Structural element........................................................................................................................................................................... 5Tax base....................................................................................................................................................................................... 6Tax Credit..................................................................................................................................................................................... 6

Interpretation.................................................................................................................................................................................. 6Tax Avoidance................................................................................................................................................................................. 6

Anglo-Canaidan anti-avoidance doctrines.................................................................................................................................... 6Specific Anti-avoidance Rules....................................................................................................................................................... 6

GAAR......................................................................................................................................................................................... 7Income from an office and Employment.......................................................................................................................................... 7

Characterization........................................................................................................................................................................... 7Contractor / Employee.............................................................................................................................................................. 7

Total relationship test............................................................................................................................................................ 7Incorporated employees............................................................................................................................................................ 8

Inclusion - Renumeration.............................................................................................................................................................. 8Termination Payment................................................................................................................................................................ 8

In respect of........................................................................................................................................................................... 9Loss of O/E............................................................................................................................................................................. 9

General Benefit............................................................................................................................................................................ 9Characterization of benefit........................................................................................................................................................ 9

Administrative exclusion...................................................................................................................................................... 10Receipt / enjoyment of benefit................................................................................................................................................ 10Connection to O/E................................................................................................................................................................... 10

Not conferred by employer but taxable...............................................................................................................................11CRA regulation..................................................................................................................................................................... 11

Valuation of Benefit................................................................................................................................................................. 11Special Benefit........................................................................................................................................................................... 12

Relocation Allowance.............................................................................................................................................................. 12Interest-free and low-interest loans........................................................................................................................................12

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Computation........................................................................................................................................................................ 13Home purchase and home relocation loans.........................................................................................................................13

Forgiveness of Debt................................................................................................................................................................ 13Options to Acquire Securities.................................................................................................................................................. 14

Allowances, Exclusions and Deductions.....................................................................................................................................16Allowances.............................................................................................................................................................................. 16

Exceptions for reasonable travel and motor vehicle allowances..........................................................................................17Exlusions................................................................................................................................................................................. 18Deduction................................................................................................................................................................................ 19

Travel and Motor vehicle expense – s.8(1)(H) AND (H.1)......................................................................................................20Meals – s.8(4)....................................................................................................................................................................... 21Home office expense............................................................................................................................................................ 22

Moving expense...................................................................................................................................................................... 23eligible relocation - s.248(1)................................................................................................................................................. 26

Limitations.............................................................................................................................................................................. 28Income from Business and Property.............................................................................................................................................. 29

InCome from Business - Characterization...................................................................................................................................29Business- Ordinary Meaning.................................................................................................................................................... 30Reasonable Expectation of Profit............................................................................................................................................. 31

New Two step test................................................................................................................................................................ 32Continue application............................................................................................................................................................ 33

Business: adventure or concern in the nature of trade...........................................................................................................33Income from Business: Inclusions............................................................................................................................................... 34

Damages and other compensation.......................................................................................................................................... 34Income or gift / windfall........................................................................................................................................................... 35Non-competition payment....................................................................................................................................................... 35Prizes and Awards................................................................................................................................................................... 36

statutory provisions for lottery winnings..............................................................................................................................36

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Prize..................................................................................................................................................................................... 37Decision Tree.................................................................................................................................................................... 37

Income from property................................................................................................................................................................ 38Interest Income....................................................................................................................................................................... 38

“legal interest” – under s.12(1)(c)........................................................................................................................................ 38combined payments of interest and capital.........................................................................................................................39Discounts and premium....................................................................................................................................................... 40

Income from a business or property: deductions........................................................................................................................41Profit and Income – Earning purpose test................................................................................................................................42

Factual Remoteness............................................................................................................................................................. 43Deemed remoteness – policy consideration in background..................................................................................................43

Public Policy...................................................................................................................................................................... 43avoidability....................................................................................................................................................................... 44

Personal or living expenses..................................................................................................................................................... 45Travel expense..................................................................................................................................................................... 45

Automobile expense......................................................................................................................................................... 46home office expenses.......................................................................................................................................................... 46food and entertainment expenses....................................................................................................................................... 47use of recreational facilities and club dues..........................................................................................................................48

Reasonableness Limitation...................................................................................................................................................... 49Timing Issues in Computing Income from a Business or Property..................................................................................................50

Profit for the Year and Inventory................................................................................................................................................ 50Profit for the Year Subsection 9(1).......................................................................................................................................... 51

True Picture Principle........................................................................................................................................................... 51Matching Principle................................................................................................................................................................ 51Running Expense Principle................................................................................................................................................... 51Realization Principle............................................................................................................................................................. 52Market-to-Market Principle................................................................................................................................................... 52

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Inventory................................................................................................................................................................................. 53Costs included in inventory.................................................................................................................................................. 53homogeneous inventory...................................................................................................................................................... 54

Accounting conventions.................................................................................................................................................... 54Lower of cost or market (LCM) rule – s.10(1)....................................................................................................................54

Capital Expenditure................................................................................................................................................................. 55start up costs of a business generally characterized as capital expenses.........................................................................56costs to finance (or refinance) a business generally characterized as capital expenses...................................................56costs to terminate a long-term agreement generally characterized as a capital expense................................................56business expansion costs generally characterized as currently deductible expenses.......................................................56costs to acquire another business generally characterized as a capital expense..............................................................57cost to protect or preserve intangible property generally characterized as a capital expense.........................................57

expenses to repair or replace tangible personal property....................................................................................................57Statutory Capitalization Rules - Carrying Costs on Vacant Land...........................................................................................58

Capital Cost Allowance............................................................................................................................................................ 59depreciation......................................................................................................................................................................... 59Capital Cost Allowance......................................................................................................................................................... 59undepreciated capital cost................................................................................................................................................... 60Capital Cost.......................................................................................................................................................................... 60acquisition of depreciable property...................................................................................................................................... 61

available for use rules....................................................................................................................................................... 61disposition of depreciable property................................................................................................................................... 61half-year rule.................................................................................................................................................................... 61

The Characterization of depreciable property.........................................................................................................................62Allocation of Proceeds in Consideration for Disposition of Property.........................................................................................63Interest Expense..................................................................................................................................................................... 66

Taxable Capital Gains and Allowable Capital Losses.....................................................................................................................69computation............................................................................................................................................................................... 69

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General Computational Rules.................................................................................................................................................. 69Characterization......................................................................................................................................................................... 70

Real Property.......................................................................................................................................................................... 70Personal-Use Property............................................................................................................................................................. 71Listed Personal Property.......................................................................................................................................................... 71Mixed Uses of Property............................................................................................................................................................ 73Change in Use......................................................................................................................................................................... 73

from Income-Producing Property to Another Purpose..........................................................................................................73from Another Purpose to Income-Producing Property..........................................................................................................73Real Property from Income-Producing Capital Property to Inventory or Vice Versa..............................................................73

Non-Arm’s Length Transactions, Rollover on Transfer of Property to Spouse or Common-Law Partner, and Attribution Rules (subdiv F)...................................................................................................................................................................................... 74

Non-Arm’s Length Transactions.................................................................................................................................................. 74potential income-shifting through non-arm’s length transactions...........................................................................................74anti-avoidance rules to prevent income-shifting among non-arm’s length persons................................................................75

Rollover on Inter Vivos Transfer of Capital Property to Spouse or Common-Law Partner...........................................................76Attribution Rules........................................................................................................................................................................ 76

STRUCTURAL ELEMENTTAX UNIT Every person resident in Canada in that year/person – not income splittingTAX BASE Taxable itemACCOUNTING PERIORD

Each taxation year

TAX RATE

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TAX CREDIT Substracted directly from the amount of tax

TAX BASES.2(2) Taxable income = income ± division CS.3(A) Total income from source = 4 identified source S.3(B) Taxable capital gain (0ther than LPP) + net gain from disposition LPP – (allowable capital loss – allowable

business investment lossS.3(C) - deduction of division ES.3(D) - losses from four source (income – allowable business investment loss)S.111 - carryovers

TAX CREDITSubtracted directly from amount of tax.Non-refundable / refundable

INTERPRETATION

Pre 1984 Strict construction MNR v MacInnes(1954)1984-1991 Purposive approach1991-2005 Non-substance plain

meaning Post 2005 Modern approach Canada Trustees (2005,SCC)

Will-Kare Paving & contracting Ltd (2000)

TAX AVOIDANCE

ANGLO-CANAIDAN ANTI-AVOIDANCE DOCTRINES- Substance and Form doctrine, Duke of Westminster- Sham Doctrine- Ineffective Transaction- Reject: Business Purpose Test, Stubart (1984)

6

Interpretation Tools1. Words – Ordinary sense2. Context3. Scheme of Act4. Object5. Parliament intention

SPECIFIC ANTI-AVOIDANCE RULES

Address inclusions s.6(1)Disallowing / limiting deductions

s.67 “reasonable in circumstance”

TimingDeeming s.6(3) /s.16 (1) / s.65 / s.74.1 / s.75.1

GAAR1. Alone or as part of series of transactions results in tax benefit - s.245(1)2. cannot reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to

obtain a tax benefit - Motivated by tax benefit s.245(3)3. results in a misuse of specific provisions of the ITA or other relevant enactments or an abuse having regard to these

provisions read as a whole - Misuse/abuse a. Achieves outcome the provision intended to preventb. Defeat the underlying rationalc. Circumvent provision

INCOME FROM AN OFFICE AND EMPLOYMENT

CHARACTERIZATIONS.3 From each office and each employmentS.5(1) Define incomeS.5(2) Define lossS.6 S.7 What must be included (benefit)S.8 What may be deductedS.248(1)

Office/Employment definition

CONTRACTOR / EMPLOYEETOTAL RELATIONSHIP TESTWiebe Door (1986)

- Whether engage himself to performing service or as a person in business

7

Income from O/E Characterization Remuneration Termination payment Benefit General benefit Special benefit Allowances / Exclusions / Deduction Moving expense

Four Elements1. Degree of control2. Ownership of tool3. Chance of profit /

loss4. integration

- considering control, entrepreneurship (risk of profit, chance of loss, ownership of tools), integration, specific results (Alexander), relevance of intention (Wolf and Royal Winnipeg Ballet)

INCORPORATED EMPLOYEESEngel v MNR (1928)

- substance legal relationship- no sham

legislation response – anti-avoidance rule in s.18(1)(p) and s.125(7) – personal service businessDynamic Industries (2005)

- analysis history to decide if it is a personal service business – to exclusively service only employer or not?

INCLUSION - RENUMERATIONs.5(1) Salary, wage, and other renumeration, including gratuities Goldman (1953) Gagnon (1965) – Gratuities;

Seary (1979)s.6(1)(c) Fees – director fees

s.6(3)

Deemed renumeration(a) from payer to payee(b) comes from an obligation arising from agreement

immediately before, during, or immediately after(c) an inducement(d) a compensation(e) consideration for convenant

Curran v. MNR (1989) – inducement not include 3rd party’s payment

Strike Pay

s.8(1)(iv) – Union Due deductions.149(1)(k) – Union given tax -exempt

TaxableLoeb (1978)Ferris

Not TaxableO’Brien (1985)Fries (1989)

Tort Damage

Not taxable – as a compensate for personal asset Cirella / Kant (2001)

TERMINATION PAYMENTinclusion as employment income where salary paid during notice period [Quance] but otherwise not [Atkins and Pollock]s.56(1)(a)(ii)

Include “as, on account or in lieu of payment or in satisfaction of … a retiring allowance”

s.248(1) Retiring allowance

8

Income from O/E Characterization Remuneration Termination payment Benefit General benefit Special benefit Allowances / Exclusions / Deduction Moving expense

(a) on or after retirement(b) in respect of a loss of O/E, as, on account or in lieu of payment of

damages, order/judgement of a tribunal

IN RESPECT OFOverin 1987

- With limitationMendes-Roux (1997)

- Compensation for a wrongful dismissal include a part of income and a part of mental distressGrant (2008)

- Two fold test: the nexus requirement is satisfied if either the amount would not have been received but for the loss of the office or employment or the purpose of the payment is to compensate for a loss of employment

- An award can be traced to event unrelated

LOSS OF O/ESchwarz (1996)

- an amount cannot be received in respect of “a loss of an office or employment” if the office or employment has not commenced;

- it also concludes that lump sum compensation for the termination of an employment agreement is not income from an unspecified source under paragraph 3(a);

- however, that it is arguable that this amount might be characterized as a capital receipt

GENERAL BENEFITs.6(1)(a) Value of board, lodging or other of any kind, in respect of, in the course

of, by virture of the O/EPurpose: prevent employee to barter for non-cash benefit

CHARACTERIZATION OF BENEFITrequires “a material acquisition or something of value in an economic sense” (Lowe, Huffman); where an advantage is primarily for the purpose of the employer’s business, no benefit will be recognized unless the benefit to the employee is more than incidental (Lowe, Cutmore, Dunlap, McGoldrick); to determine whether a benefit to a taxpayer is more than incidental, at least one decision suggests that subjective considerations can be taken into account (Rachfalowski)NOT TAXABLE TAXABLELowe (1996)

- Primary purpose of trip- Enjoyment – incidental / more than incidental

Cutmore (1986)- Employer hire CPA to file tax return for senor

employee

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Income from O/E Characterization Remuneration Termination payment Benefit General benefit Special benefit Allowances / Exclusions / Deduction Moving expense

Interpretation BulletinHuffman (1990)

- Police’s plain clothes not taxable = restored to the economic situation

MacInnis (2003)- Moving back home after retiring from Army not

taxableRachfalowski (2008)

- Golf membership that taxpayer not interested- Actual use rather than availability, objective

manifestation based on the subjective enjoyment => not taxable

- Benefit more than incidentalDulap (1998)

- Christmas Party – not economic advantage – enjoyed by employee

- taxable- Legislative response: not taxable under $150 per

personJex & Foubert (1998)

- Training related to work = Purely personal decision- CRA: only include benefits from personal interest

trainingMcGoldrick (2003)

- Free lunch = Benefit more than incidental

ADMINISTRATIVE EXCLUSION- Parties under $150 per employee- Specific / general employment related training- Discounts on employer merchandise- In house recreational facilities- Transportation pass which operated by employer

RECEIPT / ENJOYMENT OF BENEFITDiMaria

- Employer’s scholarship for employee’s son- S.56(1)(n) exempt/ S.6(1)(a) father’s benefit?- No obligation to send son to college = not father’s benefit

LEGISLATIVE RESPONSEextending the scope of the s.6(1)(a) inclusion to benefits received or enjoyed by a person who does not deal at arm’s length with the taxpayer and specifically excluding qualifying educational assistance in s.6(1)(a)(vi) [note that amounts received as scholarships, fellowships and bursaries are included in s.56(1)(n) unless received in the course of business (in which case they’re taxable as business income) or in respect of an office or employment (in which case they’re taxable as employment income); if included under paragraph 56(1)(n), however, they are effectively exempt unders.56(3)(a)]

CONNECTION TO O/Enexus test does not require that the benefit be a form of remuneration, so long as there is some connection with the taxpayer’s office or employment (Savage), nor that the benefit be received from the employer (Waffle and Giffen), though the nexus requirement can be broken when the benefit is of a personal gift (Phaneuf Estate) – though courts require strong evidence to

10

Income from O/E Characterization Remuneration Termination payment Inclusion General benefit Special benefit Allowances / Exclusions / Deduction Moving expense

this effect (Mindszenthy); see also CRA administrative positions excluding frequent flyer points unless converted to cash and non-cash gifts up to $500 per year for employeesSavage (SCC, 1983)

- Employer paid the taxpayer $100 for completing each of the three Life office management association courses.- A taxable benefit / a prize under s.56(1)(n)?- FCA: not a payment for service = gift in nature- SCC: a benefit “in respect of” an office and employment = widest possible scope => in relation to/in connection with

employment.Phaneuf Estate (FCTD, 1978)

- Employer bequeathed to employees the right to purchase $17.5 shares @ $2- Court: as a personal gift rather than remuneration

Minzenthy (TCC, 1993)- Employer give taxpayer a real Rolex for him to attend presentation for company, then deduct the cost of the watch.- Court: if it’s gift => need a stronger evidence.

NOT CONFERRED BY EMPLOYER BUT TAXABLEWaffle – Employee of Ford’s dealer ship, awarded by Ford a free holidayGiffen – frequent flyer points, later CRA exclude the benefit from frequent flyer point unless converted to cashPoynton – embezzled funds

CRA REGULATION $500/year/employee – gift from employer; additional $500 for long term service/every five years

VALUATION OF BENEFIT

FMV / ≠ COST TO EMPLOYER DISCOUNT VALUE / SCRAP VALUE COST TO EMPLOYERSpence (FCA, 2011)

- Discount for teachers’ children attend private school

Schroter (FCA, 2010)- Employer provided parking space

/ passes

Wisk (TCC, 1999)- Gold ring with corporate logo

Jelles (TCC, 1996)- Board/lodging for 24hr on call

resident care takers

Waffle (Ex. Ct. 1968)- Holiday offered at the cost to

offeror rather than subject valueTaylor (TCC,1995)

- Exclusive personal use of yacht- Cost at annual rate of return

SPECIAL BENEFIT

RELOCATION ALLOWANCE

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Income from O/E Characterization Remuneration Termination payment Inclusion General benefit Special benefit Allowances / Exclusions / Deduction Moving expense

Used to be recoginzed as non-taxable benefit for “merely compensated out of pocket cost” (Ransom, Ex Ct.1967) “simple restore to original economic position”(Splane, FCTD 1990) “No economic gain ”&”net worth was not increased”(Hoefele, FCA 1955)Then court begin to recognize such allowance taxable:

- Philips (FCA 1994) - $10,000 relocation payment- Pezzelato (FCC, 1995) – reimbursed higher interest

The legislative post new rules on relocation allowance:s.6(23) An amount paid or value of assistance provided to any person in respect of, in the course of, or by virtue of an

individual’s O/E = s.6(1)(a)’s benefits.6(19) An amount paid of a housing loss to taxpayer / non-arm’s length person deems benefit of O/Es.6(21) Housing loss = greater of (a) ACB of the residence / (b) highest FMV in previous 6 month EXCEEDS (c) lessor of

proceeds of disposition / FMV if it disposed of before the end of the next taxation year, or otherwise the (d) FMV.

s.6(20)An amount paid in respect of an eligible housing loss in respect of, in the course of, or by virtue of an individual’s O/E deem to be s.6(1)(a) benefit at amount of (a) ½ (amount received in the year + amount received in previous year - $15,000) EXCEEDS (b) amount including as an eligible housing loss on preceding taxation year.

s.6(22) Eligible hosing loss = a housing loss in respect of an eligible relocation and no more than one residence in respect of an eligible relocation.

s.248(1) Eligible relocation = enable taxpayer to be employed, carry on a business or attend post-secondary education + at least 40 Km closer

Thomas (FCA 2007)- Taxpayer move to Saint John and spent $850,370 to build a new house. After his employment terminated in June 1998,

employer buy his house at his cost when FMV of the house = $758,000- Issue 1: received in respect of his employment?- Court: “in respect of”= a very broad

INTEREST-FREE AND LOW-INTEREST LOANS

s.6(9) Deems by s.80.4(1) to be a benefit received in a taxation year by an individual to be included in computing the individual’s income from an office or employment

s.80.4(1)Deems an individual or corporation to have received a benefit where a person or partnership receives a loan or incurs a debt because of or as a consequence of a previous, the current or an intended O/E of an individual or because of services perfomed or to be performed by a corporation carring on apersonal services business

s.80.4(3)s.80.4(1) does not apply to any loan/debt or a part thereof: (a) on which the interest ≥ an arm’s length rate, except where an amount is paid or payable in respect of interest by someone other tha the debtor, or (b) was include in computing the income of a person or partnership.

s.80.4(7) Prescribed rate = specified in s.4301 of the Regulations for each quarter (currently 2%)

12

COMPUTATIONs.80.4(1) amount = (a) + (b) – ( (c)+(d))(a) interest paid on the loan computed at the prescribe rate(b) amount paid/payable in respect of the loan by the employer or a person not dealing at arm’s length with the employer(c) interest for the year paid on the loan within 30 days after the end of the year and (d) amounts paid or payable by the employer that are reimbursed by the debtor in the year or within 30 days after the end of the year

HOME PURCHASE AND HOME RELOCATION LOANSs.80.4(4) Limits the prescribed rate for computing the benefit from a home purchase/relocation loan to no more than the

rate when the loan was received or the debt incurreds.80.4(6) Home purchase/relocation loan with repayment terms > 5years = new loan after 5 years.

s.80.4(7)Home purchase loan = portion of loan used to acquire or repay a loan or debt received or incurred to acquire a dwelling for habitation for: (a) the individual by virtue of whose office or employment the loan was received or the debt incurred, (b) a specified shareholder of a corporation by virtue of whose services the loan is received or the debt incurred, or (c) a person related to the individual or specified shareholder

s.248(1)home relocation loan = a loan received in circumstances where individual has commenced employment in a location in Canada (the “new work location”) and by reason thereof has moved from an old residence to a new residence at least 40 km closer to the new work location, the loan is used to acquire a dwelling for habitation of the individual that is the new residence

Hoefele (FCA, 1995)- Taxpayer move from Calgary to Toronto in respect of his job. The employer compensated employees for increasedT

mortgage interest payment on costlier homes in Toronto based on an average cost differential of 1.55.- Ministry: Taxable under s.6(9) and s.80.4(1)- Taxpayer: not “because of or as a consequence of their employment” but because they bought house- FCA: “because of” require a strong causal connection, but do not see any strong causal relationship here; only trade life

for life in the relocation.- Dissenting: but for the employment, the taxpayer would not received the monthly interest.

Legislative response- S.80.4(1.1): a loan or debt is deemed to have been received or incurred because of O/E if it is reasonable to concluded

that reasonable to concluded that, but for an individual’s previous, current or intended O/E, the term would have been different; or the loan would not have been received/debt would not have been incurred.

FORGIVENESS OF DEBTMcArdle (TCC,1984)

- Taxpayer left his job and owed his employer $14,774.72, the taxpayer’s former employer waived the debt. - TCC: an integral part of the arrangement under the taxpayer’s employment => a direct nexus between the debt

forgiveness and employment

13

Greisinger (TCC,1986)- Taxpayer borrowed $140,000 when he move to Edmonton for work, but after the real estate market collapsed he cannot

sell his Calgary residence and need to move back to Calgary. Employer forgave $60,000 of the remaining debt.- Court: Reimbursement should not be taxable.

Legislative response

s.6(15)benefit = where a loan or other obligation to pay an amount is settled or extinguished without any payment by the taxpayer; or the amount that is less than the amount of the obligation outstanding at that time = deemed to the amount by which the amount of the obligation outstanding at that time exceeds the amount so paid, if any.

s.6(15)(a)

Deems a benefit to be enjoyed by a taxpayer at any time an obligation issued to any debtor is settled or extinguished

s.6(15)(b) Deems the amount of the benefit to be the forgiven amount.

s.6(15.1)forgiven amount = A – BA = the lesser of the amount loaned and the principal amount of the obligationB = the amount paid in satisfaction of the principal amount of the obligation

Hendlisz (TCC,2001)- Employer forgive $25,000 which taxpayer borrowed for purchase of a house, and Taxpayer argued that it compensated

him for a decline in the value of his former residence- Court: no evidence that it is related to the housing loss = benefit of E/O under s.6(1)(a) and s.6(15)

Rémillard (TCC, 2011)- Taxpayer borrowed from RCI $5 million, paid interest at 10%, RCI forgave the principal amount. Taxpayer argued that

the debt was forgiven because a public company wanted to buy RCI so need all loans removed from the balance sheet; s.6(15.1) did not apply as debt ≠ commercial obligation.

