Basic Structure of Income · Web viewIntroduction6 Basic Structure of Income Tax6 Tax payable...
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Introduction................................................... 6 Basic Structure of Income Tax........................................6 Tax payable by persons resident in Canada...........................6 1. Tax Unit ............................................................................................................................................. 6 Tax payable by persons resident in Canada...........................6 a. Who is a “person”?................................................... 7 b. Who is “resident in Canada”?.........................................8 2. Tax Rate ............................................................................................................................................. 9 Individuals............................................................. 9 Corporations............................................................ 9 Inter Vivos Trusts...................................................... 9 Policy Considerations:..................................................9 3. Tax Base .......................................................................................................................................... 10 Inclusions............................................................. 10 Deductions............................................................. 10 Losses................................................................. 11 4. Accounting Period .......................................................................................................................... 12 Policy Considerations..................................................12 Evaluating Income Tax Provisions .................................................................................................... 12 Income from Office or Employment..............................14 Contract of Service vs. Contract for Services ................................................................................... 14 Wiebe Door Services Ltd. V MNR (1986, Fed CA)....................15 671122 Ontario Ltd. V Sagaz Industries (2001, SCC)...............15 Wolfe v The Queen (1975, SCC)....................................16 Incorporated Employees .................................................................................................................... 16 Limitation re personal services business expenses..................17 Dynamic Industries v Canada (2005, FCA)..........................17 I. Inclusions....................................................... 18 Remuneration ..................................................................................................................................... 18 Inducement Payments.................................................... 19 Curran v MNR (1959, SCC).........................................19 Moss v MNR (1963, Exch)..........................................20 Quance v Canada (1974, FCTD).....................................20 Torts Damages.......................................................... 21 Cirella v Canada (1978)..........................................21 Benefits ................................................................................................................................................ 21 Lowe v Canada (1996, FCA)........................................21 R v Savage (1983, SCC)...........................................22 Detchon v Canada (1995, TCC).....................................22 Automobile Benefits.................................................... 23 Standby Charge......................................................... 23 Hewitt v Canada (1995, TCC)......................................24 Side Notes from Class in case he asks more details about how this Operating Benefit is calc’d........................................25 Automobile operating expense benefit...............................25
Transcript of Basic Structure of Income · Web viewIntroduction6 Basic Structure of Income Tax6 Tax payable...
Introduction............................................................................................................................6Basic Structure of Income Tax..............................................................................................................................................6
Tax payable by persons resident in Canada...................................................................................61. Tax Unit ..................................................................................................................................................................................... 6
Tax payable by persons resident in Canada...................................................................................6a. Who is a “person”?..........................................................................................................................................................................7b. Who is “resident in Canada”?....................................................................................................................................................8
2. Tax Rate ..................................................................................................................................................................................... 9 Individuals.............................................................................................................................................................................................. 9Corporations.......................................................................................................................................................................................... 9Inter Vivos Trusts................................................................................................................................................................................9Policy Considerations:.......................................................................................................................................................................9
3. Tax Base .................................................................................................................................................................................. 10 Inclusions............................................................................................................................................................................................. 10Deductions...........................................................................................................................................................................................10Losses.....................................................................................................................................................................................................11
4. Accounting Period .............................................................................................................................................................. 12 Policy Considerations.....................................................................................................................................................................12
Evaluating Income Tax Provisions ................................................................................................................................... 12
Income from Office or Employment.......................................................................................14Contract of Service vs. Contract for Services ................................................................................................................ 14
Wiebe Door Services Ltd. V MNR (1986, Fed CA).............................................................................................15671122 Ontario Ltd. V Sagaz Industries (2001, SCC)......................................................................................15Wolfe v The Queen (1975, SCC)................................................................................................................................16
Incorporated Employees ....................................................................................................................................................... 16 Limitation re personal services business expenses............................................................17
Dynamic Industries v Canada (2005, FCA)..........................................................................................................17I. Inclusions.................................................................................................................................................................................18
Remuneration ........................................................................................................................................................................... 18 Inducement Payments....................................................................................................................................................................19
Curran v MNR (1959, SCC)..........................................................................................................................................19Moss v MNR (1963, Exch)...........................................................................................................................................20Quance v Canada (1974, FCTD)................................................................................................................................20
Torts Damages................................................................................................................................................................................... 21Cirella v Canada (1978)................................................................................................................................................21
Benefits ......................................................................................................................................................................................... 21 Lowe v Canada (1996, FCA)........................................................................................................................................21R v Savage (1983, SCC).................................................................................................................................................22Detchon v Canada (1995, TCC).................................................................................................................................22
Automobile Benefits........................................................................................................................................................................23Standby Charge..................................................................................................................................................................................23
Hewitt v Canada (1995, TCC).....................................................................................................................................24Side Notes from Class in case he asks more details about how this Operating Benefit is calc’d........25Automobile operating expense benefit.................................................................................................................25
Insurance Benefits............................................................................................................................................................................26Tsiaprailis v The Queen (2005, SCC)......................................................................................................................27
Interest Free and Low Interest Loans.....................................................................................................................................27Canada v Hoefele (1995, FCA)...................................................................................................................................27
Relocation Assistance..................................................................................................................................................................... 28Splane v MNR (1990, FCA)..........................................................................................................................................28Pezzalo v Canada (1995, TCC)...................................................................................................................................28Phillips v MNR (1994, FCA)........................................................................................................................................29
Allowances .................................................................................................................................................................................. 29 MacDonald v Canada (AG) (1994, FCA).................................................................................................................29Blackman v MNR (1967, TAB)...................................................................................................................................30
Statutory Exclusions........................................................................................................................................................................31Guilbert v MNR (1991, TCC).......................................................................................................................................31Dionne v Canada (1996, TCC)....................................................................................................................................32
II. Deductions............................................................................................................................................................................. 32Travel Expenses................................................................................................................................................................................ 32
Motor vehicle travel expenses.........................................................................................................................................33Nelson v MNR (1981)....................................................................................................................................................33Canada v Cival (1983, FCA).........................................................................................................................................34Yurkovich v MNR (1986, TCC)...................................................................................................................................35Luks v MNR (1958, Ex Ct)............................................................................................................................................35
Meals...................................................................................................................................................................................................... 36Healy v Canada (1979, FCA).......................................................................................................................................36
Legal Expenses...................................................................................................................................................................................36Werle v The Queen (1995, TCC)...............................................................................................................................36
Professional Membership Dues..................................................................................................................................................37MNR v Montgomery (1970, Ex Ct)...........................................................................................................................37
Office Rent............................................................................................................................................................................................37Prewer v MNR (1989, TCC).........................................................................................................................................37
Expenses of Sales Persons............................................................................................................................................................38Creighton v MNR (1951, TAB)...................................................................................................................................38Bowman v MNR (1985, TCC).....................................................................................................................................38Verrier v MNR (1990, FCA).........................................................................................................................................39
Income/Loss from a Business or Property..............................................................................40MNR v Taylor (1956, Ex Ct)........................................................................................................................................40Regal Heights Ltd. v MNR (1960, SCC)...................................................................................................................41
Gambling............................................................................................................................................................................................... 41MNR v Morden (1961, Ex Ct).....................................................................................................................................42
Reasonable Expectation of Profit (REOP)..............................................................................................................................42Stewart v Canada (2002, SCC)...................................................................................................................................42
i. Inclusions.............................................................................................................................................................................43Gains from Illegal Activities ................................................................................................................................................ 43
No. 275 v MNR (1955, TAB).......................................................................................................................................43Damages and Compensation .............................................................................................................................................. 43
Canada v Manley (1985, FCA)....................................................................................................................................44Queen v Atkins (1976)..................................................................................................................................................44
Interest ......................................................................................................................................................................................... 44 Perini Estate v MNR (1982, FCA).............................................................................................................................45Sherway Centre v Canada (1998, FCA)..................................................................................................................45Queen v Greenington Group (1979, FCTD)..........................................................................................................46
Payments of Interest and Capital Combined ................................................................................................................ 46 Groulx v MNR (1967, SCC)..........................................................................................................................................46Vanwest Logging v MNR (1971, Ex Ct)..................................................................................................................47
Discounts and Premiums ...................................................................................................................................................... 47 O’Neil v MNR (1991, TCC)...........................................................................................................................................47
Royalties ...................................................................................................................................................................................... 47 MNR v Morrison (1966, Ex Ct)..................................................................................................................................48Huffman v MNR (1954, TAB).....................................................................................................................................48
Rent ................................................................................................................................................................................................ 48 Pitman v MNR (1954, TAB)........................................................................................................................................49
Inducements, Reimbursements and Refunds ............................................................................................................... 49
Iron Ore Co. of Canada Ltd v Canada (2001, FCA)............................................................................................49II. Deductions............................................................................................................................................................................ 50
Damage Payments ................................................................................................................................................................... 50 Imperial Oil Ltd v MNR (1947, Ex Ct).....................................................................................................................50
Fines and Penalties ................................................................................................................................................................. 51 65302 British Columbia Ltd. v Canada (1999, SCC).........................................................................................51
Theft .............................................................................................................................................................................................. 52 Thayer Lumber Company Ltd. v MNR (1957, TAB).........................................................................................52Cassidy’s Ltd v MNR (1989, TCC).............................................................................................................................52
Legal Defense Costs ................................................................................................................................................................. 52 Rolland Paper Co v MNR (1960, Ex Ct)..................................................................................................................52Neeb v Canada (1997, TCC)........................................................................................................................................53
Promotional Expenses ........................................................................................................................................................... 53 Ace Salvage Alberta Ltd. v MNR (1985, TCC)......................................................................................................53Ross v Canada (2005, TCC).........................................................................................................................................54No 511 v MNR (1958, TAB)........................................................................................................................................54Olympia Floor & Wall Tile v MNR (1970, Ex Ct)................................................................................................54
Recreation, Meal and Entertainment Expenses .......................................................................................................... 54 Royal Trust Company v MNR (1957, Ex Ct).........................................................................................................55Fehrenbach v MNR (1994, TCC)...............................................................................................................................55Fingold v MNR (1993, TCC)........................................................................................................................................56Scott v Canada (1998, FCA)........................................................................................................................................56
Clothing Expenses .................................................................................................................................................................... 56 No 360 v MNR (1956, TAB)........................................................................................................................................56
Home Office Expenses ............................................................................................................................................................ 56 Work space in home.........................................................................................................................................................57
Locke v MNR (1965, TAB)...........................................................................................................................................57Travel Expenses ........................................................................................................................................................................ 58
Cumming v MNR (1967, Ex Ct)..................................................................................................................................58Interest Expense ....................................................................................................................................................................... 58
Bronfman Trust v Canada (1987, SCC)..................................................................................................................59Ludco Enterprises Ltd v Canada (2001, SCC).....................................................................................................59Tennant v MNR (1996, SCC).......................................................................................................................................59Hills v MNR (1970, TAB)..............................................................................................................................................60Emerson v Canada (1985, FCTD).............................................................................................................................60Leslie v Canada (1998, TCC).......................................................................................................................................60
Timing Issues............................................................................................................................................................................. 61Inclusions .................................................................................................................................................................................... 61
West Kootenay Power & Light Co v MNR (1992, FCA)...................................................................................62Canderel Ltd v Canada (1998, SCC).........................................................................................................................62MNR v Benaby Realites (1967, SCC).......................................................................................................................62Commonwealth Construction v MNR (1984, FC)..............................................................................................63
Deductions .................................................................................................................................................................................. 64 Amounts Payable.............................................................................................................................................................................. 64
JL Guay Ltee v MNR (1971, FCTD)...........................................................................................................................64Wawang Forest Products Ltd v Canada (2001, FCA)......................................................................................65Canada v Burnco Industries Ltd (1984, FCA).....................................................................................................65Buck Consultant Ltd v Canada (2000, FCA).........................................................................................................65
Capital Expenditures.......................................................................................................................................................................66Canada v Johns-Mansville (1985, SCC)..................................................................................................................66Wardean Drilling (1969, Ex Ct).................................................................................................................................67
CAPITAL COST ALLOWANCES (CCA).................................................................................................................................67UCC.............................................................................................................................................................................................. 68
ReCapture and Terminal Loss.........................................................................................................................................69MNR v Browning Harvey Ltd (1990, FCTD)........................................................................................................69Hewlett Packard v Canada (2004, FCA)................................................................................................................70
Eligible Capital Expenditures......................................................................................................................................................70Pre-Paid Expenses............................................................................................................................................................................71
Urbandale Realty Corp v MNR (2000, FCA).........................................................................................................72Toronto College Park Ltd v Canada (1996, FCA)...............................................................................................72Canderel Ltd v Canada (1998, SCC).........................................................................................................................72
Doubtful Debts................................................................................................................................................................................... 73Coppley Noyes & Randall Ltd v MNR (1991, FCTD).........................................................................................73
Bad Debts............................................................................................................................................................................................. 74Anjalie Enterprises Ltd. v Canada (1994, TCC)..................................................................................................74
Taxable Capital Gains and Allowable Losses..........................................................................75Real Property ............................................................................................................................................................................. 75
Regal Heights Ltd v MNR (1960, SCC)....................................................................................................................75Tangible Personal Property ................................................................................................................................................ 76
Canadian Kodak Sales Ltd v MNR (1954, Ex Ct)................................................................................................76Corporate Shares ..................................................................................................................................................................... 77
Irrigation Industries Ltd v MNR (1962, SCC)......................................................................................................77Debt Obligations ...................................................................................................................................................................... 78
Wood v MNR (1969, SCC)............................................................................................................................................78MNR v Freud (1968, SCC)............................................................................................................................................79Millford Developments v MNR (1993, FCTD).....................................................................................................79
Canadian Securities ................................................................................................................................................................ 79 Vancouver Art Metal Works Ltd v Canada (1993, FCA).................................................................................80
Foreign Exchange .................................................................................................................................................................... 80 Tip Top Tailors Ltd v MNR (1957, SCC)................................................................................................................80Shell Canada Ltd v Canada ()......................................................................................................................................81
Computing Taxable Capital Gains.....................................................................................................................................81Disposition of Capital Property ......................................................................................................................................... 82
MNR v Keiboom...............................................................................................................................................................82Proceeds of Disposition: ........................................................................................................................................................ 83
Robert v MNR (1990, TCC)..........................................................................................................................................83Anti Avoidance Rules:.....................................................................................................................................................................84
Adjusted Cost Base .................................................................................................................................................................. 84 Sterling v Canada (1983, FCA)...................................................................................................................................85
Expenses of Disposition ......................................................................................................................................................... 85 Avis Immobilien GmbH v Canada (1996, FCA)...................................................................................................85
Special Computation Rules..................................................................................................................................................86Personal Use Property ........................................................................................................................................................... 86
Burnett v Canada (1995, TCC)...................................................................................................................................87Boudreau v Canada (1999, TCC)..............................................................................................................................87
Listed Personal Property...............................................................................................................................................................88Principle Residence ................................................................................................................................................................. 88
Flanagan v MNR (1989, TCC).....................................................................................................................................89Ennist v MNR (1985, TCC)...........................................................................................................................................90Jukic v Canada (1994, TCC).........................................................................................................................................90Falk v MNR (1991, TCC)...............................................................................................................................................90
Surrounding Land.............................................................................................................................................................................91Canada v Yates (1983, FCTD) affirmed by FCA............................................................................................91Rode v MNR (1985, TCC).............................................................................................................................................91Augart v MNR (1993, FCA)..........................................................................................................................................91
Designation..........................................................................................................................................................................................92
Dispositions.........................................................................................................................................................................................92DEEMED DISPOSITTIONS.......................................................................................................................................................93
Change in Use........................................................................................................................................................................93Duthie Estave v Canada (1995, FCTD)...................................................................................................................93
Death......................................................................................................................................................................................... 94Mastronardi Estate v Canada (1977, FCA)...........................................................................................................94
Rollovers......................................................................................................................................................................................... 95Exchanges of Property........................................................................................................................................................95
Glaxo Wellcome Inc v Canada (1996, TCC)..........................................................................................................97McKervey v MNR (1992, TCC)...................................................................................................................................97
Transfer of Property to Spouse or C/l Partner........................................................................................................97Transfer of Farming or Fishing Property to Child..................................................................................................98
Stop-Loss Rules............................................................................................................................................................................99
Other Deductions................................................................................................................100Support Payments.................................................................................................................................................................100
Thibaudeau v Canada (1995, SCC)........................................................................................................................100Allowance and Discretionary Use .................................................................................................................................. 102
Armstrong v Canada (1996, FCA)..........................................................................................................................102Mambo v Canada (1995, TCC).................................................................................................................................102Velleaux v Canada (2002, FCA)..............................................................................................................................102Larsson v Canada (1997, FCA)................................................................................................................................103Arsenault v Canada (1995, TCC)............................................................................................................................103Hak v Canada (1999, TCC)........................................................................................................................................103Serby v Canada (2001, TCC)....................................................................................................................................103
Periodic Maintenance Payments .................................................................................................................................... 104 McKinnon v MNR (1989, FCA)................................................................................................................................104Sills v MNR (1985, FCA).............................................................................................................................................105Widmer v Canada (1995, TCC)...............................................................................................................................105Stephenson v Canada (2007, TCC)........................................................................................................................105Ostrowski v Canada (2002, FCA)...........................................................................................................................106Pouzar v Canada (2007, TCC)..................................................................................................................................106
Rules Relating to Computing Income...................................................................................106Reasonableness...................................................................................................................................................................... 106
Cipollone v Canada (1994, TCC)............................................................................................................................106Mohammed v Canada (1997, FCA).......................................................................................................................107Gabco Ltd v MNR (1968, Ex Ct)..............................................................................................................................107
Meals and Entertainment..................................................................................................................................................107Stapley v Canada (2006, FCA).................................................................................................................................108Pink Elephant Inc v Canada (2011, TCC)............................................................................................................108
IntroductionAlthough taxes of one form or another have been collected in most societies throughout human civilization, broad-based income tax is a relatively recent development associated w/ the formation of modern nation states.
Economic Purposes of Modern Government:1. Allocation Function: Allocating costs (through taxes) to goods and services to address
market-failures: (e.g. roads, military, etc.) a. i.e. providing goods that ≠ easily be restricted to only those willing to pay for them o
eliminate “free rider” problem2. Provision of Services: (e.g. education, healthcare, pensions, etc.) to ensure collective value
and paternalistic considerations a. E.g. public education: collective value in bringing children of diff backgrounds
together; paternalistic aim in providing opportunities for meaningful choices3. Redistribute Wealth: i.e. taxing wealthy more heavily than poor4. Stabilization through Fiscal Policy in pursuit of price stability, econ growth, and full
employment a. E.g. by increasing tax rates gov can reduce demand and inflation or by decreasing
tax rates and running a deficit gov can increase demand, reduce unemployment,
Basic Structure of Income Tax1. Tax Unit: The person/corporation who’s subject to tax2. Tax Base: The amount to which rate of tax applies 3. Accounting Period: The time over which tax base is computed4. Tax Rate: The rate of tax applied to the tax base
The first 3 elements are in s. 2(1), while the tax rate is set out in 117(2)
Tax payable by persons resident in Canada
2. (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.
o tax unit= every person resident in Canada at anytime in the year o tax base= taxable income o tax period = tax year
1. Tax UnitTax unit = the person to whom tax applies
Per 2(1) the basic unit of tax is “every person resident in Canada at any time in the year”Tax payable by persons resident in Canada
2. (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.2 Elements: PERSON + RESIDENCY
a. Who is a “person”?
Defined in 248(1) [pg. 1662]
“person”, or any word or expression descriptive of a person, includes any corporation, and any entity exempt, because of ss. 149(1), from tax under Part I on all or part of the entity’s taxable income and the heirs, executors, liquidators of a succession, administrators or other legal representatives of such a person, according to the law of that part of Canada to which the context extends
This really just expands on the ordinary meaning of the word “person” so it is useful to consider dictionary definitions:
- individual human being;- corporations;- inter vivos trusts;- tax exempt entity: heirs, executors, liquidators of a succession
In Canada the tax unit is the Individual (as opposed to familial/couple based (USA) or household (France))
Arguments justifying the use of the “individual” tax unit:1. “Control Principle” & “Distributive Justice”: Income tax is based on the economic power that
persons have over their income Whereas proponents of spousal/familial unit support allocation of tax burden based on the economic benefit received from their income or others’, rather than control over income (“Benefit Principle”)
But this suggests couple should be taxed more heavily than individuals w/ half the income of the couple
2. The diversity of groupings and the impact on personal autonomy necessary to monitor such diverse relationships make it difficult to define and require an element of intrusiveness that e don’t want the gov. to have
3. The familial unit violates tax neutrality by encouraging/discouraging the familial/couple unit
4. The familial unit discourages participation in the paid labour force by secondary earners (I.e. if you taxed the marital unit, and the second spouse went to work they’d be taxed at a higher rates, thus encouraging that 2nd person not to work)
Implications of individual taxation and progressive rates:1. Because progressive rates apply to an individual’s income, families w/ the same total
income can face diff tax burdens dep. on the share of the total amount received by each individual
2. This system means that families where each member contributes to total income actually have a lower tax burden than families where income is received by a single member – thus creating incentive to income split
Implication of the Incentive to income split:More complex Tax Act and constant amendments: This is b/c policy decisions by gov impacts the affected tax payer and acts as a catalyst for individuals to take actions, which then causes the gov to create policy to counteract those actions
- Tax planning requires careful reading/analysis and interpretation of the Act- To understand all provisions, you need to understand the scheme of the Act as a whole
b. Who is “resident in Canada”?
General Rule: Canadian residents are subject to tax on their worldwide income - Exceptions: Act permits tax-credit for income tax paid to foreign govs and some income
from foreign sources is exempt from Cdn tax per bilateral tax treatieso Canada has treaties w/ many OACD countries, though not w/ countries considered
tax havens
“Residency” not definitively defined in Act and thus courts have held that it should receive the meaning ascribed by common usage:
- Courts have referred to dictionary definitions: “chiefly a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living w/ its accessories in social relations, interests and conveniences at or in the place in question (Thomson v MNR)
Thus courts must engage in detailed inquiry into a person’s ordinary mode of living to determine whether he is resident in Canada. Guidelines from CRA:
1. It is assumed that every person has at all times a residence2. A person may be resident in more than one country at the same time3. Residence is primarily a question of fact4. Intent to reside in a certain place is relevant (≠ determinative) & must be viewed objectively 5. Residence generally involves physical presence in the jurisdiction or the right to own or
occupy a building in the jurisdiction6. Where person is not physically present, residence may turn on social, economic or
residential ties:o Most imp residential ties:
Dwelling place Residency of family, spouse or c/l partner Dependents
o Secondary residential ties: Ownership of real or personal property (car, clothes, furniture) Social ties in religious orgs, clubs, unions, recreational or professional orgs. Employment w/ Canadian employer, invol in Cnd economy, owning bank acc Landed immigrant status or work permits Provincial Healthcare Coverage Provincially registered vehicle, provincial driver’s license Seasonal dwelling in Canada Have Canadian passport
o Of limited importance (except when taken together w. other residential ties) Retention of Canadian mailing address, post office box Retention of safety deposit box Personal stationary (incl business cards) showing Cnd address/phone Local Canadian newspaper or magazine subscriptions
250(1) [pg. 1701] expands the def’n of resident and “deems” people residents in certain circs:250(1)(a) deems to be residents, those who have sojourned (presence) in Canada for 183 days or more
o Situations where presence in Canada is somewhere between temporary visitor and permanent resident
2. Tax Rate “Marginal Tax Rate” = the tax rate that applies to your last dollar of income
- Personal income taxes are applied in Canada at “progressive” rates above basic exemptions
Basic Personal Exemption: Exempts a basic amount of income from tax by providing a credit against tax otherwise payable
- ~ $10,500 which is not taxable - this = amount gov says is what everyone needs to live off.o So if you make $20,000 the first $10,500 is not taxable
3 subsections of Act set out the “marginal tax rates” based on who the person is:
Individuals 117(2) [pg. 873] sets out how to compute the amount of tax payable by individuals in the given accounting period:
Income Rate$0 to $40,726 15% 117(2)(a)
$40,726 to $81,452 22% (on amnt over $40,726) 117(2)(b)
$81,452 to $126,264 26% (on amnt over $81,452) 117(2)(c)
$126,264 and over 29% (on amnt over $126,264) 117(2)(d)
Corporations123(1) deals w/ rules re corporations
(a) says tax payable is 38% of its amount taxable for the year
Inter Vivos Trusts122(1) deals w/ tax rates applicable to inter vivos trusts:
(a) says 29% on the amount taxable for the year
Policy Considerations:Arguments for Progressive Tax Rates:
1. Moderates inequality by redistributing wealth from rich to poor2. There is a greater proportionate ability of higher income taxpayers to pay3. Provides a stabilization function (collects proportionately more or less revenue as econ
activity increases or decreases)
Arguments for Flat Tax Rates:1. Redistributive function is questionable2. No fiscal accountability when bulk of taxes falls on a disproportionate minority of high-
income earners3. Progressive tax rates discourage work effort, risk taking & saving, and encourages tax
avoidance4. Progressive rates increase the complexity of the tax regime and the difficulty of its
administration - Strength of this argument questionable
3. Tax Base
Tax Base = amount to which the rate(s) of tax apply to determine the amount of tax payable
Tax Base is set out in:2(1) Tax Base = the taxpayers “taxable income” for the taxation year
Taxable Income is defined as:2(2) “taxable income” = the “taxpayers income for the year + additions – deductions permitted by division C”
Taxpayer’s income for the year is set out in as a formula:
INCOME (3(a)) + TAXABLE CAPITAL GAIN (3(b)) – (DEDUCTIONS per 3(c) & LOSSES per 3(d))
Inclusions
3(a) captures:- Income sources inside or outside Canada- Income from 4 sources
o Office and employment (s. 5 - 8)o Business (s. 9 - 37) o Property (s. 9 - 37)
(These are not only sources of income poss but courts hesitant to find sources outside these 4)
3(a) the total of all income amounts (other than taxable capital gain from disposition of property) from a source inside or outside Canada, including… the taxpayers income for the year from each office, employment, business, and property
3(b) captures:- “taxable capital gain” from dispositions of property
Deductions Section 3(c)
Used to reduce income (from employment, office, business, property)- Generally, are a costs to the taxpayer in earning his income
o Deductions for losses from business or property can also be deducted from income Policy: encourage risky activities(but are limited as capital losses can only be used to offset capital gains)
May be used by gov to encourage certain behavior (e.g. save for retirement, grow small business)
Distinguishing Deductions from Credits:- Deduction: reduces amount of taxable income- Credit: reduces amount of tax you’d otherwise have to pay
Credits are subtracted from the amount of tax payable resulting in a reduction or a refund where no tax is otherwise owing
- Non-Refundable = reduce amount of tax payableo Not useful for very poor who aren’t paying much tax anyway
- Refundable = operates as an overpayment of taxo Very poor would rather have thiso Promote bad behavior b/c people view as ATM and will do anything to get this cash
Policy Implications:- Deductions are generally seen as inequitable. They benefit higher incomes (taxed at higher
rates) more than lower incomes- Tax credits benefit all incomes equally so are seen as a better policy- Thus many deductions have been converted into tax credits since 80’s
LossesSection 3(d)Distinguishing: Net Capital Losses vs Non-Capital losses:Need to distinguish these b/c of the way “income” is distinguished from “capital gains”
Income Tax Act allows carryover of unutilized losses from other taxation years:- Non-capital losses may be carried forward 20 taxation years or back 3 = 24-year accounting
period- Net capital losses may be carried back 3 years and forward indefinitely
111(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer’s
(a) non-capital losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year;(b) net capital losses from any taxation year preceding and from 3 taxation years immediately following the year;
Deducting these losses is optional (note use of word “may”) so you can allocate them to years for which you’ll gain greatest benefit. But if you do deduct there are some rules:
- Must deduct losses from oldest years first (111(3)(b))- Can only deduct losses if they have not been deducted in previous years (111(3)(a))- Net capital losses can only be deducted from net capital gains (111(1.1))- Non-capital losses may be deducted against income from all sources
Net Capital Losses Non-capital LossesMay only be deducted from net capital gains(except in yr of death & yr immediately preceding)
May be deducted against income from all sources
May be carried forward indefinitely (and carried back 3 taxation yrs)
Deduction limited to 24 yr period (3 taxation yrs previous and 20 taxation yrs following)
4. Accounting Period
2(1) Income tax shall be paid for “each taxation year”:- “Taxation year” is set out in s.249(1)
o Individual : a calendar year (per 249(1)(b)) [pg. 1696] “Calendar year” not defined in Act, but the Interpretation Act defines
calendar year as: period of 12 consecutive months starting January 1. o Corporation: a fiscal year (per 249(1)(a)) [pg. 1696]
Defined in 249.1(1)
11(1): [pg. 42] where an individual is a proprietor of a business, his income from the business for a taxation year is deemed to be the individual’s income from the business for the fiscal periods of the business that end in the year
- The ability to select “off-calendar” fiscal periods meant individuals had ability to postpone tax on their income where the fiscal period for their business ended in the following calendar year (i.e. there was incentive to straddle income over 2 years
- To stop this s.249.1(1)(b) [pg. 1699]: was introduced:Says that for most indiv, partnerships and prof corps, no fiscal period may end after the calendar year in which it began ?(so means must use Dec 31 as the fiscal period for their business?)? FIND OUT!
