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Chapter V O L U M E I
1Introduction ToFederal Taxation In Canada
2 Procedures and Administration
3Income Or Loss From An OfficeOr Employment
4Taxable Income and Tax PayableFor Individuals
5Capital Cost Allowances AndCumulative Eligible Capital
6 Income Or Loss From A Business
7 Income From Property
8 Capital Gains And Capital Losses
9Other Income, Other DeductionsAnd Other Issues
10Retirement Savings And OtherSpecial Income Arrangements
The detailed contents of bothVolume I and II follow.
Chapter V O L U M E I I
11Taxable Income and Tax PayableFor Individuals Revisited
12Taxable Income andTax Payable For Corporations
13Taxation ofCorporate Investment Income
14Other Issues InCorporate Taxation
15Corporate Taxation andManagement Decisions
16 Rollovers Under Section 85
17Other Rollovers and Sale Of AnIncorporated Business
18 Partnerships
19 Trusts And Estate Planning
20 International Issues In Taxation
21 GST/HST
CONTENTS
The textbook is published intwo Volumes:
Volume I = Chapters 1 to 10Volume II = Chapters 11 to 21
CHAPTER 1Introduction To Federal Taxation
In Canada
The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1
Taxable Entities In Canada . . . . . . . . 2
Federal Taxation And The Provinces . . . . 4
Tax Policy Concepts . . . . . . . . . . . . . 5Taxation And Economic Policy . . . . . . . 5
Taxation And Income Levels . . . . . . . 6
Tax Incidence . . . . . . . . . . . . . 8
Tax Expenditures . . . . . . . . . . . . 8
Qualitative Characteristics Of Tax Systems . . 9
Income Tax Reference Materials . . . . . . 11Introduction . . . . . . . . . . . . . 11
The Income Tax Act . . . . . . . . . . 11
Other Income Tax Legislation . . . . . . 14
Other Sources Of Income Tax Information . 16
Liability For Income Tax . . . . . . . . . . 18Charging Provision For Canadian Residents . 18
Charging Provision For Non-Residents . . . 19
Alternative Concepts Of Income . . . . . . 21The Economist’s View . . . . . . . . . 21
The Accountant’s View . . . . . . . . . 21
The Income Tax Act View . . . . . . . . 21
Net Income For Tax Purposes . . . . . . . 21Structure . . . . . . . . . . . . . . . 21
Components . . . . . . . . . . . . . 22
Combining The Components - ITA Section 3 . 23
Loss Carry Overs . . . . . . . . . . . 25
Net Income For Tax Purposes - Example . . 26
Net Income To Taxable Income . . . . . . 27
Principles Of Tax Planning . . . . . . . . . 27Introduction . . . . . . . . . . . . . 27
Tax Avoidance Or Reduction . . . . . . . 28
Tax Deferral . . . . . . . . . . . . . 28
Income Splitting . . . . . . . . . . . . 29
Abbreviations To Be Used . . . . . . . . . 30
Key Terms Used In This Chapter . . . . . 31
References . . . . . . . . . . . . . . . . . 31
Problems For Self Study . . . . . . . . . . 32
Assignment Problems . . . . . . . . . . . 34
CHAPTER 2Procedures And Administration
Administration Of The Department . . . . 37
Returns And Payments - Individuals . . . 38Requirement To File - ITA 150 . . . . . . 38
Due Date For Individual Returns . . . . . 39
Withholdings For Income Tax - ITA 153 . . 40
Instalment Payments For Individuals - ITA 156 41
Interest . . . . . . . . . . . . . . . 44
Penalties . . . . . . . . . . . . . . . 46
Due Date For Balance Owing - Individuals . 46
Final Returns For Deceased Taxpayers . . . 47
Returns And Payments - Corporations . . . 47Due Date For Corporate Returns - ITA 150 . 47
Filing Alternatives For Corporations . . . . 47
Instalment Payments For Corporations . . . 48
Due Date For Balance Owing - Corporations . 50
Interest And Penalties For Corporations . . . 50
Returns And Payments - Trusts . . . . . . 51
Income Tax Information Returns . . . . . 52
Refunds . . . . . . . . . . . . . . . . . . . 52
Books And Records . . . . . . . . . . . . . 53
Assessments . . . . . . . . . . . . . . . . 53
Adjustments To Income Tax Returns . . . 54
Appeals . . . . . . . . . . . . . . . . . . . 54Consent Form . . . . . . . . . . . . . 54
Informal Request For Adjustments . . . . . 55
Notice Of Objection . . . . . . . . . . 55
Tax Court Of Canada . . . . . . . . . . 56
Federal Court And Supreme Court Of Canada 57
Tax Evasion, Avoidance And Planning . . . 58Tax Evasion . . . . . . . . . . . . . 58
Tax Avoidance And Tax Planning . . . . . 58
General Anti-Avoidance Rule (GAAR) . . . 58
Collection And Enforcement . . . . . . . . 60
Taxpayer Relief Provisions (Fairness Package) 62
Key Terms Used In This Chapter . . . . . 64
References . . . . . . . . . . . . . . . . . 64
Problems For Self Study . . . . . . . . . . 66
Assignment Problems . . . . . . . . . . . 68
Detailed Table Of Contents For Both Volumes (Page 2)
V O L U M E I
CHAPTER 3Income Or Loss From
An Office Or Employment
Employment Income Defined . . . . . . . 73Cash Basis And The Use Of Bonus Arrangements 74
Net Concept . . . . . . . . . . . . . 75
Employee Versus Self-Employed . . . . . . 75Employee Perspective . . . . . . . . . 76
Employer Perspective . . . . . . . . . . 78
Making The Distinction . . . . . . . . . 78
Inclusions - Salaries And Wages . . . . . . 80
Inclusions - Fringe Benefits . . . . . . . . 80Amounts To Be Included In Income - ITA 6(1) 80
CRA Administrative Practice On Fringe Benefits(IT-470R) . . . . . . . . . . . . . . 81
Tax Planning Considerations . . . . . . . 85
