LAW 407 – Taxation Exam CAN

Table of ContentsBasic Structure of the Income Tax...........................................................................................................................................................3

Tax Rates............................................................................................................................................................................3Taxable Income..................................................................................................................................................................3

Introduction to Statutory Interpretation.................................................................................................................................................4

Tax Avoidance............................................................................................................................................................................................6Sham Doctrine.................................................................................................................................................................6Ineffective Transactions Doctrine...................................................................................................................................6Business Purpose Test.....................................................................................................................................................6Specific Anti-Avoidance Rules (SAARs).......................................................................................................................7General Anti-Avoidance Rule (GAAR)..........................................................................................................................7

Income or Loss from an Office or Employment and Other Income and Deductions.........................................................................8Employee vs Independent Contractor.............................................................................................................................8Incorporated Employees & Personal Services Businesses.............................................................................................9Inclusions – Remunerations and Payments on Termination.......................................................................................10

Inducement Payments (Taxable)...................................................................................................................................10Gratuitous Payments (Taxable).....................................................................................................................................10Strike Pay (Not Taxable)...............................................................................................................................................11Tort Damages for Personal Injury or Death (Not Taxable)...........................................................................................11Termination Payments (Taxable)..................................................................................................................................12Compensation for Breach or Waiver of Contractual Obligation...................................................................................13

Inclusions – General Benefits.........................................................................................................................................13The Characterization of a Benefit.................................................................................................................................14Connection to Office or Employment...........................................................................................................................14Valuation of Benefit......................................................................................................................................................15

Inclusions – Allowances and Other Benefits.................................................................................................................15Housing Assistance (Taxable).......................................................................................................................................15Benefits in Respect of a Housing Loss (Taxable).........................................................................................................15Forgiveness of Debt (Taxable)......................................................................................................................................16Interest-Free and Low-Interest Loans (Taxable)...........................................................................................................16Options to Acquire Securities (Must Include)...............................................................................................................17Allowances (Must Include)...........................................................................................................................................18Exceptions to Allowances.............................................................................................................................................18

Employment Deductions.................................................................................................................................................20Deductible Travelling Expense.....................................................................................................................................20Meal Deduction when Away from Ordinary Work Location.......................................................................................21Office Rent & Home Office Expenses..........................................................................................................................21Moving Expenses Deductions.......................................................................................................................................22

Income or Loss from a Business or Property and Other Income........................................................................................................25Characterization..............................................................................................................................................................26Inclusions – Income from Business and Other Income................................................................................................28

Gains from Illegal Activities (Taxable).........................................................................................................................28Damages and Other Compensation (Some Taxable and Some Windfall)....................................................................28Voluntary Payments (Windfalls)...................................................................................................................................28Prizes and Awards (Kind of Taxable)...........................................................................................................................29

Inclusions – Interest Income...........................................................................................................................................30Discounts and Premiums...............................................................................................................................................33Interest Accrual Rules...................................................................................................................................................34Transfers of Debt Obligations.......................................................................................................................................34

Deductions – Profit and Income-Producing Purpose Test...........................................................................................35Illegal Payments............................................................................................................................................................35Damage Payments.........................................................................................................................................................36

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Fines and Penalties........................................................................................................................................................36Recreation, Meals and Entertainment Expense deductions...........................................................................................37Travel Expenses............................................................................................................................................................38Home Office Expense...................................................................................................................................................39General Limitation on Deduction of Expenses.............................................................................................................39Interest Expenses...........................................................................................................................................................40

Timing Issues....................................................................................................................................................................42Inclusions.......................................................................................................................................................................42Deductions.....................................................................................................................................................................44

Inventory..........................................................................................................................................................................45Lower of Cost or Market Value (LCM)........................................................................................................................46

Capital Expenditures.......................................................................................................................................................47Characterization.............................................................................................................................................................47Statutory Capitalization Rules.......................................................................................................................................49

Capital Cost Allowance (CCA)...............................................................................................................................................................50

Taxable Capital Gains, Allowable Capital Losses................................................................................................................................52Capital Gains and Losses: Characterization and Computation..................................................................................52

Characterization.............................................................................................................................................................52Real Property...................................................................................................................................................................53Canadian Securities Regime...........................................................................................................................................53Personal Use Property.....................................................................................................................................................54Listed Personal Property................................................................................................................................................55Principal Residence Exemption......................................................................................................................................55Changes in Use.................................................................................................................................................................58Deemed Proceeds.............................................................................................................................................................59

Non-Arm’s Length Transactions...................................................................................................................................60

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Basic Structure of the Income TaxPersonal exemptions up until a certain amount, which is not taxed – Personal Credit, which is up to $11,635 (up to $23,270 if spouse or common law partner has no income and may also be increased by other credits)

After the exemption, there is a progressive tax for different rate brackets

Tax RatesRate Brackets (Federal):

Up to $45,916: 15% $45,916 - $91,831: 20.5% $91,831 - $142,353: 26% $142,353 - $202,800: 29% Over $202,800: 33%

Rate Brackets (BC): Up to $38,898: 5.06% $38,898 - $77,797: 7.7% $77,797 - $89,320: 10.5% $89,320 - $108,460: 12.29% Over $108,460: 14.7%

Bracket Creep: If the brackets are not adjusted for inflation, you are moved into higher brackets as your income increases with inflation – the brackets are now indexed for inflation

Taxable IncomeBasic tax base that the rates apply to

All the provinces have signed onto the federal definition of taxable income. As such, the federal Income Tax Act represents the taxation of all income taxes across the country.

Functions of income tax – Economic Purposes of Governments in Modern Market Economies: Allocation: address market failures, efficient resource allocation, collective values/paternalistic considerations (health,

pensions, education, etc) Distribution: tax the rich more and the poor less – deals with uneven distribution of resources Stabilizing: use tax policy to stabilize and balance what is happening in the market

Key Structural Elements:2(1) – An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

Tax Unit : Every person resident in Canada at any time in the year (person includes corporations)o Person: 248(1) – Includes any corporation, individual human beingo Residence: 250(3) – A person resident in Canada includes a person who was at the relevant time ordinarily resident

in Canada Thomson v MNR: Chiefly a manner of the degree to which a person in mind and fact settles into or

maintains or centralizes his ordinary mode of living – a question of fact DeBeers: A company resides for the purposes of income tax where its real business is carried on … where

central management and control actually abides 250(1)(a): A person is deemed to have been a resident in Canada if person sojourned in Canada in the year

for a period or periods total of 183 days or more Sojourn: make temporary stay in a place, to remain or reside for a time: Thomson Entering Canada to work for a day then going home isn’t sojourning: R&L Food Distributors

250(4): a corporation shall be deemed to have been resident in Canada if it was incorporated in Canadao 2(3): non-residents who were employed in Canada, carried on business in Canada or disposed of a taxable Canadian

propertyo Dual Resident Tie-Breaker Rules in Tax Treaties:

Individuals: Permanent home, center of vital interests, habitual abode, citizenship Corporations: Place of effective management

Tax Base : 2(2) – Taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C (109-114)

o Many deductions converted into credits so that people of all incomes would get the same amount credited rather than higher income people getting higher deductions

o Income: emphasis on “regularity” or recurring nature; periodical flow of receipts over a period of time Distinguished from capital (stock of wealth at a point in time) and consumption or expenditure (use of

income at a point of time or over a period of time) Accounting Period : Income taxes are computed over a period of time taxation year

o 249(1)(c): “calendar year” for individuals

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o 249(1)(a): “fiscal period” for corporations and resident partnershipso Loss Carryovers

Non-capital losses – 3 years back, 20 years carryforward Net capital losses – 3 years back, indefinite carryforward

Tax Rates : 117(2) Tax Credits : subtracted from tax payable or given as a refund

o Non-Refundable Credit: the credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already had one. In other words, your savings cannot exceed the amount of tax you owe. 

o Refundable Credit: treated as payments of tax you made during the year. When the total of these credits is greater than the tax you owe, the CRA sends you a tax refund for the difference.

3 – Rules for Computation: [All income from a source] All amounts from a source inside or outside Canada, including, but not restricted to, office,

employment, business and propertyo Income from a “Source” (4(1)(a)): Office and employment (5-8), business and property (9-37), other sources (56-

59.1), unspecified source (Schwartz)o Ordinary meaning of income: flow of receipts, recurring/periodical

Need not be regular or recurring (e.g. bonuses, gratuity – Consolidated Textiles v MNR)o Adam Smith – sources and forms of income

Labor (source) and wages (form) Business (source) and profit (form) Property – land, money (source) and rent, interest, dividends, royalties (form)

o Income = Consumption + Savings, I – S = C Taxing Consumption as Savings is done through tax preferred sources (e.g. TFSAs and RRSPs)

[Add net taxable capital gains] the amount by which the total of (A) taxable gains on disposition of property other than listed personal property and (B) taxable net gain on disposition of listed personal property exceeds (ii) the amount by which T’s allowable capital losses from disposition of property other than listed personal property exceeds T’s allowable business investment losses (ABIL) (38-55)

o Capital accretion (capital gains) not a part of incomeo Transfers of wealth not a part of income (e.g. gifts and receipts, inter vivos, by will, finding an article of value or

windfalls) [Deduct sub e deductions] the amount by which (a) + (b) exceeds the total permitted deductions under subdivision e (60-

66.8) [Deduct losses] the amount by which (c) exceeds total of all amounts each of which is T’s loss for the year from office or

employment, business or property or allowable business investment loss o If (d) has an amount, T’s income is that amounto In any other case, T is deemed to have zero income for the year

Income Splitting: Spreading income out over spouses and children to minimize the amount of taxes paid1. Attribution rule (74.1-75.1): If you transfer money to a spouse to invest and then income is earned on that amount, the income is

attributed to the original transferora. Debated topic and hard to apply2. Non-Arm’s Length (NAL) Transfer (69(1)): generally, not considered as fair market value – still liable to pay original tax amount

Introduction to Statutory InterpretationPrimary Sources of Interpretation: Income Tax Act, Income Tax Application Rules, Income Tax Regulations, Tax Treaties, Other Statutes and Private Law, Tax CasesOther Sources: Administrative Positions (IT Bulletins, Folios, ATRs, Opinion Letters), Scholarly and Professional Publications

Traditional Approach: a) Strict Construction – construe statutory language literally and resolve ambiguities for T – object/purpose, intent of the

legislature and consequences not relevant in the strict construction approachb) Partington v A.G.: Only look at the words of the law, equitable construction, spirit/object not relevantc) MNR v MacInnes (1954, Ex. Ct.): Wife substitutes property twice – words are taken over the spirit of Act, must be within

the express terms of the Act; said the legislature should have drafted the legislation more carefully to achieve what they may actually have intended here

a. Mr. MacInnes gives money and bonds to Mrs. MacInnes, Mrs. uses the money for more bonds, Mrs. uses the bonds for money to buy shares, Mrs. uses the shares for money to buy more shares, Mrs. gets income from shares

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i. Using strict construction, the court says the Act only talked about property substituted once, not multiple times

b. Result of MacInnes: 248(5) – disallows multiple substitutions for the purpose of avoiding taxes d) Corporation Notre Dame de Bon-Secours, Johns-Mansville Canada: Rejects resolving ambiguities against T (still good

law)

Rejection of Strict Construction: Stubart Investments Ltd v Canada (1984, SCC): Rejection of Strict Construction – Courts apply to this statute the plain

meaning rule but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liableo Start with plain meaning, then take other factors into account – Internal (w/in the sentence); External (w/in scheme

of the Act).

Purposive (Teleological) Approach: (1984-1991) High focus on the purpose of the act and then a look at the words

o Problem: If the purpose is always dominant, run into trying to fit the words into the purpose Leading examples: Bronfman Trust, McClurg and Neuman

Plain Meaning Rule: (1991-2005) Specific language with no doubt or ambiguity – apply provision regardless of its object or purpose Only look to the object and purpose when the statutory language has some doubt or ambiguity Textual orientation with a look at the words along with context and scheme Problem: words that could be given meaning are not (too narrow)

Modern Approach: Driedger’s “Modern Rule” – Textual, Contextual and Purposive Approach “The words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously

with the scheme of the Act, the object of the Act and the intention of Parliament”. Canada Trust Co. v Canada (2005, SCC): Text will be dominant (detailed act), but rejection of plain meaning. Interpretive

considerations might reveal an ambiguity that you wouldn’t have appreciated under plain meaning: “invites a largely textual interpretation.”

o NB: one element of strict construction that has remained is resolving ambiguity in TP’s favour. But this is a last resort (Gonthier)

WilKare Paving & Contracting Ltd v Canada (2000, SCC): Asphalt factory, 75% for own use, 25% sold commercially – tax benefit if primary purpose is manufacturing goods for sale.

o Two tax incentives – “primarily in the manufacturing or procession of goods for sale or lease” Accelerated depreciation (Capital Cost Allowance) – incentive to write off new equipment and investments

faster to incentivize more of that activity Regional investment tax credit

o Majority: not primarily for sale, not legal definition of sale because it is sold as part of a contract for services, not just a contract for sale of goods. Parliament referenced private law concepts of sale – you can’t interpret ITA in a vacuum

o Dissent: purpose of the provision is to encourage manufacturing and used everyday business words – the ITA must be accessible to Ts.

Tennant v Smith – Inclusions: presumption in favour of T, Deductions: presumption against T

“Canons” of Statutory Interpretation: Associated words principle: words do not operate in isolation because they must be read in context Limited class principle: read into the meaning of a word based off other words in context Presumption against repetition: each word that is given has a specific meaning Presumption of consistent expression: when a phrase appears in one place and then another, it has the same meaning in

both places and if it is different, you can read into it Principle of implied exception: where there are provisions in a special provision and in a general provision that are

inconsistent, if the special provision gives a complete rule on the subject, this rule acts as an exception to the rule in the general provision

Principle of implied exclusion: read meaning into the absence of words

Elements of Interpretation: Words - do not operate in isolation, need to understand the context Context - context can be both internal and external; certain commercial bent (words may not be used in ordinary sense)

(various principles have been developed by the courts with respect to the context)

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Scheme of the Act - broad social/economic objective realized (implied exception - specific over the general, principle of implied exclusion - dog barks, Schwartz)

Objects of the Act - can be express or inferred from elsewhere, can run counter to each other, eg. raise revenue equitably, incentivize investment

Intentions of Parliament – express statutory provisions, presumptions of legislative intent, legislature vs. legislators (Pepper v. Hart), inferences from history, etc.

Presumptions - Parliament didn’t intend to violate Charter, international law, legislate absurdly, injustice, etc.

Tax AvoidanceTax avoidance is contrasted with tax evasion. Tax evasion is where you deliberately lie, conceal information, don’t report income, etc. Tax avoidance is a legal effort to arrange affairs in a way to minimize taxes owed.

US Approach : Gregory v Helvering: Critical approach to tax avoidance – G was the sole shareholder in A and A had shares in X. G made a new company, B, and transferred X to B, then dissolved B to get tax benefits of a reorganization.

The court looks at the true nature (Business Purpose Test) – was this done for a bona fide business purpose or to avoid tax? – and looks at the Economic Substance over Legal Form – what did the transaction/scheme actually do vs what it looked like it was doing?

Considered Sham Doctrine: a mere device putting on the form of something as a disguise for concealing its real character Used the modern approach to statutory interpretation

Canadian Approach : Commissioners of Inland Revenue v Duke of Westminster: T pays his gardener in a weird way to avoid paying a legal salary for tax benefits – “every man is entitled, if he can, to order his affairs so as that the tax attaching under the appropriate acts is less than it otherwise would be”

Argued Legal Form: employment contract at law Argued “In reality” (Economic Substance) – he is working for the duke and getting paid for it

o No concept of economic substance in UK statute or common law at that time The subject is not taxable by inference or analogy, but only by the plain words of a statute applicable to the facts Implications for Anglo-Canadian Tax Law:

o Legal substance over form doctrineo Sham and ineffective transactions doctrineso Specific Anti-Avoidance Rules (SAARs)

Sham Doctrine MNR v Cameron – references Snook v London & West Riding Investments: “acts done or documents executed by parties to

the “sham” which are intended by them to give 3rd parties or the Court the appearance of creating between the parties legal rights and obligations DIFFERENT from the actual legal rights and obligations which the parties intended to create”

If the documents aren’t bona fide or intended to be the real one, you assess by the transaction they’re masking with the sham documents

Antosko gives sham doctrine a narrow construction, affirmed in Stubart:o “The transaction and the form in which it was cast by the parties and their legal and accounting advisers can be

said to have been so constructed as to create a false impression in the eyes of a third party, specifically the taxing authority”.

Ineffective Transactions Doctrine Doctrine of “legally ineffective or incomplete transactions” has the more general rule that tax consequences are to depend on

the legal substance actually created by the parties rather than the form or nomenclature that they employo Similar to the sham doctrine, but the sham doctrine comes with the intention to deceive

T must fill all requirements and complete all transactions fully to effectively establish legal relationships or else courts can assess on the basis of the actual existing relationships

Antinco Paper Products v MNR: court must make sure documents are legally correct/complete

Business Purpose Test Stubart Investments considers the business purpose test for Canada – eventually overruled by the enactment of the GAAR,

but remains authoritative for judicial anti-avoidance doctrineso Stuart Brothers Company (Profit making) & Grover Cast Stone (Losses)o Stuart sells its assets to Grover for debenture

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o Grover entered into agency agreement to have Stuart use its original assets and have the income paid to Grover Tax-motivated move – no bona fide business purpose

o SCC rejects business purpose test for two reasons: The ITA already contains a broad anti-avoidance rule in former 245(1) Tax reduction can be a business purpose

Specific Anti-Avoidance Rules (SAARs) Four general categories:

o Rules mandating the inclusion of specific amounts (ex: 6(1)(a) benefits, 56(1)(a)(ii) retirement allowances) Foreclose methods of avoiding tax

o Rules disallowing or limiting deductions (ex: 67 general reasonableness requirement, personal expenses) Challenge income-splitting arrangements involving payments to non-arm’s-length persons and to limit the

amount that T may deduct in respect of expenses that have a marked personal charactero Rules governing the timing of inclusions or deductions o Deeming provisions (substance over form, ex: 69(1) NAL transactions)

Re-characterize specific amounts or their recipients for the purposes of computing tax

General Anti-Avoidance Rule (GAAR) Introduces a business purpose test in the Act, as well as a step transaction doctrine (even if the overall series is legitimate, if

one step isn’t, you can apply the GAAR) 245(2): the tax consequences to any person “shall be determined as is reasonable in the circumstances to deny the tax benefit”

that would (but for the GAAR) result from the avoidance transaction or a series of transactions that includes the avoidance transaction

245(3): an avoidance transaction is a transaction that would (but for the GAAR) result, directly or indirectly, in a tax benefit, or is a part of a series of transactions would (but for the GAAR) result in a tax benefit unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit (business purpose test)

245(4): (2) will only apply where the transaction(s) would “result directly or indirectly in a misuse of the provisions of the Act, Regulations, Application Rules, or a tax treaty, or any other relevant enactments, or an abuse having regard to these provisions read as a whole”

REQUIREMENTS FOR THE GAAR: Transaction or series of transactions result in a tax benefit – 245(1): reduction, deduction, avoidance or deferral (Canada

Trustco Mortgage Co v Canada: burden on T to refute the “underlying assumption of facts”) of tax or other amount payable under the ITA or an increase in a refund or tax or other amount under the ITA

o Transaction – 245(1) includes an arrangement or event Primarily tax-motivated – no bona fide purpose, can be any part of the series of transactions (objective – burden on T to

disprove)o Series of transactions – 248(10): deemed to include any related transactions or events completed in contemplation of

the series – provision can apply to an event before or after an ordinary series of transactions o Non-Tax Purpose Test (objective)– 245(3): A transaction will not be characterized as an avoidance transaction if it

“may reasonably (objective) be considered to have been undertaken or arranged primarily (comparative – compare tax and non-tax motives) for bona fide purposes other than to obtain the tax benefit”.

The transaction can reasonably be considered to result in a misuse or abuse of the provisions (245(4))o Abuse ss. 9(1), 8(2), 125 or the scheme of the act?o Canada Trustco Mortgage Co v Canada: these are joined, there is only one inquiry

SCC stated that a deduction always results in a tax benefit since a deduction results in the reduction of tax - lowers the threshold for a tax benefit in a manner that seems inconsistent with the structure and purpose of the GAAR to prevent artificial tax avoidance arrangements

Duff doesn’t agree with this misuse of specific provisions vs abuse with regards to provisions read as a whole

o Lipson v Canada: burden on Minister to prove on BoP, it’s a misuse/abuse individual transactions which comprise part of a series of transactions must be viewed in the context of the entire series and the overall result it achieves

o Copthorne, reaffirming Canada Trustco: GAAR can be applied to deny a tax benefit only when the abusive nature of the transaction is clear

Remedy: Do what is “reasonable in the circumstances” in order to deny the tax benefit: S245(2)

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Where an avoidance transaction is carried out, tax benefits that would have originally been available might be lower due to the avoidance transaction

245(5): In determining reasonable tax consequences to deny a tax benefit, a) Any deduction, exemption or exclusion may be allowed or disallowed in whole or in partb) Any deduction, exemption or exclusion and any income, loss or other amount may be allocated to any personc) The nature of any payment or other amount may be re-characterizedd) The tax effects that would otherwise result from the application of other provisions of this Act may be ignored

Disclosure Rules237.3(2) – requirement to file information return in respect of a “reportable transaction”

237.3(1) – Reportable Transaction: avoidance transaction entered into by or for the benefit of a person and each transaction that is part of a series of transactions that includes the avoidance transaction if two or three conditions are met:

o Fee of an advisor or promoter is based on the amount of a tax benefit contingent on obtaining a tax benefit, or attributable to the number of persons participating in the avoidance transaction or series or provided access to advice regarding the tax consequences of the avoidance transaction or series;

o Advisor or promoter obtains confidential protection; oro The person who benefits from the avoidance transaction or the advisor or promoter obtains contractual protection

otherwise than as a result of the fee

Income or Loss from an Office or Employment and Other Income and Deductions3(a): says a TP’s income for the year includes income from each “office” and each “employment”, and 3(d) permits deductions for losses from office and employment.5(1): Income from office or employment – A taxpayer’s income for a taxation year from an office or employment is the salary, wages, and other remunerations, including gratuities, received by the taxpayer during the year. 248(1) – “employment” and “office”

Office: (1) A position of an individual (not a corporation) entitling the individual to a fixed or ascertainable stipend or remuneration which includes judicial office, MP, Senator and Minister OR (2) the position of a corporate director

Employment: position of an individual “in the service of” another person (person includes a corporation)

Employee vs Independent Contractor Employee: contract OF services – income from employment

o Deductions from employment are much more limited and employers withhold income and payroll taxes from employees

Independent Contractor: contract FOR services – business income

TEST: consider the total relationship between the parties (Wiebe Door: Business of installing & repairing overhead doors in Calgary; specific understanding that door installers would be independent contractors. Co. is reassessed as installers being EEs. Does specific understanding make them independent contractors? No; depends on legal relationship between them. Agreement is not determinative of relationship between parties; court must examine facts to determine.)

Control : Can the worker choose which equipment to use? Can the employer do more than terminate the relationship (ex: discipline)? Employer controls what is to be done and how.

Ownership of tools or equipment: Worker owning their tools is indicia they’re an independent contractor Chance of profit/risk of loss – method of remuneration : can the worker profit by doing the job faster or more effectively, or

are they paid the same regardless? Does the worker risk suffering economic loss as a result of performance, or does the employer bear the risk?

Integration : is the worker integrated into the business of the employer? Are they carrying on their own business, or are they involved in the broader business?

o Do they only work for that company or others as well? Alexander v MNR: Specific Result Test – hired for specific limited task or undefined service period? Market Investigations Ltd: Is the person performing the task as a person in business on his own account? Look at the issue from the perspective of the employee NOT the employer

SINCE WIEBE – Intention has been given emphasis: labels (nomenclature) used by the parties are not determinative (Wiebe Door), but are relevant – no one cares what you call it if it is something else.

Still consider freedom of contract, where interpretation hinges on the intention of the parties – the commonly expressed intention should be given weight (Royal Winnipeg Ballet – contractor despite extensive control via a collective agreement, Wolf v Canada – contractor despite hourly wage because risk was his own)

Other relevant factors: o Ability to subcontract/hire helpers (UK case: Market Investigations)

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o Engagement to perform a specific task vs ongoing serviceso Whether worker works for multiple employers or just oneo Where does the employee principally work (working at own home indicates contractor: Martinez, Cumming,

Henry)o Nature of pay – flat rate per time unit vs pay per service/production/job (Wiebe Door, Dangaas)o Whether business was already established

INDEPENDENT CONTRACTOR CASES EMPLOYEE CASESMartinez (1995 TCC) & Tedco Apparel Management Services Inc (1991): principal workplace is a consideration – working out of your own home indicates IC.

Norgaard (1964 Tax ABC): Commission but signed contract as employee, only worked here, activities confined to sales and promotions of employer’s products.

Cumming (1967 ExCt), Henry (1969 ExCt): Doctors ICs even if they rely upon hospital’s facilities.

Vango (1995 TCC): commission but worked in employer’s office, used their phones/facilities/materials

Dangaas (1964 Tax ABC): Method of remuneration important. IC - set own hours, found own clients, commission.

Donald McDonald (1974 TRB) & Boardman (1979 FCTD): legal substance over nomenclature.Baxter (1996 TCC): collective agreement, hourly rate, reimbursed for expenses, T-4 slips, CPP/EI/tax reductions – none of these are determinative but considered as a whole they suggest employee.

Incorporated Employees & Personal Services BusinessesSome people incorporate because of:

More deductions (e.g. “small business deduction” under 125(1)) No withholding income or payroll taxes by the employer Choice of fiscal period Allows for tax planning – choose when to take income (dividends). A third person can be made a shareholder, which means

they can be paid dividends to reduce the tax burden of T – income splittingo Setting up a CCPC to pay lower taxes through having it as business income

Government enacted SAARs for personal service businesses in 1981:125(7) – “personal services business” – a business providing services where:

(a) An individual who performs services on behalf of the corporation (incorporated employee), OR (b) Any person related (blood, marriage/partnership, adoption: 251(6)) to the incorporated employee

Is a specified shareholder of the corporation (owns 10% or more: 248(1)) AND the incorporated employee would reasonably be regarded as an officer or employee (Wiebe Door total relationship test applies: Dynamic Industries – control can be a determining factor) of the person or partnership to whom or to which the services were provided but for the existence of the corporation, UNLESS

The corporation employs in the business throughout the year more than five full-time employees, OR The amount paid or payable to the corporation in the year for the services is received or receivable by it

from a corporation with which it was associated (parent, sub, common ownership (256(1)) in the year Limitations:

a. No small business deductions for personal services business, b. Personal service business may only deduct for salary paid to the employee, amounts for negotiating contracts, legal

expenses for collecting amounts owed to it for services (18(1)(p) – considered in Dynamic Industries) 18(1)(p) generally disallows the deduction of most expenses other than remuneration and benefits paid to

incorporated employees in computing the income of a personal services business 127(5) excludes income from personal services businesses from the low corporate tax rate otherwise available to

Canadian-controlled private corporations (CCPCs) Dynamic Industries Ltd v Canada: benefits were allowed under 125(7). T makes a corporation to get non-union contracts,

then does all work for SIIL for 5 years – DIL is only paid when successful in getting contracts for SIIL, fixed the errors at own cost, paid cost and then some. SIIL employee, but for DIL? No.

o T didn’t own shares, but wife had shares in DIL – had an office at SIIL, parking spot, used their facilities/serviceso Court looks at Wiebe Door – not compensated on a regular basis, had risk, must look at whole history of Dynamic

and not just time that SIIL monopolized him – DIL is a legitimate corp and T can’t be reasonably regarded as an employee

Had the capacity to carry on business with other companies, but could not do so when doing business with SIIL because they kept him busy

o Control became an important factor in that DIL was independent and SIIL did not exercise meaningful control over him

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533702 Ontario Ltd v MNR: benefits disallowed because business wasn’t independento T worked for corporation that provided services to showroom for a company owned by T’s husband. The

corporation had no purpose outside of T’s husband’s company – but for the corporation, T would work for husband – held: personal services business

Engels v MNR: example of legitimate imposing of a corporation (pre-GAAR). T was a news anchor with Global and his contract was to expire Dec 15, 1975. Created a corporation (October 20, 1975), set up exclusivity contract (October 27, 1975) and set up a contract for his services with Global (November 19, 1975). Resigned from Global November 30, 1975.

