volume i chapter volume ii - pearson · chapter volume i 1 introduction to federal taxation in...

Chapter V O L U M E I

1Introduction ToFederal Taxation In Canada

2 Procedures and Administration

3Income Or Loss From An OfficeOr Employment

4Taxable Income and Tax PayableFor Individuals

5Capital Cost Allowances AndCumulative Eligible Capital

6 Income Or Loss From A Business

7 Income From Property

8 Capital Gains And Capital Losses

9Other Income, Other DeductionsAnd Income Attribution

10Retirement Savings And OtherSpecial Income Arrangements

11Taxable Income and Tax PayableFor Individuals Revisited

Chapter V O L U M E I I

12Taxable Income andTax Payable For Corporations

13Taxation ofCorporate Investment Income

14Other Issues InCorporate Taxation

15Corporate Taxation andManagement Decisions

16 Rollovers Under Section 85

17Other Rollovers and Sale Of AnIncorporated Business

18 Partnerships

19 Trusts And Estate Planning

20 International Issues In Taxation

21 GST/HST

The detailed contents of bothVolume I and II follow.

CONTENTS

The textbook is published intwo Volumes:

Volume I = Chapters 1 to 11Volume II = Chapters 12 to 21

CHAPTER 1Introduction To Federal Taxation

In Canada

The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1

Taxable Entities In Canada . . . . . . . . 2

Federal Taxation And The Provinces . . . . 4

Tax Policy Concepts . . . . . . . . . . . . . 5Taxation And Economic Policy . . . . . . . 5

Taxation And Income Levels . . . . . . . 6

Tax Incidence . . . . . . . . . . . . . 8

Tax Expenditures . . . . . . . . . . . . 8

Qualitative Characteristics Of Tax Systems . . 9

Income Tax Reference Materials . . . . . . 10Introduction . . . . . . . . . . . . . 10

The Income Tax Act . . . . . . . . . . 11

Other Income Tax Legislation . . . . . . 14

Other Sources Of Income Tax Information . 15

Liability For Income Tax . . . . . . . . . . 17Charging Provision For Canadian Residents . 17

Charging Provision For Non-Residents . . . 18

Alternative Concepts Of Income . . . . . . 20The Economist’s View . . . . . . . . . 20

The Accountant’s View . . . . . . . . . 20

The Income Tax Act View . . . . . . . . 21

Net Income For Tax Purposes . . . . . . . 21Structure . . . . . . . . . . . . . . 21

Components . . . . . . . . . . . . . 21

Combining The Components - ITA Section 3 . 22

Loss Carry Overs . . . . . . . . . . . 24

Net Income For Tax Purposes - Example . . 25

Net Income To Taxable Income . . . . . . 26

Principles Of Tax Planning . . . . . . . . . 27Introduction . . . . . . . . . . . . . 27

Tax Avoidance Or Reduction . . . . . . . 27

Tax Deferral . . . . . . . . . . . . . 27

Income Splitting . . . . . . . . . . . . 28

Abbreviations To Be Used . . . . . . . . . 29

Key Terms Used In This Chapter . . . . . . 30

References . . . . . . . . . . . . . . . . . 30

Problems For Self Study . . . . . . . . . . 31

Assignment Problems . . . . . . . . . . . 32

CHAPTER 2Procedures And Administration

Administration Of The Department . . . . 35

Source Deductions . . . . . . . . . . . . . 36Withholdings - ITA 153 . . . . . . . . . 36

Employer’s Remittance Of Source Deductions 37

Returns And Payments - Individuals . . . 38Due Date For Individual Returns . . . . . 39

Instalment Payments For Individuals - ITA 156 41

Interest . . . . . . . . . . . . . . . 44

Penalties . . . . . . . . . . . . . . . 45

Due Date For Balance Owing - Individuals . 46

Final Returns For Deceased Taxpayers . . . 46

Returns And Payments - Corporations . . . 46Due Date For Corporate Returns (ITA 150) . 46

Instalment Payments For Corporations . . . 47

Due Date For Balance Owing - Corporations . 49

Interest And Penalties For Corporations . . . 50

Returns And Payments - Trusts . . . . . . 50

Income Tax Information Returns . . . . . . 51

Refunds . . . . . . . . . . . . . . . . . . . 51

Books And Records . . . . . . . . . . . . . 52

Assessments . . . . . . . . . . . . . . . . 52

Adjustments To Income Tax Returns . . . 53

Appeals . . . . . . . . . . . . . . . . . . . 53Consent Form . . . . . . . . . . . . 53

Informal Request For Adjustments . . . . . 54

Notice Of Objection . . . . . . . . . . 54

Tax Court Of Canada . . . . . . . . . . 55

Federal Court And Supreme Court Of Canada 56

Tax Evasion, Avoidance And Planning . . . 56Tax Evasion . . . . . . . . . . . . . 56

Tax Avoidance And Tax Planning . . . . . 57

General Anti-Avoidance Rule (GAAR) . . . 57

Reasonable Expectation Of Profit (REOP) . . 59

Collection And Enforcement . . . . . . . . 60

Taxpayer Relief Provisions (Fairness Package) 62

Key Terms Used In This Chapter . . . . . . 63

References . . . . . . . . . . . . . . . . . 64



Detailed Table Of Contents For Both Volumes ()

V O L U M E I

CHAPTER 3Income Or Loss From

An Office Or Employment

Employment Income Defined . . . . . . . 71Cash Basis And The Use Of Bonus Arrangements 72

