1)(d)
Deductions in computing income from business and property
Topic
ITA Provisions
Notes
Section 9(1): profit = revenue – expenses
 current or running expenses = regularly incurred expenses; generally excluded
in calculating profit under section 9(1)
Key Concepts

Section 18(1): restricts deductions where there otherwise would be an available
deduction from a commercial standpoint
(a) general limitation = only deductible to the extent that it was incurred for the
purposes of gaining or producing income from business/property
(b) no deduction of capital outlay or loss (exception: interest specifically included in
section 20(1)(c))
[…]
(h) no deduction of personal and living expenses
[…]
(l) no deduction of memberships for use of recreational facilities or clubs
[…]
(r) limit mileage reimbursement to regulation 7306
[…]
(t) no deduction of income tax
Section 18(1)(p): with personal service business, can only deduct
(i)
salary or wages paid to the incorporated person
(ii)
cost of benefits or allowances paid to the incorporated person
(iii)
any amount expended in the sale of property or negotiating contracts (e.g.,
what would have been deductible if not incorporated)
(iv)
legal expenses to collect amounts owing to it
Income Earning
Purpose Analysis
Section 20: specifically included deductions
Income Earning Purpose Test
Step 1: is the expense a normal expense of running the business? if yes, likely deductible
under section 9(1)
Step 2: if likely deductible under section 9(1), check limits in section 18
Step 3: if not excluded under section 18, is the expense included under section 20?
If not deductible under the above steps, it does not constitute a deductible expense but

Law 345: Tax
Imperial Oil v MNR,
Exch Ct 1947
G. Morgan (O’Brien, Fall 2013) | Page 38
may be a capital outlay.
Facts: Imperial Oil’s vessel collided with another vessel; Imperial Oil paid over $500,000
to settle a claim for damages

p. 349: expenses that arise out of the normal course of business (even if it is an
extraordinary amount) are deductible; recognition that negligence and accidents happen
and therefore the associated compensation is in the normal course of business
Global purpose and process test
Expense incurred for the purpose of earning profit is better described as an expense
incurred in the course of carrying on the business (which is for profit).
n.b. no cause/effect analysis of expense (i.e., no requirement to show that an outlay
reaped profit)
p. 351: would the amount be properly deducted by the normal principles of business (e.g.,
the test under section 9(1))
Royal Trust v MNR,
Exch Ct 1957
Would the plaintiff have to have reported the settlement? yes if it was for profit
replacement under the surrogatum principle; no if it was to repair the ship (e.g., a capital
asset where taxation takes place on disposition)
Facts: RT paid for the memberships of certain employees at the country club (e.g.,
entrance fees + annual dues);
 Golf entrance
fees
Decision:
Step 1 deductibility (deductibility under section 9(1)) is not about GAAP but rather the
understanding in the commercial world. The next step is to turn to the ITA to see if there
is an exclusion.
Here, it appears like the social membership entrance fee was, like the bar admission fee
in Daley, a one-off expense. However, it was distinguished on the grounds that it was in
the ordinary course of business for RT (e.g., RT regularly and normally incurred these
entrance fees in order to register certain employees, unlike Daley where it was a one-time
capital expense to set-up the business)
Section 18(1)(l) restriction on amounts expended for country club memberships, etc. are
post this case’s decision but would needed to be considered in a present-day scenario
Personal or Living
Expenses
Benton
Would the employee have to report the benefit? IT-470R (¶34) would not require the
inclusion of the fees by the employee (as arguably the benefit accrues more to the
employer)
Personal or Living Expenses
Section 18(1)(h)

Example: unincorporated logging contractor who wants to big on a particular permit;
travels away to meet with a person to secure this permit; travel expenses to and from the
meeting (as well as the accommodation and meal expenses) would be deductible on the
grounds that they were expenses normally incurred in the course of business.
Generally, however, one is not entitled to claim personal or living expenses (e.g., lunches
purchased for consumption during regular work in a regular location; housekeeping
services for personal home)
Facts: farmer with serious health complications; housekeeper primarily kept the house but

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 39
also helped with milking, etc.; farmer deducted housekeeper’s salary from business
revenue
Issue: if he had hired a farmhand, the entire amount would be deductible. However,
instead he hired a housekeeper to take care of those tasks so he didn’t have to hire a
farmhand.
Decision: [see casebook]
Childcare expenses
Domestic labour is a value imputed to the household to avoid taxation (but the trade-off is
that we cannot deduct the costs of housekeeping, gardening and dog walkers). Some
deductions have emerged (e.g., the childcare deduction).
Section 63 lowest-earning spouse claims childcare expenses at set rate
 $7,000/year for child under age 7
 $4,000/year for child under age 16
 cap: 2/3 of taxpayer’s annual income
 limit: cannot deduct payments to spouse or older children (inverse: no reporting
income)
n.b. spouses who are unable to care for children either due to disability or incarceration
are not considered to be the lowest earning spouse, even if they have less income than
the other spouse

Policy consideration: enables both spouses to work (more complicated with single
parents or separated spouses)
Issues: limits amount of deduction even when costs might be higher; the deduction has
not increased since 1998 therefore has not kept up with inflation
Scott
Symes v Canada (SCC 1993) argued that all childcare expenses should be deductible
(e.g., not limited) because “but for” having a nanny, Symes (female lawyer) would not be
able to practise law. SCC rejected the argument and limited the deduction to section 63.
Facts: foot and subway courier; wanted to claim food and water expenses as he required
more “fuel”

Decision: FCA returned to TCC on the grounds that a vehicle courier would have been
able to deduct mileage, etc. expenses
Business need test
(Leduc)
Note: settled between CRA and Scott (likely so it wouldn’t create a precedent); issue was
whether car expenses connected to fuel or things like the transportation costs or running
shoes
CB 361-2: distinction between business and personal

Step 1: is the expense what generally accepted business and commerce practises would
allow? (n.b. practises shift with the times)
Step 2: is the expense something that similar businesses would incur in the course of
earning income?
Home office
expenses
Step 3: would the expense have been incurred even if the taxpayer was not involved in
the business
Section 8(13) deduction for employee
Section 18(12) business expense
No deduction except to the extent that it is either a) the principle place of business, or b)

