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Taxation | Fall 2017 | Prof. Duff TOC \h \u \z Avoidance PAGEREF _ygdrrw6058y6 \h 1GAAR - s. 245 PAGEREF _zarn3gu50b2z \h 1Characterization PAGEREF _xw9kfgnleftx \h 2If the T is a corporation/incorporated employee, is T carrying on a “personal services business” - SAAR PAGEREF _o34pt6s3pgb0 \h 2Inclusions PAGEREF _la311ryzklqp \h 3Inclusions: Forms of Remuneration PAGEREF _42rtdhtgwcam \h 3Inducement Payments (Taxable 6(3)(b) & (c)) PAGEREF _j5dbuiycklmy \h 3Gratuitous Payments (Taxable under 5(1)) PAGEREF _cq33evlyig2d \h 3Strike Pay (Not Taxable) PAGEREF _6uzpr0x8jg50 \h 3Tort Damages for Personal Injury or Death (Not Taxable) PAGEREF _pihuugoasi2f \h 4Inclusions: Payments on Termination PAGEREF _irhtkh2odxbn \h 4Was there a loss of employment or office? PAGEREF _arzdtwkhg9tt \h 4Was the payment made in respect of a loss of employment? PAGEREF _k9wb219ovolf \h 4Inclusions: General Benefits 6(1)(a) PAGEREF _2xakibw67uaj \h 51. Characterization - Is there a benefit? PAGEREF _ryayrn86cbfp \h 52. Connection to Employment? PAGEREF _iwvgii9em2n7 \h 63. Valuation PAGEREF _ayrawowccvd0 \h 7Inclusions: Other Benefits PAGEREF _8sof7d2o7cr \h 7Relocation Assistance PAGEREF _pj0ddon7bxab \h 7Housing Loss Payments Included (as opposed to an ‘eligible housing loss’) PAGEREF _n4ratzvrpkld \h 8Forgiveness of Debt PAGEREF _2ldaljaheanw \h 8Interest Free Loans PAGEREF _cczu3ugp3qos \h 8Employee Stock Options PAGEREF _wpi6fn7gpky2 \h 9Inclusions: General Allowances 6(1)(b) PAGEREF _aj2m4x9z76ju \h 9Distinction Between “Allowance” and “Reimbursement” or “Accountable Advance” PAGEREF _qnorumkd4p9 \h 10EXCEPTIONS to General Allowances (Not Included in Income) PAGEREF _80w92w6mchel \h 10Statutory Exclusions (Not Included in Income) PAGEREF _1doscpiv0410 \h 10Part-time Travel Expenses PAGEREF _chpemw8e2gzq \h 10Special Work Site Location PAGEREF _ew0uvje47z34 \h 11Remote Work Location PAGEREF _wok5u6ep1oog \h 11Employment Deductions PAGEREF _lpuscgqhnjb8 \h 12Travelling Expenses PAGEREF _ostbdq7w63fv \h 12Meal Deductions Incurred While Travelling (? Deductible) PAGEREF _h9hc441jg28g \h 13Home Office Expenses PAGEREF _5xjk7t62rgoz \h 13Moving Expense Deductions PAGEREF _mywvfmok2sy7 \h 14Eligible Relocation Analysis Cases for Purpose of Moving Expense Deduction PAGEREF _pqv2g6wz2pek \h 15Income or Loss from Business or Property (& Other Income) PAGEREF _3apmdua6751k \h 16Characterizing Business or Property PAGEREF _n6w2n93lwk0p \h 16Inclusions PAGEREF _4myfoutpq5q1 \h 17Gains from Illegal Activities (Included) PAGEREF _iepzzjemm1p7 \h 17Damages and Settlement Payments (Included if replaced income) PAGEREF _z4aj58l54v6 \h 17Voluntary Payments (Not included if ‘gifts’) PAGEREF _z6krrvfnf4vv \h 18Prizes and Awards (Included unless Prescribed Prizes or Lucky/Random Draws) PAGEREF _fybq9n49wbx1 \h 18Lucky/Random Prize Draws 40(2)(f) & CL (Not Taxable) PAGEREF _wng4r6y0e4sy \h 19Prescribed Prizes 56(3) (Not Taxable) PAGEREF _p53bw95f71ce \h 19Interest Income from Property 12(1)(c) PAGEREF _lanrppyc7s8t \h 19Characterizing Interest PAGEREF _c5k5b91wayw \h 19Payments of Part Interest & Part Capital - Deemed Interest 16(1)(a) PAGEREF _dg62m8xmjrhc \h 20Discounts and Premiums PAGEREF _mjprbwdu07gc \h 21Accrual Rules and Debt Obligation Transfer PAGEREF _xeykjwx6a9cc \h 21Deductions PAGEREF _lnw2k2ct4246 \h 22General Profit / Income Producing Tests For Deductibility 9(1) and 18(1)(a) PAGEREF _2m5nakv4u0vl \h 22Illegal Payments (Highly Restricted but Possibly Deductible) PAGEREF _r1a59pxmeuct \h 22Damage Payments (Likely Deductible under Business Practice/Income Producing Purpose Test PAGEREF _aeq29d8jc86h \h 22Fines and Penalties (Not Deductible 67.6) PAGEREF _abin5m7bua6k \h 23Deductions for Mixed Business and Personal Expense PAGEREF _5ur0gw62eeii \h 23Deductions for Entertainment, Recreation, Meals, Parties - Limited by 18(1)(h) & (l) PAGEREF _59q1itda7chp \h 23Limits on Deductibility for Meals/Entertainment 67.1(1) PAGEREF _itzqs2jbd0dt \h 24Home Work Space (Possibly Deductible Under 18(12)) PAGEREF _akylrdmnlz0q \h 24Travel Expenses (Deductible under 18(1)(h) PAGEREF _dbba0bo0pcil \h 25Deducting Interest Expense 20(1)(c) PAGEREF _6l1y8rrhzwfz \h 26Timing Issues PAGEREF _udyc6qfu2tdh \h 27General Timing Issues PAGEREF _55aw7wkr3go9 \h 27Deducting Inventory Costs PAGEREF _rhwm3kpap58g \h 28Capital Expenses - Cannot Deduct 18(1)(b) PAGEREF _qmyj04vgf7n3 \h 28Acquisition/Maintenance/Repair of Property - Is the Expenditure Capital or Deductible Business Expense? PAGEREF _pg8ad8ew3sd4 \h 29Capital Cost Allowance PAGEREF _au3hr3sx0gpn \h 30Taxable Capital Gains and Allowing Capital Losses PAGEREF _hsnjeg4m3k15 \h 31Characterizing Capital Property PAGEREF _ogg2y8oyelbv \h 31Characterizing Real Property PAGEREF _mwmnt1mlws9y \h 31Canadian Securities Election - Can Characterize Gains/Loss as CC 39(4) PAGEREF _2tdmdlxjg7xm \h 32Calculating Gains and Allowable Losses PAGEREF _tzh505kgtozf \h 33General Rules on Calculating Gains and Allowable Losses PAGEREF _x5818yi31z9x \h 33Personal Use Property - No Allowable Capital Loss 40(2)(g)(iii) PAGEREF _gbj0f4akol9t \h 33Listed Personal Property - Losses Allowable Only Against Gains from Same 41(2) PAGEREF _4gik525q1x0k \h 33Principal Residence PAGEREF _2v60q3voc4h8 \h 34Recognition and Non Recognition Rules PAGEREF _npkeym493o4w \h 35Allocating Proceeds Upon Disposition of Mixed Inventory and Capital Assets PAGEREF _25xx4h5qwmuj \h 35General Limitations Regarding Reasonableness PAGEREF _ofdnkzr29mit \h 36Avoidance GAAR - s. 245Imposes a business purpose test and a ‘step transaction’ doctrine - where each step but one in a series of transactions is otherwise legitimate, the GAAR may be applied to deny the tax benefit obtained. Three requirements: 245(3)(a-b) Transaction or series of transactions of which the transaction is a part would, but for the GAAR, result in a tax benefit - T to disprove, objective standard 245(1) “tax benefit” = reduction, avoidance or deferral of tax payable or an increase in tax refund Applies to any transaction that results in any tax benefit to T Trustco Mortgage 245(3)(a-b) The transaction or series of transactions of which the transaction was a part, cannot reasonably be considered to have been undertaken or arranged primarily for non-tax purposes 245(4) The transaction in question results directly or indirectly in a misuse or abuse of the ITAMisuse and abuse is one analysis Trustco Mortgage Determining abuse or misuse test process from OSFC Holdings Ltd v Canada, 2001 FCA1) Identify relevant provision/policy2) Determine whether avoidance transaction constituted a misuse or abuse having regard to the identified policyDetermining abuse from Copthorne Holdings Ltd v Canada, 2011 SCC1) Where the transaction achieves an outcome the statutory provision was intended to prevent2) Where the transaction defeats the underlying rationale of the provision 3) Where the transaction circumvents the provision in a manner that frustrates or defeats its object, spirit, or purpose3) To deny a tax benefit where there has been strict compliance with the Act on the grounds that an avoidance transaction constitutes a misuse or abuse, requires the relevant policy be clear and unambiguous. Remedial Action245(2) where transaction is an avoidance transaction, the tax consequences shall be determined as is reasonable in the circumstances in order to deny a tax benefit that would have resulted w/o the GAARGAAR can be used adjust deductions in computing income from a source and net income from all sources, deductions, and tax credits per (5)(a)GAAR can be used as an attribution rule to allocate any deduction, income, loss to “any person” per (5)(b)GAAR authorizes CRA and courts to recharacterize the nature of any payment per (5)(c)Tax effects that would otherwise result from the application of any other provisions of the Act may be ignored per (5)(d)Characterization 5(1) T’s income for a taxation year from an office or employment = the salary, wages, and other remuneration, including gratuities, received by the taxpayer in the year. Received accounts for cash one has, not what one is owed (ie not accounts receivable) Per 248(1) (definitions)“Office” = position of an individual (ie cannot be a corporation) entitling individual to a fixed or ascertainable stipend, elected by popular vote or appointed in a representative capacity (public or corporation director)Exhaustive definition “Employment” = position of an individual in the “service of” some other person (including government or foreign government) and “servant” or “employee” means a person holding such a positionExhaustive definition Must note distinction between historical contract of being “in service” → i.e. independent contractors vs “contract of service” (subject to business income) → i.e. employment Wiebe Door “TOTAL RELATIONSHIP” TESTExpress intent of the parties not determinative - substance of the relationship over nomenclature 1) Control over the performance of work Less control → contractor 2) Ownership of tools or equipment Ownership → contractor 3) Risk of profit/loss or method of remunerationHourly basis → employment Piecemeal/per job → contractor 4) Integration Higher integration → employment However, cannot be given too much weight on its own, must also assess exclusivity, whether T works w/ other companies as well. Other factors: hiring of helpers, financial risk taken, degree of responsibility for investment and management, opportunity for profit, principal workplace, specific results, exclusivity of employment (integration test viewed from the work’s perspective), whether business already established. While “specific understanding is not itself determinative” per Wiebe, it may be a relevant consideration since it is at the essence of what are essentially contractual relationships Royal Winnipeg Ballet If T is a corporation/incorporated employee, is T carrying on a “personal services business” - SAAR Taxpayer’s who provided services in the form of an incorporated employee used to benefit from lower corporate tax rate. However, with the Personal Services Business provision 125(7), taxpayer’s are barred from benefiting from lower corporate taxes and may not file business expenses - except for employee salaries, etc. 18(1)(p). 125(7) Personal services businessEITHER (a) an individual who performs services on behalf of the corporation (incorporated employee) OR: (b) any person related to the incorporated employee Is a specified shareholder (who owns 10% of more 248(1)) -AND- the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation; UNLESS (c) the corporation employs in the business throughout the year more than 5 full-time employees - OR: (d) the amount paid or payable to the corporation in the year for the services is received or recievable by it from the corporation with which it was associated (parent, sub, common ownership 256(1)) IT Bulletin IT-73R6 “personal services business” = taxpayer performing the services would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporationLimitations of Personal Services Business 18(1)(p) - no small business deductions; may only deduct for salary paid to the employee, amounts for negotiating contracts, legal expenses for collecting amounts owed to it for services Dynamic Industries Central question: Is T providing the services to another person as an employee (ie personal services business), or as a person in business on his own account? Factors from Wieb Door: 1) Ownership of Tools, 2) Chance of Profit and Risk of Loss, 3) Integration, 4) Control Remuneration consistent w/ “Cost + K” and inconsistent w/ employment relationships: T not compensated for time spent prepared estimates unless awarded K; not paid if did not win K; no paid on a regular basis (required to finance himself to compensate for delays); required to pay for costs of “warranty work” (ie repairing errors/mistakes)Facts: Dynamic, technically owned by wife, ran by husband Mr. Martindale. Transferred all shares to wife to get around union regulations, not as far as we know for tax purposes → he is able to now bid on both union and non-union work. Performed contract work for SILL on a “cost +” basis, and for a time all of Dynamic’s work was consumed by work with SILL. Dynamic paid a salary to Martindale’s wife. Business expenses filed by Dynamic were reassessed on the basis of 18(1)(p). Found in Dynamic’s favour: T not a PSC and T’s business deductions were allowed Counterpoint: Failure to meet “integration test” in 533702 Ontario Ltd. In this case the wife held a private corporation for a show room connected with the husband’s heating business. Inclusions Inclusions: Forms of Remuneration 5(1) T’s income for a taxation year from an office or employment = the salary, wages, and other remuneration, including gratuities, received by the taxpayer in the year. 5(2) T’s loss for a taxation year from an office or employment = amount of T’s loss, if any, for the taxation year from that source computed by applying the provisions of the ITA. 6(1)(a) Remuneration includes boarding, lodging, and other benefits, (b) allowances for personal living expense (c) directors/other fees6(3) an amount received by one person from another: [SAAR - expanding scope of taxable income from O/E] (a) during period while payee was an officer or in employment of payer - OR: (b) on account, in lieu of, or in satisfaction of an obligation arising out of an agreement made immediately prior to, during, or immediately after a period the payee was an officer or in employment shall be deemed as remuneration unless the taxpayer can establish that the payment does not fall under one of the following circumstances: (c) as consideration or partial consideration for accepting the office/employment (inducement payment)(d) as remuneration for services as an officer or under an employment K (e) consideration for a covenant Inducement Payments (Taxable 6(3)(b) & (c)) Inducement payments are generally taxable under 6(3)(c) and not characterized as a capital receipt or windfall. Curran v MNR Inducement payment taxable under 6(3) Taxpayer offered 250K in consideration for his “resignation” from the major shareholder of a competitor's company, subsequently employed by an affiliate corporation. Fact that payment did not come from eventual employer not relevant; could have also been capture under s. 3 “unspecified source” Grenier - T released from employment when employer amalgamated with another company, received 200K and begins working for the new amalgamated company. Court rejected T’s argument that it was for the disposition of right from the old position and finds it taxable under 6(3)(b) and (c).Volpe - T moved for a new position and recieved 27K from an agreement with his new employer as compensation for a housing loss; court found it was at least partly consideration for accepting the job and thus taxable under 6(3)(b) and (c). Gratuitous Payments (Taxable under 5(1))Goldman v MNR Gratuitous earnings in connection with an office or employment = gratuitous income → taxable incomeFacts: Chairman and counsel for the shareholders committee and the corporation agreed that the company would pay the “costs and expenses” of the committee, but not any remuneration to the members. Goldman was a member of the committee, received 3 installments of payment over two years. Claims it was a “gift” and therefore not taxableHeld: Taxpayer liable to income tax although it is voluntary on the part of the person who made it when the payment is made to a person in connection with an office or employment; just because there is no legal right to claim the benefit does not make it a gift. Other Cases Finding the Payment Received as Taxable Yaholnitsky-Smith v MNR, 1992 TCC → Taxpayer received assistance from charitable group home she was employed at to attend a professional training program. Assistance considered remuneration as it found to be consideration for her return to school during her employment. Other Cases Finding the Payment Received Not Taxable. Heggie v MNR, 1985 TCC → taxpayer received gratuitous payment after his position was terminated when the company was bought out. Because the payments were made by the purchasing company and not the employer, it was not found to be “income”. Seary v MNR, 1978 TRB → taxpayer received monthly payments after threatening legal action for denying tenure at U of T, the monthly payments were not taxable because the taxpayer held no office or employment during the time the payments were made. (note 10). The series of monthly payments became “windfalls” and therefore not taxed; the lump-sum, once he became employed again, was taxed as income. Strike Pay (Not Taxable)IT-334R - “financial assistance paid by a union to its members is not necessarily income of the member for the purposes of the Act” and goes on to suggest that only assistance paid to employees the union will be treated as income. Fries v MNR, 1978SSC held that ambiguity in this area is to benefit the taxpayer, and that strike payments are not an income from a source under s. 3. Holding under FCA court [REVERSED] strike pay as income from an unspecified source (s. 3); rejected T’s argument that IT bulletin is to be given credence and that the payments are a return on capital as the union dues are deucted against their income, the members lose control over the funds once taken by the union + payments are recurring/periodical and equal to former income (aspect of surrogatum principle).Pre-fries: Loeb: taxpayer entered in employment K with union during strike and received taxable employment income; employment by union during strike = employment income (legal substance over form)Ferris: taxpayer carried on business with other union members operating a newspaper and received taxable business income. Carrying on a business during a strike = business income (legal substance over form)Tort Damages for Personal Injury or Death (Not Taxable)Cirella v Canada, 1978Damages in tort, including for loss of income, not taxable as “income” Facts: Cirella awarded $14,500 as special damages for loss of income for several years with respect to personal injuries sustained in an MVA (ie past income capacity). General damages for future income capacity not went after by tax authorities. MNR argument that it should be taxed under 3 rejected as the loss of earning power is a capital value. Court also rejected argument that it was substitution for employment and ought to be treated as employment (surrogatum principle, London Thames). IT-365R2 general and special damages, including out of pocket expenses, accrued or future loss of earnings, pain and suffering, loss of amenities of life, loss of earning capacity, shortened expectation of life, the loss of financial support caused by death of supporting individual are excluded from income. Also, Kant dame award for permanent disability found not to be wage replacement. Inclusions: Payments on Termination 56(1)(ii) There shall be included in computing the income of a taxpayer any amount recieved by the taxpayer in the year as, on account of or in lieu of payment, or in satisfaction of retiring allowance other than an amount received out of or under an employee benefit plan, a retirement compensation or salary deferral arrangement. 