Ccpc Corporation Real Estate Investments Canada

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					COURSE OUTLINE

Introduction
a)   Course objectives
b)   Discuss different kinds of taxes
c)   Focus on the tax policy principle of horizontal equity


     Readings:                                                Arthur J. Cockfield, Tax
             Law, in Encyclopedia of Life Support Systems (EOLSS), Developed under the
             Auspices of the UNESCO, Eolss Publishers, Oxford , UK, 2003
             Materials, pp. 1-24, 35-46, 64-72 (skim these readings)


                 1.      Tax Base – What is Income?
a)   General - Source Concept of Income
     Readings:                                                    Materials, pp. 79-97
             ITA, ss. 3, 4
            Section 3(a)
            source concept of income
            Taxable income for the year = net income
            From a source inside or outside Canada - including income from each office,
            employment, business and property
            Other than taxable gain from the disposition of a property
                     Non-exhaustive list
            3(b) - gives authority to tax capital gains

     Haig-Symons definition of income

            Outside Section 3
            Windfall gains
            Gambling gains – provided you are not in the business of gambling
            Gifts and inheritances

     Surrogatum Principle
     Applied to the amounts received as civil damages, or amounts paid in settlement of a
     claim for breach of contract or tort, to determine if the amount received is a surrogate
     for income from a source
             Have to be able to trace the source of income if the income appears to have
             changed
             Ie - I own a Co. and am in contract with a supplier. The supplier breaches
             contract.
             I would have had 100000 profits, had the contract been fulfilled. Then I sue,
             and I receive a settlement. That settlement is taxable, as it is "surrogate" to the
             original expectation of profits


     Case Law

     Bellingham v The Queen (1997, FCA)
              Punitive damages fall within concept of windfall gains
              Expropriation extra interest not a source

              Section 3 test v Winfall
              1 – winfall if no productive source
              2 – non-recurring
              3 – unexpected or unplanned
              4 – brought by bargain or exchange

     The Queen v Cranswick (1982 FCA)
            Rationale for excluding windfall gains from source of income

     Curran v MNR (1959, SCC)
             Broad interpretation of section 3
             $ received as inducement to leave employment = taxable (source =
             employer)
             Similar to Schwartz

              6(3) application
              characterizing income v a capital asset for $ paid to induce person to leave
              employment
              treated by court as payment for services rendered by the appellant
              ESSENCE of contract was for SERVICES

     Canada v Fries (1990, SCC)
            Strike pay does not constitute income
            Benefit of doubt must go to the taxpayer

     Schwartz v the Queen (1996 SCC)
            Application of surrogatum principle
            Specific sections of ITA take precedent over general concepts (apply s56 over
            s3)
            Hard to justify this (Cockfield)
                    Settlement was from bargain (he doesn‟t see this)




b)     Source Concept of Income – Income Splitting
     Readings:                                                  Materials, pp. 111-135
             (don‟t read Romkey case)
             ITA, ss. 56(2), 74.1, 74.2, 74.3, 69(1)(b)


Section 56(2) – indirect receipt rule
A payment or transfer of property made pursuant to the direction of, or with the
concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a
benefit that the taxpayer desired to have conferred on the other person (other than by an
assignment of any portion of a retirement pension pursuant to section 65.1 of the Canada
Pension Plan or a comparable provision of a provincial pension plan as defined in section 3
of that Act or of a prescribed provincial pension plan) shall be included in computing the
taxpayer's income to the extent that it would be if the payment or transfer had been made
to the taxpayer.

Section 56(2) preconditions ( from Neuman)
   1. The payment must be to a person other than the reassessed taxpayer
   2. The allocation must be at the direction or with the occurrence of the reassessed
      taxpayer
   3. The payment must be for the benefit of the reassessed taxpayer or for the benefit of
      another person whom the reassessed taxpayer wished to benefit
   4. The payment would have been included in the reassessed taxpayer's income if it had
      been received by him or her. COURTS have actually read this in to the section -
      it's not actually clear from the language of the ACT

Section 74.1(1) Spouse or common law partner (only property)
Income attribution and capital gain attribution back to the transferor
Attribution of gain or loss continues for the period that the transferor
       a-is resident in Canada
       b-has not been divorced from the transferee
       c-is alive
       d-is cohabitating
Does not arise when there is a payment of fair market consideration
Extends to indirect transfers through trusts
Extended to common law and same sex

(2) to minor
Where an individual has transferred or lent property, directly or indirectly, to or for the
benefit of a person who is under 18 AND who is does not deal with the individual at arms
length any income or loss shall be deemed to be the income of the transferor not the
transferee
       Transferred or lent
       Directly or indirectly
       Under 18
       In close relationship (arms length)

Section 74.2 Gain or loss deemed that of lender or transferor (only property)
(1) Where an individual has lent or transferred property (in this section referred to as "lent
or transferred property"), either directly or indirectly, by means of a trust or by any other
means whatever, to or for the benefit of a person (in this subsection referred to as the
"recipient") who is the individual's spouse or common-law partner or who has since become
the individual's spouse or common-law partner, the following rules apply for the purposes of
computing the income of the individual and the recipient for a taxation year:

Section 74.3 Transfers of loans to a trust(only property)
1) Where an individual has lent or transferred property (in this section referred to as "lent or
transferred property"), either directly or indirectly, by means of a trust or by any other
means whatever, to a trust in which another individual who is at any time a designated
person in respect of the individual is beneficially interested at any time, the following rules
apply:


Section 120(4) "kiddie tax"
      (1)Taxable dividends and shareholder benefits on shares of a corporation that are not
      listed for trade on recognized exchange
      (2)income from a partnership or trust that is derived by provisions of goods and
      services by a person who is related to the minor
      Arose out of the disgust out of Ferrel decision however….
      Q: Why doesn't this also apply to spouses?
       Don‟t know the answer to this
       Much debate here

Section 69(1)(b) – inadequate compensation
If something is gift disposed to another at a value that is less than FMV – the Donor will be
seen to have proceeds of disposition = to FMV

Case Law

Neuman v the Queen (1998 SCC)
     Leading case on income splitting
     Dividend earnings do not fall within 56(2)
     Level of participation of a shareholder no bearing on nature of dividend
     Recognized personhood of corporation
     Saw the corporation as a separate taxable entity
     Neuman was never entitled to the dividend so therefore not splitting

Ferrel v the Queen (1998 TCC)
       Strict interpretation of 56(2)
       Illustrative case

Dunkelman v MNR (1959, Exch)
     Results in the addition of “lent” to the language of s74
     This case no longer applicable as the language changed

Wertman v MNR (1964, Exch)
      Income attributed back to the transferor (even though transfer was before coming to
Canada)
      Scholars like this approach


Definitions
Income Splitting
       The transfer of income from one person to another who is taxed on the income at a
        lower marginal tax rate than that applicable to the transferor
       Usually within an economic group/unit (ei family) so that the benefit is retained
       GENERAL RULE – he who gets the income should be taxed on it
 

4 techniques of income splitting
   1. Direction or payment by a third party to a person other than the taxpayer who
      earned the income
   2. The assignment of a right to income between the two
   3. Transfer of property that generates gain
   4. Low interest or non-interest bearing loans


Indirect Receipt
      Requires a taxpayer to recognize as income those amounts that are not received
      directly but are instead applied for his benefit

       Practice - this is now encompassed within 56(2) so the previous common law
       doctrine is not referred to as the courts simply turn to the statute.
Capital Gain
= Proceeds of disposition (sale price)- adjusted cost base (tax cost)


 Progressive income tax range
Where the income tax rate that you pay, increases as your income increases
This is a social policy scheme that enforces vertical equity


Flat income tax
Where there is one universal tax rate


Transfer
For the purpose of attribution rules is when a person executes the instrument that divests
       him of the property and at the same time vests it in that other person
       Broadly construed does not include loans

Ways to lower tax payout
Gift to minor children of capital assets that will primarily get capital gains
Payment of a reasonable salary to a child or spouse through a family business
In partnerships - high rate buys all the investment assets, the low rates buys the rest




 2.     Liability to Tax – Residence vs. Source-Basis of
                           Taxation
a)    Liability of Residents / Concept of Residence
b)    Part-Time Residence
c)    Liability of Non-Residents

      Readings:                                                    Materials, pp. 149-181
              ITA, s. 2; s. 3; s. 114; s. 248(1) definitions of “person,” “taxation year,”
              “individual,” and “non-resident”; s. 250(1)(a) and s. 250(3)