- Court: “forgiven amount” need each condition is satisfied, but dismissed the appeal as it is under s.6(15), so no need to refer to definition in s.6(15.1)

OPTIONS TO ACQUIRE SECURITIESs.7(7) Apply to “securities” issued by “qualify persons” as shares or mutual fund units and corporations and mutual

fundss.7(3)(a) excludes the application of paragraph 6(1)(a) , “except as provided by this section, the employee is deemed to

have neither received nor enjoyed any benefit under or because of the agreement”

s.7(1)

Value determined by specific computational rules(a) deems the employee to have received a benefit because of the employee’s employment in the taxation year in which the employee acquired the securities, amount = (i) FMV of share @ taxpayer acquired EXCEEDS the total of (ii) the “strike price”(share price offered by the option)and (iii) the “option price”(b) employee has transferred or otherwise disposed of rights under the agreement to an arm’s length person, deems the employee to have received a benefit because of E/O in the taxation year in which the disposition is made, amount = if any, disposition EXCEEDS amount paid to acquire the rights by which

14

s.7(1.1)a special rule for options issued by Canadian-controlled private corporations (CCPCs), the benefit under paragraph 7(1)(a) is deemed to be received in the taxation year in which the securities are disposed of or exchanged, rather than the taxation year in which the securities are acquired

s.7(5) section 7 “does not apply if the benefit conferred by the agreement was not received in respect of, in the course of, or by virtue of, the employment”

s.7(1.7)

deems taxpayers who at any time receive amounts in respect of rights ceasing to be exercisable (e.g., cancelled options) to have disposed of the rights at that time to a person with whom the taxpayer was dealing at arm’s length and to have received the amounts as consideration for the disposition (this provision reverses Buccini (FCA, 2001) which held that paragraph 7(1)(b) did not apply to amounts received as compensation for the cancellation of options when the issuing company amalgamated with another company)

s.7(4) If employee ceased to be employed, “for greater certainty”, s.7(1) “shall continue to apply as though the person were still an employee and as though the employment were still in existence”

s.53(1)(j) where a taxpayer acquires a security that is subject to a deemed benefit under section 7, the amount of this benefit is added in computing the adjusted cost base(ACB) of the security to the taxpayer

s.110(1)(d)

allow taxpayers to deduct an amount equal to ½ of the benefit deemed under subsection 7(1) where various conditions are satisfied (thereby taxing the benefit in the same amount as if it were a capital gain)Conditions:

- (i) Share acquired under the agreement by the taxpayer (or a non-arm’s length person in specific circumstances)

- (i.1) Security = non-redeemable common shares where the company cannot redeem, acquire or cancel the shares within two years

- (ii)(A) option were not “in the money” ( strike price ≥ FMV of share at option issuing)- (ii)(B) dealing at arm’s length with qualifying person

S.110(1)(d.1)

Same deduction as s.110(1)(d) but for CCPC.Conditions:

- (i) acquired a share of a CCPC in respect of which a benefit is deemed under s.7(1)(a) as modified by s.7(1.1)

- (ii) hold the share for two years- (iii) not deducted under s.110(1)(d)

TAXABLE NOT A S.7 BENEFITTaylor (TCC, 1988)

- Taxpayer became a director of Bianca in 1979 and of Greenwood in 1980 and was granted stock options in each company. Taxpayer exercise the option right in 1980 and 1981. Ministry account the option benefit as taxable, taxpayer claims: he was not an employee, so s.7(1)(a) not apply; and as s.7(5) exclude s.7 as the benefit was not received in respect of “employment”; and the option is

Busby (FCTD, 1986)- A German businessman rely on taxpayer to serve

in his capacity. The company granted her options, which taxpayer exercised. Ministry found it was s.7(1)(a) benefit.

- Court: not taxable under the s.7 as the option received by taxpayer as a gift to the personal relationship.

15

given only as the company wanted to enhance their reputations through their association with him.

- Court: based on s.248(1), a director is an employee; s.7’s presumption is all employees are in employment. S.7(5) only exclude the amount of any benefit received for consideration extraneous to employment, the intent of the Act gives “employment” an inclusive meaning. The company to hire director is for that the investor will presumed that taxpayer would performing the duties for company, and s.7(5)’s nexus words are words of the widest possible scope.

Bernstein (FCA, 1977) Grohne (FCTD, 1989)- Benefit received qua shareholders => s.15 as

shareholder benefitRobertson (FCA,1990) and Henley (FCA, 2008)

- Agreement to acquire options was not with a qualifying person (employer)

- Benefit under s.6(1)(a) either @ option exercised (Robertson) or @ option grant if can value the options

ALLOWANCES, EXCLUSIONS AND DEDUCTIONS

ALLOWANCESs.6(1)(b) an allowance for personal or living expenses or as an allowance for any

other purpose.s.248(1) “personal or living expenses” = include expenses of properties maintained

for the use or benefit of the taxpayer or a person connected by blood relationship, marriage or common-law partnership or adoption with the taxpayer and not maintained in connection with a business carried on for profit or a reasonable expectation of profit. E.g. rent to pay out at a low price

Exceptionss.6(b)(i)-(xi)

(i) travel, personal or living allowance fixed under an Act of Parliament / Inquiries Act(ii) travel, separation allowances under service regulations of Canadian Forces(iii) and (iv) allowance for diplomats, foreign aid workers and member of CF(v.1) board and lodging (up to $300/m) on youth sports teams/recreational program(vi) allowance for clergy(ix) allowance for child required by employment to live away from domestic establishement(v)(vii)(vii,1) reasonable allowance for travel exp(vii.1)(x)(xi) reasonable allowance for use of a motor vehicle

REIMBURSEMENT ALLOWANCE

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Income from O/E Characterization Remuneration Termination payment Inclusion General benefit Special benefit Allowances / Exclusions / Deduction Moving expense

an expense actually incurred in the course of the employment or a loss actually incurred actually incurred in the course of the employment.

An arbitrary amount usually paid in lieu of reimbursement.

MacDonald (FCA, 1994)- Taxpayer transferred from Regina to Toronto. RCMP paid a housing subsidy of $700/m. - Court: allowance is composed of 3 elements: (1) an arbitrary amount in that it is predetermined sum set without any

specific reference; (2) an allowance will usually be for a specific purpose; (3) the recipient need not account for the expenditure of the funds towards an actual expense.

- S.6(1)(b) is easier to apply than s.6(1)(a)North Waterloo Publishing Ltd.

- Taxpayer edited two newspaper at two locations in ON, received an annual meal allowance.- Court: even not improper purpose/reasonable estimations, law treated as additional remuneration

Income Tax Folio S2-F3-C2 “benefits and allowances from employment”REIMBURSEMENT ALLOWANCE ACCOUNTABLE ADVANCEDetailed receipts required No need to account A payment for expenses to be incurred by an employee and for

which the individual accounts with vouchers/receipts/returns not spent

EXCEPTIONS FOR REASONABLE TRAVEL AND MOTOR VEHICLE ALLOWANCESs.6(1)(b)(vii)

Reasonable allowances for travel expense (0ther than motor vehicle expenses) received by an employee from the employer for travelling away from:

(A) The municipality where the employer’s establishment where the employee ordinarily worked or reported was located, and

(B) The metropolitan area, if any, where this establishment was locatedIn the performance of the duties of the office or employment.

s.6(1)(b)(vii.1)

Reasonable allowances for the use of a motor vehicle received by an employee from the employer for travelling in the performance of the duties of the O/E <- can be in municipality/metropolitan area

s.6(1)(b)(x)(xi)

Deemed not to be reasonable where:(x) Use of a vehicle for the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of O/E <- based on km = reasonable(xi) where the taxpayer receives an allowance in respect of the use and is reimbursed in whole or in part for expenses in respect of that use (except supplementary business insurance or toll or ferry charges and the allowance was determined without reference to these reimbursed expenses) <- cannot get allowance / reimbursement at the same time

Blackman (TAB, 1967)- The taxpayer worked for a ferry company, and was required to move to other location for periods of time. He lived in

Montreal for 240 days in each of three years, and company paid him a per diem allowance of $4.- ? Travelling

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- Court: appellants were not travelling but were living at different places in the performance of the duties of their employment. Allow the exempt of allowance = an overpaid compare to the other employees

Bouchard (TRB, 1980)- Taxpayer lived in Quebec City, and also employed as a part-time professor at Université de Sherbrooke, and received

$1,500 as an allowance for travel and living expenses.- ? travel allowance under s.6(1)(b)(vii)- Court: Taxable. Travel to work for another job ≠ in performance of employment duty

Legislation Responses.81(3.1) as an allowance for, or reimbursement of, travel expenses incurred by the individual in the year in respect of

the individual’s part-time employment in the year with the employer (other than expenses incurred in the performance of the duties of the individual’s part-time employment) if (a) throughout the period in which the expenses were incurred, (i) the individual had other employment or was carrying on a business, or (ii) where the employer is a designated educational institution …, the duties of the individual’s employment were the provision in Canada of a service to the employer in the individual’s capacity as a professor or teacher; and (b) the duties of the individual’s part-time employment were performed at a location not less than 80 kilometres from, (i) where subparagraph (a)(i) applies, both the individual’s ordinary place of residence and the place of the other employment or business referred to in that subparagraph, and (ii) where subparagraph (a)(ii) applies, the individual’s ordinary place of residence

NOT TAXABLE TAXABLECampbell (TCC, 2003)

- Region school board officers worked out of their homes – travelled from home to attend meetings

Blackman (TAB,1967)- Ferry manager sojourn for many months in another

cityBouchard (TRB, 1980)

- Part-time professor work at another university 230km away

- Reversed by s.81(3.1)Daniels (FCA, 2004)

- Municipal councilor who has homeoffice, but preparation for council meeting was distinct from the performance of the work itself which took place at council meetings.

EXLUSIONS

s.6(6) Excludes any allowance (not in excess of a reasonable amount) in respect of expenses for

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(a) The taxpayer’s board and lodging for a period at a special work site/remote location as taxpayer required to be away from the principal places of residence / at the site for at least 36 hours

(b) Transportation between the taxpayer’s principal place of residence and the special work site during the period has a temporary nature

s.6(6)(a) “SPECIAL WORK SITE” a location at which the duties performed by the taxpayer were of a temporary nature, if the taxpayer maintained at another location a self-contained domestic establishment as the taxpayer’s principal place of residence factor may considered as the mail, billing, family, ownership of the property, rental, the duty performed – contract or ?(A) that was, throughout the period, available for the taxpayer’s occupancy and not rented out by the taxpayer to any other person, and(B) to which, by reason of distance, the taxpayer could not reasonably be expected to have returned daily from the special work site”

s.248(1) “SELF-CONTAINED DOMESTIC ESTABLISHMENT” a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats

s.6(6)(a)(ii)

“REMOTE LOCATION” A location that the taxpayer could not reasonably be expected to establish and maintain a self-contained domestic establishment

EXEMPT UNDER S.6(6) NOT ALLOWED EXEMPTIONWORKSITE

Jaffar (TCC, 2002)- A system analyst find a work with Malvern,

but then assigned to work in Rochester, and be paid $37,00 allowance for the apartment and travelling exp to Toronto(his family there).

- Court: Assigned to work in Rochester = unusual work place; special work site may be any place in the world including a large metropolitan city.

Guilbert (TCC, 1991)- A editor accept a permanent job in Quebec City

on temporary basis, but believe that he would leave sooner or later, use of an apartment in Quebec City for 50% of time, maintain a home in Orford, but bring his children with him during school year.

- ? exempt under s.6(6)- Court: newspaper’s premises are not work site

= s.6(6) is not applicable here. (Parliament’s express intent = to benefit lumber and mining workers, oil well drillers, exploration crews, employees at isolated bases, and those work at remote construction sites”)

TEMPORARY NATURE

Rozumiak (TCC, 2005)- Three year term in Chicago office of Ports

Authority was temporaryCRA – expected duration no longer than 2 years

Harle (TRB, 1976)- Alberta MPPs dutie ≠ a sufficiently temporary

nature

PRINCIPAL PLACE

CRA – A room (rooms) in a hotel, dormitory, boarding house or bunkhouse ≠ self-contained domestic

Barrett (TCC, 1997)- Taxpayer’s residence was not available for his

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OF RESIDENCE A

establishmentSpannier (TCC,2005)

- Worked for 20-day periods in AB maintained a principal place of residence at a friend’s house in Kelowna

occupancy after he separated from his spouse.

DISTANCE CRA – Generally will not to be expected to return daily if more than 80 km.Charun (TCC, 1983)

- Tempory work only 60 km away, but taxpayer worked 12 hours a day, 7 days/week, and trip took 90 min each way including ferry

- Court: more than only the space. Need to consider the hours of work, the type of roadway, the time of travel, general physical and mental health of taxpayer.

Can be expect to return daily for 50, 60 or even 82 km:Leclair (TCC, 1997)Smith (TCC, 1998)Duperron (TCC, 1984)

REMOTE LOCATION

Interpretation Bulletin- Established community – which provide

essential services within a reasonable commuting distance

- Remoteness – 80 km most direct route from an established community of > 1,000 people

Legislative Response- Exempt under s.110.7 for residence in

prescribed northern zone.

Dionne (TCC, 1996)- A teacher worked in a small community on

Hudson’s Bay, and the contract include an allowance to transport foods

- ? self-contained domestic establishment - Court: lodging = self-contained domestic

establishment, and a community there. A lodging eats and sleep over many months = enough to establish

DEDUCTION

s.8(1) Specific deductionss.8(1) Limitation to amounts specifically identifieds.8(4) Limitation on mealss.8(13) Limitation on home offices.8(10) Limitation on employer certificates.118(10) Non-refundable credit introduced in 2016 ($1,222 now)s.8(1)(h)(h.1)

Travel and motor vehicle expenses

s.8(1)(j) interest on borrowed money used to acquire a vehicle and capital cost allowance in respect of the vehicle where motor vehicle expenses are deductible under paragraph 8(1)(h.1) and the vehicle is used in the

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performance of the duties of the office or employment8(1)(i) (ii) (iii)

office rent, assistant’s salary, and cost of supplies if required by the contract of employment

TRAVEL AND MOTOR VEHICLE EXPENSE – S.8(1)(H) AND (H.1)deductions allowed for travel and motor vehicle expenses for travelling in the course of an office or employment where the taxpayer(a) was ordinarily required to carry on duties away from the employer’s place of business or in different places, and(b) was required under the contract of employment to pay the travel expensesprovided that the taxpayer did not receive an allowance for travel or motor vehicle expenses that was exempt under subparagraph 6(1)(b) (and did not claim a deduction under another paragraph)

• taxpayer’s place of business interpreted in relation to the taxpayer: Nelson (TRC, 1981)• concept of “ordinarily” in relation to requirement to carry on duties way from employer’s place of business interpreted as

a normal requirement of the duties: Tremblay (FCA, 1997), Imray (FCTD, 1998)• requirement “under contract” may be implied from duties: Rozen (FCA, 1985)

EXEMPT UNDER S.8(1)(H)&(H.1) NOT ALLOWED EXEMPTIONKlue (TRB, 1976)

- A police required to attend the Court to give evidence and deduct the cost.

- ? in course of employment?- Court: not taxable, attendance at court was an

essential and important part of his duties as a police officer.

Chrapko (FCA, 1998)- A teller working at 3 racetracks, two in

Toronto(75%), one in Fort Erie(25%). He commuted to work and sought to deduct motor vehicle expense.

- Court: only allowed deduction of travelling to Fort Erie => “travelling to a place of work away from the place he usually worked ” = not normally work site.

Merten (FCTD, 1990)- A project manager sought to deduct automobile

exp incurred to travel to different work sites to which he often travelled directly from home.

- Court: allow the deduction based on Chrapko had “qualified” s.8(1)(h) as taxpayer entitled to deduct expense for travelling from home to work as the

Luks(Ex. Ct., 1958)- electrician worked for 3 different employers at different

sites, under the contract he needed to provide tools for his work, and he carried tools in his car, which he used to travel from his home to each work site.

- ? travelling in course of taxpayer’s employment?- Court: a practical thing ≠ make it part of the duties of his

employment. travelling home and carrying his tools home = after duties of employment.

Hoedel (FCA 1988)- A police was required to travel with the dog while he was

off-duty in order to better socialize the dog. He deduct the expense in connection with the use of his private vehicle.

- Court: disallowed the deduction. Expense incurred in trips of a personal nature would not be deductible, except to the extent that such expenses were increased because of the necessity of taking the dog along such trips.

Hogg (FCA, 2002)- A judge received a non-taxable vehicle allowance for travel

in >15km from the base court. He also deduct the motor vehicle expense for travel to and from his base court from home “by reason of security concerns”.

- Court: deny deduction – security concerns were irrelevant

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place of work ≠ usually works- Read the Act a bit differently.

Evans (TCC, 1998)- A school psychologist works for Calgary Board of

Education, and was required to travel to various schools, to which she often travelled directly from home. Taxpayer sought to deduct motor vehicle expenses that were not covered by the allowance.

- Court: as the taxpayer used her car on a permanent basis to carry the paper and materials = a necessary expense incurred in the performance of duties.

Toutov (TCC, 2006)- Programmer work from home but also need to

travel to company to meet clients.- Court: his home office = an extension of

corporate’s place of business and is the taxpayer’s principal place of employment.

with whether or not entitle to s.8(1)(h.1)

MEALS – S.8(4)Only allow the deduction on meals on basis of s.8(1)(h) unless:“… the meal was consumed during a period while the taxpayer was required by the taxpayer’s duties to be away, for a period of not less than twelve hours, from the municipality where the employer’s establishment to which the taxpayer ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located.”Healy (FCA, 1979)

- Taxpayer worked for 3 racetracks, two in Toronto, one in Fort Erie, where he worked for a shorter period. While in Fort Erie, the taxpayer lied in a motel. He sought to deduct expense travel to Fort Erie and the cost of accommodation and meals.

- Trial Judge: ”report to work” = to conceive and identify the establishment of employer to which the employee on a regular occurrence, usually / normally reported to work.=> three racetracks = ordinarily reported for work.

- FCA: “ordinarily” = usually, commonly. Taxpayer usually work in Toronto. S.8(4) not to prevent the legitimate deduction of expenses properly incurred while working at different places.

Interpretation BulletinWhere the employer has more than one place of business to which an employee ordinarily reports on a continuing basis, the establishment referred to in subsection 8(4) is the one to which the employee reports most frequently. Where more than one of the employer’s places of business is located within the same municipality or metropolitan area, all such places of business will be viewed as a single establishment for the purposes of subsection 8(4).

HOME OFFICE EXPENSE

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s.8(1)(i)(ii) Office rent – the payment of which by the O/E was required by the contract of employements.8(1)(i)(iii)

Cost of supplies consumed – consumed directly in the performance of the duties of the O/E and that the O/E was required by the contract of employment to supply and pay for.

s.8(13)

Limitation on otherwise deductible amounts:(a) disallows the deduction of “otherwise deductible” amounts for any part of a “self-contained domestic establishment in which the individual resides” (“work space”) except to the extent that the work space is either (i) the place where the individual principally performs the duties of the office or employment, or (ii) used exclusively for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment(b) limits amount deductible for the work space to the individual’s income for the year from the office or employment computed without reference to the amount deductible for the work space, and loss limitation rule(c) allows an amount not deductible because of paragraph (b) to be deducted in the following year for the work space in respect of the office or employment can carry forward loss under the same job.

EXEMPT UNDER S.8(1)(I)(II) NOT ALLOWED EXEMPTION, MAY DEDUCT UNDER S.8(1)(I)(III)

Prewer (TCC, 1989)- An administrative assistance agreed to add sales work to

her administrative duties, and the employer agreed that she could carry out administrative duties at home outside normal office hours and signed T2200 that she was required to maintain an office. Taxpayer convert a bedroom into a home office and deducted 1/3 of the cost of the residence.

- Court: the reasonable expense of using office space in one’s own home to meet a requirement for office space from an employer’s establishment are deductible under s.8(1)(i)(ii)

Most other cases do not allow home office expense = office rentFelton (TCC, 1989)

- Court: Office rent is not expense to maintain an office in general.

If run a home office – can deduct some expenses under s.8(1)(i)(iii) as cost of supplies consumed directly in the performance of the duties:Drobot (TCC, 1987) & Haltrecht (TCC, 2000)Interpretation Bulletin:Deductible for “the cost of fuel, electricity, light bulbs, cleaning materials and minor repairs” under s.8(1)(i)(iii)

Haltrecht (TCC, 2000)- Part-time lecturer not own office at university, sought to deduct 14% of utility exp as a home office under s.8(1)(i)(iii)- ? not the place where he principally performed the duties under s.8(13)- Court: more time for professor to spent in preparation than in lecturing

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Income from O/E Characterization Remuneration Termination payment Inclusion General benefit Special benefit Allowances / Exclusions / Deduction

MOVING EXPENSEs.62 Amount paid as or on account of “moving expense” in respect of an

“eligible relocation”s.62(3) “moving expense”

includes any expense incurred as or on account of(a) travel costs (including a reasonable amount expensed for meals and lodging) in the course of moving the taxpayer and members of the taxpayer’s household …,(b) the cost to the taxpayer of transporting or storing household effects in the course of moving ... ,

(c) the cost to the taxpayer of meals and lodging near the old residence or the new residence for the taxpayer and members of the taxpayer’s household for a period not exceeding 15 days,(d) the cost to the taxpayer of cancelling the lease by virtue of which the taxpayer was the lessee of the old residence,(e) the taxpayer’s selling costs in respect of the sale of the old residenceadditional provisions since 1976 includes any expense incurred as or on account of …(f) where the old residence is sold by the taxpayer or the taxpayer’s spouse or common-law partner as a result of the move, the cost to the taxpayer of legal services in respect of the purchase of the new residence and of any tax, fee or other duty (other than [GST]) imposed on the transfer or registration of title to the new residence,(g) interest, property taxes insurance premiums and the cost of heating and utilities in respect of the old residence (up to $5,000) for the period (i) throughout which the old residence is neither ordinarily occupied by the taxpayer or any other person who ordinary resided with the taxpayer at the old residence immediately before the more nor rented by the taxpayer to any other person, and (ii) in which reasonable efforts are made to sell the old residence, and(h) the cost of revising legal documents to reflect the address of the taxpayer’s new residence, of replacing drivers’ licenses and non-commercial vehicle permits (excluding any cost for vehicle insurance) and of connecting or disconnecting utilitiesbut does not include any costs incurred in respect of the acquisition of the new residence other than those in paragraph (f)

s.248(1) “ELIGIBLE RELOCATION”s.62(1)(a)-(d)

Limitations(c)(i) not exceed the income from working at a new work location/carrying on the business at a new location (ii)the total amount of s.56(1)(n) and (0) = scholarship, bursary, etc.But can be carry forward.

EXEMPT UNDER S.6(6) NOT ALLOWED EXEMPTIONIN RESPECT Legislative response Storrow (FCTD, 1978)

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Income from O/E Characterization Remuneration Termination payment Inclusion General benefit Special benefit Allowances / Exclusions / Deduction

OF? - Now the decision is subject to amendment in s.62(3)(f) and (h); and amendment in s.63(1) that moving expense had been incurred “in the course of” an eligible location with a broader nexus test requiring that the exp “in respect of” and eligible relocation.

