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Law 345 (Taxation) CANAuthor: Vivian BurtonProfessor: Martha O’Brien

Table of ContentsTable of Contents..................................................................................................................................................................1

I. Studying Tax Law: basic concepts and terminology...........................................................................................................9

Overview...........................................................................................................................................................................9

Taxes vs. Other Payments to Government......................................................................................................................10

The 5 attributes of taxes..................................................................................................................................................10

Tax Rates and Operation of Exemptions, Deductions and Credits..................................................................................11

Types of Taxation............................................................................................................................................................12

Terminology....................................................................................................................................................................12

Tax Policy Criteria............................................................................................................................................................13

II. Canada’s tax system........................................................................................................................................................13

Constitution Act provisions on taxation:.........................................................................................................................14

Federal and Provincial Tax Collection Agreements..........................................................................................................15

The Tax Adjudication System..........................................................................................................................................16

Tax Court of Canada Procedures:....................................................................................................................................16

Interpretation of Tax Statutes:........................................................................................................................................16

Placer Dome Canada Ltd. v Ontario (Minister of Finance) (2006) SCC (see case brief for detailed provisions)...........16

III. The source concept of income: section 3 of the act.......................................................................................................16

Bellingham v The Queen (1996) FCA Windfalls (“additional interest”) are non-taxable (includes lottery winnings, other bets, money found on the street, etc. as they are not recognized as “sources of income”)...............................17

Cartwright & Sons Ltd. V MNR Punitive damage awards are not taxable as they have “no income feature”........18

The Queen v Cranswick (1982) FCA Gratuitous payments are not taxable. List of windfall gain factors...........18

Curran v Minister of National Revenue (1959) SCC Un-enumerated sources of income may still be taxable as income from a source. Payment in consideration for future services and lost benefits = income...........................19

Canada v Fries (1989) FCA Strike pay to union members is not taxable as it is not “income from a source”..........19

The Surrogatum Principle................................................................................................................................................19

London & Thames (1990) Eng. CA Surrogatum principle: ask what the compensation is intended for, and if it is for an amount that would have been taxable, then the compensation is taxable......................................................19

Schwartz v the Queen SCC (1996) SCC The surrogatum principle cannot be applied to a lump sum payment that cannot be apportioned into taxable and non-taxable amounts; if part is taxable but cannot be defined, the entire amount is non-taxable. An appellate court cannot overturn a finding of fact from a trial court, as they do not

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have the opportunity to hear witnesses, evidence, etc. General provisions cannot overrule specific provisions: more correctly done in Savage. Since Curran, there has never been another un-enumerated source of income in Canada (not a good argument that a payment is an un-enumerated source). Note: Retiring allowances are included in income (are taxable) under Section 56(a), but are not taxed until they are actually received...................20

Atkins (1976) FCA Settlements for wrongful dismissal are not taxable for the same reason that retiring allowances are not taxable (no quid pro quo: there has been no exchange or services/the money was not earned similar to a windfall). Exam Note: Section 56(a): retiring allowances include wrongful dismissal payments, severance payments, and gratuitous payments provided at the end of employment, and all are taxable..................20

The Queen v Savage (1983) SCC A general taxation provision cannot override a specific provision.......................20

Tsiaprailis (2005) SCC Cemented the surrogatum principle as binding Canadian law (first apparent application beyond business income). A settlement amount from a lawsuit that serves to replace lump-sum payments is taxable if the regular payments would have been taxable. Section 6(1)(f) provides an incentive to employers to create group insurance plans as their contributions are tax-deductible, and employees are only taxed on payments they receive.................................................................................................................................................................21

The Queen v Antonija Siftar (2003) FCA Apportionment principles (see case brief for details)...............................22

Johnson (2012) – ON CA A Ponzi scheme is not a source, so income from one is not taxable & contributions are not deductible..............................................................................................................................................................22

Interpretation bulletin 365R2 (page 99) Amounts awarded for loss of life, etc. are non-taxable as you can`t bargain away a portion of your life (human capital) or that they cannot be considered to be market transactions which would lead to tax payable.................................................................................................................................22

IV. Receipt and enjoyment of an amount as income or “nexus”.........................................................................................22

General Rule:...............................................................................................................................................................23

Net Worth Assessments..............................................................................................................................................23

Peter D Field v The Queen (2001) TCC The nexus required for RRSP withdrawals is whether T was the actual recipient of the funds, not whether they had a legal claim to them............................................................................23

Buckman v MNR (1991) TCC Revenue from criminal activity can be income from a source, if the realities of the situation (based on method of earning and T’s intention) support this; consider factors other than just strict ownership....................................................................................................................................................................23

Minister of Finance v Smith – Judicial Committee of the Privy Council Income from illegal business is still taxable as income from a source..............................................................................................................................................24

James v United States Embezzled funds are included in income and are taxable...................................................24

Gilbert v Commissioner of Internal Revenue (1977) 2nd Circuit Distinguished from Buckman as T had a true intention to repay in that case the embezzled funds (they were a loan instead of income)........................................24

The Queen v Poynton – ON CA Leading authority on fraudulent funds being included as income Absolute control of illegally-obtained funds not required..........................................................................................................24

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Curlett v MNR (1961) EX CR 427 Strict legal ownership is not the exclusive test of taxability; a Court must also consider the circumstances surrounding the receipt of the money and the manner in which it is held.......................24

V. Residence as the primary basis of Canadian tax liability.................................................................................................24

Approach:....................................................................................................................................................................25

A. Introduction to Residence...........................................................................................................................................25

Thomson v MNR (1946) SCC Ordinary residence is the deciding factor in determining whether a taxpayer must pay CA income tax. Ordinary residence is distinguished from “stays, visits, and sojourns” (e.g. temporary stays). It does not matter where a taxpayer “intends” to be a resident; only what the circumstances reveal...................26

Denis M Lee v MNR (1990) TCC Immigration status does not affect residency status for tax purposes Residence is a question of fact and depends on the specific facts of each case; the more ties a TP has within Canada, the more likely they will be considered a resident (see case brief for factors)...........................................................................26

R & L Food Distributors Limited v. MNR (1977 Tax TRB) Commuting to a place for work is not sojourning...........27

B. Part-Time (Part-Year) Residence.................................................................................................................................28

IT-221R3 (Consolidated) Determination of an Individual’s Residency Status..........................................................28

Schujahn v MNR (1962) Exchequer Court Must distinguish between residence/ordinary residence and sojourning; they do not overlap Severing all ties with Canada part-way through a tax year signifies part-time residence Residence is a question of fact; Change of domicile depends on the intent of the party, but residence is based on the factual circumstances external to the intent of the T..................................................................................................29

Ordinarily Resident......................................................................................................................................................30

The Queen v Reeder (1975) FCTD Physical presence not necessary for a taxpayer to be “ordinarily resident” Where Residency is long established, difficult to show Severance...............................................................................30

C. Avoidance of Dual-Tax Residence................................................................................................................................30

Article IV Canada-US Tax Treaty..................................................................................................................................30

Article 4 Canada-UK Tax Treaty...................................................................................................................................31

Salt (2007) TCC Indicia of non-residence (severance of ties with Canada) – Canada/Australia Treaty...................31

D. Provincial Residence...................................................................................................................................................32

Mandrusiak v The Queen (2007) BCSC Thomson was used to determine ordinary residence................................32

E. Residence of Corporations..........................................................................................................................................32

De Beers Consolidated Mines Ltd v. Howe (1906 HL) Residency for corporations is a question of fact (based on where company keeps house and does their business) central management and control.....................................32

F. Source as a Basis of Canadian Tax Liability..................................................................................................................32

VI. Income from office or employment...............................................................................................................................34

A. Basic Definitions and Provisions..................................................................................................................................34

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Interpretation Summary of 6(1)(a)..............................................................................................................................34

B. Employee vs. Independent Contractor/Consultant/Sole Proprietor...........................................................................35

Test for Employee vs. Independent Contractor:..........................................................................................................35

Wiebe Door Services v MNR (1986) FCA Leading single question test to employee/contractor; must consider whole scheme of operations and all factors when control/organizational tests are inconclusive...............................36

Ontario v Sagaz Industries Canada (2001) SCC Affirms Wiebe Door; Consider the Central Question + Factors......36

Wolf v The Queen (2002) FCA Intention is a valid factor to be considered............................................................36

Royal Winnipeg Ballet v MNR (2008) FCA Intention in the K should be considered. Where it is established that the K terms are not an appropriate reflection of the legal relationship between the parties, the stated intention will be disregarded.............................................................................................................................................................36

Lang v. MNR (2007) TCC Intent is a test that cannot be ignored, but its weight varies from case to case; it should be used predominantly as a tie-breaker......................................................................................................................37

C. Personal Services Businesses and Incorporated Employees........................................................................................37

- Sazio v MNR (1968) Exch, Ct. T successfully received CCPC 13.5% rate, after this the law was changed to make PSBs and SIBs pay the 38% rate (28% federally and 10% in BC).........................................................................37

D. Introduction to Benefits, Reimbursements and Allowances.......................................................................................38

1. General........................................................................................................................................................................38

The Queen v Savage (1983) SCC Benefit need only be a material acquisition which confers a benefit upon the employee.....................................................................................................................................................................39

Lowe v The Queen (1996) FCA Is there a measurable economic benefit? Who possesses the primary benefit?....39

Waffle v MNR (1968) Exchequer Crt. Benefit can be received from a 3rd party (supplier or an advertiser), if connected to employment...........................................................................................................................................40

Interpretation Bulletin IT-470R....................................................................................................................................40

IT-91R4 – Employment at Special Work Sites or Remote Work Locations...................................................................43

June 11, 2009 Policy Changes re Employer Gifts.........................................................................................................43

2. Valuation of Employment Benefits..............................................................................................................................44

Giffen v The Queen (1995) TCC Method of valuing benefits – no longer used for loyalty points (now non-taxable to promote simplicity) – IT470R...................................................................................................................................44

Dunlap v The Queen (1998) TCC There is no real difference between receiving money and money’s worth..........44

Richmond v The Queen Availability of benefits and not actual use of a benefit are the correct measure for taxability.....................................................................................................................................................................45

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Rachfalowski v The Queen Taxability for a benefit should be based on actual use/subjective value, not the full value of a benefit’s availability....................................................................................................................................45

3. Allowances: 6(1)(b)......................................................................................................................................................45

Interpretation Summary of 6(1)(b)..............................................................................................................................45

The Queen v. Huffman (1990) FCA Draws the distinction between allowance and reimbursement; reimbursements to the employee for expenses that should be borne by the employer are non-taxable.....................46

The Queen v. MacDonald (1994) FCA Leading case on s.6(1)(b) – Definition of an allowance: An arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – Generally for a specific purpose – Discretion of the recipient, in that the recipient need not account for the expenditure of the funds ..........46

4. Special and Remote Worksites: subsection 6(6)..........................................................................................................47

IT470R – Determination of Remote Work Location.....................................................................................................47

5. Auto & Travelling Allowances: 6(1)(b)(v), (vii), (vii.1), (x),(xi); Reg 7306, & 18(1)(r)...................................................48

E. Deductions in computing income from employment.................................................................................................48

1. General Limitations on Deductions: S.8(2) & sections 67 and 67.1(1), 67.1(2)(a) and (f)............................................49

2. Traveling Expenses: 8(1),(f), (g), (h), (h.1), and 8(4)....................................................................................................49

Crawford, Renko et al. v the Queen (2002) TCC “Meals and lodging” provision was interpreted literally to mean that both must be incurred to allow a deduction........................................................................................................50

Martyn v MNR (1962) Travel to and from work is not deductible...........................................................................51

Hogg v The Queen (2002 FCA) Travel to/from work not deductible even w/ work-related security issues.............51

3. Legal Expenses: 8(1)(b) and 60(o.1).............................................................................................................................51

4. Professional and Union Dues: 8(1)(i)(i)(iv)(v) and 8(5)................................................................................................51

The Queen v. Swingle (1977) s. 8(1)(i)(i) is interpreted strictly – only professional expenses required by statute are deductible (requirements limited to those stated explicitly)........................................................................................52

5. Cost of Supplies: 8(1)(i)(iii), and 8(10).........................................................................................................................52

6. Home Office Expenses: 8(13).......................................................................................................................................52

Summary:........................................................................................................................................................................53

VII. Income from business or property................................................................................................................................53

A. Business as a source of income: organized activity and pursuit of profit...................................................................53

Income from Business and Property: Distinguished....................................................................................................54

Luprypa v The Queen (1997) TCC Specific expertise or a system to make money from gambling = a business......55

LeBlanc v The Queen (2007) Lottery is pure chance = not an expected earning source = no source/no tax...........55

The Pursuit of Profit – Reasonable Expectation of Profit (REOP).................................................................................56

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Stewart v. The Queen (2002 SCC) New test to find out if activity is a Business or Property...................................56

B. Comparison of carrying on a business to earning income from property and realization of capital gains.................57

1. Adventure or concern in the nature of trade?............................................................................................................57

IT-459 – Adventure or Concern in the Nature of Trade:..............................................................................................57

2. Carrying on a business vs. adventure in the nature of trade vs. investing in capital properties...............................58

Secondary intention and transactions in real property: IT-218R.................................................................................58

Saskatchewan Wheat Pool v MNR (2008) TCC The fact that a purchaser might be compelled to resell a capital asset at a profit is not determinative; must have had in their mind at the time of purchase a set of circumstances that would allow them to resell at a profit instead of using the property as a capital asset.......................................59

Arcorp Investments (2000 FCTD) Personal securities trading business = business income (not ACNT, but an actual business involved in trading, and not capital investments as they were publicly-traded liquid assets).......................59

Interpretation Bulletin IT-459......................................................................................................................................59

C. Income from property................................................................................................................................................59

General: s. 248(1) “property”; 9(3); Stewart REOP applies to Property AND Business....................................................60

Interest: paragraph 12(1)(c); subsections 12(3), (4) and (11), 16(1)(a)...........................................................................60

Groulx v. MNR (1967) SCC Court found blended payments from an increased purchase price (above FMV).........60

Rent and Royalties...........................................................................................................................................................61

Wain-Town Gas and Oil (1952) After-sale share in profits are royalties and subject to income tax........................61

Spooner Where all legal rights are transferred, the transaction constitutes a sale - gives rise to profits; if less than all rights are transferred, the transaction is a lease or licence and the payments are rent or royalties......................61

Dividends.........................................................................................................................................................................62

VIII. Deductions in computing income from business and property....................................................................................62

A. Structure of the Act – Business/Property....................................................................................................................62

B. The Income Purpose Earning Test...............................................................................................................................63

Daley v MNR (1950) A deduction is permissible if it is in accordance with the ordinary principles of commercial trading or accepted principles of business practice.....................................................................................................63

Imperial Oil (1947) If an expense is incurred in the ordinary course of business, it will generally be deductible... .63

Royal Trust Co v MNR (1957) Exch. Ct Ordinary course of business expenses are generally deductible.................63

C. Personal or Living Expenses.........................................................................................................................................64

***IT 470R - Removal [Moving] Expenses.......................................................................................................................64

Benton (Thomas Harry) v MNR (1952) House-keeper is a personal expense – not deductible................................64

***Commuting to place of business...............................................................................................................................65

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Dr. E. Ross Henry v MNR (1974) SCC Travel costs between home and work are generally not deductible against income from business/property Costs incurred travelling from one place of business to another are generally deductible....................................................................................................................................................................65

***Moving Expenses.......................................................................................................................................................65

***Home Office Expenses...............................................................................................................................................66

D. Deduction of Interest Expense – see hand-out...........................................................................................................67

The Queen v Bronfman Trust (1987 SCC) Gave requirement that Borrowed funds be used for an income earning purpose; money must be borrowed to use directly on the income earning purpose Test…....................................67

The Queen v Attaie (1990) FCA T tried to offset mortgage interest as a loss against interest income on term deposits This was not allowed as money to finance a personal residence is an ineligible use (not for the purpose of earning income) Contrast with Singleton............................................................................................................67

Singleton v Canada (2002) SCC Interest payments deductible if direct link between loan and eligible use.............67

Ludco Enterprises Ltd. Brian Ludmer, David Ludmer and Cindy Ludmer v The Queen (2001) SCC Courts must apply principles of statutory interpretation to define income; absent a sham or window dressing, courts should not be concerned with the sufficiency of income expected or received from an investment. Note: new amendments mean Ts cannot defer interest in this way anymore....................................................................................................68

E. Policy Reasons for Denying Deductions.......................................................................................................................69

***Expenses of Illegal Businesses...................................................................................................................................69

Eldridge Earnings from an illegal business are subject to tax, and the expenses (provable) of an illegal business are deductible..............................................................................................................................................................69

Buckman v MNR (1991) TCC Illegal income is taxable and expenses incurred in earning illegal income are deductible....................................................................................................................................................................69

Bribery of Certain Officials – s. 67.5 – Bribes are not deductible.................................................................................69

Fines and Penalties – s. 67.6 – Fines & Penalties are not deductible..........................................................................69

IX. Computation and timing................................................................................................................................................69

Amounts Receivable........................................................................................................................................................69

Section 12(1) – Income Inclusions...............................................................................................................................69

Section 12(2) – Interpretation.....................................................................................................................................70

CASE LAW RULES:........................................................................................................................................................70

J. Colford Contracting When an amount becomes receivable, it must be included in income................................70

Benaby Realties An amount is not ‘receivable’ for tax purposes until the actual amount is ascertained...............70

West Kootenay Power and Light (1992) FCA An amount is receivable when all requirements for entitlement to payment have been done (even where customer is not yet legally obliged to pay).....................................................70

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JL Guay Ltee Expenditures may only be deducted from income in the period in which they were made................71

Capital vs. Current Expenditures.....................................................................................................................................71

***Basic Test:..................................................................................................................................................................71

British Insulated and Helsby Cables Ltd v. IRC (1926 HL) Onetime payment to create an asset = a capital outlay.71

***Repair of Tangible Assets..........................................................................................................................................71

Canada Steamship Lines Ltd v MNR (1966) Exch Boiler of the ship is a capital asset in and of itself; substantial repairs to existing capital equipment are not capital assets.......................................................................................72

The Queen v Shabro Investments Ltd (1979) FCA New tech employed to improve a building is a capital outlay; not deductible under s. 18(1)(b)..................................................................................................................................72

Gold Bar Developments Ltd v The Queen (1987) FCTD New test outlined for repairs vs. capital outlays: Is the expense for a new addition/quality improvement, or is it simply fixing something that has worn out? No definitive test!.............................................................................................................................................................................72

Non-Capital Losses..........................................................................................................................................................73

Section 111(1)(a) – Carry Forward and Back of Non-Capital Losses............................................................................73

X. Capital gains....................................................................................................................................................................73

A. Introduction................................................................................................................................................................73

Taxation of Capital Gains and Losses: 3(b) and subdivision E......................................................................................73

Distinguish Income from Property: 9(3)......................................................................................................................73

Calculation of Capital Gains and Capital Losses:..........................................................................................................73

Taxable Capital Gains / Allowable Capital Losses........................................................................................................74

Carry Forward and Back of Capital Losses:..................................................................................................................74

Policy Evaluation of Preferential Taxation of Capital Gains.........................................................................................74

B. Definitions...................................................................................................................................................................74

Property and Capital Property.....................................................................................................................................75

Cost, Capital Cost, and ACB.........................................................................................................................................75

The Queen v Compagnie Immobiliere BCN Ltee (1979 SCC) “Definitions of: ‘dispositions of property’ and ‘proceeds of disposition’ are not exhaustive; these expressions must bear both their normal meaning and their statutory meaning; it would be wrong to restrict the former because of the latter....................................................76

C. Deemed Dispositions and Deemed Proceeds..............................................................................................................76

1. Ceasing to be or becoming a resident of Canada....................................................................................................76

2. Gifts and Sales below FMV to Non-Arm’s Length Persons.......................................................................................76

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3. On Death.................................................................................................................................................................77

4. Lottery Winnings & Losses Revisited.......................................................................................................................78

D. Rollovers: transfer of capital property to spouse/CLP inter vivos and on death.........................................................78

Spousal Rollover on Death..........................................................................................................................................79

E. Personal Use Property (PUP) and Listed Personal Property (LPP)...............................................................................79

Calculation of LPP Net Capital Losses and Gains.........................................................................................................80

Principle Residence Exemption.......................................................................................................................................81

Policy for Principle Residence Exemption....................................................................................................................81

Section 54 – “Principle Residence”..............................................................................................................................81

Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE)......................................................................82

Cassidy v the Queen (2010) FCA It’s no longer the moment just before the disposition; look at the minimum lot size year by year, to determine if all of the property was necessary for the use and enjoyment of the residence (Consider individually whether the gain was sub-dividable in a given year)................................................................83

Yates PRE applies to lot size at time of disposition.................................................................................................83

Augart (1980s after Yates) Look at the moment before the property is sold; if it’s sub-dividable then, the excess land is not exempt, if it’s not sub-dividable then, you get the exemption on the extra land.......................................83

Stewart Subjective desire for and use of a bigger property doesn’t lead to allowance for a larger principle residence exemption....................................................................................................................................................83

I. Studying Tax Law: basic concepts and terminology

Overview

Definition of a Tax, and Direct vs. Indirect Tax testTax (definition): a tax is a compulsory and un-requited payment to government for the purpose of raising revenue.

- A tax is a non-voluntary payment, not a donation, but an enforced contribution exactly pursuant to legislative authority (e.g. no common law of taxation).

- A tax must be within the legislative body’s authority to assess.- The purpose is to raise revenue- A tax must be paid with money

Definition of a Tax- "The essential characteristics of a tax are that it is not a voluntary payment or donation but an enforced

contribution exacted pursuant to legislative authority in the exercise of the taxing power, the contribution being of a proportional character and payable in money imposed, levied and collected for the purpose of raising revenue to be used for public or government purposes and not as payment for some special privilege or service rendered." (MNR v Shawinigan Water and Power Co. 1953 Exchequer Court.)

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Is it Direct or Indirect?- Test set out by Rand J. in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan, (1952) SCC:

“Is the tax related or relatable, directly or indirectly, to a unit of the commodity or its price, imposed when the commodity is in the course of being manufactured or marketed?”

- John Stuart Mill: A direct tax is one which is demanded from the very persons who it is intended or desired should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he

shall indemnify himself at the expense of another.

Direct Taxes (example): income taxesIndirect Taxes (examples): excise taxes and import taxes.

Taxes vs. Other Payments to Government

Payments to government that are not taxes:1. Fines and penalties (traffic tickets, etc.) can be distinguished from taxes as they are meant to deter behaviour

(primary purpose) instead of the primary purpose of raising revenue pursuant to the wealth of the offender (tiered income tax system).

2. Royalties (paid to government, e.g. natural resource exploitation royalties) are also in a separate category from taxes. They are also payments to government, but are meant to represent the government’s share of the project’s value.

3. Fees or prices: amounts that are paid to receive services from government (e.g. bus fare, fishing licenses, etc.) can also be distinguished from taxes as they are meant to recognize the value of goods received, and not just to increase govt. revenue.

- Lottery tickets example: this is almost a cross between a price (paid for a service – the chance to win), and a tax (as 40% of lottery revenue goes into government coffers, and is then re-distributed to pay for government services). Since stats show that lower-income people spend much more of their disposable income on lottery tickets, it is effectively a regressive tax.

- When looking at a payment to government, it is often difficult to distinguish whether it is a tax, or whether it is a fine/penalty, a royalty, or a price.

- Deterrent (SIN) taxes: those that are imposed on purchases of goods that we wish people would consume less of (liquor, cigarettes, gas, etc.). These have a primary effect of raising revenue, and a secondary effect of deterring use.