Argued that through incorporation, he could do business and broadcasting work with multiple clients Contract between the corporation and Global was similar to his employment contract from before Held not to be a tax motivated move – allowed him to freelance, charge his mother for advice, and reduce the tax burden

o Court looked at 1) substance over form, 2) ineffective transactions, 3) sham doctrine and 4) business purpose test

Government’s response to Engel, many cases like this 2 new SAARs• Recall, 3 benefits of being an incorporated employee 1) deductions, 2) lower corporate rate, 3) income splitting • SAAR kills 1 + 2 (leaves open the possibility of income splitting at this time) (NOTE: a lot of this income splitting is later

eliminated by the “Kiddie Tax”)

Inclusions – Remunerations and Payments on TerminationOffice and Employment Income:5(1) – Salary, wages, and other remuneration, including gratuities6(1) (a) – Remuneration includes boarding, lodging, and other benefits, (b) allowances for personal or living expense, (c) director’s and other feesSAAR – expands office and employment – includes amounts connected to employment, but not otherwise characterized as remunerationSome specific exclusions – ex: disability benefits (6(16)) and special work site/remote location (6(6))3(a): income from an unspecified source6(3): Deems amounts to be remuneration where received from one person by another:

a) while payee was an officer of or in the employment of the payer, ORb) on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement immediately before, during,

or immediately after the payee was an officer of or in the employment of the payer,AND, irrespective of when the agreement under which the amount received was made or the form or legal effect thereof, the amount can reasonably be regarded as having been received

c) as consideration for accepting the office or employmentd) as remuneration for services, ore) as consideration for a covenant

MUST BE (A) OR (B) PLUS (C), (D) OR (E)• Onus on the Minister• Sort of a SAAR -- expands scope of TP’s income from office or employment by including amounts connected to the employment

relationship, but not otherwise characterized as taxable remuneration• Some specific exclusions – ex: disability benefits (6(16)) and special work site/remote location (6(6))• Gifts and windfalls not taxable

Inducement Payments (Taxable) “Inducement to accept an office or enter into a contract of employment.” – Arguably not taxable under 5(1), but under 6(3) 6(3) deems inducement payments to be taxable remuneration where payment is received by one person from another:

o (a) during period while payee was an officer or in employment of payer OR o (b) on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement

Strict reading means that 6(3) doesn’t apply when the inducement payment is made by someone other than the taxpayer’s current/future employer

Curran v MNR: TP worked for Imperial, good salary, pension, opportunities for promotion, to sit on board. Brown gave $ in exchange for TP giving up all benefits in Imperial, whether or not he actually took over the co, Brown wanted him to (Brown ran the co).

C argued that he was being paid for loss of income from Imperial Oil, non-taxable capital receipt (capital gains weren’t taxable at the time).

Exchequer Court says it doesn’t fall under 6(3) because though it would reasonably fit under 6(3)(c), it would not fit into 6(3)(a) or (b), but taxable under 3(a). SCC agrees.

Economic substance : substance of the matter was “acquisition of services.” Results driven judgment to tax him regardless of the fact that this falls outside of 6(3).

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Legal substance : look to the true nature of the payment as found in the 2 agreements and the surrounding circumstances - it was made for personal service.

Grenier: T was fired when the company was taken over by another, gets $200k and starts working for the merged company. Court rejects the argument that it was for disposition of rights from the old job and finds it taxable under 6(3)(b)&(c)Volpe: V moves for a new job and gets $27k from an agreement with the new employer as compensation for housing loss. It wasn’t simply compensation for capital loss, but also consideration or partial consideration for accepting the job so taxable under 6(3)(b)&(c)

Gratuitous Payments (Taxable) 5(1): requires taxpayers to include “gratuities” in computing income from office or employment

o Amounts paid on account of legally non-enforceable claimso Taxpayers often argue that these are windfalls/gifts, not remuneration, and therefore not taxable

Goldman v MNR: T chair of a committee with no remuneration, but he seeks pay and gets $14K. Held to be taxable – the payment was made in connection with office, even if it was voluntary and indirect

o 3(4): any payment made to any person in connection with any duty, office, or employment … shall be salary and taxable of income

o TEST: a gratuitous payment to an individual, despite being voluntary from the perspective of the person making it, is taxable income if, from the standpoint of the person receiving it, it represents payment for services

Not having a legal right to it does not mean that it will not be taxable Seary v MNR: T denied tenure and was paid $1K/month after threatening to sue, and is given a lump sum payment when

tenure is given – the lump sum is taxable as a gratuity within 5(1), but monthly payments non-taxable since T had no office or employment when paid

o 56(1)(a)(ii) created in response to this case (Retiring Allowance) Mr C: Honorarium after serving on commission of inquiry was a gratuity Heggie: H was fired and paid 5 months’ salary when his company was bought out. HELD: not taxable because payment was

made by purchaser and not as remuneration for services by employer under 5(1). Not under 6(1)(a) because it was for unanticipated unemployment, not prior employment, that was “real and proximate cause of the benefit”.

Yaholnitsky-Smith: Y was employed by a charity that paid for her school, though she was not employed when in school and had no obligation to return – this was taxable under 6(3)(e) because it was paid in consideration for her covenant to return to school

o Duff: Weird characterization because the charity wasn’t getting anything in return (didn’t have to come back to work for them)

Strike Pay (Not Taxable)Background : Payments made by unions for non-performance of services. Union will build up a strike fund. Union dues are deductible 8(1)(i)(iv). Unions are tax exempt 149(1)(k). Funds coming out as strike pay have never been subject to tax.

Summary: Payment in a contract with a union is not strike pay (Loeb), payment as a result of a union enterprise is not strike pay (Ferris – carried on a business during strike), profits from union activities distributed to non-participants is strike pay, and therefore not taxable (O’Brien)

Loeb v Canada (1978) – Strike pay as employment incomeo T makes an employment contract with teacher’s federation in anticipation of strike so she can keep paying towards

the pension fund. She argues sham without substance, but the court says it’s a bona fide legal relation and therefore, taxable.

Ferris v MNR (1977) – Strike pay as business incomeo Union members publish newspaper during strike and distribute profits as strike pay – HELD: not strike pay but

income from a business venture so it is still taxable, the form cannot change the substance Canada v O’Brien (1985) – Strike pay as strike pay

o Union repping striking people makes a newspaper and distributes profits as strike pay – HELD: not taxable because the body producing the paper was merely an agent for individual union members (unlike Ferris)

Canada v Fries (1989) – REVERSED BY THE SCC – strike pay is not income from a source as the benefit of the doubt goes to T

o Fries got money from the strike fund that was more than usual strike payo Held: payment is taxable as periodic payments based on actual income – T is performing services for the union,

apply the surrogatum principle IT-334R2 – adopts SCC ruling of Fries that strike pay need not be included in income, unless it is for services performed for

the union

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Surrogatum Principle: The surrogatum principle provides that the character of a receipt of an award of damages or of an amount received in settlement of a claim as a capital or income receipt depends on what the amount was intended to replace, so that if the replaced amount would have been taxable in the recipient's hands, the award or settlement amount will also be taxable

Tort Damages for Personal Injury or Death (Not Taxable)Where a taxpayer receives tort damages for personal injury or death, this compensation typically includes special damages in respect of lost earnings. Are these particular damages taxable?

Generally, we don’t tax damage payments for physical/emotional injury Cirella v Canada: T gets in an accident and gets $14.5K special damages for lost income as he has to do lighter work than

beforea. Not taxable as the payment was for capital loss of income earning capacity (human capital), not wages – it arose

from the injury, not from employment – the surrogatum principle (London and Thames Haven) doesn’t applyi. Damages replace income if 1) received pursuant to a legal right or 2) as a substitution for income

(surrogatum)ii. Note: Might argue as capital receipt**

b. Did not count as business income because he did not carry on his own business; he was an employee Kant: Damage award for permanent disability was found not to be a wage replacement IT-365 R2: special and general damages for personal injury/death excluded from income, unless it’s income replacement Workers’ compensation is including in income under 56(1)(v), but effectively exempt through 110(1)(f)

Termination Payments (Taxable)Amounts received on or after the termination of an office or employment are not easily characterized as remuneration for services 56(1)(a)(ii): any amount received by T as, on account or in lieu of payment of, or in satisfaction of…is a retiring allowance

Reverses Canada v Atkins where courts said amounts in lieu of notice weren’t income from office or employment248(1): “retiring allowance” – an amount (not a pension benefit) received (a) on or after retirement of a T from an office or employment in recognition of T’s long service, (b) in respect of a loss of office or employment of a T, whether or not received as, on account of or in lieu of payment of, damages, or pursuant to an order or judgement of a competent tribunal, received by T or a representative after death

A payment is “in respect of” the loss of an office or employment where it is compensation for amounts that would have been included as employment income, not where the compensation is for a separate injury “against the person of the taxpayer (Fournier) – though some cases have adopted a broader test (Merrins, Niles)

“In respect of” is interpreted very broadly – Mendes-Roux (1977): could encompass any payment connected with T’s loss of employment

o The court needs to read into the language here to determine the purpose (is it for the loss of employment or office or for distress?)

o Broad connection – payment must simply be linked to an amount that would have otherwise been taxable (damages not taxable).

Overin v. Canada (1997) → go to for the nexus testo Some limit must be placed on 56(1)(a)(ii) → nexus between receipt and loss of employment -- otherwise everything

would be caughto A couple of tests to deal with this provision:

1) “but for” the loss of employment → “where the payment would not have been received BUT-FOR the loss of the office or employment

2) purpose of the payment is to compensate for the loss of employment (purpose to compensate for loss) → “in addition to the but-for test, where the purpose of a payment is to compensate a loss of employment, it may be considered as having been receiving “with respect to” that loss.”

Merrins (1995): T was fired, filed a grievance, and was paid $60K to drop the lawsuit – the amount is taxable as it is in relation to loss of income, not a capital gain from a disposition of a right to having a hearing

Stolte (1996): T gets amount based on 2 months paid of which some is for pain/suffering/stress from loss of a job – not taxable – even though some of the amount is based on income, it isn’t in relation to loss of income

Niles (1991): T settled a discrimination claim for $5K with no actual judgment – it’s a taxable retiring allowance as it is in respect of office/ employment

Fournier (1999): A lump sum payment in settlement of a grievance was said to be damages for injury “against the person of T” – compared to Niles: the outcome/ taxability depends on the characterization of damages

CRA: damages from loss of employment, including general mental, should be taxed, injuries unrelated to employment and human rights tribunal awards shouldn’t be taxed

Quance v Canada (1974): T was fired and given 9.5 months’ pay in lieu of notice, which was paid in the same intervals as when he still worked there – found to be taxable: payment because of no notice is within 6(3) regardless of whether you had to sue for it or not

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Canada v Atkins (1976): Lump sum payment for job loss is non-taxable because it’s not from a contract – REVERSED in 1981 by 56(1)(a)(ii)

Schwartz v Canada (SCC 1996) *Retiring allowances don’t apply to intended employment*. Taxpayer gets verbal offer of employment from Dynacare for $250,000 per year plus option to acquire shares. Gives notice to his law firm, Dynacare subsequently cancels the contract before he starts working. He gets another job that pays $175,000 per year. Dynacare recognizes breach, offers compensation for stock option, S responds in regards to his lost salary and disagrees on option pricing. Negotiations conclude with agreement to settle for $360,000 + $40,000 costs → MNR assesses this as a retiring allowance.Tax Court of Canada → not a retiring allowance

not taxable under 56(1)(a)(ii) because the employment never existed not taxable under 6(1)(a) as an employment benefit inclusion because the employment doesn’t exist not taxable under 3(a) as income from a source because income pertains to recurring receipts, this was a lump sum for loss of

source judge throws MNR a lifeline to consider a capital receipt to at least be able to tax half finding of fact that the $360,000 was paid for embarrassment, anxiety, inconvenience and not the value of the stock options

because MNR brings no evidence to the contraryFederal Court of Appeal → critical issue on appeal was the TCC’s finding of fact re: apportionment

1. agrees with the TCC that this is not taxable under 56(1)(a)(ii) because the employment never existed2. overturns the TCC’s finding of fact that the money was paid for “e, a, + i.”

a. therefore, taxable under 3(a) as income from a sourceb. the source was the employment contract

Supreme Court of Canada → MNR argues 3(a), in alternative 56(1)(a)(ii)1. rejects the FCA’s reversal of the TCC’s finding of fact

○ 3(a) finding by the FCA falls apart because the payment was for embarrassment, anxiety, and inconvenience○ In obiter, the SCC rejects the TP’s argument that 3(a) only includes the listed sources + subdivision d because the

wording “without restricting the generality of the foregoing” indicates that the scope is meant to include all possible sources of income (Parliament’s intent) = you can have income from an unspecified source

○ 56(1)(a)(ii) is a specific solution to a specific problem - taxability of these payments should be assessed under the specific provision (rule of statutory interpretation) (specific over the general)

2. 56(1)(a)(ii): this payment isn’t caught by “retiring allowance” either○ Employment is defined in 248(1): uses the phrase “in the service of” and he was never in the service of Dynacare,

never in their “employment” for the purposes of this Act○ Principle of implied exclusion: in 80.4(1), Parliament contemplates both “intended” and “current” employment -

they turned their mind to it in this section, if they wanted to include “intended” employment in 56(1)(a)(ii), they would have

Duff: thinks this is an implausible interpretation – it imputes an intent to Parliament when, most likely, they just didn’t think about it Thinks they should have gone with the FCA’s reasoning and gone back to 3(a), used the surrogatum principle to characterize

this as income from a source (“close enough”) Another option would have been to go with the TCC’s lifeline and characterize this as a capital receipt SCC’s decision leads to the absurd result that this type of payment would not be taxable one second before employment &

would be taxable one second following the commencement of employment Amazingly enough → Parliament hasn’t amended 56(1)(a)(ii) to include “intended,” probably have endorsed this decision,

GAAR would likely apply, although it is always difficult to prove abuse

Compensation for Breach or Waiver of Contractual Obligation As with inducement payments received prior to the commencement of an office or employment, it is arguable that

compensation received from an employer for the breach or waiver of a contractual obligation is not remuneration from services rendered under the office or employment, and thus is not taxable under subsection 5(1) of the Act.

According to subsection 6(3), such compensation may be deemed to be remuneration where, “irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof,” it may be reasonably regarded as having been received as per subsections (c-e).

Moss v MNR: T paid to release his right of first refusal on a collateral contract after resigning as sales manager – found to be taxable under 6(3) as either (d) remuneration for partial services, or (e) a covenant re: termination

Inclusions – General Benefits6(1)(a): subject to exceptions, where a benefit (board, lodging, or other benefit of any kind) is received or enjoyed by T in respect of, in the course of, or by virtue of an office or employment, the amount must be included in computing T’s income

2011 amendment: includes benefits received or enjoyed by a person who does not deal at arm’s length with T

Statutory Exemptions: (6(1)(a)(i)-(vi))13

o Income arrangements addressed elsewhere in 6 or 56 (e.g., pension benefits)o Other benefits specifically included under 6 (e.g., automobile benefits)o Exempt benefits (counseling services, educational benefits received or enjoyed by an individual other than the taxpayer)

General Rule: application of 6(1)(a) involves 3 steps The characterization of a benefit

o Received or objectively enjoyed by the taxpayer or a non-arm’s length person (question of fact)o Related persons under 251(1)(a) shall be deemed not to deal with each other at arm’s lengtho Related persons defined in 251(2)(a) - individuals connected by blood relationship, marriage, common law

Partnership, or adoption 251(6) defines blood relationship)o A corporation + a person who controls the corporation, two corporations if controlled by the same person

The determination of a relationship between the benefit and the taxpayer’s employmento Nexus = “in respect of” (where all the action is because it is the loosest connection test)

The valuation of the benefit to be included in computing the taxpayer’s income

The Characterization of a BenefitTest: (Lowe)

Was there an economic or material advantage to the taxpayer? Was the primary purpose to benefit the employer? Is the taxpayer’s enjoyment more than incidental?

Lowe v Canada (1996): T goes on a business trip with his wife, and both are engaged in business activities most of the time – it is not a taxable benefit as both were primarily engaged in business activities on behalf of the employer

Philip v MNR: something of value in economic sense apart from the business purpose conferred? Threshold Question: was the principle purpose of the trip business or pleasure?

o If there is only incidental pleasure/personal benefit, it shouldn’t be taxableo Purpose of 6(1) is to equalize tax of those paid normally against those who received compensation via benefits and

not salary/wages A de minimis rule according to Duff → if the personal enjoyment exceeds the incidental threshold, then that portion of the

expense can be taxable (relative calculation)

TAXABLE (material advantage + non-business primary purpose + more than incidental enjoyment)

NON-TAXABLE (no material advantage)

Gernhart v Canada: US T gets tax equalization payment when he moves to Canada to put him in original position, which was found to be taxable under 6(1)(a) – gave him an advantage over other in the same situation (they should have just paid him more)

Guay: A reimbursement to send the kid to a special school that the kid would have to attend when T was posted abroad in the future was found to be non-taxable because it didn’t increase T’s net worth, just restored T to the position he would otherwise be in

Pellizzari v MNR: Legal fees were paid for by the corporation for T’s fraud charges were found to be a taxable benefit as the charges were personal

Huffman v MNR: Cop gets reimbursed for job clothes, which was not a taxable benefit as it was just a reimbursement

Cutmore v MNR (pre-Lowe): T forced to use tax services by employer which was found to be a taxable benefit, even though it was obligatory and not fun

Pollesel v Canada: TP got his moving expenses paid by the employer for a relocation. Not taxable because the TP did not receive an economic benefit. Similar to MacInnes.

Faubert v Canada: Employer pays for T to take courses to upgrade and get certifications needed for positions and this was found to be a taxable benefit as it was primarily for T’s benefit and wasn’t mandatory to take them. Personal interest training is taxable but specific employer-related training is not.

NON-TAXABLE (material advantage, BUT primary benefit to employer, or incidental enjoyment)

Deitch v MNR: T was a legal aid lawyer for the Law Society, which paid professional liability insurance on T’s behalf. Even though this is a mandatory policy of the employer, it is taxable benefit to T.

Rachfalowski v Queen: Employer paid for a golf membership for T who didn’t golf and didn’t want the membership; T only took it not to be rebellious – not taxable as it is primarily for the benefit of the employer – INCONSISTENT WITH CUTMORE since it’s post-Lowe

R v Poynton: T embezzles from a corporation and this is found to be a taxable benefit under 6(1)(a)McGoldrick: Free meals at work were taxable because the personal benefit to the TP was more than incidental.

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Dunlap v Canada: a Christmas party was found to be a taxable benefit, even if it was unilaterally conferred – NOTE: $300 was found not to be trivial, but maybe under $100 is?DiMaria v Canada: T’s employer paid his son $3,000 to attend university and recognize his academic achievement – money paid to son provided no material advantage to T because T was under no obligation to send son to school, and tax system taxes individual legal entities, not families – also not taxable under 6(1)(a) – REVERSED BY 2011 AMENDMENT OF 6(1)(a) – but scholarships are still exempt (6(1)(a)(vi))Williams v MNR: Food on a BC ferry is found a benefit as it is more than incidental, but isn’t taxable if T has to pay a reasonable chargePaton: The husband is the primary beneficiary of his wife’s attendance, even though the employer asked her to comeCRA: non-taxable things include employee discounts, transport to job, recreational facilities, transit passesIT-470R: no taxable benefit for uniforms, reasonable social events (<$100), training taken for the employer’s benefit

Connection to Office or EmploymentR v Savage (1983): T gets $300 from employer for passing life insurance courses and this was found to be taxable because “benefit of whatever kind” and “in respect of” are words with broad scope

Nowegijick v Queen: “in respect of” = widest possible connection between two related subjects Unnecessary for something to be received in exchange for services to be considered job income – T took courses to

improve courses to improve knowledge in the company business NOT A GIFT – Phaneuf: gifts are a disinterested act of kindness (N.B.) Despite concluding that the $300 received by Mrs. Savage was a benefit “in respect of” her employment, the SCC

proceeded to hold that the payment was exempt under a more specific provision – 56(1)(n) (subsequently discussed in prizes section).

Mindszenthy v Canada: a Rolex given to T by the employer was found to be taxable as there was no evidence of a non-employment intent

Note: Notwithstanding Savage, the CRA excludes certain gifts from the application of 6(1)(a) by administrative concession. For example, two non-cash gifts per year on a tax-free basis of an aggregate value of less than $500.

Waffle v MNR: T gets a holiday from Ford for meeting sales quota – he was a car salesman, but not employed by Ford – this was found to be taxable: the benefit doesn’t have to come directly from the employer to be a benefit Giffen v Canada: Frequent flyer miles are taxable since only employees who flew a lot got them, even if you did have to join the program

(NB: CRA’s current policy is that frequent flyer points are not taxable)Phillips: $10K was given to T to compensate for higher housing cost and this was found to be taxable as it was dependent on continued employmentCRA: exempt from 6(1)(a) are wedding gifts, Christmas gifts, etc (IT-470R), if the employer doesn’t claim, aggregate under $500 in 2 years, 2 non-cash awards per year if under $500, generally safe if under $100

Valuation of BenefitValue – material or monetary “worth” – Either through cost – average vs. marginal, but later was determined as the fair market value

Must be able to place a value on the benefit for it to be taxable – general rule: value is fair market value – Spence v Canada (2011) – Value of benefit was the full amount of the discount on children’s tuition

o Spence was decided before 6(1)(a)(vi) was introduced in 2013, which exempts educational benefits received or enjoyed by an individual other than the taxpayer “under a program provided by the taxpayer’s employer that is designed to assist individuals to further their education, if the taxpayer deals with the employer at arm’s length and it is reasonable to conclude that the benefit is not a substitute for salary, wages or other remuneration”.

Detchon v Canada: T is a teacher at a private school and his kids go there for free, but he would be in trouble if he didn’t send his kids there – is the value of the benefit the full tuition or the cost to the school of having the child there? It is the average cost to the employer – REVERSED BY SPENCE AND SCHROTER

Waffle: The trip is taxed off its cost to Ford, not its subjective value – benefit need not come directly from employer Giffen: Cost to the employer is not always the correct valuation, ex: frequent flyer mile value = cost of the same ticket Richmond: Year-round parking is only used once/week, but must be taxed on full benefit of potential use. Toronto Parking Authority: Free parking taxed as a benefit, value determined as the market rate Wisla: Ring with a stamp of the corporation’s logo is valued at metal scrap cost – where there is no market for it, not

necessary to include the value

Inclusions – Allowances and Other BenefitsHousing Assistance (Taxable)6(23): An amount paid or value of assistance provided by any person in respect of, in the course of, or because of an individual’s office or employment in respect of the cost of, the financing of, the use of or the right to use a residence is, for the purposes of this section, a benefit received by the individual because of office or employment.

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Splane v MNR (1990 – overturned by 6(23)): TP transferred, compensated for higher mortgage payments Moved from Ottawa to Edmonton, high interest rates, had to buy a new house in Edmonton w/ a mortgage at the high interest

rate and was compensated for the difference in interest Non-taxable: TP restored to original position, no benefit of any significant value conferred

Hoefele (Kroll) (1996): Moved from Calgary to Toronto, higher prices in Toronto, compensated for the differential in mortgage interest paymentsPhillips v MNR (1994): Lump payment for moving was held to be taxable – enabled TP to acquire more valuable asset, increased net worth.Pezzelato v Canada (1995): Reimbursed for interest on T’s old residence which TP was unable to sell (given bridge financing) – taxable because it’s like giving him extra pay.

Benefits in Respect of a Housing Loss (Taxable)6(19): An amount paid in respect of a housing loss (other than an eligible housing loss) to T or someone not at arm’s length in respect of, in the course of, or because of an office or employment is deemed to be a benefit to T – nexus test6(20): An amount paid at any time in a taxation year in respect of an eligible housing loss to or on behalf of a taxpayer or a person who does not deal at arm’s length with the taxpayer in respect of, in the course of or because of, an office or employment is deemed to be a benefit received by the taxpayer at that time because of the office or employment to the extent of the amount, if any, by which

(a) one half of the amount, if any, by which the total of all amounts each of which is so paid in the year or in a preceding taxation year exceeds $15,000

The first $15,000.00 of an eligible housing loss is tax freeHalf of the amount above $15,000.00 is a taxable benefit

(b) the total of all amounts each of which is an amount included in computing the taxpayer’s income because of this subsection for a preceding taxation year in respect of the loss

6(21) – “housing loss”: amount by which the greater of the cost of the residence and its highest fair market value during the previous 6 months exceeds its fair market value at the time if it is not disposed of or the lesser of its fair market value and the proceeds of its disposition, if it is disposed of6(22) – “eligible housing loss”: refers to eligible relocation248(1) – eligible relocation: means a relocation of T where

(a) the relocation occurs to enable To (i) to carry on a business or be employed in Canada (“the new work location”), ORo (ii) to be a student in full time attendance at a post-secondary level

(b) both the before and after residences are in Canada (c) the distance between the before residence and the new work location is not less than 40km greater than the distance

between the new residence and the new work location

Ransom v MNR (1967): T was forced to move, lost money on his house, compensated by employer – NOT TAXABLE – effects of this case have been limited by the rules starting in 1998 (REVERSED)Thomas v Canada (2007): Moved back to Ottawa from NB for his work and suffered a loss on his NB home, NB employer paid him for his housing loss, argued it wasn’t a taxable benefit because it was after his employment

Cost – $850k, FMV – $768.5k Sells the residence to his employer for $850k Housing loss was $91.5k ($850k - $768.6k)

o It was not an eligible housing loss because the housing loss was not in respect of the eligible relocationVolpe (1990 TCC): V moves for a new job and gets $27k from an agreement with the new employer as compensation for housing loss. It wasn’t simply compensation for capital loss, but also consideration or partial consideration for accepting the job so taxable under 6(3)(b)&(c).

Forgiveness of Debt (Taxable)6(15): (a) a benefit shall be deemed to have been enjoyed by T any time an obligation issued by a debtor is settled or extinguished and (b) the value of that benefit shall be deemed to be the forgiven debt amount at that time6(15.1) – “forgiven amount”: has the meaning that would be assigned by 80(1) if (a) it was a commercial obligation, (b) no amount included in computing income because of the obligation being settled/extinguished at that time were taken into account

80(1): “forgiven amount” at any time in respect of a commercial obligation issued by a debtor is the amount determined by the formula A-B, where A=amount issued, B=amount paid back or already included in T’s income

McArdle v MNR (1984): Forgiveness of debt was part of the mutual agreement to end employment – TAXABLE, forgiveness came about because of employment contract

N.B. If this was a modern case and you could not argue that it was not debt forgiveness as an employee benefit because he was no longer employed, could argue as a retiring allowance

Norris (1994 TCC): Waffle applies – the benefit need not come directly from the employer16

TP provided consulting services to Co: Sunys (through management Co: PMC [his employer]), TP received interest free loan from Sunys, which was subsequently forgiven

Cousins (1972 TRB); McIlhargey (1991 FCTD): TAXABLE: Rejection of the argument that discharge of debt is compensation for decrease in net worth due to fall in housing or stock prices.

Mortgage for house, and loans for stock, if forgiven is income, not compensation for loss of valueGreisinger (1986 TCC): follows Ransom – partial debt forgiveness when debt is incurred from a move where TP is unable to sell old house, then sells the new location and moves back to old house – this is pre-6(15), would now be overruled.

Interest-Free and Low-Interest Loans (Taxable)6(9) Where an amount in respect of a loan or debt is deemed by 80.4(1) to be a benefit received by an individual, the amount of the benefit shall be included in computing the income of the individual as income from an office/employment.80.4(1) Where a person receives a loan/incurs a debt because of or in consequence of the previous, current or intended office/employment of the individual, or in a personal services business, they are deemed to have received a benefit.

Note the nexus test to office and employment: Narrower than “in respect of”. The amount of the benefit is the amount, if any, by which [(a) + (b)] exceeds [(c) + (d)].

o (a) Amount of interest that would be payable at the prescribed rate for the year Prescribed rates in Reg. 4301

o (b) The actual amount of interest paid by the employer.o (c) The amount of interest actually paid to the lender.o (d) Interest paid by the employer which is reimbursed by the TP.

