CHERN/HABERSTOCK TAXATION OUTLINE -...

CHERN/HABERSTOCK TAXATION OUTLINE

w/ M.O.B

Sebastian Chern & Brooke Haberstock: They made a terrible couple, but a helluva tax outline.Fall 2016

TABLE OF CONTENTS

Introduction to canadian income tax..............................................................................................................4

CRASH COURSE IN TAX POLICY.......................................................................................................................6

Statutory interpretation & Tax / Burden of proof...........................................................................................7

Constitution Act Division of Powers...............................................................................................................7

Residency.......................................................................................................................................................9Approach......................................................................................................................................................................................................................... 9Sources as a Base of Tax Liability...................................................................................................................................................................... 13

Income for Taxation Year – Non-Capital Income...........................................................................................15Income from a Source............................................................................................................................................................................................ 15Income from Office or Employment [s. 3(a)]...............................................................................................................................................19

Canada Employment Credit................................................................................................................................................................................. 24Inclusions [s. 6]......................................................................................................................................................................................................... 24Deductions [s. 8]....................................................................................................................................................................................................... 31

GENERAL RULES for DEDUCTIONS (In computing Income from Employment)...........................................................................31TRAVELLING EXPENSES........................................................................................................................................................................................ 32LEGAL EXPENSES..................................................................................................................................................................................................... 35DUES and OTHER EXPENSES of PERFORMING DUTIES.......................................................................................................................... 36HOME OFFICE EXPENSES (*income from employment)......................................................................................................................... 37

Income from Business or Property [s. 3(a)].................................................................................................................................................38SUBDIVISION B – INCOME from BUSINESS or PROPERTY – s. 3(A)...................................................................................................40BUSINESS/PROPERTY or Personal Endeavour (Stewart Test) - Reasonable Expectation of Profit Test (Can use for BUSINESS or PROPERTY)...................................................................................................................................................................................... 41Gambling and Other Related Windfalls........................................................................................................................................................... 42Acquiring Capital Property to Earn Income.................................................................................................................................................. 42

Deductions From Business or Property [ss. 18 and 20].........................................................................................................................50Net Income from a B/P........................................................................................................................................................................................... 50Deductibility of ordinary running or current expenses............................................................................................................................ 50INCOME EARNING PURPOSE TEST................................................................................................................................................................... 50Application of Income-Earning Purpose Test............................................................................................................................................... 51Can.................................................................................................................................................................................................................................. 51Running expense requirement............................................................................................................................................................................ 51Specific limitations................................................................................................................................................................................................... 51Limitation on Capital Expenditure.................................................................................................................................................................... 52Specific permissions................................................................................................................................................................................................. 52Reasonability requirement................................................................................................................................................................................... 52Food................................................................................................................................................................................................................................ 52Beverage....................................................................................................................................................................................................................... 52Entertainment............................................................................................................................................................................................................ 52Childcare....................................................................................................................................................................................................................... 52

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Personal or living expenses................................................................................................................................................................................... 52Permitted Interest Deduction.............................................................................................................................................................................. 53

Deductions Against Income from Employment or Business (Universal)........................................................55Deductions permitted.............................................................................................................................................................................................. 55Other Deductions...................................................................................................................................................................................................... 56Child Care Expenses................................................................................................................................................................................................. 56Moving Expenses....................................................................................................................................................................................................... 56“Eligible Relocation”................................................................................................................................................................................................ 56Expenses include....................................................................................................................................................................................................... 57Student Moving Expenses...................................................................................................................................................................................... 57Scholarships................................................................................................................................................................................................................ 58&....................................................................................................................................................................................................................................... 58Bursaries....................................................................................................................................................................................................................... 58Bribery of Certain Officials................................................................................................................................................................................... 58Fine and Penalties.................................................................................................................................................................................................... 59

Income for Taxation Year – Capital Income/Gains........................................................................................59Example........................................................................................................................................................................................................................ 60Terminology................................................................................................................................................................................................................ 60Enabling Provision................................................................................................................................................................................................... 60Taxable Capital Gain............................................................................................................................................................................................... 61Allowable Capital Loss............................................................................................................................................................................................ 61Capital gains from disposition of any property........................................................................................................................................... 61Capital losses from disposition of any property........................................................................................................................................... 62Right to a Prize/Lottery Winnings.................................................................................................................................................................... 62ACB of Property Acquired as Prize.................................................................................................................................................................... 62Test for Determining a Capital Expenditure................................................................................................................................................. 62Capital expense.......................................................................................................................................................................................................... 62Repair Deduction...................................................................................................................................................................................................... 63Test.................................................................................................................................................................................................................................. 63Criteria.......................................................................................................................................................................................................................... 63Capital Cost Allowance – Depreciable Capital Assets............................................................................................................................... 64Capital Cost of Property......................................................................................................................................................................................... 64CCA.................................................................................................................................................................................................................................. 65UCC.................................................................................................................................................................................................................................. 65Exclusions from Depreciable Property............................................................................................................................................................ 66Land is not deemed to be DP................................................................................................................................................................................ 6650% / Half Year rule............................................................................................................................................................................................... 66Terminal Loss............................................................................................................................................................................................................. 66Recaptured Depreciation...................................................................................................................................................................................... 66CAPITAL GAINS FRAMEWORK............................................................................................................................................................................ 66General Rules for Capital Gains.......................................................................................................................................................................... 66Capital Loss................................................................................................................................................................................................................. 67Adjusted Cost Base................................................................................................................................................................................................... 67

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Proceeds of Disposition.......................................................................................................................................................................................... 67Carry Forward and Back of Capital Losses.................................................................................................................................................... 69Net capital losses....................................................................................................................................................................................................... 69Non-Capital losses.................................................................................................................................................................................................... 69Part Dispositions....................................................................................................................................................................................................... 69Identical Properties................................................................................................................................................................................................. 69Gifts of Cash................................................................................................................................................................................................................. 70Non-Arm’s Length..................................................................................................................................................................................................... 70“Related Persons”...................................................................................................................................................................................................... 71Inadequate Considerations................................................................................................................................................................................... 71Immigration................................................................................................................................................................................................................ 72Emigration................................................................................................................................................................................................................... 72Capital Property of a Deceased Tax Payer..................................................................................................................................................... 73Where transfer or distribution to spouse or spouse in trust.................................................................................................................. 73Rollovers....................................................................................................................................................................................................................... 73Inter Vivos Transfers = exception to the non-arm’s length rule........................................................................................................... 74Personal Use Property............................................................................................................................................................................................ 74Listed Personal Property....................................................................................................................................................................................... 74“No Loss Rule”............................................................................................................................................................................................................ 75Disposal of Personal Use Property [including LPP] ($1000 rule)........................................................................................................ 75Partial Disposition.................................................................................................................................................................................................... 75PUP Ordinarily Disposed of as a Set.................................................................................................................................................................. 75Loss on PUP................................................................................................................................................................................................................. 76EXAMPLE:.................................................................................................................................................................................................................... 76EXAMPLE : PUP ordinarily disposed of as a set........................................................................................................................................... 76Calculation of LPP Net Capital Losses and Gains........................................................................................................................................ 76Calculation of Income............................................................................................................................................................................................. 77Taxable Net Gain from Disposition of LPP..................................................................................................................................................... 77Determination of LPP Net Gain.......................................................................................................................................................................... 77LPP Loss........................................................................................................................................................................................................................ 77

Principal Residence Exemption.........................................................................................................................................................................78Principal Residence.................................................................................................................................................................................................. 78

Miscellaneous............................................................................................................................................................................................................ 82Notes.............................................................................................................................................................................................................................. 83

INTRODUCTION TO CANADIAN INCOME TAX

Tax is:

(1) Compulsory (2) Unrequired

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All taxes must have 5 components:

(1) Each tax must have a base upon which it is leveled (2) Each tax must have a tax filing unit responsible for paying the tax (3) Taxes must have a rate that is to be applied to the base (which gives you the tax owing) (4) Unless imposed on an individual transaction, taxes must have a period over which the base is measured and tax is

collected. (5) Each tax must have a set of administrative arrangements for it’s collection

DEFINITIONS:Tax Base- Total amount of assets or revenue that a government can tax

- 3 possibilities: (1) Income :

o Income tax is a comprehensive tax base, but the govt might impose tax on only some aspects of income (i.e. payroll taxes like EI)

o Can be done in two wasy: Source—the net amount earned from sources such as employment, property and budget (this

is how income is defined in the ITA) Use—the value of an individual’s personal consumption and their increase in net wealth

(2) Consumption In Canada = FSTo Consumption taxes are used to avoid the situation where a person has vast savings but no current income—

they would not pay any tax if it weren’t for consumption taxes. o Consumption is also a comprehensive tax base—equivalent to income tax that exempts the value of a TPs

savings from tax. (i.e. GST)o Excise taxes: only imposed on certain goods and services (policy behind this: some goods create social costs

—like alcohol, tobacco, luxury goods etc)(3) WealthIn Canada= property taxes

Taxpayer/Tax Filing Unit- An individual (or married couple who file a tax return jointly) along with all dependents of that individual (or married couple). May be the income earner, purchaser, manufacturer, owner etc. Generally the recipient of income is subject to tax.

Tax Period: Time period over which we calculate the base

- Individual: January 1st- December 31st - Corporations/Trusts: Can be off calendar / can set fiscal year as they wish

Tax Collection/Administration: Different countries have different tax mixes based on what the electorate wants and the services that they demand. In Canada, Federal taxes are collected by the CRA and under tax collection agreements, amounts are remitted to the provinces.

Tax Rates: The percentage that you apply to the tax base to get the receivable amount.

- Statutory Rate

Up to 45,282 15%45,283 – 90,563 20.5% (down from 22% in 2015) Trudeau’s middle class tax cut90,564 – 140,388 26%140,399 – 200,000 29%200,001+ 33% (new rate added for 2016)

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- Marginal Rate: the rate of tax that applies to each additional dollar a TP earns within each income bracket (highest amount of tax that is paid on the last dollar of taxable income)

- Average Rate : The rate that is applicable to the TPs income as a whole. (Take the tax actually payable and divide by the taxable income)

- Effective Rate: Total tax payable divided by the total accretion top wealth—usually computed by reference to some broader measure of the TPs income other than taxable income.

~Classification of tax rates:

(1) Progressive As your income rises, you pay more tax. In our progressive system, everyone pays the same amount of tax up to the limit for the first tax bracket. [Western democracy believe that taxation should be based on ability to pay]

(2) Regressive Higher tax burden falls on those with less ability to pay Policy: Canada has attempted to address this through GST & HST: Basic groceries etc are exempt from GST.

(3) ProportionalSame rate for those with low or high income [In Canada: progressivity of income tax is offset by the regressivity of other taxes.]

**All Canadian taxes are regressive EXCEPT Income Tax.

Tax Incidence: Who bears the burden of taxation (i.e. Landlord might be the TP, but the renter could bear the burden of taxation via increased rent etc)

Exemptions: Amounts that you do not have to report.

- Not many specifically provided for in the ITA (See .81)- Important provision: the one that links exemptions under other statutes (if something is exempt under another Act it

won’t be taxable under the ITA—for example exemption for income situation on a reserve b/c Indian Act declares it exempt)

- Main types of exempt income: things that are not recognized by Canadian law as being income from a source (lottery winnings, gifts, strike pay, found money – don’t need to report these things on a tax return b/c in the eyes of the CRA they are nothing)

Deductions: Amount removed before taxable income is calculated. Worth a lot more to high income tax payers than low income tax payers. [Policy: This is why our system offers more credits than deductions.]

- You claim deductions on your tax return, then have to point to the section in the act that allows you to make that deduction.

- Will be worth more dollars to a person in a higher tax bracket than to a person in a lower tax bracket.

Credits : Reduction in tax otherwise payable to reduce tax liability overall. (Basic personal amount that every Canadian TP can claim eliminates tax on your first 11k)

- You calculate how much tax you owe, and then deduct the tax credit from the tax otherwise payable to arrive at actual tax liability.

o Tax credits are calculated with the lowest statutory rate: aka, everyone gets the exact same dollar amount

- Example: basic personal amount – eliminates tax payable on the first $11,138 of income (is an indexed amount – same for every TP)

- Credits are almost always worth less than deductions to high income individuals because credits are worth the same in dollars whether you are high or low income.

What is a CCPC?

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Based on the policy of wanting to encourage entrepreneurship and grow the economy (CCPCs pay taxes at about half the rate up to $500,000 – approx. 13.5% instead of 26%)Issue: When CCPCs get near the threshold of getting too big to be a CCPC (15 million in capital) loses incentive to grow.

Note on cash vs accrual accounting:

Cash- business has money based on what is in your pocket [income from employment and office as well as farming and fishing use this method]

Accrual- Allows you to record money when it’s either receivable or payable but the cash isn’t actually in or out of your pocket yet. (Christmas bonus example) Stops you from deferring a payment until the cash is in your pocket. (You could not get your Xmas bonus on January 1st, invest it, grow it, then pay tax on it in 2017 – you have to include it for 2016) [most businesses, corporations etc use this method]

EXAMPLE:

You get a Christmas bonus which your boss tells you about on December 1st, 2016 but you do not actually receive it until 2017. Since you are an employee, this is not included in your income until 2017. Employer can likely deduct it in the 2016 tax year because they have probably incurred the liability in that year.

If it was mailed to you on December 15th and you don’t get it until January 1st, cheque deemed to be in your control once hits the mailbox so it is likely that you would have to claim it for 2016 as would the employer.

CRASH COURSE IN TAX POLICY

Policy on the exam: What does the provision exemplify police-wise?: The provision XY is meant for XY.3 big criteria for “good policy”:

(1) Equity - Vertical equity: Those who have more should pay more - Horizontal equity: Those who have the same amount in income in whatever form should pay the same taxes {i.e. a

company car would be taxed the same as cash}

(2) Neutrality - Taxes should not unduly affect personal/economic decisions.- “Incentives” non-neutrality - Tax Expenditures:

o “Anti-neutrality” provisions of the ITA (deductions, credits, special rates etc) o “You insulate your roof, we will hack $500 off your taxes”o Q: What are we trying to achieve with X tax expenditure and is it a valid government objective? o Q: If we use the tax system for this expenditure, will the benefits go to the people you intended and will it

have a fair and non-distorting effect? (i.e. Child Fitness Tax Credit)- Direct Subsidy:

o “You pay $1000 to insulate your roof, we will send you a $500 cheque”

Tax Expenditures vs Direct Subsidies

- TEs are easier to design than DSs- TEs= less discretion than DSs- TEs= less stigma than direct government handouts

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(3) Simplicity/Efficiency - Catch- all way to describe aspects of a tax system that make it efficient and easier to comply with and administer- 3 attributes of a simple system:

(1) Comprehensible: Person should be able to at least see the logic even if they don’t understand the details (2) Certainty: It should be possible in advance to determine the tax consequences of your actions(3) Compliance Convenience: It should not be too difficult or time consuming to comply with tax rules. Average joe

should be able to do this online. It should not be too costly for the gov’t to enforce, taxes should be difficult to avoid/evade.

(4) **Global Competitiveness: Canada has cut rates for individuals and corporations substantially since the 80s to this end.

STATUTORY INTERPRETATION & TAX / BURDEN OF PROOF

Statutory Interpretation Placer Dome

- The Modern Approach has been adopted for tax statutes as well: "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament"

- BUT: The wording of tax legislation is very specific, so the textual side of interpretation is probably going to resolve your issues most of the time.

- If ambiguities: Presumption in favour of the TP. SCC says: If you have applied ALL approaches and you still cannot determine whether an amount is included or deductible, then tie goes to the taxpayer

- BoP: Is always on the TP once you get to court.

CONSTITUTION ACT DIVISION OF POWERS

Federal Legislative Authority

Constitution Act 1867, s. 91(3)

Exclusive legislative authority for “all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces;” including “The raising of Money by any Mode or System of Taxation”.

Provincial Legislative Authority


“Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes”;


“Shop, Saloon, Tavern, Auctioneer, and other Licences in order to the raising of a Revenue for Provincial, Local, or Municipal Purposes.

DIRECT INDIRECT

A direct tax is one which is demanded from the very person who it is intended or desired should pay it. – J.S. Mill(Income Tax is a direct tax)

Courts generally refer to taxes on a unit of a marketable commodity that are ‘passed on’ to a final consumer as indirect

Indirect taxes are those which are demanded from one person in the expectation that he shall indemnify himself at the expense of another. – JS Mill

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“Is the tax related or relatable, directly or indirectly, to a unit of the commodity or its price, imposed when the commodity is in the course of being manufactured or marketed?” - Canadian Pacific Railway Co. v. Attorney General for Saskatchewan [1952]

Source vs Non-Source Income

3(a): Total of all positive income [revenue] (non-capital only) from sources including office, employment, business and property

3(b): (Allowable capital losses from property other than listed personal property) – (Capital gains from all property other than listed personal property and taxable net gains from LPP) = Taxable Capital Gain or Net Allowable Capital Loss

3(c): Take results of 3(a) and 3(b) and claim any deductions under 3(e)

56: Other amounts that do not fall within enumerated sources but that the system wants to tax

Four Income Splitting Techniques

“Income Splitting” : involves the transfer of income from one person to another who is taxed on the income at a lower marginal tax rate than that applicable to the transferor.What about the ITA? Some sections counteract certain types of income splitting while others endorse it.

Redirection of payment by 3rd party to other

Assignment of a right to income from on TP to another

Transfer of property that generates income/gain

Us of low-interest or non-interest bearing loans

Preventative legislation

Transfers and loans to spouse or CL

74.1(1) Individual is taxed, not transferee

Transfers and loans to minors

74.1(2)If under 18 years and who (a) is not at arm’s length (b) is the niece or nephew

Then individual is taxed unless that person becomes 18 at end of year.

Gain or loss deemed that of lender or transferor

74.2(1) Net capital gain/loss of lent/transferred property is deemed to be individual’s

RESIDENCY

“Who does the state claim authority to tax?””Residence consists of present ties to (but not necessarily physical presence in) a jurisdiction. It is not, at least directly, a matter of a person’s intention. It is noteworthy, however, that the courts have on occasion blurred the distinction between residence and domicile.”

Remember:

- Countries will limit taxation to what they can reasonably control – this is why residence is key in Canada

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- Attempts to limit juridical double taxation - Canadians are taxed on their world wide income- Everyone is presumed to be resident somewhere, but that is a rebuttable presumption.

Approach

TITLE SECTION DESCRIPTION

Tax payable by Persons Resident in Canada

s. 2(1)If resident in Canada, tax shall be paid on taxable income from sources inside or outside Canada

Tax payable by non-resident persons

2(3)If not taxable under 2(1) and (a) employed in Canada, (b) carried on business in Canada, (c) disposed of a taxable Canadian property. Will be taxed on income earned in Canada determined in accordance with Division D

Ordinary resident(TEST)

Are they a factual resident of Canada?

250(3)A person who was at the relevant time ordinarily resident in Canada(This is a very expansive definition)

Thomson

[Lee]

Residence must not be casual and uncertain, but rather in the ordinary regular course and that the usual relationship of such residence was beyond doubt. Used to consider things like where your family is, street address, where your magazines are sent, clubs you belong to, etc. However with increased mobility these criteria are beginning to break down. Intention of TP is not conclusive.

1. Everyone is presumed to have a tax residence. You don’t have to own or rent somewhere to be resident.

2. You can be resident in more than one place at the same time (depending on the definition of resident in the respective country.)

Thomson

“The degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.”