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 40
used exclusively for the purpose of earning income from business and used on a regular
and continuous basis for meeting clients, customers or patients
Limit: cannot create a loss using this deduction
Sample Problem of
Home Office
Deduction
Sample Problem of
Commute Time
Moving Expenses
[see handout]
Distinction between a home office for personal convenience (non-deductible), and
running a business out of one’s home (decuctible): McCreith
 chairman of liquor corporation who performed 70% of activities at home (but did
not hold meetings there)
 remainder at the head office 55 km away
 allowance for travel between home and head office
Income = $15,000 Y1, $100,000 Y2
Home office = $20,000 Y1
Assistant’s salary = $5,000 Y1
Stationary = $1,000 Y1
Internet, phone, fax = $2,000 Y1
Solution: in Y1 deduct $8,000 ($5,000 + $1,000 + $2,000) and $7,000 from the home
office. Carry over remaining $13,000 from home office to Y2.
Travel between King St and courthouse: deductible
Travel between home office and courthouse: likely depends on whether the home office is
deductible;
Travel between home and King St: not deductible (normal commute)
Travel between home and courthouse: as above
Was the home office deductible? not unless he works more than 50% of the time in his
home office, or if he uses it exclusively for
Moving Expenses
Section 248(1): definition of “eligible relocation” (move)
 eligible relocation a) enables the taxpayer to i) carry on business / be employed
at a new work location, or ii) be a student in a full time postsecondary program;
b) old and new residences are in Canada (some exceptions for students and
residents who are absent from Canada); and c) new residence is at least 40 km
closer to the new work location than the old residence.
Limits:
(1) expenses were not paid by an employer (if partially paid, must claim the amount
paid as a benefit it order to deduct the full moving expenses)
(2) expenses were not deductible in computing the previous year’s income
(3) expenses do not exceed income from employment or business at the new work
location (or, for students, the amount of scholarships/bursaries included in
computing income for the year)
Problem for students:
 moving expenses are only deductible to the extent that there is a taxable
inclusion of a scholarship or bursary
 since 2009, scholarships and bursaries have been non-taxable in a qualifying
educational program
 side door, potentially, if working part-time while attending school (provided that
income exceeds the moving expenses)
Section 62(3): deductible moving expenses
 travel costs (including a reasonable amount for meals and lodgings)
 transportation and storage of household effects



Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 41






Connection to
Benefits and
Allowances
Examples (CB 613
– 14)
Introduction
meals and lodging for up to 15 days near the old residence or the new residence
cost of cancelling a lease
selling costs for the sale of the old residence
when the old residence is sold, legal services and taxes/fees/duties (except GST
or VAT) imposed on the transfer or registration of title to the new residence
interest, property taxes, insurance premiums
[see annotated statute p. 39]
However, the actual cost of the new residence is not deductible nor is mortgage
insurance/mortgage interest/surveys/inspections for the new residence
Benefits
IT-470R para 35—full reimbursement of moving expenses does not impute a taxable
benefit; para 36—remote location move does not impute a taxable benefit
Allowances
An allowance would be taxable (e.g., not exempt) but might be able to argue that the
allowance was a partial reimbursement.
Bayette (1990): old wording required start of employment to be close to the move
Deduction of Interest
Tax theory considers interest to be the cost of capital (e.g., the capital outlay to have
capital to “play with.”)



While this representation is criticized, courts have considered it to not be deductible but
for section 20(1)(c).
Bronfman Trust
Section 20(1)
The following amounts can be deduced related to the source of income (or proportionate
to the amount that can be related to the source of income):
(c) the amounts paid in the year, or to be paid in the year (cash/accrual notion)
pursuant to a legal obligation to pay interest on
(i) borrowed money for the purpose of earning income from business/property
(ii) an amount payable for property acquired for the purpose of gaining or
producing income from property/business
or a reasonable amount, whichever is less
Facts: trustees borrowed money to pay out the beneficiary instead of cashing out shares;
trustees claimed the interest as deductible on the grounds that it was an indirect way of
doing what the trust could do directly (e.g., cash out the shares; pay out the beneficiary;
borrow funds; re-purchase shares; and
Decision: not deductible
Reasons: borrowing funds to pay the beneficiary is not an income-earning purpose
Analysis:
1. eligible purpose (e.g., income-earning purpose)
2. current use of borrowed funds (e.g., not original use)
3. direct vs. indirect use
Key: the steps that were taken not the intention of the consequences
However, some acknowledgement that the courts should consider the reality of the
transaction as opposed to the legal steps (e.g., should not privilege folks with great tax
planning)

Law 345: Tax
Attaie
G. Morgan (O’Brien, Fall 2013) | Page 42
Facts: mortgage interest was deductible when the house was rented (e.g., money earned
to ); when money arrived, he placed it in a term deposit as it was a better return on
investment than paying off the mortgage; house no longer rented

Issue: paid tax on the interest earned on the investments therefore the mortgage should
be deductible (e.g., took out mortgage to invest in term deposit)
TCC—interest deductible
FCA—direct use of the funds therefore no deduction of interest
Singleton
Problem: in Bronfman, SCC relied on the TCC decision See CB 407.
Facts: law partner; capital account in law firm valued at $300,000; wanted to use capital
account to purchase a house and then borrow money to repay the capital account

TCC: borrowed to buy the house
FCA: tax planning
SCC: deductible as court only considers direct use (e.g., no consideration of true
economic purpose)
Analysis from Shell Canada (SCC 1999)
(1) amount paid in the year, or payable in the year, which the deduction is sought
(2) amount paid pursuant to a legal obligation to pay interest on borrowed money
(3) borrowed money used for the purpose of earning non-exempt income from a
business or property
(4) amount is reasonable in consideration of three requirements
Ludco Enterprises
[handout]
n.b.: Shell Canada was the closest that the SCC gets to saying that tax planning is a
business purpose
Facts: wealthy group in QC that borrowed money from a Canadian bank to purchase
shares of two tax-havens in the Bahamas; tax havens used money to purchase
government bonds; interest paid to tax havens (no withholding tax on government bonds);
claimed interest paid on Canadian loans

Issue: was the interest incurred for the purposes of earning profit?
Decision: deduction allowed

Introduction
reasonableness of the interest ($6 million in interest to earn $600,000 in
dividends) = assessment of commercial rates, arm’s length nature of the
transaction to determine whether the interest was reasonable
 deduction when traceable to a legitimate use (although this model would be shut
down)
 ancillary income-earning purpose was sufficient (as true purpose was tax
planning)
 emphasis on tax certainty
Public Policy Considerations
Public policy limitations on golf club memberships, food/drink/entertainment
Goal: reasonable apportionment between personal lives and economic lives in section
18(1)(l)
Other considerations:
 deductibility of expenses of an illegal business (when the income is imputed)
 fines and penalties restricted by 18(1)(a)

Law 345: Tax
Eldridge
G. Morgan (O’Brien, Fall 2013) | Page 43
Facts: Mrs Eldrige ran a call girl operation; deductions claimed: apartment rent, legal
fees, liquor gifts, etc.

