1.
2.
3.
4.
5.
It is income from employment or from business?
Has the taxpayer received remuneration or taxable benefits?
What is the value of the remuneration or benefit?
WHEN did they receive the remuneration or benefit?
Is the taxpayer entitled to statutory deductions from employment income?

2(1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at
any time in the year.
3(a) The income of a taxpayer for a taxation year is the taxpayer’s income for the year (other than a taxable capital gain from the disposition
of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for
the year from each office, employment, business and property,
3(d): deductible losses allowed from O/E/B/P
117(1)Rates: Tax shall be computed as:
(2) The tax payable under this Part by an individual on the individual’s taxable income or taxable income earned in Canada, as the case may
be (in this subdivision referred to as the “amount taxable”) for a taxation year is
o (a) 15% of the amount taxable, if the amount taxable is equal to or less than the amount determined for the taxation year in respect
of $40,726;
o (b) if the amount taxable is greater than $40,726 and is equal to or less than $81,452, the maximum amount determinable in
respect of the taxation year under paragraph (a), plus 22% of the amount by which the amount taxable exceeds $40,726 for the
year;
o (c) if the amount taxable is greater than $81,452, but is equal to or less than $126,264, the maximum amount determinable in
respect of the taxation year under paragraph (b), plus 26% of the amount by which the amount taxable exceeds $81,452 for the
year; and
o (d) if the amount taxable is greater than $126,264, the maximum amount determinable in respect of the taxation year under
paragraph (c), plus 29% of the amount by which the amount taxable exceeds $126,264 for the year.
123(1)(a): CORPORATE RATE 38% of amt taxable for the year





Residence for individuals citing relevant cases and provisions of the ITA and apply those principles to a particular fact pattern to determine whether a
person is “resident” in Canada for the purposes of the ITA.
Income tax is paid on taxable income for every person resident in Canada at any time of year.
Residence is a test to determine whether someone has a sufficient connection to the Canada to be a taxpayer
Taxable is tax paid on worldwide income
3(a) The income of a taxpayer for a taxation year is the taxpayer’s income for the year (other than a taxable capital gain
from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of
the foregoing, the taxpayer’s income for the year from each office, employment, business and property,
part time resident is not taxable on part of the year for which a person is not resident
foreign tax credit/deduction for tax paid in another country via tax treaty.
Residence is where person is in the settle routine of life – normally/customarily live
**see summary for 8 gazillion other factors from IT**
Factors Considered by Courts (and noted in IT-221R3):
1. main factor will be a place where the taxpayer has the right to stay (parents house, inlaws house) (however,
wealthier taxpayers often have more than one place where they regularly, normally or customarily live)
2. a second key factor is the residence of the taxpayer’s spouse and children
“ordinarily resident” means residence [generally a superfluous term
Definition of Resident:

For purposes of income tax, every person has a residence at all times and may have more than 1. Proof of
residence elsewhere DOES NOT mean they are not ALSO Cdn resident. If there are limited ties to Canada and
settled routine elsewhere, then not resident

Do not actually need a place of abode, shelter

Intention is relevant but not determinative.
-Intention is relevant but not determinative.
-Having a house in Canada is not determinative but a BIG consideration
Physical presence is not necessary to be found resident- – he kept his matrimonial home + family is a consideration
Court will look to the ties a taxpayer has to Canada such as where family and children live, DL, OHIP, club membership. Are
non-Canada accommodations temporary?
Wife and kids may not be a strong tie if otherwise residential ties outside of Canada, job; foreign DL, Bank acct, never was a
Cdn resident
Sometimes having a house in Canada just to reasonably facilitate a sale will not make you a resident.
(kids + wife stayed to sell house)
2(1)
3(a)
114
126
IT 221R3
250(3)
Thomson
Beament
Russell
Allchin
Shih
Shujahn
Don’t necessarily look to the place where the person has the greatest ties, just that substantial ties also remain
Example of “ordinarily resident” factors: owned a house all along, 2 joint bank acts, APEG license in ON; furniture stored not
sold; safety deposit box; RRSP; credit card; ON DL
Divorced and had a bank acct to pay wife alimony – not held as resident b/c he was settled into his life in England; ordinarily
not temporary resident there, and not getting any Canadian taxpayer benefits.
Taxation for non-residents
provides that a person not taxable under subsection (1) (i.e. not resident in Canada) who
(a) Was employed in Canada;
(b) Carried on business in Canada;
(c) Disposed of taxable Canadian property,
at any time in the year or the previous year must pay an income tax on taxable income earned in Canada
“taxable income earned in Canada” – it includes employment income earned in Canada, business income earned in Canada,
and taxable capital gains (net of allowable capital losses) from dispositions of “taxable Canadian property”
defines taxable Canadian property as essentially property that has a reasonably permanent connection to Canada and
where it is administratively feasible to collect the tax – it includes, e.g.:
(i)
real property situated in Canada; - the vendor is a non-resident, so the tax is obligated to be
paid by the purchaser. (REA has to find out if the vendor is a non-resident) – b/c the gov
doesn’t want the money to leave the country. Via s.116
(ii)
capital property used by the non-resident in carrying on a business in Canada;
(iii)
a share of the capital stock of a corporation resident in Canada that is not listed on a
prescribed stock exchange;
(iv)
share of non-resident corp. if fmv of Canadian properties > 50% of fmv of all properties and >
50% of the value of the share was derived from Canadian real properties, resource properties
or timber properties;
(v)
share of listed Canadian corp. if > 25% owned by non-resident person, etc.
Other than this, income is taxed under Part I (same as resident tax) and subject to s.117 rates but just on Canadian Source
Income
Temporary/ Sojourn/ Part-year
Temporary: CRA administrative position is if taxpayer leaves Canada for less than 2 yrs, presumed to continue to be resident
unless can clearly establish all residential ties have been severed.
Sojourn: deemed resident if sojourn in Canada 183 days or more then taxed on world wide income [but still can be resident
if less than 183 days – Thomson]
Transients may be considered part year
“sojourn” less than a visit, more than a vacation.
Armed forces deemed resident, fed/prov civil servant stationed outside Canada
Part year: Individuals only pay world-wide income tax on the part of the year in Canada [careful if greater than 183 days but
still transient like Schujohn]**
Corporations resident of Canada part year are taxed world-wide
Hauser (Pilot)
McFayden
Nicholson
2(3)
115
248(1)
250(1)(a)
250(1)(b)-(f)
114
114
Set out principles of residence for corporations citing relevant cases and provisions of the ITA and apply those principles to a particular fact pattern to
determine whether a corporation is “resident” in Canada for the purposes of the ITA.
Residence of Corporations
Taxed on persons
s.2,3
Corporations are persons, so must determine residence of corporations
248(1)
The directors of a corp manage the affairs of the corp, so where they meet is the place of management and control (and
thus residence of corp).
Ask which country is the control and management of corporation? Majority in UK but mines were in SA
De Beers
Shareholder residence normally irrelevant unless certain shareholder are major controllers to elect and remove directors +
Unit Const v
influence decisions ie shareholder may be “operating mind”. Question of Fact - Directors all met in Kenya, incorporated in
Bullock
Kenya but operating mind shareholder was in UK. Here evidence was readily given.
* Evidence is hard to gather and hard to see if de facto shareholder control.
Must distinguish between when management and control was validly exercised by a corps OWN board [even if ill-advised]
Wood
and where the actual power of the board has been usurped.
Incorporated in Canada after April 26 1965 are deemed resident of Canada b/c manage/control test is too uncertain and
250(4)(a)
easy to change residence.
Incorporated pre-April 26 1965 deemed resident of Canada if they were resident and carried on business after 26April65
250(4)(c)
**these rules make it possible for a corporation to be resident of more than one country
-if not incorporated in Canada, then use common law test of management and control is here to determine residency
Residence of Trusts
Trust is deemed to be an individual and taxed as individual
A individual is defined to mean a person other than a corporation
THUS a trust is a person and a taxpayer and must determine residence of trust
A trust resides where the management and control of the trust resides
“where there is ownership and control of the trust property” says 104(1)
[“de facto control test” – look at the facts?]
Problems with determining residence of trust 1. If many trustees living in different countries or 2. Trustee is not in Canada
but most of the business is; challenging b/c trustees jointly own the trust ppty and they usually act unanimously and cannot
delegate (dicta in Thibodeau). So no trustee or majority of trustees truly owns/controls the trust ppty.
The management and control test does not work well with trusts b/c trustees cannot delegate their work b/c of fid. Here,
applied the de facto control test and found that most of the decisions were made in Bermuda even though one trustee lived
in Canada
SCC notes similarities between corps and trusts b/c both have holding of assets that are managed and both may distribute
income. Residence of trust should be determined by where the real business is carried on (de Beers) and where the central
management and control of the trust ACTUALLY takes place.
-the ‘protector’ of the trust could remove the trustees
Provincial Residence
Where an individual was resident on last day of taxation year, that province can tax entire income for that year. Same with
individuals with business income.
Trusts are individuals 104)(2) so this applies to TRUSTS as well
Corporations wherever their permanent establishment province is.
Using the cases below, demonstrate the reluctance of courts to find unenumerated sources of income.
•
Income from sources listed in s. 3(a) include four sources: office, employment, business or property
•
the sources are “without restricting the generality of the foregoing” so the sources could extend beyond the four
listed sources – but for it to be income it must have a source
•
income is a net concept b/c only net results in increase in ability to pay
•
“income” is not defined.
•
sources listed in s.56 do not restrict the generality of s.3
BUT courts are reluctant to extend beyond the enumerated sources other than those ones listed specifically in the act
Court did not say whether strike pay is an accretion to wealth but said it is not from a source, not from office, employment,
business or ppty [not from employment b/c he wasn’t working] did not add as unenumerated source but
-implicit recognition of unenumerated source.
-Explicit recognition from court that there CAN be unenumerated sources but breach of contract is NOT an income form
source caught by the act but from SURROGATUM principle
- def’n of employment s.56 is to work but never worked (s. 248) “in the service of”
Held: 3(a) is not exhaustive and unenumerated sources are included but in case of damages in contract where he did not
work, does not apply b/c there is a SPECIFIC PROVISION. To expand 3(a) when 56 exists would make 56 meaningless.
- s.3 suggests ANY income from source may be included BUT courts are reluctant to add to list of sources b/c then have to
figure out HOW to calculate the income, deductions – so leave it to parliament.
- Interpretaion of s. 56(1)(a)(ii)
•
provision required employment and no “employment” here as that term defined under s. 248(1) which requires
that a person be “in the service of” some other person
•
Schwartz was not in the service of another person because he had not even started to “serve” Dynacare
•
therefore $360,000 could not be considered a retiring allowance
•
it might be considered an unenumerated source under s. 3(a) but the specific provision in s. 56(1)(a)(ii) had
implicitly excluded inclusion under an unenumerated source under s. 3(a)
NCA: s. 42 deals with covenants specifically so cannot override the specific s.42 with the general s.3
-analogous to Schwartz in that general cannot override the specific
-is it a capital receipt? Ie try to make something unenumerated into something enumerated.
NCA: not an enumerated source within the meaning of the word – there is nothing in the Act that says having a nonexclusive, commonly held right to carry on a business is “ppty”
-a general right to do something that anyone can do, or a right that belongs to everyone is not the property of anyone! And
so Manrell did not give up property within the ordinary meaning of the word
Proposed s. 56.4. in response to Manrell