Intention ≠ relevant Lee

“ordinarily resident” if TP does not sever all residential ties with Canada, but are physically absent for considerable period of time, then the TP can be found to be still ordinarily resident

Thomson born in Canada pre-citizenship. Goes to Bermuda, gets British passport, went to US. Returns to Canada in 1932 for 150 days. 1934: builds house in NB. Not resident of Bermuda, not resident of US from 1930-41 but started taxing him as resident of US in 1942. By 1946, both Canada and US saying resident.Held: Resident of Canada. Factors considered: East Riverside address was home.

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Born in England in 1946 and had UK and Northern Ireland passport. Stamped in and out of Canada many times. Authorized period of stay varied from 5-45 days. Some stamps said “visitor” Throughout 3 year period, was employed full time by non-resident corporation and all work performed outside of Canada. 1981: married Canadian citizen residing in Canada. Wife purchases house with his $$. During 3 year period (1981-83) returned to Canada regularly when not working. Parents in England still maintained bedroom for him. He never paid IT, not allowed to work in Canada, given fixed date to leave Canada upon entry, Could not join OHIP, pay UI or maintain RRSP or join pension plan, out of country 183+ days, no desire to work in Canada, had residence in Britain and had mortgage there on first wife’s house. Claimed could not lead normal life in Canada. Had RBC account. *Decision in this case turned on marriage which would normally be neutral—tipped the scale in this case. (Resident in 1982 and 83 after marriage)

IT-221R3

Emphasis on the need for TP to sever “all significant residential ties” top avoid a determination of tax residency

If TP does not pay capital gains on departure (128.1) when severing ties then CRA may assert TP still considers themselves resident for tax purposes ***

Factors to consider in determining whether an individual is resident in Canada (None are conclusive but some have more weight than others): (Lee)

1. Past/present habits of life; 2. length of visits; ties within the jurisdiction vs. ties elsewhere; 3. permanence; 4. ownership of dwelling in Canada / vacation property (if leased then

arms-length?); 5. Residence of spouse/children (are they dependent?); 6. membership with churches/professional organizations; 7. registration of automobiles; 8. Canadian credit cards and financial institutions / bank accounts;

subscriptions to newspapers / magazines; 9. Canadian insurance policies; 10. mailing address in Canada / safety deposit boxes; 11. telephone listing in Canada; 12. stationary / business cards showing Canadian address; 13. Driver’s license /health card / pension plans / legal docs; corporation /

partnerships; 14. Frequency of visits to Canada for social / business reasons; 15. burial plot in Canada / Canadian will; 16. **employment in Canada; 17. storage of personal belongings in Canada; 18. landed immigrant status; 19. severance of ties in former country of residence

• Intention is not an element in determining residence – that is a factor for ‘domicile’ = The country that a person treats as their permanent home, or lives in and has a substantial connection with. (Lee)

• Citizenship and immigration status is not determinative for tax purpose*You can be resident in 2+ countries at the same time.

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Deemed Resident

Can they be deemed resident? (not factual, just >183 days sojourn)

(Look at every period that includes where a person sojourns in Canada, add them up and if totals 183+ days, deemed to be resident throughout the year.)

250(1)

(a) Sojourned in Canada for 183 days or more(b) Member of the Canadian Forces(c) (i) Ambassador, Minister, High commissioner, Officer or servant; (ii) agent-

general, officer, or servant of province

R&L Distribution

T attempting to argue that CCPC (b/c special tax rate) therefore trying to argue that two of their shareholders are deemed residents in Canada and therefore CCPC b/c incorporated in Canada.{Wherever shareholders are, dictates control thus making it possible for it to be a CCPC}

[Sojourn]

“To make a temporary stay in a place. To remain or reside for a time.” (Dictionary b/c not defined in the ITA)

Coming from one country to work for the day at a place of business in another country and thereafter returning to one's permanent residence in the evening is not making a temporary stay. It appears you may have to stay overnight.(Commuting ≠ Sojourning)

IT-221R3 Nature of temporary stay must be established to be akin to temporary residence

Taxation year

249(1)(b) For individual, a calendar year

249(1)(a) Corporation or Canadian resident partnership file on basis of fiscal year

249.1(4) Individuals who operate businesses can elect to file on basis of fiscal year

Part Year Resident

Different from “Deemed” because this is factual residence “Ordinarily”[Starts out in Canada but at some point relocates or relocates to Canada from elsewhere]

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[DID THEY LEAVE/ENTER CANADA AT ANYTIME]

Exception that person resident to Canada is taxed on worldwide income for whole year

TP are taxable on their worldwide income for the period in in the year they are resident in Canada, and only taxable on their income from employment in Canada, from carrying on business in Canada, and on capital gains in respect of taxable Canadian property during the part of the year that they were non-residents.

[TEST]: Facts must disclose either that the individual commenced to reside or ceased to reside in Canada

Schujahn T born, raised and educated in US. Moves to TO to set up subsidiary of business in Canada. Returned to US but had set up whole life in Can.

When cease to be resident? As soon as left TO ceased to be resident. Only reason wife and child stayed in Canada was to ensure sale of house.

Held: Part year resident. Not deemed resident because was present in Canada

Must establish factual circumstances are indicative of a severance of Canadian Residence

Burden on TP to prove all ties with Canada severed

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for 183+ days

Reeder T born

Temporary departure is insufficient to counter long-standing Canadian residency (all significant ties must be severed)

Lee See above

Dual Residency

Are they resident in another country and also factual/deemed resident of Canada?

250(5)

[What does treaty say?]need grounds to use it

A person is deemed non-resident of Canada for taxation purposes where under any tax Treaty, T is a resident under another country and not a resident in Canada

CAN-US TAX TREATY

2. If resident in both

(a) resident of permanent home. If home in both or neither state wherever personal and economic relations are closer (centre of vital interests)

(b)if Centre of vital interests cannot be determined habitual abode?

(c) if in both or neither citizen

(d) if citizen in both or neither settle by mutual agreement

Basically: If central management and control in Canada, but incorporated in USUnder Canadian law, resident in Canada. Under US law, resident in US. Tiebreaker is s. 250(5) Resident where incorporated.

Trieste v Armstrong

[Test of habitual abode in a jurisdiction]

Whether the individual "resided there habitually, in the sense that he regularly, customarily or usually lived [there]."

Lingle

“the concept of “habitual abode”, as evidenced by the clearer French version of the text (séjourne de façon habituelle) involves notions of frequency, duration and regularity of stays of a quality which are more than transient. To put it differently, the concept refers to a stay of some substance in the jurisdiction as a matter of habit, so that the conclusion can be drawn that this is where the taxpayer normally lives”

CAN-UK

Same except (e) where “national” not citizen

Less clear tiebreaker if dual residence. “Competent authorities decide” if cannot prove which country is residence.

What if no treaty?

If no treaty, no tie-break and thus you have dual residence.

Emigration 128.1(4) Where resident becomes a non-resident - subject to departure tax

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128.1(4)(b)

Deemed disposition at time immediately before the time that is immediately before the time, each property owned by taxpayer other than (i) real or immovable property or resource property for fair market value

BASICALLY: A zeroing out to put the ACB at FMV when you enterestablishes new ACB for when you enter

128.1(4)(c)Reacquisition – deemed to have reacquired each property deemed disposed of at a cost equal to proceeds of disposition

Immigration 128.1(1)where becoming resident in Canada, T deemed to have (b) disposed of and (c) re-acquired property (that is taxable in Canada) for FMV (this becomes T’s new ACB)

Provincial Residence

Reg 2601TP resides in province on the last day and no business income outside province, then taxable on income earned in year in province

Reg 2607

[Dual Residence]

If TP resides in more than one province on last day, then deemed to have resided where reasonably regarded as his principle place of residence

Deemed Corporate Residence

250(4)

Deemed Corporate Residence – in Canada if:

(a) incorporated in Canada after April 27 1965 OR

(c) if before 1965, it was incorporated in Canada (provinces, territories, and federal) and was common law resident (central management and control) in Canada or carried business in Canada

De Beers

CL Test: Where does central management and control abide?

Common law idea that a company resides where its real business (where directors meet) is carried out - where the central management and control actually abides (Red Moose Example – dual residency per “domestic law” of both states)

Sources as a Base of Tax Liability

s. 2(1) – Tax payable by persons resident in Canada – tax on all taxable income s. 2(3) – Tax payable by non-resident, for: employment in Canada; business in Canada; disposal of property in Canada

o s. 212 (1) - imposes 25% inc. tax on certain payments made by Canadian residents to non-resident manage. fees, interest (non-arm’s length. E.g. Canadian company pays interest to parent company), estate/trust, rent/royalties, pensions,

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retiring allowances (not income from employment but it’s income from another source of income [Not 2(3)] RRSPs

s. 215 (1) - Canadian residents have obligation to withhold and remit tax on behalf of non-resident s. 215 (6) - if amounts are not withheld, then Canadian corporation is jointly and severally liable for the tax owing s. 249(1)(b) – Taxation Year – is, in the case of an individual, a calendar year

Tax rates – 117

Tax rate Bracket Maximum in bracket

Tax credit (15%) Up to $11,038 (as of 2013) of 15% Credit of 1655.7

15 Up to $44,701 6705.15

22 $44,702 – $89,401 9835.1 (16540.25)

26 $89,402 – $138,586 12787.84 (29328.09)

29 $138,587 and over

TIMING

Accrual Method

Must include income when it is earned or when a deduction is incurred

Most larger businesses use accrual

Professional business

34(a)

Computing income for professional practice (accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor)

May elect to not include any amount in respect of work in progress (delay billing) at the end of the year

34(b) shall apply for all subsequent years unless TP revokes the election.

Cash Method

Generally include income only when they are paid and can only make deductions when they make payments.

Cheques considered cash. When delivered to payee, it is considered received. If available for pickup, it is considered received (cannot delay taxation by picking up later).

Employees compute income under “cash method”; farming and fishing businesses may elect to use method

INCOME FOR TAXATION YEAR – NON-CAPITAL INCOME

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Remember:

s. 4(1)(a) – calculate income/loss from each source separately s. 249(1)(b) – Taxation Year – is, in the case of an individual, a calendar year

INCOME FROM A SOURCE

Various items of revenue received by a taxpayer must be analyzed and allocated to a source which is either expressly enumerated in the Act or recognized by the case law.“Source Concept”—comes from Agrerian society: If you wanted to tax “income”, you were going to be taxing the crop minus the expenses of growing the crop.

IS THE INCOME from a RECOGNIZED SOURCEIf income is from a source, it is taxable.

Income from Taxation Year

3(a)Total of all positive income [revenue] (non-capital only) from sources including office, employment, business and property

De Beers

Common law idea that a company resides where its real business (where directors meet) is carried out - where the central management and control actually abides (Red Moose Example – dual residency per “domestic law” of both states)

Retiring Allowance

(Office/Employment)

56(1)(a)(ii)

*Other amounts that do not fall clearly within the enumerated sources but that the system wants to tax.

Retiring allowance, other than an amount received out of or under an employee benefit plan, a retirement compensation arrangement or a salary deferral arrangement

only when the individual was an employee of the company (Schwartz)

severance pay is included in employment income

248(1)

[Definition]

Amount received (other than pension/death benefit), for

(a) T’s retirement from office or employment in recognition of T’s long service OR

(b) in respect of loss of office/employment whether or not damages, in lieu of payment, or pursuant to an order or judgment of a competent tribunal

New Sources Allowed Bellingham

TP land expropriated by town. TP rejects this offer and goes to the Compensation Board who says 6x town’s offer. Accepts something in the middle. Additional interest on this settlement is not income from a source.

No new sources found to date.Narrow interpretation of 3(a).

Windfall Gain Cranswick Unsolicited payment to minority Not taxable

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(Unexpected gain)

Canadian shareholder of US company[US company controls CanCo and has +50% shares, Cranswick less than 1% shareholder of CanCo.]

Punitive damages considered windfall

additional interest awarded under provincial expropriation act is non-taxable

Damages for mental distress or defamation not taxable

Cranswick(Via Bellingham)

TEST

Is it non-recurring, unexpected or an unusual form of income? Was there a bargain, consideration, minimum standards of commercial behavior?

Relevant but non-conclusive indicia in determining if windfall gain:

a. TP had no enforceable claim to the paymentb. There was no organized effort on the part of TP to receive paymentc. The payment was not sought after or solicited by TP in any mannerd. The payment was not expected by the TP, either specifically or

customarilye. The payment had no foreseeable element of recurrencef. The payor was not customary source of income to TP the payment was

not consideration for or in recognition of property, service or anything else provided or to be provided by TP,

g. it was not earned by TP, either as a result of any activity or pursuit of gain carried on by TP or otherwise

Strike Pay Fries Not source not taxable

Lottery LeBlanc Not source not taxable

Gifts Bellingham Does not flow from productive source not taxable

Compensation by Federal Republic of

Germany81(1)(g) Compensation for Nazi crimes Not taxable

Gambling Graham v GreenProfessional gambling is taxable (business) source

Hobby gambling is not source NT

Advanced payments for Future Services

Curran 3P employer gives T $250k as inducement to leave current job and work for him instead.

Closest thing to a new source

Deemed taxable as income within 3(a) but specific source not named (likely employment)

Schwartz suggests it may be tax exempt if employment doesn’t begin

{This case uses SP but does not

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explicitly state it}

Prize for achievement 56(1)(n) If received by virtue of office or employment = benefit = taxable source

Surrogatum Principle

London and Thames

T’s boat (used for income earning) damaged by oil tanker. T receives $ from owner of oil tanker in negligence suit. Since compensation replaced T’s profits in addition to repairing the boat, it is taxable as income.

Amounts received as civil damages, or amounts paid in settlement of claim for breach of contract or tort, are treated as income if compensating for money earned by TP.(i.e.: loss of income, expenses incurred, property destroyed or punitive damages resulting from personal injury)

Surrogatum Principle

(application)Schwartz

T has K with new employer and new employer breaches K. Lump sum payment and legal costs are provided to T. Lump sum was to compensate T for anxiety etc and anxiety is not a commodity therefore: is non-taxable pursuant to the SP.

First express adoption of the SP by the SCC (in obiter)Arguments: (1) Retiring allowance? Rejected. Was never an employee therefore could not collect a payment for loss of employment.(2) Partially for loss of employment, partially for moral damages and since no apportionment, all is non-taxable.

Retiring AllowanceSchwartz

(Only if employee)

s.56(1)(a)(ii)

(falls under “other sources”) taxable amount received out of an employee benefit plan, retirement plan, or salary deferral included in incomeOn or after retirement, in recognition for T’s long service

s.248(1)

“Retiring Allowance” – amount received (other than pension/death benefit), for T’s retirement from office or employment in recognition of T’s long service OR in respect of loss of office/employment whether or not damages

If recognized source, IS SUFFICIENTLY YOURS TO PAY TAXES ON IT (NEXUS)

Receipt/Benefit FieldT’s wife forged his RRSP withdrawal forms, he ended up getting taxed on it, judgment in his favour.

T must have personally received and benefited from the amounts(Nexus=receipt)

Policy: BAD! If somebody gets away with forgery, nobody gets taxed.

Strict ownership of income is not test

Buckman T=lawyer who embezzled funds from clients. Claims funds not “income” but rather liability claimed to be borrowing.

Circumstances and manner in which it is held

Comes down to his intention. He intended to keep the funds for himself and he did and therefore should be

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taxable.

Factors to consider: behaviour of T, intention to repay funds, the manner in which the amount was held by T

Any net worth income is considered to be income.

Fraudulently obtained funds are

taxablePoynton

T found guilty of tax evasion Did not declare $ that he had obtained through kickbacks from his employment

Intent to repay funds=okay Gilbert

Appellant fully intended to repay funds.

How to Calculate Income

Income and Loss separately

4(1)(a) calculate income/loss from each source separately for 3(a)

Strict ownership of income is not test Buckman

Circumstances and manner in which it is held

Factors to consider: behaviour of T, intention to repay funds, the manner in which the amount was held by T

Surrogatum principle

In the case that payment is received in substitute for another/different payment, where the payment being replaced is taxable, then the replacement payment should also be taxable

o Usually applied to amounts received in civil damages, or paid in settlement of a claim for breach of contract or tort

Tsiaprailis TEST Portion of lump sum was paid to TP, in lieu of monthly payments, to settle a law suit in which she claimed entitlement to continued disability benefits in the form of monthly payments. Portion of the lump sum payments received up until that point were taxable under the SP.

(1) What was payment intended to replace (must be clear)?

(2) Would the replaced amount be taxable?

If amount received is a substitute for earning potential (ie: delivery truck), it is tax-free

Can't apply the principle if there is no evidentiary basis for apportionment of payment (Schwartz)

Burden is on the T to show that it was not apportioned to taxable payments

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(Schwartz)

IT 365R2Damages for personal injury are excluded from income unless reasonably considered employment income

Companion to Tsiaprallis Siftar

Tax court judge allowed appeal on the basis that settlements of disability insurance claims were not payable on a periodic basis and were therefore not taxable pursuant to para 6(1)(f) of the Act. Pursuant to Tsiaprallis, matter must be remitted to Minister for reassessment to see if some portion is taxable under 6(1)(f)

It is for the taxpayer to declare the portion of a settlement which is to be included in his or her income. If CRA is not satisfied that the TP’s declaration reflects the reality of the transaction, it can use the tools at its disposal under the Act to reassess the TP. TP bears the burden of establishing the facts in supporting his or her position.

INCOME FROM OFFICE OR EMPLOYMENT [S. 3(A)]

Calculating Income from OFFICE or EMPLOYMENT

“Employment” 248(1)

Position of an individual in the service of some other person

ISSUE is whether Employee (employment) or Independent Contractor (business)ITA does not distinguish between EE from IC so issue is left to the courts as a question of fact.

Income from O/E{enabling} 5(1)

income for tax year from office/employment is T’s salary, wages and other remuneration, including gratuities

Loss from O/E 5(2)losses for tax year from office/employment is T’s loss, if any for the tax year (really rare)

Payments by employer to employee

6(3)

Amount received by TP from another (a) during a period where TP was an officer or in employment of payer

Shall be deemed income from an office or employment under s. 5

6(3)

Unless payment cannot reasonably be regarded as:

(c) consideration for accepting office/contract/employment; (d) as remuneration for services as an officer or under K of employment OR (e) in consideration for a covenant with reference to what officer/employee can/can’t do before/after termination

***Note that in Curran this did not apply because payment came from 3P

Is TP an EMPLOYEE or INDEPENDENT CONTRACTOR

Key Distinction: If you are an employee, you are taxed under “income from employment” (employers must withhold tax from

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employee’s paycheques)Key Question: Are they earning income from employment or income from business? [original “control test” from R v. Walker but this broke down with the increase in highly skilled/professional workers]

*Need to be careful when making these distinctions RE integration because in this day and age if you are asking people if they are an integral part of the business, the answer will almost always be yes.

WIEBE DOOR TEST Wiebe Door: test for Employee vs. Independent Contractor Own business or own account? K of service or for service? Control over work (EE), own tools (IC), opportunity for profit/risk of loss (IC), Integration into ER’s business (EE – although highly inconclusive)

Notes: Control over work was original common law test and degree of control is still most important.

Sagaz case: last time SCC discussed this distinction (Affirms Wiebe list of factors):

- Degree/level of control over workers activities: o Can they contract out work to others? o Does the worker provide services to more than one payer?

- Whether the worker provides his own equipiment - Whether the person has hired their own helpers? - Degree of financial risk taken by worker (Is there a risk of loss?)- Degree of responsibility for investment and management held by the worker - Worker’s opportunity for profit in the performance of his/her tasks

Wolf case: aeronautical engineer has sufficient level of expertise that in charge of own destiny

Wiebe Door: Uber for doors – door repairers all have understanding that would be running own business and therefore responsible for own taxes etc. Did not have to come to Wiebe premises, could turn down gigs etc. If installer did faulty job, had to go fix it without pay. Paid by the job, more they worked, more paid.

