Definitions and Classifications............................................................................................ 3Five Main Components of Tax....................................................................................................... 4Exemptions, Deductions, Credits................................................................................................. 5Accounting Principles...................................................................................................................... 6Evaluative Criteria for Tax Policy................................................................................................ 7Tax Avoidance vs. Tax Evasion......................................................................................................8Tax Expenditures............................................................................................................................... 8

Taxation and the Constitution............................................................................................ 9Equalization Payments.................................................................................................................... 9Direct and Indirect Taxation......................................................................................................... 9Tax Collection System...................................................................................................................... 9Tax Adjudication System..............................................................................................................10General and Informal Procedure in Tax Court......................................................................10Tax Statute Interpretation Principles......................................................................................10

Income...................................................................................................................................... 11Source................................................................................................................................................. 11Surrogatum Principle.................................................................................................................... 12The Source Concept of Income................................................................................................... 14

Nexus Between Taxpayer and Income Source............................................................14Who Receives the Benefit?...........................................................................................................14

Residence................................................................................................................................ 15Indicia of Residency....................................................................................................................... 16Ordinary Resident.......................................................................................................................... 18Statutorily Deemed Resident......................................................................................................18Part Year Residence....................................................................................................................... 19Tax Treaties – Tiebreakers..........................................................................................................19

Departure Tax - Deemed Disposition (See Below).........................................................................20Provincial Residence..................................................................................................................... 20Residence of Corporations...........................................................................................................21

250(4) Deemed Residence of Corporations................................................................................21Common Law Residence Test De Beers........................................................................................21

Non-Residents Canadian Source Income................................................................................22

Income from Office or Employment................................................................................23Employee v. Independent Contractor......................................................................................23

Intention of the Parties...............................................................................................................................25Corporations and Employment (Personal Services/Incorporated Employees)........25

Personal Services Businesses v. Businesses with a Single Incorporated Employee........26Benefits............................................................................................................................................... 26

Valuation of Employee Benefits..............................................................................................................28Loyalty Points.................................................................................................................................................29

Allowances........................................................................................................................................ 29Allowance vs. Reimbursement................................................................................................................30Special and Remote Worksites................................................................................................................30Automobile and Travelling Allowances...............................................................................................31

Deductions in Computing Income from Employment........................................................31Travelling Expenses.....................................................................................................................................32

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Legal Expenses............................................................................................................................................... 33Cost of Supplies..............................................................................................................................................34Home Office Deduction...............................................................................................................................34Professional and Union Dues...................................................................................................................34

Income From Business or Property................................................................................35Determining whether Income is from Business or Property...........................................35Income from Business................................................................................................................... 36

A Good Starting Point “anything which occupies the time, attention and labour of a man for the purpose of profit” (Smith v. Anderson)......................................................................36Statutory Framework..................................................................................................................................36Organized Activity.........................................................................................................................................37Pursuit of Profit..............................................................................................................................................38

Adventure or Concern in the Nature of Trade.......................................................................39IT-459 (SCC – “A convenient summary of the law”)......................................................................39

Income from Property................................................................................................................... 42Interest...............................................................................................................................................................43Rents and Royalties......................................................................................................................................44Dividends.......................................................................................................................................................... 45

Deductions from Computing Income from Business or Property..................................45Personal or Living Expenses....................................................................................................................47Child Care Expenses.....................................................................................................................................47Commuting to the Place of Business.....................................................................................................48Moving Expenses...........................................................................................................................................48Home Office Expenses.................................................................................................................................49

Deduction of Interest.....................................................................................................................50Policy Reasons for Denying Deductions..................................................................................51

Expenses of Illegal Businesses.................................................................................................................51

Computation and Timing.................................................................................................... 52Capital Outlay or Current Expenditure?..................................................................................52Timing of Recognition................................................................................................................... 55

Amount Receivable.......................................................................................................................................55Amounts Payable...........................................................................................................................................56Losses................................................................................................................................................................. 57Quarantined Capital Losses......................................................................................................................57

Capital Gains........................................................................................................................... 57Policy...................................................................................................................................................................57Statutory............................................................................................................................................................58Disposition....................................................................................................................................................... 59

Deemed Dispositions / Proceeds...............................................................................................60On Becoming or Ceasing to be a Resident..........................................................................................60On Death............................................................................................................................................................60Lottery Winnings...........................................................................................................................................61Gifts and Sales Below FMV to Non-Arm’s Length Persons..........................................................61

Spousal Rollovers............................................................................................................................62Personal Use Property and Listed Personal Property........................................................63

Tax Treatment................................................................................................................................................63Principle Residence Exemption.................................................................................................64

Mechanism....................................................................................................................................................... 65

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Depreciable Property and Capital Cost Allowance..............................................................66Mechanism....................................................................................................................................................... 66Exclusions from CCA....................................................................................................................................67

Taxation and Aboriginal Peoples....................................................................................67

Definitions and ClassificationsPurposes of Tax:

1. Funding government and public services2. Wealth distribution3. Reflects how society thinks we should function – which values we encourage and which

we discourage

Normative Values – Tax Reflecting Public Policy:1. What do we pay for collectively and what individually?2. Of those things for which we pay collectively, who should pay more or less?3. How can the tax system address social inequality?4. Should the tax system address social inequalities?

Tax vs. Other Government Collected Payments- Tax: “Enforced contribution demanded under legislative authority, payable in money,

collected for the purposed of raising revenue for government purposes or spending” Shawinagin Power

o Compulsoryo Unrequited

- Fines/Penalties: o Compulsory, but imposed to deter or punisho Could be considered a “tax on bad behavior”, though it is generally considered to be

separate from tax- Royalties:

o Charged on a private sector enterprise for the right to take/exploit Crown resources (corresponds to amount of resource used)

- Prices:o A requited (voluntary) payment to the government in exchange for goods/serviceso A price set above the fmv of goods/services by government could be considered a

tax

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Five Main Components of Tax1. The Tax BaseThe amount, transaction, or property upon which the tax is levied:

1. Incomea. Haig-Simons Theory: Income is anything that raises an individual’s ability to

pay taxesi. Everything that a person gets should be taxed

b. Personal income tax makes up the bulk (51%) of the federal budget, with only 11% coming from Canadian corporate income.

2. Consumptiona. Essentially an income tax that exempts the value of the taxpayer’s savings

i. Pro: accurately reflects personal choiceii. Con: Consumption drives the economy, taxing it limits growth

b. GST v. PSTi. GST is a value-added tax – it is applied at any time that value is added to

goodsii. PST is a single application tax – it is applied to consumers when buying

from retailers3. Wealth

a. Can be a blanket annual tax on an individual’s wealth, or a tax imposed when an individual transfers wealth (estate tax)

b. Usually a low rate (not enough wealthy people to make a significant difference to revenue flow)

4. Laboura. Employment Insurance may be an example of this: employers and employees pay

a premium for the employer (who can never use it) this resembles a tax

2. The TaxpayerThe person responsible for paying the tax the person identified by statute as the taxpayer- The Tax Filing Unit (Taxpayer) is the person who is initially liable for the tax, but this

person may end up shifting or passing the tax along in prices

3. Rate of TaxationRate applied to the Base to arrive at the amount owing- Statutory Federal taxation rates are set out in ITA 117

o Allows for a personal tax credit to offset the first $10,320 (no tax in the bottom bracket)

o (1) 15% up to $40, 726o (2) 22% up to $81,452o (3) 26% up to $126,264o (4) 29% above $126,264

- Note: Provincial rates are added to the federal rates, but all taxes are collected by the Federal Government.

o For BC: top combined federal and provincial rate is 43.7%o For BC: combined rate for a regular corporation is 26.5% (16.5% fed, 10% BC)o For BC: “small business” rate for active CCPC with income up to 500,000 is

13.5% (11% fed, 2% BC)(1) Marginal Rate:

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- The rate of tax that applies to an additional dollar a taxpayer earns within each income bracket

(2) Average Rate:- Total tax payable divided by taxable income (average of marginal rate paid on all your

income)(3) Effective Rate:- Total tax payable divided by total “accretion to wealth”

Three Ways to Classify Tax Rates1. Progressive Takes an increasing proportion of income as income rises2. Proportional Takes a constant proportion of income3. Regressive Takes a declining proportion of income as income rises

4. Time PeriodThe period over which the tax base is measured and the tax is collected (does not apply when tax is imposed on transactions)- For most individuals, this is the calendar year- For some corporations/businesses, there are several “tax years” within a calendar year

5. AdministrationIn Canada, it’s the CRA!

Net Income and Taxable Incomeo Net Income: Division B Income (Part I)

o (1) determine the total of all amounts, each of which is the taxpayer’s income for the year

o (2) Add the net taxable gainso (3) subtract the deductions permitted in subdivision Eo (4) Subtract any losses from employment, business, and propertyo Note: Some thing which increase a taxpayer’s ability to pay have been held not

to fit within the concept of income in s.3 Strike Pay – Gambling Gains – Gifts – Inheritance

o Taxable Income: Division C (Part I)o Division C allows for the deduction of additional amounts in certain

circumstanceso If taxpayers qualify, their taxable income will be less than their net income for

tax purposeso Therefore, Basic Federal Tax Payable…

o (1) Apply rate schedule in s.117o (2) deduct tax credits

Exemptions, Deductions, CreditsAll three operate to reduce the amount of tax payable, either by reducing global income or reducing tax otherwise payable

Exemptions Funds are outside of the tax system - Exempt income is simply not reported- Examples:

o S.81 exemptions

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o Income not from a source (gifts, money found on street, gambling)o Indian Act exemptions for FNs on a reserveo Charities and Non-Profits

Deductions Reduce Net Income - Deductions off of your Net Income- Specifically statutorily provided, a person must bring themselves within the area of the

applicable provision to claim the deduction- Exampled:

o Deductions for employees who contribute to an RRSP or RCPPo Deductions for employees who pay for child care

Credits Reduce Tax Otherwise Payable - Two Kinds:

o (1) Deductions off the basic Federal Tax Payableo (2) Deductions after the basic Federal Tax Payable has been determined

(provincial tax credits)- Note: The result of type (1) is an implicit provincial tax credit, since the provincial tax is

levied on the basic federal tax payable, which has been decreased by the tax credit- Refunding Tax Credits:

o Tax credits are presumptively non-refundable (the government does not normally pay the taxpayer)

o Tax credits can be made refundable (GST credit, Canada child tax benefit)- Note: In the 80’s, one of the major tax reforms was the shift of many deductions to credits

because deductions mean much greater savings for wealthier people, and credits give the same benefit for all income groups, depending on how many dollars are spent in the credit area

Accounting PrinciplesGAAP Rules of financial accounting in Canada are contained in the CICA (Canadian Institute of Chartered Accounting)- Generally Accepted Accounting Principles (GAAP) is a financial accounting rule, not a

tax reporting rule occasionally the law will force GAAP to be adjusted, where there is conflict between GAAP and the law, the law prevails (Canderel)

- Financial Statements: o Meant to represent to the owners of the business a conservative view of how

much money they made, what their assets areo Reporting of a business’ financial accounts – truly and fairly disclosing the

business’ accountso Often – the results for financial statement purposes under GAAP are not the same

as the results for tax purposes

Accounting Principles Applicable to the Income Tax ActCash MethodDeals with amounts that are actually received and amounts that are actually paid- You don’t pay tax until you actually receive the money- Employees, farmers and fishers are the only parties allowed to use the Cash Accounting Rule

Accrual Method

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Deals with the amounts payable and the amounts receivable (what has “accrued” at a certain date)- If you have done the work and are entitled to be paid within the year, the amount must be

included within your income- Applies to anyone in business other than farmers and fishers

Evaluative Criteria for Tax PolicyNormative Theory Underlying the Taxation system The Fundamental purpose of a tax system is to raise revenue for a government’s purposes (Shawinagin Power). The fairest, most neutral tax system of all would be no tax system. that said, since we need revenue for govt. the tax structure should be made as neutral, equitable, and simple as possible.

Tension between complexity and equity more complex rules are designed to reach a more equitable result, but can operate to obscure the taxation system

EquityPrinciples:

(1) Horizontal Equity people who are similarly situated should be treated similarly (pay the same amount of taxes)

a. I.E.: Employee benefits: employees should be taxed similarly, whether they are paid in benefits or in money

(2) Vertical Equity unequals should be treated appropriately differently (those who have more should pay more)

- Competing Theories on an Equitable Tax System:o Benefit Theory Income should be defined in reference to the economic

resources that the taxpayer benefits from (standard-of-living concept)o Control Theory Income should be defined by the economic resources that

individuals control (ability-to-pay concept)

NeutralityPrinciple: taxes should avoid distorting the workings of the market mechanism of personal decisions- Possible Effects of Tax:

o Change in timing of transactionso Financial and Accounting changeso “Real” decisions by individuals/firms (where to live, how much to work)

- Note: This principle is honored largely in the breach government uses tax incentives to affect personal choices all the time

SimplicityPrinciples:

(1) Comprehensivenessa. Tax system should be understandable to those to whom it applies

(2) Certaintya. Application of the tax system to transactions should be reasonably stable and

predictable (3) Compliance Convenience

a. Taxpayers should not have to devote undue amounts of time complying with the taxation system

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(4) Administrative Conveniencea. Costs of collecting and enforcing tax should be reasonable (as with Harmonized

Tax)(5) Difficult to Avoid or Evade

a. Taxation system should offer minimal opportunity for non-compliance

Tax Avoidance vs. Tax Evasion(1) Tax Avoidance

a. Perfectly legal, even encouraged behaviorb. Effectiveness of tax expenditures depends on people seeking to structure their

affairs to avoid taxes where possiblec. As long as you disclose your income fairly and openly, there is no criminal

activity (misinterpreting the Income Tax Act is not criminal)(2) Tax Evasion

a. Fraud tax evasion is a criminal offence prosecuted in provincial courtsb. Falsifying documents, claming deductions that have no basis

- Note: The line isn’t always obvious, but if a taxpayer is clearly disclosing everything, it’s on the level – regardless of whether something turns out to be wrong, will only have to pay more taxes, won’t be criminally charged.

Tax ExpendituresThe Income Tax Act is both a tax collecting and a government spending statute The main purpose of the Income Tax Act is to raise revenue, but it is also used to encourage and incentivize certain behaviors, and penalize others - Research suggests people respond to tax expenditures more than they do to other

incentives/disincentive programs

Technical Tax Provisions establish the rules and structure of the taxation system

Tax Expenditures provisions which provide implicit subsidies for those who behave in a way that the government wished to encourage

Distinguishing between Tax Expenditures and Technical Tax Provisions(1) Construct a benchmark system using the traditional tax policy criteria – anything that

deviates from this benchmark is a Tax Expenditure(2) Tax Expenditures are anything that can be justified by reference to a government

spending objective (used in place of direct government spending)

Tax Expenditures vs. Direct Government Spending- Arguments For:

o Less complex and bureaucratically costly than direct spending programso Encourages private decision-makingo Uses an established administrative frameworko Less stigma attaches than to direct government handouts

- Arguments Against:o Can turn into open-ended programs with limited government control o Upside-down effect: the higher the income the greater the implicit subsidyo Increases the complexity of the taxation system

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o Subject to more abuse than direct government spendingo Increases the perceived unfairness of the taxation system

Taxation and the ConstitutionBoth the Federal and the Provincial governments have direct taxation powers:- Federal:

o 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”

- Provincial:o 92(2) Provincial legislatures have exclusive legislative authority for “Direct

Taxation within the Province in order to the raising of a Revenue for Provincial Purposes”

Equalization Payments36(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- Problem: Some have characterized this as a constitutional problem, because the federal

government raises money through federal income tax act and transfers money to the provinces, arguable the feds are raising money for a provincial purpose

- Possible Solution: Courts have characterized this as “co-operative federalism”, not the pursuit of a purely provincial purpose

Direct and Indirect TaxationA direct tax is one which is demanded from the very person who it is intended or desired should pay it.  Indirect taxes are those which are demanded from one person in the expectation that he shall indemnify himself at the expense of another.  – J.S. Mill

- Direct: Taken from the earner, investor, employee etc. who is intended to pay ito Individuals do actually pay, since there is no one to pass it on to

- Indirect: Taxes on a unit of a marketable commodity that are “passed on” to a final consumer

o Canadian Pacific Railway “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?”

o Does the tax attach in such a way that the purchaser is just going to add it to the resale price?

Tax Collection SystemTax collection systems are one of the main methods of harmonizing federal and provincial systems. The provinces ceded primary taxation power in the 1930s, and adopted a Federal tax base, but continue to administrate separate provincial taxation systems.

