TAX LAW: SKILL OBJECTIVES OUTLINE
SPRING 2014, PROFESSOR MARK GILLEN
UNIVERSITY OF VICTORIA FACULTY OF LAW
JAMES BILLINGSLEY
1
RESIDENCE
ISSUE A threshold issue is whether __________ is subject to tax under the ITA.
RULE
 Income tax is a tax on the income of a tax unit. S. 2(1) of the Act provides that income tax is payable
on the taxable income of “every person resident in Canada at any time of the year.” Accordingly, it
must be determined whether _________ is “resident in Canada” for the purposes of the Act.
o
o
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DEFN TAXABLE INCOME: 2(2) The taxable income of a taxpayer for a taxation year is the taxpayer’s income
for the year plus the additions and minus the deductions permitted by Division C.
WORLDWIDE INCOME: 3(a) Residents are taxed on worldwide income (income “from a source inside or
outside Canada”) including from office, employment, business and property. Part I; a progressive rate structure.
While “Residence” is not expressly defined in the Act, the meaning of the term has been interpreted
and applied in case law.
In Thomson (1946), the SCC found that residence “depends on the spatial bounds within which a
person spends his or her life or to which his or her ordered or customary living is related.” Although
not binding in law per se, para 1.6 of Income Tax Folio S5-F1-C1 [formerly Interpretation Bulletin IT221R3] references the remarks of Estey J. in Thomson, noting that residence is the “place where a
person in the settled routine of his or her life normally or customarily lives.”
In Beaumont and Russell, the courts indicated that a primary factor in determining residence is
whether the taxpayer has available a place in which he or she has the right to stay. (ITF 1.11).
In Allchin, the TCC also noted that the presence of one’s family is a primary factor. (ITF 1.11).
However, compare with Shih (Taiwan), Shujahn (selling house), Nicholson (divorced).
As per Thomson, the intention of the taxpayer, while perhaps relevant, is not determinative.
Draw in any other relevant law from cases below.
APPLY
 In the present case, there are ____ key factors that make it likely that ___ is resident in Canada:
o ____ has had a place to stay in ______ since ________.
o ______.
o ______.
Policy Economic allegiance theory, benefit theory, ability to pay, neutrality, enforceability
CONCLUDE __________________________________________________________________________.
Thomson v. M.N.R., [1946] SCR 209
Facts: Sold home in NB; said Bermuda was his residence but spent little time there; most of time in US; returned to NB regularly
for 4-5 months a year; accompanied by wife & child.
Held: US may have been primary residence, but he was also resident in Canada
1. It must be assumed that every person has at all times a residence.
2. Not necessary for residence that a person have a home, place of abode or shelter.
3. A person may have more than one residence.
4. The intention of the taxpayer (Bermuda), while perhaps relevant, not determinative.
Beament v. M.N.R., [1952] SCR 486
Facts: Posted overseas for WWII in 39; stayed to 46 with one short visit to Canada for a few weeks; married in England and had
children; established matrimonial home in England.
Held: not resident in Canada until he returned in 46; absence of home in Canada to which he could return was a factor;
intention to eventually return home was not determinative.
Russell v. M.N.R., (1948), [1949] Ex. C.R. 91
Facts: absent for several yrs on war service but had matrimonial home/family in Canada
Held: resident; home is a strong factor; physical presence not necessary.
2
Income Tax Folio S5-F1-C1: [formerly Interpretation Bulletin IT-221R3]
• (para 1.5) Rand J. Thomson : “residence” is : "a matter of the degree to which a person in mind and fact settles into or
maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or
in the place in question.
• para. 1.8 : all relevant facts must be considered “including residential ties with Canada and length of time, object, intention
and continuity with respect to stays in Canada and abroad”
Factors Considered by Courts (and noted in Income Tax Folio S5-F1-C1)
 Para. 1.11 : “the residential ties of an individual that will almost always be significant residential ties for the purpose of
determining residence status are the individual's:
• dwelling place (or places);
(compare a house with family living in it vs. a rental property you can’t go back to b/c it is rented on a long-term lease to an unrelated person)
• spouse or common-law partner; and
• dependants.”
Other Factors Courts have Considered Include (noted in Income Tax Folio S5-F1-C1):
• Personal property in Canada (furniture, clothing, automobiles, recreational vehicles)
• Social ties (memberships in Cdn recreational and religious organizations)
• Economic ties (employment with a Cdn employer and active involvement in a Cdn business, and Cdn bank accounts,
RSPs, credit cards, and securities accounts)
• Landed immigrant status or appropriate work permits in Can
• Hospitalization and medical insurance coverage
• Driver’s license
• Vehicle registration
• Seasonal dwelling place in Can or a leased dwelling place referred
• Passport
• Memberships in Canadian unions or professional organizations
And also considered per Income Tax Folio S5-F1-C1 (para. 1.15):
• Cdn mailing address,
• Post office or safety deposit box,
• Personal stationery (biz cards) showing a Cdn address,
• Canada telephone listings
• Canadian newspaper and magazine subscriptions
Allchin v. R., [2003] (TCC)
Facts: worked in US 92-97, stayed w/ relatives/friends; US bank acct & bills; attempted to move family there w/ imm. lawyer,
BUT family in Can 93-95, Ont. driv license, health insurance, club member, temp accom. In US
Held: resident from 93-95 at common law (but US resident by virtue of tax treaty); family primary factor.
Compare Allchin to: Shih v. R., [2000] TCC
Facts: immig. to Can w/ wife & fam so kids can get Cdn education; purchased home; BUT returned to Taiwan & only in Can for
at most 59 days in any given year; residence, family, job, etc., in Taiwan
Held: not resident; house & family in Can does not override strong connections to Twn; customary life in Twn
Schujahn v. M.N.R., [1962] Ex. C.R.
Facts: xfered to US 2 Aug 57; left Can & put up house for sale; family stayed until sold Feb ‘58
Held: residence given up 2 Aug 57; family in house until sold was reasonable to facilitate sale.
Hauser v. R., [2005] TCC, affirmed [2006] FCA
Facts: Air Can pilot 92-95, worked in Fl; divorced 96, remarried & relocates to Bahamas (new bank acct, shipped goods); BUT
maintained Transport Can license, remained Air Can pilot, union, joint bank account, had to be at airport 24 hours before he flew,
stayed w/ family/friends in Cambridge; in Canada many days 97-01
Held: resident; Thomson-can be resident in more than 1 place; substantial ties to Canada; econ allegiance theory.
McFayden v. R., 2000 (TCC)
Facts: eng’s spouse posted in Japan; sold matr. home & vehicles in Can; eng found job in Japan but returned in 95 and lived in
home he & spouse continued to own but had rented out; maintained 2 joint bank accounts; professional eng membership; stored
furniture; maintained safety deposit box, credit card, driver’s license.
Held: resident – ties significant; consider the factors together and in their entirety.
Compare McFayden with — Nicholson v. R., 2004 (TCC)
Facts: moved to UK for new job, but then returned. Separated from wife and still on joint title as security for equalization
payment in division of property. Still had license, health/dental insurance because kids were on his coverage, Cdn bank account
for monthly support payments to his former wife, collapsed his RSP,
Held: not resident; no intention to return except to visit; settled nature of life was in the UK; important: separated from his wife.
3
Residence of Corporations
ISSUE Whether a corporation is “resident” in Canada for the purposes of the ITA.
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Person under s. 2(1) includes a corporation, as corporation is regarded as a person for the purposes
of the ITA under s. 248(1). Reference 3(a) and 3(d).
Deemed Residency: corporations incorporated in Canada on or after 27 Apr 1965 are deemed to be
resident in Canada. (250(4))
o A corp incorporated in Canada before is resident in Canada if: (250(4)(c))
 It has carried on business in Canada after that date, OR
 It is resident under the common law rule.
APPLY: Corporation is incorporated in Canada; thus resident for the purposes of the ITA
OLD LAW: A corporation is resident wherever “the central management and control actually abides”. (DeBeers. This
is usually where the board of directors meets. (DeBeers). The directors’ location is generally determinative, unless their
power has been “usurped”. (Wood)
o When the shareholders dictate the directors’ actions (e.g. where there is a majority shareholding company), the
test is where the shareholders reside. (Unit Construction)
Central management and control test:
o De facto. Where does control actually reside? (not merely de jure) (Unit Construction)
o Even when the location is selected for tax avoidance and the corp does all of its business in Canada, if the
directors are non-Canadian and non-usurped, it’s not a Canadian resident. (Wood). This indicates a high
degree of formalization of the test.
Residence of Trusts
Whether a trust is “resident” in Canada for the purposes of the ITA.
When the ITA refers to a “trust”, it’s referring to the trustee. (104(1), 248(1))
Trusts are deemed to be individuals (and taxed accordingly). (104(2))
General Test: the trust resides wherever the trustee resides.
Multiple Trustees: the law here is presently unclear – NB the CRA uses the same test as Garron.
o The central management and control test has been applied to trusts. (Garron)
Non-Residents
NON RESIDENTS PAY TAX IF:
2(3) Where a person who is not taxable under 2(1) for a taxation year
(a) was employed in Canada
(b) carried on business in Canada, or
(c) disposed of a taxable Canadian property,
income tax shall be paid on the person’s taxable income earned in Canada in accordance with Div D
115 in Division D outlines “taxable income earned in Canada by non-residents”; also PART I tax so
progressive
4
THE CONCEPT OF INCOME
ISSUE The first issue is to determine if _________ qualifies as income for the purposes of the ITA, and if so
whether it constitutes income from a source, enumerated or unenumerated.
RULE
 Defined: Income is a net concept – it is net of expenses incurred in the generation of that income. This
concept of income reflects the policy rationale of taxing accretions to wealth and tracking a taxpayers’
ability to pay. The identification of an amount or transaction as income is important for tax policy, as it
affects the income tax base. It is also important in this case _.
 Source: While the ITA does not specifically define “income,” it indicates under s. 3(a) that income is
“from a source.” S. 3(a) enumerates four sources of income: office, employment, business or property.
 The ITA provides a set of rules for the determination of income from these enumerated sources —
subdivision a (ss. 5-8) has rules on income from office & employment, and subdivision b (ss. 9-37) has
rules on business and property.
o Apply: ____________ is income from [source]; whereas ________________.
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Unenumerated: However, s. 3(a), prefaces the four enumerated sources with the phrase “without
restricting the generality of the foregoing.” Thus, while income must have a source, the sources could
extend beyond the four listed. This is supported by s. 56, which states that the other types of income
listed there, including pension and EI benefits, do not restrict the generality of s. 3. The court in Fries
implicitly and court in Schwartz explicitly recognize unenumerated sources
Accordingly, the ITA contemplates sources of income unenumerated in the Act.
o Apply: if not income from ______, ______ may be income from an unenumerated source.
Factors that Suggest No Unenumerated Source — non-exhaustive list from Cranswick
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D had no enforceable claim to the payment.
No organized effort by D to receive the payment.
Payment was not sought after or solicited by D in any manner.
Payment was not expected by D, either specifically or customarily.
Payment had no foreseeable element of recurrence.
Payor was not a customary source of income to D.
Payment was not in consideration for or in recognition of property, services or anything else provided or to be
provided by D (i.e. not earned by D’s or another’s activities).
In addition to the factors in Cranswick, the courts have also considered:
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Not a productive source (i.e. a source that can produce income) (Bellingham)
o Eg: D underpaid for expropriated land, awarded damages against city that include statutory-imposed
“additional interest”. Not a productive source. (Bellingham)
The activity was not in the pursuit of profit (i.e. no intent to earn money). (Stewart)
o The taxpayer’s intention is determinative if reasonable (evidence to support)
o Eg: D buys property, takes yearly losses, sells for capital gain. No REOP. (Stewart)
Eg: D owns shares in company A; parent company B pays out all of A’s shareholders to avoid litigation. Payment of
“an unusual and unexpected kind”, no source. (Cranswick)
Reluctance: While the possibility of unenumerated sources has been expressly acknowledged—such as
in the Schwartz decision—courts are reluctant to extend the sources beyond those specifically listed in
the Act. This may be because the ITA provides no rules or guidance on calculating income from such
sources. Courts are likely more comfortable in deferring to Parliament to amend the ITA and expressly
include them as sources if Parliament so chooses, rather than finding new unenumerated sources at
common law.
o
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Damages for breach of an employment K prior to work starting is not income from a source (Swartz)
A non-competition agreement is not income form a source. (Fortino).
Strike pay is not income from a source. (Fries).
Policy: is there an accretion to wealth? [equity]; does the surrogatum principle apply?
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Gifts, Inheritances, Windfalls, Illegal Income, Imputed Income
 Gifts and inheritances: personal gifts are not taxable, but gifts received in the course of business
or employment are seen as benefits and thus included (see below).
o Gifts of property are deemed to be dispositions at FMV, and thus may incur capital gains.
There are rollovers for gifts between spouses or shareholders and their companies. (69(1))
o Inheritances are not taxed.
 Windfalls: not taxable as long as they don’t constitute a business (e.g. horse racing eg. below).
 Illegal income is taxable as an accretion to wealth. (Buckman, Poynton, Eldridge), unless the
proceeds are seized during an investigation —there is no accretion to wealth and thus no income.
 Imputed income is just an expense avoided (e.g. avoiding rent by owning a house). Not taxed.
Damages and Settlements – The Surrogatum Principle
 Surrogatum: tax damages and settlements are intended to replace something.
 Tax them in the same manner as you would the thing they are replacing. (London & Thames)
Contractual Damages
 Expectation damages: where damages for lost income are awarded, tax damages as income.
o Exception: where a breach of contract has resulted in the loss of the whole business (e.g.
breach of franchise license), that is compensation for the loss of the source; a capital gain.
 Reliance damages: this is not an accretion to wealth (just replacing wealth) – not taxed.
o Exception: if the amount is to compensate for the loss of property (e.g. a destruction of a
building), it will be taxed as a disposition of property, and thus a capital gain.
 Restitution damages: like reliance damages, not taxed – just compensation for loss.
Personal Injury Awarded
 Usually have no source. You are being compensated for the loss of physical ability or the
infringement of the right not to be injured. Really non-contractual restitutionary damages. (Schwartz)
 Cost of care: not taxed (no accretion to wealth).
 Compensation for lost earning capacity: (Tsiaprailis)
