LAW 407: TaxationConcept of income..........................................................................................................................4

Definition of Income................................................................................................................................4Haig-Simons Definition........................................................................................................................................4Imputed Income:...................................................................................................................................................4

Income from a Source.............................................................................................................................4What is a source?...................................................................................................................................................4Surrogatum Principle:...........................................................................................................................................5No Source:.............................................................................................................................................................5

Income from Office or Employment..............................................................................................6Employee vs Contractor..........................................................................................................................7

Inclusion...................................................................................................................................................7Salary, Wages, and Other Remuneration:.............................................................................................................7Deemed Remuneration: (s 6(3))............................................................................................................................8Benefits Generally:................................................................................................................................................8Specific Benefits:................................................................................................................................................11

Allowance (s 6(1)(b)).....................................................................................................................................11Interest Free Loans (s 6(9), 80.4)...................................................................................................................12Home Purchase or Relocation Loans.............................................................................................................12Forgiveness of Employee Debt (s 6(15), 6(15.1))..........................................................................................12Relocation Assistance (s 6(19)-(23))..............................................................................................................13Employee Stock Options (s 7)........................................................................................................................13

Other Sources of Income:....................................................................................................................................14Scholarship (s 56(1)(n))..................................................................................................................................14Retirement Allowance (s 56(1)(a)(ii))............................................................................................................15Annuity (s 56(1)(d)).......................................................................................................................................16

Allowance Exclusions............................................................................................................................17Travel Allowance: (s 6(1)(b)(vii)).......................................................................................................................17Motor Vehicle Allowance: (s 6(1)(b)(vii.1)).......................................................................................................17Special Work Site Allowance: (s 6(6))...............................................................................................................17

Deductions..............................................................................................................................................18Legal Expenses: (s 8(1)(b)).................................................................................................................................18Sales Expenses: (s 8(1)(f))..................................................................................................................................18Travel Expenses: (s 8(1)(h))................................................................................................................................19Motor Vehicle Expense: (s 8(1)(h.1)).................................................................................................................19Meals: (s 8(4)).....................................................................................................................................................19Dues and Other Expenses of Performing Duties: (s 8(1)(i))...............................................................................19Home Office Expenses: (s 8(13))........................................................................................................................20Capital Element of Annuity: (s 60(a)).................................................................................................................20

Income From Business or Property.............................................................................................20Timing:................................................................................................................................................................20

Business or Property as a Source.........................................................................................................21Income from Business vs Income from Property:...............................................................................................21Business:..............................................................................................................................................................21

Personal Endeavors........................................................................................................................................22Gambling........................................................................................................................................................22ACNT.............................................................................................................................................................23

Property:..............................................................................................................................................................23

Inclusions................................................................................................................................................24Damages:.............................................................................................................................................................24Services etc. to be Rendered (s 12(1)(a))............................................................................................................24Amounts Receivable: (s 12(1)(b)).......................................................................................................................25Interest:................................................................................................................................................................25

Is It Interest?...................................................................................................................................................25Timing............................................................................................................................................................25Blended payment (s 16(1)(a)).........................................................................................................................26Transfer of Debt Obligation: (s 20(14)).........................................................................................................27Discounts and Premiums:...............................................................................................................................27

Royalties: (s 12(1)(g)).........................................................................................................................................27

Deductions..............................................................................................................................................28Damages:.............................................................................................................................................................28Personal Expense: (s 18(1)(h))............................................................................................................................29

Travel Expenses..............................................................................................................................................29Home Office: (s 18(12))......................................................................................................................................29Illegal Payments: (s 67.5(1))...............................................................................................................................29Fines and Penalties: (s 67.6)................................................................................................................................30Meal Expenses: (s 67.1)......................................................................................................................................30Promotional Expenses:........................................................................................................................................30Recreational Facilities and Club Dues: (s 18(1)(l))............................................................................................30Interests Expense: (s 20(1)(c))............................................................................................................................30

Borrowing Money..........................................................................................................................................30Financing Property.........................................................................................................................................31

Financing Expenses: (s 20(1)(e))........................................................................................................................31Restricted Farming Loss:....................................................................................................................................32Prepaid Expenses:...............................................................................................................................................32Reserves:.............................................................................................................................................................32

Doubtful Debts...............................................................................................................................................32Deferred Payments (s 20(1)(n))......................................................................................................................33Unearned Amounts.........................................................................................................................................33

Inventory.............................................................................................................................................................33Running Expense:...............................................................................................................................................34Incorporation Expenses:......................................................................................................................................34Capital Expenditure:............................................................................................................................................34

Capital Expenditures.............................................................................................................................35Current vs Capital Expense:................................................................................................................................35

Maintenance and Repairs...............................................................................................................................35Capital Cost Allowance:......................................................................................................................................36

Is There a Depreciable Property?...................................................................................................................36What is the Undepreciated Capital Cost?.......................................................................................................36Half Year Rule................................................................................................................................................37Capital Cost Allowance..................................................................................................................................37Recapture and Terminal Loss.........................................................................................................................37Limitation on CCA and Stop-Loss Rules.......................................................................................................38Enhanced Allowance for Capital Assets........................................................................................................38Allocation of Proceeds of Disposition............................................................................................................39Disposition of Building..................................................................................................................................39

Capital Gains and Losses.............................................................................................................40Real Property: Trading vs Investing....................................................................................................................41Special Computation Rules.................................................................................................................................41

Personal-use Property.....................................................................................................................................41Gifting upon Death.........................................................................................................................................42Inter Vivos Transfer to Non-Arm’s-Length Persons......................................................................................42

Superficial Loss..............................................................................................................................................42Change in Use.................................................................................................................................................43

Roll overs............................................................................................................................................................44Reserve for Deferred Payment............................................................................................................................44

Anti-Avoidance Rules...................................................................................................................44Inter Vivos Transfer to Non-Arm’s-Length Persons.........................................................................44

Attribution Rules...................................................................................................................................45Non-Application:.................................................................................................................................................45Transfers and Loans of Property to Spouse or CL Partner: (s 74.1(1))..............................................................45Transfers and Loans of Property to Minors: (s 74.1(2)).....................................................................................46Transfers and Loans of Property to Repay Financing of Another Property: (s 74.1(3)).....................................46Taxable Capital Gain and Allowable Capital Loss from the Property Transferred or Lent: (s 74.2(1))............46

Income Diversion...................................................................................................................................46Broader than the attribution rules -> not limited to spouse, CL partner, or minors -> cover parents, adult children, or adult siblings....................................................................................................................................46Indirect Payments: (s 56(2))................................................................................................................................46Assignment of Income: (s 56(4))........................................................................................................................46Interest-Free or Low-Interest Loans: (s 56(4.1)).................................................................................................47

General Anti-Avoidance Rule (GAAR)...............................................................................................47

CONCEPT OF INCOME

Definition of Income Whether an item or receipt constitutes income determines whether it is subject to tax

Income is not defined in the Act. However, the court has interpreted the word in accordance with its ordinary meaning: money received, especially on a regular basis, for work or through investments (Curran).

- Periodic, regular, certain, foreseeable, expected and enforceable (Rumack)- An economic gain is not income for tax purposes if it is on capital account or is a

capital receipt, is not realized, or is not coming from a source (LMW)

Haig-Simons Definition - Income equals consumption plus gain in net worth over a taxation year

- Does not matter whether the gain is from periodic payments, profits from the sale of property, transfers from other people, or direct products of one's own labour

- Also does not matter whether the gain in net worth is expected or unexpected, regular or irregular, deliberate or incidental, realized or accrued, in cash or in kind

- Difficult to implement - Assumes accretion to wealth can be quantified in terms of market prices or

at least objectively valued - Liquidity issue: TP might have to sell the assets producing income in order

to pay their taxes, notwithstanding their increased in wealth - Social and political reasons for not taxing certain economic benefits such

as gifts, damages for pain and suffering, or value of unpaid housework even if they constitute gain

Imputed Income: - The act does not recognize imputed income as income (LMW)

- Homeowner enjoys tax advantage by virtue of the non-taxation of imputed rent - Unpaid housework

- Home repairs and improvements, homegrown food, and car maintenance by the owner

- Childcare by stay-at-home parent

Income from a SourceCanadian income tax law adopted a source concept -> income is a yield from a source

- Only income from a source is included in the computing income under s 3(a), and only loss from a source is deductible under s 3(d)

- Section 4(1)(a) requires computation of income by each source separately first.

What is a source? - Specific sources listed in s 3(a): Office and employment, business, and property

- Case law has not ruled out the possibility of income from an unspecified source; however, courts have tended to limit the sources of taxable receipts to those specifically identified in the Act (Schwartz)

- Characteristics of an income source (LMW): - It recurs on a periodic basis - It involves organized effort, activity, or pursuit on the part of the TP- It involves a marketplace exchange - It gives rise to an enforceable claim to the payment by the TP, and - In the case of a business or property source, there is a pursuit of profit

- Illegal sources are also sources (LMW)- Examples (LMW)

- Source of gains from gambling is the business of gambling in some cases - Source of gifts received by TP in respect of employment is employment - Source of payment in consideration of the loss of pension rights, chances for

advancement, and opportunities for re-employment is employment (Curran)- The fact that the agreement stated that the money was for loss of pension

rights, chances for advancement, and opportunities for re-employment does not change the true nature of the payment

- Source of money stolen by a lawyer from client is business - Source of fraudulently acquired funds from a company in which the TP was an

officer or EE is employment - Source of damages or settlements may have a source from an enumerated source

under the surrogatum principle - Source of payment from a Ponzi scheme is property (investment)- Strike pay does not have a source (Fries)- Damages and settlement awards -> may be considered as on account of income,

capital, or windfall- Characterization depends on the nature of the injury or harm for which the

compensation is made

Surrogatum Principle: - Where, pursuant to a legal right, a trader receives from another person, compensation for

the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation (Manley)

- Tax treatment depends on the item for which the payments is intended to substitute

No Source: - Damages for personal injuries are not income for tax purposes because they are not

from a productive source (Cirella)- A person is not property/asset/business -> not income from B/P- Not earned for services rendered -> not income from O/E

- Reference to damages as loss of income and reasoning applicable thereto merely indicates the method by which the amount was calculated

- However, if an amount can reasonably be considered EMT income, it will be included as income (IT-365R2)

- It is offensive to tax a payment for pain and suffering, as the victim should be assisted rather than taxed

- Tort damages are supposed to put the victim back to the original position -> the person is not better off in receiving this money -> no accretion of value

- Lottery winning are not taxable so long as the gambling activities are not organized and carried out systematically (Leblanc)

- Section 52(4) deems the prize to have been acquired by TP at a cost equal to FMV -> not taxable income and does not attract CG

- Exceptions: - Gambling as an adjunct or incident of a business carried on -> taxable

- Ex. casino owner who gambles in his own casino or an owner of horses who trains and racers horses and who bets on the races

- Gambling using expertise and skill to earn a livelihood in a gambling game in which skill is a significant component -> taxable

- Ex. Luprypra- Regular pool player, practice in the afternoon, bet with

inebriated players at night -> carefully manages risks- Personal gifts and inheritances -> transfer of capital/not from a productive source

(Bellingham)- May encourage redistribution of wealth - Relieve familial gifts from tax consequences - Donor is taxed on any capital gains realized when making the gift

INCOME FROM OFFICE OR EMPLOYMENT

Section 3(a) includes in income for the year TP’s income from office or employment - Employment = the position of an individual in the service of some other person (s

248(1))- Employee = a person holding such a position

- Office = the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration (s 248(1))

- Officer = a person holding such a position

Section 3(d) losses can be deducted from income- Loss from EMT is the loss calculated per the provisions of the ITA (s 5(2))

Section 5–8: Rules for computing taxpayer’s income or loss from office or employment- TP’s income from employment or office = salary, wages and other remuneration,

including gratuities, received by the taxpayer in the year (s 5(1))

Employee vs Contractor If relationship governed by “contract of service” -> employee; if “contract for service” = contractor (LMW)

Is the person who has engaged himself to perform these services performing them as a person in business on his own account? (Wiener Door)

- Factors (Sagaz)- The level of control - Whether the worker provides own equipment - Whether the worker hires his or her own helpers - Degree of financial risk taken by the worker - Degree of responsibility for investment and management held by the worker - The worker’s opportunity for profit in the performance of his or her tasks- Generally has more than 1 client - Intention of the parties in a contractual relationship

InclusionSalary, Wages, and Other Remuneration:

TP’s income from employment or office = salary, wages and other remuneration, including gratuities, received by the taxpayer in the year (s 5(1))

- Timing = when received - An amount of money is deemed received by EE when it is available to the EE;

(Morin) doesn’t matter if EE voluntary chose not to be paid - Unconditional right to be paid (Blenkarn)- TP does not have to have it in bank account (Morin)

- The amount that is withheld by ER for taxes is still “received” by TP - When time of work completion and payment are in different year -> include in

year of receipt - Cheque is verbally treated as cash

- When payments of salary or wage are mailed to EE -> deemed received on the day they are mailed (s 248(7)(a))

- When money is paid by ER to a third party for the benefit of EE, payment constitutes constructive receipt in the hands of TP

- The word receive = to get or derive benefit from something, to enjoy its advantages without cessation having it in one’s hands (LMW)

- Fee: fixed payments in respect of an office - Wage & Salary: regular payments to employees for their services different on the type

of work performed, and/or the period to which the payments refers)- wage = short term; salary = long term

- Gratuity: amounts paid to an officer or employee on account of legally non-enforceable claims.

