1. Income

1.1 - COMPUTING INCOMEBellingham

Windfall gains are NOT income from a recognized source.o Indicia of a windfall:

1. TP has no enforceable claim to the payment; 2. No organized effort on the part of the TP to receive payment; 3. Payment was not sought after or solicited by the TP in any manner; 4. Payment was not expected, either specifically or customarily; 5. Payment had no foreseeable element of recurrence; 6. Payor was not a customary source of income to the TP; 7. Payment was not in consideration for or in recognition of property, services or anything else provided

or to be provided by the TP. Punitive damages are NOT income from a recognized source. Some things are NOT taxable because they are outside of the market economy; they are something that cannot

be ordinarily bargained for. o IE: Personal injury damages compensating pain/suffering are NOT taxable.

TP bought land with intent to sell, but land was expropriated by City before he could sell. The court settlement given to TP was composed of: 1) the value of the land, 2) ordinary interest, and 3) additional interest (punitive) because City initially gave poor compensation. ?: How to tax additional interest?D: The taxpayer was fully compensated for land and rights on debt. Additional interest was windfall gain and akin to punitive damages, thus not an income from a source and NOT taxable.

Cartwright A voluntary payment in compensation for infringement of copyright has been interpreted as an apology

payment for use (a sort of voluntary punitive damages) and as such is not income from a recognized source.

Cranswick If a TP is sent an unsolicited cheque to convince him not to sue a corporation, this is a windfall gain and NOT

income from a recognized source. Corporation sold undervalued shares of a company in which TP was a shareholder. Corporation then sent TP a cheque, without any explantion of what the cheque was for (presumably so that he would not sue them). D: Windfall gain and thus NOT taxable: TP had no enforceable claim to that payment; he didn’t expect the payment (either specifically or customarily; no foreseeable element of reoccurrence; payer was not a customary source of income; and the payment wasn’t earned by the TP.

Curran Sources may extend beyond the enumerated grounds, but courts have not yet specifically stated a new

unenumerated ground. TP given lump sum by a 3rd party to induce him to leave current employment, but never ended up working for them. D: Taxable as income from a source under s.3(a), but court does NOT specify what source.

Fries Strike pay does NOT constitute income from a recognized source and thus is NOT taxable under s.3(a).

o UNLESS, surrogatum principle applies.D: Employees don’t pay tax on their union dues each month; union can invest $ and doesn’t pay tax on anything, even when they pay out strike pay. Thus, not income from a recognized source.

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1.2 - Surrogatum PrincipleTsiaprailis

Officially adopted the surrogatum principle:o TEST:

1) What was the payment intended to replace? 2) Would the replaced amount have been taxable in the recipient’s hands?

RE: Employment Insurance Benefits – s.6(1)(f):o Generally, a lump sum that is provided at the time the employee becomes disabled/injured is NOT

taxable under any provisions of the act. However, periodic payments (IE: wage replacement) converted into a lump sum in a

settlement process can be taxable under the surrogatum principle. Car accident, had to go on long-term disability. Group policy covered her, but insurer stopped payments and she had to sue to get money back. CRA wanted to tax her on the lump sum she was paid in settlement.D: portion covering the back payments not paid out (wage replacement) was taxable under s.6(1)(f) per the surrogatum principle. Relevant Provisions:

s.6(1)(a) - Includes in an employee’s (and office) income the value of any benefit received in the year through office/employment, except any benefit:

o (i) – Derived from the contributions of the employer to a group sickness or accident plan, etc… = [it is not until an employee actually receives benefits out of the plan that there are any tax

consequences to the employee] s.6(1)(f) – the amount of periodic payments received by the employee to replace income from

employment under a group sickness or accident, or disability insurance plan to which the employer contributed ARE included in income from office/employment, to the extent that the amounts received by the TP exceed the total contributions made by the TP under the plan before the end of the year.

o = [Under s.6(1)(f), the employee can DEDUCT the total amount of premiums that they contributed (not employer; and doesn’t have to be in same tax year) from the payments that they will be receiving, which are included in income.]

o As long as the employer contributes something, the plan will fall under s.6(1)(f).Notes:

If the employee pays 100% of the contributions then there is no employment benefit and any benefits received are NOT taxable under any other provision of the act.

If the employee was compensated directly by the driver, the amount would NOT have been included in income.

Under Tsiaprailis, compensation for future earnings could be included as employment income under the surrogatum princinple.

o However, according to CRA’s tax bulletin IT-365R2, payments for loss of future earnings for a person injured/disabled do not have to be included by income.

Compensation in such cases is for loss of capacity to learn (IE: loss of a particular asset)o Although this may be the CRA’s current position, interpretation bulletins are not binding on either

the CRA or taxpayers. o Thus, the interpretation bulletin is a statement of CRA’s current assessing policy and administrative

position, but it is not a statement of law and could be changed any time.

Siftar The surrogatum principle can be applied where there is no allocation of the settlement; courts can assess

the appropriate portioning of settlement. Similar facts to Tsiaprailis, but there was no allocation in the settlement.

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1.3 - Payments by Employer to EmployeeS.6(3) – [Captures types of payments from employer to employee]

S.6(3) – A payment from an employer to employee:o (a) – during a period while the payee was an officer of, or in the employment of, the payer, oro (b) – arising out of an agreement made by the payer to payee immediately prior to, during, or

after…Shall be deemed, for the purposes of s.5, remuneration for the payee’s services rendered, unless the employee can establish that the amount received was not consideration for:

o 1. Accepting the office/entering into contract of employment (IE: signing bonus)o 2. Services under employment contract;o 3. An agreement for post-employment contract services.

Note: in Curran, s.6(3) did NOT apply because taxpayer was NOT paid by the actual employer, but rather by a 3rd party, and Curran never became an employee of the person who paid him.

Note: in Schwartz, s.6(3) did NOT apply because he never became an employee of the company.

1.4 - Retirement AllowanceS.56(1)(a)(ii) – retirement allowances included in income under s.3(a).

S.248(1) – “Retirement Allowance” – means an amount, other than a superannuation, pension or death benefit, received:

(a) on or after retirement of a TP from employment/office in recognition of the TP’s long service, or;(b) in respect of a loss of an office or employment of a TP , whether or not received as, on account in lieu of

payment of, damages, or pursuant to an order or judgment of a competent tribunal

Schwartz Wrongful dismissal payments ARE taxable under s.56(1)(a)(ii), as part of the definition of retirement

allowances as per s.248(1). But, settlement payments in compensation for breach of offer of employment are NOT taxable if

employment with prospective employer had not yet commenced. TP left for new job, but new employer repudiated contract before he commenced employment. TP receives lump sum settlement. D: NOT taxable under s.56(1)(a)(ii).

s.248(1) – “Employment” – the position of an individual in the service of some other person.

Note: Legal fees to establish retirement allowance are not deductible under s.8(1)(b) because s.56 is not part of subdivision A.

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1.5. – Receipt and enjoyment as an amount as income or “Nexus” Once it is established that income is from a source, it must be determined WHO must pay tax on it. Must establish a nexus that shows the TP has an ability to enjoy or control the income.

o IE: If TP can prove they are trustee/agent, not taxable b/c funds received on behalf of 3P.

Fields (Informal Proceeding = No Precedent Being Set) TP must “receive” RRSP withdrawal in order for it to taxable.

Wife forged TP’s signature and wrote herself cheque from his RRSP account. In divorce proceedings, he did NOT make a claim to get money back. CRA then tried to tax him on RRSP withdrawal.D: cannot request tax since he did not derive benefit.

ITA s.146(8) says RRSP withdrawals are taxable when received by TP; here the TP never “received” them.

Note: Obrien disagrees; he “receive” an indirect benefit; he decided on his own accord not to go after the

money since his lawyer advised him not to. He also received the benefit of the deduction when he contributed.

Buckman Illegally using other people’s money will not protect you from tax liability, even if the money would

otherwise not have been taxable under GAAP principles. Embezzled funds are not “borrowed” and are fully taxable as gains from an illegal business where

there is no intention to repay the funds. Lawyer/TP embezzled funds from clients. TP argues not profits from a business or income from a business as he didn’t have the money absolutely without restriction. D: TP received the money, appropriated it unto himself, and used and enjoyed it for his own benefit. Furthermore, he never treated it as a loan as he did not have an intention to repay. Thus TAXABLE. Note: Court distinguished from American case where embezzler immediately returned money; here there was no chance of returning the funds and no intention.

*Poynton* Earnings from illegal operations or illicit businesses are NOT exempt from tax.

o It does not have to be quid pro quo; you don’t need to have provided service in exchange for funds in order for them to be taxable.

1.6 - Net worth Assessmentss.152(7):

Minister is not bound by a return or information supplied by TP or on behalf of TP.o This gives Minister the ability to make net worth assessments.

IE: Estimate TP’s assets at beginning and end of year and look at lifestyle to determine how much personal consumption.

s.152(8): Assessment is valid and binding. Burden of proof shifts to TP to show that CRA has made incorrect assumptions.

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2. Residency

1. Individuals – (3 Categories)

(A) Resident in Canada Taxpayers who are resident in Canada at any time in the year are subject to Canadian income tax on worldwide

income for the tax year (S.2(1)). A taxation year for an individual is the calendar year (S.249(1)(b)). A taxpayer is resident in Canada for tax purposes through one of two ways:

o 1. Ordinarily Resident S.250(3) – a reference to a person resident in Canada includes a person who was at the relevant

time ordinarily resident in Canada. Thomson; Denis M. Lee; IT-221R3

o 2. Deemed resident [Intro] A person who is not resident under the CL may nonetheless be deemed resident by

virture of the ITA and subject to tax on worldwide income. S.250(1)(a) – a person is deemed resident if the person “sojourned” in Canada for a period or

periods aggregating 183 days or more in a calendar year. “Sojourning” = One sojourns at a place where one usually, casually or intermittently stays. It is a

less perment situation than resident – something less than a permanent abode. Commuting to Canada during the day for work (for > 183 days) is not sufficient on it’s own to

fulfill the sojourning requirement, even if the individual spends the night in Canada a few times a year (R&L Food Distributors)

(b) – was at any time in the year a member of the Canadian forces

Effects: taxable on WW income; entitled to claim all deductions and credits allowed by the ITA; may affect CCPC status.

(B) Part-year Resident in Canada (N/A to corporations / sojourners) Part-year residence is an exception to the rule in s.2(1) that a person resident in Canada at any time of the year

is taxed on worldwide income. S.114 – Where a person commences or ceases to be resident in Canada during a taxation year, that person is

only subject to taxation on worldwide income for the part of the year that they were resident in Canada. For the period where the person is non-resident, they are only subject to taxation on Canadian source income.

In order to establish part-time residency, the facts must disclose either that the individual commenced to reside or ceased to reside in Canada (Schujahn)

If a TP goes and lives abroad but does not substantially sever secondary residential ties to Canada, they may be considered “ordinarily resident” in Canada (Reeder)

o IE: “Ordinarily resident” can look over a period of several years, where as “resident” tends to look at the year in question.

oEffects: WW income for period resident, CDN source for period non-resident; may only claim certain personal deductions or tax credits pro rata for period when resident; Capital gains “departure tax” (S.128.1(4))

#Schujahn - TP moved to Toronto for 3 years then went back to US. Wife and son remained in Toronto to facilitate sale of house, etc, and TP made a few visits to them in the tax year (TP was in Canada for more than 183 days in P-T year). D: Residence was severed when he moved. Visits to family were transitory. #Reeder – TP moves to France for job training then came back. Claimed he severed residency. D: absence intended to be temporary, did not matter that he did not have a home in Canada during the time.

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IT-221R3 – CRA Income Tax Bulletin Re: Residence & Severing Residency ***Not Binding***Generally, unless an individual severs significant residential ties with Canada upon leaving the country, the individual will continue to be a resident of Canada.

Primary considerations: o 1. Dwelling place (owned or leased) [= Significant tie if available for occupation, but less if rents/leases to a 3P

in an arm’s length transaction]o 2. Spouse or CL partner [not significant if relationship breakdown]o 3. Dependents

Secondary residential ties that may be considered in assessing residence status of an individual while outside of Canada: o 1. Personal property in Canadao 2. Social and economic tieso 3. Hospitalization and medical coverage in Canadao 4. Driver’s license or vehicle registered in Canadao 5. Canadian passporto 6. Memberships in Canadian unions, or professional organizations.

Paragraph 12: o CRA can assess residency based on whether person filed their last income tax return as though they were

severing their ties. Sojourners:

o Part of a day counts as a full day, in terms of counting up the period of sojourn. (But see R&L Food)

Residency does NOT require permanency or continuous residency throughout the entire tax period (Thomson) Presumption that everyone has a country of residence (Thomson) It is possible to have more than one country of residence (Thomson) A taxpayer’s INTENDED country of residence is irrelevant (Thomson; Lee) You can ordinarily be resident in Canada even if you are only there for the minority of the year (Thomson)

Denis M. Lee – a number of these factors together may establish residency, but none are individual conclusivePersonal:

Past/present habits of life Regularity/length of visits in Canada, and purpose of stay Ties within jurisdiction and ties elsewhere Mailing address in Canada (and if periodicals/magazines sent to address) & telephone listing in Canada, Canadian drivers license Stationary (including business cards) showing address in Canada Storage of personal belongings. Obtaining landed immigrant status or appropriate work permits in Canada (IT-221R3)

Economic: Ownership of a dwelling in Canada or rental of a dwelling on a long-term basis (IE: lease for 1+ years)

o If you have access to it whenever you want to go there = STRONG INDICATOR Credit cards, Canadian bank accounts, CPP, RRSP, etc. Rental of Canadian safe deposit box or PO box Active involvement in business in Canada or employed in Canada Directorship/membership in Canadian corporation Subscription for life or general insurance (including health insurance) through a Canadian company Ownership of a Canadian vacation property Registration and maintenance of automobiles, boats and airplanes in Canada

Social: Memberships with Canadian churches or synagogues, recreation and social clubs, unions and professional organizations Frequent visits to Canada for social or business purposes

Family:Residence of spouse, children, and other dependent family members in a dwelling maintained by the individual

Other: Legal documentation indicating Canadian residence Filing an income tax return as a resident Severing substantially all ties with former country of residence

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(C) Non-Residents

1. Tax on Active Income S.2(3) – non-residents are subject to Canadian tax (IE: under Part I of the ITA) on income earned in Canada for

the year if the person:o (a) Was employed in Canada

Residence of employer is irrelevant S.153(1)(a) requires employers to withhold the relevant portion from all employee’s wages, and applies to non-

residents and residents alike.o (b) “Carried on business” in Canada

o (c) Disposed of taxable Canadian property at any time in the year or a previous year. o = (1) real property in CAD and (2) shares of private corp’s that derive their value primarily from real prop in CAD

----------------------------------------------------------------------------------------------------------------------------------------------------------------2. Passive Income received from a Resident = taxable under Part XIII

2A) Payments from Canadian Residents to Non-Residents S.212(1) – non residents must pay a flat income tax of 25% (amount can be changed in tax treaty) on every

amount (gross) paid to them by a person resident in Canada for:o (a) a management or administration fee or charge

IE: CDN corporation pays US subsidiary a fee for handling all the CDN corporation’s foreign exchange. o (b) interest that

(i) is not fully exempt interest, and is paid or payable (a) to a person with whom the TP is not dealing at arm’s length, or (b) in respect of a debt/other obligation to pay an amount to a person with whom the

payer is not dealing at arms length. (ii) is participating debt interest [[NOTE: no withholding tax on interest payments between CDN/US residents]]

o (c) estate or trust income [IE: UK resident receives income from CDN estate or trust (IE: will of deceased CDN resident)o (d) rent and royaltieso (h) pension benefitso (j.1) retiring allowance

IE: awards for wrongful dismissal, awarded after someone has become a non-resident. Note: not employment income (IE: NOT under s.2(3)); rather, income from an “other source”

under s.56.o (i) RRSP Payments [Note: US is one of the only countries whose tax treaty w/ Canada recognizes RSP’s

as pension plans – other jurisdictions interpret it as straight income when you stop being a resident.]

