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READ BOTH QUESTIONS IN PART A BEFORE BEGINNING TO ANSWER1 MINUTE 48 SECONDS PER MARK (BRING CALCULATOR SINCE U CAN TO CALCULATE THIS IF NEEDED)

Canada’s Tax System................................................................................3The Source Concept of Income and Nexus of Income................................4

The Source Concept of Income..................................................................................................................4Nexus.........................................................................................................................................................5

Residence as the primary basis of Canadian Tax Liability...........................6Introduction to Residence..........................................................................................................................6Part Year Residence...................................................................................................................................6Avoidance of Dual Tax Residence..............................................................................................................6Provincial Residence..................................................................................................................................7Residence of Corporations.........................................................................................................................7Source as a Basis of Canadian Tax Liability (withholding provisions).........................................................7

Income from Office or Employment..........................................................9Basic Definitions and Provisions.................................................................................................................9Employee vs. Independent Contractor/Consultant/Sole Proprietor..........................................................9Corporations and Personal Services Businesses and CCPCs.......................................................................9Related and Non-Arm’s Length Persons...................................................................................................10Office or Employment Income – Benefits................................................................................................10

General................................................................................................................................................10Valuation of Employment Benefits......................................................................................................11Allowances...........................................................................................................................................11Special and Remote Worksites – allowances and benefits...................................................................12

Deductions in computing income from employment...............................................................................13General limitations on deductions.......................................................................................................13Travelling Expenses..............................................................................................................................13Legal Expenses.....................................................................................................................................14Cost of Supplies....................................................................................................................................14Home Office Expenses.........................................................................................................................14Moving Expenses and Child Care Expenses – See “Subdivision E” section...........................................14

Income from Business or Property..........................................................15Business as a source of income: organized activity and pursuit of profit................................................15Distinguishing Carrying on a Business to Income from Property and Realization of Capital Gains..........16

Income from Property versus Income from Business...........................................................................16Adventure or Concern in the Nature of Trade (ANT)...........................................................................16

Income from Property..............................................................................................................................17General Introduction............................................................................................................................17Interest Income....................................................................................................................................18Rent and Royalties...............................................................................................................................18Dividends.............................................................................................................................................19

Deductions in Computing Income from Business or Property..................20Structure of the Act.................................................................................................................................20The Income Earning Purpose Test – determines if an expense is OK under s. 18(1)(a)............................20Personal or Living Expenses in the business context................................................................................20

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Deduction of Interest Expenses...............................................................................................................21Policy Reasons for Denying Deductions...................................................................................................22

Subdivision “E” Expenses – Deductions not tied to any particular source 23Moving Expenses.....................................................................................................................................23Child Care Expenses.................................................................................................................................23

Capital vs. Current Expenditures and Computation and Timing...............24Capital vs. Current Expenditures..............................................................................................................24Computation and Timing.........................................................................................................................24

Accounts Receivable............................................................................................................................24Amounts Payable.................................................................................................................................25

Carrying Forward and Back of Non-Capital Losses...................................................................................25

Capital Gains (CGs) and Losses................................................................26Important Introduction............................................................................................................................26Definitions................................................................................................................................................26Deemed Dispositions and Deemed Proceeds...........................................................................................27Rollovers: Transfer of capital property to spouse/CLP inter vivos and on death.....................................28Personal Use Property (PUP) and Listed Personal Property (LPP)............................................................30Principal Residence Exemption................................................................................................................31

Depreciable Property and Capital Cost Allowance (CCA).........................33How to Calculate CCA and UCC................................................................................................................33Terminal Loss...........................................................................................................................................34Recapture................................................................................................................................................34Timing: When is an asset (depreciable property) acquired?...................................................................34

Aboriginal Taxation.................................................................................36

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Canada’s Tax SystemConstitutional basis of taxation – concurrent federal and provincial jurisdictionsConstitution Act Sectionss. 91(3) – Federal – Plenary taxation power – complete and full powers to tax (non-provincial matters)s. 92(2) – Provincial – exclusive direct taxation power within province for provincial purposes (provinces cannot impose indirect taxes except pursuant to s. 92(4))

A direct tax is one that is demanded from the very person who pays, e.g., income tax. An indirect tax is demanded from one person but expected to be passed on, e.g., excise tax.s. 92(4) – provinces may use any mode or system of taxation WRT non-renewable resources and energy productions. 92(9) – Licenses, shops, auctioneer, saloons, taverns, other licenses (interpreted broadly) – provinces may raise revenues with licenses

s. 121 – common market – no taxes (no provincial customs) permitted on transport between provincess. 125 – provinces can’t tax federal objects, feds can’t tax provincial objects – does not apply to feess. 53 – any taxation bill must originate from the House of Commons (no taxation w/o representation)s. 90 – any provision of the Constitutional Act respecting the Parliament of Canada applies to provinces as well – means that s. 53 also applies to the Legislative Assemblies of the various provincesTax Collection Agreements – How Feds Collect on Behalf of ProvincesAll provinces except Quebec and Alberta (for corporate tax) have entered intergovernmental agreementsCRA/FEDS – sole regulator, collector, and enforcer of provincial and federal income tax, feds collect on behalf of province, individuals send only one income tax form (except Quebec which has its own bureaucracy)As a result, ITA is the governing statute which defines everything – income, exemptions, deductionsFederal credits are usually matched by provincial credits – makes it more uniform (objective)Provinces set on brackets, rates (adjust them according to CPI) and exemptions, usually match feds rulesTax Adjudication StructuresSend in tax return, CRA sends back notice of assessment, CRA may audit and issue new assessment or reassessments. 152(7) – Minister can reassess you notwithstanding what you say on your tax return (or lack thereof)One can appeal the assessment by sending a notice of objection within 90 days, goes before CRA appeals division

s. 152(8) – The assessment is deemed valid and binding, the assessment can be objected or appealed and the burden is on the TP to show that the allocation by the Minister was wrong (Siftar)

Then appeal to TCC, two procedures available 1) Informal for amounts less than $12,000 can be self-represented or represented by non-lawyer agent. Simpler trial rules, no appeals, no cost awards, 2) Formal requires self-represented or representation by a lawyer, Formal rules, cost awards, etcAppeal to FCC if possible, then SCCInterpreting Tax LegislationPlacer Dome – Driedger’s modern rule applies: Statute must be read in entire context, grammatical, and ordinary sense – a contextual approach. The TP should be able to rely on the clear meaning of the words of the Act. When ordinary meaning Is insufficient, try textual interpretation, then contextual, then purposive. Where more than one reasonable interpretation (ambiguity), emphasize context and lower emphasis on ordinary meaning of words.

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The Source Concept of Income and Nexus of IncomeThe Source Concept of Income No definition of income in the ITA!s. 2(2) – taxable income is the TP’s income plus additions and deductions permittedHow Income is Calculateds. 3(a) – start with aggregate income from positive “sources” – e.g., the enumerated sources of employment, office, business, and property and unenumerated sourcess. 3(b) – add capital gains to the above amount (only 50% of the gain or loss is taxable)s. 3(c) – subtract uncommon deductions from the above amounts. 3(d) – deduct losses from sources under s. 3(a)s. 56 – add sources of income from here, e.g., retiring allowances under s. 56(1)(a)(ii)Judicial efforts to define incomeBellingham – Income should flow from the performance or breach of a market transaction. Thus, things like windfall gains, gambling, and gifts and inheritances aren’t income from a source. These amounts don’t come from a productive source. They tend to be unexpected, unplanned, and non-recurring. Seven relevant but non-conclusive indicators of non-taxable windfall payments include: 1) No enforceable claim to the payment, 2) No organized effort to receive payment, 3) Unsolicited, 4) Not expected, 5) No foreseeable element of recurrence, 6) Not a customary source of income, 7) No consideration for the payment/no market exchangeCransbrook – Court recognized that a payment given in exchange for not suing may be taxableCurran – s. 3(a) is not an exhaustive list of sources of income. Canada v. Fries – Strike pay isn’t income under s. 3(a). Also, if the court is unsure whether or not something is income, there is a residual benefit in favour of the TP that it not be incomeSurrogatum PrincipleLondon and Thames – Amounts received by a TP in the place of income from a source may be included in income as if such amounts were income from that source (e.g., civil damages rewarded for breach of K)Schwartz v. The Queen – Affirms that Surrogatum principle is law in Canada. Also, if an amount doesn’t fall under the specific provision intended to catch it, then one cannot resort to the general provision of s. 3(a) and try and call it an unenumerated source

ITA Provisions Relating to Schwartzs. 248(1) – retiring allowance is defined as an amount received on or after retirement or loss of office (includes wrongful dismissal) – it assumes you actually started works. 248(1) – employment is defined as the position of an individual in the service of some other person and “servant” and “employee” means a person holding such a positions. 6(1)(a) – any “benefits of any kind whatever received” are taxable as income

s. 6(1)(a)(i) – except amounts derived from what the TP contributed to a group planss. 6(1)(a)(ii) – retiring allowances are taxables. 6(3) – payments passed from employer to employee (while employed or paid before or after) are deemed income (in Schwartz there was no employment rel’ship in the first place so this doesn’t applys. 6(3)(c) – signing bonuses are income (Didn’t apply in Curran because payment wasn’t from the employer; it was from a third party, didn’t apply to Schwartz as he was never employed in the first place)s. 6(3)(d) – back pay or advances on salary are incomes. 6(3)(e) – payments to induce one into a confidentiality agreement are income

Savage – Example of amount not falling under specific provision intended to catch it not being able to resort to general provision: A $100 gift from employer; is it a benefit or prize for achievement? If prize, exemption on amounts less than $300. Court said it had to be a gift because if you could just call it a benefit, then the specific provision would have no pointTsiaprailis – Surrogatum principle, test: 1) What was the amount intended to replace? If sufficiently clear, move to, 2) Would the replaced amount have been taxable in the recipient’s hands? (see Siftar below)

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Siftar – The burden is on the TP to show that no part of a lump sum received is a surrogatum replacement for something taxable. Failure to establish an allocation is not determinative of the issue and does not preclude an inquiryHow 6(1)(f) – periodic payments intended to replace income from employment – workss. 6(1)(a) – any “benefits of any kind whatever received” are taxable as income

s. 6(1)(a)(i) – except amounts derived from what the TP contributed to a group plansIn other words, employees don’t have to include in taxable income any amount their employer contributed to a plan that covers them. UNTIL the employee receives the benefit of the plan (becomes disabled or ill) then:6(1)(f) The periodic payments now received to replace income from employment from the group plan are included in income.

Note, however: The employee, once he starts receiving these benefits, may deduct the total of his contributions to the plan. The idea is that the contributions the employee made were not deductible when he made them, so he shouldn’t be taxed now on them (that would be double taxing).

