Table of Contents
Chapter 1: Introduction ........................................................................................................................................................... 2
What Is a Tax? .................................................................................................................................................................... 2
Direct vs. Indirect Taxes (John Stewart Mill) ..................................................................................................................... 3
Constitutionality of Taxation .............................................................................................................................................. 3
Taxation Rate Regimes ....................................................................................................................................................... 5
Evaluating Taxes and Tax Regimes .................................................................................................................................... 6
Unit 2 ...................................................................................................................................................................................... 7
Test for residency ................................................................................................................................................................ 9
Tax Base............................................................................................................................................................................ 11
What Is Income ................................................................................................................................................................. 12
UNIT 3.................................................................................................................................................................................. 15
THE INCOME TAX ACT ...................................................................................................................................................... 15
SECONDARY SOURCE OF CANADIAN INCOME TAX LAW .................................................................................................. 15
PROVINCIAL TAX LEGISLATION ........................................................................................................................................ 16
TAX COURTS ..................................................................................................................................................................... 16
AMENDING THE INCOME TAX ACT ................................................................................................................................... 17
CANADA REVENUE AGENCY PUBLICATIONS .................................................................................................................... 17
UNIT #4................................................................................................................................................................................ 18
THE ADMINISTRATION OF INCOME TAX LAW................................................................................................................... 18
Process of Filing Taxes ..................................................................................................................................................... 18
Notice of Objection ........................................................................................................................................................... 20
Settlements ........................................................................................................................................................................ 21
Unit #5: Employment Income ............................................................................................................................................... 21
Section 5: Salary, Wages And other remuneration received by the Taxpayer .................................................................. 21
Section 6: What is characterized as employment Income ................................................................................................. 22
Section 7: Taxation of Employee Stock Options .............................................................................................................. 23
Section 8: Employment Deductions .................................................................................................................................. 23
Characterization of Employment vs. Business relationship .............................................................................................. 23
Incorporated Employees ................................................................................................................................................... 26
Introduction to Employment Benefits ............................................................................... Error! Bookmark not defined.
General Approach to the Inclusion (and Taxation) of Employment Benefits....................... Error! Bookmark not defined.
Characterization as an Employment Benefit ......................................................................................................................... 29
1
CHAPTER 1: INTRODUCTION
WHAT IS A TAX?
 Dictionary def’n = A contribution to State revenue, compulsorily levelled on people, businesses,
property, income, commodities, transactions, etc.
 Textbook = a contribution to government revenue compulsorily levied on individuals, property or
businesses
 Sprysak definition: payment of money w/ no immediate or directly linkable good or service in return
o NB: if there is a direct good or service in return this constitutes one of the following:
fee/exchange/sale
SCC Def’n of Tax  Lawson v Interior Fruit and Vegetable Committee of Direction
 A tax is a charge which is:
(1) Enforceable by law (compulsory)
(2) Imposed under the authority of the legislative branch of government (no taxation w/out
representation)
(3) Imposed by a public body (allows legislature to delegate powers to another public body)
(4) Imposed for a public purpose
Lawson v Interior Tree Fruit and Vegetable Committee of Direction
Facts: BC fruit rancher did not want to have levies and licencing fees imposed on him by the BC
government. Challenged legislation as ultra vires. SCC granted his appeal and discussed what is a tax.
Ratio: Set out 4 requirement of a Tax (enforceability, authority of legislature, public body, public purpose)
IN ADDITION to the LAWSON Criteria: SCC looks at whether the charge more closely resembles a fee
 Fee = exchange, and the amount relates to the cost to the government for providing that good/service
 Tax = Government takes money from the person based on certain indicators (e.g. income) which may not
directly relate to government expenditures on that good/service
 Two Requirements for a fee (RE Eurig)
1. Charged with respect to a good/service that is being provided to you
2. Connection between the amount charged and the cost imposed on government for providing
good/service
Re Eurig Estate, [1998] 2 S.C.R. 565
Facts: ON enacted a probate regime whereby for a fee, the provincial courts would examine the will and if it complied
with the relevant law, provide letters of probate to the executors, which they could then take to third parties (who would
have to comply with the terms of the will). Executive branch did this under authority of the Administration of Justice
Act, which delegated to the Executive the power to make regulations regarding the payment of “fees” (but made not
explicit mention of delegating the power to create “taxes”).
Reasoning: Court considered Lawson factors and considered the fact that the fees:
1.
Were on a sliding/increasing scale,
2.
This scale depended upon (or were tied to) the value of the deceased’s estate, rather than the
costs incurred by the courts to grant probate, and
3.
These graduated levies were intended to generate a surplus for the province, rather than simply
cover the costs of providing this service (see paras 20-23)
Held: Probate system was actually a tax (direct tax)
2
WHY SHOULD WE CARE WHAT A TAX IS
 Two constitutional reasons:
(1) Section 91/92 of the Constitution Act  Respective taxation powers
(2) Section 53 & 90 Constitution  for a tax to be valid it must originate in legislature (“no taxation
w/out representation)
DIRECT VS. INDIRECT TAXES (JOHN STEWART MILL)
 A direct tax is one that is demanded from the very person who it is intended or desired should pay it;
whereas [charge the person who gets direct benefit from it]
o Example: PST, Income Tax
 An indirect tax is one that is demanded from one person in the expectation and with the intention that
he shall indemnify himself at the expense of another (“paying off”) [tax one individual with expectation
that will transfer liability to someone else]
 Example: Liquor tax/fuel tax
TEST (per Bank of Toronto v Lambe): court will consider “the general tendencies of the tax and common
understanding of men as to those tendencies”.
NB: this distinction is important because the Constitution incorporates these definitions in allocating power
[provinces can only implement direct taxation regimes]
ALTERNATIVE CLASSIFICATIONS OF TAXATION
Type of Tax Taxation Type Trigger
Advantages/Disadvantages
Head Tax
A: simple to understand/administer, efficient, neutral, fair (same burden on every
person)
D: regressive, unfair (same burden on every person), inefficient.
Consumption
Income
Less Complex Head (a person)
Consumption
A: Fairly simple (at least in theory), ties taxation to benefit/use, encourages
savings/investment
D: May tax poorer people disproportionately, discourages spending, may not
accurately reflect “ability to pay”
More Complex Income
A: Better ties taxation to ability to pay taxes, better utilization of revenue base
(Consumption + D: Discourages income providing activities, more expensive to administer,
changes in wealth) discourages savings as compared to a consumption tax, chases away the wealthy
CONSTITUTIONALITY OF TAXATION
(A) Federal Government – s.91(3)
 Power to raise money by any mode or system of taxation BUT
 Feds must have jurisdiction (some connection to Canada) – 2 requirements
(a) Connection between the country and the person (residence, citizenship, domicile) OR
(b) Source of income (regardless of where living, income can be traced within our borders)
(B) Provincial Government – s. 92(2)
 power of “direct taxation within the province in order to the raising of a revenue for provincial
purposes”
(C) No Taxation w/out representation – Section 53, 54, 90 of Constitution Act
 In order for tax to be valid it must originate in the legislature (parliament or provincial leg.)
 Can be delegated to a public body (such as Executive) BUT must be done explicitly and
intentionally (Eurig Estate)
 This aspect of taxation is important for democratic reasons (don’t like the tax vote em out) &
prevents the senate from initiating their own taxation regime
3
(D) S. 121 provides that all Articles of the Growth, Produce, or Manufacture of any one of the Provinces
shall, from and after the Union, be admitted free into each of the other Provinces.  Prevents one
province from taxing another province
(E) S. 125 no lands or property belonging to Canada or any province shall be liable to taxation.  Prevents
the federal government from taxing the provinces, and vice versa
Bank of Toronto v Lambe (1887) - Direct vs. Indirect Taxation
Facts/Issue: Quebec decided to tax any provincial institute that worked within its provincial boundaries.
Bank operated primarily in upper Canada but had a few branches in Quebec. Quebec said we want to impose
a tax on the entire bank (not just those in Quebec). This was going to be a significant charge to the bank of
Canada, so they challenged it that Quebec imposing an unconstitutional indirect tax.
Decision: Tax Constitutional
Ratio: To determine whether a tax is “direct” or “indirect”, the court will consider “the general tendencies of
the tax and common understanding of men as to those tendencies”  even though the business recovers their
costs from the consumer does NOT mean that every corporate tax is indirect  a tax can have indirect effects
and still be a direct tax
 Intention of the Quebec legislature and the general tendencies of the tax was that the banks were
intended to pay and ultimately bear the burden of the tax.
 BUT if dealing w/ a commodity or export tax (tax added to the gross supply chain) and the legislature
wants to impose the tax in the supply chain and this tax is passed down (from manufactuer to
consumer), then this is indirect as the legislature will anticipate that the tax is pass down
 For example in PST as direct tax, there is one tax which is triggered when a consumer purchases
something subject to PST. Retailer is acting as the agent for the government. The retailer does not pay
the tax. There is not a case where the retailer pays it then recoups from individual consumer.
NB: There is a fundamental difference in “economic tendancy” of the owner to try and shift the incidence of the
tax and the passing on of the tax. When a tax is passed down the supply chain if tax is “ related to a unit of the
commodity or its price, imposed when the commodity is in the court of being manufactured or marketed than the tax
clings as a burden to the unit of transaction presented to the market”) [Canadian Pacific Railway v Sask]  if commodity
type tax, which is levied early in the chain = indirect tax
Kingstreet Investments Ltd. v. New Brunswick, [2007] 1 S.C.R. 3.
Ratio: The surcharge placed on liquor purchase for resale was unconstitutional to the province because indirect tax.
Re Eurig
Majority decision (Major): If the Administration of Justice Act had explicitly delegated the power to create taxes by
legislation to the Executive, then such taxes would pass the section 53 constitutional requirement; however, as the
legislation only delegated the power to impose fees, the probate regime was constitutionally invalid (para 36)
Dissent (Bastarache): the only purpose of section 53 is to prevent the Senate from introducing and enacting tax
legislation.
Given this, we aren’t too bothered by the fact that the Administration of Justice Act did not specifically refer to (and
delegate) the taxation power. The delegation set out in section 5 to impose fees was legally sufficient to include the
probate taxes – therefore the taxes actually imposed are constitutional and legal.
TYPES OF TAXES
Provincial Tax
 21.8% of total revenues comes
from income taxes
 GST 11%
 Property tax 16%
Federal Tax
 60% of its total revenues are derived from income tax
 75% of its tax revenues are derived from income taxes
 76% of income tax revenues are derived from personal
income taxes
 GST raises 12% of total revenues (under 15% of tax revenues)
4
SOLUTION FOR ALBERTA TAXATION ISSUES
(1) CD Howe Institute  8% solition: reduce personal income tax to 8% and add 3% sales tax to GST
 Solution to reduce rapidly growing expenses and lead to greater saving, investment and result in less volatile
gov’t revenues
 Support HST b/c compared to income taxes, consumption-based taxes are a less economically distortive way
of raising gov’t revenue (increase gov’t revenue, less volatile, simple to administer)
 Although this change would be revenue neutral it would put more emphasis on a less volatile tax base than it
present is in relying on royalty revenues and would spur economic growth (lowering income taxes effects tax
payers behaviors and would boost taxable incomes for a tax revenue gain)
 Offer a large tax credit to cancel out the regressive taxation impact of the sales tax
 Advantages: encourages foreign investment (corporate tax remains low)
 Disadvantage: decrease consumption, black market sales
(2) Parkland Institute  increase corporate and personal income tax rates
 Says AB is dealing w/ fiscal shortfall from over-reliance on natural resource royalties (volatile and
unsustainable) in funding core services (healthcare, education, social services, public infrastructure) and
NOT overspending.
 This solution would bring in more money and help stabilize provincial revenues.
 Even in making these changes could still be the country’s lowest-tax jurisdiction and says would be more
instep w/ Albertan’s beliefs (those who earn more should bare more of the tax burden)
 Disadvantages: discourage foreign investment
TAXATION RATE REGIMES
 Three different taxation regimes:
1) Proportional (flat tax)  rate of taxation does not change as income changes {Alberta}
2) Progressive  taxpayers tax rate increases w/ income [all provinces except AB]
 Vertical equity satisfied
3) Regressive  taxpayers pay tax at a lower rate as their income increases
 Can still have vertical equity in this regime  they still pay more tax, just pay a lower tax rate
NB: if you combine a progressive rate regime (Federal) with a proportionate tax regime (Alberta you get a
Progressive Rate Regime
HORIZONTAL VS. VERTICAL EQUITY
Vertical Equity = If you have a different amount of income, then you should pay a different amount of tax. More
specifically, the person with the higher income should pay more tax than the person with the lower income.
o In Canada we have vertical equity but NO horizontal equity, as different types of income are taxed
differently
Horizontal equity = individuals w/ similar income and assets should pay the same amount in taxes no matter
the difference in situation between the two people
 Canada often violates this – because capital gains are taxed less than employment income
 In Canada, we distinguish between different types of income and DO NOT have horizontal equity
 5 types of income under the Income Tax Act
a. Employment income
b. Property/investment income
c. Business income
d. Other (eg. receipts from a pension plan)
e. Capital gains
f. Each source of income has separate rules for calculating the tax on that income
5
 Because of this there are advantages to having income counted as one form or another.
g. EX. Canada often violates Horizontal Equity principal b/c an individual who does not work but
makes $50,000 of capital gain will pay less tax than someone who works and makes $50,000 in
employment income.
TERMINOLOGY:
Marginal Tax Rate: the rate at which incremental income will be taxed.
 Every additional dollar will be taxed at that
Average Tax Rate: this is calculated by taking total taxes payable and dividing it by total taxable income.
 Equation: Avg Tax Rate = Total Taxes Payable/Total Taxable Income
 In a progressive system – marginal tax rate will always be higher than average tax rate
Refund Calculation: 10,000 taxable income, put a 1000 into RRSP  1000/last tax rate = $260  refund calculation
HISTORY OF INCOME TAXES IN CANADA
 Canada has the Canada Revenue Agency administer and collect not only federal, but provincial income
taxes. Province delegates their taxation power to the municipality, and delegate power to levy tax
primarily through property tax.