- That the services had not been completed when payment was made or that there was no assurance of remuneration do not prevent the amount in question being taxable E/O income (Goldman)

- If, from the perspective of the recipient, the amount accrues to him in relation to his O/E -> taxable income

- But if the amount is given as a personal gift that is in no way connected to the recipient’s O/E -> not income

- Does not matter if the payment was voluntary or not expected - Indirect payment -> okay - G was told no remuneration “as such” but expected getting leftover from lawyer

fees – argued the payments were windfall. Held: income from office

Deemed Remuneration: ( s 6(3) )

An amount received by one person from anothera. during a period in which the payee is in O/E of the payer, or

- Section 6(3) only applies when TP is employed by the payer and the payment is paid by the ER under an EMT relationship (Folio S2-F3-C1)

- If paid by third party as in Curran -> s 6(3) does not apply, but could argue income from source

b. on account, in lieu of, or in satisfaction of an obligation arising out of an agreement made immediately prior to, during, or immediately after an employment

- Moss: ER paid Moss for him to give up his right to buy shares at a discounted price if the company decides to sell, which was part of Moss’s EMT k -> deemed remuneration

- The payment must be provided for in the contract (Folio S2-F3-C1)- Ex. if agreement does not provide for any payment after termination and

ER terminates EE; EE sues for damages for loss of EMT -> not covered by this section -> may be retirement allowance

Is deemed as remuneration for services during O/E, unless TP can reasonably establish it was not for:

c. Inducement payment for accepting EMT - In Moss, the right can be reasonably regarded as having been received by Moss as

partial consideration for accepting EMT and partial consideration for remuneration for services

d. Remuneration for service e. Consideration for a covenant for EE to do or not to do something before or after

termination

Benefits Generally:

Section 6(1)(a): include the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office or employment, except

1. Is there a benefit? - Benefit = an economic advantage or material acquisition (Savage)

- Does not have to represent a form of remuneration for services rendered (Savage)

- Reimbursement can also be an economic advantage (S2-F3-C2)- Reimbursement for the purchase of a personally-owned asset, even

if used for EMT purpose -> benefit- Reimbursement for personal travel expense (ex. between home and

regular place of work) -> benefit - Whether a benefit exist under this section depends on the underlying nature

of the expense covered by the benefit (LMW, Lowe)- If personal -> economic advantage is conferred -> must include

- Childcare expenses, rent, laptop for personal use, legal fees for defending a personal criminal charge, cost of personal travel, free use of ER’s property (cars, buildings, etc), parking, education without charge, interest free loans, cash allowances, EE stock options

- Primary purpose is to benefit the EE - If EMT related or part of ER’s biz expense -> when the expense is

reimbursed, there is no economic advantage to EE -> not benefit - Clothing for the job such as lawyer’s robe or plain clothing for

police (Huffman), office supplies- Police couldn’t wear the clothes off duty because they were

too big - If primary purpose is to benefit the ER, not EE -> not taxable if

any personal benefit is merely incidental to the biz purpose (Lowe)

- TP was sent by his employer to New Orleans to accompany the brokers and their wives, who were expected to enjoy what was described as "four sun-filled days and fun-filled nights". The taxpayer was found to receive no personal benefit from the trip. While the taxpayer derived some personal pleasure from the trip, the Court found that he and his wife had little time left over for his own pleasure after looking after his employer's business, and any pleasure derived by the taxpayer was merely incidental to the trip's business purpose. Wife was there to serve ER as well.

- Consider: whether there is a business purpose, is the benefit required for EE to perform more effectively, is the benefit required to fulfill a condition of EMT, does ER have moral or contractual duty to provide the benefit (S2-F3-C2)

- “value of … whatever” includes benefit not convertible to money

2. Is the benefit receive in respect of, in the course of, or by virtue of O/E? - This section applies only to benefits received in relations to EMT

- “in respect of” indicate that it was intended to emphasize that only the smallest connection of EMT is required to triggering the operation of the section (LMW, Savage)

- Any benefit received by an EE from his or her ER is presumed to have been derived from the EMT relationship (Savage)

- Rebutted if the EE can establish that the benefit is received in his or her personal capacity

- Does not have to represent a form of remuneration for services rendered (Savage)

- TP was employed by a life insurance company, had received a “prize” for passing courses in life insurance. The employer did not require its employees to take the courses. The SCC found that the prize was received “in respect of, in the course of, or by virtue of” the taxpayer's employment. In this case, the courses were taken by the taxpayer to improve her employment skills, not for any recreational motive; and this was enough to decide that the employer's payment to the taxpayer was “in respect of” her employment.

- Value of gold ring received for length of service -> taxable benefit (Wisla)- Benefit doesn’t have to come directly from ER; can be from third party (LMW)

3. What is the value of the benefit? - The value of the benefit is generally determined on the basis of the cost of

providing the benefit determined by the fair market value of the benefit -> FMV can be different than cost to ER in providing the benefit (Spence)

- If personal or living expense are reduced by reimbursement or free use of ER’s property or services -> value of benefit = amount that would otherwise be paid by EE

- It is not the cost to the ER that determines the value of benefit; rather, it is the amount that TP received (Spence)

- Value of tuition benefit = FMV – amount TP paid- In-kind benefits -> FMV- Where benefit has dual character such as trip to Bahamas with a mix of

biz and pleasure -> reasonable apportionment- Luxury-ness of the benefit may increase the portion attributed to

the TP (Zakoor)- “value of … whatever” includes benefit that are not convertible to money

4. Benefit must be received or enjoyed by TP - The EE, or person not at arm’s length with EE, must, in fact, have received

or enjoyed the benefit (LMW)- Golf club membership; EE did not enjoy golf, wanted a different

membership but didn’t get it -> membership was primarily for the benefit of ER -> not taxable (Rachfalowski)

- Free parking pass; TP did not drive to work -> not taxable (Adler)- Timing = received or enjoyed in the year

5. Exceptions in section 6(1)(a) i. Benefit derived from ER’s contribution to/under a deferred profit sharing plan,

EE life and health trust, group sickness or accident insurance plan, group term life insurance policy, pooled registered pension plan, private health services plan, registered pension plan or a supplementary unemployment benefit plan

- ER contribution to health and medical benefit plans and benefits received under the plans

ii. Benefit under retirement compensation arrangement, EE benefit plan, or an EE trust

iii.Benefit in respect of the use of an automobile iv. Benefit derived from counselling service v. Benefit under a salary deferral arrangement, subject to subsection (11)vi. Benefit that is received or enjoyed by an individual other than TP under a

program of TP’s ER that is designed to assist with education , if TP deals with ER at arm’s length and that is reasonable to conclude that the benefit is not a substitute for salary, wage, or other remuneration of TP

- i.e. scholarships for TP’s children - ER’s contribution to RESP of TP’s children are not included in this section

because children do not enjoy the benefit -> include in TP’s income (S2-F3-C2)

Specific Benefits:

Allowance (s 6(1)(b))- Allowance = any periodic or other payment that an EE receives from ER without

having to account for its use (CRA)- Usually an arbitrary amount that is predetermined without using the actual cost - Usually for a specific purpose, and - Used as the EE chooses without providing receipts

- Include allowance in EMT income: All amounts received as an allowance for personal/living expense or as allowance for any other purpose, except (s 6(1)(b))

- Include all allowance and then take out the following exempted amounts: - Allowances fixed by an act of parliament or by the treasury board- Travel and separation allowances received by members of the Canadian

Forces- Reasonable allowance for travel expenses paid to EE employed to sell

property or negotiate contracts for the ER - Reasonable allowance for travel expenses (other than allowance for the

use of a motor vehicle and other than for EE employed in connection of selling property) where EE is required to travel away from the municipality where ER’s establishment is located (see “Exclusions”)

- Reasonable allowance for the use of automobiles for travelling (other than EE employed to selling property) in the performance of the duties of O/E (see “Exclusions”)

- Reasonable allowance for EE’s child who has to go to school elsewhere- Amateur athletes and members of recreation programs

Interest Free Loans (s 6(9), 80.4)- If an amount is deemed by s 80.4(1) to be a benefit -> income from O/E (s 6(9))- Section 80.4

- Applicability: - Loan or debt incurs because of or as a consequence of previous/current/

intended O/E- Reasonable to conclude that, but for the previous/current/intended

EMT, the terms of the loan would be different, or the loan could not have been received (s 80.4(1.1))

- Interest paid by EE < prescribed rate - Lender does not have to be the ER - Applies to former EE receiving loan from ER pursuant to an agreement

entered into while former EE was still an EE (IT-421R2)- Amount of Benefit = (a + b) – (c + d) (IT-421R2)

- a = interest calculated at prescribed rate - prescribed rate defined in s 80.4(7)(b) -> determine according to

Regulation 4301- b = amount of interest paid or payable by ER or related person - c = amount of interest paid by EE- d = any amount under “b” paid back to ER by EE

- This section does not apply if - The interest rate is equal or greater to the commercial rate AND the

creditor is in the biz of lending (s 80.4(3)(a)), or - The loan or debt is brought into income by another provision of the act for

the year (s 80.4(3)(b))

Home Purchase or Relocation Loans- If the loan is received by virtue of employment and is used to buy a home, it may qualify

as a home purchase loan (s 80.4(7)) - If the employee moved at least 40 km closer to a new work location, the loan may qualify

for a special type of home purchase loan: a home relocation loan (ss 110(1)(j), 248(1))- Permit a deduction of the prescribed benefit on a $25,000 loan - The prescribed rate used to compute the benefit for these two types of home

purchase loans is the lesser of the prescribed rate at the time that the loan is made and the prescribed rate during the relevant period (s 80.4(4))

- These loans are also deemed to be new loans every five years which means that the “prescribed rate at the time that the loan is made” changes every five years. This rule is an attempt to have the taxable benefit rules mirror commercial practice: that is, five-year fixed rate residential home mortgages (s 80.4(6)).