Decision: some deductions allowed
Non-deductibility of
fines and penalties
Non-deductibility of
bribes
Non-deductibility of
outlays of capital
British Insulated
Reasons:
 income from an illegal business is taxable, and can deduct
 if deductions can be proved to be for an income earning purpose, the deductions
will be allowed
BC Egg Case = primarily overruled by statute
 facts: levied over-quota fine related to the excess eggs; excess eggs produced
for a customer who they were afraid would leave them if they couldn’t deliver
 what is said, however, was that there is no restriction on fines and penalties on
public policy grounds (e.g., deductible provided that it was for the purpose of
earning income)

Section 67.6: no deductions for fines and penalties
 likely good policy given environmental offences where the profits would exceed
the after-tax cost of the penalty
Section 67.5(1) non-deductibility of illegal payments

Bribes of foreign officials are barred under Canada’s international treaty obligations
(which have domestic effect under the Corruption of Foreign Public Officials Act). Bribes
of domestic officials were incorporated for consistency (using Criminal Code provisions).
Section 18(1)(b) capital outlay or loss

No deduction of outlays, losses or replacement of capital unless expressly permitted by
the ITA.
Key distinction: capital vs. current expenditures
 repairs/maintenance are considered current expenditures, but substantial
upgrades are capital outlays (Canada Steamship, Shabro Investments)
 capital outlays can result in an enduring benefit (British Insulated)
Facts: lump sum capital payment made to institute pension benefits scheme

Issue: section 248(1) makes retiring allowances and notice payments as deductible
expenses of business (and included income for employees under section 261(1)(2))
Decision: non-deductible as capital outlay
Canada Steamship
Lines
Contributions each payroll into the fund are deductible. This, however, is an unusual
fixed expenditure—but still a capital outlay despite being made to incur an enduring
benefit.
Facts: business carries goods through the Great Lakes and St Lawrence Seaway; ships
are outlays on account of capital (fixed asset to use in the course of business); floors and
walls of some cargo holds needed to be replaced; replacement of boilers
Decision:
 floor/wall repairs = deductible expense = recurring expenses (not outlays of
capital) = repair/replacement of worn or damaged part of the ship from use
 does not shift from recurring expense to outlay of capital simply given the
 boilers = acquisition of new asset = outlays of capital
 awkward, however, as the boilers wore out and needed to be replaced for the
ship to run (repairs, however, would have been a recurring expense)

Law 345: Tax
Shabro
Investments
G. Morgan (O’Brien, Fall 2013) | Page 44
pg. 498: things used to earn income vs. recurring expenses
Facts: two storey building with concrete slab floor; floors were not supported well; lower
storey became unusable as the concrete fractured; issues with storm drains, plumbing,
etc.; taxpayer installed new floor over steel tiles; claimed as deductible expense

Decision:
 steel tiles = capital outlay
 new concrete floor = marked improvement in the structure of the building =
capital outlay
 repairs of storm drains, etc. = reconsidered as repairs due to vandalism and
poor workmanship are still repairs
Gold Bar
Developments
Using losses in
other years
What’s more challengeable? likely lumping the concrete floor in as a capital outlay (more
a repair/replacement that upgrade given that it just substituted one concrete floor for
another)
Facts: replacement of brick with metal cladding; bricks were a hazard; continued
deterioration would have incurred more costs
Decision: deductible as recurring expense
 work was not voluntarily undertaken to improve the building
 cost of the repair was substantial but it was not so large to replace the building
(building = $8 million vs. $250,000 in repairs)
Income in section 3(a) = calculated from each source
(b) = capital gains and losses
(c) = specific deductions
(d) = deduction of losses from office/employment/business/property
The act allows non-capital losses to be carried forward and back. Non-capital losses =
losses from a source (typically business or property).
Section 111(1)
(a) non-capital losses can be claimed 20 years preceding / 2 years following
Example
2009: taxpayer has $50,000 income from employment; loss of $9,000 from consulting
business
2010: taxpayer has $50,000 income from employment; loss of $57,000 from consulting
business
The excess $7,000 from 2010 can be carried back to 2009.
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Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 45
Capital Gains and Losses
Introduction
Term
Introduction
Details
For the purposes of the exam, we assume that the capital gains taxable rate is always
50%.
Key Concepts

Net capital loss = capital losses > capital gains
Net capital gain = capital gains > capital losses
n.b. net capital loss cannot be used when computing income (e.g., hived off from
income) therefore must be used in years where there is a net capital gain
Section 3(a): capital gains – net non-capital gains (e.g., LPP gains – LPP losses) –
allowable capital losses
Section 111(1)(b) excess losses from capital dispositions can be carried forward
indefinitely and back 3 years
Section 111(2) death = immediate tax year end (policy consideration: death ≠ tax
planning tool)
Section 39(1)(a) and (b): disposition of the source itself results in the realisation of a
capital gain or loss.
 excluded: gains and losses that are brought into the calculation of income from
a source
 essentially, capital gains are gains from any disposition if it isn’t taxed as
income; capital losses are losses from any disposition if it isn’t a non-capital
loss
Example:
Calculation of
Capital
Gains/Losses
Purchase a ship for $1 million in 2000. It’s maintained but it has depreciated in value by
the time that it was sold in 2010 for $500,000. There is no capital loss, however, as
section 39(1)(b)(i) excludes loss due to depreciable property. However, there is a
provision allowing for the deduction of an amortization of depreciation.
Section 40(1)

ACB: $100
PoD = $200
Capital gain = PoD - ACB + expenses (e.g., broker fees on sale of stocks)
Capital gain = $200 – ($100 + $10) = $90
Policy
Considerations
Section 38(a): 50% of the capital gain is included in income as a taxable gain ($45).
Section 38(b): 50% of the capital loss is deducted from capital gains as an allowable
capital loss (-$45). Net capital losses are carried back or forward per section 111(1)(b).
No taxation on capital gains = New Zealand
Tax as income = many countries
More preferential treatment = US (lower income = 5%; higher income = 15%)
Why preferential treatment? benefit to older and higher income individuals, who are
more likely to vote than lower income and younger individuals.

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 46
Three key policy criteria: equity; neutrality; and certainty (fourth factor would be global
competitiveness)
 Tax equity = primary criteria for the assessment of tax provisions (e.g., the
people who make the same amount of money should be taxed equally
 Neutrality = tax payers should distort economic and personal choices as little as
possible
 Certainty = tax payer should be able to determine what is taxable and how it will
be taxed in advanced
Issues with Canadian taxation of capital gains/losses:
 benefit accrues to the wealthy (e.g., not equitable)
 privileges capital gains over income from a source (e.g., not neutral)
Issue #1: arbitrary method to account for inflation
One of the purposes of limiting capital gains taxation is to avoid taxing inflation
Alternative
Mexico: ACB increases by the consumer price index; on sale, only recognise capital gain
to the extent that there is a “real” gain (e.g., eliminate inflation factor)
Issue #2: taxation only on disposition (e.g., on realisation of the gain/loss)
This allows taxpayers to time when they would like to realise their capital gains (and
wealth can increase for a significant portion of time without taxation) by selling gains
when losses are going to be accrued.
Issue #3: lifetime capital gains exemption
Default position
ACB
Identical
Properties
Exemption of up to $750,000 for private corporations, or farming/fishing assets passed
on to the next generation.
Section 54 capital property = (a) any depreciable property (physical assets that
depreciate in value based on age and wear); and (b) any non-depreciable property
where any gain or loss from the disposition of which would, if the property were disposed
of, be a capital gain or a capital loss
Section 53
Barter (exchange of one asset for another) is still a taxable transaction based on the
value of the assets (e.g., value = proceeds of disposition).
Section 47
Certain properties are identical to each other (e.g., common share of XYZ corporation =
every other common share of XYZ corporation; bonds of same issue of XYZ corporation;
mutual fund trusts)
However, two pieces of land are never identical.
Owner of identical properties = average ACB (e.g., purchase of shares at different times
= different prices)
Example (Capital Gains handout pg. 3):
ACB of each share = $1.17 (average of 200 @ $1 and 100 @ $1.50)
Capital gain = $43 (100*[$1.60 - $1.17])