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All the provinces except Quebec have tax collection agreements with the federal government

Government Bodies Authorized to Deal with Taxation:- Department of National Revenue- Canada Revenue Agency:

o Minister of National Revenue is ultimately responsible for the CRAo CRA is an independent body that collects taxes separate from the government, it

sees every taxpayer as a client- Department of Finance:

o Primary setter of Tax Policy. o Department of Finance studies the way the taxation system works, take proposals

and drafts legislation, and works on the budget each year

Tax Adjudication System1) When you file your return at the end of your taxation year, you get a notice of

assessment:a. If there are errors, the CRA will fix them, but has up to 3 years to reassessb. Once you get a notice of assessment, you can file an objection within 90 days

2) If you’re not happy with your assessment, you can appeal to the Tax Courta. Appeals from there go to Federal Court, then FCA, then SCC

General and Informal Procedure in Tax CourtGeneral Procedure: - Very similar to regular civil litigation, formal rules of evidence are followed and costs are

available

Informal Procedure:- Developed in response to the sense that there should be some less expensive way of

challenging a tax assessmento Only for penalties less than $12,000o Tax court rules do not applyo Taxpayers frequently represent themselveso Informal procedure decisions are not regarded as precedent (though they can be

presented in the informal procedure, since rules are relaxed)

Tax Statute Interpretation PrinciplesThe Leading Case is Placer Dome

1) If the language is clear, you don’t create a purposive interpretationa. Because of because of the degree of precision and detail characteristic of many

tax provisions, a greater emphasis has often been placed on textual interpretation where taxation statutes are concerned Canada Trustco Mortgage

2) “Even when it appears unambiguous at first sight, sometimes in a particular context the words can’t be clearly applied or disapplied, then you must take a contextual, purposive approach.” (Driedger interpretive principles apply) (Canada Trustco)

a. legislative purpose may not be used to supplant clear statutory language, but to arrive at the most plausible interpretation of an ambiguous statutory provision

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3) “Residual presumption in favour of taxpayer. If there is no way if telling whether or not the act catches a particular situation, the presumption is in favour of the taxpayer.” (Canada Trustco)

IncomeIncome is not defined in the Income Tax Act – instead, there are rules and a method for computing income.

Section 3 The Process(1) language is fairly technical, but basically what it says is you take the taxpayer’s income

from all sourcesa. Four Sources are Enumerated (Office, Employment, Business and Property)b. Also see s.56c. May be unenumerated sources, per Curran

(2) Add to that taxable capital gains minus allowable capital losses (3b)(3) Then Deduct Deductions

a. Moving expenses, child care expenses, legal expenses (etc)(4) Then Deduct Losses From Sources

a. Losses from enumerated grounds (office/employment/property/business)

SourceFor Income to be taxable, it has to come from a source.

Section 3 determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property

Section 56(1) includes a list of things that the tax act also calls sources:- (a) Pension benefits and retiring allowance: any amount received in satisfaction of:

o (i) pension benefito (ii) retiring allowance (other than amount received out of employee benefit plan)

- (h) RRSP- (n) Scholarships, bursaries, etc

o Though notice that 56(3) essentially exempts all scholarship and bursaries - (u) Social Assistance Payments- (v) Worker’s Compensation

Section 4(1)(a) When you are calculating your income, you calculate it on a source-by-source basis. Income from business, employment, property, etc.

Haig Simons Model anything that increases the taxpayer’s ability to pay tax should be included as income. This model has not been adopted in the Canadian system, though there was some talk of adopting it in the 60s.

Bellingham (leading case on source income)

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Court reaffirms the basic principles of source income – example of judicial consideration of “source”. No definition of source in the act, must look to s.3 and s.56. Taxpayer fought expropriation board over value of expropriated property. Received 377K for land value, 181K for interest on award, and 114K as additional interest because the town acted in bad faith with a low initial offer.Held:- The 377K is income from a business (property purchased as ANT)- 181K ordinary interest was also income from a business- 114K extra interest is a windfall, and not income from a sourceFollowing Cartwright punitive damages are not income from a source, it is the public policy of demonstrating social disapproval of the town’s conduct through punitive interest

Cases On Source Income Discussed in Bellingham- Cartwright Punitive Damages are not income- Cranswick Windfall Gains are not income

o Indicia of windfall gains: Taxpayer has no enforceable claim No organized effort to receive payment Not sought after or solicited by taxpayer No foreseeable possibility of recurrence Payment not in consideration for property or services

- Fries Strike Pay is not incomeo This is pretty clearly income under surrogatum principle, but it has been specifically

exempted because of powerful lobby groups

CurranExample of the SCC implicitly saying that sources of income extend beyond the enumerated grounds income is “within the meaning of 3(a)”, but the court does not specify the source.Curran receives 250K payment from Brown, who wants him to leave Imperial Oil and join Federated Oil (which Brown controls). Payment made by Brown, funds were drawn from FO. B and C signed agreement that the money was for giving up assets at IO, employment contract between Currant and FO was signed right after. Attempt to separate payment from income from employment.Held:- The whole payment was for services to be provided by Curran to the new employer - The acquisition of services and the payment to make those services available is income from

a source “within the meaning of 3(a)”o Notice that the Court says it’s income within the meaning of 3(a), but doesn’t

specify what kind of income

Surrogatum PrinciplePrinciple: Is this payment compensation for a taxable amount that would have been received if it were not for the receipt of this compensatory amount? if it is, it will be taxable as though it were the taxable amount- Adopted into Canadian law in obiter in Schwartz- Officially adopted in Tsiaprailis

1) If there is a clear allocation, determine whether the amount paid is compensation for a taxable amount (Tsiaprailis)_

a. What was the amount Intended to Replace?b. Would the Replaced Amount have been Taxable in the appellant’s hands?

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2) If there is no specific allocation, look to the facts to determine whether a portion is compensation for a taxable amount (Siftar)

a. Failure to allocate cannot preclude inquiry into the makeup of a settlementb. Burden is on the taxpayer to report the taxable portion

IT-365R2Bulletin advises that all amounts received as settlements for death or personal injury will be excluded from income regardless of whether a portion of it can be considered lost income- Problem: This is a much more generous interpretation that Tsiapralis, which applied the

surrogatum principle to those portions of the settlement that were for lost income- Remember: IBs are not binding; this one probably should not be strongly considered

Section 6(3) codifies a presumption of which payments must be seen as remuneration for employments. 6(3) An amount received

a) During the period while the payee was in the employment of the payerb) In satisfaction of an obligation from an agreement between the payer and payee

(immediately prior to, during, or immediately after a pay period in which the payee was an employee of the payer)

Shall be deemed to be remuneration for services rendered, unless it is established that it cannot reasonably have been regarded:

c) As consideration for accepting the officer or entering employment contractd) As remuneration for services as an officer or under the employment contracte) In consideration for a covenant (or negative covenant) about employee behavior after

employment

London and Thames Oil WharfsEarly Example of the Surrogatum PrincipleFacts: Oil Wharfs damaged, wharf company sued successfully for lost profits.Held: Award for lost profits is taxable, because it is compensatory income in lieu of a normally taxable income (business)

Schwartz(1) Obiter discussion of Surrogatum Principle(2) General provisions cannot be used to include sources that are exempt under specific

provisions. This case also suggests that there are unenumarated sources, but fails to name any of them.

Taxpayer lawyer signed new employment contract, left firm for new job, just before he started the new company informed him they no longer wanted him. His lawyer did not sue the company, but they settled on a 360,000 payment.Held:- Lump sum is not taxable (not included in income, was for taxpayer’s embarrassment)- Court looks to specific and general provisions - Payment not a payment in lieu of pension or retiring allowance (included under 56(1)(a)(ii))

because retiring allowances are defined as “after a period of time”- Since the payment cannot be in lieu of a retiring allowance (the specific provision), it cannot

be included under the general provision 3(a)Note the Problem: La Forest says he’s following Savage, but the same type of conflict between specific and general provisions does not exist in this case

Tsiaprailis

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Non-Obiter application of the Surrogatum Principle. Taxpayer in car accident, severely disabled, went on long-term disability, insurance policy paid by employer. After a while, insurer decides she is well again and stops paying. Tsiaprailis sues insurer.Held:- Unlike in Schwartz, the exact breakdown of the 105K payment was determinable in this

caseo 36K was total of all periodic payment, remainder was 75% of future payments under

the policy- Once you have a clear allocation, you decide whether the Surrogatum principle applies:

o (1) What was the amount Intended to Replace?o (2) Would the Replaced Amount have been Taxable in the appellant’s hands?

- In this case: Taxableo the payment was intended to replace taxable insurance income, which would have

been taxable in the appellant’s hands

SiftarIf there is no specific allocation in a settlement, look to the facts to determine what amount is in compensation for a taxable amount. Companion case to Tsiapralis, split at SCC. Issue: how should the surrogatum principle be applied in a case where there is no allocation within a lump sum settlement?Held: - Failure to allocate cannot preclude inquiry into the makeup of a settlement- Burden is on the taxpayer to report the taxable portion

SavageLife insurance company paid her $300 for passing 3 exams, at this time the Tax Act said no tax on gifts under 500, Savage said this was a gift under 500. This case is mostly about employment benefits.Held:- She received the money from her employer, but NOT as compensation for employment

The Source Concept of IncomeSection 3 “Global Income Tax”- income from all sources is aggregated and subject to an overall tax structure- losses are also calculated source-by-source, and can be used against other sources of income

(except in certain enumerated cases)- Capital Gains and Losses are essentially hived off into a separate tax dimension

o 3(b) “quarantines” allowable capital losses, such that they can only be used against capital gains (except ABILs under s.3(d))

Section 4(1)(a) Income is calculated on a source-by-source basis

111 losses can be carried over from previous years and ahead for 3 years

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Nexus Between Taxpayer and Income SourceThe taxpayer who is liable for an amount must have some right to the income, and some ability to use or enjoy it

Who Receives the Benefit?Field v. The QueenA taxpayer must actually receive the income, or the enjoyment or benefit of the income, to be taxedTaxpayer’s estranged wife forged RRSP withdrawal, any amount received out of RRSP are taxable income, F appealed because he never received any of the funds fraudulently removed from his account.Held:- Taxpayer did not “receive” any amounts “as benefits out of or under” the RRSP- Taxpayer was a victim of fraud through no fault of his own, he should not be compelled to

pay tax on his defrauded money while pursuing the offender through the courts- Note: Martha thinks this case was wrongly decided, since he got a deduction when he put his

funds in the RRSP, and a constructive benefit when he had a chance to reclaim his funds during his divorce proceedings

Buckman v. MNRNexus established despite an illegal businessTaxpayer was a lawyer who embezzled funds from his clients, Revenue assessment included the embezzled funds in his income. Taxpayer argued embezzled funds were not income from an enumerated source, and that he did not “profit” from the funds since he never legally owned them. Held:- The nexus between taxpayer and income source was established:

o Appellant received the money, appropriated it and used it for his enjoymento Number and method of misappropriations had earmarks of a business

- Note: This case also stands for the principle that illegal businesses are just as taxable as legal businesses

ResidenceResidence is the primary basis for income tax in Canada. We tax based on residency on the assumption that you probably derive most of your income and enjoy most of the social benefits of the country in which you are resident.

Process:1) Determine Residency

a. National?b. Provincial?c. Ordinary resident?

2) If resident in two countries or provinces, apply tiebreaker

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Residents v. Non-residentsCanadian Residents are taxed on their worldwide income s. 2(1)Non-Residents living in Canada are taxed only on their Canadian sources of income s. 2(3)

International Treaties:- limit the exertion of source jurisdiction, to make sure no person is over-taxed- decide whether a taxpayer is liable in one place or the other- double-taxation is no eliminated, but it is restricted to a tolerable degree

s. 250(3) A Person IS Resident When:- A reference to a person resident in Canada includes a person who was at the relevant time

ordinarily resident in Canadao Look to case law to determine “resident” and “ordinarily resident”

s. 250(1) A Person is DEEMED Resident When:- a person shall be deemed to have been a resident of Canada throughout the taxation year if

the persono (a) Sojourned in Canada in the year for a period of, or periods which total, 183 days

or more Requires more than coming to Canada for the day, and rarely staying over

(R&L Foods)o (b) was at any time of the year a member of the Canadian Forceso (c) was at any time of the year (i) an ambassador, minister, high commissioner,

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

Indicia of Residency A court must look to all the facts to determine residency.

IT-221R3Bulletin on clarifying residence for tax purposes probably the state of the lawResidential Ties (Most Important Factor)- Dwelling place (may not be as significant if it is rented at arm’s-length)- Spouse or common law partner- dependantsSecondary Residential Ties- Personal property in Canada- Social ties (clubs, religious groups)- Economic ties- Landed immigrant status- Medical insurance- Driver’s license- Seasonal homeCRA will always consider whether a person who ostensibly intends to sever residency has complied with the provisions of the act (deemed disposition – departure tax)“Ordinary Resident”- Where a person has extended periods of absence from Canada, ordinary residence test may

be used to determine whether the individual retained residence status while abroad:

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o A) evidence of intention to permanently sever ties with Canada (good evidence is complying with Canadian tax laws that apply upon ending Canadian residence Departure Tax)

o B) regularity and length of visits to Canadao C) residential ties outside of Canadao Hansen in “Individual Residence” 1977 Conference Report, argued that “ordinary

residence” should have a broader interpretation than “resident”, since it implies residence over a number of years, not just the tax year in question

o Ordinary residence does not require permanency or continuous residence through the entire tax period. (Thomson)

“Sojourning”- Any part of a day can be considered to be a day for sojourning purposes- A person is not automatically considered to be sojourning for every day spent in Canada

(R&L Foods)o Commuting to Canada for the day to work and then returning to your home in the

USA does not equal time “sojourned” in Canada under 250(1)

Lee v. MNRList of Factors for determining residence enumeratedTaxpayer born in England, entered Canada as “visitor”. Worked full-time for a non-resident corporation, all funds deposited in a Canadian bank, married a Canadian and paid for a house in Canada. Immigration Canada insisted he left Canada every 27 days.Held:- Appellant is a resident- Important Factors in this case:

o Spouse in Canadao Home in Canada where he chose to spend his leisure time

- Note: Intention is not relevant in determining residence- List of Indicia relevant to Determining Residency:

Past/Present habits of life Regularity/length of visits in the jurisdiction asserting residence Ties w/in jurisdiction Ties elsewhere Permanence or otherwise purposes of stay Ownership of a dwelling in Canada or rental of a dwelling on a long-term basis

(e.g. a lease for one or more years) Residence of spouse, children and other dependent family members in a

dwelling maintained by the individual in Canada Young children and dependent spouse are important Memberships with Canadian churches or synagogues, recreational and social

clubs, unions and professional organizations Registration and maintenance of automobiles, boats and airplanes in Canada Holding credit cards issued by Canadian financial institutions and other

commercial entities including stores, car renal agencies, etc. Rental of Canadian safe deposit box or PO box Subscriptions for life or general insurance (incl. health insurance) through a

Canadian company Mailing address in Canada Telephone listing in Canada Stationery (incl. business cards) showing address in Canada

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Magazine/periodicals sent to an address in Canada Canadian bank accounts other than a non-resident acct Canadian driver’s licence Membership in a Canadian pension plan Membership in Canadian P/Ps Frequent visits to Canada for social or business purposes Will prepared in Canada Legal documentation indicating Canadian residence Filing an income tax return as a resident Ownership of a Cdn vacation property Active involvement in business in Canada Employment in Canada Maintenance/storage in Canada of personal belongings including clothing,

furniture, family pets, etc. Obtaining landed immigrant status or appropriate work permits in Canada Severing substantially all ties with former country of residence

Ordinary Resident250(3) A reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada

Thomson v. MNROrdinary residence does not require permanency or continuous residence through the entire tax period.Taxpayer originally Canadian, moved to USA but spent an average of 150 days/year in Canada. While in Canada, resided in a house he built and owns. Passport listed place of residence as Bermuda (though he had not lived there for 20 years). He did not “sojourn” in Canada for statutorily prescribed 183 days. appealed on the grounds that he was not residing or “ordinarily resident” in Canada.Held:- Appellant was a resident:

o Home in Canada was determined, in all the circumstances, to be his permanent residence

o His Bermudan citizenship was irrelevant - Gradation of time, intent, and continuity make it impossible to give “residing” a precise and

inclusive definition

Hansen – “Individual Residence” 1977 Conference Report - “ordinary resident”, though it has been interpreted to have a narrower meaning than

“resident” in Thomson, actually should be seen to have a wider meaningo “Resident” suggests a focus on the tax year at issueo “Ordinary Resident” suggests a focus on the taxpayer’s activities over a number of

years

Statutorily Deemed Resident250(1) person is deemed resident where - a) sojourned in Canada in the year for a period of, or periods which total, 183 days or more- b) was at any time of the year a member of the Canadian Forces

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- c) was at any time of the year (i) an ambassador, minister, high commissioner, officer or servant of Canada (ii) an agent-general, officer or servant of a province

R&L Food DistributorsCommuting to Canada for the day to work and then returning to your home in the USA does not equal time “sojourned” in Canada under 250(1)Appellant corporation appeals from its assessment in which it was denied a small business deduction because the controlling shareholders were not Canadian residents. Issue whether R&L is a Canadian Controlled Private Corporation for the tax year.Shareholders:- Labe lived in Michigan w/wife&kids, commuted to Windsor for work - Rosenthal lived in Michigan, commuted to Windsor, belonged to social clubs in Windsor

and MichiganHeld:- Not Residents - Coming to Canada for the day to work then returning to your life in the USA does not count

as residency – homes and social lives were in the states

Part Year ResidenceSection 114 If a person is found to have only been resident in Canada for part of the taxation year:- for the part–year they were resident they pay tax on global income- for the part-year they were non-resident they pay tax only on Canadian-source income

NOTE: This can only apply to residents or ordinary residents deemed residents are deemed to be resident for the whole year, based on the statutory criteria (sojourning 183 days)

Schujahn v. MNRExample of a part-year resident. Question of Residence depends on the Facts.Appellant was transferred to operate a business in Toronto, then transferred back to Minneapolis three years later (August 1957). Wife and family remained in Toronto into 1958, and maintained a small bank account and car. Appellant spent three vacation periods in Toronto after he left Canada in AugustHeld:- Appellant severed his residence in August, he was partial resident for that year- Question of residence will depend on the facts:

o Residence elsewhere was not conclusive, but was consideredo Wife and child remained in TO only with the purpose of selling the house without a

huge losso Transfer back to Minneapolis was intended to be permanent

The Queen v. ReederExample of a taxpayer arguing part-year residence who was found to be a full-time residentTaxpayer born and raised in Canada, got a job with Michellin Canada, moved to France for an “initial training period” of indefinite length. Outside of Canada for 8 months. Issue was whether the taxpayer was a non-resident of Canada for the 8 month period.Held:- Taxpayer was resident of Canada for the entire time

o Absence was intended to be temporaryo Despite not having permanent home in Canada for training period

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o Canada remained the “ordinary residence”

Tax Treaties – TiebreakersIt is possible to be resident in two countries at once, both taxing you on your global income. To prevent such situations, Canada has tax treaties with other nations to establish residence in the case of a tie.

