Table of Contents

Basic Concepts and Canada’s Tax System.............................................................................................................. 5Definition of Tax................................................................................................................................................................................................ 5Compared to Other Govt Collected Payments......................................................................................................................................5Indirect vs. Direct Taxes................................................................................................................................................................................ 5Progressive tax................................................................................................................................................................................................... 5Regressive tax..................................................................................................................................................................................................... 5Assessing the Effectiveness of Tax Policy.............................................................................................................................................. 5Rates of Tax......................................................................................................................................................................................................... 5Exemptions.......................................................................................................................................................................................................... 6Deductions........................................................................................................................................................................................................... 6Credits.................................................................................................................................................................................................................... 6Generally Accepted Accounting Principles (GAAP)...........................................................................................................................6Section 152 – Net Worth Assessments....................................................................................................................................................6Interpretation Bulletins................................................................................................................................................................................. 6

Equity and Policy in Tax Law.................................................................................................................................................... 6Equity..................................................................................................................................................................................................................... 6Neutrality.............................................................................................................................................................................................................. 6Simplicity.............................................................................................................................................................................................................. 6Tax Expenditures.............................................................................................................................................................................................. 7

Constitution and Taxation......................................................................................................................................................... 7

The Source Concept of Income.................................................................................................................................. 7Schwartz (SCC 1996) Payment not income from a source, surrogatum not successful.....................................................................8Tsiaprailis (2005) Surrogatum principle successful..........................................................................................................................................8Siftar (2003 FCA) T has to prove which part of a lump sum is non-taxable............................................................................................8

Nexus Between Taxpayer and a Source of Income.............................................................................................. 9General Rule:....................................................................................................................................................................................................... 9

Field (2001 TCC) T not taxed b/c he didn’t have the benefit of the income (RRSP withdrawal by wife)...................................9Buckman (1991 TCC) Strict ownership is not the exclusive test to determine what is income for taxation............................9

Residence as the Primary Basis of Canadian Tax Liability...............................................................................9Thomson v. MNR (1946 SCC) – Determining Residence/Ordinary Residence – LEADING............................................................10Lee v. MNR (1990 TCC) – Determining Ordinary Residence; Cit/Imm status not determinative...............................................10R&L Food Distributors Ltd v. MNR (1977 TRB) – Application of Sojourning.......................................................................................10

Part-Year Residence................................................................................................................................................................. 11Section 114 – Individual Resident in Canada for Only Part of Year.........................................................................................11

Schujahn v. MNR (1962 Exch Ct) – Establishing Part-Year Residence.....................................................................................................11The Queen v. Reeder (1975 FCTD) – Where Residency is long established, difficult to show severance................................11

Avoidance of Dual Tax Residence........................................................................................................................................ 11Section 250(5) – Deemed Non-Resident..............................................................................................................................................11Tax Treaties...................................................................................................................................................................................................... 12Withholding Tax............................................................................................................................................................................................. 12Section 128.1(4) – Departure Tax...........................................................................................................................................................12

Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus Treaty..................................................12Provincial Residence................................................................................................................................................................ 13

Regulation 2601 – Residents of Canada...............................................................................................................................................13Regulation 2607 – Dual Residency.........................................................................................................................................................13BC ITA Section 2 – Liability for Tax........................................................................................................................................................13

Mandrusiak v. The Queen (2007 BCSC) – Thompson used to determine ordinary residence......................................................13Residence of Corporations and Trusts............................................................................................................................... 13

Section 250(4) – Corporation Deemed Resident.............................................................................................................................13De Beers Consolidated Mines Ltd v. Howe (1906 HL) – Residency for corporations is a question of fact..............................13

Sources as a Basis of Tax Liability........................................................................................................................................ 13

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Income from Office or Employment...................................................................................................................... 14Basic Definitions and Provisions.......................................................................................................................................... 14

Section 248(1) – Definitions Section for Office or Employment...............................................................................................14Section 5 – Income / Loss from an Office or Employment...........................................................................................................14Section 6(1)(a) – Basic Inclusion in Income from Employment (see Savage)....................................................................14Section 8(2) – Limitation on Deductions.............................................................................................................................................14Section 153(1)(a) – Withholding of Tax by Employer...................................................................................................................14Section 118(10) – Canada Employment Credit.................................................................................................................................14

Employee vs. Independent Contractor/Consultant/Sole Proprietor.......................................................................14Differences Between Employee and Independent Contractor...................................................................................................14TEST for Employee vs. Independent Contractor:.............................................................................................................................14Case Law on Employee vs. Independent Contractor:.....................................................................................................................15

Wiebe Door Services v. MNR (1986 FCA) – Leading – single question test to employee/contractor........................................15Wolf v. The Queen (2002 FCA) – Intention is a valid factor to be considered......................................................................................15Royal Winnipeg Ballet v. MNR (2008 FCA) – Intention in the K should be considered...................................................................15Lang v. MNR (2007 TCC) – Intent should not be ignored, but weight is in question.........................................................................15

Personal Services Businesses and Incorporated Employees......................................................................................15Section 18(1)(p) – General Limitations on Deductions from Business or Property Income........................................16Section 125(7) – Definitions......................................................................................................................................................................16Section 248(1) – Specified Shareholder...............................................................................................................................................16

Benefits, Reimbursements and Allowances..................................................................................................................... 16Savage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employee, no quid pro quo needed.................................................................................................................................................................................................................................. 17Lowe (FCA) – ‘Merely incidental’ benefits are not taxable............................................................................................................................17

Valuation of Employment Benefits.........................................................................................................................................................17Giffen v. The Queen (1995 TCC) – Using FMV method of valuing benefits............................................................................................17Dunlap.................................................................................................................................................................................................................................. 17

Allowances........................................................................................................................................................................................................ 18The Queen v. Huffman (1990 FCA) – distinction between allowance and reimbursement...........................................................18The Queen v. MacDonald (1994 FCA) – Leading case on s.6(1)(b) – what constitutes an allowance........................................18

Special and Remote Worksites.................................................................................................................................................................18Automobile and Traveling Allowances.................................................................................................................................................19

Deductions and Computing Income from Office or Employment..............................................................................19Traveling Expenses....................................................................................................................................................................................... 20

Martyn v. MNR (1962) – Travel to and from work is not deductable......................................................................................................21Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issues...................21

Legal Expenses................................................................................................................................................................................................ 21Professional and Union Dues....................................................................................................................................................................21

The Queen v. Swingle (1977) – Professional status must required by statute for deduction of dues; opens the door to the deduction of other dues not strictly required to maintain professional status...........................................................................21

Cost of Supplies............................................................................................................................................................................................... 22

Income from Business or Property........................................................................................................................ 22Business Source of Income: Organized Activity and Pursuit of Profit.....................................................................22

Framework for Income from Business or Property........................................................................................................................22Why the distinction between income from property vs. income from a business matters...........................................22What Constitutes a Business.....................................................................................................................................................................22

Epel: regular poker winnings found not to be business income, simply luck b/c no significant element of risk management...................................................................................................................................................................................................................... 23Luprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = business............................23LeBlanc v. The Queen (2007) – Lottery is pure chance = not an expected earning source = no source/no tax....................23

The Pursuit of Profit – Reasonable Expectation of Profit (REOP)............................................................................................23Stewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or Property vs. non-source......................23

Adventure or Concern in the Nature of Trade (ACNT)..................................................................................................24IT-459 – Adventure or Concern in the Nature of Trade:...............................................................................................................24

MNR v. James A Taylor (1956 Exch Ct) – Transaction is ACNT – factors to consider – trade was business-like..................25Rutledge............................................................................................................................................................................................................................... 25

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Regal Heights Ltd v. MNR (1960 SCC) – Secondary objective of earning profit on land results in an ACNT..........................25Irrigation Industries Ltd v. MNR (1962 SCC) – Investment in shares of a company are capital investments........................25Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT)...............................................25

Income from a Property.......................................................................................................................................................... 26Business vs. Property................................................................................................................................................................................... 26

Hollinger v. MNR (1972) – Approach for Business vs. Property Income; inactive partner still considered to be earning income from business even though not personally involved......................................................................................................................26Walsh and Micay v. MNR (1965) – Rental properties generally seen as income from property, not business.....................26

Interest................................................................................................................................................................................................................ 26Groulx v. MNR (1967 SCC) – Court found blended payments from an increased purchase price...............................................27

Rent and Royalties......................................................................................................................................................................................... 27Wain-Town Gas and Oil (1952) – After-sale share in profits are royalties and subject to income tax......................................27

Dividends........................................................................................................................................................................................................... 28

Deductions in Computing Income from Business and Property..................................................................28Structure of the Act – Business/Property..........................................................................................................................28Income Earning Purpose Test............................................................................................................................................... 28

Imperial Oil (1947) – If expense in ordinary course of business, then generally deductible........................................................28Royal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally deductible, from T’s perspective initial fees are actually an recurring annual expense thus deductible...........................................................................29

Personal and Living Expenses............................................................................................................................................... 29Section 18(1)(h) – Personal and Living Expense.............................................................................................................................29

Benton (Thomas Harry) v. MNR (1952) – Expense has to be directly related to the business; only part of housekeeper’s salary is deductible......................................................................................................................................................................................................... 30

Section 63 – Child Care Expense Deduction.......................................................................................................................................30Commuting Expenses................................................................................................................................................................................... 30

Dr. Ross Henry – Travel from/to home is not deductible from income from business/property...............................................30Moving Expenses............................................................................................................................................................................................ 30Home Office Expenses.................................................................................................................................................................................. 32

McCreath (2008 TCC) – Travel between home-workspace and place of employment not deductible if the home office is just for convenience....................................................................................................................................................................................................... 32

Example Problem – Home Office Deductions and Carry-forward............................................................................................32Deduction of Interest Expense – see handout..................................................................................................................32

Section 20(1) – Deductions Permitted in Computing Income from Business/Property................................................32The Queen v. Bronfman Trust (1987 SCC) – Requirement that borrowed funds be used directly for an income earning purpose to claim interest expense...........................................................................................................................................................................33Singleton (2002 SCC) Court rejects true economic purpose approach; instead analyzes legal relationships.......................33

Policy Reasons for Denying Deductions.............................................................................................................................33Eldridge (1964 Exch Ct) Expenses for illegal business are deductible insofar as they can be proven......................................33

Bribery of Certain Officials – s. 67.5.......................................................................................................................................................33Fines and Penalties – s. 67.6...................................................................................................................................................................... 33Policy:.................................................................................................................................................................................................................. 34

Computation and Timing.......................................................................................................................................... 34Capital vs. Current Expenditures.......................................................................................................................................... 34

Section 18(1)(b) – Capital Outlay or Loss...........................................................................................................................................34British Insulated and Helsby Cables Ltd v. IRC (1926 HL) – One time payment to create asset - capital................................34

Repair of Tangible Assets........................................................................................................................................................................... 34Canada Steamship Lines Ltd v. MNR (1966 Exch) – Boiler of the ship is a capital asset itself......................................................34The Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building, both capital outlay and current expenditures but single operation so deemed all capital outlay................................................................................................................35Gold Bar Developments Ltd v. The Queen (1987 FCTD) – New test outlined for finding repairs over capital: was there a choice to repair?............................................................................................................................................................................................................... 35

Timing – Amounts Receivable............................................................................................................................................... 35Section 12(1) – Income Inclusions......................................................................................................................................................... 35CASE LAW RULES:......................................................................................................................................................................................... 36

J. Colford Contracting – When an amount becomes receivable, it must be included in income...................................................36Benaby Realties – An amount is not ‘receivable’ for tax purposes until the actual amount is ascertained.............................36

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West Kootenay Power and Light (1992 FCA) – Receivable means: everything has been done that is required to give rise to entitlement to be paid – even where customer is not legally obliged to pay at that moment..................................................36JL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent..............................................37

Non-Capital Losses.................................................................................................................................................................... 37Section 111(1)(a) – Carry Forward and Back of Non-Capital Losses.....................................................................................37

Capital Gains................................................................................................................................................................. 37Taxation of Capital Gains and Losses: 3(b) and subdivision E...................................................................................................37Distinguish Income from Property: 9(3).............................................................................................................................................37Calculation of Capital Gains and Capital Losses:..............................................................................................................................37Carry Forward and Back of Capital Losses: 111(1)(b) and 111(2)(a)...................................................................................38Policy Evaluation of Preferential Taxation of Capital Gains........................................................................................................38

Definitions.................................................................................................................................................................................... 38Section 248(1) – “Property”...................................................................................................................................................................... 38Section 54 – Definitions............................................................................................................................................................................... 38Example – Identical Properties:...............................................................................................................................................................39Section 248(1) – “Disposition” INCLUDES: (gift?)............................................................................................................................39

Compagnie Immobiliere BCN (1979 SCC) – Disposition and POD – stat/normal meaning............................................................39Deemed Dispositions and Deemed Proceeds................................................................................................................... 39

Section 128.1(1) – Immigration (we are only going to use this for individuals)...............................................................39Section 128.1(4) – Emigration................................................................................................................................................................. 40Gifts and Sales Below FMV to Non-Arm’s Length Persons...........................................................................................................40Section 70(5) – Capital Property of a Deceased Taxpayer...........................................................................................................41Lottery Winnings Revisited....................................................................................................................................................................... 41

Rollovers: Transfer of Capital Property to Spouse/CLP...............................................................................................41Section 248(1): “Common-Law Partner”.............................................................................................................................................41Section 73(1) and (1.01) – Inter Vivos Transfers............................................................................................................................41Example – Spousal Rollover...................................................................................................................................................................... 41Section 74.2(1)(a) – Spousal Attribution Rule..................................................................................................................................42Example – Opt-out of Spousal Rollover and Attribution Rule....................................................................................................42Spousal Rollover on Death......................................................................................................................................................................... 42

Personal Use Property (PUP) and Listed Personal Property (LPP).........................................................................43Section 54 – Definitions............................................................................................................................................................................... 43Section 46(1) – Personal use Property.................................................................................................................................................43Section 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NIL........................................................................................43Calculation of LPP Net Capital Losses and Gains..............................................................................................................................43

Principle Residence Exemption............................................................................................................................................ 44Policy for Principle Residence Exemption..........................................................................................................................................44Section 54 – “Principle Residence”.........................................................................................................................................................44Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE).............................................................................44Example – Principle Residence Exemption.........................................................................................................................................45Example – Principle Residence Exemption 2.....................................................................................................................................45Depreciable Property and Capital Cost Allowance (CCA)............................................................................................................45

Benz Ltd: requirement that the depreciable property you want to claim CCA for be used to earn income............................46IMPUTED INCOME...................................................................................................................................................................... 49

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Basic Concepts and Canada’s Tax SystemDefinition of Tax- "The essential characteristics of a tax are that it is not a voluntary payment or donation but an enforced contribution

exacted pursuant to legislative authority in the exercise of the taxing power, the contribution being of a proportional character and payable in money imposed, levied and collected for the purpose of raising revenue to be used for public or government purposes and not as payment for some special privilege or service rendered." (Shawinigan Water and Power)

Compared to Other Govt Collected Payments- Tax is compulsory and unrequited- Fines/penalties – compulsory as well but are used mainly to deter/punish behaviour

o Taxes are sometimes used to encourage a certain behaviour (RRSP, RESP, etc) or discourage/account for a dangerous behaviour (alcohol/tobacco) but that is not their main purpose

- Royalties – made to Crown for extraction of natural resources | to company for software use rights- Prices – a ‘requited’ payment to the govt in exchange for a good or service (licence, transit, etc)Indirect vs. Direct Taxes- Provinces have indirect taxation power. Indirect taxes are those that are ‘passed on’ to a final consumer.

o Excise taxes on tobacco, alcohol, import duties- A direct tax is one which is demanded from the very person who it is intended or desired should pay it.

Tax Bases: Income, Consumption, Wealth (capital gains could be considered a wealth tax)Tax filing unit: Who pays a particular tax (who does the statute say pays the tax)Tax period: Time frame over which base is measured and tax is collected. For individuals, this is the calendar year. (s.249(1)(b)) Corporations can have an off-calendar year end. Some taxes are transaction-based.

Progressive tax: The more you earn, the more you pay and the tax rate goes up as your income goes up. Intended to redistribute wealth. Increasing proportion of tax as income rises. Higher income persons have a greater ability to pay – they should be paying.Regressive tax: The low income person will pay a greater proportion of their income on the tax. Consumer taxes are inherently regressive. Excluding absolute necessities (like non-processed foods) helps to make it less regressive. Declining proportion of tax as income rises – usually results from flat tax. Low income persons pay a higher portion of their disposable income

Policy Objectives of Taxation

1. Raise revenue for the government2. Redistribute income 3. Stabilize the economy

o Increase and decrease tax according to strength of economyo When economy is downrevenue is downgovernment can lower tax more income to spend on

consumption.4. Pursue economic growth

o Can reduce taxes on certain kinds of investments and savings5. Correct market failures

o Ex: Pollution is a kind of market failure b/c producer and consumer don’t bear the full cost of the pollution, part of cost is borne by general society; tax system can try to respond to this by imposing cost on producer and consumer by putting tax on the product

6. Promote international competitiveness7. Balance between different sources of revenue8. Promote particular activities or industries

o E.g. encouraging production of films in Canada by allowing you to defer tax and write off things fasterAssessing the Effectiveness of Tax Policy

- Does the policy advance the goals pursued by the government?o Raise revenue, distribute wealth, discourage/encourage certain activities

- Does the policy have unintended consequences?- Also look at fairness – is the burden falling on the people we want it to fall on?- Is there a better way to achieve certain policy goals?

Rates of Tax:- Statutory (set out in s. 117)- Marginal Rate – highest rate that applies to the last dollar of income for a tax year

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- Average Rate – total tax paid divided by the taxable income- Effective Rate – total tax paid divided by the total income (including non-taxable income)

Exemptions: exempted income does not have be reported (Lottery Winnings; Gifts; Strike Pay)Deductions: taxable income = total income – deductions (RRSP/RESP; Moving Expenses; Childcare Expenses; Union Dues) Worth more to higher-income earnersCredits: tax payable = total taxes – credits. (Personal Tax Credit; Education Credits; etc) Worth the same to every tax payer, unlike a deductionGenerally Accepted Accounting Principles (GAAP)- Rules set out by the Canadian Institute of Chartered Accountants for how to produce financial statements- May be relevant for tax purposes, but may be overwritten by ITA or case lawSection 152 – Net Worth Assessments(7) Assessments not dependent on return information – The Minister is not bound by a return or information supplied by T, and in making an assessment, may assess the tax payable(8) Assessment deemed valid and binding – Assessment shall be deemed to be valid and binding absent errors

Interpretation Bulletins- Statement by the CRA on how they approach a particular issue. - It’s not binding on the CRA or the taxpayer. (You can file in contravention of an interpretation bulletin and the CRA can

assess in contravention of an interpretation bulletin) - They are not binding on the courts but courts like them because they provide guidance and very often the courts will look

at an interpretation bulletin as an explanation of the Act. - In Canada, there is no doctrine of legitimate expectations regarding substantive law, so CRA doesn’t have to follow the

bulletins unless a court determines that the interpretation bulletin was the correct interpretation of the law. - The CRA can change the IT and there is no doctrine of estoppel that precludes the CRA from changing an IT.

Cash method: an item of revenue is included in income when received and an expense is deducted when paid (standard for income from employment, office, property and income from farming)

Accrual method: an item of revenue is included in computing income when it is receivable and an expense is deductible when payable (standard for income from a business) Capital gains and capital losses recognized when a capital property is disposed of and the proceeds are receivable.

Equity and Policy in Tax Law

Equity- Vertical Equity: Those who have more should pay more.- Horizontal Equity: those who have the same accretion to income (regardless of type), should be subject to same levels of

taxation (ex. taxation of employee fringe benefits)- Tax is premised on the notion of equity/fairness – most important factorNeutrality- Taxes should not unduly effect personal decisions – marriage vs. common law, market factors, etc- Difficult to obtain because tax system is built on encouraging/discouraging certain actions (honoured in the breach)- If the tax system is completely neutral the work practices, and business, investment and consumption decisions of people

would be not be any different than they would have been if there were no taxes. - Rationale: If behaviour is influenced by the tax system, will effect allocation of resources which may lead to less efficient

allocation (market = best allocation of resources).- Neutrality is often compromised by the government in aid of other objectives

o Certain tax policies are designed to necessarily violate neutrality; they exist to affect behaviouro Compromises are made for deliberate policies of, for example, promoting savings for retirement (thus RRSP

and pension deductions) or other deductions, credits or reduced tax rates to promote certain activities or induce certain behaviour.

