Tax, September 9, 2009



Basic Structure of Income Tax: 5

Tax Unit: Tax payable by persons resident in Canada s.2(1) 5

Accounting Period s.249(1) 5

Tax Rates s.117(2) 6

Taxable Income s.2(2) 6

Income for taxation year, basic rules s.3 6

Statutory Interpretation: 6

Pre- Driedger’s: Strict construction 6

McInnis – strict interpretation 6

Driedger’s Modern Rule: 7

Will-Kare Paving, 2000, SCC- Contextual approach, meaning of goods- asphalt 7

Tax Avoidance: 8

Judicially Created 8

Gregory v. Helvering- USA business purpose test- Judicial activism 8

Duke of Westminster (HL)- Judicial restraint 8

GAAR : To prevent artificial tax avoidance arrangements. 8

Income or Loss from an Office or Employment: (s. 5 to 8.): 9

Characterization 9

Wiebe Door Services FCA- legal relationship over nomenclature, employee or indep. contractor? 9

Alexander specific results test for contractor 9

Incorporated Employees 9

Engel 1982, - PSB test (pre-specific anti-avoidance in s.18(1)(p) and s.125(7) ) 10

Dynamic Industries FCA 2005 – s. 18(1)(p), PSB limitations 10

Inclusions 10

Remuneration: s.5(1) s.6(3). 10

Goldman 1953, SCC – payment in connect w/ office 11

Fries, 1989, FCA- strike pay is income/ surrogatum. 11

Fries SCC 1990: strike pay doesn’t fall within income from a source under s.3. 11

Cirella 1978- FCTD- tort special damages not income, award for impairment of earning capacity. 11

Curran 1959, - inducement payments are income 12

Payments in Respect of Loss or an Office or Employment s. 56(1)(a)(ii) retiring allowance 12

Mendes-Roux 1997- amt of wrongful dismissal damages replacing wages taxable, rest is not. 12

Ahmad 2002, TCC- compensation for the wrong ( not taxable. 12

Schwartz 1996, SCC- not retiring allowance b/c never had job. 13

Taxable Benefits s.6(1)(a): 13

Characterization of Benefit: 13

Lowe 1996- Benefit test: primarily pleasure or primarily business w/ personal pleasure beyond de minimus 13

Dunlap 1998 – Christmas party taxable benefit. 13

Huffman (1988)- reimbursement is not benefit. 13

Relationship to Office or Employment 14

Savage SCC (1983)- in respect of- wide scope 14

Valuation 14

Detchon avg cost of education. 14

Benefits in Respect of a Housing loss 6(19) to 6(23) 14

Phillips – employer provided housing subsidy is benefit 15

Forgiveness of Debt s.6(15) 15

McArdle - connection b/w employment and forgiveness of loan 15

Interest free and low interest Loans s.6(9) and s80.4(1): 15

Home purchase loans and home re-location loans s. 80.4(7) and s.110(1)(j) 16

Insurance Benefits s.6(1)(f) 17

Tsiaprailis, SCC Broadens use of surrogatum principle 17

Allowances 6(1)(b): 17

MacDonald 1994,- factors of allowance 17

North Waterloo Publishing 1998 -allowance 18

Exemptions to Inclusions 18

6(1)(b)(v)- 6(1)(b)(vii.1): reasonable allowance for travel expenses: 18

Blackman – no allowance for sojourning 18

Bouchard – travel to part-time job s.81(3.1) 18

s.6(6): Employment at a special work site 18

Guilbert – poor analysis of s.6(6) 18

Deductions s.8(2) 19

Non-refundable Canada Employment Credit s.118(10). 19

Legal expenses s.8(1)(b) and s.60(o.1) 19

Meals s.8(4) 19

Certificate of Employer s.8(10) 19

Travelling Expenses s.8(1)(h) and s.8(1)(h.1) 19

Luks 1958 – commuting expenses are personal expenses 20

Hoedel: RCMP dog, transport is part of duty 20

Chrapko – commuting costs and personal choice of where to live 20

Evans- car as office ( allowed 20

Reasonable. s.67 and s.67.1(1) 20

Moving Expenses s. 62(1), 62(3) and s. 248(1) 20

Physical Transfer 21

Storrow 1978 – physical transfer 21

Ball 1996- search for housing ineligible 21

Critchley 1983- home includes dog 21

Reasonable efforts made to sell old residence: 21

Lowe 21

Cusson, 21

Purpose of Relocation 22

Beyette – delay move for legitimate reason, no time limit. 22

Abrahamsen- move for purpose of finding a job, allowed. 22

Howlett 1998- no new work location/job, just moving closer to work. Disallowed 22

Broydell 2005- moving closer due to traffic, no new work location. Disallowed 22

where is the TP ordinarily resident 22

Rennie, 1989 – ordinarily resident 22

Additional cases on Ordinarily resident: 22

Distance of Relocation 23

Giannakopoulus – shortest route coupled w/ normal route to public not straight-line. 23

Limit on Deductible Amount 23

Hippola – only deduct against what made at job moved for. 23

Business and Property 23

Characterization: 24

Ordinary meaning of Business 24

Smith v. Anderson, 1880: activity and profit 24

Morden, - no REOP, gambling is hobby. 24

Treasure Seeking 24

Extended meaning AINT: “adventure or concern in the nature of trade” 24

Taylor, leading case on AINT 24

CRA bulletin on transaction as AINT. (Same distinction related to capital gains.) 25

Regal Heights- secondary intention test/ (use for capital gains too) 25

Reasonable Expectation of Profit (REOP)- for personal type situations: 25

Stewart 2002 scc- source of income test includes REOP. 25

Inclusions 26

Gains from illegal activities 26

No. 275 – illegal income included 26

Smith v. Minister Finance, PC- proceeds from prohibition taxable. 26

Damages and other compensation 26

London and Thames – origin of surrogatum 26

Donna Rae – capital receipt and lost profit income 26

H.A. Roberts Ltd- Capital receipt 26

CRA: Damages, settlement and Similar Receipts 27

Bellingham:- punitive damages, windfall. 27

Cartwright and Sons: damages not replacing income or capital 27

Voluntary payments 27

Federal Farms Limited - no legal right, voluntary ( gift 27

Campbell – gratuitous payment treated as income for services 27

Cranswick:- windfall share compensation for oppression. 27

Frank Beban logging: - windfall, nat’l park. 28

Mohawk Oil FCA 28

Prizes and Awards 28

Abrahams 1960- IGA pure chance, not taxable- pre s.56(1)(n) 28

Poirer- 1968- won trip in draw, not taxable 28

Rother: ‘55 architect prize, not taxable. 28

Watts: ’66 architect prize taxable, contractural agreement 28

s.56 (1)(n): Scholarships, bursaries, etc (‘72 after these cases) “Other income” in subdiv D. 28

Savage – reversed by exclusion clause in s.56(1)(n) 29

Turcotte : pop knowledge is not a field 29

Foulds: prescribed prize reg 7700- music 29

Labelle: prescribed prize low threshold- accounting 29

Interest Inclusions s. 12(1)(c) 29

Perini Estate FCA – interest referable to principal sum retroactively 29

Miller – retroactive salary increase, interest referable. 30

Payment of Interest and Capital Combined s. 16(1) 30

Groulx – factors for s.16(1) 30

VanWest Logging – deferred payment not capitalizing interest 31

Rodman Construction: - relationship to FMV, most important factor 31

Discounts and Premiums 31

O’Neil – Peter Dixon and Sons test 31

WestCoast Parts- ratio of interest to bonus, low not interest 31

no. 593 , ratio of interest to bonus high ( hidden interest. 31

Deductions: s.9(1), s.18(1)(a), s.18(1)(h), s.67 31

Illegal Payments/ Expenses 32

Espie Printing Co.- illegal payments may be deducted. 32

s.67.5: Non-deductibility of illegal payments:- bribes 32

Damage Payments 32

Imperial Oil Limited- loss incidental to normal risk of business 32

Davis – link to income producing too remote, not allowed. 32

McNeill- applies 63502 32

CRA Bulletin on damages 32

Fines and Penalties 33

65302 BC 1999 SCC : reversed by s.67.6. But reject public policy and avoidability tests 33

Reversed by s. 67.6 after March 22, 2004 “non-deductibility of fine and penalties,” 33

Recreation, Meal, and Entertainment Expenses: 33

Royal Trust Exch.- general principles now subject to s.18(1)(l)(ii) 33

s.18(1)(l)(i) and (ii): Use of rec facilities and club dues 33

Sie-Mac Pipeline contractors- broad interp of s.18(1)(L)(i) 34

Parties: Personal or business party? 34

Roebuck – not ordinary business practice 34

Fingold , - guests didn’t know were business guests 34

Grunbaum- company invited guests allowed knew they were business guests. 34

s.67.1(1): Expenses for food 34

Scott- didn’t apply s.67.1(1) 34

Clothing Expenses 34

No. 360 – could wear elsewhere ( personal 34

Giroux – couldn’t wear elsewhere 35

Home Office Expenses s.18(12) 35

Locke pre- s.18(12) general principles 35

s.18(12) Work Space in Home (after 1987): 35

Vanka - phone call could be meeting clients 35

Cases Trying to say not a home office b/c then won’t be subject to limitation in para b: 35

Travel Expenses, excluded from s.18(1)(h) 35

Cumming – deductions allowed for travel from base in course of business. 36

Henry:- disallowed b/c had office 36

Cork: - drafter follows Cummings 36

Forestell –notwithstanding personal choice. 36

Randall SCC- travel b/w related businesses deductible 36

A-1 Steel and Iron- business portion deductible, personal not. 36

Limitations on Deductions: Reasonableness s.67 36

Cipollone: s.67 36

Interest Expense Deductions s. 20(1)(c) 36

From Shell, 4 parts to this provision: 37

Bronfman Trust 1987. SCC- bona fide purpose. Direct use still good law. 37

Tenant, SCC- direct use and tracing 37

Attaie, 1990- indirect use not allowed 37

Grenier, indirect use allowed, tracing. 37

**Singleton 2001, SCC- Drops bona fide purpose test. Tracing applied. 38

**Ludco Enterprises SCC 2001 – ancillary purpose is sufficient 38

Timing Issues: 38

Inclusions 38

Received s. 12(1)(a): 38

Kenneth Roberston ltd 1944,- quality of income. 38

Receivable: s.12(1)(b) 39

West Kootenay Power and Light: 1991- amt receivable/ true picture/ legal right 39

Canderel SCC- true picture is rule of law, not matching. TIPS running expenses 39

Ikea: SCC- symmetrical to Canderel 39

Interest accrual: 39

s.12(3): corporations, partnerships or commercial trusts 40

s. 12(4): individuals or personal trusts 40

s.20(14): allocates interest b/w buyer and seller of debt obligation. 40

Deductions 40

Amounts payable s. 18(1)(a) and (e) 40

JL Guay , FC- contractor holdbacks, must be legal obligation 40

Samuel F Investments – definition of contingent liability 41

Inventory Costs: 41

Friesen, 2005, SCC- inventory, capital property distinction 41

Neonex 1978 – True picture, include inventory costs when sold. Match revenue & expense 41

Anaconda American Brass, - FIFO unless can prove LIFO 41

Conservative accounting principle s.10(1) and 10(1.01) 41

Running Expenses: 41

Canderell – benefits over-time speculative. 42

Tower Investments: option to defer running expenses if want to. 42

Prepaid Expenses s. 18(9): limitation respecting prepaid expenses: 42

Capital Expenditures s. 18(1)(b): 42

Characterization: Two main tests: British Insulated and BP Australia 42

Johns-Manville Corp. 1985, SCC – production expense not capital expense- mine perimeter 42

Once and For all/ enduring benefit test applied: 43

Establishing or extending test/ acquisition vs. use: 43

Distinction b/w repairs and upgrades/ Acquisition vs. Maintenance 43

Canada steamship Lines- capital cost for boiler, current expense for wall repairs 43

Shabro Investments – renos capital expense, repairs current expense 43

Goldbar , 1987, FTD- purpose of repair 44

Capital Cost Allowances: 44

s.20(1): deductions permitted in computing income from business or property. 44

Depreciable property: s. 13(21) 44

UCC: s.13(21): A -E-F +B 44

Income producing test 45

Hickman Motors SCC -depreciable pty doesn’t have to be held for particular period of time 45

Acquisition of depreciable property 45

Wardean drilling- acquired: possession, use and risk 45

Deductions in respect of depreciable property: 45

Disposition of depreciable property: 46

Olympia & York Developments- when disposed of 46

Allocation of Proceeds s.68 for CCA 46

Golden 1983, SCC- factors for applying s.68 47

Petersen – unreasonable allocation 47

Leonard –unreasonable allocation on FMV, no hard bargaining 47

Taxable Capital Gains and Allowable Capital Losses 47

Real Property: 48

Regal Heights-SCC- secondary intention doctrine. 48

Racine- rejected secondary intention 48

Morev Investments: FCA 48

Secondary intention to sell for profit? Factors (Badges of Trade) 48

Computation of Taxable capital gains and losses 48

s.40(1)(a)(i): capital gain 48

s.40(1)(b)(i): capital loss, 48

ACB: adjusted tax base, s. 54 49

Capital property: 49

Recognition and non-recognition rules 49

Non-recognition: Roll-over rules: s.73(1) inter vivos transfer 49

Recognition: Deemed disposition: 49

Non- Arm’s Length Transactions and Attribution rules 49

s.251(2): non-arm’s length relationships 49

Non-Arm’s Length Transactions s. 69 50

Marcantonio: 1991- income splitting s.69(1)(a) applied 50

Attribution Rules: 50

Basic Rules 50

Special Rules 51

Lipson, 2009 SCC 51

Basic Structure of Income Tax:

1) Tax unit, 2) Tax base, 3)Accounting period, 4) Tax Rate(s), 5) Tax credits: refundable (GST, Cdn Child Tax Benefit, medical expenses) and non-refundable (mostly non-refundable: education amt, textbook, charitable, etc).

Tax Unit: Tax payable by persons resident in Canada s.2(1)

s.2. (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year. (2(3) non-residents still need to pay some taxes)

Accounting Period s.249(1)

s.249(1) taxation year: in case of corporation a fiscal period; in case of individual, a calendar year, with reference to taxation year ending in that year. s.37 of ITA defines “year”: to a calendar year means any period of 12 consecutive months commencing on Jan 1.

Tax Rates s.117(2)

S. 117(2) Rates for taxation years after 2008: A) 15% up to $40, 726. B) > than $40, 726 and equal to or less than $81,452, the maximum amount determinable in respect of the taxation year under paragraph a, plus 22% of the amount by which the amount taxable exceeds 40, 726 for the year. (15% up to 40, 726 and then 22% above that up to 81 452.) C) greater than 81 452 but less than or equal to 126, 264, than 26% for amount above 81 452. D: greater than 126, 264 then 29% for amount exceeding.

Marginal tax rates: only amts above pay higher rate on. So pay 15 for first 40, then 22 on next 40, then 26 on next 40, etc. Don’t pay 29% on whole 126, 000.

Provincial tax rates pg. vii, just add on that amount to federal rate eg. Alberta 10% ( 25%, 32%, etc.

Indexed tax rates, accounts for inflation s. 117.1, complicated formula telling that the numbers will increase each year based on inflation .

Zero rate: defined through personal tax credit s.118(1): off-set amount against tax owing, it is (15% x some amt.) Amounts are defined later in 118(1) E.g. 118(1)© single status: $10, 320 x 15%. Tax on the first 10, 320 is zero. Idea is to have some amt of income to live on that is tax free.

Taxable Income s.2(2)

s.2(2) taxable income: taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C. (Division C: formerly personal deductions got converted into tax credits. Not much in Div. C anymore.)

Income for taxation year, basic rules s.3

s. 3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year determined by the following rules: Verbal formula: Add stuff in para A and Para B then subtract para C and then subtract para D.

Paragraph a: income from sources, office and employment (subdiv a s.5-8) and business and property (subdiv b s. 9-37), and other sources (subdiv d, s56-59).

Paragraph b: has its own formula. (i) [A+B] -(ii).

i) [A) taxable capital gains+ B) gain from disposition of property]-ii) allowable capital losses(allowable business losses minus allowable business .investments losses).

Can only deduct capital losses against capital gains. Only ½ of capital gain and loss.

Personal property: doesn’t recognize loss for personal use properties. Some listed personal property affected by market then losses are due to market and not due to personal use. But can only offset losses from listed personal prop against net gains from listed personal prop.

paragraph c: subtract deductions in subdivison e (s. 60-66), other deductions not included elsewhere. s.62 moving expense deduction.

Paragraph d; Losses from o and e, b and p, and allowable business losses. If losses exceed revenue, can deduct them against everything. (allowable business loss is species of capital loss)

paragraph e: result of formula is income for the year. If negative then can carry forward 20 yrs or back 3 years to offset income.

Statutory Interpretation:

Pre- Driedger’s: Strict construction

McInnis – strict interpretation

Attribution rules: income war tax. Where Husband transfers property to wife or vice versa, will still be tax as if the transfer hadn’t been made. Transferor is taxed on income that transferred. Gave wife bunch of cash, she used to purchase bonds, then sold bonds and bought shares, then sold shares and bought other ones. She got some dividends on the shares that is income from a source. Minister said the dividend income was from the money transferred from the husband ( transferor should be taxed on the dividend as if transfer had not been made. Trying to avoid income splitting.

Issue: meaning of substituted property? Is it indefinite?

Exchequer Ct: Thorson P: says two substitutions kicks it out of the rule ( doesn’t remain in hands of transferor. Words just says “or from property substituted therefore.” No article before property. Ct. uses strict construction and says if parliament wants it to be indefinite then they should have explicitly said so. Some other part of the Act, it said a previous owner includes all previous owners. ( ct said they should put that wording into that section too.

Strict Construction: Ct. wouldn’t interpret words broadly. Interpreted narrowly to protect TP from the state. Tax as a “theft of property” attitude underlying Implications: ambiguity resolved in favor of TPs.; but could work against TP is a broad reading of act would have given benefit. e.g. Witthuhn deduction for ppl confined to wheelchair, he was confined to rocking chair type thing. Nope sorry, SOL.

Driedger’s Modern Rule:

Harmoniously, grammatical and ordinary sense, words in context, scheme, object, intention of parliament.

internal context: 4 corners, immediate, statute as whole, sometimes context suggests technical or legal meaning eg. Will-Kare- goods

• Associated words principle- prizes, associated with list including bursary and scholarship ( prize didn’t need to be won in a competition.