Section 2(1)
Worldwide income of taxpayer who are resident in Canada in a taxation year
      Reduced effect by part-time residence rules in Section 114
Section 2(3)
Non-resident taxpayers liable to tax only on income from Canadian sources
      Employed
      Carry on a business in Canada
      To dispose of Canadian profit

Section 3(a)
Taxable income for the year = net income
From a source inside or outside Canada - including income from each office,
employment, business and property
Other than taxable gain from the disposition of a property
Section114 Part-time residence
Notwithstanding subsection 2(2), the taxable income for a taxation year of an individual
who is resident in Canada throughout part of the year and non-resident throughout another
part of the year is the amount, if any, by which

s.114 of ITA -- „pro rate tax liability‟

The year at which you become resident or cease to be resident - says that in that year (you
were resident part of the year) we basically tax you under two separate provisions

           o   For part of year resident  taxed as resident = on worldwide income
           o   For part of year non-resident  only taxed on income from Canadian sources

      Big problem is dealing with foreign source income - how we tax this. Not a clear hard
       and fast rule.
    2 Methods in practice:
   1 - Look at dates the income was received (entitled to it) - if earned when non-resident
   then not liable for tax on it. ie. employment income - look at date earned
   2 - If you receive interest - depending on when it is payable, if payable yearly - then
   normally time apportionment on time resident in Canada

Section 250. (1)
For the purposes of this Act, a person shall, subject to subsection 250(2), be deemed to
have been resident in Canada throughout a taxation year if the person
(a) sojourned in Canada in the year for a period of, or periods the total of which is, 183 days
or more;

Section 250(3) Ordinarily Resident
A person who was at the relevant time ordinarily resident in Canada
Widens the scope of residence but does it essentially mean the same thing?

Section 250(4) deemed resident
A corporation is deemed to have been resident in Canada throughout the taxation year if (i)
it was incorporated in Canada -- after April 1965 -- or before 1965 if it was a resident of
Canada or „carrying on business in Canada‟.

Case Law

Thomson v MNR (1946 SCC) – FACTS AND CIRCUMSTANCE TEST OF RESIDENCY
     Resident test defined on facts of each case
     “resident” not a term of invariable static elements
     every person has a residence for a given time (for tax purpose)
     TEST – evaluate the strength of the ties based on facts and circumstances

Dennis M Lee v MNR (1990 TCC)
      Intention or free choice is an essential element in domicile but absent in resident
      Weigh all factors involved
      Factors to weigh are set out on 157

R&L Food Distributors v MNR (1977 TRB)
     Application of 250(1)(a)
     Commuting in for work and returning every night does not fall within sojourning
     Looking for CCPC deductions (shareholders hence have to be Canadian)

Schujahn v MNR (1962 Exch)
      Status of residence for tax purposes
       Wife and child in Toronto to facilitate house sale therefore visit transitory and
incidental (not resident)

The Queen v KF Reeder (1975 FCTD)
       One is "Ordinarily resident" in the place where in the settled routine of his life he
regularly normally and customarily lives




Definitions under 248(1)
Person
"person", or any word or expression descriptive of a person, includes any corporation, and
any entity exempt, because of subsection 149(1), from tax under Part I on all or part of the
entity's taxable income and the heirs, executors, liquidators of a succession, administrators
or other legal representatives of such a person, according to the law of that part of Canada
to which the context extends

Individual
"individual" means a person other than a corporation;

FROM AN INTERPRETATION BULLETIN
Residential Ties in Canada
For determining residential status
       Dwelling Place
              Kept available for his living
              If leased to a person on arm's length terms - this will be considered and
              MIGHT change the consideration of this dwelling

       Spouse or Common law partner-INCLUDES SAME SEX PARTNERS
             If the break up was before the person left then this will not be considered

       Dependents

Secondary Residential Ties
Considered but unusual for one to stand alone as a determinant of residence

       Personal property
       Social ties
       Economic ties
       Landed immigrant status in Canada
       OHIP
       Driver's licence
       A vehicle
       Seasonal dwelling
       Canadian passport
       Membership in union

Tertiary Ties
Very limited importance but add to overall picture
       Magazine subscriptions
       Telephone listing in Canada
       Deposit box

Evidence of intention to Sever Residential Ties

A question of fact
Length of stay abroad
Look at whether a return to Canada is foreseen at the time of departure

Sojourners
Sojourners are only taxed on worldwide income for the sojourn period
Whereas non-residents are taxed on full year

Any part of a day is considered to be a day for the purposes of deciding the 183 day
threshold
       Nature of each stay is considered.
       If commuting to Canada for work and returning each night is not considered
       sojourning
       VACATIONING would be sojourning




                        3.     Employment Income
a)   Introduction
b)   Who is an Employee?
     Readings:                                                 Materials, pp. 225-243
             ITA, s. 248(1) definitions of “employee”, “employer”, “employment” and
             “business”



     Section 248(1)
     Employee
     Defined under 248(1) however not very helpful in delineating between the two terms

     Independent Contractor
     Synonymous with business person or freelancer. There is no master-servant
     relationship

     Income from business vs income from employment
     Employee vs employer
     Distinction
            1 - payment and withholding of tax
                   Employer must withhold and remit a prescribed amount
            2 - basis of measurement
                   From employment - cash basis, when received
                   From business - accrual basis, when earned
            3 - reporting Period: Taxation year
                   Business income - fiscal year
                   Employment - calendar
            4 - scope of deductions
                   Employee - limited scope under section 8
                   Businessman - broad scope under section 9 and 20

     Attempts to Avoid Characterization as an Office or Employment

     1 -Interposing a Contract for Services
       Recall that courts are not bound by the intentions of the parties to a contract
       and can characterize the source of income on the basis of the "substance" of
       the relationship Boardman v the Queen

       How would you build a contract to allow for independent contract relationship
            Specify a single specific task
            Who will provide tools etc.
            Layout the test of Wiebe door

2 - Interposing A Corporation or Trust
       Look back at income splitting techniques for the usefulness of these schemes
       Neuman case, Ferrel case

3 - Capitalization of the Employment Benefit
       Various methods intended to convert what would otherwise be income from an
       office or employment into income from a capital source - which is either exempt
       or only partially taxable.


Case Law
Wiebe Door Services v MNR (1986 FCA)-ENTREPRENEUR TEST
        Test for independent contractor v employee
        1-control
        2-ownership of the tools
        3-chance of profit
        4-risk of loss
        Look at the whole package of the factors (p229)Whose business is it?

        Old test: was control – problem now that servants have more skill than
        master

        Integration test: Is the employee‟s work integral to the ongoing business?

671122 ont v Sagaz Industries Canada (2001 SCC)
       Affirms Wiebe door test
       List is not exhaustive and must always way ALL factors

Cavanagh v The Queen (1997 TCC)
       The employer is not entitled to decide the nature of the tax relationship
       through T4 reporting. That is for a court to decide.
       Tutorial leader case
c)    Fringe Benefits
     Readings:                                                  Materials, pp. 243-268;
             281-288
             ITA, s. 5; s. 6(1)(a); s. 6(3); s. 248(1) definition of “salary or wages”


     Section 5 Income from Office or Employment
     Income from office or employment includes the following
       Salary and Wages
       Given their ordinary meaning and include compensation for services rendered by
     employees in the course of their duties

       Gratuities
       Voluntary payments made in consideration of services rendered in the course of a
     taxpayers office or employment

       Other remuneration
       Includes honoraria, commissions, bonuses, gifts, rewards and prizes provided as
     compensation for services



     Section 6(1)(a)
            Was enacted to ensure that all benefits were captured despite the section 5
           "Other remuneration" is sufficiently broad
            Requires the value of "board, lodging and other benefits of any kind
           whatever"
            Serious policy concerns involved in this section - both for and against
            Hx only money or something convertible into $ was included in income for tax
           purposes
            Purpose of the section is to equalize the tax paid by those who get cash with
           those who get cash in kind

             Valuation of benefit = fair market value

     Section 6(3)
     Mandate the source of income as that not a capital source
     P243
     An amount received from one person to another during the period when the person
     was an employee of the payer or during the period immediately before or after it shall
     be deemed to be remuneration of the payees deed

     Section 248(1) Salary or wages
     "salary or wages", means the income of a taxpayer from an office or employment as
           computed under subdivision a of Division B of Part I and
     includes all fees received for services not rendered in the course of the taxpayer's
           business but does not include superannuation or pension
     benefits or retiring allowances
Case Law
Sorin v MNR (1964 TAB)
        Man using a room at the hotel he ran to take afternoon naps – not seen as a
        benefit
        Didn‟t feel appropriate use of section to punish for this behaviour

The Queen v Savage (1983 SCC) (a good decision)
       Broader interpretation of the necessary relationship between a benefit and a
       taxpayer's employment or office
       A benefit is a material acquisition which confers an economic benefit on the
       taxpayer
       Woman taking courses to continue her education – work policy that
       encouraged continuing ed.

