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Taxation Law Summary Fall Li

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                                    Taxation Law Summary - Fall Li
                                               INTRODUCTION
Objectives
    - help learn statutory interpretation skills
    - teach about tax law (income tax)
    - tax policy

Who Pays tax?
   - Individuals (natural persons)
   - Corporations
   - Partnerships(don't pay tax at the entity level)
   - Trusts (don't pay tax at the entity level)

We cover personal income tax in this course.
Tax policy - think critically about tax law.

WHAT IS TAX?
 A levy by the gov't (compulsary and enforceable) for consideration (nothing specific in return- not like a fee for
     something for something else)
 "Tax":
- Wealth
- Income (sometimes earnings)
- Inheritance
- Property/assets
- Consumption (GST/HST, PST, Excise- cigarettes, alcohol)

THE ROLE OF INCOME TAX
 For revenue raising
(note other ways of raising revenue: crown corps, tariffs, borrowing for debt interest/ bonds, lottery, sale of
assets/investment, fees, printing money)
 For spending = tax expenditures.(spending money thru the tax system) To create incentives and spending programs.
 For redistribution of income

                                       HISTORY OF IT IN CANADA
   1st introduced in 1917 - needed money to finance the war effort "Income Tax War Act" (ITWA). Before 1917, the
    government revenue mainly came from duties and excise.
   1948 - "War" dropped from the title (ITA). The Act became Income Tax Act.
   1971- Tax Reform- response to recommendations made by a royal commissions headed by Mr. Carter.
   1972 - Carter report - accountant chaired Royal Commission on tax reform (radical ideas)
    1) 1972 Capital Gains become taxable- houses, bonds, stocks- only 50% of the capital gain is included in the
          income.
     Made it clear that it doesn't matter how you earned money it should be taxable (a buck is a buck is a buck).
     CTB - Comprehensive Tax Base -
   Before 1972 Capital Gains ( a profit made from the sale of a Capital property) were tax exempt - not fair. "A buck is a
    buck is a buck"
   Pre-1972 still tax exempt
    2) 1988 Reform - Lower tax rates.
     Flattening the rate- back then, the more you made, the more you had to pay tax (as high as 80%); after 1988,
          cutting down the number of rates.
     The tax base became wider (ie. Taxable capital gain from ½ to 2/3 to 3/4).
     Alot of tax incentives were removed- the new credits yield same reduction in tax to all taxpayers regardless of
          their level of income- improving the equality of the system.
     The introduction of a new general anti-avoidance rule (GAAR) s. 245- reaction to the caselaw; this provision
                                                                                                                              2
       denies taxpayers the tax benefits arising from any transactions that may reasonably be considered to have been
       undertaken primarily for the purpose of avoiding the payment of tax.
   GST introduced


                                               THE INCOME TAX ACT
 Is a statute that contains the rules for tax liability in Can.
 Tax rules primarily statutory
 Federal income tax act relevant to provincial gov'ts tax purposes
 Federal tax base adopted by the provincial gov't
 Organized into 17 parts and 260+ sections and divisions and subdivisions within the parts
- Section, subsection, para, subpara, clause, subclause (s.44 example in book)
- Will focus on Part I

INTERPRETING THE ITA
 2 approaches: Literal /Strict Approach or the consideration of the "Why" (Purposive/Intention Approach)
1. Strict Approach:(until 1984 followed)- take literal meaning of the word.
- Any ambiguity using the Strict Approach will be decided in favour of the taxpayers
- Strict Approach creates certainty for the taxpayer
- disdvantage: by interpreting literally may be defeating the underlying purpose
- purpose of the Act is NOT relevant.

2. Modern Rule- examination of the meaning of words, the context and the intent of Parliment
(diluted rule now)
Stubert SCC 1984
-> meaning of words =
          - Ordinary meaning (the first one that you go to, if there is a technical meaning, it then will override the ordinary
meaning)- go to the dictionary;
          -Legal/Technical meaning (if exists,
          will override ordinary meaning), found in law dictionaries, other areas of law.
          - Statutory meaning         (trumps all
          other meaning)
          (a) exhaustive/ conclusive by
          using the word " x means..." “X is…”
          (b) inclusive by using the word "x
          includes..."- not exhausted
          (c) "deeming" rule - parliament
          deems something to be
          something to achieve a particular
          objective
-> context = internal (the section which the word is used), external; ie. “it provides compensation for damages, like flood,
forest fire and other disasters.” What is “other disasters”? In this context, making reference to flood and forest fire, “other
disasters” means natural disasters but NOT human made disasters.
- context can be very close or very far or very big (full sentences) or very small.
- you might have to look outside of ITA, decisions in other jurisdictions.

-> intention/purpose of parliament- a legal fiction because difficult to ascertain. Ie. Tax avoidance law, tax enforcement.
    SCC does not like modern rule- diluted
 where can you find them? Parliamentary debate, notes to the Act itself,

3. "Plain" Meaning -(like strict approach somewhat) if the meaning of the words in the act are plain then no need to look
to intention of parliament.
 The predominant approach now

1) Parliament passes laws.
2) Courts - play a lesser role in tax law.
3) Revenue Canada (CCRA now) collects taxes.
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4) Department of Finance - makes policy changes.
5) Department of Justice - represent CCRA in tax litigation.

4. “Purposive” Approach- looking at the leg intent and interpret it.

TIPS for interpretation

    1.   every word has a meaning. Same words have the same meaning; different words have different meanings.
    2.   be familiar with the context-
    3.   be familiar with defined terms-
    4.   learn the word patterns- ie. “the total…and…” means adds; “the amount by which…exceeds…” means subtract;
         “that proportion of …that is A is of B means a fraction; “the lesser of A and B” means a max limit; “greater of A
         and B” means a minimum.
    5.   “and”/ “or”- distinguish the differences;
    6.   skip over non-essential words
    7.   find the basic rule.


OTHER SOURCES OF INCOME TAX LAW IN CANADA

1) Legislation - ITA, regulations, ITAR (Income Tax act Rules - prior to 1972)- transitional rule before reforms of the act.
2) Case Law - judges only interpret the meaning of words in the "Act". They do not make common law rules. No tax
    liability is created by case law.
3) Tax treaties - (major source)(Canada U.S. Treaty in order to remove double taxation) - if in conflict with domestic tax
    law the treaty overrides- purpose: to prevent double taxation.
4) income tax regulations (highly technical) introduced by the government having the delegated power from the leg –
source of law binding to the law.

CCRA Publications (Canada Customs and Revenue Agency)- NOT THE LAW:
     (a) Interpretation bulletin by the government BUT it is NOT binding by anyone.
     (IT) how they interpret concepts in the Act Interpretive Aids. Tax payer or courts or CCRA are not bound by this
interpretation.
       (b) Information circulars (IC) -deals with administrative procedural issues. Useful but not binding.
       (c) Advanced ruling - CCRA makes an advanced decision about how tax law will apply to certain situations. These
       are a contract b/w CCRA and the taxpayer. Make publication on a no name basis but keeping the facts. There are no
       cases that have gone to court so far. Do not apply every advanced ruling to the case because practically you don’t
       want to expose everything to Revenue Canada.

TAX POLICY OBJECTIVES
P28- Table
(1) Equity
 A fair sharing of the tax burden based on ability to pay- you make more you pay more.
 Progressive system (personal income tax)
 What tool can we use to measure equity?- ability to pay (measurement thru? comprehensive tax rate- the sources of
     your wealth “where income is coming from”), -consumption power,
 Horizontal Equity = people with the same ability to pay tax should pay the same amount of tax. The tax base should be
     as broad as possible.("A buck is a buck is a buck")
 Vertical Equity = when income rises, taxes rise (progressive taxation) Justifications are: for redistribution purposes and
     for the utility value ($100 doesn't really hurt the wealthy as it would to the poorer.)- taking income from wealthy to re-
     distribute to the poorer; a lot of social risks and causes that should be spread across the society.
 Progressivity level has been decreasing (flattening the tax rate)
 Marginal utility- the more money you have, the less enjoyment you can get!!! But taking money from the poor may
     decrease their enjoyment of life
 On the other side- why people who have worked hard should pay more tax money? It is considered as a penalty.
 Conclusion- HE/VE are measured by the person’s ability to pay. There might be drawback…but the policy is actually
     conflicting as to the concept “a buck is a buck is a buck.”
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(2) Neutrality
 Income tax should be a non-factor when people making decisions “neutral factor”- less distortion in decision making.
 A tax system that does not affect people's behaviour (want to make the tax system as least distortive as possible.)
 Tax expenditures are contradictory to neutrality (deliberate distortions) (ie. capital gains on principle residences are tax
     exempt)
 The market should be the source for allocating resources NOT according to the tax system. Let the market work first.
     If there is any inequity of the system then the tax system jumps in.

(3) Simplicity
 Compliance and understanding of the tax payer is increased and administration is easier with a simpler system
 Compliance by taxpayers and administration by government are both easier and less costly in a system that is simple
     and understandable.

(4) Economic stabilization
 Stabilizing effect on the economy
 A progress tax system has a stabilization effect on the economy: restraining expansions by moving taxpayers into
     higher tax brackets, and restraining contractions by moving taxpayers into lower tax brackets. By the same token,
     income tax revenues are subject to more severe fluctuations than revenues from other taxes.

(5) International Competitiveness
 More important issue now because of globalization (EU, Japan)
 need to be especially competitive with the United States

(6) Balance
 Should not be overly reliant on one kind of tax.
 Need balance btwn personal and corporate income tax
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                                                      Chapter 2:

                                          TAX EXPENDITURES
Policy- government spending money on various program; maintaining the high progressive rate system
but instead of reducing the rate the government gives money back to the society;
- don’t look at it from the equity perspective as everyone would get benefit from any of the expenditures
on any of the program.

(1) WHO TO TAX?
  s.2(1) ITA "Any Person Resident in Canada at any time of the year"
  for non-residents, there are certain limitations on taxing them.
  "Person" = corporations (legal persons) and individuals (natural persons)
  -->Individual as tax unit (look at the indiv as a unit without looking at the family or whether they are
   married.)
 example:
Unit A has two partners- X makes 0 and Y makes 100,000/year- tax paid- 30,372.
Unit B has two partners- X and Y both pay 50,000/year- tax paid- 22849
   - this explains the concept of equity and why tax is paid according to individual NOT household- Unit A
        were put into the higher tax bracket but even though both units make the same as household income.
   - However, ITA does recognize the concept of family. In the Tax Anti-Avoidance Provisions. GST
        refund depends on the number of family members; child benefit money as well.
 A person resident in Canada in a taxation year is liable to pay income tax on the person's worldwide income
   (from a source inside or outside of Canada/worldwide)
 Non Residents are taxed under s.2(3) -catches all those not caught under s.2(1) and taxes any income earned
   only in Canada employment property or business in Canada)
 Example:

--------Tax-------------portion of the income
--------------taxable income------------------old losses from other years
------------------------net income--------------------deducting expenses from gross income
----------------------------------income---------employment, capital gain, business income property income, others

Note: Why to shift income btwn individual family members? - Credits and deductions and - progressive rates


(2) WHAT IS TAXABLE?
 Taxable income
 S.2(2) ITA = the tax base is taxable income
        - "Taxable income is income minus the deductions permitted by Division C of Part I of ITA"
 s.3 discusses how to calculate income:
        - s.3(a) - income is from all sources excluding capital gains, inside and outside Canada (note: but not
exhaustive list)


(3) WHEN DO WE WANT TO TAX?
tax period:
 Each taxation year(s.2(1))
- definition found in s.249(1)= is the calendar year for individuals and in the case of a corporation it is the fiscal
period
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   What to do with fluctuating income from year to year rather than an even amount every year? - one way for
    relief is called "loss carryovers". Ie.if 01 I made 100,000, but 02 I actually lost 20,000- you can carry over
    the loses to the next fiscal school.

(4) HOW MUCH TO TAX?
Tax income x rates - credits

Rates:
 s.117(2)
 Rates of personal income are progressive (in four brackets) : 16%, 22%, 26%, 29%
- First $30,000 taxed at 16%, more than 30K but less than $61.5K taxed at 22%, less than $100K taxed at 26%,
more than $100K ie. The 101K is taxed at 29%.
 The rate of corporate income tax is flat (38% - 10% abatement for prov.tax= 29.10%)

(5) HOW TO COLLECT?
Tax administration:
 CCRA - to administer the ITA

Courts:
 The Tax Court of Canada (1 judge)
Note: Automatic appeal to FCA if unhappy
       2 procedures:
       - informal ( no legal representation)
       - general (counsel is present, evidence)
 Federal Court of Appeal (3 judges)
Must apply to the Supreme Court for Leave to Appeal if unhappy

Department of Finance:
 To prepare legislation

Department of Justice:
 Counsel for CCRA

Note:
 have "Self" Assessment System
- tax liability is assessed by taxpayers themselves by filing tax returns
- Compliance mechanism:
T4 slips from employer(SIN); Donations; T5 slip


TAX DEFERRAL AND TIME VALUE OF MONEY
 Time value of money reflects the idea that the sum of money that is due to be received in the future is worth
  less than the same sum of money that is due to be received immediately
 Assumption is that the sum of money on hand today could be invested at compound interest, which over a
  period of time would cause it to grow.
 Tax deferral= You are getting an interest-free loan from gov't if you are deffering your tax liability p 54
 Rule of 72 is the rule of thumb: Divide 72 by the interest rate= number of years it will take for money to
  grow to twice its value ie. interest rate=10% start with 100$ year one-$110, year two -$121 is the future
  value :. $21 (72/10= 7.2 year to double the money)
 Pay attention to timing rules
                                                                                                                   7
     Economic gains for the taxpayer in tax postponement. Could get an unpredictable windfall (ie. Gov't decides
      on lowered rate)
     Ie RRSP- reduce the amt of money to be taxed.




                                                   CHAPTER 3:
                                                 RESIDENCE
     s.2(1) Any person resident in Canada is taxable in Canada on their world income
     S.2(3) non residents must pay tax on income earned in Canada
     Full-time resident ----------Part-time Resident-----------Visitors-------------------Non-resident
     For Full-time resident, to determine residency status, we look at
      1. dwelling place/car.
      2. spouse/partners- if I have a marriage/relationship/dependent in a country, people tend to move w/ them.
      3. children/dependents
      4. OHIP coverage- anybody living in Ontario will have coverage/driver license
      5. social ties- where you go to church, where are your friends,

TAX JURISDICTICTIONAL BASIS:
(a) residence (Canada) (U.S.)
(b) source of income - tax on all income having its source in that country (Canada)
(c) domicile - mental state is relevant here
(d) citizenship - U.S. and Phillipines tax people based on this. In Canada, birth place and citizenship is NOT
relevant in determining residency.

TAXATION OF RESIDENTS:
 on their worldwide income
Meaning of residence
 Policy - Why tax Canadian residents on world wide income?
Justifications:
 - horizontal equity - tax same people in same way
 - revenue collection (is higher)(in practice foreign source income doesn't bring in much revenue due to
      Foreign tax Credit - foreign tax paid is deductible in Canada.
 - Tax havens - country with no income tax, we can tax it, but if CCRA cannot find out how much income is
      earned we can't tax it (where we have no tax treaty with the haven country)
 - Vertical equity - rich stay richer, poor stay poorer
 - Neutrality (tax payer should be able to invest anywhere without concern for taxation)

     Resident - taxable on income earned world wide
     Non-resident - taxable on income earned in Canada - s. 2(3) non resident who worked in Canada (sources
      of income)

MEANING OF 'RESIDENCE'

Resident - 2 SCHEMES: (statutory, case law)
                                                   1) STATUTORY
       i)- s. 250(1)(a) ITA (This definition applies to whole ITA)
     Subject to s. 250(2), person deemed to be a resident in Canada throughout a taxation YEAR if:
    (a) sojourned in Canada in the year for a period of, or periods the total of which is 183 days or more
    (b) members of Canadian Forces always deemed to be Canadian residents for tax purposes
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    (c) Canadian or provincial diplomats(ambassador, minister, high commissioner, officer or servant of Canada,
        agent-general, officer or servant of a province) deemed to be residents
    (d) performed services, at any time in the year, in a country other than Canada under a prescribed
        international development assistance program of government of Canada and was resident in Canada at
        any time in the 3 month period preceding the day on which those services commenced.

     "deemed" - we tell someone they are a resident regardless of what they think about it. (parliament has
      spoken) Not really a resident but we deem them.

     "means" - exhaustive definition
     "sojourners" - don't consider Canada their home, but are residents if stay longer then 183 days (only applies
      to countries that we don't have a tax treaty with)
     Sojourners are transient stay/temporary visitors
     Commuters just for 10 hours to work somewhere are not sojourners
     "days"= 24 hours

       (ii) s. 250(3) Ordinarily Resident
       "inclusive" definition - not exhaustive, more real then deeming
 Relevant definition for the whole Act. IN THIS ACT…
 "Ordinarily resident person includes a person at the relevant time who is ordinarily resident in Canada"
     (inclusive def’n)
- circular definition - not useful
 CCRA uses this definition to assess people who are absent from Canada one year, but who is normally a
     resident and have residential ties.
 Court uses this provision to say that even though we are not present in Canada for most of the time, you can
     still be considered as ordinarily resident.

                                     The Queen v. Reeder (application of s. 250(3)

Facts: Man born in Canada in 1947 and resided here until the period in issue. He took employment with a company that
sent him to France for training. In France he rented an apartment, took out insurance and lived there until December 1972.
His wife went with him.

Issue: Was he ‘not resident’ in Canada for the period he was in France? If he was resident is his liability relived by the
Canada/France Tax convention?

Decision: Resident of Canada for the whole year.

Held: Material Factors in determining residence include:
     - past and present habits of life
     - regularity and length of visits in the jurisdiction asserting residence
     - ties within that jurisdiction
     - ties elsewhere
     - permanence or otherwise of purposes of stay abroad
In this case ties to France were temporary and severed as soon as return to Canada was allowed. His normal home was
always Canada.


                                    2) CASE LAW def'n of Residents
          - see Thomson Leading case:
                                  Thomson v. M.N.R.- leading case (1994)
Facts: Man born in Saint John, NB left to Bermuda in 1923 to escape high taxation in Canada. He got a British passport
there then returned to the United States to set up residence in North Carolina. In 1932 he returned to St. Andrew's, NB and
rented a house where he stayed 134 days in 1933 and 81 days in 1934. In the latter year he built a house near Rothesay
                                                                                                                             9
(Canada) costing $90000- purely for the family NOT commercial purposes. His wife wanted to be near relatives and
friends there. Since then up to 1942 he spent average of 150 days each year in NB. He closed up his house in NB except
for a servants quarters, and brings his wife, kids servants with him to his other houses. In 1941 he was taxed in the US as a
non-resident (before that he didn’t pay tax in any countries) but in 1942 he was taxed as a US resident in the US.
Issue: Was he a resident in Canada?
Held: resident of Canada for the purposes of ITA.
 Does not fall under the sojourner rule since he never stayed more then 183 days. However this is not an exhaustive
     definition of residence.
 Whether or not he is a resident must be determined by the facts and circumstances of each case.
 Factors looked at included : intention (not relevant in this case), owning a house, social and family ties,
     regularity of visits, mode of life,
 Also can look to: job, bank accounts, he wasn’t a resident anywhere before 1941.
Dual resident with the U.S. not relevant for Canadian tax purposes.
- IN determining residency, citizenship is NOT a determinative factor.

CHANGE IN RESIDENCE- subject to the following two provisions: (not examinable)
 S.114 part year rule
 S.128.1 departure tax - if someone emigrates from Canada will tax on departure; subject to capital gain tax
  on properties that are deemed to be sold on the time of departure.
 How to determine if the person has given up the residency? Same reasons as above in determining
  whether the person is a full-time resident in Canada.

                                  => S.114: Part Time Residence: (non shaded part)

                                                   Schujahn v. M.N.R.
Facts: Man was an American citizen who worked for a US company. They sent him to Canada to work from 1954 to
August 2, 1957 when he was recalled to the US for good. His wife stayed in Canada until Feb. 1958 to sell their house. He
kept a small bank account and a car for his wife in Toronto. He gave up his club membership in Toronto when he left and
assumed one in the US. The appellant was in Toronto on 3 occasions between August and December 1957.

Issue: Did the appellant cease to be a Canadian resident for tax purposes on August 2, 1957, as to be allowed the benefits
of s.114 of the ITA (part year rule)?
Held: He was not a resident as of Aug. 2, 1957.
- Must take into account all circumstances.
- He did keep a house in Toronto and his wife and son remained there, but it was merely to facilitate the selling of the
house.
- He severed all his ties to Canada on that day except for the house, simply because it took time to sell it.

   S.114 overrides s.2(2)
   Structure of s.114 is: Taxable income = (a) - ( (b) +(c) )
        - Focus on para (a) amount:
        Para (a) ; income of individual assuming no income exists for part of the year taxpayer was non-
        resident (ie. income earned in Canada)
        Deductions - Paragraph (b) - loss carry over (losses earned in other years - losses based on income
        your using in para (a))
        Para (c) special deductions

   So income for Canadian tax purposes (para(a)) is only income earned while resident in Canada
    (assuming para b and c don't apply)
   Ratiionale of s.114 is its relief measure for s.2(1): Resident at any time of the year all world wide income
    subject to taxation
   This section applies mainly to immigration and emigration of individuals.
   Applies to people resident for part of the year as well as those non resident for part of the year.
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   Does not apply to sojourners b/c they are deemed resident for the whole of the year. (:. If spend more
    than 1/2 the year in Canada then can not claim s.114 part year resident)
   For example: X monthly income of 10,000 Cdn; non resident in Canada from Jan. 1to march 31; after Mar
    31 X works for a foreign company in a foreign country; taxable income? 10,000 x3 months = 30,000.

                                          => Departure Tax
(changes in residence)
   tax implications if someone who becomes a resident or gives up residency.
   s. 128.1 Applies to Capital Gains

ie. Shares: cost= 5,000; FMV= 25,000; deemed disposition trigger an artificial profit of (25,000- 5,000=
20,000); so the capital gain is taxable for the departure tax purposes.
ie X has property
           Cost          100
Mar 1/99          FMV            160     (year of residency change)
May 1/00          sale           190

RULES (applies to anything not already taxable and doesn't apply to taxable Canadian property)
1) deemed disposition for FMV on year of departure (sales proceeds called proceeds of disposition (POD)
 - ie. the price you could get for sale if sold
 - POD = 160
 - Capital Gain = FMV - Cost = 60
 - 2/3 of Capital Gains taxable so $40.
 - Person didn't sell property but because they left Canada taxpayer is forced to realize a Capital Gain
    (Deemed to have realized a Capital Gain)

2) Deemed re-acquisition at cost = FMV (at time of emigration)
 - Sale in 2000
 - POD = 190
 - C.G. = 190-160 = 30
 - C.G. = POD - Cost
 - But this doesn't really matter since we never tax people on this but other countries do.
 - Principle - we want to tax all Capital Gains earned while person is a Canadian resident.
 - Immigrants are caught too - C.G. earned elsewhere are not taxable in Canada (unless a taxable Canadian
    property)
 - Use deeming rule 2 to avoid double taxing immigrants

 Timing
- General rule -> C.G. taxed when realized (sale)
- S. 128 overrides general rule by deeming a sale on date of departure (or entry)


DUAL RESIDENCY
 visitor stays for more than 183 days (resident in Canada) but other country considers them a resident as well.
 Or like the Thompson case where T is a factual resident.
 Tax treaties deal with this- without tax treaties, the domestic tax law is incapable of resolving this situation.
 P. 2589- Canada-United States Tax Convention (1980)
Canada/US Tax Treaty
Article IV (2) pg. 2413
 Tie Breaker rule- breaking up the dual residency and make the person belong only to one country:
        (a) considered resident of a state where he has a permanent home. If a home in both or neither state
            residency determined by where his personal or economic relations are closer (center of vital
                                                                                                                 11
            interests ie. Bank accounts money in each, friends, family in each)

        (b) if (a) does't apply he is deemed a resident of a state where he had a habitual abode (a dwelling
            place- between a home and a temporary place)

        (c) if (b) doesn't help look at citizenship

        (d) if citizenship doesn't help (dual) tax authorities will figure it out.

