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Law 345 - Taxation - Martha O’Brien - 2015

Kaitlyn Kastelic: Outline

Kaitlyn Kastelic | Page 1

ContentsI. Studying Tax Law: Basic Concepts and Terminology.............................................................................................................3

II. Canada’s Tax System............................................................................................................................................................5

Interpreting Tax Legislation: Placer Dome (2006, SsCC).......................................................................................................5

III. Source Concept of Income: Section 3, ITA...........................................................................................................................6

Included and Excluded Sources of Income...........................................................................................................................6

Surrogatum Principle...........................................................................................................................................................7

IV. Receipt and Enjoyment of an Amount as Income or “Nexus”.............................................................................................8

Nexus – between a taxpayer and a source of income..........................................................................................................8

Net Worth Assessment........................................................................................................................................................8

V. Residence: the Primary Basis of CDN Tax Liability................................................................................................................8

Part-Year Residence...........................................................................................................................................................10

Tax Treaties........................................................................................................................................................................11

Provincial Residence..........................................................................................................................................................13

Residence of Corporations.................................................................................................................................................13

Taxation of Non-Residents.................................................................................................................................................14

VI. Income from Office or Employment.................................................................................................................................14

A. Basic Definitions and Provisions.....................................................................................................................................14

B. Employee vs. Independent Contractor/Consultant/Sole Proprietor..............................................................................15

C. Interposing a Corporation in Employment Relationship (PSB’s): Section 125(7)............................................................16

Non-arm’s Length and Related Persons: section 251.....................................................................................................18

D. Introduction to Benefits, Reimbursements and Allowances..........................................................................................19

Valuation of Employment Benefits.................................................................................................................................19

Allowances.....................................................................................................................................................................20

Special and Remote Worksites – subsection 6(6)...........................................................................................................20

Automobile and Travelling Allowances..........................................................................................................................21

E. Deductions in Computing Income from Employment....................................................................................................22

1. Travelling Expenses...............................................................................................................................................22

2. Legal Expenses......................................................................................................................................................23

3. Professional and Union Dues................................................................................................................................23

4. Cost of Supplies....................................................................................................................................................24

5. Home Office Expenses..........................................................................................................................................24

VII. Income from Business or Property...................................................................................................................................24

A. Business as Source of Income: Organized Activity and Pursuit of Profit........................................................................25

Hobby or Pursuit of Profit?............................................................................................................................................25

Source of Income Test....................................................................................................................................................26

B. Carrying on a Business to Earning Income from Property vs. Realization of Capital Gains.............................................27

Tax Outline Spring 2015 – O’Brien


Adventure or Concern in the Nature of Trade................................................................................................................27

C. Income from Property....................................................................................................................................................28

1. General.......................................................................................................................................................................28

>> Source of Income Test...............................................................................................................................................28

2. Interest.......................................................................................................................................................................29

3. Rents/Royalties..........................................................................................................................................................30

4. Dividends....................................................................................................................................................................30

VIII. Deductions in Computing Income from Business and Property......................................................................................31

A. Structure of the Act (ITA)...............................................................................................................................................31

B. The Income Earning Purpose Test..................................................................................................................................31

C. Personal or Living Expenses...........................................................................................................................................32

Moving Expenses...........................................................................................................................................................33

Home Office Expenses....................................................................................................................................................34

D. Deduction of Interest Expense.......................................................................................................................................34

E. Policy Reasons for Denying Deductions..........................................................................................................................36

Outlays of Capital: Capital vs. Current Expenditures......................................................................................................36

Carry forward/back of non-capital losses.......................................................................................................................37

X. Capital Gains and Losses....................................................................................................................................................37

ACB of “Identical Properties”.........................................................................................................................................39

Part Property ACB..........................................................................................................................................................39

Proceeds of Disposition..................................................................................................................................................39

Deemed Dispositions and Deemed Proceeds.....................................................................................................................40

Deemed Proceeds: Gifts & Sales below FMV to Non-Arm’s Length Persons..................................................................41

Deemed Dispositions on Death......................................................................................................................................42

Recall: Lottery winnings and losses................................................................................................................................43

Personal Use Property (PUP) and Listed Personal Property (LPP)......................................................................................43

Principal Residence Exemption..........................................................................................................................................45

XI. Depreciable Property and Capital Cost Allowance (CCA)..................................................................................................46

Case Index..............................................................................................................................................................................48

Exam Prep Notes- Generally doesn’t want policy except if explicitly asked.- Quality is very important (paragraphing, grammar, spelling, coherent argumentation, legal/tax terms) - Citations on exam – don’t have to be perfect; exact section numbers to support answers = best- You are free to use the abbreviations in exam (define them if they are not widely used)- Feel free to bring in calculator, but she will not deduct for arithmetic mistakes- Describe how a tax provision would apply in a situation, describing in words. Will not really have to do

calculations, because in law our language is words- Interpretation Bulletins (folio’s): represent published CRA guidelines on the interpretation of tax provisions, but

they are not binding on the court. I.e. if court finds that the bulletin does not adequately represent the law, it is



able to decide a case contrary to the bulletin.

I. Studying Tax Law: Basic Concepts and TerminologyWhat is a “Tax”?

- Key attributes : compulsory and unrequited(MNR v. Shawinigan Water and Power Co. 1953 Ex. Court.)

Essential characteristics of a tax:- Compulsory payment (not voluntary) - Enforced pursuant to legislative authority to exercise taxing power- Contribution is of a proportional character and payable in money collected to

raise revenue for public/government purposes- Not a payment for some special privilege or service rendered (i.e. unrequited)

- There is a continuum: “tax <<< >>> some other form of payment”. Compare a tax to:o Fine or Penalty: payment to deter behaviour; applied according to gravity of the offence rather than

wealth of offender; revenue generatoro Prices or Fees: requited payment for good or serviceo Royalty or License: voluntary payment to gov’t in respect of natural resources in exchange for right to

exploit; requited

Canada’s Tax System

CANADA’S TAX SYSTEM: Income from Sources = Net Income

Less: Exemptions (do not report)Less: Deductions

= Taxable Income[Apply Tax Rate]= Tax Otherwise Payable (BEFORE Credits)

Less: Credits = Tax Payable (= Actual Tax Liability)

Exemptions: Not reported on tax return or included in computing income (s. 81). Examples of amounts which are not from a source (gifts, inheritances, windfalls, lottery winnings, money found on the street).

- Need not necessarily point to a specific ITA provisionDeductions: Subtracted from net income (to arrive at taxable income).

- Worth more dollars to a person in higher tax bracket than lower- Must be provided by some part of the Act

Credits: Amount deducted from tax otherwise payable. It is computed by multiplying: (statutory amount) x (lowest statutory rate);

- Worth the same in dollars to a person the lowest tax bracket as it is to a person in the highest tax bracket;

- Must be provided by Act

Attributes of TaxesTax Base Amount, transaction or property upon which tax is levied; can be anything you define it as!

1. Income – based on amount an individual earns (e.g. income tax, payroll taxes) and indirectly based on savings

2. Consumption – based on amount that individual spends (e.g. GST (value-added), PST (single-stage), excise taxes (selective))Policy: ensures those who have no income but lots of savings still pay tax

3. Wealth – based on amount represented by an individual’s property (e.g. annual tax on net wealth, wealth transfer taxes, real property taxes, capital gains (ish))

Tax Filing Unit Unit that is responsible for paying tax (= taxpayer, usually); i.e. person who enjoys the incomeTax Rate Rate applied to tax base to determine tax liability

1. Statutory – set each year based on indexing at average inflation rate (s. 117)Up to $43,953 15%$43,954 - $87,907 22%$87,908 - $136,207 26%$135,208 and over 29%

2. Marginal – highest rate that applies to last dollar of taxable income3. Average – total tax payable divided by taxable income4. Effective – “taxes payable/net income” (includes any exempt amounts, i.e. inheritances)



Tax Period Time period over which tax base is measured and taxes collected (CDN individuals: calendar yr)Tax Collection Admin. process to collect, assess, review, audit and enforce tax system (e.g. CRA for income tax)

Other Tax Rates

January 5 Handout

CCPC (up to $ 500,000); defined in s. 125(7) 13.5% = (11% Federal plus 2.5% BC)All income of corporations that are not CCPC’s 26% = (15% Federal plus 11% BC)CCPC from a Personal Services Business 38% (combined Federal plus BC)CCPC from a Specified Investment Business 38% (combined Federal plus BC)

- Note: for Corporations, there is no basic personal exemption; income is taxed on the first dollar of profit

Types of TaxesProgressive Higher a taxpayer’s income, the higher the rate they payProportional Flat rate not dependent on income (stays constant even as income rises) – i.e. BC’s PST is a flat 7%Regressive While regressive rates are very rare, we may see regressive effects of tax more frequently.

Where a tax has “regressive” effects: lower income earners pay a higher proportion of their disposable income as tax (i.e. tax payable, not the rate). I.e. Consumption taxes – lower income earner loses greater portion of income after paying for necessities than does higher income earner)

Tax “Incidence”: Direct vs. Indirect- Direct tax: is demanded from the person who it is intended to pay it (i.e. courts accept GST as “direct”)- Indirect tax: demanded from one person w/ expectation that another person will indemnify the expense

o I.e. Tax on a unit of a marketable commodity that is ‘passed on’ to the final consumer- “Is the tax related or relatable, directly or indirectly, to a unit of the commodity or its price, imposed wen the

commodity is in the course of being manufactured or marketed?” (Allard Contractors Ltd 1993 SCC)- Example: tax on alcoholic beverages >> passed onto consumers (in price of goods when sold)

Accounting Terminology“GAAP”: Generally Accepted Accounting Principles“IFRS”: International Financial Reporting StandardsTiming: Cash method of accounting – includes amounts that are actually received and paid

VS. Accrual method of accounting – includes amounts that are accrued ( receivable and payable ) Note: there may be different standards for reporting income for tax purposes vs. accounting purposes

- Purpose of financial accounting: to give a true picture of the company’s financial situation- Purpose of reporting for taxes: to assess taxes payable

Tax law PREVAILS over professional accounting principles (i.e. where accounting standards don’t accord w/ how the courts have interpreted tax law, the accounting principles will not be followed for tax purposes)

Tax Policy Criteria and Tax ExpendituresVertical Equity People who make more should pay moreHorizontal Equity People in similar situations should be taxed the same no matter the source of income

E.g. Include fringe benefits in income from employment (i.e. a car = benefit) Neutrality Taxes should not unduly affect personal or economic decisions.

Consider: how do credits influence behaviour in reality?Simplicity Should be/have:

1. Comprehensible & rational – should be able to see the logic of it (≠ arbitrary)2. Certain – not vague (not at tax collector’s discretion post-t/p action)3. Compliance convenience – is t/p able to file own return; cost of compliance

shouldn’t be huge; (our system does not generally meet this criterion as those w/ multiple levels of incomes, investments, etc. >> things can get messy)

4. Administrative convenience – must not be too costly for gov’t to administer5. Difficult to avoid or evade – if it offers opportunities for non-compliance then it

becomes fundamentally unfair (i.e. those who do not cheat pay more)



Avoidance = legal = tax minimization; organizing affairs to minimize tax (in a legal/ moral way) until it becomes abusive (>> evasion per general “anti-avoidance rule”)Evasion = illegal = actions to defraud tax system; may be within written language of the law but NOT within the spirit of the law (criminal sanctions)

Global Competitiveness Effective rates should be such so as to attract capital – both foreign and domestic investments – though may also turn on clarity and fairnessI.e. do not want to induce companies to avoid conducting business in CanadaCompetitiveness includes many different factors (tax, corruption, etc.)

Tax Expenditures: ITA includes many provisions that are meant to (de)-incentivize certain behaviours. There are also gov’t expenditures that provide implicit subsidies to taxpayers to encourage engagement in certain types of activities or provide certain t/p’s w/ a transfer payment (evaluated using budgetary criteria).

- Taxation can be seen as a form of regulation (i.e. deductions for education; dis-incentivizing smoking)- Societal values shape tax law- Is the tax system the best place to incentivize through reduced taxes? Or, should it be through direct

subsidization or direct payment? Ask: is it effective? Are people responding as intended?

II. Canada’s Tax SystemConstitutional Division of Taxing Power

Federal s. 91(3): federal power to legislate over all things not under provincial jurisdiction including “The raising of Money by any Mode or System of Taxation”; can levy indirect and direct taxes

Provincial s. 92(2): provincial authority for direct taxation in order to raise revenue for provincial purposess. 92(9): provincial authority to issue “shop, saloon, tavern, auctioneer, and other licences” in order to raise revenue for provincial, local or municipal purposes

Not considered an indirect tax but licensing scheme (cost passed onto consumer)Charter Charter s. 36(2): “Parl. and the gov’t of CND are committed to the principle of making equalization pmts

to ensure that provincial gov’ts have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation” >> constitutionalizes equalization pmts

Federal-Provincial Tax Collection Agreement

TCA: bilateral agreements harmonizing provincial-federal tax systems for simplicity & convenience Federal gov’t defines income, exemptions, and deductions for corporations and individuals

under ITA; provinces follow suit; CRA collects for both jurisdictions Exceptions: AB corporate tax; QB individual and corporate tax (but closely follow fed’l tax rules) Provinces set own brackets and rates, basic personal exemption level, provide for provincial tax

credits, and apply an annual inflation indexation rate which may differ from the federal oneRoles of Actors

CRA: quasi-independent agency within Ministry of Revenue; enforces tax legislationDepartment of Finance: policy maker; drafts legislationDepartment of Justice: interpreter of tax legislation; represents CRA in TCC

Admin and Judicial Review of Tax Assessments and Court StructureSee handout; NOT EXAMINABLE

Interpreting Tax Legislation: Placer Dome (2006, SsCC)Placer Dome Canada Ltd. v. Ontario (2006 – SCC) See Handout

- Held that the modern, contextual approach applies to taxation statutes (rejected strict approach)- Burden of proof is on the taxpayer to “[establish] that the factual findings upon which the Minister based the

assessment are wrong” (para 25)1. Look to textual interpretation b/c t/p should be able to rely on clear meaning (policy: certainty in tax provisions)2. THEN if there is more than 1 reasonable interpretation, look to context and purpose of the Act (para 23)

In exceptional cases, residual assumption in favour of the taxpayer (only where “application of the ordinary principles of interpretation does not resolve the issue” (para 24)



III. Source Concept of Income: Section 3, ITASource Concept of IncomeNo definition of income in the Act!! (ITA endeavours to define “income”, but does not have a go-to definition)“Source concept of income” requires that every revenue received by the taxpayer must be allocated to a source which is either expressly enumerated in the Act or recognized as a source in case law

- Note: SCC affirmed that court may continue to accept arguments re: un-enumerated sources of income (i.e. s. 3(a) wording “without restricting the generality of the foregoing”) (Schwartz).

Distinguish: “receipt of the of income from a source [income]” vs. disposition of the source itself [capital]” (Bellingham)Consider: Haig-Simons definition of income: “accretions to wealth” (broad, would include gifts, inheritances (Bellingham)Section 3 & 56: are the main sections re: sources of income

Section 3: A taxpayer’s income is how to compute a taxpayer’s income in broad terms (Handout “In a Nutshell”)Section 3: A taxpayer’s income is for the year is determined as (PARAPHRASED):

(a) The total of all income from sources [enumerated or un-enumerated], excluding capital gains, from a source inside or outside Canada

ADD:(b) Only if a positive amount: capital gains minus allowable capital losses

[ignore listed personal property for now] DEDUCT:

(c) Any deductions permitted under Subdivision E – these include moving expenses, child care expenses, legal expenses in respect of retiring allowances, some others we won’t cover

(d) Losses from sources (i.e. a loss from one source may thus offset income from another source, text p. 81)Note: [We don’t cover allowable business investment losses]

Section 56(1) Amounts to be included in income – other income types not traditionally-taxed, but expressly includedSection 56(1): Without restricting the generality of s. 3, the following sources shall be included in income:

(a) pension benefits, unemployment insurance benefits, etc. including retiring allowances

Included and Excluded Sources of IncomeRecognized EXCLUSIONS (Bellingham):

- Gambling gains (does not flow from productive source of income)- Gifts and inheritances (does not flow from productive source of income)- Residual category of windfalls- Strike pay (Fries)

Recognized INCLUSIONS:

- Payment received in exchange for discharge of even a questionable legal right may constitute income from a source (Mohawk Oil)

- Inducement to leave employment = income from a source [not capital disposition] (Curran)- Amounts received from expropriating authority (as either income or capital) (Bellingham)

Residual Category of Windfalls

Indicia of a payment that constitutes a windfall ( Cranswick ): - No enforceable claim to the payment- No organized effort to receive payment- Payment not solicited by the taxpayer- Payment not expected by the taxpayer, either specifically or customarily- Payment unlikely to be recurring- Payor not a customary source of income to the taxpayer- Payment not in consideration for or in recognition of services, property or anything else

provided by the taxpayer (i.e. not earned)NOTE: relevant but not conclusive

Examples:- Punitive damages (Cartwright and Sons)- Payment to minority shareholder to stop litigation following share devaluation (Cranswick)



Surrogatum PrincipleSurrogatum Principle

When t/p receives a payment that is meant to replace an amount that is usually taxable (in full or an identifiable portion thereof), the replacement portion of the payment is taxable (Tsiaprailis).

- if the lump sum cannot be apportioned between amounts meant to replace taxable amounts and other amounts, then the full sum is NOT taxable (Schwartz)

Lump-Sum Awards

Where an amount of a lump-sum award is received (i.e. in place of periodic disability payments), t/p bears the burden of establishing which portion of the lump-sum award is non-taxable (Siftar).

Under the surrogatum principle, the whole lump sum or a portion clearly established as taxable will be included as replacement income from the included source that it replaces (Tsiaprailis).

Test for applying the surrogatum principle ( Tsiaprailis ): 1. What was the payment intended to replace? 2. Was the original amount meant to be taxable? If yes >> replacement payment is taxable.

Specific overrides General Provisions

General provisions can’t be used to include amounts excluded under specific provisions, (Schwartz)Example (Savage):

Specifically, s. 56(1)(n): gifts (over $ 500) are taxable income. - Generally, s. 6(1)(a): benefits from employment are taxable income. - SCC held: $ 300 prize from employer fell within the specific s. 56(1)(n) provision

>> not taxable because under $ 500.“Retiring Allowance”

s. 248(1) definition: includes compensation (b) in respect of a loss of an office or employment

“Employment” s. 248(1) definition: “position of an individual in the service of some other person”i.e. pre-employment is not employment (Schwartz) << now see s. 6(3)!