Forgiveness of Employee Debt (s 6(15), 6(15.1))- When ER forgives, partially or fully, a loan/debt owed by EE -> benefit (s 6(15)(a))

- Needs nexus between forgiven debt and EMT -> “in respect of, in the course of, or by virtue of”

- Value of benefit = forgiven amount (s 80(1)) = MIN (obligation issued, principal amount owing) – any amount paid in satisfaction of the principle amount

Relocation Assistance (s 6(19)-(23))- Application: amount received in respect of, in the course of or because of O/E- Housing Loss = if disposed -> Max[ACB, FMV] – Min[POD, FMV]; if not disposed ->

Max[ACB, FMV] – FMV (s 6(21))- Non-eligible Housing Loss: Amount paid at any time in respect of housing loss to or on

behalf of a TP, or person who does not deal at arm’s length with TP, in respect of, in the course of or because of O/E = benefit under s 6(1)(a) -> include as income from EMT (s 6(19))

- Eligible Housing Loss: First $15,000 and half of the amount above $15,000 are exempt from including in income (s 6(20))

- Eligible housing loss = housing loss in respect of an eligible relocation (s 6(22))- No more than 1 residence may be so designated in respect of an eligible

relocation - Enable TP to carry on biz or be employed and relocation is at least 40 km

closer to a new work location (s 248(1))- Amount paid by ER in respected of the cost of, financing of, the use of or the right to

use a residence = benefit (s 6(23))- Reverses Hoefele

Employee Stock Options (s 7)- Application: When a qualifying person (or person at non-arm’s length with ER) has

agreed to sell or issue securities to EE (s 7(1))1. Qualifying person = corporation or mutual trust fund; securities = share or unit

of trust (s 7(7))2. The benefit must be received under an agreement in respect of, in the course

of, or by virtue of EMT (s 7(5))- Applies to officers even though s 7(5) only refers to EMT (Taylor, Scott)- If EE ceases to be EE, s 7(1) continues to apply as if EE is still EE and

EMT continues to exist (s 7(4))3. Agree/Agreement: require more than “to consent to or approve of” (Transalta)

- Needs meeting of the mind and the bestowing of legal rights and liabilities - Discretionary issuance of shares like in Transalta is not an agreement

within the meaning of this section 4. Benefit must be conferred by ER, not some third party

- Complete Code: (s 7(3)(a))- If the arrangement does not fit within the opening of s 7(1) -> s 7 does not apply,

then ss 5 and 6 would apply to the benefit (s 7(3)(a))- If the arrangement does fit within the opening of s 7 -> s 7 applies exclusively and

other provisions of the ITA do not apply at all - Thus, if the benefit is not taxable within s 7, it is not taxable at all (Rogers

Estate)- Value of benefit

- If EE exercises the option = FMV of shares when EE acquired the shares – option price (amount paid by the EE to get the shares) – any amount paid by EE to get the option (s 7(1)(a))

- Timing = when option is exercised/EE buys the shares, not when EE acquires the option

- If Canadian-controlled private corporation (CCPC) -> timing = when shares are sold (s 7(1.1))

- If EE disposes the option = Value of consideration – any amount paid by EE to get the option (s 7(1)(b))

- Section 7(1.7) deems cancellation of option as disposition and any amount received in respect of the cancellation is consideration for the disposition

- Special capital gain like inclusion rule of the benefit amount (50% deduction): - Conditions for regular corporations (s 110(1)(d))

1. EE must deal at arm’s length with ER2. EE receives shares, not cash, on the exercise of the option

- If cash, special treatment only available if ER elects not to take deduction for payment

3. Share are prescribed shares (generally non-redeemable common shares (Reg 6201(1))), and

4. Option price to get the shares is equal to or greater than (FMV on the date the option was granted – the price to acquire the option)

- Conditions for CCPC shares (s 110(1)(d.1))1. TP acquired shares of CCPC2. TP has not disposed of or exchanged the shares within 2 years of acquiring

the shares 3. TP has not deducted an amount under s 110(1)(d)

- Shares gifted as charitable donation (s 110(1)(d.01))1. Security is one that is described in s 38(a.1)(i)j2. Gift made within 30 days of acquiring the shares3. Conditions under s 110(1)(d) are satisfied 4. Qualifying donee

- Value of capital gain = FMV – ACB of share - ACB of share = option price (which is the amount paid by the EE to get the

shares) + any amount paid by EE to get the option + amount of benefit calculated under s 7(1) (s 53(1)(j))

- Asymmetrical treatment: ER cannot deduct the cost shares even though EE is including it as EMT income (s 7(3)(b))

- Mitigated by special capital gain like inclusion

Other Sources of Income:

Scholarship (s 56(1)(n))- Include in income amounts received as scholarship, fellowship, bursary or prize for

achievement in field of endeavour ordinarily carried on by TP, that exceeds the scholarship exemption in s 56(3) (s 56(1)(n)) -> DOESN’T INCLUDE MONEY FROM EMT

- Scholarship/Bursary = Financial assistance towards a degree, diploma or certification (Folio S1-F2-C3)

- Prize = an amount generally qualifies as a prize for purposes of s 56(1)(n)(i) if it is paid in recognition of a genuine accomplishment in a challenging area, whether it be of an academic, vocational or technical nature (Folio S1-F2-C3)

- Award of damages for PI -> not a prize within s 56(1)(n)- Lottery winning -> not a prize within s 56(1)(n)- Prize for highest mark -> a prize within s 56(1)(n)- Use FMV to value prize

- Section 56(3) exemptions- Full time elementary, secondary, or designated post-secondary program ->

full exemption from income inclusion (s 56(3)(a))- Part time elementary, secondary, or designated post-secondary program -

> exemption limited to cost of materials related to the program and fees paid to the institution (s 56(3.1)(b))

- For the production of literary, dramatic, musical or artistic work -> exemption limited to reasonable expenses (s 56(3)(b))

- In all other cases -> exemption = $500 (s 56(3)(c))- Scholarship or bursary provided by ER to family members of EE -> not taxable

benefit of the EE provided that EE is at arm’s length with ER and amount is substitution for salary (s 6(1)(a)(vi))

- Including tuition discounts provided by educational institutions to the family members of its employees (Folio S1-F2-C3)

- Family member to include in income following s 56(1)(n) - If get scholarship, fellowship, bursary or prize in respect of, in the course of, or by

virtue of O/E, then not in s 56(1)(n), taxed under s 6(1)(a) as employment income; subject to for the benefit of ER (Folio S1-F2-C3)

- If received during or immediately after EMT -> income under s 6(1)(a), notwithstanding any agreement for EE to pay money back

- When paid back, EE can deduct the amount under s 8(1)(n)- If received prior to EMT -> s 56(1)(n)- This section applies to Savage (TP received a prize for completing certification in

relation to EMT)

Retirement Allowance (s 56(1)(a)(ii))- Terminaation payments can either be characterized as remuneration, includable under s

5(1), retiring allowance under s 56(1)(a)(ii), or windful - Retirement allowance = amount received on or after the retirement of EE in

recognition of long service, or in respect of a loss of EMT whether or not on account or in lieu of payment of damages (s 248(1)) -> include in income

- Does not include EE benefit plan, retirement compensation arrangement, or salary deferral agreement

- Timing = paid on or after retirement or loss of EMT; taxed when received - Does not have to come from the ER -> can be from third party (S2-F1-C2)- Reason for termination not relevant to whether an amount is a retiring

allowance (S2-F1-C2)

1. Is there retirement or loss of EMT? - Retirement -> a question of fact (S2-F1-C2)

- Continue to participate in health or dental plan does not mean no retirement

- Continue to accrue pension benefits -> likely continued EMT - Not required to report to work not determinative

- There must first be an EMT before there could be retirement or loss of EMT and for this section to apply (Schwartz)

- If TP returns to work or continues to be EMT -> no retirement or loss of EMT

2. In respect of the EMT - Loss of employment -> “in respect of” requires connection between loss of EMT

and the subsequent payment -> primary purpose is to compensate for loss of EMT (S2-F1-C2)

1. But for the loss of EMT would the amount have been received? -> must be no

2. Was the purpose of the payment to compensate a loss of EMT? -> must be yes

- Wrongful dismissal/reasonable notice damages = deemed remuneration under s 6(3) (reasonable notice = implied term of EMT contract) (Quance)

- Damages for breach of k -> not taxable (Atkins)- Contract canceled before EMT started -> not retiring allowance or

income from EMT -> not taxable (Schwartz)- Unused sick leave paid on or after retirement or in respect of loss of

EMT = retiring allowance (S2-F1-C2)- Accrued vacation pay is not retiring allowance (S2-F1-C2)- Damages received for loss of self-respect, humiliation, mental

anguish, hurt feelings, etc can be retiring allowance (S2-F1-C2)- Damages for reasonable notice -> retiring allowance (S2-F1-C2)- Damages unrelated to loss of EMT is not retiring allowance (ex.

human rights, PI) -> not retiring allowance (S2-F1-C2)- Exceptions (S2-F1-C2)

- Transfer from one work location or position to another with the same ER - Termination of EMT where arrangement have been made for TP to obtain

EMT with an affiliate or to be rehired - But if no assurance of offer or new EMT -> retirement/loss have

occurred

Annuity (s 56(1)(d))- Any amount received as an annuity must be included in income, except

i. Otherwise required to be included in income ii. Wrt an interest in an annuity k to which s 12.2(1) appliesiii. Received under a TFSA

- Annuity = an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise

- This definition does not include a lump sum payment or a large once-and-for-all payment (Short)

- The lump sum surrender payment in Short was proceeds of disposition with an adjusted cost base equal to the principle of the annuity -> capital gain

- 2 components: capital component and income component - Section 56(1)(d) requires the includes of both components, and then deduct

capital under s 60(a)- Capital element is determined based on Reg 300(1)

- Periodic payment of a damages award is not an annuity (IT-365R2)- In Rumack, the amount of the prize that she won was non-taxable under s 52(4) but the

annuity payments were taxable

Allowance ExclusionsTravel Allowance: ( s 6(1)(b)(vii) )

- Reasonable allowance for travel expenses is not included in EMT income if EE is required to travel, to perform EMT duties, away from:

- The municipality where ER’s establishment at which EE ordinarily worked or reported was located, and

- The metropolitan area, if there is one, where the establishment was located - Traveling to the place where EE ordinarily works/reports is not covered by this section

(IT-522R)- Ex. travelling from home to work

- This section does not cover motor vehicle expenses - Include meals and lodging

Motor Vehicle Allowance: ( s 6(1)(b)(vii.1) ) - Reasonable allowance for the use of motor vehicle is not included in EMT income if

used for travelling in the performance of duties of O/E- Deemed not reasonable if

- Measurement of the use for the purpose of the allowance is not based solely on the km driven for EMT purposes, or (s 6(1)(b)(x))

- TP receives both a reimbursement and allowance (s 6(1)(b)(xi))- If unreasonable -> include under s 6(1)(b) and then deduct under s 8(1) where

applicable (IT-522R)

Special Work Site Allowance: ( s 6(6) ) - Notwithstanding s 6(1), s 6(6) excludes any amount or allowance received or enjoyed

by TP in respect of, in the course of, or by virtue of O/E that is for a. Board and lodging at a special work site, or a remote place where TP cannot

reasonably establish and maintain a self-contained domestic establishment- Conditions for special work site: (s 6(6)(1)(a))

1. Location where TP’s duties are temporary

2. TP had a self-contained domestic establishment that was a principal residence

- SCDE = house, apartment or other similar place where a person generally eats and sleeps (s 248(1))

- SCDE = living unit with restricted access that contains a kitchen, bathroom, and sleeping facilities (CRA)

- Does not include hotel room, dorm, boarding house or bunkhouse

3. Principal residence was available and not rented out 4. TP cannot reasonably return daily 5. Away for at least 36 hours

b. Transportation between principal residence and special work site or the remote place

DeductionsSection 3(d) losses can be deducted from income

- Loss from EMT is the loss calculated per the provisions of the ITA (s 5(2))

Deduction in computing income from O/E are disallowed unless permitted by s 8 (s 8(2))

Legal Expenses: ( s 8(1)(b) ) - Amount in legal expense paid by TP to collect, establish the right to, EMT income - Does not permit legal expense paid by obtain retiring allowance -> can deduct under s

60(o.1)(i)(B)

Sales Expenses: ( s 8(1)(f) ) - May deduct non-capital expenses if TP is employed to sell property or negotiate contract

for ER, AND 1. Under EMT k, TP is required to pay own expense 2. Ordinarily required by EMT duties to be away from ER’s place of biz3. Remunerated by commission, and4. Not receiving an allowance excludable under s 6(1)(b)(v)

