Taxation – LAW 345 – O’BrienFinal Outline Spring 2011 – Asif Abdulla

Table of Contents

Basic Concepts and Canada’s Tax System.............................................................................................................. 5Compared to Other Govt Collected Payments......................................................................................................................................5Attributes of Taxes........................................................................................................................................................................................... 5Generally Accepted Accounting Principles (GAAP)...........................................................................................................................5Section 152 – Net Worth Assessments....................................................................................................................................................5

Equity and Policy in the Tax Law............................................................................................................................................ 6Equity:.................................................................................................................................................................................................................... 6Neutrality:............................................................................................................................................................................................................ 6Simplicity:............................................................................................................................................................................................................. 6Tax Expenditures:............................................................................................................................................................................................. 6

Constitution and Taxation......................................................................................................................................................... 6Pacer Dome Canada Ltd. v. Ontario (Minister of Finance) (2006 SCC) – Tax Act Interpretation...................................................6

The Source Concept of Income.................................................................................................................................. 7Section 3 – Income for Taxation Year – (pg3/4)................................................................................................................ 7Section 4(1)(a) – (pg4)............................................................................................................................................................... 7Section 56(1)(a)(ii) – Retiring Allowance – (pg35)..........................................................................................................7

“Retiring Allowance” - Section 248(1).....................................................................................................................................................7“Employment” – Section 248(1).................................................................................................................................................................7

Section 6(3) – Payments by Employer to Employee – (pg7)..........................................................................................7Surrogatum Principle: see Tsiaprailis......................................................................................................................................................8Interpretation Bulletin 365R2 – Damages, Settlements and Similar Receipts......................................................................8

Case Law on Income from a Source:....................................................................................................................................... 8Bellingham v. The Queen (FCA 1996) – income not from a source – win-fall gains.............................................................................8Schwartz v. The Queen (SCC 1996) – Retiring Allowances (s.56)................................................................................................................8Curran v. MNR (SCC 1959) – Payment in consideration for future services and lost benefits - income.....................................9Tsiaprailis v. The Queen (2005) – Surrogatum Principle.................................................................................................................................9Siftar v. The Queen (2003 FCA) – Apportionment Principles.........................................................................................................................9

Nexus Between Taxpayer and a Source of Income........................................................................................... 10General Rule:.................................................................................................................................................................................................... 10Calculation Rules attempt to resolve Three Basic Questions:....................................................................................................10

Case Law on Source-Taxpayer Nexus:................................................................................................................................. 10Field v. The Queen (2001 TCC) – Nexus for RRSP withdrawals..................................................................................................................10Buckman v. MNR (1991 TCC) – Factors to Consider Instead of Just Strict Ownership....................................................................10

Residence as the Primary Basis of Canadian Tax Liability............................................................................11Approach:.......................................................................................................................................................................................................... 11

Residence as a Tax Base.......................................................................................................................................................... 11Section 2 – Taxation of Residents and Non-Residents - (pg3)...................................................................................................11Section 250(1) – Person Deemed Resident........................................................................................................................................11Section 250(3) – Ordinary Resident...................................................................................................................................................... 11Interpretation Bulletin IT-221R3 – Determination of Residence (CRA)...............................................................................11Case Law on Residence as a Base:...........................................................................................................................................................12

Thomson v. MNR (1946 SCC) – Determining Residence/Ordinary Residence – LEADING............................................................12Lee v. MNR (1990 TCC) – Determining Ordinary Residence; Cit/Imm status not determinative...............................................12R&L Food Distributors Ltd v. MNR (1977 TRB) – Application of Sojourning.......................................................................................13

Part-Year Residence................................................................................................................................................................. 13Section 114 – Individual Resident in Canada for Only Part of Year.........................................................................................13Section 249(1)(b) – “Taxation Year”..................................................................................................................................................... 13Case Law on Part-Year Residence:......................................................................................................................................................... 14

1

Schujahn v. MNR (1962 Exch Ct) – Establishing Part-Year Residence.....................................................................................................14The Queen v. Reeder (1975 FCTD) – Where Residency is long established, difficult to show Severance................................14

Avoidance of Dual Tax Residence........................................................................................................................................ 14Section 250(5) – Deemed Non-Resident..............................................................................................................................................14Tax Treaties...................................................................................................................................................................................................... 14Section 128.1(4) – Departure Tax...........................................................................................................................................................15Case Law on Avoidance of Dual Tax Residence:...............................................................................................................................15

Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus Treaty..................................................15Provincial Residence................................................................................................................................................................ 16

Regulation 2601 – Residents of Canada...............................................................................................................................................16Regulation 2607 – Dual Residency.........................................................................................................................................................16BC ITA Section 2 – Liability for Tax........................................................................................................................................................16Case Law on Provincial Residence:........................................................................................................................................................16

Mandrusiak v. The Queen (2007 BCSC) – Thompson used to determine ordinary residence......................................................16Residence of Corporations and Trusts............................................................................................................................... 16

Section 250(4) – Corporation Deemed Resident.............................................................................................................................16Case Law on Residence of Corporations and Trusts:.....................................................................................................................16

De Bears Consolidated Mines Ltd v. Howe (1906 HL) – Residency for corporations is a question of fact..............................16Sources as a Basis of Tax Liability........................................................................................................................................ 17

Income from Office or Employment...................................................................................................................... 18Basic Definitions and Provisions.......................................................................................................................................... 18

Section 248(1) – Definitions Section for Office or Employment...............................................................................................18Section 5 – Income / Loss from an Office or Employment...........................................................................................................18Section 6(1)(a) – Basic Inclusion in Income from Employment (see Savage)....................................................................18Section 8(2) – Limitation on Deductions.............................................................................................................................................18Section 153(1)(a) – Withholding of Tax by Employer...................................................................................................................18Section 118(10) – Canada Employment Credit.................................................................................................................................18

Employee vs. Independent Contractor/Consultant/Sole Proprietor.......................................................................19Differences Between Employee and Independent Contractor...................................................................................................19TEST for Employee vs. Independent Contractor:.............................................................................................................................19Case Law on Employee vs. Independent Contractor:.....................................................................................................................19

Wiebe Door Services v. MNR (1986 FCA) – Leading – single question test to employee/contractor........................................19Ontario v. Sagaz Industries Canada (2001 SCC)...............................................................................................................................................19Wolf v. The Queen (2002 FCA) – Intention is a valid factor to be considered......................................................................................20Royal Winnipeg Ballet v. MNR (2008 FCA) – Intention in the K should be considered...................................................................20Lang v. MNR (2007 TCC) – Intent should not be ignored, but weight is in question.........................................................................20