        Akin to award for past present and future services – taxed

Laidler v Perry (1965 HL)
        Is “intention” a factor in determining the “source” of income?
        Based on expectation over time and the degree the gifts (10 g.cert.) was seen
         as source of income

Lowe v the Queen (1996 FCA)
       Expense paid trip for wife and employee where he was there for 4 days on
        behalf of company
       Test for assessing benefits – PRINCIPLE PURPOSE TEST
       Is there an economic advantage that is measurable in monetary terms?
                If yes, does the primary advantage endure for the benefit of the
        employee or the employer?
       Pleasure merely incidental to overall effect of trip (factual analysis)

The Queen v Huffman (1990 FCA)
       Plainclothes police officer – collective agreement called for reimbursement of
       clothing costs
       Seen as taxable benefit under 6(1)

Giffen v The Queen (1995 TCC)
        VALUATION problem
        Sent on frequent trips by company an individual earns air miles
        Airmiles found to be benefits and received when they traveled for free

Youngman v The Queen (1990 FCA)
      App and family own all shares in company that purchases land – then builds
      custom home
      App claims FMV = rent paid therefore no benefit
      When assessment is based on assumptions by minister onus on T to disprove
      the assumptions
      Benefit wasn‟t only rent but rent of CUSTOM home
      FMV is not only indication of real value
      Section 15(1)(c) test for benefit to shareholder
                       What is the benefit AND what $ would shareholder have to pay if not
               given




d)   Allowances
     Readings:                                                    Materials, pp. 288-294
             ITA, s. 6(1)(b); s. 18(1)(r)


Section 6(1)(b)
Requires allowances received by a taxpayer to be included in income
Not taxed is reimbursed for business expenses

Section 18 (1) General Limitations
In computing the income of a Taxpayer from a business or property no deduction shall be
made in respect of
      (r) certain Automobile Expenses
      an amount paid or payable by T as an allowance for the use by an individual of an
      automobile to the extend that the amount exceeds an amount determined in
      accordance with prescribed rules, except where the amount so paid or payable is
      required to be included in computing the individual‟s income

Case Law

The Queen v MacDonald (1994 FCA)
       Leading case on what constitutes an allowance under 6(1)(b)
       Test for an allowance under 6(1)(b)
              A predetermined sum set without specific reference to any actual expense or
cost
              Allowances are for personal or living expenses or for any other purpose so
that an allowance will usually be for a specific purpose
              Allowance is in the discretion of the recipient - need not account for it if funds
are towards an actual expense or cost

Following two cases: what is the difference between reimbursement of expenses and an
allowance?

Campbell v MNR (1955 TAB)
     Rec‟d 50/m for use of her car for business purposes (verbal agreement to receive this
     $) – she was voluntarily doing it
     App. Thought this was more like rent than allowance
     Court says = allowance
     Cockfield thinks this is a harsh result
     Seen as other compensation not reimbursement

Queen v Huffman (1990 FCA)
     Discussed above under benefit
     Not seen to be an allowance because $ was directly tied to clothing cost
     Thus taxable
e)   Deductions
     Readings:                                                   Materials, pp. 295-311
             ITA, s. 8(1)(b)-(j); s. 8(2), (4), (5), (9) and (10), 67
Section 8 - Deductions
(1) In computing a taxpayer's income for a taxation year from an office or employment,
there may be deducted such of the following amounts as are wholly applicable to that
source or such part of the following amounts as may reasonably be regarded as applicable
thereto

       (b) legal expenses – narrowly construed

                 Entitled to deduct expenses on account of legal expenses incurred to
                  establish a right to salary or wages as well as to collect any such amount
                  that is owed

                 The courts have distinguished between court fees to collect what is owed
                  (deductible) and those incurred to protect one's livelihood (non-
                  deductible)

       (c) clergy residence
       (d) teacher‟s exchange fund contribution
       (e) expenses of railway employees
       (f) sales expenses (of commission employees)
       (g) where the taxpayer was an employee of a person whose principal business was
       passenger, goods, or passenger and goods transport and the duties of the
       employment required the taxpayer, regularly,

              (i) to travel, away from the municipality where the employer's establishment
              to which the taxpayer reported for work was located and away from the
              metropolitan area, if there is one, where it was located, on vehicles used by
              the employer to transport the goods or passengers, and

              (ii) while so away from that municipality and metropolitan area, to make
              disbursements for meals and lodging,

       (h) travel expenses
       (i) dues and other expenses of performing duties

                 Dues must be annual in nature and the additional payment to join a
                  profession is not deductible
                 Prof. status must be recognized by statute
                 Malpractice insurance is deductible provided that it is required to maintain
                  professional status

       (j) motor vehicle and aircraft costs

Section 8(2) limitations
Limits the deductions that may be claimed or an officer or employee to those expenses set
out in section 8
IF an exemption is not listed in section 8 the employee is not entitled to deduct it from gross
income

Section 8(4) Meals
Permits the deduction of meals only if the officer or employee has been away from the
employers work site for a period of not less than 12 hours
Section 8(5) Dues not deductible
dues are not deductible under those subparagraphs in computing a taxpayer's income from
an office or employment to the extent that they are, in effect, levied
        (a) for or under a superannuation fund or plan;

       (b) for or under a fund or plan for annuities, insurance (other than professional or
       malpractice liability insurance that is necessary to maintain a professional status
       recognized by statute) or similar benefits; or

       (c) for any other purpose not directly related to the ordinary operating expenses of
       the committee or similar body, association, board or trade union, as the case may
       be.


Section 8(9) Presumptions – travel in T‟s own aircraft
Notwithstanding any other provision of this Act, the total of all amounts that would
otherwise be deductible by a taxpayer pursuant to paragraph 8(1)(f), 8(1)(h) or 8(1)(j) for
travelling in the course of the taxpayer's employment in an aircraft that is owned or rented
by the taxpayer, may not exceed an amount that is reasonable in the circumstances having
regard to the relative cost and availability of other modes of transportation.

Section 8(10) Certificate of Employer
An amount otherwise deductible for a taxation year under paragraph (1)(c), (f), (h) or (h.1)
or subparagraph (1)(i)(ii) or (iii) by a taxpayer shall not be deducted unless a prescribed
form, signed by the taxpayer's employer certifying that the conditions set out in the
applicable provision were met in the year in respect of the taxpayer, is filed with the
taxpayer's return of income for the year

Section 67
Applies to all deductions from any source including income from an office or employment
The amount of an expense which is otherwise deductible must also be reasonable
Only the reasonable portion will be seen as deductible
A question of FACT

Ie 67.1 - expenses for food and beverages is only 50%


Case law

Martyn v MNR (1962 TAB)
      Commuting is not traditionally deductible
      Home to airport as a pilot – evaluation under 8(1)(h)
      When does employment commence at airport or when he leaves house?
      Travel while away from employers place of business
      Place of residence is a personal choice therefore no reimbursement

Evans v the Queen (1999 TCC)
       Traveling between many schools as a psychologist
       Allowed between campuses as the amt of paper she had to take AND there appeared
no other feasible way
       Treated trunk as rented for a business

The Queen v Swingle
      Test for professional dues deduction
      Must be a profession recognized by statute
      Dues must be necessary to maintain status as a professional
       Whether the payments were necessary to maintain professional status recognized by
the statute




                 4. Property and Business Income
a)   What is a business?
     Readings:                                                     Materials, pp. 313-332
             ITA, s. 248(1) definition of “business”


Subsection 248(1)
A 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

An "organized activity" that is carried on for the purpose of profit

Case Law

Graham v Green (1925)
     Gambling on horses to the point he turns a profit
     Does not get taxed because it is insignificantly organized

Walker v MNR (1951 Exch)
     Was there intention to make profit? Rather than simply habit or hobby
     Here he was sufficiently organized (owned horses

MNR v Morden (1961)
     Amounted to nothing more than a hobby despite organized for a period
     Over ENTIRE duration in question it was sporadic

Pursuit of Profit

Moldowan v MNR (1977 SCC)
      REOP TEST
      In order to have a “source of income” the T must have a profit or a
reasonable expectation of profit