Policy ConsiderationsImplications of Using Calendar Year:
1. Returns must be filed on annual basis2. Division of income into discrete yearly period incentive to postpone tax payment by
delaying the recognition of income to subsequent years (or accelerating recognition of deductions or credits to current year)
3. May cause hardship to taxpayers whose income fluctuates and “bunches” in single yrs (e.g. torts lawyer who works on file for years but only gets paid if wins)
Evaluating Income Tax Provisions
The “Technical Tax System” (policy) is evaluated on 3 criteria:1. Equity
a. Horizontal Equity: people who are situated similarly should be treated the sameb. Vertical Equity: People w/ diff incomes should be taxed diff based on ability to pay
2. Neutralityo Tax system should not affect people’s choiceso It should be assumed that people make choices in their own best interest
therefore choices after tax should be the same as in a world w/o taxes3. Administrability
o Tax system should be easy to comply with, easy to enforce, and not easy to evade
Criteria for Evaluating Income-tax Expenditures:Income tax expenditures = Gov spending in tax credits
1. What are the gov objectives in offering the spending program?2. Whether the spending program is effective, based on:
a. Whether program is target-efficient (are only the intended targets receiving it?)b. What are the distributional consequences? (do some receive greater benefit than
others, and if so is that appropriate?)c. Whether program is administrable? (can gov keep track of costs, easy to qualify for;
does delivery exclude people who should receive it?)
Income from Office or EmploymentIMP Sections: From iLaw Can
- s.3(1): says office and employment are sources of income- s.3(d): losses for the year from office, employment, business or property- s.5(1): what is included in taxpayers income from office and employment- s.6: amts to be included as income: board, lodging or other benefits (except RRSPs, group
sickness insurance plan, health insurance, supplemental employment insurance, career/mental health counseling services)
- s.6(4): Group life insurance now a taxable benefit- s.7: stock options are unique and receive special tax treatment (taxed like capital gains)- s.8: limited deductions avail to employees: legal expenses to collect or est. a legal right to
salary or wages owed by employer, sales expenses, travel expenses
A taxpayers income includes that from each “office” and “employment” (3(a))
Distinguishing b/wn Office and Employment is imp b/c 2 tax implications:o Deductions in computing income (per s.8) from employment are much less
generous than those avail in computing income from businesso Employers are req to hold and remit income and payroll taxes for employees and
themselves – thus imposing admin and financial obligations on employersThus workers and employers will usually prefer the source of an amnt be characterized as a business rather than employment (employment typically more advantageous)
Definitions: Office = the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration and includes a judicial office, minister of the Crown, legislative assembly, etc. (248(1))Employment = means the position of an individual in the service of some other person (248(1))
Income from Office or Employment = “the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year” (per 5(1))
- Losses from these sources defined in 5(2)
Contract of Service vs. Contract for Services
Contract of Service = employeeContract for Services = Independent contractor
Traditional test to distinguish comes from:
Wiebe Door Services Ltd. V MNR (1986, Fed CA)Facts:Door building co employs several door installers 12 of whom Wiebe argues are independent contractors rather than employees as CRA had reassessed to the company for CPP and EI premiumsIssue:How to distinguish b/wn employees and independent contractors?Held:Reliance on Integration Test was error of law // 4-in-1 test correct test to applyDecision of tax court set aside, matter referred back for determination consistent w/ these reasonsAnalysis:- Workers had specific understanding that they would be running their own business and would
be responsible for their own taxes, EI and CPP- Workers worked mostly on their own, mostly had their own tools, paid per job, not required to
work/attend place of businessRule:Independent Contractor Control Test:ASK: whether the person who has engaged himself to perform these services is performing them as a person in business on his own account? (yes = contract for services // no = contract of service)1) Control test: the degree or absence of control exercised by the alleged employer over HOW
work is done rather than just WHAT is done- Traditionally most imp, but now there are other factors
2) Ownership of Tools (if worker owns tools, more likely contractor)3) Chance of opportunity for profit or risk of loss4) Integration of the alleged employee into the employer’s business. (Must be judged from the
worker’s perspective – i.e. how important is the employer to the employee? Is what the worker does an integral part of their own business? – employees don’t have a business)
** Non exhaustive listControl will always be considered, but not sole determining factor; must search for the total relationship of the parties
671122 Ontario Ltd. V Sagaz Industries (2001, SCC)Facts:Sagaz hired AIM marketing // AIM bribed Canadian Tire to replace Pf as supplier of car seat coversIssue:Whether there was an employer/employee like relationship b/wn Sagaz and AIM (such that Sagaz will be vicariously liable for AIM’s bribery)?Held:AIM was an independent contractorAnalysis:Important Facts:
- AIMs office located in a different state (contractor);- Sagaz did not specify how much time AIM was to devote to Cndn Tire, AIM decided that
i.e. AIM v responsible for mgmt. of sales agents (contractor)- AIM had to cover off its own costs for travel (contractor);- AIM sales agents worked on commissions so risk of loss/opp for profit. (contractor);- AIM free to represent a variety of products (contractor);- AIM designated the Canadian Tire account as a house account (employee);
- AIM sent out letter on Sagaz letterhead (employee);Rule:Adds factors to Test from Wiebe:ASK: whether the person who has engaged himself to perform these services is performing them as a person in business on his own account? (yes = contract for services // no = contract of service)
- Whether worker hires his own helpers- Degree of financial risk taken by worker- Degree of responsibility for investment and mgmt.- Level of control- Degree of investment and management by worker
Also imp, that this list is not exhaustive (thus, intention being brought in in Wolfe:)
Wolfe v The Queen (1975, SCC)Facts:Aerospace engineer working through Kirk-Meyer for 6 years // Canadair paid Kirk-Meyer who paid Wolfe after deducting his income tax and CPPIssue:Wolfe, as an American, only subject to tax if he has permanent place of business in CanadaHeld:Wolfe = Independent ContractorAnalysis:Followed Wiebe Door and Sagaz 4-stage approachImportant Factors considered:
- W received completion bonus – incentive not to leave job unfinished (contractor)- W had specific expertise, so nobody told his how to do job (contractor)- No pension, benefits, stock options, no job security or hope for promotion (contractor)- Didn’t attend company events/meetings, different type of security card than employees- Provided T4 from Kirk-Meyer (neutral)
Rule:Adds the contract itself and intention to the Wiebe factors- Emphasized intentions of parties can be relevant: though not determinative, weight will be
given to parties intentions if they accurately reflect the dealings b/wn the partieso When a contract is genuinely entered into as a contract for services and is performed as such,
the common intention of the parties is clear and that should be the end of t search (Decary J)o Where relevant factors point in both directions with equal force, contractual intent should
rule the day (Noel J)Wiebe Door and Sagaz only briefly mention intention, but here Noel and Decary focus much more on intention
Incorporated Employees
Definitions of “office” and “employment” refer to individuals. Thus, people may choose to structure their affairs in order to avoid either characterization and incorporate themselves (b/c generally more favorable tax consequences for businesses)
- Payments to private corporations for services performed by an individual on its behalf, are char as income from business, rather than office or employment
- CRA introduced a statutory anti-avoidance rule to eliminate the tax advantages available to incorporated employees, amending the Act to exclude “personal service corporations” from
low corporate tax rates and from most expense deductions (other than e.g. payment of employment to the incorporated employee)
S. 125(7) [pg. 968] provides a “but-for” definition: but-for the existence of the company, that individual who is performing the services would be reasonably regarded as an employeeS. 18(1)(p) [pg. 123] brings the but-for test in as a limitation of the ability to deduct under s.18
125(7) [pg. 968]“personal services business” means a business of providing services where
(a) an individual who performs services on behalf of the corporation (in this definition and paragraph 18(1)(p) referred to as an “incorporated employee”), or(b) any person related to the incorporated employee
is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than five full-time employees, or(d) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year;
18(1)(p) [pg. 123]Limitation re personal services business expenses
(p) an outlay or expense to the extent that it was made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a personal services business, other than
(i) the salary, wages or other remuneration paid in the year to an incorporated employee of the corporation,(ii) the cost to the corporation of any benefit or allowance provided to an incorporated employee in the year,(iii) any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation if the amount would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount, and(iv) any amount paid by the corporation in the year as or on account of legal expenses incurred by it in collecting amounts owing to it on account of services rendered
that would, if the income of the corporation were from a business other than a personal services business, be deductible in computing its income;
“But for Test”But for position of co would person be reasonably regarded as employee of recipient of services
But-for Test was considered in: **Hauser lawyer on this case!
Dynamic Industries v Canada (2005, FCA)Facts:Mr. Martindale (M) is ironworker who incorporated Dynamic // He worked principally for SILL during the tax period in question // Dynamic paid on “cost-plus contract price” (material + hourly wage +15%): “hourly looking” so CRA regarded M as an employeeIssue:Whether Dynamic was a “personal services business” per s.125(7)
- i.e. whether Mr. Martindale would be an employee of SILL “but for” the existence of DynamicHeld:No; B/c there was no employee relationship b/wn M and SILL, “but for” test not satisfied = Dynamic
not a “personal services business” // referred back to Minister for re-assessmentAnalysis:Criticizes trial judges application of Wiebe Door test
- No basis for ownership of tools finding; Control not considered at allFacts considered important:
- Looked at work history and found M did other contracts for other firms too- M helped SILL put together bids, only if SILL won bid would Dynamic get paid for M’s time
in producing the bid- Always a risk Dynamic would not get paid by the contractor to whom providing services- M did not receive guidance on working hours and reported on an ad hoc basis to SILL
Rule:Apply the Wiebe/Sagaz test, if found to be independent contractor, “but for” test in s.125(7) will not be satisfied
I. Inclusions
Income from office or employment The “salary, wages and any other remuneration, incl’ing gratuities rec’d by the TP in the yr” (s. 5(1))
- Remuneration can be for past, present or future compensation for services- Remuneration includes everything: salaries, wages, tips, gratuities, etc. that you receive in
the year
Remuneration
6(3) Payments by Employer to Employee :Deems a payment to be remuneration for services rendered as an officer or employee where it is received by one person from another:
(a) during a period while the payee was an officer of, or in the employment of the payer, or (b) arising out of an obligation made immediately prior to, during or immediately after the person was employed.
shall be DEEMED , regardless of legal form or effect, to be remuneration… unless it cannot reasonably regarded as having been received:
(c) as consideration or partial consideration for entering into an employment contract(d) as remuneration or partial remuneration for services as an officer under the contract of
employment, or(e) in consideration for partial consideration for a restrictive covenant re what the
employee is to de before or after termination of employment*So if you receive bonuses before or after employment you are subject to tax unless it fits into one of these 3 exceptions
None of the terms “fees”, “salary”, “wages”, “gratuities” or “remuneration” are defined in Act- So dictionary definitions start any interpretation
- Fee = a charge fixed by law for services; recompense for an official or professional service; a charge or compensation for particular act/service; fixed charge as recompense for labour; reward, compensation or wage given
to a person for something done Re Office
- Salary = reward or recompense for services performed. A fixed periodical compensation paid for services rendered. A stated compensation paid periodically as by the year, moth, or other fixed period, in contrast to wages which are normally based on an hourly rate
Re Employees- Wages = Compensation given to a hired person for his service. Compensation
of employees based on time worked or output of production Re Employees
- Gratuity = Something acquired or received w/o bargain or inducement; given freely w/o recompense; gift/ Something voluntarily given in return for a favour or especially a service; bounty; tip; bribe
Either Office or Employee- Remuneration (generic term encompassing ea. of above) = Payment;
reimbursement; reward; recompense; salary; compensation
Inducement PaymentsWhere TP receives an inducement to accept an offer
- 6(3) deems most inducement payments taxable remuneration- However, 6(3) only applies where payment is received “by one person from
another” during a period of where payee was in the employment of payer so does not apply where an inducement payment is made by someone other than the recipient’s current or future employer
Pre-Employment Amounts:
Curran v MNR (1959, SCC)Facts:C worked at Imperial, eligible for lucrative pension IF he didn’t leave Imperial // Was headhunted and got inducement personally from headhunter in form of $250K bonus in consideration for the loss of pension, advancement, etc // CRA assesses the amnt as employment income // C argues he sold his pension in exchange for the 250K and thus it was a “capital gain”Analysis:If C gave something up (pension) then headhunter must have acquired something - w/o this could not have been a disposition of capital property by CHeld:Funds were income from employment as a part of his providing servicesRatio:Inducement payments made by future employers will be considered income under s.6(3). essence of matter was the acquisition of service and the engagement by the employer of the prospective employee
Compensation for Breach or Waiver of Contractual Obligation
Moss v MNR (1963, Exch)Facts:M is asked to quit his job b/c Co wants to sell to lrgr Co // Employment contract gave M opp to buy all assets of co. for 90% of their value if co was ever sold –- So Co pays M $34K not to act on this right // Minister includes this amount in incomeIssue:Is the amnt paid for a waiver of contractual obligation considered income under 6(3)? YESAnalysis:Right to purchase for 90% and the life insurance policy were part of M’s employment contract these things formed part of his employment compensationHeld:Amount is deemed to be remuneration and therefore is taxable under ITARule:Payments for waiver of contract are considered income under s. 6(3)
Post-Employment Amounts
56(1)(a)(ii)There shall be included in computing income, any amount received by TP as, on account or in lieu of payment of, or in satisfaction of… a retiring allowance, other than an amount received under employee benefit plans, retirement compensation arrangement or a salary deferral arrangement.
Retiring Allowance = an amount received (other than pension): 248(1)(a) on or after retirement of a TP from office/employment as recognition of employees long
service or (b) in respect of a loss of an office/employment, on account or in lieu of payment of damages
or pursuant to an order of tribunalo “Retirement” here incl asked to quit/fired
Quance v Canada (1974, FCTD)Facts:Q was Co prez // Verbal contract Q to receive 4 raises in 11 years and participate in stock and pension plans // Re striking employees Q asked by parent Co to resign // Given 9.5 mo pay by way of regular cheques ea mo from which income tax was deductedIssue:Whether amounts of cheques were properly taxed? YESAnalysis:Payments were made in obligation arising out of employment contract (pay in lieu of notice)If Q had to sue for $ the damages received for dismissal w/o notice is to replace income deprived of
- Reason for award: damages for breach of employm contract: give them t quality of incomeHeld:Payments were made as replacement for salary that would have been awarded w/ proper notice This gives them the quality of income considered remuneration w/in s. 6(3)Rule:
The reason for an award of damages can infuse the damages w/ the quality of income, making them taxable
Torts DamagesGenerally not attributable to employment, property or business sources
Cirella v Canada (1978)Facts:Due to car accident C unable to work for employer b/c heavy lifting invol // C carries on business of his ownIssue:Whether C liable for income tax for special damages awarded to him in torts claim? NOAnalysis:C can only be liable for tax if it is income from employment
- amnt paid to him was not earned in pursuit of employment/trade;- damages awarded in personal injury are to compensate injured person for wrong done to
him, including the impairment of earning capacityHeld:Tort damages do NOT have character of incomeNB: Surrogatum Principle: Damages are neutral payments, and must be categorized. Test: would the sum of money for which compensation is replacing have been otherwise taxable?
NOTE: Where taxpayer suffers personal injury or death while performing duties of office/employment compensation typically avail under WCB schemes which generally bar any recovery in tort
- That compensation is included in computing recipients net income under 56(1)(v), an offsetting deduction is avail unfer 110(1)(f) in computing taxable income effectively exempting WCB payments from tax
Benefits6(1)(a): income from employment or office includes “the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of or by virtue of an office or employment”
General Rule6(1)(a) applies where a “benefit” is received or enjoyed by taxpayer in respect of, in the course of, or by virtue of an office or employment”, in which case the value of the benefit must be included in computing income from office or employment
TEST to see if 6(1)(a) applies:1. Characterize the benefit2. Determine relationship b/wn benefit and taxpayer’s employment3. Determine value of the benefit
1. Characterizing the Benefit
Lowe v Canada (1996, FCA)
Facts:L was account executive for Insurance Co. // Employer sent L and his wife to New Orleans for a week to build a rapport w/ brokers //
- Minister said taxpayer rec’d benefit under 6(1)(a) so portion of trip value should be included in income
- TP testifies he was there to work, only 2 hrs free each day, was not free to do as he wishedIssue:Whether trip constitutes a benefit under 6(1)(a) and should be included as income? NOAnalysis:TP and wife required to attend all expenses paid, but full days planned out business trip (talks, meetings, conferences, entertaining brokers and their wives)
- Benefit of this was to the employer, not employeeHeld:Though they had a few hours to themselves, taking the trip was primarily a benefit to the employer, any advantage to L was incidentalRule:If personal enjoyment is incidental to primarily business purpose not taxable
2. Determining the relationship b/wn the benefit and office or employment- For an amnt to be included as a benefit under 6(1)(a) it must have been received or enjoyed
by taxpayer “in respect of, in the course of, or by virtue of an office or employment”
R v Savage (1983, SCC)Facts:Co offered courses voluntarily taken by S to improve her knowledge of life insurance field // Rec’d $100 from employer if successfully passed 3 courses // Employer reported $300 under “other income” and claimed it as an expense of doing business // S ≠ incl payment in computing incomeIssue:Whether $300 prize given on completion of company offered courses taxable benefit? YESAnalysis:“in respect of” make the provision the widest possible in scope (Nowegijick): mean “in relation to, w/ reference to, in connection w/” which means some type of connection req.
- Employer paid in accordance w/ Co policy designed to encourage upgrading staff- S took course for better opportunity of promotion
enough of a connection to bring it w/in 6(1)(a)Held:S rec’d a benefit & it was in the course of employment Payments were in respect of employment
3. Valuation of the Benefit
Detchon v Canada (1995, TCC)Facts:TP = Teachers at private school in QB where teacher’s kids could attend free // marginal cost to school for providing benefit is zero
- Teachers argued the value of the benefit = to the cost to the school of providing the benefit- CRA said the value is that of sending a kid to that school
Issue:
How do you place value on a benefit?Analysis:
- Marginal and alternative cost not appropriate methods of valuation (b/c parents did receive econ benefit and child received a value in education)
- Rejected arg that value of benefit is cost of obtaining education elsewhere in QB it is the value of the benefit at this school which is to be considered
- Average cost per student is appropriate method to valuate benefit: Average = market priceHeld:Value is the average cost to the school of educating a studentRule:There are different ways to argue what the value of something:market value; present value (cost to provide service); subjective value to recipient; comparable value (value of something comparable on the market); amnt charged to arms length purchaser
Automobile Benefits
Automobile = a motor vehicle that primarily to carries people on highways and streets and that has a seating capacity for not more than the driver + 8 passengers (s. 248)
- (c) Doesn’t incl. a bus, but anything short of a minibus is incl.- (b) Doesn’t incl. ambulances, (b.1) EMS vehicles, (c) vehicles primarily used as taxis- (e)(i)Doesn’t incl. vans or pickup trucks which has seating for only driver + 2 passengers
and is used primarily for transporting equipment/goods in course of producing income- (e)(ii)Doesn’t incl vans or pickup trucks which is used all or substantially all for the
transportation of good, equip or passengers in course of producing income (regardless of passenger capacity)
*”Primarily” = mostly (>50%)*”All or substantially” = 90% or more
6(1)(a)(iii) explicitly excludes from the general rule governing taxable benefits, any benefit in respect of the use of an automobile
- Automobile benefits are subject to specific rules under 6(1)(e), (k) and (l)
2 Forms of Taxable Benefits:1. Operating Expenses:
Taxed on the value of personal net operating costs that employers pay on their behalf. 2. Standby Charges:
Taxed on the benefit of “availability” of the car for employee’s personal use, regardless of whether it is used
Standby Charge6(1)(e) provides that where the taxpayer’s employer…made an automobile available to the taxpayer, or to a person related to the taxpayer, he must include in income from office/employment the amount, by which
(i) an amount that is a reasonable standby charge for the automobile for the total number of days in the year during which it was made so available
exceeds(ii) the total of all amounts [paid in the year]
So employees are taxed on the benefit of “availability” of the automobile for the employee’s personal use –- Regardless of whether the car is actually used
Hewitt v Canada (1995, TCC)Facts:H employed by his own electrician company – used Co’s Mazda 75% of time for work purposes until Oct 1990 when insurance/reg expired and wasn’t renewed // CRA reassesses him for vehicle as available through 1990/1991
- H claims shouldn’t have to incl Mazda as a benefit (“standby charge”) b/c not used after Oct- CRA says as sole Co shareholder he had full control over potential use of vehicle and could
have insuredIssue:Whether H should have to incl amount calculated as a benefit from the Mazda into his income? NOAnalysis:Look at whether vehicle was “available for use”
- It is difficult to see what benefit was being derived by H by mere existence of the Mazda- Vehicle w/o insurance/reg is not “available” to someone for whom the benefit provisions of
the Act applyHeld:Assessment referred back to CRA for reassessment
- 1990: benefit re Mazda standby charge can be calc’d on basis of Jan-Oct- 1991: no standby charge
Rule:- When a company vehicle is available for personal use it is a taxable benefit.- A vehicle is not “available” where is is not insured/registered lawfully
Reasonable Standby Charge = is defined by a formula in 6(2):
Reasonable standby charge formula for when employer owns the car:- This dictates the exact amount to be incl in employee’s income as the value for the number
of days in the taxation year the car is made available to the TP or someone related to him.
A/B x (2% x (C x D))
A = the lesser of: C = full cost of vehicle incl GST and PSTa) total personal use kms drivenb) value of B
B = 1,667 x (total days available) D = total days available (30) 30
*as between A/B: numerator will = denominator unless employee *round to nearest whole numberis required by employer to use car for employment and distance travelled by car in avail days was primarily (>50%) for employment
Side note from Notes:
He asked this in class so might be exam worthy? Don’t worry about it otherwise:
A can be less than the amount of B if 3 criteria are met:1. If the employer requires the employee to use the automobile in connection w/ employment
(this is (i) in A’s formula)2. If the distance travelled by the car is primarily in connection w/ employment (IMP: “primarily”
means >50% here [“principally” by contrast, means more than any other use)(this is (ii) in A’s formula)
3. If during the period the car is avail, the kms employee drives the vehicle for personal purposes is less than 1667 kms
A/B can never be more than 1
Amount of Operating BenefitEmployees are taxed on the value of personal net operating costs that the employer pays on their behalf
- Gov’d by 6(1)(k) and 6(1)(l)
6(1)(k) says the amount of the operating benefit is calculated as:
A - BA = the lesser of:
a) the per km operating benefit of having a car = 27 cents/km in 2013b) ½ standby charge
B = all amounts paid by the taxpayer to the payor in respect of the operation of the car in the year or w/in 45 days after the end of the year.