2B) Dividends from Canadian Resident Corporation to Non-Resident S.212(2) Withholding tax on dividends

o Every non-resident person shall pay an income tax of 25% on every amount (gross) that a corporation resident in Canada pays to the non-resident person on:

(a) a taxable dividend (b) a capital dividend

Must Withhold S.215(1) – imposes obligation on CDN resident to withhold and remit the tax on behalf of the non-resident. Furthermore, S.215(6) makes the CDN resident jointly and severally liable for the tax if it is not withheld and remitted.

Extended Definition of “Carrying on Business in Canada” for Non-Residentss.253 – extended meaning of “Carrying on business:

(a) anyone who produces, mines, creates, etc., in whole or in part, anything in Canada whether or not the person exports that thing without selling it before exportation.

(b) solicits orders or offers for anything for sale in Canada through the agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada,

= the person shall be deemed, in respect of the activity or disposition, to have been carrying on business in Canada during the yr.

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2.1 – Tiebreaker Rules A person can be resident in more than one country at the same time (Thomson). To avoid double taxation, Canada has negotiated various tax treaties with other countries that have been enacted in Canada as federal legislation. Tiebreaker rules contained in the tax treaty deem the person to be resident of one country, and thus subject to taxation of that country. An applicable tax treaty takes precedent over the provisions of the ITA (S.250(5)). ==========================================================================================

Tiebreaker Rules

Article IV of Canada- US Tax Treaty [[Note: US law is same as Canadian law on the deeming of residence once set somewhere else]] Tiebreaker rules for individual resident of both countries:

o A) taxpayer resident in the state in which he has a permanent home availableo B) if no permanent residence (or in both), resident of the state with which his personal and

economic ties are the closest (centre of vital interest). IE: look at the Lee factors

o C) if this cannot be determined, then where is their habitual abodeo D) if this cannot be determined, then citizenship.

…if no other way to decide, the competent authorities may decide. Note: This is very undesireable for the TP (authorities take their time, they are not bound to decide,

and TP is taxed globally by two countries in the meantime)==========================================================================================

Article 4 of Canada- UK Tax Treaty A) taxpayer resident in the state in which he as a permanent home available B) if both or neither, where centre of vital interests are (personal and economic ties are the closest) C) if no home and no centre of vital interests, where habitual abode (room in parent’s house, hotel

room, etc.) D) citizenship …if no other way to decide, the competent authorities may decide.

==========================================================================================

Application of Tiebreak Rules:SaltTP lived in Canada for several years, then took a position with his company that moved him to Austrailia. Came back to Canada for a year, then back to Austrailia, then eventually retired in Canada. CRA claims also resident in Canada during the time resident in Austrailia. Tiebreaker looks at permanent home and closest personal/economic relationships.D: not ordinarily resident in Canada at that time. Note: court jumps over the decision on Canada and goes straight to tiebreaker rules, which do not need to be decided if you are ordinarily resident. In this case, probably had sufficiently severed ties not to be ordinarily resident.

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2.2 - Provincial Residence Reason for issue: marginal rates.

o In 2000/2001 the top marginal rate was around 54%, and it set in at around $80,000. o AB had a much lower rate and b/c have flat tax, never got highero Resulted in strong differential in tax rates for higher income individualso Now, until about 125K, BC taxes are lower than ABo Above this, AB is lowest in Canada

A TP can be resident in more than one province; but then tiebreaker rules would have to be applied to determine province of principal residence (Mandrusiak v. The Queen).

--------------------------------------------------------------------------------------------------------------------------------------------------Mandrusiak v. The Queen [2007, BCSC]?: TP residency in AB or BC.TP spend new eyars in AB, but physical location is irrelevant. Oddly, court applies test for ordinary residence in Canada to determine provincial residence. Not necessarily wrong – no other/better suggestions were available. D: Resident in both, but principally resident in AB based on property and long-term residency.

GENERAL RULE: resident in province in which you were resident on the last day of the year (Income Tax Regulation 2601

BC ITA 2(1)(a) – individual deemed resident of BC for tax purposes if were resident on the last day of the year.

***Income Tax Regulation 2607 – Dual Residenceo If resident in more than one province on last day of the taxation year, assumed that taxpayer

resided in the province that would reasonably be regarded as their principal place of residence.

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2.3 – Residence of Corporations & Trusts2 ways for a corporation to become resident: CL or deemed resident under ITA.

1. Deemed ResidentCorporation DEEMED RESIDENTs.250(4) A corporation will be deemed resident in Canada if:

(a) it was incorporated in Canada after April 26, 1965 (IE: under CDN Incorporation Act)

(c) it was incorporated in Canada before April 27 1965 and was (1) resident in Canada (based on CL principles) OR (2) carried on business in Canada in a tax year ending after April 16, 1965.

--------------------------------------------------------------------------------------------------------------------------------------------------2. CL Residence

-------------------------------------------------------------------------------------------------------------------------------------------------3. Tax Treaties for Corporations

1. CDA / US – Article IV: S.3 – jurisdiction of incorporation determines residence.

2. CDA / UK – Article 4: No clear tiebreaker rules apply to corporations, but rather the treaty leaves it to the competent

authorities to determine the corporations sole country of residence. o (takes up to 6 years to determine, while interest racks up)

Extended Definition of “Carrying on Business in Canada” for Non-Residentss.253 – extended meaning of “Carrying on business:

(a) anyone who produces, mines, creates, etc., in whole or in part, anything in Canada whether or not the person exports that thing without selling it before exportation.

(b) solicits orders or offers for anything for sale in Canada through the agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada,

= the person shall be deemed, in respect of the activity or disposition, to have been carrying on business in Canada during the year.

Note: Do NOT have to be present in Canada to be carrying on business in Canada

CL Residence Test for CorporationsDe Beers Consolidated Mines Limited v. Howe [1906, HoL]

CL Residence Test for Corporations = Where is central management and control? If BoD abdicates control to someone else who is really managing, then wherever management and

control ACTUALLY resides is the location of residenceo IE: CRA won’t recognize a fictitious BoD.

A Note on CCPC’s For the purposes of this course, it is understood that a CCPC (s.125(7)):

o Is a corporation that is resident in Canada;o Its shares are NOT listed on a stock exchange;o It is NOT controlled by:

Non-residents of Canada; A corporation whose shares are traded on a stock exchange; Or a combination of these

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3. Income from Employment / Office

3.1 - IntroductionDefinitions per s.248(1):

Office - A position of an individual entitling him/her to a fixed or ascertainable stipend or remuneration.

o Includes (1) judges; (2) ministers of crown; (3) member of Senate or House of Commons; (4) MLAs; (5) other members of legislative or execusitve council elected by popular vote; (6) corporate directors.

Employee - Includes officer Employed - Employed means performing the duties of office or employment Employer - The employer of an officer is the person who provides remuneration.

==========================================================================================

Inclusions in Income / Deductions for Employment or Office S.5(1) – defines a TP’s income from office or employment as the salary, benefits, wages, and other

remuneration, including gratuities, received by TP in the year. S.249(1)(b) – taxation year of an individual is the calendar year.

S.5(2) – there can be a loss from employment or office

S.6(1) – benefits received in the year must be included as income, EXCEPT o S.6(1)(a)(i) – does not include employer contributions to deferred profit sharing, group sickness or accident

insurance plan, long term life insurance policy, private health services plan, RPP, etc.o INCLUDED: s.6(1)(f) – the amount of periodic payments received by the employee to replace income from

employment under a group sickness or accident, or disability insurance plan to which the employer contributed ARE included in income from office/employment to the extent that the amounts received by the TP exceed the total contributions made by the TP under the plan before the end of the year.

= [Under s.6(1)(f), the EMPLOYEE can DEDUCT the total amount of premiums that they contributed (doesn’t have to be in same tax year) from the payments that they will be receiving]

As long as the employer contributes something, the plan will fall under s.6(1)(f).

S.8(1) – outlines limited DEDUCTIONS available from office or employment o S.8(2) – limits employment/office deductions to those permitted in s.8(1).

S.118(10) – Canada Employment Credit:o Tax credit of either 15% of $1K, or (if you make less than 1K) 15% of your income from

employment/office.

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Preliminary Questions

3.2 - Employee vs. Independent Contractor / Consultant / Sole ProprietorIn distinguishing an employee from an independent contractor the central question to be asked is whether the person who has been engaged to perform the services is performing them as a person in business on his own account (Market Investigations cited in Wiebe Door).

The court will consider all facts and circumstances of the “whole scheme of operations” (Wiebe Door). The case law has established a non-exhaustive list of important factor (Wiebe Door, affirmed in Sagaz)

1. Degree of control over workers activitiesa. IE: can they contract out work to others?b. IE: does the worker provide services to more than one payer?

2. Whether worker provides his own equipment. 3. Whether the person has hired their own helpers?4. Degree of financial risk taken by worker.5. Degree of responsibility for investment and management held by the worker6. Worker’s opportunity for profit in the performance of his/her tasks

7. [*Intention of parties*] – While the intention of the parties has not been considered by the SCC, courts have been willing to consider the mutual intention of the parties in the assessment (Wolf; Royal Winnipeg Ballet).

= sometimes courts willing to recognize a consensual contractual relationship between independent contractor and service purchaser (Wolf; Royal Winnipeg Ballet)

CRA not bound by the K between the parties in interpreting the role of employee/independent contractor.

--------------------------------------------------------------------------------------------------------------------------------------------------Wolf v. the QueenAmerican aerospace engineer. Worked in Canada on a very long-term contract. Could take time off when he wanted; charged a fee for services (hourly wage w/ potential for bonus if finished early). Worked for 6 months to a year at a time. Paid own CPP, reported as independent contractor. D: [considers intention]: he wanted freedom, and the parties characterized their relationship in that way. Thus, NOT an employee.

Royal Winnipeg Ballet v. MNRCompay had lots of control over dancers: decided plays, assigned parts and choreography, etc, but obligations were over at end of season. Dancers had to supply their own shoes, but not outfits. Dancers also responsible for own CPP / income tax issues. Entered into contracts agreeing to dance in particular production for the season. D: [considers intention]: independent contractors. --------------------------------------------------------------------------------------------------------------------------------------------------

A) If Independent Contractor No withholding obligation on payments to an independent contractor. Income calculated on an accrual basis.

o IE: income recognized when “earned” and expenses when “incurred”. S.249(1)(a) – taxation year of a corporation is a fiscal period. Scope of deductions are much broader than employees Must charge GST/PST if gross billings are over $30K.

B) If Employee/Employer (includes Office) s.153(1)(a) – employer must withhold and remit a prescribed amount from each payment made to an employee.

o An employer who fails to withhold as required is liable to both civil and criminal penalties.

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3.3 - Interposing a Corporation in the Employment Relationship:Personal Service Businesses & “Incorporated Employees

A) Active Business Carried on by a Corporation:s.125(7) - “Active business carried on by a corporation”

Any business other than a personal services business or specified investment business. --------------------------------------------------------------------------------------------------------------------------------------------------

C) Personal Service BusinessS.125(7) - “Personal Services Business”

A business of providing services where:o (a) an individual performing services on behalf of the corporation (an “incorporated

employee”), OR o (b) any person “related” to the incorporated employee

is a specified shareholder of the corporation AND the incorporated employee would reasonably be regarded as an employee of the person receiving the services but for the existence of the corporation, UNLESS :

o (c) the corporation employs more than 5 full-time employees throughout the year, OR

Deductions for Personal Service BusinessesS.18(1)(p) – 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 (iv) – legal expenses incurred in collecting amounts owed for services rendered.…That would otherwise be deductible in computing its income (if not a PSB).

Personal Service Business Tax Consequences:1. Not entitled to special small business tax rate under s.125(1).2. Deductions for PSBs are substantially restricted by s.18(1)(p). Combined effect = benefit of PSB heavily restricted.

Notes on distinguishing PSB from active businesses Distinguishing feature of personal services business is whether there are other clients, or whether

they are just doing what they would do for an employer, except that the TP has interposed a corporation between them.

ASSESS: are they providing services to the person who would have been their employer, if they hadn’t incorporated, or are they providing services generally to the public.

S.248(1) – “Specified Shareholder” = a person who, directly or indirectly, holds more than 10% of a class of shares of the corporation

s.248(1)(a) – a TP shall be deemed to own each share of a corporation with whom the TP does NOT deal at arm’s length.

o S.251(1)(a) – “Arm’s length” = related persons shall be deemed NOT to deal with each other at arm’s length.

s.251(2)(a) – “Related Persons” = are individuals connected by blood, marriage or common-law partnership, or adoption. (pg. 43 for “blood” / CLP info)

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3.4 – Inclusions in Income: Benefits3.4.1. Is it a benefit?

[Intro] s.6(1)(a) requires that the “value” of any benefit of “any kind whatever” received or enjoyed by an employee be included in the TP's income for the year. A benefit is a “material acquisition that confers an economic benefit on the employee” (Poynton; Savage). The benefit must be connected with the TP’s employment in some way, but need not be quid pro quo for the performance of employment duties (Savage). Where the employer is the primary recipient of the advantage secured by the expenditure and the benefit to the employee is merely incidental, there is no taxable benefit to the employee (Lowe).

Huffman An employer’s reimbursement to an employee for a mandatory expense is not a benefit that is taxable under s.6(1)(a)

Plain clothed policeman reimbursed for clothing worn on job (uniformed officers were supplied clothing, which does not account as a taxable benefit per IT-470R). D: Not taxable – clothes were only worn on duty, money was reimbursement of expense employer required employee to make.

Where an employee receives a benefit from a 3P that provides services to the company of which the TP is an officer or employee, there is a taxable benefit (Waffle)

IT-470R – Employee’s Guide – provides administrative guidance in what employer must include in employee’s “income”Gifts:

An employer can give any number of tax-free non-cash gifts (social event = gift) and awards to an employee, up to a maximum aggregate value of $500/year.

o Exemption only applies if gift is for a special occasion (IE: Christmas, birthday, marriage, etc.) or if award is for an employment related accomplishment (cannot be performance related).

o Employer can deduct the FMV of gifts.o Any amounts over $500 are a taxable benefit to employee.

An enmployer can also give a separate non-cash gift to an employee in recognition of long service/anniversary, if:o The amount of the gift does not exceed $500 (any amount over is taxable)

Items of an immaterial or nominal value (IE: coffee, tea, or T-shirt/mug/plaque/trophy with employer’s logo) will not be considered to be a taxable benefit to an employee.

Note: employer can deduct FMV of gifts (T4130) from above

Savage – TP took course related to employment. Employer encouraged course by offering $100/course. D: Yes, benefit. But also a prixe for achievement, so exempt.

The specific paragraphs of IT-470R prevail over the broad general inclusion of s.6(1)(a).

Social Event: Employer provided social event is non-taxable if event is generally available to all employees and the cost per employee

is reasonable in the circumstances. Generally, those events costing up to $100 per person will be considered non-taxable, which includes ancillary costs (IE: transportation home, etc.)

Amounts over $100 are a taxable benefit. Value to employee is the cost per person (Dunlap). Note: 50% food/entertainment rule per s.67.1 n/a if generally available for all and 1 of 6 or fewer events (s.67.1(2)).

Business Trips: If there is both a holiday and business element, the trip can be apportioned for tax purposes. Do not apportion if primarily for business.

Lowe – trip offered to employees/spouses so they could meet with prospective clients.D: no taxable benefit; primary benefit to employer. Trip was at request of employer and spouses were expected to attend the function.

Subsidized meals; No taxable benefit if employee pays a “reasonable charge” (IE: covers food of cost/preparation/service)

Uniforms and Special Clothing: Employed provided uniform or special clothing (IE: footwear) is not a taxable benefit, and neither is drycleaning for thes

Loyalty Points;No employee benefit has to be included in income provided that:

The points are not converted into cash; The plan is not indicative of another form of remuneration; AND plan or arrangement is not for tax avoidance purposes.

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3.4.2. Valuation of Employment Benefits[INTRO]: s.6(1)(a) requires that the “value” of benefits received or enjoyed be included in the taxpayers income. Value generally refers to the fair market value of the benefit (IT-470R; Giffen; Dunlap). In Steen, the court described fair market value as: “the amount a person not obligated to buy would pay a person not obligated to sell”.

1. FMV Assessed in a Fluid Way: CRA acknowledges that the FMV of a non-cash benefit may be assessed in a fluid way:

o IT-470R: Generally the FMV of the gift needs to be reported as income of the employee, unless the gift has been

customized (IE: engraved) in which case the amount reported may be reduced by a reasonable amount having regard to all the circumstances.

o Wisla – FMV of gold ring engraved with company logo held to be value of ring as scrap.