o Post-judgment damages: not taxable. Replacing a source, to be invested. Tax on interest.
o Post-injury, pre-judgment lost income: also not taxable.
 Punitive damages: like a windfall, not taxed. Victim’s gain is only incidental to the policy decision to
penalize the wrongdoer. (Bellingham)
Computation of Income
 Income is determined by totaling all of the amounts from each source. (3(a))
 Income from sources is included in income and must be (a) calculated source-by-source, and (b)
territorially (province-by-province and country-by-country). (3(a), 4)
 Net taxable capital gains are included n income (but are calculated under a different scheme,
presented in Part I, Division B, subdivision c). (3(b))
 Policy-based deductions: deductions under subdivision e are allowed (e.g. RRSP, s.60, moving
expenses, s.62, partial child care expenses, s.63). (3(c), 60, 62, 63)
 Loss recognition: current year losses from enumerated sources can be deducted. (3(d))
o If the amount produced under 3(d) is negative, income is deemed to be 0. (3(f))
 The amount calculated by 3(d) or 3(f) is a person’s net income. (3(e))
 Capital Gains: Act treats capital gains separately since they do involve not income from a source but the
disposition of a source.
 Other Types of Income: The ITA also adds other types of income that Parliament has decided to tax
that might not be generated from a “source” and thus might not fall in s. 3(a).
6
INCOME FROM OFFICE AND EMPLOYMENT: EMPLOYEE OR INDEPENDENT CONTRACTOR?
ISSUE The issue turns to whether _ could be regarded as an independent contractor earning income from
business, or whether _ could be regarded an employee earning income from employment. S. 3(a)
provides that the taxpayer’s income for a taxation year is determined by calculating the total of all
amounts each of which is the taxpayer’s income for the year, including from each of office,
employment, business or property. The rules for calculating income from employment are set out in
ss. 5 to 8 of the ITA. They are distinct from the rules calculating income from business, which are set
out in ss. 9-37. Whether _ is an employee or an independent contractor has tax implications and is
thus a frequent area of tax litigation. One reason for this is that an independent contractor is entitled
to a wider scope of deductions than an employee, as exemplified in the case of Gifford v R.
RULE
 “Employment” is statutorily defined in s. 248(1) as “the position of an individual in the service of some
other person.” Employment can in this respect be contrasted with business. Business income for tax
purposes involves a “contract for services” rather than a contract of service.
 Beyond the definition of “employment” in the Act, the courts have frequently dealt with the distinction
between an “employee” and an “independent contractor.”
 The most recent SCC decision to deal with the subject is the decision in the Sagaz case, which dealt
with the distinction in the context of vicarious liability. In that case, the court held that the test is the
so-called “control” test, plus a non-exhaustive list of factors, including: (i) whether the worker
provides his own equipment; (ii) whether the worker hires his or her own helpers; (iii) the degree of
financial risk taken by the worker; (iv) the degree of responsibility for investment and management
held by the worker; and (v) the worker’s opportunity for profit in the performance of his or her tasks.
 Subsequently, however, in the Wolf case, the Federal Court of Appeal found that the factors
traditionally developed in the case law prior to Sagaz had not been discarded. Instead, “they remain
valid although somewhat reformulated.” Consequently, the tests and factors in the earlier case law,
particularly the decisions in Wiebe Door, Pletch, and Royal Winnipeg Ballet, are likely relevant.
 One of the earlier decisions that the Supreme Court of Canada referred to with approval was the
Federal Court of Canada decision in Wiebe Door. In that case, McGuigan J. canvassed four tests —
the control test, the integration test, the economic reality test, and the specific result test, and then
noted, much like Sagaz, that one must look to the “total relationship” of the parties. The four tests:
(1) control test — looks at the degree of control possessed by the employer over the work to
be performed.
a.
b.
In a contract of service the employer has a significant degree of control usually specifying the
result of the work to be accomplished and the manner in which it is to be accomplished (start
and stop times; equipment to be used; employees who will assist in the work)
In a contract for services, the person engaging the services may specify the result but the
independent contractor determines how the work will be performed or how the result will be
accomplished (the person engaging the services will not determine the hours of work, the
equipment to be used or the person who will assist in completing the work)
(2) integration test – one version of the integration test has been whether the person
engaged is integrated in the business of the person engaging the services (and
therefore an employee), as opposed to just accessory to the business of the person
engaging the services (and therefore an independent contractor). In Wiebe Door,
McGuigan J. commented that this test would lead in almost all cases to the person being
found to be an employee. Instead, McGuigan J. suggested that the test should be
whether the particular engagement of the services is integral to the business of the
person who is providing the service – i.e. whether the business of the provider of the
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services would survive without the contract with the particular person engaging the
services.
(3) economic reality test – the economic reality test looks at whether there is a chance of
profit and risk of loss – the plus factors noted in Sagaz arguably relate primarily to this
test and are considered below in the context of applying this test.
(4) specified result test – the specified result test asks whether the person engaged has
(i) placed his or her services at the disposal of the employer for a period of time; and
(ii) without reference to a specified result (in which case the person is considered an
employee) vs. a specified result is to be produced by an independent contractor who
devotes time to the project as the independent contractor determines.
(5) total relationship — this final test regards the other tests as not necessarily decisive, and
thus requires a consideration of “the whole of the various elements which constitutes the
relationship between the parties” — an approach that the court followed in Montreal v
Montreal Locomotive.
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APPLY
Pletch: even where the control test suggests a person is an independent contractor, it is just one of a
number of factors to be considered. In this respect, the control test alone is not necessarily
determinative. While the control test can point towards the person being an independent contractor,
the person could still be found to be an employee in light of other factors.
Royal Winnipeg Ballet: where the various tests are inconclusive, the characterization that the
parties gave the transaction (i.e. the intention of parties) will determine the outcome. A similar
approach was taken by Noel J. in the FCA decision in Wolf.
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Control Test
It could be argued that _______ is a _____ on the basis that there is [not] a significant degree of
control, given that: (i) (ii) (iii) (iv) (v) (vi)
On the other hand it might be argued that __________, given that: (i) (ii) (iii)
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Integration Test
On the branch of the test criticized by McGuigan in Weibe Door, _____________.
On the test suggested by McGuigan in Weibe Door ____________.
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Economic Reality Test
The plus factors suggested in Sagaz arguably fit under this test and are considered here:
(i) whether the worker provides his own equipment
(ii) whether the worker hires his or her own helpers
(iii) the degree of financial risk taken by the worker
(iv) the degree of responsibility for investment and management held by the worker;
(v) the worker’s opportunity for profit in the performance of his or her tasks
Specified Result Test
There was [no] specified result because ______________. On the other hand _____________.
CONCLUDE (and Total Relationship) – conclude, analogize/distinguish other cases
 While the ______ tests seems to point largely in the direction of independent contractor since
________, the other tests (______________) seem to point towards ________ being an employee.
 The case is therefore somewhat analogous to like ... Pletch, where control test indicated IC but
employee because of other factors. Since the other factors seem to weigh in favour of employment, it
is not a case like Winnipeg Ballet where the other factors were equivocal.
8
INCOME FROM EMPLOYMENT: TIMING
ISSUE The issue turns to when the income from employment — ___________ — will be included.
RULE
 S. 5(1) of the ITA says that income from office or employment must be “received by the taxpayer in
the year.” Sections 6 and 7 provide that benefits are to be included in income when received, and s.
8 allows deductions to be claimed when paid; thus provides a “cash basis” for employment income.
 Further support for a cash basis for employment income is found in the decision of Vegso, which
notes the significant tax consequences that the timing of receipt can have.
FACTS: dad employed daughter to work on his tobacco farm for $8000 per hear but entitled to be paid only $100/yr
& balance when she married; daughter married and got $8,282 of employment income at that time;
HELD: income from employment is taxable in year of receipt, not years in which it had been earned
NB: result harsh since $800/yr would attract no tax; diff result if she could demand payment (deemed receipt)
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Receipt
o Items mailed: s. 248(7)  items mailed (ex. paycheck) are deemed to have been received
on the day they are mailed
o Income earned in Y1 but paid in Y2 is received in Y2 (ex. if paid on the 15th of every
month, salary for Dec 16, 2012 – Jan 15, 2013 is paid on Jan 15, 2013 and considered 2013
income); true even for retroactive increases in pay (included in year of receipt)
o Advance of income: if payment made on Dec 15, 2012 for work to be done from Dec 16,
2012 – Jan 15, 2013, included in 2012 (year 1)
o Contrast with income from business: businesses on accrual system, therefore record
when income earned not received (matching principle)
o Long delay of payment: creates an opportunity to defer tax if the employer deducts payroll
expense as the employee earns income, but if employee is not paid for a long time (ex. 2
years) since they don’t include the income until it’s paid. This is dealt with by s. 78(4) of the
act that requires remuneration deducted by employer but unpaid for 180 days (6ish months)
after year-end must be added back to employer’s income.
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Constructive receipt: where an employee asks his or her employer to pay a third party who the
employee owes money to or wants to benefit, the income is regarded as constructively received.
Jean-Paul Morin v. The Queen (1974) (Fed. T.D.)
FACTS: says he didn’t receive a ~$16,000 from employer since employer deducted $2,000 in taxes
HELD: not necessary for employee to “actually touch or feel it, or have it in his bank account”; “‘receive’
means to get or derive benefit from something, to enjoy its advantages without necessarily having it in
one’s hands”
Markman v. M.N.R., [1989] 1 C.T.C. 2381
FACTS: taxpayer awarded back pay effective April 1, 1985 but not paid until Jan 2, 1986 (despite intention
of employer to pay it sooner); taxpayer wanted to include it in 1985 tax return alleging constructive receipt
HELD: constructive receipt “applies only when a payment has been made by a payor to a party who is not
the payee, but was made for the benefit of the payee in satisfaction of an obligation contracted by him”
Blenkarn v. M.N.R. (1963), 32 Tax A.B.C. 321 (T.A.B.)
FACTS: employee was paid a portion of 1960 wages in 1961 but payment available in 1960 and employee
voluntarily chose not to requisition a cheque to which he was entitled
HELD: payment was received as soon as he had an unconditional right to be paid
(unconditional right to be paid different than that income was earned)
APPLY
CONCLUDE
____________________; on the other hand _________________.
9
INCOME FROM EMPLOYMENT: INCLUSIONS (SS.5 AND 6)
ISSUE
 If ____ were found to be earning income from employment then one would have to apply the rules in
ss. 5 through 8 to determine his/her income from employment.
 S. 5(1) provides that income from employment is the “salary, wages, and other remuneration,
including gratuities” received by the taxpayer in the year.
 Section 6(1) brings in other types of remuneration as income from employment “for greater certainty,” including:
Benefits in respect of employment [6(1)(a))]
Amounts received by the taxpayer for personal or living expenses or other purposes [6(1)(b)]
Directors fees or other fees ... in respect of employment [6(1)(c)]
Amounts that cover for losses to income from office or employment pursuant to a sickness or accident
insurance plan or a disability insurance plan [6(1)(f)]
S. 6(3) also brings in signing bonuses and non-compete payments to employees.
o
o
o
o
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Salary
Given that s. 5 of the Act provides that the taxpayer’s income for a taxation year from an office or
employment is the salary, wages or other remuneration … received by the taxpayer, the
salary/wage/etc in the amount of ___________ would be included in income from employment.
Benefits
ISSUE (1) whether the _____________ constitutes a benefit to ________, and if so,
(2) whether the benefit is likely to be considered a benefit in respect of employment. If it were
considered a benefit in respect of employment, an issue is also (3) how the benefit would be valued.
RULE
 ISSUE 1: Is there a benefit?
o S. 6(1)(a) requires the taxpayer to include in income from employment “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.”
o According to the Savage case a “benefit” is “a material acquisition which confers an
economic benefit on the taxpayer.” Thus, as a general rule, any material acquisition in
respect of employment which confers an economic benefit on a taxpayer falls within
paragraph 6(1)(a).
o
The Savage case also said that the term “benefits of any kind whatever” in s. 6(1)(a) is quite broad,
which is consonant with the tax policy consideration of horizontal equity. Not taxing benefits would mean that
those who received more of their salary in the form of benefits than those who did not would, all other things
being equal, be better off. To the extent untaxed benefits is more available for higher-paid employees, there is
also a vertical equity concern. In addition, the broad definition of “benefits” promotes neutrality; otherwise,
employers/employees would be incentivized into contracting through non-taxable benefits rather than cash.
o In Huffman v the Queen, the FCA found that a plainclothes police officer need not pay tax
on heavy-fitting clothes subject to wear and tear. The court found that there was no
economic benefit since the employee could not make personal use of the clothes.
o However, in McGoldrick v. R (2004), the FCA found that certain meals provided free of
charge to a casino employee during his shift break, as well as hams and turkeys given on
special occasions, constituted taxable benefits for the purposes of s. 6(1)(a). Even though
the employee could not bring his own meals onto the casino for sanitation reasons, and even
though he “did not enjoy the experience” (para 3) of eating the meals, the personal element
of the benefit was not “merely incidental” to the business purpose. Did not argue quantum.
o In Waffle, the court noted that benefits that cannot be converted into money may constitute
a benefit for the purposes of s. 6(1)(a).
APPLY
_____ received ______, which conferred a material benefit (since he did not have to pay for
these things himself and he took advantage of both).
10