- Incentives: these are benefits meant to encourage particular investments, e.g. tax deductions for RRSP and RESP contributions

The 5 attributes of taxes

- Base: what is being taxed (can be anything), e.g. the Income Tax Act taxes income; consumer taxes tax what is purchased in retail. Haig-Simons definition of income: every accretion to wealth should be included in the tax base (includes

everything that makes you wealthier: inheritances, windfalls, cash gifts, RRSP deductions, etc.). Many things are not taxed, or are taxed at a preferential rate to encourage particular behaviour. The HST is an example of a broad-based tax (has minimal exemptions) that applies to consumption of goods

and services. Policy note: HST and other broad-based taxes encourage savings over consumption, as

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spending on goods/services in this category results in double taxation.

- Property tax is an example of a wealth tax, although this has a limited base as the revenue collected from this tax primarily benefits property-owners. France has a legitimate wealth tax. A wealth tax attacks cumulative savings (has the opposite impact of a consumption tax), so they get you either way.

- We don’t have inheritance taxes in Canada, but we do charge capital gains etc. for the testator’s total estate value, and a 1.4% probate tax for estates that have to be probated.

- Other than income tax, CPP and EI are arguably also a tax, but they do provide reciprocal benefits to employees in the form of unemployment payments and guaranteed pensions. The effect of the employer portion of these payments is to tax the company, which is arguably passed along to the employee via lower wages.

- Personal income tax generates the majority of government revenue (has the largest base). Corporate income tax is second, and HST/PST is third.

- The necessities of life are exempt from HST, and low income Canadians will also get a credit, while higher income Canadians spend more on non-exempt goods/services, and will not receive the quarterly credit. This is meant to compensate for the regressive nature of a consumption tax.

- Tax payer or tax filing unit: this is a tax payer’s given income, but there is debate as to what should be included/exempt (inheritances, windfalls, cash gifts, RRSP deductions, etc.)

- This may be the buyer in a consumption situation, or manufacturers (excise taxes on cigarettes), suppliers, and real property owners.

- Tax rate: the percentage applied to the base to assess the tax payable.- Statutory: (set out in s. 117)- Marginal: the rate paid on the last/highest dollar of income (the highest rate of tax payable).- Average tax rate: the total tax payable divided by taxable income (less than the marginal rate).- Effective tax rate: the total tax payable divided by total accretion of wealth (Haig Simons), which is less than

both the marginal and the average tax rates.

- Tax period: the time period over which the base is measured and the tax is collected

- Collection/administration system: a group that collects/administers taxation. In Canada this is the CRA.

Tax Rates and Operation of Exemptions, Deductions and Credits- Statutory (set out in s. 117)- Marginal Rate = highest rate that applies to the last dollar of income for a tax year- Average Rate = total tax paid divided by the taxable income- Effective Rate = total tax paid divided by the total income (including non-taxable income Haig-Simons)- Classifications:

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

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

- Tax exemptions: exempted income does not have be reported (there are very few exemptions) E.g. Lottery Winnings; Gifts; Strike Pay; windfalls Pensions paid by survivors of the 2nd World War (there is nowhere to report these) The Governor General’s stipend to serve Income of status Indians (as per the Indian act) when earned on reserve Some foreign income, but this is very limited.

- Deductions: taxable income = total gross income – deductions There must be legislation to allow for the claiming of deductions.

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E.g. RRSP contributions, moving expenses, union dues, and childcare expenses There is a detailed reporting process for deductions, unlike the non-existence of exemptions in the filing

process. Exam note: explain the difference between a deduction/credit and an exemption/credit.

- Tax Credits: tax payable = total taxes – credits Unlike deductions, they do not reduce your income, but instead reduce your tax payable (they come off

at the bottom). E.g. the basic personal amount (around $10k) that each tax payer can claim. This provides the exact

same credit to each taxpayer, so it means more to someone that is higher income. Exam note: a deduction is worth more to someone with a higher marginal/effective rate (as it reduces

taxable income), while a credit is worth the same to high/low income earners, regardless of rate (because it is deducted from tax payable, not taxable income).

Types of Taxation

Progressive taxation: tax rates increase with income or other ability to pay.- Our income tax system is founded on the idea of progressive taxation. While its primary goal is to raise revenue,

redistribution of income via progressive taxation is an important secondary goal, as high-income individuals will pay more tax in total and more tax as a percentage of their wealth.

Regressive taxation: imposes a higher rate of tax on lower-income individuals or those with lesser ability to pay.- Consumption taxes (GST, PST, HST, etc.) are examples of these flat rate taxes, which have a greater impact on

lower income individuals.

Proportional taxes: take a portion of income (e.g. the 10% provincial income tax in Alberta) that is proportional regardless of income level. This is non-progressive, but in a sense, regressive on the ground.

Tax incidence: refers to the actual payers of the tax, or the individuals that bear the tax burden. An example of this is the employer portion of EI/CPP, as in most cases this cost is passed along to employees in the form of lower wages. The employees bear the burden or incidence of the employer portion of these payroll deductions.

Terminology

GAAP: procedures for financial accounting in the Chartered Accountants of Canada Handbook.

Income Tax Act: overrides any conflicting provisions in GAAP according to the SCC Example: GAAP allows for 100% of expenses to be deducted to recognize income/profit, while the Income

Tax Act only allows for 50% of expenses to be claimed as income deductions.

Cash method of accounting: a method of recognizing income as being received when payment is actually made for goods or services rendered or when funds for expenses are actually dispersed (does not include A/P and A/R).

Note: this method is only available to farmers/fishermen that are unincorporated.

Accrual method of accounting: a method of recognizing income as being received when goods or services are rendered, whether or not payment has actually yet been received or for expenses that have been accrued, whether or not payment has been made (includes A/P and A/R).

Tax expenditures: reductions in tax that you may qualify for if you perform in a way that is favourable to the government.

Example: The CRA gives a tax credit for users of public transit, and the RRSP deductions to encourage savings for retirement.

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Tax Policy Criteria

Equity: can be divided into vertical and horizontal equity.1. Vertical equity is premised on the policy that those who have greater wealth should pay more taxes (the

foundation of progressive taxation).2. Horizontal equity examines taxpayers who have the same level of income, and says that they should essentially

pay the same taxes (e.g. taxation of employee fringe benefits such as company cars). Horizontal equity is premised on the policy that those who receive additional benefits such as company cars should be taxed on the value of this good/service, as other employees must pay for their own cars and cannot claim a tax deduction for these expenses.

- In considering equity in its entirety, you must consider what amounts should be included in income and which should be excluded, and therefore, who has the greatest ability to pay?

- Q: Is the person receiving something that is of monetary benefit to them, or are they simply making a personal consumption decision?

Neutrality: the idea that taxes should not unduly affect your personal and economic decisions. We should not be too influenced by tax rules in how we live our lives on carry on business, but in reality, this is pervasive.

Simplicity/Efficiency, which can be broken down as follows:- A tax system should be comprehensible, with readers able to see the logic of its provisions, even if they are hard

to read.- Certainty: it should be possible to determine (in advance) the tax consequence of your decisions; the

consequences should not be discretionary.- Compliance/convenience: it should not be too difficult to comply with a tax law. It should be possible for the

average working person to file a non-complicated income tax return. There should also be administrative convenience in order for the simplicity/efficiency of the tax system to be maintained.

- Avoidance/evasion: taxes should be difficult to avoid or evade. If the tax system offers reward or opportunity for avoidance/evasion, the tax system would be patently unfair as the honest people would have to pay more taxes in order to compensate. Tax avoidance = a phrase that refers to tax minimization (tax planning), which is perfectly legal. Tax evasion = tax fraud, or presenting untrue information to the tax authorities in order to avoid paying

taxes. This is a criminal offence, both for the taxpayers and for their agents/representatives (accountants, lawyers, etc.).

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

breaks in the form of deductions, exemptions or credits- Evaluation Expenditures

What govt objective is being served by the expenditure? 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?

Global competitiveness (not covered in this course): an add-on the normal tax policy criteria we use to evaluate tax rules. With globalization, we consider whether particular tax rules will hurt or help our attractiveness for global investments (foreign capital).

Exam Note: If answering a policy question on the exam, use one or more of these evaluative criteria.

II. Canada’s tax system- Both the provincial and federal governments in Canada have the ability to tax income.- Only the federal government may impose indirect taxes.

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- The provincial governments may only impose direct taxes.- GST, HST, and income taxes have been held to be direct taxes.- The provinces (except Quebec) have entered into nearly identical tax collection agreements with the federal

government (CRA) to have the feds collect/administer their taxes. All of the provinces (except Quebec) are therefore referred to as “agreeing provinces”.

- Quebec is considered a “non-agreeing province” as it has not entered into a tax collection agreement, instead, choosing to maintain its independence in tax collection/administration.

- Provincial tax credits, etc. typically match the federal credits in order to create a harmonized system.

Constitution Act provisions on taxation:

- (Only 91(3), 92(2) and (9), and 36(2) are assigned).

- 91(3): Federal Parliament has exclusive legislative authority for “all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces;” including “The raising of Money by any Mode or System of Taxation”.

- 92: Provincial legislatures have exclusive legislative authority for

(2) “Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes”; The provinces often have their taxes struck down for being indirect taxes.

(9) “Shop, Saloon, Tavern, Auctioneer, and other Licences in order to the raising of a Revenue for Provincial, Local, or Municipal Purposes.

Even if license schemes (e.g. liquor licenses) raise funds in excess of costs for their regulation, the scheme will not necessarily be unconstitutional.

Development fees (to municipalities) are another example of additional licensing fees designed to offset additional costs, such as sewer hookups, hydro connection, etc. Although these costs are then passed along to the housing unit purchasers, they are not invalid for being an indirect tax as their assessment is tied to the government’s costs to provide services.

Non-exclusive provincial taxation powers:- 92A(4) In each province, the legislature may make laws in relation to the raising of money by any mode or

system of taxation in respect of (a) non-renewable natural resources and forestry resources in the province and the primary production therefrom, and (b) sites and facilities in the province for the generation of electrical energy and the production therefrom, whether or not such production is exported in whole or in part from the province, but such laws may not authorize or provide for taxation that differentiates between production exported to another part of Canada and production not exported from the province. (added 1982)

Note: indirect taxes (export/excise) are limited to non-domestic export of provincial natural resources. This is the only area in which the provinces may impose indirect taxation.

- 36 (1) Without altering the legislative authority of Parliament or of the provincial legislatures, or the rights of any of them with respect to the exercise of their legislative authority, Parliament and the legislatures, together with the government of Canada and the provincial governments, are committed to

a. promoting equal opportunities for the well-being of Canadians;b. furthering economic development to reduce disparity in opportunities; andc. providing essential public services of reasonable quality to all Canadians.

Commitment respecting public services- 36(2) Parliament and the government of Canada are committed to the principle of making equalization

payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

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Represents the entrenchment of the idea that there should be a similar base level of public services across the country.

If a particular province’s revenue-raising potential is below average, the federal government will make equalization payments to ensure the base level is maintained.

- 53. Bills for appropriating any Part of the Public Revenue, or for imposing any Tax or Impost, shall originate in the House of Commons.

Entrenches the idea of no taxation without representation (affirmed by the Supreme Court) in order to ensure the democratic process is followed.

- 90. The following Provisions of this Act respecting the Parliament of Canada, namely, -- the Provisions relating to the Appropriation and Tax Bills, (…) shall extend and apply to the Legislatures of the several Provinces as if those Provisions were here re-enacted and made applicable in Terms to the respective Provinces and the Legislatures thereof, (with the necessary substitutions).

Signifies that you cannot introduce a tax that has not been passed in the provincial legislature; in other words, that the power to introduce taxation cannot be delegated.

- 121. All Articles of the Growth, Produce or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.

Speaks to free trade between provinces and prevents the provinces from creating their own inter-provincial tariff system.

- 125. No Lands or Property belonging to Canada or any Province shall be liable to Taxation. The federal government cannot tax provincial lands and the provinces cannot tax federal lands (it would

become circular if this were allowed).

Federal and Provincial Tax Collection Agreements - Both the provinces and the federal government impose income taxes on both individuals (including trusts which

are treated like individuals) and corporations.- All provinces except Quebec have entered into separate bilateral tax collection agreements (“TCAs”) with the

federal government covering taxation of individuals. The first TCAs were signed in 1962, replacing the “tax rental agreements” of 1947. They were renegotiated in 1997.

- All provinces except Alberta and Quebec have entered into TCAs with the federal government with respect to taxation of corporations.

- All provinces, including Quebec, have agreed that they will determine residence of individuals according to the individual’s residence on December 31 of the taxation year.

- The Federal-Provincial Fiscal Arrangements Act R.S.C. 1985, c. F-8 is the federal statute that enables the federal government to enter into tax collection agreements with the provinces, territories and aboriginal governments.

- The federal government is the sole collector, administrator, enforcer (Canada Revenue Agency or “CRA”) of income tax law on behalf of the “Agreeing Provinces”. Quebec collects its personal and corporate income tax through its own separate bureaucracy.

- The federal Department of Finance develops federal income tax policy and defines income, exemptions and deductions for the calculation of income of corporations and individuals under the federal Income Tax Act and Regulations. Federal credits (personal, spousal, tuition, etc.) are usually matched by provincial credits provided under the relevant provincial income tax act/corporation tax act. The objective, and the result, is a highly harmonized national income tax system. In practice, Quebec and Alberta (in the case of corporate tax) closely follow the federal tax rules.

- Provinces set their own brackets and rates, basic personal exemption level, provide for provincial tax credits (most of which are identical to the federal credits, but apply at the lowest provincial tax rate to provincial tax otherwise payable), and apply an annual inflation indexation rate which may differ from the federal one.

The Tax Adjudication System- Step 1: You appeal a tax assessment.

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After you send in your tax return, CRA runs it through a computer and checks/corrects the arithmetic, and sends you a notice of assessment.

You may be entitled to a refund or you may owe some tax. Then the CRA may go back and look more closely at your return and your receipts, conduct an audit, and

issue you a new assessment, or reassessment.- Step 2: The next step is to object to the assessment. You do that by sending in a notice of objection within 90

days of the notice of assessment. The CRA appeals division, after hearing your arguments, either confirms the assessment, or varies the

assessment and sends you a new assessment for that year. If the CRA confirms assessment, or the new assessment is not what you were asking for in full, you can

appeal to the Tax Court of Canada. From TCC, there is an appeal to the Federal Court of Appeal; and then to the Supreme Court of Canada

(with leave)Tax Court of Canada Procedures:

The TCC has two types of procedure, informal and general.General: This is quite similar to normal civil procedure as followed under the BC Supreme Court Rules. The normal pre-trial discovery of documents and parties applies, and formal rules of evidence are followed. Costs are awarded against the unsuccessful party.Informal: Taxpayer may elect informal procedure where certain conditions are met, the most important of which is that tax and penalties in issue are not more than $12,000.

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

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

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

- Informal Procedure decisions are not regarded as precedent – they may be taken into consideration by TCC, but are not binding.

Interpretation of Tax Statutes:

Placer Dome Canada Ltd. v Ontario (Minister of Finance) (2006) SCC (see case brief for detailed provisions)- Words of the Act are to be read in their entire context and in their grammatical and ordinary sense, harmoniously

with the scheme of the Act, the object of the Act and the intention of Parliament- Where the words are plain in their meaning, that is the favoured interpretation- Only where there is ambiguity, greater recourse to the context and purpose is necessary- There is a rarely relied upon residual presumption in favour of the T, only where an issue cannot be resolved- T has the burden of establishing that the factual findings of the assessment are wrong (Siftar)

III. The source concept of income: section 3 of the act- Note: Income is not defined in the Act; rather we have a formula for computing taxable income.- You must distinguish between income from a source, and the source itself.

Section 3 – Income for Taxation Year Non-Capital IncomeT’s income for a taxation year is the T’s income for the year determined by the following rules:

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

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

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

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

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

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

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

judgment of a competent tribunal

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

Section 6(3) – Payments by Employer to Employee- S. 6(3) – An amount received by one person

a. while the payee was an officer or in the employment of the payer, orb. on account, in lieu of payment or in satisfaction of an obligation, shall be deemed income from an office or

employment under section 5Shall be deemed to be income from an office or employment under section 5, unless it cannot reasonably be considered to be

c. Consideration for accepting the job (signing bonuses are income)d. Remuneration for services rendered (compensation for additional services rendered is income), ore. Consideration in respect of a covenant governing what employee is or is not to do before/after termination

(compensations for confidentiality agreements/non-compete agreements for when employment ends is income)

- Catches some payments that are given before employment starts and after it ends.- Consider the application to Curran and Schwartz- May include damages to settle a dispute, etc.- The payment to Curran was not caught by this provision as he was never an employee of Brown, and therefore any

payment from Brown was not covered by Section 6(3).- The payment to Schwartz was also not caught by this provision as he was never an employee of Dynacare.

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

Bellingham v The Queen (1996) FCA Windfalls (“additional interest”) are non-taxable (includes lottery winnings, other bets, money found on the street, etc. as they are not recognized as “sources of income”)Facts: Mrs. Bellingham bought land; it was later expropriated by the town. She rejected the town’s offer on the

value of the land, instead going to the Land Compensation Board in Alberta, who assessed the value of the land at 6 times the original offer. Mrs. Bellingham eventually settled after further litigation. Her settlement was as follows:- $377,000 for the original value of the land at the time of expropriation- $181,000 for interest based on the late payment- $114,000 for “additional interest”The $377,000 was considered “income from a source” and as such was taxable as a taxable gain, but the

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difference in her purchase price would be “income from business”.The $181,000 would be income from property, as Mrs. Bellingham essentially had a debt claim against the town.

Issue: How should the $114,000 in additional interest be taxed?Rule: Punitive damages, or in this case, “additional interest” is considered to be a windfall and is therefore non-

taxable.Application: Robertson, J determined that the $144k was an award to censure the conduct of the town (similar to

punitive damages) and should thus be considered as a windfall.The $377k minus the purchase price would be income from business.The $181k would be income from business.Robertson cited Cartwright v Carswell and Cranswick, and identified the criteria required for an amount to be considered a windfall.The court also considered Mohawk Oil which specified that “money paid in exchange for even a questionable right may constitute income in the hands of the taxpayer.”

Claimant must show that they have a cause of action, not necessarily whether it would be successful (page 87)

Conclusion: Mrs. Bellingham did not have to pay tax on the “additional income”. Review (and brief) cases/theories included in the analysis of Bellingham

Cartwright & Sons Ltd. V MNR Punitive damage awards are not taxable as they have “no income feature”Facts: Cartwright had published a law list of all of the lawyers in Canada for several years, using Carswell for the

actual printing and publication. After several years, Carswell decided to simply steal Cartwright’s data and publish their own competing list. Cartwright was compensated with lost profits, royalties, and an additional $7k payment in additional compensation.

Issue: Was the $7k payment taxable?Rule: Income must be “from a source” in order to be taxableApplication: The tax appeal board determined that the amount had “no income feature”Conclusion: No tax on the $7k.

The Queen v Cranswick (1982) FCA Gratuitous payments are not taxable. List of windfall gain factorsFacts: Mr. Cranswick owns shares in a Canadian company which is owned by a US parent company. One day, he

receives a cheque from the US parent company, to compensate a loss he would have incurred, since the US parent company forced its Canadian subsidiary to sell shares below market value.

Issue: Should Mr. Cranwick be taxed on the cheque from the company in which he has no shares?Rule: Windfalls are not taxable.Application: The US company paid Mr. Cranswick and the other shareholders a premium to prevent a legal backlash

for some bad deals they had made on behalf of the Canadian company in which they held shares. The payments made to the Canadian shareholders were considered windfalls, with the following characteristics cited for windfalls:- The taxpayer had no enforceable claim to the payment- There was no organized effort by T to obtain the payment- The payment was not sought after or solicited- It was not expected- There is no foreseeable element of recurrence- The payment was not a customary source of income- It was consideration or recognition for property exchanged or services rendered.

Conclusion: Mr. Cranswick did not have to pay tax as this was not income from a source, but rather a form of gratuitous payment.

Curran v Minister of National Revenue (1959) SCC Un-enumerated sources of income may still be taxable as income from a source. Payment in consideration for future services and lost benefits = incomeFacts: Curran was a geologist who was making tons of money for oil companies. Mr. Brown offered Curran a

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$250k one-time payment to leave his position with Imperial Oil and executed a contract for him to work for a competitor, in consideration for Curran’s loss of pension rights, chances for advancement, and other opportunities he would forego upon leaving Imperial. Curran then signed another contract (an employment contract) with the new employer

Issue: Was the $250k payment taxable?Rule:Application: Curran argued that the $250k was a non-taxable payment to compensate for lost opportunities with his

former employer.The Majority (Martland) ruled that the entire payment was compensation for future services that Curran would provide to his new employer (as an incentive for him to switch), and thus the entire amount should be taxable as income.The dissent argued that the $250k could be divided into income that Curran would have earned (taxable) and compensation for lost opportunities (non-taxable).

Conclusion: Martland ruled that the $250k was income from a source (under Section 3), but did not define what the source was (note: this is therefore a weak ruling).

Canada v Fries (1989) FCA Strike pay to union members is not taxable as it is not “income from a source”Facts: Striking unions in SK: one group said to another that if they went on strike, they would receive strike pay

in the same amount as their regular pay. Note: union members are able to deduct their dues from their income at the time they are paid, and strike pay is then paid from the cumulative dues.

Issue: Is strike pay taxable; what if it is more than the usual nominal amount?Rule: The residual presumption in favour of the taxpayer was applied in this ruling.Application: In effect, the employees are never taxed from the income which they eventually receive as strike pay;

they are not taxed at the time of contribution, nor are they taxed at the time they receive their strike pay compensation.

Note: this is very rare under Canadian Income Tax lawConclusion:

The Surrogatum Principle - Note: this is judge-made (not in the Income Tax Act): cite London- Two-part Test:

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

- Initially, this only applied to lost profits in business, but this has expanded to other manners.

London & Thames (1990) Eng. CA Surrogatum principle: ask what the compensation is intended for, and if it is for an amount that would have been taxable, then the compensation is taxable.Facts: There was a collision at the oil wharves, between 2 ships and the wharves. The defendant had to pay an

amount to repair the wharves (compensation for damage to capital), and an amount to compensate the plaintiff for lost profits while the wharves are inoperable.

Issue: Would the lost profits, if they had not been lost but earned, be taxable?Rule: Surrogatum principle: ask what the compensation is intended for, and if it is for an amount that would

have been taxable, then the compensation is taxable.Application: The court in this case created the surrogatum principle in stating that the compensation for lost income

while the wharves were repaired was would have been taxable if it were received in the course of normal operations, and therefore the amount in lieu is taxable.

Conclusion:

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Schwartz v the Queen SCC (1996) SCC The surrogatum principle cannot be applied to a lump sum payment that cannot be apportioned into taxable and non-taxable amounts; if part is taxable but cannot be defined, the entire amount is non-taxable. An appellate court cannot overturn a finding of fact from a trial court, as they do not have the opportunity to hear witnesses, evidence, etc. General provisions cannot overrule specific provisions: more correctly done in Savage. Since Curran, there has never been another un-enumerated source of income in Canada (not a good argument that a payment is an un-enumerated source). Note: Retiring allowances are included in income (are taxable) under Section 56(a), but are not taxed until they are actually received.Facts: The taxpayer was a partner at a law firm in Toronto, who was approach by a company called Dynacare to

be their in-house counsel. He signed a contract that he would be employed with Dynacare, and quit his partnership, but Dynacare then backed out and he never started working there. He sought compensation and was awarded $360k for anticipatory breach of contract and $40k for legal fees.

Issue: Was the $360k a taxable amount?Should the Federal Court of Appeal have overturned the finding of fact of the trial judge?