proposed that one could include payments received in exchange for a non-competition covenant in income.

However, if one is selling shares in a corporation in a non-arm’s length transaction one can include the payment
for the non-competition covenant as proceeds of disposition to the extent providing the non-competition
agreement increased the value of the shares.
104(2)
248(1)
2,3
IT 447
supported by
104(1)
Thibodeau
Family Trust
Garon v The
Queen SCC
Reg 2601
402
s.3(a
56
Canada v Fries
Schwartz
Fortino
Manrell
Proposed s.56.4

If one is a sole proprietor one can include the payment in one’s eligible capital expenditures.
INCOME FROM A SOURCE?
-Income must be from a source 3(a) of each O/E/B/P
-Check if it is in s.56(1)(a)(ii) unenumerated source- pension benefit, EI, retiring allowance other than received under an
employee benefit plan, retirement compensation, or salary deferral.
-If a payment is a surprise, unusual, unexpected and did not set out to earn the income, then not a source. Criteria (none are
determinative)
i.
The taxpayer had no enforceable claim to the payment;
ii.
There was no organized effort on the part of the taxpayer to receive payment;
iii.
The payment was not sought after or solicited by the taxpayer in any manner;
iv.
The payment was not expected by the taxpayer either specifically (i.e. In the specific circumstances) or customarily
(people would not normally expect in similar circumstances);
v.
The payment had no foreseeable element of recurrence;
vi.
The payor was not a customary source of income to the taxpayer;[like you wouldn’t go an do something in
anticipation of receiving income]
vii.
The payment was not in consideration for or in recognition of property, services or anything else provided or to be
provided by the taxpayer, or was not earned by the taxpayer either as a result of any activity or pursuit of gain
carried on by the taxpayer.
a. AND then add from Stewart and Bellingham:
viii.
in the case of a business or property there is a pursuit of profit (Stewart)[4 condos]
ix.
must be a productive source (Bellingham) (a source that is capable of producing income)[expropriation casepunitive damages are not income b/c unexpected]
Employee or an independent contractor? Income from a source is s.3(a)
Income from office or employment is salary wages and other including gratuities received in the year
- “office” position of an INDIVIDUAL entitling that indiv. to fixed/ascertainable remuneration
-Also includes judicial office, office of Minister of Crown, office of Senator or HoC, MP, MLA or any elected Corporate
director; “
“Employee/employment” defined: the position of AN INDIVIDUAL in the service of some person
The definition of office/employment is “individual” even though 5(1) says taxpayers; so only individuals for O/E
Why characterize as business instead of O/E b/c want more deductions, avoid payments of CPP, EI, withholding tax at
source.
CAUTION: problems when a taxpayer gives services to one person or very few ppl; analysis gets tricky
Ask: is this a contract FOR services or a contract OF services?
Non-exhaustive factors of whether business or employment is: Control by ER, own equipment, own helpers, degree of
financial risk, degree of responsibility, oppty for profit + Weibe Door factors below:
- look also to set own hours? Is there a specified result you are being hired for?
1. Add the control test- degree of ER control for start/stop times; equipment to be sued; EEs who assist in the work
2. Integration test to Sagaz factors: is this person an integral part of the ERs business [economically dependent on business]
ie would taxpayer survive w/o ER
3. economic reality test: whether there is a chance of profit or risk of loss
Total relationship test should be looked at even if looks like a person is an IC
When the examination of the whole relationship is inconclusive, look to the what the agreement was between the parties
Determine when an amount will be included as income from employment at a particular time?
Employment income as cash basis
Income from O/E must be received by taxpayer in the year
Benefits must also be included when received
Deductions are claimed when paid
So the ITA provides for a ‘cash basis’ treatment of income ie amounts are included in income when the cash or equivalent is
received and deductions are made when the cash is actually paid out for the expense.
-Income from employment is taxable in the year of receipt, not year earned.
-So in this case, the total amount was taxable at once at a higher rate, than each year at a lower rate (or not taxable at all if
the amt was low enough)
Payment is “received” as soon as EE has UNCONDITIONAL RIGHT to be paid [ex: if EE voluntarily defers payment to
following year] (ER will have it included in their income if not received by EE in 180d- 78(4) [B wanted in year 2]
Long delay: Any remuneration deducted by the employer that remains unpaid for 180 days after the year-end must be
added back to the employer’s income
Cranswick
Analysis:
-4 sources s.3,
define
employment
248? then
-s.56
unenumerated
source
-then these 9
criteria
5(1)
248(1)
248(1)
Sagaz
Weibe factors
Pletch
Royal Wpg
Ballet
5(1)
6,7
s.8
Vesgo
Blenkarn
78(4)
Mailed items are deemed to be received on day mailed
-Advance in income is included in the year received – better to ask for a loan (but not an interest free loan! You’ll pay tax on
that employment benefit!)
-“Constructive Receipt: if EE directs income directly to a service
-Constructive receipt - don’t need to actually have in bank acct or touch it w/hands!
-Constructive receipt is only when a payment has been MADE to 3rd party in benefit of EE for satisfaction of obligation
(Markman wanted in year 1)
What is salary/wages/remuneration?
Salary/wage not defined in 5(1); definition in 248(1) does not apply to 5 and 63
Salary/wages treated the same in ITA
Remuneration is: For certainty [b/c 5(1) is too general]:
-benefits in respect of employment
-allowances received by the taxpayer as an allowance for personal or living expenses
director’s fees or other fees received by the taxpayer in the year in respect of employment
amounts that cover for losses to income from office or employment pursuant to a sickness or accident insurance plan or a
disability insurance plan
Signing bonuses and NCA to employees
1.
248(7)
?
Morin
Markman
6(1)(a)
6(1)(b)
6(1)(c)
6(1)(f)
6(3)
Is this a benefit in respect of employment and assess the value of the benefit to be included in income from employment.
a. Analyze, in a particular fact situation, citing relevant authority:
a. whether there is a benefit to an employee;
b. if there is a benefit to an employee, whether the benefit is likely to be considered a benefit in respect of employment; and
c. if it were considered a benefit in respect of employment, how the benefit would be valued.

