VOLUME I Chapter VOLUME II - Pearson · 6 Income Or Loss From A Business 7 Income From Property 8 Capital Gains And Capital Losses 9 Other Income, Other Deductions And Other Issues

Chapter V O L U M E I

1Introduction ToFederal Taxation In Canada

2 Procedures and Administration

3Income Or Loss From An OfficeOr Employment

4Taxable Income and Tax PayableFor Individuals

5Capital Cost Allowances AndCumulative Eligible Capital

6 Income Or Loss From A Business

7 Income From Property

8 Capital Gains And Capital Losses

9Other Income, Other DeductionsAnd Other Issues

10Retirement Savings And OtherSpecial Income Arrangements

The detailed contents of bothVolume I and II follow.

Chapter V O L U M E I I

11Taxable Income and Tax PayableFor Individuals Revisited

12Taxable Income andTax Payable For Corporations

13Taxation ofCorporate Investment Income

14Other Issues InCorporate Taxation

15Corporate Taxation andManagement Decisions

16 Rollovers Under Section 85

17Other Rollovers and Sale Of AnIncorporated Business

18 Partnerships

19 Trusts And Estate Planning

20 International Issues In Taxation

21 GST/HST

CONTENTS

The textbook is published intwo Volumes:

Volume I = Chapters 1 to 10Volume II = Chapters 11 to 21

CHAPTER 1Introduction To Federal Taxation

In Canada

The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1

Taxable Entities In Canada . . . . . . . . 2

Federal Taxation And The Provinces . . . . 4

Tax Policy Concepts . . . . . . . . . . . . . 5Taxation And Economic Policy . . . . . . . 5

Taxation And Income Levels . . . . . . . 6

Tax Incidence . . . . . . . . . . . . . 8

Tax Expenditures . . . . . . . . . . . . 8

Qualitative Characteristics Of Tax Systems . . 9

Income Tax Reference Materials . . . . . . 11Introduction . . . . . . . . . . . . . 11

The Income Tax Act . . . . . . . . . . 11

Other Income Tax Legislation . . . . . . 14

Other Sources Of Income Tax Information . 16

Liability For Income Tax . . . . . . . . . . 18Charging Provision For Canadian Residents . 18

Charging Provision For Non-Residents . . . 19

Alternative Concepts Of Income . . . . . . 21The Economist’s View . . . . . . . . . 21

The Accountant’s View . . . . . . . . . 21

The Income Tax Act View . . . . . . . . 21

Net Income For Tax Purposes . . . . . . . 21Structure . . . . . . . . . . . . . . . 21

Components . . . . . . . . . . . . . 22

Combining The Components - ITA Section 3 . 23

Loss Carry Overs . . . . . . . . . . . 25

Net Income For Tax Purposes - Example . . 26

Net Income To Taxable Income . . . . . . 27

Principles Of Tax Planning . . . . . . . . . 27Introduction . . . . . . . . . . . . . 27

Tax Avoidance Or Reduction . . . . . . . 28

Tax Deferral . . . . . . . . . . . . . 28

Income Splitting . . . . . . . . . . . . 29

Abbreviations To Be Used . . . . . . . . . 30

Key Terms Used In This Chapter . . . . . 31

References . . . . . . . . . . . . . . . . . 31

Problems For Self Study . . . . . . . . . . 32

Assignment Problems . . . . . . . . . . . 34

CHAPTER 2Procedures And Administration

Administration Of The Department . . . . 37

Returns And Payments - Individuals . . . 38Requirement To File - ITA 150 . . . . . . 38

Due Date For Individual Returns . . . . . 39

Withholdings For Income Tax - ITA 153 . . 40

Instalment Payments For Individuals - ITA 156 41

Interest . . . . . . . . . . . . . . . 44

Penalties . . . . . . . . . . . . . . . 46

Due Date For Balance Owing - Individuals . 46

Final Returns For Deceased Taxpayers . . . 47

Returns And Payments - Corporations . . . 47Due Date For Corporate Returns - ITA 150 . 47

Filing Alternatives For Corporations . . . . 47

Instalment Payments For Corporations . . . 48

Due Date For Balance Owing - Corporations . 50

Interest And Penalties For Corporations . . . 50

Returns And Payments - Trusts . . . . . . 51

Income Tax Information Returns . . . . . 52

Refunds . . . . . . . . . . . . . . . . . . . 52

Books And Records . . . . . . . . . . . . . 53

Assessments . . . . . . . . . . . . . . . . 53

Adjustments To Income Tax Returns . . . 54

Appeals . . . . . . . . . . . . . . . . . . . 54Consent Form . . . . . . . . . . . . . 54

Informal Request For Adjustments . . . . . 55

Notice Of Objection . . . . . . . . . . 55

Tax Court Of Canada . . . . . . . . . . 56

Federal Court And Supreme Court Of Canada 57

Tax Evasion, Avoidance And Planning . . . 58Tax Evasion . . . . . . . . . . . . . 58

Tax Avoidance And Tax Planning . . . . . 58

General Anti-Avoidance Rule (GAAR) . . . 58

Collection And Enforcement . . . . . . . . 60

Taxpayer Relief Provisions (Fairness Package) 62


References . . . . . . . . . . . . . . . . . 64

Problems For Self Study . . . . . . . . . . 66


Detailed Table Of Contents For Both Volumes (Page 2)

V O L U M E I

CHAPTER 3Income Or Loss From

An Office Or Employment

Employment Income Defined . . . . . . . 73Cash Basis And The Use Of Bonus Arrangements 74

Net Concept . . . . . . . . . . . . . 75

Employee Versus Self-Employed . . . . . . 75Employee Perspective . . . . . . . . . 76