Factors considered: Working more to gain more $$ is indicative of contractor role, productivity less important when working for wage/salary (employee)Note: In this case had K express contractual intent of parties should be given weight.

RWB: Ballet company provided stage, backdrop, choreography etc and decided on dances. At the end of the production, no dancer had the right to continue dancing for RWB.

Interpretation of employment K stated intentions should not be disregarded. This was a case where the courts recognized a consensual contractual relationship between independent parties.

Connor Homes: Child and youth workers work for companies that provide services to foster and group homes. Signed Ks confirming mutual understanding that workers would be providing services as ICs. K= No time limit, stated in charge of own taxes, ïn own business”*EMPLOYEES (Even though K said IC)

Factors considered: were required to abide by workplace manual, performed same duties as recognized employees, paid fixed hourly rate or per diem, no significant financial risks

Common intention

Common intention of parties should be considered (Wolf); Incl. express intent in K (Royal Winnipeg Ballet)

Consider Wiebe factors first, use common intention to bolster your opinion

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Intention of Parties

Test

Connor Homes

(1) “The subjective intent of each party much be ascertained”Does the person purchasing services have the intention that person purchasing from will be independent and carry on business and vice versa.

(2) “Does an objective reality sustain the subjective intent of the parties?Wiebe Door factors applied here in Connor Homes : Are Wiebe factors consistent with intentions of parties?

Objective reality Does the objective reality support the subjective intent of the parties?

Independent Contractor = “Unincorporated business person not in partnership”

FIRST: Look to “whole scheme of operations”(Wiebe as affirmed in Sagaz) SECOND: Look to intention of parties (Connor Homes)

What is the difference between EMPLOYEE and INDEPENDENT CONTRACTOR

Withholding Obligation

153(1)

ERs required to withhold EE’s salary for tax

IC remits taxes themselves

Calculating Income

EE (s.5) Income from employment calculated on a cash basis. Refers to income “received” by T

ICIncome from business includes “receivable” – if not fully paid for work done by midnight, still taxable

Deduction

IC Can deduct for anything incurred in the process of conducting work

EE – 8(2)No deductions unless you can find a provision in section 8 that allows deduction(See deductions in computing income from employment, p. X)

Canada Employment Credit

118(10)Tax credit for employees Can get up to $150 if make $1000(15% -- always lowest tax bracket)Policy: Good for you for going out and working

Tax Provisions

EE Tax under subdivision A (s. 5)

IC Tax under subdivision B (s. 9)

Tax YearEE – 249 Calendar year

IC Reported at fiscal year end

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Employment insurance IC Unlike EE, IC does not pay into EI and therefore cannot claim

Are they CCPC or just PERSONAL SERVICES BUSINESS (trying to benefit from business tax planning)?

Canadian Controlled Private Corporation (CCPC)

125(7)

What is a CCPC?

1. A corporation that is resident in Canada, 2. Its shares are not listed on a stock exchange, and 3. It is not controlled by non-residents of Canada, by a corporation whose shares

are traded on a stock exchange, or a combination of these. (at least 25% Canadian Resident shareholders)

Policy: To counteract situations where would otherwise be an employee but put a corporation in the middle deductions limited and taxed at a higher rate.

In simpler terms: Essentially what we think of as a corporation for the purposes of Canadian tax code.

RESULT of being a CCPC: Small Business Deduction

To be eligible for the “small business deduction” (11% federally, plus 2.5% in BC, for a total of 13.5%), the CCPC’s income must be income from an “active business carried on by a corporation”

“Active Business Carried on by a Corporation”

125(7)

If CCPC then reduced rate of 13.5% (on first $500,000 of income for that business)

Business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade

Personal Services Business

Not a CCPC therefore, NO tax break

38% - federal rate of 28% plus 10% - on the first dollar

125(7) “capitalization of employment benefit method” converting from income from employment to income from business{Salary is either exempt under 18(1)(p) or partially taxed as a CG.}Think Ralph Co

Business of providing services where

(a) An individual who performs services on behalf of the corporation (“incorporated employee”) OR

(b) Any person related to the incorporated employee (See Non-Arms-Length s. 251)

Is a specified shareholder (s. 248(1)) of the corporation, and the incorporated employee would reasonably be regarded as an officer/employee of the person to whom the services were provided (i.e. are their clients their employers or are they independent contractors use Wiebe Door TEST ) , but for the existence of the corporation;

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UNLESS:

(c) The corporation employs in more than five full-time employees throughout the year (min 5 full-time and 1 part-time) [excluded if fully operating business]OR (>5 employees= small business, <5 employees=personal service)

(d) The amount paid to the corporation was received from a corporation with which it was associated

Basically: Are there any other clients, or are they just doing what the would do for an employer, except that the TP has interposed a corporation between them?

Simpler Terms: Corporation with personal purpose that is to get income from property: stocks, real property or rent.Assess: (1) Are they performing services on behalf of a corporation? Is providing services on behalf of GGSI.

s. 248(1)

Now Asses (2)Specified Shareholder - Person who owns 10% or more of stock Any stock owned by person with whom T does not deal at arms-length (have separate interest) is considered to be owned by Person/T for the purposes of this definition

[remember arms length!! Don’t forget about the Garys!!]

TEST

Now assess (3)

1. Would the incorporated employee be reasonably regarded as employee using the Wiebe Door test?

2. If the individual would be an employee of clients but for the corporation of the person whom it is provided by, then it is a personal service provider.

Are they provided services to the person who would have been their employer, if they hadn’t been incorporated, or are they providing services generally to the public?

General Limitations on Deductions for Personal Service Business

(Limits compared to a corporation)

18(1)(p) RESULT of finding that something is a Personal Service Business

o Limitation on deductions for “personal services business” that would ordinarily be deductible against the income of a corporation other than a personal services business

o Deductions for payments made by corporations carrying on a personal service business are restricted to:

(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

(iii) sales expenses that would have been allowed for sales employees under 8(1)(f)

(iv) legal expenses incurred in collecting amounts owed for services rendered

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o Restricts deductions an extent that it eliminates an advantage to incorporation if you are an employee. (IC are allowed to deduct business purchases)

Specified Investment Business

No tax break

38% - federal rate of 28% plus 10% - on the first dollar

125(7)

A business carried on by a corporation (other than a Credit Union or a business leasing property [other than Real Property]) with the principle purpose of deriving income from a property (interest, dividends, rents/royalties)

But not where there are more than 5 employees

Simpler terms: If corporation has one employee and that employee is the incorporated employee/specified shareholder, if that person qualifies as an employee of the person that is paying the corporation…then that corporation is a SIB.i.e. football coach example: “Sebastian’s Coaching Service” If you are declaring yourself as such during your employment, that is fine but you are an SIB and not a CCPC.

RESULT of finding that something is a Specified Investment Business

Income is taxed at 39% (on the first dollar of income—not a graduated system like an employee gets)

Canada Employment Credit

s. 118(10) – 15% of lesser of $1000 (so $150) or T’s income for the year is provided as a tax credit against income from O/E

NOTE: This amount is indexed – in 2013 $1000 went up to $1117 ($167.55) Everyone get automatic, non-refundable tax credit on fLoirst $1117 earned

INCLUSIONS [S. 6]

What is INCLUDED in O/E income?

Is it a benefit, allowance, reimbursement or deduction?

If deduction: (1) Is this person an employee (If yes, look to s.8) ? Or are they in business on their own account? (2) Does the deduction they are trying to claim fit anywhere in section 8? (3) Is this person a professional?

EMPLOYEE BENEFITS(Included in income from employment under 6(1)(a), deductible by employer)

Value of Benefits 6(1)(a) Enacted to ensure that the value of all benefits are included in TPs income, in spite of the fact that s.5 v. broad

Includes (cash and non-cash) value of board, lodging and benefits, any kind whatever, received or enjoyed by T, or anyone not at arm’s length (related) who enjoys the benefit.**Virtually anything that an employer provides to an employee is a benefit under this section if it can be reduced to a monetary value and is connected to employment.

EXCEPT any benefit (i) from contributions of T’s employer to registered pension plan, group sickness or insurance, private health plan, unemployment

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benefit plan, deferred profit sharing plan or group term life policy

INCLUDES salary, wage, gratuity, honoraria, commissions, bonuses, gifts as compensation for services

What is a Benefit?

ASK YOURSELF: Is this something “extra”? (cash or non-cash advantage)

(1) Something of value to the TP in an economic sense that is not merely incidental to business purposes (Lowe)

(2) The benefit must be connected the the TP’s employment in some way, but need not be quid pro quo (exchange for goods and services) for the performance of employment duties (Savage)

Policy

- Revenue: without taxation of benefits, people would attempt to get their remuneration as much as possible in the form of benefits rather than salary, which would greatly reduce tax base.

- Equity: Would be unfair if some got certain amenities tax free and not others

- Employer gets to deduct almost everything given to employees

Lowe

Must be measurable economic benefit

Value = FMV determined by expert evidence (Giffen)

FMV: The “amount a person who is not obligated to buy would pay a person who is not obligated to sell” (Steen)

Benefit to Employer Lowe(BUSINESS

TRIP)

Lowe was account exec at insurance co. Co sent Lowe and wife to New Orleans to promote insurance to brokers. Both L and wife expected to attend and brokers were bringing wives. Paid holiday or business trip?

HELD: deductible business expense.{primary purpose= business to benefit the employer: he enjoyed the trip but was not able to do whatever he wanted when he got there}

“The Primarily Business Test”: was the principal purpose of this trip for business or pleasure?

Will not be considered EE benefit if ER gets advantage of expenditure

Pleasure is incidental

If a trip is part business/part pleasure, will be apportioned by the CRA.{see Waffle case = purely pleasure cruise – took place of president on trip}

TEST

(1) Does the item under review provide the employee with an economic advantage that is measurable in monetary terms? (If no, can’t be included)

(2) If there is an advantage, is the primary advantage for the benefit of the employee or the employer? If the pleasure is simply incidental to a business purpose, it is not a taxable benefit for the employee within 6(1)(a).

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Air Miles Giffen

In the case of employees getting points for flying for employment that they could then use, the value was determined to be the cost of the cheapest economy ticket on the flight. {Value when determining taxability = FMV}

Employer logo Wisla FMW of gold ring is not what employer paid for it but rather value in scrap.

Social Event Dunlop Amounts over $100 are a taxable benefit. Value to employee is the cost/person.

Publicity Promotion Arsens

“the cost of the trip to Disneyland which was undertaken primarily as a publicity promotion for the benefit of the employer’s company should not be taxed as personal benefits in the hands of the several employees who attended on the trip.”

Material AcquisitionPoynton

(relied on in Savage)

Embezzled funds = prize = income under s. 3 of ITA

If a material acquisition confers economic benefit on EE in connection to employment then included in income(Definition of “benefit”)

Doesn’t have to be Quid Pro Quo

SavageLEADING CASE(Changed the

law in Canada)No longer have to

connect the benefit to an

obligation of the employee to

provide services of employment.

S takes 3 voluntary courses related to business; received $300/course for passing exams in accordance with company policy. S did not include as income on TR but CRA reassessed and did.

Need not be a quid pro quo (exchange of goods/services) for the performance of employment duties

(ie: prize for taking non-mandatory course encouraged by employer)

Note: 56(1)(n) provided exemption exception under prizes. Section has now been amended to exclude prizes received in course of business or employment. CRA now allows employer tax free deductions for gifts up to $500/employee.

As long as Benefit available Richmond

Whether T used benefit consistently is irrelevant; as long as it is available to T it is considered as a benefit

Reimbursement(Not taxable)

HuffmanBenefits that reimburse expenses incurred by employees at order of employer, which restores an employee to his/her pre-expense economic situation are not taxable. [See below]

Allowance (Generally taxable)

MacDonaldArbitrary amount. Predetermined sum set without specific reference to any actual expense or cost. [See below]

[Exception to Rachfalowski Minimal benefit for golf membership that he tried to decline but would not

Value should be determined on individual case basis of actual use

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Availability]

Actual Use & Desirelet him. Was not taxed on this.

(and whether T even wanted it) as opposed to availability

Uniforms IT-470R If employer supplies the uniform, it is not treated as a benefit of employment

IT470R - Benefits from Employment

(Employer’s guide for what to include on

employee’s T4)

*Note: more favorable to TP than a strict interpretation of 6(1)(a) would be

Non-cash gifts/awards to arms-length EE (non-related), regardless of numbers, not taxable to less than $500 annually (aggregate). Over $500 is taxable.o Arms-length: relation. Close relatives (children; grandchildren; spouse). Corporations if in

control then related.o If non-arm’s length employees then it’s always going to be income because presumption is

you are favouring. Can rebut if shown unrelated to business. Long term service awards not taxable up to $500 Where employer pays vacation for employee (and family too), cost constitutes taxable benefit

under 6(1)(a) UNLESS employee’s presence is required for business purposes (spouses included if helping business in anyway)

Loyalty [or frequent flyer] points no longer taxable as long as: (a) the points are not converted into cash, (b) the plan is not indicative of an alternate form of remuneration or (c) the plan is not for tax avoidance purposes

Items with logos are not benefits. No longer taxed on work-related social functions given to all employees (Dunlap was taxed on

dinner) Social/athletic club taxable UNLESS employer confer advantage by expecting employee use it to

establish connections Employee using employer's exercise facilities is not considered to be taxable benefit

ALLOWANCES & REIMBURSEMENTS(Included in income of an employee, deduction for employer)

Allowance: “An arbitrary amount usually paid in lieu of reimbursement. It is paid to the employee to use as he wishes without being required to account for its expenditure.”(Ransom)Intended to compensate the employee for particular type of expense that will be imposed by reason of their employment.

2 criteria: (1) Dollar amount (2) Employee does not have to account for it – paid on a regular basis (monthly, annually)

ASK: Is this a $ payment and does the employee have to account for spending it?

Policy for including: If allowances were not included as income, employers would pay your remuneration and this could lead to employers and employees colluding and reducing the tax base.

Reimbursement: Effectively nothing for the employee. For the employer, the cost of whatever the employee is being reimbursed for is probably a deductible expense in earning income from business or property.

Reimbursement

Not taxable

Huffman Huffman was a plainclothes officer with the Niagara Regional Police Force who examined crime scenes for physical evidence (like Dexter); this caused big-time dry-cleaning bills. The contract between employee and employer

Payment (usually part of employment K) in satisfaction of obligation to indemnify someone to defray actual expenses.

Benefits that reimburse expenses incurred by employees at order of

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provided

$500/year to plainclothes members for the purchase of such clothing because uniformed officers were provided with their work clothes at no cost to them.

Taxable benefit? No. Allowance given (tax free) and employer can deduct expense.(Also remember little bit about how he could only account for $420 worth of the benefit b/c amount had been raised)

employer, which restores an employee to his/her pre-expense economic situation

Usually an expense TP would not normally have to pay otherwise

Allowance

Included in income

Macdonald[Leading case for allowance

under 6(1)(b)]

Respondent is member of RCMP, transferred from Regina to Toronto. After transfer, paid $700 per month as housing subsidy, as authorized by Treasury Board. Respondent did not include subsidy in income on tax return.

Held: Taxable.

(1) Arbitrary amount such that it’s a predetermined sum set without specific reference to any actual expense/cost but (2) generally for a specific purpose

(3) You do not need to account for how you spent the funds.

Allowances are generally taxable.

6(1)(b)Provision that says to include all amounts received for personal or living expenses or allowance for any purpose are taxable EXCEPT:

Exceptions to Allowance (Automobile and Travelling) [6(1)(b)]

Exception where allowancenot included in income*Exception to the inclusion of allowances allowances normally included in income from employment!

Employees who were selling property or negotiating contracts for their employer

6(1)(b)(v)

Reasonable allowance for all travel expenses received by an employee from an employer in connection with the selling or property or negotiating of contracts for the employer (IE sales work) in-town or out of town.

Reasonable allowances for travel expenses are not included in income.[See limitation vehicle allowances (“x” and “xi”) below.

Every other employee (doing non-sales work)

6(1)(b)(vii)

[NON-VEHICLE]

Reasonable allowance for non-motor vehicle travel expenses (other transportation, meals, lodging etc) for employees who were travelling on business out of town only for the performance of duties of the office or employment.

(1) Away from the municipality where the employer’s establishment at which the employee normally worked or reported for work was located AND

(2) Away from the metropolitan area where the employer’s establishment was located

Reasonable allowance for travelling is not included in income, other than vehicle allowance (dealt w/ separately in vii.1 - below), in performance of

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duties of EE office or employment

Note: employee who receives this allowance and the allowance is not included in income CANNOT deduct for travelling expenses other than 8(1)(f).

6(1)(b)(vii.1)

[VEHICLE]

In or Out of Town + VEHICLE

Reasonable allowances for use of vehicle for work is not included in income

For (v) & (vii.1)

Vehicle allowance is deemed unreasonable if

6(1)(b)(x)ONLY reasonable allowance if allowance based solely on number of KMs driven.

6(1)(b)(xi)T receives only the allowance in respect of the use – they CANNOT be reimbursed in part or in whole for the expenses.

REG-7306

(actually for 18(1)(r) which says employer may only deduct those REASONABLE amounts paid to employee as allowances as business expenses)

The prescribed reasonable amounts for an employer to pay as per KM allowance.

*Allowance, NOT reimbursement. The employee does not have to show that this is what it cost to actually drive the car, they just have to show that they drove a certain number or KMs.

These are the reasonable amounts, so you can’t deduct more except where the amount is required to be included in the employee’s income (so if it is reasonable and therefore required to be included in the employee’s income, the employer can deduct more)

Vehicle allowance max deduction (‘13): 0.54/km first 5000; 0.48/km after 5000

Unless in the territories (additional .04/km)

Special and Remote Worksite as Income Exception -6(6)[Provides circumstances in which allowances do not need to be included in income]

“If TP had to be away from principle residence”

For more than 36 hours (6(6)(a))

6(6)(a) Any amount or reasonable Allowance for board AND lodging expenses for period at a location shall not be included in income IF (Either (i) OR (ii))

Purpose: Recognizes that when employees have to travel for their employment and stay somewhere away from their regular home for a period or are asked to go and live somewhere in a remote area, and they are provided meals and accommodation (allowance or reimbursed), it would be a detriment to the employer if employees had to pay for it themselves, because they wouldn’t want to do it.

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SPECIAL WORK SITE

(i)Duties performed at location by the taxpayer were of a temporary nature

(i)(A)AND IF T is maintaining a self-contained domestic establishment non-rented principle residence elsewhere AND

(i)(B) Unreasonable to return home (self-contained domestic establishment)

Remote Location (ii)

A location at which, by virtue of it’s remoteness from any established community, the TP could not reasonably be expected to establish and maintain a self-contained domestic unit.

No requirement to keep a different home To establish whether remote or not, must look to definition of “established community”(IT-91R4)

“established community”= a permanent location that has:

(1) A basic food store(2) A basic clothing store with clothes in stock (not a mail-order

outlet) (3) Housing (4) Access to medical assistance and educational facilities

*Note: Work location itself might be an established community

“remoteness” When determining whether a work location is in fact remote from an established community consider:

(1) The availability of transportation (2) The distance from an established community (3) The time required to travel that distance

GENERAL RULE: A work location will be considered to be remote if the nearest established community with a population of 1K or more is further than 80KM (50M) by the most direct route normally travelled in the circumstances.