Explain the scope of “in respect of” in terms of the underlying considerations noted above.
1. Is it a Benefit to Employee?
1. Is the item convertible into money? 2. Is a benefit actually conferred on the EE and is it an allowance or a reimbursement
of expense.
Benefits are included in income in respect of office or employment
6(1)(a)
-s. 6(1)(a) includes in income from office or 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”
-s. 6,7 include specific items:
s. 6(1)(e), 6(2), (2.1) - company car
s. 6(1)(k), (l) - company pays car expenses
s. 6(9) - interest free loan the interest amt at prescribed rate per s. 80.4(1).
Benefit is “material acquisition conferring economic benefit on taxpayer.
Savage (taking
- a benefit of any kind whatever – very very broad for policy to deter ER/EE from making up benefits for tax avoidance;
courses)
-Equity: horizontal: diff. jobs have diff benefits vertical: benefits typically go to higher paid EEs
A benefit is a benefit in respect of employment if they can make some personal use of it (the the cop with clothes)
Huffman
Even if not convertible into cash, still is a benefit. [guys takes a cruise, cant convert it, sell it = benefit = included in income]
Waffle
(rejecting UK
principle from
Tennant)
2. Is it a Benefit in Relation to Employment? Provision req’s it be in respect of employment:
-Is the benefit provided as an employee or as a person? Ex: gift given by boss to an employee as a wedding gift is personal
Savage (SCC)
-Doesn’t need to be a benefit provided by way of remuneration of services
1983
-SCOPE: The words “in respect of” in s. 6(1)(a) have, the court said, “the broadest possible meaning in terms of connecting
the benefit to the employment.”

Effectively a presumption created that a benefit received by EE from ER is a benefit in respect of employment.
i.
Presumption rebutted by EE showed that the benefit was of a personal nature.

S.6(1)(a) also clearly can include a benefit from a 3rd party (Waffle-Ford company)

Old UK cases suggest to look at whether it was remuneration for services and what the intentions are of ER – ie
hope of some future quid pro quo
3. How is a benefit from E/O valued? provision calls for valuation.
1. cost to the employer- not necessarily FMV
2. So then must assess Fair Market Value: hard to determine but is the disposable value to the EE
Wilkins (suit $5)
3. Convertible to cash approach (Tennant) does not work in Canada so then the hypothetical FMV is used for willing buyer to Giffen
willing seller. Ex: Giffen’s flight points court determined cost of cheapest economy fare
4. if expense is dual character, then the portion of the cost that was from employment is included in income. If ER provides
Zakoor
for more than is needed, then a portion is included in income b/c it may be a luxurious item/facility. Ex Zakoor’s lux Cadillac.
Non-taxable amounts Exemptions from inclusion in income are: 1. Employer provided group health care 2. Group
accident/sick plans (disability)
6(1)(a)
ALLOWANCE: Is a particular amount paid by an employer is an “allowance” and must it be included in income from employment.
Allowances are included in income save for some exceptions
6(1)(b)
Allowance is not defined in ITA but IT-522-R: “any periodic or other payment that EE receives from ER in addition to
IT 522-R
salary/wages w/o having to account for it.
Allowance is: “an arbitrary amt paid in lieu of reimbursement to employee without them having to account for it
Ransom
“a limited set sum of money paid for certain kinds of expense, and, once paid, it is at discretion of the recipient who is not
Pascoe
required to account for it.”
Ask: whether the recipient had discretion about how to spend it
Policy: allowances aren’t good b/c ER can allow the EE to not account for the $ so it may be a way to giving tax free income
Allowances not included in income:
1. -Allowance fixed by Act of Parliament or Treasury Board
2. -Travel allowance from Canadian Forces
3. travel expense paid to EE who sells ppty or negotiates k for ER
6(1)(b))(v)
4. travel expense paid to EE who must travel away from municipality where ER is established
6(1)(b)(vii)
5. allowance for use of car when travelling for performance of duties of O/E
6(1)(b)(vii.1)
6. interest free loan or low interest loan to EE
6(9)
- deemed prescribed rate (T-bill + 4%) s. 80.4(1)
-Reimbursements are distinguished b/c do not provide benefit to EE – like buying supplies for ER.
-Reimbursements for living, personal expenses are taxed.
-Accountable Advance is where money is given ahead of time and the extra must be returned
An amount paid by an employer in respect of home relocation is a benefit that must be included in income from employment.
Home Relocation Benefit included? Bright line rules b/c lots of inconsistency in previous case law. Bright lines avoid the
question of even asking if it is a benefit and decreases litigation.
Value of financial assistance for home relocation in included in income from employment. BUT there is a interest
6(23)
deduction s110(1)(j) of the rate x $25k x 5 years. Anything above that is included in income.
Must be a “home relocation home” ie a loan for a house at least 40k closer to new work location
248(1)
allow compensation for housing loss limited to $15k; half of the amt above that must be included in income
6(19)-(22)
Sarnia transfer: compensation for loss for moving to a bigger city in not included
Ransom
Moncton to – Wpg: compensation to get a better house is included
Phillips
Cgy-TO; ER reimbursed interest cost – not a benefit b/c no increase in net worth
Hoefele
EXPENSES: Are travel expenses, legal expenses, home office expenses, or other expenses permitted in those paragraphs of section 8(1) set out in the
statutory supplement can be deducted from income from employment?
Allowable deductions from Employment Income?
Deductions are limited to specific amounts in s. 8(1)
8(2)
The deductions must be reasonable
67
Travel: 1. was ordinarily required to carry on the duties of the office or employment away from ER’s place of business or in 8(1)(h)
different places; and 2. was required under the contract of employment to pay the travel expenses incurred by the
taxpayer in the performance of the duties of the office or employment
-cannot claim deduction for an exempt allowance [6(1)(b)(vii) above]
Car expenses when travelling are subject to same 2 rules as 8(1)(h) above;
8(1)(h.1)
expenses to and from work are not covered.
Delancy
Meal expenses when travelling are not deducted unless EE required to be away from ER municipality for longer than 12
8(4), 67.1
hours. Cost must be reasonable + can only deduct half.
The extra expense of driving a safer car TO work are not deductible b/c you are not driving away from work in the course
Hogg
of work
Legal Expenses: deductible from income in the year incurred to “collect or establish a right to salary or wages owed” by ER 8(1)(b)
or former ER
If you are trying to establish that you should be paid MORE/are underpaid = legal expense is deductible from income
Loo
If improperly suspended during course of work and legal expenses necessary to get back wages = legal expenses are
Blackburn
deductible
Home office for employment?
Home office expenses are only deductible for employment income if the duties of the O/E are principally carried out there 8(13)(a)
or it is exclusively used for earning income + used continuously.
OTHER Deductions specifically permitted include:
-Union dues and professional dues (s. 8(1)(i)) -
-EI and CPP contributions (s. 8(1)(l.1));
-Contributions to a registered pension plan (s. 8(1)(m));
-Supplies (s. 8(1)(i)(iii)); and
-Office rent or salary to an assistant (s. 8(1)(i)(ii))
•
there are some special deductions for sales personnel who are paid by commission
•
there is also a deduction for the capital cost of an automobile supplied by the employee used in the employer’s
business (s. 8(1)(j))
INCOME FROM BUSINESS OR PROPERTY: PROFIT