Employer Perspective . . . . . . . . . . 78

Making The Distinction . . . . . . . . . 78

Inclusions - Salaries And Wages . . . . . . 80

Inclusions - Fringe Benefits . . . . . . . . 80Amounts To Be Included In Income - ITA 6(1) 80

CRA Administrative Practice On Fringe Benefits(IT-470R) . . . . . . . . . . . . . . 81

Tax Planning Considerations . . . . . . . 85

Inclusions - GST/HST/PST On Taxable Benefits86

Inclusions - Board And Lodging . . . . . . 87

Inclusions - Automobile Benefits . . . . . 87Employees And Automobiles . . . . . . . 87

Taxable Benefits - Standby Charge . . . . . 89

Operating Cost Benefit . . . . . . . . . 91

Summary Of Automobile Benefit Calculations 92

Payments By Employee For Automobile Use . 92

Example - Employer Owned Automobile . . 93

Example - Employer Leased Vehicle . . . . 93

Employer Provided Cars And Tax Planning . 94

Inclusions - Allowances . . . . . . . . . . 96Allowance Vs. Reimbursement . . . . . . 96

Taxable Vs. Non-Taxable Allowances . . . . 96

Reasonable Allowances For Motor Vehicles . 97

Employer’s Perspective Of Allowances . . . 98

Employee’s Perspective Of Allowances . . . 98

Inclusions - Employee Insurance Benefits . 99Life Insurance . . . . . . . . . . . . . 99

Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 99

Health Care Insurance . . . . . . . . . 101

Loans To Employees . . . . . . . . . . . 101General Rules . . . . . . . . . . . . 101

Home Relocation Loans . . . . . . . . 102

Tax Planning For Interest Free Loans . . . 103

(continued)

CHAPTER 3, continuedInclusions - Stock Option Benefits . . . . 105

CCPCs Vs. Public Companies . . . . . . 107

Rules For Public Companies . . . . . . . 107

Rules For CCPCs . . . . . . . . . . . 109

Other Inclusions . . . . . . . . . . . . . 110Payments By Employer To Employee . . . 110

Forgiveness Of Employee Loans . . . . . 110

Housing Loss Reimbursement . . . . . . 110

Discounts On Employer’s Merchandise . . 111

Club Dues And Recreational Facilities . . . 111

Specific Deductions . . . . . . . . . . . . 111Salesperson’s Expenses Under ITA 8(1)(f) . . 113

Travel Expenses And Motor Vehicle Costs . 114

The Salesperson's Dilemma . . . . . . . 114

Automobile And Aircraft Expenses . . . . 115

Work Space In Home Costs For Employees . 116


References . . . . . . . . . . . . . . . . . 117

Problems For Self Study . . . . . . . . . 118


CHAPTER 4Taxable Income And Tax Payable

For Individuals

Introduction . . . . . . . . . . . . . . . . 137

Taxable Income Of Individuals . . . . . . 138Available Deductions . . . . . . . . . 138

Ordering Of Deductions . . . . . . . . 138

Deductions For Payments - ITA 110(1)(f) . . 139

Home Relocation Loan - ITA 110(1)(j) . . . 139

Northern Residents Deductions - ITA 110.7 . 140

Calculation Of Tax Payable . . . . . . . . 140Federal Tax Payable Before Credits . . . . 140

Provincial Tax Payable Before Credits . . . 141

Types Of Income . . . . . . . . . . . 142

Taxes On Income Not Earned In A Province 143

Calculating Tax Credits . . . . . . . . . . 143Federal Amounts . . . . . . . . . . . 143

Provincial Amounts . . . . . . . . . . 144

(continued)


V O L U M E I

CHAPTER 4, continuedPersonal Tax Credits - ITA 118(1) . . . . 144

A Note On The Family Caregiver Amount . 144

Individuals With A Spouse OrCommon-Law Partner . . . . . . . . 145

Individuals Supporting Dependent Person . 146

Child Tax Credit . . . . . . . . . . . 148

Single Persons . . . . . . . . . . . . 148

Caregiver Tax Credit . . . . . . . . . 149

Infirm Dependant Over 17 Tax Credit . . . 149

Interaction:Eligible Dependant Credit Vs. Caregiver Or InfirmDependant Over 17 Credits . . . . . . 150Caregiver Vs. Infirm Dependant Over 17 . 151

Other Tax Credits For Individuals . . . . 152Age Tax Credit . . . . . . . . . . . . 152

Pension Income Tax Credit . . . . . . . 153

Canada Employment Tax Credit . . . . . 153

Adoption Expenses Tax Credit . . . . . . 153

Public Transit Passes Tax Credit . . . . . 155

Child Fitness Tax Credit AndChildren’s Arts Tax Credit . . . . . . . 155

First Time Home Buyer’s Tax Credit . . . . 157

Volunteer Firefighters Tax Credit . . . . . 157

Charitable Donations Tax Credit . . . . . 157

Medical Expense Tax Credit . . . . . . . 159

Disability Tax Credit . . . . . . . . . 163

Education Related Tax Credits . . . . . . 165

Employment Insurance (EI) AndCanada Pension Plan (CPP) Tax Credits . . 169

Overpayment Of EI And CPP Contributions 169

Transfers To Spouse Or Common-Law Partner 170

Political Contributions Tax Credits . . . . 170

Labour Sponsored Funds Tax Credit . . . 171

Refundable Credits . . . . . . . . . . . . 172Refundable GST/HST Credit - ITA 122.5 . . 172