Simplicity- More specifically simplicity might be broken down into:- Comprehensibility - can the taxpayers understand it;- Certainty/Predictability - is it predictable so that decisions can reliably be made on the basis of it- Compliance Convenience - is it easy to comply with and does not create undue costs order to comply (people have to

spend money to be able to comply – accountants, lawyers…)– includes the way the forms are set up, etc.- Administrative Convenience - are the costs of assessment of taxes, collection and enforcement low, and in particular,

less than the amount of revenue raised

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- Difficult to Evade and Avoid - is it difficult to evade tax and to avoid tax.

Tax Expenditures- Deductions, exemptions or credits- Evaluation of the effectiveness of expenditures:

o What govt objective is being served by the expenditure?o Are benefits distributed fairly? Is a program efficient? Does govt have control over the spending and politically

accountable for it? Can the money be better spent elsewhere?

Constitution and Taxation- 91(3): Fed has unlimited power to tax/raise money by any mode- 92(2): Prov can impose direct taxes for the purpose of raising revenue for Provincial purposes- Tax Collection Agreements – Feds collect on behalf of both Fed/Prov and then distribute to Prov

Tax Adjudication System Up to 3 years after filing your tax return and receiving your notice of assessment, CRA can go back and reassess. You can object to the assessment. You do that by sending in a notice of objection within 90 days of the notice of

assessment. The CRA appeals division, after hearing your arguments, either confirms the assessment, or varies the assessment and sends you a new assessment for that year. If the CRA confirms assessment, or the new assessment is not what you were asking for in full, you can appeal to the Tax Court of Canada. From TCC, there is an appeal to the Federal Court of Appeal; and then to the Supreme Court of Canada (with leave).

TCC has two types of procedure – informal and general - General: This is quite similar to normal civil procedure as followed under the BC Supreme Court Rules. The

normal pre-trial discovery of documents and parties applies, and formal rules of evidence are followed. Costs are awarded against the unsuccessful party.

- Informal: Taxpayer may elect informal procedure where certain conditions are met, the most important of which is that tax and penalties in issue are not more than $12,000.

- There is no discovery of documents, or pre-trial examination for discovery.- There is no appeal from a judgment under the informal procedure, just judicial review re jurisdiction, fairness,

error in law, error of fact made in perverse, capricious manner or without regard for the evidence, that TCC based decision on fraud or perjured evidence, or otherwise acted contrary to law.

- T may be represented by an agent other than a lawyer (you can represent yourself under both informal and general procedure, but if represented under general procedure, it must be by a lawyer)

- Decisions are not regarded as precedent – they may be taken into consideration by TCC, but are not binding.- Informal procedure is often not effective because tax payer has no advocate or help drafting legal arguments.

Statutory Interpretation in Tax Cases - Placer Dome Canada Used to apply strict interpretation because tax law was viewed similarly to criminal law. Now, modern rule of

statutory interpretation is starting point in tax law. - Driedger: “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense

harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament" However, there is more focus on text than there might be in other situations. Only after you consider the text

carefully, then do you look to Driedger if there is an ambiguity. If language is clear, don’t take a purposive interpretation. (Singleton – words interpreted strictly)

o Where words are clear – use strict (textual) interpretationo Where there is any ambiguity, the ordinary meaning of the words + purposive interpretation

“Thus, legislative purpose may not be used to supplant clear statutory language, but to arrive at the most plausible interpretation of an ambiguous statutory provision.”

Residual presumption in favour of taxpayer only applies if statutory interpretation as outlined above does not resolve the issue. Applied in limited circumstance and sparingly.

Under s.152(8) the taxpayer bears the burden of establishing on BoP that the factual findings upon which the Minister based the assessment are wrong (Siftar)

The Source Concept of IncomeIncome: Income is not defined in the Act. Instead, we have rules and details about how to compute it. (s.3)

- Windfall gains are not income from a sourceo ‘Additional interest’ payment under Expropriation Act was punitive, not compensatory in nature = not income

from a source) (Bellingham)o Consider the Cranswick factors to determine if it is income from a source or a windfall gain:

Enforceable claim to the payment; organized effort on T’s part to receive the payment; sought after

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or solicited by T; expected by T; foreseeable element of recurrence; customary source of income for T; made in consideration of property/services/anything else provided by T

o Strike pay is not income from a source (Fries) Note the court could have easily applied the surrogatum principle here for an opposite result

o Settlement for IP infringement likened to punitive damages (not income from a source) (Cartwright)o Payment in consideration for future services/lost benefits considered income from an unenumerated source

under s.3(a) (Curran) This is the only time the SCC has found another source under 3(a) – compensation for future services Note: Martha says that maybe the court didn’t find income from an unenumerated source… “Income within meaning of s.3 (nothing about how they wanted to interpret s.3) they didn’t want to

say it was employment, business, prop, office or that they didn’t turn their minds to it. Not clear enough in a 1952 case to say that the SCC found an unenumerated source in Curran. It’s

possible that they just didn’t enumerate what they were saying. After Schwartz: Curran wouldn’t be decided that way today because the SCC was pretty clear about

not finding unenumerated source.

Schwartz (SCC 1996) Payment not income from a source, surrogatum not successful- T resigned from Senior Partner job to work for Dynacare for more money; Position became unavailable and T was paid a

lump sum for loss of salary, stock options and emotional traumaIssue: Was the payment made to T income, and therefore taxable?TJ said that it was all one lump sum for hurt feelings, embarrassment, therefore none of it was taxable. FCA: It should be divided according to the Minister, with most of it being taxable.Held (SCC): This payment could not be traced to payment in lieu of income from an enumerated sourceReasons:

1. Even though s.3A is very broad, the case law hasn’t treated it that way and shouldn’t. 2. Surrogatum principle fails because the payment doesn’t meet the definition of retiring allowance or employment. This

is not a payment for services, this is compensation for ‘future employment’ and emotional stressComments:- Minority says that unenumerated sources should not be found; it’s time to stop looking. Gov can amend the provision to

include another type of income if they want to.- The burden of proof rests on the taxpayer to show that the amount $ falls under a non-taxable form of income. - Can Curran and Schwartz co-exist? O’brien says that Schwartz could have impliedly overruled Curran (in terms of finding

an unenumerated source of income)- Surrogatum can’t apply if there is no evidentiary basis for apportionment of payment- Burden is on the T to show that it was not apportioned into taxable payments- General provisions cannot be used to include amounts of income that exempt under specific provisions- Court was unwilling to distinguish between pain and suffering and the remuneration portions

Tsiaprailis (2005) Surrogatum principle successful- T injured in car accident, lost job, went on disability; insurance stopped paying after several months- T sued insurance company and they settled out of court for $105k - Agreed upon that settlement was apportioned: 35k for past benefits and 75% of future benefits to 65 (not taxable)Issue: Was the portion of settlement representing the past benefits taxable?Held: YES – taxable under the surrogatum principleReasons:- 6(1)(f)(ii) – Amounts received on a periodic basis pursuant to a disability plan are to be included in income- Applies Surrogatum Test from London and Thames Oil Wharves:

o 1. What was the payment intended to replace? And provided this question is sufficiently clear:o 2. Would the replaced amount have been taxable in the recipient’s hands?

Comments:- Here the claims were clear and the apportionment was clear in the negotiations – differs from Schwartz- The surrogatum principle is simply a judicial pronouncement – it is nowhere in the ITA

Siftar (2003 FCA) T has to prove which part of a lump sum is non-taxable- Authorities do not have to recognize the agreements made between parties regarding apportionment

o Policy – avoids negotiations that are akin to tax evasion- It is up to the parties to determine apportionment, but failure to do so is not determinative- System is based on self-assessment; where periodic payments are calculable, there is an ability to determine if

declarations are reasonable or not

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o Where CRA not satisfied, they can re-assess the T – then T has the burden of disproving their findingso Policy – T is in the best position to provide evidence as they have the greatest knowledge of their finances

Nexus Between Taxpayer and a Source of IncomeGeneral Rule:- Generally T must be the actual person who owns the income or the loss from each specific source in order to be taxed on it

(Field)- But consider the circumstances – T may be liable to tax even if he doesn’t legally own the income (Buckman)

Field (2001 TCC) T not taxed b/c he didn’t have the benefit of the income (RRSP withdrawal by wife)- T’s ex-wife fraudulently withdrew T’s RRSP funds from his acct. T did not attempt to recover them- Minister assessed T to pay taxes associated to that income- T claiming the amount back because he wasn’t the one who got the RRSP proceedsIssue: Are the RRSP proceeds a valid source of income for T, where he did not receive a benefit from it?Held: NO – this is not a valid source of incomeReasons:- s.146(8) requires that T receive any amounts as benefits out of or under an RRSP

o The NEXUS required by the Act is that there must be “actual receipt”Comments:- Note that T did get the benefit of deductions when he contributed to his RRSP- May be a ‘benefit’ in the fact that he did not try to recover them to ensure smooth divorce proceedings

Buckman (1991 TCC) Strict ownership is not the exclusive test to determine what is income for taxation- T(lawyer) embezzled funds from his clients and paid them interest to hide the theft- MNR assessed the money as income to be taxed – allowed the deduction of interest payments- T claimed it was to be paid back to rightful owners, but no evidence of this happeningIssue: Does the embezzled money constitute income and attract income tax?Held: YES – the money is income from a business and therefore taxableReasons:- Illegal businesses are taxable just the same as regular businesses- Gilbert – distinguished – there was a true intention to repay in that case, here there is no intention- Poynton – T fraudulently obtained funds as income – court held the money was taxable as a benefit to an officer or

employee under s.5(1) of the Act- Curlett – Bought mortgages at a discount and then sold them at a profit – court held profit was income

o Strict ownership is not the exclusive test to determine what is income for taxationo Must have regard to the circumstances surrounding the actual receipt of the money and the manner in which it is held

by To Illegally obtained money was retained by T as income from a business venture separate from legit business

- Robertson and Dominion Taxicab – If the trustee converts funds to his own use, that is now taxable, not on the basis that the quality of the money has changed, but on the basis that the manner of holding has changed

Residence as the Primary Basis of Canadian Tax Liability

- Canadian taxation is based on residence and source – this is a policy decisiono Residence is used as a tax base because it emphasizes economic association with a countryo Based on the amount of jurisdiction and control over the source/person to enforce taxation

NOTE: See Computation of Taxable Income – sections 111(1) and (2), 114 and 118(10) - (pg 44)

Factual Residence:- Whether or not the T maintains ties with Canada while he/she is abroad- Significant Residential Ties: dwelling place; spouse or CL partner; dependents in Canada- Secondary Residential Ties: Personal property; social ties; economic ties; landed immigrant status / work permits in

Canada; Canadian vehicle; seasonal dwelling; Canadian passport; membership in organizations- Other factors: mailing address/safety deposit box/post office box; stationary with Canadian address; telephone listing;

subscriptions to media

Ordinary Residence: - Temporary absences vs. severance of residence with Canada

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o Evidence of intention to permanently sever residential ties with Canada – generally, if there is evidence of a foreseeable return to Canada, CRA will lean towards temporary absence

o Regularity and length of visits to Canada; residential ties outside Canadao Intention to return to Canada is NOT considered

Sojourners:- Deemed resident if 183 days or more; Any part of a day is deemed to be a day- Not automatically considered sojourning, the nature of the temporary stay must be established to be akin to temporary

residence – see R&L Food

Thomson v. MNR (1946 SCC) – Determining Residence/Ordinary Residence – LEADING- T born in NS – lived there for 51 years; Moved to Bermuda where he declared domicile, then moved to US- T spent summers in Canada during the time in question – 4 to 5 months at a time- T bought property in Canada where he and his wife would stay – did not really spend time in BermudaIssue: - Whether T was a resident of Canada as per the ITA and therefore subject to income tax on worldwide incomeHeld: - YES, he was an ordinary resident of Canada during the times in question – taxes owed on worldwide incomeReasons:- Residency is a flexible/general term – no clear definition available- Ordinary residence must be determined – in contrast with special, occasional or casual (temporary) residence

o Where in the settled routine of T’s life, he regularly, normally or customarily lives- Intention of T in terms of residency is not relevant in determining ordinary/customary mode of life

o Only the actual way of life satisfies the test- Here, T’s ordinary residence was along the Atlantic strip of North America

o T’s residence in Canada is substantially as deep rooted and settled as in the US

Lee v. MNR (1990 TCC) – Determining Ordinary Residence; Cit/Imm status not determinative- T would visit Canada regularly – not allowed to work/reside in Canada - Employed full-time in a non-resident corporation

and work was performed outside Canada - T married to Canadian wife, who was dependant on him; pay was deposited to Canadian acct - Parents maintained T’s room in England, T paid mortgage in Canada

- T did not file taxes anywhere; he could not join OHIP, was subject to non-resident transfer taxes, was out of the country for more than 183 days per year, was not allowed to work and had no desire to work in Canada

Issue: Was T a resident of Canada during the years in question?Held: T became a resident at the time he got married to his wife and remained a residentReasons:- Residency is a question of fact – a number of factors can be considered together to determine residency:

o Past/present habits of life; length of visits; ties within the jurisdiction vs. ties elsewhere; permanence; ownership of dwelling in Canada/vacation property; Residence of spouse/children; membership with churches/professional organizations; registration of automobiles; Canadian credit cards and financial institutions / bank accounts; subscriptions to news papers / magazines; Canadian insurance policies; mailing address in Canada / safety deposit boxes; telephone listing in Canada; stationary / business cards showing Canadian address; Driver’s licence /health card / pension plans / legal docs; corporation / partnerships; Frequency of visits to Canada for social / business reasons; burial plot in Canada / Canadian will; employment in Canada; storage of personal belongings in Canada; landed immigrant status; severance of ties in former country of residence

- Intention is not an element in determining residence – that is a factor for ‘domicile’ - Usually marriage is a neutral factor, but here it determines the date of residence – ties to Canada financially

o Connected in such a way that T became resident for tax purposesComments:- Shih v. the Queen – opposite ruling: T was not a resident even though his wife/kids lived in Canada

o Was only here for western education of children – maintained membership and ties to Taiwan

R&L Food Distributors Ltd v. MNR (1977 TRB) – Application of Sojourning- T is an ON registered company dealing primarily in ON; Owned by three American shareholders- Two of the shareholders commute to Canada daily – spent much more than 183 days in Canada each- Business deduction is available under s.125(1) for Canadian Controlled Private Companies (CCPC)

o CCPC must reside in Canada, not be publically traded on exchange and be controlled by Canadian residentsIssue: Is T a CCPC? – Are the two shareholders deemed residents due to “sojourning” under s.250(1)?Held: NO – the two shareholders are not sojourning in Canada, not deemed residents, not a CCPC

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Reasons:- Oxford: Sojourn: “To make a temporary stay in a place; to remain or reside for a time”- Coming to the country to work for the day and thereafter returning to one’s permanent residence in the evening is

tantamount to making a temporary stay establishing temporary residence rather than sojourning- Home and social ties for each shareholder were clearly in the US, not in Canada Comments:- This case requires that where temporary residence is found, T still has burden of showing non-casual / non- occasional

residence – this may be flawed as the Act does not require this- Just coming to Canada for the day doesn’t count as a “sojourning” day. If you stay overnight that counts as two days of

sojourning. - If you are sojourning for more than 183 days, you become a deemed resident and are therefore taxable on your income for

the whole year

Part-Year Residence

In order to establish part-year residence, the facts must disclose either that the individual commenced or ceased to reside in Canada within a given tax yearSection 114 – Individual Resident in Canada for Only Part of Year- Notwithstanding 2(1), the taxable income of a T who is resident in Canada for part of the year and non-resident

throughout another part of the year is the amount by which:o (a) The amount that would be T’s income if T had no income/loss for the non-resident portion (basically, the amount

of income earned while a Canadian resident)- Exceeds the total of:

o (b) Deductions permitted by 111(1) – (non-capital losses and net capital losses); ANDo (c) Any other deductions permitted to the extent that: (i) it is reasonably applicable to the part of the year T was a

resident

Schujahn v. MNR (1962 Exch Ct) – Establishing Part-Year Residence- T worked for US company and is a US citizen; was relocated to Toronto HQ, moved w/ wife and kids- T bought a home in Toronto and was then relocated back to the US on a permanent move- T put house up for sale, he left back to the US, but wife stayed in Canada; T maintained mortgage payments and kept a

Canadian bank acct and vehicle for his wife’s use while selling the house- T left his Toronto clubs and joined back up with his US ones, and retrieved his old car; transferred all his belongings to the

US and bought a new home in the US when wife/kids returnedIssue:- Does T qualify for deduction under s.114 as a part-year resident?- Did T cease to be a resident on the date he left Canada?Held:- YES – T established that he had ceased to be a resident of Canada the day he left, therefore qualified under 114Reasons:- Residence is a question of fact; Change of domicile depends on the intent of the party, but residence is based on the factual

circumstances external to the intent of the T- When T went back to the US, he shifted his ties to the US and away from Canada

o Only reason for wife/kids staying behind was to sell the house – necessary ties for this purposeo There was no residential purpose for visits T made to Canada after leaving

The Queen v. Reeder (1975 FCTD) – Where Residency is long established, difficult to show severance- T born/raised in Canada; Got a job in France for 8 months – wife moved there with him for that time period- T kept personal effects/car stored in Canada; kept health coverage but lapsed; bank account maintained and his payroll

deposits were made to that bank acct- T purchased new car in France and rented a furnished apt for himself and his wifeIssue: Whether T was “not a resident in Canada” as per s.114 for the 8 months in questionHeld: T was a resident of Canada for the full year in question – taxes assessed on ALL income for the yearReasons:- Factors to consider, but not limited to:

o Past/present habits of life; regularity and length of visits; ties with the jurisdiction and ties elsewhere; permanence or otherwise of purposes of stay abroad

- Thomson: “Ordinary Resident” in the place where in the settled routine of his life he regularly, normally or customarily lives

- T maintained his ties to Canada throughout his stay in France; His ties to France were temporary

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- T paid no income taxes in France – at most he was just sojourning there

Avoidance of Dual Tax ResidenceSection 250(5) – Deemed Non-Resident- A person is deemed non-resident of Canada for taxation purposes where under any tax Treaty, T is a resident under

another country and not a resident in CanadaTax Treaties- Bilateral agreements between two states – negotiated by the Dept of Finance- Goal is to avoid double taxation and evasion of taxes- They address difficulties that arise where persons have residential or other connections with more than one country

or have income from more than one country. They apply where an individual or corporation is resident of more than one country.

- The treaties make changes to the Income Tax Act for those taxpayers covered by the treaty and thus the statutes implementing the treaties typically provide that where there is inconsistency between the treaty and the Act, the terms of the treaty prevail.

Note the application of residency rules and withholding taxes to corporations Withholding Tax- Main question: Is there a non-resident that is receiving passive income from a Canadian source? If so – 25% withholding. - I.e. renters paying rent to a non-resident should withhold- I.e. Canadian subsidiary pays US parent management fees or royalties- I.e. Trustee remits payments to non-resident beneficiary) and individuals

Step One: Look at both countries’ laws to determine if T is a resident of both.If so, look to the treaty.