Also note: If employee pays 100% contributions, there is no employment benefit – employer is not contributing. See 6(1)(f)(iii)Note: The above is relevant for periodic payments. If the insurance pays a lump sum there is no tax – it’s a pure windfall – a receipt of a capital sum.Nexus TP must have some right to the income, it must belong to the TP. Once a nexus between the TP and the source/income is established, it is taxable.Buckman – If the TP has possession and enjoyment of the funds with no intention of repaying, then the nexus is established. It doesn’t matter if the funds were illegally obtainedNigro – The onus is on the TP to show that CRA assessed him incorrectly

s. 163(3) – but the burden of justifying a penalty is on the MinisterNet worth assessmentsS. 152(7) – Minister not bound by return supplied by TP, may make its own assessment (can assess you based on your lifestyle)s. 152(8) – Assessments made by the Minister are deemed valid and binding subject to an objection or an appeal

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Residence as the primary basis of Canadian Tax LiabilityIntroduction to Residence Statutory Provisionss. 2(1) – if resident at any time of year, worldwide income is taxable for the entire years. 2(3) – if not resident during a year, TP only pays tax on Canadian sources of incomes. 250(1) – You are deemed resident… a) for the entire year if you sojourned in Canada for 183 days or more (corporations don’t sojourn), b) if you are a soldier abroad, c) if you are an ambassador or servant of Canada serving abroad (and if you’re deemed resident, s. 2(1) automatically applies)s. 250(3) – A person who is resident includes and is not limited to: A person who is ordinarily a resident (implies you don’t have to actually be present in Canada)Interpretation BulletinsIT-221R3 – Lists a ton of factors pointing towards residence. See expanded outline. Cite together with the Dennis M Lee case.Case lawThomson – “Sojourn” is defined as a stay in Canada where the person is not putting down roots – a temporary stay for a temporary purpose. “Ordinarily resident” means residence in the customary mode of life of the person concerned, where one will find one’s central aspects of life such as family, property, employment, social connections, etc. Everyone is assumed to have a residence for tax purposes and the burden is on the TP to show residence or lack of it. Dual residence is possible.Dennis M Lee – Immigration and citizenship are not determinative. One must consider various factors (see expanded outline for the very long list)R&L Food Distributors – If you don’t stay overnight, then you are not sojourningSummary: How do you apply the above?If you are deemed resident because of sojourning, you are resident. Otherwise, go through ordinarily resident test in the case law and interpretation bulletins.Part Year Residence Statutory Provisionss. 114 – If you are ordinarily resident during part of the taxation year, then the year for tax purposes is divided – while resident, pay tax on worldwide income, while not resident, on Canadian sources only

Does not apply to deemed residentsApplies to persons who were resident in Canada but severed their ties, and persons who came to Canada to establish residency

s. 249(1) – a taxation year is defined as a) fiscal years for corporations, or b) a calendar year for individualsCase LawSchujahn – One cannot be sojourning and ordinarily resident. The two categories don’t overlap. If sojourning, then you are deemed resident for the entire yearReeder – A Canadian born and raised in Canada left Canada for 8 months for employee training. Court cited Thomson and looked at various factors to see if he had given up residency. There was no evidence he severed his residential Canadian ties; no indication he left Canada forever or for an indefinite time – therefore still ordinarily resident in Canada (perhaps if he had paid departure tax…)Departure TaxSee capital gains section on deeming provisions for a proper analysis. It is mentioned here to remind the reader departure tax is very relevant to a residency questionAvoidance of Dual Tax Residence Statutory Provisionss. 250(5) – You are deemed not to be resident if would be resident in another country

But, if the treaty says you are a resident, then you are a resident pursuant to s. 250(5)Article IV of Canada-US tax treaty – If found resident of BOTH countries then the following tie-breaker rules apply to natural persons: 1) deemed resident of state where permanent home is, 2) if no permanent home or in both – center of vital interest – personal/economic interests, 3) if cannot be

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determined, habitual abode location (law is unclear what this means; perhaps add up days spent in each country, 4) if both or neither – citizenship, 5) if both or neither, authorities (IRS + CRA) will decideArticle 4 of Canada-UK tax treaty – slightly different from USA. If taxable only on basis that you earned income within a state, that by itself doesn’t make this treaty apply to you. If found resident of BOTH countries then the following tie-breaker rules apply to natural persons, 1) Permanent home, 2) center of vital interest (see above), 3) habitual abode, 4) which country you are national in, 5) competent agencies settle by mutual agreementRecall: Interpretation BulletinsIT-221R3 – Lists a ton of factors pointing towards residence. See expanded outline. Cite together with the Dennis M Lee caseCase LawSalt – A permanent home is where a TP can live immediately on arrival. When you rent your home to an arms length tenant, it is no longer a permanent residence for tax purposesProvincial Residence Statutory ProvisionsReg. 2607 – Where an individual was resident in more than one province on the last day of the taxation year, he is deemed to have resided only in that province which may be reasonably regarded as his principal place of residenceBritish Columbia ITA s. 2(1)(a) – Income tax must be paid as required by this Act for each tax year by every individual who was resident in BC on the last day of the tax yearCase lawMandrusiak – The TP lived in one province slightly longer than the other but that is not determinative. The court looked at the facts – in one province he had stronger family connections, had bought a burial plot for himself, stronger roots, had lived in that province for much longer, while in the other, he was primarily there for work related reasons. The former was his “chief or more important place of res.”Residence of Corporations Statutory Provisionss. 250(4) – Corporation is deemed resident in Canada for a tax year if a) incorporated in Canada after April 26 1965 whether federally or provincially incorporated, or c) If incorporated in Canada AND at any time in the (current) tax year or at any time in any preceding tax year of the corporation ending after April 26, 1965 it was resident in Canada or carried on business in Canadas. 250(5) – the above is subject to any tax treatiesArticle IV of Canada-US Tax Treaty – 3(a) If incorporated in the USA, then it is resident of the USA regardless of case lawArticle 4 of Canada-UK Tax Treaty – Goes straight to the competent authorities to determine residency by mutual agreement (give regard to jurisdiction it was incorporated, location of central management)

Note: Corporate residency remains a relevant issue ONLY for corporations incorporated before April 27, 1965 and corporations incorporated or continued (change of statute) outside of Canada

Case lawDe Beers Consolidated Mines Ltd – The common law test applies independently of deemed residency rules. A corporation is resident where its central management and control is located. This usually refers to the location of the board of directors (but what if the directors aren’t involved in management?).

The law is unclear in this area. One test involves requiring the “superior and directing” authority be present in the country and not necessarily the final and supreme authority. So if a majority of directors meet in country A and a minority in B, the corporation could have dual residency. Another test considers only the location of the final and supreme authority (so in the above example, residency would be found only for country A)

Source as a Basis of Canadian Tax Liability (withholding provisions) Statutory Provisionss. 2(3) – non-residents are subject to Canadian tax on Canadian sources, examples of what this means:

If employed physically in Canada – Canadian source even if employer is non-resident

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Internet sales? Depends on the treaty – most generally require a “permanent establishment” so American companies selling to Canadians likely wouldn’t pay Canadian tax on the sale

s. 212(1) – When a resident of Canada makes a payment to a non-resident, 25% is subject to withholding tax. Payment types include: Payment types:

a. Management fees, administration fees, and chargesb. Interest – Bank interestc. Estate or trust income – Example: Willd. Royalty fees and rentsh. Pension benefitsj.1 Retiring allowance – Example: Wrongful dismissal award (this is not income from employment, it’s income from another source under s. 56)l. Payments out of or under an RRSP

s. 212(2) – dividends paid by Canadian corporations are subject to withholding tax when paid to non-residentss. 215(1) – imposes on the Canadian resident the obligation to withhold and remit the tax on behalf of the non-resident

Remember, the tax is placed on the receiver non-resident. The obligation is on the payer to remit, but it’s not his tax

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

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Income from Office or EmploymentBasic Definitions and Provisions Statutory Provisionss. 248(1) – “office” is defined as a position of the individual entitling the individual to a stipend or remuneration, includes MLA, Senate, judicial offices. 248(1) – “employee” must be an individual and includes officerss. 248(1) – “employer” in relation to an officer means the person from whom the officer receives the officer’s remunerations. 248(1) – “employment” means the position of an individual in the service of some other person (including government and foreign government) and “servant” or “employee” means a person holding such a positions. 5(1) – Income from office or employment includes salary, wages, other remuneration including gratuities received by the TP in the year (meaning cash basis of accounting is applied)s. 5(2) – Allows for loss from office or employment (very rare, hard to “lose money” when employed; perhaps a commissioned salesperson will experience this)s. 6(1)(a) – amounts to be included in the income from office or employment a) include benefits – board, lodging, or any other benefits received or enjoyed by the TP by virtue of office or employment except, i) benefits derived from contributions of the TP’s employer to a registered plan…

(TP won’t be taxed on this until he actually receives them) s. 8(1) – employees may deduct the following from employment income: b) Legal expenses of the employee (to collect or establish right or salary or wages owed), c) Amounts for meals and lodging while employed by a railway company (not reimbursed), f) Expenses of a sales commission employee (requires TP to pay expenses), h) Travel from location of work – Meals and lodgings (same as railway employees), h.1) Motor vehicle expenses – If ordinarily required travel (not reimbursed by employer), i)(iv) Union dues, i)(i) Professional fees (e.g., law society dues), (4) Meals when the TP consumed them while away for a period of more than 12 hours from the city where the employer’s establishment to which the TP normally reports for work was located and away from the metropolitan area (if there was one) where it was locateds. 8(2) – Deductions restricted to what is specifically set out in s. 8 (exhaustive list)s. 153(1)(a) – employer must withhold tax from employee’s pay checkEmployee vs. Independent Contractor/Consultant/Sole Proprietor Wiebe Door – Adopts test used by Montreal Locomotive – asks one to examine the whole of the relationship between the parties and answer the question of whether or not the person is carrying on for himself on his own behalf and not for a superior. Consider factors like 1) Employer control (but not conclusive as highly skilled employees often operate independently, 2) Ownership of tools, equipment, assets, 3) Chance of profit, 4) Risk of lossSagaz Industries – The SCC adopts the Wiebe Door test. It adds another consideration – whether or not the alleged independent contractor had many clients or just one. Just one points to employmentCorporations and Personal Services Businesses and CCPCs Statutory Provisionss. 125(7) – “active business carried on by a corporation” is defined as any business carried on by the corporation except investment business and personal services businesss. 125(7) – “specified investment business” is defined as a business carried on by the corporation with the principal purpose being to derive income from propertys. 125(7) – “Canadian Controlled Private Corporation” (CCPC) is defined as a corporation resident in Canada, with shares not listed on a stock exchange, not controlled by non-residents, or by a corporation whose stock is listed on a stock exchange or a combination of theses. 125(7) – “personal services business” is defined as a corporation carrying on business where a) an individual who performs services on behalf of the corporation (“incorporated employee”) or b) any person not at arms length with the incorporated employee is 1. a specified shareholder of the corporation and 2.

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the incorporated employee would reasonably be regarded as an employee (Wiebe Door Test!) of the person OR partnership to whom services were provided BUT FOR the existence of the corporation

unless: c) the corporation employs in the business throughout the year more than 5 full-time employees

s. 248(1) – “specified shareholder” is defined as a TP who owns, directly or indirectly, any time of the year, not less than 10% of the issued shares of any class. You are deemed to own shares owned by a person you deal with at non-arms length at any times. 18(1)(p) – if your corporation is found to be a personal services business, you can’t deduct anything from income received except i) salary, ii) benefits, iii) expenses in selling property or negotiating a contract, iv) legal expenses incurred in collecting on services rendered

Also, you cannot be a CCPC since you are a personal services business. You lose the preferential tax rate of 17.6%

Related and Non-Arm’s Length Persons s. 251(1)(a) – related persons are deemed not to deal at arm’s length even if their interests conflicts. 251(1)(c) – question of fact whether persons not related are dealing at arm’s length at a particular time

All facts and circumstances are examined. Unrelated parties have been held not to be dealing at arm’s length when: 1) there is a “common mind” directing or controlling the bargaining for both sides (i.e., a person and corporation which the person is less than 50% shareholder, but also a director and officer with influence over the other directors and officers) or 2) the two persons act in concert without separate interests

s. 251(2) – “related persons” is defined as individuals connected by blood, marriage, common-law partnership, and adoption. (for the course, blood relationship means one person is the child or descendant of the other (e.g., child is related to parent and grandparent, etc))

s. 251(1)(c) – However, aunt/uncle to nephew/niece and cousins are not includeds. 251(6)(b) – spouses are related to each other and to persons who are blood relations of their spouse

s. 251(6)(b.1) – the same goes for common law partnersCorporations and arm’s length dealingss. 251(2)(b)(i) -- Corporations are related to persons who hold voting control, meaning enough shares to elect a board – normally over 50%s. 251(2)(b)(ii) – a corporation is related to a person who is a member of a related group that controls the corporation. A related group means a group of persons, each member of which is related to each other. So if Mike holds all shares of XYZ, and Mike holds 25% of ABC and XYZ holds the remaining 75% of ABC, ABC is related to Mike.s. 251(2)(b)(iii) – a corporation is related to any person related to either the person who controls it, or any member of the relate group that controls it. So Mike’s mother is related to ABC and XYZ in the above examples. 251(2)(c)(i) – Corporations can be related to each other if they are controlled by the same person or group of persons (which could mean an individual and/or corporation)Office or Employment Income – Benefits General Statutory ProvisionsRecall:s. 6(1)(a) [from start of this section] and s. 6(1)(f) and Tsiaprailis from Source Concept of Income sectionCase LawSavage – the SCC adopts Poynton – a benefit is a material acquisition conferring an economic benefit