Inclusions - GST/HST/PST On Taxable Benefits86
Inclusions - Board And Lodging . . . . . . 87
Inclusions - Automobile Benefits . . . . . 87Employees And Automobiles . . . . . . . 87
Taxable Benefits - Standby Charge . . . . . 89
Operating Cost Benefit . . . . . . . . . 91
Summary Of Automobile Benefit Calculations 92
Payments By Employee For Automobile Use . 92
Example - Employer Owned Automobile . . 93
Example - Employer Leased Vehicle . . . . 93
Employer Provided Cars And Tax Planning . 94
Inclusions - Allowances . . . . . . . . . . 96Allowance Vs. Reimbursement . . . . . . 96
Taxable Vs. Non-Taxable Allowances . . . . 96
Reasonable Allowances For Motor Vehicles . 97
Employer’s Perspective Of Allowances . . . 98
Employee’s Perspective Of Allowances . . . 98
Inclusions - Employee Insurance Benefits . 99Life Insurance . . . . . . . . . . . . . 99
Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 99
Health Care Insurance . . . . . . . . . 101
Loans To Employees . . . . . . . . . . . 101General Rules . . . . . . . . . . . . 101
Home Relocation Loans . . . . . . . . 102
Tax Planning For Interest Free Loans . . . 103
(continued)
CHAPTER 3, continuedInclusions - Stock Option Benefits . . . . 105
CCPCs Vs. Public Companies . . . . . . 107
Rules For Public Companies . . . . . . . 107
Rules For CCPCs . . . . . . . . . . . 109
Other Inclusions . . . . . . . . . . . . . 110Payments By Employer To Employee . . . 110
Forgiveness Of Employee Loans . . . . . 110
Housing Loss Reimbursement . . . . . . 110
Discounts On Employer’s Merchandise . . 111
Club Dues And Recreational Facilities . . . 111
Specific Deductions . . . . . . . . . . . . 111Salesperson’s Expenses Under ITA 8(1)(f) . . 113
Travel Expenses And Motor Vehicle Costs . 114
The Salesperson's Dilemma . . . . . . . 114
Automobile And Aircraft Expenses . . . . 115
Work Space In Home Costs For Employees . 116
Key Terms Used In This Chapter . . . . . 117
References . . . . . . . . . . . . . . . . . 117
Problems For Self Study . . . . . . . . . 118
Assignment Problems . . . . . . . . . . . 127
CHAPTER 4Taxable Income And Tax Payable
For Individuals
Introduction . . . . . . . . . . . . . . . . 137
Taxable Income Of Individuals . . . . . . 138Available Deductions . . . . . . . . . 138
Ordering Of Deductions . . . . . . . . 138
Deductions For Payments - ITA 110(1)(f) . . 139
Home Relocation Loan - ITA 110(1)(j) . . . 139
Northern Residents Deductions - ITA 110.7 . 140
Calculation Of Tax Payable . . . . . . . . 140Federal Tax Payable Before Credits . . . . 140
Provincial Tax Payable Before Credits . . . 141
Types Of Income . . . . . . . . . . . 142
Taxes On Income Not Earned In A Province 143
Calculating Tax Credits . . . . . . . . . . 143Federal Amounts . . . . . . . . . . . 143
Provincial Amounts . . . . . . . . . . 144
(continued)
Detailed Table Of Contents For Both Volumes (Page 3)
V O L U M E I
CHAPTER 4, continuedPersonal Tax Credits - ITA 118(1) . . . . 144
A Note On The Family Caregiver Amount . 144
Individuals With A Spouse OrCommon-Law Partner . . . . . . . . 145
Individuals Supporting Dependent Person . 146
Child Tax Credit . . . . . . . . . . . 148
Single Persons . . . . . . . . . . . . 148
Caregiver Tax Credit . . . . . . . . . 149
Infirm Dependant Over 17 Tax Credit . . . 149
Interaction:Eligible Dependant Credit Vs. Caregiver Or InfirmDependant Over 17 Credits . . . . . . 150Caregiver Vs. Infirm Dependant Over 17 . 151
Other Tax Credits For Individuals . . . . 152Age Tax Credit . . . . . . . . . . . . 152
Pension Income Tax Credit . . . . . . . 153
Canada Employment Tax Credit . . . . . 153
Adoption Expenses Tax Credit . . . . . . 153
Public Transit Passes Tax Credit . . . . . 155
Child Fitness Tax Credit AndChildren’s Arts Tax Credit . . . . . . . 155
First Time Home Buyer’s Tax Credit . . . . 157
Volunteer Firefighters Tax Credit . . . . . 157
Charitable Donations Tax Credit . . . . . 157
Medical Expense Tax Credit . . . . . . . 159
Disability Tax Credit . . . . . . . . . 163
Education Related Tax Credits . . . . . . 165
Employment Insurance (EI) AndCanada Pension Plan (CPP) Tax Credits . . 169
Overpayment Of EI And CPP Contributions 169
Transfers To Spouse Or Common-Law Partner 170
Political Contributions Tax Credits . . . . 170
Labour Sponsored Funds Tax Credit . . . 171
Refundable Credits . . . . . . . . . . . . 172Refundable GST/HST Credit - ITA 122.5 . . 172
Working Income Tax Benefit - ITA 122.7 . . 173
Canada Child Tax Benefit . . . . . . . . 174
Social Benefits Repayment (OAS And EI) . 175
Comprehensive Example . . . . . . . . . 176
Key Terms Used In This Chapter . . . . . 179
References . . . . . . . . . . . . . . . . . 179
Sample Tax Return For Chapter 4 . . . . 181
Problems For Self Study . . . . . . . . . 181
Assignment Problems . . . . . . . . . . . 188
Tax Software Assignment Problems . . . 195
CHAPTER 5Capital Cost Allowances AndCumulative Eligible Capital
Capital Cost Allowance System . . . . . . 201
Additions To Capital Cost . . . . . . . . . 203Determination Of Amounts . . . . . . . 203
Available For Use Rules . . . . . . . . 205
Segregation Into Classes . . . . . . . . 205
Capital Cost Allowances . . . . . . . . . 206Rates For Commonly Used CCA Classes . . 207
Half-Year Rules (a.k.a. First Year Rules) . . 209