Article IV Canada-US Tax Treaty- (2) Where an individual is a resident of both contracting states, status shall be determined by the following:

o (a) By the place where the permanent home exists; if both or neither, deemed resident of the state where personal and economic relations are closer (centre of vital interests)

o (b) If centre of vital interests cannot be determined, deemed resident where T has an habitual abode; This is not fully fleshed out in the case law. Court will look at how much time you spent in each

country.o (c) If habitual abode in both/neither, deemed resident of which T is a citizen; ANDo (d) If citizen both/neither, mutual agreement between the competent authorities of the contracting states

Recall: Thomson – Had a permanent residence in both countries- Centre of vital interests – friends/social life in both countries – family travels with him- Habitual abode – most likely in the US – but may be both- Citizenship – T was Canadian citizen, not US – would be satisfied here

Article 4 Canada-UK Tax Treaty- (2) Where resident of both contracting states, residency is determined as follows:

o (a) State where there is a permanent home; if BOTH, centre of vital interestso (b) If cannot determine centre of vital interests OR no permanent home in either state, deemed resident of state with

habitual abode;o (c) If habitual abode in both/neither, T is a resident where he/she is a national; ANDo (d) if national of both, neither, determined by competent authorities of the contracting states

Recall: Lee – wife with house available to him in Canada, and bedroom at parent’s house in the UK- Centre of vital interests – likely Canada – bank/social ties / etc- Habitual abode – more likely in Canada than in the UK – whenever not on the boat, was in Canada- National – UK national, but likely wouldn’t get this farSection 128.1(4) – Departure Tax- Before a resident becomes non-resident, T is deemed to have disposed of each property owned by T at FMV- Except those properties that will be subject to Canadian tax even though held by non-residence – real property- Policy: prevents residents from leaving Canada and avoiding the taxes associated to their gains- See Deemed Dispositions and Deemed Proceeds below

Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus Treaty

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- In ‘98, T accepted position in Australia and obtained temp residence there – released all Canadian memberships, cancelled most financial institutions and phone/cable; changed insurance coverage from residential to commercial; returned his car joined equivalent clubs in Australia; only short visit to Canada

- House was leased to a non-related party in Canada- T returned after the position disappeared; CRA assessed T for taxes for the years while in AustraliaIssue: Was T an ordinary resident of Canada from Sept 1, 1998 to April 1, 2000?Held: NO – T was a non-resident during the years in questionReasons:- T did not have permanent home in Canada – therefore deemed non-resident of Canada in accordance with article 4 of the

Canada-Australia Tax Convention and subsection 250(5) of the Acto Lease was to a third party on a fixed term, T could not move back into the house if he wanted to

Comments:- The judgment goes straight to the treaty to break the tie, but the court had not yet determined that T was an ordinary

resident of Canada FIRST!o Treaty is only to be used where there is dual residency – this likely would not have been the caseo Also, doesn’t look to permanent home in Australia, just finds that there isn’t one in Canada

Provincial ResidenceRegulation 2601 – Residents of Canada- Residency to be determined by the place of residence of the T on the last day of the taxation year

o Recall s. 249(1)(b) – taxation year is the calendar year for individualsRegulation 2607 – Dual Residency- Where more than one place of residence on the last day of the calendar year, the province which can reasonably be

regarded as T’s principle place of residence prevailsBC ITA Section 2 – Liability for Tax- Income tax must be paid for each taxation year for residents on the last day of the taxation year

Mandrusiak v. The Queen (2007 BCSC) – Thompson used to determine ordinary residence- T original resident of AB, moved to BC for employer – performed consultant work for employer in BC- 110 days in BC during 200, 4.5 days in 2001 and 0 days in 2002- T maintained a home in BC and in AB; also had a farm in AB; BC assessed T for taxes in years in questionIssue: - Was T a resident of BC for the purposes of Provincial Tax collection? If so, which residence was principle?Held: T was a resident of both BC and AB, but AB was the principle place of residence – NO tax in BCReasons:- Thompson – ordinarily resident in the place where in the settled routine of his life he regularly, normally or customarily

lives. One sojourns to the place where he usually, casually or intermittently visits/stayso The former has an element of permanence, while the latter is based on temporary residence

- Vehicles in both provinces – licence was AB; holidays in AB; family in AB; chief income (farm) in AB; social contacts were stronger in AB

Residence of Corporations and TrustsSection 250(4) – Corporation Deemed Resident- A corporation shall be deemed to have been resident in Canada throughout a taxation year if

o (a) it was incorporated in Canada (after April 26, 1965)o (c) if before 1965, it was incorporated in Canada and at anytime in the taxation year or the preceding year it was

resident in Canada or carried out business in Canada

Recall 250(5) – person is deemed non-resident where that person would be a non-resident under tax treatyRecall: Canada-US Article IV and Canada-UK Article 4 - above

De Beers Consolidated Mines Ltd v. Howe (1906 HL) – Residency for corporations is a question of fact- Operations in South Africa, but directors’ meetings and decisions took place in the UKIssue: Whether T ought to be assessed as a resident of the UKHeld: YES – Question of fact based on where company keeps house and does their business – all decisions were made in the UK, all directors located there, all trade/business was occurring thereComments: Test for corporate residence adopted in Birdmount Holdings (1978)

Sources as a Basis of Tax Liability

Recall: s. 2(3) – non-resident taxable in Canada where employed by Canadian corporation or carrying on business in Canada, or

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disposing of Canadian property – taxable in accordance with Division D

Section 212 – imposes 25% income tax on certain types of payments made by Canadian residents to non-resident- (a) Management fee; (b) Interest; (c) Estate or Trust income; (d) Rents, Royalties, etc; (h) Pension Benefits; (j.1) Retiring

Allowances; (l) RRSPs

Section 215(1) – Canadian residents have the obligation to withhold and remit the tax on behalf of non-residents

Section 215(6) – Where the Canadian corporation does not withhold and remit taxes for a non-resident, the Canadian corporation is jointly/severally liable for the tax owing

Note Generally: section 253 – Extended meaning of “carrying on business” in Canada

Income from Office or EmploymentBasic Definitions and ProvisionsSection 248(1) – Definitions Section for Office or Employment

“Office”: The position of an individual entitling him/her to a stipend or remuneration, including judicial office, office of a minister of the Crown, etc“Officer”: Person holding such an office“Employee”: Includes an officer“Employed”: Performing the duties of an office or employment“Employer”: In relation to an officer, means the person from whom the officer receives remuneration“Employment”: The position of an individual in the service of some other personSection 5 – Income / Loss from an Office or Employment

(1) T’s income for a tax year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the T in the year

(2) T’s loss for a tax year from an office or employment is the amount of T’s loss, if any, for the tax year…Section 6(1)(a) – Basic Inclusion in Income from Employment (see Savage)- Included in the computing of T’s income for the year from office or employment: the value of board, lodging and other

benefits of any kind whatever received or enjoyed by the T in a year; EXCEPT any benefito (i) Derived from the contributions of the T’s employer to a registered pension plan, group sickness or accident

insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy

Section 8(2) – Limitation on Deductions- Except as permitted by this section, no deductions shall be made in computing T’s income for a taxation year from

office/employment- NOTE: Section 8 puts narrow restrictions on what can be deducted from incomeSection 153(1)(a) – Withholding of Tax by Employer- Every person paying at any time in a tax year salary, wages or other remuneration…withholds the tax and remits it to the

CRA on behalf of the employee.Section 118(10) – Canada Employment Credit- There may be deducted the amount determined by the formula AxB, where A is the set percentage for the taxation year

and B is the lesser of $1000 and the total of T’s income from an office or employment- Policy: Going to work is more expensive than staying at home; Acknowledges employees who have expenses associated

w/employment

Employee vs. Independent Contractor/Consultant/Sole ProprietorDifferences Between Employee and Independent Contractor

1. Tax withholdings: persons do not need to withhold tax from independent contractors (they are to remit taxes themselves; whereas s. 153(1) requires employer to do this for employees)

2. Independent contractors do not pay into EI, and therefore cannot claim EI if they go out of work3. Income from employment calculated on a cash basis; business income is calculated on accrual basis

a. S. 5 refers to income “received” by T; Income from business includes amounts receivable4. s.249 individual’s tax year is the calendar year, businesses can have an off-calendar year end – s.249.15. Deductions for employees limited to enumerated items in s. 8; independent contractors have wider scope under

sections 9 and 20

GR: Employee vs. Contractor is a question of fact – determined by balancing the relevant factors- NOTE: Generally individual wants to be a contractor to deduct more expenses

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TEST for Employee vs. Independent Contractor:1. (Wiebe Door / Sagaz) Is the person engaged on his/her own account?

a. If yes, then it is a contract FOR service (contractor)b. If no, then it’s a contract OF service (employee)

2. Factors to consider when answering the above question are:a. Control – more control over the worker is indicative of an employee roleb. Ownership of tools/equipment – indicative of contractor rolec. Opportunity for profit / risk of loss – indicative of contractor roled. Organization / Integration – whether worker is integral/integrated into employer’s businesse. Intent of the parties should be considered (Wolf); Question of how much weight (Lang)f. Big indicator: is the ‘independent contractor’ charging GST?

3. Express intent drawn into the employment contract should be given weight (Royal Winnipeg Ballet)a. Where K terms are not an appropriate reflection of the legal relationship, K intention ignored

Case Law on Employee vs. Independent Contractor:

Wiebe Door Services v. MNR (1986 FCA) – Leading – single question test to employee/contractor- CRA stated that W had not been withholding taxes from employees (as per s.153(1))- W in the business of installing electronic doors; had number of installers under contract; workers worked their own hours

and could accept/refuse jobs from W; workers paid by the job and only saw W for pickup/drop off- TCC – Applied four tests: Control test (limited usefulness with highly skilled people); ownership of tools/equipment;

opportunity to make additional profit / risk of loss; organization / integration test (whether worker is integral/integrated into employer’s business (this test has limited usefulness - without the installers, W’s business wouldn’t work, almost always deems someone an employee)

Issue: Were the installers employees or independent contractors?Held: Sent back for new trial with new test parametersReasons:- Best synthesis of all the approaches (from Market Investigations):

o Is the person engaged on his or her own account? If yes, then contract FOR services (contractor) If no, then it’s a contract OF services (employee)

- Factors to consider:o Control; own equipment; hires own assistants; degree of financial risk; degree of responsibility for investment and

management; and opportunity to profit from sound management in performance of tasksNote: Sagaz (2001 SCC) affirms this approach (central question + factors)

Wolf v. The Queen (2002 FCA) – Intention is a valid factor to be considered- Aerospace engineer with long-term contract to work in Canada. Under K, he could take time off when he wanted, he

charged a fee for his services, no obligation to give notice of him quitting, he paid his own employment amounts. He ended up working for 5 years.

- Intention of the parties is also a component to be considered in determining the test used in Wiebe Door- The legitimate intention of the parties should be factored into the central question

Royal Winnipeg Ballet v. MNR (2008 FCA) – Intention in the K should be considered- Employment K for each ballet dancer – in the K, each considered independent contractor. Dancers had to provide some of

their own supplies.- K upheld by the FCA - For highly skilled performer, K might be necessary, even if just for a few performances – not actual employees- Intention in the K can be given weight in determination

o Where it is established that the K terms are not an appropriate reflection of the legal relationship between the parties, then the stated intention will be disregarded

Lang v. MNR (2007 TCC) – Intent should not be ignored, but weight is in question- Intent is a test that cannot be ignored, but its weight varies from case to case – predominantly as a tie-breaker- Trial judges who ignore intent stand a very good chance at being overruled by the FCA

Personal Services Businesses and Incorporated Employees

- Question of “Active Business Income” vs. income from a “Personal Services Business”- Anti-Avoidance legislation set out in the ITA to protect against ‘employees’ incorporating themselves to take advantage of

independent contractor taxation and the lower tax rate received by CCPCs - s. 18(1)(p)

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- Policy: ensures that only bona fide CCPCs involved in active business have access to the preferential rate - Distinguish a personal services business from the following situation:

o Lawyer is an employee of a law firm for 5 years. Then she decides to start her own practice. She incorporates it. She is now employee, director, officer of the corp. This is not a personal services business, because she is serving a wide variety of clients, and is in business on her own account. She may have some of the same clients – but she was never an employee of her clients.

Section 18(1)(p) – General Limitations on Deductions from Business or Property Income- Limitation on deductions for “personal services business” that would ordinarily be deductible against the income of a

corporation other than a personal services businessSection 125(7) – Definitions

“Active Business Carried on by a Corporation” – business carried on by the corporation other than a specified investment business or a personal services business and includes an ACNT

“Personal Services Business” – Business of providing services where- (a) An individual who performs services on behalf of the corporation (“incorporated employee”), OR- (b) Any person related to the incorporated employee (See Arms-Length s. 251)- Is a specified shareholder (see s. 248(1)) of the corporation and the incorporated employee would reasonably be regarded

as an officer/employee of the person to whom the services were provided ( see test below ) , but for the existence of the corporation; UNLESS:

- (c) The corporation employs in more than five full-time employees throughout the year OR- (d) The amount paid to the corporation was received from a corporation with which it was associated

Test for Personal Services Business:- Would the incorporated employee be reasonably regarded as an employee using the Wiebe Door test?

“Specified Business Investment” – a business (other than a Credit Union or a business leasing property other than Real Property) with the principle purpose of deriving income from a property (passive income)

“Canadian Controlled Private Corporation (CCPC)” – a corporation that is resident in Canada, its shares are not listed on a stock exchange, and it is not controlled by non-residents of Canada, by a corporation whose shares are traded on a stock exchange, or a combination of theseSection 248(1) – Specified Shareholder- Person who owns more than 10% of stock- Any stock owned by person with whom T does not deal at arm’s length is considered to be owned by T for the purposes of

this definition

Benefits, Reimbursements and Allowances

Recall: Section 5 – Income/Loss from an Office or EmploymentRecall: Section 6(1)(a) – Broad inclusion of benefits in employment from Office or EmploymentRecall: Tsiaprailis (s. 6(1)(f)) – where lump sum disability settlement was included in income as a benefit

Policy:- Revenue: Without taxation of benefits, people would attempt to get their remuneration as much as possible in the form of

benefits rather than salary, which would greatly reduce the tax baseo Limits on inclusion: some benefits would be trivial/difficult for govt to assess (free coffee)

- Equity: unjust to allow one person to avoid tax through benefits, when another with no such benefit is taxed- Because employer gets to deduct almost everything given to the employees, the policy is to include almost any benefit the

employee received from the employer

What Qualifies as a Benefit?1. (Lowe) Is there a measurable economic benefit?

a. If so, is the primary benefit to the employer or the employee? (i.e is the benefit to T merely incidental?)2. Economic advantage must be connected with T’s employment (Savage)3. Whether it is a gift/something external to employee/employer relationship will depend on the employer’s

intention/purpose of the payment (Phillips)

Interpretation Bulletin IT470R- Non-cash gifts/awards to non-arms length employee, regardless of the numbers, are not taxable up to the aggregate value

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of $500 annually; AND the employer CAN deduct the gifts/awards- Additionally, separate long-service awards are not taxable up to $500 as well- Policy: Tax simplicity, efficiency and compliance

Savage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employee, no quid pro quo needed- S worked for life insurance company; took courses related to employment, employer encouraged the courses by offering

$100/course; S took 3 courses and received 300 from employer- $300 showed up on T4, but S did not report the amount as she considered it a prize for achievement Issue: Was the cash payment a benefit of employment as defined by s. 6(1)(a)?Held: Yes this was a benefitReasons:- No requirement for employment service in return for the benefit- Cash falls into a “benefit received or enjoyed”- “in respect of” – is the widest way to define a connection between two things – employment and benefit- Poynton – does not have to be a contractual exchange of services for benefit

o If it is a material acquisition which confers a benefit upon the employee, then it’s a benefit - Laidler v. Perry – gifts in kind (such as a gift card) are fully taxable- BUT this is also a prize for achievement and that is exempt up to $500

o Specific provision prevails over the broad general inclusionComment- Before Savage, following British law which said that if you couldn’t point to a quid pro quo – no taxable benefit. Savage

held that s.6(1)a is way broader than British law and you don’t have to show a quid pro quo. Doesn’t have to be given to employee in exchange for performance of services.

Lowe (FCA) – ‘Merely incidental’ benefits are not taxable- Trips offered by employer to employees who sell the most insurance; trips were to areas where they meet with

prospective clients; T went on trip with family for such function- T assessed for the portion of the trip that was “personal travel” – as there was some enjoyment as well- Both T and wife put in 14h/day entertaining brokers; trip was fun, but they were not free to do as they pleaseIssue: Was there any taxable benefit associated to this trip?Held: NO – this was a business trip – primary benefit to the employer – personal benefit was merely incidentalReasons: (test from Poynton)- Does the payment provide T with a measurable economic benefit?

o If so, is the primary advantage to the employer or the employee?- Here, purpose of trip was to create personal relationships with the account executives to encourage business

o All done at the request of employer – wives were expected to attend for the same functionTakeaway:- s. 6(1)(a) is limited so as not to include benefits that are merely incidental to the employer’s primary purposeValuation of Employment Benefits

- Recall that s.6(1)(a) requires that the “value” of a taxable benefit be included in the T’s income- Generally the value is the “fair market value” of the benefit

o “The amount a person not obligated to buy would pay a person not obligated to sell” – Steen (1988 FCA)

Giffen v. The Queen (1995 TCC) – Using FMV method of valuing benefits - T travels by plane for work; collects airmiles; used airmiles to purchase a trip for family- CRA assessed the vacation at fair market value as a taxable benefit of employmentIssue:- Are the redeemed flights benefits under s. 6(1)(a)? – YES, they are received when family flies for free- How should the value of the benefits be determined? What T would have to pay? Cost to the airline?Held:- Cost should be the price the employee would have been obligated to pay for a ticket entitling him/her to travel the same

flight, same class, with the same restrictionsComments:- Due to difficulty of valuing benefits as well as tracking/identifying benefits of this type:

o With regard to loyalty points, no employee benefit has to be included in income provided that: The points are not converted to cash; the plan is not indicative of another form of remuneration; AND plan or

arrangement is not for tax avoidance purposes – IT470R

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Dunlap- Employees were taking part in a work sponsored dinner/drinks/entertainment event; - Employer deducted the amount of the party; Minister assessed T for the value of the night out as a benefitIssue: Was the dinner/entertainment a benefit to T? (Must receive or enjoy as per s. 6(1)(a))Held:- Yes, this was a taxable benefit to T – it is valued at the cost per person to the employerReasons:- There is no real difference between receiving money and money’s worth- No evidence that T consumed less than other guests, so the value was the proportional expenseComments:- Paragraph 9 of the IT470R – now will no longer be taxable for reasonable value given to ALL employees at social

gathering – note: more than $100/employee/event would generally considered to be a taxable benefitAllowances

- A predetermined sum, generally for a specific purpose, at the discretion of the recipient in that the recipient need not account for the expenditure of the funds (MacDonald)

- Queen v. Pascoe (1975): “An allowance is…a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense, its amount is determined in advance and, once paid, it is at the complete discretion of the recipient who is not required to account for it. 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 his or her discretion…” (cited in Huffman)

- Could be a concealed method of remuneration, therefore must be included in income from office/employment- Allowance vs. Reimbursement – see definition in Huffman

Section 6(1)(b) – personal or living expenses- Include in income from office or employment, all amounts received by T as allowance for personal or living expenses or

allowance for any other purpose, except: see Automobile and Traveling Allowances below

The Queen v. Huffman (1990 FCA) – distinction between allowance and reimbursement- T is a plainclothes officer; not paid more than uniformed officers who received uniforms for free- Received reimbursement for clothing expenses up to $500 – assessed by CRA on the benefit of allowanceIssue:- 1. Was the money received a taxable benefit under s.6(1)(a)?- 2. Was the payment a reimbursement or an allowance under s.6(1)(b)?Held:- 1. This was a reimbursement for the expenses associated to the job, not taxable benefit under s.6(1)(a)

o If there was no reimbursement for the costs, would T be able to deduct expenses under s.8(1)(i)(iii)? Amount was paid by the employee for the cost of supplies that were consumed directly in the performance of

the duties of the office or employment, and required by the K to supply and pay S. 8(10) – deductions claimed in s.8(1)(i)(ii) or (iii) are not deductible unless the prescribed form is signed

by the employer and filed with the return- 2. This was a reimbursement rather than an allowance, so not taxable benefit under s.6(1)(b)

The Queen v. MacDonald (1994 FCA) – Leading case on s.6(1)(b) – what constitutes an allowance- T was RCMP officer transferred to Regina from Toronto; Receive housing subsidy of $700/monthIssue: Was the subsidy a reimbursement or an allowance?Held: Subsidy was an allowance under s. 6(1)(b)Reasons:- First, an allowance is an arbitrary amount in that it is predetermined sum set without specific reference to any actual

expense or cost – may be set through a process of projected or average expenses or costs- Second, s. 6(1)(b) encompasses allowances for personal or living expenses, or for any other purpose- Third, the allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of the

funds towards an actual expense or costSpecial and Remote Worksites- Where employer requires employee to work away from home or to work away from an established community- Recall: s. 6(1)(a)/(b) – benefits and allowances included in income

Section 6(6) – Exception to s. 6(1) – Employment at special work site or remote location- Notwithstanding s.6(1), there shall NOT be included in income any amount received by T as an allowance for, or in the

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value of expenses T has incurred for:o (a) T’s board and lodging for a period at

(i) A special work site, that is temporary in nature, if the T maintained a principle residence elsewhereo (A) That was, throughout the period, available to T and not rented out ANDo (B) T could not reasonably be expected to have returned daily by reason of distance; OR

(ii) A location, by virtue of its remoteness, the T could not reasonably be expected to establish and maintain a self-contained domestic establishment,

o If the period during which T had to be away from principle residence was not less than 36 hours; ORo (b) Transportation between

(i) The principle place of residence and the special work site referred to in (a)(i), OR (ii) The location referred to in (a)(ii) and a location in Canada where T is employed,

o In respect of a period described in paragraph (a) during which T received board and lodging, or a reasonable allowance in respect of board and lodging from employer

IT470R – Determination of Remote Work Location- To determine if workplace is remote, must consider:

o Availability of transportation; distance from an established community; and time required to travel thereo Will be considered remote if the nearest established community w/ population of 1000 or more is no closer than

80km by most direct route normally traveled in the circumstancesAutomobile and Traveling Allowances

Recall S. 6(1)(b) – Include in income all amounts received by T in the year for personal or living expenses or as allowance for any other purpose, EXCEPT

Section 6(1)(b)(v) – Travel for sales work; In-town or Out-of-town- Reasonable allowances for travel expenses where within a period when employee was employed in connection with

selling of property or negotiating contracts for employer (sales work)

Section 6(1)(b)(vii) – Travel for non-sales work; Out of town only; Other than vehicle allowance- Reasonable allowances for travel expenses (other than for vehicle) received by employee (other than sales of property or

negotiation of contracts) from employer for traveling away from:o (A) The municipality at which the employee ordinarily worked ANDo (B) The metropolitan area, where the establishment was located

- In the performance of duties of the office or employment

Section 6(1)(b)(vii.1) – Travel for non-sales work; In-town and Out-of-town- Reasonable allowances for the use of a vehicle received by an employee (other than sales of property or negotiation of

contracts) from the employer for traveling in the performance of the duties of the office/employment

NOTE Limitation for Vehicle Allowance: s.6(1)(b) states: …and for (v), (vi) and (vii.1), an allowance received in a tax year by T for the use of a motor vehicle in connection with the course of T’s office or employment is deemed to not be a reasonable allowance:- (x) Where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of

KMs for which the car is used OR- (xi) Where the T BOTH receives an allowance in respect of the use AND is reimbursed in whole or in part for the expenses

in respect of that use

Section 7306 IT Regulations – Prescribed rate of per KM - NOTE: this is for the purposes of 18(1)(r) – deductions, but is used commonly to assess reasonableness in s.6

o Employer is not allowed to deduct more than the prescribed amounto Any amount received in allowance over the prescribed amounts would be considered non-deductable under s.18, and

also would be included in employee’s income under s.6(1)(b)- 52 cents/km for first 5000kms- 46 cents/km for every km after that- Additional 4 cents/km in the Yukon/Northwest Territories or Nunavut

Deductions and Computing Income from Office or Employment

Recall: Section 5 – include in income salary/wages/remuneration

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Deduction refers to amounts that the employee has to pay out of their own pocket for which they are not reimbursed

Section 8(1): Lists the types of expenses that can be deducted from income from office or employmento Deduction must be “wholly related to employment” meaning that if a vehicle is used for employment where the

employer doesn’t give allowance, and you use it for other things too, you claim a deduction only for the % of the expense that is wholly related to the employment.