Rule: Section 3(a) is drawn very broadly, and can include almost any income.Application: The taxpayer was essentially awarded one year’s salary ($342k) and $18k for embarrassment and

inconvenience.In the tax court, Schwartz managed to convince the judge that the $360k was a lump-sum payment, mainly for pain and suffering and therefore should not be taxable; he decided that there was no way to apportion the amount to make any of it taxable he declared this to be a fact.At the SCC, the Minister argued that the $360k was an amount for services that would have been provided were the contract not breached, as was thus income from an un-enumerated source and therefore taxable under Section 3.The Minister also argued under Section 56 (other sources of income), that the $360k was income in lieu of a retiring allowance (Section 56(a): an amount received on or after the end of employment as recognition for long-standing services provided) that Schwartz might have received from his former employer.Obiter dicta: Section 3(a) is drawn very broadly, and can include almost any income – the $360k is caught by this provision, but the SCC cannot overturn the TJ’s finding of fact that the amount could not be apportioned.Note: there are still some sources of income that are un-enumerated.The court considered the definition of the sources of income defined in the act, found that Schwartz was never an employee of Dynacare, and could thus not receive from them a retiring allowance which would be taxable under Section 56(a). They then looped back to Section 3, and ruled that since the specific provision speaking to retiring allowances (56) did not catch the $360k as income, and thus the general provision (3(a)) could not be used to include the amount as income from a source the general provision could not overrule an exemption created by a specific provision.Note: Professor O’Brien thinks that the mistake in this case was the joint-consideration of Sections 3(a) and 56, which would have led to a different result (the $360k would have been taxable), but is not decided since the TJ’s finding of fact meant that the amount could not be apportioned.

Conclusion: The SCC noted that the FCA could not overturn the TJ’s finding of fact that the $360k could not be apportioned, and followed this fact rendering the entire amount non-taxable.

Atkins (1976) FCA Settlements for wrongful dismissal are not taxable for the same reason that retiring allowances are not taxable (no quid pro quo: there has been no exchange or services/the money was not earned similar to a windfall). Exam Note: Section 56(a): retiring allowances include wrongful dismissal payments, severance payments, and gratuitous payments provided at the end of employment, and all are taxable.

The Queen v Savage (1983) SCC A general taxation provision cannot override a specific provision.Facts: Mrs. Savage’s employer had a program to pay $100 to employees that take courses outside of their

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employment which are not required, but undertaken by their own initiative. Mrs. Savage took 3 courses, was given $300, and the Minister sought to tax this amount.The Minister argued that the $300 was income from employment, since it was related to her job and given to her by her employer (a regular source of income).Mrs. Savage argued that the $300 was essentially a prize that was covered under the provision 56.1m: that $500 in prizes could be claimed tax free per annum.

Issue: Was the $300 taxable as income, or was it a prize?Rule: Taxing the prize under s. 3, would render the s. 56(1)(n) inoperable and to no effect; taxing under a

general provision when there is an exemption in a specific provision would be an error of law (general cannot override specific).

Application: The court ruled that the $300 was covered under the prize provision (56.1m) and that the Minister could not use the general provision to write the specific provision out of the Act (render it inoperable) and thus tax the $300. Note: the prize provision was later amended so that future similar amounts would be taxed.

- Changed the law significantly in Canada at the SCC level- Overruled the idea that: “to have a taxable benefit to the employee, there doesn’t have to be a

direct quid pro quo flowing from the employer to the employee”.Conclusion: The taxpayer was not taxed on her prize.

Tsiaprailis (2005) SCC Cemented the surrogatum principle as binding Canadian law (first apparent application beyond business income). A settlement amount from a lawsuit that serves to replace lump-sum payments is taxable if the regular payments would have been taxable. Section 6(1)(f) provides an incentive to employers to create group insurance plans as their contributions are tax-deductible, and employees are only taxed on payments they receive.Facts: Mrs. Tsiaprailis was injured in a car crash, and went on long-term disability expecting never to work

again. The insurer decided later that she was not disabled, so she sued for the value of her benefits. She was awarded an amount equal to the lifetime value of her long-term disability benefits, which when paid regularly, were taxable.

Issue: Was the settlement taxable?Rule: A settlement amount from a lawsuit that serves to replace lump-sum payments is taxable if the regular

payments would have been taxable.Application: The CRA argued that the portion of the settlement in lieu of her lost benefits for the 3 years prior to trial

was taxable as though it had been paid regularly at the monthly rate covered under Section 6(1)(f): the disability payments were a periodic amount disbursed by an employer-fed disability insurance plan.Mrs. Tsiaprailis argued that this was not taxable as the surrogatum principle applied, since she had not received the lost payments amount as regular payments.The Dissent recognized that although Section 6(1)(f) says that the periodic payments would have been taxable, the retributive lump-sum payment was not (the surrogatum principle applied).The Majority ruled that the very purpose of Section 6(1)(f) was to provide for taxation of a lump-sum to replace payments that would have been received over time.The remaining portion was assessed to be the present value of the future payments she would have received under the plan until she retired.

Conclusion: Mrs. Tsiaprailis had to pay tax on the portion of the payment which represented the 3 years of lost payments, which made her pay a higher rate of tax as she received a lump-sum.Note: Mrs. Tsiaprailis’ settlement was distinguishable from Mr. Schwartz’ settlement, as hers was capable of being apportioned in very clear and specific amounts and was thus taxable, while his was unclear and therefore non-taxable.

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The Queen v Antonija Siftar (2003) FCA Apportionment principles (see case brief for details) Authorities do not have to recognize the agreements made between parties regarding apportionment

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

declarations are reasonable or noto Where CRA not satisfied, they can re-assess the T – then T has the burden of disproving their findings

(shifting burden of proof)o Policy – T is in the best position to provide evidence as they have the greatest knowledge of their

financesFacts: The taxpayer received a lump-sum payment for her rights under a disability compensation plan.Issue: How is Tsiaprailis to be applied in a case where there is no allocation or apportionment in a lump-sum

settlement?Rule: There is no presumption that there is an "arrears" portion to every claim settlement.

Whether a portion of settlement amount is taxable under paragraph 6(1)(f) is a question of fact; the failure to establish an allocation cannot be determinative of the issue.

Application: “Given that the basis of our tax system is self-assessment, it is for the taxpayer to declare the portion of a settlement which is to be included in his or her income. Given that one is dealing with the calculation of the value to be attributed to the right to receive a certain income stream over a period of time, and that these calculations proceed along predictable lines, there is a certain ability to determine whether declarations are reasonable or not. If the Agency is not satisfied that the taxpayer's declaration reflects the reality of the transaction, then it can use the tools at its disposal under the Act to reassess the taxpayer. At that point, the taxpayer, who has the greater knowledge of his or her own affairs, bears the burden of establishing the facts in support of his or her position.”

This is a shifting burden of proof: the taxpayer has the burden to prove that an amount is not taxable.

Conclusion: In this case, the learned Tax Court judge allowed the appeal on the basis that, as a matter of law, settlements of disability insurance claims were not payable on a periodic basis and were therefore not taxable pursuant to paragraph 6(1)(f) of the Act.As a result of this Court's decision in Tsiaprailis, some portion of the settlement in this case may be taxable under paragraph 6(1)(f) of the Act.

The Minister must reassess the taxpayer in accordance with the decision in Tsiaprailis, as well as these reasons.

Johnson (2012) – ON CA A Ponzi scheme is not a source, so income from one is not taxable & contributions are not deductibleFacts: Plaintiff benefited from a Ponzi scheme, and the CRA sought to tax her gainIssue: Is income from a Ponzi scheme taxable as income from a source?Rule: A Ponzi scheme is not a source, and income is not taxable & contributions are not deductible.Conclusion: Mrs. Johnson was allowed to keep her gains from the Ponzi scheme as a tax-free gain.

Interpretation bulletin 365R2 (page 99) Amounts awarded for loss of life, etc. are non-taxable as you can`t bargain away a portion of your life (human capital) or that they cannot be considered to be market transactions which would lead to tax payable.An amount for loss of future earnings is also non-taxable, since it is for a loss of earning capacity (human capital).Interpretation Bulletins (General Info)

- These are essentially just the CRA’s position on a particular tax issue.- Not legally binding for taxpayers or the CRA They may be interpreted more strictly or more favourably,

depending on the particular circumstances

IV. Receipt and enjoyment of an amount as income or “nexus”- The person being taxed on an income must have a sufficient “nexus” (link) to the amount.

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- Canada also taxes non-residents on income from domestic sources (employment, business, and other income).- Note: residence for tax purposes differs from that for citizenship

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

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

Will an amount be taxed? Ask the following questions:1. Is the income from a recognized source?2. Is the amount contributing to the taxpayer’s income?

Net Worth Assessments

Assessment not dependent on return or informationSection 152(7) The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

Marginal note: Assessment deemed valid and bindingSection 152(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.

Peter D Field v The Queen (2001) TCC The nexus required for RRSP withdrawals is whether T was the actual recipient of the funds, not whether they had a legal claim to them.Facts: Mr. Field represented himself, and argued that the approximately $11k that his soon-to-be ex-wife

fraudulently withdrew from his personal RRSP should not be considered as his income. The Fields settled this issue in their family law proceedings, and thus, Mr. Field neglected to bring a fraud case against Mrs. Field.

Issue: Should Mr. Field be held liable for tax on the fraudulent RRSP deductions?Rule: The test is whether or not the taxpayer received the amount in question, not whether they had a legal

claim to the money.Application: Mr. Field argued that he didn’t receive the amount, and therefore didn’t have a sufficient “nexus” to the

money.Conclusion: Mr. Field was not required to pay tax on the RRSP withdrawal.

Critique: this could be the wrong result, as Mr. Field received a tax deduction when he put the money into the RRSP, but didn’t have to pay a corresponding tax.

Buckman v MNR (1991) TCC Revenue from criminal activity can be income from a source, if the realities of the situation (based on method of earning and T’s intention) support this; consider factors other than just strict ownershipFacts: Buckman was a lawyer who defrauded clients of their money, created false statements to mislead them,

and misrepresented the payments he made back in their accounts.Issue: Should Buckman be taxed on the embezzled funds?Rule: The court considers the intention of the taxpayer, in determiningApplication: Mr. Buckman argued that since the money was not legally obtained, it was not income, and the state

should not profit via taxation from ill-gotten gains. The court rejected this (applying Minister of Finance v Smith, and said that illegally obtained

income is still taxable).The crown argued that it was either income from an un-enumerated source, or was income from an illegal business.

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Contrary to Gilbert, the appellant in this case demonstrated a lack of intention to repay the embezzled funds by producing false documents to his clients and by misrepresenting payments as interest, which acted to further his deception.The court also distinguished Poynton, in saying that it is not limited in application to theft/embezzlement in employment relationships, but as in Curlett, applies to other business situations.“There is no difference whether the thief acted as a solicitor, agent or employee. The fact that the Funds are to be treated as income flows from the realities of the situation.”

Conclusion: The Funds received from Mr. Buckman’s income aside from his law practice/mortgage brokerage were income from a business and therefore taxable.

This was contrary to GAAP, as the courts are not bound by these regulations.

Minister of Finance v Smith – Judicial Committee of the Privy Council Income from illegal business is still taxable as income from a sourceIssue: How are the incomes of unlawful businesses to be taxed?Rule: Nothing in the Act demonstrates an intention to curtail the statutory definition of income…income from

illegal business is still taxable as income.

James v United States Embezzled funds are included in income and are taxable.

Gilbert v Commissioner of Internal Revenue (1977) 2nd Circuit Distinguished from Buckman as T had a true intention to repay in that case the embezzled funds (they were a loan instead of income)Facts: The appellant in this case embezzled funds from a business, but produced records that showed his full

intention to repay the funds.Issue: Were the embezzled funds income and therefore taxable?Rule: Embezzled funds taken with a demonstrated intention to repay are a loan, not income.

The Queen v Poynton – ON CA Leading authority on fraudulent funds being included as income Absolute control of illegally-obtained funds not requiredFacts: R fraudulently obtained $21k from the company in which he was secretary/treasurer (stole from his

employer).Issue: Were the embezzled funds taxable?Rule:Application: Although the defendant argued that the $21k was not in his absolute control, without restriction, the

court determined that this was not a requirement for money to be included as income.The Court of Appeal held that the money was taxable in his hands as a benefit to an officer or employee under subsection 5(1) of the Act.

Conclusion: R had to include the $21k in his income and pay tax

Curlett v MNR (1961) EX CR 427 Strict legal ownership is not the exclusive test of taxability; a Court must also consider the circumstances surrounding the receipt of the money and the manner in which it is held.Facts: Curlett bought mortgages at a discount and then resold them at face value to a private company in which

he had absolute control/ownership. He kept the profit, but argued that he had intended to repay it, even though several years had passed and he made no effort to do so.

Issue: Was the profit obtained income?Rule: Strict legal ownership is not the exclusive test of taxability; a Court must also consider the circumstances

surrounding the receipt of the money and the manner in which it is held.

V. Residence as the primary basis of Canadian tax liability- Residents of Canada are taxed on their worldwide income

S. 2(1) – Income tax shall be paid on the taxable income for each year of every person resident in Canada at any time in the year

S. 3(a) – Income is to be calculated from sources inside or outside Canada

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- A province may tax any individual who resided in that province on the last day of the year (December 31) (Interpretation Bulletin IT-221R3)

An individual is considered to be resident in the province where he or she has significant residential ties (IB)

If an individual is resident in more than one province on December 21, he will considered to be a resident only in the province where he has the most significant residential ties (IB)

Approach: 1. Look to s. 2 – Tax payable by a resident of Canada on all income earned inside/outside Can

a. Note Deemed Residency (s. 250(1)) and definition of Ordinary Resident s. 250(3) (Thomson)b. Note s. 249(1)(b) – definition of taxation year for an individual

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

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

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

A. Introduction to Residence

Q: how to enforce taxes against TP’s who don’t live in Canada or who have no sources of income in Canada?

Policy of “benefit theory” of taxation, under which there are 2 types of TP’s in Canada:

Tax payable by persons resident in Canada2(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.

Taxable income2(2) The taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C.

Tax payable by non-resident persons2(3) Where a person who is not taxable under subsection 2(1) for a taxation year

a. was employed in Canada,b. carried on a business in Canada, orc. disposed of a taxable Canadian property,

At any time in the year or a previous year, an income tax shall be paid, as required by this Act, on the person’s taxable income earned in Canada for the year determined in accordance with Division D.

Person deemed resident250(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;c. was, at any time in the year,

i. an ambassador, minister, high commissioner, officer or servant of Canada, orii. an agent-general, officer or servant of a province,

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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;

Ordinarily resident250(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.

Note: residence is a Q of mixed fact and law based on both case law and the facts- Everyone is presumed to have a country of residence at all times.- It is possible to be ordinarily resident in more than one country at a given time.

Thomson v MNR (1946) SCC Ordinary residence is the deciding factor in determining whether a taxpayer must pay CA income tax. Ordinary residence is distinguished from “stays, visits, and sojourns” (e.g. temporary stays). It does not matter where a taxpayer “intends” to be a resident; only what the circumstances reveal.Facts: The tax year at issue was 1940. The taxpayer (Mr. Thomson) was born in NB and he lived there for more

than 50 years. He got into a dispute with his town over his property tax assessment, sold his home, left Canada, went to Bermuda, got a British passport, and then went to live in the states. Several years later, he began spending several months per year in NB, and eventually built a very affluent home there, hired year-round employees, and brought his family with him for his summers there. In 1940, Canada assessed him for income tax based on his worldwide income as they considered him to be a resident of CA. The US didn’t consider Mr. Thomson to be a resident for much of his time there, but decided to tax him as a resident in 1942, which overlapped with the time period in which Canada sought to tax him as a resident. Mr. Thomson claimed to be a resident of Bermuda, as this was a tax-free zone.

Issue: Was Mr. Thomson ordinarily a resident of Canada?Rule: Ordinary residence is distinguished from “stays, visits, and sojourns” (e.g. temporary stays), and is the

determining factor in whether income tax will be assessed in CA.Application: Mr. Justice Rand noted that the definition of residence does not lead to a fixed list of criteria, but that it

refers to the “customary mode of life” of the person concerned.Test for ordinary residence:

- There is a presumption that everyone has at all times a country of residence.- A shelter/home of any kind in a given country does not automatically lead to residence in that

country.- It is possible to be resident in two places, at the same time (e.g. snowbirds).- A minority portion of the year spent in a CA may still lead to “ordinary” residence, if it is a regular

place of residence.Mr. Justice Rand distinguished ordinary residence from long and repeat visits, but decided that Mr. Thomson was a resident of Canada for the tax year 1940, as his ordinary residence was divided between his homes in CA and the USA, and he was therefore subject to income tax on any/all global income for any/all of the years in which he was “ordinarily resident”.The SCC also rejected Mr. Thomson’s claim that he was a resident of Bermuda, as he had only spent a few days there over a period of several years.

Conclusion: Mr. Thomson was liable for income tax for 1940, and presumably for all years in which he was a resident of Canada.

Denis M Lee v MNR (1990) TCC Immigration status does not affect residency status for tax purposes Residence is a question of fact and depends on the specific facts of each case; the more ties a TP has within Canada, the more likely they will be considered a resident (see case brief for factors)Facts: - L held a UK passport, employed full-time by a non-resident corporation to work on an oil rig, with all

work done out of Canada- However, L married a Canadian who bought a house using a mortgage guaranteed by L, for which he swore an affidavit that he was a resident of Canada.

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- L would come into Canada to visit his wife, but each time he would have to leave within the prescribed time period for a “temporary visitor” stay (about 20 days)- L paid no income tax anywhere else, so he was living his life income tax free- L’s pay cheques were deposited into a Canadian bank account Bank accounts in a given country often indicate residence in that country).

Issue: Was L a deemed resident of Canada for tax purposes?Rule: - Residence is a question of fact and depends on the specific facts of each case; the more ties a TP has

within Canada, the more likely they will be considered a residentFactors:

past and present habits of life regularity and length of visits ties within the jurisdiction ties elsewhere permanence or otherwise purposes of stay ownership of a dwelling in Canada or rental on a long term basis residence of spouse, children, and other dependent family members memberships with Canadian organizations registration of cars, boats, etc holding credit cards issued by Canadian financial orgs local newspaper subscriptions determining residence will largely be a contextual analysis

Application: - Even though L was a temporary visitor upon each entry into Canada, the lack of immigrant status does not preclude someone from being a resident for tax purposes- Most important factor is whether the individual establishes residential ties in Canada- Here, having a spouse and a residence with a mortgage he guaranteed made him a resident- s.114: see section on “part-time residence”…here, Lee became a residence when he married his wife and bought the house, which made him taxable on worldwide income for rest of the year- Note: intention is not a factor in residence

Conclusion: - Yes, L was a factual resident

Deemed ResidenceThe government has 2 methods to make an individual taxable and determine their residence:

1. Factual residence – CL principles based on Thomson and the factors in IT-221R32. Deemed residence – sojourners in Canada for more than 183 days under s.250(1)(a)

The factors assisting in determining whether someone is a deemed resident of Canada for tax purposes while abroad are located in the following information bulletin:

R & L Food Distributors Limited v. MNR (1977 Tax TRB) Commuting to a place for work is not sojourningFacts: 2 shareholders in a Canadian company lived in Michigan but commuted to Canada every day for work.

The shareholders wanted to be deemed residents under s.250(1)(a) to get a small business tax deductionIssue: Were the controlling shareholders deemed residents of Canada?Rule: Coming from one country to work for the day at a place of business in another country and thereafter

returning to one’s permanent residence in the evening is not tantamount to making a temporary stay in the sense of establishing even a temporary residence

Application: The shareholders argued that they spent more than 183 days per year in Canada, and should therefore be deemed residents.The court noted that neither of the shareholders maintained homes, memberships, families, or social connections in Canada.“Sojourn” = to make a temporary stay in a place, to remain or reside in a time

Conclusion: The shareholders were not deemed residents, so the company was denied the resident business tax deduction.

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B. Part-Time (Part-Year) Residence- Under s.114, there are special rules for calculating the taxable income of an individual who is resident in Canada

during only part of a taxation year- Note: s.114 does not apply to Deemed Residents, as they are considered residents throughout the year (no part-

time deemed residents).- Income will be split ONLY in the year an individual establishes or ceases residency in Canada- Exception to the rule in s.2(1) that a person resident in Canada at any time in a taxation year is taxed on all

worldwide income for the whole year- Acquiring or ceasing residence during the taxation year can’t happen regularly; only applies to a permanent

relocation- One consequence of leaving Canada is a “departure tax” where there is a large capital gains tax on assets even if

they are not sold- People who enter into Canada are deemed to acquire capital property at fair market value- Therefore, they must pay capital gains tax on any increases in value after entry into Canada

S. 114: Individual resident in Canada for only part of yearNotwithstanding s. 2(2), part-time residents are taxed…

- As a resident on their worldwide income only for the portion they were a resident (Interpretation Bulletin)- As a non-resident for the portion they were not a resident (Interpretation Bulletin)- Can only be used for people who have not been deemed to be a resident (E.g. A sojourner) - The facts must disclose either that the individual commenced to reside or ceased to reside in Canada

IT-221R3 (Consolidated) Determination of an Individual’s Residency Status- Note: Interpretation Bulletin is not legally binding, but it sets out the CRA’s position on the issue of residence- Generally, unless an individual severs all significant residential ties with Canada upon leaving Canada, the

individual will continue to be a factual resident of Canada

- Significant residential ties…must sever ALL significant residential ties: Permanence and purpose of stay abroad (see Thomson…temporary golf holidays) Residential ties within Canada…includes:

o Dwelling place – keeping house in Canada suitable for year-round occupancy, leasing it at non-arm’s length will be considered not to have severed ties

o Spouse, CL partner, or dependents in Canada (see Lee) Residential ties elsewhere – everyone must be resident somewhere Regularity and length of visits to Canada – if more than occasional visits, ie: Lee

- Secondary residential ties…looked at collectively: Personal property (furniture, clothing, vehicles) Social ties (membership in recreational and religious organizations) Economic ties (employment in Canada, involvement in Canadian business, bank accounts, RRSPs, credit

cards, security accounts) Landed immigrant status or appropriate work permits Hospitalization and medical insurance coverage from a Canadian province Driver’s licence Seasonal dwelling place Canadian passport Membership in Canadian unions or professional organization

- Other Residential Ties Canadian mailing address or telephone listings Canadian post office box or safety deposit box Subscriptions sent to Canadian address (Ex. Newspapers and magazines)

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- It is unusual for a single residential tie with Canada to be sufficient by itself to lead to a determination of factual residence

- Where an individual maintains residential ties while abroad, the following factors will be considered to determine significance of those ties:

Evidence of intention to permanently sever residential ties with Canadao Ex. If return to Canada was foreseen at time of departure, CCRA will attach more weight to

remaining residential tieso Ex. Presence of a contract for employment in Canada

o Ex. Whether individual complied with provisions of Act dealing with persons ceasing to be residents and non-residents

o Ex. Whether individual informed others that payments to him might be subject to withholding tax

o Ex. Length of stay abroad (Although no length of time is determinative) Regularity and length of visits to Canada Residential ties outside Canada

If an individual wishes to become a non-resident of Canada, they must:1. Sever all residential ties2. Go to local Canada Revenue Agency and pay all taxes necessary on income and capital gains (departure taxes)

Definition of “taxation year”249. (1) For the purpose of this Act, a “taxation year” is

a. in the case of a corporation or Canadian resident partnership, a fiscal period, andb. in the case of an individual, a calendar year,

And when a taxation year is referred to by reference to a calendar year, the reference is to the taxation year or years coinciding with, or ending in, that year.