248(1) “retiring allowance” = an amount (other than a superannuation or pension benefit) received (a) on or after retirement of a taxpayer in recognition of long service or (b) in respect of a loss of an office/employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages, order of judgement of a tribunal. In Quance, 1974 the taxpayer’s damages were held to be in satisfaction of an obligation arising out of a contract of employment (ie that reasonable notice be given) and thus was found to constitute taxable income. Alternatively, in the Atkins 1976 court found that damages for breach of K do not become ‘salary’ because they are measured by reference to the salary that would have been payable if the employment K had not been breached → damage payments = windfall. However, Atkins was overturned by the introduction of 56(1)(ii). Was there a loss of employment or office? In order for the taxpayer to be liable for payments received under 56(1)(ii), Schwartz held that the taxpayer must have actually commenced employment “in the service” of his/her employer, as the provision does not intend to account for “future employment”. Schwartz v Canada, 1996 Settlement money for a breach of employment contract prior to one’s employment is not treated as “retirement allowance” as there was no employment relationship (ie future employee not in the service of the future employer). Facts: S was offered and accepted a K of employment with a healthcare company for salary and share deal. Offeror breached the K prior to S coming on board with the company. Parties reached a settlement of $360,000 as a lump sum. Tax authorities assessed in the settlement as “retirement allowance”, however, S challenges as at no point was he in the employment of the payor. Analysis: Crown argument Surrogatum principle from London Thames shut down - Parl adopted a specific solution to a specific problem that resulted from rulings respecting the taxability of payments similar to those received by Schwartz, to usurp the general provisions over the detailed provision would disregard Parl’s intention → matter must be assessed under 56(1)(a)(ii) - where a specific provision exists, it is to be preferred over a general provision There is a difference between “in the service of” and “intended employment” used elsewhere in the ITA - perhaps a residue of the strict construction approach [Better to have argued that the disposition of money is from a destroyed source, which has more of a capital receipt feel to it, but line of argument not pursued] Held: T not liable for taxation on “retirement allowance” as there was no employment relationship to begin with Moss - taxpayer’s payment to release first right of refusal after resigning as a sales manager was taxed under 6(3)(d) or (e) (covenant)Was the payment made in respect of a loss of employment? In addition to requiring that the taxpayer actually commence employment (not just entering into employment K), the courts have held that the payment received must have been made in “respect of” a loss - the broadest possible nexus test; but limited by Mendes-RMendes-Roux 1997Amount received on account of lost wages/benefits is taxable as income under the “retirement allowance”, however damages/settlement for mental distress and court costs were found not taxable as retirement allowanceFacts: T wrongfully dismissed, part of the settlement was for 3 months pay and benefits, and part of the settlement was for mental distress due to the egregious conduct of her employer. Held: Only amount received on account of lost wages/benefits is taxable as income. [This case is very favourable for the taxpayer] IT-337R4 retiring allowance includes both general and special damages relating to the loss of employment (ie mental anguish, hurt feelings, etc. as well as loss income); however, does not apply to damages to compensate for human rights violation [contradicts Mendes-Roux]. Overin v Canada, 1997 and Grant v Canada, 2008 use of “but for test” → A) But for the loss of employment, would the amount have been received? B) Was the primary purpose of the payment to compensate for a loss of employment? (ie as opposed to damages for pain and suffering?). Overin also states that the payment need not come from the employer since the Act “does not impose the requirement that payment originate with the employer”. Other Cases where payment was found taxable: Merrins - T fired, filed a grievance and paid 60K settlement, amount was taxable as it is in relation to loss of income, not a capital gain from a disposition of a right to have a hearing. Niles - T settled a discrimination claim for 5K, held to be a taxable retiring allowance in respect of office/employment as the discrimination claim was not established → HR violation from IT-337R4 not established Other Cases where Payment was not found taxable: Stolte - T gets amount based on 2 of which some is for pain/suffering from loss of job - not taxable - even though the amount was of a mixed nature, it was held not taxable as it was not in relation to a loss of income. Fourier - lump sum payment in settlement of sexual harassment and HR complaint treated as not taxable as the payment was made in respect an act against the “person of the taxpayer” not in respect of her employment. Giroud - taxpayer entered into employment K with 30K liquidated damages for termination w/o cause in return for not making further claims, criticizing the employer, or working with another private hospital in the city. Liquidated damages could not be reasonably regarded as consideration for entering the K, remuneration under the K, or a covenant with reference to what he was or was not to do after the termination of the K. Inclusions: General Benefits 6(1)(a)6(1)(a) There shall be included in computing the income of a taxpayer for a taxation year as income from office/employment the value of board, lodging, and other benefits of any kind whatsoever received or enjoyed by the taxpayer or by a person who does not deal at arm's’ length with the taxpayer [immediate family]. Excludes benefits: (i) derived from the contributions of the taxpayer’s employer to or under a deferred profit sharing plan, an employee life and health trust, a group sickness or accident insurance plan, a group term life insurance policy, a pooled registered pension plan, a private health services plan, a registered pension plan or a supplementary unemployment benefit plan,(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust,(iii) that was a benefit in respect of the use of an automobile,(iv) derived from counselling services in respect of(A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or(B) the re-employment or retirement of the taxpayer,(v) under a salary deferral arrangement, except to the extent that the benefit is included under this paragraph because of subsection (11), or(vi) that is received or enjoyed by an individual other than the taxpayer under a program provided by the taxpayer’s employer that is designed to assist individuals to further their education, if the taxpayer deals with the employer at arm’s length and it is reasonable to conclude that the benefit is not a substitute for salary, wages or other remuneration of the taxpayer;Three step process for determining the inclusion of general benefits; 1) characterize the benefit, 2) determine the relationship between the benefit and the taxpayer’s employment, and 3) place a value on the benefit. 1. Characterization - Is there a benefit? A benefit is generally considered to be a material advantage - non-cash remuneration or remuneration in kind - conferred to the taxpayer that is not primarily for the benefit of the employer. If the purpose is primarily for the benefit of the employer, any personal enjoyment the taxpayer derived from it must be merely incidental. However, the key finding in most cases appears to be whether there was a material advantage conferred, regardless of the employer’s benefit. Lowe v CanadaWhere the primary purpose of the benefit activity (ex. trip) is business and personal pleasure is merely incidental, it is not a taxable benefit under 6(1)(a) → Key issue: Is the principal purpose of the trip one for business or pleasure?Facts: Employee went on business trip w/ wife to ensure the brokers enjoyed themselves and develop rapport between the employer and the brokers. Lowe testified he felt like he had to go (ie not optional) and that he was on the trip to serve his employer, not a pleasure trip. . Analysis: Appears as though Lowe had little time for personal pleasure, no element of “reward” apparent for Lowe. Pleasure derived from the trip is merely incidental. Where the pleasure component extends beyond incidental, it is implied that there would be a split based on the factual matrix, with some portion being a benefit and others not. Holding: Principal purpose of the trip was business, pleasure merely incidental therefore the value of the trip not taxable NOT-TAXED: Cases where there was no material benefit conferred to T: Huffman v MNR, 1990 Plainclothes police officer received 500$ under the CBA for clothes stained and worn in the course of work. The receipt was not taxable as it was found not to constitute a benefit but simply restore the taxpayer’s economic position. Pollesel v Canada, 1997 and MacInnis v Canada, 2003 moving expenses paid by employer not found to be taxable benefit. MacInnis had his move paid after his retirement from the military.Rachfalowski v Canada, 2009 employer paid golf membership not found to be taxable benefit as the it was primarily for the benefit of the employer, and the employee was not a golfer, went along to get along (somewhat contradictory to Dunlap, cannot however, test value to subjective value for the benefiting party)TAXED: Cases where there was found to be a material benefit conferred to T, whether or not the advantage was designed for the employer: Gernhart v Canada, 1998 “tax equalization payment” for American employee working was found to be taxable benefit as it went against the principle that similarly situated persons ought to be taxed similarly. Faubert v Canada, 1998 Employees of Revenue Canada had their tuition fees for accounting courses paid for by the employer, found to be a taxable benefit as it was not undertaken primarily for the benefit of the employer, but benefited the employee. Dunlap v Canada, 1998 employee Christmas party treated as a taxable benefit, costs valued at 302 and 278. Court rejected argument that the employees did not enjoy going to parties or that they felt the parties were mandatory Clemiss 1992 and Pellizzari 1987: officer of closely held corporation had legal fees paid for by the corporation in fraud case, held to be a taxable benefit as the fraud was not a part of the work. McGoldrick, 2003 Taxpayer was employed at a casino, given one free meal a day as was not permitted to bring food onto the premises; court held there was a taxable benefit as “although the meals were provided primarily for a business purposes, the personal benefit to the taxpayer was more than merely incidental”. Taxpayer found to only have eaten half the time; value of benefit taxed at 50%. Cutmore 1986 Senior executives were required to have accounting services provided by to them by the employer; while the advantage was primarily for the benefit of the employer, the value of the services conferred on the taxpayer was held to be a taxable benefit. IT-470R generally, the following are not considered taxable benefitsDiscounts on merchandise sold by employer Transportation to the job for security reasonsUse of employer’s recreational facilitiesWhere the employer pays the membership fees of a social or athletic club and the membership is principally for the employer’s advantage (see Rachfalowski)Airline passes, except where the employee pays less than 50% of the economy fare available on that day for that tripEmployees/retired employees of transportation companies will not be taxed on pass benefits Where attendance is required or where an employee is hosting events for a business trip (Lowe). 2. Connection to Employment? For a benefit to be taxable under 6(1)(a), the benefit must have been received or enjoyed by the taxpayer “in respect of, in the course of, or by virtue of” office or employment. R v Savage, 1983 Taxable benefit need not take the characteristic of remuneration for services as it can be a “benefit of whatever kind” - “in respect of” = broadest possible nexus testFacts: Employer awarded $300 to Ms. Savage for successfully completing 3 life insurance courses, described by the employer as a “prize”. The court found the courses were completed “in respect of her employment” as she took the courses to improve her knowledge and efficiency in the company business and for better opportunity for promotionHeld: Money granted in completing courses was connected to her employmentCases where benefit was TAXED Mindszenthy v Canada, 1993 Court rejected argument that a Rolex watch given by the president of the company to employee was a pure gift. No evidence of intention to gift. Problem in this case was that the donor deducted the value of the gift. Expense deduction as evidence against intention to gift. Waffle v MNR, 1968 Employee of dealership given 2 day vacation from Ford (the manufacturer), not his employer per se = taxable benefit, as the benefit was in “respect of” his employment. Ratio: 6(1)(a) benefit need not be received directly from employer. In respect of ≠ from employer directly. Giffen v Canada, 1995 Employe of a company that required him to travel frequently by air was assessed the value of “frequent flyer points” converted to free airline tickets as the program was only available to employees were travelled. CRA positions; some gifts allowed: Income Tax Technical News No. 22, Jan 11, 2002 employers are able to give up to two non-cash gifts a year on a non-tax basis for special occasions (Xmas, marriage, b-day, etc.) where the aggregate cost is less than 500$. Does not apply to cash bonuses or gifts that can be converted into cash (ie gold). Income Tax Technical News No. 40, June 11, 2009 non-cash gifts/awards to arm’s length employee will not be taxable as long as total value does not exceed 500. Value above = taxable. Long service non-cash awards also, under 500. As long as person was employed longer than 5 years and has not received an award in the last 5 years3. ValuationIn order to be included in the taxpayer’s income for the year, the general benefit conferred must be given a monetary value. Not defined in the act, “value” has been judicially interpreted generally to mean “fair market value” Spence. Spence v Canada, 2011“Value” = FMV Facts: Taxpayer employed at private school, able to send their children to school for 50% of the normal tuition rate. Taxpayers filed the benefit based on the (Tuition payment - Actual overhead cost), not the tuition payment. MNR reassessed the benefit to be the actual tuition payment. Analysis: [Consequentialist argument] Assessing taxable benefits on the actual cost to employer would result in inherent unfairness, as the tax on the same basic benefit could change greatly depending on the cost to the employer + the issue of taxation is on the employee’s income, not costs to employer.Held: the value of the benefit is to be the fair market value of the tuition - not the actual cost (it the full cost of tuition)[Problems w/ the judgement; no assessment of what “value” means in the text of the Act, total rejection of assessing the words of the text in their context; also, market price is not always fixed, subject to fluctuations]benefit like this might fall under 6(1)(a)(vi) → education benefit to non-taxpayer at arm’s lengthBenefits valued at FMVRichmond v Canada, 1998 TCC Employer paid taxpayer’s parking stall in d.t. TO. Taxpayer argued he walked to work most days and never used it so it should not be assessed at fair market price. Court found that it should be assessed at fair market price because use of the benefit is irrelevant, it was still benefited to him. Toronto Parking Authority and Schroter - Free parking spaces constituted taxable benefit, assessed at FMV of parking spaces in the area (d.t. TO and d.t. Edmonton)Taylor v Canada, 1995 Taxpayer assessed on full value of a yacht (175K) for exclusive use and possession, even though taxpayer argued it was only used during the year. Waffle v MNR, 1968 Employee of dealership given free vaca from manufacturer, argued in the alternative that the trip was of no monetary value → held that the value of the benefit was the cost to Ford. Benefits valued at less than FMVJelles, 1996 The taxpayer worked at a senior employment home, stayed at a suit on premises for 5 nights at week. The taxable benefit was assessed at far less than FMV as the employees were required to be on call 24 hrs and had a home away from work they returned to. Wilsa v Canada, 1999 Employer gave taxpayer gold ring w/ logo on it. Initially assessed at value of the ring ($500), but b/c the ring at the employer’s corporate logo stamped on it, the fair value was held to be substantially less, and the taxable benefit = $73. In line with IT-470R stating that corporate logos negatively impact fair market value. Inclusions: Other BenefitsRelocation Assistance - Included 6(23) 6(23) An amount paid or the value of assistance provided to any person in respect of, in the course of or by virtue of an individual’s office or employment in respect of the cost of, the financing or, the use or or the right to use a residence is, for the purpose of paragraph 6(1)(a), a benefit received by the individual because of the office or employmentPhilips 1994 - Court rejected argument that a 10K “relocation payment” was not a taxable benefit as the payment “enabled him to acquire a more valuable asset”. → relocation assistance = taxable. Pezzolato, TCC taxpayer moved for work-related purposes, employer provided “bridge financing” after he was unable sell his old house = taxable. Previous decisions Splance and Hoefele where subsidies for mortgage were held not taxable are reversed by 6(23) - the “catch all” Housing Loss Payments - Included 6(19) (as opposed to an ‘eligible housing loss’)6(19) An amount paid in respect of a housing loss to or on behalf of a taxpayer or taxpayer’s family member in respect of, in the course of, or because of an office or employment is deemed to be a benefit received, except for an eligible housing loss. 6(21) “housing loss” = amount by which the greater of [the cost of the residence] and [its highest FMV during the previous six months] exceeds the lessor of [the proceeds of disposition] or [its FMV if it is disposed of before the end of the next taxation year] or [its FMV]. IF the payment qualifies as an “eligible housing loss” 6(20), (a) the first 15K of the eligible housing loss is non-taxable, (b) beyond that ? the amount is taxed. 