• Limited class principle: wages, salaries, gratuities and any other remuneration. Interpret in light of class ( any other would be limited to the same class involving monetary remuneration.

• Scheme: assumptions: legs use same phrase in one statute, then similar meaning, coherent structure, don’t use more words then are necessary, implied exclusion (reading meaning into absence, thinking meant to be excluded)

• Purposes: object of Act raising revenues, incentives, wealth distribution. Express or inferred. White papers, technical notes,

• Intention of Parliament: how would leg have wanted this specific case decided? Interpretation Act. e.g. minister’s specific expressions of intent for an amendment. Pepper v. Hart: can look in 3 circumstances: ambiguous, one of more statements of promoter of amendment, pg. 104-105.

• Consequences: not mentioned in original Driedeger, looks at parliaments intentions, etc parliament wouldn’t have intended unreasonable outcome, absurdity etc.

Stubart Investments 1984, SCC- reject strict interpretation and business purpose test.

Facts: Profitable corp sells business to unprofitable crp and profitable corp continued to operate corp as its agent. Did this to make use of the unprofitable corps losses and shelter the income of the profitable corp. The minister reassessed and charged net income back to profitable corp (appellant).

Issue: Can TP make arrangement where future profits are routed through sister subsidiary in order to use latter co’s loss carry-forward?

Analysis: Reject strict business purpose test bc would run counter to intent of Act sometimes. Rejected strict interpretation, applied plain meaning rule, but in a substantive sense within the spirit of the charge. After Stubart, purposive approach become more dominant

Then Iaccobucci came along and reacted against purposive approach, back to plain meaning. Though should only look at purpose, etc if there was a true ambiguity.

SCC settled on Modern Approach: textual, contextual and purposeful.

Will-Kare Paving, 2000, SCC- Contextual approach, meaning of goods- asphalt

Facts: Accelerated CCA: Can deduct more upfront if accelerated ( more advantageous for tax purposes. Investment tax credit: upfront grant to help buy equipment. Both incentives involved the property primarily for the purpose of manufacturing or processing “goods for sale or lease” Will Kare makes asphalt for own use in paving work and sells excess to other cos.

Issue: legal meaning or ordinary meaning of “goods for sale”? Legal sense: asphalt is not good for sale, just part of K for work only passes ownership through accession. Ordinary sense: asphalt sold as good at end of the day.

Majority: contextual approach: can’t interpret act in vacuum, need to read in concert w. property law, comm. law, etc, legal document, purpose is to give Cdns incentive and edge over foreign investment ( asphalt is not “good for sale.”

Minority: plain meaning, ordinary person not expected to know legal definition, Minister’s statements and Hansard seem to support.

Tax Avoidance:

Judicially Created

Gregory v. Helvering- USA business purpose test- Judicial activism

Facts: TP sole owner of United Holding. UHC held 1000 shares in Monitor Sec corp. Created Averill shell corp and transfer the MSC shares to it then transferred to herself and dissolved Averill. US Act s. 112(g) if there is distribution in plan of re-organization then no gain to distribute from receipt ( no tax. Plain meaning within 112(g) ( no tax on distribution of shares when Averill dissolved. Commission of IRA: no substance to the re-org ( ignore it and consider that re-org didn’t happen.

Business purpose test: within contemplation of businesses for business purpose.

1) US cts look at business purpose underlying transactions. Read into act must be a bona fide business purpose.

2) substance over form: ignore the business reorg and look at what was really going on. What was going on economically? Can ignore the intermediate steps if have no validity.

3) sham doctrine: legal entities created for no other reason then tax reasons, ct says no it’s a sham.

Duke of Westminster (HL)- Judicial restraint

Facts: duke employed gardener, wages not deductible. So stopped paying wages and made deed to gardener for a certain amt of time. Duke signed over deed of covenant to gardener for same amt that he was making as a gardener. Duke then deducts that from his own income to lower his taxes.

Issues: Economic or commercial substance of transaction? was there a collateral k for employment in the deed?

Lord Tomlin: no collateral K, Lord Atkin: yes K for gardening. Courts will look behind to figure real legal relationship: ”legal substance” over nomenclature. Economic or commercial substance?: like an employment K, even if doesn’t say that it is, substance of the matter.

Ct: every man has a right to order his affairs to pay lower taxes. Ct doesn’t accept substance of the matter argument of IRS.

Judicial Anti-avoidance doctrines: pre-GAAR: 1) legal substance over form (nomenclature)

2) sham, 3) ineffective transactions doctrine. 4) business purpose test (US)

After Stubbart gov’t enacted broader tax avoidance rules in GAAR.

GAAR : To prevent artificial tax avoidance arrangements.

Only for transactions entered into or after September 13 1988.

Three things for GAAR to work:

1) tax benefit: low threshold, pretty much any deduction, finding of fact (deference to lower level court). Burden on TP to disprove tax benefit.

2) Transaction that is primarily tax motivated. s245(2): General anti-avoidance transaction: need avoidance transaction, tax benefit will be denied from transaction or series is denied.

Avoidance transaction:

s. 245(3)(a) any transaction that, but for this section, would result directly or indirectly in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit

245(3)(b): series of transactions. Look at the transactions separately, if one of the transactions is primarily tax-motivated then subject to GAAR. Transaction includes an arrangement or event.

Series of transactions s. 248(10): shall be deemed to include any related transactions or events completed in contemplation of the series. Cts: pre-ordained steps to reach a goal, ordinary meaning. Transactions after a series also are included.

Two aspects to bona fide non-tax purpose test: 1) objective test: reasonable to conclude was tax motivated. 2) comparative test: “primarily” tax motivated purpose. Sort of business purpose test. Language is “non- tax purpose.” Finding of fact. Burden on TP to disprove.

3) misuse or abuse: court has blended these two together. Go behind the act, policy test, broader test. 245(4): Transaction must result in misuse or abuse of tax regulations. a) misuse, b) abuse.

Burden on Minister on BOP to establish there was misuse or abuse. In Canada Trust co: clear and unambiguous misuse, 2005; In Lipson, 2009 : balance of probabilities.

Income or Loss from an Office or Employment: (s. 5 to 8.):

Characterization

s.248(1): “Office”: means a position of an individual entitling the person to a fixed or ascertainable stipend, etc. Cts have held that office typically exists independent of the person who holds it.

“employment”: position of an individual in the service of some other person.

Wiebe Door Services FCA- legal relationship over nomenclature, employee or indep. contractor?

TP argued that 12 ppl were independent contractors and not employees in ’80 and ’81. Minister: Pay UI and CPP for 3 yrs b/c employees not independent contractors. Tax Court Denning’s Test: 1) Degree or absence of control, exercised by the alleged employer: worked mostly on their own, free to accept or refuse a call. Not required to attend appellant’s place of business. But had one year job guarantee, responsible for warranty within that time: indecisive. 2) Ownership of tools: worker owned truck and tools, appellant only gave special rack: contractor. 3) Chance of Profit and Risk of Loss: worker got paid by job, responsible for own expenses and warranties of service: contractor.4) Integration of alleged employees work into alleged employers business: w/o installers A would not be able to have his business.

Tax court: Contract of service and not a contract for services ( employees.

Organization test: Was the alleged servant part of the employer’s organization? Was his work subject to co-coordinated control as to where and when rather than to how? Integration into another person’s business, useful indicator of economic dependence.

FCA: Denning’s test will always answer yes to # 4, b/c mutual dependency in a business. Need to look at it from worker’s point of view: are they working for lot’s of ppl or are they working for many ppl. Test: Need to look at whole picture, total relationship: control, own equipment, hired helpers, degree of financial risk, degree of responsibility for investment and management, opportunity to profit from sound management, organization. Not exhaustive list. Ask: Is person performing services as a person in business on his own account? Referred back to tax court.

Alexander specific results test for contractor

Specific results test: more likely independent contractor if specific result set out at outset. Here, radiologist agreed to do 9000 examinations per annum ( result set out at beginning.

Incorporated Employees

Advantages to making oneself a corporation: business deductions, low corporate rate taxes, split income with spouse and kids.

Engel 1982, - PSB test (pre-specific anti-avoidance in s.18(1)(p) and s.125(7) )

Facts: TV journalist employee of Global prior to being employed by his own co “Reasoned communications” which contracted his services. Incorporated in Nov. 1975. TP resigned from Global in Oct. 75. TP alleged purpose incorporating was to give himself greater freedom to pursue freelance work and to produce favourable tax consequences. Corp. definition is not an individual ( a 1 person corp. is not an individual and will be taxed under Business rules not under O and E ( Low corporate tax rate. Minister: assessed TP on basis that income included all amts paid by Global to TP’s co and not just amounts actually received by TP from his co as salary. Legal substance: K of service, not K for services if look at K still employee, overlap in dates.

Court: no privity of K b/w tp and employer.

Held: TP effectively terminated employment relationship with Global and properly reorganized his K of service to a K for services. TP gave proper legal effect to corporate structure created by interposition of company and ( at liberty to continue to use structure to his benefit. TP’s appeal was accordingly allowed.

Would GAAR have applied? 1) Tax benefit: lower tax as corp. versus employment relationship.

2) Primary reason: TP said he wanted to do more freelance work and wanted to charge his mother for economic advice. What is driving most of this bona fide non tax purpose or tax purpose?

3) Misuse of specific provisions: ordinary rules allow all of it, so have to come up with argument to explain why was misuse.

Specific anti-avoidance rules to stop Engel situation:

18(1) (p) limitation re PSB expenses: severely limits the expenses that can be deducted by a PSB.

125(7) PSB personal services business not eligible for low tax rate of corp. Individual who performs the services, or anyone related to the incorporated employee is specified shareholder (owns > or equal to 10% of the shares of any class). If co employs more than 5 full-time employees than not PSB.

KEY TEST: Reasonable to regard the incorporated employee as an officer or employer BUT FOR the existence of the corporation.

251(2): related persons: individuals connection by blood relationship, marrigage, common-law or adoption. 251(6): blood relation: child, parent of sibling (immediate family), all in-laws, common-law, and adoption. [Not related to aunts, uncles, nieces and nephews in income tax].

Dynamic Industries FCA 2005 – s. 18(1)(p), PSB limitations

Facts: business of providing steel work services to coal industry. TP held shares in Dynamic was ironworker. Transferred all shares to wife in 1988. Union members could only enter into K with union co, and if he didn’t own any shares then his co could enter into contracts with non-union co. Contracts independently with union firms, through dynamic can do contracts with non-union firms. Dynamic does more and more work and he does less work through the union. TP working for dynamic providing services for SIL which provided service for Fording. 1995-99; dynamics only business was with SIL. May have provided office space, etc. Paid on hourly basis, Dynamic responsible for over-head costs, warranty, and not paid for working on a bid that wasn’t accepted. 18(1)(P): dynamic can’t deduct admin expenses that his wife is doing.

Issue: is it reasonable to conclude that incorporated person is employee for SIL but for the incorporation?

Tax authority: Martindale was working for SIL almost exclusively.

Ct: control, chance of profit/risk of loss, ownership of tools, integration. (same test from Wiebe Doors). Integration: need to look at business before and after the contract with SIL. Shows that business was legitimate on it’s own and not fully integrated with SIL. History matters.

Inclusions

Remuneration: s.5(1) s.6(3).

General Rule: s. 5(1): Income from o or e. “Subject to this part, a tp’s income for a taxation yr from an o or e is the salary, wages and other remuneration, including gratuities, received by the tp in the year.”

s 6(3): expands scope of O and E by including amounts connected to employment and deems them to be remuneration (over-rides actual legal characterization):

Must have one of: (a) during a period while payee was officer or (b) arising out of obligation. Then must have one of c, d, or e: inducement, remuneration, covenant

Payments by employer to employee

s. 6(3) An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement made by the payer with the payee …

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,( INDUCEMENT PAYMENTS

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(e) in consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

Goldman 1953, SCC – payment in connect w/ office

Facts: TP wanted remuneration for all his work on trustee committee wanted 50 000, but got $20 000, gave his lawyer $6000. Paid out over 3 years. First year 6K to lawyer, second yr 7K to Goldman, third yr 7K to Goldman. TP said voluntary payment was gift from the lawyer Black ( said wasn’t taxable.

Held: But ct. said was taxable in connection with office as chairman. No doubt that both Goldman and Black intended that the money be paid to Goldman for services rendered as chairman of the committee ( was employment income. Black was a mere "conduit pipe" between the company and the appellant.

Fries, 1989, FCA- strike pay is income/ surrogatum.

[Under 8(1)(1)(iv): union dues are deductible ( haven’t been taxed. 149(1)(k): unions are exempt from taxes.]

TP chair of union. Appealed that payment by union to TP of $881 of strike pay was taxable as income. Strike pay was equivalent to taxpayer's normal net take home pay during strike period. Was paid from members' union dues, deducted monthly from their wages. TP argued that although nothing in Act exempted strike pay from being included in taxable income, interpretation bulletin issued by Minister indicated that strike pay was not considered income. Argued that union dues were just savings and then return of own capital ( no new source of income. But actually union dues are not taxable and the money goes into common fund, with no right of withdrawl ( not really savings.

HELD: appeal dismissed. Fact that were paid on periodic basis and calculated on usual salary makes it look like income. Surrogatum principle.

Fries SCC 1990: strike pay doesn’t fall within income from a source under s.3.

Cirella 1978- FCTD- tort special damages not income, award for impairment of earning capacity.

Facts: welder in MVA, awarded damages for loss of earnings. Was employed by co but after the injury started own business doing light welding jobs. Received $34,000 in damages. $14, 500 related to lost income as special damages, remainder was general damages. Minister included the $14, 500 special damages in his income as taxable said it was replacing income, using surrogatum principle (Thames Haven Oil Wharf). [Surrogate for the income: 1) receive amount pursuant to a legal right, and 2) taxable as income if substitute for income.]

Held: not income of business b/c wasn’t self-employed yet. Not employment income either. Surrogatum should only be used for business. Damages are to compensate person for harm done to them. Character is not income. Would be false to break damages into loss of income and general damages. There is one tort, one impairment ( damages are all of same nature.

R: Damages are awarded for the impairment of the (’s earning capacity that resulted from the injuries. Not damages for loss of income. Return of capital that was lost due to the tort. (Indirectly subsidizing tortfeasors by not taxing damages, b/c they then pay less.)

Interpretation Bulletin 1987 (p.271-72) Re: damages: Special or general damages for personal injury or death will be excluded from income regardless of the fact that the amount of such damages may have been determined w/ reference to the loss of earnings of the tp in respect of whom the damages were awarded. However, an amount that can reasonably be considered to be income from employment rather than an award of damages will not be excluded from income.

Curran 1959, - inducement payments are income

Brown wanted to persuade A to quit his job and work for Home Oil. So he paid him 250K in consideration for loss of A’s pension, chance of advancement and opportunities for re-employment in oil industry. K says is for consideration quitting the other job, whether or not he accepts job with Home Oil. Brown borrows money and gives to A. A agrees to work for Home Oil. A tries to say money wasn’t income but was capital asset b/c compensation for loss or relinquishment of a source of income, which was itself a capital asset. 6(3)(b): says money has to come from employer to employee ( payer was not actually Curran’s employer. B/c the money came from different corporation.

Martland: The essence of the matter was the acquisition of the appellant’s services and the consideration was paid so that those services would be made available. ( it’s income. Piercing corporate veil by saying the money is all the same coming from corp or Brown. Onus is on TP to prove that payment did not reasonably fall within provisions. Fact that paid by someone other than the employer does not take it outside of the provision.

Payments in Respect of Loss or an Office or Employment s. 56(1)(a)(ii) retiring allowance

Retiring allowance: 56(1)(a)(ii): retiring allowance- as, on account of, in lieu of payment of or in satisfaction of a retiring allowance.

Retiring allowance s. 248(1): a) payment for someone who actually retires. b) amt received in respect of a loss of an office or employment .

Mendes-Roux 1997- amt of wrongful dismissal damages replacing wages taxable, rest is not.

Wrongful dismissal of Mendes-Roux, damages partial compensation for loss of income and partial for the wrongful dismissal. The sum for loss of wages of approximately 3 months compensation for earned overtime, earned vacation and earned sick leave is taxable. The other damages for mental distress and costs aren’t taxable b/c don’t enter into the definition of retirement allowance.

Merrins: “In respect of” widest possible nexus test in retiring allowance definition ( settlement in respect of collective agreement is employment income.

Niles: settlement in respect of human rights complaint following termination of employment is income.

But in: Stolte and Fournier: lump sum payments for mental and physical injuries were non-taxable dmages arising from an injury against the person of the taxpayer.

Ahmad 2002, TCC- compensation for the wrong ( not taxable.

Got almost 500K damages for inducement of breach of K. Not taxable b.c damages for tort of inducing breach of K, distinct from taxable damages for wrongful dismissal. Look at primarily reason for compensation. Was it loss of income or was it compensation for the wrong?

CRA: distinction b/c taxable damages for loss of income and non-taxable for personal injury, and human rights violations damages.

Schwartz 1996, SCC- not retiring allowance b/c never had job.

S offered job with Dynacare would receive salary of 250K per year and stock option. Before contract began, D breached. But S already said that he would be leaving his law firm and quit. D offered to settle. S refused first offer of settlement for 75K. Later offered money for value of stock options for 267K. Finally agreement was made to settle for $360 000 plus legal costs of 40K. S said settlement reflected losses on stock option, salary, embarrassment, anxiety and inconvenience resulting from breach of employment K.

CRA: 1) retiring allowance under 56(1)(a)(ii). 2) Or it’s employment income under 6(1)(a). 3) Or, it’s income from a source of 3(1)(a).

TJ: denies all three arguments, b/c he never had the job with them. Finding of fact was that the settlement was primarily for embarrassment, inconvenience and anxiety. FCA: reversed TJ’s finding of fact.

SCC: Fed ct shouldn’t have messed with TJ’s finding of fact. But still reason out the whole case.

Can’t be retiring allowance, b/c he never held the office or employment. Act doesn’t cover loss of potential office or employment. Can’t lose employment that you never had.

[Could make argument that it is capital payment, b/c it could be compensation for loss of capital asset. Also because it’s a lump sum, not periodic, so doesn’t have characteristic of income. ]

Taxable Benefits s.6(1)(a):

s. 6(1)(a):Value of benefits:

1) the value of board, lodging and other benefits of any kind whatever .