Law 345: Tax
Partial Disposition
Adjustments to
ACB
Disposition and
Proceeds of
Disposition
G. Morgan (O’Brien, Fall 2013) | Page 47
Section 43(1)

Generally, apportioned mathematically. There may be times where this does not make
sense (e.g., selling the landlocked portion of an ocean-front property
Pg. 1 of handout

Section 248(1) disposition is not just sale of the property (e.g., Bellingham—
expropriation)
 insurance proceeds = part of the disposition if the property is lost or stolen (may
need to demonstrate that the property is lost or destroyed to establish
disposition)
 disposition even if no one else gets the property (e.g., redemption of a bond)

Section 54
“proceeds of disposition” includes
(g) sale price of sold property;
(h) compensation for unlawfully taken property;
(i) compensation for destroyed property, and any amount payable under
insurance;
(j) compensation for expropriated property;
(k) compensation for property injuriously affected
(l) compensation for property damage, and any amount payable under insurance
except to the extent that insurance proceeds has been used to repair the
damage
Compagnie
Immobilière BCN
Ltée
(SCC 1979)
Deemed
Dispositions on
Immigration /
Emigration
recall: Imperial Oil where insurance was payable for the damage to one—if insurance
was for the losss of the ship, the money was the proceeds of disposition. If, however, it
was for repair and the money was used for repair, the insurance proceeds is not
proceeds of disposition. The goal
Meaning of disposition = inclusive definition
Disposition is necessary to trigger a capital gain or loss, and often can determine that
there is a disposition because there are proceeds of disposition. However, proceeds of
disposition are not the only indicator of disposition (e.g., transfer of ownership in a gift is
a disposition).
Deemed Dispositions
Emigration
Section 128.1(4)
(b) deemed disposition, if taxpayer is an individual, of
i.
real property situated in Canada, a Canadian resource property or a
timber resource property,
for proceeds equal to its fair market value at the time of disposition
(c) reacquisition at a cost equal to the proceeds of disposition of the property
note: only real property on emigration
Immigration
Section 128.1(1)
(b) deemed disposition, if taxpayer is an individual, of
ii.
property that is taxable Canadian property,
for proceeds equal to its fair market value at the time of disposition
(c) deemed acquisition at a cost equal to the proceeds of disposition of property
note: not just real property for immigration; includes taxable Canadian property = shares


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G. Morgan (O’Brien, Fall 2013) | Page 48
of companies that hold land
Why? will tax value on increase of shares therefore the deemed disposition functions as
a reset to ensure that the tax is only on gain after becoming a Canadian resident (as was
not taxable for a non-resident)
Problem
(Capital Gains
handout p. 4)
Goal: ensure that there is no loss or gain to either the taxpayer in the shift from being a
Canadian resident to a non-resident (e.g., resets ACB to the moment of emigration or
immigration)
Property:
(a) portfolio of publicly traded securities
(b) units of a range of mutual funds
(c) villa in Provence (purchased at $100,000, now $300,000)
(d) 1000 shares of CPC that’s value is primarily derived from real property per
section 2(3)

2006: become resident of Canada again for
n.b. do not deal with Canadian taxable property (as that was already taxed and will
continue to be taxed)
(a) 500 shares of TD Bank purchased for $25/share ($12,500); now valued at
$45/share ($22,500); ACB = $22,500 (but no taxation on gain as non-residents
not taxed on capital gains)
1000 sharse of HRSK Finance purchased for $10/share ($10,000); now valued
at $8/share ($8,000); ACB = $8,000 (but no credit on loss as non-residents do
not accrue capital losses)
(b) N/A
(c) no Canadian tax consequences as disposed of and reacquired; ACB =
$300,000 (but no capital gain assessed as non-residents are not taxed on
capitals gains of foreign property)
(d) Canadian taxable property therefore not considered
Later date = cease to be a resident of Canada
(a) TD bank shares = $12,500 capital gain (taxable = $6250); HRSK shares =
$6,000 capital loss ($3,000)
(b)
(c) deemed disposition of villa in France with a $400,000 capital gain; 50%
included under section 38(a)
(d) ACB = original cost of $20,000 (not stepped up on immigration); therefore
$20,000 capital gain (taxable = $10,000)
Gifts and NonArm’s Length
Transfers
Other tax consequences: no longer taxable on world-wide income (per section 114, split
based on the time when you ceased to be resident)
Goal: avoid gaming the system
Therefore, cannot artificially inflate the ACB by increasing the sale price
Section 69(1) [see handout]
(a) acquisition in excess of FMV = deemed acquisition at FMV
(b) disposition
i) for no proceeds or proceeds less than FMV
ii) by gift inter vivos
iii) to a trust that does not result in a change in the beneficial ownership of the

Law 345: Tax
Related and nonarm’s length
Problem: Annabel
Deemed
disposition on
death
Problem: Ruth
(Handout p. 6)
G. Morgan (O’Brien, Fall 2013) | Page 49
property; and
PoD = FMV
(c) acquisition of property by way of gift, bequest or inheritance, or because
disposition does not change beneficial ownership, deemed acquisition at FMV
See “Related and non-arm’s length persons” handout

