G.Jamieson TAX FINAL- FALL 2015-O’BRIEN

BASIC CONCEPTS AND TERMS

What is a tax?

Compulsory and unrequited payment to government Has to be imposed by law (no common law of taxation- no obligation unless it is attached to a provision) Not Fines and penalties:

o meant as punishment for acting contrary to law- meant to deter, even if they do raise revenueo fine increases with gravity of offence

Not Royalties: Crown owns the natural resources (each get a cut of the resources) Not Prices/User Fees: Do get something back, right to do something, service provided Pigovian taxes (sin taxes): tax things we want people to use less of, but government benefits from people who still

buy the product

Direct: one which is demanded from the very person who it is intended or desired should pay it.Indirect: those which are demanded from one person in the expectation that he shall indemnify himself at the expense of another.

ex. Import duties- will pay up front but pass it on immediately (increases the price) – about the choice of whether to pass it on?

Note: these definitions have been cited by the SCC (JS Mill)

Basethe amount, transaction, or property upon which the tax is levied. Three bases for broad based tax, where amount is a percentage of base:

1. Income In Canada: just wages and salaries

2. Amount spent (consumption) Essentially equivalent to an income tax that exempts the value of the tax payer’s savings

from tax GST: multi-stage sales tax (applies at all stages of production) Excise taxes: only imposed on selected goods and services (normative justification is that

these goods have social costs)3. Amount represented by an individual’s property (wealth)

Rates

(handout 1)

Tax Rate: The amount/percentage applied to the tax base (amount/transaction/property on which the tax is levied)

Statutory Rate: set out at s.117

Marginal Rate: the rate that applies to an additional dollar a T earns within each income bracket (The highest bracket that the income falls into). Usually used to assess the value of a deduction and whether to take advantage of it.

Average Rate: the rate applicable to the income as a whole (fraction of total income paid in taxes)

Effective Rate: similar to average, but uses a broader measure of income than just taxable income

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TypesProgressive: Imposes a higher tax burden on those with more ability to pay, eg increasing marginal tax ratesas income increasesFlat: Everyone pays the same proportion of their income, regardless of their ability to pay, eg Alberta's 10% income taxRegressive: Imposes a higher tax burden on, those with less ability to pay, eg consumption taxes, (GST/PST/HST), the carbon tax

Exemptions – 81(1)

Means: An item exempted from tax is not included in the calculation of income, even though it increases an individual's ability to pay, statutorily exempted income does not have be reported (Lottery Winnings; Gifts; Strike Pay) as per s.81(1)

Are very specific Examples:

o gifts (may have implications from the donor)o lottery winningso random acquisitiono strike pay (controversial)o inheritance is exempt

DeductionsMeans: They reduce the tax base against which the tax rate is applied. Their value varies according to the marginal tax rate of the individual; they benefit higher income individuals more than low income individuals.

Taxable income = total income – deductions

Examples: (RRSP/RESP; Moving Expenses; Childcare Expenses; Union Dues)

Notes: Worth more to higher-income earners (as opposed to credits)

CreditsMeans: reductions in tax otherwise payable, apply AFTER income is calculated (gross income+ deducted deductions+ add rate of tax) = deducted from tax payable are the same value for all individuals

Examples: each tax payer will get the same number of dollars from each credit (independent from income)

Notes: each tax payer will get the same number of dollars from each credit (independent from income – see

handout) there are a limited amount of credits you can claim now CPP is a credit

TermsGAAP and IFRS: bind the accounting profession, lead to conservative numbers, include ALL liabilities and potential liabilities

Cash Method: amounts received and amounts paid: individuals, and farmers and fishers (don’t report an amount as income in calculating profits until you receive it, can’t claim a deduction until amount is paid)

Accrual Method: more expansive, also includes income that is just receivable (entitled to receive, done everything that is required for payment) ex. Delivered the goods and gave a receipt to pay within 30 days

Division of Powers

(handout 2)

Federal 91(3): any mode of taxation is permitted for the federal government

Provincial 92(2): direct taxation as revenue for provincial purposes. There are still cases where a provincial tax is challenged as being indirect

92(9): Licences (fees have to be within a licencing scheme, fees can also raise additional revenue within reason)

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FederalismTax Collection Agreements: between the federal government and each province EXCEPT quebec for the taxation of individual.

Feds define tax base in ITA, then provincial ITAs adopt that base for individuals ALL provinces agree that provincial residence is determined by the place of residence on December 31 POLICY: otherwise the system is fragmented Quebec: has its own collection agency AB and QC: separate tax systems for corporate tax, but they track the federal system closely

Features Feds agree to be sole collector administrator and enforcer of income tax on behalf of agreeing provinces Feds define income, exemptions and deductions under the ITA Federal credits (personal, spousal, tuition ect) are usually matched by provincial credits Provinces provide for provincial tax credits Provinces apply an annual inflation index that may differ from the federal one

Process report income, claim deductions, file a tax return, maybe receive a tax refund receive a notice of assessment can appeal a tax assessment, may be issued a new assessment or a reassessment can object by sending a notice of objection within 90 days (will hem your arguments from her onwards). CRA appeals division either confirms or varies assessment Can appeal to TCC FCA

Income Splitting

What is it? Transfer of income from one person to another who is taxed on the income at a lower marginal tax rate than that applicable to the transferor (shifting the nexus between the taxpayer and the income).

In Canada: Pensioner can split up to half of income with spouse (s.60.03) RRSP: one spouse contributes to other’s RRSP and can take a deduction S.120.4: imposes tax at the highest marginal rate on certain income for individuals under 18. Generally

applies to dividends and shareholder benefits, income from a partnership trust (page 114 for details)

Interpretation

Of Tax Statutes

Placer Dome : Driedger Method SCC abandoned strict interpretation, adopts modern approach – tax instruments are social, economic instruments not

punishmento Tax statutes are detailed and specific, therefore the textual interpretation usually gives an unambiguous

result,

Burden of proof almost always on TP, assessment valid and binding unless TP displaces (BoP)o TP can demolish Minister’s assumptions or factual findings on which M made decisiono Burden in s.152(8): assessment deemed valid and binding

“Residual presumption” in favour of taxpayer if ambiguity, accepted by SCC but used rarelyo Fries - “in the nature of income from a source” not proper interpretation strike pay is not income from a

source

If Ambiguous, go to Trustco

go on to a textual and purposive interpretationo If STILL ambiguous: goes to the taxpayer’s interpretation (rare- last ditch argument, court must be on your

side) “the residual presumption”

ITA Provisions on Burden of Proof on TPs. 152(7): assessment not dependent on return or information M is not bound by a return or info supplied by TP, may assess tax payable notwithstanding info provided or if no return

is filed

s. 152(8): assessment deemed valid and binding SUBJECT to being varied, vacated, objected, appealed, is deemed to be valid and binding

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Interpretation Bulletins

The CRA’s guide for how the CRA intends to assess certain funds. However, not binding on the department or the taxpayer, they are just helpful as the ITA is not always clear

NOTE: Occasionally see the court rule against bulletin for no basis in law, but some courts accepting bulletin (as reliance principle). Bulletins now being replaced by “folios”—interpretation of the Act for answers to common questions.

Expenditures

Collecting Statute Tax provisions: establish and define the elements of the system, rules allow the tax system to raise revenue and redistribute income. They are evaluated by the policy criteria.

Tax Expenditures (TE) implicit subsidies

Include: Deductions, exemptions or credits, lower rates Evaluation of the effectiveness of expenditures, usually by budgetary criteria

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

spending and politically accountable for it? Can the money be better spent elsewhere? Pros: encourages private decision making, encourages people to file tax returns, uses

established admin framework, less stigma than direct gov handouts Cons: open ended, if delivered as deductions rather than credits it can have a perverse effect

on low income earners, not available to non-tax paying people, can be subject to abuse, increase complexity of the system and its administration, increased perceived unfairness because not everyone knows about them, gov doesn’t report them in the budget – less accountability, less transparent than direct subsidieso (see page 75 for disadvantages)

Evaluating Expenditures

1. Identify the government objective that the TE serves Market failure? Furthering social justice/gender equality?

2. Apply budgetary criteria used with government spending programs benefits distributed fairly? Target efficient (go to the intended person, avoid unintended effects)? Reasonable admin costs (expenditures are calculated automatically, whereas

direct subsidy requires an application ect and can be more expensive)? Does the government have control over the spending program (can get out of

control with subsidy, because you don’t know how many people will take it up)

3. Identify alternative means to achieve objective (like a direct spending program, regulation)

EQUITY AND POLICY

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Equity (fairness)

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

levels of taxation (ex. taxation of employee fringe benefits) Tax is premised on the notion of equity/fairness – most important factor

Some notes: Regressive taxes represent a higher proportion of a low income person’s disposable income (lower proportion for

rich) The ITA attempts to address this regressive aspect by providing refundable credits to those people who file their tax

returns (Note the difference between refundable and non-refundable credits) System provides exemptions for other necessities Overall the Canadian tax burden is proportional People who pay more pass their taxes on (corporations pass to employees as lower wages, consumers as higher

prices, shareholders as reduced dividends ect)

Neutrality tax should not unduly affect personal economic decisions Difficult to obtain because tax system is built on encouraging/discouraging certain actions (honoured in the

breach) not much neutrality left (many taxes are changing our behaviour and are intended to do so) Rationale: If behaviour is influenced by the tax system, will effect allocation of resources which may lead to less

efficient allocation (market = best allocation of resources). Assumes that people are rational actors who make decisions based on cost/benefit calculations

Neutrality is often compromised by the government in aid of other objectiveso Certain tax policies are designed to necessarily violate neutrality; they exist to affect behaviouro Compromises are made for deliberate policies of, for example, promoting savings for retirement (thus

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

Simplicity/Efficiency

comprehensible: rational (someone should be able to follow the logic), understandable to the people to whom it applies, the principles should be apparent and consistently applied.

certainty/Predictability: someone should be able to determine in advance the tax consequences of an event (should be able to plan affairs). It should not be a vague test or at the collector’s discretion

tax amendments: have effect from the date of announcement, not when it is enacted

Compliance convenience: Main points: Taxes should be difficult to avoid or evade, if there are incentives/opportunities for non-compliance, it becomes unfair (people who are in compliance will end up paying more), Should apply across the board- and appears fair to all

perhaps not achieved in income tax.

Administrative Convenience If tax system is difficult and expensive to administer, then cost of collecting the tax is a larger portion of the tax

collected (have to have the right ratio). In Canada: efficient system (2% of the tax collected goes to administration)

Difficult to Evade/Avoid: Avoidance : minimizing tax in a legal but aggressive way (general anti-avoidance rule = if avoidance is unduly

aggressive then the CRA can put you into a different rule) – while not illegal, won’t be allowed to stando Means you are reporting honestly, and the CRA can just disagreeo Not illegal, can be distastefulo GARR: general anti-avoidance rules, if you violate GARR you pay a fee, amount owing, and interest

Evasion : is fraud, and a crimeo Provincial court offence, can result in fines or imprisonmento Means: haven’t reported income, hiding it, claiming deductions with no foundation, shamo There is an obligation to ensure your tax filings are correct

Global Competitiveness

• The effective rates that businesses pay in Canada should be competitive with other jurisdictions; there should not be a big incentive to move money out of the country• Also consider how certain and complex the system is; it seems you can have higher rates if the system is clear and fair

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Arms length and Non Arms Length

Step One: Determine Who Is Related

Persons

251(2): Related persons are Individuals connected by blood, marriage, CL partnership or adoption. Does NOT include Aunt, Uncle, Niece, Nephew, Cousin

251(6)(b) and (b.1): Spouses and CL partners are related to each other, and to relations of their spouse (in-laws are related)

248 (1): Definition of common-law partner:(a) live together for one year; OR(b) if you have a child together and you live together, regardless of length.

Relationship ends only if you live separate and apart for 90 days due to breakdown of relationship

Corporations

251(2)(b)(i): Corporation is related to a person who holds voting control i.e. over 50%-->can elect board of directors

251(2)(b)(ii): Corporation is related to a person who is a member of a related group that controls the corporation

A related group means a group of persons, each member of which is related to each other member.

251(2)(b)(iii): Corporation is related to any person related to either the person who controls it, or any member of the related group that controls it

Step 2: Determine If Arm’s Length

251(1)(a): Related persons are deemed not to deal at arm’s length, even if their interests conflict

251(1)(c): Q of fact whether unrelated persons are dealing at arm’s length at a particular time

Consider:- Do the parties have a “common-mind” which directs or controls the bargaining for both sides- Do the parties act in concert w/o separate interests?- Business partners may or may not be at arm’s length- EE’s normally arm’s length from employers unless related

NB: business partners are generally at arm’s length, although depending on the circumstances they may not be. Employees are also normally at arm’s length from their employer, unless they control or are members of the family, the controls the corporate employer.

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RESIDENCY

General Notes WHO is subject to Canadian tax? Includes deemed and ordinarily resident ITA does not define the residence of an individual go to caselaw a question of fact Residency for tax purposes is established by facts and circumstances unless deemed to be a resident

Are we dealing with a resident?

s. 2(1): Tax Payable by persons resident in Canada

2. (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

Note that s.114 Part year resident rules reduce impact

s. 2(3): Tax payable by non-residents

2(3) where a person who is not taxable under s (1) for a taxation year

(a) was employed in Canada

(b) carried on a business in Canada

(c) disposed of a taxable Canadian property

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1. Is the TP Ordinarily resident under 250(3)?

250(3) In this Act, a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada.

Thomson 1 Resident under 2(1): a matter of the degree to which a person in mind and fact settles into or maintains or

centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences or at the place in question.

Refers to residence in the course of the customary mode of life of the person concerned, and is contrasted with special or occasional or casual residence (Thomson)

Should be contrasted with “stay” or “visit” (Thomson) There is a presumption that everyone is a resident of somewhere. Ordinary residence refers to the place

where a person normally lives (Thomson) A person can still be considered an ordinary resident of Canada, even if the time spent in Canada is a

minority portion of the year (Thomson)o (Although tp only lived in Canada about 150 days of the year, he settled in when he moved to

Canada and had community and family ties in the area) Intention is not a determinative factor when it does not reflect the actual circumstances (Lee2, Thomson) You can be resident in multiple places (Thomson)

o Risk of juridical double-taxation

Lee Question of fact. There is not one determinative factor that definitively determines when a person

becomes a resident of Canada3.