Canada-US Income Tax Treaty – Article IVa) taxpayer resident in the state in which he has a permanent home availableb) If no permanent residence (or in both), resident of the state with which his personal and

economic ties are the closestc) Habitual residence

…If no other way to decide – the competent authorities may decidea. This is very undesirable for the taxpayer (authorities take their time, they are not

bound to decide, and taxpayer is taxed globally by two countries in the meantime)

Canada-UK Income Tax Treaty – Article 4a) taxpayer resident in the state in which he has a permanent home availableb) centre of vital interests (personal and economic ties are the closest)c) Habitual abode

…If no other way to decide – the competent authorities may decide

Section 250(5) If you are a resident in another country based on the application of the tiebreaker rules in Income Tax Treaties, you are resident in that country for the purposes of all of the Canadian Income Tax Act- Taxpayer decisions are definitive

Salt v. RExample of the Application of a Tiebreaker (Canada-Australia Tax Convention)Taxpayer born in UK, lived in Jamaica, Spain, and Ireland. Came to Canada in 1984 for a job in Quebec. He and his wife purchased a house in Quebec. He then got a job in Australia and moved there in 1998. Home in Canada was leased unfurnished on commercial terms (arms-length). Job in Australia terminated prematurely after 18 months, and Taxpayer moved back to Canada in 2000. Taxpayer found to be ordinary resident of Canada as well as resident of Australia from 1998-2000, on to Tiebreaker!Held:- Canada Australia Tax Convention

o A) permanent homeo B) closer economic and personal relations

- Taxpayer did not have permanent home in Canada, and was therefore not resident in Canada- Note: Although taxpayer maintained some significant ties with Canada (employer based in

Montreal, Canadian bank account, leased property), he severed many important ones (family and job in Oz)

Departure Tax - Deemed Disposition (See Below)Section 128.1(4) A taxpayer who ceases to be resident in Canada (either by ending residence or by being deemed a resident of another country by tiebreaker rules) is deemed to have disposed of their property at the time of cessation of residency for fair market value, and immediately acquired them back for the same amount

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- So, the accrued value of property will be realized and taxed as you leave- Some property is exempt (real property in Canada, property of a business carried on in

Canada)

Provincial ResidenceYou can never be taxed on your whole income in two provinces at once. Provincial residency can be very significant because of the difference in marginal rates.

1) Determining Provincial Residency residence on the last day of the year- Income Tax Regulation 2601: Individuals are taxed based on their residence on the last day

of the year- BC ITA 2(1)(a): an individual is deemed to be a resident of BC for tax purposes if they are

resident in BC on the last day of the year

2) Provincial Residency Tiebreaker- Income Tax Regulation 2607: Where a taxpayer is resident in more than one province on the

last day of the year, he/she is deemed to be resident:o Only in the province where you have your principle place of residenceo If two principle residences, in whichever province the taxpayer has the most

significant economic ties

Mandrusiak v. The QueenExample of the application of a Provincial Residence TiebreakerTaxpayer was originally resident of Alberta, but moved to BC for a job. Taxpayer maintained homes in BC and AB, performed consultant work in BC in relevant years (110 days in 2000, 4.5 days in 2001, and no days in 2002). Maintained farm in Alberta — Province assessed taxpayer for taxation years 2000, 2001, and 2002 on basis he was resident in British Columbia. Taxpayer appealedHeld:- 1) Decide whether taxpayer is resident in both provinces

o Taxpayer was resident in Alberta and ordinarily resident in BC (in both provinces, he lived with his wife in a permanent home)

- 2) Break Tie!o Where did he have more significant residential ties?

- Taxpayer was resident of Albertao Cars in both provinces, but maintained AB driver’s licenseo Spent Christmas and NYE in ABo Source of income was farming in ABo Family was located in AB

Residence of CorporationsThe corporation is considered to be a “person” and “taxpayer”. This is different that the residence of the controlling shareholders (see R&L Foods), the corporation itself has residence.

250(4) Deemed Residence of Corporationsa) A company incorporated in Canada (after April 26, 1965) is deemed to be resident in

Canada

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c) If the corporation was incorporated in Canada but before April 27, 1965, then a corporation is deemed to be resident in Canada if:

a. at any time in the taxation year they were resident in Canada ORb. carried on business in Canada

253 “Carrying on a business in Canada” a) produces, mines, grows, etc.b) solicits, orders or offers anything for sale in Canada through an agent or servant, whether

the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada

Common Law Residence Test De Beers1) Corporation is resident in the nation in which central management and control resides

a. Where the board of directors meets and makes decisions2) Corporation is resident where the real management and control resides

a. Unit Construction If the board of directors abdicates control to someone else who is really managing the company, then the corporation is resident in the country in which the real management and control resides

Corporation Residence TiebreakersUsed in situations where statutory (deemed) residence conflicts with common law residence

1) Canada-USA deemed resident in country in which it was incorporated2) Canada-UK straight to decision by competent authorities

De Beers Mines v. HoweDeveloped the Common Law Test for Corporate ResidenceMining company in South Africa, registered in SA, with regular meetings held in SA. However, majority of directors resided in London, and had meetings there where much of the company’s business was conductedHeld:- Business was resident of UK

o Majority of the Directors lived and met in Londono Centre of management and control was in the UK o Despite the company being registered in SA, the real control and management of the

company was in England

Non-Residents Canadian Source IncomeActiveNon-residents are subject to Canadian tax if they earn or receive income in CanadaSection 2(3)- non-residents that earn income in Canada from a business or the disposition of taxable

Canadian property file in the same way as residents and are taxed at the same marginal rateSection 153- general provision that charges employers to withhold and remit tax on income from

employment, applies to non-residents earning income from employment in Canada

PassiveNon-residents who receive income of a “passive” nature from Canadian sources are also taxed (Part XIII – Non-Resident Withholding Tax)Section 212(1)

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- “Parent provision” imposes a statutory 25% income tax on gross amounts of certain types of payments made by Canadians to non-residents:

o Management Fees Canadian corporation with US subsidiary, Canadian corporation pays fees to subsidiary for administrative fees. When the Canadian corporation pays, it will withhold 25% of the payment and remit it.

o Payments on interest earned in Canadao Estate or Trust incomeo Royalties paid to non-residentso Rent received by non-residents on Canadian propertyo Canadian pension received by non-resident BC government makes pension

payments to a person that has permanently moved to another countryo Non-Residents (that were once residents) that take money from an RRSP

Section 215- (1) Canadian residents are obligated to withhold and remit tax from payments to non-

residents - (6) Canadian is jointly and severally liable if the tax is not withheld and remitted

Income from Office or EmploymentBasic Statutory Framework:- s. 248(1) Definitions

o “office”: office entitling a person to an ascertainable stipend (includes judges, public officers, directors, office of a person elected by popular vote or appointed in a representative capacity etc.)

o “employee”: person (must be human) that occupies employment positiono “employer”: the person from whom an employee receives their remunerationo “employment”: position of an individual in the service of another person

- s. 5 Charging sectiono (1) Income from Employment salary, wages and other remuneration (including

gratuities received as benefits of employment)o (2) Loss from Employment rarely ever happens

- s. 6 Expands “income from employment”o Includes benefits of all kinds, and allowances

- s. 8 Employee deductions- s. 153 Duty of the employer to withhold and remit income tax

Employee v. Independent ContractorUltimately, always a question of Fact.

Historically, courts have distinguished between:- Employee engaged in a contract OF service- Independent contractor engaged in a contract FOR service

By Assessing the nature and degree of control over the purported employee

The Central Question is best enumerated in the Test from Market Investigations: - “the fundamental test to be applied is: “Is the person who has engaged himself to

perform these services performing them as a person in business on his own account?” - To determine, court will look to all the circumstances and factors listed below

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o A court is not bound by the contract between the parties in interpreting the relationship

Courts Will Consider all the Facts the case law has established some important factors, but emphasis is always reserved for the “whole scheme of operations”Wiebe Door

1) Degree of Control2) Ownership of Tools3) Chance of Profit4) Risk of Loss

Sagaz (affirmed and adopted Wiebe Door)1) Control2) Who provides equipment3) Has the person engaged hired helpers of their own4) Degree of responsibility5) Degree of Financial Risk6) Opportunity for Profit

See also Wolf and Winnipeg Ballet, which indicate the court’s willingness to take the stated intentions of the parties into consideration (though the express relationship is not determinative)

Functional Differences:- Withholding of Tax

o Employers are required to withhold and remit taxes on payments to employees (s. 153), but not for independent contractors

o Issue normally arises where employer does not withhold/remit in assumption that employee is independent contractor, and CRA assesses the person as an employee

- Basis of Measuremento Income from employment is taxed when it is receivedo Income from business is taxed when it is receivable

- Reporting Periodo Employees use the calendar year as their taxation year (249(1))o Businesses (independent contractors) can have different tax years

- Scope of Deductionso Employees do not get many deductions (s. 8)

8(2) if deduction is not listed, an employee can’t claim ito Expenses incurred for the purpose of running a business are usually deductibleo Thus, Workers usually prefer to be independent contractors than employees

Wiebe Door Services v. MNRAppellant contends that 12 persons for which he was assessed EI and Pension payments in 1980 and 1981 were actually independent contractors. Appellant owned a door installation company that engaged workers with the understanding that they would be running their own businesses, paying their own taxes and contributions to EI and CPP. Installers owned their own trucks and tools, Wiebe supplied special racks and a drill for certain jobs. Installers were asked to provide a 1-year guarantee of their work.Held:- Matter referred back to Tax Court: insufficient evidence for finding- Stated relationship between the parties is not determinative - Court partially rejects the historical “Control Test” (degree of control over work conditions

of the alleged employee)

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o Test cannot adequately describe all independent contractor relationships- Test for Determining Employee v. Independent Contractor

o (1) Degree of Controlo (2) Ownership of Toolso (3) Chance of Profito (4) Risk of LossEmphasis always retained for the “combined force of the whole scheme of operations” (This test is useful, but not determinative)

Ontario v. Sagaz Industries- SCC Affirmed and adopted test from Wiebe Door- “there is no one conclusive test for determining whether a person is an employee or an

independent contractor…what must always occur is an examination of the total relationship between the parties”

Intention of the PartiesWolf v. The QueenWhile the express description by the parties of the relationship between them is not determinative, Courts should consider the intention of the parties in determining whether a person is an employee or an independent contractor

Royal Winnipeg Ballet v. MNRIntention of the parties should always be taken into account when determining the “total relationship between the parties”- Evidence of parties understanding the terms of their contract must be given the proper

meaning and weight- This does not mean that the parties’ declarations as to their legal relationships are

determinative – but they should be given weight

Corporations and Employment (Personal Services/Incorporated Employees)Employees have tried to re-characterize income from employment as income from business through incorporation – this does not work

Basically - The Department of Finance excluded personal services business income from “active business income” and thus from the special low rate for CCPCs, and restricted deductions available for personal services businesses (to

s. 125(7) Definitions:- “active business carried on by a corporation”

o Any business carried on by the corporation other than a specified investment business or personal services business

- “specified investment business” (also do not get special low CCPC tax rate)o business carried on by a corporation, the principle purpose of which is to derive

income from propertyo UNLESS:

a) the corporation employs more than 5 full-time employees

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b) any other corporation provides managerial, administrative, financial, etc. services, which, without the corporation, would be expected to require 5 full-time employees

- “personal services business” (do not get special low CCPC tax rate) An individual who performs services on behalf of a corporation (incorporated

employee) that is a specified shareholder and would reasonably be regarded as an officer or employee of the party to which the service is being provided, if it were not for the existence of the corporation, will be held to be in a Personal Service Business

UNLESS: The corporation employs 5 or more full-time employees

18(1)(p) Restrictions on deductions by corporations carrying on a personal service businessPersonal Services Businesses are not entitled to the special low taxation rate for Canadian Owned CorporationsThe only deductions allowed to Personal Service Businesses are:- (i) Remuneration paid to an incorporated employee of the corporation- (ii) Cost to the corporation of any benefit/allowance provided to an incorporated employee- (iii) Sales expenses that would have been allowed for a sales employee- (iv) Any amount paid by the corporation on account of legal expenses incurred in collecting

amounts owed for services rendered

Sazio (Actual case which was tweaked for In-Class Problem)Example of re-characterizing income from employment as income from business through incorporation – this would no longer work with 118(1)(p)Ralph Sayzio was coach for the Hamilton Tiger Cats; annual salary, bonuses based on team performance, and benefits package including car. Canadian owned corporation pays a much lower rate (13.5%) than an individual at top marginal rate (43%). Plan is to incorporate a business to contract to coach the football team (RalphCo.), make himself an employee of the corporation, and have the payment from the football team to RalphCo. taxed at 13.5%Held: - RalphCo. Is valid, the court will not simply ignore recognized and properly constructed legal

entity- In response to this case and cases like it, the Department of Finance created 125(7)

Personal Services Business

Personal Services Businesses v. Businesses with a Single Incorporated EmployeePersonal Services Business: Where the incorporated employee is basically an employee of the one employer with a corporation in the middle

Business with Single Incorporated Employee: Like a lawyer, the corporation has only one employee, but the services are available to anyone

Note: in a situation where an employee wants to become an independent contractor, but continue to do essentially the same work for an employer, the employer should insist that the employee incorporate, because:

a) Corporations cannot be employees, so the employer would simply contract with the corporation

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b) The incorporated individual would have to pay their own taxes, and would operate as a personal services business

BenefitsFIRSTs. 5(1) Includes in an employee’s income “amounts received as salaries, wages, gratuities, and other remuneration including gratuities”

THENs. 6(1)(a) Further Includes in an employee’s income “the value of board, lodging and any other benefits of any kind whatever received or enjoyed by the taxpayer in respect of, in the course of, or by virtue of an office or employment”- Enacted to catch all benefits not caught by “other remuneration” in 5(1)- Exemptions: benefits derived from contributions of the taxpayer’s employer to a deferred

profit sharing plan, an employee life and health trust, a group sickness or accident insurance plan, life insurance, health services plan, pension, or unemployment insurance plan

Relationship between Benefit and Employment:- In Canada, you don’t have to show that an employee provided services in exchange for the

benefit, it just has to be “received or enjoyed in respect of, in the course of, or by virtue of an office or employment” (Savage)

o Almost anything provided by an employer to an employee will qualifyo The basic question is “if you weren’t an employee there, you wouldn’t get it”

- However, A benefit from employment requires that a material acquisition conferred an economic benefit on the taxpayer (Huffman)

o Not just restoring the taxpayer to the state they would have been in if not for the employment

- LOWE Test: (Adopted from Poynton)o (1) Does the item under review provide the employee with an economic advantage

that is measurable in monetary terms?o (2) If there is an advantage, is the primary advantage for the employee or the

employer? If the primary benefit is to the employer (i.e. a business trip) then it is not a

benefit of employment- Examination of the Facts:

o Was a considerable portion of the usual working hours available for leisure or recreation? (Philip)

o Was the activity related to matters of no immediate interest to the employer? (Hart)o Was there personal value to the employee apart from the business value?o What was paid for?

Policy Reasons:- Equity employees paid in benefits should be taxed equally to employees paid in cash- Revenue government would take a substantial hit if they could not tax benefits

However: - There are many benefits that the CRA simply does not go after, because it would be too

difficult to assess and collect taxes on the benefits (i.e. free coffee at work).

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- Powerful unions and lobby groups have prevented some benefits which could be calculated in money from being taxed (i.e. Strike Pay)

Development of the Rule: Royal Commission on Taxation No. 16 Tax Treatment of Benefits Traditional Rule Only money or something capable of being turned into money can constitute income for tax purposes (Tennant v. Smith)- Income tax came from the benefit that went into the employee’s pocket, not the benefit

that he saved in his pocketNew Rule in Canada The language in 6(1)(a) overrides the traditional rule in Tenant (Waffle)- “value of board, lodging, and other benefits of any kind whatsoever”

T4130 Employer’s Guide Relaxation of the rule- Employers can give any number of tax-free non-cash gifts for special occasions (birthday,

Christmas, etc.) to an employee up to a combined total of $500 in one tax year. Anything more than $500 will be considered income, and taxed accordingly.