Personal Services Businesses and Incorporated Employees......................................................................................20Section 18(1)(p) – General Limitations on Deductions from Business or Property Income........................................20Section 125(7) – Definitions......................................................................................................................................................................20Section 248(1) – Specified Shareholder...............................................................................................................................................21

Benefits, Reimbursements and Allowances..................................................................................................................... 21Savage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employee..............................22Lowe (FCA) – Is there a measurable economic benefit? Who possesses the primary benefit?....................................................22

Valuation of Employment Benefits.........................................................................................................................................................22Giffen v. The Queen (1995 TCC) – Method of valuing benefits – no longer used for loyalty points – IT470R........................22Dunlap.................................................................................................................................................................................................................................. 23

Allowances........................................................................................................................................................................................................ 23The Queen v. Huffman (1990 FCA) – distinction between allowance and reimbursement...........................................................23The Queen v. MacDonald (1994 FCA) – Leading case on s.6(1)(b) – what constitutes an allowance........................................24

Special and Remote Worksites.................................................................................................................................................................24Automobile and Traveling Allowances.................................................................................................................................................24

Deductions and Computing Income from Office or Employment..............................................................................25General Limitations on Deductions:.......................................................................................................................................................25Traveling Expenses....................................................................................................................................................................................... 26

Martyn v. MNR (1962) – Travel to and from work is not deductable......................................................................................................27Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issues...................27

2

Legal Expenses................................................................................................................................................................................................ 27Professional and Union Dues....................................................................................................................................................................28

The Queen v. Swingle (1977) – s. 8(1)(i)(i) – interpreted strictly – professional required by statute.....................................28Cost of Supplies............................................................................................................................................................................................... 28Home Office Expenses.................................................................................................................................................................................. 29

Income from Business or Property........................................................................................................................ 30Business Source of Income: Organized Activity and Pursuit of Profit.....................................................................30

Framework for Income from Business or Property........................................................................................................................30Definition of a Business............................................................................................................................................................................... 30

Luprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = business............................30LeBlanc v. The Queen (2007) – Lottery is pure chance = not an expected earning source = no source/no tax....................30

The Pursuit of Profit – Reasonable Expectation of Profit (REOP)............................................................................................31Stewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or Property.....................................................31

Adventure or Concern in the Nature of Trade (ACNT)..................................................................................................32IT-459 – Adventure or Concern in the Nature of Trade:...............................................................................................................32

MNR v. James A Taylor (1956 Exch Ct) – Transaction is ACNT – factors to consider – trade was business-like..................33Regal Heights Ltd v. MNR (1960 SCC) – Secondary objective of earning profit on land results in an ACNT..........................33Irrigation Industries Ltd v. MNR (1962 SCC) – Investment in shares of a company are capital investments........................33Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT)...............................................33

Income from a Property.......................................................................................................................................................... 34Business vs. Property................................................................................................................................................................................... 34

Hollinger v. MNR (1972) – Approach for Business vs. Property Income................................................................................................34Walsh and Micay v. MNR (1965) – Rental properties generally seen as income from property, not business.....................34

Interest................................................................................................................................................................................................................ 34Groulx v. MNR (1967 SCC) – Court found blended payments from an increased purchase price...............................................35

Rent and Royalties......................................................................................................................................................................................... 35Wain-Town Gas and Oil (1952) – After-sale share in profits are royalties and subject to income tax......................................35

Dividends........................................................................................................................................................................................................... 35

Deductions in Computing Income from Business and Property..................................................................36Structure of the Act – Business/Property..........................................................................................................................36Income Earning Purpose Test............................................................................................................................................... 36

Imperial Oil (1947) – If Expense in ordinary course of business, then generally deductible........................................................36Royal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally deductible............................37

Personal and Living Expenses............................................................................................................................................... 37Section 18(1)(h) – Personal and Living Expense.............................................................................................................................37

Benton (Thomas Harry) v. MNR (1952) – House-keeper is a personal expense – not deductable.............................................37Section 63 – Child Care Expense Deduction.......................................................................................................................................38

Symes v. The Queen (1994 SCC) – s.63, found not discriminatory towards women – note LHD dissent.................................38Commuting Expenses................................................................................................................................................................................... 38

Dr. E Ross Henry – Travel from/to Home is not deductable aginst income from business/property.......................................38Moving Expenses............................................................................................................................................................................................ 39Home Office Expenses.................................................................................................................................................................................. 40

McCreath (2008 TCC) – Travel between home-workspace and place of employment MAY not be deductable...................40Example Problem – Home Office Deductions and Carry-forward............................................................................................40

Deduction of Interest Expense – see handout..................................................................................................................41Section 20(1) – Deductions Permitted in Computing Income from Business/Property................................................41

The Queen v. Bronfman Trust (1987 SCC) – Requirement that Borrowed funds be used for an income earning purpose; Money must be borrowed to use directly on the income earning purpose...........................................................................................41

Policy Reasons for Denying Decuctions............................................................................................................................. 41Eldridge............................................................................................................................................................................................................................... 41

Bribery of Certain Officials – s. 67.5.......................................................................................................................................................41Fines and Penalties – s. 67.6...................................................................................................................................................................... 41Policy:.................................................................................................................................................................................................................. 41

Computation and Timing.......................................................................................................................................... 42Capital vs. Current Expenditures.......................................................................................................................................... 42

3

Section 18(1)(b) – Capital Outlay or Loss...........................................................................................................................................42British Insulated and Helsby Cables Ltd v. IRC (1926 HL) – One time payment to create asset - capital................................42

Repair of Tangible Assets........................................................................................................................................................................... 42Canada Steamship Lines Ltd v. MNR (1966 Exch) – Boiler of the ship is a capital asset itself......................................................42The Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building – capital outlay..................................43Gold Bar Developments Ltd v. The Queen (1987 FCTD) – New test outlined for finding repairs over capital......................43

Timing – Amounts Receivable............................................................................................................................................... 43Section 12(1) – Income Inclusions......................................................................................................................................................... 43CASE LAW RULES:......................................................................................................................................................................................... 44

J. Colford Contracting – When an amount becomes receivable, it must be included in income...................................................44Benaby Realties – An amount is not ‘receivable’ for tax purposes until the actual amount is ascertained.............................44West 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..................................................44JL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent..............................................45

Non-Capital Losses.................................................................................................................................................................... 45Section 111(1)(a) – Carry Forward and Back of Non-Capital Losses.....................................................................................45

Capital Gains................................................................................................................................................................. 46Introduction to Capital Gains................................................................................................................................................. 46