Working Income Tax Benefit - ITA 122.7 . . 173

Canada Child Tax Benefit . . . . . . . . 174

Social Benefits Repayment (OAS And EI) . 175

Comprehensive Example . . . . . . . . . 176


References . . . . . . . . . . . . . . . . . 179

Sample Tax Return For Chapter 4 . . . . 181



Tax Software Assignment Problems . . . 195

CHAPTER 5Capital Cost Allowances AndCumulative Eligible Capital

Capital Cost Allowance System . . . . . . 201

Additions To Capital Cost . . . . . . . . . 203Determination Of Amounts . . . . . . . 203

Available For Use Rules . . . . . . . . 205

Segregation Into Classes . . . . . . . . 205

Capital Cost Allowances . . . . . . . . . 206Rates For Commonly Used CCA Classes . . 207

Half-Year Rules (a.k.a. First Year Rules) . . 209

Short Fiscal Periods . . . . . . . . . . 211

Tax Planning Considerations . . . . . . 212

Dispositions Of Depreciable Assets . . . 213Capital Gains . . . . . . . . . . . . 214

Recapture Of Capital Cost Allowance . . . 215

Terminal Losses . . . . . . . . . . . 216

Summary Of Tax Consequences . . . . . 217

CCA Schedule . . . . . . . . . . . . . . . 217

CCA Determination - Special Situations . 218Separate Class Election . . . . . . . . . 218

Cumulative Eligible Capital (CEC) . . . . 220Eligible Capital Expenditures Defined . . . 220

Additions, Amortization, And Dispositions . 220


References . . . . . . . . . . . . . . . . . 225

Appendix - CCA Rates For Selected Assets 226



CHAPTER 6Income Or Loss From A Business

Overview . . . . . . . . . . . . . . . . . 239Classification Of Income . . . . . . . . 240

Business Income Vs. Property Income . . 242Tax Consequences Of Classification . . . . 242

Business Income Defined . . . . . . . . 243

Property Income Defined . . . . . . . . 244

(continued)


V O L U M E I

CHAPTER 6, continuedBusiness Income Vs. Capital Gains . . . . 244

Tax Consequences Of Classification . . . . 244

Capital Gains Defined . . . . . . . . . 245

Criteria For Identifying Capital Gains . . . 245

Business Income And GAAP . . . . . . . 247

Business Income - Inclusions (Revenues) 248Amounts Received And Receivable . . . . 248

Reserves . . . . . . . . . . . . . . 249

Limitations On Deductions From Business AndProperty Income . . . . . . . . . . . . 252Specific Limiting Items Under ITA 18 . . . 253

Foreign Media Advertising - ITA 19 And 19.1 258

Provincial Capital And Payroll Taxes . . . 259

Limitations On Deductions From Business,Property, And Employment Income . . 259Reasonableness . . . . . . . . . . . 259

Meals And Entertainment . . . . . . . . 260

“Luxury” Automobile Costs . . . . . . . 261

Automobiles Owned By The Taxpayer . . . 261

Automobile Leasing Costs . . . . . . . 262

Leasing Property . . . . . . . . . . . 264

Illegal Payments, Fines And Penalties . . . 264

Business Income - Specific Deductions . 265Inventory Valuation (Cost Of Sales) . . . . 265

Other Deductions . . . . . . . . . . 266

Reconciliation Schedule . . . . . . . . . 268

Business Income - Example . . . . . . . . 270

Taxation Year . . . . . . . . . . . . . . . 271General Rules . . . . . . . . . . . . 271

Unincorporated Businesses- Non-Calendar Fiscal Year . . . . . . 271

Special Business Income Situations . . . 273Income For Farmers . . . . . . . . . . 273

Professional Income (Billed Basis) . . . . . 275

Sale Of A Business . . . . . . . . . . 276


References . . . . . . . . . . . . . . . . . 278



Tax Software Assignment ProblemFor Chapter 6 . . . . . . . . . . . . . . 303

CHAPTER 7Income From Property

Property Income: General Concept . . . 307

Interest As A Deduction . . . . . . . . . 308The Singleton And Ludco Court Cases . . . 309

IT-533 - “Interest Deductibility” . . . . . 309

Discount And Premium On Issued Debt . . 312

Interest Income . . . . . . . . . . . . . . 314Individuals - Modified Accrual Method . . 315

Discount And Premium On Debt Holdings . 316

Prescribed Debt Obligations . . . . . . . 316

Accrued Interest At Transfer . . . . . . . 317

Payments Based On Production Or Use(Royalties) . . . . . . . . . . . . . . . 318

Rental Income . . . . . . . . . . . . . . . 318Capital Cost Allowances . . . . . . . . 319

Rental Income Example . . . . . . . . 320

Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 321The Concept Of Integration . . . . . . . 321

Eligible Vs. Non-Eligible Dividends . . . . 322

Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 323- Eligible Dividends . . . . . . . . . 326

Comparison Of Investment Returns . . . . 329

Income Trusts . . . . . . . . . . . . . . . 330How Do Trusts Work? . . . . . . . . . 330

Investments In Publicly Traded Trusts . . . 330

Basis For Popularity . . . . . . . . . . 331

Taxation Of Income Trusts . . . . . . . 333

Mutual Funds . . . . . . . . . . . . . . . 334Distributions . . . . . . . . . . . . . 334

Adjusted Cost Base . . . . . . . . . . 335

Stock And Capital Dividends . . . . . . . 336

Foreign Source Income . . . . . . . . . . 337

Shareholder Benefits . . . . . . . . . . . 339


References . . . . . . . . . . . . . . . . . 340





V O L U M E I

CHAPTER 8Capital Gains And Capital Losses

Economic Background . . . . . . . . . . 357

General Rules . . . . . . . . . . . . . . . 358Capital Gains Defined . . . . . . . . . 359

Dispositions . . . . . . . . . . . . . 359

Proceeds Of Disposition . . . . . . . . 360

Adjusted Cost Base . . . . . . . . . . 361

Calculating The Capital Gain Or Loss . . . 362

Detailed Application Of The Rules . . . . 363Identical Properties . . . . . . . . . . 363