Section 8(2): General Limitations – Except permitted by s.8, no deductions shall be made in computing T’s income from office or employment

Section 8(10): Certificate of Employer – Otherwise deductable amounts under s. 8(1)(c), (f), (h), (h.1), (i)(ii) or (i)(iii) by T shall not be deducted unless a prescribed form, signed by T’s employer certifying the conditions set out in the applicable provision, is filed with the T’s tax return

Section 67: General Limitation Re: Expenses – No deduction shall be made except to the extent that the outlay or expense was reasonable in the circumstances

Section 67.1(1): Expenses for Food/Beverages/Entertainment – Amount paid in respect of the consumption of food, beverages or enjoyment of entertainment is deemed to be 50% of the lesser of:- (a) The amount actually paid for the food/beverage/entertainment; OR- (b) An amount in respect thereof that would be reasonable in the circumstances

Section 67.1(2): Exceptions – (1) doesn’t apply to amount in respect of food/beverages/entertainment where:- (a) Paid by a T who is in the ordinary course of business of providing food/beverages/entertainment OR- (f) Paid in respect of one of six or fewer special events held at which f/b/e is generally available to all individual employed

by the TTraveling Expenses

Section 8(1): Deductions allowed with respect to the following amounts as may be reasonably regarded as:

(f) Sales Expenses (of Commission Employee) – Deduction for expenses incurred as sales employee- Where T was employed in connection with the selling of property or negotiation of Ks for T’s employer and

o (i) Is required under K to pay own expenses;o (ii) Was ordinarily required to carry the duties of the employment away from place of businesso (iii) Was remunerated by commissions with fixed reference to the volume of sales made; ANDo (iv) Was not in receipt of an allowance for travel expenses by virtue of s. 6(1)(b)(v) (above)

(Because, cannot deduct from allowance that wasn’t included in income to begin with!)- Amounts expended by the T in the year for the purpose of earning the income from the employment (but cannot exceed

the commissions earned in (iii)), to the extent that amounts were not:o (v) Outlays, losses or replacements of capital or payments on account of capitalo (vi) Expenses that by 18(1)(l) (use of recreational facilities and club dues), are not deductable OR

NOTE: s. 8(4) applies to 8(1)(f) and (h) – meals cannot be included where away for period less than 12 hours NOTE: s. 8(10) applies to (f), (h), (h.1) or (1)(i)(ii)/(iii) – T shall not deduct unless certificate of employer certifying that the conditions set out in the particular provision were met – must be filed with return for the year

(g) Transport Employee’s Expenses – Transport workers (who pay food AND lodging) deduction - Where the T is employed by a person/goods transport business, and T’s duties include regular

o (i) Travel away from T’s work location municipality, on vehicles used by business for transporto (ii) While away from that municipally, T makes disbursements for meals AND lodging,

- Amounts disbursed by T, to the extent that T has not been reimbursed for the disbursements

NOTE: Renco – refused deduction for BC Ferries employees due to the “AND lodging” component- Specific literal interpretation used in deduction sections

(h) Travel Expenses – Deduction Other than Vehicle for work-related travel expenses – N/A if (f) or (g) used- Where T, in the year, (i) was ordinarily required to travel and (ii) required under employment K to pay the travel

expenses during the work-related travel, amounts expended by the T for traveling (other than vehicle expenses) in the course of office or employment, EXCEPT where T

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o (iii) Received an allowance for travel expenses that was not included in T’s income (s. 6(1)(b)(v-vii)); ORo (iv) Claims a deduction for the year under (e), (f) or (g)

NOTE: s. 8(4) applies to 8(1)(f) and (h) – meals cannot be included where away for period less than 12 hours NOTE: s. 8(10) applies to (f), (h), (h.1) or (1)(i)(ii)/(iii) – T shall not deduct unless certificate of employer certifying that the conditions set out in the particular provision were met – must be filed with return for the year

(h.1) Motor Vehicle Travel Expenses – Work-related vehicle expense deduction – N/A if (f) used- Where T is required to (i) travel for work and (ii) required by employment K to pay for vehicle expenses incurred in the

performance of duties, amounts paid by T on those vehicle expenses, EXCEPT where T- (iii) Received an allowance for vehicle expenses that was not included in income (s. 6(1)(b)), OR- (iv) Claims a deduction for the year under (f)

Martyn v. MNR (1962) – Travel to and from work is not deductable- T was a pilot, attempted to claim trips to and from work as business expenseIssue: Whether T’s travel to and from the airport were deductable as travel expensesHeld: Travel was not deductable under s. 8(1)Reasons:- The travel was not carried out in the course of employment, but rather proceeding from home to work

o T’s work start/ends at the point he arrives/leaves work, no evidence to suggest trips included in work- All employees experience this type of travel – busses, taxi, walking, wouldn’t be covered either- Luks v. MNR (1959) – “traveling between the appellant’s home and the several places where he was employed was not

part of the duties of his employment…the journeys were not made for the employer’s benefit, nor were they made on the employer’s behalf or at his direction, nor had the employer any control over the appellant when he was making them. The utmost that can be said of them is that they were made in consequence of the appellant’s employment. That is not sufficient for the present purpose.”

Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issues- Claimed that he was required to use his own car for security, and since necessary, it should be deductibleHeld: Denied by the court- Although security concerns were a function of his work, it was not sufficient to render the expense deductible- If travel to and from work has concerns that are not addressed through remuneration, it should be taken up with the

employer

Legal Expenses

Section 8(1)(b) – Legal Expenses of Employee- Amounts paid in the year for legal expenses incurred by T to collect/establish a right to salary or wages

NOTE: Proposed amendment allows a deduction for legal expenses for when employee has to sue to collect any amount required by this subdivision to be claimed by the employee. I.e. if Tsiapralis happened again then she could deduct her legal expenses (it wasn’t salary or wages in that case) Even though this isn’t the law right now, they would have let you claim the legal expenses since 2001.

Recall Schwartz: The compensation was not included in his income - it was considered exempt…so he wouldn’t be able to claim a deduction for the legal expenses under s.8.

Section 60(o.1) Legal Expenses [re. Job Loss or Pension Benefit]- There may be deducted in computing a T’s income for a taxation year such of the following amounts:- (o.1) The total legal expenses paid by T in recovery of a benefit under a pension plan or a retiring allowanceProfessional and Union Dues

Section 8(1)(i) – Dues and Other Expenses of Performing Duties- Amounts paid by the T in the year as:

o (i) Annual professional membership dues necessary to maintain professional status recognized by statute eg. Law society dues are easily deductible, because required to practice law

o (iv) Annual dues to maintain membership in a trade union or to maintain membership in an association of public servants to improve members’ conditions of work

o (v) Annual dues retained by employer, pursuant to collective agreement, and paid to a trade union or association

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designated in (iv) of which T was not a member

The Queen v. Swingle (1977) – Professional status must required by statute for deduction of dues; opens the door to the deduction of other dues not strictly required to maintain professional status- T is a chemist, employed as a manager of laboratory services; designated as an analyst under the Canada Shipping Act; T is

required to stay abreast of scientific news, trends etc for his job - T claimed deductions for numerous memberships to scientific societies; Reassessment only allowed the one fee related to

his union fees as a public servant pursuant to 8(1)(i)(iv), but none of the othersIssue: - Whether payment of the amounts were “necessary to maintain professional status recognized by statute” as per s. 8(1)(i)

(i)Held: T is not a professional recognized by statute – s. 8(1)(i)(i) strict requirements are not metReasons:- Bond v. MNR / Rutherford v. MNR / Cooper v. MNR:

o Where a T’s income was derived from an office/employment he could deduct dues he was required to pay in order to exercise the very right to carry on his profession or calling

- Deductable dues are not limited to those that have the effect of maintaining one’s professional status; it may be necessary to belong to organizations in order to remain qualified in one’s job

- S. 8(1)(i)(i) should not be read in isolation – (iv) and (v) allow deduction of dues without stipulation that they must be required to maintain T’s job

- But, before any of that can be addressed, T must be a professional recognized by statuteo Analyst designation is merely “any person” or sometimes “qualified person” – special skills, abilities or

qualifications are needed to meet the standard of s. 8(1)(i)(i)Comments:- Had T been a professional recognized by statute, this makes room for deductibility where fees paid were required for the

maintenance of qualification within the professional field, rather than the strict requirement to maintain professional status

- Law Society of BC – you have to join. CBA you don’t have to join. So, sole practitioners could deduct CBA from their income because that is an expense used to get income - but as an employee you can’t.

Cost of Supplies

Section 8(1)(i) – Dues and Other Expenses of Performing Duties cont’d- (ii) Office rent or salary to an assistant/substitute, payment of which required by the K for employment- (iii) Supplies consumed directly in the performance of duties of the office/employment, where required by K of

employment to pay for supplies

Income from Business or PropertyBusiness Source of Income: Organized Activity and Pursuit of ProfitFramework for Income from Business or Property- Section 3(a) – Income includes a source inside/outside Canada for the year from each office, employment, business and

property (note: if not a source, it is not included in income!)- Section 9 – income/loss from business or property

o (1) T’s income for a tax year from business or property is the T’s profit from that business or property Profit is not defined by the Act – generally understood as net profit (revenue - expenses)

o (2) T’s loss for a tax year from business or property is the amount of T’s loss o (3) “Income from a property” does not include any capital gain from the disposition of that property and “loss

from a property” does not include any capital loss from the disposition of that property- Section 12 – Specific inclusions in Income from a Business or Property- Section 20(1)(c)(i) – Interest paid on amounts borrowed for the purpose of earning income from a business or property

is deductable from income from business or property- Section 18 – Restrictions on deductions – listedWhy the distinction between income from property vs. income from a business matters- For an individual, generally both are treated the same (exception: dividends)- For businesses, the distinction is important:

o CCPCs have a special low rate on active business income under s.125. The low rate is not available for property income.

“Active Business Carried on by a Corporation” is business carried on by the corporation other than a specified investment business or a personal services business and includes an ACNT

o The tax liability of non-resident taxpayers is tied to the source of income. Income from a business in Canada is

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taxable under Part I of the Act on a net basis, whereas income from property is generally subject to a 25% withholding tax on a gross basis.

o Income from a business carried on in Canada is taxable under Part 1 of the Act on a net basis, whereas income from property is generally subject to a 25% withholding tax when sent to non-residents under Part XIII on a gross basis.

What Constitutes a Business- S. 248(1): “Business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and…an

adventure or concern in the nature of trade, but does not include an office or employment- Smith v. Anderson (1880) – “anything which occupies the time, attention and labour of a man for the purpose of profit” is

a business- Gambling winnings are not included in business earnings even where carried out in an organized fashion (LeBlanc);

Unless there is specific expertise or a system to make profits and reduce risk (Luprypa, Epel)

Epel: regular poker winnings found not to be business income, simply luck b/c no significant element of risk management.

Luprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = business- Pool-shark; filed NIL returns for two years; made money gambling on pool, had a system- 1991 CRA prepares a net-worth assessment – looked to assets and records estimates on net worth

o From this they estimate “income” and expenses, and non-deductable expenses are added to income- S. 152(7) – Permission for Minister to create net-worth assessments and not accept T’s assessment of return- S. 152(8) – Assessment is deemed valid and binding until T displaces itIssue: Whether the gambling in this situation is a valid source of income (business source?)Held: Here, this was a business and therefore a valid source of incomeReasons:- Past cases have held that gambling isn’t a source where there is no inside info or no expertise associated to it- Where there is specific expertise or a system in place to make money, then it’s akin to a business

o Here, T managed the risk, already a skilled player, practiced all week and selected drunk opponents

LeBlanc v. The Queen (2007) – Lottery is pure chance = not an expected earning source = no source/no tax- One brother won substantial amount in sports lottery, so for next 3 years, they engaged in massive gambling

o Played 50M, and won 55M – profit of $5M in the year in question- Ts were paying employees to run tickets for them; CRA assessed them on their winningsIssue: Whether the gambling winnings were taxable or not?Held: This was mere chance gambling – not taxableReasons: - The odds of winning these lotteries is astronomical; no way to form a solid system of betting- 40(2)(f) – Capital gains/losses from lottery is NIL- 52(4) – deems the cost of the property that is won in connection with lottery at FMV at possession. - There may be some organization here, but not to the point where it becomes an organized activity for profit- No evidence to show that there was nothing more than luck associated to their winnings – therefore it is not an expected

earning source and not taxable- Categories of gambling: a) pure pleasurable pursuit (not taxable) b) gambling connected with a business i.e. casino

(taxable) and c) gambling where there is an element of skill and an ability to minimize risk (taxable)The Pursuit of Profit – Reasonable Expectation of Profit (REOP)- Profit generally distinguishes T’s activities that are for business/property from those that are purely personal- Under the source model, income/loss from areas that are not a source, are not included in income- Hobbies may incidentally turn a profit, but generally make losses. CRA doesn’t want to lose money.

o Policy: Wealthy businesspersons could use side businesses for personal pleasure and deduct losses!

Old Test: Moldowan (1977 SCC) : - “…in order to have a “source of income” the T must have a profit or a reasonable expectation of profit. Source of income,

thus, is an equivalent term to business”o Many legitimate businesses were denied their losses under this rule

Reasonable Expectation of Profit Test:- In response to the inadequacies of the old test from Moldowan, the following test was made (Stewart)- Determination from all of the facts, with non-exhaustive list of criteria to consider:

o Profit/loss experienced in the past years

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o Taxpayer’s trainingo Taxpayer’s intended course of actiono Capability of the venture as capitalized to show a profit after capital cost allowance

Modern Approach: Stewart

Stewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or Property vs. non-source- T purchased 4 condos from which he earned rental income; for the years in question, he lost money on them- Could have operated as a tax shelter – take losses for 10 years and then income after that – T here though was trying very

hard to reduce losses and run a viable business, but the interest rates were too highIssue: Can losses be deducted (is this income/loss from a business/property, in which case it would be a source?)Held: Ruling for T – losses could be deducted because it was a valid source of incomeReasons:- Moldowan – mistakenly equated “source of income” with REOP; does not accord with defn of business in CL:

o “Anything which occupies the time and attention and labour of a man for the purpose of profit” –Smith- REOP is problematic because it is vague and uncertain and produced unfair and arbitrary results- Actual test must be grounded in the words of the Act and the definition from Smith- S. 3 – income includes sources of business and property; s.9 – T’s income for a tax year from business/property is his

profit there from; s.18(1)(h) – personal and living expenses are not deductableo Question of REOP only required where there is some personal or hobby element

TEST: The issue of whether or not a T has a source of income is to be determined by looking at the commerciality of the activity in question.

1. Is the activity of the T undertaken in pursuit of profit, or is it a personal endeavour? a. Where the activity contains no personal element and is clearly commercial, no further inquiry neededb. Where the activity could be classified as a personal pursuit, it must be determined whether or not the activity

is being carried on in a sufficiently commercial manner to constitute a source of incomec. Subjective/objective test – must have subjective intention to profit – assessed using an objective standard

with reference to the non-exhaustive Moldowon 4 factorsi. Subjective – T must show they were trying to earn money; Objective – T must show that they’ve

taken reasonable steps in an attempt to earn income2. If it is not a personal endeavour, is the source of income from business or property?

a. Look to definition of business – s. 248(1) and CL from SmithHere:- No personal element involved in the rental properties – inquiry ends here

o Rented at arm’s length, no evidence of personal use; clearly commercial; motivation of capital gains- A tax motivation doesn’t mean that you don’t have a commercial motivation and doesn’t override the commercial

motivation

Adventure or Concern in the Nature of Trade (ACNT)

Recall: Definition of “Business” in s.248(1) includes adventures or concerns in the nature of trade- Leads to a highly litigated area of Tax Law – distinction between business/property income and capital gain- Turns on whether the transaction can be characterized as an ACNT- Why T prefers it to be a capital gain = only 50% of the gain is taxable- But if you have a loss, you want it to be an ACNT = can deduct your expenses

Capital Property: Purchaser acquires property to hold it and earn income and then later sells it for capital gain- By nature creates income; shares, real property, etc

ACNT: purchaser acquires property with the sole intent of making profit from it on a quick sale- True ACNTs are usually intermittent – T does not carry on the practice like a normal business would- Where a single transaction is carried out like that of a regular business, it is an ACNT (Taylor)- Secondary purpose of earning profit on the flip of property is enough for ACNT (Regal-Heights)- Investment in shares of a company is a capital investment, NOT ACNT (Irrigation Industries)

o Unless it’s a securities trading business – then it’s business income in the traditional sense of the definition (Arcorp Investments)

Treatment: ACNT are deemed to be treated as income, as a virtue of the “Business” definitionIT-459 – Adventure or Concern in the Nature of Trade:- This is one of the more authoritative Interpretation Bulletins – praise from SCC and follows Taylor

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- Where T habitually engages in an activity capable of producing profit, T is carrying on trade/businesso Where only done infrequently, then it becomes a question of whether the activity was an ACNT

- Test:o Whether T dealt with the property acquired in the way a dealer would ordinarily deal with it?o Whether the nature/quantity of the property excludes the possibility that its sale was the realization of an

investment or was otherwise of a capital nature? ANDo Whether T’s intention is consistent with a trading motivation

- Lists 12 factors used to determine whether transactions are in the nature of capital or in the nature of trade:o Feasibility of venture; zoning; extent to which the venture has been carried out; evidence of a change of intention;

nature of the experience of those involved; reasons for selling; etc- Intention to sell at a profit, is insufficient on its own to prove ACNT – this is almost always present (Regal)- Any losses of an ACNT are deductable against income, whereas losses from a capital loss only against other Cap

MNR v. James A Taylor (1956 Exch Ct) – Transaction is ACNT – factors to consider – trade was business-like- T worked for company that regularly acquires lead; company could not acquire it from supplier, so T bought it personally

and sold it to the company for 80k gain; T didn’t possess the lead, just brokered/assumed riskIssue: Whether T’s transaction was an ACNT (business taxable) or capital asset (capital gain)?Held: The transaction was an ACNT, therefore taxable as income from a businessReasons:

o Was not for investment purposes – there was no capital nature behind the purchaseo T could not do anything with the lead accept sell it – purchased with sole intent to sell to companyo Commodity itself doesn’t create income in and of itself, it is used to create income through T’s employer

- Carried out in the same manner as would a trader of the commodity; just because it’s not T’s regular business does not make it separate from business income

Rutledge: R goes to Berlin and finds a lot of toilet paper, imports into Britain and sells it for profit. He argues that this was a capital gain and that he was realizing on an investment. There was an element of speculation, and this was an isolated transaction. ACNT implies nature of speculation and one-time transaction. Whether the transaction is different in type or isolated is not determinative but can be very important. And intention to sell as a profit is not the ultimate test either. The way that Rutledge bought and sold the toilet paper and the way Taylor bought and sold the lead is how a trader would have acted in the circumstances.