This is accomplished through “tax collection agreements” – which generally require the
provinces to use the Income Tax Act’s calculation of “taxable income”
Two Exceptions to system:
1) Quebec  own income tax legislation for corporations and trusts
2) Alberta  corporate income tax
EVALUATING TAXES AND TAX REGIMES
 Three ways governments evaluate taxation regimes:
1. Revenue Generation:
 Enact to generate revenue (car taxes, luxury taxes, sin taxes)
 Evaluate the taxes effectiveness by how well it achieves this goal
 Caution: to high a tax causes people to leave the province/country, decrease consumption
 May levy a tax to decrease consumption
Equation: Revenue = Tax base [income] x tax rate
 To increase revenue can either broaden the tax base or increase the tax rat e
 General trend has been to lower tax rates
 Non-taxable bases: income in RSP and RESP is not subject to tax while it is in the plan, tax
free savings account, gifts and inheritances, lottery winnings, gambling, scholorships, capital
gains
 Tax free savings account
2. Efficiency:
 Two components:
1) Look at how imposition of how tax influences tax payers behaviour
 An efficient tax is one that does not influence behaviour – let market govern
 Head tax does not influence


Consumption tax will influence
EXCEPTION: The “income effect of taxation” = To the extent that the imposition of a tax
provokes people to work more in order to pay for that tax, the tax is inefficient but it is a good
inefficiency. But, there is also the “substitution effect” where a tax is implemented or
increased and a person changes to non-taxable activities.
2) Look at costs of administration (cost to comply w/ tax and administer and ensure
compliance)  common measure
 If easy to evade tax, it may not be efficient
6
3. Fairness or Equity:
 Basic Principle  if tax is unfair people will not comply
 How do we determine what is fair: Two governing philosophies
(1) Ability to pay principal
 Amount of tax should directly relate to persons ability to pay  in Canada equate
this to income
 Does not account for how the person is actually living
 Difficult to determine what should be included in a persons income (inheritances,
dependants etc)
(2) Standard of Living Principle:
 If you can afford more or consume more you should pay more
UNIT 2
FIVE ELEMENTS TO CANADA’S INCOME TAX REGIME – SECTION 2(1)
(1)
(2)
(3)
(4)
(5)
(6)
A tax unit (i.e. taxpayer), who is the subject of taxation, (who are we going to tax?)
A tax base (i.e. income), on which the tax is assessed, (what are we going to tax?)
A taxation year (aka “accounting period”), which is the period of time over which income and the
associated tax liability (if any) is calculated, [time period over which tax calculated – most countries tax
over a taxation year – could have a system where taxes calculated over a persons lifetime]
A taxation rate regime (aka “a structure of tax rates”), which is applied to income to calculate the
taxpayer’s tax liability, and [mechanical calculation]
Tax credits, which reduce the taxpayer’s tax liability calculated above. [tax credits]
PLUS additional element of tax expenditures: Expenditures (can be in the form of a credit, deduction
or exemption), which are direct spending by the gov’t contained and administered though the ITA and
allows the gov’t to use the existing tax regime as a way of providing benefits to their members.
Section 2(1): An income tax shall be paid, as required by the Act, on the taxable income for each taxation year
of every person resident in Canada at any time in the year.
HOW CAN THE GOVERNMENT LEGITIMATELY TAX A PERSON?
1) Sufficient connection between the person and the country [THE FOCUS OF THIS UNIT]
 Ex. Residency is the basis that Canada asserts jurisdiction to tax people
 Section 2(1): If you a resident of Canada at any time in the year then you are subject to your
worldwide income
 Doesn’t matter where the income was earned, it will all be
 Residency is the basis that Canada asserts jurisdiction to tax that person
2) Sufficient connection between the income and the country to legitimately allow the country to tax that
income  Even if not a resident for the purposes of s.2(1) you can still be taxed on your income if there is a
sufficient connection between your income and Canada
 Section 2(3) look at a) employed; b) carried on business; c) disposed of taxable
Canadian property
 Section 2(12) refers to other income which has connection to Canada (interest,
divideneds, rent)  more passive forms of income but if non-resident receives these
while not in Canada they can be taxed in it
 The country must prove that the income can be traced to that country
 The person need not have any other connection to the country other than earning the income
7
Test In Canada:
1) Are they a resident? If yes then per s.2(1) taxed on worldwide income
2) If no, can they still be taxed based on a connection between her income and Canada
TAX UNIT – WHO IS SUBJECT TO TAXATION IN CANADA
 Section 248(1) = defines who is person for income tax purposes
 Inclusive definition
 Supplements the dictionary meaning
 Includes: any corporation, any entity exempt {entity that is not taxable due to an exemption e.g.
charity], trusts (inter vivos trusts and testamentary trusts],
 As a general rule a partnership is not considered a person for tax purposes
o Focus on partners individually, tax on share of attributed income
o S.96 stipulates that we pretend a partnership is a person so the partnership can calculate
its net profit from its activities
Aside: Number of groups have argued that individuals are not subject to income tax; support their arguments
with the following theories: Natural person Theory = natural person is one who works for ones self and hence
not for profit, therefore such a person would not fall within the scope of the ITA
WHAT CONSTITUTES A TAXATION YEAR
Two possible definitions:
(1) If a corporation or Canadian resident partnership a taxation year = = a fiscal period, and one of the
primary selection considerations is to find a time period where you are able to do all the steps required
for financial reporting, auditing, etc. (s.249(1)(a))
o Fiscal period is defined in 249.1
(2) If an individual, a partnership, an inter vivos trust or a professional corporation = a calendar year
(249(1)(b))
o if you are an individual earning business income you are allowed to report that business income
on a non-calendar basis if you want (won’t test on this)
o estates within 90 days from the end of the year
 keep in mind it will take some time to settle the estate
 inter vivos trusts are taxed as if they are individuals, therefore they are taxed on a
calendar year
o EXCEPTION: Testamentary trusts: Any up to 12 months period ending after the date of death
WHAT IS TAXABLE INCOME
 “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” (s.2(2))
 A person’s taxable income CANNOT be less than $0
WHO IS TAXED
 There are three ways countries may determine if there is a sufficient connection between the country and
the person:
(1) Residency
 Canada uses these criteria – see below
(2) Citizenship
 Only applies to individuals who were born in the country or born outside but took necessary steps to get
citizenship in that country
o In US citizenship is inherited
8
o Article 4 of Canada-US treaty  where you have individual who is a resident of Canada and
citizen of the US, such that each subject to tax, treaty says we will essentially break the tie and
tell one of the countries they cannot apply their domestic law to that person.
o Treaty also provides that other country must enforce the other countries tax law/ exchange
information
 Strength: Provides bright line test of whether citizen or not
 Weakness: Negative – criticised: a) overbroad (catches people who have no economic connections ot the
country ); b) Under-inclusive – people living and working and generating economic activity in usa who
are not citizens
(3) Domicile
o Two elements:
A) Must be physically present in that jurisdiction
B) Also have to intend that country to be your permanent or indefinite home
o Strengths: more sophisticated and refined then citizenship
o Weakness: Somewhat subjective because intention to make permanent home can be difficult to
determine AND can only have one domicile at a time, cannot have more then one permanent or
indefinite home.
TEST FOR RESIDENCY
 Possible to get a ruling from the CRA on whether a resident or not  required to fill out form NR73 (if leaving Canada) OR NR-74 (entering Canada)
 CRA has published income Tax folio S5-F1-C1 to determine an individual’s residence status
Two step test to determine if a resident:
(1) Are they a resident under the common law rules (per. Thomson)
o If Yes, which province are they a resident of?
(2) If No, are they still deemed a resident under a statutory deeming rule?
RESIDENCE OF AN INDIVIDUAL – COMMON LAW TEST (THOMSON V MINISTER OF NATIONAL REVENUE):
Per Justice Rand:
 Residence = Chiefly 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 of social relations, interests or
conveniences at or in the place in question
o Can be a resident even though it is not your permanent and definite home (distinguished from
domicile)
o Justice Rand also distinguished “ordinarily resident” from “occasional, casual or deviatory”
residence.
Residency is ascertained by a comprehensive factual analysis:
(1) Determinative factor = residential ties of the individual under consideration including his spouse/common
law partner, dependants (e.g. is the ind. Spouse living in Canada or have a place available to live)
(2) Secondary Residential Ties – gain weight as more accumulate
a)
b)
c)
d)
e)
f)
g)
h)
i)
Personal property in Canada (i.e. furniture, clothing, automobiles, etc.),
Social ties with Canada (i.e. memberships in Canadian recreational and religious organizations)
Economic ties with Canada (i.e. employed with Canadian employer, involvement in a Canadian business,
Canadian bank accounts, etc.),
Landed immigrant status or appropriate work permits in Canada,
Canadian hospitalization and medical insurance coverage,
Canadian driver’s licence,
Canadian seasonal dwelling place or leased dwelling place,
Canadian passport,
Memberships in Canadian unions or professional organizations, etc.
9
(3) Taxpayers intention
 While a taxpayer’s intention to reside in a particular jurisdiction may be relevant to the determination of
residence this intention is not determinative, but “must always be viewed objectively against all the
surrounding facts”
o Taxpayers subjective intention is not relevant in determining residency LOOK at objective
manifestations of intention (some judges have even said intention is irrelevant)
(4) Resided in Canada for lengthy period of time
 Where a taxpayer has resided in Canada for a lengthy period of time, clear and “virtually irreversible”
measures are required to terminate this residency
 CRA would have to have significant change in facts or circumstances to validate claim that not a
Canadian resident (not necessarily virtually irreversible just significant)
 Length of stay or the time present in the jurisdiction is not conclusive. An individual may be outside
the jurisdiction for the whole year but may still be held to be a resident (if, say his/her spouse and family
reside within the jurisdiction)
(5) Resident of another jurisdiction:
 Little important in determining Canadian residency
(6) RRSP or Canadian Pension Plan?
 Not determinative
***Where there is tie, court should be open to why have residency in certain jurisdiction, should be allowed to
give explanation for why not a resident.
***Most important 3: where property located, social ties, economic ties
NB: Every person has at least one residence for tax purposes at all times (i.e. must be a resident somewhere)
o AND a person may be a resident in more than one country at the same time (unlike domicile)
NB: Residence is primarily a question of fact – will not overturn finding by the tax court unless a palpable and
overriding error
PROVINCIAL RESIDENCY FOR INDIVIDUALS
 If they are a resident under the CL test, next step is: are they a resident for provincial tax purposes
 Test for determining provincial residency is the same virtually as if resident for Canada – but two
modification (Thomson test + modifications)
a) Apply test as of Dec 31st of the year  considered a resident of the province in which they were
a resident as of Dec 31st of the particular taxation year (as opposed to ties over the entire year)
b) You can only be found to be residents in one province or territory in the year (per Regulation
2607)
o You apply the test on the last day of the year – where personal family ties, social connections,
economic connections, as of that date.
 EXCEPTION: where the individual earns business income through a permanent establishment in another
province, then, effectively, income earned through that permanent establishment in the other province will
be subject to provincial tax in that province.
R v Smale
Facts: S lost job in Sask, could not find employment so moved to AB. For a year lived in Calgary and would visit Sask every 4-6
weeks where wife and kids lived so could finish school year. At end of year he and his wife separated.
Issue – where is S resident for provincial tax purposes? The province of Saskatchewan argued that since (a) S had a home
immediately available for him in Saskatchewan and (b) his wife and dependent children continued to live in Saskatchewan, he
continued to be a Saskatchewan resident for provincial tax purposes.
 Most significant factor is residential ties
Held: Not a resident
Reasoning: Because S planned to move his kids to Calgary once they were finished school he could argue himself out of the ties
10
RESIDENCE OF AN INDIVIDUAL – STATUTORY DEEMING RULES  APPLY ONLY IF FOUND TO BE A NON-RESIDENT UNDER CL
 Deeming rules are contained in s.250
(1) Sojourner Rule – s.250(1)(a) = Deemed to be a resident for entire year if that person sojourned
in Canada for a period of 183 days or more (bright line test)
o Rule only applies for federal taxation purposes, does not deem you a resident for provincial
tax purposes – thus per s.120(1) the feds levy a sur-tax on you to account for fact paying less
tax
o Even if only lived in Canada for half the year then still taxed for entire year under this rule
o Sojourn = staying temporarily in a foreign land as opposes to ordinary residence
o CRA Folio Paragrpah 1.33  sojourning – to make a temporary stay in the sense of establish
temporary residence
o Cannot sojourn in a country you are a resident of
o Do not care why you have temporary residence here (e.g. jail, work, vacation)
NB: A day for the purposes of sojourner rule does not mean a 24 hour consecutive period, can be here for less
then 24 hoUncertainty where staying spans two days.
(2) Special Individuals Rule – s.250(1)(b) –(g)
o Special Individuals: These individuals are deemed even though they may not be a resident for
purposes of the CL
o Include: members of Canadian forces, government officers/servants, children (certain
spouses to the above)
o While they may work and live abroad they are deemed
 Most countries have similar deeming rules  country deemed residents are living in
either deem them not to be a resident or deem them not to be a taxable entitity
 In Canada we deem to be non-taxable
NB: Section 114 of ITA: overrides or modifies s.2(1) [if resident at any time in the year, then taxable in world
wide income for entire year]  s.114 modifies this, if resident for portion of year and non-resident for another
portion then 2(1) will apply only for period that Canadian resident, and for remainder of year when a nonresident only subject to 2(3) and 2(12) which says income sourced to Canada is taxed in Canada.
TAX BASE
Tax base = “the amount to which the rate (or rates) of tax is applied to determine the amount of tax payable”.
 Is taxable income which is calculated by following all the inclusions, deductions and exemptions in the
Act
 Section 3 is important as it indicates Canada’s approach to calculating taxable income, namely, a
“source” approach taxed on worldwide income from each recognized source
 Five recognized and named sources of income for Canadian income Tax purposes:
1. Employment
2. Business
3. Property (investment)
4. Net capital gains
5. Other = miscellaneous receipts (s.56) – spousal support, pension
o Generally speaking courts have said if not listed in act and not enumerated then not taxable
under the act
o When courts are unsure what something is classified as they will put it under business income
o Because different sources of income, does not adhere to horizontal equity
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WHAT IS INCOME
 Hagg Simons Definition of Income:
o Income = consumption + changes to your net worth
 Good definition because regardless of what you spend or what you make it is all income
 Broad tax base with this definition and would generate the most revenue and be the
fairest
 Good starting point --. But criticised for being to broad so no country uses this definition.
o Net worth = total assets = liabilities
o Problems:
a) Requires tax payers to value all of there assets even though the value may not be realized
b) Difficult to administer
c) Certain types of consumption the government may not want to tax
 Carter Commission: wanted to make a broad tax base to to do on Jan 1, 1972 they stipulated that if you
dispose of a capital asset or realize a capital gain or loss this would be included in your tax base.
General Definition of Income:
 Income (profit) = revenues (receipts) – expenses
 Deductions are considered expenses for income tax purposes
 Allow taxpayers to reduce their revenue/salary for certain expenditures to create incentives to
engage in certain activities & take into account expenses required to generate receipts and salaries
 Non-residents income is only calculated based on revenues and not expenses – flat tax of 25%
 In Canada, expenses are allowed for tax purpose  BUT only allowed to deduct those expenses
incurred for the purpose of earning the revenues. If incur expense that is not directly relatable to
revenue/expense then cannot deduct it (e.g. personal and living expenses which you would incur
regardless of job).
 Section 8(2) – cannot claim a deduction for personal income unless specifically provided for in s.8
 RRSP contributions can be deducted against any source of income (non source specific deduction)
DETERMINING TAX LIABILITY
Example:
Income
Marginal tax rate
0-40,000
25%
40-80,000
37%
80-120,000
36%
120,000 +
39%
First taxpayer has income of 40,000 value. Makes a 10,000 RRSP contribution. To determine a taxpayers tax
liability take: taxable income x tax rate = tax liability
(1) Net Method
(Taxable income = 40,000 x tax rate = 0.25) = 10,000  tax liability w/out RRSP contribution
After tax income = 30,000 dollars = taxable income – tax liability.
Taxable income 40,000 and RRSP deduction of 10,000  net taxable income = 30,000 dollars
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Tax rate = x 25%
Tax liability = 7,500
Savings in Tax Liability = 10,000 – 7,500 = 2,500