6(6)(b)Allowance for transportation between site and home not included in income

SPECIAL WORK SITE (a) Between Principle residence and Same as (a)(i) OR

Remote Location (b) Between Principle residence and same as (a)(ii)

Period of time Same as (a)

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Remoteness IT470Rconsider transportation, distance, time – if nearest 1000 population location is no closer than 80km = remote

SPECIAL WORKSITE – TAXABLE BENEFIT? (1) Use Lowe test to determine if the travel is a benefit (Is it primarily for the benefit of the employer, and any employment is simply incidental (2) If there is a pleasure portion of the “benefit” for the employee, would need to apportion accordingly.

DEDUCTIONS [S. 8]

GENERAL RULES for DEDUCTIONS(In computing Income from Employment)

Unlike benefits, allowances and reimbursements, which are flows of advantages or cash from employer employee, a deduction relates to an out-of-pocket payment by the employee that is not reimbursed by the employer. Deductions are generally narrow and hard to claim.

An employee can only deduct an amount less than or equal to the income from that source, so a TP cannot create a loss from employment.

How it works: Employee personally bears an expense, then claims a deduction. If the amount is not within the allowable deductions in s.8, it is not deductible.

Deductions allowed 8(1)

Deductions allowed in computing taxpayer’s income(Employee will argue: had expense of earning their income from employment)

Deductions are difficult to get for employees and are applied to the source they came from (you have to match your expense to the employment in which it was incurred – for most at least)

Limitations 8(2) Except as permitted under section 8(1) Basically saying that you have to fit yourself under one of the 8(1) deductions or not at all.

GENERAL LIMITATIONS TO

DEDUCTIONS(Applies to entire ITA)

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Reasonableness Rule

No deduction shall be made except to the extent that the outlay or expense was reasonable in the circumstance. [Q of fact]

Courts tend to agree with the employee in these situations… if a business person says it was a reasonable expense, the courts will tend to agree (there is no case law to say what is and is not reasonable) …however, if paying your spouse a huge salary, probably not reasonable.

Exceptions if in business of

providing F/D/E67.1(2)

67.1(1) does not apply where employer is in the business of providing food/alcohol/entertainment (restaurant cannot deduct 100%)

Expenses for Food 67.1(1) An amount paid or payable for food or beverages or the enjoyment of entertainment deemed 50% for income(A deduction for food, beverage or entertainment is limited to 50% of

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what you paid OR what a reasonable amount to pay would have been)

Exceptions for F/D/E67.1(2)(a) 67.1(1) does not apply where amount was paid as compensation

67.1(2)(f)Where six or fewer special events where F/D/E is generally available to all individuals.

TRAVELLING EXPENSES

Sales Expenses of Commission/Sales Employee(Can deduct expenses incurred in the course of work!)

8(1)(f)

In a nutshell: (Sales expenses of commission employee)-(deductions for expenses incurred as sales employee)= X

How it works: A TP who was employed in connection with the selling of property or the negotiating of Ks for employer can deduct the amount the TP expended for the purpose of earning the income.

Travel and other expenses are deductible where (all conditions must be met):

- 8(1)(f)(i): the employment K must require the TP to pay his/her own expenses

- 8(1)(f)(ii): the TP must be ordinarily required to carry on the employment duties away from the employer’s place of business.

- 8(1)(f)(iii): The TP must be remunerated in whole or in part by commissions based on the volume of sales or K’s negotiated.

- 8(1)(f)(iv): TP cannot have received a non-taxable allowance for travel expenses under 6(1)(b)(v)

- 8(1)(f)(v): the amount expended cannot be an outlay, loss, or replacement of capital (or payments on account of capital) except what is allowed under 8(1)(j) (motor vehicle and aircraft costs)

- 8(1)(f)(vi) The expenses cannot be for club memberships, cabins, yachts etc as in 18(1)(l) (use of recreational facilities)

Note: 8(1)(f): the deduction cannot exceed the commission amount !Other note: Cannot claim under 8(1)(f) AND 8(1)(h) – see below.

Meals 8(4) Only included in deduction if travelling for more than 12 hours

67.1(1) Only deductible at 50% of value or reasonable amount

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Certificate of

employer8(10) Amount shall not be deductible unless certificate of employer must be

filed

Transport Employee’s Expenses

(Can deduct expenses for food and lodging)

8(1)(g)

In a nutshell: (Transport employee’s expenses)-(Transport employee (who pay food and lodging) deduction) = X

How it Works: A TP who works for a transportation company may deduct the amounts spent on meals and lodging.

Deductible where duties include travel for transport of goods/people and employment requires T to pay for expenses relating to food AND lodging, to the extent not already reimbursed.

All these conditions must be met:

- TP must be an employee of a person whose principal business is transporting goods and/or passengers

- 8(1)(g)(i): the employment duties must regularly require the TP to travel: (1) Away from the municipality where the employer’s

establishment where the TP regularly reported for work was located.

(2) Away from the metropolitan area where the municipality is (if applicable)

(3) On vehicles (including boats) used by employer to transport the goods and/or passengers.

- 8(1)(g)(ii): While away from municipality/metropolitan area, TP must pay for both meals and lodging.

NOTE8(1)(g) contemplates journeys of substantial distance which require disbursements for both meals AND lodging --- it does not encompass cases where a TP goes from a place inside the metropolitan area to a place just outside of it and back in the same day (ferry workers case here – returned home at night but were away during the day and tried to claim meals.

Crawford

Refused BC Ferries employees food-only deduction (20%) due to wording of the provision (“AND lodging”) – specific literal interpretation can’t deduct one without the other.

*Literal interpretation of statute in deduction provisions.

Can’t deduct meals if you sleep at home.

Policy: Good thing tbh because there are lots of people who “for a myriad of reasons cannot return home for lunch”.

67.1(1) 50% food deduction

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Non-Sales Travel Expenses”

(Can deduct (OTHER THAN MOTOR VEHICLE) for work related expenses)

8(1)(h)

In a nutshell: (Travel expenses for non-commission employees)- (deduction (other than vehicle) for work related expenses) = X

How it Works: TP may deduct travel expenses (NOT MOTOR VEHICLE) incurred while travelling in the course of office or employment.

Work-related travel expenses other than vehicle are deductible – N/A if (f) or (g) is used

Conditions:

(1) (i) TP must be ordinarily required to carry on the duties of office or employment away from the employer’s place or business OR in different places.

(2) (ii) Employment K must require the TP to pay his/her own travel expenses when performing these duties

(3) (iii) TP cannot have received a non-taxable allowance for travel expenses under 6(1)(b)(v) or (vii)

(4) (iv) TP cannot claim a deduction under paras 8(1)(f) or (g)(5) 8(4) *see below (6) 8(10) *see below(7) TP cannot include commuting costs if work duties have not yet

begun (Martyn) o If the travel was not carried out in the course of

employment, but was rather proceeding from the journey from home to work, this cannot be included as travel expenses in s. 8(1)(h)

o Luks – “travelling between the appellant’s home and the several places where he was employed was not part of the duties of his employment…the journeys were not made for the employer’s benefit, nor were they made on the employer’s behalf or at his direction, nor had the employer any control over the appellant when he was making them. The utmost that can be said of them is that they were made in consequences of the appellant’s employment. That is not sufficient for the present purpose.”

Meals 8(4) Meals not included unless travelling for more than 12 hours

Certificate 8(10) Certificate of employer must be filed with tax return

67.1(1) 50% food deduction, as above

Motor Vehicle Travel Expenses

8(1)(h.1)

Work-related travel expense for vehicles are deductible – N/A if (f) used

EXCEPT where T received vehicle allowance NOT included in income under s. 6(1)(b)

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Martyn

TP, pilot, attempts to deduct cost of commuting between home and airport, a round trip distance of 27 M. Public transportation inconvenient and often unavailable.

Commuting to work is an expense for all employed persons – why is he any different?

Deduction not allowed for commute to work by pilot. If journey not made for employer’s benefit, behalf or at his direction/control – no deduction. (Luks v MNR)

Travel from home to work is not deductible because it is not part of the duties of employment;

Hogg

(Deductions in computing income

from office or employment)

Officer travelled to and from courthouse in own car. Received a non-taxable allowance if went to a different court house that was +15km extra. Due to nature of employment, feared personal safety if commuted publicly.

Even where work-related security concerns exist

NOTE Could opt to try s. 6(6), to try to not include allowance to start with, instead of using a deduction

LEGAL EXPENSES

Expenses of Employee

8(1)(b)

TP can deduct amounts paid in the year (anything that would have been taxable if you had received it) for legal expenses incurred by TP to collect/establish a right to salary or wages.

Amendment expands it to anything that is considered as employment income, not just salary/wagesNote: This is the only situation where you could have a loss from employment.

Note: TP in Schwartz would not have been able to deduct his legal fees, as he was NOT suing to recover income from employment.

Loo Legal claim does not have to be successful for TP to claim expenses incurred.

IT-99R Failure to collect an amount established as owed to T does not preclude a deduction

BlagdonExpenses incurred by shipmaster to defend his competence and right to command a ship were non-deductible because they were incurred to protect his means of livelihood, not to collect salary or wages owing

60(o.1)

May also deduct the total legal expenses paid by T in recovery of a benefit under pension plan [certain pension benefits that cannot be deducted under 8(1)(b) can be deducted here.]

retiring allowance is another source of income under s.56 and includes an amount received in respect of loss of employment – i.e. wrongful dismissal

Basically: Can deduct legal expenses incurred in lieu of retiring allowances.

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DUES and OTHER EXPENSES of PERFORMING DUTIES

8(1)(i) – Provides deduction for annual professional and union dues T can deduct amounts paid as:

8(1)(i)

In a nutshell: Dues and other expenses of performing duties

How it works: A TP may deduct an amount paid in the year for… SEE BELOW

Requirement: must have been paid for during the year.

Note: Fairly difficult to meet (Law Society fees are covered, CBA not – much better to have employer pay than to pay yourself and attempt to claim deduction) Limitation: TP cannot be reimbursed or be entitled to be reimbursed for any amount the TP seeks to deduct.

Professional and Union Dues

8(1)(i)(i)Annual professional membership dues necessary to maintain a professional status are deductible.

Swingle

TP is chemist who needs to keep up with tech developments so has memberships to professional societies which require payment of annual dues ($193.15).

annual professional membership dues necessary to maintain professional status that are recognized and maintained by statue

(iv)Membership in trade union (A s.3 of the Canada Labour Code or B in provincial statute) or association of public servants to improve work conditions; OR

(v)Dues retained by employer, pursuant to collective agreement, paid to union or association of public servants of which T was not a member

Limitation 8(5)

Sets out when dues in 8(1)(i) are NOT deductible:

TP cannot deduct dues levied by a profession organization or trade union for a purpose ancillary to its ordinary operating expenses (i.e. pension plan, additional insurance)

Benefits such as malpractice insurance are deductible PROVIDED THAT the insurance is required to maintain professional status.

Cost of Supplies8(1)(i)(ii)

Office rent or salary to an assistant/substitute is deductible, if payment is required by employment K

8(1)(i)(iii) In a nutshell: Dues and other expenses for performing duties

How it works: TP may deduct the cost of supplies consumed directly in the performance of the duties of the office or employment.

ALL of these conditions must be met:

(1) TP has to pay the amount OR another person can pay the amount if the

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TP must include the amount in income for the year. (2) Supplies must be consumed directly in the performance of the

duties of the office/employment. (3) The employment K must require the TP to supply and pay for the

supplies.(4) TP’s employer must certify that the conditions above were met and the

TP must file this certification with the tax return under s.8(10).

Uniforms not considered supplies and therefore not deductible under 8(1)(i)(ii)

HOME OFFICE EXPENSES(*income from employment)

8(13)

In a nutshell: work space in home

How it works: TP may deduct an amount for the use of a workspace within a self contained domestic establishment when computing income from employment.

Basically: CRA wants you to take the whole floor area of the contained domestic establishment, determine what proportion is the home work space and then that proportion will be deductible.

(If renting etc, percentage of rent paid, utilities, insurance etc would be calculated. If owns, percentage of related expenses such as mortgage interest, insurance, property taxes, maintenance fees, utilities etc)

248(1)“self contained domestic establishment”—a dwelling-house, apartment or similar place of residence in which a person as a general rule sleeps and eats.

Work Space in Home

8(13)(a)

Notwithstanding 8(1)(f) and (i), No amount is deductible from home office

EXCEPT where home office is either:

(i) the principle location of duties OR (ii) is used exclusively for earning income AND used regularly to conduct

meetings in the ordinary course of business

8(13)(b)Limitation:

If (a) is satisfied, deductible amount shall not exceed the income from O/E

8(13)(c)Limitation:

Losses can be carried forward until income from employment exceeds the losses

McCreath Home office to primary office travel is not a deductible transportation cost

INCOME FROM BUSINESS OR PROPERTY [S. 3(A)]

Business and property income works on the accrual basis, so a TP must include amounts received and receivable, paid and payable.

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Remember: 3(a) includes 4 sources of income: (a) office (b) employment (c) business (d) property

Income from Business VS Income from Property:

Income from Business= active generally implies that there is an active, organized, ongoing business activity A business is… “anything that occupies the time, attention and labour of a man (or woman or corporation)”(Smith v. Anderson)

Income from Property= passive generally the owner of a property is not required to devote a significant amount of time and energy to derive income from that property (can come from things like rent, dividends, royalties etc)”income from property” implies that ownership of the property without doing anything more entitles you to income from it) [Income from property does not include any capital gains or losses from the disposition of that property however s.9(3) ]

Qs to ask in making distinction:

- Was income the result of efforts made or time/labour devoted by the TP?- Was there a trading character to the income? - Can income fairly be described as income from a business within the meaning of the term used in the act?- Nature and extent or services performed? - If income derived principally from ownership of property, the income is generally considered to be income from

property—but if earning of income involves significant activity, could be income from business.

Why do we care about this distinction? for personal taxation, both taxed the same but: important for CCPCs: As per s. 248(1) … “business”- includes profession, calling, trade, manufacture, or undertaking, and…includes an adventure or concern in the nature of trade but does not include office or employment.

“property”- means property of any kind whatever whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal and, without restricting the generality of the foregoing, includes… (a) a right of any kind whatever, a share or a choice in action (b) unless a contrary intention is evident, money, (c) a timber resource property and(d) the work in progress of a business that is a profession Since defined so broadly, means that something of value is generally considered to be property for ITA purposes.

Type of Corporation Notes

CCPC: Canadian Controlled Private Corporation”

Receives “small business deduction” of 13.5% on first $500,000

*Note: income from property does not count!!

*Usually what we think of as a corporation for the purposes of the Canadian tax code.

A corporation that is (1) resident in Canada (2) shares are NOT listed on a stock exchange and (3) it is not controlled by (a) non-residents of Canada, (b) a corporation whose shares are traded on a stock exchange, or (c) a combination of these

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Active business income of a CCPC is taxed at a special low rate (13.5%) due to a tax credit under s.125 known as the “small business deductionConditions: Income must be from “active business carried on by a corporation”—this excludes income from “specified investment business” or “personal services business” unless more than 5 employees (these can be CCPCs but don’t get special rate.)

SIB: Specific Investment Business*No tax break

Taxed @ 39%Exception: More than 5 full time employees during year = CCPC but no tax break.

Corporation where personal purpose is to get income from property (stocks, real property or rent) hence why no tax break.

A business providing services where (a) an individual who performs services on behalf of the corporation (b) Any person related to the incorporated employee

Policy: Individuals should not have access to the special low tax rate by using a corporation to invest their capital to earn income from property.

PSB: Personal Services Business

*No tax break Taxed @ 39%

i.e. coach example – can’t claim he is a CCPC for the purpose of the tax break.[If corporation has one employee and that employee is the incorporated employee/specified shareholder, if that person qualifies as an employee of the person that is paying the corporation, then that corporation is a PSB.

A business carried on by a corporation in a taxation year means a business providing services where (a) an individual who performs services on behalf of the corporation or (b) any person related to the incorporated employee

Policy: Individuals should not have access to the special low tax rate by using a corporation to perform their employment

Canadian Resident Corporations which are NOT CCPCS

Taxed @ 26%

Can never be CCPCs!!

Non-resident corporation

Income from Property VS Capital Gains:

Income from Property… is included in INCOME under s. 3(a)

Income from Capital Gains… is include in INCOME under 3(b) [ONLY A PORTION OF CAPITAL GAINS INCLUDED]

Imputed Income VS Income from Property:

Income from Property: Value derived by the owner of a property from allowing another person to use the property.

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Imputed Income: (1) Non-case income or income in kind OR (2) Income that arises outside the marketplace i.e.: If TP occupies own home instead of deriving rental income from letting to a tenant enjoys imputed income to the extent of the rent foregone. Owner enjoys a benefit and increases economic power and that value is imputed to him.*Imputed income includes any gain, benefit or satisfaction from a non-market transaction or event.

SUBDIVISION B – INCOME from BUSINESS or PROPERTY – s. 3(A)

Enabling Provision 3(a) Income from business and property included in income for taxation year

Income 9(1)

T’s income for tax yr. for business/property is T’s profit from that business/property = net profit (revenue-expenses)

Court asks: Do business people regard these expenses as expenses of earning income? How would average business person see this? [Court will generally agree unless the ITA restricts it in some way]

Loss 9(2) T’s loss for a tax year from business or property is T’s loss from that business or property

Gains and losses not included

9(3) Income/Loss from property does not include capital gain/loss from disposition of that property

Amounts & Timing Rules

12 ?????

Deductions20(1)

see list p.19 ITAR

Specifies deductions in computing income from business or property (these deductions are allowed – would not be if just applying general principles)[20(1)(c) is the provision relied upon by the TP in Stewart.

Limitations on Deductions 18(1)

Limitations on deductions – even if you could argue that the expense incurred for reason of earning property profits, you still can’t deduct.(p) – restrictions on deductions for PSB(r) – max amount you can deduct for paying an amount to an employee for using their own car

BUSINESS/PROPERTY or Personal Endeavour (Stewart Test) - Reasonable Expectation of Profit Test(Can use for BUSINESS or PROPERTY)

If clearly commercial then unnecessary / Only necessary if possibly personal endeavor[Has been applied broadly in situations where the view is taken that the TP does not have a reasonable expectation of profit. No

expectation of profit=no income=nothing to deduct losses from]

Policy: People often try to claim deductions for activities that they just enjoy doing (happens often with gambling)

What to look for here? Situations where a capital property is sold and sale price is paid in installments or the amount paid is dependent on the use or production of the property.

FIRST STAGE Does the taxpayer intend to carry on an activity for profit (subjective requirement) and is there evidence to support that intention was carried out in a

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Is the activity of the T undertaken PRIMARILY in pursuit of profit, or is it a

personal endeavor (hobby/pastime)?SUBJ/OBJ INQUIRY

reasonably commercial manner? (objective requirement)

Objective factors (indicia of commerciality): (Moldowan)

1. The profit and loss experience in past years2. The taxpayer’s training3. The taxpayer’s intended course of action4. The capability of venture

*Court in Stewart said REOP test should no longer be used exclusively as stand alone test—too vague, so bring in subjective enquiry first.

SECOND STAGE

If it is not a personal endeavour, is the source of income a business or

property?