Deemed Remuneration

Section 6(3): Payments deemed to be remuneration for t/p’s services unless it is established that it is not reasonably related to several enumerated grounds. Includes: (c) signing bonus; (d) payment in advance for services; (e) payment for signing confidentiality agreement;

- Purpose: to capture payments made to the t/p before or after the employment term when they are reasonably related to the employment relationship (e.g. signing bonuses or covenant w/ reference to what the t/p can(not) do after termination).

- Note: s. 6(3) didn’t apply in Curran b/c payee didn’t enter employment w/ payor after the payment for leaving original job (but it was still found as a “source” under s. 3(a)).

Damages for Personal Injury or Death - generally not taxable

Interpretation Bulletin IT-365R2 : Damages, Settlements and Similar Receipts - Amounts received by t/p or dependent for damages for personal injury or death

>> excluded from income regardless if determined wrt loss of earnings expected by t/p- However, if amount is reasonably considered as income from employment rather than an

award of damages >> not excluded from income.Burden of Proof on Taxpayer

T/P duty to file

Siftar (para 6):- Basis of our tax system is self-assessment (there is an individual duty to file taxes)- It is for the t/p to declare what portion (i.e. of a settlement) to be included in income- If CRA is not satisfied that the t/p’s declaration reflects the reality, then it can reassess

>> burden on t/p to establish facts to support their opinion Sources calculated separately

Losses NOT from a Source

Section 4(1)(a): A taxpayer must add up income from all sources independently and subtract losses and allowable deductions accordingly from each source BEFORE aggregating. Thus, losses that are not from a source of income (not from an enumerated source in s. 3 or s. 56) are not deductible. Example: Loss from new business can offset positive income from employment.Calculating sources separately is important b/c it acts to ensure that losses that a t/p tries to claim are related to recognized sources (i.e. not from “hobby” activities).

Carry back & forward - losses

Losses deductible: carry back’s and carry forward’s – we’ll come to later in courseSection 111(1)(a): non-capital losses can be carried forward 20 years and back 3 years



IV. Receipt and Enjoyment of an Amount as Income or “Nexus”

Nexus – between a taxpayer and a source of incomeRelevant Nexus An amount included in income must ‘belong’ to the taxpayer in some way. If the taxpayer can show

that they received the money in trust for a beneficiary or as an agent, and receive no benefit from it, then the taxpayer will not pay taxes on it.

Nexus = control, enjoymentExample: actual receipt of RRSP funds in order to be taxed on their withdrawal (Field); Court found an insufficient nexus between the funds and Mr. Field, who was not taxed on the RRSP funds withdrawn by his estranged wife b/c he did not “benefit” nor “receive” the funds.

Nexus for Illegal or Immoral Business

Illegality is not a defence to a tax liability incurred from using other’s money as your own. Income obtained from an illegal or immoral business (i.e. embezzling) is still taxable (Buckman).

- Where the t/p embezzles money and has no intention of repaying, instead enjoying/ receiving the funds as his own, a tax liability will be assessed accordingly. (Buckman)

- This applies equally to illegal income activity related to a source of employment income or a source of business income (Poynton, Buckman)

- For expenses related to an illegal business (i.e. loss related to fraud) – not deductible b/c the expenses are unreasonable (general exclusion) (case about the Calgary lawyer who couldn’t deduct expenses to retrieve money from Africa)

Net Worth Assessment- This is one means that the CRA uses to get around the “nexus” problem

s. 152(7) Section 152(7): Minister is not bound by a return or information provided by the taxpayer. Minister can assess tax payable through a net worth assessment

- Calculate net worth (assets and liabilities) at beginning of year and end of the year.- Difference is accumulation to net wealth.- Add on estimated personal consumption.- Assess this net worth increase as income for tax purposes.

[NOTE – this procedural detail is not in the provision directly]s. 152(8) Section 152(8): taxpayer bears burden to appeal the assessment amount, otherwise it’s binding.

V. Residence: the Primary Basis of CDN Tax LiabilityWho is Taxable under the Canadian System?Categories of Taxpayers: (a) individuals; (b) corporations; (c) trusts and estates.Alternative bases for taxation:

Citizenship or Nationality

Used in the USA (as well as residence) - Rationale: every citizen/national should support the state through tax, regardless of location- Concern: due to increased global mobility, this base tends to exaggerate a person’s political

connection to a state, as well as their connection to their jurisdiction of birth or nationalityResidence Residency is defined as being a closer relationship than citizenship but not as close as domicile.

Domicile involves: (1) a fact of presence within the jurisdiction; and (2) present intention on the part of the individual to maintain a permanent home in the jurisdiction. In comparison, residence only consists of present ties and is not directly concerned with intention. Benefits: ability to pay principle (progressive tax system) and enforceability (easier to locate t/p).

Source of Income

Non-residents are taxed on income derived from a source within a country through working, investing, or carrying on business.Residents may also be taxed on income earned in a foreign state (i.e. Canadian residents are taxed on their world-wide income as per s. 2(1))



Residency-based TaxationITA provisions Section 2(1): Worldwide income of taxpayers who are resident in Canada at any time during a

taxation year is subject to tax Section 2(3): Non-resident taxpayers are liable to tax for income from Canadian sources (including employment in Canada, carrying on business in Canada, or disposing of taxable Canadian property)

Determining Residence

Tests: (1) S. 250(3) = person who was ‘ordinarily resident in Canada’(2) S. 250(1) = deemed residency

(a) Sojourned in Canada for a period/periods totalling 183 days or more(b) Member of the Canadian Forces(c) CDN resident prior to appointment as (i) ambassador, minister, high commissioner or

servant of CND, or (ii) an agent-general, officer or servant of a province BUT, there is no technical or statutory definition of ‘resident’ or ‘ordinarily resident’ and so must turn to case law (largely fact-based). (Residence is often defined by what it is not…)

- No single test for residence: “The gradation of degrees of time, object, intention, continuity and other relevant circumstances shows [that] ‘residing’ is not a term of invariable elements, all of which must be satisfied in each instance.” (Thomson)

Features of Residency

Features of residency ( Thomson ) : Every person has a residence at all times during the year for tax purposes (somewhere) Can be resident in more than one country at a time Residence is the “spatial bounds within which [an individual] spends their life or to which

[their] ordered or customary living is related”; residence doesn’t require a home or shelterIntention is not relevant in determining residency though it is an essential element in domicile (Lee).

Ordinarily Resident

‘Ordinarily resident’: “residence in the course of the customary mode of life of the person concerned, and it is contrasted with special or occasional or casual residence. The general mode of life is, therefore, relevant to a question of its application.” (Thomson, pg. 143)Note: being “ordinarily resident” considers its antithesis as casual residence.

Factors in Assessing Residence

Note: immigration status ≠ determinative but may be relevant evidence for tax purposes (Thomson)Factors to consider to establish if t/p is resident of CND (non-exhaustive, non-determinative (Lee):

past and present habits of life regularity and length of visits; permanence or otherwise purposes of stay (social/business) ties in the jurisdiction; ties elsewhere (substantially severed ties w/ former country of res?) obtaining landed immigrant status or appropriate work permits in Canada ownership or long-term rental of dwelling in Canada; ownership of CDN vacation property residence of spouse, child or other dependent family in CDN dwelling maintained by t/p memberships with Canadian churches, rec/social clubs, unions, professional organizations registration and maintenance of automobiles, boats and airplanes in Canada holding credit cards issued by Canadian financial institutions and other commercial entities newspapers, magazines, or periodical subscriptions sent to a Canadian address rental of Canadian safe deposit box or post office box subscriptions for insurance (i.e. health insurance through a Canadian insurance company) mailing address or telephone listing in Canada stationary including business cards showing a Canadian address Canadian bank accounts other than a non-resident bank account Active securities accounts with Canadian brokers Canadian driver’s licence Membership in CDN partnerships; active involvement in business activities in CDN burial plot in Canada; will prepared in Canada legal documentation indicating Canadian residence filing a Canadian income tax return as a Canadian resident employment in Canada maintenance or storage in CND of personal belongings (clothing, furniture, pets, etc.)

Sojourning Definition of “sojourn”: “Applying to a presence in Canada where the nature of the stay is either outside the range



Note: see folio below

of residence or is what is commonly understood as temporary residence or residence for a temporary purpose” (Thomson)

“Temporary stay in a place; to remain or reside for a time” (R&L Food Distributors Limited) CRA generally counts calendar days (i.e. arrive at 5pm leave at 11am = 2 days) (S5-F1-C1)

NOTE: Sojourning and residence are mutually exclusive (i.e. can only be one or the other)- Only count days re: sojourning rule where not resident, ordinarily resident

Examples of sojourning activity: business trips, holiday trips, unexpected delays- Commuting to work every day between the USA and Canada is NOT considered sojourning

as the individual is not staying overnight. If the individual has no other ties to Canada, then they are not ‘ordinarily resident’ nor deemed resident (R&L Food Distributors Limited)

‘Sojourning’ vs. becoming ‘Ordinarily Resident’ - ExampleIf you’re coming to CND for work – consider whether it is a temporary purpose (i.e. ‘sojourning’) vs. being transferred to Canada (i.e. permanently such that you become ‘ordinarily resident’). Example:

- Came to Canada casually to work for 2 weeks in Jan. = ‘sojourning’. Taxed as a non-resident for income earned from CDN sources only while non-resident – until May 15…

- Transferred to CND permanently on May 15 = becoming ‘ordinarily resident’. Taxed as resident starting May 15 (on worldwide income). See “Part-Year Residence” section below.

Canadian Controlled Private Corporations (CCPC)

Section 125(7): Corporation is a resident of Canada and a CCPC when: Shares are not listed on a stock exchange Not controlled by non-residents, by a corporation whose shares on traded on a stock

exchange (i.e. public corporation), or a combination of these Benefit from Lower Rate:

- Small business deduction: CCPC’s (excluding PSB and SIB) pay lower tax rate (page 4)- CCPC’s must earn income from an “active business carried on by a corporation”

Why a lower rate? >> Encourages entrepreneurship and growth through amassing of capital

Part-Year ResidenceITA Provisions Section 114: Method to calculate tax for part-year residences

- Divide year into resident vs. non-resident periods>> Resident in Canada period – tax worldwide income>> Non-resident in Canada period – tax income earned from Canadian sources

Taxation Year - Section 249(1)(b): For an individual, the tax year is a calendar year (Jan 1 to Dec 31)Severing Residential Ties

Court looks to many factors to determine if taxpayer has severed residential ties and thus constitutes a part-time resident, including:

An established home in Canada? (Schujahn – despite found to be non-res. in this case) Location of dependents (Schujahn) Location of personal belongings (Schujahn) Club memberships (Schujahn) Bank accounts and credits cards (Schujahn) Filing of income tax in other jurisdiction as a resident (Schujahn) Intent to return to country – temporary or non-regular nature of absence (Reeder)

Class notes: court has tendency to more readily-accept that CDN ties are severed if individual was not always a CDN resident (i.e. returning to original residence; not leaving origin) - see Income Tax Folio S5-F1-C1 (1.23) - below

Tax TreatiesConflicts with Dual Tax Residence

In a bilateral tax treaty, Canada and another country agree on allocating the taxes between the two countries (i.e. if t/p is resident in more than one country)

- Policy : encourage global free mvmt of capital; double tax would discourage int’l economy



- Idea : efficiency and global competitiveness- Problem : If CND doesn’t have tax-treaty w/ country, may not have agreed for tie-breakers

In Canada, treaties don’t have force of law unless/until they are enacted domestically.S. 250(5):Tax treaty prevails over ITA

Section 250(5): Application of tax treatiesA person is deemed not to be a resident in Canada if they would normally be a resident of Canada but for a tax treaty that makes them resident in another country.**In order for tax treaties to apply, the taxpayer must be found as resident in both countries.

Canada-US Tax TreatyArticle IV

Applies by reason of “domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature”Tie-breaker Test (Article IV 2.):

1. location of permanent home2. if more than one permanent home, centre of vital interests (location in which personal and

economic relations are closer) (e.g. dependents, extended family, economic interests)3. if still unclear, location of habitual abode (= where most time spent, relative to other state)4. if still unclear, state in which he is a citizen (usual tie-breaker unless a dual citizen)5. if still unclear, decision by mutual agreement by CRA and IRS (competent authorities)

Canada-UK Tax Treaty Article 4

Applies by reason of “domicile, residence, place of management or any other criterion of a similar nature” – does not mention ‘citizens’ or ‘corporations’Tie-breaker Test (Article 4):

1. location of permanent home2. if not, centre of vital interests (location in which personal and economic relations are

closer) (e.g. dependents, extended family, economic interests)3. if still unclear, location of habitual abode (= where most time spent, relative to other state)4. if still unclear, state in which he is a national (usual tie-breaker unless a dual citizen)5. if still unclear, decision by mutual agreement by competent authorities

Salt v. The Queen (2007 – TCC)

FACTS: P is a citizen of the UK.- P lived in CND for 14 years before he took a job in Australia which could last 2 years. He

received a visa for three years. When he left Canada, his return date was uncertain. - He leased Montreal home for 22 months (req’d 6 months’ notice of return)- Belongings were stored in Canada. - Resigned from CDN clubs- Cancelled all but one credit card, phone and cable services and all subscriptions. - While in Australia, filed tax returns as a resident in Australia and as a non-resident in CND.- Most of salary and rental income was paid through a CDN bank account, rest in Australia- Continued to contribute to the QB pension plan and maintained membership in the

company’s pension, life insurance and long-term disability plans. - Maintained his investment portfolio in Canada. - P returned to Canada after 18 months; couldn’t move back into Montreal for 2 months. - After 15 months in CND, P returned to Australia and stayed for 18 months until he retired. - CRA conceded that P was an Australia resident for the period.

ISSUE: Was P ordinarily resident in CND during his first stint in Aus.? If so, apply tie-breaker rules. HOLDING: Court applied treaty and found that Australia predominated b/c of his established home (could not readily go back to home in CND b/c needed to provide 6 months’ notice to tenants) and many important ties in CND were severed (though some remained; para 17)Note: TCC did not make a decision on whether ordinarily resident in CND and applied the tax treaty directly. Should first determine if t/p is resident of both states before applying treaty.



Determining an Individual’s Residence When Leaving Canada

Income Tax Folio S5-F1-C1 (See Handout) - CITE THIS FOLIO IF TESTED ON AN ISSUE OF RESIDENCE

Residential Ties in Canada 1.10: A resident of Canada continues to be a resident after leaving Canada unless they sever all significant ties with Canada.

Significant Residential Ties (1.11):- Dwelling place(s) – unless leased at arm’s length (1.12)- Spouse or common-law partner – unless separated (1.13)- Dependents – (might imply that independent adult children aren’t as significant)

Secondary Residential Ties (1.14) – must be looked at collectively. Include: personal property in Canada social ties in Canada economic ties with Canada (employment, active involvement in business, bank accounts,

retirement savings plans, credit cards, and securities accounts) landed immigrant status or appropriate work permits in Canada hospitalization and medical insurance coverage from a province or territory driver’s license from province or territory vehicle registered in a province or territory seasonal dwelling place in Canada or leased dwelling place Canadian passport memberships in Canadian unions or professional organizations

Other Residential Ties (1.15) – limited importance except when taken w/ other factors - i.e. 1.16Canadian mailing address, PO box, safety deposit box, personal stationary (including business cards) showing a CDN address, CDN telephone number, and local newspaper/magazine subs.

You’ve been gone a while, but maintain ties… Determining if ‘Ordinarily Resident’ (1.16)A temporary absence from Canada, even on an extended basis, is insufficient to avoid Canadian residence for tax purposes. The following will be considered (non-determinative):

Evidence of intention to permanently sever ties (not enough in and of itself) Regularity and lengths of visits to Canada Residential ties outside Canada

Length (1.17) – no particular length of stay abroad necessarily results in becoming non-residentDate non-resident status acquired 1.22 – question of fact, case-specificIf resident in another country before entering CND 1.23: generally becomes non-res. on leaving CND

Sojourning rule 1.32 and 1.33 - Applies where you have not established enough residential ties to be considered ‘ordinarily

resident’ (i.e. ‘deemed resident’ and ‘ordinarily resident’ are mutually exclusive)- If you sojourn for 183 days or more >> deemed resident for the entire year per s. 250(1)(a)

>> taxed on worldwide income for whole year- 1.33: CRA considers any part of a day to be a day (for purpose of sojourning)

Centre of Vital Interests Test (re: tax treaties) 1.50. cites OECD Model Tax Convention commentary:- Re: “personal and economic relations” – looks to family and social relations, occupations,

political/cultural activities, place of business, etc. - Suggests that if person sets up 2nd home, fact of retaining the 1st home may tend towards

finding that the 1st is his centre by virtue of keeping itDeparture Tax Section 128.1(4): A t/p emigrating from CND (who ceases to be resident) is deemed to dispose and

reacquire of all property except for real property situated in Canada. **See Capital Gains section**



Provincial ResidenceProvincial Residency

Regulations : 2601: Provincial residence = where taxpayer was resident on December 31st of given tax year2607: Inter-provincial tie-breaker rule: use principal place of residence

Income Tax Folio S5-F1-C1, 1.2: Provincial Residence is based on significant residential ties.Determining Principal Provincial Residence (if dual residence) (Mandrusiak)

Approach in the case : conceded that he was resident in AB. Was he also resident in BC? If so, where was his “principal place of residence” per Regulation 2607?

“Ordinarily resident” is determined by Thomson test (accepted in provincial context) Look for longevity, independent children, extended family, existence of a home, social

connections BC ITA(p. 65 student edition)

Section 2(1): An individual is taxed in BC if:(a) they are resident in BC on the last day of the taxation year, OR(b) when not resident in BC on the last day of the yr, had income earned in BC during the yr

Note: it matters where you were resident (not where you physically were)

Residence of CorporationsDetermining Residence of a Corporation

The residence of a corporation can be determined by statutory rules, case law, and tax treaties.