2. Benefit Availability vs. Actual UseRichmond v The Queen (1998)

A benefit is taxable if it is made available to an employee regardless of how much the employee actually utilizes the benefit.

o BUT, in Rachfalowski (2009) the court suggested that the value of a benefit should be determined on an individual basis of actual use rather than availability.

Parking spot provided to employee. Employee argues only used it 20% of time so should be assessed 20% of value.D: Actual usage irrelevant. Taxable on 100% of benefit.

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3.5. Allowances

2.1 - Reimbursement vs. AllowanceReimbursement:

A reimbursement is a cash payment from an employer to employee to repay that employee for an expense incurred on behalf of the employer. Generally, a reimbursement is only permitted upon presentation of the actual receipt for the expenditure (Huffman). Reimbursements are generally not taxabale in the hands of the employee.

Allowance: An allowance refers to a cash payment that is intended to compensate an employee for a particular

type of expenditure. It is an arbitrary amount that is pre-determined without specific reference to any actual expense or cost (MacDonald). An allowance may be expended in the discretion of the recipient and the recipient is not required to produce a receipt as a condition precedent to receiving the amount.

S.6(1)(b) – allowances for personal or living expenses or any other purposes generally must be included in income from employment.

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3.6. Exemptions to s.6(1)(a) & (b) (= allowances not included in income)

3.6.1. Special & Remote Worksites Allowance Exemption

s.6(6) – Exception to s.6(1): Employment at Special Work Site or Remote Location Notwithstanding s.6(1), there shall NOT be included in income any amount received by TP as an

allowance (or reimbursed for expenses) for:

o (a) TP’s BOARD AND LODGING for a period at… (i) a special work site, where duties performed by TP were of a temporary in nature, if

the TP maintained elsewhere a “self-contained domestic establishment” as his/her principle residence…

(a) that was, throughout the period, available to TP and NOT rented out AND (b) TP could not reasonably be expected to have returned daily by reason of

distance; OR (ii) a location, by virtue of its remoteness from an “established community”, the TP

could not reasonably be expected to establish and maintain a self-contained domestic establishment.

If the period during which the TP had to be away from principle residence was >36 hours*; OR

o (b) TRANSPORTATION between… (i) the principle place of residence and the special work site referred to in (a)(i), OR (ii) the location referred to in (a)(ii) and a location in Canada where TP is employed.

If the period during which the TP had to be away from principle residence was >36 hours*; OR

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IT-91R4 “Remoteness” = when determining whether a work location is in fact remote from an establish

community, consider:o 1. The availability of transportation;o 2. The distance from an established community; ando 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.

o Remoteness can still be shown if these conditions are not met (IE: no road to travel to community)

“Established Community” = a permanent location that has:o 1. A basic food store;o 2. A basic clothing store with clothes in stock (not a mail-order outlet);o 3. Housing; ando 4. Access to medical assistance and educational facilities.

NOTE: the work location ITSELF may be considered an “established community”.

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3.6.2. Automobile & Travelling Allowance Exemption Recall: s.6(1)(b) – include in income all amounts received by TP in the year as an allowance for

personal or living expenses or as an allowance for any other purpose, EXCEPT------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(1) S.6(1)(b)(v) – Travel for SALES Work ; In-town or Out-of-town

Reasonable allowances for travel expenses received by employee from employer in connection with the selling of property or negotiating contracts for the employer (IE: sales work)

o See limitation for vehicle allowances.------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(2) S.6(1)(b)(vii) – Travel for NON-sales work ; Out of town ONLY; OTHER THAN Vehicle Allowance

Reasonable allowances for travel expenses (other than allowances for a vehicle) received by employee (other than an employee employed in connection with the selling of property or negotiating contracts) from the employer for travelling from:

o (A) the municipality at which the employee ordinarily worked, ANDo (B) the metropolitan area where the establishment was located,

…in the performance of duties of the office or employment. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------(3) S.6(1)(b)(vii.1) – Travel for NON-sales work ; In-town or Out-of-town; Vehicle Allowance

Reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the sales of property or negotiation of contracts) from the employer for travelling in the performance of the duties of the office or employment.

o See limitation for vehicle allowances.

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Effects on Employee: The prescribed rates in Regulation 7306 are for the purposes of s.18(1)(r) deductions, however they are also commonly used to assess reasonableness under s.6. That said, employees are not bound by the prescribed rates and in certain circumstances may argue that additional vehicle allowance compensation is reasonable.

Effects on Employer: S.18(1)(r) allows a deduction by an employer of an amount paid to an individual as a motor vehicle expense allowance, provided it is within the prescribed limits of Regulation 7306. Any amount over the prescribed limit may only be deducted if the employee includes that amount in his income for the year under s.6(1)(b).

S.6(1)(b)(x) and (xi) – Limitation for Vehicle Allowance an allowance received in a tax year by TP for the use of a vehicle in connection with the course of

TP’s office or employment is deemed to not be a reasonable allowance:o (x) where the measurement of the use of the vehicle for the purpose of the allowance is NOT

based solely on the number of KM’s for which the car is used, ORo (xi) where the TP BOTH receives an allowance in respect of the use AND is reimbursed in

whole or in part for the expenses in respect of that use. (except where the reimbursement is in respect of..toll or ferry charges…and the

amount of the allowance was determined without reference to those reimbursed expenses)

Regulation 7306 – Prescribed rate per KM $0.52 / KM for first 5,000KMs $0.46 / KM for every KM after that Additional $0.04 / KM in the Yukon Territories, Northwest Territories, or Nunavut

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3.7 - s.8(1) Deductions in Computing Income from Office / Employment Provisions with regard to deductions will be interpreted strictly based on wording (Crawford)

[Intro] – s.8(1) outlines the deductions available in computing income from office/employment. Only those deductions expressly provided in s.8 are permitted (S.8(2)).

3.7.1. Deductions for Travelling under s.8(1)

s.8(1): Deductions are permitted with respect to the following amounts as may be reasonably regarded as:

Martyn v. MNR (1962)

#F. Travelling / Commissioned Salesperson Deduction s.8(1)(f): Sales Expenses: Where TP was employed in connection with the selling of property or negotiation of K’s for TP’s employer, amounts expended by the TP in the year for the purpose of earning income can be deducted (but cannot exceed the commissions earned) where the salesperson:

(i) is required under K to pay own expenses; (ii) required to travel on regular basis for work (iii) was remunerated by commissions with fixed reference to the volume of sales made; AND (iv) was not in receipt of an allowance for travel expenses by virtue of s.6(1)(b)(v)

But, cannot deduct:o (v) outlays, losses or replacements of capital or payments on account of capitalo (vi) expenses that by virtue of s.18(1)(l) (IE: use of recreational facilities [yachts, camps, lodges, golf,

and club/membership dues in sport/dining/recreational facilities), would NOT be deductible.

NOTES: S.8(4) applies to s.8(1)(f) and thus meal expenses by TP who is officer/employee shall not be included in deduction

under s.8(1)(f) unless the meal was consumed during required departure from municipality where TP’s work was located for no less than 12 hours.

S.8(10) applies to s.8(1)(f) and thus the TP cannot deduct amounts expended unless a prescribed form, signed by the TP’s employer certifying that the conditions set out in the applicable provisions were met in the year, is filed with the TP’s income tax return.

#G. Transport Workers (who pay for food AND lodging) Deduction s.(8)(1)(g) – Transport Employee’s Expenses

Where the TP is employed by a person/goods transporter business, and TP’s duties include regularo (i) travel away from TP’s work location municipality, on vehicles used by business and

transport, ANDo (ii) while away from that municipality, TP makes disbursements for meals AND lodging

General Limitations on Deductions (applies to entire ITA) S.67 – no deduction shall be made unless the expense or outlay was REASONABLE in the

circumstanceso S.67.1(1) – amount paid in respect of the consumption of food, beverage or entertainment is

deemed to be 50% of the lesser of: (a) the amount actually paid/payable, OR; (b) an amount that would be reasonable in the circumstances.

o S.67.1(2) – Exceptions – (1) does NOT apply to an amount paid in respect of food/beverages/entertainment where the amount:

(a) was paid as compensation (f) is in respect of one of six or fewer special events where the food/beverage/entertainment

is generally available to all employees.

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Travel to and from a place of employment is NOT deductible under s.8(1).TP was a pilot, attempted to claim trips to and from work as business expenses; reassessed, not within s.8(1). ?: Whether TP’s travel to/from airport were deductible as Travel ExpensesD: Travel was NOT deductible under s.8(1).Reasons:

Travel was NOT carried out in the course of employment, but rather proceeding from home to work.

Hogg v. The Queen (2002) Travel to and from a place of employment is not deductible, notwithstanding work-related security

issues. TP argued that he was required to his is own car for security purposes, and since necessary, should be deductible. D: Not deductible. Although security concerns were a function of his work, it was not sufficient to render the expense deductible.

3.7.2. Deductions for Legal Expenses

3.7.3. Professional & Union Dues Deduction

The Queen v. Swingle S.8(1)(i)(i) interpreted strictly – professional status must be required by statute.

TP is chemist (analyst). Claimed deductions for numerous memberships to scientific societies. Reassessment only allowed one fee related to his union fees as a public servant pursuant to s.8(1)(i)(iv).?: Whether payment of the amounts were “necessary to maintain professional status recognized by statute as per s.8(1)(i)(i). D: T is not a professional recognized by statute. S.8(1)(i)(i) strict requirements are not met. Reasons:

Deductible dues are NOT limited to those that have the effect of maintaining one’s professional statuts; it may be necessary to belong to organizations in order to remain qualified in one’s job.

#G. Transport Workers (who pay for food AND lodging) Deduction s.(8)(1)(g) – Transport Employee’s Expenses

Where the TP is employed by a person/goods transporter business, and TP’s duties include regularo (i) travel away from TP’s work location municipality, on vehicles used by business and

transport, ANDo (ii) while away from that municipality, TP makes disbursements for meals AND lodging

s.8(1)(b) – Legal Expenses of Employee Amounts paid in the year for legal expenses incurred by TP to collect/establish a right to salary or

wages owed to TP by employer or former employer.

NOTE: Retiring allowances NOT covered here, as s.56 is NOT part of subdivision A. IT-99R5 – action must be successful to be covered here.

s.8(1)(i) – Dues Amounts paid by the TP in the year as:

o (i) annual professional membership dues necessary to maintain professional status recognized by statute.

IE: Law Society dues = deductible, because required to practice law. But, does not apply to law professors, since not required to be members of bar to be professors. First time bar call fees are NOT deductible (capital outlay) – applies to equivalents in all professions.

o (iv) annual dues to maintain membership in a trade union or to maintain membership in an association of public servants to improve members’ conditions of work.

o (v) annual dues retained by employer, pursuant to collective agreement, and paid to a trade union or associate designation in (iv) of which TP was NOT a member.

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S.8(1)(i)(i) should not be read in isolation – (iv) and (v) allow deductability of dues without stipulation that they must be required to maintain TP’s job.

But, before any of that can be addressed, TP must be a professional recognized by statute. o Analyst designation is merely “any person” or sometimes “qualified person” – special skills,

abilities or qualifications are needed to meet the standard of s.8(1)(i)(i). Comments:

Had TP been a professional required by statute, this makes room for deductibility where fees paid were required for the maintenance of qualification within the professional field, rather than the strict requirement to maintain professional status.

3.7.4. Cost of Supplies

3.7.5. Home Office Expensess.8(1)(i) – Other Expenses of Performing Duties (ii) office rent or salary to an assistant/substitute, payment of which is required by the K for

employment. (iii) supplies consumed directly in the performance of duties of the office/employment, where

required by K of employment to pay for supplies.

NOTES: S.8(10) applies to s.8(1)(i)(ii/iii) and thus the TP cannot deduct amounts expended unless a prescribed form, signed by

the TP’s employer certifying that the conditions set out in the applicable provisions were met in the year, is filed with the TP’s income tax return.

s.8(13) – Work Space in Homeo (a) no amount is deductible from income from office/employment in respect of any part of a

home office, EXCEPT to the extent that the home office is either: (i) the principle location of the office/employment duties, OR (ii) used exclusively for earning income from office/employment AND used on a

regular/continuing basis for meeting customers in the ordinary course of duties. o (b) the amount that is deductible from income for the year for office/employment shall not

exceed the TP’s income from that office/employment [=cannot create a tax loss from a home workspace] AND

o (c) where denied deductions because of (b), losses can be carried forward one year until income from employment exceeds the losses and the deductions can be used.

NOTES: Theoretically, held to same “reasonableness” standard of other business expenses, but it is difficult

to rebut the presumption of personal use. o Deterimined by amount of space occupied by the office against the total home area for

(mortgage or rent, taxes, utilities, phone, etc.)

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4. Income from Business & Property

4.0. Introduction – Business Income vs. Property IncomeFramework

S.3(a) – income includes a source inside/outside of Canada for the year from each office, employment, business and property.

S.9 – Income / Loss from Business or Propertyo (1) – TP’s income for a tax year from business or property is the TP’s profit from that business/property

[profit is not defined by Act – courts have generally interpreted “profit” as net-profit (revenue – expenses)]

o (2) – TP’s loss for a tax year from business or property is the amount of the TP’s loss. S.12 – Specific Inclusions in Income from a Business or Property S.20 – Deductions Permitted S.3(d) losses from business or property are calculated source by source, and will reduce overall taxable income

when they are applied according to s.3(d). --------------------------------------------------------------------------------------------------------------------------------------------------[Intro - Business] A business is “anything that occupies the time, attention or labour” of a person (Smith). The case law has generally established that a business requires an ongoing, organized, commercial activity with the objective of earning profits. Business is also defined in s.248(1) of the ITA to include “an adventure or concern in the nature of trade”.

Income derives from a P/S carrying on activity business constitutes business income, even if the TP is a silent or inactive partner (Hollinger)

s.248(1) – “business” – includes a profession, calling, trade, manufacture, or undertaking of any kind whatever--------------------------------------------------------------------------------------------------------------------------------------------------[Intro – Property] Property income is passive in nature. Generally, the owner of a property is not required to devote a significant amount of time and energy to derive income from that property. (Hollinger). Property is defined broadly in s.248(1) of the ITA as “property of any kind whatever whether real or personal or corporeal or incorporeal”. Income from peropty does not include any capital gains or losses from the disposition of that property (S.9(3)).

Rental income is generally considered to be income from property (Walsh)o However, if enough activity were involved it cound be considered a business (Walsh).

Rental income earned by a corporation pursuant to the objects of its incorporation are generally presumed to be income from a business (Etoile Ommobiliere SA)

Distinguishing Propery and Business Income: (Hollinger) Whether income was the result of efforts made or time and labour devoted by TP Whether there was a trading character to the income Can the income be fairly described as income from business within the meaning of the ITA? The nature and extent of services rendered or activities performed.

Affects of Property vs. Business Income To be eligible for the small business tax rate under s.125(1), a CCPC’s income must be income from an “active

business carried on by a corporation (s.125(7)). This excludes income from a “specified investment business”. S.125(7)) – “Specified Investment Business” – means a business…the primary purpose of which is to derive

income from property, but does NOT include a business o (a) – that employs more than 5 full-time employees throughout the year, ORo (b) – or corporations provide services to the business that could reasonably be expected to require more

than 5 full-time employees if those services had not been provided.

NOTE: See non-resident taxation if non-resident

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4.1 – “For the Pursuit of Profit” (applies to Property & Business income) The pursuit of profit generally distinguishes a TP’s activities that are for business/property from those

that are purely personal, such as hobbies.

Two-stage test from Stewart: 1. Is the activity of the TP undertaken in pursuit of profits, or is it a personal endeavor?

o Where the activity could be classified as a personal endeavor, it must be determined whether or not the activity is being carried on in a sufficiently commercial manner to constitute a source of income:

Objective/subjective test – TP must show they intended to earn profit, and TP must show that they have taken reasonable steps in an attempt to earn income.