(Business usually requires a heightened level of TP activity)

Section 248(1): “Business” as source– includes profession, calling, trade, manufacture or undertaking of any kind whatever, and adventure or concern in the nature of trade, but does not include office or employment

Smith – “anything which occupies time/attention/labour of man for purpose of profit” is a business

“Property” – (below) whether real or personal or corporeal or incorporeal

Note: if it is a personal endeavour and the income is relatively substantial it will be deemed a capital gain

Stewart

TP experienced real estate investor earning rental income from 4 condo units. Borrowed $$ to buy units and was provided with projections of rent/income therefrom. Projections showed losses, so he claimed losses, mainly as result of significant expenses on $$ borrowed to acquire the units. Losses disallowed by minister b/c had no reasonable expectation of profit at time of purchase so appealed to SCC.

REOP test alone is inappropriate b/c it second guesses the TP maybe they want to make profit but are unsuccessful.

When the activity contains no personal element, no further work needed. If could be classified as personal, must decide if it is being carried out in a sufficiently commercial manner of constitute a source of income.

Gambling and Other Related Windfalls

POLICY: You wouldn’t want people using gambling losses to reduce income for tax purposes.

Lottery Ticket Winnings

LeBlanc

Brothers bidding $$$ on sports parlay games. Moved closer to US to bid there too. Expert claims no way to win a sports lottery using any kind of system.

Deemed not income from a source (court accepted it was pure luck)

may be different if Stewart REOP test applied

Gambling is not taxable when the gambling is a pleasure pursuit, even if it is regular and has some organization.

Pool Sharks Luprypa TP claimed difference between reported and assessed income was attributed to gambling on pool and was therefore not taxable income. TP’s business WAS pool

Were taxed on winning because this differed from the old horse-racing cases he was relying on.

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– practiced every day, strategic about choosing opponents etc.

His methods were an organized activity, he set himself up to win by never drinking while playing, playing drunk people, practicing regularly

generally if there is specific expertise or system, it makes it a business (thus taxable)

Acquiring Capital Property to Earn Income

ACTN 248(1)

“business” includes … an adventure or concern in the nature of trade

o However, it does not necessarily mean that a T engaged in an ACNT is "carrying on" a business

o Determination is made based on degree of activity and situation’s own particular facts

o *One of the most litigated areas of tax law Classic example: You buy a house at a really low price so you buy it to re-sell it

ASAP to make a profit. You are behaving like a buyer in real estate. Any transaction where the buyer purchases with the intention of re-selling it ASAP at a profit will be an ANT.

IF ANTTAXABLE INCOME FROM BUSINESS

Taylor

TP is GM of Canadian subs of American company. Commodities fluctuated a lot pre war and he wanted to get better lead for company to give them an edge. Unable to purchase on behalf of company, so he personally bought and sold 22 carloads of lead to the company. Assumed the risk personally and made $84,000 company let him keep profit. RC said ACTN but he said was capital gain b/c only did it a couple times.

Don’t have to be in the business of lead to be taxable on it. This can also be a ANT.

Do not have to be in business in order to have your income from a transaction be taxed as business income – if it is characterized as an ANT, it will be taxed as business income and NOT as capital gain. If there is no income derived while the item is owned, then it is likely to be an ANT = distinguishing characteristic of an ANT.

Single transaction can be an ANT. The intention to sell at a profit is an indicator that it is an ANT, behaving as a trader of the commodity would also be an indicator, and the nature and quantity of the subject matter is also a good indicator to see if something is an investment on which to earn income before being sold, or whether it is of a capital nature (for personal use.)

CG vs ACTN

If profits are found to be capital gains (not ACNT), T is taxed at 50% of income from Property/business

VS

If profits are found to be ACNT, profit is taxed as income from business (at full tax rate)

Dif ways to characterize

(normally land)

Capital investment: Capital gain when sold, must be for personal use or income earning in meantime

ANT: Bought with the intention of selling, but not earning income off in the mean time

Business: You are in the business of buying/selling of land

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ACNT TEST

Acquiring capital

property to earn income

IT-459(SCC

appr.)

IT-218R(referred to in

IT-459)

Taylor

TP’S CONDUCT

Primary Consideration: Whether the taxpayer’s actions were essentially what would be expected of a dealer in such property

1. TP’s intention at the time of the purchase of the property 2. Feasibility of TP’s intention 3. Geographical location, zoning 4. Extent to which the TP and his/her associates carry out the initial or

primary intention 5. Evidence of change of intention 6. Nature of the business, profession trade, experience of the TP and

his/her associates 7. Extent to which the purchase is made with borrowed money (less

important post-Stewart) 8. Length of time property held by TP 9. Whether TP made purchase alone or with others 10. Reasons for selling? unsolicited high offer? Actively marketing land?11. Extent of TP and associates’ hist in real estate (are they in the business

of buying and selling?)

In short—factors that suggest ANT:

- Effort made to attract purchasers or sale within short period- Steps to improve marketability & listing after completion- TP’s commercial background or previous experience

NATURE AND QUANTITY OF

PROPERTY

Primary consideration: If property acquired is of such a nature or of such magnitude that it could not produce income or personal enjoyment by virtue of ownership (only purpose would be subsequent sale of the property) presumption is ACTN

Factors:

1. If TP not in position to operate or lease for income (i.e. can only sell) then presumption of ACNT

2. If property of an investment nature (produces income by mere possession), then manner and intention of acquisition determinative

3. Buying of lead (like in Taylor) could only be re-sold (he certainly could not have hung onto several tons of lead ACNT

INTENTION Primary consideration: Not sufficient by itself to establish ACNT. But if one of above tests established, then INTENTION can be corroborative. Inability to establish intention does not preclude.

Secondary intention: If the primary intention was investment at time of acquisition, was secondary intention to sell?

1. Secondary intention significant if little likelihood of property being retained

2. Requires not only the thought of a sale at a profit crossed Ts mind at the time of purchase, but that the prospects of such a sale be an operating motivation in the acquisition of the capital property

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(Saskatchewan Wheat Pool)3. Secondary purpose/intention of earning profit on the flip of

property is sufficient to find ACNT (Regal-Heights) Assuming requirement in Wheat Pool is satisfied

ISOLATED TRANSACTIONS

These factors are not sufficient to prevent a finding of ACNT:

1. Transaction was single or isolated (Taylor)2. TP did not create organization to carry out transaction3. The transaction different from TP’s other activities and he has

never entered such a transaction before

LOSSES

If established to be ACNT

Then loss constitutes loss from business and enters into calculation of non-capital loss for the year.

Regal Heights

Plan to build shopping centre on land close to highway. Regal Heights people parcelled land and sold it as profit. They said original land purchase intended to be an investment but when first intention didn’t pan out, sold it for profit!

If you have a secondary intention when something is purchased (with raw land especially), it cannot be ignored and will likely be considered ANT because of the vast number of options the purchaser has.

Irrigation Industries

Dormant company acquires shares of mining/smelting company (instead of purchasing farm which was primary intention). Bought shares, but only had couple weeks because bank wanted money. Shares had risen by this point so irrigation paid the bank back and held remaining shares for a while, eventually selling them for $17.50 per share.

NOT ANT but rather capital trade b/c II bought this not in the way that a trader in this field would have gone about it. The way you finance something is not a sufficient indicator of what your intention was.[Note: this may have something to do with the fact that these are shares and not land… shares are inherently created to make income, so do not have to show that you were immediately going to receive dividends.]

Arcorp Industries

Dealer in trades and securities incorporates Arcorp and owns all of the shares. In his capacity as a dealer, he is offered the chance to invest in a private placement (stocks). Dealer had Arcorp invest in 24-32 companies, but in almost all cases held onto shares for less than a year except where there was a selling restriction. Are profits taxable as income from business or corporation or are they capital gains and therefore

Shares were a commodity being sold ANT. (See distinction b/w ANT, carrying on business and investing in capital properties above!)

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taxed at half the rate?

Sask Wheat Pools

Had loss and wanted to treat it as a business loss b/c had income from other sources to offset these losses. Argued they never had a secondary intention at time of transaction to use it to make profit.

Test of secondary intention is a stricter test. For something you acquire for capital/investment purpose to be also characterized as ANT (thus taxable income from business) the TP must have, in the forefront of his mind AT TIME OF PURCHASE, the possibility of selling it at a profit as a motivation for purchase.

Income from Property

[ 3(a) 9(1) 248(1) ]

Classic Types of Property Income:

- Renting a room, car, space - Amount that flows to you from a debt obligation (can take many forms. i.e. bank account) - Dividends—if you own a share in a corporation, it may have a right to a dividend

Most shares do; income flows merely from ownership of shares; each share (or type) has same value; when companies earn profit and have leftover money after taxes, can distribute to shareholders.Being in the business of buying and selling bonds is NOT income from dividends

- Royalties – payments for using IP i.e. license fees, patents, software etc right to receive share of mineral resource based on joint ownership

12Expressly brings certain items typically derived from a property source into income.

“Property”

(generally not primary residence; not ACNT if you purchase property for personal use or to rent it out)

248(1)

Of any kind whatever,

Whether real or personal or corporeal or incorporeal, and without restricting generality of the forgoing, this includes: A right of any kind whatever as share or chose in action:

1. Still requires a characteristic of ownership2. Unless contrary intention indicates, money; 3. Time resource property and 4. Work in progress of a business

Stewart

Note: same analysis regarding source of income and reasonable expectation of profit applies to property income as well as business income.

INCLUSIONS from BUSINESS or PROPERTY

[lender is RECEIVING interest here]

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12(1)(c) 12(3) & (4)

REMEMBER: Income from property is the value derived by the owner of a property from allowing another person to use the property. Therefore, a TP who occupies his own home instead of deriving rental income from letting to a tenant enjoys imputed income to the extent of the rent foregone.

Income Inclusion

12(1)

Expressly brings into income certain items that are typically derived from a property source.

Listed amounts received and receivable to be included in income for a tax year from business or property

J Colford Contracting

Receivable amounts must be included in income – where T has legal right to the payment

Benaby Realties An amount is not receivable until the actual amount owed is ascertained

West Kootenay

Power

Absolute certainty of what is owed/receivable is not required – sufficient certainty is enough

Services, etc. to be rendered

12(1)(a)Amounts received (i) for services not yet rendered/goods delivered or (ii) arrangement of repayability for return or resale of articles/goods delivered to customer

Amounts receivable 12(1)(b)Any amount receivable for property sold or services rendered in the course of business.

INTEREST

These include: bank accounts/term deposits (lending money to the bank’s capital), bonds (loans to government), etc.

Capital outlay [to banks, gov’t, etc] to be guaranteed income in the form of interest

Late payment charges, an extension of credit rather than a loan, are still taxed as interest income

Are you dealing with interest being PAID or interest being RECEIVED?

“Interest” (definition from case law, not from ITA but generally accepted for tax purposes) “compensation for the use of money belonging to another person; it must be referable to a principal amount and must either accrue daily or be allocable on a day to day basis.” (Miller v. The Queen)

- Essentially payments made on a debt obligation - The amount of interest is determined by the interest rate and the principal amount of a debt obligation

Interest Included in Income

12(1)(c) Subject to (3) & (4)

Any amount received or receiveable by the taxpayer in the year as , on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was

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not included for a preceding taxation year

[If reporting on a cash basis, report interest when received. If reporting on accrual basis, report interest when receved or receivable.]

Note* This section also intended to capture substitutes for interest (ie. Late fees)

Interest Income

[ CORPORATION / Partnership / Unit

Trust]

12(3)Include any interest on a debt obligation (other than bond, debenture, bond) that accrues to it to the end of the year or becomes receivable or is received by it before the end of the year, to the extent it was not included in previous year’s income

Interest from Investment Contract

Individual Persons

12(4)INDIVIDUAL PERSONS who hold investment K’s must only include interest accrued to it on the K to each anniversary date with respect to K, if an anniversary date has occurred in that year.

Anniversary Date

12(11)

of an “investment contract” means

(a) one year after the day immediately preceding the date of issue of the contract

(b) the day at every successive one year from para (a)

(c) the day on which the contract was disposed of

Investment Contract

12(11)Any debt obligation other than

(i) An obligation in which TP has included in computing income

EXAMPLE

Individual makes $1000 loan with a 2 year term on June 1st, 2014, with interest at 5% per annum (50$).Anniversary date = May 31, 2015T includes no interest income for 2014. In 2015 the T must include 365 days of interest income ($50)On May 31st, 2016, the TP receives the principal back and $100; for the 2016 tax year the TP can deduct the $50 already paid so he must include the $50 in income.

Income and Capital Combined

[BLENDED PAYMENTS-

repayment of both capital and interest]

i.e. a mortgage

Deferred payments construed as loans (anti-avoidance)

16(1)

Where amount is blended income/capital, include the part reasonably regarded as interest (Minister can assess the blend, does not necessarily reflect paperwork blend)

*Anti-avoidance measure

Groulx TP sold property and took payment in installations while charging no interest. Claimed all installments were just part of the purchase price (proceeds of disposition of capital property, making them capital gains and thus non-taxable at that time. Basically he low-key attempts to capitalize interest on a debt

Court found payment to Montreal farmer to be a blended payments, such that an increased purchase price was in lieu of interest payments

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so that he wouldn’t have to pay tax on it.

Vanwest Logging

If price paid is in excess of fair market value, the excess is deemed interest; if the price reflects the fair market value then there is no element of interest in the payment.

Once something is deemed Blended Payments then you have to determine 12(4)/12(11)

RENT and ROYALTIES(payments based on production or use)

Rent Generally fixed payment; periodic; for the use of property for a given period of time

Royalties

Amounts paid for use/production of intangible property (copyright/trademarks/patent/ etc.)(If all legal rights in a property are transferred, the transaction is a sale, giving rise to sales profits. If less rights are transferred, the transaction is a lease or license and the payments are rents/royalties)

Vauban Normally are a share in profits or percentage of profits, based on use or # of units, copies, or articles sold

Payments Based on Production or Use of

Property

12(1)(g)

Include in the income any amount RECEIVED by TP in the year that was dependent on the USE OF OR PRODUCTION FROM PROPERTY whether or not the amount was an installment of the purchase price of the property.(Basically: include income generated via rent/royalties)

Wain-Town Gas and Oil

After-sale share of profits are royalties and subject to income tax (not capital payments)

Non Residents Syspro If payment from rent/royalty is going to a non-resident, withholding tax under 212(d) applies

DIVIDENDS (income from PROP)

(are included in income when received)

Accepted CL definition

Any pro rata (in proportion) distribution from a corporation to its shareholders is a dividend, unless the distribution is made on the liquidation of the corporation or on an authorized reduction of corporation capital

When Applies Corporations cannot pay dividends if they do not have profits after tax. Common shares are entitled to dividends; each is equal to every share of that class.

Dividends received from

RESIDENT corporation

12(1)(j) Any amount of a dividend in respect of a share of the capital stock of a corporation resident in Canada are to be included in TPs income for that year.

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FOREIGN corporations, trusts

and investment entities

12(1)(k)Any amount required by subdivision I to be included in computing the taxpayer’s income for the year

Dividend Tax Credit

[individual]

82(1)(b) & 121

Provides relief from double taxation by allowing individual shareholders a dividend tax credit in computing tax payable

Tax-free

[corporate shareholder]

112 Allows corporate shareholders to receive dividends on a tax-free basis

When is a dividend paid? 84

Where corporation… (a) Increase the paid-up capital in respect of the shares of any class of its capital stock (b) Distributes, funds, or property on the wind-up (c) Redeems or purchases for cancellation of it’s shares (d) reduces the paid-up capital in respect of any class of it’s shares of its capital stock otherwise than by way of a redemption, acquisition or cancellation of the shares.

DEDUCTIONS FROM BUSINESS OR PROPERTY [SS. 18 AND 20]

DEDUCTIONS from BUSINESS or PROPERTY [18 & 20][what can employer deduct!]

Net Income from a B/P

9(1)

Daley

Primary rule for deductions

Subject to this part, defines TPs income for a taxation year from a business or property as: TPs profit from that business or property for the year.

An expenditure properly deducted under accounting principles will be deductible for tax purposes, unless prohibited.

If not for purpose of gaining income from business or property, then not included in profit under 9(1).

{“profit” has not been defined interpreted as revenues/expenses.}

Deductibility of ordinary running or

current expenses

Daley TP is lawyer in NS..relocates to US but returns to Canada and pays flat fee of $1500 to join the Ontario bar and claims deduction of $500/year over 3 years. Argued outlay to allow him to carry on business and deducts over a period of time he thought was reasonable.

Held: No deduction b/c capital outlay

2 Step Inquiry:

(1) Would a reasonable business person (RB) consider this expense to be an expense of earning income?If NO: expense is normally NOT deductible unless the ITA specifically allows it.If YES: Go to step 2

(2) Does the ITA contain a specific

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rule that restricts or prevents the expense from being deducted?

(Focuses on ordinary running or current expenses: wages, salaries, allowances, inventory, utilities, insurance etc) A RB relies on GAAP, ordinary commercial principles etc

INCOME EARNING PURPOSE TEST Imperial Oil

TP ship hit by another ship and TP pays owner for damage. Can TP deduct that amount in calculating income from business of transporting petroleum products?

(1) (Daley) Is it in the realm of normal commercial/business practice? Is it’s deduction consistent with ordinary principles of commercial trading or accepted principles of business and accounting practice?If no, not deductible.If yes, STEP 2:

(2) Is it restricted by section 18(1)(a)? Must be for the purpose of gaining or producing income from business As long as it is for this purpose, it may still be deductible even if it produces no profit at all.

Application of Income-Earning

Purpose TestRoyal Trust

TP paid for employees to join social clubs and deducted a lump sum including annual dues and also money for one-time admission fee for a new membership. Memberships allowed employees to develop relationships and garner new business.

Are annual dues deductible? Yes.

All outlays or expenses made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is DEDUCTIBLE for income tax purpose

In this case looked at…

- What competitors were doing

Note: 18(1)(l) now prohibits this

CanAccording to Daley & Royal Trust, All the expenses that are incurred in the normal course of carrying on the business and which are deductible according to normal and accepted business and commercial practice are in principle deductible as part of the calculation of profit mandated by 9(1)

Running expense requirement

Imperial Oil To be deductible, must be running expenses incurred for the purpose of producing income from the business or expenses that are ordinary risks of running the business

Includes travel expenses incurred while away from home in course of carrying

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TP’s business

Daley One time outlay for right to earn income is non-deductible (1500$ fee)

Specific limitations 18(1)

An outlay or expense only deductible to the extend it was made for the purpose of gaining or producing income

(a) Provides that an expense is deductible to the extent that it is incurred for the purpose of earning income from business or property.

(b) Capital expenditures or losses are not deductible unless expressly permitted

(h) Personal or living expenses are not deductible (but business travel expense are)

(l) Initiation fees and annual dues for club memberships, cabins, yachts etc are not deductible unless the TP’s business is to operate such an entity

(p) Expenses incurred by a personal services business are not deductible, except for salary, wages and remuneration costs; costs of providing allowances or benefits, costs incurred in the selling of property or negotiating Ks and legal expenses to collect amounts owed for services rendered.

(r) Only reasonable allowances for motor vehicles (ITR 7306) are deductible

(t) Income tax, penalties and interest (paid or payable) are not deductible expenses

o Expenses are deductible under 9, except where restricted by 18(1)(a)

Limitation on Capital Expenditure 18(1)(b) Denies current deductions for capital expenditures (dealt with through 20(1)(a))

Specific permissions 20

Overrides s. 18, specifically allows certain deductions:(a) a capital cost allowance

(b) Interest, which includes interest on money borrowed to earn income from business and interest on personal property bought on credit and for the use of earning income from that property or business

Reasonability requirement

67Only reasonable outlays or expenses are deductible (Cannot deduct amount that is unreasonable even though would otherwise be able to do so)

Food

Beverage

Entertainment

67.1(1) limitation on deductions for food/beverage/entertainment = 50% of amount or deemed reasonable amount

Childcare

[deductible]

Symes s. 9/18(1)(a)/18(1)(h) do not prevent the deduction of child care expenses as an business expense

1. Is the expense normally seen as a business expense by business people?

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2. Are the needs of the child unrelated to business (i.e. are they to make parent available for business?)