Short Fiscal Periods . . . . . . . . . . 211
Tax Planning Considerations . . . . . . 212
Dispositions Of Depreciable Assets . . . 213Capital Gains . . . . . . . . . . . . 214
Recapture Of Capital Cost Allowance . . . 215
Terminal Losses . . . . . . . . . . . 216
Summary Of Tax Consequences . . . . . 217
CCA Schedule . . . . . . . . . . . . . . . 217
CCA Determination - Special Situations . 218Separate Class Election . . . . . . . . . 218
Cumulative Eligible Capital (CEC) . . . . 220Eligible Capital Expenditures Defined . . . 220
Additions, Amortization, And Dispositions . 220
Key Terms Used In This Chapter . . . . . 225
References . . . . . . . . . . . . . . . . . 225
Appendix - CCA Rates For Selected Assets 226
Problems For Self Study . . . . . . . . . 228
Assignment Problems . . . . . . . . . . . 233
CHAPTER 6Income Or Loss From A Business
Overview . . . . . . . . . . . . . . . . . 239Classification Of Income . . . . . . . . 240
Business Income Vs. Property Income . . 242Tax Consequences Of Classification . . . . 242
Business Income Defined . . . . . . . . 243
Property Income Defined . . . . . . . . 244
(continued)
Detailed Table Of Contents For Both Volumes (Page 4)
V O L U M E I
CHAPTER 6, continuedBusiness Income Vs. Capital Gains . . . . 244
Tax Consequences Of Classification . . . . 244
Capital Gains Defined . . . . . . . . . 245
Criteria For Identifying Capital Gains . . . 245
Business Income And GAAP . . . . . . . 247
Business Income - Inclusions (Revenues) 248Amounts Received And Receivable . . . . 248
Reserves . . . . . . . . . . . . . . 249
Limitations On Deductions From Business AndProperty Income . . . . . . . . . . . . 252Specific Limiting Items Under ITA 18 . . . 253
Foreign Media Advertising - ITA 19 And 19.1 258
Provincial Capital And Payroll Taxes . . . 259
Limitations On Deductions From Business,Property, And Employment Income . . 259Reasonableness . . . . . . . . . . . 259
Meals And Entertainment . . . . . . . . 260
“Luxury” Automobile Costs . . . . . . . 261
Automobiles Owned By The Taxpayer . . . 261
Automobile Leasing Costs . . . . . . . 262
Leasing Property . . . . . . . . . . . 264
Illegal Payments, Fines And Penalties . . . 264
Business Income - Specific Deductions . 265Inventory Valuation (Cost Of Sales) . . . . 265
Other Deductions . . . . . . . . . . 266
Reconciliation Schedule . . . . . . . . . 268
Business Income - Example . . . . . . . . 270
Taxation Year . . . . . . . . . . . . . . . 271General Rules . . . . . . . . . . . . 271
Unincorporated Businesses- Non-Calendar Fiscal Year . . . . . . 271
Special Business Income Situations . . . 273Income For Farmers . . . . . . . . . . 273
Professional Income (Billed Basis) . . . . . 275
Sale Of A Business . . . . . . . . . . 276
Key Terms Used In This Chapter . . . . . 278
References . . . . . . . . . . . . . . . . . 278
Problems For Self Study . . . . . . . . . 280
Assignment Problems . . . . . . . . . . . 290
Tax Software Assignment ProblemFor Chapter 6 . . . . . . . . . . . . . . 303
CHAPTER 7Income From Property
Property Income: General Concept . . . 307
Interest As A Deduction . . . . . . . . . 308The Singleton And Ludco Court Cases . . . 309
IT-533 - “Interest Deductibility” . . . . . 309
Discount And Premium On Issued Debt . . 312
Interest Income . . . . . . . . . . . . . . 314Individuals - Modified Accrual Method . . 315
Discount And Premium On Debt Holdings . 316
Prescribed Debt Obligations . . . . . . . 316
Accrued Interest At Transfer . . . . . . . 317
Payments Based On Production Or Use(Royalties) . . . . . . . . . . . . . . . 318
Rental Income . . . . . . . . . . . . . . . 318Capital Cost Allowances . . . . . . . . 319
Rental Income Example . . . . . . . . 320
Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 321The Concept Of Integration . . . . . . . 321
Eligible Vs. Non-Eligible Dividends . . . . 322
Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 323- Eligible Dividends . . . . . . . . . 326
Comparison Of Investment Returns . . . . 329
Income Trusts . . . . . . . . . . . . . . . 330How Do Trusts Work? . . . . . . . . . 330
Investments In Publicly Traded Trusts . . . 330
Basis For Popularity . . . . . . . . . . 331
Taxation Of Income Trusts . . . . . . . 333
Mutual Funds . . . . . . . . . . . . . . . 334Distributions . . . . . . . . . . . . . 334
Adjusted Cost Base . . . . . . . . . . 335
Stock And Capital Dividends . . . . . . . 336
Foreign Source Income . . . . . . . . . . 337
Shareholder Benefits . . . . . . . . . . . 339
Key Terms Used In This Chapter . . . . . 340
References . . . . . . . . . . . . . . . . . 340
Problems For Self Study . . . . . . . . . 341
Assignment Problems . . . . . . . . . . . 347
Tax Software Assignment ProblemFor Chapter 7 . . . . . . . . . . . . . . 354
Detailed Table Of Contents For Both Volumes (Page 5)
V O L U M E I
CHAPTER 8Capital Gains And Capital Losses
Economic Background . . . . . . . . . . 357
General Rules . . . . . . . . . . . . . . . 358Capital Gains Defined . . . . . . . . . 359
Dispositions . . . . . . . . . . . . . 359
Proceeds Of Disposition . . . . . . . . 360
Adjusted Cost Base . . . . . . . . . . 361
Calculating The Capital Gain Or Loss . . . 362
Detailed Application Of The Rules . . . . 363Identical Properties . . . . . . . . . . 363