The effect of this section is to require an individual to whom the provision applies to include as a benefit an amount equal to the difference between the prescribed rate and amounts paid by the debtor either as interest or a reimbursement paid by the employer - benefit is the difference between the prescribed rate of interest and the interest paid by the taxpayer

Contemplates i) employer makes loans to employee directly, or ii) employee borrows from the bank and employer pays them an interest subsidy

80.4(3): (a) (1) doesn’t apply if the interest rate is equal to or higher than the commercial rate or (b) if the loan was included in T’s income80.4(4): The prescribed interest rate for computing a benefit under 80.4(1) from a home purchase or home relocation loan can’t exceed what it would have been if calculated with the prescribed rate at the time the loan was incurred80.4(6): If repayment terms are greater than 5 years, the loan is “renewed” every 5 years, so is deemed a new loan at the 5-year point80.4(7): “Home purchase loan” – loan given to help T purchase a home or buy into a co-op110(1)(j): The deemed interest on the first $25K of a home purchase/relocation loan related to office or employment is non-taxable248(10) – “Home relocation loan”: loan received by T or T’s spouse where T has commenced employment at a location and by reason thereof has moved from the residence in Canada at which, before the move, the individual ordinarily resided to a residence in Canada at which, after the move, the individual ordinarily resided if

new residence is at least 40km closer to work location than old residence the loan is used to get a dwelling or buy into a co-op, with the purpose of living there the loan is received in the way described in 80.4(1) the loan designated by T as a home relocation loan, but you can only have 1 of these at a time!

Canada v Hoefele (1995 FCA): relation to (says because of, or consequence of) office or employment required by 80.4(1) is stricter than the “in relation to” of 6(1)

80.4(1): Language “as a consequence of” requires a strong causal connection between the debt or loan and employment, a connection closer than required by the language of ‘in respect of’ found in 6(1)(a).”

Non-taxable because TP got financing and qualified for the loan independently (reversed by 80.4(1.1))Siwik (1996 TCC): there is no difference between the interest-free loan and the employer paying the interest to you (or bank for you).

80.4(1.1): a loan or debt is deemed to have been received or incurred because of an individual’s office or employment … personal services business… if it is reasonable to conclude that, but for an individual’s previous, current or intended office or employment, or services...

the terms of the loan or debt would have been different OR the loan would not have been received or the debt would not have been incurred.

6(23) is more general, so it probably gets ousted (not a charging provision, it’s an interpretive rule) Might use it if the benefit isn’t an interest-free or low interest-loan Basically, it’s taxable if you get a housing subsidy

Options to Acquire Securities (Must Include)Option price: if you have to pay to buy the option, that is the option price → not common in the employment contextExercise/strike price: amount you pay per share to exercise the option

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“In the money”: shares are already worth something

7 : warrants, employee stock options, and generally, rights issued to employees to buy shares in an employer-corporation are a taxable benefit

7(3): where either an employer-corporation A or any other corporation B, which does not deal with A at arm’s length, issues to an employee, T, of A the right to buy stock in either A or B, that right fails to be taxed under s. 7 or not at all

7(4): if your employment ends before you exercise or dispose of the options, you are deemed to remain an employee until you exercise or dispose of the options – no loophole

7(5): s. 7 doesn’t apply if the employee did not receive the rights “in respect of, in the course of, or by virtue of, the employment”

o s. 7 refers to employment and so does not appear to include directors, who hold an office and are not “in service” of anyone

Taylor: should be given an inclusive definition and should not be restricted to definition of employment in 248(1)

7(1)(a): if the employee exercises the rights, T is deemed to have received the benefit in the year he or she exercised the rights to acquire the shares

o Value = (FMV) – (what you paid to acquire option + what you paid for the shares upon exercising)o If the shares are sold later at a higher price, the additional value is taxed as a capital gain

7(1)(b): if the employee disposes of rights, he is deemed to have received the benefit in the year he disposed of the right – 7(1.7) deems the cancellation of an option to constitute a transfer or disposition and deems amounts received on cancellation to be proceeds of disposition

o Value = (price you sell the rights for) – (price you paid to acquire the option) 7(1.1): For employees of CCPCs (Canadian-controlled private corporation), 7(1)(a) is read as deferring inclusion of the stock

option benefit until the year they dispose of the securities, rather than when they acquire them

110(1)(d): allows employees to deduct ½ of the amount included under 7, where the securities are non-convertible common shares or widely held trust units, the exercise price is not less than fair market value of the security when the option is granted, and the employee deals at arm’s length with the employer

As long as they’re not “in the money” shares when they are granted Has to be a prescribed share (common share)

110(1)(d.1): Employees of a CCPC allowed to deduct ½ of the amount included under 7(1.1), but shares have to have been held for at least two years

Allowances (Must Include)6(1)(b): Any amount received by T as an allowance for personal or living expenses or as an allowance for any other purpose must be included in T’s income from office or employment

Dictionary definition of allowance: money paid to cover special expenses Allowance is not defined in the Act – CRA distinguishes between allowances and:

o Accountable advances: where money is given ahead of time, but employee must show receipts and give back unspent money

o Reimbursements: where the employee pays for something upfront and gets paid back after showing receipts NOTE: reimbursements and accountable advances are generally not taxable BUT COULD fall under 6(1)

(a) as a benefit

MacDonald v Canada (1994 FCA): RCMP member relocated and was paid cost of living allowance of $700/month as a result.

o Taxable as income and an allowance was defined as the following: Arbitrary : predetermined amount set without specific reference to any actual expense or cost. May be set

through process of projected of average expenses or costs. Not a reimbursement. For a specific purpose : usually for a specific purpose Discretionary : no need to account for spending (no receipts needed)

North Waterloo Publishing Ltd v Canada (1998): Taxable: TP given meal allowance, whereas reimbursement or in-kind benefit might not have been taxable

o Duff: Sometimes you get caught in an allowance because it’s received in a certain form. In this sense, 6(1)(b) can catch people inappropriately.

Lepine (1978 TRB): Monthly isolation bonus is income. Huffman (1990 FCA): $500 allowance for clothes, but had to show $400 of receipts – non-taxable reimbursement as there

was low discretion with how to spend the moneyo Duff says that this was likely an allowance

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Exceptions to AllowancesDid T get Travel Expense Allowances? These are Excluded from Income .

6(1)(b)(v) – reasonable allowances for travel expenses for the period where TP’s job was selling property or negotiating contracts are excluded

6(1)(b)(vii) – reasonable allowances for travel expenses (other than for use of a motor vehicle) received by an employee (other than an employee under 6(1)(b)(v) ) from the employer for travelling away from

a) municipality where employer’s establishment at which TP ordinarily worked or ordinarily reported was located, AND

b) metropolitan area, if there is one, where the establishment was located, in performance of duties of employee’s office or employment

6(1)(b)(vii.1) – reasonable allowances for the use of a motor vehicle, received by an employee, (other than a 6(1)(b)(v) employee) from the employer for travelling in the performance of the duties of the office or employment are exempt from inclusion in T’s income

6(1)(b)(x) & (xi) – amount for motor vehicle will be in excess of “a reasonable allowance” when it is based on something other than solely kilometres for employment purposes OR where TP receives both an allowance and reimbursement for the vehicle

Blackman v MNR (1967): TP was forced to live in Montreal 240 days a year for three years when he had home in H and was given a per diem

o Taxable: allowance was not for travel expenses, but was for increased cost of living in Montreal and for out of pocket expenses

o Travelling : moving back/forth, Sojourning: to live temporarily (may depend on accommodation type) – Length of stay, type of residence, how often you go there, place of business and work hours

Bouchard v MNR (1980): TP had a full-time job in Montreal, but taught part-time in Sherbrooke where that employer gave him allowance he claimed for travelling

o Taxable: travel expenses were not because of employment, they were voluntarily incurred by TP 81(3.1): reverses Bouchard, exempts a reasonable allowance or reimbursement for travel expenses incurred in respect of

part-time employment; … if… throughout the period in which the expenses were incurred… the individual had other employment or was carrying on a business… provided the duties of the part-time employment were performed at a location not less than 80km away from both the individual’s ordinary place of residence and the place of other employment.

Campbell (TCC, 2003): Allowance not taxable for travel between home and admin building for board meetings because he worked from home – Distinguished in Daniels – Turns on whether home office is the taxpayer’s place of business

O’Connell (1998 TCC): “Reasonable” can be determined with reference to rest of Act, including limits on luxury vehicles.

Benefits/Allowances in Relation to a Special Work Site or Remote Work Location? 6(6)(a)(i) defines special work site as a location at which the duties performed by the TP were of a temporary nature, if the

TP maintained at another location a self-contained domestic establishment as the TP’s principal place of residence that was throughout the period, available for the TP’s occupancy and not rented by the TP to any other person, AND

o (ii) To which by reason of distance, TP could not reasonably be expected to have returned daily from the special work site.

o 6(6) Must be away for no less than 36 hours from principle place of residence and the allowance/benefit must be reasonable.

6(6)(a)(ii) defines remote work location as a location at which, by virtue of its remoteness from any established community, the taxpayer could not reasonably be expected to establish and maintain a self-contained domestic establishment, if the period during which the taxpayer was required by the taxpayer’s duties to be away from the taxpayer’s principal place of residence, or to be at the special work site or location, was not less than 36 hours

6(6)(a)(i)&(b)(i) exempts inclusion of benefits or allowance for board, lodging, and transportation, between a special work site or remote work location and the TPʼs place of residence

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

Guibert v MNR (1991 TCC): Guy keeps house in M when working in Q, thinks he works on temp basis but ends up staying a while. Employer gives him allowance for apartment in Q, which he uses 50% of time, kids live in it too.

o Temporary: went there on a temporary basis and was there longer than expectedo Principle place of residence: kids living there, wife living away, there for the weekends but goes back on weekends,

ownership vs use, exclusivity of useo Taxable: not a special work site, doesn’t think it’s an “unusual” place – Duff disagrees, hates on this decision.

Note: This contemplation of a special worksite (as only applying to “blue collar” out in the bush type worksites) has subsequently been rejected.

Jaffar v R (2002): says that special work sites don’t have to be in the bush, they can be in a big city Rozumiak v Queen (2005): TP paid to set up office in Chicago for 3 year term, determined to be a special work site.

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Barrett v Canada, (1997, TCC): TP claimed exemption for 40$ per day for board and lodging allowance. He is separated from his wife and was denied this exemption because his residence (where the wife lived) was not available for his occupancy.

Spannier v Canada, (2013, TCC): Worked in Fort McMurray for 20 day periods. Returned and would live with a friend elsewhere for 8 day periods, which she felt was her home even though didn’t pay rent or own. Court held this constituted a self-contained domestic establishment as principal place of residence. Allowed exemption.

IT-91R4: Duties considered temporary nature if the expected duration at the commencement of the duties are reasonably expected not to last more than 2 years, principle place = where you eat and sleep.

Reasonableness of Daily Return: Smith v Canada – TP lived 60km away- Taxable – not unreasonable to commute 60km Charun v MNR – 60km away but it was a shit road and included a ferry ride, plus he worked 12hr shifts

o Non-taxable: you should consider length of trip, hours of work, type of road, time of day of travel, physical and mental health of TP

IT-91R4: Generally 80km, but consider the things above in Charun as well.

Remote Work Location:Dionne v Canada, (1996, TCC): taxpayer worked up North at a location with approximately 400 people. Had certain amenities there like a cooperative food store. Rented an apartment. Employer paid an isolation premium (approximately $14,000). Also paid for trips to his domiciliary origin.

i. Taxpayer argues that these payments should be exempt because of the remote work location. Established community: CRA – “a body of people who reside in the same locality and who are permanently settled in that

location” provided that essential services are available within a reasonable commuting distance (food store, clothing store, housing, medical assistance and educational facilities) therefore, it’s an established community

Remoteness from an established community exists if the closest established community with more than 1,000 people is more than 80 kms away

Even if it wasn’t: does he have a self-contained domestic establishment? YES, he had an apartment and he lived there with his family.

“Maintain” does not require TP to live there permanently. If a person moves into lodging where he eats and sleeps over many months, that is sufficient

o Idea that this provision (lack of established community and self-contained domestic establishment) really would apply to a truly remote worksite like a logging camp.

Deduction for Residence in Prescribed Northern or Intermediate Zone:110.7 – allows for the deduction for allowances given for residing in the northern or intermediate zones of the country (zones defined in Reg. 7303.1)

110.7(2): 100% deduction allowed for the northern zone and 50% for the intermediate zone110.7(1)(a) – allows deductions for allowances given for travel expenses for those working in the northern and intermediate zones and for members of the TP’s household

Prescribed amount in Reg. 7304 Trips made when the TP lived in the prescribed area

110.7(3) – deduction limited to 2 trips/individual/year 110.7(1)(b) – deduction for allowance made for living expenses for the lesser of:

1. 20% of the taxpayer’s income for the year, and2. the total of

o (A) $11 for each day in the qualifying period that the taxpayer resided in the prescribed area, ando (B) $11 for each day in the qualifying period throughout which the individual maintained and resided in a self-

contained domestic establishment in the prescribed area (except where claimed by another individual who resided on the day in the establishment)

3. NOTE: Limited by deductions made under 6(6)(a)(i)

Employment Deductions8(2): Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.8(10): An amount otherwise deductible… under (1)(c), (f), (h) or (h.1) or (1)(i)(ii) or (iii) shall not be deducted unless a prescribed form, signed by TP’s employer certifying conditions set out in applicable provision were met …is filed.67: To be deductible, expenses must be reasonable in the circumstances.

8(1)(i)(i) and (iv) to (vii): Deductions allowed for professional and union dues

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8(1)(i)(ii) and (iii): Deductions allowed for other expenses (office rent, assistant’s salary, and cost of supplies) required by the contract of employment8(1)(m): Deductions allowed for contributions to pension plans8(1)(b): T may deduct legal expenses paid to establish a right to salary or wages owed by employer/former60(0.1): T may deduct legal expenses incurred in the year, or the preceding 7 years, to establish a right to a “retiring allowance”.

Key Limitations:8(2) – general limitation8(10) – employer certificate required for deductions under 8(1)(h) and (h.1) or 8(1)(i)(ii) and (iii)8(13) – limitation on deduction in respect of any part of a self-contained domestic establishment in which the individual resides (work space in home)

Deductible Travelling Expense8(1)(h) allows the TP to deduct “amounts expended by the TP in the year (other than motor vehicle expenses) for travelling in the course of the office or employment,” provided that the TP in the year,

a. was ordinarily required to carry on duties of O/E away from employer’s place of business or in different places, and

b. was required under contract of employment to pay travel expenses incurred by TP in performance of duties of the office or employment, except where the TP,

c. received allowances for travel expenses that was, because of 6(1)(b)(v), (vi) or (vii), not included in TP’s income, ORd. claims a deduction for the year under 8(1)(e), (f) or (g). (for specific types of jobs)

8(1)(h.1) allows TPs to deduct amounts expended in respect of motor vehicle expenses incurred for travelling in the course of an office or employment, also provided that the TP, in the year,

a) was ordinarily required to carry on duties of office or employment away from employer’s place of business or in different places, and

b) was required under the contract of employment to pay travel expenses incurred by TP in performance of duties of office or employment, and also except where the TP,

c) received allowance for travel expenses that was, because of 6(1)(b), not included in computing TP’s, ord) claims a deduction for the year under 8(1)(f).

8(10): TP must submit form signed by employer to qualify for these deductions (only applies to 8(1)(h)).8(1)(j): Allows deduction of interest payments and capital cost allowances related to the acquisition of a motor vehicle used to perform duties of the office or employment or an aircraft.

Luks v MNR (1958 ExCt): TP tries to deduct home/work commute because he had to bring tools he couldn’t leave at work. Wanted to deduct because he took his tools to the different jobs and didn’t leave them at work.

o Denied: Travel done before and after his duty. Taking his tools may have been practical, but not part of his duty. Chrapko (1988 FCA): TP worked at 3 racetracks. Denied for 2 racetracks in TO that he worked at 75% of time, allowed 3rd

deduction because 8(1)(h) encompasses travel to a place of work away from the places which the TP usually works. Merten (1990 FCTD): TP tries to deduct for travel from home to non-office work sites. Held that the Luks rationale can

no longer be applied following Chrapko – can deduct travel from home to a work site which is not usual place of work . Evans (1999 TCC): follows Merten - usual place of business was office but often went directly to schools from home.

Allowed on secondary basis that TP had to carry files in car on a permanent basis, had no choice but to do so (against Luks).

Meal Deduction when Away from Ordinary Work Location8(1)(h) allows the TP to deduct “amounts expended by the TP in the year (other than motor vehicle expenses) for travelling in the course of the office or employment,” provided that the TP in the year,

was ordinarily required to carry on duties of O/E away from employer’s place of business or in different places, and was required under contract of employment to pay travel expenses incurred by TP in performance of duties of the office or

employment, except where the TP, received allowances for travel expenses that was, because of 6(1)(b)(v), (vi) or (vii), not included in TP’s income, OR claims a deduction for the year under 8(1)(e), (f) or (g). (for specific types of jobs)

8(4): meals not included in 8(1)(h) unless eaten when TP required to be away from municipality or metropolitan area for > 12 hours67.1: meals and entertainment deduction is limited to 50% of otherwise deductible amount when incurred for the purpose of earning income

Healy v. The Queen (1979 FCA): TP lived in TO, worked at 2 places there and 1 in Fort Eerie. Deducted meals in Fort Eerie. Deductible: first, find municipality where employee usually works, and then find whether he has to be away from there for more

than 12 hrs in the course of work. Find the base – ignore outside locations (like Fort Eerie). Court said yes, he ordinarily reports for work in Toronto, and he was away for more than 12 hours, therefore all his meals are

deductible.

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IT-522R: where TP ordinarily reports or reports most frequently, but if more than one establishment in a municipality, all such places of business shall be viewed as a single establishment.

Office Rent & Home Office Expenses8(1)(i)(ii): Deduction for office rent (likely not allowed where taxpayer owns the property: Felton, Thompson, and other cases, but it was allowed in Prewer)

Prewer v MNR, 1989 TCC: taxpayer owns home, has a home office. Tries to deduct ⅓ of total expenses of her residence (percentage of mortgage and utilities interest. Is that office rent? Not really → court says that this doesn’t seem necessary (for example, doesn’t make sense to say that heat or hydro expenses relate to her home office, office was only 1/12 of the home, not more than 10% could accurately be attributed to her home office)

Felton: Court disallowed, said “rent” can only arise from a landlord-tenant relationship. Better off deducting office costs under supplies (iii) if you own your home office (for example: characterizing electricity as a supply). (things like mortgage interest would likely never be deductible this way). This approach is favored over the Prewer approach.

IT-352R2: No deduction can be made for the rental value of the work space area in a home owned by the individual.8(1)(i)(iii): The cost of supplies that were consumed directly in the performance of the duties of the office and employment that were required by the contract of employment to be supplied and paid for.

These include things like fuel, electricity, light bulbs and cleaning supplies (IT-352R2). If the TP owns the residence with the home office, some expenses may be deductible under this section as a “cost of supplies

consumed directly in the performance of the duties” (Drobot)8(13): Workspace in a home deductible only to the extent that the workspace is either the place where the individual principally performs the duties of the office or employment OR used exclusively for the purpose of earning income from the office and employment and used on a regular and continuous basis for meeting customers (meeting can be phone contact: Vanka) or other persons in the ordinary course of performing the duties of the office or employment

8(13)(b) deduction cannot exceed income from that workplace 8(13)(c) can carry deduction forward if it brings income to zero

Moving Expenses Deductions62(1) allows deductions for amounts paid by the TP:

Amounts paid as or on account of “moving expenses” as defined in 62(3) Amounts incurred in respect of an “eligible relocation” as defined in 248(1) Subject to limitations in 62(1)(a)-(d)

o Can’t be paid on the taxpayer’s behalf in respect of, in the course of or because of the taxpayer’s office or employment

Storrow (1978): Wanted to deduct for higher house cost, higher mortgage interest, legal registry fees, and installation of doors, windows and locks

These costs were not deductible as moving expenses Land registry fees became allowed under 62(3)

Ball (1996): Wanted to deduct costs of job hunting and house hunting, but they were not deductible Not sure if this would be allowed with the amendment to “in respect of”

62(3) – “moving expenses” include “any expense incurred as or on account of” and for limits to the below: (** Does Not specify reasonable amount BUT- 67: To be deductible, expenses must be reasonable in the circumstances.)(a) Travel costs for TP and “members of household’ (including reasonable amount expended for meals and lodging), in the course of moving from old to new house.

Critchley (1983 TRB): Cost of moving a dog deductible because the dog was characterized as a member of the household.

(b) Cost to TP of transporting or storing household effects in course of moving from old to new.

Yaeger (1986 TCC): Cost of moving/storing family horse not deductible because a horse was not a household effect.Hasan (2004): Summer rent paid by McGill student not deductible since there was no move, just kept it while awayRath (1982): Cost of replacing furniture destroyed in a fire while in storage not deductible (cost of fire insurance likely deductible if included in storage cost)

(c) Cost to TP of meals and lodging near old or new residence for TP and “members of household” for period <15 days.*NOTE: lack of reasonableness limit, unlike (a), but the CRA might rely on the general reasonableness limitation in s. 67 for this purpose, though the SCC has suggested that s. 67 doesn’t apply where a specific provision contains its own reasonableness limitation (Shell Canada).

Critchley (1983 TRB): Cost of moving a dog deductible because the dog was characterized as a member of the household.Trainor (1999): Taxpayer incurred meal and lodging expenses for 34 days before moving in a new residence, was reimbursed by his employer for meals and lodging for 23 days and was allowed to deduct meal and lodging expenses for the remaining

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*67.1 does not apply to 62; therefore, no authority for limiting meals and beverage deduction to 50%.

11 days

(d) Cost to TP of cancelling the lease on old residence. Has been interpreted strictly.Patry (1982): Taxpayer not allowed to deduct difference between rent paid and rent received from subletting apartment for remainder of lease after moving

Note: decided with strict construction, might be different now

(e) TP’s selling cost in respect of old residence. Has usually been interpreted generously – Pollard v MNR: interest penalty to discharge mortgage

on old residence deductible Canada v Collin: payment to trust company to make a

low-interest loan to purchaser of old residence Faibish (2008): cost to remedy mould not deductible

because it was done in the hopes of it helping with the sale of the house

Trigg v Canada (2009): cost to remove asbestos deductible because it was a response to a direct demand from a purchaser

(f) ** Where old residence is sold as a result of the move, cost of legal services in respect of the purchase of the new residence and any tax, fee or duty (except GST and VAT) imposed on the transfer or registration of title to the new.

Land title office fees are now included, so this overrules a tiny part of the Storrow result.Zant (2010): not deductible since taxpayer rented old residenceRenaud (2009): not deductible since taxpayer retained old residence as investment property

(g) Carrying costs: Interest, property taxes, insurance premiums and cost of heating and utilities in respect of the old residence, up to $5000, when not occupied nor rented and reasonable efforts are made to sell it.

You can’t claim under this paragraph if you are renting. Cable television has been recognized as a utility under (g). Johnston (2003): Interest on borrowed funds used to purchase new residence not deductible even though secured by mortgage on the old residence until soldLowe (2007 TCC): ‘Reasonable efforts’ – only told family + friends; was waiting out probationary period on new job to sell – deduction for amounts incurred to maintain old resident were disallowed, BUTCusson (2006 TCC): first TP told friends to advertise; then hired agent and sold. Carrying costs for whole time allowed.

(h) Cost of revising legal documents to reflect the change in address, replacing drivers’ license and non-commercial vehicle permits (excluding any cost for vehicle insurance) and utility disconnect/connection

Does not include costs for acquiring new residence, but for (f)

Although cable television is a “utility”, equipment and installation charges do not count as connection or disconnection costs, and hence are not deductible: Cusson (2006 TCC)

Distance to Relocation Requirement to be an Eligible Relocation:248(1) – eligible relocation: means a relocation of T where• (a) the relocation occurs to enable T

• (i) to carry on a business or be employed in Canada (“the new work location”), OR• (ii) to be a student in full time attendance at a post-secondary level

• (b) both the before residence and the after residence are in Canada• (c) the distance between the before residence and the new work location is not less than 40km greater than the distance between

the new residence and the new work location

Giannakopolous v MNR (1995 FCA): New work location 36km by straight-line, 44km by odometer. Deductible – shortest normal route is the preferred test.

Lund (1995 TCC): Although the ferry may have been inconvenient, it was still the shortest normal route.Nagy (2007 TCC): CRA suggested a crazy route. Adopts Giannakopolous – a realistic, normal routeHiggins (1995): Deduction disallowed since shortest normal route by ferry was only 15-20 kms, even though the route may have been inconvenient due to freezing on the river and line-ups for the ferryLund (2010): shortest normal route determined by distance rather than time

Purpose of Relocation:23

Issues when a delayed move or new responsibilities with same employer Dierckens (2011 TCC): After 10 years of driving a school bus near Winnipeg, TP moves closer to work

o Deduction allowed: court gives broad interpretation to the wording of the provision – seems to import no time limit Beyette v MNR (1990 TCC): TP changes jobs, delays moving for 5 years because of health and market sucking.

o Deductible: TP had good reasons to delay. There is no time limit in the Act so it’s up to the TP to decide.o Duff thinks new language “enable TP to be employed” might frustrate this as TP already employed when he moves.

Abrahamsen v Canada (2007 TCJ): Under old language, couldn’t deduct if you hadn’t commenced employment. This case said, under the new language, you CAN deduct moving expenses in the search for employment, as the move would “enable” you to be employed at a new location.

New Work Location: Several cases in which the deduction was disallowed on the basis that the taxpayer did not have a “new work location” even

if the purpose of the move was to perform new duties or effectively perform existing duties: Howlett (1998), Broydell (2005), Grill (2009), Moreland (2010)

Gelinas (2009 TCC): Move deductible because she got promoted to FT from PT and could no longer commute.o No new work location but work had materially changed, the move enabled her to work.

Grill v Queen (2009 TCC): TP commutes for 10 years, but then moves closer to work when divorces wife.o Denied: No new work location here, move did not enable him to work

Moreland v Queen (2010 TCC): TP tries to deduct moving expenses after getting new duties at same job.o Cites Grill, denies deduction. No new work location. Rejects interpretative approach in Gelinas.

NOTE: TCC inconsistent w/ Moreland and Gelinas , make sure to mention this Note: Duff – Eligible relocation, does relocation enable you to take up new employment? dictionary definitions of enable, are two types 1) facilitate, 2) move necessary to enable you to be employed (facilitation versus necessity) - courts need to decide what definition to pick, haven’t faced this issue

Residences Before and After Relocation – where T was “ordinarily resident”According to Duff, there are three types of these cases:

Move to one location but maintain or retain former home Temporary workers Move to one place and then to another (hardest to deal with)

To determine if there is an eligible relocation, must determine where TP ordinarily resided before and after the move. Rennie v MNR (1990 TCC): Moves from M to E, keeps M home, then moves E to V, claims M to E and E to V moves.

o Denied because his ordinary residence was in V, you can only have 1 ordinary residence at a timeo Note: He couldn’t deduct big ticket items now (buying/selling costs) and didn’t deduct them when he had the

chance. Should have maintained Montreal as ordinary place of residence and claimed other jobs were temporary, sojourning. Then deduct in stages – nothing in the Act says you can’t move over 3 years/have a drawn-out relocation.

Jaggers (1997 TCC): TP allowed to deduct cost of sale of house 2 years after move as he kept the old house since the new job was uncertain

Neville (1979 TRB): TP lives in temporary house for 2 years then moves from old house. Held: the old house was the ordinary residence the whole time.

Pitchford (1997 TCC): Moved from V to MJ then MJ to S. Left most furniture in storage until S, then tried to deduct the V-S transport. TP had no settled routine of life where they normally or customarily lived until S – no ordinary residence until S. It was deductible.

Dalisay v Canada (2004 TCC): Moved from St Johns to Regina, then to Edmonton seven weeks later. Both moves deductible, as there was never ordinary residence in Regina.

Ringham (2000 TCC): TP got work in H, sold home in Kanata and rented in K while travelling weekly to Thornhill where he stayed at an inn. TP then moved to T to work at employer’s office. TP sought to deduct sales cost on the house in K. Held that there was realistically only one move as the rental premises was temporary and not an ordinary residence.