3. Women confront childcare expense in order to work

4. Those who bear children should not be economically or socially disadvantaged. Unfair to impose costs of pregnancy upon one half of population (Brooks)

Personal or living expenses

[non-deductible]

18(1)(h)Other than travel expenses incurred while away from home in course of carrying TP’s business

Definition 248(1)

(a) For use or benefit of TP or non-arms length not in connection to business

(b) insurance policy

(c) expenses of property maintained by an estate or trust

BentonFarmer seeks to deduct wages for housekeeper . If had hired farmhand could deduct.

House-keeper is a personal expense and therefore not deductible

Henry

Anesthetist shares office with other doctors and joint assistant does billing. TP drove between office and hospital and home for various medical visits.

Travel between work and home is not deductible against income from B/P

{But travel between work and work is office to hospital okay}

Automobile Expenses

18(1)(r)

employer cannot deduct automobile expenses, EXCEPT reasonable amount given as allowance to employee for use of their car, because it would be including it in their income

Deduct reasonable allowance don’t deduct more

Reg 7306 Amount total of 54 cents for first 5000 km, then 48 cents thereafter

Home Expenses

[non-deductible]

18(12)(a)

No deduction for income from business in respect to any part of a home office

EXCEPT to the extent that home office is either the principle location of the duties

OR it is used exclusively for earning income from business AND used on a regular basis for meeting customers in respect of business (McCreath)

18(12)(b)Deduction shall not exceed the profit from that business (claim down to zero and then carry over) AND

18(12)(c)Losses can be carried forward until the business is profitable and deductions can be used

McCreathTravel between home-office and place of employment may be deductible where home office is primary

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Permitted Interest Deduction 20(1)(c)(i)

Interest paid/payable on money borrowed for purpose of earning profit from business/property = deductible

Bronfman Trust

TP took $ out of trust from which she was paid allocations of capital, but instead of selling shares from the trust, the trustees decided to lend to the TP from the bank. TP attempted to deduct the interest charged by the bank.

Basically: Is an interest deduction available where loan seen as preserving income-producing assets rather than producing income itself?Not eligible b/c $$ was not used for the purpose of earning income.

Borrowed funds must be used for an income earning purpose ***

The use must be eligible under 21(c); the direct and current use of the borrowed funds is relevant

“current” meaning it must remain eligible if borrowed funds no longer used for an income earning purpose, then the interest will be non-deductible

For borrowed funds to be deductible: (1) Must be for income earning purpose (2) Current use of borrowed funds in question (3) Assess direct use of funds.

Attaie

TP used borrowed funds to purchase a home after moving from Iran. Initially rented out home but eventually moved in, meaning that home ceased to be an income-earning asset and became a personal asset.

Once it became personal asset, interest paid on mortgage no longer for the purpose of earning income.

Court unwilling to accept indirect use of borrowed funds for the purpose of allowing an interest deduction

*It is the current use of the funds, not the original use which is important.

Singleton Partner at a law firm took 300K out of his equity and borrowed same amount, which he used to refinance his partnership capital account.

Was the borrowed money “used for the purpose of earning income from a business”?

SCC allows the deduction.

Sets out 4 elements from Shell case:

(1) $$ must be paid/payable in year seeking deduction

(2) $$ must be paid pursuant to legal obligation to pay interest on borrowed money

(3) Borrowed $$ must be used for the purpose of earning non-exempt income from a business or property (focus on TP USING the $$, not borrowing it)

(4) $$ must be reasonable, as assessed by reference to first 3 requirements

searching for the true "economic realities" is irrelevant; all that is needed is a direct link between the

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borrowed money and eligible use

- Emphasis on the autonomy of the TP and freedom to structure transactions in a way that reduces taxes

- *Court should simply apply 20(1)(c) rather than search for economic realities of the transaction.

Claims Bronfman correct in outcome but went too far.If it is direct, eligible use of funds, do not care if TP structured for tax purposes.

Ludco

TP borrowed $ through fam company in Canada to invest in 2 offshore companies in Panama. Companies reinvested returns and only paid out 600K in dividends that year. Since companies non-resident, interest income not subject to tax in Canada. TP eventually sells share and gets capital gain.

Direct use of borrowed funds was to purchase shares but was purpose to earn income?

SCC Modern Approach: read ITA precisely and specifically

SCC finds 20(1)(c) can apply when TP used borrowed $ to make an investment for more than one purpose, provided that one of those purposes = income.

“Whether, considering all circumstances, the TP had a reasonable expectation of income at the time the investment is made”

considers the “income” requirement of 20(1)(c)(i) to be REVENUE. Don’t need to produce PROFIT, only REVENUE therefore the “profit” component need not be bona fide(v permissive interpretation)

IT-80

Interest would be deductible in the following circumstances:

o where a corporation or partnership has used borrowed money to pay dividends, distribute profits or return capital;

o where a taxpayer has used borrowed money to make a low-interest or interest-free loan to an employee or shareholder;

o where a shareholder or partner has used borrowed money to make a loan to a corporation or partnership, or to make a payment under a guarantee given in respect of a loan to the corporation or partnership; and

o where a person or partnership has used borrowed money to acquire property for a purpose other than the earning of income, interest may be deducted to the extent of any income from the property

DEDUCTIONS AGAINST INCOME FROM EMPLOYMENT OR BUSINESS (UNIVERSAL)

UNIVERSAL DEDUCTIONS (from E/O & B/P)(Still going to come into deductions when calculating total income)

Deductions 3(c) Calculate 3(a)+(b) – deductions allowed in subdivision e

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permitted

Other Deductions 60 Amounts deductible in computing taxpayer’s income for taxation year

Child Care Expenses

63For each child under 7 – max deduction of 7k per year; 7-16 – max of 4k per year; deduction cannot exceed 2/3 of lower income spouse’s income

Symes

available for lower earning spouse BUT only if they are earning income from a sourceo Earning from something like dividends does not count b/c could still be

watching the children (no actual work) Expense must be to allow business or employment income Cannot be used against income from property

Moving Expenses 62(1)

Deduct from income expenses incurred for moving in respect of an eligible relocation (defined in 248(1)) that was:

(a) not paid by employer;

(b) not included in a previous year;

(c) total does not exceed amount earned from employment or business in the new location [allows carry over] (ie: if moved in Dec for $4000 and only made $2000, must wait until following year to deduct); and

(d) all reimbursements and allowances in respect of the expenses are included in income

Policy: We want people to move in order to earn income generous courts RE allowing deductions for moving expenses

“Eligible Relocation”

248(1)

Relocation to carry on a business or be employed in Canada, OR full-time post-secondary student,

(b/c) where both locations are in Canada AND distance between old home and new work

(d) is not less than 40km greater than distance between new home and new work/school location (shortest normal route open to travelling public).

Where Canadian residents maintain residency in Canada, moving expense deduction applies for employment/business abroad as well

BrackenMoving your home-office is not eligible relocation – missing the four essential elements: old work; new work; old home; new home

BeyetteMoving at a later date than the date of employment in the new location is fine so long as you're moving to a place closer to new work location than your old residence

Abrahamsen Moved and didn’t find a job until 16 months later, deductions allowed

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(This based on amended language in the ITA)

Dueck Personal reasons for moving are not acceptable

Templeton Allowed deduction for move by home office to be closer to economic centre

Gianakopoulos

RE: 40 km rule Court replaces requirement to move within 40 km of work with test measuring distance on “shortest normal route open to the travelling public”(To prevent TP from being expected to use extraordinary route)

GelinasAllowed moving expenses where TP changed departments (same employer) and changed from PT to FT work.

WunderlichAllowed moving expenses for TP who moved closer to work b/c he was promoted to management position. Court basically qualified new job title AS “new work location”

Expenses include 62(3)

(a) travel costs (food/lodging) [“members of the household”: includes pets] /

[unrestricted by 67.1(1), there is exception for s. 62];

(b) storage/transport of goods (moving costs);

(c) meals/lodging up to 15 days if near old or new residence (moving expenses are

not limited by 50% food costs rule in s. 67.1(1) – fully deductible for 15 days)

(d) cancelling old lease;

(e) costs of selling old residence [e.g. legal, licensee];

(f) purchasing costs: legal fees and transfer taxes for new property;

(g) interest/insurance/utils/taxes for old place up to $5000, if left empty and for

sale; [Utilities: actual utilities not installation fees (moving etc.)]

(h) revision of legal docs to reflect new address, of replacing drivers' licenses and

non-commercial vehicle permits (excluding any cost for vehicle insurance) and

of connecting or disconnecting utilities, but does not include costs incurred for

the acquisition of the new residence no deduction for costs (other than in (f))

associated w/ acquisition of new house

Student Moving Expenses 62(2)

NO requirement for move to be within Canada; allows deduction even if move is not to carry on business

Remember: Moving Expenses for students are only deductible to the extent that you have taxable scholarship income. However, if earning income from employment at new location in addition to being a student, could make moving expense deduction that way.

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Subdivision D – Other sources Income

Retiring Allowance

(Office/Employment)

56(1)(a)(ii)

Retiring allowance, other than an amount received (included on reception) out of or under an employee benefit plan, a retirement compensation arrangement or a salary deferral arrangement

only when the individual was an employee of the company (Schwartz) severance pay is included in employment income

248(1)

[Definition]

Amount received (other than pension/death benefit), for

(c) T’s retirement from office or employment in recognition of T’s long service OR

(d) in respect of loss of office/employment whether or not damages, in lieu of payment, or pursuant to an order or judgment of a competent tribunal

Scholarships

&

Bursaries

56(1)(n)

If the amount that T’s scholarships and bursaries or prizes for achievement in a field of endeavour ordinarily carried out by T, exceed the T’s scholarship exemption for the year under 56(3), it will be included in income for the year.

Allowed up to $500 even if not a qualifying scholarship, most all scholarships would be though

Section 56(3)

Scholarship/bursary/prizes Exemption– exempt entire amount

o T’s scholarship/bursaries exemption for a tax year is the total of those in connection with enrolment in an educational program that qualifies for the educational tax credit (118.62) which requires that the T be enrolled in a “qualifying educational program” at a “designated educational institution”.

o “qualifying educational program” – minimum 3 consecutive weeks, 10 hrs per week

o “designated educational institution” – Canadian and foreign universities and colleges, provided, if foreign, the program is at least 13 weeks long

Bribery and Fines

S. 3 does not distinguish between income derived from legitimate activities and income from illegal activities Court has also held that deductions are permitted

Bribery of Certain Officials 67.5

Not deductible

(Comes out of international treaties Canada has signed for abolishing corruption of foreign public officials.)

Anything that is an offence under s.3 of Corruption of Public Officials Act is not deductible.

Fine and Penalties 67.6 Not deductible

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(From ANY source – including s.56 sources)

o EXCEPT in the case of damages and contractual penalties o ALSO if the fines are incurred for income earning purposes they will likely

be deductible although there has been no case law since codification

BC Eggs: producer ate cost of levy for producing too many eggs because they feared losing a customer.Thought was better decision to overproduce eggs and risk paying fine than to make customer look elsewhere for eggs

Policy issues here?

Eldridge

TP is madam and was arrested and had business shut down. Was also assessed at that time. Which expenses related to her criminal operation are deductible?

Income from illegal business is taxable

Court allows expenses w/ documentary evidence to be deducted.

- Protection of girls (cheque)- Bail for one girl not deductible

b/c was benefit to an employee that she had to pay

- Counsel = deductible b/c part of employment K.

- Newspaper purchase? No b/c not seen as damaging her business

Court will allow you to deduct and not go into public policy issues so long as there is PROOF.

BuckmanFunds embezzled from clients by lawyer included as income and was taxed; thus deductions would be deductible.

INCOME FOR TAXATION YEAR – CAPITAL INCOME/GAINS

Capital Gains

SEPARATE CATEGORY FROM INCOME FROM SOURCES (3(a) and 56)Partially included under 3(b), but calculation is distinct and relationship to TP’s income or loss from source subject to special rules.

9(3) Says that income or loss from a source that is property does not include capital gains, but this is probably set out for greater certainty, since 3(a) and 3(b) already separate those two categories.

Exam situations where you may see this: Sale of capital property such as shares or land held as an investment. Sale of fixed capital asset used in business. Personal context: Sale of something of value held formerly for enjoyment (i.e. a painting).

NOTE: There is not necessarily any qualitative difference between the financial benefit of receiving a capital gain as distinct from receiving other types of income but history and policy dictate that they must be treated differently.

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Policy reasons for taxing capital gains:

Equity: Vertical (b/c TP who is able to generate more capital gains is taxed accordingly and bears higher burden due to progressive system) Horizontal (b/c TP who earns $1000 via capital gains is put in same position as someone who earns $1000 via employment)

Neutrality: Reduces the incentive for TPs to structure transactions to look like capital transactions VS income producing transactions. (Why problem? B/C incentive is then there for TPs to sell shares rather than to distribute them as dividends)

Simplicity: “The notoriously elusive distinction b/w capital gains and business income would cease to be significant if capital gains were taxable in full.” ½ rate of inclusion has fluctuated in an attempt to deal with this but remains at ½. Capital losses receive less tax relief than other losses b/c they can only be offset against capital gains.

Global Competitiveness: Distinction was first made in the UK. Full taxation of CGs might discourage investment by individuals and corporations.

Example

Example 1: Basketball business

o Selling basketballs = income from business; buying house with profits from the business and renting = income from property; Not acting as agent for company but want to monopolise on hoops so you personally buy 5000 hoops (assuming all the risk) = ACNT (Taylor); Buying warehouse to store balls and hoops = capital gain (because of enduring benefit or advantage to the business) (British Insulated)

Example 2:

- You purchased 100 shares at $1 per share. 5 years later, shares are worth $5 each. You sell. Taxable capital gain =( (sale price) – (purchase price) ) – 50 %) $500-$100= $400- 50% = $200 Taxable capital gain

Terminology

Capital Gain- a profit from the sale of property or an investment

Adjusted Cost Base (ACB)- Sub word for a purchase price (amount laid out/cost)

- what you actually paid for the asset- including expenses related to acquisition of property]- IT-285R2 para 8 - capital cost of property = full cost of T acquiring the property and includes legal,

accounting, engineering and other fees incurred to acquire the property

Proceeds of Disposition (POD)- Another term for sale price of property (basically FMV){Defined in s.54(a-f) }

- Ask: What did you receive/what does CRA think you received when disposed of property?- This could be compensation for property someone destroys, expropriates, steals or damages.- **Can never be less than FMV.

LPP- Listed Personal Property

Enabling Provision

3(b) BRINGS CAPITAL GAINS INTO TAX SYSTEM (Calculate gain/loss under s.40, use s.38 to divide in half, result is included here)

Must determine the amount by which:

(i) capital gains from disposition of property (other than LPP) AND taxable net gain for the year from disposition of LPP (positive figures only s. 41(2));

EXCEEDS (ii) allowable capital losses from the disposition of property other than LPP (no

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losses from PUP other than LPP – s. 40(2)(g)(iii))

Simply put: calculate CG and CL and figure out the difference between the two

FORMULAs.40(1)

(capital gains from disposition of property (other than LPP)) + (taxable net gain for the year

from disposition of LPP) –(allowable capital losses from the disposition of property (other

than LPP)) = net capital gain

Calculation of Capital Gains/Losses:

s. 40(1)(a)(i): Calculation of Capital Gain = POD-ACB

- POD= (# of units) x (current FMV)

- ACB= (# of units) x (what owner/seller paid originally/what deemed worth @

time)

s.40(1)(b)(i) Calculation of Capital Loss= POD-ACB (# will be negative)

[Note: You have a capital loss when you sell, or are considered to have sold, a capital

property for less than it’s adjusted cost base plus the outlays and expenses involved in

selling the property.]

Taxable Capital Gain 38(a) 1/2 of Tp’s capital gain for the year from disposition of property

Allowable Capital Loss

38(b) 1/2 of the TP’s capital loss for the year

EXAMPLE

ACB= 2000POD= 1000Capital Loss= POD-ACB = 1000subtract ½= 500 allowable capital loss

Capital gains from

disposition of any property

39(1)(a) excluding gains from dispositions of property that are taxed as income from a source

Capital losses from

disposition of

39(1)(b) excluding losses from dispositions of property that are taxed as income from a source (S. 39(1)(b)(i) Exception in definition of capital losses for depreciable property – to follow)

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any propertyBasically: If you dispose of property it will be treated as capital property unless you are treating it as income or loss from a source.

Prizes

Right to a Prize/Lottery

Winnings

40(2)(f)gain or loss from the disposition of a chance to win a prize/bet OR a right to receive such an amount = NIL

Bowman (LeBlanc)

Agrees you cant have capital gains or losses but doesn’t preclude business of winning lotteries.

ACB of Property

Acquired as Prize

52(4)

Property acquired after 1971 as a prize in connection with lottery scheme is deemed to have been acquired at FMV (at the time of winning)

o IF you sell it you don’t have to pay taxes on the totality of the current market value

Test for Determining a Capital Expenditure

Is it a current expense (fully deductible) or capital expense (partially deductible)

TEST for determinin

g if it is a capital outlay

(British Insulated)

ENDURING BENEFIT TEST: Does the expenditure result in an enduring benefit or advantage to the business or property source? If yes then Capital expenditure/outlay.

When what you are doing is laying out funds for an enduring benefit for your business or property, it is no longer a deductible expense but rather an outlay.This is a question of fact: Look at the object and effect of the payment

Capital expense

British Insulated

Company starting up a pension plan and made large initial lump sum contribution to trust for company’s employees. Payment formed “nucleus” of the pension plan which it was designed to create. It was intended to secure a substantial and lasting advantage, making it a capital expense.

BASIC TEST comes from here

One-time payment to set up a pension fund for employee = capital outlay = no deduction

Enabling Provision 9(1)

An expenditure is deductible if made for reason of earning income from business/property

Outlays not deductible 18(1)(b) Outlays not included in income no deduction

Exceptions allowing

deduction20 Specific deductions allowed

Repair of Tangible Capital Assets

Repairs = deductible

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improvements/acquisition of new asset = capitalize (added to capital cost of asset) = non-deductible

General Principle: Things used in the business to earn the income are capital assets, so money laid out to acquire them are non-deductible outlays on account of capital. Money used to upgrade the asset is also an outlay of capital.

Repair Deduction

Canada Steamship

T made two classes of expenditures on his ships: (1) Replaced floors and walls of cargo holds (2) Replaced boilers. Held that boiler is separate capital asset while floors repairs.(Floors deductible, boiler not) Even though boiler is still a piece of equipment, it is still sort of free standing.

Vancouver Tugboat – engine is considered capital asset.

Deductible in the computation of profit from the business in accordance with ordinary business or commercial principles & Not prohibited by provision 18(1)(b)

Test Gold Bar

Is asset substantially different from what it would be if repairs were not req’d?

If yes, not deductible, if no, then you have only repaired it (thus deductible)

Is it voluntary and not motivated by repair crisis? = not repair improvement

Criteria Improve vs repair

In exam: Argue both.

Shabro

T repaired floor which involved structurally upgrading by sinking steel piles. Total cost was 95K and tried to claim as an operating expense. Decided was an outlay on account of capital and therefore non-deductible. New floor was deemed fundamentally structurally different.