Partial Dispositions . . . . . . . . . . 364
Warranties On Capital Assets . . . . . . 364
Capital Gains Reserves . . . . . . . . . 365
Bad Debts On Sales Of Capital Property . . 367
Special Rule For Sales Of Real Property . . 368
Provisions For Special Assets . . . . . . . 370Principal Residence . . . . . . . . . . 370
Personal Use Property . . . . . . . . . 372
Listed Personal Property . . . . . . . . 373
Gains And Losses On Foreign Currency . . 374
Options . . . . . . . . . . . . . . 376
Deemed Dispositions - Change In Use . . 377Example - Change In Use . . . . . . . . 378
Special Rules For Principal Residences . . . 380
Special Rules For Automobiles . . . . . . 382
Deemed Dispositions- Departures From Canada . . . . . . . 383
Small Business Investments - Deferral . . 384
Replacement Property - Deferral . . . . . 385Voluntary And Involuntary Dispositions . . 386
Timing Considerations . . . . . . . . . 386
Application Of ITA 44(1) To Capital Gains . 387
Application Of ITA 13(4) To Recapture . . 388
Combined Application Of ITA 13(4) And 44(1) 389
Capital Gains And Tax Planning . . . . . 392
Key Terms Used In This Chapter . . . . . 392
References . . . . . . . . . . . . . . . . . 393
Problems For Self Study . . . . . . . . . 394
Assignment Problems . . . . . . . . . . . 404
Tax Software Assignment ProblemFor Chapter 8 . . . . . . . . . . . . . . 413
CHAPTER 9Other Income, Other Deductions,
And Other Issues
Introduction . . . . . . . . . . . . . . . . 415
Other Income - Subdivision d Inclusions 416Pension Benefits . . . . . . . . . . . 416
Retiring Allowances . . . . . . . . . . 417
Death Benefits . . . . . . . . . . . . 417
Income Inclusions From Deferred Income Plans 418
Scholarships And Prizes . . . . . . . . 418
Research Grants . . . . . . . . . . . 418
Social Assistance And Workers’ Compensation 418
Universal Child Care Benefit . . . . . . 419
Other Deductions - Subdivision e . . . . 419CPP Contributions On Self-Employed Earnings 419
Moving Expenses . . . . . . . . . . . 420
Child Care Expenses . . . . . . . . . 422
Disability Supports Deduction . . . . . . 426
Related Inclusions And Deductions . . . 428Employment Insurance Benefits . . . . . 429
Pension Income Splitting . . . . . . . . 429
Spousal And Child Support . . . . . . . 430
Annuity Payments Received . . . . . . 432
Registered Savings Plans . . . . . . . . . 434Registered Education Savings Plans (RESPs) . 435
Registered Disability Savings Plans (RDSPs) . 439
Tax Free Savings Accounts (TFSAs) . . . . 440
Non-Arm’s Length Transfers Of Property 442Inadequate Considerations . . . . . . . 442
Inter Vivos Transfers To A Spouse . . . . . 445
Transfers Of Depreciable Assets . . . . . 447
Transfer Of Farm Or Fishing Property To Child 449
Death Of A Taxpayer . . . . . . . . . . . 450
Income Attribution . . . . . . . . . . . . 452Basic Rules . . . . . . . . . . . . . 453
Avoiding Income Attribution . . . . . . 454
Tax Planning And Income Attribution . . . 458
Key Terms Used In This Chapter . . . . . 459
References . . . . . . . . . . . . . . . . . 459
Problems For Self Study . . . . . . . . . 460
Assignment Problems . . . . . . . . . . . 470
Tax Software Assignment ProblemFor Chapter 9 . . . . . . . . . . . . . . 481
Detailed Table Of Contents For Both Volumes (Page 6)
V O L U M E I
CHAPTER 10Retirement Savings And OtherSpecial Income Arrangements
Planning For Retirement . . . . . . . . . 483Tax Deferred Savings . . . . . . . . . 484
Defined Benefit Vs. Money Purchase Plans . 486
Registered Retirement Savings Plans (RRSPs)487RRSP Deduction Limit . . . . . . . . . 489
Examples Of RRSP Deduction Calculations . 496
Undeducted RRSP Contributions . . . . . 498
RRSP And RRIF Administration Fees . . . . 500
RRSP Withdrawals And Voluntary Conversions 500
Involuntary Termination Due To Age . . . 501
Spousal RRSP . . . . . . . . . . . . 501
Home Buyers’ Plan (HBP) . . . . . . . 503
Lifelong Learning Plan (LLP) . . . . . . . 505
Departure From Canada . . . . . . . . 506
Death Of The RRSP Registrant . . . . . . 507
Registered Pension Plans (RPPs) . . . . . 509Employer Contributions To The RPP . . . 509
Employee Contributions To The RPP . . . 510
Options At Retirement . . . . . . . . . 510
Phased Retirement . . . . . . . . . . 510
Pooled Registered Pension Plans (PRPPs) . . 511
Registered Retirement Income Funds (RRIFs)512RRIF Withdrawals . . . . . . . . . . . 512
Death Of The RRIF Registrant . . . . . . 513
Evaluation Of RRIFs . . . . . . . . . . 514
Deferred Profit Sharing Plans . . . . . . . 514
Profit Sharing Plans . . . . . . . . . . . . 515
Transfers Between Plans . . . . . . . . . 515Retiring Allowances . . . . . . . . . . 516
Retirement Compensation Arrangements 517Arrangements Defined . . . . . . . . . 517
Part XI.3 Refundable Tax . . . . . . . . 517
Salary Deferral Arrangements . . . . . . 518
Key Terms Used In This Chapter . . . . . 519
References . . . . . . . . . . . . . . . . . 520
Problems For Self Study . . . . . . . . . 522
Assignment Problems . . . . . . . . . . . 530
Tax Software Assignment ProblemFor Chapter 10 . . . . . . . . . . . . . 539
GlossaryThe Glossary can be found:
• at the back of the separate paperStudy Guide, and
• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.
Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.
