PRINCIPLES OF CANADIANINCOME TAX LAW

Fifth Edition

PETER W. HOGGProfessor Emeritus, Osgoode Hall Law School

York University, TorontoScholar in Residence

Blake, Cassels & Graydon LLP,Toronto

JOANNE E. MAGEEAssociate Professor, Atkinson Faculty

of Liberal and Professional StudiesYork University, Toronto

and

JINYAN LIAssociate Professor, Osgoode Hall Law School,

York University, Toronto

THOMSON

CARSWELL

CONTENTSPreface iiiSummary of Chapters vTable of Cases xxv

Chapter 1 lncome Tax Law and Policy

1.1 Role of the income tax 21.2 The Income Tax Act 4

(a) Primary source of tax law 4(b) Structure of the Act 4(c) Citing the Act 6(d) Statutory style 6

1.3 Interpreting the Act 7(a) Important skill 7(b) Statutory Interpretation 8

(i) What is it? 8(ii) Approaches 8(iii) Statutory language 9

(c) Meaning of words 10(i) Statutory definitions 10(ii) Ordinary, technical, or legal meaning 10(iii) Context 11

(d) Legislative purpose and intent 11(e) Interpretation tips 12

1.4 Other sources of tax law 13(a) Income tax application rules 13(b) Income tax regulations 13(c) Tax treaties 14(d) Tax cases 14

1.5 Administrative publications 15(a) Information circulars 15(b) Interpretation bulletins 15(c) Advance rulings 17

1.6 History 18(a) Confederation 18(b) Provincial income taxes 19(c) Federal income tax 19(d) Federal-provincial agreements 19(e) Tax reform of 1971 and the Carter Report 20

(i) The Carter Report 20(ii) Major changes 21

(0 Introduction of indexing 22

CONTENTS

(e) Tax reform of 1988(h) Post-1988 changes

1.7 Policy objectives ~(a) Significance(b) Equity

(i) Ability to pay principle -

(ii) Recent trend

(c) Neutrality(i) Definition '(ii) Distinguished froin equity(iii) Deliberate policies(iv) Unintended effects "

(d) Simplicity and administrative efficiency(e) International competitiveness

1.8 Tax expenditures(a) Concept •(b) Public scrutiny(c) Difficulties of accounting(d) Policy evaluation

Chanler 2 Structural Features38

2.1 Five basic elements00

2.2 Who? — Liability for tax(a) "Person"(b) Residents(c) Non-residents

2.3 Taxation Unit40

2.4 What? —The tax base(a) Concept of income(b) Measurement of income

40(c) Assignment of income

2.5 When? — Taxation year(a) "Taxation year" defined(b) Income fluctuation

2.6 How much? — Tax rates and credits •43

(a) Rates(b) Credits "

43(c) Alternative minimum tax

44(d) Computation of tax liability

2.7 How? — Tax administration ,45

(a) Departmental responsibilities45

(i) Department of Ftnance(ü) CRA 4 g

(iii) Department of Justice(b) Self-assessment System(c) Resolution of tax disputes

2.8 Tax planning and tax avoidance

CONTENTS

(a) Taxpayers' right to minimize tax 49(b) Role of judges 50(c) Role of lawyers 50

2.9 Tax deferral and the time value of money 51(a) Timing 51(b) Tax deferral 51(c) Time value of money 52(d) Other benefits of tax deferral 53

Chapter 3 Residence

3.1 Jurisdiction to tax 55(a) Residence 56(b) Source of income 56(c) Policy justifications 57

3.2 Taxing residents on world income 583.3 Taxing non-residents on Canadian source income 583.4 Residence of individuals 59

(a) Common law residence 59(b) Ordinarily resident 63(c) Sojouming for 183 days 64