Consider all the REOP factors (from Moldowan) for evidence of commerciality or personal nature:

Profit/loss in the past Capacity of venture to show profit TP’s intended course of action TP’s training Amount of time TP devotes to activity

2. If it is determined to be for the pursuit of profit, assess whether the source of income is business or property

-----------------------------------------------------------------------------------------------------------------------------------------------Stewart v The Queen (2002 SCC)TP bought pre-developed condos. TP ran a loss because paying high interest fees, management fees, maintenance, etc, for 10 years, than later collecting rent. Minister said no REOP of profit for years before income earned. TP also did some work himself (fired property manager) and thus a personal element. D: Losses can be deducted because it was a valid source of income.Reasoning: No personal element involved in the rental properties, thus inquiry ends.-Rented at arms length; no evidence of personal use; clearly commercial, motivation for capital gains.

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4.1.1. “Organized Activity” and Gambling Income Distinction between business as an organized activity and hobby is particularly important regarding

gambling income.

Luprypa v. The Queen (1997 TCC) Where taxpayer has a specific expertise or a system in place to control the outcome and minimize risk

of gambling, it may be considered business from income. TP employed as sandwich maker, but was also a pool-shark. Filed NIL returns for two years; made money gambling on pool. CRA prepared net-work assessment (152(7)) and thus onus on TP to prove otherwise (152(8)). ?: Was gambling in this situation a valid source of income (business source)?D: Here, this was a business and therefore a valid source of income. Reasons: TP managed risk, already a skilled player, practiced all week, selected drunk opponents (did not drink himself), and it was his primary source of income.

Epel v. The Queen (2003) TCC Gambling winnings that can be attributed solely to a run of good luck with no significant element of

risk management are not taxable. Regular poker winnings.D: not taxable because attributed to a run of luck by TP, with no significant risk of management.

Leblanc v. The Queen (2007 TCC) Gambling winnings do not constitute income from business if profit results from pure luck, regardless

of whether an organized business-like system is utilized.TP’s had system of sports gambling (hired employees to do work, etc.).D: Pure chance/luck (odds of winning = astronomical); no possibility of minimizing risk = NOT income from a source.

NOTE: S.40(2)(f) – a gain/loss from the disposition of

o (i) a chance to win a prize or bet, or o (ii) a right to receive an amount as a prize or as winnings on a bet

…in connection with a lottery scheme or a pool system of being betting is NIL

s.52(4) – where any property has been acquired by a TP as a prize in connection with a lottery scheme, the TP shall be deemed to have acquired the property at a cost to the TP equal to its FMV at the time

o (IE: if you sell the house at FMV instead of moving in, no gain/loss)

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4.2. Business Income – Adventure or Concern in the Nature of Trade (ACNT)The ITA definition of “business” in s.248(1) includes “an adventure or concern in the nature of trade” (“ACNT”). The characterization of what constitutes an ACNT is important in distinguishing between business income and capital gain. IT-459 provides guidance on characterizing ACNT and is considered authoritative on the matter as it summarizes the jurisprudence and has received praise from the SCC (Taylor).

IT-459 Adventure or Concern in the Nature of Trade1. Where a person habitually does something that is capable of producing a profit, even if it is apart from his ordinary occupation, that person is carrying on a business.

2. Even where such a thing is done infrequently, or only once, it is possible to say that the person has engaged in a business transaction if it can be shown that he engaged in an ACNT.

***TEST S to determine whether a particular transaction in an ACNT: (mirrors the test from Taylor)1. Taxpayer’s Conduct:

Primary Considerations: o Whether the TP’s actions in regard to the property were essentially what would be expected of a

dealer of such property. [Factors set out in IT 218R IF transaction involves real estate] Factors that suggest ACNT:

o Length of period of ownership; evidence that an effort was quickly made to find purchasers points to a trading intention.

o Steps taken with the intended result or improving marketability of the property.o The fact that the person has a relevant commercial background (or frequency/number of other

similar transactions by the TP)o Circumstances responsible for sale of property

2. Nature of the Property: Primary Consideration:

o Whether the nature and quantity of the property excludes the possibility that its sale was the realization of an investment or was otherwise capital in nature.

Factors that suggest ACNT: o The property is of such a nature that it could not provide income or personal enjoyment and must be

sold to produce a profit (Happy Valley Farms) o The TP is not in a position to operate the property for personal enjoyment or income.o The TP can operate the property for enjoyment or income but does not.

Note: o Strong presumption that shares of a company are a capital investment (Irrigation Industries)

But, presumption can be rebutted when transactions are carried out in the same was a securities trading business (IE: business income) (Arcorp) [not ACNT; just business]

3. Taxpayer’s Intention: Primary Consideration:

o Whether the TP’s intention is consistent with other evidence pointing to a trading motivation. Factors:

o Intention to sell for a profit is NOT sufficient, on its own, to establish an ACNT (Regal Heights) However, it can be an added factor in favor of ACNT.

Secondary Intention: o Secondary intention requires not only the thought of a sale at a profit but that the prospects of such

a sale be an “operating motivation” in the acquisition of the capital property (Snell Farms)

4. Factors that CANNOT prevent a finding of ACNT: Single or isolated transactions because they can be an “adventure” (Rutledge; Taylor) TP did not create an organization to carry out the transaction. Transaction was totally different from other activities carried out by the TP.

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MNR v. James A. Taylor (1956)TP bought and sold lead. ?: Whether TP’s transaction was an ACNT (business taxable) or capital transaction (capital gain)?D: ACNT, therefore taxable as income from business.Reasons:

Purchased with sole intent to sell to company – no other use for lead. Carried out in the same manner as would a trader of the commodity.

Regal Heights Ltd v. MNR (1960, SCC)TP purchased land with hopes of developing shopping centre. Another mall opened up and so he failed. TP then sold land for 140K profits and claimed as capital gains. D: ACNT, therefore taxable as income from business.Court accepts primary goal was development but recognizes that secondary goal was to sell property for profit.

o Where MNR can show secondary objective to “flip” property, then there may be an ACNT.

Irrigation Industries Ltd v. MNR (1962, SCC)TP bought shares of corporation with borrowed funds, then sold them after 3 weeks.D: Capital gains, not income from business. Reasons: Borrowing is not a significant factor; this is normal practice in stock market investing. No immediate prospectus of obtaining dividend is also a common feature of stock market investing.

Acorp InvestmentsPrivate company with one shareholder who was a security salesman for stock brokerage. All shares of TP were held by this one shareholder. Almost all assets of the company were marketable securiites that could be traded on stock exchange. TP had no license to broker stocks – buying for its own account; really acting for the shareholder personally. Undertook about 38 transactions per month – huge value – held for less than a year. D: Corporation that bought and sold shares was found not to be investing, but trading (IE: carrying on business as a trader would). Not ACNT; just carrying on a business.

Happy Valley Farms Ltd v. The QueenTP acquired large plot of land. Evidence showed he intended to raise capital on portion of land and subdivide the rest. D: ACNT, therefore taxable as income from business.Reasons:

Virtually no chance of producing income except for sale. TP made similar sales of other parcels of land.

Interpretation Bulletin IT-218RDetermining ACNT for Real Estate transactionsFactors courts consider in determining whether profit or loss on a sale of land is on income or capital account (i.e. is it an adventure in the nature of trade, or a transaction in a capital property held as an investment intended to generate income):

a. taxpayer’s intention at the time of the purchase of the propertyb. feasibility of taxpayer’s intentionc. geographical location, zoningd. extent to which the taxpayer and his/her associates carry out the initial or primary intentione. evidence of change of intentionf. nature of the business, profession, trade, experience of the taxpayer and his/her associatesg. extent to which the purchase is made with borrowed moneyh. length of time the property is held by the taxpayeri. whether taxpayer made the purchase alone or with othersj. reasons for sellingk. extent of taxpayer’s (and associations) previous and subsequent dealing in real estate.

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4.3. Property Income

4.3.1 – Interest Income “Interest” is not defined by the ITA, but the case law has generally determined interest to be

compensation for the use of money belonging to another person. It is the payments made on a debt obligation.

--------------------------------------------------------------------------------------------------------------------------------------------------1. Section 12 – Inclusions to Income from Business or Property

S.12(1)(c) – Interest included in Income – subject to ss. (3) and (4.1), any amount received/receivable in tax year that was paid to TP as interest or in lieu of interest.

o NOTE: late payment charge = effectively an amount in lieu of interest = thus taxed same way.

S.12(3) and (4) – Anti-avoidance Rule for Deferral Over Long Term Lending – timing rules that determines when interest must be declared and when it is to be paid on:

o (3) [applies to corporations] – requires corporation to report in income the interest ACCRUED on most debt obligations held by the corporation at the end of each tax year, to the extent not included in income in any previous year.

o (4) [applies to persons] – requires individuals who hold investment K’s to include interest accrued on the K to each “anniversary day” with respect to the investment K, to the extent not included in the TP’s income in any previous year.

S.12(11) defines “anniversary day”: (a) the day that is one year after the day immediately preceding the date of issue

of the K; (b) the day that occurs at every successive one year interval from the day

determined under (a); AND (c) the day on which the K was disposed of.

S.12(3)(4) n/a if TP reporting interest as it accrued daily on debt obligation.

NOTE: investment contract encompasses all debt or any extension of credit that requires a payment. --------------------------------------------------------------------------------------------------------------------------------------------------

2. Section 16(1) – Income and Capital Combined S.16(1) – Where, under a K or other arrangement, an amount can reasonably regarded as part interest

(or other amount of an income nature) and part capital, the following rules apply:o (a) – the part reasonably regarded as interest shall be deemed to be interest for the lender

ANDo (b) the part reasonably regarded as an amount of income, other than interest, shall be included

in the income of the TP. NOTE: s.16(1) can apply to all types of combined income/capital (IE: royalties/rent, etc)--------------------------------------------------------------------------------------------------------------------------------------------------Groulx v. MNR (1967, SCC)

Court may find blended payments from an increased purchase price. Thus taxable interest income. TP sold farm for 395K (above FMV). Purchaser paid 85K down and made interest free payments over 7 years. D: This was a blended payment (interest + capital gain); thus should have been reporting interest each year with each installment. NOTE: Minister can look at transaction to determine if it is a blended payment, even if differs from agreement.

But, if the price was at or below FMV, Minister would have a hard time finding interest included.

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4.4.2 – Rent and Royalties (Payments based on Production/Use) “Rent” = amounts paid for use of tangible property, whether real or personal. “Royalties” = amounts paid for use intangible property (IE: copyright, trademarks, patents, know how,

scientific knowledge, trade secrets, licensing fees, etc.) *RULE: where all legal rights are transferred, the transaction constitutes a sale of property. If less than

all rights are transferred, the transaction is a lease or license and the payments are rent or royalties.

1. Section 12(1)(g) – Payments Based on Production or Use (IE: Rents and Royalties) s.12(1)(g) – include in income any amount RECEIVED by TP in the year that was dependent ON THE USE

OF OR PRODUCTION FROM PROPERTY whether or not that amount was an installment of the sale price of the property, except that an installment of the sale price of agricultural land is not included by virtue of this paragraph

o NOTE: s.12(1)(g) generally applies to the sale of property where the sale price is dependent on the production or use of the property.

IE: purchase priced payable in fixed installments based on tons of gravel removed.o PURPOSE of provision = prevents TP’s from converting what would otherwise be fully taxable

rent or royalty income into capital gains

2. Payments for Computer Software No statutory guidelines for characterizing payments for computer software as royalties or purchase

prices. CRA’s administrative policy is to distinguish “shrink-wrap” and “custom software”.

o “Shrink wrap” = over the counter software that is licensed pursuant to a standard unsigned license agreement.

= purchase of a good. o “Custom” = software subject to a license agreement where it is clear that the customer was

aware of its terms. = royalties.

4.4.4 – Dividendss.248(1) provides that a dividend includes a stock dividend.

Inclusions in Income – Dividends: s.12(1) – include in TP’s income for the year

o (J) – dividends RECEIVED from resident corporations.o (k) – dividends RECEIVED from non-resident corporations.

Prevention of Double Taxation: Sections 82(1)(b) and 121 provide relief from double taxation by allowing individual shareholders a

dividend tax credit in computing tax payable.

Witholding Tax for Dividends to Non-Residents See non resident taxtion

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4.5 – Deductions from Business / Property[Intro] Expenses incurred in the normal course of carrying on a business and which are deductible according to normal and accepted business and commercial practice are in principle deductible (Royal Trust; Daley) as part of a TP’s calculation of profit required by s.9(1). It is only where there are specific restrictions in the Act that a business expense may be limited or disallowed.

S.20(1) – Specific Deductions Permitted – notwithstanding the limitations in s.18(1)(a), (b), and (h), there are some specific deductions expressly permitted:

(c) – interest (See Below)

General Limitations on Deductions (applies to entire ITA) S.67 – no deduction shall be made unless the expense or outlay was REASONABLE in the

circumstanceso S.67.1(1) – amount paid in respect of the consumption of food, beverage or entertainment is

deemed to be 50% of the lesser of: (a) the amount actually paid/payable, OR; (b) an amount that would be reasonable in the circumstances.

o S.67.1(2) – Exceptions – (1) does NOT apply to an amount paid in respect of food/beverages/entertainment where the amount:

(a) was paid as compensation (f) is in respect of one of six or fewer special events where the food/beverage/entertainment

is generally available to all employees.

S.18(1) – Limitations on Deductions of Expenses – In computing income, no deduction permitted in respect of:

**(a) – outlay or expense EXCEPT TO THE EXTENT that it was made or incurred by the TP for the purpose of gaining or producing income from property/business.

(b) – capital outlay or loss – an outlay, loss of replacement of capital, a payment on account of capital or an allowance in respect of deprecitation except as expressly permitted by this Part.

o See current vs capital expenditures (pg. 35) (h) – personal living expenses, other than travel expenses incurred while away from home in the

course of carrying on the TP’s business (l) – use of recreational facilities and club dues (p) – limitation regarding personal services business expenses – an outlay or expense to the extent

that it was incurred by a corporation for the purpose of gaining or producing income from a personal services business, other than [listed exceptions], that would, if income of corporation were from a business other than PSB, be deductible in computing its income.

(r) – automobile expenses – amount paid to employee for an automobile allowance that exceeds the maximum amount prescribed in Regulation 7306 UNLESS the employee includes the excess amounts as income.

(t) – taxes paid under this acto NOTE: s.60(o) – TP can deduct costs of objections or appeals.

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4.5.1 - Personal or Living Expensess.18(1)(h) – Personal Living Expenses No deduction shall be made in respect of personal or living expenses of the TP, other than travel expenses incurred by the TP while away from home in the course of carrying on the T’s business.

S.248(1) – “Personal Living Expenses” includes:o (a) expenses of properties maintained by any person for the use/benefit of TP or any person connected

with the TP by blood relationship, marriage or common-law partnership or adoption, and NOT maintained in connection with a business carried on for profit or with a REOP.

o (b) the expenses of an insurance policy or annuity contract where the beneficiary is the TP or a connected party.

o (c) expenses of properties maintained by an estate or trust for the benefit of the TP as a beneficiary.

>>Commuting Expenses<<Dr. E Ross Henry

Commuting to a place of business from one’s residence is a personal expense and thus not deductible. o But, travel to and from sites where business is carried on is deductible (which could include a

home-office)D: Doctor provided all services at hospital (did not see patients at home), had an office outside of home, thus travel to/from home and hospital not deducible. But travel to/from office and hospital is deductible.

McCreath Travel between primary office and home office is not a deductible commuting expenses.

o The home office exists for convenience sakes only. --------------------------------------------------------------------------------------------------------------------------------------------------s.18(1)(l) – Use of Recreational Facilities and Club DuesNo deduction shall be made in respect of an outlay or expense made after 1971 for the use of a yacht, camp, lodge or golf course or facility OR as membership fees or dues in any club, the main purpose of which is to provide dining, recreational or sporting facilities to its members.

Benton (Thomas Harry) v. MNRTP farmer operated large farm with no employees. He employed house-keeper to free him up for tasks around the farm (and she also did a little bit of farm work). TP claimed but for her services, he would not be able to perform farming functions.D: Housekeeper is a personal expense. 40% of her labour can be linked to farming and thus 40% deductible.