No. 1 - Application Of The Median Rule
No. 2 - Stock Option Shares Deemed
Not Identical Property
No. 3 - Determining M&P Profits
No. 4 - SR & ED Expenditures
No. 5 - Final Returns For Deceased Taxpayers
No. 6 - Business Valuations
No. 7 - Tax Shelters
No. 8 - Transfer Pricing
Detailed Table Of Contents For Both Volumes (Page 7)
V O L U M E I
CHAPTER 11Taxable Income And Tax Payable
For Individuals Revisited
Introduction . . . . . . . . . . . . . . . . 541
Lump-Sum Payments . . . . . . . . . . . 543
Treatment Of Losses . . . . . . . . . . . 544Carry Over Provisions . . . . . . . . . 544
Personal Use Property Losses . . . . . . 546
Listed Personal Property Losses . . . . . 546
Non-Capital Losses . . . . . . . . . . 547
Net Capital Losses . . . . . . . . . . 548
Net Capital Losses At Death . . . . . . . 550
Allowable Business Investment Losses . . . 551
Farm Losses . . . . . . . . . . . . . 553
Lifetime Capital Gains Deduction . . . . 554Qualified Property . . . . . . . . . . 554
Determining The Deductible Amount . . . 555
Comprehensive Example . . . . . . . . 558
Ordering Of Deductions And Losses . . . 559Significance Of Ordering . . . . . . . . 559
Ordering In ComputingNet Income For Tax Purposes . . . . . 560
Ordering In Computing Taxable Income . . 560
Example . . . . . . . . . . . . . . 561
Tax Payable Overview . . . . . . . . . . 562
Tax On Split Income . . . . . . . . . . . 563
Tax Credits Revisited . . . . . . . . . . . 565Transfer Of Dividends To A Spouse
Or Common-Law Partner . . . . . . . 565
Charitable Donations Credit Revisited . . . 566
Foreign Tax Credits Revisited . . . . . . 571
Alternative Minimum Tax . . . . . . . . . 573General Concept . . . . . . . . . . . 573
Minimum Tax Calculation . . . . . . . 573
Tax Credits For AMT . . . . . . . . . 574
AMT Carry Forward - ITA 120.2 . . . . . 575
Key Terms Used In This Chapter . . . . . 575
References . . . . . . . . . . . . . . . . . 576
Sample Tax Return For Chapter 11 . . . . 577
Problems For Self Study . . . . . . . . . 577
Assignment Problems . . . . . . . . . . . 587
Tax Software Assignment Problems . . . 598
CHAPTER 12Taxable Income And Tax Payable
For Corporations
Computation Of Net Income . . . . . . . 605
Computation Of Taxable Income . . . . . 607Deductions Available To Corporations . . . 607
Dividends From Other Corporations . . . 608
Non-Capital Loss Carry Over . . . . . . 611
Ordering Of Taxable Income Deductions . 613
Geographical Allocation Of Income . . . 614Permanent Establishments . . . . . . . 614
Example - Permanent Establishments . . . 614
Federal Tax Payable . . . . . . . . . . . . 615Basic Rate . . . . . . . . . . . . . . 615
Federal Tax Abatement . . . . . . . . 615
General Rate Reduction . . . . . . . . 615
Provincial Tax Payable . . . . . . . . . . 616Small Business Rate . . . . . . . . . . 617
Investment Income Rates . . . . . . . . 617
Small Business Deduction . . . . . . . . 618Canadian Controlled Private Corporation . 619
Active Business Income . . . . . . . . 619
Annual Business Limit . . . . . . . . . 621
Allocation Among Associated Companies . . 622
Calculating The Small Business Deduction . 622
Elimination Of Small Business DeductionFor Large CCPCs . . . . . . . . . . 624
Personal Services Corporations . . . . . 626
Professional Corporations AndManagement Companies . . . . . . . 627
Manufacturing And Processing ProfitsDeduction . . . . . . . . . . . . . . . 628Calculating The Deduction . . . . . . . 628
M&P Profits Defined . . . . . . . . . 630
General Rate Reduction - ITA 123.4(2) . . 630Full Rate Taxable Income . . . . . . . . 631
Application To Companies Other Than CCPCs 631
Application To CCPCs . . . . . . . . . 632
Foreign Tax Credits For Corporations . . 633
Key Terms Used In This Chapter . . . . . 635
References . . . . . . . . . . . . . . . . . 636
Problems For Self Study . . . . . . . . . 637
Assignment Problems . . . . . . . . . . . 643
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CHAPTER 13Taxation Of
Corporate Investment Income
Integration . . . . . . . . . . . . . . . . 651The Basic Concept . . . . . . . . . . 651
Dividend Gross Up And Tax Credit Procedures 652
Integration And Business Income . . . . . 653
Refundable Taxes On Investment Income 655Meaning Of Aggregate Investment Income . 655
Basic Concepts . . . . . . . . . . . . 656
Refundable Part I Tax OnInvestment Income . . . . . . . . . . . 658Additional Refundable Tax On
Investment Income (ART) . . . . . . . 658
Problem One: Excessive Tax Rates On FlowThrough Of A CCPC’s Investment Income . 660
Solution To Problem One:Refundable Portion Of Part I Tax . . . . 661
Refundable Part IV Tax OnDividends Received . . . . . . . . . . 664Problem Two: Use Of Multi-Level Affiliations
To Defer Taxes On Investment Income . . 664
Solution To Problem Two:Refundable Part IV Tax . . . . . . . . 665
Part IV Tax On Portfolio Dividends Received 666
Dividends From A Connected Corporation . 667
Dividends Paid Out Of Mixed IncomeOf A Connected Corporation . . . . . 669
Refundable Dividend Tax On Hand . . . 670Basic Concepts . . . . . . . . . . . . 670
RDTOH - General Definition . . . . . . 671
Refundable Portion Of Part I Tax Payable . 671
The Dividend Refund . . . . . . . . . 673
Example Of RDTOH Calculations . . . . 674
Working Through Large CorporateTax Problems . . . . . . . . . . . . . . 676