3.5 Residence of Corporation 65(a) Common law residence 65(b) Statutory definition 67

3.6 Residence of trusts 673.7 Provincial residence 683.8 Change in residence 69

(a) Part-year residence 69(b) "Departure tax" 70

3.9 Dual residency 703.10 Deemed non-resident 71

Chapter 4 The Concept of "Income "4.1 Importance 744.2 What is income? 74

(a) Statutorily undefined 74(b) Section 3 75(c) Net concept 76(d) Haig-Simons theory 77(e) Carter Commission's "comprehensive tax base" 78

(i) Comprehensive tax base 78(ii) Taxation of capital gains 79

(f) Judicial concept of income 804.3 "Income from a source" 82

(a) Source theory 82(b) Characteristics of an income source 82(c) Enumerated sources 83(d) Unenumerated sources 84

4.4 Statutory inclusions and exemptions 86

CONTENTS

(a) Capital gains 86

(b) Other income . . „.,o/

(c) Exclusions from income g 7

4.5 Gifts and inheritances „„

(a) Taxability . . . . " ' „oo

(b) Carter Commission recommendations gg(c) Reasons for exclusion g9

4.6 Windfalls %

4.7 Damages and settlements 9 0

(a) The "surrogatum principle" 90(b) Damages for personal injury 92(c) Punitive damages 93

4.8 Imputed income „ .(a) Non-taxation 9 4

(b) Owner-occupied home 94(c) Unpaid housework 95

4.9 Illegal income 9 6

Chapter 5 Income from Employment

5.1 Legislative scheme 100

5.2 Office and employment defined 101(a) Statutory definitions 101(b) Office or employment 101(c) Office or business 102(d) Employment or business 102

(') Contra« of Service vs. contract for Services 102(11) Tax consequences of the distinction 102(iü) Relevant tests . . . 105

" T i m i n g '.'.'.'.'.'.'.'.'.'.'. .' .' '. 1085 4 Salary and wages HO

5 5 Benefits —general scheme HO

(a) Inclusion in income . HO

<b) Policy • • • • . . . . . . . . . . 1 1 1

(0 Reasons for inclusion III(») Reasons for exclusion 112

(c) "Benefit" defined 113

(') Economic advantage or material acquisition H30 0 Convertible into money 115

(d) Relationship to employment ' 116(e) Valuation 117

(0 Cost to the employer 117(») Fair market value . . 1 1 8

(in) Apportionment 1195-6 Allowances 120

(a) Inclusions in income .120

(b) "Allowance" defined . 1 2 0

(c) Reimbursements distinguished [ 121

CONTENTS

5.7 Benefits — selected items 122(a) Automobiles 122(b) Loans 123(c) Housing benefits 124

(i) Confusion in the case law 124(ii) Statutory rules 127

5.8 Employee stock options 128(a) "Employee stock Option" defined 128(b) Application of section 7 128(c) Tax consequences 129

(i) Taxable benefit 129(ii) Timing of inclusion 129(iii) Special deduction 129(iv) Adjusted cost base of the shares 130

(d) Preferential treatment 130(i) Capital gains-like taxation 131(ii) Deferral of recognition 131(iii) Policy justifications 133

5.9 Compensation for loss of employment 1345.10 Deductions from employment income 135

(a) Deductions denied 135(b) Deductions permitted 136

Chapter 6 Income from Business or Property: Profit

6.1 Statutory framework 1396.2 Concept of profit 140

(a) Net concept 140(b) Financial versus tax accounting 140(c) Question of law 145

6.3 Judicial interpretive framework 146(a) Canderel and the framework 146(b) "Accurate picture" of profit requirement 147

(i) The goal 147(ii) Measurement of "accurate picture" 149(iii) Onus of proof 150

(c) Freedom of choice of accounting methods within constraints 150(d) Financial accounting principles as interpretive aids 151

6.4 Methods of accounting 151(a) Cash method 151(b) Accrual method 152(c) Accounting for capital assets 154(d) Accounting for inventory 155

Chapter 7 Income from Business or Property: Inclusions

7.1 Separate sources 1587.2 "Business" and "property" defined 158

(a) Importance of characterization 158(b) Statutory definitions 159

XI

C O N T E N T S

(c) Common law lest: pursuit of profit 159

(i) Stewart and Walls 160

(ii) Intention to profit as opposed to reasonable expectation of profit . . . .161