4.5.2 - Home Office Expenses

S.18(12) – Work Space in Home – in computing an individual’s income from a business for a taxation year: (a) no amount is deductible in respect of a work space EXCEPT to the extent that the work space is:

o (i) the individual’s principle place of business, ORo (ii) used exclusively for the purpose of earning income from business AND used on a regular

and continuous basis for meeting clients, customers or patients in respect of the business. (b) amount deductible under (a) cannot exceed the individual’s income for the year from the business

o IE: a loss cannot be created or increased (c) but losses created by the deduction can be carried forward indefinitely.

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4.5.3 - Deduction of Interest Expense PERMITTEDAt common law, interest is considered to be a capital expenditure and therefore no deduction is permitted pursuant to s. 18(1)(b). However, s.20.(1) specifically permits the deduction of interest in computing a TP’s income for the year from business/property notwithstanding s.18(1)(a), (b) and (h). Interest may thus be deductible if the amount is reasonable (s.67) and certain conditions are met.

S.20.(1) – Specific Deductions Permitted – there may be deducted: (c) – interest PAID in the year or PAYABLE in respect of the year (depending upon method regularly

followed by the TP in computing income [IE: accrual]) pursuant to a LEGAL OBLIGATION to pay interest on:

o (i) borrowed money used “for the purpose of earning non-exempt income” from a business or property (other than borrowed money used to acquire property the income from which would be exempt OR to acquire a life insurance policy)

o (ii) an amount payable for property [IE: interest on unpaid purchase price] acquired for the purpose of gaining or producing (non-exempt) income from the property or for the purpose of gaining or producing income from a business (other than borrowed money used to acquire property the income from which would be exempt OR to acquire a life insurance policy)

or a REASONABLE AMOUNT in respect thereof, whichever is the lesser.

1. Purpose of earning income In Ludco, the SCC held that there must be a “reasonable expectation of income” at the time the

investment was made in order for a TP to deduct interest under s.20.(1)(i). The court will apply an objective test although the TP’s subjective intention may still be relevant (Ludco).

o An ancillary purpose of earning income is sufficient (Ludco), regardless of whether the primary motive of the TP was to earn non-eligible income (Singleton).

o Gross income, not net income or profit (Ludco)

2. Eligible vs. Ineligible Use Borrowed funds must be used for the purpose of earning non-exempt income.

o No deduction is allowed for interest on funds used to produce exempt income, purchase life insurance, for personal consumption, or to produce capital gains (Bronfman)

In determining whether money was borrowed for an eligible use, the court will look at the direct use of the funds. If there is a direct link (IE: look where money put) between the borrowed funds and the eligible use, this element is satisfied (Singleton).

3. Original vs. Current Use It is the current use of the borrowed funds which is relevant in assessing deductibility, not the original

use (Bronfman) TP must be able to show that the borrowed funds are still being applied to an eligible use (Bronfman)

4. ReasonablenessNOTE: arm’s length interest will not tend to be found unreasonable. Recall Stewart, in which minister argued unreasonable rate of interest but court held it was a marketplace accepted amount negotiated at arm’s length.

Note: s.20(3) – if a TP borrows additional money to pay down money previously borrowed money it will be deemed to have been borrowed for the same purpose as the original money borrowed.

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Singleton v. The Queen (2002, SCC) #Direct use?TP took money out of his firm’s capital investment account to purchase a house, and then replaced the money he took with a bank loan on the same day. ?: was the money borrowed used for the purpose of producing non-exempt income under s.20(1)(c)(i)?D: yes, deductible. Does not matter whether primary motve of the TP was to make capital gains.

Ludco Enterprises Ltd. v. The Queen (2001, SCC) #Purpose to earn income?TPs borrowed $6.5 million and used it to purchase shares in two non-resident companies located in tax haven countries. The companies used the funds to invest in CAD and US government debt obligations which were exempt from withholding tax by Canada and the US, and the companies earned interest on these debt obgliations. The interest income was not subject to CAD tax since the companies were non-resident. The directors of the companies had broad discretion to pay dividends at a any time. Over a period of 8 years, very minimal dividends ($600K) were paid by the companies to the TPs, amounting to only 1/10th of the interest ($6 million) that the TP’s paid on the borrowed funds. The TPs claimed a deduction each year for the interest expense on the the $6.5 million they had borrowed to buy the shares. ?: Here the dirct use of the borrowed funds was to purchase shares. The issue is whether the purpose was to earn income?D: deduction permitted. TPs had a reasonable expectation of income derived from the nature of the investment, the companies investment strategy and the companies dividned policy. Although income was not the primary purpose for the investment, it was a purpose, and a reasonable one. Income was actually received, and even though it was a small amount in comparison to the capital gains and interest charges, the sufificency of the income is not a matter for the court absent a sham. Note: majority concerned with emphasizing tax certainty: a TP should be able to act within the rules nad know what tax liability will be, without expectation that government will characterize their actions.

The Queen v. Bronfman Trust (1987, SCC)Trust made distributions of capital to the beneficiary, but instead of selling capital assets to make the payments, the trustees decided to retain the trust investments and borrow to make the capital distributions. ?: was the interest on the borrowed funds deductible by the trust?D: not deductible; must be an eligible use.Eligible and Ineligible Uses of Borrowed Money:

D: the purpose of distributing capital to the beneficiary is not an income earning purpose.Direct vs. Indirect Use of Borrowed Money:

There is no deduction permitted for interest paid on borrowed funds which indirectly preserve income-earning property but which are not directly used for the purpose of earning income from the property.

o It is not sufficient for a TP to show that it used the funds indirectly for the purpose of earning income if the indirect use of the funds was not an eligible use.

D: Note: the trust would have been entitled to a deduction if it had sold income producing capital assets to obtain cash to make the capital distribution, and then borrowed funds to replace the income generating assets.

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4.5.4 – Policy Reasons for Denying DeductionsS.67.5 – Bribery of Certain Officials

(1) non-deductibility of illegal payments – in computing income, no deduction shall be made in respect of any outlay made or expense incurred for the purpose of doing anything that is an offence under s.3 of the Corruption of Public Officials Act or any sections 119 -101, 123-125, 393 and 426 of the Criminal Code, or an offence under s.465 of the CC as it relates to an offence described in any of those sections.

o CC offences mentioned in the ITA: 119 – bribery of judicial officers, MPs, MLAs, 120 – bribery of justice, peace officer, police commissioners; 121 – frauds on government; 123 – municipal corrpuption; 124 – selling/purchasing office; 125 – influencing/negotiating appointments or dealings in offices; 393 – fraudulently obtaining tranposrtation (bribing fare takers); 426 – secret commissions; 465 – conspiracy to commit an offence

S.67.6 – Non-deductibility of Fines and Penalties In computing income, no deduction shall be made in respect of any amount that is a fine or penalty (other than

a prescribed fine or penalty) imposed under a law of a country or of a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty.

Imperial Oil Damages and contractual penalties are generally deductible if they meet the general test of

deductibility under section 9, paragraphs 18(1)(a) and (h).

Recall: Buckman – lawyer embezzled funds from clients. Income was taxable, and expenses would be deductible as well. MNR v. Eldridge (1964)

Income produced from an illegal business is still taxed. Deductions are claimable, but the onus is on the TP to prove them.

o Regular expenses will be permitted, but certain types will never be recognized. Illegal businesses are taxable just like legal ones. Some expenses were deductible if TP could prove them Some expenses were NOT: expenses of bailing herself out of prison, etc. Allowed: rent on the apartment used in the business, except for an additional amount that could not be proven

to be for business. Bribes of police = not deductible. Bail bonds to get herself out of prison = not deductible. Payment to buy out an entire issue of a newspaper so people would not see her story = not deducitble because

judge thought it couldn’t have hurt her business.

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5. Capital vs. Current Expenditures & Timing

5.1 - Capital vs. Current Expenditures Current expenses (IE: non-capital expenditures) are generally fully deductible in the year incurred. S.18(1)(b) – In computing income from business/property, no deduction shall be made for an outlay,

loss or replacement of capital or a payment on account of capital. o Capital outlays can be added to the overall ACB of the larger capital asset, or held as a distinct

capital asset in and of itself.

Repairs/Maintenance vs. Upgrades/Additions of Tangible Assets Where an asset is restored to its original condition, the maintenance and repairs are deductible current

expenses (Gold Bar). o New technology may be used to effect a repair even if doing so goes beyond restoring the asset

to its original condition (Gold Bar).

Capital Expenditrues Capital expenditures generally provide an enduring benefit to the TP. Where an asset has been substantially improved beyond its original condition or where an integral part

of the asset has changed in character, the upgrades or additions may constitute capital outlays. (Shabro).

Shabro Investments Did TP make a material/significant improvement/upgrade, adding substantially to the capital asset?

Floor of building had to be reconstructed on top of newly sunken steel piles. The work made the building into a long term usable asset – a character it did not previously have due to a serious construction defect. Modern technology was used to effect defect. D: capital outlays. The nature of the property was changed. The work made the building into a long term usable asset – a character it did not previously have due to a serious construction defect.

Gold BarBricks falling off building Repairs were made using modern building techniques. D: Current expenses. Nothing was done more than what was required to repair deteriorating conditions.

Look to the purpose of the expenditure by the TP: is it to improve (make different or beter) or to return to pre-damaged state?

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5.2 – Timing of Recognition of Revenue and Expenses

5.2.1 – Amounts Received and “Receivable”S.12(1) – Income Inclusions - The following amounts are included in a TP’s income from business or property:

(a)(Any amount RECEIVED by TP in the course of a business:o (i) for services to be rendered or goods to be delivered in a subsequent year.

IE: retainer at a law firm is for services in future, so must be included.o (ii) under an arrangement that is repayable in whole or in part on the return (or resale) to the TP of

goods delivered to a customer. (b) Any amount RECEIVABLE by TP in respect of property sold or services rendered in the course of a business in

a given year, notwithstanding that the full amount is not due until a subsequent year. o The amount shall be deemed to have become receivable on the day that is the earlier of:

(i) the day on which the account in respect of the services was rendered, and (II) the day on which the account in respect of those services would have been rendered had

there been no undue delay in rendering the account in respect of the services.

1. Case Law Rules – “Amounts Receivable”:“Receivable” is not defined by the ITA, and its meaning has therefore been left to the courts.

J Colford (1960)Under K, entitled to 85% payment but final 15% could be heldback until architect issues certificate. Certificate was issued in the current year but payment was not due until after year-end. D: Yes, receivable in current year. All conditions precedent to payment were fulfilled.

Benaby Realties (1960)In 1954, Crown announced they would expropriate land. Payment came in 1954. ?: TP argues it had a receivable payment as of 1954, and thus the payment should count in that year.D: not receivable in 1954. Amount was not ascertained until 1954 and no clear amount could be pointed to prior to that. Does not matter that TP could not legally sue for non-payment yet.

West Kootenay Power and Light (1992)TP billed customers every two months. At end of fiscal year, it was unclear how much was owed to TP. S.12(1)(b) requires goods that have been delivered, and an amount receivable though not yet due. ?: TP has legal right to payment but is it receivable because not 100% ascertainable?D: Receivable because reasonably ascertainable. T

5.2.2. - Timing of the Recognition of Expense ITA uses words such as: “paid”, “payable”, “payments made”, and “incurred”, but does not define

them. Paid/Payable is related to the timing of Received/Receivable An expense is incurred when all conditions precedent occur that establish the TP’s legal obligation to

make the payment and the amount due is reasonable ascertainable regardless of whether immediate payment is required (J.L. Guaty Ltee)

An amount becomes receivable when the TP becomes legally entitled to the payment through fulfillment of all conditions precedent regardless of whether the TP is immediately entitled to payment. (J Colford; West Kootenay)

An amount is not receivable until the actual amount is ascertainable (Benaby Realties)o Absolute certainty, however, is not required; an amount is receivable if it is reasonably

ascertainable (West Kootenay) IE: accurate estimates can be made based on past billings and current rates (West

Kootenay)

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5.3 – LossesNon-capital losses can be used to offset a TP’s taxable income in s.3(c) as per s.3(d).

S.111(1)(a) – non-capital losses can be carried forward 20 years and back 3 years.

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6. Capital Gains

6.1 - IntroductionS.3 – Income for Taxation Year – income of a TP for a tax year for this Part is the TP’s income for the year determined by the following rules:

(b) – requires TP to calculate his taxable capital gains from all property OTHER THAN LPP, and taxable NET GAINS from LPP, and subtract from those two amounts the allowable capital losses from property OTHER THAN LPP. This results in a net taxable capital gain or net (allowable) capital loss.

--------------------------------------------------------------------------------------------------------------------------------------------------1. Meaning & Calculation of Capital Gains/Losses

S.39(1) - Meaning of Capital Gain / Loss (a) – Capital gain = Gain from disposition of any property (excluding gains from dispositions of property

that are taxed as income from a source). (b) – Capital loss = Loss from disposition of any property (excluding losses from disposition of property

that are taxed as income from a source) other than:o (i) – depreciable property

S.40(1) – Gains and Loss Calculation – *EXCEPT as otherwise expressly provided in this Part*: (a)(i) – a TP’s CAPITAL GAIN:

o = POD of the property – ACB + any outlays or expenses incurred to make disposition (b)(i) – a TP’s CAPITAL LOSS:

o = ACB + any outlays or expenses incurred to make disposition – POD of the property *Note: although there is no express provision to this effect in the ITA, according to Interpretation Bulletin IT-285R2 para.8-9, the ACB of capital property includes taxes, fees (legal/accounting/engineering), and other expenses incurred to complete the acquisition.

S.38(a) and (b) – Taxable Capital Gains / Allowable Capital Losses (a) – taxable capital gains from the disposition of property is 50% of the capital gain. (b) – allowable capital loss is 50% of the capital loss from disposition of property.

--------------------------------------------------------------------------------------------------------------------------------------------------2. Carry Forward and Carryback of Capital Losses

S.111(1)(b) – “Net capital losses” (the amount by which allowable capital losses for the year exceed taxable capital gains for the year) can be carried back three years and carried forward indefinitely.

NOTE: but are only deductible from taxable capital gains (s.111(1.1).

S.111(2) – Net Capital Losses Convertible to Non-Capital Losses - where TP dies and has remaining net capital losses, these losses can be converted to a non-capital loss to be used against any taxable income in the year of death or the year immediately preceding the year of death. --------------------------------------------------------------------------------------------------------------------------------------------------

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3. Policy Evaluation of Preferential Taxation of Capital Gains

Three Principle Policy Reasons for Taxing Capital Gain (As per Commission): 1. Equity:

o Vertical – richer people tend to create higher capital gains;o Horizontal – capital gains are treated more closely to other types of income earned.o BUT the preferential treatment of capital gains tax clearly favours higher-income earners, and is thus

not horizontally or vertically equitable. 2. Neutrality:

o Makes the system more neutral by reducing the incentive for TP to structure their transactions to look like capital transactions (still a benefit, but less than historically as until 1972, capital gains were outside of the ITA and thus exempt)

o BUT, preferential policy skews towards people seeking capital gains and delaying dispostions. 3. Simplicity/Certainty:

o Should be able to determine tax consequences and plan for it.o BUT, this is now one of the most litigated areas of tax law, so may not have achieved this goal).

Furthermore, Canada imployed a preferential rate of inclusion for all capital gains thus the distinction between income/capital gains remained important. Also gives TP lots of control over when to recognize gains/losses = simplifciaiotn that the Commission identified was lost.

Full taxation of capital gains would discourage invesmtnet by individuals and corporations.

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6.2 – DefinitionsRECALL:Regal Heights – failed to do mall development – secondary purpose to flip = ACNTTaylor – single purchase of lead for company – similar to the regular trading of lead = ACNTIrrigration Industries – trading in shares is capital = NOT ACNTArcop Investments – trading company – regular business is trading shares = business income. --------------------------------------------------------------------------------------------------------------------------------------------------

1. Property & “Capital Property”s.248(1) – “Property” – means property of any kind whatever whether real or personal or corporaeal or incorporeal and includes:

(a) a right of nay kind whatever, a share of a chose 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.

S.54 Definition: “Capital Property” – means any depreciable property and any other property, other than depreciable property, any gain or loss from the disposition of which would be a capital gain or loss. --------------------------------------------------------------------------------------------------------------------------------------------------

2. Adjusted Cost Base [ACB]S.54 Definition: “Adjusted Cost Base [ACB]” – to a TP of any property means:

where depreciable property, ACB is the capital cost to TP at that time. Where non-depreciable property, ACB is the amount laid out to acquire the property.