Interpretation Bulletin IT-470R – bring it with you and scan it to ensure CRA doesn’t consider something a benefit or not (it’s in jacket of binder) – remember bulletins are not law however: Some points from it, Employers can give employees two tax-free non-cash gifts per year for special occasions (does not include stuff like gift certificates which are “almost cash”) Total cost must not exceed $500. Also, a separate non-cash long service/anniversary award may also qualify for non-taxable status to the extent that its total value is $500 or less. Long service award – cannot be for less than 5 years of service or 5 years since the last long service award was

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granted. The above gift and reward policy does not apply to non-arm’s length employees. Items of immaterial or nominal value such as coffee, tea, t-shirts, etc are non-taxable. Frequent flyer points collected by employees while on employer business are taxable (see para. 14)

Lowe – The court can apportion the value of something like a trip into business and pleasure (pleasure taxable to employeeHuffman – To show that something is not a material acquisition conferring an economic benefit on TP, show that the item has no value to TP outside the employment and that he normally wouldn’t have acquired itBure – Paying a hockey player’s agent fees is a benefit because such fees aren’t deductible to the hockey player. More broadly this case shows that if the employer pays for some benefit you normally would have to pay for yourself, it will be taxableHousing Loss and Eligible RelocationsRansom – TP had to relocate for job, had to sell home at a loss which employer compensated for. Court says, not taxable because move was result of employment rel’ship and that employee’s financial position was harmed, draws analogy between reimbursing for the loss in home value with ordinary traveling expenses.Phillips – employee gets money to compensate for higher living expenses in new city. This increases employee’s net worth, TP gains an advantage, Savage test satisfied

Ransom and Phillips Now legislatively overruleds. 6(23) – eliminates all exemptions in case law for subsidies provided by employers to assist employees acquire a home – all of that is considered a taxable benefits. 6(19) and (20) – preserves Ransom for the first $15,000. employees who must relocate and suffer a loss from selling a home at a reduced price are subject to tax on one half the compensation received for any amount over $15,000. the loss must be actuals. 6(19) – a housing loss payment is deemed a benefit of employment. To qualify for the above exemptions it must be an “eligible relocation”s. 248(1) – “eligible relocation” is defined as a relocation that enables the TP to be employed at a location in Canada or to be a full-time student in Canada, with a distance greater than 40 kilometers from the previous Canadian location to the new Canadian locations. 6(20) – if a non-arm’s length person is doing the eligible relocation (i.e., your spouse) and you own the home, the home can be designated to receive the exemptions. 6(21) – “housing loss” for our course is defined as when the adjusted cost base exceeds the selling price (proceeds of disposition) of the home

Valuation of Employment Benefits Case LawSteen – The value of a benefit is its fair market value; meaning the amount someone not obligated to buy would pay to a person not obligated to sellGiffen and Mommersteeg – The proper measure of value is the price one would have to pay to receive the same thing with all the same features, all the same pros/consDunlap – A benefit is a benefit even when unilaterally conferred. A benefit is a benefit when it’s not extraneous or collateral to the employment

Note: The court looked to interpretation bulletin IT-470R but ignored it. Christmas parties can be benefits and taxable even if the CRA’s administrative bulletin says they won’t tax

Allowances Statutory Provisionss. 8(10) – If the amount paid to an employee is in fact a reimbursement and not an allowance or deduction, the employer must provide a certificate showing the agreement that the employer paid the employee’s expense as part of his employments. 6(1)(b) – allowances, for personal, living, or any other expense, are taxable

Series of exceptions: Travel, personal and living expenses (as stated in legislation or part of a gov’t inquiry), Travel and separation allowances of Canadian Armed Forces, V) reasonable allowances received by the employer for the travel expenses of employees selling property or

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negotiating contracts for the employer, VI)(A)(B) Travel expenses for non-sales persons (excludes expenses of an automobile) requires travel away from municipality or metropolitan area – Must be going out of town from where the employer is based – Travel has to be related to performance of the duties

s. 6(1)(b)(vii) – not included in income: reasonable allowances for travel expenses (other than motor vehicle expenses) received by an employee (other than an employee covered by 6(1)(b)(V))) from an employer for traveling away from -- A) the municipality where the employer’s establishment at which the employee ordinarily worked or where the employee ordinarily reported, and B) the metropolitan area where the establishment was located – in the performance of duties of the employee’s office or employments. 6(1)(b)(vii.1) – not included in income: reasonable allowances for the use of a motor vehicle received by an employee (other than an employee covered by 6(1)(b)(V)) from the employer for travelling in the performance of the duties of the office or employment

Comment: Assumption is that the employee is using his own vehicle. But the provision states “any motor vehicle”s. 6(b)(x) – must produce a log for the number of km travelled and the employer must have multiplied an amount for that allowances. 6(b)(xi) – cannot both receive an allowance and receive reimbursement in whole or in part for expenses related to that uses. 18(r) – the employer uses this provision to deduct the amount paid to the employee for the motor vehicle expenses – the amount must abide by the prescribed rules (except where the amount paid is required to be included – probably not going to see this)

Reg. 7306 – 52 cents per km < 5000 km., 46 cents per km > 5000 km., (extra 4 cents per km in the territories)

Note: If the employer isn’t deducting more than these amounts, then he doesn’t have to include them as income (duh)

Case LawMacDonald – Leading case on what an allowance is under s. 6(1)(b) -- “An allowance is an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost. S. 6(1)(b) specifies that taxable allowances include those for personal or living expenses, or for any other purpose, so that an allowance will usually be for a specific purpose. An allowance is in the discretion of the recipient in that he or she need not account for the expenditure of funds.”The Difference Between an Allowance and a ReimbursementHuffman -- With a reimbursement, there is no discretion. It is paid to defray someone’s actual expenses.With an allowance, the amount is determined in advance and expenditure is at the complete discretion of the TP. In Huffman, payment was only made upon presentation of receipts. It was not an allowance. In Huffman, there was an administrative decision not to require receipts for expenses over $400, with an allowance paid of $500. But normally, receipts were required. This administrative decision did not change the nature of what the $500 actually was – reimbursement.(Comment: For Huffman, he would prefer an excepted allowance over a deduction or reimbursement. If he spends less than $500, he gets to pocket the balance without having to pay tax on it. With a deduction, he would have had to spend money out of pocket and received no reimbursement [decrease in net worth]. If it were considered a benefit, he’d have to pay tax on it – if it weren’t considered a benefit, it’d have no real value to him any way.)Special and Remote Worksites – allowances and benefits Statutory Provisionss. 248(1) – “domestic establishment” is defined as a dwelling house, apartment, or other similar place of residence in which a person as a general rule sleeps and eatss. 6(6)(a)(i) – Not included in income: Board and lodging for a period at i) a special worksite, or ii) a remote worksite

To qualify as a special worksite:s. 6(6)(a)(i) – the duties performed there must have been of a temporary nature

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s. 6(6)(a)(i) – the TP must have maintained at another location a self-contained domestic establishment as a principal place of residence that A) was available to the TP throughout the period and not rented and B) by reason of distance, the TP could not reasonably be expected to have returned daily from the special work siteTo qualify as a remote worksite:s. 6(6)(a)(ii) – because of the remoteness from any establishment community, the TP must not be reasonably expected to establish and maintain a self-contained domestic establishment at the work site

s. 6(6)(b) – Not included in income: payments by the employer to the employee for transportation between i) the principal place of residence and the special work site referred to in (a)(i), or ii) the location referred to in (a)(ii) and the location in Canada in which the TP is employedInterpretation BulletinsIT-91R4 – for 6(6)(a)(ii), an “established community” must have essential services – a grocery store, a clothing store, etc. To be “remote”, one must be 80 km away from a community or it must take an inordinate amount of time to reach that community (e.g., ferry travel by a ferry that comes infrequently)Deductions in computing income from employment General limitations on deductions Statutory ProvisionsRecall:s. 8(1) – employees may deduct the following from employment income: b) Legal expenses of the employee (to collect or establish right or salary or wages owed), c) Amounts for meals and lodging while employed by a railway company (not reimbursed), f) Expenses of a sales commission employee (requires TP to pay expenses), h) Travel from location of work – Meals and lodgings (same as railway employees), h.1) Motor vehicle expenses – If ordinarily required travel (not reimbursed by employer), i)(iv) Union dues, i)(i) Professional fees (e.g., law society dues), (4) Meals when the TP consumed them while away for a period of more than 12 hours from the city where the employer’s establishment to which the TP normally reports for work was located and away from the metropolitan area (if there was one) where it was locateds. 8(2) – Deductions restricted to what is specifically set out in s. 8 (exhaustive list)s. 67 – whether it be employment, business, property, office income, any deduction must be reasonable in the circumstancess. 67.1(1) – expenses for food, entertainment, etc must be 50% of either a) the amount actually paid or b) the amount that would be reasonable in the circumstances

Exceptionss. 67.1(2)(a) – you can deduct the whole amount if the expense paid for food, entertainment, etc, is provided for or in expectation of compensation in the ordinary course of a business that provides food, entertainment, etcs. 67.1(2)(f) – you can deduct the whole amount if the food, entertainment, etc was paid for one of six or fewer special events held in a calendar year in which the food, entertainment, etc is available to and consumed/enjoyed by all individuals employed by the TP at the TP’s particular place of business

s. 8(10) – certificate certifying deduction by the employer is required for (c), (f), (h), and (h.1)Travelling Expenses Statutory Provisionss. 8(1) – employees may deduct the following from employment income:

f) Expenses of a sales commission employee (requires TP to pay expenses) negotiating property or other contracts, g) if a transport employee required to travel regularly i) away from the municipality and metropolitan area where the TP reported to work on vehicles used by the employer to transport, then ii) the employee can deduct meals and lodging to the extent that the TP was not reimbursedh) Travel expenses where the TP was i) ordinarily required to cary on duties away from the employer’s place of business AND ii) required under contract to pay the travel expenses incurred

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by the TP in the performance of his duties UNLESS iii) the TP received an allowance or iv) claims a deduction under (e), (f), or (g), h.1) Motor vehicle expenses where the TP i) ordinarily required to carry on duties away from the employer’s place of business or in different places, AND ii) required under contract to pay motor vehicle expenses incurred in the performance of the duties UNLESS iii) the TP received an allowance or iv) claims a deduction under (f),

s. 8(4) – employees may deduct the cost of meals if it was consumed while the TP was required to be away for a period not less than 12 hours from the municipality where the employer’s establishment to which the TP ordinarily reported for work was located AND away from the metropolitan area if applicableCase LawRenko – To get a deduction under s. 8(1)(g) it’s expected that you need both food AND lodging paid for. So if you return home each day then you can’t deduct food expensesMartyn – Commuting to work is not an expense incurred in the course of performing duties of employment.Hogg – Commuting to work is an expense incurred in order to allow one to perform his duties and not an expense incurred in the course of his duties. Essential difference. Commuting to work is a personal expense – a consumption decision – even if you feel it is safer for you to drive to work.Legal Expenses Statutory Provisionss. 8(1)(b) – TP’s may deduct legal expenses incurred to collect or establish a right to salary or wages owed to the TP by the employer or former employer

s. 60(o.1) – retirement allowances isn’t salary or wages and so one must use this provision to deduct legal fees incurred in establishing a right or to collect retirement allowances (the ITA is rigid in categorizing income)

Recall Tsiapraillis where the court held that retiring allowances are included as income from employment but aren’t salary or wages