Net Concept . . . . . . . . . . . . . 73

Employee Versus Self-Employed . . . . . . 73Employee Perspective . . . . . . . . . 74

Employer Perspective . . . . . . . . . . 75

Making The Distinction . . . . . . . . . 76

Inclusions - Salaries And Wages . . . . . . 77

Inclusions - Fringe Benefits . . . . . . . . 77ITA 6(1) - Amounts To Be Included In Income 77

CRA Administrative Practice On Fringe Benefits(IT-470R) . . . . . . . . . . . . . . 78

Tax Planning Considerations . . . . . . . 82

Inclusions - GST/HST/PST OnTaxable Benefits . . . . . . . . . . . . . 83

Inclusions - Board And Lodging . . . . . . 84

Inclusions - Automobile Benefits . . . . . . 84Employees And Automobiles . . . . . . . 84

Standby Charge . . . . . . . . . . . . 86

Operating Cost Benefit . . . . . . . . . 88

Payments By Employee For Automobile Use . 89

Example - Employer Owned Automobile . . 89

Example - Employer Leased Vehicle . . . . 90

Employer Provided Cars And Tax Planning . 91

Inclusions - Allowances . . . . . . . . . . 92Allowance Vs. Reimbursement . . . . . . 92

General Rules . . . . . . . . . . . . . 92

Taxable Vs. Non-Taxable Allowances . . . . 93

Reasonable Allowances For Motor Vehicles . 94

Employer’s Perspective Of Allowances . . . 95

Employee’s Perspective Of Allowances . . . 95

Inclusions - Employee Insurance Benefits . 95Life Insurance . . . . . . . . . . . . . 95

Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 96

Health Care Insurance . . . . . . . . . 97

Loans To Employees . . . . . . . . . . . . 97General Rules . . . . . . . . . . . . . 97

Home Relocation Loans . . . . . . . . . 98

Tax Planning For Interest Free Loans . . . . 99

(continued)

CHAPTER 3, continuedInclusions - Stock Option Benefits . . . . 100

CCPCs Vs. Public Companies . . . . . . 103

Rules For Public Companies . . . . . . . 103

Rules For Canadian Controlled PrivateCorporations . . . . . . . . . . . . 105

Cash Payment In Lieu Of Shares . . . . . 106

Other Inclusions . . . . . . . . . . . . . 106Payments By Employer To Employee . . . 106

Forgiveness Of Employee Loans . . . . . 107

Housing Loss Reimbursement . . . . . . 107

Discounts On Employer’s Merchandise . . 107

Club Dues And Recreational Facilities . . . 107

Specific Deductions . . . . . . . . . . . . 108Salesperson’s Expenses Under ITA 8(1)(f) . . 109

Travel Expenses And Motor Vehicle Costs . 110

The Salesperson's Dilemma . . . . . . . 111

Automobile And Aircraft Expenses . . . . 112

Home Office Costs For Employees . . . . 112

Key Terms Used In This Chapter . . . . . 113

References . . . . . . . . . . . . . . . . . 114



CHAPTER 4Taxable Income And Tax Payable

For Individuals

Introduction . . . . . . . . . . . . . . . . 131

Taxable Income Of Individuals . . . . . . 132Available Deductions . . . . . . . . . 132

Ordering Of Deductions . . . . . . . . 132

Deductions For Payments . . . . . . . . 133

Home Relocation Loan . . . . . . . . 133

Northern Residents Deductions . . . . . 134

Calculation Of Tax Payable . . . . . . . . 134Federal Tax Payable Before Credits . . . . 134

Provincial Tax Payable Before Credits . . . 135

Types Of Income . . . . . . . . . . . 136

Taxes On Income Not Earned In A Province 137

Calculating Tax Credits . . . . . . . . . . 137Federal Amounts . . . . . . . . . . . 137

Provincial Amounts . . . . . . . . . . 137


V O L U M E I

CHAPTER 4, continuedPersonal Tax Credits - ITA 118(1) . . . . 138

Individuals With A Spouse OrCommon-Law Partner . . . . . . . . 138

Individuals Supporting Dependent Person . . 139

Child Tax Credit . . . . . . . . . . . 140

Single Persons . . . . . . . . . . . . 140

Caregiver Tax Credit . . . . . . . . . . 140

Infirm Dependant Over 17 Tax Credit . . . 141

Interaction:Eligible Dependant Vs.Caregiver Or Infirm Dependant Over 17 . 142

Caregiver Vs. Infirm Dependant Over 17 . 143

Other Tax Credits For Individuals . . . . 144Age Tax Credit . . . . . . . . . . . . 144

Pension Income Tax Credit . . . . . . . 144

Canada Employment Tax Credit . . . . . 145

Adoption Expenses Credit . . . . . . . 145

Public Transit Passes Credit . . . . . . . 146

Child Fitness Credit . . . . . . . . . . 147

First Time Home Buyer’s Tax Credit . . . 147

Charitable Donations Credit . . . . . . 147

Medical Expense Credit . . . . . . . . . 149

Disability Credit . . . . . . . . . . . 153

Education Related Credits . . . . . . . 155

Employment Insurance (EI) AndCanada Pension Plan (CPP) Credits . . . 158

Transfers To A Spouse Or Common-Law Partner 159

Working Income Tax Benefit . . . . . . 159

New Graduates Working In Designated Areas 161

Political Contributions Tax Credits . . . . 161

Labour Sponsored Funds Tax Credit . . . 162

Dividend Tax Credit . . . . . . . . . . 162

Foreign Tax Credits . . . . . . . . . . 162

Investment Tax Credits . . . . . . . . . 162

Refundable Credits . . . . . . . . . . . . 163Refundable GST Credit . . . . . . . . 163