Calvano v Canada (2003 TCC): TP moved from B to live in rental in C, delayed selling house in B for 16 months after renting to a tenant who insisted on long lease. Court rejects argument that residence in C was temporary until B house sold and disallowed selling cost for B house on basis that TP ordinarily resided in C at the time of sale.

Turnbull (1999 TCC): TP kept home in NF, worked in BC & various other places. Returned to NF yearly, listed it as home for taxes, built house there. Held TP was at all times ordinarily resident in NF, disallowed expenses for moves to/from BC.

Macdonald (1998 TCJ): TP moved from CB to AB for 6 weeks to work. No deduction because still ordinarily resided in CB. Cavalier (2002 TCC): TP forced to move from D to F for 4-month teaching contract. Wife stayed in D, didn’t change bank

account or mailing address. Court said purpose of deduction is to encourage mobility in work force, allowed deduction. Ordinarily resided in F for 4 months – slept, worked and socialized at new work location.

o NOTE: TP’s stay was longer, this decision is also more recent, court wants to promote mobility of labour

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Klein v Canada (1997): TP had 2 homes in M, tried to deduct selling cost of both when moved to V. Only 1 allowed.

*NOTE: If arguing an eligible relocation is over multiple residences over multiple years, cannot deduct moving expenses to the first location until the last residence in the last year.

e.g. Move from Toronto to Vancouver: Sell home in Toronto and move belongings to a temporary residence in Vancouver in 2016 and move to a permanent residence in Vancouver in 2017 If arguing that both “moves” are just one, cannot claim deductions of Toronto to Vancouver temporary residence until 2017 (rather than 2016) because that is when the eligible relocation actually occurred

o However, you have an unlimited carry-forward allowed under 62(1)(b)

TWO MOVE CASESCalvano v MNR Neville v MNR

TAXED NOT TAXEDBrampton to Coquitlam Peterborough to WinnipegMarch 1995:Moves from Brampton into a rented house in Coquitlam. At the time of the move, rents his Brampton house to a tenant who insists on a 16-month lease.June 1996:Sells the Brampton house and tries to deduct selling costs of the house as moving expense in the 1996 tax year. He argues that he lived in Coquitlam only temporarily (no ordinary residence) until selling his Brampton house.Held: May not deduct 1996 selling costs because he was ordinarily resident in Coquitlam at the time.

August 1973: Accepts a government appointment in Winnipeg during a sabbatical from his strenuous job as a professor at Trent University, Peterborough. He does not sell the Peterborough home, anticipating returning at the end of the sabbatical. He moves into a rented house in Winnipeg.Spring 1975: Resigns position at Trent, buys a Winnipeg house seeking to deduct cost of moving household effect from Peterborough to Winnipeg as moving expenses.Held: His old residence was in Peterborough until spring 1975 because until that time, his domestic arrangements in Winnipeg were of a temporary nature.

THREE MOVE CASESRennie v MNR Pitchford v Canada Dalisay v Canada Ringham v Canada

TAXED NOT TAXED NOT TAXED NOT TAXEDMontreal to Edmonton to Vic Vic to Moose Jaw to S’toon St John’s to Regina to Edmo Kanata to Kanata to RichmoAugust 1981:T moves to E, begins working for U of A. Doesn’t sell the M house. T claims moving expenses from M to E for 1981 tax year.August 1983:T moves to V, begins working for UVic. Rents in V. T claims moving expenses for moving from E to V for 1983 tax year.1984:T sells M house, buys V house. T claims cost of selling M house and moving remaining personal effects from M to V.Held: 1984 deductions disallowed because T was ordinarily resident in V at the time.

1993: T moves from V to MJ. T leaves much of his furniture in storage at the time. T had no “settled ordinary routine of life” until moving to S.1994:T moves from MJ to S. T claims moving expenses for moving furniture from storage to S.Held: T moved from V and didn’t take up residence in which he ordinarily resided until he got all of his furniture out of storage and established himself in S.

T moves from SJ to R and 7 weeks later, T moves from R to E. T seeks to deduct the cost of moving from SJ to R against employment income earned in E.Held:T was never ordinarily resident in R. She moved from SJ to E, so all moving expenses incurred along the way are deductible.

1995: T accepts job offer in Hungary. Expecting to move at any time, T sells K house and moves to a rented condo in K. T does not unpack many boxes at condo and never sees it as ordinary residence (although he does change his mailing address to this address). Move to Hungary is delayed.1996: Delays in Hungary job became indefinite, so T moves from K to Richmond in order to work at same employer’s Thornhill, Ontario office.Held: There was realistically only one move (from the original Kanata home to Richmond) and all moving expenses along the way are deductible.

Limitations on Deductibility62(1)(a): Moving expenses not deductible to the extent they were paid on the TP’s behalf in respect of, in the course of or because of the TP’s office or employment.62(1)(c): Limits amount that may be deducted to income from the business or employment at new location 62(1)(b): Permits expenses to be deducted in next year (if you don’t make enough in 1st year unlimited carry-forward)62(1)(d): No deductions to the extent reimbursements/allowances received by TP for expenses are not included in TP’s income.

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James (2001, aff’d 2003): Incorporated a company to provide services to another company for which he had to move for. Rather than pay himself a salary, he paid himself through dividends. Courts disallowed the deduction because he paid himself through a dividend and not salary, as per 62(1)(c)

Note: could change his assessment from dividend to salary the year after and use 62(1)(b) to carry it forward thenHippola v The Queen (2002 TCC): TP maintained res in N, worked in W and rented there while family stayed in N. TP then moved back to N intending to start own business but soon after started working for company M.

No deduction: TP’s income from business that he moved back to start was zero. Duff doesn’t like this: purpose is that income must be linked to location; but why care about this?

Income or Loss from a Business or Property and Other IncomeIncome that is “business” or “property” income is fully taxable under 3(a) and 9(1), and losses from the same are fully deductible from 3(d).

3(a) – business or property are identified as a source of income, 3(d) – permits Ts to deduct losses from business or property9(1) – income from business or property is PROFIT from that business, implying the allowance of deduction of reasonable expenses incurred9(2) – “loss”: T’s loss, if any … from that source is computing by applying the provisions respecting computation of income from that source, with such modification as the circumstances require9(3) – income from property and loss from property do not include capital gains or losses from disposition of that property

CharacterizationS. 3 determines the source of income to determine between property and business income.

Property:o Ordinary Meaning: right to possession, use or disposal of anything. Everything which is subject to ownership,

corporeal or incorporeal, tangible or intangible, visible or invisible, real or personalo Extended Meaning: 248(1): property of any kind whatever whether real or personal or corporeal or incorporealo Property Income : passive, property doing the work (e.g. interest from loaning money, rent, dividends, royalties)o Types : capital property – investment, personal use // inventory – business income

Business:o Ordinary Meaning: habitual occupation, profession or trade. Organized activities or enterprises (objective) which

have as their object gain (subjective) through the utilization of labour and capital in varying combinations. Investments of time and capital on a future outcome.

o Extended Meaning: 248(1): profession, calling, trade, manufacture, or undertaking of any kind whatever or adventure or concern in the nature of trade – does not include an office or employment – this is income from a combination of labour and capital

Business – Ordinary Meaning (objective and subjective factor) Smith v Anderson (1880) – Business = anything which occupies the time and attention and labour of a man for the purpose

of profit. (1) organized activity (objective) (2) for purpose of making a profit (subjective)

Gambling Cases: *Morden (1961 Exch. Ct.): Owned a hotel and racing stable with 12 horses, M bets on horses systemically in past, then

casually. MNR wants to tax the casual gambling winnings as business income. He argued that the gambling winnings are from a hobby, not a business.

o Objective test – organized activity – making a bet is not organized, more random; related to the reasonable expectation of profit (REOP)

o Subjective test – for the purpose of profit – he probably had this purposeo TEST (subjective): Was dominant purpose entertainment or enterprise of commercial character?o Held: gambling was for purpose of entertainment , therefore not taxable

Graham v. Green (1925 KB): Organized effort is ‘taxable vocation’, simple betting of gambler as habit or addiction is not.o If you’re just betting, you can’t really expect to win in the long run hint of the REOP testo Note: gambling gain might be taxable under extended definition of business in 248(1) or as income from an

specified source under 3(a). Most cases hold gambling gains as not taxable. No decisions consider if it might be income from a source 3(a).

Leblanc (TCC 2006): Brothers who systematically gambled and won playing sports lotteries not taxed (even if player has REOP, not taxable, the flipside is that gambling losses are not deductible)

o Duff: CRA badly argued it; can argue that people with a system and a skill could be taxed Alarie’s The Taxation of Poker and Other Gambling Winnings in Canada: how gambling winnings can amount to income

from a businesso TP has access to inside information

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o TP has a skill that provides a demonstrable betting advantageo TP is a bookmaker, casino operator or other provider of gambling opportunities

Luprypa v Canada, (1997, TCC): TP was a regular pool player, deemed to be carrying on a business. Court held that the system created by the taxpayer created a reasonable expectation of profit in which he carefully managed risks.

o Devoted several hours in the afternoon each day practicing and challenged inebriated players while he was sobero Court concluded that pool “was not a hobby for the Appellant. It was his livelihood and business”

Cohen v The Queen (2011, TCC): TP takes on playing poker full-time. Court looks at the following factors:o Source of income if undertaken in a sufficiently commercial manner

Commercial involves a subjective intention to profito The profit and loss experience in past yearso The taxpayer’s trainingo The taxpayer’s intended course of actiono The capability of the venture to show a profit

Treasure-Seeking Cases: MacEachern (1977 TRB): Treasure hunting – held to be income from a business as partners intended to sell anything they

found for profit, it was a well-organized endeavor and there was potential for substantial profit. Tobias (1978 FCTD): Failed treasure hunt. Deductions allowed – uncertainty of profit doesn’t stop expenses from being

business expenses.

Windfall Case: Cameron (1971 TAB): C is a salmon + herring fisherman, engages with others to catch and sell two killer whales. TP said he

wasn’t a whaler. Held that the captures were fortuitous (windfall) and not business income.o NOTE: that this might be covered under AINT as an organized activity with view to profit.

Test: organized activity (objective) for the purpose of making a profit (subjective) Having key skills and knowledge behind the activity can be used to argue it as business income How often you do the activity can help determine if it was organized

Extended Meaning – Adventure or Concern in the Nature of Trade (ACNT)The Act adds to the ordinary meaning with a profession, calling, trade, manufacture or undertaking of any kind whatever and...an adventure or concern in the nature of trade.

“Adventure” is an “unusual, exciting, and daring experience” commercial speculation “Concern” is a “matter of interest or importance” or a “business or company” enterprise “In the nature of trade” requires the activity to have some of the characteristics of a trading enterprise nature and

quantity of subject matter (whiskey – Fraser’s and toilet paper – Rutledge cases) Interpretation highly litigated because it determines whether something is income or loss from a business OR a capital gain

or loss

MNR v Taylor (1956 ExCt): TP buys 1500 tons of metal (lead), sells to his own company, makes profits. Issue: Was it a capital gain (not taxable at the time) or business income? – Held: Taxable as ACNT.

o Positive Signs that it is an ACNT ‘Manner of dealing’ test: was the transaction carried out the way a professional trader would do it? (use of

property, holding property, seek out purchasers, soliciting offers/advertising, improve property, hold it for a short time then flip it)

Nature and quantity of subject matter : too much for personal use? Is it capable of having personal use? Personal use property vs income producing capital, buying something in order to sell it at a profit (inventory)

Intention : Profit? REOP? (Though here, wasn’t a factor – this isn’t an essential factor) Risk or danger : Presence suggests an ACNT (not present/important in this case)

o Negative Signs that it is not an ACNT Frequency of trade : Singleness or isolation of transaction has no bearing, though might be an indicator

(has the individual done it before?) Organization : No organization necessary (i.e. threshold lower than for a business), no need for an

overarching organization created to carry on the adventure Transformation of subject matter : Nothing needs to be done to the subject matter to make it saleable Relationship to other activities of the taxpayer : if the true nature is an adventure in trade, then the profits

are taxable, regardless if there is a link to the individual’s ordinary course of business or wholly unconnected

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Intention to profit : no need for intention to profit Duff says this is a bit odd because speculative activity points to an intent to profit, this point is very fact specific and at the margins of an analysis

IT-459 (approved by SCC in Friesen): Must consider all circumstances of the transaction – there is no single criterion, just a series of main tests:

o Did TP acquire and deal with the property in the same way as would an ordinary dealer in that property? Short holding period, looks for buyers, improve marketability, commercial building in sim products

o Does the nature and quantity of the property exclude the possibility that it was purchased as an investment or capital item, or that it could have been disposed of other than in a transaction of a trading nature?

Can’t produce income, no personal use, requires operation to produce income but TP doesn’t know how to operate, only usable for resale

o Is TP’s intention, consistent with other evidence pointing to a trading motivation? Intention for profit not determinative, intention to sell at first available opportunity suggests ACNT, counts

if resell for profit was 2nd intention if 1st intention didn’t work out

Secondary Intention doctrine: Regal Heights Limited (1960 SCC): ACNT - TP had “secondary intention” to resell property, notwithstanding that “primary

intention” was to build a shopping center [income from an asset]. o Subsequent cases have established that a transaction may be an ACNT where but for possibility of re-sale at profit,

wouldn’t have acquired the property. Same with Racine

Inclusions – Income from Business and Other Income9(1): A taxpayer’s income from business or property is the “profit” from that business or property (net concept)

Net concept allows for the deductions of reasonable expenses incurred for the purpose of gaining/producing income from the business or property from the gross revenues obtained by the business or property

9 + 12 include certain amounts based on either the concept of “profit” or specific statutory inclusions respectively

Gains from Illegal Activities (Taxable) No 275 v MNR (1955 Tax ABC): TP was a prostitute. Operation in nature of trade and therefore taxable. Courts have always

said that, in the tax context, they are judging the economic generating nature of the activity, not its legality. A taxpayer can’t use their criminality to be in a better position than someone who isn’t engaged in crime.

o Once it is established that they are earnings from a business, doesn’t matter if the business is legal or illegal. Hammill (FCA, 2005): TP invests in a fraudulent scheme; the loss from the fraud not deductible since not connected with a

source of income (there was no actual business since it was a fraud) Johnson (FCA, 2012): Gains from Ponzi scheme in which taxpayer invested were taxable business income because she

entered into agreements to receive a profit on her investments and she did in fact receive said profit. Ruff (TCC, 2012): Loss from internet scam connected with taxpayer’s law practice, but deduction of expenses not

reasonable (spent a lot of money to go abroad and find the scammer’s money) in the circumstances under 67 Smith (1927 PC): Bootlegging profits. No valid reason for finding Parliament would exclude illegal activities. To do so

would increase the burden on lawful businesses.

Damages and Other Compensation (Some Taxable and Some Windfall) Surrogatum principle applies, where pursuant to a legal right, compensation is paid that replaces otherwise taxable business income

Canada v Manley (1985): TP gets damages for breach of authority (finders’ fee contract that didn’t get fulfilled).o Taxable: surrogatum says that if damages are replacing profit (for ACNT here), the damages are taxable

Amount received pursuant to a legal right (contract) Compensation in lieu of a sum that would have been taxable (the finder’s fee would have been profit from a

business because the taxpayer had engaged in an “adventure in the nature of trade” Engaged in the nature of trade because looking for a purchaser was a speculative adventure

London & Thames Haven Oil Wharves v Attwooll (1967): include in income where (1) received pursuant to legal right; (2) surrogate for an amount that would have been taxable as profits – characterization for tax purposes follows characterization of received amount in lieu of which damages paid (deemed business income)

Donald Hart Limited (Ex. Ct. 1959): Look to nature and quality of the award; damages for infringement of trademark and passing off “was made for the purpose of filling the hole in the taxpayer’s profit” regarded as income; therefore, taxable.

HA Roberts Ltd (1969 SCC): Damages for cancellation of long-term contract characterized as a capital receipt since separate mortgage business ceased to exist, and because contracts were “capital assets of an enduring nature” due to their importance. The mortgage business was destroyed when the clients left = loss of a source of income, not income itself.

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CIR v Fleming and Co (Machinery) Ltd. (HL) [IT-365R2]: Distinction between cases where “the structure of the recipient’s business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than a surrogatum for the future profits surrendered” (business income) and cases “when the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipient’s profit-making apparatus” (capital receipt)

Pe Ben Industries v MNR (1988 FCTD): Long term contract to transport to oil sands distinguished from TP’s ordinary business – long term contracts more likely to be capital. More likely to be capital for a smaller company (bigger effect on business).

o Capital receipt because it was a capital asset of enduring nature Canadian National Railway v MNR (1988): One of many contracts cancelled – loss of income, just compensation for future

profits. Donna Rae Ltd (1980 TRB): TP’s fishing gear destroyed. Compensation: 70% capital [gear], 30% income [lost profits]. BC Fir & Cedar Co (1929 ExCt): Manufacturer/dealer of lumber products gets insurance proceeds after fire destroys plant.

o Payment for lost profit and fixed charges – both counted as income. Bellingham (1996 FCA): TP gets extra payment for expropriation. Non-taxable windfall because it is punitive damages. Cartwright & Sons (1961): Punitive damages for copyright infringement non-taxable – don’t comp for profits/capital.

Voluntary Payments (Windfalls)Voluntary payments to businesses have repeatedly been held to be windfalls. The surrogatum principle is typically only applied where T had a legal right to the payment in lieu of which he receives compensation (so not applicable here). Goldman emphasized compensation for services rendered from the point of view of the recipient.

Federal Farms v MNR (1959 ExCt): TP got voluntary payment from relief fund to compensate for lost crops and supplies.o MNR said this is compensation for the profits the farms would have gotten if the damage had not been doneo Non-taxable: Not the same as insurance because no legal right to payment, no contract, not set up in advance, no

expectation, unlikely to reoccur, did not result directly or indirectly from any business operationo Just because payment related to/kind of measured by amount of loss doesn’t affect nature or quality as a gift (of a

charitable nature) German v. MNR (1959, TAB): Windfall case, taxpayer gets a dividend but it’s non-taxable because it was “entirely

gratuitous,” nature of gift/windfall, surprising/ unexpected Cranswick (1982 FCA): Minority shareholders are unhappy with the majority’s move to sell off the division for less than it’s

worth. To avoid the lawsuit, the company makes a deal with minority shareholders for (i)$3.35 per share (may be taxable later), or (ii)buy shares at $26 each (taxable capital gain) → Duff says the court just got confused here and said this payment was a non-taxable windfall

o Factors: Enforceable claim to payment? Organized effort to recover payment? Payment sought after or solicited? Payment expected? Element of foreseeable recurrence? Customary source of income? Consideration for or in recognition of property, services or anything else provided by TP? Was it earned?

Frank Beban Logging (1998 TCC): Taxpayer is a logging contractor, got $800,000 from BC when his business was destroyed due to creation of a national park, payment was a non-taxable “windfall” because not received pursuant to any legal/statutory right

Mohawk Oil (1992 FCA): Rejected Cranswick. Payment in consideration for suing, therefore taxable because of surrogatum.

Campbell (1958 Tax ABC): Professional swimmer pulled from lake in distance swim with only a half mile to go, didn’t complete swim as per contract with Toronto Star but they still paid her $5000 because of her effort, income from a business because the payment was for a service that she substantially performed

o Voluntary payments arising out of services rendered are not gifts – they are taxable

Non-Competition Payments:Fortino (TCC, 1997) & Manrell (FCA, 2003): Amounts in exchange for agreement not to compete not taxable as income or capital receiptLegislative Response – 56.4(2): Non-competition payments, defined as restrictive covenants, are taxable as income

Can characterize non-competition payment as capital receipt when accompanying the sale of a business

Prizes and Awards (Kind of Taxable)Like voluntary payments, prizes and awards are often received without legal entitlement. However, there may be valuable consideration by a recipient to a grantor for a prize or award, or opportunity to receive a prize or award. Just because it is a prize does not point to anything in particular.6(1)(a) and 9(1): See if it falls into office and employment or business income (prizes in competitions) Yes? TAXABLE

Awards received in course of business or from office or employment are fully taxable40(2)(f): A taxpayer’s gain or loss from the disposition of

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o a chance to win a prize or bet, oro a right to receive an amount as a prize or as winnings on a bet,o in connection with a lottery scheme or a pool system of betting referred to in section 205 of the Criminal Code is nil.

Now, these kind of prizes are explicitly not taxed 56(1)(n): Amendment in 1972 as to “other sources of income” makes a prize for achievement in a field of endeavour ordinary carried on by the taxpayer taxable as income from a separate source

Without restricting the generality of s. 3, there shall be included in computing the income of a taxpayer for a taxation year, the amount, if any, by which

(i) the total of all amounts [...] a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer, other than a prescribed prize

Subject to the $500 exemption in 56(3)56(1)(d): Include any amount paid to the TP as an annuity60(a): Annuity payments not taxable if paid as a return of capital OR paid under a will or trust56(3): List of exempt prizes because they are “ Prescribed Prizes ” and are completely exempt:

Reg. 7700 – “prescribed prize”: any prize "recognized by the general public" and "awarded for meritorious achievement in the arts, the sciences or service to the public" but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered

o Not for amounts reasonably regarded as compensation for services rendered or to be rendered, nor student scholarships or bursaries

Prizes from lucky draws not taxable: Abraham v MNR (1960): TP owned IGA, got draw entries for ordering stock, won a car in a draw.

o Non-taxable: Won by pure chance (though from selected pool) – severs business connection (less chance, less tax) Poirier (1968 Tax ABC): Car dealer meets quota, entered into draw, wins vacation paid by car company.

o Non-taxable: No characteristics of income, not taxable benefit as employee either.

Prizes in Competitions may be taxable as business income: Rother (1955 Tax ABC): Architect gets $2K in design competition

o Non- taxable : not received as employee, for services nor as purchase fee – prize or gratuitous award nature. Watts (1966 ExCt): Taxable, Architect wins design competition. Though not from course of business, court construes

contract between TP and competition by virtue of ‘entering into this competition by the respondent and the filing of drawings pursuant to it’ – semi-finalist situation

o NOTE: 56(1)(n) would make both of the above taxable on the basis that they are prizes in a field of endeavour ordinarily carried out by the taxpayer

Annuity Payments: Rumack v MNR (1992 FCA): TP wins cash for life, payments financed by annuity not owned by TP.

o Not taxed on capital but taxable for income – regular, certain, foreseeable, expected, enforceable.

Prizes for Achievement in a Field of Endeavour (taxable, subject to $500 exemption in 56(1)(n) ): Canada v Savage (1983): Pre-56(1)(n) including “other than in course of business or employment” - $300 from employer for

doing 3 courses○ “Prize” is for something accomplished, not just competition with others○ Must be achieved in field ordinary carried on by TP; rules out prizes won in games of chance, at party, for

athletics Turcotte v Canada (1997): Cinema manager goes on game show, wins after answering questions about movies

○ Not taxable: area of culture not a field of endeavour - “defined, specific field… continuously engaged in by TP”

Prescribed Prize (tax exempt): Foulds v Canada (1997 TCC): Music prize awarded to TP for managing a band

o Wasn’t in the course of the business because it was not remuneration, it was not recurring, etc.o Non-taxable: meritorious achievement in arts and recognized by general public

Meritorious achievement in the arts because the band is scored on a variety of criteria Recognized by the general public because it was advertised in the press and radio

Labelle v Queen (1994 TCC): Accounting professor wins a case competition for accountants – recognized by general public?

o Non-taxable: Minister must prove it isn’t recognized by general public, can’t just say it isn’to Duff: might have made this ‘general public’ argument with too low a threshold

Knapik-Sztamko (2014 TCC): Actress in a play at the National Art Centre, received $80,000 from an opera foundation

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o Non-taxable: Did not render any services to the foundation, was a meritorious achievement in the arts and was recognized by the general public

Price Decision Tree:

Inclusions – Interest Income12(1)(c): Income includes any amount received or receivable by the TP in the year (depending on the method regularly followed by the TP in computing the TP’s income) as, on account or in lieu of payment of, or in satisfaction of, interest to the extent that the interest was not included in computing the TP’s income for a preceding taxation year

Received – cash; receivable – accrual basis (accounts receivable – legal right to it)20(1)(c): Provides for a deduction for the payer of interest

Characterization – Is it Interest? TEST (Perini): Interest is not defined in the act, but the 3 elements for the legal definition of interest are:

Compensation for the use or retention of a principal sumo Money paid for the use of money lent

Referable to a principal sumo Percentage of the principal sum per annum

Accrues from day to day, even if payable at intervalso The total interest owed at the end of the year goes up day-by-day

Just because a contract says a sum is “interest” doesn’t necessarily mean it will be characterized that way by the courts. Similarly, just because a contract claims an amount is not “interest” does not mean the courts will not say it is.

Evidently, this means the CRA will contest a TP’s characterization where it is in its interest to do so But a TP may also challenge his own characterization of an amount (ex: what they named it in a contract)

Interest payment referable to principal sum determined retroactively:Perini Estate v Queen (1982 FCA): TP sells company for 1) lump sum payment, 2) payments for 3 years based on net profits and 3) interest payments on 3yr payments were computed from closing day until payment (couldn’t be calculated until profits known).

Taxpayer’s argument: #3 was a capital payment (part of the purchase price), despite the use of the word “interest”. Argued that #3 does not meet the legal interest requirement of accruing day to day

o Since the principal on which it’s based (share of profits from closing date to date of payment) doesn’t exist yet, therefore it can’t accrue

Determined as interest (thus, taxable): Parties to the contract can give a contingent liability retroactive effect such that it could qualify as a principal sum to which interest could be said to be referable. Even though the payments were contingent, they became retroactive when the conditions were satisfied; thus, the payments could be deemed interest on a principal.

Note: The contingent interest is directly related to the principal amount even though it was an undetermined amount at the time the contract was made (different from Sherway according to Duff.)

Miller (1985): TP received retroactive salary increase with “interest” payable from time of initial salary payment; court followed Perini in finding principal amount doesn’t need to be absolutely fixed in order for there to be interestIT-369R – Interest Income – where interest is retroactively awarded pursuant to an award for damages, it is taxable as income and interest pursuant to payment made after the closing date is taxable.

Taxable over $500Exempt(not taxable)

NoYes

Prescribed? Not taxable

NoYes

For achievement in a field of endeavor ordinarily carried on by the taxpayer?

Fully taxable as income from employment or business

NoYes

In respect of employment or in the course of business?

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Payments Comprising Compensation – can be distinguishedNOTE: Occasionally, a TP may succeed in characterizing an amount called “interest” as something else

Bellingham (1996 FCA): Substance over nomenclature – where something is classified as simple interest payment but is actually punitive damages, it will not be taxable – expropriation payment had additional interest payment on court-ordered increased amount

RG Huston et al. (1962 ExCT): Payments from war claims fund called/calculated as interest but were grants as TP had no property or legal or equitable right to amount on which interest was computed. (distinguished in Perini)

Ahmad v. Canada, (2002, TCC): Similar to Huston, legal action taken - damage payments and pre-judgment interest from time of injury to the decision - can “pre-judgment interest” be legal interest - in this context, the court said that this amount wasn’t taxable under 12(1)(c) because there was no principal amount in reference to which interest could accrue until the judgement determined that he had been wronged, that he had suffered a loss from the wrong, and the amount of the loss

o In Perini, there was a legal right to the principal from the contract and here, there was no legal right until the judgment came down.

Coughlan v. Canada, (2001 TCC): Contrary result to Ahmad, breach of contract, liquidated damages are specified in the contract - taxpayer argued that the prejudgment interest should be characterized as an additional damage award - court rejected this, payment was “interest on liquidated amounts wrongfully withheld”, taxable as interest under 12(1)(c) because you knew that you had a right to the amount → same as reasoning in Perini

o (DD: could also think in the context of torts that the legal right arises when the tort occurs, Coughlan concept in contract law could also be used in tort context like Ahmad).

o Interest on settlement payments (so probably also pre-judgment interest?) is legally interest

Payments in Lieu of Interest: Hall v. MNR, (1970, Ex Ct): Taxpayer sold matured bearer coupons that he clipped from a number of Canada bonds that he

held. Court held that amounts received for the bearer coupons were taxable because amounts were received “in lieu of payment of interest” and not a capital gain. Surrogatum principle.