Interpretation BulletinsIT-99R5 – CRA thinks you must be successful in establishing an amount was owed in order to deduct the legal expenses. But remember these bulletins are not binding law and some judges in recent decisions have said that you don’t have to win your case.Cost of Supplies Statutory Provisionss. 8(1)(i)(iii) – employees can deduct the cost of supplies consumed directly in the performance of the duties that the employee was required by the contract of employment to supply and pay for.

s. 8(10) – certificate of employer will be required for the employee to deduct this expenseHome Office Expenses Statutory Provisionss. 8(13)(a) – deductions for home office are permitted if i) TP spends more than half his time at the home office principally performing duties of employment, OR ii) used on a regular and continual basis for meeting customers and others during employment – used for the purpose of earning incomes. 8(13)(b) – cannot generate a loss from workspace deductions at homes. 8(13)(c) – you can carry the loss forward however

Note: An expense from home office is probably best calculated by taking a percentage of the square footage occupied by the home office relative to the total square footage of the home. Then pro-rate things like, rent, utilities, etc

Moving Expenses and Child Care Expenses – See “Subdivision E” section

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Income from Business or PropertyBusiness as a source of income: organized activity and pursuit of profit Statutory Provisions s. 248(1) – “business” is defined as a profession, calling, trade, manufacture, or undertaking of any kind whatsoever and includes an adventure or concern in nature of the trade, but doesn’t include employment/offices. 3(a) – business income is an enumerated source of incomes. 9(1) – income from business is a calculation of profit of the TP

ITA specifically requires certain items be included as income from business or property:s. 12(1)(a) – amounts received for goods and services to be rendered in the futures. 12(1)(b) – amounts receivable for property sold or services rendered in the course of businesss. 12(1)(c) – interests. 12(1)(d) – amounts deducted in a preceding year as a reserve for doubtful debtss. 12(1)(g) – amounts received based on production or use of propertys. 12(1)(j) or (k) – dividendss. 12(1)(l) – income from partnershipss. 12(1)(m) – income from trustss. 12(1)(n) – benefits from profit sharing plan and employee trust to employers. 12(1)(x) – inducement or assistance paymentss. 12.1 – cash bonus on Canada Savings Bonds

s. 20(1)(c)(i) – can deduct interest on borrowed money used to generate income from businesss. 40(2)(f) – lottery winnings are not taxableCase LawCanderel – what is “profit”? it is a question of law subject first to the ITA and second to case law. Beyond this, the court must apply interpretive aids such as “well-accepted principles of business (or accounting) practice” such as GAAP. GAAP is not the law howeverLuprypa – the character of a true business is that there is risk management; an organized system to manage risk, and a reasonable expectation of profit. This is why professional gamblers can be taxed on their winnings as business income

In the instant case the TP Carefully managed risk, skilled player, played Monday to Friday, played drunk players (minimized risk) – He organized the activity and had a profit intention. He played a lot – it was not a mere hobby

LeBlanc – Since lottery winnings are generally not taxable under 40(2)(f), the burden is on the CRA to show that a TP had an organized system of defeating the lottery system. If no organized system, then no reasonable expectation of profit and so any winnings received are not taxable.Stewart – s. 20(1)(c)(i) does not require net profit in order for interest to be deductible.Also, leading case for establishing when business losses are deductible. The judge cites Smith for the principle that anything which occupies the time and attention and labour of a man for the purpose of profit is a business. Whether or not profit is actually received does not matter. The court devises a two stage approach to determining if the activity is a business.

Step one: is the activity of the TP undertaken in pursuit of profit or is it a personal endeavor?There must be subjective intention to profit but objective evidence of itShow that predominant intention is to make profit

Factors: Training, past loss/profit. Intended course of action, expectation of capital gain, arms-length renting, no personal benefit, etcMoldowan REOP to be considered – But not deciding factor

Factors pointing against commercial activity include personal benefits (like a yacht rental business where the business owner often uses the yacht himself)

Court asked the question: For what purpose would the TP have spent his time and money in this activity if not for profit?

Sipley v. The Queen – the amount of time a TP devotes to the activity is a factor

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If the activity carries no personal element and is clearly commercial, no further inquiry is required. Proceed to step 2

If the activity could be classified as a personal pursuit, determine if it’s being conducted in a sufficiently commercial manner:

Is profit the primary motive for the activity – consider Moldowan list – Not exhaustiveDo not need to have net profitMotivation for capital gains realization does not detract from profit motivationREOP is a factor that may be taken into account

Step two: If not a personal endeavor, then classify the income – is the source business or property? Generally business income requires an additional level of taxpayer activity than property income. Refer to cases in the following section (Hollinger, Walsh and Micay) to completely assess this.

Distinguishing Carrying on a Business to Income from Property and Realization of Capital GainsIncome from Property versus Income from Business Note: The difference between property and business income is important because property income doesn’t get the CCPC preferential tax treatment and is subject to a 25% withholding tax while business income does get the CCPC treatment and is not subject to withholding tax)Case LawHollinger -- If income is derived principally from ownership of property, the income is generally considered income from property. But if the earning of the income involves a significant amount of activity, the income is often income from a business. The court articulated various factors pointing either way: 1) whether the income was the result of efforts made or time and labour devoted by the TP, 2) whether there was a trading character to the income, 3) can the income be fairly described as income from a business within the meaning of that term as used in the Act, 4) the nature and extent of services rendered or activities performedWalsh and Micay – character of property income is passive ownership. So if you rent out a property and provide nothing outside of utility service, maintenance of common areas, etc, then it’s probably going to be property income. But if you offer personal services like breakfast, maid service, laundry, etc, then it’s probably going to be business income.Etoile Immobiliere SA – rental and other similar income earned by a corporation pursuant to its objects of incorporation are generally presumed to be income from a business (the corporation is in the business of holding property for revenue)Adventure or Concern in the Nature of Trade (ANT) Statutory ProvisionsRecall:s. 248(1) – specifically includes ANT’s in the definition of business income, so s. 9(1) applies to themCase LawTaylor – An influential case on the difference between ANT’s and businesses and capital gains. One can have an ANT without carrying on a business in the traditional sense and unconnected to the ordinary activities of the TP. It depends on the nature of the business transaction: If the operations involved are of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the line of business in which the venture was made then it is an ANT even if it was just a single transaction, and even if there was no intention to profit and no formal organization set up to execute the transaction.

As for the difference between a capital gain and an ANT, consider the nature and quantity of the good and whether that precludes the nature of investment in capital property. For example, buying lead is not an investment in itself – you can’t personally use it normally. Capital assets tend to produce income to the owner.

Also, ask the manner in which it was acquired – was it acquired in a manner similar to how speculators would buy it or?(See also Irrigation Industries and the interpretation bulletins)

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Regal Heights – If you engage in a venture and acquire an asset, and if at the time of acquisition you have both a primary intention to earn income from it and a secondary intention to sell the asset at a profit is found, then if you do sell, the proceeds received are an ANT and not a capital gain. (Note: In the particular facts of the case, the court noted that the TP didn’t take meaningful efforts to pursue the primary objective and merely sold at a profit at the earliest opportunity)

Riznak – Distinguishes Regal Heights on the basis that the TP received an unsolicited offer to buy the property and that the secondary intention to sell the asset at a profit didn’t exist at the time of acquisition

Hughes – There can be a change of intention from a capital holding to an ANT. When there is, the court can apportion between income from ANT and capital.Irrigation Industries – Applying Taylor, derives a two-step approach to finding an ANT: 1) whether the person dealt with the property purchased by him in the same way as a dealer would ordinarily do and 2) whether the nature and quantity of the subject matter of the transaction may exclude the possibility that its sale was the realization of an investment.

The court considered various factors as pointing towards/against a capital gain:The fact that he borrowed to buy the stock – Not an indicator that leans either wayThe fact that he bought stock in a new company – Anticipate shares don’t give dividends – That by themselves is not indicative of ANT – Dividends do not hold much significanceCannot distinguish ANT from investment of intention of profit (both have it)

Comment: The judge took each factor individually and dismissed them. Arguably, he should have taken the totality of the circumstances – that would have pointed more strongly towards a finding that this was income

Intention to sell for profit as soon as opportunity presented itself – Not a sufficient testLegacy: Court will tend to find selling shares as a capital gainArcorp Investments -- Finds TP’s intention was not to earn investment income but to trade securities, to carry on the business of buying/selling stocks – Arcorp’s securities activities exhibited a “badge of trade”. Way TP was behaving was identical to what a broker would do own his own account. Volume of transactions and the marketable nature of the securities – Factors in finding businessInterpretation BulletinsIT-346R – TP’s who trade in commodities/futures as part of their business or where the TP has special (insider) information about the commodity will have their activities treated as business income. Other TP’s, referred to as “speculators” may treat these activities as capital in nature provided they do so on a consistent basis.IT-459 – Important summary of the law on ANT’s. Has some credibility as it was given SCC approval as a summary of the law. Proceed with caution as the SCC didn’t adopt everything. Lengthy, so refer to page 56 of expanded outline.Income from Property General Introduction Statutory Provisionss. 248(1) – “property” under the Act is property of any kind whatever whether real or personal, immovable or movable, tangible or intangible, corporeal or incorporeal (includes rights to shares and choses in action)s. 3(a) – property income is an enumerated source of incomes. 9(1) – income from property is the TP’s profit from the propertys. 9(3) – income from property does not include capital gains and lossess. 12 – see above (beginning of this section) for certain items that are brought into income that are typically derived from a property sources. 20(1)(c)(i) – borrowed money used for the purpose of earning income from property is tax deductibleRecall s. 212 and s. 215 – withholding provisions that apply to property incomeCase LawNote that the same analysis (Stewart) regarding source of income and reasonable expectation of profit applies to property income as well as business income.

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Interest Income Statutory Provisionss. 12(1)(c) – interest from property is included as income from propertys. 12(3) – applies to business associations, requires the association to include interest income accrued even if not yet paid. Example: corp X loans $1000 to Y on June 1 2001. Loan is repayable in full on May 2003. All interest and principal payable at May 2003. Corp X has a year end at Dec 31. Corp X must include in income on a per diem rate interest accrued during 2001 and a year’s worth of interest in 2002.s. 12(4) – Anniversary Day Accrual Rule: applies to individuals holding investment contracts (all debt obligations except ones where the TP reports interest as it accrues daily)

s. 12(11) -- Definition of anniversary day – a) One day before the anniversary of the advance = 1 year, b) the day that occurs at every successive one year interval from the day determined under (a), and c) the day on which the contract was disposed of

Use end of calendar yearThis section requires the individual to include in income each year the interest accrued on the Investment K to each anniversary day in respect of the investment KWhen the loan is outstanding for a year, include interest accruing to that date

This means that if corp X in the above example was an individual who normally reports interest income only when actually received (on a cash basis), this requires income to be reported as follows:In 2001: Nothing (no anniversary day)In 2002: One anniversary day has arrived so 365 days of interest must be includedIn 2003: Another anniversary day elapsed plus payment was made. Individual X reports total interest received for the term of the loan with deductions for amounts already reported in previous years.s. 16(1) – When an amount to be paid can be reasonably regarded as part interest or another amount of an income nature and part capital in nature, a) the part that can be reasonably regarded as interest shall be deemed interest paid on a debt obligation held by the person to whom the amount is paid or payable, and b) the part that can be reasonably regarded as amount of an income nature shall be included as income of the TP to whom it is paid or payable for the taxation year in which the amount was received