Side Notes from Class in case he asks more details about how this Operating Benefit is calc’d
Automobile operating expense benefit(k) where
(i) an amount is determined under 6(1)(e)(i) in respect of an automobile in computing the taxpayer’s income for the year,(ii) amounts related to the operation (otherwise than in connection with the taxpayer’s office/employment) of the automobile for the period in the year during which the automobile was made available to the taxpayer or a person related to the taxpayer are paid or payable by the taxpayer’s employer or a person related to the taxpayer’s employer, and(iii) the total of the amounts so paid or payable is not paid in the year or within 45 days after the end of the year to the payor by the taxpayer or by the person related to the taxpayer,
the amount in respect of the operation of the automobile determined by the formulaA - B
Where A =(iv) where the automobile is used primarily in for office or employment during the period and the taxpayer notifies the employer in writing before the end of the year of his intention to have this subparagraph apply, then it is 1/2 of the amount determined under 6(1)(e)(i) in respect of the automobile in computing the taxpayer’s income for the year, and
so if you drive car for primarily employment purposes, then operating
charge can electively be stated as ½if not primarily for employment, or you don’t elect to use this provision then you are in (iv) below
(v) in any other case, the amount equal to the product obtained when the amount prescribed for the year is multiplied by the total number of kms that the car is driven (otherwise than in connection with office or employment) during the period or periods referred to in 6(1)(k)(ii), andWhere “amounts are prescribed” is in the Regulations: 7305.1 (pg 2220 of Act)
The per km operating benefit of having a car in 2013 = 27 cents/kmB =Total of all amounts in respect of the operation of the automobile paid in the year or within 45 days after the end of the year to the payor by the taxpayer or by the person related to the taxpayer;
6(1)(L) applies where an employer does not make an automobile available to an employee but confers on an employee a benefit in respect of the operation of an automobile owned or leased by the employee himself
- Here, provided the benefit is conferred on the employee in the course of employment, the employee must include the “value” of the benefit in computing his income from office or employment
o IT Bulletin IT-63R5 says the “value” of the benefit is calc’d by determining the ratio of the personal use kms to the total kms multiplied by the operating costs of the vehicle paid by the employer
Operating costs = gas, oil, maintenance charges and repair expenses, and some other costs (licenses and insurance) but does not include the cost of acquiring or leasing the car
Insurance Benefits
6(1)(a)(i) says the following are excluded from being taxable benefits under 6(1)(a)*i.e. 6(1)(a)(i) is an exception to 6(1)(a)
o Group sickness amount of benefit received is taxable under 6(1)(f) o Accident Insurance amnt of benefit received is taxable under 6(1)(f)o Group Term Life Insurance Policy benefit derived is taxable under 6(4)o Private Health Services Plan – fully exempt from taxo Profit Sharing Plan
Employees are exempt from tax on wage loss replacement insurance plans to which their employer has made a contribution
- However the payments actually received by the employee is taxable for the employee- Thus characterizing the plan as one to which an employer has contributed is most
advantageous ex ante (beforehand) - BUT characterizing a plan as an employee pay all plan is most advantageous ex post (after
the fact) for those who actually receive benefits under these plans
So w/ long term disability you’re better off to pay yourself (rather than the employer) so whatever
you collect under the plan is tax-free to you
Tsiaprailis v The Queen (2005, SCC)Facts:Rec’d long term disability for 8 years, Manulife terminated benefits // T sued Manulife and rec’d lump sum payment of $105K after signing release in which Manulife denied all liability - paid $18K in costs, GST and disbursements// MNR reassessed T to incl $105K less legal expenses as incomeIssue:Whether lump sum payment under wage loss replacement plan is taxable under 6(1)(f)? YESAnalysis:Majority: (Charron)Look at Surrogatum Principle to determine taxability here: Determinative Qs are:
1. What was the payment intended to replace?2. Would the replaced amnt have been taxable in the recipient’s hands?
Here, part of settlement was intended to replace past disability payments – had they been paid to T originally, they would have been taxable
- thus portion of lump sum allocated to these arrears is taxableDissent (Abella)Lump payment was to extinguish liability for T’s disability claims, not made in accordance w/ the disability insurance policy – thus was not a payment made pursuant to itHeld:Portion of lump sum payment allocated to Manulife’s arrears for missed payments is taxableRule:Surrogatum Principle
Interest Free and Low Interest Loans
s. 6(9) says income from office/employment includes an amnt in respect of a loan or debt that is deemed by 80.4(1) to be a benefit rec’d in a taxation year by an individual
s. 80.4(1) says where a person “received a loan or otherwise incurs a debt b/c of or as a consequence of a previous, current or intended office/employment of an individual”, the individual is deemed to have rec’d a benefit in a taxation year equal to the diff b/wn:
1. The total of all interest on the loan or debt computed at a prescribed rate for the period it was outstanding (a) + all interest paid/payable in respect of the loan or debt by the employer (b)
2. The total of interest paid on the loan or debt w/in 30 days after the end of the taxation year (c)+ any portion of any interest paid/payable by the employer that is reimbursed by the debtor in the year or w/in 30 days after the end of the taxation year (d)
“Prescribed Rate” in Reg 4301 (dep on whether you owe money to CRA or CRA owes you) pg. 2038- Interest rate is higher where you’re paying CRA // lower where they’re paying
Canada v Hoefele (1995, FCA)
Facts:5 taxpayers req by employer (Petro) to relocate from Calgary to Toronto // Petro instituted relocation incentive: paid any increase in interest charges on mortgages taken out on costlier Toronto homes // Financing taken on homes to be arranged through normal means (Petro ≠ invol)Issue:Whether the interest subsidy qualifies as a taxable benefit under 80.4(1)? NOAnalysis:For interest to qualify as taxable benefit under 80.4(1) it must be from a loan or debt incurred “b/c of”, “as a consequence of “ or “by virtue of” employment
- It’s not the benefit that must arise b/c of employment, but the debt must be incurred b/c of employment
Must be close causal connection b/wn debt and employment (closer than that req in 6(1)(a))- No strong connection here: TPs just did what they had to and traded like for like- Had to qualify for loans on their own merits; subsidy given to defray pary of interest
increases involDissent: (Robertson)But for their employment w/ Petro TP would not have rec’d monthly interest subsidy // In effect TPs rec’d loans (mortgages) at reduced rate which is what 80.4 was designed to captureHeld:Loans/debt incurred was to retain ownership of a house, not incurred by virtue/consequence/b/c of employment
- subsidy did not increase taxpayer’s equity in their homes- their net-worth was not increased
Thus not taxable benefit under 80.4(1)
Relocation AssistanceSee Hoefele case (directly above) as well as:
Splane v MNR (1990, FCA)Facts:Taxpayer transferred from Ottawa to Edmonton compensated by employer for increased mortgage interest payments on new residence // Minister argued was taxable benefitHeld:NOT a taxable benefit
- No econ benefit was conferred on S: he moved at employers request and incurred expended- Reimbursement of that loss cannot be considered benefit – he was simply restored to econ
situation he was in before he undertook to assist employer by relocating
Pezzalo v Canada (1995, TCC)Facts:P was employee of pan-Canadian construction co – transferred to Toronto and received $13K as reimbursement of interest expenses on money taxpayer had to borrow to acquire house in Toronto while unable to sell former houseHeld:This WAS a taxable benefit
- If employers wish to ensure their employees do not suffer tax burden resulting from the
conferral of benefits they should gross up the benefit by the tax cost, including the tax on the amount of the gross up, afer all the employer can deduct it
Phillips v MNR (1994, FCA)Facts:Taxpayer was carman w/ CNRail received $10K “relocation payment” after transferring to Winnipeg when Moncton closed its shopHeld:Payment enabled P to acquire a more valuable asset = increase his net worth WAS tax’ble benefit
6(23) effectively overrule decisions in Splane and Hoefele - housing on relocation of an employee is included in come regardless of the form in
which such assistance is rec’d
IT-470R: Re Moving Expenses- Where employer reimburses employee for expenses incurred in moving, either b/c
employee transferred from one est. of the employer to another or b/c having accepted employment at place other than where former home located:
reimbursement NOT considered conferring a taxable benefit on the employee
- Where the employer pays the expense of moving an employee and thei family/household out of a remote place at the termination of the employment there,
NO taxable benefit is imputed
AllowancesIn addition to remuneration and benefits, taxpayers must incl. “all amounts rec’d in the year as an allowance for personal or living expenses or as an allowance for any other purpose” (s. 6(1)(b))
o Exceptions listed in 6(1)(b)(i)(xi)
Characterizing what is an “Allowance”Allowance not defined in Act
- Courts have held: amnts paid are an “arbitrary amount”, pre-determined w/o regard to the actual amount of the expenses incurred
MacDonald v Canada (AG) (1994, FCA)Facts:M was RCMP officer paid $700/mo as housing subsidy after transferred from Regina to Toronto
- did not incl this amnt on tax return and was reassessedIssue:Whether housing subsidy is an “allowance” under 6(1)(b)?Analysis:Purpose of 6(1)(a) and (b) to capture gains arising from taxpayer’s enrolment that in effect increase TPs income from employment
1. $700 was predetermined “round” amnt – arbitrary b/c not calc’d re specific expense2. $ was for particular purpose (to subsidize accommodation costs)
3. Rt rec’d money totally in his discretion, not req to account for rent to receive paymentsHeld:Housing subsidy WAS taxable allowanceRule:“Allowance” has 3 elements (Ransom v MNR):
1. An arbitrary amount – predetermined sum w/o specific reference to any actual expense or cost (but may be set through projected expenses)
2. 6(1)(b) encompasses allowance for person or living expense OR for any other purpose so that allowance usually for specific purpose
3. It is in the discretion of recipient in that he may not need to account for the expenditure of the funds towards an actual expense
Exceptions
6(1)(b)(i) – (ix) are exceptions to 6(1)(b) requirement re allowances:
- (v) reasonable allowances for travel expenses when employee was employed in connection w/ selling property or negotiating contracts for employer (Q = was it reasonable)
- (vii) allowances for travel expenses (other than for use of car) other than an employee employed in connection w. selling property or negotiating contracts, for travelling away from
(A) the municipality where employer’s establishment at which employee ordinarily worked or reported, and
(B) the metropolitan area, if there is one, where that establishment was locatedin the performance of the duties of the employee’s office/employment
- (vii.1) reasonable allowances for use of motor vehicle by employee (other than employee employed in connection w/ selling property or negotiating contracts) for travelling in the performance of the duties of the office/employment
- (x) modifies this: allowance rec’d here shall be deemed not reasonable where measurement of use of vehicle is not based solely on the number of kms used in the course of employment
- (xi): where benefit is rec’d and is reimbursed in whole or in part, allowance is taxable to the employee
Defining “Travel Expense”:
Blackman v MNR (1967, TAB)Facts:B had to move (3-4 mo at a time) outside municipality of employer’s main establishment in course of employment operations // Allowance provided by employer to cover “out of pocket expense & additional expenses while away from home” (co’s finance mgr said for travel, meals, laundry, entertainment) // B ≠ incl amnts in computing income // MNR reassessed adding allowanceIssue:Whether allowance for “travel expenses” in connection w/ employment so as to fall into allowance exception under 6(1)(b)(vii)? NOAnalysis:
- B not travelling from place to place but in fact living at different places in the performance of duties of employment
- Purpose of legislation: to give same treatment to all employees of a designated trade – if having to travel in performance of duties and got expenses to make up for personal expenditures, shouldn’t be taxed more than those who don’t have to travel
Held:Allowance for personal/living expenses rather than travel expensesAllowance NOT exception to 6(1)(b) and are taxable
Statutory Exclusions
6(6) exempts certain benefits/allowances rec’d by TP who is employed at a “special work site” or “remote location” – applies where an employee’s duties at a special worksite or remote location require him to be away from his principle place of residence a the site for at least 36 hrs
(a) exempts the value of, or a reasonable allowance in respect of, expenses that TP incurred for board and lodging
(b) exempts benefits/allowances for transportation b/wn special worksite and taxpayer’s principle place of residence
What is a “Special Worksite”
Guilbert v MNR (1991, TCC)Facts:G took temporary position in QB City on basis he would be appointed chairman of newspaper he worked for in Ottawa // Condition: newspaper provided him free apartment during stay // G maintained principle residence where wife live, he returned on wknds // Continued to occupy position in QB City months after learning he’d not be getting position in OttawaIssue:Whether QB City apartment = “special worksite”? NOAnalysis:6(6)(a)(i) defines “special worksite” as:
(i) a special work site, being a location at which the duties performed by the taxpayer were of a temporary nature, if the taxpayer maintained at another location a self-contained domestic establishment as the taxpayer’s principal place of residence
(A) that was, throughout the period, available for the taxpayer’s occupancy and not rented by the taxpayer to any other person, and(B) to which, by reason of distance, the taxpayer could not reasonably be expected to have returned daily from the special work site
Looking at legislation reforms: revision extended provision from construction workers to include lumber and mining workers, oil well drillers, exploration crews, and employees at isolated bases.Held:A worksite is a work site and cannot refer to just any place of workRule:Temporary Job in the City which includes a free apartment is not a special work site.
6(6)(a)(ii) exempts “a location at which, by virtue of its remoteness from any established community, the taxpayer could not reasonably be expected to establish and maintain a self-contained domestic establishment”
Self Contained Establishment = “dwelling-house, apartment or other similar place of residence in
which place a person as a general rule sleeps and eats” (s. 248(1))
Dionne v Canada (1996, TCC)Facts:D lived in small remote village as teacher – given salary and equalization adjustment measures to compensate for quality of life and high cost of living, incl cost to transport perishable food // D challenged inclusion of the expenses incurred to transport food reimbursed by him to his employerIssue:Whether D had a self-contained domestic establishment? YESAnalysis:D argues size of village and services there did not = established community – court disagreed – there was school, nurses, and a co-op which is sufficient to constitute an est. community
- Also, D had lodging where he could eat and sleep = domestic establishmentD argues he could only have established/maintained self contained establishment if it was permanent – court looks at defin of “maintain” and “establish” and says most important part is stability, not duration; no requirement for permanencyHeld:D had self contained domestic establishment so 6(6)(a)(ii) not met and benefit must be included in computing D’s incomeRule:If a person moves into a lodging where he eats and sleeps over many months, that is enough to “establish” and “maintain: a self-contained domestic establishment
II. Deductions
Overriding general limitations:s. 67: In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances
applies to ANY deduction (not just re office/employment)
s. 67.1(1) for the purposes of this Act, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per cent of the lesser of
(a) the amount actually paid or payable in respect thereof, and(b) an amount in respect thereof that would be reasonable in the circumstances
Travel Expenses
s. 8(1)(h)(i) To deduct travel expenses, TP must have been “ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in diff places”
Travel ExpensesTravel expenses can be deducted…s.8(1)(h) where the taxpayer, in the year,
(i) was ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in different places, and(ii) was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment,
amounts expended by the taxpayer in the year (other than motor vehicle expenses) for travelling in the course of the office or employment, except where the taxpayer
(iii) received an allowance for travel expenses that was, because of 6(1)(b)(v), 6(1)(b)(vi) or 6(1)(b)(vii), not included in computing the taxpayer’s income for the year, or(iv) claims a deduction for the year under paragraph 8(1)(e), 8(1)(f) or 8(1)(g);
Motor vehicle travel expensesMotor vehicle travel expenses can be deducted where…S.8(1)(h.1) where the taxpayer, in the year,
(i) was ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in different places, and(ii) was required under the contract of employment to pay motor vehicle expenses incurred in the performance of the duties of the office or employment,
amounts expended by the taxpayer in the year in respect of motor vehicle expenses incurred for travelling in the course of the office or employment, except where the taxpayer
(iii) received an allowance for motor vehicle expenses that was, because of paragraph 6(1)(b), not included in computing the taxpayer’s income for the year, or(iv) claims a deduction for the year under paragraph 8(1)(f);
8(1)(j) where a deduction may be made under paragraph 8(1)(f), 8(1)(h) or 8(1)(h.1) in computing the taxpayer’s income from an office or employment for a taxation year,
(i) any interest paid by the taxpayer in the year on borrowed money used for the purpose of acquiring, or on an amount payable for the acquisition of, property that is
(A) a motor vehicle that is used, or(B) an aircraft that is required for use
in the performance of the duties of the taxpayer’s office or employment
8(10) further requires the employer to sign a prescribed form, certifying the conditions set out in the provision were met, which much be filed w/ income tax return
- This is form T2200
3 Requirements for these Deductions1. Employee must have been “ordinarily required” to carry on business away from employer’s
ordinary place of business“Ordinarily” is defined in IT-522R:"ordinarily" means "customarily" or "habitually" rather than "continually," but should be some degree of regularity in the travelling that the employee is required to do
2. Employee required to pay ravel expenses incurred3. Employee must not have received a travel allowance
Nelson v MNR (1981)Facts:N accepted position of contract manager of Konvey’s project at Ont. PO College // Konvey’s head office in Toronto // N claims he was ordinarily required to carry on his duties away from his employer’s “place of business” in Toronto and wants to deduct travel expenses under 8(1)(h)(i)
Issue:What is meant by “employer’s place of business”?Analysis:8(1)(h)(i) refers to estb’mt the employee was hired for/assigned and ordinarily reports for work
- Employment contract did not refer to Toronto office // assigned to place at PO College- Letter stated “traveling on company business away from employers place of business is
exceptional”Held:Nature of N’s duties ≠ require he carry out his duties away from “employer’s place of business”Ratio:Employer’s place of business should be interpreted in relation to the taxpayer – to the place he was hired or assigned and ordinarily reports for work
- 8(1)(h)(i) ≠ refer to employer’s head office or admin office, but specifically to the establishment the employee was hired for, to which he was assigned and at which he ordinarily reports for work
8(1)(h)(ii) stipulates that in order to deduct travel expenses, TP must have also been req nder contract of employment to pay the travel expenses incurred in the performance of his duties of the office/employment
Canada v Cival (1983, FCA)Facts:C worked at Dept Ntn Revenue using own car to carry out duties of employment // Expenses for car in his work exceeded mileage payment he rec’d fr employer by $500 and so he claimed that amount as a deduction from his income // Minister disallowed itIssue:Whether C was required by contract of employment to pay the automobile expenses incurred in order to be entitled to deduction under 8(1)(h)? NOAnalysis:Trial Judge
- Arrangement re use of car was a contract under which C was impliedly required to pay expenses incurred to the extent the costs exceeded his mileage reimbursement
FCA- Terms of employment were in collective agreement // arrangement re car was if anything, a
unilateral contract under which employer undertook to reimburse C for using his caro Did not invol promise by C to use his car and pay out of pocketo C not contractually bound to use car in doing job nor to pay expenses
Held:C not required to pay expenses incurred by him in the use of his car CANNOT claim the expenses as deduction under 8(1)(h)Rule:Voluntary use ≠ “required”. (To claim deduction, need to prove that failure to use personal car will lead to termination, otherwise the court may conclude you voluntarily used your own car)
8(1)(h)(iii) also imposes requirement for deducting travel expenses in course of office/employment that employee must not have rec’d travel or motor vehicle “allowance” that is
exempt from tax under 6(1)(b)
Yurkovich v MNR (1986, TCC)Facts:Y calc’d total automobile expenses incurred = $6400, reporting $2100 of this was rec’d fr. employer calc’d per km // Y calcu’d his expenses on that he’s used vehicle 56.2% of time for businessIssue:Whether Y qualifies under 8(1)(h)(iii) as NOT having rec’d an allowance for travel expenses?Analysis:Amount from employer: no evidence that mileage rates were calc’d in advance, in anticipation of travel but rather were paid as a result of claims made by Y subsequent to travel
- This places the amount from employer outside 6(1)(b)(vii) and 8(1)(h)(iii)Held:Y’s claim is granted b/c 8(1)(h)(i) and (ii) are met ((iii) is inapplicable)Rule:If you receive a reimbursement, s.8(1)(h)(iii) doesn’t apply: and you can deduct the travel costs.If you receive an allowance, s.8(1)(h)(ii) says you cannot make the deduction from your income for the travel costs.
Travel in the Course of Office or Employment8(1)(h) and (h.1) authorize deductions of “amounts expended by taxpayer in the year for travelling in the course of office or employment”
Luks v MNR (1958, Ex Ct)Facts:Under terms of union contract governing employment, L req to provide heavy load of tools in use of his work – able to leave tools on premises at own risk // L carried tools in car in which he travelled 47 miles to/from work every day // Deducted $1239 as travel expenses, claiming carrying tools were part of duties of employmentIssue:Whether expenses were for “travelling in the course of his employment” under 8(1)(h)? NOAnalysis:Wording of rule provide if employee is “necessarily obligated to incur the expenses of traveling in performance of duties” then they may be deducted (Ricketts v Colquhoun) Expenses not necessary obligation here:
- incurred b/c he lives away from place of work & must travel to that place to perform duties- incurred partly before duties fulfilled and partly after- that it was practical to do so does not make it part of duties of employment- journey not made for employer’s benefit; employer had no control over L during trips
Held:Travel b/wn home and work and carrying tools NOT part of duties of employment
- Travel made in consequence of employment but not “in the course of employment”Rule:Employee must be “necessarily obligated to incur the expenses of traveling in performance of duties” in order to be deductible
MealsTP who seek to deduct costs of meals and travel expenses hunder 8(1)(h) or (f) must satisfy requirement in 8(4):
That meal was consumed during period while TP was required by the his duties to be away, for a period of not less than 12 hours, from the municipality where the employer’s establishment to which the TP ordinarily reports for work is located, and away from the metropolitan area, if there is one, where it was located
o If traveling for less than 12 hours, you’re expected to pack a lunch
Healy v Canada (1979, FCA)Facts:H employed by Ont Jockey Club, required to work at 3 tracks: 2 in TO, 1 at Fort Erie // Rec’d no reimbursement for while in FFE // H deducted these costs from income // Minister rejects deduction of $500 for mealsIssue:Whether this employment situation brings H w/in 8(4) to deduct meal expenses from income? YESAnalysis:Purpose of provision (8(4)):1. Find municipality where employee usually reports for work
o “Ordinary” when used w/ “reporting for work” = reporting in the larger sense, not just “in most cases”
o H spend 2/3 of time working in TO so he “ordinarily” worked in TO – so FE not the municipality in which he “ordinarily worked”
2. Find whether he is entitled to meal expenses deducted for having been away from the municipality for > 12 hrs in the course of employment
Held:Objective of 8(4) is to prevent abuses in applying 8(1)(h) which enables employees to deduct out of pocket expenses when required by employment to work away from usual workplace
- H can deduct meals under 8(4) in this caseRule:“Ordinarily” = as a matter of regular occurrence
Legal Expenses8(1)(b) allows taxpayer’s to deduct “amounts paid by taxpayer on account of legal expenses incurred by the taxpayer to collect or establish a right to an amount owed to the taxpayer, that if received, would be required to be included in computing income”
Werle v The Queen (1995, TCC)Issue:Whether appellant can deduct $30K in legal fees paid re lawsuit brought against former employer for wrongful dismissal and wages he was entitled to? YES - ishHeld:W may deduct legal fees incurred BUT amount is limited to fees in respect of the issue that he had an employment contract which entitled him to 9 mo. wages in the event of a dismissal, but not re
issue of wrongful dismissal (though deductible under diff provisions)Rule:“to establish a right to” in 8(1)(b) adds 2 principles:
1. The legal fees may be for purpose of estb’ing a right (i.e. litigation ≠ need to be successful)2. The “right” which may be litigated is a claim to an entitlement to salary/wages
Professional Membership Dues
8(1)(i)(i) says tax payers may deduct “annual professional membership dues in the payment of which was necessary to maintain a professional status recognized by statute” to the extent that they have not been reimbursed and are not entitled to reimbursement
MNR v Montgomery (1970, Ex Ct)Facts:M claimed deduction of $43 which he’d paid as wardroom dues as an officer in Naval Reserve // Evidence that if member refused to pay, could end in release from service // MNR disallowed //Issue:Whether this was truly professional membership dues? NOAnalysis:Meaning of word “profession”, concluded Pt had in mind, the concept of organized societies of professional persons which have been given special status by the state – incl Naval Reserves
- But wardroom dues not w/in 8(1)(i)(i) b/c the provision inherently has a direct relationship b/wn membership in professional society and professional status
- Wardroom dues not paid to maintain officer status, but rather to defray costs of the mess- Possibility of loss of status for not paying too remote
Held:Wardroom dues not deductible as professional membership duesRule:Need to have “profession” which is an organized society given special status by the stateFees must have connection to maintaining professional status
Office Rent8(1)(i)(ii) says TPs may deduct amounts paid by the TP as “office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment”
Prewer v MNR (1989, TCC)Facts:P employed by Co experiencing difficulties so to help agreed to add to workload and do regular tasks at home, outside office hrs // Converted 1/3 bedrooms to office // Deducted 1/3 cost of maintaining home // MNR disallowed deductionAnalysis:Reasonable expenses of using space in ones home as office away from employer’s establishment are deductible under 8(1)(i)(ii)
- P was required to maintain office in her home at own expense - implicit in accepting duties
What is reasonable cost for deduction?- Residence has 12 rooms total, no evidence that any common rooms were used as office so
office was 1/12 of space she had to heat. No major hydro appliances used in it.Held:Not more than 10% of home can be fairly attributed to home office // Appeal allowed in part
Expenses of Sales Persons
8(1)(f) provides general rule for deducting expenses where a taxpayer is employed “in connection with the selling of property or negotiating of contracts for the TP’s employer”
- Allows TP to deduct “all amounts expended by TP in yr for the purpose of earning the income from the employment as long as certain requirements are met:
To Qualify under 8(1)(f):1. TP must have been employed “in connection w/ the selling of property or negotiating
contracts for his employer”2. TP must under the contract of employment have been required to pay TP’s own expenses in
performance of his employment duties (8(1)(f)(i))3. TP must have been “ordinarily required to carry on the duties of the employment away
from the employer’s place of business” (8(1)(f)(ii))4. TP must have been remunerated in whole or part by commissions or other similar amounts
fixed by reference to the volume of sales made or the contracts negotiated (8(1)(f)(iii))5. TP must not have rec’d a travel allowance exempt from tax under 6(1)(b)(v) (8(1)(f)(iv))
8(10) further requires the employer to sign a prescribed form, certifying the conditions set out in the provision were met, which much be filed w/ income tax return
Looking at Qualifier 1 (is he employed in connection w/ selling of property/contracts?):
Creighton v MNR (1951, TAB)Facts:C was tech at Cattle Breeders Assn whose duties invol inseminating cows, driving around his designated territory to do so // charged farmers $5/cow and was paid $3/cow from Assn // Claims expenses in connection w/ automobile mileage in performance of duties // MNR disallowsAnalysis:8(1)(f) relates to persons employed in connection w/ selling property or negotiating contracts but C did neither he merely performed duties for farmers wh’d already made arrangements w/ AssnHeld:CANNOT claim deduction for this under 8(1)(f)
Looking at Qualifier 2 (is he under the contract of employment required to pay own expenses?)
Bowman v MNR (1985, TCC)Facts:B claimed expenses as commission salesman // Major portion of which reimbursed by employer but B spent more than reimbursements for entertainment & promotion // Letter from VP of Co stated it is understandable someone in B’s position would be willing to invest own $ for promotions to maximize earnings” // B took view he had no choice but to spend in order to earn income
Issue:Was there a contract of employment relating to the making of excess expenditures? NOAnalysis:Letter by VP absolves Co of any poss involvement in excees expenditures B might incur BUT also shows it was expected B would be out of pocket by amnts greater than the reimbursements he received in order to maximize earnings
- An understandable position for Co to take but it is not a requirement that the employee pay his own expenses
Held:NO contract of employment requiring B to pay own expenses, so ≠ claim deductions under 8(1)(f)
Looking at Qualifier 3 (was he ordinarily required to carry on duties away from place of business?)