2) received and enjoyed by the tp in year in respect of, in the course of, or by virtue of an office or employment: nexus test.

3) value of the benefit.

Characterization of Benefit:

Lowe 1996- Benefit test: primarily pleasure or primarily business w/ personal pleasure beyond de minimus

Facts: Account exec went on trip, incentive package for independent brokers whom he dealt with for employer. Argued trip was business purpose and had to go, not personal trip and not in-kind benefit that was taxable. His wife required to attend, b/c had to wine and dine with the brokers’ spouses. Brokers were awarded points based on how much they had sold, and could win a trip .There were business meetings during the trip, account execs had to accompany brokers and talk business.

Minister: the trip was 62% personal pleasure for him and 75% for his wife was personal and this was taxable benefit as a percentage of the cost of the trip. TJ: accepted wife’s portion, but for TP said it was only 20 % personal pleasure.

CA: Travel benefit test: is whether the trip was primarily for business and personal aspect is merely incidental (de minimus) then not taxable benefit. Benefit if: Primarily for personal pleasure OR primarily business, but personal pleasure is more than incidental there is clearly taxable benefit, allocate by percentage.

Held: Trip was primarily for business, b/c court looked at everything was required to do business purpose things. Adds up the time that he would have for personal pleasure very little time ( just incidental. No taxable benefit at all.

Dunlap 1998 – Christmas party taxable benefit.

Christmas party was taxed as benefit b/c party costs were more than significant $300/person. Could fit it into Lowe framework by saying that the personal aspect was more than incidental.

Interpretation bulletin: events up to $100 per person not taxable.

Huffman (1988)- reimbursement is not benefit.

cleaning bill for plainsclothes cop. Not material advantage just re-imbursement for out of pocket expenses. Can draw distinction b/w a benefit and a reimbursement.

Fuzzy though see Gernhart (1996): tax equalization payment for lower salary in Canada then she had in US. She said that it was not a benefit but was a reimbursement. Ct didn’t buy it, unfair to any other Canadian resident.

Relationship to Office or Employment

Savage SCC (1983)- in respect of- wide scope

Facts: TP employed by insurance co, completed 3 life insurance courses. Employer awarded 100 for completing each course. Employer deducted it and reported it on her t4a form as additional income.

TP argued that it wasn’t received in respect of her office and employment. TP says it was a gift. CA: says in the nature of a gift not remuneration for services. The courses may benefit the employer but are not direct benefit.

SCC: “in respect of” hard to conclude that the courses weren’t in connection to or in relation to her employment.

Additional:

Mindszenthy: Employer gave tp a rolex watch at his house. Employer deducted the expense ( wasn’t a gift, was a taxable benefit. CRA admin policies: up to $500 a year for gifts to employees for religious holidays, weddings, etc. The employer can deduct it and it is tax free to the employee.

Waffle- 3rd party gave benefit still counts. Benefit doesn’t have to come from employer. Car dealer received trip from Ford, not from his employer. Still in respect of employment, even though it’s a third party.

Giffen- airmiles benefit. Employee gets aeroplan points from flying for work. Can use them for personal use ( it’s a taxable benefit. “Free travel was not a benefit received in a personal capacity and wholly divorced from employment.”

Valuation

Detchon avg cost of education.

Teachers at boarding school, kids go to the school free. Minister said taxable benefit. They argued was necessary for the employees and expected of them, almost compulsory. The teachers only received 25-30 000/year. And the student tuition was over 7000/year. No difference in salary if you didn’t have a kid going to the school.

Issue: how to value the benefit of the free tuition?

Marginal cost of having the kids in the class- one more person almost zero b/c never had full capacity.

Average cost divided by students was 5000/year. FMV for tuition was 7000/year. Cost of alternative English language education 600/year. Sometimes ACT uses FMV, not in this provision though. Could interpret this to mean that Act didn’t mean FMV in this case. TP says marginal cost ( since cost to school is nil then value of benefit would also be nil.

Held: Average costs of educating a student is a sensible method of valuing the benefit.

Benefits in Respect of a Housing loss 6(19) to 6(23)

6(19): Benefit re: housing loss:

For the purposes of 6(1)(a), an amount paid at any time in respect of a housing loss (other than an eligible housing loss) to or on behalf of a tp or an arm’s length person in respect of, in the course of or because of an office or employment is deemed to be a benefit received by the tp at that time because of the o or e.

• These rules enacted in 1998 limits decision from Ramson: move from Sarnia to Montreal, sold house at loss, employer compensated for portion of the loss. Ct say it was reimbursement, not benefit ( not taxable.

6(20): Benefit re eligible housing loss:

For eligible housing loss, tax part of benefit for relocation but only ½ of the amount that exceeds $15 000.

• e.g. year : $20 000- 15 000= 5000/2= $2500, benefit in year 1.

• year 2: $10 000- [add year 1 and year 2=$30 000- 15 000)/2= 7500]= 2500 benefit in year 2.

First 15 000 is tax free anything above that is 1/2 taxable whenever you get it

6(21): Housing loss:

the amount by which the greater of the cost of the residence and its highest FMV during the previous 6 months exceeds its FMV at the time if it is not disposed of or the lesser of its FMV and the proceeds of its diposition if it is disposed of.

• Also can peg the value to the highest value of the house in 6 month period before sell it.

• d) fair market value – actually haven’t sold it

6(22) Eligible Housing loss

a housing loss in respect of an eligible relocation of the tp, no more than 1 residence may be designated in respect of an eligible relocation. Have to move 40km closer to new work location, employer compensates you for loss.

Relocation Assistance: Moving expenses If employer reimburses then it’s not taxable benefit, it’s just reimbursement for moving: Pollesel. Moving expenses are not benefits they are reimbursements. If employer doesn’t reimburse, then the tp can deduct moving expenses from taxes ( its equal b/w population.

Gov’t enacted 6(23) “Employer provided housing subsidies” to over-rule Hoefele and Splane: “For greater certainty” Basically all employer-provided housing assistance on relocation of an employee included in income regardless of the form in which such assistance is received.

(Not related to moving expenses-that is just getting to the new location).

Phillips – employer provided housing subsidy is benefit

Employer gave employee 10 000 cash payment for higher cost of living. Court said was a benefit. “relocation payment” Philips is still good law.

Forgiveness of Debt s.6(15)

No nexus test- for employment in this section

s. 6(15): “Forgiveness of employee debt” a) deems benefit when debt is settled or extinguished

b) the value of the benefit is the amount forgiven.

6(15.1): forgiven amount: If you have a loan from employer and it is forgiven that is the benefit.

e.g. employer lends 50 000, you pay some of it back. Principal amount owing 40 000, employer says pay 5000 and we’ll call it even ( the benefit is $35 000.

e.g. UBC housing loan 45 000, forgive 1/5 each year over 5 years. Have 9000 taxable benefit each year.

NOTE: Better to have housing loss that is eligible then to forgive debt. B/c forgiven debt is fully taxable whereas eligible housing loss the first 15 000 is tax free and the excess is ½ taxable above that under 6(20).

McArdle - connection b/w employment and forgiveness of loan

Relationship b/w forgiveness and employment under 6(15) which has no deeming rule within it. The tp owed employer almost $15 000, they wrote it off when he quit. TP said it was b/c they knew it would be hard to collect. Not that it had something to do with his employment.

Court found that forgiveness of the debt was part of arrangement to end his employment: the thing that motivated the forgiveness of the loan was the existence of the contract of employment. Enough connection b/w employment and forgiveness of the loan( to put into realm of taxable benefit

Interest free and low interest Loans s.6(9) and s80.4(1):

6(9): Amount in respect of interest on employee debt : where amt is deemed to be benefit under 80.4(1) the amount of the benefit shall be included in computing income.

s 80.4(1): if you get low interest or subsidized low interest or no interest benefit then it’s a benefit pegged to a prescribed rate. Has nexus test: “because of or a consequence of a previous, current or intended O and E or b/c of services performed or to be performed by personal services business deemed to have received benefit:

The benefit is the difference b/w the interest at prescribed rate and the actual interest charged by the employer and paid by the employee. Also if the employer pays any interest that is included, if the employee pays any interest that is deducted.

Deemed benefit= (a+b) –(c+d)

a= interest on loans or debt at prescribed rate.

b= Interest paid on debt by employer.

c= interest paid on loan within 30 days of end of year

d= any portion reimbursed.

Example

prescribed rate =5%, 100 000 no interest loan from employer.

The benefit would be 5000 each year.

Employer pays mortgage interest subsidy to loan at 2% to bank, worker pays 3% to bank.

a=5000 (5% of 100 000)

b=2000 (2% of 100 000)

c=5000 (2% employer+3% worker)

[5000 (interest at prescribed rate)+2000 (amount employer paid)]- 5000 (interest paid that year by employer and worker)= 2000

Benefit is $2000 a year paid by employer to bank to give worker a lower interest rate.

Example

UBC: 50 000 mortgage subsidy over 5 years, 60 months= 833.33/month

10 000/year.

Right now the prescribed rate is 1%, but the bank rates are higher 5%.

100 000 for 5 years at 5%= amount borrow at.

But (a) is computed at prescribed rate of 1% ( a= 1000

b=10 000- amount of employer’s subsidy

c=5000 (5% bank rate of 10 000)

[(1000+ 10000)- 5000]= $6000

Tax benefit in $6000 for each year.

s. 6(23): Any eligible housing loss is a taxable benefit. Does it apply? But 6(9) is more specific in that talks about a specific amount and gives a formula ( most likely to apply to the UBC situation.

Home purchase loans and home re-location loans s. 80.4(7) and s.110(1)(j)

s.80.4(7) home purchase loan: loan or debt incurred by tp in circumstances of 80.4(1) used to acquire or repay a loan or debt that was used to buy dwelling, loan is received by virtue of o or e.

• Different nexus test b/c the loan or debt was incurred because of or as a consequence of the employment ( whereas 6(1)(a) nexus links the benefit to the employment.

s. 80.4(1.1): “but for test”: a) the terms of the loan would have been different or b) the loan would not have been received. BUT FOR the employment

s.80.4(4): the prescribed rate stays fixed at the rate that it was when the loan was given. Unless the prescribed rate goes down, then get the lower rate. But never have to pay more if it increases.

s. 80.4(6): after 5 years if the loan is outstanding the rate re-sets to whatever the prescribed rate is then.

Home Relocation Loan: (special type of home purchase loan)

Deduction under s.110(1)(j): if have home relocation loan then certain % deemed interest is tax free on the first $25 000. e.g. under first UBC re-location loan, the deemed interest.

248(1): defines home re-location loan( must be 40km movement closer to the worksite

s.80.4(3)(b): this rule doesn’t apply if the loan is included in the employers income. If the loan is forgiven, there is no deemed interest deductible.

Insurance Benefits s.6(1)(f)

s. 6(1)(f): employment insurance benefits: wage loss replacements payments (sickness or accident, disability insurance, income maintenance) from a group plan are taxable if employer has contributed to the plan. Elements: 1) benefits payable on a periodic basis, 2) benefits payable pursuant to one of the plans, 3) employer has made a contribution to the plan.

Opposite for individual insurance benefits are not taxable. But if the employer makes contributions then the premium is taxable b/c the disability benefits aren’t included in your income.

|If employer pays all or part of premium then: |

| |Premium |Disability Benefit (received) |

|Group |Not included |Included |

|Non-group |Included |Not included |

Unionized employees said that group benefit plan under collective agreement was actually employee paid plan, b/c was trade- off for higher wages. Ct rejected argument in Dagenais and Leonard.

Tsiaprailis, SCC Broadens use of surrogatum principle

TP got long-term employment benefits. When insurer cut her off, got lump sum settlement: past benefits, future benefits and costs. Minister taxed her on the lump sum settlement. Then allowed adjustment for legal expenses.

Tax court: not subject to 6(1)a and 6(1)f b/c not payable on periodic basis

FCA: the payments up to the settlement were payable on a periodic basis, they just weren’t paid. But the future payments aren’t taxable.

SCC: SCC applied surrogatum principle to the employment income part of the settlement.

Dissent: it’s paid pursuant to the settlement ( not taxable.

Majority: part of the settlement was to replace the disability payments up to the time that she settled ( that part is taxable under the surragatum principle. The future amount is a capital payment

Allowances 6(1)(b):

Allowance for personal or living expenses or any other purpose. Doesn’t have to confer economic benefit. Generally means a periodic or other payment received by an employee from his/her employer, in addition to salary, if the employer doesn’t have to account for it’s use. Distinguish with reimbursement, which is just paying back a fixed accounted for out of pocket expense.

MacDonald 1994,- factors of allowance

Facts: $700 each month as a housing subsidy from employer b/c he moved from Regina to Toronto

Allowances are usually cash: 1) Arbitrary amount predetermined sum set without specific reference to any actual expense or cost, 2) usually for a specific purpose, 3) don’t have to account for it’s use.

Analysis: Looking at 3 factors, the $700 is an allowance. Distinguished from a reimbursement, which TP would have to submit receipts. Also distinct from accountable allowance, which is an advanced that must be accounted for after the fact.

North Waterloo Publishing 1998 -allowance

Meal allowance for $1440. Reimbursement for living expenses or taxable allowance?

Allowance b/c pre-set amt for food, didn’t have to show receipts, paid in advance.

Exemptions to Inclusions

6(1)(b)(v)- 6(1)(b)(vii.1): reasonable allowance for travel expenses:

s. 6(1)(b)(v): Reasonable travel expense allowances received in selling property or negotiating contract for employer.

s. 6(vii) Reasonable allowances received by employees (other than for selling prop or negotiating K) for travel away from municipality or metro are where normally worked.

s.6(vii.1) Reasonable allowance (other than selling prop or neg. K) for use of a motor vehicle in performing employment duties

Blackman – no allowance for sojourning

Employee got per diam of $4 per day while he was working in another city for 3 to 4 months. TP tried to argue that it was a travel allowance and so should be exempt from tax.

Ct: says he’s not traveling, which would be to go back and forth. Instead he’s sojourning, which is just living in another place and working there. Don’t get an allowance for sojourning, only for traveling. Factual distinction: might depend on what type of place staying in, how long, etc.

Bouchard – travel to part-time job s.81(3.1)

Quebec gov’t employee who had PT job as professor in Sherbrooke. Couldn’t deduct his travel because it wasn’t part of his job. It was traveling to get to his job.

Reversed by subsection 81(3.1) Exempt reasonable travel expenses for PT employees for travel not less than 80km away from main job or have a part-time job at university or college than the part-time job has to be at least 80km from principal residence. (Cost of earning the income at another location rather than a personal cost of getting to another job.

s.6(6): Employment at a special work site

Exempts benefits or allowances for board and lodging and travel to and from in 2 circumstances:

a) Special work site and/or b) Remote work location: Must be away from principal residence for greater than or equal to 36 hours for exemption. And must be of a temporary nature.

s.6(6)(a)(i); special worksite: location where TP performed duties of temp nature, if they maintained another location as principal residence that was available and not rented and b/c of distance it was unreasonable to return daily from the special worksite.

Guilbert – poor analysis of s.6(6)

TP took job as editor of nwspr in Quebec city, it was a permanent job, but he took it on assumption it was temporary, because he was going to get promotion to Ottawa. Employer provided him with apartment in QC free of charge. TP worked there for 3 years. Maintained home in Eastern townships whole time, returned there every wknd. His wife stayed at Eastern township year round, but kids lived with TP in QC. TP said only occupied the apartment 50% of the time, said he didn’t have exclusive use of the apartment the whole time, b/c other employees sometimes stayed there. TP argues that QC is a special worksite, so his allowance board and lodging allowance is exempt.

Analysis: Ct just says it’s not a special work site!! (Duff yells and screams about how shitty this decision is). The court should have worked through the provision like so:

To use 6(6) need to establish: 1) location where duties are temporary, 2) need to maintain principal residence that wasn’t rented and couldn’t return to b/c of distance, available for occupancy.

(Note: 81(3.1) distance is 80Km, but for housing subsidy it is 40km closer to the job.)

Principal Residence? Relevant that his kids were with him in QC, might suggest that it’s his principal residence.But going back to Eastrn township every wknd and fact that wife is there points to it being the principal residence.Fact that other ppl use the QC apt might point away from it being his principal residence.

Temporary job? works there for 3 years, doesn’t matter that he thinks of it as temporary. It is a permanent job that he accepted in QC, he wasn’t moved there temporarily to do the job.But if it was permanent, why didn’t he sell the house in Sherbrooke and move everybody to QC?

CRA: “by reason of distance,” generally should be 80Km away, but exceptions to general rule, factors to consider: number of hour of work for each special work site shift, amt of time that would be required for travel and time of day, means of transportation available and the route, length of rest period if returned home daily, health of employee.

Deductions s.8(2)

s.8(2): deductions must be stipulated in section 8, if not listed in the act not able to deduct it. (Unlike in property and business income, where reasonable expenses can be deducted.)

Non-refundable Canada Employment Credit s.118(10).

Tax credit for employment expenses s.118(10), doesn’t come off the top of income come off the bottom. Lowest marginal rate: 1000 x lowest marginal rate= $1044. Exempts the federal portion of tax on the first $1044 of employment income.

Legal expenses s.8(1)(b) and s.60(o.1)

s.8(1)(b) Can deduct legal expenses incurred to collect or establish a right to remuneration owed to the employee by an employer or former employer.

s.60(o.1): Can deduct legal expenses to establish a right to collect retiring allowance.

Meals s.8(4)

s.8(4) An amt spent for a meal shall not be deducted under paragraph 8(1) (f) or 8(1)(h) unless the meal was consumed while TP was required by the taxpayer’s duties to be away, for a period of not less than twelve hours, from the municipality where the employer’s establishment to which the taxpayer ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located.

Certificate of Employer s.8(10)

s.8(10): employer must prepare certificate and employee files it with return. The employer’s consent is necessary to say that the requirements are met for meals, travelling deductions, etc.

Travelling Expenses s.8(1)(h) and s.8(1)(h.1)

s.8(1)(h): travel expenses other than motor vehicle expenses can be deducted if the TP:

(i) was ordinarily required to carry on the duties of the o or e away from the employer’s place of business or in different places, and

(ii) was required under the contract of employment to pay the travel expenses incurred by the TP in the performance of the duties…

except where

(iii) received an allowance for travel expenses that wasn’t included in income.

s.8(1)(h.1): motor vehicle expenses deduction, essentially the same rules as 8(1)(h).

