Basic Concepts and Canada’s Tax System
Taxation – LAW 345 – O’BrienFinal Outline Spring 2011 – Asif AbdullaTable of Contents TOC \o "1-4" Basic Concepts and Canada’s Tax System PAGEREF _Toc164005902 \h 5Compared to Other Govt Collected Payments PAGEREF _Toc164005903 \h 5Attributes of Taxes PAGEREF _Toc164005904 \h 5Generally Accepted Accounting Principles (GAAP) PAGEREF _Toc164005905 \h 5Section 152 – Net Worth Assessments PAGEREF _Toc164005906 \h 5Equity and Policy in the Tax Law PAGEREF _Toc164005907 \h 6Equity: PAGEREF _Toc164005908 \h 6Neutrality: PAGEREF _Toc164005909 \h 6Simplicity: PAGEREF _Toc164005910 \h 6Tax Expenditures: PAGEREF _Toc164005911 \h 6Constitution and Taxation PAGEREF _Toc164005912 \h 6Pacer Dome Canada Ltd. v. Ontario (Minister of Finance) (2006 SCC) – Tax Act Interpretation PAGEREF _Toc164005913 \h 6The Source Concept of Income PAGEREF _Toc164005914 \h 7Section 3 – Income for Taxation Year – (pg3/4) PAGEREF _Toc164005915 \h 7Section 4(1)(a) – (pg4) PAGEREF _Toc164005916 \h 7Section 56(1)(a)(ii) – Retiring Allowance – (pg35) PAGEREF _Toc164005917 \h 7“Retiring Allowance” - Section 248(1) PAGEREF _Toc164005918 \h 7“Employment” – Section 248(1) PAGEREF _Toc164005919 \h 7Section 6(3) – Payments by Employer to Employee – (pg7) PAGEREF _Toc164005920 \h 7Surrogatum Principle: see Tsiaprailis PAGEREF _Toc164005921 \h 8Interpretation Bulletin 365R2 – Damages, Settlements and Similar Receipts PAGEREF _Toc164005922 \h 8Case Law on Income from a Source: PAGEREF _Toc164005923 \h 8Bellingham v. The Queen (FCA 1996) – income not from a source – win-fall gains PAGEREF _Toc164005924 \h 8Schwartz v. The Queen (SCC 1996) – Retiring Allowances (s.56) PAGEREF _Toc164005925 \h 8Curran v. MNR (SCC 1959) – Payment in consideration for future services and lost benefits - income PAGEREF _Toc164005926 \h 9Tsiaprailis v. The Queen (2005) – Surrogatum Principle PAGEREF _Toc164005927 \h 9Siftar v. The Queen (2003 FCA) – Apportionment Principles PAGEREF _Toc164005928 \h 9Nexus Between Taxpayer and a Source of Income PAGEREF _Toc164005929 \h 10General Rule: PAGEREF _Toc164005930 \h 10Calculation Rules attempt to resolve Three Basic Questions: PAGEREF _Toc164005931 \h 10Case Law on Source-Taxpayer Nexus: PAGEREF _Toc164005932 \h 10Field v. The Queen (2001 TCC) – Nexus for RRSP withdrawals PAGEREF _Toc164005933 \h 10Buckman v. MNR (1991 TCC) – Factors to Consider Instead of Just Strict Ownership PAGEREF _Toc164005934 \h 10Residence as the Primary Basis of Canadian Tax Liability PAGEREF _Toc164005935 \h 11Approach: PAGEREF _Toc164005936 \h 11Residence as a Tax Base PAGEREF _Toc164005937 \h 11Section 2 – Taxation of Residents and Non-Residents - (pg3) PAGEREF _Toc164005938 \h 11Section 250(1) – Person Deemed Resident PAGEREF _Toc164005939 \h 11Section 250(3) – Ordinary Resident PAGEREF _Toc164005940 \h 11Interpretation Bulletin IT-221R3 – Determination of Residence (CRA) PAGEREF _Toc164005941 \h 11Case Law on Residence as a Base: PAGEREF _Toc164005942 \h 12Thomson v. MNR (1946 SCC) – Determining Residence/Ordinary Residence – LEADING PAGEREF _Toc164005943 \h 12Lee v. MNR (1990 TCC) – Determining Ordinary Residence; Cit/Imm status not determinative PAGEREF _Toc164005944 \h 12R&L Food Distributors Ltd v. MNR (1977 TRB) – Application of Sojourning PAGEREF _Toc164005945 \h 13Part-Year Residence PAGEREF _Toc164005946 \h 13Section 114 – Individual Resident in Canada for Only Part of Year PAGEREF _Toc164005947 \h 13Section 249(1)(b) – “Taxation Year” PAGEREF _Toc164005948 \h 13Case Law on Part-Year Residence: PAGEREF _Toc164005949 \h 14Schujahn v. MNR (1962 Exch Ct) – Establishing Part-Year Residence PAGEREF _Toc164005950 \h 14The Queen v. Reeder (1975 FCTD) – Where Residency is long established, difficult to show Severance PAGEREF _Toc164005951 \h 14Avoidance of Dual Tax Residence PAGEREF _Toc164005952 \h 14Section 250(5) – Deemed Non-Resident PAGEREF _Toc164005953 \h 14Tax Treaties PAGEREF _Toc164005954 \h 14Section 128.1(4) – Departure Tax PAGEREF _Toc164005955 \h 15Case Law on Avoidance of Dual Tax Residence: PAGEREF _Toc164005956 \h 15Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus Treaty PAGEREF _Toc164005957 \h 15Provincial Residence PAGEREF _Toc164005958 \h 16Regulation 2601 – Residents of Canada PAGEREF _Toc164005959 \h 16Regulation 2607 – Dual Residency PAGEREF _Toc164005960 \h 16BC ITA Section 2 – Liability for Tax PAGEREF _Toc164005961 \h 16Case Law on Provincial Residence: PAGEREF _Toc164005962 \h 16Mandrusiak v. The Queen (2007 BCSC) – Thompson used to determine ordinary residence PAGEREF _Toc164005963 \h 16Residence of Corporations and Trusts PAGEREF _Toc164005964 \h 16Section 250(4) – Corporation Deemed Resident PAGEREF _Toc164005965 \h 16Case Law on Residence of Corporations and Trusts: PAGEREF _Toc164005966 \h 16De Bears Consolidated Mines Ltd v. Howe (1906 HL) – Residency for corporations is a question of fact PAGEREF _Toc164005967 \h 16Sources as a Basis of Tax Liability PAGEREF _Toc164005968 \h 17Income from Office or Employment PAGEREF _Toc164005969 \h 18Basic Definitions and Provisions PAGEREF _Toc164005970 \h 18Section 248(1) – Definitions Section for Office or Employment PAGEREF _Toc164005971 \h 18Section 5 – Income / Loss from an Office or Employment PAGEREF _Toc164005972 \h 18Section 6(1)(a) – Basic Inclusion in Income from Employment (see Savage) PAGEREF _Toc164005973 \h 18Section 8(2) – Limitation on Deductions PAGEREF _Toc164005974 \h 18Section 153(1)(a) – Withholding of Tax by Employer PAGEREF _Toc164005975 \h 18Section 118(10) – Canada Employment Credit PAGEREF _Toc164005976 \h 18Employee vs. Independent Contractor/Consultant/Sole Proprietor PAGEREF _Toc164005977 \h 19Differences Between Employee and Independent Contractor PAGEREF _Toc164005978 \h 19TEST for Employee vs. Independent Contractor: PAGEREF _Toc164005979 \h 19Case Law on Employee vs. Independent Contractor: PAGEREF _Toc164005980 \h 19Wiebe Door Services v. MNR (1986 FCA) – Leading – single question test to employee/contractor PAGEREF _Toc164005981 \h 19Ontario v. Sagaz Industries Canada (2001 SCC) PAGEREF _Toc164005982 \h 19Wolf v. The Queen (2002 FCA) – Intention is a valid factor to be considered PAGEREF _Toc164005983 \h 20Royal Winnipeg Ballet v. MNR (2008 FCA) – Intention in the K should be considered PAGEREF _Toc164005984 \h 20Lang v. MNR (2007 TCC) – Intent should not be ignored, but weight is in question PAGEREF _Toc164005985 \h 20Personal Services Businesses and Incorporated Employees PAGEREF _Toc164005986 \h 20Section 18(1)(p) – General Limitations on Deductions from Business or Property Income PAGEREF _Toc164005987 \h 20Section 125(7) – Definitions PAGEREF _Toc164005988 \h 20Section 248(1) – Specified Shareholder PAGEREF _Toc164005989 \h 21Benefits, Reimbursements and Allowances PAGEREF _Toc164005990 \h 21Savage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employee PAGEREF _Toc164005991 \h 22Lowe (FCA) – Is there a measurable economic benefit? Who possesses the primary benefit? PAGEREF _Toc164005992 \h 22Valuation of Employment Benefits PAGEREF _Toc164005993 \h 22Giffen v. The Queen (1995 TCC) – Method of valuing benefits – no longer used for loyalty points – IT470R PAGEREF _Toc164005994 \h 22Dunlap PAGEREF _Toc164005995 \h 23Allowances PAGEREF _Toc164005996 \h 23The Queen v. Huffman (1990 FCA) – distinction between allowance and reimbursement PAGEREF _Toc164005997 \h 23The Queen v. MacDonald (1994 FCA) – Leading case on s.6(1)(b) – what constitutes an allowance PAGEREF _Toc164005998 \h 24Special and Remote Worksites PAGEREF _Toc164005999 \h 24Automobile and Traveling Allowances PAGEREF _Toc164006000 \h 24Deductions and Computing Income from Office or Employment PAGEREF _Toc164006001 \h 25General Limitations on Deductions: PAGEREF _Toc164006002 \h 25Traveling Expenses PAGEREF _Toc164006003 \h 26Martyn v. MNR (1962) – Travel to and from work is not deductable PAGEREF _Toc164006004 \h 27Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issues PAGEREF _Toc164006005 \h 27Legal Expenses PAGEREF _Toc164006006 \h 27Professional and Union Dues PAGEREF _Toc164006007 \h 28The Queen v. Swingle (1977) – s. 8(1)(i)(i) – interpreted strictly – professional required by statute PAGEREF _Toc164006008 \h 28Cost of Supplies PAGEREF _Toc164006009 \h 28Home Office Expenses PAGEREF _Toc164006010 \h 29Income from Business or Property PAGEREF _Toc164006011 \h 30Business Source of Income: Organized Activity and Pursuit of Profit PAGEREF _Toc164006012 \h 30Framework for Income from Business or Property PAGEREF _Toc164006013 \h 30Definition of a Business PAGEREF _Toc164006014 \h 30Luprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = business PAGEREF _Toc164006015 \h 30LeBlanc v. The Queen (2007) – Lottery is pure chance = not an expected earning source = no source/no tax PAGEREF _Toc164006016 \h 30The Pursuit of Profit – Reasonable Expectation of Profit (REOP) PAGEREF _Toc164006017 \h 31Stewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or Property PAGEREF _Toc164006018 \h 31Adventure or Concern in the Nature of Trade (ACNT) PAGEREF _Toc164006019 \h 32IT-459 – Adventure or Concern in the Nature of Trade: PAGEREF _Toc164006020 \h 32MNR v. James A Taylor (1956 Exch Ct) – Transaction is ACNT – factors to consider – trade was business-like PAGEREF _Toc164006021 \h 33Regal Heights Ltd v. MNR (1960 SCC) – Secondary objective of earning profit on land results in an ACNT PAGEREF _Toc164006022 \h 33Irrigation Industries Ltd v. MNR (1962 SCC) – Investment in shares of a company are capital investments PAGEREF _Toc164006023 \h 33Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT) PAGEREF _Toc164006024 \h 33Income from a Property PAGEREF _Toc164006025 \h 34Business vs. Property PAGEREF _Toc164006026 \h 34Hollinger v. MNR (1972) – Approach for Business vs. Property Income PAGEREF _Toc164006027 \h 34Walsh and Micay v. MNR (1965) – Rental properties generally seen as income from property, not business PAGEREF _Toc164006028 \h 34Interest PAGEREF _Toc164006029 \h 34Groulx v. MNR (1967 SCC) – Court found blended payments from an increased purchase price PAGEREF _Toc164006030 \h 35Rent and Royalties PAGEREF _Toc164006031 \h 35Wain-Town Gas and Oil (1952) – After-sale share in profits are royalties and subject to income tax PAGEREF _Toc164006032 \h 35Dividends PAGEREF _Toc164006033 \h 35Deductions in Computing Income from Business and Property PAGEREF _Toc164006034 \h 36Structure of the Act – Business/Property PAGEREF _Toc164006035 \h 36Income Earning Purpose Test PAGEREF _Toc164006036 \h 36Imperial Oil (1947) – If Expense in ordinary course of business, then generally deductible PAGEREF _Toc164006037 \h 36Royal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally deductible PAGEREF _Toc164006038 \h 37Personal and Living Expenses PAGEREF _Toc164006039 \h 37Section 18(1)(h) – Personal and Living Expense PAGEREF _Toc164006040 \h 37Benton (Thomas Harry) v. MNR (1952) – House-keeper is a personal expense – not deductable PAGEREF _Toc164006041 \h 37Section 63 – Child Care Expense Deduction PAGEREF _Toc164006042 \h 38Symes v. The Queen (1994 SCC) – s.63, found not discriminatory towards women – note LHD dissent PAGEREF _Toc164006043 \h 38Commuting Expenses PAGEREF _Toc164006044 \h 38Dr. E Ross Henry – Travel from/to Home is not deductable aginst income from business/property PAGEREF _Toc164006045 \h 38Moving Expenses PAGEREF _Toc164006046 \h 39Home Office Expenses PAGEREF _Toc164006047 \h 40McCreath (2008 TCC) – Travel between home-workspace and place of employment MAY not be deductable PAGEREF _Toc164006048 \h 40Example Problem – Home Office Deductions and Carry-forward PAGEREF _Toc164006049 \h 40Deduction of Interest Expense – see handout PAGEREF _Toc164006050 \h 41Section 20(1) – Deductions Permitted in Computing Income from Business/Property PAGEREF _Toc164006051 \h 41The Queen v. Bronfman Trust (1987 SCC) – Requirement that Borrowed funds be used for an income earning purpose; Money must be borrowed to use directly on the income earning purpose PAGEREF _Toc164006052 \h 41Policy Reasons for Denying Decuctions PAGEREF _Toc164006053 \h 41Eldridge PAGEREF _Toc164006054 \h 41Bribery of Certain Officials – s. 67.5 PAGEREF _Toc164006055 \h 41Fines and Penalties – s. 67.6 PAGEREF _Toc164006056 \h 41Policy: PAGEREF _Toc164006057 \h 41Computation and Timing PAGEREF _Toc164006058 \h 42Capital vs. Current Expenditures PAGEREF _Toc164006059 \h 42Section 18(1)(b) – Capital Outlay or Loss PAGEREF _Toc164006060 \h 42British Insulated and Helsby Cables Ltd v. IRC (1926 HL) – One time payment to create asset - capital PAGEREF _Toc164006061 \h 42Repair of Tangible Assets PAGEREF _Toc164006062 \h 42Canada Steamship Lines Ltd v. MNR (1966 Exch) – Boiler of the ship is a capital asset itself PAGEREF _Toc164006063 \h 42The Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building – capital outlay PAGEREF _Toc164006064 \h 43Gold Bar Developments Ltd v. The Queen (1987 FCTD) – New test outlined for finding repairs over capital PAGEREF _Toc164006065 \h 43Timing – Amounts Receivable PAGEREF _Toc164006066 \h 43Section 12(1) – Income Inclusions PAGEREF _Toc164006067 \h 43CASE LAW RULES: PAGEREF _Toc164006068 \h 44J. Colford Contracting – When an amount becomes receivable, it must be included in income PAGEREF _Toc164006069 \h 44Benaby Realties – An amount is not ‘receivable’ for tax purposes until the actual amount is ascertained PAGEREF _Toc164006070 \h 44West Kootenay Power and Light (1992 FCA) – Receivable means: everything has been done that is required to give rise to entitlement to be paid – even where customer is not legally obliged to pay at that moment PAGEREF _Toc164006071 \h 44JL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent PAGEREF _Toc164006072 \h 45Non-Capital Losses PAGEREF _Toc164006073 \h 45Section 111(1)(a) – Carry Forward and Back of Non-Capital Losses PAGEREF _Toc164006074 \h 45Capital Gains PAGEREF _Toc164006075 \h 46Introduction to Capital Gains PAGEREF _Toc164006076 \h 46Taxation of Capital Gains and Losses: 3(b) and subdivision E PAGEREF _Toc164006077 \h 46Distinguish Income from Property: 9(3) PAGEREF _Toc164006078 \h 46Calculation of Capital Gains and Capital Losses: PAGEREF _Toc164006079 \h 46Carry Forward and Back of Capital Losses: 111(1)(b) and 111(2)(a) PAGEREF _Toc164006080 \h 47Policy Evaluation of Preferential Taxation of Capital Gains PAGEREF _Toc164006081 \h 47Definitions PAGEREF _Toc164006082 \h 48Section 248(1) – “Property” PAGEREF _Toc164006083 \h 48Section 54 – Definitions PAGEREF _Toc164006084 \h 48Example – Identical Properties: PAGEREF _Toc164006085 \h 48Section 248(1) – “Disposition” PAGEREF _Toc164006086 \h 49The Queen v. Compagnie Immobiliere BCN Ltee (1979 SCC) – Disposition and POD – stat/normal meaning PAGEREF _Toc164006087 \h 49Deemed Dispositions and Deemed Proceeds PAGEREF _Toc164006088 \h 49Section 128.1(1) – Immigration PAGEREF _Toc164006089 \h 49Section 128.1(4) – Emigration PAGEREF _Toc164006090 \h 49Gifts and Sales Below FMV to Non-Arm’s Length Persons PAGEREF _Toc164006091 \h 50Section 70(5) – Capital Property of a Deceased Taxpayer PAGEREF _Toc164006092 \h 50Lottery Winnings Revisited PAGEREF _Toc164006093 \h 51Rollovers: Transfer of Capital Property to Spouse/CLP PAGEREF _Toc164006094 \h 51Section 248(1): “Common-Law Partner” PAGEREF _Toc164006095 \h 51Section 73(1) and (1.01) – Inter Vivos Transfers PAGEREF _Toc164006096 \h 51Example – Spousal Rollover PAGEREF _Toc164006097 \h 51Section 74.2(1)(a) – Spousal Attribution Rule PAGEREF _Toc164006098 \h 52Example – Opt-out of Spousal Rollover and Attribution Rule PAGEREF _Toc164006099 \h 52Spousal Rollover on Death PAGEREF _Toc164006100 \h 52Personal Use Property (PUP) and Listed Personal Property (LPP) PAGEREF _Toc164006101 \h 53Section 54 – Definitions PAGEREF _Toc164006102 \h 53Section 46(1) – Personal use Property PAGEREF _Toc164006103 \h 53Section 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NIL PAGEREF _Toc164006104 \h 53Calculation of LPP Net Capital Losses and Gains PAGEREF _Toc164006105 \h 54Principle Residence Exemption PAGEREF _Toc164006106 \h 54Policy for Principle Residence Exemption PAGEREF _Toc164006107 \h 54Section 54 – “Principle Residence” PAGEREF _Toc164006108 \h 54Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE) PAGEREF _Toc164006109 \h 55Example – Principle Residence Exemption PAGEREF _Toc164006110 \h 55Example – Principle Residence Exemption 2 PAGEREF _Toc164006111 \h 55Basic Concepts and Canada’s Tax SystemTax is a compulsory and unrequited (nothing identifiable is returned for that payment)Used to fund government/public servicesWealth distribution from rich to the poorReflects how society thinks Canada should function – what to encourage/discourageCompared to Other Govt Collected PaymentsTax is compulsory and unrequitedFines/penalties – compulsory as well but are used to deter/punish behaviourRoyalties – made to Crown for extraction of natural resources | to company for software use rightsPrices – a ‘requited’ payment to the govt in exchange for a good or service (licence, transit, etc)Taxes are sometimes used to encourage a certain behaviour (RRSP, RESP, etc) or discourage/account for a dangerous behaviour (alcohol/tobacco)Attributes of TaxesTax Bases:Income, Consumption, Wealth (not usually used in Canada)Rates of Tax:Statutory (set out in s. 117)Marginal Rate – highest rate that applies to the last dollar of income for a tax yearAverage Rate – total tax paid divided by the taxable incomeEffective Rate – total tax paid divided by the total income (including non-taxable incomeClassifications:Progressive Rates: increasing proportion of income as income risesHigher income persons have a greater ability to pay – they should be payingRegressive Rates: declining proportion of income as income rises – usually results from flat taxLow income persons pay a higher portion of their disposable incomeTax Period:Period over which tax is calculated; Income – annuallyInstalments may be required over the periodOthers are transactionally basedExemptions: exempted income does not have be reportedLottery Winnings; Gifts; Strike Pay Deductions: taxable income = total income – deductionsRRSP/RESP; Moving Expenses; Childcare Expenses; Union DuesCredits: tax payable = total taxes – creditsPersonal Tax Credit; Education Credits; etcGenerally Accepted Accounting Principles (GAAP)Rules set out by the Canadian Institute of Chartered Accountants for how to produce financial statementsMay be relevant for tax purposes, but may be overwritten by ITA or case lawSection 152 – Net Worth Assessments(7) Assessments no dependent on return information – The Minister is not bound by a return or information supplied by T, and in making an assessment, may assess the tax payable(8) Assessment deemed valid and binding – Assessment shall be deemed to be valid and binding absent errorsEquity and Policy in the Tax LawEquity:Vertical Equity: Tax should consider how parties are situated against those in unequal positionsHorizontal Equity: Those that are similarly situated should be taxed in a similar fashionTax is premised on the notion of equity/fairness – most important factorNeutrality:Taxes should not unduly effect personal decisions – marriage vs. common law, market factors, etcDifficult to obtain because our tax system is built on encouraging/discouraging certain actionsSimplicity:Comprehensibility – should be able to se how the system is meant to work with little effortCertainty – should be able to determine in advance the tax consequences of decisionsCompliance Convenience – should not be difficult or inconvenient to comply with tax lawAdministrative Convenience – should not be too difficult for govt to administer the tax collectionDifficult to Avoid/Evade – should be efficient to avoid dishonestyTax Expenditures:Where individuals would not be able to participate in a govt encouraged initiative, they are given tax breaks in the form of deductions, exemptions or creditsEvaluation ExpendituresWhat govt objective is being served by the expenditure?Are benefits distributed fairly? Is a program efficient? Does govt have control over the spending and politically accountable for it? Can the money be better spent elsewhere?Constitution and Taxation91(3): Fed has unlimited power to tax/raise money by any mode92(2): Prov can impose direct taxes for the purpose of raising revenue for Provincial purposesTax Collection Agreements – Feds collect on behalf of both Fed/Prov and then distribute to ProvPacer Dome Canada Ltd. v. Ontario (Minister of Finance) (2006 SCC) – Tax Act InterpretationWords of the Act are to be read in their entire context and in their grammatical and ordinary sense, harmoniously with the scheme of the Act, the object of the Act and the intention of ParliamentWhere the words are