Savage v. MNRSCC adopts a broad interpretation - In Canada, you don’t have to show that an employee provided services in exchange for the benefit, it just has to be “received or enjoyed in respect of, in the course of, or by virtue of an office or employment”Taxpayer employed as a research assistant, took three Office Management Association courses voluntarily. She received $100 per course passed by her employer (total $300). Question is whether the money was untaxable or whether it was subject to tax as a benefit in respect of employment.Held:- Broad interpretation of the relationship between benefit and taxpayer’s employment

necessary to consider the benefit “received or enjoyed in the course of, by virtue of an office or employment”

- 6(1)(a) widens the category of taxable benefits- In this case: Mrs. Savage’s benefits were clearly in relation to her employment, even if they

were not directly received in exchange for services provided fell under broad definition of 6(1)(a)

Lowe v. MNRPersonal expenses v. Expenses from employment/office will turn on the facts. If the material acquisition is a mere incident of what was primarily a business trip it should not be regarded as a taxable benefit within 6(1)(a).Taxpayer was an executive at an Insurance company based in Ontario. His job was to promote the company’s insurance to independent brokers. He went on an expense-paid trip with his wife to New Orleans, for the purpose of facilitating the enjoyment of the brokers for whom he was responsible. CRA assessed the trip as a taxable “benefit” under 6(1)(a) – taxpayer appealed.Held:- Travel expenses were a taxable benefit of employment- Examination of the Facts:

o Was a considerable portion of the usual working hours available for leisure or recreation? (Philip)

o Was the activity related to matters of no immediate interest to the employer? (Hart)o Was there personal value to the employee apart from the business value?o What was paid for?

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- In this case, because the personal benefits were merely incidental to what was overwhelmingly a business trip, the benefits should be taxable within 6(1)(a)

Huffman v. MNRA benefit from employment requires that a material acquisition conferred an economic benefit on the taxpayerTaxpayer was plainclothes police officer whose duties involved general investigation at a crime scene. Nature of the job required him to buy extra-large overcoat (to store on-duty equipment) and caused extra wear on the clothing. Plainclothes officers are reimbursed $500 for wear to their clothes (because uniform officers’ uniforms are provided). Trial Judge found that the $500 was not a taxable benefit of employment, Crown appeals.Held:- Court affirmed the broad principle in Savage- However, in this case, the $500 reimbursement was not a benefit of employment because the

taxpayer was simply being restored to the position he would have been in had the employer not required him to incur the expense

Valuation of Employee Benefits6(1)(a) requires that the “value” of a taxable benefit be included in the taxpayer’s income. The definition of “value” becomes a critical issue.

Fair Market Value:- In Canada, the value of a benefit is its Fair Market Value- The value that a person not obliged to buy would pay to a person not obliged to sell- The FMV of a benefit is a fluid standard, and can be affected by the uniqueness of the

benefit (like personalized messages, restricted tickets bought with airmiles)

Giffen v. The QueenProspective cost to the employer is not the universal measure of the value of benefits. Proper measure of value is the Fair Market Value of equivalent benefits.Appellant was an employee required to travel. Tickets were bought by the employer. Appellant earned frequent flier miles on employer-paid ticket, which were later used by family members to go on trips. Question became: how to value the benefit of the tickets bought by the airmiles?Held:- The proper measure of value is the price the employee would otherwise have had to pay for a

ticket for the same class of flight with the same restrictions as airmiles tickets- Fair Market Value of the tickets = the amount a person not obliged to pay would pay to a

person not obliged to sell for a ticket with the same qualities (restrictions) as the airmiles ticket

Loyalty PointsIncome Tax Technical News 40 The CRA’s current administrative position is that loyalty points (frequent flier miles, etc.) collected by employees on purchases reimbursed by employers do not have to be included in income provided that:- The points are never converted into cash- The plan is not indicative of another form of remuneration- The plan does not exist for tax avoidance purposesThis policy is due to the difficulty in valuing, tracking, and identifying the benefits accumulated through loyalty points

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AllowancesAllowances are presumptively included in a calculation of an employee’s income under 6(1)(b). That section also sets out some specific allowances that are exempt from taxation.

Section 6(1)(b) A taxpayer must include in income all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, Except:- (v) reasonable allowances for travelling expenses for work-related travel (selling property or

negotiating contracts)- (v.1) allowances for board and lodging, maximum $300/month, if:

o The taxpayer is a member of a sports team/rec program of the employer of which registration is restricted to under 21

o The allowance is in respect of the taxpayer’s participation on the sport’s team (not coach, trainer, etc)

o The employer is a registered charity or non-profito Allowance is reasonably attributable to the cost to the taxpayer of living away from

where he would otherwise live remote workplace allowance- (vi) reasonable allowances received by a minister or clergyman in charge of or ministering to

a diocese, parish, congregation- (vii) reasonable allowances for travel expenses (other than car allowances) received by

employee for travelling away from:o (a) the municipality where the employer’s establishment is located or where the

employee ordinarily reportedo the metropolitan area where the employer’s establishment was located

For business purposes- (vii.1) reasonable allowance for motor vehicle use for work purposes

Allowance vs. ReimbursementDefined in Huffman

Allowance An allowance is a predetermined sum of money paid to enable the recipient to provide for certain kinds of expense – the amount is determined in advance, and once paid is at the complete discretion of the recipient (included in income)

Reimbursement Remuneration paid to a person for a sum paid on behalf of the party remunerating (not included in income)

Example: in Huffman, the $500 paid to plainclothes officers was a reimbursement for the wear and tear expected on street clothes. The fact that under-cover police officers were only required to submit $400 in receipts was only due to the fact that when they upped the reimbursement amount from max400 to max500, they made a small statutory exemption to allow for less paperwork

The Queen v. MacDonaldLeading Case on what constitutes an “allowance” under 6(1)(b)Taxpayer was RCMP officer transferred from Regina to Toronto. He received a $700/month housing subsidy following his transfer that was not included on his income. Minister assessed the subsidy to be an allowance.Held:

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- The $700/Month was an allowance- Look to the Facts:

o (1) Arbitrary amount - predetermined sum set without specific reference to any actual expense or cost

o (2) Allowance will usually be for a specific purposeo (3) Allowance is totally within the discretion of the recipient (reimbursements

happen after the fact and are partially at the discretion of the payer)

Special and Remote Worksites6(6) creates a special exception to the presumptive inclusion of allowances under 6(1)(b).

6(6) Notwithstanding 6(1), taxpayers shall not include in a computation of income from office or employment any amount received or enjoyed (in respect of the office or employment) that is the value of or reasonable allowances in respect of expenses incurred for:- (a) A taxpayer’s board and lodging at:

o (a) A special worksite, if it is temporary work and the taxpayer maintains a permanent residence elsewhere that is:

(i) Available and not rented out (ii) To which the employee could not reasonably return every day

If the taxpayer was required to be in the remote worksite for more than 36 hours- (b) Transportation between:

o (i) the principle place of residence and the special workplaceo (ii) the location referred to in (a)(ii) and the location where the taxpayer is employed

Automobile and Travelling Allowances6(1)(b) contains a number of exceptions to the presumptive inclusion of allowances, applying to automobile and travel allowances.

6(1)(b)(v) Reasonable allowances for traveling salespeople (travelling expenses for work-related travel: selling property or negotiating contracts)

6(1)(b)(vii) Non-motor vehicle non-salesperson reasonable allowances for performing employment duties away from the municipality where employer is established and employee works

6(1)(b)(vii.1) Reasonable allowances for motor vehicle expenses incurred by a non-sales employee for traveling in performance of the duties of an office or employmentAllowances for motor vehicle use will NOT be reasonable where:

Measurement not based solely on number of km driven (employee has to keep track of kms, but it is not the same as a reimbursement, as the allowance is meant to compensate for wear and tear, and other non-gas expenses)

Reg 7306: allowable per-kilometer rates – employers can only deduct up to this amount, but employees could given more than this amount in allowances and not include it in income

Taxpayer is also reimbursed for motor vehicle use

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Deductions in Computing Income from Employment8 authorizes some deductions in respect of employee income, but the deductions are strictly limited to those expenses set out in 8(2). Courts are very strict that no other deductions are allowed to avoid the potential for unlimited expansion of deductible personal expenses necessary for employment.

8(2) No deductions except those enumerated in this section

67 Reasonableness Requirement- The amount of the expense otherwise deductible must also be reasonable- Applies to all deductions on income from any source including from employment or office- Once you have calculated the deduction, if it is allowed, it is a question of fact whether the

amount of the deduction is reasonable

67.1 Arbitrarily restricts the deduction of expenses incurred for food, beverages, and entertainment to 50% of the cost of those items- EXCEPT:

o (1) expenses incurred by employees in the ordinary course of a food, beverage, or entertainment business

o (2) expenses incurred: for one of six or fewer events held by the employer in the year at which food/bev/ent are available to all employees

8(4) Meals are not deductible even under any of these categories of deductible expenses UNLESS the meal was consumed when the employee was required to be away for no less 12 hours from the ordinary place of work- employers can’t simply have employees drive across town to deduct their meals

Travelling ExpensesOnly permissible if they were incurred at the employer’s behest – the cost of travelling to and from work is not deductible, even if the nature of your job or lifestyle requires you to arrange special transportation (Hogg, Martyn)8(1) Permissible deductions from employment/office include:- (f) Sales expenses of commission employees, where the employee:

o (i) paid own expenses under the employment contracto (ii) is ordinarily required to carry on employment duties away from employer’s place

of businesso (iii) is remunerated in whole or in part on commission (can have salary in addition,

but must make commissions)o (iv) did not receive travel allowance that was exempt from taxes under 6(1)(b)(v)o Are deductible, unless:

They are outlays, losses, or replacements of capital They are expenses that would not be deductible for an independent

contractor They are amounts that would otherwise be paid under 6(1)(e)

o you can only deduct up to the amount of commissions you earned, cannot create a loss from employment

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- (g) Transport Employee’s Expenses, where an employee is required to regularly:o (i) travel away from the place where the office is located on vehicles used by the

employer to transport goods; ando (ii) was required under contract to pay travel expenseso To be eligible for this deduction, an employee must be away for long enough to incur

meal AND lodging expenses (Renko)- (h) Travel Expenses, where the taxpayer was required to:

o (i) was ordinarily required to work away from the employer’s place of business; ando (ii) was required under contract to pay travel expenseso Except Where:

(iii) taxpayer received a travel allowance exempt under 6(1)(b) (iv) taxpayer also claims deductions for transport expenses(e), commission

expenses(f), or railway employee expense(g)- (h.1) Motor Vehicle Expenses, where the taxpayer:

o (i) was required regularly to travel away from the place where the office is located; and

o (ii) while so away, was required to pay motor vehicle expenseso Except Where:

(iii) employee received an allowance under 6(1)(b) (iv) employee claimed deduction under (f)

RenkoUnder 8(1)(g)(ii), an employee must be away long enough to incur meal AND lodging expenses to be eligible for the deductionFerry workers for BC ferries. Test case by ferry employees as to whether or not they could deduct the amounts they spend on their lunches when they were on the ferries. They were allowed to buy meals on board at half price. Appears to meet requirements of 8(1)(g), except that they weren’t making disbursements for lodging. CRA policy was that $11 for a meal on the job was reasonable, which was restricted by 67.1 to 50%. So the employees were claiming $5.50 for each meal on the job.Held:- 8(1)(g)(ii) does not allow the deductions at all- To be eligible for the deductions, you need to be away long enough to incur lodging and

meal expenses. - You have to have meal and lodging expenses or  you’re not entitled to any deduction at all

Martyn v. MNRTravel expenses are only deductible if they were incurred at the employer’s behest, or the employer had some control over them. The normal cost of commuting to work is not deductible as a travel expense. Everyone does that.Taxpayer pilot attempted to deduct the cost of commuting between home and airport, round trip 27 miles. Evidence disclosed that public transit was unreliable/unavailableHeld:- Expenses not deductible- Every employee is required to accommodate the journey between home and work

o “travelling expenses” usually refers to transportation while on duty and includes hotels, meals, taxis and gratuities

- These expenses were not incurred at the employer’s behest, nor under his direction, nor had the employer any control over them

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HoggSecurity concerns are irrelevant for tax purposes – employees forced for personal or social reasons to use special transportation to work will not automatically receive a deduction. Hogg was a judge. He mostly worked at the Etibicoke courthouse, to which he traveled in his own car. He was also frequently required to go to meetings away from his chambers. So when his employment required him to be present at other locations than his base courthouse, he would get a non-taxable allowance for anything over 15 km. He claimed a deduction under 8(1)(h.1) for traveling past his home courthouse, because the circumstances of his employment required him to use his own car as a result of security requirements.Held:- You may be required to use a personal car to travel, but that is not part of your duties of the

office, which are to dispense justice- Also, the judge would be ineligible for the deduction regardless, because he also received a

non-taxable allowance under 6(1)(b)

Legal Expenses8(1)(b) Allows deductions of expenses incurred collecting or establishing a right to collect salary

60(o.1) Allows deduction for legal expenses incurred to collect or establish a right to:- (a) a benefit under a pension plan of the taxpayer or a deceased person of whom the taxpayer

was a dependant, legal representative, or relation- (b) a retiring allowance of the taxpayer or a deceased person of whom the taxpayer was a

dependant, legal representative, or relation

Remember you cannot deduct legal fees incurred to collect awards that are not considered to be income (as in Schwartz)

IT-99R5 Indicates that the action has to be successful. This is pretty strict.

Cost of Supplies8(1)(i)(iii) costs of supplies consumed directly in performing duties of office/employment are deductible where not covered by employer

Remember: 8(10) to deduct an amount under this s. 8(1)(i)(iii), it must be presented in proscribed form, signed by employee certifying the conditions set out were met, and filed with taxpayer's return

Home Office Deduction8(13)- (a) No amount is deductible in computing an individual’s income except to the extent that

the home office is:o (i) the principle place where the individual performs the duties of office or

employment if you work at home more than you work in the office

o (ii) used exclusively during the period of which the amount relates for the purpose of earning income from office/employment AND used on a regular and continuing basis

- (b) No deductions from home office can be greater than the income from office/employment

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o cannot create a loss from employment- (c) losses from the home office from the previous year that would otherwise not be

calculated under (b) because they would create a loss can be carried on to the next year (but only one year)

o losses from a home office cannot be used to create a loss from employment, but can be carried forward and used to offset income from employment

Professional and Union Dues8(1)(i) Deduction for Dues or other expenses in performing duties:- (i) professional membership dues where membership is required by statute- (ii) office rent or salary for assistant or substitute that the employee was required by contract

to pay for- (iii) cost of supplies the employee was required to pay for- (iv) trade union dues are deductible

SwingleExpenses incurred for professional membership dues are only deductible when they are required by statute for employmentTaxpayer was an employee of the federal government with a PhD in chemistry and was a chemical analyst. He was claiming deductions for annual dues to professional societies. All clearly related to employment and allowed him to keep up with developments in the field.Held:- He was not allowed this deduction because the dues were not necessary to be considered a

professional- Deduction is for lawyers, doctors, etc. who are required to be members of their professional

society in order to practice in that profession

Income From Business or PropertyDetermining whether Income is from Business or PropertyWhile income from different sources is taxed differently, the Act does not set out detailed rules for characterization, so we must turn to case law.

1) The distinction usually depends on the extent of the activity in the owner earning the income

2) This really only applies in relation to individual, since there are specific definitions of specified investment businesses and personal service businesses

HollingerMust look to the facts to determine whether income is from business or property – income from business will have more extensive active involvementInactive partner carrying on a bottling business in New JerseyHeld:- Some criteria for courts to consider:

o (1) whether the income was the result of efforts made or time and labour devoted by

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the taxpayero (2) whether there was a trading character to the incomeo (3) whether the income can be fairly described as income from business within the

meaning of the Acto (4) the nature and extent of the services rendered or activities performed

- If income from property has any meaning at all, it can only mean the production of revenue from the use of such property which produces income without the active and extensive business-like intervention of its owner or someone on his behalf

Walsh & MicayIncome from renting a property at arm’s length is usually income from property. Services that are expected by renters as part of renting that are related to upkeep of property itself will not recharacterize income from property as income from business.Taxpayer lawyers had interest in rental property. They provided ancillary services to tenants like heating, appliances, janitorial services to common areas.Held:- It is a question of fact when ownership and rental of real property is business income and not

property income- The services provided are part and parcel of property ownership, and do not constitute an

active business interest- However Where a corp is in business of renting properties, rental revenue will be seen as

income from a business

Areas where business and property income is treated differently:- (1) Active business income of a Canadian-controlled private corporation (CCPC) is taxed at

a special low tax rate because of a tax credit under s. 125, known as the “small business deduction”

o this low rate is unavailable for property income (specified investment business)- (2) The tax liability of non-resident taxpayers is tied to the source of income For example, income from a business carried on in Canada is taxable under Part I of the Act on a net basis, whereas income from property is generally subject to a 25% withholding tax under Part XIII on a gross basis

Income from BusinessBusiness:- 248(1) Definition includes a profession, calling, trade, manufacture or undertaking of any

kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure of concern in the nature of trade but does not include an office or employment

o this is a hugely broad definition, for further guidance, look to the:- Case Law Definition an organized activity that is carried on in the pursuit of profi t

A Good Starting Point “anything which occupies the time, attention and labour of a man for the purpose of profit” (Smith v. Anderson)

Statutory Framework3(a) business is an enumerated source of income

Section 9

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- (1) A taxpayer’s income from business or property is their profit from business or property for the tax year

- (2) Loss is the loss from said business/property- (3) does not include any capital gain/loss

How to Determine “Profit”:- Candarel v. The Queen The determination of profit under 9(1) is a matter of law, to be

determined under normal commercial principles (GAAP) EXCEPT where that determination is inconsistent with a specific provision of the income tax act

- Test is of “well-accepted principles of business (or accounting) practice” or “generally-accepted accounting principles” except where inconsistent with specific provisions of the Act

Section 12(1) in addition to the general requirements of s. 9, the Act sets out specific items to be included in computing income from business or property, including:- (a) amounts received for goods/services to be rendered in the future- (b) amounts for property sold/services rendered in the course of business- (c) interest- (d) amounts deducted in a preceding year as a reserve for debts- (g) amounts received based on production or use of property- (j) dividends- (l) income from partnerships- (m) income from trusts- (n) benefits from profit-sharing plans- (x) inducement or assistance payments

Section 20 deductions permitted for things that might not otherwise be deductible- (1)(c)(i) interest payments can only be deducted where connected to money borrowed for

earning income from business/property and/or for acquiring property which will gain/produce income from itself/from being used in business (Stewart)

Organized ActivityThe distinction between a business as an “organized activity” and a mere hobby is particularly important in the case of gambling operations. The taxpayer often tries to describe the gambling operation as a business, in order to deduct the expenses.