- Taxpayer moved from Ottawa to Vancouver in July 1975, he sought to deduct the difference in the cost of Vancouver home compared to his Ottawa home, interest on this amount, land registry fees, and installation cost of a dishwasher and new door locks.

- Court: moving expense ≠ outlays or cost in connection with the acquisition of a new residence.

Volmer (TCC, 2011)- Taxpayer move from London, ON to Edmonton,

incurred legal fee to successfully defend against a motion brought by his spouse’s former spouse to restrain them from moving two children to Edmonton.

- Court: should consider whether the exp is of the same type as those which are listed. Not the same kind of exp = no deduction.

TRAVEL COSTS.62(3)(A)

Critchley (TRB, 1983)- Taxpayer moved from BC to ON, and sought

to deduct $19 for tranquilizer and rabies shots for the family dog.

- ? a member of house hold- Court: ITA -> not member of the family but

memeber of the household = include the dog.

Ball (TCC, 1996)- Taxpayer plan to move to ON, and sought to

deduct the cost of trip to search for work, house and a school for his child

- Court: Moving exp -ordinary meaning. for the job search trip, the taxpayer was not moving.

- Will affect by 1997 amendment on S.62(1) allowing “in respect of”

TRANSPORT AND STORING HOUSEHOLDS.62(3)(B)

Yaeger (TRB, 1986)- RCMP member sought to deduct the cost to

transport a horse& trailer back to Canada- Court: s.62(3)(b) to effect that are capable of

being transported/stored, in French = Meuble du contribuale. => not include animal.

Hansan(TCC, 2004), aff’d (FCA, 2005)- Student rent an apartment for 12 month, and

sought to deduct the cost for summer rent as the cost of storing household effects

- Court: amount need to be paid when taxpayer physically move or changes her residence, and the taxpayer return to the same apartment.

Rath (FCA, 1982)

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- When taxpayer move to Ottawa, the shipped household effect destroyed in fire at warehouse

- Court: loss by fire / expenditure to buy household ≠ plain meaning of moving exp by s.62(1) nor s.62(3)(b)

MEALS AND LODGINGS.62(3)(C)

Trainor (TCC, 2000)- Taxpayer’s employer reimbursed him for

meals and lodging for 23 days, but taxpayer incurred exp for another 11 days, which he sought to a deduction

- ? 15 day period set in s.62(3)(c)- Court: should be allowed, s.62 given a

liberal interpretation. COST OF CANCEL LEASES.62(3)(D)

Party (TRB, 1982)- When taxpayer moved, she subleased her

former apartment at $50 less/month, which she sought for a deduction

- Court: if allowed, legislation need to expressly provide for such expense. under the strict interpretation

- May be different under modern approach?SELLING COSTS OF OLD RESIDENCES.62(3)(E)

Pollard (TCC, 1988)- Taxpayers was required to discharge a

mortgage, and he agreed to pay a higher interest rate on mortgage on his new residence. Sought to deduct the increased interest expense.

- Court: mortgage prepayment or discharge fees are legitimate and accepted selling costs.

Collin (TCC, 1986) Aff’d (FCTD, 1990)- Taxpayer paid a lump-sum interest so he

could qualify for a new mortgage.- Court: taxpayer’s direct/immediate object in

making the payment = effect the sale = a selling cost

Trigg(TCC, 2009)- Taxpayer paid $9892.15 to remove asbestos

from old residence as the purchaser made it a condition to offer.

Faibish (TCC, 2008)- Taxpayer spent $4,552 to remedy a mould

problem before listing it for sale, which he sought to deduct as selling cost under s.62(3)(e)

- ? necessary exp in order to sell the old house- Court: An expense reasonably incurred and

directly related to putting a home up for sale is clearly a cost of selling and is a moving expense. But mould is not prevent for house to sale. “expense” does not denote capital expenditures for repairs or improvements.

- * hope merely bring about the a sale

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- Court: distinct with Faibilsh – direct response of a long-waited buy in a slow market.

COST OF LEGAL SERVICE & REGISTRATIONS.62(3)(F)

Van Zant (TCC, 2010)- Taxpayer sought to deduct $1818.64 in respect

of the purchase of the new residence- Court: Taxpayer did not own her own home

before = s.62(3)(f) not applyRenaud (TCC, 2009)

- Taxpayer keep the old residence for rental, sought to deduct legal fees and transfer taxes on new home, as s.45(1)(a) deemed him to have disposed of the residences

- Court: s.62(3)(f) only apply to “sold” = not extend the meaning to include a deemed disposition

CARRYING COST OF OLDS.62(3)(G)

Cusson (TCC, 2007)- Taxpayer asked two friend to help him to sell

his old residence, who placed advertisements. Then he retain a real estate to sell the old residence and finally sell it in dec 2002. Sought to deduct 9 months cost.

- Court: taxpayer chose to call on his friend = reasonable effort

Johnston(FCA, 2003)- Taxpayer purchased a new house in Winnipeg

using the loans secured by the Toronto home, which is sold to repay the loans. Sought to deduct the interest.

- Court: interest on money borrowed to purchase in the new location is not with in the definition, even the loan is secured by the old home.

Lowe (TCC, 2007)- Taxpayer moved from Madoc but move back

one year later when offer another job, but sought to deduct the cost of carrying residence in Madoc.

- Court: taxpayer not make reasonable effort as only to tell family and friend that the property would be for sale.

ELIGIBLE RELOCATION - S.248(1) (a) the relocation occurs to enable the taxpayer (i) to carry on a business or to be employed at a location (“the new work location”) that is, except if the taxpayer is absent from but resident in Canada, in Canada, or (ii) to be a student in full-time attendance at a post-secondary educational institution,(b) the taxpayer ordinarily resided before the relocation at a residence (“the old residence”) and ordinarily resided after the relocation at a residence (“the new residence”),(c) except if the taxpayer is absent from but resident in Canada, both the old residence and the new residence are in Canada [for students, subsection 62(2) modifies the word “both” to “either or both”], and

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(d) the distance between the old residence and the new work location is not less than 40 kilometres greater than the distance between the new residence and the new work location

ALLOWED NOT ALLOWEDDISTANCE RELOCATION

Giannakopoulos (FCA,1955)- Taxpayer rely on the odometer in the car, but

minister denied based on the straight line method.

- Court: adopt shortest normal route method instead of the crow flies method, which using ordinary routes of public travel – road, highways, railways.

Nagy (TCC,2007) - Court:look at shortest route and normal route

of public- Not a robotic approach – look at realistic

measurement of traveling distance - Look at shortest route one might travel +

notion of normal route to the travelling public

Lund (TCC,2010) - Distance T’s old residence 33km by

revenue authority suggested route. T said that the traffic on 33km route resulted in longer commute time.

- Court: use shorter distance to determine normal route -Where 2 routes both be considered normal, the shorter route by distance should be used for calculating distance

Higgins (TCC, 1995)- SNR by ferry = 15-20 km, but may have been

inconvenientHauser(TCC, 2014)

- road construction resulted in delays in SNR

PURPOSE OF RELOCATION1

BEFORE FINDING WORKPost 1997 legislationAbrahamson(TCC, 2007)

- Not need to have employment at the new location, give more latitude to taxpayer

per-1998, Deduction disallowed Pelchat (TCC,1984)Glaubitz (TCC, 1994)McLaren (TCC, 1999)

AFTER FINDING WORKBeyette (TCC, 1989)

- Taxpayer commences a new job and move 5 years later based on the personal reasons.

- Court: no time limited is expressed by the Act.Dierckens (TCC, 2011)

- Taxpayer drive a school bus, after 10 years decide to move to 46 km closer location

- Court: s.62 not provide any time period that the move must following the commencement of employment.

1 Enable to make possible, practical or easy, potential wider meaning. & Before 1998, s.62(1) required taxpayer to have “commence” E/B at a new location; but since 1998, can allow to enable taxpayer to carry on B/E at a new work location.

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- A Broad view- left to the taxpayer’s choice.NO NEW WORK LOCATION

Gelinas (TCC, 2009)- Taxpayer changed from part-time nurse job to

full-time- Court: something has to changed in the

taxpayer’s work to result in the taxpayer’s move.

Disallowed even the purpose was to perform new duties / better performing existeing dutiesHowlett(TCC, 1998), Broydell (TCC, 2005); Grill (TCC, 2009); Moreland (TCC, 2010)

ORDINARILY RESIDE?2

Neville (TRB, 1979)- Taxpayer originally live in Peterborough ON,

rent on a month-to-month basis in Winnipeg and finally move to Winnipeg two years later, sought to deduct the cost of selling home in Peterborough.

- Court: the previous arrangement has a temporary nature ordinaryily resided in P

Jaggers (TCC, 1997)- Taxpayer kept old residence until he secured a

new job and then sell the house- Court: expense = comply to the purpose of the

divisionRingham (TCC, 2000)

- Taxpayer prepare to move to Budapest, sold his house at Kanata & rent a condo at Robson Court. When the job in Budapest delayed, he moved to Richmond Hill and sought to deduct the selling cost of Kanata home.

- Court: Robson Court was a temporary pied-a-terre, a way-station. Not unpack boxes. Not ordinarily resident at Robson Court.

Cavalier (TCC, 2001)- Accept a short-term teaching position,

taxpayer lived in AB in a residence at college with limited personal items, and frequent back to Delta. Sought to deduct the cost to move to

Rennie (TCC, 1990)- Taxpayer kept his Montreal home, but live in

Edmonton for several years in a rental home, and final worked in Victoria. Sought to deduct three moving expenses.

- ? two residences at the same time?- Court: cannot ordinarily resident in two places,

and no evidence that the appellant was in Montreal in 1984.

Calvano (TCC, 2003)- Taxpayer move to BC from Brampton ON,

rented a house and leased old home, then sold his old residence moved into a new house after 19 months. Sought to deduct selling cost.

- Court: can ordinarily resident on a temporary basis. Need consider factors included: 1) family moving together; 2) all belongings were moved; 3)driver licence, health care and bank accounts were all moved; 4) change old property to income-producing property; 5)eat, sleep and live in rent home; 6) started and established a social life; 7)property was chosen to accommodate the special needs of family.

MacDonald (TCC, 2007)- A pipe fitter lived in NS tried to find job in AB

but failed, tried to deduct the cost of moving to AB and back

- Court: not established that he changed the place as 1) maintained a NS driver licence,

2 Thomson (SCC, 1946) Ordinarily resident = the place where in the settled routine of his life he regularly, normally or customarily lives

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AB and back.- Court: purpose of s.62 is to encourage mobility

in the work force, legislative intent for seasonally unemployed worker seeking job in other provinces.

Persaud (TCC, 2007)- Taxpayer obtain a work in AB for four month

and come back to NB, deduct the cost of moving to and back to NB

- Court: resident more than 3 months, worked and opened a bank account in AB, and visit his children in AB(family). = ordinarily resident

covered by NS health insurance; 2) not take all his belongings; 3) spouse rested in NS; 4) maintained 3 houses in NS and no property in AB; 5) not changing mail address

- Inconsistent with Cavalier

LIMITATIONS

s.62(1)(a) (a) the expenses were not paid on the taxpayer’s behalf in respect of, in the course of or because of, the taxpayer’s office or employment

s.62(1)(c) (c)(i) where the relocation occurred to enable the taxpayer to carry on a business or to be employed at a new work location, the expenses do not exceed the total of all amounts included in computing the taxpayer’s income for the taxation year from the taxpayer’s employment at the new work location or from carrying on the business at the new work location limited to the income of the E/B(c)(ii) where the relocation occurred to enable the taxpayer to be a student in full-time attendance at a post-secondary educational institution, the expenses do not exceed the total of all amounts included in computing the taxpayers income for the year as scholarships, fellowships, bursaries, prizes for achievement in a field of endeavour ordinarily carried on by the taxpayer or research grants

s.62(1)(d) all reimbursements and allowances received by the taxpayer in respect of the expenses are included in computing the taxpayer’s income

s.62(1)(b) provides an unlimited carry forward for allowable moving expenses the deduction of which is disallowed under paragraph 62(1)(c) by permitting the deduction of moving expenses “to the extent that … they were not deductible because of this section in computing the taxpayer’s income for the preceding taxation year”

James (TCC, 2001), aff’d (FCA, 2003)- Taxpayer as a consultant incorporate himself as Stellar and caused Stellar to pay him dividends of $57,000 in 1998 and

$22,000 in 1999, based on the employer’s requirement. Then the taxpayer and his wife moved to Surrey, B.C. in September 1998. Minister disallowed his moving expense deduction on the basis that he had not reported any business or employment income from the new work location

- Court: not allowed as the taxpayer has other method to receive income from Stellar, can put himself on the payroll.

INCOME FROM BUSINESS AND PROPERTY

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INCOME FROM BUSINESS - CHARACTERIZATION

s.9(1) Income from B/P = profit from that B/P for the years.9(2) The loss computing by applying the provisions of the Act for

computing income form that source with such modifications as the circumstances require

s.9(3) Income from P not include capital gain from the disposition of propertyLoss from P not include any capital loss from the disposition of that property

s.12-16 Inclusionss.18-20 Deductionss.10 Inventorys.13 Capital cost allowancess.248(1) “BUSINESS” includes a profession, calling, trade, manufacture or

undertaking of any kind whatever and, except for the purposes of [various provisions we don’t need to consider] an adventure or concern in the nature of trade but does not include an office or employment“PROPERTY” - means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes (a) a right of any kind whatever, a share or chose in action(b) unless a contrary intention is evident, money(c) a timber resources property, and(d) the work in progress of a business or profession

BUSINESS- ORDINARY MEANINGBUSINESS WIND FALL / GIFT / HOBBY

GAMBLING Lupypra (TCC, 1997)- skilled pool player who played inebriated

opponents carried on a business of playing pool for profit

Morden (Exch.Ct. 1961)- Taxpayer used to own a horse racing stable, but

sell his horses in 1948, and added gains from gambling in computing his income in following year.

- Court: still under strict interpretation, casual winning not subject to tax.

o Objective test – organization of the taxpayer’s effort and the susceptibility of

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Income from B/P Income from B - Characterization Inclusion Income from P Deduction Profit and Income-Producing test Mixed personal and business exp Timing Issues Profit for the year and inv Capital cost allowances

the subject matter to making a profit (reasonable expectation of profit) – Graham v. Green

o Subjective test – the man’s own dominant object – whether it was to conduct an enterprise of a commercial character or whether it was primarily to entertain himself, Lala Indra Sen

Leblanc (TCC, 2006) - brothers who consistently made net gains from

sports lotteries were “compulsive gamblers” with no reasonable expectation of profit

Radonjic (TCC, 2013)- gains from online poker not taxable since

“chance remains the predominant factor in whether [players] win or lose”

TREASURE-SEEKING

MacEachern(TRB, 1977)- employee of Parks Canada sea-diving in

spare time and located the wreck, realize $26421.4 after reverse the cost

- Court: a hobby with a potential for profit, with characteristics somewhat akin to a business endeavour

Tobias(1978) - Taxpayer searched for treasure buried on

island but failed, sought to deduct exp as business loss

- Court: no special degree & lack of professional qualification ≠ unreasonable = business

Cameron (TRB,1971) - taxpayer capture two killer whales – sold and

minister added the share of proceeds $8033.33 to taxpayer’s income.

- Court: ≠whaler, outside scape of business; two occasion = fortuitous ≠ biz venture in usual sense. 3rd catch may possibly have fallen into a different category

FRAUD Johnson(FCA,2012)- taxpayer received the money from the

fraudulent project, and claimed to be a trust rev.

- TCC: these net receipts were not income from a source. – there was little connection between the capital and the net receipts ≠ the capital is the source. 1 nothing was actually earned with the capital; 2. The net receipts is not from the appellant’s

Hammill(FCA,2005) - victim of gem fraud, taxpayer paid $1651766,

then, the gem are gone. - ? can deduct of the fraudulent selling cost as a

biz lose?- Court: Not a deducible loss as it is a fraud from

beginning to end, as not qualify as a source of income. Incompatible with the existence of a business under the Act. (like walking in the street and been robbed)

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agreement with Lech.- FCA: 1. Her contractual right has been

respected – distinct with Hammill. 2. engage in an undertaking of business, so can deduct loss and should be tax on the gain.

- Be critized not consistent.

- reasonable in the circumstance – too naïve to be claim can pass the objective test.

ILLEGAL ACTIVITIES

Smith (JCPC, 1926) - the taxpayer derived profits in 1920 by

engaging in “illicit traffic in liquor” contrary to the Ontario Temperance Act

- illegal biz = bizFogazzi (Ont. C.A., 1993)

- embezzled funds were received and misappropriated in connection with the normal operation of his business = taxable

REASONABLE EXPECTATION OF PROFITNO REASONABLE EXPECTATION AS BUSINESSStewart (Ex.Ct. 1964)

- taxpayer tried to deduct the dog raise exp as part of advertise biz loss – minister disallowed as “personal/living exp”

- Court: there is no reasonable expectation of profit => Personal and living expense

Moldowan (SCC, 1977) - farm as pure hobby = no reasonable expectation of

profit, disentitled to claim any deduction- criteria: the profit and loss experience in past years,

the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive.

Quebec v Lipson (SCC, 1979)- taxpayer = shareholders of a company owned an

apartment for renting, and the market are poor, the taxpayer formed a syndicate leased the building from the company, and owners deduct the loss.

- Ministry: Disallowed the losses on the basis that the syndicate not entered into the transaction for the

Dorfman (FCTD, 1972)- taxpayer has a mink farm and furrier biz. Mink farm

generate losses. Minister – taxpayer’s chief source of income was the furrier biz ≠ mink farm and the furrier biz

- Court: Chief source of income can be both, not need a net income before “ a net profit might reasonably be expected to come.”

Sirois (TCC, 1988) - taxpayer run a restaurant and 1982 doubled the number

of seats, increased rev by 60%, and 1983 increase the days of operation, increase rev another 18%. Still no net profit.

- Court: pre1982, limited seat and day of operation no reasonable expectation; but post 1982 seem to have reasonable expectation

- Overreach of the test – judge the success of biz / Running the biz right or not

Tonn (FCA,1996) - taxpayer made bad decision on rental property (burden

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purpose of making a profit.- Court: the renewal = create a deductible loss ≠

making a profit Potential biz purpose testLandry (FCA, 1994)

- taxpayer returned to the practice of law in 1979 at age of 71, after long interruption and report losses each year from 1979-1992

- Court: to determine a source of income, only an activity is profitable or carried on with a reasonable expectation of profit, which can be denied after long-term failure.

on high interest) and generate sustainable loss. Keeping loss for a long period.

- Judge: loss from bona fide biz be disallowed solely because the taxpayer made a bad judgement? Moldowan test should be applied with a latitude favouring the taxpayer, whose biz judgement may have been less than competent.

- A loss may be incentive to wait to have the property value increase to have the capital gain, other you can expect to carry the biz loss to deduct further gain. – tax system can transfer the loss into gain. <= one tool to tax it as income / disallowed the loss deduction /build in the house value

NEW TWO STEP TESTStewart (SCC, 2002)

- Taxpay purchases four condo units & paid $1000 for each unit and financed the rest of the purchase price through debts. Taxpayer reported net rental loss in 1990-1992.

- Disallowed to be a business by Ministry as there is no reasonable expectation of profit. a tax shelter?

- Iacobucci J.: Reasonable expectable of profit is not a necessary requirement for a source of income, REOP should not be blindly accepted as the correct approach to the “source of income”, as it lead court to second-guess the bona fide commercial decisions. Business = “anything which occupies the time and attention and labour of a man for the purpose of profit”

o 2 stage approach: Is undertaken in pursuit of profit/a personal endeavour? (personal

type activity?) If not a personal endeavour, is the source of the income a biz or property?

o Stage 1, As the activity is complete commercial = biz. Stage 2, taxpayer pursuit capital gain – motivation of capital gains = pursuit profit.

Walls (SCC, 2002)- the taxpayers invested in a limited partnership that had been structured as a tax shelter- Court: the Partnership purchased and maintained an ongoing commercial operation = entitled to business loss

CONTINUE APPLICATIONREOP only step in after the endeavour has personal endeavour treat. A clear Line between the commercial or personal? Morris (FCA 2004)

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Income from B/P Income from B - Characterization Inclusion Income from P Deduction Profit and Income-Producing test Mixed personal and business exp Timing Issues Profit for the year and inv Capital cost allowances

- report fishing rev. exp and net loss as fishing guide. REOP applied here, it has a personal like treat, “no experience, training or talent to enable him to run a biz”

Cohen (TCC, 2011) - playing poker on a full-time basis and sought to deduct loss. No evidence to support that this so-called venture had the

capacity to show a profit.Bouchard (TCC,2011)

- taxpayer formed a partnership for daughter to support her tennis training and deduct the biz loss from partnership. Venture strictly for personal reason and minor cannot compelled to share any income as the agreement as she is a minor to sign.

BUSINESS: ADVENTURE OR CONCERN IN THE NATURE OF TRADETaylor (Ex. Ct., 1956)

- National lead allowed company to have on hand a 30-days’ supply of metal. Taxpayer asked National lead to allow company to have 3 months. National lead denied. Taxpayer then bought the lead by himself and sold to company and realizing profit.

- The minister claim it is a biz income, but taxpayer claim it is capital gain (it is not taxable upon 1972).- Court:

o Negative nature of advanture: 1. Singlessness or isolation; 2. No organization be set up; 3. Nothing was done to the subject matter to make it saleable;4. Different in nature from taxpayer’s daily work = adventure; 5. Not intent to profit.

o Positive guides: 1. The transaction has a treading nature; 2. Has the same kinds / same way as ordinary trader or dealer in property – in the nature of trade. (e.g. short holding period, get rental or likewise income/loss from property, endeavour to find the buyer) 3. excluded the possibility that its sale = realization of an investment / capital nature

o Application: = trade.Rutledge (1929) – large quantity of toilet paper purchased from a bankrupt firm in Berlin and sold in London for a considerable profitFraser (UK, 1949) – large quantity of whisky purchased through an agent and sold at a large profit without taking delivery, without having it blended and without advertisingStringam Farms (TRB, 1977), Tamas (FCTD, 1981) and Gavreau Beaudry Ltée (TRB, 1981) – futures transactions involving commodities and currencyInterpretation Bulletin Test:

1. In the same way as a dealer2. The nature and quantity3. Intention

“Secondary intention”Regal Heights Ltd. (SCC, 1960) – even if the taxpayer’s primary intention in acquiring property is to hold it for the purpose of earning income from its use rather than its sale, the acquisition and subsequent sale of the property may be characterized as an

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adventure in the nature of trade on the basis that the taxpayer had a “secondary intention” to profit from re-selling the property: the taxpayer’s “secondary intention” to sell the property at a profit must have been a “motivating intention” at the time of the acquisition, such that the taxpayer would not have purchased the property but for the possibility of selling it at a profit: Racine (Ex. Ct., 1965), Morev Investments Ltd. (FCA, 1973), Reicher (FCA, 1975), Crystal Glass Canada Ltd. (FCA, 1989)

INCOME FROM BUSINESS: INCLUSIONS

DAMAGES AND OTHER COMPENSATIONBurmah Steamship Co., Ltd. v. CIR,16 T.C. 67 (1930).– draw the distinction

Suppose someone who chartered one of the Appellant’s vessels breached the charter and exposed himself to a claim or damages, … there could … be no doubt that the damages recovered would properly enter the Appellants profit and loss account for the year. The reasons would be that the breach of the charter was an injury inflicted on the Appellant’s trading, making (so to speak) a hole in the Appellant’s profits .... Suppose, on the other hand that one of the Appellant’s vessels was negligently run down and sunk by a vessel belonging to some other ship owner, and the Appellant recovered as damages the value of the sunken vessel, I imagine that there could be no doubt that the damages so recovered could not enter the Appellant’s profit and loss account because the destruction of the vessel would be an injury inflicted, not on the Appellant’s trading, but on the capital assets of the Appellant’s trade ....