Taxation of Capital Gains and Losses: 3(b) and subdivision E...................................................................................................46Distinguish Income from Property: 9(3).............................................................................................................................................46Calculation of Capital Gains and Capital Losses:..............................................................................................................................46Carry Forward and Back of Capital Losses: 111(1)(b) and 111(2)(a)...................................................................................47Policy Evaluation of Preferential Taxation of Capital Gains........................................................................................................47

Definitions.................................................................................................................................................................................... 48Section 248(1) – “Property”...................................................................................................................................................................... 48Section 54 – Definitions............................................................................................................................................................................... 48Example – Identical Properties:...............................................................................................................................................................48Section 248(1) – “Disposition”................................................................................................................................................................. 49

The Queen v. Compagnie Immobiliere BCN Ltee (1979 SCC) – Disposition and POD – stat/normal meaning......................49Deemed Dispositions and Deemed Proceeds................................................................................................................... 49

Section 128.1(1) – Immigration...............................................................................................................................................................49Section 128.1(4) – Emigration................................................................................................................................................................. 49Gifts and Sales Below FMV to Non-Arm’s Length Persons...........................................................................................................50Section 70(5) – Capital Property of a Deceased Taxpayer...........................................................................................................50Lottery Winnings Revisited....................................................................................................................................................................... 51

Rollovers: Transfer of Capital Property to Spouse/CLP...............................................................................................51Section 248(1): “Common-Law Partner”.............................................................................................................................................51Section 73(1) and (1.01) – Inter Vivos Transfers............................................................................................................................51Example – Spousal Rollover...................................................................................................................................................................... 51Section 74.2(1)(a) – Spousal Attribution Rule..................................................................................................................................52Example – Opt-out of Spousal Rollover and Attribution Rule....................................................................................................52Spousal Rollover on Death......................................................................................................................................................................... 52

Personal Use Property (PUP) and Listed Personal Property (LPP).........................................................................53Section 54 – Definitions............................................................................................................................................................................... 53Section 46(1) – Personal use Property.................................................................................................................................................53Section 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NIL........................................................................................53Calculation of LPP Net Capital Losses and Gains..............................................................................................................................54

Principle Residence Exemption............................................................................................................................................ 54Policy for Principle Residence Exemption..........................................................................................................................................54Section 54 – “Principle Residence”.........................................................................................................................................................54Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE).............................................................................55Example – Principle Residence Exemption.........................................................................................................................................55Example – Principle Residence Exemption 2.....................................................................................................................................55

4

Basic Concepts and Canada’s Tax System- Tax is a compulsory and unrequited (nothing identifiable is returned for that payment)- Used to fund government/public services- Wealth distribution from rich to the poor- Reflects how society thinks Canada should function – what to encourage/discourage

Compared to Other Govt Collected Payments- Tax is compulsory and unrequited- Fines/penalties – compulsory as well but are used to deter/punish behaviour- 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)- Taxes are sometimes used to encourage a certain behaviour (RRSP, RESP, etc) or discourage/account for a dangerous

behaviour (alcohol/tobacco)

Attributes of Taxes

Tax Bases:- Income, Consumption, Wealth (not usually used in Canada)

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

o Progressive Rates: increasing proportion of income as income rises Higher income persons have a greater ability to pay – they should be paying

o Regressive Rates: declining proportion of income as income rises – usually results from flat tax Low income persons pay a higher portion of their disposable income

Tax Period:- Period over which tax is calculated; Income – annually- Instalments may be required over the period- Others are transactionally based

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 DuesCredits: tax payable = total taxes – credits- Personal Tax Credit; Education Credits; etc

Generally 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 law

Section 152 – Net Worth Assessments(7) Assessments no 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

5

Equity and Policy in the Tax Law

Equity:- Vertical Equity: Tax should consider how parties are situated against those in unequal positions- Horizontal Equity: Those that are similarly situated should be taxed in a similar fashion- Tax is premised on the notion of equity/fairness – most important factor

Neutrality:- Taxes should not unduly effect personal decisions – marriage vs. common law, market factors, etc- Difficult to obtain because our tax system is built on encouraging/discouraging certain actions

Simplicity:- Comprehensibility – should be able to se how the system is meant to work with little effort- Certainty – should be able to determine in advance the tax consequences of decisions- Compliance Convenience – should not be difficult or inconvenient to comply with tax law- Administrative Convenience – should not be too difficult for govt to administer the tax collection- Difficult to Avoid/Evade – should be efficient to avoid dishonesty

Tax Expenditures:- Where individuals would not be able to participate in a govt encouraged initiative, they are given tax breaks in the

form of deductions, exemptions or credits- Evaluation 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

Pacer Dome Canada Ltd. v. Ontario (Minister of Finance) (2006 SCC) – Tax Act Interpretation- Words of the 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- Where the words are plain in their meaning, that is the favoured interpretation- Only where there is ambiguity, greater recourse to the context and purpose is necessary- There is a rarely relied upon residual presumption in favour of the T, only where cannot be resolved- T has the burden of establishing that the factual findings of the assessment are wrong (Siftar)

6

The Source Concept of Income

Section 3 – Income for Taxation Year – (pg3/4)

Non-Capital IncomeT’s income for a taxation year is the T’s income for the year determined by the following rules:

(a) Determine the total of all positive income (other than taxable capital gains) from a source inside or outside Canada, including but not limited to, the T’s income from each office, employment, business and property

NOTE: New sources are allowed by the Act, but none found to date - Bellingham

Capital Gains and Losses(b) Determine amount by which

i. The total of: (A) T’s taxable capital gains from disposition of property other than LPP, AND (B) T’s taxable net gain for the year from dispositions of LPP (must be a positive figure for LPP)

Exceedsii. The amount of T’s allowable capital losses for the year from dispositions of property other than LPP

(c) Determine the amount of (a) plus (b) exceeds the allowable deductions permitted by 60, 62, 63

Non-Capital Losses(d) Determine the amount (c) exceeds the total amount of T’s loss from the year from an office, employment,

business or property

Section 4(1)(a) – (pg4)- Calculate income/loss from each source separately- Because deductions/inclusions differ from source to source- Net income is still a consolidation of all the income/loss from each source

Section 56(1)(a)(ii) – Retiring Allowance – (pg35)- There shall be included in computing T’s income, a retiring allowance, other than an amount received out of an

employee benefit plan, retirement compensation arrangement or a salary deferral arrangement

“Retiring Allowance” - Section 248(1)- An amount received (other than superannuation, pension, death benefit)

o (a) On or after retirement of T from an office or employment in recognition of T’s long service ORo (b) In respect of loss of an office/employment whether or not received as damages or pursuant to an order

or judgment of a competent tribunal

“Employment” – Section 248(1)- Position of an individual in the service of some other person

Section 6(3) – Payments by Employer to Employee – (pg7)- (a) Payments made during a period while the payee was an officer or in the employment of the payer, OR (b)

on account, in lieu of payment or in satisfaction of an obligation, shall be deemed income from an office or employment under section 5

7

- UNLESS, the payment was made (c) as consideration for accepting the office/contract/employment, (d) as remuneration for services as an officer or under k for employment; OR (e) in consideration for a covenant with reference to what the officer/employee is or is not to do before/after termination

Surrogatum Principle: see Tsiaprailis- When payment is received in substitute for another payment, where the payment being replaced is taxable,

then the replacement payment should also be taxable- Two-part Test:

o 1. What was the payment intended to replace? (Must be clear)o 2. Would the replaced amount have been taxable in the recipient’s hands?