6(22) Eligible housing loss refers to an “eligible relocation”248(1) eligible relocation = a relocation of the taxpayer where (a) enable the taxpayer to carry on a business or be employed in Canada (the “new work location”) OR to be a FT student at post-secondary school (b) both previous and after residences are in Canada (c) the distance between the previous residence and the new work location is not less than 40km great than the distance between the new residence and the new work location. Thomas v Canada, 2007T Argument 1 shot down: agreement to reimburse 850K for cost of home as a “separate K” not related to employment → broad nexus test; K was at least related to employment T Argument 2: Payment not an eligible housing cost as it was not made in respect of an eligible relocation; payment as compensation for termination, not to help him move Facts: Taxpayer began employment with JD Irving, having moved from Ottawa to Saint John to do so. Taxpayer built a home. One year later, JD terminated his employment. Taxpayer decides to move back to Ottawa. JD agreed to pay $850K to reimburse taxpayer for costs of the house, market value established to be $758K. MNR seeks to assess the difference ($91K) as part of the taxpayer’s income. Taxpayer argues that the agreement was not a part of his employment agreement, but a separate agreement. Held: Fully taxable benefit; not an eligible housing loss Forgiveness of Debt - Included 6(15)(a) 6(15)(a) a benefit shall be deemed to have been enjoyed by T any time an obligation issued by the debtor is settled or extinguished and (b) the value of that benefit shall be deemed to be the forgiven debt amount at that time 6(15.1) “Forgiven amount” = meaning in 80(1) where: (a) it was a commercial obligation (b) no amount included in computing income because of the obligation being settled/extinguished at that time was taken into account80(1) “Forgiven amount” = A (amount issued) - B (amonut paid back)McArdle v MNR, 1984 Taxpayer indebted to employer for 17K for housing loan, when relationships soured the taxpayer resigned and the employer forgave the loan. Direct nexus between debt forgiveness and employment relationship; held to be taxable Norris v Canada, 1994 the taxpayer provided consulting services to Suny’s International through a corporation called PMC. Suny’s granted and later forgave a 135K interest free loan. Taxpayer argues that the loan was not a benefit associated with his employment b/c Suny was not his employer. Court cited Waffle in rejecting the argument as a 6(1)(a) need not be received from an employer directly. Cousins v MNR, 1971 and McIlhargey v Canada, 1991 court rejected taxpayer's arguments that the forgiveness of former employer debts merely compensated them for a decrease in their net-worth (one for a real estate loss and one for a loss in share value). Court found the forgiveness constituted a real benefit of avoiding a decrease in the taxpayer’s net worth. Opposite result in Gresinger where taxpayer borrowed 140K from employer in a move from Calgary to Edmonton; market collapsed and he was unable to sell his Calgary home. Moved back to Calgary, employer forgave the remaining 40K debt. Court found the forgiven amount as a non-taxable reimbursement for the taxpayer’s loss on the disposition of the Edmonton residence. *Note: not good law!6(15)(a) codifies result in Cousins and McIlhargy and overturns result in Greisinger by deeming a benefit “any time an obligation issued..is settled or extinguished”. Interest Free Loans - Included 6(9), Exception for Relocation Loan 110(1)(j)6(9) an amount in respect of a loan or debt that is, under 80.4(1), deemed to be a benefit is to be included. 80.4(1) where T receives a loan or otherwise incurs a debt of or as a consequence of a previous, current, or intended office or employment, the individual is deemed to have received a benefit equal to the difference between the interest at a prescribed rate (Reg 4301(c)) and the interest that is actually paid or payable. 80.4(3)(a) doesn’t apply if the interest rate is equal or above commercial rate or (b) if the loan was included in T’s income80.4(4) the interest cannot exceed what it would have been if calculated with the prescribed rate at the time the loan was incurred. 80.4(6) if repayment terms are greater than 5 years, the loan is “renewed” every 5 years, so is deemed a new loan at the 5 yr point. 110(1)(j) The deemed interest on the first 25K of a home purchase/relocation loan related to office/employment is non-taxable248(10) “home relocation loan” loan recieved by T or T’s spouse where T has commenced employment at a location and by reason thereof has moved (from an old residence in Canada to a new residence in Canada) if(a) new residence is at least 40km closer to work location that old residence (b) the loan is used to get a dwelling or buy into a co-op(c) the loan is received in the way described under 80.4(1)(d) the loan is designated by T as a home relocation loan - only 1 at a time! 80.4(1.1) a loan or debt is deemed to have been received or incurred because of individual’s office or employment..or personal serives business...if it reasonable to conclude that, but for an individual's previous, current, or intended office or employment (a) the terms of the loan would have been different - OR - (b) the loan would not have been received or the debt not incurred Hoefele case? Employee Stock Options - Included 7(1)(a) 7 employee stock options are a taxable benefit. 7(1)(a) if the employee exercises the right, T is deemed to have received the benefit in the year he exercised the right Value = [FMV] - [what T paid to acquire option] + [what T paid for the shares upon exercising] 7(1)(b) if the employee disposes of the rights, T is deemed to have received the benefit in the year the rights were disposed Value = [price rights sold for] - [price paid to acquire option] 7(1.7) cancellation of an option constitutes a transfer or disposition and deems amounts received on cancellation to be proceeds of disposition. 110(1)(d) employees are able to deduct ? amount included under s. 7 IF the securities are: Common shares or widely held trust units, the exiercise price is not less than fair market value when the option is granted, and the employee deals at arm’s length with the employer Ie no “in the money share” 110(1)(d.1) employees are able to deduct ? amount included under s. 7 IF the security is shares of a Canadian controlled private corporation and held for two years7(3) If qualifying person has agreed to sell or issue securities to an employee, the employee is deemed to have neither received nor enjoyed any benefit under or because of the agreement [not enough info] 7(4) when options are exercised after employment, the rules governing the taxation of stock option benefits continue to apply as though the taxpayer were still employed 7(5) operation of 7 not applicable if the employee did not receive the rights “in respect of, in the course of, or by virtue of, the employment” Taylor, 1988 - an officer of a corporation is an employee for the purposes of s. 7 - computing stock options as part of T’s income for the taxation year Other cases Busby, 1986 held differently; that an officer of a corp ≠ employee for purposes of s. 7 → however factual matrix very different, found to have received those options in consideration “extraneous” to her office (ie her personal relationship). Grohne 1989 court found that a director who was also a shareholder received the stock options with respect to him being a shareholder, not an officer. S. 7 held not to apply in this case. Inclusions: General Allowances 6(1)(b) 6(1)(b) all amounts received by the taxpayer in the year as an allowance for personal or living expenses are to be included - with exceptions (see below)Allowance has been statutorily interpreted to encompass cash remuneration in addition to an employee’s typical or basic remuneration; contrasted with 6(1)(a) which designed to capture non-cash remuneration or remuneration in kind. Note: if something fails the allowance test under MacDonald it may still fall under 6(1)(a). MacDonald v Canada, 1994 ALLOWANCE TEST 1) Arbitrary amount that is predetermined sum set w/o specific reference to an actual expense or cost; not linked to reimbursement 2) Allowance will usually be for a specific purpose 3) Allowance is for the discretion of the recipient in that they need not account for the expenditure Other CasesLepine v MNR, 1978 (isolation bonus in Guinea to set up aluminum plant) and Canada v Demers, 1980 (cost of living adjustment for work with the OAS in Haiti)- relocations allowances and isolations payments generally taxable under 6(1)(a) or 6(1)(b)North Waterloo Publishing v Canada, 1998 FCA meal allowance taxable whereas reimbursement or in-kind benefit might not have been taxable, as it was for the employer’s advantage. Distinction Between “Allowance” and “Reimbursement” or “Accountable Advance” IT-522R provides some guidance on meaning of “allowance”: “Reimbursements” and “accountable advances” are payments made to enable employees to conduct the employer’s business, and are not for personal or living expenses generally. “Allowance” = periodic or other payment that an employee receives from an employee w/o having to account for use → taxable under 6(1)(b)“Reimbursement” = payment to an employee to repay for amounts spent on the employer’s business → generally not taxable “Accountable advance” = amount given to an employee for expenses to be incurred by the employee on the employer’s business and to be accounted for by the production of vouchers and return outstanding amounts → generally not taxable EXCEPTIONS to General Allowances (Not Included in Income)6(1)(b)(v) reasonable allowance for travel expenses for the period where T was employed in the selling of property or negotiating contracts6(1)(b)(vii) reasonable allowances for travel expenses (other than use of motor vehicle) received by an employee (other than an employee under 6(1)(b)(v)) from the employer for travelling away from (a) municipality where employer’s establishment at which T ordinarily worked or reported AND (b) metro area, where the establishment was located, in performance of duties of employee’s office/employment6(1)(b)(vii.1) reasonable allowance for the use of a motor vehicle received by an employee (other than a 6(1)(b)(v) employee) from the employer for travelling in the performance of the duties of the office or employment are exempt from inclusions in T’s income. 6(1)(b)(x) & (xi) amount for motor vehicle will not be ‘reasonable’ when based on something other than solely KMs driven for work - or - when T receives both an allowance and a reimbursement for the vehicleBlackman v MNRPersonal expenses while away for long periods of time, where the employee is “sojourning” and not “travelling” are not exempted as reasonable travel allowances Company paid “travelling expenses” for employees who were required to spend large amounts of time away from home, 240 days. Company indicated in trial that expenses were to compensate for need to keep oneself busy when not at work away from homeHeld: Time spent was too long, payment were clearly for employee’s personal enjoyment/living, allowances not exempted[Possible factors to consider: type of residence, length of stay, normal working hours/employers place of business] Cases on Vehicle AllowancesCampbell 2003 taxpayers held offices w/ regional school board but worked from home. Employer granted them a per/km allowance for travel between home and the school building where meetings were required. Court held the allowance was exempt under 6(1)(b)(vii.1) as the taxpayers were “going from one place of business to another”. Daniels 2004 distinguished Campbell. City councillor given km allowance to travel from home to municipal meetings, but court found he was simply going from home to work, not from one workplace to another. O’Connell 1998 taxpayer used a BMW ($66k) to travel from Montreal and Toronto to NYC to buy clothing for retail. Minister determined what was “reasonable” based on actual operation costs + annual capital cost of the vehicle. “Reasonable” held to also include in light of other provisions in the Act and regulations and can exclude luxury vehicles. Statutory Exclusions (Not Included in Income)Part-time Travel Expenses 81(3.1) 81(3.1) reasonable allowance or reimbursement for travel expenses incurred in respect of part-time employment, provided part-time duties performed at location are not less than 80 km from individual’s ordinary place of residence and place of other employment or business[generally employees of higher education institutions] Special Work Site Location - Not Included 6(6)(a)(i) 6(6)(a)(i) special work site = location at which the duties performed by T were of a temporary nature, if T maintained at another location a self-contained domestic establishment as T’s principal place of residence...That was available throughout the period for T’s occupancy and not rented by T to any other person - AND:By reason of distance, T could not reasonably be expected to have returned daily from the work site248(1) “self-contained domestic establishment” = a dwelling house, apartment or other similar place of residence which, as a general rule, the place where the person eats and sleeps. 6(6) Must be away for no less than 36 hours from principal place of residence and the allowance/benefit must be reasonable 6(6)(a)(i) & (b)(i) NOT included in the exemption are benefits or allowance for board, lodging, and transportation between special work site at remote location and principal place of residence. Guilbert 1991Special worksite cannot be any ordinary place of work away from the taxpayer’s home - newspaper office in another city where taxpayer spent significant time away from his family is not “special enough” [likely a very poor judgement] Facts: Taxpayer agreed to take up a position with another newspaper company on a temporary basis, but became longer term than anticipated, Was provided with a 6-bdrm apartment in Quebec City between 1984-1986, but maintained a principal residence in Orford Township. Taxpayer claims he did not occupy the apartment for more than 50% of the time. Held: no exemption for the apartment as the worksite is not “special” [Better factors to consider: location of family; time spent; ownership vs use; habitual abode; exclusivity of use see IT-91R4] For a more recent interpretation and counterpoint to Guilbert; Jaffar and Rozumiak Jaffar v R, 2002 taxpayer was a computer analyst sent to work at a client’s office in Rochester for over a year, employer paid for accommodation and trips back home to visit family. Court found that this was indeed a “special worksite”; held that a special worksite = an unusual place where an employee does his or her task, and can be any place in the world, including large centres, to reflect modern commercial realities. Rozumiak 2005 taxpayer employee of Port of Vancouver, sent to Chicago for a 3 year stint to set up a sales office; held to be a “special work site” Other CasesSmith v Canada, 1998 TCC taxpayer had a special worksite 60km from his home, court rejected argument for allowance exemption on account that the distance was not far enough for the taxpayer to be reasonably unable to return home daily. Charum v MNR, 1983 TCC taxpayer was 60km away, but had to take a ferry and a small winding road, court found in taxpayer’s favour that the location was far enoughIT-91R4 “Temporary nature” if work can be reasonably expected to provide continuous employment not beyond 2 years, must consider nature of duties performed by employee, overall time estimated, and agreed period of time“Principal place of residence” place where employee maintains a self-contained domestic establishment. “By reason of distance...expectation of returning home” generally qualifies if work site is more than 80km away and considers number of hours each shift, travel time, means and condition of transportation, length of rest period if employee returned home, and general mental/physical health of the employee. Remote Work Location - Not Included 6(6)(a)(ii)6(6)(a)(ii) remote work location = location at which, by virtue of its remoteness from any established community, T could not reasonanbly have been expected to establish and maintain a self-contained domestic establishment248(1) “self-contained domestic establishment” = a dwelling house, apartment or other similar place of residence which, as a general rule, the place where the person eats and sleeps. 6(6) Must be away for no less than 36 hours from principal place of residence and the allowance/benefit must be reasonable 6(6)(a)(i) & (b)(i) NOT included in the exemption are benefits or allowance for board, lodging, and transportation between special work site at remote location and principal place of residence. Dionne 1996 TCCA remote work location cannot be a location where the taxpayer maintains a SCDE in an ‘established community’ Teacher in arctic village given many benefits, including a transportation allowance; court denied the exclusions and held it was taxable as T 1) maintained a SCDE and the village was 2) an established community w/ medical centre, school, basic services, etc. IT-91R4“Established community” = “a body of people who reside in same locality and who are permanently settled in that location”; cannot be an ‘established community’ if it lacks essential services, generally including basic food store, clothing store, housing, access to certain medical assistance and certain educational facilities “Remoteness” = factors to consider are availability of transport, distance from an established community, and time required to travel that distance General rule: Remote = nearest established community of 1,000+ is 80km or more away; room to maneuver Town could become remote when influx outgrows the essential services it is able to offer “Could not reasonably be expected to establish and maintain a self-contained domestic establishment” = factual determination case-by-case. Reasonable expectation exists where: employer provides SCDE at the work location, the employee is drawn from the local community where housing has already been established, the employee opts to buy property and builds his own SCDE, the employee rents a SCDE at the work location Employment Deductions 8(2) General limitation on deductions: no deductions shall be made except as permitted by this section8(10) deduction under 1(c), (f), (h), (h.1) or 1(i)(ii) or (iii) shall not be deducted unless a prescribed form, signed by T’s employer certifying the conditions set out in the provisions were met67: to be deductible, expenses must be reasonable in the circumstances Travelling Expenses - Generally Deductible 8(1)(h)8(1)(h) T may deduct amounts expended by T in the year (other than motor vehicle expenses) for travelling in the course of the office/employment provided that T(a) was ordinarily required to carry on duties of office/employment away from employer’s place of business or in different places - and: (b) was required under K of employment to pay travel expenses incurred by T in performance of duties of office/employment EXCEPT where(c) T receive allowances for travel expenses that was, because of 6(1)(b)(v), (vi) or (vii) not included in T’s income - OR: (d) T claims a deduction for the year under 8(1)(e), (f), or (g) [for specific types of jobs] 8(1)(h.1) T may deduct amounts expended in respect of a motor vehicle expenses incurred for travelling in the course of an office or employment, also provided that T (i) Was ordinarily required to carry on duties of office or employment away from employer’s place of business or in difference places - and: (ii) Was required under K of employment to pay travel expenses EXCEPT where (iii) received an allowance for motor vehicle expenses that was, because of 6(1)(b) not included in computing T’s income - OR: (iv) T claims a deductions under 8(1)(f)General requirements:1) travel in the ordinary course of office and employment and ordinarily required to carry on duties away from employer’s place of business General travel expenses → 8(1)(h)(a)MV expenses → 8(1)(h.1)(i)Luks 1958 - practical for employee to make certain travelling decisions does not make those decsisions required to carry out employment duties [and other cases below]Electrician provided w/ tools, wanted to bring them to a fro his home and sought to deduct MV expenses - denied. 