Designation Of Eligible Dividends . . . . 677CCPCs And Their GRIP . . . . . . . . 679
Non-CCPCs And Their LRIP . . . . . . . 680
Part III.1 Tax On Excessive Eligible DividendDesignations . . . . . . . . . . . . 681
Key Terms Used In This Chapter . . . . . 683
References . . . . . . . . . . . . . . . . . 683
Problems For Self Study . . . . . . . . . 684
Assignment Problems . . . . . . . . . . . 690
CHAPTER 14Other Issues In
Corporate Taxation
Introduction . . . . . . . . . . . . . . . . 701
Acquisition Of Control Rules . . . . . . . 701Economic Background . . . . . . . . . 701
Acquisition Of Control Legislation . . . . 702
Deemed Year End . . . . . . . . . . 702
Restrictions On The Use Of CharitableDonations . . . . . . . . . . . . . 702
Restrictions On The Use Of Losses . . . . 703
Unrecognized Losses At Deemed Year End . 704
Deemed Disposition Election . . . . . . 705
Associated Companies . . . . . . . . . . 707Examples - Associated Corporation Rules . . 709
Investment Tax Credits . . . . . . . . . . 712Procedures . . . . . . . . . . . . . 712
Eligible Expenditures . . . . . . . . . 712
Rates . . . . . . . . . . . . . . . 713
Refundable Investment Tax Credits . . . . 714
Carry Overs Of Investment Tax Credits . . 715
Effect Of Acquisition Of Control . . . . . 716
Tax Basis Shareholders’ Equity . . . . . . 716Shareholders’ Equity Under GAAP . . . . 716
Paid Up Capital (Tax Basis Contributed Capital) 717
Tax Basis Retained Earnings . . . . . . . 717
Capital Dividend Account . . . . . . . 718
Distributions Of Corporate Surplus . . . 720Regular Cash Dividends . . . . . . . . 721
Stock Dividends . . . . . . . . . . . 721
Dividends In Kind . . . . . . . . . . 722
Capital Dividends Under ITA 83(2) . . . . 723
Deemed Dividends Under:ITA 84(1) - Increase In PUC . . . . . . 724ITA 84(2) - On Winding-Up . . . . . . 726ITA 84(3) - On Redemption, Acquisition,
Or Cancellation Of Shares . . . . . . 727ITA 84(4) And ITA 84(4.1) . . . . . . . 728
Key Terms Used In This Chapter . . . . . 729
References . . . . . . . . . . . . . . . . . 730
Problems For Self Study . . . . . . . . . 731
Assignment Problems . . . . . . . . . . . 737
Tax Software Assignment Problem . . . . 746
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V O L U M E I I
CHAPTER 15Corporate Taxation AndManagement Decisions
The Decision To Incorporate . . . . . . . 749Basic Tax Considerations . . . . . . . . 749
Other Advantages And Disadvantages . . . 750
Tax Reduction And Deferral . . . . . . . 751Approach . . . . . . . . . . . . . . 751
Basic Example . . . . . . . . . . . . 752
Public Corporation . . . . . . . . . . 754
CCPC - Active Business Income . . . . . 755
CCPC - Investment IncomeOther Than Dividends . . . . . . . . 758
CCPC - Dividend Income . . . . . . . . 759
Conclusions On Tax Reductions And Deferrals 760
Provincial Taxes And Integration . . . . . 763Tax Deferral . . . . . . . . . . . . . 763
Tax Reduction . . . . . . . . . . . . 764
Examples - Effects Of Provincial RatesOn Integration . . . . . . . . . . . 765
Summary: Tax Deferral And Tax Reduction 768
Tax Free Dividends . . . . . . . . . . . . 768Tax Rates On Dividends . . . . . . . . 768
Use Of Tax Credits . . . . . . . . . . 768
Tax Free Amounts For 2013 . . . . . . . 770
Income Splitting . . . . . . . . . . . . . . 770Basic Concept . . . . . . . . . . . . 770
Example . . . . . . . . . . . . . . 771
Shareholder Benefits Including Loans . . 772The Owner-Manager Environment . . . . 772
Shareholder Benefits Other Than Loans . . 773
Shareholder Loans . . . . . . . . . . 773
Management Compensation . . . . . . . 777General Principles . . . . . . . . . . 777
Salary Vs. Dividends . . . . . . . . . . 778
Salary Vs. Dividends ForThe Owner - Manager . . . . . . . . . 778The Basic Trade-Off . . . . . . . . . . 778
Conclusion . . . . . . . . . . . . . 787
Key Terms Used In This Chapter . . . . . 787
References . . . . . . . . . . . . . . . . . 787
Problems For Self Study . . . . . . . . . 787
Assignment Problems . . . . . . . . . . . 793
CHAPTER 16Rollovers Under Section 85
Rollovers Under Section 85 . . . . . . . . 799
General Rules For The Transfer . . . . . 800Transferor And Transferee . . . . . . . 800
Eligible Property . . . . . . . . . . . 800
Consideration To Transferor . . . . . . . 801
Making The Election . . . . . . . . . . 801
Establishing The Transfer Price . . . . . . 801
Transfer Prices - Detailed Rules . . . . . 803Rules Applicable To All Assets . . . . . . 803
Accounts Receivable . . . . . . . . . 804
Inventories, Non-Depreciable Capital Property 805
Disallowed Capital Losses . . . . . . . 806
Depreciable Property . . . . . . . . . 808
Disallowed Terminal Losses . . . . . . 810
Eligible Capital Property . . . . . . . . 810
Eligible Capital Property- Disallowed Deductions . . . . . . . 812
Summary Of Transfer Price Rules . . . . . 813
Allocation Of The Elected Value . . . . . 813Consideration Received By The Transferor . 813
Assets Acquired By The Corporation . . . 814
Paid Up Capital Of Shares Issued . . . . 816Paid Up Capital Reduction . . . . . . . 816
More Than One Class Of Shares . . . . . 817
Comprehensive Example- Section 85 Rollovers . . . . . . . . . 818
Gift To Related Party - Section 85 . . . . 821General Rules . . . . . . . . . . . . 821
Example . . . . . . . . . . . . . . 822
Excess Consideration - Section 85 . . . . 824Shareholder Benefit - ITA 15(1) . . . . . 824