Schujahn v MNR (1962) Exchequer Court Must distinguish between residence/ordinary residence and sojourning; they do not overlap Severing all ties with Canada part-way through a tax year signifies part-time residence Residence is a question of fact; Change of domicile depends on the intent of the party, but residence is based on the factual circumstances external to the intent of the TFacts: An American citizen moved his family to Toronto for his job for a few years then was recalled back part-

way through the year (August).His family remained in his Toronto house for a few months to facilitate the sale of his house (kept a car and CA bank account), but left as soon as this was complete.

Issue: Did he remain a resident of Canada for the entire taxation year?Rule: In order to establish part-time residency in Canada, the facts must disclose either that the individual

commenced to reside or ceased to reside in Canada part-way through a given taxation year.Application: Residence is a question of fact that, unlike the law of domicile, and does not depend on will of individual.

Here, sole purpose why the TP’s wife and son remained in Toronto was to ensure the sale of the house and maintaining bank accounts was a logical consequenceP made a Christmas visit to Canada, but it was simply of a transitory and incidental nature.Note: Schujahn was not a deemed resident as he wasn’t sojourning; he was residing in Canada until August 1957 sojourning and residence are mutually exclusive.

Conclusion: Mr. Schujahn demonstrated that he had severed all ties when he moved back to the US, and his family finished this by selling the house and returning to the US ASAP.

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Ordinarily Resident- “Ordinarily resident”: an individual who is physically absent but has not severed all residential ties to Canada,

and thus still must pay Canadian income tax has a wider scope than resident

- “Ordinary Residence” – Place where an individual regularly, normally, or customarily lives in the settled routine of his life (Thomson)

- s.250(3): where an individual has not severed all of his residential ties with Canada but is physically absent for a considerable period of time (extending over a period of several months or years), they may be “ordinarily resident” in the place where in the settled routine of life they customarily live

Where an individual maintains residential ties while abroad, courts generally consider him an ordinary resident (and taxable for full year)

Exception: Part-time residence – CCRA will consider above factors

- Intention is key: an individual can be “ordinarily resident” while physically absent as long as they show an intention to return and no intention to permanently sever ties Example: an idiot who tried and failed to apply for non-residency status while teaching English in Japan

The Queen v Reeder (1975) FCTD Physical presence not necessary for a taxpayer to be “ordinarily resident” Where Residency is long established, difficult to show SeveranceFacts: - Reeder accepted a job with Michelin Canada and was sent to France for training, note: Reeder was told

the training time was not set (may be more than 6 months).- He sold his house and put his furniture into storage; couldn’t sell his car but stored it in a garage- Upon arrival in France, he rented a furnished apartment, bought a car, and drove with Ontario DL- He kept a bank account in Canada where Michelin deposited pay- R tried to claim part-time residency under s.114 for March to November when he was in France

Issue: Was Reeder considered to be “ordinarily resident” of Canada under s.250(3)Rule: If a TP goes and lives abroad but does not sever all secondary residential ties to Canada, they will be

“ordinarily resident” in Canada and will be taxed on all of their worldwide income for the entire taxation year

Application: Old presumption: if an individual was abroad over 2 years, they would become a non-resident No longer applies: residency is now a question of fact in every case whether someone should be considered a non-resident due to going abroad

The court applied the ordinarily resident test from Thomson: Reeder always intended to return to Canada following the training period even though his length of stay in France was indeterminate in length. Also, he didn’t collectively sever his secondary residential ties to Canada

Note: a taxpayer might get relief from double taxation if Canada had a tax treaty with France at the timeConclusion: Reeder was found to be ordinarily resident in Canada and had to pay tax for the entire taxation year.

C. Avoidance of Dual-Tax Residence

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

under another country and not a resident in Canada

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

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

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

b. If centre of vital interests cannot be determined, deemed resident where T has an habitual abode;c. If habitual abode in both/neither, deemed resident of which T is a citizen; ANDd. If citizen both/neither, mutual agreement between the competent authorities of the contracting states

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

Article 4 Canada-UK Tax TreatyThe Canada UK Tax Treaty is very similar to the Canada US Tax Treaty, but is simpler due to the fact that the UK doesn’t tax based on citizenship.(2) Where resident of both contracting states, residency is determined as follows:

a. State where there is a permanent home; if BOTH, centre of vital interestsb. If cannot determine centre of vital interests OR no permanent home in either state, deemed resident of state

with habitual abode;c. If habitual abode in both/neither, T is a resident where he/she is a national; ANDd. if national of both, neither, determined by competent authorities of the contracting states

Recall Lee: - wife with house available to him in Canada, and bedroom at parent’s house in the UK- Centre of vital interests – likely Canada – bank/social ties / etc- Habitual abode – more likely in Canada than in the UK – whenever not on the boat, was in Canada- National – UK national, but likely wouldn’t get this far

Section 128.1(4) – Departure Tax- Before a resident becomes non-resident, T is deemed to have disposed of each property owned by T at FMV- Except those properties that will be subject to Canadian tax even though held by non-residence – real property- Policy: prevents residents from leaving Canada and avoiding the taxes associated to their gains- See Deemed Dispositions and Deemed Proceeds below!

Salt (2007) TCC Indicia of non-residence (severance of ties with Canada) – Canada/Australia TreatyFacts: T born in UK, moved to Jamaica and lived there for 10 years; Moved to Canada in 74 with wife and kids;

worked for 2 years, then moved to Spain/Ireland; Returned to Canada in 84 and purchased home in QCIn 98, T accepted position in Australia and obtained temp residence there – released all Canadian memberships, cancelled most financial institutions and phone/cable; changed insurance coverage from residential to commercial; returned his car joined equivilent clubs in Australia; only short visit to CanadaHouse was leased to a non-related party in CanadaT returned after the position disappeared; CRA assessed T for taxes for the year’s while in Australia

Issue: Was T an ordinary resident of Canada from Sept 1, 1998 to April 1, 2000?Rule: T did not have permanent home in Canada – therefore deemed non-resident of Canada in accordance

with article 4 of the Canada-Australia Tax Convention and subsection 250(5) of the Act- Lease was to a third party on a fixed term, T could not move back into the house if he wanted to

Application: The judgment goes straight to the treaty to break the tie, but the court had not yet determined that T was an ordinary resident of Canada FIRST!Treaty is only to be used where there is dual residency – this likely would not have been the caseAlso, doesn’t look to permanent home in Australia, just finds that there isn’t one in Canada

Conclusion: NO – T was a non-resident during the years in question

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D. Provincial Residence- Regulation 2601 – Residents of Canada

Residency to be determined by the place of residence of the T on the last day of the taxation year Recall s. 249(1)(b) – taxation year is the calendar year for individuals A province may tax any individual who resided in that province on the last day of the year (December

31) (Interpretation Bulletin IT-221R3)- Regulation 2607 – Dual Residency

If an individual is resident in more than one province on December 31, he will considered to be a resident only in the province where he has the most significant residential ties (Interpretation Bulletin IT-221R3)

- BC ITA Section 2 – Liability for Tax2 (1) An income tax must be paid as required in this Act for each taxation year by every individual

a. who was resident in British Columbia on the last day of the taxation year, or

Mandrusiak v The Queen (2007) BCSC Thomson was used to determine ordinary residenceFacts: T original resident of AB, moved to BC for employer – performed consultant work for employer in BC

110 days in BC during 200, 4.5 days in 2001 and 0 days in 2002T maintained a home in BC and in AB; also had a farm in AB; BC assessed T for taxes in years in question

Issue: Was T a resident of BC for the purposes of Provincial Tax collection? If so, which residence was principle?Rule: Thomson – ordinarily resident in the place where in the settled routine of his life he regularly, normally or

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

Application: Vehicles in both Provinces – license was AB; Holidays in AB; Family in AB; chief income (farm) in AB; Social contacts were stronger in AB

Conclusion: T was a resident of both BC and AB, but AB was the principle place of residence – NO tax in BC

E. Residence of Corporations

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

o (a) it was incorporated in Canada (after April 26, 1965)o (b) out of scope; AND (c) if before 1965, it was incorporated in Canada and at anytime in the taxation year or the

preceding year it was resident in Canada or carried out business in Canada

Recall 250(5) – person is deemed non-resident where that person would be a non-resident under tax treatyRecall: Canada-US Article IV and Canada-UK Article 4 – above De Beers Consolidated Mines Ltd v. Howe (1906 HL) Residency for corporations is a question of fact (based on where company keeps house and does their business) central management and controlFacts: Operations in South Africa, but directors’ meetings and decisions took place in the UKIssue: Whether T ought to be assessed as a resident of the UK?Rule: Test for corporate residence adopted in Birdmount Holdings (1978)Application: Question of fact based on where company keeps house and does their business – all decisions were made

in the UK, all directors located there, all trade/business was occurring thereConclusion: T was a resident of the UK for tax purposes

F. Source as a Basis of Canadian Tax Liability

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Recall: s. 2(3): non-resident taxable in CA where employed by Canadian corporation or carrying on business in Canada, or disposing of Canadian property – taxable in accordance with Division D

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

Retiring Allowances; (l) RRSPs

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

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

Note – section 253: Extended meaning of “carrying on business” in Canada- Canada taxes on the basis of residence (worldwide income) and source. - Subsection 2(3) lists the “active” income sources on which Canada taxes non-residents. - Canada also taxes non-residents on “passive” income under Part XIII of the Act. Info about Part XIII taxation of non-residents:- Although the Act imposes tax on non-residents on a very broad range of income from Canadian sources, and at a

relatively high rate, Canada’s tax treaties with other countries contain exemptions and maximum rates which override the ITA.

- Recall that the federal statute bringing a tax treaty into force in Canada as part of Canadian law invariably provides that in the event of inconsistency between the tax treaty and Canadian law, the tax treaty prevails. (Most countries also provide credits for foreign tax paid by their residents).

- Subsection 212(1) is the basic provision, imposing a statutory 25% income tax on certain types of payments made by Canadian residents to non-residents.

- Subsection 215(1) imposes on the Canadian resident the obligation to withhold and remit the tax on behalf of the non-resident, and

- 215(6) makes the Canadian resident jointly and severally liable for the tax if it is not withheld and remitted.

212(1): [paraphrased] Non-residents must pay 25% tax on every amount that a person resident in Canada pays or credits to the non-resident person as, on account or in lieu of payment of, or in satisfaction of:

(a) management fees or administration fees or charges. Example: Canadian corporation pays its U.S. subsidiary a fee for handling all the Canadian corporation’s foreign exchange transactions. Canadian corporation must withhold 25% of the fee and pay it as tax to the Canadian government.

(b) Canadian resident company pays interest on a loan from its Australian parent company: Australian parent company is subject to 25% withholding tax that must be withheld and remitted by Canadian company.

(c) estate or trust income. An example would be a resident of the UK receiving a share of the income from a Canadian resident estate or trust (perhaps resulting from the will of deceased Canadian resident), or a non-resident investor in a Canadian income trust who receives a distribution of the trust’s income.

(d) Rents and royalties. Canadian mining company operating a Canadian mining venture pays a royalty to a US company under a contractual obligation, based on production from the Canadian mine.

(h) pension benefits – a payment of a superannuation or pension benefit. Canadian pension plan for former employees of BC government pays pension benefits to retired employee now resident in New Zealand.(j.1) retiring allowance. Example: Individual employed for 15 years in Canada; employment wrongfully terminated. Individual severs ties with Canada to live in Bahamas. Later receives wrongful dismissal damage award from Canadian former employer.(l) a payment out of or under a registered retirement savings plan.

Note that a retiring allowance is not income from employment in Canada (which would be taxed under 2(3)) – it’s income from another source under s. 56.

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212(2) – Canadian resident corporations paying a dividend to a non-resident shareholder must withhold 25% of the dividend.

VI. Income from office or employmentA. Basic Definitions and Provisions

Section 248(1) – Definitions Section for Office or Employment“Office”: The position of an individual entitling him/her to a stipend or remuneration, including judicial office, office of a minister of the Crown, etc“Officer”: Person holding such an office“Employee”: Includes an officer“Employed”: Performing the duties of an office or employment“Employer”: In relation to an officer, means the person from whom the officer receives remuneration“Employment”: The position of an individual in the service of some other person

Section 5 – Income / Loss from an Office or Employment(1) T’s income for a tax year from an office or employment is the salary, wages and other remuneration, including

gratuities, received by the T in the year(2) T’s loss for a tax year from an office or employment is the amount of T’s loss, if any, for the tax year…

Section 6(1)(a) – Basic Inclusion in Income from Employment - Included in the computing of T’s income for the year from office or employment: the value of board, lodging and

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

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

Interpretation Summary of 6(1)(a)- “A material acquisition that confers an economic benefit on the employee” (Poynton, Savage)- Need not be a quid pro quo for the performance of employment duties (Savage)- May be a payment of cash, or an item of property, a party, meal, or other non-cash advantage- An amount will not be a benefit to the employee if the employer is the recipient of the advantage secured by

the expenditure (Lowe)- IT-470R provides administrative guidance on what an employer must include in reporting an employee’s income

from employment; it is significantly less demanding than the law, strictly applied.

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

from office/employment- Note: Section 8 puts narrow restrictions on what can be deducted from income

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

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

Section 118(10) – Canada Employment Credit- There may be deducted the amount determined by the formula AxB, where A is the set percentage for the

taxation year and B is the lesser of $1000 and the total of T’s income from an office or employment- Provides a $150 tax credit to those that work outside of the home- Acts as a token amount to recognize that leaving the home to work involves costs that are not incurred when

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- Since 2007, this amount has been indexed to inflation; the maximum amount for 2011 is $1095

B. Employee vs. Independent Contractor/Consultant/Sole Proprietor

Differences between Employees and Independent Contractors1. Tax withholdings: persons do not need to withhold tax from independent contractors (they are to remit taxes

themselves; s. 153(1) requires employer withholding of employee salaries and other income2. Independent contractors do not pay into EI, and therefore cannot claim EI if they go out of work3. Income from employment calculated on a cash basis; Business income is calculated on accrual basis

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

sections 9 and 20

GR: Employee vs. Contractor is a question of fact – determined by balancing the relevant factorsNote: Generally individual wants to be a contractor to deduct more expenses; CRA wants employees

There have historically been different tests for classifying the TP:

The Control Test – Baron Bramwell in R. v. Walker- Based on the nature and degree of control over the work done- IC told “what” must be done; EE is told not only “what” must be done but also “how” to do it- 4 factors:

i. Power of selection of the servantii. Payment of wages…EE paid for time, IC paid for achieving a certain result

iii. Control over method of work…ER controls EE methods, IC control their own methodiv. Master’s right of suspension or dismissal

- Also known as the “specific result” test, whereby IC merely undertakes to produce a specified result, employing his/her own means to produce that result

- Note: this is no longer the accepted test, as most EE’s work more independently nowadays

The Total Relationship Test – Lord Wright’s “Fourfold Test” in Montreal Locomotive- Adopted by Fed. CA in Wiebe Door; used most often and preferred by CRA, it considers:

i. Control – same as control test above, but adds the following three factorsii. Ownership of tools – IC provides their own tools, maintenance costs, insurance, ect…

iii. Chance of profit – EE has less opportunity to share in profits than IC; EE gets remuneration based on time while IC gets paid at completion of project

iv. Risk of loss – EE entitled to payment regardless of whether business profits; IC has risk of not getting paid if he/she screws up and must re-do the work

Integration Test – Lord Denning’s “Organization Test” in Stevenson- This test examines the question from the point of view of the individual worker- Q: does the individual consider themselves to be part of the business? Whose business is it?- Distinction made between:

i. Contract of service – man is employed as part of a business and his work is done as an integral part of the business

ii. Contract for services – man’s work, although done for the business, is not integrated into it but is only accessory to it

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

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

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a. Control – more control over the worker is indicative of an employee roleb. Ownership of tools/equipment – indicative of contractor rolec. Opportunity for profit / risk of loss – indicative of contractor roled. Organization / Integration – whether worker is integral/integrated into employer’s businesse. Intent of the parties should be considered (Wolf); Question of how much weight (Lang)

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

Wiebe Door Services v MNR (1986) FCA Leading single question test to employee/contractor; must consider whole scheme of operations and all factors when control/organizational tests are inconclusiveFacts: CRA stated that Wiebe had not been withholding taxes from their employees (as per s.153(1))

Wiebe was in the business of installing electronic doors; had number of installers under contract; workers worked their own hours and could accept/refuse jobs from W; workers paid by the job and only saw W for pickup/drop offTCC – Applied four tests: Control test; ownership of tools/equipment; opportunity to make additional profit / risk of loss; organization / integration test (whether worker is integral/integrated into employer’s businessWithout the installers, Wiebe’s business wouldn’t work, so they are integral – therefore they are employees!

Issue: Were the installers employees or independent contractors?Rule: All factors weighed when control/organizational tests are inconclusive.Application: Best synthesis of all the approaches:

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

Factors to consider:Control; own equipment; hires own assistants; degree of financial risk; degree of responsibility for investment and management; and opportunity to profit from sound management in performance of tasksJustice Wicken acknowledged that the “control test” is still fundamental, but that it breaks down in the case of highly skilled professional employees. He accepted the 4 tests relating to control, ownership, tools, losses and profits.He went on to consider the organization and control test (created by Lord Denning), noting that if it is applied from the employer’s point of view, it will always lead to the worker being considered as an employee; it must be considered from the employee’s point of view.

Conclusion: Sent back for new trial with new test parameters

Ontario v Sagaz Industries Canada (2001) SCC Affirms Wiebe Door; Consider the Central Question + Factors

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

contractor/employee that should be factored into the central question.

Royal Winnipeg Ballet v MNR (2008) FCA Intention in the K should be considered. Where it is established that the K terms are not an appropriate reflection of the legal relationship between the parties, the stated intention will be disregarded

- Employment K for each ballet dancer; in the K, each considered independent contractor- K upheld by the FCA - For highly skilled performer, k might be necessary, even if just for a few performances – not actual employees

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- Intention in the K can be given weight in determination

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

C. Personal Services Businesses and Incorporated Employees- Income of a corporation from a personal services business taxed at 28% federal, and 10% BC rates. The

combined 38% rate applies to the first dollar of income (profit).- The PSB must withhold and remit T’s tax from T’s salary under s. 153(1)(a) ITA)

- Sazio v MNR (1968) Exch, Ct. T successfully received CCPC 13.5% rate, after this the law was changed to make PSBs and SIBs pay the 38% rate (28% federally and 10% in BC)

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

advantage of independent contractor taxation and the lower tax rate received by the CCPC - s. 18(1)(p)- Policy: ensures that only bona fide CCPCs involved in active business carried on by a corporation have access to

the preferential rate for Canadian Small Businesses -

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

of a corporation other than a personal services business

Section 125(7) – Definitions

“Active Business Carried on by a Corporation”: business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade

“Personal Services Business”: Business of providing services wherea. An individual who performs services on behalf of the corporation (“incorporated employee”), ORb. Any person related to the incorporated employee (See Arms-Length s. 251)

Is a specified shareholder (s. 248(1)) of the corporation and the incorporated employee would reasonably be regarded as an officer/employee of the person to whom the services were provided ( see test below ) , but for the existence of the corporation; UNLESS:c. The corporation employs in more than five full-time employees throughout the year ORd. The amount paid to the corporation was received from a corporation with which it was associated

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

- If the individual would have been an independent service provider, regardless of the corporation (doctors, lawyers, etc.), then the personal services business rules do not apply.

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

“Canadian Controlled Private Corporation (CCPC)”: a corporation that is resident in Canada, its shares are not listed on a stock exchange, and it is not controlled by non-residents of Canada, by a corporation whose shares are traded on a stock exchange, or a combination of these

Section 248(1) – Specified Shareholder- Person who owns more than 10% of stock

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- Any stock owned by person with whom T does not deal at arm’s length is considered to be owned by T for the purposes of this definition

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

at arm’s length

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

o There is “a common mind” which directs or controls the bargaining for both sides ORo The two persons act in concert without separate interests

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

o (i) A person who controls the corporation, if it is controlled by one person;o (ii) A person who is a member of a related group that controls the corporation; ORo (iii) Any person related to a person described in (i) or (ii)

- (c) Any two corporations if they are controlled by the same person/group of persons

Note: 251(6)(b) and (b.1) make spouses and common law partners related to each other, and to the persons who are blood relatives of their spouse or CLP. This means “in-laws” are related.Note: for the purposes of this course, it is understood that a “Canadian controlled private corporation” (subsection 125(7)) is 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. (The statutory definition is somewhat more complicated, but a simplified definition is sufficient for this course.)

D. Introduction to Benefits, Reimbursements and Allowances

1. General- Recall: Section 5 – Income/Loss from an Office or Employment- Recall: Section 6(1)(a) – Broad inclusion of benefits in employment from Office or Employment

Amounts to be included as income from office or employment6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable

Value of benefitsa. the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the

year in respect of, in the course of, or by virtue of an office or employment, except any benefiti. derived from the contributions of the taxpayer’s employer to or under a deferred profit sharing plan, an

employee life and health trust, a group sickness or accident insurance plan, a group term life insurance policy, a private health services plan, a registered pension plan or a supplementary unemployment benefit plan,

ii. under a retirement compensation arrangement, an employee benefit plan or an employee trust,iii. that was a benefit in respect of the use of an automobile,iv. derived from counselling services in respect of

A. the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or

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B. the re-employment or retirement of the taxpayer, orv. under a salary deferral arrangement, except to the extent that the benefit is included under this

paragraph because of subsection 6(11);

Recall: Tsiaprailis (s. 6(1)(f)) – where lump sum disability settlement was included in income as a benefit

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

the form of benefits rather than salary, which would greatly reduce the tax base- Limits on inclusion: some benefits would be trivial/difficult for govt to assess (free coffee)- Equity: unjust to allow one person to avoid tax through benefits, when another with no such benefit is taxed- Because employer gets to deduct almost everything given to the employees, the policy is to include almost any

benefit the employee received from the employer

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

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

intention/purpose of the payment (Phillips)

Interpretation Bulletin IT470R- Designed to assist employers in preparing T4s and automatic employee deductions- Policy: Tax simplicity, efficiency and compliance- Non-cash gifts/awards to non-arms length employee, regardless of the numbers, are not taxable up to the

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

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

The Queen v Savage (1983) SCC Benefit need only be a material acquisition which confers a benefit upon the employeeFacts: S worked for life insurance company; took courses related to employment, employer encouraged the

courses by offering $100/course; S took 3 courses and received 300 from employer$300 showed up on T4, but S did not report the amount as she considered it a prize for achievement

Issue: Was the cash payment a benefit of employment as defined by s. 6(1)(a)?Rule: Specific provision prevails over the broad general inclusion.

Benefit need only be a material acquisition which confers a benefit upon the employee.Application: Yes, this is a benefit – no requirement for employment service in return for the benefit

- Cash falls into a “benefit received or enjoyed”- “in respect of” – is the widest way to define a connection between two things – employment and

benefitPoynton – does not have to be a contractual exchange of services for benefit

- If it is a material acquisition which confers a benefit upon the employee, then it’s a benefit- BUT this is also a prize for achievement and that is exempt up to $500- Specific provision prevails over the broad general inclusion

Conclusion: Yes this was a benefit, but it’s also a prize for achievement, so exempt up to $500

Lowe v The Queen (1996) FCA Is there a measurable economic benefit? Who possesses the primary benefit?Facts: Trips offered by employer to employees who sell the most insurance; trips were to areas where they

meet with prospective clients; T went on trip with family for such functionT assessed for the portion of the trip that was “personal travel” – as there was some enjoyment as well

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Both T and wife put in 14h/day entertaining brokers; trip was fun, but they were not free to do as they please

Issue: Was there any taxable benefit associated to this trip?Rule: An economic benefit is one which provides the employee with a measurable economic gain.Application: Does the payment provide T with a measurable economic benefit?