Interpretation Bulletin 365R2 – Damages, Settlements and Similar Receipts- Damages for personal injury or death are excluded from income- Except the amount that could reasonably be considered to be income from employment

Case Law on Income from a Source:

Bellingham v. The Queen (FCA 1996) – income not from a source – win-fall gains- T owned an investment property but it was expropriated by the city- In litigation T received punitive damages for: 1. Value of the land; 2. Interest on the value; 3. Additional interestIssue: Whether the Additional Interest awarded constitutes income or capital gains under the ITAHeld:- Value of the land: T has to pay tax on capital gains; Interest on the value: also capital gains;- Additional interest: this was punishment, not compensation, doesn’t replace a taxable amount – not taxableReasons:- Broad defn of income (any accretion to wealth) vs. Narrow defn of income (income from business that recurs)

o Policy: Govt chooses efficiency and simplicity over pure equity- Likely falls into win-fall gains – non-taxable- Cranswick – Factors to consider in determining win-fall gains:

o T has no enforceable claim to the payment; No organized effort on T’s part to receive the payment; Not sought after or solicited by T; not expected by T; No foreseeable element of recurrence; Not a customary source of income for T; not made in consideration of property/services/anything else provided by T;

- Fries – SCC found that strike pay is not income from a source- Here, Source was the Expropriation Act – T is the beneficiary; no element of exchange or bargain; no

consideration; no quid pro quo

Schwartz v. The Queen (SCC 1996) – Retiring Allowances (s.56)- 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?Held: No, this payment could not be traced to payment in lieu of income from an enumerated sourceReasons:- Surrogatum Principle: if payment could be traced to replacement of a payment that is a valid source under 3(a)

o Here, this is not a payment for services, this is compensation for ‘future employment’ and emotional stresso 3(a) contemplates the addition of other sources, but there has yet to be any additions (Krishna)

- “Retiring Allowance” – made in the course of employment – cannot lose position that is not yet heldo Expanding the specific definition under the Act would nullify the effect of s.56(1)o The court should prefer the specific s.56(1)(a)(ii) over the general 3(a)

8

- “Employee” – definition does not include a person who has future obligations to an employerComments:- s.56 explicitly states that it is not to restrict the generality of 3(a), but this was ignoredTakeaway Points:

1. Surrogatum can’t apply if there is not evidentiary basis for apportionment of paymenta. Burden is on the T to show that it was no apportioned to taxable payments

2. General provisions cannot be used to include amounts of income that exempt under specific provisions3. Never has there been a ruling where income has been found from a source not enumerated under 3(a)4. Court was unwilling to distinguish between pain and suffering and the remuneration portions

Curran v. MNR (SCC 1959) – Payment in consideration for future services and lost benefits - income- T was induced to retire from his position and take on a new position; received payment and singed agreementIssue: Was the payment received by T taxable as income?Held:- Yes – The payment was taxable income – made by the employer to T and received by T to induce him to serve

as manager for the company – payment for services renderedReasons:- T had to resign in order to make the services available, which voided certain benefits, but the payment made to

T was made with consideration for those losses and for future service to the new employer- 6(3) doesn’t apply because the employer never employs TDissent:- Substantial part of the amount paid to T was a capital receipt and not taxable as incomeComments:- This is the only time the SCC has found another source under 3(a) – compensation for future services

Tsiaprailis v. The Queen (2005) – Surrogatum Principle- 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 for all the claims- Agreed upon that settlement was apportioned: 35k for pas benefits and 75% of future benefits to 65Issue: Was the portion of settlement representing the past benefits accrued income that is 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- Surrogatum Principle – The surrogatum payment is included in taxable income

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? o YES to both

- The proceeds have flown from the same source as the taxable periodic paymentsComments:- Here the claims were clear and the apportionment was clear in the negotiations – differs from Schwartz

Siftar v. The Queen (2003 FCA) – Apportionment Principles- 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 ability to determine if

declarations are reasonable or noto 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

9

Nexus Between Taxpayer and a Source of IncomeNOTE: See Net Worth Assessments Above (Basic Concepts)

General Rule:- The taxpayer must be the actual person who owns the income or the loss from each specific source (Field)

o Exception: Must have regard to the circumstances surrounding the actual receipt of the money and the manner in which it is held by T (Buckman)

Calculation Rules attempt to resolve Three Basic Questions:1. What amounts of revenue must be recognized as income?2. What amounts of expenses are recognized as deductable?3. When must the relevant amounts be recognized?

Case Law on Source-Taxpayer Nexus:

Field v. The Queen (2001 TCC) – Nexus for RRSP withdrawals- 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 the proceeds were not received by him as per s.146(8)Issue: Is the RRSP withdrawal 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 v. MNR (1991 TCC) – Factors to Consider Instead of Just Strict Ownership- 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 taxation o 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 duty to account is breached, the trustee converts funds to his own use,

10

which 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 alteredo Trustee’s duty to return the money flows from his relationship with his cesti qui trust; o Taxability flows from the manner in which he holds the funds

Residence as the Primary Basis of Canadian Tax LiabilityApproach:

1. Look to s. 2 – Tax payable by a resident of Canada on all income earned inside/outside Cana. Note Deemed Residency (s. 250(1)) and defn of Ordinary Resident s. 250(3) (Thomson)b. Note s. 249(1)(b) – definition of taxation year for an individual

2. Part-year residence s. 114 – not taxed on portion where T commenced/ceased residency in Can3. If Dual-Residency issue: First must determine that there is a dual residency situation

a. In Canada: look to s. 2(1) (taxation of residents of Canada); s. 250(1) Deemed residency; and s. 250(3) definition of ordinary residence in Canada (Not done in Salt)

4. Then look to any tax treaties that exist to determine which residency prevails5. Then cite s. 250(5) to demonstrate the Deemed residency of T – accords with Treaties6. Where resident becomes a non-resident: departure tax s. 128.1(4)