Luks 1958 – commuting expenses are personal expenses

Facts: electrician worked at 3 different sites, distances of 8 miles, 9 miles or 47 miles from his house in North York. He deducted his travel expenses under 8(1)(h): motor vehicle costs and 8(1)(j): capital cost of his car. Argues that travelling to his jobsite is part of his job b/c he has to bring his tools with him.

Ct: practical to do so, but doesn’t mean that it’s part of his duties. Commuting expenses are not part of his job, just personal expenses.

Hoedel: RCMP dog, transport is part of duty

RCMP in charge of training dog, had to take him back and forth. That was a necessary expense in course of duty ( deductible, not personal expense.

Chrapko – commuting costs and personal choice of where to live

TP worked at 3 different race tracks as teller, two in Toronto and one in Fort Erie, lived in Niagara falls. Worked at Fort Erie only 25% of the time.Sought to deduct all of the travelling expenses.

Ct. Allowed deduction for cost to Fort Erie only. Didn’t allow deduction to go to T-dot b/c that was just commuting cost to where he usually worked and it was his own choice to live in Niagara falls.

Evans- car as office ( allowed

Psychologist who went to different schools each day from her home carrying workbooks etc with her. Ct. allowed deduction for all expenses including from her house to school at beginning and end of the day b/c she had no choice but to physically leave all the stuff in her car trunk permanently. ( unclear whether Luks is still good law.

Reasonable. s.67 and s.67.1(1)

s.67. the outlay or expense must be reasonable in the circumstances.

s.67.1 (1) …an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per cent of the lesser of (a) the amount actually paid or payable in respect thereof, and (b) an amount in respect thereof that would be reasonable in the circumstances.

Rationale is that even when it’s for business, there is some personal enjoyment.

**Limitation for meals and entertainment is excluded under s.62(1) for moving expenses.

Moving Expenses s. 62(1), 62(3) and s. 248(1)

1) what qualifies as an eligible moving expense? 62(3)

2) what is an eligible relocation? 248(1)

3) what are limitations on deductions? 62 (1) (a) to (d).

Limitations on Deductibility for moving expenses s. 62(1):

62(1)(a): moving expenses not deductible if not paid by TP in respect of employment

62(1)(d): can’t deduct moving expenses if reimbursements and allowances aren’t included in income.

62(1)(c]: deduction limited to the amount of income made that year at new work location or from carrying on the business or if move for ed the deduction is limited to the amount of fellowships, bursaries, grants.

62(1)(b): non-deductible moving expenses for the preceding taxation year may be deducted in the subsequent taxation year or until have income. Unlimited carry-forward.

S. 62(3) Eligible Expenses

(3) In subsection 62(1), “moving expenses” includes any expense incurred as or on account of

(a) reasonable travel costs in moving the family members to new residence (including a reasonable amount expended for meals and lodging).

(b) cost of transporting or storing household effects

(c) cost of meals and lodging near the old residence or the new residence for a period not exceeding 15 days,

(d) cost of canceling the lease of the old residence,

(e) selling costs in respect of the sale of the old residence,

(f) cost of legal services in respect of purchase of the new residence and any tax, fee or duty (other than GST) imposed on the transfer or registration of title to the new residence, only where old residence being sold.

(g) Mortgage interest, property taxes, insurance premiums and costs associated w. maintaining heat and power to a max of $5000 for a vacant “old residence” for period where reasonable efforts being made to sell it.

(h) cost of revising legal documents to reflect the address of new residence, of replacing drivers’ licenses and non- commercial vehicle permits (excluding cost for vehicle insurance) and of connecting or disconnecting utilities,

but, for greater certainty, does not include costs (other than costs referred to in paragraph 62(3) (f)) incurred by the taxpayer in respect of the acquisition of the new residence.

Eligible Relocation

Defined in s.248(1): (p.1954) a) the relocation occurs to enable the TP to i) carry on business or to be employed at the new work location ii) be a FT student.; b) both old and new residence are in canada; c) not less then 40 km b/w old and new residence.

Physical Transfer

Storrow 1978 – physical transfer

( moved from Ottawa to Van deducted moving expenses including: difference in price b/w old and new residence; the mortgage interest attributable to the difference; land registry fees; installation costs of a new dishwasher and locks. ( argues were moving expenses. Minister argues not really expenses, just extra costs incurred in replacing an asset, the old residence.

Ct: agrees with minister “Only outlays incurred to effect the physical transfer of the TP, his household, and their belongings to the new residence are deductible.” Not the costs incurred in connection with the acquisition of a new residence. ( Deduction for land registry fees now allowed under 62(3)(f).

Ball 1996- search for housing ineligible

Travel to search for housing and employment not included as a deductible moving expense.

Critchley 1983- home includes dog

costs to move family dog are covered because the French says home not family (dog is covered b/c is part of the home or household effects. (horse would not be covered: Yaeger).

Reasonable efforts made to sell old residence:

Lowe

where there is no ad made or family members are living there, not a reasonable effort to sell.

Cusson,

told ppl about intention to sell and later contacting a real estate agent was a reasonable effort to sell.

Purpose of Relocation

Beyette – delay move for legitimate reason, no time limit.

Facts: TP lived in Winnipeg, got new job in Beausejour in ‘81. B/w ‘81 and 1986 commuted from Winnipeg to Beausejour, daily roundtrip of 110km. Moved in 1986 to BJ.

Issue: is he entitled to moving deduction when he had already been working there for 5 years?

Analysis: good reasons for delaying the move: illness, lacking housing, inactive selling market, probably irrelevant. There is no time limit in the Act. No basis for Minister’s claim that 5 years is unreasonable. Allow TP’s appeal.

Beaudoin: follows Beyette.

reaffirms ability to delay move for legitimate reasons. TP got job in Courtnay in 1996 but didn’t move there until 2003 from Nanaimo. Still eligible purpose follows Beyette.

Abrahamsen- move for purpose of finding a job, allowed.

Tp doesn’t have to have job already, can move for the purpose of finding a job in the new location, but might be disallowed if never do find employment or attend post-secondary at the new location.

Howlett 1998- no new work location/job, just moving closer to work. Disallowed

sales rep moved from Brantford to waterdown ON after got promotion whereby he needed to spend more time at work in Missasuaga. No new work location ( was disallowed the deduction.

Broydell 2005- moving closer due to traffic, no new work location. Disallowed

employer said move closer after TP had probs getting to work because of delays with commuter train and winter driving. No new work location ( disallowed moving deduction.

where is the TP ordinarily resident

.Most litigated issue

Rennie, 1989 – ordinarily resident

Facts: Prof moved from Montreal to Ed to teach. Left his home with relative who paid current expenses, with understanding that he could come back at any time. Working Ed for 2 years. Then moved to Vic and after a year decided to move there permanently and sold house in Montreal.

Claimed moving expenses from: 1) Montreal to Ed in 1981; 2) from Ed to Vic. in 1983; 3)from Montreal to Vic. 1984.

Ct. interprets “ordinarily resided” the settled routine of his life, where he regularly normally or customarily lives. Was ordinarily resident in Vic ( could not have moved from Montreal to Victoria in 1984. Person can’t be ordinarily resident in 2 places at the same time even if own two house, one must be primary.

Additional cases on Ordinarily resident:

Jaggers: Allowed to deduct costs of old resident sold more than 2 yrs after moved to new residence. Broad interpretation of purpose. Disallowed.

Neville: Prof took job in Winnipeg during sabbatical, rented there. After sabbatical quit job in Peterbrough, sold home in Peterborough and bought home in Winnipeg. Minister said Peterborough no longer old resident, so couldn’t deduct costs. Tax court said could b/c rental in Winnipeg was temporary ( Peterborough was still old residence. Allowed/

Pitchford: Moved from Vic to Moose jaw in 93 then Moose jaw to Saskatoon in 94. Wanted to deduct cost of moving furniture stored in Vic to Saskatoon. Ct allowed b/c wasn’t settled, and didn’t take up an ordinary residence until got all stuff to Saskatoon ( Vic still old resident. Allowed.

Ringham: sold home in Kanata and rented condo in same city commuted weekly to Thonrhill where he stayed in Hotel. Was supposed to go to Budapest, project fell through so moved to Richmond Hill and worked FT at employer’s office there. Taxpayer argued that realistically only one move from home in Kanata to Richmond Hill. The condo and holiday inn were transitionary and temporary, didn’t unpack boxes and kept a lot of stuff in storage. Allowed.

Calvano: TP moved from Brampton to Coquitla in 1995 but didn’t sell ON home for 16 months b/c tenant insisted kid’s school year not be interrupted. Ct said no, he ordinarily resided in Coquitlam ( can’t deduct cost of selling ON home. Disallowed.

Turnbull: Newfie worked in BC but kept home in NFLD, returned there each yr and listed nfld on tax return. Disallowed costs of moving to and from BC.

McDonald: NS went to AB for 6 weeks for work. Disallowed expenses of back and forth b/c kept house, girlfriend there, driver’s licence, bank account etc. Just incurred travel costs, not moving expenses.

But in Cavalier, teacher who took 4 month contract allowed moving expense from Delta to Fort Mac, even though wife stayed behind and he didn’t change his address.

Distance of Relocation

new residence must be at least 40 km closer to the new work location than the old residence.

Giannakopoulus – shortest route coupled w/ normal route to public not straight-line.

Moved from stony plain to Ed to work at UofA. Was 44km by odometer. Minister used straight line method to measure it was only 36km, so she couldn’t deduct the costs of moving.

Tax Court: the straight line method is unrealistic, b/c it doesn’t measure how ppl actually commute on the roadways. Leads to absurd results, such as a lake being in the middle.

Test: should be the shortest route one might travel to work coupled with the notion of the normal route to the travelling public. Would leave room to consider travel not only on roads but on ferries and rail lines.

(Followed in Nagy : common sense, realistic practical look.

Limit on Deductible Amount

Hippola – only deduct against what made at job moved for.

Facts: owned house in Navan, moved to Waterloo for work, but wife and family remained in Navan. Moved back to Ottawa area with purpose of starting his own business but then was hired by another corp. Ct said that he didn’t earn anything from his own business (the business) because didn’t actually start one ( couldn’t deduct the moving expenses. However, if he had moved back with the purpose of working for the corp. then he could have deducted moving expenses. This case illustrates the effect of the business in paragraph c.

Business and Property

s.9(1) Profit= revenue-expense. 9(2) Loss= subject to s.31

9(3), income and loss from profit doesn’t include a capital gain or loss (those rules are in other sections).

Characterization:

s. 248(1): business: Includes a profession, trade, calling, trade, manufacture, undertaking or any kind whatever, and adventure or concern in the nature of trade. (AINT) But doesn’t include office or employment.

property: property of any kind whatever, whether real or personal or corporeal or incorporeal and w/o restricting the foregoing includes: a) a right, a share, a chose in action; b) unless contrary intention, money, c) a timber resource property, d) work in progress of a business that is a profession.

• Note: Right to compete is not property, even though it’s worth something and you can sell it.

Ordinary meaning of Business

Smith v. Anderson, 1880: activity and profit

anything which occupies the time, attention and labour of a man for the purpose of profit is business: 1) activities, 2) profit-making purpose.

Morden, - no REOP, gambling is hobby.

Facts: TP owned a racing stable, always placing bets on horses, games, cards, etc. Sold most horses in 1948. Continued to gamble was assessed for gambling wins in 1949, 51, 52, 53. Was assessed on basis that his gambling was a business.

Lala Indra Sen: subjective dominant purpose, profit or entertainment?

Graham v. Green: bookie calculates the odds and makes profit by other ppl betting versus the better who can’t expect to win all the time ie. hasn’t calculated the odds. For a hobby not usually reasonably expected to win. REOP.

Ct: gambling is a hobby not a business, REOP.

Cts. generally consistent on the gambling cases, don’t tax them. USA does tax.

Treasure Seeking

McEachern: searching for treasure, it was a well-organized business endeavour ( had to pay tax on it as a business.

Tobias: searching for treasure unsuccessful tried to say it was a business to deduct the losses. Ct allowed it following McEachern.

Cameron: caught killer whale and sold to aquarium. Was pro salmon fisherman, not whaler ( it was a windfall. Did it twice with a group of ppl. Ct says just a windfall, but maybe if it had happened 3 times might be a business.

Extended meaning AINT: “adventure or concern in the nature of trade”

Taylor, leading case on AINT

Facts: cdn metal co, parent co didn’t want subco to have more than 30 days worth of supply. TP bought lead more than 30 day supply, to lock in supply of lead for the co. TP bought 1500 tons of lead, entered into future contract. Lead prices went up and he sold it to co and made almost $83K profit. It was a one time thing to buy and sell lead. He says didn’t even intend to profit.

Issue: capital gain or income from a source? CRA says its AINT ( taxable.

1) Manner of dealing test: deal with something in same way that a trader would. Factors to look at : quick turnover, soliciting buyers, Improving properties value can be a factor. Not all traders do that, some just buy low and sell high.

2) nature and quantity of the subject matter: whisky case (can’t use it to own dividends or rent it out) can only use it for sale or personal use. Rutledge: Toilet paper: a) sale, b) personal use, c) investment. If it’s (a) then likely for trade. Link between nature and quantity and intention to profit. Land and art work could fit into all three categories ( nature and quantity doesn’t stamp it as being part of a trade.

3) Intention to profit: not necessary, not sufficient. But could be relevant.

4) Number of transactions is not determinative, frequency isn’t necessary because act says “an adventure.”

Following factors don’t take it out of AINT: 1)No organized activity was evident. 2) Product was enhanced or not. It could make it more like an adventure. e.g. fixing up a ship and then selling it for a profit. But not necessary.3) was a single or isolated transaction 4) it was different from and unconnected to ordinary activities 6) purchased without intention to make profit

Sometimes academics and courts say that the main test that ties the factors together is intention, the factors are just objective manifestations.

CRA bulletin on transaction as AINT. (Same distinction related to capital gains.)

All circumstances must be considered, no single criterion can be formulated. But principle tests are:

1) Manner of dealing: comparison, efforts to attract purchasers, quick turn-over, enhancements to improve marketability, TP’s commercial background in similar area.

2) nature and quantity of property excludes possibility that its sale was realization of an investment or was otherwise of a capital nature, or could have been disposed of other than in trading nature. Factors: if TP isn’t in position to operate or lease property than presumption bought it to re-sell it.

3) TP intentions, as established or deduced, is consistent with other evidence pointing to a trading motivation. Factors: intention to make profit is corroborative to tests above not sufficient by itself., secondary intention test.

Regal Heights- secondary intention test/ (use for capital gains too)

Facts: TP bought and then sold vacant land in Calgary. Primary purpose was to build a shopping centre. Court said that secondary intention was to resell the property at a profit. Secondary intention test: Sort of like a “but for’ test. Would you have bought the property BUT FOR the prospect of reselling it for a profit? “possibility of re-sale at a profit was one of the motivating considerations that entered into the decision to acquire property in question.” ( AINT.

Losses= expenses – revenues.

Premised on deductible expenses for businesses.

Two limits on deductions:

s.18(1)(a): purpose of earning income test.

18(1)(h): personal and living expenses

20(1)©(i)( interest- income earning prupose test.

s. 248(1) “personal living expenses”: expenses not connected w/ a business carried on for profit or with a REOP.

s. 31: limits losses on farming businesses to up to $15000. If chief source of income is neither farming nor farming in combination with another source.

Reasonable Expectation of Profit (REOP)- for personal type situations:

Stewart 2002 scc- source of income test includes REOP.

Facts: Stewart owned 4 rental condos, sustained losses due to significant interest expenses. Only put $1000 down and got loan for $79K from developer. Losses are interest, operating expenses, capital cost allowances vs. rental income. Projected to loose money for 10 years. Can sell it later for capital gain ( only ½ tax. Tax shelter: Generating losses to shelter other sources of income for 10 years and then sell the condo and get ½ taxable capital gain. Stewart reported the losses, higher losses than expected, sold one unit to try to pay down the losses, but still had significant losses.

Issue: Property as source of business income?

Minister disallowed on basis that the TP had no REOP and ( no source of income.

SCC: test is too uncertain, imprecise and leads to hindsight assessment of business judgment. REOP test is used to see if TP’s activity is a hobby or a personal endeavour rather than a business only. Here TP rented the 4 condos to arms-length renters in order to obtain rental income ( commercial nature. No personal element. **REOP can be used to determine hobby vs. commercial activity ONLY:

“Pursuit of Profit” Two-stage test:

(1) is the activity of the TP undertaken in pursuit of profit, or is it a personal endeavour? (does source exists?), REOP test used here. Effect of REOP is to disallow losses, but it’s at earlier stage at the characterization stage.

(2) if it isn’t a personal endeavour, is the source of the income a business or property? (is source b or p?).

**As long as investment isn’t personal in nature, it constitutes a business or property income source

Inclusions

s.9(1)( include your profit.(net concept= revenue-expenses).

s. 12-17( various amounts that must be included in computing a TP’s income from a b and p.

Gains from illegal activities

No. 275 – illegal income included

Facts: all income from 4 years was profits from prostitution.

Issue: Are the profits of prostitution taxable, seeing as it is an illegal activity?

TP: it’s illegal ( shouldn’t taxable as govt is then benefiting.

R: once courts are satisfied that income is taxable in nature, it is immaterial that it came from illegal act. Policy reason: why should honest ppl have to carry the burden. crooks shouldn’t be able to benefit from illegal activity. Provincial laws may vary ( tax should be consistent, as somethings might be illegal and others not.

Smith v. Minister Finance, PC- proceeds from prohibition taxable.

privy council overturns SCC decision that proceeds from liquour during prohibition not taxable. PC said taxable.

Damages and other compensation

Manley surrogatum for contract breach damages

Facts; Levy asked TP to find purchaser for controlling shares of a co for a finder’s fee. He did so. Levy refused to pay finder’s fee. TP sued for damages and awarded damages for breach. Minister included damages in TP’s income.

Issue: are damages for breach of warranty income from a b or p?

Analysis: TP received damages, precisely what he would have got if contract fulfilled. Distinct from damages for wrongful dismissal. Surrogatum principle applies because the damages replace the profit that he would have got, which would have been taxable.

London and Thames – origin of surrogatum

(Surrogatum): 1) receive money pursuant to legal rights, 2) amt being replaced has the character of income. and would have been included for tax purposes.

Donna Rae – capital receipt and lost profit income

: compensation for destruction of lobster traps is capital receipt, compensation for stock in trade is replacement for business income.