- If so, is the primary advantage to the employer or the employee? Here, purpose of trip was to bring personal relationships to the account executives to

encourage business All done at the request of employer – wives were expected to attend for the same function

Takeaway: s. 6(1)(a) is limited so as not to include benefits that are merely incidental to the employer’s primary purposeNote: In Hale, the taxpayers wife was considered to be part of the “selling unit” necessary for Mr. Hale to get a salesman job. Mrs. Hale was providing a benefit to the employer, not the other way around.

Conclusion: No – this was a business trip – primary benefit to the employer – personal benefit was merely incidental

Waffle v MNR (1968) Exchequer Crt. Benefit can be received from a 3rd party (supplier or an advertiser), if connected to employmentFacts: T took a luxury only (no work obligation) cruise when his employer was incapable of attending.Issue: Was this a taxable benefit?Application: “I think that the language in s.6 to the effect that the “value of board, lodging and other benefits of any kind whatsoever” is to be included in taxable income, overcomes the principle laid down in Tennant v Smith (If a benefit from employment is for the benefit of the employer only, then the benefit goes tax free to the employee)

Interpretation Bulletin IT-470R

Discussion and InterpretationINTRODUCTION¶ 1. The information herein refers to cases where there is an employee-employer relationship but does not necessarily apply if the employee is also a shareholder or relative of the owner of the business.¶ 2. Except where the Act provides otherwise, taxpayers are generally taxable on the value of all benefits they receive by virtue of their employment. The more common "fringe benefits" are discussed below and have been classified generally as taxable benefits or as non-taxable privileges. In the second group there may well be a point beyond which the "privilege" concept is no longer valid, i.e., the advantage to the employee is, in fact, a form of extra remuneration. Then the "fringe benefit" is viewed as a taxable benefit.¶ 3. Where an amount in respect of a taxable benefit should be included in income, the employer must determine its value or make a reasonable estimate of it and include that value in the box provided on form T4 Supplementary under the heading "Employment Income Before Deductions" and also in the appropriate box in the area entitled "Taxable Allowances and Benefits".

PART A -- AMOUNTS TO BE INCLUDED IN INCOME

Board and LodgingS. 4 The Income Tax Act refers specifically to board and lodging as a benefit derived from employment. This includes board and lodging regularly furnished as a perquisite of the employment, as is common for hotel employees and domestic and farm help. The value placed on this benefit should approximate its fair market value. Where subsidized board and lodging is provided to an employee the value of the benefit for "board" is determined on the basis described for subsidized meals (See ¶ 28 below); the "lodging" benefit will be valued at the fair market value of the accommodation less the amount charged to the employee.S 5 However, by virtue of subsection 6(6), an exception to the above rules is made in respect of board and lodging received by an employee whose duties are performed at a remote location or, in some circumstances, at a special work site. This exception is discussed in IT-91R3, "Employment at Special or Remote Work Sites".Rent-Free and Low-Rent HousingS. 6 When an employer provides a house, apartment, or similar accommodation to an employee rent-free or for a lower rent than the employee would have to pay someone else for such accommodation, the employee receives a taxable benefit. The employer is responsible for reasonably estimating the amount of such a benefit, which would normally be considered to be the fair market rent for equivalent accommodation had the employee rented from a third party, less any rent paid. (…)

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Travel BenefitsS. 7 An amount received, or the value of a benefit received or enjoyed, by virtue of employment in respect of travelling expenses incurred by an employee, the employee's family or both is a taxable benefit, unless the amount is an allowance which falls within the exceptions in paragraph 6(1)(b) or is an amount described in subsection 81(3.1) or otherwise excluded from income under subsection 6(6). (…) Gifts (Including Christmas Gifts)

S. 9 A gift (either in cash or in kind) from an employer to an employee is a benefit derived during or because of the individual's employment. When the value of a gift commemorating a wedding, Christmas or similar occasion does not exceed $100 and when the employer does not claim its cost as an expense in computing taxable income, the gift is not required to be reported as income of an employee. This practice will only apply to one gift to an employee in a year, except in the year an employee marries in which case it will apply to two gifts.When an employee is rewarded by an employer with merchandise or other non-cash items, the fair market value of the award must be included in the employee's income. If an item is personalized with a corporate logo or engraved with the employee's name or a message, the fair market value of the item may be negatively affected. In such cases, the amount to be included in the employee's income may be reduced by a reasonable amount, having regard to all the circumstances. Depending on the value of a particular award, the existence of a logo may have little, if any, impact on the fair market value of the item. When the award given is a plaque, trophy or other memento of nominal value for which there is no market, it is not necessary to include any amount in an employee's income as a taxable benefit.

See Sections 10 to 13 for information on holiday trips, other prizes and incentive awards.

[But see p. 253 Materials Note 3 and June 11, 2009 policy changes below, page 6.]An employer-provided party or other social event, which is generally available to all employees, will be accepted as a non-taxable privilege if the cost per employee is reasonable in the circumstances. As a guideline, those events costing up to $100 per person will be considered to be non-taxable. Ancillary costs, such as transportation home, would increase that amount. Parties costing more than that are generally considered to be beyond the privilege point and may result in a taxable benefit.

Holiday Trips, Other Prizes and Incentive AwardsS. 10 Where an employer pays for a vacation for an employee, the employee's family or both, the cost thereof to the employer constitutes a taxable benefit to the employee under paragraph 6(1)(a). Similarly, where a vacation property owned by an employer is used for vacation purposes by an employee, the employee's family or both, there is a taxable benefit conferred on the employee under paragraph 6(1)(a) the value of which is equivalent to the fair market value of the accommodation less any amount which the employee paid therefor to the employer. In any case, the taxable benefit may be reduced if there is conclusive evidence to show that the employee was involved in business activities for the employer during the vacation.

S. 11 In a situation where an employee's presence is required for business purposes and this function is the main purpose of the trip, no benefit will be associated with the employee's travelling expenses necessary to accomplish the business objectives of the trip if the expenditures are reasonable in relation to the business function. Where a business trip is extended to provide for a paid holiday or vacation, the employee is in receipt of a taxable benefit equal to the costs borne by the employer with respect to that extension.

S. 12 There may be instances where an employee acts as a host or hostess for an incentive award trip arranged for employees, suppliers or customers of the employer. Such a trip will be viewed as a business trip provided the employee is engaged directly in business activities during a substantial part of each day (e.g., as organizer of activities); otherwise it will be viewed as a vacation and a taxable benefit, subject, of course, to a reduction for any actual business activity.

S. 13 Where an employee receives a prize or other award related to sales or other work performance from his or her employer, the fair market value of such an incentive is regarded as remuneration to be included in income under section 5 of the Act. Similarly, the fair market value of any award not regarded as remuneration that is received by an employee

a. in respect of,b. in the course of, orc. by virtue of

The employee's office or employment is also included in income from an office or employment by virtue of paragraph 6(1)(a). (…)

Frequent Flyer ProgramS. 14 Under this program, which is usually sponsored by an airline, a frequent air traveller can accumulate credits which may be exchanged for additional air travel or other benefits. Where an employee accumulates such credits while travelling on employer-paid business trips and uses them to obtain air travel or other benefits for the personal use of the employee or the employee's family, the fair market value of such air travel or other benefits must be included in the employee's income. Where an employer does not control the credits accumulated in a frequent flyer program by an employee while travelling on employer-paid business trips, the comments in ¶ 3 above will not apply and it will be the responsibility of the employee to determine and include in income the fair market value of any benefits received or enjoyed.

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June 2009: New policy announced in Income Tax Technical News No. 40

Loyalty ProgramsMany employees collect loyalty points (e.g., frequent flyer points) on their personal credit cards offered by third parties when travelling on employer reimbursed business trips or incurring other business related expenses. These points can be exchanged or redeemed for goods and services, including gift certificates. The CRA has been of the view that where an employer does not control the points accumulated under such programs, it will be the responsibility of the employee to determine and include in income the fair market value of any benefits received or enjoyed. However, employees often face significant difficulties with respect to the

- valuation of these benefits as well as tracking and identifying the benefits attributable to points- accumulated by way of employment versus personal use of the credit cards. Effective for 2009, the CRA will no longer

require these employment benefits to be included in an employee’s income, so long as:- the points are not converted to cash,- the plan or arrangement is not indicative of an alternate form of remuneration, or- the plan or arrangement is not for tax avoidance purposes.

It should be noted that where an employer controls the points (e.g., a company credit card), the employer will continue to be required to report the fair market value of any benefits received by the employee on the employee’s T4 slip when the points are redeemed.

Travelling Expenses of Employee's SpouseS. 15 Where a spouse accompanies an employee on a business trip the payment or reimbursement by the employer of the spouse's travelling expenses is a taxable benefit to the employee unless the spouse was, in fact, engaged primarily in business activities on behalf of the employer during the trip.

Premiums under Provincial Hospitalization and Medical Care Insurance PlansS. 16 Where an employer pays all or a part of the premiums or contributions that an employee is otherwise required to pay to a provincial authority administering a provincial hospital insurance plan, a provincial medical care insurance plan, or both, the amount paid is a taxable benefit to the employee.

S. 17 Where an employer pays an amount to an employee in respect of the employee's premium under a provincial hospital or provincial medical care insurance plan, the amount paid is a taxable benefit to the employee.

Subsidized MealsS.28 Subsidized meals provided to employees will not be considered to confer a taxable benefit provided the employee is required to pay a reasonable charge. A reasonable charge is generally defined as one that covers the cost of food, its preparation and service. Where less than a reasonable charge is paid, the value of the benefit is that cost less the amount paid by the employee.

Uniforms and Special ClothingS. 29 An employee who is supplied with a distinctive uniform which is required to be worn while carrying out the duties of employment or who is provided with special clothing (including safety footwear) designed for protection from the particular hazards of the employment, is not regarded as receiving a taxable benefit.

S. 30 Payments made by an employer to a laundry or dry cleaning establishment for laundry or dry cleaning expenses of uniforms and special clothing, or directly to the employee in reimbursement of such expenses, do not constitute a taxable benefit to the employee.

Transportation to the JobS. 32 Employers sometimes find it expedient to provide vehicles for transporting their employees from pick-up points to the location of the employment at which, for security or other reasons, public and private vehicles are not welcome or not practical. In these circumstances the employees are not regarded as in receipt of a taxable benefit. However, a reimbursement or allowance paid to the employee for transportation to and from the location of employment must be included in income. Subsection 6(6) provides an exception to this latter rule. See also IT-91R3, "Employment at Special or Remote Work Sites".

Recreational FacilitiesS. 33 Where employees generally are permitted to use their employer's recreational facilities (e.g., exercise rooms, swimming pools, gymnasiums, tennis, squash or raquetball courts, golf courses, shuffle boards) free of charge or upon payment of a nominal fee, the value of the benefit derived by an employee through such use is not normally taxable. The taxable benefit received by an employee who is provided

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with board, lodging and accommodation is discussed in ¶s 4 to 6 and 10 above.

S. 34 Similarly, where the employer pays the fees required for an employee to be a member of a social or athletic club the employee is not deemed to have received a taxable benefit where the membership was principally for the employer's advantage rather than the employee's. See also IT-148R2, "Recreational Properties and Club Dues".

Removal [Moving] ExpensesS. 35 Where an employer reimburses an employee for the expenses incurred by the latter in moving the employee and the employee's family and household effects either because the employee has been transferred from one establishment of the employer to another or because of having accepted employment at a place other than where the former home was located, this reimbursement is not considered as conferring a taxable benefit on the employee.

S. 36 In addition, where the employer pays the expense of moving an employee and the employee's family and household effects out of a remote place at the termination of the employment there, no taxable benefit is imputed.

IT-91R4 – Employment at Special Work Sites or Remote Work Locations

Remoteness from an established community14. If an employee could not reasonably be expected to establish and maintain a self-contained domestic establishment at the work location, the next test is whether this inability is due to the location's remoteness from an established community. When determining whether a work location is in fact remote from an established community, factors such as the following will be considered:

- the availability of transportation; - the distance from an established community; and - the time required to travel that distance.

As a general rule, a work location will be considered to be remote if the nearest established community with a population of 1,000 or more is no closer than 80 kilometres (50 miles) by the most direct route normally travelled in the circumstances. Cases not meeting this general rule are not necessarily disqualified from the exclusion under subsection 6(6) and will be considered on their merits. If the work location is not remote from an established community, or if the work location itself can be considered an established community, the employee will, subject to 16 below, not qualify for the remote work location exclusion.

15. The term “established community” is considered to mean a body of people who reside in the same locality and who are permanently settled in that location. A location will not be considered an established community if it lacks essential services or such services are not available within a reasonable commuting distance. In general, essential services would include:

- basic food store; - a basic clothing store with merchandise in stock (not a mail-order outlet); - housing; and - access to certain medical assistance and certain educational facilities.

June 11, 2009 Policy Changes re Employer Gifts“The CRA has received submissions that the current policy has not significantly reduced administrative burden in cases where numerous immaterial items may be given to an employee in a year. Concerns also include employers introducing gift and award policies principally for the purpose of providing tax-free remuneration to employees. Additionally, numerous tax planning questions are received as to how to maximize the tax-free status by categorizing items in order to qualify for either the gift policy or award policy.Effective for 2010, to address these issues, the following changes and clarifications are being made to the CRA’s gift and award policy:

- Non-cash gifts and non-cash awards to an arm’s length employee, regardless of number, will not be taxable to the extent that the total aggregate value of all non-cash gifts and awards to that employee is less than $500 annually. The total value in excess of $500 annually will be taxable.

- In addition to the above, a separate non-cash long service/anniversary award may also qualify for non-taxable status to the extent its total value is $500 or less. The value in excess of $500 will be taxable. In order to qualify, the anniversary award cannot be for less than five years of service or for five years since the last long service award had been provided to the employee. For the purposes of applying the $500 thresholds, the annual gifts and awards threshold and the long service/anniversary awards threshold are separate. In other words, a shortfall in value under one policy cannot be used to offset an excess value of the other.

- The employer gift and award policy will not apply to non-arm’s length employees (e.g., relative of proprietor, shareholders of closely held corporations) or related persons of the non-arm’s length employee.

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- For clarification purposes, items of an immaterial or nominal value, such as coffee, tea, T-shirts with employer logos, mugs, plaques, trophies, etc., will not be considered a taxable benefit to employees. There is no defined monetary threshold that determines an immaterial amount. Factors that may be taken into account include the value, frequency, and administrative practicability of accounting for nominal benefits.”

2. Valuation of Employment Benefits- Generally accepted definition of fair market value: the amount that a person who is not obligated to buy would

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

o “The amount a person not obligated to buy would pay a person not obligated to sell” – Steen (1988 FCA)- To calculate, we use the fair market-value of the benefit that is paid for by the employer (Lowe).

Giffen v The Queen (1995) TCC Method of valuing benefits – no longer used for loyalty points (now non-taxable to promote simplicity) – IT470RFacts: T works for HW and travels by plane for work; collects airmiles; Used airmiles to purchase a trip for family

CRA assessed the vacation at fair market value as a taxable benefit of employmentIssue: 1. Are the redeemed flights benefits under s. 6(1)(a)? – YES, they are received when family flies for free

2. How should the value of the benefits be determined? What T would have to pay? Cost to the airline?Rule: IT470R: new policy on loyalty programs – employees no longer need to include frequent flier miles from

their employer as long as they cannot be converted to cash and are not an alternate form of remuneration.

Application: Minister: Cost should be the price the employee would have been obligated to pay for a ticket entitling him/her to travel the same flight, same class, with the same restrictionsAppellant: Due to wide price range, economy tickets are not to be valued any higher than the cheapest discounted farePolicy (simplicity of administration): Due to difficulty of valuing benefits as well as tracking/identifying benefits of this type, with regard to loyalty points, no employee benefit has to be included in income provided that:

- The points are not converted to cash; the plan is not indicative of another form of remuneration;- AND plan or arrangement is not for tax avoidance purposes – IT470R

Conclusion: Appeal allowed – the assessment is to use the above method

Dunlap v The Queen (1998) TCC There is no real difference between receiving money and money’s worth.Facts: Employees were taking part in a work sponsored dinner/drinks/entertainment event;

Employer deducted the amount of the party, but did not include the apportioned amounts on the employees’ individual T4s; Minister assessed T for the value of the night out as a benefit

Issue: Was the dinner/entertainment a benefit to T? (Must receive or enjoy as per s. 6(1)(a))Rule: There is no real difference between receiving money and money’s worth.Application: T argued that:

1. he consumed less than the other guests, and2. that he received no economic benefit for attending the party, and3. that the value of the hotel room should not be taxed as it prevented drinking & driving

Court’s response:1. No evidence that T consumed less than other guests, so the value was the proportional expense

(total cost divided by the # of guests).2. There is no real difference between receiving money and money’s worth3. Despite T’s policy argument re: drinking/driving, the court noted that he could have just not

drunk and thus could have driven home/not received the benefit of the room.Comments:Paragraph 9 of the IT470R – now will no longer be taxable for reasonable value given to ALL employees at social gathering – note: more than 100 are generally considered to be a taxable benefit

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Goal of IT470R: small value gifts from employers to employees should be recognized as personal gifts, but they are benefits of employment as they seek to improve the employer/employee relationship. This also recognizes that it is way too much trouble to account for/tax small gifts.

Conclusion: Yes, this was a taxable benefit to T – it is valued at the cost per person to the employer

Richmond v The Queen Availability of benefits and not actual use of a benefit are the correct measure for taxability.Facts: T’s employer provided a parking space which T said they only used 20% of the yearIssue: Was the parking space a taxable benefit, and if so, based on what value?Rule: It doesn’t matter whether T only used the parking spot (the benefit) for a portion of the available time,

the point is that it was available to T the entire time and thus should be taxed as such.Application: Justice Bell: it doesn’t matter whether or not you used the space, in order to determine whether it was a

benefit to you; what matters is that it was available for your use.IT470R: para. 34: When the employer pays the fee for an employee to have a club membership that is principally for the employer’s benefit, the value will not be a taxable benefit for the employee.

Conclusion: Parking space is taxable at 100% of its value

Rachfalowski v The Queen Taxability for a benefit should be based on actual use/subjective value, not the full value of a benefit’s availability.Facts: T was given a golf club membership by his employer, but he hated golf and asked for cash in lieu. T was

denied cash and was required to keep the membership even though he didn’t want it.Issue: Was the golf club membership a taxable benefit, and if so, based on what value?Rule: The value to an individual taxpayer should be based on subjective value/actual use, and not merely the

time in which the benefit was available to the taxpayer.Application: This decision could lead to various BoP issues and credibility problems as measurable benefits based on

subjective value would be administratively difficult and problematic.Justice Bowman seemed to accept the proposition in para. 34 of IT470R, in noting that since the membership was mainly for the employer’s benefit, it was not a taxable benefit for the employee.

Conclusion: Golf club membership is not a taxable benefit

Issues with Benefits Received:- Does a given benefit fall within the very broad language of Section 6(1)(a)?- Is it really a reimbursement of an expense on behalf of the employee or the employer?

In Huffman, the court realized that the employee had borne the cost of procuring a uniform, and since this was a cost that should have been incurred by the employer, the payment was a reimbursement.

- What is the appropriate measure of a benefit’s value? In most cases, the valuation will be based on the expense actually incurred by the employer (fair market

value may be less than the actual $ cost if the benefit is customized to the employee as in a fitted suit that is worth far less when sold on the open market).

3. Allowances: 6(1)(b)

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

expenses or allowance for any other purpose, except: see Automobile and Traveling Allowances belowInterpretation Summary of 6(1)(b)

- Definition (MacDonald) – an arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – Generally for a specific purpose – Discretion of the recipient, in that the recipient need not account for the expenditure of the funds no need to submit receipts

- Could be used as a concealed method of remuneration; it must be included in income from office/employment- Allowance vs. Reimbursement – see definition in Huffman- Examples: clothing allowances, travel allowances, and accommodation allowances

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- May be exempt if it meets conditions for exemption in subparagraphs (v) – (vii.1) of 6(1)(b) and is not deemed unreasonable by 6(1)(b)(x) or (xi)

- May also be exempt under 6(6) Essentially says that cash payments from employers that are intended to cover personal/living/other

expenses will be taxable.

Reimbursement- A cash payment by employer to employee to repay employee for an expense incurred on behalf of the employer;

the employer will normally require the employee to produce a receipt for the expense- Such amounts are not taxable in the hands of the employee; the employee incurred the expense on behalf of the

employer, and the employer is merely repaying a debt owed to the employee.The Queen v. Huffman (1990) FCA Draws the distinction between allowance and reimbursement; reimbursements to the employee for expenses that should be borne by the employer are non-taxable.Facts: T is a plainclothes officer; not paid more than uniformed officers who received uniforms for free

Received reimbursement for clothing expenses up to 500 – assessed by CRA on the benefit of allowanceIssue: 1. Was the money received a taxable benefit under s.6(1)(a)?

2. Was the payment a reimbursement or an allowance under s.6(1)(b)?Rule: IT470R Uniforms and Special Clothing: when an employer requires an employee to wear special clothing,

this is not considered to be a taxable benefit; payments to launder/dry-clean special clothing are also not considered taxable benefits.Test for a benefit – the court adopted Poynton: it is a material acquisition that incurs an economic benefit upon the employee, but also noted the need to consider the purpose of the expenditure (business trip in Lowe), and noted that purely incidental personal enjoyment is not sufficient to make an acquisition taxable.

Application: There must be a conferral of an economic benefit to the taxpayer in order for a given benefit to be taxable. This was a reimbursement, which requires T to present receipts to show his expenditures.1. This was a reimbursement for the expenses associated to the job, not taxable benefit under s.6(1)(a)

- If there was no reimbursement for the costs, would T be able to deduct expenses under s.8(1)(i)(iii)?

- Amount was paid by the employee for the cost of supplies that were consumed directly in the performance of the duties of the office or employment, and required by the K to supply and pay

- S. 8(10) – deductions claimed in s.8(1)(i)(ii) or (iii) are not deductible unless the prescribed form is signed by the employer and filed with the return

2. This was a reimbursement rather than an allowance, so not taxable benefit under s.6(1)(b)- Queen v. Pascoe (1975): “An allowance is…a limited predetermined sum of money paid to enable

the recipient to provide for certain kinds of expense, its amount is determined in advance and, once paid, it is at the complete discretion of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is NOT an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion…”

Conclusion: T is not liable for tax for the reimbursement.

The Queen v. MacDonald (1994) FCA Leading case on s.6(1)(b) – Definition of an allowance: An arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – Generally for a specific purpose – Discretion of the recipient, in that the recipient need not account for the expenditure of the fundsFacts: T was RCMP officer transferred to Regina from Toronto; Receive housing subsidy of 700/monthIssue: Was the subsidy a reimbursement or an allowance?Rule: An aarbitrary amount in that it is predetermined sum set without specific reference to any actual expense

or cost – Generally for a specific purpose – Discretion of the recipient, in that the recipient need not account for the expenditure of the funds

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Application: 1. An allowance is an arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – may be set through a process of projected or average expenses or costs

2. Section 6(1)(b) encompasses allowances for personal or living expenses, or for any other purpose, so that an allowance will usually be for a specific purpose

3. The allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense or cost

Conclusion: Subsidy was an allowance under s. 6(1)(b)

4. Special and Remote Worksites: subsection 6(6)- Where employer requires employee to work away from home or to work away from an established community

- Test for special worksites:1. T must be away from principle municipality of residence for at least 36 hours2. The work must be temporary3. T must maintain a separate residence that is available to them at all times (not rented out)

- Test for remote worksites:1. T must be away from principle municipality of residence for at least 36 hours2. Worksite must be too remote from any established community to expect T to maintain a residence

- Recall: s. 6(1)(a)/(b) – benefits and allowances included in income- Note: neither the employee’s residence nor the worksite need to be in Canada- Remoteness (outlined in IT91R4, page 5) = a worksite more than 80km from T’s residence (or a worksite

separated by water, a mountain range, etc.)- Established community = a body of ppl who reside in the same local and have access to essential services- Note: if the employer supplies meals/lodging, or transportation to/from special/remote worksites, or provides a

reasonable allowance for these expenses, either the benefit or the allowance (depending on form) will not be included in T’s taxable income.