       Factors in REOP
       Profit and loss experience in past years
       Taxpayer‟s training
       Intended course of Action
       Capability of the venture to show a profit
       Not exhaustive

Stewart v MNR (2002 SCC) – KNOW THIS!
     Modifies REOP – but does it kill Moldowan?
     NEW TEST for Business Income
     1 – is the activity of T undertaken in pursuit of profit or is it a personal endeavor (a
     commercial manner)
     2 – If it is not a personal endeavor, is the source of the income business or property
Income from a Business Distinguished from Other Sources of income
Detailed rules on the characterization of income is not in the code. It must be decided in
caselaw

Capital gains are different from business gains
       Unless the person is in the business of buying and selling property
       Capital gains generated from a lawyer who buys and sells is different and taxed as a
       capital gain



b)   Personal vs. income-earning expenses
     Readings:                                                  Materials, pp. 348-390 and
             424-429 and 618-655; 660-661
             ITA, s. 9(1) and (2); s. 18(1)(a) and (h); s. 18(12); s. 67 and 67.1;
             s. 248(1) definition of “personal or living expenses”; s. 20(1)(c); s. 20(3)


Section 9(1) Income
Subject to this part, a T‟s income for a taxation year from a business or property is the T‟s
profit from that business or property for the year

Section 9(2) Loss
A T‟s loss in a taxation year from a business or property is the amount of the T‟s loss, if any,
for the T year from that source computed by applying the Act with modifications as required
in the circumstances.


Section 18(1)(a)
Provides that an expense is deductible to the extent that it is incurred for the purpose of
earning income from a business or property

Section 18(1)(h)
Travel Expenses – no personal deduction (LeDuc)

Section 18(12)
Prohibits the deduction by an individual of home office expenses unless the home office
       1) is the taxpayer's "principle place of business"
       2) is used exclusively for business and on a regular and continuous basis for meeting
       clients, customers, or patients

Section 67
No deduction shall be made in respect of an outlay or expense otherwise deductible under
the Act except to the extent that the outlay or expense was reasonable in the circumstances
       Mostly been used to curb reduction in income through deductions that are largely
       personal in nature, or where amounts have been diverted to persons who are not at
       arm's length

Section 67(1)
      (1) limits the deduction of food and entertainment expenses to 50% of the lesser of
      the actual cost or a reasonable amount




Section 20
Overrides 18 specifically allowing a deduction of capital cost allowance, interest, or other
amount.
Usually imposes limits on the availability and amount of any deduction
To the extent that these limits are not met, section 18 applies to prohibit the deduction of
the particular expense

Section 20(1)(c) – deductions from business income
Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer's
income for a taxation year from a business or property, there may be deducted such of the
following amounts as are wholly applicable to that source or such part of the following
amounts as may reasonably be regarded as applicable thereto
    (c) an amount paid in the year or payable in respect of the year (depending on the
    method regularly followed by the taxpayer in computing the taxpayer's income),
    pursuant to a legal obligation to pay interest on
       (i) borrowed money used for the purpose of earning income from a business or
       property (other than borrowed money used to acquire property the income from
       which would be exempt or to acquire a life insurance policy),
       (ii) an amount payable for property acquired for the purpose of gaining or producing
       income from the property or for the purpose of gaining or producing income from a
       business (other than property the income from which would be exempt or property
       that is an interest in a life insurance policy),

Section 20(3) – borrowed money
For greater certainty, it is hereby declared that where a taxpayer has used borrowed money
       (a) to repay money previously borrowed, or

       (b) to pay an amount payable for property described in subparagraph 20(1)(c)(ii)
       previously acquired,
       subject to subsection 20.1(6), the borrowed money shall, for the purposes of
       paragraphs 20(1)(c), 20(1)(e) and 20(1)(e.1), subsections 20.1(1) and 20.1(2),
       section 21 and subparagraph 95(2)(a)(ii) and for the purpose of paragraph 20(1)(k)
       of the Income Tax Act, Chapter 148 of the Revised Statutes of Canada, 1952, be
       deemed to have been used for the purpose for which the money previously borrowed
       was used or was deemed by this subsection to have been used, or to acquire the
       property in respect of which the amount was payable, as the case may be.


Section 248(1) “personal or living expenses”
personal or living expenses" includes
   (a) the expenses of properties maintained by any person for the use or benefit of the
   taxpayer or any person connected with the taxpayer by blood relationship, marriage or
   common-law partnership or adoption, and not maintained in connection with a business
   carried on for profit or with a reasonable expectation of profit,

   (b) the expenses, premiums or other costs of a policy of insurance, annuity contract or
   other like contract if the proceeds of the policy or contract are payable to or for the
   benefit of the taxpayer or a person connected with the taxpayer by blood relationship,
   marriage or common-law partnership or adoption, and

   (c) expenses of properties maintained by an estate or trust for the benefit of the
   taxpayer as one of the beneficiaries;
Case law

Set up in Daley v MNR recently confirmed in Canderel v Canada 1998 scc
       An expenditure properly deducted under accounting principles will be deductible for
     tax purposes unless prohibited by some provision of the Act and the converse is also
     true

Imperial Oil Ltd v MNR (1947 Exch)
      Q: was the payment made in respect of a liability for a happening that was really
    incidental to the business?
      It is never necessary to show that a causal relationship between an expenditure and
    a receipt
              Might still be deductible even if it resulted in a loss


Leduc v the Queen
Tried to claim legal expenses to defend something as a cost of business as he needed to be
defended in order to continue practicing business
Personal expenses a question of fact
There was no announcement that the LSUC had begun proceedings and income was already
flowing from his office

Scott v MNR (1998 FCA)
Whether a foot and transit courier travelling 150km a day throughout Toronto area and
carrying a heavy backpack can deduct as a business expense a modest amount for extra
food and water
Courier company considered him an independent contractor




Deductions
Specific Deductions

Section 8
8. (1) In computing a taxpayer's income for a taxation year from an office or employment,
there may be deducted such of the following amounts as are wholly applicable to that
source or such part of the following amounts as may reasonably be regarded as applicable
thereto

(g) where the taxpayer was an employee of a person whose principal business was
passenger, goods, or passenger and goods transport and the duties of the employment
required the taxpayer, regularly,
(i) to travel, away from the municipality where the employer's establishment to which the
taxpayer reported for work was located and away from the metropolitan area, if there is
one, where it was located, on vehicles used by the employer to transport the goods or
passengers, and
(ii) while so away from that municipality and metropolitan area, to make disbursements for
meals and lodging,

(h) - travel expenses

Legal Expenses 8(1)(b)

Entitled to deduct expenses on account of legal expenses incurred to establish a right to
salary or wages as well as to collect any such amount that is owed
The courts have distinguished between court fees to collect what is owed (deductible) and
those incurred to protect one's livelihood (non-deductible)

                                 Travelling expenses

Martyn v MNR
1962 TAB
Commuting is not traditionally deductible

Tried to deduct the cost of commuting between home and the airport he was a pilot
Evidence disclosed that public transit was very inconvenient and often unavailable

Is this transportation "in the course of his employment" as required by section 8(1)(h)

The big question is when does his employment actually commence? Upon arrival at airport
OR when he leaves his home.


Evans v the Queen
1999 TCC

A woman traveled between many schools as a psychologist. She was given an allowance for
this but not to get to school 1 and home at the end. She claimed this as a deduction

It was allowed ONLY because of the amount of paper she had to take with her and that
there appeared to be no other way for her to conduct her business - kind of treated her
trunk as though it was rented as business.


                           Professional and Union Dues

Dues must be annual in nature and the additional payment to join a profession is not
deductible

Prof. status must be recognized by statute
Malpractice insurance is deductible provided that it is required to maintain professional
status

The queen v Swingle

Took membership in chemistry societies in order to stay abreast of new developments in the
field
He paid annual dues to several
He was only allowed the dues paid to a Canadian Association

The issue stems off whether the payments were necessary to maintain professional
status recognized by the statute

Test for professional dues deduction
Must be a profession recognized by statute
Dues must be necessary to maintain status as a professional
                                 Commuting Expenses

Generally considered personal or living expenses

Cumming v MNR
1967 Exch

Doc holds an appointment at the hospital where he renders services. Billing and
administrative work is all done from a home office. He traveled back and forth between
home and the hospital. What portion if any of his automobile costs are deductible?

Reasoning
There was proof that the other anaesthetists also maintained vehicles for this purpose
Did not see that the hospital was his base of business as he had no set office space and the
nature of his work was such that it was carried out in several different locations in the
hospital

Felt the base of business was the home

If the doctor had have had an office at the hospital or facilities for, then it would have been
different

Viewed that whenever he went to the hospital to service his patients, he was doing so for
the purpose of gaining income.