Partial Dispositions . . . . . . . . . . 364

Warranties On Capital Assets . . . . . . 364

Capital Gains Reserves . . . . . . . . . 365

Bad Debts On Sales Of Capital Property . . 367

Special Rule For Sales Of Real Property . . 368

Provisions For Special Assets . . . . . . . 370Principal Residence . . . . . . . . . . 370

Personal Use Property . . . . . . . . . 372

Listed Personal Property . . . . . . . . 373

Gains And Losses On Foreign Currency . . 374

Options . . . . . . . . . . . . . . 376

Deemed Dispositions - Change In Use . . 377Example - Change In Use . . . . . . . . 378

Special Rules For Principal Residences . . . 380

Special Rules For Automobiles . . . . . . 382

Deemed Dispositions- Departures From Canada . . . . . . . 383

Small Business Investments - Deferral . . 384

Replacement Property - Deferral . . . . . 385Voluntary And Involuntary Dispositions . . 386

Timing Considerations . . . . . . . . . 386

Application Of ITA 44(1) To Capital Gains . 387

Application Of ITA 13(4) To Recapture . . 388

Combined Application Of ITA 13(4) And 44(1) 389

Capital Gains And Tax Planning . . . . . 392


References . . . . . . . . . . . . . . . . . 393




CHAPTER 9Other Income, Other Deductions,

And Other Issues

Introduction . . . . . . . . . . . . . . . . 415

Other Income - Subdivision d Inclusions 416Pension Benefits . . . . . . . . . . . 416

Retiring Allowances . . . . . . . . . . 417

Death Benefits . . . . . . . . . . . . 417

Income Inclusions From Deferred Income Plans 418

Scholarships And Prizes . . . . . . . . 418

Research Grants . . . . . . . . . . . 418

Social Assistance And Workers’ Compensation 418

Universal Child Care Benefit . . . . . . 419

Other Deductions - Subdivision e . . . . 419CPP Contributions On Self-Employed Earnings 419

Moving Expenses . . . . . . . . . . . 420

Child Care Expenses . . . . . . . . . 422

Disability Supports Deduction . . . . . . 426

Related Inclusions And Deductions . . . 428Employment Insurance Benefits . . . . . 429

Pension Income Splitting . . . . . . . . 429

Spousal And Child Support . . . . . . . 430

Annuity Payments Received . . . . . . 432

Registered Savings Plans . . . . . . . . . 434Registered Education Savings Plans (RESPs) . 435

Registered Disability Savings Plans (RDSPs) . 439

Tax Free Savings Accounts (TFSAs) . . . . 440

Non-Arm’s Length Transfers Of Property 442Inadequate Considerations . . . . . . . 442

Inter Vivos Transfers To A Spouse . . . . . 445

Transfers Of Depreciable Assets . . . . . 447

Transfer Of Farm Or Fishing Property To Child 449

Death Of A Taxpayer . . . . . . . . . . . 450

Income Attribution . . . . . . . . . . . . 452Basic Rules . . . . . . . . . . . . . 453

Avoiding Income Attribution . . . . . . 454

Tax Planning And Income Attribution . . . 458


References . . . . . . . . . . . . . . . . . 459





V O L U M E I

CHAPTER 10Retirement Savings And OtherSpecial Income Arrangements

Planning For Retirement . . . . . . . . . 483Tax Deferred Savings . . . . . . . . . 484

Defined Benefit Vs. Money Purchase Plans . 486

Registered Retirement Savings Plans (RRSPs)487RRSP Deduction Limit . . . . . . . . . 489

Examples Of RRSP Deduction Calculations . 496

Undeducted RRSP Contributions . . . . . 498

RRSP And RRIF Administration Fees . . . . 500

RRSP Withdrawals And Voluntary Conversions 500

Involuntary Termination Due To Age . . . 501

Spousal RRSP . . . . . . . . . . . . 501

Home Buyers’ Plan (HBP) . . . . . . . 503

Lifelong Learning Plan (LLP) . . . . . . . 505

Departure From Canada . . . . . . . . 506

Death Of The RRSP Registrant . . . . . . 507

Registered Pension Plans (RPPs) . . . . . 509Employer Contributions To The RPP . . . 509

Employee Contributions To The RPP . . . 510

Options At Retirement . . . . . . . . . 510

Phased Retirement . . . . . . . . . . 510

Pooled Registered Pension Plans (PRPPs) . . 511

Registered Retirement Income Funds (RRIFs)512RRIF Withdrawals . . . . . . . . . . . 512

Death Of The RRIF Registrant . . . . . . 513

Evaluation Of RRIFs . . . . . . . . . . 514

Deferred Profit Sharing Plans . . . . . . . 514

Profit Sharing Plans . . . . . . . . . . . . 515

Transfers Between Plans . . . . . . . . . 515Retiring Allowances . . . . . . . . . . 516

Retirement Compensation Arrangements 517Arrangements Defined . . . . . . . . . 517

Part XI.3 Refundable Tax . . . . . . . . 517

Salary Deferral Arrangements . . . . . . 518


References . . . . . . . . . . . . . . . . . 520



Tax Software Assignment ProblemFor Chapter 10 . . . . . . . . . . . . . 539

GlossaryThe Glossary can be found:

• at the back of the separate paperStudy Guide, and

• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.

Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.