Recall: ACB includes all amounts paid for expenses of acquisition (IE: ACB = capital cost at purchase + expenses of acquisition)

S.43(1) – ACB for Partial Dispositions For computing TP’s gain or loss for the disposition of part of a property, the ACB of the part that was

disposed of is the portion of the ACB of the whole property that could reasonable be regarded as attributable to that part immediately before disposition.

S.47(1)(a) and (b) – ACB of Identical Properties (Averaging Rule) After 1971, where TP acquires identical properties, the overall ACB is the average of the total

combined ACB’s for each identical property. o IE: average ACB for stocks/shares/mutual funds

--------------------------------------------------------------------------------------------------------------------------------------------------3. Disposition

S.248(1) – “Disposition” – a disposition of any property INCLUDES: (a) any transaction or event entitling a TP to proceeds of disposition of the property. (b) any transaction or event by which:

o (i) where the property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, or an interest in it, the property is redeemed in whole or in part or is cancelled.

o (ii) where the property is a debt or any other right to receive an amount, the debt or other right is settled or cancelled.

A disposition does NOT include:

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(e) any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property, EXCEPT where the transfer is:

o (i) from a person or a partnership to a trust for the benefit of the person or the partnership,o (ii) from a trust to a beneficiary under the trust, ORo (iii) from one trust maintained for the benefit of one or more beneficiaries under the trust to

another trust maintained for the benefit of the same beneficiaries (j) any transfer of the property for the purpose only of securing a debt/loan, or any transfer by a

creditor for the purpose only of returning property that had been used as security for a debt/loan.o [IE: if corporation borronw in markets, the lender will acquire a debt obligation.]

(l) any issue of a bond, debenture, note, certificate, mortgage or hypothecary claimo [IE: corporation hasn’t disposed of anything – borrowed in markets and granted property rights to someone else.

When lender disposes of bond they’ve disposed of property, but corporation has not acquired it; just released from requirement to pay because covenant is fulfilled.]

(m) any issue by a corporation of a share of its capital stock, or any other transaction that, but for this paragraph, would be a disposition by a corporation of a share of its capital stock.

o IE: creation and distribution of additional shares by a corporation are not a disposition of shares.]

S.54 – “Proceeds of Disposition” [NOTE: only applies to this Part, whereas general definition of disposition applies to entire ITA]

Proceeds of disposition includes:o (a) – sale price of property that has been soldo (b) – compensation for property unlawfully takeno (c) – compensation for property destroyed, and any amount payable under a policy of

insurance in respect of loss or destruction of propertyo (d) – compensation for property taken under statutory authority or the sale price of property

sold to a person by whom notice of an intention to take it under statutory authority was given. IE: expropriated property

o (e) – compensation for property injuriously affected o (f) – compensation for property damaged, including insurance proceeds except if insurance

proceeds are used to fully repair the damage. [IE: So, would have been able to deduct the costs, but insurance covered anyways so it’s a wash.]

Compagnie Immobiliere BCN Ltee (1979, SCC) Definitions of “disposition of property” and “proceeds of disposition” are not exhaustive and must bear

both their normal meaning and their statutory meanings. Dispositions will likely occur whenever someone loses control over, or right to, an asset for whatever

reason.

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6.3 - Deemed Dispositions & Deemed Proceeds

6.3.1. Ceasing to be or Becoming a Resident of CanadaS.128.1(4) – Emigration – where at any particular time a TP ceases to be resident in Canada

(b) – Deemed Disposition – the TP is deemed to have disposed, at the time immediately before ceasing to be a Canadian resident, of each property owned by the TP for proceeds equal to its FMV at the time of disposition, which proceeds are deemed to have become receivable and have been received by the TP at the time of disposition.

o (i) Does not apply to real property situated in Canada where TP is an individual (or to a Canadian resource property or timber resource property)

--------------------------------------------------------------------------------------------------------------------------------------------------S.128.1(1) – Immigration – where a TP becomes resident in Canada

(b) – Deemed Disposition – the TP is deemed to have disposed, at the time immediately before becoming resident, of each property owned for proceeds equal to its FMV at the time of disposition.

o (i) Does not apply to property that is taxable Canadian property if the TP is an individual. “Taxable Canadian Property” = (1) real property situated in Canada and (2) shares of

private corporations (IE: not listed on an exchange) that derive their value primarily from real property situated in Canada.

Note: upon immigration, if a TP does not want the deemed disposition and deemed acquisition to affect the ACB of their taxable property, the property could be moved into a taxable Canadian property in exchange for shares in it, which is excluded under s.128(1)(b)(i)

(c) – Deemed Acquisition – the TP shall be deemed to have acquired, just before becoming resident, each property deemed by (b) to have been disposed of by the TP, at a cost equal to the proceeds of disposition of the property.

o Note: [this becomes new ACB of property]o Note: this means that immigrants are only taxed on capital gains while actually resident in

Canada.

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6.3.2. Non-arms Length and Arm’s Length Persons

1. IndividualsS.251(1) – Definition of “Arm’s Length” – for the purpose of this Act

(a) RELATED PERSONS shall be deemed not to deal with each other at arm’s length (c) where (a) does not apply, 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. o Note: Unrelated parties have been held not to deal at arm’s length when:

1. There is a “common mind” which directs or controls the bargaining for both parties to the transaction, or

2. The two parties act in concert without separate interests. 3. Price different from FMV may be another factor. Note: Business partners may or may not be at arm’s length, depending on the

circumstances of the transaction. Employees are normally at arm’s length from their employer, unless they control, or are members of a family, that control the corporate employer.

--------------------------------------------------------------------------------------------------------------------------------------------------S.252(2) – Definition of “Related Persons” – related persons are:

(a) Individuals connected by blood relationship, marriage, common-law partnership or adoption;

o S.252(6) – Blood Relationships, Etc. – persons are connected by: (a) An individual is in a blood relationship with his/her: grandparents, parents, children

(and other successive descendants), and siblings. Note: the relationship of aunt/uncle with nephew/niece, and cousins of any

degree are not included in related persons.o BUT – may not be dealing at arm’s length anyway, so careful to note

whether provision says “related” or “arms length”. (b) spouses and (b.1) CL partners are related to each other, and to the persons who are

blood relations of their spouse or CL partners (IE: in-laws are related). (c) adoption if one has been adopted, either legally or in fact, as the child of the other or

as the child of a person who is so connected by blood relationship (otherwise than as a brother or sister) to the other.

-------------------------------------------------------------------------------------------------------------------------------------------------- S.248(1) – Definition of “Common Law Partner” – means a person who cohabits with the TP in a

conjugal relationship and either:o (a) had been living in such a relationship with the TP for a continuous period of at least one

year, OR Note: proposed amendment: “has so cohabited throughout the 12-month period that ends at that time”

o (b) is the parent of a child (biological or adoptive) of whom the TP is a parent. …and once this relationship starts, then the TP is deemed to have to be in a CL partnership unless they were not cohabiting for a period of at least 90 days because of a breakdown of their conjugal relationship. --------------------------------------------------------------------------------------------------------------------------------------------------

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2. CorporationsS.252(2) – Definition of “Related Persons” – related persons are:

(b) a corporation ando (i) the person who controls the corporation, if it is controlled by one person

Note: person who holds voting control, meaning enough shares to elect the BoD, normally over 50%.

o (ii) a person who is a member of a related group that controls the corporation Note: a related group means a group of persons, each member of which is related to

each other member. EXAMPLE: If Bob holds 100% of the shares of ABC, and Bob also holds 25% of DEF, and

DEF holds 75% of ABC, than Bob is related to DEF. o (iii) any person related to a person described in (i) or (ii);

Note: a corporation is related to any person related to either the person who controls it, or any member of the related group that controls it.

EXAMPLE: Bob’s CL partner Amy is related to ABC and DEF in the example above. (c) any two corporations

o (i) if they are controlled by the same person or group of persons. ==========================================================================================

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6.3.3. On DeathS.111(2) – Capital Losses Convertible to Non-Capital Losses - where TP dies and has remaining net capital losses, these losses can be converted to a non-capital loss to be used against any taxable income in the year of death or the year immediately preceding the year of death.

S.70(5) – Capital Property of a Deceased Taxpayer – where in a taxation year a TP dies: (a) [Deceased recognizes capital gains/losses] - the TP shall be deemed to have, immediately before

the TP’s death, disposed of each capital property of the TP and received proceeds of disposition equal to the FMV of the property immediately before death.

(b) [Inheritor acquires at FMV] - any person who as a consequence of the TP’s death acquires any property that is deemed by paragraph (a) to have been disposed of by the TP shall be deemed to have acquired it at the time of the death at a cost equal to its FMV immediately before the death.

Note: if recipient is a spouse or CLP, refer to s.70(6) below.

3. Gifts and Sales not at FMV (for individuals & corporations)S.69(1) – Inadequate Consideration – Gifts and Below FMV Sales

Except as expressly otherwise provided in this Acto (a) Where property is sold in a non-arms length transaction and the actual selling price is

GREATER than FMV, the purchaser is deemed to have ACQUIRED the property at FMV. [The proceeds to the seller remain the actual selling price]

o (b) Where property is sold: (i) in a non-arms length transaction and the actual selling price is LESS than FMV, the

seller is deemed to have RECEIVED proceeds of disposition equal to the FMV. [The cost to the purchaser remains the actual cost]

(ii) to any person by way of gift inter vivos, the seller is deemed to have RECEIVED proceeds of disposition equal to the FMV.

[The cost to the purchaser is also deemed to be FMV (see below – (c)]o (c) where TP ACQUIRES a property by way of gift/bequest/inheritance, the TP is deemed to

have ACQUIRED the property at FMV

Note: where the gift or sale is to a spouse or CLP, see 6.4.1 (pg. 45)

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6.4 – Rollovers: Transfer of Capital Property to Spouse/CLP

6.4.1. Inter Vivos (gift, transfer, etc.) to SPOUSE/CLPs.73(1) – Inter Vivos Transfers by IndividualsUnder s.73(1), the transfer by an individual of capital property to the TP’s spouse or to a spouse trust will automatically benefit from rollover treatment, unless the transferor elects otherwise.

REQUIREMENTS: To qualify for rollover treatment, there must be a transfer of capital property, both the transferor and transferee must be resident in Canada, and the transferee must be either (1) the transferor’s spouse or CL partner (or a spouse trust), or (2) the transferor’s former spouse or CL partner, if the transfer is in settlement of rights arising out of their marriage or CLP (IE: marriage breakdown) (s.73(1) and (1.01).--------------------------------------------------------------------------------------------------------------------------------------------------If NO election is made (automatic), the POD on a rollover of capital property are automatically deemed to be the original ACB of the transferred property (S.73(1)(a)(ii)) unless the property is depreciable, in which case the proceeds of disposition are deemed to equal the UCC (S.73(1)(a)(i)).

[IE: no capital gain/loss to transferor because receives proceeds equal to ACB]The transferee is deemed to have acquired the capital property equal to the proceeds of disposition (s.73(1)(b)).

[IE: ACB transferred to transferee]

Note: the express provisions of s.73(1) OVERRIDES s.69(1) and the general rules in s.40(1)(a). Note: attribution rule-------------------------------------------------------------------------------------------------------------------------------------IF ELECTION IS MADE: the transferor may elect not to apply the rollover in his/her income tax return for the taxation year in which the transfer occurs. In that case, s.69(1)(b) [pg. 44] applies as usual. ==========================================================================================

1. The Attribution Rule (applies to above)

s.74.2(1)(c) – LPP – same rules above apply to LPP capital gains.74.2(1)(d) – and applies to LPP loss

S.74.2(1)(a) – The Attribution Rule – Gain/Loss Deemed that of TransferorNote: DOES NOT APPLY if: (1) transferor or transferee dies or ceases to be resident in Canada, or relationship ends (IE: if relationship ends, separating spouses/CLPs can divide property on rollover basis and defer taxation of the gain or loss on the property until the recipient ex-partner disposes of it).

S.74.2(1)(a) - Where an individual has transferred property, either directly or indirectly (IE: trust) to a recipient who is the individual’s spouse/CL partner, OR who has since become the individual’s spouse/CL partner [catches anticipatory moves], the following rules apply:

Any taxable capital gains (other than net LLP gains) shall be deemed to be a taxable capital gain of

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6.4.2 – Spousal Rollover on Death and Election

S.70(6) – Transfer to Spouse/CLP on DeathNormally, when a TP dies s.70(5) applies and any capital property of the deceased is deemed to have been disposed of for proceeds of disposition equal to the FMV of the property immediately before the death, thus realizing all capital gains or losses in the year of death. The recipient of any capital property is also deemed to have acquired the property at a cost equal to its FMV immediately before death.

However, where s.70(5) would otherwise apply but the recipient is the spouse/CLP (or a trust exclusively for spouse/CLP) of the deceased and was resident in Canada immediately before the TP’s death, different rollover rules apply. Pursuant to s.70(6), the deceased TP is deemed to have disposed of the property and received proceeds of disposition equal to its ACB immediately before the death. The result is no taxable capital gain or loss for the deceased. The recipient spouse/CLP is also deemed to have acquired the property at a cost equal to those proceeds – the ACB – at the time of the death.

S.70(6) automatically applies unless a legal representative of the deceased TP makes an election under s.70(6.2), in which case the rules under s.70(5) are applicable. (See above)-------------------------------------------------------------------------------------------------------------------------------------------------Note: where deceased has unused allowable capital losses, it may be better to experience a capital gain on this disposition and elect out of s.70(6). Note: if election made and disposition creates capital losses, they can be used against other sources of income of the deceased TP in the year of death or year immediately preceding the year of death (s.111(2)(a)). -------------------------------------------------------------------------------------------------------------------------------------------------POLICY: basically saves the state from having to support a needy widower b/c the government taxed the inheritance from deceased spouse. Less of an issue as income equality between couples increases.

EXAMPLE - Spousal Rollover on Death H has investment portfolio containing:

5K shares of Xco, with an ABC of 50K and a FMV immediately before H’s death of 100K.o Taxable capital gain of 25K.

Building has ACB of $1 million and FMV of 1.5 milliono Taxable capital gain of 250K

10Kunits of Acme income trust with ACB of 500K; FMV of 250K. o Allowable capital loss of 125K

He dies in 2007, leaving everything to his widow. He also has allowable capital losses unused from previous years (net capital losses) of 200K.

Total taxable capital gains = 275K. Total net capital losses and allowable capital loss = 325K. So per 70(6), rollover to spouse would defer 500K capital gains on the building (TCG of 250K). Rollover of the Xco shares would defer a gain of 50K (TCG of 25K). Rollover of trust units would defer loss of 250K (ACL of 125K).

Q: Can H’s personal representative usefully use the election not to have 70(6) apply?A: Yes, if the elction not to use the rollover is made on all 3 properties, there will be ACL (125K) plus net cap losses from previous years of 150K, totaling 275K to offset all of the TCG of 275K. This will leave W with ACB of actual FMV, but will not increase the tax liability of the estate in the year that ends when H dies.

The excess capital loss of 50K can be carried back to the year preceding the husband’s death (or year of death) and deducted as if it were a non-captai loss in those years.

S.74.2(1)(a) – The Attribution Rule – Gain/Loss Deemed that of TransferorNote: DOES NOT APPLY if: (1) transferor or transferee dies or ceases to be resident in Canada, or relationship ends (IE: if relationship ends, separating spouses/CLPs can divide property on rollover basis and defer taxation of the gain or loss on the property until the recipient ex-partner disposes of it).

S.74.2(1)(a) - Where an individual has transferred property, either directly or indirectly (IE: trust) to a recipient who is the individual’s spouse/CL partner, OR who has since become the individual’s spouse/CL partner [catches anticipatory moves], the following rules apply:

Any taxable capital gains (other than net LLP gains) shall be deemed to be a taxable capital gain of

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6.5 – Personal Use Property (PUP) & Listed Personal Property (LPP)1. Definitions

A) PUPS.54 – “Personal Use Property” – of a TP includes:

(a) property owned by the TP that is used primarily for the personal use or enjoyment of the TP or o (ii) a person “related” to the TP

(“Related” – pg. 43-44)o (iii) where the TP is a trust, a beneficiary under the trust or any person related to the beneficiary.