Canada Child Tax Benefit . . . . . . . 164

Social Benefits Repayment (OAS And EI) . 164

Comprehensive Example . . . . . . . . . 166


References . . . . . . . . . . . . . . . . . 168



Tax Software Assignment Problems . . . 181

CHAPTER 5Capital Cost Allowances AndCumulative Eligible Capital

Capital Cost Allowance System . . . . . . 187

Additions To Capital Cost . . . . . . . . . 189Determination Of Amounts . . . . . . . 189

Available For Use Rules . . . . . . . . 191

Segregation Into Classes . . . . . . . . 191

Capital Cost Allowances . . . . . . . . . 192Rates For Commonly Used CCA Classes . . 193

Half-Year Rules (a.k.a. First Year Rules) . . 195

Short Fiscal Periods . . . . . . . . . . 197

Tax Planning Considerations . . . . . . 198

Dispositions Of Depreciable Assets . . . 199Capital Gains . . . . . . . . . . . . 200

Recapture Of Capital Cost Allowance . . . 201

Terminal Losses . . . . . . . . . . . 202

CCA Schedule . . . . . . . . . . . . . . . 203

CCA Determination - Special Situations . 203Separate Class Election . . . . . . . . . 203

Cumulative Eligible Capital (CEC) . . . . 205Eligible Capital Expenditures Defined . . . 205

Terminology . . . . . . . . . . . . . 206

Additions, Amortization, And Dispositions . 206


References . . . . . . . . . . . . . . . . . 211

Appendix - CCA Rates For Selected Assets 212



CHAPTER 6Income Or Loss From A Business

Overview . . . . . . . . . . . . . . . . . 223Net Income For Tax Purposes . . . . . . 223

Classification Of Income . . . . . . . . 224

Business Income Vs. Property Income . . 226Tax Consequences Of Classification . . . . 226

Business Income Defined . . . . . . . . 227

Property Income Defined . . . . . . . . 228


V O L U M E I

CHAPTER 6, continuedBusiness Income Vs. Capital Gains . . . . 228

Capital Gains Defined . . . . . . . . . 229

Criteria For Identifying Capital Gains . . . 229

Business Income And GAAP . . . . . . . 230

Business Income - Inclusions (Revenues) 232Amounts Received And Receivable . . . . 232

Reserves . . . . . . . . . . . . . . 232

Limitations On Deductions FromBusiness And Property Income . . . . . 236Specific Limiting Items Under ITA 18 . . . 236

Foreign Media Advertising - ITA 19 And 19.1 242

Provincial Capital And Payroll Taxes . . . 242

Limitations On Deductions From Business,Property, And Employment Income . . 243Reasonableness . . . . . . . . . . . 243

Meals And Entertainment - ITA 67.1 . . . 243

“Luxury” Automobile Costs . . . . . . . 244

Automobiles Owned By The Taxpayer . . . 245

Automobile Leasing Costs - ITA 67.3 . . . 245

Illegal Payments, Fines And Penalties . . . 248

Leasing Property . . . . . . . . . . . 248

Business Income - Specific Deductions . 249Inventory Valuation (Cost Of Sales) . . . . 249

Other Deductions . . . . . . . . . . 250

Reconciliation Schedule . . . . . . . . . . 252

Business Income - Example . . . . . . . . 253

Taxation Year . . . . . . . . . . . . . . . 255General Rules . . . . . . . . . . . . 255

Unincorporated Businesses -Non-Calendar Fiscal Year . . . . . . . 255

Special Business Income Situations . . . 256Income For Farmers . . . . . . . . . . 256

Professional Income (Billed Basis) . . . . 258

Ceasing To Carry On A Business . . . . . 259

Scientific Research And Development . . . 260


References . . . . . . . . . . . . . . . . . 261



Tax Software Assignment ProblemFor Chapter 6 . . . . . . . . . . . . . . 282

CHAPTER 7Income From Property

Property Income: General Concept . . . 285

Interest As A Deduction . . . . . . . . . . 286IT-533 - “Interest Deductibility” . . . . . 288

Discount And Premium On Issued Debt . . 291

Interest Income . . . . . . . . . . . . . . 293Discount And Premium On Debt Holdings . 295

Prescribed Debt Obligations . . . . . . 295

Accrued Interest At Transfer . . . . . . . 296

Payments Based On Production Or Use(Royalties) . . . . . . . . . . . . . . . . 297

Rental Income . . . . . . . . . . . . . . . 297Capital Cost Allowances . . . . . . . . 297

Rental Income Example . . . . . . . . 299

Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 300The Concept Of Integration . . . . . . . 300

Eligible Vs. Non-Eligible Dividends . . . . 301

Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 301- Eligible Dividends . . . . . . . . . 304

Comparison Of Investment Returns . . . . 308

Income Trusts . . . . . . . . . . . . . . . 308How Do Trusts Work? . . . . . . . . . 308

Investments In Public ly Traded Trusts . . . 309

Taxation Of Trusts: Pre-2011 Rules . . . 311

Mutual Funds . . . . . . . . . . . . . . . 312Distributions . . . . . . . . . . . . . 313

Adjusted Cost Base . . . . . . . . . . 314

Stock And Capital Of Dividends . . . . . 315

Foreign Source Income . . . . . . . . . . 315Foreign Non-Business (Property) Income . 316