Finding
1 - the commuting expenses were exceptions and thus deductible
2 - to consider the amount of upkeep to claim consideration must be given to amount of
time used for business v personal and extent of wear and tear in both.
On the facts here, awarded 50%

                                Home Office Expenses

A difficult issue

Section 18(12)
Prohibits the deduction by an individual of home office expenses unless the home office
1) is the taxpayer's "principle place of business"
2) is used exclusively for business and on a regular and continuous basis for meeting
clients, customers, or patients

A loss cannot be created or increased.
Losses created cannot be carried forward indefinitely

Business purpose test must be met and provisions under 18(1)(h) and 67 must be complied
with

A deductible amount should be based on a reasonable allocation of costs
attributable to the home office.
Determine the amount of space occupied by the office compared to total usable
area of home
                 Entertainment expenses and Business Meals


Prevailing rule
If the principal purpose of the entertainment is business, the expenses are
deductible.
Really hard to justify this deduction as its main purpose is personal enjoyment
Creates horizontal inequities

Section 67(1)
(1) limits the deduction of food and entertainment expenses to 50% of the lesser of the
actual cost or a reasonable amount


Education Expenses

Non-deductible personal expenses
Courts have distinguished between cost of post-graduate (personal expenses) and refresher
courses taken by professionals (deductible).
Section 118
Tuition fees are granted a tax credit for post-secondary education
Tax on some student loans is also tax deductible

                      The Requirement of Reasonableness

Section 67
No deduction shall be made in respect of an outlay or expense otherwise deductible under
the Act except to the extent that the outlay or expense was reasonable in the circumstances
Mostly been used to curb reduction in income through deductions that are largely personal
in nature, or where amounts have been diverted to persons who are not at arm's length

Mulder Bros v MNR
1967 Tax

It is up to the minister to decide what is reasonable under section 67
The documents available to the minister were not the whole picture that was shown at
court.

The court reassesses and says that the taxpayer was too high, but the MNR was too low.

No 511 v MNR
1958
Advertising expenses as a deduction

Sponsoring a baseball team for the purpose of advertising the company's product. For the
purpose of producing or maintaining income

Was seen to be a legitimate cost of business but was it "reasonable"?
Because the expense would actually amount to almost one half of the year's income, this
was seen as unreasonable

Also, in order to be deductible the advertising has to speak to the industry they are in - not
just the company name

Beauchemin v MNR
1977 TRB
Plastic surgeon
Buys a porsche and tries to write it off - then buys a 4wheel drive for the winter
Found the use of the winter vehicle was reasonable given the Canadian winter

                                    Other deductions

A lot of these are to create social equalities and increased activities

Associated with earning income
Moving expenses
Child care expenses
Attendant care expenses

Corresponding to personal obligations
Alimony, maintenance and support payments

RRSP contributions - a combination of both income and personal obligation

                                  Child Care Expenses

Section 63
For a parent who must pay child care expenses in order to pursue gainful occupation outside
the home
Justified on the basis that child care expenses bear some relationship to the earning of
income
Only available to the "supporting individual" with the lower income
Only to reduce "earned income"
CANNOT exceed 2/3 of the deducting paren'ts earned income - limited to $7000 per child
under 7 and $4000 for those between 7-16
Payments to a relative under 18 don‟t count

Symes v the Queen
1994 SCC

Constitutional challenge to Child care deduction being contra section 15
Can child care be a business expense and if so - is this barred by s63

MAJORITY
Interprets section 63 as "a code in itself, complete and independent" thereby not open to
question
Child care deductions cannot occur in the source calculations or in business income
calculations –

Says the intent of the section is to place limitations on the child care expenses deduction

Need to look at the section within the context of the whole act

 DISSENTER (two women justices)
Feel section 63 and 9(1) must coexist
Feels that the interpretation that 63 exists on its own, is contrary to most complex
deductions as well as giving a gender specific interpretation

Feels any interpretation that does not recognize the inherent difference in businesswomen
vs. businessmen
Feels that when looking at ambiguity in the law must look through the prism of the
CHARTER to do so

Thibideau Case
Child support if pursuant to separation no deduction
Alimony is an ok deduction




                                  Charitable Donations

A taxpayer may be able to deduct charitable donations as a business expense if it can be
established that the donations were made for an income-earning purpose

CRA recognizes that for the purposes of 118.1 a payment may be IN PART a gift and part
payment for services the Queen v Zandstra

Amount of a charitable gift is other than "crown gifts", "cultural gifts", " ecological gifts"
limited to 75% of income for any taxation year - excess can be carried forward 5yr

Cultural gifts
Gifts of property certified under the Cultural Property Export and Import Act, provided the
donee is a designated institution under the statute - 100% deductible

MAY be able to deduct for a business expense - IF they were made for a income earning
purpose Olympia floor and Tile v MNR 1970

A gift to a university with direction as to its use may not give rise to a credit Brown v MNR
1984 TCC

CRA does not recognize gifts of services - artists can claim their paintings under 118.1(7)

The Queen v McBurney
1985 FCA
Quid pro quo test for charitable donation

Paid amounts to three Christian religious schools which were attended at various times in
the taxation years in issue by his children

Each school was non profit and registered charity

Were the contributions tuition fees for his children (non-deductible) or were they charitable?

Reasoning
To constitute a "gift" it must appear that the property transferred was transferred
voluntarily and not as the result of a contractual obligation to transfer it AND that no
advantage of a material character was received by the transferor by way of return
However, a return on a gift may not in itself make it a non-gift

Usually a gift comes from a "detached and disinterested generosity"

As the taxpayer felt it his duty to send his children to a Christian school and although there
was no legal duty to make such payments the courts cannot see that these payments were
solely charitable gifts - there was an obvious duty felt
Klotz v The Queen
2004 FCA

Under AFE taxpayers acquired limited edition prints which they donated to colleges and
universities that were prescribed for the purposes of para 118.1(1)(f)
Bought prints for $300 per
Immediately donated back for approx $1000 for tax purposes.

At issue here klotz bought paintings for $75000 and donated for a donation receipt of
$258400 - never saw them, played no role in picking them and never had possession

His motivation was purely that of the tax write-off

When deciding the best evidence of fair market value the taxpayer runs a risk that
the courts or board may conclude that the price is what was paid for the object
NOT what was valued in giving the gift

Held that the paintings were personal-use property - as giving away is one way to make use
of property
However, the overvalue was not equal to gross negligence, but the issue is sent back to the
minister for reassessment

248(35)(36) - parliament retroactive - giving teeth to Klotz
Donated price = price paid

Charitable Tax Credit
2 tier credit
first $200 X lower rate
greater than $200 credit @high rate
max donation = 75% net income


Medical Expenses

Usual rationale - expenses under 3% of income are seen as normal and should be
accomodated under normal budget - thus no credit

An income security program contained in the Act

Is this efficient and equitable as an income security program?
Equity is hardly reached in this arena
Are low income persons NOT receiving their medical coverage necessary OR
Are high income persons taking advantage of the deductions

Problems
Definition of "allowable expense"
Use of deduction as a mechanism for delivering tax relief

Section 118.2(1)
Medical expense credit

Section 118.2(2)
Sets out what can constitute a medical expense

Whitfield v the Queen
2004 TCC
Appellants husband has problems. He is receiving LTDP
Purchased hot tub, eliptical,

Issue
Were the trainer and hot tub prescribed by a doctor?
Were they devices designed to assist an individual in walking?