Verrier v MNR (1990, FCA)Facts:V successful car salesman, claimed $7390 expenses for things like oil/gas for demonstrator; courtesy cars provided by him to customers; parking charges incurred while conducting business; advertising; entertainment expenses uncured on benefit of customers; commissions/finders fees
- No written contract existedIssue:Was V entitled to claim the deduction of expenses? YESHeld:If an employee’s failure to carry out a task could result in unfavorable assessment by employer, it would seem that is compelling evidence that the task is a duty of employment
- Failure to sell cars would lead to TPs dismissal from job- Employer and Salesman recognized that enough cars can onl be sold if salesman is
ordinarily required to carry on the duties of his employment away from employer’s place of business
Income/Loss from a Business or PropertyGov’d by: Part 1, Division B, Subdivision b, s 9-37
- 9(1) = income- 9(2) = losses
Profit = The difference b/wn revenue and expenses taken to gain the revenueIncome from Property here does not include capital gains/losses from the disposition of property
Profits from a business or property ARE taxable under 9(1) and 3(a)- If profit is of capital nature, only ½ of gain is taxable (s. 38)- *So more advantageous to argue a gain is from the disposition of capital
Losses from a business or property ARE deductible under 3(d)- If loss is of capital nature, only ½ of loss is deductible (3(b)(ii))- *So more advantageous to argue loss is non-capital from business or property
Business = includes a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade but ≠ include an office or employment (s. 248(1))
o “Includes” = not an exhaustive meaningo Courts have included anything which occupies the time and attention of a man for
the purpose of profit; organized activity of any kind carried out for purpose of profit
Property = Property of any kind whatever whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal…and includes: (s. 248(1))
(a) a right, a share or a chose of action(b) money (unless contrary intention is evident)(c) timber resource property, and(d) work in progress of a business that is a profession
*Distinction b/wn business and property generally dep on degree of activity involved in producing the income
- Property = capital and loan (e.g. renting out apartment, where you don’t do much)- Business = capital and labour in a commercial enterprise (e.g. renting out hotel; flipping
house)
Both business and property distinguished from capital gains- Answer dep on whether property purchased as an investment (= capital gain) or for resale
(= income from business)
Adventure or Concern in Nature of Trade:
MNR v Taylor (1956, Ex Ct)Facts:T was prez of GM Canada // when prices of lead broke post war lead was avail abroad cheap // Got permission from parent company to purchase 1,500 tons of lead himself (req 22 rail cars to move) and sell it to Co. // MNR assessed the $83,700 he made in doing so as taxable
Issue:Whether this purchase and re-sale of lead was “adventure or concern in nature of trade”? YESAnalysis:No single guide, each case must be determined on facts, but some neg and pos propositions guide:NEG:
- Singleness or isolation of transaction consideration but not determinative- Don’t need an organization to be set up to effect transaction- That transaction totally diff in nature than any other activities of taxpayer; that he has never
done transaction of the kind before does not mean it cant be in nature of trade- Even where person entered transaction w/o any intention to sell at profit
POS:- Transaction is of same kind and carried on in same way as transactions of an ordinary
trader/dealer in property of the same kind = adventure in nature of trade- Commodity itself stamps the transaction as a trading venture (based on nature and quantity
of subject matter)Held:Evidence shows he entered into transaction for variety of purposes, all of business nature and similar to those that would have motivated a trader
- Nature and quantity of lead; dealt w/ lead as any dealer in imported lead would have- Purchase and sale of lead = income from “business or concern in the nature of trade”
Additional considerations- efforts made to find purchasers- time b/wn purchase and sale- while in possession steps taken to improve marketability of the item- property is of such magnitude it would not provide personal enjoyment
Regal Heights Ltd. v MNR (1960, SCC)Facts:1953 RH purchased 3 parcels of land to build lg shopping centre (mall, parking, ads) // Est. RH Corp and transferred property to it in return for shares // B/cm apparent shopping centre ≠ be est. b/c lg department store announced intention to locate elsewhere in neighborhood // 1954 sellIssue:Whether profit from sale of real estate = profit from venture/concern in nature of trade? YESHeld:They failed to promote shopping centre and disposed of their speculative property at a profit = venture in nature of trade and profit is taxableAnalysis:
- Amnt of land shows intention to build not sell- Est corporation imp b/c only would est mall via a corporation- Got approval of land rezoning; approached anchor department stores
Primary intention was to have shopping centre but knew in back of their minds they could sell if it didn’t work out; would not have bought property if he didn’t have poss to resell.
GamblingBoth business and property distinguished from personal pleasure or hobby
- Purpose is for enjoyment rather than purpose of profito Profits treated as windfalls (non-taxable b/c not income)
o Losses treated as personal expenses (non-deductible)
Gambling winnings not included in computing taxpayer’s income b/c gambling may not constitute a business if the activity is “not susceptible” to making a profit
- Gambling spectrum: bookmaking vs casual gamblero Volume of gambling and size of winnings are considerations but not determinative
3 ways gambling can amount to income from business1. Taxpayer has access to inside information, used systematically2. Taxpayer manifests a cultivated physical skill which provides him a demonstrable betting
advantage over other players3. Taxpayer is a bookkeeper, casino owner, etc.
MNR v Morden (1961, Ex Ct)Facts:M operated hotel but spent substantial time training & betting on horses at tracks // Claims gambling activities after selling his horses amounted to mere hobby and should not be taxable //MNR reassesses M for $14,000 in relation to net gains from gambling activitiesIssue:Whether income from gambling constituted “business” NOAnalysis:- Professional bookmakers taxable on their vocation so persons making gains by organizing their
efforts in the same way as a bookmaker should be taxable- Ask what is the man’s dominant object? To conduct commercial enterprise or entertain himself?Held:After he sold horses only placed occasional bets that did not amount to a calling or carrying on of a business Gambling merely hobbyRule:Casual winnings from bets in friendly games or occasionally placing bets not “business” subject to tax unless they amount to conducting an enterprise of a commercial character
Reasonable Expectation of Profit (REOP)Courts have frequently supplemented the subjective “Profit-Making Purpose Test” for the existence of a business or property source w/ a REOP test to govern deductibility of losses from a business or property
Stewart v Canada (2002, SCC)Facts:S purchased 4 condos from which he earned rental income; when purchasing was provided income/expense projections which projected negative cash flow and income tax deductions for 10 yrs // Incurred losses mainly from interest on $ borrowed to acquire units // MNR disallowed loss on basis S had no reasonable expectation of profit (thus no source of income, thus no loss source)Issue:What is the test for determining whether taxpayer has a business or property source of income?Analysis:
- REOP test should no longer apply b/c has b/cm broad based tool
To determine whether taxpayer has source of business or property income:1. Is activity of taxpayer undertaken in pursuit of profit or is it a personal endeavor?
a. Where activity contains no personal element and is clearly commercial, no further inquiry necessary
b. Where nature of venture contains elements suggesting it could be a hobby or personal pursuit, it must be determined whether activity is being carried on in a sufficiently commercial manner to constitute a source of income
- Taxpayer must est. his predominant intention is to make profit from activity and that activity has been carried out in accordance w/ objective standards of business like behaviour. To do look at 4 objective factors laid out in Moldowan:
i. Profit and loss experience in past yearsii. Taxpayer trainingiii. Intended course of actioniv. Capacity of venture to show profit after charging capital cost allowance
- Test must not be used to second guess business acumen of taxpayer, rather it is the commercial nature of taxpayer’s activity which must be eval
2. If it is not a personal endeavor, is the source of income a business or property?
Held:No personal element in properties: rented to arms length parties; did not use for personal benefitCondos purely commercial activity and thus = source of income; referred back to MNR for reassess.Rule:Test above.
i. Inclusions
General Inclusion = Profits in 9(1)Profit = The difference b/wn revenue and expenses taken to gain the revenue
Gains from Illegal Activities
No. 275 v MNR (1955, TAB)Facts:Appellant appeals determination of her income on grounds that (i) her income being derived from prostitution is not taxable b/c not derived from a “business”, and (ii) if considered a business, it is not taxable b/c it is a business which is malum in seIssue:Whether earnings from illegal activities are taxable as income from business? YESAnalysis:Profits come w/in literal words in Act – no reason to think Parliament were intended to exclude people partaking in illicit activities: would increase burden on those whose businesses are lawfulAlso, it is not correct construction of the Act to read it as permitting persons to defeat taxation by setting up their own wrong.Held:It is immaterial that income comes from legal or illegal businesses; profits are taxable.
Damages and Compensation
Apply the surrogatum principle AND determine whether underlying amount was compensated for loss of capital or loss of income
To assess this see It Bulletin IT-365R2 : An amount received by a taxpayer in lieu of performance of the terms of a business contract may, depending on the facts, be either an income or capital receipt.
- If receipt relates to loss of an income-producing asset = capital receipt- If it is compensation for the loss of income = business income
Factors to consider:(a) if compensation is received for failure to receive $ that would have been income if
it had been received will likely be income receipt(b) where the structure of recipient’s business is fashioned to absorb the shock as one
of the normal incidents to be looked for and where it appears compensation received is no more than a surrogatum for the future profits surrendered will prob be treated as a revenue receipt
(c) when the rights/advantages surrendered on cancellation destroy or cripple the whole structure of the recipient’s profit-making apparatus, involving serious disclosure of the normal commercial organization and resulting perhaps in the cutting down of staff previously required, recipient of compensation may affirm it represents the price paid for the loss or sterilization of a capital assets is therefore capital (not revenue receipt)
Canada v Manley (1985, FCA)Facts:Taxpayer entered agreement to find purchase for shares in Co in exchange for finder’s fee // Was awarded damages for breach of warranty when finder’s fee not paid // MNR included damages in computing taxpayer’s incomeIssue:Whether damages from legal action should be included in computing income? YESHeld:M received damages for precisely what he would have realized in profit form his adventure in the nature of trade and thus should be treated in the same way for tax purposesRule:Where pursuant to a legal right, a trader receives compensation for failure to receive a sum of money which, had it been received would have been credited to amount of profit arising from the trade carried on by him, is should be treated as if it had been received instead of the compensation
Queen v Atkins (1976)Rule:An amount paid in settlement of a claim for damages for wrongful dismissal is not salary taxable as income from office or employment.
Interest
Interest: not defined in ActJudicial interpretations:
o Blacks Dictionary: compensation allowed by law for the use or forbearance of borrowed money
o Halsbury: the return or compensation for the use or retention by 1 person of a sum of money belonging to or owed to another
Rule:Income includes any amount received or receivable by the TP in the year as, on account of, in lieu of payment of or in satisfaction of, interest (12(1)(c))
Characterization
Perini Estate v MNR (1982, FCA)Facts:Taxpayer owned all shares of Record Co and sold them to Columbia Records // Agreement provided (i) initial payment of $660,000 (capital) (ii) additional payments based on post-tax profits determined by financial statements for the fiscal year (royalties), and (iii) 7% interest on the royalties // MNR characterized interest as interest income
- P argued they lack essential characteristic of true interest b/c do not accrue from day to day on an existing principle amount and thus are capital (no tax)
Issue:Does this 3rd interest amount constituted interest for purposes of ITA? YESAnalysis:
- What parties agree to name something is not relevant- The fulfillment of a conditional obligation (to pay more if there are post-tax profits) can
have a retroactive effect and the value can become the principle amount for the purpose of interest income
- B/c of the basis on which balance of price was to be determined, seller was obligated to wait for payment of the balance Interest appropriate compensation for the delay
Held:The existence on the closing date of a conditional obligation to pay the balance of priceRules:
- 3 elements of characterization of interest:o Compensation for the use/retention of principle sum of $,o Is computed by reference to a principle amounto Accrues day-to-day (even where payable once a year/on intervals - Sherway)
- Contingent amounts can constitute a principle amount
Sherway Centre v Canada (1998, FCA)Facts:TP financed shopping centre construction by issuing bonds at lower interest rate and a “participatory interest” equal to 15% of operating surplus over $2.9MHeld:
Participatory interest was interest under ITA b/c it was payable only so long as there was principle outstandingRule:Even where interest is payable once a year or at intervals, it may still be capable of being allocated on a day-to-day basisContingent payments may be deemed interest if they are retroactively referable to a principle sum
- Parties to a contract can give contingent liability retroactive effect such that it could qualify as a principle sum to which interest could be said to be referable
- Even though payments were contingent they b/cm referable to sum when the conditions were satisfied, thus payments could be deemed interest on principle
Queen v Greenington Group (1979, FCTD)Facts:GG purchased parcel of land from a company to which GG had loaned money and from which GG was owed arrears of interest
- When purchasing land arrears owing set off against purchase price of land- MNR assessed this as income under 12(1)(c)
Held:The corresponding reduction in the purchase price WAS an amount received “in lieu of payment of, or in satisfaction of interest” //MNR’s assessment upheldRule:Look at what is being offset – if it is interest or income in nature, then it is taxable
IT Bulletin re what “interest” income is: IT-396R:- Interest does not arise unless there is an amount due to another person for the period in
which the interest is calculated- Where an award for damages is made which includes interest on all or a portion of the
award, that amount will constitute interest income in the hands of the recipiento This is b/c liability for damages is considered to originate from the date on which
the injury occurred therefore there is an amount owing that is not determinable until a later date, once the right to receive damages has been est.
Payments of Interest and Capital Combined
Gov’d by 16(1)(a) Where under contract or arrangement, an amount can be reasonably regarded as being in part interest or other amount of an income nature, and in part an amount of a capital nature… the part of the amount that can be reasonably regarded as interest shall be deemed to be interest on a debt obligation held by the person to whom the amount is paid (irrespective of when contract/arrangement made)
- i.e. is taxable
Groulx v MNR (1967, SCC)Facts:Farmer sells farm for down-payment of $85K and remaining $310K to be paid annually over 7 years // Agreement contained reduction for paying early (indicates there’s an interest element)Issue:
Whether part of capital received from installment payments can be reasonably considered interest received by him? YESAnalysis:1. Normal Business Practice re interst on the type of property: charging interest on the transactions.2. Relationship of price paid to FMV of property at the time: Sum at closing was excess FMV3. Intention test: Here G was sophisticated, it looked like he intended to capitalize on the interest.Rule:16(1) allows court to re-characterize payments under agreements as interest, if reasonable (particularly where there is something in the intention of the TP to avoid paying tax on interest)See also…
Vanwest Logging v MNR (1971, Ex Ct)Analysis:To determine whether part of each installment payment would reasonably be regarded as in part a payment of interest, necessary to consider 4 criteria: (clarifies and adds to Groulx)
1. Terms of agreement b/wn parties2. Course of negotiations b/wn them leading to the agreement3. Relationship of price paid to apparent market value of the property at the time, and4. Common practice w/ respect to payment of interest on the sale of the type of property
Held:Price of timber not greater than fair market value
Discounts and PremiumsWhere a debt obligation is acquired at a price less than the principle amount payable on maturity, this “discount” constitutes an economic return in addition to any interest that may be payable on the debt
- To the extend these kinds of economic returns can substitute for the payment of interest, they are included in computing the recipient’s income from a business or property in the same way as ordinary interest
O’Neil v MNR (1991, TCC)Facts:Taxpayer acquired Gov treasury bill w/ maturity value of $200K for a purchase price of only $189K // Treasury bill did not carry a stated interest rate and it was mutually agreed the rate of discount was slightly higher than the bank interest ratesIssue:Should the diff b/wn the purchase price and the maturity value be considered income? YESHeld:
- It is reasonable to liken this investment to a loan to the Gov and the diff b/wn the purchase price and maturity value as interest per 16(1)
- Amount of the interest is in the nature of interest paid on money invested so 12(1)(c) applies
Royalties
Royalties (Blacks):Compensation for the use of property (usually natural resources or copyright material), expressed
as a % of receipts from using the property or as an account per unit produced…a share of product or profit reserved by owner for permitting another to use the property.
Gov’d by 12(1)(g):Royalties are included in computing income from a business or property of the following amounts:
(g) any amount received by taxpayer in the year that was dependent on the use of or production from property whether or not that amount was an installment of the sale price of the property.
o Installments of the sale price of agricultural land is not included hereo Provision sufficiently broad to incl more payments than traditional royalties
TEST:Whether the amounts received “depend on” the use of or production from property
- Payments must be related to a measurement method (quantity, time, etc.) (Morrison)
1. Amounts received must “depend on” the use of or production from property
MNR v Morrison (1966, Ex Ct)Facts:Municipality removed rock from Morrison’s land to build bridge // Negotiation of damages referred to payments made on monthly basis and relating to amount of rock removed // Municipality made 2 lump payments instead and no record of amount of rock removedIssue:Do payments received constitute royalties?Analysis:
- Wording “dependent on use of or production from property” in 12(1)(g) limits amounts to those which depend on the extent of use or production from property – either according to time or quantity or some other method of measurement
- No record kept of how much removed so payments not based on quantity- Payments were amounts paid in settlement of unascertained claims for damage which
taxpayer held against municipality for rock removal and house damageHeld:No, amounts do not fall under 12(1)(g) and thus are not included in incomeRule:Payments must be made in relation to a measurement method to be considered royalty payment
2. Relationship b/wn “amounts received in year” and the use of or production from property
Huffman v MNR (1954, TAB)Facts:Taxpayer sold mining leases – purchase price payable in installments of 25% the value of the gold removed until full price $25K paid plus 2.5% interest/yrIssue:Whether 12(1)(g) is broad enough to capture payments beyond traditional royalty payments? YESHeld:The receipts in question depended on the use or production from property and therefore are captured by 12(1)(g)
- Shows 12(1)(g) can incl amount not normally thought of as being from business/property
Rent
Courts and CRA tend to refer to language of 9(1) and 3(a) to include rent in computing a taxpayer’s income from a business or property.
- Rent is characterized as such depending on the extent to which income is derived from the active participation of the TP
Rent is distinguished from “payments on account of capital” which have arisen in cases where the lessee can apply some or all of the rent payments to the purchase price of the property.
Pitman v MNR (1954, TAB)Facts:Trying to sell land, enters into crop share agreement in the form of a lease for purchase (you farm my land, I get certain % of crop until that reaches certain amnt and then you can buy land from me) // Eventually farmer had paid enough to purchase property // TP argues amounts should not be rental income b/c at end of day, other guy gets propertyHeld:Taxpayer could not be certain the farmer was ever going to pay enough to buy land, therefore amounts = rent
- The option to purchase contained in a lease is collateral to, and independent of the landlord/tenant relationship
- Exercise of the option does not have retroactive effect, i.e. payments originally received as rental payments do not simply change to payments on account of capital
Inducements, Reimbursements and RefundsWhere a payer pays an inducement, refund, reimbursement, etc. to a payee in the context of earning income from business or property, the payee must include the value of the inducement payment as income from business or property in the year in which it was received. (12(1)(x))
- this includes where the amount in received from a person or partnership or the government
“inducement” = what induces, attracts, leads one on, assistance as aid, contribution as help, allowance as money paid to cover special expenses
“refund” or “reimbursement” = repayment
Iron Ore Co. of Canada Ltd v Canada (2001, FCA)Facts:Appellant rec’d refund for 8 years of taxes paid + interest in the amount of $3.5M // Following the refund MNR reassessed Ap adding to their income the refunded sales tax (minus interest)Issue: Whether refund received was a “refund” w/in 12(1)(x)(iv)? YESHeld:Ap’s refund falls into 2nd category and therefore must be included in income in the year in which it is received under 12(1)(x)(iv)Rule:There are 3 kinds of amounts under 12(x)(iii) and (iv):
(a) those received as inducements(b) those received as refund, reimbursement, contribution or allowance(c) those received as assistance, whether as a grant, subsidy, forgivable loan, deduction from
tax, allowance or any other form of assistance
II. Deductions9(1) is a net concept that implicitly authorizes deductions of legitimate expenses incurred in order to earn income from the business or property to which the expenses relate
In applying this provision, the first test is:“Whether it was made or incurred by the taxpayer in accordance with ordinary principles of commercial trading or well accepted principles of business practice”
- Need to know what “ordinary business principles” means
S. 18 In computing income of a TP from business or property no deduction shall be made in respect of:
(1)(a) any outlay or expense unless it was “incurred by taxpayer for the purpose of gaining or producing income from business or property” (1)(b) even if it is ordinarily deductible, if it is capital in nature it cannot be deducted unless expressly permitted by Act (capital cost allowance)
(1)(c) you cannot deduct an outlay or expenses to the extent to which is may reasonably be regarded as having been made or incurred for the purpose of gaining or producing exempt income or in connection with property the income from which would be exempt;
o I.e. if you are not taxed on it; you cannot deducto Abrg people do not need to pay tax if sufficiently tied to reserve
(1)(h) a personal or living expense (other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business)
S. 67 moreover, [ which applies to the computation of income from ALL sources]Limits the amount that may be deducted to an amount that is “reasonable in the circs”
Damage Payments
Imperial Oil Ltd v MNR (1947, Ex Ct)Facts:Ap had to pay settlement damages of $529K in claims arising from negligent collision at sea // Wanted to deduct, arguing costs of damages were a proper expense incurred in course of and for purpose of marine operations // MNR argued payment was to satisfy a legal expenseIssue:Can the damages paid for the negligence of its servants be deducted under 18(1)(a)? YESAnalysis:Profits and gains, and the deductibility thereof must be ascertained on the ordinary principles of
commercial trading or well accepted principles of business/accounting practices - unless deduction is prohibited by the express terms of the excluding provisions of the Act”
- Based on HL decision: if trader had to pay damages for negligence of his servants, that the loss is really incidental to the trade then the amount is deductible
- Deduction is based on looking at circs: course of earning, process of earning it; revenue generating process
- If cost arose as a result of the income generating process then amount is deductibleHeld:Marine operation was part of the normal business from which Imperial earned income and risk of collision was an ordinary hazard of marine operations Can deduct liability amntRule:If damage payment was incurred b/c of a liability that was incidental to the business, then the amount is deductible
Fines and PenaltiesTraditionally not deductible b/c not incidental to business or b/c would contradict public policy
- In 2004 legislatively dealt w/ in s. 67.6 which sets out that all fines and penalties:In computing income, no deduction shall be made in respect of any amount that is a fine or penalty (other than a prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty.
Though the deduction of fines such as those incurred by TP here are now legislatively denied, this case is useful for the analysis it goes through:
65302 British Columbia Ltd. v Canada (1999, SCC)Facts:Egg farmers producing in excess of their quota, penalized w/ $275K // Claimed fine should be deducted b/c in order to fill Loblaws order he had to overproduceIssue:Whether fine/penalty may be deducted for purpose of gaining or producing income? YES
- did Ap incur the fine for the purpose of gaining or producing income from its business?Analysis:Majority
- Avoidability Test: (Day & Ross) b/c its avoidable you didn’t have to incur it and therefore its not incurred on behalf od gaining income
- Statutory Interp: (Rizzo Shoes) attn. must be paid to fact that act is so detailed and complex and courts should be reluctant to embrace unexpressed notions of policy as a guise for statutory interp absent express exceptions = you can deduct it if for purpose of income
- Can look at public policy (Neil Brooks) b/c courts should not interpret one statute so as to frustrate objectives of another
- Be weary of judicial public policy b/c it is up to Pt to set out policyBastarache
- Calc of profit test is not necessarily and accounting test- Fine should be analyzed every time to see if it is inconsistent and would defeat effectiveness
of other legislative enactments- Public policy is relevant - deterring penalties should not be deductible
- compensatory penalties should be deductibleHeld:
Cannot agree that deductions should be allowed b/c contrary to public policy – too uncertain- Allowing fines to be deductible is consistent w/ tax policy of neutrality and equity
Ap did incur penalty for the purpose of gaining or producing income from business b/c it was incurred as part of his day to day operationsExample of how to apply this case: If there is a specific anti-avoidance provision for one area but not for the area you are arguing you can argue that parliament didn’t want to introduce it—therefore it should be deductible
TheftLike damages, fines and penalties, losses attributable to theft may be either avoidable or remotely connected with the taxpayer’s business
Thayer Lumber Company Ltd. v MNR (1957, TAB)Facts:Daily cash receipts did not balance against daily sales records (done 1/yr) = shortage of $8122 was deducted by Co as a loss fr theft // Loss was reported to PO and Insurance Co (not reimbursed)Issue:Can the theft amount be deducted?Arguments:
- Ap: this was lost in the normal course of business- MNR: this isn’t an ordinary business risk and therefore is not contemplated by 18(1)(a)
Analysis:The theft occurred as result of the normal course of business b/c it had always been the practice of the Co. to leave the vault unlocked during business hours and they had never had a problemHeld:Loss was suffered by Ap carrying on his business in the usual way and therefore it is deductible
Cassidy’s Ltd v MNR (1989, TCC)Facts:TP sought to deduct amnts that had been embezzled over a period of 4 yrs by a senior VPAnalysis:There is an inherent risk in business that employees will stealBUT use of employees is necessary in carrying on a businessVP drew cheques on the account in the same manner that ordinary cheques were drawn = normalHeld:Loss from theft WAS deductible b/c incurred in the “normal course” of business
- BUT if you steal from your own company then that is not deductibleRule:Theft from senior employees is deductible
Legal Defense Costs
Rolland Paper Co v MNR (1960, Ex Ct)Facts:TP tried to deduct legal expenses incurred in defending criminal charge of conspiring to lessen competition // TP argued fees made in defending its day-to-day business practices; directly related to earning income // MNR argued incurred for defending accusation so not allowedIssue:Do legal fees fall w/in the Act as deductible? YESAnalysis:
Expenses were made in effort to establish that its trading practices were not illegal Expenses were paid to defend their way of doing business and preserve the system under
which they operated and so should be deductibleHeld:Legal expenses in course of TPs business have been considered by SCC to be deductible; irrespective of whether you win or lose caseRule:If activities that led to action were in course of business, amnts paid to defend such actions should be deductible
Neeb v Canada (1997, TCC)Facts:N incurred legal expenses in defense of criminal charges under Narcotic Control ActAnalysis:
- The distinction between Mr Need’s case and that of Rolland Paper is this: Rolland Paper was charged with an illegal business practice within the context of its business. Its defence against the charge was directly related to the manner of carrying on the business.
- The reason Mr. Need was charged was that he carried on a criminal business in the first place. In this defense he was not seeking to justify the manner in which he carried on his business …He was defending himself, not his business.”
Held:Legal expenses not nosiness expenses incurred for purpose of gaining or producing income, rather were personal expenses incurred to reduce length of sentenceHauser thinks distinguishing this case fr Rolland Paper is crap.
NOTE: s. 60(o) can deduct legal fees incurred in defending tax assessments
Promotional ExpensesGenerally common expense, but can be challenged where expense is too remotely connected t the TP’s business to have been incurred for purpose of gaining or producing income from that business
Ace Salvage Alberta Ltd. v MNR (1985, TCC)
Facts:TP has scrap metal business, wants to deduct expenses from maintaining horses as a promotional // argues horses race under name Ace Stables among other connectionsIssue:Whether $ from horses is a proper business deduction? NOAnalysis:No empirical evidence that a connection existed between horse-racing and salvage incomeJust because an owner authorizes expense in a certain way does not make them deductible
- Just b/c activity may aid in promoting business, does not make it deductibleHeld:Horse racing expenditures taken for purpose of training and racing horses, not directly associated w/ salvage business or promoting itRule:Promotional expenses must have a certain level of connection to the TP’s business.If the purpose of the “promotional activity” is markedly different than the normal business purpose deductibility based on connection is unlikely.