Important Point: as tax deductions reduce the income of a taxpayer, the benefit of a deduction is
taxpayer specific

Example: let’s assume that we have 2 taxpayers who each contribute $10,000 to his or her RRSP
and as a result can claim a tax deduction. The first taxpayer has $40,000 of taxable income
before taking into account his RRSP contribution; the second taxpayer has $400,000 of taxable
income before taking into account her contribution.

Question: What is the value of that tax deduction to each taxpayer (i.e. how much tax does the
taxpayer save or, if tax has already been deducted as source, how much of a tax refund does the
taxpayer receive)? Answer: 2,500 is the benefit then from the RRSP deduction. [the above is
the net method of calculating the tax savings of the deduction.
(2) Method 2: Gross Method
Taxable income before contributions: 40,000 dollars taxable income, how much of that goes to the government
and how much goes to the taxpayer? 10,000 goes to the government and 30,000 goes to the tax payer. (tax rate
of 25% recall).
RRSP deduction: 10,000  government pays for 25% of this  2500 and taxpayer pays 7,500 (75%).
Example 2: 400,000 tax payer at tax rate of 39%
156,000 to government (39)
244,000 to tax payer (61)
RRSP deduction of 10,000  3900 government pays and 6100 to tax payer
Deductions are deducted at that 39% rate (if deduction brings you still within the bracket)  better outcome for
higher bracket tax payer
Example 3: 85,000 tax payer w/ 10,000 rrsp contribution. After make claim will be at 75,000 of income  drop
in tax bracket.
5000 x 36% & 5000 X 32% = 1800 & 1600 = 3400 savings
 If it had been contribution of 11,000 then 6,000 would be taxed at 36% and 5,000 would be taxed at
32%
TAX CREDITS VS. TAX DEDUCTIONS:
Tax deductions: reduce a taxpayer’s taxable income, which in turn reduces the taxpayer’s tax liability (which is
calculated by multiplying taxable income by the appropriate tax rates).
 If tax deductions exceed taxable revenues to create a net loss in respect of a particular source of income
(or activity), then that loss:
(a) may be used to offset taxable income from another source (or activity) in the current tax year
(b) May be carried back up to 3 taxation years or carried forward to offset taxable income in those tax
returns (see section 111).
o If the loss is not a loss from the disposition of a capital asset, referred to as a “non-capital
loss”, then it can be carried back up to 3 years and forward generally up to 20 years and
offset against any other source of income in those years;
 40,000 lost in 2013; 50,000 employment income in 2012, new income for 2012 =
10,000
o If the loss is a loss from the disposition of a capital asset, referred to as a “net capital loss”,
then the loss can still be carried back up to 3 taxation years and can be carried forward
indefinitely (i.e. until the taxpayer dies), but can only be used to offset net taxable capital
gains in those years.
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o Therefore, the benefit of a deduction will generally be realized either in that year that it is
claimed or in a prior or subsequent year.
Tax Credits: do not have any impact on a taxpayer’s income: Instead, tax credits are calculated separately from
the calculation of taxable income (and taxes payable).
o The general rule is you take the value of the credit and multiply it by the lowest marginal rate (i.e. in
Alberta, 25%). You then take that product and use it to reduce your tax liability.
o Because these credits do not alter a taxpayer’s income (and are generally calculated at the same rate
for all taxpayers), tax credits are generally taxpayer-neutral
o Tax deductions comply with vertical equity but tax credits do not because treats everyone the same
o Some tax credits can only be used to reduce tax liability, therefore this benefit is lost because these
tax credits are “non-refundable”
o That said, there are some exceptions where tax credits can be used by someone other than the
taxpayer (i.e. tuition and education tax credits) or carried forward to a subsequent year (i.e. student
loan interest).
o A few tax credits are also “refundable” (i.e. the GST credit)
LIMITED EXCEPTION: CHARITABLE DONATIONS (SECTION 118.1):
 1st $200.00 of charitable donations – multiple amount of donations claimed by lowest marginal rate
(25% in AB)
 BUT for any donations over and above $200.00 you multiple it by the highest marginal rate federally
and 21% in AB for a total rate of 50%
 The defn of total charitable gift in s.118(1) – makes it possible to make donations and get receipts and
hoard them up to 5 years and get them back all at once
 For those married or in CL, the CRA says you can pool the donations
 Common tax credits available to individuals located in s.118(1):
a) Basic personal credit (s.118(1)(c))
b) Married or common law partner credit (s.118(1)(b)
c) Child tax credit (s.118(1)(b.1)
 Other common tax credits include: charitable donation tax credit, medical expense credit, pension
income credit, old age credit, tuition and education credits, etc.
HIGH LEVEL SUMMARY OF THE CALCULATION OF (NET) TAXES PAYABLE
Calculate your net income (i.e. revenues minus deductible expenses) on a source by source basis
 Recall 5 Sources of income: there are different sets of rules for each  e.g. employment – income
– deductions = net income
 Each deduction is tied in with each specific source of income so cannot make it across different
sources
2) Aggregate (average) sources of income and claim non-source specific deductions (if any)
3) Calculate taxes payable based on marginal tax rates
1)
 Taxable income = 60,000 and made 20,000 RRSP  40,000 x .25 = 10,000 and 20,000 x 32% = 6,400 –
therefore tax liability of 16,400
4)
Determine which tax credits you are entitled to, add them up and multiply them by the appropriate rate
(usually the lowest marginal rate)
 Determine which tax credits entitled to, add them up and x by appropriate marginal tax rate
5)
Use this tax credit amount to reduce your tax liability and determine your net taxes payable
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TAX EXEMPTIONS
 As Canada has not adopted the Haig-Simon definition of income or the comprehensive tax base
recommended by Carter, it is possible for a taxpayers net worth to increase w/out triggering an
associated tax liability = exemptions
o E.g. 50% of capital gains, 750,000 of capital gains arising from the disposition of a qualified
small business, human rights damage awards
o each year, the federal government prepares a Tax Expenditure report that lists these non-taxable
amounts and quantifies the “cost” to the government (in terms of lost tax revenue).
DIFFERENCE BETWEEN NON-TAXABLE AND TAXABLE AMOUNTS
1. Pre-tax Income * Tax Rate = Taxes Payable
2. Pre-tax Income – Taxes Payable = After-tax Income
3. Pre-tax Income * (1 – Tax Rate) = After-tax Income
calculations)
4. Pre-tax Income = After-tax Income/(1 – Tax Rate)
(amalgamation of the first 2
CHOICE OF UNIT – INDIVIDUAL V FAMILY