- Cannot deduct capital costs (s 8(1)(f)(v))- Client list = capital asset -> expands the income-earning structure (Gifford)

- Requires ER certification in prescribed form to be deductible (s 8(10))- May include cost of entertainment of customers (IT-522R)

- Limited to the lesser of the 50% of: amount paid or reasonable amount for the entertainment (s 67.1(1))

- This section applies even if TP did not enjoy any of the food/beverage/entertainment (Stapley)

- If not reasonable -> cannot deduct (s 67)- See below for meal deductions

Travel Expenses: ( s 8(1)(h) ) - May deduct travel expenses (other than motor vehicle) incurred in the course of O/E if:

1. TP ordinarily required by EMT duties to work away from ER’s place of biz or in different places

2. Under EMT k, required to pay travel expenses incurred in performing EMT duties 3. Does not receive an allowance that is excludable under s 6(1)(b)(v), (vi), or (vii)4. Does not claim a deduction under 8(1)(e), (f), or (g)

- Requires ER certification in prescribed form to be deductible (s 8(10))- If not reasonable -> cannot deduct (s 67)- See below for meal deductions

Motor Vehicle Expense: ( s 8(1)(h.1) ) - May deduct motor vehicle expenses incurred in the course of O/E if

1. TP ordinarily required by EMT duties to work away from ER’s place of biz or in different places

2. Under EMT k, required to pay motor vehicle expenses incurred in performing EMT duties

3. Does not receive an allowance that is excludable under s 6(1)(b)4. Does not claim a deduction under 8(1)(f)

- Requires ER certification in prescribed form to be deductible (s 8(10))- If not reasonable -> cannot deduct (s 67)

Meals: ( s 8(4) ) - If TP wants to deduct meal expenses as part of s 8(1)(f) or (h) deduction, TP must satisfy

the following conditions: 1. Meal consumed during the period TP was required by EMT duties to be away2. For a period not less than 12 hours 3. From the municipality, or metropolitan area if there is on, where ER’s

establishment is located and to which TP ordinarily report to - If more than one place -> the place most frequently reported (IT-522R)

- Otherwise, cannot include meals in s 8(1)(f) or (h) deduction- If not reasonable -> cannot deduct (s 67)- Amount of deduction is limited to the less of 50% of: amount paid for the meal or

reasonable amount of the meal (s 67.1(1))

Dues and Other Expenses of Performing Duties: ( s 8(1)(i) ) - May deduct amounts paid for the following to the extent TP is not reimbursed and is

not entitled to be reimbursed:i. Professional membership dues

- Requires ER certification in prescribed form to be deductible (s 8(10))ii. Office rent or salary of assistants, where TP is required to pay under EMT k

- Subject to s 8(13) below - Rent is only deductible if TP actually rents the space; if TP owns the

space, cannot deduct rent (IT-352R2)- Requires ER certification in prescribed form to be deductible (s 8(10))

iii. Office supplies consumed in performing EMT duties, where TP is required to pay under EMT k

- Subject to s 8(13) below - “supplies” include cost of repairs, fuel, electricity, minor repairs,

regardless of whether TP owns or rents the office (IT-352R2)- Amount is based on reasonable apportionment between O/E and personal

living (IT-352R2)- Requires ER certification in prescribed form to be deductible (s 8(10))

iv. Union dues v. Union dues retained by ER, where TP is not a member of that union vi. Dues to a parity or advisory committee or similar body, where payment is

required by lawvii. Dues to a professions board

Home Office Expenses: ( s 8(13) ) - Notwithstanding s 8(1)(f) [sales expense] and (i) [expenses of performing duties], office

rent, supplies, and assistant’s salary that relate to a home office are only deductible if the workspace is: (s 8(13)(a))

- Principally (>50%) used by TP for performing EMT duties, or- Used exclusively, during the period to which the expense relates, for meeting

customers or other people in performing EMT duties - Deductions in relation to the home office cannot exceed income from the O/E ->

cannot generate losses from the O/E (s 8(13)(b)) - Excess loss not deductible because it exceeds income from the O/E may be carried

forward following year, but still cannot generate losses in the following year (s 8(13)(c))

Capital Element of Annuity: ( s 60(a) ) - See “Annuity” above

INCOME FROM BUSINESS OR PROPERTY

Section 3(a) includes in income for the year TP’s income from business or property

Income from business or property = profit from business or property (s 9(1))- Income or loss from property does not include capital gain or loss from the disposition of

the property (s 9(3))

Timing : - While GAAP will generally form the very foundation of the “well-accepted business

principles” applicable in computing profit, they may not be applicable in every case and must be subordinate relative to the legal rules which govern (Canderel)

- The method chosen to determine the profit of a taxation year must be appropriate to the biz to which it is applied, tells the truth about PT’s income position

- Generally, should match revenues with expenditures; but the matching principle is not a rule of law, but merely an interpretive guideline to help determine the most accurate picture of T’s income for a taxation year

- An expense is deductible in the year in which the TP has a legal and unconditional, though not necessarily immediate, obligation to pay an amount (JL Guay)

- Contingent liability is not deductible (s 18(1)(e))- If liability contested in courts -> not unconditional -> wait (LMW)

- Mark-to-Market (s 10.1) allow TP to elect to mark-to-market accounting for each eligible derivative as defined under s 10.1(5)

- If TP = financial institution, s 10.1(4)(a) mandatory -> deems an eligible derivative to be mark-to-market property, and subject to the mark-to-market rule in s 142.5

- If TP is not financial institution, s 10.1(4)(b) provides that the mark-to-market rules in s 10.1(6) applies, which deems each eligible derivative held by the taxpayer at the end of a taxation year have been disposed of at fair market value immediately before the end of the year and to have been reacquired or renewed for an amount equal to that fair market value

- The accrual method is the only acceptable method under GAAP for most businesses - Revenue items are recognized as income when they are earned (regardless of

whether payment has been received)- Expenditure items are recognized when they are incurred (even if not paid), with

the exception of inventory and capital asset expenditures

Business or Property as a Source Income from Business vs Income from Property:

- If income is derived from the activity of the owner or the owner’s EE -> business income - If income is derived from the ownership of the property -> property income

Business: - Includes a profession, calling, trade, manufacture, or undertaking of any kind

whatever and, …, an adventure or concern in the nature of trade but does not include an O/E (s 248(1))

- Generally, profit-motivated, organized, continuous, or systematic operations (LMW)

- Profession, trade, calling - Involve human skill, knowledge, and experience - Trade refers to the practice of some occupation, business or

profession habitually to make a living - Trade also means the commercial city to of buying and selling

goods for profit - Calling includes occupation, vocation or trade

- Manufacture is an example of industrial, productive activity that often involves both labour and assets

- Undertaking of any kind whatever - Action to do something or enterprise - Business kind of undertaking as opposed to personal kind

- The business can be quite different and separate from what TP’s regular occupation (IT-459)

The main differences between business and ACNT: profit motive and habitually doing itPersonal Endeavors

- Where there is a personal or hobby element to the endeavor -> apply REOP test to determine whether the venture is undertaken in a sufficiently commercial manner to be considered as a biz source of income; where there is no personal or hobby element -> do not apply REOP (Stewart)

1. Is there a personal or hobby element to the activity in question? - If yes -> go to “2”; If no -> biz as a source -> do not go to “2”

2. Is the activity of TP undertaken in pursuit of profit? -> if yes -> biz - Does TP intend to carry on the activity for profit and is there evidence

to support that intention? - Reasonable expectation of profit is a factor to be considered but

is not conclusive - Other considerations:

- Profit and loss experience in the past years - TP’s training - TP’s intended course of action, and - Capability of the venture to show a profit

- Motivation by capital gains accords with the ordinary business person’s understanding of pursuit of profit -> helps with finding of a biz source

- Evaluate the nature of the activity as opposed to TP’s biz acumen

Gambling - Whether there is gambling biz is determined by all the circumstance and the TP’s

entire course of conduct; consider (Folio S3-F9-C1)1. Degree of organization in pursuit of the activities 2. Existence of special knowledge and inside information reduces element of

chance 3. Gambling for pleasure vs gambling as a means of gaining livelihood, and 4. Extent of TP’s gambling activities, including the number and frequency of bets

- 3 categories (Leblanc)1. Gambling for pleasure -> not taxable

- Not a biz even though they do it regularly, even compulsively and with some sort of organization or system

- Ex. Leblanc- Hired helpers; wrote computer codes; negotiated discounts with

sellers; played in a number of jurisdictions; betted $10-13M per year

2. Gambling as an adjunct or incident of a business carried on -> taxable - Ex. casino owner who gambles in his own casino or an owner of horses

who trains and racers horses and who bets on the races3. Gambling using expertise and skill to earn a livelihood in a gambling game in

which skill is a significant component -> taxable - Ex. Luprypra

- Regular pool player, practice in the afternoon, bet with inebriated players at night -> carefully manages risks

ACNT- Whether a particular transaction is ACNT depends on its character and

surrounding circumstances and no single criterion can be formulated (Taylor, IT-459)

1. Whether the TP dealt with the property acquired in the same way as a dealer in such property ordinarily would deal with it

- Ex. finding buyers, improving marketability and operability, financing etc. - Buying toilet paper from bankrupt company and then selling for

considerable profit within a short time (Rutledge cited in Taylor)2. Whether the nature and quantity of the property excludes the possibility that its

sale was the realization of an investment or was otherwise of a capital nature, or that it could have disposed of other than in a transaction of a trading nature

- When it is of a magnitude that it could not produce income or personal enjoyment and the purpose is for subsequent sale -> likely ACNT

- In Taylor, the nature and quantity of the lead determined that TP could do nothing but sell it

- Buying whiskey in excess of what could be enjoyed by himself, his friends and family, and a commodity which yields no pride of possession -> ACNT

3. Whether TP's intention, as established or deduced, is consistent with other evidence pointing to a trading motivation

- Intention to profit itself is not sufficient - Inability to establish intention to profit does not preclude ACNT

- Intention to profit is not a necessary condition for ACNT (Taylor)

- The following are not sufficient in and of themselves to preclude a finding of ACNT- Single and isolated transaction (Balgownie Land Trust cited in Taylor)- TP did not create an organization to carry out the transaction (Taylor)- Transaction totally different from what TP normally does and TP has never

entered into such transaction before (Lindsay et al cited in Taylor)

Property: - Property of any kind whatever whether real or personal, immovable or movable,

tangible or intangible, or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

a. a right of any kind whatever, a share or a chose in action,b. unless a contrary intention is evident, money,c. a timber resource property,d. the work in progress of a business that is a profession; ande. the goodwill of a business, as referred to in subsection 13(34);

- Property must have or entail some exclusive right to make a claim against someone else (LMW)

- Ex. Legal right to receive a non-competition payment is not a right to any kind whatever

- Property has consistently been interpreted as entailing an exclusive and legally enforceable claim (LMW)

InclusionsIncome from business or property = profit from business or property (s 9(1))

Damages: - Surrogatum Principle requires TP to include payments received as damages or other

compensation as income from biz if the amounts are: received pursuant to a legal right and in lieu of amounts that would have been included in income (Manley)

- Whether the receipt must be included as income depends on whether the compensation was to fill a hole in the stream of income or hole in the structure: income vs capital (Donald Hart)

- In Donald Hart, the only evidence in the proceeding was loss of profit; no evidence for passing off or damage to good will -> damages are income

- Ship vs charter example (Donald Hart)- If the charter is breached -> hole in plaintiff’s trade -> damages = loss of

profits -> income - If the ship is damages -> hole in plaintiff’s capital asset -> damage =

recovery of capital -> not income- IT-365R2

- Where TP’s biz structure is designed to absorb the shock of what appears to be a normal incident and the compensation is for future profits -> income

- Where TP’s biz structure and profit-making apparatus is so crippled, involving serious dislocation of normal commercial organization -> capital

- Where the receipt is compensation for capital (IT-365R2)- If asset is sold, destroyed or abandoned, then treated as a disposition -> damage =

disposition price- If asset is retained -> cost base of the asset is reduced by the amount of damage- If no relation to a particular asset -> may be related to amortizable eligible capital

expenditure under s 14- Government Assistance (IT-273R2)

- Assistance received in respect of capital property, whether business related or personal, is ordinarily netted against the cost of the repairs made to that property or, if it relates to the replacement of that property, it normally reduces the cost or capital cost of the property so acquired

Services etc. to be Rendered ( s 12(1)(a) ) - Include in income amounts received that is on account of services not rendered or

good not delivered before the end of the year, or otherwise not earned - May deduct a reasonable amount as a reserve for goods and services to be rendered

after the end of the year (s 20(1)(m)) - CRA allow full amount to be deducted -> complete offset

- Include reserve amount in income in the next year (s 12(1)(e)(i))

Amounts Receivable: ( s 12(1)(b) ) - Include in income amounts receivable for services rendered or goods sold in the year

notwithstanding the amounts are not due until a subsequent year UNLESS TP uses, and is allowed to use, the received accounting method

- Farming and fishing biz are permitted to use the received accounting method (s 28)

Interest: Is It Interest?