Regal Heights Ltd v. MNR (1960 SCC) – Secondary objective of earning profit on land results in an ACNT- T purchased land with hopes of developing shopping centre; Another mall opened up so failed- T sold the land for 140k profit – claimed it as capital gainsIssue: Whether T’s profits were derived from an ACNT?Held: YES – the profits were resulting from an ACNT, and therefore taxable in business incomeReasons:- The efforts were all promotional in character – no evidence of assurances that shopping centre would result- Accepts primary goal of development, but recognizes that the secondary goal was to sell property for profit

o Where MNR can show secondary objective to ‘flip’ property, then there will be an ACNT- The venture was entirely speculative and it was sold at a substantial profit- Based on factual circumstances rather than what the intentions of the T were

Irrigation Industries Ltd v. MNR (1962 SCC) – Investment in shares of a company are capital investments- T bought shares of company by borrowing on bank overdraft; T(company) was originally formed to grow alfalfa, but

ended up buying the mining shares – held 60% of the shares for 3 weeks (sold to clear overdraft), then remaining 40% were sold at a later date

- Looks like simple playing of the market – great profits; not the regular business of T; borrowed for quick saleIssue: Whether the gains are resultant from an ACNT?Held: NO, these are capital gains – not income from a businessReasons:- Borrowing is not a significant factor, this is normal practice in stock market investing- No immediate prospect of obtaining dividend – also common with this type of investment- Bought with hopes of gains – not determinative, everyone buys with the hopes of gain- Taylor test:

o Nature and quantity of the subject matter did not preclude a capital investmento Shares represent ownership interest in a corporation – investment aspect by very nature

Notes: Makes for a strong presumption that purchase of shares is a transaction in capital! Shares will almost always be capital

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property to the buyer except if the person is a trader (income from business) or if T buys all the shares of a corp, and then “flips” it by fixing it up, then that’s speculation and that will be considered an ACNT.

Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT)- Private company with one shareholder – stock broker for another stock brokerage- Almost all assets of the company were marketable securities that could be traded on the stock exchange- T (corp) had no licence to broker stocks – could only buy for its own account; really the corp was acting for the

shareholder personally- Undertook about 38 transactions per month – huge value – held for less than yearIssue: Whether the transactions were capital investments or carrying on a business or ACNT?Held: - Gains were income from securities trading business (not an ACNT, but an actual business involved in trading)

Income from a Property

S. 248(1) “Property”- means any kind whatever whether real or personal or corporeal or incorporeal and without restricting the generality of the forgoing, this includes: A right of any kind whatever, as share or a chose in action:- Still requires a characteristic of ownership (may be some value associated to covenant/right of way)- Unless contrary intention indicates, money;- A timber resource property; AND- The work in progress of a business that is a profession- Property is so broad that it concludes your right as a beneficiary in a contingent discretionary trust. Income from trust

distributions is property income in addition to rent, royalties, interest.- Almost any right treated as property. Services are not property.

o Martha disagrees with the case that says that a non-compete clause is not property. (Numbered case) There is a right that has value, has a price that attaches to it, and is enforceable. Covenantee can sell it. It is an enforceable right to protect interest in a business.

- Note that there are no hard and fast rules: while interest income will generally be considered income from property, in the case of a bank it’s actually income from business. If you are in the business of buying and selling bonds, then you have an inventory of bonds, then that is INCOME FROM BUSINESS if they had any interest income.

Business vs. Property- Business implies activity while property only requires one to let the property earn on its own (Hollinger)- For personal taxation, they are both taxed the same, for corporations, there is a difference between them

o CCPCs have a special rate, only if they are carrying on an active businesso S. 125(7) – specified investment business – principle purpose is to derive income from property

- S. 9(3) – Income from property does not include any capital gains/losses from the disposition of that property

Hollinger v. MNR (1972) – Approach for Business vs. Property Income; inactive partner still considered to be earning income from business even though not personally involved- T claimed that her interest in a partnership was property income because she wasn’t involved in any of the management

(she was an inactive owner). Court said it was income from business because the partnership was carrying on business.- If income from a property has any meaning at all, it can only mean the production of revenue from the use of such

property which produces income without the active and extensive business-like intervention of its owner or someone else on his/her behalf

o Whether income was the result of efforts made or time and labour devoted by T?o Whether there was a trading character to the income?o Can the income be fairly described as income from business within the meaning of the Act?o The nature and extent of services rendered or activities performed

- If income derived principally from ownership of property, income is generally considered to be income from property; if it involves a significant amount of activity, the income is often income from a business

Walsh and Micay v. MNR (1965) – Rental properties generally seen as income from property, not business- The level of service will generally determine whether rentals are from a property source of from a business

o Here, rent received should be regarded as having accrued to them as owners rather than traderso The additional services rendered are relatively insignificant and insufficient to convert T from landowners to

conductors of a businessInterest

- Interest is the compensation for the use of money belonging to another person, it must be referable to a principal amount and must either accrues daily* or be allocable on a day-to-day basis.

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o Barfried: Interest always accrues daily. Even if it’s an annual rate, we divide that to get the day-to-day rate.- Late payment charges are considered interest income. A supplier of G & S who has not yet been paid has in effect

extended credit to the person who received the services. If the client hasn’t paid by a certain date and gets a late payment charge, that’s effectively a charge in lieu of interest. The charge for the dentist is income in lieu of interest.

- Timing is important with interest. It’s easy to adjust when you receive interest by K. ITA doesn’t want you to be able to defer recognition of your interest income for too long a period.

Section 12- Inclusions to Income from Business or Property – SEE HANDOUT!- (1)(c) – Interest – subject to (3) and (4.1), any amount received/receivable in tax year that was paid to T as interest or in

lieu of interest- (3) and (4) – Anti-avoidance rule for deferral over long term lending – timing rule that determines when interest must be

declared and when it is to be paid ono (3) Applies to corporations – requires corporation to report in income the interest accrued at the end of each tax

year, even where borrower does not actually pay the interest yeto (4) Applies to persons – requires individuals who hold investment Ks to include interest accrued on the K to each

anniversary date with respect to the K, except amounts already included previously- (11) “Anniversary date” and “investment contract” defined

Section 16(1) – Interest Income and Capital Combined- Where, under a K, an amount can reasonably be regarded as part interest or other amount of income and part capital, the

following rules apply:o (a) The part reasonably regarded as interest shall be deemed to be interest for the lender ANDo (b) The part reasonably regarded as an amount of income, other than interest, shall be included in income of the

T

NOTE: Minister can look at a transaction and determine that it is blended and determine the part that is reasonably regarded as interest (even if it differs from the agreement); This keeps people from hiding interest in capital (Groulx)

Groulx v. MNR (1967 SCC) – Court found blended payments from an increased purchase price- T sold farm for 395k; Purchaser paid 85k down and interest free payments over 7 years- MNR reassessed the years in question for instalments made in those years as blended payments

o Price had been inflated to include an “interest” amount – spread over the payments- Trial court found that the purchase price was more than the FMV; even though there was bargaining

o Evidence showed that price would have been lower, but for the willingness to give no interesto Normal rate of interest rate was 5-6%; T knew he could charge interest, but instead kept price higho Court deemed 5.5% of the purchase price to be interest paymentso Now interest amount owing, s. 12(3)/(4) would apply to include them in income under accrual model

Issue: Whether payments made could be regarded as part interest payments as per s. 16(1)?Held: YesComments:- If the price was at or below FMV, the Minister would have had a hard time finding interest included- Vanwest Logging (1971) and Carter (1964) – didn’t find the same increase in sale price – no interest includedRent and Royalties- Rent is generally a fixed payment; periodic; for the use of property for a given period of time- Royalties are amounts paid for the use and production of intangible property (copyright, trademarks, patents, scientific

knowledge, trade secrets, licensing fees, etc)o 2 entities agree to develop a mine – one will get 40% of profits and one will get 60%, that is considered a royalty.

- RULE: Where all legal rights are transferred, the transaction constitutes a sale of property- gives rise to profits. If less than all rights are transferred, the transaction is a lease or licence and the payments are rent or royalties.

o Gravel: “for every truckload from your land we’ll pay you $2000.” In law, you’ve transferred a limited profit-a-prendre and therefore you’ve sold part of your property. But many cases have found that the owner is receiving a royalty and therefore it has to be included as income.

Section 12(1)(g) – Payments Based on Production or Use- Amount received by T in the year 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 propertyo Prevents people from claiming capital sales when they licence the removal of a resource from property

- Note THAT ROYALTIES ONLY TAXED WHEN RECEIVED. Interesting because most of the entities receiving royalties would probably be on an accrual basis, so this is kind of like an exception to that.

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Wain-Town Gas and Oil (1952) – After-sale share in profits are royalties and subject to income tax- Franchise contract to supply municipality with natural gas; sold right to another company in exchange for share in the

gross receipts- Even though this was a sale of a capital asset, the share of the income was a royalty and is treated as income- See s.12(1)(g)

Note on Computer Software:- Software is really intellectual property- Click-wrap or shrink-wrap software, even though it is technically a license, is treated as a regular consumer good/income

from business- Custom software is treated as income from property (intellectual property)- Not a big difference tax-wise. May have cross-border implications (normally a payment of a royalty is subject to

withholding tax, whereas purchase price of a good isn’t subject to withholding tax)- But there is no withholding tax on artistic works according to the treatyDividends- Income received by shareholders by the corporation – distribution of income by share- Section 12(1)(j)/(k) include dividends from resident/non-resident corporations- Can be in cash or in kind (rare)- Are subject to the 25% withholding tax if being sent to a non-resident.

Deductions in Computing Income from Business and Property

- Deductions for business/property generally allowed unless there is a specific limitation (s.18)- The expenses are deducted on the basis of recognized accounting principles except where the act provides a timing rule or

some other rule (like s.67.1)- s.9 is your permission to deduct the expenses of the business or property. S.18 then applies the restrictions. (Daley)

Structure of the Act – Business/Property

Section 9(1)/(2) – Computation of net profit; deductibility of ordinary running expenses- Income/loss is your ordinary profit/loss from carrying on a business or investing in a property

Section 12 – Inclusions in Income of Business or Property- (c) – Interest received by T- (g) – payments based on production or use (royalties)- (j) – Dividends from Resident Corporations- (k) – Dividends from Non-Resident Corporations

Section 18(1) – Limitations on Deduction of Expenses – In computing income, no deduction in respect of:- (a) – Outlay or expense except to the extent that it was made or incurred by T for the purpose of gaining or producing

income from business/property- (b) – Capital outlay or loss - (h) – Personal living expenses, other than travel expenses incurred while away from home in the course of carrying on the

T’s business (Personal vs. Business – Symes, Benton) – see s. 248(1) as well.- (l) – Use of recreational facilities and club dues- (p) – Limitation regarding personal services business expenses- (r) – Automobile expenses – amount employer can deduct for allowance to an employee for using car

o Note also Regulation 7306 – sets out the max deductable amounts- (t) – Taxes paid under this Act; (note. S. 60(o) – T can deduct costs of objections or appeals) Can’t deduct penalties

charged under the ITA or interest on unpaid income tax

Section 20 – Specific Deductions Permitted- Notwithstanding the limitations in s. 18, there are some special deductions permitted- (1)(c) – Interest paid by T on amounts borrowed for the purpose of earning income from business/property

Section 67(1) – General “Reasonableness” Limitation- In computing income, no deduction shall be made unless that outlay or expense was reasonable

Income Earning Purpose Test

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Was the expense occurred in the course of, for the purpose of, incurring income?

Imperial Oil (1947) – If expense in ordinary course of business, then generally deductible- Collision at sea between two vessels; Imperial at fault; US Steele damaged; T had to pay; T deducted costsIssue: Is the cost of repairs to US Steele a deductible amount for T?Held: YES – expense arose as consequence of normal/ordinary risk of businessReasons:- Expenses that are part of normal business (negligence on the part of Imperial’s employees) are to be treated as deductible,

even where amounts are large- If it is an expenditure made as part of the income earning process, it will not be restricted by s. 18(1)(a) - No specific causal connection to income earning is required, just needs to be part of the overall business

o Looked at in light of the connection with the operation, transaction or serviceo You don’t have to prove that a certain expense related to a particular amount of incomeo Satisfying a legal obligation that arose in the course of carrying on a business is deductible.

Comments:- If T had received the income, would they have had to declare the settlement? Likely split amount:

o Surrogatum principle – the payment would be in lieu of lost-profits – taxableo Damage repairs are an investment in their capital property – not taxableo This shows the very permissive way that Canadian courts have allowed deductions for income from business or

property as opposed to income from employmento See London v. Thames Oil Wharves and Tsiapralis

Royal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally deductible, from T’s perspective initial fees are actually an recurring annual expense thus deductible- Attempting to deduct fees to allow employees membership at country club- Note: s.18(1)(l) – restriction on deduction for club dues – was not in force yetIssue: Are the membership fees paid for employees a deductable business expense? Employees were required to join these clubs. Part of it was the first-time membership application and part for annual dues.Held: - YES – deductibility is determined by ordinary principles of commercial trading (what does a businessperson think is

necessary to maintain the business?)- Unless specifically disallowed, generally any expense will be a valid business expenseReasons:- Membership dues were an expense as an income earning initiative – evidence shows business occurs there- Two requirements for deductibility:

o 1. Must be in accordance with commercial trading or business practiceso 2. Must be incurred for the purpose of producing income from the business

- Is the initial fee paid deductible as well? (Note Daley – initial fee was not a deductible expense!)o Yes, Royal Trust can deduct because from their perspective this was a recurring annual expense in a way because

each year they’ll have to pay some initial fees. Here, the annual recurring expense included adding new members and joining new clubs, so the initial fees are also a regularly occurring business expense and are therefore deductible.

o Compare to Daley where the one-time expense was not deductible because he was just going to pay it once.Comments: s.18(1)(l) now removes the deductibility of membership dues at clubs, yacht, etc.Daley v. MNR (1950)- Expense for a lawyer to transfer to a new location (cost of admission to the new Bar) deducted by T - Court held this was not an ordinary cost of business, this was an outlay on account of capital. The purpose of the outlay

was for an enduring right to carry on the business of law in Ontario. Note: this wasn’t annual dues, this was a one-time expense to pass the Ontario Bar.

- Significance: Court confirms that s.9(1) is where you claim your general expenses relating to acquiring income from a business or property.

- This renders s.18(1)(a) probably not necessary since s.9(1) covers it. Don’t claim expenses under s.18(1)a - that’s a restriction only. S.9(1) is the provision that gives the permission.

Personal and Living ExpensesSection 18(1)(h) – Personal and Living Expense- [No deduction shall be made in respect of] Personal or living expenses of the T, other than travel expenses incurred by T

while away from home in the course of carrying on the T’s business

Section 248(1) – “Personal living Expenses” Includes:29

- (a) Expenses of properties maintained by any person for the use/benefit of T or any person connected with T by blood relationship, marriage or common-law partnership or adoption, and NOT maintained in connection with a business carried on for profit (with a REOP)

- (b) The expenses for an insurance policy where the beneficiary is T or connected party- (c) Expenses of properties maintained by an estate or trust for the benefit of T as a beneficiary

Section 18(1)(l) – Use of Recreational Facilities and Club Dues- An outlay or expense made after 1971 for the use of a yacht, camp, lodge or golf course or facility OR as membership fees

or dues in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members

Recall Section 67.1 – Arbitrary limitation on expenses for food/drinks/entertainment to 50% of the amount spent

Benton (Thomas Harry) v. MNR (1952) – Expense has to be directly related to the business; only part of housekeeper’s salary is deductible- Farmer operated large farm with no employed farm hands; T employed a house-keeper to free him up for tasks around the

farm; T wanted to deduct the wages of the house-keeper because, but for her services, he would not be able to perform farming functions

Held:- NO – housekeeper is a personal expense. Only 40% of her labour can be linked to the farming function- Only 40% (the farm work portion) is considered a business expense, the things we do for ourselves are excluded- So, it’s not a “but for” test – the expense has to be directly connect to the income earningComments: Had he hired an employee for the farm work for the same wages, he would have been able to deductSection 63 – Child Care Expense Deduction- For each child under 7 – max deduction of 7k per year- Children between 7 and 16 – max deduction of 4k per year (child must be under 16)- Must be able to produce receipts to claim deductions (i.e. you have to actually spend the amount)- Earned income refers to income from employment or business but not property

o I.e. Why? Income from property is passive and you could look after your children- Deduction cannot exceed 2/3 of the lower income spouse’s income

o Expenses must be to allow business or employment o Payments to the child’s own parent, the taxpayer’s dependent or a relative under 18 do not qualify

- This is a deduction, not a credit. Therefore, it’s worth more to high-income earners. Because a high-income earner has a higher tax rate, they are saving more when you give them a $7000 deduction (i.e. $7000 X 0.40 rather than $7000 X 0.29)

- This rate has not changed since 1998Commuting Expenses

Recall: section 8(1) – specifically, work transportation as deductable against income from office/employment- Martyn – Airline pilot, travel to and from work is not deductable under s. 8(1)- Hogg – wanted to deduct cost of driving from home to courthouse, denied

Dr. Ross Henry – Travel from/to home is not deductible from income from business/property- Anaesthetist working at RJH; before times of medicare, so clients paid T directly- Also had an office shared with a group of doctors that was managed by one person in terms of billings- Did not see patients at their home; would drive to and from the hospital, and would drive from his house/hospital to the

office as well; T wanted to be able to deduct all of the transportation- He could deduct from the office to the hospital because that’s travel for business purposes. Also, the emergency trips

between his home and the hospital could be deducted.- But, can he deduct the travel from the home to the office or hospital?Held:- NO – from home to work is the same as anyone going to work – does not occur in the course of business- If he’s moving between sites where business is carried on, then he may deduct

Also note McCreath – home-office to primary office is not a deductable transportation costMoving Expenses- Bayett – a move at a later date to the date of employment in the new location is fine so long as you’re moving to a place

closer to new work location than your old residence- If you move your home office from one place to another, the expenses are not allowed – missing the four essential

elements: old work; new work; old home; new home- Public policy: We want people to move to make more money because then they’ll pay more tax and we won’t have to pay

them EI30

- Example: Canadian ambassador in NYC – s.250(1)(c) deems him a Canadian resident, he moves back to Ottawa. He has to pay the moving expenses himself. Because he’s a deemed resident, he can claim the expenses.

- Moving expenses are largely personal, and moving allowances therefore have to be included in income (s.6(1)(b)). It’s NOT an exempt allowance!! Include it in your income, and then deduct your expenses. If it’s a reimbursement, then you don’t have to report anything.

- If you’re a (non-working) student, you need to have taxable scholarship income to claim a deduction for your moving expenses.

- See IT470R- Sample problem p.384.

o Her principal place of business so qualifieso Max she can deduct is $15,000 - $8000 from the business expenses and $7000 from the home office expenseso But in the second year she can deduct $28,000 in new expenses and the $13,000 from year one. She has enough

income in the second year to do this.- Sample problem p.382

o This is the Ross Henry situationo B) if the home office qualifies as a home office, Martha says there is an argument that it should be deductible (no

case on this) CRA will say this is commuting from home to the office. T will say I am commuting from two places of business/bases of operation (Ross Henry)

o C) Not deductible.o D) Not deductible.o E) Deductible. Show that the home office is a true base of operations (therefore has to qualify under s.18(12) or

VERY close to qualifying under s.18(12)o McCreath – chairman of NS Liquor Corp. 70% of duties performed at home. Lived 55km from corp office. Received

an allowance for travelling from his home to the corp office (would have been an exempt allowance...but CRA says that it was a non-exempt allowance because it was simply a commuting allowance and was therefore taxable) McCreath lost on appeal – court said you work at home for your own convenience. So, “is the home office for business purposes or is it merely for the convenience of the taxpayer?” will be considered. Courts not very open to the idea that you can deduct costs from home office to workplace office...