Greenington Group (1979): Instead of charging the full interest, accepted a lower price for the property taxable as TP was getting a payment in lieu of interest

Roszko (2014 TCC): Invested in a Ponzi scheme, got back “interest”, wasn’t actually deemed as interest because it was a return on capital since the schemer did not utilize TP’s money as instructed

Deduction of Interest Expenses – 20(1)(c) Characterization of a payment as interest or not interest does sometimes come up in the deductions context. Obviously, the incentives of the Minister and TP are reversed.

Yonge-Eglinton Building (1974 FCA): TP borrowed money for building; paid “ordinary” interest, and “additional interest” of 1% of annual gross rental income; this amount not interest under 20(1)(c) (therefore not deductible) because it is not directly related to the principal sum.

Sherway Centre (1998 FCA) *Expanded concept of interest*: TP financed mall with bonds paying fixed interest and “participatory interest” equal to 15% of TP’s “operating surplus”.

o Held: law must consider new and innovative financing schemes, allowed deduction [20(1)(c)]. Interest must only be ascertainable on daily basis, not necessary it be expressed on a daily basis. Court also questions requirement of principal in the traditional sense—All that is required is that the payment’s purpose be compensatory for loaning money and getting back money at a later time.

o Sherway TEST - Are payments a percentage of, or in any way related to, the principal sum? broadened concept of interest (which Duff thinks is a bit distorted – as long as there’s principal, it’s interest)

Received or Receivable Methods: Freeway Properties: TP corporation sold a parcel of land and took back a $300,000 mortgage with interest owing during the

term and the mortgage payable in three lump-sum instalments.o Taxable at the time of the deal because that is when the payments/mortgage became receivable and the TP accounts

for income on the accrual method Elm Ridge Country Club: TP receives interest in 1983, but includes it as income in 1982 on the grounds that this amount

accrued during 1982o Court sided with the Minister arguing that TP usually reported other interest income on a cash basis and did not

report the accrued interest in computing its income for 1982 CRA IT-396R: Although 12(c) permits a TP to report interest income from different sources using different methods, interest

from the same source (i.e. same payer, on same type of interest-yielding property) must be reported using the same method

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Combined Interest and Capital:16(1)(a): Deemed interest where payment of interest and capital are combined: where, under a contract or an arrangement, an amount can reasonably be regarded as being in part interest and in part of a capital nature, the amount that can reasonably be regarded as interest is deemed to be interest

Anti-avoidance rule that should only be used when there is something in the evidence that indicates that it was the intention of the vendor to avoid taxation on the interest by including it as part of a larger capital payment than would otherwise have been made.

It determines tax consequences on the basis of the economic or commercial substance of the contract or other arrangement rather than its legal form

Test – Groulx: Farmer sold property for a price far above FMV in exchange for waiving interest on the purchase price – price to be paid over 8 years – interest charged if late and discount provided if early

o Normal business practices: If the taxpayer had followed well-recognized business practices, then the balance of $310,000 that was payable in annual instalments would have had an interest rate of 5-6%

o Selling price higher than fair market value: shown that the sale price of $395,000 was above the fair market value of $320,000 based on an arm’s length sale test → when you crunch the numbers re: instalment payments, then it comes out to $320,000 up front for the property → anything in excess looks like something other than a sale price

o Capitalized interest to avoid tax: waiving interest leads to tax avoidance, they find he knew what he was doing (time-value of money) → the 6% penalties for late payments are normal, but the 5% discount for early payments is unusual and shows that the parties were aware of the time-value of money

o Terms of the contract: the 6% and 5% penalty/reward clauses demonstrate an awareness and desire not to double his taxable income

Vanwest: TP bought a right to cut timber – paid $1.5M up front and $1.2M/year over the next 5 years.o Four criteria:

The terms of the agreement between the parties The course of the negotiations The relationship between the price paid and the apparent market value of the property at the time The common practice with respect to payment of interest on the sale of timber limits

o None of the factors in Groulx were present, interest was only contemplated on late payments (as was standard business practice re: timber). No other reference to interest, discounts for early payment or being sold above FMV.

The relationship between FMV and purchase price is the most important Rodmon Construction (1975 FCTD): No interest doesn’t automatically mean it’s an avoidance transaction.

o FMV is the most important factor – “the highest price available in an open and unrestricted market between informed, prudent parties acting at arm’s length and under no compulsion to act”

o Price in excess of FMV is deemed interesto But how to get FMV? How to determine who would actually pay it?

Duff thinks it’s too hard to discern.

Discounts and PremiumsDiscount: Arises from the acquisition of a debt obligation for an amount less than the principal or face amount payable at maturity – either original issue discount or discount on subsequent acquisition on secondary market

e.g. T-bill that pays $1,000 a year from now is acquired for $950

Premium: Results from the disposition of a debt obligation for an amount greater than the cost for which it is acquired – either on redemption or through a disposition on the secondary market

e.g. A corporate bond issued for $1,000 pays a face amount of $1,000 a year from now plus an additional $50 To the extent that these kinds of economic returns can substitute for the payment of interest, one might expect that they

should be included in computing the recipient’s income from a business or property in the same way as ordinary interest Case law suggests that these premiums and discounts must (i) compensate for the use of borrowed money, (ii) refer to the

principal amount and, (iii) accrue day by day

Yield: A percentage of the amount loaned expressed like an ordinary interest rate e.g. T-bill paying $1,000 in one year acquired for $950 – Yield = $50/$950 = 5.26%

Gains and losses on the disposition of debt obligations result from:1. Accrued returns2. Changes in perceived risks3. Changes in interest rates

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Tax Implications of Discounts and Premiums : Where an increase in the value of a discounted debt obligation (or a debt obligation paying a premium on maturity) arises

from the operation of time alone (day-to-day accrual), this increase is generally characterized as interest (Lomax) Where an increase or decrease in the value of a debt obligation results from changes in credit risks or interest rates, on the

other hand, the gain or loss is generally on account of capital, unless the investor carries on a business as a trader in securities (in which case the gain or loss is characterized as income from the taxpayer’s business as a trader).

As a result, where an investor disposes of a debt obligation before maturity, the CRA will first compute the amount of any interest element resulting from day-to-day accrual, and then compute any capital gain or loss by subtracting from the proceeds of sale of the debt obligation both its cost the accrued interest up to the date of its disposition.

o E.g. Where the $1,000 t-bill is sold for $990.15 after 6 months, at a time when interest rates have fallen from 5.26% (the prevailing price when the t-bill was issued) to 2%, approximately $25 of the gain will be characterized as interest, while the remaining $15.15 will be characterized as a capital gain.

Lomax v. Peter Dixon & Sons, (1943 KB): Where there is a reasonable rate of interest on a fairly secure loan, there is no presumption that a discount or premium has the character of interest

1. If the premium or discount exists to deal with a particular risk, then the premium or discount is not interest, it should be treated as capital

2. Can also deal with risk using a higher interest rate3. In deciding the true nature of the discount or premium, consider:

a. The term of the loanb. The rate of interestc. The nature of the capital riskd. The extent to which the parties expressly took or may reasonably be supposed to have taken the capital risk into

account in fixing the terms of the contract

O’Neil v MNR, (1991 TCC): Taxpayer bought treasury bill for $189k, which will pay $200k on maturity → return in the form of a discount because he acquired this debt obligation for less than the principal amount payable upon maturity. Cashed in for $200k. Did this twice. The treasury bills had no stated interest.

TP argues this “discount” is realized as a capital gain. The difference in the purchase price and the redemption values of the bonds should be reasonably regarded as interest

pursuant to 16(1) Court agrees with an Interpretation Bulletin that states that Government Treasury Bills carry no stated interest rate and the

“difference between the amount paid by the purchaser and the matured value of the Bill represents income in the nature of interest.”

BUT → a discount on a debt obligation that doesn’t have a stated interest rate is usually, but not always interest - if the loan is made at, or in excess of, a reasonable commercial rate then no presumption that the discount is interest

HERE → the debt obligation has no stated interest rate and the loan was not made at a reasonable commercial rate, therefore we assume that the discount is income in the nature of interest

Other Cases:No. 593 (TAB, 1959): $100,000 for 6 months at 4% plus a premium or bonus of $13,000, characterized as “a receipt on account or in lieu or in satisfaction of additional interest which the [taxpayer] might have received” so taxable under then 6(1)(b) [now 12(1)(c)]West Coast Parts Co. Ltd. (Ex. Ct., 1964): $125,000 for 2 years at 10% plus a premium or bonus of $56,000, characterized not as interest or a payment on account of, in lieu of or in satisfaction of interest, but as “an inducement to the lender to incur the risk of not getting his money back in speculative circumstances” subject to tax as profit from an adventure in the nature of tradeGestion Guy Ménard Inc. (T.C.C., 1993): gains on Treasury bills with zero interest payable sold on secondary market one day before maturity prior characterized as amounts received in lieu of payment of interestGoulet ((T.C.C., 2009), aff’d (F.C.A., 2011): discounts on debt obligations with zero interest characterized as interest under rules for “prescribed debt obligations” in Reg. 7000 and subject to tax under subsections 12(4) and (9)

NOTE: Prescribed debt obligation rules deem discounts and premiums to be interest when no interest is payable

Interest Accrual Rules12(3) and (4) provide that accrued interest (received or receivable) (on purchased debt obligation) must be included in vendor’s income for the taxation yearDebt Obligation: the right of a lender or creditor to payment of a sum of money or principal amount that is owed by a borrower – regardless of the form that this debt obligation may take, e.g., a mortgage, a bond, a government treasury bill, or a debenture (a floating charge on the assets of a corporation). 12(3): (Corporations) For corporations, partnerships, unit trust or any trust with a corporation as a beneficiary, interest on a debt obligation is accrued to the end of the year, or becomes receivable or is received by it before the end of the year

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12(4): (Individuals) A taxpayer who holds an interest in an investment contract (a prescribed debt obligation) shall include the interest that accrued to the taxpayer with respect to the investment contract up until the anniversary day, which is one day before the issuance + one year

The amount of interest that must be included is the amount that has accrued up to the anniversary day rather than the amount that accrues during the whole year

12(9): For the purposes of subsections (3), (4) and (11) and 20(14) and (21), if a taxpayer acquires an interest in a prescribed debt obligation, an amount determined in prescribed manner is deemed to accrue to the taxpayer as interest on the obligation → deemed accrual interest12(11): Defines investment contract and anniversary date - see 12(4)Reg. 7000(1): A prescribed debt obligation is one that meets any of these conditions.

A debt of obligation where no interest is stipulated to be payable in respect of the principal amount (like O’Neil, no interest prescribed as payable)

Strip the coupon off the bond idea Escalating interest debt obligation (interest is higher each year) Interest in a given year is dependent on a contingency existing after the year Before this, all of these were ways of getting around the “received/receivable” rules

Reg. 7000(2): Amount deemed to accrue to a taxpayer as interest on a prescribed obligation is the maximum amount payable under the debt obligation and apply a fixed rate over the term of the debt obligation

Transfers of Debt ObligationsWhere a taxpayer sells a debt obligation on which interest has accrued without receipts, the price at which the obligation is sold is likely to include an amount equal to the value of the accrued but unpaid interest to which the purchaser will be entitled

Purpose is to make sure that the interest is allocated evenly and taxed as income, and that there is no capital gain or capital loss for either party

o Example: issue price is $1000, 10% per year → after 6 months, obligation worth about $1050 A sells debt obligation to B: looks like a capital gain of $50 (NO - it is accrued interest) B sells, gets $100 of interest and the principal of $1000 Proper approach is to conceptualize the $100 of interest as the total value that accrued over the year and

divide between the seller and the vendor → this is what 20(14) does Here, 12(3) + 12(4) say that the accrued interest up to the time of sale must be included in computing the vendor taxpayer’s

income20(14): Allows a deduction for the buyer for any accrued but unpaid interest up to the time of the transfer - in the example, this is $50 - purpose is to avoid double taxation52(1): Applies to the vendor to include the accrued interest in income under 12(4), and reduces a possible capital gain or increases the capital loss by computing the accrued but unpaid interest as income by adding it to the cost of the debt obligation - in the example, $50 + $1000 = the $1050 that it sold for53(2)(l): Amount of the deduction in 20(14)(b) and subtract it from the cost of the debt obligation - no capital loss - cost was $1050, subtract $50, back to $1000

Canada v Antosko [1994] SCC: Investors bought a debt obligation ($5M) from NB gov’t for $10 and deducted accrued, but unpaid interest on the debt obligation. They had a contract where they ran company for two years, and the interest on the debt obligation was suspended during this time.

To come within opening words of 20(14), 2 conditions are required:○ Must be transfer of debt obligation○ Transferee must become entitled to interest accruing before transfer date, but not payable until after the date

Absence of consideration for the interest is not relevant, transaction comes within ambit of section 20(14) does not work to ensure that entire amount of interest is taxable, as had the board not disposed of debt obligation,

none of the interest would be taxed This would lead to absurd consequences, as debt obligations sold by tax-exempt agents (like BoC) would be worth less, as

they would not permit deductions Agreement to suspend repayment of accruing interest that would otherwise have been payable was legally enforceable,

therefore accrued interest was not payable before transfer Amounts DEDUCTIBLE under 20(14) Duff: Might be an interesting GAAR case

Deductions – Profit and Income-Producing Purpose TestMust pass 6 different tests to be an allowable deduction:

1. Be of an income nature (and not a capital expenditure) o 9(1) – Business Practices Test: Whether the outlay or expense being deducted was made or incurred by the TP in

accordance with ordinary principles of commercial trading or well accepted principles of business practice. 35

o Profit under 9(1) is a net concept – (revenue minus expenditure) – capital not included2. Be reasonable in amount as per s. 673. 18(1)(a) – Income Producing Purpose Test - no deduction shall be made ... except to extent made ... for purpose of gaining

or producing income from business or property4. Not a personal expenditure - 18(1)(h): disallows personal/living expenses, except travel, incurred for T’s business.

o 248(1): because personal expenses are not incurred in connection with a business carried on for profit, or with a reasonable expectation of profit

5. Not be expressly prohibited by the act (ex: 67.1 lets you only get 50% for meals/entertainment, 18(12) limits home office)6. Not constitute abusive tax avoidance – GAAR s.245

18(1)(l)(ii): Excludes membership fees or dues re: clubs for entertainment purposes, reverses Royal Trust18(12): Limits amount taxpayer can deduct for a home office67: General limitation - no deduction unless the expense was reasonable in the circumstances67.1: An amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per cent of the lesser of

o (a) the amount actually paid or payable in respect thereof, ano (b) an amount in respect thereof that would be reasonable in the circumstances

THIS DOES NOT APPLY TO THE MOVING EXPENSES (NB: a lot of these limitations are to get at things that scream too much of being personal expenses.)

Illegal PaymentsMany of these cases fail on a lack of evidence that the illegal payment was actually made, not in principle.

Espie Printing v MNR, (1960 Ex. Crt): In terms of the facts, some confusion about what the nature of the illegality is. CRA says you cannot deduct these “illegal” payments. Court says that these payments are proper expenses. Here, illegal payments are deductible, just show you actually made these bribes. This reasoning is followed in the bribe cases.

Muller’s Meats v MNR, (1969, TAB): Meats and kickback payments, taxpayer deducts, court says that if you can prove that these payments are made, then they are deductible.

MNR v Eldridge, (1964, Ex Ct.): Prostitutes made bribes. Here, there was no evidence that these payments were made. Case loses on the basis that there was no evidence of payments (not on the principle that illegal payments cannot be deducted).

United Colour v MNR, (1985 TCC): Accepted that the bribes were made, and therefore deductible.

Statutory Amendment:67.5(1) (cannot make a deduction for an expense incurred for the purpose of doing an offence under section 3 of the Corruption of Foreign Public Officials Act or various sections of the Criminal Code)

Now, any payment of bribes is not deductible. Under the Act, not under the more specific provisions. Reverses United Colour.

Neeb v Canada, (TCC 1997): drug dealer, gets caught. Had drugs seized, wants to deduct the six million dollars of seized drugs as “inventory”.

(Duff: these sorts of issues only come up when someone is caught). Raises the question: do we read public policy into the test?

Bowman says that this contravenes public policy BUT no link made to the statute. Statement that this expense is non-deductible on the basis of public policy. (note: changes later with 65302)

Damage Payments 9(1) allows deductions – business practices test, 18(1)(a) excludes certain deductions - income producing purpose If a taxpayer incurs a substantial damage payment resulting from the negligence of one of its employees, can they deduct it?

Imperial Oil Limited v. MNR (1947, Ex. Ct.) (decided before 18(1)(a), nexus test for the IPP test used to “wholly, exclusively, and necessarily… for the purpose of earning the income”) Oil company, ship collides with another, that ship sunk. Taxpayer was sued by the other company, ends up settling for $525,000. Taxpayer sought to deduct this expense. CRA sought to prevent this deduction under the old language “wholly, exclusively, necessarily”

9(1) gives authorization for deductions and then the subsequent provisions limit what deductions are permissible Business Practices Test (objective)

○ A well-accepted business risk that collision at sea is going to happen in this industry due to negligence on employee’s behalf

Income Producing Purpose (subjective) - nexus test○ Need to look at in light of the business, use a nexus test - connected/incidental to the business. ○ Subjective test (look at the objective indicia of subjective intent) → here, found that there was an income earning

purpose. Incurred as part of an operation by which the taxpayer produced income. Found to satisfy both tests.36

Duff : does the analysis here actually turn on the language of wholly/exclusively/necessarily? Perhaps a tighter nexus test. Key idea: inherent in the income earning purpose.

Fairrie v Hall, (1947 KB): Libel damages not deductible because the damages payable were “only remotely connected” with the taxpayer’s trade as a sugar broker.

Herald and Weekly Times Limited v Federal Commissioner of Taxation, (1932, HC): Newspaper, published libelous things, damage payment made. Damages here are deductible because they are connected with being a newspaper.

Davis v MNR (1964, TAB): Taxpayer was a pig farmer, drove to look at pigs, was in a car accident, sought to deduct the damages and legal costs he incurred. Court said not deductible, not enough evidence to support a connection. Would be different if he was a pig transporter. Connected or nexus tests still plays a role. Davis also decided under the old language. Still however, is a nexus test.

Canada v Royal Trust (1983, FCA): Same judge as in Imperial Oil, post-amendment to the Act - added 18(1)(a)’s new nexus of “in respect of,” no longer “wholly, exclusive etc.,” business model was going out and building relationships with clients by joining clubs, organizations etc., common business practice re: the objective business practices test in 9(1) based on normal industry practice and subjective test of IPP in 18(1)(a) also passed due to evidence that it brought in business (evidence made this easier to demonstrate than Imperial Oil).

o Reaffirms the methodology: 9(1) and then 18(1) exceptions → 18(1)(l)(ii) reverses this decision

Fines and PenaltiesUsually Canadian courts have disallowed deductions of fine and penalties because…

Not incurred for an IPP under 18(1)(a) (one doctrine that develops is avoidability - if the taxpayer can conduct his/her business without incurring the fine or penalty, then perhaps the expense was not incurred for the purpose of producing income. Decision to do something bad is not part and parcel of business).

Public policy – allowing the deduction would undermine the policy incentives of the fine itself

Necessity/Avoidability Day & Ross Inc. v Canada (1976, FCTD): Court broke with the above tradition, allowed deduction of “overweight trucking”

violations, test of avoidability - seen more as a “user’s fee,” this line of reasoning affirmed in Amway of Canada Ltd. v Canada

o Duff: at this point, the jurisprudence is so confused that the courts have forgotten about 9(1) and the concept of profit/business practices test

Poulin (FCA, 1996): Damages for false and fraudulent misrepresentations “committed deliberately with the aim of causing damage” were “completely foreign” to the taxpayer’s business and not deductible because the “delictual act” giving rise to the damage claim “cannot … be considered as being necessary to carrying on the trade or profession”

Public Policy Lusco Products Ltd. v MNR (1956, TAB): Alcohol in medicine exceeded the regulated amount, deduction disallowed due to

public policy, not fair to share equally with the public the consequences of their unlawful act Neeb v Canada, (TCC 1997): Drug dealer, gets caught. Had drugs seized, wants to deduct the six million dollars of seized

drugs as “inventory”. o How should the Act deal with this?

(Duff: these sorts of issues only come up when someone is caught). Raises the question: do we read public policy into the test?

o Bowman says that this contravenes public policy BUT no link made to the statute. Statement that this expense is non-deductible on the basis of public policy. (note: changes later with 65302)

Horton Steelworks Ltd. v MNR (1972, TRB): Taxpayer could have carried on the business without committing the infraction, penalty was not for an IPP purpose (DD says bit of a stretch)

65302 BC v Canada (1999, SCC): Taxpayer was an integrated egg and poultry producer in BC. Taxpayer sold eggs, had a quota. Regulatory scheme, fines if you violated the scheme, “over-quota levy” regime. Usually would be over the quota by a bit. Taxpayer intentionally decided to produce over-quota for a number of years so as not to lose a major contract. Had the choice to buy additional quota, didn’t. Assessed a levy of $270,000. Deducts this amount.

o Move away from Imperial Oil because wording of the Act has changed, example of plain meaning approach (Duff: based on a not too careful analysis of Imperial Oil, doesn’t accept incidental or connected as a test, but does not fully reject the remoteness test)

o MNR says that this is “avoidable” as per Day & Ross/Amway Court relies on the plain meaning approach. Court cannot make this up. Needs to be rooted in the language

of the statute. Rejected avoidability for 18(1)(a). DD: avoidability would have been more appropriately considered under 9(1)’s concept of profit → BUT

now avoidability is thrown out as a testo MNR also tries to deny deduction on public policy grounds.

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Court says public policy is the role of the legislature, not a free-flowing concept for the courts to use 67.5 – non-deductibility of illegal payments, example

o Court contemplates that that there could be a breach of public policy so egregious and repulsive that it wouldn’t be justified for the purpose of producing income. (possible “egregious and repulsive exception”)

CIBC v Canada (2013, FCA): CIBC involved with the Enron scandal, paid $3 billion worth of settlementso MNR argued public policy - payments were “egregious and repulsive” - FCA says this was just obiter in 65302,

Iacobucci just meant that conduct could be so egregious as to be factually disconnected from the business, can’t disconnect it from the business just because the conduct is egregious - not an overarching policy reason to strike it out - 9(1) is not a “morality test.”

o Also rejects Crown’s argument that “the morality of a taxpayer’s conduct” can affect the business practices test under 9(1)

o Duff : this line of reasoning will likely not get the CRA anywhere in the future.

Statutory Amendment: 67.6: 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

o In response to the SCC writing out the objective test in 9(1), Parliament has had to directly specify this

Recreation, Meals and Entertainment Expense deductions Royal Trust Co v MNR (1957): TP paid memberships in social clubs for employees to help business development

o Approach to analysis of deductions :o 9(1) – Deductions are generally allowable under 9(1) if they are in accordance with the ordinary principals of

commercial trading, or well accepted principles of business practice (for that specific business). o Apply “business purpose” or “income producing” test of 18(1)(a) – Was expense incurred for purpose of earning

income? Don’t have to actually earn income, but must have intention to earn income off expense. Here, there was. 18(1)(l)(ii) – Overrules specific result in Royal Trust Co, but analysis is still important.

o No deducting membership fees/dues in any club main purpose of which is to provide dining, recreational or sporting facilities for members. To determine “main purpose” of club, look at club’s by-laws, organization, and particularly, whether > 50% of its assets are used in providing dining, recreational or sporting facilities.

o If employer pays fees for employee, it is normally a taxable benefit, except for a social or athletic club. The membership in the facility must be shown to primarily be for the employer’s benefit or else it will be taxable in the employee’s hands.

Damon Developments (1988 TCC): Deduction disallowed under 18(1)(l)(ii) for membership fees to the Saskatchewan Roughrider Football Club because it was a club, [might’ve been different if just buying game tickets]

18(1)(l)(i) – No deduction for the use or maintenance of property that is a yacht, a camp, a lodge or a golf course or facility, unless it was made in the ordinary course of the taxpayer’s business of providing the property for hire or reward.

o Under Reg 1101(2)(f), no deduction for capital cost allowance in relation to such property. Sie-Mac Pipeline (1992 FCA): TP sent clients/employees to a fishing lodge for appreciation and inform them of new

products. No deduction allowed – “use” in 18(1)(l)(i) doesn’t only mean own/rent, need not be exclusive . Related incidental expenses also not deductible (food, transportation to lodge, etc.) [Taking customers to restaurant is deductible]

Social Events Adaskin (1953 Tax ABC): Deduction for cast party disallowed because it was not incurred to gain/produce income under

18(1)(a). Roebuck (1961 Tax ABC): Cost of clients at bat mitzvah disallowed, not accepted business practice (9(1)) or in 18(1)(a) test Must be clear that they’re a guest of the company (also according to accepted business practices (9(1), and income producing

purpose 18(1)(a))o Fingold (1992 TCC): Clients at wedding denied because they didn’t know they were company guests.o Grunbaum (1994 TCC): Invites from the company, correspondence through company, so deductible (clear were

business guests)

Limits on Meals and Entertainment Deductions:67.1(1): Limits amount TP may deduct in respect of human consumption of food or beverages or enjoyment of entertainment to 50% of the lesser of amount actually paid/payable and amount that is reasonable in circumstances when incurred for the purpose of earning income [except: moving expense (62)] 67.1(2): Lists exceptions (non-deductible) where an amount paid/payable by a person in respect of food, beverage, entertainment is:

o Paid or payable in ordinary course of business (i.e. exempts hotels, restaurants for producing food, promo samples)o Relates to a charity fundraising event the primary purpose of which is to benefit a registered charity.

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o Is an amount for which the person is compensated and the amount of the compensation is reasonable and specifically identified in writing (the person compensating is then subject to 50% rule).

o Food and beverages that would be exempt under 6(6)(a) [special work site]o 6 or fewer special events held in year at which food, beverage, entertainment is available to all employees at a

particular place of business.o NOTE: employers not subject to 50% rule on allowance/reimbursement for food, beverage, and entertainment costs

included in employee income.67.1(3): Deems costs for seminars, conferences, etc, to be $50 per day67.1(4)(a): Excludes airplane meals, in-flight movies, etc 67.1(4)(b): “Entertainment” – defined to include amusement and recreation

Stapley v Canada (2006 FCA): TP bought food, tickets, etc, for clients. Deducted fully, Minister said 50% - held 50%. The wording of 67.1 is very broad. ‘in respect of human consumption’ means section contemplates consumption by

individuals other than the TP.Scott v Canada (1998, FCA): Bike courier seeks to deduct additional food and water, MNR argued personal/living expense, court says yes by analogizing it to fuel for a courier who works by automobile → text/context says no because Parliament has introduced so many specific exceptions, but the purpose says yes so court makes it happen

Travel Expenses18(1)(h): Travel expenses incurred by TP while away from home in the course of carrying on the TP’s business” are deductible, in contrast with other “personal and living expenses”, which are disallowed

ASK: what is the base of operations (Cumming), is TP carrying on 1 business in two locations, or two different business (Randall: not allowed), and is the TP travelling or sojourning (Blackman)

Commuting: Cumming (1967 Ex. Ct.): Anaesthetist has no office in hospital so he does admin work at his house nearby.

o Governing test : where is the “base of operations”? Here, home office. Journeys to/from hospital not commutes but were journeys made in course of practice deductible.

o Court seems to put some weight on fact TP lived very close to hospital; that he lived close for business reasons. Henry (1972 SCC) – Not deductible: Travel expenses disallowed for TP who travelled b/w home and hospital where he also

had an office. Cork (1990 FCA) – Deductible: TP had home office (this was his base of operations), deducted expenses to construction

sites to which he brought tools. Forestell (1991 TCC) – Deductible: TP lived in Campbellford, commuted to Toronto weekly. Base was C, though only small

part of total business conducted there. TP had apartment in T, claimed it as a “home office” Element of choice in home office.

o Duff thinks it’s wrong, shouldn’t be able to have “home office” in T but base in C where he lives as well. Also says you wouldn’t be able to argue this if he were an employee.

Travel in Business with Different Locations or to a Separate Business: Randall (1967 SCC): TP managed racetrack in BC, took contract with a track in Portland. Travel expenses deductible in

course of a single business but not when it’s from one business to another. Here, single business, therefore travel expenses deductible.

Waserman (1969 Tax ABC): Furrier shops in Toronto and Ottawa a single business and deductible. Frank v Ozvegy (1978): TP a radiologist worked 2 ½ days in a different city, sought to deduct the cost of meals and rent for a

furnished apartment in the other city deductible because the expenses were no more than if he stayed in a hotel A1 Steel & Iron Foundry (1963 ABC): When trip involves business & pleasure, partial deduction allowed for business part.