plain in their meaning, that is the favoured interpretationOnly where there is ambiguity, greater recourse to the context and purpose is necessaryThere is a rarely relied upon residual presumption in favour of the T, only where cannot be resolvedT has the burden of establishing that the factual findings of the assessment are wrong (Siftar) The Source Concept of IncomeSection 3 – Income for Taxation Year – (pg3/4)Non-Capital IncomeT’s income for a taxation year is the T’s income for the year determined by the following rules:Determine the total of all positive income (other than taxable capital gains) from a source inside or outside Canada, including but not limited to, the T’s income from each office, employment, business and propertyNOTE: New sources are allowed by the Act, but none found to date - BellinghamCapital Gains and LossesDetermine amount by whichThe total of: (A) T’s taxable capital gains from disposition of property other than LPP, AND (B) T’s taxable net gain for the year from dispositions of LPP (must be a positive figure for LPP)ExceedsThe amount of T’s allowable capital losses for the year from dispositions of property other than LPPDetermine the amount of (a) plus (b) exceeds the allowable deductions permitted by 60, 62, 63Non-Capital LossesDetermine the amount (c) exceeds the total amount of T’s loss from the year from an office, employment, business or propertySection 4(1)(a) – (pg4)Calculate income/loss from each source separatelyBecause deductions/inclusions differ from source to sourceNet income is still a consolidation of all the income/loss from each sourceSection 56(1)(a)(ii) – Retiring Allowance – (pg35)There shall be included in computing T’s income, a retiring allowance, other than an amount received out of an employee benefit plan, retirement compensation arrangement or a salary deferral arrangement“Retiring Allowance” - Section 248(1)An amount received (other than superannuation, pension, death benefit) (a) On or after retirement of T from an office or employment in recognition of T’s long service OR(b) In respect of loss of an office/employment whether or not received as damages or pursuant to an order or judgment of a competent tribunal“Employment” – Section 248(1)Position of an individual in the service of some other personSection 6(3) – Payments by Employer to Employee – (pg7)(a) Payments made during a period while the payee was an officer or in the employment of the payer, OR (b) on account, in lieu of payment or in satisfaction of an obligation, shall be deemed income from an office or employment under section 5UNLESS, the payment was made (c) as consideration for accepting the office/contract/employment, (d) as remuneration for services as an officer or under k for employment; OR (e) in consideration for a covenant with reference to what the officer/employee is or is not to do before/after terminationSurrogatum Principle: see TsiaprailisWhen payment is received in substitute for another payment, where the payment being replaced is taxable, then the replacement payment should also be taxableTwo-part Test:1. What was the payment intended to replace? (Must be clear)2. Would the replaced amount have been taxable in the recipient’s hands?Interpretation Bulletin 365R2 – Damages, Settlements and Similar ReceiptsDamages for personal injury or death are excluded from incomeExcept the amount that could reasonably be considered to be income from employmentCase Law on Income from a Source:Bellingham v. The Queen (FCA 1996) – income not from a source – win-fall gainsT owned an investment property but it was expropriated by the cityIn litigation T received punitive damages for: 1. Value of the land; 2. Interest on the value; 3. Additional interestIssue: Whether the Additional Interest awarded constitutes income or capital gains under the ITAHeld:Value of the land: T has to pay tax on capital gains; Interest on the value: also capital gains;Additional interest: this was punishment, not compensation, doesn’t replace a taxable amount – not taxableReasons:Broad defn of income (any accretion to wealth) vs. Narrow defn of income (income from business that recurs)Policy: Govt chooses efficiency and simplicity over pure equityLikely falls into win-fall gains – non-taxableCranswick – Factors to consider in determining win-fall gains:T has no enforceable claim to the payment; No organized effort on T’s part to receive the payment; Not sought after or solicited by T; not expected by T; No foreseeable element of recurrence; Not a customary source of income for T; not made in consideration of property/services/anything else provided by T; Fries – SCC found that strike pay is not income from a sourceHere, Source was the Expropriation Act – T is the beneficiary; no element of exchange or bargain; no consideration; no quid pro quoSchwartz v. The Queen (SCC 1996) – Retiring Allowances (s.56)T resigned from Senior Partner job to work for Dynacare for more money; Position became unavailable and T was paid a lump sum for loss of salary, stock options and emotional traumaIssue: Was the payment made to T income, and therefore taxable?Held: No, this payment could not be traced to payment in lieu of income from an enumerated sourceReasons:Surrogatum Principle: if payment could be traced to replacement of a payment that is a valid source under 3(a)Here, this is not a payment for services, this is compensation for ‘future employment’ and emotional stress3(a) contemplates the addition of other sources, but there has yet to be any additions (Krishna)“Retiring Allowance” – made in the course of employment – cannot lose position that is not yet heldExpanding the specific definition under the Act would nullify the effect of s.56(1)The court should prefer the specific s.56(1)(a)(ii) over the general 3(a)“Employee” – definition does not include a person who has future obligations to an employerComments:s.56 explicitly states that it is not to restrict the generality of 3(a), but this was ignoredTakeaway Points:Surrogatum can’t apply if there is not evidentiary basis for apportionment of paymentBurden is on the T to show that it was no apportioned to taxable paymentsGeneral provisions cannot be used to include amounts of income that exempt under specific provisionsNever has there been a ruling where income has been found from a source not enumerated under 3(a)Court was unwilling to distinguish between pain and suffering and the remuneration portionsCurran v. MNR (SCC 1959) – Payment in consideration for future services and lost benefits - incomeT was induced to retire from his position and take on a new position; received payment and singed agreementIssue: Was the payment received by T taxable as income?Held:Yes – The payment was taxable income – made by the employer to T and received by T to induce him to serve as manager for the company – payment for services renderedReasons:T had to resign in order to make the services available, which voided certain benefits, but the payment made to T was made with consideration for those losses and for future service to the new employer6(3) doesn’t apply because the employer never employs TDissent:Substantial part of the amount paid to T was a capital receipt and not taxable as incomeComments:This is the only time the SCC has found another source under 3(a) – compensation for future servicesTsiaprailis v. The Queen (2005) – Surrogatum PrincipleT injured in car accident, lost job, went on disability; Insurance stopped paying after several monthsT sued insurance company and they settled out of court for $105k for all the claimsAgreed upon that settlement was apportioned: 35k for pas benefits and 75% of future benefits to 65Issue: Was the portion of settlement representing the past benefits accrued income that is taxable?Held: YES – taxable under the surrogatum principleReasons:6(1)(f)(ii) – Amounts received on a periodic basis pursuant to a disability plan are to be included in incomeSurrogatum Principle – The surrogatum payment is included in taxable income1. What was the payment intended to replace? And provided this question is sufficiently clear:2. Would the replaced amount have been taxable in the recipient’s hands?YES to bothThe proceeds have flown from the same source as the taxable periodic paymentsComments:Here the claims were clear and the apportionment was clear in the negotiations – differs from SchwartzSiftar v. The Queen (2003 FCA) – Apportionment PrinciplesAuthorities do not have to recognize the agreements made between parties regarding apportionmentPolicy – avoids negotiations that are akin to tax evasionIt is up to the parties to determine apportionment, but failure to do so is not determinativeSystem is based on self-assessment; where periodic payments are calculable, there is ability to determine if declarations are reasonable or notWhere CRA not satisfied, they can re-assess the T – then T has the burden of disproving their findingsPolicy – T is in the best position to provide evidence as they have the greatest knowledge of their financesNexus Between Taxpayer and a Source of IncomeNOTE: See Net Worth Assessments Above (Basic Concepts)General Rule:The taxpayer must be the actual person who owns the income or the loss from each specific source (Field)Exception: Must have regard to the circumstances surrounding the actual receipt of the money and the manner in which it is held by T (Buckman)Calculation Rules attempt to resolve Three Basic Questions:What amounts of revenue must be recognized as income?What amounts of expenses are recognized as deductable?When must the relevant amounts be recognized?Case Law on Source-Taxpayer Nexus:Field v. The Queen (2001 TCC) – Nexus for RRSP withdrawalsT’s ex-wife fraudulently withdrew T’s RRSP funds from his acct. T did not attempt to recover themMinister assessed T to pay taxes associated to that incomeT claiming the amount back because the proceeds were not received by him as per s.146(8)Issue: Is the RRSP withdrawal a valid source of income for T, where he did not receive a benefit from it?Held: NO – this is not a valid source of incomeReasons:s.146(8) requires that T receive any amounts as benefits out of or under an RRSPThe NEXUS required by the Act is that there must be “actual receipt”Comments:Note that T did get the benefit of deductions when he contributed to his RRSPMay be a ‘benefit’ in the fact that he did not try to recover them to ensure smooth divorce proceedingsBuckman v. MNR (1991 TCC) – Factors to Consider Instead of Just Strict OwnershipT(lawyer) embezzled funds from his clients and paid them interest to hide the theftMNR assessed the money as income to be taxed – allowed the deduction of interest paymentsT claimed it was to be paid back to rightful owners, but no evidence of this happeningIssue: Does the embezzled money constitute income and attract income tax?Held: YES – the money is income from a business and therefore taxableReasons:Illegal businesses are taxable just the same as regular businessesGilbert – distinguished – there was a true intention to repay in that case, here there is no intentionPoynton – T fraudulently obtained funds as income – court held the money was taxable as a benefit to an officer or employee under s.5(1) of the ActCurlett – Bought mortgages at a discount and then sold them at a profit – court held profit was incomeStrict ownership is not the exclusive test to determine what is income for taxationMust have regard to the circumstances surrounding the actual receipt of the money and the manner in which it is held by TIllegally obtained money was retained by T as income from a business venture separate from legit businessRobertson and Dominion Taxicab – If duty to account is breached, the trustee converts funds to his own use, which is now taxable, not on the basis that the quality of the money has changed, but on the basis that the manner of holding has alteredTrustee’s duty to return the money flows from his relationship with his cesti qui trust; Taxability flows from the manner in which he holds the fundsResidence as the Primary Basis of Canadian Tax LiabilityApproach: Look to s. 2 – Tax payable by a resident of Canada on all income earned inside/outside CanNote Deemed Residency (s. 250(1)) and defn of Ordinary Resident s. 250(3) (Thomson)Note s. 249(1)(b) – definition of taxation year for an individualPart-year residence s. 114 – not taxed on portion where T commenced/ceased residency in CanIf Dual-Residency issue: First must determine that there is a dual residency situationIn Canada: look to s. 2(1) (taxation of residents of Canada); s. 250(1) Deemed residency; and s. 250(3) definition of ordinary residence in Canada (Not done in Salt)Then look to any tax treaties that exist to determine which residency prevailsThen cite s. 250(5) to demonstrate the Deemed residency of T – accords with TreatiesWhere resident becomes a non-resident: departure tax s. 128.1(4)Residence as a Tax BaseThe common jurisdictional bases for imposing income tax are citizenship, nationality, residence and source of incomeCanadian taxes are based on residency – connection to Canada determines if taxed on world-wide income or notTaxation is based on residence and source – this is a policy decisionResidence is used as a tax base because it emphasizes economic association with a countryBased on the amount of jurisdiction and control over the source/person to enforce taxationSection 2 – Taxation of Residents and Non-Residents - (pg3)Tax payable by persons resident in Canada – tax on all taxable income for each taxation year of every person resident in Canada at any time in the yearTaxable income – is the T’s income for the year plus the additions and minus the deductionsTax payable by non-resident – Where not taxable under (1)Was employed in Canada,Carried on a business in Canada, ORDisposed of taxable Canadian property,At any time in the year or previous year, income tax shall be paid on T’s taxable income earned in Canada for the year determined in accordance with Division DNOTE: See Computation of Taxable Income – sections 111(1) and (2), 114 and 118(10) - (pg 44)Section 250(1) – Person Deemed ResidentPerson shall be deemed to have been resident in Canada throughout a taxation year if the person(a) Sojourned in Canada in the year for a period of, or the total of, 183 days or more;(b) Was, at any time of the year, a member of the Canadian forces; OR(c) Was at any time of the year: (i) an ambassador, minister, high commissioner, officer or servant of Canada, OR (ii) an agent-general, officer or servant of a province, AND was resident in Canada immediately prior to appointment or employment by Canada/provinceSection 250(3) – Ordinary Resident“Person resident in Canada” includes a person who was at the relevant time ordinarily resident in CanadaExpands the realm of residency to those who are not always living in Canada, but “ordinarily” doThomson: In the place where in the settled routine of T’s life he/she regularly, normally or customarily livesInterpretation Bulletin IT-221R3 – Determination of Residence (CRA)The CRA determines residency in the following manner – not binding on the courtsFactual Residence:Whether or not the T maintains ties with Canada while he/she is abroadSignificant Residential Ties: dwelling place; spouse or CL partner; dependents in CanadaSecondary Residential Ties: Personal property; social ties; economic ties; landed immigrant status / work permits in Canada; Canadian vehicle; seasonal dwelling; Canadian passport; membership in organizationsOther factors: mailing address / safety deposit box/ post office box; stationary with Canadian address; telephone listing; subscriptions to mediaOrdinary Residence: Temporary absences vs. severance of residence with CanadaEvidence of intention to permanently sever residential ties with Canada – generally, if there is evidence of a foreseeable return to Canada, CRA will lean towards temporary absenceRegularity and length of visits to Canada; residential ties outside CanadaIntention to return to Canada is NOT consideredSojourners:Deemed resident if 183 days or more; Any part of a day is deemed to be a dayNot automatically considered sojourning, the nature of the temporary stay must be established to be akin to temporary residence – see R&L FoodCase Law on Residence as a Base:Thomson v. MNR (1946 SCC) – Determining Residence/Ordinary Residence – LEADINGT born in NS – lived there for 51 years; Moved to Bermuda where he declared domicile, then moved to UST spent summers in Canada during the time in question – 4 to 5 months at a timeT bought property in Canada where he and his wife would stay – did not really spend time in BermudaIssue: Whether T was a resident of Canada as per the ITA and therefore subject to income tax on worldwide incomeHeld: YES, he was an ordinary resident of Canada during the times in question – taxes owed on worldwide incomeReasons:Residency is a flexible/general term – no clear definition availableOrdinary residence must be determined – in contrast with special, occasional or casual (temporary) residenceWhere in the settled routine of T’s life, he regularly, normally or customarily livesTo order taxation for temporary residence alone would be unreasonable unless residence proved BRDSojourns – is outside the range of residence or what is commonly understood as temp residenceIntention of T in terms of residency is not relevant in determining ordinary/customary mode of lifeOnly the actual way of life satisfies the testHere, T’s ordinary residence was along the Atlantic strip of North AmericaT’s residence in Canada is substantially as deep rooted and settled as in the USLee v. MNR (1990 TCC) – Determining Ordinary Residence; Cit/Imm status not determinativeT would visit Canada regularly – not allowed to work/reside in Canada - Employed full-time in a non-resident corporation and work was performed outside Canada - T married to Canadian wife, who was dependant on him; pay was deposited to Canadian acct - Parents maintained T’s room in England, T paid mortgage in CanadaT did not file taxes anywhere; he could not join OHIP, was subject to non-resident transfer taxes, was out of the country for more than 183 days per year, was not allowed to work and had no desire to work in CanadaIssue: Was T a resident of Canada during the years in question?Held: T became a resident at the time he got married to his wife and remained a residentReasons:Residency is a question of fact – a number of factors can be considered together to determine residency:Past/present habits of life; length of visits; ties within the jurisdiction vs. ties elsewhere; permanence; ownership of dwelling in Canada / vacation property; Residence of spouse/children; membership with churches/professional organizations; registration of automobiles; Canadian credit cards and financial institutions / bank accounts; subscriptions to news papers / magazines; Canadian insurance policies; mailing address in Canada / safety deposit boxes; telephone listing in Canada; stationary / business cards showing Canadian address; Driver’s licence /health card / pension plans / legal docs; corporation / partnerships; Frequency of visits to Canada for social / business reasons; burial plot in Canada / Canadian will; employment in Canada; storage of personal belongings in Canada; landed immigrant status; severance of ties in former country of residenceIntention is not an element in determining residence – that is a factor for ‘domicile’Usually marriage is a neutral factor, but here it determines the date of residence – ties to Canada financiallyConnected in such a way that T became resident for tax purposesComments:Shih v. the Queen – opposite ruling: T was not a resident even though his wife/kids lived in CanadaWas only here for western education of children – maintained membership and ties to TawaiwanDue to increased mobility of the world, many of these factors carry less weightR&L Food Distributors Ltd v. MNR (1977 TRB) – Application of SojourningT is an ON registered company dealing primarily in ON; Owned by three American share holdersTwo of the share-holders commute to Canada daily – spent much more than 183 days in Canada eachBusiness deduction is available under s.125(1) for Canadian Controlled Private Companies (CCPC)CCPC – corp must reside in Canada, not be publically traded on exchange and controlled by Canadian resIssue: Is T a CCPC? – Are the two shareholders deemed residents due to “sojourning” under s.250(1)?Held: NO – the two shareholders are not sojourning to Canada – therefore not deemed residentsReasons:Oxford: Sojourn: “To make a temporary stay in a place; to remain or reside for a time”Coming to the country to work for the day and thereafter returning to one’s permanent residence in the evening is tantamount to making a