(iii) Layperson's sense of "profit" 162(iv) Implications for tax shelter investments 162

(d) Personal endeavours distinguished 164(i) Importance of distinction 164

(ii) Hobbies 165(iii) Personal elements in rental properties 166(iv) Gambling 166

(e) Employment distinguished 167(f) Capital gains distinguished 167(g) Business distinguished from property 168

(i) Level of activity 168(ii) Differential tax treatments 169

7.3 Inclusions in Computing income from business '70(a) Income vs. capital receipt 17°(b) Timing-realization principle '71(c) Amounts received '72(d) Amounts receivable ' "

(i) Accrual method of accounting '73

(ü) Meaning of "receivable" ' 7 4

(iii) Säle of property ) 7 5

(iv) Services 1 7 6

(v) Professional businesses '777.4 Inclusions in Computing income from property '77

(a) Retum on Investment '77(b) Dividends 1 7 8

(c) Rent and royalties 178

(d) Interest ' 7 9

(i) Definition l 7 9

(ü) Special timing rules l 8 °(e) Blended payments l 8 2

(0 Discounts l 8 3

(i) Definition l 8 3

(ü) Position of creditor l 8 4

Chapter 8 Income from Business or Property: Deductions

81 Two fundamental questions '(a) Deductibility l 8 9

(b) Timing of deductions l 9 °8.2 Income tax logic and the ability to pay l 9 1

8.3 Income-eaming expenses l 9 "(a) Statutory rules '^2

(b) Purpose test l 9 3

(i) Income-earning vs. personal expenses

CONTENTS

8.4 Personal or dual-purpose expenses 194(a) "Personal or living expenses" defined 194(b) Dual-purpose expenses 195(c) Child care expenses 196(d) Food and beverages 197(e) Entertainment expenses 198(f) Commuting expenses 200(g) Housekeeping expenses 201(h) Home-office expenses 201

8.5 Public policy 203(a) The issue 203(b) Fines, penalties and illegal payments 203

(i) Common law approach 203(ii) Statutory prohibitions 206

(c) Damages and similar payments 207(d) Expenses of illegal businesses 208

8.6 "Reasonable" requirement 209(a) Rationale 209(b) Unreasonable amount attributable to personal elements 209(c) Unreasonable amount in non-arm's length payments 210

8.7 Timing 211(a) Capital vs. current expenditures 211(b) Current expenses 212

(i) "Expense" 212(ii) "Expense incurred" 212(iii) Contingent liabilities 213(iv) Contested or unincurred liabilities 215

(c) Running expenses 216(d) Prepaid expenses 218(e) Reserves 219

(i) Special rules 219(ii) Doubtful debts reserve 221(iii) Deferred payments reserve 222(iv) Unearned amounts reserve 223

8.8 Inventory 224(a) What is inventory? 224(b) A matter of timing 224(c) Cost of goods sold 225(d) Valuation methods 226(e) Tracing inventories 228

8.9 Interest expense 229(a) What is interest? 229(b) Current or capital expenditure 230(c) Paragraph 20(I)(c) 231(d) "Purpose" lest 231

(i) "Any" not "the" purpose 233(ii) "Gross" not "net" income 234

CONTENTS

(iii) "Reasonable" expectation of gross income()(e) Tracing the use of borrowed money 236

(i) Money is fungible 236(ii) Current use ZJI

(iii) Direct use 238(f) Other costs of financing 240

8.10 The lay of the land on deductions 24-(a) General categorization of expenses 24-(b) Different purpose tests for interest and other expenses 242(c) Mismatch and tax arbitrage 243

Chapter 9 Income from Business or Property: Capital ExpendituresO/tQ

9.1 A timing issue -*°(a) Capital versus current expenditures 248(b) Tax deferral — the impact of capitalizing expenses 249