Folio S5-F1-C1(page 131)(SRT = significant residential ties)

Evidence of Intention Evidence of intention to permanently sever residential ties with Canada (Shih)4 When there are no other residential ties, an intention to return to Canada is not enough to establish

ordinary residence Length of stay abroad is one factor but there is no particular length of stay which necessarily means the

individual becomes a non-resident Look at if the individual's return to Canada was foreseen at time of departure; this may make the

remaining residential ties more significant eg if an employment K exists if and when the individual returns to Canada

Steps Taken to Comply with ITA Look at if the individual complied with the ITA provisions around individuals ceasing to be resident in

Canada and individuals who are not resident in Canada s.128.1(4): Deemed disposition and reacquisition (see pg 28 of outline)

1 TP assessed taxes for 1940, argued not resident then. Held: he was a resident, based on maintaining home in Canada which he resided in when in Canada, and paid non-resident taxes in US in the year in question. Also his passport listed Bermuda as place of residence, but hadn’t lived there for 20 yrs. Court found the home in NB to be the primary home.2

3 Denis M. Lee v. MNR: TP treated by Immigration Canada as a visitor, worked/earned income outside Canada (oil rig), came and went for 3 years, deposited cheques in CAD bank, married Cdn woman who lived here and was wholly dependent on TP. TP guaranteed mortgage on house for wife. Held: TP resident as of date of his marriage. Marriage wasn’t the deciding factor, but he was definitely resident by time of mortgage, and marriage tips the scale in terms of deciding the exact point at which TP became resident

4 Although wife and sons were in Regina and Shih was personal resident in Canada, he still had strong ties in Taiwan and spent most of his time there. The only reason the family came to Canada was so that the son had a western education

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s.212(1) and (2): Withholding tax on payments to non-residents (see pg 35 of outline) Whether the individual informed any Canadian residents making payments to the individual that he/she

intended to become a non-resident upon leaving so that certain payments would be subject to a withholding tax under Part XIII DEPARTURE TAX PAID?

Regularity and Length of Visits Occasional return visits will not affect an individual's status as a non-resident if he/she has severed all ties But if visits are more than occasional and some secondary residential ties exist this factor will add weight

to those ties (especially if visits are regular)

Residential Ties Elsewhere? If an individual establishes no SRT's outside Canada it makes the remaining residential ties in Canada more

significant An individual can be resident in multiple countries so having SRT's abroad does not necessarily mean no

longer resident in Canada

Dwelling place

whether owned or leased, will usually be a SRT look to relationship between TP and person leasing the dwelling place Salt: house leased to 3P, NOT immediately available Shih: owned a house where wife and sons lived but not a resident if someone has no existing ties, and purchases a dwelling place and leases to family member (not spouse) for lower

than FMV usually will not be a SRT

Spouse or Dependents

see if partner stayed behind indicates SRT if individual was already living apart from spouse prior to leaving likely not an SRT Schujahn: wife and child remained behind only temporarily to sell home

Secondary Residential Ties

personal property social ties (Schujahn, gave up social ties and re-established US ones) economic ties (business ties, employer, retirement savings plan) work permits medical coverage driver’s licence vehicle registration seasonal dwelling place passport memberships in unions, professional organizations

Other Residency Ties

mailing address business cards with address telephone listings local newspaper subscriptions

Are they a deemed resident? (Individuals and Corporations)

s. 250(1): Person deemed to be residence

250(1) For the purposes of this Act, a person shall, subject to subsection 250(2), be deemed to have been resident in Canada throughout a taxation year if the person

(a) sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more;

(b) was, at any time in the year, a member of the Canadian Forces;

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(c) was, at any time in the year,

(i) an ambassador, minister, high commissioner, officer or servant of Canada, or

(ii) an agent-general, officer or servant of a province,

and was resident in Canada immediately prior to appointment or employment by Canada or the province or received representation allowances in respect of the year; MEANS WHEN INDIVIDUAL HIRED, NOT STARTED WORK

Notes: Easiest way to get to residency Someone could be deemed resident under this section but not be resident in a particular province for

provincial tax purposes SOJOURNERS s.114: will be taxed on worldwide income for ENTIRE year due to s.2(1)

o R&L Foods

Sojourning Thomson: Applies to presence in Canada that is outside the range of residence; it could have been foreseen at the time of arrival that the stay was going to be passing

R&L: The meaning of sojourn refers to a temporary stay in a place and does not include coming to one country for work during the day (NOT COMMUTING) and returning at night to a permanent residence in another country5

Note in R & L, men wanted to be residents to take advantage of Canadian-Controlled Private Corporation Tax rate

s. 125(7) – a corporation that is resident in Canada, its shares are not listed on a stock exchange, and it is not controlled by non-residents of Canada or by a corporation whose shares are traded on a stock exchange

CCPCs receive a tax benefit (13.5% in BC instead of 26%), but controlling shareholders must be resident in Canada

Soujourners (Folio S5-F1-C1): This is a question of fact, commuting to Canada for work is not sojourning, but otherwise every part of the day spent sojourning is considered to be a full day for the purpose of calculating whether the person sojourned in Canada for long enough. Sojourners have to pay tax on worldwide income for the full year.

5 R&L Food Distributors: Shareholders of a small corporation wished to claim the small business tax rate for CCPC. In order to gain it, two of the three shareholders had to establish that they were resident in Canada. These shareholders commuted from the US to Canada for work and very occasionally slept in the store or in a hotel in Canada for work. Held: Commuting is not sojourning; not resident under Thomson. Although belonged to a social club in Windsor, the family and religious ties of the shareholders were in the US. They were not deemed to be resident in Canada

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Are they a Part year resident?

Are they a Part year resident?

s.114: Part Year Resident

249(1)(b): In the case of an individual a CALENDER year

When a person has been resident in Canada for part of the year and non-resident for another part (NOT DEEMED RESIDENTS) take the individual's income for the whole year, and for the part of the year where they are non-resident, only tax them on the income you would tax any non-resident on in s.2(3):

income from employment in Canada; a business carried on in Canada; or taxable capital gains realized in Canada

Notes: this is like an EXCEPTION to the rule in 2(1) that a person resident in Canada is taxed on WWI for whole

year individual either began to reside or ceased to reside in Canada during the year (assess according to

residency factors) are only taxed for the portion of the year they are resident NO OVERLAP with sojourners (who are taxed for WHOLE year)

Must show they commenced or ceased to reside

Schujahn

Residence is a question of fact if spouse/CL/dependents remain behind temporarily, then person becomes non-resident when they leave if the only reason certain ties are maintained is to facilitate the ending of ties, then cease when TP leaves

Short term residency: easier to sever ties

Folio S5-F1-C1: Determining if an Individual has Severed Ties: see above Note: compliance with departure tax under 128.1

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If Ties in Canada Reeder

If all ties in Canada: a person can remain resident if all their ties are here (likely for longer term residency)

Non-exhaustive list for determining residence: past and present habits of life regularity and length of visits in the jurisdiction asserting residence ties within that jurisdiction, eg property and investment, employment, family, business, cultural and social ties elsewhere permanence or otherwise of purposes of stay abroad

Date non-residence status is acquired

Date person severs all ties with Canada, usually the latest of days on which: person leaves spouse/CL partner/dependents leave becomes resident elsewhere

Capital Gains Implications

s.128.1(4): Deemed Disposition and Reacquisition on emigration from Canada(4) For the purposes of this Act, where at a particular Notestime a taxpayer ceases to be resident in Canada,

(b) the taxpayer is deemed to have disposed, at thetime (in this paragraph and paragraph (d) referred to asthe “time

of disposition”) that is immediately beforethe time that is immediately before the particular time, of each property

owned by the taxpayer other than, if the taxpayer is an individual

(i) real or immovable property situated in Canada, a Canadian resource property or a timber resource property,

for proceeds equal to its fair market value at the time of disposition, which proceeds are deemed to have become receivable and to have been received by the taxpayer at the time of disposition;

(c) the taxpayer is deemed to have reacquired, at the particular time, each property deemed by paragraph (b) or (b.1) to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property;

Issues: ASK: Does this effect a CCPC? Is the TP now subject to withholding tax? If you don’t file your taxes and claim all this, the CRA will take the position that you are still a resident and therefore

taxable on your worldwide income.

Policy: Otherwise, when a person emigrated from Canada capital gains and losses that had accrued while Canadian resident

would escape Canadian tax liability The deemed dispositions for almost all forms of capital property upon emigration prevents people from moving to a

Country where Canada has a tax treaty and then claiming an exemption from Canadian tax under the treaty. Real property in Canada and capital property used to carry on business in Canada through a permanent establishment

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remain subject to Canadian tax on disposition by non-residents located in treaty countries

Corporate Residence

s. 250(4) : Corporate Residence(4) A corporation is deemed to be resident where:

(a) deems a corporation resident throughout the taxation year if you are incorporated in Canada AFTER April 26, 1965 in any of the provinces, territories, or federally

OR (based on date- 1965)

(c) deemed resident in Canada if incorporated BEFORE April 27 1965, if incorporated in Canada, if so, have they been resident in Canada OR carried on business in Canada any year after 1965

s.253: definition of Carrying on Business: almost any dealings in Canada will qualify as carrying on business in Canada, even if the corporation would not qualify under the common law rule

the common law applies a residency test to determine residency

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s. 250(4): Corporate Residence

(4) A corporation is deemed to be resident where:

(a) deems a corporation resident throughout the taxation year if you are incorporated in Canada AFTER April 26, 1965 in any of the provinces, territories, or federally

OR (based on date- 1965)

(c) deemed resident in Canada if incorporated BEFORE April 27 1965, if incorporated in Canada, if so, have they been resident in Canada OR carried on business in Canada any year after 1965

s.253: definition of Carrying on Business: almost any dealings in Canada will qualify as carrying on business in Canada, even if the corporation would not qualify under the common law rule

the common law applies a residency test to determine residency

De Beers Residency test: Where the real business of the corporation is carried on, DEEMED to be where the central management and control actually abides

Unit Construction

Look to where actual control is exercised where controlling shareholder is (not the place where the company ought to be managed)

if directors don’t actually make decisions, or if they abdicate their responsibilities to the management, then control is really with the majority shareholders

look for subsidiary companies controlled by parent

General Indications of Residency

See red moose problem

where do they meet? Distinguish shareholder control form central management If shareholders are making decisions where do they live? Shareholder control is relevant for determining CCPC status

Note that in the US: deemed to be resident in the country it is incorporated in can lead to tax haven issues. Can also cause a corporation to be resident nowhere…

Note Even if non-resident, still has to pay tax on sources within Canada!!

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Avoiding Dual Residence

s. 250(5): Deemed non-resident

s.250(5) Notwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.

means the TP is a resident if tiebreaker rule says person is resident does not apply to someone with dual residency since or before Feb 1998

Article IV - Tie Breaker Rule for Individuals (UK and US)Application When a natural person is resident in BOTH Canada AND

1. the United Kingdom, 2. the United States, or 3. another country which has the same rules as the US or UK for exam purposes

To be liable to tax for the purposes of article 1 of a tax treaty, an individual must be subject to the most comprehensive form of taxation as exists in the relevant country; in Canada this means full tax liability on worldwide income: Crown Forest Industries Ltd 1995 SCC

Who usually needs it? Sojourners who are resident in another country with a treaty

250(5) governs

A person is resident where the tiebreaker rule says they are resident

Procedure

UK: Article 4(2)

US: Article IV (2)

Go through these options and STOP once one applies

(a) permanent home: If you don’t have the right to walk in and sleep there, it is not permanently available (requires IMMEDIATE possession) However, you do not need to own the home Could be a monthly rental (or room)

(b) centre of vital interests: If in both or neither- deemed to be resident where social/economic interests are greatest Consider:

o Familyo Job, runs businesso Keeps personal possessionso Conducts political and cultural activitieso Administers property

(c) habitual abode look to caselaw for definition Where does the individual spend most of her

time? Intentions could be relevant here

Lingle: depends on the facts of the case, but “involves notions of frequency, duration and regularity of stays of a quality which are more than transient. To put it differently, the concept refers to a stay of some substance in the jurisdiction as a matter of habit, so that the conclusion can be drawn that this is where the taxpayer normally lives”

Not just nights slept

(d) citizenship CRA and IRA (competent authorities try to agree)

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Article IV - Tie Breaker Rule for CorporationsApplication If the corporation is resident in both Canada and the US/UK and is subject to world wide tax liability in both

go to the rule250(5) Governs

For all purposes of Canadian tax law, notwithstanding any other provision in the ITA, a person is deemed to be resident only where the tiebreaker rule in the treaty says that person is resident

Canada – UK

Article 4(3)

The competent authorities of the Contracting States shall endeavour to determine by mutual agreement the state of which the person shall be deemed to be a resident

Will considero its place of effective managemento the place where it is incorporated or otherwise constitutedo any other relevant factors

If competent authorities are unable to determine the matter by mutual agreement, they shall endeavour to determine by mutual agreement the mode of application of the tax treaty to that person

Canada- US

Article IV (3)

(resident where incorporated)

If the company is created under the laws in force in one Contracting State, but not under the laws in force in the other Contracting State, it shall be DEEMED to be a resident only of the first state

In any other case, the competent authorities of the Contracting States shall endeavour to settle the question of residency by mutual agreement and determine the mode of application of the Convention to the company

Without such agreement, the company shall not be considered a resident of either Contracting State for the purposes of claiming any benefit under the tax treaty

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Taxation of Non-Residents

2(3): non-residents are still subject to tax in Canada if the earn income/receive income from property in Canada on the following:

Active Sources s.2(3): income active sources:

S.248(1) Employment

S. 253 Carrying on business (super broad)o almost any dealings in Canada will qualify as carrying on business in Canada

(a) produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada whether or not the person exports that thing without selling it before exportation,

(b) solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada, or…

Capital Gain on taxable Canadian Property: real property situated in Canada or shares of a PRIVATE corporations which earns its income primarily from real property situated in Canada

Passive Sources s. 212-218: non-residents are also taxed on passive income sources located in Canada

Non-Residents are charged extra on amounts under 212

s. 212(1) 25% tax on any non resident that receives any enumerated payments from a Canadian resident. Obligations are enforced by s. 215

(1) Non-residents pay 25% on amounts for:

(b) interest that is not fully exempt and is paid/payable to a non arms length person for a debt obligation, or participating debt interest.

Eg. Canadian resident company pays interest to American parent company for a loan from Aus. Parent. The Aus. Parent is then subject to 25% WITHOLDING tax which Canadian co must withhold and remit

(c) estate or trust income Eg. UK resident gets a share of income form Canadian resident estate/trust estate administrator/trustee

must withhold and remit 25%

(d) rents, royalties Eg. Canadian resident corp pays rent on its office space to a US corp who owns the building. Canadian corp must

withhold and remit 25%

(h) Pension Benefits Eg. Canadian pension plan for former BC public sector employee pays pension benefits to a retired employee

who is now resident elsewhere. Plan must withhold and remit 25%

(j.1) Retiring Allowance Eg. Someone is wrongfully dismissed, severs ties with Canada and later receives damage award. Former

employer must withhold and remit 25%

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(l) Payment out of or under RRSP RRSP is Canadian resident who pays person who is non-resident must withhold and remit 25%

(2) Canadian resident corporations paying dividends to a non-resident shareholder must withhold and remit 25% of dividend Note that person is taxed in the country they are receiving it as well… maybe not such a good deal

Residents must withhold tax from non-residents

s. 215(1) Withholding and Remitting of tax

collection mechanism- imposes an obligation on the RESIDENT to withhold 25% of the payment to the non-resident to withhold and remit on behalf of the non-resident

Note: US treaty reduces withholding tax to 5%

s. 215(6) Liability for Tax Liability: Canadian resident is jointly and severally liable for the tax that is supposed to be withheld and remitted if the Canadian resident fails to comply

Provincial Tax Residence

BC ITA 2(1)(a)2(1)(a) An income tax must be paid as required in this Act for each taxation year by every individual who was resident in British Columbia on the last day of the taxation year

Income Tax Regulation 26072607. Where an individual was resident in more than one province on the last day of the taxation year, for the purposes of this Part, he shall be deemed to have resided on that day only in that province which may reasonably be regarded as his principal place of residence.