S3(a) includes income from business or ppty as enumerated source

S9-37 sets out rules for determining income from business or ppty

S 9(1): starting point- income is profit from business or ppty for that year

S10-37 modify, reinforce, allow, disallow inclusions and deductions

S.12(1) sets out items that MUST be included

S.18 limitations on deductions

S.20 list of expenditures that may be deducted.

First start with is it income from business or ppty and note the distinction

Then look at the concept of profit under the Act.
Importance of Characterization of Income as Business or Ppty as a Source –mostly not distinguished

Income must be characterized as from a source or not taxable per 3(a)

Loss has to be a loss from an enumerated source or not deductible para 3(d) [no unenumerated sources losses allowed]

Loss from personal endeavors are NOT deductible under 3(d) unless characterized as loss from B/P

Employment v Business characterization is for what deductions are available
Does a taxpayer’s endeavor involve a “business” or “property”?
Business is a profession, calling, trade, manufacture or undertaking of any kind and…and adventure or concern in the
248(1)
nature of trade but does not include an office or employment
Anything that occupies the TIME, ATTENTION AND LABOUR of a person in pursuit of PROFIT. [income from B/P is profit
Smith (UK)
9(1)]
adopted by
-if it is a passive endeavor, then ppty likely.
Stewart
Property: “ppty of any kind whether real, personal, corporeal, incorporeal and w/o restricting the generality of the
248(1)
foregoing includes 1. a right of any kind whatever, share, chose in action 2. unless a contrary intention is evident, money.
Ppty is a legally enforceable right to EXCLUDE others -The definition of ppty is VERY BROAD (Manrell)
Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that
9(1)
business or property for the year.
Income from Business/ppty does not include CG or CL from disposition of ppty; [***remember: a return on capital is not
9(3)
income]
Intention to Make Profit? (Stewart Test)
1. If activity is clearly commercial = then business or ppty pursuit of profit (Walls)
Stewart test
2. If some personal aspect/mixed commercial, then ask was there a predominant intention to profit or totally
(Walls decided
personal endeavor?
same day)
i. Notion of profit is ordinary business person’s idea of profit incl CG UNLESS predominant
intention was ONLY CG b/c 9(3) excludes CG
ii. [can have more than 1 intention but court will look at predominant one]
iii. is the intention to profit reasonable?
iv. Ask: “Does the taxpayer intend to carry on an activity for profit and is there evidence to
support that intention” (Stewart)
v. This requires the taxpayer to prove intention to make profit + that it was business like
behavior. [cant just assert intention; gotta have obj evidence]
vi. Five factors that are considered: (4 from Moldowan’s old reasonable expectation of profit
test)
1. Profit and loss in previous years
2. Taxpayer’s training (less trained = less reasonable)
3. Taxpayer’s plans to turn present loss into future profit.
4. The capacity of the venture to show profit after deduction of capital cost
allowance.
5. The amount of time taxpayer spends on activity (Sipley) [wknds and evenings
means hobby; heavy time commitment = profit expectation]
2. If only personal and you make money, likely non-taxable as a windfall.
Policy: note that tax shelters will almost always have commercial element so a form of tax avoidance by making something
out to be business.
SCC says:
Ludco Enterprises
1. courts should not be quick to embellish the provisions of the ITA in response to concerns about tax avoidance
when it was open to Parliament to be precise and specific with respect to any mischief to be prevented;
2. absent a provision to the contrary, taxpayers are entitled to arrange their affairs for the sole purpose of
achieving a favourable position regarding taxation; and
3. income for the purpose of s. 20(1)(c) is the gross income not net income.
•
therefore taxpayer had an expectation of earning dividend income and that was all that was required
to be entitled to take the deduction
Hobbies + Personal endeavors Pre-Stewart–argue purely personal for non-business; vice versa for business.
If there is a personal element to the endeavor, is it in the pursuit of profit or purely personal endeavor but all the
These are all prefollowing cases are pre-Stewart, so used old reasonable expectation of profit test
Stewart!!
Not keeping records, no budget, no advertising, did not bill = no expectation of profit = no business; new test would likely
Landry
be a business
Author of 6 books w/o profit = not business; if applied Stewart may be clearly commercial; under new test = business
Payette
Car racing with no ability to make a living = no reasonable expectation of profit
Cree
Restaurant – no reasonable expectation of profit when so small
Sirois
Policy of old test: negatively affects ppl with poor business sense but genuine intention to make money suffer
Query? Can u deduct in development stage? Metalworking machines made no product to sell and no source of income
Knight
Rental properties –commercial? Or personal? Use Stewart Test!
Personal element if rent out ppty to friends or use it yourself.
Gambling as a regular Activity
Casual betting is a hobby and not deductible under 3(d) but may also be characterized as commercial and the distinction is
made on objective factors. Ie bookies vs casual Vegas trips (windfalls)
Must be evidence that gambling activities are an enterprise of commercial character or very organized enough to make it
Morden
a business or calling
Regularly attending horse races, betting substantially and successfully; trying to get inside infor/research is sufficiently
Walker
systematic to be a business not hobby
Skilled in hobby x5 days a week; primary source of income; system for minimizing risk is business not hobby
Luprypa
Have a system, hire ppl, high volume of activity in hobby + 5 x week – court finds NO system to win and they picked the
Leblanc
underdog which is hardly a system to win money; reckless betters.
No pro gamblers who assessed risk, minimized risk and relied on info, knowledge and skill. They were just compulsively
trying their luck in a large volume
INCLUSIONS: TIMING: when an amount is likely to be included in income from business or property.
(i)
Ask if there is anything to prevent the person from getting the money? (Ikea?)