Was there some level of skill/organization involved in earning the income that takes activity beyond being a "habit" (Luprypa)?

o Sufficient element of skillo Minimization of risko Minimal Importance of luck

- Gambling does not constitute a business if profits result from pure luck, regardless of whether it is operated with a “business-like” system (LeBlanc)

40(2)(f) exempts a taxpayer’s gain or loss from the disposition of- (i) a chance to win a prize or bet- (ii) a right to receive an amount as a prize or winning on a bet

52(4) Where any property has been acquired by a taxpayer at any time after 1971 as a prize in connection with a lottery scheme, the taxpayer shall be deemed to have acquired the property at a

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cost to the taxpayer equal to its fair market value at that time. (so you’re not taxed later on unreasonable capital gains)

Luprypa v. The QueenA gambling operation can be a business when there is a sufficient element of skill, minimization of risk, and minimal importance of luck∆ tried to show that the difference b/w his reported income and assessed income was due to gambling on pool, and was thus not taxable income.Held:- Pool gambling operation was a business- Factors considered:

o ∆ minimized his risk by playing inebriated opponents while sobero ∆ practiced consistently

This is one of the few cases where the court has found a gambling business.

LeBlanc v. The QueenGambling does not constitute a business if profits result from pure luck, regardless of whether it is operated with a “business-like” system.Brothers won 1.7million in a sports lottery in 1996. Continued to gamble massively in sports lotteries and win – spent 50million on tickets and won 55million. They paid their friends to go out and buy the tickets for them. CRA assessed the proceeds as a business.Held:- Betting was not a business- Statistical experts said that regardless of the system built up by the brothers, they really only

kept on winning out of pure luck- There was no business because the brothers could not influence their chances of winning

despite their efforts to do soo No element of skillo No risk minimization

Epel v. The Queen- Regular poker winnings were found not to be taxable, because they were attributed to a run

of luck by ∆ without significant element of risk mgmt.

Pursuit of ProfitOld Test: Reasonable Expectation of Profit Test (Landry)- A reasonable expectation of profit is an objective assessment based on the facts:

o Profit and loss experience in the pasto Capacity of the venture to show a profito Intended course of actiono Training of the taxpayero Etc.

- This test was often used by the Minister to deny losses from business, on the grounds that they were not businesses because there was no REOP

- The court in Stewart rejected this test because it was being used to second-guess bona fide business decisions of taxpayers (counter to the principles of equity and neutrality)

New Test Stewart v. The Queen - (1) is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal

endeavour?

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o A) Only apply this test where: there is some personal or hobby element, where the nature of the activity is clearly commercial there is no need to analyze the taxpayer’s bad decisions

o B) Not a purely subjective inquiry does not hinge on the taxpayer’s stated intention to have carried on a business

o C) Look to all the facts for evidence of commerciality or personal nature: Profit and loss in the past Capacity of venture to show profit Intended course of action Training of the taxpayer Amount of time taxpayer devotes to the activity

- (2) If it is not a personal endeavour, is the source of income a business or property?o Basically comes down to the level of activity involved in the income

Stewart v. The QueenCourt rejects the REOP test, and establishes the test for “pursuit of profit” for the purposes of business income under 3(a)S was real estate investor, purchased 4 condos with intent of renting them out - mortgaged them at high interest rate which meant for first 10 years or so there would be a loss on the condos. Minister denied interest deductions stating there was no REOP and therefore no source of income for purpose of s. 9, and taxpayer could not deduct his losses from the properties.

Minister’s Defunct Arguments:- (1) taxpayer financed the purchase with debt, indicative of no intent to make a profit

o SCC this is indicative of nothing – the vast majority of business people finance their deals with debt

- (2) Interest expense was for tax purposes only, and was thus non-deductibleo SCC a tax motivation does not affect the validity of a taxpayer’s actions. You

can have a commercial motivation structured in the most tax-effective manner, and that does not mean you don’t have a commercial motivation.

Held:- 2 Stage Test:

o (1) is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?

o (2) If it is not a personal endeavour, is the source of income a business or property?- The overall assessment to be made is whether the taxpayer’s activity is legitimately intended

to be a commercial endeavour, not whether there were actual profits

Adventure or Concern in the Nature of TradeANTs are deemed to fall under the definition of business for tax purposes. If the transaction is not an ANT, it would be a capital disbursements, resulting in a capital gain or loss.

IT-459 (SCC – “A convenient summary of the law”)1. Where a person habitually does something thing that is capable of producing a profit, even if it is apart from his ordinary occupation, that person is carrying on a business.

2. Even when such a thing is done infrequently, or only once, it is possible to say that the person has engaged in a business transaction if it can be shown that he engaged in an ANT.

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3. Test to determine whether a particular transaction is an ANT: (mirrors the test from Taylor)- (1) Taxpayer’s Conduct

o Primary Consideration: whether the taxpayer’s actions in regard to the property were

essentially what would be expected of a dealer of such propertyo Factors that Presume ANT:

Evidence that an effort was quickly made to find purchasers Steps taken with the intended result of improving the marketability

of the property In some circumstances, the fact that an appellant has a relevant

commercial background will be significant- (2) Nature of the Property

o Primary Consideration: whether the nature and quantity of the property excludes the

possibility that its sale was the realization of an investment or was otherwise capital in nature

o Factors that Presume ANT: The property is of such a nature or magnitude that it could not

provide income or personal enjoyment The taxpayer is not in a position to operate the property for personal

enjoyment or income the taxpayer can operate the property for enjoyment or income but

does noto Shares:

Shares are presumed to be a Capital Investment (Irrigation Industries)

This presumption can be rebutted when transactions were carried out in the same way as a securities trading business would carry out the transactions (Arcorp Investments)

o Underwriting stocks (Purchase of speculative penny stocks in Arcorp)

o Transactions were frequent (4/day in 32 companies)o Stock not held for any length of time (for less than a year in

every instances except where restricted by contract)o There was no intention to hold the securities long term

- (3) Taxpayer’s Intentiono Primary Consideration:

whether the taxpayer’s intention is consistent with other evidence pointing to a trading motivation

o Factors: Intention to sell for a profit is not sufficient, on its own, to establish

an ANT However, it can be an added factor in favour of ANT when coupled

with another factoro Secondary Intention:

There can be more than one intention when a property is aquired – if sale for a profit is not the primary intent, then a court should examine whether it was a secondary intent

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Secondary intention, present at the time of the purchase and acted on, can characterize a transaction as an ANT rather than a capital transaction (Regal Heights)

- (4) Factors that cannot prevent a finding of ANT : o single or isolated transaction (Rutledge)o taxpayer did not create an organization to carry out the transactiono transaction was totally different from other activities carried out by the taxpayer

TaylorFirst consideration of ANT by the courtT worked for co that needed supply of lead - T purchased 22 carloads of lead himself, then sold to company and made a huge profit. Taxpayer argued that he bought an asset as a capital investment and then sold it for a profit. Minister argued that it was a business venture. Question was whether the transaction was ANT and therefore taxable as income form business, or whether it was disposal of capital (and therefore capital gain).Held:- Purchase was an ANT- Test:

o (1) did person deal with property like an ordinary dealer would?o (2) did nature or quantity of property preclude an investment?o (3) just being an isolated venture outside taxpayer’s normal actions does not

preclude an ANT- Factors Considered:

o Nature and quantity of the subject matter He could not do anything with 22 truckloads of lead except sell it Lead cannot normally generate income on its own

o Taxpayer’s intention He bought the lead with the intent of selling it, rather than earning

income from the lead Lack of motivation to make a profit is irrelevant, since he did make

a profit

RutledgeIt does not matter if the transaction is singular or isolated, if it is a business endeavor it will be an ANTTaxpayer went to Berlin after WWII on cinema business, found huge supply of toilet paper from defunct German firm. Imported it into UK for a huge profit. Taxpayer argued it was an investment.Held:- Purchase was an ANT- An ANT is a business endeavour, even if it only happens once and the taxpayer has never

done anything like that before

Regal HeightsSecondary intention, present at the time of the purchase and acted on, can characterize a transaction as an ANT rather than a capital transaction.Taxpayer formed partnership to purchase piece of land on TransCan Highway to be developed for a shopping centre. Plan doesn't work out, larger shopping centre was declared 2 miles away. Taxpayer sells land in 3 lots, making profit which partnership claims were capital gains - minister

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reassessed gains as income from business, argued that the partnership was speculating on land (bought land with the intention of selling it)Held:- The fact that the initial purpose for buying the property failed does not recategorize the

subsequent disposal of the property as capital gains- If a taxpayer purchases property with the intent to earn income from it and the secondary

intent of selling it at a profit, and then sells it at a profit without earning income from it, the transaction will likely be characterized as an ANT

- In this case:o Although the taxpayer was hopeful of putting the land to a capital use, there was

always an intention of selling the land at a profit if the shopping centre didn’t work out

o It was significant that the taxpayer had not worked hard to establish income-earning property (no leases signed, no contracts with stores)

Irrigation IndustriesShares are presumed to be a capital investment, not an ANT.Appellant company was incorporated to purchase farm property and operate an alfalfa mill, though this never happened (company was dormant). Some years later, it bought shares in a corporation with a bank loan, paid back the loan after 3 weeks with proceeds from selling most of the shares (which had drastically gone up in price), and used the proceeds from the remainder of the shares (sold much later) to buy some land.Held:- Shares were a capital investment

o Just because the shares are bought with some intention of disposing of them if their value increases does not make an isolated purchase an ANT

- Application of Taylor Test for ANT:o (1) did person deal with property like an ordinary dealer would?

Trading stocks usually involves underwriting with the intent of raising the public value in stocks (not the case here)

o (2) did nature or quantity of property preclude an investment? Shares are property usually designed to be a capital investment

Given that these facts seem pretty indicative of an ANT, the bar seems to have been set pretty high for finding an ANT in the purchase and sale of shares

Arcorp InvestmentsExample of a case where the purchase and sale of shares was an ANT and not a capital investmentAll the Shares of AI were held by a single individual (Hodgkinson) who was a broker-dealer for an investment firm in Vancouver. AI bought mostly penny stocks in resource companies on private placements to which H had access because of his position with the investment firm (shares issued in private placements for cheap then put on public trading exchange)Held:- Profits are ANT- Court rejects the taxpayer’s argument that his intent was to hold the securities as a capital

investment, but he was forced to sell by unforeseen expenses (divorce, house payments- Transactions were carried out in the same way as a securities trading business would carry

out the transactions (a business such as the taxpayer worked for)o Purchase of speculative penny stocks was underwriting o Transactions were frequent (4/day in 32 companies)

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o Stock not held for any length of time (for less than a year in every instances except where restricted by contract)

o There was no intention to hold the securities long term

Income from Property248(1) Definition property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes:

o (a) a right of any kind whatever, a share or a chose in actiono (b) money

Income from interest-generating property: the four major incomes from property are Rent, Royalty, Dividends, and Interest

9(3) Income from property does not include capital gains from the disposition of property

Property v. Capital Gains – Fruit and Tree Analogy- If Property is the Tree, Income from property is the Fruit, and Capital gains is the money you

make selling the tree when you’re done

Imputed Income- The economic value derived by the owner from the use of his own property - Imputed income is not taxable:

o Because deriving benefits from your own home is non-taxable imputed income, homeowners are in a better position for tax purposes than renters

o Does this violate principles of equity/neutrality?

481 v. MNRAlmost everything except services has been defined as property, though there are a few rights that, despite the broad definition, the court has said should not be included as propertyBenefit obtained by the covenantee under a non-compete covenant was held not to be property. Martha thinks this is actually the wrong decision, because the right had value, could be sold, was enforceable and seems generally like a right in the nature of property. (as soon as you contract to forgo a right, don’t you essentially create a piece of property?)

InterestThe Act does not include a definition of “interest”, the meaning of the term has been judicially considered.

Judicial Definition of Interest Compensation for the use of money belonging to another that must be (a) referable to a principal amount and (b) accrue daily or be allocable on a daily basis

Debt Obligation Debt obligations are capital properties owned by the lender (the right to be repaid) – represents an investment of funds that generates interest

Late Payment Charges- Have been considered to be interest- Amount charged for late payment, usually a percentage of the amount outstanding in view of

the price of goods/services and the time since the due date

Section 12

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- (1)(c) includes in income any amount received or receivable “as on account or in lieu of payment, or in satisfaction of, interest”

Special Timing Rules:- (3) Applies to Corporations

o there shall be included any interest on a debt obligation…that accrues to it to the end of the year, or becomes receivable or is received by it before the end of the year (Groulx)

Even if there is no interest received or due/actually owing to the corporation, you have to report all of the interest that has accrued during the year

- (4) Applies to individualso Where a taxpayer holds interest in an investment contract, on any anniversary day of

the contract, there shall be included in computing the taxpayer’s income for the year the interest that accrued to the taxpayer to the end of that day with respect to the investment contract

even if no interest was actually received, you have to report all of the interest that has accrued during the year between the acquiring of the investment contract and the anniversary day

- (11) Definition of “anniversary day of an investment contract”o Basically, every one year after the individual acquires the contract

Blended Payments:- Payments that are both the repayment of capital and interest- Example:

o Taxpayer loans out $1000 on agreement that she gets back $1500 in 6 months – she must include the $500 in her income

o Classic example is a mortgage- The interest component of these payments must be segregated and included in income

CRA Can Assess Interest Component Regardless of the legal arrangement between the partiesSection 16(1) where, under a contract or other arrangement, an amount can reasonably be regarded as being in part interest or other amount of an income nature and in part an amount of a capital nature, the following rules apply:- (a) irrespective of the form or legal effect of the contract between the parties, if reasonably

there must be an interest component then the CRA can assess an interest component in payments

- (b) the part of the amount that can reasonably be regarded as an amount of an income nature, other than interest, shall be included in the income of the taxpayer

Groulx v. MNRRegardless of the legal nature of the contract between the parties, a court may assess a component of a transaction as interest if it is reasonable that interest should have been a component.Taxpayer sold farm to corporation, agreed to 395,000 accepting 85,000 down and 310,000 to be paid over 20 years. Farmer did not charge interest on the payments of capital except in the event of delay of payment (at which point interest would be 6%).Held:- Since no reasonable buyer would pay that much for your property unless the taxpayer was

subsidizing their interest, some of the 310,000 has got to be interest

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- Groulx was held to be considered to have received a portion of each payment as interest – the payments were blended payments

- Facts Considered:o Company unwilling to pay the high asking price unless Groulx waived interesto Evidence was that 395,000 was above the fair-market value (however, this is difficult

to show, since there were intense negotiations between arms-length parties)

Rents and RoyaltiesRent Generally a fixed payment for the use of property for a given amount of time, after which the right to use the property expires (St. John Shipbuilding and Dry Dock Co)

Royalties Can Be:- amounts paid for the rights to use intangible property

o copyright, invention, trade-name, patent, design, model, plan, etc- amounts paid for the right to receive a share of production

o two different entities agree at arms length to develop a mine

12(1)(g) any amount received by the taxpayer in the year that was dependant on the use of or production from property, whether or not that amount was included in the sale price of that property, must be included in income

- IF all the rights of ownership in a property are transferred, then the transaction is seen as a sale of property

- IF not all the ownership rights are transferred, it’s a lease or license, and any payment is rent or royalty

SpoonerThe reason that 12(1)(g) was inserted into the ActMrs. Spooner owned a ranch, old 20 acres to oil company, asked for $5000 and 25,000 shares in the oil company, and a 10% share in the production from the land.Held:- The court held that this was capital gain, since she sold her property for a profit and it didn’t

matter that her price included shares and a stake in the production- This did not sit well with the CRA (as it then was)

o Hence, 12(1)(g) was inserted into the Act

Waynetown GasWG sold its monopoly contract (right to supply municipality without competition) to another company for money and a portion of gross receipts from the contract.Held:- 12(1)(g) applies in this case to include the amount that the company received from the

contract

Dividends12(1) Inclusions in calculating income:- (j) dividends received from Canadian corporations- (k) dividends received from non-resident corporations

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Remember: Dividends paid by Canadian corporations to foreign reisidents are subject to withholding tax

Deductions from Computing Income from Business or PropertyGenerally, expenses from business and property are deductible, if reasonable(67), and personal expenses are not. Business expenses are normally current or running expenses necessary to keep the business running.