   Double Taxation
    - worst example is Dual residency (solved by tax treaties)
    - problem - causes of DT
           o dual residency (Resident/Resident) - relieved by treaties
           o Resident/Source - relieved by Foreign Tax Credit (FTC)
           o Source/source - US person hired by Canadian company but works for Canadian company in
              Canada and mexico (Canada and Mexico both tax all income - No solution

Tax treaties - 2 purposes
1) Prevent international double taxation
2) Prevent international tax evasion

Note: Next three sections not examinable:
RESIDENCE OF CORPORATIONS
 Determined in 2 ways:
1. Place of Incorporation s.250(4)
2. Place of Central Management and Control (where board of directors hold its meetings)
RESIDENCE OF TRUSTS
 s.104(2) Deems a trust to be an individual :. Need to determine the residency of the trustee.
 General Rule : look to the trustee residence
 - trust resides where the trustee resides
- look to the majority of the trustees if more than one trustee
- not hard and fast rule

PROVINCIAL RESIDENCE
 The province in which the indiv resided on the last day of the taxation year is entitled to tax indiv on his
  entire income for the year.
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                                                  INCOME
CONCEPT OF INCOME
 no definition in ITA
 Importance:
-->To determione the tax base: if not income then can't tax you. If it is income then can tax you
--> For Tax Subsidy purposes - tax credits are tied to the notion of income
--> Linked to Tax Equity

WHAT IS INCOME- s. 3 is relevant in any parts in Part I.
 s.3 has rules for computation of income- Tax law definition had been influenced by economists definition
     of income.
- s. 3(a) contains the legislative expression of the source concept of income:

s.3.The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the
year determined by the following rules;
  (a) determine the total value of all amounts each of which is the taxpayer's income for the year (other than a
      taxable capital gain from the disposition of a property) from a source inside or outside Canada, including,
      without restricting the generality of the foregoing, the taxpayer's income for the year from each office,
      employment, business and property.

 ~ Para.(a): Determine all of the income from a source. (examples illustrated)- including (NOT exhausted and
    conclusive) 4 types of income to be included in determining income; capital gains (does not consider as
    coming from a specific source) are NOT included in this para. (a) instead para. (d) deals with it; includes
    income for INSIDE or OUTSIDE of Canada; determine the total amt for a SOURCE; Anything that is
    considered from a SOURCE is included.
 ~ What is a SOURCE? Something produced?
 1. 60,000 Salary- yes!! Income from employment- para. a
 2. 5,000 rent earned- yes!! Income from property- para a
 3. 10,000 lottery winning
 4. 8,000 Taxable Capital Gain- para b (clause A), must be 16,000 in gross capital gain (50%)
 5. 3,000 Allowable Capital Losses- para b (subpara ii), must be 6,000 in gross capital losses
 6. 4,000 child care expense
 7. 26,000 business losses
 ~ Para (b): Determine the amount if any, by which subpara. (i) exceed- (ii) if (i) – (ii) is negative, you have to
    reduce it to zero.
         (i) is clause A (which is Taxable Capital Gains) + Clause B (Taxable Net Gain for business
property)- only a portion of the capital gain is deductable NOT tax in full only 50%.
         (ii) is the Allowable Capital Losses- the amt the person can claim the ACL for the year. - only
portion of allowable capital losses is taxable only 50%
        (iii) total is the net profit
                                                                                                                    13
~ Para (c): add up (a) and (b) and deduct (e)
(a) + (b) - subdivison (e) (e) is the deduction outside the regime of the normal deduction in ITA.- ie child care
expense, moving expense.
income plus net profit - special deductions
 ~ Para (d): (c) - non capital losses (businesses not property sold off)- the taxpayer’s losses in para. (a).

 ~ Para (e)
(d) = your income
--> if loss, then income=zero

Para a= 60,000 + 5,000= 65,000.
Para b= 8,000 – 3,000 = 5,000
Para c= para a + para b – subdiv. E = 65,000 + 5,000 – 4,000 = 66,000.
Para d = para (c) – non capital losses= 66,000 – 26,000 = 40,000.
Para f = If you get a negative figure, acc’ding to para (f), it will be equal to ZERO.

Word Patterns:
Para (a) the total of all amounts (add all the items listed in the paragraph)- the total of …and…and…
Para (b) "exceeds" (means subtract) - the amount , if any, by which X (selling price) exceeds Y (cost)
(answer can never be a negative. It will equal 0)- determine what exceeds from subpara. I to subpara. II.
Para (c) & (d)- all the paragraphs are culminated.
READ ALL the paragraphs TOGETHER.

Applying the Rule:
Example
X:
Wage = 100,000
Taxable C.G = 50,000
Business Loss = 30,000

(a) income from office or employment is $100,000. (TCG excluded under (a) and so are losses they are not income)

(b) = TCG - 0 (ACL)
$50,000-0 =$50,000

(c)= (a) + (b) -subd(e)
$100 000 + 50 000 - subdiv(e) = $150,00

(d) = (c) - losses
150,000 - 30,000
= 120,000

(e) = (d)= income= $120,000


   "Source"/ Earners
   "Net" of Losses and "Net" of Costs and Expenses
   Capital gains and losses treated differently than earned income ( non capital)
   Income is a net Concept (s.3 allows the net of losses) (net profit only is income under s.3a not gross)

                     HAIG SIMONS DEF'N (ECONOMIST'S DEF'N)- not adopted in Canada.
- this is the very common definition of income.
SCENARIO: X in 2001, Salary $30K, Consumption $20K, Hide $10K
Property:Jan 1 FMV = $100K, Dec 31 FMV=$140K
                                                                                                              14

Income = $20,000 + $40,000 + 10,000 (cash is property)= $70,000

 Haig-Simons definition of income is increase in Net Worth (A) plus consumption (C)
I=A+C
 The def'n of income= the sum of the market value of rights exercised in consumption and the change in
    value ofg the stored of property rights btwn the beginning and teh end of the period in question
Income = Consumption + Change in value of property( savings + capital gain)
For example:
 1. 60,000 Salary- yes!! Income from employment- para. a
 2. 5,000 rent earned- yes!! Income from property- para a
 3. 10,000 lottery winning
 4. 8,000 Taxable Capital Gain- para b (clause A), must be 16,000 in gross capital gain (50%)
 5. 3,000 Allowable Capital Losses- para b (subpara ii), must be 6,000 in gross capital losses
 6. 4,000 child care expense
 7. 26,000 business losses
 8. 45,000 consumption
 9. 40,000 savings (this is the figure calculated by the previous calculation)
 10. house fmv= 300,000; year end fmv= 340,000- capital gain of 40,000.
therefore, C= 45,000; S= 40,000 + 40,000= 80,000; Income= C + A= 45,000 + 80,000= 125,000.
** ITA doesn’t approve unrealized capital gain (only you dispose the property and you get the money for capital
gain).

    Gifts, inheritances, prizes, windfalls, etc. are non-recurring amounts which constitute the transfer of old
     wealth, not the creation of new wealth. They do not arise from a source and they are excluded by the source
     concept of income and from the definition of income.
 broaden definition
- but salary not included as in s.3(a)
- disposition does not matter here
- source doesn't matter
- This is the goal of every tax reform
 Promotes the ability to pay notion: it broadens the tax base
 Net worth assessment practical application of this def'n

                           CARTER'S COMPREHENSIVE TAX BASE (C.T.B)
   Recognized broadening the current tax base basically by taxing CGs
   CGs taxed only if they was realized after the report


INCOME FROM A SOURCE (p84)
 income is a yield from a productive source
 S.3 codifies this by saying that only income from a source is included in computing a taxpayer's income
 Distinction btwn capital and income: Income was the yield of the productivce source and the source itself
    was capital
 S.3(a)- income from a source; NOT capital gain. Court refused to interpret s. 3(a) in a broad matter, ONLY
    narrowly in terms of enumerated sources.
 S. 3(b)- includes capital gain.
 Caselaw:
Source characteristics:
-->Recurs on a periodic basis ie salary
                                                                                                                        15
--> it involves organized efforts, activity or pursuit on the part of the tax payer ie do something to earn it
(not lottery, windfall, gambling, betting)
--> it involves a market exchange (must do something to earn what you do for consideration) ie you are
willing to sell something for something in return
-->gives rise to an enforceable claim to the payment of the taxpayer ie legal entitlement to the income.
-->in the case of a biz or property source, there is a pursuit of property- reasonable expectation of profit-
ie prevent wealthy people from creating all kinds of deductions.
 Alot of people have speculated dealing and whether a loss is from a source is very important
 See p84
 Income from office, employment, property and business set out in s.3(a) explicitly
 May use the enumerated sources to analogize--> examples
- Stealing money from clients: analogized to a business source of stealing money
- Gambling activity: analogized to a business of gambing in some cases
- The source of gifts received by a taxpayer in respect of employment is his office or employment
- Gifts that are purely personal have no source. But could be with an employment or business
- gifts in kind are property that can deemed CGs. There is a deemed disposition. Ie. Donor buys car gives gift car
to recipient son valued at $50,000. Donor has a deemed disposition of a CG of
$50K
                                           Fries: Strike pay
Issue: Whether strike pay was taxable? Union pays the strike pay. The person is a union member and money is
paid out from union due, money from union members’ paycheque; the amt in issue is $880; you only get paid
when you are on the picket line; under s. 8, the union due paid by members are tax deducible.
Finding: strike pay was not income from a source under s. 3. The benefit of doubt should go to taxpayer.
 no source so not income
 Do not work for the union as employer; cant be earned; not reoccurring; but with consideration.
 Any ambiguity in interpretating s. 3 should be in favor of the taxpayers.

                              Schwartz v. The Queen: damage for breach of contract
Facts: Taxpayer took a position with a new employer (salary + stock option), but before the employment began he was told
his services were not needed. He accepted a lump sum of $360000 as damages for breach of contract(personal
embarrassment + future loss + personal pain and suffering), plus $40000 for legal costs. The minister argued that the
income was either a retiring allowance, an employment benefit, or income from a source under s.3 of the ITA. On appeal
the court broke down the award further into part salary loss and part stock option loss. In the SCC appeal, the damages
break down was overturned.
Issue: Was the income taxable from a source under s.3(a) of the ITA, or was it taxable under s.56(1)(a)(ii) of the ITA as a
retiring allowance?
Held: The award is not taxable under s.3- the settlement amt is NOT an income
 parliament specifically amended the ITA making such payments taxable under s. 56 (income from another
     source), and also by making them taxable as constituting a retiring allowance.
 Parliament did not intend s.3 to be used to tax such awards. S. 3 should be given a liberal and general interp.
 The award cannot be considered a retiring allowance either since to be so a person must be 'in the service' of
     some other person (ie - the definition of employment). He could not have been in the service of someone
     for whom he had yet to begin working.
 The retiring allowance only applies wrongful dismissal awards with regards to employment contracts that
     have already begun.
LaForest: room to expand on s.3a "not limiting the foregoing"... Leaves hope the possibility of non-
specified sources
Major: not the court's role in broadening the tax base (rejected Major's opinion)
If there is a specific section that doesn’t apply then s. 3, as a general provision, should not be applied as
well.

"SURROGATUM PRINCIPLE"
                                                                                                                 16
re: damages
 - the tax consequences of a damage or settlement depend on the tax treatment of the item for which the
    payment is intended to substitute. Look to what is the reason for the payment?
 Loss of income(ie. for salary, profit...)(taxable), property destroyed(viewed as loss of capital and capital
    receipts is generally not income) personal injury and punitive damages (not taxable)
 Break down the amount into different sources

WINDFALLS
 Ie. Good luck, gambling winnings, found items, lottery winnings
 not taxed b/c no income source
 What is a windfall and what is not can be disputed
 Political justifications for excluding them, no policy or adminstrative reasons.

IMPUTED INCOME
--> A form of non-cash income.
 The benefits from labour on one's own behalf or the benefits from the ownership of property
Ie. Driving your car that you own saves you money on bus fare, cabs
Ie. Cooking for yourself instead of going out to eat and spending money (Self- provided services)
Ie. As a tax lawyer, do your own tax return in return you save some money!!!
Ie. You own the house, you pay yourself a rent.
 Not treated as income for tax purposes
 Significant policy issues- non neutrality, non-equality

Ie. Policy Argument - Unfairness of the System
                                Renter                                          Home Owner
Cash- what we have on hand      100,000                                         100,000
Investment                      Stock                                           house
Income                          Dividend income from stocks- 10,000             NR
Expense                         Rent 12,000                                     NL
Investment sold at year end     180,000                                         180,000
Taxable Income                  Dividend of 10,000 + CG of 80,000 (1/2          CG of 80,000 but exempt from tax
                                of it is taxable) + the rent is NOT             (full principle residence exemption)
                                deducible because it is considered as           therefore NO INCOME
                                personal expense


:. Distortive effect on the market: Encouragement of property ownership; woman stay home;

   Difficulty in taxing is that it is difficult to value imputed income, especially services

ILLEGAL INCOME
 Are taxable
 Ie. Prosecution, drugs, smuggling, prostitution, embezzlement, stealing from clients.
 Illegality is irrelevant in terms of interpreting the def’n of income.

THE IMPORTANCE OF SOURCE
 Income/gain
 Loss
 s.4 computation (source by source computation)
                                                                                                                        17

                                             Bellingham v. The Queen
Facts: Taxpayer received money for the appropriation of lands from the government. Compensation was
broken down into a compensation amount, ordinary interest, and additional interest under the Expropriation Act.
Issue: Did the additional interest constitute income? Were the proceeds of disposition income or a capital gain?
Held: Proceeds are income not a capital gain. The additional interest was not taxable income, but rather a
windfall gain. The payment is not compensatory but rather is punitive- bad behaviour. The payment does not
flow from a bargain, there is no consideration. It is a zero sum situation. The taxpayers gain is the payee's loss.
Non compensatory payments cannot be considered taxable income. Punitive damages do NOT come from a
source as well as the interests that come along with it.


                                              Fortino et al. v. The Queen
Facts: The taxpayers sold their shares of Fortino's Supermarket to Loblaws. They signed a non competition agreement
(NCA) for which the taxpayers agreed not to compete with Loblaws for payments- 1/3 of the total 1.5m are for non
competition in which the taxpayers are not allowed to open another stores to compete with the Loblaws. As well, the value
of the shares have capital gains.
Issue: Were the payments received by Loblaws for the NCA considered taxable income? If so was the income excluded by
any provisions of the ITA?
Held: Payments received by the appellants were not given for services rendered by the appellants. They were in return for
the appellants agreement not to make profits by operating their business in specific areas. This is considered a capital
receipt not income.
Para. 39- capital gain is NOT an income from a source acc’ding to s. 3(a); s.56(d) part I-
Para. 40- the context of the Act didn’t tell us how should interpret s. 3(a).
Para. 49- in the present case, the payment received were not given for services rendered by the taxpayers. The Fortinos not
entered a consulting contract but only NCA; the amt entered is for NCA- not an income; taxpayers had given up a source of
revenue and prohibited to render any services to generate income; when you are paid to NOT to do anything- that is
capital NOT income. Unlike the US, gross income is “ALL sources of income derived”. Can. Crt are not as
aggressive as the US to capture income from unexpected sources.
to qualify as a capital gain, there must be a disposition of property in order to profit from capital gain. In this case,
there is NO property, so there is NO disposition of property, therefore not qualified capital gain. Contract in this
case is NOT property.
Reasonable allocation- people can get away by selling the share for 1 dollar and consider everything else under
NCA- court said that it has to be REASONABLE- in this case, 1/3 of the total amt is reasonable.




                                    INCOME FROM EMPLOYMENT
                                                        Chapter 5
General
-   source by source acc’ding to s. 4
-   computation- revenue/income vs. expense/deduction; timing.

EMPLOYMENT INCOME OVERVIEW
 S.5- inclusions characterizations- income from wages or salary should be treated as income.
- s. 5(1) tells you how to calculate the profits you get from employment; s. 5(2) determines the loss (deduction)
 S.6- fringe benefits, non salary forms of renumeration- expanded over the years to catch all sorts of
     benefits received by employee.
 S.7- employee stock options- just an option to have the right to? When do we tax the option? When it is
     bought? Sold?
 S.8 - deductions -very restrictive
                                                                                                                   18
DEFINITIONS OF "EMPLOYMENT", "OFFICE" and Others
-->s.248(1) in light of s. 5(1)
 Employment - The position of an indiv (natural person) in the service of some other person (includig her
    majesty or a foreign state or sovereign) and "servant" or "employee" means a person holding such a
    position
- does not apply to corporations b/c not an indiv by definition b/c not a natural person
 Office - the position of an individual entitling the indiv to a fixed or ascertainable stipend orf remuneration
    and includes a judicial office, the office of the minister of the crown, office of the member of the senate...
 Salary- annual sum ie 100,000/yr; permanent position;
 Wages- temp work, ie. 15/hr.
 Other renumeration- bonus, performance (commission)
 Gratuities- tips,
 Income from any OTHER type of sources is NOT included.

EMPLOYMENT INCOME VS. BUSINESS INCOME: DIFFERENCES
Note: Tax consequences all more favourable to the taxpayer earning income from business

-->Employment Income
 Contract of service
 Employer required to withhold income tax and CPP contributions and Employment Insurance Premiums
    that is payable on the income and to pay the employer's share of payroll taxes on this income
 when earn income thru a corp the corp is deemed a "personal service business" and :. Doesn't benefit from
    the low small biz tax rate.
 Entitled to fewer deductions than biz or office income

-->Business Income
 Contract for Services
 No need to wiithhold tax or payroll taxes
 Different timing rules- accrual basis

Only Policy Justification for inequity:
-administrative efficiency

                Test to determine whether the person is an EMPLOYER or EMPLOYEE:
    1. control- employer has control over when the work is done; how much to pay; the payroll.
    2.

                   Tests for Determining whether contract of service or contract for services
Wiebe Door Services Ltd.- not exhausted
1) Integration Test
 --> ask whose business is it?
 - is the person an integral part of the business (look to the economic dependence which would indicate that he is
an employer) or carries on biz on his or her own account

- Wolf case: if the services are provided to one company for a significant amount of time (ie. 5 years) then strong
indication that the taxpayer is an employee and not an independent contractor

2.) Economic Reality Test
 -->who bears the financial risks and opportunities of profit ?
- incorporates the control test (are parties in a master-servant relationship? Ie. Degree of control of employer
over the work that is performed)
                                                                                                                 19
     whether the person is paid on a salary.
- and also asks whether the worker owns the tools and has the chance of profit and risk of loss which = an
independent contractor

3.) Specified Result Test
- asks whether the worker has placed his services at the disposal of the employer for a period of time without
reference to a specified result = employee vs. finishing performance is when you get paid = contractor)
- for employees, they are rarely asked to have a specific task finished at the end of the term of employment.

4.)If all else fails Look at the totality (total relationship test)
 --> looks at the above tests in order to characterize the rel btwn parties

                                                 Wiebe Door Services
Facts: Installer and repairer of doors. 75% of business is repairs. It used many different installers over the
years each running their own business.
Issue: Was the relationship really contractor/contractee?
Held:
The following factors must be weighed when determining the total relationship of the parties and this whether or
not there is a contract for services or of service.
                          - control
                          - ownership of assets (equipments, tools)
                          - chance of profit (economic)
                          - risk of loss (economic)

   incorporation of services
- s.18(1)(p): deductions of a business that provides personal services limited to those allowed to employees

                                                 Wolf Case 2002
Fact: W an engineer, an American; worked in aerospace business; thru intermediate company, he worked at a
Montreal company for 5 years as an independent contractors; his work is no difference as any other engineers
hired by Can. Company- your own space, to provide services for a number of year; he argued as business
income NOT employed (to have exemptions)
Issue: employer or employee?
Held: a worker with specialized skills under a 5 yr contract was self employed (business income).
 looked to 3 factors: control, ownership of equipment (found to be inconclusive help) and financial risk
    (found no job security or benefits)

TO incorporate company:
- Li incorporated a company Li Ltd., so to receive money from the school; advantage is to get a lower tax
   bracket (business income);
- S. 18(1)(b)- in the business income area; to limit the deductions available to a incorporated company; to
   neutralize the advantages.

TIMING ISSUES
 S.5 (1): a taxpayers income from an office or employment for a taxation year "must be RECEIVED by
   the taxpayer in the year"
 An item of income is received at the earlier of (1) when it is received in cash (or the equivalent to cash.
   ie when the cheque is sent in the mail) or, 2) when there is a constructive receipt (ie. if an employee who
   had an unconditional right to receive payment voluntarily decided to defer it)
 When the payments of salary or wages are mailed to an employee, s. 248(7) deems the payments to have
   been received on the day that they are mailed. Ie if mailed on December 31, 02 but received on January 03,
   the salary would be deemed to have been received by the employee in 2002 (part of 2002 income).
                                                                                                                          20
   Whenever an employee is paid a salary in a diff calender year than they year in which the pay was earned,
    the pay will be taxed in the year of receipt
Ie. When employee is paid an advance in december for january, the income will have to be recognized in the
december year, not tHE january year
 Business income is reported on an accrual basis not a cash basis like employment income.

BENEFITS (s.6)
Examples of benefits- PERSONAL (taxable) VS. BUSINESS (non-taxable) BENEFITS
    1.   Employer- owned Property for PERSONAL use, ie car, laptop, corporate jet, TV set

    2.   additional insurance- ie pensions

    3.   personal travels- ie conferences,

    4.   entertainment- ie. In insurance, law profession- free basket ball tickets

    5.   personal expense- ie. To pay grocery bills, babysitting fees.

    6.   T.V. Set for employer $400 reimbursement of cost --> not taxable

    7.   T.V. Set for Home $400 reimbursemant --> taxable

    8.   TV set for home bought with $400 bonus--> taxable

    9.   T.V. Set for home $400 allowance from employer--> taxable

    10. Business trip, spouse and child come $400 cost paid by employer--> taxable

    11. Loss from sale of home $400 reimbursement. Relocated by employer--> non taxable s.6(19)

     12. TV set bought by employer then tells X to take it home- no payment on X's part--> taxable
- b/c free use of company-owned property. Not a gift, employer can take it back at any time. Look at this like leasing:
value is cost of TV, BUT equivalent to renting of T.V.

                                        s.6- EMPLOYEE BENEFITS:
 Business Expense of Emplyr, X gets no personal gain--> not taxable
 Ask 3 questions:
    1) what is a taxable personal benefits? If the benefit are for the purpose of the employer then NO
        personal benefits. If benefits paid by the employer but for personal uses- should be taxable.
    2) If yes, then is it a taxable benefit derived from an employment?
    3) If Yes. Then figure out the value of the employment benefits- sometimes difficult.
 TAXABLE:
1. Reimbursements of a Cost incurred by employee
2. Allowance
3. Employer owned property made available fore free use by the employer
4. Employee's free use of Employer's services - ie. Universities, private schools, daycares for kids of
employees

                                                           POLICY

    1) Taxing Benefits
           o Equity
                  - Horizontal – $400, however gained, should be taxed
                  - Vertical – high income earners tend to derive a lot of benefit from the employer – a janitor does
                       not
                                                                                                                          21
                             If benefits tax free, we are not taxing them
            o Distortion
                   - Tax system should ideally be neutral
           o Potential loss of revenue
                   - because majority of taxpayers are employees
                   - Cannot afford to not tax benefits – benefits would replace cash
    2) Not Taxing Benefits
           o Liquidity problem
                   - Where does the cash come from? You may have the asset but not the liquidity
           o Administrative Difficulties
                   - Sometimes difficult to ascertain what benefits and the value of these benefits
                   - Explains non-taxation of small things like cheap coffee, staff discounts – too difficult to assess
                       but doesn’t mean they are not taxable, just too difficult to assess
           o Social and Political Reasons
                   - Statutory exceptions built in for political reasons


s. 6- Inclusions- amounts to be included as income from office or employment as indicated below:
 S.6(1)(a)- Employee Benefits: what to include in income Include in a taxpayer's income from office or
     employment: the value of board, lodging and other benefits in any kind received or enjoyed by the
     taxpayer in the year in respect of, in the course of, or by virtue of an office or employment.."
 Board- provides food; lodging- provides a place of accommodation.
 Policy for taxing the benefits- horizontal/vertical equity; A and B earns 50,000 a year but A gets grocery
     bill reimbursed; if we do not tax the reimbursement then we violate the concept of horizontal equity. How
     about vertical equity- librarian vs. Dean of law professor- the dean would probably get more benefits (ie. Jet
     golf club membership)- in general, the more you make the more benefits you get- it should be taxed as well.
     Also the distortion effect- people will tend to get so called benefits but not salary. Also, over 60 % of the
     government revenue is collected from employment income tax- if there are loopholes everywhere such as
     asking employer to pay all benefits but reduce the salary base- then the government would collect less tax.
     1. equity- vertical and horizontal – equitable treatment;
     2. tax based protection- employment income is secured and predictable;
     3. distortion effect- to reduce the variety of compensation packages (more benefits vs. less salary).
     4. but strong social policy objective policy- not tax for the society; difficult to determine the amt of
          benefit; the enforcement is also difficult.