2) required under K ot pay travel expenses General travel expenses → 8(1)(h)(b) MV expenses → 8(h.1)(ii)3) T cannot have received a reasonable travel allowance that would be excluded from inclusion General travel expenses → 8(1)(h)(c - d)MV expenses → 8(1)(h.1)(iii - iv) Other cases considering whether travel was done in the course of the office/employment Found not deductible Canada v Diemert, 1976 DTC travelling to the location where the employee must undertake his/her duties does not make the traveling a required part of the employee’s duties. Found deductible Chrapko v Canada, 1988 FCA employee normally worked in Toronto but also responsible for locations in Fort Erie; court distinguished Diemert and found that the expenses were incurred in travelling to a place of work away from the places where the employee normally works. MNR v Merten, 1990 FCTD Can deduct travel from home to unusual work site a taxpayer can deduct expenses for travelling from their home to a place of work as long as that place of work is other than the place at which they “usually work”.Evans v Canada, 1998 DTC administrator required to travel to different schools throughout the work day. Given an allowance for distance between the schools, but not for the distance from home to first school and from the last school back home. Also required to deliver specific materials from home to school. As she was required to transport the materials from and to her home and the start and end of the day, it was a necessary expense incurred in the performance of her duties. Meal Deductions Incurred While Travelling (? Deductible) 8(1)(h) - general travel expenses and 8(1)(h.1) motor vehicle expenses 8(4) Meals can be deducted as a travelling expense but only where T was required by duties to be away for a period of at least 12 hrs from the municipality or metro area where the employer ordinarily reports 67.1 meals and entertainment deductions are limited to ? of otherwise deductible amount [ie can only deduct ? meal expenses] Healy 1979 FCA Must first determine place of ordinary work location; then determine whether T spent at least 12 hrs from that location in the course of T’s duties Facts: Taxpayer worked at Jockey Club, required to spend time at Fort Erie twice for 3 weeks at a time; lived in a motel. Was given no allowance or reimbursement for meals, travel expenses, or accommodation. Taxpayer’s meals deduction was rejected on the basis it did not meet the requirements in 8(4)Analysis: Ordinary work location = TO → Head office in Toronto, assigned schedules, etc. ? of time spend in TorontoHeld: Permitted to deduct meal costs as was required to carry out his duties for periods of 12hr+ in Erie IT-522R where a taxpayer may be said to ordinarily report to multiple work locations in different areas, 8(4) applies to the one reported to most frequently. Multiple work sites in the same municipality or metro area are treated as a single site for the purpose of 8(4).Home Office Expenses - Deductible if Meets Conditions in 8(13) 8(1)(i) deductions for office rent including (ii) payment of salary for assistance which was required by K of employment and (iii) cost of supplies consumed directly in the performance of the duties of the office or employment and that was required by the K of employment for T to pay forIT-352R2 “supplies” under 8(1)(i)(iii) = expenses for maintenance of the home including energy, light bulbs, cleaning material, etc. 8(13) where otherwise deductible, deductible only to the extent that the workspace is either that place where the individual principally performs the duties of the office or employment OR used exclusively for the purpose of earning income from the office and employment and used on a regular and continuous basis for meetings customers or others in the ordinary course of performing the duties of the office or employment. 8(13)(c) deductions cannot exceed income generated from that workplace 8(13)(c) can carry deductions forward if it brings income to zero Deductions for rent tend not to be allowed where taxpayer owns the property (Felton, Thompson) but accepted in Prewer (although the court greatly reduced the deduction to 10% of the value of maintaining the home in order to better reflect the physically small area the work space took up). Where T owns the property; they may still avail themselves of deducting the cost of supplies under 8(1)(i)(iii) Haltrecht taxpayer was a part-time instructor at York U, not provided w/ an office. Deducted 14% of utilities and maintenance costs of home. Court awarded in favour of taxpayer and held that utility costs were deductible as “supplies” under 8(1)(i)(iii) and that the 20 hours spent at work constituted the place where the taxpayer “principally performs the duties of her O/E” under 8(13)(a)(i).Moving Expense Deductions - Deductible for Eligible Relocation 62(1) 62(1) T may deduct amount paid as or on account of moving expenses in respect of an eligible relocation 248(1) - “eligible relocation” = (a) a relocation which enables T (i) to carry on a business or be employed in Canada (the “new work location”) OR (ii) be a FT student at post secondary(b) both previous and new residence were in Canada (c) distance between the previous residence and the new work location is not less than 40km greater than the distance between the new residence and the new work location [ie the move brings T 40km closer to the new work location] 62(1) EXCEPTIONS: (a) they were not paid on the taxpayer’s behalf in respect of, in the course of or because of, the taxpayer’s office or employment;(c) the total of those amounts does not exceed T’s total income at the new location (d) all reimbursements and allowances received by the taxpayer in respect of those expenses are included in computing the taxpayer’s income (ie no exclusions)62(1)(b) - expenses may be deducted in the next year (if T does not make enough in 1st year → unlimited carry forward)Storrow → moving expesnes refer to the ordinary out of pocket expenses incurred by T in the course of physically changing the residence and do not cover costs associated with acquisition of new residence [EXCEPT for carve-out in 63(2)(f)63(2) “moving expenses” includes (is not exhaustive) “any expense incurred as or on account of” the following: [Always subject to 67](a) Travel costs for T and members of the household -Ball 1996 TCC court disallowed expenses for visiting new city in advance to scope out housing and school possibilities as they held that s. 62 “does not allow the deduction of expenses for house hunting and job hunting.” → in the “course of” the move-Hasan 2004 taxpayer was architecture student in Montreal, worked in Toronto in the summer. Kept her place in Montreal and deducted her rent payments as the cost for storing furniture. Court rejected the deduction on the basis that expenses must be paid where the taxpayer physically moves or changes residence. -Critchley 1983 veterinarian costs of preparing family dog for move was allowed as the dog was part of the “household”. (b) cost of T for transport and storing household effects-Yaeger 1986 court rejected veterinarian and moving costs for horse as the horse was not part of the “household”, nor is it a “household effect” (ie stuff). -Rath 1982 court rejected the taxpayer’s deducted costs of replacing furniture destroyed in the fire while in transit. (c) cost of meals and lodging near old or new residence for T and members of household -Trainer 1999 total moving time was 34 days, 23 of which were reimbursed by employer. Court allowed taxpayer to deduct meal expenses for remaining un-reimbursed 11-days. (d) cost of cancelling lease of old place-Patry 1982 cost difference between subletting a lease and lease owing is not the same as the cost of “cancelling a lease” and therefore not deductible. (e) selling costs -Pollard v MNR, 1987 TCC additional increase interest in lieu of a cancellation penalty of 6K on mortgage was held to qualify under 6(23)(e). -Faibish v Canada, 2008 TCC cost of dealing with mold prior to listing house not a “moving expense” as a “moving expense” does not denote capital expenses for repairs or improvements. -However, in Trigg v Canada, 2010 TCC the taxpayer, upon insistence from a buyer, paid for asbestos treatment. Expense deduction allowed as they were part of the “selling costs” (whereas in Faibish the repairs were not “selling costs” but costs incurred in the hope to sell). (f) cost of legal services, tax, duty, etc. when buying -Zant T was a lessee, denied legal costs/taxes as she did not own her home (boo!)(g) carrying costs up to 5K + reasonable efforts - interest, property taxes, insurance, utilities up to 5K when house not occupied and reasonable efforts made to sell -Johnstone, TCC 2003 interest on borrowed funds used to purchase new residence not deductible even though secured by mortgage on the old residence until sold -Lowe v Canada, 2007 TCC taxpayer telling friends and family that his home is for sale but did not want to sell it until his probationary period ended ≠ making “reasonable efforts” to sell old residence -Rosa v Canada, 2005 TCC reasonable efforts to sell old residence were not made as the taxpayer’s son continued to live there. (h) cost of revising legal docs to reflect address change, replacing license, utility disconnection/connection -Cusson v Canada, 2006 TCC the court found TV antenna/cable as “utility” within 62(3)(h) but cannot deduct installation charges, only connection and disconnection costs. Eligible Relocation Analysis Cases for Purpose of Moving Expense DeductionThree considerations; 1) purpose to enable T to be employed or carry on a business at a location in Canada 2) residence at which T ordinarily resided before and after the relocation 3) distance of the relocation Purpose of Relocation Dierkens 2011 - No temporal connection necessary between time of move and commencement of work at “new work location” - move can be before or after the commencement of work Facts: T was a school bus driver in Selkirk, but lived in Winnipeg for 10 years. Old location was 47 km away from his work, new location was 1 km away. Moving expenses deduction were rejected on the basis that he had been working there for years and the work was not a “new work location”.Held: Deduction allowed - no need for temporal connection as not contemplated in act; only that the move enable employmentBeyette 1989 At the discretion of the taxpayer to determine appropriate time to move T delayed move by 5 years die to health and market reasons; deduction allowed. Abrahamsen, 2007 confirms that deductions are allowed where T had already obtained employment prior to moving Residence Before and After Relocation - Where T “Ordinarily Resided” Rennie - only one ordinary residence at a time T moved from M to E, keeps M home, then from E to V, claims M to E and E to V but denied - should have claimed one big move (M-E-V)Ringham - essentially one move where T briefly stated in rental home; rental home not ordinary residence as temporary BUT - Calvano T who lived in rental property for 16 months not allowed to deduct Pitchford 1997 - Move from one non-ordinary residence to another cannot be deducted -series of moved before settling down in a permanent location, kept furniture in storage until settling down - could not deduct for previous moves as they were not his ordinary residence Turnbull - Where T maintains an ordinary residence in one place and temporarily spends time in another place, the move back to the ordinary residence cannot be deducted - T lived in NF, worked around in BC for a bit, but always maintained a home in NF; court rejected his attempt to deduct cost of moving permanently back to the NF Similar to MacDonald - T moved away from ordinary residence for 6 weeks; court held his ordinary residence throughout remained the same and could not deduct for the move back to his ordinary residence Deduction allowed where T continued to ordinarily reside at former residences before moving from the old residence to the new residence - Neville, Jaggers T’s lived in old houses for 2 years - deduction allowed as they were held to ordinarily reside at the same house Also converse decision in Calvano Public policy argument: Cavelier - purpose of the deduction is to allow mobility in the workforce - moved due to work for several months, court allowed deduction for move back (held the new workplace was his ordinary residence) counterpoint to Turnbull and MacDonald Distance Requirement Giannakopolous 1995 - shortest normal route one would take to commute to work is the preferred test - not necessarily “as the crow flies” or pure geographical/linear distance → Nagy “common sense should play a role” Lund - ferry ride was the shortest possible route, even though inconvenient Income or Loss from Business or Property (& Other Income)Income from business or property is taxable under 3(a) and 9(1), and losses are deductible from 3(d)3(a) - business, or property, as “sources” of income - 3(d) permits the deduction of losses from said sources 9(1) income from business or property is the PROFIT from that business or property - [implying the allowance of deduction of reasonable expenses incurred]9(2) “loss” from that source is computed by applying the provisions respecting the computation of income from that source under the ITA 9(3) income from property and loss from property do not include capital gains or losses from the disposition of property Characterizing Business or Property 248(1) “BUSINESS” - includes a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade BUT does not include office or employment” 248(1) “PROPERTY” - means property of any kind whatever whether real or personal, immoveable or moveable, tangible or intangible, corporeal or incorporeal and includes the right of any kind whatever, a share, chose in action, money, timber resource property, work in progress, and the goodwill of a business. “Business” is broadly defined in the Act, and has been further interpreted to include anything which occupies the time and attention and labour of a man for the purpose of profit (Smith v Anderson; also MacEachern) and therefore contains an objective component - the organized activity, and a subjective component - purpose of profit. Even where an activity has the component of a a pursuit of profit (ie gambling), a lack of organization (Morden) or lack of reasonable expectation of profit (Graham v Green) may differentiate a hobby activity from a business. Even undertakings that are clearly AINCT embarked in response to a very fortuitous turn of circumstances (whaling case) has raised some ambiguity (although perhaps more ambiguity than necessary in Cameron). Taylor provides three guiding principles or tests: the nature and quantity test, high degree or frequency of activity and transactions in favor of finding a ‘business purpose’; manner of dealing test, assessing advertising/solicitation, usage, holding period, method of financing, knowledge of what one is dealing with; and the intention test, determining whether there was an intention to produce a profit throughout. The intention test was expanded in Regal Heights, which held that it a taxpayer’s intention to sell at a profit was sufficient to render the acquisition of property an adventure in the nature of trade -secondary intention can be determined by assessing whether, but for the opportunity to sell at a profit,the taxpayer would have undertaken the activity. The following factors from Taylor on there own are not conclusive individually: 1) Frequency of trade (singular or infrequent transactions tend to favour non-business purposes)2) Organization not necessary, can be a one-off “adventure”3) Transformation of the property not necessary 4) Link to ordinary business 5) Intention to sell at a profit at the point of disposition is not necessary (This would make almost everything a busines)InclusionsGains from Illegal Activities (Included)No. 275 v MNR, TAB 1955Gains from illegal activity are to be inlcuded as it would be unjust to allow a taxpayer to gain a benefit through illegal activity that other law-abiding taxpayers cannot benefit from Facts: T a prostituteAnalysis: Her income producing activity falls within a “business”; cnce income is characterized as such, it is immaterial for the purposes of tax whether it comes from a legal or illegal business, a malum in se or malum prohibitum act. Other casesSmith, 1927 - To exclude illegal activities from inclusion in taxable income would unduly burden lawful business Mann v Nash, 1932 argument that government should not tax illegal activity as a matter of principle in refusing to profit from illegality rejected. Johnson v Canada, 2012 FCA taxpayer unknowingly had investment gains from investment involved in a Ponzi scheme. Court held her income remained taxable. Fact that fraudster used proceeds of unlawful scheme to fund the profits he was contractually obliged to pay is not relevant in determining the income tax consequences to the taxpayer. Damages and Settlement Payments (Included if replaced income)Must first ask whether the damages are settlement is intended to compensate for a loss of capital or a loss of income (London & Thames). Canada v Manley, 1985 FCA Where damages are given in lieu of what would have been received had the business activity been undertaken w/o a breach of K, the damages are taxable as business income by way of the surrogatum principleTEST: 1) Does T have a legal right to the payment? 