INCLUDED AS BUSINESS INCOME CAPITAL RECEIPTManley (FCA,1985)

- Distinct with Atkins, in which damages cannot be income for tax purposes

- Court: surrogatum principle - If received sum of money treated as if the sum actually will be received.

- Finder’s fee should be his income => compensation => biz income.

Donald Hart Limited (Ex. Ct. 1959)- infringement of its trademark = damage to goodwill,

which is capital asset / compensation for loss of profit?- The only evidence to awarding the damages = loss of

profit => compensation for loss of profit => business income

Canadian National Railway (FTCD, 1988)- Compensation on cancellation of a long-term contract

M. V. Donna Rae Ltd (TRB, 1980)- Taxpayer get the compensation after vessel drove

through his traps, which settled at $60,000- Court:most settlement is for the loss of capital, 30%

for incomeH.A. Roberts Ltd. (SCC, 1969)

- taxpayer manage the mortgage for clients; received compensation for the cancelled contracts. =biz income or capital receipt?

- Court: Payment of compensation for the termination of a separate biz of the taxpayer (distinct premises, under a manager, different method of accounting)

- Loss of contract = “the loss of capital assets” , as it equals loss of biz + loss of long-term K of enduring profit.

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Income from B/P Income from B Characterization Inclusion Damages and other compensation Gift / Windfall Non-competitive payment Price and awards Income from P Deduction Timing Issues

= business income, as CNR have a lot of similar K and can absorb the shock from the termination of the K,“no more than a surrogatum for future profits surrendered”

Pe Ben Industries Co. (FCTD, 1988) - Long term K = Major thing for the small company- = capital receipt

INCOME OR GIFT / WINDFALLINCOME GIFT/WINDFALLPresent a legal right Present a legal right but nothing taxable: e.g. pain and

sufferingMohawk Oil Co. (FCA, 1992)

- the taxpayer entered into a contract with Phillips Petroleum Company (“Phillips”) under which Phillips would supply and install a waste oil re-processing plant, which failed to work. taxpayer claimed damages from Phillips and settled with the company in 1982 for $7,162,187.

- Minister relied on the settlement documents to characterize $3,443,708 as business income and $3,718,430 as a capital receipt.

- TJ: windfall as settlement not based on Mohawk’s loss of future profits

- FCA: the settlement amount including compensation for lost profits and expenditures thrown away. Such compensation cannot be regarded as “akin to a windfall.” True nature of the biz

- Context = there may some legal right existed here

Federal Farms Limited (Ex. Ct. 1959)- Taxpayer suffered a flood and received some relief

fund which used to clear up debris and rehabilitated farm which from the donation

- Court: Taxpayer has no legal right/expectation/service; the money received is in the nature of a voluntary personal gift and nothing more.

Cranswick (FCA, 1982)- A bad trade – avoid future litigation, either buy back

$26/share or pay $3.35/share for minority shareholder- Taxable capital gain / Income from a source- Court: Income from a source = typically earned by it /

typically flows from it as expected return. Here the payment is unexpected kind and unusual, not income earned/arising from the shares

Bellingham (FCA, 1995)- Received a compensation from Expropriation Act

which amount determined by the Land Compensation board

- Pure damage award – unrelated to the issue of fair compensation for expropriated lands, taxpayer = beneficiary. Not flow from either an express or implied agreement between the parties. No element of bargain or exchange. No consideration. There is no quid pro quo, on the part of the taxpayer. = windfall in nature

NON-COMPETITION PAYMENT

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Used to be not taxable as income from a source - Fortino (TCC, 1996) nor as capital gains from the disposition of property- Manrell (FCA 2003)Legislative response – “restrictive covenant”s.56.4(1) “restrictive covenant” - an agreement entered into, an undertaking made, or a waiver of an advantage or right

by the taxpayer, whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or service by the taxpayer of by another taxpayer that does not deal at arm’s length with the taxpayer, other than an agreement or undertaking … that disposes of the taxpayer’s property

s.56.4(2)non arm’s length

include in computing their income for a taxation year “the total of all amounts each of which is an amount in respect of a restrictive covenant of the taxpayer that is received or receivable in the taxation year by the taxpayer of by a taxpayer with whom the taxpayer does not deal at arm’s length (other than an amount that has been included in computing the taxpayer’s income because of this subsection for a preceding taxation year…)

s.56.4(3)arm’s length

provides that subsection 56.4(2) does not apply to an amount received or receivable in respect of a restrictive covenant granted by a particular taxpayer to an arm’s length taxpayer(a) section 5 or 6 applied to include the amount in computing the particular taxpayer’s income(b) the particular taxpayer elects to treat the amount as proceeds of disposition of goodwill of a business (class 14.1 property), or(c) the amount directly relates to the particular taxpayer’s disposition of shares of a company or an interest in a partnership that carries on the business to which the restrictive covenant relates (“eligible interest”) and the disposition is to the purchaser, the amount is consideration for an undertaking not to compete, the restrictive covenant may reasonably be considered to have been granted to maintain or preserve the value of the eligible interest, the amount is added to the proceeds of disposition of the eligible interest, and the particular taxpayer and the purchaser elect

s.56.4(4) sets out tax treatment to purchaser, proving that(a) amounts required to be included in the particular taxpayer’s income under section 5 or 6 are considered to be wages paid by the purchaser to the employee(b) amounts treated as proceeds of disposition of goodwill of a business by virtue of the election in paragraph 56.4(3)(b) are considered to be incurred by the purchaser as the cost of this property, and(c) amounts treated as proceeds of disposition of an eligible interest by virtue of the election in paragraph 56.4(3)(c) are included in computing the cost to the purchaser of the eligible interest

PRIZES AND AWARDSINCOME GIFT / WINDFALLCampbell (TRB, 1958)

- Taxpayer challenged to swim cross the lake but failed when only half a mail to go but still got the prize $5000 =? Income

- Court: professional swimmer / contract / expection / performance of service for which payment was made

Abraham (TAB, 1960)- Taxpayer join a draw in which IGA dealers in the

Ottawa-Hull region could win a car and accept $2275 instead

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Rumack (FCA, 1992)- Won a “cash for life” that paid $1000 per month for

the rest of her life, each = partly returned capital / investment income

- Minister: $12,000 = annuity payment as income under s.56(1)(d) and allowed a deduction for the $3844.80 return of a capital under s.60(a)

- Court: payments are periodic, regular, certain, foreseeable, expected and enforceable, inexhaustible = stream of payments from contractual obligation. (logically imply that all taxable) = Equal to invest the lottery gain and get the annuity (?)

- Disagree with this case – didn’t have the choice to win an annuity or a lum sum

- Court: it is a chance not open to anyone. Still by pure chance and cannot tax the sweepstakes/bingo/gambler = element of chance = non-taxable prize.

STATUTORY PROVISIONS FOR LOTTERY WINNINGSs.40(2)(f) notwithstanding the general rules for computing a capital gain or loss in subsection 40(1), a taxpayer’s gain or

loss from the disposition of (i) a chance to win a prize or bet, or(ii) a right to receive an amount as a prize or as winnings on a betin connection with a lottery scheme or a pool system of betting referred to in section 205 of the Criminal Code is nil

s.52(4) deems the cost of property acquired as a prize in connection with a lottery scheme to be its FMV at that time

PRIZEs.56(1)(n) includes prizes won “for achievement in a field of endeavour ordinarily carried on by the taxpayer”

excludes amounts received “in the course of business” or ”in respect of, in the course of or by virtue of an office or employment”also excludes “prescribed prizes” – defined in Reg. 7700 as any prize that is “recognized by the general public” and “awarded for meritorious achievement in the arts, the sciences or service to the public” (excluding “any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered”)

Rother (TAB, 1955)- Won by architect in design competition not taxable since “in the nature of a prize or gratuitous award received in the

course of a competition”DECISION TREE

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is the prize received in respect of, in the course of or by virtue of an office or employment or in the course of a business?

Yes fully taxable as income from O/E Yes

NO

Not taxable

YES NOIn course of O/E? Watt (1966)

- Prized won by architect in design competition = taxable as the income from a separate contractual relationship created by entering the competition

Knapik-Sztamko (TCC, 2014)- Singer receive a prize from a

foundation which paid $80,000 from 1997 to 2006 to support development of the taxpayer’s career

- ≠ in the course of business, as no employment or service agreement

- ≠compensation for services rendered or to be rendered

For in respect of / in course of / by virtue of an office or

employment?

Savage (SCC, 1983)- Prize is nothing more nor less than an

award for something accomplished. Achievement must be in a field of endeavour ordinarily carried on by the taxpayer

Turcotte- Go to a TV show on Quebec cinema =?

Field of endeavour- Not a field endeavour as the taxpayer

had been unemployed for several year

Prescribed prize = for meritorious

achievement in arts/sciences/service to

public, and;= recognized by the general

public

Foulds (TCC, 1997)- Manage a band, band won two music

prizes. Taxpayer received a share - Court: not have the character of

recurring receipts ≠ fall within the ambit of the “ordinary concept of income”

- For meritorious achievement - Well advertised in press and on the

radio = enough for general publicLabelle (TCC, 1994)

- US $5,000 in Second international Accounting Case Writing Competition

- ? by the “general public”?

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NO for achievement in a field of endeavour ordinarily carried on by the

Yes

NO Not taxable

Prescribed?

Taxable over $500

INCOME FROM PROPERTY

INTEREST INCOMEs.12(1)(c) subject to subsections (3) and (4.1)*, any amount received or

receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s income) as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer’s income for a preceding taxation year**;* interest accrual rule** prevent to double tax

“LEGAL INTEREST” – UNDER S.12(1)(C)the compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by the one who is entitled to use it; the amount owed to a lender in return for the use of borrowed money - Black’s Law Dictionary, 10th ed. Interest is the return or compensation for the use or retention by one persons of a sum of money belonging to or owed to another. Interest accrues from day to day even if payable only at intervals, and is, therefore apportionable in respect of the time between persons entitled in succession to the principal. - Hallsbury’s Laws of England, vol. 49, para. 1303 requirements from Canadian constitutional law cases:1. compensation for the use or retention of a principal sum; 2. referable to the principal sum(e.g. percent of principal sum); 3. day to day accrualINTEREST NOT INTEREST (GIFT/WINDFALL / CAPITAL)Perini Estate (FCA, 1982)

- Taxpayer sell the company All Records Supply of Canada to another, and received an “interest” equal to 7% of the taxpayer’s share of the net profits computed from the closing data to the date of the payment. Taxpayer argue the amount = capital as a part of purchase

- Court: 7% = contingency additional pay, party has right to made the retroactive obligation. The existence on the closing date of a contingent liability to pay the balance, which the parties were entitled to treat as having become absolute with retroactive interest.

Miller (FCTD, 1985)- interest on retroactive salary increase

Huston (Ex. Ct., 1961)- Taxpayer’s factory was partially destroyed during

WWII, and he received compensation under a War Claims Fund, including interest computed at 3% per year from 1946 to the date of payment. Taxpayer claim that the payment = non-taxable grants, even though it called interest.

- Court: take the nature from the substance = grant to individuals

Bellingham (FCA, 1995) - additional penalty interest characterized as non-

taxable punitive damagesRozsko (TCC, 2014)

- “interest” on investment in Ponzi scheme

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues

Coughlan (TCC, 2001)- pre-judgment interest on damage award; contrary

decision in Ahmad (TCC, 2002), but CRA takes the position that these amounts are legal interest since liability for damages originates on the date of the injury even if the amount owing is not determinable until a later date [IT-396R “Interest Income” (May 29, 1984), para. 4]

Greenwood (TCC, 2011) - interest on tax refund following successful litigation

by taxpayerShaw (FCA, 1993) and Bellingham (FCA, 1995)

- ordinary interest on compensation for expropriated property

Thyssen Canada Ltd. (FCA, 1986) - late payment charges “had all the characteristics of

interest”Sherway Centre (FCA, 1998)

- Taxpayer issue bond with “participatory interest” computed as a percentage of the taxpayer’s operating surplus, which taxpayer sought deduction under s.20(1)(c)(i)

- Court: 1. It’s on day-to-day basis; 2. It can be refer to a principal sum – the principal sum can be something different, not just a %, may be something outstanding

characterized as a return of the taxpayer’s capitalLebern Jewellery Co. (TRB, 1976)

- 7% “interest” on late payments to non-resident supplier characterized a “part of the agreed selling price” not interest; similar result in Taran Furs Montreal Ltd. (TCC, 1985), but conclusion in Thyssen Canada Ltd. (FCA, 1986)

COMBINED PAYMENTS OF INTEREST AND CAPITALs.16(1) Where, under a contract or other arrangement, an amount can reasonably be regarded as being in part interest

or other amount of an income nature and in part an amount of a capital nature, the following rules apply:(a) the part of the amount that can reasonably be regarded as interest shall, irrespective of when the

contract or arrangement was made or the form or legal effect thereof, be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable; and

(b) the part of the amount that can reasonably be regarded as an amount of an income nature, other than interest, shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in the income of the taxpayer to whom the amount is paid or payable for the taxation year in which the amount was received or became due to the extent it has not otherwise been included in the taxpayer’s income. Anti-avoidance rule

Factors to consider (Groulx & Vanwest Logging Co.):1. Well-recognized practice in the business world

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2. The term of the agreement3. The course of negotiation (vendor’s intention of capitalizing interest)4. Relationship between the price paid and property’s FMV at the time.

INTEREST NOT INTERESTGroulx (Ex. Ct. 1966)

- Taxpayer owned a farm, and after intense negotiation, the purchaser accepted the price $395,000 and taxpayer agreed to waive interest on deferred payments, also provide for interest at 6% per annum on late payment, and a discount of 5% per annum on early payment.

- Minister claim part of deferred payment amount = interest (based at 5% discount rate), taxpayer claim it is capital receipts.

- Court: The FMV may fairly be the PV of the deferred payment so the FV will subject to the interest yield.

- Factors:o Well-recognized practice in business world to

generate interest in deferred paymento The property sold at a price > FMVo The taxpayer intentionally capitalizing interest

Vanwest Logging Co. (Ex. Ct., 1977)- Taxpayer sold a tract of timber for $7.5 million, of

which $6 million due over next five yrs of $1.2 million each.

- Court: distinguished with Groulx, no evidence that party discussed interest, or sale price >FMV, and practice in similar sales was to not charge interest.

- Need to look the negotiations, to the price and FMV, and common practice with respect to payment of interest => whether it can reasonably be inferred that installment payments = interest/capital

Lehigh Cement Limited (TCC, 2009, rev’d on FCA, 2010)- ? reasonable to regard a portion of each interest

payment as a return of capital BBL- From the payer perspective, the principle still owed to

the non-armlength CBR but not BBL.- Court will not ignore both legal form and the economic

substance of the relevant transactions. = more focus on the payer perspective rather than receptor perspective

DISCOUNTS AND PREMIUMa “discount” arises from the acquisition of a debt obligation for an amount less than the principal or face amount payable at maturity – Purchased price < Face value (either on issue – “original issue discount” – or on acquisition in the secondary market)a “premium” or “bonus” results from the disposition of a debt obligation for an amount greater than the cost for which it was acquired (either on redemption or through a disposition in the secondary marketLomax v. Peter Dixon & Sons Ltd (KB, 1943)

- Characterization of the discount/premium not presume to be interest, need to consider from all the circumstances of the case, consider factors: 1)the term of loans; 2)the stipulated rate of interest; 3)the capital risk; 4)the extent to which risk taken into account in fixing terms of contract

- Where no interest is payable, a “discount” or premium will normally be interest.INTEREST NOT INTERESTO’Neil (TCC, 1991)

- Taxpayer buy Canada treasury bill and realizing a return of $10543.80

West Coast Parts Co. Ltd.(Ex. Ct. 1964)- $125,000 for 2 year at 10% plus a premium of

$56,000

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- Court: difference between the purchase price and the maturity value = interest

No. 593 (TAB,1959)- Loan $100,000 with a bonus of $13000 = in lieu of

interest Gestion Guy Menard Inc (TCC 1993)

- Treasury bills with zero interest payable sold one day before maturity = in lieu of payment of interest

- Take capital risk into account = profit from an adventure in nature of trade

INCOME FROM A BUSINESS OR PROPERTY: DEDUCTIONSs.9(1) “profit” (net concept) (rev - cost)s.18(1)(a) prohibits deductions in respect of “an outlay or expense except to

the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property” only deduct to gaining/producing income

s.18(1)(h) prohibits the deduction of “personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business” only can deduct the travel exp while away from house to carry on the business

s.67 prohibits deductions “in respect of an outlay or expense in respect of which an amount is otherwise deductible under this Act, except to the extent the outlay or expense was reasonable in the circumstances” only to reasonable extent on the deduction – important anti-avoidance rule (some expenses will be unreasonable therefore undeductible)

s.67.5 disallows the deduction of various illegal payments (bribes and kickbacks) [applicable after July 13, 1990] a public policy consideration

s.67.6 disallows the deduction of fines and penalties [applicable after March 22, 2004] reverse relevant case law

s.18(1)(t) disallows the deduction of amounts paid or payable under the Income Tax Act (including fines and penalties and interest on late payments) [applicable after 1988]

s.18(12) limitation on deduction of home office expenses [applicable after 1987] = similar to the relevant employee limitation

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Profit and Income-earning test Personal or living exp Reasonableness limitation Timing Issues

s.13(7)(g)&(h)s.13(2) s.20(16.1)s.67.2-67.4

limitations on deductions in respect of passenger vehicles [applicable after 1987]

s.67.1 50% limitation on deduction of meals and entertainment [applicable at 80% after June 17, 1987, reduced to 50% after February 21, 1994] first look at other deductible exp/ then reasonable limitation can kick in

s.18(1)(l) Reg. 1102(1)(f)

disallows the deduction of an outlay or expense and capital cost allowance in respect of the use or maintenance of a yacht, a camp, a lodge or a golf course or facility, and membership fees and dues in a club the main purpose of which is to provide dining, recreational or sporting facilities for its members [applicable after 1971]

PROFIT AND INCOME – EARNING PURPOSE TESTImperial Oil Ltd. (Ex. Ct. , 1947)

- one of the taxpayer’s ships collided with and sank a ship owned by U.S. Steel called the “Craster Hall”, the taxpayer settled with U.S. Steel in 1930, and sought to deduct settlement in computing its income

- Minister: in respect of amounts “not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income”

- ? for the purpose of earning profit under s.9(1) – ? deducible under s.6(a) [s.18(1)(a)]

- Court:o The deductibility of expense inherent in the concept of “annual profit or

gain”, so deductible under s.18(1)(a) stem from s.9(1)’s profit testo meaning of “profit” and judicial test for assessing allowable deductions in

computing “profit”= Ordinary principle of commercial trading or well accepted principles of biz and acc practice unless deductions is prohibited within the express terms of the excluding provisions. If deduction is not permissible by the ordinary principle of commercial trading or accepted business and acc practice = it is not necessary for further inquiry3

o interpretation of income-earning purpose test of 18(1)(a) look at connection with the operation – nexus connection between the expenditure and business incidental to trade and business.Strong & Co. Limited v. Woodifield (1906) – English case law – only losses incidental to the trade itself can be deducted as are connected with in the sense that they are really.

- Application deductible

3 Criticized later by SCC decision as the legal test should not controlled by accounting principle. Per Iacobucci J. in Symes (SCC, 1994) the determination of profit under subsection 9(1) is a question of law, courts have been reluctant to posit a subsection 9(1) test based upon “generally accepted accounting principles” (GAAP) .... Any reference to GAAP connotes a degree of control by professional accountants which is inconsistent with a legal test for “profit” under subsection 9(1).

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Profit and Income-earning test Personal or living exp Reasonableness limitation Timing Issues

o Profit of s.9(1) - deductible according to the ordinary principles of commercial trading and well accepted principles of business and accounting practice as an item in the total cost of its marine operations.

o Income-earning purpose of s.18(1)(a) - its consequential liability to pay damages for a collision resulting therefrom, was a normal and ordinary risk of the marine operations, part of the appellant’s business and really incidental to it.

FACTUAL REMOTENESSINCIDENTAL FACTUAL REMOTENESSImperial Oil Ltd. (Ex. Ct. , 1947) - liability incidental to the marine operation

Davis (TAB, 1964) – deduction of damages from automobile accident en route to brother’s house to inspect two boars disallowed since “in no way incidental to the business of farming or hog-raising”Ace Salvage Alberta Ltd. (TCC, 1985) – deduction of expenses to board, train and race horses disallowed in computing income from the taxpayer’s salvage business on the basis that they were incurred in the course of a separate business, not for the purpose of promoting the salvage operation

Herald and Weekly Times Ltd. (HC, 1932) – damages for libels published in the taxpayer’s newspaper were deductible]

Fairrie v. Hall (KB, 1947) – deduction of damages for malicious libel disallowed on the basis that the libel was “only remotely connected” with the taxpayer’s business

Rolland Paper Company Limited (Ex. Ct., 1960) – deduction of legal expenses to defend against criminal charge for anti-competitive trade practices allowed on the basis that they were made for the purpose of earning income defending the way to establishing the business

Cormier (TCC, 1989) and Sommers (TCC, 1993) – where deduction of legal expenses to defend against charges of tax evasion were disallowed on the grounds that they were not incurred to defend a way of doing business but were personal to the taxpayer

DEEMED REMOTENESS – POLICY CONSIDERATION IN BACKGROUNDFine, Penalty, Cost to defense yourself – deem to be not incidentalAlexander von Glehn & Co. (KB, 1920), E.H. Pooler & Co. Ltd. (Ex. Ct., 1962), and Horton Steel Works Ltd. (TRB, 1972) – deduction of fines and penalties disallowed on the basis that they were not incidental to the taxpayers’ businesses because the businesses “could have been carried on without any infraction of the law”. Trading with enemy ≠ incidental = deemed remotenessPoulin (FCA, 1996) – deduction of damages resulting from fraudulent misrepresentation made in the course of the taxpayer’s business as a real estate broker disallowed on the grounds that “act committed deliberately with the aim of causing damage cannot be considered as being necessary for carrying on the trade or profession” and was therefore “completely foreign” to the business even though it was “committed while carrying on the trade or profession”No. 666 (TAB, 1959) – deduction of legal expenses to appeal a decision of the Ontario Securities Commission which had cancelled the taxpayer’s registration as a broker on account of questionable sales practices disallowed on the basis that “a business can perfectly well be carried on without any infraction of the law”

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PUBLIC POLICYLusco Products Ltd. (TAB, 1956) and King Grain and Seed Company Ltd. (TAB, 1956) – deduction of fines disallowed on the grounds that doing so would allow the taxpayer “to share with the public revenue the loss to which it was condemned” by reason of its own unlawful act or negligenceNeeb (TCC, 1997) – deduction of $6 million cost of marijuana and hashish seized by U.S. Drug Enforcement Agency disallowed on the grounds that “the Canadian public should [not] be expected to subsidize a drug dealer’s loss through forfeiture of illegal drugs, by allowing him to write-off the cost of the drugs so forfeited”Eldridge (Ex. Ct., 1964), Muller’s Meats Ltd. (TAB, 1969), and United Color and Chemicals Ltd. (TCC, 1992) – bribes and kickbacks deductible if proven [reversed by section 67.5]

S.67.5(applicable after July 13, 1990) In computing income, no deduction shall be made in respect of an outlay made or an expense incurred for the purpose of doing anything that is an offence under section 3 of the Corruption of Foreign Public Officials Act or under any of section 119 to 121, 123 to 125, 393 and 426 of the Criminal Code, or an offence under section 465 of the Criminal Code as it related to an offence described in any of those sections.