Reasoning
Prescription need not be in writing
Previous case law suggests that 118.2 is to be given the narrowest of possible constructions
Though the court was not willing to apply the strict "in writing" interpretation, they also
were not willing to see the prescription for "non impact" as equalling an exact method

Willing to accept the hot tub as the best form of hydrotherapy but not the elliptical as the
only non-impact method

Regarding "are they of a prescribed kind"? Under subpara (i)
Looked at the case law regarding a hot tub right off
Seems that if the court finds on evidence that a significant purpose and use of the tub is to
assist in mobility then it is allowed
On the facts here- was found to relieve pain not actual mobility
Cost of installation is allowable under 118(1.2)


If General Accepted Accounting Principles say the deduction is ok, then it‟s ok
UNLESS the ITA says differently



c)   Timing of Income and Deductions
     i)   Relevance of financial accounting

     Readings:                                                    Materials, pp. 431-445
             ITA, s. 11; s. 249; s. 249.1


Section 11(1) proprietor of business
Where an individual is a proprietor of a business the individual‟s income from the business
for a taxation year is deemed to be the individual‟s income from the business for the fiscal
periods of the business that end in the year

Section 249 (1) definition of Taxation year
a) in the case of a corporation = fiscal year
b) in the case of an individual = the calendar year

Section 249.1(4)
Permits individual who operate businesses and partnerships to retain an off-calendar fiscal
period.
        Section 34.1 eliminates deferral option
        Example – business picks fiscal as feb – jan
        34.1 requires individual to include in income of a calendar an estimate of the period
feb - dec
Case Law

Canderel v The Queen (1998 SCC)
Well accepted business principles and accounting practices are external to the legal
determination of profit (AIDS only)
Takes Profit definition from Irwin
       The difference between the receipts from the trade or business during such year and
the expenditure laid out to earn those receipts

How to figure out profit from Canderel
1 – a question of law
2 - The difference between the receipts from the trade or business during such year and the
expenditure laid out to earn those receipts
3 – in seeking to ascertain profit, the oal is to obtain an accurate picture of the T‟s profit for
the given year
4 – in ascertaining profit, the Taxpayer is free to adopt any method which is not inconsistent
with
        a – the ITA
        b – established case law principles or “rules of law”
        c – well accepted business principles
5 – Well accepted business principles as found in GAAP are interpretive aids not rules of law.
 They will influence the finding of profit if at all on a case by case basis depending on facts
of the T situation
6 – after the above is shown by T – onus shifts to minister to Show that the figure provided
does not represent an accurate picture or that another method of computation would
provide a more accurate picture




Significance of Timing Principles
When is fundamentally important as profit must be computed annually
Want to hold the money in your use as long as possible as you retain the interest value on
the money
        Govt wants the money sooner so as to earn that themselves

Relevance of Financial Accounting Practice
The accounting profession in general aims at a conservative estimate of the profitability and
size of a business. It would rather err on the side of caution on lest the users of the financial
information be misled.

In contract to financial accounting rules the tax accounting rules in large measure aim at
providing a definition of both a fair and accurate tax base

"matching principle"
Fundamental principle that is adopted
If an expense can be reasonably identified as relating to particular revenue or to particular
accounting periods the costs should be deducted in the period or periods in which the
corresponding revenue is recognized
        If a particular expense will generate income or otherwise benefit the
        business for a number of years the expense should be amoritized over that
        period

Methods of Accounting
Cash method
All that is accounted for is revenues actually received by the taxpayer and expenses actually
paid by T. Income from office or employment is generally computed on a cash basis.
Cheques are treated as cash – received when received NOT when cashed

Accrual Method
Income recognized in the year in which it is earned, regardless of when payment is actually
received, and deductions are clained in the year in which they are incurred, regardless of
when they are paid.
Used by corporations, and in computing income in most businesses.



     ii) current vs. capital expenses (business only deductions)
     Readings:                                                 Materials, pp. 486-498;
             506-515
             ITA, s. 9(1) and (2); s. 18(1)(a) and (b); s. 18(9)

Section 9(1) Income
Subject to this part, a T‟s income for a taxation year from a business or property is the T‟s
profit from that business or property for the year

Section 9(2) Loss
A T‟s loss in a taxation year from a business or property is the amount of the T‟s loss, if any,
for the T year from that source computed by applying the Act with modifications as required
in the circumstances.

Section 18(1) matchable expenditures
“matchable expenditure” of a T means the amount of an expenditure that is made by the T
to
a) Acquire a right to achieve production
b) Fulfill a covenant or obligation arising in circumstances in which it is reasonable to
conclude that a relationship exists between the covenant or obligation and a right to receive
production

Section 18(9) Limitation respecting prepaid expenses
In computing income from a business or property no deduction shall be made in respect of
an outlay or expense to the extent that it can reasonably be regarded as having been made
or incurred
       i) as consideration for services to be rendered after the end of the year
       ii) in lieu of payment or in satisfaction of interest, taxes, rent or royalties in respect
of a period that is after the end of the year or
       iii) as consideration for insurance in respect of a period after the end of the year


Case Law

British Insulated and Helsby Cables ltd v IRC (1926 HL)
Basic distinction between current and a capital expenditure
       Capital expenditure – one time only payment AND to purchase an asset for the
       enduring benefit of the trade.
Here a pension plan was seen to endure to attract employees

Denison Mines v MNR (1972 FCA)
In extracting ore there was left haulageways that T wanted to claim as capital expenditures
NO
If an asset arises out of normal business practices then that is seen as the cost of income
and not deductible
Non new property just change
Johns-Manville Canada Inc. v The Queen (1985 SCC)
Ongoing Acquiring of land to widen mouth of mine – capital or income expenditure?
Land not thought to depreciate
Here the land was consumed – permits current deduction

Analysis
1 – purpose of the acquisition
2 – were they incurred regularly
3 – does the expenditure form a discernable more or less constant expense of business?
4 – were the lands acquired for intrinsic value? No and they were worth less after
5 – was there a benefit achieved through the acquisition?
6 – any asset achieved was transitionary as the wall expanded back
7 – can business continue without the expense?
8 – does it give way to a capital cost or depletion allowance
9 – does it tie to another asset? (no there was no ore they were overburden)
10 – expenditure was small related to the cost of operating the mine

Canada Steamship Lines v MNR (1966 Exch)
Trying to claim cost of repairing walls of ship and boilers
Costs of repairs are still current expenses not capital outlay even if they are extensive and
cost a substantial amount (this is not enough)
Test
Does the asset make the original different in kind? If yes, no deduction

Outlay of capital
      Something spent to upgrade an asset
Expenditure for repair
      Repairing physical effects on the asset of wear, tear and accident
      Current expense

The Queen v Shabro Investments (1979 FCA)
Whether an amount spent by appellant in replacing a substantial part of the floor of the
lower story of a building (owned to rent) was an expense on “repair” or account of capital
DEFECT not originally known
Though visibly didn‟t change the asset, it was substantially different (improve) in kind after
the repair
Factual = depreciation and no deduction

Gold Bar Developments v The Queen (1987 FCTD)
Look at the purpose – what was the intention of T in deciding to spend his $
Was their a choice to avoid the expense? – here no – it was voluntary
Compare cost of repair to value of asset
If a decision to repair is forced – it doesn‟t matter that they repair with up-to-date methods


The basic test: Enduring benefit
Does the cost produce in the hands of T an asset? That asset cannot change or be used to
develop another product – should stay the same

Repair of Tangible Assets
Repairs to tangible assets are deductible as current business expenses
As the repairs parts get larger and are capable of independent use - whehter the
expenditure of moneys on the "repair or replacement" of a component part actually falls
within prohibition of para 18(1)(a)

Excluded would be – a replacement by something so different in kind form the thing
replaced that it constitutes a change in the character – an upgrading – of the thing upon
which the money is expended instead of being a mere repair

Ask – what is the purpose of the expenditure
Was it a voluntary decision?

Permanent improvement is not allowed



iii)         Capital cost allowance
 Readings:     Materials, pp. 516-538
               ITA, s. 18(1)(b); s. 20(1)(a); Reg. 1100(1) and (2); Reg 1102(1)(a)-(d);
          s. 13(1) and (4); s. 13(21) definitions of “depreciable property,” “proceeds of
          disposition,” “total depreciation” and “undepreciated capital cost”; s. 20(16); and
          s. 248(1) definition of “disposition”
Capital Cost = amount paid + amount owed + cost of purchase + capital
expenditures

Depreciation: accounting term for the loss in value of certain assets attributable to their
use in the income-earning process
        Ie – taxi inc miles = decr. Value. The amount of depreciation should be deducted
        from gross income

2 purposes of depreciation
1 – to attribute wear and tear on assets to the right accounting period
2 – to establish a proper value to the asset at any given time

Statutory rates that are established recognize changes in fluctuation of supply and demand,
inflation etc.