As already noted, in Canada, we have a progressive tax regime (both federally and combined).
Canada ignores an individuals relationships status (generally) for purpose of calculating each ind. Tax
liability  but issue: two households, each containing at least 2 individuals and having the same total
amount of household income, can pay different amounts of tax
Carter Commission expressed a strong concern about this result and, as a consequently, recommended
the creation of a new family tax unit. = a husband, wife, and any minor dependent children would
collectively report their income in a joint return and calculate their associated tax liability using a set of
marginal tax brackets specifically created for family tax units.
UNIT 3
THE INCOME TAX ACT
 Income tax act = primary source of income tax law in Canada
 Main sections of the ITA include:
a) Table of Proposed Amendments (xiii): shows the status of budgetary amendments proposed by the
HOC
 Valuable because tells us what the government intends to change
b) Tax Reference Tables (xxv): very useful for quick reference of tax rates, credits, etc.
c) Detailed Table of Sections (lxxv): this can be a useful research starting point
d) Legislative Provisions (page 1): always includes a related provision and notes section (gives case
law/articles related to that section)
e) Index – along with the Detailed Table of Sections (p.g1229)
SECONDARY SOURCE OF CANADIAN INCOME TAX LAW
INCOME TAX APPLICATION RULES (ITARS)
 These help taxpayers deal with the introduction of capital gains as a source of income as of Jan 1, 1972
 Relates to federal governments policy objectives based on Carter commission to bring capital gains
within the tax base
 Only 50% of the capital gain or loss is included in the tax base
Equation: Proceeds of disposition (selling price) – adjusted cost base (purchase price) – selling expenses =
capital gain (if positive); or capital loss (if negative)
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INCOME TAX REGULATIONS
 The Regulations (pg. 1585) are administrative rules created by the executive branch to implement
substantive provisions of the Act.
 The power of the executive to make regulations is delegated pursuant to s.221
TAX TREATIES
 Generally apply where Canadian residents obtain income from other jurisdictions and non-residents
derive income from activities carried on in Canada
 Canada has entered into bi-lateral tax treaties with other countries for three primary purposes:
a) Elimination of double tax – less important because most countries deal w/ in domestic tax law
b) Reciprocal enforcement of each country’s domestic tax legislation, (CRA will enforce the IRS code
of the USA) and
c) Reciprocal sharing of tax information for tax administration purposes
 Canada’s ITA includes both the Canada/US and Canada/UK tax treaties

PROVINCIAL TAX LEGISLATION
 Generally, Provinces adopt the federal ITA calculations of “taxable income”
 Exceptions:
a) Alberta Corporate income tax
b) Quebec personal and corporate income tax
 The provinces and feds have entered into tax collection agreements
 Gives CRA the authority to administer the provincial acts on behalf of the provinces
 To be a party to these agreements the definition of income must be materially the same 
because CRA does not want to deal with different income calculations
NB: some provinces have opted out of these collective agreements (e.g. Quebec and AB), in these cases look
after own administration and enforcement
TAX COURTS
 Primary court of 1st instance (since 1991) for tax cases = Tax court of Canada
 National court created by the Tax Court of Canada Act with limited jurisdiction to hear appeals
with respect to various matters and statutes (s.12)
 Tax matters can be heard by other courts:
 Unless the provincial income tax legislation gives the jurisdiction to the tax court, any
question of provincial residency must be hard in QB
 If you have an criminal offense – then depending on the offense heard in either provincial
court or QB
 The CRA has authority to grant relief (i.e if have tax liability cannot pay or it arose in
sympathetic circumstances can apply to CRA to grant relief)
 When questioning audit or decision of the CRA it goes to court
 Issues of registrations with non-profits the court of first instance is the Federal court of
Appeal
 Section 20: The Tax Court has the ability to make its own Rules of Court
TWO TYPES OF HEARING IN TAX COURTS
1) Informal Procedure
o Create greater access to justice – faster, cheaper
o Tax payer can self-rep
o No examination or expert witnesses
o BUT only deals with simpler cases and do not have a general right of appeal
o Strictly speaking decisions do not have precedential value
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o The amount of federal income tax and applicable penalties must be $25,000 or less per taxation
year (s.18 Tax Court Act) – if slightly over can waive your rights to the extra amount
2) General Procedure
o Analogous to Court of Queens Bench
o Includes examinations, full precedential weight, full rights of appeal
o Must be represented by counsel if not self-rep
o Costly and time consuming
APPEALS FROM TAX COURT
 Appeals are to the Federal Court of Appeal  SCC
 Tax cases do not have a leave as right to SCC (Must be of national importance)
 If general procedure case then full right of appeal to Fed. Tax Court
AMENDING THE INCOME TAX ACT
 Minister of Finance formulates and implements the federal tax policy AND can amend tax legislation
 The process of amendment is the House of commons  senate  Governor General to achieve royal
assent
 Generally amendments are enacted retroactively back to the budget date when first announced
 Prevents taxpayers from being able to plan into the existing rules of proposed amendemnts
 Legislative amendments are treated as current law
NB: If there is a change in government between when the amendment announced and when given royal assent,
the draft legislation will still be enacted by the new government
CANADA REVENUE AGENCY PUBLICATIONS
 Assist taxpayers and practioners in complying with the act
(1) Income Tax Folios (replacing interpretation bulletins): provide taxpayers with
a) Summaries of the law
b) CRA’s interpretation of the law (where the law is uncertain) on a subject-area basis
 Main publication produced by CRA
 Drawbacks?
o Just CRA interpretation NOT the law therefore it is possible for a taxpayer to comply with
the folio and then have the courts say that the position is wrong
o CRA is not bound by these published interpretations nor are the courts
o The summaries do not distinguish between what is the CRA’s opinon and what is the laws
opinion –BE CAREFUL
o NB: if rely on the opinion which is wrong the courts direct the CRA to waive any interests or
penalties
(2) Information Circulars: Generally provide information of the policies and procedures to comply with the Act
(i.e. how to do a “fairness application”) rather than summaries and interpretations of substantive tax law.
(3) Advance Tax Rulings (ATRs): Rulings given by the CRA on a proposed (as opposed to completed) series of
transactions as to what they believe the tax effects will be.
 CRA agrees to bind themselves to what they set out in the advanced tax ruling as long as set out all facts
and carry out transaction as set out in ruling
 CRA does not have to issue an advance tax ruling
o IC70-6R5 para 15 sets out when the CRA may refuse to issue a ruling
(4) Technical Interpretations: similar to ATRs because asking the CRA for their interpretation/position BUT the
interpretations are generally:
 are of a particular provision rather than to a proposed transaction
 are done on a “no-names” basis (as opposed to full disclosure) [anonymous]
 are not subject to any fees from the CRA, and
 the CRA is not bound by the Technical Interpretation (although they likely would follow it - it
would also have value in defending against possible gross negligence penalties)
NB: evolved into a “light” version of an advanced tax ruling
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UNIT #4
THE ADMINISTRATION OF INCOME TAX LAW
 Primary responsibility of the administration of the ITA rests w/ the CRA
 However the Dept. of Finance drafts and enacts legislation
 Starting point for administration of income tax law = section 150(1)
 Subject to s.150(1.1) taxpayers generally must prepare and file an income tax return for each
taxation year w/ the CRA
o “Living individuals”  s.150(1)(d) requires individuals to file their returns for the
preceding tax year by April 30th
 Where April 30th falls on a weekend of statutory holiday then the deadline is
extended to 11:59pm of the next business day
o “Deceased Individuals”  General rule in 150(1)(d) applies UNLESS the ind. Passed
away after October in which case the deceaseds legal rep gets at least 6 months after the
deceased deaths in which to file final tax return
 Exceptions to the General Rules :
a) Section 150(1.1): Individual does not have to file a tax return if they
1) Do not have a tax liability OR
2) Have not disposed of capital property;
3) Do not have a positive balance in a Home Buyers Plan or Lifelong Learning Plan
b) Section 150(2): An individual must file a tax return if furnished with a demand to do so by the
Minister (even if the individual fits within the exceptions contained in subsection 150(1.1))
WHY FILE A TAX RETURN IF YOU DO NOT HAVE TO:
 Tax returns only need to be filed if: (1) taxes are owing to the government; (2) disposed of capital
property in Canada; or (3) CRA sends a formal notice for a tax return
 Generally a good idea to file a return because:
a) Can claim certain credits that are not dependant on income (e.g. GST credit)
b) Even if you have a low income but that income is employment/business income will gain the ability
to contribute to an RRSP- can utilize these later to lower tax liability down the road
c) File a return starts the statutory clock ticking for limitation period of when CRA can look back at
your past taxes (3 years income tax and 4 years GST)
PROCESS OF FILING TAXES
TAX RETURN PROCESS: NOTICE OF ASSESSMENT
A. File Tax Return:
 Section 152(1): CRA reviews an individual’s tax return once received and assesses tax payers tax,
interest, penalties, tax refund, lossess etc for the year “with all due dispatch”.
o 3rd parties (employer etc) send tax information to both you and the CRA (e.g T4’s) which are
used to determine if you are filing a compliant return
o This information is communicated to the taxpayer by a Notice of Assessment (section 152(2)).
B. Notice of Assessment (s.152(2))
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 Initial assessment = desk assessment – typically done at CRA offices without any other information
from the taxpayer except a completed return
 Assessment communicated to the taxpayer via the NOA
o If this assessment differs from the return files then you generally will owe the CRA money
o Outstanding balances are subject to interest
o NB: the CRA need not wait for the taxpayers return to issue a NOA (s.152(7)) & it is not bound
by the info contained in the taxpayers return
 CRA can determine your income through a net worth assessment (net worth = assets –
liabilities): often go to financial institutions, LTO to get snapshot of income
 Assessment is considered to be correct unless the taxpayer disproves on a BOP
o Should keep all receipts supporting your return for up to 6 years otherwise cannot
disprove the burden
C. Payment, Objection, Audit
 If taxpayer is satisfied with their assessment they pay the government
 If the NOA differs from your return you can either 1) pay the return OR 2) object
 CRA may choose to audit the taxpayer after the initial NOA has been issued
REASONS FOR REASSESSMENT
1)
2)
3)
4)
5)
Sudden change in behaviour or lifestyle - starts filing w/ little or no income
Not including tax slips
Audits tied to private corps that they own shares in
Certain type of deductions
If audited before – put on watch list
AUDITING A TAXPAYER
 Generally: The CRA derives its authority to audit from s.231.1
o Notice of reassessment: flows from an audit
 In the event of a civil audit for compliance  the taxpayer has a positive duty to assist the CRA in the
audit per s.231.1(1)(d)
 BUT if the CRA is building a case for tax evasion, the duty to assist disappears and Charter
protections kick in
 In Jarvis the SCC stipulated that if an auditor continues under the guise of a civil audit
then that information will be thrown out if they know they will be seeking criminal
charges BUT information obtained during a civil investigation that turned criminal can
still be used so long as no further assistance was sought from the taxpayer once it turned
criminal
 CRA has the power so assume information and make decisions based on those assumptions (no
requirement of hard evidence – taxpayer bears burden of disproving assessment)
 Time Period to Conduct Audit:
1. Three years to conduct an audit on an income tax return from the date of filing initial return
 Additional three years from the date of mailing the initial NOA to audit the client and issue
notice of reassessment per s.152(1)(b)
2. Four years to conduct an audit for GST returns
EXCEPTION: If the CRA suspects a taxpayer has made a mistake attributable to gross negligence OR intentional fraud
then there is NO statute of limitations per Section 152(4)(a)
o The CRA bears the burden of proof of proving fraud (BRD) or negligence (BOP)
OUTCOMES FOLLOWING AN AUDIT
1. Tax is acceptable and the desk assessment stands (no reassessment issued)
2. Re-assessment issued and the taxpayer may either: Pay the taxes OR Challenge the reassessment by filing a
Notice of Objection per Section 165(1))
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NOTICE OF OBJECTION
 No prescribed form, BUT the CRA has created a form T400A
 Generally should sets out the relevant facts and reasons for disputing the NOR
 To have valid reasons must set out the relevant law and the application of the law to
the facts in issue
 Only three possible reasons for objection:
a) The CRA got the law wrong
b) The CRA got the facts wrong
c) The CRA made an error in applying the law to the facts
 Generally: Must file the notice within 90 days from the date the CRA mailed the NOR
 The NOO preserves your appeal rights AND tells the collection branch of the CRA to hold off
 The notice of objection then goes through the Appeals Division of the CRA
ADMINISTRATIVE APPEAL
 The Appeals division of the CRA is separate department from the audit division but still connected to
the CRA
 The appeals officer has had no contact with the auditor
 If the assessment is the result of an audit, the auditors working papers will be included and the
taxpayer is entitled to a copy
 The taxpayer is allowed to submit further evidence with respect to the assessment
 Generally: it is easier to appeal successfully when the appeal is the result of a personality conflict
between the auditor & taxpayer [e.g. taxpayer refused to provide documents] OR is a matter of law (file
a memo, provide facts)
 Benefits: Appeal helps narrow and define the issues in the event of litigation
 Settlement: Officially cannot settle a tax case at the appeals division BUT practically ITA disputes are
usually about the application of facts to the law and thus are amenable to settlement (e.g. client is
claiming a deduction on an expense but cannot remember if it is a business or personal expense)
Three possible outcomes for filing a NOO:
1. Notice of reassessment – which confirms the taxpayers initial return
2. Notice of Confirmation – confirms the auditors reassessment
 If this is the case the taxpayer may file a Notice of Appeal in a timely manner per Section 169(1)
= equivalent of a SOC
 Must file within 90 days of receiving notice of confirmation
INTEREST & DISPUTES
 Interest continues to accrue to unpaid taxes even though you file a NOO (to appeals division) or a Notice
of Appeal (to tax court)
 If You win: then no interest accumulated
 BUT if you lose you must pay the interest from the date that the amount should have been paid (April
30th of the year after the taxation year)
 This rate is adjusted quarterly
 THUS to avoid interest liability commonly advised to pay interest with a letter stating that
payment is solely for the purpose of stopping interest from accruing and not as an admission or
acceptance of liability
o This way, if the taxpayer is successful, she will get the payment back plus interest
(although the interest rate is lower) but if unsuccessful, will not have an increased bill.
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BURDEN OF PROOF IN TAX APPEALS
Section 152(1) & (4): The Minister of National Revenue is entitled to make an assessment pursuant to these
sections
 This assessment/reassessment sets out the taxpayers liability for the year and is based on:
a) Info provided to the taxpayer on his return
b) Info independently gathered by the minister
c) Any assumptions made by the minister
 This assessment is presumed to be correct AND the taxpayer bears the burden of refuting it on a BOP
Three Ways for the Taxpayer to Satisfy Their Legal Burden of Proof to Dispute the Assessment per
Northlands
1) Challenge the Ministers allegation of assumptions from which the assessment was based
 i.e. the assessment was not supported by the assumption - made an assumption but did not use it
calculating the assessment
2) Show that one or more of the assumptions were wrong
 i.e. Minister got the facts wrong (assumed 100K of income, but in fact less as shown by the
taxpayer)
3) Contend that even if the assumptions were justified, they still do not result in the calculation of the
assessment
 i.e. improper application of the law to the facts
NB: If the taxpayer proves one of these the will win appeal UNLESS the Minister shows that the assessment is
otherwise valid (but here the burden would shift to the Minister to prove)
SETTLEMENTS
o Minister cannot enter into settlements (can only apply law to the facts)
o In ordinary civil litigation, parties will typically consider the costs and risks of litigation and may, to
minimize them, decide to settle their case before trial.
o In tax litigation these reasons are not as applicable – tax settlements may encourage people to
be more aggressive and not comply with the income tax act
o Can possibly justify when there is uncertainty in the outcome such that settlement costs may
be less than the trial costs
o It is possible to create a settlement offer position which conforms to this lettered principled
approach – say assume these facts are true and then apply law to the facts to create a judgment –
creative to make look like principled approach
UNIT #5: EMPLOYMENT INCOME
 Taxation of employment income important because (a) generates roughly 2/3rds of all income tax AND
(b) each individual who earns employment income typically has the right to vote
 Four main sections of the ITA that cover income – Section 5-8
SECTION 5: SALARY, WAGES AND OTHER REMUNERATION RECEIVED BY THE TAXPAYER
 Generally per Section 5(1): A taxpayers employment income = salary, wages and other remunerations
including gratuities received by the taxpayer during the year
o “Received by the taxpayer” (recognition event for employment income)= implies that
employment income is included on a cash basis: i.e. when the monies are received as
opposed to when the work was done
 Thus if you receive an advance on cash you must claim it in the year you receive it
not the year the work was done for it
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 Attempts at delaying income: When the taxpayer and employer attempt to artificially change the date
of receipt, courts will deem you to have received the payment when you were supposed to receive it
 Section 248(7): Almost anything sent by first class mail is deemed to be received by
the person on the date it was mailed
 NOTE: When you have an individual is both a employee and lender/shareholder of the corporation it is
important to consider whether the earned the monies in the course of employment or in another capacity
because there are different recognition events
 For example: The recognition event for business income is based upon principals of accrual
accounting
 Report the income once you have done everything to become entitled to payment of
the income (even if you will receive the cash later) [i.e. satisfied all the terms of the
contract]
 To recognize and conduct expenses for a business must satisfy two requirements:
i. Taxpayer must be legally liable for the amount of the expense
ii. The expense can be estimated with reasonable accuracy
***The ability to deduct expenses calculating business income and the requirement to recognize employment
income when received creates a tax planning opportunity for owner-managed businesses (see Cliffe ):
 If a company pays a “salary” to the sole shareholder of a owner managed than the company is not taxed
but the individual is (higher tax liability). BUT if instead the company pays dividends to the shareholder
then the company is taxed but not the shareholder [lower tax liability because taxed at corporate tax rate]
Cliffe v MNR
Facts: The P & M owned almost all of the shares of their company. The Company’s fiscal year was August 1 to
July 31. Decided that the P should receive $7,500 in remuneration in respect of the companies 1953-54 fiscal
year. BUT because this remuneration would limit cash flow decided to take out only what they would need to
sustain themselves and their family. For P this was only 4000. The difference between of 2500 was recorded in
the company’s books. In calculating the business income for tax purposes the company deducted the full
amount of the P’s salary. BUT the P only reported the amount he had received.
Issue: Was the P required to claim the full amount of employment income including amounts he had not yet
received?
Held: Filing position of P and company were correct
Reasons:
 Section 18(1)(a): Provision for deducting business expenses: If the expense incurred for generating
business income then deduct the expense for purpose of net income. In the case of employment expenses
are allowed to deduct these when the business is legally liable fo the expense AND can estimate the
expense with reasonable accuracy.
 Therefore corporation allowed to deduct the full 7500
 NB: this was changed by the introduction of s.78(4)
EXCEPTION: Section 78(4): If the corporation has not paid out the entire salary that it has dedicated for tax
purposes for calculating business income within 179 days of its year end the corporation has to amend it tax
return and does not get a deduction for the amount that is unpaid
SECTION 6: WHAT IS CHARACTERIZED AS EMPLOYMENT INCOME
 Section 6 expands what is taxable under s.5 by refining what is considered to be employment income
 Generally: The value of board, lodging and other benefits of the kind received or enjoyed by a taxpayer
in respect of an office or employment shall be included in the taxpayers employment income
22