Foreign Business Income . . . . . . . . 316

Shareholder Benefits . . . . . . . . . . . 317


References . . . . . . . . . . . . . . . . . 318





V O L U M E I

CHAPTER 8Capital Gains And Capital Losses

Economic Background . . . . . . . . . . 331

General Rules . . . . . . . . . . . . . . . 332Dispositions . . . . . . . . . . . . . 333

Adjusted Cost Base . . . . . . . . . . 334

Calculating The Capital Gain Or Loss . . . 336

Detailed Application Of The Rules . . . . 336Identical Properties . . . . . . . . . . 336

Partial Dispositions . . . . . . . . . . 337

Warranties On Capital Assets . . . . . . 338

Capital Gains Reserves . . . . . . . . . 338

Bad Debts On Sales Of Capital Property . . 340

Special Rule For Sales Of Real Property . . 341

Non-Arm’s Length Transfers Of Property 342Inadequate Considerations - ITA 69 . . . . 343

Inter Vivos Transfers To A Spouse . . . . 346

Non-Arm’s Length Transfers OfDepreciable Assets . . . . . . . . . 347

Farm Or Fishing Property To A Child . . . 349

Replacement Property Deferral Provisions 350Voluntary And Involuntary Dispositions . . 351

Timing Considerations . . . . . . . . . 351

Application Of ITA 44(1) To Capital Gains . 352

Application Of ITA 13(4) To Recapture . . 352

Combined Application Of ITA 13(4) And 44(1) 354

Small Business Investments - Deferral . . 357

Deemed Dispositions . . . . . . . . . . . 358Change In Use . . . . . . . . . . . . 359

Departures From Canada . . . . . . . . 362

Death Of A Taxpayer . . . . . . . . . 363

Provisions For Special Assets . . . . . . . 365Principal Residence . . . . . . . . . . 365

Personal Use Property . . . . . . . . . 369

Listed Personal Property . . . . . . . . 370

Gains And Losses On Foreign Currency . . 370

Options . . . . . . . . . . . . . . 373

Capital Gains And Tax Planning . . . . . 373


References . . . . . . . . . . . . . . . . . 375



Tax Software Assignment Problem . . . . 391

CHAPTER 9Other Income, Other Deductions,

and Income Attribution

Introduction . . . . . . . . . . . . . . . . 393

Other Income - Subdivision d Inclusions . 395Pension Benefits . . . . . . . . . . . 395

Retiring Allowances . . . . . . . . . . 395

Death Benefits . . . . . . . . . . . 395

Income Inclusions From Deferred Income Plans 396

Scholarships And Prizes - ITA 56(1)(n) . . . 396

Research Grants . . . . . . . . . . . 397

Social Assistance AndWorkers’ Compensation Payments . . . 397

Universal Child Care Benefit . . . . . . 397

Other Deductions - Subdivision e . . . . 398CPP Contributions On Self-Employed Earnings 398

Moving Expenses . . . . . . . . . . . 398

Child Care Expenses . . . . . . . . . 401

Disability Supports Deduction . . . . . . 404

Related Inclusions And Deductions . . . 406Introduction . . . . . . . . . . . . . 406

Employment Insurance Benefits . . . . . 406

Pension Income Splitting . . . . . . . . 407

Spousal And Child Support . . . . . . . 408

Annuity Payments Received . . . . . . . 410

Registered Savings Plans . . . . . . . . . 411Registered Education Savings Plans (RESPs) . 412

Registered Disability Savings Plans (RDSPs) . 417

Tax Free Savings Accounts (TFSAs) . . . . 419

Income Attribution . . . . . . . . . . . . 420The Problem . . . . . . . . . . . . 420

Basic Rules . . . . . . . . . . . . . 421

Income Attribution - Other Related Parties . 424

Anti-Avoidance Provisions . . . . . . . 425

Tax Planning . . . . . . . . . . . . 426


References . . . . . . . . . . . . . . . . . 427





V O L U M E I

CHAPTER 10Retirement Savings And OtherSpecial Income Arrangements

Planning For Retirement . . . . . . . . . 443Tax Deferred Savings . . . . . . . . . 444

Defined Benefit Vs. Money Purchase Plans . 446

Registered Retirement Savings Plans . . 447RRSP Deduction Limit . . . . . . . . . 449

Examples Of RRSP Deduction Calculations . 456

Undeducted RRSP Contributions . . . . . 457

RRSP And RRIF Administration Fees . . . 459

RRSP Withdrawals And Voluntary Conversions 459

Involuntary Termination Due To Age . . . 461

Spousal RRSP . . . . . . . . . . . . 461

Home Buyers’ Plan (HBP) . . . . . . . 462

Lifelong Learning Plan (LLP) . . . . . . . 464

Departure From Canada . . . . . . . . 466

Death Of The Registrant . . . . . . . . 467

Registered Pension Plans (RPPs) . . . . . 468Employer Contributions To The RPP . . . 469

Employee Contributions To The RPP . . . 469

Options At Retirement . . . . . . . . . 470

Phased Retirement . . . . . . . . . . 470

Registered Retirement Income Funds . . 470RRIF Withdrawals . . . . . . . . . . . 471

Death Of The Registrant . . . . . . . . 472

Evaluation Of RRIFs . . . . . . . . . . 472

Deferred Profit Sharing Plans . . . . . . . 473

Profit Sharing Plans . . . . . . . . . . . . 473

Transfers Between Plans . . . . . . . . . 474Retiring Allowances . . . . . . . . . . 474

Retirement Compensation Arrangements 475Arrangements Defined . . . . . . . . . 475