- Any amount received or receivable as, on account of, in lieu of, or in satisfaction of interest must be included (s 12(1)(c))

- Interest is not defined in the ITA; defined through caselaw (Sherway)- Consideration or compensation for the use of retention by one person of a

sum of money, belonging to or owed to another (Saskatchewan, IT-396R)- Usually (but does not have to) accrues day to day - Calculated in reference to a principal amount (but does not have to)

- “in lieu of interest” -> review all the circumstances to determine whether in substance in amount is interest (Wenger’s et al)

- Substance over form - If the amount can be characterized as the cost for borrowing or as being

made for the use of borrowed -> interest (Sherway)- Participatory interest was to compensate for having to issue bonds

at a lower interest rate - Ex. late payments are in the nature of interest; overdue sale price is in

effect a loan - Damages or settlement that stipulates interest -> interest income (IT-396R)

- But depends on whether the underlying damages is taxable -> if the damages are not taxable, interest is not taxable

- Equity vs debt - Yonge-Eglinton: payments continued even after there is no principal owing;

payment depended on TP earning rental income; lender was SH and lent money when TP can’t get money anywhere else; profit-sharing structure where the lender is providing equity capital -> not interest; its dividend, not deductible under the ITA

Timing- Timing = received or receivable or accrual

- Received = cash method -> received when:- Credited to bank account - Offset against another debt - Cheque accepted as payment - Value of commodity accepted in lieu of cash

- Receivable -> when there is a clear legal right to receive it - Accrual

- For corporations, partnership, or trust with a debt obligation on which interest is required -> must use accrual method (s 12(3))

- Investment k held by non-corporation, partnership or trust TPs -> include interest accrued up to the anniversary date of the investment k (s 12(4))

- Anniversary day = the day that is one year and every successive year immediately before the date of issue of the contract (s 12(11))

- Investment contract: (s 12(11))- Salary deferral arrangement but not a, b, d to i of the

definition of salary deferral arrangement in s 248(1) // Retirement compensation arrangement, but not a, b, d, f to n of s 248(1) definition // Employee benefit plan, but not a to 3 of s 248(1) // Foreign retirement arrangement // TFSA // Income bond // Income debenture // Small business development bond // Small business debenture // Included in income otherwise // Obligation in respect of net income stabilization account // A prescribed contract

- s 12(11)(i) -> debt less than 1 year -> s 12(4) doesn’t apply - Prescribed debt -> accrual (s 12(9))

- Any debt obligation that possesses one or more of the terms and conditions in Reg 7000(1)

- No interest debt obligations // contingent interest debt obligations // deferred-interest debt obligations // debt instrument subject to coupon stripping

- Method usually followed: - TP is required to follow the accounting method s/he uses for interest

income from a particular source, but not necessarily the method of accounting for other types of income (IT-396R)

- Should use the same accounting method for interest income from the same source (i.e. same payer, on same type of interest-yielding property) (IT-396R)

Blended payment (s 16(1)(a))- Any part of the amount that can reasonably be regarded as interest shall be deemed to be

interest - Where property sold on deferred or instalment payment basis and no interest is

specified -> question of fact whether each payment contain an interest element (IT-254R3)

- This section does not say that there is ALWAYS an interest element - Determined from the payer’s perspective

- Consider: (Groulx)1. Common practice in the business world

- Even if the normal practice is to include interest, parties can still agree to not include interest (IT-254R3)

2. Terms of the agreement- If there is a discount for repaying early -> likely contain interest

3. Course of negotiations- Suggesting waiving interest for more capital -> likely contain interest

4. Relationship between price paid and FMV

- Section 16(1) does not apply unless there is sufficient evidence that selling price is greater than FMV (IT-254R3)

- Interest portion is the lesser of: excess of selling price over FMV, or amount determined using the normal interest rate at the time of the transaction

- If price > FMV -> likely contain interest 5. Tax avoidance or sham transaction

- Payments under annuity k are excluded from this section (s 16(4)(a))

Transfer of Debt Obligation: (s 20(14))- Where there is a transfer/assignment of debt obligation AND the transferee becomes

entitled to interest accrued prior to the transfer that is not payable until sometime after the transfer

- Transferor include (in the year of transfer) the accrued amount in income (to the extent that it was not included in previous years) (s 20(14)(a))

- Accrued but unpaid interest that is included in income may be added to the cost base -> increasing cost base -> decreasing gain (s 52(1)(d))

- Transferee deduct the accrued amount from income (s 20(14)(b))- Deduction by transferee is not conditional on the transferor including the

same amount in his/her income (Antosko)- When calculated the adjusted cost base of the debt obligation, transferee

must deduct the amount deducted under s 20(14)(b) from the cost of the debt obligation -> reducing cost -> increasing gain (s 53(2)(l))

- If this amount is greater than the cost paid by transferee for the debt obligation -> the excess is deemed to be gain from a disposition of that debt obligation (s 40(3))

- In Antosko, TP acquired the debt for $10, deducted $38,335 as interest accrued prior to the transfer -> ACB = 10 – 38335 = 38325 (s 53(2)(l)) -> gain = $38,325 (s 40(3))

Discounts and Premiums: - Discount: acquiring a debt obligation at a price less than the principal amount payable on

maturity - Premium: a bonus amount paid at maturity in excess of the principal amount - Discounts and premiums can be interest or biz -> subject to interest inclusion timing

Royalties: ( s 12(1)(g) ) - Include in income any amount received that is dependent on the use of or production

from property, except agricultural land production, whether or not that amount was an installment of the sale price of the property

- Rents and royalties are such payment, both are not defined by the ITA- Rent = fixed payment for the use of property for a given period of time - Royalties = sum of money paid to a patentee for the use of a patent or to

an author for each copy of their work - Profit a prendre -> selling property related to the use of the land -> include

- Ex. excavation of gravel

- Differentiate from Perini and Sherway -> the return in those cases are based on the operation of the business as opposed to property

- Timing = received (LMW)- TP that use the accrual method may include on a receivable basis

- Problem with this section - Installment payment for the sale price is return of capital, not income - There is no recovery of previous cost under this section

Deductions Section 9(1) includes a TP’s “profit” from biz or property in computing income

- Profit is a net concept that implicitly authorizes the deduction of legitimate expenses incurred in order to earn income from B/P to which the expense relate (Symes)

- Loss carryover: 3 years back, 20 years forward (s 111(1)(a))

Deductibility depends on whether the outlay or expense was made or incurred for the purpose of gaining or producing income from B/P ( s 18(1)(a) , Symes )

- The expense does not need to lead to some income -> no causation required - Whether the expense is deductible according to accounting principles or practices (LMW)- Whether the expense is normally incurred by other TP carrying on similar biz (LMW)- Whether the expense would have been incurred if TP was not engaged in the pursuit of

biz income - In Symes, the childcare expense allowed TP to be available to practice law but it

did not derive from the business - Incurred for the day to day operation of the business (65302 BC Ltd)- Contingent expenses are not deductible (s 18(1)(e))

General limitation on expenses: must be reasonable in the circumstances (s 67)

Damages: - Whether damages are deductible depends on whether the payment was in respect of a

liability for a happening that was really incidental to the business (Imperial Oil)- Consider TP’s operation, transaction, or service in respect of which it was made

so that it may be decided whether it was made not only in the course of earning income but as part of the process of doing so

- Examples in Imperial Oil - Inn owner paid damages for injury of its customer from a broken window -

> not deductible - Damages paid by ferry company to passengers injured during embarkation

and disembarkation -> deductible - Damages paid by newspaper company for libel -> deductible - Tramway company paid damages for injuries to property and person in

connection with accidents with broke trolley wires and excavations made in the roadway -> deductible

- Symes: ship collision; biz of transporting petroleum products -> deductible

Personal Expense: ( s 18(1)(h) ) - Not deductible EXCEPT travel expense incurred while away from home in the course of

carrying on biz - Examples:

- Everyday living expense: food, shelter, clothing, recreation (LMW)- But: self-employed courier who consumed an extra meal each day -

> deductible because the extra meal was needed as a result of his biz (Scott)

- Lawyer paid legal fees to depend against sexual assault charges, which could lead to him losing his license to practice -> not deducible because charges did not arise in the course of TP’s biz (LMW)

- Childcare -> not deductible (Symes)- Commuting -> not deductible

- But: doctor set up home office used exclusively for bookkeeping and paperwork of the practice; no office at hospital -> journey to and from hospital were not commutes but journeys made in the course of practice -> deductible (Cumming)

Travel Expenses- Travel expense for biz purpose are not prohibited by s 18(1)(h)

- Travel expense = transportation cost and the ordinary living expenses that are incurred in connection with the trip (LMW)

- Limitation on meal/beverage/entertainment deduction (s 67.1) - 50% of lesser of: actual amount or reasonable amount

- Requirements: - “away from home” -> home = location of TP’s family residence or regular place

of biz (LMW)- “in the course of biz” -> requires biz nature of the trip (LMW)

- If mix purpose -> dominate purpose of the trip is determinative -> may apportion

Home Office: ( s 18(12) ) - Can deduct expenses related to home office if home office is

- Principally (>50%) place of biz, OR- Used exclusively for the purpose of earning income and on a regular and

continuous basis for meeting clients, customers, or patients - Deductions in relation to the home office cannot exceed income from the biz ->

cannot generate losses from biz (s 18(12)(b)) - Excess loss not deductible because it exceeds income from biz may be carried forward

following year, but still cannot generate losses in the following year (s 18(12)(c))

Illegal Payments: ( s 67.5(1) ) - Payments for bribery -> not deductible

Fines and Penalties: ( s 67.6 ) - Fine or penalty (other than a prescribed fine or penalty) imposed under a law of a country

or of a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty -> not deductible

Meal Expenses: ( s 67.1 ) - Limits deduction for food/beverage/entertainment to 50% of the lesser of: the actual

amount or amount reasonable in the circumstances (s 67.1(1)) -> even if it’s for business- This section applies even if TP did not enjoy any of the

food/beverage/entertainment (Stapley)- Entertainment includes amusement and recreation (s 67.1(4))- Food/beverage/entertainment for travel on airplane/train/bus -> not deductible (s

67.1(4))- Exceptions: (s 67.1(2))

- Ordinary course of biz (ex. running a restaurant)- Charity fundraising event - Compensated expenses where compensation is reasonable and specifically

identified in writing to the person paying the compensation- Expense included as taxable employment benefit or allowance - <6 special events where food/beverage/entertainment is generally available to all

individuals employed by the TP at a particular place of biz - Conferences/convention that entitles participant to food/beverage/entertainment (other

than incidental refreshments) and a reasonable part of the fee is not identified as compensation for such -> amount deemed to be $50 per day (s 67.1(3))

Promotional Expenses: - Needs to satisfy biz purpose test under s 18(1)(a)