This has been given a BROAD interpretation to mean that if an employee or anyone related to an
employee receives or enjoys a benefit that is connected to the employment relationship that it is
taxable (Savage) UNLESS you can find an exception
Benefit need not flow from the employer to the employee (s.6(1)(a))  e.g. if client gives you a
trip this is a benefit because flowed from employment
SECTION 7: TAXATION OF EMPLOYEE STOCK OPTIONS
 Stock options is a good way to retain and remunerate employees without the employer having to pay out
cash
 Can be some tax benefits for this form of remuneration (delay or recognition event/change in
characterization of the benefit – business or employment relationship)
 BUT do to changes in securities legislation regarding recognition and reporting of stock options this has
lost popularity
SECTION 8: EMPLOYMENT DEDUCTIONS
 General Rule: Section 8(2): An employee cannot deduct anything against employment income for tax
purposes UNLESS it is specifically provided for in s.8
 Allowable expenses will be deductible in the year they are paid as opposed to the years to which they
pertain [follows cash basis approach]
CHARACTERIZATION OF EMPLOYMENT VS. BUSINESS RELATIONSHIP
 Important to determine in what capacity a person is providing services for another person (i.e. business
or employment relationship)
TWO POSSIBLE CHARACTERIZATIONS:
1)
2)
3)
4)
5)
1. Employment (i.e. service provider = employee)
2. Business Relationship (i.e. service provider = independent contractor)
 This characterization determines how a person will be taxed under the ITA and have non-tax
implications
Tax implications:
 By virtue of s.8 an employee is very limited in the kinds of deductions they may claim
 BUT if running a business they broad spectrum of deductions possible: Section 18(1)(a) – if the
expense was incurred for the purpose of earning business income (But For Test) then it will be
deductible for tax purposes
Employment insurance:
o If employment relationship then both employer and employee are subject to the EI premiums
o BUT if independent contractor then service recipient will not have to pay EI premiums
Vicarious Liability:
o Employer VL for acts of employee
Payment and withholding of tax:
o Section 153(1)(a): Employer has responsibility of calculating, withholding and remitting source
deductions for employment income
o Generally no withholding requirements for business income
Basic of Measurement:
o Employment income calculated on a cash basis
o Business income calculated on accrual basis
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DETERMINING CHARACTERIZATION
 ITA has unhelpful definitions (overly broad)
o Example: Section 248(1): Employment is defined as “ the position of an individual in the
service of some other person… and “servant” and “employee” mean a person holding such
position”
(1)
Definition of a business is a bit more helpful: Business is defined as “includ[ing] a profession,
calling, trade, manufacture or undertaking of any kind whatever and… an adventure in the nature
of trade, but does not include an office or employment”
**NB: if determined to be an employee continue within this unit to determine income. If determine to be IC
then go to unit 6 for calculating business income
Common Law Determination For Status of A Service Provider: Wiebe Door Services v Minister of
National Revenue
(1) Generally: The determination is a question of fact. Must look at the entire relationship and all of the facts
surrounding it to determine if the SP is in business of himself or in a master-servant relationship
o ASK: Is there a contract of service (employment) or a contract FOR services (IC)
o Utilize comprehensive factual analysis (see steps 1-6)
(2) Control Test:
o Most important test
o If the control is less extensive (service recipient is only controlling what is done rather then what AND
how things should be done) then likely an IC
o If controlling what and how things should be done then more likely employee
 Issue with test: breaks down when the service provider has a high level of expertise
o Other Indica of control:
a) Subcontracting
 Where the SP that initially contracts must perform those services this is more likely
employment
 Where the employee does not have to do work themselves this is more likely business
relationship
b) Mode and Time of Payment
 Regular payment = more likely employment
 Payment upon completion = business
c) Evaluation of work
 Does the SR get to evaluate the work being performed – if yes more likely employment
 In a business relationship there is generally no provison for evaluating work other than at
the end of the contract
d) Suspending and terminating relationship
 If the SR can terminate the relationship at any point without notice severance or cause,
more likely IC
(3) Ownership of Tools Test
o Least important
o Generally you hire a business person to do work for you, the business person will have their own
tools to provide that service to you
o If the SR is providing the tools then more likely employment
o Problem with test: expensive or specialized equipment involved then the SR may possess it and the
SP is just providing their skills
(4) Chance of Profit/Risk of Loss
o Second most important test
24
o ASK: does the SP have the ability to profit or potentially sustain a loss in providing services? If YES
then likely an IC
o If remuneration is NOT tied to performance then likely employee
o Certainty/guarantee in the short term? Likely employee
(5) Integration Test
o Test MUST be applied from the SERVICE PROVIDERS perspective (person doing the work)
o ASKS: how important is the service recipient to the service providers business?
o If they are crucial then more likely employment (e.g. SP only has one client)
o If less important more indicative of IC (e.g. if the SP has a lot of clients)
o Problem: it is possible for the SP to have only one client and still be in a business relationship
NB: Potential sixth criteria (not discussed in Wiebe): What are the parties objective intentions as manifested by
their actions with respect to the relationship? What did the parties intend when they were structuring their
relationship (principals of contract law)
Wiebe Door Services Ltd
Facts: Wiebe was in the business of installing and repairing doors in Calgary. WDS had contracts with a
number of door installers and repairers, each of whom had the understanding that they would be running their
own business with all of its implications (i.e. no unemployment insurance, responsible for WCB premiums,
taxes, etc.)
Issue: were these door installers and repair persons employees or independent contractors for tax purposes?
Analysis: Look at the whole relationship of the parties to determine if the service provider is in business for
himself/herself or a servant of the service recipient
 -is there a contract of service (i.e. an employment relationship) or a contract for services (i.e. a business
relationship)?
 Comprehensive factual analysis – see test
HOW CAN AN EMPLOYER CREATE A BUSINESS RELATIONSHIP RATHER THAN AN EMPLOYMENT RELATIONSHIP
(1) Use a Written Contract at the beginning of the relationship
o Using the words “business relationship” is not indicative BUT can signal intentions of parties
o When it is close this statement can break a tie
o Add a clause about sick days, no medical insurance, no pension plan etc
(2) Advise The Service Provider to Incorporate
o Simply incorporating will not in of itself automatically create a business relationship
o The legislation stipulates that when you have a corporation providing services to a 3rd party you
ignore the corporation and ask what the relationship is between the SP and recipient?
 If the answer is an employment relationship then this is a personal service business and the
corporation will be ineligible for tax breaks found in s.18(1)(p) and restricted to deducting only
employee expenses
(3) Go Through Wiebe Test and Think of if the CRA would lean toward a business relationship
o Have service providers give estimates to the service recipient before doing the work and have recipient
approve work
o Set as few rules as how work is done within parameters of business needs and commercial realities
o To extent possible require them to provide their own tools
o If the service provier is going to use their equipment – have a separate agreement for that
o To extent possible do not want to preclude service provider from going out and getting other clients
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INCORPORATED EMPLOYEES
 Can you change an employee’s characterization by having the service provider incorporate a company
who will then contract and provide services to a service recipient?
o Short Answer: NO – legislation depletes the benefits if found to be a personal service business
(see below)
o But what are the benefits of not found to be this?
RELATIVE TAX BENEFITS
1) Service provider will likely be able to deduct more expenses incurred in providing services under the
rules in s.18(1)9a) and s.20 in calculating business income (rather than the restricted deductions in s.8)
2) The SP and SR may be able to avoid paying EI premiums
o S.5(2)(b) of the employment insurance act: employment is not insurable if the person earning it
owns more then 40% of the voting shares of the corporation
o Section 5(2)(i) employment is not insurable if the employee and the employer do not deal with each
other at arm’s length (which is virtually always the case in this situation)
3) Setting up a corporation may open up possibilities to split income (typically) with other family
members.
 Generally the ITA does take into account an individuals relationship status for tax purposes
THUS incentive to move income from the higher tax payer to the lower tax payer
 If have a corporation can set up other family members to be employees of the corporation (BUT
must legitimately provide a service and be legitimately compensated for the work they do) thus
reducing your remuneration
 ALSO if have a corporation you can have your family members own shares and pay out
dividends to them which allows income splitting and thus tax savings.
4) Using a corporation may create a “tax deferral” and hence the availability of more pre-tax
income/wealth for other (income earning) purposes during the deferral period
 Example: Service provider has net income of 600K BUT they are willing to live off 100K of pretax income. The remainder the SP wants to invest. Personal tax rate = 40%, Corporate tax rate –
15%/ If the SP earns the income personally (does not incorporate), then total after tax income =
360,000. With 60K to live on and 300K to invest.
o BUT if SP incorporated: Taxed at 40% on 100K, but only 15% on the remaining 500K.
Then have 60K of personal income and 425K of investment. Extra 125K to invest in
bonds = tax deferral strategy (where postpone the payment of the tax)