Section 62(1) – Moving Expenses- There may be deductable from T’s income from a tax year amounts for expenses incurred for moving in respect of an

eligible relocation, to the extent thato (a) They were not paid for on T’s behalf by the T’s office or employmento (b) They were not included in a previous yearo (c) The total of those amounts does not exceed the amount earned from the employment or business in the new

locationo (d) All reimbursements and allowanced received by T in respect of those expenses is included in income

Section 62(2) – Moving Expenses for Students- There may be deducted for a tax year, the amount that T would be entitled to deduct under (1), for attendance in full time

study

Section 62(3) – Definition of Moving costs- Moving expense includes:

o (a) Travel costs (including reasonable amount on meals/lodging), from old residence to new residenceo (b) Costs of transporting household effects from old to new residenceo (c) Cost of meals and lodging near the old residence or new residence for up to 15 dayso (d) Cost of cancelling lease at old residenceo (e) Selling costs of old residenceo (f) Legal fees and transfer taxes of the new propertyo (g) Interest, property taxes, insurance premiums, utilities up to $5000 for the period where the old house is left

empty and reasonable efforts are made to sale ito (h) Revision of legal documents to reflect the new address of T’s residence

- But, does not include (other than costs in (f)), the costs incurred by T of the acquisition of the new residence

NOTE: s. 62(3)(c) – is not limited by the arbitrary 50% rule in s. 67.1 – full deductibility for up to 15 days

Section 248(1): “Eligible Relocation”- Means a relocation of the T to enable T to carry on a business or to be employed in Canada, OR to be a student in full-time

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attendance enrolled in a program at post-secondary level, where both locations are within Canada, AND distance between the old residence and new work location is not less than 40km greater than the distance between the new residence and the new work location

o The test used to determine distance is the “shortest normal route open to the travelling public”

Section 56(1)(n) – Amounts to be included in Income for the year – Scholarships/Bursaries- The amount that T’s scholarships and bursaries or prizes for achievement in a field of endeavour ordinarily carried out by

T, exceed the T’s scholarship exemption for the year under (3)- Almost everything would be exempt

Section 56(3) – Scholarship/bursary/prizes Exemption- T’s scholarship exemption for a tax year is the total of – generally all scholarships/bursaries/prizesHome Office Expenses

Section 18(12) – Workspace in Home- Notwithstanding any other provision of the Act, (such as s. 8(1)(f) and (i) – sales worker for commission expenses | dues

and other business expenses)- (a) No amount is deductable from income from office/employment in respect of any part of a home office EXCEPT to the

extent that the home office is either:o (i) It is the principle location of the office/employment duties, ORo (ii) It is used exclusively for earning income from office/employment AND used on a regular basis for meeting

customers in the ordinary course of duties- (b) Where (a) is satisfied, the amount that is deductible from income for the year from office/employment shall not

exceed the T’s income from that office/employment; AND- (c) Where denied deduction because of (b), losses can be carried forward until income from employment exceeds the

losses and the deduction can be used

NOTES:- Home office expenses are often difficult to characterize- Theoretically, held to the same “reasonableness” standard of other business expenses, but it is difficult to rebut the

presumption of personal use- Cannot create losses, but losses can be carried forward and applied against gains from the same office/employ- Amount should be based on reasonable allocation of costs attributable to the home office

o Determined by the amount of space occupied by the office against the total home areao Ratio used to apportion expenses from home costs (mortgage, taxes, utilities, phone, internet, etc)

McCreath (2008 TCC) – Travel between home-workspace and place of employment not deductible if the home office is just for convenience- T received a per-km allowance from employer for home to office travel- Minister assessed it for tax – not an excluded allowance because it is just regular travel to and from work; the home office

is for convenience, and is not required, primary office is still elsewhere- Court agreed with Minister’s argumentsComments:- Where the home office is the primary place of business, the travel between home-office and secondary work location may

be deductible – no case law on that!Example Problem – Home Office Deductions and Carry-forward- T is a self-employed lawyer – income is income from a business- T owns a house in which the basement is used as the law officeYear 1: T bills 15k income – whether paid or not, as receivable from his clients- Expenses: 20k of the mortgage interest, utilities and taxes; 1k for stationary; 5k for part-time secretary; 2k for

telephone/fax/Internet (so that’s 8k in non-home office expenses (5+2+1k) – regular business expenses)How much can T claim from his income in the first year?- 28k in expenses; and 15k in profit – so she’d be left with a loss of 13k- So she can deduct 15k (s. 18(12)(b)): 8k from the non-home-office and 7k from the home-office expenses

o This leaves 13k of expenses that cannot be deducted in year 1 (carry forward – s. 18(12)(c))Year 2: T bills 100k in revenue and 28k in expenses (same amount in expenses as year 1)- So now she can deduct the full 28k year2 expenses and bring forward the remaining 13k from the previous year against

the 100k profit; That reduces her income from business in year 2 to 100- (28+13) = 59k

Deduction of Interest Expense – see handout

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Recall: s. 18(1)(b) – prohibits deductions outlays of capital – at CL, interest is generally a payment on capitalSection 20(1) – Deductions Permitted in Computing Income from Business/Property- Notwithstanding 18(1)(a), (b) and (h), in computing income from T for a year from business/property, there may be

deducted such of the following amounts as may reasonably be regarded as applicable to:o (c) An amount paid/payable in the year, pursuant to a legal obligation to pay interest on:

(i) Borrowed money used for the purpose of earning income from business/property (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

NOTE: Timing (accrual vs. cash accounting); requirement of legal obligation; income earning purpose required; limitation where income which is earned is exempt; based on “reasonable” deduction standard

The Queen v. Bronfman Trust (1987 SCC) – Requirement that borrowed funds be used directly for an income earning purpose to claim interest expenseFacts: Trust borrowed funds to make distributions to the beneficiary. Argued that if they had made disbursements out of the trust and borrowed to replenish the investment, the interest expense would be deductible, and that since the borrowed money indirectly preserves income-producing assets it should be deductible on this basis. Held: The interest expense is not deductible. In obiter: “Assessment of T’s transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon T’s sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.”

Singleton (2002 SCC) Court rejects true economic purpose approach; instead analyzes legal relationshipsFacts: T argued that he took his partnership equity out to buy a house and then borrowed to put the equity back in the partnership (which would be deductible). If he had borrowed the money for a house, that would not have been deductible. Issue: Was the borrowed money used for the purpose of buying a personal residence or for investing in the partnership?SCC: As a matter of law, you’re not supposed to look for the true economic purpose, you’re supposed to look for the legal relationships. Should he be able to take his capital out (it’s his and he’s paid tax on this) and refinance by borrowing? T says he should be able to finance his business with debt or equity. COURT REJECTS TRUE ECONOMIC PURPOSE APPROACH – which Bronfman seemed quite open to. Court quotes Shell: “this court has never held that the economic realities of a situation can be used to recharacterize a taxpayer’s bona fide relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer’s legal relationships must be respected in tax cases.”- Example of a provision to the contrary: Blended payments section that specifically overrides what the agreement is

between the parties. (s.16(1))- Sham is fraud. A series of transactions where what is reported is different than what happened (false docs for CRA and

real docs for themselves)Held: You’re entitled to minimize your taxes if you report everything accurately and everything is in accordance with the act.

Policy Reasons for Denying Deductions

Eldridge (1964 Exch Ct) Expenses for illegal business are deductible insofar as they can be proven- T running an illegal call girl service; T declared her income and listed her expenses; no receipts- Claimed things like: legal fees, paying off police, BC tel, hotel fees, etcIssue: Were these illegal activity expenses deductible?Held: Expenses for illegal businesses are deductible, but only insofar as they can be provenReasons:- Without receipts, majority could not be proven anyways- Rents were allowed, legal fees were traceable and considered as benefits to employees; assistance for bodyguard

protection was deductible where could be proven- Cost of buying out all publications of the newspaper to protect her business – not covered because court found the press

was not harmful to her businesso Question: did the court have the right to question the favourability of the press? Is it not an expense? Martha

thinks this was an error of law.

Recall: Buckman – where lawyer embezzled funds from clients – income was taxable, and expenses would be deductible as wellBribery of Certain Officials – s. 67.5- Required by the Bribery of Foreign Officials Treaty which Canada signed- Bribes given to judicial officers/MPs/MLAs/Police/etc are no longer deductible

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- Covers mainly the corruption offences of the CCCo S. 119 bribery of judicial officers, MPs, MLAso S. 120 bribery of justice, peace officer, police commissionerso S. 121 frauds on governmento S. 123 municipal corruptiono S. 124 selling/purchasing officeo S. 125 influencing/negotiating appointments or dealing in officeso S. 393 fraudulently obtaining transportation (bribing fare takers)o S. 426 secret commissionso S. 465 conspiracy

Fines and Penalties – s. 67.6- No deduction for fines/penalties imposed by law or by a person in authority to impose it- Damages and contractual penalties are deductible if they meet the test of deductibility under s.9, paragraphs 18(1)(a) and

(h). (See Imperial Oil and IT-467R2)Policy: - In some cases it would be profitable for a business to contravene regulations and take a fine in order to be more profitable

if the fines/penalties were deductible- By removing deductibility on bribery, there are no tax-law incentives for attempting such an act- Public morality; cohesion with criminal law; public protection; social values; etc

Computation and TimingCapital vs. Current Expenditures- Current expenses occur day-by-day/month-by-month/etc; Salary, supplies, advertising, insurance etc- Imperial Oil – payments that occur as a result of business, even where large can still be deductible expenses- Capital expenditures, however, are not tax deductible – they are capital outlays that can be added to the overall ACB of the

larger capital asset, or held as a distinct capital asset in and of itself

Recall: s. 9(1) income for business/property is net profit; (2) loss is T’s loss from the business or propertySection 18(1)(b) – Capital Outlay or Loss- [In computing income from business/property, no deduction shall be made for] an outlay, loss or replacement of capital, a

payment on account of capital… (remember s.20(1)(c) which makes an exception for interest!)

Basic Test: Does the expenditure result in an enduring benefit or advantage to the business or property source?

Classic examples of outlays on account of capital:-Buying equipment (capital property – provide an enduring benefit to business)-Buying inventory (items either for resale or to be incorporated into things you sell).

British Insulated and Helsby Cables Ltd v. IRC (1926 HL) – One time payment to create asset - capital- T made a lump-sum payment to a pension fund to serve as a nucleus for the fund and to ensure older employees ranked

appropriately- T deducted lump sum payment as a current expenditure; Minister said it was a capital expenditure (not deductible)Issue: Whether the lump-sum payment to the fund was a capital expenditure or a deductable current expenseHeld: This was a capital expenditure and cannot be deductedReasons:- When an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a

trade, there is very good reason to treat the expenditure as a capital expense- Here, payment not made as a gift/bonus, but to form a nucleus. This is for the benefit of the older employees. The monthly

contributions T makes to match employee’s payments are deductible, but this was differento One time payment, used to create this asset – that is a capital outlay

General criteria but NOT decisive in every case:o Capital expenditure – going to be spent once and for all o Income expenditure – going to recur every year

Analogy to Vickers: Shipbuilding firm needed access to open sea so it dredged a canal for ships to go through. Found to be an outlay on account of capital – not a running expense of the business.

Repair of Tangible Assets

Test: Is the asset substantially different from what it would be if repairs were not required? (Gold Bar)- Improvement of the asset alone is not determinative – all repairs generally improve the asset

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- Must look to whether the repair was actually required as well- A new marketable asset may be a capital asset even if required by the main asset (Canada Steamship)- Part of an expenditure may be a capital expense and part of it a repair expense (Shabro) Check if part of it resulted in an

upgrade. However, new technology can be used to effect a repair without it being considered a capital expenditure (Shabro, Gold Bar)

Canada Steamship Lines Ltd v. MNR (1966 Exch) – Boiler of the ship is a capital asset itself- T paid for expenditures of two types:

o 1. Expenses for replacing wear and tear items on boat; 2. Expenses to replace boilers on the shipIssue: Were the expenditures capital expenditures or simply repair of capital assets?Held: - 1. Deductible – clearly ship repairs – so these were repair of capital assets and deductible expenses- 2. Machinery within a ship is a capital outlay and non-deductibleReasons:- 1. Clearly ship repairs – even though for new floors and walls – not marketable in and of themselves

o Substantial costs do not change the fact that they are still deductible as repairs of capital asset- 2. Could be considered as separate capital assets or as repairs of the larger capital asset (boat)

o Because boilers are marketable as assets on their own, they are a capital asseto When it’s the power plant of the ship, it’s not a repair, it’s a capital outlay

General idea: An outlay that replaces a capital asset will be capital outlayAn outlay that merely repairs or maintains a capital asset will be a deductible expense.

The Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building, both capital outlay and current expenditures but single operation so deemed all capital outlay- Two story building with concrete slab floor built on garbage dump; floor cracked- T installed new flooring and support system for foundation - $95k claimed as deductionIssue: Were the expenses for the new floor and new steel piles repairs or capital outlay?Held: Capital outlay – word differed from regular repairsReasons:- Sinking of the steel piles is a capital outlay because this is a new and better asset for the building- Replacement of the floor – would generally be wear and tear

o Using new tech or addressing new knowledge (i.e. mould) does not necessarily prevent something from being a repair

o Poor construction and vandalism are also valid reasons for current expenditure for repairso BUT, here replacement of floor and sinking of piles was a single operation – capital outlay

- Re: Replacement of other stuff affected in building; the test is whether you’re making a material and significant improvement/upgrade. This is sent back for reconsideration b/c tax court got the test wrong. Martha suspects they would be deductible.

- “Generally speaking, replacements of worn or damaged parts, even though substantial, are repairs and are to be contrasted with changes designed to create an enduring addition or improvement to the structure.”

Gold Bar Developments Ltd v. The Queen (1987 FCTD) – New test outlined for finding repairs over capital: was there a choice to repair?- Apartment building had an entire wall that was unsound; instead of using replacement bricks they used better metal

cladding – cost of 200kHeld:- The expenditures for the new wall are repair costs and thus deductible

o They don’t significantly change what the building would be if it were built correctly from the startReasons:- Improvement of the asset is not a definitive test – because generally the asset is improved after repairs- Did T have the choice to repair? Were they doing it to make the asset different or better?- Here the repair was required for the proper maintenance; Not voluntarily undertaken to improve the value of the building.

Once you are forced to undertake an expenditure, then you don’t necessarily have to use the same product (i.e. the bricks) - “What was done was neither more nor less than was required to replace the deteriorating and dangerous brick condition”- Compared against the value of the property (8M), the cost of repairs (200k) is not out of the question- Is the building substantially different from what it would have been if the bricks were sufficient at the start?

o No. This is not an actual improvement, this is a repair.- “An expenditure which is in the nature of a repair will not be allowed as a deduction from income if it becomes so substantial

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as to constitute a replacement of the asset.”- Note: Difficult to find any difference between the wall in this case and the concrete floor in Sabro

Timing – Amounts Receivable

Recall: Section 12(3)/(4) – avoids the delay of taxes on amounts receivable – specifically interestSection 12(1) – Income Inclusions- There shall be included in computing income from T for a year from business/property such of the following:

o (a) Any amount received by T in the course of business in compensation for goods delivered in a subsequent year (eg. Retainer at a law firm is for services in the future, still must be included)

o (b) Amounts receivable by T in respect of property sold or services rendered in the business year, even where not due until a subsequent year; the amount shall be deemed to have become receivable on the day that is earlier of:

(i) The day on which the account in respect of the services was rendered, and (ii) The day the account would have been rendered had there been no undue delay

CASE LAW RULES:- Receivable amounts must be included in income – where T has a legal right to payment (J Colford Contracting)

o The legal restrictions/conditions must be removed. At that point, you must include. o Where everything has been done to give rise to an entitlement to be paid (West Kootnay Power)

- An amount is not “receivable” until the actual amount owed is ascertained (Benaby Realties)o Absolute certainty is not required – sufficient certainty triggers inclusion (West Kootnay Power)

- Not receivable where the payment is still contingent on some condition precedent (JL Guay)

J. Colford Contracting – When an amount becomes receivable, it must be included in income- T is a corporation with year end March 31; - T had a contract whereby they were not entitled to the remaining 15% of the money owed to them until architect

certificate was issued; When issued, the amount becomes receivable within 30 days, but can’t sue for it until the end of the 30 days is up

- Payment of the K was received before the end of the year and remaining 15% was paid the next yearIssue: Whether the remaining 15% was a receivable amount in the current tax year?Held: YES – must be included in the current yearReasons:- T had the legal, but not necessarily immediate, right to the payment

o Receivable means entitlement; when restriction removed, then it becomes part of income receivable- Architect certificate was received in the current year, so the amount became receivable even though the company couldn’t

sue for it until the next “year”

Benaby Realties – An amount is not ‘receivable’ for tax purposes until the actual amount is ascertained- Expropriation of property owned by T; Crown announced expropriation before year end; in the subsequent tax year, the

Crown actually paid for the land. Sidenote: Here, the land is not a capital asset – it is inventory of the business and thus taxable as profit in the business

- T arguing that the profits should be included in the previous year – probably because they had losses that were going to expire. Argues that since the time when expropriation announced T had a right to receive the amount.

Issue: Was the amount receivable in the year of expropriation or the year paid?Held: - T had the right to receive as of the date of expropriation, but until the amount was ascertained, there is nothing that can

be taken into account as the amount receivableo The valuation occurred after the tax year had ended

- Therefore, the profit is to be accounted in the year the valuation occurred – which is the year T was paid- An amount can “not be regarded as a trade receipt for the purpose of ascertaining the appropriate year of assessment until

the amount was fixed”

West Kootenay Power and Light (1992 FCA) – Receivable means: everything has been done that is required to give rise to entitlement to be paid – even where customer is not legally obliged to pay at that moment- T bills customers every two months; The period at the end of the tax year was unclear as to how much owed- As of the company’s year end, it would have delivered electricity that it had not been paid for.- T included the unpaid power income estimate in their financial statements, but did not include it in their taxes- According to Colford, the company would have a receivable because they are entitled to the payment- But, they are relying on Benaby – the fact that the amount is not ascertainedIssue:

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- Does T have to include its revenue for the year as inclusive up to the last day of the year, even though mid-bill?Held: The estimated revenues are receivable and should be included in the yearly income. The court wants the company to reflect the truest image of what the income in the year was.Reasons:- The company can estimate very accurately the amount that they are entitled to be paid. Here, the receivable is sufficiently

ascertainable- Receivable means that everything has been done that is required to give rise to entitlement to be paid; Even though

customer is not legally obliged to pay at that moment- Having delivered the electricity, there is an entitlement to be paid, even though no bill yet- Good delivered, therefore a right to be paid – becomes receivable (s. 12(1)(b))Note: this is not the rule for everything; the court will look at the business and the circumstances, but the court wants the truest picture where that is possible.

JL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent- Construction: 10% holdback that doesn’t have to be paid until engineer’s certificate issued- 30 days are given before payment is due; T was claiming large deduction even though the architect certificate had not

been issued; Minister claimed not deductibleHeld:- This is a contingent amount based on architect certificate – condition precedent needs to be released before there’s any

obligation to pay or amount payable- Cannot deduct until that condition precedent is released- This is basically just the reverse of Colford- Note: Court is stricter about being able to make deductions than they are about including amounts as receivable!

Non-Capital Losses

Recall: s. 3(a) – Income is the total amount from all sources (profits); s. 3(b) – Calculates the amount T’s capital gains exceed T’s capital losses; s. 3(c) – Adds profits from non-capital and any positive capital gains; and s. 3(d) allows T to offset the total in (c) against the non-capital losses experienced by T in the year- Note: Non-capital losses can be used against all incomeSection 111(1)(a) – Carry Forward and Back of Non-Capital Losses- Non-capital losses can be carried forward 20 years and back 3 years- An overall loss from sources in a year can be applied against any income in future/past years

Capital GainsTaxation of Capital Gains and Losses: 3(b) and subdivision E

RECALL:

- Section 3(a): Requires income (positive income only) from all sources to be determinedo Requires calculation of revenue and deductible expenseso Sources: enumerated in s.3(a); “other sources” in s. 56; and possibly unenumerated sources

- Section 3(b): Requires calculation of taxable capital gains from all property other than LPP, and the taxable net gains from LPP, and subtract from those two amounts the allowable capital losses from property other than LPP. This results in a net taxable capital gain or net (allowable) capital loss.

o Net capital gain is included in income; net capital loss may be carried forward or back and set off against taxable gains in those years (s.111(1)(b)) – CANNOT be set off against income from sources

- Section 3(c): Requires the amounts in 3(a) and 3(b) to be added together and then the deductions allowed by subdivision E are claimed; Not dependant on the source, so much as they are the nature of expenses;

o Includes moving expenses; childcare expenses; etc

- Section 3(d): Allows for the deduction of non-capital losses from the enumerated and other sources; Excess non-capital losses may also be carried forward and backward (s.111(1)(a))

Subdivision ‘E’ Deductions: Deductible against all income, regardless of source- Recall s. 62 – Moving Expenses – discussed above in Personal and Living Expenses- Recall s. 63 – Childcare ExpensesDistinguish Income from Property: 9(3)

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Section 9(3) – Gains and Losses Not Included- In this Act, “Income from a Property does not include any capital gain from the disposition of that property and “Loss from

a Property” does not include any capital loss from the disposition of that propertyCalculation of Capital Gains and Capital Losses:

Section 39(1)(a) and (b) – Meaning of Capital Gain and Capital Loss- Capital gain and losses are gains and losses from the disposition of any property, excluding gains and losses from

dispositions of property that are taxed as income from a source- (1)(b)(i) Exception in definition of capital losses for depreciable property

Section 40(1) – Gains and Loss Calculation

- EXCEPT as otherwise provided in this part:

- (a)(i): T’s capital gain is the PoD of the property, minus the ACB and any outlays or expenses incurred to make the disposition

o CG = POD – (ACB + expenses of disposition)

- (b): T’s capital loss is the ACB plus the outlays or expenses of making the disposition, minus the PoDo CL = ACB – (POD + expenses of disposition)

NOTE: No express provision for the inclusion of expenses, but generally accepted that ACB includes property taxes, fees and other expenses incurred to complete the acquisition – IT285R2 para 8: the term “capital cost of property” generally means the full cost to the T of acquiring the property and include legal, accounting, engineering and other fees incurred to acquire the property.