Part XI.3 Refundable Tax . . . . . . . . 476

Salary Deferral Arrangements . . . . . . 476

Individual Pension Plans (IPPs) . . . . . . 477


References . . . . . . . . . . . . . . . . . 479



Tax Software Assignment ProblemFor Chapter 10 . . . . . . . . . . . . . 492


For Individuals Revisited

Introduction . . . . . . . . . . . . . . . . 495

Lump-Sum Payments . . . . . . . . . . . 497

Treatment Of Losses . . . . . . . . . . . 498Carry Over Provisions . . . . . . . . . 498

Personal Use Property Losses . . . . . . 500

Listed Personal Property Losses . . . . . 500

Non-Capital Losses . . . . . . . . . . 501

Net Capital Losses . . . . . . . . . . 502

Net Capital Losses At Death . . . . . . . 504

Allowable Business Investment Losses . . . 505

Farm Losses . . . . . . . . . . . . . 507

Lifetime Capital Gains Deduction . . . . 508Qualified Property . . . . . . . . . . 509

Determining The Deductible Amount . . . 510

Comprehensive Example . . . . . . . . 513

Ordering Of Deductions And Losses . . . 514Significance Of Ordering . . . . . . . . 514

Ordering In ComputingNet Income For Tax Purposes . . . . . 514

Ordering In Computing Taxable Income . . 515

Example . . . . . . . . . . . . . . 515

Tax Payable Overview . . . . . . . . . . . 516Basic Federal Tax Payable . . . . . . . 517

Tax On Split Income . . . . . . . . . . . 517

Tax Credits Revisited . . . . . . . . . . . 519Transfer Of Dividends To A Spouse

Or Common-Law Partner . . . . . . . 519

Charitable Donations Credit Revisited . . . 520

Foreign Tax Credits Revisited . . . . . . 525

Alternative Minimum Tax . . . . . . . . . 527General Concept . . . . . . . . . . . 527

Minimum Tax Calculation . . . . . . . 528

Tax Credits For AMT . . . . . . . . . 529

AMT Carry Forward - ITA 120.2 . . . . . 529


References . . . . . . . . . . . . . . . . . 531



Tax Software Assignment Problems . . . 550


V O L U M E I


For Corporations

Computation Of Net Income . . . . . . . 557

Computation Of Taxable Income . . . . . 559Deductions Available To Corporations . . . 559

Dividends From Other Corporations . . . 560

Non-Capital Loss Carry Over . . . . . . 563

Ordering Of Taxable Income Deductions . 565

Geographical Allocation Of Income . . . 565Permanent Establishments . . . . . . . 565

Example - Permanent Establishments . . . 566

Federal Tax Payable . . . . . . . . . . . . 567Basic Rate . . . . . . . . . . . . . 567

Federal Tax Abatement . . . . . . . . 567

General Rate Reduction . . . . . . . . 567

Provincial Tax Payable . . . . . . . . . . . 568Small Business Rate . . . . . . . . . . 569

Investment Income Rates . . . . . . . . 569

Small Business Deduction . . . . . . . . 570Canadian Controlled Private Corporation . 571

Active Business Income . . . . . . . . 571

Annual Business Limit . . . . . . . . . 573

Allocation Among Associated Companies . 574

Calculating The Small Business Deduction . 574

Elimination Of Small Business DeductionFor Large CCPCs . . . . . . . . . . 576

Personal Services Corporations . . . . . 578

Professional Corporations And ManagementCompanies . . . . . . . . . . . . 579

Manufacturing And Processing ProfitsDeduction . . . . . . . . . . . . . . . . 579Calculating The Deduction . . . . . . . 580

M&P Profits Defined . . . . . . . . . 582

General Rate Reduction - ITA 123.4(2) . . 582Full Rate Taxable Income . . . . . . . . 583

Application To Companies Other Than CCPCs 583

Application To CCPCs . . . . . . . . . 584

Foreign Tax Credits For Corporations . . 585


References . . . . . . . . . . . . . . . . . 588



CHAPTER 13Taxation Of

Corporate Investment Income

Integration . . . . . . . . . . . . . . . . . 603The Basic Concept . . . . . . . . . . 603

Dividend Gross Up And Tax Credit Procedures 604

Integration And Business Income . . . . . 605

Refundable Taxes On Investment Income 607Meaning Of Aggregate Investment Income . 607

Basic Concepts . . . . . . . . . . . . 608

Refundable Part I Tax OnInvestment Income . . . . . . . . . . . 610Additional Refundable Tax

On Investment Income (ART) . . . . . 610

Problem One: Excessive Tax Rates On FlowThrough Of A CCPC’s Investment Income 611

Solution To Problem One:Refundable Portion Of Part I Tax . . . . 613

Refundable Part IV Tax OnDividends Received . . . . . . . . . . . 616Problem Two: Use Of Multi-Level Affiliations

To Defer Taxes On Investment Income . . 616

Solution To Problem Two:Refundable Part IV Tax . . . . . . . . 617

Part IV Tax On Portfolio Dividends Received 618

Dividends From A Connected Corporation . 619

Dividends Paid Out Of Mixed IncomeOf A Connected Corporation . . . . . 621

Refundable Dividend Tax On Hand . . . 622Basic Concepts . . . . . . . . . . . . 622

RDTOH - General Definition . . . . . . 623

Refundable Portion Of Part I Tax Payable . 623

The Dividend Refund . . . . . . . . . 625

Example Of RDTOH Calculations . . . . 625

Designation Of Eligible Dividends . . . . 628Basic Concepts . . . . . . . . . . . . 628