9.2 "Capital expenditure" defined 250(a) Common law tests 250

(i) Enduring benefit test "(ii) Recurring expenditures 25-(iii) Residual test in favour of the taxpayer 2M

(b) Acquisition of assets Z J

(c) Repair of tangible assets ~J

(d) Protection of intangible assets(e) Websites and domain names 2*(f) Corporate takeovers 258(g) Goodwill 259(h) Expenses with respect to a new business

9.3 Recovery of capital expenditures 261(a) Statutory guesswork(b) Accounting methods 26~

(i) Straight-Iine method 2

(ii) Declining-balance method9.4 Capital cost allowance (CCA) 2 6 4

(a) Overview 264(b) Depreciable property and CCA rates

(i) Meaning 2 6 5

(ii) Rate of CCA 2 6 6

(iii) Accelerated cost recovery(c) Undepreciated capital cost (UCC)

(i) Meaning 2 6 8

269(ii) Cumulative account

269(iii) Class concept

T70(d) Capital cost . . . . .

270(i) Meaning

^71(ii) Apportionment "(iii) Timing of acquisition

(e) Proceeds of disposition

CONTENTS

(i) Meaning 273(ii) Timing 274

(f) Half year rule 275(g) Example of CCA computation 276(h) Retirement of depreciable property 277

(i) No more guesswork 277(ii) Recapture 279(iii) Terminal loss 280(iv) Review example 281

(i) Limitations on CCA deductions 283(i) Tax shelter losses 283(ii) Rental properties 283(iii) Leasing property 284

9.5 Eligible capital expenditures 285(a) Amortization of intangibles 285(b) "Eligible capital expenditure" defined 286(c) Deduction 287

Chapter 10 Capital Gabis

10.1 History 29010.2 Policy 291

(a) Should capital gains be taxable? 291(i) Equity 291(ii) Neutrality 292(iii) Certainty 292

(b) Should capital gains be taxed preferentially? 292(i) Partially taxable 293(ii) Lifetime exemption 294

10.3 Statutory framework 296(a) Inclusion in income 296(b) Taxable capital gains/allowable capital losses 296(c) Capital gains/capital losses 296(d) Gains/losses 297

10.4 Basic concepts 297(a) Capital property 297(b) Depreciable property 298(c) Disposition 298(d) Proceeds of disposition 299(e) Adjusted cost base 300

10.5 Computation of gain or loss 301(a) Proceeds due within the year 301(b) Proceeds due in a future year 301(c) Loss 305

10.6 Timing of realization 305(a) General rule 305(b) Timing of "disposition" 305(c) Policy implications 306

CONTENTS

30710.7 Special events and deemed dispositions

(a) Purpose

(c ) ° ' f t 3.0<d> T r u s t 310(e) Change of use(f) Departure from Canada

10.8 Capital losses(a) "Quarantined"(b) Stop-loss rules

(i) Superficial losses(ii) Personal-use property losses(iii) Listed personal property losses

10.9 Principal residence exemption(a) Tax expenditure(b) "Principal residence"

(i) Ownership(ii) "Ordinarily inhabited"(iii) Surrounding land(iv) Designation "

(c) Residence requirement(d) Mechanism of exemption(e) Change of use rules '

(i) Deemed disposition "(ii) Election(iii) Partial change of use

Chapter 11 Investing and Trading319

11.1 Capital or income319

(a) Importance of characterization(b) Investing and trading distinguished

11.2 Trade 3

(a) Frequency of transactions(b) Relationship to taxpayer's other work(c) Inventory

11.3 Adventure in the nature of trade333

(a) Isolated transaction334

(b) Intention to trade334

(i) Intention on acquisition(ii) Secondary intention(iii) Differing intentions(iv) Change of intention(v) Corporate intention

11.4 Typical transactions(a) Real estate '

340(b) Securities

340(i) Common law principles

CONTENTS

(ii) Canadian securities election 342(c) Commodities 342(d) Foreign exchange 343(e) Hedging 345(f) Derivative financial instruments 348