2) Is the payment a surrogate for what would have otherwise been realized as income? Facts: K to award finder's fee in exchange for finding purchasers for the controlling shares of a company. Company failed to provide the fee and taxpayer sued for damages for breach of warranty of authority. MNR assessed damages as income. Holding: Damages were taxable - Taxpayer received in damages precisely what he would have received had the K been performed as agreed Cases where payment was found to be replacement of income, and taxableDonald Hart Ltd. v MNR, 1959 Ex Ct. taxpayer argued that tort damages for infringement was a capital receipt in respect of a loss in the value of its trademark and goodwill. Argument rejected, court found that the damages had been awarded to compensate for lost profits → what taxpayer would have made as business income had infringement not R - damage payment for long term K characterized as lost income as the business was able to absorb the shock. Counterpoint to Pe Ben Cases where payment was found to be replacement of capital and not included HA Roberts Ltd v MNR, 1969 SCC. Long-term contracts characterized as “capital assets of an enduring nature” Characterized as capital receipt since separate mortgage business ceased to exist, and because the contracts were so necessary for the business that they could be called “capital assets of an enduring nature” T had a real-estate mortgage business, lost several major long-term client contracts. Awarded in damages, court found to be capital receipts for loss of capitalPe Ben Industries T had contracts to deliver material to heavy oil manufacturing plant, K terminated. For Pe Ben, the K was a major source of business, and characterized as a capital asset. The determination therefore may hinge on how the business is characterized, its profit source, and its business model. Case where payment was found to be of mixed income and capital nature MV Donna Rae Ltd. v MNR, 1980 TRB taxpayer compensated for destruction of lobster traps. Court concluded that compensation was 70& for capital loss and 30% for income loss → characterized the damage receipt as suchCases where payment was not compensatory and therefore a non-taxable receipt Cartwright and Sons 1961 TAB punitive damages constituted a capital receipt as the damages “had no income feature” - T (publishing company) received punitive damages for infringement claim. Bellingham, FCA 1995 expropriation aware akin to punitive damage - provisions in expropriation act that says initial offer is too low, the property owner would receive, in addition to the difference for fair market value, an award akin to a punitive award. Court found punitive award not taxable. Voluntary Payments (Not included if ‘gifts’)Federal Farms Ltd. 1959Purely gratuitous payments having nothing to do w/ business operation are not taxable as business incomeGratuitous payments having the characteristic of a gift are are distinguished from other payments where: 1) T has no legal right or expectation of payment 2) Money not substituting for any income 3) Unlikely to recur (deals with expectation again)Facts: Taxpayer’s crops were destroyed in a great flood. Community rallied to establish a Fund for flood victims. Taxpayer applied for the Fund and received assistance. Taxpayer received total of 40k. Taxpayer had no insurance and no other money came aside from the fund. Holding: Not included as business income However, Campbell - gratuitous payments as compensation for (or in addition to) services rendered are generally taxable Facts: T made agreement with newspaper for her to swim across Lake Ontario in exchange for 6K. T swam just shy, but the newspaper paid her 5K for her efforts anywayAnalysis: Court held that the Star was obliged to pay as the negative publicity would be otherwise ruinous for the newspaper. The payment therefore was found not to be truly gratuitous on the part of the donor and therefore taxable income for the taxpayer (even though the court recognized she had no legal right or claim to the money)Other windfall casesCranswick 1982 - settlement payment to SHs was not income from dividends, gain from disposition, not expected, and no legal right to give → windfall - T had shares in X Ltd, X sold part of company for very low value, offered payment to SH to avoid litigations. Frank Beban Logging 1998 TCC taxpayer received 800k after its logging operations came to an end when its territory was converted into parkland by the BC government. Court held that the payment was not made in pursuant to any legal or statutory right and was therefore a non-taxable windfall. Prizes and Awards (Included unless Prescribed Prizes or Lucky/Random Draws)ALWAYS Requires the following analysis: Is the prize in respect of T’s employment or in the course of T’s business (6(1)(a) and 9(1))? → If yes, FULLY TAXABLE (56(1)(n))If not, might still be taxable under 56(1)(n) or might be tax-free under 40(2)(f)/random prize draw 56(1)(n) prizes not received in the course of business may be taxable if they are “for an achievement in a field of endeavour ordinarily carried on by T” → If yes, TAXABLE SUBJECT to a $500 exception 56(3)(a) UNLESS it is a “prescribed prize”If not, likely not taxable if it is a ‘random prize draw’ under 40(2)(f)56(3) prescribed prizes are completely tax exempt: Reg 7700 “Prescribed prize” = prize or award recognized by general public -AND - for a meritorious achievement in the arts, sciences, or service to the publicT’s Prize in respect of T’s business/employmentWhatts 1966 - T architect who entered a design competition for the CMHC for which he received 4k as one of five entrants asked to submit further drawings and 15K as a prize for best design. Court characterized both payments as taxable income from a “contractual relationship” that had been entered into between the architect and the CMHC. Note today would be caught by 56(1)(n) anyway REVERSED: Rother 1955 TAB architect won a cash prize for finalist design for the National Gallery Canada. Court held the prize was gratuitous award received in the course of a competition and not taxable. Note today would be caught by 56(1)(n) as a field of endeavour ordinarily carried on by the taxpayer. BUT WHY WAS IT NOT FOUND TO BE IN RESPECT OF EMPLOYMENT/BUS? T’s Prize not in respect of employment/buz. Turcotte 1997 - Trivia not a “field of endeavour ordinarily carried on by the taxpayer - game show contestant won 19K by answering questions about Quebec cinema, Charlie Chaplin, and Charles de Gaulle; court held winnings were not taxable. Begs the question, can a hobby or non-remunerative activity constitute a field of endeavour... ? Savage 1983 - NOT GOOD LAW T given 300$ award for completing 3 courses relating to her work, held to be non-taxable - but specifically reversed - no award or prize given in respect of employment or business is to qualify for the 500$ exception. Lucky/Random Prize Draws 40(2)(f) & CL (Not Taxable) 40(2)(f) T’s gain or loss from the disposition of a chance to win a prize or bet or a right to receive an amount as a prize or as winnings on a bet in connection with a lottery scheme or pool system of betting referred to in s. 250 of CC is nil. Abraham, 1960 TABPure random prize draws not taxable [tenuous connection w/ employment/business in this case]Facts: Taxpayer operated an IGA. One of the suppliers provided all of the clients w/ a raffle ticket attached to order forms, no extra charge or fee was needed to enter the prize. Taxpayer won 2K. MNR assess the winnings as business income. Held: Not taxable - prize was won by chance and not presented as remuneration for services renderedOther casePoirer, 1968 random prize draw winnings not taxable as there was no characteristic of taxable income - T salesman at Ford and met the sales quota to be entered into a draw for a vacation. Draw was random but entrance was not.Prescribed Prizes 56(3) (Not Taxable)56(3) prescribed prizes are completely tax exempt: Reg 7700 “Prescribed prize” = prize or award recognized by general public -AND - for a meritorious achievement in the arts, sciences, or service to the publicDoes not include an amount that can be reasonably regarded as having been received as compensation for services S1-F2-C3 does not include scholarships or bursaries Foulds, 1997If not business income but award is recognized by the public for a meritorious achievement in the arts, sciences, or services to the public, it is “prescribed prize” and tax free. Advertising of the prize on local radio sufficient for it to be “publicly recognized” Facts: Band won two music awards totaling 31K. Analysis: Prize not business income Band’s participation in musical competitions not an integral part of the business (more so playing as a cover band in bars)Prize not awarded for remuneration; prize money not similar to remuneration the band would have received from similar type of work Prize set up by the CRTC, money must be used only for recording Amount does not have the recurring, free-use characteristics of a business receiptFurthermore, the nature of prize fits within a “meritorious achievement in the arts” & was recognized by the general public as it was advertised, well attended, etc. Holding: Not taxed b/c prescribed prize Other casesLabelle 1994 - lowered the threshold for “public recognition” by community standards duo wins accounting prize - meritorious for science of accounting. Was it sufficiently recognized by the public? Court held yes - is this good? Knapik-Sztramko 2013 TCC opera singer won a prestigious prize from a foundation and given 80k from 1997-2006 to support her career. Court found that the receipt was a prescribed prize as the foundation a) had not employment or service agreement but imposed specific constraints b) foundation did not sponsor or present award recipients to opera companies, c) foundation received no benefit in the remuneration, consideration, or promotion, d) dealing w/ monies as income would disregard Parliamentary intent w/r/t prices and scholarship amounts Interest Income from Property 12(1)(c)12(1)(c) Income includes any amount recieved or receivable by T in the year as, on account of, or in lieu of payment, or in satisfaction of, interest to the extent that the interest was not included in computing T’s income for a preceding taxation year. Characterizing Interest “Interest” not defined in the Act. Prior constitutional cases have held that interest can be characterized as compensation for the use or retention of a principal sum, that refers directly to the principal sum (ie a percentage of the principal sum over a given period of time), and accrues daily. Those three elements were crystallized in Perrini Estates. Expanded in Sherway but HOW? Perrini Estate TEST 1) Compensation for use or retention of a principal sum - the value lent to another personValue of principal sum need not be fixed; can be tethered to a fluctuating value (ie percentage of profit) (Miller)2) Interest referable to a principal sum 3) Day-to-day accrual, even if payable at intervals Facts: Taxpayer owned all shares of ARS, sold them to CRC. Agreement provides that 1) CRC would pay an initial sum on closing date, 2) CRC would make additional payments based on post-tax net profits of ARS at fixed times (April 30 of 1969,1970, and 1971), and 3) an amount described as “interest” on the additional payments, computed on an annual rate of 7% from the closing date to the date of each additional payment. Taxpayer received in “interest” 14K, 28K, and 119K at those fixed dates which was characterized as “interest income” and included for tax purposes by the MNR. Nomenclature not determinative; payments called “interest” may be better characterized as compensation RG Huston 1962. payments from war claims funds called “interest” were really grants as the taxpayer had no proprietary, legal, or equitable right to the payments. Bellingham damages for farmer whose land was undervalued in expropriation received “interest” and “extra-interest”. “Interest” was taxable, but the “extra interest” was characterized as punitive damages.Other Cases where Payment was Held to Interest and Included Shaw 1993 FCA interest payment as part of settlement of an action for additional compensation following the expropriation of a farm was held to be taxable income. Ahmad 2002 FCA claimant received 388K as a “pre-judgement interest”. Court held it was not taxable income since there was no principal amount to which the interest could accrue until the judgement determined that he had been wronged, that he had suffered a loss from the wrong, and the amount of the loss. Hall taxpayer sold interest coupon from Canada savings bond, court held this payment was in lieu of interest. Coughlan 2001 TCC corporation required to indemnify him for costs for defending himself in legal proceedings. Court awarded damages and “prejudgment interest” and held the interest was taxable income as “interest on liquidated amount wrongfully withheld” that the taxpayer had a right to. Greenington Group Ltd, 1979 FCTD a reduction in the purchase price of 135K in lieu of arrears of interest was included as taxable income. Case where Payment was Found to be Return of Capital Roszko 2014 TCC taxpayer loaned 800,000K to TransCap w/o knowing it was a Ponzi scheme. Taxpayer received 156K, court held that because TransCap did not utilize the taxpayer’s money as instructed the payment made was held to be a return of capital, not interest income.Payments of Part Interest & Part Capital - Deemed Interest 16(1)(a)16(1)(a) where a purchase amount can be reasonably regarded as part interest and part capital - the part that can be reasonably regarded as interest shall be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payableGroulx, 1967Property sold at above market price with balance instalments set to account for interest rate = part interest and part capitalFacts: Taxpayer operated a large farm. Approached by Thorndale Investment Corp to sell a large portion of the farm for $395K, with $85K on closing and balance payable before June 1, 1964 in annual instalments commencing in 1958. No interest to be paid unless instalments went into arrears, at which point there would be a 6% interest rate on arrears & early payments give rise to a 5% discount. Property sold above FMV, balance calculated to account for 5% interest Held: Purchase amount remaining taxable as interest Vanwest LoggingExtent what part of the purchase price may be regarded as interest turns on 1) terms of agreement 2) course of negotiations 3) relationship between price paid and FMV 4) common industry practices Nomenclature not determinative (ie parties said “no interest shall be charged on unpaid balance” → must assess based on Perrini test) T sold a tract of lumber for 7.5m with a similar arrangement as Groulx, MNR assessed part of the purchase price as taxable income from interest. Found in taxpayer’s favour (allowed separation from capital and interest as no evidence supposed interest amount impacted purchase price and was not common in the industry)FMV as key in some casesRodmon Construction key determinative finding of fact is market price. Per Connor fair market value is “highest price available in an open and unrestricted market between informed, prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of money” Discounts and Premiums “Discount” arises from the acquisition of a debt obligation for an amount less than the principal or face value payable at maturity. Example: 10,000 Bond with interest @ 5% / year in 2017, maturity date in 2027Interest rates go up, so new bonds in 2018 pay 6% - in order to sell a 2017 bond on a secondary market, seller must sell the 10,000 Bond for 8,300 in order for it to yield 6% - must sell less than what was paid for and what will be received in 2027This is an economic gain for the purchaser and are included in T’s calculation of interest income from that property. “Premium/bonus” arises from the disposition of a debt obligation for an amount greater than the cost for which it was acquired. Example: 10,000 Bond, in addition to interest, paid an additional amount at maturity - say 10,500. This is added amount (or “premium”) is generally included in T’s calculation of interest income from that property. 12(9) Deemed accrual: Where no stated rate of interest is given for a prescribed debt obligation, the discount/premium is treated as interest at rate set under Reg 7000. -[codification of Lomax] Lomax v Peter Dixon & SonsWhere no interest is payable on a debt obligation, a discount or premium = interest Where a loan is made at or above reasonable commercial rate of interest, there is no presumption that a discount at which the loan is made or a premium at which it is payable is in the nature of interest. Must examine term of loan, rate of interest, capital risk, extent to which risk taken into account in fixing terms of K O’Neil v MNR, 1991T-Bills = income from property; discount on debt is treated as interest (implicit return w/ character of interest)T-Bills purchased at discount for a very short term, no stated interest only the discount Held: Taxable as interest Accrual Rules and Debt Obligation Transfer 12(3) For Corporations, Partnerships, Trusts interest to be included in the taxation year is to accrue at year end. 12(4) For individual investors (ie persons not included in 12(3)) who hold an interest in an “investment contract” there shall be included in computing T’s income for the year the interest that accrued to T to the end of that day w/ respect to the investment contract12(11) “Anniversary day” = Issue date, next year - 1 day 12(11) “Investment contract” As Duff says, under 20(14) accrued interest is allocated between vendor and purchaser on the transfer of a debt obligation by requiring inclusion ot the transferor and permitting a deduction to the transferee, with adjustments to ACB of debt obligation under 52(1) for the vendor and 53(2)(1) for the buyer. FOR THE SELLER OF THE DEBT OBLIGATION12(3) and (4) accrued interest (received or receivable) must be included in the seller’s taxation year. 52(1) accrued, but unpaid interest that is included in the vendor’s income may be added to the cost of the debt obligation 20(21) when the debt obligation is sold at FMV, a deduction from T’s income is permitted in respect of accrued, but unpaid interest which is otherwise included if it cannot reasonably be considered to have been received or become receivable. FOR THE BUYER OF THE DEBT OBLIGATION 12(1)(c) For the buyer, the full amount of interest must be included in the year it is received or receivable, even if the amount was included in the purchase price. 20(14) Allows for a deduction of an amount of unpaid but accrued interest (before the transfer) to the extent this amount is included under 12(1)(c) and included in the seller’s income per 12(3-4)To come within 20(14), T must 1) actually transfer the debt obligation 2) transferee must become entitled to interest accruing before transfer date, but not payable until after the date (Antosko). 53(2)(l) reduces costs base (which affects gain or loss on disposition) of debt obligation by any amount that is deductible under 20(14). Deductions General Profit / Income Producing Tests For Deductibility 9(1) and 18(1)(a) 9(1) T’s income for a taxation year from business or property is T’s PROFIT from that business or property [business practice test]18(1)(a) No deduction that be made in respect of an outlay or expense except to the extent that it was made or incurred by T for the purpose of gaining or producing income from the business or property [income producing test]18(1)(h) No deduction shall be made made for personal or living expenses EXCEPT travel expenses incurred while in course of carrying on T’s business67 Reasonableness limitation - any deductions made under this act must be reasonable in the circumstances. Implicit within the definition of profit in 9(1) is the deduction of ‘costs’ associated with the achievement of that profit. Historically test for deduction was “whether it was made or incurred by the taxpayer in accordance with ordinary principles of commercial trading or well accepted principles of business practice’ (objective test) per Royal Trust Co 1957 and Imperial Oil Co 1947 and reflective of 9(1). However, in 65302 BC Ltd. the SCC rolled the 9(1) test together along with 18(1)(a) test, producing a more subjective income earning test with a focus on “income” or revenue production expressed in 18(1)(a). Public policy and avoidability arguments were also generally put to rest in McNeil and public morality was also rejected in CIBC. Finally, the reasonableness limitation set out in 67 must also be taken into consideration when determining deductibility of expenses or outlays (Cippolone, Ruff)Illegal Payments (Highly Restricted but Possibly Deductible)67.5(1) No deduction shall be made for an expense incurred in carrying out an act prohibited in s. 3 of the Corruption of Foreign Public Officials Act; s. 119-121, 123-125, 393 and 426 of the Criminal Code, or s. 465 of the Criminal Code [cannot make deductions for the bribing of public officials, public sector employees, private agents, or employees] 67.5(2) MNR may reassess as necessary to give effect to 67.5(1) Espie Printing Co 1960 - Where not in contravention of 67.5(1), illegal payments have been generally held to be deductible Cases where “Under the table” payments not deductible Muller’s Meats and Eldridge taxpayers were unable to deduct ‘under the table’ payments as they were unable to adduce evidence that such expenses were actually incurred.Case where “Under the Table” payment were deductible United Color and Chemicals, fact that “kickback” payments made secretly and “carried on an aura of impropriety” are not in themselves determinative so long as the burden of proof had been met .Damage Payments (Likely Deductible under Business Practice/Income Producing Purpose TestImperial Oil TESTDamage payments are generally deductible where the payments was made in respect of a liability for an event that is, at its heart, really incidental to the businessTwo part analysis: 1) Type of incident must be normal and ordinary hazard of the industry and 2) the specific facts of the incident must also be normal and ordinary - remoteness? Facts: Tanker ship collided in harbour w/ other ship, no negligence - deduction allowed Davis Activity for which damage payments were incurred cannot be too remotely connected to the business Facts: En route to brother’s farm see a pig to purchase for the taxpayer’s