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

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

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

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

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

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

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

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

1. Availability of transportation; distance from an established community; and time required to travel there2. Will be considered remote if the nearest established community w/ population of 1000 or more is no closer

than 80km by most direct route normally traveled in the circumstances

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5. Auto & Travelling Allowances: 6(1)(b)(v), (vii), (vii.1), (x),(xi); Reg 7306, & 18(1)(r)

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

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

with selling of property or negotiating contracts for employer (sales work)- This essentially includes any expense incurred in travelling away from T’s normal home base (hotel, means,

certain other incidentals)

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

property or negotiation of contracts) from employer for traveling away from:a. The municipality at which the employee ordinarily worked ANDb. The metropolitan area, where the establishment was located

- In the performance of duties of the office or employment- This includes expenses other than motor vehicle costs: airplanes, ferries, buses, and other incidentals incurred

while away from T’s normal home base.

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

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

Note: Limitation for Vehicle Allowance: s.6(1)(b) (when a vehicle allowance is not reasonable) states: …and for (v), (vi) and (vii.1), an allowance received in a tax year by T for the use of a motor vehicle in connection with the course of T’s office or employment is deemed to not be a reasonable allowance:

i. Where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of KMs for which the car is used OR

ii. Where the T BOTH receives an allowance in respect of the use AND is reimbursed in whole or in part for the expenses in respect of that use

Section 7306 ITRegulations – Prescribed rate of per KM (limit to what employers can deduct for compensating employee’s vehicle expenses).

- NOTE: this is for the purposes of 18(1)(r) – deductions, but is used commonly to assess reasonableness in s.6o Employer is not allowed to deduct more than the prescribed amounto Any amount received in allowance over the prescribed amounts would be considered non-deductible

under s.18, and also would be included in employee’s income under s.6(1)(b)- 52 cents/km for first 5000kms- 46 cents/km for every km after that- Additional 4 cents/km in the Yukon/Northwest Territories or Nunavut

Policy Note: the CRA wants to limit non-taxable allowances, and imposes ‘reasonableness limits’ to prevent employers from providing additional compensation as allowances (see 18(1)(r)); the “hard and fast limit” is only imposed on employers, not employees.Note: other than the enumerated exceptions, generally, allowances are taxable.

E. Deductions in computing income from employment

- Unlike benefits, allowances and reimbursements, which are flows of advantages or cash from employer to employee, a deduction relates to an out-of-pocket payment by the employee that is not reimbursed by the employer. The employee personally bears the expense, and may then claim a deduction

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- If the amount is not within the allowed deductions in s. 8, it is not deductible (8(2))- In some cases, the deduction is conditional upon the employer providing a certificate in accordance with 8(10)Recall: Section 5 – include in income salary/wages/remuneration

- Section 8 authorizes a number of deductions in respect of employment income – limited to listed categories- Section 8(2): no deductions allowed whatsoever unless T’s situation fits within 8(1)- Note: there is also a general “reasonableness” provision to limit deductions- Section 67 no deduction shall be made unless the expense or outlay was reasonable in the circumstances

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

1. General Limitations on Deductions: S.8(2) & sections 67 and 67.1(1), 67.1(2)(a) and (f)

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

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

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

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

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

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

employed by the T

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

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

2. Traveling Expenses: 8(1),(f), (g), (h), (h.1), and 8(4)

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

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

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

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

exceed the commissions earned in (iii)), to the extent that amounts were not:o (v) Outlays, losses or replacements of capital or payments on account of capital

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o (vi) Expenses that by 18(1)(l) (use of recreational facilities and club dues), are not deductible ORo (vii) Amounts described in 6(1)(e) – Out of scope.

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

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

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

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

NOTE: Renko – refused deduction for BC Ferries employees due to the “AND lodging” componentSpecific literal interpretation used in deduction sections

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

expenses during the work-related travel, amounts expended by the T for traveling (other than vehicle expenses) in the course of office or employment, EXCEPT where To (iii) Received an allowance for travel expenses that was not included in T’s income (s. 6(1)(b)(v-vii)); ORo (iv) Claims a deduction for the year under (e), (f) or (g)

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

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

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

Crawford, Renko et al. v the Queen (2002) TCC “Meals and lodging” provision was interpreted literally to mean that both must be incurred to allow a deduction.Facts: BC Ferries employees tried to deduct the costs of food purchased on the ferry during their 8-10 hour

shifts.Issue: Are the meal expenses allowable deductions?Rule: “Meals and lodging” provision was interpreted literally to mean that both must be incurred to allow a

deduction.Application: The court looked at Section 8(1)(g)(ii): meals and lodging deduction provision, and noted that it did not

apply to these employees as they incurred no lodging expenses; they went home after their 8-10 hour shifts.

This was a very literal interpretation of the “meals AND lodging” provision.The appellants’ lawyer argued that the CRA was estopped from charging tax on the incurred expenses as they had previously communicated that the meal expenses would be an allowable deduction.They also noted that truck drivers who slept in their cabs and thus incurred no lodging expenses would fail under the literal interpretation, and thus it was incorrect, but the TCC failed to decide on this matter.

Conclusion: The meal costs were not an allowable deduction.

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

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

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

Hogg v The Queen (2002 FCA) Travel to/from work not deductible even w/ work-related security issuesFacts:- T (PCJ, but employee here) argued that security concerns related to work (T was a regional court judge) required his

travel to and from work- T traveled in his own car and received an allowance for trips over 15k- Claimed that he was required to use his own car for security, and since necessary, it should be deductibleHeld: Denied by the court- Although security concerns were a function of his work, it was not sufficient to render the expense deductible- If travel to and from work has concerns that are not addressed through remuneration, it should be taken up with the

employer

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

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

3. Legal Expenses: 8(1)(b) and 60(o.1)

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

NOTE: Proposed amendment would limit this recovery to where the salary claimed would be included in income

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

allowance (also applies to damages in lieu of notice that are awarded in wrongful dismissal cases)

Note: In Tsiaprailis, T was unable to deduct legal expenses as the amount she was claiming from her employer was not a salary or benefit; the amendment to s. 8(1)(b) would allow her to claim her legal expenses incurred in recovering the LTD benefits that her employer was denying.

In Schwartz, T would be unable to deduct his legal expenses under the current provision or under the proposed amendment.

4. Professional and Union Dues: 8(1)(i)(i)(iv)(v) and 8(5)

Section 8(1)(i) – Dues and Other Expenses of Performing Duties

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- Amounts paid by the T in the year as:o (i) Annual professional membership dues necessary to maintain professional status recognized by statute

eg. Law society dues are easily deductible, because required to practice lawo (iv) Annual dues to maintain membership in a trade union or to maintain membership in an association of

public servants to improve members’ conditions of worko (v) Annual dues retained by employer, pursuant to collective agreement, and paid to a trade union or

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

- Note: this is a fairly difficult test to meet (Law Society fees are covered, but CBA memberships are not)

The Queen v. Swingle (1977) s. 8(1)(i)(i) is interpreted strictly – only professional expenses required by statute are deductible (requirements limited to those stated explicitly)Facts: T is a chemist, employed as a manager of laboratory services; designated as an analyst under the Canada

Shipping Act; T is required to stay abreast of scientific news, trends etc for his job – he is a well-respected member of the scientific communityT claimed deductions for numerous memberships to scientific societies; Reassessment only allowed the one fee related to his union fees as a public servant pursuant to 8(1)(i)(iv), but none of the others

Issue: Was payment of the amounts “necessary to maintain professional status recognized by statute” as per s. 8(1)(i)(i)?

Rule: T is not a professional recognized by statute – s. 8(1)(i)(i) strict requirements are not met to make the expenses deductible.

Application: Bond v. MNR / Rutherford v. MNR / Cooper v. MNR:- Where a T’s income was derived from an office/employment he could deduct dues he was

required to pay in order to exercise the very right to carry on his profession or calling- Deductible dues are not limited to those that have the effect of maintaining one’s professional

status; it may be necessary to belong to organizations in order to remain qualified in one’s job- S. 8(1)(i)(i) should not be read in isolation – (iv) and (v) allow deductibility of dues without

stipulation that they must be required to maintain T’s job- But, before any of that can be addressed, T must be a professional recognized by statute- Analyst designation is merely “any person” or sometimes “qualified person” – special skills,

abilities or qualifications are needed to meet the standard of s. 8(1)(i)(i)Comments:

- Had T been a professional required by statute, this makes room for deductibility where fees paid were required for the maintenance of qualification within the professional field, rather than the strict requirement to maintain professional status

- If T were an independent contractor (rather than an employee), he could have deducted the expenses from his consultancy fees.

Conclusion: Membership fees are not deductible.

5. Cost of Supplies: 8(1)(i)(iii), and 8(10)

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

employment to pay for supplies- (x) Even if employees can deduct the cost of supplies, they need a certificate from their employer to verify the

fees (this can be difficult where employers do not support employees in their deductions).

6. Home Office Expenses: 8(13)

Section 8(13) – Work Space in Home- Notwithstanding s. 8(1)(f) and (i) – (sales worker for commission expenses | dues and other business expenses),

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- (a) No amount is deductible from income from office/employment in respect of any part of a home office EXCEPT to the extent that the home office is either:o (i) It is the principle location of the office/employment duties, ORo (ii) It is used exclusively for earning income from office/employment AND used on a regular basis for

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

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

the losses and the deduction can be used- Note: Page 383/384 details how to calculate work space in home deductions.

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

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

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

Also note McCreath – home-office to primary office is not a deductible transportation costThe home office exists for convenience sake only

Summary:- It’s very difficult to qualify for most deductions.- It’s almost impossible to have a loss generated by employment (embezzlement one year and repayment the next

year may lead to this in some cases).

VII. Income from business or property

Note: Business and property are the remaining enumerated sources (other than office/employment).- Business income is calculated using the accrual method (when earned) as opposed to the cash method for income

from office/employment (when received).

A. Business as a source of income: organized activity and pursuit of profit

Framework for Income from Business or Property- Section 3(a) – Income includes a source inside/outside Canada for the year from each office, employment, business

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

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

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

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

property is deductible from income from business or property- Section 18 – Restrictions on deductions – listed

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Definition of a Business- Section 248(1): “Business” – includes a profession, calling, trade, manufacture or undertaking of any kind whatever

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

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

Unless there is specific expertise or a system to make profits in place (Luprypa)- Section 125(7): “specified investment business” carried on by a corporation in a taxation year means a business

(other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but, except where the corporation was a prescribed labour-sponsored venture capital corporation at any time in the year, does not include a business carried on by the corporation in the year where

i. the corporation employs in the business throughout the year more than 5 full-time employees, orii. any other corporation associated with the corporation provides, in the course of carrying on an active

business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided;

Recall: “Active Business Carried on by a Corporation” – business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure/concern in the nature of tradeSmall Business Deduction: These businesses attract a special low tax rate because of the credit in section 125

o Recall definitions from above

Income from Business and Property: Distinguished- Income from office and employment, are taxed according to the rules in subdivision A, sections 5 to 8 of the Act. - Income from business and property, are taxed according to the rules in subdivision B, sections 9 through 37. - For individuals, the differences between income from business and income from property are not very significant

for this course. - Individual source calculation and deduction rules apply to both- Losses from business or property are calculated source by source, and will reduce overall taxable income when they

are applied according to 3(d).- A business is “anything that occupies the time, attention and labour of a man (or woman, or corporation” (Smith v

Anderson, p. 311 Materials). The idea is that a business requires an organized, ongoing, commercial activity with the objective of earning a profit.

- “Business” is defined in 248(1) to include an adventure or concern in the nature of trade which we study in Part VII B. of the syllabus.

- Income from property is essentially passive in nature; the owner of the property is not required to devote time and energy to earn the income. Income from property is composed primarily of the classic types: rents (from real or personal property), royalties, dividends (distributions of profits by corporations to shareholders) and interest (paid as a percentage of the principal amount of a debt obligation). Property is defined very broadly in s. 248(1). Income or loss from property must be distinguished from gains or losses arising from the disposition of property – 9(3).

- The distinction between income from property and income from business is significant when the income is earned by a “Canadian controlled private corporation” (CCPC). To be eligible for the special low tax rate, or “small business deduction” (it is actually a credit, that results in a rate of 11% federally, plus 2.5% in BC, for a total of 13.5%), the CCPC’s income must be income from an “active business carried on by a corporation” (125(7)). This excludes income from a “specified investment business” (SIB) or a “personal services business” (PSB) (both also defined in 125(7)).

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- All business corporations were presumed by the courts to be engaged in earning income from business, even if the “business” amounted to investing in property. The ITA therefore specifically excludes these two defined types of business that, for policy reasons, are ineligible for the special low rate.

- As we saw when we studied PSBs, the ITA only allows income of CCPC from a PSB to benefit from the 13.5% rate if it employs in the PSB more than 5 full time employees throughout the year. The same is true for a SIB. The policy is that individuals should not have access to the special low tax rate by using a corporation to perform their employment, or to invest their capital to earn income from property.

- Income from a PSB is taxed, as we saw, at 38%, and deductions in computing income from a PSB are limited by 18(1)(p). Income from a SIB is also taxed at 38%, though the way it is applied is complex, and not covered in this course.

- For Canadian resident corporations that are not CCPCs, the general corporate rate is 15% federally and 10% in BC, for a total of 25%. Recall that a non-resident is subject to Canadian taxation if it carries on business in Canada (through a branch operation) or disposes of taxable Canadian property (ITA 2(3)), and is subject to Part XIII tax on amounts paid or credited to it by a Canadian resident. You are not responsible to know how federal and provincial rates apply to non-resident corporations taxed under Part I.

- Note: pay particular attention to whether cash or accrual accounting is used to calculate each type of income, and whether the Act specifies this.

Luprypa v The Queen (1997) TCC Specific expertise or a system to make money from gambling = a businessFacts: - Sandwich maker, but also a pool-shark; filed NIL returns for two years; made money gambling on

pool- 1991 CRA prepares a net-worth assessment – looked to assets and records estimates on net worth

o From this they estimate “income” and expenses, and non-deductible expenses are added to income

- S. 152(7) – Permission for Minister to create net-worth assessments and not accept T’s assessment of return

- S. 152(8) – Assessment is deemed valid and binding until T displaces itIssue: Was the gambling in this situation is a valid source of income (business source?)Rule: Specific expertise or a system to make money from gambling = a businessApplication: - Past cases have held that gambling isn’t a source where there is no inside info or no expertise

associated to it- Where there is specific expertise or a system in place to make money, then it’s akin to a business- Here, T managed the risk, already a skilled player, practiced all week and selected drunk opponents

Conclusion: Here, this was a business and therefore a valid source of income

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

gamblingo Played 50M, and won 55M – profit of $5M in the year in question

- T were paying employees to run tickets for them; CRA assessed them on their winningsIssue: Were the gambling winnings were taxable or not?Rule: Lottery is pure chance = not an expected earning source = no source/no taxApplication: - The odds of winning these lotteries is astronomical; no way to form a solid system of betting

- 40(2)(f) – Capital gains/losses from lottery is NIL- 52(4) – deems the cost of the property that is won in connection with lottery at FMV at possession- There may be some organization here, but not to the point where it becomes an organized activity

for profit- No evidence to show that there was nothing more than luck associated to their winnings – therefore

it is not an expected earning source and not taxableConclusion: This was mere chance gambling – not taxable

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The Pursuit of Profit – Reasonable Expectation of Profit (REOP)- Profit generally distinguishes T’s activities that are for business/property from those that are purely personal- Under the Source model, income/loss from areas that are not a source, are not included in income- Hobbies may incidentally turn a profit, but generally make losses

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

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

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

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

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

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

Modern Approach: Stewart

Stewart v. The Queen (2002 SCC) New test to find out if activity is a Business or PropertyFacts: - T purchased 4 condos from which he earned rental income; for the years in question, he lost money

on them- Could have operated as a tax shelter – take losses for 10 years and then income after that – T here

though was trying very hard to reduce losses and run a viable business, but the interest rates were too high

- Minister, TCC, and TCA all determined that losses were not deductible based on no REOPIssue: Development of a new test for “business or property” incomeRule: TEST: The issue of whether or not a T has a source of income is to be determined by looking at the

commerciality of the activity in question.1. Is the activity of the T undertaken in pursuit of profit, or is it a personal endeavour?

a. Where the activity contains no personal element and is clearly commercial, no need for inquiry

b. Where the activity could be classified as a personal pursuit, it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income

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

i. 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

2. If it is not a personal endeavour, is the source of income a business or property?a. Look to definition of business – s. 248(1) and CL from Smith

Application: - Moldowan – mistakenly equated “source of income” with REOP; does not accord with defn of business in CL:

o “Anything which occupies the time and attention and labour of a man for the purpose of profit” –Smith

- REOP is problematic because it is vague and uncertain and produced unfair and arbitrary results

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o NO LONGER THE TEST- Actual test must be grounded in the words of the Act and the definition from Smith- S. 3 – income includes sources of business and property; s.9 – T’s income for a tax year from

business/property is his profit there from; s.18(1)(h) – personal and living expenses are not deductible

- Question of bona fide business are only required where there is some personal or hobby elementHere: No personal element involved in the rental properties – inquiry ends here- Rented at arm’s length, no evidence of personal use; clearly commercial; motivation of capital gains

Conclusion: Ruling for T – losses could be deducted because it was a valid source of income

B. Comparison of carrying on a business to earning income from property and realization of capital gains1. Adventure or concern in the nature of trade?

Recall: Definition of “Business” in s.248(1) includes adventures or concerns in the nature of trade- Leads to a highly litigated area of Tax Law – distinction between business/property income and capital gain- Turns on whether the transaction can be characterized as an ACNT

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

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

ACNT (but not capital investment) (Arcorp Investments)

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

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

o Where only done infrequently, then it becomes a question of whether the activity was an ACNT- Test:

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

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

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

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

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

bought it personally and sold it to the company for 80k gain; T didn’t possess the lead, just brokered/assumed risk

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Issue: Whether T’s transaction was an ACNT (business taxable) or capital asset (capital gain)?Rule:Application: - Certainly and adventure – a bold and imaginative one at that

- Whether or not it was in the nature of trade?o Was not for investment purposes – there was no capital nature behind the purchaseo T could not do anything with the lead accept sell it – purchased with sole intent to sell to

companyo Commodity itself doesn’t create income in and of itself, it is used to create income through

T’s employer- Carried out in the same manner as would a trader of the commodity; just because it’s not T’s regular

business does not make it separate from business incomeConclusion: The transaction was an ACNT, therefore taxable as income from a business

Regal Heights Ltd v MNR (1960 SCC) Secondary objective of earning profit on land results in an ACNTFacts: - T purchased land with hopes of developing shopping centre; Another mall opened up so failed

- T sold the land for 140k profit – claimed it as capital gainsIssue: Whether T’s profits were derived from an ACNT?Rule: Profit must have been an operating motivation in purchasing a property in order for the purchase to

constitute an ACNT; knowing that selling at a profit as a back-up plan if the original plan (development) did not succeed is not enough.

Application: - The efforts were all promotional in character – no evidence of assurances that shopping centre would result

- Accepts primary goal of development, but recognizes that the secondary goal was to sell property for profit

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

Conclusion: YES – the profits were resulting from an ACNT, and therefore taxable in business income

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

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

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

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

Notes: Makes for a strong presumption that purchase of shares is a transaction in capital!

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2. Carrying on a business vs. adventure in the nature of trade vs. investing in capital properties

Secondary intention and transactions in real property: IT-218RFactors courts consider in determining whether profit or loss on a sale of land is on income or capital account (i.e. is it an adventure in the nature of trade, or a transaction in a capital property held as an investment intended to generate income):

a. taxpayer’s intention at the time of the purchase of the propertyb. feasibility of taxpayer’s intentionc. geographical location, zoningd. extent to which the taxpayer and his/her associates carry out the initial or primary intentione. evidence of change of intentionf. nature of the business, profession, trade, experience of the taxpayer and his/her associatesg. extent to which the purchase is made with borrowed moneyh. length of time the property is held by the taxpayeri. whether taxpayer made the purchase alone or with othersj. reasons for sellingk. extent of taxpayer’s (and associations) previous and subsequent dealing in real estate.

Saskatchewan Wheat Pool v MNR (2008) TCC The fact that a purchaser might be compelled to resell a capital asset at a profit is not determinative; must have had in their mind at the time of purchase a set of circumstances that would allow them to resell at a profit instead of using the property as a capital assetFacts: In this case, the transaction resulted in a loss to the taxpayer, so the taxpayer took the position that the acquisition and subsequent disposition of the property was an ACNT. The loss would therefore be a non-capital loss (from a business source) and not a capital loss, so that 100% of the loss would be deductible in computing income from all sources. Issue: How do we apply secondary intentions to determine whether an investment was a capital investment in property or an ACNT?Rule: The fact that a person buying a property as a capital investment could be induced to resell at a sufficiently high price is not sufficient to change an acquisition of capital into an ACNT: the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition

He must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital.

Arcorp Investments (2000 FCTD) Personal securities trading business = business income (not ACNT, but an actual business involved in trading, and not capital investments as they were publicly-traded liquid assets)Facts: Private company with one shareholder – security salesman for stock brokerage. Almost all assets of the company were marketable securities that could be traded on the stock exchange. T had no licence to broker stocks – buying for its own account; really acting for the shareholder personally. Undertook about 38 transactions per month – huge value – held for less than yearIssue: Whether the transactions were capital investments or carrying on a business or ACNT?Held: Gains were income from securities trading business (not an ACNT, but an actual business involved in trading)

Interpretation Bulletin IT-459Recall: s. 2(3): non-resident taxable in CA where employed by Canadian corporation or carrying on business in Canada, or disposing of Canadian property – taxable in accordance with Division D

Non-residents (that are not taxable as residents) that work, operate a business, or dispose of taxable Canadian capital assets during the taxation year will be subject to tax.

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- For non-residents that carry on a business (consider s. 253), they will be subject to tax on profits (revenue – expenses) this means that non-residents that engage in a one-time trade/transaction my be brought within the definition of carrying on a business in Canada, and subject to tax under section 2(3) E.g. A non-resident sells something on www.ebay.ca would likely be deemed to be carrying on business in

Canada and therefore subject to tax under Section 2(3).

C. Income from property

Note: Stewart overturned Maldovan on gambling, deciding that engaging in gambling is to take a chance, which cannot be considered a source.- Stewart test applies to income from property too (as well as business income)- Profit motive is important.- If there is a personal element of enjoyment in the activity/personal use of the asset, and you are behaving in a

sufficiently personal way, then the expectation of profit and resulting taxation do not apply.