H.A. Roberts Ltd- Capital receipt

real estate business, managing properties, long term contracts cancelled. Got damages for breach. Have they lost the source of the income? Then would be capital. Or is it replacement of profit? Then would be income using surrogatum.

Two arguments: 1) Mortgage department was separate business and b/c lost contracts department ceased to exist; 2) Capital nature b/c lost source of income, capital assets of an enduring nature. Key issues are term of contract, significance to the business.

CRA: Damages, settlement and Similar Receipts

in respect of cancellation or non-performance of a business contract: Income or capital receipt? Factors to consider: a) if compensation received for failure to receive money that would be income, then likely will be income receipt. b) surrogatum for future profits surrendered then treated as income receipt. But if c) profit-making is seriously crippled due to the cancellation then compensation may represent the price paid for loss of sterilization of a capital asset ( is capital not revenue receipt.

Pe Ben: small business, contract cancelled, separate business destroyed, lost source of income ( capital assets of enduring nature.

CNR company: same fact as Pe Ben. But since such a large corp. it is surrogatum for lose of business income, wouldn’t destroy a separate business.

CRA : characterization of businesses as separate businesses: depends on degree of interconnection, interlacing or interdependence b/w the operations.

Bellingham:- punitive damages, windfall.

expropriating authority low-balled TP and he got an award. Penalty on expropriation authority has characteristics of windfall. No entitlement to punitive damages ( not taxable. Punitive damages: (not supposed to be compensatory in nature): In Canada: punitive damages are not of character of income or capital b/c we have concept of “source of income.”

Cartwright and Sons: damages not replacing income or capital

damage payment for copyright infringement, but there was no loss of income by the copyright infringement ( surrogatum doesn’t apply.

Voluntary payments

made without any legal entitlement on the part of the recipient( surrogatum can’t apply, b/c it’s one of needed components. Gift/windfall: no legal right, no contract, no legal right, not reoccurring.

Federal Farms Limited - no legal right, voluntary ( gift

Facts: TP’s farm flooded by hurricane, lost crops and damages fields, ditches. Assistance fromHurricane Relief Fund for lost crops and lost containers and supplies. Got 40K used to repair farm, get back into production for next year. Was able to deduct losses too.

Issue: Was the relief fund money income?

Analysis: Minister says surrogatum applies money was meant to replace revenue from crops which were the stock in trade of the TP. TP says was a windfall made in the public interest.

R: No contract b/w TP and fund, no consideration, no legal entitlement, no business relationship ( monies were in nature of a voluntary personal gift, unlikely to ever happen again. Distinct from insurance or damage payments.

Campbell – gratuitous payment treated as income for services

Shirley Campbell promised 5000 from Toronto Star if she swam across Lake Ontario pulled ½ mile from shore. She didn’t complete the contract but Toronto Star paid her anyways ( taxable as services.

Cranswick:- windfall share compensation for oppression.

majority SH of co controlled by parent co. Some suggestion that majority had screwed minority. US parent co would either give 3.35/ share to each shareholder or purchase shares for 26.00. Probably means that shares were trading for 26.00-3.35= $22.65 ( equivalent offers. If TP sells shares then it would be taxable capital gain. If TP goes for the 3.35 option then tax authority wanted to tax it fully as income. CRA: say that it’s income from a source. CT: windfall b/c not typical income from shares. Compensation for oppression. Probably not rightly decided.

Frank Beban logging: - windfall, nat’l park.

compensation for logger who carried on logging contracts on Queen Charlotte island when gov;t turned into National park. No legal right, gov’t not a party to contract, not for breach. Voluntary ( windfall.

Mohawk Oil FCA

6 million in damages for negligent construction of waste oil reprocessing plant is not windfall. Part is on account of lost income and part is on account of capital for capital outlay in constructing the plant.

Prizes and Awards

Abrahams 1960- IGA pure chance, not taxable- pre s.56(1)(n)

Facts: TP operated IGA, entered contest from stock supplier. Won a car, requested cash instead. TP paid nothing for contest tickets. Minister said $ was in virtue of his being in business as IGA dealer (was property that should be included in business income.

CT: car was won by pure chance, he asked for money b/c he already had a car, but still remains a prize. Non-taxable prize. (At the time there was no 56(1)(n). Just looking at whether it was business income.) Questionable: Needed to be IGA dealer be in draw. If probability was higher than would it be easier to connect the prize to the business.

Poirer- 1968- won trip in draw, not taxable

TP won trip to caribean from draw by Ford. He was prez of Ford dealership. CT said not taxable b/c didn’t have character of income.

Rother: ‘55 architect prize, not taxable.

architect won $2000 as an award for being one of 6 finalists for design contest. Ct said not part of business, just a prize and non-taxable receipt.

Watts: ’66 architect prize taxable, contractural agreement

architect won $4000 for being one of 5 finalists and then one $15000 for design contest. Ct: taxable b/c he entered into contractural arrangment with CMHC. But not taxable from his normal business.

s.56 (1)(n): Scholarships, bursaries, etc (‘72 after these cases) “Other income” in subdiv D.

s. 56(1)(n): scholarships, bursaries, etc:

a scholarship, fellowship, bursary or similar prize (but excluding a prescribed prize) that exceeds the scholarship exemption described in s.56(3) must be included in the recipient’s income. For achievement.

*Excludes amounts received in the course of business, and amounts received in respect of, in the course of or by virtue of an office or employment. (This is for prizes that TP won in their field but not at work or b/c of work). Those amounts are taxable under 6(1)(a) and 9(1). This was added after Savage: the prizes for doing the insurance courses

s. 56(3): Exemption for scholarships, fellowships, bursaries and prizes:

scholarship exemption for a taxation year is the total of: a) total amt of scholarships, fellowships and bursarie, if the student is entitled to claim the education tax credit under 118.6(2) for the preceding, current or following tax year, or received by a primary or secondary school student.

b) The lesser of two amts (i) total amount of all the prizes minus (ii) total expenses incurred to fulfill conditions.

c) The lesser of 2 amounts (i) $500 and (ii) portion of total amt of scholarships not eligible for exemption under 56(3)(a) or (b). Thus still can get $500 exemption even if don’t qualify for the more generous exemptions.

Prize for achievement

Savage – reversed by exclusion clause in s.56(1)(n)

Facts: TP received $300 from her employer for successfully completing three business courses. She argued that she was taxable under 56(1)(n) because allowed a $500 exemption.

Issue: was this sum a prize? [decided before exclusion for b,e, and o in 56(1)(n)] . Prize is associated with scholarship, fellowship or bursary ( usually speaks to achievement, attainment, need ( very broad concept. Prize must be for achievement in the field normally carried on by the TP. Crown: prize was fully taxable under O and E, but ct says the more general provision in 56(1)(n) should apply because it is more specific. Specific provision should trump general provision.

Ct: The first $500 received in a year that falls within 56(1)(n) is exempt from tax.

Savage was reversed by the provision that excludes prizes from b, e, and o in 56(1)(n) ( prize won within this context is a taxable benefit. Work-related, business-related awards, prizes and similar payments do not qualify for the $500 exemption and are taxed under (9)(1) and 6(1)(a).

Turcotte : pop knowledge is not a field

welfare recipient won $19000 on game show won questions related to cinema. Was a cinema manager before but unemployed for 7 years. Ct said, no popular knowledge is not a field .

Prescribed Prize: Reg. 7700- prescribed prize: recognized by general public and awarded for merit achievements in arts, science or public service e.g. Nobel prize. But doesn’t include an amt reasonably regarded as compensation for services rendered or to be rendered.

Foulds: prescribed prize reg 7700- music

Won two music awards. Ct said not business income and recognized by the public ( prescribed prize under reg: 7700.

Labelle: prescribed prize low threshold- accounting

accounting prof won prize for writing accounting case. Minister didn’t make a good argument for 7700 not applying ( it applied.

Interest Inclusions s. 12(1)(c)

s. 12(1)(c) include amt received or receivable by the taxpayer in the year as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer’s income for a preceding taxation year;

Characterization of income as distinct from other amounts: Interest not defined in Act. Federal gov’t has jurisdiction over regulating interest ( much of this arises in constitutional law.

Perini Estate FCA – interest referable to principal sum retroactively

TP owned all shares of All Records, sold shares to Columbia records for: 1) initial payment of $660K (capital receipt), 2) addt’l payments based on profits not to exceed 1.2 million over 3 years, 3) interest on the add’l payments from end of year to when payment made. TP got interest of almost 150K between 1969 and 1971, calculated at 7% (under 3rd element).

Minister characterized it as income. TP: payments weren’t interest, just called interest, actually part of purchase price ( not income nature. Didn’t accrue interest daily on a principal amount b/c that principal amount had to be determined at the close of fiscal year.

3 characteristics of Interest: 1) compensation for use of principal sum: “money paid for the use of money lent or for not exacting repayment of debt.” 2) Interest is referable to the principal sum; 3) accrues daily even if payable only at intervals.

CT: B/c basis of balance of price was to be determined, the seller obliged to wait for payment of the balance. Interest was the appropriate compensation for that delay. Conditional obligation became absolute with retroactive effect.

Miller – retroactive salary increase, interest referable.

retroactive salary increase w/ interest payable for periods to which salary related.

Huston and Bellingham: not interest, compensation for a) war claims fund and b) expropriation punitive damages.

Deductions for payer of interest under 20(1)(c]:

Borrower pays participatory interest often in real estate context, lender wants decent return from lending the money, borrower worried about future profits. Usually pay fixed interest and then offer a rate or return based on their profits called participating interest computed as % of profits.

p. 572-73( borrowers paid fixed rate and then an additional amt as participatory interest (share of revenue or profit).

Yonge-Eglinton 1974

not interest b/c determinable to profit ( not deductible under 20(1)©.

Sherway Centre 1998

Ct modified concept of interest and said that participatory interest was referable to the principal sum. Intention was to pay interest. Broadened the concept of interest and said that can go back over the year and see how much has accrued on a daily basis. Always for deduction of business costs.

Leg has expanded under 20(1)(e) for rules that allow for deduction in situations like these two cases.

Payment of Interest and Capital Combined s. 16(1)

capitalizing interest( trying to characterize interest as capital income to get it only ½ taxable.

s. 16(1): anti-avoidance rule: determines tax consequences: “regardless of the form or legal effects” Substance over form. To apply: 1) must be reasonable to regard part of a payment as interest and part as capital. 2) amount reasonably regarded as interest is deemed to be interest.

Groulx – factors for s.16(1)

Facts: TP sold farm through installment payments w/o interest. Schedule of payments: 85K on closing and then 15K due 1958, 25K due 1959, 50K due 1960, 50K for 3 years and then one final payment of 70K. All ends up to 395K. Late with any payments then 6% interest charge. Or if paid early would get 5% reduction annual rate. TP: Capital payments, not interest.

CT: 1) Part of each payment could reasonably be considered as interest since he sold it for more than FMV. Strong inference that price includes interest. 2) appreciated the benefit of capitalization proposed the non-payment of interest despite common business practices. 3) intention/ negotiations—no ordinary farmer, suggested the arrangement. 4) terms of contract: the late interest payment and early interest discount makes it look like interest.

VanWest Logging – deferred payment not capitalizing interest

Sold timber for 7.5 million, 1.5 million up front and then 1.2 for the next 5 years.

Applied 4 criteria from Groulx: 1) terms of agreement: no evidence interest considered by parties 2) course of negotiations, 3) relationship of price paid to FMV: wasn’t excessive 4) common practice: no indication that wasn’t. Court says this contract was just deferring payment not capitalizing interest. (Duff: logging contract might be in payment installments b/c maybe can’t cut them down right away anyways.)

Rodman Construction: - relationship to FMV, most important factor

most important factor seems to be the relationship b/w price paid and FMV in the Groulx test.

Discounts and Premiums

Discounts: Gov’t treasury bill, pay discounted amount, don’t pay the face value of it. Common-law it’s discount not interest( Act changes it to interest.

O’Neil – Peter Dixon and Sons test

Bought treasury bill for 189K on Jan 27, ’89 held it for 6 months and on june 26 ’89 got 200K. Then on July 26 ’89 bought another one for 189K then waited 6 months and on Jan 1 ’90 turned it in and got 200K. There is no interest payable on the treasury bill, the return is the discount. Can take the return and convert it into an equivalent interest rate.

CRA: difference b/w amt paid and return is interest. TP: its an asset and it matured and ( it’s a capital receipt.

Test in Peter Dixon & Sons: if get an ordinary interest rate and premium or discount on top of that there is no presumption there discount is interest. Might just be compensation for higher risk. But where no interest is payable, a discount or premium will normally, if not always, be interest”

2) need to look at all of the circumstances

3) look at term of loan, rate of interest, nature of the capital risk.

Gov’t bond: no interest, low risk, ( whole discount will be treated as interest.

WestCoast Parts- ratio of interest to bonus, low not interest

TP loaned 125K for 2 years at 10% per year interest and then 56K bonus. Ratio 25K: 56K, 1: 2.2 Ratio of interest to bonus is low ( more likely to be compensation for risk and not interest.

The higher the ratio gets, the more likely the bonus will be interest.

no. 593 , ratio of interest to bonus high ( hidden interest.

TP loaned 100K for 6 months at 4% per year interest and then 13K bonus. Ratio b/w interest and bonus: 1:6.5 Ratio of interest to bonus is high ( bonus more likely to be hidden interest.

Change in interest rate: Example discount worth $10, on 100= 10% If interest rates go below 10% down then the value of the debt obligation will increase, because will still be same amount . But if interest rates go up then the value of the debt obligation decreases because will only be getting $10 still but if interest rate is 12 then it’s worth less than normal interest.

Deductions: s.9(1), s.18(1)(a), s.18(1)(h), s.67

1) Starting point is 9(1): profit is net concept= revenue-expenses. Business Practice test: deductibility of an expense or outlay is whether it was made or incurred by the TP in accordance with ordinary principles of commercial trading or well accepted principles of business practice. [Down-played in 63502 BC, jumped right to income-producing test. Rjected avoidability and public policy tests].

2) Income-producing purpose test: 18(1)(a) disallows deduction of any outlay (cash payment) or expense (incurred) EXCEPT to the extent that it was made or incurred by the TP for the “purpose of gaining or producing income from the business or property.”

s. 18(1)(h) disallows deduction of personal living expenses

3) Reasonable standard: s. 67: applies to all sources of income and limits deductions to amounts that are reasonable in the circumstances.

s.67.1: business meals and entertainment deduction limited to 50%.

Illegal Payments/ Expenses

TPs may deduct ordinary expenses that are incurred for the purpose of gaining or producing income, even if it is illegal. (Angle).

Espie Printing Co.- illegal payments may be deducted.

Facts: illegal arrangement related to OT wages, allowed the tp to avoid paying taxes on those wages.

Issue: can Tp deduct wages of employees, which were illegally arranged?

Analysis: illegality has no bearing on whether the wages were laid out for the purpose of earning income. Can’t compute net profit properly without including them. Deductions allowed.

s.67.5: Non-deductibility of illegal payments:- bribes

prohibits deductibility of deductions of bribery payments made to govt employees or officials or payments that would be an offence under the criminal code.

Damage Payments

Imperial Oil Limited- loss incidental to normal risk of business

Facts: imperial oil paid damages of ½ million to settle negligence claim against one of it’s employees for a collision at sea that sunk the other ship. TP argued amt was a liability that is inherent in doing business in marine environment ( its an ordinary business expense that is part of doing business.

Issue: Are damage payments deductible?

Analysis: Test under 9(1): normal business practice expense ordinary and expected: Yes. Test under 18(1)(a): Income producing test: If losses were incidental and pursuant to the course of operations which produced the profits and formed a necessary risk undertaken to earn the profits, then deductible.

Appeal allowed. Negligence and liability part of normal and ordinary risk of doing business in marine environment, incidental pursing profit. Remoteness test.

Davis – link to income producing too remote, not allowed.

Got in car accident going to look at pigs that his brother brought for their business as pig-farmers. Link to business was too remote.

McNeill- applies 63502

Accountant had to pay 500K damages for breaching restrictive convenant. Deductible as an expense under s.18(1)(a) following 63502 BC because rejection of public policy and avoidability tests.

CRA Bulletin on damages

Damages must a) the outlay must have been made for the purpose of gaining or producing income from the b and p(18(1)(a).

b) outlay must not be on account of capital

c) outlay must not be made for the purpose of gaining or producing exempt income

d) outlay must not be a personal expense

3) outlay must be reasonable in the circumstances( s.67.

Fines and Penalties

65302 BC 1999 SCC : reversed by s.67.6. But reject public policy and avoidability tests

Facts: over-quota levy fine too many laying chickens. 10 to 15 producers were charged over-quota per year. TP made deliberate policy to produce over-quota b/c wanted to keep being the supplier for one buyer. Could have bought more quota but decided it was too expensive. Assessed for penalties of $220K.

Issue: Did the TP incur the over-quota levy for the purpose of gaining or producing income from its business? CA: deliberate decision that was avoidable ( no deduction.

SCC Analysis: broad language in 18(1)(a) doesn’t support public policy or Avoidability tests. Look at concept of profit. Has brought into question the validity of the remoteness test.

Allowed deduction But says that that fine or penalty that is so egergrious or repulsive will not be deductible( doesn’t this bring it back into 9(1) within the well-accepted?

**This rejection of public policy and avoidability approach stands for legal defence costs, damage payments and illegal expenses.

Reversed by s. 67.6 after March 22, 2004 “non-deductibility of fine and penalties,”

Other than a prescribed fine or penalty. (Prescribed- gov’t can prescribe that some fines are allowed as deductions.

Recreation, Meal, and Entertainment Expenses:

Royal Trust Exch.- general principles now subject to s.18(1)(l)(ii)

Facts: deducted club fees and membership dues of officers, $9500. Argued needed memberships to gain new clients through networking. Policy of which officers will join which clubs and Royal Trust goes about getting them admitted. Has been doing it for years, but never deducted. Evidence: policy had resulted in business from which income was gained or produced. Club extension of office, b/c did business there and was convenient for clients.