CCPCs And Their GRIP . . . . . . . . 630

Non-CCPCs And Their LRIP . . . . . . . 631

Part III.1 Tax On Excessive Eligible DividendDesignations . . . . . . . . . . . . 632


References . . . . . . . . . . . . . . . . . 634




V O L U M E I I

CHAPTER 14Other Issues In

Corporate Taxation

Introduction . . . . . . . . . . . . . . . . 647

Acquisition Of Control Rules . . . . . . . 647Economic Background . . . . . . . . . 647

Acquisition Of Control Legislation . . . . 648

Deemed Year End . . . . . . . . . . 648

Restrictions On The Use OfCharitable Donations . . . . . . . . 648

Restrictions On The Use Of Losses . . . . 649

Unrecognized Losses At Deemed Year End . 650

Deemed Disposition Election . . . . . . 651

Associated Companies . . . . . . . . . . 653The Problem . . . . . . . . . . . . 653

Investment Tax Credits . . . . . . . . . . 657Procedures . . . . . . . . . . . . . 657

Eligible Expenditures . . . . . . . . . 658

Rates . . . . . . . . . . . . . . . 659

Refundable Investment Tax Credits . . . . 660

Carry Overs Of Investment Tax Credits . . 661

Acquisition Of Control . . . . . . . . . 661

Tax Basis Shareholders’ Equity . . . . . . 662Shareholders’ Equity Under GAAP . . . . 662

Paid Up Capital (Tax Basis Contributed Capital) 662

Tax Basis Retained Earnings . . . . . . . 663

Pre-1972 Capital Surplus On Hand . . . 663

Capital Dividend Account . . . . . . . 664

Distributions Of Corporate Surplus . . . 666Regular Cash Dividends . . . . . . . . 666

Stock Dividends . . . . . . . . . . . 667

Dividends In Kind . . . . . . . . . . 668

Capital Dividends Under ITA 83(2) . . . . 669

Deemed Dividends Under:ITA 84(1) - Increase In PUC . . . . . . 670ITA 84(2) - On Winding-Up . . . . . . 671ITA 84(3) - On Redemption, Acquisition,

Or Cancellation Of Shares . . . . . 672Under ITA 84(4) And ITA 84(4.1) . . . . 673


References . . . . . . . . . . . . . . . . . 675



Tax Software T2 Assignment Problem . . 685

CHAPTER 15Corporate Taxation AndManagement Decisions

The Decision To Incorporate . . . . . . . 687Basic Tax Considerations . . . . . . . . 687

Other Advantages And Disadvantages . . . 688

Tax Reduction And Deferral . . . . . . . 689Approach . . . . . . . . . . . . . . 689

Basic Example . . . . . . . . . . . . 690

Public Corporation . . . . . . . . . . 692

CCPC - Active Business Income . . . . . 694

CCPC - Investment IncomeOther Than Dividends . . . . . . . . 697

CCPC - Dividend Income . . . . . . . 698

Conclusions On Tax Reductions And Deferrals 699

Provincial Taxes And Integration . . . . . 702Introduction . . . . . . . . . . . . . 702

Tax Deferral . . . . . . . . . . . . . 702

Tax Reduction . . . . . . . . . . . . 703

Tax Free Dividends . . . . . . . . . . . . 706Tax Rates On Dividends . . . . . . . . 706

Use Of Tax Credits . . . . . . . . . . 706

Tax Free Amounts For 2010 . . . . . . . 707

Income Splitting . . . . . . . . . . . . . . 708Basic Concept . . . . . . . . . . . . 708

Example . . . . . . . . . . . . . . 709

Shareholder Benefits . . . . . . . . . . . 710The Owner-Manager Environment . . . . 710

Shareholder Benefits Other Than Loans . . 711

Shareholder Loans . . . . . . . . . . 711

Management Compensation . . . . . . . 714General Principles . . . . . . . . . . 714

Salary Vs. Dividends . . . . . . . . . . 715

Salary Vs. Dividends ForThe Owner - Manager . . . . . . . . . 716The Basic Trade-Off . . . . . . . . . . 716

Other Considerations . . . . . . . . . 716

Conclusion . . . . . . . . . . . . . 724


References . . . . . . . . . . . . . . . . . 725




V O L U M E I I

CHAPTER 16Rollovers Under Section 85

Rollovers Under Section 85 . . . . . . . . 737

General Rules For The Transfer . . . . . . 738Transferor And Transferee . . . . . . . 738

Eligible Property . . . . . . . . . . . 738

Consideration To Transferor . . . . . . . 738

Making The Election . . . . . . . . . 739

Establishing The Transfer Price . . . . . . 739

Transfer Prices - Detailed Rules . . . . . 741Rules Applicable To All Assets . . . . . . 741

Accounts Receivable . . . . . . . . . 742

Inventories, Non-Depreciable Capital Property 742

Disallowed Capital Losses . . . . . . . 743

Depreciable Property . . . . . . . . . 745

Terminal Losses Disallowed . . . . . . . 747

Eligible Capital Property . . . . . . . . 748

Eligible Capital Property- Disallowed Deductions . . . . . . . 749

Allocation Of The Elected Value . . . . . 750Consideration Received By The Transferor . 750

Assets Acquired By The Corporation . . . 751

Paid Up Capital Of Shares Issued . . . . 752Paid Up Capital Reduction . . . . . . . 753

More Than One Class Of Shares . . . . . 754

Section 85 Rollovers— Comprehensive Example . . . . . . 755

Gift To Related Person - Section 85 . . . 757General Rules . . . . . . . . . . . . 757