Mandrusiak

(BC case)

The test for principal residence as defined in ITR 2607 is qualitative, based on all of the relevant factors. In this context principal means "chief, primary, most important."

Not just about where your body is on the last day of the year Thomson test applies even in provincial context

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The Source Concept of Income

Income must come from a source TP has a duty to report their income correctly (Siftar) Not all accretions of wealth are taxed (Bellingham)

There must be a Nexus between Taxpayer and Source

What is it? Two rules: income must come from a source, and there must be a NEXUS between the TP and the funds

What does it mean?

If someone can show they received the amount as an agent, nominee, or trustee (ie they have no right to enjoy it) then they won’t be liable for the amount.

Response to tax avoidance techniques (trying to make it look like there isn’t a nexus) has resulted in some definitions of nexus, and basic criteria to assess it

Examples Employment: income from employment is taxable to the individual who receives it- usually the person who earned it by providing services

Business: “the profit therefrom” which suggests that the provider of services is taxable form the provision of services

Property: “the profit therefrom” which suggests the owner of the property is taxable from holding the property

Capital gain/loss: defined as a gain or loss from the disposition of property, which suggests the owner of the property, who controls the disposition must recognize the gain or loss.

Buckman Strict legal ownership is not the exclusive test. The court must consider the circumstances surrounding the actual receipt of money and the manner in which it was held. Even if the amount is stolen

Field Constructive receipt of money is not enough. Unauthorized acts which are not encouraged or for the benefit of the taxpayer are not taxable (potential issue with this case).

Exceptions Newman – 56(2): If 4 requirements are met, person who diverted the income to another person will be taxed rather than the beneficial recipient

Statutory version of the doctrine of indirect receiptBoutilier: where TP transfers a right to receive money to a non-arms length person, s56(4) may require the TP to include the amount in income anyways

IF Nexus can’t be determined CRA does a Net Worth Assessment

s.152(7): can do a net worth assessment if the CRA thinks someone has a large income than they are reporting because of large spending habits They will get as much info as possible, (the CRA can demand bank records from the bank) and figure out your total net

worth at the beginning of the year, then look at your net worth at the end of the year. Any increase of net worth is treated as income, then they add to that an estimate of what they believe you would

have spent on your “lifestyle”/personal expenses

They then issue an assessment binding on TP unless TP meets burden of proof on appeal 152.8) CRA can’t share information with other arms of government, but other arms of government can share information

with CRA… (Example: DOJ fraud cases, drug dealing)

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SOURCES OF INCOME IN THE ITA

Formula for inclusion

Section 3 sets out how to compute a taxpayer’s taxable income in broad terms: (BUT DOES NOT DEFINE INCOME)

(a) START WITH the taxpayer's income from all sources (inside and outside Canada) office, employment, business and property, s.56 sources (statutory/non traditional sources), amounts by Surrogatum

(b) ADD taxable capital gains minus allowable capital losses

(c) DEDUCT anything that the taxpayer may claim under subdivision E: includes moving expenses,child care expenses, legal expenses in respect of retiring allowances, etc

(d) DEDUCT losses from sources

s. 3(a) :Income for taxation Year

Income for taxation year is the TP’s income from all amounts (not capital gains) from a source INSIDE or OUTSIDE Canada, INCLUDING office, employment, business and property

NOT EXHAUSTIVE there are UNENUMERATED SOURCES

s. 4(1)(a):Income or loss from a source or from sources in a place

Income from each source is calculated SEPARATELY as each source has a different tax rate Keep type AND place separate- if several businesses at the same time Expenses or deductions can only be claimed against the associated source Later, the income/loss is aggregated to compute TOTAL INCOME and here loss from one source

can offset income from another

s. 6(3):Payments by employer to employee

DEEMS these amounts or anything comparable to these amounts as remuneration for services for the purposes of s.5:

(c) consideration or partial consideration for accepting the office or entering into the contract of employment, CONCERNS SIGNING BONUSES, K can be made before, during, or after employment relationship

(d) remuneration or partial remuneration for services as an officer or under the contract of employment, CONCERNS REMUNERATION OR PARTIAL REMUNERATION FOR SERVICES

(e) consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment. CONCERNS PAYMENT FOR NON-DISCLOSURE OR NON-COMPLETE K… OR SOMETHING SIMILAR

IF paid(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer, INCORPORATES THE SURROGATUM PRINCIPLE

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s. 56(1): Other Inclusions

Income includes (without restricting generality of s.3):

56(1)(a): pension benefits, unemployment insurance benefits, ect (ii)- a retiring allowance

o Means TP received amount in respect of loss of office or employment because of retirement or other reasons (wrongful dismissal)

o that is NOT a pension benefit or an amount received because of death because these are covered by 6(1)(a)(iv)

o MUST HAVE BEEN EMPLOYED FIRST Can also be received by TP, dependent, relation, representative after death

o Examples: Human rights violation award Recognition of long service award Settlement amounts for dismissal even if court ordered

Note: Legal expenses can be deducted under 60(o.1)56(1)(h): RRSP56(1)(n): scholarships bursaries if exceeds scholarship exemption56(1)(q): education savings plans56(1)(u): social assistance payments

Sources Under the Common Law

What is income? for the year, net income from each source, plus net taxable capital gains

Is it from a Source?

1. 3(a)

2. 56(1)

3. unenumerated source

Bellingham: Amounts from a productive Source Amount that flows from performance or breach of a market transaction As opposed to everything that increases your wealth or ability to consume (Haig-

Simons definition)

Swartz: Consider factors to determine if an amount is taxable under 3(1) or 56(1) Consider general v specific provisions

Non-Enumerated Sources

Curran: there are unenumerated sources of income (whether or not they are used)o Money received to leave employment in lieu of pension = income from

employment

Schwartz: but 3(a) should not be used to capture payments which do not fit into any of the categories

o Offered senior position, then pulled out, he sued for breach of K and received a lump sum. Was not allocatable, didn’t fit any of the inclusions, not from a source

o Damages for hurt feelings after K ended, so Surrogatum doesn’t apply

Savage: Either way, 3(a) cannot override a more specific exemptiono TP got money to take exams, MNR assessed as a benefit, but it was exempt under

a specific provision

Surrogatum Principle for amounts in lieu of income that is from a source

Swartz: if the taxpayer receives an amount which replaces another amount that would normally be taxable, the replacement amount is also taxable

Cannot apply to a non-apportioned sum can ONLY apply where the sources of different amounts are identifiable

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(two part test) Tsiaprailis test

1. What was the payment intended to replace? Look at the essence of the K (Curran) Here, apportionment of settlement was for “past income” benefits taxable under

6(1)(f) If not clear…no Surrogatum can be applied

2. If sufficiently clear, would the replaced amount have been taxable in the recipient’s hands?

Siftar Burden of proof on TP: bears burden that no part of a lump sum payment is a replacement for taxable income, must DISPROVE any assumption the MNR has made regarding the Surrogatum of a lump sum payment

Allocate the AmountSiftar: it is a question of fact whether a settlement amount includes a taxable component under 6(1)(f) failure to allocate amounts does not preclude a court from doing so

Parties’ intentions and the nature of the claim are relevant If cant allocate- can’t apply to a source or Surrogatum it

General v Specific Provisions

Swartz: general provisions - 3(a) – cannot include amounts which are already EXEMPT in specific provisions other provisions CANNOT restrict the generality of 3(a)

Contrast with Savage: amount didn’t fall under the specific provision but did fall within general provision (

Recognized Exclusions from Income (not from a source)

Bellingham: recognized exclusions under 3(a) in the common law are: gambling wins: do not flow from a source which is able to produce income (unless

doing it for a living gifts and inheritance: represent transfers of old wealth which was already taxed, not

the creation of new wealth windfall category

o such as additional interest awarded on expropriation because imposed as a penal consequence

Fries: strike pay is not income under 3(a)IT 365R2:

Personal injury damages (pain and suffering, special damages) that cannot be considered compensation for income (even if calculated based on lost income)

Remember that court will ultimately decide this issue (bulletins are not binding)

Windfall Gains Cranswick factors are not determinative but can be considered, look for unusual or unexpected gains

No enforceable claim to payment (this was admitted here) No organized effort on the part of the taxpayer to receive payment Not sought after or solicited in any manner Not expected (either specifically or customarily) No foreseeable element of recurrence Payor was not a customary source Not consideration for property, services or anything else provided by Cranswick to the

US co.

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INCOME FROM OFFICE OR EMPLOYMENT – 3(a)

Definitions and Provisions

s.248(1) Definitions

Employment: position of an individual in the service of some other personEmployee: individuals (no corporate employees) holding such positionOffice: means the position of an individual entitling them to fixed stipend/remuneration: are elected or appointedemployer: the person from whom the officer receives employment

s.5 Income (1) and Loss (2) from Office or Employment

(1) Charging section: Defines taxable income from office/employment as salary, benefits, wages and other remuneration

(2) taxpayer's loss is their loss for the year. It's almost impossible to realize a loss from employment

S. 6(1)(a) Basic Inclusion in Income from Employment

Basic inclusions: Value of benefits, Personal or living expenses, EI benefits, Director's fees (any benefit of any kind whatever received or enjoyed by the T in a year

EXCEPT: contributions from a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy

S. 8(2) General Limitation on Deductions

except as permitted by this section, no other deductions shall be made in computing employee income Narrow space for deduction

s.118(10) Canada Employment Credit

An employee may deduct from their income the lesser of 15% of their employment income and 15% of an indexed amount ($1127 in 2014)

This recognizes that there are expenses connected with employment (eg buying uniforms), but critique that it is a complicating TE when there are other means of reducing taxes

s.153(1)(a) Withholding of Tax by Employer

If there is an employment relationship where salary, wages or other remuneration is paid, then the employer must withhold tax from the employee's paycheque and remit it to the government

(NOTE that failure to do so exposes employer to administrative penalties and criminal sanctions, interest also accrues on debt and penalties)

Is Someone Employed?

What is employment?

248(1): the position of an individual in the service of another person (including corp)

What is Office?

248(1): captures situations where a person is appointed to a position of government service, including elected legislative positions. Also includes persons appointed to be a director of a corporation

Who is an employee?

248(1): Includes an officer; performing duties of employment

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Is someone an Employee or an Independent Contractor?

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Connor Homes6 Test

(With Wiebe Door7 /Sagaz Factors)

1. Determine the subjective intent of each party to the relationship

Look at the written K the parties entered into, but note the sophistication level of the parties: do they understand the tax consequences of being an employee/IC?

Consider their actual behaviour, such as invoices for services rendered, registration for GST purposes and income tax filings as an IC

Lang (2007 TCC): must consider the intent, but its weight is undetermined. No SCC ruling on this issue

Wiebe Door (1986 FCA): OLD view that the intentions of the parties is irrelevant

Wolf (2002 FCA) 8: the intention of the parties is RELEVANT

Royal Winnipeg Ballet (2008 FCA) 9: intentions of parties should always be taken into account when determining the relationship. However:

Parties’ declaration about the legal character of the K is not determinative (statements about intent do not necessarily mean the parties’ intent was realized

Compare what the parties state about their legal relationship within the terms of the K, BUT if the terms of the K do not reflect the parties’ intentions, their intentions will be disregarded

2. Determine whether an objective reality sustains the subjective intent of the parties

Consider the Wiebe Door/Sagaz factors to determine if the legal effect of the relationship is one of IC or employee

o CONTROL: the nature and extent of the control which the employer has over the worker's activities

o EQUIPMENT: whether the person performing the services provides their own equipment

whether the person hires their own helpers o OPPORTUNITY FOR PROFIT/RISK OF LOSS:

what degree of financial risk the person has taken what degree of responsibility for investment and management the person has whether and how far the person has an opportunity of profiting from sound

management when performing the task o ORGANIZATION: to what extent, from the individual's perspective, that individual is

integrated into the employer's operations (is the employer just one of several clients, the sole client, etc?)

o GST?

Key question: is the person who has been engaged to perform the services performing them as a person in business on his own account?◦ If YES: then independent contractor◦ If NO: then employee

6 Connor Homes : Child care workers in group homes; enter K with TP that they are IC and in biz on own account; paid $14/hr but must submit invoices; CRA said TP hadn’t complied with 153(1)(a), workers were employees so corp TP required to withhold tax. Held: Employees. All work done at employer’s premises, set hrs, no discretion, no risk of loss or supply of own tools.7 Wiebe Door Services Ltd. v. MNR [1986, FCA]: Company hired ppl to install electric doors – issue of whether they were employees or independent contractors. Discussed previous tests and set out factors to consider in assessing the relationship. Held: referred back for new trial, at which court held that door-installers were independent contractors.8 Wolf v. the Queen: American aerospace engineer. Worked in Canada on a very long-term K. Could take time off when he wanted; charged a fee for services (hourly wage w/ potential for bonuses if finished early). Worked for 6 months to a year at a time, with several renewals. Paid own CPP, reported as independent businessperson. FCA held that he wanted the freedom, and the parties characterized their rel’ship in that way, so he was not an employee.9 Royal Winnipeg Ballet v. MNR: Company had lots of control over dancers – decided plays, assigned parts and choreography etc., but obligations were over at end of season. Had to supply their own point shoes, but not outfits etc. Entered into Ks agreeing to dance in particular production for the season. Responsible for own CPP/income tax issues. Held: independent contractors.

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No particular factor is dominant and there is no set formula

Is there an employee hiding behind an interposing Corporation?

Is the income a result of an “active business” carried on by a corporation?

s. 125(7): means any business carried on by the corporation (includes an adventure or concern in the nature of trade)

NOT INCLUDING

a specified investment business (SIB)

OR

a personal services business (PSB)

Is it a Specified Investment Business?

“specified investment business”: Are businesses who employ LESS than five full-time EEs and whose principal purpose of the business is to derive income from property

Is it a Personal Services Business?

“personal service business”: is a services business where:

(a) an individual (referred to as an incorporated employee) performs services on behalf of the corporation OR

(b) any person related to the incorporated employee

is a specified shareholder s.248 the TP or any person with which they do not deal at arms-length, own at least 10% of the shares

avoids someone not being a SS by giving shares to wife examples:

o TP’s wife owns 10% or more of shares of X co, TP is an SS of X coo TP owns 10% of shares in Y co, and X and Y are related, TP is an SS of X co.