Residence as a Tax Base- The common jurisdictional bases for imposing income tax are citizenship, nationality, residence and source of income- Canadian taxes are based on residency – connection to Canada determines if taxed on world-wide income or not- Taxation is based on residence and source – this is a policy decision

o 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

Section 2 – Taxation of Residents and Non-Residents - (pg3)(1) Tax payable by persons resident in Canada – tax on all taxable income for each taxation year of every

person resident in Canada at any time in the year(2) Taxable income – is the T’s income for the year plus the additions and minus the deductions(3) Tax payable by non-resident – Where not taxable under (1)

a. Was employed in Canada,b. Carried on a business in Canada, ORc. Disposed of taxable Canadian property,

At any time in the year or previous year, income tax shall be paid on T’s taxable income earned in Canada for the year determined in accordance with Division D

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

Section 250(1) – Person Deemed Resident- Person shall be deemed to have been resident in Canada throughout a taxation year if the person- (a) Sojourned in Canada in the year for a period of, or the total of, 183 days or more;- (b) Was, at any time of the year, a member of the Canadian forces; OR- (c) Was at any time of the year: (i) an ambassador, minister, high commissioner, officer or servant of Canada,

OR (ii) an agent-general, officer or servant of a province, AND was resident in Canada immediately prior to appointment or employment by Canada/province

11

Section 250(3) – Ordinary Resident- “Person resident in Canada” includes a person who was at the relevant time ordinarily resident in Canada

o Expands the realm of residency to those who are not always living in Canada, but “ordinarily” do- Thomson: In the place where in the settled routine of T’s life he/she regularly, normally or customarily lives

Interpretation Bulletin IT-221R3 – Determination of Residence (CRA)- The CRA determines residency in the following manner – not binding on the courts

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

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

Case Law on Residence as a Base:

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- To order taxation for temporary residence alone would be unreasonable unless residence proved BRD

o Sojourns – is outside the range of residence or what is commonly understood as temp residence- 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

12

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 Tawaiwan- Due to increased mobility of the world, many of these factors carry less weight

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 share holders- Two of the share-holders 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 – corp must reside in Canada, not be publically traded on exchange and controlled by Canadian resIssue: 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 to Canada – therefore not deemed residentsReasons:- 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

Part-Year Residence

GR: 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 year

Section 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:

13

o (a) The amount that would be T’s income if T had no income/loss for the non-resident portion, other than: (i) Out of scope for this class

- 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) is reasonably applicable to the part of the year T

was a resident; OR (ii) if substantially all of T’s income calculated under (a) was while non-resident, then deductions can reasonably be considered to be applicable to that part of the year

Section 249(1)(b) – “Taxation Year”- A “Taxation Year” is, in the case of an individual, a calendar year

Case Law on Part-Year Residence:

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 the purpose (bank etc)o 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- T paid no income taxes in France – at most he was just sojourning there

14

Avoidance of Dual Tax Residence

Section 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 Canada

Tax Treaties- Bilateral agreements between two states – negotiated by the Dept of Finance- Where there are dual residencies, the treaty can be used to determine how the T is taxed

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;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 far

Section 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!

Case Law on Avoidance of Dual Tax Residence:

Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus Treaty- T born in UK, moved to Jamaica and lived there for 10 years; Moved to Canada in 74 with wife and kids; worked

for 2 years, then moved to Spain/Ireland; Returned to Canada in 84 and purchased home in QC- 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 equivilent clubs in Australia; only short visit to Canada

15

- House was leased to a non-related party in Canada- T returned after the position disappeared; CRA assessed T for taxes for the year’s 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 Residence

Regulation 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 individuals

Regulation 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 prevails

BC 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

Case Law on Provincial Residence:

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 base don 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)16

o (b) out of scope; AND (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

Case Law on Residence of Corporations and Trusts:

De Bears 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 CA where employed by Canadian corporation or carrying on business in Cananad, or 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 obligation to withhold and remit tax on behalf of non-residents

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

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

17

Income from Office or Employment

Basic Definitions and Provisions

Section 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 person

Section 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 a T’s income for a taxation year

from office/employment

NOTE: Section 8 puts narrow restrictions on what can be deducted from income

18

Section 153(1)(a) – Withholding of Tax by Employer- Every person paying at any time in a tax year salary, wages or other remuneration…shall deduct or withhold

from the payment the amount determined in accordance with prescribed rules and shall remit that amount to the Receiver General on account of the payee’s tax for the year

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; If receiving welfare, not as deserving as

someone going to worko Acknowledges employees who have expenses associated to that employment

Employee vs. Independent Contractor/Consultant/Sole Proprietor

Differences Between Employee and Independent Contractor(1) Tax withholdings: persons do not need to withhold tax from independent contractors (they are to remit taxes

themselves; s. 153(1) requires employer withholding of employee salaries and other income(2) Independent contractors do not pay into EI, and therefore cannot claim EI if they go out of work(3) 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 receivable(4) Reporting: s.249 individual’s tax year is the calendar year, business income reported fiscally – s.249.1(5) 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; CRA wants employees

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)

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 Wiebe had not been withholding taxes from their 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

19

- TCC – Applied four tests: Control test; ownership of tools/equipment; opportunity to make additional profit / risk of loss; organization / integration test (whether worker is integral/integrated into employer’s businesso Without the installers, W’s business wouldn’t work, so they are integral – therefore they are employees!

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

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 tasks

Ontario v. Sagaz Industries Canada (2001 SCC)- Affirms Wiebe Door Central Question + Factors

Wolf v. The Queen (2002 FCA) – Intention is a valid factor to be considered- Intention of the parties is also a component to be considered in determining the test used in Wiebe Door- Where there’s legitimate intention from both parties that show why they would both consider the person a

contractor/employee, that 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- 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 the CCPC - s. 18(1)(p)- Policy: ensures that only bona fide CCPCs involved in active business carried on by a corporation have access to

the preferential rate for Canadian Small Businesses -

20

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 business

Section 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 adventure or concern in the nature of trade

“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 (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

“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 these

Section 248(1) – Specified Shareholder- Person who owns more than 10% of stock- Any stock owned by person with whom T does not deal at arms 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 as 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

21

- 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? (Benefit to T is merely incidental)2. Economic advantage was 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- Designed to assist employers in preparing T4s and automatic employee deductions- Policy: Tax simplicity, efficiency and compliance- Non-cash gifts/awards to non-arms length employee, regardless of the numbers, are not taxable up to the

aggregate value of $500 annually; AND the employer CAN deduct the gifts/awardso Policy: perks that keep employees happy and allows them to stay at work