- If satisfied -> generally deductible even though it has a lasting benefit - CL established that advertising expense paid out while a biz is in operation, and directed

to attract customers are current expense (LMW)- Expense of businessmen with a view to introduce particular products to market are also

current expense (LMW)- Cost of purchasing good will = capital expenditure (class 14.1)

Recreational Facilities and Club Dues: ( s 18(1)(l) ) - Expense or outlay in respect of “the use or maintenance of a yacht, camp, lodge, golf

course or facilities” -> not deductible, unless TP in the biz of providing such property for hire or reward (s 18(1)(l)(i))

- Expense for membership fees or dues in any club the main purpose of which is to provide dining, recreation or sporting facilities to its members -> not deductible (s 18(1)(l)(ii))

Interests Expense: ( s 20(1)(c) )

Borrowing Money- Interest on borrowed money used for the purpose of earning income from B/P is

deductible if: (s 20(1)(c)(i))

1. Amount is paid or payable in the year in which it sought to be deducted 2. Paid pursuant to a legal obligation to pay interest on borrowed money3. Borrowed money is used for the purpose of earning non-exempt income from

B/P -> MAKE SURE YOU TAKE ABOUT WHAT PURPOSE IS - Use = current (rather than original), direct use (Folio S3-F6-C1)

- Direct: If TP borrows money to buy a personal home is ineligible even if the loan enabled TP to retain income-earning investments

- It is an error to treat a sequence of transactions as one -> look at each transaction independently (Singleton)

- Exceptions to the direct use rule: (Folio S3-F6-C1)- Borrowed money used by a corporation to redeem shares,

return capital, or pay dividends - The borrowed money must replace

capital/dividends being used for eligible purposes - Consider whether TP had a reasonable expectation of income at the time

the investment was made (Ludro)- Income does not mean net income

- Where one income source is disposed of and the proceeds are used to acquire another income source -> interest on the borrowed money continue deductible, can apportion however you like (Folio S3-F6-C1)

- Can apportion if the borrowed money is not used up entirely to acquire the second income source

- If borrowed money is commingled with non-borrowed money -> TP can apply flexible approach to allocate borrowed money to eligible use (Folio S3-F6-C1)

- Borrowed money used to repay previously borrowed money is deemed to be used for the same purpose as the previous loan (s 20(3))

- Disappearing source rule (s 20.1)- Where the property is sold for less than the purchase price -> the

depreciated amount remains eligible for interest deductions4. Must be reasonable

Financing Property- Interest on an amount payable for property acquired for the purpose of gaining or

producing non-exempt income -> deductible (s 20(1)(c)(ii))- No “use” test -> BUT MAKE SURE YOU TALK ABOUT THE PURPOSE

- But must be for the purpose of producing non-exempt income - Disappearing source rule under s 20.1 also applies by virtue of s 20.1(4)

- Participating payments are not deductible under s 20(1)(c) because they are excluded amounts under s 20(1)(e)(iv.1)

Financing Expenses: ( s 20(1)(e) ) - Expenses incurred in the course of: -> deductible

- issuances or sale of trust units, stock etc - borrowing money used for the purpose of earning non-exempt income from B/P- financing property acquired for the purpose of earning non-exempt biz income

- rescheduling/restricting debt obligations from the above 2 points - Excluded amount (s 20(1)(e)(iv.1)) -> not deductible under this section

- Principal or interest of a debt obligation - Amount contingent or dependent on the use of or production from property - Amount computed by reference to revenue/profit/cash flow/commodity

price/dividends

Restricted Farming Loss: - Where TP farms part time with the pursuit of profit (s 31((1))

- Requires the farming to be ancillary or subordinate to other income sources - Loss from all farming biz is deemed to be the lesser of:

1. Amount of losses from faming, and 2. $2,500 plus the less of:

a. Half of actual losses from farming that exceeds $2,500, and b. $15,000

Cannot deduct more than $17,500 of farming losses from non-farming income, and can only deduct that much if the farm suffered a loss of $27,500 or more

Prepaid Expenses: - Cannot immediately deduct (s 18(9)(a))

i. Prepaid expense for services to be rendered after the yearii. Payments on account of or in lieu of interest, taxes, rent, or royalties in respect of

a period after the end of the year, or iii. As consideration for insurance for a period after the end of the year

- Instead, deduct in the subsequent year to which the expense can reasonably be considered to relate (s 18(9)(b))

- Compare with prepaid revenue, which are included on a received or receivable basis

Reserves:

Doubtful Debts- Doubtful debt = debt owing and possible of collection (LMW)

- If there is a reasonable doubt that an account receivable is not collectible -> doubtful debt; consider

- Age of overdue account; but delay alone is not sufficient - History of account - Financial position of debtor - Any increase or decrease in debtor’s total sales - TP’s past bad debt experience - General biz condition in the country and locality

- Reasonable amount for doubtful debt that have been previously included in income can be deducted as a reserve (s 20(1)(1))

- Amount deducted as a reserve must be included in income in the next year (s 12(1)(d))- If debt becomes bad -> can deduct under s 20(1)(p) -> no need to add in income next year

- If bad debt is actually collected -> include in income (s 12(1)(i))

Deferred Payments (s 20(1)(n))- If payment of the purchase price for a property sold is deferred to a future year, can

deduct reserve IF: 1. Amount from the sale must be included in income 2. Property must be an inventory property 3. Except for real property, all or part of the purchase price must not be due until at

least 2 years after time of sale - Reserve amount = reasonable amount that can be reasonably regarded as a portion of the

profit from the sale - Amount of reserve must be included in next year’s income unless conditions are met

again (s 12(1)(e)(ii))

Unearned Amounts- For inclusions under s 12(1)(a) - May deduct a reasonable amount as a reserve for goods and services to be rendered

after the end of the year (s 20(1)(m)) - CRA allow full amount to be deducted -> complete offset

- Include reserve amount in income in the next year (s 12(1)(e)(i))

Inventory - Inventory = a description of property the cost or value of which is relevant in computing

a TP’s income from biz or would have been so relevant if the income from biz had not been computed in accordance with the cash method and, wrt farming biz, includes all livestock held in the course of carrying on the biz (s 248(1))

- What property is inventory depends on the nature of the biz (LMW)- Deemed inventory: advertising or packaging materials, supplies, work in

progress of a biz that is a profession (s 10(5))- Cost of inventory is clearly deductible under s 9(1) as cost incurred for the purpose of

earning income - However, cost of inventory is not deductible right away

- Cost of inventory is only deductible in the year in which the inventory was sold - Include in income the revenue from selling inventory - Deduct from income the cost of goods sold = opening inventory + cost of goods

purchased during the year – closing inventory - Closing inventory = MIN (cost for acquisition, FMV at the end of year) (s

10(1))- This valuation method is only available for non-ACNT biz- If ACNT -> closing inventory = cost for acquisition (s 10(1.01))- “cost” = original cost + reasonable cost incurred for acquisition

(IT-473R)- Opening inventory = closing inventory from preceding year (s 10(2))- FMV for work in progress = amount reasonably be expected to be

receivable (s 10(4)(a))- FMV for advertising or packaging materials, supplies = cost of

replacement for that property (s 10(4)(b))- Determining “cost for acquisition” (IT-473R)

- Where practical to identify costs by reference to specific items -> ascertain its laid-down cost

- Where not practical -> specific item, average cost, or FIFO- Cannot use last in, first out method

- Use the one that gives the truer picture of TP’s income and follow consistently year to year

- Change is only accepted if the new method is more realistic and gives a truer picture

Running Expense: - Running expenses refer to expenses that are not related to any particular item of

revenue, but relate to the running of the biz as a whole (Oxford Shopping Centre)- Neither clearly current expense nor clearly capital expenditures - Benefit of running expenses generally extend beyond the year

- Running expense can be deducted right away even though it is amortized over a number of years under accounting principles as long as it yields a truer picture of TP’s income (Canderel) -> An exception to matching principle

- Examples of running expenses: - Oxford Shopping Centre: large payment to city

- Payment was made to maintain and enhance the popularity of the shopping centre while at the same time avoiding taxes for street improvement

- Payment was to induce the city to make changes on city property that could be beneficial to TP’s biz

- Payment did not change or add to P’s premises or building or in connection with the structure of the biz

- Can be revenue expense notwithstanding the once and for all nature of the payment or the more or less long-term characterization of the advantages gained

- Canderel: Tenant inducement payments - TIP’s could not be correlated directly, or at least not principally, with the

rents generated by the leases which they induced - Distinguishable if the advantage gained is only rent, which may need to be

match; this is because in Canderel, there were more general benefits in addition to rent

Incorporation Expenses: - The lesser of:

- Amount of expense incurred for the incorporation of the corporation, and - $3000 – the total amount deducted by other TP’s in respect of the incorporation of

the corporation - Can be deducted (s 20(1)(b))

Capital Expenditure: - A capital outlay, a payment on account of capital or an allowance in respect of

depreciation is NOT deductible unless permitted by the ITA (s 18(b))- For depreciable property -> can deduct CCA under s 20(1)(a)

- If a capital expenditure does not qualify for CCA -> prohibited by s 18(1)(b) unless another exception applies

- Deduction allowed only in capital gains or losses - See “Capital Expenditures” for more detail

Capital ExpendituresA capital outlay, a payment on account of capital or an allowance in respect of depreciation is NOT deductible unless permitted by the ITA (s 18(b))

- Where an expense is of a capital nature -> cannot deduct now, but will be added to the cost base

Current vs Capital Expense: - Common law test for determination: (Johns Manville)

1. Enduring benefit test - Expenditure brings lasting advantage beyond the tax year-> likely capital

2. Biz structure vs earning process test - Client list = capital asset -> expands the income-earning structure (Gifford)- Note in Johns Manville, the additional land added to the mine pit but was

still found to be a current expense 3. Recurring expenditure

- Ex. Amazon setting up warehouses and fulfillment centres -> ongoing, but hard to treat as current expenditure as it expand its operations

4. Relative size of the expenditure 5. Purpose as to acquiring an asset

- Quite arbitrary; arose in recent litigation 6. Presumption in favour of TP

- Examples (LMW)- Target of TOB

- Costs to fight off hostile TOB -> capital expenditure- Costs to facilitate friendly TOB -> current expense

- Acquirer -> costs are generally capital expenditures - Legal expenses incurred to complete takeover -> capital - Purchasing goodwill -> capital (clss 14.1)- Cost to protect IP ->

Maintenance and Repairs- If cost is small in relation to the asset being repaired, the cost is a kind that will regularly

occur, and its purpose is to simply restore to its normal capacity -> current expense - Repair a ship that otherwise wouldn’t be able to operate -> restore to original

condition -> current expense (Canada Steamship)- Where cost is large, not regular, and improve the quality substantially beyond its original

condition -> capital expenditure - Foundation was added in order to fix the first floor which had collapsed ->

improve condition -> capital (Shabro Investment)- Repairs made in anticipation of sale or as a condition of sale -> capital (Folio S3-F4-C1)

- But not if repairs would have been done regardless of the same

Capital Cost Allowance: - Section 18(1)(b) explicitly prohibits deductions in respect of depreciation AND payment

on account of capital - Section 20(1)(a) allows TP to deduct capital cost allowance for depreciable property

- 3 basic features of CCA:- Not straight-line basis -> Most CCAs are computed on a declining-balance

basis- Exception: 1100(1)(c) for class 14 property = patents, franchise,

concessions and license- Not applied to individual assets – by a class

- Most CCAs are generally computed by a class method - Not mandatory : “there may be deducted”

Is There a Depreciable Property? - “depreciable property” = as defined in (s 13(21) (s 248(1))

1. Acquired by TP (Folio S3-F4-C1)- Owned by TP, deemed to be owned by TP, or in which TP has a leasehold

interest - Does not have to have legal title -> beneficial owner can claim CCA if that

person has all the incidents of ownership: possession, use and risk - TP will be considered to have acquired a depreciable property at the earlier

of: the date on which title is obtained, or incidences of ownership are obtained (Canada Trust)