farm when they crashed. Court held that negligence while driving had no sufficient connection to pig farming. Held: Not deductible - no sufficient connection to the business IT-467R2 To be deductible as a business expense, damages must meet 5-part test1) Outlay must have been made for the purpose of gaining or producing income from the business or property 18(1)(a)2) Outlay must not be on account of capital 18(1)(b)3) Outlay must not be made for the purpose of gaining or producing exempt income 18(1)(c)4) Outlay must not be a personal expense 18(1)(h)5) Outlay must be reasonable in the circumstances (s. 67)Other Cases where Damage Payments were DeductedIncome Tax Case No 8 taxpayer was a tramway car company that incurred damages for a crash. Deduction allowed. Herald and Weekly Times taxpayer was a newspaper who published libelous material and paid damages in respect of that material. Deduction allowed. McNeill v Canada, 2000 FCA accountant breached provisions of the restrictive covenant after selling his business. Court held the taxpayer’s actions were “for the purpose of keeping his clients and his business”. Deduction allowed. McNeill, FCA 2000 - Rejection of avoidability and public policy. deliberate breach of restrictive covenant, damages were deductible.CIBC, FCA 2013 “egregious and repulsive” conduct not a reason for rejecting deduction. Court also rejected Crown’s argument that the “morality of a taxpayer’s conduct” can affect the business practices test under s. 9(1). Taxpayer settled lawsuits associated with fraudulent accounting practices conducted by Enron (don’t think payments were allowed to be deducted any..) Other Cases where Damage Payments were NOT Deducted Fairrie v Hall taxpayer was a sugar broker who incurred libel damages. Unable to deduct as court held libel was not sufficiently connected to sugar brokerage businessPoulin v Canada taxpayer was a real estate broker who incurred damages for false and fraudulent representation to a client. Court held the actions did not “correspond to a risk that was necessary for him to assume in order to carry on his business as a real estate broker”. Deduction not permitted. Fines and Penalties (Not Deductible 67.6) 67.6 No deduction shall be made in respect of any amount that is a fine or a penalty imposed under a law of a country or of a political subdivision of a country (including a state, province or territory) by person or public body that has authority to impose the fine or penalty. Historically subject to the income producing purpose test and found to be deductible under 65302 BC Ltd. but since statutorily overturned. Deductions for Mixed Business and Personal Expense Deductions for Entertainment, Recreation, Meals, Parties - Limited by 18(1)(h) & (l)18(1)(h) No deduction shall be made made for personal or living expenses EXCEPT travel expenses incurred while in course of carrying on T’s business18(1)(I)(i) No deduction shall be made for the maintenance or use of a property that is a yacht, camp, lodge, golf course or facility unless the expense is incurred in T’s business of providing the property for hire 18(1)(I)(i) No deduction shall be made for membership fees or dues in any club the main purpose of which is to provide dining, recreational or sporting facilities to its members General analysis in Royal Trust Co TEST A)Is the deduction consistent with ordinary principles of commercial trading or well accepted business and accounting practices (derivative of 9(1))? B) Is the expense made for the purpose of producing income (derivative of 18(1)(a))? SPECIFIC DECISION REVERSED by 18(1)(I) but analysis is still important Facts: Major effort to attract business is based on its belief that personal contacts by its officers produce the best business results. Officers of the business are therefore encouraged to partake in community and social events, join clubs etc. Business claims $9.5K in such expenses for social club payments. Held: Deductible - met the test “Yacht” under 18(1)(l)In John Barnard Photographer Ltd the court held that the meaning of the term “yacht” should be determined by the use of the vessel, as it generally connotes a pleasure craft, not just a vessel type. Taxpayer used boat to produce an almanac sold to tourists and deduction was allowed. In CIP Inc. the vessel was “converted tugboat” even though the owners entertained clients on it - deduction allowed. More traditional/typical uses of luxury boats for entertaining clients disallowed in Robitaille and for hosting seminars for clients in disallowed in Voyageur Travel Insurance “Camp or lodge” 18(1)(l) In Fehrenbach, 1994 TCC taxpayer was a partner at a law firm who used a condo for personal uses and occasionally to entertain clients. Court found dictionary meaning of “lodge” could include condo but that could not have been the intended application, deduction disallowed nonetheless at it was not reasonable under s. 67 and personal expenses under 18(1)(h). Cont.? Hewlett-Packard, 2005 TCC company rewarded employees with weekend stays at resort hotels. Deductions allowed as large, modern resort hotels cannot properly understood to be “lodges” as understood by most CanadiansSie-Mac Pipeline, FCA 1992 expenses denied to stay at fishing lodge, including transportation, licenses, meals, etc.Golf Course or FacilityGroupe Y Bourassa, 1995 TCC court disallowed deductions for insurance broker hosting golf tournaments for clients, green fees, meals, etc. IT-148R3 “facility” used to refer exclusively for a golf course and includes amenities provided by a golf club such restaurant, conference rooms, fitness, tennis court, etc. Membership/green fees not deductibleExpenses for food etc. not deductible b/c 18(1)(l)(i). Cost to entertain business guests at personal events is not deductible unless guests are identified as ‘business guests’ (Grunbaum)Adaskin, TAB 1953 cast parties following radio shows not deductible since not incurred for the purpose of earning income - no need to “show appreciation” and “cement good relations” after the fact. Roebuck, TAB 1961 expenses for existing and prospective clients invited to bat mitzvah not deductible since neither is accordance with accepted business practice nor incurred for the purpose of earning incomeFingold, TCC 1992 expenses for business guests invited to son’s bar mitzvah and stepdaughter’s wedding treated as shareholder benefits on the basis that the business guests were not aware that the expenses were paid by the company. Grunbaum, TCC 1994 expenses for business guests invited to wedding not a shareholder benefit and deductible to the taxpayer’s company on the grounds that the invitation ot eht business guests came from and identified the company. Limits on Deductibility for Meals/Entertainment 67.1(1)67.1(1) An amount paid in respect of human consumption of food or beverages or the enjoyment of entertainment is deemed to 50% the lesser of (a) amount actually paid -or- (b) amount in respect that would be reasonable in the circumstances EXCEPTIONs 67.1(2)(b) fundraisers to a registered charity 67.1(2)(f) One of six or fewer “special events” held in a calendar year at which food, beverages, or entertainment is generally provided to all individuals employed by the person at a particular place of business of the person and consumed or enjoyed by those individuals Stapley - “Consumption” interpreted very broadly - realtor gave clients Xmas gifts w/ gift cards for good - held to be consumables.Scott, FCA 1998 Bike courier sought to deduct cost of water and food as “fuel deductions”. Court found in taxpayer’s favour, but never applied 67.1. Home Work Space (Possibly Deductible Under 18(12))*NOTE: Must still first perform general analysis above on 9(1); 18(1)(a), 18(1)(h) 18(12)(a) No shall be made on any part of a self-contained domestic establishment UNLESS (i) Work space is principal place of business - OR: (ii) Used exclusively for the purpose of earning an income from business AND used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business Vanka - phoning allowed - maybe e-contact? 18(12)(b) cannot generate a loss in a year [home office expense shall not exceed income from that business] 18(12)(c) If there is a loss, it can be carried forward indefinitely. For best Taxpayer results ensure the work space is seperate from the SCDEDufour, - home office in garage = part of SCDEEillis - same utilities bill for house and pottery studio = part of SCDEMaitland - B&B on bottom floor/personal living on top = part of SCDE (entire house was part of SCDE)Broderick - fully seasonal inn available in off season = part of SCDE Lott - business cannot take up whole house; daycare w/o seperate area = part of SCDE Deduction allowed: Sudbrack, TCC 1991 separate apartment in a country inn constituted its own self-contained domestic establishment apart from the inn - deduction allowed.Travel Expenses (Deductible under 18(1)(h) 18(1)(h) No deduction shall be made made for personal or living expenses EXCEPT travel expenses incurred while in course of carrying on T’s businessPermitted under 18(1)(h) where travelling in the course of the business from the taxpayer’s “base of operations” (Cumming, Cork, Henry). Taxpayer generally able to choose their base (Forestell). Travel deductible only when in the course of a single business, not between business or from one business to another (Randall, Waserman). Where travel involves both business and pleasure, a portion of the expenses may be non-deductible - expenses are to be parcelled out and a partial deduction may be permitted (A 1 Steel and Iron)Key CaseCumming, 1967 - Persons carrying on a business may deduct travel expenses under 18(1)(h) where they are travelling to and from base of operations (in this case, Dr’s home (base) to the hospital to meet w/ patients)Facts: Taxpayer had a specialized medical practice, appointed to a hospital where he rendered all of his services to his patients. He also maintained an office in his home that used for administrative functions of the practice which he was unable to carry out at the hospital. Would tend to go to and from the hospital twice a day. Attempt to deduct travel costs but deductions disallowed. Analysis: Dr.’s base of business was his home - place he was called from to serve clients, kept records, studied, etc.Distinguished from English case Newson v Robertson where a barrister travelling from his home outside of London to his chambers was disallowed a deduction on the basis that his travel expenses were reflective of personal choices to live in the country, not of the necessity to go to where he made his income Held: Deduction allowed. Other “Commuting Cases” Henry (SCC, 1972) – travel expenses not deductible since taxpayer anaesthetist maintained a separate office not at homeCork (FCA, 1990) – travel expenses to construction sites deductible since taxpayer drafsperson maintained an office in one room of his rented home, where he performed services on drafting tablesForestell (TCC, 1991) – travel expenses from Cambpellford, Ontario, to Toronto, where taxpayer worked exclusively at the Royal Ontario Museum from 1978 to 1990, including meals and rent deductible on the basis that his base of operations was at his home in Campbellford (90 minutes northeast of Toronto) → element of choice Travelling to with Multiple Businesses Randall (SCC, 1967) – travel to from Vancouver to Portland deductible since taxpayer’s business of managing horse-racing activities was carried on in different locations - only deductible when travelling to one biz, not from one biz to another. Waserman (TAB, 1969) – travel from Ottawa to Pembroke, Ontario deductible since taxpayer’s furrier business was carried on in different locationsOzvegy (TRB, 1978) – cost of meals and rent for furnished apartment in travel Shelbourne, Nova Scotia, where taxpayer performed radiology services 2? days a week deductible since taxpayer’s base was 158 miles away in Yarmouth, Nova Scotia, and cost to stay in a hotel would have been moreDeducting Interest Expense 20(1)(c) 20(1)(c)(i) T may deduct an amount paid or payable in the year (depending on the method regularly followed by T in computing income) pursuant to a legal obligation to pay interest on borrowed money for the purpose of earning income from business or property20(3) Borrowed money used to repay a loan is deemed to be used for the purpose for which the previous indedeness was used or incurredFrom Bronfman 1987, the initial considerations were1) whether the debt was incurred for the direct use of earning an income2) whether there was bona fide purpose of earning income3) the course of action actually taken by T, not whether the alternative course of action taken by T was compliant w/ the Act. 4) Court also, in obiter, mentioned the possible alternative as being a ‘sham’ in the American sense However, subsequent decisions have significantly altered these primary considerations. Grenier 1992 permitted deductions for debt interest on an indirect usage (although rejected in Attaie two years earlier)Mark Resources 1993 and Robitaille 1997 followed the Bronfman analysis regarding real bone fide purpose, but this analysis was subsequently undermined in a series of later cases, beginning with Shell Canada 1999, a major turning point. In Singleton 2002 the court isolated each transaction, rejecting the bona fide purpose and focusing only on the direct use of the funds with respect to each individual transaction. In Ludco the court held to two very significant findings: 1) Income earning purpose does not need to be bona fide or the primary purpose, but an ancillary purpose is acceptable. So long as there is an ancillary income purpose, even where the primary purpose is tax minimization, the purpose test in 20(1)(c) is met. Note - potential impact on the GAAR, however, in Lipson, a case with similar facts, the GAAR was held not to apply. This line of analysis cropping up in the last 20 years appears more in line with Duke of Westminster. 2) “Income” refers to gross revenue, not net income or profit, possibly widening the scope of compliant transactions. Ludco was distinguished recently by Swirsky 2014 since the payee on the dividends had no reasonable expectation to receive those dividend payments. Business Persons and Houses Cases Robitaille, TCC 1997 Taxpayer takes money out of the law firm to buy a house. Went to the bank and borrowed money to pay back the law firm. Court held the real purpose was to buy a house, not to capitalize the law firm. Singleton, 2001 partner at law firm had initially invested 300K in the law firm and borrowed a further 300K to contribute to that capital. Following the loan, T withdrew 300K to build his personal residence. The court only examined each transaction independently - dismissing the bona fide purpose of the series of transactions. Timing IssuesGeneral Timing Issues Overarching Principles: 9(1) Taxable income = PROFIT and 9(2), permitted losses in the Act Most business income is typically computed on an accrual basis, according to which revenues are included in computing a taxpayer’s income in the taxation year which they have earned, even if they have not been received, and expenses are deducted in the taxation year in which they are incurred, even if they have not been paid. Cash based accounting method: amounts are included when actually received, expenses are deducted when actually paid Accrual based accounting method: include amounts when receivable (pursuant to a legal right) and deduct expenses when payable (pursuant to a legal obligation to pay) - generally preferred method in business context Pure Accrual - used to calculate interest General Inclusion Rules 12(1)(a) - requires amounts received for services not yet rendered or goods not yet delivered 20(1)(m) - amounts included in 12(1)(a) may reasonably be deducted [CRA wants to be aware] 12(1)(b) - requires the inclusion of amounts receivable for property sold or services rendered, even if not due this taxation year - UNLESS not required to produce a true picture of the business’s income for the year [where working on a cash basis would provide a more accurate picture; this method imposes accrual accounting] 12(1)(c) - requires interest income and amounts in lieu, received or receivable, depending on method T usually uses for interest income General Deductions Rules 20(1)(m) deductions for amounts included in 12(1)(a) 18(9) Disallows immediate deduction of prepaid expenses for services to be rendered after the year, payments on account of or in lieu of interest, taxes, rent or royalties in respect of a period after the end of the year, as consideration for insurance, which are instead deductible in the subsequent year to which the expenses can reasonably be considered to relate. - Overturns Oxford Shopping Ctre.Publishers Guild of Canada 1957 Ex. Ct. Key considerations: 1) method of accounting should be appropriate to the business type 2) accounting method chosen should represent a true picture of T’s income for the year 3) accounting methods must otherwise comply with the ITA Facts: T used an “instalment basis”, amounts receivable from subscriptions were not brought into income until actually received and expenses incurred were not deducted until this income was received. Court held that this method was acceptable as it reflected the income position of the taxpayer. Obiter re: accountant’s role: accounting methods and principles may change, in order for accountants to carry on their duties as conveyors of business transactions, they must have the freedom to determine which method most appropriately conveys the business’s financial position. Court must not abdicate assignment of tax liability to accountants, that is a function of the courtWest Kootenay 1991 FCA True picture is whichever method provides a more accurately matches revenue and expenditure - absolute conformity to one method not required, there are different purposes for tax accounting and financial accounting. Unbilled revenues where T has a legal right should be included in computing T’s income where doing so better represents the true nature of T’s profit and business - T delivered electricity at the end of the year, but did not bill it until next year. Accrual method as opposed to cash based method. Canderel 1998 SCCMatching principle is not a legal principle but an interpretive aid; in calculating income T must adopt a method that is 1) consistent w/ ITA and case law 2) consistent w/ well established business principles 3) will yield an accurate picture of income for the year “Realization Principle” Ikea, 1998 SCC - lump sum payment received at once best represented by inclusion in the year it was made or “realized” - T received inducement payment, attempted to amortize payment over the term of the lease: Court held the doing so would not be a true picture as T receive payment at once and could immediately spend the money as cash on whatever it wanted. CONT. ? Friedberg T used to “realization principle” to realize massive losses on buying and selling gold futures contracts - court held that was acceptable - 142.5 in response financial institutions are to use a mark-to-market approach, preventing them from seeing massive losses CRA indicates GAAR would be applicable in these cases Friedberg effectively overturned by FCA in Kruger by holding that the “truer picture approach” in this instance was the “mark-to-market”. Deducting Inventory Costs 248(1) “Inventory” = description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year 10(5)(a) property other than capital property of a taxpayer that is advertising or packaging material, parts or supplies or work in progress of a business that is a profession is inventory” → “works-in-progress” are inventory