      Must Determine 3 Things:
      1. Is It A Benefit?
- is there economic gain? Is there a money valued attached to the benefit?
- Savage case: is there a material gain?
- is it for employer's business purpose or employee's personal consumption?
Ie. Huffman: issue: is the money for buying uniform clothes considered as personal benefits? D argued that he
wouldn’t need except for the job; clothes for police work could not wear to party so not employee benefit b/c not
personal consumption. But ordinarily, clothing/transportation/shelter/food is an employee benefit.
Ie sightseeing trip can be argued as business gain because you were there to promote and advertise the company
and you gained nothing from it/were asked to be there. You were there for your job and something came along
with it.

    2. "In Respect Of The Taxpayer's Employment"- personal vs. business expense.
- SCC Savage: widest scope possible of these words
Facts: employed by a insurance company as a clerk, had received a payment of 300 from her employer. The
employer had offered its employees 100 per course as prize for passing course. She passed 3 courses.
Held: benefit "in respect of and by virtue of the taxpayer's employment
--> Savage creates presumption that: any benefit received by an employee from his employer is assumed
to be in respect of the taxpayer's employment or derived from the employment relationship.
                                                                                                                       22
Presumption can be rebutted but only if the employee can establish that the benefit is received in his personal
capacity.
- rejected notion that s.6(1)a required that benefits must be received in exchange for services performed by the
employee
- the language is not restricted to benefits that are related to the office or employment in the sense that
they represent a form of remuneration for services rendered. If it is a material acquisition which confers
an economic benefit on the taxpayer and does not constitute an exemption ie. Loan or gift, then it is
within the all-embracing definition of s. 3.
- a business trip that employee must attend and purely for the benefit of the employer- person can argue that
there is NO personal gain but solely for business/employer- no economic benefits conferred on the employee.
“probably the widest of any expression intended to convey some connection between two related subject matters”
"in relation to", "in connection with"
presumption (rebuttable)


    3. Value of Benefit
- three ways to figure out valuation:
     a) Fair Market Value is the standard way
     b) Look at cost to employer; easy because employer claimed the same as deduction;
     c) or the resale price;
     d) or apportionment (30% business and 70% personal income)

 not taxable:(exceptions)
s.6(1)(a) (i-v)
- (i) if the employer contributes money to each of the plan to the employee (ie. RRSP, registered pension
plan, group sickness or accident insurance plane, private health services plan, supplementary
unemployment benefit plan, deferred profit sharing plan or group term life insurance policy)- then it is
NOT taxable. Policy- encourage to save money for future; government pension plan is NOT enough;
- (iv) derived from counseling services in respect of mental or physical health of the taxpayer; the re-
employment or retirement of the taxpayer.

ALLOWANCES
 s.6(1)(b)- includes in a taxpayer's income from an office or employment "All Amounts Received By
     The Taxpayer In The Year As An Allowance For Personal Or Living Expenses Or As An Allowance For
     Any Other Purpose..."
 Allowance (defined by CCRA) = means an periodic or other payment that an employee receives from an
     employer, in addition to salary or wages, without having to account for its use
 Purpose is to compensate the employee for expenses taht he is likely to incur in the course of employment.
 Allowance vs. Reimbursement:
- Recipient of allowence has no duty to account to employer
- For Reimbursement must account.
 2 KINDS OF ALLOWANCE:
1) allowances for personal and living expenses
2.) allowance for any other purpose except:
         ~ Exceptions:
b2(1). travel personal or living expenses allowances expressly fixed in the 6(1)(a) by the parliament
 ie. an MP having a reasonable fixed travel allowance
Ie. public enquirers may have public enquiry expenses allowances
b2(2). travel and seperation allowances received as member of canadian armed forces
b2(3). representations and other special allowances as person out of country.
Ie. Can. Diplomat, foreign aid
b2(5). Reasonable allowances received by an employee by an employer for travel expenses (for sales, contract negotiating
employees)
                                                                                                                               23
- reasonable transportation costs, meal costs, hotel cost, entertaining expense
- test is: what is reasonable?
b2(6)Received by a minister or clergyman in their duty
b2(7)Reasonable allowances for travel expenses received by an employee from traveling away from its ordinary
employment place in the performance of duty for employer outside the metropoliton area where regular work is. (other than
for motor vehicles)
- deals with with non-contract and non negotiations and sales employees
- must travel outside the city - employee contract requires that it be stated that they must travel and they are required by the
job

Note: If you can, stay away from allowances b/c s.6(1)(b) covers all allowances as taxable and hard to
qualify for the exceptions

SPECIFIC BENEFITS:
                                          HOUSING BENEFITS
   where employees are relocated and have to sell and buy a new house.

                                                 Ransom (1967)
Fact: engineer transferred from Montreal to Sarnia and then moved back to Montreal by employer. Sold his
house at a loss and was reimbursed.
Issue: Should the reimbursement be taxed?
 Argued its a traveling expense
Held: in favour of taxpayer, not taxable
Reasoning: the loss had incurred "by reason of" his employment (employer transferred the employee). Nothing
is added to his wealth (he didn’t SAVE HIS POCKET). However, the house you lived in is deemed to be
personal consumption item. However, in this case, because the employer transferred the employee and was
asked to sell the house, suddenly the house is switched from personal to business consumption. Employment
demanded relocation is treated as business consumption but not personal consumption so NOT taxable.

                                                  Phillip (1994)
Facts: lump sum payment towards purchase of new housed in new location
Held: Where a taxayer is relocated by his employer and does not incur a loss on the sale of the old home, but is
required to pay more for a similar home ina new (more expensive) location, any payment made the employer to
offset the extra cost of the new home is a taxable benefit under s.6(1)(a). Added to net worth and wealth to his
pocket by employer's payment

                                              Hoefele (1995)
higher mortgage cost in a new place. Employer reimbursed higher mortgage cost as long as houses are
comparable.
Held: The subsidy was not a taxable benefit
More similar to Ransom
Reasoning: the net worth of the employee was not increased by the subsidy. Comparable home with no
additional equity in the home.

S.6(19)
 What?: deals with INELIGIBLE HOUSING LOSSES
 Purpose?:To support s.6(1)(a)
 Who? Non -Arms length dealings (marriage, adoption or blood relationship)
 Any benefit is taxable if a housing loss unless an eligible housing loss
 Any benefit is taxable under 6(1)(a) if have an ineligible housing loss and non arms length dealing

S6(21)
 What is a HOUSING LOSS? defined: buy high sell low
                                                                                                              24
 Housing Loss = A-D
(or acb - fmv)
- A is the adjusted cost base (acb)
- D is the fmv of the residence when sell for determining the housing loss

                                                           examples
House-->
Cost=200 000
Fmv=160 000
HL.= 40,000
Reimburse= 30,000

Cottage-->
Cost=80,000
FMV=70,000
H.L=10,000

S.6(22)
 Determines what is a ELIGIBLE HOUSING LOSS?
 Must designate one residence (the house or cottage), usually whatever has the higher loss.
 S.248 (1) Eligible relocation = (a) for income earning purposes, and (b) both residences must be in
    canada and (c)your new house must be a distance 40 km closer to employment now.

                                                       Back to examples:
Designate House b/c bigger H.L.
:. Cottage is ineligible H.L. and covered by s.6(19)
Look to s.6(20)

S.6(20)
 For the purposes of s.6(1)(a) amount of reimbursement for more than 15 000 which is determined by
    the formula IS DEEMED TO be a taxable benefit
 First 15 000 is exempt from tax, after that only half of that is taxed
 Para (a) - para (b)= amount that is exempt from taxing
 Formula for calculating taxable eligible benefit = 0.5 (amount paid -15 000)

Ie.
a=0.5(30,000-15,000)= 7,500

To what extent is Ransom overruled?
 Look to s.6(19) and s.6(20)

S.6(23)
 Any amount paid or value of assistance (any subsidies whatsoever, financial assistance) in respect of the
    employee's housing from office or employment is taxable.


                                  EMPLOYEE STOCK OPTIONS s.7(1)
   An option for the employee to buy stock at the employees company- favorable price.
   Rationale: Incentive to employees to work harder for the company
Example:
Year1: option to purchase the stock at a price 50.00
Year2: FMV of share 90.00 and exercise option by buying shares
Year 3: share sold 110.00
-->Should the 40.00 made be taxable as a CG or employment income?
                                                                                                                       25
- if had got a raise or bonus it would have been taxable on the 40.00.

   No immediate cost to employer at time of giving
   Taxable as employee benefit? yes - benefit included in income
   Timing of recognition of benefit?

Scope Of Section 7(1)(a): Application
- Under paragraph 7 (1) (a), the employee is taxed on the difference between the option price (the amount he employee has
paid for the stock) and the fair market value of the stock received when the option is exercised.
- s.7(1)(a)
   7.(1) Subject to subsections (1.1) and (8)[both deferral rules], where a qualifying person has agreed to sell or issue
securities .. to an employee
          (a) if the employee has acquired securities under the agreement, a benefit equal to the amount, if any, by
          which (how much to tax?) (i) – [(ii) + (iii)] ie. 90 – (50 + 0)= 40
                    (i) the value of the securities at the time the employee acquired them
exceeds the total of
                    (ii) the amount paid or to be paid .. by the employee for the securities, and
                    (iii)the amount paid … to acquire the right to acquire the securities is deemed to have been
                    received, in the taxation year in which the employee acquired the securities
   Who is caught by this provision? The employer as the qualifying person.
   For example: you have a parent company and a subsidiary company; does it matter if employee X gets stock
    options from parent/subsidiary company pursuant s. 7(1)(a)? Doesn’t matter so long as the employer sold
    the employee the stock option.
   must be a qualifying person under s.7(7)
-   Applies to all stock options granted to employees of all corporations or mutual fund trust
-       must have a K
-   Applies to employees who cease to be employees before all things happen that would make the provision
    applicable
-   Does not apply if the benefit was not received in respect of, or in the course of, or by virtue or, the
    employment


   STOCKS: GENERAL RULE:

(1)_Amount of Benefit
 Amount of benefit = FMV when the option is exercised/bought - (option price + cost of the option)
Example: 90K-(50k+0) = 40K is a taxble benefit
 Benefit for an exercised stock option is the difference between the value of the securities at the time
    the employee acquired them and the total amount paid + the amount paid for the right to acquire
    them

(2) Timing- questions!!!.
 Applies in the YEAR THE SECURITIES WERE ACQUIRED:
Ie. When exercised and option is bought- in the example it is YEAR 2 when the employee exercises the right.

Note: the increase from exercising option price to the share selling price is considered a CG/proceeds. For
example, the cost is the originally 50 and the FMV is 110- so there should be a CG of 60. However, you have
already been taxed the 40.00 gain from s. 7(1)(a) therefore you are only taxed from 90.00 to 110.00= 20.00 CG
(s. 53(1)(j)).

NOTE:
 S.110(1)(d) There are special deductions to tax the benefit like a CG
 May have a taxable benefit under s.7(1)(a) but not be eligible for a special deduction
                                                                                                                          26

Timing
- under s.7(1)(a) – when share is bought there are deferral rules that also apply:

Deferrals for CCPCs
 7(1.1)
a Canadian-controlled private corporation [CCPC] (not a publicly traded corporation) … has agreed to sell or issue a
share … to an employee of the corporation …
     (a) the corporation,
     (b) the Canadian-controlled private corporation, the share of the capital stock of which has been agreed to be
         sold and
     (c) the CCPC that is the employer of the employee,
in applying paragraph (1)(a) in respect of the employee's acquisition of the share, … "the taxation year in which the
employee acquired the securities" shall be read as a reference to "the taxation year in which the employee disposed
of or exchanged the securities".


- In example, the amount is taxable in the year that the shares are sold so in Year 3. This applies to employees of CCPC’s.
- Does not modify any other area of s.7(1)(a) so the amount that is taxable and how it is taxed remains the same – it is
  simply a deferral rule.
- Time value of money applies only to the $80k

Deferral in respect of non-CCPC employee options
7.(8) Where a particular qualifying person (other than a CCPC) has agreed to sell or issue securities …to a taxpayer
who is an employee … in applying paragraph (1)(a) …. reference in that paragraph to "the taxation year in which
the employee acquired the securities" shall be read as a reference to "the taxation year in which the employee
disposed of or exchanged the securities" if
      (a) the acquisition is a qualifying acquisition; and
      (b) the taxpayer elects, in accordance with subsection (10), to have this subsection apply
- it has to be (i) employees are at arm’s length; (ii) common shares; (iii) public company; (iv)


Meaning of "qualifying acquisition"
7.(9) a taxpayer's acquisition of a security … is a qualifying acquisition if
     (a) the acquisition occurs after February 27, 2000;
     (b) the taxpayer would, if this Act were read without reference to subsection (8), be entitled to deduct an amount
          under paragraph 110(1)(d)(common shares at arm’s length) in respect of the acquisition in computing income
     (c) the taxpayer was not, at the time immediately after the agreement was made, a .."specified
          shareholder"(controls more than 10% of voting rights) … of any of
                         i. the particular qualifying person
                        ii. any qualifying person that, at that time, was an employer of the taxpayer and was not
                            dealing at arm's length with the particular qualifying person, and
                       iii. the qualifying person of which the taxpayer had, under the agreement, a right to acquire a
                            security; and
     (d) where the security is a share,
              a. it is listed on a prescribed stock exchange (publicly traded shares)

7 (10) Public Company deferral more restrictive – 100k cap and employee must file election to get it

Election for the purpose of subsection (8)
7(10)
For the purpose of subsection (8), a taxpayer's election to have that subsection apply … is in accordance with this
subsection if
    a) the election is filed,… before January 16 of the year following the year in which the acquisition occurs…
    b) the taxpayer is resident in Canada at the time the acquisition occurs; and
    c) the specified value .. does not exceed the amount by which
                                                                                                                       27
                        (i)      $100,000


- $100k limit from the issuing qualifying person is not cumulative year after year
             o limit is determined by the option price at the time the agreement was made
             o rule introduced in 2000 because there was pressure by high tech industry to prevent the brain drain
- Conditions for this rule applies to any public company that issues stock options to employees
             o Rule generally not meaningful to employees in practise since they tend to sell on same day as exercising
                 the option

SUMMARY:
- If you start from position where a employees gets bonus of $80k to buy the stock and another employee gets $80k benefit
  toward buying stock – should be treated the same
- Special Treatment:
               o $80k benefit is half taxed in certain circumstances under 110
- Timing: because we are dealing with a piece of paper, no cash available, timing difficult
               o Deferral rules allow that benefit to be deferred until the benefit is realized
               o Allowing the employees a lot of control as to when they will pay the tax
Stock Option Benefit
               o Characterisation of the benefit derived by the employee can be tricky
- Employment Income or Capital Gains?
               o Formula – FMV and Time Acquired minus cost employee has paid
- Timing:
               o Used as a means as providing tax subsidy
               o General: Taxable when share is bought
- Nuance – to figure out the cost base of the share s.53 adjustment
s. 7(3)
- (a) to avoid double taxation; make sure that s. 6 applies and not to be applied again.
- (b) the corporation cannot deduct the employee’s stock option as company expense. Policy- you don’t want to
hide the stock option as an expense on the financial statement from buyers.

 SPECIAL DEDUCTIONS: s.110(1)(d)
 Requirements:
- Employee must be at arms length with the employer (only applies actual employees who actually work for the
company)(excludes owner shareholders or those who control the company)
- Must be prescribed shares (are typically common shares)
- stock option price must be equal to the fmv of the stock at that time(ie. actually worth 20,000 at that time
offered by employer)

 Deduction = 1/2 of employee’s benefit
Ie. 80k/2= 40k
 Goes to income s.3(a)

Mechanism to avoid double taxation:
 Cost of share = laid down cost but s.53(i)(j) allows you to add the taxable benefit to the cost of the share
Ie.= jump to 100k in year 2
:. CG tax only paid on the 40K (b/c now140K-100K) rather than 120K(140k-20k) which would double tax the
80K

 Timing Rules For Deferral:
=> CCPC Stock (s.7(1.1) )Deferral
   ~ Stock options for Canadian-Controlled Private Corporations (not traded in stock market) the benefit is
     deemed to be received when the employee disposes of or exchanges the securities (selling time)(not
     when they are acquired)
                                                                                                                         28
    ~   Defferal benefit for employees of CCP.
    ~   Does not change the amount that is the taxable benefit. Still same formula as in s.7(1)(a)

=> Another Deferral benefit S.7(8):
 ~ Not automatic deferral
 ~ Must be a qualifying aquisition-->conditions to be:
      - Occurs after feb 27,2000
      - Taxpayer would be entitled to deduct under s.110(1)(d) (meet 2 conditions)
      - employees must be a specified shareholder (can not own more than 10% of company)
 ~ Must have Election under s.7(10).                For election must be: filed, employee resident in canada
   when acquisition occurs, cannot exceed $100,000 (note: determined by the option price)
 ~ Shares must be publically traded shares


                                              SUMMARY:
=>GENERAL RULE s.7(1)(a)
=>SPECIAL TREATMENT:
 Taxed like a CG in certain circumstances s.110(1)(d)
   Special timing rules rather than general rule: deferred until the share is sold :. Allow the employee some control




DEDUCTIONS FROM EMPLOYMENT- s. 8
P 137
 No deduction to anyone under s.8(2) ie. NOTHING is permitted UNLESS SPECIFICALLY ALLOWED
 s.8(1) PERMISSIVE RULES- in computing the employee’s income from an office or employment...
General deductions:
--> s.8(1)(b) legal expenses incurred to collect salary or wages- if employee is fired by employer and employee
wants to hire a lawyer to sue the former employer- this expense can be deducted.
 s. 8(1)(c)- deals with religions.
--> s.8(1)(d)) teacher's exchange fund contributions (very specific)
 s. 8(1)(e)- railway employees.
--> s.8(1)(f) sales personnel entitled to some extra deductions, if meet 4 conditions:
i.) K must actually say employee must pay his own expenses
ii) Employeee ordinally required to travel in order to carry on the employer's business
iii). Employee renumerated by commission, in whole or in part tied to amount of sales made
iv.) employee not in receipt of a reimbursement under 6(1)(a) or an allowance that is exempted in 6(1)(b)(v.)
(Policy- if no reimbursement or allowance must have equity and :. Not treated as income)
- not many people can claim this deduction. The kind of job must be selling a property in negotiating contract;
the employment contract must require the employee pays his/her own expense; require employee negotiate or
sell homes for business and require to travel; the renumeration package must be based on commission; no
allowances received.

--> s.8(1)(h) travelling expenses for travelling employees deductible if:
i.) Ordinarily required to travel (not occasionally, at least 50% of the time doing the business) to carry duties in
different places
ii). Pay travel expenses out of his own pocket
iii.)must not have received an allowance for traveling expenses that was exempted from tax under s.6(1)(b)
iv). A form T2200 must be signed by the employer regarding these requirements
-->s.6(1)(i) dues and expenses od performing duties: ie Annual professional membership dues
                                                                                                                29
   S.8(13) Home office expenses

Ie. Li travels to attend conferences; 500,00 travel expense; Li paid the money and got reimbursed; Can Li be
taxable under s. 6(1)(a); the travel is NOT for the purpose of personal expense- NO!!! not tax under s. 6(1)(a).
In another case, Li got allowance; under s. 6(1)(b) not taxable; in another case, no reimbursement of 500.00; can
you deduct? Must be ORDINARILY required by Osgoode to travel.

                                               HOME OFFICE RULES
Work space in home
 8.(13) Notwithstanding paragraphs 8(1)(f) and 8(1)(i),
   (a) no amount is deductible … in respect of any part …of a self-contained domestic establishment in which the
        individual resides, except to the extent that the work space is either
        (i) the place where the individual principally performs the duties of the office or employment, or
        (ii) used exclusively during the period in respect of which the amount relates for the purpose of earning
             income from …and used on a regular basis for meeting clients


                            SUMMARY OF INCOME FROM EMPLOYMENT
                                     INCLUSIONS S.5, 6, 7
                                      DEDUCTIONS S.8
                             ORDINARY EMPLOYEES CAN NOT DEDUCT
                                                                                                                               30
                      INCOME FROM BUSINESS/ PROPERTY: PROFIT
Introduction
- in s. 3, in computing income, the income must come from a source- business or property.
S.9 general rule
S.10 general rules
S.11
S.12-17 Inclusion rules
S.18-37 deductions

   S.9 (1) subject to this part, a taxpayer's income for a taxation year from a biz or property is the taxpayer's
    profit from that biz or prop for the year
   What is "profit" ? Revenue inclusion – deduction= profit (net concept).

                                                      Canderel 1998
Facts: Canderel (commercial real estate developer) owned and rents apt buildings. When market was soft he couldn't rent
to all units, so gave tenant induced profits (tip) (sum of money paid) to his tenants. 4m in 1986.
Issue: What is the profit for the taxpayer?

Canderel tip treated in 1 of 3 ways under GAAP, either:
1.) current deduction in full (deduct as an operating expense in the year it was paid) - The more deduction up front the
better. #1 is the best! Immediate benefits!!
2.) add to cost of rental building and depreciation (treat as capital expenditure and add to the cost of the building) - the
worst option
3.) amortization (deducted in chunks over the life of the relevant lease)- the whole portion of the tips is distributed
throughout the lease. Ie. The lease is 10 years; 1/10 of the lease is deducted each year for 10-year period.
Held unanimously: the payments gave rise to significant immediate benefits to the general business of the taxpayer and
matching was not a rule of law just an interpretative aid. Taxpayer was allowed to deduct the tip in calculating their
profit their profit for the year b/c resulted in a "an accurate picture of profit"

   To what respect should tax law follow accounting principles (gaap)?

The framework coming from Canderel:

 CANDEREL :SIX PART INTERPRETATIVE FRAMEWORK (p143):
(1) The determination of profit is a question of law. Court has discretion to determine meaning of “profit”; it
has a rule different from that from financial accounting rules.
- Judges Have The Final Say
(2) the profit of a biz for a tax year is to be determined by setting against the revenues from the biz for that year
the expense incurred in earning said income
- Profit Is A Net Concept ie revenue minus expense equal profit.
(3) in seeking to ascertain profit, the goal is to obtain an accurate picture of profit for that given year. In this
case, compare the two methods and which will give an accurate picture? What are the commercial benefits
flowing to Canderel? Immediate benefits or deducted throughout the term of the lease? In the absence of any
provision in ITA, the taxpayer is free to choose any methods available to compute profit and the onus is shifted
to the CCRA to prove why the method used is inaccurate.
- Accurate Picture Of Profit Requirement
- taxpayer's method is assumed to be accurate. Onus on the CCRA to show that the tax[payer's method is not
the most accurate or "truer picture". It is NOT to maximize/minimize profits but to give an accurate pic.
(4) in ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with (a) the
provisions of the ITA (b) established case law principles or "rules of law"; (c) well-accepted biz principles
- Freedom Of Choice Within Constraints
(5) Well accepted biz principles (usually different from caselaw in Income Tax law), which include but are not
limited to GAAP, are not rules of law, but merely interpretative aids.
                                                                                                                             31
- role of well accepted biz principles and GAAP
(6) Reassessment- onus on taxpayer first to show prima facie an accurate picture of income for the year, which
is consistent with the Act, caselaw and accepted biz principles, then the onus shifts to the Minister to show that
either, does not provide an accurate picture or another more accurate method of computation would provide a
more accurate picture.