A Canadian-controlled private corporation (defined in s.125(7)) earns active business income (defined
in s.125(7)) is eligible for a small business deduction where the first 500K will be subject to a combine
federal and AB corporate tax rate of 14%
o NB: This low corporate rate is primarily due to the small business deduction set out in
Section 125 which is generally applicable only in respect of first 500K of active business
income earned by a Canadian controlled private corporation
In contrast, if an individual earns $500,000 of business income, then subject to our progressive rate regime
for individuals, roughly $380,000 ($500,000-120,000) of that business income will be subject to personal
tax at a combined federal and Alberta personal tax rate of 39%
Caution: this savings is somewhat deceiving! Generally, it is a temporary as opposed to absolute
savings (which is why it is referred to as a “tax deferral”)!
PERSONAL SERVICE BUSINESS
 To combat inappropriate tax planning (SP incorporating), in 1981, the federal government created the
definition of a “personal service business” in subsection 125(7)
26

= A service business carried on by a corp where, the individual who provides the services on the
corps behalf or anyone related the individual is a specified shareholder (person who owns not
less than 10% of issued shares) would reasonably considered an employee of the service
recipient but for the existence of the corporation UNLESS the corporation employs in its
business throughout the year more than 5 fulltime employees
 Under this section if a corporation is found to be carrying on a personal services business then two
consequences flow from that result:
1) Personal service income earned by MyCorp is not eligible for the low corp tax rate
o Personal service business income will be taxed at full corporate rates which are much closer
to personal income tax rates and then MyCorp dividends being paid out to employees will
also be taxed making taxes actually higher
2) S. 18(1)(p) is engaged and states that if the corp is earning personal service business income the corp
is extremely limited in the expenses it can deduct in the business income
RESULT: Back to Wiebe Door to determine if personal service business or active business
Dynamic Industries v Canada
Facts: D provides steel worker services in AB and BC. Shares owned by husband and wife. Both are also employees. SR is SILL who
has no written K’s w/ dynamic. Fees based on hourly rate of husband’s time. Living out allowance provided to dynamic. Any
problems w/ dynamics work, dynamic had to rectify the problem and not paid anything during that time. Overhead costs (building,
wife’s time) not compensated by SILL. Husband had no fixed hours. SIL didn’t pay Dynamic until SILL got paid. If SILL not paid
then Dynamic not paid. CRA says personal services business and so high taxes.
Issue: Is Dynamic carrying on a “personal services business” or an “active business”?
Analysis: Wiebe Door Test
 Ownership of Tools: Looks like employment b/c husband provided w/ office, admin, facilities, technology and maintenance
 Entrepreneurial Test: Dynamic paid based on husbands hours so looked more like employment relationship
o Risk/Profit: Courts focus on risk way more than profit
 Paid by hour so could be employment but risk b/c if SILL didn’t get paid than Dynamic not paid 
typically non-payment is a business risk rather than an employment risk
 No compensation for fixing problems so business relationship
 Husband had to bid on projects and no compensation for his bids so business relationship
 Irregular payments points to business relationship
 Integration Test: Dynamic was doing service for other clients and SILL looked less integral to Dynamic so more like a business
relationship
 Control Test (most important): Husband worked when he wanted and how much he wanted and had lots of discretion so more like
a business relationship
Held: Business relationship
TAXATION OF EMPLOYMENT BENEFITS – S.6(1)(A) – INCLUDE IN EMPLOYMENT INCOME VALUE OF BENEFITS
o Employment Benefit = an economic advantage or material acquisition, measurable in monetary terms,
that one confers on an employee in his capacity as an employee
o General RULE per s.6(1)(a): When an employee receives a benefit in the course of, in respect of , or
by virtue of, an office or employment, the benefits will be taxes.
 Presumption that all benefits are taxable unless you can show otherwise.
o Section 6(1)(b) also provides that as a general rule “allowances” provided by an employer to an
employee will be taxable as employment income
 Allowance (as defined in case law) = a financial amount given for a specific purpose for which
the employee does not have to account back to his employer (e.g. gym membership allowance)
 EXCEPTION: Mileage per Regulation 7306: an employer can pay the employee a tax-free
mileage allowance in respect of the employees use of their personal vehicle for employment
purposes at a rate of 0.54 cents for the 1st 5000km and 0.48 cents for each additional kilometer.
 NB: does not include travel to and from work
 Three potential results for allowances:
27