This means for corps and indivs, would have to apply s.12(3) and (4) – Would have to report on the anniversary date or days accrued to the end of the year

s. 20(14) – Sale of debt obligations where interest has accrued but hasn’t yet been paid: When the transferee of the debt instrument becomes entitled to the interest accrued and entitled to interest accrued for a past period when he did not own the obligation, the accrued interest is included as income to the transferor to the extend that it is not otherwise included. The same amount may be deducted from the transferee’s incomeCase LawFarm Security Act and Barfried – Something is interest if it accrues daily, is compensation for use of a principal amount, and is linked to a principal amount and a rate. A debt obligation is an obligation to repay money and includes bank accounts.Lebern Jewelry – Late payment charges are interestGroulx – If selling a capital asset in installments, the court will look at various factors to see if interest is implicitly blended into the payments. Consider factors such as, selling for above market value, a discount for paying the entire balance in full early, whether it’s a common practice in the industry to charge interest in such circumstances, discussion of how interest is to be handled on payments in negotiations (If no discussion, perhaps avoid Groulx. See VanWest Logging)Rent and Royalties Rent – Amount paid for use on a tangible, real or personal property Rent for tangible property was always included in income What is use? A property is used when the one allows the person to take possession or make use of the property.Royalties – Broader term for tax purposes than in ordinary day use of the word Ordinary use – Share of profit from an activity or amount paid to use the right of intangible property (copyright, invention, trade-name, design, etc) Also includes owner of a mineral property – May enter into a joint venture – Collect royalties from the actual operator

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Statutory Provisionss. 12(1)(g) – includes in income any amounts received (not receivable) by the TP in the year where the payment was dependent on the use or production from property whether or not that amount was an installment of the sale price

This stops the conversion of royalties (e.g., from taking the oil from the land) into capital gainss. 212(1)(d)(vi) – This deems certain payments to be rent or royalties but specifically excludes some payments such as this one – copyright payments in respect of production or reproduction of any literary, dramatic, musical, or artistic work (includes computer software) – this is business income not subject to withholding taxs. 212(1)(d) – includes patents as being royalties subject to withholding tax

US-Canada Tax Treaty – royalties from patents are exempt from withholding taxInterpretation BulletinsComputer software – Payments may be characterized as licenses (royalties) or sales – Considered property, subject to Canadian copyright – CRA policy is to treat software in two categoriesSource code and custom software – CRA treats payments for source code as royalties (“custom software”)Or software subject to a license agreement where it is clear the customer was aware of its terms (usually verified by signing the license agreement) – this is custom software Fees paid for custom software/source code are royaltiesShrink-wrap – Seems to be goods, but in fact is a license, a right to use the software, use property. includes store bought software, and “web-wrap” downloads from internet CRA treats this as sale proceeds even though it’s technically a licenseCase LawPallett – sale of gravel where the purchase price is payable in fixed installments falls under s. 12(1)(g)Wain Town Gas & Oil Company Ltd – accepting sale of franchise in installments of gross receipts falls under s. 12(1)(g)Dividends Note: Ownership of the share (property) – Dividends are income from property, receipt requires nothing more than ownership, needs no skill or effort so remember, Canadian Corporation – Withhold tax to non-resident shareholdersStatutory Provisionss. 248(1) – definition of dividend is vague, only says dividend includes a stock dividend. Paid in cash, property, or new stock of the corporation. The amount of dividends received is included as income.s. 12(1)(j) – includes as income dividends from Canadian corporationss. 12(1)(k) – includes as income dividends from non-resident corporationss. 81(1)(b) – gives individuals a dividend tax credit to minimize double taxations. 121 – gives corporate shareholders a dividend tax credit to minimize double taxations. 84 – deems a dividend paid when (a)When corporation increases the paid up capital in respect of the shares of any class of its capital stock (b)Distributes funds or property on winding up, discontinuance, or reorganization of business (c) Redeems or purchases for cancellation its shares (d) reduces the paid up capital in respect of any class of shares of its capital stock otherwise than by a redemption, acquisition, or cancellation of the sharess. 15(1) – value of economic benefits received from a corporation by a shareholder must be included in shareholder’s income

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Deductions in Computing Income from Business or Property

Structure of the Act Recall:s. 9(1) – income is profit – implies a net concepts. 18(1) – Limits deductions on business and property income:

a) the outlay or expense must be made or incurred for the purpose of gaining or producing income from the business or property, b) depreciation is not allowed except where expressly permitted by the ITA, h) personal and living expenses, other than travel expenses incurred by the TP while away from home in the course of carrying on the TP’s business are not permitted, l) the use of recreational facilities and club dues are not permitted (e.g., i) maintenance of a yacht, golf course, etc, unless actual owner and ii) club memberships), p) personal services businesses are restricted (see elsewhere in outline), r) vehicle expenses (see elsewhere in outline for the specific rules), t) payments under different acts such as ii) interest under Part IX of the Excise Tax Act

s. 20 – permits certain deductions such as a) CCA, c) interest, etc (discussed later where relevant)s. 67 – no deduction is permitted unless reasonable in the circumstancesAlso recall Canderel cited earlier for the definition of profitThe Income Earning Purpose Test – determines if an expense is OK under s. 18(1)(a) Case LawImperial Oil – Expenses that arise as an ordinary manner of operating a business are deductible regardless of quantum. The expense must be incurred in the process of income, but the expense by itself needn’t have a direct causal link to the income earned. There is no condition that the expense should actually earn income – a “but for” test is inappropriate. As applied to the particular case, a payment made to satisfy a negligence claim was a valid business expense.Daley – Non-recurring expenses with enduring benefits are capital in nature and not valid property/business deductionsPersonal or Living Expenses in the business context Statutory Provisionss. 248(1) – “personal or living expenses” includes (not limited to) a) expenses of properties maintained either for the TP or his relatives and not maintained in connection with a business carried on for profit or a reasonable expectation of profit, b) expenses or costs of a policy of insurance if the proceeds are payable to or for the benefit of the TP or a relative, c) expenses of properties maintained by an estate or trust for the benefit of the TP as one of the beneficiaries s. 18(1)(h) – deduction not permitted: personal and living expenses, other than travel expenses incurred by the TP while away from home in the course of carrying on the TP’s businesss. 18(1)(l) -- the use of recreational facilities and club dues are not permitted (e.g., i) maintenance of a yacht, golf course, etc, unless actual owner and ii) club memberships)s. 67.1(1) – expenses for food, entertainment, etc must be 50% of either a) the amount actually paid or b) the amount that would be reasonable in the circumstances

Exceptionss. 67.1(2)(a) – you can deduct the whole amount if the expense paid for food, entertainment, etc, is provided for or in expectation of compensation in the ordinary course of a business that provides food, entertainment, etcs. 67.1(2)(f) – you can deduct the whole amount if the food, entertainment, etc was paid for one of six or fewer special events held in a calendar year in which the food, entertainment, etc is available to and consumed/enjoyed by all individuals employed by the TP at the TP’s particular place of business

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s. 18(12) – Home office expenses: a) No deduction (for an otherwise business deduction) for any part of a self-contained domestic establishment in which the individual resides unless it’s i) Principal place of business or, ii) Used exclusively for the purpose of earning income from a business (meeting clients, patients, customers). b) Cannot create a loss with the deductions – Deductible only to income from business. C) Can carry an amount forward to the following year

Implies that s.9(1) and s.18(1)(a) must also be met – Reference to “expenses otherwise deductible under the Act”

Deductible amount – Based on a reasonable allocation of costs attributable to the homeDetermine the amount of space occupied by the office compared to the total usable area of the home – Proportion of square footage – Take that from expenses of the home as business deduction

Case LawBenton – rejects the “but for” test for deducting personal and living expenses business expenses. There has to be a stronger link between the expense and its purpose for earning incomeScott – peculiar analogy drawn between a motor vehicle and “human” vehicle to let a pedestrian courier deduct food costs above what people normally eat at work. Court claims the decision should not be read broadly as in most cases such an analogy cannot be drawn – e.g,. construction workers can’t claim for their meals because, while their job is more strenuous than others, there is no analogy like the fuel in food versus gasoline fuel (no other court cases have used Scott)Dr. E Ross Henry – commuting from home to your place of business is not deductible as a business expense unless it’s between two “bases of operation” (one business location to another).

Comment: What if you have a home office? Yes, if it’s a principal place of operations then perhaps commuting from there to another place of business is deductible

Deduction of Interest Expenses Statutory Provisionss. 20(1)(c) – recall that can deduct interest on borrowed money pursuant to a legal obligation to pay interest on i) borrowed money used for the purpose of earning income through business or property sources (other than borrowed money used to acquire property that’s exempt from tax), or ii) amounts payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a business (other than exempt income)s. 67 – this will require that the interest rate deducted be reasonable in the circumstancess. 20(3) – funds borrowed to pay off other deductible loans are also deductible – one form of deductible borrowing merely replaces anotherNote: Timing of the deduction – Accrual v. cash accounting of the deduction – Depends on method regularly followed by the TPCase LawBronfman Trust – The current use of the borrowed funds must be an eligible use under 20(1)(c). The original use is not relevant. The funds must be directly used for an income earning purpose. The funds cannot be indirectly used for an income earning purpose if the direct use is not an eligible use. So if you borrow money off your warehouse to buy a Nintendo game, the interest is not deductible.Singleton – Courts are directly to look merely at the form of the transaction and not the substance. Looking at the true economic purpose of the transaction is not the correct test. If the result is tax avoidance, as long as it wasn’t a sham transaction (i.e., the transaction actually occurred as represented to the CRA) then this is acceptable.

This is why you can make the interest payments on the mortgage to your personal residence tax deductible by for example, taking money out of your business, using it to buy a personal residence, then borrowing money on the house and putting it back in the business. The current use is an eligible business purpose. The funds are directly being used for an eligible business purpose. That’s all that matters.

Ludco – Interest is deductible if you use the borrowed funds to acquire something that has more than one purpose. If one of the purposes is earning income, even if that purpose in ancillary, it suffices to be

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deductible. So e.g., if you borrow to buy something to primarily earn capital gains from it, as long as some income is earned you are OK.Policy Reasons for Denying Deductions Statutory Provisionss. 67.5 – you cannot deduct the cost of bribing public officialss. 67.6 – Fines and penalties (anything, including parking tickets) are not deductibleCase LawEldridge – You can deduct the expenses of an illegal business (except for the above statutory provisions). Proving the expenses can be difficult however (who keeps receipts for an illegal business?)

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Subdivision “E” Expenses – Deductions not tied to any particular source

Moving Expenses Statutory Provisionss.248(1) – “Eligible relocation” is one where TP relocates to a) To carry on business or employment (i) in Canada in a new work location Or to be a student (ii) – Full-time, post-secondary level, and b) Old residence and new residence must be in Canada (except for student), c)Have to move a new residence 40 km closer to the new job than your old residence

But if you are absent from Canada but resident in Canada (meaning taxable), then movement of residence does not have to be in Canada nor does employment have to be in Canada. For example, a Canadian diplomat to the USA can deduct moving expense of moving from Washington back to Ottawa. Allow deduction even though not physically present in Canada

s. 62 – Can deduct, in computing TP’s income, amounts of moving from an eligible relocation, (a) But if employer pays for it, you do not get deduction. However, this is not considered a benefit of employment if employer pays it any way (see IT-470R), (b) Cannot have previously deducted it in the year before – Can only deduct to the extent that they were not deductible in the year before due to s.62 (notably: the limits in part c), (c) (i) Amount deducted cannot exceed more than you can earn from new work location, (c) (ii) Amount deducted cannot exceed taxable amounts included by s.56(1)(n) and (o) – Which are scholarships and bursaries. If scholarship is exempt from tax – That means nothing can be deducted(d) – If do get payment for moving from someone, it is considered part of income if you are going to try to get deduction under s.62

s.62(2) – Moving expenses of student -- For a student – Either or both of the residences have to be in Canada to be able to deduct (for employees, BOTH have to be in Canada)s.62(3) -- What are moving expenses: a) Cost of moving – Motels, food, etc – In the course of travel – 50% limitation does not apply, b) Cost of transporting/storing household effects, c) Cost of lodging and board near the old/new residence – No more than 15 days, d) Cost of cancelling the lease, e) Selling cost in respect to sale of old residence – Lawyer fees, advertising, etc – even if you don’t own the property but your partner does, f) If sold old residence – Legal costs of buying new residence (cannot deduct tax of buying the house) – even if you don’t own the property but your partner does -- But do not get to deduct cost of house itself or the loss incurred if sold for below what you paid, g) Interest, property taxes, insurance premiums of old residence – During period trying to sell – when it’s vacant, Up to $5000, Cannot be residing in the residence, Have to make reasonable efforts to sell, h) Cost of getting new driver license, connection fees (hydro, cable). But does not include costs incurred to get new residence – Except for legal costsInterpretation BulletinsIT-470R – Employer reimbursements for employee moving expenses because of a transfer or a new job (with the employer) are not taxable. Also, no tax is paid when the employer pays the cost of moving an employee out of a remote location at the termination of the employment at that locationChild Care Expenses Statutory Provisionss. 63(1) – permits the deduction of child care expenses off “earned income”. e) requires that it can’t be more than 2/3 of the TP’s income. Also, the provision permits that up to $7000 per child under 7 can be deducted and $4000 per child between 7 and 16 years, and it must be deducted against the lower earner’s income (if both parents live together) although there are exceptions if one parent is attending school or not able to care for children due to illness or infirmity Case LawSymes – s. 9(1) and s. 18(1)(a) and (h) don’t specifically prohibit deduction of child care expenses as a business expense. But the court rejects the idea that one can do so because of s. 63. s. 9(1) and s. 18 are general provisions. s. 63 is a specific provision. Specific trumps general.