Primary objective- to obtain the most accurate picture of profit

An issue related to damages is TIP (tenant inducement payments). In Canderel, TIPs were deductible in full in the year of
payment by the landlord. There were 2 cases that were heard along with Canderel and Ikea Ltd. v. R. (p.178) is one of
those cases.
Facts: In Ikea, Ikea receives TIP. Ikea being a huge tenant and landlords wanting to have a tenant like Ikea, the landlord
guaranteed a source of income, TIP. So Ikea got a huge payment of TIP from the landlord.
Issue: Is that receipt an income or capital?
Ikea’s argument: They argued that it’s capital. They didn’t ask for it, it just came to them. It’s like a windfall.
Decision: TIP is actually income. What really happened in economic terms is that Ikea’s rent is reduced by the receipt of
the TIPs.

Issue 2: When the income should be included?
Ikea’s argument: The income should be spread throughout the lease term. They shouldn’t be required to include TIPs in
the year of receipt b/c their lease term lasts more than 1 year. They should be amortized the inclusion of TIPs over several
years in small chunks.
Decision: You remember in Canderel, Canderel said that TIPs are fully deductible in the year of payment. Here the court
basically says the same thing that the income has to be included in the year of receipt. So there is some kind of matching or
identical treatment of a payer and a payee in this particular situation. Li thinks that it might be hard for the court to go the
other way around when it comes to income inclusion.
Reasoning: So in analyzing whether TIPs is in the nature of income, the court looked at what the payment is replacing. The
court concluded TIPs are replacing future rental payments. And rental payments are current expenses for Ikea. So damages
or reimbursement of current expenses are treated as income b/c when you calculate profit, you get the same result. The
compensation for current expenses are income and the expenses are fully deductible.


COMPUTATION OF PROFIT
ie. X has a store
May yr 1 cost of goods = 1000 for the purpose of resell.
Dec Yr 1 goods sold = 3000
Jan yr 2 3000 received
Year       Cash-                                                   Accural
1          revenue=0                                               D= 1000
           Deductions= bought items for 1000                       R= 3000
           Loss-revenue- deductions = -1000=0                      P= 2000
2          Revenue= 3000                                           R=0
           D=0                                                     D=0
           Profit=3000                                             P=0


(A) CASH METHOD
 All income actually received in the accounting priod are recognized for that period and all expenses actually
    paid in the accounting period are recognized for that period
 Not generally used, only in certain circumstances: like in employment income in s.5/s.6 that stipulates
    "when received", and property income s.12(1)- dividends, rights, interests; and under s. 28-
    farmers/fisherman (seasonal)

(B) ACCRUAL METHOD (the General method)
 Common method
                                                                                                                    32
   Codified in 12(1)(b)
   Not recognized until earned or becomes receivable not received and when it is payable or incurred( even if
    the have not been paid)
   More accurate depiction



                       INCOME FROM BIZ OR PROP: INCLUSIONS
SEPERATE SOURCES
 S.3(a) requires that a taxpayer include in his income from business or property when computing income
     for a tax year
 S.9 income from biz or prop is the profit therefrom but TWO DIFFERENT sources of income.
 You can write off business expense from property as source of income and vice versa. You have to compute
     profit from these two difference sources of income.
 Two Separate Sources: 1. Business, 2. Property
 generally governed by the same computation rules
 A couple differential treatments of these two sources (3 in total):
1. attribution rules (anti avoidance rules) of 74.1 74.2 apply to income from property not biz. Income earned
from one taxpayer is attributed to another taxpayer. Only income from property is subject to attribution rule.
2. small business deductions- only available to business income NOT property income. Policy- only small
business income creates jobs. Therefore, small business deductions is considered business income.
3. timing-
ie. non resident who carried on a biz in canada is liable to pay part 1 on his biz income, but not if he received
income from property. If non resident received various classes of income from property taxpayer is liable to pay
part XIII tax.
See 164

Idea of source
- in the case of profit ie. Efforts made by a taxpayer and there is some economical gain, but you don’t want to
   pay tax, how can you argue re source? Say 1. windfall (I didn’t do anything to earn it); 2. not a result of a
   business enterprise (Not business income)  if the money is gained from having sold the property,
   CAPITAL GAIN; 3. capital receipt- NOT taxable.
- In the case of a loss ie. How can you argue that I really have a loss? It is not windfall; it is really a business
   loss/property loss pursuant to s. 3(d) you can deduct this from the source of income. S. (d) will recognize the
   loss when it come from a business or property.

WHAT IS A "BUSINESS"?
 S.248(1) Business includes a profession, calling, trade, manufacture or undertaking of any kind whatever
    and... An adventure or concern in the nature of trade but does not include an office or employment
- merely inclusive definition
 Must also interpret the ordinary meaning of the word according to the facts presented.
 Caselaw says: must have a "PURSUIT OF PROFIT"
- pursuit of profit test set forth in Stewart
(Note:B/f Stewart: need reasonable expectation of profit)
- NEED: intention to profit, pure commercial ventures are in pursuit of profit and no need to look at the result,
must distinguish btwn commercial ventures and personal activities.

   If loss has a source like a biz then may be able to deduct in s.3(d)
   Profit Is A Net Concept. Profit = Revenue (Inclusions) - Deductions
                                                                                                                             33
WHAT IS PROPERTY? Distinguish what is business and property as a source of income.
 S.248 (1) Means property of any kind whatever whether real or personal or corporeal or incorporealand,
  without restricting the generality of the foregoing, includes: (a) a right of any kind whatever, a share or a
  chose in action, (b) unless a contrary intention is evident, money...
 normally clear what property is for income purposes
 ie if you own a house, and rent to someone  the rent is property income.
 If you have a bank account  interest is the property income. But for the bank it is a business income.
 If you have stocks and get paid the dividends  property income.

                                                             Stewart
Facts: Stewart (real estate investor + good income) purchased 4 condo units and paid 1,000 for each unit, borrowed almost
100% for that purchase and there would be losses for the first 10 yrs b/c interest well exceeded his revenue/rental income
but after the 10yrs there would be a large CG ( S can collect rent after and is considered as property income). He sheltered
some other employment income from tax. Motivation was to earn CGs at end of ten yrs. No personal element to these
properties: units all rented to arms length parties and no evidence that the taxpayer intended to make use of any properties
for his personal benefit. He wanted to deduct interest + depreciation. Tax attraction- loss from the rent (s. 3(d)); the value
of the units will go up- capital gain (only 50% will be taxable); in this case, the interest loss >> rent so he suffered a loss
but at the same time the value of the property is going high (you don’t pay CP tax until you sell the house). S argued it is a
property source bc he has his own job and not in a business of managing properties.
See p 170
Revenue Canada Tax Court:
     used the reasonable expectation of profit (REOP test) test as a source test to deny the recognition of tax shelter losses
     on the grounds that these losses were not a business or property source and thus were not deductible under s.3(d). if
     you don’t have any reasonable expectation of profit, you cant deduct the loss from a source of business/property
     income.
 Lost, not deductible- there are brochures saying that there would be a 10 year negative cash flow.
 Relied Historically on : Muldan:(1977)embraces reop:
- raising horses and race horses
- Held: Need reasonable expectation of profit to determine that there was a source and in turn deductible

Federal Court of Appeal:
 Lost
Applied to leave to the SCC and pursuaded the court that the issue was of national importance
SCC:
 After Stewart trial and Cof A cases: NO more reasonable expectation of profit test used.
 Pursuit of Profit test- the predominant intention of the taxpayer is to pursue a profit then the test is satisfied the
    expense is deductible. Commercial ventures are presumed to have profits. In this case, S invested the units; he didn’t
    live in any of the units purchased (no personal consumption involved); and it is commercial ventures. In commercial
    venture, you could have a profit or a loss, then the profit/loss can be included.
Ludco (2002)
Held: the deductibility of interest expense under s.20(1)(c) allowed.
- The investment was "profitable" to the taxpayer b/c of the favourable treatment of capital gains from the disposition of
shares
- Income means grossing point. Further, primary purpose does not need to be to earn income. Secondary
    purpose is sufficient: to earn small dividend
 Used Ludco
 Redefines reop role: If an activity has no personal element and is clearly commercial, no further inquiry is
    necessary and reop has no role.


BIZ OR PROPERTY VS. PERSONAL ENDEAVOURS
 Pure personal expenses are not deductible (hobbies, rental properties with personal elements purposes, and
   some gambling if hobby only and not systematic to be a commercial activity)
 Hobbie farmers, dog breeders - all personal endeavours and :. Not deductible
                                                                                                                   34
BIZ VS. CGS
 Note: Only an issue when there is a sale of property
 CGS are taxed favourably
 Ask was the bought as "an adventure in the nature of trade?" If yes then biz profit

PROPERTY V. CG
 If property is tangible or intangible then usually let others use it and get returns on it via royalties or rent or
  interest/dividends
 If sell property for a gain or loss then s.9(3): tells us income from property does not include CGs from the
  disposition of property
 Income from property is fully included in income, while CGs are only 50% included in income.

BIZ VS. EMPLOYMENT
 Contract for services- income from biz
 Contract of services- income from employment

BIZ VS. PROPERTY
 Distinction is relevant when property is involved in the biz
 Test Is: How Much Energy You Spend On It (Level- Of Activity- Test) and the extent of services provided
   by the property owner?
 Ie. employ many people occupied in managing apartment buildings then probably in the nature of biz
   income
 Ie. Rent from apartment buiding prima facie property but if ina dditions services provided of various kinds
   of services that are beyond the ordinary ie. Laundry service, restaurant is biz.


INCOME FROM BIZ
(A)     INCOME RECEIPT VS. CAPITAL RECEIPTS
 In computing profit only a receipt of income is included.
 Distinction important for damage payments, property and other unusual receipts
 Damages- punitive damages (no source), payment for stealing goodwill is payment on a capital account
 Tenant Inducement Payments (tip) see s.12(1)(x) requires that all receipts in the nature of
    reimbursements or inducements, in respect of the acquisition of an asset or the incurring of a deductible
    expense, be included in income unless the amount has already reduced the cost of the property or the
    amount of the expense
 Payments under NCA is capital not income.

                                                          Ikea
Facts: got tips (tenant compensation case)
Ikea Claims it is a windfall and it is a capital receipt.
Court says tips is a income receipt. (court looked at what payment was replacing?, ie. was replacing future
rental payments)
 Further, income must be identified in the year of receipt

(B.)     TIMING
 REALIZATION PRINCIPLE: an amount is not realized as income until it obtains the "quality of income"
 Purely caselaw principle
 Test for whether an amount received by a taxpayer has this quality: Is the taxpayer's right to it absolute
     and under no restrictions, contractual or otherwise, as to its disposition, use or enjoyment? Ie if the
     taxpayer is subject to the use/possession/enjoyment of the income, then it is NOT income to the taxpayer
     and should not be included in the income section.
                                                                                                                             35
     When amount received or realized that has quality of income, they are taxable in the year received, subject
      to any contrary provision of the Act or other rule of law.
     Amounts received or receivable are included


(C)       AMOUNTS RECEIVABLE

Income inclusions
  12.(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or
property such of the following amounts as are applicable

Amounts receivable – only applies to income from business
S12(1)(b)
any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in
the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless the method
adopted by the taxpayer for computing income … does not require the taxpayer to include any amount receivable in
computing the taxpayer's income … unless it has been received in the year,// … an amount shall be deemed to have
become receivable in respect of services rendered in the course of a business on the day that is the earlier of

          -   codification of the accrual method
          -   so, business income is subject to accrual method of accounting
          -   cash method okay only if allowed – farmers, fishermen
          -   So what makes something receivable? Case Law

 s.12(1)(b)
#1). codifies the accrual method of accounting in respect of property sold or services rendered in the course of a
business (business income-ie property sold or services rendered in the course of your business), the only
exception being taxpayers permitted to utilize the cash method for tax purposes (to ensure other parts of the Act
that allow cash method is still valid).

#2).contains a deeming rule in respect of services rendered: an amount for services rendered is deemed to
become receivable on the earlier of the day on which the account was rendered (date of billing- when the
bill/invoice is sent out) and the day on which it would have been rendered had there been no "undue delay ("no
undue delay" date- sometimes taxpayers don’t want to send the bill bc of too much profit so to postpone bill
date)

     No statutory definition for receivable
     case law meaning: RECEIVABLE = Time When Taxpayer Has Obtained A Clear Legal, Yet Not
      Necessarily An Immediate, Right To Receive It (from Colford case)

                                                           Colford
Facts: construction company; payments are made based on progress.
Issue: When is the holdback (amt not paid to construction company until the project is completed and until it is satisfied)
receivable in order to recognize as income? Should C be required to include the holdback amt receivable?
Court: Holdbacks not receivable b/c at private law the contractor had no legal right to the holdback until the certificates in
question were issued by the architect or engineer (not legal right yet).
 When clearly legally entitled to receive the holdback is when receivable
 Ie arbitration, tort award, court award, expropriation- it is receivable when the amt is fixed/ascertainable.
 You need to look at the right to be paid, and the amt to be paid (not dispute over the amt) to determine amt
    receivable.

=> WHEN SALE PRICE FOR PROPERTY FROM BUSINESS BECOMES RECEIVABLE? Usually
when there is a change in title. When the bundle of rights is transferred, then it is receivable.
several options:
                                                                                                                              36
#1) when K is completed,or #2)when title is passed to the purchaser or,
#3)when property is delivered, #4)billing, #5) payment

-   In the sale of goods the sale price becomes receivable at the time of delivery

   Generally caselaw: SERVICES fees are receivable when service is performed (legal clear right) BUT
    also have s.12(1)(b): deeming rule: deemed to become receivable on the earlier of the date of billing and
    "no undue delay" date
   There are 3 rules- general rule: accrual method; s. 12(1)(b); and s. 34 for professionals.

          West Kootenay Power and Light Company Ltd.- electricity is sale of property, NOT services

Is the supply of selling electricity is in the nature of selling properties or providing services? It is considered as
selling of goods (look at GST Act- electricity is selling of goods); the general accrual rule is applied. They
supply the electricity on a on-going basis; they should have no difficulty in calculating the amt of electricity
even though the bill would be sent after a few months- when the business is to sell properties, it is on a monthly
basis; the taxpayer cannot defer the last month’s payment as receivable to the next year. The acct receivable for
the last month should be included. Since the taxpayer will claim all the expenses used to providing the
electricity in the last month, the revenue should also be included.

                           Maritime- telecommunication is selling services, NOT property.
Taxpayer in telephone biz and nature of biz is characterized as a service. Sending bills after a few months.
Rendered services but could not send out bill on the last day of the ending year, so sent it out the next year.
Issue: When is it receivable: in the current year or future year?
Held: Receivable in the current year.
 When taxpayer has obtained the legal and clear right
Taxpayer argued that I Should be able to use the billing date rule under s.12(1)(b)
 S.12(1)(b) deeming rule only applies when services are performed with a discrete contract (separate and
    individually distinct). When there is a continuing/onging services, then s. 12(1)(b) is NOT applicable then use the
    general accrual method.
 Here was when service was rendered (legal clear right obtained)

WORK IN PROGRESS S. 34
s. 34- In computing the income of a taxpayer for a taxation year from a business that is the professional practice of an
accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor, the following rules apply:
    (a) where the taxpayer so elects … there shall not be included any amount in respect of work in progress at the
         end of the year; and
   (b) where the taxpayer has made an election … 34(a) shall apply in computing the taxpayer's income from the
         business for all subsequent taxation years unless the taxpayer … revokes the election (election is valid for all
         subsequent years).
-> work in progress generally represents services that have been partially rendered but have not yet reached a
full finished stage where a taxpayer can bill the client. By-pass the accrual method- the value of work in
progress does not have to be included in this income/excluded from profit calculation. Advantage- current
immediate deduction on the other side.
->Effect: allows deferral until the next year without requiring a deferral of the deduction of expenditures
incurred in the year of performing the work in progress.
->Reasoning: governed by provincial statutes so should help me.

                            Brock- s. 12(1)(b) overrides s. 34 once you sent out a bill to clients.
Lawyer in Kitchener. Has practice of sending out interim statements to clients and says pay within 10 days.
Court: Excluded interim reports from term work in progress definition
b/c here actually rendered a bill that had to be paid by the client and sending out the bill rule(deeming rule) overrides this.
 As soon as you send out a bill it is no longer a work in progress
                                                                                                                      37
AMOUNTS RECEIVED- when you receive the money for service not rendered at the end of the year, it
has to be included for that year as well.
Income inclusions
  12.(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or
property such of the following amounts as are applicable

Services, etc., to be rendered
S12(1)(a)
any amount received … in the course of a business
(i) that is on account of services not rendered or goods not delivered before the end of the year or … may be
regarded as not having been earned in the year or a previous year, or
(ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale;
          - pre-paid goods or services must be included in income
          - under GAAP matching principle - not included until expenses incurred
          - Canderel - Not a rule of law but remains an important accounting principle and generally followed
          Unearned Income Rule
          - X,
                        o Yr 1, received $10k but not earned in Yr 1. Issue- so what happens to year 1?
                        o Yr 3, cost      $9k goods delivered
                        o Revenue = $10k for Yr 1.
        - Under s. 20(1)(m) you can deduct unearned income so you can offset this effect –not partially
          earned income…you can deduct whatever you are included in s. 12(1)(a) under s. 20(1)-
          reasonable amt of reserves- in this case it is 10K (full amt); so the profit for Yr 1 is 0.

INCOME FROM PROPERTY **look at other summaries for extra notes.
12(1)g
 Requires A Taxpayer To Include As Income Any Amount Received That Is Dependent On The Use Of Or
    Production From Property
 Applies to Rent (or lease payments) and Royalties are payments for the use of property and are :. Taxable
    under this para.
 Must distinguish rent and royalties from sale: In general if all teh legal righgts of property ared
    transferred, the transaction constitutes a sale; whereas if less than all rights are transferred, the transaction is
    a lease or license and the paymnets are rents or royalties.
 Even if amount paid as installment of sale price, may still be included under s.12(1)(g) if actually payment
    dependent on the use of or production from that property.
 See example In Pallett: proceeds from the sale of gravel, sand, shale and topsoil were treated as were treated
    as rent or royalties when the purchase price was payable in fixed installments

RE: INTEREST INCLUSIONS
 "S.12(1)(c) Any amount received or receivable by taxpayer in the year (depending on the method regularly
   followed by the taxpayer in computing the taxpayer'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 taxpayer's income
   for a proceeding taxation year.'
 Also Gives taxpayers the choice of reporting interest income by the cash method or the receivable method.
Example :
5 yr term bond of $1000
Bought on Dec 31 yr 1
Simple interest @ 10%
Maturity date dec 30 Yr 6
Interest of $500 received Jan 6th Yr 7
Under cash method: received in year 7, or receivable in year 6

   Too much deferral and distortion and loss of time value of money for gov't by using 12(1)(c) ie. For 5 years
    can defer and postpone of income.
                                                                                                         38
   S.12(4) NOW OVERIDES S.12(1)(C)

   S.12(4): MANDATORY TIMING RULE applies to individuals and it requires that all interest on an
    "investment contract" be reported annually
-->"investment contract" s.12(11) = any debt obligations.
--> anniversary date= day immediatly proceeding the date of issue of the K
 Example: If bond issued in November 1, 2002 would have no interest income to report in 2002. He would
    have to report in 2003 the 12 months accrued to Oct 31, 2003 even if the bond was a compound bond on
    which no interest was received or receivable in 2003. Same obligation to reporrt the 12 months interst
    accrued to oct 31, 2004 /2005,/2006. ($100 included in income each year)

DIVIDENDS
 s.12(1)(j) and s.12(1)(k)
Dividends on the shares of a corporation must be included in income on a cash basis.
 Main policy concern is the minimization of double taxation earned thru corporations
                                                                                                              39
                         INCOME FROM BIZ/PROP: DEDUCTIONS
Income Tax Logic
 Deductions are amounts subtracted in computing profit
      - s. 9- general provisions.
      - s. 18- no deductions are allowed in computing profits
TWO QUESTIONS

(a) Deductability?
(i) Is it:
 Income earning or,
 Non Income Earning (Personal)
(ii) Public Policy

(b) Timing of Deductions see p 200- when? The year it incurred or later year?
 Current expenses- permitted
 Capital - prohibited see middle para p. 200
 Other (tips currently deductable)

GENERAL PRINCIPLES:
(i) Ability to Pay
(ii) Accurate Picture of Profit- puts the onus on the Minister

S.18(1)(a)(h): DEDUCTION LIMITATIONS
 S.18(1)(a): A general limitation: prohibits the deduction of an outlay or expense except to the extent that it
     was made or incurred for income earning purposes from the business or properties (NOT personal expense)
- ie only expenses that are incurred for the business or property purpose (purposive approach NOT
expense as a result approach). If you have a mixed business/personal expense, only the portion to the
business expense can be deducted. In CL, the crt uses “ the predominant purpose” vs. “apportionment
expense”.
 S.18(1)(h) prohibits yet again deductions for personal or living expenses Exception- travel expense for
     business reasons.
 It is a purpose test determined on a case by case basis (don't need to show result
 Can have dual purposes
 (Will discuss later)

S.20(1)(c): DEDUCTIONS PERMITTED
 Imposes a purpose test: Interest is deductible only if the borrowed money is used for the purpose of earning
    income from income from business or property and only if it is a reasonable amount.
 Timing: provides that an interest expense is deductible when the interest is paid or payable
                                                    STEPS:
#1) must Characterize As Interest- (borrowed income and must compensate from the use)
#2) Interest Must Be Paid Or Payable
#3 ) Purpose Test
(Note: B/f Ludco- the purpose test was the principal or predominant purpose test . Now with Ludco- any
purpose is ok as long as reasonable expectation of profit)
 Any purpose- a taxpayer must have a reasonable expectaton of income from the property or biz acquired
    with borrowed money at the time the investment was made (reasonable expectation of income test)
 Income means gross income not net income or profit
#4) Tracing The Use Of The Borrowed Money:
 ~ Uses:
                                                                                                                              40
 (a) eligible use: is an income earning purpose use (Bronfman Trusts Case)
 (b) current vs. original use: the current use rather than the original use of borrowed funds that determines
eligibility for a deduction.
 (c) Direct vs. Indirect Use:
          - It is the direct use that is determinative (confirmed in Bronfman Trust (1987) alot of assets no cash so borrow
from bank to pay beneficiaries and want to deduct the interest. Court says: no can't deduct b/c not for income earning
purposes

                                                      - smarter in Singleton
Borrowed 300 K from his capital account at work, bought house to live with wife. Paid money back to law firm account
and wants to deduct interest.
Court: yes it is deductible: clear that the taxpayer used the borrowed money funds to refinance his capital account and :.
Deductible
Economic realities are irrelevant and taxpayers are entitled to structure their affairs to reduce tax

Guest Speaker: Brian Ludmer
                                                         Ludco ***
Meade moves to Bahamas and continues his bond fund work there.
1976 FAPI Rules eliminate some foreign vehicles, ie. more than 10% held, for tax deferral ans savings such as family
investment corps and trusts.
Ludco invests approx 7.5mill for shares using 6.5 million of borrowed funds from bank. Approx 6 mill of interest paid over
8 yrs of investment. Ludco transfers its shares under s.85 ITA to a subsidiary in return for interest bearing and non-interest
bearing securities.
1983 Revenue Canada announces taht it is going to deny interest deductions (in excess of dividends received ) for
investments in offshore companies notwithstanding lack of legislative amendment.
Issue: Borrowed money for the purpose of earning income. So what does the purpose of earning income mean?
SCC 2001:
Principles
(1). Purpose is a mixed question of fact and law
(2). Need to only show that the taxpayer has a "reasonable expectation of earning income" not an
expectation of reasonable income
 ~ Rejects primary purpose in the absence of sham(= it isn't what it seems: distribution of capital rather than
     earnings) or window dressing (= the token dividend constructed solely with the view to the Ludco decision
 ~ Rejects ranking of purposes and accepts 'dual nature of a common share"
 ~ Don't actually have to receive dividends only reasonably expect to receive dividends.
(3). Income in s.20(1)(c) is gross income not net income
(4). No Economic Realities Test
 ~ Should not use to recharacterize bona fide legal rels, or to alter the interpretation of a clear and
     unambiguous stautory provision.
 ~ Only look to legal formal transactions not his economic reality

(5). The time at which the taxpayer's "purpose" is tested is the time of investment.
 ~ It is the purpose of the investment, notg the borrowing that counts.
(6). ITA does not distinguish btwn domestic and foreign corporations in applying s.20(1)(c)
 ~ Revenue Canada tried to distinguish offshore nature of biz from other investments.
(7). Tracing Replacement Investments for purposes of continued interest deduction need only show
income earning investments equal to the amount of related debt


                                         Duke of Westminister case 1936 H.L.
Principle: Taxpayers have a right to arrange their affairs in any way they like to minimize taxation
 We follow this approach up until today in Canada
                                                                                                                 41
INTEREST DEDUCTIONS:
 S.20(1)(c) allows deductions in addition to 18(1)(a)which prohibits deductions
 Capital expenditures are not deductible under s.18(1)(b) unless allowed to do amortization method for some
    capital expenditures under s.20(1)(a)(b)
 Special rule to allow interest deductions for income incurred for income earning purposes under s.20(1)(c)
 Policy issues:
1. all or nothing rule
2. The premium we give to creative tax planning.