- Additionally, separate long-service awards are not taxable up to $500 as well

Savage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employee- 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 benefit, but it’s also a prize for achievement, so exempt up to $500Reasons:- Yes, this is a benefit – 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 - BUT this is also a prize for achievement and that is exempt up to $500

o Specific provision prevails over the broad general inclusion

Lowe (FCA) – Is there a measurable economic benefit? Who possesses the primary benefit?- 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:- 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 bring personal relationships to 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 purpose

22

Valuation 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) – Method of valuing benefits – no longer used for loyalty points – IT470R- T works for HW and 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 restrictions- Due to wide price range, economy tickets are not to be valued anymore than the cheapest discounted fare- Appeal allowed – the assessment is to use the above methodComments:- 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

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 are generally considered to be a taxable benefit

Allowances

Defn: MacDonald: an arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – Generally for a specific purpose – Discretion of the recipient, in that the recipient need not account for the expenditure of the funds - Could be used as a concealed method of remuneration, it must be included in income from office/employment- Allowance vs. Reimbursement – see definition in Huffman

Section 6(1)(b) – personal or living expenses

23

- 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 deductable 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)

o 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…”

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, so that

an allowance will usually be for a specific 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 cost

Special 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 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,

24

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 circumstances

Automobile 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 ITRegulations – 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)

25

- 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- Section 8 authorizes a number of deductions in respect of employment income – limited to listed categories- Section 67 no deduction shall be made unless the expense or outlay was reasonable in the circumstances

o Section 67.1 – arbitrarily restricts deduction of expenses for food/beverages/entertainment to 50%

General Limitations on Deductions:

Section 8(1): Lists the types of expenses that can be deducted from income from office or 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 T

Traveling 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

26

o (vii) Amounts described in 6(1)(e) – Out of scope.

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 To (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)

Section 8(4): Meals- Meal expenses by T who is officer/employee shall not be included in deduction under s. 8(1)(f) or (h) unless

the meal was consumed during required departure from municipality where T’s work was located for not less than 12 hours.

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 expense; Reassessed, not within s.8(1)Issue: 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.”

27

Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issues- T (PCJ, but employee here) argued that security concerns related to work required his travel to and from work- T traveled in his own car and received an allowance for trips over 15k- Claimed that he was required to use his own car for security, and since necessary, it should be deductableHeld: 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 would limit this recovery to where the salary claimed would be included in income

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 lesser of: the total legal expenses paid by T in recovery of a benefit under a pension plan or a retiring

allowance

Professional 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 deductable, because required to practice lawo (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 worko (v) Annual dues retained by employer, pursuant to collective agreement, and paid to a trade union or

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

The Queen v. Swingle (1977) – s. 8(1)(i)(i) – interpreted strictly – professional required by statute- 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 – he is a well-respected member of the scientific community

- 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 others

Issue: - 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:

28

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 deductability 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 required by statute, this makes room for deductability where fees paid were

required for the maintainance of qualification within the professional field, rather than the strict requirement to maintain professional status

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

Home Office Expenses

Section 8(13) – Work Space in Home- Notwithstanding 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)

29

Also note McCreath – home-office to primary office is not a deductable transportation cost- The home office exists for convenience sake only

Income from Business or Property

Business 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 minus 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 – listed

Definition of a Business- Sectin 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

30

- 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 in place (Luprypa)

Recall: “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 adventure/concern in the nature of trade- Small Business Deduction: These businesses attract a special low tax rate because of the credit in section 125

o Recall definitions from above

Luprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = business- Sandwhich maker, but also a pool-shark; filed NIL returns for two years; made money gambling on pool- 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- T 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 – thefore it is not an

expected earning source and not 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

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

Old Test: Maldowan (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:

31

- In response to the inadquacies of the old test from Maldowan, the following test was made- Determination from all of the facts, with non-exhuastive list of criteria to consider:

o Profit/loss experienced in the past yearso Taxpayer’s trainingo Taxpayer’s intended course of actiono Capability of the venture as capitalized to show a profit after capital cost allowance

- Landry – Lawyer conducting practice so inefficiently that there was no REOP and therefore no business- This principle was altered in Stewart

Modern Approach: Stewart

Stewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or Property- 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 high- Minister, TCC, and TCA all determined that losses were not deductable based on no REOPIssue: Development of a new test for “business or property” incomeHeld: 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

o NO LONGER THE TEST- 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 bona fide business are 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 need inquiryb. 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 a 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 arms length, no evidence of personal use; clearly commercial; motivation of capital gains

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

32

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, not an ACNT (but not capital investment) (Arcorp Investments)

Treatment: ACNT’s are deemed to be treated as income, as a virtue of the “Business” definition- So what otherwise looks like a business transaction, can be found to be income from a business/property

IT-459 – Adventure or Concern in the Nature of Trade:- This is one of the more authoritative Interpretation Bulletins – praise from SCC and follows Taylor- Where T habitually engages in an activity capable of producing profit, T is carrying on trade/business

o 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:- Certainly and adventure – a bold and imaginative one at that- Whether or not it was in the nature of trade?

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

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 income

33

Reasons:- 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!

Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT)- Private company with one shareholder – security salesman for stock brokerage- Almost all assets of the company were marketable securities that could be traded on the stock exchange- T had no licence to broker stocks – buying for its own account; really 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 time resource property; AND- The work in progress of a business that is a profession

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 different between them

o Govt does not want to give special tax rate to investors, it is for bona fide businesseso 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

34

Hollinger v. MNR (1972) – Approach for Business vs. Property Income- 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 then traderso The additional services rendered are relatively insignificant and insufficient to convert T from

landowners to conductors of a business

Interest

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

35

Issue: Whether payments made could be regarded as part interest payments as per s. 16(1)?Held: Trial court affirmed for its reasoningComments:- 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 included

Rent 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, trade marks, patents,

know how, scientific knowledge, trade secrets, licencing fees, etc)- RULE: Where all legal rights are transferred, the transaction constitutes a sale - 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

NOTE: Becoming more important as society shifts to a knowledge-based economy;

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

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

Note on Computer Software:- Essentially intellectual property – software is copied to computer, no actual corporeal property – licence- If T agrees to licence agreement – good is purchased; If software is customized for company use – it is licenced- Software licences cannot be taxed the same way as other sales, they are just treated as a good

Dividends- Income received by Shareholders of a corporation by the corporation – distribution of income by share- Section 12(1)(j)/(k) include dividends from resident/non-resident corporations- Section 82(1)(b) and 121 protect against double taxation

Deductions in Computing Income from Business and Property- Deductions for business/property generally allowed unless there is a specific limitation (s.18)

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

36

- (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)