AND: the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom the services of the corporation were provided BUT FOR the existence of the corporation,

Wiebe Door test:o Degree of control —level of control over the worker; criticized due to skill level of some

employeeso Ownership of tools—who owns the tools of equipmento Change of profit/risk of loss—set or steady wage indicates employeeo Integration test—how integral/integrated is the working in employer’s biz

UNLESS:(c) The corporation employs more than five full-time employees OR(d) The amount paid or payable to the corporation in the year for the services is received or

receivable from a corporation with which it was associated in the year

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Note: not a law corporations because the lawyer is providing professional services, not an employee of the clients

Result if PSB or SIB

Cannot get the small business rate because NOT a CCPC limits advantages of incorporating

CCPC: a corporation that is resident in Canada, its shares are not listed on a stock exchange, and it is not controlled by non-residents of Canada, by a corporation whose shares are traded on a stock exchange, or a combination of these (and rate only applies to first 500,000)

CCPC requires active business so get 5 employees and you can get ito CCPC rate is 13.5%, but PSB or SIBs will pay 38% on the first dollar earned

No tax benefit beyond the individual employment relationship

Deductions limited by 18(1)(p):

(1) Cannot make deductions(p) for outlays/expenses for the purpose of earning income OTHER THAN:

(i) the salary, wages or other remuneration paid in the year to an incorporated employee of the corporation,

Note that PSB must withhold and remit the tax from the employee’s salary under s.153(1)(a)

(ii) the cost to the corporation of any benefit or allowance provided to an incorporated employee in the year,

(iii) anything the employee could have deducted if they didn’t incorporate, such as amounts connected to selling of property or negotiating Ks

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

Capitalization of Employment Benefit

Curran: Refers to methods intended to convert what would otherwise be income from office or employment into income from a capital source. Opportunities arise at the end of employment where a large sum is paid and the tp has attempted to characterize it as something other than income from employment

Captured by: either s 56(1)(a) – retiring allowances, or s 6(3)(c, d, and e) Curran avoided these provisions because the payor was not his employer

What is included as Income from Employment?

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s.5: Basic Rule5(1): Income from office or employment is the salary, wages and other remuneration, including gratuities, bonuses, rewards ect received by TP in the year.

5(2): taxpayer's loss is their loss for the year.***It's almost impossible to realize a loss from employment

s.6(3) Remuneration

Any amount received:

(a) During period while in employment of the payor; OR

(b) Amounts in lieu of obligation of K made immediately prior to or immediately after the time when payee was in employment of payor. SURROGATUM (payment made before employment)

Is deemed remuneration under s.5 UNLESS It cannot reasonably regarded as:

(c) A singing bonus

(d) Remuneration or partial remuneration for services as an officer or under the K of employment OR

(e) In consideration or partial consideration for a covenant re: what payee can or cannot do after termination of employment i.e. confidentiality agreement, non-compete clause.

Note: if it is c-e, then it is taxable as remuneration under 5(1)

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s.6(1)(a): Includes Benefits

(broadly written on purpose)

Include:(a) Value of benefits: board (FOOD), lodging, or other benefits

enjoyed by TP or someone not at arm’s length with TP in the course of or by virtue of TP’s employment

EXCEPT(i) Pooled registered pension plan, registered pension plan, life and health trust, deferred profit sharing plan, private health services plan, supplementary unemployment benefit plan.

[BUT note that once a TP claims and receives the benefits these plans provide, then you have to include the benefits in income]

Notes: On a cash basis (tax year in which the employee received or enjoyed benefit) Not used for petty stuff (Coffee) Includes benefits, UNLESS does not benefit the TP (Lowe, Rachfalowski) or is something the

employer should bear (Huffman)Policy:

Seeks to avoid the tax base being eroded through ERs choosing to remunerate employees with material acquisitions rather than monetary payments

Supports horizontal equity These concerns are balanced into the CRA’s assessing policy by the concern that the cost of

administration for implementing 6(1)(a) does not outweigh the incremental revenue gained through the collection of tax derived from these benefits

What is a benefit?

Savage10: CRA must show the benefit was given in respect of, in the course of, or by virtue of office or employment

Old rule: used to be that CRA had to show the employer gave something to an employee as a benefit in exchange for services, otherwise ≠ taxable. Savage relaxed this previous rule.

Now: it is more RELAXED, almost anything will count if it is IN ANY WAY CONNECTED to employment, flows from employer to employee

o eg. If they weren’t an employee they wouldn’t get ito even if the employee hasn’t performed the services of employment yet

Lowe: can apportion the trip according to how much was personal benefit and how much was for employer (and if spouse was working or just along for fun)

Lowe Test (adopted from Poynton):

1. Does the item under review provide the employee with an economic advantage that is measurable in monetary terms?

i. Is it a material acquisition conferring an economic benefit on T? (Lowe)o not just field clothes for work (Huffman)o could include the team paying agent instead of player paying agent directly (Bure)

2. If there is an advantage, is the primary advantage for the employee or the employer? If alleged benefit is for employer and NOT aimed at benefitting the employer = not a benefit,

employee doesn’t have to pay tax (Lowe) It is NOT enough that something is just received during employment (Savage) must also actually

be an advantage

10 The Queen v. Savage [1983, SCC]: ∆’s employer gave payments totaling $300 to ∆ for completing courses relevant to work. ∆ argued a prize for achievement, which would only be taxable over $500. Held: money “was rec’d or enjoyed by ∆ in respect or, in the course of, or by virtue of her employment.” Employer paid in accordance w/ company policy to encourage self-upgrading of employees – so employer benefits, and not extraneous to employment.

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IT 470R for employer/ employee relationship

(handout 10)

Included IN income (ARE BENEFITS) Board and Lodging except remote worksites Rent-free and low rent housing Free Meals (not meals the employee pays for)

o or if the amount paid is unreasonable = cost to employer – amount paid)

Holiday/vacation Travel benefits (if apportioned part is not for

work but for personal benefit)o Spousal accompaniment, unless they

worko UNLESS an allowance under 6(1)(b) or

excluded by 6(6)- special and remote worksites

Provincial medical insurance Recreational facilities and social clubs (UNLESS

just for employer’s benefit Non cash gifts if over 500 annually, just the

amount over (since 2010) Any gift to a non arms length employee

NOT Included in Income (plain exemptions) Business trips (no personal time) Uniforms and special clothing if it must be

worn and cleaned accordingly Staff parties up to 100/person (Dunlap) Subsidized meals if the amount is reasonable Transport to and from work provided by the

employer (company van picks you up)o UNLESS an allowance or

reimbursement = benefito But exempt if remote work site

If employer pays moving expenses from remote place at termination of employment

Moving expenses reimbursement when the employer REQUIRES employee to move

Frequent flier miles if not converted to cash, or an alternate form of remuneration

Office party if available to ALL employees if cost is reasonable - 100/person

Non cash gifts under 500 annually to arms length employee (since 2010)

Non cash gift for long service if under 500 AND only 1/five years

Valuation of benefits

s. 6(1)(a): requires that the value of the benefit be included in the TP’s income Generally, this is the fair market value Compare to UK, where value of non-cash benefits is typically the resale value for employee

Steen: the amount a person not obligated to buy would pay to a person not obligated to sell

FMVDunlap: FMV = cost to employer

Stayed in hotel room provided by employer

Wisla: But sometimes the merchandise may have logos that devalue it impacts FMV and reduces it (here, logoed ring was only worth the gold)

Spence (2011 FCA) important case Start with FMV Then the TP can prove the price the employer paid was inappropriate

Value difficult to determine

Giffen: (now superseded on the facts of frequent flier miles bc of IT 470R) but non cash benefits of employment or non standard advantages will be assessed in a fluid way make arguments to real value, especially where there is no real FMV…

Unwanted benefit (alt to FMV)

Rachfalowski: employee asked for cash instead, but had to keep membership so used it occasionally primarily benefited employer (follows Lowe)

value under 6(1)(a) is determined on actual use rather than availability

Richmond: employee got parking space at no charge, only used it 20% of time. CRA assessed for full amount, TP had no contradictory evidence of amount

whether TP uses benefit is irrelevant, availability = benefit at FMV

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6(1)(b): Includes Allowances

All allowances for personal or living expenses (or any other purpose) must be included in income from office or employment.

Steps to follow:

1. Is it an allowance? (received from employer)

2. Is it exempted?

3. Is it reasonable?

What is an allowance?

McDonald:(1) an arbitrary predetermined sum of money without reference to an actual expense. Once received it

is at the(2) complete discretion of the recipient on how it should be spent and the recipient is(3) not required to account for how it was spent

6(1)(b) encompasses allowances for living expenses and the recipient doesn’t have to account for it

still flows from the employer to the employee

Not a reimbursement

Huffman: A reimbursement is a payment in satisfaction of an obligation to indemnify or reimburse someone, it is not a payment that the recipient is entitled to apply at their discretion

The fact that no receipts were needed for expenses for last 100 dollars was just an administrative decision (because of the raising of the reimbursement) and didn’t change the general nature of the payment (reimbursement).

Exempted Allowances (do not include as income)

6(1)(b)(v): Salesperson’s travelling expenseso Reasonable allowances for the traveling expenses (motor vehicle, other, meals, lodging)

received by an employee from their employero IF the allowances are in respect of a period of time the employee was employed in connection

with the selling of property or negotiating of contracts for the employer

** NOTE: employee who receives this allowance, and does not report it in income, CANNOT then deduct travel expenses under 8(1)(f) or (h)

6(1)(b)(vii): Non-Salesperson’s travelling expenses (For those employees not engaged in selling property or negotiating contracts for their employer)

Reasonable allowances for travel expenses (NON MOTOR VEHICLE), other than those relating to the use of a motor vehicle, that are received by an employee from their employer, for travelling away from:

(A) the municipality where the EE ordinarily worked or reported to; AND

(B) the metropolitan area, (if there is one) where this place is located

in the course of performing the duties of employment

** NOTE: employee who receives this allowance, and does not report it in income, CANNOT then deduct travel expenses under 8(1)(h)

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6(1)(b)(vii.1): Non-Salesperson’s motor vehicle allowanceo For those employees not engaged in the selling of property or the negotiating of contracts for

the employer:o Reasonable allowances for the use of JUST a motor vehicle for travelling in the performance of

the duties of employment that are received by an employee

Reasonableness of Exempted Allowances

(if a reimbursement, employee would have to show all receipts, here just have to use a motor vehicle)

s.6(1)(b): automobile expenses Unreasonable IF

(x) the measure of the use of the vehicle is NOT based SOLELY on the number of KM driven in connection with the employment; OR

(xi) the employee was also reimbursed in whole or in part for those same expenses

Why? Likely more like a salary substitute if you are paying them way more (disguised salary)

s. 18(1)(r): automobile expenses unreasonable IF it exceeds the prescribed limits for deductible automobile allowances that an employer can claim

Prescribed limit in Reg 7306:(b) 54 cents a km for the 1st 5,000 km driven;(a) 48 cents a km for all kms beyond that;(c) plus an extra 4 cents a km for travel in the Yukon, NWT or Nunavut

Note: employees are not bound by this, employers are bound. if an employer pays more, the employer can still deduct the whole amount as long as the employee includes the extra above this limit in their income

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6(6): Special and Remote Work Sites- exemption for reasonable benefits AND allowances

how it works: excludes from income amounts received or enjoyed by TP which are the value of or RESONABLE allowances or benefits received for:

Special Work Sites: a location where the duties performed were: … of a temporary nature (room, accommodation, meals) AND the employee maintains a “self-contained domestic establishment” as principle residence while

away, WHICH ISo Available for TP’s occupancy—i.e. Not rented; ANDo is farther away than you could reasonably be expected to return from daily

248(1): “self-contained domestic establishment” – a dwelling house, apartment or other place of residence where a person, as a general rule, sleeps and eats

6(6)(a)(i) exempts board and lodging if required to be at special worksite for 36+ hours 6(6)(b)(i) exempts transportation from principle place of residence to the special work site,

Remote Work Sites: Doesn’t have to be temporary but has to be remote from an established community; could not reasonably be expected to establish and maintain a self contained domestic establishment.

TEST in IT-91R4: generally 80 km away, by the most direct route, to the nearest “established community” of more than 1,000 people.

o OR look to: If no road, availability of transport, distance from community, time required

to travel “established community”:

o Body of people permanently settledo Has essential services: basic food store, clothing store with clothes in stock, access to

medical and education facilities.o A community that doesn’t have those four things ≠ established community.

if your work location is NOT in an established community AND is remote from the nearest established community qualify

6(6)(a)(ii) exempts board and lodging if required to be at remote location for 36+ hours 6(6)(b)(ii) exempts transportation from location of remote works site and place where TP is

employed

Notes: doesn’t need to be in Canada allows employers to move workforces temporarily to special works sites, or permanently to

remote work sites

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Deductions from Employment/Office

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General Limitations:

s. 8: Amounts that an employee is required to pay out of pocket and ≠ reimbursed

(1) amounts paid Deductions can only be claimed against employment income to the extent that the expense is wholly

applicable to the employment

(2) General limitation if the deduction isn’t listed in s. 8, it’s not available

(10) certificate of employer required as proof for some deductions (1)(c) (1)(f) (1)(h) (1)(h.1) (1)(i)(ii) (1)(i)(iii)

s. 67: the amount of the expense deducted must be REASONABLE

Note: this is in subdivision F, applies to ALL SOURCES OF INCOME

s. 67.1 (1): Food restriction An otherwise reasonable amount paid for food, beverages or entertainment is only 50% of what it

otherwise would be

(2) Except: if it is(a) TP’s business to provide food/entertainment or(f) staff parties- if available to all employees and no more than 6 times a year

8(1)(f): Travelling Salesperson’s Deduction

requires 8(10) certificate- employer must say you are required to pay own expenses

Who: a TP who was employed in connection with the selling of property or then negotiating of Ks for the employer can deduct amounts expended for the purpose of EARNING THE INCOME.