Piles on their own for sure capital outlay, but MOB thinks could argue either way for the floor. Essentially different in kind from the building as it originally was.

replacement/substitution of some part of the asset that is essentially different in kind from what was there before constitutes an "improvement" rather than "repair" so taxed capital outlay

“Substantial improvement” that last for many years or enduring benefit that lasts beyond the end of the year must generally be capitalized

Gold Bar Bricks begin falling off building due to shoddy contracting work. T repaired and re-did outside of building (replaced exterior wall) with different finish. Determined that this is a current expenditure. Won’t be non-deductible just because you use better materials.

Improvement of the asset alone is not determinative – all repairs generally improve the asset

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Court says must look at the purpose in the mind of the TP in formulating the decision to spend the money. Was it to improve the asset, to make it different or better? (Outlay on account of capital) Or was it forced upon him? (No choice= current expenditure)

Painting Currently deductible as recognized as regular expense caused by ordinary use of the asset

Marketable Asset

Canada Steamship

A new marketable asset may be a capital asset even if required by the main asset

New Technology Gold Bar

repair motivated by crisis, T can deploy new technologies to improve their business = still deductible

Substantial costs

Canada Steamship

substantial costs do not change the fact that they are still deductible as repairs of capital asset

Capital Cost Allowance – Depreciable Capital Assets

Ensures deduction over period of time that expense produces benefits

We are back to income from business or property here but with a capital gains elementWhen applies: You have made an outlay of capital but the ITA has to compensate for the fact that it ages and wears over time, thus becoming less valuable.REMEMBER: outlay vs. repair cases (see Shabro, Gold Bars etc)Q: How much can be deducted under section 9(1) recognizing that tangible personal property can depreciate in value?Not available for PUP (aka sailboat that you enjoy holidays on, vehicles not used to earn income from business or property)Note: Where TPs in loss position, generally will not claim CCA It is an optional deduction and not a required one.

Capital Cost of Property 20(1)(a)

[Cannot deduct the cost of acquiring depreciable property but can claim it for each year that you own it to reflect the fact that it is depreciating or becoming obsolete]

A llows a TP to deduct an amount to reflect “ depreciation ” under the title of capital cost allowance (“CCA”)

Regulations lay out allowable deduction for each class of property (see separate handout for schedules of property classes)[In Tax Law, do not let TPs decide rate of depreciation but rather have rigid schedule that TP can use to calculate the depreciation of assets]

Notwithstanding 18(1)(a)(b)(h) an amount which is allowed by the regulations is deductible

No deduction is permitted for expenditures that are not for the purpose of earning income or that are of a personal nature (Reg 1102(1)(c)), assets the cost of which are currently deductible (1102(1)(a)), inventory (1102(1)(b)), and land (1102(2))

CCA Reg 1100 Specifies % you would apply to class

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[Deductible]

On exam: Will be told what class

1100(1)Tells us about separate classesIf same TP has separate income sources, put the properties in separate classes; requirement of separate classes for separate business

1100(1)(a)The amount is equal to the appropriate percentage of the underpreciated capital cost (“UCC”) of each class of depreciable assets. The timing of the deduction for CCA is fixed at the end of the taxation year

UCC 13(21)

“depreciable property”

Acquired by TP for reason that is capital in nature (enduring benefit), is not consumed in income earning process, forms part of fixed assets of the enterprise, not inventory, used for income earning

CALCULATION OF UCC:

{ A (the cost of all acquisitions of property in the class) + B (recapture***) }

– { E (the aggregate of all CCA previously claimed in respect of the class, which includes any “terminal loss” previously deducted) + F (the lower of the cost and proceeds of disposition of assets of the class that have been disposed of) }

***Note: recapture is when you sell something and you have already decided on a depreciation amount but what you receive in real life is actually more than expected but already deducted. So you need to recapture the excess depreciation.

A= the cost of getting all the shit B= recapture (depreciation amount upon sale less than expected)E= combined all CCA previously deducted F= lower of cost and POD of assets that have been disposed of [aka PODsometimes]

EXAMPLE:

Year 1:

TP buys three busses for total of $75,000. [Class 10 30%]Busses respectively cost: $20K, $25K, $30K

TP buys building to garage busses for $100K [Class 1 4%]

Assume: These are TPs only depreciable assets

Class 10 (busses) UCC = (A+B) – (E+F) UCC= (75K) + 0) – (0+0) = 75K

½ year rule applies b/c A+B>E+F Notional UCC= 50% 75K = 37.5K[remember that this applies before you do the % calculation]

CCA= 30% of 37.5K 11.25K

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*NOTE: Remember to look to 13(1) for income inclusion if (E+F)>(A+B)

Exclusions from

Depreciable Property

1102(1)

(b) Anything that goes into calculation of profit or loss is NOT depreciable property (i.e. inventory)

(c) Something that is not acquired for the purpose of gaining income is NOT depreciable property (i.e: your house is PUP, not depreciable property)

Land is not deemed to be

DPBen’s Ltd

TP owned and operated bakery in Halifax and purchased adjoining residential properties. Sold 3 houses and were taken off land (wanted to expand bakery). In his tax return, he allocated the cost of land at $3000 and the cost of houses at $38,600. Minister said should be no deduction for CCA on basis that entire purchase was really land.

You must acquire the property for use as a business or property source of income. The regulations exclude property that is not acquired for purpose of gaining or producing income.

50% / Half Year rule 1100(2)

If additions to A exceed additions to F then apply 50% Rule / half-year rule***Only apply this when there is new property ! {to prevent from buying things at end of the year even if they aren’t worn out to claim depreciation}

Terminal Loss

(Mandatory Deduction)

20(16) if TP no longer owns any property of that class AND A+B > E+F THEN mandatory deduction

Recaptured Depreciation

[Income Inclusion]

13(1)

Applies where, at the end of a taxation year, the aggregate of the total depreciation allowed (CCA) to the TP and the lesser of proceeds of disposition (POD) and capital cost of the property sold exceeds the capital cost of property.

Include in income the amount by which (E+F) exceeds (A+B)

“notional negative balance”

CAPITAL GAINS FRAMEWORK

General Rules for Capital

Gains

40(1)(a)

A gain equals the amount by which a TP’s proceeds realized on disposition of property exceeds the adjusted cost base of the property and any associated expenses of disposition

Calculation of Capital Gain = PoD – ACB

38(a) 1/2 of Tp’s capital gain for the year from disposition of property

Capital Loss 40(1)(b) The excess of the adjusted cost base of a property and any expenses of disposition over the proceeds of disposition

Calculation of Capital Loss = PoD – ACB (the number will be a negative)

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38(b) 1/2 of the TP’s capital loss for the year

Adjusted Cost Base

What you actually paid for the asset- including expenses related to acquisition of property - despite what the asset is worth at FMV can be under FMV (if got a deal), if a complete gift then ACB = FMV, can never be over FMV

54(b)

“ACB”

The amount laid out or given in exchange for the acquisition of property.{“amount” s. 248(1) money, right or things; barter transactions are taxable b/c value is exchanged}[Where depreciable property= ACB is capital cost to TP at that time][Where non-depreciable property= ACB is the cost to TP adjusted as of that time s.53]

Exceptions …to capital property (ACB) : Inventory AND Adventure in Nature of Trade

IT-285R2 para 8

capital cost of property = full cost of T acquiring the property and includes legal, accounting, engineering and other fees incurred to acquire the property

NOTE: No express provision for the inclusion of expenses, but generally accepted that ACB includes property taxes, fees and other expenses incurred to complete the acquisition

Proceeds of Disposition

Usually means the sale price of a property (basically FMV). The POD are the amounts you receive, or what the CRA considers you to have received, when you dispose of your property. This could include compensation for property someone destroys, expropriates, steals or damages

“Disposition” 248(1) Definition v broad: likely to occur whenever a TP had some property and no longer does.

INCLUDES:

(a) Any transaction or event entitling a taxpayer to proceeds of disposition of the property(b)(i) Any transaction where property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, the property is redeemed in whole or in part or is cancelled. Shares can be cancelled when corporation ceases to exist.(b)(ii) where property is a debt or any right to receive an amount, the debt is cancelled or settled. Disposition of a debt obligation.

BUT DOES NOT INCLUDE

(e) Transfer of property as a consequence of which there is no change in the beneficial ownership EXCEPT trust transfers (j) Transfer of the property for the purpose only of securing a debt/loan or transfer by creditor for purpose of returning property used as security for a debt/loan (SEE NEXT PAGE) If considered dispositions, would put a restraint on

investment (mortgage, secure transactions)(l) Issue of a bond, debenture, note, certificate, mortgage or hypothecary claim AND

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Actual issuing by corp is not a disposition(m) Issue by a corporation of a share or its capital stock, or any other transaction that would be a disposition by a corporation of a share of its capital stock

“POD” 54

Another term for sale price of property (basically FMV)

- Ask: What did you receive/what does CRA think you received when disposed of property?

INCLUDES:

(a) Price of prop sold; (b) Compensation of prop stolen; (c) Compensation for prop destroyed; (d) Compensation for expropriation; (e) Compensation for prop injuriously affected;

Compensation for prop damaged and any amount payable in respect of damage

“dispose of” CompagnieThe term “dispose of” has the broadest possible meaning and includes parting with, destroying, or extinguishing property, even though no POD were received in return.

What can be disposed of?

RCI Environment

In principle, any right that is converted into cash is likely to result in a disposition when it is converted.

IB IT-460Disposition in any event or transaction where possession, control and all other aspects of property ownership are given up.

Deemed Disposition(Would not normally be dispositions

but are deemed to be

so for tax purposes)

45 Changing capital assets from income earning to non-income earning

What is?ITA deemed somebody to have disposed of something that they have not really disposed of. These overrule the general rule of simplicity, wherein we usually wouldn’t calculate stuff until it was disposed of.

70(5)

Death of TP

(a) TP who died deemed to have disposed of each property immediately before disposition and received FMV POD.

(b) Anybody who inherits property as consequence of TP’s death deemed to have acquired it at FMV immediately before TP’s death.

70(6) Exception: 70(5) does not apply if deceased TP transfers property to

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surviving spouse.

128.1(4)(b)Giving up Canadian Residence(If you have reported dispositions in Canada, the CRA considers it a factor of severance of residential ties)

104(4)(b), (c) By trust of trust property every 21 years

Carry Forward and Back of Capital Losses

Net capital losses

111(1)(b) Net capital losses may be carried back 3 years and carried forward indefinitely BUT can only be used against capital gains

Non-Capital losses

111(2)(a)

Where T dies, remaining capital losses can be used as non-capital losses to offset non-capital gains (gains from sources – business, property, employment) in year of death or preceding year Policy: gives the estate the most options, at death of T, to minimize or get rid of capital gains

Partial Dispositions and Identical Properties

Part Dispositions

43(1) Apportion the ACB of the property reasonably between the property you are selling and the property you are keeping [reasonable apportionment relative to value].

Identical Properties 47(1)

Overall ACB becomes the average of the total combined ACBs for each property[In this course: limited to shares of same class of a particular corporation and units of same class of a particular mutual fund trust or income trust.]

o Intangible assets (ie: stocks/shares of corp/mutual funds/trust units); can never have two identical land properties Real property can never be identical.

o Shares are identical when they have exactly the same rights attached to them.o If corp with more than one class issued, each share in a class is identical with other

shares in that class.o Policy: Idea that shares can be bought at different times, at varying prices so

when T is disposing of them, he or she should not be able to pick the ACB that suits him/her best

EXAMPLE: Identical Properties Bob makes the following purchases of common shares of X corp: - 200 shares of X at $1 per share on March 1st, 2004 - 100 shares of X at $1.50 per share on September 15th, 2006- Sells 100 shares of X for $1.60 on January 15th, 2007

*The Act does not allow the TP to choose which of the identical properties acquired at different times and prices are disposed of in a particular transaction. It achieves this objective by forcing the TP to average all of the ACBs of all identical properties they hold at any given time.

SO: Bob’s ACB of each of his identical shares is the average of all the ACBs of the shares:

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((200x1)+(100x1.5))/300= $1.17POD= ACB= $1.17/100

Gifts and Sales Below FMV to Non-Arm’s Length Persons

Generally the Act would impose a tax liability on the transfer and the donor would bear liability Donor is deemed to have sold it for FMV and done deemed to acquire it at equivalent cost. 69(1)[b & c]

NOT deemed dispositions, but have deemed consequences.Situations that show that a disposition really includes any situation where the person disposing of something has lost the attributes of ownership.

2 STEPS: (1) Determine whether 2 ppl are NOT at arms-length from each other (Mostly just asking: Are they related?)

(2) If not dealing at AL, at an amount MORE than FMV, then TP is deemed to have acquired it at FMV.Look to “inadequate considerations” section below

[Price<FMV=vendor’s POD increased][Price>FMV= purchaser’s ACB lowered]

Gifts of Cash

Not taxable because no accrued gain.*Donor is deemed to have received POD equal to FMV and donee is deemed to acquire it at cost equal to that value.

Littler A sale at an undervaluation is not a gift.

Non-Arm’s Length 251(1)

(a) Related persons shall be deemed not to deal with each other at arm’s length

*If you are related to someone, you are not dealing at arm’s length, even if you hate them.[FAMILY DEALS NOT AT ARMS LENGTH]

(c) It is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm’s length

Factors to think about:

- Common mind directing the persons - 2 persons acting in concert, without separate interests- (de facto control) - (price different from FMV)- Business partners may or may not be at arms-length depending on the circumstance- Employees are normally at arms-length from their employer unless they control or

are members of a family that controls the corporate employer

[NON FAMILY MIGHT NOT DEAL AT ARMS LENGTH BUT LOOK AT FACTORS]

“Related Persons”

251(2) (a) Individuals connected by blood relationship, marriage or common-law partnership or adoption(b) a corporation and (i) a person who controls a corporation, if it is controlled by one person (ii) a person who is a member of a related group that controls the corporation; OR (iii) any person related to a person described in (i) or (ii)

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(c) any two corporations if they are controlled by the same person/group of persons

251(6) “blood relationship”(a) child/bro/sis, (b) spouse or connected to spouse (in-laws), (c) CL spouse, (d) adopted child

o Excludes aunt/uncle and nieces/nephews and cousins

Note: corporation is related to persons who holds voting control, meaning enough shares to elect the board of directors (normally over 50%)

248(1)

“common law partner”(a) 2 people who have lived together in a conjugal relationship for 12 months

(c) 2 people who have child together, as soon as they move in together.

*Once two people start cohabiting, they are deemed to continue to do so unless they live separate and apart for at least 90 days due to a breakdown in the relationship.

Unrelated Parties held not to deal at arm’s length when (a) common mind or (b) act in concert w/o separate interests

Inadequate Considerations

69(1)(a)

Gifts and sales BELOW FMV

If you pay too much to someone who is not at arm’s length from you for an asset, then you (TP) will not get the full acquisition cost from your ACB (anti-avoidance rule) – you only get the FMV of the item as the ACB instead of the full acquisition cost.

Where recipient T acquires something (when not dealing at arm’s length) at an amount more than FMV, then he or she is deemed to have acquired it at FMV ACB of purchaser = FMV, POD of seller = what they got for it

You are counting the extra money as a gift to your “family”

69(1)(b)

Where disposing T does so (i) for no proceeds or proceeds less than FMV not at arm’s length, or (ii) to any person by way of gift inter vivos, he or she is deemed to have received POD of FMV

o If sold for less than FMV, deemed POD = FMVo The giver of the gift is going to be the one to realize the capital gain or loss

Exception: inter vivos transfers

69(1)(c)

Where recipient T acquires property by bequest/inheritance/etc (ie: recipient pays $0), he or she is deemed to acquire the property at FMV

Recipient gets ACB at FMV

Note: When transferring at less than FMV, giver is deemed to have disposed for FMV, but there’s nothing that deems the recipient to have acquired the gift at FMV (unless it was for inheritance/bequest that required the beneficiary to pay some amount less than FMV) – see s. 69(c) / s. 70(5)(b))

IMMIGRATION/EMIGRATION“You can’t take it with you”: Country where real property is situated will be eligible for capital gain.

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{form of deemed disposition}

Why Tho?

- To tax capital gains which accrue on capital property while a person is a resident in Canada - To tax all gains on taxable Canadian property whether a person is a resident or a non-resident - To give an exemption for capital gains that accrue on property which is not taxable Canadian property while a TP is

not resident in Canada.

Immigration

Entering

128.1(1)(b)

Where T becomes resident of Canada, T is deemed to have disposed of all properties owned by T for the FMV, at the time immediately before the time immediately before becoming a resident

What does this mean?(b) Immediately before you become resident, you dispose of all property at FMV. You will not be taxed on your deemed capital gain b/c you are not resident but (c) you reacquire it as soon as you become resident and then you are taxed based on the gains/losses that accrue while you are a Canadian resident.

128.1(1)(c)

T deemed to have acquired properties disposed of in (b) at FMV (this becomes the ACB of the property)

o (i) except for taxable Canadian Property (real property or shares in a company with primary income from real property)

Emigration

Leaving

128.1 (4)(b)

Where TP ceases to be resident in Canada, TP is deemed to have disposed at the time immediately before the time immediately before the particular time, of each property owned by TP for Fair Market Value [FMV] happens while they are still resident in Canada.

What does it mean? (b) Immediately before leaves Canada, dispose of all property at FMV (c) You reacquire it as soon as you become a non-resident

128.1(4)(c)

Deemed acquisition at FMV after becoming non-resident

o except for real property in Canada, where T is an individual

NOTE: remember if primary residence is disposed of; apply Principle Residence Exemption (s. 40(2)(b)) don’t pay tax at all on the principle residence (the government is expecting that you are buying back into market)

NOTE: A person who wishes to claim that they are a non-resident will need to pay the departure tax. Since the person has not actually received any money (b/c they have not actually disposed on any

DEATH and TRANSFERS/ROLLOVERS

Transfers of capital property to spouse/common law partner inter vivos and on death

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(ACB rolls over to transferee)

Capital Property of a Deceased Tax

Payer

70(5)

*Happens normally but not for spouses (i.e. in a will)

Where in a taxation year a taxpayer dies,

(a) deemed disposed of at POD equal to FMV, immediately before death(b) deemed acquired by beneficiary at ACB of FMV, immediately before death

Deemed disposition on death – meant to soak up losses deemed disposed = incurred capital gains when died.

So: Good if have losses and want to offset with gains.

Where transfer or distribution

to spouse or spouse in trust

70(6)

*Happens normally for spouses unless you opt out

IS NOT DISPOSED OF IS JUST TRANSFERRED (Can elect out if you would realize capital gains that you can soak up capital losses you are hanging ontoterminal tax return: Only time you can use losses against ALL income)

Where (5) would otherwise apply (meaning T is deceased), but recipient is a spouse/CLP resident in Canada, then (5) does not apply and

recipient is deemed to have acquired property at the ACB of the deceased spouse; and the deceased spouse is deemed to have disposed of the property at their original ACB (no gains/loss for the deceased)

So: Good if had no gains because want to keep it that way.

Policy: tax planning opportunity? MOB thinks could just keep getting younger and healthier CL spouse and passing it along.