Two Rules:1. Common Law Rule : where the corp’s central management and control resides (De Beers)

Factors to consider:o Meeting and decision places of the Board of Directors (De Beers Consolidated)o Actual place of management, not purported place (e.g. can use the residency of

the controlling shareholders if the board are just puppets) (Unit Construction)o Multiple residences if central management and control located in two or more

jurisdictions (Swedish Central Ry. Co. Ltd. v. Thompson)o Note: difficult to apply CL test in modern times b/c of increased mobility and tech

2. Deeming Rule : Section 250(4): Corporation deemed resident IF incorporated in CND:After April 26, 1965: deemed to be resident of CanadaBefore April 27, 1965: must be incorporated in CND AND at any time between April 26, 1965 and present time, it was resident in CND according to the CL rule OR carried on business in CND

Treaty Provisions: apply tie-breaker rules if corporation is resident in both countries- Canada-US Tax Treaty – only tie-breaker rule is where the corporation was incorporated;

otherwise settled by mutual agreement between CRA and IRSo US law: US resident corporation if incorporated in US

- Note, Canada-UK Treaty (not super helpful for tie-breaking re: corporations?) >> Section 250(5): deemed non-resident if would be a resident of Canada but for a tax treaty that deems it a resident of another country (after application of tie-breaker rules)

Red Moose Practice Problem in Class

Facts: Corporation incorporated in AB in 1964 and carried on business in CND starting that year; shares sold to UK company in 2004; board meetings and decisions made in UKIssue: Is the corporation resident in Canada for tax purposes in 2005?Model Answer:

- S. 250(4)(c): deemed resident in CND b/c incorporated in CND and carried bus. in CND- Resident in UK b/c UK law looks to central mgmt./control, located in the UK (De Beers)

o Note: facts do not indicate a possible issue that the board is not central mgmt., but all s/h’s are also resident in the UK anyways

- Look to UK-CND Tax Treaty to resolve the tie. Article 4(3) applies, but leaves it to the competent authorities to determine its sole country of resident >> no clear answer.



Taxation of Non-ResidentsRecall: Canada taxes on the bases of residency and source Principle: All economic activity in CND is taxed in CND (even though non-residents may be taxed in other state). ITA Provisions Active Taxation:

Section 2(3): Tax payable by non-resident persons – A person is taxed in CND if in the year, (a) employed in Canada(b) carried on a business in Canada (defined in s. 253)(c) disposed of a taxable Canadian property

Withholding Tax on passive income

Passive Taxation: Part XIII of the ITA (Tax on Income from Canada of Non-Resident Persons):

Section 212(1): Non-residents shall pay (they are subject to deduction of) a 25% income tax when receiving payment from a resident. Types of payments:

(a) management fees(b) interest [only if non-arm’s length?] (e.g. Canadian resident company pays interest to

Australian parent company on a loan from parent; Australian parent is subject to 25% withholding tax that must be withheld and remitted by Canadian company.)

(c) estate or trust income(d) rents, royalties, etc. (h) pension benefits(j.1) retiring allowances [may include wrongful dismissal damage award; handout]

o Note: “retiring allowance” is income from another source, taxed per s. 56(l) registered retirement savings plan payments [i.e. if you retire abroad]

Section 212(2): CDN resident corporation paying a dividend to non-resident shareholder must withhold 25% of the dividend.

Obligations on Resident:Section 215(1): Residents obligated to withhold and remit tax on behalf of the non-resident. Section 215(6): Canadian resident jointly and severally liable for the tax if not withheld/remitted.

VI. Income from Office or EmploymentStarting Framework:

- S. 3: there are 4 enumerated sources of income: office, employment, business, property- s. 5: the charging section for income from office or employment - (1) income; (2) loss- s. 6: employee benefits- s. 8: deductions in computing income from employment (must be explicitly provided in section)

A. Basic Definitions and ProvisionsDefinitions – s. 248(1) – p. 55 student edition

- Office : position entitling individual to remuneration; elected/appointed/etc.; includes corp. directors- Employee : includes officer (must be natural person)- Employer : person from whom officer receives remuneration- Employment : position of individual (“servant” or “employee”) in service of another

o RECALL Schwartz case : employment must be current. In Schwartz, wasn’t an employee yet b/c K term never began (not in service) at time of the case, as it was a K for service in the future.

- Person : includes any description of a person, includes corporation (note: pretty broad definition)- Taxpayers : includes any person whether or not liable to pay tax

Note: “independent contractor” is not expressly defined in ITA – is usually a self-employed sole proprietor (not incorporated) who provides services; in business for themselves; distinction is a question of fact



Key provisions

Basic inclusions in income from employment:

S. 5(1): taxpayer’s income from an office or employment is the salary, wages and other remuneration, including gratuities received by the taxpayer in a year.S. 5(2): taxpayer’s loss from an office or employment is the amount of the loss, if any, from that source by applying the provisions of this Act. S. 6(1)(a): value of benefits in respect of, in the course of, or by virtue of the taxpayer’s office or employment is including in income.

- Received or enjoyed by t/p or person in arm’s length to t/pLimitation on deductions in computing income from employment:

S. 8(1): allowable deductions, as may reasonably regarded as applicable, include (b) legal expenses of employee, (f) sales expenses, (g) transport employee’s expenses, (h) travel expenses, (h.1) motor vehicle travel expenses, (i) duties and other expenses of dutiesS. 8(2): general limitation – no deductions unless permitted by s. 8.

OtherS. 153(1)(a): withholding of tax by employerS. 118(10): Canada Employment Credit – small credit for employees b/c can’t deduct expenses like independent contractors; only available on income from employment

Tax implications: income from employment (“employee”) VS. income from business (“independent contractor”):1. Payment and

withholding tax- Employer must withhold from payments to employee per s. 153 and remit- Class note: failure to withhold/remit is “real bad” (similar to withholding on

payments to non-residents per s. 215(6) – person who fails to deduct/remit may be liable for the tax). Failure may attract penalties, can be as bad as criminal charges.

- Directors could become personally liable for unremitted tax if corp. can’t pay.- No withholding obligation for payments to independent contractor. Contractor may

be req’d to make instalments (quarterly or monthly) towards tax (s. 156)2. Basis of measurement - Employees : income calculated on “cash basis” (see wording: “received by the t/p”

per s. 5(1)); Income recognized when received; deductions permitted when expense is paid

- Contractors : income calculated on “accrual basis” (taxed on amounts receivable in addition to amounts actually received; may deduct payable expenses)

3. Reporting period: tax yr - Individual taxes (employee and independent contractors) – calendar year (s. 249)4. Scope of Deductions - Employee may deduct very limited expenses (s.8); must be expressly provided (s.

8(2))I.e. NOT usually clothing, parking, transportation (chauffer vs. transit), etc. >> Considered personal consumption decisions rather than deductible expenses

- Self-employed person has wider scope to deduct expenses (s. 9 and 20) Expenses incurred for the business are generally deductible unless excluded. There are still restraints but determination of what may be deducted is broader.

5. Canada Employment Credit – s. 118(10)

- Small credit; only applies to income from employment (not to income from business or property)

B. Employee vs. Independent Contractor/Consultant/Sole ProprietorITA does not adequately distinguish between employees from an independent contractor, so the issue is the left to the courts, as a question of fact.Traditional Approach

Common law distinction: Employee = contract of service Independent contractor = contract for service

“It seems to me that the difference between the relations of master and servant and of principal and agent is this: A principal has the right to direct what the agent has to do; but a master has not only that right, but also the right to say how it is done.” (Re Walker, pg. 220)>> Criticisms: simplistic; breaks down in relation to highly skilled professional workers (Wiebe Door)

Common law control test (p. 220): what is the nature and degree of control over the person purported



to be an employee, considering:(1) the power of selection of the servant(2) the payment of wages(3) control over the method of work(4) the master’s right of suspension or dismissal

Modern Approach

Key Question: “It is whether or not the individual is performing the services as his own business on his own account.” (SCC in Sagaz Industries, adopted in Connor Homes at para 23). If so, it is a contract for service >> the worker is an independent contractor.

It is insufficient to simply state in a contract that the services are provided as an independent contractor to make it so; must be grounded on a verifiable objective reality (Connor Homes).

- Intentions of the parties are taken into account (i.e. declaration of the legal character of their K; the mutual understanding between the parties about their relations), but it is not determinative (Royal Winnipeg Ballet in Connor Homes)

Test ( Connor Homes , para 39-40): (1) Ascertain the subjective intent of each party to the relationship, determined by contract or

behaviour (i.e. invoices rendered, registration for GST purposes, income tax filing as an independent contractor) >> do both parties think it is an employment relationship?

(2) “[A]scertain whether an objective reality sustains the subjective intent of the parties.”- (Determined in light of the intention but does not need to come to same conclusion); consider

the Wiebe Door factors to assess the factual reality of the relationship through objective facts.

Non-determinative, non-exhaustive list of factors ( Wiebe Door , aff’d by SCC in Sagaz Industries ) : Level of control over activities of individual – not determinative, but an important factor

o Note : appreciate the role of highly specialized people in modern workplace (may not directly supervise b/c of position’s intricacies, but could still be employees)

Whether the worker provides his own equipment Whether the worker hires his own helpers Degree of financial risk taken by the worker Degree of responsibility for investment and management held by the worker Worker’s opportunity for profit in the performance of his tasks

>> Search for the total relationship between the parties concerned; weigh/balance characteristics

Note: Court of Appeal in Wiebe Door criticized using an “Organization” or “Integration” test which looks at whether the worker was integral to alleged employer – inherently flawed b/c employer uses workers by virtue of needing them. May maintain a limited use from worker’s perspective

C. Interposing a Corporation in Employment Relationship (PSB’s): Section 125(7)

“Active business carried on by a corporation”

Business carried on by corporation other than a specified investment business or personal services business and includes an adventure or concern in the nature of trade. (S. 125(7))

“Personal services business”

S. 125(7): Corporation providing services where:(a) an individual who performs services on behalf of the corp (incorporated employee)(b) any person related to the incorporated employee

is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person/partnership to whom services are provided but for the corporation unless:

(c) the corporation employees more than 5 full-time employees throughout the year [arbitrary test to become active business] OR

(d) the amount paid or payable to the corporation for services is received or receivable by it from a corporation with which it was associated in the year [not relevant in this course]



“Specified investment business”

S.125(7): Corporation whose principal purpose is to derive income from property but does not include a business carried on by the corporation in the year where:

(a) the corporation employs more than 5 full-time employees throughout the year [arbitrary test to become active business] OR

any other corporation associated with the corporation provides (in the course of carrying on an active business) managerial, administrative, financial maintenance or other similar services and that corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided.

Consequences for PSB

Two key reasons to avoid the personal services business designation:1. Higher taxation rate

- PSBs are taxed at a higher tax rate (38%) than general corporations as they are not eligible for the small business deduction nor the general rate reduction. >> removes tax advantages to incorporate an otherwise employment-like relationship

2. Limitation on deductions: s. 18(1)(p) limits deductions that a PSB can claim, compared to a corp

Capitalization of employment benefit = methods to convert an income from office or employment into income from capital (either exempt or only partially taxed as a capital gain)

Restrictions on Deductions by PSB

Section 18(1)(p): limitation re personal services business expensesNo deduction shall be made in respect of outlay or expense to the extent that it was made or incurred by a corporation for the purpose of gaining or producing income from a personal services business other than:

(i) salary, wages or other remuneration paid to an incorporated employee(ii) cost of any benefit or allowances provided to an incorporated employee(iii) amount expended by corporation in connection with the selling of property or the

negotiating of contracts if the amount would have been deductible if the incorporated employee were an employee (and would have been able to deduct the same expense)

(iv) any amount paid by the corporation as or on account of legal expenses incurred by it in collecting amounts owing to it on account of services rendered

RalphCo Example in Class (Handout) – tax reduction/deferral available before PSB rules were enacted (pre-1985)Facts Ralph is employed as a coach for a pro football team (salary $ 500k, bonuses, benefits)

Ralph incorporated “RalphCo”; he is sole s/h and director; Ralph also an employee for RalphCoFootball team released Ralph from employment K; entered services agreement w/ RalphCoTeam will pay $ 500k for coaching services + bonuses to RalphCoRalph will take $ 300k salary from RalphCo; dividends distrib. per RalphCo board of directors

Issue Who is taxable on what amounts under this proposed change to the employment arrangement? Analysis Ralph took salary and incurred tax benefits by structuring a private corp. prior to PSB rules:

Benefit from pre-PSB rules:- Reduced overall tax liability (not incl. Ralph’s first $ 300k; same salary & tax)- Tax paid per private corporation structure (CCPC active business) on $200k:- Combined BC/fed’l CCPC active business income rate: 13.5%- Can deduct $ 300k salary paid to rent (Ralph pays income tax)- Business profits = $ 200,000- Tax bill is $ 27,000 (13.5% x $ 200k); retained earnings $ 173,000

Tax paid if Ralph is just an employee of team (individual tax) on $200k:- The additional $ 200k would be salary, subject to highest BC progressive tax bracket (29% fed’l

+ 16.8% prov’l BC)- Tax bill is $ 91,600 on the additional $ 200k (keeps $ 108,400)

Tax Savings for the CCPC form: $ 64,600- Deferred tax of a portion of his employment income via dividends paid later



- Ralph could defer tax on the retained earnings by distributing dividends at a later time (presumably after retirement) when he is in a lower tax bracket

Relationship of corporation to the people receiving services: Ralph would reasonably be regarded to be an employee (Wiebe Door) >> it’s a PSB of the corporation (unless more than 5 FT employees of the corporation – i.e. enough activity to validate the corporate structure per s. 125(7))

Law Reform Since 1985, the business corporation rate is only available for income of an “active business carried on by a corporation” which specifically excludes PSB’s. Income of a PSB corp is now taxed at 38% combined

Questions to consider in applying whether it is a “personal services business”:- Does the individual perform services on behalf of the corporation?- Are they a “specified shareholder”? Test is > 10% (incl. those held by close relations, s. 248(1) below))- Would the incorporated employee reasonably be regarded as an employee of the person/corporation to whom

the services are provided (i.e. Ralph would otherwise be employee of the football team)- Exception: if the corporation employs more than 5 full-time employees.

Non-arm’s Length and Related Persons: section 251“Specified Shareholder”

Section 248(1) - “specified shareholder”: taxpayer who owns, directly or indirectly, 10% or more of the issued shares - and (a) a taxpayer shall be deemed to own shares owned by a person with whom the taxpayer does not deal at arm’s lengthsNote: to assess whether it is a PSB, CRA looks at whether the incorporated employee is a “specified shareholder” (*includes ownership of shares by persons at non-arm’s length per s 248(1)(a)).

Non-arm’s Length

(Handout)

Section 251(1) : Arm’s Length (a) related persons deemed not to deal w/ each other at arm’s length (even if interests conflict)(c) it is a question of fact whether persons are not related to each other are, at a particular time, dealing with each other at arm’s lengths.

This requires an examination of all of the facts/circumstances between the two persons at the relevant time. Unrelated parties have been held not to deal at arm’s length when: There is a ‘common mind’ which directs or controls the bargaining for both sides

(i.e. a person and corporation of which he is < 50% s/h but acts as a director and officer w/ influence), OR

The two persons act in concert without separate interestsExamples of Arm’s length

- Business partners – may or may not, depending on the circumstances- Employees – normally are arm’s length from employer (unless they control or are

members of a family that controls the corporate employer)Definition of “Related persons” s. 251(2)

(Handout)

S. 251(2)(a) Individuals connected by blood relationship [s. 251(6) – note specifics, doesn’t include nephews/cousins/aunts], marriage or common-law partnership or adoptionS. 251(2)(b) A corporation and…

(i) Person who controls the corporation (if controlled by 1 person)

[Who holds voting control, meaning enough shares to elect the board of directors, normally over 50%]

(ii) Person who is a member of a related group that controls the corporation

[A related group is a group of persons, each member of which is related to each other. Example: If Amy holds all of the shares of XCo. and 25% of YCo., and XCo. holds 75% of YCo., then Amy is related to YCo.]

(i) Person related to a person described in (i) or (ii)

[Example: Amy’s common-law partner Andy is related to XCo. And to YCo. In the above example]

Blood Relationship, etc.

Section 251(6): Definition of blood relationship, etc. (a) Blood relationship – child or descendent (parents, grand-parents, etc.) brother, sister(b) Marriage, including in-laws(b.1) Common-law partnership, including in-laws(c) Adoption



D. Introduction to Benefits, Reimbursements and AllowancesGeneral Framework

Section 6(1): There shall be included in computing the income of a taxpayer as income from an office or employment such of the following amounts as are applicable.

Generally includes cash and non-cash benefits. Inclusions:(a) value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer or by person who does deal at arm’s length with the taxpayer except for contributions made to group plans(b) all amounts received by the taxpayer as an allowance for personal or living expenses or as an allowance for any other purpose [see Act for exceptions](c) director’s or other fees in respect of, in the course of, or by virtue of office/employment(f) employment insurance benefits(j) reimbursements and awards

Class Note: any cost is deductible by the employer as a cost of carrying on the business.Policy Considerations

Why are non-cash benefits taxed? - Employer can generally deduct, so employee must include for the purposes of tax equity.- Gov’ts revenue base would be eroded if employees could receive indirect benefits as

remuneration which were excluded from income.- Horizontal equity – same tax assessed for t/p income in cash vs. indirect benefits

Note: administration concerns – the cost of administering the tax system must not outweigh in the incremental revenue received from taxation of benefits

Valuation of Employment BenefitsBenefits What is a benefit? : “[A] material acquisition which confers an economic benefit on the taxpayer

and does not constitute an exemption” (Poynton in Savage) Given in respect of, in the course of, or by virtue of office or employment (s. 6(1)(a)) Does not have to be connection between employee performing job and receiving the

benefit [i.e. no need for quid pro quo from employee] (Savage) Conferred as an employee and not simply as a person (Savage) Will not be a benefit if the employer is the recipient of the advantage secured by the

expenditure – no significant element of personal pleasure (Lowe)See Handout: Interpretation Bulletin IT-470R

Gifts What about gifts ? Gifts are generally non-taxable (Bellingham), but there are special considerations when the gift is given to an employee Criteria included in Interpretation Bulletin IT-470R at ¶9 (Handout):

No limit on the number of tax-free non-cash gifts and awards up to a combined value of $ 500 per year (*to an arm’s length employee)

In addition, a separate non-cash long service/anniversary award may qualify as non-taxable up to $ 500 (min. 5 yrs’ service or since last award) (*to arm’s length employee)

Items of immaterial or nominal value (coffee, company T-shirts, plaques, trophies, etc.) will not be considered taxable.