Dividend Stripping — ITA 84.1 . . . . . . 826Applicability Of ITA 84.1 . . . . . . . . 827
Dividend Stripping Example . . . . . . . 827
Capital Gains Stripping — ITA 55(2) . . . 830Application Of ITA 55(2) . . . . . . . . 830
Capital Gains Stripping - Examples . . . . 831
Key Terms Used In This Chapter . . . . . 833
References . . . . . . . . . . . . . . . . . 834
Problems For Self Study . . . . . . . . . 834
Assignment Problems . . . . . . . . . . . 842
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CHAPTER 17Other Rollovers And
Sale Of An Incorporated Business
Introduction . . . . . . . . . . . . . . . . 851
Share For Share Exchanges - ITA 85.1 . . 851General Rules . . . . . . . . . . . . 852
Conditions For The Application Of ITA 85.1 852
Example . . . . . . . . . . . . . . 852
Exchange Of Shares In A Reorganization- ITA 86 . . . . . . . . . . . . . . . . . 854Conditions For The Reorganization . . . . 855
Procedures . . . . . . . . . . . . . 856
Example Using ITA 86(1) In An Estate Freeze 857
Gift To Related Person - ITA 86(2) . . . . 860
Using ITA 86(1) - Tax Planning Considerations 862
Amalgamations - ITA 87 . . . . . . . . . 863Position Of The Amalgamated Company . . 864
Position Of The Shareholders . . . . . . 865
Vertical Amalgamations (Parent And Subsidiary) 865
Non-Tax Considerations . . . . . . . . 865
Amalgamations - Tax Planning Considerations 866
Winding-Up Of A 90% Owned Subsidiary 867Acquisition Of Assets . . . . . . . . . 867
Disposition Of Shares . . . . . . . . . 870
Tax Planning Considerations- Amalgamation Vs. Winding-Up . . . . 871
Winding-Up Of A Canadian Corporation . 872Example . . . . . . . . . . . . . . 873
Convertible Properties . . . . . . . . . . 875Application . . . . . . . . . . . . . 875
Sale Of An Incorporated Business . . . . 876Restrictive Covenants
(a.k.a. Non-Competition Agreements) . . 877
Sale Of Individual Assets . . . . . . . . 878
Sale Of Assets As A Going Concern . . . . 878
Sale Of Shares . . . . . . . . . . . . 880
Evaluation Of Alternatives . . . . . . . 881
Example . . . . . . . . . . . . . . 882
Key Terms Used In This Chapter . . . . . 885
References . . . . . . . . . . . . . . . . . 885
Problems For Self Study . . . . . . . . . 886
Assignment Problems . . . . . . . . . . . 891
CHAPTER 18Partnerships
Introduction . . . . . . . . . . . . . . . . 899Taxable Entities In Canada . . . . . . . 899
Chapter Coverage . . . . . . . . . . 900
Partnerships Defined . . . . . . . . . . . 900The Importance Of Defining A Partnership . 900
Basic Partnership Elements . . . . . . . 901
Types Of Partnerships . . . . . . . . . 901
Co-Ownership, Joint VenturesAnd Syndicates . . . . . . . . . . . . . 902Introduction . . . . . . . . . . . . . 902
Co-Ownership . . . . . . . . . . . . 903
Joint Ventures . . . . . . . . . . . . 903
Syndicates . . . . . . . . . . . . . 904
Partnership Income, Losses,And Tax Credits . . . . . . . . . . . . . 904Introduction . . . . . . . . . . . . . 904
Applicable Concepts . . . . . . . . . 905
Calculating The Amounts To Be Allocated . 907
Methods Of Allocation . . . . . . . . . 912
The Partnership Interest . . . . . . . . . 913The Concept . . . . . . . . . . . . 913
Acquiring A Partnership Interest . . . . . 913
Adjusted Cost Base Of The Partnership Interest 914
Disposition Of A Partnership Interest . . . 918
Limited Partnerships And Limited Partners 919Definitions . . . . . . . . . . . . . 919
At-Risk Rules . . . . . . . . . . . . 919
Transfer Of Property To And FromA Partnership . . . . . . . . . . . . . . 921Definition Of Canadian Partnership . . . . 921
Transfers With No Rollover Provision . . . 922
Common Partnership Rollovers . . . . . 923
Specified Investment Flow ThroughPartnerships . . . . . . . . . . . . . . 926
Key Terms Used In This Chapter . . . . . 927
References . . . . . . . . . . . . . . . . . 927
Problems For Self Study . . . . . . . . . 928
Assignment Problems . . . . . . . . . . . 933
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CHAPTER 19Trusts And Estate Planning
Introduction . . . . . . . . . . . . . . . . 941
Basic Concepts . . . . . . . . . . . . . . 942What Is A Personal Trust? . . . . . . . . 942
Establishing A Trust . . . . . . . . . . 943
Returns And Payments - Trusts . . . . . . 944
Non-Tax Reasons For Using Trusts . . . . 945
Classification Of Trusts . . . . . . . . . . 945Personal Trusts . . . . . . . . . . . . 945
Testamentary Vs. Inter Vivos Trusts . . . . 946
Taxation Of Trusts . . . . . . . . . . . . 947Rollovers To A Trust . . . . . . . . . . 948
Rollovers To Capital Beneficiaries . . . . 951
21 Year Deemed Disposition Rule . . . . 951
Net Income For Tax Purposes Of A Trust 952Preferred Beneficiary Election . . . . . . 953
Amounts Deemed Not Paid . . . . . . . 953
Amounts Retained For A BeneficiaryUnder 21 Years Of Age . . . . . . . . 953
Taxable Income Of A Trust . . . . . . . . 954
Income Allocations To Beneficiaries . . . 954Discretionary And Non-Discretionary
Distributions . . . . . . . . . . . . 955
Flow Through Provisions . . . . . . . . 955
Principal Residence Exemption . . . . . 957
Tax Payable Of Personal Trusts . . . . . . 957Testamentary vs. Inter Vivos Trusts . . . . 957
Income Attribution - Trusts . . . . . . . . 960
Purchase Or Sale Of An Interest In A Trust 961
Tax Planning . . . . . . . . . . . . . . . 962Qualifying Spousal Trusts . . . . . . . . 964