Home Office Expense18(12)(a): No deduction for any part of a self-contained domestic establishment except if:

Work space is either principal place of business, OR Used exclusively for the purpose of earning income from business AND used on a regular and continuous basis for meeting

clients, customers or patients of the individual in respect of the business Vanka (2001 TCC): Used regularly/continuously for meetings (7/night over phone). 18(12)(a)(ii) includes phone meetings.

18(12)(b): Cannot generate a loss in a year (i.e. home office expenses can’t exceed income from that business)18(12)(c): If exceeds under (b), can be carried forward indefinitely*18(12) for home office expenses for a business has similar wording as 8(13) for home office expenses for employment

Must still satisfy 9(1) (ordinary/accepted), 18(1)(a) (income-producing), 18(1)(h) (personal expenses) first thoughPart of a self contained domestic establishment?

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Ellis (1994 TCC): TP sold pottery out of studio/store above garage. No deduction. Studio part of self-contained domestic establishment per 18(12)(a)—utilities bill was the same for the home and studio. Separate utilities!

o Perceptual distinction (sign, separate entrance) not enough if it’s still part of domestic establishment. Dufour (TCC 1998): Home office in taxpayer’s garage part of his self-contained domestic establishment physically

connected to home Maitland (2000 TCC): B&B, owner on top floor. No deduction for the losses due to 18(12)(b). Whole house is self-

contained domestic establishment. Sudbrack (TCC 2000): Separate apartment in a country inn constituted its own self-contained domestic establishment apart

from the inn Broderick (2001 TCC): TP lived in basement, B&B in the rest; whole premises was a self-contained domestic establishment

and distinguished Sudbrack on the basis that the residence was seasonal, fully available to the family during off-season. Lott: Can’t evade the rule that the business area must be separate by saying the business takes up the whole house (daycare)

General Limitation on Deduction of Expenses 67: In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Basically functions as an anti-avoidance rule Could be considered a more flexible statutory instrument for achieving the policy goals underlying paragraphs 18(1)(a)-(h) Used to be in 12(1), this suggests that its purpose is to be applied together with 18(1)(a)-(h) to disallow part of an amount as

a deductible expense

Cipollone v Canada (1994, TCC): Doctor of Humour, she has losses that well exceed her business income. Losses are valuable to her as she can off-set them against other sources of income in 3(d).

MNR argues that she had no reasonable expectation of profit but the court disagreedo Issue isn’t that she has no REOP, her expenses were spent to earn an income and with a reasonable expectation of

profito Her issue is that her expenses themselves were unreasonable, MNR should assess what portion of these expenses are

reasonableo Court says expenses are unreasonable by virtue of comparison with the revenue (disproportionate) + personal nature

of the expenseso MNR should probably have tried to disallow these expenses under 18(1)(a) + 18(1)(h)

Duff: problematic to assess reasonableness by proportionalityo WHY? because startups always first run a loss, if this reasoning is true then they would never be able to run a loss -

the Act explicitly provides for the possibility of a loss

Other Cases: Mohammad v Canada (1997, FCA): More reluctant to take up “disproportionate expense to revenue” approach of Cipollone.

Was a condo, taxpayer claimed rental losses, Minister disallowed on the basis that the taxpayer had no REOP. TCC accepted that there was a REOP but limited on the basis of 67 because the purchase of the condo was 100% financed; therefore, interest expense was unreasonable.

o FCA says that you cannot do a general expense in relation to revenue. Should assess the reasonableness on its own (this is where we would get to 18). Rejected the notion that expenses cannot be disproportionate to revenues.

o Emphasizes going after these expenses under 18 (other tool)o When does 67 ever apply? → one time you can use it, when the expenses are “excessive or extravagant” based on

objective components (because this is an anti-avoidance rule) Ammar v Canada (2006, TCC): Immigration consultant for students in Egypt and the middle east. Rented an apartment in

Cairo for $4000/month. Courts say that he could have for example stayed in a hotel, was found to be an excessive or extravagant expense. 67 was applied, partly because he could have easily found less expensive accommodations. Is an objective element to the “excessive and extravagant test” (note: rest of the cases in this realm deal with non-arm’s length parties).

Hammill v. Canada (2005, FCA): Invests in a fake business buying and selling gems. Court says this was fraud; therefore, no source of income so no deduction. Investing wasn’t reasonable, ought to have known it was a scam.

o Additional category → you should have known better Ruff v Canada (2012, TCC): A lawyer gets suckered into trying to get a container with $8.5 million in it out of Cote-

d’Ivoire, spends $400,000 trying to do so, claims this as a deductible expense of his law practice. Courts allows MNR’s argument under 67 that this was unreasonable, even though it was made in respect of his law practice.

o Duff calls this the category of “If you’re an idiot.” Maduke Foods Ltd. v MNR: 67 successfully used to limit deductions for rental payments to non-arm’s length parties

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Interest Expenses20(1)(c): Taxpayer can deduct:

Interest on borrowed money used for the purpose of earning income from a business or property Interest on amount payable for property acquired for the purpose of earning income or a reasonable amount in respect

thereof, whichever is the lesser.18(1)(b): Borrowed money is capital and not deductible20(3): Money borrowed and used to repay previously borrowed money will be deemed to have been used for the purpose for which the initial loan was used18(9)(a)(ii): There is no deduction for pre-paid interest

4 Conditions (Shell Canada): Amount is paid/payable in the year in which the deduction is sought Amount paid under a legal obligation to pay interest Borrowed money is used for the purpose of earning non-exempt income from business or property; and Amount is reasonable in the circumstances [built-in reasonableness test] - refers to rate of interest

Key test: Did the taxpayer “use or acquired borrowed money for the purpose of earning income from a business or property?” → IPP testShell Canada Ltd. v Canada (SCC, 1999) - elements of this provision → also said that if the taxpayer can satisfy this reasonable test, then the deduction is also reasonable for the purposes of s. 67

Duff says this is wrong because each is surrounded by a different context Anti-avoidance vs. reasonable allocation

“Used for the purpose of earning income”a) Bronfman: “used” – courts must look at the current and direct use of the moneyb) Singleton: “direct use” – only look at the effect of each transaction independentlyc) Ludco: “income” – does not mean net profit – simply gross income or revenue

o Earning income need not be the primary purpose and no income actually needs to be earned – there only needs to be a reasonable prospect of earning income – you can make the argument that in those cases, the deduction should be pro-rated

GAAR: you should, however, consider the possible application of the GAAR to transactions whose primary purpose is to obtain a capital gain or to avoid tax!!

NOTE: cannot use loan for non-eligible purpose, then your own money for an eligible purpose, and turn around and deduct interest on the loan, as if it were for something eligible (Attaie)

If you can identify even a part of the old loan, you can continue to deduct the interest on the whole loan (Tennant)

Case Law Used in Bronfman Trust Trans-Prairie Pipelines Ltd. v MNR (1970, Ex. Ct.): Relied on by the trust taxpayer in BT. Here, corporation borrowed

$700,000 to expand, had to get rid of preferred shareholders, paid out $400,000 to do so and $300,000 to the company - court said this was indirectly used for the purpose of earning income from the business and deductible - $400K comes in, $400K goes out - “filling the gap”

Sternthal v The Queen (1974, FCTD): Case relied upon by the CRA in BT. Taxpayer borrowed money and loaned it to his children interest-free. By borrowing, he didn’t need to sell his assets, and attempted to deduct this expense (on the basis of an asset preservation argument). In this case, the court said no, cannot do this. Taxpayer used the borrowed funds to make loans to his children and not for the purpose of producing income.

Bronfman Trust v Canada (1987, SCC): high point of substantive/purposive approach, plain meaning rule has now moved away this from (contrast to Singleton and Ludco) Bronfman sets up a trust for his daughter, she gets 50% of the income from the shares and capital at the trustees’ discretion. Increased in value to $70 million, but not much income generated from the trust because at the time, capital gains were not taxable. Trustees paid out capital distributions of $2.5 million. Financed these payments not by selling assets, but by borrowing money to pay the difference between trust income and what had been paid out - incurred interest expenses on this borrowed up - tried to deduct it when computing income of the trust

i. BT argues indirect use + asset preservation and a hypothetical alternative Jurisprudence favours looking at the ineligible, direct use of money - not the eligible indirect use of the borrowed funds

o Here, the eligible direct use is asset preservation - used borrowed money to retain income-earning properties it otherwise would have had to sell in order to make the capital allocations to the beneficiary

o Using borrowed money to prevent capital losses isn’t enough for this deduction since the purpose of 20(1)(c)(i) is to increase a taxpayer’s income-earning potential

o This interpretation would unfairly benefit people who are wealthy enough to borrow and then claim the deduction

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Court’s response to hypothetical alternative argument: we are dealing with what you did do as opposed to what you could have done. You didn’t do the hypothetical. Second response: Dickson suggests that even if the hypothetical is done, would have been a very short period of time - sham?

o Duff : is this the conventional use of the term sham? not really. A better way to come to this same conclusion would be to look at “purpose”. If you do these transactions, your real purpose is not to earn income but to borrow funds to pay out the amount.

o Laudable trend is to move away from tests based on the forms of transaction towards an assessment of the transactions with “an eye towards commercial and economic realities” → strong anti-avoidance background in the case → look at what is really done

Distinguished from Trans-Prairie - that was dominated by business reasons, here the interest expense being claimed is 10X the income generated by the “preserved assets”

o Also argued that in Trans-Prairie, shareholders were paid out that originally put money in, whereas in BT, the beneficiary never put anything in

o obiter: the test is direct use, but as a last result, an indirect use will only succeed if the use of the borrowed funds is a bona fide purpose to earn income earn profit

Note: after Bronfman Trust (subsequent jurisprudence), direct use and the order of the transactions become the main takeaways. (SCC gets rid of the rest of the analysis over time)

TRACING TO CURRENT USE argument can also be used to characterize a use as an IPP

Post-Bronfman:Emphasis on economic substance to determine purpose for which borrowed funds are used (Bronfman Trust, Mark Resources, Robitaille) rejected in more recent SCC decisions (Shell Canada, Singleton, Ludco Enterprises), and not challenged under GAAR (Lipson)

Mark Resources Inc v Canada (1993, TCC): Canadian company with a US subsidiary. Had a bunch of losses that expired. Could lose their losses. Borrowed money in Canada. Invested in US subsidiary as a contribution of capital. Dividends come back - are generally tax-free (with the exception of withholding tax at the border). US subsidiary bought secure investments and the income of the US subsidiary was sheltered from tax.

o CRA says that the real purpose was to get a tax shelter in Canada. Import the losses, therefore no deduction. Robitaille (1997 TCC): TP withdraws equity in law firm to buy a house, then borrows $ to replace equity. Held: focus must

not be on direct/immediate result of use of funds, but on ultimate economic objectives sought by transaction (here, to buy house). The bona fide purpose was not to produce income.

Shell Canada Ltd. v Canada (SCC, 1999): American operations needed money, borrowed NZ dollars re: higher interest rates. Forward exchange contract to repay the interest + principal, moving back and forth between currencies = capital gain when US$ converted to NZ$.

o FCA said the true purpose for borrowing the funds was the reduction of taxation AND the higher NZ interest rate was not reasonable as required by postamble to 20(1)(c).

o SCC reverses, says that the borrowed funds were ‘used’ by the taxpayer for the purpose of earning income from business AND that the interest rate was reasonable. Formalist/plain meaning approach.

o 20.3: reverses this decision - weak currency borrowing Ludco Enterprises Ltd. v Canada (2002, SCC): Offshore tax haven company, $600,000 worth of dividends, paid out $6M in

interest expenses - $5.4M losses as to their investment in Panamanian companies - then sold for $9.24M - 50% of $9.24M is $4.62M + dividends is a gain, subtract $5.22M + the $6M of expenses = a tax loss and the deductions are deferred → an aggressively structured tax shelter investment

o Bona fide purpose - court read words into the act that “a” income earning purpose is enough, the $600,000 was income → pass this testo Income had to be “net income” - gross income is allowed here, which is the $600,000 - ignores the words of the

Act - 9(1) defines income as an aggregate/net termo THIS IS SO EGREGIOUS, MUCH CORRUPTION

Singleton (2001 SCC): TP had invested 300K of capital in partnership, borrowed another 300k and invested it in partnership then withdrew 300K to buy house.

o Court must simply apply 20(1)(c)(i) and view transaction independently by applying only the direct use test. o Commercial & economic reality test rejected . TP doesn’t have to show bona fide purpose (undermining Bronfman ). o MNR didn’t try it here but Singleton might have been GAAR’d

Lipson v Canada (SCC, 2009): Singleton with a spousal twist. Earl Lipson wants to buy a house, had a corporation. Took money out, taxable as deemed dividend. Various rules exist which allow the transfer of property between spouses. Mrs. Lipson borrows money, buys shares from her husband. She owns the shares, he buys the house, mortgages it, she takes the mortgage proceeds and repays the loan. Mrs. Lipson attempted to deduct the interest on the mortgage under 20(3) - deemed to use current funds for the purpose of the original funds. CRA initially disallowed on the basis that the “true economic purpose” for which the borrowed funds were used was to purchase a residence, but relied on the GAAR. Court uses the

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GAAR for the attribution rules, but suggests not appropriate for interest deductions - interest expenses allowed.

Leaves the test for interest expense deductions to look at the direct use and what it was used for.

Focus → was there a “reasonable expectation of income?” Swirsky v The Queen (2014, FCA): similar transaction to Lipson. Uses the proceeds to repay a loan. No history of dividends

on shares. Court says that you haven’t used borrowed funds for the purpose of producing income. If there are no dividends/income (or no reasonable expectation of income - REOI), then you cannot get the interest deduction. (No expectation of any income = no deduction for interest expense under 20(1)(c)(i)).

TDL Group Co v Canada (2015 TCC): Wendy’s (US company) owns Tim Hortons (TDL), which is also a US branch of TH. Canadian corporation borrowed about $300 million from Wendy’s. Buys shares in the US TH subsidiary. TH loans it back to Wendy’s interest free. TP had no reasonable expectation of earning taxable income when it acquired the shares in the US TH subsidiary and “the sole purpose” for the borrowed funds was to “facilitate an interest free loan to Wendy’s while creating an interest deduction for TDL”. Interest payable and dividends not received, interest from capital earns no income at all. No expectation of any income at all → courts will step in and the interest expense deduction is disallowed.

o Duff: This suggests at least some limit on interest deductibility. If you have no reasonable expectation of anything, the interest deduction will be disallowed. What if $1 paid? Does that get you REOI? Ludco suggests yes.

Other Notable Cases Attaie (1990 FCA): TP buys house at 10% interest – interest rates go up to 14-16% so decided to invest $ instead of putting it

into mortgage. Tries to deduct because the purpose of the borrowed funds changed to income earning. Deduction denied because of direct use approach in Bronfman Trust .

o Direct use of the funds was to buy the house, rather than to earn income Grenier (1992 FCTD): TP mortgages house for $66,000 to start a business, which was deductible. Pays off the $66,000 then

borrows for new house, tries to deduct interest on that for $66,000 plus an additional $151,700. Court disallows deduction under direct use test, but allows deduction under 20(3) for $66,000 of the new loan, which deems money borrowed to pay off a loan to be borrowed for same purpose as loan was originally for accepts post Bronfman Trust ‘indirect use’ argument

o Duff: borrow money, pay off mortgage on the old house, then rely on 20(3) to argue that the use for paying off mortgage was to use the money towards earning an income, which was why it was borrowed before

Canadian Helicopters (FCA, 2002): Court accepts that taxpayer, which loaned borrowed funds to its parent company interest free, had a bona fide purpose to earn income in the form of management fees from operating another company that the parent company purchased with the interest-free loan

o Decided after Singleton, ability to use the indirect eligible use argument

Timing IssuesInclusionsComputation of profit for a taxation year under 9(1) based on “true picture” principle (for which matching of revenues and expenses is a guideline, but not a rule of law) – West Kootenay, Candarel

T will want to defer inclusions and accelerate deductions – CRA will want the opposite

Accounting Methods Cash basis – money actually received/paid Accrual – receivable/payable Pure accrual – interest income

Determining the Tax YearInterest/rental income is generally computed on an accrual basis, while statutory rules provide for royalties/dividends to be taxable when received (on a cash basis). Allocation of T’s business or property income depends partly on accepted business practices, partly on judicial principles, and partly on statutory rules.

General Rules: 9 – profit “for the year”9(1): A net concept for “profit in the year”9(2): The loss for the year is the loss for the taxation year

“True picture” of the taxpayer’s income - spread expenses over time “Matching principle” is an interpretive principle to match revenue with expenses: Canderel, 1999 SCC (not a rule of law)

o Matching plays a role in capital expenses, also inventory in s. 10 (don’t deduct until you sell) “Principle of consistency” is that a taxpayer can’t change their accounting practice from year to year in order to distort the

“true picture” of income

Additional Rules: 12 (business inclusions from business or property)43

Principle → don’t include amounts until you realize them - realization principle generally is akin to a judicial rule of law → true picture of realized income

10: If you incur expenses to build up inventory, can deduct when it is sold10(2.1): Codifies the principle of consistency - need to get permission to switch accounting methods12(1)(a): Include amounts received for services not yet rendered or goods not yet delivered

20(1)(m): Where amounts are included in 12(1)(a), a reasonable amount may be deducted – CRA wants to know12(1)(b): Include amounts receivable for property sold or services rendered, even if not due this year, unless true picture doesn’t require this (ex: if working on a cash basis is more accurate)

Imposes accrual accounting – T must be legally entitled to the amount and the amount must be ascertainable12(1)(c): Include interest income and amounts in lieu, received or receivable, depending on the method T usually uses for interest income

T doesn’t need to use the same method of accounting for accounting and tax purposes (West Kootenay) Payment is “realized” when it had the “quality of income” OR when T’s entitlement is absolute, even if this results in a

distortion of income for the year (Ikea) Symes – although Royal Trust Co says the TEST for deductions from income from business or property is whether it is

consistent with the “ordinary principles of ordinary commercial trading” or “well accepted principles of business practice”, determination of “profit” under 9(1) remains a question of law subject to legal principles and not generally accepted accounting principles – might look at those first, but subject to judicial and statutory rules

12(2): Extends the scope of inclusion, above rules are only for greater certainty, amount that’s part of the “true picture” for the year as per 9(1) is taxable

“Amounts to be Received”Publisher’s Guild of Canada v MNR (1956): Door-to-door sales not counted (nor expenses deducted) until actually received because people would cancel their subscriptions

TP matched their inclusion with their deduction on a cash basis – installment basis of accounting Allowed: if not prohibited and if accepted by accountants as appropriate to the business, + reflects income accurately true

pictureWest Kootenay Power & Light Co v The Queen (1992 FCA): TP is an electric power co, had 2 month billing cycle. At the end of the tax year, there was some electricity that had been provided that hadn’t been billed for yet, but it was possible to estimate the cost of the amount that had been provided. Until 1979, TP didn’t include those amounts in tax return, used the “billed method” instead. Then changed to the “accrual method” and included the unbilled amounts in tax return. Stayed on accrual for accounting purposes (financial statements), switched back to billed method for tax. This resulted in lower income in this year.

Two issues: 1) conformity between tax accounting and accounting for financial purposes, 2) whether estimates of unbilled revenues should be included in computing income

NO absolute requirement that there be “conformity” between financial & tax accounting methods. As a rule, proper method is that which presents the ‘ truer picture’ of a TP’s revenue, which more fairly and accurately portrays income, and which ‘matches’ revenue and expenditure is to be used for tax purposes. Here that happens to be the “accrual” method.

Court found the unbilled revenue should be included (accrual method) in order to provide a true picture. As the amount not billed was both receivable and calculable, it should be included. Not DUE but RECEIVABLE and therefore include in business income under 12(1)(c)

NOTE: that while the narrow conception of conformity is rejected, the broader conception that, unless otherwise indicated, GAAP should be used to calculate income for tax has not been overruled.

DeductionsExpense must’ve been incurred and there must be a legal liability to pay.

Where TPs compute their income on an accrual basis, expenses are generally deductible in the taxation year in which they are payable, even if they are not actually paid until a subsequent taxation year.

Where TPs are permitted to compute their income from a business or property on a cash basis, expenditures are not deductible until the taxation year in which they are actually paid.

18(1)(a): Disallows deduction of outlay or expense except to the extent paid or payable - Contains income producing purpose test, but is also relevant to timing18(1)(e): Disallows deduction of amounts as or on account of a reserve, a contingent liability or a sinking fund, except as expressly permitted by the ITA flipside of cases like West Kootenay18(1)(b): Disallows deduction in respect of an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted in Part I of the ITA [allowed as capital cost allowance under 20(1)(a), terminal loss under 20(16), or resource allowance under section 66]18(2): Capitalizes carrying costs on vacant land18(3.1): Capitalizes construction period “soft costs”18(9): Allocates deduction of prepaid expenses to taxation year to which the outlay or expense can reasonably be considered to relate

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Running Expenses Expenses that cannot be easily matched with specific revenues (running expenses) may be deducted in the year in which they

are incurred, even if the amount of the deduction is particularly large and distorts the TP’s income for that year. Running expenses are things like advertising costs, expenses/payments where you are not sure if you will directly benefit

from it or not. They are generally allowed as deductions in the year paid and they don’t need to be matched by revenue.

Oxford Shopping Centre v Canada, (1980, FCTD): Traffic congestion outside mall. New shopping centre was going to be constructed, Oxford paid money to Calgary to build a new road interchange. $490k payment in lieu of local improvements and taxes. Financial statements (accounting): spreads out this expense over 15 years → starting in 1975 (amortize). For tax purposes, want to claim it all right now (deduct it for the year, loss that they could carry back) CRA: says uniformity, cannot use two methods - try to use the “conformity principle,” not a thing. Courts reject this.

While ‘matching principle’ will apply to expenses related to particular items of income, & particularly with respect to computation of profit from acquisition & sale of inventory, it does not apply to the running expenses of the business as a whole even though deduction of a particularly heavy item of running expense in the year in which it is paid will distort the income for that particular year. Amount is deductible only in the year in which it was paid.

Act amended in response: 18(9) A deduction is for the year in which it reasonably relates - deductible in the year that you get what you paid for18(9)(a) disallows the deduction of specific prepaid expenses

i. Prepaid services in respect of a period at the end of the yearii. Prepaid interest, taxes, rent or royalties in respect of period at end of year

iii. Prepaid insurance in respect of period at end of year18(9)(b): basically deduct these expenses in the year that you could reasonably consider them to relateDoes this reverse Oxford?

Depends on what the payments are for → didn’t say that your payment was in lieu of taxes - possible but unclear. One thing not included in 18(9) → in Canderel, basically says matching not required because TIPs (Tenant Inducement

Payment) are not listed in 18(9) (depends on current period benefits) TIPs currently are deductible!

Canderel Ltd (1998 SCC): TP paid $4M to induce tenants to sign leases that ran from 3-10 years, deducting this amount in 1986 for tax purposes, but amortized over the life of the leases for financial accounting purposes. Should these be amortized over lease or use matching for the year?

“Matching principle” just an “interpretive aid” , not “established rule of law”. The goal of the legal test for profit should be to produce the truer picture of profit.

CRA says expenses bring a stream of revenue into existence and they wanted to match it with the future rental income (brought about by the TIP). Court said that these were running expenses. Turned on a factual finding that TIPs are not included in 18(9).

Benefit: wasn’t just to get one tenant into the building, also were “current period benefits” → would be arbitrary to spread it out (just as was the case in Oxford)

Duff : not totally sure, would have made more sense to spread it out.Ikea (1998 SCC): Flip side of Canderel. SCC reaffirmed “realization principle” (when was the benefit realized?). Inducement payment received by Ikea to enter into long-term lease had to be included into income year it was received/realized. Could not spread recognition of payment over life of lease, as it would’ve distorted Ikea’s tax picture to ignore the fact the entire amount was freely available to it.

Mark-to-Market Rules142.2(1): Mark-to-market property of a taxpayer for a taxation year means property (other than an excluded property) held at any time in the taxation year by the taxpayer that is

a) a share,b) if the taxpayer is not an investment dealer, a specified debt obligation that is a fair value property of the taxpayer for the

taxation year,c) if the taxpayer is an investment dealer, a specified debt obligation, ord) a tracking property of the taxpayer that is a fair value property of the taxpayer for the taxation year

Friedberg (SCC 1993) *Realization principle trumps matching principle* – TP speculated on futures, i.e. gold: these were contracts to buy and sell gold in the future. As the price changes, the contracts change in value. BUT, if you’re playing both sides, it can “even out.” The TP sold all the lower value contracts at the end of each taxation year (a huge loss) and then sold all the high ones the following taxation year (offset income with loss). CRA wanted to rely on the matching principle → this is all one big scheme.

Outcome: The realization principle trumped matching principle (losses were properly deductible in each of the taxation years in which they were claimed on the grounds that they were actually incurred in those years while the gains were actually

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realized in the following taxation years). The TP was allowed to do this. CRA response: we will GAAR the shit out of anyone who tries to do this. (JH: purpose → implicit deduction for people who

are in legitimate business where due to nature of the market, the value of the goods can go up and down, etc → allows ‘implicit deduction’ for the unrealized losses)

Legislative Response: 142.5(1): “Mark-to-market” rules adopted for “financial institutions” – defined in 142.2(1): profit/loss from the disposition of

a mark-to-market property included in computing the TP’s income for the year 142.5(2): Deemed disposition and reaquisition at fair market value at the end of the taxpayer’s taxation year

Kruger (FCA, 2016): Newsprint manufacturer selling mostly in the US began buying and selling foreign currency options in the US and subsequently developed an options trading business. Began computing its income on a mark-to-market basis, reported net losses on option contracts of over $91M for 1998, which the Minister disallowed on the basis that the accrued losses had not been realized

FCA allowed TP to use the mark-to-market accounting approach Duff: inconsistent with the Friedberg decision essentially reverses Friedberg

Legislative Response: 10.1(6) enacted to adopt mark-to-market accounting for eligible derivatives: deemed disposition and reacquisition at FMV at

the end of the TP’s taxation year

InventoryAct contemplates both received and receivable. Payable = legal obligation to pay, then the amount is deductible. Statutory rules for inventory accounting are an excellent example of the matching principle at work. Codified in statutory rules.

248(1): “inventory” means a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year

Incentives → taxpayer wants to characterize expense as inventory because then gets into the realm of business and therefore fully deductible from computation of business income under 9(1)

o CRA wants to characterize as a capital expense because there is no deduction as per 18(1)(b)

Gross Profits = Proceeds - C0 - C1 + C2

Gross profits = Proceeds – C0(Cost of inventory at beginning of the year) – C1(cost of stuff created in the year) + C2(stuff left over at the end of the year)

Costs included in inventory:o Costs of acquisition and expenses (e.g. transportation and storage) to bring the inventory to its location and

condition at the end of the year – inventory that is bought or sold without modificationo Costs of subdivision and development – land inventoryo Costs of labour and materials incorporated into the inventory and at least some overhead costs – inventory that is

manufactured or produced

The costs of inventory are not deductible until the inventory is sold (Neonex). Matching + truer picture : Costs to acquire/produce inventory are deductible in the year that the inventory is disposed of →

matches revenues and expenses to provide a truer picture With homogeneous inventory: T can work around the above rule by deducting inventory costs incurred in the year, but then

adding back the cost of unsold inventory remaining at the end of the year

Neonex International v Canada (1978 FCA): Taxpayer makes custom neon signs for sale or rent. No inventory of completed signs. “work in progress” (WIP inventory) - didn’t deduct the costs until including income when sold (labour, parts as costs) - from 1970-72, same practice for accounting, BUT wanted to deduct the costs of partially completed signs.

No. Court says that they cannot do this. True picture of income? not to deduct these costs. (how inventory accounting works) - cannot play around with accounting like this.

Inventory is to be deducted when it is sold.

Work in Progress (WIP) Inventory:10(5)(a): Work in progress inventory of a business that is a profession is inventory34: Taxpayers are able to elect to exclude work in progress inventory at the end of the year in computing income from a business that is a professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor

Through this exclusion, TPs are allowed to deduct the costs of partially completed work in the year in which they are incurred.