2. Included within the description of a prescribed class in Schedule II of Regs- The property must be acquired for the purpose of gaining or producing

income (Reg 1102(1)(c))- Is not inventory (Reg 1102(1)(b))- Is not a s 18(1)(l) property: yacht, camp, lodge, golf course or facility

(Reg 1102(1)(f))- Is not land (Reg 1102(2))

- The depreciable property must be available for use before the cost can be included in the calculation of UCC (s 13(26))

What is the Undepreciated Capital Cost? - UCC = (A + B) – (E + F) where: (s 13(21))

- A = capital cost of the asset acquired - For a class of assets -> add all costs - When a new asset of the class is acquired, added to UCC of the class - The depreciable property must be available for use before the cost can be

included in the calculation of UCC (s 13(26))- E = amount of CCA that already been deducted - F = Disposition of asset

- The amount = MIN (POD – selling expense, capital cost of property)

- POD = sale price and compensation for property unlawfully taken, damaged, destroyed or appropriated (s 13(21))

- POD = when property is destroyed/stolen without insurance - Disposition = any transaction entitling TP to POD (s 248(1))- Cost = amount paid to acquire the asset; not amount economically

at risk (Canada Mortgage)- See “Allocation of Proceeds” if necessary

- B = recapture -> bring UCC back to 0- Any amount included in TP’s income under this section for a tax year

before this time - Where a property is disposed of and the class becomes empty -> think about terminal loss

and recapture instead of CCA deduction

Half Year Rule - Where there is net acquisition of asset of a class, the CCA that a TP may deduct for the

class is based on the UCC of the class otherwise determined less half of the net addition of the UCC during the year (Reg 1100(2))

- UCChalf year rule = Awithout the new acquisition + ½(net acquisition) – E + B - Note that “F” and addition to “A” are considered in “net acquisition”

- The depreciable property must be available for use before the cost can be included in the calculation of UCC (s 13(26))

- Certain property is exempt from the half year rule - Class 12 property - Patents, franchises, concession or licenses (class 14) - Property for the purpose of cutting and removing merchantable timber (class 15)

Capital Cost Allowance- CCA rate found in Reg 1100(1)(a)- CCA = CCA rate * UCC for the class at the end of the year - Where TP deduct less than the max CCA for the year, the excess is not carried forward,

but remains as part of the UCC balance for future years

Recapture and Terminal Loss - POD may be less than, greater than, or equal to UCC

- If POD < UCC AND there is no asset left in the class -> terminal loss (s 20(16)) - Deductible as business loss, not under s 20(1)(a)

- If POD > UCC -> recapture (s 13(1)) - (E + F) > (A + B) -> UCC = negative- Negative amount included in income and add as “B” next time there is

addition of asset to the class - If POD > cost -> capital gain + recapture

Limitation on CCA and Stop-Loss Rules - Rental property in separate classes: each rental property acquired for more than

$50,000 must be place in a separate class (Reg 1101(1ac))- So that recapture cannot be escaped by buying more assets of the class - Rental property = building used principally for the purpose of gaining or

producing gross revenue that is rent (Reg 1100(14)) - Rental property stop-loss rule: CCA deduction capped at the net income from the rental

property (Reg 1100(11))- Deduct all other expense first -> if there is a positive amount of income left, can

claim CCA up to that amount; if no amount of income left, cannot claim CCA- CCA deduction for rental property cannot be used to generate losses - This rule does not apply to TP who is a life insurance corp, or a corp whose

principal biz was leasing, rental, developmental, or sale of real property, or partnerships who are members of such corp (Reg 1100(12))

- Separate classes for separate businesses: property acquired for producing income from one biz must be in a separate class as property acquired for producing income from another biz (Reg 1101(1))

- Lease property stop-loss rule: CCA deduction capped at the net income from the leasing property (Reg 1100(15))

- Leasing property = moveable depreciable property used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue (Reg 1100(17))

- Ex. construction equipment, boats, aircrafts that are rented out to users- This rule does not apply to TP who is a corp in the biz of leasing….. (Reg

1100(16))- Leasing property worth more than $25k

- Deems sale leaseback of specified leasing property to be a loan of the purchase price by the lessor to the lessee at gov’s prescribed interest rate, so that the rent received by the lessor is deemed to be a blended payment of interest and principal on the loan

- Lessor’s claim to CCA is restricted to the amount of principal notionally repaid on the loan each year

Enhanced Allowance for Capital Assets - Enhanced allowance in the form of expensing or accelerated depreciation

- Both forms come with the suspension of the half-year rule - Starts November 20, 2018; Phasing out in 2023- Expensing -> 100% depreciable applies to:

- Machinery or equipment for use in Canada primarily in the manufacturing or processing of good for sale or lease (class 53 or 43)

- Clean energy equipment (class 43.1 or 43.2)- Accelerated depreciation -> increase net addition to the class by 1.5 times

- Applies to other class of capital property - Any disposition reduced non-eligible property first before applying the 1.5 times

incentive to the net addition- So as to keep addition of eligible property higher

- First year enhanced CCA deduction will be lost if not claimed - Increase to net addition only available between 2018 and 2024, but suspension of

half year rule continues to 2027 - Non-Eligible property:

- Property acquired from non-arm’s length and rollover transaction

Allocation of Proceeds of Disposition - In the sale of assets comprising of various depreciable and non-depreciable property,

what would the SELLER like to maximize?- Maximize non-depreciable and Minimize depreciable property = max CG and min

recapture - In the sale of assets comprising of various depreciable and non-depreciable property,

what would the BUYER like to maximize?- Maximize depreciable and minimize non-depreciable property -> can depreciate

the asset earlier- If an amount received or receivable from a person can reasonably be regarded as being

in part the consideration for the disposition of a particular property of TP, that amount shall be deemed to be proceeds of disposition of the particular property irrespective of the form or legal effect of the contract or agreement, and the person to whom the property was disposed of shall be deemed to have acquired it for an amount equal to that part (s 68)

- Allows the Minister to deem an allocation between POD of properties (Golden)- Amended after Golden such that this section does not required property +

something other than property in order to apply - Consideration to determine whether allocation is reasonable (Golden)

- Bona fide negotiations between the parties - Unreasonably if the amount stipulated in the agreement departs

significantly from the FMV and there is little E that the parties engaged in hard bargaining over the allocation

- Will interfere if it is clearly unreasonable or a sham - Consider both seller and buyer’s perspectives and the surrounding

circumstances- Consistency between buyer and seller- Consistency between contractual allocation and tax positions

- Look to the purchase and sale agreement - If both parties agreed on the allocation -> hard for CRA to overturn

int despite the language in s 68

Disposition of Building- Section 13(21.1) prevents TP from claiming a terminal loss on the disposition of a

building to the extent that the TP either realizes a gain from the disposition of subjacent or immediately contiguous land in the same tax year or does not dispose of the land

- i.e. If there is capital gain on the land and terminal loss on the building -> automatic reallocate the proceeds to get rid of the terminal loss

- This would apply to Golden where allocation of POD to building is < UCC- Section 13(21.1) applies where TP holds onto the land

CAPITAL GAINS AND LOSSES

Section 3(b) includes capital gain in income - Capital loss only deductible against capital gains

- Loss carryover: 3 years back, indefinitely forward (s 111(1)(b))- Complete deduction in year of death (s 111(2))

- Loss from listed personal property only deductible against gains on listed personal property (s 41(2)(a))

- Loss carryover: 3 years back, 7 years forward (s 41(2)(b))

Capital gain = any gain from the disposition of property is a capital gain unless it is otherwise taxed as income (s 39(1)(a))

- CG = POD – (ACB + selling expense ) (s 40(1))- POD includes sale price of property, compensation for property destroyed,

appropriated, or damaged, mortgage settlement upon foreclosure (s 54)- ACB: (s 54)

- Depreciable property = capital cost -> cost paid to acquire (Canada Trust)- Other property -> cost of property adjusted in accordance with s 53

- Taxable CG = 50% of CG (s 38(a))

Capital loss = any loss from the disposition of property if that loss would not be otherwise deductible as a loss under s 3 (s 39(1)(b))

- CL = (ACB + selling expense) – POD (s 40(1))- Allowable CL = 50% of CL (s 38(b))

Capital property (s 54)- Any depreciable property, and

- Depreciable property -> eligible for CCA (s 13(21))- Any property (other than depreciable property), any gain or loss from the disposition of

which would, if the property were disposed of, be a CG or CL - Canadian securities -> TP can choose to treat securities as capital property (election is

permeant) (s 39(4)), except Canadian securities held by a trader/dealer in securities, a financial institution, a lending institution, a non-resident (s 39(5))

- Canadian securities = capital stock of a corporation resident in Canada (s 39(6))

Disposition = any transaction entitling TP to POD (s 248(1))- Timing = when TP become “entitled” to POD (LMW)- If involuntary disposition, timing = earlier of (s 44(2))

1. The day TP agreed to an amount as full compensation 2. The day the amount of compensation is finally determined 3. 2 years following the day of loss/destruction/taking of property

- Deemed disposition: - Gifting upon death or inter vivos, change in use- Destruction or loss of property without insurance -> POD = 0- Demolition, appropriation, foreclosed

Real Property: Trading vs Investing - Have to make sure the proceeds from selling real property is not income from biz before

it can be capital gain -> usually where TP is engaged in buying and selling property on the side

- Business includes a profession, calling, trade, manufacture, or undertaking of any kind whatever and, …, an adventure or concern in the nature of trade but does not include an O/E (s 248(1))

- Consider: (LMW)- Intention on acquisition

- Is it to resell or hold to generate income- Skill and experience of TP, coupled with the frequency of the transaction - Whether TP uses borrowed money or own money - Subsequence course of dealing

- Efforts made to attract purchases or to make the property more marketable- Whether the transaction relate to TP’s ordinary work

- If related to TP’s ordinary work -> more likely to be trading - How long is the property held by TP

- If short -> more likely to be trading - Circumstances responsible for the sale

- Did a resale arose from something unanticipated at the time of purchase- Whether TP uses the property to earn income

- If intention is to hold property as a source of income or any purpose other than resale -> investment

- Secondary intention (Regal Height, Canada Safeway)- If primary intention is to use property in some non-speculative way, but

with a secondary intention of selling it at a profit if the primary purpose does not work out -> trading

- Secondary intention to resell must exist at the time of purchase and have been an operation/motivating reason for acquisition

Special Computation Rules

Personal-use Property

Personal-use property includes (s 54)- Property primarily used for personal use and enjoyment byTP/person related to

TP/beneficiary of TP who is a trust - Debt owing to TP in respect of the disposition of TP’s personal-use property - TP’s option to acquire personal-use property

List personal property = personal-use property that is (s 54)- Print, etching, drawing, painting, sculpture, or other similar work of art, jewelry,- Rare folio, rare manuscript, or rare book,- stamp, or coin

ACB and POD of personal-use property (including listed personal property) are deemed to be = Max (actual figure, $1000 ) (s 46(1))

- CG = POD – (ACB + selling expense) (s 40(1))- If gain -> taxable (s 3(b))- If loss -> stop-loss rule

- Loss from disposition of personal-use property = nil (s 40(2)(g)(iii))- Stop-loss rule does not apply to listed personal property

- Loss from LPP only deductible against gains on LPP (s 41(2))

Gifting upon Death- Donor deemed to have disposed of the property at FMV -> POD = FMV (s 70(5)(a))

- Donor realizes any capital gain or loss - Donee deemed to have acquired the property at FMV (s 70(5)(b))

- Donee does not pay tax on receipt, but may get capital gain or loss in the future - These rules do not apply to spouse or CL partner of the deceased (s 70(6)(c))

Inter Vivos Transfer to Non-Arm’s-Length Persons - Non-arm’s length definition

- Related persons are deemed to not be dealing at arm’s length (s 251(1))- Blood, marriage, CL relationship, adoption, corporation controlled by

common/related persons (s 251(2))- Question of fact whether persons whether person not related are dealing at arm’s

length (s 251(1)(c))- If property sold for less than FMV

- Transferor deemed to have received POD at FMV (s 69(1)(b)) -> capital gain, rollover rules may apply