No. 1 - Application Of The Median Rule

No. 2 - Stock Option Shares Deemed

Not Identical Property

No. 3 - Determining M&P Profits

No. 4 - SR & ED Expenditures

No. 5 - Final Returns For Deceased Taxpayers

No. 6 - Business Valuations

No. 7 - Tax Shelters

No. 8 - Transfer Pricing


V O L U M E I


For Individuals Revisited

Introduction . . . . . . . . . . . . . . . . 541

Lump-Sum Payments . . . . . . . . . . . 543

Treatment Of Losses . . . . . . . . . . . 544Carry Over Provisions . . . . . . . . . 544

Personal Use Property Losses . . . . . . 546

Listed Personal Property Losses . . . . . 546

Non-Capital Losses . . . . . . . . . . 547

Net Capital Losses . . . . . . . . . . 548

Net Capital Losses At Death . . . . . . . 550

Allowable Business Investment Losses . . . 551

Farm Losses . . . . . . . . . . . . . 553

Lifetime Capital Gains Deduction . . . . 554Qualified Property . . . . . . . . . . 554

Determining The Deductible Amount . . . 555

Comprehensive Example . . . . . . . . 558

Ordering Of Deductions And Losses . . . 559Significance Of Ordering . . . . . . . . 559

Ordering In ComputingNet Income For Tax Purposes . . . . . 560

Ordering In Computing Taxable Income . . 560

Example . . . . . . . . . . . . . . 561

Tax Payable Overview . . . . . . . . . . 562

Tax On Split Income . . . . . . . . . . . 563

Tax Credits Revisited . . . . . . . . . . . 565Transfer Of Dividends To A Spouse

Or Common-Law Partner . . . . . . . 565

Charitable Donations Credit Revisited . . . 566

Foreign Tax Credits Revisited . . . . . . 571

Alternative Minimum Tax . . . . . . . . . 573General Concept . . . . . . . . . . . 573

Minimum Tax Calculation . . . . . . . 573

Tax Credits For AMT . . . . . . . . . 574

AMT Carry Forward - ITA 120.2 . . . . . 575


References . . . . . . . . . . . . . . . . . 576

Sample Tax Return For Chapter 11 . . . . 577



Tax Software Assignment Problems . . . 598


For Corporations

Computation Of Net Income . . . . . . . 605

Computation Of Taxable Income . . . . . 607Deductions Available To Corporations . . . 607

Dividends From Other Corporations . . . 608

Non-Capital Loss Carry Over . . . . . . 611

Ordering Of Taxable Income Deductions . 613

Geographical Allocation Of Income . . . 614Permanent Establishments . . . . . . . 614

Example - Permanent Establishments . . . 614

Federal Tax Payable . . . . . . . . . . . . 615Basic Rate . . . . . . . . . . . . . . 615

Federal Tax Abatement . . . . . . . . 615

General Rate Reduction . . . . . . . . 615

Provincial Tax Payable . . . . . . . . . . 616Small Business Rate . . . . . . . . . . 617

Investment Income Rates . . . . . . . . 617

Small Business Deduction . . . . . . . . 618Canadian Controlled Private Corporation . 619

Active Business Income . . . . . . . . 619

Annual Business Limit . . . . . . . . . 621

Allocation Among Associated Companies . . 622

Calculating The Small Business Deduction . 622

Elimination Of Small Business DeductionFor Large CCPCs . . . . . . . . . . 624

Personal Services Corporations . . . . . 626

Professional Corporations AndManagement Companies . . . . . . . 627

Manufacturing And Processing ProfitsDeduction . . . . . . . . . . . . . . . 628Calculating The Deduction . . . . . . . 628

M&P Profits Defined . . . . . . . . . 630

General Rate Reduction - ITA 123.4(2) . . 630Full Rate Taxable Income . . . . . . . . 631

Application To Companies Other Than CCPCs 631

Application To CCPCs . . . . . . . . . 632

Foreign Tax Credits For Corporations . . 633


References . . . . . . . . . . . . . . . . . 636




V O L U M E I I

CHAPTER 13Taxation Of

Corporate Investment Income

Integration . . . . . . . . . . . . . . . . 651The Basic Concept . . . . . . . . . . 651

Dividend Gross Up And Tax Credit Procedures 652

Integration And Business Income . . . . . 653

Refundable Taxes On Investment Income 655Meaning Of Aggregate Investment Income . 655

Basic Concepts . . . . . . . . . . . . 656

Refundable Part I Tax OnInvestment Income . . . . . . . . . . . 658Additional Refundable Tax On

Investment Income (ART) . . . . . . . 658

Problem One: Excessive Tax Rates On FlowThrough Of A CCPC’s Investment Income . 660

Solution To Problem One:Refundable Portion Of Part I Tax . . . . 661

Refundable Part IV Tax OnDividends Received . . . . . . . . . . 664Problem Two: Use Of Multi-Level Affiliations

To Defer Taxes On Investment Income . . 664

Solution To Problem Two:Refundable Part IV Tax . . . . . . . . 665

Part IV Tax On Portfolio Dividends Received 666

Dividends From A Connected Corporation . 667

Dividends Paid Out Of Mixed IncomeOf A Connected Corporation . . . . . 669

Refundable Dividend Tax On Hand . . . 670Basic Concepts . . . . . . . . . . . . 670

RDTOH - General Definition . . . . . . 671

Refundable Portion Of Part I Tax Payable . 671

The Dividend Refund . . . . . . . . . 673

Example Of RDTOH Calculations . . . . 674

Working Through Large CorporateTax Problems . . . . . . . . . . . . . . 676

Designation Of Eligible Dividends . . . . 677CCPCs And Their GRIP . . . . . . . . 679

Non-CCPCs And Their LRIP . . . . . . . 680

Part III.1 Tax On Excessive Eligible DividendDesignations . . . . . . . . . . . . 681


References . . . . . . . . . . . . . . . . . 683



CHAPTER 14Other Issues In

Corporate Taxation

Introduction . . . . . . . . . . . . . . . . 701

Acquisition Of Control Rules . . . . . . . 701Economic Background . . . . . . . . . 701