and are to be deducted as such; former provision 34(a) allowing certain professions to elect to exclude WIPs was repealed. Unique InventoryWhere particular items of inventory are unique or easily distinguished, the Neonex principle is preferred. NeonexInventory costs not deductible until inventory is sold - “matching” deduction to corresponding revenue is the preferred method for deducting inventory costs as it provides a fairer picture of T’s income for the year - immediate deduction w/o corresponding revenues does not fairly depict profit and loss situationFacts: Taxpayer custom builds electronic signs to customer specs, usually under conditional sales agreement. Taxpayer had several signs incomplete without yet receiving full payment at the end of the year, taxpayer deducted the costs for the current year but was reassessed. MNR argument: proper method was to carry the expenses in the books until the revenue is derived from their sales since there can be no revenue until the completed signs have been delivered Analysis: Deduction denied -taxpayer to use “matching method” and wait to deduct once payment has been received (revenue generated). Homogenous/Numerous Inventory Where inventory is homogenous or numerous, the principle in Neonex can be achieved by deducting all inventory expenses incurred in the year and adding back the cost of inventory that remains unsold at the end of the year. Pursuant to the following formula: [GP Gross profit] = [P proceeds ] - [C0 cost of inventory at beginning of year] - [C1 cost of inventory produced or acquired throughout the year] + [C2 cost of inventory remaining at beginning of year] → GP = P - CO - C1 + C2 Preferred accounting method is FIFO per Anaconda Brass and IT-473RIT-473R - LIFO and average cost are not accepted for income tax accounting LIFO preferable to T when prices are increasing (but CRA doesn’t like - IT473R) However, Anaconda 1955 (old case, mind) allows for FIFO only where it reflects that actual physical flow of inventory - a hurdle for T to prove factually. When cost of inventory decreases in the year, the ITA permits the deduction of that loss. 10(1) inventory will be valued at the lower of the cost at which T acquires the property or its FMV at the end of the year - allowing for the deduction of accrued losses in the value of unsold inventory10(1.01) LCM not applicable in an adventure in the nature of trade - inventory is valued at the cost T acquired it. 10(2.1) method of evaluation is to be consistent from year to year. Capital Expenses - Cannot Deduct 18(1)(b) 18(1)(b) Prohibits any deductions 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. Capital expenses are not defined in the Act, and must be characterized by the courts according to one of two general lines of jurisprudence: 1) Was the expense incurred once and for all (ie a lump sum payment) with a view to bring into existence an asset or advantage for the enduring benefit of the trade? (British Insulated; Helsby Cables)Requires a) outlay of a lump sum and b) the acquisition or coming into existence of a ‘enduring benefit’2) Was the amount expended on the establishment of the overall business structure from which profits are earned or in the process of earning income? (BP Austrialia, Sun Newspaper, Hallstrom)Test could go either way - business structure analysis leads to characterization of a capital expenditure while income earning process analysis leads to characterization of a deductible business expense. CONT ? In John Mansville, the court considered both lines of authority but was ultimately persuaded by the Australia/Sun Newspaper line of jurisprudence; held that the acquisition of land to be destroyed in growing the open pit mine would was not a ‘enduring benefit’ (ie land would be consumed) but was instead an expense necessary in the process of earning income and therefore deductibleOther Cases Applying the “Enduring Benefit Test” Damon Developments (TCC, 1988) – cost to replace stoves, refrigerators and window blinds characterized as capital expenditures to rental business, whereas cost to replace drapes, televisions and washers and dryers characterized as deductible expenditures to hotelAlgoma Central Railway (Ex. Ct. , 1967) – benefit to taxpayer railway from five-year geological survey of northern Ontario too remote or speculative to constitute an enduring advantage; identical conclusion in Oxford Shopping Centres Ltd. (FCTD, 1980)Central Amusement Co. (FCTD, 1992) – circuit boards on video and other arcade games currently deductible since had to be replaced on a recurring and regular basis and provided only a temporary advantageCanada Starch Co. Ltd. (Ex. Ct., 1968) – payment to owner of registered trademark to withdraw opposition to taxpayer’s registration of a new cooking oil called “VIVA” currently deductible since a trademark only protects “distinctive” goods or services which depend on the current operations of the business, not registrationOther Cases Applying the “Business Structure Test” Bancroft (TCC, 1989) – preliminary development costs for a tourist resort which the taxpayer eventually abandoned not deductible since the taxpayer “was in the process of creating a business structure”Bowater Power Co. (FCTD, 1971) – cost of engineering studies to assess opportunities to increase power generation from taxpayer’s existing watersheds deductible since they were “incurred … while the business of the [taxpayer] was operating and [were] part of the cost of this business”Acquisition/Maintenance/Repair of Property - Is the Expenditure Capital or Deductible Business Expense? Canada Steamship Lines Characterization turns on 1) whether expense was for an ordinary repair (deductible) or an ‘upgrade’ (capital outlay) and 2) whether the thing acquired was really a part of the larger asset (deductible) or part of distinct asset class The fact that a repair or acquisition is expensive or constitutes an overhaul does not necessarily mean it is capital. Boilers powering ship = capital outlay - viewed as distinct assets Replacing floors/walls = deductible business expense - integral part of larger asset Capital Expense (Not deductible 18(1)(b) Deductible Business Expense Distinct Asset Class Part of Larger Asset Class -Thompson Construction, 1967 Installation of new engine for machine power shovel = capital outlay (high cost relative to value of the machine, old engine had remaining commercial value)-Vancouver Tugboat, 1957 new boat engine = capital outlay (high cost of engine relative to boat as a whole) -Donohue Normick Inc. Alternative parts for machines necessary to run the business = capital outlay (Durable, significant asset, expenditure not regular, repeated, parts had intrinsic permanent value, parts were to alternate with identical parts already installed - alternative rather than spare, made to order)-Canadian Reynolds Metals Co, 1996 Lining in manufacturing machine = capital costs (increased the useful life of the machine)-Canadaport, 1993 Pipeline inner lining replacement = deductible business expense (fibreglass lining in a crude oil pipeline held not to be a capital expense, comparable to wall/floors of cargo ship in Canada Steamship Lines, opposite of Canadian Reynolds )Upgrades/Significant Improvement Ordinary Maintenance/Repair -Shabro Investments 1979 Heavy renos that are “improvements” = capital cost (sought deduct expenses for removal of bottom floor, installation of new floor, construction, and replacement of waterlines/utilities as capital outlay as the renovations were “improvements” resulting from international deficiencies not “repairs” from normal wear and tear, but wire + plubming deductible)-Morel v MNR, 1951 Major renos that are “improvements” required to comply w/ regulations = still capital costs (hotelier who was compelled to make significant renovations to the bar area in order comply with liquor licensing requirements)-Bowland, 1999 and Speek, 1994 repair to rental property after fire = capital outlay -Gold Bar Developments, 1987 repairs necessary for integrity of the structure for an apartment = deductible business expense (involuntary, necessary expense)-Marklib 1999 Restoration to original condition = deductible business expense (building w/ extensive repairs, req’d by municipality) CONT. ? IT-128R factors to assess to determine whether the expenditure is a capital cost allowance: Enduring Benefit (capital); Maintenance (deductible business expense) vs Betterment (capital expense)Integral Part (deductible business expense) vs Separate Asset (capital expense)Relative Value (higher value in relation to property = capital)Acquisition of Used Property (repairs on newly acquired used property = capital)Repairs Made in Anticipation of Sale (capital expense) Deemed Capitalization Provisions 18(2) Deductions for interest and property taxes on vacant land that produces income (farming, rent) can be deducted (BUT NOT if held for resale/development or not used in business/income) - otherwise, all carrying costs on vacant land are capitalized. [Carrying costs on income producing vacant land deductible] 18(3.1) No deductions shall be made in respect of any outlay or expense made that can reasonably be regarded as a cost attributable to the period of construction, renovation, or alteration of a building [No deduction on construction/reno]However, 20(29) allows the deduction of “soft costs” relating to construction of to the extent that they do not exceed T’s rental income from that building - any costs exceeding rental income for the year are to be capitalized. [except construction/reno of rental income that actually produces some income] Capital Cost Allowance 20(1)(a) allows for the optional deduction of part of the capital cost of the property against income from the business or property on a declining balance method of depreciation for the pool of assets in each class as provided in the ITA Regulations. Option, but cannot be carried over, only allows higher UCC next year 13(21) CCA may be claimed in respect of “depreciable property” acquired by the taxpayer For leases/conditional sales agreements where purchaser/lessor bears incidents of ownership they may deduct IT-285R2, Wardean Drilling and Construction Berous IT-285R2 capital cost includes all acquisition costs - legal, accounting, engineering, labour, material, overhead. Undepreciated Capital Cost is the value of the asset class remaining after the deduction of the CCA - expressed as UCC = A - E - F + BA: sum of capital costs of all assets in the class - includes the purchase price and capital expenses to improve or upgrade E: total depreciation as defined in 13(21) which is taken up to that point in time and any terminal loss deducted under 20(16)F: total of proceeds of disposition but only up to the capital cost (proceeds above capital cost are capital gains)B: recaptured depreciationSpecial Rules Reg 1101(a) prescribes seperate classes for depreciable property used in separate business Reg 1101(1ac) prescribes a seperate class for rental properties acquired at a capital cost of 50K or more Reg 1100(11, 14) Prohibits the production of net losses for rental properties through CCA deductionsRules Restricting Capital Cost Allowance Reg 1102(1)(b) property acquired produced for purpose of sale [inventory]Reg 1102(1)(f) use or maintenance of recreational facilities Reg 1102(2) LAND - buildings yes, land no. Reg 1102(1)(c) any expense incurred that was not for the purpose of gaining or producing income or for personal useBen’s Limited 1955 - re: Reg 1102(1)(c) income purpose test Cannot claim CCA where there was never any intention to produce or earn income from the acquisition of the capital property. Facts: T runs bakery, purchased land with a few tenanted wood-frame buildings, collected small amount of rent from left-over leases, then as planned demolished them to make way for factory expansion. Allocated most of the acquisition cost to the buildings but not depreciable since never intended to produce income. Hickman Motors Income purpose test somewhat feeble: Assets rented out for 5 days after acquisition then sold at a loss - however, throughout the existence of the asset before, during, after ownership by T Income ≠ profit alla Ludco Assets transferred from unprofitable sub to profitable parent co, rented for 5 days then sold at a loss triggering terminal loss - T was in business of leasing equipment. Other CasesGlassman, 1966 Ex Ct following this case; T argued dual purpose, firstly to gain rental income and secondly to eventually demolish the rental homes and build a fancy new tower. Court rejected the argument and found the primary purpose was to demolish and build new tower. Rental property and later demolition = No ACCDo not argue “dual purpose”Adanac Apparel Ltd. 1969 Ex Ct taxpayer argued original purpose in acquiring adjacent building was to add it as a “bargain barn” even though it eventually sold the property. Court allowed the CCA on the basis of its primary purpose. Adjacent property for expansion plans = ACC Gascho, 1966 TCC taxpayer acquired property for purpose of completing the sale (acquired property as partial consideration for the sale of his family farm). ACC disallowed. Bolus-Revelas, 1971 Ex Ct T acquired amusement rides which it placed in storage. Purpose must be the precise use of the specific property, not type of property No ACC Disposition 248(1) “disposed of” - any transaction or event that entitled T to proceeds of disposition. T disposes of depreciable property when they divest themselves of all duties, responsibilities, and charges of ownership and also all profits, benefits, incidents of ownership - Olympia and York Disposition to be given broadest possible meaning including demolition - proceeds = 0 - Campagnie Immobiliere13(21) Proceeds of disposition = sale price of property sold, compensation for property lost, teken, destroyed Scenarios at disposition: Proceeds = UCC → no impactProceeds less than UCC = terminal loss where asset disposed of is the last in its class - 20(16) difference deducted from business/property income that year If assets disposed of is not lass in its class - then proceeds deducted in computing UCC Proceeds greater than UCC = recapture 13(1) difference is included in business/property income for the year and fully taxable Proceeds greater than both UCC and capital cost → recapture up to value of capital cost; above that is capital gain 54Taxable Capital Gains and Allowing Capital LossesCharacterizing Capital Property39(1) capital gains and losses defined as residual gains and losses - not recognizable read without 3(b). 54 “capital property” = depreciable property of T and any property (other than depreciable property) any gain or loss from the disposition of which would be a capital gain or a capital lossProperty that cannot be characterized as capital property is generally recognized as inventory - income property - Friesen Characterizing Real PropertySecondary intention to sell at a profit at the outset (or moment of acquisition) sufficient to render the transaction as being an AINT and that asset as a business income producing asset (Regal Heights). The secondary intention doctrine relies on a latent speculative motivation subservient to the primary motivating factor, present from the very beginning. The secondary intention must be motivating in that, but for the possibility of resale at a profit, T would not have made the purchase (Racine). In general, sale of vacant lands have been held to be sale of inventory (no capital gain/loss) (Morev, DeSalaberry) but exceptions have been found for land purchased for personal reasons - the secure storage of wealth (Lawee) and purchase and sale of cottage property (Montfort Lakes) - or where property was held for a very long period of time for the eventual purpose of business (H Fine & Sons). However, in Gratle property acquired and sold at a profit within 5 months was characterized as a speculative AINT. In McDonald the court found T’s intention from the beginning to be one of speculation, regardless of time it was held (contra H Fine). In Happy Valley 17 previous transactions precluded T from establishing that the property was a “hobby farm”. According to IT-218R factors for determining whether proceeds are gains or business income include T’s intention at time of purchase, location and zoned use of real estate, evidence of any changes in intention, nature of business or trade of the taxpayer, whether borrowed money was used and how much, length of holding, and evidence of extensive dealing in real estateRegal Heights Ltd Secondary intention to sell at a profit at the outset (or moment of acquisition) is sufficient to render the transaction as business income and not capital property Facts: 4 partners purchased a golf course with the intention to develop a shopping centre but were later unable to due to the opening of another large department store down the road. Partners wound up the corporation and sold off the land. Analysis: T took steps to develop the property → evidence of speculatory intention Holding: Proceeds of disposition is business inventory Racine - would T have purchases the property but for the prospect of selling at a profit? Must be evident from moment of purchase. Other cases finding disposition of vacant land as capital gainLawee, 1972 FCTD disposition of vacant land held to be capital gain; it was held for 9 years and found that T used the land to securely store wealth. Montfort Lakes, 1979 FCTD disposition of vacant land with the intention to build a summer cottage was found to be a capital gain as the initial purchase was personal and disposition came as a result of an unsolicited offer. H Fine and Sons, 1984 FCTD disposition of vacant land after 10 years with purpose of eventual business expansion found to be a capital gain. (seems like an outlier…)Other cases finding disposition was income business Gratl v Canada, 1993 FCA property acquired and sold at profit within 5 months was characterized as a “speculative” adventure in the nature of trade. McDonald, 1974 FCA property was intended to be held and resold after 10-20 years, but sold prematurely on threat of expropriation, court held that the intention from the beginning was one of business, regardless of time Happy Valley, 1986 FCTD taxpayer argued the property was for a “hobby farm” but court rejected on the grounds that T had previously bought and sold properties on 17 occasions Canadian Securities Election - Can Characterize Gains/Loss as CC 39(4)39(4) T can elect to have every Canadian security and disposition thereof to be deemed as capital property 39(6) “Canadian seucrity” = security that is a share of the capital stock of a corporation resident in Canada or a mutual fund trust or bond, debenture, bill, note, mortgage, or similar obligation issued by a person resident in Canada. 