3(a) Business and Property are enumerated sources

9(1) Income is the profit from business/property. - Rely on s. 9 as permission to deduct expenses from business/property .

Income Earning Purpose Test Royal Trust Co.The essential requirement is that the expense be incurred “for the purpose” of making income from a business

o (1) determine whether the deduction is permissible by the ordinary principles of commercial trading or accepted principles of business

o (2) determine whether the specific deduction is included or excluded by 18(1)

18(1) General Restrictions on Deductible Expenses- (a) General: Can only deduct expenses that were incurred for the purpose of earning income

from the business or property- (b) Capital Expenditure: Cannot deduct outlay on account of capital- (h) Personal and Living Expense: no deduction for personal or living expenses, other than

travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business

- (p) Corporations carrying on a personal services business are limited to the things a sales employee can deduct

- (t) Can’t deduct tax (duh!)

20 (1)(c): specific deduction for interest expense- This section overrides s. 18- This section usually applies specific limits to the amount deductible, to the extent that the

income exceeds these limits s.18 applies

67.1 General “Reasonableness” Limitation

Daley v. MNRExpenses incurred once for the general benefit of the business are usually capital outlays. Taxpayer was a lawyer, finished law school and went to WWII. When he got back he was called to the bar, for a fee of $1500. He claimed a deduction of 500/year of that 1500 over a 3 year period, as an outlay that allowed him to carry on his business.Held:- This was an outlay on account of capital- It was a benefit acquired once which benefited the business over time, not a recurring or

running expense of operating the business- This case noted that:

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o 9(1) is the general enabling section for deductions from business/property incomeo The concept of pursuit of profit is inherent in 9(1), it is not necessary to claim

the deductions under 18(1)(a)

Imperial Oil v. MNRLegal fees resulting from the foreseeable danger of employee negligence in the course of normal business activities are incidental to the running of a business, and are deductible(under the War Income Tax Act) Appellant transported petroleum, ship collided with other ships while at sea. Appellant paid ~$500,000 in damages, and attempted to deduct the damages as an expense from business. ∆ argued that transportation of petroleum was part of the business. Minister argued that the expense was not “directly related to the source of income”, rather it was related to avoiding liability, and thus should not be deducted.Held:- Legal fees resulting from the foreseeable danger of employee negligence are incidental to the

running of a business, and are deductible:o Transportation is part of the businesso Risk of collision is a normal and ordinary hazard of marine operations

- Range of allowable deductions for business expenses under the ITA is broader than under the War Income Tax Act

- Remember Surrogatum: o The amount of damages paid to replace the property would not be taxableo The amount paid for lost profits would be taxable

Royal Trust Co. v. MNRThe essential requirement is that the expense be incurred “for the purpose” of making income from a business. Taxpayer company had developed a policy of requiring certain employers to join other commercial organizations. Company paid all the fees. Evidence is that club memberships resulted in business, and competitors followed the same practice.Held: - Club Membership Fees

o Deductibleo They were incurred following good business practices for a trust companyo Clubs were to be used as extensions of the office facility

- On-Off Joining Fees o Deductible for Royal Trust

For Royal Trust, it was an expense that arose from time to time when managers got to the point that they were asked to join social clubs

o Not deductible for the employees Joining fees were capital outlay – a one-time expense that would

benefit in the long term (as in Daley)Notice that these fees are now specifically excluded from deduction under 18(1)(l)

Personal or Living ExpensesGenerally not deductible in computing income (prohibited in one way or another by 9(1), 18(1)(a), 18(1)(h)). The question is: What expenses are personal or living expenses, and what expenses are necessary to carry on the business?

18(1) Limitations

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- (h) cannot deduct personal and living expenses (except when travelling)- (l) cannot deduct use of recreational facilities and club dues (unless incurred in the ordinary

course of the taxpayer’s business)

Benton v. MNRExample of distinction between personal/living expenses and business expensesTaxpayer farmer had a stroke, was unable to live alone, retained a housekeeper who did chores around the house. He paid her $780, which included board and lodging. Taxpayer sought to deduct the expense. Minister reassessed the portion for board and lodging as un-deductible.Held:- Minister’s decision upheld – wages paid in excess of $455 were personal or living expenses

and not deductible under 18(1)(h)- Court Rejects the But For Test:

o “would the income have been made, but for the expense?”- The proper question is: was the expense related to the income earning process?

Child Care ExpensesChild care deductions are “floating” they are not attached to a particular source of income, and can be deducted from income from employment or from business

63 provides some tax relief for a parent who must pay child care expenses in order to earn income from employment- s. 63 is only available to reduce earned income- s. 63 is not available when income is earned from capital

Caps on s. 63:- 2/3rds of the taxpayer’s income for the year- Only the lower income spouse can claim the deduction- $7000/child under the age of 7 (this has been frozen since 1998)- $4000/child between 7 and 16- Payments made to the child’s own parents or to older children do not qualify

Symes v. The QueenCourt recognizes the argument for an expanded child care deduction, but refuses to go beyond the specific provision of s. 65Taxpayer partner in law firm hired a full-time nanny for her kids and deducted the entire expense as a business expense. Minister reassessed, based on the specific deduction in s.65. Taxpayer appealed, arguing that the entirety of child-care expenses are a legitimate business expense and that denial of such deduction was a breach of s.15 of the CharterHeld:- Appeal dismissed – Parliament has already provided a deduction in s.65, which cannot be

lightly disregardedo General section 9(1) permits the deduction, but specific provision 65 limits the

deduction specific rule presides- Arguments for allowing a broader deduction: (recognized but not followed)

o Expenses are incurred solely for worko Choice to have children should not be viewed as a personal consumption choice:

kids benefit society as a whole, people who have them should not be punished

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Commuting to the Place of BusinessDr. E. Ross. Henry v. MNRDoctor in Vic (royal Jube) shared his office with a group of doctors that hired one assistant that did their billing. Taxpayer dropped off billing cards a couple of times/week – drove from home to hospital, and from hospital to downtown office, as well as occasional emergency trips. Minister allowed the trips between hospital and downtown office, because both were business offices, but not travelling from home to the hospital every day.Held:- Minister’s decision upheld- (1) Expense from trips between two places of business for business purposes is

deductible- (2) Trips from home to a place of business are not deductible

Moving ExpensesLike child care expenses, moving expenses are “floating” and can be deducted from income from business or employment.

1) Moving expenses are deductible if they are necessary or integral to earning income from business or being a full-time student

2) To be eligible to deduct moving expenses, it must be an “eligible relocation” as stated in 62(1) this has been interpreted to mean move “to enable” the earning of income from business or employment, or being a full-time student

Section 62- (1) General Moving Expenses: deductions are allowed for an eligible relocation, to the

extant that:o (a) they were not paid for by the taxpayer’s employer (allowance or reimbursement)o (b) they were not deducted in the preceding yearo (c) the total amount does not exceed:

(i) the business income (can’t create a loss) (ii) the income from scholarships/bursaries

o 56(1) student must include scholarships and bursaries in income that exceed exemption under 56(3)

But:o 56(3) Normal scholarships and bursaries are now almost

completely exempt (scholarships/bursaries received, being enrolled in a qualifying educational program)

So, it is VERY RARE for scholarships/bursaries to be included in income, which means that moving expenses will rarely be deductible for students

- (2) Student Moving Expenseso may be deductible if either the new residence or the old residence is in Canada

- (3) List of Deductible Moving Expenses:o (a) travel cost in the course of moving taxpayer/taxpayer’s householdo (b) cost of transporting and storing household effectso (c) Cost of meals/lodging near the new residence or old residence for no more than

15 days note that 67.1 does not apply to limit this provision (expressly so stated in

67.1)

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o (d) the cost of cancelling the leaseo (e) the selling expenses in respect of the old residenceo (f) If you or your spouse had to sell the house in order to move, you can deduct the

fees associated with the acquisition of the new residenceo (g) up to $5000 in cost of selling your old residence, if you have to move before you

can sell ito (h) cost of legal documents to reflect the new residence

248(1) “Eligible Relocation”- (a) relocations that enable a taxpayer to:

o (i) carry on a business or be employed in Canadao (ii) be a full-time post-secondary student

- (b) both residence moved from and the residence moved to are in Canada- (c) the distance between the old residence and the new work location is not less than 40

kilometers greater than the new work location and the new residence

Home Office ExpensesEssentially the same as 8(3) - though that section applies to income from employment and this section to income from business

18(12) Prohibits the deduction of home office expenses, UNLESS the home office:- (a) is the taxpayer’s principle place of business- (b) is used exclusively for business and on a regular and continuous basis for meeting clients,

customers or patients

Expenses under 18(12) can only be deducted from business income – though losses created by those deductions can be carried forward indefinitely under 18(12)(c)

Deduction of InterestDeduction of interest payments on borrowed money would normally be excluded under the general provision 18(1)(b) as “payments on account of capital”. Some interest expenses are deductible under the specific exemption in 20(1)(c).

20(1)(c) Some interest can be deducted:- (i) payments on a legal obligation to pay interest used for the purpose of earning income

from business or property- (ii) payments on property acquired for the purpose of gaining/producing income from the

property or a businessOn a reasonable amount of interest 20(3) If you borrow more money to pay down money previously borrowed or an amount payable on property under 20(1)(c)(ii), it will be deemed to have been borrowed for the same purpose as the original money borrowed

4 Necessary Characteristics Per Shell in Singleton (a summary of the law)- (1) amount must be payable in the year the deduction is sought- (2) amount must be payable pursuant to a legal debt obligation- (3) borrowed money must be used for the purpose of earning income from business/property- (4) the amount must be reasonable

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o interests amounts negotiated at arm’s length will not tend to be found unreasonable

Bronfman Trust(1) Onus is on the taxpayer to show that they borrowed the funds to earn income from business/property(2) Courts cannot ignore the direct use to which the taxpayer puts the borrowed money (even when justified by an eligible indirect use)Trustees made discretionary capital allocations to Ms. Bronfman. They decided to retain the trust investments and make the allocations with a bank loan. Trustees deducted the interest, claiming it was for the purpose of earning income from the investments (property) of the trust. Minister reassessed, finding that the loan was not directly for the purpose of earning income from property.Held:- Minister’s decision was upheld:

o A direct ineligible use of borrowed funds cannot be overlooked whenever an indirect eligible use of funds can be found

o The court must look to the direct use to which the borrowed money is put , not the indirect use to which the money could have been put, if the interaction was structured differently

- To be deductible, the money must have been borrowed for the purpose of earning income- Onus is on the taxpayer to show that they borrowed the funds to earn income from

business/property

SingletonThe economic realities of the situation cannot be used to re-characterize the taxpayer’s legal relationships – the court will look to the use to which the borrowed money was putTaxpayer partner in law firm (Singleton Urquhart!). Had 300K of capital in law firm account. He wanted to take that 300K and invest in a house, then borrow that same amount of money to refinance the partnership capital account. Minister assessed the borrowed money as a personal expense. Taxpayer appealed.Held:- In this case, the stated purpose of the borrowed money was to finance the capital investment

in the firm account and thus was undoubtedly for the purpose of earning non-exempt income from the property

- The purpose that must be determined is not the “true economic purpose” of the borrowing, but the taxpayer’s purpose on using the money

o The search for economic reality cannot override an unambiguous application of the Tax statute

o Taxpayers are entitled to structure their transactions to reduce taxes- Absent a “sham” or “window dressing” or other vitiating circumstances, a taxpayer does not

have to demonstrate bona fide purpose

Ludco20(1)(c) 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 from business/propertyTaxpayers borrowed 6.5mil from banks in Canada to purchase shares in 2 Panamanian companies. The companies were used to invest in Canadian and US govt. debt obligations which were exempt from withholding tax and earned interest on those debts. Taxpayers deducted the interest from the initial investment. When this type of venture became statutorily untenable, they sold the business and made 3mil in capital gains. Minister reassessed to deny the interest

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deductions on the grounds that the money was borrowed for a capital gain and not to earn income from business/propertyHeld:- Deductions allowed- The taxpayers borrowed the money with an ancillary purpose of earning income and a

reasonable expectation of incomeo Reading a dominant or exclusive purpose test into 20(1)(c) would be untenable

- The amount of interest sought to be deducted was reasonably it was borrowed from a Canadian bank at the prevailing interest rate for such transactions

These deductions would be prohibited by modern anti-avoidance laws

Policy Reasons for Denying DeductionsCourts will sometimes prohibit deductions if they would result in a frustration of public policy

Expenses of Illegal Businesses1) The CRA will often do a net worth assessment and tax the person based on that

assessment2) The person being reassessed (often in jail) will have to rebut the presumption of the

minister (arguing there were deductions)3) Deductions are difficult to prove:

a. most expenses are paid in cash with no paper trailb. the taxpayer has usually just been convicted, weakening their credibility on the

stand when they are claiming deductible expenses

Bribery of Officials:67.5 Non-Deductibility of Illegal Payments- No deduction for expense incurred for the purpose of doing anything that is an offence under

s.3 of Corruption of Foreign Officials Act or corruption payments under the Criminal Code

Fines and Penalties67.6 Non-Deductibility of Fines and Penalties- No deduction for any amount that is a fine or penalty imposed by a country or political

subdivision of a country by any person that has the authority to do so

Eldridge1) income from illegal businesses is still income2) deductions from illegal businesses are calculable in income, but must be proven by the

“businessperson” 3) The state is not sharing in unlawful gains, simply taxing in respect of resources

Taxpayer carrying on call girl operation, filed taxes for the first time in 1957 (for years 1954-1957). She alleged that she kept no accounts, so a net worth statement was obtained by Taxation Division officers. Filed net worth return from 1958-1960. Appellant was charged under the criminal code, assets and records were seized, including detailed income and expenditures. There were more tax liabilities assessed.Held:- Madame claimed some deductible expenses- What she could prove:

o Security costs

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o Telephone feeso Legal fees required by contract to allow employee to return to work

- What she could not prove:o Whisky bribe to officialso Bribes to policeo (67.5 would now automatically preclude these payments)

- Non-deductible:o Bail bond fees (not for earning income, since the business was over when she was

arrested)o Purchase of Flash Magazine to avoid production (court says it would not have hurt

her productivity – though the court should not second-guess business decisions)

Computation and TimingCapital Outlay or Current Expenditure?Current expenses are generally deductible (usually from business), while outlays on account of capital are not.

9(1) Income from business/property is profit from that business/property

18(1)(b) No deduction for capital outlay or loss

Determining whether a capital outlay or a current expenditure:Must look at all the facts to decide whether it was a capital expenditure or an income expenditure. (British Insulated)- (1) Funds paid for things used in a business to earn income are capital outlays

o Sums paid with the intent of bringing into existence an asset for enduring benefits of trade (British Insulated)

o Inventory does not count as capital outlay (British Insulated) Inventory bought and sold in the course of the business, capital assets are used

in the earning of income from the businesso Acquiring capital assets = capital outlayo Upgrading capital assets = capital outlay

- (2) Funds paid to repair/maintain capital assets are current expenditureso Repairing capital assets = current expense

So long as the capital asset survives and damaged pieces are being continuously replaced, those are losses incurred in the course of business (Canada Steamship)

o Maintaining capital assets = current expenseOften, the issue will concern a thing that may or may not be part of another capital asset or a distinct asset of its own (see the boilers in Canada Steamship)

Repairs vs. UpgradesThere is no single test to distinguish between deductible “repairs” and non-deductible capital outlay (Shabro)- A court should look to the purpose of the outlay of the taxpayer (Gold Bar)

o Is it to improve the capital asset, make it different or better?