temporary stay establishing temporary residence rather than sojourningHome and social ties for each shareholder were clearly in the US, not in CanadaComments:This case requires that where temporary residence is found, T still has burden of showing non-casual / non- occasional residence – this may be flawed as the Act does not require thisPart-Year ResidenceGR: In order to establish part-year residence, the facts must disclose either that the individual commenced or ceased to reside in Canada within a given tax yearSection 114 – Individual Resident in Canada for Only Part of YearNotwithstanding 2(1), the taxable income of a T who is resident in Canada for part of the year and non-resident throughout another part of the year is the amount by which:(a) The amount that would be T’s income if T had no income/loss for the non-resident portion, other than:(i) Out of scope for this classExceeds the total of:(b) Deductions permitted by 111(1) – (non-capital losses and net capital losses); AND(c) Any other deductions permitted to the extent that: (i) is reasonably applicable to the part of the year T was a resident; OR (ii) if substantially all of T’s income calculated under (a) was while non-resident, then deductions can reasonably be considered to be applicable to that part of the yearSection 249(1)(b) – “Taxation Year”A “Taxation Year” is, in the case of an individual, a calendar yearCase Law on Part-Year Residence:Schujahn v. MNR (1962 Exch Ct) – Establishing Part-Year ResidenceT worked for US company and is a US citizen; was relocated to Toronto HQ, moved w/ wife and kidsT bought a home in Toronto and was then relocated back to the US on a permanent moveT put house up for sale, he left back to the US, but wife stayed in Canada; T maintained mortgage payments and kept a Canadian bank acct and vehicle for his wife’s use while selling the houseT left his Toronto clubs and joined back up with his US ones, and retrieved his old car; transferred all his belongings to the US and bought a new home in the US when wife/kids returnedIssue:Does T qualify for deduction under s.114 as a part-year resident?Did T cease to be a resident on the date he left Canada?Held:YES – T established that he had ceased to be a resident of Canada the day he left, therefore qualified under 114Reasons:Residence is a question of fact; Change of domicile depends on the intent of the party, but residence is based on the factual circumstances external to the intent of the TWhen T went back to the US, he shifted his ties to the US and away from CanadaOnly reason for wife/kids staying behind was to sell the house – necessary ties for the purpose (bank etc)There was no residential purpose for visits T made to Canada after leavingThe Queen v. Reeder (1975 FCTD) – Where Residency is long established, difficult to show SeveranceT born/raised in Canada; Got a job in France for 8 months – wife moved there with him for that time periodT kept personal effects/car stored in Canada; kept health coverage but lapsed; bank account maintained and his payroll deposits were made to that bank acctT purchased new car in France and rented a furnished apt for himself and his wifeIssue: Whether T was “not a resident in Canada” as per s.114 for the 8 months in questionHeld: T was a resident of Canada for the full year in question – taxes assessed on ALL income for the yearReasons:Factors to consider, but not limited to:Past/present habits of life; regularity and length of visits; ties with the jurisdiction and ties elsewhere; permanence or otherwise of purposes of stay abroadThomson: “Ordinary Resident” in the place where in the settled routine of his life he regularly, normally or customarily lives”T maintained his ties to Canada throughout his stay in France; His ties to France were temporaryT paid no income taxes in France – at most he was just sojourning thereAvoidance of Dual Tax ResidenceSection 250(5) – Deemed Non-ResidentA person is deemed non-resident of Canada for taxation purposes where under any tax Treaty, T is a resident under another country and not a resident in CanadaTax TreatiesBilateral agreements between two states – negotiated by the Dept of FinanceWhere there are dual residencies, the treaty can be used to determine how the T is taxedArticle IV Canada-US Tax Treaty(2) Where an individual is a resident of both contracting states, status shall be determined by the following:(a) By the place where the permanent home exists; if both or neither, deemed resident of the state where personal and economic relations are closer (centre of vital interests)(b) If centre of vital interests cannot be determined, deemed resident where T has an habitual abode;(c) If habitual abode in both/neither, deemed resident of which T is a citizen; AND(d) If citizen both/neither, mutual agreement between the competent authorities of the contracting statesRecall: Thomson – Had a permanent residence in both countriesCentre of vital interests – friends/social life in both countries – family travels with himHabitual Abode – most likely in the US – but may be bothCitizenship – T was Canadian citizen, not US – would be satisfied hereArticle 4 Canada-UK Tax Treaty(2) Where resident of both contracting states, residency is determined as follows:(a) State where there is a permanent home; if BOTH, centre of vital interests(b) If cannot determine centre of vital interests OR no permanent home in either state, deemed resident of state with habitual abode;(c) If habitual abode in both/neither, T is a resident where he/she is a national; AND(d) if national of both, neither, determined by competent authorities of the contracting statesRecall: Lee – wife with house available to him in Canada, and bedroom at parent’s house in the UKCentre of vital interests – likely Canada – bank/social ties / etcHabitual abode – more likely in Canada than in the UK – whenever not on the boat, was in CanadaNational – UK national, but likely wouldn’t get this farSection 128.1(4) – Departure TaxBefore a resident becomes non-resident, T is deemed to have disposed of each property owned by T at FMVExcept those properties that will be subject to Canadian tax even though held by non-residence – real propertyPolicy: prevents residents from leaving Canada and avoiding the taxes associated to their gainsSee Deemed Dispositions and Deemed Proceeds below!Case Law on Avoidance of Dual Tax Residence:Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus TreatyT born in UK, moved to Jamaica and lived there for 10 years; Moved to Canada in 74 with wife and kids; worked for 2 years, then moved to Spain/Ireland; Returned to Canada in 84 and purchased home in QCIn 98, T accepted position in Australia and obtained temp residence there – released all Canadian memberships, cancelled most financial institutions and phone/cable; changed insurance coverage from residential to commercial; returned his car joined equivilent clubs in Australia; only short visit to CanadaHouse was leased to a non-related party in CanadaT returned after the position disappeared; CRA assessed T for taxes for the year’s while in AustraliaIssue: Was T an ordinary resident of Canada from Sept 1, 1998 to April 1, 2000?Held: NO – T was a non-resident during the years in questionReasons:T did not have permanent home in Canada – therefore deemed non-resident of Canada in accordance with article 4 of the Canada-Australia Tax Convention and subsection 250(5) of the ActLease was to a third party on a fixed term, T could not move back into the house if he wanted toComments:The judgment goes straight to the treaty to break the tie, but the court had not yet determined that T was an ordinary resident of Canada FIRST!Treaty is only to be used where there is dual residency – this likely would not have been the caseAlso, doesn’t look to permanent home in Australia, just finds that there isn’t one in CanadaProvincial ResidenceRegulation 2601 – Residents of CanadaResidency to be determined by the place of residence of the T on the last day of the taxation yearRecall s. 249(1)(b) – taxation year is the calendar year for individualsRegulation 2607 – Dual ResidencyWhere more than one place of residence on the last day of the calendar year, the province which can reasonably be regarded as T’s principle place of residence prevailsBC ITA Section 2 – Liability for TaxIncome tax must be paid for each taxation year for residents on the last day of the taxation yearCase Law on Provincial Residence:Mandrusiak v. The Queen (2007 BCSC) – Thompson used to determine ordinary residenceT original resident of AB, moved to BC for employer – performed consultant work for employer in BC110 days in BC during 200, 4.5 days in 2001 and 0 days in 2002T maintained a home in BC and in AB; also had a farm in AB; BC assessed T for taxes in years in questionIssue: Was T a resident of BC for the purposes of Provincial Tax collection? If so, which residence was principle?Held: T was a resident of both BC and AB, but AB was the principle place of residence – NO tax in BCReasons:Thompson – ordinarily resident in the place where in the settled routine of his life he regularly, normally or customarily lives. One sojourns to the place where he usually, casually or intermittently visits/staysThe former has an element of permanence, while the latter is base don temporary residenceVehicles in both Provinces – licence was AB; Holidays in AB; Family in AB; chief income (farm) in AB; Social contacts were stronger in ABResidence of Corporations and TrustsSection 250(4) – Corporation Deemed ResidentA corporation shall be deemed to have been resident in Canada throughout a taxation year if(a) it was incorporated in Canada (after April 26, 1965)(b) out of scope; AND (c) if before 1965, it was incorporated in Canada and at anytime in the taxation year or the preceding year it was resident in Canada or carried out business in CanadaRecall 250(5) – person is deemed non-resident where that person would be a non-resident under tax treatyRecall: Canada-US Article IV and Canada-UK Article 4 - aboveCase Law on Residence of Corporations and Trusts:De Bears Consolidated Mines Ltd v. Howe (1906 HL) – Residency for corporations is a question of factOperations in South Africa, but directors’ meetings and decisions took place in the UKIssue: Whether T ought to be assessed as a resident of the UKHeld: YES – Question of fact based on where company keeps house and does their business – all decisions were made in the UK, all directors located there, all trade/business was occurring thereComments: Test for corporate residence adopted in Birdmount Holdings (1978)Sources as a Basis of Tax LiabilityRecall: s. 2(3) – non-resident taxable in CA where employed by Canadian corporation or carrying on business in Cananad, or disposing of Canadian property – taxable in accordance with Division DSection 212 – imposes 25% income tax on certain types of payments made by Canadian residents to non-resident(a) Management fee; (b) Interest; (c) Estate or Trust income; (d) Rents, Royalties, etc; (h) Pension Benefits; (j.1) Retiring Allowances; (l) RRSPs Section 215(1) – Canadian residents have obligation to withhold and remit tax on behalf of non-residentsSection 215(6) – Where Canadian corporation does not withhold and remit taxes for a non-resident, Canadian corporation is jointly/severally liable for the tax owingNote Generally: section 253 – Extended meaning of “carrying on business” in CanadaIncome from Office or EmploymentBasic Definitions and ProvisionsSection 248(1) – Definitions Section for Office or Employment“Office”: The position of an individual entitling him/her to a stipend or remuneration, including judicial office, office of a minister of the Crown, etc“Officer”: Person holding such an office“Employee”: Includes an officer“Employed”: Performing the duties of an office or employment“Employer”: In relation to an officer, means the person from whom the officer receives remuneration“Employment”: The position of an individual in the service of some other personSection 5 – Income / Loss from an Office or EmploymentT’s income for a tax year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the T in the yearT’s loss for a tax year from an office or employment is the amount of T’s loss, if any, for the tax year…Section 6(1)(a) – Basic Inclusion in Income from Employment (see Savage)Included in the computing of T’s income for the year from office or employment: the value of board, lodging and other benefits of any kind whatever received or enjoyed by the T in a year; EXCEPT any benefit(i) Derived from the contributions of the T’s employer to a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policySection 8(2) – Limitation on DeductionsExcept as permitted by this section, no deductions shall be made in computing a T’s income for a taxation year from office/employmentNOTE: Section 8 puts narrow restrictions on what can be deducted from incomeSection 153(1)(a) – Withholding of Tax by EmployerEvery person paying at any time in a tax year salary, wages or other remuneration…shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall remit that amount to the Receiver General on account of the payee’s tax for the yearSection 118(10) – Canada Employment CreditThere may be deducted the amount determined by the formula AxB, where A is the set percentage for the taxation year and B is the lesser of $1000 and the total of T’s income from an office or employmentPolicy: Going to work is more expensive than staying at home; If receiving welfare, not as deserving as someone going to workAcknowledges employees who have expenses associated to that employmentEmployee vs. Independent Contractor/Consultant/Sole ProprietorDifferences Between Employee and Independent ContractorTax withholdings: persons do not need to withhold tax from independent contractors (they are to remit taxes themselves; s. 153(1) requires employer withholding of employee salaries and other incomeIndependent contractors do not pay into EI, and therefore cannot claim EI if they go out of workIncome from employment calculated on a cash basis; Business income is calculated on accrual basisS. 5 refers to income “received” by T; Income from business includes amounts receivableReporting: s.249 individual’s tax year is the calendar year, business income reported fiscally – s.249.1Deductions for employees limited to enumerated items in s. 8; independent contractors have wider scope under sections 9 and 20GR: Employee vs. Contractor is a question of fact – determined by balancing the relevant factorsNOTE: Generally individual wants to be a contractor to deduct more expenses; CRA wants employeesTEST for Employee vs. Independent Contractor:(Wiebe Door / Sagaz) Is the person engaged on his/her own account?If yes, then it is a contract FOR service (contractor)If no, then it’s a contract OF service (employee)Factors to consider when answering the above question are:Control – more control over the worker is indicative of an employee roleOwnership of tools/equipment – indicative of contractor roleOpportunity for profit / risk of loss – indicative of contractor roleOrganization / Integration – whether worker is integral/integrated into employer’s businessIntent of the parties should be considered (Wolf); Question of how much weight (Lang)Express intent drawn into the employment contract should be given weight (Royal Winnipeg Ballet)Where K terms are not an appropriate reflection of the legal relationship, K-intention ignoredCase Law on Employee vs. Independent Contractor:Wiebe Door Services v. MNR (1986 FCA) – Leading – single question test to employee/contractorCRA stated that Wiebe had not been withholding taxes from their employees (as per s.153(1))W in the business of installing electronic doors; had number of installers under contract; workers worked their own hours and could accept/refuse jobs from W; workers paid by the job and only saw W for pickup/drop offTCC – Applied four tests: Control test; ownership of tools/equipment; opportunity to make additional profit / risk of loss; organization / integration test (whether worker is integral/integrated into employer’s businessWithout the installers, W’s business wouldn’t work, so they are integral – therefore they are employees!Issue: Were the installers employees or independent contractors?Held: Sent back for new trial with new test parametersReasons:Best synthesis of all the approaches: Is the person engaged on his or her own account?If yes, then contract FOR services (contractor)If no, then it’s a contract OF services (employee)Factors to consider:Control; own equipment; hires own assistants; degree of financial risk; degree of responsibility for investment and management; and opportunity to profit from sound management in performance of tasksOntario v. Sagaz Industries Canada (2001 SCC)Affirms Wiebe Door Central Question + FactorsWolf v. The Queen (2002 FCA) – Intention is a valid factor to be consideredIntention of the parties is also a component to be considered in determining the test used in Wiebe DoorWhere there’s legitimate intention from both parties that show why they would both consider the person a contractor/employee, that should be factored into the central questionRoyal Winnipeg Ballet v. MNR (2008 FCA) – Intention in the K should be consideredEmployment K for each ballet dancer – in the K, each considered independent contractorK upheld by the FCA For highly skilled performer, k might be necessary, even if just for a few performances – not actual employeesIntention in the K can be given weight in determinationWhere it is established that the K terms are not an appropriate reflection of the legal relationship between the parties, then the stated intention will be disregardedLang v. MNR (2007 TCC) – Intent should not be ignored, but weight is in questionIntent is a test that cannot be ignored, but its weight varies from case to case – predominantly as a tie-breakerTrial judges who ignore intent stand a very good chance at being overruled by the FCAPersonal Services Businesses and Incorporated EmployeesQuestion of “Active Business Income” vs. income from a “Personal Services Business”Anti-Avoidance legislation set out in the ITA to protect against ‘employees’ incorporating themselves to take advantage of independent contractor taxation and the lower tax rate received by the CCPC - s. 18(1)(p)Policy: ensures that only bona fide CCPCs involved in active business carried on by a corporation have access to the preferential rate for Canadian Small Businesses - Section 18(1)(p) – General Limitations on Deductions from Business or Property IncomeLimitation on deductions for “personal services business” that would ordinarily be deductible against the income of a corporation other than a personal services businessSection 125(7) – Definitions“Active Business Carried on by a Corporation” – business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade“Personal Services Business” – Business of providing services where(a) An individual who performs services on behalf of the corporation (“incorporated employee”), OR(b) Any person related to the incorporated employee (See Arms-Length s. 251)Is a specified shareholder (s. 248(1)) of the corporation and the incorporated employee would reasonably be regarded as an officer/employee of the person to whom the services were provided (see test below), but for the existence of the corporation; UNLESS:(c) The corporation employs in more than five full-time employees throughout the year OR(d) The amount paid to the corporation was received from a corporation with which it was associatedTest for Personal Services Business:Would the incorporated employee be reasonably regarded as an employee using the Wiebe Door test?“Specified Business Investment” – a business (other than a Credit Union or a business leasing property other than Real Property) with the principle purpose of deriving income from a property“Canadian Controlled Private Corporation (CCPC)” – a corporation that is resident in Canada, its shares are not listed on a stock exchange, and it is not controlled by non-residents of Canada, by a corporation whose shares are traded on a stock exchange, or a combination of theseSection 248(1) – Specified ShareholderPerson who owns more than 10% of stockAny stock owned by person with whom T does not deal at arms length is considered to be owned by T for the purposes of this definitionBenefits, Reimbursements and AllowancesRecall: Section 5 – Income/Loss from an Office or EmploymentRecall: Section 6(1)(a) – Broad inclusion of benefits in employment from Office or EmploymentRecall: Tsiaprailis (s. 6(1)(f)) – where lump sum disability settlement was included as income as a benefitPolicy:Revenue: Without taxation of benefits, people would attempt to get their remuneration as much as possible in the form of benefits rather than salary, which would greatly reduce the tax baseLimits on inclusion: some benefits would be trivial/difficult for govt to assess (free coffee)Equity: unjust to allow one person to avoid tax through benefits, when another with no such benefit is taxedBecause employer gets to deduct almost everything given to the employees, the policy is to include almost any benefit the employee received from the employerWhat Qualifies as a Benefit?