    Interest on money borrowed by taxpayer to earn income from biz or prop is deductible from biz or
     prop income under s.20(1)(c). Provides for deduction of amounts that can reasonably be considered.
 IMPOSES A PURPOSE TEST: Interest Is Deductible Only If The Borrowed Money Is Used For The
     Purpose Of Earning Income From Biz Or Property
- if borrowed money is used to earn exempt income: interest not deductible
- if borrowed money is used to earn CGs, not deductible
-when borrowed funds are used to get property that has the potential to produce both income and capital gains
(dual purpose)...use Ludco test: "whether the taxpayer had a reasonable expectation of earning gross income?"
(No need for a primary, dominant income earning purpose, any reasonable expectation of income from
property.)
 TIMING: Interest expense is deductible when the interest is paid or payable
 S.20(1)(c) could be net or gross income but court in Ludco randomly chooses gross income. But under
     s.9(1) income = profit(net)

INCOME EARNING PURPOSE
 Prior Ludco must have dominant, primary income earning purpose
 After Ludco any reasonable expectation of earning gross income.
 An expense incurred for the purpose of earning income from biz or prop is deductible even if it actually
   results in loss

   DISTINCTION BTWN INCOME EARNING VS. PERSONAL EXPENSES: factors to look to:
        is it deductible under accounting principles?
        is it normally incurred by other taxpayers carrying on similar bizs? :industry standard
        Whether a particular expense would have been incurred if the taxpayer were not engaged in the
          pursuit of biz or property income or whether in absence of activity, the need to incur expense
          would still be there?
        could taxpayer have avoided the expense without affecting gross income?
        whether it is an expense "of the trader" or "of the trade". If incident of the trade-part of the biz
          operation itself, it is an income earning expense.
        whether a particular expense was incurred in order to approach the income-producing circle
          (clothing, childcare, housekeeping, commuting) or was incurred within the circle itself(only the
          latter is deductible as income earning expense)

PERSONAL OR DUAL PURPOSE EXPENSES
 deduction of personal or living expenses is disallowed explicited by s.18(1)(h) and implicitly by s.18(1)(a)
  and s.9
      - s. 9(1)- Income or Loss from a Business/ Property
      - s. 9(3)- Income from Property excludes capital gain; Loss from Property excludes capital loss



                                CHILDCARE: personal and living expenses.
                                                                                                                           42
There is a tax credit for all families to help to cover the cost of childcare. Section 63 explicitly applied to child care
services purchased ‘to enable the taxpayer…to carry on a business’. There are three limitations:
              (a) Only the lower income parent can claim the deduction, therefore the deduction cannot be claimed at all if
                   one parent has no income
              (b) The deduction cannot exceed two-thirds of the ‘earned income’ of the lower income parent
              (c) The deduction cannot exceed $7 000 per child under the age of seven, and $4 000 per child aged 7-16.

                                                            Symes:
FACTS: The issue was childcare: was a partner at a law firm in Toronto (business income), she and her husband
(employee) had two children. Employees cannot deduct anything. She was deducting salaries of childcare expense from
her practice.
Issue: is that allowed. Look at it from two perspectives:
 Social policy issue: in the dark ages, when business men were men, they developed rules of accounting to mens needs.
     They could deduct things that were suited for men but things suited for women were not deductable. After the war
     some women started doing businesses. Does that mean they have to pay childcare? That is a social policy aspect.
     Because of the social policy in late sixties we have s. 63: you can have deduction for childcare to parents, and there is a
     statutory cap. Every taxpayer who has to incure childcare expenses from business or employment. but for Symes
     section 63 was not good enough for her because she spent much more than allowed by the cap ($7,000). So she wants
     to rely on section 9: deduct for business.
 Technical issue: matter of profit computation: 18(1)(a) or (h): a taxpayer is allowed to deduct expenses only to the
     extent for business. Does the law practice need the trade? So on the technical issue the courts struggled because the
     taxpayer said the women's entrance required new rules because old rules were for men, and the court should examine
     whether childcare expense should be deductable. There were two women judges and seven men.
SCC said no deduction because that is personal expense.
 Having kids is a huge personal consumption item. Most women who care about social policy disagree. So should
     that social policy concern be considered in this technical issue? court said it is a good idea to take care of the social
     policy issue and resolve the women problem. but they are not going to do it in this case because there is already section
     63 that takes care of this issue: THEY ARE HIDING BEHIND SECTION 63.
 The court found that the childcare expenses allowed her to practice law, NOT as a result of practicing law.
 If the needs for the childcare is for the trader ie taxpayer, but for the business, then not deductible. The crt rejected this
     test.

 Charter Issue- Section 15 of charter: if women cannot deduct, that puts business women in a disadvantaged
group. She is not going to talk about constitutional argument.
On the section 15 argument: men can deduct their fancy cars and the poor woman has to pay childcare expenses.
The male judges said there are many employed women and they cannot deduct it but this successful lawyer
should be allowed to deduct because 63 allows everyone to deduct to certain extent and that is fair.

   The downside of allowing Symes is it only applies to self-employed people and not employed people.

Social Policy: before, rules made by men for men => enactment of s.63 in late 60’s, allowing deduction for EVERY
taxpayer. It’s a tax expenditure, designed to assist parents with costs of child care and lower the barrier for women in
entering the work force.

Technical Issues: Ct struggled with technical issues such as profit computation (s. 9(1)) -> s. 18(1)(a) &(h) – Court looked
at needs of trade/er and applied principles of accounting profession, where childcare expenses are taken as pl expense => no
deductible.

Charter Issue: tax system does discriminate against women . For the minority of the Ct, composed of the female judges,
the discrimination was of the business women against business men. For the majority, discrimination was of business
women against employed women.

Social Issues: Ct recognized the need of taking into consideration social policy issues into technical solutions, but didn’t
take a stab at them, arguing that s. 63 didn’t leave room for their deductibility as business expenses. To allow full
deductibility as a business expense would undermine the caps and limitation to lower-Income taxpayer of s. 63.
                                                                                                                          43

                                 FOOD AND DRINKS: personal expenses
   Everybody has to drink and food. So traditionally these are the most essential basic consumption items.

                             Scott – Exception to personal expenses (find the said analogy)
 Food and drinks ARE deductable if...
F: The taxpayer was a carrier on foot and he took the TTC, and travelled 150 km every day. He needs to drink
and eat more. He needed 3 extra dollars of water and food. He is self employed. Every package he carried earn
some more and if he stopped running no income.
COURT: The need for the food and drink arose from the income earning circle.
Any food he eats and drinks before delivering packages were personal, but anything after that was for business.
In Symes SCC said we should re-conceptualize so this is the time to do it. But they drew a line: analogy: food
for person BUT fuel for car. The court analogized Scott’s need for extra food and beverages to a courier who
needed more gasoline for his car because of its business use. You need a very similar analogy.
 Problem: floodgates that every personal expense is going to be deductable now. COUNTER by the
     court: If you cannot find an analogy you don't have deduction.
3 TESTS:
1. Is it an intrinsic part of the business?
Prof says there are a lot of situations where you have to spend money: if you go to bay street you have to pay
more money for clothes and that is necessary for the business. But you need to have an anology under Scott.

                   ENTERTAINMENT: Business Expenses subject to s. 67.1 and s. 18(1)(l)
Section 67.1

- This section limits the deductibility of expenses for ‘food or beverages or the enjoyment of entertainment’ to 50 per cent
of the amount actually paid, or 50 percent of the ‘amount in respect thereof that would be reasonable in the circumstances’.
If the amt is not reasonable, only the reasonable amt of the cost will be deducted.
- It has a personal consumption element => in order to avoid difficult evidentiary matters re: allocation of expense,
Parliament decided to allow deduction of ½.

- s. 18(1)(l)- use of recreational facilities and club dues- prohibits the deduction of membership fees in
social and recreational clubs as well as the expenses for the use or maintenance of a yacht, a camp, a
lodge, or a golf course. But outside these specific prohibitions, the principle remains intact. In this case,
Royal trust doesn’t apply.
Royal Trust paid for memberships to exclusive, and expensive clubs for their high ranking employees. They then tried to
deduct the cost of these on their taxes. The Court found that such payments were a normal business practice of trust
companies, and produced business contracts and opportunities for the companies. The Court held that the payments were
made for the purpose of gaining or producing income from the business and were deductible.

                                      COMMUTING- personal expenses
   The nature of the journey to work is dictated by the consumption decision as to where to locate one's home.
   They are expenses that make a taxpayer available for work, buut they are not incurred in the course of
    business
 Traditionally considered personal in nature and not deductible.
                                              Confirmed in Hogg
Judge travelled to and from courthousse in his own car and wanted to deduct car expensers. Said needed
privacy and safety because of the natured of his job.
Held: Commuting expenses are personal expenses and not deductible

                                                Cummings v. MNR
Fact: Anathetist with no office in the hospital and had home office out of necessity. And took 5 trips every day
back and forth to and from and from office to hospital.
Held: Deductible
                                                                                                                         44
Reasoning: Here, income earning circle started at his home office out of need (he needs to have his office since
the hospital didn’t provide him with one) and any movement made after that was considered income earning
expense
- pure commuting expenses is not business expense. However, if you argue that there is a need to have a home
office then you may get exception. Once a taxpayer has traveled from home to the office, any business
related travel from the office, other than the journey home, is incurred in the course of the business and is
a deductible business expense. Thus, the lawyer who travels from his office to the courthouse, and back
again, does incur a deductible expense.
 Note: must establish where the income earning begins.

Housekeeping Expenses- personal expense.
- housekeeping may make the taxpayer available for work, but it is not done in the course of the business or as
part of the income-earning process.
Benson v. MNR
Fact: owned a farm; hired a housekeeper to maintain the house while worked in farm.
Issue: is the housekeeper’s salary deductible as business expense?
Cr: NO. but if the farmer done the housework himself and hired a farm hand to work the farm, the farm hand’s
wages would have been deductible as an expense incurred to earn income from the farming business.

                      S.18(12): HOME OFFICE EXPENSES: applies to only natural person
Definition of Home Office:
 S.18(12)(a): No Home Office deductions unless can meet one of the two conditions:
(1) it is the indiv's principal place of biz (at least 50% of the business activity are done here) or
(2) used exclusively for the purpose of the earning income from biz and used on a regular and continuous
basis for meeting clients, customers or patients of the indiv in respect of biz. (service oriented business).

Vanka case
- doctor made phone calls at home only; considered as a home office. Ie NOT something that a person calls it as
home office but not doing anything to it.
 Where conditions are met there is still a cap under s.18(12)(b): the home office deduction can not be used
    to create a loss or increase in loss.

Example 1:
Yr1    - 15,000 Billed (revenue- billed clients)
       - 12,000 Home Office Expense (internet connection, telephone, mortgage borrowed to buy the house) must be
       reasonable- if you use one of the four rooms for HO, then only claim the expense in that one room.
       - 8,000 Business Expense (salary for assistant, telephone charge applied, travel expenses).

Yr.2     - 100,000 billed.
         - 12,000 Home Office Expense
         - 40,000 Business Expense.

Analysis for Y1: R= 15,000 s. 12(1)(b); D= 12,000 + 8,000= 20,000 s. 9 or s. 18(1)(a); Loss of 5,000. s. 18(12)(b) says that
you CANT have a LOSS. Therefore, the profit without HOE= 15,000 – 8,000= 7,000. Therefore, the max. amt of HOE to
be deductible is 7,000. therefore, your profit for the year would be 0. what about the other 5,000 expense that is not
deducted?
Analysis for Y2- R= 100,000; D= 40,000 + 12,000= 16,000; P >> 0 so s. 18(12)(b) doesn’t kick in. However, because of
s.18(12)(c) and P >> 5,000, therefore P= 100,000- 40,000- 12,000- 5,000= 43,000.
What happens if only 52,000 billed in Yr2? In this way, p= 0 without including the 5,000 from Yr1. However, s. 18(12)(c)
says that the 5,000 can carry over indefinitely.

Example 2:
15K billed for services
20K Mortgage interest, prop tax, utilities
                                                                                                                     45
5K salary to part time assistant
2 K telephone fax
1k Stationary

->Profit s.9(1)= revenue - deductions
Revenue =15K
Deductions s.18(12)(a) =20+5+1+2= 28K
Loss = 13K

But S.18(1)(b) says the maximum amount (ie home office expense) taxpayer can deduct is the amount of
revenue (income from the home office business) which is the 15K.
Deductions can not exceed revenue.
 :. Can normally deduct 8K for business expenses (1k+2K+5K) and the remainder can deduct on home office expenses of
the 28k
Profit = Revenue - Biz Deductions = 15K - 8K= 7K left that is allowed to devote for home office educations
Recomputed Profit= Revenue - Biz deductions - Home office deductions- = 15K - 8k - 7K= 15-15=0 :. no loss.
28-15= 13K could not be deducted in year 1.

   S.18(12)(c)= can carry over the home office expenses that can not be deducted in a particular year (bc of
    s. 18(12)(b)) and will be deductible in a future year if the income from business is sufficient in that year, if
    not can carry it over indefinitely. The amt that is not deducted in this year can carry over to the next taxable
    year. Deduction is NOT denied but postponed.


PUBLIC POLICY- why income earning expenses should not be deductible?
 traditionally the courts would not recognize a benefit accruing to a criminal from his crime. Ie. Illegal act.
  Taxpayer pays damages to other parties due to his bad behavior.
 Significantly changed since SCC decision 65302 B.C. Ltd when said such policy determinations are best
  left to the Parliment.

                               65302 BC Ltd Case- illegal act expense can be deducted
F: Taxpayer intentionally exceeded the production quota for chicken production alloted to it by BC egg
marketing board rather than buying additional quota. Fined 270K. Taxpayer deducted the fine as a current biz
expense.CCRC denied the deduction.
SCC: (5-2) all fines should be deductible if they were incurred for the purpose of earning income
irrespective of public policy considerations, unless in the extreme case where the breach of law is SO
repulsive/egregious (remarkably wrong) that it cannot be deducted. Ie. Pollution damages.
 no express rule in ITA against it. There is clear unambiguous language and :. No need to read into it.
 ITA is based on self assessment. Taxpayer should deduct anything they want.
 If Parliament doesn’t like this kind of deduction, it should have said it in the Act. Court is NOT to change
     the legislature but best left to the Parliament.
 Minority Reasoning: can distinguish btwn 2 groups of fines and penalties:
1. fines and penalties created to have a deterrent effect and 2. Compensatory fines and penalties.
Those within the second group should be deductible and allowed.
Public policy would deny the deduction of deterrent fines but not compensatory fines.
 ~ SCC should be a court not a legislature. "Such public policy determinations are better left to the
     Parliament."
 ~ If so repulsive and so egregious and defy everyone's morality obviously, then those that the damages
     could not be justified as being deducted

Exception- Few rules that prohibit the deductions of expenses on grounds of public policy:
- s.18(1)(t) no deduction of interest and penalties arising out of the Act itself. Ie. Tax to be paid; fine/penalty for
not paying tax; interest for delay payment.
                                                                                                                     46
- s.67.5 prohibits deduction of expenditures made in order to commit certain offence under the Criminal Code
(bribery of members of Parliaments, judges; bribery of officers in Criminal Court; bribery of governmental
officers; the cost of bribery is NOT deductible) or the Corruption of Foreign Public Officials Act (bribery of
foreign public officials).
- s.127(4.1)(b) denies a tax credit deduction of political contributions, if taxpayer acquired a financial benefit
from the contribution.

Exception- REASONABLE REQUIREMENT – quantity of the deduction concerned
S.67:
 Prohibits the deduction of an expense except to the extent that the expense was "reasonable in the
    circumstances." Ie. A pizza bus delivers pizza from Can. To Rome??? Cant have PERSONAL
    CONSUMPTION.
 Applicable to all deductions of income not only biz and prop income.
 Usually used for courts seeking to restrict dual purpose expenses or payments btwn non-arms length
    persons.
 s.67.1(1):more specific : expenses in respect of human consumption of food and beverage and
    entertainment expenses, (usually serve dual purposes- personal & business) can only deduct 50%.
 S.67.1(2): exceptions to sub 1: (a) if there ordinary business is to sell food, beverage or entertainment then
    arbitrary rule does not apply or; (b) those food, beverage and entertainment expenses incurred in order to
    donate it to charities.

TIMING- consider time value of money and tax deferral
A. GENERAL
 two major types: Current Expenses And Capital Expenditures
 Current Expenses- expenses that bring to a biz a value or benefit that is consumed in the year that the
    expense is incurred. Fully deductible. The value of the expense is totally exhausted the current year and
    doesn’t extend to the next taxable year. Ie. Salary, rent.
 Capital Expenditures- expenses that bring to the biz an enduring value or benefit that is not consumed or
    realized in the year that the expense is incurred. Big and long lasting. Ie. Buildings, cars, computers,
    furnitures.
 Running expenses- in btwn. Benefits and values last longer than a year, but are not as enduring in value as
    capital expenditures or are not attached to a partic item. General expense (overhead).
 WHEN EXPENSE IS INCURRED/PAYABLE is the time at which the expense is deductible.
    ~ Incurred only when the taxpayer has a clear legal though not necessarily immediate obligation to pay an
       amount (Guay Ltee v. MNR) ie. Holdback is not payable until the certificate is obtained. Sales of
       goods/rendering services-
    ~ A legal obligation to pay must be absolute obligation, not contingent upon some other events.
       Contingent liability is not a requirement.
Expense- any obligation to pay someone some money.

B. MODIFICATIONS
                             PREPAID EXPENSES- subject to limitations in s. 18(9)
   An expense paid in respect of services or goods to be received in a future year. Ie. Insurance policy for 3
    years, rent for 2 years. Paid before taxpayers receive the benefits. Ie. Tenants pay 3 year rents in year 1.
 under the accrual method of accounting, prepaid expenses are not fully deductible from income in the
    year of payment
-s.18(9) stipulates that (a) certain categories of prepaid expenses must not be deducted in the year of payment
and must be deducted in the years to which they relate. (not exhaustive, must refer to CL).
Stipulated categories:(1) pre- payment for future services (the year after the taxable year), (2) prepayment for
taxes, rent, royalties and (3) paying for future years of insurance.

X- services.
                                                                                                                  47
Y1- payment 10,000
Y2- service rendered.
- s. 18(9)(a)(i)- for the client, prepaid service is NOT deductible in the year that it is paid (cant deduct
10,000 in Y1). The deduction can be made until the service is rendered (Y2).
- another example, if you pay 3 years of rent in advance, you can only deduct Y2 rent in Y2 and Y3 rent in Y3.
You CANT deduct Y2 rent and/or rent Y3 in Y1.

-s.18(9)(b) In that particular future year you can deduct that portion.
The portion of the expense that applies to the current accounting year is recognized as an expnse of that year.
Allocate it to the relevant years.


                                           DEFERRED PAYMENT
  S.20(1)(n) postpones the realization of income when the payment of the purchase price for a property sold
   is deferred to a future year.
Note: Only businesses that sell property are eligible
       ~ Three conditions must be met:
~ sales of property (real or personal, personal use)(inventory)
~ Inventory property (ie. sold in the course of business)
~ Must be income included in income calculation
~ Deferred payment until after end of the year (when part or whole of the purchase price is deferred)

        ~ for non-real property the deferral must be for at least 2 years after the time of sale*
        ~ real property deferrals don’t have to be for at least 2 years*, as long as after the year end.

- the amount of the reserve is the amount that "can be reasonably regarded as a profit from the sale"

For Example:
X is real estate developer; cost= 60,000; sale= 100,000 (to pay 50,000 in Y1, 25,000 in Y2, and 25,000 in Y3).
In Y1, under s. 12(1)(b)  R= 100,000, s.9(1)(b)  60,000, then P= 40,000. Then it is unfair bc the developer
allows deferred payment therefore the 40,000 is NOT fully realized. However, under s. 20(i)(n) allows you to
deduct reserve deduction.
Reasonable Amy= (Profit for the transaction x Deferred Payment)
                         ------------------------------------------------=(25,000 + 25,000) x 40,000= 100,000= 20,000
                                   Total Payment
Therefore, you have 80,000 deduction in Y1 (60,000 + 20,000)
In Y2 then, the reserve must be brought back in the next year s. 12(1)(e).
Note: S. 12(1)(e)(ii): Proceeding year deduction must be included in the revenue of the next year.
Y2, R= 20,000, D= reserve= (40,000 x 25,000)/100,000= 10,000, P= 20,000- 10,000= 10,000.
Y3, R= 10,000 (brought back the reserve s. 12(1)(e), D=0, P= 10,000.

                             YR1                            YR2                           YR3
Revenue
s. 12(1)(b)                  100,000
S. 12(1)(e)                                                 20,000                        10,000

Deduction
s. 9                         60,000
s. 20(1)(n)                  20,000                         10,000                        0

Profit (R-D)                 20,000                         10,000                        10,000
                                                                                                          48
                                        DOUBTFUL DEBT RESERVES
    s. 20(1)(l)- permits a deduction in computing income from a business or property of “a reasonable amt
     as a reserve for…doubtful debts” that have been previously included in computing income or that
     have arisen from loans made in the ordinary course of a money-lending business.
    Doubtful debt- the debt is owing and possible of collection, but that possibility is NOT sufficiently
     certain in the mind of the taxpayer that he wishes to be placed in the disadvantageous position of
     having to pay income tax thereon before that possibility has become more of a certainty.

Example:
YR1
lawyer services rendered
Billed (payable upon receipt)           1000
Costs                                   800 in providing services
Dec 31                                  Bill not paid.
YR 2                                    client went to Jail
YR3                                     client went Bankrupt


General Profit Calculations
s. 12(1)(b) revenue inclusion ---------------- 1000
Deduction s. 9 costs --------------------------- 800
Profit --------------------------------------------- 200

    Now apply s. 20(1)(L)(i): Reserve deduction - A Reasonable Amount In Respect Of A Doubtful Debt (that
     has been included in income this year or a previous year; but other than the debts (ii) applied) “don’t
     consider the profits”.
- there has to be an actual debt

 What is doubtful?
Look at several factors (set out in IT)
-> financial health of debtor
-> length of arrears of debtor
-> length of arrears of debt, etc.
note: the whole amount of the debt could be doubtful ie. In YR1 there is 90% of the small business went
bankrupt, and your client is a small business, then it is predictable that it is doubtful debt.