(b) the unpaid balance owed to the TP in respect of the TP’s disposition of PUP. (c) options to acquire property that would, if acquired, be PUP

Note: PUP = IE: personal residence, summer cottage, vacation property, car, furniture, etc.Note: Property owned by a trust, P/S, or corporation is PUP if the property is primarily for the personal use or enjoyment of certain individuals (IE: TP or related persons)-------------------------------------------------------------------------------------------------------------------------------------------------

B) LPP

S.54 – “Listed Personal Property” – of a TP MEANS the TP’s PUP that is all or any portion of a right to: (a) print, etching, drawing, painting, sculpture, or other similar at, (b) jewelry (c) rare folio, rare manuscript, or rare book, (d) stamp, or (e) coin

Policy: LPP, as a “collectible”, does not inevitably decline in value through use. So it is unlike PUP, in which losses are not permitted to prevent the deduction of capital losses attributable to personal consumption. -------------------------------------------------------------------------------------------------------------------------------------------------

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3. Capital Gains from PUPNOTE: Calculate capital gains from PUP using 1K rules BELOW

GAIN: A TP’s taxable capital gain from the disposition of PUP is 50% of the capital gain (s.38(a)).o The taxable capital gain is included in the TP’s income in s.3(b) and may be reduced by any

allowable capital losses. LOSS: A TP’s loss from the disposition of PUP is generally deemed to be nil (40(2)(g)(iii)

4. LPP Net Capital Gains (and LPP Loss)NOTE: Calculate capital gains from PUP using 1K rules above>>>S.41(2) – Determination of LPP Net Gain

A TP’s net gain from disposition of LPP is the amount determined as follows:o (a) calculate amount by which the TP’s total gains from the disposition of LPP exceed losses

from the disposition of LPP in the year, ando (b) deduct from the amount determined in LPP losses for the 7 taxation years immediately

preceding and the 3 taxation years immediately following the taxation year. …and the remainder in (b) is the TP’s net gain for the year from dispositions of LPP.

S.41(1) – provides that a TP’s TAXABLE net gain from the disposition of LPP is 50% of the net gain determined under s.41(2).

[Gain Affects] A TP’s taxable net gains from the disposition of LPP are included in the income equation in S.3(b)(i)(B). Taxable net gains are combined with the TP’s other taxable capital gains for the year (s.3(b)(i)) and any allowable capital losses for the year (other than LPP losses) may be used to offset the gain (s.3(b)(i)(ii)). [Loss Affects] Where a TP’s total losses from the disposition of LPP exceeds the total of the TP’s gains for the year from the disposition of LPP, the TP has incurred a LPP loss (S.41(3)). A LPP loss is not included in the income calculation under s.3(b)(i)(B). However, the LPP loss can be carried forward 7 years and back 3 years (s.41(2)(b)) but may only be used to offset taxable net gains from the disposition of LPP in those years.

S.46(1) – The $1,000 Rule: APPLIES TO PUP & LPP Where a TP has disposed of PUP (including LPP):

o (a) the ACB of the PUP is deemed to be the greater of the actual ACB or $1,000.o (b) the POD of the property are deemed to be the greater of the actual POD or $1,000.

>>S.46(2) – Partial Disposal of PUP: Where TP has disposed of only part of a PUP (including LPP):

o (a) the ACB to the TP is deemed to be the greater of (i) the ACB [actual or deemed per 69(1)] of that part and (ii) the apportioned amount of $1,000 that the ACB of the part is to the ACB of the whole of the property (IE: total ACB/# of pieces)

Partial ACB = ACB / # of pieces (ii) = ACB of part / ACB of whole [as a set] * 1Ko (b) the POD of the part disposed of shall be deemed to be the greater of (i) the POD [actual

or deemed per 69(1)] of that part and (ii) the apportioned amount of $1,000 that the POD of the part is to the whole of the property (IE: total POD/# of pieces).

(ii) = POD of part / POD of whole [as a set] * 1K>>S.46(3) – PUP Ordinarily Disposed of as a Set: Where a number of PUPs (including LPP) that are ordinarily sold as a set

o (a) are disposed of by more than one disposition so that all of the properties have been acquired by one person or by a group of non-arms length persons, AND

o (b) before the first disposition, the set had a total FMV of more than $1,000, …the properties shall be deemed to be a single PUP and each disposition shall be deemed a part of

that property (refer to method in s.46(2)). [[[HERE = POD = FMV of the set sold as a set!!

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6.6 – Principal Residence Exemption A TP’s residence is generally primarily for personal use and therefore PUP

o However, any capital gains realized by a TP on the disposition of a property may be exempt from tax for each year in which the residence qualified as a principal residence.

A TP’s loss from the disposition of PUP is generally deemed to be nil 40(2)(g)(iii) PRE calculated in the year you dispose of the property.

S.54 Definition – “Principal Residence” S.54 - A principal residence is a property that is a housing unit, leasehold interest in a housing unit or a share in

capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation that is owned, whether jointly or otherwise, in the year by the TP where:

o (a) the housing unit was ordinarily inhabited in the year by the TP, the TP’s spouse/CLP, or a child of the TP

Note: “ordinarily inhabited” does not require continuous inhabitation; must be living in it in a normal way through some part of the year, even 2 weeks of a year at a cottage (if not rented out for other time)

o (c) a PR must be designated by the TP. Where the TP owns multiple properties, only one may be designated as a PR for each taxation year. The designation is made at the time of disposal of the first property.

Different rules apply for Spouses/CLPs & Families (See below)==========================================================================================

1. Spouses/CLPs & FamiliesBefore 1982:

Each married spouse could claim the PRE if each spouse owned a property separately and not as a JT with the other spouse.

1982 to date: Only one PRE may be claimed by a family, comprising of the MARRIED spouses and any unmarried

children under the age of 18. Spouses who are legally separated and living apart may each claim a personal residence. CLPs could still claim second exemption.

1993 to date: CLPs limited to one principal residence (including any unmarried children under the age of 18)

o S.248(1) – Definition of “Common Law Partner” – means a person who cohabits with the TP in a conjugal relationship and either:

(a) had been living in such a relationship with the TP for a continuous period of at least one year, OR

Note: proposed amendment: “has so cohabited throughout the 12-month period that ends at that time”

(b) is the parent of a child (biological or adoptive) of whom the TP is a parent. …and once this relationship starts, then the TP is deemed to have to be in a CL partnership unless they were not cohabiting for a period of at least 90 days because of a breakdown of their conjugal relationship.

2001 to date: Same sex couples limited to one principal residence.

==========================================================================================

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2. ½ Hectare for Use/EnjoymentUp to ½ Hectare: A principal residence is deemed to include up to one-half hectare (1.24 acres) of surrounding land that may reasonable be regarded as contributing to the TP’s use and enjoyment of the housing unit as a residence (S.54).

Unless the TP uses the land to earn income, courts and the CRA will accept without proof that land up to one-half hectare does contribute to the TP’s use and enjoyment (IT-120R6).

Greater than ½ Hectare: Any land in excess of one-half hectare is deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the TP can establish it was necessary to such use and enjoyment (S.54). CRA requires the excess land to be “clearly necessary”, not merely desireable (IT-120R6).

TEST: TP must establish on a BoP that without the contended land they could not practically have used and enjoyed the unit as a residence (Rode).

Courts will primarily consider objective evidence, although subjective evidence on matters of lifestyle may be marginally relevant in the determination (Stuart).

o Exception (Alternative Weak Argument) – In Carlile, the FCA ostensibly approved a subjective test where the land does not qualify on the objective test. However, subsequent cases have been dismissive of the reasoning in Carlile, preferring objective evidence (Stuart).

Accessibility to roads and utilities from residence may lead court to find the excess land necessary (Stuart)

If by-laws permit subdivision of land, but TP chooses not to subdivide, the TP will not be given the PRE deduction for the excess land (Stuart)

Cassidy v. The Queen (2011, FCA) Land in excess of one-half hectare is considered necessary if zoning by-laws exist that impose minimum

lot sizes or forbid subdivision of land.o If by-laws change, the PRE for the excess land will be apportioned based on the number of

years in which the restrictions applied.When TP purchased property by-laws precluded him from acquiring less than the entire 2.43 hectares. Property was his principal residence. Before sale, by-laws change. CRA claims portion of land over ½ hectare is not exempt by the PRE. TP argues PRE for years in which by-laws applied.D: PRE applies to entire property for all years that by-laws existed. ==========================================================================================

3. Calculation of PRES.40(2)(b) – Calculation of Princiapl Residence Exemption

Capital Gains after PRE = A – (A x B / C) PRE = A x B /C

o First calculate the total capital gain (A)o B = one plus the number of tax years for which the property was a PR and for which TP was

resident in Canada. Note: the plus one does not have to be used here by the TP is not needed

Policy: allows TP to swap PRE between new/old residence in same year.o C = total number of tax years that TP owned the housing unit.

Note: any partial years = whole years for calculation. ==========================================================================================

4. Other PRE Considerations A TP may buy, renovate, occupy and sell a series of PR’s over the years.

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o But if the transactions become too numerous, the residences may become the subject of an adventure in the nature of trade (Isaaks; Nowoczin; Vogan).

TP claiming the PRE must be resident in Canada during the year of designation, but the property may be located outside of Canada.

A homeowner who vacates the PR and rents it out may continue to claim the dwelling as a PR for a maximum period of absence of 4 yeas as long as the owner elects under s.45(2) to treat the dwelling as PUP while renting it out.

o A period of absence greater than 4 years is permissible on work relocation. o A homeowner who vacates the residence in order to move at least 40 KM closer to a new place

of employment may continue to claim the PRE for the property for the duration of the relocated job plus one year or until death.

==========================================================================================5. PRE Policy

If we didn’t have this, no one would sell.o Most people who are selling are likely going to buy back in to a market – if have to pay tax on

their gain, will have to buy back in at a lower cost, or get a loan to buy back in.o No one will move in a different market, then.o (Plus there is the problem of negative equity in the housing market right now)

However, the exemption doesn’t bring things to neutral; perceived way of saving for retirement – when retire move into smaller place, have difference between house/condo to live off.

o Though now kids aren’t moving out and parents have to keep their big houses more often.o Plus the rate of increase in housing values is slowing.o Baby boomers are a problem

So this exception makes sense but also distorts. Plus government is controlling people by getting people to take on oblgiations like mortgages, making

us less likely to rise up against them? Our system is probably why we don’t have such a housing crisis as there was in the US

o But its still bado Renter credit exists, but you have to be really poor.

7. Depreciable Property & Capital Cost Allowance (CCA)

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Depreciable property is a class of property included in the definition of capital property under s.54. Recall: s.18(1)(b): in calculating income from business/property, no deduction permitted for capital

outlays

s.20(1)(a) – Can Deduct CCA: S.20(1)(a) allows a TP to deduct the CCA of certain capital assets allowed by regulation

notwithstanding the limitations on deductions in 18(1)(a), (b) and (h).o In computing income for tax purposes, the specific CCA rates set out in the ITA must be followed rather than the

GAAP rates of depreciation.

Policy: CCA is a recognition that the depreciation of capital assets is a true cost of doing business that must be accounted for in taxation. CCA attributes the depreciation of assets to the proper accounting period and establishes a proper value for the asset at any given time. --------------------------------------------------------------------------------------------------------------------------------------------------S.13(21) – Definition of “Depreciable Property”

Depreciable property is capital property where a deduction is available. o It is property acquired by the TP for the purpose of earning income from property/business that has an enduring

benefit to a business, is not consumed in income-earning process, and is not part of inventory (IE: not bought to be resold).

o IE: ships and boilers in Canada Steamshipo IE: new pilings and concrete floor in Shabro

--------------------------------------------------------------------------------------------------------------------------------------------------Regulation 1100(1)(a) – outlines the maximum amount of CCA deduction permitted under 20(1)(a):CCA = UCC x %

(i) Class 1 = 4%o Buildings

(ii) Class 2 = 6% (iii) Class 3 = 5% (iv) Class 4 = 6% (v) Class 5 = 10% (vi) Class 6 = 10% (vii) Class 7 = 15% (viii) Class 8 = 20%

o Residual/default class (ix) Class 9 = 25% (x) Class 10 = 30%

o Most vehicles

Regulation 1101(1) – Separate Classes: assets of each separate business source must be kept in separate classes.

Regulation 1102(1) – Exclusions: specifically excludes certain items from the classes of property in Schedule II: (a) otherwise deductible expenses (b) inventory (c) property that was not acquired for the purpose of gaining or producing income.

Bens Ltd. CCA cannot be deducted on property that was acquired without any intention of gaining/producing

income (IE: 1102(1)(c))

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TP purchases residential properties next to his bakery. His intention from the beginning is to remove houses. TP tried to claim CCA on houses, claiming they were depreciable properties of the bakery business.D: No CCA. Never any intention to use houses for the purpose of producing income (1102(1)(c). Houses were actually an impediment to income.

Regulation 1102(2) – Land Excluded: The classes of property in Schedule II are deemed not to include land on which the property is located.

Notes: CCA is an optional deduction; if business already in a loss position, it will not claim its CCA. S.39(1)(b)(i) – no capital losses on depreciable property are permitted.

--------------------------------------------------------------------------------------------------------------------------------------------------Undepreciated Capital Cost (UCC)

s.13(21) – “Undepreciated Capital Cost”UCC = (A+B) – (E+F)

A = total cost of all acquisitions of property in that class IE: includes property which is no longer in TP’s possession – any ever acquired.

B = total recapture ever recorded (assume Nil) IE: amount included in TP’s income in previous tax years.

E = Total CCA previously claimed in that class IE: amount claimed under 20(1)(a) in previous years, including any “terminal loss” deducted.

F = The lower of (i) original capital cost and (ii) total proceeds of disposition of assets of that class.

Note: UCC calculation is thus cumulative and reflects all acquisitions and dispositions of property in a particular class since the first asset in the class was acquired.

Note: In computing UCC for a particular year:[UCC of the class at end of previous year] – [CCA claimed for the previous year] + [cost of acquisitions in the year] – [proceeds of disposition (up to cost) in the year]--------------------------------------------------------------------------------------------------------------------------------------------------

Regulation 1100(2): The Half-Year Rule The amount by which cost of acquisitions in the year (in that class) exceed proceeds from disposition

(in that class) is subject to the half-year rule. o IE: only 50% of the value can be put into the class of assets.

Note: if dispositions > acquisitions in the year for that class, 1100(2) has no application. --------------------------------------------------------------------------------------------------------------------------------------------------

Terminal LossS.20(16) - Where:

(a) at end of tax year (A+B) exceeds (E+F) [IE: there is a positive UCC], and (b) TP no longer owns any property of that class [empty class], then (c) TP must deduct the amount of excess determined under (a) [IE: a terminal loss], (d) and cannot claim CCA [because no property left in the class]

Note: the whole amount of the terminal loss is deductible from income from business/property. It is not a capital loss.

IE: So, you can have a capital gain on depreciable property, but CANNOT have a capital loss. 54

--------------------------------------------------------------------------------------------------------------------------------------------------Recapture

S.13(1) - When UCC at year-end is a negative amount, there will be recapture for that amount included in the TP’S income.

IE: at end of tax year (E+F) exceeds (A-B), recapture. Note: if you sold off the most expensive items in a class, such that the remaining items were worth less

in total than the one sold, you would probably refill the class, unless terminating the business. Note: recapture cannot exceed CCA previously deducted, since F is proceeds of disposition UP TO

ORIGINAL CAPITAL COST.

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A.1. Moving Expenses (SUBDIVISION E DEDUCTION)S.62(1) – Moving Expenses

S.62(1) - There may be deductible from a TP’s income from a tax year amounts paid for incurred for moving in respect of an “ELIGIBLE RELOCATION”, to the extent that:

o (a) the moving expenses were not paid on the TP’s behalf by an employero (b) the moving expenses were not deducted in a previous yearo (c) the total of those amounts DOES NOT EXCEED (i) the amount earned by the TP from

employment or business in the new work locationo (d) and all REIMBURSEMENTS and ALLOWANCES received by TP in respect of those expenses

are included in income.