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Capital vs. Current Expenditures and Computation and TimingCapital vs. Current Expenditures Statutory Provisionss. 9(1) – income from business is a calculation of profit of the TPs. 18(1)(b) – no deduction against income can be made for capital outlays or losses or depreciation (except where expressly permitted)Case LawBritish Insulated – To be a capital outlay, there must be an enduring benefit that will provide a lasting and substantial advantage. Contrast this to an expense which might be incurred multiple times a year – recurring, essentially.Canada Steamship Lines – Replacing something worn out generally will be regarded as repairs and maintenance that are deductible as current expenses even if repairs are extensive and costly. That’s because you are not obtaining a new benefit, you are repairing your existing benefit. However, if upgrading an existing asset with something that is separate and distinct (something that could be removed and sold separately for instance), that provides and enduring benefit that’s lasting and substantial, this points to a capital asset.

This is why repairing floors/walls of a ship is an repair expense (you can’t do anything separately with floors and walls) but buying a boiler (which can be quite easily removed and sold, relatively speaking) is a capital outlay.

Shabro Investment – The case essentially stands for the principle that upgrading a capital asset with something that substantially changes the character of the asset (e.g., the type of foundation in the building was changed from concrete slab to a slab with steel piles) will be a capital outlay.

Also, replacement due to wear and tear is not a determining factor of whether or not it was an expense or a capital outlay.

There was a comment that including the cost of the new concrete slab with the steel piles was unreasonable, but arguably the two components are interconnected – steel piles are useless without the concrete foundation

Gold Bar Developments – The fact that the repair is non-recurring is not determinative of whether or not something is a capital outlay. Factors the court considered here: The fact there was “no choice” but to do it suggests a repair, the fact that the repair constitutes a small percent of the value of the building (only outlays so substantial as to constitute a replacement of assets are capital outlays), repairs that greatly improve an asset beyond its original condition may be capital outlays, and whether or not the repair attempts to change the structure of the building.

This case is difficult to reconcile with Shabro. But you could say that in Shabro, steel piles greatly improved the foundation beyond its original condition and changed the structure of the building. The building veneer in this case plays a relative minor role in the structure

Computation and Timing Accounts Receivable Statutory Provisionss. 12(1)(a) – amounts received: Any amount received by the TP in the year that is i) on account of services not rendered or goods not delivered (e.g., a lawyer’s retainer) or ii) under an arrangement or understanding that it’s repayable in whole or in part on the return or resale to the TP or articles in or by means of which goods were delivered to a customer

Are to be included as income for that year as income from business or propertys. 12(1)(b) – amounts receivable: Any amount receivable with respect to property sold or services rendered in the course of business in a year, even if the funds are due in a subsequent year, are taxable in the current year, unless the TP uses the cash method of accounting

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An amount is deemed receivable on the earlier of i) the day which the account for the services were rendered and; ii) the day which the account for services would have been rendered had there been no undue delay in rendering the accounts.

12(2) The above provisions are created for greater certainty and shouldn’t be construed as implying that amounts not included in those paragraphs are not to be included in computing income from a business for a taxation year whether received or receivable or notCase LawJ Colford Contracting – To be an account receivable, there shouldn’t be a mere precarious right to receive the amount; there should be a legal right, though not necessarily immediate.Benaby Realties – Profit must be ascertainable to be an account receivable. So at the moment of expropriation, the TP may acquire a right to compensation, but that right is not an account receivable until it’s known what will be paid out.West Kootenay Power – An estimate of what future remuneration will be may suffice to be an account receivable. What matters is whether or not the amounts were sufficiently ascertainable and whether or not the TP had a clear legal right to payment.Amounts Payable Case LawJL Guay Ltee – All “condition precedents” must be removed before a deduction can be made for an expense. If it’s still uncertain how much you will owe, if anything, then you can’t deduct the expense until you have a legal and unconditional, though not necessarily immediate, obligation to pay the amount.Carrying Forward and Back of Non-Capital Losses Div C of the Act

s.111 of the ITA – Losses deductible(1)(a) – Non-capital losses – Losses from a source (office, employment, business, etc)

Can carry back 3, forward 20So if you have a loss 2000, you can still claim it in 2015

Can set losses from one source against gain from another sourceIf you have a loss in 2000, you can only claim it, at furthest back, in 1997

(1)(b) – Net capital losses – Only deductible against capital gains, not sourcesCan carry back 3, forward infiniteRemember – Only ½ of capital losses are deductibleRestrictions – Earlier losses must be deducted before later losses

Each item of loss can only be deducted once

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Capital Gains (CGs) and LossesImportant Introduction Statutory ProvisionsTaxation of Capital Gains and Lossess. 3(b) – makes capital gains a source of income – the provision requires computation of capital gains and losses in the ITAs. 3(c) – Add the amounts of 3(a) and 3(b) – then claim deductions out of subdivision EDistinguish Income from Propertys. 9(3) – distinguish capital gains from property income – income from a property does not include CGs and capital lossesWhat are Capital Gains and Losses? How are they computated?s. 39(1)(a) – CGs are received from disposition of any property that’s not included as income from a source

s. 39(1)(b) – Capital losses exclude i) losses of depreciable propertyBy default, this means that if the gain or loss is income from a source under 3(a), then it will not be a CG/loss. If it isn’t income from a source under 3(a), then it’s a CG

Example: Inventory is not a CG. ANTs are not CGs.s. 40(1)(a)(i) – CGs are the proceeds of disposition (POD) minus the adjusted cost base (ACB) which includes any outlays or expenses incurred in making the disposition

s. 40(1)(b)(i) – Capital losses are the ACB plus the outlays in making the disposition minus the POD (e.g., property purchase tax is included in the ACB, Interp. Bulletin IT-285R2)

Taxable Capital gains and allowable capital lossess. 38(a) – only half your CGs are included in income

s. 38(b) – only half your capital losses are includedCarrying forward and back net capital lossess. 3(b) – by separating capital losses from 3(a), implicitly we know that capital losses can’t be deducted against sources of income found in 3(a)s.111 of the ITA – Losses deductible

(1)(a) – Non-capital losses – Losses from a source (office, employment, business, etc)Can carry back 3, forward 20So if you have a loss 2000, you can still claim it in 2015

Can set losses from one source against gain from another sourceIf you have a loss in 2000, you can only claim it, at furthest back, in 1997

(1)(b) – Net capital losses – Only deductible against capital gains, not sourcesCan carry back 3, forward infiniteRemember – Only ½ of capital losses are deductibleRestrictions – Earlier losses must be deducted before later losses

Each item of loss can only be deducted onces. 111(2)(a) – Exception: In the year the TP dies, or the year before the TP’s death, net capital losses may be deducted against income from sources under 3(a)Definitions Recall property (and Regal Heights, Taylor, Irrigation, Arcorp cases)s. 248(1) -- “property” under the Act is property of any kind whatever whether real or personal, immovable or movable, tangible or intangible, corporeal or incorporeal (includes rights to shares and choses in action)s. 54 – “capital property” is defined as any depreciable property and any property that would give a CG or capital loss on disposition

Cost, capital cost not defined but the ordinary use of cost might be the “amount to acquire the property and expenses required to complete the transaction”

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s. 54 – “Adjusted Cost Base” – a) where the property is depreciable, the capital cost to the TP of the property as of that time (time it was paid for), and b) for any other property, the cost adjusted in accordance with s. 53 (not part of the course), and d) the ACB cannot be less than zeros. 43(1) – the ACB of part of a property is the portion of the whole ACB that can be reasonably attributed to that part

Identical PropertiesFor this course – Identical properties are limited to shares of the same class of a particular corporation and units of the same class of a particular mutual fund trusts. 47(1)(a) – Where the TP owns an identical property and then buys another identical property, he is deemed to have disposed of the previously acquired property immediately before the particular time for proceeds equal to the ACB to the TP immediately before the particular times. 47(1)(b) – The TP is deemed to have acquired the new ACB equal to the quotient of the ACB of the previously acquired property and the cost of the newly acquired property divided by the number of identical properties he owns (in other words, average the cost of purchasing the new identical property with the cost of purchasing the old identical property)

s. 47(1)(b) – at the time of disposition, add up the various ACBs of the identical property and divide it by the number of identical properties sold

s. 248(1) – “disposition” is: a) Any transaction or event entitling the TP to proceeds of disposition of the property, b) Any transaction or event by which: i) Where the property is a share, bond, debenture, mortgage, etc, the property is redeemed in whole or in part or is cancelled, ii) where the property is a debt or any other right to receive an amount, the debt or other right is settled (terms substantially changed, e.g., accepting less than what was owed in the first place) or cancelled

A disposition needn’t be voluntary and could even include when the property is destroyed and insurance paid – when the nature of ownership changes, essentially (see below case)

Exceptions: What does not qualify as a dispositione) Transfer of property where there is no change in beneficial ownership of property, j) Any transfer of property for the purpose only of securing a debt or a loan or transfer by a creditor for the purpose only of returning property that had been used as security, l) Any issue of bond, debenture, note, certificate, m) Any issue by a corporation of a share of its capital stock (When redemption of shares – then it’s considered as shareholders disposing of property)

The list in s.24(1) of what qualifies as a disposition is not exhaustiveCompagnie – read “disposition” as widely as possible, don’t restrict the meaning because of the statute because the statutory meanings are non-exhaustive

s. 54 – “Proceeds of disposition” includes the following:(a) Sale price of property sold – Classic example(b) Compensation for property unlawfully taken – Does not say it has to come from thief(c) Insurance compensation for destruction or loss of property – Destruction of property can amount to

disposition(d) Expropriation(e) Compensation for injurious affect (usually statutory effect, like zoning changes) to property – Only

disposition if you receive compensation, otherwise just a loss(f) Compensation for property damaged

Except, within reasonable time, that compensation has been used to repair the propertyThen it is not proceeds of disposition

Also: When a corporation ends, when a gift is givens. 248(1) – “timing of disposition” In real property, date of transfer/conveyance is the date of disposition, Shares, date when you actually relinquish shares is date of dispositionDeemed Dispositions and Deemed Proceeds Statutory Provisionss. 2(3)(c) – non-residents must pay tax where applicable when disposing of Canadian propertyOn Ceasing to or becoming a resident of Canadas.128.1(1)(b) and (c) -- Deemed dispositions on becoming a resident in Canada

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(b) – TP deemed dispose of property immediately before leaving that is owned by the TP other than

(i) property that is taxable Canadian property (real property and shares of Private Canadian corporation Resident in Canada [PCRC]) … (A PCRC is not publicly traded, has major shareholders resident in Canada, created by Canadian statute, somewhat different from a CCPC)

for proceeds equal to FMV(c) – TP deemed to have acquired at the particular time each property deemed to be disposed of in paragraph (b) at cost equal to proceeds of disposition

The effect of the above is to “reset” one’s ACB of non-Canadian property – to update it to the current FMV as of the time you become a resident. This also triggers capital gains liability on all non-Canadian property.

s.128.1(4)(b) and (c) – Deemed dispositions on ceasing to be a resident(b) – TP is deemed to have disposed of each property owned by the TP other than

(i) real property situated in Canada (resource, timber included) … for proceeds equal to FMV at time of disposition

(c) – TP deemed to have reacquired each property deemed to have been disposed of in paragraph (b) at cost equal to proceeds of disposition

The effect of the above is to “reset” one’s ACB of Canadian and non-Canadian property – to update it to the current FMV as of the time you become a resident. This also triggers capital gains liability on all Canadian and non-Canadian property (except Canadian real property).