3 Methods for Determining the Order in Which Inventory is Sold:

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FIFO (first in, first out): First inventory you buy/produce is assumed to be first sold LIFO (last in, first out): Last inventory you buy/produce is assumed to be the first sold

o If GP is reduced, so is the tax owed – The court will reject LIFO, unless it reflects the actual physical flow of inventory (Anaconda)

Average cost: averages the cost of sold and unsold inventoryYou can choose which method, but it must track the flow of your commodities (American Brass).

Anaconda American Brass *FIFO and LIFO*. Copper prices rise throughout the year. Switched from FIFO to LIFO. This means that they could deduct the cost of copper, and then add back the cost of the older, cheaper copper, giving them a lower income return.

Court said no. You can use whatever accounting method you want, but it must follow the flow of the inventory. So, establish the actual physical flow of your inventory.

Method of valuing has to track onto commodity flow - if you want to use LIFO, you better actually do LIFO CRA accepts specific item accounting, average cost or FIFO, but not LIFO

Lower of Cost or Market Value (LCM) Profit for your business = Gross Profit – CostCost = C0 + C1 - C2 (add the cost of inventory in the factory at the start of the year to the cost of inventory made or acquired during the year then subtract cost of inventory in the factory at the end of the year)

C2 can be either the cost or fair market value, see below The lower the C2, the greater your addback cost to subtract from your gross profits

Generally, you add back the cost (C2).What happens if that inventory has decreased in value (unrealized loss) (often because the products that you have are now obsolete)? The loss of value is reflected in 10(1) - implicit deduction

10(1) : When you add back the value of what’s left in your inventory, add the lower of cost or FMV. o This allows a TP to trigger a loss without having actually sold the product. o Deduct the loss of value against your overall income in the year in which the loss occurs. o Reg 1801 allows TPs to value all inventory at FMV

10(2): Requires the value of inventory at the start of the taxation year to be the same as at the end 10(4): FMV of property (other than property that is obsolete, damaged, defective, held for sale or lease or for the purpose of

being processed, fabricated, manufactured, incorporated into, attached to for property for sale or lease) that is:o WIP of a business that is a profession, means the amount that can reasonably be expected to become receivableo Advertising or packaging material, parts, supplies or other property that is included in inventory, means the

replacement cost of the property

Friesen v Canada (SCC 1995) *Lower of Cost or FMV, Reversed by 10(1.01)*. TP had a single item of property, holding it for resale. Didn’t want to sell it: intent was to develop the land for business income. This was an ACNT. Value of the property went down - this is an unrealized/accrued loss for the purpose of computing his business income for 9(1). TP wanted to use LCM (lower of cost or fair market value) and relied on 10(1): TP says this is inventory and he can value it at LCM for the unrealized loss.

Court uses the plain meaning rule and allows the deduction - departure from the realization principle Duff: Until you sell that property, you can’t calculate your income/loss. Therefore, the TP wasn’t calculating his income!

Should stick with the realization principle - Iacobucci in dissent agrees

Legislative Responses: 10(1.01) : Lower of cost or FMV does not apply to inventory held in a business that is an Adventure or Concern in the Nature

of Trade (ACNT). If ACNT, then inventory will be added back simply at cost. o This reverses Friesen.

After Kruger – 10(15): Property of a TP that is a swap agreement, a forward purchase or sale agreement, a forward rate agreement, a futures agreement, an option agreement or any similar agreement is deemed not to be inventory of the TP

Cyprus Anvil Mining Corp (FCA, 1989): 3-year tax exemption given to the mining corp, wanted to pump in as much income as possible into those years. Changed from the LCM method to value all their inventory at FMV.

ITA requires consistency in accounting methods from one tax year to another; subsequently codified in 10(2.1).o 10(2.1) – accounting methods to value “regular” inventory should be kept consistent, unless T has a good reason to

switch and the Minister approves

Capital ExpendituresCapital expenditures are expenses that bring into existence enduring assets.

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NOTE: expenses incurred to set up the business structure (including research) are capital expenses, but there must be something that comes out of it or you get no deduction at all.

18(1)(b): In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay, loss or replacement of capital, a payment on account of capital (capital expenditures) or an allowance in respect of depreciation, obsolescence or depletion (if the capital property is depreciable, can deduct % over time as a Capital Cost Allowance (CCA)) except as expressly permitted by this Part

1. Distinct from a capital loss; are offset against capital gains in Subdivision C2. Even if an expense has been made within the meaning of 18(1)(a), it may still not be deductible on the basis on 18(1)(b)3. Where T makes a capital expenditure, the amount is added to the cost of the property on account of which expenditure was

incurred and EITHER:o Subtracted from the proceeds of disposition when that property is disposed of, ORo Amortized and deducted over time from T’s income from a business

4. Non-depreciable capital property is offset against proceeds of the sale (1/2 deductible or taxable)

CharacterizationCharacterization of capital expenses by the courts have generally relied on 2 tests:

British Insulated and Helsby Cables v Atherton: If the expenditure is “once and for all”, with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, it is a capital expense.

BP Australia v Commissioner of Taxation 1966 AND Sun Newspapers Limited v Federal Commissioner of Taxation 1938: Sums expended on the structure within which the profits were to be earned (CE) vs. expended as part of the money-earning process (not CE). Distinction between the acquisition of the means of production (CE) and the use of them.

o Sun Newspapers Ltd. (1938) – 3 factors: (a) character of advantage sought, including lasting qualities; (b) manner in which it is to be used; and (c) means adopted to obtain it (i.e., periodic or lump-sum payments).

Johns-Manville Canada v Queen (1985 SCC): TP mined asbestos. Over time, had to buy more land to strip away to facilitate roadways. Doing this for 40 years. The cost of the land was 3% of the annual revenue of the mine. TP deducted the cost of acquiring the land as an ordinary business expense.

MNR - This is a capital expense for the structure of his business, not a deductible current expense. Objective -- British Insulated: Recurring/annual payment? Or “once and for all”/enduring benefit? Subjective -- BP Australia and Sun Newspapers: Is the purpose simply to keep operating the business, or is it to acquire

capital asset and set up the structure of the business? TP allowed to treat land as income expenditure deductible against business and property income. Rule of statutory interpretation: where statute unclear and one reasonable interpretation leads to a favourable outcome for TP

and the other doesn’t, and the expenditures were bona fide in the course of business activities, then go with the one that favours relief.

Court focuses on surface, says it’s consumed each year; no enduring benefit. NOTE: If they had bought all of the land at the beginning, it would’ve been a capital expense, and only deductible as an

offset when sold. They turned a non-deductible capital expense into a deductible business expense by doing it this way. Duff : This makes sense. This doesn’t distort the income.

○ Also - think that if this was a capital expense, there would be an incentive to improve the land for selling (environmental angle?)

Capital Expense Currently Deductible Expense Enduring Benefit Test: British Insulated, approved in Canada by Johns Manville:

1. Expense incurred once and for all2. WITH a view to bringing into existence an asset or

advantage for the enduring benefit of the trade3. Which could be negative as there is a right not to run

the business – BC Electric

Johns Manville – T ran an open-pit asbestos mine and needed to purchase the surrounding land to expand the pit – currently deductible expense.

Occurred regularly and historically, part of the cost of production, land was “consumed”, didn’t add to productive capacity of mine, relatively small expense vs overall cost of operation, only transitional benefit

Expended on structure which the profits are to be earned Part of the money-earning process (Sun Newspapers)Expended to acquire the means of production (incl. goodwill, copyrights)

To use the means of production (Hallstroms)

Smaller businesses get better tax results on compensation for losing long-term contracts – because more likely the contract represented a “separate business”

Bigger businesses get better results with expensing capital-like assets – because it’s less likely to look as though they are setting up a structure to earn profits

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Test #1 → “once and for all,” was the expense incurred to get an enduring benefit for the trade? (British Insulated) Once and for all, enduring benefit cases:

○ *Montreal Light, Heat & Power Consolidated (1942, SCC): Refinance cost to reduce interest is a capital expenditure as it is an enduring benefit.

○ *Haddon Hall Realty Inc. (1961, SCC): Cost to landlord to replace appliances in rental units was a capital expenditure due to the fact that the expenditure was made once and for all to create a benefit of an enduring nature.

○ British Columbia Electric Railway Co. (1958, SCC): Termination of unprofitable business is a capital expenditure as it is an enduring benefit.

○ H.J. Levin (1971, Ex. Ct.); Daley v. MNR (1950): A dentist’s tuition fees to become a specialist, lawyer’s LSUC admission fee were capital expenditures because they were not recurring, and had enduring benefit.

Cases where the court said no capital expenditure because it didn’t create an advantage of enduring benefit:○ Johns-Manville (above)○ *Algoma Central Railway (1967, SCC): Railway did major survey of its lands to spark resource & development

interest and increase traffic; chance of benefit resulting too remote to be capital nature. Analogized to advertising expense.

○ *Canada Starch Co. Ltd. (1968, Ex. Ct.): TP made payment to trademark holder to be allowed to partially infringe their trademark. Court said this was income expenditure; value in TM is in its relation to the business, not in mere registration / permission to use it; hence there is no advantage of enduring benefit created by the payment.

○ Algoma Central Railway and Canada Starch suggest where TP incurs expenses in course of business to expand market share & develop goodwill, these will be income expenditures. BUT where TP purchases existing goodwill, it will be a capital expenditure.

○ *Oxford Shopping Centres Ltd. (1980, FCA): Income expenditure – not enough connection between the road work and a benefit to the business; analogous to the geological survey in Algoma.

○ *Central Amusement (FCTD, 1992): Taxpayer deducted costs of circuit boards in computing business income, MNR said this was a capital expense of an enduring benefit, court said no because kids learned the games, quick replacement, expenditure occurred on a recurring and regular basis

○ Damon Developments Ltd (1988, TCC): TP owned hotel, was allowed to treat costs to replace furniture and appliances as income expenditures. Distinguished form Haddon Hall (landlord case) because in a hotel, such items have a much shorter life and thus less of an ‘enduring benefit’, expenditures to replace them are very regular.

Test #2 → Business Structure vs Money-Earning Process (BP Australia, Sun Newspapers, Hallstrom’s):○ *J.S. Bancroft (1989, TCC): TP was going to build a resort; held property for a few years before abandoning

project. Tried to deduct against income, but held as capital expenditure because TP was in process of creating business structure.

○ Cormack (1965): Travel expenditures incurred to research similar businesses and thereby improve one’s own business constitute a capital expenditure because it’s meant to improve one’s business.

○ D.M. Firestone v. The Queen (1987, FCA): TP bought troubled companies & tried to fix them. Expenses incurred in researching potential acquires held to be capital expenditure in course of putting together new business structure.

○ Park Royal Shopping Center (1995): Extensive renovation costs on account of capital○ Neonex International (1978): Legal expenses for failed takeover bid characterized as capital expense.○ Young v MNR (1989): Cost of subscriptions to investment publications characterized as capital. T not a trader or

dealer in securities, used the info to manage investments and expand portfolio of capital assets. Expenditure incurred in process of gaining or producing business income:

○ *Bowater Power Co (1971, FCTD): Engineering studies to determine if business could be expanded by addition of capital asset held to be part of cost of business and not a capital expenditure because business already up and running & studies part of course of business.

○ Kruger Pulp and Paper (1975 TRB): Consulting services and legal fees incurred by TP with view towards acquiring timber rights and investigation a plant site were deductible expenses incurred in operation of a business

Improvements (Capital Expenditures) vs Repairs (usually deductible) Capital Expense Currently Deductible ExpenseImprovements to capital assets and upgrades are capital expenditures & improving an asset by making it something different in kind is a capital expense Replacing a ship boiler is a distinct capital asset – it can function without the ship (Canada Steamships)

Repairs are deductible expenses & replacing a part that is integral to an asset as a whole is a current expense Repairs to a ship’s cargo hold, the exterior “fabric” of the boat (Canada Steamship)

Replacing the engine in a power shovel (Thomson Construction) – it had a high cost in relation to the value of the shovel as a whole and the old engine still had substantial commercial value on its own

Cost of inserting fiberglass liner into pipeline to prevent leakage and extend its life expectancy analogous to repairing cargo hold in Canada Steamships (Canaport)

Courts look at the size of the expenditure and compare it to Voluntary or involuntary expenditure? Was the purpose of 49

repairs and expenses incurred in other years – repairs usually $10-15k, sought to deduct $42k to replace boat engine (Vancouver Tugboat)

the expense to improve or repair the asset? Replacement of the exterior brick cladding on the building with metal cladding was a repair to the “fabric” of the building (Goldbar)

The cost of the repair is small in relation to the value of the building and there was no choice but to repair as it was an extreme safety hazard

T was within their rights to place with newer, safer, technology

Replacing the carbon lining in pots (Canadian Reynolds Metal) – it had an enduring nature as these had a useful life of 9ish years

Repairs were made to a building on top of a landfill (removed old floor, installed new steel foundation, new floors installed) and all were found to be improvements as the old part was replaced with something essentially different in kind. (Shabro)If repairs substantially improve capital asset, it is deemed to be a capital expenditure.NOTE: wire and plumbing replacements were currently deductible

“As long as the repairs were done to preserve or conserve the asset and not to create a new asset” – Complied with work orders issued by municipal authorities for apartment complexes – merely restored the building to its original condition (Marklib Investments) – could have been applicable to Shabro

Lost building on account of fire and wanted to rebuild – tried to use the purpose test: wanted to have the same building again classic capital expense (Bowland)

Factors to Consider when Determining as a Capital Expenditure: The parts in issue were durable: they were not to be thrown out after being used but were to be repaired or retooled; The parts were a significant asset for the respondent;

CRA Folio S3-F4-C1 (Replaced IT-128R): Enduring Benefit: An expenditure will normally be considered capital in nature if it brings into existence an asset or

advantage that has an enduring benefit. Maintenance or Capital Improvement: Expense to restore to original condition (incl. improvements in tech, materials or

workmanship) – current expense Integral Part or Separate Asset: Repair a property (current expense) vs acquire a separate asset (cap ex) Relative Value: Consider amount of the expenditure compared to the value of the whole property, previous average

maintenance and repair costs or other expenses and annual profits Readying a Used Property for Rental or Other Use: Costs to ready depreciable property for use are generally cap ex,

repairs or replacements to used property to put in suitable condition also cap ex Anticipation of Sale: Repairs made in the anticipation of the sale of a property or as a condition of the sale are generally

regarded as capital in nature o If repairs were going to be made anyways or sale negotiated after repairs were underway, cost should be classified as

though no sale was contemplated

Statutory Capitalization Rules Specific rules that require the taxpayer to “capitalize” stipulated amounts (carrying charges) in certain circumstances

18(2): If the taxpayer is holding vacant land + has borrowed money to acquire the land, then the land may be capital or inventory Cannot deduct interest and property taxes on vacant lands to generate a loss Can only get down to zero Taxpayer has vacant land, certain “carrying charges” are not deductible under 18(2)(a) or 18(2)(b) Ward: TP invested in golf course as a tax shelter, sought to deduce his share of annual losses (interest expenses > revenues

from renting the property) disallowed b/c prop was for resale and development18(3): defines land as vacant land based on excluded definitions - it includes parking lots

These disallowed costs are added to the cost of land under 10(1.1) when the land is inventory o 10(1) allows a taxpayer to value inventory left at the end of the year at the lesser of FMV or costo 10(1.01) is a carve-out where if the taxpayer’s business is an ACNT, then the inventory property is valued at costo Cost includes the disallowed costs under 18(2)(a) + (b)

These disallowed costs are added to the cost of land under 53(1)(h) when the land is capital property Relates to renovations, buildings, land

18(3.1): Soft costs related to ownership incurred during construction/renovation must be capitalized with the building except to the extent that they were used for earning income

Cannot deduct any costs that are attributable to the period of construction/renovation if they are reasonably related to the construction/renovation

But, if used for earning income, then deductible - only up to the amount of income - zero20(29): Can deduct the lesser of the total of soft costs or income from rental buildings up to the amount of rental income - cannot generate losses

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Capital Cost Allowance (CCA)CCAs are allowed under 20(1)(a) and Reg 1100(1), and have three general characteristics:

A declining balance; Class basis (aggregate) → the rate is applied to the Undepreciated Capital Cost (UCC) of the class Permissive (“may”) → i.e., a TP is able to deduct in a subsequent year if they choose

Process: Is it depreciable property or non-depreciable capital property? On disposition of the property:

o Does T have a deductible terminal loss?o Does T have to pay recaptured depreciation?o Does T have to pay for a taxable capital gain?

18(1)(a): Deductions must meet the IPP test, BUT...18(1)(b): Can’t deduct any capital expenses unless explicitly allowed

Non-depreciable property - nondeductible, tax consequences on disposition, see above Depreciable property (DP) – s.20 is an allowance regime where taxpayers can deduct expenses that would otherwise be non-

deductible capital expenditures13(21): Defines DP as property acquired by the taxpayer in respect of which the taxpayer has been allowed a deduction under 20(1)(a) in computing income20(1)(a): Each year, T may deduct part of the capital cost of property against income from business/property as a CCA– declining balance method – every year, an undepreciated balance remains in the purchase price

Deductions reflect depreciation in the cost of property that is used over time and declines in value as it is used, consumed, or wears out

The deduction is optional, but you can’t carry forward your unused CCA – the UCC however, stays high permitting higher CCA deductions in subsequent taxation years

Amount of depreciation permitted for specific classes are found in Reg 1100 and Schedule II Reg 1101(1): Different businesses require different classes for property that would otherwise be in the same class Reg. 1101(1)(a): Stipulates rates (by which the value of the DCP declines per year) applicable to specific classes of DCP

under 20(1)(a), go to Schedule 2, sets out the rates, also applies to UCCo In some cases, higher depreciation amounts are allocated to incentivize investments in certain kinds of property –

tax policy consideration

UCC : for every class of property, T has a total “pool” from which they can claim deductions (e.g. Car purchased for $30,000, depreciation at 30%, UCC at $21,000 after one year)Recaptured Depreciation : negative UCC balances indicates the system gave T more deductions than actually suffered in depreciation so the CRA wants that back and is required to include the entire amount into taxable income (13(1)). (e.g. Car sold for $40,000, the depreciation of $9,000 from before must be added back into income as recaptured depreciation, other $10,000 is taxed as capital gain)Terminal Loss : when the last (or only) asset in class is disposed of, and the T still has a positive UCC, this indicates that T suffered more depreciation over the life of the asset than they were permitted to deduct. T is then permitted to deduct this terminal loss against business income (20(16)). (e.g. Car sold for $15,000, additional loss of $6,000 allowed to be depreciated as terminal loss)UCC = A – E – F + B (13(21))

A: Sum of capital costs of all assets in the class – includes the purchase price and capital expenses to improve/upgradeo Costs include any legal, accounting, engineering fees, etc (IT-285R2)

E: Total depreciation (20(1)(a)) which is taken up to that point in time and any terminal loss deducted under 20(16) when the UCC is a positive number

F: Total of proceeds of distribution but only up to the capital cost (can’t depreciate what you sold for an increase in value as that’s a capital gain)

B: When the UCC is a negative balance – recaptured depreciation (class basis) when sale proceeds minus the adjusted cost base (54 – capital cost) is a net positive

Note: any capital gains (recapture) are included as ½ taxable capital gains for the purposes of computing income for the purpose of 13(1) and any terminal losses are fully deductible from computing taxpayer’s income under 20(16) (business deductions)

13(21) – “Depreciable Property”: Property for which a T can claim CCA (listed in Reg. 1102(1) and (2)) The taxpayer must have acquired the property for the purposes of the UCC formula

o Wardean Drilling: If the taxpayer has the normal incidences of title (use, possession, risk), then he/she has acquired it, although legal title may remain with the vendor as security for the purchase price

o 13(26): this is an available for use rule - no CCA even if you have legal title until the property is acquired - usually AFU when delivered

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o Therefore, disposition is when you have surrendered all legal incidences of title - for example, could still have legal title but no possession (focus on substantive ownership) (Olympia and York Developments)

Reg. 1102(1): Excludes a number of things from the capital cost allowance regimeo Reg. 1102(1)(b): Inventory is not depreciable capital propertyo Reg. 1102(1)(c): Same IPP test as in 18(1)(h) → this property must be used for an income producing purpose to get

the capital cost allowances in 20(1)(a) Reg. 1102(2): Real property is not a depreciable asset - Land is not depreciable property

o The classes of property described in Schedule II shall be deemed not to include the land upon which a property described therein was constructed or is situated.

Reg 1100(2) – “Half-year rule”: for an asset acquired during the taxation year, can deduct half of its CCA for that year Ben’s Ltd: T runs bakery, purchased land with a few tenanted wood-frame buildings, collected a small amount of rent on one

occasion, and then tore the buildings down as he had always planned. Allocated most of the acquisition cost to the buildings, but they were not depreciable, as they were never intended to produce income and so there was no CCA deduction allowed.

o Argument that the purpose of the acquisition was to expand the business (business purpose) need to the look at the real purpose of the acquisition

o The income producing test must be applied separately to each piece of property in each class Hickman Motors: The test is SOME INCOME, not net profit (similar to Ludco) – the fact that the assets produced revenue

establishes that they continued to be used for the purpose of producing incomeo Distinguish Ben’s from Hickman: one residential property rented for a short time versus equipment continuously

used for the same purpose before, during, and after it was held by T.

248(1): “disposed of” – any transaction or event that entitles a T to proceeds of disposition 13(21): “proceeds of disposition” – sale price of property sold, compensation for property lost, taken, destroyed Four possible scenarios at disposition:

o Proceeds = UCC reduced to zero, CCA was calculated perfectlyo Proceeds < UCC terminal loss: difference is deducted from business/property income that year (20(16)), but

only when there is no more depreciable property left in the classo Proceeds > UCC recaptured depreciation: difference is included in business/property income that year (13(1))o Proceeds > UCC & capital cost recaptured depreciation and capital gain

54: Capital gain inclusion – defines the adjusted cost base of the depreciable property to be the capital cost NOTE: 13(21) does not include demolition, but the SCC has held that “disposition” ought to be given the widest possible

meaning, including demolition, in which case, proceeds would be zero (Copmangie Immoblliere BCN Ltee)

Reg 1101(a): Prescribes separate classes for depreciable property used in separate businessesReg 1101(1ac): Each rental property with a capital cost over $50K constitutes its own distinct class

Reg 1101(14) – “Rental Properties”: a building owned by T or a partnership, whether jointly or otherwise, if in the relevant taxation year, the property was used principally for the purpose of gaining or producing gross revenue, that is rent

o NOTE: doesn’t apply to a scenario where T rents the property to someone under an agreement where they then carry on the business of promoting or selling T’s goods or services in the property

Reg 1101(11) – CCA on a rental property is restricted to the amount of rental income – can’t use to generate loss

Taxable Capital Gains, Allowable Capital LossesCapital Gains and Losses: Characterization and Computation3(1)(b): Allowable capital losses are only deductible against taxable gains

3(b)(i)(a): Losses from disposition of personal property only deductible against personal property gains38(a): Capital gains are taxed at ½ the gain38(b): Capital losses are deductible at ½ the loss39: “Capital gain” – residual, a gain, or loss from disposition of property that would not be taken into account in computing income from business or property

39(1)(b)(ii): Losses from disposition of depreciable property are excluded (terminal losses: 20(16)(b))40(1)(a): GAINS

(i): If property was disposed of in the year, GAINS = PROCEEDS - [ACB + TRANSACTION COST]. If this gives you a positive number, then you have a gain.

(iii): “Reasonable reserve” in respect of the gain. [i] - [iii, reasonable reserve]. This allows you to spread the gain out subject to limitations.

o The limits are in (d): You can only do this over a 5-year period and you must take ⅕ of the gain minimum. 40(1)(b): LOSSES

(i): If property was disposed of in the year, LOSS = PROCEEDS - [ACB + TRANSACTION COST]. If this gives you a negative number, you have a loss.

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248(1): “Disposition” – any transaction or event entitling T to proceeds of disposition of property54: “Proceeds of disposition” – money for (a) sale, (b) property unlawfully taken, (c) property destroyed including insurance payouts, (d) statutory expropriation, (e) property injuriously affected, (f) compensation for property damaged54: “Adjusted cost base” – (a) where the property is depreciable property of T, ACB is the capital cost to T of the property as of that time and costs properly regarded as capital costs are added to the capital cost of the building, (b) in any other case, ACB is the the cost to T of the property adjusted, as of that time, in accordance with s. 53

Characterization39(a) + (b): capital gains and losses are amounts that would not otherwise be included or deductible in 3(a) for computing a taxpayer’s income for the year

If a gain from a disposition of property would be a capital gain, then it is capital property (Friesen) If a loss from a disposition of property would be income from a business, then it is inventory (Friesen) Characterization Test → distinction turns on whether property was disposed of in the course of a business or as part or an

adventure or concern in the nature of trade – Course of business or ACNT Inventory Incentives:

o Income from office, employment, business or property is fully taxable under 3(a), whereas only ½ of capital gains are included → taxpayer wants to characterize gains as capital

o Losses from office, employment, business or property are full deductible under 3(a), whereas only ½ capital losses are deductible and usually only against capital gains → taxpayer wants to characterize losses as office/employment/business/property income

Is it ACNT? (MNR v Taylor) What is the nature or quantity of the subject matter?

o A large quantity or something not usually for personal use indicates an “adventure in the nature of trade”o Personal use property (a house to live in) or an income producing capital property (rental home) would not be an

“adventure in the nature of trade” o Both are distinguishable from buying something in order to sell it at a profit (inventory)o Inventory gives rise to business income

What is the manner of dealing?o Seeking purchasers indicates the taxpayer is acting like a tradero A short holding period to mitigate costs o Method of financing (borrowing heavily)o Speculating on future prices

Addition to the Test: What is the intention to speculate (including secondary intention)? This is the motivating factor in purchasing (ex: but for the resale value, T would not have purchased: Regal Heights, Racine)

Capital Property/Assets InventoryFactors:

Long holding period Unsolicited offer or sale due to crisis T rarely buys and sells land Large amount of equity Land used for personal use No intention to profit

Factors: Short holding period Solicited offers T frequently buys and sells/in the business as a

developer Bought with borrowed money Not for personal use Intention to profit

Real Property Real property: land and whatever is erected or growing upon or affixed to the land – also includes rights of land, but not

including a mortgage secured by real propertyo CRA: Real property acquired for investment is converted into inventory when T (1) begins improving it with a

view of selling it, (2) applies to subdivide the land into lots for sale, or (3) applies to subdivide into strata lots. o The CRA will calculate the value at the date of the hypothetical disposition.

Personal property: everything that is the subject of ownership not coming under denomination of real estate o Where property is held for personal use, a gain or loss on the disposition of the property is generally characterized as

being on account of capital Regal Heights Ltd v MNR (SCC, 1960) – “secondary intention doctrine”. T bought land to develop a shopping center and

did some related activities but it became clear that this wouldn’t work as the anchor tenant decided to go somewhere else, so T sold the land at a profit and claimed a capital gain.

o Was the sale of real property ACNT and therefore profit from a business within the meaning of 3, 9, 248(1)?53

o This was ACNT as there was a speculative venture in vacant land – there was no guarantee of landing the anchor tenant – if the primary intention failed, the secondary intention was to sell the land for profit/capital gain.

Racine (1965, Ex. Ct): Ts each had real estate business experience and borrowed money to purchase land and machinery of a bankrupt corporation, which they turned over 4-6 weeks later at a gain of $20k each.

o Characterizing the transaction as ACNT would require that the purchaser had in mind at the exact moment of purchase the possibility of resale as an operating motivation. Secondary intention must be motivating in that BUT FOR the possibility of resale, you wouldn’t have bought it.

Taylor: relied on similar considerations in dealing with an ACNT. Look at the nature and quantity of subject matter, same kind, same way test – did the person deal with the property the same with a trade would?

Vacant Land vs. Land with Buildingso Vacant land: more likely inventory - this presumption hints at the “nature of subject matter” test from Taylor

Vacant land may be a factor that indicates T is holding land as inventory, but if T improves the land (ex: puts a building on it), it is more likely to get the capital characterization.