General: s. 248(1) “property”; 9(3); Stewart REOP applies to Property AND BusinessS. 248(1) “Property”- means any kind whatever whether real or personal or corporeal or incorporeal and without restricting the generality of the forgoing, this includes: A right of any kind whatever, as share or a chose in action:- Still requires a characteristic of ownership (may be some value associated to covenant/right of way)- Unless contrary intention indicates, money;- A time resource property; AND- The work in progress of a business that is a profession

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

o Govt does not want to give special tax rate to investors, it is for bona fide businesseso S. 125(7) – specified investment business – principle purpose is to derive income from propertyo S. 9(3) – Income from property does not include any capital gains/losses from the disposition of that

propertyInterest: paragraph 12(1)(c); subsections 12(3), (4) and (11), 16(1)(a)Section 12- Inclusions to Income from Business or Property – SEE HANDOUT!- (1)(c) – Interest – subject to (3) and (4.1), any amount received/receivable in tax year that was paid to T as interest

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

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

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

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

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

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

the T

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

Mortgage payments are the classic example of blended payments; principle reduces gradually as payments begin to pay more and more principle and less interest.

Groulx v. MNR (1967) SCC Court found blended payments from an increased purchase price (above FMV)Facts: - T sold farm for 395k; Purchaser paid 85k down and interest free payments over 7 years

- MNR reassessed the years in question for instalments made in those years as blended paymentso Price had been inflated to include an “interest” amount – spread over the payments

- Trial court found that the purchase price was more than the FMV; even though there was bargainingo Evidence showed that price would have been lower, but for the willingness to give no

interesto Normal rate of interest rate was 5-6%; T knew he could charge interest, but instead kept

price higho Court deemed 5.5% of the purchase price to be interest paymentso Now interest amount owing, s. 12(3)/(4) would apply to include them in income under

accrual modelIssue: Whether payments made could be regarded as part interest payments as per s. 16(1)?Rule: If the sum of payments exceeds FMV, there will be found to be blended payments that include interest.Application: If the price was at or below FMV, the Minister would have had a hard time finding interest included

Vanwest Logging (1971) and Carter (1964) – didn’t find the same increase in sale price – no interest included

Conclusion: Trial court affirmed for its reasoning (interest was included within the blended payments)

Summary of Interest Questions:1. What constitutes interest?2. When does it have to be reported?3. Is there an element of blended payments?

Rent and Royalties- Rent is generally a fixed payment; periodic; for the use of property for a given period of time- Royalties are amounts paid for the use and production of intangible property (copyright, trade marks, patents, know

how, scientific knowledge, trade secrets, licencing fees, etc) Royalties are akin to rental payments

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

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

Section 12(1)(g) – Payments Based on Production or Use- Amount received by T in the year that was dependent on the use of or production from property whether or not

that amount was an instalment of the sale price of the propertyo Prevents people from claiming capital sales when they licence the removal of a resource from propertyo This is a timing provision that means that the royalty must have been received, not just receivable you

don’t have to account for payments on an accrual basis

Wain-Town Gas and Oil (1952) After-sale share in profits are royalties and subject to income taxFacts: Franchise contract to supply municipality with natural gas; sold right to another company in exchange for share in the gross receiptsIssue: Was this a sale or rental/royalty agreement?Rule: After-sale share in profits are royalties and subject to income taxHolding: Even though this was a sale of a capital asset, the share of the income was a royalty and is treated as income

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Spooner Where all legal rights are transferred, the transaction constitutes a sale - gives rise to profits; if less than all rights are transferred, the transaction is a lease or licence and the payments are rent or royaltiesFacts: Mrs. Spooner sold a portion of her ranch land for cash, a share in the extracting company, and a portion of the oil extracted. Issue: Was this a sale or a rental/royalty agreement?Rule: Where all legal rights are transferred, the transaction constitutes a sale - gives rise to profits; if less than all rights are transferred, the transaction is a lease or licence and the payments are rent or royalties

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

Dividends- Income received by Shareholders of a corporation by the corporation – distribution of income by share- Section 12(1)(j)/(k) include dividends from resident/non-resident corporations- Section 82(1)(b) and 121 protect against double taxation- Dividends may be received as cash, property, or shares in the corporation.- The value of a dividend will be included in a shareholder’s income (may be more difficult when it’s not cash)- Note: assume dividends are included in income at full value for exam purposes.

VIII. Deductions in computing income from business and property- Deductions for business/property generally allowed unless there is a specific limitation (s.18)

A. Structure of the Act – Business/PropertySection 9(1)/(2) – Computation of net profit; deductibility of ordinary running expenses- Income/loss is your ordinary profit/loss from carrying on a business or investing in a property

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

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

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

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

o Note also Regulation 7306 – sets out the max deductible amounts- (t) – Taxes paid under this Act; (note. S. 60(o) – T can deduct costs of objections or appeals)

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

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- (1)(c) – Interest paid by T on amounts borrowed for the purpose of earning income from business/property

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

o Hardly ever relied upon now

B. The Income Purpose Earning TestDaley v MNR (1950) A deduction is permissible if it is in accordance with the ordinary principles of commercial trading or accepted principles of business practice.Facts: Expense for a lawyer to transfer to a new location (ON) from another province was claimed as a

deduction by T. T claimed he incurred the expense to earn income from a business.Issue: Was this a valid deduction?Rule: A deduction is permissible if it is in accordance with the ordinary principles of commercial trading or

accepted principles of business practice.Application: Court held that this was not an ordinary cost of business, as this was just an initial expense at the outlay

of business in order for the T to be qualified (to pass the bar) in Ontario in order to be eligible to carry on a business.President Thorsten of the Exchequer Court:- Expenses are deductible for computing profit under Section 9.- Section 18 does not speak to allowable deductions; Section 9 is a net-sum provision that allows for

deductions and Section 18 is a restrictive provision to restrict deductible expenses to those incurred for the purpose of earning income.

Test for deductibility: Whether the deduction is permissible by the ordinary principles of commercial trading or accepted principles of business practice.Business purpose test: Whether a transaction has to have a commercial purpose other than a tax avoidance purpose, in order to be valid. Should be called the income-purpose test (as in Section 18(1)(a); exists to recognize that transactions made solely to avoid tax should not meet the deductibility standard.

Conclusion: The amount was not deductible.

Imperial Oil (1947) If an expense is incurred in the ordinary course of business, it will generally be deductibleFacts: Collision at sea between two vessels; Imperial at fault; US Steele damaged; T had to pay; T deducted

settlement costs from its income for the relevant year(s).Issue: Is the cost of repairs to US Steele a deductible expense for T?Rule: If an expense is incurred in the ordinary course of business, it will generally be deductible

Test: did T incur the expense for the purpose of earning income, even if no income was actually earned (instead a loss was incurred)?

Application: - Expenses that are part of normal business are to be treated as deductible, even where amounts are large

- If it is an expenditure made as part of the income earning process, it will not be restricted by s. 18(1)(a)

- No specific causal connection to income earning is required, just needs to be part of the overall business considered in light of the connection with the operation, transaction or service

Comments:- If T had received the income, would they have had to declare the settlement? Likely split amount:- Surrogatum principle – the payment would be in lieu of lost-profits – taxable- Damage repairs are an investment in their capital property – not taxable

Conclusion: YES – expense arose as consequence of normal/ordinary risk of business

Royal Trust Co v MNR (1957) Exch. Ct Ordinary course of business expenses are generally deductibleFacts: - Attempting to deduct fees to allow employees membership at country club

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- Note: s.18(1)(l) – restriction on deduction for club dues – was not in force yetIssue: Are the membership fees paid for employees a deductible business expense?Rule: Ordinary course of business expenses are generally deductibleApplication: - Membership dues were an expense as an income earning initiative – evidence shows business occurs

there- Two requirements for deductibility:

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

- Is the initial fee paid deductible as well? (Note Daley – initial fee was not a deductible expense)o Here, the annual recurring expense included adding new members and joining new clubs, so

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

of businessConclusion: - YES – deductibility is determined by ordinary principles of commercial trading

- Unless specifically disallowed, generally any expense will be a valid business expense

C. Personal or Living Expenses

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

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

Section 248(1) – “Personal living Expenses” Includes:- (a) Expenses of properties maintained by any person for the use/benefit of T or any person connected with T by

blood relationship, marriage or common-law partnership or adoption, and NOT maintained in connection with a business carried on for profit with a REOP

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

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

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

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

***IT 470R - Removal [Moving] Expenses

Para 35. Where an employer reimburses an employee for the expenses incurred by the latter in moving the employee and the employee's family and household effects either because the employee has been transferred from one establishment of the employer to another or because of having accepted employment at a place other than where the former home was located, this reimbursement is not considered as conferring a taxable benefit on the employee.

Para 36. In addition, where the employer pays the expense of moving an employee and the employee's family and household effects out of a remote place at the termination of the employment there, no taxable benefit is imputed.

Benton (Thomas Harry) v MNR (1952) House-keeper is a personal expense – not deductibleFacts: Farmer operated large farm with no employed farm hands; T employed a house-keep to free him up for

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

Issue: Were the house-keeping wages deductible?Rule: A house-keeper is a personal expense – not deductibleApplication: Only the farm work is considered a business expense, the things we do for ourselves are excluded

Comments: Had he hired an employee for the farm work for the same wages, he would have been able to deduct

Conclusion: NO – housekeeper is a personal expense. Only 40% of her labour can be linked to the farming function

***Commuting to place of businessDr. E. Ross Henry v MNR (1974) SCC Travel costs between home and work are generally not deductible against income from business/property Costs incurred travelling from one place of business to another are generally deductible.Facts: T was an anesthetist who commuted from home to work twice per day, and to work (the hospital) as

needed for emergencies. He wanted to deduct all commuting costs from his income.Issue: Are commuting costs deductible?Rule: Commuting costs between home and a place of business are generally not deductible, but costs incurred

travelling from one place of business to another are.Application: The Minister allowed Dr. Henry to deduct commuting costs from the hospital to his personal office, and

the costs for travelling to the hospital for emergency cases.The Minister refused to allow T to deduct the cost of travelling between home and the hospital, noting that these costs are personal, and no different than those incurred by any otherThe court distinguished Cummings, as in that case, T had a home office which he used for billings, and therefore he had a home base-of-operations, so his travel to the hospital was travel between bases of operations and therefore deductible.

Conclusion:

***Moving Expenses- Bayett – move at a later date to the date of employment in the new location is fine so long as you’re moving to a

place closer to new work location than your old residence- Home-offices are not allowed – missing the four essential elements: old work; new work; old home; new home

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

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

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

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

full time study

Section 62(3) – Definition of Moving costs (Quite restrictive language “includes” so might be able to analogize similar expenses, but would be difficult).- Moving expense includes:

o (a) Travel costs (including reasonable amount on meals/lodging), from old residence to new residence

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o (b) Costs of transporting household effects from old to new residenceo (c) Cost of meals and lodging near the old residence or new residence for up to 15 dayso (d) Cost of cancelling lease at old residenceo (e) Selling costs of old residenceo (f) Legal fees and transfer taxes of the new propertyo (g) Interest, property taxes, insurance premiums, utilities (landline, possibly cell phones, cable, natural gas,

etc.) up to $5000 for the period where the old house is left empty and reasonable efforts are made to sale ito (h) Revision of legal documents to reflect the new address of T’s residence

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

NOTE: s. 62(3)(c) – is not limited by the arbitrary 50% rule in s. 67.1 – full deductibility for up to 15 daysSection 248(1): “Eligible Relocation”- An eligible relocation occurs to

- enable a taxpayeri. to carry on business or to be employed, at a new work location, or ii. 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.- 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 kilometres closer to the new work location than the old residence was.

40 kilometres by the shortest normally travelled route.- I.e. Old home to new work has to be 40km greater than new home to new work. - Test: the method used to determine distance is the “shortest normal route open to the travelling public”

Section 56(1)(n) – Amounts to be included in Income for the year – Scholarships/BursariesThe amount that T’s scholarships and bursaries or prizes for achievement in a field of endeavour ordinarily carried out by T, exceed the T’s scholarship exemption for the year under (3)

Section 56(3) – Scholarship/bursary/prizes Exemption- Exempts all scholarships and bursaries under 56(1)(n) in connection with enrolment in an educational program that

qualifies for the educational tax credit (118.62) which requires that the T be enrolled in a “qualifying educational program” at a “designated educational institution”

- T’s scholarship exemption for a tax year is the total of – generally all scholarships/bursaries/prizes

- “qualifying educational program” = minimum 3 consecutive weeks, 10 hrs per week- “designated educational institution” = Canadian and foreign universities and colleges, provided, if foreign, the

program is at least 13 weeks long

***Home Office ExpensesSection 18(12) – Workspace in Home

- Notwithstanding any other provision of the Act,

- (a) No amount is deductible from income from office/employment in respect of any part of a home office EXCEPT to the extent that the home office is either:

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

meeting customers in the ordinary course of duties

- (b) Where (a) is satisfied, the amount that is deductible from income for the year from office/employment shall not exceed the T’s income from that office/employment; AND

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- (c) Where denied deduction because of (b), losses can be carried forward until income from employment exceeds the losses and the deduction can be used

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

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

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

D. Deduction of Interest Expense – see hand-outRecall: s. 18(1)(b) – prohibits deductions outlays of capital – at CL, interest is generally a payment on capitalSection 20(1) – Deductions Permitted in Computing Income from Business/Property

- Notwithstanding 18(1)(a), (b) and (h), in computing income from T for a year from business/property, there may be deducted such of the following amounts as may reasonably be regarded as applicable to:(c) An amount paid/payable in the year, pursuant to a legal obligation to pay interest on:

i. (i) Borrowed money used for the purpose of earning income from business/propertyii. (ii) An amount payable for property acquired for the purpose of gaining or producing income

from the property or for the purpose of gaining or producing income from a businessor a reasonable amount in respect thereof, whichever is the lesser

Note in particular: (1) timing (accrual vs. cash accounting) of the deduction; (2) requirement for a legal obligation to pay the interest; (3) income earning purpose requirement; (4) limitation where income which is earned is exempt; (5) deduction permitted (subparagraph ii) where interest is charged on unpaid purchase price rather than money borrowed; (6) “unreasonable” interest charges will not be deductible.

The Queen v Bronfman Trust (1987 SCC) Gave requirement that Borrowed funds be used for an income earning purpose; money must be borrowed to use directly on the income earning purpose Test…

1. T must trace the borrowed funds to an identifiable use which triggers the deduction (here the borrowed funds were used to refinance the appellant's capital account at his law firm).

2. The second requirement is consideration of the direct use of the borrowed funds (here it was to refinance the appellant's capital account at the firm).

The Queen v Attaie (1990) FCA T tried to offset mortgage interest as a loss against interest income on term deposits This was not allowed as money to finance a personal residence is an ineligible use (not for the purpose of earning income) Contrast with Singleton

Singleton v Canada (2002) SCC Interest payments deductible if direct link between loan and eligible useFacts: The appellant, a partner in a law firm, took $300,000 from his capital account in his law firm to purchase

a house and, on the same day, contracted a bank loan to replenish his capital account. Income Tax Act, paragraph 20(1)(c) provides that interest on borrowed money used for the purpose of earning income (such as capital investment by a partner in a law firm) is deductible. The Minister and the Tax Court of Canada both found that, on any realistic view of the matter, the borrowed funds were not used for the purpose of earning income but for the purpose of purchasing a house. This was an appeal from the Tax Court decision that the interest on the borrowed funds were not deductible under paragraph 20(1)(c).

Issue: Was the borrowed money used for the purpose of earning income from a business and deductible?67

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Rule: TP’s motive or bona fide purpose is not relevant in categorizing whether the borrowed money was used for the purpose of earning non-exempt income from business or property; all that is needed is a direct link between the borrowed money and eligible use

Application: FCA:- The transactions must be viewed independently.- The capital account was financed with the appellant's own funds; it was not financed by personal

borrowing. When the $300,000 was withdrawn from the firm, the firm's assets would have been reduced, and the liabilities of the firm would have been increased if the firm had had to borrow to pay the appellant his $300,000. In order to replace the firm's reduction of assets or eliminate the firm's need to incur the increased liability caused by the withdrawal of his capital funds, the appellant borrowed the money from the bank and paid $300,000 into the firm

An initial capital investment or subsequent refinancing thereof by a partner in a law firm can be financed with borrowed funds for which the interest payable is deductible. The Minister has presented no logical reason why, if a partner invested his own funds in his firm, he cannot withdraw those funds for personal use and refinance the investment in the firm with borrowed money in respect of which interest is deductible.The requirement of paragraph 20(1)(c) is that the borrowed money be used for the purpose of earning income. Its application is not limited to the initial investment made nor to the refinancing of prior borrowed funds. Its application does not exclude refinancing with borrowed funds, a partner's investment of his own funds in his firm which he withdraws for a non-eligible purpose. Provided the transactions are properly structured and there is no sham, there is no reason why transactions occurring the same day should not be treated independently and each be given meaning.Applied two requirements for interest deductibility from Bronfman Trust v The Queen:

3. T must trace the borrowed funds to an identifiable use which triggers the deduction (here the borrowed funds were used to refinance the appellant's capital account at his law firm).

4. The second requirement is consideration of the direct use of the borrowed funds (here it was to refinance the appellant's capital account at the firm).

Conclusion:

Ludco Enterprises Ltd. Brian Ludmer, David Ludmer and Cindy Ludmer v The Queen (2001) SCC Courts must apply principles of statutory interpretation to define income; absent a sham or window dressing, courts should not be concerned with the sufficiency of income expected or received from an investment. Note: new amendments mean Ts cannot defer interest in this way anymoreFacts: The taxpayers in this case borrowed about $6.5 million and used the borrowed money to purchase shares

of two companies (“Justinian” and “Augustus”) resident in Panama and operated from headquarters in the Bahamas (both tax haven countries). The companies used the funds to invest in Canadian and US government debt obligations which were exempt from withholding tax by Canada or the US, and earned interest on these debt obligations.

Issue: Here the direct use of the borrowed funds was to purchase shares, but was the purpose to earn income?Rule: Courts must apply principles of statutory interpretation to define income; absent a sham or window

dressing, courts should not be concerned with the sufficiency of income expected or received from an investment.

Application: SCC finds that 20(1)(c)(i) can apply when a taxpayer uses borrowed money to make an investment for more than one purpose, provided that one of those purposes is to earn income.An ancillary purpose of earning income is sufficient. Reading a dominant or exclusive purpose test into subparagraph 20(1)(c)(i) “would require a rewriting of the provision to introduce a concept of degree, exclusivity or primacy in the taxpayer’s purposes.” To determine whether the requisite purpose is present, “courts should objectively determine the nature of the purpose, guided by both subjective and objective manifestations of purpose.” The proper “test to determine the purpose for interest deductibility under s. 20(1)(c)(i) is whether, considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the investment is made.” This provides an objective standard, apart from the taxpayer’s subjective intention, which is relevant but not conclusive.

Conclusion: Income earning purpose established and the value of the interest deducted was reasonable.68

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E. Policy Reasons for Denying Deductions***Expenses of Illegal BusinessesEldridge Earnings from an illegal business are subject to tax, and the expenses (provable) of an illegal business are deductibleFacts: - T was running a common body house; T declared her income and listed her expenses; no receipts

- Claimed things like: legal fees, paying off police, BC tel, hotel fees, etc.Issue: Were these illegal activity expenses deductible?Rule: Earnings from an illegal business are subject to tax, and the expenses (provable) of an illegal business are

deductibleApplication: - Without receipts, majority could not be proven anyways

- Rents were allowed, legal fees were traceable and considered as benefits to employees; assistance for protection was deducible where could be proven

- Cost of buying out all publications to protect her business – not covered because court found the press was not harmful to her business

- Question: did the court have the right to question the favourability of the press? Is it not an expense?

Conclusion: Expenses are deductible, but only insofar as they can be proven (need receipts)

Buckman v MNR (1991) TCC Illegal income is taxable and expenses incurred in earning illegal income are deductibleFacts: lawyer embezzled funds from clients...Conclusion: income was taxable, and expenses would be deductible as wellBribery of Certain Officials – s. 67.5 – Bribes are not deductible

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

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

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

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

IX. Computation and timingAmounts Receivable Recall: Section 12(3)/(4) – avoids the delay of taxes on amounts receivable – specifically interestSection 12(1) – Income Inclusions

- There shall be included in computing income from T for a year from business/property such of the following:o Any amount received by T in the course of business in compensation for goods delivered in a

subsequent year (e.g. Retainer at a law firm is for services in the future, still must be included)

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

i. (i) The day on which the account in respect of the services was rendered, and

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ii. (ii) The day the account would have been rendered had there been no undue delaySection 12(2) – Interpretation(2) Paragraphs 12(1)(a) and 12(1)(b) are enacted for greater certainty and shall not be construed as implying that any amount not referred to in those paragraphs is not to be included in computing income from a business for a taxation year whether it is received or receivable in the year or not.

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

o Where everything has been done to give rise to an entitlement to be paid (West Kootenay Power)- An amount is not “receivable” until the actual amount owed is ascertained (Benaby Realties)

o Absolute certainty is not required – sufficient certainty on amount is needed (West Kootenay Power)- Not receivable where the payment is still contingent on some condition precedent (JL Guay)

J. Colford Contracting When an amount becomes receivable, it must be included in incomeFacts: - T is a corporation with year end March 31;

- T had a contract whereby they were not entitled to the remaining 15% of the money owed to them until architect certificate was issued; when issued, an amount becomes receivable but can’t sue for it.

- Payment of the K was received before the end of the year and remaining 15% was paid the next year

Issue: Was the 15% was a receivable amount in the current tax year?Rule: When an amount becomes receivable, it must be included in incomeApplication: - Whether T had the legal, but not necessarily immediate, right to the payment

o Receivable means entitlement; when restriction removed, then it becomes part of income receivable

- Architect certificate was received in the current year, so the amount became receivableConclusion: YES – must be included in the current year

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

subsequent tax year, the Crown actually paid for the land- Here, the land is not a capital asset – it is inventory of the business and thus taxable as profit in

the business- T arguing that the profits could be used in the previous year – likely arguing to use losses from 7

years priorIssue: Was the amount receivable in the year of expropriation or the year paid?Rule: An amount is not ‘receivable’ for tax purposes until the actual amount is ascertainedApplication: - T had the right to receive as of the date of expropriation, but until the amount was ascertained,

there is nothing that can be taken into account as the amount receivableo The valuation occurred after the tax year had ended

Conclusion: Therefore, the profit is to be accounted in the year the valuation occurred – which is the year T was paid

West Kootenay Power and Light (1992) FCA An amount is receivable when all requirements for entitlement to payment have been done (even where customer is not yet legally obliged to pay)Facts: - T bills customers every two months; The period at the end of the tax year was unclear as to how

much owed- T included the unpaid power in their financial statements, but did not include it in their taxes

Issue: Does T have to include its revenue for the year as inclusive up to the last day of the year, even though mid-bill?