Example . . . . . . . . . . . . . . 758

Section 85 - Excess Consideration . . . . 759Shareholder Benefit - ITA 15(1) . . . . . 759

Dividend Stripping — ITA 84.1 . . . . . . 761Applicability Of ITA 84.1 . . . . . . . . 762

Dividend Stripping Example . . . . . . . 762

Capital Gains Stripping — ITA 55(2) . . . 764Application Of ITA 55(2) . . . . . . . . 765

Capital Gains Stripping - Example One . . 766

Capital Gains Stripping - Example Two . . 767


References . . . . . . . . . . . . . . . . . 769



CHAPTER 17Other Rollovers And

Sale Of An Incorporated Business

Introduction . . . . . . . . . . . . . . . . 783

Share For Share Exchanges . . . . . . . . 783General Rules . . . . . . . . . . . . 784

Conditions For The Application Of ITA 85.1 784

Example . . . . . . . . . . . . . . 784

Exchange Of Shares In A Reorganization . 786Application Of ITA 86(1) . . . . . . . . 786

Conditions For The Reorganization . . . . 786

Procedures . . . . . . . . . . . . . 787

Example Using ITA 86(1) In An Estate Freeze 788

Gift To Related Person - ITA 86(2) . . . . 791

Practical Considerations . . . . . . . . 793

Using ITA 86(1) - Tax Planning Considerations 793

Amalgamations . . . . . . . . . . . . . . 794Position Of The Amalgamated Company . . 795

Position Of The Shareholders . . . . . . 796

Vertical Amalgamations (Parent And Subsidiary) 796

Non-Tax Considerations . . . . . . . . 796

Amalgamations - Tax Planning Considerations 797

Winding-Up Of A 90 Percent OwnedSubsidiary . . . . . . . . . . . . . . . . 798Acquisition Of Assets . . . . . . . . . 798

Disposition Of Shares . . . . . . . . . 801

Tax Planning Considerations- Amalgamation Vs. Winding-Up . . . . 802

Winding-Up Of A Canadian Corporation . 803Example . . . . . . . . . . . . . . 803

Convertible Properties . . . . . . . . . . 806Application . . . . . . . . . . . . . 806

Sale Of An Incorporated Business . . . . 807Restrictive Covenants

(a.k.a. Non-Competition Agreements) . . 807

Sale Of Individual Assets . . . . . . . . 808

Sale Of Assets As A Going Concern . . . . 809

Sale Of Shares . . . . . . . . . . . . 811

Evaluation Of Alternatives . . . . . . . 812

Example . . . . . . . . . . . . . . 813


References . . . . . . . . . . . . . . . . . 816




V O L U M E I I

CHAPTER 18Partnerships

Introduction . . . . . . . . . . . . . . . . 829Taxable Entities In Canada . . . . . . . 829

Partnerships Defined . . . . . . . . . . . 830The Importance Of Defining A Partnership . 830

Basic Partnership Elements . . . . . . . 830

Types Of Partnerships . . . . . . . . . 831

Co-Ownership, Joint VenturesAnd Syndicates . . . . . . . . . . . . . 832Co-Ownership . . . . . . . . . . . . 832

Joint Ventures . . . . . . . . . . . . 833

Syndicates . . . . . . . . . . . . . 833

Partnership Income, Losses, Tax Credits . 834Introduction . . . . . . . . . . . . . 834

Basic Concepts . . . . . . . . . . . . 834

Calculating Partnership Income Or Loss . . 835

Allocations To Partners AndPartner Expenses . . . . . . . . . . . . 839Method Of Allocation . . . . . . . . . 839

Allocation Of Specific Items . . . . . . . 840

The Partnership Interest . . . . . . . . . 841The Concept . . . . . . . . . . . . 841

Acquiring A Partnership Interest . . . . . 841

Adjustments To The ACB OfA Partnership Interest . . . . . . . . 843

Limited Partnerships And Limited Partners 846Definitions . . . . . . . . . . . . . 846

At-Risk Rules . . . . . . . . . . . . 847

Transfer Of Property To And FromA Partnership . . . . . . . . . . . . . . 849Transfers With No Rollover Provision . . . 849

Common Partnership Rollovers . . . . . 851

Specified Investment Flow ThroughPartnerships . . . . . . . . . . . . . . 854


References . . . . . . . . . . . . . . . . . 855



CHAPTER 19Trusts And Estate Planning

Introduction . . . . . . . . . . . . . . . . 869

Basic Concepts . . . . . . . . . . . . . . 870What Is A Personal Trust? . . . . . . . . 870

Establishing A Trust . . . . . . . . . . 871

Returns And Payments - Trusts . . . . . . 872

Non-Tax Reasons For Using Trusts . . . . 873

Classification Of Trusts . . . . . . . . . . 873Personal Trusts . . . . . . . . . . . . 873

Testamentary Vs. Inter Vivos Trusts . . . . 874

Taxation Of Trusts . . . . . . . . . . . . 875Rollovers To A Trust . . . . . . . . . . 876

Rollovers To Capital Beneficiaries . . . . 879

21 Year Deemed Disposition Rule . . . . 879

Net Income For Tax Purposes Of A Trust 880Preferred Beneficiary Election . . . . . . 881