S.12-17 set out rules for inclusion of income from business or ppty

S12 deal with (i) the sale of goods, (ii) the provision of services, (iii) the receipt of interest, (iv) dividends, (v) rent, and (vi) royalties

S.13 is the system of depreciation (capital cost allowance)

S.14 system of amortization

15-17 are anti-avoidance rules

s.16 disguised interest payments – imputed interest when loan disguised to disguise interest

s.17 imputes interest on loans to foreign corporations
An amount is realized when it has the “quality of income” and the following Question is answered yes: “Is his right to it
Ikea citing
absolute and under not restrictions, contractual or otherwise, as to its disposition, use or enjoyment?”
Robertson
Quality of income is when the taxpayer has an absolute right to it with no restrictions, contractual or otherwise as to its
Ikea
disposition, use or enjoyment income even though it is not actually received by the taxpayer but only realized as income
according to the accrual method. These amts are taxable in the year realized, subject to any other contrary provision in
the Act.
Assess when an amount will be considered receivable including how it would apply to holdbacks and expropriation
compensation.
Inclusion of profit in income and accrual method requires inclusion of amts receiveable
9(1)
requires inclusion in income of “any amt receivable in course of business in that year, notwithstanding that the amt is not
12(1)b
due until a subsequent year
12(1)b(i)
Amts are deemed to have been receivable on the earlier of:
12(1)b(ii)
1. 12(1)b(i): The day on which the account in respect of services was rendered and
2. 12(1)b(ii):The day on which the acct of those services WOULD have been rendered had there been no undue delay in
rendering the acct
“receivable” means: a clear legal, not necessarily immediate, right to receive it. Not a precarious or tenuous right.
12(1)b
Holdbacks
Work is finished but amt not receivable until certificate of satisfactory completion issued – that means they don’t have the Colford
legal right yet to receive it, so not receivable
Expropriations
Compensation for expropriated ppty is receivable when amt is fixed by arbitration or agreement even though the right to
compensation arose when ppty was expropriated. So need BOTH right to compensation and the judgment that
determines the amt. Even if appeals!
Inclusion of amounts receivable but unearned
-includes amts received early even if service not yet rendered. [would not normally be included in accrual, but ITA includes
it when you get it!]
- for example: hockey season tickets – the Canucks have to include that in income for 2012 even though games are played
in 2013.
-BUT THEN its deducted again via 20(1)(m) restoring the accrual method. This stupid thing is to keep track of things
Benaby
12(1)a
Special timing of Interest Rules:

s. 12(1)(c) taxpayer must include in income “any amount received or receivable by the taxpayer in the year (depending on the method
regularly followed by the taxpayer in computing the taxpayer’s income) as, on account of, or in lieu of payment of or in satisfaction of,
interest to the extent that the interest was not included in computing the taxpayer’s income for a preceding taxation year.”

b/c it says received or receivable, the taxpayer can treat it cash or accrual basis but just follow the same method year to year but can use
different methods for different sources.

12(3) + (4) limit the use of cash method to defer tax.

12(3) requires corporations or partnerships to include in income, interest accrued, received or receivable to the end of the year.

12(4) applies to individuals
o req’s all interest on an investment contract accrued to the anniversary day of the k be reported annually.
o 12(11) defines the anniversary day as the day one year after the day immediately preceding the date of issue of the k [ie issued
1Nov05, then have to report interest accrued due to 31Oct06 for 2006 taxation year]
o 12(11) “investment contract” defined as any debt obligation [other that some limited exceptions]
Assess whether a particular payment on a loan consists partly of principal and partly of interest and how the payment is to be treated under the Income
Tax Act.

Instalment?

Arms length?