a) Not taxable by virtue of an exception under s.6(1)(b)
b) Allowance taxable but employee able to claim an associated employment
expense per s.8 which reduces net tax effect of unused amount
c) Allowance fully taxable with no opportunity to claim an associated
expense
Alternative Approach to giving allowances: Employer reimburses an employee for work related expenses
incurred by the employee on the employers behalf
 Here there is no increase in net worth thus not taxable and the employer can deduct the expense
using more generous deductions for calculating business income
 Reimbursement policy only works in respect of true expenses (e.g. cannot reimburse for a yoga
class)
THREE PRIMARY RULES FOR DEDUCTING EMPLOYMENT EXPENSES IN CALCULATING BUSINESS INCOME:
1. Section 18(1)(a): If an expense is incurred for the purpose of earning business (or property) income,
then generally deductible unless there is another provision which limits this rule
2. Section 18(1)(h): Personal and living expenses are generally not deductible for tax purposes
3. Section 67: Only the “reasonable” amount of an expense will be deductible for tax purposes
 Reasonableness is assessed in the circumstances (contextual test – what is reasonable will be
broader for a large corp rather then a small corp)
TAXABLE BENEFITS
Recall: If a taxpayer can deduct an expense, this means that the expense is essentially paid out of pre-tax
income (cheaper to the taxpayer)
o Example: If have a tax rate of 40%, $1000 of after-tax income is equal to 1666.67 of pre-tax income.
Thus, if you have a $1000 expense that you get to deduct from pre-tax income, it would have cost you
$600.00 of your after tax income
Taxable Benefits: Are included in the taxpayers income, while non-taxable benefits are excluded and thus
reduce the overall tax burden
 Benefit is deductible to employer (as business expense) and taxable to the employee (as employment
income)
 Better situation: Benefit is deductible by employer BUT does not have to be reported by employee
Three Situations where a benefit is non-taxable:
1. Statutory Exception - The Act specifically excludes the amount from the employees income
 Example benefits derived from contributions from employer to a registered pension plan,
insurance plan etc.  Here there is no immediate taxable amount
o NB: Pension plans are taxable when they become due
 Certain scholarship programs are also not taxable  if the scholarship is from K-12 it will be
taxable because the parent has an obligation to provide for their minor child
 Section 6(1)(a)(i) - employer payments to certain types of plans excluded
 Section 6(1)(a)(iii) automobile benefits  benefit will not be taxable where an employer
provides a company vehicle that will be exclusively used for work
 Section 6(1)(a)(iv) - counselling services in respect of: (a) mental/physical health of the taxpayer
or someone related to the taxpayer, and (b) the re-employment or retirement of the taxpayer 
non taxable benefit to the employee
 Section 6(1)(a)(vi) – certain scholarship programs provided by the employer to the employee’s
children – if are a current or retired worker of an organization and have children attending postsecondary those children would be eligible for a scholarship program
28
2. The courts have judicially interpreted the Act to exclude or not apply the amount from the
employees income
 Here there are two main exceptions:
A) Principal exception: If the expenditure is primarily for the employers benefit, then it
will be non-taxable to the employee (read into s.6(1)(a))
 E.g. Continuing education is a benefit to employer
 A gym membership is only beneficial to the employee UNLESS there is a
physical component to the job
B) Factual Exception: Even in cases where the employee is primary beneficiary, the
benefit will be Taxable ONLY if the employee actually (subjectively) benefit from
the expenditure
 Example: Parking spot that employee does not use
 Generally: Expenses in the form of yachts, camps, lodges, golf courses, dining memberships
provide no deduction to employer (s.18(1)(i))
o May result in double tax: E.g. employer incurring golf fees and no deduction provided
(thus paying tax on this), and if employee has to include this as a taxable benefit then
double taxation
3. Administrative Exceptions: Interpretations of the ITA such that amount is not to be included
 CRA has taken position that certain expenses received by an employee shall not be taxable”
a) Where it is unclear where there has been a benefit to the employee
b) Where it is unclear who the primary beneficiary is
c) Where it is very difficult to quantify the benefit (e.g. frequent flyer points from work related
trips)
TAXATION OF EMPLOYMENT BENEFITS TEST
o If the benefit does NOT fall within one of the statutory or administrative exceptions then the application
of s.6(1)(a) involves the following three steps:
a) Characterization of the benefit
b) Determination of the relationship between the benefit and the taxpayers employment
c) Valuation of the benefit in determining the proper tax treatment to the employee
CHARACTERIZATION AS AN EMPLOYMENT BENEFIT
o In Lowe v Canada the courts utilized the primary beneficiary test to determine if the benefit was
taxable:
1) Did the item under review provide the employee with an economic advantage that is measureable in
monetary terms? If YES then
2) Was the primary beneficiary the employer of the employee?
 All or nothing rule: if the employee is the primary beneficiary then they have to pay full tax OR f
the employer is the primary beneficiary than non-taxable employee benefit
NB: The primary beneficiary test can produce different outcomes depending on the ocurt
o Gym memberships usually seen as a primary benefit to the employee
o
o
o
Employer is usually seen as the primary beneficiary for continuing education for an employee
Court utilize a subjective application – did it actually benefit the employee rather than could it benefit the
employee
Judges often get creative in applying the all or nothing rule to achieve a desirable outcome – e.g. first half of trip
is business whereas the latter half is all personal (win- win situation)
29
Lowe v Canada
Facts: Lowe was an account executive for the insurance company whose job included maintain and devoting relationships with independent
insurance brokers and encouraging them to sell employers insurance. Brokers who sold enough policies got a trip for two and Lowe and his wife also
allowed to go to promote sales and build relationships. There were some business meeting during the all expense paid trip, but recreational activities
were scheduled. CRA took position that Lowe enjoyed a taxable employment benefit in respect of personal time on trip. Attributed greater proportion
to wife who likely did less business activities
Issue: Did Lowe and his wife achieve a taxable employment benefit from the trip?
Analysis: Used the Primary Beneficiary test
Held: The primary purpose of the trip was business related so the entire trip was non-taxable to Lowe
RELATIONSHIP TO AN OFFICE OR EMPLOYMENT
o Section 6(1)(a): A benefit must be in respect of, in the course of, or by virtue of an office or
employment
o R v Savage: “in respect of” are to be given the widest possible scope  as a result of this interpretation
courts do not have difficulty in finding the necessary relationship between the benefit and employment
relationship
VALUATION
o Once you have determined that an employee has received or enjoyed a taxable benefit the next step is to
value that benefit to determine the income inclusion  there is no bright line test for this
o Many different methods to calculate as set out in Detchon
Detchon v Canada
Facts: Appellants taught at private school (BCS). BCS has 1 tuition for boarding students and another for day students.
No written K but teachers were expected to live on campus, be available for school business 24/7, send their school-aged
children the BCS, eat in cafeteria. Teachers children did not have to pay tuition and the teachers did not report the free
education as a taxable benefit.
Issue: Is the free education to the teacher’s children a taxable benefit?
Analysis: Court said unsure if “value” in s.6(1)(a) refers to “fair market value”, “cost” or something else. Court said that
the appropriate value of the benefit was the “average cost per student to BCS”.
o NOTE: in Spence v Canada (2011) FCA the FCA took a different approach than the TCC and found that the
“value” of the taxable employment benefit was the full tuition price rather than the school’s average perstudent-cost
EMPLOYMENT DEDUCTIONS
o Generally, two types of deductions that employees are entitled to:
(a) Deductions from employment income (as set out in s.8) = source specific deductions
 Deductions claimed when calculating income from a particular source
(b) Other Deductions: RRSP, alimony = non-source specific deductions
 Can be claimed against multiple or any source of income
o Starting Point (Section 8(2)): Unless the deduction is specifically provided for in s.8, an employee
cannot claim the deduction in calculating employment income
 Complete opposite to business expenses set ut in s.18(1)9a)
 To reduce discrepancy Parliament has enacted a non-refundable Canadian
employment tax credit per s.118(1):
o Purpose of the credit is to acknowledge certain expenses that Canadian
employees incur in the course of providing their employment services
without requiring them to itemize or provide supporting documentation
o Credit is based on the lesser of the employees income for the year and a
base amount and is multiples by the lowest federal marginal rate (15%)
30
Assuming that an employee has at least $1,117 of employment income for the 2013 taxation year, then he/she will receive
a tax reduction of $168 (which is typically much less than the tax benefits if the service provider can calculate his/her
income using the business income rules)
Alberta has a refundable family employment credit for Alberta residents with children under the age of 18 who meet the
income eligibility criteria (A family net income of less than $53,725 for families with one child, $70,275 for families with
two children, $80,200 for families with three children, and $83,500 for families with four or more children
UNIT 6: BUSINESS & PROPERTY INCOME
WHAT IS A BUSINESS:
Section 248(1): Business includes a profession, calling, trade, manufacture or undertaking of any kind whatever
and adventure in the nature of trade BUT does not include an office or employment
o As there are only 5 classes of income under the ITA, business income has been given a broad definition
(“catch-all category”)
o Hallmarks:
(1) The sale of goods or the provision of services (as opposed to passive ownership of property and
economic rent therefrom)
(2) The intention to make a profit from a person’s activities (as opposed to doing an activity for
personal reasons); and
(3) Active ownership as opposed to passive ownership of property
(4) An element of risk (but also system to minimize or manage such risk).
 NB: courts reluctant to find that gambling is a business
o Adventure in the nature of trade
o An isolated transaction (which lacks the frequency of a trade) in which the taxpayer
buys property with the intention of selling it at a profit and then sells it (normally at a
profit but sometimes a loss)
o Example: if decide to flip a house, not in the business of doing this, but would still
constitute an adventure in the nature of trade
o Requires a scheme for profit making (generally if successful, it will not take much for
the court to find this scheme)
Why characterize something as business activity?
o If the taxpayer loses a significant amount of money from an activity – having that activity be classified
as a business allows for the taxpayer to deduct those losses from other sources of income
BUSINESS INCOME VS. PROPERTY INCOME
o Property Income: Income arising from the mere ownership of the asset
 Four main categories of property: 1) interest; 2) dividends; 3) rents; 4) royalties
o Business Income: Where operating a business or selling goods (or combo), something more then just
mere ownership must be generating the income
 Example: owning an apartment, renting it out, cleaning it, providing food (likely
business) as opposed to just renting it out
o RULE: Where the activity of the owner is very low than generally the income from dividends, rents,
royalties, interest will be characterized as property BUT if the level of activity is high then courts have
said this is more like a business
o Generally: Rules for calculating business income and property income are the same
31

o
(1)
(2)
(3)
Section 9: Taxpayers income for a taxation year from a business or property is the
taxpayers profit from that business or property
 Therefore in most cases do not need to distinguish between the two types
BUT Exceptions where distinction is important
Common EXCEPTIONS:
Access to Small Business Deduction
 Only available to the corporation – individuals cannot claim
 Canadian Controlled Private Corporations (CCPC) which is earning Active Business
Income – the first 500K if active business income is eligible for small business
deductions (brings tax rate down to 14% from 30%)
 BUT if the CCPC is earning specified investment business income (from property) no
deduction
Income Splitting and Attribution Rules
 Married couples are separate and distinct persons for the purpose of the ITA
 ITA contains attribution rules which prevent one spouse from shifting their income to their
spouse etc
 These rules primarily apply to investment income – business income is NOT subject to these
rules
Registered Retirement Savings Plans:
 In order to be able to contribute to an RRSP you have to earn the eligibility by earning certain
types of income in prior years
 Employment and business income will earn you eligibility BUT property income will not
EXCEPT where the property income is rent from real property or royalties from an invention
you created
BUSINESS INCOME VS. CAPITAL GAINS



Generally: More beneficial to earn business income than employment income or property income BUT
It is More beneficial to generate capital gains then business income due to a 50% inclusion rate for capital
gains
o Means only 50% of capital gains are required to be included in an individuals tax return, the other 50% is
tax free
o In contrast, if you realize the gain from the disposition of property and it is characterized as a business
gain, 100% of that must be realized on the taxpayers return
BUT while the characterization favour capital gains in the event of a gain IF there is actually a loss it is better to
be characterized as business income
If You Profited From the Sale of An Asset


Business Gain: 100% of the gain goes toward income (
pay full tax)
Capital Gain: 50% of the gain is included in income
(reduces tax bill by half)
If you Lost on the Sale of an Asset


Business Loss: 100% of that loss can be used to offset
ANY source of income
o Generally utilize loss to offset gains from the
year the loss occurred BUT can apply the
losses to three years prior or carry forward 20
years if you are an individual
Capital Loss: 50% of the loss is calculated into your
income and can only be used to offset against positive
taxable capital gains
o If there are no capital gains to offset those
losses, you can carry losses back three years
or forward indefinitely (until dead)
THUS taxpayers much rather it be a business loss, because can be offset against any source of income and
100% deductible
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CHARACTERIZATION OF BUSINESS GAIN OR LOSS – TEST
 There is a difference between the income earned while holding an asset and the income earned upon
disposition of an asset
1) Disposition (sale) of an Asset (Business Gain or Capital Gain)
o Use Primary and secondary Intention test
o If determined to be a capital asset this DOES NOT mean that the rental
income from the property will be taxed as a capital gain
2) Income Generated by the Asset
o Business income/investment (property) income