ISSUE 2: Is the benefit in respect of employment?
o RULE: In Savage, the SCC notes that in assessing whether the benefit was provided to the
taxpayer in respect of employment, the words “in respect of, in the course of, or by virtue of
an office or employment” should be given “the broadest possible meaning in terms of
connecting the benefit to the employment.” Hogg suggests that this the SCC’s approach in
Savage effectively creates a presumption that a benefit received by an employee from
employer is a benefit in respect of employment. The presumption can be rebutted; however,
it requires the employee to show that the benefit was of a personal nature.

In rebutting this presumption, aspects of the earlier case law are still relevant, such as the finding
in Laidler v Perry that “one look to the intentions of the employer and whether the benefit could be
said to be a mere personal gift not inspired by the hope of some future quid pro quo”, and Seymour v
Reed, which found one should look to “whether or not the benefit was provided by way of
remuneration for services.” Savage formulates the test as whether the benefit was provided to the
taxpayer “as an employee or as a person.”
o Third Parties: The decision of Waffle indicates that the meaning of “in respect of
employment” is broad enough that it includes benefits to employees by third parties.
APPLY








Part of original employment contract?
Intentions? Mere personal gift or inspired by the hope of some future quid pro quo?
Provided by way of remuneration of services?
A personal gift based on a longstanding personal relationship?
Given in the context of Xmas/wedding/birthday, or recognition of long service?
Gifts the notion of the “broadest possible meaning?
However, the ______ provided to _______ did not provide a benefit because he/she could
not make personal use of them. This is comparable to Hoffman.
ISSUE 3: How is the benefit valued?
o RULE: If _ constitutes a benefit, and it is in respect of employment, the issue turns to its
value. This is b/c s. 6(1)(a) calls for inclusion of the “value” of benefits received or enjoyed.
o A starting point is the cost to the employer, which often represents the FMV of the benefit.
While the cost to the employer is easy to determine, it does not always represent the FMV.
Eg., in Wilkins v Rogerson, an employee sold a suit given to him by his employer. The suit sold second-hand
for 5 pounds, but it cost the employer 14.15 pounds. FMV = 5 pounds.
o
Steen v R defined FMV is “that which a willing buyer would pay a willing seller in an open
market.” If there is no market, the test could be based on a hypothetical market requiring an
estimate of the price a willing buyer would pay to a willing seller.


In Giffen v R, the court valued the frequent flyer points obtained as a benefit by an employee for
travel he undertook for his employer as equal to the cost of the most restrictive economy fare.
In Rachfalowski v R, the court found that the value of the benefit of a free golf membership should
be determined on the basis of actual use rather than availability of the benefit. Employee did not like
golf, did not want membership, but persuaded to use it for ‘corporate culture’.
o Apportionment
 The courts may apportion the value of the benefit to the extent it was actually used.
 More willing to apportion a benefit’s value where there is good evidence to do so.



In Adler v R, FMV of a parking pass provided by the employer was found to be a taxable
benefit. The court declined to apportion for reasons of administrative simplicity.
 However, in McGoldrick v R, the court reduced the assessment by 50%, as the taxpayer
claimed he ate in the cafeteria only half the time available to him.
Dual Character Expenses: part employer/part personal; eg. Bermuda conference – apportion.
Luxurious Facilities: in Zakoor, the court included a portion of the capital cost of a
Cadillac provided by employee, as the extra luxury was a benefit. Consider: is the
benefit justified in the circumstances, or necessary for carrying out the business?
Allowances
11
ISSUE Whether a particular amount [_______] paid by ______ is an “allowance” and whether the allowance
must be included in income from employment.
RULE
 S.6(1)(b) provides that the taxpayer must include in income “all amounts received by the taxpayer in
the year as an allowance for personal or living expenses or as an allowance for any other purpose.”
This provision includes any allowance, except for certain prescribed exceptions in s. 6(1)(b).
 “Allowance” is not defined in the Act. While not a source of law, IT-522R nonetheless follows the
case law, and defines an allowance as “any periodic or other payment that an employee receives
from an employer, in addition to salary or wages, without having to account for its use.” Support for
this def. is found in the case law, such as in Queen v Pascoe, where the FCA defined an allowance
as “at the complete discretion of the recipient who is not required to account for it.”
 In this respect, an allowance can be distinguished from a reimbursement, which the court in Pascoe
found “a payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his
or her actual expenses” is not an allowance. The key question is thus whether the recipient has
sufficient discretion as to how it is spent. If it only defrays his or her actual expenses incurred on
behalf of the employer it is arguably not an allowance.
APPLY
 Does the employee have to account for its use? (submit receipts)
 If not, does it fall within one of the permitted exceptions in s. 6(1)(b):
o
o
o
o
o
Allowance fixed by an Act of Parl or the Treasury Board
Travel and separation allowances received by members of the Cdn forces
*reasonable allowances for travel expenses paid to an employee who is employed to sell property or negotiate
contracts for the employer [s. 6(1)(b)(v)]
*reasonable allowances for travel expenses paid to an employee where the employee is required to travel away
from the municipality where the employer’s establishment is located [s. 6(1)(b)(vii)]
* reasonable allowances for the use of automobiles for travelling in the performance of the duties of an office or
employment within the municipality [s. 6(1)(b)(vii.1)] ex. nurse of NS (hospital gave her $ to account for travel)
Reimbursements Distinguished


Reimbursements of employer expenses not taxed since provide no benefit to employee (buys office supplies for employer)
But reimbursements of employee’s personal/living expenses are taxed (ex. if employer pays for gas used in car driven by employee

Accountable advance is not included in income; it’s an amount paid in advance to an employee who is required to use it
to pay for something for the employer, to account for its use and to return any amount spent.
solely for personal use then amount included in income since benefit to employee)
Home Relocation
ISSUE whether or not an amount paid by an employer in respect of home relocation is a benefit that must be
included in income from employment.
RULE
 When relocating for employment, special statutory rules overrule the often confusing case law.
 S. 6(3): “for greater certainty,” the value of financial assistance in the context of an employee home
relocation loan is to be included in income from employment.
 Hwvr, s. 110(1)(j) allows a deduction of interest at the prescribed rate times $25,000 for a period of
five years. In effect it allows the employer to provide assistance in the purchase of a new home for
relocation to the extent of the deduction but any amount over that is included in income. It must be
on a “home relocation loan” which is defined in s. 248(1) as a loan to acquire a home at a place at
least 40 kilometers closer to a new work location.
 Ss. 6(19)-(22) provide that if an employee relocates his/her home at least 40km closer to work, up to
$15k may be paid by the employer. The employee receives this benefit tax-free, and any remaining
amount is included in income at a ½ rate. Responding to Ransom.
APPLY
INCOME FROM EMPLOYMENT: DEDUCTIONS (S.8)
12
ISSUE whether ______ is entitled to any statutory deductions from the income from employment.
RULE
 8(2) limits deductions from employment to those specifically provided for in s. 8: “except as permitted
by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year
from an office or employment.” Such deductions are subject to further limitations or conditions as set
out in s. 8. Section 67 provides that the deductions must also be reasonable. Deductions from
employment income are thus tightly controlled for the purposes of the ITA.
 One must look through s. 8 to determine if the deduction is specifically allowed:
o
o
o
o
o
o
o
o
o
o

Travel/Meal Expenses
Rule: S. 8(1)(h) and (h.1) provides that a taxpayer can deduct motor vehicle expenses incurred while
travelling in the course of employment where the taxpayer “was ordinarily required to carry on the
duties of the office or employment away from the employer’s place of business or in different places,”
and is required, under the employment K, to pay travel or motor vehicle expenses.
o
o





In Delancy, the court found that a football player staying in a hotel in his team’s city during the football season
was not entitled to deduct travel expenses, as he did not travel away from his place of business.
In Hogg, the court found that a judge could not deduct the extra expense of bulletproofing his car, as this was
not away from workplace.
Meals: Section 8(4) provides that meal expenses may be deductible where the employee is away
from the municipality where employment is located for more than 12 hours. Section 67.1 states that
such meals required by employment – due to travel or otherwise – are only ½ deductible. The same
two requirements for travel expenses (ordinarily required + employment K) apply.
Apply: was ___ required to travel away from the employer’s place of business? In employment K?
Legal Expenses
S. 8(1)(b) allows for the deduction of amounts paid in the year for legal expenses incurred “to collect
or establish a right to salary or wages owed” by the employer or former employer.
o