Is the amt finally in instalments higher than it would have been with an interest-loan?
Blended Payments
residential mortgages etc are partial payments of interest and principal so that the principal gradually reduces over the life
of the loan – called blended payments. Must UNBLEND the payment to figure out what is reasonable interest.
16(1) provides that the part of the payment that can be reasonably be regarded as interest shall be deemed to be interest
16(1)
and thus is included in income per 12(1)©
-when a vendor/taxpayer of a ppty converts interest income to CG by increasing the cost of the ppty but paying in
Groulx
instalments w/o tax, those instalments can be considered blended and the interest portion is included in income
-an instalment payment can be truly interest free in non-arms length transactions.
Any deferred payment to instalments can attract 16(1) – imputed interest [such that that the payment will be unblended
to figure out a reasonable interest payment that is then taxed!]
Identify situations when a discount on a debt obligation must be included in income and situations in which it need not be included in income.
-A debt obligation may be issued at a discount (T-bill or commercial paper)
-Whether a bond is sold on discount or premium depends on market interest rates; if interest rates go up, bond prices go
down.
Discounts on a debt obligation must be included in income b/c if the bond was sold at discount, when it is redeemed, the
value is more than just the interest, it is also the face value which is greater than what was paid.
16(1) [imputed interest] does not apply when a debt obligation is bought at a substantial discount – the extra redemption
Wood
proceeds are not reported as interest income. Today – it would be CG income.
* Where an obligation is traded a a discount as a result of market forces outside the control of the parites, 16(1) will not
apply to the discount.
The sale of a debt obligation at a discount at the time of creation of the debt obligation (Original-issue discount) is subject
Satinder
to 16(1) [un-blending] and thus discount portion is interest income.
-When discount is set by the parties, not market forces so allows parties tax avoid.
Non-interest bearing debt obligations (strip + zero coupon): the full amt of the discount on an interest free debt
12(9) and Reg
obligation is deemed to accrue to the holder in annual installments during the term of the bond.
7000
-the holder is required to report as interest income a prescribed amt of the discount in each taxation year that he holds
the debt obligation. 12(3) and 12(4)
Business or Property Deductions1. Is it deductible?
2. Is it reasonable?
3. When can you deduct it?
[when explaining capital expenditure vs current expense start with 18 that capital expenditures are disallowed in one year then go to 20 where they
are allowed, then say CEC 7%/yr thing]
Timing-some of the provisions affect the timing of deductions
•
s. 18(1)(b) disallows the deduction of capital expenditures in one year b/c they must be spread out over time according the method provided
by the Act
•
ss. 20(1)(a) +(b) provide for the method of taking deductions for capital expenditures
•
SO: important to distinguish between current expenditures that are deducted in the year of expenditure (thereby reducing income and
therefore reducing taxes) and capital expenditures that must be deferred (and therefore can only be deducted mostly in future years leading
to more tax in the current year and less tax in future years)
•
s. 18(9): no deduction of certain prepaid expenses; deferred deduction to the year to which they relate
•
s. 20(1) also permits reserves to be taken (i.e. allowing deductions for expenses in the year to which they relate but which will not be paid or
incurred until a later year)
Is expense deductible?
The taxpayer must include profit from business or property in taxable income
Profit is not defined in the Act, but it is mostly based on Generally accepted Accounting Principles
So first 1. what is the GAAP treatment? Then 2. Is the GAAP varied by law/Act
Deductions not allowed
Deductions allowed
Expenses must be income-earning purpose to be deductible under s.9
“in computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay
or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing
income from the business or property.”
“in computing the income of a taxpayer from a business or property no deduction shall be made in respect of personal
or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the
course of carrying on the taxpayer’s business.”
All deductions must be reasonable in the circumstances
Mixed personal and business expenses are evaluated case by case and are apportioned via GAAP and 18(1)a – and
they are expenses “of properties maintained by any person for the use or benefit of the taxpayer or any person
connected with the taxpayer by blood relationship, marriage or common-law partnership or adoption, and not
maintained in connection with a business carried on for profit or with a reasonable expectation of profit.”
Dual purpose expenses:
1. apportionment the part that is business is apportioned and deducted. For meals and entertainment, Act has
arbitrary of 50% in s.67.1
2. primary/dominant purpose sometimes courts deduct the ENTIRE amt if the principal purpose of the expense was
business or disallowing the whole thing if principally personal
*for dual purpose, courts will usually use 18(1)a or h and 67 and also limit it b/c GAAP doesn’t allow it.
SIX tests for whether an expense is PERSONAL from SYMES:
the majority in Symes cited six tests for whether an expense is personal or for business:
(i)
Whether the expense is deductible according to accounting principles or practices such as GAAP.
[on test, note it then say it requires expert evidence]
(ii)
Whether the expense is normally incurred by other taxpayers carrying on similar businesses. If it is,
there may be an increased likelihood that the expense is a business expense. [indicate that it
requires investigation further]
(iii)
Whether the expense would be incurred if the taxpayer was not doing this business or property
income or whether, in absence of the business activity, the need to incur the expense (such as
food, clothing and shelter) would still be there. Kind of like the “but-for’[This one you can try to
apply on the exam] ie does person still have to incur this expense if you take away the business?
(iv)
Whether the taxpayer could have avoided the expense without affecting gross income.
(v)
Whether the expense is an expense “of the trader” or “of the trade”. If the expense was an
incident of the trade – part of the business operation itself, it is an income-earning expense.
(vi)
Whether a particular expense was incurred in order to approach the income-producing circle (such
as clothing, child care, housekeeping or commuting) or was incurred within the circle itself. Only in
the circle is 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.
Also include Scott 3 Qs below:
9(1)
18
20
18(1) a
18(1) h
67
248(1) def’n of
personal/living
expenses.
Symes
Child care – partial deduction with 3 limits:
1. Only the lower income parent can claim the deduction [thus no deduction allowed if lower income
parent has no income?]
2. Deduction cannot exceed 2/3 of “earned income” of lower income parent
3. Deduction capped at $7k/child under age 7 and $4k/child between 7-16
-Use six Symes tests above to figure child care.
Food and beverages not deductible per 18(1)h but ask 3 Qs:
What is the need that the expense meets?
Would the need exist apart from the business?
Is the need intrinsic to the business?
-if need exists apart from the business, then is a personal expense
-see below provision 67.1 that limits
Entertainment: if they are personal, cannot be deducted per 9(1) and 18(1)a but
1. 1st look to accounting principles,
2. then see if it is restricted under the Act.
3. Doesn’t have to actually result in income-production, just that it was the purpose
4. Then look at principal purpose
Fees for social clubs and expenditures for yacht, camp, lodge, golf course are not deductible.
Food/Entertainment: deductions are limited to 50% of reasonable entertainment expenses
This includes consumption by any person, not just the taxpayer
Commuting is dual purpose but only deductible once they get to work, not just to get to work.
Housekeeping is not deductible.
Home office dual purpose – deduction based on proportion of floor space devoted to home office
Home Office:
*s. 18(12)(a) only applies “in respect of an otherwise deductible amount” - thus the case law is still relevant –first
satisfy the requirements of the cases for deductibility and then, pursuant to s. 18(12)(a) the home office must also be
either:
1. the principal place of business,
or, if not the principal place of business, then
2. it must be used exclusively for the purpose of earning income from business and used on a regular
and continuous basis for meeting clients, customers or patients …
*s. 18(12)(b) limits the deduction to the extent there is income from the business for which the home office is used
Office must be the exclusive use of that room for work-related activities; allowed in Logan, denied in Mallouh (mixed
use room)
Timing – 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”]
Capital expenditures cannot be fully deducted in the year they are incurred but must be spread out over time
according the method provided by the Act
Method of capital expenditures deduction
Prepaid expenses are not deductible until the year they relate to
Fines, Penalties and Illegal stuff and Damages
Bribes that are offences under the criminal code are specifically disallowed
-119-121, and 123 dealing with bribery of judges (119), police officers, officers of the court (120), government officials
(121) or municipal officials (123) ; purchase of an office (124); payments to influence an office holder (125); bribe of
collection of fine or toll, ticket fee or fare (393) and 426 (bribe to agent to favour briber – e.g. purchase agent).
Fines and penalties imposed under ITA not deductible
The test originally if Fines were deductible if for the purpose of earning income from B/P – (added 67.6 b/c of this case)
unless the conduct that caused the fine is “egregious”
Damages are generally deductible if they are incurred as part of earning income from B/P; they MUST be part of the
normal operation of business (ie truck drivers or extra hens so not to lose market share) but they also must be
reasonable. s.67
Test: whether the expense/damages came about as a part of the operations, transactions or services that the taxpayer
earns income
Damages are deductible if they were incurred for the purpose of gaining or producing income from business.
**some wrongful actions may be so egregious that damages could not be justified for the purpose of gaining income.
[so the deduction would be denied]
Reasonable? s.67
an amt is deductible only to the extent that it is reasonable in the circumstances
s.67 applies to ALL DEDUCTIONS NOT JUST B/P ONES!
63
Scott
Royal Trust
18(1)(l)
67.1
Stapley
Cumming
18(12)
18(12)(a)(b)
Logan, Mallouh
18(1)b
20(1)a,b
18(9)
67.5
67.6
65302 (Poultry case)
18(1)(a),(b),(e)
Imperial Oil
McNeill
67
67 also overlaps with personal mixed expenses in that they are considered unreasonable
Amount attributed to personal elements is unreasonable: Expenses that are excessive in relation to the purpose of the
expense (usually b/c there is a personal element
-or a Cadillac for travel/1st class travel.
Amount attributed to non-arms length payment is unreasonable – ie a wife gets paid too much (sexist!) or a dentist
pays his family trust too much. Have to look at the facts at what is a reasonable amt of pay for a job that your family
member gets.
Amount attributed to non-arms length CAN be reasonable if a common business world business deal
No. 511 (baseball
team)
Mulder, Costigane,
Aessie
Is an expenditure that is incurred for the purpose of earning income from business or property a capital expenditure or a current expenditure?
Current expenses: are only deductible to the extent that there is a benefit realized in that year – ie they are consumed
in the same year.
The General limitation is that an expense may not be deducted for an outlay or expense except if it was incurred for the
purpose of gaining or producing income from the business or property
Expense is “incurred” when taxpayer has a LEGAL OBLIGATION to pay that amt even if no immediate obligation to pay
-… [A]n obligation to do something which may in the future entail the necessity of paying money is not an expense
Construction holdbacks are not incurred until a certificate is issued (i.e. until the holdback becomes payable), even if the
work is already complete so NOT deductible.
Not allowed to deduct reserves or contingent liabilities except as permitted under Part I
“contingency is an event that may or may not occur” “contingent liability “depends for its existence upon an event
which may or may not happen
A contingent liability fund’s contributions may be deducted if the amount going out the other side is fixed (like by WCB
or something)
If the paying out of an amt from a contingent acct is dependent on a future uncertain event, then not deductible
Contested amounts or non-incurred liabilities are not deductible – cannot deduct estimated cost of doing work that you
are required to do.
Capital Expenditures
TEST: Step 1: is an expense deductible?
Was it incurred for the purpose of earning income from bus/ppty 9(1) 18(1)(a) and
is it reasonable (67).
If deductible and reasonable, then
Step 2: WHEN can the expense be deducted? 18(1)(b).
The value of capital outlay is not deducted to the extent that value remains. [Only the spent part can be deducted
yearly]. The extra bit that makes you 0.0001% richer is not deductible.
Outlays, loss, replacement of capital deductions are prohibited by 18(1)(b) BUT Some deductions of capital outlays are
permitted
Def’n of Capital expenditure::It is an expenditure that will provide a benefit lasting beyond the year and for a
substantial period of time.
Tests for whether something is a Capital Expenditure:
Enduring Benefit Test: Main one – providing a benefit beyond the taxation year and gives an enduring substantial and
lasting benefit is a capital expenditure
if expense incurred for establishment/expansion of business then capital
Business Structure Test: if the expenditure is part of the income earning process, it is current. If it BUILDS or EXPANDS a
business then capital.
Business structure test: Inducement payment made in exchange for exclusive work is a current expense b/c it was made
as part of the money earning process
A lump sum non-competition payment made to a competitor was a capital expenditure b/c it was large, non recurrent
unusual made for the purpose of obtaining an enduring advantage of the business.
Recurring Expenditures –“a capital expenditure is going to be spent once and for all and an income expense is a thing
that is going to recur every year” non-conclusive test that doesn’t ask the right question b/c capital exp are not always
once and for all
Residual Test: can characterize an expense in favour of the taxpayer if not giving them the deduction would leave them
no relief from a bona fide expenditure in the course of business
Capital or Current determination problems:
Small recurring expenditures – example tools bought every year does not distort income and hard/$ to keep track of the
depreciation of small things
18(1)a
Burnco
Guay
18(1)(e)
Wawang
CPR – liability acct
CPR
GM applying
Wawang
Northwood Pulp
and Timber
20(1)(a),(b)
British Insulated
Johns Mansville
BP Australia
Sun Newspapers
(Opp of BP)
Ounsworth
Johns-Manville
Repair of Tangible Assets: To determine if repair is capital or current, courts look at :
1. The relative size of expenditure
2. Whether the expenditure is recurring
3. The effect the expenditure has on the value of the asset repair – does it make it better? Example
fixing the muffler on a car may make it last much longer, but the cost is small in comparison to value
of car
If something is much better after a repair than it was before and give greater lasting value, and is an improvement then
it is CAPITAL
If just replacing what was already there with no improvement and damages due to normal wear and tear just restored
to normal capacity, then it is a current expense
If replace dirt floor with concrete to be a new and improved item, then capital
If the expense was substantial and improved the quality of the thing, then Capital
Intangible/copyright/trademark, patent protection litigation costs are large and may restore the usefulness or increase
value
go from s.18  20(1)(a) 20(1)(b) and may then be deductible via the cumulative eligible capital account 7%/yr.
Before the provision, held to be current expense b/c process of carrying on business
Kelloggs deducted the cost of litigation for Shredded Wheat in 1943  not a capital expense b/c it simply preserved the
intangible asset and kept the normal usefulness, did not add value or extend life.
Counter: Kellogg and Canada Starch were one time expenses, not likely to recur, did more than restore normal value – it
removed a cloud on validity and improved value/quality of the asset b/c you could actually use it (and for longer than
the current year)
Earl v MNR
Defending a licence to supply natural gas is an enduring benefit and so capital expense and so not deductible. Probably
correct b/c a CLOUD was lifted off the license and he could now use it.
All these cases don’t make sense b/c prior to 1972 there was no deduction for intangibles and would have been left with
nothings for the companies so the courts made it work
Websites and Domain Names: must have enduring benefit - If it is a well-known name that will give benefit for many
years, it is a capital expense – ¾ added to CECEA and 7% deducted yearly
Corporate Takeovers :The expense of defending hostile takeover is a capital expense b/c it defends the continued use of
assets as they are now.
Friendly takeover is considered a current expense.
expenses incurred by an acquirer in an effort to complete a takeover were capital expenditures – here there will be a
change in the business the benefits from which will likely accrue over many years
F was venture capitalist and took over struggling business and improved them.
Expenses to investigate the businesses were capital; expenses to supervise them were current.
Goodwill: Treated as capital expenditure
Dominion Natural
Gas
Expenses for new business are capital expenditures b/c benefits that extend beyond that year and give enduring benefit
F was venture capitalist and took over struggling business and improved them.
Expenses to investigate the businesses were capital; expenses to supervise them were current.
Costs to see if you can increase capacity of your currently running business is current
Canada Steamship
Shabro
Shabro
Canada Starch 1968
Kellogg
Neonex
Firestone
Firestone
Bowater
Depreciation and Capital Cost Allowance Compared:

“Capital cost allowance” is the tax term for the accounting concept of “depreciation”

“Depreciation” is an accounting device for recognizing the cost of a capital asset as an expense in each year of the useful life of the asset
o e.g., if one pre-pays rental expense for 10 years then one has a right to occupy for 10 years and thus a portion of the rental expense
should be recognized in each year – in the case of a capital asset like a building with a useful life of 10 years then one should
depreciate it over the 10 years to recognize expense in each year
Two methods of calculating depreciation:
1. the straight-line method is the one most often used by accountants
a. cost of asset divided by # useful years of asset – allocates a portion to each year of assets life
2. the ITA uses (double) declining balance method for most types of depreciable assets
a. 2xstraight line rate x book value
b. gives heavier depreciation in earlier years but lower in later years.

Declining balance used b/c:
1.
2.
3.
Provides heavier write-offs in earlier years when benefits of asset are highest. Wear and teat reduces asset productivity as it gets
older.
Maintenance is more expensive in later years so declining balance may even costs
The realizable value is greater in the early years than later years. Better estimate of book value and of income.
Capital Cost Allowance and Depreciation:

Capital cost allowance rates are generous under ITA b/c use declining balance method which gets a higher deduction for CCA than straightline in the early yars

So reduces tax charged and defers tax over (a bit b/c straight line higher rate later)
Why?

Wanted uniformity b/c previously ppl could use whatever they wanted and see what the MNR said.

Allows for faster write-offs for some assets – promotes particular investments like scientific R&D so that a company can right off an expense
quicker.
Capital Cost Allowance (“CCA”)

Depreciation of most capital expenses uses the declining balance method.(20(1)(c), ITR 1100(1)

Undepreciated Capital Cost [“UCC”]: Normally just the amount you haven’t deducted yet
o Formula: (original capital cost + recapture) – (capital cost allowance taken so far +
terminal losses + min{proceeds of disposition, original capital cost})

(ITA s. 13(21))
What This Means for Disposition
o If you sell for less than the outstanding UCC, the difference is immediately and fully Deductible (20(16))
o If you sell for more than the outstanding UCC, the difference is fully included in income (as “recapture” – ITA s. 13(1)), and the UCC
is reset to 0 (it cannot be negative-13(1))
o Recapture is capped at the total amount that you’ve deducted so far. If you sell for more than the original capital cost, the extra
amount is taxed as a capital gain, not recapture
o Class Concept: UCC is not calculated on a per-asset basis; it is calculated per-class.
o CCA only applies to depreciable property ( 248(1), 13(21), 20(1)(a), ITR 1100, ITA Sched. II)
o Basically, look in Schedule II for the list of classes and their rates of deduction.

Capital Cost: This has its ordinary meaning – the actual cost of acquiring the asset, including the legal, accounting, and
engineering fees and reasonable material, labour and overhead costs.

This only applies to purchases, and not leases. The form of the contract matters here; the court does not look at the substance
(unless it’s a sham), and just relies on the legal form.(Trustco)
o Example: ∆ arranges a complex web of legal agreements to implement what was substantially a lease in the form of a
purchase. No anti-avoidance rules apply; eligible for CCA. (Trustco)

Apportionment: Where an asset belongs to multiple categories (e.g. land + building: non- depreciable and depreciable), apportion the
capital cost between them (68)
o The parties’ agreement is usually deferred to by the CRA; the vendor wants high land value (for 50% taxable capital gains) and the
purchaser wants high building value (for high CCA).