Chapter 12 Other Income and Deductions

12.1 "Income" and social policy 352(a) Concept of income and the "ability to pay" 352(b) Refining income for policy reasons 353

12.2 Statutory inclusions and deductions 353(a) Inclusions 353(b) Deductions 355

12.3 Public pensions 35512.4 Tax-assisted private pension plans 356

(a) Types of plans 356(b) Tax assistance 356

(i) Benefit of tax deferral 357(ii) Policy implications 358(iii) Design objectives 359

(c) Employer-sponsored plans 362(i) Registered pension plans (RPPs) 362(ii) Deferred profit Sharing plans (DPSPs) 363

(d) Registered retirement savings plans (RRSPs) 364(i) Definition of RRSP 364(ii) Contributions based on earned income 364(iii) Withdrawals 366(iv) RRSP annuities 367(v) Registered retirement income funds (RRIFs) 368(vi) Tax consequences on death 368

(e) Contributions vs. direct transfers to RPPs, RRSPs and DPSPs 36912.5 Registered education savings plans (RESPs) 37012.6 Retiring allowances 372

(a) Meaning of "retiring allowance" 372(b) Tax treatment 375

12.7 Spousal and child support 376(a) Definitions 376(b) Deduction-inclusion System 377(c) Policy objectives 378

12.8 Workers' compensation and social assistance 38012.9 Moving expenses 381

(a) Deduclion 381(b) Policy objectives 382

12.10 Child care expenses 382(a) Deduction 382(b) Policy objectives 383

CONTENTS

Chapter 13 Income Splitting

13.1 Whose income? 38613.2 Income Splitting: why and how? 387

(a) Tax savings 387(i) Tax unit 387(ii) Rates and credits 388(iii) Characterization of income 389

(b) Techniques 38913.3 Taxation of the family 389

(a) Non-recognition of the family 389(b) Policy debate 390

(i) Equity between families 390(ii) Impact on household labour and employment 39-(iii) Equity between families and unattached individuals 393

(c) Limited recognition of the family 39413.4 Non-arm's length transfers 395

(a) Subsection 69(1) 395(i) Arm's length 396(ii) Fair market value 397

(b) Gifts 398(c) Inadequate or excessive consideration 398

13.5 Rollovers 400(a) Cost-basis transfer of capital property 400(b) Transfer to spouse or common-law partner — inter vivos 40U

(i) "Spouse" or "common-law partner" 400(ii) Roliover 401(iii) "Qualifying transfer" 402(iv) Election 4 0 2

(c) Transfer to spouse or common-law partner — on death 403(d) Transfer to child 404

(e) Transfer to Corporation ^0513.6 Attribution rules 405

(a) Taxing the original owner 405(b) Transactions 4 0 6

(i) "Transfer" or "loan" 4 0 6

(ü) Indirect transfer 4 0 8

(iii) Anti-avoidance 4 0 8

(c) Attributable income 4 0 8

(i) Income from property or substituted property(ii) Income from business excluded(iii) Capital gains 4 I 0

(d) lntra-family transfers 4 "

(i) Spouse or common-law partner(ii) Related m'inor 4 1 2

(e) Transfer to trust or Corporation 4

(i) Trust 4 l 2

CONTENTS

(ii) Corporation 41313.7 Income diversion 414

(a) Rationale 414(b) Indirect payment 415(c) Transfer of rights to income 417(d) Interest free or low interest loans 417

13.8 Tax on minors 418(a) Rationale 418(b) The "kiddie" tax 418

13.9 Evaluation 420

Chapter 14 Taxable Income and Tax for Individuais14.1 Tax payable 42414.2 Net income 425

(a) Foundation of the tax base 425(b) "Net" of current year losses 425(c) Loss from an income source 425(d) Allowable capital losses 426(e) Allowable business investment losses 427