Travel (and meal) expenses (s. 8(1)(h) and (h.1)
Legal expenses incurred to collect salary or wages (s. 8(1)(b))
Union and professional dues (s. 8(1)(i))
EI and CPP contributions (s. 8(1)(l.1)
Contributions to registered pension plan (s. 8(1)(m))
Supplies (s. 8(1)(i)(iii))
Office rent or salary to an assistant (s. 8(1)(i)(ii))
Sales personnel paid by commission.
Capital cost of an auto supplied by the employee used in employer’s business (s. 8(1)(j))
Home office (s. 8(3))
In Loo, FCA allowed the deduction for DOJ lawsuit, as he was trying to establish he was owed more than he
was paid — i.e. establishing a right to wages. Blackburn: applies to criminal defence.
Home Office Expenses – Supplies, Office Rent, Etc. - (nb: same as home office expense for business (18(12))
Rule: S. 8(13) concerns home office expenses, but this provision limits home office expenses rather
than specifically permits them. The provisions that permits home office expenses are those in s.
8(1)(f) and (i) that are referred to in s. 8(13). S. 8(1)(f) permits deductions for home office expenses
where the taxpayer is “employed in connection with the selling of property or negotiating of contracts
for the taxpayer’s employer” — Apply: these are / are not the tasks of the _________. OR...
S. 8(1)(i) has subparagraph (ii) deals with office rent but these expenses must be required by the
employment K. S. 8(1)(i) has subparagraph (ii) that deals with the cost of supplies consumed in the
performance of the duties of the employment, but it must be required by the employment K.
Other
Determine if any other item is included in s. 8.
INCOME FROM BUSINESS OR PROPERTY: PROFIT
13
ISSUE It must be determined whether ____’s endeavor involves a “business or property.”
RULE
 Income from business is calculated under ss. 9 through 37 of the Act. The starting point is s. 9(1),
which states that “a taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property” Profit is not defined in the Act, but the SCC has held
in Canderel & Symes case that “profit” is a net concept involving revenues less expenses. Therefore
the revenues of a business are included in income from business.
 According to the case Ikea (citing the case Robertson), an amount is included in income from
business where it has the quality of income and where the taxpayer’s right to the amount is “absolute
and under no restrictions, K or otherwise, as to its disposition, use of enjoyment”
 Statutory Def: S. 248(1) states that “business” includes a “profession, calling, trade, manufacture or
undertaking of any kind whatever and … an adventure or concern in the nature of trade but does not
include an office or employment.” The definition is not exhaustive, therefore one must look more
generally to the ordinary meaning of the word. S. 248(1) states that “property” “means property of
any kind whatever whether 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.” The definition of property in the Act is thus very broad.
 CL Def: “business” has been defined as “anything which occupies the time and attention and labour
of a person in the pursuit of profit.” This definition, set out in the English case of Smith v. Anderson,
which the SCC adopted in the Stewart decision. The test for whether an activity involves a “pursuit
for profit” was relatively recent developed by the SCC in Stewart and Walls.
Bus/
Prop
Stewart
v.Canada,
2002
SCC
• Bought 4 condos through a
real estate developer
• Clear from beginning
transaction would involve
losses for several years
• Scheme promoted by
developer as a tax shelter
to “use rental losses to
offset other income and
realize a gain at the end of
the day from the expected
appreciation in the value of
the property”
• Loss created by the
taxpayer paying $279,960
for the condos with $4,000
down and rest on credit
with interest charges
• Interest charges were
greater than rental income
on the properties so losses
generated every year
• Expectation there would be
capital gain from properties
over the years they would
be held.
• APPLICATION: owning and
renting condos that Stewart
never used was clearly
commercial, so bus/prop at
step 1; losses deductible
under s. 3(d)
TEST
(1) Assess whether the activity is clearly commercial or if it has a
personal element. If it is clearly commercial, then it is business
or property.
(2) If there is a personal element then ask, based on the
objective evidence, whether there was a predominant intention
to profit.
•
Subj/Obj: not enough for taxpayer to simply assert their
intention was to make a profit; any alleged subj intention
must be supported by obj evidence
•
Moldowan v. The Queen (SCC 1977)
factors re predom intent:
(i) The profit and loss experience in previous years;
(ii) The taxpayer’s training;
(iii) The taxpayer’s intended course of action to convert
present losses into future profits; and
(iv) The capacity of the venture, given its capitalization, to
show a profit after deduction of capital cost allowance.
•
Sipley v. R., (TCC 1995)
(v) also considered amount of time taxpayer spent on the
particular activity

The older REOP test from Moldowan is not necessary
14
Bus/
Prop
•
•
Walls v.
Canada,
2002
SCC
• Taxpayer held unit in LP, set up
standard tax shelter investment
• LP engaged in storage warehouse
operation; acquired for $2.2m
paying $1 cash with rest as a loan
at 24% interest
• LP paid vendor mgmt services fee
to operate storage park—
LP losses allocated to Walls.
• TCC said no REP so losses could
not be deducted
• FCA said because activity was
clearly commercial (no personal
elements) it was clearly business
or property so loss was from
business or property and could be
deducted per s. 3(d)
•
•
(Stewart); a REOP is only a factor in determining whether
there was an intention to make a profit; “profit” includes
capital but if motivation is purely to make capital gains it’s
not bus/prop (rather it’s CG)
SCC, applying Stewart, held it was “self-evident” that the
activity was “commercial in nature” and that “there was no
evidence of any element of personal use or benefit in the
operation”
Also held (consistent with its holding in several earlier
cases) that it did not matter that the taxpayer was motivated
by a desire to reduce taxes
NOTE: the effect of Stewart/Walls/Ludco (see notes at 154) is to allow tax shelters (concern may be
that legitimates business or property activities would not be entitled to deduction (therefore failed
business but have to pay tax on any CG)/ putting onus on legislators)
Proposed amendments to restore REP test in 2003; never passed.
1. Pursuit of personal pleasure/hobbies distinguished:
Lawyer: Landry v. The Queen (1994) (FCA)
Facts: 71 yr.-old lawyer started law again after not having practiced for 23 yrs; had losses over 15 years; did not keep good
records; didn’t have a budget; did not advertise other than listing in telephone directory; did not always bill clients for services
rendered, etc.
Held: FCA held, using REOP, that lawyer was not engaged in a business so could not deduct the losses
SCC in Stewart suggested Landry case wrongly decided on basis that there was no personal element (but may have been a
personal element – he may have derived some personal satisfaction in acting as a lawyer)
Author: Payette v. M.N.R., [1978] C.T.C. 2223
Facts: taxpayer was author of six books – incurred losses on all the books
Held: under REOP test, he had no REOP and therefore could not deduct the losses
Stewart: Personal element to writing/publishing the books? If no personal element to the writing and publishing of the six books,
endeavor would be considered clearly commercial so no need to assess whether the taxpayer had a predominant intention to profit
Car racer: Cree v. M.N.R., [1978] 2472
Facts: full-time employee of data company claimed losses of $11,600 from car racing in 74. Amateur since 68-73 but turned
professional in 74; owned a trailer, a van and a racing car and went to national racing events across the country; expert witness on
car racing noted appellant was a licenced professional auto-racer but also testified that: “I don’t know why they do it. There are fifty
in Canada. They all have to work because they cannot make a living with auto racing.”
Held: appellant’s activity before 1974 had no REOP – so loss not deductible
Stewart: 1) personal pleasure in auto racing? Appears yes, amateur/ pro distinction. 2) predominant intention of profit? (4 factors)
a. Only losses experienced (no predom intent)
b. No pro training, but spent 5 years as amateur, which indicates training (predom intent)
c. No sign taxpayer intended to convert present losses into future profit
d. Van, trailer, race car will depreciate quickly; indicates low capacity of venture to make profit; expert evidence also indicates
not ability to profit; also still fulltime employee
Restaurant: Sirois v. M.N.R., (1987), [1988] 1 C.T.C. 2147
15
Facts: taxpayer’s restaurant in ‘76; seats 20; only open four days a week; ‘82 seats increased to 40; ‘83 started opening 6 days a
week and increased advertising; ‘83 and ‘84 produced higher revenues; loss prior to ‘84 but in ‘84 the loss was almost eliminated
Held: no REOP for 81 before expansion of restaurant; situation different in 82 to 84 with expansion of restaurant, increased
operating hours and increased advertising; REOP profit in those years (even though he was making some loss)
Stewart: (1) personal element? Hard to say. (2) Predom intention? What if the expansion/ advertising from 82-84 didn’t work?
Metal work: Knight v. M.N.R., [1993] 2 C.T.C. 2975
Facts: school teacher interested in metal work; acquired machines; built shop on his property (was a machinist, developed
software for machines); machines cost $200k; took leave in ‘86-87 from teaching to develop prototype tools for use in connection
with computer software – i.e., software to operate machining equipment; said he was developing the “business”
Held: in 1986-87 was only engaged in research, experiment and development – had no product to sell, no business to carry on
and hence no source of income; his product was not ready for sale; so no REOP so no deduction of losses allowed for those years.
Yacht: Chequer v. R., [1988] 1 C.T.C. 257
Facts: acquired 48’ cruiser boat; plan was to charter it out on a full-time basis, had another full-time job in 1981-82; claimed net
losses in those years from the boat charter business of $31,534 and $24,608.
Held: failed to establish a reasonable expectation of profit so couldn’t deduct losses
Stewart: likely not business
2. Rental Properties — usually commercial, but there can be personal elements
Maloney v. M.N.R., [1989] 1 C.T.C. 2402
Facts: taxpayer rented house to his mother at a low rent; rental income was less than sum of mortgage interest, property taxes
and other maintenance expenses on the property losses on rental property claimed against income from other sources
Held: no REOP from property; the annual losses were in the nature of gifts and thus were non-deductible consumption expenses
Stewart: 1) personal element because prop rented to mother? 2) predom intention — seems not to profit given the cost of
mortgage interest, property taxes and maintenance expenses
3. Gambling as a Regular Activity

Casual betting may be characterized as simply a personal hobby, and such losses would not be
deductible under 3(d). However, in some circumstances, gambling may constitute income from business.
M.N.R. v. Morden, [1961] C.T.C. 484
Facts : inveterate gambler who placed bets on outcome of baseball, hockey, football, and card games; made money. Taxable?
Held: Not subject to tax –mere windfall gains
Walker v. M.N.R., [1951] C.T.C. 343
Facts: farmer was part-owner of several horses; moved in the racing milieu and thereby gained access to info about horse races;
regularly attended horse races betting on them substantially and successfully
Held: his gambling activity was not merely a hobby but was sufficiently extensive and systematic to constitute a business;
test — (really the source question – does the income come from a source (i.e., something capable of producing income)
Stewart: 1) Engaged in an organized activity in a systematic way — so predominant intention was to make an income
Luprypa v. R., [1997] 3 C.T.C. 2363
Facts: after divorce in 1989; no longer employed; practiced playing pool every M – F in afternoons to improve skills; every
weekday evening, after 11 pm, would play inebriated opponents; would not drink alcohol so he could maintain an advantage; made
$16,000 from pool in 1989, $20,000 in 1990 and $40,000 in 1991; won $200 to $300 almost daily (i.e., about $48,090 per year)
Held: Luprypa had a system and a reasonable expectation of profit (applying Moldowan case since case was pre-Stewart); it was
his principal source of income and he managed risks by being a skilled player, spending afternoons practicing to improve his skills,
playing only inebriated players after 11 p.m., and avoiding alcohol himself, Monday – Friday practice
Stewart: 1) appears that it was purely commercial
Gambling post-Stewart:
16
Leblanc v. R. (2006), 2007 D.T.C. 307 (T.C.C.)
Facts: 2 brothers had grade 12 education; had worked in father’s window washing business; prior to ‘96 won a substantial amount
of $ on a lottery; in ‘96 they started to invest heavily in sports lotteries (point spread, over & under, etc.); lived cheaply & ploughed
winnings back into lottery games; brothers estimated they lost 95% of bets; spent $50 mil over 4 years, but made $55 mill.
Held: not organized, not business (MG: error, b/c expert statistician said the odds would have been incredibly small w/o a system)
Cohen v. R. (2011), [2011] 5 C.T.C. 2199 (T.C.C.)
Facts: lawyer quit practicing law to play poker full-time; played 6 to 8 hours per day & attended several tournaments out of town;
otherwise self-taught; for 2006 taxation year reported loss of $121,992; had law firm income from employment $200,000 in 2005
and continuing to receive law firm severance pay in 2006 expenses included purchases identified as “inventory” (cash spent to get
into poker games); interest charges; money spent on books; registration fees for the Las Vegas seminar; and travel expenses
Held: applied Stewart, found not engaged in a business since his training was limited attendance at a single seminar in Las Vegas
and the reading of books and articles; no business plan or budget or system for winning

LEVEL OF ACTIVITY — Business or Property?
ITA, for the most part, treats business and property the same. However, there are some exceptions:
1.
2.
3.
4.
5.
6.
7.
8.
Attribution Rules (s. 74.1 and 74.2) apply to the transfer of property from Spouse A to B, where income from property or
capital is included in the income of Spouse A (prevents splitting)
Non-Resident Income from Business Carried on in Canada (s. 2(3)) is taxed at s.117 graduated tax rates, whereas income
from property is taxed at a flat rate in Part XIII tax (s. 212)
Income from Business Allocated to Provinces of Permanent Establishment (Reg. 2601), whereas income from property
taxed in province in which the owner was resident on the last day of the taxation year.
Foreign Accrual Property Interest Definition Excludes Active Business Income (s. 95(1)); FAPI rules prevent incorporating
an offshore co. to hold foreign investments (accrual in foreign corp must be included in income), so doesn’t apply if the
offshore co is carrying on a real business
Capital Cost Allowance Restrictions on “Rental Property” (Reg. 1100(11)) do not allow CCA to result in losses from “rental
property” (stop loss rules) [but these do not apply to income from business]
Cumulative Eligible Capital Deductions only in respect of a Business (s. 20(1)(b)), not for property (applies to intangibles
that are income from a business (ex. copyright, goodwill))
Small Business Deduction and Investment Income Refund: Distinction made between “active business” income for which
small business deduction available (s. 125) and “aggregate investment income” that excludes active business income and
for which a partial refund is available (s. 129)
Inclusion of amount received for goods not delivered or services not rendered is for a business (s. 12(1)(a); accrual accounting)
Level of Activity Test
 Test lies in the “level of activity”—whether income comes merely from ownership of property (passive), or
whether income comes primarily from efforts of owner/employees (active: time, labour, effort)
 Rental Properties
o PROP: if activities are typical of those involved in maintaining property such as maintenance of the building, heating,
lighting, air conditioning and parking, rental income will still be considered property income
o BUS: at some point addition of services such as protection, housekeeping, laundry, mail service, a restaurant, etc.
will cause income to be considered income from business; where landlord owns many buildings and engages
significant management team to manage the buildings and the business of renting and maintaining the buildings the
rental income may be considered income from business