Where the cost of the gift exceeds $500, the excess amounts are included in the employee’s income

T4130 Employers’ Guide – Taxable Benefits and Allowances: Rules for gifts and awards:- “Gift”: must be for a special occasion (holiday, birthday, wedding, childbirth)- “Award”: employment-related accomplishment such as outstanding services (generally, a

valid non-taxable award has clearly-defined criteria, nomination/evaluation process, and a limited number of recipients)

o NOT performance-related, which is considered a “reward” = taxable benefit- A non-cash gift or award for any other reason >> policy doesn’t apply and the FMV must

be included in the employee’s incomeGifts and awards policy DOES NOT APPLY to cash or near-cash items; nor if the recipient is at non-



arm’s length (relatives, shareholders, or related to them)Test for Determining a Benefit

Test ( Poynton in Savage , Lowe ) :1. Does the item under review provide the employee w/ measurable economic advantage?2. If so, is the primary advantage for the benefit of the employee or the employer?

Example (Lowe): Lowe and wife sent on a business trip to host – court held that the trip was in favor of the employer (personal enjoyment was merely incidental) >> not taxable benefit.

Valuation of Benefits

Test: Fair Market Value (arm’s length) Amt the person not obligated to buy would pay to someone not obligated to sell (Steen)

Should it be FMV or adjusted for the employee’s actual use thereof? >> FMV (Richmond) Value of the benefit available to the individual (whether used or not) (Richmond – court

assessed full value of the parking spot despite its infrequent use) Recall: determine whether for employer or employee benefit (Rachfalowski – court did

not assess the full golf membership cost as taxable b/c it primarily benefited employer)IT-470R See Handout

AllowancesAllowances Note: keep allowances and benefits separate, although benefits are so broadly drawn that it could

capture certain allowancesSection 6(1)(b): include in income from office/employment: allowances for personal or living expenses or any other purposes, except (v, vii) reasonable travel expenses (below)

What is an allowance? (Macdonald):- “An arbitrary amount in that it is a predetermined sum set w/o specific reference to any

actual expense or cost”, though it may be set via a projected expense- Will usually be for a specific purpose- “In the discretion of the recipient” who “need not account for the expenditure of the

funds towards an actual expense or cost” Policy Consideration: allowances are taxed b/c can be disguised as additional remuneration.

Reimbursements (differentiated from an allowance)

What is a reimbursement? – not taxable b/c simply returning to previous economic situation“A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance; it is not a sum allowed to the recipient to be applied in [their] discretion to certain kinds of expense.” (Pascoe in Huffman)

Employee is reimbursed upon showing receipts or proof of purchase Amount that would otherwise be deductible in computing income (s. 8(1)) if no

reimbursement provided (s. 6(1)(j))Example (Huffman): plainclothes police officer received reimbursement for up to $500 for clothes (purchased large to accompany equipment, often ruined, etc.) >> court found it was a non-taxable reimbursement (not an allowance / benefit). See IT-470R, paras 29-30

Special and Remote Worksites – subsection 6(6)Special and Remote Worksites(Exemption)

Section 6(6): exemption (i.e. not included in income) for either a benefit or allowance for specific expenses when the employee is at (a)(i) a special temporary worksite or (a)(ii) a remote worksite.

Amount of exemption: value of the benefit or the allowance (must be reasonable)Note: remote location, special worksite or principal residence –need not be in Canada

Requirements:(a)(i) Special temporary worksite: not normal worksite of the worker (temporary) IF t/p maintained a principal place of residence at another location that is available at all time for the employee’s occupancy AND is reasonably far that could not be expected to commute daily(a)(ii) Remote worksite: location by virtue of its remoteness from an established community where the t/p could not be reasonably expected to set up a residence (no requirement to have a principal place of residence elsewhere)

(a) To qualify for board/lodging expenses: taxpayer must be required to be away from principal residence or at the special work site not less than 36 hours.



(b) Transportation expenses:- (i) special temporary work site – to/from principal place of residence- (ii) remote work site – between remote worksite and a location in Canada or in the

country in which the t/p is employed

“self-contained domestic establishment” (s. 248(1)): means a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats.

IT-91R4Remote Work Sites

Para 14: factors to consider in whether a work location is in fact “remote”: availability of transportation; distance from an established community; and time required to travel that distance.

General rule work location is considered remote if the nearest established community w/ a population of 1,000+ is no closer than 80 km by the most direct route normally travelled.

Para 15: “established community” is a permanent settlement which includes essential services: food store; clothing store w/ merch in stock; housing; access to medical/educational facilities.

Exam Approach: Special Worksite or Remote Location

Example: X (a lawyer) is employed by a law firm and travels to Vancouver for 8 days from HQ in Toronto to negotiate various business deals for the company. All expenses paid by the company.

Two options: (1) Special Temporary Worksite : exempt allowance under s. 6(6) since gone for more than 36

hours and Toronto is likely principal place of residence (2) Exempt Allowance : under s. 6(1)(b) since expenses incurred exclusively for business

interest of the employer (per Lowe)Example: T works on Baffin Island, lives in employer-provided accommodation, and is provided 3 round trips to Calgary over 1.5 years.

- Accommodation, meal and transportation would be exempt if Baffin Island qualifies as a remote location (according to CRA guidelines – 80 km from established community. If so, then food and lodging would be excluded from income since T is gone 1.5 years (>36 hrs).

- Travel between site and Calgary is a reasonable allowance under s. 6(6)(b)(ii) and so exempt from income. If it is an allowance, then the taxpayer is not accountable and could fly anywhere. If it is a benefit or reimbursement, then taxpayer must fly to Calgary.

- Note : Clothing for safety (i.e. down in cold temperatures) is exempt (para 29 of IT-470R ) .

Automobile and Travelling Allowancess. 6(1)(b) Section 6(1)(b) exempt allowances

(v) reasonable allowance for travel expenses for a salesperson (selling of property or negotiating Ks)(vii) reasonable allowance for travel expenses (other than motor vehicle’s expenses) received by non-salesperson (vii.1) reasonable allowance for use of motor vehicle received by employee other than a salesperson for travelling in performance of duties

However, the ITA carves out exceptions to the exemptions for motor vehicle expenses:(x) allowance deemed unreasonable if the measurement is not based solely on # of km’s travelled (xi) allowance deemed unreasonable where the taxpayer receives both an allowance in respect of use AND is reimbursed in whole or in part for expenses in respect of that use

Reg. 7306 Regulation 7306: guidelines on reasonable rates for per km allowance 52¢ on first 5000kms; 46¢ for excess kms Additional 4¢ per km in the territories

s. 18(1)(r) Section 18(1)(r): employer’s deduction of expenses- The employer can only deduct as expenses according to the reasonable rates. - To the extent that the employer pays out more than the reasonable rate, the excess can be

deducted but also is to be included in the employee’s income.Note: reasonable rate for deduction per “prescribed rules” (see: Regulation 7306)

Note on word choice

Refer to it as a motor vehicle allowance (not reimbursement), b/c there are a lot of variable expenses (gas prices, etc.). It’s unlikely that the payment will be the exact amount of the expense. It looks like a



reimbursement (b/c you report # of km) but it’s an exempt allowance.

E. Deductions in Computing Income from EmploymentApplicable to income from office/employment:General Limitation Section 8(2): General limitation - only allowable deductions are those in s. 8General Application Section 8(1): deductions can only be claimed against employment income to the extent that

the expense is wholly applicable to the employment or reasonably proportionate to the source. (I.e. can only deduct work portion; ask yourself if it’s part of your position!)

Applicable to ALL sources of income, not just employment or office:Must be Reasonable Section 67: deduction can only be made if the deduction was both deductible under the ITA

and reasonable in the circumstancesExpenses for food, beverages, entertainment: 50% (w/ exceptions)

Section 67.1(1): an amount in respect of human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50% of the lesser of:

(a) amount actually paid or payable(b) amount that would be reasonable in the circumstances

Exception: Section 67.1(2): (1) does not apply to an amount in respect of consumption of food or beverages or the enjoyment of entertainment if the amount

(a) Is paid in the ordinary course of business (i.e. it is their business to provide food, beverages, entertainment: restaurants, movie theatres, etc.)

(f) Is in respect of one of 6 or fewer special events held in a calendar year where food, beverages or entertainment is generally available to all persons employed by an employer and consumed by all (i.e. holiday parties)

- Note: see IT-470R for rules (i.e. up to $100 per person)

1. Travelling Expensess. 8(1)(f)

salesperson

(f) sales expenses are deductible where the salesperson is (i) expected to pay own expenses under contract, (ii) ordinarily req’d to carry on employment duties away from employer’s place of business, (iii) was remunerated in whole or in part on commission (re: volume of sales), AND (iv) was not in receipt of an exempt travel allowance under s. 6(1)(b)(v) [i.e. allowance that was not included in income b/c can’t receive both exempt allowance and deduction];

can only deduct up to commission or similar amounts under s. 8(1)(f)(iii) to extent that amounts were (v) not capital outlays (e.g. realtor purchasing new vehicle to take clients around), AND (vi) not outlays or expenses considered non-deductible under s. 18(1)(l) [recreation/clubs]

*subject to meal restrictions under s. 8(4) and *requires a certificate from employer under s. 8(10)

s. 8(1)(g)

transport employee

(g) transport employee’s expenses are deductible where the employee was req’d to regularly (i) travel away from municipality where employer’s establishment located and away from metropolitan area on vehicles used by the employer to transport goods or passengers, AND (ii) while away from that municipality/metropolitan area, made disbursements for meals and lodging to the extent that the t/p has not been reimbursed and is not entitled to reimbursement

Expenses must be for both meals and lodging to qualify. This provision contemplates transport employees that are completing a long trip so as to require disbursements for both meals and lodging, not just a day trip where they return home at night. Deduction for meals is not intended for workers who return home each night. (Crawford)



s. 8(1)(h)

non-vehicletravelexpenses

(h) travel expenses (other than motor vehicle expenses) are deductible by an employee who is (i) ordinarily required to carry on the duties of employment away from the employer’s place of business or in different places, and (ii) was required under contract to pay for incurred travel expenses EXCEPT WHERE (iii) the taxpayer received an allowance under s. 6(1)(b)(v), (vi) or (vii) that was not included in income, OR (iv) claims a deduction under paragraph (e), (f) or (g).*subject to meal restrictions under s. 8(4) and *requires a certificate from employer under s. 8(10)

Cannot claim travel to and from work ; how far you live away from work and selecting between driving/taxi/transit = personal consumption decisions (Martyn)

Travel must be in performance of employment duties to be deductible (Hogg) While efficiency, cost and security concerns instruct one’s consumption choices, they do not

render a consumption decision to be deductible (Hogg) On strict wording of s. 8(1)(h)(iii) (as in Crawford), cannot deduct amounts in excess of an

allowance received (Handout)

s. 8(1)(h.1)

motor vehicle expenses

(h.1) motor vehicle travel expenses are deductible where the taxpayer was (i) ordinarly required to carry on duties of employment away from the employer’s place of business or in different places, AND (ii) was required under contract to pay such expense EXCEPT WHERE the taxpayer (iii) received an allowance under s. 6(1)(b) that was not included in income, OR (iv) claims a deduction under paragraph (f). *requires a certificate from employer under s. 8(10)

s. 8(4): meals

Section 8(4): meals consumed by a t/p who is an officer or employer shall NOT be deducted under (1)(f) or (h) UNLESS meal was consumed during a period while the t/p was req’d to be away, for a period of not less than 12 hrs, from the area where the employer’s establishment is located.

s. 8(10) Section 8(10): deductions under paragraphs (1)(f), (h) or (h.1) are not allowed unless a certificate signed by the employer is filed certifying conditions set out in provisions were met.

2. Legal ExpensesDeduction against Income from Employment

Section 8(1)(b): amounts paid by t/p in the yr to collect or establish a right to an amount owed to the t/p if the amount (if rcv’d) would be req’d to be included in t/p’s income [from employment]

Conflicting sources whether deduction is allowable if claim is unsuccessful: o IT-99R5 Bulletin: Legal and Accounting Fees (1998) in text: deduction under s. 8(1)

(b) only allowed if t/p is successful collecting or establishing amount is owedo Loo (FCA, text p 300): being successful is not necessarily req’d to deduct expense

Note: likely an area where there could be a loss from employment (i.e. no restriction; possible to deduct an amount greater than what is recovered)

Deduction against “Other Sources of Income”

‘Other Sources of Income’ - S. 60(o.1): deduction of legal expenses allowable if establishing right to: (A) a pension plan amount in respect of employment of t/p (incl. deceased), OR (B) a retiring allowance of the t/p (incl. deceased)Limitation: no deduction for legal expenses related to relationship breakdownAgain: no restriction on deduction; could deduct amount greater than what is recovered

3. Professional and Union DuesProfessional and Union Duess. 8(1)(i)

Section 8(1)(i): amounts are deductible if the amount paid on behalf of the taxpayer is required to be included in the taxpayer’s income as:

(i) annual membership dues the payment of which is necessary to maintain a professional status recognized by statute(iv) annual dues to maintain membership in a trade union (as defined by (A) s. 3 of the Canada Labour Code OR (B) in any provincial statute providing for the investigation, conciliation or settlement of industrial disputes) OR to maintain membership in an association of public servants the primary object of which is to promote the improvement of the



members’ conditions of employment or work. (v) annual dues where taxpayer is not a member (pursuant to the provisions of a collective agreement) retained by the employer from the taxpayer’s remuneration and paid to a trade union or association in (iv).

Target: employees that have to pay fees themselves; not paid by employer who’d claim expense Key question: whether the membership dues were necessary to maintain a professional status recognized by statute (Swingle), not whether it was useful in employment

- In Swingle, couldn’t deduct dues b/c professional society was not regulated by statute- NOTE : this is regarding a deduction against income from employment (could deduct this

expense against income from business as an independent contractor)Note: must be annual in nature and not a one-time entry fee into a profession

Limitationss. 8(5)

Limitations - Section 8(5): dues are not deductible if they are(a) for or under a superannuation fund or plan(b) for or under a plan for annuities, insurance (other than professional insurance required by

statute) or similar benefitsfor any other purpose not directly related to the ordinary operating expenses of the committee or similar body, association, board or trade union.

4. Cost of SuppliesSection 8(1)(i)(iii): cost of supplies deductible that were consumed directly in performance of duties and that the employee or officer was req’d to pay for under their K. *requires a certificate from employer under s. 8(10)

Question comes down to: is it a personal expense?Note: Alternate claim under Huffman – could argue that safety clothes were ‘used up’ (Although reimbursement is always better than deduction b/c employee would get full amount from employer)

5. Home Office ExpensesSection 8(13): work space in the home notwithstanding paragraphs (1)(f) and (i) (a) in order to claim a deduction for a work space in the home, it must be

- (i) the place where the individual principally performs the duties of office/employment, or- (ii) used exclusively for the purpose of earning income AND used on a regular and continuous basis for

meeting customer or other persons in ordinary course of performance(b) if conditions in (a) are met, then deduction shall not exceed income earned from the office or employment (pre deductions) [i.e. can’t use this expense to render a loss for the year](c) if full amount of expense cannot be claimed because it would have otherwise generated a loss, then the expenses can be carried forward to a year when loss will not be generated

How to calculate: proportion of home expenses that relate to % of home dedicated to work spaceNote: Income from business/property has a similar provision: Section 18(12)

VII. Income from Business or PropertyFramework Section 9(1): income = profit from said business/property (i.e. Revenue > Expenses)

Section 9(2): loss = loss from said business/property (i.e. Expenses > Revenue)Section 9(3): income/loss does not include any capital gains/losses from disposition of property

Losses from business or property are calculated source by source, and will reduce overall taxable income from all sources when applied according to s. 3(d)

Definition of “Profit”: Profit = Revenue – ExpensesSection 12(1): list of specific inclusions (and timing rules) for calculating income



(a) services, etc. to be rendered(b) amounts receivable(c) interest(f) insurance proceeds expended(g) payments based on production or use(j) dividends from resident corporations(k) foreign corporations, trusts and investment entities

Section 18(1): specific limitations on deductionsSection 20(1): specific deductions are permitted (e.g deductions would not be deductible on general principles but are by virtue of s. 20)

Non-residentsTaxation

Income from a business = taxable under s. 2(3)(b) on a net basisIncome from a property = subject to 25% withholding tax under s. 212(1) on a gross basis

- Note: income from holding shares in a corp. (dividends) = income from propertyMisc. class/handout notes:

- Distinction btwn taxation on income from business vs. property is not too significant for individuals, but VERY significant for CCPC’s; to be eligible for special low tax rate, income must be from an “active business carried on by a corporation” (s. 125(7)).

- Policy note: there is a greater compliance issue w/ income from business/property b/c there’s not the same s. 153 withholding requirement as there is for income from employment.

A. Business as Source of Income: Organized Activity and Pursuit of Profit

Definition of “Business”

Business: “anything that occupies the time, attention and labour of a man [or woman, or corporation] for the purpose of profit” (Smith v. Anderson)S. 248(1): “business” includes a profession, calling, trade, manufacture and undertaking of any kind; an adventure or concern in the nature of trade but does NOT include an office/employment

“Specified Investment Business”

S. 125(7): “specified investment business”: a business carried on by a corporation whose principal purpose is to derive income (including interest, dividends, rents and royalties) from property but does not include a business carried on by the corporation where:(a) corporation employs in the business throughout the year more than 5 full-time employeesNOTE: arbitrary threshold between passive and active business is # of employees (5)Policy: don’t want wealthy individuals to receive low CCPC rate by incorporating their investments

“Personal Services Business”

S. 125(7): “personal services business”: a business carried on by a corporation where an individual who provides the services on behalf of the corporation (or a related person) as a specified shareholder unless the corporation employs more than 5 full-time employees. (Tax rate = 38%)

“Active business carried on by a corporation”

S. 125(7): “Active business carried on by a corporation”: (≠ PSB or SIB) means a business carried on by a corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade. (Tax rate = 26% OR 13.5% for CCPC)

Policy note One of the reasons for the small business deduction (reduced CCPC rate) is to encourage small business development (employs people) and helps small businesses raise capital >> build economy

Hobby or Pursuit of Profit?Issue: Hobby vs. Income?