S.248(1) – “Eligible Relocation” – is a relocation where:o (a) relocation occurs to ENABLE the TP

(i) to carry on business or to be employed, at a new work locationo (b) both old and new residences must be in Canada, ANDo (c) the residence must be at least 40KM closer to the new work location than the old residence

was (by the shortest route normally travelled). --------------------------------------------------------------------------------------------------------------------------------------------------IT-470R - Para 35 – No taxable benefit if an employer reimburses the employee for moving expenses either because (1) the employee was transferred or (2) the employee accepted employment at a place other than where the former home was located. IT-470R - Para 36 – No taxable benefit where an employers pays employee’s moving expenses out of a remote location at the termination of employment. --------------------------------------------------------------------------------------------------------------------------------------------------

Moving expenses may still be deductible even where the TP relocates PRIOR to finding employment/business at new location (IE: TP moved 16 months before finding job) (Abrahamsen)

There is no requirement for the TP to relocate within a specified time frame after commencing employment/business at a new location (IE: TP can start new job and wait years before moving) (Beaudoin; Jaggers; Beyette)

S.62(3) – Definition of Moving Expenses (Applies to Students AND non-students) S.62(3) – moving expenses includes:

o (a) – travel costs (including reasonable amounts on meals/lodging), from old residence to new residence.

o (b) costs of transporting household effects (IE: goods) from old to new residenceo (c) costs of meals and lodging near old/new residence for TP and members of the TP’s

household for up to 15 days NOTE: not limited by the 50% rule in s.67.1 (IE: full deductibility for up to 15 day

o (d) cost of cancelling lease at old residenceo (e) costs of selling old residenceo (f) if old residence is sold by TP (or TP’s spouse/CL partner) legal fees and transfer taxes

(other than GST) of the NEW PROPERTYo (g) interest, property taxes, insurance premiums, and utilities up to a maximum of 5K for the

old house IF (i) the old residence is not ordinarily occupied (by TP, TP’s family, or rented) and (ii) reasonable efforts are made to sell the old residence

o (h) costs of revision of documents to reflect the new address of TP’s residence or of connecting/disconnecting utilities.

...but does NOT include (other than costs in (f)), other costs incurred by the TP for the acquisitionNOTE: moving expenses must be deducted in year of move but excess can be carried to future years. 56

A.2. Moving Expenses for STUDENTS (Subdivision E deduction) To the extent that a student receives scholarships/bursaries in excess of his/her exemption for the year

(IE: amounts included in income), can deduct moving expenses. See definition of “Moving Expenses” above!

S.62(2) – Moving Expenses for Students S.62(2) - There may be deducted for a tax year the amount that TP would be entitled to deduct under

(1).

S.62(1) – Moving Expenses S.62(1) - There may be deductible from a TP’s income from a tax year amounts paid for incurred for

moving in respect of an “ELIGIBLE RELOCATION”, to the extent that:o (a) the moving expenses were not paid on the TP’s behalf by an employero (b) the moving expenses were not deducted in a previous yearo (c) the total of those amounts DOES NOT EXCEED:

(ii) [FOR STUDENTS] – the total of scholarships, grants, bursaries etc. in EXCESS of the exemption for the year (IE: amounts included in income)

o (d) all REIMBURSEMENTS and ALLOWANCES received by TP in respect of those expenses are included in income.

S.248(1) – “Eligible Relocation” S.248(1) – a relocation where

o (a) relocation occurs to enable TP (ii) [FOR STUDENTS] to be a student in FULLTIME attendance enrolled in a

postsecondary program at a college or university also referred to as a new work locationo (b) both residence must be in Canada, AND

As per s.62(2) EITHER the new or old residence is in Canada (not both)o (c) the residence must be at least 40KM closer to the new work location than the old residence

was (by the shortest route normally travelled).

Scholarships / Bursaries / Grants / Etc. A TP must include in income amounts received for scholarships, grants, bursaries, etc., that EXCEED the

TP’s scholarship exemption for the year under S.56(1)(3). S.56(1)(3) exempts all scholarships/bursaries/grants in connection with enrolment in an education

program that qualifies for the educational tax credit (118.62) which requires the TP be enrolled in a “qualifying educational program” at a “designated educational institution”.

o “Qualifying Educational Program” = minimum 3 consecutive weeks, 10 hours per week.

o “Designated Educational Insitutiton” = Canadian and foreign university’s and colleges, provided, if foreign, the program is at least 13 weeks long.

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APPENDIX 1 – Policy Shit

Tax Policies Normative Theory Underlying the Taxation system : The Fundamental purpose of a tax system

is to raise revenue for a government’s purposes. The fairest, most neutral tax system of all would be no tax system. that said, since we need revenue for gov’t, the tax structure should be made as neutral, equitable, and simple as possible

Tax Equity

Vertical Equity Idea that those who have more should pay more

Horizontal Equity People who are similarly situated should be treated the same (i.e. pay the same amount of

tax) Asserts that those who have the same amount of accretions to wealth, regardless of form,

should be subject to same levels of taxation. E.g. employee fringe benefits – such as a company car

o Argument that value of benefit should be treated as moneyTax Neutrality

Taxes should avoid distorting market mechanism of personal decisions (i.e. influencing people’s conduct in the market) however, they always do this. Influence how people structure finances, engage in transactions, and decide where and how to live.

In Canada, for tax purposes we interpret common law, married couples etc. as being in the same situation

Tax credits for making films in the province bringing in business; highly competitive world market

Tax Simplicity A. Comprehensiveness B. Certainty: taxpayer should be able to determine with some certainty what the

consequences will be of a given financial action/situation shouldn’t be up to the discretion of the tax-collecting body

o The law/rules should be clear, and enforcement should be according to their tenets C. Compliance should be easy – shouldn’t be impossible for a reasonably well-educated

person to file their own tax returno Shouldn’t cost a high price to comply

D. Administrative convenience o Shouldn’t be too costly for the government to comply o If government has to spend a lot, will get less money and may not make sense to bother

with collection. Note: one big advantage of HST was the money saved in harmonized collection

o Canada has a highly efficient collection system E. Taxes should be difficult to evade

o Otherwise those who do pay are also paying for those who don’t – honest taxpayers shouldn’t pay more to compensate for dishonest ones.

o System should impose tax at a level that is easy to collect E.g. directly taxing employment income through the employer

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APPENDIX 2: OTHER SHITTaxation and Aboriginal PeoplesExemptions from Tax

o ITA, s.81(1)(a) an amount declared to be exempt from income tax by any other enactment of parliament shall not be included in the income of a TP.

o ITA, s149(1)(c) municipal authorities exempt from taxationo ITA, s.149(1)(d.5) municipal corporations exempt from taxation.

Indian Act, s. 87(1)(a) Exemption for interest of an Indian or band in reserve lands or surrendered landsBases of exemption: s. 87 of Indian Act; Treaty Rights; pre-contact Aboriginal rights, sovereignty

o Mitchell v. Canada

Benoit Idea that certain FN groups are exempt by reason of treaties signed by their forebearsTreaty 8 was in play here

o Didn’t mention taxation, but at time of negotiation commissioners reported back to Ottawa saying they’d assured FN that the treaty wouldn’t lead to imposition of any tax (among other things) so oral assurances given that it didn’t open the way to imposition of any tax

Issue: So do we have to interpret treaty 8 as exempting all descendents from all taxes for all time? Held: Not everyone – exempts status Indians.

o So note that corps must be registered as Indians under the Indian Act to claim exemption

s. 87(1)(b)87(1)(b): “the personal property of an Indian or a band situated on a reserve” is exempt from taxation.

o Issue: what counts as situated on a reserve?

Williams Bastien Estate and Dube say that Williams is the correct test.Issue: taxability of unemployment insurance benefits rec’d by Williams(1) Reaffirmation of Indian Act exemption – policy reasons

o Discusses Mitchell v. Peguis all agreed that property not subject to seizure, but on different grounds

In Williams, Gonthier confirms LaForest’s policy grounds from PeguisExemption is not a mechanism for addressing less favourable economic status of aboriginal people. It’s meant to

ensure that lands that were set aside for FN ppl and the personal property situated on those reserves which have been theoretically granted by the Crown are not repossessed by gov’t through taxation powers. Wouldn’t be a protected grant of reserve property if always subject to tax and potential repossession on nonpayment of debts.

(2) Connecting Factors test to determine whether property is situated on reserve o Physical property is simple: considered to be situated where paramount location is. o Rights to receive streams of income – trickier.

Early cases essentially applied conflicts of law test – where is the debtor? Normally person seeking to enforce payment of a debt owing must take action where the debtor lives. So if debtor not on reserve, no dice.

But…this was determined not to be the appropriate method.o Highly fact-driven assessment – is the property connected enough to the reserve to count?o Job 1: W was a member of Penticton band, worked for non-Indian employer, doing manufacturing work. Employment was

performed on the reserve, though company head office wasn’t. We look to where em’ment was performed for most taxation purposes. Source of TP income was on the reserve,

would be exempt.o Job 2: Administrative work, paid by band, designed to generate em’ment opportunities for FN ppl. Also exempto Then TP claimed UI benefits (now EI) on basis he’d qualified for it through these jobs

Cheques were generated at a computer centre in Vancouver, and paid out of federal funds by Fed Crown, collected from em’ers and em’ees across the country

Assessed tax on UI benefits easier to find b/c there’s a federal trail attached to his SIN. If he didn’t report the income from the jobs, hard for CRA to find.

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o Court applied connecting factors test Location of em’ment that led to him being entitled to receive the benefits was the important factor. If em’ment had

been performed off the reserve, then the benefits would likely not have been sufficiently connected. Federal Crown is everywhere, permeating all of Canada Fact that cheques were printed in Vancouver is irrelevant Fact that TP lived on reserve wasn’t determinative – not req’d

o So, not just the location of the debtor – look substantively at connection to the reserve, and if there is a concrete substantive connection then benefits will be exempt.

Following Williams, seems to have been a sense that a greater range of income would be exempt. o Many cases followed, lots of claims, but things swung back the other way.

Recalma [1998, FCA]TP had ~400,000 accumulated capital. Put in BMO at Park Royal, so technically not off reserve land. But then invested in mutual fund

trust (which invested in int’l companies w/ no connection to Cdn/reserve etc.), which meant the funds were not in any way deposited in the PR bank branch

So, argued that capital and income was linked to the reserve through the TPs connection to reserve. Had earned most of the money through fishing, and lots invested in on-reserve assets; contributed to on-reserve endeavours etc.

Argued their connection, and using $ to pursue trad way of lifeResult: not exempt Martha thinks this is right, but that the reasons are off the rails.

Draw dividing line b/w two types of income (1) Income ‘integral to the life of the reserve’(2) Income earned in commercial mainstreamCould have one or the other – no middle ground.

So after Recalma courts would say “was this earned in commercial mainstream?” and if yes, not exempt. Did it contribute to FN way of life? May be exempt.

But Williams didn’t talk about this at all, and in that case TP’s income wasn’t particularly part of trad way of life. didn’t care about the type of activity or connection to the reserve; just looked at where income was sourced from.

Issue: is all income earned off the reserve going to be in the commercial mainstream, now?

Akiwenzie 2004 DTC 6007 (FCA)We can see Herschfield J and TCC being less strict on the Connecting Factors TestStill a leading case, but at least some judges are starting to look at it differentlyFacts

TP claimed deduction for 45% of his salary from Indian Affairs CanadaHis T4 showed all income as taxable, of course, so he needed to claim it out framed as a deduction. CRA denies

deduction. On appeal to TCC, showed that 20% of duties were carried out on reserve, which was held to be exemptTCC also found that all his income could be determined to be situated on each and every reserve in Canada that he worked

with, so 100% deductibleFCA: Crown abandoned argument w/ respect to the 20%, but said other 80% was taxable.

Basically TP argued he worked his entire adult life for FN ppl – born on reserve, still resides on a (different) reserve and commuting to office. Leader in FN community, and all job was about creating connections to improve life on reserve.

20% physically on reserve for work (i.e. talking to band leaders etc. – not counting the time he resides there)but rest of work should count as well.

FCA found not situated on a reserve – standard isn’t to situate on every reserve affected by his workJust b/c work was beneficial to reserves doesn’t make the cut

FCA said they wouldn’t have exempted the 20%, but by this point CRA had dropped that part of the fight already anyway.

Southwind [FCA]Business income – TP lived on reserve, had logging K business (SP)

One client, an off-reserve company, and did work off-reserve, but had office/home on reserve. Held: CF Test

Also considered whether commercial mainstream or beneficial to reserve communityTest sought to isolate those activities that benefit the reserve community Martha thinks this is really suspect,

because tax liability shouldn’t be based on whether you’re benefiting the community – it doesn’t pay your taxes.Do see businesses that get caught in exemption – e.g. gas stations physically situated on reserves etc.

Bastien Estate v. Canada [2011 SCC] Strongest case – heard w/ Dube and decided the same day in successive judgements.

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B status Indian, lived whole life, operated moccasin making business and put $ in term deposits in a credit union located on reserve (head office and only place of business)

Issue: is interest paid on term deposits taxable?Up until this time, courts had held that such income was taxable. Because the interest was generated by the Caisse Populaire

(credit union) by its acts off-reserve (i.e. investing in commercial markets) So because CP earned in commercial mainstream, the interest is mainstream as well.This is TJ, and upheld by FCA

SCC: doesn’t rest on whether property integral to life of reserve/benefits way of life. Look at connecting factors test and determine whether income is situated on reserve.

So, CF test: CP was on reserve; agreement was made on reserve; income arose from K’ual obligation entered into on reserve; deceased

TP resided on reserve, and capital investment used to earn the income was earned on the reserveNote: didn’t matter that it was from moccasin-mftring; could be anything situated on reserve.

All connecting factors connect to reserve, so its exempt. Don’t care where CP earns its income – in this case it’s on the reserve, and the K is on the reserve, and we care where TP earned his income where debtor earns income with which it pays debt is irrelevant.

So opens possibility of banks beginning to operate on reserves and take deposits on an exempt basis.Hard to see any way this was income off-reserve, except for CP’s income

Dubé v. Canada [2011 SCC]Status Indian, born and registered on reserve, but …didn’t live on reserve?? I’m not positive what the difference in issue was. Put money in a CP, and argued interest income was exempt. SCC still held exempt.Overall, interest-earning activities aren’t closely connected to the reserve, but SCC found exempt because the K was b/w a FN person

and the CP, it took place on reserve and the interest was payable on reserve; debtor was present, est’d carrying on business on reserve

o Have to go to reserve to make deposit, K must be made on reserve and interest income must be payable on reserve. Dissent: Deschamps and Rothstein

o Based on TCC findings (which whole court accepted), impossible to find sufficient concrete connection b/w interest income and reserve.

Indian Act s. 90.(1)For the purposes of section 87 and 89, personal property that is

o (a) purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands, or

o (b) given to Indians or to a band under a treaty or agreement between a band and Her Majesty,shall be deemed always to be situated on a reserve.

Kakfwi [FCA]90(1) is exemption for property granted by treatyAppeal from TCC holding that TP’s salary as Chief of band was exempt. Paid by band, from a fund that supported band councils and their activities

These funds were provided under an agreement b/w band and Crown under support funding program.TCC found that since fund from Crown, salaries paid out of it were exempt

FCA said band support funding agreement isn’t the kind intended to be included in 90(1)(b) this is for treaties, and gov’t funding programs aren’t in the same category.

So not simply funding arrangements that may be concluded by agreement.Oh, and they cited Mitchell v. Peguis, on something.

But, his salary should have been exempt since he was on reserve… not sure how it became off-reserve. Also an issue as to whether money was personal property

Income Tax Exemption For Bands & Corps Owned Thereby: 149(1)(c) and (d.5).

Otineka Development Corporation LimitedCourt found band had exercised on-reserve reg powers in such a way that it was undeniably a governing body, and thus exempt under

149(1)(c), even if it wouldn’t have been exempt under 87(1). Also, band had inc’d a corp, of which band held all shares. Not clear exactly how the band can hold the shares as an entity, but it did.

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CRA sought to tax corp on basis that it wasn’t a band or an Indian, but it was counted as a municipal corp under 149(d.5)Note amendment to d.5

So, doesn’t allow bands to take cash and invest it off-reserve and then claim exemption – has to be from activities on the reserve. But in Otineka it would have qualified.

Can be unpopular b/c implies that FN gov’ts are equiv of municipalities.

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