Banking Business
o
o

PROP: normally interest on a loan would be considered income from property
BUS: if lender is a bank that makes a business of lending, interest income would be considered business income
Rebuttable presumption that corporate entities earn income from business rather than property
Canadian Marconi Company v. The Queen (1986) 2 C.T.C. 465 (S.C.C.)
FACTS: co had electronic equipment manuf and processing (M&P division) and broadcasting division; sold
broadcasting division and senior officer and 12 employees involved (albeit part time) did trading to invest the
proceeds (while looking for a permanent investment), claimed M&P deduction on income from the trading
HELD: presumption that a corporation earns its income from business, not property; in this case not rebutted
(income from business), could claim M&P deduction (which the ITA said was avail for active business income)
INCOME FROM BUSINESS OR PROPERTY: INCLUSIONS
17
ISSUE If ____ were found to be earning income from business, the next issue is whether the _______
(items) would be included as income from business or property.
RULE
 Income from business or property is calculated under ss. 9 through 37 of the Act. The starting point
is s. 9(1), which states that “a taxpayer’s income for a taxation year from a business or property is
the taxpayer’s profit from that business or property” Profit is not defined in the Act, but the SCC has
held in Canderel & Symes case that “profit” is a net concept involving revenues less expenses.
Whether something constitutes profit is a question of law.
 Ss. 12-17 set out the rules for inclusion of income from business or property. The general purpose of
the inclusion provisions is to reinforce the accrual approach to the recognition of income.
Eg. s. 12(2) provides that the inclusion rules in s. 12(1)(a) and (b) are enacted “for greater certainty”
 According to the Ikea case (citing the Robertson case), an amount is included in income from
business where it has the quality of income , which is when the taxpayer’s right to the amount is
“absolute and under no restrictions, K or otherwise, as to its disposition, use of enjoyment”
o Apply: the amount is due to _____ because ______ has done everything the K required and
therefore has an absolute right to the amount ‘with no restrictions, K or otherwise’”
 An amount may be considered income when it is realized according to accrual accounting even if it
isn’t received (so from Ikea, “amounts received or realized by the taxpayer, free of conditions or
restrictions upon their use, are taxable in the year realized subject to any contrary provision of the
Act or other rule of law”
Determining when an amount is receivable
 According to GAAP, income from business is normally accounting for on an accrual basis
 S. 12(1)(b) provides that “Any amount receivable by the taxpayer in respect of property sold or
services rendered in the course of a business in the year, notwithstanding that the amount or any
part thereof is not due until a subsequent year, …” and “in respect of services rendered in the course
of a business” an amount is receivable the earlier of:
(i) the day on which the account in respect of the services was rendered, and
(ii) the day on which the account in respect of those services would have been rendered had there been no
undue delay in rendering the account in respect of the service.”

If service is rendered but not yet billed/ undue delay hasn’t passed, it may nonetheless be included in
income under s. 9(1) (ex. if taxpayer had absolute right but just hasn’t rendered bill); since 12(2) says
12(1)(b) is enacted for greater certainty only.
 In MNR v Colford Contracting, the SCC found that “in the absence of a statutory definition to the
contrary”, “it is not enough that the so-called recipient has a precarious right to receive an amount in
question, but he must have a clearly legal, though not necessarily immediate, right to receive
it.” This is normally the time when the person has completed the services contracted for or when the
good sold has been delivered. At such time there is a right to receive the amount and the amount is
usually known at that point.
o Holdbacks: in Colford Contracting, a construction contractor completed all the work and
was paid the stipulated amount except for 15% held back for pending architect approval. The
court found that the 15% amount was not receivable until approved. A clear legal right to
receive it would only arise when the certificate is rendered.
a. Expropriation: in Benaby Realties, the court found that a clear legal right to receive money
for expropriation did not occur at the moment of expropriation. While there may have existed
a legal right at this time, the right was not clearly to a fixed amount. As soon as it is fixed by
agreement, arbitration, or court order, there is a right to a known amount that is receivable.
Subsequent appeals does not prevent amount from having the quality of income.
Debts and Interest
18
ISSUE Whether particular payment on a loan consists partly of principal and partly of principle, and how the
payment is to be treated under the ITA.
RULE
 In debt instruments—such as residential mortgages or treasury bills—payments are part for interest
and part for principal over the life of the loan (blended payments).
 S. 16(1) provides that where “where, under a contract or other arrangement, an amount can
reasonably be regarded as being in part interest … and in part an amount of a capital nature …” the
part of the payment that can reasonably be regarded as interest “shall … be deemed to be interest.”
To deem such part of the payment as interest, blended payments must thus be unblended to
determine the amount of interest and include/deduct it as income from property. In this way, s. 16(1)
looks through the legal form of the transaction to get to the economic substance as involving the
payment of interest. Interest included as bus/prop income in s. 12(1)(c) or deducted in s. 20(1)(c).
Eg. Groulx v. MNR, [1967] CTC 422
FACTS: instead of selling property for $370k (purchaser wouldn’t agree) taxpayer sold a farm for $395k with $85k
payable immediately and $310k was payable in installments over the next six years. No interest was payable by the
purchaser; would the $25k (difference between 370 and 395) be considered interest?
HELD: payments over the 7 years could reasonably be regarded as payments of part principal/part interest.
NOTE: installments can be genuinely interest-free where the taxpayer and the borrower are not at arm’s length (e.g.,
parent sells property to child), but where parties are at arm’s length, it is hard to see why vendor would accept a low
interest or interest-free deferred payment unless the purchaser agreed to pay more than the market price


Where debt obligations yield interest, the interest is included as income.
With respect to discounted debt instruments, the difference between the face value paid on maturity
and price paid for the bond is generally included in income, unless the discount was not engineered
at the outset.

Situations in which a discount on a debt obligation must be included as income include:
o Yield (benefit to the creditor) on an obligation (like a bond) generally includes the interest
paid, but also the difference between face value paid on maturity and price paid for the bond
a.
b.
c.
If the bond is sold to the creditor at a discount, the yield is higher than just the interest
If the bond is sold to the creditor at a premium, the yield is lower than just the interest
Ex: D issues bond to C for $10,000 with 5% interest per annum – later C sells bonds to P when interest
rates have gone up to say 10% for $6,000 – P gets $500 per annum on $6,000 investment for 8.33%
return and then gets $10,000 on maturity for a further gain of $4,000
o S. 16(1) applies to an original issue discount, and an amount that can reasonably be
regarded as interest is taxed as such ($4,000 gain in above example considered interest).
o In Satinder v the Queen, the FCA found that with respect to the sale of a debt obligation at a
discount, the discount portion was interest income under s. 16(1).
o Section 20(1)(f)(i) provides that the discount can be deducted 3%.

However, interest need not be included where the discount was not engineered at the outset. In
Wood v MNR, an investor who purchased a mortgage at a substantial discount and held it to maturity
did not have to report the redemption proceeds as interest income. The reason was that the discount
was not engineered at the outset but resulted from market forces.
o 16(1) doesn’t apply (today would be considered CG)
19
20
INCOME FROM BUSINESS OR PROPERTY: DEDUCTIONS
ISSUE If the income is regarded as business or property, it must be determined (1) whether the expenses
____ are deductible as income from business or property. Sub-issues include (2) whether the
amount of deductions are reasonable, and also (3) when the expenses can be deducted.
RULE
 As noted above, s. 9(1) provides that income from business is profit (revenues less expenses); also
profit (according to the Canderel case) is determined according to well-accepted business principles
(which include GAAP) subject to the Act and case law. In calculating income from business, GAAP
requires that expenses be incurred for the purpose of earning income from business.
 This is reinforced by s. 18(1)(a) which provides that no deduction can be made in respect of “any
outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose
of gaining or producing income from … business or property.”
 Ss. 18 disallows or limits certain deductions, including:
o
o




S. 18(1)(b): no deduction in respect of capital expenditures: “an outlay, loss or replacement of capital, a
payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as
expressly permitted by [Part I, s. 20(1)(a) and (b)]
S. 18(1)(h): no deduction can be made in respect of “personal or living expenses of the taxpayer” (defined in
248(1); ex. food, shelter, clothing, personal entertainment)
S. 18(9) prohibits deduction of prepaid expenses (deducted in year to which they relate)
o
S. 20, by contrasting, permits certain deductions. For example, s. 20(1) permits reserves to be
deducted in the year to which they relate (even if not paid until the future).
S. 63 allows partial deductibility of childcare expenses to employment/business (see the limitations).
S. 67 adds a further requirement that expenses are reasonable in the circumstances.
In Royal Trust, the court found there is no req that the expenditure actually result in the earning of
income from bus/property. Instead, one should look to the purpose of the expenditure— whether it
was incurred for the purpose of earning income from bus/property—rather than the result.
In Symes, the SCC set out 6 tests for determining whether an expense was incurred for the purpose of
gaining or producing income from business:
1. GAAP: Whether the expense is deductible according to accounting principles or practices such as
generally accepted accounting principles.
2. OTHER BUSINESSES: whether the expense is normally incurred by other taxpayers carrying on
similar businesses. If it is, there may be an increased likelihood the expense is a business expense.
3. BUT FOR: Whether a particular expense would have been incurred if the taxpayer were not engaged
in the pursuit of business or property income or whether, in absence of the business activity, the
need to incur an expense (such as food, clothing and shelter) would still be there.
4. AVOIDABILITY: whether the taxpayer could have avoided the expense w/o affecting gross income.
5. TRADE: Whether the expense is an expense “of the trader” or “of the trade”. If the expense was an
incident of the trade – part of the business operation itself, it is an income-earning expense.
6. CIRCLE: Whether a particular expense was incurred in order to approach the income-producing
circle (eg. clothing, child care, housekeeping or commuting) or was incurred within the circle itself.
Only the latter would be deductible as income-earning expenses. This test may be of limited
assistance in cases where the “personal circle” and “income-producing circle” overlap, such as in the
case of home office expenses. Makes you available for work (doesn’t count) vs. actually part of the business (counts).
Subsequent to Symes, the FCA in Scott used the following tests to determine whether an expense was
for the purpose of gaining income from business:
1. What is the need that the expense meets;
2. Would the need exist apart from the business; and
3. Is the need intrinsic to the business? (2 and 3 are articulated in Symes)
APPLY BOTH
21