AVOIDABILITYALLOWED DISALLOWEDDay & Ross Inc. (FCTD, 1976) – deduction of fines and penalties for overweight trucks allowed on the grounds that they were “a necessary expense” and “not outrageous transgressions of public policy

Amway (FCA, 1996) – deduction of fines and penalties disallowed on the basis that they “cannot be considered to have been incurred for the purpose of producing income unless [they were] an unavoidable incident of carrying on the business”Thiele Drywall Inc. (TCC, 1996) – deduction of legal expenses to defend against tax-evasion charges involving a scheme to falsely record employment income as reimbursements in order to evade income and payroll taxes denied on the grounds that the charges were not a “normal … ordinary [or] unavoidable incident of carrying on the business”

But court didn’t connect deemed remoteness test to the s.9(1) test65302 B.C. Ltd.(S.C.C. , 1999)

- the taxpayer was determined to have exceeded its quota and was assessed an over-quota levy, although the taxpayer’s owner-manager testified that it was normal for producers like the taxpayer to exceed their quotas by 2-6%, the taxpayer made a deliberate decision to exceed its quota in order to supply a purchaser that it feared it might otherwise lose. Taxpayer sought to deducted the over-quota levy, which resulting in a non-capital loss. the Minister disallowed the deduction.

- Court:o Ordinary and well accepted? - jump direct into the s. 18(1)(a) not consider the s.9(1) but it should subject to this

test – it is clearly ordinary practiceo Incurred for the purpose of income? – yes - The decision to produce over-quota was a business decision made in

order to realize income.

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o deemed remoteness? – unavoidance + incidental + remoteness – no statue basis – all gone; factual remoteness test kept, deemed remoteness probably no - maybe if the egregious or repulsive “that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income.”

o Avoidable? – statute s.18(1)(a) cannot support of this testo Rule of public policy – reluctant, such public policy determinations are better left to Parliament. – only up to

legislator.o => Deductible

Legislative responses.67.6 (applicable after March 22, 2004) In computing income, no deduction shall be made in respect of any

amount that is a fine or penalty (other than a prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose a fine or penalty.

No definition of fine / penalty here – whether a regulatory charge will satisfy the result?McNeill (FCA, 2000)

- the taxpayer was determined to have breached the restrictive covenant and was required to pay damages and costs, which the taxpayer deducted the damage payment in computing his business income.

- the Minister disallowed the deduction on the basis that the damage payment was not a normal risk that was incidental to his business

- Court: 65302 BC Ltd. is equally applicable to court awards of damages as to fines and penalties.Canadian Imperial Bank of Commerce (FCA, 2013)

- in litigation resulting from the collapse of Enron Corporation, the taxpayer paid $3 billion to settle claims that it took part in transactions with sufficient knowledge to render it liable for losses due to Enron’s misleading financial reports

- the Minister disallowed the deduction on the basis that the taxpayer’s role in Enron’s frauds was “so egregious and repulsive”, the Crown also argued that the deduction could be disallowed under subsection 9(1) on the basis that settlement not deductible under well accepted business principles or generally accepted accounting principles.

- Court: Reject deemed remoteness - recognizing that certain conduct may, because of its egregious or repulsive nature, be so disconnected factually from the taxpayer’s actual business (or from any business) that an expense the taxpayer incurs because of that conduct cannot meet the income earning purpose test.

- Reject subsection 9(1) test: does not harbour an implicit morality test that could deny the deduction of a claimed business expense that is deductible under well accepted business principles and passes all of the specific statutory tests for deductibility.

PERSONAL OR LIVING EXPENSESs.18(1)(h) prohibits the deduction of “personal or living expenses of the

taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business” only can deduct the travel exp while away from house

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Profit and Income-earning test Personal or living exp Reasonableness limitation Timing Issues

to carry on the businesss.248(1) “personal or living exp”

But the characterization of a personal or living expense generally depends on judicial decisions

s.67 Subject to a reasonable limitation

TRAVEL EXPENSEWORK RELATED PERSONAL REASONSCumming (Ex. Ct. , 1967)

- the taxpayer maintained an home office where he performed administrative work, and deducted automobile expenses of travel “to and from the hospital”

- Denning - Newsom v. Robertson - you must look to see what is the base from which the trade, profession, or occupation is carried on

- Court: taxpayer has no personal base in hospital, distinguishable between N v. R

Cork (FCA, 1990) – expenses incurred by draftsperson travelling to different construction sites deductible since he maintained an office in one room of his rented home, where he performed services on drafting tablesForestell (TCC, 1991) – expenses of travelling from Cambellford, Ontario, to Toronto, where taxpayer worked exclusively at the Royal Ontario Museum from 1978 to 1990, as well as cost of rent and all meals in Toronto deductible on the basis that the taxpayer’s base of operations was at his home in Campbellford, 90 minutes northeast of Toronto personal choice

Henry (SCC, 1972) – expenses incurred by anaesthetist travelling a mile and a half from home to and from hospital in Victoria not deductible since taxpayer maintained a separate office that was not located in his home

AUTOMOBILE EXPENSEs.13(7)(g)(h)

generally limit the capital cost of a passenger vehicle for purposes of the capital cost allowance rules to $20,000 or such other amount as is prescribed [$30,000 since 2001 – see Reg. 7307(1)]; see also corresponding rules for “recapture” and “terminal loss” in subsections 13(2) and 20(16.1)

s.67.2 limits the deduction of interest on borrowed money used to acquire a passenger vehicle2.67.3 limits the deduction of lease charges in respect of a passenger vehicle

A BUSINESS WITH DIFFERENT LOCATIONS SEPARATE BUSINESS / COMBINE WITH PLEASURE / TRAINING

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Randall (SCC, 1967) – travel from Vancouver to Portland, Oregon and back again deductible since taxpayer’s business of managing horse-racing activities was carried on in different locationsWaserman (TAB, 1969) – travel from Ottawa to Pembroke, Ontario deductible since taxpayer’s furrier business was carried on in different locationsOzvegy (TRB, 1978) – cost of meals and rent for furnished apartment in travel Shelbourne, Nova Scotia, where taxpayer provided radiology services 2½ days a week deductible since taxpayer’s base was 158 miles away in Yarmouth, Nova Scotia, where he also rendered radiology services, and cost to stay in a hotel would have been more

A-1 Steel and Iron Foundry Ltd. (TAB, 1963) – deduction of expenses for European trip taken by president and controlling shareholder and his wife limited to 35% of the actual expense on the basis that only a small portion of the trip was devoted to visiting business contracts and inspecting techniques at other foundriesShaver (TCC, 2004), aff’d (FCA, 2004) – travel expenses to attend monthly Amway business seminars throughout North America disallowed under paragraph 18(1)(b) “on account of capital” since they contributed to training which would result in an enduring advantage to the taxpayer[notwithstanding paragraph 18(1)(b), subsection 20(10) allows the deduction of expenses to attend, “in connection with” the taxpayer’s business, “not more than two conventions held during the year by a business or professional organization at a location that may reasonably be regarded as consistent with the territorial scope of that organization”]

HOME OFFICE EXPENSESHome office expense have often been characterized as “personal/living exp”, unless it is exclusive used for business purpose & separate from living spaces

EXCLUSIVELY FOR BUSINESS PURPOSE PERSONAL / LIVING EXPLogan (TAB, 1967) – deduction of home office expenses allowed on the grounds his full-time office was unsuitable for night-time work, he had deliberately purchased a home with a separate study, and he used the study exclusively for his medical practice, writing reports and consulting with other doctors 5-8 times per week

Locke (TAB, 1965) – expenses of a home office maintained by a lawyer who also had an office at the law firm where he worked disallowed on the basis that “his home office appeared to be used, in the relevant taxation year, principally for his own personal convenience”Mallouh (TCC, 1985) – home office expenses characterized as “personal expenses whose sole purposes was for the [taxpayer’s] purposes” on the ground that the taxpayer did not need the home office, did not treat or receive patients in the home office, had not purchased the home with the primary purpose of establishing a medical office, and had no business phone number for the home office nor any sign indicating that he operated a medical office in his home

s.18(12) (a)

disallows the deduction of “self-contained domestic establishment” in which the

Vanka (TCC, 2001) – using a home office for phone calls constitutes meeting with patients

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individual resides (“work space”) except to the extent that the work space is either(i) the individual’s principal place of business or(ii) used exclusively for the purpose of earning income from the business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business

s.18(12)(b)

limits the amount deductible for the work space to the individual’s income for the year from the business computed without reference to the amount deductible for the work space cannot increase the loss

Ellis (TCC, 1994), Dufour (TCC, 2000) and Maitland (TCC, 2000) – work spaces determined to be part of the taxpayers’ self-contained domestic establishments (subject to the loss limitation rule) since they were physically attached to and accessible from the interior of the taxpayer’s home and shared utility connectionsSudbrack (TCC, 1991) and Dennis (TCC, 2007) – work spaces of a country inn and a bed-and-breakfast determined not to be part of the taxpayers’ self-contained domestic establishments (not subject to the loss limitation rule) because the personal living areas were kept separate from the work spaces

s.18(12)(c)

allows an amount not deductible because of paragraph (b) to be deducted in computing the individual’s income from the business in the following year

FOOD AND ENTERTAINMENT EXPENSESNOT DEDUCTIBLE DEDUCTIBLE Roebuck (TAB, 1961) – expenses for existing and prospective clients invited to daughter’s bat mitzvah not deductible since neither “in accordance with the principles of commercial trading or accepted business practice” nor “incurred for the purpose of gaining or producing income from the law business or practice”Fingold (TCC, 1992) – expenses for business guests invited to son’s bar mitzvah and stepdaughter’s wedding treated as shareholder benefits on the basis that the business guests were not aware that the expenses were paid by the taxpayer’s companyAdaskin (TAB, 1953) – cast parties following radio shows to “show appreciation” and “cement good relations” not

Grunbaum (TCC, 1994) – expenses for business guests invited to daughter’s wedding deductible to the taxpayer’s company and not a shareholder benefit on the grounds that the invitations to the business guests came from and identified the company and all correspondence was handled exclusively by the company business guests are made aware that they are business guests.Scott (FCA, 1998) – in computing his income from his courier business, the taxpayer deducted $11 per day on that basis that this was the extra cost of food and water consumed above what an average individual would consume each day. Court allowed the deduction on the grounds that a foot and transit courier “should be able to deduct the fuel his body

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deductible since not incurred for the purpose of earning income – show is already over and cast got the pay. what if future show carry on?

needs ... above the average person’s intake in order to perform his job”

s.67.1(1) generally deems an amount paid or payable “in respect of the human consumption of food or beverages or the enjoyment of entertainment” to be 50% of the lesser of(a) the amount actually paid or payable in respect thereof, and(b) an amount in respect thereof that would be reasonable in the circumstances[note that this provision does not apply to specific provisions, including the moving expense deduction in section 62]

Stapley (FCA, 2006)- the taxpayer gave clients who bought or

sold homes through his business gift certificates for food and beverages and tickets to concerts and sporting events

- Court: apply to the human consumption of food / beverages or the enjoyment of entertainment by persons other than the taxpayer.

s.67.1(2)exceptions

(a) ordinary course of business, (e.g. restaurant, entertainment locate)(b) charity fundraising event,(c) compensated expenses where compensation is reasonable and specifically identified in writing to the person paying the compensation (can be other’s consumption that are compensated for)(d)-(e.1) taxable or exempt benefits or allowances in computing income from an office or employment,(f) one of six or fewer special events where food, beverages or entertainment is generally available to all individuals employed by the person at a particular place of business (work parties)

s.67.1(3)-(4)

deems the amount paid or payable for food, beverages and entertainment to be $50 per day for a conference, convention or similar event entitles the participant to food, beverages or entertainment (other than incidental beverages or refreshments) and a reasonable part of the fee is not identified as compensation for the food, beverages or entertainment,

s.67.1(4) specifies that entertainment “includes amusement and recreation” and provides that no amount paid or payable for travel on an airplane, train or bus shall be considered to be in respect of food, beverages or entertainment.

USE OF RECREATIONAL FACILITIES AND CLUB DUESs. 18(1)(l)(i)Reg. 1102(1)(f)

disallow the deduction of an outlay or expense and capital cost allowance in respect of “the use or maintenance of a yacht, a camp, a lodge or a golf course or facility, unless the taxpayer made or incurred the outlay or expense in the ordinary course of the taxpayer’s business of providing the property for hire or reward”

s.18(1)(l)(ii)

disallows the deduction of “membership fees or dues … in any club the main purpose of which is to provide dining, recreational or sporting facilities for its members”

NOT LODGE/YACHT RELATED COST ALSO NOT DEDUCTIBLE.

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John Barnard Photographers Ltd. (TCC, 1979) – boat used for research and photography in order to produce a fishing almanac was not a yacht within the meaning of subparagraph 18(1)(l)(i) which is aimed at “recreational facilities including a yacht used for pleasure”Fehrenbach (TCC, 1994) - condominium at ski resort in Collingwood, Ontario, used to entertain clients and prospective clients was not a “lodge” within the meaning of subparagraph 18(1)(l)(i)Hewlett Packard (Canada) Co. (TCC, 2005) – expenses incurred to reward successful employees with weekend stays at resort hotels fully deductible on the basis that these were not “lodges” within the meaning of subparagraph 18(1)(l)(i) The statute does not prohibit to use/maintenance in a hotel

Sie-Mac Pipeline Contractors Ltd. (FCA, 1992), aff’d (SCC, 1993)Taxpayer invite customers at remote fishing lodge, denied deduction as s.18(1)(l)(i), argued that the expenses should be allowed because it did not have exclusive use of the lodge; it also argued that the provision, if it applied, should disallow only the accommodation expenses (at that time meal and entertainment is fully deductible)Court: There is no need for the property to be “owned” or “rented” or “exclusively controlled” in order to be “used”. None of the costs incurred are deductible in this case. Use of lodge = everything around the lodge => “… subparagraph 18(1)(l)(i) … prohibits the deduction of both direct and indirect or incidental expenses in relation to the use of a property referred to in that subparagraph.”

REASONABLENESS LIMITATIONs.67 in computing income, no deduction shall be made in respect of an outlay or expense in respect of which an

amount is otherwise deductible under this Act, except to the extent the outlay or expense was reasonable in the circumstances. anti-avoidance rule

GAAR may fit into reasonable rule hereReasonable Test:It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay such an amount having only [a] business consideration … in mind.

- Business purpose test- Ethically unreasonable

Cipollone (aka Dr. Phela Goodstein) (TCC , 1994)- the taxpayer owned the “Institute of Humour”. Her revenues ranged from $85

to approximately $5,300, while her expenses ranged from over $4,000 to approximately $17,000, resulting in consistent losses

- the Minister disallowed the losses for that she had no reasonable expectation of profit in these years and that the expenses were unreasonable

- Court: The problem lies not in the absence of a reasonable expectation of profit – businesses of this sort can be quite lucrative – but rather in the attempt to deduct unreasonable expenses. – combination of personal exp here

Mohammad (FCA, 1997)

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Profit and Income-earning test Personal or living exp Reasonableness limitation

- the taxpayer and an associate purchased a rental property in 1987, intending to rent it for a few years, but continued generate loss without net income flow in. Minister disallowed the deduction of the taxpayer’s rental on the basis that the rental operation had no reasonable expectation of profit OR the interest expenses on the taxpayer’s personal bank loan should be disallowed under section 67 on the grounds that it was unreasonable to finance 100% of the purchase price

- Court: Reject REOP. Section 67 … cannot be invoked to limit an otherwise deductible expense on the ground that it is excessive or disproportionate in relation to revenues (different with Cipollone), but need to search for an objective component.

- reasonableness of an expense should be determined objectively “in terms of its magnitude or quantum” while also conceding that “there will be instances where the objective component will be difficult to isolate and, therefore practical experience informed by commonsense will have to prevail” – for example, in cases where expenses are “deemed to be unreasonable because they are believed to be excessive or extravagant”

- Not reverse Cipollone case, but need to evaluate the reasonableness as an objective criteria. extravagant and have personel component = unreasonable: Ammar (TCC, 2006)

- the taxpayer carried on an immigration and consulting business & rented an apartment in Cairo, Egypt, for an annual amount of $40,000 around. based on research indicating that the average annual rent for comparable apartments in a similar area of Cairo from 2004 to 2006 was $20,000, the Minister applied section 67 to limit the rental deductions to this amount

- the Court held that the rent expenses in 1998 and 1999 were reasonable, but relied on section 67 to limit the deductions in 1997 and 2000 to $25,000 “These considerations are in my view the kind of objective components referred to in … Mohammad ....”

there may be some personal element. This is an eligible biz, and have clients, only the cost on hotel room higher than reasonable market price => limited rental exp.

Ruff (TCC, 2013)- Stewart, Judge I: “if, in the circumstances, the expense is unreasonable in relation to the source of income, then s. 67 of

the Act provides a mechanism to reduce or eliminate the amount of the expense”- Noël J.A. in Hammill (FCA, 2005) “... In my view, the Supreme Court in Stewart acknowledged that there is no inherent

limit to the application of section 67, and that in the appropriate circumstances, it can be used to deny the whole of an expense if it is shown to be unreasonable.”

- the taxpayer was a lawyer whose practice included acting as a trustee for estates, the taxpayer advanced almost $400,000 in order to obtain the container in what he eventually realized was a fraud. the taxpayer deducted these expenses in computing his income from his legal practice

- Court: It seems clear that the Appellant was undertaking this activity as part of his law business [which] included acting as a trustee. But if the amounts claimed are unreasonable, then the amounts claimed could be reduced or denied in their entirety. none of the amounts expended by the Appellant are reasonable in relation to his law practice and therefore no portion of these amounts is deductible in computing his income from his law practice business

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TIMING ISSUES IN COMPUTING INCOME FROM A BUSINESS OR PROPERTY

PROFIT FOR THE YEAR AND INVENTORYLegislation contemplate on different accounting methods:

Cash basis Accrual basisInclusion received Receivable *entitlement to amount but

not yet due Deduction Expended

Outlay madeExpense incurred *a paid amount but not yet due

s.12(1)(b) “amount receivable” – inclusion amount receivable unless you not have to include a choices.12(1)(a) unearned income – be regarded as not having been earned – include as income in s.12(e) and deduct by reserve

in s.20(1)(m)s.12(1)(c) include amount receivable – deduct doubtful debt s.20(1)(l)(i) and bad debt s.20(1)(p)(i) and if it becomes live

again include through s.12(1)(i) and s.12(1)(d)s.18(1)(b) depreciable property needs deduct in CCA – s.20(1)(a)s.10 Inventory

PROFIT FOR THE YEAR SUBSECTION 9(1)TRUE PICTURE PRINCIPLEPublishers Guild of Canada Ltd. (Ex. Ct., 1957)

- the taxpayer carried on a business selling books and magazines through installment payments, and computed its income on an installment basis, including only the gross profit element of amounts received in the year and deducting expenses, whether laid out or incurred, including selling costs and overhead expenses including collection costs

- Court: Allow the change in acc system. where there is a dispute about a system of accounting, test:

o True picture and appropriate to the business: in the first place, whether it is appropriate to the business to which it is applied and tells the truth about the taxpayer’s income position and,

o if that condition is satisfied, whether there is any prohibition in the governing income tax law against its use

MATCHING PRINCIPLEWest Kootenay Power and Light Co. (FCA, 1992)

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues

Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues Profit for the year Inventory

- the taxpayer produced and sold electricity to residential customers on a 2-month billing cycle, subject to regulation by the BCUC, which did not allow billing for electricity supplied until December 31 until the end of the billing cycle. In 1979, it included unbilled revenue for tax and financial accounting purposes as the cost incurred in this year.in 1983, while continuing to report unbilled revenue for accounting purposes, it returned to a billed method for tax purposes, as a result of which its income for that year decreased.

- Minister: cannot use two methods for financial report and tax purpose – conformity principle- Court: reject conformity principle. “The approved principle is that whichever method presents the “truer picture” of a

taxpayer’s revenue, which more fairly and accurately portrays income, and which “matches” revenue and expenditure, if one method does, is the one that must be followed.”

RUNNING EXPENSE PRINCIPLEOxford Shopping Centres Ltd.(FCTD, 1980), aff’d (FCA, 1981)

- the taxpayer paid $490,050 to the City of Calgary in 1973 in respect of a road interchange constructed by the City that improved access to and use of the taxpayer’s parking area, and for tax purposes, the taxpayer deducted lump sum payment in computing its income for its 1973 taxation year

- Court: Matching principle – subject to the running exp method – if no item can be related to the exp, so can deduct the exp on whole in one yr. (No certainty that the benefit will continue, so should deduct it now)

Canderel Ltd. (SCC, 1998)- tenant inducement payments (TIPs) – prepaid exp- SCC: = running exp, as s.18(9) not include it as prepaid exp; matching principle

= not rule of law, only to picture the taxpayer’s situationTower Investment Inc.(FCTD, 1972),aff’d (SCC, 1973)

- advertisement exp = Running exp

REALIZATION PRINCIPLEIkea Ltd. (SCC, 1998)

- Received a TIP and amortization- SCC: Need to include in current yr. – realization principle – receive a large sum

and no conditions attach as to its use.Friedberg (SCC, 1993)

- the taxpayer carried on a business buying futures of gold, closed out contracts with accrued losses before the end of each year, and deferred disposing of contracts with accrued gains until the following taxation year, therefore generate net losses. Ministry reassessed the taxpayer on the basis that a “marked to market” method of accounting (recognizing accrued gains and accrued losses at the end of each taxation year)

- SCC: Realization principle - the respondent reported his losses when they were actually incurred, and his gains when they were actually realized. – kinda of not comply with picture principle

- administrative response: CRA indicated that it would consider applying the GAAR to transactions like those in Friedberg if entered into after September 12, 1988

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues Profit for the year Inventory Capital Expenditures CCA

- legislative response: s.142.5 (applicable to taxation years ending after October 20, 1994) mandatory “mark-to-market” rules for financial institutions

MARKET-TO-MARKET PRINCIPLECanadian General Electric Co. (SCC, 1961)

- Taxpayer had a foreign currency gain. Although the gain was not realized until 1952, the taxpayer accrued the gain for tax purposes. the Minister reassessed the taxpayer by disregarding the accrued gains and including the realized gain in the taxpayer’s income for its 1952 taxation year

- SCC allow taxpayer’s recognition: profit must be determined on ordinary commercial principles unless the provisions of the Income Tax Act require a departure from such principles

- Departure from realization principleKruger (FCA, 2016)

- starting in 1997, the taxpayer (which was not a “financial institution” for the purpose of the mark-to-market rule in section 142.5) began computing its income on a mark-to-market basis. Minister disallowed the deduction on the basis that the taxpayer had not realized the accrued losses.