Rule: Receivable means: everything has been done that is required to give rise to entitlement to be paid – even where customer is not legally obliged to pay at that moment

Application: - Having delivered the electricity, there is an entitlement to be paid, even though no bill yet

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- Good delivered, therefore a right to be paid – becomes receivable (s. 12(1)(b))- Receivable means that everything has been done that is required to give rise to entitlement to be

paid; Even though customer is not legally obliged to pay at that moment- Was the amount ascertainable?- Evidence here shows that very accurate estimates could be made – sufficiently ascertainable

Conclusion: The estimated revenues are receivable and should be included in the yearly income

JL Guay Ltee Expenditures may only be deducted from income in the period in which they were madeFacts: - 30 days are given before payment is due; T was claiming large deduction even though T was

holding on to the expense in wait for an architect certificate; Minister claimed not deductible because not yet paid

Issue: When is an amount dependent on a condition precedent considered receivable?Rule: An amount is not receivable while it is still contingent on a condition precedentApplication: - This is a contingent amount based on architect certificate – condition precedent needs to be

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

Conclusion:

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

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

Recall: s. 9(1) income for business/property is net profit; (2) loss is T’s loss from the business or propertySection 18(1)(b) – Capital Outlay or Loss

- [In computing income from business/property, no deduction shall be made for] an outlay, loss or replacement of capital, a payment on account of capital…

***Basic Test: Enduring Benefit – Does the expenditure result in an enduring benefit or advantage to the business or property source?British Insulated and Helsby Cables Ltd v. IRC (1926 HL) Onetime payment to create an asset = a capital outlayFacts: - T made a lump-sum payment to a pension fund to serve as a nucleus for the fund and to ensure

older employees ranked appropriately- T deducted lump sum payment as a current expenditure; Minister said it was a capital

expenditureIssue: Whether the lump-sum payment to the fund was a capital expenditure or a deductible current expenseRule: A onetime payment used to create an asset = a capital outlayApplication: - When an expenditure is made with a view to bringing into existence an asset or an advantage for

the enduring benefit of a trade, there is very good reason to treat the expenditure as a capital expense

- Here, payment not made as a gift/bonus, but to form a nucleus. This is for the benefit of the older employees. The monthly contributions T makes to match employee’s payments are deductible, but this was different

- Onetime payment, used to create this asset – that is a capital outlayConclusion: This was a capital expenditure and cannot be deducted

***Repair of Tangible AssetsGR: Is the asset substantially different from what it would be if repairs were not required? (Gold Bar)

- Improvement of the asset alone is not determinative – all repairs generally improve the asset71

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- Must look to whether the repair was actually required as well- A new marketable asset may be a capital asset even if required by the main asset (Canada Steamship)- Does it provide increased capital value? Prolonged life?

Canada Steamship Lines Ltd v MNR (1966) Exch Boiler of the ship is a capital asset in and of itself; substantial repairs to existing capital equipment are not capital assets.Facts: T paid for expenditures of two types:

1. Expenses for replacing wear and tear items on boat;2. Expenses to replace boilers on the ship

Issue: Were the expenditures capital expenditures or simply deductible repair of capital assets?Rule: Capital expenditures not deductible as repairs/expenses under s. 18(1)(b)Application: 1. Clearly ship repairs – even though for new floors and walls – not marketable in and of themselves

- Substantial costs do not change the fact that they are still deductible as repairs of capital asset2. Could be considered as separate capital assets or as repairs of the larger capital asset (boat)

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

Conclusion: 1. Deductible – clearly ship repairs – so these were repair of capital assets and deductible expenses2. Machinery within a ship is a capital outlay and non-deductible

The Queen v Shabro Investments Ltd (1979) FCA New tech employed to improve a building is a capital outlay; not deductible under s. 18(1)(b)Facts: - Two story building with concrete slab floor built on garbage dump; floor cracked

- T installed new flooring and support system for foundation - $95k claimed as deduction under s. 18(1)(b)

Issue: Were the expenses for the new floor and new steel piles deductible repairs or capital outlay?Rule: New assets for enduring benefit of a business are not deductible; repairs to existing assets are; 18(1)(b)Application: - Sinking of the steel piles is a capital outlay because this is a new and better asset for the building

- Replacement of the floor – would generally be wear and tearo New tech does not necessarily hinder something from being a repairo Poor construction and vandalism are also valid reasons for current expenditure for

repairso BUT, here replacement of floor and sinking of piles was a single operation – capital outlay

Conclusion: Capital Outlay – work differed from regular repairs

Gold Bar Developments Ltd v The Queen (1987) FCTD New test outlined for repairs vs. capital outlays: Is the expense for a new addition/quality improvement, or is it simply fixing something that has worn out? No definitive test!Facts: - Apartment building had an entire wall that was unsound; instead of using replacement bricks

they used metal cladding – cost of 200kIssue: Was this expense a capital outlay or a deductible repairs expense?Rule: No definitive test for repair expenses vs. capital outlay; consider whether it`s a new addition or quality

improvement, or if it is expended to fix something that has worn outApplication: - Improvement of the asset is not a definitive test – because generally the asset is improved after

repairso Whether the repairs are substantial will determine how large the improvement will be

- Did T have the choice to repair? Here the word was required for the proper maintenanceo And there is a substantial improvement as a result of the required repairs

- Compared against the value of the property (8M), the cost of repairs (200k) is not out of the question

- Is the building substantially different from what it would have been if the bricks were sufficient at the start?

- No. This is not an actual improvement, this is a repair.

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Conclusion: - The expenditures for the new wall are repair costs and thus deductibleo They don’t significantly change what the building would be if it were built correctly from

the start

Non-Capital LossesRecall: s. 3(a) – Income is the total amount from all sources (profits); s. 3(b) – Calculates the amount T’s capital gains exceed T’s capital losses; s. 3(c) – Adds profits from non-capital and any positive capital gains; and s. 3(d) allows T to offset the total in (c) against the non-capital losses experienced by T in the year

- Note: Non-capital losses can be used against all income

Section 111(1)(a) – Carry Forward and Back of Non-Capital Losses- Non-capital losses can be carried forward 20 years and back 3 years- An overall loss from sources in a year can be applied against any income in future/past years

X. Capital gains

A. IntroductionTaxation of Capital Gains and Losses: 3(b) and subdivision ERECALL:

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

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

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

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

o Includes moving expenses; childcare expenses; etc.

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

Subdivision ‘E’ Deductions: Deductible against all income, regardless of source- Recall s. 62 – Moving Expenses – discussed above in Personal and Living Expenses- Recall s. 63 – Childcare Expenses

Distinguish Income from Property: 9(3)Section 9(3) – Gains and Losses Not Included

- In this Act, “Income from a Property does not include any capital gain from the disposition of that property and “Loss from a Property” does not include any capital loss from the disposition of that property

Calculation of Capital Gains and Capital Losses: Section 39(1)(a) and (b) – Meaning of Capital Gain and Capital Loss

- Capital gain and losses are gains and losses from the disposition of any property, excluding gains and losses from dispositions of property that are taxed as income from a source

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- (1)(b)(i) Exception in definition of capital losses for depreciable property – to follow

Section 40(1) – Gains and Loss Calculation- EXCEPT as otherwise provided in this part:

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

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

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

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

Taxable Capital Gains / Allowable Capital Losses Section 38(a) and (b)

- Taxable capital gains are ½ of the T’s capital gains; Allowable capital losses are ½ of T’s capital losses

Carry Forward and Back of Capital Losses: Sections 111(1)(b) and 111(2)(a)Section 111(1)(b) – Net capital losses can be carried back three years and carried forward indefinitely

- Note, capital losses can only be deducted against capital gains

Section 111(2)(a) – Where T dies, and there are remaining net capital losses, these losses can be converted to a non-capital loss to be used against any income in the year of death or the previous tax year

Policy Evaluation of Preferential Taxation of Capital Gains- Capital gains are more favourable to T than employment/business income- Currently the highest tax rate is 43.7%, but you would only be taxed on 21.85% of capital gains at that rate- Until 1972, capital gains were outside of the ITA and therefore exempt- Three major policy concerns for changing the historical approach:

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

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

o 3. Certainty: Should be able to determine tax consequences and plan for it i. NOTE: most commonly litigated area, so may not have achieved this goal

- Full taxation of capital gains would discourage investment by individuals and corporations- Effective tax rate on capital gains became 50% of that on other income- Lifetime exemption for capital gains – Fishing/farming investments up to 750k

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

- Capital losses receive less relief than other types of losses because generally capital losses are deductible only from capital gains and not from other sources of income

- Capital gains are not realized until the property is actually disposed of

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B. DefinitionsRecall:

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

Property and Capital PropertySection 248(1) – “Property”

- Property of any kind whatever whether real or personal or corporeal or incorporeal and includes:o Right of any kind whatever, a share or a chose in action;o Money, unless contrary intention;o Timber resource property; ando Work in progress of a business that is a profession

Cost, Capital Cost, and ACBSection 54 – Definitions

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

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

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

that could reasonably be regarded as attributable to that part immediately before disposition

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

properties…o The overall ACB becomes the average of the total combined ACBs for each propertyo Used for stocks/shares/mutual funds “average position”

Example – Identical Properties:Bob makes the following purchases of common shares of X Corp:

- Purchase 200 shares of X for $1 per share on March 1, 2004- Purchase 100 shares of X for $1.50 per share on September 15, 2006- Sale of 100 shares of X for 1.60 on January 15, 2007

The Act does not allow T to choose which of the T’s identical properties are acquired/disposed of at a particular time. It achieves this objective by forcing T to average all the ACBs of the identical properties at any given time

So Bob’s ACB of each of his identical shares is the average of all the ACBs of the shares- 200x1=200; plus 100x1.5 = $350; Then the total amount is divided by the number of properties- 350/300 = 1.17; So B’s capital gain on 100 is 1.60-1.17 x 100 = $43- s.38(a) states that B’s taxable capital gains are ½ of his total gains = $21.5

Section 248(1) – “Disposition”

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- INCLUDES:- (a) Any transaction or event entitling a taxpayer to proceeds of disposition of the property- (b)(i) Any transaction where property is a share, bond, debenture, note, certificate, mortgage, agreement of sale

or similar property, the property is redeemed in whole or in part or is cancelled- (b)(ii) where property is a debt or any right to receive an amount, the debt is cancelled or settled

- BUT DOES NOT INCLUDE- (e) Transfer of property as a consequence of which there is no change in the beneficial ownership EXCEPT:

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

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

a corporation of a share of its capital stock

NOTE: “Proceeds of Disposition” defined in section 54 (a-f)- Price of property sold; compensation of property stolen; compensation for property destroyed; compensation for

expropriation; compensation for property injuriously affected; compensation for property damaged and any amount payable in respect of damage

The Queen v Compagnie Immobiliere BCN Ltee (1979 SCC) “Definitions of: ‘dispositions of property’ and ‘proceeds of disposition’ are not exhaustive; these expressions must bear both their normal meaning and their statutory meaning; it would be wrong to restrict the former because of the latter

C. Deemed Dispositions and Deemed Proceeds1. Ceasing to be or becoming a resident of Canada

Section 128.1(1) – Immigration- (b) [Where T becomes resident of Canada], immediately before the time immediately before the time of

becoming a resident, T is deemed to have disposed of all properties owned by T, for their FMV at the time of disposition

o (i) Except for property that is taxable Canadian property (where T is an individual)- (c) T shall be deemed to have acquired the properties disposed of in (b) at FMV

o This becomes the ACB of the property – only taxed on gains while actually resident in Canada

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

Section 128.1(4) – Emigration- (b) [Where T ceases to be resident in Canada] T is deemed to have disposed at the time immediately before the

time immediately before the particular time, of each property owned by T for FMVo (i) Except for real property situated in Canada, where T is an individual

2. Gifts and Sales below FMV to Non-Arm’s Length Persons

Section 251(1) Arm’s LengthRelated persons shall be deemed not to deal with each other at arm’s length, even if their interests are in conflict

Non-related Arm’s Length? – Question of fact:

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Requires an examination of all the facts and circumstances existing between the two persons; unrelated parties have been found not to be dealing at arm’s length when

- There is “a common mind” which directs or controls the bargaining for both sides OR- The two persons act in concert without separate interests

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

o (i) A person who controls the corporation, if it is controlled by one person;o (ii) A person who is a member of a related group that controls the corporation; ORo (iii) Any person related to a person described in (i) or (ii)

- (c) Any two corporations if they are controlled by the same person/group of persons

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

Common-law partner = means a person who cohabits at that time in a conjugal relationship with the taxpayer and(a) has so cohabited with the taxpayer for a continuous period of at least one year, or(b) would be the parent of a child of whom the taxpayer is a parent, if this Act were read without reference to paragraphs 252(1)(c) and (e) and subparagraph 252(2)(a)(iii),

and for the purposes of this definition, where at any time the taxpayer and the person cohabit in a conjugal relationship, they are, at any particular time after that time, deemed to be cohabiting in a conjugal relationship unless they were not cohabiting at the particular time for a period of at least 90 days that includes the particular time because of a breakdown of their conjugal relationship;

Corporations: A corporation is related to the person who holds voting control, meaning enough shares to elect the board of directors, normally over 50%: 251(2)(b)(i).

- A corporation is related to a person who is a member of a related group that controls the corporation 251(2)(b)(ii). A related group means a group of persons, each member of which is related to each other member. So if Amy holds all the shares of Xco, and Amy holds 25% of Yco and Xco holds 75% of Yco, Amy is related to Yco.

- A corporation is related to any person related to either the person who controls it, or any member of the related group that controls it 251(2)(b)(iii). So Amy’s CLP Andy is related to Xco and to Yco, in the above example.

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

o (a) Where T acquires something when not dealing at arm’s length at an amount more than FMV, then T is deemed to have acquired it at FMV (paying $1000 for a $500 item means the ACB of the item is only $500)

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

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

Note: When transferring at less than FMV, giver is deemed to have disposed for FMV, but there’s nothing that deems the recipient to have acquired the gift at FMV (unless it was for inheritance/bequest that required the beneficiary to pay some amount less than FMV – see s. 69(c) / s. 70(5)(b)) For the donor: if giving something to someone, give it as a gift, not an xfer at less than FMV)

3. On Death

Section 70(5) – Capital Property of a Deceased Taxpayer- Where T dies in a tax year:

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

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

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

4. Lottery Winnings & Losses Revisited

Recall: LeBlanc – arguing that gambling was not a source of income; court held that there was no way to minimise T’s losses and the risk was maximized, so this was not a business source – not income that is taxableSection 40(2)(f) – Limitations – Right to a Prize

- T’s gain or loss from the disposition of a chance to win a prize or bet OR a right to receive an amount as a prize or as winnings on a bet, in connection with a lottery scheme or a pool system of betting is NIL

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

at a cost to T equal to FMV at that time

D. Rollovers: transfer of capital property to spouse/CLP inter vivos and on deathSection 248(1): “Common-Law Partner”- Means a person who cohabits at that time in a conjugal relationship with the T AND

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

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

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

Canada, the property is deemed to have been disposed of at the time by the individual for proceeds equal to the ACB of that person immediately before the transfer (will never have a gain or loss, unless you elect out of this)

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

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

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

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

Example – Spousal Rollover- S1 has capital property acquired for $5000, that same property is now worth $10,000- S1 transfers it to S2 as gift (spouse or CLP)

Section 73(1)(a)(ii) states that S1 is deemed to have disposed of it for original ACB – which is $5000;Section 73(1)(b) states that S2 acquires the property for $5000- S. 69 does not apply because it is overridden by express section of the Act

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What if the property was sold to S2 for $7500? What is S2’s ACB and S1’s POD?- S2 maintains ACB of $5000 and S1’s POD are $5000 – even though received more

Then S2 sells the property to an arm’s length person for its FMV ($10,000)- Due to the roll-over provision, S2 has a capital gain of $5000 where she should only have $2500- See Attribution rule below s. 74.2(1)(a)

Section 74.2(1)(a) – Spousal Attribution Rule - Basically, where an individual has lent/transferred property to a person who is the individual’s spouse, the following

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

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

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

Example – Opt-out of Spousal Rollover and Attribution RuleYear 1: S1 experiences allowable capital loss of $25k (total capital loss of $50k) (s. 38(b))Year 2: S1 experiences taxable capital gains of $25k (total of $50k – s. 38(a))- S1 transfers property to S2 and opts out of s. 73(1) rollover to pass the gains to S2

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

o S. 69(1)(c) – S2 is deemed to have acquired at FMV – new ACB

Year 3: S2 sells the property to 3P at arm’s length for $50k more than S2’s ACB – taxable gain of $25k (s. 38(b))- Under s. 74.2(1)(a), this taxable gain is attributable back to S1

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

Spousal Rollover on Death

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

Section 70(6) – Where Transfer or Distribution to Spouse or CLP- Where (5) would otherwise apply, but recipient is a spouse/CLP resident in Canada, then (5) does not apply and

recipient acquires property at the ACB of the deceased spouse; and the deceased spouse is deemed to have disposed of the property at their original ACB (no gains/loss)

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

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

- Where electing out of s. 70(6), then the rules under (5) apply and spouse acquires at FMV instead

E. Personal Use Property (PUP) and Listed Personal Property (LPP)

Section 54 – Definitions- “Personal-Use Property”:

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o (a) Property owned by T that is used primarily for the personal use or enjoyment of T, related person to T, or where T is a trust – a beneficiary under that trust

o (b) Any debt owning to T in respect of the disposition of property that was T’s PUP ANDo (c) Options to acquire property that would, if acquired, be PUP

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

art; jewellery; rare folio, rare manuscript, or rare book; stamp; OR coino Note: does not include antiques

Notes: PUP are things that have value and can even increase in value (rare); cottage/ski cabin/personal residence- May be held by a corporation, but still for use of a related party primarily- Does not include income-generating investment property – income from a business or property / ACNT- Policy: charging capital gains on PUP would mean home-owners would have less to buy their next home (restraint on

movement for jobs, etc., and likely a restraint on the disposition of property)

Section 46(1) – Personal use Property- Where T has disposed of PUP,

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

Note: Low-valued PUP is basically taken right out of the tax system for simplicity reasons (policy)

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

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

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

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

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

Example – SEE PUP SAMPLE ANSWER HANDOUT

Section 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NIL- T’s loss from disposition of any PUP, other than LPP, is nilNote: This recognizes that PUP is generally worn out based on depreciation from use, or passing of time/style

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

the year from disposition of LPP

Section 41(2) – Determination of LPP Net Gain

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- T’s net gain from disposition of LPP is the amount determined as follows:o (a) Amount of T’s gains from disposition of LPPo (b) Deduct LPP losses from previous 7 years or following 3 years, so long not already been used

- and the remainder (b) is the T’s net gain for the year from dispositions of LPPSection 41(3) – LPP Loss- LPP loss for T for a tax year is the amount, if any, by which T’s total losses from disposition of LPP exceeds the total

of T’s gains for the year from disposition of LPP

Principle Residence ExemptionRecall: s. 248(1) definitions of “Spouse” and “Common Law Partner”

Old definition of spouse allowed for CL partners to each claim a principle residence New rules in 2001 brought same sex couples into definitions for spouses and CL spouses Up to and including 1981, one PR per taxpayer (kids, CL spouses could have their own) 1982-1992: spouses includes opposite sex CLPs (one PRE per nuclear family = legally married spouses) 1993-2000: opposite sex CL partners became spouses (one PRE per couple or family) 2001: CLPs became both opposite sex and same-sex

Recall: T’s home is for personal use and therefore is a PUP

RULE: The capital gains experienced for each year in which the residence is T’s principle residence is excluded from taxes at the disposition of the property

Applies once per year on one homePolicy for Principle Residence Exemption- Would hinder the market if taxes were collected on each gain made from personal residence

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

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

housing unit stands, unless it exceeds ½ hectare around the property; (Yates – size at time of disposition)o If more than ½ hectare around the house, must be shown that the exceeding land was part of the use and

enjoyment of the housing unit as a residenceo TEST: Rode (1985 TCC): “objectively consider all of the relevant circumstances…[when asking]: have the T

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

Must be ordinarily inhabited in the yearo TEST: ordinarily inhabiting in the year, not throughout the year; must be living in it in a normal way through

some part of the year by one of those qualifying people (not too stringent) need not spend all time there (secondary residences and recreational residences can easily qualify) might be able to claim this on properties that are managed by corporations for tenants, but where you spend an

annual holiday there Note: can only have 1 principle residence

b. Only one property qualifies for personal residence per yearNote: so when sold, you can exempt any years associated to that property where it’s the only principle residence; Close nuclear family members cannot split up their primary residences (before 1982)

(c) where the taxpayer is an individual other than a personal trust, unless the particular property was designated by the taxpayer in prescribed form and manner to be the taxpayer’s principal residence for the year and no other property has been designated for the purposes of this definition for the year

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(e) the principal residence of a taxpayer for a taxation year shall be deemed to include, except where the particular property consists of a share of the capital stock of a co-operative housing corporation, the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence, except that where the total area of the subjacent land and of that portion exceeds 1/2 hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment, and

Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE)1. First calculate the capital gain A2. B = one plus the number of years after it was acquired during (need not be there the entire year) which T was

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

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

Capital Gains after Exemption = A – (A x B / C) PRE = A x B / C

Example – Principle Residence Exemption1982: H and W purchase house as joint-tenants for $40k1993: They add $10k swimming pool – Capital cost/ACB is increased to $50k1995: H dies, W becomes sole-owner – spousal rollover on death – W acquires H’s ACB on half interest (s. 70(6))2005: W sells for $500k – capital gain of $450k

Assume both were resident in Canada throughout the time in question

PRE = A x B / C (s. 40(2)(b))B = 1 + 24 (number of qualified years) = 25C = 24 years (1982-2005, inclusive)

PRE = $468,750 So W would only designate 23 years for the house (1982-2004), which would result in $450k

NOTE: No losses from Principle Residence because it is a PUP!

Example – Principle Residence Exemption 21975: H and W buy house in Victoria in W’s name for $50k1980: H inherits cabin on Saltspring on ½ hectare of land for $30k (deemed FMV s. 70(5)(b))1985: They sell Victoria house for $65k, and rent for a couple years (capital gain of $15k)1987: W buys a new house in Victoria for $80k1991: H transfers Saltspring property by deed of gift to daughter (POD at FMV of $75k) (s. 69(1)(b)) – gain – $45k- Daughter’s ACB is deemed $75k under s. 69(1)(c)

FIRST HOUSE (Victoria House):- Gain of $15k (CG = POD – (ACB + expenses) – s. 40(1)(a))PRE = AxB / C (s. 40(2)(b)) = 15 x (1 + 11years) / 11 years = $16,363 – more than necessary!

So W would only designate Victoria house for 10 years – 1975-1984, which would result in B= 1 +10;

The PRE would apply throughout the ownership of first house, resulting in no capital gains

SECOND HOUSE (Cabin in Saltspring):- Gain of $45k (s. 40(1)(a))

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H can designate the cabin for 9 of the 12 years he owned it:- 85-91 = 7 years + 80-81 = 2 years (because before ’82 H and W could designate separate properties)

PRE = 45k x (9+1) / 12 = $37, 500 so the gain after deduction is $7,500H’s income must include $3750 in taxable income – 50% as per s. 38(a)

NOTE: this calculation assumes that T wants to designate Cabin for 87-91 over the new house purchased in 87

Cassidy v the Queen (2010) FCA It’s no longer the moment just before the disposition; look at the minimum lot size year by year, to determine if all of the property was necessary for the use and enjoyment of the residence (Consider individually whether the gain was sub-dividable in a given year)Facts:Issue: Whether Mr. Cassidy is entitled to the benefit of the principal residence exemption in relation to the

capital gain he realized in 2003 on the sale of his home and the 2.43 hectares of land on which it was located

Rule:Application:Conclusion: Mr. Cassidy was entitled to the exemption for the entire gain

Yates PRE applies to lot size at time of disposition

Augart (1980s after Yates) Look at the moment before the property is sold; if it’s sub-dividable then, the excess land is not exempt, if it’s not sub-dividable then, you get the exemption on the extra landFacts: Couple bought 9 acres and built a house, when the minimum lot size was 3 acres (had 6 excess acres).

Sometime while they lived there, the land was rezoned and the minimum lot size became 80 acres (they were living on a non-conforming parcel).

Issue:Rule:Application: Before the rezoning, Ts could have subdivided, not after.

Court applied Yates, and says that you look at the requirement for lot size right before disposition (80 acres) and therefore they get the exemption for the whole time.Under Cassidy, the years would be considered individually, so the time bfore the rezoning would only allow for an exemption of the 3 minimum acres, and after the rezoning they would be entitled to the exemption for the entire lot

Conclusion:

Stewart Subjective desire for and use of a bigger property doesn’t lead to allowance for a larger principle residence exemptionNote: may be allowed a larger lot when access to a house requires a larger lot (e.g. a very long driveway)

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