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Conflicting jurisprudence: Shabro funds paid to repair a floor that substantially improved a

hidden defect were an upgrade and thus a capital outlay Gold Bar funds paid to repair a damaged roof with better

materials than the original roof was made with were current expenditures, because repairs are not bound to be in the same material as the old structure (can adopt new tech. advances)

o Is it simply to return the asset to its pre-damaged state? Repairs can be a valid current expenditures even if they only happen once

(Gold Bar)

British InsulatedMust look at all the facts to decide whether it was a capital expenditure or an income expenditureTaxpayer company set up pension plan in conjunction with employees. Company contributed a lump sum to form a “nucleus” for the fund. Company sought to deduct this sum as a current expenditure.Held:- Facts which suggest capital expenditure:

o (1) Whether it is spent once or is a recurring expenseo (2) Whether the sum was paid for with the intent of bringing into existence an asset

for enduring benefits of trade- In this case: Capital Expenditure

o the sum was expended once to enable the company to establish an enduring pension plan, giving the company the enduring advantage of being able to offer a pension plan

o Distinguished from retirement payments, which are called upon to pay for the retirement of employees from time to time (current expense)

Canada SteamshipThings used in a business to earn income are capital assets. - Acquiring capital assets = capital outlay- Upgrading capital assets = capital outlay- Repairing capital assets = current expense

Taxpayer made expenditures for various repairs to a ship. (a) replacing walls/floors of cargo hold due to wear and tear of loading and unloading cargo and (b) replacing the boilers. Question is whether either of these expenditures is capital outlay or loss from business?Held:- Replacing the walls and floors was a deductible expense

o Cost of repairo So long as the ship survives and damaged plates are being continuously replaced,

those are losses incurred in the course of business- Replacing the boilers was a capital outlay

o Cost of upgradingo The boilers were technically and mechanically distinct from the ship

replacement/upgrade of a component asset, not a repair of the shipo tricky because it depends on whether you characterize the boilers as a separate piece

of machinery or as a component of the ship as an entire structure

Shabro Investments

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There is no single test to distinguish between deductible “repairs” and non-deductible capital outlayTaxpayer owned a two-storey building as a rental property. When the building was built there was a hidden defect which later caused the floor to sink. It could not be repaired, and had to be substantially replaced and altered in order to retain the integrity of the structure. Taxpayer replaced a substantial part of the floor of the lower storey, and deducted the expense. Is it a deductible expense or a capital outlay?Held:- Distinction between repairs and improvements depends on the facts:

o Damages from accident or vandalism call for “repairs” which are deductible expenses this expense does not become disqualified just because it involves technology that was not available when the original structure was built

o Repairs go beyond merely remedying the damage, they compensating for a defect and/or effect a substantial improvement

- Installation of the piles to conceal the hidden defect:o Improvement, cost is a capital outlay

- Money spent to remove and replace the flooro Replacement that went beyond remedying the damageo Compensating for the hidden floor defect substantially improved the structureo Thus, capital outlay

Gold BarA court should look to the purpose of the outlay of the taxpayer.- Is it to improve the capital asset, make it different or better?- Is it simply to resort the asset to its pre-damaged state?

Taxpayer owned an apartment with brick veneer. Bricks began to fall away, inspection revealed entire wall was unsound due to inferior work by original subcontractor. Taxpayer made repairs using metal cladding instead of bricks – deducted it as a business expense.This Case is very difficult to reconcile with ShabroHeld:- The repair of the walls, including the new metal cladding, was a current expense

o Taxpayer had no choice but to make the outlayo It was not a voluntary expenditure to improve the building or earn greater incomeo The fact that the repair was substantial and may only occur once does not disqualify

it from being a repair - Though the repair arguably improved the building (metal siding better than brick) the court

cannot accept the suggestion that, once repair is forced on the taxpayer, he must ignore advances in technology and available material

Timing of RecognitionAmount ReceivableSection 12 Income Inclusions- (1) Receivable

o (a) Any amount received (i) on amounts to be delivered in a subsequent year must be included

in income (ii) taxpayer must include even amounts that may have to be

refunded

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o (b) If you’re receiving payment over time, and the full amount is only contractually available on a certain later date, the full amount has to be included as receivable

(3) Paragraphs (1)(a) and (b) are for certainty and shall not be construed to as implying that any amount referred to in those paragraphs shall not be included in income

For an Amount to be Receivable: (West Kootenay Power – upholding principles from Colford and Belaby)

(1) the taxpayer must have a clearly legal, though not necessarily immediate, right to receive payment (Colford)

a. Amounts become receivable when the taxpayer’s legal right to them crystallizes, even if they cannot insist on immediate payment

(2) the amount must be sufficiently ascertainable (Benaby)a. even if a taxpayer has a right to some compensation, that right does not

crystallize until the amount of the compensation can be reasonably determinedo Truer Picture Principle (West Kootenay Power) IF a company clearly has a legal

right to the payment and the amount, though not absolutely certain, can be reasonably ascertained based on estimates from the past billing and the current rates, then the amount will be receivable the court essentially tries to find, in all these cases, the taxation interpretation

that most accurately describes the taxpayer’s actual ability to pay, as it has crystallized at the time

Colford ContractingOutlines the meaning of “receivable” If the taxpayer has a clearly legal, though not necessarily immediate, right to receive the paymentColford contracting is a subcontractor plumbing company. It has an off-calendar year-end for tax purposes. As a subcontractor, it is entitled to payments for work and materials up to 85% of the value of the contract. Contractor can withhold 15% until the owner/architect issues certificate of substantial completion. Once certificate is issued, payment of hold-back is due within 30 days. Architect issued certificate, funds paid 30 days later, within those 30 days was the year-end for Colford. Question is whether the amount was receivable when the certificate was issued or when it was eventually paid.Held:- In this case the payment was receivable

o Though the payment was not received until the next fiscal year, the payment was receivable when the architect’s certificate was issued

o The taxpayer’s legal right to payment crystallized when the certificate was issued, even though at that point it could not insist on immediate payment

Benaby RealtiesAn amount is only receivable if is sufficiently ascertainable to be included as an amount receivableCrown expropriated 2 properties of company on Jan 7. Company’s fiscal year ended on April 30. Crown paid for expropriations on Nov 9. Taxpayer argued that amount was receivable in the previous year, Minister held the amount could not be taxed because it had not been decided upon until the subsequent year.Held:- Though the taxpayer had a legal right to SOME compensation when the land was

expropriated, that right could not be said to have crystallized into an amount receivable until the government decided on the sum

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- Amount was taxable in the subsequent year

West Kootenay Power and Light v. The QueenUpholds Principles from Benaby and Colford

(1) For an amount to be receivable, the taxpayer must have a clearly legal, though not necessarily immediate right to receive it

(2) Amounts are not receivable if they cannot be sufficiently ascertainedAppellant generates and distributes hydro-power, and is subject to regulation. Charged clients for power every two months. At the end of its tax year, it had delivered power that it had not yet charged for. Did not included the price of the delivered yet unbilled power in the tax calculation of the previous yearHeld:- Truer Picture Principle the court essentially tries to find, in all these cases, the taxation

interpretation that most accurately describes the taxpayer’s actual ability to pay, as it has crystallized at the time

o Company clearly had a legal right to the paymento The amount, though not absolutely certain, could be reasonably ascertained based on

estimates from the past billing and the current rates

Amounts PayableJ.L. Guay LtéeAmounts are only payable when:

(1) all the events occur that establish the taxpayer’s liability to make the payment (Colford)(2) the amount due can be determined with reasonable accuracy (West Kootenay Power)

Taxpayer was contractor, entitled to withhold 10% of pay to subcontractors until work was complete, Amount became payable 35 days after certificate was issued by architects. Certificate had not yet been issued as of the end of the tax year. Taxpayer deducted the holdbacks in the previous tax year, Minister reassessed them for the next year.Held:- Expenses are not deductible, all events necessary to establish the taxpayer’s liability to make

the payment have not yet occurredo The taxpayer cannot deduct expenses that it MAY be required to pay the taxpayer,

but not until the certificate has been issued and 35 days have elapsedo Also – there are still conditions that attach to the withholding payment: if the

subcontractor damaged the structure, the payment may be less

LossesSection 111(1) Carry forward and back of losses- (a) Carry forward and back of non-capital losses

o For the purposes of computing taxable income for a tax year, the taxpayer can deduct non-capital losses for the 20 tax years immediately preceding and the 3 tax years immediately following

- (b) Carry forward and back of capital losseso net capital losses can be carried forward indefinitely from the past and for the three

tax years immediately following can only be used against capital gains

Quarantined Capital LossesSection 3

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“global income tax” : generally provides that sources of income are calculated separately and then aggregated and subject to a taxation rate- 3(a) take your income from all sources and subtract the remaining losses from all sources

(business/employment /property)- 3(d) losses from business, office, and employment are deductible from income of all these

sources (subject to specific restrictions)- 3(b) allowable capital losses are “quarantined”

o can only offset taxable capital gainso This is to prevent taxpayers, who can control when capital gains and losses are

realized, from manipulating the timing of realization of capital losses to impair tax revenues

o Exception: Allowable Business Investment Losses

Capital GainsPolicyPreferential Taxation of Capital Gains- Until 1971: capital gains and losses were completely outside the tax system- In 1966: Report of the Royal Commission on Taxation

o “A buck is a buck is a buck”o Income increase from capital gains should be taxableo Equality

Horizontal equality between taxpayers who earn money on the stock market and who earn the same amount from employment

Vertical equity wealthier taxpayers who make more money from capital gains share a greater % of the tax burden

o Neutrality Reduces incentive for taxpayers to structure their actions to look like capital

gains rather than accurately depicting them as they areo Certainty

The notoriously elusive distinction between capital gains and business income would cease to be so relevant

- Settled on Half-Inclusiono Pressure from provinces, who resisted full inclusion of capital gains on the grounds

that it would discourage investment by individuals and corporationso Capital losses are recognized less generously than other sources of loss (only

allowed to offset capital gains) because the taxpayer has significant control over when the gains or losses are realized

Note on Equality- since you only pay tax on ½ of your capital gains (per s. 38), the top taxation rate is

effectively 21.85% as opposed to 43.7%- This is the greatest discrepancy in the tax system – the largest anomaly from an equality

sense

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Because wealthier people tend to invest more in capital gains, this effectively creates a heavily regressive tax that benefits those with investment capital

StatutoryRemember248(1) “Property” is property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes:9(3) Income from property does not include capital gains from the disposition of property, and loss from property does not include capital loss

Section 54 Defines “Capital Property” as:o (a) any depreciable property of the taxpayero (b) any property other than depreciable property, any gain or loss from the

disposition of which would be capital gain or lossSo, to fill in the meaning of “Capital Property” under 54, we must look to:39(1) Meaning of Capital Gain and Loss - (a) CAPITAL GAIN: is any gain from the disposition of property that is not income from a

source, from the disposition of:o (i) eligible capital property (including depreciable property)o (ii) a Canadian resource propertyo (ii.1) a foreign resource propertyo (ii.2) a property where 142.4(4) or (5) apply to the dispositiono (iii) an insurance policyo (iv) a timber resource propertyo (v) an interest of a beneficiary under a qualifying environmental trust

- (b) CAPITAL LOSS: is loss from disposition of any property of the taxpayero EXCEPT (i) depreciable property (capital property, but a loss on this property is

treated as income loss from a source)

38 Taxable Capital Gains and Allowable Capital Losses- (a) Taxable capital gain is ½ of the taxpayer’s gain for the year from the disposition of the

property- (b) Allowable capital loss is ½ of the taxpayer’s capital loss from the disposition of that

property

40(1) Capital Gain and Loss Calculation- (a) CAPITAL GAINS: the amount by which a taxpayer’s proceeds from the disposition of

property exceed the adjusted cost base of the property, and any associated disposition expenses

o Proceeds – ACB – associated costs of disposition = CG- (b) CAPITAL LOSS: the excess of the adjusted cost base of the property and associated

disposition expenses over the proceeds of dispositionThe Adjusted Cost Base- 54 “Adjusted Cost Base” means:

o (a) with depreciable property, the capital cost to the taxpayer of that property as of that time

o (b) In any other case, the cost to the taxpayer of the property adjusted, as of that time, in accordance w/ 53 “Cost” What you paid to acquire the property, includes costs

associated with the process of acquisition

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o Except that: o (c) Property that was reacquired by the taxpayer after having been disposed of by the

taxpayer will not have an adjustment to the cost baseo (d) At no time can an ACB be nil

- 43(1) ACB of Part of a propertyo where part of capital property sold, ACB will be based on value of property being

sold in proportion to value of entire property- 47(1) ACB of “identical properties”

o (a) property that is identical in every way - assume this only applies to shares/trust units of the same class - real property, even condo air space, is never identical

o Basically, where taxpayer acquires identical properties at different ACBs, the ACBs are averaged

111(1)(b) Carry forward and back of capital losses- net capital losses can be carried forward indefinitely from the past and for the three tax years

immediately followingo Note: 111(2)(a) if a taxpayer dies, net capital losses for all taxation years not

claimed for any other taxation years can be carried forward and deducted against all sources

o Essentially, the quarantine on net capital losses applies throughout a taxpayer’s life

Disposition248(1) “Disposition” is not dependant on a desire to dispose of property, nor of receiving proceeds from a disposition- (a) any event entitling a taxpayer to proceeds of disposition completed gifts are disposition- (b) Including:

o (i) share/bond/certificate cancelled or redeemed by the corporationo (ii) debt obligation is settled for a lesser amount or cancelled

- Does Not Include :o (e) Where there is no change in beneficial ownership

changing the registration on a property, a mere change in legal title, will not mean a disposition

o (j) transfers of property for purpose of securing loan Mortgages give banks in theory a property interest on your home, but this does

not make a dispositiono (l) when a corporation issues a bond, it does not dispose of anythingo (m) when a corporation issues shares, it does not dispose of anything

54 “Proceeds of Disposition”- Proceeds of disposition occurs wherever compensation is given for a disposition, including

payment under an insurance policy for loss of property

Compagnie Immobilière BCN LtéeDefinition of disposition given very broad interpretationtransaction in which an interest in real property disappeared and merged with someone else's interest, question was if disposition occurredHeld:- Disposition will likely occur whenever someone loses control over, or right to, an asset for

whatever reason- definitions of "disposition of property" and "proceeds of disposition" are not exhaustive -

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expressions bear normal and statutory meaning

Deemed Dispositions / ProceedsDispositions that do not actually occur, but the Income Tax Act says that they do

On Becoming or Ceasing to be a Resident128.1

(1) A Person that Becomes a Canadian is deemed to have disposed of and immediately reacquired capital property (other than already taxable Canadian property) at fair market value

a. Two Exception (not deemed disposed of)i. Real Property in Canada

ii. Shares in Canadian private corporations(2) A Person that Ceases to be a Canadian Resident is deemed to have disposed of and

immediately reacquired capital property (other than already taxable Canadian property) at fair market value

a. One Exceptioni. Real Property In Canada

1. because there is no risk of losing the ability to tax the gain on real property in Canada

Mitigating Departure Tax:- Immigrants who were resident for 60 months or less out of the 120 months before they left

Canada are not subject- If someone emigrates from Canada and then returns within 60 months they may elect to undo

the earlier deemed disposition and reacquisition

On Death70(5)- (a) Right before death, a person is deemed to have disposed of all capital property for fair

market value- (b) people named in the will are deemed to receive willed property at fair market valueThis means that when a person dies, the income that accumulated to their estate over their lifetime is realized and taxed, before it is passed on to their descendants at FMV

11(2): in the year that the taxpayer dies, capital losses become income from a source and can be used against income from any source

Lottery Winnings40(2)(f) Costs and Gains of Lottery Winnings are deemed to be Nil- can’t deduct the cost of a lottery ticket as a capital loss, when the chance of winning is

disposed of because the ticket didn't win- conversely, there is no capital gain where the lottery ticket wins

52(4) ACB of Lottery Winnings will be deemed to be the FMV of that property- I.e. if a $100 lottery ticket is purchased, and a house is won, the fair market value of the

house will be the ACB, not the $100 ticket

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Gifts and Sales Below FMV to Non-Arm’s Length PersonsFIRST: It must be determined whether the person is at arm’s length- 251(1)(a) “Related Persons” are deemed to deal not at arm’s length

o 251(2) “Related Persons” or persons related to each other, are: o (a) individuals connected by blood relationship, marriage or common-law

partnership or adoption 251(6) Defines those terms:

Blood relationship: one is the child or other descendent of the other or one is the brother or sister of the other

Marriage: one is married to the other or to a person who is so connected by blood relationship to the other

Common Law: one is in a common-law partnership with the other or with a person who is connected by blood relationship to the other

o 248(1) “Common Law” partner means a person who cohabits in a conjugal relationship with the taxpayer and:

(a) has so cohabited for 12 months (b) is the biological or adopted parent of the

taxpayer’s child Adoption: one has been adopted, either legally or in fact, as the

child of the other or as the child of a person who is so connected by blood relationship

o (b) A corporation, and (i) the sole controller of the corporation (ii) a group of related people that control the corporation (iii) a person related to the sole controller or groups of related controllers of the

corporationo (c) Any two corporations

(i) if they are controlled by the same person/group (“controlling mind”)- 251(1)(b) 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 lengtho Unrelated parties have generally been held not to deal at arm’s length when:

There is a “common mind” which directs or controls bargaining for both sides Two persons act in concert without separate interest

SECOND: If the transferor and transferee are not at arms length:69(1) Gifts Inter-Vivos and Sales at other than FMV to non-arm’s length persons- (a) Where a taxpayer acquires property from someone not at arm’s length for more than fair

market value:o taxpayer is deemed to have paid only fair market value

- (b) Where a taxpayer disposes of anything to someone not at arm’s length for less than fair market value:

o the taxpayer is deemed to have received fair market value- (c) Where a taxpayer receives something from someone not at arm’s length for less than fair

market value:o the taxpayer is deemed to acquire the property at an equivalent cost (Unless this is a

gift, at which point the transferee will acquire the property at FMV)So, if you are transferring property, make sure you are either transferring it for FMV or doing so with a valid inter-vivos gift

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Note: if property is transferred at price below fmv, transferor is deemed to have disposed of at fmv and will have to pay tax on this amount, and the transferee will be deemed an acb of only what was actually paid, which means a lower acb, and therefore the difference between these 2 amounts gets taxed twice