- FCA: “Canderel Ltd. and Ikea Ltd. decisions that the realization principle can give way to other methods of computing income pursuant to section 9 of the Act where these can be shown to provide a more accurate picture” => taxpayer can use market to market acc

s.18(9) disallowed the immediate deduction of specific prepaid exp.(b) allows the deduction of these exp in the yr to which they can “reasonably be considered to relate”(a) specifies the prepaid expenses to which the provision applies as “an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred” as: (i) consideration for services to be rendered after the end of the year, (ii) payments on account of, in lieu of payment of or in satisfaction of interest, taxes …, rent or royalties in respect of a period that is after the end of the year, [or] (iii) consideration for insurance in respect of a period after the end of the year

Mark-to-Market Provisions

deem taxpayers subject to these rules to have disposed of property subject to the rule immediately before the end of the year for proceeds equal to its fair market value at the time and to have reacquired the property at the end of the year at a cost equal to this fair market value

s.142.5 deems any “financial institution” that holds a “mark-to-market property” at the end of a taxation year to have disposed of the property immediately before the end of the year for proceeds equal to its fair market value at the time and to have reacquired the property at the end of the year at a cost equal to the deemed proceeds [“financial institution” and “mark-to-market property” are defined in subsection 142.2(1)]

s.10.1(1) allows taxpayers to elect to use “mark-to-market” accounting for each “eligible derivative” as defined in subsection 10.1(5)

INVENTORYs.248(1) “inventory” a description of property the cost or value of which is

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues Profit for the year

relevant in computing a taxpayer’s income from a business for a taxation year

Neonex International Ltd. (FCA, 1978)- until 1970, the taxpayer treated the partially completed signs as work-in-progress (WIP) inventory for financial

accounting and tax purposes; from 1970 to 1972, the taxpayer deducted the cost of partially completed signs in computing its income for tax purposes while continuing to treat these signs as WIP inventory for financial accounting purposes

- the Minister disallowing deductions for the cost of partially completed signs in these years on the grounds that these costs were properly deductible in the years in which the signs were sold

- Court: The expenses incurred in connection with the partially completed signs were laid out to bring in income in the next or some other taxation year, not in the year in which they were claimed.

o True picture principle – matching principle

COSTS INCLUDED IN INVENTORY• acquisition costs: for inventory that is bought or sold without any modification, inventory costs include acquisition

costs as well as expenses (e.g., transportation and storage) to bring the inventory to its location and condition at the end of the year

• inventory that is manufactured or produced generally includes the costs of labour and materials that are incorporated into the inventory and at least some overhead costs (DL + DM + Overhead)

• land inventory generally includes the costs of subdivision and development• for greater certainty, paragraph 10(5)(a) specifies that inventory property other than capital property that is advertising

or packaging material is inventory

HOMOGENEOUS INVENTORYif gross profit = proceeds – cost, and cost = C0(beg. cost of inv.) + C1(cost of inv. acquire this year) - C2(cost of unsold inv.), then gross profit = proceeds - C0 - C1 + C2(in this way, the cost of unsold inventory may be relevant in computing the taxpayer’s business income for the year)Cost = only deduct everything and add back what left / Cost of unsold inv. RelevantACCOUNTING CONVENTIONSFirst In First Out (FIFO) – assumes that the oldest inventory is sold first, so unsold inventory is the most recently acquired or producedLast In, First Out (LIFO) – assumes that the most recently acquired or produced inventory sold first, so unsold inventory is the oldestAverage Cost – averages the cost of sold and unsold inventory *s.47Anaconda American Brass Ltd. (JCPC, 1955)

- Taxpayer used the LIFO to calculate the copper inventory. - Cannot rely on LIFO – “nor is it legitimate to regard the closing inventory… residue of cost rather than as a concrete

stock of metals awaiting the day or process.” FIFO will reflect the company’s true picture here. = reflect the “physical flow of the goods”

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues Profit for the year

CRA not accept LIFO method, can only accept FIFO and Average cost. LOWER OF COST OR MARKET (LCM) RULE – S.10(1)Cost and value – acc – if the price < value, should adjust to the market value

• for the purpose of computing a taxpayer’s income for a taxation year from a business, s.10(1) provides that property described in an inventory shall generally be valued at the end of the year at the cost at which the taxpayer acquired the property or its fair market value at the end of the year, whichever is lower, or in a prescribed manner [Reg. 1801 allows taxpayers to value all inventory at fair market value]

• cost = C0 - C1 + C2 => C2 = lessor of the actual cost / FMV = departure from the realization principle• the effect of this rule, which codifies a traditional accounting practice, is to recognize for tax purposes accrued

losses in the value of inventory in the taxation year in which they occur instead of the taxation year in which they are realized

Cyprus Anvil Mining Corp. (FCA, 1989)- taxpayer open a new mine, and under a tax program, income from the new mine was exempt from income tax for three

years. When the value of lead and zinc was increasing, the taxpayer changed its method of inventory accounting from the LCM to FMV for tax purposes

- Court: s.10(1) must be viewed in the context of the Act and be harmonious with the object and intention of Parliament. By failing to adhere to the consistency principle in the computation of income, the respondent has not fairly and accurately portrayed its profit picture.

- Cannot change the accounting principle for the tax purpose- Codify in s.10(2.1) – require to use the same acc method unless the taxpayer, with the concurrence of the Minister and

on any terms and conditions that are specified by the Minister, adopts another method permitted under this sectionFriesen (SCC, 1995)

- the taxpayer acquired a parcel of land in Calgary in January 1982 for the purpose of eventually selling it at a profit => adventure; in computing his income for his 1983 and 1984 taxation years, the taxpayer relied on subsection 10(1) to deduct the accrued losses, without realizing a loss by disposing of the property

- Court - Major: plain meaning reading, allowed using the LCM rule to recognize an accrued loss on an unsold parcel of land held in an adventure in the nature of trade

- After: act amending – “other than adventure and nature of trade” – s.10(1.01) –LCM not apply here.amendment after Kruger

• for the purpose of section 10, s.10(15) provides that property of a taxpayer that is a swap agreement, a forward purchase or sale agreement, a forward rate agreement, a futures agreement, an option agreement or any similar agreement is deemed not to be inventory of the taxpayer

• this provision prevents options traders like Friedberg and Kruger from using the lower of cost or market rule in subsection 10(1) to deduct unrealized losses, while deferring tax on unrealized gains

• as well, section 10.1 allows taxpayers that are not financial institutions to elect mark-to-market treatment for “eligible derivatives”

CAPITAL EXPENDITURE

59 Income from B/P Income from B Characterization Inclusion Income from P

s.18(1)(a) disallows deduction of outlay or expense except to the extent paid or payable

s.18(1)(e) disallows deduction of amounts as or on account of a reserve, a contingent liability or a sinking fund, except as expressly permitted by the ITA

s.18(2) (3) capitalizes carrying costs on vacant lands.18(3.1) to (3.3)

capitalizes construction period “soft costs”

s.18(9) allocates deduction of prepaid expenses to taxation year to which the outlay or expense can reasonably be considered to relate

s. 18(1)(b) disallows deduction in respect of an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted in Part I of the ITA [allowed as capital cost allowance under paragraph 20(1)(a), terminal loss under subsection 20(16), or resource allowance under section 66] = capital exp not deductible in computing income of business or property- depreciable capital property => deducible under CCA / terminal loss- resource allowance rule- non depreciable capital property: e.g. share of company, land … calculate in Adjusted Cost Base

One main test:… when an expenditure is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

British Insulated and Helsby Cables v. AthertonAnother test:… were these sums expended on the structure within which the profits were to be earned or were they part of the money-earning process? B.P. Australia Ltd.

Johns Mansville Corp.(SCC, 1985)- the taxpayer operated an open-pit asbestos mine in Asbestos, Quebec. In order to extend the perimeter of the mine to

maintain a gradual slope and prevent landslides, the taxpayer bought land on a regular basis, which it stripped away to expand the mine. in computing its income for 1969 and 1970, the taxpayer deducted the cost of land purchased in each year.

- Court: expenditures would qualify as expenses rather than being capital in nature. The character of the advantage sought is that of an advantage in the current operations of the taxpayer. The practice was recurring and the manner in

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Income from B/P Income from B Characterization Inclusion Income from P

which the object of the expenditures was applied was directly incorporated into the mining operations of the taxpayer. Finally, the means adopted by the taxpayer to gain this advantage was the periodic outlay of funds ....

- The legacy for the Canadian tax jurisdiction – to favour the taxpayer when there is some ambiguity in the act.START UP COSTS OF A BUSINESS GENERALLY CHARACTERIZED AS CAPITAL EXPENSESFirestone (FCA, 1987) - $77,590 incurred to investigate potential businesses for acquisition as part of venture capital business characterized as a capital expense “in the course of putting together a new business structure”Bancroft (TCC, 1989) – preliminary development costs for a tourist resort which the taxpayer eventually abandoned not deductible since the taxpayer “was in the process of creating a business structure”Levin (Ex. Ct., 1971) – travel expenses and tuition fees to attend a prosthodontics course in New York characterized as capital expenses since they were “not of a recurrent nature” and “were made with a view to bringing into existence an advantage … as a prosthodontic specialist, for the enduring benefit” of the taxpayerNote, however, that fees paid for advice to buy or sell securities are deductible under paragraph 20(1)(bb), representation expenses to obtain a licence, permit, franchise or trademark are deductible under paragraph 20(1)(cc)COSTS TO FINANCE (OR REFINANCE) A BUSINESS GENERALLY CHARACTERIZED AS CAPITAL EXPENSESMontreal Light, Heat & Power Consolidated (SCC, 1942) – costs to refinance the taxpayer’s debt characterized as capital expenditure “made with a view to securing an enduring benefit, the reduction of the cost of borrowed capital over a period of at least fifteen years”Bennett & White Construction Ltd. (SCC, 1948) – commissions paid to three directors to guarantee the company’s indebtedness to a bank characterized as capital expenditures “incurred in obtaining the capital … to finance the operations”Note, however, that interest and other finance expenses are deductible under paragraphs 20(1)(c), (d), (e), (e.1), (e.2), (f) and (g)COSTS TO TERMINATE A LONG-TERM AGREEMENT GENERALLY CHARACTERIZED AS A CAPITAL EXPENSEBritish Columbia Electric Railway (SCC, 1958) - $220,000 paid to five municipalities in order to replace money-losing rail service with bus service, characterized as a capital expense on the grounds that it resulted in “an advantage for the enduring benefit of the appellant’s business” and increased the value of its transportation franchises which were capital assetsMandrel Industries Inc. (Ex. Ct., 1965) – $150,000 paid to terminate an exclusive agreement to distribute the recipient’s products in Canada characterized as a capital expenses that was “made once and for all” and “brought into being … an advantage in that the appellant could operate its own selling operation in Canada without being in breach of its previously existing exclusive sales contract”BUSINESS EXPANSION COSTS GENERALLY CHARACTERIZED AS CURRENTLY DEDUCTIBLE EXPENSESAlgoma Central Railway (Ex. Ct. , 1967), aff’d (SCC, 1968) – cost of five-year geological survey designed to encourage resource development in northern Ontario and increase traffic on its railway lines characterized as a currently deductible expenses on the basis that any enduring advantage was speculativeBowater Power Co. (FCTD, 1971) – cost of engineering studies to assess opportunities to increase power generation from taxpayer’s existing watersheds deductible since they were “incurred … while the business of the [taxpayer] was operating and [were] part of the cost of this business”Pantorama Industries Inc. (FCA, 2005) – fees paid to consulting firm to find new locations for the taxpayer’s stores and negotiate leases characterized as currently deductible expenses incurred “to insure the ongoing operation of the appellant’s business”

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COSTS TO ACQUIRE ANOTHER BUSINESS GENERALLY CHARACTERIZED AS A CAPITAL EXPENSESoutham Business Publications (Ex. Ct., 1966) - $50,000 paid to acquired circulation records and subscription lists of a publication which the taxpayer acquired the exclusive right to publish characterized as a capital expense to acquire “a non-tangible capital asset” rather than an “operational expense”Metropolitan Taxi Ltd. (SCC, 1968) – $104,000 to acquire the business of another taxi company, including 14 licences that were about to expire but likely to be renewed, characterized as a capital expenditure for the acquisition of “an intangible, enduring advantage of a capital nature”Sun Newspapers Ltd. (Austr. H.C., 1938) – lump-sum non-competition payment paid to a competitor characterized as a capital expenditure “for the purpose of obtaining an advantage for the enduring benefit of the appellant’s trade … namely the exclusion of what might have been serious competition”COST TO PROTECT OR PRESERVE INTANGIBLE PROPERTY GENERALLY CHARACTERIZED AS A CAPITAL EXPENSEDominion Natural Gas Co. (SCC, 1940) – legal expenses to maintain franchise to supply natural gas characterized as a capital expense that was incurred “once and for all … for the purpose and with the effect of procuring for the company ‘the advantage of an enduring benefit’”Farmers Mutual Petroleum Ltd. (SCC, 1967) – legal expenses incurred by the taxpayer to defend its title to various resource properties characterized as a capital expense “to protect … capital assets” from which the taxpayer’s income was derivedMcLaws (Ex. Ct., 1970) aff’d (SCC, 1972) – payments to discharge debts of a wholly-owned corporation that the taxpayer had guaranteed, characterized as capital expenses “to protect and preserve the source of income a business which was in immediate danger of bankruptcy and whose existence was imperiled”Canada Starch Co. Ltd. (Ex. Ct., 1968) – payment to owner of registered trademark to withdraw its opposition to taxpayer’s registration of a new cooking oil called “VIVA” currently deductible since a trademark only protects “distinctive” goods or services which depend on the current operations of a business, not registration – exception on the general principle => trade mark

EXPENSES TO REPAIR OR REPLACE TANGIBLE PERSONAL PROPERTYwhile the difference between repairs and capital additions or improvements is obvious in certain cases, it becomes a matter of difficulty in others.Repairs - deductible Replace Capital Asset / Part Replacements Upgrades – capital expWear + tearDamon Developments Ltd. (TCC, 1988)A hotel - the taxpayer deducted amounts expended in each of these years to replace furniture, televisions, window coverings and dishwashersCourt: expenditures for the hotel occur regularly at relatively short

Haddon Hall Realty Inc. (SCC, 1961)the taxpayer owned and operated an apartment building for rental income; the taxpayer deducted exp to replace stoves, refrigerators, and window blinds.Court: Expenditures to replace capital assets which have become worn out or obsolete are something quite different from those ordinary annual expenditures for repairs. Expenditures=clearly capital

A change in characterCanada Steamship Lines Limited (Ex. Ct., 1966)the taxpayer deducted expenses that it incurred in 1956 and 1957 to replaced the floors and walls of cargo-carrying holds in ships and the boilers by which the ships were powered Court: upgrading – an replacement constitutes a change in the character =

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intervalsCanada Steamship Lines Limited (Ex. Ct., 1966)the taxpayer deducted expenses of replaced the floors and walls of cargo-carrying holds in ships and the boilers by which the ships were powered Court: cargo-carrying holds = not a separate part = repair the ship = current operations cost

Repair in light of new technology Gold Bar Development Ltd.the taxpayer owned an apartment building, deduct cost to repair an exterior brick wall that an inspection revealed to have become unsound.Court: Nothing in the repair project attempted to change the structure of the building. What was done was neither more nor less than was required to replace the deteriorating and dangerous brick condition.Can use new technologySubjective: not voluntary for taxpayerMarklib Investments II-A Ltd. (TCC, 1999)the taxpayer owned two apartment building. after an inspection by municipal authorities, the taxpayer was required to spend $3,457,385 to comply with work orders.Court: Apply the purpose test – “It is the purpose, rather than the result of an expenditure that determines whether it is characterized as a

outlays Stove etc. already contemplated in the scheme of depreciable capital propertyCost significant part to asset Thomson Construction (Ex. Ct., 1957)the taxpayer deducted $6,006.13 which it spent in order to install a new engine in a used power shoveCourt: =replace Capital asset – expenditure is substantial compare to the cost of asset, to allow a deduction in full as an operating expense of an outlay as this would frustrate the clear intent of s.20(1)(a) regard to capital cost allowances.Cost huge compare to other yearVancouver Tugboat Co. (Ex. Ct., 1957)the taxpayer deducted $42,086.71 which it spent to replace the engine in one of its tugboats. repair costs over the previous three years were established to have been under $15,000.Court: substantial expense compare to other years &cost to replace a substantial portion of the capital asset rather than to renew some minor item in the course of carrying out the ordinary run of repairsRebuildBowland (TCC, 1999), aff’d (FCA, 2001)the taxpayer, who owned a rental property that was damaged by fire, deducted expenditures incurred in order to restore the building to a usable conditionthe Court dismissed the taxpayer’s appeal on the grounds that the repairs were “a one-time occurrence” which “gave rise to an enduring benefit” and “brought the rental property back into existence” since “the house was virtually rebuilt and resulted in a new capital asset” => back to traditional test

capital expenditure.New structure Shabor Investments Ltd.the taxpayer owned a two–storey building, deducted expense of construct a new and repair and replace waterlines, drains, plumbing and wiring that had become damaged as a result of subsidenceCourt: damage floor = “installation of the piles was a permanent addition to the structure of the building”; waterline, drains, etc. – able to deduct as cause by aging and wear and tear.expenses to renovate buildings often characterized as capital expenses if addressing extensive deterioration and substantial relative to value of the building: Healey (TCC, 1984); Coleman (TCC, 1984); Earl (TCC, 1992)expenses to renovate buildings generally characterized as capital expenses if the renovation occurs shortly after the taxpayer purchases the property and if the renovation costs are substantial compared to the purchase price: Wager (TCC, 1985); Méthé (TCC, 1986); Dyer (TCC, 1991); Fiore (FCA, 1993); and Mbénar (FCA, 2013)

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capital outlay or a current expense”

STATUTORY CAPITALIZATION RULES - CARRYING COSTS ON VACANT LANDs.18(2) deduction of interest relating to the acquisition of land and property taxes in respect of land to net income from

the land for the year, unless the land is used in the course of a business other than a sales or development business carried on by the taxpayer in the particular year or held primarily for the purpose of gaining or producing income from the land for the particular year (earning income can be incidental purpose - Ward)

s.18(3) stipulates that land does not “except to the extent that it is used for the provision of parking facilities for a fee or charge“ include (a) any building or other structure affixed to land, (b) land subjacent to these buildings or structures, or (c) land that is immediately contiguous to these buildings or structures that is “a parking area, driveway, yard, garden or similar land as is necessary for the use of” these buildings of structures = land with building on it not subject to s.18(2)

s. 53(1)(h) expenses that are disallowed under subsection 18(2) are added to the cost of inventory under subsection 10(1.1) or the adjusted cost base of capital property

Ward (FCTD, 1988)- the taxpayer was one of several investors who purchased a 167-acre golf course in Richmond Hill through a joint venture

in May 1974 , of the $7.7 million purchase price, the investors paid $135,000 and the remainder was financed with debt. their intention was to eventually sell or develop the land. in computing his income for the taxation years 1974 to 1978, the taxpayer included his share of the rental income and deducted his share of the joint venture’s expenses.

- concluding that the property was held primarily for the purpose of resale and development, the Court held that subsection 18(2) applied to disallow the deduction of the interest expenses other than interest attributable to buildings and land subjacent or immediately contiguous to these buildings

CAPITAL COST ALLOWANCEDEPRECIATION

- Straight-Line / Declining Balance – dep on the % of certain asset’s value- undepreciated capital cost (UCC)- terminal loss - the asset has depreciated more than has been accounted for, so an

additional deduction should be allowed- recaptured depreciation - the asset has depreciated less than has been accounted

for, so the excess deduction should be included in computing income- the amount by which the proceeds exceed the original capital cost should be

subject to tax as a capital gain

CAPITAL COST ALLOWANCE

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues Profit for the year Inventory Capital Expenditures CCA

1. CCA is generally computed not for individual assets but for classes of assets with similar useful lives (listed in Schedule II of the Regulations), the capital cost of each of which is added in computing the undepreciated capital cost (UCC) of the class as a whole2. CCA generally uses a declining balance method, computing allowable CCA for each class of assets by applying specific rates prescribed in in paragraph 1100(1)(a) of the Regulations to the UCC of the class at the end of the taxpayer’s taxation year [straight line method prescribed by paragraph 1100(1)(c) for class 14 property (patents, franchises, concessions and licences)]3. the deduction of CCA in paragraph 20(1)(a) is optional; if CCA is not claimed for a taxation year, the UCC of the class is not reduced and remains to be deducted in a subsequent tax year4. since CCA is generally computed on a class basis, terminal losses and recaptured deprecation are generally recognized only when dispositions of depreciable property have implications for the class as a whole; capital gains, however, are computed for individual assetss.20(1)(a) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for the year from a business

or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:(a) such part of the capital cost to the taxpayer or property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation [see Part XI of the Regulations]

Reg.1100(1)

For the purposes of paragraphs 8(1)(j) and (p) and 20(1)(a) of the Act, the following deductions are allowed in computing a taxpayer’s income for each taxation year:(a) subject to subsection (2), such amount as the taxpayer may claim in respect of property of each of the following classes in Schedule II not exceeding in respect of property … of the undepreciated capital cost to the taxpayer as of the end of the taxation year (before making any deduction under this subsection for the taxation year) of property of the class;

Reg.1100(11)-(14)

limit aggregate deductions in respect of a prescribed class of property that includes rental property to the amount, if any, by which the taxpayer’s aggregate income from renting or leasing rental properties (computed without deducting CCA) exceeds the taxpayer’s aggregate losses from renting or leasing rental properties (computed without deducting CCA)

Reg.1100(15) – (17)

limit aggregate deductions in respect of a prescribed class of property that includes leasing properties to the amount, if any, by which the taxpayer’s aggregate income from renting, leasing or earning royalties from leasing properties (computed without deducting CCA) exceeds the taxpayer’s aggregate losses from renting, leasing or earning royalties from leasing properties (computed without deducting CCA)

UNDEPRECIATED CAPITAL COSTdefined in s.13(21) “at any time” by a formula the key elements of which are A - E - F + B, whereA is the total of all amounts each of which is the capital cost of depreciable property of the class acquired before that timeE is the “total depreciation” allowed to the taxpayer for property of the class before that time [defined in subsection 13(21) as amounts deducted as CCA under paragraph 20(1)(a) before the time in respect of property of the class and as a terminal loss under subsection 20(16)]F is the lesser of the proceeds of disposition of the property (less disposition costs) and the (original) capital cost of the propertyB is amounts included under section 13 [as recaptured depreciation under subsection 13(1)]

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CAPITAL COSTaccording to one generally accepted interpretation, the expression capital cost to the taxpayer “refers to the actual, factual or historical cost to [the taxpayer] of the depreciable property”: Cockshutt Farm Equipment of Canada Ltd. (TAB, 1966)cases have held that capital costs include architect fees, the cost of preparing a site for the construction of a building, and interest and other financing expenses to finance the construction of a new mine: Oriole Park Fairways Ltd. (TAB, 1956); George T. Davie & Sons Ltd. (TAB, 1961); and Sherritt Gordon Mines Ltd. Ex. Ct., 1968)in Canada Trustco Mortgage Co. (SCC, 2005), the SCC rejected the Crown’s argument that GAAR should apply to reduce the capital cost of property that the taxpayer acquired at very little real economic cost as part of an elaborate series of circular transactions in which it purchased assets and leased the assets back to the vendor = economic cost not the principle .only the legal cost = capital costunder s.13(7)(g), the cost of a passenger vehicle is limited to $30,000Duncan (FCA, 2002)

- the taxpayer was one of several Canadian investors who paid $320,000 in December 1991 to purchase interests in a U.S. partnership called Klink Development Company (“Klink”), which owned an IBM mainframe computer worth US$7,000, which it had acquired nine years earlier at a capital cost of US$3.7 million. On the basis that the UCC of the computer for Canadian tax purposes was CAD$4,536,940, Klink reported a terminal loss of CAD$4,486,940 on the disposition of the computer, resulting in net losses which the Canadian investors deducted in computing their incomes in 1991

- the Minister accepted that the UCC of the computer was CAD$4,536,940 under the definition in subsection 13(21), but applied the GAAR to disallow the terminal loss on the acquisition of the partnership interests and the sale of the computer resulted in a tax benefit (the terminal loss), were undertaken primarily to obtain the tax benefit, and resulted in a misuse or abuse of the definition of UCC in subsection 13(21) and the terminal loss provision in subsection 20(16)

- Court: .... In so doing, they exploited what can only be seen as an obvious loophole which allowed them to deduct a cost in excess of 4 million for a computer which had a value of some U.S. $7,000 when it first became property under the Act. As such, the appellants misused these provisions and abused the capital cost allowance system generally.