Commissioned sales employee meet criteria of 6(1)(b)(v)

Requirements of the TP 8(1)(f)(i): TP pays own expenses

8(1)(f)(ii): TP is ordinarily required to carry on employment duties away from employer’s place of

business

8(1)(f)(iii): TP must be remunerated in whole or part BY COMMISSIONS based on volume of sales or Ks

negotiated

o note- can ONLY deduct up to amount of commissions to AVOID LOSS

o don’t need to show the expenses caused you to earn the commission

8(4): can’t deduct meal amounts if not away for more than 12 hours

Requirements of the Amount itself:

8(1)(f)(iv): amount cannot already be a claimed exempt allowance under 6(1)(b)(v)

8(1)(f)(v): amount cannot be a capital outlay (eg cost of buying a car- any loss or replacement of capital

except motor vehicle and aircraft costs – 8(1)(j)

8(1)(f)(vi): amount cannot be for club memberships, cabins, yachts, ect or anything that would be

excluded under 18(1)(l) if this was income from business rather than employment.

amount not limited to just travel expenses

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8(1)(g): Transport employee’s deduction

Who: a TP who works for a transportation company (passenger or goods transport)

Requirements of the TP: 8(1)(g)(i): TP travels AWAY FROM MUNICIPALITY where employer is located (or where employee

reports for work) and the metropolitan area where employer is located (if there is one) with a

vehicle/boat used to transport the goods/passenger(s) as required by employment duties

AND

8(1)(g)(ii): TP has to pay for meals AND lodging while doing this

Crawford: BC ferries case have to be away long enough to incur meals and lodging expenses, per (ii) to get this deduction contemplates a journey of substantial distance

Consequences: meal amounts were reasonable, and restricted to 50% under 67.1

8(1)(h): Non-Motor Vehicle travel expenses

requires 8(10) certificate- employer must say you are required to pay own expenses

Requirements of the TP: 8(1)(h)(i): TP ordinarily required to carry on duties of office or employment away from employer’s

place of business OR in different places

8(1)(h)(ii): employment K requires employee to pay travel expenses directly while performing duties

8(1)(h)(iv): TP cannot claim a deduction under 8(1)(e), (f) or (g)

8(4): employee must be away for 12+ hours to claim meals (still 50%?)

Requirements of the Amount itself:

8(1)(h)(iii): cannot have already claimed as an exempt allowance under 6(1)(b)(v) or (vii)

67.1(1): meals/beverages/entertainment TP can only deduct 50% of the actual cost or the

reasonable cost

8(1)(h.1): Motor Vehicle travel expenses

requires 8(10) certificate- employer must say you are required to pay own expenses

Requirements of the TP: 8(1)(h.1)(i): TP ordinarily required to carry on duties of office or employment away from employer’s

place of business OR in different places

8(1)(h.1)(ii): employment K requires employee to pay travel expenses directly while performing duties

8(1)(h.1)(iv): cannot claim a deduction under 8(1)(f)

Requirements of the Amount itself:

8(1)(h.1)(iii): cannot have already claimed as an exempt allowance under 6(1)(b)(v) or (vii)

MUST BE REASONABLE- Regulation 7306:o Unreasonable if exceeds:

54 cents a km for the 1st 5,000 km driven; 48 cents a km for all kms beyond that; plus an extra 4 cents a km for travel in the Yukon, NWT or Nunavut

Hogg: expense cannot be for driving to and from the place where the TP begins duties of office/employment, even if there is a work related reason for driving instead of other modes of transport (security issues for judge)

Martyn: pilot could not claim getting to and from the airport even if public transit was not available, living far is a personal choice, take it up with the employer

8(1)(b): Legal Expenses

8(1)(b): Employee can deduct legal expenses incurred to: collect or to establish a right to an amount owed to T that, if received, would be required to include in

income under subdivision A (income from office or employment – ss. 5,6,7,8)Notes:

one of the few places where you could get a loss from employment Amounts under s.56: are under subdivision D so retiring allowance/wrongful dismissal amounts

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would not be deducted under this provision but they are covered along with pension benefits under s.60(o.1)

CRA position in IT-99R5: asserts that TP must be successful in the legal battle to claim the amount, BUT

Loo: FCA disagrees DOJ lawyers fighting for equal pay with Toronto, lost, could still deduct

Blagdon: establishing a right to salary owing is deductible, but NOT if you are protecting a means of livilhood

Examples: Schwartz: if not Surrogatum, income from employment (tax free) he was not suing to recover income

from employment under A so cant deduct However the settlement gave him extra for legal fees Tsiaprailis: sued life insurance company for something that would have been included in income

8(1)(i): Professional and Union dues

(ii) ONLY requires 8(10) certificate

TP can deduct an amount paid in the year: 8(1)(i)(i): professional membership dues where membership necessary to maintain a professional

status recognized by statute.o e.g. doctors/lawyers who are req’d to be members of professional society in order to practice

in that professionSwingle: memberships must be required by statute to continue profession, not just related or required to stay abreast of profession

o Note that first time bar call fees are capital outlays not deductible 8(1)(i)(ii): office rent or salary for assistant or substitute that the employee was req’d by contract to

pay for requires s.8(10) form

8(1)(i)(iv): Trade Union dues

8(1)(i)(iii): cost of supplies

requires 8(10) certificate

TP can deduct cost of supplies that were consumed directly in the performance of the duties of office or employment

Requirements: TP has to pay the amount or another person can pay if TP must include amount in income Supplies must be consumed DIRECTLY in the course of performing duties Employment K must require the TP to supply and pay for supplies Certificate from employer

Watts: secretary could not deduct cost of housekeeper as an assistant

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8(13): Home Office Expenses for Income from Office/ Employment

TP can deduct an amount for the use of a workspace within a self contained domestic establishment s. 248(1): “self contained domestic establishment”: a dwelling house, apartment or similar place of

resident in which a person generally sleeps and eats(a) No deduction UNLESS:

(i) the place is where the individual PRINCIPALLY performs duties of office/employment(ii) the place is used EXCLUSIVELY for the purpose of earning income from office/employment AND used on a regular/continuing basis for meeting customers or other persons in the ordinary course of performing duties of office/employment

(b) CANNOT make a deduction that exceeds income from office/employment Can’t create a loss from a workspace even if one exists

(c) CAN carry forward deductions excluded under (b) – losses- to the next year (ONLY one year)

Application: (may be hard to claim) allocate amount to workspace (portion of home)

o take whole value of home, calculate square footage, apportion then deduct the proportionate amount of expenses from

o if renting: utilities, insurance, rento if own: mortgage interest, insurance, property taxes, maintenance fees, utilities

Joe deakes problem handout 12

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INCOME FROM BUSINESS OR PROPERTY – 3(a)

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3(a) Business and Property are enumerated Sources

9(1) A taxpayer’s income from business or property is their profit

this is a question of law:o revenue minus expenses, from said business or property for the year

compare to s. 5 for office/employment

(2) Loss is the loss from said business/property Note: no bar to creating loss with respect to business/property, unlike employment

(3) Income/loss doesn’t include any capital gain/loss Usually comes up in relation to income from property DISTINGUISH: capital gains/losses when disposing of property v income flowing from owning property

111(1)(a) Noncapital Losses can be carried forward 20 years or back 3

12: inclusions for computing income

In addition to the requirements in s.9, there are specific items to INCLUDE in computing income 12(1)(a): amounts received for goods and services to be rendered in the future 12(1)(b): amounts receivable for property sold or services rendered in the course of business 12(1)(c): interest 12(1)(d): amounts deducted in a preceding year as a reserve for doubtful debts 12(1)(g): amounts received based on production or use of property 12(1)(j) or (k): dividends 12(1)(l): income from p/ps 12(1)(m): income from trusts 12(1)(n): benefits from profit-sharing plan and employee trust to employer 12(1)(x): inducement or assistance payments 12.1: cash bonus on Canada Savings Bonds

20General deductions for things that might not otherwise be deductible (capital outlays)

18Restrictions on deductions – restricts generality of s.9(1)

What is Profit?

Not defined in the act Courts: generally determine this is a NET amount (all revenues minus expenses) A question of law not just GAAP accounting principles give way to ITA rules or common law

Distinguish between property v business

- For an individual, generally both are treated the same (exception: dividends)- For businesses, the distinction is important:

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

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

o The tax liability of non-resident taxpayers is tied to the source of income. Income from a business in Canada is taxable under Part I of the Act on a net basis, whereas income from property is generally subject to a 25% withholding tax on a gross basis.

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

1. Is it The MODERN approach in Stewart: A business is “anything which occupies the time and attention and labour of a man for the purpose of profit” citing Smith

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Income from [Business/ Property] OR Personal?

No REOP required (overrules Moldowan) Test instead assesses whether a source of income exists The profitability of a business does not affect the deductibility of an expense

Is the activity in the pursuit of profit or a personal endeavour?

i. If clearly commercial – no further inquiry no need to analyze TP’s business decisions It is income from business

ii. If there is a personal or hobby element – is it a source of income?

it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income

iii. Subjective/Objective test for personal element

must have subjective intention to profit – assessed using an objective standard with reference to the non-exhaustive Moldowon 4 factors

o look for indicia of commercialityo profit/loss in the pasto capacity of venture to show profit – business plan, adequate financing

(REOP is just one factor)o intended course of action (not about TP’s business acumen)o training of TPo amount of time TP devotes to activity

Subjective – T must show they were trying to earn money Objective – T must show that they’ve taken reasonable steps in an attempt to earn income

Luprypa: organized system for minimization/management of risk indicates a business activity (professional gambler distinguished from casual gambler)

LeBlanc: gambling winnings that step from pure luck are not taxable as business income, and are exempt from capital gains tax under 40(2)(f), even if a business like system is employed to try and win (note…expert evidence could take this either way)

2. Income from Business, OR Property?

TEST from Lois: it is a question of fact generally depends on the extent of the activity of the owner earning income

Consider these factors:o whether the income was the result of efforts made or time and labour devoted by the

taxpayero whether there was a trading character to the incomeo can the income be fairly described as income from a business within the meaning of the term

as used in the act; ando the nature and extent of services rendered or activities performed

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BUSINESS s.248: “Business” includes a

profession, calling, trade, manufacture or undertaking of any kind whatever and…an adventure or concern in the nature of trade

but does not include an office or employment

It is anything that occupies the time, attention and labour of a person for the purpose of profit (Smith) and refers to active, for-profit activity.

Generally established by case law that a business is an organized activity, carried on for purpose of profit (Stewart)

PROPERTY capital property: Purchaser acquires property to hold

it and earn income and then later sells it for capital gain

o By nature creates income; shares, real property..

248(1): Property: “property of any kind whatever whether real or personal or corporeal or incorporeal”. (also see specific inclusions under def)

Income from property is passive, it does not require the owner of the property to devote time and energy in order to earn the income.

Doesn’t require extensive businesslike intervention Income from property does not include gains or losses

made on dispositions of property, which are taxed separately as capital gains (9(3))

commercial activity which falls short of being a business may nevertheless be a source of property income. (Stewart)

Where this becomes an issue: Interest can be from either (Walsh) Rental income can be either ( )

Why the distinction is important: Important if income is earned by a CCPC, because to be eligible for the small business rate of 13.5%,

the CCPC’s income must come from:o 125(7): “active business carried on by a corporation” not SIB or PSBo NOT property income

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3. If business: Income from Business, or Capital Gains?

Is it an Adventure in the Nature of Trade? (= income from Business, not Capital gains)

If yes TP will have to include profit as INCOME FROM BUSINESS as opposed to realization of capital gains TP has incentive to characterize as capital gains because of the preferential tax rate (50%) Can even include one off transactions NOTE that losses from ANT = Loss from Business = deductible

IT-459: HOW TO SPOT AN ANT

Factor 1 Taxpayer’s conduct : Whether the taxpayer dealt with the property acquired like a dealer would ordinarily deal with it

o efforts soon made to find purchasers shortly after acquisitiono steps taken to improve marketabilityo taxpayer has a background in similar areas

Factor 2 Nature of the property : Whether the nature/quantity of the property excludes the possibility that it was the realization of

an investment or was of a capital nature or it could have been disposed of other than in a transaction of a trading nature

o not for personal enjoyment (ex. So large)o property must be leased to produce income (cargo ship)o prima facie an investment (business, security) shares are strongly presumed to be a

capital investment (Irrigation Industries) BUT it can be rebutted if transaction is carried out like a securities trading business

(Arcorp), factors include: frequency of transactions duration of holding (quick profit or long term investment?) intention to acquire for resale at profit nature and quantity of securities held time spent on this

Irrigation Industries: purchased farm through a corporation, farm never happened. Corp then purchased shares in a mining company with overdrafted money (no assets), then made a huge profit. It was an isolated occasion, borrowing has no impact, investments also go up securities are presumed to be a capital investment, not ANT, so capital gain/loss, not income

Arcorp: all shares held by one person, frequently traded, had inside knowledge when a TPs business is to buy and sell shares for profit, this is business income rather than capital gains.

Factor 3 Taxpayer’s intention : whether the taxpayer’s intention (established or deduced) was consistent with other evidence

pointing to a trading motivation (particularly for real prop)o intention to sell for profit not sufficient on its owno can be used if coupled with other factorso secondary intentions, present at the time of acquisition and ultimately acted on can

indicate ANT (Regal Heights).

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o However, it must have been an OPERATING motivation at the time, not just a thought in the back of one’s mind, because intention to sell is always there (SK Wheat Pool) upheld in Snell Farms

unclear if this applies to anything but real property

IT -218 factors for real property taxpayer’s intention at the time of the purchase of the property feasibility of taxpayer’s intention geographical location, zoning extent to which the taxpayer and his/her associates carry out the initial or primary intention

(Arcorp) evidence of change of intention nature of the business, profession, trade, experience of the taxpayer and his/her associates extent to which the purchase is made with borrowed money length of time the property is held by the taxpayer whether taxpayer made the purchase alone or with others reasons for selling extent of taxpayer’s (and associations) previous and subsequent dealing in real estate secondary intention as operating motivation [SK Wheat Pool] confirm with handout 12

Taylor Isolated Transactions the following factors do not PRECLUDE an ANT

o single transactiono TP did not create an organization to carry out transactiono Transaction is totally different from any of the TP’s other activities, or has never before or

since entered into this type of transaction

Taylor: nature and quantity of the stuff (raw materials- lead) meant he could ONLY ever sell it, dealt with the lead like a dealer would **LEADING where IT 459 comes from

Regal Heights: even if primary intention was to build shopping centre (as an investment) the secondary intention to sell land at profit was strongly there at the beginning ** be careful of this case

Snell Farms: Secondary intention requires not only the thought of a sale at a profit but that the prospects of such a sale be an operating motivation in the acquisition of the capital property.

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4. If Property Income: What type?

248 (1): Property is defined to mean property of any kind whatever, whether real, personal, corporeal or incorporeal. Specifically includes:

1. a right of any kind, a share or chose in action2. unless a contrary intention is evident, money3. a timber resource property4. the work in progress of a business that is a profession

(such as rent, royalties, dividends the value derived from allowing another person to use the property) even includes contracts, she thinks includes non compete clauses

Income from Property: does not include the capital gains/losses on the disposition of the property, or the economic value of the use of the property (which is generally not taxable)

12(1)(c): Interest included in Income

What is included in income from property? any amount received or receivable “as, on account of or in lieu of payment of, or in satisfaction of, interest…” constitutes income from property.