Ross v Canada (2005, TCC)Facts:Successful securities trader attempted to deduct the costs of his thoroughbred race horsing activities under section 8(1)Held:Court accepted the appellant’s argument that he garnered business through the horseracing activities
- b/c he explained he was from rural Ont. And was not in TO financial circles when he began brokerage career and b/c about 1/5 of his business b/cm clients as a result of contacts through involvement in racing
No 511 v MNR (1958, TAB)Facts:Taxpayer was a company selling lumber in Canada and lost $22,500 sponsoring a baseball team in order to obtain advertising – sought to deduct in computing incomeAnalysis:
- Have to consider purpose for one’s actions rather than the resultIn determining reasonability of expenditure on advertising take cognizance of: size of business, patronage to be expected in the future, form of adverting, locality where it is done, and size of the population reached by the adverting”Held:Court allowed the deduction but limited it to $5000 based on reasonability
- The full $22,500 was more than half its net income at the time
Olympia Floor & Wall Tile v MNR (1970, Ex Ct)Facts:Tried to deduct charitable donation as a promotional deduction instead – said charitable donations were to men who were in a position to cause purchases to be made of his goodsAnalysis:
TP made outlay for purpose of producing income, even though outlay may take form of a gift it is not a “gift” w/in meaning of Act (and so not subject to limitation of charitable donations)Held:Deduction allowed
Recreation, Meal and Entertainment ExpensesWhile these are often incurred for business promotion they may also give personal benefit on the object of the promotional activity as well as on persons who conduct these activities
This decision was reversed by 18(1)(l)(ii) now but analysis of “profit” relevant today
Royal Trust Company v MNR (1957, Ex Ct)Facts:Ap sought to deduct 9K which was paid as admission and membership dues at social clubs // Claimed membership at clubs necessary to creating and promoting business – major recruitment of business is the personal contracts by officers, so must take part in community lifeIssue:Should cost of membership be deductible? YESAnalysis:It was w/in good business practice to make payments like this – made pursuant to carefully considered business policy – memberships did produce profitable business for taxpayerHeld:Memberships likened to an extension of taxpayer’s office facilities
- good business practice in the industry to have such memberships DeductibleRule:If expense incurred in accordance w/ principles of commercial trading & accepted business practice and is made for purpose of gaining/producing income from business, amnt is deductible
NOTE:18(1)(l)(i) says where a taxpayer expends an amount to “use” “maintain” a yacht”, “camp” or “lodge” or a “golf course facility” the expenditure is non-deductible unless it is made or incurred in the ordinary course of the TPs business of providing the property for hire or reward
Camp or Lodge:
Fehrenbach v MNR (1994, TCC)Facts:
- TP sought to deduct expenses incurred to maintain a condo he used mostly for private use but occasionally to entertain clients
Held:- Pt could not have intended such a broad application of term “lodge” as the dictionary
definition which includes almost any abode whether seasonal or not, no matter how big or small and would incl a condo
- Disallowed deduction on basis it was not reasonable for purpose of gaining income (condo was a personal expense)
Golf Course Facility:
It Bulletin IT-148R3 - “Facility” refers only to a golf course and is intended to extend words “golf course” to incl
any amenities provided by a gold club, restaurant, dining room, lounge, hall, conference room, pool, tennis court or curling rink.
- Expenses incurred for food/drink at golf club are not subject to 18(1)(L) provided there is a genuine business purpose for the use of the facilities and the expenses are not incurred in conjunction w/ a game of golf or other recreational activity at the club.
Fingold v MNR (1993, TCC)Facts:Attempt to deduct part of daughter’s wedding and son’s bat mitzvah b/c invited business guestsAnalysis:
- Where TP incurs expenses to promote their business, the target of the expense must be aware that the TP and no one else has actually disbursed the funds for that purpose
- No evidence business guests thought they were guests of the Co. rather than the TP personally
Held:Deduction disallowed
Per 67.1(1)Can only deduct 50% of costs incurred “in respect of human consumption of food or beverage or the enjoyment of entertainment”
Entertainment = “amusement and recreation”MORE ON THIS IN LATER SECTIONS
Scott v Canada (1998, FCA)Facts:Courier who delivered packages by foot sought to deduct cost of additional food and water he consumed as part of daily routineHeld:Court analogized expenses to gasoline by couriers who deliver packages by automobile
- Takes into account diff methods of doing same job and puts all couriers on an equal footing
Clothing ExpensesLike meals and entertainment, clothing acquired for business purposes may also provide a personal benefit
No 360 v MNR (1956, TAB)Facts:Ap deducted $950 for expenses for altering wardrobe, accessories and a dress for TVIssue:Whether or not Ap can deduct this expense as being incurred for business purposes?Analysis:Argued she was under an obligation to appear stylish and not to wear same outfits repeatedlyHeld:
Deduction disallowed b/c wardrobe is a “personal or living expense” TP could and did wear outfits and accessories outside of work (just like any other TP)Rule:To be deductible, clothes cannot be for personal benefit
Home Office ExpensesS. 18(12) Work space in home(12) in computing an individual’s income from a business for a taxation year,
(a) no amount shall be deducted in respect of a self-contained domestic establishment in which the individual resides, except:
(i) where it is the individual’s principal place of business, orIT-514 says “principle” is not defined in Act but “chief” and “main” are synonymous
(NB doesn’t need to be exclusively for business)
(ii) where it is used exclusively for the purpose of earning income from business AND used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business; (more difficult to argue than (i))IT-514 says work space:
must be used exclusively to earn business income met where segregated (such as a room) is used for a business and no other purposes
Regularity and frequency of meetings req dep on nature of the business activity but if infrequent or irregular intervals gen. wont meet req
(b) Where (i) or (ii) met, cannot deduct more than TPs income from the business to which it relates – i.e. home offices cannot be used to generate a losses to deduct against income from other sources
(c) Allows amount of deduction disallowed under (b) to be carried forward indefinitely and deducted against future income from the business (if continuity of qualification)
Locke v MNR (1965, TAB)Facts:Ap solicitor set up study in home (8 room house) and deducted expenses from it – study was placed so he could receive phone calls, meet clients and read the law // Disallowed by MNRIssue:Whether TP can deduct his office expenses? NOAnalysis:Several Qs to consider whether home office can be deducted:
- Was room definitely separate from living quarters?- Was an appreciable amnt of business transacted there or just for convenience?- Was house municipally assessed for business purposes?- Was telephone ordered for business purposes?- Was there a sign on house announcing a law office was being maintained?- If he already had office, was home office a second branch of the main?
Held:Disallowed: deduction ≠ come from expenses incurred for purpose of gaining/producing income
- office appeared to be used for taxpayers own convenience onlyRule:If the office in home is for personal convenience the expense is not deductable
S. 20(1) – an exception to 18(1)If you have an expense that meets judicial business practice test and it is denied by 18(1), then you can go to 20(1)(c):Allows deduction of
(c) a legal obligation to pay interest on(i) borrowed money used for the purpose of earning income from a business or property (ii) an amount payable for property acquired for the purpose of gaining or producing income from the property or business
S. 20(3)If TP uses borrowed money to repay previously borrowed money previously or to pay an amount payable for property described in (1)(c)(ii) the borrowed money is deductible
Travel Expenses18(1)(h) travel expenses incurred by TP while away from home in the course of carrying on his business are specifically excluded from those “personal and living expenses” that cannot be deducted in computing income from business or property
- so they’re excluded from the exclusion can be deducted
Cumming v MNR (1967, Ex Ct)Facts:C was anesthetist worked at hospital but could only do admin work at home // travelled to and from hospital and claimed as deductible travel expenses // Minister disallowed most of themIssue:Whether travel expenses can be brought under 18(1)(a)? YESAnalysis:He needed car to perform job // chose to live close to hospital for purpose of practice not personal preferenceHeld:
- His base was his home: kept files there, where he was called when services needed- When going to hospital did so to serve patients for the purpose of gaining income
Journeys to/from hospital not commutes were journeys made in course of practice deductibleRule:For travel expenses to be deductible, must be incurred from travel b/wn TPs “base” of operations
- Where TP has no base, it is poss that travel to and from all locations could be deductibleTravel to and from office not deductible but expenses assoc w/ travelling in course of business is allowed
Interest Expense20(1)(c) permits the deduction of amounts paid pursuant to legal obligation to pay interest on
borrowed money used for the purpose of earning income from a business or property, or a reasonable amount thereof, whichever is the lesser
Shell Canada Ltd v CanadaProvision has 4 elements:
1. Amnt must be paid in the yr or be payable in the year in which deduction is sought2. Amnt must be paid pursuant to a legal obligation to pay interest on borrowed $3. Borrowed $ must be used for purpose of earning non-exempt income from a business or
property4. Amnt must be reasonable – assessed by reference to first 3 requirements
Bronfman Trust v Canada (1987, SCC)Facts:Trustees borrowed money from bank and paid out to beneficiary so they didn’t have to liquidate capital assets to pay beneficiaryIssue:Whether the use of the borrowed funds (and the interest on it) has to be directly for an income earning purpose or can an indirect use be sufficient to deduct under 20(1)(c)?Analysis:20(1)(c) purpose: to encourage accumulation of capital which would produce taxable income
- Focus is on use to which borrowed money was put (here, towards beneficiary)- Current use , rather than original use is what’s relevant (here, used to make capital
allocations, not for business)- Direct use in the year not any indirect use that counts
Held:Money borrowed to pay capital allocations – interest on borrowing NOT deductibleRule:Interest payments only deductible if borrowed money used directly to earn income from business or property
BUT…
Ludco Enterprises Ltd v Canada (2001, SCC)Facts:Money borrowed, incurring interest, to buy shares in off-shore Co.s located in tax havens // Co keeps money and re-invests it so people can claim capital gain (remember $ borrowed to realize capital gains is not deductible)Analysis:“income” in 20(1)(c)(i) doesn’t refer to net income but to ‘income subject to tax’ (gross income)“Purpose” requirement in 20(1)(c)(i) needn’t be bona fide but can be “ancillary.”Held:Interest deduction allowed an ancillary purpose to earn income is sufficient to satisfy even if primary purpose was to obtain capital gain and avoid tax
Tennant v MNR (1996, SCC)Facts:TP borrowed $1M to purchase common shares in arms length corporation // Company tanked and
disposed of shares for $1000 // TP continued to deduct interest on full $1M and CRA reassessedHeld:Full amnt of borrowed funds deductible:
- As long as the replacement property can be traced to the entire amnt of the loan, then the entire interest payment is deductible
- The amnt of interest to be deducted related to the amnt of the loan, not the value of the replacement property
Hills v MNR (1970, TAB)Facts:TP sought to deduct interest payments on a bank loan obtained to acquire a home 25% of the space to be used for rental purposes // MNR said he could only deduct 25% of interest expenseHeld:Board agreed w/ Minister, characterizing remaining 75% as a “personal living expense” not incurred for purpose of producing income from a property or business w/in 12(1)(c) or 18(1)(a)
Emerson v Canada (1985, FCTD)Facts:TP borrowed $100K to purchase shares of 3 small corps which were sold at a loss of $35K at which time TP borrowed further $63K to discharge amnt of initial loan still outstanding // argued interest on 2nd loan deductible under 20(3)Held:Rejected TPs argument – TP failed to establish that existence of a source of income to which interest continued to relate
- B/c borrowed funds could no longer be traced to an eligible use, deductibility of interest was disallowed
Leslie v Canada (1998, TCC)Facts:TP’s annual salary almost doubled upon getting BA – sought to deduct interest on student loans under 20(1)(c) on basis money was used for purpose of earning income from the business of working as a salaried employeeHeld:TP argument rejected – absent an ongoing business / a reasonable expectation of profit against which the expenses might be set, the expenses of gaining an education and interest paid on money borrowed to do so are personal or living expenses
Timing Issues
Need to know what amounts must be included/deducted but also when such amounts are included/deducted
Incentives are to:- delay income inclusions (better to pay tax at latest possible time)- accelerate deductions from income
General Rule: Income from business and property is computed on an accrual basis:- Revenues are included in computing income in the year in which they are earned, even if
they have not been received- Expenses are deducted in the taxation year in which they are incurred, even if they have not
been paid
Inclusions
s. 9(1) defines income from business or property as “the taxpayer’s profit from that business or property for the year”
s. 9(2) defined taxpayer’s loss, if any, for the taxation year from that source, computed by applying the provisions of this Act respecting computation of income from that source w/ such modification as the circs require
s. 12 contains a number of additional rules specifying that TPs must include:- 12(1)(a) unearned amounts that are received in the yr in the course of business- 12(1)(b) amounts receivable for property sold or services rendered in the year – unless
method adopted by TP for computing income doesn’t require them to include an amnt receivable unless it has been received in the year
- 12(1)(c) amounts received or receivable on account of, in lieu of, or in satisfaction of interest
- 12(1)(g) amounts received that were “dependent on the use of or production from property” (royalties – effectively “cash” basis)
Rules* Whatever accounting method portrays a “truer picture” of TPs income and expenditures is the one that must be followed (West Kootney Power)
- Computation of profit for tax purposes is a legal question (Canderel)- GAAP may provide guidance but is not determinative (Canderel)
Test1. Start w/ s. 9(1) – what method provides truest picture?2. Look to s. 12 to see if it requires additional amounts to be included/provides specific timing
rule
West Kootenay Power & Light Co v MNR (1992, FCA)Facts:TP sends bill to clients every 2 mo // TP changed from an “accrual” to a “billed” basis for its income tax return and wants to include December income in following year’s tax returnIssue:Whether estimates of unbilled revenue at the end of the TP’s tax year should be included in income from business that year? YESAnalysis:Starting Point = s. 9(1) (profit for the yr)
- TP not required to compute income tax in same manner as income for accounting purposeso Based on GAAP either including or excluding the amnt receivable from Dec would
have been acceptable- Method that presents “truer picture” of TPs revenue and matches revenue and expenditure
is the method that should be used Here, truer picture req amnts from Dec be includedThen apply 12(1)(b): (amnts receivable)
- “receivable” not defined in Act - means amts to which TP is legally entitled, provided they are sufficiently ascertainable, though not immediately due
o Co. had a legal right to be paid for electricity supplied, even though not yet billedHeld:Amnts must be included as income in the year then endingRule:Whatever accounting method portrays a “truer picture” of TPs income and expenditures is the one that must be followed
Canderel Ltd v Canada (1998, SCC)Rule:Determination of profit under 9(1) is a question of law not fact. Its determinates are:
1. Express provisions of Act which dictate specific treatment for specific expenditures2. Established rules of law resulting from judicial interpretation of the various provisions
Beyond these, any further tools of analysis are merely interpretive aids but no more (business practices, accounting practices, ordinary commercial trading principles, etc. together = GAAP)- But remember GAAP is just an interpretive aid, whereas provisions of the Act form the foundation
MNR v Benaby Realites (1967, SCC)Facts:TP was compensated for 2 parcels of land that was seized and sought to include the gains in computing its income // TP argued the movement of expropriation, it no longer has its land but instead a right to receive compensationAnalysis:
- At moment of expropriation, TP did acquire a right to receive compensation in place of land- But in the absence of a binding agreement b/wn the parties, the owner had no more than
right to claim compensation and there is nothing which can be taken into account as an amount receivable due to the expropriation
- ITA requires profits be taken into account/assessed in the yr the amnt is ascertainedHeld:
There must be a right to receive, not just a right to claim payments TP had only a right to claim
Commonwealth Construction v MNR (1984, FC)Facts:TP rec’d judgement on a mechanic’s lein action in ’74 and an award of costs in ’75 // argued amnts not rec’d until ’77 when the action was settled following appealAnalysis:
- Following Benaby, the amnts payable were ascertainted by a judgement in 74/75 so that they b/cm receivable in those years and were in fact paid in those years
- Thus they were taxable in hands of TP having acquired “the quality of income” in those yrs- Possibility of a successful appeal does not derogate from “the quality of income” at time of
receiptHeld:Rejected TP argument amnts taxable in yrs awarded
12(4) Subject to subsection (4.1), if in a taxation year a taxpayer holds an interest in, or a right in, an investment contract on any anniversary day of the contract, there shall be included in computing the taxpayer’s income for the year the interest that accrued to the taxpayer to the end of that day with respect to the investment contract
- 12(11) defines “investment contract”“investment contract”, in relation to a taxpayer, means any debt obligation other than
(a) a salary deferral arrangement or plan (b) a retirement compensation arrangement (c) an employee benefit plan (d) a foreign retirement arrangement,
(d.1) a TFSA,(e) an income bond,(f) an income debenture,(g) a small business development bond,(h) a small business bond,
(i) an obligation in respect of which the taxpayer has at periodic intervals of not more than one year, included in income throughout the period in which the taxpayer held an interest or right in, the obligation, the income accrued on it for those intervals,(j) an obligation in respect of a net income stabilization account,(k) an indexed debt obligation, and(l) a prescribed contract.
- 12(11) defines “anniversary day” based on anniversary day not just year end (Dec 31)“anniversary day” of an investment contract means
(a) the day that is one year after the day immediately preceding the date of issue of the contract,(b) the day that occurs at every successive one year interval from the day determined under paragraph (a), and(c) the day on which the contract was disposed of;
DeductionsAs w/ inclusions, the year in which amnts may be deducted in computing income from business or property is determined by the concepts of “profit” and “loss” in 9(1) and 9(2)
- Where taxpayers compute their income on an accrual basis: deduct expenses in year in which expenses are payable (even if not actually paid until later year)
- Where taxpayers are permitted to compute their income on a cash basis: expenditures are not deductible until the tax year in which they are actually paid
Both accrual and cash methods are contemplated by: 18(1)(a) Disallows deductions of “outlays” (actual payment, cash) or expense (payable), except to the extent it was “made” (paid) or incurred (assumed) by the TP
20(1)(c) which permits a deduction for interest that is ‘paid in the year or payable in respect of the year”
s.18(1)(a) – Can only deduct outlay (paid - cash basis) or expense (payable) if made/incurred for B/Ps.18(1)(b) – Disallows deductions of capital expensess.18(1)(e) – Disallows deductions for reserves for contingent liabilities.
However, where future event is very likely to occur, the liability is deductible. Where it’s not very likely, then liability is a non-deductible contingent one (Time Motors).
Similar principles:- Start w/ s. 9(1) – “truer picture”- Look to s. 18 – is the deduction of the expense denied?- Look to s. 20 – is the expense allowed or allowed in part over time?
Amounts PayableTo the extent income from business or property is generally computed on an accrual basis, with amnts included in the taxation year they are receivable the “truer picture” principle suggests the deductions should be allowed in the year the expenses are incurred or payable
RULE: Deductions allowed in tax yr when expenses are incurred/payable. (Buck Consultants)
Amounts are payable when TP is legally obliged to make a payment, not when payments are contingent, eg: on authorization or another event (JL Guay Ltee, Wawang). o Can only be allowable deduction in year in which it b/cms certain and mandatory
An obligation to do something which may entail paying money in the future is not an expense under 18(1)(a) (Burnco)
JL Guay Ltee v MNR (1971, FCTD)Facts:Building contractor hires subcontractors to perform part of construction - pays them part of the fee
w/ remainder being contingent on their work being approved by architect // Contractor wants to deduct balance of the payment to be made to the subcontractors from its income as an expenseIssue:Whether contractor can deduct the balance of the payment to the subcontractors keeping in mind, it still is contingent on approval by architect? NOAnalysis:Balance payment being made is regarded as contingent b/c need approval – until that time, contractor is under no obligation to pay subcontractorsRule:An amnt withheld which is due and payable in the future can only constitute an allowable deduction in the year in which it b/cms certain and mandatory
Wawang Forest Products Ltd v Canada (2001, FCA)Facts:Taxpayer carried on forestry business through independent contractors who were required to pay their own WCB premiums –- Under agreement allowing TP to hold back share of their contract price until rec’d clearance fr WCB that premiums had been paid – some holdbacks were never paidHeld:Court allowed deduction of all holdbacks in the year in which the work was completed b/c they were payable at this time under the contract, only after which was the taxpayer entitled to w/hold amnts as security against vicarious liability for the contractors’ obligations under WCB legislation
- A legal obligation to pay an amount may exist even if there is some risk that the actual payment may be set off against potential counterclaims.
Canada v Burnco Industries Ltd (1984, FCA)Facts:Burnco operates gravel pit under agreement w/ City of Calgary requiring it to backfill excavated areas // Burnco sought to deduct $700K in computing income as estimate future cost of backfillingAnalysis:An expense is an obligation to pay a sum of money – it cannot be said to be incurred by a taxpayer who is under no obligation to pay anyoneHeld:Deduction NOT allowedRule:An obligation to do something which may in the future entail the necessity of paying money is not an expense until there is an obligation to pay, there is no expense
Buck Consultant Ltd v Canada (2000, FCA)Facts:Taxpayer entered 15-yr lease where first 14 months were rent free // sought to deduct amnts during rent free period based on notional payment schedule according to which rental payments were amortized over the duration of the leaseAnalysis:Deduction would not conform w/ GAAP and does not provide truest picture of TP incomeHeld:Amnts NOT deductible b/c no outlay or expense had been made / incurred as req under 18(1)(a)
Capital Expenditures
Capital expenditures are expenditures creating future benefits- Used by Co’s to acquire or upgrade physical assets such as equipment, property, or
industrial buildings.Capital losses the amount by which purchase price of asset exceeds selling price the loss is realized when asset is sold
18(1)(b) prohibits any deduction of capital expenditures = “outlay of capital”, “loss or replacement of capital” or “payment on account of capital” except as expressly permitted by this part
- May NOT claim deduction on an amount that is from capital property (aka capital expenditure)
- Capital loss: “allowable” portion of the loss (½) is deductible only against taxable capital gains for the year and not against income from a business or property
- Capital expenditure : the amount is added to the cost of the property for which it was made/incurred…and either subtracted from any proceeds of disposition in order to compute a capital gain or loss, or deductible over varying periods of time in computing his income from a business
o As result: capital expenditures not fully deductible in the taxation year in which they are made/incurred are deferred to subsequent years in which gains/loss are realized or deductions are permitted
This ensures a “truer picture” of the taxpayer’s income by matching the deduction of expenditures with the inclusion of revenues in subsequent taxation years
TEST 1: Is the property acquired by the expense considered a capital property?Act doesn’t define “outlay of capital” “replacement of capital” or “payment on account of capital” SO characterizing something as a capital expenditure depends on legal tests from c/l (discussed in Johns-Mansville)
Canada v Johns-Mansville (1985, SCC)Facts:TP operated open pit mine in course of which it was necessary to purchase land on a regular basis to maintain a gradual slope to prevent landslides // TP deducted cost of land acquired during year as ordinary business expense // MNR disallowed on basis that cost land was capital expenditureIssue:Whether purchase of land was a capital expenditure? NOAnalysis:Factors to decide whether an expense or capital expenditure:1. Purpose of expenditures: when viewed form the practical and business outlook was the removal of a current obstacle in the operation of the mine and was not the acquisition of a capital asset2. Expenditures were incurred year in and year out as an integral part of the day to day operations of the undertaking of the taxpayer
3. Expenditures form an easily discernible, more or less constant, element and part of the daily and annual cost of production4. Lands were not acquired for any intrinsic value but merely by reason of location, and after the mining operation for the year in question had been completed, the land had acquired no intrinsic value and consumed in the mined process5. Expenditures produced a transitional benefit - one which had no enduring value b/c similar expenditures were required in the future if the mining operation was to be continued6. Lands acquired in any given year do not produce permanent wall or perimeter to the mining operation but are simply a transitional region of the wall representing the core7. They have occurred for 40 years and there’s no indication that it can continue annually w/o them8. Capitalization will not produce an asset which is subject to CCA recognized in ITA
- i.e. there is no Class for land in Regs9. Did not add to the ore body nor did they increase the productive capacity of the mine10. The cost of these was relatively small and are directly related to the cost of operation averaging over a long period about 3% annuallyHeld:This was an ordinary business expense, directly connected to the daily operations should be allocated to revenue account not to capital therefore was fully deductibleRule:Key factors to look at to characterize an expense as capital:
o were the amounts expended on the income earning structure (capital) or as part of money earning process (revenue expenditure)
o acquiring means of production (capital) or using them (revenue expense)o tools used (capital) versus performing work (revenue expenditure)o if the expense has a lasting value it points to capital whereas if there will have to be
additional similar expenditures in the future it points to revenue expenseo once and for all expense points to capital whereas recurring points to revenue expenditure
*It is a basic concept of tax law: where the taxing statute is not explicit, any reasonable uncertainty or ambiguity resulting from that, should be resolved in favour of the taxpayer
Wardean Drilling (1969, Ex Ct)Ratio:Lease arrangements constitute an acquisition of property by lessee so the lessee is the one who can deduct CCA (not lessor)
- A purchaser has acquired assets of a class when the purchaser has all the incidents of title, such as possession, use and risk, even though legal title may remain w/ vendor as security of purchase
CAPITAL COST ALLOWANCES (CCA)
20(1): may deduct any amounts as are wholly or partly applicable to the capital cost of the property that otherwise might be non-deductible
20(1)(a): allows deduction of CCA on “depreciable property”- Computed using declining balance
- Assets are assigned to a class, percentage of decline is assigned by the class of capital- Deduction of CCA is optional
o where advantageous, TP can forego current deductions and maintain UCC & defer the tax value to subsequent accounting periods
13(1) capital amounts deducted in CCA in previous years, that are then made up for on sale recaptured in full in income for the yearDepreciable Property
13(21): depreciable property = property acquired by the TP in respect of which he has been allowed, or would, be entitled to a deduction of CCA under 20(1)(a)
Requirements:1. Acquired by TP2. Property for which deduction is allowed3. Property is “available for use by TP” (13(26))
“available for use” defined in 13(27) = (1) time property first used; (2) time immediately after the first taxation year after which the property was acquired; or (3) immediately before disposition
Reg 1100(1)(a) sets out the various CCA rates applicable to specific classes of depreciable property [under s 20(1)(a)]:
Class 1 (most buildings) = 4%Class 8 (furniture) = 20%Class 10.1 (passenger vehicles) = 30%
Exclusions from CCA:Reg 1102(1):
(a) amounts already deductible in computing income(b) property that is inventory(c) property not acquired for the purpose of earning income
Reg 1102(2): land is not depreciable property
UCC
Defined in 13(21) by formula:(A + B) - (E + F)
A = total capital cost of any asset in the class (i.e. what you paid for the property)B = recapture amounts from 13(1)E = total depreciation (i.e. CCA in past years)F = the lesser of: proceeds of disposition (minus outlays) OR capital cost
You deduct the lesser of the two b/c the diff b/wn proceeds of disposition and original cost is capital gain – so you shouldn’t have to suck up that amount again for recapture
Proceeds from disposition incl (13(21)):(a) sale price of property(b) compensation for property unlawfully taken, (c) destroyed, (f) damaged
*You cannot take CCA once you have disposed of all the assets in that class
NOTES:*“Half Year Rule” in Reg 1100(2): Can only calculate ½ the normal CCA for a property in the year in which it is acquired
Reg 1100(11) – Prevents taking CCA from losses from rental propertiesReg 1100(15) – Similar rules for leasing property consisting of personal property
ReCapture and Terminal Loss
When an item of depreciable property disposed of, the proceeds from the disposition may be equal to, less than or greater than the UCC with respect to the asset.