Dual Purpose Expenses are partly incurred for the purposes of producing income from business or
property and partly considered personal or living expenses (ex. business trips). Two approaches:
a. Apportionment between income-producing portion and personal/living expense portion
(nb: meals and entertainment expenses are always apportioned 50% under s. 67.1)
i. Stapley, 2006 (FCA): s. 67.1 applied to a real estate agent who provided clients
with gift certificates for food/beverage even though he didn’t consume them himself.
b. Principal Purpose: deduct entire amount if expense principally for business or disallowing
entirely if principally personal
i. Cormack (1965): doctor who became a professor was not allowed to deduct
expenses incurred on a trip to Europe to study educational methods on the basis
that the principal (or dominant or primary) purpose of the trip was personal
ii. Royal Trust Company: court allowed the deduction of the entire expense of club
memberships for its employees on the basis that the principal purpose was to earn
income through obtaining clients and keeping them
Childcare
In the Symes decision, the SCC found that the childcare expenses of a female lawyer who paid a lawyer to
care for her 2 children were not deductible as a business expense as they were not incurred as part of the
income-earning process. Rather, they only made the taxpayer available for earning income from business.
 Also, S. 63 of the Act already comprehensively addresses child-care
Food and Beverage
 Expenses for “food or beverages or the enjoyment of entertainment” incurred for a business purpose can
only be ½ deducted under s. 67.1.
 In Scott, however, the FCA allowed a courier to deduct the cost of an extra meal that his 10-hour / 150km
per day job required. The court analogized the extra meal to extra fuel consumed by someone using their
car in a delivery business. While this was analogy was used to justify distinguishing the facts of this case
from any fact scenario in which a labour intensive job requires extra — construction, creates uncertainty.
 The taxpayer needn’t consume from the food and beverage expenditure. In Stapley, the courts
applied s. 67.1 to a real estate agent’s deduction of gift certificates for food, bev, and entertainment
tickets. Even though the agent didnt use the certificates himself, the plain meaning of the section applied.
Club Membership
 In Royal Trust Company, the taxpayer deducted the expense of its employees’ memberships in social
clubs and other community organizations. Evidence indicated that the employees could meet prospective
clients, thereby providing a business advantage. The court found that the principal purpose was to earn
income—to acquire and keep clients—not to personally benefit its employees. Deduction allowed.
 However, s. 18(1)(l) of the Act now disallows deductions for club memberships. Club memberships have
a personal element to them as employee benefits from them (although Rachwalowski is an interesting counterexample).
Commuting
 Commuting is considered dual-purpose in nature by the courts; while commuting is necessary to earn
income, it also partly a consumption choice of where to live; courts tend to find that commuting makes
the taxpayer available to work but not incurred in the course of the business.
 However, once a taxpayer has traveled to work any business-related travel from the office to another
place, other than home, for the purpose of the business is a business expense.
 In Cumming, an anesthetist rendered all his services at a hospital near his home. However, there was no
office available at the hospital and so he did his books/research at a home office used exclusively for
work. Court found that the home office was the base from which the practice operated and thus the trips
to the hospital and back were not commutes to work but were trips made in the course of his business.
22
Housekeeping
 The courts treat housekeeping similar to commuting. While it frees the taxpayer for work, it is also partly
a personal consumption choice. According, it is generally not deductible.
 In Thomas Harry Benton, the court rejected the argument that but for the housekeeping expense, the
taxpayer would not have been available for other work. In that case, a 62-year old farmer who owned and
operated a 480 acre farm hired a housekeeper (he was a semi invalid due to a stroke) and sought to
deduct the cost from his farm business. The court found that any contributions of the housekeeper to the
income-earning work of the farm were secondary, even though taxpayer needed her to run the farm;
only expense deduction was where the housekeepers’ efforts related to the production of farm income
Home office expense
 A home office expense can be deducted only under s. 18(12) if the home office is either:
(i) the principal place of business, or, if not the principal place of business, then
(ii) it must be used on a regular and continuous basis for meeting clients, customers or patients …
 “Principal” in 18(12)(i) means first in rank or importance and would generally mean, in the context of a
home office, that the home office was used more than 50% of the time .
 Since s. 18(12)(a) only applies “in respect of an otherwise deductible amount” the case law prior to the
enactment of s. 18(12) may still be relevant. Further, the deduction of home office expenses must meet
the requirements of ss. 9(1), 18(1)(a), 18(1)(h) and 67 discussed above (and the Symes or Scott tests)
 Earlier cases dealing with the specific issue of home office expenses required that the home office be
used exclusively for the purpose of earning income from business, probably out of a concern for the
evidential difficulty of determining the proportion of business use where the use is partly business and
partly personal.
 In Logan v. MNR, a doctor was permitted to deduct a proportion of the home expenses attributable to the
room in the home that was used as an office because he established that the office was used exclusively
for work-related activities such as medical writing, bookkeeping and meeting with other doctors
 However, in Mallouh v. M.N.R., a doctor was denied a deduction for costs of a home office that occupied
half of the basement in home since the office was a sort of general study or den in which businessrelated work was not the exclusive activity.
 Deduction is limited to the extent there is income from the business for which the home office is used.
Kickbacks, bribes, other illegal payments
 S. 67.5 states “no deduction shall be made in respect of an outlay made or expense incurred for the
purpose of …” [list of illegal activities], which includes bribery in general. Policy.
 Statute overruled OLD CASE  United Color & Chemicals Ltd. v. MNR (1992 TCC): a company could
deduct money it had provided to a manager for the purpose of making bribes as an expense because the
bribes allowed the company to make money from business.
Fines and Penalties
 18(1)(t) provides that interest/penalties imposed under ITA and other Acts are not deductible
 67(6) states that “in computing income, no deduction shall be made in respect of any amount that is a
fine or penalty (other than a prescribed fine or penalty) imposed under a law of a country or of a political
subdivision of a country (including a state, province or territory) by any person or public body that has
authority to impose the fine or penalty.”
 OLD CASE  (1999) (“Poultry Case”): fines were deductible as long as they were incurred for the
purpose of earning income from business or property (but noting that it was conceivable that a breach
could be so egregious or repulsive that the fine imposed could not be justified as being incurred for the
purpose of producing income)
23
Damages and Similar Payments
 Damages are deductible if they are incurred as part of the operations (or transactions or services) of the
business [per Imperial Oil case]
 Damages are not deductible if not part of the operations of the business – i.e., if not part of the normal
risks of the business [per Imperial Oil case and the Poulin case]
 S. 67 also requires that the expense be reasonable (therefore must satisfy the gaining or producing
income test or the enduring benefit test and be reasonable)
 Courts will not normally disallow deduction of damages on moral or public policy grounds BUT the
damages could be said to be so egregious or repulsive that it was not for the purpose of earning income
from business or property [per the Poultry case and McNeill]
Imperial Oil v. M.N.R. (1947), 3 D.T.C. 1090 (Ex. Ct.)
FACTS: 2 ships collide at sea, taxpayer entered into settlement, tried to deduct cost of settlement
HELD: damages deductible even though the expenditure wasn’t ‘directly’ for the purpose of gaining income (rather to discharge
legal liability). Test is whether the expense came about “as part of the operations, transactions or services by which the
taxpayer earned income”. Transport of oil by sea was Imperial Oil’s business; risk of collision at sea was part of that business.
Poultry Case (1999 SCC)
FACTS: taxpayer produced eggs over allocated quota to meet demand of a buyer (additional quota not available), did not inform
BC Egg Marketing Board, inspector discovered 6,700 layers over quota, agreed to pay $269,630 and dispose of excess hens.
Deducted over quota levy under 9(1) and 18(1)(a).
HELD: deductible. MAJ: expense incurred for the purpose of gaining/ producing income from business; but it is conceivable that
a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the
purpose of producing income. However, such a situation would likely be rare …”
McNeill v. The Queen, 2000 D.T.C. 6211 (F.C.A.)
FACTS: taxpayer ordered to pay damages for breach of NCA, claimed damages as a deduction
HELD: allowed deduction, found Poultry applies to damages as well as levies/fines
Reasonableness Requirement
 S. 67 states that an amount otherwise deductible is deductible only to the extent that the outlay or
expense was reasonable in the circumstances. There are two generally understood concepts of
unreasonableness:
a. Unreasonable due to excessive expense
a. In No. 511 v. M.N.R. (1958), a company sponsored baseball team using more than ½ of
the company’s profits. The court held that the sponsorship was a legitimate expenditure
(advertising), but it was excessive, and reduced the allowable expense significantly.
b. Unreasonable due to non-arms length payment
a. In Mulder Bros (1967), a co controlled by 2 brothers paid salary to themselves plus one
brother’s wife. The court found the salary given to the wife was excessive; reduced it.
b. In Costigane v R (2003), a dentist had a family trust that operated a financial services
business, employing dental hygenists from his dental practice as employees. The
business provided management/ banking/ accounting to Mr. Costigane’s dentistry office.
This allowed Mr. Costigane to pay a fee to CFS, which allowed the family trust to
distribute the money. HELD fee charged by CFS to Mr. Costigane excessive; reduced.
c. HOWEVER, In Aessie v R (2004), self-employed CA whose spouse assisted (spouse =
employee of Mayday Mgmt Inc); deducted fees for services provided by his spouse.
HELD: “deal with Mayday is a common and reasonable business deal that is not unusual
or untoward in the business world. It is not appropriate for the Court to interfere in such a
transaction.”
24
When is the amount deductible?
ISSUE If the amount is deductible and reasonable, another issue is when the amount is deductible. The
timing of a deduction depends upon whether the expense is characterized as current.
RULE
 One must distinguish between expenses that bring benefits that will, in part, accrue beyond the year
(or have an enduring value – referred to as capital expenses), and those that bring benefits
consumed in the year (referred to as current expenses)
When a capital expense be deducted
 Section 18(1)(b) provides that capital expenditures cannot be deducted. The Act then sets out
specific rules for the deduction of such expenditures. Section 20(1)(a) provides a deduction for
depreciable assets (tangible property), referred to as a CCA. Section 20(1)(b) provides a special kind
of deduction for expenditure on intangible assets (ex. copyright), referred to as a CEC.
 Unfortunately, some capital expenditures don’t fall in either category. They can’t be deducted at all if
they’re found to be capital.
When can an expense be deducted (current)
 Section 18(1)(a): current expense can only be deducted if it was “made or incurred” by the taxpayer
 In determining when an expense is “made or incurred,” the general rule is to follow the accrual
method, which stipulates that an expense is incurred when the taxpayer has a legal obligation to pay
the amount even though there is no immediate obligation to pay it.
o This was confirmed in Burnco Industries Ltd., where the FCA noted that “an obligation to do
something which may in the future entail the necessity of paying money is not an expense.”
o In Guay Ltee, the court disallowed a contractor from deducting amounts for construction
holdbacks, as the amounts were not payable until the architect’s certificate was confirmed.
Contingent liabilities
 18(1)(e) prohibits deduction of contingent liabilities except as permitted under Part I
(deduction for inventory sold on credit which doesn’t get paid). The purpose of the provision is to
prevent abuse since such liabilities an estimate and may never materialize.
 A Contingency is “an event which may or may not occur” (Winter). In Wawang Forest Products, the
court noted that the question is “whether the legal obligation has come into existence at that time, or
whether no obligation will come into existence until the occurrence of an event that may not occur.”
o

In McLarty, (2008), the SCC found that the “the focus is ... on two particular types of uncertainty:
1) whether an event may or may not occur; and 2) whether a liability depends for its existence upon
whether that event may or may not happen.”
o

FACTS: joint venture interest in speculative project, payment based on cash flow/sale if any amount owing; not
contingent even though there may be insufficient funds; but if cash flow alone would be speculative
Canadian Pacific Limited v. M.N.R., (ONCA)
o
o
o

FACTS: holdbacks for worker’s comp oblig; found not contingent b/c legal obligation to pay the amounts.
FACTS: company liable to reimburse Worker’s Comp for benefits paid to workers/dependents; upon receipt of
notice of an award would calculate projected total amount & add to “deferred liabilities-workers comp” account.
HELD: taxpayer entitled to deduct the deferred liabilities account (not just amounts paid in a year); not
contingent account within 18(1)(e) because it was based on an existing liability/obligation (obligation not
contingent even though amount may vary); distinction between existence of liability vs amount of liability.
NOTE: expert evid said it accorded with GAAP
General Motors of Canada Ltd. v. R. (2004 FCA)
o
o
FACTS: collective agreement required GM to allocate $2/hr/worker to an account whose purpose would be
later decided; MNR argued there was not obligation to pay until the use was agreed upon.
HELD: applied Wawang, but legal liability was contingent; to be absolute it needed a subsequent agreement
between GM and CAW as to how funds would be spent.
Contested amounts not deductible (must wait until resolution of case to deduct expense, Northwood Pulp)
25
Running expense
 Definition: expense that will last beyond the current year, not related to any item of revenue but
relates to the running of the business as a whole (Vallambrosa Rubber 1910, Naval Colliery 1928)
 Fully deductible in year in which they’re incurred
 TEST: whether the expenditure relates to the taxpayer’s business as a whole or to a particular
revenue stream; if it is not related to a particular revenue stream then it can be deducted in the
current year even though accounting treatment may result in it being amortized over a longer period
o
i.e. business could not continue but for the expense but that the expense does not relate to any particular stream of revenues.
Oxford Shopping Centres v. The Queen (1980 F.C.T.D.)
FACTS: shopping centre developer paid for improvements to roadway to reduce traffic congestion (shopping centre
didn’t own road but city wasn’t fixing it; necessary for customers); road is not an asset of Oxford therefore can’t deduct
under CCA; sought to deduct it in the year of expenditure
HELD: expenditure not capital because it was a “running expense” that “is not referable or related to any particular item
of revenue” – so expenditure could be deducted in full in the year (even though amortized for accounting purposes)
Canderel Ltd. v. The Queen (1998 S.C.C.)
FACTS: Tenant inducement payments made to tenants in consideration for them entering into lease, allowed taxpayer to
generate income, maintain market position, attract other tenants; sought to deduct full amount in the year.
HELD: tenant inducement payments were a “running expense”, not “directly or at least not principally” incurred to earn a
specific stream of rental income of the tenant (brought other immediate benefits); could deduct payments in the year they
were made (even though amortized for accounting purposes)
Prepaid expense
 Courts have found that if prepaid, expense should be expensed under s. 9(1) and s. 18(1)(a),
according to generally accepted accounting to match revenues over the periods to which they relate.
 This often includes prepaid rent and insurance.
 Section 18(9) allows a deduction for certain types of prepaid expenses in the years to which they
relate (the provision was added for greater certainty according to IT-417R2)
o
o