(Lowe) Is there a measurable economic benefit? If so, is the primary benefit to the employer or the employee? (Benefit to T is merely incidental)Economic advantage was connected with T’s employment (Savage)Whether it is a gift/something external to employee/employer relationship will depend on the employer’s intention/purpose of the payment (Phillips)Interpretation Bulletin IT470RDesigned to assist employers in preparing T4s and automatic employee deductionsPolicy: Tax simplicity, efficiency and complianceNon-cash gifts/awards to non-arms length employee, regardless of the numbers, are not taxable up to the aggregate value of $500 annually; AND the employer CAN deduct the gifts/awardsPolicy: perks that keep employees happy and allows them to stay at workAdditionally, separate long-service awards are not taxable up to $500 as wellSavage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employeeS worked for life insurance company; took courses related to employment, employer encouraged the courses by offering $100/course; S took 3 courses and received 300 from employer$300 showed up on T4, but S did not report the amount as she considered it a prize for achievement Issue: Was the cash payment a benefit of employment as defined by s. 6(1)(a)?Held: Yes this was a benefit, but it’s also a prize for achievement, so exempt up to $500Reasons:Yes, this is a benefit – no requirement for employment service in return for the benefitCash falls into a “benefit received or enjoyed”“in respect of” – is the widest way to define a connection between two things – employment and benefitPoynton – does not have to be a contractual exchange of services for benefitIf it is a material acquisition which confers a benefit upon the employee, then it’s a benefitBUT this is also a prize for achievement and that is exempt up to $500Specific provision prevails over the broad general inclusionLowe (FCA) – Is there a measurable economic benefit? Who possesses the primary benefit?Trips offered by employer to employees who sell the most insurance; trips were to areas where they meet with prospective clients; T went on trip with family for such functionT assessed for the portion of the trip that was “personal travel” – as there was some enjoyment as wellBoth T and wife put in 14h/day entertaining brokers; trip was fun, but they were not free to do as they pleaseIssue: Was there any taxable benefit associated to this trip?Held: NO – this was a business trip – primary benefit to the employer – personal benefit was merely incidentalReasons:Does the payment provide T with a measurable economic benefit?If so, is the primary advantage to the employer or the employee?Here, purpose of trip was to bring personal relationships to the account executives to encourage businessAll done at the request of employer – wives were expected to attend for the same functionTakeaway:s. 6(1)(a) is limited so as not to include benefits that are merely incidental to the employer’s primary purposeValuation of Employment BenefitsRecall that s.6(1)(a) requires that the “value” of a taxable benefit be included in the T’s incomeGenerally the value is the “fair market value” of the benefit“The amount a person not obligated to buy would pay a person not obligated to sell” – Steen (1988 FCA)Giffen v. The Queen (1995 TCC) – Method of valuing benefits – no longer used for loyalty points – IT470RT works for HW and travels by plane for work; collects airmiles; Used airmiles to purchase a trip for familyCRA assessed the vacation at fair market value as a taxable benefit of employmentIssue:Are the redeemed flights benefits under s. 6(1)(a)? – YES, they are received when family flies for freeHow should the value of the benefits be determined? What T would have to pay? Cost to the airline?Held:Cost should be the price the employee would have been obligated to pay for a ticket entitling him/her to travel the same flight, same class, with the same restrictionsDue to wide price range, economy tickets are not to be valued anymore than the cheapest discounted fareAppeal allowed – the assessment is to use the above methodComments:Due to difficulty of valuing benefits as well as tracking/identifying benefits of this type:With regard to loyalty points, no employee benefit has to be included in income provided that:The points are not converted to cash; the plan is not indicative of another form of remuneration; AND plan or arrangement is not for tax avoidance purposes – IT470RDunlapEmployees were taking part in a work sponsored dinner/drinks/entertainment event; Employer deducted the amount of the party; Minister assessed T for the value of the night out as a benefitIssue: Was the dinner/entertainment a benefit to T? (Must receive or enjoy as per s. 6(1)(a))Held:Yes, this was a taxable benefit to T – it is valued at the cost per person to the employerReasons:There is no real difference between receiving money and money’s worthNo evidence that T consumed less than other guests, so the value was the proportional expenseComments:Paragraph 9 of the IT470R – now will no longer be taxable for reasonable value given to ALL employees at social gathering – note: more than 100 are generally considered to be a taxable benefitAllowancesDefn: MacDonald: an arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – Generally for a specific purpose – Discretion of the recipient, in that the recipient need not account for the expenditure of the funds Could be used as a concealed method of remuneration, it must be included in income from office/employmentAllowance vs. Reimbursement – see definition in HuffmanSection 6(1)(b) – personal or living expensesInclude in income from office or employment, all amounts received by T as allowance for personal or living expenses or allowance for any other purpose, except: see Automobile and Traveling Allowances belowThe Queen v. Huffman (1990 FCA) – distinction between allowance and reimbursementT is a plainclothes officer; not paid more than uniformed officers who received uniforms for freeReceived reimbursement for clothing expenses up to 500 – assessed by CRA on the benefit of allowanceIssue:1. Was the money received a taxable benefit under s.6(1)(a)?2. Was the payment a reimbursement or an allowance under s.6(1)(b)?Held:1. This was a reimbursement for the expenses associated to the job, not taxable benefit under s.6(1)(a)If there was no reimbursement for the costs, would T be able to deduct expenses under s.8(1)(i)(iii)?Amount was paid by the employee for the cost of supplies that were consumed directly in the performance of the duties of the office or employment, and required by the K to supply and payS. 8(10) – deductions claimed in s.8(1)(i)(ii) or (iii) are not deductable unless the prescribed form is signed by the employer and filed with the return2. This was a reimbursement rather than an allowance, so not taxable benefit under s.6(1)(b)Queen v. Pascoe (1975): “An allowance is…a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense, its amount is determined in advance and, once paid, it is at the complete discretion of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is NOT an allowance; it is not a sum allowed to the recipient to be applied in his or her discretion…”The Queen v. MacDonald (1994 FCA) – Leading case on s.6(1)(b) – what constitutes an allowanceT was RCMP officer transferred to Regina from Toronto; Receive housing subsidy of 700/monthIssue: Was the subsidy a reimbursement or an allowance?Held: Subsidy was an allowance under s. 6(1)(b)Reasons:First, an allowance is an arbitrary amount in that it is predetermined sum set without specific reference to any actual expense or cost – may be set through a process of projected or average expenses or costsSecond, s. 6(1)(b) encompasses allowances for personal or living expenses, or for any other purpose, so that an allowance will usually be for a specific purposeThird, the allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense or costSpecial and Remote WorksitesWhere employer requires employee to work away from home or to work away from an established communityRecall: s. 6(1)(a)/(b) – benefits and allowances included in incomeSection 6(6) – Exception to s. 6(1) – Employment at special work site or remote locationNotwithstanding s.6(1), there shall NOT be included in income any amount received by T as an allowance for, or in the value of expenses T has incurred for:(a) T’s board and lodging for a period at(i) A special work site, that is temporary in nature, if the T maintained a principle residence elsewhere(A) That was, throughout the period, available to T and not rented out AND(B) T could not reasonably be expected to have returned daily by reason of distance; OR(ii) A location, by virtue of its remoteness, the T could not reasonably be expected to establish and maintain a self-contained domestic establishment,If the period during which T had to be away from principle residence was not less than 36 hours; OR(b) Transportation between(i) The principle place of residence and the special work site referred to in (a)(i), OR(ii) The location referred to in (a)(ii) and a location in Canada where T is employed,In respect of a period described in paragraph (a) during which T received board and lodging, or a reasonable allowance in respect of board and lodging from employerIT470R – Determination of Remote Work LocationTo determine if workplace is remote, must consider:Availability of transportation; distance from an established community; and time required to travel thereWill be considered remote if the nearest established community w/ population of 1000 or more is no closer than 80km by most direct route normally traveled in the circumstancesAutomobile and Traveling AllowancesRecall S. 6(1)(b) – Include in income all amounts received by T in the year for personal or living expenses or as allowance for any other purpose, EXCEPTSection 6(1)(b)(v) – Travel for sales work; In-town or Out-of-townReasonable allowances for travel expenses where within a period when employee was employed in connection with selling of property or negotiating contracts for employer (sales work)Section 6(1)(b)(vii) – Travel for non-sales work; Out of town only; Other than vehicle allowanceReasonable allowances for travel expenses (other than for vehicle) received by employee (other than sales of property or negotiation of contracts) from employer for traveling away from:(A) The municipality at which the employee ordinarily worked AND(B) The metropolitan area, where the establishment was locatedIn the performance of duties of the office or employmentSection 6(1)(b)(vii.1) – Travel for non-sales work; In-town and Out-of-townReasonable allowances for the use of a vehicle received by an employee (other than sales of property or negotiation of contracts) from the employer for traveling in the performance of the duties of the office/employmentNOTE Limitation for Vehicle Allowance: s.6(1)(b) states: …and for (v), (vi) and (vii.1), an allowance received in a tax year by T for the use of a motor vehicle in connection with the course of T’s office or employment is deemed to not be a reasonable allowance:(x) Where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of KMs for which the car is used OR(xi) Where the T BOTH receives an allowance in respect of the use AND is reimbursed in whole or in part for the expenses in respect of that useSection 7306 ITRegulations – Prescribed rate of per KM NOTE: this is for the purposes of 18(1)(r) – deductions, but is used commonly to assess reasonableness in s.6Employer is not allowed to deduct more than the prescribed amountAny amount received in allowance over the prescribed amounts would be considered non-deductable under s.18, and also would be included in employee’s income under s.6(1)(b)52 cents/km for first 5000kms46 cents/km for every km after thatAdditional 4 cents/km in the Yukon/Northwest Territories or NunavutDeductions and Computing Income from Office or EmploymentRecall: Section 5 – include in income salary/wages/remunerationSection 8 authorizes a number of deductions in respect of employment income – limited to listed categoriesSection 67 no deduction shall be made unless the expense or outlay was reasonable in the circumstancesSection 67.1 – arbitrarily restricts deduction of expenses for food/beverages/entertainment to 50%General Limitations on Deductions:Section 8(1): Lists the types of expenses that can be deducted from income from office or employmentSection 8(2): General Limitations – Except permitted by s.8, no deductions shall be made in computing T’s income from office or employmentSection 8(10): Certificate of Employer – Otherwise deductable amounts under s. 8(1)(c), (f), (h), (h.1), (i)(ii) or (i)(iii) by T shall not be deducted unless a prescribed form, signed by T’s employer certifying the conditions set out in the applicable provision, is filed with the T’s tax returnSection 67: General Limitation Re. Expenses – No deduction shall be made except to the extent that the outlay or expense was reasonable in the circumstancesSection 67.1(1): Expenses for Food/Beverages/Entertainment – Amount paid in respect of the consumption of food, beverages or enjoyment of entertainment is deemed to be 50% of the lesser of:(a) The amount actually paid for the food/beverage/entertainment; OR(b) An amount in respect thereof that would be reasonable in the circumstancesSection 67.1(2): Exceptions – (1) doesn’t apply to amount in respect of food/beverages/entertainment where:(a) Paid by a T who is in the ordinary course of business of providing food/beverages/entertainment OR(f) Paid in respect of one of six or fewer special events held at which f/b/e is generally available to all individual employed by the TTraveling ExpensesSection 8(1): Deductions allowed with respect to the following amounts as may be reasonably regarded as:(f) Sales Expenses (of Commission Employee) – Deduction for expenses incurred as sales employeeWhere T was employed in connection with the selling of property or negotiation of Ks for T’s employer and(i) Is required under K to pay own expenses;(ii) Was ordinarily required to carry the duties of the employment away from place of business(iii) Was remunerated by commissions with fixed reference to the volume of sales made; AND(iv) Was not in receipt of an allowance for travel expenses by virtue of s. 6(1)(b)(v) (above)(Because, cannot deduct from allowance that wasn’t included in income to begin with!)Amounts expended by the T in the year for the purpose of earning the income from the employment (but cannot exceed the commissions earned in (iii)), to the extent that amounts were not:(v) Outlays, losses or replacements of capital or payments on account of capital(vi) Expenses that by 18(1)(l) (use of recreational facilities and club dues), are not deductable OR(vii) Amounts described in 6(1)(e) – Out of scope.NOTE: s, 8(4) applies to 8(1)(f) and (h) – meals cannot be included where away for period less than 12 hours NOTE: s. 8(10) applies to (f), (h), (h.1) or (1)(i)(ii)/(iii) – T shall not deduct unless certificate of employer certifying that the conditions set out in the particular provision were met – must be filed with return for the year(g) Transport Employee’s Expenses – Transport workers (who pay food AND lodging) deduction Where the T is employed by a person/goods transport business, and T’s duties include regular(i) Travel away from T’s work location municipality, on vehicles used by business for transport(ii) While away from that municipally, T makes disbursements for meals AND lodging,Amounts disbursed by T, to the extent that T has not been reimbursed for the disbursementsNOTE: Renco – refused deduction for BC Ferries employees due to the “AND lodging” componentSpecific literal interpretation used in deduction sections(h) Travel Expenses – Deduction Other than Vehicle for work-related travel expenses – N/A if (f) or (g) usedWhere T, in the year, (i) was ordinarily required to travel and (ii) required under employment K to pay the travel expenses during the work-related travel, amounts expended by the T for traveling (other than vehicle expenses) in the course of office or employment, EXCEPT where T(iii) Received an allowance for travel expenses that was not included in T’s income (s. 6(1)(b)(v-vii)); OR(iv) Claims a deduction for the year under (e), (f) or (g)NOTE: s, 8(4) applies to 8(1)(f) and (h) – meals cannot be included where away for period less than 12 hours NOTE: s. 8(10) applies to (f), (h), (h.1) or (1)(i)(ii)/(iii) – T shall not deduct unless certificate of employer certifying that the conditions set out in the particular provision were met – must be filed with return for the year(h.1) Motor Vehicle Travel Expenses – Work-related vehicle expense deduction – N/A if (f) usedWhere T is required to (i) travel for work and (ii) required by employment K to pay for vehicle expenses incurred in the performance of duties, amounts paid by T on those vehicle expenses, EXCEPT where T(iii) Received an allowance for vehicle expenses that was not included in income (s. 6(1)(b)), OR(iv) Claims a deduction for the year under (f)Section 8(4): MealsMeal expenses by T who is officer/employee shall not be included in deduction under s. 8(1)(f) or (h) unless the meal was consumed during required departure from municipality where T’s work was located for not less than 12 hours.Martyn v. MNR (1962) – Travel to and from work is not deductableT was a pilot, attempted to claim trips to and from work as business expense; Reassessed, not within s.8(1)Issue: Whether T’s travel to and from the airport were deductable as Travel ExpensesHeld: Travel was not deductable under s. 8(1)Reasons:The travel was not carried out in the course of employment, but rather proceeding from home to workT’s work start/ends at the point he arrives/leaves work, no evidence to suggest trips included in workAll employees experience this type of travel – busses, taxi, walking, wouldn’t be covered eitherLuks v. MNR (1959) – “traveling between the appellant’s home and the several places where he was employed was not part of the duties of his employment…the journeys were not made for the employer’s benefit, nor were they made on the employer’s behalf or at his direction, nor had the employer any control over the appellant when he was making them. The utmost that can be said of them is that they were made in consequence of the appellant’s employment. That is not sufficient for the present purpose.”Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issuesT (PCJ, but employee here) argued that security concerns related to work required his travel to and from workT traveled in his own car and received an allowance for trips over 15kClaimed that he was required to use his own car for security, and since necessary, it should be deductableHeld: Denied by the courtAlthough security concerns were a function of his work, it was not sufficient to render the expense deductibleIf travel to and from work has concerns that are not addressed through remuneration, it should be taken up with the employerLegal ExpensesSection 8(1)(b) – Legal Expenses of EmployeeAmounts paid in the year for legal expenses incurred by T to collect/establish a right to salary or wagesNOTE: Proposed amendment would limit this recovery to where the salary claimed would be included in incomeSection 60(o.1) Legal Expenses [re. Job Loss or Pension Benefit]There may be deducted in computing a T’s income for a taxation year such of the following amounts:(o.1) The lesser of: the total legal expenses paid by T in recovery of a benefit under a pension plan or a retiring allowanceProfessional and Union DuesSection 8(1)(i) – Dues and Other Expenses of Performing DutiesAmounts paid by the T in the year as:(i) Annual professional membership dues necessary to maintain professional status recognized by statuteeg. Law society dues are easily deductable, because required to practice law(iv) Annual dues to maintain membership in a trade union or to maintain membership in an association of public servants to improve members’ conditions of work(v) Annual dues retained by employer, pursuant to collective agreement, and paid to a trade union or association designated in (iv) of which T was not a memberThe Queen v. Swingle (1977) – s. 8(1)(i)(i) – interpreted strictly – professional required by statuteT is a chemist, employed as a manager of laboratory services; designated as an analyst under the Canada Shipping Act; T is required to stay abreast of scientific news, trends etc for his job – he is a well-respected member of the scientific communityT claimed deductions for numerous memberships to scientific societies; Reassessment only allowed the one fee related to his union fees as a public servant pursuant to 8(1)(i)(iv), but none of the othersIssue: Whether payment of the amounts were “necessary to maintain professional status recognized by statute” as per s. 8(1)(i)(i)Held: T is not a professional recognized by statute – s. 8(1)(i)(i) strict requirements are not metReasons:Bond v. MNR / Rutherford v. MNR / Cooper v. MNR:Where a T’s income was derived from an office/employment he could deduct dues he was required to pay in order to exercise the very right to carry on his profession or callingDeductable dues are not limited to those that have the effect of maintaining one’s professional status; it may be necessary to belong to organizations in order to remain qualified in one’s jobS. 8(1)(i)(i) should not be read in isolation – (iv) and (v) allow deductability of dues without stipulation that they must be required to maintain T’s jobBut, before any of that can be addressed, T must be a professional recognized by statuteAnalyst designation is merely “any person” or sometimes “qualified person” – special skills, abilities or qualifications are needed to meet the standard of s. 8(1)(i)(i)Comments:Had T been a professional required by statute, this makes room for deductability where fees paid were required for the maintainance of qualification within the professional field, rather than the strict requirement to maintain professional statusCost of SuppliesSection 8(1)(i) – Dues and Other Expenses of Performing Duties cont’d(ii) Office rent or salary to an assistant/substitute, payment of which required by the K for employment(iii) Supplies consumed directly in the performance of duties of the office/employment, where required by K of employment to pay for suppliesHome Office ExpensesSection 8(13) – Work Space in HomeNotwithstanding s. 8(1)(f) and (i) – (sales worker for commission expenses | dues and other business expenses),(a) No amount is deductable from income from office/employment in respect of any part of a home office EXCEPT to the extent that the home office is either:(i) It is the principle location of the office/employment duties, OR(ii) It is used exclusively for earning income from office/employment AND used on a regular basis for meeting customers in the ordinary course of duties(b) Where (a) is satisfied, the amount that is deductible from income for the year from office/employment shall not exceed the T’s income from that office/employment; AND(c) Where denied deduction because of (b), losses can be carried forward until income from employment exceeds the losses and the deduction can be usedNOTES:Home office expenses are often difficult to characterizeTheoretically, held to the same “reasonableness” standard of other business expenses, but it is difficult to rebut the presumption of personal useCannot create losses, but losses can be carried forward and applied against gains from the same office/employAmount should be based on reasonable allocation of costs attributable to the home officeDetermined by the amount of space occupied by the office against the total home areaRatio used to apportion expenses from home costs (mortgage, taxes, utilities, phone, internet, etc)Also note McCreath – home-office to primary office is not a deductable transportation costThe home office exists for convenience sake onlyIncome from Business or PropertyBusiness Source of Income: Organized Activity and Pursuit of ProfitFramework for Income from Business or PropertySection 3(a) – Income includes a source inside/outside Canada for the year from each office, employment, business and property (note: if not a source, it is not included in income!)Section 9 – income/loss from business or property(1) T’s income for a tax year from business or property is the T’s profit from that business or propertyProfit is not defined by the Act – generally understood as net-profit (revenue minus expenses)(2) T’s loss for a tax year from business or property is the amount of T’s loss (3) “Income from a property” does not include any capital gain from the disposition of that property and “loss from a property” does not include any capital loss from the disposition of that propertySection 12 – Specific inclusions in Income from a Business or PropertySection 20(1)(c)(i) – Interest paid on amounts borrowed for the purpose of earning income from a business or property is deductable from income from business or propertySection 18 – Restrictions on deductions – listedDefinition of a BusinessSectin 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 an office or employmentSmith v. Anderson (1880) – “anything which occupies the time, attention and labour of a man for the purpose of profit” is a businessGambling winnings are not included in business earnings even where carried out in an organized fashion (LeBlanc); Unless there is specific expertise or a system to make profits in place (Luprypa)Recall: “Active Business Carried on by a Corporation” – business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure/concern in the nature of tradeSmall Business Deduction: These businesses attract a special low tax rate because of the credit in section 125Recall definitions from aboveLuprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = businessSandwhich maker, but also a pool-shark; filed NIL returns for two years; made money gambling on pool1991 CRA prepares a net-worth assessment – looked to assets and records estimates on net worthFrom this they estimate “income” and expenses, and non-deductable expenses are added to incomeS. 152(7) – Permission for Minister to create net-worth assessments and not accept T’s assessment of returnS. 152(8) – Assessment is deemed valid and binding until T displaces itIssue: Whether the gambling in this situation is a valid source of income (business source?)Held: Here, this was a business and therefore a valid source of incomeReasons:Past cases have held that gambling isn’t a source where there is no inside info or no expertise associated to itWhere there is specific expertise or a system in place to make money, then it’s akin to a businessHere, T managed the risk, already a skilled player, practiced all week and selected drunk opponentsLeBlanc v. The Queen (2007) – Lottery is pure chance = not an expected earning source = no source/no taxOne brother won substantial amount in sports lottery, so for next 3 years, they engaged in massive gamblingPlayed 50M, and won 55M – profit of $5M in the year in questionT were paying employees to run tickets for them; CRA assessed them on their winningsIssue: Whether the gambling winnings were taxable or not?Held: This was mere chance gambling – not taxableReasons: The odds of winning these lotteries is astronomical; no way to form a solid system of betting40(2)(f) – Capital gains/losses from lottery is NIL52(4) – deems the cost of the property that is won in connection with lottery at FMV at possessionThere may be some organization here, but not to the point where it becomes an organized activity for profitNo evidence to show that there was nothing more than luck associated to their winnings – thefore it is not an expected earning source and not taxableThe Pursuit of Profit – Reasonable Expectation of Profit (REOP)Profit generally distinguishes T’s activities that are for business/property from those that are purely personalUnder the Source model, income/loss from areas that are not a source, are not included in incomeHobbies may incidentally turn a profit, but generally make lossesWealthy businesspersons could use side businesses for personal pleasure and deduct losses!Old Test: Maldowan (1977 SCC):“…in order to have a “source of income” the T must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business”Many legitimate businesses were denied their losses under this ruleReasonable Expectation of Profit Test:In response to the inadquacies of the old test from Maldowan, the following test was madeDetermination from all of the facts, with non-exhuastive list of criteria to consider:Profit/loss experienced in the past yearsTaxpayer’s trainingTaxpayer’s intended course of actionCapability of the venture as capitalized to show a profit after capital cost allowanceLandry – Lawyer conducting practice so inefficiently that there was no REOP and therefore no businessThis principle was altered in StewartModern Approach: StewartStewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or PropertyT purchased 4 condos from which he earned rental income; for the years in question, he lost money on themCould have operated as a tax shelter – take losses for 10 years and then income after that – T here though was trying very hard to reduce losses and run a viable business, but the interest rates were too highMinister, TCC, and TCA all determined that losses were not deductable based on no REOPIssue: Development of a new test for “business or property” incomeHeld: Ruling for T – losses could be deducted because it was a valid source of incomeReasons:Moldowan – mistakenly equated “source of income” with REOP; does not accord with defn of business in CL:“Anything which occupies the time and attention and labour of a man for the purpose of profit” –SmithREOP is problematic because it is vague and uncertain and produced unfair and arbitrary resultsNO LONGER THE TESTActual test must be grounded in the words of the Act and the definition from SmithS. 3 – income includes sources of business and property; s.9 – T’s income for a tax year from business/property is his profit there from; s.18(1)(h) – personal and living expenses are not deductableQuestion of bona fide business are only required where there is some personal or hobby elementTEST: The issue of whether or not a T has a source of income is to be determined by looking at the commerciality of the activity in question.Is the activity of the T undertaken in pursuit of profit, or is it a personal endeavour? Where the activity contains no personal element and is clearly commercial, no need inquiryWhere the activity could be classified as a personal pursuit, it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of incomeSubjective/objective test – must have subjective intention to profit – assessed using an objective standard with reference to the non-exhaustive Moldowon 4 factorsSubjective – T must show they were trying to earn money; Objective – T must show that they’ve taken reasonable steps in an attempt to earn incomeIf it is not a personal endeavour, is the source of income a business or property?Look to definition of business – s. 248(1) and CL from SmithHere:No personal element involved in the rental properties – inquiry ends hereRented at arms length, no evidence of personal use; clearly commercial; motivation of capital gainsAdventure or Concern in the Nature of Trade (ACNT)Recall: Definition of “Business” in s.248(1) includes adventures or concerns in the nature of tradeLeads to a highly litigated area of Tax Law – distinction between business/property income and capital gainTurns on whether the transaction can be characterized as an ACNTCapital Property: Purchaser acquires property to hold it and earn income and then later sells it for capital gainBy nature creates income; shares, real property, etcACNT: purchaser acquires property with the sole intent of making profit from it on a quick saleTrue ACNTs are usually intermittent – T does not carry on the practice like a normal business wouldWhere a single transaction is carried out like that of a regular business, it is an ACNT (Taylor)Secondary purpose of earning profit on the flip of property is enough for ACNT (Regal-Heights)Investment in shares of a company is a capital investment, NOT ACNT (Irrigation Industries)Unless it’s a securities trading business – then it’s business income in the traditional sense of the definition, not an ACNT (but not capital investment) (Arcorp Investments)Treatment: ACNT’s are deemed to be treated as income, as a virtue of the “Business” definitionSo what otherwise looks like a business transaction, can be found to be income from a business/propertyIT-459 – Adventure or Concern in the Nature of Trade:This is one of the more authoritative Interpretation Bulletins – praise from SCC and follows TaylorWhere T habitually engages in an activity capable of producing profit, T is carrying on trade/businessWhere only done infrequently, then it becomes a question of whether the activity was an ACNTTest:Whether T dealt with the property acquired in the way a dealer would ordinarily deal with it?Whether the nature/quantity of the property excludes the possibility that its sale was the realization of an investment or was otherwise of a capital nature? ANDWhether T’s intention is consistent with a trading motivationLists 12 factors used to determine whether transactions are in the nature of capital or in the nature of trade:Feasibility of venture; zoning; extent to which the venture has been carried out; evidence of a change of intention; nature of the experience of those involved; reasons for selling; etcIntention to sell at a profit, is insufficient on its own to prove ACNT – this is almost always present (Regal)Any losses of an ACNT are deductable against income, whereas losses from a capital loss only against other CapMNR v. James A Taylor (1956 Exch Ct) – Transaction is ACNT – factors to consider – trade was business-likeT worked for company that regularly acquires lead; company could not acquire it from supplier, so T bought it personally and sold it to the company for 80k gain; T didn’t possess the lead, just brokered/assumed riskIssue: Whether T’s transaction was an ACNT (business taxable) or capital asset (capital gain)?Held: The transaction was an ACNT, therefore taxable as income from a businessReasons:Certainly and adventure – a bold and imaginative one at thatWhether or not it was in the nature of trade?Was not for investment purposes – there was no capital nature behind the purchaseT could not do anything with the lead accept sell it – purchased with sole intent to sell to companyCommodity itself doesn’t create income in and of itself, it is used to create income through T’s employerCarried out in the same manner as would a trader of the commodity; just because it’s not T’s regular business does not make it separate from business incomeRegal Heights Ltd v. MNR (1960 SCC) – Secondary objective of earning profit on land results in an ACNTT purchased land with hopes of developing shopping centre; Another mall opened up so failedT sold the land for 140k profit – claimed it as capital gainsIssue: Whether T’s profits were derived from an ACNT?Held: YES – the profits were resulting from an ACNT, and therefore taxable in business incomeReasons:The efforts were all promotional in character – no evidence of assurances that shopping centre would resultAccepts primary goal of development, but recognizes that the secondary goal was to sell property for profitWhere MNR can show secondary objective to ‘flip’ property, then there will be an ACNTThe venture was entirely speculative and it was sold at a substantial profitBased on factual circumstances rather than what the intentions of the T wereIrrigation Industries Ltd v. MNR (1962 SCC) – Investment in shares of a company are capital investmentsT bought shares of company by borrowing on bank overdraft; T(company) was originally formed to grow alfalfa, but ended up buying the mining shares – held 60% of the shares for 3 weeks (sold to clear overdraft), then remaining 40% were sold at a later dateLooks like simple playing of the market – great profits; not the regular business of T; borrowed for quick saleIssue: Whether the gains are resultant from an ACNT?Held: NO, these are capital gains – not income from a businessReasons:Borrowing is not a significant factor, this is normal practice in stock market investingNo immediate prospect of obtaining dividend – also common with this type of investmentBought with hopes of gains – not determinative, everyone buys with the hopes of gainTaylor test:Nature and quantity of the subject matter did not preclude a capital investmentShares represent ownership interest in a corporation – investment aspect by very natureNotes: Makes for a strong presumption that purchase of shares is a transaction in capital!Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT)Private company with one shareholder – security salesman for stock brokerageAlmost all assets of the company were marketable securities that could be traded on the stock exchangeT had no licence to broker stocks – buying for its own account; really acting for the shareholder personallyUndertook about 38 transactions per month – huge value – held for less than yearIssue: Whether the transactions were capital investments or carrying on a business or ACNT?Held: Gains were income from securities trading business (not an ACNT, but an actual business involved in trading)Income from a PropertyS. 248(1) “Property”- means any kind whatever whether real or personal or corporeal or incorporeal and without restricting the generality of the forgoing, this includes: A right of any kind whatever, as share or a chose in action:Still requires a characteristic of ownership (may be some value associated to covenant/right of way)Unless contrary intention indicates, money;A time resource property; ANDThe work in progress of a business that is a professionBusiness vs. PropertyBusiness implies activity while property only requires one to let the property earn on its own (Hollinger)For personal taxation, they are both taxed the same, for corporations, there is a different between themGovt does not want to give special tax rate to investors, it is for bona fide businessesS. 125(7) – specified investment business – principle purpose is to derive income from propertyS. 9(3) – Income from property does not include any capital gains/losses from the disposition of that propertyHollinger v. MNR (1972) – Approach for Business vs. Property IncomeIf income from a property has any meaning at all, it can only mean the production of revenue from the use of such property which produces income without the active and extensive business-like intervention of its owner or someone else on his/her behalfWhether income was the result of efforts made or time and labour devoted by T?Whether there was a trading character to the income?Can the income be fairly described as income from business within the meaning of the Act?The nature and extent of services rendered or activities performedIf income derived principally from ownership of property, income is generally considered to be income from property; if it involves a significant amount of activity, the income is often income from a businessWalsh and Micay v. MNR (1965) – Rental properties generally seen as income from property, not businessThe level of service will generally determine whether rentals are from a property source of from a businessHere, rent received should be regarded as having accrued to them as owners rather then tradersThe additional services rendered are relatively insignificant and insufficient to convert T from landowners to conductors of a businessInterestSection 12- Inclusions to Income from Business or Property – SEE HANDOUT!