Acquisition Of Control Legislation . . . . 702

Deemed Year End . . . . . . . . . . 702

Restrictions On The Use Of CharitableDonations . . . . . . . . . . . . . 702

Restrictions On The Use Of Losses . . . . 703

Unrecognized Losses At Deemed Year End . 704

Deemed Disposition Election . . . . . . 705

Associated Companies . . . . . . . . . . 707Examples - Associated Corporation Rules . . 709

Investment Tax Credits . . . . . . . . . . 712Procedures . . . . . . . . . . . . . 712

Eligible Expenditures . . . . . . . . . 712

Rates . . . . . . . . . . . . . . . 713

Refundable Investment Tax Credits . . . . 714

Carry Overs Of Investment Tax Credits . . 715

Effect Of Acquisition Of Control . . . . . 716

Tax Basis Shareholders’ Equity . . . . . . 716Shareholders’ Equity Under GAAP . . . . 716

Paid Up Capital (Tax Basis Contributed Capital) 717

Tax Basis Retained Earnings . . . . . . . 717

Capital Dividend Account . . . . . . . 718

Distributions Of Corporate Surplus . . . 720Regular Cash Dividends . . . . . . . . 721

Stock Dividends . . . . . . . . . . . 721

Dividends In Kind . . . . . . . . . . 722

Capital Dividends Under ITA 83(2) . . . . 723

Deemed Dividends Under:ITA 84(1) - Increase In PUC . . . . . . 724ITA 84(2) - On Winding-Up . . . . . . 726ITA 84(3) - On Redemption, Acquisition,

Or Cancellation Of Shares . . . . . . 727ITA 84(4) And ITA 84(4.1) . . . . . . . 728


References . . . . . . . . . . . . . . . . . 730



Tax Software Assignment Problem . . . . 746


V O L U M E I I

CHAPTER 15Corporate Taxation AndManagement Decisions

The Decision To Incorporate . . . . . . . 749Basic Tax Considerations . . . . . . . . 749

Other Advantages And Disadvantages . . . 750

Tax Reduction And Deferral . . . . . . . 751Approach . . . . . . . . . . . . . . 751

Basic Example . . . . . . . . . . . . 752

Public Corporation . . . . . . . . . . 754

CCPC - Active Business Income . . . . . 755

CCPC - Investment IncomeOther Than Dividends . . . . . . . . 758

CCPC - Dividend Income . . . . . . . . 759

Conclusions On Tax Reductions And Deferrals 760

Provincial Taxes And Integration . . . . . 763Tax Deferral . . . . . . . . . . . . . 763

Tax Reduction . . . . . . . . . . . . 764

Examples - Effects Of Provincial RatesOn Integration . . . . . . . . . . . 765

Summary: Tax Deferral And Tax Reduction 768

Tax Free Dividends . . . . . . . . . . . . 768Tax Rates On Dividends . . . . . . . . 768

Use Of Tax Credits . . . . . . . . . . 768

Tax Free Amounts For 2013 . . . . . . . 770

Income Splitting . . . . . . . . . . . . . . 770Basic Concept . . . . . . . . . . . . 770

Example . . . . . . . . . . . . . . 771

Shareholder Benefits Including Loans . . 772The Owner-Manager Environment . . . . 772

Shareholder Benefits Other Than Loans . . 773

Shareholder Loans . . . . . . . . . . 773

Management Compensation . . . . . . . 777General Principles . . . . . . . . . . 777

Salary Vs. Dividends . . . . . . . . . . 778

Salary Vs. Dividends ForThe Owner - Manager . . . . . . . . . 778The Basic Trade-Off . . . . . . . . . . 778

Conclusion . . . . . . . . . . . . . 787


References . . . . . . . . . . . . . . . . . 787



CHAPTER 16Rollovers Under Section 85

Rollovers Under Section 85 . . . . . . . . 799

General Rules For The Transfer . . . . . 800Transferor And Transferee . . . . . . . 800

Eligible Property . . . . . . . . . . . 800

Consideration To Transferor . . . . . . . 801

Making The Election . . . . . . . . . . 801

Establishing The Transfer Price . . . . . . 801

Transfer Prices - Detailed Rules . . . . . 803Rules Applicable To All Assets . . . . . . 803

Accounts Receivable . . . . . . . . . 804

Inventories, Non-Depreciable Capital Property 805

Disallowed Capital Losses . . . . . . . 806

Depreciable Property . . . . . . . . . 808

Disallowed Terminal Losses . . . . . . 810

Eligible Capital Property . . . . . . . . 810

Eligible Capital Property- Disallowed Deductions . . . . . . . 812

Summary Of Transfer Price Rules . . . . . 813

Allocation Of The Elected Value . . . . . 813Consideration Received By The Transferor . 813

Assets Acquired By The Corporation . . . 814

Paid Up Capital Of Shares Issued . . . . 816Paid Up Capital Reduction . . . . . . . 816

More Than One Class Of Shares . . . . . 817

Comprehensive Example- Section 85 Rollovers . . . . . . . . . 818

Gift To Related Party - Section 85 . . . . 821General Rules . . . . . . . . . . . . 821

Example . . . . . . . . . . . . . . 822

Excess Consideration - Section 85 . . . . 824Shareholder Benefit - ITA 15(1) . . . . . 824

Dividend Stripping — ITA 84.1 . . . . . . 826Applicability Of ITA 84.1 . . . . . . . . 827

Dividend Stripping Example . . . . . . . 827

Capital Gains Stripping — ITA 55(2) . . . 830Application Of ITA 55(2) . . . . . . . . 830