Section 251
For individuals:
Related persons = persons connected by blood, marriage, common-law partnerships or
adoptions
 blood relationship is the child or descendant o the other, or one person is the
sibling of the other per section 251(6)(a)
n.b. aunts or uncles (nephews or nieces), and cousins are not related persons
 spouses and common law partners per section 251(6)(b) and (b.1) where
common law partner requires (a) a 12 month period of co-habitation
For corporations:
Related persons =
 (2)(b)(i) person who holds voting control (voting control = enough shares to
elect the board of directors (typically, > 50%);
 (2)(b)(ii) person who is a member of a related group that controls the
corporation (related group – a group of persons, each member of which is
related to each other member); and
 (2)(b)(iii) person who is related to any person who controls the corporations, or
any member of the related group that controls it
Transaction = below FMV therefore Barbara will be deemed to have an ACB of
$10/share and Annabel will be deemed to have a capital gain of $10,000
Solution: split up the transfer to two separate transactions (sell 700 shares at $10; gift
the remaining 300 shares at another date)
[see handout]
Ruth’s estate
(a) deemed disposition of Garmin shares = capital gain of $40,000
(b) deemed disposition of heritage house = capital gain of $450,000



note: net capital losses from previous years could be applied against the capital
incomes; net capital losses convert to regular losses in year of death (e.g., can apply
against income from pension, etc.)
Rollover of capital
property to spouse
or common law
partner inter vivos
Jaden
(a) Garmin shares: ACB = $95,000
(b) heritage house: ACB = $600,000
Rollovers
Tool for marital breakdown to facilitate transfer of property to split of the capital property
in the relationship without incurring immediate tax consequences
Section 74.2
Unless election, there is a deemed transfer at the ACB (e.g., no gain/loss), and the other
spouse is deemed to acquire at the ACB
Essentially, the ACB rolls over to the spouse receiving the property

Law 345: Tax
Rollover of capital
property to spouse
or common law
partner inter vivos
Spousal rollover
on death
G. Morgan (O’Brien, Fall 2013) | Page 50
Note: attribution rules are not examinable
Rollover facilitates the settlement of property division; to find the most tax-efficient
solution, and to facilitate a more final settlement by not requiring further interaction on
later sale of the property
Recall: difference between value of property and tax value of the property (e.g., what are
the capital gains and losses, and what are the respective marginal rates at which the
property would be taxed given the spouses’ incomes and other assets)
Sections 70(6) and 70(6.2)


Key: ACB of deceased spouse rolls-over to surviving spouse
The impact is the deferral of any capital gain or loss until the surviving spouse dies or
disposes of the property (e.g., defers tax consequences of death in terms of deemed
disposition at fair market value)
Policy: recognise the economic interdependence of couples; survivor should retain full
value of shared property during lifetime
If election to not apply section 70(6), section 70(5) applies (e.g., deemed disposition)
Problem (handout
p 8)
Note: there are a number of planning opportunities here as it may be in best interests of
surviving spouse to have the deemed disposition take place (e.g., if the deceased
spouse has enough capital losses to offset the capital gain, it might be better to have the
surviving spouse to get the ACB adjusted up to current market value)
Section 70(5)
Section 70(6)
Defer $500,000 capital gain on the building
(e.g., $250,000 taxable capital gain) + defer
Total capital losses (net capital losses + $50,000 capital gain on the XCo shares
allowable capital losses) = $325,000
(e.g., $25,000 capital gain)
Better tax planning is to both recognise the gain and recognise the losses (e.g., to
proceed with the deemed disposition) as the allowable capital losses do not rollover to
the spouse

Total taxable capital gains = $275,000

Benefits: “use it or lose it” on capital losses; no tax liability on deemed disposition on
death per section 70(5); adjusts up ACB for surviving spouse
n.b. remaining net capital losses (e.g., $50,000) can apply to income from sources from
year of death and preceding death as a non-capital loss per section 111(2)(a)
Introduction
Alternative logic: if surviving spouse has a much lower marginal rate, it may be prudent
to reserve capital losses for income from sources OR if surviving spouse has a much
higher income, he or she may want to defer (or may have capital losses to apply)
PUP and LPP
PUP = deemed nil loss (as it is presumed to be worn out or old) BUT can recognise a gain
(if such a thing is possible, generally real property)
LPP = recognise both loss and gain
Section 54
“personal-use property” (“PUP”)
Example: house in Whistler that’s held by a corporation

Law 345: Tax
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“listed personal property” (“LPP”)
n.b. in principle, this is an exhaustive list (but SI to a) in particular)
LPP = PUP +
a) print, etching, drawing, painting, sculpture, or other similar work of art
b) jewellery
c) rare folio, manuscript or book
d) stamp
e) coin
$1000 Rule
Problems
(handout p 9)
LPP Losses
Policy considerations: items with significant value (and value that increases in time); some
characteristics of investment (blend of personal use plus stored value)
Section 46(1)—applies to PUP and LPP
 deems the ACB of the property to be the greater of $1000 or the actual ACB
The effect of this provision is to exclude from gains/losses small (e.g., essentially the
garage sale exemptions)
A.
Surfboard: 0 (deemed ACB = $1000, deemed PoD = $1000)
Bicycle: gain = $200 (deemed ACB = $1000, actual PoD = $1200)
B.
Sculpture: loss = $1000 (actual ACB = $2000; deemed PoD = $1000)
Rare coin: LPP gain of $700 in same year as culture
Section 41(1)-(3)



(2) net gain =
a) amount of gains from dispositions of LPP > amount of losses from LPP
disposition
b) carry forward 7 years and back 3 years losses from LPP disposition
Problem
(handout p 9)
(3) LPP loss = total losses of LPP disposition > total gains of LPP disposition
Year 1: LPP losses of $1000 per section 41(3)
Year 2: LPP losses of $2000 per section 41(3)
Year 3: LPP gains of $10,000

Solution: carry forward the LPP losses from year 1 and year 2 for a net gain in year 3 of
$7,000
Grouping
How much is included as income? $3,500 (half of the net gain)
Section 46(3)—property deemed to be single PUP under circumstances of section 46(3)

Section 46(2)
a) when only part disposed of, ACB deemed to be greater of actual ACB, or
proportion of $1,000 that the portion of the set is of the whole set (e.g., one
$1,000 ACB for the whole set)
b) PoD = greater of actual PoD, or proportion of $1,000 that the part represents of
the whole
CB 582
Key: anti-avoidance rule that ensures that one doesn’t double up (or triple up) on the
$1000 rule
Problem 1: PUP that is a set
Deemed ACD = $1000; actual PoD = $1600; gain = $600
Section 46(3) = treat as one property therefore ACB = $1000; PoD = $2400; and gain =

Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 52
$1400
O’Brien: would want to argue that the furniture is a work of art (e.g., LPP) as it avoids
incurring section 46(3)
Problem #1: Lance
Spousal
Rollover—inter
vivos and on death January 2007: purchase 1000 Class A shares for $10/share ($10,000)
November 2007: purchase 2000 more Class A shares for $20/share ($40,000)
January 2008: transfer 1500 units to common-law partner when shares = $20/share
($60,000)
What is Lance’s ACB of the transferred units?
Identical properties cost per share: $50,000/3000 = $16.67/share
1,500 shares @ $16.7/share = $25,000
What is Lance’s capital gain or loss resulting from the gift to Craig?
PoD = ACB = no capital gain or loss under section
What is Craig’s ACB of the units?
ACB = PoD = $25,000 (not fair market value, which would be $30,000)
What if Lance left them in a will to Craig?
Section 70(6) Lance is deemed to have disposed of the units for the ACB ($25,000)
therefore PoD = ACB. Craig’s ACB for the shares is the same as the PoD (not fair market
value, which would be $30,000)
If election, section 70(b) deemed disposition (therefore Lance gets the capital gain, and
Craig gets the full, fair-market value ACB.
Deemed Grouping
of PUPs
n.b. do not analyse whether common law partner when O’Brien says that one is (same
with employee/independent contractor)
Section 46(3)
Set deemed when
1) properties would normally be sold as a set
2) question of fact
3) match or belong together
4) produced at roughly the same time (but not where it doesn’t make sense like a
coin collection with one year for a century)
5) ordinarily, worth more collectively than individually
Principal Residence Exemption
Term
Principal
Residence
Exemptions
Details
Key Concepts
Generally, houses increase in value therefore would always result in a capital gain.
However, there is an exemption for one’s principal residence (e.g., the home with the most
PUP)
Home = PUP (e.g., acquisition for personal use and enjoyment)
Why no taxation on capital gain?
 inhibit home sales (especially given that most people sell in order to repurchase
in the same market)
 no deduction for mortgage interest (as there is in the states)
Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 53
However, not a neutral exemption: it is a subsidy on home ownership and the benefit only
accrues to home owners (e.g., not renters who generally don’t have a deduction unless
particularly low income)
ITA Provisions
Application:
 1 per nuclear family
 proportional to the number of years that you a) own it; b) inhabit it; and c) are
resident in Canada
Section 54
“principal residence” introductory words and (a), (c) and (e)
(e) land subjacent to the housing unit (e.g., under it) and such portion of immediately
contiguous land (e.g., directly around it) that contributes to its use as a residence except
where the total area exceeds ½ hectare (approx.. 1 acre) where the excess does not
contribute unless the taxpayer establishes that it was necessary for use and enjoyment
“housing unit” = house, condo, townhouse, unit in a duplex or triplex; cottage/cabin/ski
chalet/float home/RV
Necessary for Use
and Enjoyment
Farthest definition: mobile van parked on a piece of land (but not accepted by CRA—just
accepted by TCC)
“principal residence”
(e) land subjacent to the housing unit (e.g., under it) and such portion of immediately
contiguous land (e.g., directly around it) that contributes to its use as a residence except
where the total area exceeds ½ hectare (approx... 1 acre) where the excess does not
contribute unless the taxpayer establishes that it was necessary for use and enjoyment
Rode (TCC 1985): is the excess land necessary to live in the house as a residence? (e.g.,
not a subjective analysis of whether you’d like it)
Stuart Estate (FCA 2002): objective not subjective test
Where it likely succeeds? minimum lot size under zoning requirements exceeds ½ hectare
(e.g., can’t sell if subdivided and can’t own less than the minimum) (Yates); need excess
land to access a roadway; strange lot configurations on the coastline or waterfront to
access house from roadway
Multiple Houses
Owned a Year
Yates: minimum lot = 10 acres
Business = buying, renovating and reselling (at a profit)
ANT = buying and then selling (at a profit)
Flags to CRA: claiming more than one principal residence in multiple years
Ordinarily Inhabit
Number of
Principal
Residences per
Family Unit
In some cases, the CRA has been able to establish that the purchase was for inventory
(e.g., not for personal use and enjoyment). This argument is more difficult if the taxpayer
occupies it as the principal residence.
(a) taxpayer is an individual, the housing unit was ordinarily inhabited by the taxpayer,
spouse (or former spouse) or child of taxpayer
ordinarily inhabit = moved personal effects in; inhabit in an ordinary way;
Before 1982: each member of a couple could designate a different principal residence if
they owned them separately (e.g., the house in town and the cottage), and the child of a
couple could own a third residence (e.g., the wealthier one was, the more that could be
sheltered)
Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 54
1982: shelter 1 property per married couple and their minor children
1993: shelter 1 property per married couple and opposite-sex common law partners and
their minor children
2001: shelter 1 property per spousal relationship (married, common law partner)
Election back to 1998 for same-sex common law partners
Formula
Changes were designed to impose tax neutrality (e.g., neither encourage or discourage to
marry; treat same sex and opposite sex couples the same)
When taxpayer disposes of principal residence, can designate it as PRE to shelter the
capital gain.
Section 40(2)(b) calculation formula
A = amount that would be the taxpayer’s gain (e.g., 40(1)(a): PoD – ACB)
B = 1 + number of tax years after acquisition date that the residence was the principal
residence and during which Canadian resident
C = number of taxation years that end after the acquisition date during which the taxpayer
owned the property whether jointly or otherwise
Example
Deduction applies to capital gain
 recall: no capital loss on PUP therefore no capital loss
1. Bill and Barb
1995: Bill’s ACB = $125,000; Barb’s ACB = $125,000
2000: Barb sells cottage inherited in 1990 for $100,000; designates it as her principal
residence from 1990-1999 (so whole gain is exempt)
2003: Bill and Barb sell house for $350,0000; $50,000 gain for each
Bill can designate his ½ interest only for 2000 to 2003 (as Barb designated the cottage as
PRE and they are common-law partners). The same for
5/9th of the exemption applies to both half interests
2. Cassidy problem
2002: purchase 3 hectares when minimum lot size = 2 hectares
2006: property rezoned to permit 1 hectare minimum lot size
2008: property sold for a profit of $100,000
Cassidy: year-by-year analysis; year of re-zoning was not included (but “assuming without
deciding” and O’Brien thinks that 2006 should be included at list to the extent that the
rezoing came into effect)
Handout pg. 11
Solution: full PRE for 2002, 2003, 2004, 2005
1975: H & W marry
1975: house purchased in wife’s name only for $50,000
1980: H inherits $30,000 property on Saltspring
Law 345: Tax
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1985: sell house in Victoria for $65,000