(1)(c) – Interest – subject to (3) and (4.1), any amount received/receivable in tax year that was paid to T as interest or in lieu of interest(3) and (4) – Anti-avoidance rule for deferral over long term lending – timing rule that determines when interest must be declared and when it is to be paid on(3) Applies to corporations – requires corporation to report in income the interest accrued at the end of each tax year, even where borrower does not actually pay the interest yet(4) Applies to persons – requires individuals who hold investment Ks to include interest accrued on the K to each anniversary date with respect to the K, except amounts already included previously(11) “Anniversary date” and “investment contract” definedSection 16(1) – Interest Income and Capital CombinedWhere, under a K, an amount can reasonably be regarded as part interest or other amount of income and part capital, the following rules apply:(a) The part reasonably regarded as interest shall be deemed to be interest for the lender AND(b) The part reasonably regarded as an amount of income, other than interest, shall be included in income of the TNOTE: Minister can look at a transaction and determine that it is blended and determine the part that is reasonably regarded as interest (even if it differs from the agreement); This keeps people from hiding interest in capital (Groulx)Groulx v. MNR (1967 SCC) – Court found blended payments from an increased purchase priceT sold farm for 395k; Purchaser paid 85k down and interest free payments over 7 yearsMNR reassessed the years in question for instalments made in those years as blended paymentsPrice had been inflated to include an “interest” amount – spread over the paymentsTrial court found that the purchase price was more than the FMV; even though there was bargainingEvidence showed that price would have been lower, but for the willingness to give no interestNormal rate of interest rate was 5-6%; T knew he could charge interest, but instead kept price highCourt deemed 5.5% of the purchase price to be interest paymentsNow interest amount owing, s. 12(3)/(4) would apply to include them in income under accrual modelIssue: Whether payments made could be regarded as part interest payments as per s. 16(1)?Held: Trial court affirmed for its reasoningComments:If the price was at or below FMV, the Minister would have had a hard time finding interest includedVanwest Logging (1971) and Carter (1964) – didn’t find the same increase in sale price – no interest includedRent and RoyaltiesRent is generally a fixed payment; periodic; for the use of property for a given period of timeRoyalties are amounts paid for the use and production of intangible property (copyright, trade marks, patents, know how, scientific knowledge, trade secrets, licencing fees, etc)RULE: Where all legal rights are transferred, the transaction constitutes a sale - gives rise to profits; if less than all rights are transferred, the transaction is a lease or licence and the payments are rent or royaltiesNOTE: Becoming more important as society shifts to a knowledge-based economy;Section 12(1)(g) – Payments Based on Production or UseAmount received by T in the year that was dependent on the use of or production from property whether or not that amount was an instalment of the sale price of the propertyPrevents people from claiming capital sales when they licence the removal of a resource from propertyWain-Town Gas and Oil (1952) – After-sale share in profits are royalties and subject to income taxFranchise contract to supply municipality with natural gas; sold right to another company in exchange for share in the gross receiptsEven though this was a sale of a capital asset, the share of the income was a royalty and is treated as incomeNote on Computer Software:Essentially intellectual property – software is copied to computer, no actual corporeal property – licenceIf T agrees to licence agreement – good is purchased; If software is customized for company use – it is licencedSoftware licences cannot be taxed the same way as other sales, they are just treated as a goodDividendsIncome received by Shareholders of a corporation by the corporation – distribution of income by shareSection 12(1)(j)/(k) include dividends from resident/non-resident corporationsSection 82(1)(b) and 121 protect against double taxationDeductions in Computing Income from Business and PropertyDeductions for business/property generally allowed unless there is a specific limitation (s.18)Structure of the Act – Business/PropertySection 9(1)/(2) – Computation of net profit; deductibility of ordinary running expensesIncome/loss is your ordinary profit/loss from carrying on a business or investing in a propertySection 12 – Inclusions in Income of Business or Property(c) – Interest received by T(g) – payments based on production or use (royalties)(j) – Dividends from Resident Corporations(k) – Dividends from Non-Resident CorporationsSection 18(1) – Limitations on Deduction of Expenses – In computing income, no deduction in respect of:(a) – Outlay or expense except to the extent that it was made or incurred by T for the purpose of gaining or producing income from business/property(b) – Capital outlay or loss (h) – Personal living expenses, other than travel expenses incurred while away from home in the course of carrying on the T’s business (Personal vs. Business – Symes, Benton) – see s. 248(1) as well.(l) – Use of recreational facilities and club dues(p) – Limitation regarding personal services business expenses(r) – Automobile expenses – amount employer can deduct for allowance to an employee for using carNote also Regulation 7306 – sets out the max deductable amounts(t) – Taxes paid under this Act; (note. S. 60(o) – T can deduct costs of objections or appeals)Section 20 – Specific Deductions PermittedNotwithstanding the limitations in s. 18, there are some special deductions that might not have been allowed(1)(c) – Interest paid by T on amounts borrowed for the purpose of earning income from business/propertySection 67(1) – General “Reasonableness” LimitationIn computing income, no deduction shall be made unless that outlay or expense was reasonableHardly ever relied upon nowIncome Earning Purpose TestImperial Oil (1947) – If Expense in ordinary course of business, then generally deductibleCollision at sea between two vessels; Imperial at fault; US Steele damaged; T had to pay; T deducted costsIssue: Is the cost of repairs to US Steele a deductible amount for T?Held: YES – expense arose as consequence of normal/ordinary risk of businessReasons:Expenses that are part of normal business are to be treated as deductible, even where amounts are largeIf it is an expenditure made as part of the income earning process, it will not be restricted by s. 18(1)(a)No specific causal connection to income earning is required, just needs to be part of the overall businessLooked at in light of the connection with the operation, transaction or serviceComments:If T had received the income, would they have had to declare the settlement? Likely split amount:Surrogatum principle – the payment would be in lieu of lost-profits – taxableDamage repairs are an investment in their capital property – not taxableRoyal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally deductibleAttempting to deduct fees to allow employees membership at country clubNote: s.18(1)(l) – restriction on deduction for club dues – was not in force yetIssue: Are the membership fees paid for employees a deductable business expense?Held: YES – deductibility is determined by ordinary principles of commercial tradingUnless specifically disallowed, generally any expense will be a valid business expenseReasons:Membership dues were an expense as an income earning initiative – evidence shows business occurs thereTwo requirements for deductibility:1. Must be in accordance with commercial trading or business practices2. Must be incurred for the purpose of producing income from the businessIs the initial fee paid deductible as well? (Note Daley – initial fee was not a deductible expense)Here, the annual recurring expense included adding new members and joining new clubs, so the initial fees are also a regularly occurring business expense and are therefore deductibleComments: s.18(1)(l) now removes the deductibility of membership dues at clubs, yacht, etc.DaleyExpense for a lawyer to transfer to a new location was claimed as a deduction by TCourt held, this was not an ordinary cost of business, as this was just an initial expense at the outlay of businessPersonal and Living ExpensesSection 18(1)(h) – Personal and Living Expense[No deduction shall be made in respect of] Personal or living expenses of the T, other than travel expenses incurred by T while away from home in the course of carrying on the T’s businessSection 248(1) – “Personal living Expenses” Includes:(a) Expenses of properties maintained by any person for the use/benefit of T or any person connected with T by blood relationship, marriage or common-law partnership or adoption, and NOT maintained in connection with a business carried on for profit with a REOP(b) The expenses of a policy of insurance, annuity contract where the beneficiary is T or connected party(c) Expenses of properties maintained by an estate or trust for the benefit of T as a beneficiarySection 18(1)(l) – Use of Recreational Facilities and Club DuesAn outlay or expense made after 1971 for the use of a yacht, camp, lodge or golf course or facility OR as membership fees or dues in any club the main purpose of which is to provide dining, recreational or sporting facilities for its membersRecall Section 67.1 – Arbitrary limitation on expenses for food/drinks/entertainment to 50% of the amount spentBenton (Thomas Harry) v. MNR (1952) – House-keeper is a personal expense – not deductableFarmer operated large farm with no employed farm hands; T employed a house-keep to free him up for tasks around the farm; T wanted to deduct the wages of the house-keeper because, but for her services, he would not be able to perform farming functionsHeld:NO – housekeeper is a personal expense. Only 40% of her labour can be linked to the farming functionOnly the farm work is considered a business expense, the things we do for ourselves are excludedComments: Had he hired an employee for the farm work for the same wages, he would have been able to deductSection 63 – Child Care Expense DeductionFor each child under 7 – max deduction of 7k per yearChildren between 7 and 16 – max deduction of 4k per yearMust be able to produce receipts to claim deductionsDeduction cannot exceed 2/3 of the lower income spouse’s incomeExpenses must be to allow business or employmentSymes v. The Queen (1994 SCC) – s.63, found not discriminatory towards women – note LHD dissentLawyer carrying out practice; claimed expense for live-in-nanny – far exceeding the limitationT wanted to claim full expense because it was required to facilitate her ability to work – discriminatoryT’s family determined that T would pay all the expenses for the children; no sharing despite active fatherIssue: Are the childcare expenses personal expenses only, or can they be a business expense?Held: s. 63 sets out limits on childcare expense deductions – no evidence of discriminatory natureReasons:General provision of 9(1) cannot override the specific provision of s.63T’s personal family decision makes it seem more discriminatory than it actually is – had she been a single woman in the same scenario, there may be a discrimination issu hereDissent (LHD):The expenses should be deductable as business expensesMen’s interest are deductable, but women’s are not – must be deductable to be equalMajority used the Charter to interpret the ITA, but did not find an infringement, they just preferred to read the Act in terms most favourable to Charter protectionCommuting ExpensesRecall: section 8(1) – specifically, work transportation as deductable against income from office/employmentMartyn – Travel to and from work is not deductable under s. 8(1)Dr. E Ross Henry – Travel from/to Home is not deductable aginst income from business/propertyAnaesthetist working at RJH; before times of medicare, so clients paid T directlyAlso had an office shared with a group of Doctors that was managed by one person in terms of billingsDid not see patients at their home; would drive to and from the hospital, and would drive from his house/hospital to the office as well; T wanted to be able to deduct all of the transportationHeld:NO – from home to work is the same as anyone going to work – does not occur in the course of businessIf he’s moving between sites where business is carried on, then he may deductAlso note McCreath – home-office to primary office is not a deductable transportation costThe home office exists for convenience sake onlyMoving ExpensesBayett – move at a later date to the date of employment in the new location is fine so long as you’re moving to a place closer to new work location than your old residenceHome-offices are not allowed – missing the four essential elements: old work; new work; old home; new homeSection 62(1) – Moving ExpensesThere may be deductable from T’s income from a tax year amounts for expenses incurred for moving in respect of an eligible relocation, to the extent that(a) They were not paid for on T’s behalf by the T’s office or employment(b) They were not included in a previous year(c) The total of those amounts does not exceed the amount earned from the employment or business in the new location(d) All reimbursements and allowanced received by T in respect of those expenses is included in incomeSection 62(2) – Moving Expenses for StudentsThere may be deducted for a tax year, the amount that T would be entitled to deduct under (1), for attendance in full time studySection 62(3) – Definition of Moving costsMoving expense includes:(a) Travel costs (including reasonable amount on meals/lodging), from old residence to new residence(b) Costs of transporting household effects from old to new residence(c) Cost of meals and lodging near the old residence or new residence for up to 15 days(d) Cost of cancelling lease at old residence(e) Selling costs of old residence(f) Legal fees and transfer taxes of the new property(g) Interest, property taxes, insurance premiums, utilities up to $5000 for the period where the old house is left empty and reasonable efforts are made to sale it(h) Revision of legal documents to reflect the new address of T’s residenceBut, does not include (other than costs in (f)), the costs incurred by T of the acquisition of the new residenceNOTE: s. 62(3)(c) – is not limited by the arbitrary 50% rule in s. 67.1 – full deductability for up to 15 daysSection 248(1): “Eligible Relocation”Means a relocation of the T to enable T to carry on a business or to be employed in Canada, OR to be a student in full-time attendance enrolled in a program at post-secondary level, where both locations are within Canada, AND distance between the old residence and new work location is not less than 40km greater than the distance between the new residence and the new work locationIe. Old home to new work has to be 40km greater than new home to new work. The test used to determine distance is the “shortest normal route open to the travelling public”Section 56(1)(n) – Amounts to be included in Income for the year – Scholarships/BursariesThe amount that T’s schollarships and bursaries or prizes for achievement in a field of endeavour ordinarily carried out by T, exceed the T’s scholarship exemption for the year under (3)Section 56(3) – Scholarship/bursary/prizes ExemptionT’s scholarship exemption for a tax year is the total of – generally all scholarships/bursaries/prizesHome Office ExpensesSection 18(12) – Workspace in HomeNotwithstanding any other provision of the Act,(a) No amount is deductable from income from office/employment in respect of any part of a home office EXCEPT to the extent that the home office is either:(i) It is the principle location of the office/employment duties, OR(ii) It is used exclusively for earning income from office/employment AND used on a regular basis for meeting customers in the ordinary course of duties(b) Where (a) is satisfied, the amount that is deductible from income for the year from office/employment shall not exceed the T’s income from that office/employment; AND(c) Where denied deduction because of (b), losses can be carried forward until income from employment exceeds the losses and the deduction can be usedNOTES:Home office expenses are often difficult to characterizeTheoretically, held to the same “reasonableness” standard of other business expenses, but it is difficult to rebut the presumption of personal useCannot create losses, but losses can be carried forward and applied against gains from the same office/employAmount should be based on reasonable allocation of costs attributable to the home officeDetermined by the amount of space occupied by the office against the total home areaRatio used to apportion expenses from home costs (mortgage, taxes, utilities, phone, internet, etc)McCreath (2008 TCC) – Travel between home-workspace and place of employment MAY not be deductableT received a per-km allowance from employer for home to office travelMinister assessed it for tax – not an excluded allowance because it is just regular travel to and from work; the home office is for convenience, and is not required, primary office is still elsewhere – home office was for the same employer thoughCourt agreed with Minister’s argumentsComments:Where the home office is the primary place of business, the travel between home-office and secondary work location may be deductable – no case law on that!Example Problem – Home Office Deductions and Carry-forwardT is a self-employed lawyer – income is income from a businessT owns a house in which the basement is used as the law officeYear 1: T bills 15k income – whether paid or not, as receivable from his clientsExpenses: 20k of the mortgage interest, utilities and taxes; 1k for stationary; 5k for part-time secretary; 2k for telephone/fax/Internet (so that’s 8k in non-home office expenses (5+2+1k) – regular bus-exp)How much can T claim from his income in the first year?28k in expenses; and 15k in profit – so she’d be left with a loss of 13kSo she can deduct 15k (s. 18(12)(b)): 8k from the non-home-office and 7k from the home-office expensesThis leaves 13k of expenses that cannot be deducted in year 1 (carry forward – s. 18(12)(c))Year 2: T bills 100k in revenue and 28k in expenses (same amount in expenses as year 1)So now she can deduct the full 28k year2 expenses and bring forward the remaining 13k from the previous year against the 100k profit; That reduces her income from business in year 2 to 100- (28+13) = 59kDeduction of Interest Expense – see handoutRecall: s. 18(1)(b) – prohibits deductions outlays of capital – at CL, interest is generally a payment on capitalSection 20(1) – Deductions Permitted in Computing Income from Business/PropertyNotwithstanding 18(1)(a), (b) and (h), in computing income from T for a year from business/property, there may be deducted such of the following amounts as may reasonably be regarded as applicable to:(c) An amount paid/payable in the year, pursuant to a legal obligation to pay interest on:(i) Borrowed money used for the purpose of earning income from business/property(ii) An amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a businessNOTE: Timing (accrual vs. cash accounting); requirement of legal obligation; income earning purpose required; limitation where income which is earned is exempt; based on “reasonable” deduction standardThe Queen v. Bronfman Trust (1987 SCC) – Requirement that Borrowed funds be used for an income earning purpose; Money must be borrowed to use directly on the income earning purposePolicy Reasons for Denying DecuctionsEldridgeT running a common body house; T declared her income and listed her expenses; no receiptsClaimed things like: legal fees, paying off police, BC tel, hotel fees, etcIssue: Were these illegal activity expenses deductible?Held: Expenses are deductible, but only insofar as they can be provenReasons:Without receipts, majority could not be proven anywaysRents were allowed, legal fees were traceable and considered as benefits to employees; assistance for protection was deducible where could be provenCost of buying out all publications to protect her business – not covered because court found the press was not harmful to her businessQuestion: did the court have the right to question the favourability of the press? Is it not an expense?Recall: Buckman – where lawyer embezzled funds from clients – income was taxable, and expenses would be deductible as wellBribery of Certain Officials – s. 67.5Required by the Bribery of Foreign Officials TreatyBribes given to judicial officers/MPs/MLAs/Police/etc are no longer deductibleCovers mainly the corruption offences of the CCCFines and Penalties – s. 67.6Case law states that fines/penalties are deductible if they are incurred in the process of earning profitThis section states there’s no deduction for fines/penaltiesThere are some exceptions that have not been applied in any case lawPolicy: In some cases it would be profitable for a business to contravene regulations and take a fine in order to be more profitable while fines/penalties are deductibleBy removing deductibility on bribery, there are no tax-law incentives for attempting such an actPublic morality; cohesion with criminal law; public protection; social values; etcComputation and TimingCapital vs. Current ExpendituresCurrent expenses occur day-by-day/month-by-month/etc; - Salary, supplies, advertising, insurance etcImperial Oil – payments that occur as a result of business, even where large can sill be deductible expensesCapital assets however, are not tax deducible – they are capital outlays that can be added to the overall