Requires deferral of prepaid expense for future services, interest, taxes, rent, royalties, insurance (only).
To the extent a prepaid expense is not in the list, to be treated in accordance with GAAP (IT-417R2);
presumably subject to the residual middle ground treatment in Tower.
In Tower Investment, a taxpayer sought to deduct over a 3 year period costs of an ad campaign to
find tenants for apartment buildings. The court found the ad expenditures were not current
expenditures (“not for the year they were made but for future years”, like a pre-paid expense); the
deductions were made in accordance with GAAP and allowed under 18(1)(a) = middle ground
between current expense and capital (not long enough to be an enduring benefit). Deferral allows
prepaid expenses to be matched with the revenue they create.
Reserves
 In general, reserves (amount set aside to account for the future) are not deductible
 S. 18(1)(a): reserves taken as contingencies for future expenses are not deductible because they are
not “outlays or expenses” “made or incurred by the taxpayer.” Exceptions:
 S. 18(1)(e) specifically does not allow the deduction of reserves. Act provides exceptions:
o
o
S. 20(1)(l): allows a reserve for doubtful accounts ie “a reasonable amount in respect of doubtful debts … that
have been included in computing the taxpayer’s income for the year or a preceding taxation year” (making a
reasonable estimate of the likely uncollectable amounts in a year ie bad debts expense). Reserve taken in a
year under 20(1)(l) must be added to income in the next year under 12(1)(d); next year another reserve can be
taken out; when an amount is determine uncollectible it can be deducted under 20(1)(p).
20(1)(n): if you sell something on installments, a reserve can be taken for installment payments that are due
more than 2 years from the time of sale (for property sold in the course of business ie inventory; not real estate)
Inventory
 Match inventory with revenue (ex. determining closing inventory);
 Value the inventory at either FMV or at the lower of cost or market value (10(1)).
 Can elect, but once election’s made must continue with it (10(2.1).
26
Interest
 Interest is the cost of borrowed funds and is considered a capital expenditure (“expense or outlay”)
and therefore NOT deductible under 18(1)(b) unless the Act specifically permits it (SCC, confirmed in
Shell; even though it’s not an enduring benefit).
Shell Canada Ltd. v. The Queen, SCC
FACTS: In substance it was a US loan at 9% but on paper it was a NZ loan at 15.4%
HELD: form>substance, whether it is a loan or not depends on how the parties
characterize it; could deduct 15.4%; court was not to examine “economic realities” of
the situation, just to accept the characterization of the arrangement (K) by the
parties, subject to evidence of a sham

In Shell, the court noted there were four elements to s. 20(1)(c):
(i)
the amount must be paid in the year or be payable in the year in which it is sought to be
deducted;
(ii)
the amount must be paid pursuant to a legal obligation to pay interest on borrowed money;
(iii)
the borrowed money must be used for the purpose of earning non-exempt income from a
business or property; and
a.
The borrowed money must be directly used to earn income;
i.
ii.
b.
Money borrowed to purchase home/property in anticipation of CG is not deductible (CG not bus or prop
since 9(3) says income from prop doesn’t include disposition of prop)
i.
ii.
(iv)






Bronfman (1987 SCC): instead of selling trust investments to pay beneficiary (believed time wasn’t right), borrowed
money to give beneficiary and deducted interest as expenses;
HELD: direct use didn’t yield income from bus/prop therefore not deductible
[FORMALISTIC] Singleton (2010 SCC): Partner in a law firm drew $300k in the capital account of his firm to buy a
personal house and same day borrowed $300k from bank to replace law firm capital account; HELD: deductible against
income from law firm because direct use was investment in the business (even though whole purpose was to purchase
personal house)
Ludco Enterprises: invested in shares of corps that paid out low dividends (goal to accrue CG) using debt financing
(therefore paid interest on loans); over 8 years paid $6mill interest, got $600,000 dividends, sold shares for $9.2mill CG;
deducted interest pursuant to 20(1)(c) (large losses provided for tax shelter scheme).
HELD: whole amount of interest deductible as long as part of the purpose is to earn income from business or
property, even if part of gain is CG (in this case, dividends); rejected primary purpose test; income in 20(1)(c) means
“gross income” (not clear what that means but in this case the losses were offset by expectation of CG); deduction of
interest only disallowed if evidence of a sham transaction.
the amount must be reasonable, as assed by reference to the first three requirements;
Per Shell, whether it is a loan or not depends on how the parties characterize it (i.e. one looks to the
legal form not to the substance of the transaction).
One can deduct the whole amount of interest even though part of the gain is income and part of the
gain is a capital gain.
Per Ludco, interest is deductible as long as earning income from business or property is part of the
purpose of the use of the borrowed funds.
Per Ludco, “income” in s. 20(1)(c) means “gross income.”
It is the current use of the borrowed funds that matters.
o Exception to the current use rule is that if money was borrowed to earn income from
business or property & the property ceases to earn income or the business ceases to exist
then the unpaid balance of the loan is deemed to continue to be used for the purpose of
earning income from business or property so the interest continues to be deductible (20.1).
o A decline in the value of the property acquired with the borrowed money declines it does not
affect the amount of interest that can be deducted (i.e. the deduction is not reduced
according to the proportionate value of the property – per Tenant).
It is the direct use of the borrowed funds that matters (per Bronfman and Singleton).
27
CAPITAL EXPENDITURES (OR CURRENT EXPENDITURES)
ISSUE If ______ is incurred for the purpose of earning income from business or property, the issue turns to
whether it is is a capital expenditure or a current expenditure.
RULE
 A capital expenditure, while not defined in the Act, is generally a cost incurred on property that will
provide a benefit that will last for beyond the year and usually for a substantial period of time. Section
18(1)(b) provides that a capital expenditure cannot be deducted in the year that it is incurred.
Instead, the Act sets out specific rules for the deduction of such expenditures over several years
under a scheme provided in the Act. Section 20(1)(a) provides a deduction for depreciable assets
(tangible property) known as a CCA. Section 20(1)(b) provides a special kind of deduction for
expenditure on intangible assets (ex. copyright), referred to as a CEC. Unfortunately, some capital
expenditures don’t fall in either category. They can’t be deducted at all if they’re found to be capital.
 Section 18(1)(a), by contrast, allows the deduction of a current expense when it was “made or
incurred” by the taxpayer.
 Issue is thus whether _ is a capital expenditure (not deductible under 18(1)(b)) or a current expense.
 Several common law tests have been developed in determining whether an expenditure is a capital
expenditure: the enduring benefit test, the recurring expenditures test, the business structure test,
and the residual test. The business structure test is arguably the same as the enduring benefit test,
and the enduring benefit test is the main test.
Tests
 Enduring Benefit: test is derived from Helsby, adopted in Canada in Johns Mansville.
o Considers whether the item provides a benefit beyond the year it was acquired; whether
it provides “an asset or an advantage for the enduring benefit of a trade.”
o
o


Recurring expenditures: this test, established in Ounsworth v Vickers and Valambrosa Rubber,
considers a capital expenditure as incurred once and for all, whereas an income [or current]
expenditure is one that recurs every year. In other words, it considers whether the expenditure is
is one that recurs every year (current) or not likely to recur (capital).
The test is less than ideal
o
o
o

Some businesses have large outlays like delivery vehicles, which must be incurred every year (buses).
Non-recurring benefits may be exhausted in the year (ex. severance payment)
The damages payment in the Imperial Oil case was a large expenditure to pay damages caused by a
collision at sea – it would not provide an enduring benefit but it would, hopefully, be a one-time
expenditure (or at least an infrequent expenditure)
Business Structure: articulated in Canada Starch; adopted as separate test in John-Mansville
o Whether the expense was incurred to provide the establishment/ expansion of the
business or “part of the money-earning process”
o Very similar to the enduring benefit test – an expense that provides for the establishment
or expansion of the business is one that provides an enduring benefit to the business
o

Company sought to deduct the whole amount of a payment for a pension scheme for its employees in the
year in which it was incurred. HL found such a payment must be spread over several years, as the co was
buying the “substantial and lasting advantage” of a happy/secure staff, both present & future.
Policy: A deduction of the whole amount of a benefit in one year that endures for several would
understate income for the current year and overstate income for future years. Deferring the deduction
would be consistent with GAAP and would provide a more accurate measure of ability to pay.
Thus expenditure over a number of years deducting portion of the expense used up in each year.
Application: regularly buying land adjacent to mine (current: John-Mansville, but nb: wouldn’t have been
deductible at all if capital b/c land=non-depreciable); exclusive agency agreement (current: B.P. Australia
– part of normal gas business); cf. Sun Newspapers NCA – large amount; enduring competitive advantage
Residual test: if interpretation of tax statute is unclear and it’s reasonable to find both a
deduction and no deduction for an expense clearly incurred to earn income, choose deduction
(Johns-Mansville)
28
Small Recurring Expenditures
 Where it does not make sense to capitalize a relatively small item that provides an enduring benefit (ex.
stapler); tends to be recurring in a similar amount year to year; expense item in current year. [admin simplicity]
Types of Capital Assets
 Depreciable Property: CCA applies to these. (20(1)(a))
o Schedule 2 of the ITA provides classes of depreciable capital expenditures. (ITR 800)
o NB these assets are mostly tangible, though some are intangible.
 Eligible Capital Expenditures: these capital expenditures have an associated deduction scheme: 75%
of the expenditure is added to a cumulative eligible capital account, and each year 7% of the present
balance of the account may be deducted. (20(1)(b))
o NB these are all intangible assets, excluding depreciable intangible assets.
 Non-Depreciable Property: includes land, shares, & bonds, the cost of which is recovered on sale.
o Natural resources get a depletion allowance instead of a depreciation allowance. (65)
 Nothings: no deductions permitted at all (e.g. a yacht – 18(1)(l)).
Repair, Maintenance or, Improvement of Tangible Assets
 The test for whether the cost of repair or improvement of an asset is capital or current for the purposes of
the ITA begins by considering whether the cost was incurred for business (i.e. not personal). If it was
incurred for business, the three-part test assesses:
o Relative size of the expenditure (if it’s small, less likely capital)
o Whether the expenditure is recurring (recurring indicates capital)
o Effect of expenditure on the value of the asset repaired (restoring asset to normal operation does not
increase enduring benefit it was originally expected to provide – current – vs extending its life or
substantially increasing value of the asset – capital)
 Examples:
o D replaces a flat roof with a sloped roof. It was substantial, it wasn’t recurring, and it increased the
value of the building. It was thus an enduring benefit. Capital. (Earl)
o Replaced walls/floors of ship. Sizeable expenditure, resulted from usual wear and tear (so perhaps
recurring?), but didn’t change nature of ship (only restored to original) Current. (Canada Steamship)
o D buys building with sinking floor, so D puts in reinforced (better quality) flooring. sizeable, not
recurring, restored building to normal operation but improved quality. Capital. (Shabro)
Protection of Intangible Assets
 Ex. cost of litigation to preserve rights re: intangible assets (ex. patents, copyrights, trade names)
 Whether an expense incurred in acquiring or protecting an intangible asset is capital or current.
o Canada Starch: current: payment to a competitor to settle trademark dispute; related to “process” of
carrying on business rather than “business entity, structure or org”; didn’t provide “enduring benefit”
o Kellogg: current: cost of litigating right to use name “Shredded Wheat”— perhaps b/c preserving
intangible asset (“Shredded Wheat”) is similar to repairing its normal usefulness of an asset. (but non-recurring)

NB: in Starch and Kellogg, courts may have been willing to stretch because otherwise there would have been
no deductions even though they were clearly incurred to earn income from business and reduced ability to pay
o Dominion Natural Gas Co: capital (enduring benefit): legal costs to defend challenge to its license to
supply natural gas not deductible; costs increased value of licence by removing cloud on validity.
Domain Names (likely capital), Corporate Takeovers, and Goodwill, New Business Expenses