Capital Gains Stripping - Examples . . . . 831


References . . . . . . . . . . . . . . . . . 834




V O L U M E I I

CHAPTER 17Other Rollovers And

Sale Of An Incorporated Business

Introduction . . . . . . . . . . . . . . . . 851

Share For Share Exchanges - ITA 85.1 . . 851General Rules . . . . . . . . . . . . 852

Conditions For The Application Of ITA 85.1 852

Example . . . . . . . . . . . . . . 852

Exchange Of Shares In A Reorganization- ITA 86 . . . . . . . . . . . . . . . . . 854Conditions For The Reorganization . . . . 855

Procedures . . . . . . . . . . . . . 856

Example Using ITA 86(1) In An Estate Freeze 857

Gift To Related Person - ITA 86(2) . . . . 860

Using ITA 86(1) - Tax Planning Considerations 862

Amalgamations - ITA 87 . . . . . . . . . 863Position Of The Amalgamated Company . . 864

Position Of The Shareholders . . . . . . 865

Vertical Amalgamations (Parent And Subsidiary) 865

Non-Tax Considerations . . . . . . . . 865

Amalgamations - Tax Planning Considerations 866

Winding-Up Of A 90% Owned Subsidiary 867Acquisition Of Assets . . . . . . . . . 867

Disposition Of Shares . . . . . . . . . 870

Tax Planning Considerations- Amalgamation Vs. Winding-Up . . . . 871

Winding-Up Of A Canadian Corporation . 872Example . . . . . . . . . . . . . . 873

Convertible Properties . . . . . . . . . . 875Application . . . . . . . . . . . . . 875

Sale Of An Incorporated Business . . . . 876Restrictive Covenants

(a.k.a. Non-Competition Agreements) . . 877

Sale Of Individual Assets . . . . . . . . 878

Sale Of Assets As A Going Concern . . . . 878

Sale Of Shares . . . . . . . . . . . . 880

Evaluation Of Alternatives . . . . . . . 881

Example . . . . . . . . . . . . . . 882


References . . . . . . . . . . . . . . . . . 885



CHAPTER 18Partnerships

Introduction . . . . . . . . . . . . . . . . 899Taxable Entities In Canada . . . . . . . 899

Chapter Coverage . . . . . . . . . . 900

Partnerships Defined . . . . . . . . . . . 900The Importance Of Defining A Partnership . 900

Basic Partnership Elements . . . . . . . 901

Types Of Partnerships . . . . . . . . . 901

Co-Ownership, Joint VenturesAnd Syndicates . . . . . . . . . . . . . 902Introduction . . . . . . . . . . . . . 902

Co-Ownership . . . . . . . . . . . . 903

Joint Ventures . . . . . . . . . . . . 903

Syndicates . . . . . . . . . . . . . 904

Partnership Income, Losses,And Tax Credits . . . . . . . . . . . . . 904Introduction . . . . . . . . . . . . . 904

Applicable Concepts . . . . . . . . . 905

Calculating The Amounts To Be Allocated . 907

Methods Of Allocation . . . . . . . . . 912

The Partnership Interest . . . . . . . . . 913The Concept . . . . . . . . . . . . 913

Acquiring A Partnership Interest . . . . . 913

Adjusted Cost Base Of The Partnership Interest 914

Disposition Of A Partnership Interest . . . 918

Limited Partnerships And Limited Partners 919Definitions . . . . . . . . . . . . . 919

At-Risk Rules . . . . . . . . . . . . 919

Transfer Of Property To And FromA Partnership . . . . . . . . . . . . . . 921Definition Of Canadian Partnership . . . . 921

Transfers With No Rollover Provision . . . 922

Common Partnership Rollovers . . . . . 923

Specified Investment Flow ThroughPartnerships . . . . . . . . . . . . . . 926


References . . . . . . . . . . . . . . . . . 927




V O L U M E I I

CHAPTER 19Trusts And Estate Planning

Introduction . . . . . . . . . . . . . . . . 941

Basic Concepts . . . . . . . . . . . . . . 942What Is A Personal Trust? . . . . . . . . 942

Establishing A Trust . . . . . . . . . . 943

Returns And Payments - Trusts . . . . . . 944

Non-Tax Reasons For Using Trusts . . . . 945

Classification Of Trusts . . . . . . . . . . 945Personal Trusts . . . . . . . . . . . . 945

Testamentary Vs. Inter Vivos Trusts . . . . 946

Taxation Of Trusts . . . . . . . . . . . . 947Rollovers To A Trust . . . . . . . . . . 948

Rollovers To Capital Beneficiaries . . . . 951

21 Year Deemed Disposition Rule . . . . 951

Net Income For Tax Purposes Of A Trust 952Preferred Beneficiary Election . . . . . . 953

Amounts Deemed Not Paid . . . . . . . 953

Amounts Retained For A BeneficiaryUnder 21 Years Of Age . . . . . . . . 953

Taxable Income Of A Trust . . . . . . . . 954

Income Allocations To Beneficiaries . . . 954Discretionary And Non-Discretionary

Distributions . . . . . . . . . . . . 955

Flow Through Provisions . . . . . . . . 955

Principal Residence Exemption . . . . . 957

Tax Payable Of Personal Trusts . . . . . . 957Testamentary vs. Inter Vivos Trusts . . . . 957

Income Attribution - Trusts . . . . . . . . 960

Purchase Or Sale Of An Interest In A Trust 961

Tax Planning . . . . . . . . . . . . . . . 962Qualifying Spousal Trusts . . . . . . . . 964