Section 38(a) and (b) – Taxable Capital Gains / Allowable Capital Losses- Taxable capital gains are ½ of the T’s capital gains; Allowable capital losses are ½ of T’s capital lossesCarry Forward and Back of Capital Losses: 111(1)(b) and 111(2)(a)

Section 111(1)(b) – Net capital losses can be carried back three years and carried forward indefinitely- Note, capital losses can only be deducted against capital gains

Section 111(2)(a) – Where T dies, and there are remaining net capital losses, these losses can be converted to a non-capital loss to be used against any income in the year of death or (and) the previous tax yearPolicy Evaluation of Preferential Taxation of Capital Gains- Capital gains are more favourable to T than employment/business income- Currently the highest tax rate is 43.7%, but you would only be taxed on 21.85% of capital gains at that rate- Until 1972, capital gains were outside of the ITA and therefore exempt- Capital gains and policy:

o 1. Greater Equity: Vertical – richer people tend to create higher capital gains yet these are taxed less; Horizontal – both a capital gain and employment income are benefits but one is taxed at 50%

o 2. Neutrality: Huge influence on individual choices; people structure their affairs to have capital gains.o 3. Certainty: Capital gains is the most commonly litigated area, so may not have achieved this goal

- Full taxation of capital gains would discourage investment by individuals and corporations- Effective tax rate on capital gains became 50% of that on other income

o Note: part of a capital gain is probably due to inflation if you’ve held something for a long time. But with shares that is not necessarily the case (i.e. you sell them after a week), yet both treated the same.

- T has a lot of control regarding when to dispose of the capital property and then pay tax. - Lifetime exemption for capital gains – Fishing/farming/small business corporation shares up to 750k (375k deduction)- Capital losses receive less relief than other types of losses because generally capital losses are deductible only from capital

gains and not from other sources of income- Capital gains are not realized/taxable until the property is actually disposed of

Definitions

Recall:- Regal Heights – Mall development failure – secondary purpose to flip – ACNT - Taylor – Single purchase of lead for company – similar to the regular trading of lead – ACNT - Irrigation Industries – Farming company investment in mining – share trading is capital – NOT ACNT

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- Arcorp Investments – Trading company – regular business is trading shares – business income

Section 248(1) – “Property”- Property of any kind whatever whether real or personal or corporeal or incorporeal and includes:

o Right of any kind whatever, a share or a chose in action;o Money, unless contrary intention;o Timber resource property; ando Work in progress of a business that is a profession

Section 54 – Definitions

- “Capital Property”: any depreciable property and any non-depreciable property who’s POD would be a capital gain or capital loss

- “Adjusted Cost Base”: to a T of any property at any time means:o Where depreciable property, ACB is the capital cost to T at that timeo Non-depreciable property, ACB is the cost to T adjusted as of that time (s. 53)o ACB = capital cost at purchase + expenses of acquisition (transfer tax, legal fees, etc)

Section 43(1) – General Rule for Part Dispositions- For computing T’s gain or loss for the disposition of part of a property, the ACB of the part that was disposed of that could

reasonably be regarded as attributable to that part immediately before disposition

Section 47(1) – Identical Properties (Averaging Rule)- After 1971, where T owns property that has two or more identical properties and acquires one or more of those

properties…o The overall ACB becomes the average of the total combined ACBs for each propertyo Used for stocks/shares/mutual funds “average position” (has to be in the same class so that they have the same

rights)o Mutual fund trust – trustee delegates to financial managers who will buy lots of different shares from different

companies. Spreads the risk throughout a particular area of the economy. Idea is that you buy units in a mutual fund trusts. You share with all other unit holders on the basis of how many units you buy. Equal to any other unit of that trust of that class.

o Why have this rule? So that people don’t have undue control over when they realize gains and losses.Example – Identical Properties:Bob makes the following purchases of common shares of X Corp:- Purchase 200 shares of X for $1 per share on March 1, 2004- Purchase 100 shares of X for $1.50 per share on September 15, 2006- Sale of 100 shares of X for $1.60 on January 15, 2007The Act does not allow T to choose which of the T’s identical properties are acquired/disposed of at a particular time. It achieves this objective by forcing T to average all the ACBs of the identical properties at any given timeSo Bob’s ACB of each of his identical shares is the average of all the ACBs of the shares- 200x1=200; plus 100x1.5 = $350; Then the total amount is divided by the number of properties- 350/300 = 1.17; So B’s capital gain on 100 is 1.60-1.17 x 100 = $43 - s.38(a) states that B’s taxable capital gains are ½ of his total gains = $21.5Section 248(1) – “Disposition” INCLUDES: (gift?)- (a) Any transaction or event entitling a taxpayer to proceeds of disposition of the property- (b)(i) Any transaction where property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar

property, the property is redeemed in whole or in part or is cancelled- (b)(ii) where property is a debt or any right to receive an amount, the debt is cancelled or settledBUT DOES NOT INCLUDE- (e) Transfer of property as a consequence of which there is no change in the beneficial ownership EXCEPT:

o Trust transfers (listed)- (j) Transfer of the property for the purpose only of securing a debt/loan or transfer by creditor for purpose of returning

property used as security for a debt/loan- (l) Issue of a bond, debenture, note, certificate, mortgage AND- (m) Issue by a corporation of a share or its capital stock, or any other transaction that would be a disposition by a

corporation of a share of its capital stock

NOTE: “Proceeds of Disposition” defined in section 54 (a-f)

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- Price of property sold; compensation of property stolen; compensation for property destroyed; compensation for expropriation; compensation for property injuriously affected; compensation for property damaged and any amount payable in respect of damage

Compagnie Immobiliere BCN (1979 SCC) – Disposition and POD – stat/normal meaning- Broad definition to disposition. “Definitions of ‘dispositions 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”

Deemed Dispositions and Deemed ProceedsSection 128.1(1) – Immigration (we are only going to use this for individuals)

- (b) [Where T becomes resident of Canada], immediately before the time immediately before the time of becoming a resident, T is deemed to have disposed of all properties owned by T, for their FMV at the time of disposition (shares, bonds, mutual funds, real property situated outside Canada)

o (i) Except for property that is taxable Canadian property (where T is an individual) i.e. Canadian real property and shares of private Canadian corporations You don’t get a step up here because the gov wants to tax you on the whole thing.

- (c) T shall be deemed to have acquired the properties disposed of in (b) at FMVo This becomes the ACB of the property – only taxed on gains while actually resident in Canada

Note: this overrides the general rule that gains are not taxed until realized. Problem because you still have to pay the tax...have to find money to do so. Section 128.1(4) – Emigration- (b) [Where T ceases to be resident in Canada] T is deemed to have disposed at the time immediately before the time

immediately before the particular time, of each property owned by T for FMVo (i) Except for real property situated in Canada, where T is an individual (Why? No risk that the property won’t be

taxed when disposed of. It can’t be taken with you out of the country)NOTE THE DIFFERENCE: Shares of Canadian private corporations are taxed for their capital gains on your way out!Gifts and Sales Below FMV to Non-Arm’s Length Persons

Section 251(1) Arm’s Length- (a) Related persons shall be deemed not to deal with each other at arm’s length- (c) It is a question of fact whether persons not related to each other are at a particular time dealing with each other at

arm’s length

Non-related Arm’s Length? – Question of fact:- Requires an examination of all the facts and circumstances existing between the two persons- Unrelated parties have been found not to be dealing at arm’s length when

o There is “a common mind” which directs or controls the bargaining for both sides ORo The two persons act in concert without separate interests (i.e. to help one get a particular tax result)

Section 252(2) – Definition of “Related Persons”- (a) Individuals connected by blood relationship, marriage or common-law partnership or adoption;- (b) A corporation and

o (i) A person who controls the corporation, if it is controlled by one person; (enough shares to elect the Board - over 50% of shares);

o (ii) A person who is a member of a related group that controls the corporation (people who are related to a person/corp who controls- family relationships, in-laws, brothers and sisters, grandma, of the person(s) that controls the corp. i.e. if Ralph and Wife own 51% of the shares, they are both related even though they each own half of that) OR

o (iii) Any person related to a person described in (i) or (ii)- (c) Any two corporations if they are controlled by the same person/group of persons

Note: 251(6)(b) and (b.1) make spouses and common law partners related to each other, and to the persons who are blood relatives of their spouse or CLP. This means “in-laws” are related.

Common law partnership: (proposed amendment to the definition): a person who cohabits at that time in a conjugal relationship with T and has so cohabited throughout the previous 12 months, OR would be a parent of a child of whom T is a

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parent (either a biological or adopted child) This means you don’t have to live together for the full 12 months prior if you already have a child with them (but you still have to be living together at the time) They become CLP as soon as they cohabit. Once you have cohabit in a conjugal relationship, it’s considered to continue unless you live apart for 90 days because of a breakdown of the relationship.

Section, subsection, paragraph, subparagraph111(1)(b)(i)

Note: wiebe door and then personal services business and then specified shareholder.

Section 69(1) – Inadequate Consideration – Gifts and Below FMV Sales- Except as expressly otherwise provided within the Act,

o (a) Where T acquires something when not dealing at arm’s length at an amount more than FMV, then T is deemed to have acquired it at FMV (i.e. can’t increase your ACB by paying more to your bro)

o (b) Where T disposes of something for no proceeds or proceeds less than FMV not at arm’s length, or to any person by way of gift inter vivos, T is deemed to have received POD of FMV (potential trap***)

o (c) Where T acquires a property by gift/bequest/etc, T is deemed to acquire the property at FMV

***when you have consideration of $1 for family cottage, mom will have POD of $50,000, son will only have ACB of $1 – so will be taxed twice on the value up to $50,000! If you want to give a gift of capital property, make it an actual gift!

Note: When transferring at less than FMV, giver is deemed to have disposed for FMV, but there’s nothing that deems the recipient to have acquired the gift at FMV (unless it was for inheritance/bequest that required the beneficiary to pay some amount less than FMV – see s. 69(c) / s. 70(5)(b)) Note the potential for double taxation hereSection 70(5) – Capital Property of a Deceased Taxpayer- Where T dies in a tax year:

o (a) T shall be deemed to have, immediately before T’s death, disposed of each capital property of the T and received POD equal to the FMV of the property immediately before death

o (b) Where T acquires any property that is deemed to have been disposed of by someone’s death, T shall be deemed to have acquired it at the time of the death at a cost equal to FMV immediately before death (ACB = FMV)

Note: if recipient is a spouse or CLP, refer to s. 70(6) - belowLottery Winnings Revisited

Recall: LeBlanc – arguing that gambling was not a source of income; court held that there was no way to minimise T’s losses and the risk was maximized, so this was not a business source – not income that is taxable

Section 40(2)(f) – Limitations – Right to a Prize- T’s gain or loss from the disposition of a chance to win a prize or bet OR a right to receive an amount as a prize or as

winnings on a bet, in connection with a lottery scheme or a pool system of betting is NIL- Pay $100 for ticket, lose, you have no gain or loss (chance is disposed of when draw is made and you didn’t win)- If you did win, the gain is nil – non-taxable

Section 52(4) – Cost of Property Acquired as a Prize- Property acquired by T after 1971 as a prize in connection with lottery scheme is deemed to have been acquired at a cost

to T equal to FMV at that time (ACB is value of the house at the time you win it – not the cost of the lotto ticket you bought)

Rollovers: Transfer of Capital Property to Spouse/CLPSection 248(1): “Common-Law Partner”- Means a person who cohabits at that time in a conjugal relationship with the T AND

o (a) Has cohabited with the T for a continuous period for at least one year, ORo (b) Would be the parent of a child of whom the T is a parent,

- And once this relationship starts, then the person is deemed to be in a common law partnership unless they were not cohabiting for a period of at least 90 days because of a breakdown of their conjugal relationship

Section 73(1) and (1.01) – Inter Vivos Transfers- (1)(a)(ii) – When one spouse transfers property to spouse under conditions of (1.01), both spouses are resident in

Canada, the property is deemed to have been disposed of at the time by the individual for proceeds equal to the ACB of that person immediately before the transfer

- (1)(b) – And the property is deemed to have been acquired by the transferee equal to those proceeds

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Note: s. 73(1.01) – property is transferred by an individual where the property is transferred to the individual’s spouse or CLP OR former spouse or common-law partner of the individual in settlement upon breakdown

Explained:- ACB of Spouse1 goes over to Spouse2; Spouse1 does not experience a gain/loss and Spouse2 gets original ACB- This section can be opted out of if explicitly stated in Spouse1’s tax return- S. 73(1)’s specificity overrides the generality in s.69 (“except as otherwise provided in this Act”)

o But where T opts out of this section, s.69 springs back upo Occurs on breakdown where settlement must take tax repercussions into consideration

Example – Spousal Rollover- S1 has capital property acquired for $5000, that same property is now worth $10,000- S1 transfers it to S2 as gift (spouse or CLP)Section 73(1)(a)(ii) states that S1 is deemed to have disposed of it for original ACB – which is $5000;Section 73(1)(b) states that S2 acquires the property for $5000- S. 69 does not apply because it is overridden by express section of the ActWhat if the property was sold to S2 for $7500? What is S2’s ACB and S1’s POD?- S2 maintains ACB of $5000 and S1’s POD are $5000 – even though received moreThen S2 sells the property to an arm’s length person for FMV ($10,000)- Due to the roll-over provision, S2 has a capital gain of $5000 where she should only have $2500- See Attribution rule below s. 74.2(1)(a)Section 74.2(1)(a) – Spousal Attribution Rule - Basically, where a spouse has lent/transferred property to a person who is the individual’s spouse, the following rules

apply:o The spouse sells the property at FMV to a third partyo Calculate the taxable gains from the transferred properties (from Spouse 2), deduct the total allowable capital

losses from the transferred properties (from Spouse 2), and the net capital gain is deemed to be capital gain of the transferor (Spouse 1)

Only applies where couple is still married/CLP and resident in Canadao You can have a rollover at the time of the initial transfer, but if you’re still spouses at the time that the recipient

spouse disposes of it to a 3P at FMV, the gain is attributed back to Spouse 1.o If you’re separated or Spouse 1 died, no attribution back to Spouse 1.o Idea is to allow couples who are separating to divide marital assets (either on a rollover basis) or to elect out of it

and divide their property and their tax liabilities in a fair way. The rollover isn’t going to help you unless you are splitting up – because the spousal attribution rule will apply if you are still together.

o You can’t elect out of this rule.o Even if you opted OUT of the rollover, this section still applies.o Idea is that you don’t want the wealthier spouse to transfer properties to the other spouse and thereby avoid taxeso But you do want spouses to be able to divide their property when they break up, hence why the spousal attribution

rule doesn’t apply if the relationship is over

Note: This was designed to prevent couples from shifting gains/losses to each other to avoid taxesExample – Opt-out of Spousal Rollover and Attribution RuleYear 1: S1 experiences allowable capital loss of $25k (total capital loss of $50k) (s. 38(b))Year 2: S1 experiences taxable capital gains of $25k (total of $50k – s. 38(a))- S1 transfers property to S2 and opts out of s. 73(1) rollover to pass the gains to S2

o S. 69(1)(b) – S1 is deemed to have disposed at FMV – and thus taxable gain of $25k This gain is offset by S1’s previous $25k allowable loss carried forward – s. 111(1)(b)

o S. 69(1)(c) – S2 is deemed to have acquired at FMV – new ACBYear 3: S2 sells the property to 3P at arm’s length for $50k more than S2’s ACB – taxable gain of $25k (s. 38(b))- Under s. 74.2(1)(a), this taxable gain is attributable back to S1

o However, if S1 is dead or relationship is over, then S2 would be taxed on the gainsSpousal Rollover on Death

Recall: s. 70(5) – when someone dies, property is deemed disposed at FMV; and recipient acquires at FMVRecall: s. 111(2)(a) – allows remaining capital losses to be used against income in death year or preceding year

Section 70(6) – Where Transfer or Distribution to Spouse or CLP- Where (5) would otherwise apply (deemed capital disposition on death), but recipient is a spouse/CLP resident in

Canada, then (5) does not apply and recipient acquires property at the ACB of the deceased spouse; and the deceased

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spouse is deemed to have disposed of the property at their original ACB (no gains/loss)

Note: This allows for post-mortem tax-planning; exception to the normal rules of rollover on death- Where deceased has some allowable capital losses, then may be better to experience the gains on this disposition – may elect

out of s. 70(6) under (6.2)o Also note, if disposition creates capital losses, they can be used against other income (s. 111(2)(a))

- Where electing out of s. 70(6), then the rules under 70(5) apply and spouse acquires at FMV instead- The transferor spouse has POD equal to their ACB so no gain or loss for them- S.70(6) recognizes the couple as an economic unit and that the assets that the couple have were accumulated together

o Typically everything was in husband’s name, husband usually died first, so the wife would have to pay all the taxes, gov would have to step in to support the wife. This is why they’ll defer the tax consequences until the death of the second spouse (saves the gov from supporting a needy widower) This could go on forever if the survivor kept re-marrying

- This rollover is also automatic unless you elect out.- If you elect out, s.70(5) kicks in again.- AND you can elect out on an asset-by-asset basis- Note the capital losses can be set off against all income (in the year of your death and the preceding year)

Personal Use Property (PUP) and Listed Personal Property (LPP)Section 54 – Definitions

- “Personal-Use Property”:o (a) Property owned by T that is used primarily for the personal use or enjoyment of T, related person to T, or

where T is a trust – a beneficiary under that trusto (b) Any debt owning to T in respect of the disposition of property that was T’s PUP ANDo (c) Options to acquire property that would, if acquired, be PUP

- “Listed Personal Property”: o T’s PUP that is all or any portion of any: print, etching, drawing, painting, sculpture, or other similar work of art;

jewellery; rare folio, rare manuscript, or rare book; stamp; OR coin

Losses from LPP are only allowed to be set off against gains from LPP.Notes: PUP are things that have value and can even increase in value (rare); cottage/ski cabin/personal residence- May be held by a corporation, but still for use of a related party primarily- Does not include income-generating investment property – income from a business or property / ACNTSection 46(1) – Personal use Property- Where T has disposed of PUP,

o (a) The ACB is the greater of $1000 or the actual ACB of the propertyo (b) T’s POD of the PUP is deemed to be the greater of $1000 and T’s actual POD

Note: Low-valued PUP is basically taken right out of the tax system

Partial Disposal of PUP:- (2) Where only part of the PUP is disposed of,

o (a) The ACB to T of the part so disposed is deemed to be the greater of the ACB of the part disposed and the apportioned amount of $1000 that the part is to the whole of the property (PACB=ACB/# of pieces)

o (b) The POD of the part disposed is deemed to be the greater of the POD of the part and the same apportionment under (a). (PPOD = POD/# of pieces)

PUP Ordinarily Disposed of as a Set:- (3) Where a number of parts that are ordinarily sold as a set, are disposed of by more than one disposition to one person

or a group of non-arms-length persons, and before the first disposition had a total FMV of more than $1000, the properties shall be deemed to be a single PUP and each disposition shall be deemed a part of that property (refer to method in s. 46(2))

Example – SEE PUP SAMPLE ANSWER HANDOUTSection 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NIL- T’s loss from disposition of any PUP, other than LPP, is nil

Note: This recognizes that PUP is generally worn out based on depreciation from use, or passing of time/style

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Calculation of LPP Net Capital Losses and Gains

Recall: section 3(b)(i) – capital gains from all property including LPP is calculated, but net-losses from LPP are not included in calculation (net-losses of LPP are carried used against LPP gains 7y ahead/3y back – s. 41(2)(b))Section 41(1) – Taxable Net Gain from Disposition of LPP- T’s taxable net gains for tax year from disposition of LPP is ½ the amount determined under (2) to be T’s net gain for the

year from disposition of LPP

Section 41(2) – Determination of LPP Net Gain- T’s net gain from disposition of LPP is the amount determined as follows:

o (a) Amount of T’s gains from disposition of LPPo (b) Deduct LPP losses from previous 7 years or following 3 years, so long as they haven’t already been used