Corporate Takeovers: costs of defending against a takeover are likely capital expenditures (Neonex), but costs of
facilitating a friendly takeover by a to-be-acquired company may be current.
Goodwill: buying goodwill=capital, but growing it (advertising)=current. Buy client list = capital (Gifford)
New Business: expenses in setting up a new business is likely a capital expenditure.
29
CAPITAL GAINS: SS. 38 – 54
ISSUE Whether _ has a taxable capital gain or allowable capital loss for _ and at what amount.
RULE
 Section 3(b) of the ITA states that “taxable capital gains” net “allowable capital losses” are
includes as a taxpayers’ income for the year. S. 38(a): states that “taxable capital gain” is ½ of a
capital gain S. 38(b) states that “allowable capital loss” is ½ of a capital loss, which can only be taken
against capital gains. Capital losses can be carried back 3 years or forward indefinitely.
 S. 40: CG or loss is derived from a “disposition of property” measured by the difference between the
“proceeds of disposition” (value at the end) and the “adjusted cost base” (value at the beginning)
 Realization: capital gains and losses are included in income only when realized, thereby postponing
any tax on a capital gain until the gain has been realized/disposed (see below).
Property that can give rise to a CG or loss
 Capital property is, per s. 54, (a) “any depreciable property of the taxpayer” and (b) “any property (other
than depreciable property), any gain or loss from the disposition of which would, if the property were
disposed of, be a capital gain or a capital loss, as the case may be.” Capital property thus includes
depreciable property and any property that can generate a capital gain/loss.
 Capital gain: 39(1)(a) states that a CG is any gain that is not otherwise taxed under 3(a) (i.e. not a gain
from office, employment, business, property, or unenumerated source);
o

Therefore inventory (from business/adv in the nature of trade) is not CG
However, certain types of property are excluded from the normal scheme of capital gains/losses.
o 39(1)(b) excludes from capital losses any amount from a source deductible under 3(d), and also
“depreciable property” (defined in s. 13(21)), since CCA can be made for such property and the
loss is subject to deductibility as a terminal loss or as a recapture under 20(16)).
o S. 13(21) states that “Depreciable Property” is property for which CCA can be claimed under
20(1)(a). Fully deductible, eventually, via the CCA (20(1)(a)) or as a terminal loss. (20(16)).
What kinds of transactions are dispositions
 248(1): “disposition” includes “any transaction or event entitling a taxpayer to proceeds of disposition of
property”
 S. 54: “proceeds of disposition” includes sale of property (net expenses incurred in sale), expropriation,
payments from insurance from loss of asset, and the redemption or cancellation of a loan. FMV when deemed.
 Disposition without proceeds of disposition
o IT-460: where possession, control & all other aspects of property ownership are relinquished
there is a disposition even if no consideration flowing to the person disposing of the property
i. Property that is stolen/destroyed/lost/abandoned can be considered disposed
ii. Inter vivos gift: s. 69(1)(b) deems proceeds of disposition at FMV (so donor must pay tax); donee
deemed to acquire at FMV
iii. Disposition on death: s. 70(5) deems taxpayer disposed of all capital property immediately before
death at fair market value; person inheriting is deemed to acquire property at FMV


Other deemed dispositions: (i) every 21 years from inception of trust for trust property (104(4)); (ii)
change in use of property from non-income to income-earning or vice versa; (iii) becomes non-resident
Timing: In general, CG or losses are not recognized for tax until realized by disposition
o CRA prefers time of close (when real enforceability right arises since vendor has performed and
taxpayer gets cash to pay tax) over time of K (taxpayer had legal right to force sale at fixed price)
o Re: involuntary dispositions, s.44(2) deems time at which the proceeds of disposition become
receivable to be the earliest of: 1) day the taxpayer agreed to an amount as full compensation for
the property lost/ destroyed/ taken/ sold 2) day the amount of compensation is finally determined
by a court/ tribunal 3) where a claim/suit/appeal is not taken, the day 2 years after the day of the
loss/ destruction/ taking of the property
30
Adjusted cost base
 For depreciable property, s.54 states that the “adjusted cost base” is the capital cost of the property.
 In any other case, the adjusted cost base is “the cost to the taxpayer of the property adjusted, as of that
time, in accordance with s. 53.” The cost is considered to include the cost of the property + cost of
acquisition (ex. legal expenses of the acquisition).
 53(1) and (2) provide adjustments.
o Upward adjustments: some expenses associated with the property are included at the time of
disposition by adding them to the cost base, e.g. interest on a loan taken to purchase it, property
taxes, etc. This reduces capital gains (or causes capital losses). (53(1))
o Downward adjustments: these do the opposite of upward adjustments. (53(2))
 Deemed cost for deemed dispositions: for inter vivos gift (69(1)), deems property to have been
acquired for fair market value (therefore net CG 0)
 Rollovers: Where a disposition of property without triggering a capital gain (deemed disposal at the
adjusted cost base, and receiver deemed to acquire at same amount)
o Ex. person carrying on business as sole propriety, incorporates/ joins partnership, transfers
property to corporation/ partnership
o Disposition deemed at adjusted cost base = 0 gain, corp deemed to have acquired at individual’s
adjusted cost base, therefore when corp sells it pays full capital gain from the time the individual
acquired the property. Same mechanism for transfer to spouse.
Computation of Gain or Loss
 Proceeds Due within the Year: if taxpayer is entitled to be paid in full in the year of disposition: capital
gain/loss = proceeds of disposition – (adjusted cost base + expenses of disposition). (40(1))
 Proceeds Due in a Future Year: if taxpayer disposes of property but is not entitled to receive the
proceeds in the same year, a “reasonable” reserve may be deducted from the capital gain in each year.
This reasonable reserve must be no less than the lessor of: (40(1)(a)(ii)). Taxpayer can thus take reserve
for proceeds to be received in the future (over 5 years) (40(1)(a)(iii)
o Gain*X/5 (where X = 4 – num. of years since disposition). (40(1)(a)(iii)(D))
o Gain*(proceeds not yet received)/(total proceeds). (40(1)(a)(iii)(C))
 Loss: these are immediately deducted in the year of disposition. (40(1)(b))
Other items
 There are lots of stop loss rules
 Personal use property:
a. S. 54 defines “personal use property”, for which no loss is allowed (40(2)(g)(iii) + $1000 rule
 46(1): deems adjusted cost base and proceeds of disposition to be the higher of $1000 or
the actual figure; therefore small items not taxed on gain
b. Can be losses on “listed personal property” deducted against gains on “listed personal
property” (3(b)(i)(B)) (defined in s. 54: art, jewellery, valuable collectibles); $1,000 rule
applies
 S. 40(2)(b) Principal residence exemption (defined in s. 54); property must be designated as taxpayer’s
principal residence for the year and taxpayer must be in resident for the year
31
INVESTING AND TRADING
ISSUE Whether a particular activity involves a “trade” or “adventure in the nature of trade” such that
gains will be characterized as business income


TRADE
The definition of “business” under s. 248(1) includes “trade”; therefore if an activity or transaction is a
trade, it is treated as income from business under s. 3(a), and NOT a capital gain.
Factors taken into account in regard to whether a particular activity involves “trade” include 1. frequency
of transactions; 2. relationship to the taxpayers’ other work:
1. Frequency of Transactions: more frequent transactions of a particular type suggest that the person
is involved in a trade (i.e., the person is carrying on a business)
a. In Scott, lawyer acquired 149 discounted mortgages over 8 years using partly his own money and
partly borrowed money. Court found he was engaged in a “trade” of acquiring such mortgages;
therefore not CG.
b. In Wood, lawyer acquired 13 mortgages at a discount over 7 years using his own money. Court
found the activity was not a trade; thus CG, not income. This was due to relatively fewer number of
transactions and use of taxpayer’s own money, which was more consistent with personal investment
than carrying on business
c. In Forest Lane Holdings, gain from transactions in corp securities was held to be income, due in part
to the number of transactions.
2. Relationship to the Taxpayer’s Other Work: if the transactions are related to the taxpayer’s
ordinary business then they are more likely to be a trade (i.e., the earning of income from business)
a. In Cooper, a member of a cotton brokerage firm bought and sold 50 cotton futures on his own
account (on the side) over 2 years; found to be in the business of trading in cotton.
b. In Morrison, a member of a grain merchant firm bought and sold grain on his own account (on the
side), about 200x a year; found to be in the business of trading in grain.
c. In Whittall: stockbroker bought/sold securities in oil & gas rights on his own account; found to be a
trade.
APPLY
CONCLUDE
Depreciable Property vs Inventory
 It is possible that property held as depreciable property may become inventory; if so any gain on the sale
becomes income (rather than CG)
 In Canadian Kodak Sales, Kodak leased out “recordaks” and earned income from property (recordak was
the depreciable property); Kodak then sold the machines to the lessees, HELD: recordaks were
converted into inventory so sale produced income.
32
ADVENTURE IN THE NATURE OF TRADE
If something is from an adventure in the nature of trade, it is treated as income from business, NOT capital
gains. Factors to take into account include:
1. Isolated Transaction: “trade” involves transactions in which person sets out to earn profit vs. “adventure
in the nature of trade” suggests an isolated single transaction/ few transactions in which a person intends
to earn profit (speculative in nature)
2. Intention to Trade—is the speculative venture of the taxpayer such that she intends to earn a profit?
Intention on Acquisition
 If the taxpayer’s intention was to resell the property for a profit then the gain is treated as income
(and a loss as a loss from business);
 If the taxpayer’s intention was to hold the property as an investment or for personal use then it is
not considered an adventure in the nature of trade and any gain or loss on the sale of the
property is treated as a capital gain or capital loss.
 Primary factor is the taxpayer’s intention when they acquire the property, based on objective
evidence from the following factors:
1.
2.
3.
Period of ownership (shorter period suggests an intention to resell and thus speculate for gain);
Efforts made to attract purchasers or to make the property more marketable (suggests an
intention to gain from buying and selling the property not personal use or an investment);
The nature of the property; whether it yields income
Taylor: taxpayer bought 1500 tons of lead held in 22 railway cars; this kind of property
would not yield income from property such as rent, interest, dividends, or royalties and
hard to imagine a personal use for 22 railway cars full of lead, HELD: acquisition of the
lead was an adventure in the nature of trade and therefore it involved a “business”
4.
The skills and experience of the taxpayer
Dube: building inspector/architect bought a building and sold it within 6 months,
bought another building with money, sold that 2nd building within 6 months, bought a
3rd building that he used as a residence and office; said that he had to sell the first 2
buildings because not suitable; HELD: didn’t accept this b/c of his expertise as a
building inspector/architect; gain on sales of the buildings held to be business income.
5.
The relationship of the transaction to the taxpayer’s ordinary business (if it is similar to the
taxpayer’s ordinary business, it is more likely to be considered an adventure in nature of trade);
The circumstances surrounding the sale, especially whether it came about unexpected or due to
unforeseen circumstances (suggests intention to hold property as investment/ personal)
Whether the taxpayer borrowed the funds to acquire the property
(perhaps being more consistent with a speculative transaction).
6.
7.
Secondary Intention: the person may have purchased with an intention to put the property to
personal use or to use it in a business but a secondary intention to sell if the primary intention did not
work out. A secondary intention to sell for profit must have been a motivating reason for the
acquisition at the time of acquisition.



Regal Heights: acquired land with the intention of building a shopping center; chose not to do so after learning
that another shopping center was being built nearby; sold the land and made a profit, HELD (SCC): profit was
income from business; although there was a primary intention to build a shopping center the taxpayer had a
secondary intention to sell the land for a profit if the primary intention did not work out. Adven. in nature of trade
But scope limited by Reicher (FCA): acquired land and built an office building; moved in to the building for his
own office as an engineer and leased out the remaining space – within the year he sold the build and leased
back the office space he was using (due to unforeseen financial difficulties) HELD: sale of the property was not
a motivating reason for acquiring the land and building an office building on the land. Thus CG.
Hiwako Investments (FCA): acquired apartment buildings and sold them for a profit within the year, because
they proved to be less profitable than had been anticipated and was in response to an unsolicited offer.
HELD: accepted that the buildings were purchased to earn rental income and while the taxpayer may also have
had CG in mind at the time of purchase, the resale of the apartment buildings was not an operating motivation
at the time the apartment buildings were acquired. Thus CG.
33