Timing of Acquisition: CCA can only be claimed on property that is "available for use"(13(26))

Availability for use is deemed in several circumstances (actual use, two taxation years after the taxation year it was acquired in,
immediately before disposition, etc)(13(27))

Proceeds of Disposition: This term has “the broadest possible meaning”, and even applies to the destruction of tangible property. If you
stop owning it, it’s been disposed of; any money you receive constitutes “proceeds”
Specific items included as “proceeds of disposition” are set out in the (13(21))


Timing of Disposition: Occurs when ownership passes under provincial law
(Hewlett Packard)

Example: ∆ exchanges their old fleet of cars for a new fleet every October; new fiscal year starts in November. Their contract says that
title for the old fleet passes a month after the exchange. Provincial law allows it, so disposition of old fleet occurs in the next fiscal year
and
∆ is able to claim CCA on both new and old cars simultaneously, every year
(Hewlett Packard)

Half-year Rule: Only 50% of the CCA for an asset may be claimed in the taxation year it is
acquired in (this is to average out the effect of acquiring assets at different times of year)(ITR 1100(2))

This regulation only applies where total cost of acquisitions exceeds total proceeds of dispositions for the class in the year (remember the
class concept – assets are lumped together)

Limitations on Deductions:
o Rental Properties: CCA cannot induce a loss on rental property (i.e. it is capped at rental income – all other deductions) (ITR
1100(11))
o A rental property is a building used “principally for the purpose of gaining … rent”(ITR 1100(14))
Eligible Capital Expenditures

“Eligible Capital Expenditure” Defined: An expenditure “on account of capital for the purpose of gaining or producing income from
the business”, subject to statutory exclusions(ITA s. 14(5))

Property that can be purchased with such an expenditure is “eligible capital property”(ITA s. 54)

nb – The most important of these expenditures is the cost of goodwill.
Amount of Deduction: A deduction of no more than 7% of the “cumulative eligible capital” (“CEC”) account can be taken each year.(ITA s.
20(1)(b))

¾ of each eligible capital expenditure is added to the CEC account, and ¾ of the proceeds of disposition of eligible capital property is
subtracted from CEC account.
(ITA s. 14(5))
As with the UCC, there is a recapture that is included in income
(ITA s. 14(1))

If the account has a positive balance when the taxpayer ceases to carry on business, that amount is deductible as a “terminal

allowance” (similar to the UCC terminal loss) (24(1))
Capital Gains
Be able to determine in a given fact pattern referring to relevant authority whether a taxpayer has a taxable capital gain or allowable capital loss and
determine the amount of the taxable capital gain or allowable capital loss.
Inclusion in income for taxable capital gains:
Income includes taxable capital gains less allowable capital losses
3(b)
Computation of taxable capital gains is s.38-55
38-55
A taxable capital gain is ½ of capital gain
38(a)
Allowable capital loss is ½ capital loss
38(b)
An capital gain or loss is a gain or loss derived from a “disposition of property” measured by the difference between the
40
“proceeds of disposition” and the “adjusted cost base”
Any gain is a capital gain unles otherwise taxed under 3(a) [O/E/B/P] so income from O/E/B/P is NOT a capital gain
39(1)(a)
Same for capital losses – cannot be losses deductible under 3(d) EXAMPLE: inventory!
39(1)(b)
Realization: Capital gains/losses are realized on disposition. Like 9(3) says
Capital gains tax is a residual tax that applies ONLY to those gains from disposition of property that would not otherwise
be taxed.
So, is someone:
(i) a trader, in which case the gain is income from business (inventory);
(ii) a speculator, in which case the gain is also income from business; or
(iii) simply an investor who has realized an investment in which case it is a capital gain.
this is, consequently, a major source of tax litigation
Basic Concepts

Capital Property: Depreciable property and any property that can generate a capital gain/loss(54)
Certain types of property are excluded from generating capital gains/losses. (39(1)(a),(b))


Depreciable Property: Property for which CCA can be claimed under s. 20(1)(a)(13(21))
These are fully deductible, eventually, via the CCA (s. 20(1)(a)) or as a terminal loss (s. 20(16))

 Disposition: Any event entitling a taxpayer to proceeds of disposition of property (248(1))

Proceeds of Disposition: This includes the sale price of the property (net of any expenses incurred in selling it) as well as
expropriation payments, payments from insurance for loss of the asset, involuntary disposition of a corporate share or debenture,
etc (ITA s. 54)

Inter Vivos Gifts: Proceeds of disposition are deemed to be the fair market value (ITA s. 69(1)(b)) o

Timing of Involuntary Disposition: In the case of loss, destruction or taking of the property, the time of disposition is deemed to
be the earliest of (1) the day the taxpayer agreed to an amount as full compensation for the property, (2) the day the amount is
determined by a court or tribunal, or (3) if there is no legal proceeding, two years after the day of the loss/etc.(ITA s. 44(2))
Adjusted Cost Base:
For depreciable property, the "adjusted cost base" is the capital cost of the property.(54)

For non-depreciable property, the adjusted cost base is the cost at the time of disposition,

adjusted as required by s. 53. (54)

Upward adjustments: Some expenses associated with the property are included at the time
of disposition by adding them to the cost base. e.g. interest on a loan taken to purchase it, property taxes, etc. This reduces capital
gains (or causes capital losses)(53(1))

Downward adjustments: These do the opposite of upward adjustments (53(2))

Pre-72 adjustments for ppty acquired before 72 since CG were not taxed then.

Deemed Costs for deemed dispositions: when ppty is deemed to be disposed (inter vivos gifts) then the disposition is equal to FMW

for thatppty then deemds it acquired at FMV
Rollovers: disposition can happen w/o CG triggered.
Computation of Gain or Loss

Proceeds Due within the Year: If taxpayer is entitled to be paid in full in the year of disposition: capital gain/loss = proceeds of
disposition – (adjusted cost base + expenses of disposition)(40(1))

Sold for $100 – [acb $80 + expense $5] = $15 CG. $15x0.5% = $7.5 is taxable CG.

Proceeds Due in a Future Year: If taxpayer disposes of property but is not entitled to receive the proceeds in the same year, a
“reasonable” reserve may be deducted from the capital gain in each year. This reasonable reserve must be no less than the
lessor of:
(40(1)(a)(ii)) o

Gain*X/5 (where X = 4 – number of years since disposition).(40(1)(a)(iii)(D) o

Gain*(proceeds not yet received)/(total proceeds). (ITA s. 40(1)(a)(iii)(C))

Capital Loss: ½ the capital loss is immediately deducted in the year of disposition (40(1)(b))
IT-221R3
Other Factors Courts have Considered Include (and noted in IT 221R3:
•
frequency and duration of visits
•
past and present habits of life
•
purposes of stay in Canada
•
presence of social and business connections to Canada vs. ties elsewhere
•
ownership of dwelling house in Canada or rental of dwelling house on long-term basis
•
residence of spouse, children and other dependent family members
•
memberships with religious, recreational or social clubs, unions or professional organizations
•
registration and maintenance of cars, boats, airplanes in Canada
•
credit cards issued by Canadian financial institutions, stores, etc.
•
local newspaper subscriptions sent to a Canadian address
•
rental of safety deposit box or post office box in Canada
•
insurance through Canadian insurance company
•
mailing address in Canada
•
telephone listing in Canada
•
stationary with Canadian address
•
Canadian bank accounts
•
membership in a Canadian pension plan
•
will prepared in Canada
•
burial plot in Canada
•
ownership of Canadian vacation property
•
employment in Canada
•
maintenance or storage of personal belongings in Canada
•
severing of ties with former country of residence
Other Factors Courts have Considered Include (and noted in IT 221R3):
a. personal property in Canada (such as furniture, clothing, automobiles and recreational vehicles),
b. (b) social ties with Canada (such as memberships in Canadian recreational and religious organizations),
c. (c) economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and
Canadian bank accounts, retirement savings plans, credit cards, and securities
d. accounts),
e. (d) landed immigrant status or appropriate work permits in Canada,
f. (e) hospitalization and medical insurance coverage from a province or territory of Canada,
g. (f) a driver’s license from a province or territory of Canada,
h. (g) a vehicle registered in a province or territory of Canada,
i.
(h) a seasonal dwelling place in Canada or a leased dwelling place referred
j.
(i) a Canadian passport, and
k. (j) memberships in Canadian unions or professional organizations.
And also considered per IT-221R3:
•
the retention of a Canadian mailing address,
•
post office box, or safety deposit box,
•
personal stationery (including business cards) showing a Canadian address,
•
telephone listings in Canada, and
•
local (Canadian) newspaper and magazine subscriptions