Spousal RolloversCalled a “rollover” because there is no gain or loss

TO QUALIFY you must be (121(1))- Transferor’s spouse or CL partner- Transferor’s former spouse or CL partner- A “spouse trust”

73 Inter-Vivos transferThis section operates to override 69(1)(b) – deemed disposition on transfer between non-arm’s length persons – because it is a more specific provision- (1) Where spouse/clp or former spouse/clp transfer property

o (a) proceeds of disposition are deemed equal to the acb of the transferoro (b) transferee deemed to have acquired the property for an acb equal to the acb of the

transferor- (1.01) Where spouses/clp sell property to each other, the acb is deemed to be equal

unless the transferor opts out of this sectiono Why opt out? Spouses may be actively transferring property at fmv, or to

intentionally realize a capital loss or gain o If you opt out, 69(1) deemed disposition rules will apply (because spouses are

“related persons” and thus not at arms length)

74.2(1)(a) Spousal Attribution Rule- Upon disposition of the transferred property, this section attributes the entire amount of the

actual gain back to the spouse who originally owned the propertyo Anti-avoidance rule prevents spouses to transfer property to lower income spouses

before selling it to a 3rd party- Rule Applies:

o REGARDLESS of whether the property was transferred for FMV or was covered by spousal rollover (whether 73(1) has been opted out of)

o BUT NOT where the spouses are no longer together, where a spouse has died, or one spouse is no longer resident

70(6) Spousal Rollover Upon DeathThis section operates to override 70(5) – deemed disposition at fmv on death – because it is a more specific provision- Upon the death of a spouse, that spouse is deemed to dispose of their property, and their

spouse deemed to acquire it at its original acbo Similar to 73 inter-vivos rollover (defers realization of tax consequences)o Policy: to ensure that when one spouse dies, the inheriting spouse does not have to

pay taxes on capital gains such that they would not be able to support themselves- Spouses can Elect Out and have some property transferred at fmv, the gains and losses

therefore taxable 70(6.2)

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Personal Use Property and Listed Personal Property54 “Personal Use Property”PUP is property used primarily for personal use and enjoyment, any gains from disposition are capital gains, but losses are not deductible, since they were not incurred in the making of income- (a) property owned by the taxpayer that is used primarily for the personal use or enjoyment

of the taxpayer or for the personal use or enjoyment of one or more individuals each of whom is

o (i) the taxpayero (ii) a person related to the taxpayer

- (b) Debt owing to the taxpayer for disposition of personal-use property

Personal Use Property must be distinguished from property that is used as a source of income- PUP is exempt from tax

o Includes physical property, usually depreciable property, used primarily for the use and enjoyment of an individual

- If part of the property is used to earn income, then only part of the asset is PUP- A change in use from PUP to income source will trigger disposition

54 “Listed Personal Property”LPP is a sub-category of PUP – it is PUP that can generate income, and thus the losses are deductible (but only against LPP gains)- The definition is exhaustive, listed personal property MEANS prints, etchings, paintings,

sculptures or other similar works of art, jewelry, rare folio, rare manuscript, or rare book, stamp, or coin

Tax Treatment40(2)(g)(iii) Limitation on Capital Losses- Cant have loss on PUP unless it is Listed Personal Property

o Reason is because Personal Use Property is deemed to lose value as individual consumes/enjoys the property and we do not want to create capital losses attributable to personal consumption

- Exception is given for LPPo Because these are assets that don't on their own produce income, and are a stores of

value that can be used both for enjoyment and as an investmento Their values increase and decrease with markets

3(b) LPP Gains and Losses- (i)(A) lpp gains carved out from other capital gains- (i)(B) lpp losses can only be used to offset lpp gains, not other capital gainsRemember, though, that businesses that buy and sell the types of things that are otherwise LPP do not quarantine their gains and losses, because the property is part of a business (not for personal use and enjoyment)

41 Calculation of LPP Gains- (1) Taxable gain from LPP is 1/2 of the amount determined in (2)- (2) Determining Gain

o (a) calculate total gains from LPP in the year, minus total losses from LPP

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o (b) losses carry forward 7 years, back 3 (oldest losses must be deducted first)

46- (1) $1000 Rule

Operates to exempt transactions in PUP (including LPP) that are bought and sold for less than $1000 small transactions are exempt because they are impossible to track this $1000 ceiling has been in place a long time – time for it to be indexed?

- (2) Anti-Avoidance: Where PUP only partially disposed ofo If it is part of a set that would normally be sold together, the $1000 rule will only

apply in proportion to the portion of the set that is sold i.e. if you sell a chair that is ¼ of a set, you are covered by $250 (1/4 of the

$1000 dollar rule)- (3) Anti-Avoidance: Properties normally sold as a set

o Where the parts of a "set" of PUP is sold in separate transactions, and would have a value of greater than $1000 if sold as a set, the PUP will be deemed to have been disposed of as a set for the greater of $1000 and the FMV of the set

Principle Residence ExemptionA taxpayer’s home is PUPPrinciple Residence Exemption exempts capital gain on your principal residence, proportional to:- the years that you own it- the years that it is your principle residence- the years that you are a Canadian residentYou get one principal residence, you calculate the exemption in the year that you sell the residence, and in that year you calculate the tax exemption based on years of ownership, years it was the principle residence, and years you were a Canadian resident

POLICY:- if taxpayers were taxed on capital gains taxes when selling houses, it would inhibit

transaction in housing market- tax consequences on residences could make people less willing to move for jobs/biz

opportunities- lack of capital gain tax probably boosts market prices somewhat- because gains not taxable, mortgage interest payments also not taxable, and there is less

incentive for people to get the largest mortgage possible

54 A “Principle Residence” IS- A particular property that is a housing unit (broadly defined in case law – unit in duplex,

recreational place, houseboat, trailers), a leasehold interest, or a share in housing co-op- (a) Must be ordinarily inhabited in the year by TP, spouse, former spouse, Common Law

Partner, former CLP, or childo 248(1) “Common Law Partner” means cohabiting in a conjugal relationship for a

continuous period of at least one year, or being the parent of the taxpayer’s child Conjugal relationship is one of intimacy: eating together, living together

(Sanford)o Ordinarily Inhabited

Actually a fairly easy test to meet Just have to ordinarily inhabit the home at some time during the year

- (c) the taxpayer must designate the property to be the principle residence for the year

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o No other property may be designated as the principal residency by the taxpayer or spouse, child, CLP

- (e) Principal residence includes the 1/2 hectacre around house but no more, unless it can be established more land was necessary for use and enjoyment

o Rode Test: Must objectively examine all the facts existing immediately before the

disposition Have the taxpayers established on a balance of probabilities that that could not

have practically or legally used or enjoyed the residence but for the use of the surrounding land greater than ½ hectare?

o Principal residence exception will only include more than ½ acre around the residence if the land is practically or legally necessary for use and enjoyment (Stewart Estate)

Mechanism40(2)(b) allows an exemption for a taxpayer's principal residence

FORMULA: A – (A x B) / C - A = Gain otherwise calculated- B = 1 + number of taxation years that end after the acquisition date for which the property

was the taxpayer’s eligible principal residence (designated, ordinarily used, TP was Canadian resident)

- C = Total number of years the taxpayer owned the property

TP must be resident in Canada [s.40(2)(b)(B)], but property need not be located in Canada

Stewart EstatePrincipal residence exception will only include more than ½ acre around the residence if the land is practically or legally necessary for use and enjoymentwidow sold 3 acres of land subject to condition that developer could get subdivision approval, which he did. Stewart estate claimed the principal residence exception for the whole property. Argued that she needed the 3 acres to get subdivision approval and that she needed it to grow vegetablesHeld:- Overturned the majority in Carlisle application of the subjective lifestyle decision test to

determine what is necessary for the use and enjoyment of a residence.- More than ½ acres was not necessary in this case

o Growing vegetables was a personal choiceo 3 acres was not “practically or legally” necessary for subdivision

Depreciable Property and Capital Cost AllowanceDepreciable property is capital property (Section 54 definition)

Starting Point: 18(1)(b) no deduction for capital outlays

CAPITAL COST ALLOWANCE: 20(1)(a) Allows a deduction of such part of the capital cost of property in a year as is allowed by regulation- The capital cost of property is the adjusted cost base, the amount laid out to buy the

property, including the purchase costs and taxes

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- This recognizes that some capital assets depreciate from time and use, and that this is a real expense in earning income – allows specific rules for taking into account the depreciation of assets over time in calculating income from property/business

- Business/Accounting terminology = terms “Depreciation” or “Amortization” of assets describe this loss in value

Regulation 1100(1): Rate of capital cost allowances to different CLASSES of capital property- classes are set out in Schedule II, we don’t have to know them

MechanismReg 1101(1) stipulates that taxpayer must keep the assets of each business separate, SO: Group and calculate the undepreciated capital cost of the capital property of each capital property of a certain class in the year

13(21) FORMULA FOR UCC: (A+B) – (E+F)- A = Capital cost of all the taxpayer’s property that has ever been in that class- B = Recapture previously reclaimed- E = CCA Previously claimed- F = Proceeds of Disposition (up to cost)

o Total proceeds of disposition of properties of that class that have been disposed of, up to the original capital cost

THEN: apply the % of the certain class in the regulations to the UCC, and you have your CCA

Reg 1100(2) HALF YEAR RULE- Limits the deduction for CCA in the year an asset is acquired- Only allows you to add half of the acquisition price of the new property to the class of

that property in the year that you buy it- Formula: ½ (cost of acquisition – proceeds of disposition)

o Actually slightly more complicated than just halving the cost, since the amount will be altered by any proceeds of disposition that year

20(16) TERMINAL LOSSNormally, 39(1)(b)(i) says that there are no capital losses allowed on depreciable propertyHOWEVER, there are situations where you do not claim enough capital cost allowance, the property depreciates more in a year than your tax deductions have accounted for- Formula:

o (a) Where at the end of a tax year (A+B) is GREATER than (E+F), ando (b) The taxpayer owns no more property from that class (class is empty)o (c) there shall be deducted (taxpayer must deduct) the amount of the excess

The whole amount of a terminal loss is included in income in the year it is realized: it is not halved like capital losses (but gains on depreciable property are taxed at half, since they are normal capital gains)

RECAPTURE:covers situations where the depreciable capital property has, in the real world, not depreciated as much as was allowed in deduction by the tax act13(1)(a) When your year-end UCC is a negative amount [(E+F) is GREATER than (A+B)], in the following year, the recapture will become B in the equation

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Exclusions from CCARegulation 1102- (1)

o Something purchased as an ANTo Inventory of a businesso Property not acquired for the purpose of gaining or producing income

- (2) Land

Exclusion of land means there is a need to separate the cost of land from the cost of houses and other structural properties on the land

Ben’s Ltd.Land is excluded from CCA – this is an example of someone incorrectly assessing what portion of the cost was for the property (which has a CCA) and what was for landTaxpayer operated a bakery, bought 3 adjoining residential properties, each with a house on it. Each of the properties cost 43K. After acquiring the properties, the bakery sold the houses for a total of $1200, and took them off the land. Allocated $3000 of the cost to the land, and $38,000 to the houses – claiming CCA of 10%. CRA refused the CCA, arguing that the whole of the purchase price should be allocated to the land.Held:- No CCA allowed- There was never any intention of using the houses for business, therefore, they did not

qualify as depreciable property

Taxation and Aboriginal PeoplesExemption applies only to Status Indians – inuit, metis, etc. are taxed as normal

Theories for Exemption (none of which have worked)(1) As sovereign nations and members of sovereign nations, members should not be taxable

a. Problem Canada taxes citizens and nationals of other countries(2) Mitchell v. Canada Based on pre-contact activity, first nations should be able to buy

and sell materials across the Canada-USA border without being taxed (borders were different)

a. SCC Historical evidence did not support the right that was asserted(3) Treaty signed by forbearers

a. E.g. Treaty 8 (considered in Benoit) “we assured them that the treaty would not lead to any interference with their way of life, and did not open the way to any imposition of any tax”)

b. In this case, the court said that the oral assurances accompanying the treaty did not go so far as to preclude the possibility of tax at any time

Basically, the exemption in the Indian Act is the only strong foundation for a tax exemptions

INDIAN ACT- 87(1): Indian Act exemption for status First Nations people

o notwithstanding any other act of Parliament or the Provinces but subject to 83 (band’s own power to tax)

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o Things Exempt: Real property on reserve lands Personal property situated on reserve lands

- 90(1): Funding that comes from a treaty or agreement or Personal property given to Indians or a band by Her Majesty is deemed to be situated on reserve (thus, always exempt)

INCOME TAX ACT- 81(1)(a): an amount declared to be exempt from income tax by any other enactment of

Parliament shall not be included in the income of a taxpayero Therefore, if you’re exempt under the Indian Act, you simply do not report the

income- 149(1): Band Corporations exemption – bands as public bodies performing a function of

government in Canada this has been largely rejected by bands, who do not like being treated as municipalities

o (c) no tax is payable by a person that was a municipality or a municipal or public body performing the function of government in Canada

o (d.5) no tax is payable by corporations, not less than 90% of the capital of which, is owned by a municipality or a public body performing a function of government in Canada

The Law Set Out Williams Still the Leading Case (upheld by Bastien Estate). Court outlines the Connecting Factors Test for determining when personal property is situated on a reserveWilliams was a Status Indian that worked on reserve, worked for a non-Indian company that had its activities on the reserve, but its office off the reserve (income exempt, he was employed on reserve). When that job ended, he worked for a job creation project funded by the government and administered by the band (income exempt, employed on reserve). After this job ended, W claimed EI, it was calculated in Vancouver and sent to him. Question was whether EI benefits that Williams received were taxable?Held:- Purpose of the Indian Act Exemption

o NOT a mechanism for addressing the generally less favourable economic status of first nations people

o Purpose is to ensure that lands that have been set aside for first nations people, and the personal property on those lands which theoretically have been granted by the Crown, are not repossessed by the Crown through its taxation powers

- CONNECTING FACTORS TEST:o Physical personal property

Considered situated where its “paramount location” is If it’s “home” is on the reserve, it is exempt

o Streams of Income Location of the employment determines exemption status

- In this case :o the location of the employment that generated the right to the EI benefits was the

determinative factor The fact that it was generated by the computer in Van was meaningless The fact that it came from the federal government didn’t matter (government is

both on and off reserve)

The Law Wanders a Bit Recalma v. The Queen

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Court added an extra element – for income to be exempt, it must be connected to the reserve or “integral to the life of the reserve”Recalmas had 400k, put it in a bank account at BMO in Park Royal (which is technically on surrendered lands). Argued funds had not left the reserved. Funds were transferred into an investment account and used to purchase assets all over the place. The question was whether the investments funds were on reserve and tax exempt. Argument was that the Recalmas were connected to the reserve, and they earned most of the money through traditional means (fishing), which sufficiently connected the funds to the reserve, even though they were invested off-reserve.Held:- Income not exempt- Court distinguished between Income in the commercial mainstream and Income that is

“integral to the life of the reserve”Problem: this distinction does not appear to mesh with Williams (the EI system is not “integral to life on the reserve”)

In the Wake of Recalma- Akiwenzie

o A is a status Indian, employed by Indian Affairs Canada. Claimed deduction of 45% of salary, on the basis that this amount was situated on reserve. 20% of the time he was physically on the reserve, but all of his employment was related to reserve life

o Held: The fact that the his employment was related to reserves in general was not the test - His employment was located off-reserve, thus his income was taxed as normal Appears to be a return to the strict connecting factors test from Williams

- Southwindo S lived on reserve and ran a logging business. Contracted with off-reserve company,

and logged off-reserve. Had his office and ran his business in his home on the reserve. Argued that his income should be exempt, since it was reserve-based.

o Held: Source of the income was off-reserve and not exempt. Court applied the connecting factors test, but also considered whether the

income was commercially mainstream or beneficial to the reserve community

The Law Restored Bastien Estate The Connecting Factors Test in Williams is the correct law the court categorically rejected the idea that the exemption is tied to whether the income is “integral to the life of the reserve”Status Indian operated a moccasin manufacturing business on reserve, deposited some of the profits in a credit union that had its home and only office on reserve. Question is: is the interest income from the term deposits exempt?Held:- All the connecting factors connect this income to the reserve

o The income came from a business run on the reserve, with goods sold on reserve- Not Relevant:

o that the interest income from the credit union is earned by the credit union through investments in the commercial mainstream

o That Bastein’s business may or may not have been beneficial to the whole FN community

Dube v. Canada- SCC again says that interest income from an account with a bank on reserve is exempt – the

income is generated from the agreement between the status Indian individual and the bank, which is situated on the reserve

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o Note that in this case, the only connecting factors were that the individual was a Status Indian, earned the income on reserve, and deposited the income in a bank on reserve

The Treaty Exemption Kakfwi Kakfwi received salary as chief, paid out of funds provided by Crown under the band’s funding program. Is the salary exempt because it was paid out of funds provided to the band by the Crown?Held:- Band support funds are not the type of funds that are supposed to be included in 90(1)(b)

such agreements are the highest ranking of agreementso Treaties or agreements made in the treaty processo Not simply funding agreements or any matter concluded by agreement with the

Crown

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