Gifts and sales below fair market value to non-arm’s length personsRegarding definition of “non-arms length” – see PREVIOUS section of outline – already discusseds.69(1) – Inadequate or excessive considerations – Unless specified elsewhere in the ITA

(a) – TP has acquired from person (not dealing at arm’s length) at an amount in excess of FMV at the time of acquisition, TP shall be deemed to have acquired at FMV (the lower cost)(b) – Where TP has disposed of anything

(i) – To a person (not at arm’s length) for no proceeds or proceeds less than the FMV at time of disposition(ii) – To any person by way of gift inter vivos(iii) – To a trust because there has been no change in beneficial ownership

TP is deemed to have received proceeds of disposition equal to that FMV(c) – Where TP acquires property by way of gift, bequest, or inheritance (or get something that does not result in change in beneficial ownership), the TP is deemed to acquire the property at FMV

(Nothing is deemed if sold below FMV – Just applies to gifts, inheritances, etc)Deemed Dispositions and Proceeds on Deaths.70(5)(a) and (b)

(a) Deemed disposition and receipt of proceeds at FMV right before death(b) Anyone who acquires that property after you die is assumed to have acquired at FMV

Also recall the previous section on capital losses on death – they are deductible against other sources of income.Property Won Through Lotterys. 40(2)(f) – Selling a right to win a prize or bet (arguably a form a property), or the right to receive an amount as a prize or bet is not taxable (no capital gains, no income) – gains/dispositions “deemed nil”s. 52(4) – Where property is acquired by a TP after 1971 as a prize in connection with a lottery scheme, the TP is deemed to have acquired the property at its current FMVRollovers: Transfer of capital property to spouse/CLP inter vivos and on death s. 248(1) – common law partner (CLP) defined as a person who cohabits at that time in a conjugal relationship with the TP and

a) has so cohabited with the TP for a continuous period of at least one year, or

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b) would be the parent of a child of whom the TP is a parent, if this Act were read without reference to paragraphs 252(1)(c) and (e) and subparagraph 252(2)(a)(iii)

s.73(1) – Inter vivos transfers by individuals – When subsection 1.01 applies and both individual and transferee are resident in Canada at the time, and if the transferor does not elect out of this provision, property transferred is deemed

(a) To have been disposed of at the time by the individual for proceeds equal to(i)FMV of the property at the time of acquisition (cost the person paid for it – the ACB)(b) And the transferee acquires the amount equal to those proceeds (the original ACB)

s.73(1.01) – Qualifying transfers (transfers that qualify for the rollover provisions)(a) To spouse or common law partner(b) To a former spouse or common law partner of the individual in the settlement of rights arising of their marriage or common law partnership

s.73(1) – No gain, no loss for the spouse giving (regardless of whether there was a gain/loss)Transferee – Receives the ACB of the giverExample: Acquired capital property at $5K – Now worth $10K – Give to wife as a gift

s.73(1) – Deemed to have disposed of it for $5K and spouse acquired at $5KEven if sold to wife for $7500 – Deemed disposed of at that time for proceeds equal to $5K. If spouse now sells to arm’s length person for FMV of $10K, due to spousal rollover, capital gain is $5K even though paid $7.5K for property

You can elect out of the provision. Suppose you do:s.69(1)(b) applies – disposition to a non-arm’s length personThis means if given to spouse as gift – giver deemed to dispose at FMV = tax liabilityIf elect out and sold for $7500: You are deemed having disposed at FMV and pay full capital gains as if sold for $10,000. In the meantime, the transferee’s ACB would be only $7500 (a bad situation to be in for both parties)

Any transfer to spouse is deemed to be on a rollover basis One must expressly elect out of the rollover

If you do elect out – Then s.69(1) appliesEither rollover or a non-arms length transfer (if at FMV, no problem, if not FMV, then problematic with the deeming provisions)All transfers (i.e., any type of property) are included in s.73(1) – Meant to deal with couples who are plitting up – Can transfer without paying capital taxImportant: This provision truly covers all transfers. Not just gifts – Even sales at FMV will be hit by it unless one elects out

s.74.2(1)(a) – Spousal attribution rule – Anti-avoidance rule – To stop shifting of gains – capital gains shift back to transferor unless spouses were separated, relationship breaks down, or transferor dies between time of transfer and disposal

Applies between time of original transfer (even before becoming spouses)Applies to spouses, common law partners, or people who have since become spouses/CLP

This rule attributes the entire gain back to the transferor spouse if the Transferee spouse is deemed not to have realized the gain – losses remain with the transferee howeverDoes not apply if spouses were separated, relationship breaks down, or the transferor dies between time of transfer and disposal (the wording says they must be a spouse or CLP and in those cases, they are not)

In those cases, the transferee keeps the gain and no attribution back to the transferors.70(6) -- Spousal Rollover on DeathSame idea as spousal rollover inter vivos

s.70.6(a) – Property that would apply under normal deemed dispositions upon death that was transferred to a spouse or CLP (must be resident in Canada) – Following rules apply:

(c) – Disposition rules on death do not apply(d) – Dead person deemed to have disposed the property and received POD equal to the ACB (Deemed no gain)

Surviving spouse is deemed acquired property at cost equal to the proceeds

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s.70(6.2) – However, you can elect out of 70.6(a) to have normal deemed disposition rules on death (s.70(5)) apply (In that case, the ACB becomes the FMV – you are deemed disposed of the property on death)

REMEMBER: Normally, capital losses can only offset capital gainsTwo special years – Year of death or year before death, allowable capital losses in previous years can be carried forward against income from sources – s.111(2)(a)

Personal Use Property (PUP) and Listed Personal Property (LPP) Statutory Provisionss. 54 -- PUP is defined as INCLUDING property used primarily for personal use or enjoyment of a TP, or personally use and enjoyment of those related to the TP, or, where the TP is a trust, the personal use and enjoyment of the beneficiaries of the trust, or the PUP of a partnership includes partners and their relatives who use the property for personal use and enjoyment

PUP is part of capital gains and gets entered there – However, there is such thing as PUP losses (they are deemed to be “nil”), not included in capital losses – this prevents the deduction of capital losses attributable to personal consumption (s. 40(2)(g)(iii))

s. 54 – Listed Personal Property -- LPP – Subset of PUP -- Defined – All listed personal property is PUP but PUP is not LLP -- LPP – Means (exhaustive list) – Owns all or a portion or an interest in or rights to: Print, etching, drawing, painting, sculpture or other similar works of art, Jewelry, Rare folio, rare manuscript, rare books, Stamps, Coins

the list is exhaustive list although there is a place for possible expansion under the category of “Other similar works of art”

s.40(2)(g)(iii) -- – you CAN have a loss on LPPs. 3(b)(i)(B) but LPP losses can only be set off against LPP gains

s. 46(1)(a) and (b) -- The $1000 Rule – a) ACB and b) POD are deemed $1000 if less than $1000s. 46(2) -- If you dispose part of PUP

a) the ACB is deemed to be the greater ofi) the ACB to the TP determined in s.43(1) (the amount that can be reasonably regarded as attributable to that part), orii) the proportion of $1K that the ACB of the part disposed bears to the ACB of the whole property

b) the proceeds of disposition (POD) is deemed to be the greater ofi) the POD to the TP determined in s.43(1) (the amount that can be reasonably regarded as attributable to that part), orii) the proportion of $1K that the POD of the part disposed bears to the POD of the whole property

s.46(3) – Deems number of PUPs sold separately to be a single transaction of a sale of PUP when:Criteria: Must be of type that is normally disposed of as a set, Whether parts constitute a set (do they match, produced at the same time, worth more collectively than individually), Even if purchased individually, if two or more owned at same time, constitutes a set, Disposed of all items through more than one disposition either to 1 person or to members of a group who are not at arm’s length with each other, Aggregate FMV of the assets must be more than $1K – (Otherwise $1K rule kicks in)

s.41(1) – Definition of Net taxable LPP gains: they are ½ the amount of net gains from LPPs.41(2) -- Taxable net gains from LPP – TP net gain from LPP is determined as follows:

s. 41(2)(a) -- Determine total gains minus losses for the current year if excess net gains remain, proceed

s. 41(2)(b) -- Can carry losses 7 years forward and 3 years back --Another way to say it is that you can look for losses 7 years in the past and 3 years in the future – For that particular year’s assessment of LPP

If have net gain, can look back and find a loss in the previous 7 years – s. 41(2)(b)s. 41(2)(b)(ii) -- Have to deduct oldest losses firsts. 41(2)(b)(i) -- Can only use amounts still left over

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Cannot create losses with past amounts to refresh them in order to keep losses from expiring after 7 years – Cannot deduct more than you have gained

s. 41(2)(b)(iii) -- By taking $10K loss in past to apply to gain in $5K now – Does not create a $5K loss now

s.41(3) – Definition of LPP loss means the amount by which the TP’s losses for the year from sales of LPP exceeds the total of TP’s gains for the year from dispositions of LPP

And remember, excess losses over gains – LPP losses – Cannot be used against other sources in that year – s. 3(b)(i)(B)

Note: As with other capital losses, only half appliesIF CONFUSED SEE PG 93 OF OUTLINE FOR SAMPLE PROBLEMPrincipal Residence Exemption Statutory Provisionss.54 – Definition of ‘principal residence’ -- A property that contains a housing unit (broadly defined in case law – unit in duplex, recreational place, houseboat, trailers), a leasehold interest, a share in housing co-ops. 54(a) Must be ordinarily inhabited by the TP, spouse, former spouse, CLP, former CLP, or child

Definitions:Spouse – Legally marrieds. 248(1) -- Common law partner – Cohabits in conjugal relationship and has cohabited for at least 1 year at time of considering their status – 12 month period in the time before applying

If you are parents of a child, do not have to be living for the preceding 12 monthsIf living apart – Remain common law partner unless breakdown of relationship (breakdown for at least 90 days)

Ordinarily inhabit – Not too difficult to do soDoes not say throughout the year, just says in a year – Does not need to be entire year. What seems to be the test is inhabited in the ordinary way

TP can only designate a particular property for each year, but only oneOrdinarily inhabited – Requires housing unit must be usually or commonly occupied as an abode

Includes seasonal or recreational occupationVacant lot cannot qualify as principal residence until there is a housing unit

Legislative Changes over the years to CLP’s designating personal residencesUntil December 31, 1981, each spouse could claim a principal residence if each spouse owned a property separately and not as joint tenants.This was then restricted. From 1982 to 1992, each common law partner could still claim separate principal residences.This was further restricted. From 1993 to 2000, only same sex common law partners could claim separate principal residences. However, from 1998 to 2000, same sex common law partners could elect to be treated as standard common law partners.Now, spouses living together who are not separated/divorced can only claim one principal residence.