Principle: cannot claim personal pursuit as a business simply to offset losses/expenses (cannot claim losses incurred for a hobby or personal pursuit b/c not a “source”)Examples: yacht rental business; antique trading business; [personal interests]How to resolve? Source of income test

Gambling Are gambling winnings income from a source?Bellingham – gambling was a hobby and generally results in windfall gains that are non-taxableBUT … Necessary to distinguish between occasional gambling (just lucky) to running a gambling operation (carrying on an organized business with a view for profit)>> Gambling can be a taxable source of income if it’s a business



Factors to Consider ( Luprypa ): Is there a system for minimizing or managing the apparent risks? Is there skill involved? Is it carried on in a business-like manner? (With a view for profit?)

Gambling = Taxable: where the t/p carefully manages the risks, practices, and it is the primary source of income (and relied on as steady income) (Luprypa – pool shark)

Gambling ≠ Taxable Where the winnings are “attributed to a run of the luck by the taxpayer without a significant

element of risk management.” (Epel, pg. 314) Where the betting system itself maximizes risk and so profit still from pure luck (Leblanc)

Categories of Gambling Cases ( Leblanc , para 37):

(1) Pleasurable pursuit – “not taxable even though they do it regularly, even compulsively and with some sort of organization or system”

(2) Business of gambling – “adjunct or incident of a business carried on, for example by a casino owner who gambles in his own casino”

(3) Livelihood – “where a person uses his own expertise and skill to earn a livelihood in a gambling game in which skill is a significant component”

Lotteries ( Leblanc ) : Section 40(2)(f): gains and losses from a chance to win a prize or bet in connection with a lottery scheme or a pool system of betting is nil.

Cost of Property Acquired in a Prize: Section 52(4): where any property has been acquired by a taxpayer (after 1971) as a prize in connection with a lottery scheme, the taxpayer shall be deemed to have acquired the property at a cost to the taxpayer equal to its fair market value at that time.

Source of Income TestHistorical Approach: REOP

Rule: taxpayer must have profit or reasonable expectation of profit to have a source (Moldowan)Criticisms: - Can be an assessment of the t/p’s business acumen if business always turns a loss (Landry)

- Not consistent w/ the law as common law emphasizes the profit purpose, not the expectation of profits (Stewart)

- Vague and uncertainty in application (unfair/arbitrary treatment of t/ps) (Stewart)>> In Stewart, SCC rejected the REOP test from Maldowan. REOP is sufficient to find that it’s a source, but it’s not necessary. You can still have a source of income even if the actual events reveal that the business would never be successful. I.e. REOP excluded bona fide investment decisions where it just turned out that they wouldn’t (or took time to) pan out (as in Stewart)

Modern Approach

**Only applies to situations where there is some personal or hobby element** Two-stage test for source of income ( Stewart ):

1. Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour? Is there evidence to support that intention? (look to indicia)

2. If it is not a personal endeavor, is the source of the income a business or property?

Objective Indicia of Commerciality ( Moldowan in Stewart ): is the predominant intention to profit? The profit and loss experience in the past years The taxpayer’s training The taxpayer’s intended course of action Capability of the venture to show a profit (i.e. is it commercially viable?) Amount of time taxpayer devotes to activity (Sipley)

I.e. look for “badges of trade” (Stewart) – acting in a business-like manner? Did they market the business? Did they charge a reasonable amount for the activity/product?>> If the predominant intention is to profit, it can be a source even if there’s a personal element.



B. Carrying on a Business to Earning Income from Property vs. Realization of Capital Gains

Adventure or Concern in the Nature of TradeAdventure in the Nature of Trade

Adventure in the nature of trade (ANT): income from business as distinguished from investment in a capital property >> taxed as income rather than capital gains

Realizations on investments will result in a capital gain (e.g., increase in value on rental property upon disposal). Business, however, suggests habitual and organized activities resulting in income.

Example: Land can be bought to realize a gain on later (capital investment), or in the business of buying or selling land (business income), or with an intention to make a profit on, without it being the main business activity of the taxpayer (subject of an ANT). I.e. house flipping is a textbook example of ANT (likely taxed as income rather than capital gain)

Practically speaking, when property is sold for a gain, t/p wants it to be a capital gain (50% taxable). When sold for loss, t/p wants it to be a loss from business (loss 100% included in income).

Determining ANT Key Question: was the transaction conducted in a manner of a business, even if it was a single transaction? (Taylor)

- Arcorp articulated: is the gain/loss a mere realization or change of investment (in which case it falls into the capital category) or was it attributable to carrying on a business (income)? Are there badges or characteristics of ordinary trading?

General Rule: “depends on its character and surrounding circumstances and no single criterion can be formulated” (Taylor, pg. 556)

Four-step analysis:1. Taxpayer’s conduct

Was transaction carried out in a way that a dealer in the trade would ordinarily? (Taylor) Factors that indicate ANT: similarity between individual trader and company of

employment (e.g. company would have bought lead the same way in Taylor); efforts to find or attract purchasers; steps taken to improve marketability or salability; relevant commercial background (IT-459, Arcorp)

2. Nature and quantity of the property Did the nature and quantity of the subject matter exclude the possibility that its sale was a

realization of an investment or otherwise capital in nature? (Taylor) Factors that indicate ANT: unable to use for personal enjoyment or income (e.g. lead in

Taylor or toilet paper in Rutledge)o Commodities (like lead) – almost always subject of ANT (like in Taylor)

Strong presumption that shares and other securities are investments such that a capital gain or loss is realized upon resale (Irrigation Industries)

3. Taxpayer’s intention (not determinative) Was the t/p’s intention consistent with other evidence indicating a trading motivation? Factors that indicate ANT: intention to profit (not sufficient but relevant); secondary

intention that was present at time of purchase and ultimately acted on (Regal Heights, Saskatchewan Wheat Pool)

4. Factors that do not preclude ANT Singleness or isolated transactions (Taylor, Rutledge) Totally different in nature from other activities of the t/p (e.g. dentist habitually buying

and selling real estate) No organization set up to carry out transaction

NOTE: IT-459 seems to summarize Taylor. It has been archived but is still mostly relevant



Handout – Secondary Intention

“Secondary intention” – refers to intent of reselling the commercial enterprise if circumstances made that desirable. Property may be an ANT (not capital gain) if there was a secondary intention of reselling for a profit at time of purchase. (Regal Heights)

- The secondary intention must be an operating motivation in the mind of the purchaser (i.e. at the forefront when acquiring the property, b/c nearly everybody would sell on a whim if it became super valuable) (Saskatchewan Wheat Pool)>> Snell Farms Limited (current law aff’d): was resale for profit an operating motivation in the acquisition of capital property?

IT-218R(Real Estate)

Land as income or capital…

Factors to consider in determining whether profit (or loss) on sale of land is income or capital (i.e. ANT or investment):

(a) Taxpayer’s intention at the time of the purchase of the property(b) Feasibility of taxpayer’s intention(c) Geographical location, zoning(d) Extent to which the t/p and their associates carry out the initial or primary intention(e) Evidence of change of intention(f) Nature of the business, profession, trade, experience of the t/p and his/her associates(g) Extent to which the purchase is made with borrowed money(h) Length of time the property is held by the taxpayer – not necessarily given case whereby

real estate was held for 6 years with no action and so found to be ANT(i) Whether taxpayer made the purchase alone or with others(j) Reasons for selling – what about unsolicited offer to sell that is just too good to pass up?

So then an investment and not a speculative trade…(k) Extent of taxpayer’s (and associations) previous and subsequent dealing in real estate.

C. Income from Property

1. GeneralDefinition of Income from Property

Property: “the production of revenue from the use of such property which produces income w/o the active and extensive business-like intervention of its owner or someone on its behalf.” (Lois Hollinger)

Passive income by virtue of simple ownership

Section 248(1) definition of “property”: property of any kind whatever whether real or personal, immovable or moveable, 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

Four general categories of income from property:(1) Interest; (2) Rent; (3) Royalties; (4) Dividends

≠ capital gain/loss

Income from property ≠ capital gain/loss:Section 9(3): “income from a property” does not include any capital gain from disposition of property and “loss from a property” does not include any capital loss from the disposition of that property

>> Source of Income Test(Note: same approach as applies to business income)

Historical Approach

Rule: t/p must have profit or reasonable expectation of profit to have a source (Moldowan). Criticisms: Can become an assessment of the t/p’s business acumen if business always turns a loss (Landry) Not consistent w/ common law emphasis on profit purpose, not expectation of profits (Stewart) Vague and uncertainty in application resulting in unfair/arbitrary treatment of t/p’s (Stewart)



Modern Approach

**Only applies to situations where there is a personal or hobby interest or element**Two-stage test for source of income ( Stewart ):

1. Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour? Is there evidence to support that intention? (look to indicia)

2. If it is not a personal endeavor, is the source of the income a business or property?Objective Indicia ( Moldowan in Stewart ):

the profit and loss experience in the past years the taxpayer’s training the taxpayer’s intended course of action capability of the venture to show a profit amount of time taxpayer devotes to activity (Sipley)

2. Interest- Lender will include interest in income; - Borrower often able to deduct interest expense (depending on what loan is for)

Defined *Interest is not defined in the Act, so look to case lawInterest: rent for the use of another’s money

interest must relate to a principal amount interest accrues daily (or be allocable on a day-to-day basis) interest arises with respect to debt obligations

Debt obligation: advancement of money where intention is that the money will be repaid Examples: loans, bonds, promissory notes, bank accounts, mortgages, debentures Holder of debt obligation owns a capital asset (property right to be repaid)

Late payment charge: interest payment whereby supplier of goods levies a charge on the outstanding balance (i.e. a loan from the supplier for time to pay)

Timing for Inclusion in Income s. 12(1)(c)

Section 12(1)(c): there shall be included in computing the income (subject to (3) and (4)) any amount received or receivable as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not previously included in income.

Whether included as received or receivable depends on t/p’s regular method Corporationss. 12(3)Handout

Section 12(3): relates to interest received/receivable by a corporation *overrides s. 12(1)(c)- Accrue interest on debt obligations held by the corp. to each tax year end, to the extent not

included in previous year income; accrue each year even if interest is not received annuallyIndividualss. 12(4)Handout

Section 12(4): relates to interest received/receivable by an individual *overrides s. 12(1)(c)- Accrue interest pursuant to an “investment contract” to each “anniversary day” (defined in s.

12(11)), not y/e

Section 12(11) definitions:“anniversary day”: of an investment contract means

(a) the day that is one year less a day the date of the contract(b) day that occurs every one year interval in (a)(c) the day on which the contract was disposed of (=> when principal paid off)

Example: if date of contract is June 1, 2010, then anniversary date is May 31, 2011 and every May 31st thereafter until contract is finished

“investment contract”: any debt obligation except(i) where the taxpayer has reported interest accruing as of December 31st, rather than

reporting any interest up the anniversary dateExample of Exception: if date of investment contract is June 1, 2010, then no interest is included in 2010 but in 2011 (first year in which there is an anniversary date), 365 days of interest is included in income.



Blended Payments

Blended payments: interest components must be segregated from capital principal amounts and included in income by holder of debt obligation

Section 16(1): where under a contract an amount can reasonably be regarded as being in part interest and in part an amount of a capital nature

(a) the part that can reasonably be regarded as interest shall be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable.

*anti-avoidance provision to disallow K’s that don’t account for reality (interest)

Groulx (1967, SCC) – illustration of s. 16(1)(a) re: blended paymentsFacts π sold farm for $395k ($85k down + $310k payable in installments over 7 years w/ ‘no

interest’ indicated unless an installment was missed). Arguments CRA argued installments were blended pmts b/c normally would charge interest on a

7-year loan. There was evidence that the full purchase price was above market value >> something else must be included in the payments to account for the inflated price.

Holding Part of each installment payment was interest (calculated wrt the likely interest rate).Per s. 16(1)(a): each payment was blended (part purchase price and part interest)

Ratio Fair market value can be looked to as a comparator – to determine amount of interest vs. principal in blended payments

3. Rents/Royalties- Note: don’t worry about cross-border royalties

Rents & Royalties Defined

Rents: income rcv’d from another’s use of your (tangible or real) property (usually periodic, fixed pmts)

Royalties: payments received for letting another use intangible property (e.g. license fees for IP) and mineral rights. Helpful definition in Vauban Productions, p. 341:

share in profits or share of profit based on proportion of use, sale or rental based on degree or duration of use of that right

General Rule: A sale is where all of the legal rights in a property are transferred. Where anything less than the full rights are transferred, it is a lease or license and so the payments are rents or royalties.

Section 12(1)(g): included in income shall be any amount received that was dependent on the use of or production from property whether or not that amount was an instalment of the sale price of the property, except that an instalment of the sale price of agricultural land is not included

does not explicitly refer to rents and royalties but these amounts usually fall here Payments Based on Production or Use

Issue: how to distinguish a rent/royalty from a sales profit question of fact, absent statutory rules royalty = payment linked to sales or production (Wain-Town Gas)

o i.e. gravel, top soil, oil, etc. though it looks like a sale, can be royalties

Section 212(d): non-residents are subject to a 25% withholding tax on deemed rents and royalties including rent, royalty or similar payment (see (i) for inclusions)

Payments for Computer Software

Issue: when are payments for computer software sales rather than licenses shrink-wrap (including web-wrap or click-wrap) = software licensed pursuant to standard

unsigned license agreement = sales proceeds custom software = customer aware of software agreement = royalties

4. Dividends“Dividends” *Not defined in the Act*

Dividend: pro rata distribution from a corporation to its shareholder (defined in English case law, not in the Act; Hill v. Permanent Trustee of New South Wales); income from property (shares)



s. 12(1)(j) Inclusion of dividends received from resident corporationsRecall: when CDN corporation pays to a non-resident recipient, withholding per s. 212(2)

s. 12(1)(k) Inclusion of dividends received from non-resident corporationsAvoiding double-taxation: Individual s/h’s receive a dividend credit and corporate s/h’s receive dividends tax-free to avoid double taxation (distributing corporation pays income tax and s/h includes in income too)

Recap: be able to identify the type of income.- Corporation that receives mostly rents (i.e. owns office building w/ principal income from renting offices) >>

corporation is carrying on a specified investment business (not entitled to small business deduction)

VIII. Deductions in Computing Income from Business and Property

A. Structure of the Act (ITA)s. 9(1) Computation of Profit (Income) = revenue – expenses

**Cite s. 9(1) for deductibility of ordinary/running expenses in calculating profit. In principle, deduct whatever is deductible under the ordinary principles of commercial trading or acctg. principles, unless there’s something in the act that restricts it (Daley)

s. 18(1) LIMITATIONS on Deduction of ExpensesRestricts deduction that would otherwise be available from a commercial standpoint(1)(a) general limitation = only expenses made or incurred for the purpose of gaining or producing

income from the business/property may be deducted(1)(b) no deduction of capital expenditures (outlay or loss) – except as provided in s. 20(1)(h) no deduction for personal and living expenses, except where re: travel related to business(1)(l) no deduction for use of recreational facilities and clubs (i.e. yacht, lodge, golf course, unless made

in the ordinary course of business of providing the property for hire/reward)(1)(p) limitation on deductions for personal services businesses expenses; can only deduct:

(i) salary or wages paid to the incorporated person(ii) cost of benefits or allowances provided to incorporated person(iii) any amount expended in the sale of property or negotiating contracts (if the amount

would have been deductible by the incorporated person from an office/employment)(iv) legal expenses incurred to collect amounts owing to it

(1(r) limit mileage reimbursement to regulation 7306 [employer deduction re: employee allowance](1)(t) no deduction of income tax

s. 20 PERMITTED specific deductions – overrides s. 18(1)(a) capital cost of property (capital cost allowance) – as allowed by regulation(1)(c) interest paid/payable

s. 67(1) General limitation on deductions (applies to deductions for all sources):“Reasonableness”: deductions only allowed to the extent that they are reasonable in the circumstances

s. 67.1 Expenses for food – generally may only deduct 50% for food/beverages/entertainment for human consumption, unless:(2)(a) in business of providing food/beverages/entertainment, OR (f) for a staff event (max 6 per year)

B. The Income Earning Purpose TestIncome Earning Purpose Analysis (consistent with Daley)

Step 1: Is the expense incurred in accordance with principles of commercial trading or accepted business practice for the purpose of earning income? If yes, then it is likely deductible under s. 9(1).Step 2: If deduction is likely allowable under s. 9(1), is it limited under s. 18? Step 3: If deduction is not excluded under s. 18, is the expense included under s. 20?Note - If the expense does not constitute a deductible expense but may be a capital outlay.



Imperial Oil v. MNR (1947 – Exch. Ct.) – was it a capital outlay or a deductible expense?Facts Imperial Oil’s vessel collided w/ another vessel; Imperial Oil paid over $500k to settle damage claimHolding Expenses that arise out of the normal course of business (even if an extraordinary amount) are deductible;

recognition that negligence and accidents are not abnormal/unusual >> compensation is in normal courseRatio Expense incurred for the purpose of earning is one that is “made not only in the course of earning the

income but as part of the process of doing so.” (CB 351)

Royal Trust v. MNR (1957 – Exch. Ct.) – memberships Facts Royal Trust paid for memberships of certain employees at social clubs (incl. entrance fee + annual dues) Holding Deductibility under Step 1 (above) is not about GAAP but rather whether the expense was made according

to commercial principles and business practice.Distinguished the entrance fee (aka one-time expense) from Daley (bar admission fee) in that it was in the ordinary course of business. RT regularly and normally incurred these expenses as each new employee was provided access to the social clubs for the purpose of garnering business.

Note Section 18(1)(l) now restricts such expenses for memberships.

C. Personal or Living Expensess. 18(1)(h) Personal and living expenses are not deductible unless they are travel expenses incurred by the

taxpayer while away from home in the course of carrying on the taxpayer’s business.Section 248(1): “personal or living expenses”: includes

(a) expenses of properties maintained by any person for the use or benefit of the taxpayer or related persons and NOT maintained in connection a business carried on for profit or with a reasonable expectation of profit

(b) expenses, premiums or other costs of an insurance policy if the proceeds of the policy are payable to or for the benefit of the taxpayer or related person.