ACQUISITION OF DEPRECIABLE PROPERTYA purchaser has acquired assets of a class in Schedule B [now Schedule II] … when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements.Wardean Drilling Ltd. (Ex. Ct., 1969), per Cattanach J.

- Buy some property but the buyer not take the title immediately. Court adopt CL understand of property = when title passed / all incidences of title (even title may remain as security for the purchase) “when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements”

AVAILABLE FOR USE RULESs. 13(26) in applying the definition of UCC in subsection 13(21), no amount shall be included in respect of the capital cost

of property of a class before the time that the property is considered to have become available for use by the taxpayer

s.13(27) Non-buildings: generally considered to have become available for use by a taxpayer at the earliest of (a) the

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time the property is first used by the taxpayer, (b) the time immediately after the beginning of the first taxation year of the taxpayer beginning more than 357 days after the end of the taxation year in which the taxpayer acquired the property,(can delay for a yr then as the dep. property) (c) the time immediately before the disposition of the property, or (d) the time the property is delivered to the taxpayer and is capable of being used to produce a commercially saleable product or service

s.13(28) Buildings: generally considered to have become available for use by a taxpayer at the earliest of (a) the time all or substantially of the building is first used by the taxpayer for the purpose for which it was acquired, (more than 90%) (b) the time the construction of the building is complete, (c) the time immediately after the beginning of the first taxation year of the taxpayer beginning more than 357 days after the end of the taxation year in which the taxpayer acquired the property, or (d) the time immediately before the disposition of the property

- Renovation etc. = another buildings = also subject to the available for use rulesDISPOSITION OF DEPRECIABLE PROPERTYs.248(1) “disposition” include, among other things, “any transaction or event entitling a taxpayer to proceeds of

disposition of property”s. 13(21) “proceeds of disposition” include “the sale price of property that has been sold” as well as various kinds of

compensation for property unlawfully taken, destroyed or expropriatedOlympia and York Developments Ltd. (FCTD, 1980)in the context of depreciable property, courts have held that taxpayers dispose of depreciable property when they “divest themselves of ‘all of the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership’ even though they retain legal title”& Quebec adopt the same principleHALF-YEAR RULEReg.1100(2)

where a taxpayer acquires property of a class in a taxation year, provide that the CCA that the taxpayer may deduct in respect of the class is determined as if the UCC of property of the class were reduced by 50% of the amount, if any, by which the capital cost of property of the class acquired by the taxpayer in the year exceeds the proceeds of disposition (up to the capital cost) of any property of the class disposed of by the taxpayer in the year

this rule was substantially amended effective June 21, 2019 (for which your are not responsible) => follow the US rulesHewlett Packard (Canada) Ltd. (FCA, 2004)

- the taxpayer provided its employees with new cars each year, in order to maximize CCA deductions and minimize the effect of the half-year rule, the taxpayer entered into an arrangement with Ford to acquire new vehicles immediately before the end of each taxation year and to dispose of its old vehicle fleet to Ford immediately after each taxation year

- the Tax Court relied on the statutory definitions of “disposition” to conclude that the taxpayer had disposed of the old vehicles before the end of the year, even though it continued to own them at the time, on the grounds that it had an enforceable entitlement to be paid for the vehicles

- the Federal Court of Appeal rejected this interpretation on the grounds that the taxpayer was not entitled to proceeds of disposition until the property was sold after the end of each taxation year

- it also rejected the suggestion that the arrangement resulted in an abusive “doubling up” of CCA deductions on the grounds that the old fleet was used throughout the year and the new fleet was acquired and available for use before the end of the year

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??? GAAR – tax benefit √ / tax motivated √ / misuse or abuse of rule??? – no; Tax planning for sure, but legitimate tax planning.

THE CHARACTERIZATION OF DEPRECIABLE PROPERTYs.13(21) property acquired by the taxpayer in respect of which the taxpayer has been allowed to deduct CCA in the year

or a preceding year, or would be if the taxpayer owned the property at the end of the year and the ITA were read without reference to the available for use rule in subsection 13(26)

s.1102(1) deems the classes of property described in Part XI and Schedule II of the Regulations not to include property(a)the cost of which is deductible in computing the taxpayer’s income,(b) that is described in inventory,(c) that is not acquired for the purpose of gaining or producing income, or (personal property)(f) that is property described in paragraph 18(1)(l) [a yacht, camp, lodge or golf course or facility]

s.1102(1)(c)

“for the purpose of gaining or producing income”- income earning test of s. 18(1) “purpose of gaining or producing income from the biz or property”- Income of s.9(1) - a taxpayer’s income for a taxation year from a business or property is the taxpayer’s

profit from that business or property for the year. = purpose - profito May suggest the different test or just under the scheme that no need to repeat the similar test

Ben’s Ltd. (Ex. Ct., 1955)- the taxpayer owned and operated a bakery in Halifax. It acquire three adjoining properties, with the intention of

removing the buildings and expanding the bakery. At this time, the properties were subject to tenancy agreements, one of which expired on May 1, 1952, after the tenancies expired, the taxpayer applied to rezone the property from residential use to commercial use. in early June 1952, the taxpayer sold the three buildings for $1,200 and they were removed from the land. As the building sold for $1200, deduct from the existing UCC (still hold another building in that category) – no terminal loss; and allocated $3,000 of the purchase price to the land and $38,632.85 to the buildings and deducted 10% of the amount allocated to the buildings $3,863.28 as capital cost allowance in its 1952 taxation year

- the Minister disallowed the deduction of CCA on the basis that the buildings were not acquired for the purpose of gaining or producing income as Reg.1102(1)(c)

- Court: rejected the taxpayer’s main argument that it had acquired the properties for the purpose of gaining or producing income on the grounds that this general income-producing purpose did not apply to the buildings, which were the property in respect of which the taxpayer sought to deduct CCA

o Should GAAR apply? – tax benefit? Tax motivated? Misuse or abuseo A subject test = but need objective evidences

ALLOWED DISALLOWEDcases in which CCA or a terminal loss was allowed on a building that was demolished on the basis that the taxpayer acquired the buildings for the purpose of gaining or producing income, but this purpose was frustrated or changed: Adanac Apparel Ltd. (Ex. Ct., 1969); Moldaver (TCC, 1992)

cases in which CCA or a terminal loss was disallowed on the basis that the taxpayer acquired property for personal use, not for the purpose of gaining or producing income: Gordon (Ex. Ct., 1966); Malatest (TCC, 1993), aff’d (FCA, 1996); Noonan TCC, 1997); Girouard (TCC, 1997)

Hickman Motors Ltd. (SCC, 1997)

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- where the taxpayer acquired leasing properties from a subsidiary which it held for five days before disposing of the properties to another subsidiary, deducting over $2 million in CCA in respect of the leasing assets and including rental income of only $20,000

- majority of the SCC allowed the deduction of CCA on the basis that the taxpayer had carried on a leasing business during the five days and had acquired the property for the purpose of gaining or producing “gross income” or revenue

o In order to deduct the capital cost allowance at issue, (1) Hickman Motors Ltd. must have had a business source of income to which the assets related (s. 20(1) of the Income Tax Act ...) - the essential core operations may at times be limited to accepting rental revenue and assuming the business risk and other obligations

o (2) the assets must have been acquired for the purpose of producing income (Reg. 1102(1)(c)). it is sufficient to presume that if property produces revenue, it meets the requirements of Regulation 1102(1)(c). not “real purpose ” but “a purpose” & income = gross rev. => Westminster rule

- GAAR apply?o Tax benefit √ / Tax motivated √ / Misuse or abuse? – underestimate the legislation purpose? - allow the deduction

capital asset over time = but only four days / Duncan case – apply the GAAR – only for tax purpose- so maybe abusive of CCA scheme

ALLOCATION OF PROCEEDS IN CONSIDERATION FOR DISPOSITION OF PROPERTYVendors Purchasersgenerally prefer to allocate proceeds in the following order:1. non-depreciable capital property (half taxable capital gain)2.depreciable capital property on which little CCA has been deducted (potential recaptured depreciation and taxable capital gain if proceeds > capital cost)3.inventory (business income to the extent that proceeds exceed value for tax purposes)

generally prefer to allocate proceeds in the following order:1.inventory (cost fully deductible in computing business income when sold)2.depreciable capital property with high CCA rates (deductible over a relatively short period of time)3.depreciable capital property with low CCA rates (deductible over a longer period of time)4.non-depreciable capital property (cost offset in computing taxable capital gain)

s.68 If an amount received or receivable from a person can reasonably be regarded as being in part the consideration for the disposition of a particular property of the taxpayer …(a) the part of the amount that can reasonably be regarded as being the consideration for the disposition shall be deemed to be proceeds of disposition of the particular property irrespective of the form or legal effect of the contract or agreement, and the person to whom the property was disposed of shall be deemed to have acquired it for an amount equal to that part=> a rule reverse proceeds and cost ; court will be reluctant to read it into the rule when facing non-armlength parties

s.13(21.1) which applies where a taxpayer disposes of a building and the proceeds are less than the lesser of its capital cost and its cost amount (generally defined in subsection 248(1) as the proportion of the UCC of the class that the capital cost of the property is of the capital cost of all property of the class that had not been disposed of

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before that time) relocation from seller’s aspects.13(21.1)(a)

subjacent and immediately contiguous land is sold in the same taxation year, reallocates proceeds from the land to the building by deeming the proceeds of disposition for the building to be the lesser of (i) the amount, if any, by which the total fair market value of the land and the building exceeds the lesser of the fair market value and the adjusted cost base of the land, and (ii) the greater of (A) the fair market value of the building and (B) the lesser of its capital cost and its cost amount, and deeming the proceeds for the land to be the amount, if any, by which (iii) the total proceeds of disposition exceeds (iv) the deemed proceeds for the building

s.13(21.1)(b)

where subjacent and immediately contiguous land is not sold in the same taxation year, any loss on the building as if it were a capital loss by deeming the proceeds of the building to be the total of (i) the proceeds otherwise determined, and (ii) ½ of the amount by which the greater of the cost amount and the fair market value of the building exceeds the proceeds of disposition otherwise determined

Golden (FCA, 1983), aff’d (SCC, 1986)- the taxpayer owned an apartment. Skalbania Ltd.offer to purchase the apartments for $5.6 million, of which $2.6 million

would be allocated to the land, $2.4 million to the buildings, and $600,000 to other property (trucks, equipment, roadways, etc.) The owners rejected this offer, but sold the apartments a week later for $5.85 million, of which $5.1 million was allocated to the land and $750,000 to the buildings and other property

- the Minister relied on section 68 to reallocate proceeds from the land to the buildings. = “reasonable consideration” o s.67 – “reasonable in circumstance” => FMV / what reasonable biz person having only biz purpose in mindo s.68 not said based on FMV, only to “reasonable consideration”, but FMV may be relevant; apportionment by

arm’s length party is also important- TJ: relied on the opinion of an expert appraiser to conclude that it would have been reasonable to allocate only

$2,320,000 to the land- FCA: transaction is at arm’s length and is not a mere sham or subterfuge, the apportionment made by the parties

in the applicable agreement is certainly an important circumstance and one which is entitled to considerable weight. It is open to an owner to dispose of his property as he sees fit and for that purpose it is open to him, when he sees it to be to his advantage, to realize on the full potential of an asset of one kind even if as a result the greatest potential of a related asset cannot be realized in the transaction.

NOT REASONABLE REASONABLEBARGAINING POWER

Peterson (TCC, 1988) – unreasonable to allocate any amount to goodwill of day-care centre since it had lost money for 5 years, its licence had been cancelled, and appraisal reports concluded that its goodwill was non-existentLéonard (TCC, 1990), aff’d (FCTD, 1990) – know the allocation at the last minute of negotiation, ask reallocation - court allows taxpayers to rely on section 68 to increase the cost for CCA

Transalta Corp. that an allocation agreed upon by non-arm’s length parties does not “trump the reasonableness test” in section 68, which properly turns on “whether a reasonable business person, with business considerations in mind, would have made the allocation”; although not clear, this statement appears to suggest that tax-motivated allocations even between arm’s length persons, could be subject to reallocation under section 68

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purposes of milk and livestock quotas acquired together with a farm, on the basis that the agreed prices were less than half their appraised values and were not the result of serious negotiations since the taxpayers were informed of the allocation at the last minute

H. Baur Investments (TCC, 1987) – taxpayer want to reallocate the cost, but court rejects taxpayer’s attempt to rely on section 68 to reduce the proceeds for a building on the grounds that the agreed amount was “the sole reflection of the purchaser’s view” (even if an agreement is not always decisive)

DISPOSITION OF LAND AND BUILDINGS WHERE BUILDING DEMOLISHED

in these circumstances, several cases held that it would not be reasonable to regard any part of the sale price as consideration for the disposition of the buildings: Steen Realty Ltd. (Exch. Ct., 1964), Emco Ltd. (Ex. Ct., 1968); Moulds (FCTD, 1977), aff’d (FCA, 1978)

other cases concluded that the allocation of proceeds should be based on the value of the buildings to the vendor: Gateway Lodge Ltd. (Ex. Ct., 1967); City Parking Properties & Development (Ex. Ct., 1969)Teardown the building firstMalloney’s Studio Ltd. (SCC, 1979) after some negotiation, the taxpayer accepted an offer to sell the land “clear of all buildings” for $280,000the Minister assessed the taxpayer on the basis that it was reasonable to regard $80,000 of the sale price as proceeds for the disposition of the buildingThere can be no doubt that the contract did indeed deal only with land “clear of buildings”, and … it is clear that the purchaser required only the land, … The rule operates only as a second stage, the first stage being the agreement or valid determination that the sale involves both a sale of depreciable property and in part the sale of something else. Here the contract demonstrably relates only to the sale of vacant land

EXPLOITATION in Stanley (SCC, 1972),where a building was expropriated and then sold for $200, the Court rejected the taxpayer’s argument that only $200 of the compensation that he received should be allocated to the building, concluding instead that the proceeds should be based on the appraised value of the building that was used to determine the compensation that he received

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INTEREST EXPENSEs.20(1)(c)(i)

allows taxpayers to deduct, in computing income from a business or property, “an amount paid or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s income), pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt …) … or a reasonable amount in respect thereof, whichever is the lesser.”

- Deduct biz/property interest - Use of borrow money – use of the fund is important but not the source of borrowing.

- E.g. buy a house and rent a part of it, can deduct the appropriate part interest- Built in the “reasonable” limitation

The provision has four elements: (1) the amount must be paid in the year or be payable in the year in which it is sought to be deducted; (2) the amount must be paid pursuant to a legal obligation to pay interest on borrowed money; (3) the borrowed money must be used for the purpose of earning non-exempt income from a business or property; and (4) the amount must be reasonable, as assessed by reference to the first three requirements. Shell

s.20(3) specifies “for greater certainty” that borrowed money that is used to repay money that was previously borrowed (“previous indebtedness”) is deemed to be used for the same purpose as the previous indebtedness or the previous use deemed by subsection 20(3)

- Borrow money for repay the previously borrowed money = the same use purpose

… the purpose of the interest deduction provision Parliament created in subparagraph 20(1)(c)(i) … [is] to encourage the accumulation of capital which would produce taxable income. … The statutory deduction thus requires a characterization of the use of the borrowed money as between the eligible use of earning non-exempt income from a business or property and a variety of possible ineligible uses. * made of for this provision – how much weight should we put on this “purpose”?Bronfman Trust (SCC, 1987)

- The trustees made capital distributions to the beneficiary. the trust financed most of the distributions with loans from the Bank of Montreal. the trust repaid the loans by 1972, but incurred interest expenses which it deducted

- Court: Its obviously restricted purpose being the encouragement of taxpayers to augment their income-producing potential. precludes the allowance of a deduction for interest paid on borrowed funds which indirectly preserve income-producing property

o there is only outgoing money but no potential income for the money paid outo Consequence argument: s.20(1)(c)(i) would have to interpreted so that a deduction would be permitted for

borrowings by any taxpayer who owned income-producing assets

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Income from B/P Income from B Characterization Inclusion Income from P Interest Income Deduction Timing Issues Profit for the year Inventory Capital Expenditures CCA

- the taxpayer must satisfy the Court that his or her bona fide purpose in using the funds was to earn income. Here income from equity cannot cover the interest exp (no s.9(1) profit)

Mark Resources Inc. (TCC, 1993)- Court: That purpose – The earning of dividend income cannot, … in my opinion, be said to be the real purpose of the

use of the borrowed funds is the importation of the losses from the US.... The earning of interest income by [the US subsidiary] and the payment by it of dividends to [the taxpayer] were integral but subservient and incidental steps to the real objective that lay behind the implementation of the plan

Robitaille (TCC, 1997)- the “true commercial and practical nature” of the transactions carried out by the appellant leads to the conclusion that

their ultimate purpose was the purchase of his residence, not investment in the law firm in which he is one of the partners. Investment in the law firm already existed and the purpose of the loans was only to reimburse money withdrawn and used for personal purposes a few days earlier. consistent with Bronfman Trust

BROAD PURPOSIVE APPROACH TO THE INTERPRETATION OF SUBPARAGRAPH 20(1)(C)(I) REJECTEDShell Canada Ltd. (SCC, 1999)

- the taxpayer engaged in a “weak currency borrowing” & deducted interest at 15.4% and reported foreign exchange gains on interest and principal payments as taxable capital gains

- SCC: it is well-established in this Court’s tax jurisprudence that a searching inquiry for either the “economic realities” of a particular transaction or the object and spirit of the provision at issue can never supplant a court’s duty to apply an unambiguous provision of the Act to a taxpayer’s transactions. Where the provision at issue is clear and unambiguous, its terms must be simply applied.

- allowed the taxpayer’s appeal on the grounds that the borrowed New Zealand dollars were used for the purpose of earning income in the taxpayer’s business after they were converted into U.S. dollars, that 15.4% was a reasonable amount of interest on a New Zealand dollar loan

- the reasonableness test in section 67 could not apply to a provision that “has its own internal reference to ‘reasonableness’, as does s. 20(1)(c)(i)”*

Canadian Pacific Ltd. (FCA, 2001) - the FCA held that the GAAR did not apply on the grounds that the taxpayer’s primary purpose for borrowing funds was

for a bona fide business purpose and that the choice of currency in which the taxpayer chose to borrow the funds could not be characterized as a separate transaction for the purposes of the GAAR

** Although it is probably right to say that the borrowed funds were used for the purpose of earning income from the taxpayer’s business (since this use could be traced through the conversion of the New Zealand dollars into U.S. dollars), and right to conclude that 15.4% was a reasonable amount to pay for New Zealand dollars within the meaning of the post-amble to paragraph 20(1)(c), it is less clear that the limitation in section 67 could not have applied since the post-amble refers to a “reasonable amount” [emphasis added] while the limitation in section 67 refers to “an outlay or expense that is reasonable in the circumstances” [emphasis added]. Since a reasonable outlay or expense for the purpose of section 67 is generally interpreted as an outlay or expense that a reasonable businessperson would have paid having only business considerations in mind (Gabco Ltd.), it seems reasonable to conclude that a tax-motivated weak-currency borrowing like that in Shell Canada Ltd. (which clearly would not have been undertaken having only business considerations in mind) could have been subject to the rule. Unfortunately, the SCC did not consider section 67 in much detail in Shell Canada Ltd.

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legislative responses.20.3 (applicable to taxation years ending after February 27, 2000) which eliminates any tax advantages from “weak currency borrowings” by disallowing the deduction of excess interest payments on “weak currency debt”, deeming any foreign exchange gain or loss on the repayment of the debt to be on income account, and deeming any disallowed interest expense to be an amount paid by the taxpayer to settle the debt

Singleton (SCC, 2001)- involved a series of transactions essentially identical to Robitaille, in which a taxpayer withdrew capital from a law firm,

and used borrowed funds in order to recapitalize the partnership- SCC: Courts cannot search for the “economic reality” or the “bona fide” purpose of the transaction in this case.

In giving effect to the legal relationships underlying the transactions here, it is obvious that the borrowed money was used directly to refinance the respondent’s capital account. This is a direct, eligible use within the meaning of s. 20(1)(c)(i) of the Act.

??? GAAR applied to Singleton?- Not apply on GAAR as the ministry can rely on Bona fide purpose and direct use of fund case line at that time- Tax benefit √ / tax motivated √ / misuse or abuse –

o A serie of transactions / happen in the same day – easy to conclude that they are a serie of transaction May the borrow/repay from the partnership are tax motivated

o Misuse or abuse – s.20(1)(c) - interest deduction Done it in a way contre the rational the provision – encourage accumulate capital to generate income – not

apply here SCC-> if parliament want can introduce the “series” into s.20(1)(c) -> Lipton -> SCC - GAAR could apply in that case and revisit Singleton

Ludco Enterprises Ltd. (SCC, 2001)- involved a series of transactions somewhat similar to those in Mark Resources Inc., in which the taxpayers borrowed

funds in Canada in order to capitalize Panamanian companies, which earned investment income that was subject to little or no tax in Panama, reinvesting most of this income and paying dividends of $600,000 which were greatly exceeded by interest expenses on the borrowed funds of $6 million, allowing the taxpayers to shelter other income from tax and realized a subsequent capital gain of $9.24 million (only half of which was subject to tax)

- SCC:o “The purpose” could mean ancillary purpose: Absent a sham or window dressing, a taxpayer’s ancillary

purpose may be nonetheless a bona fide, actual, real and true objective of his or her investment. (Duff: but when you say “the purpose” it is not like “a purpose” should focus on the primary purpose) … [T]he requisite test to determine the purpose for interest deductibility under s. 20(1)(c)(i) is whether, considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the investment is made.