On marriage breakdown – If one spouse receives exclusive possession of matrimonial home, other spouse (owner) may continue to claim exemption for period during which he is not in possessionIf child of TP occupies a dwelling, qualifies for exemptionIf you vacate and rent out your principal residence – May claim as principal residence for up to a period of absence of four years. Longer absence – Permissible on work relocationIf vacated for work relocation, if 40 km closer to new work location, may claim PRE for duration of relocated job plus on year or until death during employment

Would then elect to treat dwelling as PUP, but 4 year limit does not apply

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(e) Principal residence includes up to half hectare of surrounding land (including the land under the home) – Automatically deemed part of principal residence – Reasonably regarded as contributing to use and enjoyment – Accepted by the CRA – See Interpretation bulletin IT-120R6

If more than half a hectare around house it is deemed not to contribute to the use and enjoyment of the home. In that case, the TP must prove that land was necessary to use and enjoyment of the house to Include it as part of the principal residence exemption – Hard to do

Test for necessity of excess land is primarily objective, lifestyle is almost irrelevantIndispensable to use and enjoyment of the housing unit as a residenceExpert appraisal is not conclusive evidence of necessitySee following case law

40(2)(b) –The formula for calculating what portion (some or all) of the capital gains receive the personal residence exemptionProperty does not have to be in Canada, but person has to be resident in Canada for the year they designate itThe Formula: A – (AB/C)

A – Actual capital gainB – 1+Actual number of years qualified (years deemed PRE and resident of Canada)

C – Years owned the propertys. 40(4) – When one spouse transfers personal residence to another in a way in which the rollover on death (70(6)) or inter vivos (73(1)) roll over applies,

a) the receiver is deemed to have owned the property throughout the period during which the giver owned it;b) The property is deemed to be the receiver’s personal residence

i) where it is a rollover on death, for any tax year for which the property would have been the giver’s personal residenceii) where it is an inter vivos transfer, for any tax year where the property would have been the giver’s personal residence

c) where the receiver is a trust, the trust is deemed to have been resident in Canada during each tax year the giver was resident in Canada

Interpretation BulletinsInterpretation Bulletin IT-120R6 para. 15 – The CRA requires the TP to establish that excess land is “clearly necessary” to the proper functioning of the residence and not merely desirable.Case LawYates – If zoning forbids subdividing the land into smaller parcels, the excess land will be considered necessaryCarlile -- If does not qualify on objective test, may find recourse in subjective test

Found that land could not be subdivided and that the land was necessary using an objective test – used vague and unclear evidence however

Minority – Noted the land had subdivision potential, that the TP only used 3 acres personally, and leased the rest – Essentially used an objective test

The court applied only the objective test, but said there was a subjective test“Where the land does not qualify on the objective test it may, however, qualify as part of the principal residence by recourse to a subjective test”

Stuart Estate – court says that subjective evidence is marginally relevant and not very persuasive. The court suggests looking at objective factors such as Accessibility to roads, utilities requiring a larger lotIF CONFUSED, SEE SAMPLE PROBLEM ON PG 97

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Depreciable Property and Capital Cost Allowance (CCA)Statutory Provisionss. 54 – by definition, depreciable property is capital propertys. 18(1)(b) – capital outlays are not deductible expenses, but20(1)(a) – Capital Cost Allowance, another specific deduction allowing one to deduct capital cost of property Allows you to deduct part of the capital cost – Specifically permits you to deduct IF YOU WANT (can defer CCA to future years)ITA – Requires all assets in respect of a particular business that are within a particular class be pooled

Exceptions – Passenger vehicles costing more than $30K – Treated separately (Reg. 7307)Exceptions – Rental property costing more than $50K – Treated separately (Reg. 1101(1ac))

Reg. 1100(1)(b) and (c) -- The “declining balance” method (where a percentage of the capital cost is reduced each year) is used for most capital property. The “straight line method” (where a flat even amount is deducted each year) is permitted only for certain property such as leasehold interests, patents, concessions, franchises or licensess. 13(21) – definition of depreciable property -- Essentially – Property that allows deduction under 20(1)(a) is depreciable propertyReg. s. 1100(1) -- Separates property into classes of propertyReg. s.1102(1) – Property that cannot claim a CCA deduction

a) Property that had its costs deductible in the ITAb) Inventory propertyc) Property acquired that was not for purpose of earning income

Reg. s.1102(2) – Land is excluded – Even land upon which building is situated on -- Have to separate land from the buildingReg. s. 1101(1) – if you own different businesses you have to separate capital properties into separate classes for each business/property income source, namely:

Where there are more than one property for a class and (a) where one property is for one business (b) and the other for another business, (c) and (d) a separate class is prescribed for the properties for each business, even though the properties would ordinarily be within the same class

Reg. 1100(1)(a) – CCA is the amount equal to the appropriate percentage of the UCC of each class of depreciable assets: i) Class 1, 4%, ii) Class 2, 6%, iii) Class 3, 5%, iv) Class 4, 6%, v) Class 5, 10%, vi) Class 6, 10%, vii) Class 7, 15%, viii) Class 8, 20%, ix) Class 9, 25%, x) Class 10, 30%Reg. 1100(11) – for rental properties, you cannot create a loss with CCA. CCA can only be deducted from net income

Reg. 1100(14) – a rental property is defined as a building used primarily for the purpose of producing gross revenue that is rent

How to Calculate CCA and UCC s. 13(21) – sets out the formula for determining permitted CCA in the year and undepreciated capital cost (UCC)

The Formula: A+B-(E+F)A – Entire total capital cost of every property that has ever been in that classEven if it is no longer there – Total historical cost of that classB – Total recapture up to that time historically for that class – Capital gain from depreciable propertyE – Total historical capital cost deducted for that class at that timeDeductions claimed under 20(1)(a), Includes terminal losses previously claimed when class was emptyF – Proceeds of disposition of all properties in the class that has been disposed off up to their original capital cost (lesser of POD and capital cost)

Treat excess in a different way – More means it is a capital gainPrevents recapture for sale in excess of original cost – Would be capital gain

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Cannot have a capital loss for depreciable property (a negative amount, would be called recapture)

Half-Year Rule – Reg. s.1100(2) – Formula for determining a particular policy adjustment to the UCC of the class

Effectively only allows half the year of capital cost allowance in respect to capital property acquired in year

This creates a notional UCC that must be used in the first year of an acquisitionNotional UCC = Year-End UCC – [½ x (Acquisitions in Year – Dispositions in Year)]Second part: Must be positive

First determine the year end UCC using A+B-(E+F)Then determine the notional UCC taking the year end UCC – (1/2 * (Acquisitions in Year – Dispositions in Year))Then take the figure produced and multiply it by the CCA rate for the given class to determine the CCA that may be deducted for the year.SEE PAGE 100 OF OUTLINE FOR SAMPLE PROBLEM

Terminal Loss s. 20(16) – Only occurs at end of a tax year – Deductible under this section

When UCC is positive AND the class is empty (last asset is sold)Mandatory to deduct the terminal loss – the FULL amount is deductible

Asset depreciated at a rate faster than relevant CCA rateEmpty class – Positive value – Terminal lossEmpty class – Negative value – RecaptureExample: Sold remaining buses (30K and 50K) at 24K each

UCC = (125K+0) – (13,725+11,250+14,857+18K+15K+24K+24K) = 4168(Positive amount means a terminal loss)Buses declined by a total of 44K (125K cost and only recovered 81K in proceeds)

But only claimed 39,832 in CCA – terminal loss of $4,168

s.39(1)(b)(i) – No capital loss is permitted for the disposition of depreciable propertySo, when one disposes of depreciable capital property, go to CCA calculations to see if a terminal loss can be found which would allow a deduction

Recapture Required to include amount as income inclusion – Deducted too much in the past – Therefore have to include the extra deducted earlier on to income – s.13(1)

This excess is taxed as a capital gain

Unlike terminal loss, you do not necessarily need an empty class – The recapture will then be part of B in the formula

May occur if assets are left in a class – Difference from terminal loss

Example: Building is sold for $95KUCC = (100K +0) – (2K+3920+3763 + 95K) = (4683)

In the definition of UCC, it cannot be a negative figure, so:s.13(1) – Brings this negative balance into the TP income as recapture

Can avoid recapture if buy another asset that makes the UCC positive

Timing: When is an asset (depreciable property) acquired? Depends on intention – When was legal title passed, what events occurred (change in possession, delivery, etc) (See Wardean Drilling Ltd.)s. 13(26) “Available for use” – In order to claim a CCA

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s.13(27) – Property other than a building acquired by a TP is considered available for use at earlier of the following general times

a) First used for purpose of earning incomed) Delivered or made available for the use or benefit of the TPc) Time immediately before disposal

s.13(28) – Similar rule for buildings – when is the starting time when CCA may be claimed?a) Time used by TP for intended purposeb) Time at construction completed) Time immediately before disposal

Available for use – Rules apply to property acquired after 1989The above applies only for determining the maximum CCA available for deduction under s. 20(1)(a) and the Regulations. For all other purposes such as recapture and terminal loss, UCC additions are made at the time the property is acquired.Case LawBen’s Ltd – cost is undefined in the ITA, but it is ordinarily the amount expended to acquire it. Also, to claim CCA, the asset must be acquired for the purpose of earning income

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Aboriginal TaxationStatutory ProvisionsIndian Acts. 83(1)(a) – the band can tax land on reserve (as if it were a municipality)s.87(1) –Following property is exempt from taxation

s.87(1)(a) – Interest of an Indian or a band in reserve or surrendered landss.87(1)(b) – Personal property situated on the reserve (where litigation is)

s. 88 – provincial laws of general application apply to Indians subject to any treatiess.90(1) – For the purposes of section 87 and 89, personal property that is

(a) purchased by gov’t with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or (b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty, Shall be deemed always to be situated on a reserve.

Income Tax Acts.81(1)(a) – An amount declared to be exempt from tax by any other enactment of Parliament is not included in income

Relevant because the Indian Act provides limited exemption for status Indianss. 149(1)(c) – incorporated municipalities and Indian Bands are exempt from paying taxs.149(1)(d.5) Municipal corporation exemption

Provided 90% of shares held by municipality (Band) and 90% of income earned in geographical boundaries of the municipality (reserve) – Then income is exempt

Case LawNowejigick – income is personal property (incorporeal property)Williams – used for s. 87 of the Indian Act. Start here. See pg 104Recalma – the income earned must be integral to life on the reserve. See pg 104Kinookimaw Beach Association – Corporations cannot claim exemption under s. 87 of the Indian Act. The corporation is being taxed, not the shareholders, and corporations cannot be registered/status Indians. (note exception in s. 149 of ITA, above)Otineka Development Corporation -- Facts: Indian band and Indian corporation – Municipal corporations?Held: Not municipalities as such, but a band is a public body performing a governmental function Exempt and since it was 100% owned by the band and the income was generated on the reserve Suppose corporation invests in mutual fund – Becomes taxable – Source is off reserve (Recalma)Akiwenzie – Work benefitting reserve doesn’t mean your employment is situated on the reserve. The test is to ask where you physically perform your duties (perhaps if 50% on reserve, get an apportionment?)Southwind -- Fact: Sole proprietor running a business – Contracted with one client (non-native logging company) All actual logging was off-reserve, administrative work on reserve Only one client – an off-reserve corporation Was paid by off-reserve bank accounts Held: Income generating activity is off-reserve (logging), payment off reserve Suggests this idea that there has to be community benefit to the income. Otherwise, aboriginals entering into “the commercial mainstream” must pay full tax like everyone else. Suggests that an activity is only a Native activity if it benefits the community Is this diverging from Williams? Perhaps, but the appellant did spend a lot more time off reserve than the TP in the Williams case Kakfwi – deals with s. 90 of the Indian Act agreement between Crown and band for the Crown to pay the Chief’s salary argument that this salary was not taxable under s. 90(1)(b) – i.e., an agreement between a band and the Crown. argument fails: The meaning of s. 90 is that it be an agreement pursuant to a treaty. Treaties are written in general terms and often contain many agreements within them – those agreements are what the provision refer to the TP got the money pursuant to an agreement, but not one under a treaty. because a s. 87 argument wasn’t made, the courts didn’t consider it – they left it open, however, that such an argument may have succeeded were it pledGreyeyes – involves s. 90(1)(b) – the treaty required gov’t to assist band members with their education so the gov’t gave out scholarships but tried to tax it. But since it was property given per a treaty, deemed situated on reserve and so taxation wasn’t permitted