Alter Ego Trusts . . . . . . . . . . . . 964

Joint Spousal Or Common-Law Partner Trusts 965

Estate Planning . . . . . . . . . . . . . . 965

Estate Freeze . . . . . . . . . . . . . . . 967

SIFT Partnerships And Trusts . . . . . . . 970


References . . . . . . . . . . . . . . . . . 971



CHAPTER 20International Issues In Taxation

Introduction . . . . . . . . . . . . . . . . 979

Residence . . . . . . . . . . . . . . . . . 980Residence Of Individuals . . . . . . . . 980

Residence Of Corporations . . . . . . . 987

Residence Of Trusts . . . . . . . . . . 988

Part I Tax On Non-Residents . . . . . . . 988Carrying on Business in Canada . . . . . 989

Canadian Source Employment Income . . 991

Dispositions of Taxable Canadian Property . 993

Part XIII Tax On Non-Residents . . . . . 994Interest Payments . . . . . . . . . . . 995

Dividend Payments . . . . . . . . . . 996

Royalty Payments . . . . . . . . . . . 996

Rental Income . . . . . . . . . . . . 997

Pension Payments, Other Retirement Benefits 998

Shareholder Loans To Non-Residents . . . 999

Immigration And Emigration . . . . . . 1000Entering Canada - Immigration . . . . . 1000

Departures From Canada - Emigration . . 1000

Unwinding A Deemed Disposition . . . . 1002

Short-Term Residents . . . . . . . . . 1003

Foreign Source Income Of Residents . . 1004Introduction . . . . . . . . . . . . 1004

Foreign Investment Reporting Requirements 1005

Foreign Source Employment Income . . . 1006

Foreign Source Business Income . . . . 1006

Foreign Source Interest Income . . . . . 1007

Foreign Source Capital Gains . . . . . . 1008

Problems With Foreign SourceDividend Income . . . . . . . . . . 1008

Foreign Source Dividends ReceivedBy Individuals . . . . . . . . . . . 1009

Foreign Dividends Received FromNon-Affiliated Corporations . . . . . 1010

Dividends Received FromNon-Controlled Foreign Affiliates . . . 1011

Dividends Received FromControlled Foreign Affiliates . . . . . 1015

Foreign Accrual Property Income (FAPI) . . 1015

Key Terms Used In This Chapter . . . . 1018

References . . . . . . . . . . . . . . . . 1018


Assignment Problems . . . . . . . . . . 1025


V O L U M E I I

CHAPTER 21GST/HST

Introduction . . . . . . . . . . . . . . . 1035

Transaction Tax Concepts . . . . . . . . 1037Value Added Tax (VAT) . . . . . . . . 1039

Liability For GST/HST . . . . . . . . . . 1041The Concept Of Supply . . . . . . . . 1041

Supply Categories . . . . . . . . . . . . 1042Taxable Supplies . . . . . . . . . . 1042

Exempt Supplies . . . . . . . . . . . 1044

Applying the GST/HST Rate . . . . . . . 1044Place Of Supply . . . . . . . . . . . 1044

Applying The Rate . . . . . . . . . . 1045

Collection And Remittance Of GST/HST 1045

Registration . . . . . . . . . . . . . . . 1046Meaning Of Person For GST/HST . . . . 1046

Who Must Register . . . . . . . . . . 1046

Exemption For Small Suppliers . . . . . 1047

Input Tax Credits . . . . . . . . . . . . 1049Vendors Of Fully Taxable And

Zero-Rated Supplies . . . . . . . . 1049

Vendors Of Exempt Supplies . . . . . . 1051

Examples . . . . . . . . . . . . . 1052

Relief For Small Businesses . . . . . . . 1055Quick Method Of Accounting . . . . . 1055

Small Suppliers Exemption . . . . . . . 1058

Streamlined Input Tax Credit Method . . 1058

GST/HST Procedures And Administration 1059GST/HST Returns And Payments . . . . 1059

Associated Persons . . . . . . . . . . 1061

Refunds And Rebates . . . . . . . . . 1061

Books And Records . . . . . . . . . 1061

Appeals . . . . . . . . . . . . . . 1061

General Anti-Avoidance Rule . . . . . . 1062

Employee And Partner GST/HST Rebate 1062General Concept . . . . . . . . . . 1062

Calculating The GST/HST Rebate Amount . 1063

Example . . . . . . . . . . . . . . 1063

Residential Property, New Housing Rebate 1064General Rules For Residential Property . . 1064

New Housing Rebate . . . . . . . . . 1064

(continued)

CHAPTER 21, continuedSale Of A Business . . . . . . . . . . . . 1065

Sale Of Assets . . . . . . . . . . . . 1065

Sale Of Shares . . . . . . . . . . . 1065

Other Situations . . . . . . . . . . . 1066

Specific Applications . . . . . . . . . . 1067

Partnerships And GST/HST . . . . . . . 1068General Rules . . . . . . . . . . . . 1068

Partner Expenses . . . . . . . . . . 1068

Disposition Of A Partnership Interest . . . 1068

Transfers Between Partners And Partnerships 1068

Reorganization Of The Partnership . . . 1069

Trusts And GST/HST . . . . . . . . . . . 1069

Key Terms Used In This Chapter . . . . 1069


Assignment Problems . . . . . . . . . . 1075

GlossaryThe Glossary can be found:

• at the back of the separate paperStudy Guide, and

• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.

Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.

No. 1 - Application Of The Median Rule

No. 2 - Stock Option Shares Deemed

Not Identical Property

No. 3 - Determining M&P Profits

No. 4 - SR & ED Expenditures

No. 5 - Final Returns For Deceased Taxpayers

No. 6 - Business Valuations

No. 7 - Tax Shelters

No. 8 - Transfer Pricing


V O L U M E I I

Documents

VOLUME I Chapter VOLUME II - Pearson · 6 Income Or Loss From A Business 7 Income From Property 8 Capital Gains And Capital Losses 9 Other Income, Other Deductions And Other Issues