Same with a partnership tax case - “a view of profit” => so it can be apply for an ancillary purpose; but there may be difference between these two provisions

o “income” not necessary mean profit / net income: Viewed in this context, the term “income” in s. 20(1)(c)(i) does not refer to net income, but to income subject to tax. (Duff : here = earning some rev = income. ?? 20(1)

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(c) infer to same word with s.9(1) -> income from B/P = profit. How can court decide the income = rev? Here 20(1)(c) is not just say income but income from B/P. SCC decision basic means = million expense + a dollar div => an ancillary purpose to gain rev? )

These transaction before 1988, can GAAR apply here??? Still risky if no return in practices

tracing to a current eligible useHills (TAB, 1970) – allocation of deduction between business and personal usesTennant (SCC, 1996) – taxpayer uses $1 million in borrowed funds to purchase shares, which are exchanged for other shares worth $1,000; interest fully deductible since traceable despite lower valueEmerson (FCA, 1986) – deduction lost if source of income ceases to exist; (a little bit harsh) [legislative response in section 20.1]

indirect use cases after Bronfman TrustGrenier (FCTD, 1998) – taxpayer mortgages home to invest in business, subsequently sells home, uses borrowed money to purchase a new home, and seeks to deduct mortgage interest on new home; Court allows deduction of interest on an amount equal to the borrowed funds originally invested in the business on the basis that a share of the borrowed funds used to purchase the new residence were indirectly used for the purpose of earning income from the business

- S.20(3) borrow and repay the first loan = under the same purpose Canadian Helicopters (FCA, 2002) – Court accepts that taxpayer, which loaned borrowed funds to its parent company interest free, had a bona fide purpose to earn income in the form of management fees from another company that the parent company purchased with the interest-free loan = success in this oneAttaie (FCA, 1990) – taxpayer, who fled Iran at the time of the Islamic Revolution, purchases a home with money borrowed under a high-rate open mortgage repayable at any time, which he intends to repay when he gets his money out of Iran; when this happens, interest rates have increased and the taxpayer decides to invest his funds at a higher rate and deduct the mortgage interest, which is disallowed on the basis that the direct use of the borrowed funds was to purchase a house = didn’t get the deduction (if repay the loan first and mortage house to borrow money and re-invest for higher rate, so the borrow interest can be deduct)TAXABLE CAPITAL GAINS AND ALLOWABLE CAPITAL LOSSES

COMPUTATION

GENERAL COMPUTATIONAL RULES

s.3(b) allowable capital losses are generally deductible only against taxable capital gains [special rules for listed personal property and allowable business investment losses]

s.38(a)(b) define a taxpayer’s “taxable capital gain” and “allowable capital loss” as ½ of the taxpayer’s capital gain or

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Taxable Capital Gains/ Allowable capital loss TCG ACL Non-Arm length Transaction, Rollover, Attribution Rules

capital losss.39(1)(a) generally defines a taxpayer’s capital gain as a gain from the disposition of property that would not be included

in computing the taxpayer’s income for the year if section 3 that provision were read without paragraph 3(b) and the words “other than a taxable capital gain from the disposition of a property” in paragraph 3(a) -> residual from s.(3)(a)

s.39(1)(b) generally defines a capital loss as a loss from the disposition of property other than depreciable property that would not be deductible under paragraph 3(d) if section 3 were read without paragraph 3(b) and the words “other than a taxable capital gain from the disposition of a property” in paragraph 3(a) and without the words “or the taxpayer’s allowable business investment loss for the year” in paragraph 3(d) – cannot have loss from dep. Property

s.40(1)(a)(b)

provide general rules for computing a gain or loss from the disposition of property:gain = proceeds – (adjusted cost base + disposition costs) loss = (adjusted cost base +

disposition costs) – proceeds(ii) and (iii) allow taxpayers to spread a gain over up to five years by deducting a reasonable reserve in respect of proceeds payable after the end of the year

s.248(1) “DISPOSITION” defined in in subsection 248(1) to include “any transaction or event entitling a taxpayer to proceeds of disposition of the property”

s.54 “PROCEEDS OF DISPOSITION” (POD) of property defined in section 54 to include “the sale price of property that has been sold” and various types of compensation – sale / torn down of building / demolition of property “ADJUSTED COST BASE” (ACB) of any property at any time defined in section 54 as

(a) where the property is depreciable property, the capital cost of the property4

(b) in any other case, the cost to the taxpayer adjusted, as of that time, in accordance with section 535

(d) in no case shall the ACB be less then nil6“CAPITAL PROPERTY” defined in section 54 as depreciable property and any property other than depreciable property any gain or loss from the disposition of which would be a capital gain or loss

s.53(1) additions in computing ACB, e.g., paragraph 53(1)(h) (carrying costs on vacant land) and paragraph 53(1)(j) deemed employment benefit in respect of securities)

s.53(2) deductions in computing ACBs.40(3) deemed gain when the deductions in computing the ACB of a property at any time exceed the total of the cost to

the taxpayer of the property and additions in computing the ACB of the property at that time [added in computing the ACB of the property under paragraph 53(1)(a)]

s.43(1) where a taxpayer disposes of part of a property, the ACB of the part is the portion of the ACB of the whole property that “can reasonably be regarded as attributable to that part” of a part of part dispositions [deducted in computing the ACB of the remaining part under paragraph 53(2)(d)]

4 If sell some dep. Property at the price > the capital cost, the amount of this part = taxable capital gain (not recapture dep.), which capture in s.545 ACB will arise in stock options – avoid double taxation6 Like in s.3

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s.47(1)(a)(b)

averages the ACB of identical properties by deeming taxpayers who acquire identical properties to have disposed of previously-acquired properties immediately before the acquisition for proceeds equal to their ACB and to have acquired all identical properties after that time at a cost equal to the total of their ACBs divided by the number of the identical properties owned by the taxpayer immediately after that time = average weight rule

CHARACTERIZATIONsince capital gains and losses are defined as a residual, the legal tests to determine the existence of a capital gain or loss depend on those that are used to determine the characterization of income from a source, particularly the characterization of an adventure in the nature of trade (need to be for personal use not for the purpose of biz)

REAL PROPERTYthe nature and quantity of the subject matter does not stamp it as being of a trading nature, though this may be more likely with vacant land than with developed land on which a building is situated or constructed (vacant land more likely to be treat as inv.)as a result, courts generally look to the taxpayer’s intentions as indicated by the manner of dealing test from Taylor (Ex. Ct., 1956), considering: (1) the period of time during which the property is held, (2) the circumstances responsible for the sale, (3) whether the taxpayer uses the property to earn income, (4) the manner in which acquisition was financed (implicit REOP test), and (5) other activities carried on by taxpayerin Regal Heights Ltd. (SCC, 1961), the SCC also developed a “secondary intention” doctrine to characterize as income or loss as business income or loss even where the taxpayer’s initial intention was to acquire property as capital property where the taxpayer had a secondary intention to dispose of the property at a gain since most taxpayers would be willing to sell property if the price were high enough, subsequent cases have clarified that the taxpayer’s “secondary intention” to sell the property at a profit must have been a “motivating intention” at the time of the acquisition, such that the taxpayer would not have purchased the property but for the prospect of selling it at a profit: Racine (Ex. Ct., 1965), Morev Investments Ltd. (FCA, 1973), Reicher (FCA, 1975), Crystal Glass Canada Ltd. (FCA, 1989). (but for test here)

PERSONAL-USE PROPERTYs.54 PERSONAL USE PROPERTY is defined include (a) property owned by the taxpayer that is used primarily for the

personal use or enjoyment of the taxpayer or for the personal use or enjoyment of one or more individuals each of whom is (i) the taxpayer [or] (ii) a person related to the taxpayer

s.40(2)(g)(iii)

notwithstanding subsection 40(1), a taxpayer’s loss from the disposition of personal-use property (other than listed personal property) is nil (not allowed for deduction for the capital loss)

s.46(1) generally excludes relatively small gains from the disposition of personal-use property by (a) deeming the ACB to the taxpayer of the property immediately before the disposition to be the greater of $1,000 and the amount otherwise determined and (b) deeming the taxpayer’s proceeds of disposition of the property to be the greater of $1,000 and the taxpayer’s proceeds otherwise determined

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LISTED PERSONAL PROPERTYs.54 LISTED PERSONAL PROPERTY as personal-use property that is all or any portion of, or an interest or right to any

(a) print, etching, drawing, painting, sculpture, or other similar work of art(b) jewellery(c) rare folio, rare manuscript, or rare book,(d) stamp, or (e) coinAllow claim loss on LPP only contra the LPP’s taxable net gains

s.3(b)(ii) requires taxpayers to include taxable net gains from dispositions of listed personal propertys.41(1) defines taxable net gains from dispositions of listed personal property as one half of net gains from dispositions

of listed personal propertys.41(2) net gains from dispositions of listed personal property as gains from dispositions of listed personal property less

losses from dispositions of listed personal property and listed personal property losses for the previous 7 years and the subsequent 3 years

s.41(3) a listed personal property loss for the year as the amount, if any, by which losses for the year from the disposition of listed personal property exceeds gains for the year from dispositions of listed personal property

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Property

inventory (business income/loss) capital property

income-producing property

depreciable capital propoerty

(CCA, taxable capital gain, no allowable

capital loss)

non-dep capital property

(taxable capital gain, allowable capital loss)

personal use property(1/2 gains taxable, loss

deems to be nil)

listed personal property

(1/2 net gains taxable, loss against gains)

principal residence(exempt from each year designated)

MIXED USES OF PROPERTYs.45(1)(b) for the purpose of subdivision c, where property has, since it was acquired by a taxpayer, been regularly used in

part for the purpose of gaining or producing income and in part for some other purpose, the taxpayer shall be deemed to have acquired for that other purpose, the proportion of the property that the use regularly made for that other purpose is of the whole use regularly made of the property at a cost equal to the same proportion of the cost to the taxpayer of the whole property and, if the property is disposed of, the proceeds of disposition of the proportion of the property deemed to have been acquired for that other purpose are deemed to be the same proportion of the proceeds for the whole property

s.13(7)(c) for the purpose of the CCA rules, where property has, since it was acquired by a taxpayer, been regularly used in part for the purpose of gaining or producing income and in part for some other purpose, the taxpayer shall be deemed to have acquired for the purpose of gaining or producing income, the proportion of the property that the use regularly made for the purpose of gaining or producing income is of the whole use regularly made of the property at a capital cost equal to the same proportion of the capital cost to the taxpayer of the whole property and, if the property is disposed of, the proceeds of disposition of the proportion of the property deemed to have been acquired for the purpose of gaining or producing income are deemed to be the same proportion of the proceeds for the whole property

CHANGE IN USE FROM INCOME-PRODUCING PROPERTY TO ANOTHER PURPOSEs.45(1)(a)(ii)

for the purpose of subdivision c, where a taxpayer having acquired property for the purpose of gaining or producing income has commenced at a later time to use the property for another purpose, the taxpayer is deemed to have disposed of the property for proceeds equal to FMV and reacquired the property at a cost equal to FMV

s.13(7)(a) for the purpose of the CCA rules, where a taxpayer has ceased to use depreciable property for the purpose of gaining or producing income, the taxpayer is deemed to have disposed of the property for proceeds equal to FMV and reacquired the property at a cost equal to FMV

FROM ANOTHER PURPOSE TO INCOME-PRODUCING PROPERTYs.45(1)(a)(i)

for the purpose of subdivision c, where a taxpayer, having acquired property for another purpose, has commenced to use property for the purpose of gaining or producing income, the taxpayer is deemed to have disposed of the property for proceeds equal to FMV and reacquired the property at a cost equal to FMV

s.13(7)(b) for the purpose of the CCA rules, where a taxpayer, having acquired property for another purpose, has commenced to use property for the purpose of gaining or producing income, the taxpayer is generally deemed to have acquired the property at a cost equal to the lesser of (i) its FMV at that time, and (ii) the total of its cost otherwise determined and ½ of the amount by which its FMV exceeds this cost (= Cost + ½ capital gain)

s.45(2) – where these provisions would otherwise apply and the taxpayer makes an election, the taxpayer is deemed not to have begun to use the property for the purpose of gaining or producing income (as a result of which there is

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no deemed disposition and the property continues to be characterized as personal-use property) => the taxpayer can elect not change the use of the property and not get the CCA = allow people to avoid the tax

REAL PROPERTY FROM INCOME-PRODUCING CAPITAL PROPERTY TO INVENTORY OR VICE VERSAalthough the deeming rules in paragraphs 45(1)(a) and 13(7)(a) and (b) contemplate changes in the use of property from an income-producing purpose to personal use or vice versa, it is generally agreed that they do not contemplate changes between an income-producing use as capital property and inventorywhere real property is converted from income-producing capital property to inventory, the CRA calculates subsequent gains or losses on the basis that there was a notional disposition of the property on the date of conversion, with the resulting gain or loss recognized in the year of the actual disposition (as a result, gains and losses are characterized as partly capital gains or losses and partly business income or losses)the CRA adopts the same approach where property is converted from inventory to income-producing capital property, but requires more substantial evidence of an intention to change the use of the property, and will not accept that there is a change of use where the property is vacant landwhere a taxpayer acquires real property as inventory, both the CRA and the courts take the view that there is a strong presumption that the property retains this character absent clear and unequivocal acts indicating a change of intention, and the CRA takes the position that the character of vacant land remains inventory where a taxpayer elects under subsection 45(2), property is deemed not to have begun to be used for the purpose of gaining or producing income (until the election is rescinded)Burnet (TCC, 1995)

- T lived house West Van then moved North Van. 1979 - T wanted benefit real estate boom, so tore down house West Van and built bigger house to sell at profit. House declines in value, so T and family move back for period of time. Then fam moves back in North Van, and sell property for $385K. T claims business loss tax return $520K.

- PUP that loss disallowed / an adventure in the nature of trade that loss allowed- Court: The intention to realize a profit on the sale of a large house was, at the outset, although somewhat ill-conceived,

at least understandable in the market that prevailed in 1979. Moreover, the house, if intended, as the respondent suggests, to be a permanent residence, was much too large and elaborate for the Burnet family. … return to the property in West Vancouver was equally consistent with the financial exigencies that prevailed in 1981. Even lived in West Van house for a short time an adventure in the nature of trade that loss allowed

Down (TCC, 1993) – $112,818 loss on disposition of home in which the taxpayer resided characterized as a business loss since the taxpayer had bought and sold 80-100 properties in previous years and lived in the house for only 10 monthsJason (TCC, 1995) – short holding period and 96.5% debt finance suggested taxpayer had a secondary intention to sell the property for profit at the first opportunityMcMillan (TCC, 1987) – loss on disposition of a house in which the taxpayer resided for 10 months characterized as a non-deductible loss from the disposition of personal-use property on the grounds that the house was custom built to the taxpayer’s specifications and sold due to financial difficultiesBoudreau (TCC, 1999) – loss on property rented to parents at below market rates and sold to sister at a loss disallowed on the basis that the property was personal-use property

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NON-ARM’S LENGTH TRANSACTIONS, ROLLOVER ON TRANSFER OF PROPERTY TO SPOUSE OR COMMON-LAW PARTNER, AND ATTRIBUTION RULES (SUBDIV F)

NON-ARM’S LENGTH TRANSACTIONS

POTENTIAL INCOME-SHIFTING THROUGH NON-ARM’S LENGTH TRANSACTIONSassume that an individual owns capital property with ACB = $1,000 and FMV = $5,000if the individual is a higher-income spouse, the individual might sell the property to a lower-income spouse for $1,000, thereby shifting the gain to the lower-income spouse when he or she sells the property to an arm’s length person for proceeds equal to its FMVif the individual is a lower-income spouse, the individual might sell the property to higher-income spouse for more than $5,000, as a result of which the lower-income spouse will realize an artificial gain and the higher-income spouse will realize an artificial loss loss when he or she sells the property to an arm’s length person for proceeds equal to its FMV

ANTI-AVOIDANCE RULES TO PREVENT INCOME-SHIFTING AMONG NON-ARM’S LENGTH PERSONSs.69(1)(a) where a taxpayer has acquired anything from a person with whom the taxpayer was not dealing at arm’s length

at an amount in excess of its FMV at the time of the acquisition, deems the taxpayer to have acquired it at that FMV

s.69(1)(b) where a taxpayer has disposed of anything to a person with whom the taxpayer was not dealing at arm’s length for no proceeds or for proceeds less than its FMV at the time of the disposition (or to any person by way of gift), deems the taxpayer to have received proceeds of disposition equal to that FMV;where a taxpayer has acquired property by way of gift, the taxpayer is deemed to acquire the property at FMV

s.251 251(1)(a) related persons are deemed to deal with each other not at arm’s length; paragraph 251(2)(a) stipulates that individuals are related where they are connected by blood relationship, marriage or common-law partnership, or adoption; these terms are defined in subsection 251(6) - persons are connected by

(a) blood relationship if one is the child or other descendant of the other or one is the brother or sister of the other;(b) marriage if one is married to the other or to a person who is so connected by blood relationship to the other;(b.1) common-law partnership if one is in a common-law partnership with the other or with a person who is connected by blood relationship to the other; and(c) adoption, if one has been adopted, either legally or in fact, as the child of the other or as the child of a person who is so connected by blood relationship (otherwise than as a brother or sister) to the other

s.248(28) Unless a contrary intention is evident, no provision of this Act shall be read or construed … to require the inclusion or permit the deduction, either directly or indirectly in computing a taxpayer’s income [or] taxable income … of any amount to the extent that the amount has already been directly in indirectly included or

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deducted, as the case may be, in computing such income [or] taxable income ….[note that this interpretive rule only applies to inclusions or deductions in computing “a taxpayer’s income [or] taxable income” NOT the income or taxable income of two or more taxpayers] => only double taxation against the same person is disallowed

note that these provisions apply “[e]xcept as expressly provided in this Act”note also that these provisions adjust only one side of the transaction (except in the case of a gift), potentially resulting in double taxationAllfine Bowlerama Ltd. (TRB, 1972)“There is a general presumption in law against taxing the same income dollars twice. Double taxation can only be considered to exist where it is equitable and/or the language of the taxing Act is clear and unequivocal.... To permit the Minister to impose such a “tax” would be tantamount to allowing the masquerading of a penalty as a tax not permitted under the Income Tax Act. The Board has no alternative but to allow the appeal.”IT-405 “Inadequate Considerations – Acquisitions and Dispositions”(cancelled September 30, 2012), para. 5… where it can be shown that the transfer occurred at an amount other than the fair market value by reason of an honest error and not by a deliberate attempt to evade or avoid tax, the Department may permit an adjustment in the amount of the proceeds of disposition or purchase price to reflect the amounts deemed by paragraph 69(1)(a) or 69(1)(b) to have been paid or received. The onus will be on either or both taxpayers, as the case may be, to substantiate a claim that the incorrect valuation was caused by an honest error.

ROLLOVER ON INTER VIVOS TRANSFER OF CAPITAL PROPERTY TO SPOUSE OR COMMON-LAW PARTNERs. 69(1) Applies “except as expressly provided in this Act” and is over-ridden by subsection 73(1) for transfers of capital

property to a spouse or common law partners.73(1) where an individual transfers any particular capital property in circumstances to which subsection 73(1.01)

applies and both the individual and the transferee are resident in Canada, unless the individual elects in the individual’s return of income for the year in which the property is transferred that the provision not apply

s.73(1.01) applies where an individual transfers property to (a) the individual’s spouse or common-law partner (b) a former spouse or common-law partner in settlement of rights, or (c) to a spouse or common-partner trust

s.73(1)(a) deems the particular property to be disposed of for proceeds equal to (i) a proportion of the UCC of the class (based on the FMV of all property) immediately before that time if the property is depreciable property, or (ii) the ACB of the property immediately before that time if the property is non-depreciable capital property

s.73(1)(b) deems the particular property to have been acquired at that time by the transferee for an amount equal to the deemed proceeds

e.g. capital cost = 3000, UCC = 1000, FMV = 4000 => deem to be UCC for transfer for arm-length; tax is deferred when transferee sell the property

ATTRIBUTION RULES

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s.74.1(1) income or loss from property transferred or loaned directly or indirectly by an individual to or for benefit of the individual’s spouse or common-law partner or property substituted therefor deemed that of the individual and not the spouse or common-law partner

s. 74.1(2) income or loss from property transferred or loaned directly or indirectly by an individual to or for benefit of a related minor or property substituted therefor deemed that of the individual and not the related minor

s.74.2(1) taxable capital gains and allowable capital losses from property transferred or loaned directly or indirectly by an individual to or for benefit of spouse or common-law partner or property substituted therefor deemed that of the individual and not the spouse or common-law partner

s.74.5(6)-(9)

ensure that the attribution rules apply to back-to-back loans and transfers, guaranteed loans, and transfer or loans of property to a trust

s.74.3 s.74.4

special rules that apply where property is transferred or lent to a trust of which a spouse or common-law partner or related minor is a beneficiary or a corporation of which a spouse or common-law partner or related minor is a “specified shareholder”(owning more than 10% of the shares of any class)

s.74.5(1)(2)

UNDER FMV s.74.5(1) and (2) generally provide that the attribution rules do not apply to transfers for fair market consideration and loans for value

s.74.5(1)(c)

ROLLOVER RULE where an individual transfers property to or for the benefit of a spouse or common-law partner, however, paragraph 74.5(1)(c) provides that the exclusion in subsection 74.5(1) applies only where the transferor elects not to have the rollover in subsection 73(1) apply

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

The word “transfer” is [a] term of wide meaning.... The word … is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

if the lower-income spouse does not elect out of 73(1), the rule in 74.5(1) does not apply, which means that the attribution rules in 74.1(1) and 74.1(2) apply, and income and capital gains on the shares held by the higher-income spouse are attributed to the lower income spousein this circumstance, the anti-avoidance rule in 74.5(11) could apply to prevent the operation of the

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attribution rules, so that the higher-income spouse will be subject to tax on income and capital gains on the shares held by the higher-income spouse\

Lipson (SCC, 2009)- in 1994, the taxpayer (Earl) and his wife (Jordanna) entered into an agreement to buy a house in Toronto for $750,000,

with a closing date of September 1, 1994.- on August 31, 1994, Jordanna borrowed $562,500 from the Bank of Montreal and gave the bank an interest-bearing

demand promissory note, on the same day, Jordanna bought 20 5/6 shares of Lipson Family Investments Ltd. from Earl for $562,500 (their fair market value). also on the same day, Earl forwarded $562,500 to his solicitor in trust to purchase the house, the next day, the solicitor paid $562,500 toward the purchase of the house and Earl and Jordanna were registered as joint owners of the property. immediately thereafter, the Bank of Montreal registered a mortgage on the property and forwarded $562,500 to the taxpayer’s solicitor, who used the funds to repay Jordanna’s loan

- in his 1994 tax return, Earl did not elect out of the rollover in subsection 73(1) of the Act, as a result of which subsection 74.5(1) did not apply and the attribution rule in subsection 74.1(1) applied to any income or loss of Jordanna from the transferred shares (net income/loss will contribute back to Earl)

S.20(1)(c)(i) / S.20(3) / s.73(1) rollover / s.74.1(1) -apply when apply s.73.(1) attribute loss back to Earl/ s.74.5(1)(c) GAAR –

o Tax benefit √o Tax motivate? Transaction – separately???? – √o Misuse and abuse –

(a) is an outcome that the provisions relied on seek to prevent; (b) defeats the underlying rationale of the provisions relied on; or (c) circumvents certain provisions in a manner that frustrates the object, spirit or purpose of those

provisions Misuse the attribution rule to reduce the tax Tax consequence -> if GAAR apply?

o In the present case, disallowing the interest deduction in computing the income or loss attributed to Mr. Lipson and attributing that deduction back to Mrs. Lipson is a reasonable outcome.

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