Section 20 – Specific Deductions Permitted- Notwithstanding the limitations in s. 18, there are some special deductions that might not have been allowed- (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

o Hardly ever relied upon now

Income Earning Purpose Test

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 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 serviceComments:- 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 taxable

Royal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally 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?Held: - YES – deductibility is determined by ordinary principles of commercial trading- 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)

37

o 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

Comments: s.18(1)(l) now removes the deductibility of membership dues at clubs, yacht, etc.Daley- Expense for a lawyer to transfer to a new location was claimed as a deduction by T- Court held, this was not an ordinary cost of business, as this was just an initial expense at the outlay of business

Personal and Living Expenses

Section 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:- (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 of a policy of insurance, annuity contract 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) – House-keeper is a personal expense – not deductable- Farmer operated large farm with no employed farm hands; T employed a house-keep 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 the farm work is considered a business expense, the things we do for ourselves are excludedComments: Had he hired an employee for the farm work for the same wages, he would have been able to deduct

Section 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- Must be able to produce receipts to claim deductions- Deduction cannot exceed 2/3 of the lower income spouse’s income

o Expenses must be to allow business or employment

38

Symes v. The Queen (1994 SCC) – s.63, found not discriminatory towards women – note LHD dissent- Lawyer carrying out practice; claimed expense for live-in-nanny – far exceeding the limitation- T wanted to claim full expense because it was required to facilitate her ability to work – discriminatory- T’s family determined that T would pay all the expenses for the children; no sharing despite active fatherIssue: Are the childcare expenses personal expenses only, or can they be a business expense?Held: s. 63 sets out limits on childcare expense deductions – no evidence of discriminatory natureReasons:- General provision of 9(1) cannot override the specific provision of s.63- T’s personal family decision makes it seem more discriminatory than it actually is – had she been a single

woman in the same scenario, there may be a discrimination issu hereDissent (LHD):- The expenses should be deductable as business expenses- Men’s interest are deductable, but women’s are not – must be deductable to be equal- Majority used the Charter to interpret the ITA, but did not find an infringement, they just preferred to read the

Act in terms most favourable to Charter protection

Commuting Expenses

Recall: section 8(1) – specifically, work transportation as deductable against income from office/employment- Martyn – Travel to and from work is not deductable under s. 8(1)

Dr. E Ross Henry – Travel from/to Home is not deductable aginst 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 transportationHeld:- 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 cost- The home office exists for convenience sake only

Moving Expenses- Bayett – 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- Home-offices are not allowed – missing the four essential elements: old work; new work; old home; new home

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 year

39

o (c) The total of those amounts does not exceed the amount earned from the employment or business in the new location

o (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 deductability 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 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 Ie. Old home to new work has to be 40km greater than new home to new work. 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 schollarships 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)

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

Home Office Expenses

Section 18(12) – Workspace in Home- Notwithstanding any other provision of the Act,

- (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 duties40

- (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 MAY not be deductable- 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 – home office was for the same employer though

- 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 deductable – 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 office

Year 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 bus-exp)

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

Recall: s. 18(1)(b) – prohibits deductions outlays of capital – at CL, interest is generally a payment on capital

Section 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

41

(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 for an income earning purpose; Money must be borrowed to use directly on the income earning purpose

Policy Reasons for Denying Decuctions

Eldridge- T running a common body house; 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 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

protection was deducible where could be proven- Cost of buying out all publications 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?

Recall: Buckman – where lawyer embezzled funds from clients – income was taxable, and expenses would be deductible as well

Bribery of Certain Officials – s. 67.5- Required by the Bribery of Foreign Officials Treaty- Bribes given to judicial officers/MPs/MLAs/Police/etc are no longer deductible- Covers mainly the corruption offences of the CCC

Fines and Penalties – s. 67.6- Case law states that fines/penalties are deductible if they are incurred in the process of earning profit- This section states there’s no deduction for fines/penalties- There are some exceptions that have not been applied in any case law

Policy: - In some cases it would be profitable for a business to contravene regulations and take a fine in order to be

more profitable while fines/penalties are 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 Timing

Capital 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 sill be deductible expenses

42

- Capital assets however, are not tax deducible – 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 property

Section 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…

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

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 expenditureIssue: 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

Repair of Tangible Assets

GR: 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- 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)

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 tare items on boat; 2. Expenses to replace boilers on the shipIssue: Where 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

43

The Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building – 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 tare

o New tech does not necessarily hinder something from being a repairo 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

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

o Whether the repairs are substantial will determine how large the improvement will be- Did T have the choice to repair? Here the word was required for the proper maintenance

o And there is a substantial improvement as a result of the required repairs- 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.

Timing – Amounts Receivable

Recall: Section 12(3)/(4) – avoids the delay of taxes on amounts receivable – specifically interest

Section 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

44

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

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 Aboslute certainty is not required – sufficient certainty on amount is needed (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, but can’t sue for it- Payment of the K was received before the end of the year and remaining 15% was paid the next yearIssue: Whether the 15% was a receivable amount in the current tax year?Held: YES – must be included in the current yearReasons:- Whether 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

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- 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 could be used in the previous year – likely arguing to use losses from 7 years priorIssue: 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

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- T included the unpaid power in their financial statements, but did not include it in their taxesIssue: - 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 incomeReasons:- 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))- 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- Was the amount ascertainable?

o Evidence here shows that very accurate estimates could be made – sufficiently ascertainable

45

JL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent- 30 days are given before payment is due; T was claiming large deduction even though T was holding on to the

expense in wait for an architect certificate; Minister claimed not deductable because not yet paidHeld:- This is a contingent amount based on architect certificate – condition precedent needs to be released before

there’s any obligation to pay or amount receivable- Cannot deduct until that condition precedent is released

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 income

Section 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

46

Capital Gains

Introduction to Capital Gains

Taxation 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 Expenses

Distinguish Income from Property: 9(3)

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 property

Calculation 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- Exceptions listed in (a) are out of scope for this class- (1)(b)(i) Exception in definition of capital losses for depreciable property – to follow

47

Section 40(1) – Gains and Loss Calculation

- EXCEPT as otherwise provided in this part:

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

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

- (b): The 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 losses

Carry 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 the previous tax year

Policy 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- Three major policy concerns for changing the historical approach:

o 1. Greater Equity: Vertical – richer people tend to create higher capital gains; Horizontal – capital gains are treated more closely to equivalent income earned

o 2. Neutrality: Makes the system more neutral by reducing the incentive for T to structure their transactions to look like capital transactions (still a benefit, but less than historically)

o 3. Certainty: Should be able to determine tax consequences and plan for it NOTE: 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- Lifetime exemption for capital gains – Fishing/farming investments up to 750k

o Applies to shares of small private companies and farm property when disposed of to the next generation – Canadian small business can be passed on capital gains free up to that 750k amount

- 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

48

- Capital gains are not realized 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- Arcop 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 Recall: ACB includes all amounts paid for expenses for acquisitiono 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”

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, 2007

The 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

49

at any given time

So 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 = $21.5

Section 248(1) – “Disposition”- INCLUDES:- (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 settled

- BUT 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 or hypothecary claim 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)- 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

The Queen v. Compagnie Immobiliere BCN Ltee (1979 SCC) – Disposition and POD – stat/normal meaning- “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 Proceeds

Section 128.1(1) – Immigration

- (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

o (i) Except for property that is taxable Canadian property (where T is an individual)

- (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: Upon immigration if you do not want your taxable property to be deemed for a new ACB, it could be moved into a taxable Canadian property for shares in it, which is excluded under 128.1(1)(b)(i)

50

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

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 arms 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

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;o (ii) A person who is a member of a related group that controls the corporation; ORo (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.