Section 20(1)(a)
Allows a T to deduct an amount to reflect “depreciation” under title of CCA
“An amount which is allowed by the regulations is deductible. However no deduction is
permitted for expenditures that are not for the purpose of earning income or that are of a
personal nature” (regulation 1102(1)(c))

The amounts allowed by the regulations are deductible whether they reflect the actual
depreciation or not

Section 13(21)
Underpreciated Capital Cost
Of a class is the aggregate of A (the cost of all acquisitions of property in the class) and B (
recapture minus the aggregate of E (all CCA previously claimed in respect of the class,
which includes any “terminal loss” previously deducted in respect of the class) and F ( the
lower of the cost and proceeds of disposition of assets of the class that have been disposed
of)

Accounting depreciation methods

“Straight-line” method
under which the cost of the asset is allocated evenly over the asset‟s useful life

“Declining balance” method
 under which the annual amount of depreciation is based on a fixed percentage of the
asset‟s written down cost (after taking in to account depreciation from previous years)
under this method depreciation is usually greater in the first few years.
Used for tax purposes except for certain property such as a leasehold interest, patent,
concession, franchise or licence = straight line method
Regulation 1100(1)(b)(c)

CCA – is a permitted deduction
T may claim any amount as a deduction up to the maximum amount reg 1100(1)(a)
Can defer CCA to a different year
CANNOT double up CCA – but rather is limited to % of the assets written-down cost or
“underappreciated capital cost” at the end of that year.

T must pool all assets and then CCA is claimed on the entire pool
Exceptions
       Passenger autos are different
       Rental property acquired above $50 000 or more is a separate class

MAJOR limitation regulation 1102(1)(b)
     Requires that an asset be acquired for the purpose of gaining or producing income

Calculation of CCA

Governed by 1100(1)(a)
CCA = appropriate percentage of “UCC” of each class of depreciable assets
Timing for deduction of CCA is fixed at the end of the taxation year

In practice calculation
Take the UCC of the class from year before, deduct CCA from last year, ADD costs of new
purchases in the year, MINUS proceeds of disposition (up to the cost of property) in the year

50% rule – regulation 1100(2)
applies to acquisitions in 1982 and subsequent years.
To overcome perceived inequities (buy in nov, yet get full allowance)
Only applicable to depreciable property acquired that taxation year, and only once
This creates notional UCC for the first year of the added depreciable property

SEE PAGE 519-521 FOR CALCULATIONS

Disposition of depreciable assets

What happens when the actual depreciation is different than that calculated

Section 13(1) – recaptured depreciation
Where at the end of a taxation year the total of the amounts determined for the UCC,
exceeds the total of the amounts determined for A to D in that definition the excess shall be
included in computing the T‟s income for the year.

UCC calculation yields a negative = then taxpayer income for the year.

Section 13(21) – definitions
Total depreciation

Replacement Property Rules

If recapture nails T – when there was intent to replace, then due to tax imposed they may
not be able to rebuy
Section 13(4)
Permits deferral of recapture when the disposition was involuntary (fire, expropriation etc)
or the property disposed of was a “former business property”
ONLY applies when a replacement property is acquired within a specified period

Rental and Leasing Property Restrictions

Restrictions are usually attempts to negate undue tax advantages derived from CCA claims
for certain kinds of property
        Reg. 1100(11)

The meaning of Cost

Although undefined in the act, the “cost” of an asset is ordinarily the amount expended to
acquire it.

Case Law

Bens Ltd v MNR (1955 Exch)
Owns and operates a bakery
Bought land with houses, with intent of expanding the bakery

Question to be asked to apply CCA = “Was the outlay for the purpose of gaining income”
HERE = “was the purchase of the frame homes (that were torn down) for the purpose of
producing income”

On the facts – the acquisition of the homes were clearly extraneous to the land purchase
(the true purpose)

When is depreciable Property Acquired?

As the acquisition of depreciable property effect the application of the 50% rule there is an
impact on when you see the property acquired.

TEST (MNR v Wardean Drilling Ltd)
T has acquired the asset when title has passed assuming that the assets exist at that time,
or when the purchaser has all the incidents of title, such as possession, use and risk,
although legal title may remain in the vendor as security for the purchase price as is the
commercial practice under conditional sales agreement.

       Intention is determined from the agreement of sale

Schultz v MNR (1979 TRB)
The asset was under construction when it was purchased
Must have legal title and possession
Cannot have possession of something that is not yet built = no CCA

Thomas McQuillan v MNR (TRB 1981)
A film is not a depreciable property until production is done and ready for public viewing
Was trying to CCA for costs
                               Eligible Capital Expenditures

Section 14(5)
“eligible capital expenditure” to include nearly all expenses that are incurred after 1971 for
the purpose of gaining or producing income from a business, are capital in nature and are
not otherwise deductible under the ACT
examples: goodwill, customer lists, some franchises and expenses of incorporation and
reorganization

Royal Trust Corp of Canada v The Queen (1982 FCTD)
Whether the additional price paid in the sale of shares constituted CCA?
Clear that the shares were being sold in the hopes of producing income (to the public
market) and that the extra cost was to secure this – IT WAS SEEN AS A CCA

The Queen v Saskatoon Drug and Stationary (1978 FCTD)
Looking at leases, they have to be comparable to the market and not an overly goodwill
type
NEED TO ASK COCKFIELD



                     5.     Capital Gains and Losses
a)   Basic Elements
     Readings:                                                    Materials, pp. 542-550;
             568-581; 586-588
             ITA, s. 39(1)(a) and (b); s. 38(a) and (b); s. 40(1)(a); s. 40(1)(b); s. 54
             definitions of “adjusted cost base,” “capital property,” and “proceeds of
             disposition”; s. 43; s. 248(1) definition of “disposition”


Section 40(1)
      (a) A gain equals the amount by which a T's proceeds realized on a disposition of
      property exceed the adjusted cost base of the property and any associated expenses
      of disposition
             MAIN EQUATION        CG=Proceeds of disposition - ACB

       (b) a loss as the excess of the adjusted cost base of a property and any expense of
       disposition over the proceeds of disposition


Definitions under section 54

Adjusted Cost Base (depreciable property)
ACB of depreciable property at any given time is its "capital cost" to the taxpayer as of that
time (section 54 para a)
       Must be reduced by the amount of any investment tax credit or governmental
       assistance (subs. 13(7.1))

CAPITAL COST ADJUSTS UP BY EXPENDITURES TO IMPROVE
CAPITAL COST ADJUSTS DOWN BY CAPITAL COST ALLOWANCE


Adjusted Cost Base (non-depreciable property)
ACB of capital property other than depreciable property is its "cost" adjusted as of the
relevant time in accordance with section 53 (section 54 para b)
Subsection 248(1) – definition of “disposition”
Includes "any transaction or event entitling a taxpayer to proceeds of disposition of
property"

EXAMPLE
House = 70 000
Add roof = 30 000
Total cost = 100 000

4% CCA, but 1/2rule = $2000
therefore ACB = 100 000 – 2 000 = 98 000

Capital gain on sale = 50% taxable

Deemed Dispositions

b)   Capital Losses Personal-Use Property and Listed Personal
     Property
     Readings:                                                 Materials, pp. 588-593
             ITA, s. 40(2)(g)(iii); s. 41; s. 46; s. 54 definitions of “listed personal
             property” and “personal use property”



Section 41
Permits losses on listed personal property to be deducted from gains on such property
       Loss on listed personal property may be deducted only from gains on listed personal
property (section 41)

Personal Use Property (section 54)
Capital property owned by a taxpayer and used primarily for the personal use or enjoyment
of the owner or any individual related to the owner
Mostly chattels
Summer cottage


Listed personal Property (section 54)
All or a portion of….
Sketch, painting, manuscript, coin (collectibles)
        Also personal use property
        As a "collectible" its value does not inevitably decline through use
        If value falls it may be for essentially the same reasons that cause any capital loss,
        such as changing market conditions.



c)   Principal Residence
     Readings:                                                   Materials, pp. 600-604
             ITA, s. 40(2)(b); s. 40(4); s. 54 definition of “principal residence”; s. 54.1


Section 40(2)(b) principle residence
T‟s gain from the disposition of a property that was the principle residence at any time after
the date
Principle Residence (section 54)
A housing unit, leasehold interest or share of the capital stock of a cooperative housing corp
owned (jointly or otherwise) by T and ordinarily inhabited by T
       Includes up to ½ hectare of surrounding land
       Claiming more than this is difficult
       Has to be shown as “indispensable to the use and enjoyment”(rode v mnr)

The Principal Residence
      Considered the most generous provision in the Act
      NO cap

Any gains realized on a disposition of a property that qualifies as a "principal residence" may
be exempt from tax
      Test
      Must be the principal dwelling throughout the period of ownership

A capital loss on a disposition of an owner-occupied dwelling is disallowed as a loss on
personal-use property

T may not claim CCA on the family home because it is not held to produce income

Principal residence includes up to one-half hectare of surrounding land. This may
reasonable be regarded as contributing to the T's use and enjoyment of the housing unit as
residence