Amounts Deemed Not Paid . . . . . . . 881

Amounts Retained For A BeneficiaryUnder 21 Years Of Age . . . . . . . . 881

Taxable Income Of A Trust . . . . . . . . 882

Income Allocations To Beneficiaries . . . 882Discretionary And Non-Discretionary

Distributions . . . . . . . . . . . . 883

Flow Through Provisions . . . . . . . . 883

Principal Residence Exemption . . . . . 885

Tax Payable Of Personal Trusts . . . . . . 885Testamentary vs. Inter Vivos Trusts . . . . 885

Income Attribution . . . . . . . . . . . . 888

Purchase Or Sale Of An Interest In A Trust 889

Tax Planning . . . . . . . . . . . . . . . . 890Qualifying Spousal Trusts . . . . . . . . 892

Alter Ego Trusts . . . . . . . . . . . 892

Joint Spousal Or Common-Law Partner Trusts 893

Estate Planning . . . . . . . . . . . . . . 893

Estate Freeze . . . . . . . . . . . . . . . 895

SIFT Partnerships And Trusts . . . . . . . 898


References . . . . . . . . . . . . . . . . . 903




V O L U M E I I

CHAPTER 20International Issues In Taxation

Introduction . . . . . . . . . . . . . . . . 911

Residence . . . . . . . . . . . . . . . . . 912Importance . . . . . . . . . . . . . 912

Residence Of Individuals . . . . . . . . 912

Residence Of Corporations . . . . . . . 917

Residence Of Trusts . . . . . . . . . . 918

Non-Residents Earning CanadianSource Income . . . . . . . . . . . . . 919Basic Approaches - Part I Or Part XIII Tax . 919

Canadian Source Employment Income . . 920

Carrying on Business in Canada . . . . . 921

Dispositions of Taxable Canadian Property . 923

Canadian Source Property Income . . . . 924

The Problem Of Double Taxation . . . . 927Sources Of The Problem . . . . . . . . 927

Dual Residence . . . . . . . . . . . 928

Residence Vs. Citizenship . . . . . . . 930

Residence Vs. Source . . . . . . . . . 930

Immigration And Emigration . . . . . . . 931Entering Canada - Immigration . . . . . 931

Departures From Canada - Emigration . . . 931

Unwinding A Deemed Disposition . . . . 934

Short-Term Residents . . . . . . . . . 935

Foreign Source Employment Income . . . 935

Foreign Source Business Income . . . . . 936

Foreign Source Capital Gains . . . . . . . 936

Foreign Source Investment Income . . . . 936Foreign Investment Reporting Requirements 937

Non-Resident Entities . . . . . . . . . 938

Foreign Affiliates . . . . . . . . . . . 940

Controlled Foreign Affiliates . . . . . . . 941

Foreign Accrual Property Income (FAPI) . . 941

Foreign Affiliate Dividends . . . . . . . 944

Foreign Investment Entities . . . . . . . 946

Dividends From Foreign Non-AffiliatedCompanies . . . . . . . . . . . . 947

Transfer Pricing . . . . . . . . . . . . . . 948


References . . . . . . . . . . . . . . . . . 948



CHAPTER 21GST/HST

Introduction . . . . . . . . . . . . . . . . 981

Transaction Tax Concepts . . . . . . . . 983

Liability For GST/HST . . . . . . . . . . . 987The Concept Of Supply . . . . . . . . 987

Supply Categories . . . . . . . . . . . . . 988Taxable Supplies . . . . . . . . . . . 988

Exempt Supplies . . . . . . . . . . . 989

Applying the GST/HST Rate . . . . . . . . 990Place Of Supply . . . . . . . . . . . 990

Collection And Remittance Of GST/HST . 991

Registration . . . . . . . . . . . . . . . . 992Who Must Register . . . . . . . . . . 992

Input Tax Credits . . . . . . . . . . . . . 995Vendors Of Fully Taxable And

Zero-Rated Supplies . . . . . . . . . 995

Vendors Of Exempt Supplies . . . . . . 997

Example . . . . . . . . . . . . . . 998

Relief For Small Businesses . . . . . . . 1000Quick Method Of Accounting . . . . . 1000

Small Suppliers Exemption . . . . . . . 1003

Simplified Input Tax Credit Method . . . 1003

GST/HST Procedures And Administration 1004GST/HST Returns And Payments . . . . 1004

Associated Persons . . . . . . . . . . 1006

Refunds And Rebates . . . . . . . . . 1006

Appeals . . . . . . . . . . . . . . 1006

Employee And Partner GST/HST Rebate 1007Calculating The GST/HST Rebate Amount . 1008

Example . . . . . . . . . . . . . . 1008

Residential Property, New Housing Rebate 1009New Housing Rebate . . . . . . . . . 1009

Sale Of A Business . . . . . . . . . . . . 1010

Specific Applications . . . . . . . . . . . 1011

Partnerships And GST/HST . . . . . . . 1012

Trusts And GST/HST . . . . . . . . . . . 1013

Key Terms Used In This Chapter . . . . 1014

Problems For Self Study . . . . . . . . . 1015

Assignment Problems . . . . . . . . . . 1019


V O L U M E I I

GlossaryThe Glossary can be found:

• at the back of the separate paperStudy Guide, and

• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.

Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.

No. 1 - Application Of The Median Rule

No. 2 - Revoked Stock Option Election

No. 3 - Stock Option Shares Deemed

Not Identical Property

No. 4 - Election For Pre-1982 Residences

No. 5 - Determining M&P Profits

No. 6 - SR & ED Expenditures

No. 7 - Final Returns For Deceased Taxpayers

No. 8 - Business Valuations

No. 9 - Tax Shelters

No. 10 - Transfer Pricing


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