Business Asset = an asset the taxpayer acquires with the intention of selling for a profit
o E.g. inventory – staples purchases printers to sell
Capital Asset = an asset that is purchased not with the intention of selling it for a profit but for using
that asset to generate income
o E.g: printers purchased by staples are used to print documents for paying
customers
RULE: An asset can be a capital or business asset – the characterization depends on the taxpayers intention at
the time of acquisition of the asset
TEST
 Test is applied at the time of acquisition of the Asset NOT the time of sale of asset
 Characterization is based on the objective intention of the taxpayer at the time of acquisition of the asset
1) Primary Intention Test: At the time of the acquisition of the asset was the taxpayers intention to:
a) Sell the asset?
 If YES then is a business gain/loss and when dispose of gain/loss any subsequent gain/loss on the
sale will be business income
b) Make use of the asset for either a) income earning or personal purposes?
 If YES then appears to be a capital asset BUT move to secondary intention test
2) Secondary Intention Test
 Did the taxpayer have a secondary intention to sell the asset for a profit if the primary intention
was frustrated and the secondary intention to sell was a motivating factor at time of acquisition?
 Therefore need both A) Secondary intention to sell and B) Was a motivating factor at time of
acquisition
o Example: buying something to use it but know that you can flip is quickly
to make a profit
o If YES then characterized as a business asset and will be a business gain or loss.
o If NO then is a capital asset
NB: a mere intention to sell the asset for a profit if the initial intention does not work out is merely a prudent
investment decision and does not imply a secondary intention to engage in business or an adventure in the
nature of trade
 BUT there is a difference between a taxpayer who responds to a changing investment climate and a taxpayer who
actively contemplates the potential of profit on resale at the time of the investment. Where the potential of profit from
a quick sale is a motivating consideration, it suggests a secondary intention to engage in an adventure in the nature of
trade (and hence business income treatment)
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3) To determine if taxpayer’s primary or secondary intentions courts will look at taxpayers Actions AND
Conduct for example”
(a) Number of Similar Transactions:
o The more a person does this type of activity the more likely they are a business person
and not an investor
o Increased transactions = more likely business income
o BUT Caution because “adventure in the nature of trade” only requires one transaction
and still constitutes business activity
(b) Nature of Asset:
o Where the property being disposed of is shares in a corporation the courts will
presumptively (rebuttable) that the shares were acquired for the purpose of earning
income (dividends) and thus are a capital asset
 Exception: If the person is a broker then the presumption is that the acquisition is
a business asset
o Raw land (undeveloped) is presumed to be a business asset (presumption that intend to
flip land for profit)
(c) Return on Investment:
o Ask: How could a reasonable person have expected to make money through the
acquisition and ownership of the property?
 If answer is only through resale of property then likely on account of business
(“trading assets”)
 BUT if assets have the potential to generate income (even if remote) then) it will
treated as a capital asset (e.g shares that have little expectation of dividend
return)
o Example: If buy raw land and try to dress it up as a parking lot the Court will still infer a
business asset because the only reasonable way to make money off it is to sell it because
putting in a seizable investment just to get a small revenue (return low compared to
investment)
(d) How does this Transaction Relate to the Taxpayer’s Business?
o A taxpayer’s profits from transactions that are closely related to his other ordinary
business activities are usually characterized as business income.
o Strong presumption that if transaction is connected in any way with taxpayers usual
business it is intrinsically part of business
(e) Degree of Organization:
o Basically how professional the taxpayer was in the activity – if they acted as a business
person then more likely a business asset
o Where a taxpayer deals with property in much the same way as a dealer would with
similar property, then any resulting profit is likely to be characterized as business income.
(f) Length of Ownership:
o For some assets, the longer the asset is held, the more likely that a Court (and CRA) will
consider the gain to be on account of capital.
 Shorter hold = business (more likely to sell for profit)
 Longer hold = capital
o Not as strong of an indicia as the others
o NB: not just duration of ownership but what you did with the asset in that period
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INCOME FROM (CAPITAL/BUSINESS) ASSETS
 Must ask 2 questions to get full income tax picture:
(1) What type of asset does the taxpayer own
 This question determines how to characterize the gain or loss on disposition
(2) What type of income is generating while owner (if any)
 Determine how to report the income generated by the asset while owned
Example: Purchase a condo.
 If purchased to sell for a profit, then when the condo is sold, the gain will a 100% includable business
gain
 BUT if purchased with no secondary intention to flip, then when condo is sold: the gain will be a 50%
capital gain
 If condo rented during period of ownership then rental income is either:
a) Property - low level activity
b) Business income – high level activity
THUS even though by virtue of the primary and secondary intention tests, an asset may be properly
characterized as a capital asset, such a capital asset may generate business or property income while it is owned
and being used.
THE ELECTION FOR CAPITAL GAINS TREATMENT
 To relieve uncertainty with respect of purchase and sale of Canadian securities, it is possible for an
individual or a corporation who is not a stock broker or day trader to make a onetime lifetime election to
deem all of the acquisitions of Canadian securities to be on account of capital per Section 39(4)
o Once you make that election – from that year for the rest of your life, all of your purchases
and sales of Canadian securities will be capital transactions, capital gain or loss treatment.
o T123 election form must be filed.
o Cannot go back on this. Once you make the election that precludes you in the future from
being able to take the position that a stock you used for business you can you that loss as
against other sources of income.
o Many taxpayers will wait until have a really big gain to elect to give notice.
UNIT 7: CAPITAL GAINS & LOSSES




History: Capital gains/losses are only subject to tax if they occurred after January 1, 1972
o Before this time they were exempt as sources of income (thus excluded from the tax base)
Recognition Event: Disposition of the asset
Inclusion Rate: Capital gains are taxed at the same marginal rate (if an individual) as other sources of
income BUT only has a 50% inclusion rate = only 50% of capital gains are taxable as capital gains
o THUS some people factor this into the marginal rates and say that at the highest tax bracket,
capital gains are taxed at 19.5% (i.e. 39% x 50%)
Formula for Calculating Capital Gains: (s.40):
Capital Gain = Proceeds on the disposition of property – Adjusted Cost Base (ACB) – Selling Expenses
 If negative number then = capital loss (ACB and selling expenses exceed proceeds on disposition)
 if positive = capital gain (proceeds of disposition exceed ABC and selling expenses)
Allowable Capital Loss/ Net Capital Loss (Taxable Capital Gain) = Capital Gain x 50% (inclusion rate)
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CALCULATING CAPITAL GAIN/LOSS
 In order to calculate a capital gain or loss by the above formula four main questions must be answered:
(1) What constitutes a disposition (and when does a disposition occur) for tax purposes?
(2) What are the proceeds of disposition (and how are they calculated)?
(3) What is the adjusted cost base (ACB) (and how is it calculated)?
(4) What is included in the associated selling expenses of a disposition?
DISPOSITIONS
 Dispositions are the recognition event for capital gains/losses
 Section 248(1)(a): Defines disposition as “any transaction or event entitling a taxpayer to proceeds of
disposition of the property”
 The most common form of disposition = Voluntary sale of property for valuable consideration
 BUT: Dispositions do not have to be voluntary/for consideration they can also be:
a) involuntary (e.g. expropriation/theft)AND
b) For no consideration (e.g. gift)
o Example: Gifts
 Often no consideration given in the disposition of a gift
 Section 69(1)(b) deems the taxpayer to have received the fair market value (FMV) of
the gift as proceeds of disposition


There are also deemed dispositions under the ITA which deem property to be disposed of even if there is
no actual change in legal title
 When a person dies, for income tax purposes, immediately prior to death the taxpayer is deemed to
have disposed of all capital property despite there being no change in legal title
 If have capital property which using for personal use (e.g. residential home) and then convert it into
income earning property (rent out house), then despite their being no legal change in title, there is
deemed to a disposition and reacquisition of property
 Prior to the acquisition of Canadian residency or severing Canadian residency there is a deemed
disposition of all or a persons capital property
Section 248(1): Non-dispositions:
a) Transfers of property to secure a loan
b) Bailments
c) Leases
d) Granting of an option
e) Licences
o THUS if selling a home which has increased in value (thus triggering tax liability),
can instead put up the increased value as security for a loan – does not trigger
recognition event because no disposition
When has a Disposition Occurred:
 General rule: When the vendor has an absolute but not necessarily immediate right to be paid the sales
proceeds (e.g. all condition precedents have been satisfied even if proceeds are paid in installments)
 No bright line test and can be arbitrary as to when a Court will make a finding of when disposition
occurs
 Other Tests:
1) Where there has been a transfer to another party, the disposition occurs when the attributes of
ownership passes to the recipient (duties, responsibilities and charges of ownership + profits,
benefits and incidents of ownership)
 Some cases legal title has not yet changed but the person is getting all the benefits from it
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2) At the time of transfer contemplated in the contract
3) In the case of a sale of shares of a corporation, the disposition date is not the trade date (i.e. date
sale goes through exchange) it is the settlement date (date seller required to deliver the share
certificates and purchaser required to pay for shares)
 NB: The settlement date can be a few days after the trade date  important because if
selling unsuccessful stocks to offset gains from other stocks at the end of the year be
wary of settlement date so it does not push you into the following year (thus not allowing
you to offset gains)
Proceeds of Disposition:
 Per Section 54: The proceeds of disposition are generally the amount of the sale price of the property
sold (excluding GST) for an arm length sale (not colluding with purchaser)
o BUT if there is collusion (e.g. buyer and seller are family members which try to
manipulate sale price for one parties benefit), the CRA can re-determine the proceeds
of disposition based on Adjusted Cost Base of the Disposition - see below
 The proceeds of disposition generally include any and all consideration flowing to the former capital
property owner
o THUS both monetary consideration and non-monetary consideration (e.g. tangible
property) will constitute a proceed for the disposition
o Example: Barter transactions (where no cash involved –e.g. goods for goods/service
for goods/service for service) constitute proceeds of disposition
o In these types of transactions the CRA will assign the fair market value for
what you are giving up so you cannot get around tax liability
o Gifts: With gifts, s. 69(1)(b) deems the taxpayer to have received FMV for the
gift as proceeds of disposition.
 Ex. if grandma gives her grandchild the house b/c grandma has to report
the FMV on her tax return so if Grandma doesn’t have the primary
residence tax break can be a big problem.
ADJUSTED COST BASE

Adjusted Cost Base (per Section 54) = Original cost of capital asset (including associated costs [i.e.
legal fees] + costs required to get asset into a usable condition (delivery charges, installation, set up
charges)
o Includes: Improvements made to the capital
 These will be characterized as capital expenditures and added to the ACB of the asset
o Does NOT include: Repairs and maintenance expenses in respect of the capital asset
 Taxpayer can deduct these expenses (as business/property expenses) in the year they are
incurred
NB: this difference in treatment creates an incentive for a taxpayer to try and characterize all expenses incurred
in respect of capital assets as repairs
Test for Determining For Characterizing the Capital Asset Expenditure (Improvement vs Repair):
Central Question: Per Minister of National Revenue v Algoma
o Was the expenditure made with a view to bring into existence an advantage for the enduring benefit
of the taxpayer’s business?
o IF YES, then it is a capital improvement (aka capital expenditure) (and will be added to the
ACB)
o IF NO, then it is a repair and maintenance expense, and there is an immediate deduction in
the year incurred
Additional Factors used in answering central question per Central Amusement:
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1) Is the expenditure annual, recurring, or continuous (something you are doing all the time)?
o The more frequently you conduct the expense the more it looks like repairs (and is deductible)
o If unusual then more likely to be capital expense (improvement)
2) Is the purpose of the outlay to provide a temporary advantage?
o If yes, more likely repair and maintenance
o If provides a more lasting advantage then improvement
3) What is the magnitude of the expense in relation to the value of the asset as a whole?
o If small, likely repairs and maintenance
o If large, likely capital improvement
4) What is the useful life of the expenditure
o Longer, likely it is a capital improvement
 CS: ITA requires the improvement to be made with cash or some equivalent asset
NB: When dealing with assets purchased prior to 1972, it is only the gains/losses of the value of capital property
post 1971 which constitute a source of income under the Act.
 Example: If purchased house in 1930s, on dispositon any increases in value prior to 1972 will not be
taxed BUT the ACB will be taxed after 1972
NB: When dealing with property which is passed down through families (e.g. farms) special rules in the ITA
allow this to occur without cause ACB
NOTE: Generally when a person acquires a capital asset there is no deduction or tax credit, its value is
determine by the adjusted cost base. BUT if the property acquired is depreciable capital property (e.g.
property that deteriorates over time or through its use) you may claim that depreciation as an expense against
the capital property (capital cost allowance)
EXPENSES ON DISPOSITION
Definition: Actual selling costs (realtor fees, mortgage break fee), and those expenses incurred to bring the
property to a saleable condition (ie. fix the deck, paint the house, clean the house) are deducting in calculating
the capital gain/loss
 BUT issue as to exactly what expenses are properly deductible under this category. No bright line test
 Court has generally said that if you incur expenses for the purpose of disposing of the property than you can
deduct those in calculating your capital gains/loses (Avis Immobilien GmbH v Canada)
o Court Distinguished Between:
 Expenses “incurred or made directly for the purposes of making the disposition”
 Which are deductible
 Expenses “which may have merely facilitated the making of the disposition or which were
entered into on the occasion of the disposition”
 Which are NOT deductible
RESERVES

RULE per Section 40(1): Taxpayer is required to calculate their capital gain/loss in the taxation year in
which the taxpayer disposes of capital property and include 50% of it in their tax return
o When the disposition is in the form of a sale for FMV and the taxpayer receives full
consideration in the year of sale it is easy to pay this tax (b/c have cash in hand)
o BUT when the sale price is to be paid over a period of years there is a cash flow problem  will
have to pay taxes on the entire gain without the necessary cash from the sale to do so
o Solution per s.40(1)(a)(iii): Taxapyer can claim a reasonable reserve (usually 5 years) 
defers the recognition event of a portion of the gain to a future year
o To utilize this provision the taxpayer must recognize the greater of
a) 20% of the total gain OR
b) Proportion of the proceeds actually received in the year
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