(c) expenses of properties maintained by an estate or trust for benefit of the t/p as beneficiarys. 18(1)(l) Expenses re use of recreational facilities and clubs are not deductible (after 1971) for:

(i) for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facilities unless the taxpayer made the expense in the ordinary course of the taxpayer’s business of providing the property for hire or reward

(ii) membership fees or dues (whether initiation fees or otherwise) in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members

Recall IT-470R (Employee Benefits): employee NOT deemed to receive taxable benefit where:- Para 33: employees are permitted to use employer’s recreational facilities- Para 34: employer pays fees for employee to be a member of a social or athletic club

where membership is principally for employer’s advantages. 67.1 Section 67.1: 50% Rule for Food, etc.

(1) Other than sections 62, 62 […] an amount paid or payable in respect of the human consumption of food or beverages in the enjoyment of entertainment is deemed to be 50% of the lesser of

(a) the amount actually paid or payable(b) an amount that would be reasonable in the circumstances

Thomas Harry Benton v. MNR (1952 – AB)

Cannot deduct house-keeper’s wages as expense of farm management and operation when the house-keeper’s duties were domestic in nature (help with farm operations was of a secondary nature). The wages were personal and living expenses and not deductible against farm income.

Commuting to a Place of Business

(not deductible unless travel is

Dr. E. Ross Henry (1969 – Exch. Ct.)Facts: Doctor who drove from office to hospital, where paperwork was completed and all treatments took place, respectively. Also drove between house and hospital/office.Holding: Could not deduct expense of commuting from home to office. BUT, could deduct trips between hospital and other office, as well as emergency trips from home + trips to patient’s homes. Compare with: Hogg (2002 – FCA) = employment situation



related to business activities

… not purely personal transport or convenience)

- Judge traveling to/from home not deductible b/c not in carrying duties of employmentMcCreath Headnote (2008 TCC) Handout

- Taxpayer cannot deduct expenses incurred to travel between home and place of employment, despite that he did some work from home

- In this case, t/p conducted most of employment-related activities from home (not from his office) purely for convenience, not in the performance of his employment duties>> Allowance for mileage was properly included in his income (not a deduction)

Court will ask: is this purely convenience OR really required for your business (re: expense for commute); hard argument to make; really a “personal consumption decision”

Moving Expenses*Recognizes that moving expenses can go beyond personal consumption and are connected to earning income.

s. 62(1) Moving expenses may be deducted where incurred in respect of an eligible relocation to the extent that:(a) They were not paid on the t/p’s behalf in respect of, in course of or b/c of office or employment(b) They were not deductible under s. 62 from income in a previous year(c) The total amounts do not create a loss from the income earned at new location(d) All reimbursements and allowances received are included in income

s. 62(2) Moving expenses of students that are otherwise deductible may be deducted if either the new residence or the old residence is in Canada

s. 62(3) “moving expenses” in (1) may include any of the following(a) Travel costs (including a reasonable amount for meals and lodging)(b) Cost to the taxpayer of transporting or storing household effects during move(c) Cost for meals and lodging near old or new residence for t/p and family for up to 15 days(d) Cost of cancelling the lease on the old residence(e) Selling costs in respect of sale of old residence(f) Where old residence is sold by t/p or spouse as a result of the move, the cost of legal services to

purchase a new residence (and any tax, fee or duty other than goods & services taxes)(g) Interest, property taxes, insurance premiums and the cost of heating and utilities in respect of

the old residence, to the extent of the lesser of $5000 and the total of such expense for the period (i) the old residence is not ordinarily occupied by the taxpayer or anyone who normally resides with them AND (ii) during which reasonable efforts are made to sell the old residence

(h) Cost of revising legal documents to reflect the new residence address, cost of replacing drivers’ licences and of disconnecting or connecting utilities

s. 248(1) “eligible relocation”: relocation of a taxpayer in respect of which the following apply(a) Relations occurs to enable the taxpayer to

(i) Carry on a business or to be employed at a location (“the new work location”) that is in Canada, except if the taxpayer is absent from but resident in Canada

(ii) To be a student in full-time attendance enrolled in a program at a post-secondary level at a university, college or other educational institution

(b) The taxpayer ordinarily resided before the relocation at the old residence and is ordinarily residence after the relocation at the new residence

(c) Except if t/p is absent from but resident in CND, both old and new residences are in CND AND(d) The new residence must be at least 40km closer to the new work location than the old residence

was [by the shortest normally travelled route] NOTE: actual cost of the new residence is not deductible (mortgage, insurance, mortgage interest, surveys, inspections)s. 56

[Students]

Application to students re scholarships:Section 56(1)(n): scholarships, bursaries and other amounts are included in income to the extent the amounts exceed scholarship exemptionsSection 56(3): exemption for scholarships under s. 56(1)(n) in connection with enrolment in an educational program that qualifies for the education tax credit (118.62) which requires that the taxpayer be enrolled in a “qualifying educational program” at a “designated educational institution”

Qualifying educational program = minimum 3 consecutive weeks, 10 hours per week Designated educational institution = Canadian and foreign universities and colleges, provided, if

foreign, the program is at least 13 weeks long



Connection to Benefits & Allowances: IT-470R Para 35: Where an employer reimburses an employee for moving expenses, this reimbursement is not considered as

conferring a taxable benefit on the employeePara 36: Where the employer pays the moving expenses of an employee out of a remote place at the termination of

the employment, no taxable benefit is imputed

Case Law AnalysisWhere the taxpayer is commuting, how long is too long before the taxpayer finally moves?

8 years was acceptable period of time (Beaudoin (2005 – TCC) Deduction allowed of legal fees and real estate commission incurred to sell former residence where the

taxpayer held off selling for two years to ensure the new job worked out (Jaggers (1997 – TCC)Legislation changed from “commenced” to “enable”…

TCC interpreted as to give more latitude such that when a taxpayer moved 16 months before finding employment, the deduction was allowed (Abrahamsen (2007 – TCC)

What purpose does 40km difference rule serve? >> Personal consumption decision vs. business purpose decisionDeduction disallowed where home and workplace distance remained the same after move (Grill) BUT allowed where t/p changed departments within same hospital and went from part-time to full-time employment (Gelinas)

Home Office ExpensesSection 18(12):

(a) No amount shall be deducted in respect of an otherwise deductible amount for any part of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either(i) the individual’s principal place of business OR(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients in respect of business

(b) Where conditions in (a) are met, the amount deductible shall not exceed the individual’s income from the business

(c) Any amount not deductible in (b) is deemed an amount otherwise deductible that can be deducted in succeeding years [i.e. deduction can be carried forward indefinitely]

NOTE: Suggests that business purpose test of s. 9(1) and s. 67 must be complied with Appropriate Amount = proportion of expenses relating to space occupied by home office compared to total area of home (incl. rent, utilities, insurance, mortgage interest, property tax, maintenance, etc.)

D. Deduction of Interest ExpenseInterest Expense (Handout)

Section 20(1)(c): notwithstanding s. 18(1)(a), (b) and (h) in computing income, there may be deducted the following, either in full or in part as they may reasonably be regarded as applicable to (c) An amount paid in the year or payable in respect of the year (depending on the method regularly followed by the t/p), pursuant to a legal obligation to pay interest on:

i. Borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy

ii. An amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or property that is an interest in a life insurance policy)

Or a reasonable amount, whichever is lesser […]

Note in particular: 1. Timing (accrual vs. cash accounting) of the deduction2. Requirement for a legal obligation to pay the interest3. Income earning purpose requirement 4. Limitation where income which is earned is exempt



5. Deduction permitted (ii) where interest is charged on unpaid purchase price rather than borrowed funds

6. “Unreasonable” interest charges will not be deductible

Policy Reasons:Object of s. 20(1)(c)(i): incentivize accumulation of capital w potential to produce income by allowing t/p’s to deduct interest costs associated w/ its acquisition. The accumulation of income producing capital is seen as b/c because it creates wealth and increases tax base.(Ludco, para 63)

Bronfman Trust (1987 – SCC)

FACTS: Trustees borrowed money to pay out the beneficiary instead of cashing out shares; trustees claimed an interest deduction on the grounds that it was an indirect way of doing what the trust could do directly (i.e. cash out shares, pay out beneficiary, borrow funds, re-purchase shares)HOLDING: Not Deductible – courts looks to the actual steps and not what t/p might have done ANALYSIS (RATIO): to deduct an interest expense, the interest paid must comply w/

1. Eligible use – must be able to trace borrowed funds used for income earning purposeo Deduction not permitted for interest on funds to produce exempt income, purchase

life insurance, personal consumption or to produce capital gains.o Purpose to distribute capital to beneficiary is not eligible.

2. Current use of borrowed funds is relevant, not the original use (*recognize when purpose changes); must be an eligible use currently

3. Direct use must be eligible – cannot use funds indirectly for the purpose of earning income (i.e. no deduction if interest paid indirectly preserves income-earning property but is not directly used for income-earning purpose)

Attaie(1990 – FCA)

FACTS: Taxpayer moved from Iran to Canada, bought house and rented it out, deducting interest on mortgage. Taxpayer then moved into residence and received $200,000 from Iran. The money was not used to pay off the mortgage but re-invested in term deposits. Taxpayer then sought to offset interest payable under mortgage against interest generated by term deposits.

HOLDING: Court looked to direct use of money and found it was used to finance a personal residence, which is ineligible. Thus, the mortgage interest was not deductible. Note: Current use of income is now a personal nature (not to earn income) >> no deduction. It’s not what you could’ve done, but what you actually did.

Singleton(2002 – SCC)

FACTS: Partner in law firm removed money from his capital count (lawyer’s rightful money; used $ to buy a house), and then borrowed money to replenish capital account.ISSUE: Was the borrowed money used for the purpose of earning income from a business?HOLDING: Yes, must look to the single transaction of borrowing money to refinance capital account – direct, eligible use within s. 20(1)(c)(i)

Unless the transaction is prohibited by a specific provision of the Act or is a sham, then only the actual transaction is considered

Economic realities cannot re-characterize a bona fide transaction If the provision is unambiguous, the court cannot go looking for economic realities

ANALYSIS from Shell Canada (1999 – SCC) : Elements of s. 20(1)(c)(i)1. Amount must be paid, or payable, in the year in which the deduction is sought2. Amount must be paid pursuant to a legal obligation to pay interest on borrowed money3. Borrowed money must be used for the purpose of earning non-exempt income from a

business or property4. Amount is reasonable in consideration of the three requirements

NOTE: Shell Canada was the closest the SCC gets to saying that tax planning is a business purpose. Ludco Enterprises Ltd.

FACTS: Wealthy group from CND borrowed money from a CDN bank to purchase shares of two companies resident in Panama and operated from HQ in the Bahamas (both tax-haven countries). Companies used money to purchase US and CDN gov’t bonds, interest earned paid into company; no



(2001 – SCC) withholding tax on gov’t bonds. Group claimed interest paid on CDN loans.

ISSUE: Was the interest incurred for the purposes of earning income?HOLDING: Yes, deduction allowedREASONING:

Interest was reasonable based on assessment of commercial rates, arm’s length nature of the transaction

S. 20(1)(c)(i) can apply when t/p uses money for more than one purpose, provided that one of those purposes is to earn income (even if ancillary)

Proper test to determine purpose for interest deductibility under s. 20(1)(c)(i) is whether, considering all circumstances, t/p had reasonable expectation of income at time the investment was made

Deduction was traceable to legitimate use Courts are not concerned w/ sufficiency of income, only that there was a reasonable

expectation of income

E. Policy Reasons for Denying DeductionsIntroduction/ Goals

- To distinguish between personal consumption expenses and income-earning expenses- To disallow deductions that would frustrate public policy

Expenses of Illegal Businesses

Starting Point: “Income” does not distinguish between legitimate and illegal business activities.

Eldridge (1964 – Exch. Ct.)FACTS: Mrs. Eldridge ran a call-girl operation; deductions claimed (against a net worth tax assessment against her) for apartment rent, legal fees, liquor gifts, etc.RATIO: Reasonable expenses in carrying on a business + properly documented were allowable deductions. Illegal businesses are just as taxable as legal businesses.

Recall Buckman: using embezzled funds does not detract from taxation!Non-deductibility of Bribes

Section 67.5(1): no deduction shall be made for an outlay or expense for the purpose of doing anything that is an offence under section 3 of the Corruption of Foreign Officials Act or under sections 119-121, 123-125, 393, and 426 of the Criminal Code, or under section 465 of the Criminal Code (*SEE HANDOUT for charges)

CND has signed an international treaty abolishing the corruption of foreign officials Domestic legislation has also been enacted to protect domestic officials

Non-deductibility of Fines & Penalties

Section 67.6: no deduction shall be made for any amount that is a fine or penalty (other than a prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty.

Includes parking tickets, speeding tickets, environmental fines, etc. Damages and contractual penalties are generally deductible if they meet the general test

of deductibility under s. 9 and s. 18(1)(a) and (h) (Note on p. 402, text)

Outlays of Capital: Capital vs. Current ExpendituresNon-deductibility of Outlays of Capital

Section 9(1): income from business or property = taxpayer’s profit

Limitation per Section 18(1)(b): outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly prohibited by this part are not deductible.

Depreciation (CCA) allowable deduction under section 20(1)(a)

Note: important determination b/c if it’s a current expense, then deduct all per s. 9(1) as a repair expense. If it’s a capital outlay, deduct the CCA allowable under s. 20(1)(a).

Basic Test: Basic Test: Enduring Benefit



Enduring Benefit Capital expenditure is one “made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.” (British Insulated)

“Once and for all” is not sufficient to distinguish current vs. capital (British Insulated) Cost of expenditure (compared to value of asset) ≠ determinative (Canada Steampship) Money laid out to upgrade an asset – is an outlay of capital (Canada Steamship) An expenditure to repair the physical effects of an asset in the business – whether

resulting from wear and tear or accident – is a current expense (Canada Steamship) The word “improve” is not super helpful b/c a repaired asset is better than before

FOR THE EXAM: Good argument is more important than “correct” determination- Not a test of whether it’s a large, unusual expense

Case Examples: British Insulated (1926 – England)

Sum paid into pension plan is deductible as a capital outlay (not as a current expenditure); it allowed the company to establish the fund to offer its current & future employees a secure old age provision.

Canada Steamship (1966 – Exch. Ct.)

Maintenance and repair = deductible expenses (of floors and walls of cargo hold due to wear and tear of the ship from use)Replacement boilers = acquisition of new asset = capital outlay (tough call since boilers needed to be replaced for the ship to run)

Shabro Investments (1979 – FCA)

New floor supported by pillars = capital outlay (it’s an addition to the building asset)Replacing pipes, drains, etc. = current expense

Gold Bar (1987 – FCTD)

Replacement of collapsing brick wall w/ a better-constructed one = current expense “Not a voluntary expenditure with a view to bringing into existence a new capital asset for the purpose of producing income, or for the purpose of creating an improved building so as to produce greater income” (pg. 503)

Carry forward/back of non-capital lossesUsing Losses in Other Years

Section 111(1)(a): non-capital losses may be carried forward 20 years and back 3 years Non-capital losses = losses from a source (typically business or property) Use oldest losses first so that they do not ‘expire’ Look to structure of section 3: (d) = deduction of losses

X. Capital Gains and LossesFramework Taxation of capital gains & losses: Section 3

(a) calculation of each income (revenue less deductions) from a source excluding capital gains(b) calculation of

(i)(A) taxable capital gains from all property except LPP and (i)(B) taxable net gains from LPP (ii) LESS allowable capital losses = net taxable capital gain [include in income] or net (allowable) capital loss [carry]

(c) add (a) and (b) together and apply deductions permitted by subdivision e (as these deductions apply to all sources of income, e.g. moving expenses) – except those that have already been deducted under (a)

(d) allows the deduction of non-capital losses from the enumerated sources. o Recall: non-capital losses may be carried forward 20 and back 3 yrs (s. 111(1)(a))

Distinguish income from property: Section 9(3)Specifies that income or losses from a source that is property does not include capital or gains from the disposition of that property Note that … section 3(a) and (b) already separate out these categories



Definition Section 39(1) - Definition of capital gain & capital loss(a) capital gain = taxpayer’s gain from disposition of property (except for gains and losses

that are taxed as income or loss from a source – refers to ANT whereby disposition is source of income)

(b) capital loss = taxpayer’s loss from disposition of property other than depreciable property

Calculation Section 40(1) (“except as otherwise provided in this Part”)(a) capital gain = POD – (ACB + Expenses incurred to make the disposition)(b) capital loss = (ACB + Expenses incurred to make the disposition) – POD

Note: although not expressly referred to in the Act, ACB includes property taxes, fees and other expenses to acquire property (but not interest on loan) are included according to IT-285R2

Section 38: 50% Taxable capital gain and allowable capital loss: Section 38(a) taxable capital gain = 50% of capital gain(b) allowable capital loss = 50% of capital loss

Carry forward and back:net capital losses

Carry forward and back of net capital losses: Section 111Net capital losses = allowable capital losses – taxable capital gain (1)(b) net capital losses can be carried forward indefinitely and backward 3 years (2)(a) In year of death, t/p is deemed to have disposed of all property. If net capital losses cannot all be used in year of death or in year preceding death, then capital losses convert to losses from a source and so are deductible in computing income (so long as there is income from a source)

Policy Evaluation - Capital Gains TaxPolicy reasons to TAX capital gains

Policy reasons for taxation of capital gains (in general):1. Results in greater equity

Horizontal: taxpayer who realizes $1000 capital gain on stock market is put in nearly same position as one who earns $1000 from employment

Vertical: wealthy taxpayers deriving large portions of income from capital transactions assume a more appropriate tax burden as those earning income from employment

2. Neutrality of the system – reduces incentive to make income-producing transactions look capital 3. Certainty – full tax of capital gains would render distinction btwn capital vs. income insignificant

50% rate Canada’s response: 50% rate meant to appease the public, provincial government and Common Committee who were opposed to full taxation

Evaluating Canada’s System:

Evaluating Canada’s system: 1. Likely offends

Horizontal and vertical equity – have to have capital to realize capital gains so it is likely wealthy taxpayers that are only being taxed at 50% on their gains, while a less wealthy person is being taxed on 100% of their income from employment

Neutrality – capital gains rates definitely influence economic decisions Certainty & simplicity – differing rates between income and capital make the system less

certain and more complex 2. Favourable because

Can account for inflation if property is held onto for a long period of time (not actually a gain, simply inflation)

Not taxed until realized as the disposition of the property is the trigger for tax relevance; there are also timing benefits for acquisitions and dispositions

Lifetime capital gains exemption for capital gains realized by individuals (everyone gets an exemption up to $750,000 on very specific types of businesses; think of like a retirement fund for entrepreneurs)

TFSA – capital gains made are tax-free (putting in after-tax money so it benefits both high and low-income earners – avoiding double taxation)



Definitions“Property” “property” (section 248(1)): property of any kind whatever whether real or personal, immovable or

moveable, 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

“Capital property”

“capital property” (section 54): means(a) any depreciable property(b) property other than depreciable whereby, on disposition, any gain or loss would be a capital

gain or loss (=> residual bucket!)“ACB” “ACB” (section 54): means, except as otherwise provided

(a) if depreciable property, the capital cost to the taxpayer as of that time (b) any other case, the cost to the taxpayer, as of that time, adjusted in accordance with section 53

NOTE: Calculated “at any time” though the ACB relevant to capital gains or losses is the AC immediately before the disposition.