Case Law

Stuart Estate v the Queen (2004 FCA)
Objective evidence is required to support a claim that land in excess of 1/2 hectare was
necessary to the use and enjoyment.
Subjective evidence is only marginally relevant



d)   Deemed dispositions and rollovers
     Readings:                                                   Materials, pp. 605-607;
             596-600
             ITA, s. 13(4); s. 44
with respect to the capital gains materials,
you only need to know the general concepts we

touched on during class, along with the problems we took up in Chapter 6

Deemed Dispositions
Donor (bears the tax)
CG if FMV exceeds ACB
CL if less

Donee
ACB = FMV

Section 70(5)
Deemed disposition at death of capital property
ACB = FMV

Deemed disposition at FMV achieves the following goals
1 – equivalent treatment of gifts and sales
2 – prevention of avoidance or deferral of tax on accrued but unrealized gains
3 – prevention of the shifting of income to family members taxable at lower rates

Deemed disposition on change in use

Section 45(1)
A disposition at FMV is deemed to occur when a T changed the use of property from person-
use to income-earning purposes or vice versa
Applies to any capital property – although in practice most likely dwellings
(2) can opt out if turning it into a income earning – but then no CCA. Must weigh the
options, if there is a change in mind then the deemed disposition occurs on the first day
(3)
Can elect out of deemed disposition if being turned into principle dwelling but not if there
was a CCA against it since 1984

TEST
A clear and unequivocal positive act evidencing a change of intention is necessary to change
the use of the land
A mere intention of the taxpayer is not enough
       Test satisfied by the initiation of construction to change the physical nature of the
       property
       Preliminary planning MAY be enough (Duthie estate v the queen)

Leib v MNR (1984, TCC)
T moves back into a house he used to rent
Is seen as a deemed disposition at FMV
Supposed to create equity between this guy and the guy who sells a rental to use $$ to buy
new house

Home office or borders
Does not trigger deemed disposition if
1 – the income remains ancillary to the personal use
2 – the T does not make structural changes to the house
3 – the T does not claim any CCA in respect of the house
Presumably the T can claim CCA on the furniture and equipment in home office.

Rollover

The increase of decrease in Capital is seen to follow the property transferred and there is no
deemed disposition until the donee disposes of it
Transfer of capital property to a spouse, and farm property to a child
DONEE – deemed to acquire at the ACB of the donor at time of transfer

This regime is attempting to maintain the spousal link as one economic unit.

To qualify for rollover the recipient must be
1 – the transferor‟s spouse of common law partner
2 – the transferor‟s former spouse or common law partner if the transfer is in settlement of
rights arising out of their marriage or common law partnership or
3 – a “spouse trust”

still qualify for a rollover if it happens before divorce decree as they are still married
Gifts and non-Arms length Transactions

Gifts are seen to impose FMV acquisition on the donee and proceeds of disposition on the
donor of FMV

Sold for greater than FMV
Vendor -> selling price
Buyer -> FMV

Sold for less than FMV
Vendor -> FMV
Buyer -> actual cost

        Here we see two taxpayers being taxed on the same amount and the general
principle against double taxing may not extend to them

       May include a “price adjustment clause” here to accept FMV should there be a
reassessment.

Non-Arm‟s Length RULES
1 - Related persons are not arm‟s length
       Blood, marriage, adoption, corporations connected by common control
       Common law and same sex are treated this way as well

       Not related to uncle, aunt, cousin or someone dead

2 – unrelated person‟s may not deal at arm‟s length
       a question of fact

Determining whether person‟s not deal at arm‟s length consider
1- the existence of a common mind that directs the bargaining for both parties to the
transaction

2 – parties acting in concewrt without separate interests (or in a highly interdependent
manner)

3 – de facto control in the sense of excessive or constant advantage authority or influence
by one party over the other

4 – price different from FMV
       6. Introduction to Taxation of Corporations
a)     How are corporations taxed?
     Readings:                                                   Materials, pp. 682-690
Section 248(1)
      A corporation is an incorporated company
      Presence of separate juristic personality as the hallmark of a corporation

Major types of corporations are "private corporations", "public corporations", and "canadian
controlled private corporations CCPC's"

Section 89(1) private corporation
      Defines a private corporation generally as a corporation resident in Canada other
      than a public corporation or a corporation controlled by one or more public
      corporations

       Defines a public Corporation as corporation resident in Canada whose shares are
       traded on a Canadian stock exchange listed in regulation 3200.

       Canadian corporation = either a corporation resident and incorporated in Canada or a
       corporation resident in Canada throughout the period beginning 6/18/71

Section 125(7)
      CCPC - private corporation that is a Canadian corporation whose shares do not trade
      on a prescribed foreign stock exchange and is not controlled, directly or indirectly, in
      any manner whatever, by one or more non-residents or by one or more public
      corporations or by a combination or non-residents and public corporations

Control separates "private corporation" and "ccpc"
       However, control in this concept is not defined

CCPC control
      De jure control (ownership of a sufficient # of shares to elect a majority of the board)
      But modified by ss 251(5) and 256(5.1)
             Certain rights other than full ownership rights
             Latter section imposes concept of de facto control in addition to de jure

Subsidiaries of public corporations
       Neither public nor private corporations
       Subject generally to the regime applicable to public corporations

Overview of the Taxation of Corporations - Rules Applicable to all Corporations

a) Computation of Income and Taxable income

Taxation is computed in much the same way as the income of an individual
As a corporation cannot be an employee sources are generally limited to businesses,
property, and taxable capital gains
Taxation year = fiscal year (cannot exceed 53 weeks)
Taxable dividends rec'd by corp are taxable as income
       In order to prevent cascading of tax dividends received are generally deductible in
       the computation of the recipient's taxable income.
b) Tax rates

Basic federal rate for corporate income is 38%
Supplemented by 4% surtax which is applied to the basic rate of 38% less the provincial
abatement of 10%

Net effect is 1.12% of income

CCPC
        Small business deduction rate (13.1%)
        Investment income (basic fed rate subject to refundable tax of 6 2/3%)= 35.8%

c) Income Tax Credits

Provincial abatement
Section 124(1)
       Deduct from income tax otherwise payable an amount equal to 10% of its taxable
       income earned in the year in a province. Suppose to allow for provincial tax on the
       earnings of a corporation

Small business tax credit
Section 125
       An additional credit of 16% on active business income of CCPC that is earned in
       Canada
       13.12% fed rate

Canadian Manufacturing and Processing Credit
Section 125.1
      Allows corp to deduct income tax otherwise payable 7% of its Canadian
      manufacturing and processing profits that are not eligible of the small business tax
      credit
      Gives then about 22.12% rate fed.
             39% base rate - 10% prov abate. + 4% surtax - 7% credit

B)      Section 85 transfers


       Readings:                                                  Materials, pp. 698-702



hence I will not test
you on the dividend gross-up, s. 85 rollovers, or
any other advanced matters we discussed

             7.     Tax Evasion versus Tax Avoidance
a)      Interpretation of Tax Statutes

       Readings:                                                  Materials, pp. 750-764


Strict construction
        A clear and literal meaning of the words in the section

Modern approach/Rule
       Stubart case here
              Talk about the old approach first
       PURPOSIVE interpretation (look at the whole and the particular section)
       Plain meaning approach (ignore legislative intent)
       Modified purposive approach (teological approach)

Case Law

Strict interpretation
The Cape Brandy Syndicate v CIR (1920 TC)
        In taxation you have to look at what is clearly written
        You read nothing in; you imply nothing but you look fairly at what is said

Witthuhn v MNR (1957 TC)
       Sought to deduct caregiver costs for a spouse who was confined to bed but for 3h per
day in a special chair
       The court interpreted the section strictly and denied on the basis that it said “bed or
wheelchair” and her chair was not

Johns-Manville Inc v The Queen (1985 TC)
      All statutory ambiguities should be decided in favour of the taxpayer

Modern Approach
Stubart investments ltd v The Queen (1984 SCC)
       Birth of the modern approach
       Leaves unclear what relative weight should be given to the ordinary meaning,
context and purpose

Antosco et al v The Queen (1994, SCC)

Bon Secours v Quebec (1995 SCC)




b)     General Anti-avoidance Rule – not responsible for this material


     Readings:                                                   Materials, pp. 770-792;
             797-815
             ITA, s. 245


Purposeful non-disclosure of income
Was the benefit gained by real bona fide business principles – off the hook

				
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Description: Ccpc Corporation Real Estate Investments Canada document sample