In our example for YR1 (assuming the whole amt of debt is doubtful)
s. 12(1)(b) income inclusion             1000
s. 20(1)(L)(i)                           -1000 (doubtful debt reduction)
s. 9 costs                                -800
Profit                                    -800 (net loss of 800)

Yr. 2
    s. 12(1)(d) Doubtful Debt Deduction Under S. 20(1)(L) Must Be Included In Income Next Year.

R= s. 12(1)(d)                                   1000
s. 20(1)(L)(i) reserve deduction                 -1000
Profit                                            0

If debt paid in YR2:
- s. 12(1)(d) revenue inclusion    1000
- You get paid 1000 but already accounted for by s. 12(1)(d)
- s. 9 costs = 0
- Profits = 1000
                                                                                                                  49
 Bad Debt rules - debt is never getting paid
 s. 20(1)(p) Final Deduction For Bad Debts That Have No Chance Of Being Paid: It Will Not Be Brought
Back In Next Year As Income Inclusion ( s. 12(1)(b))
- for total of all debts that are bad debts and have been included in taxpayers income for that year or previous
     years
YR3
- R= s. 12(1)(d)                    1000
 -D= s. 20(1)(p)                    -1000 (if you have evidence that the debts will never be paid)
-P                                  0

 If By Chance Paid Years Later:
- S. 12(1)(I) ----Any Bad Debt Deducted Under S. 20(1)(P) That Is Paid Will Be Included In Income For The
Year It Is Paid.


                         UNEARNED INCOME RESERVES (NOT taught in class)
    S.20(1)(m): A Taxpayer May Deduct A Reasonable Amount In Respect Of Goods That Will Be Delivered
     Of Services That Will Be Rendered
- s. 20(1) trumps s. 18 deductions limitations.
- s. 20(1)(m) Income included in s. 12(1)(a) that are unearned are allowed a reserve deduction. What is the
amount? - a reasonable amount for unearned income (the whole amount is reasonable)

Revenue included under s. 12(1)(a) and deducted under s. 20(1)(m).

Yr. 1              Under 12(1)(a)                     Under 20(1)(m)
                   Income= 10000                      Deduction = 10000          Profit=0

In Year 2 - something happens
12(1)(a) doesn't apply

- But 12(1)(e) applies - Anything Deducted Under S. 20(1)(M) Must Be Included As Income In The Next
Year. But deduction in s. 20(1)(m) applies again in this year. So in yr 2 profit equals zero again.
 Reserve deductions always brought back as income in the next year.

Example again:
X situation:
Year 1 received 10000 (unearned)
Year 3 property delivered at cost of 9000
Year 1           s. 12(1)(a) = 10000
                 s. 20(1)(m) = (-10000)
                 Profit        =0

s. 12(1)(a) requires prepaid income to be included in income for that year. (modifies general accounting rules)

s. 20(1)(m) reserve deduction (reasonable amount - for prepaid income all of the income is reasonable deducted)

Year 2

s. 12(1)(e) (reserve deduction income is brought back again)
s. 12(1)(e) = $10000.
s. 20(1)(m) deduction again = (-10000)
Profit = 0

Year 3
1) s. 12(1)(e) revenue inclusion = 10000
                                                                                                                             50
2) s. 12(1)(b) receivable income must be included

s. 248 (28) - But no double inclusion or deduction so just apply one rule 1 or 2. Since 12(1)(e) is more specific we apply
12(1)(e) not 12(1)(b).

Property delivered in Yr. 3 so:
s. 9: cost = 9000 (deduct all reasonable costs

Profit = 10000 - 9000 = 1000.

INVENTORY
 Cost of inventory is clearly deductible in computing profit under s.9(1)
 Definition of inventory: s.248(1): any property the cost at which is relevant in computing profit.
 Inventory= In merchandising or manufacturing biz, there will be assets that have been purchased either for
   immediate resale or for resale after they have been assembled or used in the manufacture of some product.
 Timing is crucial
 Biggest Deduction for some is the “cost of goods sold”
 You can only deduct it when it is SOLD.

    Cost of Goods Sold = Opening Inventory + Purchases During the Year – Closing Inventory

  Opening inventory => inventory at very first day of the year
  Closing inventory => inventory on the last day of the year
  Purchases => purchased during the year
~ Opening inventory of this year is your closing inventory of last year
~ S.10(2) to calculate closing inventory: lk to pieces bought but not sold and the value/cost of it (valuation)
~ 2 important things for closing inventory: 1. Valuation (FMV); 2. Tracing (cost)

Example:

YR1- on Dec. 31                            Closing Inventory                         20,000

YR2 – Jan. 1                               Opening Inventory                         20,000
                                           Cost of Goods Acquired.                   5,000
YR2- Dec. 31                               Closing Inventory                         Cost= 15,000 OR FMV= 18,000
                                                                                     s. 10(1)  CI= 15,000.
                                                                                     Reg. 1801  CI= 18,000.
                                                                                     s. 10(1.01)  CI= 15,000.

                                           Cost of Goods Sold=
                                           OI + CGA - CI


RE: VALUATION of Closing Inventory:
   1. S.10(1) In Computing Income From Biz Which Is Not In The Nature Of The Adventure Of Trade,
      Property Described In An Inventory Shall Be Valued At The End Of The Year At The Lower Of The
      Cost At Which Taxpayer Acquired The Prop Or The Fmv At The End Of The Year Or In A Prescribed
      Manner(Ie. Regulation 18.01). (Can Vary From Year To Year)
   2. Regulation 18.01 (p1964) - Can Use The Fmv if they want
   3. New method (c) MANDATORY FOR ADVENTURES IN TRADE: S.10(1.01) Applies To
      Inventories Of A Biz That Is An Adventure In The Nature Of Trade.(ie. Real estate, speculation
      deals... See chapt 11) Such Inventories Must Be Valued At Cost. (although accounting rules would
                                                                                                                               51
         require the lower of cost or fair market value method is used)at which the taxpayer acquired the
         property.
         - Why s. 18.01- for example, for real estate:Y1, cost= 2m. FMV= 1.2m; YR2 FMV= 0.5m, sale= 0.5m
         - YR1- R= 0, CGS= OI + CGA – CI(FMV)= loss of 0.8m. however, there is only paper loss of (1.2m-
           0.5m). after s. 18,01 is implemented, then there is NO loss.

                                       Friesen v. Canada- reason behind s. 18.01
Bought a large piece of real estate(ie. $2mill) and in yr 2 goes down alot (ie. 1.5 mill) and in yr 3 prop is sold for alot less
(ie. 0.5 mil) Argued this is inventory property
Fmv is 1.5 mill and the cost is 2 million.
Court: Can not use the formula here
 S.10(1) could be used to claim a deduction for an inventory writedown even if the taxpayer owned only one asset in
     inventory (such as a single parcel of land)
 Taxpayers are allowed to choose btwn the lower of cost or fair market value method and the fair market value
     method
Note: S.10(1.01): legislative response to this case to reverse the decision

   S.10(2) notwithstanding sub(1),Opening Inventory For This Year Should Be The Same As Your Closing
    Inventory For Proceeding Year.
   S.10(2.1) Same Valuation Method Has To Be Used Year After Year.

RE : TRACING: 2 Methods:1. LIFO 3. FIFO
 1. LIFO: last in first out. Allocates the oldest costs to closing inventory and the most recent costs to the
   goods sold.
 2. FIFO first in is first out. Assumes that the goods sold were the first goods purchased and allocates the
   most recent costs to closing inventory and the oldest costs to goods sold.
FIFO is the accepted method in Canada for tax purposes.

                                         CAPITAL EXPENDITURES
                                                           Chapter 9

   S.18(1)(b) prohibits the deduction the deduction of CE's except as expressly permitted by this part.
   S.20(1)(a) allows capital cost allowance in recognition of the depreciation of most tangible property. (can
    be amortized over a period of years)
   S.20(1)(b) allows the amortization of costs for intangible property (ie goodwill, software, copyright, patent)

CE DEFINED:
 Not defined in the Act
 No universal definition
 timing is the only difference
 Case law says look to:
(i) Enduring Benefit Test
- Will this asset be useful for a long period of time? If yes, CE
(ii) Recurring Expenditures?
- if have to be replaced frequently then current expenditure not CE.

                                                  Canada Steamship p 266
Taxpayer replaced the floors of the cargo carrying holds in its ships. The expenditures were substantial in relation to the
value of the value of the ships and in relation to the repair experience of previous years. On the other hand, the work
necessitated by normal wear and tear.
Held: Current Expense

                                                     Shabro Investments:
                                                                                                                      52
Held: CE
Insert info p 266.




Note generally: If major improvement likely CE, If just replacing then usually current expense.
But no hard and fast rule

TIMING
 2 methods of calculating:
   (i) straight line method; (ii) declining balance method
 Straight Line Method: the cost of the asset is allocated evenly over the useful life of the asset.
 DECLINING BALANCE METHOD involves applying a uniform rate of depreciation to the unrecovered
   cost of the asset. Normally rate is about twice the straight line method rate. The depreciation charge is
   heaviest in the 1st year of the assets life and declines progressively each year thereafter.
 Only Declining method accepted.

CAPITAL COST ALLOWANCE (CCA)
 S.20(1)(a) Authorizes regulations permitting the deduction from income of "capital cost allowance."
  "Permits the deduction from biz or prop income of: such part of the capital cost to the taxpayer or such
  amount in respect of a the capital cost to the taxpayer of property if any as is allowed by regulation"
 Depreciation = the amount of value lost to the prop over the year.
 Capital cost- the cost to acquire capital costs; ie. A car to drive.
 CCA is used instead of the word depreciation
 Notions of class and UCC
 S.20(1)(a) sends us to Regulation 1100
Regulations:
1100(1)
For the purposes of paragraphs 8(1)(j) and (p) and 20(1) (a) …the following deductions are allowed in computing a
taxpayer's income for each taxation year:
             o (a) subject to ss(2), such amount as he may claim in respect of property of each of the following
                classes in Schedule II not exceeding in respect of property
                      Class 1 – buildings - 4%,
                      Class 2 - …. - 6%
                      Class 3 – 43…
                      Class 44 - ….. - 25%
              o      of the undepreciated capital cost to him as of the end of the taxation year (before making any
                     deduction under this subsection for the taxation year) of property of the class;
Formula
CCA = CCA% x UCC (Undepreciated Capital Cost)

- formula:
CCA = CCA Rate (%) x Undepreciated Capital Cost (UCC) at the end of
       year

   UCC defined in s.13(21): Depreciable property is any property of the taxpayer in respect of which a
    deduction under s.20(1)(a) is allowed  s. 20(1)(a) takes us to the regulations. Look at regulation 1102.
- Can compute at any particular time
- Schedule II
- Formula :
        UCC = (A capital caose+B) - (E+F)
                                                                                                                   53
A = (total capital cost) The total of all amounts each of which is the capital cost to the taxpayer of a depreciable
prop of the class acquired before that time. Ie the capital cost= 20,000k. if you have more than one property in
one class, then add them together in that particular class.

B = Is Recapture required by s.13(1)- requires certain amt of expenditure to be recaptured.

E = (total amount of CCA claimed in previous years) The total depreciation allowed to the taxpayer for property
of the class before that time (in all previous years). TOTAL CCA.

F = (the lesser of (a) P.O.D. Proceeds of Disposition, (b) Capital costs)
The total of all amounts each of which is an amount in respect of a disposition before that time of property... Of
the taxpayer of the class, and is the lesser of o (a) the proceeds of disposition (sale price)of the prop minus any
outlays and expenses to the extent that they were incurred or made by the payer for the purpose of making the
disposition (b) the cost to the taxpayer of the property.

                                                  Key Concepts:

Class
 UCC is computed for each class of property
 Theory is that gains and losses will roughly cancel each other out in the long run

Depreciable Property
 13(21) means any property of the taxpayer in respect which a deduction under para 20(1)(a) is allowed.
 S.20(1)(a) is provided for by the regulations which describes a CCA.
 Regulation 1100(1)permits a taxpayer to deduct a capital cost allowance in respect of property comprised of
    any of the 46 prescribed classes.
 Following types of property are excluded from any of the classes and are NOT considered "depreciable
    property" s.1102(1)(2):
    - para (1)(c) Property that was not acquired for the purpose of gaining or producing income- is it used to
        earn income???
    - para(1)(b )Inventory,(since the cost of inventory is not a capital expenditure) (use cost of goods
        formula) (ie. Car for cardealer- inventory and not deductible) ie. Is the property used to operate the
        business???
    - para (2) Land (b/c, although the cost of land acquired for the purpose of gaining or producing income is
        a capital expenditure, land does not wear out and no deduction for its depreciation) (must apportion
        btwn buildings and land b/c building is a depreciable property
    - Most intangible property is excluded and is therefore not eligible for capital cost allowance deductions.
Instead these expenditures for such qualify as eligible capital expenditures, 3/4 of which may be amortized

Capital cost
 Capital cost = purchase price plus any other taxes and freight charges etc.

P.O.D
 Proceeds of Disposition = Defined in ss.13(21): includes: (useful in computing depreciation)
   ~ The sale price of prop that has been sold
   ~ Compensation for prop unlawfully taken ie. Someone stole my car and I get reimbursed.
   ~ Compensation for prop destroyed of any amount payable under a policy of insurance in respect of loss
      or destruction of property.
   ~ Comp for prop taken under statutory authority or sale price of prop sold to a person by whom notice of
      an intention to take it under statutory authority was given
   ~ Comp for prop injuriously affected
   ~ Anything the taxpayer receives because of the loss of the property.
                                                                                                                                 54

EXAMPLE

UCC = (A+B)- (E+F)
A= Capital cost
B= Recapture
E= total depreciation in previous years
F= Total of lesser of cost and p.o.d.- all amt that equals to the disposition before that time. That time= year of the tax year.
CCA= UCC x rate
Facts:
Yr 1 : cost of car a 20,000
Year 3 : car sold for $10K, car bought

Analysis:
Yr 1: UCC= 20,000
CCA= 20,000x 40% = $8,000- in calculating the profits, take that as a deduction (s. 9).

Yr 2: 20,000 (A) - 8,000 (E) = 12,000
CCA = 12,000 X 40%= $4,800

Yr 3: he bought another taxi for 24,000. however, car A is sold for 10,000.
UCC= 44,000 (A= 20,000+24,000) - (E= 8,000+4,800= 12,800+ F= 10,000)
= 21,200
CCA= 21,200 x 40%= $8,480
** to calculate F, use the lesser of the capital cost (ie. 20,000) and the cost of disposition (ie. 10,000)

Yr 4: still keep in both cars for A keep F b/c second car is not sold on the facts, E add up total deprecaition
UCC= 44,000 - ( 21,120 E= 12,800+ 8,480 + 10,000)
UCC= 44,000 -31,120
CCA= UCC x 40%

THE HALF YEAR RULE
Reg 1100(2)
    1. Timing – “Available for Use”
            a. General Timing Rule – When should the capital cost be added to A
            b. “Available for Use” – property is available for use in the income earning process
            c. Can take advantage by buying a lot of depreciable property at the end of the year
            d. Will increase the UCC and therefore the CCA
            e. If purchased at beginning of year – lose a half year of CCA
    2. Rationale
            a. Since it used to apply to a full year – unfair
            b. Deeming Rule made available to bring rough justice since it is an arbitrary rule
            c. Wording tricky – idea is to ensure only half the cost included in the calculation of UCC
Reg 1100(2)

Where at the end of a taxation year of a taxpayer

a. aggregate of all amounts, each of which is an amount added

(i)      by reason of subparagraph 13(21) (f)(i) [UCC “A” component] of the Act in respect of a property acquired in
   the year or that became available for use by the taxpayer in the year, **when a new cost is added to Item A or

to the undepreciated capital cost to the taxpayer of property of a class (Item A) in Schedule II, other than:          List of
exceptions we will not cover

exceeds

 (c)      the aggregate of all amounts, each of which is an amount deducted
                                                                                                               55
            (i) by virtue of subparagraph 13(21)(f) (iv) or (v) [UCC “F” component] of the
                    Act in respect of property disposed of in the year, or

Formula: Where “New” A >”New” F (whatever you bought in that year is >> whatever you sold in that year) always
look at the first year to see if this rule applies. In our example, YR 3 applies.
the amount that the taxpayer may deduct … under subsection (1) [1100(1) - CCA] … shall be determined as if the
undepreciated capital cost … were reduced by an amount equal to 50 per cent of the amount by which the aggregate
determined under paragraph (a) exceeds the aggregate determined under paragraph (b).

Formula:

Where New A (due to the amount added by a purchase) > New F (due to a deduction in the year) - Reduce UCC by 50 %
of the difference
Applies to the net increase to the UCC

REg. 1100(1)
CCA= % x UCC
UCC – 50% (new A para (a)– new F para (b) in that year)
Example continued:
Yr 1:
actual ucc                                         = 20,000
Notional ucc                                       = actual ucc- 50% of new A - new F
                                                   = 20,000 - (20,000- 0)/2
                                                   = 20,000 – 10,000
UCC                                                = 10,000
CCA                                                = 10,000 x 40% = 4,000

Yr 2:
Note: must have new purchase(a new A) for half yr rule to apply
So here does not apply
:. Use actual UCC                                   = 20,000 - 4000 = 16,000
CCA                                                 = 16,000 x 40% = 6400

Yr 3: New Acquisition: new car costs 24,000 and old car was sold at 10,000.** New A and New F
Actual UCC                                         = 44,000 - (E 10,400 + F 10,000)= 44,000 - 20,400= 23,600
Notional UCC b/c new A amount                      = 23,600 - 50% of (new A 24,000 - new F 10,000)
                                                   = 23,600 - 50% of (14,000)
                                                   = 23,600 - 7,000 = 16,600
CCA                                                = 16,600 x 40%= 6640

Example #2:
YR 1- UCC                                                 = 100
Notional UCC                                              = 100/2= 50
CCA                                                       = 20% x 50= 10
YR2- A                                                    = 100
E                                                         = 10
F (sold the capital for 70)                               = 70
Notional UCC                                              = 20
CCA                                                       = 20 x 20% = 4
However, there is 10 depreciation and and 20 in YR2 (because you sold the capital for 70 from 100). But ITA
only allows you to deduct 14 in total. The next topic deals with this problem- TERMINAL LOSS.

RETIREMENT OF DEPRECIABLE PROPERTY
 Special rules are necessary b/c of guess work that do not reflect the actual decrease in value
 Overestimating or underestimating the CCA
                                                                                                                        56
   Recapture => tax system has allowed too much depreciation deduction and it will recapture
   Terminal Loss =>tax system has allowed too little depreciation deduction

example
Capital cost is100'
Presale UCC is 90

(example a)
Sale price is 80
bought at 100
P.o.d.=80
Presale UCC=90
Tax system allows a deduction b/c capital cost minus pre-sale UCC

20(16) – overrides s18 (1)(a)(b)(h)
Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), where at the end of a taxation year,
     (a) the total of all amounts used to determine A to D in definition "undepreciated capital cost" …exceeds the
         total of all amounts used to determine E to J .. (positive amt/excess amt) and
     (b) the taxpayer no longer owns any property of that class,
in computing the taxpayer's income for the year
     (c) there shall be deducted the amount of the excess determined under paragraph 20(16)(a), and
     (d) no amount shall be deducted for the year under paragraph 20(1)(a) [no CCA deductions – no property to
         depreciate]. NO double deduction!!!
- see if there is a positive UCC and see if there is any assets left. If there is, no terminal loss and calculate the
regular CCA. If there isn’t, use terminal loss and just deduct the amt.
Analysis of example (a)
A= 100
E= 10= assume actual depreciation minus the allowed depreciation in previous years
F= 70= when the determination of the class is FINAL!!
100-80=20= Post sale UCC
Both conditions are met of s.20(16) so... Claim 10 as the terminal loss deduction
However, you cant deduct the original 4 according to s. 20(16)(d). Cant have double deduction.

Example (b)
A= 100
E= 10
F= 95
UCC= -5 What happens when you have negative? Recapture!!

   RECAPTURE S.13(1) when (e + f) exceed (a + b). Must have a negative balance at the end of the
    taxation year and that balance must be included in income therefore.
   note: Recapture will be avoided if there another depreciable prop of the same class costing more than the
    amount of recapture. (ie. Buy another asset)
   After recapture has been recognized under s.13(1), the negative balance must be placed in the UCC account
    rises to zero for the following year. At the year end, if you have negative under normal calculation, you have
    to include that negative value in the next year’s calculation.
Analysis of (b)
YR 2= A=100
E= 10
F= 95
100 - (10+95)
=5
S.13(1) income = recapture of $5

Post sale UCC = YR3= (A+B) - (E-F)
= (100+5) - (10+95)
                                                                                                                         57
=0


Example (c)
P.O.D 108
F= lesser of cost and P.O.D =
100 and 108 so take 108
UCC= (A+B) - (E+F)
    = (100) -(10+100)
    = 100-110
    = -10

POST SALE UCC= 10 b/c of recapture of 10 under s.13(1) of $10

Recaptured depreciation
13(1)
Where… total of the amounts determined for E to J in the definition "undepreciated capital cost" … exceeds the total
of the amounts determined for A to D .. the excess shall be included in computing the taxpayer's income for the year.

(2)      POD 95
         Pre- Sale UCC = 90
13.(1)
         A = 100
         E = 10
         F = 95
UCC = (A + B) – (E + F)
UCC = 100 – (10 + 95) = (5)
So E to F amount exceeds A to D amount by 5
So the 5 dollars is Recapture
S 13(1) Income = 5
Post-Sale UCC = (A 100 + B Recapture 5) – (E 10 + F 95) = 0

- Easy to avoid recapture when running a business is to buy another asset in the same class
- The timing of purchasing the new asset – prior to year-end – important to avoid recapture
-

(3)      POD 108
         Pre-Sale UCC = 90

       A = 100
       E = 10
       F = 100 – lesser of cost and PoD
UCC = 100 – (10 + 100) = (10)
Recapture = 10

** what happens
           i)         A= 100; E= 10; F=90 (sold at the same price); UCC=0
           ii)        A= 100; E=10; F=100; UCC= (10); so in the next year recapture 10.
           iii)       A= 100; E=10; F=108; UCC=(18); however there is CG of 8.

Overview

In YR 2, Capital Cost= A= 100
Included in income
What source of income is it?
- 20(1)(a) governs deduction in computing profit – can be claimed in respect of business assets as well as property income
  (rental income)
- So when a recaptured amount is included, should be characterized as income from business or property
                                                                                                                           58
What about the remaining $8?
It is a CG.
- Because depreciable property is one kind of capital property – when sold for a profit, the profit is included as a CG.

Overview of Profit

s. 3(a) Income, we have:
1) employment s.5
2) office s.5
3) business s.9
4) property.s.9
5) capital gain (under s. 3(b)).
6) other income
- in computing profits, add up all the revenue. From that you subtract deductions (current expenses ie. Rent,
salary, cost of supply; inventory- cost of goods sold; interest under s. 20(1)(c) for the money borrowed for the
purpose of earning income; capital expeditures; terminal loss;
- if we have a +ve profit, then go to s. 3(a)
- if we have –ve profit, then go to s. 3(d).
                                                 CAPITAL GAINS
                                                       CHAPTER 10

   Initially excluded in tax base b/c of source theory
   1972 deduction of one-half of realized CGs in income and to allow one-half of capital losses against those
    gain
   1988 Increased to 3/4
   2000 changed back to 1/2 taxed and taxed preferentially.
   Ie. Security, stock, real estate.
   Why not deductible in full? No truth economic gain.

Example
bought a piece of property at a cost          =100
p.o.d                                         =500
Gain                                          =400
Is the $400 taxable under Capital Gains? It depends.