Analysis: 1) determine whether the expense was made or incurred in accordance with ordinary principles of commercial trading or well accepted principles of business practice, profit test 9(1). If not, then end of the matter. 2) If it was then secondly, see it is deductible unless it falls outside of exception in 18(1)(a) and ( is prohibited. “income purpose test. “ Here: 1) yes, expense was consistent with good business practices: done with clear policy, 2) Was the expense made “For the purpose” of producing income from the business under s.18(1)(a) Yes. (don’t have to establish that did make income).

s.18(1)(l)(i) and (ii): Use of rec facilities and club dues

Reversed by s. 18(1)(l)(ii) in 1972: no deduction shall be made in respect of membership fees or dues in any club the main purpose of which is to provide dining, rec or sporting facilities for its members. CRA Interpretation: will look at club to ascertain the main purpose. [Club membership will be a taxable benefit to employee, unless can show that the membership is principally for the employer’s benefit. But employer still can’t deduct it.]

s.18(l)(i): Use of rec. facilities: no deduction for property use or maintenance such as yacht, camp, lodge or golf course or facility (unless using it for course of business such as hire or reward: if own golf course then can deduct maintenance.)

Yacht: if yacht is used primarily to entertain clients deductibility of any interest expenses on funds borrowed is not deductible. But expenses for food and beverages on the yacht, will be allowed if genuine business purpose and not in relation to the recreational nature. Barnard photographer: used yacht for doing photographer not for doing fun things. Deduct allowed.

Camp or lodge: question of law: location, seasonal or year-round basis, type of facilities, primary or secondary focus or incidental to the hotel or inn.

Sie-Mac Pipeline contractors- broad interp of s.18(1)(L)(i)

sent 7 customesr and 5 employees to 3 day fishing lodge. Tried to deduct expenses of almost $13K. Was the expense for the use of the lodge? CT said no use, doesn’t mean ownership, even renting for a night will suffice to put under 18(1)(l)(i). TP tried to say okay room cost not deductible, but everything else should be. Court said, no everything related to the lodge is not deductible

Parties: Personal or business party?

Roebuck – not ordinary business practice

tried to deduct some costs of bat mitzvah because said invited clients. Ct said this is not ordinary or well accepted business practice. Purely for social entertainment.

Fingold , - guests didn’t know were business guests

Need to make it clear that guests who are business guests were in fact invited by the business. Not allowed.

Grunbaum- company invited guests allowed knew they were business guests.

wedding of daughter. Company invited business guests, separate invitations, sent out by business with company name on it. Allowed.

s.67.1(1): Expenses for food

Limits deduction to 50% for human consumption of food or beverages or enjoyment of entertainment. Or 50% of a reasonable amount if the amount paid was not reasonable. (built-in reasonableness clause).

Exceptions: for long-haul truck dirvers and s. 62 moving expenses (not limited to 50%), expenses in expectation of compensation in ocb, fund-raising events, expenses compensated, expenses for food and beverages that would be exempt under paragraph 6(6)(a), and for six or fewer special events in a calendar year open to all employees at a particular place of business

Scott- didn’t apply s.67.1(1)

bike courier wanted to deduct water and food b/c it’s fuel. Ct said okay but only extra food or water.

Stapley- plain meaning of 67.1(1) “any person”

Facts: Real estate agent gave gift certificates for food, beverages and tickets for concerts and sporting events to clients that he had sold their home or helped them purchase. Expectation was for referrals. Marketing expenses. He never ate the food, attended the concerts or sporting events. Minister disallowed 50% of the deductions under 67.1(1).

TCC: allowed total deduction b/c costs were in respect of earning a profit, he didn’t consume or participate. FCA Analysis: grammatical, ordinary sense: “any person.” Also says “in respect of” which is widest possible nexus test. Scheme of the act: many highly specific exceptions, if parliament wanted to exclude marketing expenses they could have made another exception. They didn’t. Two of the exceptions support that there is no need for TP participation in consumption or enjoyment( restaurantuer can deduct samples (doesn’t have to eat them), Can deduct food for employees if in remote area whereby employee couldn’t have self-contained domestic establishment. (67.1(2)(a) and (d)) Purpose--Mischief sought to be cured: trying to reduce deductions that are blend of personal and business to account for personal part. Arbitrarily chose 50%. Plain meaning rules and therefore taxpayer is caught under 67. 1. TCC set aside, only allowed 50%.

Clothing Expenses

No. 360 – could wear elsewhere ( personal

Facts: TP tried to deduct $950 for costs of making and altering wardrobe, accessories and dresses for TV. TP is actress of radio and tv. Has to provide own wardrobe for modern plays and must be certain fabric, cut, etc so that she photographs well. She was chosen for contracts b/c she was most elegant. Minister said was personal expenses.

Held: personal expense. b/c she could wear the clothes for other personal occasions.

Giroux – couldn’t wear elsewhere

TP allowed deduction for clothes that he couldn’t wear except on stage or television and is required to provide. Distinction b/w this case and No. 360, b/c he couldn’t wear these clothes outside of work in his private life.

Analogy to employment allowance: Huffman plainclothes cop not taxable benefit.

Home Office Expenses s.18(12)

Locke pre- s.18(12) general principles

Facts: lawyer in Toronto, study in his house w/ library. Deducted 1/6 of his home expenses, for the purpose of producing his income. Disallowed, minister said were personal expenses. TP said had 1-2 appointments in his home study per week, returned phone calls, worked on cases, “possibly tv” etc. Court: no brassplate outside his house nor did he have occupation next to phone number in book.

Consider: 1) was the room definitely separate from living quarters, 2) was an appreciable amt of business transacted or was it just used for convenience, 3) was home partially municipally assessed for business purpose, 4) was telephone ordered for business purpose, 5) was there sign on house, 6) was home office a second branch of main office. Dismissed study was for personal convenience, not for business purpose.

s.18(12) Work Space in Home (after 1987):

18(12)(a): no amt shall be deducted for any part of a self-contained domestic establishment where TP resides, except to the extent that the work space is either:

i) individual’s principal place of business or

ii) used exclusively for purpose of earning income from business, AND used on regular and continuous basis for meeting clients, customers, or patients of the individual in respect of the business. (makes test harder than in Locke).

(b) If pass test in i) or ii) can’t deduct more than income (before expenses) for that business in a tax year. (can’t generate loss)

(c) can carry forward amount from para (b) that couldn’t deduct that year. Can carry forward indefinitely. (But still have to meet the criteria under i) and ii) in subsequent years and be carrying on the same business).

[analogy in s. 8(13), deducting office rent and supplies for home office, applies same way].

Vanka - phone call could be meeting clients

family physician home office, courts said that meeting could include phone conversations with patients. This case lowers threshold for the test in (ii).

Cases Trying to say not a home office b/c then won’t be subject to limitation in para b:

Elis sculpter and Dufour: notary shared utilities, physically attached ( home office.

Matiland: B and B lived within, home business. Broderick: b and B, lived in separate suite, still home business though b/c seasonal so for most of year it was resident. Sudbrack: lived in separate suite within country inn, allowed, not home business.

Travel Expenses, excluded from s.18(1)(h)

s.18(1)(h): travel expenses incurred by the TP while away from home in course of carrying on the TP’s business are excluded from 18(1)(h) ( are deductible.

• travel expenses are still subject to 67.1-reasonable amt.

Cumming – deductions allowed for travel from base in course of business.

Facts: anaesthetist had office in home ½ mile from hospital where he did admin aspect of work. Worked at hospital all day then went home worked on records, then went back and worked from 6:30 to 8pm. Tried to deduct 1400 and 1000 for 1962 and 1963 for travel to and from hospital or elsewhere in connection with his practice. (gas, maintenance and capital costs). Minister disallowed all but 100, b/c travel at beginning and end of day are personal expenses.

Analysis: Dr didn’t have office at hospital, his office was in home. Court compares lawyer working at court house to dr working at hospital. Courthouse is not base of lawyer’s practice ( hospital is not base of practice. Deductions allowed for travel from base in course of business.

Henry:- disallowed b/c had office

travelling from home not allowed for dr, b/c he also had a separate office.

Cork: - drafter follows Cummings

drafter home was base of his work, went there to contract sites. Allowed

Forestell –notwithstanding personal choice.

an independent contractor for ROM for 12 years. Lived in Campellford ON, commuted to TO on weekly basis, kept apartment there. But argued that base of operations was still in Campbellford. The implication is that everything is deductible! CT relies on concept of base. Problems w/ this case: personal choice, not sure really indpendent contractor, why isn’t T-dot apartment base?

Randall SCC- travel b/w related businesses deductible

Traveling between race tracks in BC and Oregan, one related business ( deductible travel expenses.

and Wasserman: Travel between 2 related businesses: deductible. Travel between 2 independent businesses; Not deductible.

A-1 Steel and Iron- business portion deductible, personal not.

went to europe for business, but only small portion was business related ( only 35% deductible.

Limitations on Deductions: Reasonableness s.67

s. 67: may provide a more flexible statutory instrument for achieving the policy goals underlying paras 18(1) (a) and (h).

Cipollone: s.67

Facts: TP humourologist, deductions exceeded expenses every year and no realized profit. 1987: revenues $85, expenses $14, 588. 1988: revenues $475, expense $7693, etc. 1987 through 1993 huge loses. Minister: no REOP ( deductions disallowed.

Ct: no REOP is wrong test. Novel and unusual types of businesses shouldn’t be discouraged if in good faith. Rather, should look at reasonableness of the deductions. Here the deductions are disproportionate to the revenues over several years. Refers back to minister to determine what portion of the deductions were reasonable.

Interest Expense Deductions s. 20(1)(c)

s.18(1)(b): financing expenses viewed as long-term capital expenses, not allowed. Provisions in section 20 are exemptions to this.

Notwithstanding paragraphs s. 18(1)(a) and (b):

s.20(1)(c)(i): allows deduction for an amt paid in the year or payable in respect of the year, pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a b or p (other than borrowed money used to acquire a property the income from which would be exempt or to acquire a life insurance policy) or a reasonable amt, whichever is the lesser.

For the purpose of s.20(1)(c) there is a rule in s.20(3): for greater certainty if TP uses borrowed money to repay money previously borrowed or to pay off property debt then borrowed money is deemed to be used for the same purpose as original loan or indebtness. (Basically re-paying old loan with borrowed money is same purpose as using it for the first loan. Allows for re-financing)

From Shell, 4 parts to this provision:

1) amt paid must be paid in the year or payable in the year in which it is sought to be deducted.

2) amt must be paid pursuant to legal obligation to pay interest. (Sherway center concept of interest)

3) (i) borrowed money must be used for the purpose of earning non-exempt income from a b or p [like test in 18(1)(a).]

4) amt must be reasonable, whichever is lesser. (Shell said if pass this reasonable test than s. 67 won’t apply).

Bronfman Trust 1987. SCC- bona fide purpose. Direct use still good law.

Facts: Trust bonds and shares worth 70 million, but has less than 1% return. Strategy to earn little income b/c taxable but then make capital gains, which weren’t taxable at the time. Phyllis has right to 50% of income and trustees can give her discretionary amt of capital. Trustees made payments to Phyllis in 1969 and 1970 of 500K and 2 million but instead of liquidating capital to do so, they borrowed 300K US and 1.9Cdn from bank. Had to liquidate assets to pay off bank loans in 72 ( loans postponed but didn’t obviate need to reduce capital assets. Paid interest in 1970, 71, and 72. Sought to deduct the income.

Issue: Is interest paid to the bank deductible? Can it be deductible if the borrowed money isn’t used directly for earning income, rather it is used to preserve income-producing assets that might otherwise have to be liquidated?

Trust: 1) indirect use 2) end result is the same as if the trust had sold assets to pay the allocations and then borrowed money to replace them, in that case the interest would be deductible—counter-factual. Crown: the borrowed money was used to pay the allocations ( was not borrowed for the purpose of earning income from b or p.

SCC: disagrees with FCA, b/ Consequences, presumed intent of parliament: If rule is that can get loan instead of selling income producing asset, then favours affluent ppl who could just get the loan and would be able to deduct the interest by saying it was indirect purpose to retain income-producing assets by borrowing the money.

Principles: 1) direct use, 2) exception for bona fide indirect purpose (Trans Prairie) 3) Must be to earn net income.

Tenant, SCC- direct use and tracing

Bought 1 million shares in 1981, which he purchased with a loan. Traded the shares in 1985 for 1000. Cont’d to deduct interest on million. Was disallowed, but then SCC allowed it b/c the first shares were replaced with the second shares and the borrowed money was then tied up in investments and being used for the purpose of earning income: Traced back.

Attaie, 1990- indirect use not allowed

TP fled Iran before revolution purchased home in ON borrowed money at high interest rate, which would allow him to pay back w/o penalty when he got money out of Iran. But by that time interest rates had gone way up, so it was better deal for him to stay in the mortgage. So he invested the money from Iran and then sought to deduct his mortage interest payments b/c direct use was that the funds had gone into the house ( not allowed. Bona fide indirect use rejected.

Grenier, indirect use allowed, tracing.

Tp owned house mortgaged the house and used the funds to invest in a business. Used house as security. But then subsequently sells the house and pays off the old mortgage, he has 66K less, has to pay higher mortgage on his new house. Tried to deduct interest on the mortgage on the new house. Was allowed under Trans Prairie/ Bronfman indirect exception b/c borrowing filled the hole in his assets.

**Singleton 2001, SCC- Drops bona fide purpose test. Tracing applied.

Borrowed money put it into partnership, took money out on same day to buy house.

SCC: Major (7); No bona fide language in s.20(1)(c), look at legal relationships. He borrowed money to put into partnership. Deduction allowed. View the transactions separately. Tax payers may structure their affairs as they wish.

Labell (dissent): Think about real purpose.

**Ludco Enterprises SCC 2001 – ancillary purpose is sufficient

TP borrowed money at high interest rate to invest in companies in Panama at lower interest return rate. Panama companies don’t give dividends, just keep reinvesting into company. Over-time value of shares will increase. Goal was to sell later and get capital gain. Had total interest deductions of 6 million on loan. Only received 600K from company in dividends. Sold the shares in 1985 for capital gain of 9.42 million. $6 million: fully deductible, 9.42/ 2= 4.62 million capital gain inclusion+ 600K dividends= inclusion. So generating a loss of 780K.

SCC: An ancillary purpose to earn income is sufficient to satisfy the statutory test, even if the primary purpose is to obtain a capital gain or avoid tax. Income means gross income not net income.

March 1988: GAAR came into effect. Facts in Ludco are pre-GAAR. Would GAAR apply? 1) tax benefit? interest deduction (low threshold). Mismatch b/w full interest deduction and income. 2) Series primarily tax-motivated? Probably, tax-haven company in Panama, 3) Misuse or abuse of the provision? s. 20(1)c(i) argue using earlier decisions that court said gross income. Or what abuse of the purpose? purpose was to allow deduction on interest for earning income, not realizing capital gains.

Timing Issues:

Three methods of accounting: 1) cash basis: include amt when receive, deduct when pay. For o and e generally computed on cash basis. Dividends and royalties, some income from property. Only farmers and fisherman can use for business tax purposes.

2) Receivable/payable method: include it when it’s receivable and deduct when payable, even if haven’t paid. Sometimes referred to as accrual. Most income from property.

3) Pure Accrual: interest income included on accrual basis, even if not received, or receivable. Contrast with realization principle: don’t include gains on accrual basis only include gain once realized and money is received or receivable.

Inclusions

Starting point: s.9(1): Tp’s profit from b or p for that year and s.9(2): loss from that year.

Net concept of profit from s. 9(1) is based on profit for the year. What is the year?

Legal test for s. 9(1), not a factual or accounting test. Looking for true picture of tp’s income. Makes more sense to look at income on receivable/payable method for most businesses. But sometimes cash is appropriate e.g. farming and fishing.

Realization principle: “ amts received or realized by a tp , free of conditions or restrictions upon their use, are taxable in the yr received, subject to any contrary provision of the act or other rule of law.” (Ikea).

Received s. 12(1)(a):

s. 12(1)(a); Must include amts received but not earned by the tp in the year in course of business. (doesn’t say property).

[Deduction under s. 20(1)(m) offsets where goods or services will be delivered after the end of the yr.: where amts are included under s.12(1)(a), a reasonable amt can be reserved for when goods actually delivered].

Kenneth Roberston ltd 1944,- quality of income.

Exch. Insurance agent took premiums from US companies insuring against WCB. Co would pay premium based on payroll of year. But wouldn’t know exact payroll at beginning of year. So paid advanced fee, part of it was minimum amt, but part of it could be refunded if paid too much.

Distinction b/w income and deposits (or advances). Quality of income: “absolute and under no restriction, as to disposition, use or enjoyment.” Don’t have to give it back like a deposit.

Receivable: s.12(1)(b)

s. 12(1)(b): amts receivable in business (doesn’t say property) notwithstanding that amt or part of it is not due until subsequent year. Unless the method that use is to only include amts received (cash basis) then have to include amounts receivable in current year.

( codifies the accrual method (r/p) in respect of property sold or service rendered, the only exception is for tp’s permitted to use cash method.

West Kootenay Power and Light: 1991- amt receivable/ true picture/ legal right

Facts: distributes hydro power. 2 month billing. At end of year 83 and 84, had delivered some electricity that hadn’t yet been paid for. Could not issue bill until completion of billing cycle. 1983, changed from accrual to billed system, for tax purposes. But kept accrual method for financial statement purposes. So didn’t include estimate of unbilled revenue at year end, only included revenue already billed for taxes. Estimated sale price of delivered (by looking at prorating or gross loads) but not yet billed was 4 million for 83 and same for 84. Minister added it to tax years by reassessment in 1987.

1) Which accounting practice gives truer picture? (GAAP): Treat the unbilled revenues as: a) include the unbilled revenues as of year end or b) exclude the unbilled revenue and include them once received the next year.

FCA: undesirable to have requirement for conformity b/w financial statements and tax returns. “whichever method presents the “truer picture” of a TP’s revenues, which more fairly and accurate portrays income, and which matches revenue and expenditure, if one method does, it should be followed.” Accrual method presents a truer picture of co’s income: more accurately and fairly matched revenue and expenditure.

2) Do unbilled revenues at issue come under s. 12(1)(b) as amount receivable? Sufficiently ascertainable to be included an amt receivable and appellant had a clear legal right to payment ( income had to be included in that year. Receivable: clear legal right and sufficiently ascertainable amt.

Canderel SCC- true picture is rule of law, not matching. TIPS running expenses

Facts: shopping centre paid TIP to induce them to get into center, in exchange going to receive income over years.

Issue: Should the TIPS be deducted in the year of payment (current deduction) or deducted over the life of the leases (amortization method)? [Capital expense: generally has enduring benefit and should ( be amortized. Current expense: value is totally used up in the current year.]