14.3 Losses 428(a) What is a "loss"? 428(b) Does source matter? 428(c) When do losses occur? 428(d) Whose losses? 429

14.4 Limitations on deductions for losses 430(a) Personal losses 430(b) Capital losses 430(c) Farm losses 430(d) Tax shelter losses 432

(i) Characteristics of tax shelters 432(ii) Techniques of tax shelters 433(iii) Judicial response 434(iv) Legislative response 435

(e) Stop-loss rules 43614.5 Taxable income 43714.6 Loss carryovers 437

(a) Non-capital losses 437(b) Net capital losses 439(c) Allowable business investment losses 439(d) Farm losses and restricted farm losses 440(e) Change of corporate control 440

14.7 Tax policy 442(a) Objectives 442

(i) Ability to pay 442(ii) Economic efficiency and neutrality 442(iii) Stimulation of certain economic and social activilies 443(iv) Technical deductions 444

CONTENTS

444(b) "Slaging" the deduction

445(c) Utility of "net income concept

t • 44S

(d) Conversion of deductions to credits446

14.8 Tax rates for individuals446

(a) Rate structure446(i) Federal rates - 447(ii) Provincial rates448

(b) Marginal and average rates(c) Progressive, regressive or flat rates

449(i) Definition 450(ii) Justification for progressive rates 4^2(iii) Arguments for Hat rates 4 ^(iv) Flattening the rates "

(d) Indexing for inflation(i) Effect of Inflation(ii) lndexation rules

45614.9 Tax credits "

4 ib(a) Non-refundable credits(b) Refundable credits

46014.10 The alternative minimum tax

460(a) Rationale

461(b) Computation of the AMT

Chapter 15 Corporations and Shareholders15.1 Introduction

464(a) Scope of chapter(b) Incorporation

465(c) Public and private corporations(d) Canadian-controlled private corporations(e) Corporate distributions

46915.2 Integration of Corporation and shareholder taxes

469(a) Double taxation of corporate income(b) Carter Commission's proposals

472(c) Tax reform of 1971

4/3(d) Subsequent reforms „,

47615.3 Shellering income in a Corporation

476(a) Carter Commission's proposals

477(b) Tax reform of 1971

47 s(c) Tax reform of 1988(d) Reforms in the 1994 and 1995 budgets

(e) Rate reductions in 200015.4 Taxation of shareholders

480(a) Integration and imputation(b) Gross-up and credit procedure

4ö-*(c) Effect of gross-up and credit

48415.5 Taxation of corporations

484(a) Taxable income

CONTENTS

(i) General rule 484(ii) Intercorporate dividends 485(iii) Charitable donations 486

(b) Tax rates 486(i) Federal lax 486(ii) General rate reduction 486(iii) Corporate surtax 487(iv) Large corporations tax 487(v) Provincial abatement 488(vi) Provincial taxes 488(vü) Standard corporate rate 489

(c) Investment income of Canadian-controlled private corporations 490(i) Canadian-controlled private corporations 490(ii) Policy 490(iii) Refundable dividend tax on hand account 491(iv) Dividends 492(v) Capital gains 493

(d) Active business income of Canadian-controlled private corporations 493(i) Small business deduction 493(ii) Active business income 494(iii) Investment income compared 495(iv) Limits on the small business deduction 495

(e) Manufacturing and processing credit 496(f) Conclusion 497

Chapter 16 Parlnerships

16.1 Introduction 49916.2 Definition of partnership 49916.3 Taxation of partnership 50116.4 Partnership interest 50216.5 Rollovers for the formation and dissolution of Canadian partnerships 504

Chapler 17 Trusts

17.1 Introduction 50817.2 Nature of trusts 508

(a) Definition of trust 508(b) Inrer vivos vs. testamentary trusts 508(c) Personal vs. commercial trusts 510(d) Discretionary vs. non-discretionary trusts 510(e) Spousal trusts 511(f) Alter ego and Joint spousal trusts 512

17.3 Special features of taxation 512(a) Legislative scheme 512(b) Taxed as an individual 513(c) Rates 514(d) Conduit treatmenl of trusts 515