- and the remainder (b) is the T’s net gain for the year from dispositions of LPP

Section 41(3) – LPP Loss- LPP loss for T for a tax year is the amount, if any, by which T’s total losses from disposition of LPP exceeds the total of T’s

gains for the year from disposition of LPP

Principle Residence Exemption

Recall: s. 248(1) definitions of “Spouse” and “Common Law Partner”Recall: T’s home is for personal use and therefore a PUP

We have this exemption because if we didn’t, no one would ever sell. If you’ve had to pay tax on your gain, you’re going to have to borrow more to get back into the market. People would resist moving to places where there are jobs. It freezes up the housing market and the employment market. Exempting the gain entirely probably inflates the housing market a bit. It clearly influences economic choices. A lot of people buy houses as a way of saving for retirement. So this exemption makes sense but it also distorts. It’s a way of saving because as long as the value is going up, you’ll have a capital gain at the end (which is only 50% taxable)

RULE: The capital gains experienced for each year in which the residence is T’s principle residence is excluded from taxes at the disposition of the property- Applies once per year on one homePolicy for Principle Residence Exemption- Would hinder the market if taxes were collected on each gain made from personal residence

o Principles of society – to organize individuals, ensure they have a stake in community, that they settle down, get caught up in the Canadian way of life – strive to pay of mortgage; Community control

o The portion of mortgage affiliated with the home office is deductibleo Your principle residence is PUP because it doesn’t earn income for you

Section 54 – “Principle Residence”- Property that is a “housing unit” and deemed to include the land immediately contiguous to the land on which the housing

unit stands, unless it exceeds ½ hectare around the property; (Yates – mandatory min lot size immediately before time of disposition)

o If more than ½ hectare around the house, must be shown that the exceeding land was part of the use and enjoyment of the housing unit as a residence

o TEST: Rode (1985 TCC): “objectively consider all of the relevant circumstances…[when asking]: has T established on BoP that without the additional area of land…they could not practically have used and enjoyed the unit as a residence?” (lifestyle is more or less irrelevant; it must be practically or legally necessary)

o Long driveway – you can’t practically get access to the house without the driveway lando Augard – when T purchased 9 acres, min lot size was 3 acres. At disposition, min lot size was 80 acres. Thus all of

T’s acres were considered under the principle residence exemptiono Carlile – 32.75 acres, bylaw required min lot size 25 acres, T rented 25 acres to a farmer but claimed the entire

capital gain on the property as exempt. T successful. Court approves of a subjective test but make decision based on the objective test.

o Stewart Estate – overrules Carlile (no subjective test for determining whether the excess land is necessary) Stewart had 3 acres, min lot size was a lot smaller. She sold the land subject to the fact that the buyer could get subdivision approval. The estate claimed the exemption for the whole 3 acres. Court rejected this (widow could have applied for the subdivision approval herself and the fact that she wanted to grow fruit for herself doesn’t count)

o Home flippers – if you do this A LOT, CRA will say that you’re not buying a property to live in, it’s your business

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location. Each purchase and sale is an ACNT.- (a) Must be ordinarily inhabited in the year

o TEST: ordinarily inhabiting in the year by the specified persons, not throughout the year; must be living in it in a normal way through some part of the year (not too stringent)

- (b) Only one property qualifies for personal residence per yearo Note: so when sold, you can exempt any years associated to that property where it’s the only principle residence;

Close nuclear family members cannot split up their primary residences (before 1982)Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE)

1. First calculate the capital gain A2. B = one plus the number of years after it was acquired during which T was resident in Canada and living in the

housing unit as a qualified/designated principle residencea. (Note: B carries the extra year to allow exemption to swap between new/old principle residence)b. The plus-one does not have to be used here by the T if not needed

3. C = Total number of years the T owned the housing unit

Capital Gains after Exemption = A – (A x B / C) PRE = A x B / CExample – Principle Residence Exemption1982: H and W purchase house as joint-tenants for $40k1993: They add $10k swimming pool – Capital cost/ACB is increased to $50k 1995: H dies, W becomes sole-owner – spousal rollover on death – W acquires H’s ACB on half interest (s. 70(6))2005: W sells for $500k – capital gain of $450kAssume both were resident in Canada throughout the time in questionPRE = A x B / C (s. 40(2)(b))B = 1 + 24 (number of qualified years) = 25C = 24 years (1982-2005, inclusive)PRE = $468,750 So W would only designate 23 years for the house (1982-2004), which would result in $450kNOTE: No losses from Principle Residence because it is a PUP!Example – Principle Residence Exemption 21975: H and W buy house in Victoria in W’s name for $50k1980: H inherits cabin on Saltspring on ½ hectare of land for $30k (deemed FMV s. 70(5)(b))1985: They sell Victoria house for $65k, and rent for a couple years (capital gain of $15k)1987: W buys a new house in Victoria for $80k1991: H transfers Saltspring property by deed of gift to daughter (POD at FMV of $75k) (s. 69(1)(b)) – gain – $45k- Daughter’s ACB is deemed $75k under s. 69(1)(c)FIRST HOUSE (Victoria House):- Gain of $15k (CG = POD – (ACB + expenses) – s. 40(1)(a))PRE = AxB / C (s. 40(2)(b)) = 15 x (1 + 11years) / 11 years = $16,363 – more than necessary!So W would only designate Victoria house for 10 years – 1975-1984, which would result in B= 1 +10; The PRE would apply throughout the ownership of first house, resulting in no capital gainsSECOND HOUSE (Cabin in Saltsprings):- Gain of $45k (s. 40(1)(a))H can designate the cabin for 9 of the 12 years he owned it:- 85-91 = 7 years + 80-81 = 2 years (because before ’82 H and W could designate separate properties)PRE = 45k x (9+1) / 12 = $37, 500 so the gain after deduction is $7,500H’s income must include $3750 in taxable income – 50% as per s. 38(a)NOTE: this calculation assumes that T wants to designate Cabin for 87-91 over the new house purchased in 87Depreciable Property and Capital Cost Allowance (CCA)

Recall, when repairs are made to a capital property, the expense is deductible in full. This is not about repairs – it’s about the depreciating value of certain capital assets over time.

DP is a class of capital property (s.54) Act allows a deduction (CCA) to recognize that the cost of certain items to earn their income, is a real cost This is about depreciation/amortization of capital assets; it recognizes that things wear out and are worth less, which

is a real expense of earning income from business/property. Thus it recognizes the true cost of doing business using capital assets.

The decrease in value over time, although it’s not an amount laid out in the sense that you are writing a cheque, it’s still a cost of earning income. If we didn’t have 20(1)(a) then you wouldn’t be able to deduct the amount because it would be seen as an amount laid out for capital.

CRA gives high rate of depreciation if they want to encourage people to invest in a particular thing; because

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businesses can write the assets off faster. It reduces the business’s taxable income. There are rigid rules that dictate the max amounts that physical assets depreciate each year Compare getting the oil changed on a vehicle (business expense) with getting a new vehicle (capital asset) Straight line depreciation – you could write off 50% in the first year, 50% in the second year, and then you’re at 0. But for tax, you’re always apply A PERCENTAGE OF WHAT’S LEFT. 50% in the first year, 50% of what was left in year

1, etc. So you never really get to 0. So this means that you have 1 value for your financial accounting and a different value for tax accounting. (declining balance)

Even though it’s called an “allowance”– it’s really a deduction. But you get to choose whether or not to claim it.

Recall the specific limitations from computing income from business or property:s.18(1)(a) No deduction except to the extent that the expense is to earn income from business or propertys.18(1)(b) No deduction for capital outlays (consider repairs which are deductible vs capital outlays which are not deductible) s.20 – specific deductions from income from business/property20(1)(a) – allowed to deduct a certain amount with respect to the capital costs of property (Portion for which the property deteriorates in a given year, known as CCA)

Operates notwithstanding 18(1)(b) – which disallows capital deductions from income

Depreciable Property – 248(1) – as defined in 13(21)- Depreciable property is capital property where a deduction is available - Prop acquired by T for use of carrying out an income, is of enduring benefit to the income earning business, and is not

consumed or re-sold (like inventory)

Reg 1100(1):- For 20(1)(a) – provides CCA rates depending on what type of property it is- Each kind of property is described in a schedule- Each with their own depreciation percentages - Apply this % to the UCC of all the assets in the class at the end of the year (group all the assets by class first) = Add

them up, apply the half year rule, and that’s the max deduction you can claim under s.20(1)(a)

Reg 1102(1): The following are not DP- (a) Otherwise deductable expense- (b) Any inventory- (c) Property not acquired for purpose of gaining or producing income

1102(2) – exclusion of land – land does not depreciate

1101(1) – assets of each separate business source must be kept separately

Depreciation rules are an attempt at regulating the timing of financial reporting – fixed rate of depreciation regardless of what is actually happening in real life to your assets

CCA is another example of the Tax Act controlling timing

CCA is an optional deduction – a year a business is in a loss position, it won’t claim its capital cost allowance

Calculation- UCC x % depreciation = CCA under 20(1)(a)- The UCC is the amount left over after the CCA is applied- UCC is the total balance in the class at any given time, it is subject to depreciation in each year that the CCA is applied

UCC = (A + B) – (E+F)

A – total cost of all amounts of the capital cost to T of depreciable capital assetsB – total recapture E – total depreciation (CCA) claimed before that timeF – Proceeds of disposition of property (up to the ACB of the property – anything above is a capital gain)

Class 5 assets – 10% CCA depreciation: $100,000

Year 1: (assume this is the first year of business and you have no other assets)A = 100,000

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E = no previous CCA, so NILSo UCC is 100,000 (but for the half-year rule)So CCA is 10,000

Half year rule – 1100(2) – prevents people from buying assets in December and claiming the full depreciation of them when they haven’t held them that long – limits the deduction for CCA in the year that you purchased the property (totally arbitrary – applies whether you bought in January or in November – this can unfairly deny a legitimate depreciation expense…)So actually in year 1, the UCC would be 50,000 due to half-year rule, so CCA would be 5000In a year where POD of assets for that year is higher than the cost of new property, the half-year rule doesn’t apply. Formula = 0.5 (capital cost of new assets in the class – POD of things in the class that you sold for the year)

Benz Ltd: requirement that the depreciable property you want to claim CCA for be used to earn incomeT operated a bakery. Bought 3 adjoining residential properties with houses on them b/c T wanted to expand the business. Cost of properties was $43,000. After acquisition, T sold off the 3 houses for $1200 and they were taken off the land. T would rather claim the purchase price as the price of the buildings (depreciable property) b/c then he can get a CCA (whereas with land you can’t) In the year they bought, they claimed a CCA of $38600 for the houses saying that the land was only worth $3000. CRA refused the CCA deduction for the houses on the basis that the entire purchase price should be allocated to the land, wouldn’t allow ANY of the purchase price to be allocated to the houses. The houses were not purchased to earn income - they were more like an impediment. There was never any intent of using the houses in the bakery and thus they didn’t qualify as depreciable property (no CCA).

CCA is somewhat crude and totally rigid in allowing T to recognize depreciation. CCA is sometimes claimed for more than the real life dimunition in value (and sometimes less). That’s when you have potential for recapture or terminal loss.Terminal loss – when an asset depreciates in market value faster than you can claim CCA (s.20(16)) Note that it’s in section 20 which would be a costs of capital not otherwise allowed.Terminal losses must be deducted in the year the class was emptied. Only when the class is empty and you have a positive amount that you have a terminal loss.

When the UCC calculation produces a negative amount because E and F exceed A and B for UCC, that’s when you have recapture (the absolute value of the amount is the recapture). Recapture is included in s.13(1) as income from the business or property. The FOLLOWING year the recapture shows up in B of the calculation. At that point the UCC calculation would be 0 - you get a clean slate to start again.

You might have a terminal loss on the buses (deduction) and recapture on the building (inclusion). Have to calculate whether there is recapture or terminal loss for each class. At the end of the day, the real world hooks up with the required deductions under the ITA. If you’re continuing the business you’ll try to soak up the recapture by replenishing the class with other assets.Recapture can never exceed the CCA (which for our purposes means the ACB) (because in F you can only include POD up to the original capital cost – the extra is a capital gain)

Aboriginal Taxation

Exempt categories of taxpayers: non-profits, charities, labour organizations (Fries – if union has investment income from investing dues, that is tax exempt) Indian Act exemption for status Aboriginal people and for municipal corps owned by bands.

Indian Act Provisions

s.83(1)(a) - authorizes band councils to make by-laws for “taxation for local purposes of land, or interests in land, in the reserve, including rights to occupy, possess or use land in the reserve”.

s.90(1) For the purposes of section 87 and 89, personal property that is (a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or (b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty, shall be deemed always to be situated on a reserve. *Kakfwi

s.87(1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province...the following property is exempt from taxation: (don’t have to report it at all – applies to municipal, provincial, and federal taxes – subject to the band’s own power to tax)(a) the interest of an Indian or a band in reserve lands or surrendered lands; and(b) the personal property of an Indian or a band situated on a reserve.

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Income Tax Act Provisions

81(1)(a) There shall not be included in computing the income of a taxpayer for a taxation year an amount that is declared to be exempt from income tax by any other enactment of Parliament...

149(1)(c) No tax is payable under this Part on the taxable income of a person for a period when that person was a municipality in Canada, or a municipal or public body performing a function of government in Canada

149(1)(d.5) No tax is payable for a corporation, commission or association not less than 90% of the capital of which was owned by one or more municipalities in Canada, if the income for the period of the corporation, commission or association from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period

Arguments in Favor of Not Taxing Aboriginals1) Sovereign Nations

a. Problem: Canada taxes citizens and nationals of other countries who could make the same claim as Indians regarding sovereignty wrt Canadian source income.

2) Mitchell – based on pre-contact activity, first nations should be able to import goods for personal reasons or to exchange with other first nations across the Can-US border without being charged import duties.

a. SCC found that the historical evidence did not support the right that was asserted.b. Shwartz – SCC said that appellate courts shouldn’t overturn the TJ’s finding of fact, yet they did this in Mitchell

3) Benoit – idea that certain groups of FN are exempt by reason of the treaty that their ancestors signeda. Treaty 8 didn’t refer to taxation but at the time the treaty was signed the settlers responded to Ottawa

regarding the treaty and said that the treaty didn’t open the way to any tax. Oral assurances were given. Issue: does that mean that all modern descendants of Treaty 8 are exempt from all tax for all time? Court said No, it doesn’t go that far.

4) Indian Act Exemptiona. Basically the only argument that really works. Applies to status Indians (registered on the band list)b. Thus corporations cannot be Indians for the purposes of the Indian Actc. Purpose is to ensure that the lands of the reserve and the personal property on those lands (granted by the

Crown, in theory) are not repossessed by government through it’s taxation powers.

When is property situated on reserve for the purposes of s.87(1)(b)? Tangible PP is considered situated where it’s paramount location is Intangible PP – more complicated

o Early cases looked at where is the debtor. If the debtor was on reserve, so was the income (this was an int’l conflict of law test) This is not appropriate for the Indian Act exemption.

Nowejegick (1983) – “in respect of” is the broadest phrase that can imply a connection between two concepts. Income is personal property and could potentially be exempt from tax.

Williams v. The Queen: Connecting Factors Test (affirmed in Bastien and Dube)o Facts: Status Indian, lived on reserve, worked for a non-Indian employer, company had the activities on

reserve, owned and managed by non-indians and the registered office was off-reserve. But the employment was performed on reserve. When that job ended, worked on a second job that was through fed gov. After the second job he claimed UI. Are the UI benefits exempt? Yes. Connecting factors test:

Location of the employment which led to Williams being qualified for the benefits was the most important factor.

Residence on the reserve wasn’t itself determinative. (compare to CoL approach) Where debtor is located (would actually point to off-reserve because Crown was the debtor)

o Impact of Williams: a greater amount of income will be exempt for Indians on reserve. But then things went the other way: Recalma

o Facts: Recalma’s had millions of dollars, that they put in a bank on surrendered land. Problem: the funds were then transferred to an investment account in mutual funds. Was the investment income situated on reserve? The funds were basically invested in companies all over the place. It was argued that the capital and the income it generated was linked to the reserve through the Recalma’s connection to the reserve. A lot of their money was invested in on-reserve things and activities. Argument is that the money is being used to support a native way of life. FCA drew a line between income that is intimately connected to the Indian way of life and income earned in the economic mainstream.

o Impact: the courts would look at whether the income was earned in the commercial mainstream. If so, it was not exempt. However, Williams never talked about these things! Williams’ UI benefits were not part of the

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traditional way of life. The court in Williams just looked at source. Akiwenzie

o Dominant approach wrt income from employment. Status Indian employed with Indian Affairs Canada. Claims a deduction for 45% of his salary on the basis that this amount is situated on reserve. TCC – he wins. FCA – CRA agrees that 20% of the salary is located on reserve (because he performed duties on reserve) A claimed that his entire adult life he was working for FN people – his job is intimately connected to reserve life. Court sided with the Crown, finding that 80% of the income was not on reserve. Although the employment was integral to the future of the reserves did not mean that it was situated on reserve.

This is a fairly strict test - WHERE the duties are performed. Note: although this is still a leading case, courts are now looking at it different/loosening up the

connecting factors test to make more income “on reserve” income that is exempt. Southwind

o Logging contracting business with 1 client. He performed the logging services off-reserve but he ran the business from the reserve. It was the only fixed place of business. He wanted his income exempt. FCA applied connecting factors test to find the location of the business activity – where the decisions are made, records kept, services performed, etc.

o Also asked “what degree is the business in the commercial mainstream?”o Held: the income was clearly an off-reserve source. It was part of the commercial mainstream, not exempt.

Reversal of the Recalma Approach in Bastien Estate and Dube These cases are about investment income but the court rejects the “traditional way of life” as being a test for

connecting the income to the reserve.Bastien Estate: T was a status Indian born and died on reserve, operated a business on reserve and put some of the savings in a bank on reserve. Issue is whether the interest on these savings is taxable?

Up to this point, the interest income was taxable because this interest was generated by the bank’s activities off-reserve.

SCC says the test is Williams and connecting factors. The exemption doesn’t depend on whether the property is integral to the traditional Indian way of life.

Connecting factors: location of the debtor (the bank), place of payment of the interest payment (on reserve), arose from K entered into on reserve, T resided on reserve, and the savings were earned on reserve (he could have been doing ANYTHING on reserve – not just moccasin making!!) It doesn’t matter where the bank earns the money, but where T earns the income! Where the debtor (the bank) earns the income is not relevant.

Dube Status Indian born on one reserve but didn’t live there. He lived part-time off reserve. He put money in a credit union

on another reserve that he didn’t have a connection to. He argued that his interest income was exempt. Majority: this is exempt. The K was between an Indian and made on the reserve, the credit union was on reserve.

Living on reserve, having earned the income on reserve is not hugely important. The only thing you have to establish is that you are status and that you deposited the money on reserve and the interest is payable on reserve.

Here there was a dissent. Connecting factors – the income not from reserve activities, didn’t spend the amounts on reserve, the credit union earns income in commercial mainstream. They wanted more of a connection.

Almost back to the old test before Williams – where is the interest payable, where is the debtor (bank) located!Kakfwi

S.90(1)(b) – PP given to Indians/band under a treaty are deemed to always be situated on reserve Funding that comes out of a treaty would then appear to be always exempt. Salary of Chief – he claimed exemption from taxation. Salary was paid out of funds from the fed gov. The question is

whether the salary is exempt because it was paid out of this agreement under the Band Support Funding Program. On appeal, court said that the BSFP is not the kind that is supposed to be included under s.90(1)b – which is meant to

apply to treaties, not other funding agreements S.90(1)(b) agreements are the highest ranking ones (treaties and agreements made as part of treaty process, not

simply funding arrangements)

IMPUTED INCOME

Imputed income is a form of non-cash income Consists of the flow of benefits derived from labour on one’s own behalf or the benefits from the ownership

of property Generally considered income under Haig-Simons concept – when a person uses or consumes his or her own

personal services or own property this increases their economic power and ability to pay

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BUT for purposes of the Act imputed income is NOT income from a source and not taxable – raises policy concerns

Policy Considerations:

Although not imputing income from personal services and property violates principles of equity and neutrality (neutrality because it encourages personal services over other productive activities and ownership over rental), the Carter Commission did not recommended that values be imputed to services. They noted the practical difficulties involved in trying to impute a value to services and the likelihood of subsequent disputes that would be difficult and expensive to settle.

Examples: Imputed rent of an owner occupied home; unpaid housework.

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