**Recall distinction between capital acquisition/disposition, adventure in the nature of trade, carrying n a business of buying and selling property as inventory.

ACB of “Identical Properties”Identical Properties ACB

Section 47(1) – Identical Properties = shares of the same class of a particular corporation, and units of the same class of a particular mutual fund trust or income trust(Definition can include other types of property that we won’t worry about!)

- s. 47(1) requires a taxpayer to average the ACBs of identical properties (i.e. where the identical properties were acquired at different prices)

- Taxpayer cannot “order” the disposition of identical properties by choosing the price-point of the property for a particular transaction >> ACBs must be averaged.

Land (and other physical assets) are likely not identical with the exception of two undivided ½ interests (unless selling less desirable portion in which value will be apportioned)

Example:T1: purchase 200 Class A shares of X Corp for $1.00 per shareT2: purchase 100 Class A shares of X Corp for $1.50 per shareT3: sell 100 Class A shares of X Corp for $1.60 per share

ACB of each individual share = average ACB of all shares = ((200 x $1.00) + (100 x $1.50)) / 300 = $1.17 per share >> Capital gain on T3 sale = ($1.60 - $1.17) x 100 = $43

T4: purchase 200 Class A shares of X Corp. for $2.00 per share>> ACB of each individual share = ((200 x $1.17) + (200 x $2.00)) / 400 = $1.58 per share

Part Property ACBSection 43(1): for the disposition of part of a property, the ACB immediately before the disposition is the portion of the ACB of the whole property that can reasonably be regarded as attributed to that part. (I.e. both quality and quantity)

Proceeds of Disposition“disposition” (section 248(1)): disposition includes, except as expressly otherwise provided,

(a) any transaction or event entitling a taxpayer to proceeds of disposition of the property [sale/exchange](b) any transaction or event by which, (i) where the property is a share, etc., it is redeemed, acquired or

cancelled, OR (ii) where the property is a debt, the debt is settled or cancelled BUT DOES NOT INCLUDE

(e) any transfer in which there is no change in the beneficial ownership (except re trusts)



(j) any transfer for the purpose of securing a debt or loan, or any transfer by a creditor for the purpose of returning property used as a security(l) any issue of a bond, debenture, mortgage, etc. (m) any issue by a corporation of a share of its capital stock

“proceeds of disposition” (section 54): see Act for list of inclusions and exclusionsClass notes: If it’s a transaction where someone receives “proceeds of disposition” >> it’s a disposition! Although to be a “disposition”, you don’t necessarily require “proceeds” (i.e. it includes theft, destruction, ‘running away’ (if it’s an asset that can run away!)); “disposition” when you no longer have a hope of getting something back (i.e. no compensation, payment, insurance, etc.); “disposition” need not be contractual.Definitions NOT exhaustive:“[D]efinitions of ‘disposition of property’ and ‘proceeds of disposition’ are not exhaustive; these expressions must bear both their normal meaning and their statutory meaning; it would be wrong to restrict the former because of the latter” (Compagnie Immobiliere BCN Ltee (1979 – SCC), pg. 565)

Deemed Dispositions and Deemed ProceedsImmigration & Emigration

Immigration EmigrationDeemed disposition of property at fair market value immediately before becoming resident of Canada (FMV example: price at which shares trade on the stock exchange)

Exception: (i) taxable Canadian property = real property situated in Canada and shares of private corporations that derive their value primarily from real property situated in Canada

(section 128.1(1)(b))

Deemed disposition of property at fair market value immediately before ceasing to be resident of Canada

Exception: (i) real or immovable property situated in Canada

(Section 128.1(4)(b))

Deemed acquisition of property at cost equal to POD (aka fair market value) at time of becoming resident of Canada

(section 128.1(1)(c))

Deemed acquisition of property at cost equal to POD (aka fair market value) at time of ceasing to be resident of Canada

(Section 128.1(4)(c))Note: recall s. 2(3) whereby non-residents are taxable on business carried on in Canada and disposition of taxable Canadian property (likely why it’s an exception in deemed disposition; CRA is not concerned w/ not being able to tax it when it is actually disposed).

Handout Examples: (see handout for policy)Resident of FrancePurchased

>> Tax Treatment on Immigration >> Tax Treatment on Emigration

Villa in France for $ 100k

(Not real property in CND)

FMV when became CND resident: $ 300k FMV on ceasing to be CDN res: $ 700kDeemed disposed/reacquired at FMV right before becoming CDN resident = ACB for CND tax purposes $ 300k, per s. 128.1(1)Note: $ 200k increase in value not taxed in CND b/c took place when non-resident>> not within s. 2(3) tax on non-residents

Deemed disposed (POD $ 700k) and reacquired for $ 700k immediately before ceasing to be resident, per s. 128.1(4).Realize capital gain of $ 400k per s. 40(1)(a)(i) and therefore a taxable capital gain of $ 200k per s. 38(a).

500 sh’s of TD Bank @ $ 25/share (publicly-

FMV when became CND resident: $ 45/sh FMV on ceasing to be CDN res: $ 70/shDeemed disposed/reacquired at FMV right before becoming CND resident = ACB for CND tax purposes $ 45/ sh, per s. 128.1(1)

Deemed disposed and reacquired at FMV immediately before ceasing to be resident, per s. 128.1(4) >> realize the $ 25/sh capital



traded) Note: $ 20/share increase not taxed in CND b/c took place when non-resident >> not within s. 2(3) tax on non-residents

gain = $ 12.5/sh taxable capital gain

1,000 sh’s of HRSK Inc. (US mortgage company) for $ 10/share

FMV when became CND resident: $ 8/sh FMV on ceasing to be CDN res: $ 2/shACB will be $ 8/share for CND tax purposes on becoming CDN resident, per s. 128.1(1)Note: loss in value not included for CDN tax purposes b/c took place when non-resident and not within s. 2(3) tax on non-residents

Deemed disposed and reacquired at FMV immediately before ceasing to be resident, per s. 128.1(4) >> realize the $ 6/sh loss while CDN resident (s. 40(1)(b)) = $ 3/sh allowable capital loss (ACL) per s. 38(b)

100 sh’s of CDN resident private company @ $ 20/sh

FMV when became CDN resident: $ 30/sh FMV on ceasing to be CDN res: $ 40/shNOT deemed disposed of – they are included in the exception of taxable CDN property, per s. 128(1)(b)(i).

Deemed disposed of (b/c only exception is for real/immovable property) at $ 40/sh, per s. 128.1(4). >> Realize capital gain of $ 2,000 per s. 40(1)(a)(i) and therefore a taxable capital gain of $ 1,000 per s. 38(a).

>> Can deduct allowable capital loss from the taxable gains to determine amount to include in income under s. 3(b) for the final tax return as a CDN resident.

Deemed Proceeds: Gifts & Sales below FMV to Non-Arm’s Length PersonsGifts & Sales below Fair Market Value to Non-arm’s Lengths Persons

Anti-avoidance legislation: preventing taxpayers from getting out of paying capital gains by artificially inflating the ACB by paying a higher price. Note: For tax purposes, a gift is a gratuitous transfer; doesn’t include a sale at an undervaluation (The Queen v. Littler)

Section 69(1)(a) Acquisition (non-arm’s length) for MORE than FMV

>> t/p deemed to have acquired it at FMV>> proceeds to the vendor remain the selling price

(b) Disposition situations:(I) Dealing at non-arm’s length; for no proceeds or less than FMV (II) To any person by gift inter vivos(III) To a trust that does not result in a change in beneficial ownership of the property>> POD is deemed equal to FMV

(c) Acquisition by way of gift, bequest or inheritance or because disposition does not result in beneficial change in ownership >> deemed acquisition at FMV

Note: if acquired from any person at a price below FMV (above $ 0), ACB for purchaser is price paid.

Example: A sells shares to child B for $7. A bought shares for $5 and are worth $10 now. A: POD = $10 (s. 69(1)(b)); Capital Gain = $5B: ACB = $7Result is double taxation in that A pays capital gain on full amount and B accrues a capital gain since could sell for $10 now (and thus has $3 capital gain automatically)

Non-Arm’s Length

Related & Non-arm length’s persons – see pg. 18 (Section 251(1) and (2))“common-law partner” (s. 248(1)): means a person who cohabits in a conjugal relationship with the taxpayer (a) has so cohabited throughout the 12-month period that ends at that time, OR(b) would be the parent of a child of whom the taxpayer is a parentAnd where at any time the taxpayer and the person cohabit in a conjugal relationship, they are deemed to a cohabiting as such unless they were living separate and apart at the particular time for a period of at least 90 days that includes the particular time because of a breakdown in their conjugal relationship.



[i.e. you are considered to be living together UNLESS it breaks down for 90 days]

EXCEPTION: Spousal Rollover - Inter Vivos Transfer

*Section 69(1)(b), (c) do not apply due to opening words of that section: “except as expressly otherwise provided in this Act” => s. 73 is an exception! S. 73(1) applies automatically unless the transferor elects otherwise (in which case s. 69 applies)

Effect: Deferring capital gains calculationWhen to use? On marital breakdown, property can be split (transferring undivided half-interests) without paying capital gains. It facilitates the settlement to find a tax-efficient solution (such that one party is not, suddenly, being taxed on capital gains. It also allows for a final settlement such that it does not require further interaction on future sale of the property. ** Also applies for transfers when not in relationship breakdown.

Section 73(1): where property has been transferred where (1.01) applies AND both the individual and t/p are resident in Canada (unless elect for provisions not to apply), the property is deemed

(a) to have been disposed of by the individual where POD = ACB(b) to have been acquired by the transferee for original ACB (as above)

Section 73(1.01): this subsection applies where property has been transferred by an individual to(a) the individual’s spouse or common-law partner(b) former spouse or common-law partner in settlement of rights arising out of their marriage

or common-law partnership

Summary of Requirements for (1) to apply: 1. transfer of capital property 2. residency in Canada of transferor and transferee3. current or former spouse or CLP

Attribution Rule

(between t/p and spouse/CLP)

Section 74.2(1)(a) – Where an individual has lent or transferred property to or for the benefit of their spouse or CLP, this section attributes the capital gains and losses back to the transferor that would otherwise have been earned by the t/p’s spouse.Policy: attribution rule is intended to stop a t/p from creating a tax benefit by shifting income or capital gains from the t/p to their lower-taxed spouse/CLP (a policy against “capital gains splitting”)Does not apply if: relationship breaks down or if the transferor dies. I.e. gains accrue to transferee (use rollover provision to defer taxation of gain/loss until ex-partner disposes of it)

Deemed Dispositions on DeathDeemed Disposition on Death

Section 70(5): Where a taxpayer dies, immediately before death(a) deemed to have disposed of each capital property where POD = FMV(b) any person who acquires as a consequence of death, acquisition (ACB) = FMV

I.e. Estate must show all capital gains/losses that result from the deemed dispositionEXCEPTION: Rollover on Death

**An exception to s. 70(5), which recognizes the economic unit of spouses in property ownership:Section 70(6): where property of a Canadian resident taxpayer is transferred after death of taxpayer (where otherwise (5) would apply) to:

(a) taxpayer’s spouse or CLP who was resident in Canada immediately before t/p’s death, or (b) a trust wherein the t/p’s spouse or CLP is the sole beneficiary (and resident in CND)

if it can be shown, within the period ending 36 months after the death of the taxpayer or an amount of time as reasonable in the circumstances (=> i.e. time to settle estate) (c) paragraphs 5(a) and (b) do not apply in respect of the property (d) the taxpayer shall be deemed to have, immediately before their death, disposed of the property and received POD equal to (ii) its ACB to the taxpayer immediately before death

and the spouse or CLP is deemed to have acquired the property at the time of death at a cost equal to the original ACB



Rollover is automatic unless there is an election out of it: Section 70(6.2): taxpayer’s legal rep can elect in the income tax return for the year in which taxpayer died to not have (6) apply and thus (5) will apply.

When might it be beneficial to elect out of the rollover? Given previously unused capital losses, a gain allows these losses to be used (and so not wasted) to offset this gain. Additionally, the highest ACB will be transferred such that the deceased’s spouse will not be stuck with a potentially larger capital gain in the future (by selling property at FMV). Tax planning required: may not want estate to pay large amount of capital gains just to transfer the ACB to the spouse as the spouse may be relying on money in the estate for living expenses.

Recall: Lottery winnings and lossesLottery Winnings Lotteries ( Leblanc ) :

Section 40(2)(f): gains and losses from a chance to win a prize or bet in connection with a lottery scheme or a pool system of betting is nil. I.e. Don’t need to pay capital gain tax if you win; can’t claim capital loss of ticket price if you lose

Deemed Cost of Prize Property

Cost of Property Acquired in a PrizeSection 52(4): where any property has been acquired by a taxpayer (at any time after 1971) as a prize in connection with a lottery scheme, the taxpayer shall be deemed to have acquired the property at a cost to the taxpayer equal to its fair market value at that time.I.e. if you win a house worth $ 1m, your ACB is $ 1m, not the cost of the ticket

Personal Use Property (PUP) and Listed Personal Property (LPP)- Personal use property – can have a gain on this even though it is not used to generate income

o Does NOT include property that is used for investment purposesITA Definitions Section 54 - Note: All LPP is PUP but not all PUP is LPP (since LPP is collector’s or rare items)

“personal use property”: of a taxpayer includes(a) property that is owned by the taxpayer that is primarily used for the personal use or

enjoyment of the t/p OR for the personal use or enjoyment of (ii) persons related to the t/p, OR (iii) where the t/p is a trust, a beneficiary or person related to the beneficiary

(b) any debt owing to the taxpayer in respect of the disposition of property that was PUP(c) any property that is an option to acquire property that would, if acquired, be PUP

and PUP of a partnership includes any partnership property that is used primarily or for the personal use or enjoyment of any member of the partnership or related persons of partners

“listed personal property” of a t/p is PUP that is all or any portion of, or any interest in or right to(a) print, etching, drawing, painting, sculpture, or other similar work of art(b) jewelry(c) rare folio, rare manuscript or rare book(d) stamp(e) coin

Note: this will not apply to a person who is in the business of buying/selling art, jewellery, etc. “Personal Use Property” must be primarily for personal enjoyment (or apportion business amt)



$1000 Rule

Grouping / Sets

*Applies to PUP and LPP (since LPP is a subset of PUP)Purpose: to exclude from gains/losses the small sales (i.e. the garage sale exemptions)

Section 46 (1) where a taxpayer has disposed of PUP (other than excluded property),

(a) ACB immediately before disposition deemed to be greater of $1000 or ACB otherwise determined

(b) POD shall be deemed to be greater of $1000 and POD otherwise determined

(2) where part of PUP disposed of (other than excluded property)(a) ACB immediately before disposition shall be the greater of (i) ACB otherwise determined

AND (ii) the proportion of $1000 that the ACB is of the ACB of whole property (b) POD shall be deemed to be greater of (i) POD otherwise determined AND (ii) the

proportion of $1000 that the ACB of partial property is of ACB of whole property

(3) anti-avoidance rule such that where a number of PUP would ordinarily be disposed of as a set(a) Have been disposed of by more than one disposition so that all properties have been

acquired by one person or by a group of persons not dealing at arm’s length(b) Had FMV greater than $1000 immediately before disposition

Effect: only get 1 x $1000 rule for the whole set and not for each individual disposition (which would allow for avoidance of capital gains where set as one is worth more than $1000 but individual pieces are worth less!). Section 46 serves as anti-avoidance rules.

S. 46(2) and (3) applied together as (3) determines what is a set and (2) determines how to calculate ACB and POD.

Factors to determine if property is a set (question of fact): Property should be normally sold as a set Items should match or belong together Items should have been produced or issued at roughly the same time Ordinarily, worth more collectively than individually

Loss on PUP (other than LPP)

Section 40(2)(g)(iii): loss from PUP (other than LPP) is deemed to be nil

Loss on LPP Section 3(b)(i)(B): LPP is not included in calculation of capital gains under (i)(A) BUT the taxable net gain is added back in here Note: only net gain for LPP is included in s. 3(b)(i)(B); can only carry forward/back LPP net loss:

Section 41(1) Taxable net gain from disposition of LPP is ½ of LPP net gain

(2) Net gain from disposition of LPP is determined as (a) Net gain = total LPP gains – total LPP losses(b) Losses can be carried forward 7 years and backwards 3 years (deduct from net gain)

Restrictions:(i) Can only use losses that haven’t previously been deducted(ii) Must use oldest losses first(iii) Cannot create a loss so can only deduct previous losses up to the amount in (a)

(3) LLP loss = where LPP loss > LPP gains Can only offset LPP losses from LPP gains

Principal Residence ExemptionPolicy Generally, houses increase in value and therefore would always result in a capital gain.



However, there is an exemption for a taxpayer’s principle residence! Why no taxation on capital gain?