Interest is not defined in the act Accounts for both cash and accrual methods AND Surrogatum principle Cannot include amount that was included in income in the previous year Determined by the interest rate and the principle amount of debt obligation Includes LATE PAYMENT charges also any obligations to pay via bank accounts, investment certificates, bonds NOTE: can engage in a business of buying and selling debt obligations (Arcorp) then the income

of the business is the interest Includes BLENDED PAYMENTS (see below) mortgage payments, where monthly payment never

changes but the proportion of payment v interest changes over amortization period

*** PAY ATTENTION: is it interest being received or paid? If receiving income include as income here If paying income may be able to deduct under 20(1)(c)(i)

Blended Payments

16(1): where, under a K, an amount can reasonably be regarded as part interest or other amount of income and part capital, the following rules apply:

(a) The part reasonably regarded as interest shall be deemed to be interest for the lender AND(b) The part reasonably regarded as an amount of income, other than interest, shall be included in income of the T

Groulx: In determining whether a payment involves an interest payment as well as a payment on capital, the courts will consider whether the payment was more than the RMV of the property, if you can reasonable consider that part is interest, it will be deemed interest

Minister can also look at a transaction and determine that it is blended, even if that differs from the agreement keeps people from hiding interest or characterizing payments as capital gains which have 50% less tax

Vanwest Logging: no evidence that interest had been discussed, and the business practice in logging industry was not to charge interest emphasis placed on industry

Timing of Interest

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(to avoid deferring interest to reduce taxable income in a year)

12(3) a Corporation must include in income an amount of interest accrued on most debt obligations held by the Corp. to each tax year end of the Corp., to the extent not included in income in a previous year.

Accrued means even if not received or receivable must just report the amount that has accrued by corporation’s year end

Corporations do no get an anniversary day more rigid rule this means that even if there is no right to enforce payment until the following year, the amount

accrued must be included in incomeo prevents corporations from deferring income until the end of a term of debt obligation)

12(4) an individual who as interest payable to them pursuant to an investment contract (debt obligation) must include in income each year the interest accrued for each year that has an anniversary day.

Section 12 (11): “investment contract” encompasses all debt obligations held by individuals Section 12 (11): anniversary day means the day that is one year after the day immediately

preceding the date of issue of the contract and the day that occurs at every successive one year interval from the anniversary day and the day on which the contract was repaid less rigid

TP must report amount that has accrued by the year end as income

12(11)(j): OR an individual can choose to report interest income as it accrues- report interest as it accrue daily as of December 31 of each year, rather than deferring reporting any interest until the first anniversary day.

Example:o interest received May 30, 2001, first anniversary date is May 31, 2002o On December 31, 2001, can either include interest, or not until next may

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12(1)(g): Rents and Royalties Included in Income

What is included in income from property? payments RECEIVED (NOT receivable) based on production or use of property are to be included in income from property. Amount must be dependent on use of or production from property.

Rents: amounts paid for the use of tangible property, whether real or personal, usually for specific time. After which the right to use the property expires (St. John shipbuilding)

Royalties (Vauban): amounts paid for the use of intangible property (usually for natural resources or intellectual property) usually a share in the profits based on amounts of the things sold/used

o Such as oil royalities

Payments based on production V payments based on use: IF all legal rights are transferred transaction is a sale of property. BUT if not all the rights are

transferred, then it is a lease or a licence, and the payments are rent or royalties. “USE”: defined broadly, eg. Excavate gravel/shale/topsoil, exploits bundle of rights without taking

whole bundle computer soft wear:

o over the counter (shrink wrapped) which is licenced under standard K, mass produced sale proceeds

o custom soft wear where customer is aware of licence terms royalties. But if you bought all the rights…could be purchase of capital asset

Consequences for residency: 212(1)(d)(i): non residents are subject to 25% withholding tax on rents, royalties, similar payments includes payments for the use of or for right to use property, invention, trade name, patent,

trademark design, plan ect

12(1)(j) and (k): Dividends Included in Income

What is INCLUDED in income from property? 12(1)(J) Dividends Received From Resident Corps

o Note that if a resident corp pays a dividend to a non resident TP, they have to withhold the tax -215(1)

12(1)(K) Dividends Received From Non-Resident Corpso 90(1) requires a TP resident in Canada to include any amount as income in a year that is a

share of a non-resident corporation NOTE: taxed in the year received, not when declared or while receivable

What is a dividend? Any Pro Rata (each amount is the same) Distribution From Corp To Shareholders Is A Dividend

Usually A Distribution In Cash Of A Share Of The After-Tax Profits Of A Corp Can Also Be In Kind – I.E. In The Form Of Property Other Than Cash Uncommon. ITA Includes Stock Dividends In The Definition Of Dividends. Very Clear. Note: Dividend Is Included In Shareholder Income as income from property. Corp. does not get to

deduct dividend.

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Deductions from Business and Income Property – 18 and 20

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9(1): Income = Net Profit

9(1): TP’s income from business or property is the PROFIT for the year. So you can claim deductions IF it was an expense to EARN income, because those expenses are not profit.

Daley: s.9 is your permission to deduct the expenses of the business or property. S.18 then applies the restrictions. CLAIM UNDER S.9!!!

Remember that s.12 dictates what is included in Business or Property income (above).

What are expenditures?

Daley (followed in Canderel)o an expenditure properly deducted by the ordinary principles of commercial trading or accepted

business principles will be deductible for tax purposeso UNLESS prohibited by some provision of the act,

And, an amount not deductible pursuant to accounting principles will not be deductible unless the Act provides a specific deduction

18: Restriction/Exclusion of Deductions

In computing income, NO DEDUCTIONin respect of:

(note that the exceptions in s.20 override)

18(1)(a)- Unless for purpose of earning income

Outlay or expense EXCEPT to the extent that it was made or incurred by T for the purpose of gaining or producing income from business/property

Imperial Oil: includes expenses incurred in the process of earning incomeo It is unnecessary to show the expense resulted in any particular revenueo INCLUDES amounts paid to satisfy legal liabilities which are incurred as part of the operation to

produce incomeo Even if very large and non-reoccurringo Even if it was caused by negligenceo Limit is drawn at criminal liability can only deduct expenses connected to civil liability

o Note: if the person receiving the award is using it as Surrogatum for lost profits (then taxable) but if just to repair damage (not taxable)

Royal Trust Co (just for layout- facts are overturned):a. was the deduction consistent with the ordinary principles of commercial trading or the principles of business?b. If yes, then determine if it was made for the purpose of earning incomec. not excluded by any other provision here

18(1)(b) – Capital outlay or loss

no deduction shall be made on an outlay, loss or replacement of capital, a payment of account of capital or an allowance in respect of depreciation, EXCEPT as permitted by this part (see 20(1)(a)) capital cost allowance

Ask: is the expense part of ongoing expenses/current expenditure for repair and therefore deductible under 9(1), or is it an expense to acquire a capital asset or advantage (that has enduring benefit) and restricted by this section?

1. British Insulated- The Enduring Benefit Test specifically RESTRICTS deduction Lump sump contribution to a pension fund was to enable the fund to start An outlay that was once off AND for the purpose of bringing fund into existence = capital outlay

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2. Repair of Tangible Assets deductible under 9(1) – income from property/business is profit

Canada Steamship: repairs and maintenance are considered current expenditures, but substantial upgrades may be capital outlays

o If ship survives as a ship repair (such as cargo walls)o REPAIR= wear and tear caused by physical useo CAPITAL OUTLAY = money used to acquire assets, upgrade assetso Cost of repair doesn’t change the nature of the expenseo BUT replacement of interchangeable pieces (such as a boiler) is a capital outlay

Bound by Vancouver Tug Perhaps because boilers are depreciable at a different rate?

Shabro: if payments substantially upgrade the value of the capital asset then the improvement is a capital improvement

o This includes changes designed to create an enduring benefit/improvemento Subsidence caused damage- only floor replacement was capital outlay, the rest was

repairs (tile, wiring, drains) Questionable

Gold Bar: must consider the MIND of the TPo Did the TP intend to make the property different or better, or simply return it to pre

damaged state? Even a one-off substantial repair can be a repair But be careful- often improvements are a choice

o If it is an emergency and the repair is forced, there is less choice/options wont be penalized for repairing to better technology (bricks fell off, replaced whole wall with different technique)

o Not bound to use the same materials

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18(1)(h) – Personal living expenses excluded except work travel expenses

248(1): personal living expenses includes(a) expenses of properties maintained for the use of the TP or any relative, rather than for a corporation with a business carried on for profit, or REOP(b) expenses of an insurance policy if the proceeds are payable to the TP or relative of TP(c) expenses of properties maintained by an estate or trust where TP as a beneficiary

If NOT a travel expense incurred to carry on the TPs business, generally would be excluded by 18(1)(a) anyways (perhaps h is a refinement?), but case law generally says:

Benton: could not deduct full amount of housekeeper even though he couldn’t run the farm (income) without her help. He should have hired farm help (DIRECT connection required) get taxed on what you do, not what you could have done

Symes: lawyer could not claim full time nanny for her children as a business expense because it was limited by another more specific provision (s.63). (HOWEVER, childcare is not precluded as a business expense)

Leduc: lawyer had to defend himself in criminal charges to keep practicing law – not normal part of the production of income, or for the purpose of earning income. Perhaps would be different where charges are more connected to work (here, would have been charged whether he was a lawyer or not)

Factors to consider:o Whether the expense is ordinarily allowed as a business expense by accountants – could

indicate whether it is a widely accepted business expenseo whether the expense is one that is normally incurred in the type of worko whether there was a reasonable expectation of income at the time the investment was madeo whether the expense would have been incurred if the taxpayer was not engaged in business

o strong inference of personal purposeo would the need exist apart from the business?

o In this case, had he not practised law, he would still have incurred legal expenses

Food and Beverages usually fall within 18(1)(h) because we all need food to survive regardless of business, but:

Scott: Analogized extra food and water to fuel for motor vehicle courier required to be competitive in this line of work (unusual case). Applied these factors:

1. What is the need that the expense meets2. Would the need exist apart from the business?3. Is the need intrinsic to the business?

Commuting Expenses usually are personal/living expenses because where we live is a personal consumption decision:

o Remember for employees, only deductible until they are carrying on the duties of employment (Martyn – couldn’t deduct under 8(1))

Cumming: allowed deduction of travel expenses between base of business in home, and other locations of the business may not stand today

Ross Henry: travel between home and business location is not deductible BUT travelling between work locations (various hospitals) is allowed as a deduction

Factors: if your home qualifies as a home office, may have a better chance between that office and others but if home office is just for convenience, and not the main base of operations, likely would be considered personal/living expense and NOT deductible

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18(1)(i) – Use of recreational facilities and club dues (from the employer’s perspective) Cannot deduct expenses for the use and maintenance of property that is:

o A yacht, cap, lodge, golf courseo UNLESS It is the ordinary course of business

Cannot deduct membership fees to any club where the main purpose is to provide dining/recreation/sporting facilities

** note that even if allowed, cut by 50% through 67.1

18(1)(p) – Limitation regarding personal services business expenseso all are not deductible except for salaries, wages and remuneration costs, costs of providing

allowances/benefits, costs incurred in the selling of property or negotiating Ks (if employee can deduct under 8(1)(f) and legal expenses to collect amounts owed

18(1)(p) – Certain Automobile expenseso amount employer can deduct for allowance to an employee for using caro Regulation 7306 – sets out the max deductible amounts

o Unreasonable if exceeds: 54 cents a km for the 1st 5,000 km driven; 48 cents a km for all kms beyond that; plus an extra 4 cents a km for travel in the Yukon, NWT or Nunavut

18(1)(t) – Taxes paid under this Act;o note. S. 60(o) – T can deduct costs of objections or appealso Can’t deduct penalties charged under the ITA or interest on unpaid income tax

18(12) – home workspace (a) expenses related to workspace that is located in the home of the TP are not deductible UNLESS:

o (i) it is the individuals (not Corp.’s) principle place of business ORo (ii) it is used exclusively for the purpose of earning income from business and is used on a

regular and continuous basis for meeting clients, customers or patients (b) TP can only deduct an amount equal to the income from business (no loss) (c) the TP can carry forward the additional amount one year

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s.20 Overrides s.18 Restrictions

at common law: interest is payment on account of capital and would not be deductible because of 18(1)(b)

20(1)(c): Deduction of Interest by Borrower

if lender interest received go to 12(3)

an amount paid in the year or payable (deduction for cash or accrual basis depending on TP) in respect of the year, 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 to acquire a life insurance policy)

an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or property that is an interest in a life insurance policy) allows for deduction when property is bought on CREDIT

or a reasonable amount in respect thereof, whichever is the lesser SUGGESTS that if interest rate follows commercial realities, if parties are at arms length and TP is able to afford amounts will be reasonable

Singleton: TEST for whether interest falls under this section (took money out of firm capital investment account to purchase house, replenished money with loaned money + deducted interest)

1. The amount must be paid in the year or be payable in the year in which it is sought to be deducted2. The amount must be paid pursuant to a legal obligation to pay interest on borrowed money3. The borrowed money must be used for the purpose of earning non-exempt income from a business or property

Bronfman: The borrowed money must be used for the purpose of earning non-exempt income from a business or property

o In order to be deductible, the borrowed funds must be used directly for an income earning purpose (Bronfman).

If a direct link can be drawn between the borrowed money and an eligible use, then the money was used for the purpose of earning income (Singleton)

Cannot be to purchase life insurance, for personal consumption or to produce capital gains

If the real purpose of the transaction is to avoid taxes that is ok as long as legal steps are followed (Singleton)

Income does not mean profit/net income absent a sham (Ludco) An ancillary purpose to earn income is sufficient, “income” in 20(1)(c) means the

potential to earn revenue rather than the earning of net-profit (Ludco) Just need a reasonable expectation of profit in all the circumstances (Ludco) Can have multiple purposes, provided one is to earn income (Ludco)

o It is the current use of the borrowed funds which is relevant in assessing deductibility, not the original use that matters (Bronfman)

Borrowed money has to be used to earn income – if this changes, can’t deduct anymore

4. The amount must be reasonable, as assessed by reference to the first three requirements

20(1)(a): Capital Cost Allowance

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Rule: notwithstanding paragraph 18 (1) (a), (b) or (h), an amount to reflect depreciation which is allowed by the regulations is deductible from income from business or property as CCA. This is a OPTIONAL deduction up to the amount in the regulations

Policy: recognizes that the cost of depreciating assets, beyond just repairs, is a cost of doing business. Someone is a loss position likely wouldn’t claim this to avoid using losses before they are useful (or can

be offset against gains) Note the ITA uses the declining balance method (apply rate against nondepreciated balance…actual

deduction amount diminishes each year)

Regulation 11021102(1)(a-c): Deemed NOT to include

(a) expenditures that may otherwise be deductible under 111(10)(a) (b) any inventory (c) property not acquired for the purpose of gaining or producing income

o Ben’s Ltd: CCA deduction for houses disallowed because the land was bought with the intention of tearing down the houses (they were NOT for income earning purpose)

o Property of a personal nature- no PUP1102(2): exclusions from the CCA system land- land does not depreciate

real property- even if we consider it part of the property in property law- it is a separate depreciable asset – apportion the total value of the land between land and buildings

s.13(21) Depreciable Property: property which you are allowed to deduct under paragraph 20 (1) (a).

o S.54: Property whose value decreases over timeo This means property acquired by TP for the purpose of earning income, provides enduring

value or benefit, not bought and sold as inventory (Canada Steamships). If something can’t be deducted as a repair under s.9, then you can deduct the CCA

every year to offset gains not a total loss if something is a capital outlay UnDepreciated Capital Cost: amount left over after the formula for CCA is applied

o Calculation can be done at any time, usually at end of the year/beginning of nexto Subject to depreciation each yeat

Regulation 1100(1)(a): RATES the amount of the CCA deduction under paragraph 20 (1) (a) is equal to the appropriate percentage of the undepreciated capital cost (“UCC”) of EACH CLASS of depreciable assets.