    A property could have several possible characters for income tax purposes. Distinguish between bus income or CG
      Inventory (profit as income)
                  o 9(1) – 3(a)- I buy and sell the property in the business of trading. Profit from a business source
      Adventure in the Nature of Trade (profit as income)
                  o (Friesen) s9(1) – s3(a)- profit form a business source.
      Capital Gains Investment (profit as CG)
                  o not in business of buying and selling investment
                  o Stewart – losses occurred but CG value went up
                  o CG 3(b)
      Income –Earning (profit as CG)
                  o business or property income stream from that property
                  o CCA – cost is deducted over time (except land)
                  o If sold for a gain, there may be recapture 13(1) – s3(a)
                            Plus there may be CG – s3(b)
      Personal Use Properties (profit as CG)
                  o Furniture, homes, cars, books
                  o If sold for a gain – CG
                  o Taxable under 3(b)
(Note: If property is an employee stock option, employment income under s7)
                                                                                                               59



   S.39(1)(a) =>A CG is a gain except where the gain is otherwise taxed as income under paragraph 3(a).
   Exclude from Capital gains treatment any property the disposition of which give rise to ordinary income.
    (ordinary income being income from employment, biz, property or any other source except taxable capital
    gains ie. Inventory from business) gain= POD – (ACB + selling expense ie. Advertisement)
   If s.3(a) doesn't catch the gain then it is a capital gain under s.39(1)(a) and then a portion of the CG
    will be included in income under s.3(b)- require to include CG as income.
   Go to example: must characterize the gain of $400...
   Considered INCOME if... Inventory s.9(1) and goes to s.3(a) or adventure in the nature of trade s.9(1)
    profit from biz and then taxed under s.3(a)

   CGS usually...investment ie.asset purchases with expectation of profit CGs and taxed under s.3(b); or
    income earning from business or property? It is both ie.rent, royalties, dividends (both. CCA to s.13(1)
    may have recapture and then recapture taxed under s.3(a) as income and the CGS taxed under s.3(b)      If
    used for personal consumption it is Personal Use Property is a capital gain and taxed under 3(b)


 POLICY
Should capital gains be taxed at all?
(a) Equity
 Vertical Equity- the more income you have the more you should be taxed. A buck is a buck is a buck
 Horizontal equity- if earn a dollar from employment income and I earn adollar from CGS we should both
    be taxed or would not be fair.
(b) Neutrality
 diff forms of investment should not be treated differently. ie. Stewart and Ludco cases demonstrate tax
    arbitage to benefit from changing to another form. Ludco- Converted interest income into CGs so the profit
    is oobtained in an unrtaxed form of CG instead of ordinary income
 If we don't tax cgs then there will be alot of tax arbitrage.
 Though not absolute neutrality still b/c taxed preferentially at 50%

(c) Certainty

Should the system taxed preferentially?
 Only one half of CGS are included in income and there is a lifetime exemption (s.110.6) from tax for
   $500,000 of cgs on the disposition of a qualified farm prop and qualified small biz corporation shares.

Inflation issue
 Act does not allow for any adjustments for inflation in computing CGS
 Negative impact of :
 "bunching" effect?
 "lock in " effect- investors are encouraged not to buy and sell

STATUTORY SCHEME s.38, s.39(1)(a), s.40, s.54
 s.38(a) provides that taxable cgs are 50% of capital gains and (b)allowable capital losses are 50% of
   capital losses.
Example: cost=100, p.o.d. = 500 :. Cg is 400 and taxable cg is 200 under s.3(b)(i)(A) Example cost =100,
pod=40:. capital loss is 60 and taxable capital loss is 30.

 WHAT IS A CAPITAL GAIN/ CAPITAL LOSS? =>
s.39(1)(a) CG = G Any gain is a cg unless the gain is otherwise taxed under s.3(a) as income.
                                                                                                                   60
S.39(1)(b) CL= L excludes losses from the dispositions of property from capital losses if the losses are
otherwise treated as losses from a regular source. (Capital loss is a loss other than those otherwise deductible
elsewhere)

   S.40(a)(i) RULES FOR THE COMPUTATION OF GAIN OR LOSS
    ~ have an adjusted cost base(acb) and proceeds of disposition (pod)
    ~ In computing gain = pod - acb + selling expenses
    ~ s.40(1)(a)(i), then s.39(1)(a), then s.38(a), then s.3(b)
    ~ In computing loss = acb - pod + selling expenses

   S.40(1)(a)(ii) RESERVE FOR DEFERRED PAYMENT same as deferred payment for discussed under
    biz and prop

 S.54 - DEFINITIONAL SECTION
 ~ Adjusted Cost Base = With respect to depreciable prop, the acb is the capital cost of the property - ACB
   for CGs; and Capital Cost for CLs: (a) where the property is depreciable property of the taxpayer, the capital
   cost to the taxpayer of the prop as of that time and, (b) in any other case, the cost to the taxpayer of the prop
   adjusted as of that time in accordance with s.53 (mechanical adjustment of ACB).
   - the acb can never be less than nil
 ~ Capital property = includes any depreciable property then you look to s.39(1)(a) to see if it is a property
   that gives rises to a cg or loss. The excluded property is not property. The included prop is capital property
   (a) any depreciable prop of the taxpayer and, (b) any prop any gain or loss from the disposition of which
   would if the prop were disposed of , be a cg or a cl, as the case may be, of the taxpayer

~    Proceeds of Disposition = consist of the gross proceeds realized by the disposition ie. The price received
    from sale, the compensation received on expropriation, the insurance proceeds received on loss/damages of
    the property/destruction of the property and so on.
- Disposition= anything giving rise to a proceeds of disposition (s.248(1) )ie sale, damage, loss reimbursement.
- Property- s. 248
- on exam, determine whether it is property? What is the cost? Is it POD? Then how do we characterize the
  gain? If the profit is the considered as CG, then the property itself is capital property.
-
COMPUTATION OF GAIN OR LOSS
Capital gain calculation – principle residence
X, owned one piece of land
                 2001, cost = 140,000
                 2002, sold for 200,000

a) gain: s.40(1)(a)(i)
          Gain= 60,000
b) s. 40(2)(b)- determine the calculation for PRINCIPLE RESIDENCE.
 the property sold has to be a principle residence, from an individual.
 The acquisition date- if bought it before 1971- fully taxable; after 1971- partially taxable.
FORMULA= A – (A x B)/C –D (in our case, D is neglected).

TIMING
 GENERAL RULE: a cg or loss is not recognized for tax purposes until it has been realized by the
   disposition of the property (lk to when taxpayer becomes legally entitled to the compensation)
   ~ This rule is complemented by s.9(3) which says that income or loss from a prop

   Special Rule for Involuntary Dispositions s.44(2) deems the time at which the pod become receivable to
    be the earliest of : (a) the day the taxpayer agreed to an amount as full compensation for the property lost,
                                                                                                                         61
    destroyed, taken or sold; (b) the day the amount of compensation is finally determined by a court or
    tribunal; (c) where a claim, suit, appeal or other proceeding is not taken before a tribunal or court, the
    day that is 2 yrs following the day of the loss , destruction or taking of the property.
Example: In yr 10 prop stolen. In yr 11 agreement to a price for it. Gain or loss only accounted for in yr 11.

   Justifications for the realization basis: p 314 good b/c solve the liquidity problem for taxpayers in finding
    the cash to pay tax on gains taht have not yet yielded any cash and give taxpayer control over the timing of
    the recognition of the cgs

SPECIAL EVENTS
                             GIFT- s. 69- inter-family transfer- General Rule
   Potential for family members to split income among them, so have s.69
   Many families regarded family as tax unit (economical sense); on the other hand, tax law treats ind. As a
    taxable unit.
Example:
X (transferor) buys prop: 1995 cost=30K
(a) 2001 gift to ANY PERSON (regardless of whether they are related or not) for free? Triggers s. 69(1)(c)- tranferee- ACV
deemed to be at FMV. Transferor- deposit at FMV.
(b) sell of property to related person between cost and FMV ie. 30K- s. 69(1)(b)? Any property disposed to a person at non-
arm’s length- deemed to dispose the property at FMV. What is non-arm’s length? S.250(1)- non arm’s length-
(c) Sell property at market value?
2002 child sells for 70K
:. 40,000 cg on the prop. Who do you tax? Child? Or X?

   S.69(1)(a)(b) Applies To A Taxpayer Who Has Acquired Something, And Has Then Made An Intervivos
    Gift Of Property to anyone(Or Has Made A Non Arms Length Sale For Inadequate Consideration, The
    Donor Is Deemed To Have Received Pod Equal To The Fmv Of The Property. Then, Any Accrued Gains
    Or Losses Must Be Recognized By The Donor Taxpayer At The Time Of Gift.

   S.69(1)(c) The Donee Of The Gift Is Then Deemed To Acquire The Property At Its Fmv.
   Non- arms length s.25(1)(a), s.25(2)(a) =>Related persons are “deemed” to be not at arms length By virtue
    of blood(not cousins), marriage, adoption, common law (inlaws, parents, brother, sister, spouses, kids,
    grandparents, same sex relationship)

Example continued :
In Yr 2001 s.69(1)(b)applies b/c disposes of something to a relation :. Deemed to have sold at fmv
For X :. pod= 50K cost= 30k
gain= 20K;cg = 20K; taxable cg = 10K ends up in s.3(b)

For Child: look to s.69(1)(a) and (c) to apply b/c acquired the prop as gift and donnee deemed to have acquired at fmv
:. Cost at Fmv = 50K
2002: pod= 70K; Cost=50k; capital gain=20K; taxable cg=10K

   This regime seeks to disregard family relations. Look to each taxpayer's property
   Quite neutral
   Donnee never has to pay tax on the gain that was taxed at the time of the gift

example continued part (b)
2001 sell to child for 30K and fmv is 50K though.
2001:
S.69(1)(b)(i): pod=fmv=50k

:. X still taxed cg of 10K b/c 20K in gain
Child acb = 30K
                                                                                                                              62
2002 child sells for 70K:
Child: pod= 70K ;acb = 30K; cg= 40K; Tcg= 20K
Unfair scenario b/c taxed twice: once in father's hands and again in child's hand((implicit double taxation)

Punishment for father selling the prop to child for less than the fmv of prop

Part C: if X charges son more than the fmv (70K)
2001: fmv is 50K
X: pod=70K cg=20K tcg=10K
Child: fmv deemed to be 50K and sell for 70K then cg is 20K and tcg is 10K. :. Double taxation occurs on teh property
    Punishment for purposely hiking up the selling price or under selling the prop to a relative

** if there is a loss, the superficial loss will catch it!!!!


                                                           DEATH
 S.70(5)Deemed Disposition On Death
The following sections try to require the CG accrued during the deceased’s lifetime to be recognized for tax
purposes in the deceased’s last taxation year (the terminal year).
 s. 70(5), and s. 70(6): rules override s. 69.-which dealt with any transfer of property between
    nonarmslength persons, deeming it to be acquired at FMV.

 S. 70(5) Capital Property Of A Deceased Taxpayer:
(a) if the TP dies, the TP shall be deemed to have immediately before death disposed of all Cap Prop and have
received POD equal to the FMV immediately before the death. The terminal tax return will include this CG.
(b) person receives a gift as a result of the death: any person who as a result of the death acquires any of the
deemed disposed property shall be deemed to have acquired it at a cost of its FMV immediately before death.

     (a) explanation: rule is a deeming rule and the property is cap property and the TP is the person who died
         and the value of property is the FMV. The timing is immediately before death.

     Example: If X owns Xco and Xco buys life insurance policy on X’s life (b/c X is main shareholder so his life is crucial
     to Xco.) and then X dies, the payout by insurance will be 1 million dollars. Xco shares will be disposed on death b/c X
     will allocate them eg: in a will. Should Xco’s shares reflect also the 1 million dollar payout?

     Answer: cases say NO! since timing of recognition is immediately before death, Xco’s shares that are being allocated
     do not include the 1 million dollars for tax purposes. Doesn’t make sense: this 1 million dollars is a reality that will be
     paid out, says prof: so new statutory rules deal with this, but we won’t deal with them.

    If a property is depreciable, u have to work with the CCA and the ACB system so we are deeming the
    property we are working with to be non depreciable. (to make it simpler)
EG:
X, property (nondepreciable)
Cost = 10 000
FMV at time of death = 30 000
Gift to child:

So: X, POD = 30 000
So X is deemed to have received 30 000 which is FMV according to s. 70(5)(a).

70(5)(b) explanation:
cost to child is FMV before death so:
X, POD = 30 000,
Child: ACB = FMV = 30 000
                                                                                                                    63
then u can later apply all of the CG rules to calculate TCG etc…
this rule is almost the same as s. 69 so rules for intervivos are v similar to rules for testamentary gifts.




 s. 70(6) Where Transfer Or Distribution To Spouse Or CL Partner:
(a)where the person who will receive the gift is spouse or CL partner who is resident in Canada before death
who falls under 70(5), the following applies: as a consequences of death of TP.
(Opening of rule gives circumstances when the rule applies. S/o falling under s. 70(5) (person who died who is
deemed to have disposed of Cap property) is the person affected by 70(6).)

(b) IF it can be shown that the property is vested indefeasibly in the spouse or CL partner, and they are the only
one that can get the property, then the following rules apply:
 a form needs to be filed with the minister within 36 months saying that the spouse got the property.

(c) then, pgphs 5(a) and (b) do not apply in respect of the property:
 so s. 70(5) is overridden by this section! The FMV transaction rules DO NOT apply if the recipient is a
spouse or CL partner.
THEN,
(d) TP is deemed to have disposed of property and received POD equal to ACB immediately before death on
nondepreciable property (forget about depreciable part b/c we assume nondepreciable property for our
purposes)

 Under 70(6) Therefore, The Proceeds Of Disposition Of Property Gifted To A Spouse Are Deemed ACB =
10 000  the rollover effect- the transfer of property from one person to another person without triggering any
tax consequences.

***so X, POD = ACB = 10 000 (not FMV as in the above rule 70(5) applying to any person).
CG = 0
SO X doesn’t have to pay tax on the economic gains = good result for X for this year!! (b/c recall that really the
value has risen to 30 000)

Spouse ACB = PODX = ACB = 10 000

 there’s rollover to the spouse on a cost basis = transferee acquires the property at the same cost as the
transferor without triggering any immediate CG tax. It’s as if the property jumped from one person to another
without tax implications.

If spouse decides to sell…
Future sale price = 70 000 (assume)
CG = 60 000
At that time of sale, the spouse will pay CG tax. We postpone the taxation and instead of the deceased paying
tax on 20 000 CG, tax will be paid later by the spouse on whatever the CG is when the spouse disposes of the
property.

Why? Policy: partners share resources and there’s no real disposition when s/thing is transferred to a spouse.
The transfer is therefore deemed to rollover and to occur on a cost basis. Inter-spousal testamentary gift is the
term we can use. Attraction is tax deferral on the accrued gains.

TP can elect out of 70(6) testamentary rules. They are just here to help. 70(5) is mandatory.
                                                                                            64
Gift to spouse on death, s.70(6)
X,       building
         cost = 30,000
         1999, fmv = 50,000
         gift to spouse
    Application of s.70(6)
         - gift to spouse (or spousal trust)
         - resident in Canada
         - elect out, s.70(6.2)
    Consequences of s.70(6)
- s.70(5)(a)(b) n/a
         - Rollover under s.70(6)(d)
                    X, transferor, s.70(6)(d)(ii)
                             POD = ACB = 30,000
                             no c.g. or c.l. ; c.g. deferred
              Transferee spouse
                             cost of property = ACB to T'or = 30,000
                             2000, if spouse sells property for 70,000
                             c.g. = 40,000


        SECTION 73: INTER VIVOS GIFT TO “SPOUSE” (same result as when the spouse is dead)
X, building
         cost = 30,000
         1999 fmv = 50,000
         2000, spouse sells for 70,000
    Application of s.73(1)
         - transfer of capital pty
         - transferee is spouse or spouse trust
         - resident in Canada
         - not elected out
    Consequences of s.73
- POD to transferor = ACB of property
- cost to transferee = ACB
- effect is rollover, tax deferral
overrides s.69(1)
                                                                                                                           65
CAPITAL LOSSES- EXAMPLE- POD= 80, ACB= 100; s. 40(1)(b) LOSS= ACB-POD; s. 38(b) allowable
capital loss; and then you put that in to s. 3(b)(ii)- it can only be used in this section and cannot jump into other
category.
 s. 38(b) ACL (allowable CL) = 50% of CL
 s. 39(1)(b) CL = L(xx)
 s. 40(1)(b) L = ACB – POD
 s. 3(b) = TCG –ACL (note that if there are no TCG, u cannot deduct CL from any other sources! So u are
    stuck with a loss if there are no TCG)

   [ludco: loss from property, non capital loss. Deductible under 3(d) as are loss from employment and
    business. Any noncap loss is fully deductible in the year.]

   CL are not deductible unless there is a disposition. Paper losses are losses accrued economically, but if
    TP doesn’t dispose of the property, they cannot be deducted.

                                             C) SUPERFICIAL LOSSES

Eg: X,
Has 100 Xco shares
ACB = 100 (a dollar per share is what he paid)
FMV = 60
May 1, POD = 60
May 15, Purchases another 100 Xco shares. Cost = 60 (thinking maybe the company will get better so he’ll just buy them
again)
Has X realized any loss to be deductible under 3(b). u’d think yes, there was a 40 dollar loss when he sold the shares that he
acquired at 100 dollars.

BUT
s. 40(1)(b) L = 40
CL = 40
So can X deduct the 50% of the loss as ACL?

Example:
                  1) X has a piece of property
                  2) Cost= 100
                  3) May 15, YR2= sold for 90

   s. 54 definitions: SUPERFICIAL LOSS (has to be a loss) means: (A) During The Period 30 Days Before
    And Ends 30 Days After The Disposition, The TP Acquires A Property (so called substituted property) The
    same/Identical To The Particular Property. (This Window Of Time Is Quarantined: Loss Is Superficial!)
    (B) After This Time, The TP Owns Or Has The Right To Acquire The Substituted Property. (still owns it
    after the 30 days)

Has X created a superficial loss per s. 54?
 Look at 30 days before and 30 days after. The new shares are substituted property under the defn’ of
    superficial loss.
Both Pgph a is met. Pgph b: yes, X still owns it.
So X has created a SUPERFICIAL LOSS. X hasn’t really gotten rid of anything!
Under the realization principle, losses should be deductible when they are realized and at the end of the day
there’s no change in X’s economic situation. So X will not be able to recognize this superficial loss.
For the purpose of s. 3(b), this loss is DEEMED to be zero!! So NO loss!!
s. 53(1)(f)- cost base adjustment  automatically applied when there is superficial loss.

                                                B) STOP LOSS RULES
                                                                                                                      66
   s. 40(2) Limitations: this section has modifications to the general rule in 40(1).

   40(2)(g): Various Losses Deemed Nil: a TP’s loss if any from the disposition of property is a superficial
    loss …is nil!
         if a loss is superficial, 40(2)(g) deems it to be zero. you’ll have nothing to deduct. “stop
    loss rule” is the term used. They deny the recognition of the loss in the year it occurs.
   s. 53 (1) Adjustment To Cost Base: addition (increase) to ACB: the only adjustment we will learn to the
    ACB rule: in computing the ACB at any time, there shall be added to the cost to the TP: 53(1)(f) where the
    property is substituted property within the meaning of “superficial loss”, the cost of the substituted property
    !
     so increase the ACB by the cost of the substituted shares.

So New shares ACB = 60 + SL (superficial loss 40)
ACB of new shares is now 100

   This rule makes sense b/c allows us to just ignore the superficial loss. The TP looks like he has done
    nothing.
   The ACB is back to 100 dollars so no loss happened.

Then, if next year shares are sold. POD = 110.
CG = 10
The TP has actually paid 100 dollars so his CG will be 10.
The loss in the previous year was too artificial to be recognized.



                          D) PERSONAL USE PROPERTY LOSS- deemed zero
PUP loss = personal use property loss

Eg:
ACB = 2000
FMV = 1200
Loss = (800)

Eg: u bought school supplies and now it has gone down in value b/c u’ve been using it. Eg: markers have less ink. Should
it be recognized as a loss? If you sold your PR at a loss then you cant claim capital loss because not acquired for the
purpose of earning income.

   s. 54 defn’ PUP (a) includes property owned by the TP that is used primarily for the personal use or
    enjoyment of the TP or for the personal use or enjoyment of (i) the TP (ii) a person related to the TP:

 s. 40(2)(g) stop loss rule: various losses deemed nil:
A TP’s loss if any, from the disposition of a property to the extent that it is a
(i) superficial loss…. (iii)A loss from the disposition of any personal use property of the TP….is nil.
 personal consumption items are personal use property.
 PUP losses are deemed to be nil. These losses are denied.
 Makes sense b/c it reflects personal consumption and personal consumption is the base of income taxation.
     If a loss in value is due to personal consumption then it shouldn’t be deductible.


** SPECIAL ISSUES - PRINCIPAL RESIDENCE
X, house
                                                                                                              67
     May 1, 2000           cost = 140,000
     2002                  sales =200,000     How to tax the 60,000 capital gain?
    s.40(2)(b)
    Amount of Gain Taxable =
                                  AxB
                 gain = A - ------------------- - D
                                      C
A:       gain otherwise computed,                                    60,000
B:       1 + # of yrs ended after purchase as P.R. ,                 4 (2000, 2001, 2002 +1)
C:       # of yrs of ownership ended after acquisition date          3(2000, 2001, 2002)
D:       n/a (special rule tied to LCGE)


                  200,000 - (200,000 x 4/3) = NIL=0
Example 2:
In 2002, I bought a 2nd house , ACB= 200,000. (relocated)
In 2003, POD= 220,000 (the 2nd house). Do I have to pay tax on the gain on the second house?
A= 20,000
B= 1+1 (up to 2002, the first house is considered as PR)
C= 2 (2002, 2003)
CG= 0 ** 1PR each year. Policy- if you have one house at any particular moment and use it as PR, NO GAIN!!!


What if taxpayer bought a new house at the new location at a cost of 50,000 and sold the second house in
November for 60,000 (relocated again)
         - s.40(2)(b) does not apply if the second house is not a "principal residence"
                  only one house can be a "p.r." per year


What if the second house is sold in January 20001 for 60,000?
         Taxation in 2001 under s.40(2)(b):
                  10,000 - (10,000 x 2/2) = Nil
EFFECT of s.40(2)(b)
-    Technically a reduction
-    Effectively an exemption
-    Why not simply exempts gains from PR?
RATIONALE
why giving tax break to home owners?
        tax expenditure
                                                                                                                   68
                  revenue loss over $3 billion each year
        who benefit?
             older homeowners v. new home owners
DEFINITION OF "PRINCIPAL RESIDENCE": S.54
         ~   type of property
         ~   ownership
         ~   ordinarily inhabited
         ~   designation
         ~   one property per "family" (taxpayer, spouse, child under 18 years of age)

  If s/o sells home and gets CG, under s. 39(1)(a) a CG is any gain from the disposition of any property to the
 extent that the gain is not an income gain. So a gain from PUP is taxable. Selling a home is like a PUP gain.
 39(1)(a) catches the gain from PUP dispositions. Most PUP however will decline in value and practically
 the only time u have a PUP gain is when pple sell houses.

     Why not tax PUP gain on principle residence? Encourages RE market and home ownership and other eco
    effects flowing from home ownership: appliances, lawyers fees, decoration… rule facilitates this by not
    taxing PUP gains.

 Prof will give the Main Ideas Of The Rule 40(2)(b) “principle residence” without reading it inside:
1) gains from the sale of principle residence should not be taxable.
2) it must be a residence where the TP lives.
3) there’s a designation process for which residence is principal residence. Doesn’t have to be in Canada.
4) how large is the land included in the principle residence? As long as the land is for enjoyment of the
home, reasonably, then that amt of land will be included in the principle residence. Eg: in country
houses, it could be a large amt of land.
5) s. 40(2)(b) specifically deals with gains from principle residence. Gains from disposition of a property
that is a TP’s principle residence is calculated as follows:

gain = A - (A x B / C)

A = CG under the normal rules, otherwise computed, s. 40(1)(a) POD-ACB
(AxB/C) part is the part not taxable.
(assume TP’s are resident in Canada)

B = 1 + # years of principle residence (# years u owned the house as the principle residence)
(rationale for adding 1 year is if u buy a new house in the same year u sell your old house, you’ll still get the full
exemption for your old house until its sold).