Housing market would be restricted as buyers would have to pay capital gains on old house in addition to purchase price of new house

No deduction of mortgage interest (as there is in the USA) Encourages people to spend more on homes b/c it is perceived as a capital gains tax-free

investmentBut, this is not a neutral exemption as it does influence economic decisions in the housing market: it is a subsidy on home ownership and the benefit only accrues to home owners (e.g. not renters)Application:

1 per nuclear family Proportional to # of years that you (a) own it; (b) inhabit it; AND (c) are resident in Canada

ITA Definitions *Remember, a principal residence is a PUP >> capital losses are nil per s. 40(2)(g)(ii))

Section 54 - “principal residence” of a taxpayer for a taxation year: housing unit = home including mobile home, houseboat, condo, housing co-op, etc. (a) housing unit was ordinarily inhabited in the year (a) by the taxpayer’s spouse or CLP or former spouse or CLP or a child of the taxpayer

o Could come into play: what was the definition of “spouse” or CLP in X year? (c) can only designate one such property (d) before 1982 (not including 1982), every taxpayer can designate a principal residence (d) after 1981 (not including 1981), one principal residence can be designated on behalf of

a nuclear family: (A) taxpayer; (B) spouse; (C) dependent child (not married and under 18 years of age); (D) where the taxpayer is not married or CL or younger than 18, claimed by mother or father or brother or sister

Limitation on size: (e) deemed to include Land subjacent to the housing unit AND a portion of any contiguous land as can be reasonably regarded as contributing the

use and enjoyment of the housing unit as a residence EXCEPT where the total area of subjacent land and contiguous is greater than ½ hectare, the excess is deemed not to contribute to use and enjoyment of the housing unit as a

residence UNLESS the t/p establishes that it was necessary for such use and enjoyment How To Use … Section 40(2)(b): calculated as later of December 31, 1971 and day on which last acquired (or

reacquired due to deemed disposition and acquisition)

PRE = A x B / C where A = total capital gain (calculated under s. 40(1)(a)(i): POD – ACB) B = 1 + number of years since the property was last acquired that it was the t/p’s principal

residence (and during which the t/p was resident in Canada) C = total number of years the t/p owned the property since last acquired

Taxable Capital Gain = A – PRE

Remember… Cannot claim a loss and so only designate as long as you need to! Property does not have to be in Canada but the taxpayer designating must be resident in

Canada for the year they designate (remember though, must ordinarily inhabit) Why ‘B’ is calculated using +1: to allow the t/p to designate both the old residence and the

new residence in the same year without gaps in claims (would only designate old house until year before it was sold, and then designate the new residence starting in the year it was purchased), b/c no benefit where (B) > (C)

Number of Principal Units per Family Unit

Changes re who can designate a principal residence:Before 1982 (not including 1982): each member of a couple could designate a different principal residence if they owned them separately, and a child of the couple could own a third residence



1982 - 1992: shelter 1 property per married couple and their minor children

1993 - 2001: shelter 1 property per married couple (including same-sex) and opposite-sex common law partners and their minor children

2001 Onwards: shelter 1 property per spousal relationship (married, common law partner, opposite and same-sex)

Note: Most couples own their home as joint tenants with an undivided half-interest – at tax time, both taxpayers have to claim half interests in order to make the whole home eligible for PRE

- i.e. can’t designate different property from your spouse’s designation if joint tenants.Spousal Rollover Section 40(4): Disposal of Principal Residence to Spouse or Trust for Spouse

Spousal Rollover: receiver is deemed to have owned the whole property for the whole time the giver owned the interest

Ordinarily Inhabit (s. 54(a))

Ordinarily inhabit for in the year = not for full year necessarily, just in the year (IT Folio S1-F3-C2)“Ordinarily Inhabit” includes seasonal or recreational occupation; a vacant lot cannot qualifyHow to establish? Move in personal effects, inhabits in ordinary way

- Example: camping in sleeping bags for a night would not suffice; must use in ordinary way

If the main reason for owning the housing unit is to gain/product income, generally not considered “ordinarily inhabited” where it is only inhabited for a short period of time in the year. (S1-F3-C2)

- Unless election made per s. 45(2) or (3)Necessary for Use and Enjoyment

Rule: land only up to ½ hectare can constitute PRE, excess land is not exempt

Rode (1985 – TCC): objective consideration if extra land is necessary for use and enjoyment of land Has the taxpayer established “on a balance of probabilities that without the area of land for which they contend constituting the subjacent and immediately contiguous land component of their housing unit they could not practically have used and enjoyed the unit as a residence?” (CB 592)

Not a subjective analysis of whether you like it (i.e. don’t care if you want space for horses)

Stuart (2004 – FCA): factual determination if land greater than ½ hectare (zoning?) Taxpayer can argue for exemption to apply to a larger area of land as necessary for use and enjoyment based on zoning restrictions, barriers to subdivision, accessibility to roads and utilities. (Personal preference for more space or privacy would not be very persuasive)

Adoption of Interpretation Bulletin IT-120R6

Cassidy (2011 – FCA): exemption evaluated every year The exemption is calculated year-by-year to determine if the excess amount of land was necessary in each year for the personal use and enjoyment of the land (i.e. with reference to the minimum lot size precluding subdivision in each year, which can change!). Look at the number of years that the excess land qualified as part of the exemption and adjust accordingly.

XI. Depreciable Property and Capital Cost Allowance (CCA)

Framework Section 9(1): Income from a business or property is the t/p’s profit (deductions generally allowed)Section 18(1)(b): General limitation on deduction of capital outlays or allowance in respect of depreciation, except as expressly permitted by this partSection 20(1)(a): capital cost of property is deductible as allowed by regulation (“CCA” deduction)

Re: income from business/property

Note: Deduction for depreciation is permitted against income from business or property- Deduction is not available for personal property!- If asset is part business and part personal use, reasonably split the expense

Why Depreciate? 1. Attributes wear and tear on assets to the proper accounting period



2. Endeavours to establish a proper value for the asset at any given timeNote: “book-value” (cost – depreciation) does not necessarily reflect actual market value – due to inflation, depression, supply and demand, good or poor maintenance of the asset

Definitions “depreciable property” (s. 13(21)): property where the taxpayer has been allowed or would be entitled to a deduction under s. 20(1)(a) in computing income

Must be used to earn income from a property or business (*not personal use) Must be a capital cost to the taxpayer of property (i.e. provide an enduring

advantage/benefit; It’s not bought and sold as inventory, for example)“capital property” (s. 54): (a) includes depreciable property“ACB” (adjusted cost base, s. 54): (a) where depreciable property, the cost to the t/p at that time

Reg S. 1100:Rates

Regulations: Section 1100(1)(a): sets out rates to determine amount which may be claimed in respect of property of each class of Schedule II

- Apply rate to UCC to determine CCA for each year.- Rates = tax policy: encourage investing in faster-depreciating assets (and vice versa)

Undepreciated Capital Cost

Section 13(21): what’s left in the bucket!UCC (of a class) = (A + B) – (E + F)

A = total historical capital costs of all assets in the class B = total recapture of all assets in the class over time E = total depreciation of the class over time (CCA) F = actual POD up to the original capital cost of the asset (additional POD = capital gain)

*Remember: non-deductible capital outlays get added to the cost of the classExcluded Capital Property

Regulations - Section 1102: exclusions from CCA system:(1) (b) inventory, (c) property not acquired for the purpose of gaining or producing income(2) land upon which depreciable property is situated

o Land is not depreciable, therefore must separate value of land from value of building for purpose of depreciation (this is done by appraisers)

Ben’s Ltd. (1955 Ex. Ct.)

Re: land exclusion

Facts: Bakery buys 3 adjoining residential properties with intention to apply for re-zoning from residential to commercial to expand bakery business. They claimed deductions on depreciation of houses (land has no CCA deduction) under what is now 20(1)(a)Holding: CRA did not allow deduction because the purchase price only reflected the cost of the land anyways (did not account for the houses). Houses were not acquired for the purpose of gaining or producing income (even though rent was earned on one of the homes).Reasoning: Must be capital in nature – have some benefit to the business

Separate Business = Separate Class

Regulations - Section 1101(1): where properties are acquired by a t/p for the purpose of gaining or producing income from different businesses or properties, separate classes are required.

Half-year Rule Regulations - Section 1100(2): when property is acquired during a year (no matter at what point during the year), the half-year rule appliesUCC = UCC otherwise determined – ½ (Acquisitions – Dispositions)

does not apply if Dispositions > Acquisitions applies where additions to A > additions to F In effect, the ½ year rule deems assets in year of acquisition to be used for only 6 months

Recapture(in income)

Section 13(1): Recaptured Depreciation – where depreciation for tax purposes exceeds real-world asset depreciation. If, at the end of a taxation year, the UCC has a notional negative balance such that (E+F) > (A+B), regardless of whether there are assets remaining in the class…>> the excess shall be included in income Recapture = amount that (E+F) for depreciation and POD exceeds (A+B) for original cost/recapture

selling for less than original cost but more than ACB at that time (amount of depreciation) asset has been depreciated faster than its market value (UCC is negative)

Vs. Capital Gain = difference between original cost and POD (where POD > original capital cost) selling for more than original cost

Intersection with Capital Gains

Section 39(1)(b)(i): cannot have a capital loss on depreciable property (only a terminal loss)

Terminal Loss(deduction)

**Only comes into play when a class of assets is empty but there is a balance in UCCSection 20(16): where

(a) (A + B) > (E + F) AND



(b) The taxpayer no longer owns the propertyIn computing income

(c) There shall be deducted the amount of excess determined in (a) AND(d) No amount shall be deducted under (1)(a) (general limitation) in respect of property of

that classEffect:

Mandatory deduction to remove UCC that is still a positive amount (=> asset has not yet been fully depreciated but is no longer owned)

Better than a capital loss b/c it is fully deductible (as opposed to a 50% allowable loss)

Case IndexNote: this case index was pulled from an old-old outline and has not been updated.

Case Ct/Year Short DescriptionArcorp Investments Ltd v Canada

FC 2000 Securities salesman. Scheme = purchase penny sh’s in private placement then sell at profit when listed publically. ANT b/c behaving as trader/dealer; high trade frequency; inside knowledge of system; profit

Bellingham v The Queen

FCA 1996 Expropriation. TP rec’d 3 part settlement: land value; interest and add’l interest. Add’l interest was exempt amount but list of sources in s 3 non-exhaustive.

Buckman v MNR TCC 1991 Lawyer defrauded clients. Paid interest to clients but otherwise would not repay as declared bankruptcy. Income from an immoral or illegal business is taxable.

Bure v The Queen TCC 1999 Canucks paid agent’s fee directly. Benefit to player was payment for benefit of the employee (not employer)

Canada v Fries SCC 1990 Strike pay was not taxable on the grounds that the residual presumption in favour of the TP.

Canada v Siftar FCA 2003 No allocation of what lump sum award represented. Burden on TP to establish what portion of the lump sum payment is non-taxable.

Cartwright & Sons v MNR

TAB 1961 Carswell published directory of lawyers for C&S and replicated list on own. Settlement = (1) royalty and (2) $7,000 lump sum. Lump sum = punitive or additional award = non-taxable (no income feature)

Cassidy v The Queen FCA 2011 Bought 3 hec 2002 when min. lot 2 hec. 2006 rezoned to permit min. lot 1 hect. 2008 property sold with $100,000 profit. Entitl. To PRE =year-by-year analysis. Not year of rezoning but likely should be PRE.

Connor Homes (1392644 Ontario Inc)

FCA 2013 Workers for a foster-home care group. K identifies as independent contractors >> actually employees

Crawford v The Queen

TCC 2002 Meal expenses claimed by employees on ferry route between Tsawwassen and Swartz Bay, and Campbell River and Quadra Island. Not deductible. Act contemplates substantial distance and duration.

Curran v MNR SCC 1959 $250,000 inducement from majority shareholder to join company. Not taxable.Daley v MNR Ex Ch 1950 Lawyer went to war, returned, had to pay flat fee to be called to the bar. Held: it

was a capital outlay (not annual) >> couldn’t deduct (note: this was pre-capital gains taxation). Look to s. 9 for general deductibility of expenses per ordinary commercial & accounting principles.

DeBeers Consolidated Mines v Howe

UKHL 1906 Common law residence test = location of central management and control

Dunlap v The Queen TCC 1998 Holiday party. Taxable as significant expenditure (hotel room, alcohol, food) that employer reported.

Eldridge v MNR Ex Ch.1964 Mrs. Eldridge ran a call-girl operation; deductions for apartment rent, legal fees, liquor gifts, etc. Court held that Illegal businesses are just as taxable as legal businesses; Expenses that were reasonable in carrying on a business and properly



documented were allowable deductions. Epel v The Queen TCC 2003 Poker. Regular winning were attributed to luck as no significant system of risk

management.Field v The Queen TCC 2001 Mrs fraudulently withdraws funds from Mr’s RRSP. Mr does not seek return to

settle divorce. Not taxable as not rec’d.

Giffen v The Queen TCC 1995 Employer used loyalty points to provide TP with a personal flight. Taxable benefit at FMV of flight.

Hogg v The Queen FCA 2002 Prov ct judge claimed deduction for travel to base court given security concerns. Not deductible. Good reasons are insufficient. Appropriate compensation is through employer.

Irrigation Industries Ltd v MNR

SCC 1962 Borrow funds to purchases shares in NB company. Sold at profit when bank demanded overdraft repaid. Sold remainder at later date. No prospect of dividends. Held: majority found ANT; dissent found capital gains.

Landry v The Queen 1995 FCA Lawyer wasn’t practicing for a while; started running a loss b/c of inefficiencies. Lawyer intended to pursue profit (REOP).

LeBlanc v The Queen TCC 2007 Sports lotteries. Not taxable due to specific exclusion s. 40(2)(f) and system not found to minimize risk.

Lee v MNR TCC 1990 UK resident who worked on rig off Canada. Income CDN account but bedroom in UK. Married in Canada. Resident of Canada.

Loo v The Queen FCA 2004 Legal expenses can be deducted even if wasn’t successful provided that the amount would have been income if successful.

Lowe v The Queen FCA 1996 Mr and Mrs hosted special trip for insurance brokers. Primary advantage = employer therefore not a taxable benefit.

Luprypa v The Queen

TCC 1997 Pool shark. CRA assessed tad. Risk mgmt = skilled player; played M-F; practiced; sober; sought inebriated opponents; won majority ($200/day); calculating and disciplined; primary and steady source of income.

Madrusiask v The Queen

BCSC 2007 Homes in BC and AB. Resident in both jurisdictions; applied Thomson to determine principal provincial residence (held: AB).

Martyn v MNR TAB 1962 Pilot tried to claim mileage for travel to/from airport. Not deductible as commuting ≠ carrying out employment duties. While more efficient, the appropriate compensation is through employer (raise).

MNR v Taylor Exch Ct 1956

Purchased and then sold 22 car loads of lead to company. ANT given indicia of trade (no personal value).

Mohawk Oil v Canada

FCA 1992 Provided there was an enforceable legal right to compensation, it was income provided that payment was made (e.g., did not need to establish that the claim was likely to succeed in court)

R v Poynton ONCA 1972 TP embezzled funds from employer. Embezzled funds taxable as no intention to repay employer.

R&L Food Distributors v MNR

TRB 1977 2 of 3 shareholders commuted to Canada for work with primary residences in the US. Not a CCPC as the 2 shareholders were not residents (rather, sojourned in Canada).

Rachfalowski v The Queen

TCC 2009 Golf membership. Not taxable as membership was primarily to the employer. Value of benefit (personal) minimal at best.

Regal Heights Ltd v MNR

SCC 1960 Land purchase near hwy route for mall. Other mall built. Subdivided and sold property at profit. ANT as secondary intention to sell property at profit. Speculative purchase therefore easy to locate 2nd intention.

Richmond v The Queen

TCC 1998 Parking space. Taxable as ultimate significance was receipt of the benefit not its actual use.



Royal Winnipeg Ballet v MNR

FCA 2008 Ballet dancers. Clear, common intention of the legal relationship will be considered. CRA should abide with intention when it aligns with objective reality.

Saskatchewan Wheat Pool v MNR

TCC 2008 Loss on purchased property. TP claimed ANT to result in a non-capital loss. Possibility of reselling at a profit must be operating motivation of purchase if the property is acquired for a capital purpose.

Schujahn v MNR Exch Ct 1962

US citizen worked at Canadian subsidiary. Recalled to US. Wife and son remained in Canada to sell home. Part-year residence (no sojourning principle before he left b/c was resident); non-resident after recall.

Schwartz v The Queen

SCC 1996 TP left law firm to join new co. K cancelled therefore settlement. Not taxable as could not determine what portions replaced income from a taxable source (salary, pension) and which did not (embarrassment).

Smith v Anderson UKCA 1880 Business = “anything which occupies the time, attention and labour of a man [sic] for the purpose of profit”

Stewart v The Queen

SCC 2002 4 condo units. Business = intention of profit (not REoP). Indicia of commerciality relevant to pursuit of profit analysis. Objective and subjective (intention) elements.

The Queen v Compagnie Immobilières BCN Ltée

FSCC 1979 Disposition necessary to trigger capital gain or loss. PoD = only one indicator of disposition as can also include gift or other transfer without proceeds

The Queen v Cranswick

FCA 1982 Unsolicited payment from US parent to shareholder of Canadian subsidiary to thwart potential US litigation.

The Queen v Huffman

FCA 1990 Undercover cop. Clothing allowance not a taxable benefit, but rather is reimbursing expense of uniform that employer bears.

The Queen v MacDonald

FCA 1994 RCMP officer provided stipend for higher cost of living after transfer. Taxable as no requirement to show expenditures (e.g., not reimbursement).

The Queen v Reeder FCTD 1975 Transferred to Canada for work, spent 2 days at office in NS then sent to Europe for work. Resident in Canada as still his customary mode of living.

The Queen v Savage SCC 1983 $300 from employer for passing 3 tests taken on own time. An employee “benefit” does not require quid pro quo; the amount was a “prize” per s. 56 specific exemption (overrode s. 6(1)(a) general inclusion of benefits)

The Queen v Swingle FCTD 1977 Gov’t chemist claimed membership dues to professional societies. Not deductible. Not necessary to maintain professional status recognized by status despite being relevant to employment.

Thomson v MNR SCC 1946 TP lived in US but summered in NB. Definition of ordinarily resident = customary mode of life (not casual)

Tsiaprailis v The Queen

SCC 2005 TP won lump sum settlement for insurer ending her LTD benefits.

Wain Town Gas and Oil Company Ltd.

FCTD 1952 K to be only natural gas supplied to municipality. Sold to new company. Royalty = agreement to pay percentage based on gas used under contract.

Wiebe Door Services v MNR

FCA 1986 Franchise with individual installers paid by the job. Installers = employees because without the installers, there would be no business.


Documents

Exam Prep Notes - UVic LSSuviclss.ca/outlines/229-Kastelic_-_Law_345_-_Final.docx · Web viewCitations on exam – don’t have to ... newspapers, magazines, or periodical subscriptions