a. Equal – the rate at which the property was statutorily depreciated appears to match actual depreciation
b. Less – the rate at which the property was statutorily depreciated was insufficient to match actual depreciation. TP disposing of the asset suffers a “Terminal Loss”
c. Greater – the rate at which the property was statutorily depreciated exceeded the actual depreciation. TP disposing of the asset realized a gain - “Recaptured Depreciation”
RECAPTURE:13(1) where the aggregate of CCA claimed for a class and the proceeds of disposition exceed the capital cost of the property acquired by TP (causing UCC to b/cm negative), the excess amount is added to TP income
- 13(21) then adds the excess amount back into UCC, bringing the balance to nil for future calculations
TERMINAL LOSS:20(16) – where TP disposes of all property in a class for proceeds less than the UCC (so UCC is left positive, but he owns no property of that class), he is entitled to deduct the entire remaining UCC instead of the CCA
- 13(21) then subtract this amount from UCC, bringing the balance to nil as a starting point for future calculations
MNR v Browning Harvey Ltd (1990, FCTD)Facts:B (Fanta Co) sought to deduct terminal losses of refrigerators that were sold under supply agreements to shopkeepers – half of which was payable at time of agreement and the other at the end of the agreement // B tried to claim CCA // MNR denied it on basis it wasn’t Bs propertyAnalysis:
- Shopkeepers had possession of the coolers but it was limited possession – limited by the right to take repossession in the event the shopkeeper failed to comply w/ conditions in agreement
- Shopkeepers also had only limited use of the coolers – could only use them for purpose of storing and displaying soft drinks manufactured by Fanta and only on shop premises
- Shopkeepers did not bear all the risk of loss – repairs governed by manufacturer warranty given to the TP
Held:Thus Shopkeepers did not acquire the right to use the coolers as they pleased and the Df reserves ownership in and title to the coolers by putting limitations on the use of them in the agreement
- TP did not dispose of refrigerators at the time of agreement- SO b/c no intent by either party to dispose of refrigerators TP could claim CCA
Hewlett Packard v Canada (2004, FCA)Facts:HP gave sales people vehicles: they’d acquire new vehicle few days before fiscal year end and dispose of old vehicle right after year end – so could deduct on both cars for that year // MNR reassesses on basis there was a change in use of the old vehicle (b/c replacement in their possess – they knew they were going to sell old car before end of year) makes it inventory itemHeld:Pt ensured that the time of disposition of property corresponds with the time of its acquisition by someone else - this is essential to the Act
- no one would own an old fleet for tax purposes in October b/c HP would have disposed of it as of that date but Ford would not have acquired it until the next
Eligible Capital Expenditures
- Enduring in nature- Not capital property- Intangible – like “goodwill”, franchises, customer lists and incorporation fees- Are not deductible as operating expenses in 18(1)(b)
14(5) defines “eligible capital expenditure” as:the portion of outlay/expense made or incurred by the TP as a result of a transaction occurring after 1971 on account of capital for the purpose of gaining or producing income from “business” other than an outlay or expense
o So the payment must be on account of capital (but is not capital)o AND for the purpose of producing income from businesso AND it cannot fall into one of the exclusions in (a)-(f):
(a) Outlays which is deductible in computing income or deductible under some provision of the Act other than 20(1)(b)
(b) Outlays made or incurred for the purpose of producing income that is non-deductible
(c) Outlay that is the cost of, or any part of the cost of,(i) tangible property of the taxpayer,(ii) intangible property that is depreciable property of the taxpayer,(iii) property that would otherwise be deductible in computing income from business(iv) an interest in, or a right to acquire any property described in (i)
to (iii)*Basically anything not deductible as an operating expense and not subject to CCA
20(1)(b)Says you may deduct up to 7% of the TP’s eligible cumulative capital in respect of the business at the end of the year
What is “cumulative eligible capital”?Defined by formula in 14(5):
A – (E + F)A = ¾ of the total of all eligible capital expenditures in respect of the business incurred by TPE = ¾ of the consideration for the disposition of the capital propertyF = a formula – which for our sake = P
P = total of all amounts deducted under 20(1)(b) in computing income from business
Example:- Tim Horton’s: bought for 200,000 (3/4 of this = A)- F = $10,500 deducted in 2012- In 2013 sell it for $400,000 (3/4 of this = E)
So CEC = a negative balance (-160,500) thus this is dealt w/ in s. 14(1)
14(1) says: essentially says, you have to include 2/3 of the excess (-160,500)- You do this b/c 2/3 of ¾ = 50% - and only 50% of capital gains are subject to tax
24(1)If you have ceased to carry on a business and don’t own any eligible capital property but still have an amount in a CCE you can claim it as a terminal loss
Pre-Paid Expenses
18(9) – Disallows immediate deduction of certain prepaid expenses, which instead are deductible in the subsequent year to which the expense can “reasonably be considered to relate” rather than the year in which the expense is incurred/made.
- Purpose: provides a “truer picture” of the TPs business income for the year by matching expenses and revenues
o So expenditures incurred/made by taxpayer for prepaid rent, interest, insurance and taxes for services rendered in a subsequent taxation year will not be deductible until the year to which they relate
Section 18(9)18(9) Notwithstanding any other provision of this Act,
(a) in computing a taxpayer’s income for a taxation year from a business or property no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred
(i) as consideration for services to be rendered after the end of the year,
(ii) as, on account of, in lieu of payment of or in satisfaction of, interest, taxes, rent or royalties in respect of a period that is after the end of the year,
(iii) as consideration for insurance in respect of a period after the end of the year, other than(A) where the taxpayer is an insurer and(B) consideration for insurance on the life of an individual under a group term life insurance policy where insurance is in respect of a period that ends more than 13 months after the consideration is paid, or
…(b) such portion of each outlay/expense shall be deductible in computing the taxpayer’s income for the subsequent year to which it can reasonably be considered to relate;
This provision has been considered in 3 cases:Amortization under 18(9) ? THINK: making payments for goods/services that will be received in future periods as these prepaid amounts are used up, the value of the asset is expensed or “amortized” over time
- insurance is a good example
NO – one-time tax doesn’t relate to a “period” “after the end of the year” (per 18(9)(a)(ii)) (Urbandale Realy); nor TIPS (Canderel)
YES – prepaid rents and prepaid service contracts because cant be reasonably or directly attributed to production of specific revenues (Toronto College Park)
“amortize” = paying off in installments over period of time
Urbandale Realty Corp v MNR (2000, FCA)Facts:Municipality Ottawa-Carleton charged a regional development charge – this is a one-time fee paid just to build a house, you never get it backHeld:18(9) does not require the amortization of a regional development charge from Ottawa-Carleton municipality b/c this one-time tax did not related to a “period” per 18(9)(a)(ii) b/c it doesn’t relate to a certain period it isn’t captured by 18(9)
Toronto College Park Ltd v Canada (1996, FCA)Facts:TP argued the absence of tenant inducement payments from 18(9) authorizes their immediate deduction b/c tenant inducement payment cannot be easily matched to a specific source of income in subsequent tax yearsAnalysis:18(9)(a)(ii) requires prepaid rents to be amortized over the period to which they relate
- Difficult to see a situation where the payment of overhead expenses like rent could reasonably be attributed to the production of a specific revenue that is mated w/ a corresponding item as opposed to general expenditures paid to earn future and speculative income
- Even though amortization is possible, it would not be required but for 18(9)
Canderel Ltd v Canada (1998, SCC)
Held:Taxpayer not required to amortize amounts paid to induce tenants into long-term leases b/c 18(9) does not include tenant inducement payments (TIPs) in the list of amounts
- Though 18(9) is not exhaustive of all amortizable expenses, that Pt directed its mind to requiring amortization of some expenses w/o requiring this of TIPs is telling. Pt would be free to institute this requirement, but has not done so.
Doubtful Debts
s. 20(1)(L)(i) allows TPs to claim a “reasonable amount in respect of doubtful debts that have been included in computing income for the year or a preceding year” as a reserve
- B/c it is a reserve, you have to bring it back into income in the following year- Where an amnt is deducted here, it must be incl in computing TPs income for the
immediately following year under 12(1)(d)
NOTES:*Use of word “may” = optional* Amnt you can claim must be “reasonable” – open to interp* Must be re the amounts you used in computing income in the year or a preceding year
What is a “reasonable” reserve?
Coppley Noyes & Randall Ltd v MNR (1991, FCTD)Facts:Mens clothing manufacturer sells to small indep owned retailers // included $2.3M in doubtful debts // Minister reassessed allowing only $1.4M- To determine whether each owing account was “doubtful” Pf looked at:
Age of overdue account; customer’s financial position, history of NSF cheques; whether sales were increasing/decreasing; personal characteristics of customer (age, health); local conditions to customer; whether amnts paid since Nov.
Pf continued to ship goods to customers despite arrears: encourage retail dev = increased market- MNR said this was evidence Pf expected debts would be paid
Issue:Whether the 2.3M reserve for doubtful debts was “reasonable” per 20(1)(L)?Analysis:- Nothing in ITA which would require departure from GAAP- MNR admits reassessment not based on same knowledge of accounts Pf had and that he didn’t
consider some factors such as break-up value to accounts to Pf- Among factors to consider in estimating reserve:
o Time element (age of overdue account)o History of accounto Financial position of cliento Any increase/decrease in client’s total saleso Past bad debt experience of taxpayero General business condition in the countryo Particular business condition in the particular locality
- To be doubtful debts, must be more than just some doubt account might not be paid – must be good and substantial reason to question likelihood of payment (Picadilly Hotel)
- For debt to be in a reserve for doubtful debts, it is sufficient that there is a reasonable doubt about the collectability of it (IT Bulletin)
- 20(1)(L) says reserve must be adjusted downward as a result of amnts paid b/c accounting principles require all current info be taken into account in preparing financial statements
Held:Taxpayer’s assessment was more appropriate one: amount ID’d by TP falls w/in range of acceptable per GAAP – and applying GAAP more consistent w/ purpose of Act
Rule: GAAP should be followed for purpose of 20(1)(L)
Bad Debts20(1)(p)(i) allows TPs to deduct the total of all debts owing to them which are established by him to have b/cm bad debts in the year, and that have been included in computing the TPs income for the year or a preceding taxation year
- So you can reserve the debt when it is doubtful (above)- and you can deduct the debt when the debt is bad (here)
* no requirement that the deduction be included in computing the taxpayer’s income in the immediately following or any subsequent tax year (unlike 20(1)(l), (m), and (n))
*If amnt of bad debt is subsequently rec’d in any taxation year, it must be included in computing TP’s income for that taxation year per 12(1)(i)
Anjalie Enterprises Ltd. v Canada (1994, TCC)Facts:A sold real property to F for $1.6M in exchange for 2 mortgages ($1M and $600K) // F failed to make payments on second mortgage, and A granted order nisi of foreclosure – at this time property worth only $700K so not econ viable to repossess the property // A claimed deduction for bad debt in ’82 // in ’89 advised MNR they’d claimed in error and should’ve claimed in ’83 (when change to Act re period for carrying forward losses increased from 5 to 7 years) and A claimed the loss in ‘89MNR disallows ’89 carry forward on basis of no longer carry forward from loss originating in ‘82Issue:When does a debt b/cm bad?Analysis:When debt is bad is a q of fact
- generally bad = when uncollectible in the year- what is uncollectible is a matter of TP own judgement as a prudent businessman (Picadilly)- TP should be in position to satisfy MNR, debt was bad AND it didn’t b/cm bad earlier (Boag)- Determination of bad debt cannot be revised in light of facts which only b/cm apparent later
(Hogan)Normally bad debt should be written off as soon as all normal collection procedures have been carried out w/o success however TP knowledge of debtor’s situation may dictate otherwise
- That A continued to seek recovery until ’84 and BCSC did not grant order nisi until after ’82 taxation year ended must be considered also that no amendment was made in ’83 filing
Held:- TP used his business judegement in ’82 and declared a loss – cannot 6 yrs later benefit from
changes in Act- Loss was incurred in ’82 therefore ’89 past 5-year carry forward period
Taxable Capital Gains and Allowable Losses3(a) is your income 3(b) says you also include “net taxable capital gains”
“capital” not defined in Act
“property” = any kind of property whether real/intangible, corporeal/incorporeal. (s. 248(1))
- Two types in act: o “capital property” = where gains/loss from disposition would be a capital gain/loss
(essentially, anything other than inventory) (s. 54)o “Inventory” = where gain/loss would be characterized as income/loss from
businessGenerally, a gain/loss from disposition of business property = where the property is disposed of in the course of business or pursuant to adventure/concern in nature of trade
To characterize gain/loss as capital ones, dep on tests from courts to determine whether property is disposed of in the course of business/adventure/concern in nature of trade:
Real Property“Land and anything growing on, attached to or erected on it, excluding anything that may be served w/o injury to the land”
- includes estate, interest, right in land, fixtures, leasehold interests- does not include mortgages
Regal Heights Ltd v MNR (1960, SCC)Facts:1953 RH buys 3 parcels of land to build lg shopping centre (mall, parking, ads) // Est. RH Corp and transferred property to it in return for shares // B/cm apparent shopping centre ≠ be est. b/c lg department store announced intention to locate elsewhere in neighborhood // 1954 sell at profitIssue:Whether profit was derived from venture/concern in nature of trade (and therefore business income subject to income tax)? YESAnalysis:Ap argues their efforts ≠ intention to sell at profit (as trial judge held): secured favorable opinion fr YYC re-zoning board; had sketches of centre made up; entered discussions w/ 4 department stores; discussions w/ bank re financing the $2M-$5M project
- Judson J says these were all of promotional character – shopping centre always dep on negotiating lease w/ major dept. store – no evidence any store did anything other than listen to ideas; ≠ get any assurance that any store was interested = speculative
Held:They failed to promote shopping centre and disposed of the property at a profit = venture in nature of trade (taxable)Rule:
Prob w/ “secondary intention” idea: everyone buys property thinking they can make a profit, not assuming they will have a loss – but this is a hard thing to disprove (Irrigation case)
“Secondary Intention” doctrine has been interpreted by subsequent cases as requiring the possibility of resale at a profit as a “motivating” reason or consideration for the decision to acquire the property
IT Bulletin IT-218RIn determining which gains from sales of real estate, courts have considered factors like: (not-exhaustive)
a. Intention w/ respect to real estate at time of purchase(NB: has been interpreted by subsequent cases as requiring the possibility of resale at a profit as a “motivating” reason or consideration for the decision to acquire the property)
b. Feasibility of TPs intentionc. Geographical location and zoned use of real estated. Extent to which intention is carried out by the TPe. Evidence of change of intention after purchasef. Nature of the business, profession or trade of the TP and associates
(i.e. real estate agents would be hard to prove against; more knowledge = more likely intent to sell at profit)
g. Extent to which borrowed money was used to finance the acquisition and terms thereof
h. Length of time real estate was held by TP(shorter time = more evidence of intention to profit)
i. Existence of persons other than TP who share interests in the real estatej. Nature of the occupation of other persons in (i)k. Factors motivating the sale of the real estate
(sale b/c unexpected circs = capital property not inventory)l. Evidence TP or associates had dealt exclusively in real estate
Using these factors – none are conclusive in themselves, relevance of each dep on facts of case
Where property originally acquired as investment may be converted to inventory (or vice versa)Rules governing this in s. 45
- Basically TP is deemed to have disposed of and reacquired property at its fair market value
Tangible Personal Property- Property “that can be seen weighed, measured, felt or touched or that is in any way
perceptible to the senses.
Characterizing gains/losses on dispositions of tangible property dep on purpose property was acquired/used
- Acquired/held for purpose of producing income from business or propertyo = “depreciable property”
gains from disposition are called “capital gains E.g. leasing property
- Acquiring/manufacturing for purpose of selling at profito = “inventory”
gains/losses are included in computing income from business
- Acquiring/using for primarily personal use/enjoymento = “personal-use property”
Canadian Kodak Sales Ltd v MNR (1954, Ex Ct)Facts:Kodak took over Recordak // K business policy re recordaks: continued to lease & also sold used ΔDespite change, K still described its business in tax returns as before: “sale of photographic supplies wholesale” // TP ≠ include amount from sale of recordaks in computing income for tax purposes (b/c capital assets, which at time were non-events) // MNR added amount in computing incomeIssue:Whether profit from sales of previously owned recordaks was profit fr. business (=taxable)? YESAnalysis:TP argued recordaks were regarded as capital assets and had been held as revenue producing property – so when sold, sale was not made w/ view to profit but for purpose of freeing capital
- Just b/c recordaks were treated as capital assets previously, does not prevent their profit from sale being profit from their business of selling photographic equipment
Held:Profits from sales of recordaks were made in the course of K’s business
Sale of Inventory –- S. 23(1)Where on or after disposing of or ceasing to carry on a business, a TP has sold any part of the property that was included in inventory of the business, that property shall be deemed to have been sold in the course of carrying on the business.
IT Bulletin IT-102R2 [pg 955 text]Basically says that if you’re in the position of Kodak and you completely segregate leasing activity from regular activity, and can specifically identify and prove which items are being leased and you sell those items at a lower price that their cost (what they were bought for), they can be classed as disposal of capital property
Corporate SharesFractional interests in ownership of the issuing corporation – confers proprietary interest in corporation itself (rather than the assets of the corporation)
- may be held for purpose of receiving regular flow of income (dividends), resale at profit, or both
Characterizes gains from the dispositions of corporate shares
Irrigation Industries Ltd v MNR (1962, SCC)Facts:Ap incorporated – original purpose: to erect mill for alfalfa dehydration - abandoned. Also purchase & reno of an office building in YYC // Using borrowed $, Ap purchased 4000 shares of Brunswick Mining, 1-4 months later at profit of $26K - Ap had no other dealings in securities otherwise
- If a co ≠ pay dividends, then only way to make money off of them is by selling them. If no dividends CRA says that is speculative – intention was to flip the shares
Pres of Co said they purchased shares b/c felt it was good opp to invest in a co which appeared to have a good chance for growth claimed sale of shares was prompted by bank re repayment of
loan & by decision in informal meeting: found price of the shares had risen so much that it ≠ sound judgment to continue to hold them as an investmentIssue:Whether profit constituted taxable income (NO) or a non-taxable capital gain? (YES)Analysis:
- Difficult to conceive of a case where securities are purchased where the purchaser does not have some intention of disposing of them if value appreciates to a certain point
Taxability should be determined by ascertaining the primary subjective intention of the purchaser at the time of purchase
- Buying shares on an isolated occasion and not as part of his regular business is not engaging in an adventure in the nature of trade merely b/c purchase was speculative needs clearer intention than this
- Quantity of shares purchased ≠ indicative of adventure in nature of trade here (4000/500K)- This ≠ sort of trading that would be carried on ordinarily by those engaged in business of
trading securitiesHeld:
- Test applied: whether Ap entered into transaction w/ intention of disposing of shares at a profit that, standing alone, is not sufficient, must look at other things too
o So court rejects the intention test - this is overturned by cases later stating the imp of intention
Rule:- Taxability should be determined by ascertaining the primary subjective intention of the
purchaser at the time of purchase- * In almost all cases when people buy shares they buy w/ some intent to make profit.
IT Bulletin IT-479R10(a) and (b) say that if you act like a securities dealer, you will be viewed as such and the amounts you gain will be considered part of your income11. Factors to consider in ascertaining this:(a) frequency of transactions (history of buying/selling securities or of quick turnover of properties)(b) period of ownership (securities usually only owned for short period)(c) knowledge of securities markets (knowledge or experience in securities)(d) securities forms part of TPs ordinary business(e) time spent (amnt of TPs time spent studying securities markers, investigating potential purchases)(f) financing (securities purchases are financed primarily “on margin” or other form of debt)(g) advertising (if TP has advertised that he is willing to purchase securities)(h) nature of shares (securities = normally speculative of non-dividend type)
Debt ObligationsReferences any kind of debt obligation (bonds, debentures, bills, notes, mortgages)
- Often acquired to receive regular flow of interest income, may also be acquired for purpose of resale at a premium or gain from holding discounted debt obligations to maturity
- In some circs these gains characterized as interest income w/in 12(1)(c) or deemed to be part interest and part capital under 16(1)(a)
- OR can be a capital gain or income from business
Wood v MNR (1969, SCC)Facts:Over 7 years Ap acquired personally an interest in 13 mortgages, 11 of which were acquired at a bonus or discount (purchased w/ savings, not borrowings) // Investment income accounted for small portion of total income // Ap assessed for income tax on $700 being his share of the discount on the mortgage he’d collected in that yearIssue:Whether the amount was a profit from business/adventure in trade (NO) or capital gain? (YES)Held:Ap’s pattern of activities is consistent w/ making personal investments out of savings, not w/ carrying on business - $700 = capital gain, not taxable.
MNR v Freud (1968, SCC)Facts:TP incurred loss after loaning money to Corp that he had established to dev prototype sports carAnalysis:
- Circs here are exceptional – at the outset this was an adventure in the nature of trade and it remained as such until it was a total loss
Held:- Here the outlay made by the Rt was speculative in nature - even more so at the outset due to
financial difficulties- Thus, the outlay made here cannot be considered an investment
Rule:- A loan made by a person who is not in the business of lending money is ordinarily
considered an investment- Only under exceptional circs can such an operation be considered as a speculation
Millford Developments v MNR (1993, FCTD)Facts:TP real estate developer incurred loss on sale of mortgage it assumed in order to sell land as part of its business operationsHeld:Notwithstanding that TP was not in business of lending money, this was a business loss on the ground that the taking back of the mortgage was solely for the purpose of effecting the sale of real property = business loss (not capital loss)
- I.e. b/c this debt was substituting one speculative asset for another (the take back mortgage), it is the same thing as though the first went bad
Canadian Securities
39(6)Canadian Security = a share of the capital stock of a Corp. resident in Canada, a unit of a mutual fund trust, debenture, bill, note, mortgage, hypothecary claim or similar obligation issued by a person resident in Canada.
- Reg 6200 says this doesn’t include shares whose value is primarily attributable to real property or debt/shares from non-arms-length corporations
39(4) allows TPs to make an election where by a “Canadian Security” is deemed to be capital property, and thus their disposition is deemed to be a disposal of a capital property
- this also works to increase investment in Canadian companies39(5) says 39(4) doesn’t apply to certain taxpayers - who at the time of disposition are:
(a) a trader or dealer in securities,(b) a financial institution(f) a corporation whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof, or(g) a non-resident,
Considered meaning of word “trader or dealer” in 39(5)(a) * IMP CASE:
Vancouver Art Metal Works Ltd v Canada (1993, FCA)Facts:Parties submitted a Q of law:Issue:Whether “trader or dealer” refers only to persons licensed by a regulatory authority to buy and sell securities in the ordinary course of business or whether it is broad enough to include persons engaged in an adventure in the nature of trade?Analysis:Trader or dealer should be given their ordinary meaning:
- “dealer = “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise, but does not include a bank or any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary capacity, but not as a part of a regular business” (Black’s)
A taxpayer who makes it a profession/business of buying and selling securities is a trader or dealer w/in the 39(5)(a)
- It is a question of fact to determine whether one’s activities amount to carrying on a trade or business. Considerations include:
o Frequency of the transactionso Duration of the holdingso Intention to acquire for resale at a profito Nature and quantity of securities held or made the subject matter of the transactiono Time spent on the activity
Held:“trader or dealer” should be given their ordinary meaning and are broad enough to include anyone whose dealing amounts to carrying on a business and can no longer be characterized as investor’s transactions or mere adventures or concerns in the nature of trade.Rule:He loses his right to election under 39(4) when he b/cms a trader or a dealer that is, when his dealing amounts to carrying on a business and can no longer be characterized as investor’s transactions or mere adventures/concerns in the nature of trade
In Robertson court distinguished b/wn trader and dealer:- “dealer” = professional trader (e.g. broker or licensed dealer)
- “trader” = something less than professional trader but who carried on a business activity amounting to something more than an adventure in the nature of trade
Foreign ExchangeFor purpose of computing income tax, amounts of foreign currency must be converted to Canadian dollars based on exchange rates prevailing at the relevant time.
Tip Top Tailors Ltd v MNR (1957, SCC)Facts:Ap purchases large quantities of cloth from Britain – ordinary practice was to pay for each lot by individual purchase of sterling // Changed practice: arranged w/ Canadian bank in London for line of credit of £250K for the purpose of purchasing material and bank could only call for the line of credit at the end of the year // Pound devalued so Co benefitted profiting $160K from thisIssue:Whether the profit from the exchange rate is taxable as business income? YESAnalysis:Rand:
- This was a gain attributable to business carried on by the co the line of credit was bought for sole purpose of buying fabric, thus the currency took on revenue characteristic which was not lost when the surplus was sold
Locke:- It was a scheme for profit making in one necessary part of the Ap’s trading operations and
part of an integrated commercial operation – the purchase of supplies, and payment for them in that currency
Held:Profit is taxable bus. income b/c it arose from the operations of the companyRule:Profits from foreign exchange generally follow the underlying transaction
Shell Canada Ltd v Canada ()Facts:TP obtained capital for US operations by borrowing funds from New Zealand – realized gain from foreign exchangeHeld:Followed Tip Top reasoning:
- They borrowed to raise working capital so any gain/loss should be treated as capitalRule:The characterization of a foreign exchange gain/loss generally follows the characterization of the underlying transaction
SO: ask whether it is part of the normal operations; if so closely tied to them
Computing Taxable Capital GainsComputation:
s. 39(1)(a) - “capital gains” = capital gain for the year from the dispositions of any property other than:
(i) eligible capital property (ii) cultural property (iii) resource property (iv) insurance policy
s. 39(1)(b) - “capital losses” = capital loss for the year from dispositions of any property other than:
(i) depreciable property (ii) property types listed in 39(a) [above]
SO- income from office, employment or property is fully taxable in 3(a)
o But ½ of each capital gain is included in computing net income in 3(b)- Losses from office, employment, business or property are fully deductible under 3(d)
o But ½ of capital losses are deductibleThus when disposing of property at a gain = better to characterize it as capital (not business/property) And when disposing of property at a loss = better to characterize it as business/property (not capital)
s. 38 “taxable” portion of capital gains and “allowable” portion of capital/business loss = ½ the amount of the gain or loss
3(b) computation: (Taxable capital gains from dispositions of non-personal property + Taxable net gain from dispositions of personal property)
- (minus)(Allowable losses from dispositions of non-personal property – allowable business investment losses)
“Taxable net gain” = ½ the taxpayer’s net gain from dispositions of property (41(1))
”Capital gains from dispositions of property” = proceeds from disposition – (property cost + selling costs) (40(1))
In order to determine amnt of taxpayer’s gain/loss from disposition of capital property, need to know the taxpayer’s “proceeds of disposition”, “adjusted cost base” immediately before disposition, and the amount of “outlay and expense” made/incurred byt the TP for making the disposition:
Disposition of Capital Property“Disposition” of property includes: (s. 248(1))Any transaction or event entitling TP to proceeds of disposition of property, other transactions or events involving the redemption, cancellation, settlement, conversion or expiry of shares, debt obligations, options and other kinds of intangible property and transfers of property to a trust
- DOES NOT include: share obligations, property transferred for purpose of securing debt
“Proceeds of Disposition” (s. 54)The lesser of: (1) the proceeds received, and (2) the original cost of the propertyInclude:
(a) the sale price of property sold(b) compensation for property unlawfully taken (c) destroyed, (d) expropriated or (f) damaged(c) amount relating to the sale of a mortgaged property or surrender of property in satisfaction
of debt
MNR v KeiboomHeld:A taxpayer may dispose of property where he conveys an economic interest in a corporation or partnership w/o explicitly transferring shares or an interest in the partnership.