TP claimed full deduction in one year. Minister said, no should be matched to the income from the lease contracts and deducted over the life of the lease contracts, relying on the matching principle.

SCC: True picture is rule of law, matching is not rule of law. Determination of profit is a question of law. Goal is to obtain accurate picture of the TP”s profit for the year. Realization principle trumps matching. Onus of proof is on the CRA to prove that taxpayers profit is not accurate. This gives tps freedom of choice to select accounting method. Running expenses

Ikea: SCC- symmetrical to Canderel

Tenant induced to enter into long term lease, received TIP. Said shouldn’t include inclusion in one year and should amorizate it over life of lease. SCC said no you’ve received it and realized it and has the quality of income, have it now and can use it now. Symmetrical to Canderel: deducted at once there, here included at once.

Interest accrual:

Interest is generally income from property. The property is the borrower’s obligation to repay the loan, which is commonly called the debt obligation.

Start with basic in 12(1)(c): interest must be included in income based on the method that the tp usually uses, so if usual cash basis then interest included when received. But if usually receivable/ payable method then interest only included when receivable etc or if accrual basis than that must be followed. True picture.

For most debt obligations, interest income is now subject to tax on a pure accrual basis under subsection 12(3) or 12(4) of the Act. These were enacted to prevent postponement of recognition of interest.

s.12(3): corporations, partnerships or commercial trusts

interest must be included on accrual annual basis. Earliest of received, receivable. Doesn’t matter that is had merely accrued.

s. 12(4): individuals or personal trusts

For debts of term greater than one year, inclusion is on accrued annual basis, based on when received the loan “the investment loan.” Include interest that has accrued on investment contract, up to end of anniversary day. (one year less a day: eg. got loan on Nov. 1 2008, report everything up to and including Oct. 31, 2009).

So basically when you aren’t actually getting the interest, it’s just accruing.

s.20(14): allocates interest b/w buyer and seller of debt obligation.

So there is 10% of interest at end of year, it’s divided bw 5 and 5 for buyer and seller.

Interest allocation rule in 20(14), with adjustments to cost base in 52(1) {interest included in income of transferor can be added to cost of debt obligation) and 53(2)(l) (interest deductible by transferee must be deducted in computing cost of debt obligation).

Deductions

Amounts payable s. 18(1)(a) and (e)

18(1)(a): outlay or expense must be made or incurred, in order to deduct.

18(1)(e): No deduction shall be made in respect of: reserves, etc—an amt as, or on account of, a reserve, a contingent liability or amt or a sinking fund except as expressly permitted by this part.

Matching principle: Incurred expense, but can’t deduct until later time that better matches the expense with revenues receiving.

1) inventory accounting- s.10

2) capital expenses- 18(1)(b), 20(1)(a) CCA

3) prepaid expenses- 18(9)

4) running expense- difficult to match, so may as well deduct now.

JL Guay , FC- contractor holdbacks, must be legal obligation

Facts: Building contractor, pays sub-contractors based on their monthly estimates. Withholds a % and pays when work approved by architect. TP contends that the amount are payable on certain day ( are balances owing and must be included in the contract expenses and deducted from his profit from the year. Wanted to deduct 227K, which represented balance owing to sub-contractors.

Ct: Uncertain as to quantum if partial damages result from badly done work, but which will no longer even be due or payable, if damages exceed the amounts withheld.

R: In general provisional amt or estimates are rejected and it isn’t recommended that data which is cond’l, contigent or uncertain be used in calculating taxable profit. Taxpayer must be legally obliged to make a payment.

Limited by Wawang Forest Products FCA 2001: Never paid 1-5% of WCB holdbacks, to independent sub-contractors. But can still deduct the amount b/c it was security against vicarious liability.

Samuel F Investments – definition of contingent liability

contingent liability: uncertainty about 1) whether payment will be made, 2) the amount payable, and 3) time which will be paid. Basic principles should till be if you don’t have legal obligation to pay then can’t deduct it.

Inventory Costs:

Costs to acquire or produce inventory deductible year that inventory is sold or otherwise disposed of. Matches revenues and expenses.

s.248(1): inventory means a description of property the cost or value of which is relevant in computing business income for a year.

Friesen, 2005, SCC- inventory, capital property distinction

Two types of property: 1) capital property: when you sell it gives rise to capital gain or loss; 2) inventory: gives rise to business profit or loss when you sell it.

Neonex 1978 – True picture, include inventory costs when sold. Match revenue & expense

Facts: made neon signs, sold under cond’l sales contracts, at yr end always a certain number of signs partially completed and in course of construction. In 1970-72, deducted the costs incurred for the partially completed signs for the purpose of computing income for tax. Accelerated some of their deductions: TP: says incurring costs for purpose of earning income, carries no stock in trade, only makes signs once contract has been entered into. Can’t earn the money it has contractual right to w/o incurring expenses.

Ct: not accurate portrayal of income b/c profit not realized in the year which expenses were claimed.The rule of law is “true picture” of profit, the matching principle is a method to get to true picture. Can’t deduct inventory costs until inventory is sold.

For homogenous inventory: better way to account is to add back the cost of the unpaid inventory at the end of the year. Gross profits= proceeds- cost. Cost= cost of inventory at beginning of year C0 + cost acquired in the yearC1 – inventory left overC2. Subtracts costs and then add back inventory not sold.

1) FIFO: first in first out. Standard, 2) LIFO: last in first out. For periods of rising prices most attractive, adding back less expensive inventory, 3) Avg Cost: averaged out over the year.

Anaconda American Brass, - FIFO unless can prove LIFO

Purchased lots of copper to produce metal products. Up until 1947 had used the FIFO method. But in 1947, prices were rising so switched to LIFO ( the assumption is that the most recently acquired copper is being sold. ( the leftover copper was cheaper and when they added it back to profits , it minimized their income. Should be based on the physical flows of the inventory, and determine which cooper you actually used to use LIFO.

CRA: can only use FIFO, average cost or specific item. Won’t allow LIFO unless can prove it was the actual inventory used.

Conservative accounting principle s.10(1) and 10(1.01)

At end of yr value the inventory at the lower of the FMV or the cost of acquiring the inventory.

s 10(1) and 10(1.01) - lower of cost or market rule (effectively allows deduction for accrued losses in the value of unsold inventory by allowing it to be “written down” to its fair market value if this is lower than its cost).

Rule not available for inventory held in an adventure in the nature of trade. Policy rational: Friesen: tried to deduct loss on inventory for land. s.10 enacted after to stop AINT.

Running Expenses:

Oxford Shopping Centres 1980, FC- running expense b/c speculative can’t be matched.

Facts: owner paid city 490K in lieu of local improvement taxes for interchange into centre. ( said income expense and ( deductible in year of payment. Crown: should be amortized based on accounting principles, distorts and unduly reduces income in 1973.

Ct: Matching principle applies to expenses related to particular items of income, particularly computation of profits from acquisition and sale of inventory. Matching principle doesn’t apply to running expense of the business as a whole even though the deduction of a heavy time of running expense in the year in which paid will distort the income for that year. Also, where did the 15 years come from?

R: Not really measurable, it is speculative can’t be matched. Makes more sense to deduct it once and treat it as running expense of the business even though may distort income.

Canderell – benefits over-time speculative.

paid huge TIP to tenant, and minister said should match the TIP against the rental income throughout the life of the lease. Ct said, would be arbitrary to do that b/c other benefits. Stream of revenue is speculative ( difficult to match over time. So, it’s a running expense.

Tower Investments: option to defer running expenses if want to.

advertising, option to defer running expenses if want to.

Prepaid Expenses s. 18(9): limitation respecting prepaid expenses:

expenditures paid or incurred by a taxpayer for prepaid rent, royalties, interest, insurance and taxes, for services to be rendered in a subsequent taxation year will not be deductible until the year to which they can reasonably be considered to relate.

Only applies to these categories listed above, in Oxford might have applied b/c in said payment was made in lieu of taxes.

Capital Expenditures s. 18(1)(b):

Can’t deduct immediately. Cost of acquiring long lasting asset. Could depreciate over time or may also have limited life.

s.18(1)(B): capital outlay or loss: No deduction for: an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part.

Capital outlay or payment or replacement of capital typically just a capital expense. Matching principle, shouldn’t be able to deduct that cost right away:

Capital expenses: on account of capital. Distinguished from on account of revenue (currently deductible

1) depreciable pty, 2) non-depreciable: e.g. land, securities, don’t wear out over time, 3) eligible capital pty.- no time on this one.

Characterization: Two main tests: British Insulated and BP Australia

1) British Insulated: “once and for all test” brings into existence asset for enduring benefit of the trade.

2) BP Australia: were the sums expended on the structure within which the profits were to be earned or were they part of the money-earning process?” Hallstroms: Acquisition vs. use: establishing or extending vs. carrying on, implements to use for work and regular performance of the work

Johns-Manville Corp. 1985, SCC – production expense not capital expense- mine perimeter

Facts: operated open pit asbestos mine, purchased land to extend perimeter of mine on regular basis. Tried to deduct the cost of acquired land as an ordinary business expense, was about 3% of costs. Minister said no it’s a capital expenditure.

SCC: Issue: is the additional surface area purchased a production expense or must the tp capitalize the land cost? Expenditures were made for bona fide purpose. Helpful to observe:

1. purpose of expenditures from practical and business outlook: not acquisition of capital asset, was for operation.

2. incurred yearly as part of integral day to day operations

3. easily discernible element or daily and annual cost of production

4. land not acquired for intrinsic value

5. transitional benefit not enduring value

6. land acquired doesn’t produce permanent perimeter

7. incurred annually for 40 years, operation can’t continue w/o them

8. capitalization of these expenditures won’t produce asset and no minerals in these lands.

9. don’t add to ore body, imply expenditures for removal of overburden

10. expenditures are small relative to cost of operating the mine. About 3% of operating cost per annum.

Here, removal of ore was continuous and recurrent struggle in which the tp was engaged and the expenditure was part of the essential profit-seeking operation b/c it was uniform over several years and was necessary in order to recover ore. Note( way it’s bought can result in different result, what if had bought all the land at once?

Once and For all/ enduring benefit test applied:

Haddon Hall Realty: wanted to deduct the cost of stoves, fridges and appliance for a rental apartment. Not allowed, capital expense,

Damon developments: appliance, drapes for hotel business. These things wear out quickly in hotel business ( current expense could deduct.

Central amusement :operated out video games had to replace circuit boards frequently, current expense

Algoma Central RWY: geological survey, speculative, like large advertising expense. Current expense. Speculative b/c might bring into existence an asset, but not sure similar to Oxford.

Establishing or extending test/ acquisition vs. use:

Cormack; trip to investigate private schools not deductible. Capital expense, even if don’ go ahead w/ the business.

Bancroft: acquired land to start tourist resort 132K but then abandoned the project. Capital expense, so not deductible. But could get capital loss when sold, but only 1/2 deductible.

Wacky Wheatleys But if operating a business and contemplating expanding that is a currently deductible expense. Analogy to damage payments on receivable side. Big operation and investigating something else then deductible, trip to Australia deductible. But for small op starting out, probably not.

Distinction b/w repairs and upgrades/ Acquisition vs. Maintenance

Canada steamship Lines- capital cost for boiler, current expense for wall repairs

Facts: tp deducted amts to repair several ships by replacing floors and walls and the boilers.

Issues: current expense or expense on account of capital?

Replacing floors and walls was deducible current expense for repairs. But replacing boiler was the acquisition of a new piece of plant or machinery, which has separate and distinct existence from the ship ( capital cost.

Two factors suggest capital cost: 1) cost large relative to larger asset and 2) cost large relative to repairs in other yrs. Only apply to severable assets.

Shabro Investments – renos capital expense, repairs current expense

bought building and then discovered built on landfill, paid 95K to remove and replace floor of building and to repair drains and waterlines. Reno are capital expenses: upgrades, designed to create an enduring addition or improvement to the structure- cost of steel pile and removing and replacing floor (floor is on the line). Repairs are current expenses: use and wear and tear and also if response to massive damages. Cost of replacing drains. e.g. replacing thatched roof w/ metal roof: reno, but if just patching thatched roof would be current expense.

Goldbar , 1987, FTD- purpose of repair

Replaced brick wall with a metal cladding one. Ct said ti was a repair in light of new technology so deductible. TP was forced to make the repair ( purpose is important. Distinction b/w choosing to do the upgrade and having to do it. “Subjective test”

Capital Cost Allowances:

Tax equivalent to depreciation for accounting purposes:

1) computed on declining-balance basis: percentage of the unrecovered or undepreciated cost is deducted each year, causing the book value to approach but not reach zero. At end still some value, so never reaches 0. Not on straight-line basis.

2) computed on class method: pooled cost of assets.

3) deduction is optional ( may be deferred to subsequent accounting periods.

s.20(1): deductions permitted in computing income from business or property.

Notwithstanding 18(1)(a), (b) and (h), in computing a tp’s income for a tax year, from a b or p, there may be deducted such of the following amts as are wholly applicable to that source or such part of the following amts as may reasonably be regarded as applicable thereto

s.20(1)(a): Capital cost of property: deduction for capital cost allowances, typically for acquiring tangible property

s.65 deduction for depletion of resources.

Depreciable property: s. 13(21)

s.13(21): definition: any property of the taxpayer in which a CCA deduction is allowed.

As allowed by regulation: found in Part xi and schedule II

Regulation 1100(1): permits TP to to deduct CCA in respect of property in any of 46 prescribed classes listed in Schedule II.

Limits on CCA for some kinds of property:

Reg 1102(1) and (2): Cost of Inventory is deductible as current expense ( not capital expenditure.

s.1101(c) property not acquired for purpose of gaining or producing income [same test from 18(1)(a) and 20(1)(c)(i).]

1102(1)(f): yacht, if not deductible for maintenance under s.18(1)(l) then can’t deduct capital costs.

1102(2): land is not depreciable property.

1101(1)(a)(c): rental properties over $50 000 separate classes, not pooled.

UCC: s.13(21): A -E-F +B

A= total cost of all properties acquired in the class before the time in question

E= amounts deducted under s. 21(1): total depreciation claimed for property.

F= total amts deducted from the UCC before the time in question as a result of dispositions of property of the class. Lesser of proceeds or capital costs.

B= amt of recapture added to the tp’s income in previous years related to the class

If balance of UCC becomes negative than it is recaptured depreciation and is taxed under s.13(1).

Example: depreciate for 2 yrs until equals $360.

But if sell it for less than $360 then can deduct the loss. “terminal loss”

sell it for more than $360, taxed back. “Recaptured depreciation”

sell ti for more than bought it for: amt above is capital gain.

UCC is basically the unrecovered costs of the assets in the class. The amt left in the asset that has not yet been depreciated. The reason for the class method is that in the long run the gains and losses will cancel each other out.

Income producing test

Reg 1102(a)(c): can’t deduct for property that was not acquired for the purpose of gaining or producing income

Ben’s Limited: property must be for purpose of gaining or producing income

Facts: appellant owned bakery bought 3 adjoining properties, sold buildings that were on land, they were removed. The properties were acquired with intention to sell houses, remove them and then expand bakery onto properties. But couldn’t be done right away because had to be re-zoned first. New extension of bakery finished in early 1953. In income tax return for 1952, the tp stated costs of acquiring the three properties and broke it down into total 42K and buildings 39K, and it deducted 10% of the buildings as CCA, $3863.

Minister disallowed CAA b/c no portion of the payment was expended for the purpose of acquiring the depreciable assets (the buildings). The entire amt was just for buying the land for the extension of the bakery.

Issue: Was the property referred to in class 6 of the “classes of property” in reg 1102(1)(6) as a “building of frame” acquired by the tp for the purpose of gaining or producing income?

TP: 1) whole purchase was for income-producing purchaser, 2) secondary intention: rent from the building which was collected for a couple months when waiting for re-zoning.

CT: frame buildings weren’t acquired for purpose of gaining or producing income rather the outlay was to acquire the land to extend the bakery. (it’s based on class of assets, therefore would need to make an argument that the buildings, the assets were for income producing purpose).

Income producing test: Ludco Enterprises: borrowed funds for purpose of earning income. Income doesn’t have to be net income, could be slight income. Would this apply in Ben Miller? Rent doesn’t have to exceed CCA.

Hickman Motors SCC -depreciable pty doesn’t have to be held for particular period of time

TP wound up a subco and acquired assets that had UCC of 5million. Parent co held the assets for 5 days and then sold them to another subco. Deducted 2million in CCA based on having the assets for the 5 days. The ct said, the depreciable property doesn’t have to be held for any particular period of time, so it was fine.

Acquisition of depreciable property

Wardean drilling- acquired: possession, use and risk

proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents to title, either actual or constructive, such as possession use and risk.

Subject to rules:

s. 13(26): can’t add the cost of depreciable property to the UCC of the class until the property is available for use.

s.13(32) leased property non-arm’s length.

Reg 1100 (2); half-year rule, when net addition of assets to the class, only ½ of the net increase can be deducted in one year (not on exam).

Deductions in respect of depreciable property:

s.20(1)(a), subsection 1100(1) of the Regulations, and Schedule II of the Regulations; prohibition against use of CCA to produce net losses for rental and leasing properties – subsections 1100(11) and (14) of the Regulations and subsections 1100(15) and (17) of the Regulations

Reg 1100(11): Rental properties: can’t deduct CCA to generate a loss, can use it to get to zero. So maximium that can be claimed for CCA is the rental income less other deductions. Designed to stop ppl from creating losses. But you can pool rental properties together. So can deduct losses from one property against another property. Compute gains and losses w/o reference to s.21(a).

Reg 1100(14): Def of rental property: used for rental income.

Disposition of depreciable property:

Subtract the lesser of its proceeds on disposition and it’s capital cost in computing the UCC of the class. Where proceeds of disposition exceed the original capital cost of the property, the excess is subject to tax as taxable gain.

If sell for greater than capital cost triggers capital gain but up to that point, subtract amt get as proceeds from UCC.

s.248: disposition includes any transaction or event entitling a taxpayer to proceeds of disposition of the property.

s.13(21): proceeds of disposition includes: sale price if sold, compensation if stolen, etc.

Terminal loss: deduction

s. 20(16): deduction for loss in property due to depreciation “terminal loss”, occurs when there is no property left in a class of depreciable property and the UCC balance is positive at the end of the tax year. (Basically caused by not depreciating at a sufficient rate). The loss is fully deductible in computing income in the year. A terminal loss must be deducted in the year it occurs, unlike CCA.