1987: house purchased in wife’s name only for $80,000
1991: H transfers Saltspring property to 16 y/o daughter (value = $75,000)
First House
Designate 1975-1984 as that is the longest time necessary
Cabin
Designate 1980, 1981 (could double designate) plus 1985 and 1986. Questions about the
1987– 1991 as overlaps with ownership of new house
10/12th exemption applies to property
Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 56
Index of Cases
Canada’s Tax System
Case
Ct/Yr
Short Description
CB
Placer Dome Canada v
Ontario
SCC 2006
Definition of hedging profits. Modern interpretative approach to tax statutes = Drieger; text prevails if words
are clear; with latent ambiguities, there is a residual presumption for tax payer; burden of proof on tax payer
hand
out
Case
Ct/Yr
Short Description
CB
Expropriation. TP rec’d 3 part settlement: land value; interest and add’l interest. Add’l interest was exempt
amount but list of sources in s 3 non-exhaustive.
Carswell published directory of lawyers for C&S and replicated list on own. Settlement = (1) royalty and (2)
$7,000 lump sum. Lump sum = punitive or additional award = non-taxable (no income feature)
Unsolicited payment from US parent to shareholder of Canadian subsidiary to thwart potential US litigation.
$250,000 inducement from majority shareholder to join company. Not taxable.
Strike pay was not taxable on the grounds that the residual presumption in favour of the TP.
Provided there was an enforceable legal right to compensation, it was income provided that payment was
made (e.g., did not need to establish that the claim was likely to succeed in court)
TP left law firm to join new co. K cancelled therefore settlement. Not taxable as could not determine what
portions replaced income from a taxable source (salary, pension) and which did not (embarrassment).
$300 from employer for passing 3 tests taken on own time. Exempt under section 56 as a prize (not income).
81
The Source Conception of Income
Included and excluded sources of income
Bellingham v The Queen
FCA 1996
Cartwright & Sons v MNR
TAB 1961
The Queen v Cranswick
Curran v MNR
Canada v Fries
Mohawk Oil v Canada
FCA 1982
SCC 1959
SCC 1990
FCA 1992
Schwartz v The Queen
SCC 1996
The Queen v Savage
Surrogatum Principle
Tsiaprailis v The Queen
Canada v Siftar
SCC 1983
SCC 2005
FCA 2003
TP won lump sum settlement for insurer ending her LTD benefits.
No allocation of what lump sum award represented. Burden on TP to establish what portion of the lump sum
payment is non-taxable.
Receipt and enjoyment of an amount as income or “nexus”
Field v The Queen
TCC 2001
Mrs fraudulently withdraws funds from Mr’s RRSP. Mr does not seek return to settle divorce. Not taxable as
not rec’d.
Buckman v MNR
TCC 1991
Lawyer defrauded clients. Paid interest to clients but otherwise would not repay as declared bankruptcy.
Income from an immoral or illegal business is taxable.
R v Poynton
ONCA 1972
TP embezzled funds from employer. Embezzled funds taxable as no intention to repay employer.
86
86
87
87
87
90
hand
out
106
108
N/A
Residency as the primary basis of Canadian tax liability
Case
Ct/Yr
Short Description
CB
SCC 1946
TCC 1990
TRB 1977
TP lived in US but summered in NB. Definition of ordinarily resident = customary mode of life (not casual)
UK resident who worked on rig off Canada. Income CDN account but bedroom in UK. Resident of Canada.
2 of 3 shareholders commuted to Canada for work with primary residences in the US. Not a CCPC as the 2
shareholders were not residents (rather, sojourned in Canada).
141
146
151
Exch Ct 1962
US citizen worked at Canadian subsidiary. Recalled to US. Wife and sun remained in Canada but resumed
club in Canada and only two visits after recall. Part-year residence (no sojourning after he left b/c resident).
Canadian citizen spent 2 days at office in NS then sent to Europe for work. Resident in Canada as still his
customary mode of living.
159
Avoidance of dual tax residence
Salt v The Queen
TCC 2007
Home in QC but working in Australia. Did not sever all residential ties. Applied tax treaty tie-breaker.
hand
out
Provincial residence
Madrusiask v The Queen
BCSC 2007
Homes in BC and AB. Resident in both jurisdictions therefore determination of principal residence (AB).
hand
out
Corporate residence
DeBeers Consolidated
Mines v Howe
UKHL 1906
Common law residence test = location of central management and control
Case
Ct/Yr
Short Description
CB
Franchise with individual installers paid by the job. Installers = employees because without the installers,
there would be no business.
CYC workers. K identifies as independent contracters.
221
Ballet dancers. Clear, common intention of the legal relationship will be considered. CRA should abide with
intention when it aligns with objective reality.
229
Introduction to residence
Thomson v MNR
Lee v MNR
R&L Food Distributors v
MNR
Part-year residence
Schujahn v MNR
The Queen v Reeder
FCTD 1975
164
Income from Office or Employment
Employees vs Independent Contractors
Wiebe Door Services v
FCA 1986
MNR
Connor Homes (1392644
FCA 2013
Ontario Inc)
Royal Winnipeg Ballet v
FCA 2008
MNR
?
Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 57
Benefits, reimbursements and allowances
The Queen v Savage
SCC 1983
Lowe v The Queen
FCA 1996
The Queen v Huffman
FCA 1990
Bure v The Queen
TCC 1999
Valuation of employment benefits
Giffen v The Queen
TCC 1995
Dunlap v The Queen
TCC 1998
Richmond v The Queen
TCC 1998
Rachfalowski v The
TCC 2009
Queen
Allowances
The Queen v Huffman
FCA 1990
The Queen v MacDonald
FCA 1994
Deductions
Crawford v The Queen
TCC 2002
Martyn v MNR
TAB 1962
Hogg v The Queen
FCA 2002
Loo v The Queen
FCA 2004
The Queen v Swingle
FCTD 1977
Case
Ct/Yr
$300 passing 3 tests. Benefit = material acquisition that confers economic value. No requirement for service.
Mr and Mrs hosted special trip for insurance brokers. Primary advantage = employer therefore not benefit.
Undercover cop. Clothing allowance not a benefit as reimbursing expense of uniform that employer bears.
Canucks paid agent’s fee directly. Benefit to player was payment for benefit of the employee (not employer)
244
255
261
N/A
Employer used loyalty points to provide TP with a personal flight. Taxable benefit at FMV of flight.
Holiday party. Taxable as significant expenditure (hotel room, alcohol, food) that employer reported.
Parking space. Taxable as ultimate significance was receipt of the benefit not its actual use.
Golf membership. Not taxable as membership was primarily to the employer. Value of benefit (personal)
minimal at best.
277
254
284
284
Undercover cop. Allowance = values that do not need to be accounted.
RCMP officer provided stipend for higher cost of living after transfer. Taxable as no requirement to show
expenditures (e.g., not reimbursement).
289
286
Meal expenses claimed by employees on ferry route between Tsawwassen and Swartz Bay, and Campbell
River and Quadra Island. Not deductible. Act contemplates substantial distance and duration.
Pilot claimed mileage for travel to/from airport. Not deductible as commuting (not carrying out employment
duties) while travelling. While more efficient, the appropriate compensation is through employer (raise).
Prov ct judge claimed deduction for travel to base court given security concerns. Not deductible. Good
reasons are insufficient. Appropriate compensation is through employer.