- I.e. where TP transfer value to spouse/kids by causing corporation to issue shares to spouse/kids for proceeds less than fair market value
- This counts as a disposition and owes tax
CRA also views changes to securities, redemption, cancellation, settlement, conversion or expiry of which would be a “disposition” under (b) may also constitute a “disposition of property” where the change is sufficient to affect the nature or econ value of the property.IT Bulletin IT-448The following changes to the debt obligation itself are considered so fundamental to the holder’s economic interest in the property that they almost invariably precipitate a disposition:
(a) change from interest bearing to interest free (or vice versa)(b) change in repayment schedule or maturity date(c) increase or decrease in principle amnt(d) addition, alteration or elimination of a premium payable upon retirement(e) change in debtorAlso, a change in voting rights attached to shares that effects a change in the voting control of the corp
*Courts have held that there is a disposal of property as soon as TP is entitled to the sale price of the property sold*Where property is not sold outright but subject to a lease w/ option to purchase, disposition has been held to occur when the transferor divests itself of “all the duties, responsibilities and charges or ownership and also all of the profits, benefits and incidents of ownership” even though they retain legal title
Proceeds of Disposition:The lesser of: (1) the proceeds received, and (2) the original cost of the property (s. 54)Include:
(a) the sale price of property sold(b) compensation for property unlawfully taken (c) destroyed, (d) expropriated or (f) damaged(c) amnt relating to the sale of a mortgaged property or surrender of property in satisfaction of
debt
Robert v MNR (1990, TCC)Facts:Ap purchased shares in a MURP – goal of investment to legally reduce and defer income tax – firm guaranteed to take up operating costs if deficit // On deficit, firm demands payment so Aps stop their payments (promissory notes) // Post discussions, Ap resold their shares to firm for $1 plus assumption of the balance of mortgage owing by Aps – claimed as loss; proceeds of disposition = $1Issue:Whether amnt owing on payments and operating losses should be included as proceeds of disposition? YESAnalysis:Remission of the debt must be calculated on the sale price:
- To determine sale price, look for true consideration for the transfer of ownership – thus examine the events leading to the transfer of ownership
The claim for operating deficits – to incl in price of building seems uncertain b/c parties did not mutually agree as to amount – they did not monetize the amount because they have released each otherHeld:
- The mortgage and promissory notes were the “proceeds of disposition”- Re sale of building put end to all claims w/ firm so ≠ put value on the mutual releases – so
deficit is not part of proceeds of disposition
Anti Avoidance Rules:68:
- If an amount received can be reasonably regarded as consideration for the disposition of a property, the provision of services, or a restrictive covenant, that shall be deemed to be proceeds of disposition irrespective of the legal effect of the contract or agreement
- The person who gained the property shall be deemed to have acquired it for and amount equal to that amount
69- (a) Where a TP has acquired anything from persons with whom he is not dealing at an arms
length and at an amount in excess of fair market value, the TP shall be deemed to have acquired it at that fair market value
- (b) Where a TP has disposed of anything to a non-arms-length party for no proceeds or proceeds less than fair market value he shall be deemed to have received proceeds of disposition equal to fair market value
- (c) Where TP acquires property by way of gift or inheritance, TP is deemed to acquire the property at its fair market value
o Since only refers to gifts here, can structure the transaction as 2 transactions: Sell ½ interest for half the value of the total value The next day giver her the other ½ interest as gift (she’ll be treated as
having acquired an additional cost base of ½)
Adjusted Cost Base
Adjusted Cost Base = (s. 54)(a) where the property is depreciable property, the capital cost to the taxpayer of the property as of that time, and(b) in any other case, the cost to the taxpayer of the property adjusted, as of that time, in accordance with section 53
“Capital cost” of depreciable property is undefined in the Act - but has been interpreted to mean “the actual factual or historical cost to the taxpayer of the
depreciable property”
“Cost” of other capital property is also undefined but is interpreted to include:- The purchase price of the property, and “those costs intimately associated w/ its acquisition
such as delivery costs, legal fees, accounting fees, survey costs and the like”
s. 26(3)If property owned before 1972, cost of property deemed to be the middle of the following 3 values:
(1) its actual cost to TP (2) fair market value at end of 1971 (3) proceeds of dispositiono Effect: this disregards gains and losses that accrued prior to the statutory
recognition of gains and losses in 1972
Sterling v Canada (1983, FCA)Facts:Pf acquired gold bullion and declared a capital gain on it’s disposition, less the carrying charge related to the financing of the acquisition and safekeeping charges // MNR disallows both chargesIssue:What is included in the definition of “cost” before disposition?Analysis:The Act provides special rules for computing capital gains under which the interest and safekeeping charges could be deductible only if they were part of the cost of the bullion (which they were not)Held:The word “cost” means the price that the TP gave up in order to get the asset
- it does not include any expense he may have incurred afterwards in order to put himself in a position to pay that price or keep the property afterwards
Where TP disposes of part of a property while retaining another part, the adjusted cost base of each part is determined under:43(1) The adjusted cost base to the TP, immediately before disposition of that portion is the portion of the adjusted cost base to the TP at that time of the whole property that can reasonably be regarded as attributable to that part
- Correspondingly, 53(2)(d) stipulates that the amount determined under this provision must be deducted in computing the adjusted cost base of the part of the property that is retained by the TP
s. 47 establishes an ”average cost” rule for identical capital properties by deeming TPs who acquire properties that are identical to one another, you average the cost base
- “identical properties” not defined in Act but we only will see this re shares
o land can never be identical- Where a TP acquires identical debt obligations w/ diff principle amounts however, 47(2)
requires the average cost to be computed according to the ratio of the principle amount of each of the identical properties to the principle amount of all the identical properties.
Expenses of DispositionIn computing gain/loss from dispositions of capital property 40(1)(a) and (b) allow TPs to deduct any outlays and expenses made or incurred by the TP for the purpose of making the disposition
Avis Immobilien GmbH v Canada (1996, FCA)Facts:Ap German Corp purchased property in Montreal for some of it paid in cash, rest borrowed from German bank in Deutche Marks // Loan instrument said Ap had to get bank’s permission prior to disposing of property, prohibiting repayment before 1988 // Ap sells property = capital gain of $9M but did not get bank’s permission and had to repay loan at penalty of $79K; also incurred loss due to exchange rates so net capital gain only $4.8M //MNR allows deduction of bank penalty onlyIssue:Whether the loss on the currency exchange is deductible as a capital loss under 40(1)(a)? NOAnalysis:“For the purpose of” in 40(1)(a) is directed to the action of making a particular disposition – meaning for the immediate or initial purpose of, not the eventual or final goal
- This does not contemplate expenses that may have merely facilitated the making of the disposition
Avis entered 2 transactions: (1) repayment of the loan for the purpose of disposing of the property(2) the exchange of currencies which was transacted for the purpose of repaying the loan
- Only those re the first transaction are deductibleThe dollar/mark conversion loss was linked to the repayment of the loan which was merely incidental to the sale of property – not for the purpose of making the disposition of the property
Special Computation Rules
Personal Use Property
“personal use property” (s. 54)includes (not exhaustive)
(a) property owned by the taxpayer that is used primarily for the personal use or enjoyment of
(i) the taxpayer,(ii) a person related to the taxpayer, or(iii) where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary,
(b) any debt owing to the taxpayer in respect of the disposition of property that was the taxpayer’s personal-use property, and
(c) any property of the taxpayer that is an option to acquire property that would, if the taxpayer acquired it, be personal-use property of the taxpayer,
Where personal-use property is disposed of for less than its original cost, the loss is generally attributable the TPs personal use of the property (40(2)(g)(iii))
- Also, 40(2)(g)(ii) disallows the deduction of capital loss from the disposition of personal-use property
- This often arises where parents try to help their kid’s business where they are not normally in the business of lending money
o Parents cant deduct it as a business loss if the business goes under and where there is no interest on the loan, this provision kicks in
o To get around this, add interest to the loan
$1000 Rule46(1) deems the adjusted cost base and the proceeds of disposition of “personal-use property” to be the greater of $1000 and the amount otherwise determined to be the adjusted cost base/proceeds of disposition
- Simplifies things by exempting capital gains on most kinds of personal-use property worth less than $1000
To prevent people from taking advantage of this rule by disposing of property through partial dispositions, 46(2) requires TP’s to allocate $1000 minimum adjusted cost base and proceeds of disposition among each of the parts disposed of based on the ratio of the adjusted cost base of the part disposed of under s. 43 and the adjusted cost base as a wholeSimilarly, where TP disposes of a number of personal-use properties that would ordinarily be disposed of as a single disposition and the fair market value exceeds $1000, 46(3) deems the set of dispositions to be a single-personal use property and each disposition disposes of a part of that property
Burnett v Canada (1995, TCC)Facts:Ap and wife purchase old house, inherits new house fr dad and then demolish old house to build a new house to sell at profit // builder unreliable; real estate prices dropped 50% and cost of construction way more than anticipated // family had to sell old house to pay and moved into unfinished new house // finally sold new house at loss and seeks to deduct as incurred in carrying out an adventure in the nature of tradeIssue:Whether this was an adventure in the nature of trade (YES) or personal use property (NO)?Analysis:
- Most people expect to sell their principle residence at some time & hope to realize a tax-free capital gain
- It is possible to speculate in one’s principle residence but it requires fairly cogent evidence to justify the conclusion that the house where one lives has b/cm an object of trade (Schlamp v Queen)
Factors weighing in favour of principle residence only:- Was principle residence before house was demolished (and a capital property)- Ap lived in new house for several years as their principle residence and rented it out- During construction entire family participated in design in manner consistent w/ intent to
live there permanently (rooms named after children)Factors weighing in favour of adventure in nature of trade:
- Aps intention to realize profit on the sale of new house was ill conceived but at least understandable given market in 1979
- New house much too large and elaborate for family as permanent residence- Sale of inherited house and return to new house consistent w/ financial exigencies
prevailing at the timeHeld:On balancing of evidence this was more consistent w/ a trading incident
Boudreau v Canada (1999, TCC)Facts:TP purchased his parent’s principle residence and rented it to his parents at below market rates until he sold it to his sister for less than he’d paid for it // argued he’d acquired the property as an investment for purpose of gaining or producing rental income and tried to deduct lossIssue:Whether this was a personal-use property? (YES) Or an adventure/concern in nature of trade? (NO)Analysis:Property wasn’t acquired for purpose of gaining income from property and so he cannot claim a capital loss on the disposition of the property b/c it relates to personal-use propertyHeld:Deduction of terminal loss disallowed – was personal-use property
Listed Personal Property
“Listed personal property” = (s. 54)Personal-use property that is all or any portion of or any interest or right to:
(a) print, etching, drawing, painting, sculpture, or other similar work of art,(b) jewelry,(c) rare folio, rare manuscript, or rare book,(d) stamp, or(e) coin;
Dispositions from these generally reflect market fluctuations rather than wear and tear so Act excludes these from the general rule in 40(2)(iii) which deems capital losses from dispositions of person-use property to be nil.
The capital losses from these are only deductible against capital gains from the dispositions of listed personal property
Are also subject to the $1000 Rule
41(1) defines a TPs taxable net gain from dispositions of listed personal property as ½ the amount determined to be the TPs net gain from dispositions of such property
- “Net gain from dispositions of listed personal property” = (41(2)(a))
The amount by which the total of the TPs gains for the year from dispositions of listed personal property exceeds the total of the TPs losses for the year from dispositions of listed personal property
o In computing this, TP’s may deduct from this amount such portion as the TP may claim of his listed personal property losses for the 7 years immediately preceding and the 3 years immediately following the taxation year (41(2)(b))
- “listed personal property loss = (41(3))”Where the total losses from dispositions of listed personal property exceed the total of the gains from dispositions of listed personal property
Principle Residence
“Principle Residence” = (s. 54)“a particular property that is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation and that is owned, whether jointly with another person or otherwise, in the year by the taxpayer, if
(a) where the taxpayer is an individual other than a personal trust, the housing unit was ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common- law partner or by a child of the taxpayer,
Based on this definition there is 2 part test for principle residences:1. Must be a housing unit that is owned by the TP or jointly2. Housing unit must have been ordinarily inhabited by the TP, his spouse, former spouse or child
Further, 54(e) of this definitions provides that a principle residence shall be deemed to include:- land subjacent the housing unit, or - land contiguous to the housing unit that can be reasonably regarded as contributing to the use and
enjoyment of the housing unit as a residenceo except where that land exceeds ½ hectare – the excess will be deemed not to have
contributed to the use and enjoyment unless the TP establishes that it was necessary to use and enjoyment
Look at physical location of house: lakefront property generally not necessary to use and enjoyment, but access to road would be
Also if well or septic system is on other 1/5 hectare Also consider regional district requirements – where these apply that will be the
amount you need to use and enjoy the property (Yates)54(c) stipulates that were a TP is an individual, the property must be designated by him in the prescribed form and manner to be his principle residence
40(2)(b) sets out the formula for calculating the TPs gain for the year from the disposition of a principle residence:
A – (A x B/C)A = the capital gainB = 1+ the number of taxation years you occupied it
C = the number of taxation years you owned it
Flanagan v MNR (1989, TCC)Facts:Ap purchased lot on Shuswap Lake from mother but was denied building permit // purchased land from land across road and caused easement on it for septic system // Had trailer and 2 vans we drove from Van to Shuswap on weekends, equipped w/ toilets, sink, bed, cupboards, lighting – didn’t leave trailer there for fear of vandalism // Sold the properties separately and claimed them as principle residences (so ≠ include any part of the capital gain in income on tax return) // MNR disallowed on basis that there was no “housing unit” ordinarily inhabited by Ap on either propertyIssue:
- Whether a “housing unit” was ever located on these properties? (YES on 1st)- If so were they a part of the principle residence? (YES – only 1st)
Analysis:“Housing Unit” ≠ defined anywhere but “housing” = a shelter of a house or house accommodation, lodging, or building thus need not be a building to be a shelter – suitably equipped trailer is OK
- IT-120R3: “housing unit” includes home, apartment, duplex or condo, cottage, mobile homes, trailer or houseboat imp for court
“Subjacent” = situated underneath or below; underlying- principle residence includes subjacent land to a trailer at the time the trailer is in use as a
housing unit“Contiguous” land will be part of principle residence if it may reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residenceIT-120R3: where residence is occupied for only short period of time during the year (seasonal), whether it was “ordinarily inhabited” dep on whether principle reason for owning property was not for the purpose of gaining or producing income
- Purpose of acquiring land was b/c of its lake frontage and surroundings- Thus the 1st property was “ordinarily inhabited” by F
Held:- 1st property was “ordinarily inhabited” by F- 2nd property was not part of principle residence - not contiguous and b/c no longer owned
the 1st property, was not a part of the principle residenceRule:
- Housing unit need not be a building // Principle reason for owning must have been not to produce income, and that you lived “ordinarily”
- “Ordinarily” does not restrict a person to having residence in one country; a person my ordinarily inhabit more than one housing unit in a year if he does so in the ordinary mode of his life. A seasonal residence may also be a taxpayer’s principle residence
Ennist v MNR (1985, TCC)Facts:Couple acquired condo but before it was ready to live in Mr got a job in Ottawa // Once finally acquired TPs sold 2 weeks later at $33K profit for which they claimed principles residence exemptionHeld:
- Court rejected taxpayers argument that they’d ordinarily inhabited by staying for one night- Just b/c they had possession and right to occupy for 2 weeks, they only stayed for 24 hrs
and this does not mean they “ordinarily inhabited” so requirement for principle residence not met.
Rule:“ordinarily” + “inhabited” together = in most cases, usually or commonly occupied as an abode
Jukic v Canada (1994, TCC)Facts:TP built and sold 3 houses claim principle residence exemption on gains from each on grounds that he and wife inhabited each residences while promoting their saleHeld:
- Properties were primarily acquired for purpose of resale = income (≠ principle residence!)- That they inhabited the properties, he did not “ordinarily inhabit” them – the habitation was
on an interim basis onlyRule:To have principle residence, it must be a capital property to you. If it is inventory, its disposition is not going to give rise to a gain and principle residence provisions will not apply
Contrasted w/…
Falk v MNR (1991, TCC)Facts:TPs bought and sold 3 residences on sale street, claimed principle residence exemptionHeld:While housing transactions objectively did portray a trading activity, they are able to claim primary residence exemption on grounds that:
- neither party was sophisticated individual w/ any experience in the real estate industry- family needs and occupation was primary motivation throughout- property 1 was too small and full of their own construction errors so undesirable for a fam- property 2 sale effort ≠ aggressive or businesslike, was necessitated by external factors- property 3 was sold because of external factors, and was too small also
Rule:- Transactions were principle use oriented w/ acceptable explanations being given for all the
sales and that no secondary motivations were at playNB: Trend now a days is w/o a really good excuse, court not likely to hold this way.
Surrounding LandHow much surrounding land qualifies as residence?
See s. 54 (above) Basically, first ½ hectare of contiguous land you pretty much automatically get; anything over that TP must prove it was necessary for the use and enjoyment of the house a residence.
- NB: ½ hectare = roughly 1 acre
Canada v Yates (1983, FCTD) affirmed by FCAFacts:Df acquired 10 acre parcel of land on which home built // ≠ want 10 acres but had to purchase that
much per zoning bylaw. // used only 1 acre for residential purposes and rented rest to neighboring farmer // Sold 9.3 acres to Guelph under threat of expropriation when bylaw increased to 25 acres and continued to reside on remaining landIssue:Whether the 9.3 acres was a disposition of a principle residence? YESHeld:They could not have legally occupied their housing unit as a residence on less than 10 acres so the entire amnt is subjacent and contiguous and may reasonably be regarded as contributing to their use and enjoyment of their housing unit as a residence.Rule:Minimum lot requirements matter re whether the amount is necessary for use and enjoyment if lot size mins > ½ hectare that will generally make that amnt necessary for use and enjoyment
Rode v MNR (1985, TCC)Facts:TPs realized gain on sale of 9 acre parcel of property, argued the entire property was necessary to use and enjoyment b/c they preferred “seclusion and self-sufficiency in the production of their food to the extent feasible”Held:TPs mode of existence does not render the additional land necessary to the use and enjoyment of their housing unit as a residenceRule:Seem like subjective factors are not sufficient for proof of necessity
Augart v MNR (1993, FCA)Facts:1980 bylaw change increasing minimum zoning requirements, to the exception of existing properties // upon sale of property, claimed tax exemption for principle residenceHeld:Principle residence election allowed – bylaw change made old minimums irrelevant at time of saleRule:Zoning requirements are relevant to a determination of how much land is necessary to the use and enjoyment of a housing unit as a principle residence (where > ½ hectare)
IT-120R6- The excess land must be clearly necessary for the housing unit to properly fulfill its function
as a residence and not simple be desirable- Excess land may be considered necessary where the size or character of a housing unit
together with its location on the lot make such excess land essential to its use and enjoyment as a residence
- Or where the location of the housing unit requires such excess land in order to provide its occupants with access to and from public roads.
Designation
s. 54 requires TP to designate the property as their principle residence for the year “in prescribed form and manner” using form T209 (for individuals) and disqualify any other property that may have been designated as such for any member of the TPs family unit for the year
Reg 2301 says designations need not be made every year but “shall be made” in any year in which the TP has disposed of a property that is to be designated a principle residence or has granted an option to acquire such a property
- And you only need to file form where you don’t get a complete exemption (i.e. where taxable capital gain remains after using principle residence exemption formula)
o E.g. if > ½ hectare of land you’d be subject to some tax so form needs to be filed.
Multiple PropertiesBecause TPs can designate diff properties as a principle residence, this creates opportunity for TPs to choose the property to maximize the value of their exemption
- If you sell 2 properties at same time, you’d look to average gain over the period of time that you owned it and the one that went up in value the most is the one you’d want to designate as your principle residence
- If you sell one and keep the other, you have to choose whether to use or save your principle residence deduction for the 2nd sale if you use exemption on 1st sale but sell the 2nd residence 10 years later, you can use the exemption on the 2nd residence for those subsequent 10 years, bot not the years before for which the other property was declared the principle residence
DispositionsThe rules governing the computation of a capital gain dep on the existence of a “disposition” which triggers the recognition of a gain or loss
- 248(1) defines “disposition” to include more than just regular sale of propertyo also incl where it burns down, stolen, etc.
DEEMED DISPOSITTIONS Taxpayers are deemed to have disposed of carious kinds of property in circs where no actual disposition has occurred:
1. change in use (45(2))2. death (70(5))
Change in Use
Where a property has changed in use:- TP can deduct CCA for depreciable property that is acquired for the purpose of gaining or
producing income – but this is not true for property acquired for personal use/enjoyment- Losses on dispositions of capital property acquired and used for purpose of
gaining/producing income are generally deductible in computing net taxable capital gains – whereas losses from dispositions of personal-use properties are generally not recognized for tax purposes
When the purpose of a property’s use has changed to/from gaining or producing income:- Act deems TPs to have disposed on property for proceeds equal to the property’s fair
market value and to have immediately reacquired the property at equal cost to that fair market value (s. 45(1)(a))
o E.g. you buy house and rent it out. 10 years later you move in and use it as your principle residence:
This change in use triggers a deemed disposition and as a result, whatever recapture in capital gains you might realize, you’ll be deemed to have realized that capital gain and have to pay tax on that.
Then starting in year 10 you’ll have a principle residence exemption in subsequent years.
Duthie Estave v Canada (1995, FCTD)Facts:D and wife acquired land for principle residence // 30 years later D decides to actively consider development of the land – did much to get project going // Confidence in the economy at beginning – however later became recessedD filed income tax in 1981 claiming a $44,000 business loss but didn’t report any change in use of land or capital gains
- D’s estate deducted business expenses in ’82 and ’83 re decline in value of land and requested the loss be carried back to ’81 too
- Pf argues land development business had been commenced in ’81 and expenditures incurred were deductible AND there was a change in land use from capital to inventory so the declined value of the land may be treated as a business loss
- MNR argued no change in land use, and D ≠ commenced development, activities merely preliminary
Issue:Whether D carried on a land development in ’81 such that there was a change in the use of the land to convert it from a personal capital asset to an inventory asset? YESAnalysis:10 facts that supported the creation of a business and change in the use of land these activities are not consistent w/ an intention to sell outright
(1) Frequent meetings(2) Formal minutes kept(3) Consultants engaged(4) Business tasks assigned to various family members and consultants(5) D arranged to devote full time to project and took time away from medical practice to do so(6) Son quit job in Edmonton to move to Invermere to work full time on project(7) $43K expended in ’81 on land development project(8) Accounting advice re business organization had been obtained and tax ruling sought(9) Project managers selected; architect submitted a contract(10) Logic network prepared – market study done, preliminary drawings, finalization of
amenities in progressHeld:There were clear positive acts which resulted in a change in the use of Duthie’s land from capital to inventory in ’81 expenses incurred in ’82-’84 incurred for purpose of earning incomeRule:Need clear and unequivocal positive act implementing a change of intention.
- Though moving off the land or physical change are not conditions precedent
Death
70(5)(a) limits the indefinite deferral of accrued gains and recaptured depreciation by deeming TPs who have died in the year to have disposed of each capital property immediately before their death for proceeds equal to the fair market value of the property over time
- where a person acquires this property as a consequence of a TPs death 70(5)(b) deems this person to have acquired the property at the time of the death, at a cost equal to fair market value of the property immediately before the TP’s death
NOTE: diff in wording: “immediately before death” in (a) vs “time of death” in (b)
Where the property is depreciable property and the original capital cost of the property exceeds its fair market value immediately before death, 70(5)(c) deems the capital cost of the property to the person acquiring it to be the original capital cost of the property to the TP
the diff b/wn this amnt and the fair market value immediately before death are allowed to this person as capital cost allowance in previous tax years
Effect of these rules: triggers capital gain and loss and recapture depreciation and terminal losses in the year of the TP’s death – the cost of the property is set to the person acquiring it and this person is liable for any recapture depreciations
Mastronardi Estate v Canada (1977, FCA)Facts:Life insurance policy of deceased was owned by Mastronardi Produce Ltd policy value decreased by $100K/year after the policy was issued // An informed purchaser of shares in the Co would not pay any more for such shares of that Co than he would have if that Co did not own the insurance policy
- W/o regard to the policy, shares would have fair market value of $323 each- If value of corp’s assets were deemed to be increased by the face amount of the life
insurance policy, the shares would have fair market value of $778 eachIssue:What is the deemed realization of gain on capital property of shares in Mastronardi Produce Ltd following the death of the owner of the shares?Analysis:70(5) enacts a 2-step fiction:
1. TP after he dies is deemed to have disposed of the property “immediately before death”2. He is deemed to have “received proceeds of disposition equal to fair market value of the
property at that time”Arguments:MNR argues words = instant of deathPf argues words = span of time before deathHeld:70(5) prescribes that the deemed realization took place “immediately before death” – at that time, as owner, he was deemed to have received proceeds of disposition equal to the fair market value of the property at the timeValue of insurance policy NOT considered in determining fair market value of the shares
Rule:“Immediately before death” ≠ mean the equivalent of the “instant of death” and does not import a necessity of valuing capital property taking into account the imminence of deathImp of this case: the language of 70(5)(a) immediately prior to death – generally insurance policies do not add to value of company’s shares (b/c its not an asset that has any value immediately prior to death)
Rollovers Rollover provisions permit disposition to occur w/o triggering tax consequences so property “rolls over” into second property
Effects: - Remove tax impediments that might otherwise defer efficient resource reallocation- Where property stolen, destroyed or taken, 13(4) and 44(1) ensure the TP ≠ burdened by
the recognition of gains on the involuntary dispositions – by allowing deferral of tax consequences by using proceeds from the involuntary disposition to acquire replacement property
Exchanges of Property
44(1) allows TP’s to defer the recognition of a gain on the disposition of capital property (other than shares) that is either:
(a) property of which the disposition is w/in the definition of “proceeds of disposition” in s. 13(21)
(c) and the TP has acquired replacement property before the later of, the end of the 2nd taxation year following the initial year and 24 mo after the end of the initial year
(b) property that was a former business property immediately before the disposition, provided that
(d) the TP has acquired capital property to replace the former w/in the later of, the first taxation year following the initial year, and 12 mo after the end of the initial year
*(b), (c), and (d) only apply where the property is stolen, destroyed or taken!