Recaptured depreciation: inclusion

s.13(1) Proceeds from disposition greater than remaining UCC then rate depreciated was excessive: Recaptured depreciation. Negative UCC balance must be included in income. If the proceeds of disposition exceed capital cost then excess is subject to tax as capital gain.

Some property deemed to be in own class, designed to trigger terminal loss or recapture. Then can’t shelter recaptured depreciation.

1101(1)(a)(c): rental property with capital costs greater then or equal to 50K, in own class when you sell it. Separate out all rental properties. Makes it impossible to avoid the recognition of recaptured depreciation on a disposition for proceeds exceeding the UCC of the property.

Olympia & York Developments- when disposed of

disposed of when no longer have the duties, responsibilities and charges of ownership, conditional lease to own building at end, was considered disposed of at beginning of lease. Was trying to maintain ownership so that he could keep deducting the CCA.

Allocation of Proceeds s.68 for CCA

Allocate the cost of the sale in this order for the buyer: 1) vehicles, 2) building, and 3) land.

Buyer will want to: allocate as much of the proceeds to inventory or services, b/c fully deductible or to depreciable property with high CCA rate.

For the seller would want to allocate costs the opposite way 1) land, 2) building, 3) vehicles.

Seller: allocate as much to non-depreciable capital property (land) and depreciable property where little or no CCA has been paid b/c want to avoid recapture. Want to maximize capital gain, b/c only half taxable and maximize terminal losses

If vendor has been losing money, no point claiming CCA, b/c should just hold onto until can deduct against profit.

Anti-avoidance rule unreasonable allocations, s.68: language similar to s.6(3), and 16(1): regardless of the form or legal affect

s.68(a): the part of the amt that can be reasonably regard as being consideration for the disposition shall be deemed to be proceeds of disposition of the particular property irrespective of the form or legal effect of the K or agreement(CRA can step in and re-allocate the proceeds amongst the assets.

Golden 1983, SCC- factors for applying s.68

Tp had claimed CCA on rental properties, buyer wanted to buy the land. Received unsolicited offer for $2.6m for land, 2.4m for buildings and 600K for other property. Seller didn’t like allocation b/c would give rise to recaptured depreciation (he would have to pay back the CCA that he had deducted on the buildings). Changed the allocation and made the buildings worth less, and the land worth the most $5.1 million out of total of $5.85 million.

CA: 1. when figuring out allocation, have to take perspective of purchaser and buyer; 2. no evidence of sham if arms-length transaction w/ bargaining b/w them, then should grant considerable weight to that. 3. Not an unreasonable price to pay for land. No s.68 then.

Petersen – unreasonable allocation

Tp ran daycare sold for 157K, allocated 45K to goodwill. (which is eligible capital property, partial inclusion). Daycare was losing money for years, license had been cancelled. Assessor said there was no goodwill, it was a shit business. Therefore not reasonable allocation. Didn’t appear to be hard bargaining.

Application of s.68: 1) relationship of allocated proceeds to FMV, give some scope; and 2) hard bargaining over allocation.

Leonard –unreasonable allocation on FMV, no hard bargaining

TP wanted to rely on s.68, bought farm and some amt was allocated to livestock and milk stock. Tp wanted to use the appraised value and not the amts in the contract.

livestock: 40 (contract) vs 87K(appraised), milk: 30K vs. 88K. Was no hard bargaining. TP wanted to deduct based on appraised value b/c would get higher deductions. Was allowed to use s.68.

The vendor would also have to pay recaptured depreciation based on the assessed value.

Agreed amts differed substantially from FMV and no hard-bargaining.

Taxable Capital Gains and Allowable Capital Losses

Characterization: capital gains and losses are residual. s.38 and s.39

s.3(b): net taxable capital gain= [taxable capital gains+ taxable net gain from disposition of property] – allowable capital losses.

s.38: taxable portion is ½ of the gain or loss.

s.39(1)(a)” capital gain- essentially a gain from disposition of property that wouldn’t be included in income but for the capital gain provision in the act.

s.39(1)(b): capital loss- same thing except it’s a loss that wouldn’t be deductible but for the capital loss provision.

Can’t have capital loss from disposing of depreciable property, (would just be terminal loss) can have capital gain though for amt above recaptured depreciation.

s.54 definition of capital property as depreciable property and property the gains and losses from the disposition of which are capital gains and capital losses

Where dispose of property at a gain, adv to characterize as capital and not business or property b/c ½ taxable.

Where dispose of property at a loss, adv to characterize as business or property, fully deductible against all income.

Friesen: Inventory (business property), which is disposed of in course of business or pursuant to adventure or concern in the nature of trade. Then capital property is everything else.

Taylor: AINT 1) manner of dealing test, 2) nature and quantity of the subject matter. If all you can do is sell it, then it’s inventory. If deal with property the way that a dealer would then it’s inventory. The residual is capital property.

Capital gain: investment, personal use property, capital asset.

Income from business: inventory, speculation, AINT.

Real Property:

Regal Heights-SCC- secondary intention doctrine.

Facts: Bought land with business partners to establish shopping mall, incorporated business and transferred property to it in exchange for shares, were sole SHs. Property was $88 700. Another store was going to relocate to neighbourhood ( wasn’t feasible to open shopping centre there. So sold all land for profit. TP said weren’t dealing in same manner as property dealer and nature and quantity test. Should be capital gain, not inventory.

TJ: primary intention was to open mall, but secondary intention was to profit from flipping the land if the mall plans didn’t work out. Minister agrees and re-assessed income to include the profits.

SCC: They did several things such as survey, attempt to negotiate with large dpt store, etc, but was all promotional. No evidence intended to build regardless of outcome of negotiations. Venture was speculative. Failed to promote a shopping center and then disposed of speculative property at a profit ( business income. Secondary Intention. Dissent: land wasn’t stock in trade or inventory it was capital asset disposed of when plans failed due to factors out of their control. Capital gain.

Racine- rejected secondary intention

Taxpayers experience in real estate biz, borrowed to purchase land and machinery of insolvent co. Sold 4 to 6 weeks later for profit of 20K each.

CRA: tp’s business experience, method financing, and brief holding period makes it business income from AINT.

Ex Ct: Intention was to carry on business, rejected CRA’s secondary intention argument.

Morev Investments: FCA

Secondary intention is the possibility of resale at profit and it should be a motivating reason, “but for” the potential wouldn’t have entered into investment.

Secondary intention to sell for profit? Factors (Badges of Trade)

1. vacant land, sort of suggest not using the land to gain income ( nature of the land tips towards captial property Morev Investments and De Salaberry Realities.

2. Developed land, more likely going to use it to gain income: Reicher, Hiwako, Crystal glass.

3. Shorter holding period, more likely bought it to flip ( capital property. McDonald.

4. circumstances for disposition: unsolicited offer, expropriation.

5. method of disposition and REOP.

6. other activities carried on by TP: e.g. related to their main business activity.

Computation of Taxable capital gains and losses

s.40(1)(a)(i): capital gain

amt which proceeds of disposition exceed the total of the adjusted cost base of the property immediately before disposition and any outlays or expenses if they were made for purpose of the disposition. (proceeds- ACB). s. 40(1)(a)(ii) and (iii): can defer recognition of part of gain if proceeds won’t be realized until next year.

s.40(1)(b)(i): capital loss,

just the opposite of gain, amt that ACB- proceeds. s.40(1)(b)(ii): must recognize full value of the loss in the taxation yr property is disposed of

ACB: adjusted tax base, s. 54

a) property that is depreciable, then ACB is the capital cost at the time of disposition.

b) Other capital property it is the cost adjusted under s.53 (transaction costs).

Principal residence is tax free gain ( don’t pay tax on capital gain.

Capital property:

1) Personal use property (PUP): no recognition for capital loss s.43(g)(iii) on disposition of PUP, assumption is that went down in value, b/c were making personal use of it. Subject to tax if goes up, but not down.

LPP: listed personal property: can get deduction for capital loss, decrease in value is due to market not personal use, eg. stamps.

2) Investment property: a) inventory, fully taxable b) business: AINT and COB, ½ taxable.

Recognition and non-recognition rules

To trigger capital gain or loss must be disposition:

Disposition: s.248(1): any transaction or event entitling a TP to proceeds of disposition of property. Other conversion or expiry of shares, debt obligations, options and other kinds of intangible property. Transfers of property to a trust or by a trust to a beneficiary of the trust.

Proceeds of disposition: s.54: sale price of property sold, compensation for property stolen, destroyed, damaged, expropriated.

Non-recognition: Roll-over rules: s.73(1) inter vivos transfer

s.73(1): inter vivos transfer:

Can elect out of this provision, only applies for capital property: not inventory. Deem transfer to occur at cost ( no tax consequence until transferee disposes of property. Then the gain is taxed back to the transferor.

s.73(1.1): qualifying transfers: spouses, common-law partners.

Recognition: Deemed disposition:

s.69(1): deemed proceeds on disposition even if no or inadequate consideration. (anti-avoidance)

s.45(1): change use of property from income-producing to non-income producing and vice versa.

s.70(5): when you die, deemed to have transferred

Non- Arm’s Length Transactions and Attribution rules

s.251(2): non-arm’s length relationships

(a): related persons includes individuals connected by blood relationship, marriage, or common-law or adoption.

b) corporation related to a person who controls the corp, members of a related group that controls it and persons related to controlling persons and members of controlling related groups.

s.251(1)(c) characterization is matter of fact. For NALS, minor could include nieces and nephews. (facts similar to implied agency test, control, common mind and goals).

s. 251(6) connection by blood relationship means connection to lineal ascendants and descendants and siblings, connection by marriage or common-law partnership means spouses and common-law partners and in-laws, and connection by adoption means connection to adopted children and parents †

[note that aunts, uncles, nieces and nephews are not related, though they may be NAL under the factual test in 251(1)(c)]

Non-Arm’s Length Transactions s. 69

Policy concern about income splitting: s69: Transactions for artificially low or high price allows for abuse by allocating gains to low-income taxpayers and losses to high-income taxpayers.

s.69 except as provided in the act (trumped by s.73(1) roll-over rule):

(1)(a): transfer of property to NAL deemed that the Tp disposed of the property for FMV. If acquired anything for greater than FMV, then deemed to have acquired it for FMV. (TP would be trying to generate loss).

(1)(b)(i): where tp has disposed of anything to NAL person for no proceeds or for less than FMV, then transferor deemed to receive the proceeds at FMV. (TP would be trying to avoid capital gain)

(1)(b)(ii): where taxpayer has desposed of anything to any person [not only a NAL person] by way of gift, taxpayer deemed to have received proceeds equal to FMV AND under paragraph 69(1)(c) recipient deemed to have acquired it at a cost equal to FMV

[Rules adjust proceeds and cost in the case of a gift, but only cost or proceeds in the case of a NAL transfer subject to 69(1)(a) or (b). So transferor value is re-assed but value to transferee is not. nonetheless, the courts are uncomfortable with the double taxation that can result in these circumstances, and favour adjustments on both sides of these transactions – Allfine Bowlerama]

Marcantonio: 1991- income splitting s.69(1)(a) applied

Facts: TP is optomoterist. Wife incorporated Andrea company to provide book-keeping and office management services to the TP. In 1983, Andrea co took over the optician side of the business selling frames and lenses. His optometerist practice and wife’s optician services operated within the same business. Prior to 1984 TP bought all optometrist supplies from various suppliers. In 83-84, Andrea started to purchase the supplies directly from the suppliers, but they were still sold by the TP. TP only gave clients one receipt with all costs on if and they never knew there were two separate corporations. In 1984 TP deducted expense of 155K paid to Andrea.

Minister reassessed in 1986 and added 42K to the TP’s income. Said that the 155K amount of expenses exceeded the FMV. Also added the net income from Andrea to the TP’s income for 1984.

TP counsel: minister can’t ignore Andrea completely and determine that TP was in the optician business.

Issue: income-splitting b/w tp and co controlled by his wife. s. 69(1)(a).

CT: Tp was buying from Andrea at retail prices not wholesale prices, but nature of their relationship was retailer/wholesaler. The FMV should have been the wholesale price not the retail price, TP couldn’t afford to buy the supplies from Andrea at same price sold to clients. Deemed to be FMV for purchase of lens and frames ( Minister was justified in reducing the expenses paid to Andrea.

Attribution Rules:

**The attribution rules apply only to income from property and not income from business ( TP’s will argue that income is from business, so that rules don’t apply.

Basic Rules

s.74.1(1): Prevent income-splitting by deeming amts received (includes loan and transferred) by spouse or common law partner to have been received in hands of transferor. Taxed back to transferor.

s.74.1(2): income or property transferred to a related minor to be the inviduals’ and not the minor’s (includes nieces and nephews)

s.74.2(1): extends the attribution rules to subsequent taxable capital gains and allowable capital losses from disposition of property or property substituted (ad infitium) for spouse or common-law partner.

• But not done for NAL minor, so can transfer shares to children and then they would be deemed to get the income from the dividends and not the transferor (Hole in legislation)

Special Rules

s.74.5(1): not withstanding any other provision, the basic attributions don’t apply if:

a) transfer for FMV AND c) if transfer to spouse or CL partner, TP elects out of s. 73(1) roll-over then it’s FMV and not ACB.

• But if don’t elect out of the rollover at s.73(1), but actually receive FMV, can still elect to transfer at ACB. Even if transfer at FMV, got accrued gain that should be taxed in hands of transferor.

s. 74.5(11) Reverse Attribution

Lower income spouse (LIS) borrows $ and buys securities

Higher Income Spouse (HIS) gets loan and buys securities from LIS,

So the HIS has the securities and the income from the securities will be attributed back to the LIS. But if there was FMV the attribution rules don’t apply, BUT if the transfer is done on roll-over basis (don’t opt out) then the attribution rules will apply.

Enacted 74.5(11): to stop reverse attribution, it stops attribution rules applying if the reason for the transfer is to reduce the tax.

Lipson is Singleton with a spousal twist.

Lipson, 2009 SCC

Facts: Goal to get access to capital in the family corp without paying tax and to get the interest deduction.

• Mr and Mrs L entered into agreement of purchase and sale of family residence for $750K

• Transaction 1: Aug 31, ‘94, Mrs L borrowed 562K from BMO to finance purchase at FMV of 20 and 5/6 shares in Lipson Family Investments. “The share loan.”

• Transaction 2: She paid the borrowed money to her husband who transferred the shares to her. FMV. used the money to buy a house.

• Transaction 3: Mrs and Mr got another loan secured by a mortgage on their new home from BMO for 562K on Sept. 1 1994. Joint chargers under the mortgage.

• Transaction 4: Same day used the mortgage loan to repay the share loan in its entirety.

• Then the interest on the mortgage loan was deducted from Mrs. L’s dividend interest on the shares and the resulting loss was attributed to Mr. L.

Mr. L claimed deduction on mortgage interest in 1994, 95 and 96 tax returns relied on 4 provisions:

1) s. 73(1): Inter vivos transfer by individuals TP may defer tax on interspousal transfer of property Rollover. Didn’t elect out of it, so the transfer of shares to his wife was deemed to be at adjusted costs base rather than FMV, so no loss or gain on sale. Didn’t elect out so then attribution rules do apply.

2) s. 74.1(1) Transfers and loans to spouse: attributes income or loss from property transferred from one spouse to another back the transferring spouse. So though Mrs L owned the shares, the income dividend and losses were attributed back to Mr. L. Negative reverse attribution.

3) s.20(3): allows a deduction for interest on money borrowed to repay previously borrowed money if the interest on the original loan is deductible: to facilitate refinancing. So the mortgage loan was treated as having funded the share purchase.

4) s.20(1)c): Mr L deducted the interest on the mortgage loan, with provision that allows deduction on money borrowed “for purpose of earning income from business or property.”

Issue: abusive tax avoidance under the GAAR?

Tax Court: the purpose of the transactions was to make interest on money used to buy a personal residence deductible. This is contrary to purpose of the provisions aren’t meant to allow attributed dividend to carry back with it the interest deduction. FCA: the series of transactions can’t be ignored in applying the provision, even if each transaction was fine separately.

SCC: Positions of the parties: Lipsons: 1) s.20(1)© is about tracing the actual use of the borrowed funds as in Singleton. Mrs. L used the borrowed funds to buy shares, so no frustration, 2) s.20(3) purpose is to refinance loan, which is what they did by taking out the mortgage, 3) s.73(1) and s.74.1 apply automatically, and they didn’t opt out.

Minister: The purpose of GAAR is to negate arrangements that would result in tax benefit but for the GAAR. Contextual and purposive approach under Canada Trust Co. The purpose of s. 20(1)© is frustrated b/c personal mortgages aren’t deductible under s. 20(1)© Also frustrates the attribution rules, b/c not consistent with act to allow one spouse to deduct interest on money borrowed to fund a personal expense for the benefit of both spouses

Analysis: singleton doesn’t apply, b/c GAAR and attribution rules weren’t at issue in that case.

Lipson admits transactions were for tax avoidance, so then issue is whether they resulted in misuse and abuse or Act or whether justified under Duke of Westminster principle.

LeBel Steps

1) Interpret the four provisions at issue to determine their essential object purpose and spirit: s. 20(3): deduct interest on borrowed money for commercial purposes. Purpose is to encourage accumulation of capital producing taxable income.

s.20(1)©: allows interest to be deducted when refinanced.

s. 73(1) facilitates interspousal transfers of property w.o triggering immediate tax consequence.

s.74.1 is designed to prevent spouses from benefiting from non-arms length relationship by attributing back any income or loss to the transferor.

2) determine whether avoidance transaction frustrates the purposes established(Need to look at context of series of transactions. Preferable to refer to the overall result of the series.

3) Misuse and abuse: Burden on Minister to prove abuse on a balance of probabilities. 1) outcome that provisions seek to prevent, 2) defeats underlying rationale of the provisions, 3) circumvents certain provisions in a manner that frustrates object, spirit of purpose of the provisions.

The abuse was attributing Mrs. Lipson’s interest deduction to Mr. Lipson. Because the attribution rules are meant to prevent income-splitting, which is what they have done. Reasonable outcome is to disallow the interest deduction in computing the income or loss attributed to Mr. Lipson and attributing that deduction back to Mrs. Lipson.

Dissent: Rothstein s.74(11) applies, so GAAR doesn’t apply. But nobody argues it all the way up.

Binnie: no clear policy, TP used every rule and ought to be able to do so Duke Of Westminister. [But would this mean that GAAR never applies?].

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