Alter Ego Trusts . . . . . . . . . . . . 964
Joint Spousal Or Common-Law Partner Trusts 965
Estate Planning . . . . . . . . . . . . . . 965
Estate Freeze . . . . . . . . . . . . . . . 967
SIFT Partnerships And Trusts . . . . . . . 970
Key Terms Used In This Chapter . . . . . 970
References . . . . . . . . . . . . . . . . . 971
Problems For Self Study . . . . . . . . . 972
Assignment Problems . . . . . . . . . . . 974
CHAPTER 20International Issues In Taxation
Introduction . . . . . . . . . . . . . . . . 979
Residence . . . . . . . . . . . . . . . . . 980Residence Of Individuals . . . . . . . . 980
Residence Of Corporations . . . . . . . 987
Residence Of Trusts . . . . . . . . . . 988
Part I Tax On Non-Residents . . . . . . . 988Carrying on Business in Canada . . . . . 989
Canadian Source Employment Income . . 991
Dispositions of Taxable Canadian Property . 993
Part XIII Tax On Non-Residents . . . . . 994Interest Payments . . . . . . . . . . . 995
Dividend Payments . . . . . . . . . . 996
Royalty Payments . . . . . . . . . . . 996
Rental Income . . . . . . . . . . . . 997
Pension Payments, Other Retirement Benefits 998
Shareholder Loans To Non-Residents . . . 999
Immigration And Emigration . . . . . . 1000Entering Canada - Immigration . . . . . 1000
Departures From Canada - Emigration . . 1000
Unwinding A Deemed Disposition . . . . 1002
Short-Term Residents . . . . . . . . . 1003
Foreign Source Income Of Residents . . 1004Introduction . . . . . . . . . . . . 1004
Foreign Investment Reporting Requirements 1005
Foreign Source Employment Income . . . 1006
Foreign Source Business Income . . . . 1006
Foreign Source Interest Income . . . . . 1007
Foreign Source Capital Gains . . . . . . 1008
Problems With Foreign SourceDividend Income . . . . . . . . . . 1008
Foreign Source Dividends ReceivedBy Individuals . . . . . . . . . . . 1009
Foreign Dividends Received FromNon-Affiliated Corporations . . . . . 1010
Dividends Received FromNon-Controlled Foreign Affiliates . . . 1011
Dividends Received FromControlled Foreign Affiliates . . . . . 1015
Foreign Accrual Property Income (FAPI) . . 1015
Key Terms Used In This Chapter . . . . 1018
References . . . . . . . . . . . . . . . . 1018
Problems For Self Study . . . . . . . . . 1020
Assignment Problems . . . . . . . . . . 1025
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CHAPTER 21GST/HST
Introduction . . . . . . . . . . . . . . . 1035
Transaction Tax Concepts . . . . . . . . 1037Value Added Tax (VAT) . . . . . . . . 1039
Liability For GST/HST . . . . . . . . . . 1041The Concept Of Supply . . . . . . . . 1041
Supply Categories . . . . . . . . . . . . 1042Taxable Supplies . . . . . . . . . . 1042
Exempt Supplies . . . . . . . . . . . 1044
Applying the GST/HST Rate . . . . . . . 1044Place Of Supply . . . . . . . . . . . 1044
Applying The Rate . . . . . . . . . . 1045
Collection And Remittance Of GST/HST 1045
Registration . . . . . . . . . . . . . . . 1046Meaning Of Person For GST/HST . . . . 1046
Who Must Register . . . . . . . . . . 1046
Exemption For Small Suppliers . . . . . 1047
Input Tax Credits . . . . . . . . . . . . 1049Vendors Of Fully Taxable And
Zero-Rated Supplies . . . . . . . . 1049
Vendors Of Exempt Supplies . . . . . . 1051
Examples . . . . . . . . . . . . . 1052
Relief For Small Businesses . . . . . . . 1055Quick Method Of Accounting . . . . . 1055
Small Suppliers Exemption . . . . . . . 1058
Streamlined Input Tax Credit Method . . 1058
GST/HST Procedures And Administration 1059GST/HST Returns And Payments . . . . 1059
Associated Persons . . . . . . . . . . 1061
Refunds And Rebates . . . . . . . . . 1061
Books And Records . . . . . . . . . 1061
Appeals . . . . . . . . . . . . . . 1061
General Anti-Avoidance Rule . . . . . . 1062
Employee And Partner GST/HST Rebate 1062General Concept . . . . . . . . . . 1062
Calculating The GST/HST Rebate Amount . 1063
Example . . . . . . . . . . . . . . 1063
Residential Property, New Housing Rebate 1064General Rules For Residential Property . . 1064
New Housing Rebate . . . . . . . . . 1064
(continued)
CHAPTER 21, continuedSale Of A Business . . . . . . . . . . . . 1065
Sale Of Assets . . . . . . . . . . . . 1065
Sale Of Shares . . . . . . . . . . . 1065
Other Situations . . . . . . . . . . . 1066
Specific Applications . . . . . . . . . . 1067
Partnerships And GST/HST . . . . . . . 1068General Rules . . . . . . . . . . . . 1068
Partner Expenses . . . . . . . . . . 1068
Disposition Of A Partnership Interest . . . 1068
Transfers Between Partners And Partnerships 1068
Reorganization Of The Partnership . . . 1069
Trusts And GST/HST . . . . . . . . . . . 1069
Key Terms Used In This Chapter . . . . 1069
Problems For Self Study . . . . . . . . . 1070
Assignment Problems . . . . . . . . . . 1075
GlossaryThe Glossary can be found:
• at the back of the separate paperStudy Guide, and
• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.
Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.
No. 1 - Application Of The Median Rule
No. 2 - Stock Option Shares Deemed
Not Identical Property
No. 3 - Determining M&P Profits
No. 4 - SR & ED Expenditures
No. 5 - Final Returns For Deceased Taxpayers
No. 6 - Business Valuations
No. 7 - Tax Shelters
No. 8 - Transfer Pricing
Detailed Table Of Contents For Both Volumes (Page 13)
V O L U M E I I
Recommended