In the circs above, 44(1)(e) generally deems the gains from the disposition of the former property = the lesser of:
the gain otherwise determined OR the amnt by which the proceeds of disposition of the former property exceed (the cost of the replacement property + any outlays/expenses made for purpose of making the disposition)
44(1)(f) deems the cost of the replacement property to be =actual cost – (gains otherwise determined on disposition of the former – actual cost of replacement property and outlays/expenses)
EXAMPLES: NOTE THESE 3 EXAMPLES – SEEMED EXAMINABLE!
Where TP uses all the proceeds from a disposition to acquire a replacement property, the effect of the rule is to not recognize any gains on the disposition and reduce the cost of the replacement by the amount of the gain on the former property.
- if commercial building insured for $700,000 burns down, and you use those proceeds to purchase another building for $800,000 there will be complete deferral of the gain on the first property
o This “rolls over” the cost of the former property to the replacement property and defers the recognition of the gain until the replacement property is disposed of.
- if you buy another property for only $500,000 (using the insurance money) you will realize some of the capital gain or recapture, proportionate to the $200,000 unused.
- So the commercial building w/ insurance value of $700,000 burns down; if you’ve never taken CCA on it. Initial cost was $300,000.
o If you rebuild that building at a cost of $700,000 under 44(1)(e) you will not recognize any of the $400,000 gain on the first property.
44(1)(f) says that the cost of the new structure is not the $700,000 you paid to construct it, it is the $300,000 (the cost of the original property)
So you don’t need to recognize gain, but your cost of the subsequent property is the cost of the first property
- If instead it costs $900,000 to rebuild – don’t need to recognize any gain, but cost of subsequent property is equal to $300,000 cost of original property + additional $200,000 you put in to rebuild the property so cost of subsequent property = $500,000
o If you rebuilt it to only $600,000 here, you would have to recognize $100,000 gain re first property (b/c didn’t use full insurance proceeds) but cost of the second property would be $300,000 cost of first property + $100,00 gain you had to recognize = $400,000
“Former Business Property” = (s. 248(1))Capital property of the TP or a person related to the TP used primarily for purpose of gaining or producing income from business other than a rental property (and subjacent and contiguous lands to rental property) – and that was real and immovable property
- So not rental property- And not tangible personal property – only real property and must be immovableBasically land and buildings used to carry land
Capital property is “replacement property for a former property” if: (s. 44(5))(a) it is reasonable to conclude t property was acquired by the TP to replace the former property(a.1) it was acquired and used by the TP (or a person related him) for a use that is the same as or similar to the use the TP (or related person) put the former property;(b) where the former property was used by the TP (or a person related to him) for the purpose of gaining / producing income from business, the capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose;
Glaxo Wellcome Inc v Canada (1996, TCC)Facts:
Glaxo’s predecessor bought 18.2 acre parcel of land w/ specific intention to use it in an anticipated future expansion of their pharmaceutical business // Glaxo later realized its growth was of such magnitude that future expansion required more space than that – so sold it for $9.5M and bought a larger site for $24M (it had remained vacant whole time from acquisition to sale) // Glaxo filed tax return w/ view to deferring recognition of the capital gain, denied by MNRIssue:Whether Glaxo can treat property as a “former business property” w/in of s. 44(1)(b) so as to defer recognition of the capital gain from its sale? NOAnalysis:Newcastle City v Royal Newcastle Hospital: distinguished from case at bar b/c use of adjacent vacant land by hospital was to assist in keeping air clean and atmosphere quiet. Here, holding land that is not contiguous w/ to Co’s premises and w/ a view to future dev only.Held:Property ws not used by Glaxo for purpose of gaining or producing income from business – it was intended to be used and waiting to be used, but was not used not former business property so ≠ fall under s. 44(1)(b) NO rolloverRule:Replacement property requires old property actually used for the purpose of earning income
McKervey v MNR (1992, TCC)Facts:TP had trucking, dismantling and chop shop – for which he attempted to rezone a parcel of land (denied) // In absence of rezoning had to use it only to store trucks and machinery // Sold property and acquired another, electing to defer gain under 44(1) – MNR denied on basis that original property not used “primarily for purpose of gaining or producing income” from businessIssue:Whether leaving metal on property “using” the land for business? YESHeld:TP appeal allowed – can rolloverRule:Property need not be used to full capacity all of the time to qualify as a “former business property” provided that a reasonable amnt of use is made of it and it is dedicated to and held in readiness for that use and provided that it is not being put to any other significant use.
Transfer of Property to Spouse or C/l Partner
When TP transfers property to person w/ whom he does not deal at arm’s length 69(1)(b) deemed him to have disposed of the property for fair market value
- Corresponding, 69(1)(c) deems the person acquiring the property by way of gift to have acquired it at fair market value
Similarly, where TP dies 70(5)(a) deems TP to have disposed of all capital property immediately before death for proceeds equal to fair market value
- 79(5)(b) deems cost of the capital property to the person acquiring it, to be the fair market value immediately before TPs death
RollOver Provisions…Where recipient of a gift a transferor’s spouse or c/l partner 73(1) and 70(6) provide rollover applicable by default unless they elect out
- 73(1) says where capital property is transferred to a current/former spouse or c/l partner or a trust for their benefit, and the TP ≠ elect out of the rollover, the property is deemed to have been disposed of at that time by the individual for proceeds equal to,
(a)(i) if depreciable property – The proportion of undepreciated capital cost immediately before that time, of all property of that class that the fair market value is of the fair market value immediately before that time of all property of that class(a)(ii) in any other case, the adjusted cost base of that property immediately before that time
- So here, gift occurs at cost rather than at fair market value – unless spouse opts out and files election saying she wants to be treated as having disposed of the shares at fair market value
o Would be preferable where there’s capital losses to apply against it
If one spouse dies and they bequeath shares to their spouse, there is an automatic roll over at cost under 70(6)
- deceased doesn’t have to recognize the gain and the spouse owns property at cost only
73(1.1) ensures the roll over applies to court-ordered divisions on marriage break-up by deeming an acquisition of capital property to be a transfer of property to a particular transferee
- recipient spouse gains tax liability – so when they dispose of it they will have to pay tax on the full gain
70(6) applies where capital property that would otherwise be subject to a deemed disposition under 70(5) is, as a consequence of death, transferred to the TP’s spouse or c/l partner and the property has b/c “vested indefeasibly” in the spouse/partner w/in 36 months after death
248(8) stipulates that a transfer of property shall be considered to have occurred as a consequence of a TP’s death where the transfer was made,
(a) as a consequence of the terms of a will or law governing intestacy(b) as a consequence of a disclaimer, release or surrender by a beneficiary under the will of
the TP
“vested indefeasibly” = (IT-449R)- A property vests indefeasibly when the person obtains a right to absolute ownership of the
property in such a manner that the right ≠ be defeated by any future event, even though the person may not be entitled to the immediate enjoyment of all benefits arising from that right
- Property is considered to vest indefeasibly in the person to whom it is bequeathed when that person has an enforceable right or claim to the ownership thereof
Transfer of Farming or Fishing Property to Child
If you transfer farming or an interest in land or shares in land there is a roll over interest73(3) and 70(9) permit a rollover on the transfer of capital property to a TPs child for land or depreciable property that was “used primarily in a fishing or farming business carried on in Canada which the TP or his spouse/partner or children were actively engaged in on a regular and continuous basis
Stop-Loss Rules These rules prevent the realization of a loss on the disposition of a property where the TP or a person affiliated w/ him acquires the property or one identical to it w/in a specific period of time
Purpose:Prevent realization of accrued losses where TPs interest in the property is not actually relinquished but continues through the acquisition of the property by the TP or his affiliate shortly before or after the disposition
Example:I have shares in Bombardier which declined in valueI also have shares in Apple on which I have realized a capital gain
- I will have to pay tax on this- So I want to trigger a loss to offset the capital gain- So I transfer the Bombardier shares to my wife – this way I trigger the loss to me to offset
my capital gain, but b/c my wife has the shares, when they go up in value they’re still thereThis is what this superficial loss rule is there to stop you from doing
- If I replace the property 30 days before or after it’s sale, the stop loss rule kicks in and ≠ allow me to claim loss.
- Loss rolls over to replacement property or is inherited to the person the shares were transferred to.
“Affiliated Persons”: 251.1(1)an individual as well as a spouse/partner of the individual
“Superficial Loss”: s. 54A loss from the disposition of property where,
(a) 30 days before through 30 days after the disposition, the TP (or a person affiliated w/ him) acquires a property that is, or is identical to, the particular property, and(b) at the end of that period, the TP (or an affiliated person) owns or had a right to acquire the substituted property,
Basic Rules applicable to dispositions of capital property: 40(2)(g)(i)53(1)(f) adds the amnt of the superficial loss in computing the adjusted cost base of any substituted property thereby preserving the accrued loss for recognition when the substituted property is ultimately disposed of
Example:- I bought 1000 shares for $22 and I sell them for $6 = loss of $16/share- W/in 30 days I buy 1000 shares for $6 (the substituted property)
o The cost base of these are not $6/share – it is $6/share + the $16/share denied losso So the adjusted cost base of these shares is $22/share
Other Deductions
These are other deductions which generally not allows in computing income/loss from specific sources
Support PaymentsPrior to 1997 spousal and child support payments were deductible in computing income of the payer and included in the income of the receiver of the payment – called “deduction-inclusion” system
- This provided income splitting that encouraged those w/ support obligations to make support payments and increased the after-tax resources available to separated families(transferring money from higher earning spouse to lower earning spouse in lower tax bracket so that less tax being paid overall on that amount)
Thibaudeau v Canada (1995, SCC)Facts:TP was divorced mother of 2, awarded custody and $1150/mo for their maintenanceDissent: (McLachlin J + L’Heureux-Dube)Deduction-inclusion system adversely affects 30% of couples b/c the inclusion of child support payments in computing income of custodial parent discriminated against them in a manner unjustifiable under s. 1 of Charter
This case brought public attention and Fed gov changes law and eliminated the deduction-inclusion system for child support payments entered into after 1997
- Spousal Support: continues to be deductible for payer and included in income of recipient- Child Support: not subject to deduction-inclusion system if entered into after 1997
o Though deduction-inclusion does still apply where agreement entered prior to 1997
CalculationsEssentially, TP may deduct support amounts paid in the year, except where they are child support
60(b) Taxpayer may deduct:A – (B + C)
A = all support amounts paid after 1996 where the TP and the recipient were living separated and apart at the time the amount was paidB = all child support amounts payable under and agreement or orderC = total of all amounts paid by TP after 1996 which is deductible in computing income for a preceding taxation year
“support amount” = 56.1(4)The amnt payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children or both if the recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse/partner (or former) and the payer are living separate and apart b/c of breakdown of partnership, and the amnt receivable under
order of tribunal or written agreement(b) the payer is a legal parent of a child of the recipient and the amnt is receivable
under an order made by a competent tribunal so written agreement not enough here!
“child support amount” = Any support amnt (as defined above) that is not identified in the agreement/order as being solely for the support of the recipient who is a spouse/partner (or former) or legal parent of a child
Also must meet commencement date requirements:“commencement day” =
(a) where the agreement or order is made after April 1997, the day it is made; and(b) where the agreement or order is made before May 1997, the day, if any, that is after April 1997 and is the earliest of
(i) the day specified as the commencement day of the agreement or order by the payer and recipient under the agreement or order in a joint election (ii) where the agreement or order is varied after April 1997 to change the child support amounts payable to the recipient, the day on which the first payment of the varied amount is required to be made,(iii) where a subsequent agreement or order is made after April 1997, which changes the total child support amounts payable to the recipient by the payer, the commencement day of the first such subsequent agreement or order, and(iv) the day specified in the agreement or order, or any variation thereof, as the commencement day of the agreement or order for the purposes of this Act.
Applying This:Where parties are v adversarial w/ one another:
- Payer will want to minimize child support and identify spousal support so payer can get max amount of deduction and recipient has to include it in their income and pay tax on it
- Recipient will want to maximize the child support so they don’t have to incl it in income and payer cannot deduct it.
In applying these provisions it is necessary to determine all of the following: 1. Whether the amount was payable:
a) As an allowance, orb) On a periodic basis for the maintenance of the recipient, children of
recipient or both2. Whether the recipient has discretion as to the use of the amount3. Whether the payer and recipient were living apart b/c of the breakdown of their
marriage/partnershipo B/c of cost of living courts have recognized that living on separate floors is
sufficient5. Whether the amount was payable pursuant to a written agreement or court order
a) When the agreement/order was madeb) Whether the agreement specifies an amount payable solely for the support of
the spouse, c/l-partner (former spouse or cl-partner), or parent.
Allowance and Discretionary UseRequirement for discretion come from defin of “support amnt”
Why is there this requirement for discretion?i. You pay tax on your ability to pay – if no control over $ no ability to pay
ii. Law recognizes it is imp that people can get on w/ their lives – how can you do if ex is dictating how you can spend the money you receive?
60.1(2) and 56.1(2) deem amnts payable under a court order/written agreement in respect of specific expenses to be payable/ receivable as an allowance on a periodic basis and subject to discretionary use by recipient where order/agreement provides these subsections apply to any amnt payable
- Provisions apply to expenses that are “on account of medical or education expenses or in respect of the acquisition, improvement or maintenance of a self-contained domestic establishment
So b/c payment for medical/education/housing are so imp you can specify that a support amount be used for those items. BUT you have to state that w/ respect to those particular uses, the deeming provisions 60.1(2) and 56.1(2) are to apply.
Armstrong v Canada (1996, FCA)Facts:On separation Rt moved out of matrimonial home and was order by court to pay monthly mortgage obligation on home // Order later amended such that he also had to pay all municipal taxes & tax arrears // Rt failed to meet monthly payments – wife obtained garnishee orders so he paid her through her solicitor // MNR disallowed deduction of the mortgage payments and taxes from RtIssue:Whether payments re monthly marital obligations (incl taxes) may be deducted from income? NOAnalysis:
- 60.1(2) applies only “where the decree, order, or written agreement…provides that and the two subsections apply to any payment made pursuant thereto”.
o No such statutory language appears in either of the court orders hereo Thus 60.1(2) can have no application in allowing the deduction
- The separated spouses are bound by an order – thus it is impossible to have discretionHeld:Wife ≠ discretion as to use of the money (b/c to go specifically to mortgage and taxes) thus the funds cannot be deducted from income
Mambo v Canada (1995, TCC)Held:That there be specific reference to these subsections in writing has 2 purposes:
1. To confirm that both parties know there are tax consequences to such an order/agreement2. To comply w/ prov statute that says parties participating in court orders/agreements have
each had independent legal advice due to their serious and permanent consequence
But these comments don’t really make sense in the realities today b/c it assumes both parties can afford to get indep legal advice…
Velleaux v Canada (2002, FCA)
Facts:TP drafted agreement stipulating support payments would be “net of tax” (but didn’t specifically refer to the 2 provisions) and thus he deducted and the former spouse included, these amnts in computing income for 7 yearsHeld:Court rejected strict interpretation from Armstrong:
- S. 56 and 60 allow splitting of income for tax purposes – to help minimize potentially devastating financial effects of divorce
- Thus, strict interpretation of these provisions would be adverse to the purposes of Pt- Better interpretation would be that express reference to the 2 provisions is not necessary as
long as it is apparent from the written agreement that the parties have understood the tax consequences of that agreement
Larsson v Canada (1997, FCA)Facts:TP made third-party motgage payments per court order, which were followed by another order stipulating the payments were payable under 60.1(2) and 56.1(2)Held:Final order applies retroactively – and payments deductible to payer (& incl in income of receiver)
Arsenault v Canada (1995, TCC)Facts:TP entered separation agreement in which he was required to pay child and spousal support of $700/mo for which he provided the former spouse w/ rent cheques payable to her landlord // MNR disallowed deduction on basis former spouse ≠ have discretion as to useHeld:Her consent to the arrangement, which was not legally binding, constituted an exercise of discretion
- She could have insisted payments come to her rather than landlord, this is where the discretion lies
Hak v Canada (1999, TCC)Facts:TP and wife enter separation agreement under which he had to pay $1000/mo in form of rent, utilities and health-care premiums // MNR disallowed deduction on basis former spouse lacked discretionary use of the payments and b/c agreement ≠ refer to the 2 provisionsHeld:The former spouse had discretion by constituting her husband as her agent to pay certain expenses on her behalf
- payment of rent and utilities was just an alternative means of satisfying the payers obligation to pay his spouse
- failure to mention s. 60.1(2) and 56.1(2) cannot be fatal to deductibility
Serby v Canada (2001, TCC)Facts:
TPs husband was ordered to pay monthly maintenance, a portion of which was to be remitted directly to third parties on TPs behalfHeld:TP did NOT have discretion as to use
- Says Hak case was wrong:Mrs. Hak did not have discretion either b/c once she agreed to have husband pay on her behalf, she could not have unilaterally given instructions to Mr. Hak to stop there the v purpose of the agreement was to remove discretion b/c she was irresponsible w/ money – but once she made the agreement, she could not change it and thus it cannot be said that she had any discretion as to use
Periodic Maintenance PaymentsThe definition of “support amount” in 56.1(4) requires amounts be payable or receivable on a periodic basis for the maintenance of the recipient, children or both
McKinnon v MNR (1989, FCA)Facts:Decree nisi of divorce require MK to pay wife $130K in form of transferring her a parcel of land and ‘periodic maintenance’ of $115K payable in consecutive annual installments over 4 years + 10% interestIssue:Whether the payments made pursuant to decree nisi were deductible to TP?- Dep on whether they were made as an allowance for maintenance (deductible) or periodic payments as installments of a lump sum (≠ deductible)Analysis:Court must look at circs aroud the payment to properly characterize it. Consider: (not exhaustive)
1. Length of periods at which payments are madeo Paid weekly or monthly = allowances for maintenanceo Difficult to envision payments made at intervals >1year as being allowances for
maintenance Here, payments made annually
2. Amnt of repayments in relation to income & living standards of both payer / recipiento Payment no greater than expected to be required to maintain recipients standard of
living = allowanceo Payments substantial portion of taxpayer’s income (or exceeds it) – difficult to view
as allowance Amounts greatly in excess of alimony and v large proportion of TPs income
3. Whether payments bear interest prior to their due dateo Interest obligations more common w/ lump sum payable by installments
Here, interest payable4. Whether amounts can be paid by anticipation at the option of payer; or can be
accelerated as a penalty at option of recipient in event of defaulto Prepayment and acceleration provisions commonly assoc w/ lump sums, not
allowance for maintenance Here, TP has privilege and wife may accelerate payment
5. Whether payments allow significant degree of capital accumulation by recipiento Life insurance premiums, blended mortgage payments, etc. allow accumulation of
capital over time however, they’re a normal expense of living which are paid from income and can form part of an allowance for maintenance
o Allowance for maintenance ≠ allow for accumulation over short period, of a signif pool of capital
Here total sum = a signif amnt compares to TPs income and real estate value6. Whether payments are stipulated to continue indefinitely or whether for fixed term
o Allowance for maintenance = provides for continuance indefinitely or until some event (child turns 18)
o Sums may be more readily seen as being of a capital nature Here, payment made over fixed term
7. Whether payments can be assigned and obligation to pay survives lifetime of payer/recipient
o Allowance for maintenance = personal to recipient & therefore unassignable, terminating at death
o Lump sum = forms part of recipient’s estate, is assignable and will survive him Here, payments not dep on survival of either party
8. Whether payments purport to release payer from future obligations to pay maintenance
o Where there is release, easier to view payments as the reducing the sentence or purchase of the capital price of an allowance for maintenance not sure I understand what this says
Payments made are in satisfaction of all financial relief under Divorce ActHeld:These were installments of a lump sum settlement thus, not deductible
Sills v MNR (1985, FCA)Facts:TP supposed to have received support payments of $300/mo but instead rec’d $1000 3x/yearHeld:B./c payments were payable on monthly basis, their late payment ≠ change their character as amnts payable on a periodic basis for the maintenance of TP and her children must be incl in income
Widmer v Canada (1995, TCC)Facts:TP accepted $15K settlement of $50K of child support payments in arrears and agreed to reduce monthly payments from $790 to $600/mo // MNR claimed $15K should be included in income b/c it was an amnt paid to obtain a release from existing obligations, not for maintenance of the kidsHeld:When the amount actually received is so different from and so much smaller than the amnt owed, the amount rec’d cannot be regarded as having the same character as the amnt owed NOT to be incl in income
Stephenson v Canada (2007, TCC)Facts:TP owed $25K in accumulated arrears of spousal support – pad $7,500 in two installments under court order terminating his obligations and stipulating these payments would be tax deductible
Held:Distinguished from Woodmer
- Character of payments ≠ change particularly where all parties agreed that was not the intention of the order
Ostrowski v Canada (2002, FCA)Facts:TP required by court to pay $88K as a lump sum payment for maintenance and support for 2 years – sought to deduct from income under 60(b)Held:Deduction allowed
- This case distinguished fr Armstrong on basis that the order ≠ extinguish the TP’s support obligations but represented an advance payment of amnts that remained payable on a periodic basis
Pouzar v Canada (2007, TCC)Facts:TP required by court to satisy spousal obligations through purchase of an annuity w/ former spouse as the payee // MNR assessment disallowed deduction on basis that annuity not payable on a periodic basisHeld:Court order to make periodic payments was the ‘underlying obligation’ and the securing of that obligation by way of annuity does not change the nature of that underlying obligation
Rules Relating to Computing Income
Reasonableness
s. 67 says no deduction shall be made in respect of an outlay or expense of which any amnt is otherwise deductible except to the extend that the outlay/expense was reasonable in the circs
Cipollone v Canada (1994, TCC)Facts:Ap’s business was a clown and humorologist // claimed revenues b/wn $85-$5,300 and resulting losses up to $14,000 b/wn ’87-’94 // MNR disallowed deductions on basis she had no reasonable expectation of profit and therefore no businessIssue:Whether the deductions made were reasonable? NOAnalysis:She spent money in order to earn a profit and her expectation of earning a profit is reasonableBUT her deduction of expenses is not reasonable per s. 67
- NOT reasonable b/c expenses compared to revenues SO disproportionate- Expenses were claimed for clothing, accessories, automobile, entertainment, promotion,
travel, office, and home…Held:Claim for expenses unreasonable – referred back for reassessment on basis that a reasonable portion of expenses are properly deductibleRatio:Cannot deduct unreasonable expenses
Mohammed v Canada (1997, FCA)Facts:TP used borrowed funds to purchase a residential property for rental purposes // MNR relied on s. 67 to limit deduction of interest expenses on the borrowed funds b/c they were unreasonable as expenses were bound to exceed revenueAnalysis:Disagreed w/ Cipoloone – the notion that expenses cannot be disproportionate to revenues is arbitraryHeld:Rejected MNR argument that it was unreasonableRule:Reasonableness of an expense must be assessed on its own not ‘collectively’ when measured against revenues
- Reasonableness is measured in terms of magnitude or quantum – there should always be an objective component… or alternatively practical experience and common sense will prevail
Gabco Ltd v MNR (1968, Ex Ct)Rule:It is not a Q of court substituting its judgement for what is reasonable to pay but rather coming to the conclusion that no reasonable businessman would have contracted to pay such an amnt only having business considerations in mind
- If there is personal benefit in the expenditure, prob wont help you argue it was a reasonable expense
- Where activity is profitable even after expenditure is incurred, chances are expense will be allowed
Meals and Entertainments. 67.1(1) limits the amount that may be deducted in respect of meals and entertainment
67.1 (1) Subject to subsection (1.1)… an amount payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50% of the lesser of
(a) the amount actually paid or payable in respect thereof, and(b) an amount … that would be reasonable in the circumstances.
67.1(4)(b) defines “entertainment” to include “amusement and recreation”
67.1(4)(a) says that no amount paid for travel on airplane, train or bus shall be considered to be in respect of food, beverage or entertainment consumed or enjoyed while travelling thereon
- so excludes airplane meals, in flight movies, etc67.1(3) says where TP attends a “conference, convention, seminar, or similar event” the fee for which “entitles the participant to food, beverage or entertainment (other than that incidental to the course of the meeting or receptions at the event) and does not identify a reasonable portion as compensation for the food, beverage or entertainment, the amount payable for that food/entertainment is deemed to be $50/day
- so if you allocated $75 you can deduct $50 for meals/entertainment (half of which is deductible)
Stapley v Canada (2006, FCA)Facts:Self-employed real estate agent bought gift certificates for food, drink and entertainment for clients who purchased homes through him – intention was this would bring more clients // Deducted this cost as a business expense under s. 18(1)(a). MNR reassessed and disallowed 50% of the deductionIssue:
- Whether this should be deducted 100% as business expenses (18(1)) or 50% under 67.1?Analysis:Grammatical and Ordinary Reading:
- Plain wording of 67.1(1) suggests no requirement of taxpayer’s actual “use” in the consumption of the food/entertainment
- So the deduction is caught by the plain wording of the provisionScheme of the Act
- There are a multitude of highly specific exceptions to 67.1(2) and this means1) had Parliament intended pure marketing expenditures to fall outside 67.1 it
would have added it as an exception2) at least 2 of the exceptions in 67.1(2) suggest there is no requirement for
taxpayer consumption or enjoyment in 67.1(1)- If 67.1(1) only covered cases where the taxpayer participated in the consumption, these
exceptions would be redundantMischief Sought to be Cured by the Provision
- 67.1(1) serves to reduce amnt of tax owing by minimizing the value of income – TPs may blend personal and business expenses and attempt to deduct them both as business expenses under 18(1)(a)
- Rt ≠ consume food or enjoy entertainment so he ≠ attempting to deduct any personal or living expenses under the guise of business ones and thus his deductions are not an abuse targeted by 67.1(1)
Held:Of the 3 considerations, must rely on that of the clear language of the provision rather than unexpressed exceptions – so caught by provision and only 50% deductibleRule:Even if an expense may have been in respect of producing income from a business, if they are also “in respect of the human consumption of food or beverages or the enjoyment of entertainment” they are caught by subsection 67.1(1
Pink Elephant Inc v Canada (2011, TCC)Facts:TP carried on business of providing public education courses in information technology which were
held in hotels and included meals as part of total cost for course // MNR argued catering expenses incurred by TP were limited to 50% under 67.1(1)Analysis:Court looks to what the mischief the provision intends to prevent
- The limitation on the amnt that may be claimed as an expense for food/beverage does not apply if the food/drink are provided for compensation in the ordinary course of business of providing food and beverage for compensation
- The exception will apply if the person in the ordinary course of their business, provides the food form compensation – whether or not provision of food/drink is a minor or significant part of the ordinary course of business
Held:Catering expenses incurred not subject to the 50% limitation under 67.1 b/c incurred in the ordinary course of business (thus fall under the exception in 67.1(2)(a)