Section 69(1) – Inadequate Considerations – Gifts and Below FMV Slaes- 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

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

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

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))

51

Section 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

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

Lottery 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

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

Rollovers: Transfer of Capital Property to Spouse/CLP

Section 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

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 up

52

o 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 Act

What 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 more

Then S2 sells the property to an arm’s length person for it’s 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 an individual has lent/transferred property to a person who is the individual’s spouse, the

following rules apply:o Total taxable gains from the transferred properties, deduct the total allowable capital losses from the

transferred properties, and the net capital gain is deemed to the be capital gain of the transferor Only applies where couple is still married/CLP and resident in Canada

Note: This was designed to prevent couples from shifting gains/losses to each other to avoid taxes

Example – 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 ACB

Year 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 gains

Spousal 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

53

Section 70(6) – Where Transfer or Distribution to Spouse or CLP- Where (5) would otherwise apply, 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 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 (5) apply and spouse acquires at FMV instead

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

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 / ACNT

Section 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

54

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 HANDOUT

Section 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

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 not 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

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 home

Policy 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

55

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 – size at 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 residenceo TEST: Rode (1985 TCC): “objectively consider all of the relevant circumstances…[when asking]: have

the T established on BoP that without the area of land…they could not practically have used and enjoyed the unit as a residence?”

- (a) Must be ordinarily inhabited in the yearo TEST: ordinarily inhabiting in the year, 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 year

o 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 / C

Example – 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 $450k

Assume both were resident in Canada throughout the time in question

PRE = 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 $450k

NOTE: 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)) –

56

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 gains

SECOND 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 87

Depreciable Property and Capital Cost Allowance (CCA)

DP is a class of capital propertyAct allows a deduction to recognize that the cost that a business uses to earn their income, is a real costRecall, when repairs are made to a capital property, the expense is deductible in full

Recall the specific limitations from computing income from business or property18(1)(a)/(b) – are the big oness20 – specific deductions from income from business/property

20(1)(a) – allowed to deduct a certain amount with respect to the capital costs of propertyPortion for which the property deteriorates in a given yearCCA is recognition from the ITA that deterioration of the capital asset is a true cost that must be accounted for in

taxationOperates notwithstanding 18(1)(b) – which disallows capital deductions from incomeCapital costs relate to the amount to acquire depreciable property

Generally tangible property that is used to create income – asset that was purchased that eventually wears outRecognizes the true cost of doing business using capital assetsThere are rigid rules that dictate the max amounts that physical assets depreciate each year

Depreciable Property – 248(1) – as defined in 13(21)- Depreciable property is capital property where a deduction is available to - 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) – following deductions are allowed- Each kind of property is described in a schedule- Each with their own depreciation percentages – rate of CCA applied to the capital cost of the depreciable property

to calculate the maximum deduction each year

57

Reg 1102(1): exclusions- (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 wont claim its capital cost allowance

Calculation- UCC x % depreciation = CCA under 20(1)(a)- The undepreciated capital cost (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 Calculation:

(A + B) – (E+F)

A – total cost of all amounts of the capital cost to T of depreciable capital assets

B – total recapture – assume NIL

E – total depreciation (CCA) claimed before that time

F – Proceeds of disposition of property – assume NIL

Class 5 assets – 10% CCA depreciation: $100,000

Year 1:A = 100,000E = 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

In the year acquired, only half of the value can be put into the class of assetsSo actually in year 1, the UCC would be 50,000 due to half-year rule, so CCA would be 5000

Lunch Session – Neil Brooks – The Trouble with Billionaires

58

Foundational Concepts: Equality Matters: Public policy should aim to reduce the gap between income groups

Income and wealth confers extraordinary advantages and freedoms Raises a moral question of whether one person should earn 1000x more than average Adverse consequences of inequality – increases social problems

Been an enormous run up in inequality over recent years Athletes – top 50 make an average of 25M per year CEOs and celebrities; bankers At the beginning of the golden age of capitalism (1947-1975), top 1% of us/can/aus richest people started earning

less of the total income of the countries At the great divergence (1975-2010) – the top 1% started lobbying for tax cuts etc, no they are all at their peak

ownership of the total income earned in their countries This run up is based in political decision making (and indecision)

1. Changes in policy – rich rigged the rules to be in their favour Look at the regulation index on financial employee incomes

2. Change in social norms The rich do not deserve the large income they are receiving

Earning money does not necessarily equate to deserving income Inequality has huge social and economic costs Strong economic growth is consistent with social justiceThe only way to deal with this inequality is through the tax system

FINAL EXAM REVIEW:

You may refer to hand-written calculations within Exam 4, and then it will be included into the answer

159 – 9:00am to 12:00pm – no reading period

Open book – bring anything you’d likeCalculator is allowed, likely wont need it

Everything covered is examinable, but focus on areas we spent most time on in class- Handouts are part of the course – review them – problems are meant to prepare for exam!- Problems in class are basically old exam questions- Residence problem – that is an old exam question – there is almost always one long fact pattern, with lots of facts

that must be addressed- Then a couple shorter fact patterns- Then a number of short answer questions (3-5 Marks)- If not asked about policy, don’t address it- Know three policy principles; Euqity, Neutrality and Simplicity- Refer to Act as specifically as possible, and refer to any relevant case law and apply it to the facts- Marks based on difficulty, complexity, reading time and time to respond- Quality of response is important! Organization, style, writing should hold throughout

o Attempt to use proper tax vocabularyo Where running out of time, move to point form – part marks will be awarded where possibleo RUN SPELL CHECK!o Abbreviations are fine: TP for tax payer; ACB; ACNT

- Do not look too had for issues that aren’t there- Remuneration is the correct term, not renumeration- General question regarding the guest lecturer

59