Timing of the deduction is fixed at the end of the tax year.

ONE: determine which class each asset belongs to for each business and/or property

Pool all assets in the same class together to calculate CCA Classes are in schedule 2 (but will be told) IF MULTIPLE BUSINESSES: separate out, even if otherwise would be in the same class

TWO: determine UCC of each class of asset (13 (21))

(A + B) - (E +F) = UCC

A = Cost of ALL acquisitions in the class over timeo historical total capital cost = purchased price (delivery cost/set up fee/import duties ect) and

Includes property that was sold

B = total recapture in the past: If you claimed too much depreciation over time, in other words you are

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able to sell asset for more than its depreciated capital costs, then you have to add back the amounts in excess

o Asset for 70,000, depreciated over time under class A. UCC is at 50,000 (deducted 20,000 in total in CCA). But FMV is 60,000. 10,000 is recapture

o To avoid this, replenish the class prior to the end of the tax year (purchase another asset in the same class at a price that exceeds what would be the recapture)

E= total CCA claimed for assets in the class from the commencement of the business (even those amounts previously deducted from the class, and terminal losses deducted)

o Terminal loss under 20(16) included: will only occur when the class is emptied by the end of the year and there is still UCC left over means you claimed too little

a UCC without any assets because assets depreciated faster that the amount claimed (total cost – total POD)

HAVE TO deduct this amount, claimed in the year it arises

F= POD of property of a class disposed of up to the time of disposition, only to the original capital cost.o Any amount above, will be counted as a CAPITAL GAIN

THREE: Does the Half Year Rule Apply?

Regulation 1100(2): In the year the TP acquires the property, can only deduct HALF the CCA amount Applies to acquisitions in 1982 and after ONLY APPLIES when the acquisition cost in the class exceed the POD

o (additions to A) > (additions to F) UCC / 2 = NOTIONAL UCC

FOUR: apply CCA percentage for each class

UCC X [% of depreciation in class] = CCA

FIVE: add all CCA’s together to get total amount of CCA deduction the can be claimed (for each source)

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111(1)(a) NON capital Losses are Deductible

S.3 doesn’t allow a negative balance that would entitle a TP to a refund SO: if TP has an overall loss from non capital sources carry losses over to another year where they can

offset gains This is difficult from employment

o 8(2) prohibits all but limited deductions but possible for business/property (starting up, borrowed money) can offset non capital business/property losses against income from ANOTHER source under 3(d), or

between different sources of business income more flexible than capital gains losses

111(1) (a) carry back 3, forward 20 relative to year of losses

can deduct back three years ahead of loss year, and 20 years forward before the loss year start with older taxation years to avoid losing the chance ex: if in 2015 there is a profit, look back 20 years to see if there is a loss to use ex. If in 2015 there is a LOSS, look back 3 years to see if there are profits you can offset

(b) net capital losses – total capital losses exceed totally capital gains back three forward indefinitely

111(2): year that ends with Ts death – net capital losses that would otherwise not be usable are CONVERTED to non capital and can be used against any sources

s.67(1): must be reasonable

No deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this act, except to the extent that the outlay or expense was reasonable in the circumstances.

s.67.1: Limit on food

deductions for food are limited to 50% of actual expenditure, or reasonable amount, whichever is less.

Illegal Payments and Fines

S.3 doesn’t distinguish between legal and illegal activities

Buckman: You are required to pay taxes on income earned from illegal activities

the government is not concerned that the taxing of illegal businesses amounts to participation in the illegality of the business

Eldridge: Deductions for expenses of illegal business activities are generally are allowed so long as the expenses can be substantiated

problematic when you have an illegal business because everything is done in cash and you have no records.

Also credibility shot because you are criminal.

67.5(1) Bribery of Officialsexpenses relating to the payment of bribes and public corruption CANNOT be deducted from income; includes provisions of CC (119–121, 123–125, 393, 426, or 465), mostly related to bribery and corruption of gov’t

67.6 Fines and Penalties

No deduction shall be made in respect of any amount that is a fine or penalty imposed by any person or public body that has authority to impose the fine or penalty (i.e. parking tickets)

o Amended after 65302 (BC Egg case), in which court held they wouldn’t restrict deduction of fines or penalties on policy grounds (because denying for public policy would make tax law to uncertain for TPs- parliament could add a provision to change)

o Certain prescribed fines are deductible, but none are yet prescribed

Imperial Oil: However, damages and contractual penalties are deductible if they meet the test under s.9

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58

INCOME: CAPITAL GAINS

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What is a Capital Gain?

A capital gain or loss is from the disposition of a capital asset, i.e. a source of income itself. Recurring income from capital asset is source income, sale of the capital asset itself leads to a capital gain or loss.

s.39(1) definition

39(1)(a): the CAPITAL GAINS from the disposition of ANY property with the exception of gains from dispositions of property that will be included in another source

39(1)(b): A taxpayer’s CAPITAL LOSS is the loss from the disposition of property, excluding losses from depreciable property, unless that loss is deductible when computing income from a source

s.54: Adjusted Cost Base (ACB)

54: adjusted cost base to the TP means(a): the capital cost to the TP at that time, if it is depreciable property(b): the cost to the TP as adjusted in accordance with s.53

Notes: ACB = amount laid out to given in exchange for acquiring the property although not mentioned in the ITA, it is generally accepted that expenses or outlays associated

with acquiring an asset (taxes, fees, other expenses) can be included in the ACB (IT-285R2)

s.40(1): calculation

40(1)(a)(i): To calculate a TP’s CAPITAL GAIN, take the amount by which the TP’s POD exceeds the total of the ACB of the TP immediately before making the disposition, plus any outlays or expenses incurred to make the disposition

POD — (ACB + expenses) = Capital Gain

40(1)(b): To calculate a TP’s capital loss, take the ACB plus the outlays or expenses incurred to make the disposition, minus the POD of the property

(ACB + expenses) - POD = capital loss

s.38: Half of gain or loss

Taxable capital gains are one half the tax payer’s capital gain for the year from the dispositions of property and

Allowable capital loss (ACL) is one half the taxpayer’s capital loss from the year from the dispositions of property

111- year of death

s.111(1)(b): Net capital losses can be deducted for any preceding years, and 3 following years

s.111(2)(a): when a TP dies, the TP’s unused net capital losses immediately convert to non-capital losses from a source and TP can use it in the year of year or the immediately preceding year.

Policy Considerations

Equity Fully taxing capital gains results in greater horizontal and vertical equity Horizontal: a TP who realizes a $1000 capital gain is put in the same tax position as a TP who earns

$1000 from employment Vertical: rich TP's who derive a greater share of their income from capital transactions assume a

more equitable tax burden compared to poorer TP's who earn their income from employment eg Warren Buffett: top marginal rate for his secretary is 38% while his is only 15% Other policy goals have overtaken this consideration (eg encouraging home ownership, small

business, farms and fishing, savings for retirement, and investing in securities)

Neutrality Reduces the incentive for TP's to structure their transactions to look like capital transactions rather

than income-producing transactions (eg selling shares vs receiving a dividend) Preferential taxation likely causes some stock market inflation in that the lower effective tax rate

contributes to higher values on shares (more people see the risk of investing as worth it) 60

A ton of tax planning occurs around this too (flirts with tax avoidance, eg Ludco)

Simplicity Taxing capital gains in full would eliminate the elusive distinction between capital gains and

business income (ie ANT) Taxing only 50% of gains undermines this policy goal, as there is still an incentive re gains

ORDER OF APPROACH

1) What type of property is it?

a) Capital property; PUP/LPP; Principle residence

2) Has there been a disposition?

a) Actual Disposition

b) Deemed dispositions

3) What are the proceeds of disposition (POD)?

4) What is the ACB of the property?

a) Identical properties

b) Part dispositions

5) Determine your gains and losses:

a) POD — (ACB + expenses incurred for purpose of disposition) = Capital gain (or loss)

6) Is there a PRE?

7) Equation from s.3(b):

a) (i)(A) Take all CGs and divide in ½ = taxable capital gains (TCG)

b) (i)(B) Add your net gain from LPP (LPP gains minus LPP losses from this or previous years)

c) (ii) Take all your CLs and divide in ½ = allowable capital losses (ACLs)

d) Deduct ACLs from TCG/LPP gains

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What type of property is it?

248(1): Property is defined very broadly as property of any kind; real, personal, corporeal or incorporeal; includes rights, money, work in progress of a business

54: Capital Property: is either(a) any depreciable property or(b) any other property OTHER than depreciable property that the disposition of which would not be included as income or loss from business or property

Has there been an actual disposition?

Disposition has a broad meaning, and the definition is not exhaustive (Compagnie Immobiliere BCN Ltee) Any time a person has lost the indicia of ownership, it is likely that a disposition has occurred. No one

else has to acquire the property, it can just cease to exist. (Compagnie Immobiliere BCN Ltee) term of lease came to an end. So interest and property disappeared by operation of the loss =

disposition.

248(1): disposition includes:(a) any transaction that entitles taxpayer to “ proceeds of disposition” of that property (incl. expropriation) Need not be voluntary Any time a person used to own property and now doesn’t (no right to control or enjoyed) =

disposition Don`t have to have proceeds of disposition in order to have a disposition (i.e. gift counts) Disposition includes destruction of the property unless you receive compensation of some sort

through insurance, or from the person who destroyed it; property that is lost or abandoned(b)(i) any transaction where share, bond, debenture, note, certificate, mortgage, agreement of sale, or interest, is redeemed in whole, part or cancelled(b)(ii) any transaction where the property is a debt and is settled or cancelled

disposition Excludes:(e) a transfer of property where there is no change in the beneficial ownership of the property, except

(i) from person or partnership to a trust for the benefit of person or partnership(ii) from a trust to a beneficiary under the trust(iii) from one trust to another trust that are both maintained for the benefit of the same beneficiaries

(j) any transfer of property for the purpose of securing debt or a lone(l) any issue of bond, debenture, note, certificate, mortgage, or hypothecary claim(m) any issue by corporation of a share of its capital stock

o But person who acquires shares gets something

54: Proceeds of Disposition includes:(a) sale price of property that has been sold(b) compensation for property unlawfully taken

o damages and court actiono insurance for stolen goodso gov of compensation for victims of crime

(c) compensation for property destroyed (incl. amount payable under insurance)(d) compensation for property taken under statutory authority (expropriation)(e) compensation for property injuriously affected(f) compensation for property damaged, (incl. amount payable under insurance) – except to extent that the compensation was used within a reasonable time to repair to repair the damage

But does not include:(j) a transfer of title as collateral for the purpose of getting a loan

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Has there been a deemed disposition?

Act deems certain transactions to involve dispositions of property despite tp retaining possession Overrides general rule that capital gains are not taxed until actually realized

See charts for

1. Emigration – deemed to have disposed of all property and reacquired at FMV when you leave

2. Immigration- deemed to have disposed of all property and reacquired it at FMV when you become a resident

4. Deemed Disposition On DEATH:

70(5)(a): In the year taxpayer dies, deemed to have disposed of all capital property immediately before death, and received proceeds of disposition equal to FMV immediately before death immediately before death important because property may devalue right after death i.e. shares where

deceased was head of the company, company worth a lot less now that they’re dead.

70(5)(b): ay person who acquires such property due to TPs death is deemed to acquire it at FMV at the time of death has the same effect as 69(1)(c) where the inheriting person gets the FMV as the ACB does NOT apply if the inheriting person is the spouse (see below)

Exception: the spousal rollover rule no Deemed disposition However, may want to opt out because: s. 111(2)(a) – allows remaining capital losses to be used

against income in death year or preceding year

70(6): if the deceased TP’s spouse receives the property as a consequence of their death, there will be no gain or loss to the deceased TP (gets the TP’s ACB) until the property is eventually sold - Where 70(5) would otherwise apply

Requires: Both the TP and the recipient are residents of Canada

What happens: (d)(ii) recipient acquires property at the ACB of the deceased spouse; and the deceased spouse is

deemed to have disposed of the property at their original ACB (no gains/loss) Automatic UNLESS 70(6.2): TP’s legal representative ELECTS OUT in effect, applies 69(1)(b)(ii) and 69(1)(c)

o This allows for post-mortem tax-planningo Where deceased has some allowable capital losses, then may be better to experience the gains

on this disposition

Also note, if disposition creates capital losses, they can be used against other income (s.111(2)(a))Where electing out of s. 70(6), then the rules under (5) apply and spouse acquires at FMV instead

Are there Deemed Proceeds under 69(1)?