17.4 Creation of trust 515(a) Methods of creation 515

CONTENTS

(b) Transfer of property 515(i) General 5 1 5

(ii) Transfer of property on death 516(c) Rollovers 5 1 6

C I O

17.5 Income taxed to the trust •""(a) Computation and designation of trust's income 518(b) Deemed disposition of trust property 519

17.6 Income taxed to the beneficiary -1

(a) Income paid or payable in the year 5-0(b) Preferred beneficiary election •(c) Special rules for capital gains J "(d) Flow-through character of income J

C73

(e) Tax-free payments to beneficiaries -17.7 Income taxed to the settlor -"-̂

(a) Anti-avoidance concems(b) Trusts for spouses or related minors 524(c) Trusts with reserved power of revocalion or control 525

17.8 Termination of trust 5 2 6

17.9 Tax planning with trusts 5 3°(a) Reasons for creating trusts(b) Planning a trust 5 3°

c<n(c) Income Splitting J

(d) Estate freeze 5 3 2

Chapter 18 Tax Administration and Ethics18.1 Filing of tax returns 5 3 5

18.2 Payment of tax 5 3 6

(a) Withholding at source(b) Instalmems 5

18.3 Assessment 5 3 8

538(a) Notice of assessment(b) Examination(c) Audit 5 3 9

(d) Reassessment18.4 Dispute resolution

(a) Objection 5 4 1

(b) Appeal 5 4 1

(c) Bürden of proof 5 4 2

(d) Settlement 5 4 3

(e) Remission order18.5 Confidentiality 54618.6 Civil penalties 54718.7 Criminal prosecutions

(a) Tax evasion 5 4 7

(b) Investigalory powers(c) Prosecution18.8 Rectifieation 548

xxn

CONTENTS

18.9 Legal ethics 550(a) Role of tax lawyers 550(b) Rules of Professional conduct 551(c) Compliance 551(d) Litigation 552(e) Tax planning 552

Chapter 19 Statutory Interpretation

19.1 Statutory law 555(a) The Act is just another Statute 556(b) Policy objectives 556(c) Legislative scheme 557(d) Complexity 558

19.2 Statutory interpretation 559(a) Meaning of words 559(b) Characterization of facts 559(c) Judicial approach to statutory interpretation 560

19.3 Strict interpretation 561(a) Literal meaning 561(b) Outdated presumptions about tax law 561

19.4 Modem approach 562(a) The Stubart decision 562(b) Relevance of "object and spirit" 564(c) Piain meaning 566(d) Summary 569

19.5 Role of judges 569

Chapter 20 Tax Avoidance

20.1 Tax avoidance 572(a) Tax evasion distinguished 572(b) "Bad" avoidance distinguished 572(c) Moral and tax policy implications 574

20.2 Judicial doctrines 575(a) The Duke of Westminster case 575(b) Literal interpretation 577(c) Form over substance 578(d) Sham 580(e) Business purpose 581

20.3 Statutory anti-avoidance rules 58320.4 General anti-avoidance rule (GAAR) 585

(a) General nature of section 245 585(i) Measure of last resort 586(ii) Minister's discretion and role of the courts 586(iii) No down-side risk for taxpayers 587

(b) Application of section 245 588(c) Tax benefil" 589(d) "Transaction" or "series of transactions" 592(e) Primary purpose 594

xxm

CONTENTS

(i) Objective determination 594(ii) Relevant tests 595

(f) Misuse or abuse 599(i) Identifying "bad" avoidance 599(ii) Determination of "policy" 599(iii) Relevance of tax policy 600(iv) "Clear and unambiguous policy" policy test 601(v) Transactions resulting in misuse or abuse 602(vi) Non-abusive transactions 604

(g) Assessment of GAAR jurisprudence 607(i) Long live the Duke 607(ii) Continuing relevance of judicial and specific anti-avoidance rules . . .

608(iii) Future developments 608

Appendix Financial Statements 609Index 615