ACB of the larger capital asset, or held as a distinct capital asset in and of itselfRecall: s. 9(1) income for business/property is net profit; (2) loss is T’s loss from the business or propertySection 18(1)(b) – Capital Outlay or Loss[In computing income from business/property, no deduction shall be made for] an outlay, loss or replacement of capital, a payment on account of capital…Basic Test: Enduring Benefit – Does the expenditure result in an enduring benefit or advantage to the business or property source?British Insulated and Helsby Cables Ltd v. IRC (1926 HL) – One time payment to create asset - capitalT made a lump-sum payment to a pension fund to serve as a nucleus for the fund and to ensure older employees ranked appropriatelyT deducted lump sum payment as a current expenditure; Minister said it was a capital expenditureIssue: Whether the lump-sum payment to the fund was a capital expenditure or a deductable current expenseHeld: This was a capital expenditure and cannot be deductedReasons:When an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason to treat the expenditure as a capital expenseHere, payment not made as a gift/bonus, but to form a nucleus. This is for the benefit of the older employees. The monthly contributions T makes to match employee’s payments are deductible, but this was differentOne time payment, used to create this asset – that is a capital outlayRepair of Tangible AssetsGR: Is the asset substantially different from what it would be if repairs were not required? (Gold Bar)Improvement of the asset alone is not determinative – all repairs generally improve the assetMust look to whether the repair was actually required as wellA new marketable asset may be a capital asset even if required by the main asset (Canada Steamship)Canada Steamship Lines Ltd v. MNR (1966 Exch) – Boiler of the ship is a capital asset itselfT paid for expenditures of two types:1. Expenses for replacing wear and tare items on boat; 2. Expenses to replace boilers on the shipIssue: Where the expenditures capital expenditures or simply repair of capital assets?Held: 1. Deductible – clearly ship repairs – so these were repair of capital assets and deductible expenses2. Machinery within a ship is a capital outlay and non-deductibleReasons:1. Clearly ship repairs – even though for new floors and walls – not marketable in and of themselvesSubstantial costs do not change the fact that they are still deductible as repairs of capital asset2. Could be considered as separate capital assets or as repairs of the larger capital asset (boat)Because boilers are marketable as assets on their own, they are a capital assetWhen it’s the power plant of the ship, it’s not a repair, it’s a capital outlayThe Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building – capital outlayTwo story building with concrete slab floor built on garbage dump; floor crackedT installed new flooring and support system for foundation - $95k claimed as deductionIssue: Were the expenses for the new floor and new steel piles repairs or capital outlay?Held: Capital Outlay – word differed from regular repairsReasons:Sinking of the steel piles is a capital outlay because this is a new and better asset for the buildingReplacement of the floor – would generally be wear and tareNew tech does not necessarily hinder something from being a repairPoor construction and vandalism are also valid reasons for current expenditure for repairsBUT, here replacement of floor and sinking of piles was a single operation – capital outlayGold Bar Developments Ltd v. The Queen (1987 FCTD) – New test outlined for finding repairs over capitalApartment building had an entire wall that was unsound; instead of using replacement bricks they used metal cladding – cost of 200kHeld:The expenditures for the new wall are repair costs and thus deductibleThey don’t significantly change what the building would be if it were built correctly from the startReasons:Improvement of the asset is not a definitive test – because generally the asset is improved after repairsWhether the repairs are substantial will determine how large the improvement will beDid T have the choice to repair? Here the word was required for the proper maintenanceAnd there is a substantial improvement as a result of the required repairsCompared against the value of the property (8M), the cost of repairs (200k) is not out of the questionIs the building substantially different from what it would have been if the bricks were sufficient at the start?No. This is not an actual improvement, this is a repair.Timing – Amounts ReceivableRecall: Section 12(3)/(4) – avoids the delay of taxes on amounts receivable – specifically interestSection 12(1) – Income InclusionsThere shall be included in computing income from T for a year from business/property such of the following:(a) Any amount received by T in the course of business in compensation for goods delivered in a subsequent year (eg. Retainer at a law firm is for services in the future, still must be included)(b) Amounts receivable by T in respect of property sold or services rendered in the business year, even where not due until a subsequent year; the amount shall be deemed to have become receivable on the day that is earlier of:(i) The day on which the account in respect of the services was rendered, and(ii) The day the account would have been rendered had there been no undue delayCASE LAW RULES:Receivable amounts must be included in income – where T has a legal right to payment (J Colford Contracting)Where everything has been done to give rise to an entitlement to be paid (West Kootnay Power)An amount is not “receivable” until the actual amount owed is ascertained (Benaby Realties)Aboslute certainty is not required – sufficient certainty on amount is needed (West Kootnay Power)Not receivable where the payment is still contingent on some condition precedent (JL Guay)J. Colford Contracting – When an amount becomes receivable, it must be included in incomeT is a corporation with year end March 31; T had a contract whereby they were not entitled to the remaining 15% of the money owed to them until architect certificate was issued; When issued, the amount becomes receivable, but can’t sue for itPayment of the K was received before the end of the year and remaining 15% was paid the next yearIssue: Whether the 15% was a receivable amount in the current tax year?Held: YES – must be included in the current yearReasons:Whether T had the legal, but not necessarily immediate, right to the paymentReceivable means entitlement; when restriction removed, then it becomes part of income receivableArchitect certificate was received in the current year, so the amount became receivableBenaby Realties – An amount is not ‘receivable’ for tax purposes until the actual amount is ascertainedExpropriation of property owned by T; Crown announced expropriation before year end; in the subsequent tax year, the Crown actually paid for the landHere, the land is not a capital asset – it is inventory of the business and thus taxable as profit in the businessT arguing that the profits could be used in the previous year – likely arguing to use losses from 7 years priorIssue: Was the amount receivable in the year of expropriation or the year paid?Held: T had the right to receive as of the date of expropriation, but until the amount was ascertained, there is nothing that can be taken into account as the amount receivableThe valuation occurred after the tax year had endedTherefore, the profit is to be accounted in the year the valuation occurred – which is the year T was paidWest Kootenay Power and Light (1992 FCA) – Receivable means: everything has been done that is required to give rise to entitlement to be paid – even where customer is not legally obliged to pay at that momentT bills customers every two months; The period at the end of the tax year was unclear as to how much owedT included the unpaid power in their financial statements, but did not include it in their taxesIssue: Does T have to include its revenue for the year as inclusive up to the last day of the year, even though mid-bill?Held: The estimated revenues are receivable and should be included in the yearly incomeReasons:Having delivered the electricity, there is an entitlement to be paid, even though no bill yetGood delivered, therefore a right to be paid – becomes receivable (s. 12(1)(b))Receivable means that everything has been done that is required to give rise to entitlement to be paid; Even though customer is not legally obliged to pay at that momentWas the amount ascertainable?Evidence here shows that very accurate estimates could be made – sufficiently ascertainableJL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent30 days are given before payment is due; T was claiming large deduction even though T was holding on to the expense in wait for an architect certificate; Minister claimed not deductable because not yet paidHeld:This is a contingent amount based on architect certificate – condition precedent needs to be released before there’s any obligation to pay or amount receivableCannot deduct until that condition precedent is released Non-Capital LossesRecall: s. 3(a) – Income is the total amount from all sources (profits); s. 3(b) – Calculates the amount T’s capital gains exceed T’s capital losses; s. 3(c) – Adds profits from non-capital and any positive capital gains; and s. 3(d) allows T to offset the total in (c) against the non-capital losses experienced by T in the yearNote: Non-capital losses can be used against all incomeSection 111(1)(a) – Carry Forward and Back of Non-Capital LossesNon-capital losses can be carried forward 20 years and back 3 yearsAn overall loss from sources in a year can be applied against any income in future/past yearsCapital GainsIntroduction to Capital GainsTaxation of Capital Gains and Losses: 3(b) and subdivision ERECALL:Section 3(a): Requires income (positive income only) from all sources to be determinedRequires calculation of revenue and deductible expensesSources: enumerated in s.3(a); “other sources” in s. 56; and possibly unenumerated sourcesSection 3(b): Requires calculation of taxable capital gains from all property other than LPP, and the taxable net gains from LPP, and subtract from those two amounts the allowable capital losses from property other than LPP. – This results in a net taxable capital gain or net (allowable) capital capital gain is included in income; net capital loss may be carried forward or back and set off against taxable gains in those years (s.111(1)(b)) – CANNOT be set off against income from sourcesSection 3(c): Requires the amounts in 3(a) and 3(b) to be added together and then the deductions allowed by subdivision ‘e’ are claimed; Not dependant on the source, so much as they are the nature of expenses; Includes moving expenses; childcare expenses; etcSection 3(d): Allows for the deduction of non-capital losses from the enumerated and other sources; Excess non-capital losses may also be carried forward and backward (s.111(1)(a))Subdivision ‘E’ Deductions: Deductible against all income, regardless of source- Recall s. 62 – Moving Expenses – discussed above in Personal and Living Expenses- Recall s. 63 – Childcare ExpensesDistinguish Income from Property: 9(3)Section 9(3) – Gains and Losses Not IncludedIn this Act, “Income from a Property does not include any capital gain from the disposition of that property and “Loss from a Property” does not include any capital loss from the disposition of that propertyCalculation of Capital Gains and Capital Losses: Section 39(1)(a) and (b) – Meaning of Capital Gain and Capital LossCapital gain and losses are gains and losses from the disposition of any property, excluding gains and losses from dispositions of property that are taxed as income from a sourceExceptions listed in (a) are out of scope for this class(1)(b)(i) Exception in definition of capital losses for depreciable property – to followSection 40(1) – Gains and Loss CalculationEXCEPT as otherwise provided in this part:(a)(i): The T’s capital gain is the PoD of the property, minus the ACB and any outlays or expenses incurred to make the dispoitionsCG = POD – (ACB + expenses of disposition)(b): The T’s capital loss is the ACB plus the outlays or expenses of making the disposition, minus the PoDCL = ACB – (POD + expenses of disposition)NOTE: No express provision for the inclusion of expenses, but generally accepted that ACB includes property taxes, fees and other expenses incurred to complete the acquisition – IT285R2 para 8: the term “capital cost of property” generally means the full cost to the T of acquiring the property and include legal, accounting engineering and other fees incurred to acquire the property.Section 38(a) and (b) – Taxable Capital Gains / Allowable Capital LossesTaxable capital gains are ? of the T’s capital gains; Allowable capital losses are ? of T’s capital lossesCarry Forward and Back of Capital Losses: 111(1)(b) and 111(2)(a)Section 111(1)(b) – Net capital losses can be carried back three years and carried forward indefinitelyNote, capital losses can only be deducted against capital gainsSection 111(2)(a) – Where T dies, and there are remaining net capital losses, these losses can be converted to a non-capital loss to be used against any income in the year of death or the previous tax yearPolicy Evaluation of Preferential Taxation of Capital GainsCapital gains are more favourable to T than employment/business incomeCurrently the highest tax rate is 43.7%, but you would only be taxed on 21.85% of capital gains at that rateUntil 1972, capital gains were outside of the ITA and therefore exemptThree major policy concerns for changing the historical approach:1. Greater Equity: Vertical – richer people tend to create higher capital gains; Horizontal – capital gains are treated more closely to equivalent income earned2. Neutrality: Makes the system more neutral by reducing the incentive for T to structure their transactions to look like capital transactions (still a benefit, but less than historically)3. Certainty: Should be able to determine tax consequences and plan for it NOTE: most commonly litigated area, so may not have achieved this goalFull taxation of capital gains would discourage investment by individuals and corporationsEffective tax rate on capital gains became 50% of that on other incomeLifetime exemption for capital gains – Fishing/farming investments up to 750kApplies to shares of small private companies and farm property when disposed of to the next generation – Canadian small business can be passed on capital gains free up to that 750k amountCapital losses receive less relief than other types of losses because generally capital losses are deductible only from capital gains and not from other sources of incomeCapital gains are not realized until the property is actually disposed ofDefinitionsRecall:Regal Heights – Mall development failure – secondary purpose to flip – ACNT Taylor – Single purchase of lead for company – similar to the regular trading of lead – ACNT Irrigation Industries – Farming company investment in mining – share trading is capital – NOT ACNTArcop Investments – Trading company – regular business is trading shares – business incomeSection 248(1) – “Property”Property of any kind whatever whether real or personal or corporeal or incorporeal and includes:Right of any kind whatever, a share or a chose in action;Money, unless contrary intention;Timber resource property; andWork in progress of a business that is a professionSection 54 – Definitions“Capital Property”: any depreciable property and any non-depreciable property who’s POD would be a capital gain or capital loss“Adjusted Cost Base”: to a T of any property at any time means:Where depreciable property, ACB is the capital cost to T at that timeNon-depreciable property, ACB is the cost to T adjusted as of that time (s. 53)Recall: ACB includes all amounts paid for expenses for acquisitionACB = capital cost at purchase + expenses of acquisition (transfer tax, legal fees, etc)Section 43(1) – General Rule for Part DispositionsFor computing T’s gain or loss for the disposition of part of a property, the ACB of the part that was disposed of that could reasonably be regarded as attributable to that part immediately before dispositionSection 47(1) – Identical Properties (Averaging Rule)After 1971, where T owns property that has two or more identical properties and acquires one or more of those properties…The overall ACB becomes the average of the total combined ACBs for each propertyUsed for stocks/shares/mutual funds “average position”Example – Identical Properties:Bob makes the following purchases of common shares of X Corp:Purchase 200 shares of X for $1 per share on March 1, 2004Purchase 100 shares of X for $1.50 per share on September 15, 2006Sale of 100 shares of X for 1.60 on January 15, 2007The Act does not allow T to choose which of the T’s identical properties are acquired/disposed of at a particular time. It achieves this objective by forcing T to average all the ACBs of the identical properties at any given timeSo Bob’s ACB of each of his identical shares is the average of all the ACBs of the shares200x1=200; plus 100x1.5 = $350; Then the total amount is divided by the number of properties350/300 = 1.17; So B’s capital gain on 100 is 1.60-1.17 x 100 = $43 s.38(a) states that B’s taxable capital gains are ? of his total gains = $21.5Section 248(1) – “Disposition”INCLUDES:(a) Any transaction or event entitling a taxpayer to proceeds of disposition of the property(b)(i) Any transaction where property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, the property is redeemed in whole or in part or is cancelled(b)(ii) where property is a debt or any right to receive an amount, the debt is cancelled or settledBUT DOES NOT INCLUDE(e) Transfer of property as a consequence of which there is no change in the beneficial ownership EXCEPT:Trust transfers (listed)(j) Transfer of the property for the purpose only of securing a debt/loan or transfer by creditor for purpose of returning property used as security for a debt/loan(l) Issue of a bond, debenture, note, certificate, mortgage or hypothecary claim AND(m) Issue by a corporation of a share or its capital stock, or any other transaction that would be a disposition by a corporation of a share of its capital stockNOTE: “Proceeds of Disposition” defined in section 54 (a-f)Price of property sold; compensation of property stolen; compensation for property destroyed; compensation for expropriation; compensation for property injuriously affected; compensation for property damaged and any amount payable in respect of damageThe Queen v. Compagnie Immobiliere BCN Ltee (1979 SCC) – Disposition and POD – stat/normal meaning“Definitions of ‘dispositions of property’ and ‘proceeds of disposition’ are not exhaustive; these expressions must bear both their normal meaning and their statutory meaning; it would be wrong to restrict the former because of the latter”Deemed Dispositions and Deemed ProceedsSection 128.1(1) – Immigration(b) [Where T becomes resident of Canada], immediately before the time immediately before the time of becoming a resident, T is deemed to have disposed of all properties owned by T, for their FMV at the time of disposition(i) Except for property that is taxable Canadian property (where T is an individual)(c) T shall be deemed to have acquired the properties disposed of in (b) at FMVThis becomes the ACB of the property – only taxed on gains while actually resident in CanadaNote: Upon immigration if you do not want your taxable property to be deemed for a new ACB, it could be moved into a taxable Canadian property for shares in it, which is excluded under 128.1(1)(b)(i)Section 128.1(4) – Emigration(b) [Where T ceases to be resident in Canada] T is deemed to have disposed at the time immediately before the time immediately before the particular time, of each property owned by T for FMV(i) Except for real property situated in Canada, where T is an individualGifts and Sales Below FMV to Non-Arm’s Length PersonsSection 251(1) Arm’s Length(a) Related persons shall be deemed not to deal with each other at arm’s length(c) It is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm’s lengthNon-related Arm’s Length? – Question of fact:Requires an examination of all the facts and circumstances existing between the two personsUnrelated parties have been found not to be dealing at arms length whenThere is “a common mind” which directs or controls the bargaining for both sides ORThe two persons act in concert without separate interestsSection 252(2) – Definition of “Related Persons”(a) Individuals connected by blood relationship, marriage or common-law partnership