Vacant land is characterized as capital property where it is held for personal reasons (Lawee, Montfort Lakes)

o Land with buildings: Hiwako Inv. Ltd. developed land that was already actively producing income at the time of purchase is more likely an investment (capital property)

Manner of Dealing:o Look to: how traders would deal with the land, holding period, high frequency of transactions, actively looking for

purchasers, buy low + sell high, method of financing, REOP, circumstances responsible for disposition, other activities by TP or principal shareholders

o Happy Valley Farms v MNR (1986, FCTD): Court rejected argument that land was acquired for a hobby farm, presumption it was ACNT because subdivided and sold on 17 previous occasions

o H. Fine and Sons Ltd. v Canada (1984, FCTD): Long holding period + a plan for business expansion = capital property

o Gratl v. Canada: Short holding period = inventory

Canadian Securities Regime39(4): Taxpayer can make an election to recognize the gain from Canadian securities as a capital gain - only when the securities are disposed of

The effect is that all Canadian securities held by that taxpayer are then deemed to be capital property Losses are therefore also capital losses 39(5): This does not apply to TPs who are traders or dealers in securities, financial institutions, etc 39(6): Security – shares, mutual fund trust or bond unit, debenture, bill, note, mortgage, excluding shares whose value is

attributable to real property or resources, debt of a corporation dealt non-arm’s length, non-arm’s length corp shares (R. 6200)

Vancouver Art Metal Works Ltd v Canada (1993, FCA): Question of law. Does a trader or dealer in securities for the purposes of the 39(5) carve-out include someone who buys and sells securities on behalf of other people in the ordinary course of business? Or is it only someone registered in a regulated industry?

Argued that Parliament intended a clear line to be drawn - noscitur a sociis (known by your associates)o Should only include people in a regulated industry because only regulated industry type things are listed here

Court disagrees because this is false - look at a non-residento Drafter also used “licensed” elsewhere, could have used it hereo A person who buys and sells is not necessarily excluded from this election, only when the dealings amount to

carrying on a business as opposed to an investment Question of fact to distinguish between an adventurer (can elect) and a trader (can’t elect)

o Frequency of transactions, length of holding, time spent on the activity, intention to acquire for resale at a profit, nature and quantity of the securities held, method of financing, etc.

This raises the question: what does it mean to trade or deal in shares? Robertson (TCC, 1996): A dealer refers primarily to a professional trader, while a trader refers to someone who carries on a

business activity beyond the level of an adventure or concern in the nature of trade; trader – frequency & dealer – knowledge Woods (TCC, 1995): “Insider” who engaged in over 100 transactions in 1986 and 1987 characterized as a trader or dealer Kane (FCTD, 1994): Taxpayer, who possessed “particular or special knowledge in which he trades”, characterized as a

trader or dealer Kane v Canada (1994, FCTD): This case draws a distinction between trading and dealing. A dealer is more professional,

requires some special knowledge of the market; a trader is engaged in a business activity that’s a bit more than an adventure in the nature of trade.

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Leng v Canada (TCC, 2007): TP made 17 trades over 3 years. MNR characterized his losses as capital losses on the basis that he wasn’t a trader in securities - made a profit but wasn’t carrying on a business, can’t deduct as business income.

Zsebok v Canada (TCC, 2012): TP made 20-50 trades per year. He claims business losses from online share trading, MNR says these are capital losses. Court says his frequency of trades/year made this an “adventure in the nature of trade” even though he’s not a trader for the purposes of the carve-out in 39(5) - remember though, he wouldn’t want to do this now since he has losses. Looked at the frequency of his trades and the short holding period.

Satinder (FCA, 1995): Gains resulting from discounts on debt obligations characterized as interest are not eligible for the Canadian securities election

Where taxpayers incur losses, they will not wish to file the Canadian securities election, but argue that they were carrying on a trading business or an ACNT:

Leng [17 transactions from 2000 to 2002 not sufficient to be characterized as a business or adventure apparently] vs Zsebok [20-50 trades a year averaging about 60 days per year sufficient to conclude taxpayer was engaged in an adventure in the nature of trade]

Personal Use Property54: Personal Use Property (PUP) – Property owned by the TP used primarily for the personal use and enjoyment of the TP or related to the TP

Must be capital property and not inventory (cases below re: sale of houses)40(2)(g)(iii): Losses from the disposition of a PUP deemed nil (overriding the general rule)46(1): Where a TP has disposed of a PUP, (a) the ACB to the TP immediately before the disposition is deemed to be the greater of $1,000 and the amount otherwise determined and (b) the TP’s proceeds of the property shall be deemed to be the greater of $1,000 and the TP’s proceeds of disposition of the property otherwise determined

Basically, they don’t care about anything <$1,000 and for anything more than that, it’s either $1,000 or the amount otherwise determined

46(3): PUP disposed of as a set – Calculate the total FMV of the entire set Anti-avoidance rule to prevent selling things off in pieces

Burnet v Canada (TCC, 1995) *loss on property* TP and wife lived in house in West Van. Inherited house in North Van from his father in 1978. There was a decline in housing prices in the 70s. TP moves into the NV home, tears the WV one down and starts building a new home. Real estate prices declined significantly. And property value declines. Then moves back to WV. Tried to rent/sell the house. House is valued at 415K in 1984. Finally, TP sells the house in 1987 for 385K.

TP claims a business loss of $520K, the difference between the expenses claimed of $905K and the selling price. MNR argument: The TP lived in this house for a long time. The bedrooms were named after his kids. This was definitely a

PUP. PUP or ACNT? Court determines it as a deductible business loss. Secondary Intention Doctrine:

a. Starting point: speculative venture of someone who is naive. The crazy real estate boom in the early 80s before the crash.

b. Initial intent was entirely speculative. The fact that things went sour and he lived in the home is just a symptom of how terrible the circumstances became.

c. Size of the house: 4000 square feet of house is too large for the family itself. It wasn’t built for them.Duff: On these matters, it depends on whether or not the judge is sympathetic.

Down v MNR 1993 TCC: $112,818 loss on disposition of home in which TP resided characterized as business loss since TP had bought and sold 80-100 props in previous years and lived in the house for only 10 months. Jason v Canada 1995 TCC: Heavily debt financed and short holding period. Even though the TP and wife lived in house, there was a secondary intent to sell for profit. That means that it’s inventory. Boudreau 1999 TCC: Loss on property rented to parents at below market rates and sold to sister at a loss characterized as a PUP.

Listed Personal PropertyListed Personal Property (LPP) (54): personal use property that is all or any portion of, or any interest in or right to any 1) print, etching, drawing, painting, sculpture, or other similar work of art, b) jewelry, c) rare folio, rare manuscript, or rare book, d) stamp or e) coin

40(1): gains from the disposition of an LPP taxed at ½ the gain taxable net gains from the disposition of LPP in 3(b)(i)(B)40(2): losses from the disposition of an LPP deductible at ½ the loss41(2): def of the gain from the disposition of an LPP41(2)(b): TPs may carry LPP losses back 3 years or forward 7 years to offset net gains from dispositions of LPPs in those years41(3): def of the loss from the disposition of an LPP loss can only be deducted against the gain from the disposition of an LPP

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Disposition of an LPP also subject to the $1,000 rule in 46 for the disposition of PUPs

Principal Residence Exemption54: Personal Residence (PR): “Housing unit” owned by the TP, whether jointly or with another person.

(a): If TP is an individual, the housing unit was “ordinarily inhabited” by TP, spouse, current/former CL partner, child (c): Must designate the house. Only matters if you have more than one house.

o This is designed to say that there is meant to be one PR per “family.” (e): Deeming rule: surrounding land

o Language that we’ve seen in the context of 18(2) o Includes land that’s underneath, around, reasonably regarded as contributing to the use and enjoyment of the

housing unit as a residence, except where excess land is more than ½ hectare of total of property unless the TP establishes that it was necessary for use/enjoyment.

40(2)(b): Gain for taxation year from a property that was TP’s principal residence GAIN = A - [A x B/C]

o A is gain otherwise determinedo The B/C fraction says you can choose over a number of years you own to call it a principal residence. o C is the number of years the property was owned by TP or jointly with another person.o B is “one plus” the years it was your principal residence

“One plus” – where a TP disposes of one residence and reacquires another in the same year, the full amount of any capital gain on both properties is exempt

Where the property was the TP’s principal residence during each taxation year in which the TP owned the property, any gain on the disposition of the property will be fully exempt.

Three Litigated Issues:1. Inventory vs Residence 2. Whether there is a housing unit and whether it is ordinarily habited by the TP3. Whether land beyond ½ hectare was necessary to the use and enjoyment of the housing unit as a principal resident

Inventory vs ResidenceIf property is INVENTORY, you’re not in Subdivision C, you’re in Subdivision B - fully taxable business income (Cayer).

TP incentives: o If there’s a gain, TP says it’s PUP.o If there’s a loss, TP wants to say that this was a business or ACNT (Burnett). o Trying to avoid PUP that deems a loss to be nil.

Cayer v Canada 2007 TCC *gains on property* TP is a single mother. Prior, she and her husband had company and bought and sold several homes. Court concluded she was actively engaged in the business. Held a real estate license for a period of time. After split in 1983, TP sold her house for 320K (her marital home, couldn't care for it anymore. They only lived there for 1.5 years). Following that, she bought and sold a number of houses — sometimes vacant land and constructed houses, sometimes renovated homes. [Duff has posted a table on the timeline]. Lots of gains.

Are these homes principal residences (and therefore exempt)? Or are these profits from the disposition of inventory and therefore fully taxable as income from business?

TP argument: Tons of reasons why she’s not in the business of renovating and selling houses -- didn’t like the home, wanted to be closer to a school, bad memories, etc.

Court refers to tests from Happy Valley Farms:o Various considerations (these are all familiar tests, such as whether something is an ACINT; manner of dealing test

(Taylor)):1. Nature of property sold2. Length of time owned

i. (1. and 2. are the tests for ACNT)3. Number/frequency of other transactions 4. Work and effort expended

i. (3. and 4. are tests for course of business/ACNT)5. Reason why property is sold 6. TP’s intentions

i. (5. and 6. tests for ACNT) o Application to the facts of this case:

1. Key factor about nature of property that’s being bought and sold: newly developed, turning over pretty quickly, buys vacant

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lots, buys houses and renovated. She incorporated highly marketable feature for quick resale.2. Length of time: for the most part, not that long.3. Number/frequency: RA only goes after three of the properties. Didn’t go after the property that she lived in for 3 years.

Started to go after her from the Balding Crescent home. 4. Work or effort: this is her sole source of income! Lots of work. 5. Reasons: court has to assess TP’s credibility. She’s got a variety of reasons: kids didn’t like, house too big. Ultimately, she

was in the business. As to why she lived in the houses for a period of time, she even admitted that it allowed her to get out of a builder’s warranty (OMG this woman seriously).

6. Intention: Objective factors suggest that intention is not to live in the house: she finances them with a line of credit (as opposed to a mortgage). Idea is to sell and pay off the principal when she sells

Other cases in the notes: Isaaks v Canada 2001 TCC, aff’d in FCA: TP a carpenter. Buys 3 residential lots. Lives for 4-13 months. Court says: this is

a business. It’s related to your business. Relationship between this sale and other businesses you’re carrying on. Giusti v Canada 2011 TCC: TP was an experienced real estate agent who engaged in many real estate transactions between

2001 and 2008, purchased a condo in April 2006, made various improvements to make it more marketable, inhabited it for four months from November 2006 to March 2007 before listing it for sale; condo characterized as inventory

Vogan v Canada 2004 TCC: Different conclusion than in Isaaks. Court held that this was PUP and therefore gain exempt. The reasons: property was constructed to the TP’s specifications. Suggests you're going to live in it. Sold bc of unsolicited offer.

o Duff notes that this is the flip side of the Burnet case. Goes back to talking about Burnet and how the court might’ve gotten it wrong there.

Falk (TCC, 1991): Although TPs bought and sold three residences on the same street between 1980 and 1988, gains were characterized as capital gains eligible for principal residence exemption because neither had experience in the real estate industry; “family needs” were the “primary operative motivation throughout” and financing was not abnormal

Was it a “Housing Unit” that was “ordinarily inhabited”?Flanagan v MNR 1989 TCC *broad interpretation of housing unit and ordinarily inhabited* TP bought property from mother on Shuswap Lake. Never built on the land. Had a trailer, tent, and van. Didn’t leave them on the property. In 1976, lived on the property from June-September. In other years, he lived there about 30 days a year. 1982: sold the first property, 1983: sold second. Claims principal residence exemption.

The van and trailer are housing units, and the TP ordinarily inhabited them. The land subjacent to the housing unit (below) is part of the principal residence as well.

Housing unit: o Dictionary: “Housing” means “shelter of a house, accommodation, lodging.” o Focus is on the word “Shelter.” Other than a roof, what is necessary for this: some basic amenities. o Look at CRA interpretation bulletin: a trailer qualifies. Housing unit is supposed to be connected to the land. o Duff : Do you think the CRA is envisioning a trailer that just sits on the land? Might say that what’s being missed

here is the “unit” being connected to the land. Duff thinks there is a degree of sympathy from the court -- less affluent people can have the exemption too!

Ordinarily inhabited: o It’s ordinary for the TP to go to this piece of property whenever he can.o Broader view of ordinarily than the “main” way we look at ito Suggests that principal residence exemption doesn’t have to be your main residence. o Second piece of land across the road not ordinarily habited.

Other cases in the notes: Rebus v Canada 2002 TCC: Garden shed. Court says that this isn’t a housing unit based on framework set out in Flanagan,

i.e. no amenities. Ennist v MNR 1985 TCC: TP buys condo in Vancouver and gets job in Ottawa and moves. Moves before condo is built. By

time all ready to be moved in, he’s basically moved to Ottawa. Puts condo up for sale. Ordinarily inhabited? He sleeps there one night. Court doesn’t buy it. Ordinarily means more than one night.

Mitosinka (TCC, 1978): Adjoining duplex with common basement inhabited by the TP’s parents was not part of the housing unit ordinarily inhabited by the TP for the purposes of the principal residence exemption

o Duff doesn’t like the result of this case Saccomanno (TCC, 1986): House that had been divided into three separate units, two of which were rented out and one of

which was inhabited by the TP, characterized as a single housing unit for the purposes of the principal residence exemption on the basis that the property was originally built as a single self-contained dwelling and that the TP had acquired it in order to return it to a single dwelling

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o ITF S1-F3-C2: where a residential property is used partly as a principal residence and partly to earn income from a business or property, entire property considered principle residence where:

The income-producing use is ancillary to the main use of the property as a residence, There is no structural change to the property No CCA claimed on the property

54(e) : Deeming rule for surrounding land – Immediately Contiguous Land Recall: Subjacent/immediately contiguous...use and enjoyment as personal property…up to 1/2 hectare unless necessary for use/enjoymentSummary: Excess land generally considered necessary to use or enjoyment where local regulations require minimum lot size for a residence (Yates) or prohibit the subdivision of property (Augart and Carlisle), though the zoning changes that are allowed under local regulations suggest that excess land is not necessary to use or enjoyment, even if an application for a zoning change has not been made (Stuart Estate); subjective considerations (“peace and seclusion”) are not necessary to the use or enjoyment of a housing unit as a principal residence (Rode)

Canada v Yates 1983 FCA *surrounding land; trumped by Cassidy* At the time TP bought property, zoning bylaw in this area said that you needed 10 acres to build. Subsequently increased to 25 acres. TP got an exemption so it was still at 10 acres. Sell 9.3 acres to the city, so left with 0.7 acres to live on. (This would be a part disposition of a property).

MNR argument : Still living there and so clearly they didn’t need the 9.3 acres. Suggests this wasn’t necessary to use and enjoyment of housing unit as a residence.

TP argument: Uh we HAD to buy 10 acres Court sides with the TP. Time to assess use/enjoyment is immediately before the disposition. Duff seems to think that this isn’t the best way to look at it. Think back to the formula in 40(2)(b): A - (A x B/C). Wouldn’t it

be more reasonable to say that it was necessary during some years and not during others? Seems like it as this has now been confirmed in Cassidy.

Cassidy v Canada 2010 FCA: Whether surrounding land was necessary should be assessed on a yearly basis. Flanagan: Wants exemption for two pieces of land. Has to be under definition in para (e). Subjacent land and immediately

contiguous. Court says that this land is not immediately contiguous: it’s something across the road. The pipe connecting it does not make it immediately contiguous.

54 : Does “use and enjoyment” have to be objective or subjective? Rode v MNR 1985 TCC: Preference for seclusion and self-sufficiency does not make land “necessary” to the use or

enjoyment of a housing unit as a principal residence. o Can’t make subjective arguments. “Necessary” is an objective test, such as zoning restrictions.

Augart v MNR 1993 FCA: Subdivision restrictions. Issue: when they finally sold whole thing, was all of the excess land part of use/enjoyment? Majority of court said yes, restrictions affected ability to use/enjoy. Strong dissent by Linden J.: the test is whether necessary for use/enjoyment as a residence! Not as an ability to subdivide. (He also said this was “not intended as a tax bonanza to the owners of large estates.”)

Carlile (FCA, 1995): 33 acres used for agricultural purposes considered necessary to use or enjoyment of housing unit as a principal residence since zoning regulations required minimum area of 25 acres, even though TP could have applied to rezone and subdivide land, which was sold to a developer who was likely to do so

Stuart Estate (2004 FCA): TP is the estate of an elderly widow. Sells land for 1.8 million to a developer, who promptly makes a successful application to rezone the land. In assessing the widow’s income, Minister said that only 45% of the land was necessary for her use and enjoyment. Estate makes argument that all of that land was necessary to use and enjoyment, bc she didn’t have resources to develop this land. Court says: the widow had some ability under the regulations to seek some amendment. It was established that if she’d simply applied, it would’ve been granted. So, not necessary to use/enjoyment.

Changes in Use The Act contains special rules deeming TPs to have disposed of property for proceeds of disposition equal to the property’s

FMV and to have immediately reacquired the property at a cost equal to that FMV whenever the purpose for which the property’s use changes to or from the purpose of gaining or producing income.

Changing the use of property:o Two different kinds: property that’s inventory/capital property OR personal use property o Note: These rules DON’T contemplate changes from inventory to capital property. CRA has said that we will have a

notional disposition when moving from inventory to capital property — wait until the disposition. Will allocate out gain/loss when you change within these worlds. No “deemed disposition” in these circumstances.

Recognition rule: typically gains/losses not triggered until you dispose. But these are “deemed dispositions” at time that use is switched.

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Recognition Rules: 70(5): Deemed disposition immediately before taxpayer’s death 128.1(4) & (1): Deemed disposition on ceasing to be resident in Canada and becoming resident in Canada

Non-Recognition Rules: 13(4), 14(6) & 44(1): Exchanges of property 85(1): Elective rollover on transfer of eligible property to a taxable Canadian corporation for consideration including shares 70(6) & 73(1): Rollovers on transfer of property to spouse or common law partner or spouse trust

Deemed Disposition and Reacquisition at FMV: EX: You have a principal residence, move out, rent it: deemed to have reacquired it for a cost at time you changed its use to

determine whether there's a capital gain or loss. Based on FMV at time of change of use. 45(1)(a):

(i): non-income producing (personal use) → income producing (ii): income → non-income producing (personal use)

13(7): Parallel rules for depreciable property (a): income → non (b): non-income → income

o *Deemed to have acquired at lesser of FMV or the total of its cost otherwise determined and ½ of the amount by which its FMV exceeds this cost

Elections: exception to the deeming provisions in 45(2) and (3) for changes in use 45(2): Non-income property → income producing property

o If TP doesn’t want to have any tax consequences — can elect not to have deemed disposition occur, continue to treat it as non-income producing property. Max four years.

o Note: the property is still treated as PUP so TP cannot deduct CCA and other business expenses, and any loss that accrues after the change in use is disallowed on the basis that the TP is deemed not to have changed the use of the property (and no losses allowed for PUP!)

45(3): Income producing property → principal residence. o TP can elect to not have deemed disposition of property at time of change of use. For four years while it’s income

producing, it can be deemed your principal residence for tax advantage purposes.o Consequence: not treated as principal residence. Cannot continue to advantage from tax consequences (i.e. CCA

deductions, deductible losses) 45(4): Election under 45(3) not allowed if a CCA deduction has been made for that property in that year.

Duthie Estate v Canada, 1995 FCTD *change of use from personal to income producing* Property in East Kootenay. Principal residence on it. In early 80s, thinks he should develop it and put condos there. Starts a project. His advisors tell him the market is changing and the project should be on hold. Puts it on hold but keeps project alive. He starts deducting expenses. 1984, TP dies in plane crash. Tax return filed by his estate.

TP estate’s argument: There was a change of use. No longer personal. Condo development. Value of property is decreased and they claim a business loss of $446K. Can see the incentive: not subject to rule that deems loss to be nil. Change of use = Since FMV has decreased, can deduct loss, carry it back to offset from other years.

MNR argument: o 1. Estoppel: Didn’t report change of use in 1981. Procedural argument.

Court: When tax return was filed in 1984, they let him know. So, there was some notification later. o 2. Substantive arguments: all preliminary. Really haven't actually started a business.

Court: There has been enough of a signal (engineering studies, etc); actions in advance clearly indicating that there are plans for applying for subdivision. Seems to suggest that preliminary activities may be enough.

Dawd (TRB, 1981): TP purchased land with the original intention of building a home, obtained an engineering study to develop the land in 1972 and a draft plan of subdivision in 1973, and sold the land to a wholly-owned corporation in 1977; Board concluded land had been converted to inventory no later than Jan 1, 1973.Jones (TCC, 1990): “Actions and conduct by a TP long in advance of actual registration of a subdivision plan may well be sufficient to establish a date or time at which a commitment to a change in use can be determined for a property”Menzies (TCC, 1990): TPs had not commenced to use a former principal residence for the purpose of earning income when they decided to rent it while waiting for the real estate market to recover. The overriding intention must exist to use the property as an asset in a rental business and an arrangement that is essentially designed to defray costs pending sale will not suffice.Noonan (TCC, 1997): No evidence that the TP who purchased a luxury condo for $450K had originally acquired it as an investment for rental purposes and subsequently converted it to personal use. Looked at how expensive it was, the choice of expensive material

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without regard to tenant wear and tear, failure of investigating the rental market and absence of search for tenants.

Non-recognition rules: the converse of recognition rules The Act contains numerous “rollover” provisions that permit actual disposition to occur without triggering any tax

consequences Policy Incentives: stimulate economy by incentivizing incorporating a business (allow people to transfer property on a tax-

deferred basis) So, instead of a deemed disposition at FMV (to trigger tax), deem it to be at cost.

o EX: Want to transfer a piece of property into a corporation. How would make sure that TP doesn't pay any tax on the transfer: deem the corporation to have acquired the property at that cost.

Change in Use from Inventory to Investment Property or Vice Versa: Notional disposition when the use changed and when the sale of property is conducted, the taxes are allocated to when the

property was either capital property or inventory taxed as capital property for the time it was not used as inventory and vice versa

Can’t turn vacant land from inventory to capital property if it remains as vacant land

Deemed ProceedsIncentives of the TP to allocate amounts deliberately: a) Purchaser: Want most of the price in inventory (then cars, then land). Why? Because these are fully deductible in computing the

purchaser’s income. Also, would want to allocate to depreciable property, especially depreciable property with a high CCA, in order to benefit from high CCA and/or terminal losses on the subsequent disposition of the property. Basically, you want to allocate wherever you get higher deductions.

b) Vendor: Likely to have claimed CCA on depreciable property in previous taxation years. So, will prefer to allocate as much of the proceeds as possible to NON-depreciable capital property (i.e. land), and depreciable property on where little or no CCA has been claimed. This is in order to minimize any recapture on previously claimed CCA, to maximize the amount of any capital gain, which is ½ taxable, and/or maximize any terminal losses that might be realized on the disposition of depreciable property.

a. Thus, vendor/purchaser interests are generally opposed in this context.

Duff then explains that there are some cases where it is mutually beneficial: i.e. the vendor has been accumulating so many losses from previous years that he’s not been getting CCA → may be mutually beneficial to allocate substantial proceeds of sale to depreciable property, enabling the purchaser to claim substantial CCA with little or no recapture to the vendor.

68, 69 are anti-avoidance rules that specify the amount at which certain transfers of property are deemed to have occurred for tax purposes.68: Applies where an amount received or receivable from a person can reasonably be regarded as being in part the consideration for the disposition of a particular property of a taxpayer or as being in part consideration for the provisions of particular service by a taxpayer. Designed to deal with limits on the TPs ability to allocate between different kinds of property

(a): Allows the CRA to reallocate consideration from the global proceeds among different elements of property o If not reasonable to regard part of global amount to vehicles, for example, then the amount can be deemed to be

something else (look at fair market value)o This affects both sides of the contract. o Recall Ben’s Ltd., where bakery bought buildings beside them and tore down buildings but allocated $39K to the

buildings and claimed $3900 CCA.

Golden v Canada 1983 FCA *independence of contracting parties to allocate as they choose is given considerable weight* TP owned apartment building in Edmonton. Approached by someone and offered $5.6M, $2.6M for the land, $2.4M for building, Remainder $600K is for vehicles. Negotiated agreement: $5.85M ($5.1M for the land, $750K for buildings, etc.).

Is it reasonable to regard part of the land consideration as being for the building? – There is no language in the provision about FMV.

It’s about consideration: deference to contract law. It was open to Golden to demand a lot for the land. Perspective of the buyer: he’s really interested in the land. So, he’s mainly concerned about the land. Not unreasonable for

him to want to pay $5.1M for the land. Worth that much to him. Ultimately, must consider from the perspective of both vendor and purchaser and to consider all of the relevant circumstances

surrounding the transaction. **Note: this applies where the transaction is at arm’s length and is not mere sham or subterfuge.

Other cases in the notes:Despite Golden, FMV plays a role in some cases. There’s not a lot of deference to contract law where the court finds that there wasn’t a lot of bargaining. Also, less willing to defer if amount that’s allocated is very far removed from FMV:

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Petersen v MNR 1988 TCC: Unreasonable to allocate any amount to goodwill of day-care centre since it had lost money for 5 years, its license had been cancelled, and appraisal reports concluded that it’s goodwill was non-existent

H. Baur Investments v MNR 1987 TCC (aff’d FCTD): Appellant just wants to undo the contract. Court is not sympathetic to this: the idea of s. 68 is not just to rely on the perspective of one or the other of the purchaser and vendor. Must look at both. Court rejects TP’s attempt to rely on s. 68 to reduce proceeds of building from $2.53M to appraised value of $1.754M on the basis that the agreed amount was “the sole reflection of the purchaser’s view”.

o Courts are generally unsympathetic to TPS who attempt to rely on s. 68 to undo the allocation agreed upon in a contract

Léonard v Canada 1990 TCC: TPs are farmers. Livestock and milk quota is depreciable property. Court allows taxpayers to use section 68 to increase the cost of quotas for livestock and milk for CCA purposes, on the basis that the agreed prices were less than half their appraised values and were not the result of serious negotiations since the taxpayers were informed of the allocation at the last minute.

o Reallocation more likely where agreed amounts differ substantially from FMV and where there is no hard bargaining over the allocation

Transalta Corp, 2012 FCA: TP sold its regulated electricity transmission business in AB for price 1.31 times the net regulated book value of its assets. FCA allowed this extra amount to be viewed as goodwill.

o Although amount agreed upon between arm’s length parties is an important factor to consider, agreed allocation which does not meet the test of reasonableness may still be challenged under s. 68

MNR v Steen Realty 1963 Ex.Ct: TP sold land and buildings to purchaser who immediately demolished buildings in order to construct 12 storey office building. Court concluded that it was not reasonable to regard any part of the $395K sale price as being the consideration for the disposition of buildings.

o Other cases, the court is more focused on the fact that the agreements are bilateral so must look at both sides: Stanley v MNR 1972 SCC: TP said clearly the building had no value (trying to deduct terminal loss on the building): need to

look at it from both sides → the appraiser said that there was some value.

Non-Arm’s Length TransactionsWhere one person disposes of something to another for proceeds greater than FMV, the transaction creates an artificial gain or reduction in loss for the transferor that is matched by an artificially high cost to the transferee.

The converse: the transaction creates an artificial loss or reduction in gain for the transferor and an artificially low cost for the transferee.

Incentives: these transactions might be used to avoid tax by allocating gains to low-income TPs and losses to high income TPs.

69(1)(a): Deems TPs who have acquired anything from such persons for proceeds greater than FMV to “have acquired it at that FMV” 69(1)(b): Deems TPs who have disposed of anything to Non-arm’s length persons for proceeds less than FMV “to have received proceeds of disposition therefore equal to that FMV”

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