1. Gifts and Sales below FMV to non-arms length persons

a true disposition with DEEMED CONSEQUENCES

69(1): unless expressly stated otherwise (see intervivos spousal transfer s.73)

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(a) Where T acquires something when not dealing at arm’s length at an amount more than FMV, then T is deemed to have acquired it at FMV

i.e. can’t increase your ACB by paying more to your bro)

(b) Where T disposes of something for no proceeds or proceeds less than FMV not at arm’s length, or to any person by way of gift inter vivos, T is deemed to have received POD of FMV (potential trap***) - flip of (1)(a)

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

If child decides to sell it for its FMV- they have a large capital gain (on top of gain from when the mom bought the cottage)

BETTER: to give a true gift, not something for nominal consideration (get a deed of gift, transfer by gift under seal) mom will have potential capital gain/loss, but child gets full ACB

(c) Where T acquires a property by gift/bequest/inheritance, T is deemed to acquire the property at FMV (UNLESS spousal rollover)

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2. Intervivos transfers between spouses/common law

s. 73(1): automatic rollover treatment deemed to be the giving spouses’ ACB unless transformer elects out (written form)

This provision overrides provision about arms length if elected out, s.73 pops back up Might want to opt out if you are giving FMV transferee spouse will realize capital gains or loss after

the separation

(1)(a)(ii) – When one spouse transfers property to spouse under conditions of (1.01), both spouses are resident in Canada, and they have not elected that this provision not apply, the property is deemed to have been disposed of at the time by the individual for proceeds equal to the ACB of that person immediately before the transfer

(1)(b) – And the property is deemed to have been acquired by the transferee equal to those proceeds when this happens the POD are DEEMED to be the ACB of the transferred property (NO GAIN OR LOSS) other spouse – ACB rolls over to recipient if transferee later disposes of it, they will calculate the amount gained or lost on the transferors old

ACB

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

don’t want the fact that they are separating to have undue tax consequences

3. Lottery Winnings

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

prize or as winnings on a bet, in connection with a lottery scheme or a pool system of betting is NIL- Pay $100 for ticket, lose, you have no gain or loss (chance is disposed of when draw is made and you didn’t

win) – ticket becomes valueless, if you can argue it is a disposition, it is gone- If you DO win, the gain is nil – non-taxable- Exemption for lottery winnings in Canada

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

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

acquired at a cost to T equal to FMV at that timeo Example: lottery ticket where you win a houseo ACB is value of the house at the time you win it – not the cost of the lotto ticket you boughto May have a gain or a loss by the time you dispose of it

Identical Properties

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Identical Property

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Personal Use Property and Listed Personal Property

3(b) takes TP gains and losses from LLP

Definitions54: Personal Use Property: property that is used primarily for the personal use or enjoyment of one or more of the following people

(54)(a)(i) the TP or (ii) a person related to the TP primarily used for personal use and enjoyment (or family’s enjoyment) for corporations – related is people who own the shares family home, recreational property, cottage car for personal use (not business use) usually chattels can be part of a house

(b) Any debt owning to T in respect of the disposition of property that was T’s PUP AND a debt arising out of the disposition of PUP is not allowed capital loss, but the debt is deductible to the

extent of gain on the disposition if it was at arms length

**generally doesn’t increase in value because you wear it out (except home) depreciates in value usually don’t see gains, but some do

54: Listed Personal Property: means personal-use property owned by the TP that is:(a) a print, etching, drawing, painting sculpture or other similar works of art;(b) jewellery;(c) rare books or manuscripts;(d) stamps; or(e) coins

- Says it means – not includes (although you could argue “includes” under a)- Can have a loss –characteristics of an investment (store of value)- Inherent worth that people value – long term value- Often traded in – note that this is a business – income/loss from a business- Isn’t LPP unless it is already for personal enjoyment categorize as PUP before assessing if something is

LPP

46: Disposing of PUP

Rule 1:40(1): general calculation of CG/CL40(2)(g)(3): exception no capital loss from PUP, other than LLP, only a gain

Rule 2: apply the thousand dollar ruleThis rule sets nil gain/loss on dispositions of property worth less than $1000 (takes low valued PUP out of system)

S.46(1) — Where T has disposed of PUP:(a) The ACB is the greater of $1000 or the actual ACB of the property

(b) T’s POD of the PUP is deemed to be the greater of $1000 and T’s actual POD

You have a sculpture with ACB of $2000; you sell it for $400What is the deemed POD?

Actual = 400, deemed =1000What is the actual loss?

1600 (2000-400)What is the deemed loss under the ITA?

2000 (greater of, 1000 and actual)What if you sold a rare coin for an LPP gain of $700 in the same year you sold the sculpture?Claim against the loss from the LPP (sculpture)

Non LLP:You buy a surfboard for $700You sell it two years later for $900What is your capital gain applying the $1000 rule?

46(1)(a): ACB is greater of 1000 or actual ACBo actual = 700o so ACB is 1000

POD are greater of 1000 or actual PODo Actual is 900o so 1000

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No gains or loss, unless it is a work of art (LPP) if there was a loss only available for LPP

46(2) disposing of part of PUP

Disposing of only one part of a property

46(2)(a): the ACB of the part being disposed, immediately before the disposition is deemed to be the greater of:

(i) the ACB to the tp that would otherwise be determined (Actual ACB)

(ii) that proportion of $1000 that the amount under (i) is of the (actual) ACB of the whole property

46(2)(b): the POD of the part being disposed of is deemed to be the greater of:

(i) the POD of that part otherwise determined

(ii) the amount under (a)(ii)

(applies to apportion the 1000 rule where 46(3) applies to properties that are in a set but disposed of in multiple transactions to a single person or group of non arms length people)

ACB1. determine the ACB of each piece2. what fraction of the total ACB does it represent?3. multiply the fraction in 2 by 10004. take the greater amount (1 or 3) => this is the DEEMED ACB of the piece under 46(2)(a)

POD5. What is the POD of each piece otherwise (eg, if under 69(1))6. multiply the fraction in 2 by 10007. take the greater of 5 and 6 => this is the DEEMED POD of the piece under 46(2)(b)

capital gains8. Determine TPs capital gains using deemed ACB and POD,

POD- ACB = capital gain under 40(1)(a)(i)

Taxable capital gains9. use s.41 to determine the taxable gain from disposition(total gains MINUS total losses) / 2

46(3) properties ordinarily disposed of in a set

46(3): properties ordinarily disposed of as a set (or part)

(a) disposed of as more than one disposition…but at the end it all belongs to one person/one group who does not deal at arms length

(b) if FMV of properties together is greater than 1000 = deemed to be a single PUP and each disposition is treated as a part of it

aimed at things like stamp collections – or where the whole set is worth more than its parts

How to determine if a type normally disposed of as a set: Question of fact:

(1) Should match or belong together(2) Should have been produced or issued at roughly the same time (questionable)(3) Should be worth more collectively than individually

If 1000 rule doesn’t reduce gain or loss to nothing….

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3(b)carve out for LPP in the provision that brings capital gains/losses into the mix

When you calculate capital gains and losses, first do it for LPP. And this gets carved out of the taxable capital gains/allowable losses insular category - can only offset against LPP gains

Don’t want you to use losses from LPP against gains in other property 3(b)(i)(B): Only net taxable gains from LLP are included in income here

40(2)(g)(iii)Losses on PUP, other than LLP are nil, but you can have a gain of PUP other than LLP under 40(1)

41: calculating taxable net fain and loss from disposition of LPP

41(1) a TP’s capital net gain from disposition of LLP is ½ the net gain as determined under (2)

41(2)(a): calculate (total gains – total losses) from dispositions of LLP (note this is different from normal capital gains)

if you still have a gain then…

41(2)(b) can carry back losses three years, and forward seven

(b)(i): only use an amount that has already been used

(b)(ii) oldest losses must be used first…which you would not anyways because they could expire

(b)(iii) can only deduct losses to the extent you have gains

if you still have a gain, then divide by two- 41(1) this is taxable capital gain

if you end up with a loss …

41(3) for what you can carry forward or back: LPP loss = losses already nets out gains

ex 1000 loss and 700 gain = 300 LPP loss than can be carried forward 7, back 3

Year 1: TP has LPP losses of $1000 (i.e. net of LPP gains) as defined in 41(3). This means that no amount is included in income, but it also means that the LPP losses can’t be used in Year 1 to reduce the amount that is subject to tax.

Year 2: LPP losses of $2000.

Year 3: LPP gains (i.e. LPP gains minus LPP losses for the year- net out the LPP losses for that year before applying (b)) of $10,000 before applying the carry forward or back provided for in 41(2)(b).

Can the Year 1 loss be carried forward to Year 3?

Yes – 41(2)(b) – you can carry LPP losses forward 7 and back 3 years.

(b)(i): only use an amount that has already been used (b)(ii) oldest losses must be used first…which you

would not anyways because they could expire can reduce 3LLP gain to 9000

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Identical Properties

Definition 47(1)(a), (b): Identical Properties

what are they? limited to shares of the same class of a particular corporation, and units of the same class of a particular mutual fund trust or income trust

corporate shares are identical in the same class- same rights/restrictions attached NOT REAL PROPERTY never exactly the same

47(1)(a) & 47(1)(b): Where a TP has acquired two or more identical properties (even if acquired at different times) the ACB of each of them is deemed to be an average of the ACB of all of the identical properties

TP cannot chose which identical properties are acquired at different times = different prices

Equation: Add all the costs of acquisition and divide by the number of identical properties Can’t choose which are disposed of you could never have 2 identical pieces of real property (even condos) Example: Shares of corp that are same class of shares from same corp

example Bob makes the following purchases of common shares of X Corp:- Purchase 200 shares of X for $1 per share on March 1, 2004- Purchase 100 shares of X for $1.50 per share on September 15, 2006- Sale of 100 shares of X for $1.60 on January 15, 2007

The Act does not allow T to choose which of the T’s identical properties are acquired/disposed of at a particular time. It achieves this objective by forcing T to average all the ACBs of the identical properties at any given time

So Bob’s ACB of each of his identical shares is the average of all the ACBs of the shares- 200x1=200; plus 100x1.5 = $350; Then the total amount is divided by the number of properties- 350/300 = 1.17; So B’s capital gain on 100 is 1.60-1.17 x 100 = $43s.38(a) states that B’s taxable capital gains are ½ of his total gains = $21.5

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Principle Residence Exemption

Definition54: Principle Residence:

(a) Definition: a housing unit (not defined) that is ordinarily inhabited in the year by the TP, the TP’s spouse or CLP or former spouse or CLP or by a child of the individual

Ordinarily inhabited : not a strict testo In the year, not the whole yearo Basically, you have to move ino Cabin, if you spend 3 weekends+/yearo Doesn’t have to be continuous, but does have to be in each year for which you claim PRE

Can also include leasehold interests and a share in the capital stock of a housing co-op(c) Quantity allowed: After 1981, a housing unit will not be considered the principal residence unless:

i) the tp designates it as the principal residence; andii) the tp’s spouse, CLP, child (under 18 and not married) or parent (if the tp is under 18 and not

married) has not designated another property for that year

this means there can be only one principle residence for a couple and their children. If before 1982, restriction only applied to the taxpayer – taxpayer could not designate two properties

as principal residences, however his spouse could also designate 1- (c)(i) Definition of spouse

1993: definition of spouse included opposite sex common law spouses 2001: definition of spouse now includes same sex partners

(e)Size Allowed: The principle residence of a tp shall include up to a half hectare of adjoining land where it can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. The principle residence exemption will be deemed to not apply to any land adjacent to the principle residence exceeding the ½ hectare, unless the tp can establish that the land was necessary for the use and enjoyment of the property.

Stuart Estates: TP claimed she needed extra land to grow vegetables for her consumption. Held: Vegetables weren’t necessary for use and enjoyment of the land.

Cassidy: Tp and CLP bought a house on 2.5 hectares in 1994, in 2003 made agreement to sell it on the condition that it was first rezoned; The rezoning was completed and then the property was sold; Held: Tp was allowed to claim the PRE for the whole time as the Court calculated it year by year

Calculation Under s.40(2)(b), TP may be exempt from CG on disposition of a property deemed to be personal residence

Note: a home is a PUP, cannot deduct any money you lose – 40(2)(g)(iii) – loss from PUP is nilThe Calculation When taxpayer disposes of principal residence:

Can designate it as a principal residence in order to try to shelter the CG you make from it from tax

Calculation Formula: 40(2)(b) CG – [CG x (1+ number of taxation years the property was designated the principle residence and tp was

Canadian Resident) /(# of taxation years after acquisition date during which the tp owned the property)]

Formula: A - A x B C

Policy It would inhibit housing market otherwise; Almost everyone selling a home will buy another one, if they have

to pay tax on the home that they just sold, they will have to borrow more to buy the next one People would not move as much as they do now, resist moving to take a job or start a business Also, none of the other costs of acquiring a home are deductible Also element of community control – part of policy to encourage home ownership

BUT, exemption probably distorts real estate market and boost market price of the home – harder for younger people to enter the market Favours homeowners over renters; basically a subsidy for buying a home

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s.62: Moving Expenses (deductible against business income)

Subdivision E: “mixed bag of policy objectives” apply to more than one source of income

248(1): Eligible relocation means a relocation of T where:a) relocation occurs to enable a TP

i) to carry on business or to be employed at a new work location, orii) to be a student in fulltime attendance enrolled in a postsecondary program at a college or university also

referred to as a new work location.b) both old and new residences have to be in Canada [though there are exceptions to this requirement for residents of

Canada who are absent from Canada, and for students], and

the new residence must be at least 40 km closer to the new work location than the old residence was (by the shortest normally traveled route)

Nagy: a reasonable route in the circumstances is fine (aka if there is traffic)

Issues of New Work Location/enabling: Braken: court required old/new work location AND old/new residences (for home office),

BUT Templeton: disagrees, allowed deduction for moving expenses where new residence with home office was closer to

economic center where TP usually did business Grill: cant get a deduction for moving closer to work location,

HOWEVER, Gelinas: allowed deduction for moving closer to same work location – got promoted, significant change in work

look for changing responsibilities (Langelier, Duek) moving up to management was a significant change (Wunderlich)

Timing: Wunderlic: expenses allowed several years after TP started work Beyette: five years is too long

Must establish residence at new location: Persaud: four months was enough to establish residence (opened bank accounts, visited with his

kids in area) McDonald: left family behind for a few weeks-denied moving expenses Sampson: denied when TP kept moving around and back and forth

62(1) can only deduct moving expenses IF:a) They weren’t paid by employer (need to be out of pocket from the expenses)b) They weren’t deductible in computing T’s income from the preceding yearc) they do NOT exceed:

i) income from employment or business at the new work locationii) or the amount of scholarships/bursaries included in computing income for the year under 56(1)(n) – most are

now exempted, so no moving expense deduction for studentsBUT: note that if it exceeds you can carry it forward a year or next year

d) all reimbursements/allowances in respect of the expenses are included in computing the taxpayer’s income

(2) provides that moving expenses of students that are otherwise deductible may be deducted if either the new residence or the old residence is in Canada (instead of both)

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(3) lists the specific moving expenses which are deductible

(a) Travel costs (including a reasonable amount expended for meals and lodging), in the course of moving the TP and members of the TP’s household

i. Note that 67.1 doesn’t apply to limit the percentage of deduction on food/etc. here(b) The cost of transporting or storing household effects in the course of the move (b)(c) The cost to the TP of meals and lodging near the old residence or the new residence for the TP and the TP’s

household for a period not exceeding 15 daysi. Note that 67.1 doesn’t apply to limit the percentage of deduction on food/etc. here

(d) The cost to the TP of cancelling the lease by virtue of which the TP was the lessee of the old residence(e) The costs involved in selling the old residence(f) Where the old residence is sold by the TP or the TP’s spouse/common law partner as a result of the move, the

costs of the legal services in relation to the purchase of the new residence and transfer or registration of title(g) Interest, property taxes, insurance and the cost of heating and utilities in respect of the old residence, up to

5,000, where it is not being occupied by the TP or the TP’s family and is not being rented out(h) The cost of revising legal documents to reflect the change in address, replacing driving licences and

connecting and disconnecting utilities

EXCEPTIONS for inclusion in income for employees in IT-470R Para 35: a reimbursement from the employer for moving expenses when the employee is transferred or accepts a

position at a new location it is not a taxable benefit Para 36: when the employer pays the expenses of moving an employee, the family and household effects out of a

remote location it is not a taxable benefit

For students:

56(1)(n): includes scholarships, bursaries and other amounts in income to the extent they exceed the scholarship exemption

56(3): exempts all scholarships and bursaries under 56(1)(n) in connection with enrolment in an educational program that qualifies for the educational tax credit under 118.62 (which requires that TP is unrolled in a “qualifying educational program” at a “designated institution” (see shawn’s outline page 75)

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