70(6.2) Option to elect out and have 70(6) not apply

Rollovers CL Partner 248(1)

Means a person who cohabits at that time in a conjugal relationship with the T AND

(a) Has cohabited with the T for a continuous period for at least one year, OR(b) Would be the parent of a child of whom the T is a parent,

And once this relationship starts, then the person is deemed to be in a common law partnership, unless they were not cohabiting for a period of at least 90 days, because of a breakdown of their conjugal relationship (cease to be CL after 90 days after breakdown)

Inter Vivos Transfers =

exception to the non-arm’s length rule

73(1.01) property is transferred, where it so to the spouse or CLP OR former spouse or common-law partner

73(1)(a)(ii) When one spouse transfers property to spouse under conditions of (1.01), and both spouses are resident in Canada, the property is deemed to have been disposed of, by the transferring spouse, for proceeds equal to the ACB of that person, immediately before the

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69(1)

transfer (if I bought it for 100, my spouse’s ACB is 100) ACB “rolls” over

Can “elect out” under 73(1)

73(1)(b) property is deemed to have been acquired by the recipient spouse at an equal ACB

Note: rollover is automatic unless the transferor ELECTS to not have the rollover provision apply to them happens primarily when the relationship is coming to an end; elect out so that the transferee spouse get new ACB of FMV. This happens so when transferee (2nd) spouse sells, they will only have to pay taxes on the discrepancy between new ACB and their sale price, rather than the much larger amount that would be taxed on the transferor spouse’s ACB

[Basically: allows the couple to settle property claims without immediately incurring tax consequences; as long as the property stays within the couple, even if they are a divided couple, then there are no tax consequences.]

**recognizing an economic union

Remember: automatic because of the economic union – doesn’t matter whose ACB is what because you are both paying for it. Would want to opt out if breaking up because y’all are separate now.

EXAMPLE

Lance purchased 1000 Class A units of Universal Resources Mutual Fund in January 2007 for $10 per unit (total of $10,000). In November 2007 he purchased 2000 more Class A units of the same fund for $20 per unit ($40,000). In January 2008 Lance transferred 1500 of the 3000 units to his common law partner, Craig, as a gift, at a time when the units were worth $20 per unit.

What is Lance’s ACB of the transferred units? (1) Average using rule in s.47 (2) $16.67/unit x 1500 units = $25,000 ACB

What is Lance’s CG or loss resulting from the gift to Craig?(1) inter vivos transfer therefore POD are deemed to be his ACB and he has no gain or loss.(2) Rollover is automatic and there is nothing to say it has not applied.

What is Craig’s ACB of the units?(1) 73(1)(b) deemed acquired by recipient at equivalent ACB.(2) ACB is the same as Lance’s $25,000

What if instead of giving the units to Craig, Lance had died and left them in his will to Craig?(1) 70(5) a and b deemed to have disposed of and acquired by beneficiary for ACB equivalent to FMV

Can Lance or his personal representative elect out of the rollover?Yes, under 73(1) Then 69(1)(b) and 69(1)(c), so that Lance is deemed to receive FMV proceeds for the gifted units, and Craig is deemed to acquire them for ACB of that same FMV. Lance’s personal representative can elect not to have the rollover on death apply. Then s. 70(5) will apply, and the result will be the same as under 69(1)(b) and (c).

PERSONAL USE PROPERTY (PUP) & LISTED PERSONAL PROPERTY (LPP)

PUPs are assets that have value but generally do not increase in value.

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(Examples: boat, cabin, camping equipment, vehicles)

Personal Use Property

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(a) Property owned by T that is used primarily for the personal use or enjoyment of TP, related persons to TP, or where TP is a trust (a beneficiary under that trust)

(b) and (c) outside the scope of this course

Note: PUP’s are assets that have value and generally do not increase in value (but possible)

o May be held by a corporation, but still for use of a related party primarily (ie: cabin in whistler)o Does not include income-generating investment property – this would be income from a business or

property/ ACNT

I.e.: bonds, shares, etc even if the income is used to pay for “fun for the family”

Listed Personal Property

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(subset of PUP more likely to increase in value and produce subsequent gain)o All or a portion of any: print, etching drawing, painting, sculpture, or other

similar work of art; jewellery; rare folio, rare manuscript, or rare book; stamp; OR coin(Note: MOB thinks “or similar work of art” broad enough to argue just about anything herethis is only wiggle room here because has to be LISTED to be LPP) These things have potentially a lot of value, which can increase in time (has

characteristic of investment) However, TP cannot deal in the items for it to still be considered personal (this

would make it a ACNT) Therefore if you dispose of it (inter vivos or upon death) there may be

separate rules for this type of sale

ASK: Is this personal use? Or is this an adventure in the nature of trade?

“No Loss Rule” 40(2)(g)(ii) Cannot have a loss from PUP [UNLESS IT IS AN LPP]

DISPOSAL of PUP and LPP

Disposal of Personal Use

Property [including LPP]

($1000 rule)

46(1)

What Does? Takes any transaction under $1000 out of the tax base (aka you do not have to report if the POD are under $1000 b/c these are generally smaller value transactions and very informal)

Where T has disposed of PUP,

(a) The ACB is the greater of 1000 or the actual ACB of the property (so if under $1000, automatically 1000)

(b) T’s POD of the PUP is deemed to be the greater of 1000 and T’s actual POD

Policy: This promotes simplicity, as it would cost far more to determine the taxable amount than would ever be recovered.

If set then Look at the PUPs ASK: are they worth more as a set? If yes then go to 46(3), if no then go to 46 (2)

Partial 46(2) Where only part of the PUP is disposed of:

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Disposition

(anti avoidance rule)

o (a) The ACB to T of the part so disposed is deemed to be the greater of (i) the ACB of the part disposed and (ii) the apportioned amount of $1000 that the part is to the whole of the property

o (b) The POD of part disposed is deemed to be greater of (i) the POD otherwise determined and (ii) the same apportionment under (a)(i).

Get 1 $1000 rule per set! Basically trying to find what proportion of the whole ACB the piece is and if that is greater than the actual ACB, that is your amount.CALCULATION: What % of 1000 is the piece? If that % > actual ACB, that is your amount.

PUP Ordinarily Disposed of as

a Set46(3)

If disposed of by more than one disposition to one person, or a group of non-arm’s length persons, (note: no tax consequence if PUPs are sold separately to a group of random people) and before the first disposition, the asset had a total FMV of more than $1000, the properties shall be deemed to be a single PUP and each disposition shall be deemed a partial disposition of that property (refer to method in s. 46(2))

For tax purposes, T’s POD will be the FMV of the complete set Policy: it looks like you are trying to get each sale to be under $1000 so no tax

owed per $1000 rule

If the TP sells the whole set in separate increments to single person or a group of people who are not all AL from each other, then each piece of the set is deemed to be part of the whole.*Set? Items should match or belong together, they should have been produced or issued roughly at the same time and worth more collectively than apart.

Loss on PUP 40(2)(g)(iii)

is deemed NIL assumption that you wore it out and sold it at a loss

o very rarely you can have again (no deemed NIL) buy low sell high later on in life

o can have a loss of LPP (see below) loss of LPP can only offset gains of LPP, can’t offset income from sources [LPP has characteristics of an investment]

EXAMPLE:

(1) You buy a surfboard for $700. You sell it two years later for $900. What is your capital gain applying the $1000 rule?NOTHING! b/c both ACB and POD less than $1000, therefore deemed to be $1000 THEREFORE 1000-1000= 0

(2) You buy a bicycle for $900. You sell it for $1200. What is your CG applying the $1000 rule?(Actual gain is $300 b/c 1200-900)CG = 1200-1000 (b/c 900 <1000) = $200 (but nobody would report this)

(3) You have a sculpture with an ACB of $2000; you sell it for $400.

What is the deemed POD? $1000What is the actual loss? $1600What is the deemed loss under the ITA? $2000 - $1000 $1000

What if you sold a rare coin for an LPP gain of $700 in the same year you sold the property?SEE BELOW

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EXAMPLE : PUP ordinarily disposed of as a set

X purchased antique dining room furniture: $100/chair x4 ; $400/ table TOTAL COST: $800Years later, the chairs are worth $200 each and the table is worth $800 separate. As a unit, the whole package is worth $2400.X wishes to give the furniture to Y Should X do this by one gift or several?

Gift: 69(1)(b) says proceeds are equal to FMV and person receiving acquiring @ FMV

If one gift, FMV = $2400. Original price was only $800, meaning that $1000 rule would apply and there would be a capital gain of $1400.

If X were to give only one share to Y, the $1000 rule would apply : $1000 deemed ACB and deemed POD of $1000 meaning no gain or loss. If X gave one piece to Y each day, could do this.46(2) tells us that can only dispose of partial pieces proportionately: ACB of the chair, for example, can only be the proportion of $1000 that the chair is of the entire property.

[Look to 46(3) Would this ordinarily be disposed of as a set? YES. ]One chair:

(1) ACB of the chair is the greater of the actual ACB ($100) [46(2)(a)(i)] and the proportion of $1000 that the ACB of the chair is of the ACB of the set (1/8), according to 46(2)(a)(ii), so that the ACB according to 46(2)(a) is $125 (1/8 of 1000).

(2) The POD of the chair is the greater of the POD otherwise determined (actual or deemed by 69(1)(b)(ii)) and the proportion of $1000 that the ACB of the chair is of the ACB of the set. POD of $2400 indicates that the set has tripled in value and each chair is now worth $300.Gain on the chair is 300-125=175 $700 total gain on all four chairs Also $700 gain on the table. Meaning total gain of $1400

**Doesn’t matter if gives as one or as several transactions same gain

Calculation of LPP Net Capital Losses and Gains

Calculation of Income 3(b)(i)

Step 1: Total up your capital gains from all dispositions (other than LPP) = (POD-ACB) = capital gains

Step 2: Divide by 2 to get taxable capital gains = A

Step 3: Total up your capital gains from LPP’s and subtract losses from LPP (per s. 41(2)) = net gains from PLP

this is because LPP losses can only be used to offset LPP gains,

NB: net-losses of LPP can be carried over and used against LPP gains 7y ahead/3y back – s. 41(2)(b)

Step 4: Divide by 2 to get taxable net gains from LPP s. 41(1) = B

Step 5: Add your net capital gains (A) + net gains from LPP (B) = C

Step 6: Deduct from C, the allowable capital losses (other than LPP losses) = Taxable Capital Gains

Taxable Net Gain from

41(1) T’s taxable net gains for tax year from disposition of LPP is ½ the amount determined

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Disposition of LPP

under (2) to be T’s net gain for the year from disposition of LPP

Basically: Set off your whole gains against your whole loss and DIVIDE BY2 2 = LLP(Note how this is different from capital gains/losses where you divide the gain in half and the loss in half and THEN set them against each other)

Determination of LPP Net Gain

41(2)

T’s net gain from disposition of LPP is the amount determined as follows:

(a) Amount of T’s gains from disposition of LPP

(b) Deduct LPP losses from the previous 7 years or following 3 years, so long as not already been used (LPP losses can be used from 7y ahead/3yrs back)

and the remainder after (b) is the T’s net gain for the year from dispositions of LPP

LPP Loss 41(3)

LPP loss for T for a tax year is the amount, if any, by which T’s total losses from disposition of LPP exceeds the total of T’s gains for the year from disposition of LPP o so that would mean you have a negative in step #2 the remainder will thus be

carried over ie: LPP gains = $200, LPP losses = $400 $200 in gains are cancelled out and

the remaining $200 are carried over to a previous or future tax year to offset gains

o NB: LPP losses cannot be used against capital gains…T must wait for another year in which he or she has gains from LPP, against which the losses could be used to offset the gains

EXAMPLE COME BACK TO THIS

X sells collection of approx. 1000 stamps for $15,000 (stamps had been acquired by X at various times since 1972 at a total cost of $23,000). At the same time, X sold his car, which original cost $3000 for $1000 and six dining room chairs for $400 a piece. The chairs cost $300 each.

What are the tax consequences to X?

What if X had sold the car for $4000 rather than $1000?

What if X had sold a painting, which cost $10,000 for $15,000?

What if the stamps were hockey cards?

PRINCIPAL RESIDENCE EXEMPTION

PRINCIPAL RESIDENCE EXEMPTION

If a dwelling qualifies as a TP’s principal residence throughout the period of ownership entire gain exempt.Who can claim? The exemption is available to an individual who:(1) owns real property that is (2) lived in by the owner or a member of their immediate nuclear family (parents and children under 18) and the exemption applies in (3) proportion to the number of years the residence is owned and ordinarily inhabited

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(while person resident in Canada).

Policy: b/c real property such an important part of the economy, there are a lot of rules about it in the ITAEncouraging “The Canadian Dream”

- Would hinder the market if taxes were collected on each gain made from personal residence If you had to pay a bunch of taxes upon disposition of principal residence, you will have a lot less money to reinvest into a new homepeople would avoid moving (renovate instead) and wouldn’t move for education and employment purposes

- This perpetuates the “principles of society” – to ensure they have a stake in community, that they settle down, get caught up in the Canadian way of life – strive to pay off mortgage; Community control

Principal Residence

RULE

The capital gains experienced for each year in which the residence is T’s principle residence is excluded from taxes at the disposition of the property Applies once per year on one home.

Gains in principle taxable, but losses are nil.

54 (a) “principal residence”

Housing unit ordinarily inhabited by TP, spouse/partner or child(includes house, condo etc)**Must be owned by TP within the taxation year, whether jointly with another person or otherwise.

“ordinarily inhabited”

Ordinarily inhabiting in the year, not throughout the year; must be living in it in a normal way through some part of the year by one of those qualifying people.

248(1)

“spouse”Actual legal marriage

“common law partner”

Cohabits in conjugal relationship w/ TP and (a) 12 month period (b) would be parent of child of whom TP is parent

[if relationship breaks down and separated for longer than 90 days, no longer CL]

Application of Exemption 54 (a) “ordinarily inhabited”

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- Does not have to be throughout year (2 weeks sufficient)- Does not have to be continuous (but does have to be every year that

you are going to claim for that property)- Can’t be renting it out.

(b) May only designate only one property per year.

(c)

Designation

- TP must designate the property to be the principal residence and no other property is so designated

- Since 2001, any type of family can only claim one PR between its members (spouses and unmarried children under 18)

- Spouses who are legally separated and living apart can each claim one

Note for Joint Tenants: Where a single property is held in joint ownership, both have to claim the PR exemption in respect of that property, but only one is actually taxed on it.BUT: If one has a second property, can only claim one PRE

(e)

Deemed Inclusion

The PR is deemed to include the land subjacent to, and surrounding the housing unit up to ½ Hectare

½ Hectare Rule(Rode)

Any surrounding land that exceeds ½ hectare is deemed not to be a part of the PR unless the TP can establish that it was necessary to the use and enjoyment of the housing unit as a residence.

How to establish if land is “necessary”

Must objectively consider all relevant circumstances: Has the TP established that without the land, they could not practically have used and enjoyed the unit as a residence?

Is having +1/2 hectare the only way to access utilities? Do zoning/subdivision requirements require land to be divided a certain way?

Rode

if more than ½ hectare, objectively consider all relevant circumstances: has the T established that without the land, they could not practically have used and enjoyed the unit as a residence?

Cassidy Since PR exemption is calculated annually, look at the zoning requirements each year to see if the land is sub dividable. If yes, TP not eligible for exemption.[look to minimum lot size, year by year… in this case,

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minimum was 50 acres]

{i.e.: if zoning says minimum lot size is 10 acres for residential property, since you can’t subdivide and you are entitled to live in the house, you can claim all 10 acres.}

Exam: Be mindful about zoning restrictions. Cannot have areas left over that are smaller than what allowed in subdivision. (Carlisle)

Note: If land becomes sub dividable/ceases to be so, could only claim PRE for excess land in non-sub dividable years since year by year.

IT-120R0 CRA’s adoption of a year by year approach.

Stuart

Objective evidence is far more persuasive than the TP’s subjective preferences; look at zoning restrictions, barriers to subdivisions, access roads and utilities.

(essentially overrules Carlisle which basically says that could use subjective test [even though that case made out on objective test].

IsaacsCourt will not allow PRE where TP has engaged in “flipping”[Court deems to be in the business of renovation, even though moves family into home]

Sangha

Court clarifies that a “flipping” business will not allow property to qualify as PRE. Looks to evidence of quick sale: stickers still on windows, no appliances or furniture.

*Business Income from ANT

FOLIO S1-F3-

C2CRA effectively confirming all of the above.

Mechanism 40(2)(b)

What you can deduct for a PRE

(Capital Gains) x (Designated years + 1)/ # of years owned

Calculation of PRE

Capital Gains after exemption: A – (AxB/C)PRE Exemption: (A x B)/C

(1) Calculate the capital gain: A

[Remember: CG = (POD – ACB)]

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(2) ***1+ # of years after it was acquired during which TP was resident in Canada: B

(3) Total # of years the TP owned the housing unit: C

***if you owned the property for 50 years and it was your principal residence for the full 50 years, you don’t need to use the “+1” and T pays no taxes b/c 50/50 = 1.

(Note: B carries the extra year to allow exemption to swap between new/old principal residence)(Note 2: NO LOSS from PRE because it is a PUP!)

Deemed Ownership

40(4)

Where a TP has disposed of property to an individual under which ss. 70(6) or 73(1) [SPOUSAL ROLLOVER] apply, for purposes of computing gain under s. 40(2), the recipient shall be deemed to own the property throughout the years that the TP owned it.

EXAMPLE:

1982: H&W purchase house as JTs for $40K1993: They add $10K swimming pool Capital cost/ACB is increased to $50K1995: H dies, W becomes sole-owner spousal rollover on death and W acquires H’s ACB on half interest (s. 70(6))2005: W sells Capital gain of $450K

Assume both were resident in Canada throughout the time of this question

PRE: A X B / C (s. 40(2)(b))A= 450KB= 1 + 24 (number of qualified years) = 25 C= 24 years (1982-2005)

((450,000) x (25) / (24) ) = $468, 750 {SO: W would only designate for 23 years which would result in $450K}****ASK ROBYN WHY Can’t have PRE exemption exceed capital gains amount because exemption is opt-in and want to offset all gains possible. Therefore, can decide how many years to claim it for.

EXAMPLE 2:

1975: H & W buy house in Victoria in W’s name for 50K1980: H inherits cabin on Saltspring on ½ hectare of land for 30K (deemed FMV s. 70(5)(b) ) 1985: They sell Victoria house for 65K and rent for a couple of years (capital gain of 15K)1987: W buys a new house in Victoria for 80K1991: H transfers Saltspring property by deed of gift to daughter (POD at FMV of 75K) (s. 69(1)(b) – gain – 45K Daughter’s ACB is deemed 75K under s. 69(1)(c)

FIRST HOUSE (Victoria)[CG= POD – (ACB+expenses 65,000 – 50,000= 15K CG

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PRE= A x B/C (15K x 11+1) / 11 = $16, 363 more than necessary therefore would only designate for 10 years.

SECOND HOUSE (Saltspring)

PRE= A x B/C 45K x (9+1) / 12 = $37,500 so gain after deduction is $7,500*Note RE B: Conly designate for 9 years b/c before 82 could designate separate properties but not after.

H’s income must include $7,500 – 50% = $3750 taxable income

S. (3) add 3(a) to (b) result and determine amount exceeds universal deductions, (d) allows offsetting with the available non-capital deductions

S. 111(1)(a) non-capital losses can be carried forward 20 years or back 3 years.o When might you see this? New business where amount you are paid may not cover expenses right off the cuff.

MISCELLANEOUS

Tax administration: There is a self-assessment system, but the CRA isn’t bound by filed tax returns and is valid despite any errors, subject to reassessment or judicial variation (ss. 152(7) and (8))

Basic credit on first $11,038 (as of 2013) of 15%.o Applies to everyone, essentially, no one pays income tax on first $11,038 of income.

Tax Rates:o Up to $43,561 15%o $87,123 22%o $135,054 26%o Infinity! 29%

Note that inheritance is exempt, minus deductions, then figure out taxes.

NOTES

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