C = # years of ownership jointly or alone

EG: House
1999 ACB = 140 000
2002 POD = 200 000
Tax consequences in 2002?
A = 60 000
B = 1+ 4=5
C=4
(1999, 2000, 2001, 2002 are all years when it was principle residence and owned)
                                                                                                                     69
Gain = 60 000 – (60 000 x 5/4)

(if there was a negative, it would be deemed zero)




                                       INVESTING AND TRADING
                                                  CHAPTER 11
CAPITAL V. INCOME
 distinction relevant only if there’s a sale of property. When a property is sold, how do we tax the gain.
  It’s taxable depending on the nature of the property.
 Examples of different types of property: inventory, investment, prop held in the nature of trade.
 Ie building? How do we distinguish it? if
  i)       Business income- adventure in the nature of trade; speculated transaction (that I think I will gain
           money from it later).
  ii)      Business income- Bought it as my office- depreciated property if I use it for income earning
           purposes.
  iii)     Property income- Rent the property out to earn income- investment assets.
  iv)      Personal income- I am going to live in it – personal use property. You can sell it at a gain (CG); at
           cost; at a loss (deemed to be zero).
  v)       As a real estate developer, it is considered as inventory
 Capital gains taxed favourably in comparison
 If there is a SALE OF A PROPERTY:

- IT COULD BE BUSINESS PROFIT
 (eg: from inventory or nature of trade)
 s. 9(1) includes it in computing profitgo to s. 3(a).
And if there’s a loss from a business source, s. 9(2) says that’s the loss from business and deduct it under 3(d).
= fully deductible or taxable if it’s a business profit/loss

- IT COULD BE A CAPITAL PROPERTY
CGs. 38(a)s. 3(b)
ACLs. 38(b)s. 3(b)
= 50% deductible or taxable if it’s a capital gain or loss

   INVESTING OR TRADING DISTINGUISHED: i.e. P338
      ~ Investing: any profit when sell is a cg
      ~ Personal Use Property: any profit is a cg
      ~ Capital Asset:( ie. Factory, building,) any profit is a cg
      ~ Inventory: any profit income from biz
      ~ Speculation: Any profit is income from a biz. I.e. A lawyer sells gold, which she acquired with a
        view to resale as profit. The property is gold here. - tricky

   When invest you want to usually hold it and typically involves earning income from property.
   When trading it is typically systematic trading (not isolated transaction)
   But have isolated incidents that could be trading or an investment
   Property used for personal consumption or an income producing business asset is characterized as a cg
   Profit on the sale of inventory property or the speculative property is characterized as biz income
                                                                                                                       70

ADVENTURE IN THE NATURE OF TRADE
 Speculative Property is an adventure in the nature of trade
 Loo at s. 248(1), consider ANT is a business.
 is the KEY TEST developed by the court  Predominant Intention At The Time Of Acquiring The
  Property
             If the intention was to resell the prop at a profit then a transaction is an adventure in the nature
       of trade and will be taxed as biz income.
             If the taxpayer's intention was to hold the prop as a source of income (or any purpose other than
       resale) then the transaction is an investment and profit will be taxed as cg
 If primary intention is very clear you go with the primary intention otherwise look to the secondary
  intention
 Look at two words: trade and adventure.




Many Other Factors To Look To: (not conclusive but relevant factor) (not exhaustive list)
Whether property acquired with borrowed funds (shows taxpayer might be a trader – finance transactions)
Period of ownership- ANT has short holdings.
Efforts made to attract purchasers – make property more marketable; ie . did the taxpayer advertise and market the
property?
Skill and experience of the taxpayer – indication of trading; ie. Securities are being traded on weekends.
Relationship of the transaction to the taxpayers ordinary business (a stockbroker selling stocks outside of work, a real
estate agent buying and selling homes)
Nature of the property – whether it yields regular income (typical kinds of properties that are litigated, commodities,
real estate, securities) If not typical investments a signal.
Circumstances of the eventual sale (esp. whether it arose from something unanticipated at the time of purchase)

                                               Regal Heights 1960
Vacant undeveloped land with the intention of building a shopping centre on the site. After some development
work has been done, the plan was abandoned when it discovered that another shopping centre built 2 miles
away:. Sold it for a huge profit
Issue: Profit cg or biz income?
 Primary intention was to build shopping centre and have an asset
 Secondary intention was to sell as profit if primary intention didn't work out.
 Existence of the secondary intention made the enterprise an adventure in the nature of trade
Held: Adventure in the nature of trade and :. Any profit income from biz

NOTE:
 But Several Cases After... Say Secondary Intention Is Irrelevant : Reicher and Hiwako - establish that the
  secondary intention to sell must have existed at the time when the property was acquired and that it must
  have been an "operating motivation" or a "motivating reason" for the acquisition of property. Secondary
  intention does not exist merely b/c the taxpayer contemplates the possibility of resale of the property.
  This would be too strict. The secondary intention doctrine will not be satisfied unless the prospect of resale
  at a profit was an important factor in the decision to acquire the property. See p 342 for more on these
  cases

NATURE OF THE PROPERTY
 When a taxpayer buys and sells a prop which is not for personal use and which will not yield income there is
  the presumption that the taxpayer purchased the prop with the intention of reselling it at a profit.
                                                                                                                 71
                                                  Chapter 12:
                            OTHER INCOME AND DEDUCTIONS
"INCOME"

   Overview of Section 3: requires that taxpayer must compute income for tax purposes.

    ~    S.3(a) Enumerated Sources
        - office employment (subdivision (a); s.5-8)
        - business/ prop (subdivsion( b); s.9-37)
        -Unenumerated sources: very few added as income under caselaw and; subdiv (D).; s.56 NEW STUFF

    ~   S.3(b) Tcg minus ACL (subdiv( c) ; s.38-54)

     ~ Subdivision (E) Statutory deductions
 (i.e. childcare expenses, moving expenses, spouse dependent payments) NEW STUFF
Policy- source as income; balance between the counterpart can deduct it then you have to include it as income;
Deduction- childcare support; usually determined by social policy issue;
SUBDIVISION (D)
p 316 ITA
 S.56 Introduced for certainty. those things that are Also Included In Income:
        ~ (a) pension benefits; unemployment payments
        ~ (b) support of dependent payments included in income by the payee
        ~ (h) benefit, payments out of RRSP included
        ~ (n) scholarships, bursaries included as income
        ~ (o) research grants included as income
        ~ (r) gov't financial assistance
        ~ (u) social assistance welfare payments

SUBDIVISION (E)
P 388
 S.60 may be Included As Deduction:
 (b) payor can deduct Spousal support payments
 (e) CPP , or QPP on self employed earning - contribute to own pension plan
 (i) private payments under RRSP or RRIF
 Subdivision E: Unique Deduction:
 Policy deductions

                                           ~ SPOUSAL SUPPORT
~    Before 1997, all spousal and child support are included as deduction for the payer, and income for
    the payee. In mid- 1990s, after the sign and thibaubdeau case, child support is not included as income
    from source because the separated spouse don’t get benefit from it.
 Example: P and R are divorced P pays 10,000 a year for support payment (spouse + child support), 4000
    solely for child support
 Payee's deduction under s.56(1)(b)?
 Formula: A -(B+C), the amt must be included in the income.
A = total of support amounts paid and received during the year when the payer was living separate and apart.
B = The total of child support amounts that became receivable during the yearafter the commencement day
C = The total of all support amounts included or deducted in a previous year- anything didn’t include from last
year.
 S.56.1 (4) Definition of Child Support Amount - Anything not identified specifically as spousal support is
                                                                                                                           72
     child support
 S.56.1(4) Definition of Support Amount must satisfy the following requirements:
(1) payment must be an "allowance"
(2) payments must be made on a periodic basis
(3) the payer and recipient must be living seperate and apart
(4) the payment must be made under the terms of either a court order or a written agreement.
 Example:
Yr 1
A= 10,000
B= 4,000
C= 0 (b/c yr 1 of payment
Income included under s. 56(1)(b)= 10,000-(4,000+0)
= 6,000

   S.60(b) refers to what the payor must include Same Formula= A - (B+C)
   Example :. R must include 4000 in her income
   Payor will be subject to a higher rate and recipient will have lower rate :. You have a tax subsidy

                                                       Thibaudeau
                                                  challenged s.56(1)(b)
Issue: custodial parent has to include child support in her income and :. discriminates against her b/c money is not for her
but is for her child. Don't link me unfairly with my ex-spouse b/c I have nothing to do with him.
Compared herself with non-divorced parents who don't have to include or in their income and divorced non-custodial
parents don't receive anything so don't have to include in their income
Held: No discrimination under s.15 of Charter and upheld para s.56(1)(b)
 The provision should not be assessed in isolation from s.60(b) which is a matching deduction for the payor spouse.
 SEE p 383 for more info.

NOTE: RESPONSE BY THE GOV'T: took out child support from the deductions inclusions system for
payor and recipient

                                            ~ MOVING EXPENSES
   Moving expenses include travel costs, transportation and storage of household effects, temporary lodging
    and meals, the costs of selling an old residence and legal expenses of buying a new residence.
   S.62 allows a deduction for moving expenses
   The deduction is only allowed if the move was 40 Km or more and was caused by a change in the location
    of the taxpayer's work(biz or employment) (eligible relocation) or a change in university for a student
   The deduction can be taken from income from employment at new location or income from a biz at new
    location or scholarships or research grants at the new location
   S.62(1)(c) Deduction can not exceed their new income
   S.62(1)(d) all reimbursements and allowances received by the taxpayer in respect of those expenses are
    included in computing the taxpayer's income - The full deduction for moving expenses is available only
    for expenses that were not reimbursed by the taxpayer's employer. NOTE: But can deduct the whole
    expense amount (reimbursement or not) if include in income the allowance under s.6(1)(a)(b) and then
    deduct under s.62.
example:
X moved in Aug 02
Moving expense 10K
Employer reimbursed 3K
Salary from new job is 40K
:. include 3,000 in income under s.6(1)(a)(b) and then can deduct full amounts (10K) under 62

                                 ~   CHILD CARE EXPENSES- s. 63(3)- deduction
                                                                                                                           73
(not responsible)
 Deductible by taxpayers who have earned income as defined in s.63(3)
 Must meet purpose test
 There is a cap depending on the age of the child (age 7)
 Only the lower income the two parents can claim child care expense deductions, (so calculate income of
    both parents first under s.3)
 If you have one working and the other one staying home – NOT applicable.
Not any childcare expenses are deductible, they must be incurred to enable parent to be employed or to carry on business,
i.e. if someone just wants to have fund or have parties and just have someone to take care of kids, then childcare expenses
are not deductible. Parents must go out to earn income.
And the childcare expenses are defined statutorily, so you have to look at the definition. And on top of that, there’s
quantitative limitation. Firstly, TP must have eligible child care expense, and then for the purpose of deduction, depending
on the age of the kid, each kid can only get the parent $7,000 childcare expense deduction per year if the child is under age
7. Any older kids from 7-16 has $4,000 per year child care expense. So this is statutory, even if you meet the purpose test,
and you have childcare expense, there’s a statutory cap on the amount of deduction. But it amount has been increased
gradually b/c childcare expenses have been increasing.
Also, only the lower income of the 2 parents can claim childcare expense deduction. And b/w the 2 parents, which one can
claim childcare deduction is dependent on their section 3 income. So you do a calculation of income for both parents and
you compare. If you did incorrect calculation, you have to recalculate it. This is very tricky when both parents earn more or
less the same amount of income. Base on the wording of the law, the conditions are very restrictive, so you really have to
meet the conditions first.
**s. 63(1)- requirement- eligible child; childcare expense; (e) amt of deduction is capped to the lesser of (1) 2/3
of earned income or (ii) annual amt- in s. 63(3), babysitting service, broading school, expense incurred by the
taxpayer- the expense is provided to enable the person to (1) to perform her employment and (2) to earn income
and (3) to do research and (5) to build up a skills for income earning.
Eligible child- child of TP or CL partner; children suffering from disability with NO age limit.
10,000 for disabled child; 7,000 under age of 7; 4,000 between 7- under 16.

POLICY REASONS
2 Predominant Reasons In Each:
 Inclusions In Subdivison (D):
1.) Part Of scheme in providing tax subsidies: technicality issue
Eg. RRSP- Time value of money, othegr costs- Straight forward deductions
2.) Ability To Pay Principle
 Deductions:
1.) i.e. child care expenses- social policy reasons, economic reasons
2.) Encouraging Mobility


                                         PENSION PLANS- s. 56(1), s. 60(e)(i)
                                          CPP- Canada Pension Plan
   Publicly administered; CPP is a huge fund;
   Money paid in called contributions/ premiums. These contributions are deductible by self employed persons
    and employers who pay in. (s.60)
   Public system- managed by gov't
   "Pay-go" system: not individually earmarked: it goes in it goes out immediately to retiree. It depends on
    current money pool; usually have two years of fund constantly there to pay the fund.
   Contribution by TP is deductible under s. 60(b).
   People/retiree who are enjoying the money must consider that as income s. 56(1)(a).
   Under s. 56(1):
   (a) pension; (b) Spousal Support; (h) RRSP;

                                              RRSP (privately managed)
                                                                                                                74
   Individual Account: what you invest is your money
   Any money earned from the RRSP is NOT taxable (s. 149).
   There is a cap for yearly contribution- in 2003, 15,500 or up to 18% o f the income- this contribution is
    deductible under s. 60.
 Must take money out at age 69 Always income under RRSP under s.56(1)(h) in year of withdrawal.
    Deferral is for time value of money.
 Can rollover their RRSP into RIFS at age 69
 Contributions to RRSP are deductible (s.60)
- good b/c you are reducing your tax base and you are deferring tax (time value of money)
 any growth in RRSP is tax free (s.149(1))(o))
 Note: interest borrowed in order to contribute to RRSP are not deductible
 Example: p 369

                                                 CHAPTER 14
                           TAXABLE INCOME FOR INDIVIDUALS
ROADMAP:
S.2(1) Every person resident in Canada must pay tax on their income
Steps:
 Calculate s.3(a) (income from source) and s.3(b)( tcg-acl) subtract s.3(c) (subdiv E deductions)
 Under s. 3(a):
- office, employment, business, property,
- Other incomes: s. 56- statutory source.
Under s. 3(b):
- Capital gain; only 50% of that is taxable – 50 % of Capital losses (allowance capital loss)
- deems to be zero if you get a negative
Under s. 3(c)
- add s. 3(a) and 3(b) together SUBTRACT subdivision (e) deduction- moving expense, childcare expense,
spousal support, pensions
Under s. 3(d)
- all losses from s. 3(a) only for current year. Ie. Stewart, Lud Co.

To calculate tax liability
   1) income from a source.
   2) “net” income under s. 3- net of current year ie. ACL is quarantine only for that year.
   3) Taxable income- s. 2(2): s. 3 income minus losses from previous year.
   4) Tax payable- taxable income x rate
   5) Credits- to be subtracted from 4)
   6) Final tax to be paid.

 Calculate "net income" s.3(d)
= Income net of current year losses
--> non-capital losses under s.3(a) deduct under s.3(d)

   "Taxable Income" s.2(2) = s.3 - Div C deductions (ie. Loss carry s.111, and s.110(1)(b) stock option
    deductions and s.110(6)(2) lifetime capital gain exemption-L.C.G.E. and s.110(1)(f) welfare payments )

 Compute tax payable:
(1) Multiply taxable income by tax rates
(2) deduct tax credits
                                                                                                             75
Yr 1.
Employment                50,000
Interest of bond          15,000
Loss from a business (12,000)
T.c.g.                    5,000
A.c.l.                    (8,000)
Child care expense        1000
s. 3(a)- 50,000 (employment)+ 15,000 (property)
s. 3(b)- (i)- TCG- 5000
s. 3(b)- (ii)- ACL- 8000 – s. 3(b)- deems to be zero if you get a negative.
s. 3(c)- 65,000- 1000= 64,000
s. 3(d)- 64,000- 12,000= 52,000
- this is the net income for s. 3
- distinguish business loss and capital loss- treated differently.
From that, we calculate taxable income?? Taxable income is s. 3 – divisions C deductions. Div. C deductions are
more mechanical;
What kind of deductions? S. 110(1)- (a)- non-capital loss (any amt as desired by TP);

LOSSES
 Acl are not as useful as non capital losses b/c if don't have tcg then your acl is wasted b/c it will be nil
    under s.3(b)
 S.3(d) a loss from an income source such as biz or prop is deductible against income from all other
    sources, including tcgs, derived in the same taxation year.
 Example:
Employment income 20K
Consulting biz 50k
Retail biz loss of 12K
Bond interest 15 k
Tcg 5k
Acl 8K
Moving expense 1K
Solution:
 S.3(a) 20,000 + 50,000 +15,000
= 65,000
 S.3(b) 5000-8000= 0 nil
 S.3(c) 65,000-1,000= 64,000
 S.3(d) 64,000 -12,000 = 52,000 is the s.3 income
Example 2:
Same but change under loss retail biz 100,000 loss
S.3(d)= 64,000-100,000
      = -36,000 = 0 nil
 This is loss carryover

LOSS CARRYOVER
NET CAPITAL LOSSES
 S.3(b)
 Not deductible in the year it was incurred
 Net Capital Loss => A - B
A = S.3(b)(iii) (acl )
B = s.3(b)(i) (tcg)

Example: 8000 - 5000 =3000 is the net capital loss
                                                                                                                     76

   If in the tax year a taxpayer incurs allowable capital losses that exceed the taxpayer's tcgs in that year the
    non deductible excess of the acl and the net capital loss is not deductible in the year that it is incurred
    but may be carried forward indefinitely and carried back three years (see 111(1)(b) below)

NON CAPITAL LOSSES
 S.111(8) (p 857) definition: To calculate a non-capital loss: Non Capital Loss = A = E - F
- a is E – F
E is the total of all amounts each of which is the TP's loss for the year from an office, employment, biz or
property
F amount determined under s.3(c) ** you must have a negative in calculating s. 3(d).

Example: in YR1
s.3(a) =65000
S.3(b) 5,000- (8000)=0 (-3000)Net CL
S.3(c) 65000- 1000= 64000
S.3(d) 64000- 100000(non CL )= 0
S.3(f)=0

E - F = 100,000-64,000= 36,000 non capital loss in 2002

   S.111(1)(a) re: taxable income - Taxpayer Is Allowed To Deduct Non-Capital Losses For 7 Years
    Preceeding The Year You Want To Deduct (Loss Year) And Three Years Forward, From Your Taxable
    Income (ie. 7 yrs proceeding 2002= 1995 and we only want to deduct from 2001)
       ~ Year of deducting the loss 7 yrs back and 3 years forward

YR- 4            you have a loss
YR-11            the end of period where you can deduct the non-capital losses. “7 year forward”
YR -14           if you are doing tax on Year 14, and you have a loss- then you can reopen YR 11 tax return and
deduct the loss.
Example : then in YR 2
2002
S.3(a) 65000
S 3(b) = 0
(c) = 64,000- 0 = 64,000 net income
Taxable income= 64000 - 36000(s. 111(1)(a)- non cap loss) = 28,000 provided that you have a gain in
taxable income for that year (s. 3(d) must have a positive value).
You do the deduction under s. 2(2).
        ~ This allows the taxpayer to allocate the loss as advantageously as possible over the years of highest
           income. But holding on to a non-cap loss in anticipation of future high income involves the rsik that
           income will not materialize b/f the expiry of the 7 yr carry forward period, in which case the loss
           would be wasted.

   Net capital loss carryovers: re: taxable income s.111(1)(b) Net Capital Losses Can Be Carried Back For 3
    Taxation Years And Carried Forward Indefinitely(For The Lifetime Of The Taxpayer) From The Year
What is NET Capitial Loss= (A –B); A= the amt of s. 3(b)(ii)- allowable capital losses; B- s. 3(b)(i)- taxable
capital gain.
Example:
Taxable income under S.2(2)= s.3(a)income - (non cap loss + net capital loss)
Taxable income = 64000 - (36000 + 1000) = 29,000 provided that you must have a CG in that year.
- s. 111(1.1)- if you don’t have any s. 3(b) amt, then you cant deduct the amt. you do the deduction under s.
    2(2).
                                                                                                                   77

s. 110(1)(d)- if you have a benefit under s. 7(1)- then ½ of the income can be deducted under Taxable
income
requirement:
    1) the securities purchased by the TP must be a prescribed share Reg. 6402- common shares.
    2) The rights the amt paid= FMV. When the TP exercises the option, they paid the FMV.
    3) Ie. YR1- option price 10 which is the FMV of the stock at that time; YR 2 FMV= 18; then include s.
        7(1)= 8. However, s. 110(1)(d)- s. 110(1)(d)- minus ½ of the benefit= 4.
LIFETIME CAPITAL GAIN EXEMPTION (LCGE)
 NOT ON EXAM
 S.110.6: limited to 2 kinds of prop:
 1. qualified small biz shares ((QSBS) ie. CCPC Gains qualify as an exemption up to the limit
 2. Qualified farm property (QFP) exemption up to a limit
 LIMIT: $250,000 tcg lifetime quota for each taxpayer

RATES FOR INDIVIDUALS
 Federal rate s.117(2) (p 760)
     ~ (a) 16% of the taxable income if it does not exceed $30,754 0 to 30754
     ~ (b) 22% for 30 755 to 61 509 amount
     ~ (c) 26% for 61 510 to 100,000 amount
     ~ (d) 29% for 100 001 and up (marginal tax rate)
 Graduated Progressive rates for individuals b/c as income rises the tax rate rises as well so that a greater
  proportion of higher income is payable in tax. See p 450 for justifications- EQUITY
 Marginal rate relevant
 Also note all numbers are indexed for inflation each year.
 Also Provincial tax 11% flat rate

Note: Exam will have a single tax rate

         Tax income (after calculated s. 3 income and division C deduction) x Rate = Tax Payable


TAX CREDITS (deduction)
 The very last stage
 Fundamentally personal credits and not from income from employment, office, biz prop
 Important b/c of social policy reasons
 See p.457 Overview Of Tax Credits (non refundable credits) : basic credit amount; the spouse common
  law partner credit, the equivalent to spouse credit; the caregiver credit; credit for dependents over 18; CPP
  Credit; education credit; disability credit
 S.118(1) PERSONAL CREDITS: formula for the purpose of computing tax Payable: A x B

A = the appropriate percentage (s.248(1) definition: the lowest percentage rate ie. 16% referred to in
s.117(2))

B = for married people/common law: (i) + (ii)
       (i) allowed a minimum of $7131 amount (single person amount) – applies to everyone
       (ii) 6055 - (C- 606) deems to be zero if negative.
                 C = Income of spouse
      ~ This provision makes sure the person is totally dependent on you (makes less than $649) and if she
          isn't then not entitled to the credit. Therefore end up with 0 and the basic amount of a single person
          ($7131)
      ~ If I have a spouse who make more than 6,661, then you are equal to a single person. Policy- the
                                                                                                                78
           spouse is totally dependent to spouse.
       ~    Note (credit) $7131 x 16% for not married person

   Refundable Credits: Child Tax Benefit, GST Credit

-s118.62- interest on student loan- credit is available 16% of the interest you have to pay, only applicable to
government loans.
Overview of Deduction:
1. expense and cost – computing income from a source.
2. current year loss – allowable capital loss under s. 3(b); and business loss under s. 3(d);
3. DVC deductions – s. 2(2)
4. Credit – tax payable- after you have applied the rate of the income.
Exam:
 2 Factual question - cite sections, caselaw (just write a couple of words if case law is applicable you think) if
    straight forward just state it)
Keep track of source, year, diff taxpayers

Interpretive qs equality

								
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