Legal expenses can be deducted even if wasn’t successful provided that the amount would have been
income if successful.
Gov’t chemist claimed membership dues to professional societies. Not deductible. Not necessary to
maintain professional status recognized by status despite being relevant to employment.
hand
out
293
383
300
301
Income from Business or Property
Short Description
Business as a source of income: organised activity and pursuit of profit
Smith v Anderson
UKCA 1880
Business = “anything which occupies the time, attention and labour of a man [sic] for the purpose of profit”
Luprypa v The Queen
TCC 1997
Snooker. Taxed. Risk management = skilled player; played M-F; practiced; sober; sought inebriated
opponents; won majority ($200/day); calculating and disciplined; primary and steady source of income.
Epel v The Queen
TCC 2003
Poker. Regular winning were attributed to luck as no significant system of risk management.
LeBlanc v The Queen
TCC 2007
Sports lotteries. Not taxable due to specific exclusion s. 40(2)(f) and system not found to minimize risk.
Stewart v The Queen
SCC 2002
4 condo units. Business = intention of profit (not REoP). Indicia of commerciality relevant to pursuit of profit
analysis. Objective and subjective (intention) elements.
Adventure or concern in the nature of trade?
MNR v Taylor
Exch Ct 1956 Purchased and then sold 22 car loads of lead to company. ANT given indicia of trade (no personal value).
Regal Heights Ltd v MNR
SCC 1960
Land purchase near hwy route for mall. Other mall built. Subdivided and sold property at profit. ANT as
secondary intention to sell property at profit. Speculative purchase therefore easy to locate 2nd intention.
Saskatchewan Wheat
TCC 2008
Loss on purchased property. TP claimed ANT to result in a non-capital loss. Possibility of reselling at a profit
Pool v MNR
must be operating motivation of purchase if the property is acquired for a capital purpose.
Irrigation Industries Ltd v
SCC 1962
Borrow funds to purchases shares in NB company. Sold at profit when bank demanded overdraft repaid. Sold
MNR
remainder at later date. No prospect of dividends. Investment b/c not consistent with a trader (underwriting).
Arcorp Investments Ltd v
FC 2000
Securities salesman. Scheme = purchase penny shares in private placement then sell at profit when listed
Canada
publically. ANT b/c behaving as trader/dealer ; high frequency of trades; inside knowledge of system; profit.
Interest
Groulx v MNR
SCC 1967
Sold farm for $85,000 on possession and remaining $310,000 in installments over 7 years no interest.
Attempt to capitalize interest. Purchase price exceeds FMV therefore add’l payment was interest.
Rent and Royalties
Spooner v MNR
JCPC 1928-9 Sale of 20 acres to Vulcan Oil for $, shares and royalty of oil (but TP rec’d $). Capital gain (pre-s. 12(1)(g)).
Wain Town Gas and Oil
FCTD 1952
K to be only natural gas supplied to municipality. Sold to new company. Royalty = agreement to pay
Company Ltd.
percentage based on gas used under contract.
Syspro Software Ltd
TCC 2003
TP holds license to distribute. Paid royalties to non-resident. Withhold tax on royalties.
CB
311
314
314
314
316
551
542
hand
out
546
hand
out
336
342
343
344
Deductions in Computing Income from Business and Property
Case
Ct/Yr
The Income Earning Purpose Test
Daley v MNR
Exch Ct 1950
Imperial Oil Ltd v MNR
Exch Ct 1947
Royal Trust Co v MNR
Exch Ct 1957
Short Description
CB
Bar admission fee in ON. Annual fees = current running expense. Admission = capital outlay.
Ship collision. Paid $500,000 in settlement. While extraordinary amount, expense arose in OCB.
Golf club entrance dues. OCB for RT to incur these fees to set up employees’ memberships.
346
348
352
Law 345: Tax
G. Morgan (O’Brien, Fall 2013) | Page 58
Personal or Living Expenses
Benton v MNR
TAB 1952
Symes v The Queen
SCC 1994
MNR v Henry
Exch Ct 1969
Moving Expenses
Beyette v MNR
TCC 1990
Abrahamsen v The Queen TCC 2007
Bracken v MNR
TCC 1984
Templeton v MNR
FCTD 1997
Grill v The Queen
TCC 2009
Gelinas v The Queen
TCC 2009
Deduction of interest expenses
The Queen v Bronfman
SCC 1987
Trust
The Queen v Attaie
FCA 1990
Singleton v The Queen
SCC 2002
Ludco Enterprises v The
Queen
SCC 2001
Farmer hired housekeeper; didn’t have to hire farmhand (deductible) but personal expense not deductible.
Lawyer claimed all childcare expenses as necessary to practice law. S. 63 governs.
Anesthesiologist claimed commute. Claim not accepted for commute from home to normal place of work
(hospital) except in emergencies. Claim accepted for travel between different work sites.
358
366
382
5 year delaying in moving closer to new location of work.
Moved 16 months before new job. Latitude to taxpayer with change to “enable” in def’n of eligible relocation.
Disallowed moving expenses for self-employed person as no separate work and home location.
Allowed self-employed moving expenses. Otherwise, illogical in modern work reality of self-employment.
Disallowed moving expenses as no change in employer or work location although move was 40 km closer.
Allowed moving expenses w/ similar move to Grill b/c changed departments and went from p/t to f/t.
613
614
615
615
615
615
Trust borrowed $ to make capital distributions to beneficiaries (instead of selling capital assets). Not
deductible as not an income-earning purpose.
Purchased home. Mortgage deductible while rented but not when he moved in (direct vs. indirect)
Law partner used capital account to purchase home and then borrowed money to repay capital account.
Deductible. Apply s. 20(1)(c)(i) not inquiry into true economic purpose.
$ borrowed from Canadian bank to purchase tax-haven shares. Tax havens purchased government bonds,
which paid interest to tax havens. Interest on Canadian loans deductible. Reasonableness = commercial
rates, arm’s length
405
413
414
hand
out
Policy reasons for denying deductions
MNR v Eldridge
Exch Ct 1964
Buckman v MNR
TCC 1991
British Insulated v IRC
UKHL 1926
Canada Steamship Lines
Exch Ct 1966
Ltd v MNR
The Queen v Shabro
FCA 1979
Investments
Gold Bar Developments v
FCTD 1987
The Queen
Call girl operation. Income from illegal business is taxable therefore deductions permitted (with evidence)
Lawyer embezzled client funds.
Lump sum capital payment to institute pension scheme.
Ship upgrades. Repairs = deductible expense as recurring expense. Significant upgrades were outlays of
capital (as income earning).
Concrete slab floor fractured. Changes to structure (steel tiles, new floor) were capital outlays. Repairs of
storm drains were recurring expenses.
Replace brick with metal cladding as bricks were a hazard. Not voluntary to improve building but to prevent
further costs therefore recurring expense.
Case
Short Description
CB
Disposition necessary to trigger capital gain or loss. PoD = only one indicator of disposition as can also
include gift or other transfer without proceeds
565
Bought 3 hec 2002 when min. lot 2 hec. 2006 rezoned to permit min. lot 1 hect. 2008 property sold with
$100,000 profit. Entitl. To PRE =year-by-year analysis. Not year of rezoning but likely should be PRE.
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out
387
108
477
497
499
502
Capital Gains and Losses
Ct/Yr
Disposition and proceeds of disposition
The Queen v Compagnie
SCC 1979
Immobilières BCN Ltée
Principal Residence Exemptions
Cassidy v The Queen
FCA 2011