- Transferee cost = priced paid - If property sold for more than FMV

- Transferor POD = price received - Transferee cost = FMV (s 69(1)(a))

- If transfer to spouse/CL partner or minor -> apply attribution rules

Superficial Loss

Superficial loss = TP’s loss from the disposition of property in any case where: (s 54)- 30 days before and after the disposition, TP or affiliated person acquires a (substituted)

property that is, or is identical, to the property disposed, AND- At the end of the period, TP or affiliated person owns or had a right to acquire the

substituted property

Affiliated person (s 251.1(1))- Spouse or CL partner, corporations controlled by a common/affiliated person

Superficial loss is deemed to be nil (s 40(2)(g)(i)) -> no deductible in year of disposition Superficial loss is added to ACB of the substituted property (s 52(1)(f))

- Superficial loss is preserved and realized in the future disposition of substituted property

Change in Use

Non-income producing income producing - TP is deemed to have disposed of the property at FMV at the time of change in use, and

immediately reacquired it at a cost equal to FMV (s 45(1)(a))- For depreciable property:

- Change from income producing to non-income producing - Disposed at FMV, reacquired at FMV (13(7)(a))

- Change from non-income producing to income producing- Reacquired at: Min (FMV, cost + ½(FMV – cost)) (13(7)(b))

- Gain/loss recognized in the year of change in use

Income producing income producing - Section 45(1) does not apply here -> CRA disagrees with CAE (IT-102R2, IT-218R)

- Leases with different types of options to purchase: (CAE)1. Exercisable at any time during the lease (firm purchase option) ->

inventory upon sale 2. Negotiable purchase option -> not inventory until the purchase option

could be exercised -> capital property before that time - Can apply notional disposition

- CRA will determine gain/loss based on a notional disposition in the year of disposition; but the gain/loss is not recognized until the eventual disposition of the property

Non-Real Property change between income producing uses (IT-102R2)- Where TP both sells and lease/rent (not real) property -> proceeds of sale of the property

= income from sale of inventory, UNLESS: - TP operates distinct leasing and sale divisions, - Different properties are used for leasing and sale, and - Rental property is sold for less than the cost to the TP

- Exception: where a particular property is leased- Without option to purchase, - The lease is long enough such that the eventual sale price is not higher than the

cost, and- The particular property is not ordinarily replaced by other property during the

lease Apply notional disposition rule

Real Property (IT-218R)- Vacant land that is capital property is converted to inventory at the earlier of:

- The time when the owner starts to make improvements with a view of selling, and - The time of making application for subdivision, provided TP proceeds with the

development of the subdivision - If the relevant authority rejects an application and the property is sold en bloc -> sale of

capital

Roll overs

Qualifying transfer: (s 73(1.01))a. To spouse or CL partner b. Former spouse or CL partner c. A trust under which spouse or CL partner is a beneficiary

Where there is qualifying transfer of capital property: (s 73(1))- Transferor is deemed to have disposed the property for proceeds equal to:

- The UCC of the property (proportion of the class), or - ACB at time of qualifying transfer

- Transferee acquires the property at cost equal to the deemed proceeds Does not realize gain or loss at time of transfer

- When transferee sells property, ACB = cost of property paid by transferee

Can elect out of roll-over

No similar rollover for transfer to children

Reserve for Deferred Payment - Section 40(1)(a) permits a deduction of a reserve for future proceeds as a relief measure,

but can only deferred for a max of 5 years 1. Determine gain otherwise determine -> i.e. total capital gain 2. Reserve is the less of:

a. Proportion of deferred gain = amount of gain otherwise determined * deferred POD (i.e. POD not yet due) / total POD (s 40(1)(a)(iii)(C))

b. Statutory 5 year limitation = amount of gain otherwise determined * (4 – number of preceding years) / 5 (s 40(1)(a)(iii)(D))

- Number of proceeding years = how many years has it been - For year 1 -> 0- For year 2 -> 1, etc

3. Amount of gain for the year of disposition = gain otherwise determined – reserve- Reserve from the previous year becomes the new “gain otherwise

calculated” for the next year

ANTI-AVOIDANCE RULES

Inter Vivos Transfer to Non-Arm’s-Length Persons Non-Arm’s Length Persons

- Related persons are deemed to not be dealing at arm’s length (s 251(1)(a))- Blood, marriage, CL relationship, adoption, corporation controlled by

common/related persons (s 251(2))- Blood relationship = child/descendant/brother/sister (s 251(6)(a))- Marriage = married to the other or to a person who is so connected by

blood relationship (s 251(6)(b))

- CL partnership = CL partnership with the other or a person who is connected by blood relationship (s 251(6)(b.1))

- Adoption = legally or in fact, as the child or as the child of a person who is so connected by blood relationship (s 251(6)(c))

- Niece and nephew are not related persons - Question of fact whether persons not related are dealing at arm’s length (s 251(1)(c))- In other case, question of fact whether the parties are dealing at arm’s length (s 251(c))

Rules: - If property sold for less than FMV

- Transferor deemed to have received POD at FMV (s 69(1)(b)) -> capital gain, roll over rules may apply

- Transferee cost = priced paid - If property sold for more than FMV

- Transferor POD = price received - Transferee cost = FMV (s 69(1)(a))

- Acquire property as gift - Transferor deemed to have received POD at FMV - Transferee deemed to have acquired at cost = FMV

- If transfer to spouse/CL partner or related minor -> attribution rules may apply

Attribution RulesAttributes gain and losses to the transferor: including future gains and losses from property

Non-Application: - Attribution rules do not apply if property is transferred at FMV, or indebtedness with

commercial interest rate and interest is regularly paid and spousal transfers, elected out of rollover rule (s 74.5(1))

- Attribution rules do not apply to a transfer or loan of property where it may reasonably be concluded that one of the main reasons for the transfer or loan was to reduce the amount of tax that would, but for this subsection, be payable on the income and gains derived from the property or from property substituted therefor (s 74.5(11))

- Income from biz not attributable (IT-511)- These rules do not apply to parents, adult children, or adult siblings

Transfers and Loans of Property to Spouse or CL Partner: ( s 74.1(1) ) - Where TP’s property has

- Been transferred or lent, directly or indirectly, by means of trust or otherwise, - to or for the benefit of a spouse or CL partner- any income or loss from the property or substitute property throughout the period

during which TP is a resident in Canada is deemed to be the income or loss of the TP

- Where spouses or CL partners are living separate and apart because of a breakdown of their marriage or CL partnership, s 74.1 ceases to apply as long as the separation continue to apply (s 74.5(3))

- Applies to individual who becomes the spouse or CL partner after the transfer (IT-511)

Transfers and Loans of Property to Minors: ( s 74.1(2) ) - Where TP’s property has

- been transferred or lent, directly or indirectly, by means of trust or otherwise,- to or for the benefit of a person:

- under 18 - who does not deal with TP at arm’s length, or - is the niece or nephew of TP

- any income or loss from the property or substitute property throughout the period during which TP is a resident in Canada is deemed to be the income or loss of the TP

Transfers and Loans of Property to Repay Financing of Another Property: ( s 74.1(3) ) - Sections 74.1(1) and 74.1(2) apply to transferred or loaned property which is used either

to repay borrowed money that was used to acquire property or to reduce an amount payable for that property

Taxable Capital Gain and Allowable Capital Loss from the Property Transferred or Lent: ( s 74.2(1) )

- Any taxable gains or allowable capital loss from the property lent or transferred to the spouse or CL partner are deemed to be that of the TP

- Applies to listed personal property (s 74.2(1)(c))- Does not apply to minors

Income Diversion Broader than the attribution rules -> not limited to spouse, CL partner, or minors -> cover parents, adult children, or adult siblings

Indirect Payments: ( s 56(2) ) - Where there is a payment or transfer of property to another person,- At the direction/concurrence of TP,- The payment or transfer is for TP’s own benefit or for the benefit of someone TP wish to

have the benefit conferred, and - Payment or transfer would have been made to the TP if it had not been made to that

person- McClurg: payment of dividends only to wife’s share class; HELD: s 56(2) did not

apply because if the dividends had not been declared, the money would have stayed with the corporation and would not have gone to TP

Include in TP’s income, not the transferee

Assignment of Income: ( s 56(4) ) - Where the right to an amount - Has been transferred/assigned to a non-arm’s length person

- Related persons: Blood, marriage, CL relationship, adoption, corporation controlled by common/related persons (s 251(2))

- Amount would have been included in TP’s income if the right had not been transferred or assigned

- McClurg: payment of dividends only to wife’s share class; HELD: s 56(2) did not apply because if the dividends had not been declared, the money would have stayed with the corporation and would not have gone to TP

- The amount transferred while TP was a resident in Canada is included in TP’s income

Interest-Free or Low-Interest Loans: ( s 56(4.1) ) - Non-arm’s length loan that bear little or no interest - The borrower invests the loan in an income-producing property, and- It may reasonably be considered that one of the main reasons for the loan was to reduce

or avoid tax Attributes income from the property to the lender

General Anti-Avoidance Rule (GAAR)The application of GAAR involves 3 steps: (Canada Trust)

1. Whether there is a tax benefit arising from transaction under s 245(1) and (2)- Tax benefit = a reduction, avoidance or deferral or tax or an increase in refund of

tax or another amount paid under the act (s 245(1))- Factual determination

- If a reduction against taxable income is claimed, the existence of a tax benefit is clear -> reduction of tax

- In other instances, the existence of tax benefits can only be established by comparison with an alternative arrangement

2. Whether the transaction is an avoidance transaction under s 245(3), in the sense of not being arranged primarily for bona fide purposes other than to obtain the tax benefit

- Transaction include an arrangement or event (s 245(1))- Avoidance transaction = a transaction that results in a tax benefit, either by itself

or as part of a series of transactions unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit (s 245(3))

- Series of transactions - A series of transactions involves a number of transactions that are

pre-ordained in order to produce a given result with no practical likelihood that the pre-planned events would not take place in the order ordained

- Section 248(10) extends the meaning of serious of transaction to include related transactions or events completed in contemplation of the series

- Parties knew of the series such that it could be said that they took it into account when deciding to complete the transaction

- “in contemplation” = because of or in relation to, not actual knowledge

- Can be applied to events either before or after the basic avoidance transaction

- If at least one transaction in a series of transactions in an avoidance transaction, then the tax benefit that results from that series may be denied by GAAR

- Primarily for bona fide purposes - If there are both tax and non-tax purposes to a transaction, it must

be determine whether it was reasonable to conclude that the non-tax purpose was primary

- If so -> GAAR cannot be applied to deny the tax benefit - Objective assessment of the driving forces of the transaction ->

factual inquiry - Consider the relationship between the parties and the actual

transactions that were executed between them - Tax planning, arranging one's affairs so as to attract the least

amount of tax, is a legitimate and accepted part of Canadian tax law- Section 245(3) does not permit a transaction to be

considered to be an avoidance transaction because some alternative transaction that might have achieved an equivalent result would have resulted in higher taxes

- Not limited to real business purposes -> family purposes can also be a non-tax purpose

3. Whether the avoidance transaction is abusive under s 245(4)a. Interpret the provisions giving rise to the tax benefit to determine their object,

spirit and purpose - Must be interpreted in their legislative context, together with other related

and relevant provisions, in light of the purposes that are promoted by those provisions and their statutory schemes

b. Determine whether the transaction falls within or frustrates that purpose - Where TP carries out transactions primarily in order to obtain, through the

application of specific provisions of the act, a tax benefit that is not intended by such provisions, section 245 should apply

- This would be the case even though the strict words of the relevant provisions may support the tax result sought by the TP

- Examples of abusive tax avoidance - TP relies on specific provisions of the act in order to achieve an outcome

that those provisions seek to prevent- When a transaction defeats the underlying rationale of the provision- An arrangement that circumvents the application of certain provisions in a

manner that frustrates or defeats the object, spirit or purpose of those provisions

- Burden of Proof: section 245(1), (2), and (3) = TP; section 245(4) = minister