or adoption;(b) A corporation and(i) A person who controls the corporation, if it is controlled by one person;(ii) A person who is a member of a related group that controls the corporation; OR(iii) Any person related to a person described in (i) or (ii)(c) Any two corporations if they are controlled by the same person/group of personsNote: 251(6)(b) and (b.1) make spouses and common law partners related to each other, and to the persons who are blood relatives of their spouse or CLP. This means “in-laws” are related.Section 69(1) – Inadequate Considerations – Gifts and Below FMV SlaesExcept as expressly otherwise provided within the Act,(a) Where T acquires something when not dealing at arm’s length at an amount more than FMV, then T is deemed to have acquired it at FMV(b) Where T disposes of something for no proceeds or proceeds less than FMV not at arm’s length, or to any person by way of gift inter vivos, T is deemed to have received POD of FMV(c) Where T acquires a property by gift/bequest/etc, T is deemed to acquire the property at FMVNote: When transferring at less than FMV, giver is deemed to have disposed for FMV, but there’s nothing that deems the recipient to have acquired the gift at FMV (unless it was for inheritance/bequest that required the beneficiary to pay some amount less than FMV – see s. 69(c) / s. 70(5)(b))Section 70(5) – Capital Property of a Deceased TaxpayerWhere T dies in a tax year:(a) T shall be deemed to have, immediately before T’s death, disposed of each capital property of the T and received POD equal to the FMV of the property immediately before death(b) Where T acquires any property that is deemed to have been disposed of by someone’s death, T shall be deemed to have acquired it at the time of the death at a cost equal to FMV immediately before deathNote: if recipient is a spouse or CLP, refer to s. 70(6) - belowLottery Winnings RevisitedRecall: LeBlanc – arguing that gambling was not a source of income; court held that there was no way to minimise T’s losses and the risk was maximized, so this was not a business source – not income that is taxableSection 40(2)(f) – Limitations – Right to a PrizeT’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 a pool system of betting is NILSection 52(4) – Cost of Property Acquired as a PrizeProperty acquired by T after 1971 as a prize in connection with lottery scheme is deemed to have been acquired at a cost to T equal to FMV at that timeRollovers: Transfer of Capital Property to Spouse/CLPSection 248(1): “Common-Law Partner”Means a person who cohabits at that time in a conjugal relationship with the T AND(a) Has cohabited with the T for a continuous period for at least one year, OR(b) Would be the parent of a child of whom the T is a parent,And once this relationship starts, then the person is deemed to be in a common law partnership unless they were not cohabiting for a period of at least 90 days because of a breakdown of their conjugal relationshipSection 73(1) and (1.01) – Inter Vivos Transfers(1)(a)(ii) – When one spouse transfers property to spouse under conditions of (1.01), both spouses are resident in Canada, the property is deemed to have been disposed of at the time by the individual for proceeds equal to the ACB of that person immediately before the transfer(1)(b) – And the property is deemed to have been acquired by the transferee equal to those proceedsNote: s. 73(1.01) – property is transferred by an individual where the property is transferred to the individual’s spouse or CLP OR former spouse or common-law partner of the individual in settlement upon breakdownExplained:ACB of Spouse1 goes over to Spouse2; Spouse1 does not experience a gain/loss and Spouse2 gets original ACBThis section can be opted out of if explicitly stated in Spouse1’s tax returnS. 73(1)’s specificity overrides the generality in s.69 (“except as otherwise provided in this Act”)But where T opts out of this section, s.69 springs back upOccurs on breakdown where settlement must take tax repercussions into considerationExample – Spousal RolloverS1 has capital property acquired for $5000, that same property is now worth $10,000S1 transfers it to S2 as gift (spouse or CLP)Section 73(1)(a)(ii) states that S1 is deemed to have disposed of it for original ACB – which is $5000;Section 73(1)(b) states that S2 acquires the property for $5000S. 69 does not apply because it is overridden by express section of the ActWhat if the property was sold to S2 for $7500? What is S2’s ACB and S1’s POD?S2 maintains ACB of $5000 and S1’s POD are $5000 – even though received moreThen S2 sells the property to an arm’s length person for it’s FMV ($10,000)Due to the roll-over provision, S2 has a capital gain of $5000 where she should only have $2500See Attribution rule below s. 74.2(1)(a)Section 74.2(1)(a) – Spousal Attribution Rule Basically, where an individual has lent/transferred property to a person who is the individual’s spouse, the following rules apply:Total taxable gains from the transferred properties, deduct the total allowable capital losses from the transferred properties, and the net capital gain is deemed to the be capital gain of the transferorOnly applies where couple is still married/CLP and resident in CanadaNote: This was designed to prevent couples from shifting gains/losses to each other to avoid taxesExample – Opt-out of Spousal Rollover and Attribution RuleYear 1: S1 experiences allowable capital loss of $25k (total capital loss of $50k) (s. 38(b))Year 2: S1 experiences taxable capital gains of $25k (total of $50k – s. 38(a))S1 transfers property to S2 and opts out of s. 73(1) rollover to pass the gains to S2S. 69(1)(b) – S1 is deemed to have disposed at FMV – and thus taxable gain of $25kThis gain is offset by S1’s previous $25k allowable loss carried forward – s. 111(1)(b)S. 69(1)(c) – S2 is deemed to have acquired at FMV – new ACBYear 3: S2 sells the property to 3P at arm’s length for $50k more than S2’s ACB – taxable gain of $25k (s. 38(b))Under s. 74.2(1)(a), this taxable gain is attributable back to S1However, if S1 is dead or relationship is over, then S2 would be taxed on the gainsSpousal Rollover on DeathRecall: s. 70(5) – when someone dies, property is deemed disposed at FMV; and recipient acquires at FMVRecall: s. 111(2)(a) – allows remaining capital losses to be used against income in death year or preceding yearSection 70(6) – Where Transfer or Distribution to Spouse or CLPWhere (5) would otherwise apply, but recipient is a spouse/CLP resident in Canada, then (5) does not apply and recipient acquires property at the ACB of the deceased spouse; and the deceased spouse is deemed to have disposed of the property at their original ACB (no gains/loss)Note: This allows for post-mortem tax-planning; exception to the normal rules of rollover on deathWhere deceased has some allowable capital losses, then may be better to experience the gains on this disposition – may elect out of s. 70(6) under (6.2)Also note, if disposition creates capital losses, they can be used against other income (s. 111(2)(a))Where electing out of s. 70(6), then the rules under (5) apply and spouse acquires at FMV insteadPersonal Use Property (PUP) and Listed Personal Property (LPP)Section 54 – Definitions“Personal-Use Property”:(a) Property owned by T that is used primarily for the personal use or enjoyment of T, related person to T, or where T is a trust – a beneficiary under that trust(b) Any debt owning to T in respect of the disposition of property that was T’s PUP AND(c) Options to acquire property that would, if acquired, be PUP“Listed Personal Property”: T’s PUP that is all or any portion of any: print, etching drawing, painting sculpture, or other similar work of art; jewellery; rare folio, rare manuscript, or rare book; stamp; OR coinNotes: PUP are things that have value and can even increase in value (rare); cottage/ski cabin/personal residenceMay be held by a corporation, but still for use of a related party primarilyDoes not include income-generating investment property – income from a business or property / ACNTSection 46(1) – Personal use PropertyWhere T has disposed of PUP,(a) The ACB is the greater of 1000 or the actual ACB of the property(b) T’s POD of the PUP is deemed to be the greater of 1000 and T’s actual PODNote: Low-valued PUP is basically taken right out of the tax systemPartial Disposal of PUP:(2) Where only part of the PUP is disposed of, (a) The ACB to T of the part so disposed is deemed to be the greater of the ACB of the part disposed and the apportioned amount of $1000 that the part is to the whole of the property (PACB =ACB/# of pieces)(b) The POD of the part disposed is deemed to be the greater of the POD of the part and the same apportionment under (a). (PPOD = POD/# of pieces)PUP Ordinarily Disposed of as a Set:(3) Where a number of parts that are ordinarily sold as a set, are disposed of by more than one disposition to one person or a group of non-arms-length persons, and before the first disposition had a total FMV of more than $1000, the properties shall be deemed to be a single PUP and each disposition shall be deemed a part of that property (refer to method in s. 46(2))Example – SEE PUP SAMPLE ANSWER HANDOUTSection 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NILT’s loss from disposition of any PUP, other than LPP, is nilNote: This recognizes that PUP is generally worn out based on depreciation from use, or passing of time/styleCalculation of LPP Net Capital Losses and GainsRecall: section 3(b)(i) – capital gains from all property including LPP is calculated, but net-losses from LPP are not included in calculation (net-losses of LPP are carried used against LPP gains 7y ahead/3y back – s. 41(2)(b))Section 41(1) – Taxable Net Gain from Disposition of LPPT’s taxable net gains for tax year from disposition of LPP is ? the amount determined under (2) to be T’s net gain for the year from disposition of LPPSection 41(2) – Determination of LPP Net GainT’s net gain from disposition of LPP is the amount determined as follows:(a) Amount of T’s gains from disposition of LPP(b) Deduct LPP losses from previous 7 years or following 3 years, so long not already been usedand the remainder (b) is the T’s net gain for the year from dispositions of LPPSection 41(3) – LPP LossLPP loss for T for a tax year is the amount, if any, by which T’s total losses from disposition of LPP exceeds the total of T’s gains for the year from disposition of LPPPrinciple Residence ExemptionRecall: s. 248(1) definitions of “Spouse” and “Common Law Partner”Recall: T’s home is for personal use and therefore a PUPRULE: The capital gains experienced for each year in which the residence is T’s principle residence is excluded from taxes at the disposition of the propertyApplies once per year on one homePolicy for Principle Residence ExemptionWould hinder the market if taxes were collected on each gain made from personal residencePrinciples of society – to organize individuals, ensure they have a stake in community, that they settle down, get caught up in the Canadian way of life – strive to pay of mortgage; Community controlSection 54 – “Principle Residence”Property that is a “housing unit” and deemed to include the land immediately contiguous to the land on which the housing unit stands, unless it exceeds ? hectare around the property; (Yates – size at time of disposition)If more than ? hectare around the house, must be shown that the exceeding land was part of the use and enjoyment of the housing unit as a residenceTEST: Rode (1985 TCC): “objectively consider all of the relevant circumstances…[when asking]: have the T established on BoP that without the area of land…they could not practically have used and enjoyed the unit as a residence?”(a) Must be ordinarily inhabited in the yearTEST: ordinarily inhabiting in the year, not throughout the year; must be living in it in a normal way through some part of the year (not too stringent)(b) Only one property qualifies for personal residence per yearNote: so when sold, you can exempt any years associated to that property where it’s the only principle residence; Close nuclear family members cannot split up their primary residences (before 1982)Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE)First calculate the capital gain AB = one plus the number of years after it was acquired during which T was resident in Canada and living in the housing unit as a qualified/designated principle residence(Note: B carries the extra year to allow exemption to swap between new/old principle residence)The plus-one does not have to be used here by the T if not neededC = Total number of years the T owned the housing unitCapital Gains after Exemption = A – (A x B / C) PRE = A x B / CExample – Principle Residence Exemption1982: H and W purchase house as joint-tenants for $40k1993: They add $10k swimming pool – Capital cost/ACB is increased to $50k 1995: H dies, W becomes sole-owner – spousal rollover on death – W acquires H’s ACB on half interest (s. 70(6))2005: W sells for $500k – capital gain of $450kAssume both were resident in Canada throughout the time in questionPRE = A x B / C (s. 40(2)(b))B = 1 + 24 (number of qualified years) = 25C = 24 years (1982-2005, inclusive)PRE = $468,750 So W would only designate 23 years for the house (1982-2004), which would result in $450kNOTE: No losses from Principle Residence because it is a PUP!Example – Principle Residence Exemption 21975: H and W buy house in Victoria in W’s name for $50k1980: H inherits cabin on Saltspring on ? hectare of land for $30k (deemed FMV s. 70(5)(b))1985: They sell Victoria house for $65k, and rent for a couple years (capital gain of $15k)1987: W buys a new house in Victoria for $80k1991: H transfers Saltspring property by deed of gift to daughter (POD at FMV of $75k) (s. 69(1)(b)) – gain – $45kDaughter’s ACB is deemed $75k under s. 69(1)(c)FIRST HOUSE (Victoria House):Gain of $15k (CG = POD – (ACB + expenses) – s. 40(1)(a))PRE = AxB / C (s. 40(2)(b)) = 15 x (1 + 11years) / 11 years = $16,363 – more than necessary!So W would only designate Victoria house for 10 years – 1975-1984, which would result in B= 1 +10; The PRE would apply throughout the ownership of first house, resulting in no capital gainsSECOND HOUSE (Cabin in Saltsprings):Gain of $45k (s. 40(1)(a))H can designate the cabin for 9 of the 12 years he owned it:85-91 = 7 years + 80-81 = 2 years (because before ’82 H and W could designate separate properties)PRE = 45k x (9+1) / 12 = $37, 500 so the gain after deduction is $7,500H’s income must include $3750 in taxable income – 50% as per s. 38(a)NOTE: this calculation assumes that T wants to designate Cabin for 87-91 over the new house purchased in 87Depreciable Property and Capital Cost Allowance (CCA)DP is a class of capital propertyAct allows a deduction to recognize that the cost that a business uses to earn their income, is a real costRecall, when repairs are made to a capital property, the expense is deductible in fullRecall the specific limitations from computing income from business or property18(1)(a)/(b) – are the big oness20 – specific deductions from income from business/property20(1)(a) – allowed to deduct a certain amount with respect to the capital costs of propertyPortion for which the property deteriorates in a given yearCCA is recognition from the ITA that deterioration of the capital asset is a true cost that must be accounted for in taxationOperates notwithstanding 18(1)(b) – which disallows capital deductions from incomeCapital costs relate to the amount to acquire depreciable propertyGenerally tangible property that is used to create income – asset that was purchased that eventually wears outRecognizes the true cost of doing business using capital assetsThere are rigid rules that dictate the max amounts that physical assets depreciate each yearDepreciable Property – 248(1) – as defined in 13(21)Depreciable property is capital property where a deduction is available to Prop acquired by T for use of carrying out an income, is of enduring benefit to the income earning business, and is not consumed or re-sold (like inventory)Reg 1100(1):For 20(1)(a) – following deductions are allowedEach kind of property is described in a scheduleEach with their own depreciation percentages – rate of CCA applied to the capital cost of the depreciable property to calculate the maximum deduction each yearReg 1102(1): exclusions(a) Otherwise deductable expense(b) Any inventory(c) Property not acquired for purpose of gaining or producing income1102(2) – exclusion of land – land does not depreciate1101(1) – assets of each separate business source must be kept separately Depreciation rules are an attempt at regulating the timing of financial reporting – fixed rate of depreciation regardless of what is actually happening in real life to your assetsCCA is another example of the Tax Act controlling timingCCA is an optional deduction – a year a business is in a loss position, it wont claim its capital cost allowanceCalculationUCC x % depreciation = CCA under 20(1)(a)The undepreciated capital cost (UCC) is the amount left over after the CCA is appliedUCC is the total balance in the class at any given time, it is subject to depreciation in each year that the CCA is appliedUCC Calculation:(A + B) – (E+F)A – total cost of all amounts of the capital cost to T of depreciable capital assetsB – total recapture – assume NILE – total depreciation (CCA) claimed before that timeF – Proceeds of disposition of property – assume NILClass 5 assets – 10% CCA depreciation: $100,000Year 1:A = 100,000E = no previous CCA, so NILSo UCC is 100,000 (but for the half-year rule)So CCA is 10,000Half year rule – 1100(2) – prevents people from buying assets in December and claiming the full depreciation of them when they haven’t held them that longIn the year acquired, only half of the value can be put into the class of assetsSo actually in year 1, the UCC would be 50,000 due to half-year rule, so CCA would be 5000Lunch Session – Neil Brooks – The Trouble with BillionairesFoundational Concepts:Equality Matters: Public policy should aim to reduce the gap between income groupsIncome and wealth confers extraordinary advantages and freedomsRaises a moral question of whether one person should earn 1000x more than averageAdverse consequences of inequality – increases social problemsBeen an enormous run up in inequality over recent yearsAthletes – top 50 make an average of 25M per yearCEOs and celebrities; bankersAt the beginning of the golden age of capitalism (1947-1975), top 1% of us/can/aus richest people started earning less of the total income of the countriesAt the great divergence (1975-2010) – the top 1% started lobbying for tax cuts etc, no they are all at their peak ownership of the total income earned in their countriesThis run up is based in political decision making (and indecision)1. Changes in policy – rich rigged the rules to be in their favourLook at the regulation index on financial employee incomes2. Change in social normsThe rich do not deserve the large income they are receivingEarning money does not necessarily equate to deserving incomeInequality has huge social and economic costsStrong economic growth is consistent with social justiceThe only way to deal with this inequality is through the tax systemFINAL EXAM REVIEW:You may refer to hand-written calculations within Exam 4, and then it will be included into the answer159 – 9:00am to 12:00pm – no reading periodOpen book – bring anything you’d likeCalculator is allowed, likely wont need itEverything covered is examinable, but focus on areas we spent most time on in classHandouts are part of the course – review them – problems are meant to prepare for exam!Problems in class are basically old exam questionsResidence problem – that is an old exam question – there is almost always one long fact pattern, with lots of facts that must be addressedThen a couple shorter fact patternsThen a number of short answer questions (3-5 Marks)If not asked about policy, don’t address itKnow three policy principles; Euqity, Neutrality and SimplicityRefer to Act as specifically as possible, and refer to any relevant case law and apply it to the factsMarks based on difficulty, complexity, reading time and time to respondQuality of response is important! Organization, style, writing should hold throughoutAttempt to use proper tax vocabularyWhere running out of time, move to point form – part marks will be awarded where possibleRUN SPELL CHECK!Abbreviations are fine: TP for tax payer; ACB; ACNTDo not look too had for issues that aren’t thereRemuneration is the correct term, not renumerationGeneral question regarding the guest lecturer ................
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