39(5) Election does not apply to non-residents, traders or dealers, financial institutions (defined in 142.2(1)) corporations whose principal business is the lending of money or purchase of debt.Where individual incurs losses - will argue they are engaged in trade; where incur gains, will argue not “traders/dealers” What is a “trader”? Vancouver Art Metal Works “Trader” is someone who frequently transacts at a rate or volume beyond that of an AINT: To distinguish a “trader” (not eligible for capital gains election) from an ‘adventurer’ (eligible for capital gains election) must examine following factors: Frequency of transactions, duration of holding, intent to acquire for resale, nature and quantity of the security What is a “dealer”? Robertson Dealer = Professional trader, generally licensed; but if not licensed possesses specialized, professional knowledge Kane - determined by level of expertise as distinguished from a ‘common risk taker’ trading on any advice they receive.IT-479R person w/ inside knowledge = dealer Other casesWoods, 1995 TCC taxpayer argued he was not a “Bay Street trader” but court included his gains nonetheless as he had made over 100 transactions in a span of a year and admittedly did not seek to acquire dividend-yielding shares as those do not tend to increase in value quickly. Used borrowed money. Was an insider, sat on boards. Leng, TCC 2007 T’s losses were capital losses: not a trader - had no knowledge of shares and only made 17 trades in 2 years - not business of trading shares Zsebok 2012 T losses were business losses: although not a trader, high frequency of trade (15-20/yr) and acquisition of dividend paying shares lead to conclusion that this was an “adventure in the nature of trade” → business losses DOES NOT INCLUDE DISCOUNTS/PREMIUM on debt obligations as these are characterized as interest income 12(1)(c) Satinder Calculating Gains and Allowable Losses General Rules on Calculating Gains and Allowable Losses 3(b) Allowable capital losses only deductible against capital gains38(a-b) Gains taxed ? value of the gain; losses deducted at ? value of the loss 39(1)(b) allowable capital losses are only deductible against taxable gains 39(1)(b) losses from disposition of depreciable property are excluded - calculated as terminal losses 20(16)(b)40(1)(a) Gains = Proceeds - ACB - selling costs 40(1)(b) Losses = ACB + selling cost - proceeds Personal Use Property - No Allowable Capital Loss 40(2)(g)(iii) 54 “personal-use-property” PUP is property owned by T used primarily for personal use or enjoyment of T of one or more persons who is the T, person related to T…40(2)(g)(iii) T’s loss relating to disposition of personal use property is NIL. but gains are still taxable under 40(1) Presumption that T should not write-off personal wear and tear 46(1) Gains for property use property disposed of less than $1,000 are exempted Only applicable for property that is capital property, not inventory. When T incurres a loss, T will attempt to argue that the property is inventory / for the purpose of producing income, not capital property - if it were capital property that is PUP, the loss from disposition is zero. Burnett - secondary intention to sell at a profit sufficient to render the asset as inventory alla Regal Heights - CRA must establish that T would have purchased the property regardless of whether market went up or downFacts: TP incurred 500K loss from the building of a monster home - CRA argued it was a PUP Capital property, losses the disposition of which are nill. TP argued it was a speculative adventure in trade and that losses are deductible. Even though house was designed w/ family input, bedrooms named after kids, etc. there was a secondary intention to gain form a rising market. Held: Property was income property - secondary intention doctrine alla Other casesDown TCC 1993 - loss on disposition of home in which taxpayer resided characterized as business loss since T had bought and sold 80-100 properties in previous years and lived in the house for only 10 months. Jason, TCC 1995 - short holding period and 96.5% debt financing suggested property was held as an adventure in the nature of tradeBoudreau, TCC 1999 - loss on property rented to parents at below market rates and sold to sister at a loss characterized as personal use propertyListed Personal Property - Losses Allowable Only Against Gains from Same 41(2)54 “listed personal property” is T’s PUP that is (a) print, etching, drawing, painting, sculpture, similar work of art (b) jewellery (c) rare folio, manuscript, book (d) stamp (e) coin 41(2) Losses deducted only against gains from disposition of listed personal property. However, 41(2)(b) permits losses to be carried back 3 years; forward 7 years41(1) taxable net gains from disposition of LPP is ? net gains from disposition of LPP46(1) applies - gains for PUP disposed of less than $1,000 is exempted Principal Residence 54 “principal residence” = housing unit owned (whether jointly or otherwise) in the year by T if (a) the housng unit was ordinarily inhabited in the year by T, spouse or common-law partner or former spouse or common law partner or child of T - or: (b) T elected under 45(2) or (3) to change the use of the property to or from an income producing useProvided that: (c) the property was designated by T for the year in prescribed form to be T’s principal residence for the year and no other property has been designated as T’s principal residence for the year by T, or T’s spouse/CL partner (unless living separate/apart) or child of TOr if T is under age 18 and not married/CL partnership by T’s mother or farther or sibling under age 18 who is not married/CLPIncludes: (e) deemed to include subjacent and immediately contiguous land that can reasonably be regarded as contributing to the use and enjoyment of the property - if this exceeds ? ha, the excess land must be necessary for the use and enjoyment of the land as a residence 40(2)(b) Formula for Principal Residence Exemption = A - ( A x B / C ) - D Formula to determine the game based on number of years the residence was a principal residence relative to the number of years T owned it. Where property was T’s principal residence the entire time T owned it, the full capital gain will be exempt by operation of 40(2)(b)A: T’s gain from the property B: 1 + number of taxation years that end after the acquisition date for which the property was T’s principal residence and during which T was a resident in Canada Allows T who disposes one residence and reacquires another residence in the same year to exempt the full capital gain on both residences C: Number of taxation year that end after the acquisition date during which T owned the property whether jointly or with another personIn order for a principal residence exemption to apply, must assess three things: 1) whether the property in question was capital or inventory, 2) whether it is a housing unit and ordinarily resided by T, 3) if any land beyond ? ha was necessary for the use and enjoyment of the housing unit as a principal residence. Was the property capital or inventory / business income producing property?Cayer Must determine by the nature of the property, length of time owned and used, frequency of similar transactions, work expended on improving the property, reasons why property sold, and T intention at time of acquisition Must also assess the context of previous and subsequent transactions - do not look at one purchase in isolation Facts: T builds and sells three houses in a span of two years. Before that, she and her husband had a construction firm, frequently bought and sold homes in the past as a business. Is she in the business of building and selling homes, are or they her personal homes? Court held it was business.Other casesIsaaks, TCC 2001 - carpenter buys three empty lots, subsequently builds a home on each one, inhabits for 3-4 months. Held as business. Giusti, TCC 2001 - T was a realtor, purchases a condo, improves it, sells it after living in it for a few months. Business. Falk, TCC 1991 - 3 homes in 8 years, but T was not experienced in the area, held the moves were for “family needs” Is the property a “housing unit” ordinarily resided by T? Flanagan Housing unit need not be a “building” - but must be suitably equipped to provide semblance of comfort and shelter, need not be hooked up to services Person may “ordinarily inhabit” more than one housing unit in a year if T does so in the course of the customary mode of lifeT had a lot with a trailer as vacation property, claimed as principal residence successfully (but not property across the street) S1-F3-C2 “Housing unit” includes house, apartment, condo, cottage, mobile home, trailer, houseboat, leasehold in a unit, share of co-op housingIT-120R3 “Ordinarily resided” = can be seasonal, as long as not owned for purpose of gaining/producing income Other casesRebus, 2002 Garden shed on vacant lot ≠ ordinarily resided or housing unit; T had apartment, bought lot to build house, never did anything on it and tried to claim as primary residence - what a bum. Ennist, TCC 1985 - condo presale, get relocated before he moved, goes and sleeps in it for one night → not ordinarily inhabited Mitsinkai, TCC 1978 - adjoining duplex with common basement inhabited by the taxpayer’s parents was not part of the housing unit ordinarily inhabited by the taxpayer - parents had “seperate housing unit” Saccamanno, TCC 1986 - house divided into three separate units, but the entire property was exempted because the original purpose was as a single dwelling unit - remained one single dwelling unit - not three S1-F3-C2 where residential property is used partly as principal residence and party to earn income from business or property, the entire property can be principal residence so long as: 1) the income-producing use is ancillary to the main residential use 2) there is no structural change to the property 3) no CCA has been claimed on the propertyExcess land over ? ‘necessary for use and enjoyment of land as a residence’? Excess land generally considered necessary where zoning regulations require a minimum lot size for a residence (Yates) and where zoning regulations do not allow for subdivision (Augart and Carlisle). But where subdivision is allowed and no application to subdivide has been made, the CRA may establish that the excess is not necessary, even where T cannot afford to subdivide it - analysis is on the property not on the taxpayer (Stuart Estate). Peace and tranquility not relevant considerations (Rode). Recognition and Non Recognition Rules 45(1)(a) where a taxpayer acquires property for (i) personal use or income use [either as capital property or inventory] or (ii) as income use [either capital property or inventory] to personal property - T is deemed to have disposed of it for proceeds equal to FMV and immediately required it at a cost equal to FMV. [Note - only between personal use and other; not between inventory and capital] IT-218R when T changes use of property from inventory to capital or vise versa, CRA allocates gains and losses on the disposition of property based “notional disposition” where disposition = ACB - FMV at time of conversion Personal → Income [capital or inventory]45(2) Where usage transforms from personal to income production, T may elect to have the property deemed personal use as a principal residence for up to 4 years even though T does not reside on that property (54(b,d)). Cannot claim CCA 45(4)T may rescind election at any time - property will be deemed to be income producing on the “first day of that subsequent year” and going forward can not become principal residence again under 54. Income [capital or inventory] → Personal 45(3) Where an income producing property transforms to personal property, T may elect to have the the deemed disposition no apply, allowing T to designate the property as a principal residence for up to four year before the change of use even though T has not ordinarily resided there (54(b, d)). Cannot occur if T claimed CCA on the property, however, 45(4)Effecting Changes in Use Where T acquires real property as inventory, there is a strong presumption that the property retains that characteristic absent a strong and unequivocal declaration of intention to the contrary. CITATION? Duthie Estate Steps taken in altering the use of the property must be clear and unequivocal per IT-218R but need not be formal. Meetings with various professionals, plans, drawing, etc. can be taken as an unequivocal act Duthie Estate, as can having an engineering study and draft plan completed Dawd. Noonan, T purchased luxury condo for 450K. After the market tanked he sold it for a heavy loss. T argued that he originally purchased it for rental but later ended up living in it. Court held no change in use because he never attempted to find tenants and the very luxurious condo made it difficult to rent. Allocating Proceeds Upon Disposition of Mixed Inventory and Capital Assets 68(a) the part or amount that can reasonably be regarded as being the consideration for the disposition shall be deemed to be the proceeds of disposition irrespective of the form or legal effect - allocation of proceeds can be re-allocated to reflect the commercial reality of the transaction.Golden - Reasonable arm’s length transactions resulting from negotiation that are not a sham or subterfuge deserve a significant degree of deference Original offer; 5.6M - 2.6 for land, 2.4 for buildings, 0.6M for trucks, equipment, etc. - Negotiated agreement 5.85M - 5.1 for land, 0.75K for buildings, trucks, equipment, etc. Other consideration are FMV (Peterson) and adequate bargaining time and position (Leonard).Other casesPeterson - sale allocated part of purchase price to goodwill; court held no value in good will as business was in the stinker for a while → FMV important consideration H Baur Investments - taxpayer cannot use s. 68 to undue arm’s length negotiated transaction that he later regrets Leonard - last minute allocation during the negotiation, in this case allowed the taxpayer to use s. 68 General Limitations Regarding ReasonablenessCasesCippolone, TCC 1994 Known as the “Doctor of Humour”. Expenses far exceed revenue. Deductions are suspicious. Gabco, 1968 test is whether a reasonable business person would have paid the amount having only business considerations in mind role of s. 67 is not to make a judgement on the business decisionsHammill, FCA 2005 unreasonable to be defrauded in such a way, became the basis of the decision in Ruff TCC 2013, while there was a source, it was not reasonable for the taxpayer to believe that there was a container with 8.5m held in Africa and spend 400K in pursuing that. Mohammad, FCA 1997 taxpayer borrowed money to purchase condo’s with the intention of operating at a loss while hopefully selling the condos at a gain later on. Taxpayer made no down payment and thus the interest expenses were extremely high. Court held that such a move was excessive and unreasonable. Court held that the expenses must be based objectively - by reference to the market rate of interest. TOC \h \u \z Avoidance PAGEREF _ygdrrw6058y6 \h 1GAAR - s. 245 PAGEREF _zarn3gu50b2z \h 1Characterization PAGEREF _xw9kfgnleftx \h 2If the T is a corporation/incorporated employee, is T carrying on a “personal services business” - SAAR PAGEREF _o34pt6s3pgb0 \h 2Inclusions PAGEREF _la311ryzklqp \h 3Inclusions: Forms of Remuneration PAGEREF _42rtdhtgwcam \h 3Inducement Payments (Taxable 6(3)(b) & (c)) PAGEREF _j5dbuiycklmy \h 3Gratuitous Payments (Taxable under 5(1)) PAGEREF _cq33evlyig2d \h 3Strike Pay (Not Taxable) PAGEREF _6uzpr0x8jg50 \h 3Tort Damages for Personal Injury or Death (Not Taxable) PAGEREF _pihuugoasi2f \h 4Inclusions: Payments on Termination PAGEREF _irhtkh2odxbn \h 4Was there a loss of employment or office? PAGEREF _arzdtwkhg9tt \h 4Was the payment made in respect of a loss of employment? PAGEREF _k9wb219ovolf \h 4Inclusions: General Benefits 6(1)(a) PAGEREF _2xakibw67uaj \h 51. Characterization - Is there a benefit? PAGEREF _ryayrn86cbfp \h 52. Connection to Employment? PAGEREF _iwvgii9em2n7 \h 63. Valuation PAGEREF _ayrawowccvd0 \h 7Inclusions: Other Benefits PAGEREF _8sof7d2o7cr \h 7Relocation Assistance PAGEREF _pj0ddon7bxab \h 7Housing Loss Payments Included (as opposed to an ‘eligible housing loss’) PAGEREF _n4ratzvrpkld \h 8Forgiveness of Debt PAGEREF _2ldaljaheanw \h 8Interest Free Loans PAGEREF _cczu3ugp3qos \h 8Employee Stock Options PAGEREF _wpi6fn7gpky2 \h 9Inclusions: General Allowances 6(1)(b) PAGEREF _aj2m4x9z76ju \h 9Distinction Between “Allowance” and “Reimbursement” or “Accountable Advance” PAGEREF _qnorumkd4p9 \h 10EXCEPTIONS to General Allowances (Not Included in Income) PAGEREF _80w92w6mchel \h 10Statutory Exclusions (Not Included in Income) PAGEREF _1doscpiv0410 \h 10Part-time Travel Expenses PAGEREF _chpemw8e2gzq \h 10Special Work Site Location PAGEREF _ew0uvje47z34 \h 11Remote Work Location PAGEREF _wok5u6ep1oog \h 11Employment Deductions PAGEREF _lpuscgqhnjb8 \h 12Travelling Expenses PAGEREF _ostbdq7w63fv \h 12Meal Deductions Incurred While Travelling (? Deductible) PAGEREF _h9hc441jg28g \h 13Home Office Expenses PAGEREF _5xjk7t62rgoz \h 13Moving Expense Deductions PAGEREF _mywvfmok2sy7 \h 14Eligible Relocation Analysis Cases for Purpose of Moving Expense Deduction PAGEREF _pqv2g6wz2pek \h 15Income or Loss from Business or Property (& Other Income) PAGEREF _3apmdua6751k \h 16Characterizing Business or Property PAGEREF _n6w2n93lwk0p \h 16Inclusions PAGEREF _4myfoutpq5q1 \h 17Gains from Illegal Activities (Included) PAGEREF _iepzzjemm1p7 \h 17Damages and Settlement Payments (Included if replaced income) PAGEREF _z4aj58l54v6 \h 17Voluntary Payments (Not included if ‘gifts’) PAGEREF _z6krrvfnf4vv \h 18Prizes and Awards (Included unless Prescribed Prizes or Lucky/Random Draws) PAGEREF _fybq9n49wbx1 \h 18Lucky/Random Prize Draws 40(2)(f) & CL (Not Taxable) PAGEREF _wng4r6y0e4sy \h 19Prescribed Prizes 56(3) (Not Taxable) PAGEREF _p53bw95f71ce \h 19Interest Income from Property 12(1)(c) PAGEREF _lanrppyc7s8t \h 19Characterizing Interest PAGEREF _c5k5b91wayw \h 19Payments of Part Interest & Part Capital - Deemed Interest 16(1)(a) PAGEREF _dg62m8xmjrhc \h 20Discounts and Premiums PAGEREF _mjprbwdu07gc \h 21Accrual Rules and Debt Obligation Transfer PAGEREF _xeykjwx6a9cc \h 21Deductions PAGEREF _lnw2k2ct4246 \h 22General Profit / Income Producing Tests For Deductibility 9(1) and 18(1)(a) PAGEREF _2m5nakv4u0vl \h 22Illegal Payments (Highly Restricted but Possibly Deductible) PAGEREF _r1a59pxmeuct \h 22Damage Payments (Likely Deductible under Business Practice/Income Producing Purpose Test PAGEREF _aeq29d8jc86h \h 22Fines and Penalties (Not Deductible 67.6) PAGEREF _abin5m7bua6k \h 23Deductions for Mixed Business and Personal Expense PAGEREF _5ur0gw62eeii \h 23Deductions for Entertainment, Recreation, Meals, Parties - Limited by 18(1)(h) & (l) PAGEREF _59q1itda7chp \h 23Limits on Deductibility for Meals/Entertainment 67.1(1) PAGEREF _itzqs2jbd0dt \h 24Home Work Space (Possibly Deductible Under 18(12)) PAGEREF _akylrdmnlz0q \h 24Travel Expenses (Deductible under 18(1)(h) PAGEREF _dbba0bo0pcil \h 25Deducting Interest Expense 20(1)(c) PAGEREF _6l1y8rrhzwfz \h 26Timing Issues PAGEREF _udyc6qfu2tdh \h 27General Timing Issues PAGEREF _55aw7wkr3go9 \h 27Deducting Inventory Costs PAGEREF _rhwm3kpap58g \h 28Capital Expenses - Cannot Deduct 18(1)(b) PAGEREF _qmyj04vgf7n3 \h 28Acquisition/Maintenance/Repair of Property - Is the Expenditure Capital or Deductible Business Expense? PAGEREF _pg8ad8ew3sd4 \h 29Capital Cost Allowance PAGEREF _au3hr3sx0gpn \h 30Taxable Capital Gains and Allowing Capital Losses PAGEREF _hsnjeg4m3k15 \h 31Characterizing Capital Property PAGEREF _ogg2y8oyelbv \h 31Characterizing Real Property PAGEREF _mwmnt1mlws9y \h 31Canadian Securities Election - Can Characterize Gains/Loss as CC 39(4) PAGEREF _2tdmdlxjg7xm \h 32Calculating Gains and Allowable Losses PAGEREF _tzh505kgtozf \h 33General Rules on Calculating Gains and Allowable Losses PAGEREF _x5818yi31z9x \h 33Personal Use Property - No Allowable Capital Loss 40(2)(g)(iii) PAGEREF _gbj0f4akol9t \h 33Listed Personal Property - Losses Allowable Only Against Gains from Same 41(2) PAGEREF _4gik525q1x0k \h 33Principal Residence PAGEREF _2v60q3voc4h8 \h 34Recognition and Non Recognition Rules PAGEREF _npkeym493o4w \h 35Allocating Proceeds Upon Disposition of Mixed Inventory and Capital Assets PAGEREF _25xx4h5qwmuj \h 35General Limitations Regarding Reasonableness PAGEREF _ofdnkzr29mit \h 36 ................
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