Taxation – LAW 345 – O’Brien
Final Outline Spring 2011 – Asif Abdulla
Table of Contents
Basic Concepts and Canada’s Tax System
Compared to Other Govt Collected Payments
Attributes of Taxes
Generally Accepted Accounting Principles (GAAP)
Section 152 – Net Worth Assessments
Equity and Policy in the Tax Law
Equity:
Neutrality:
Simplicity:
Tax Expenditures:
Constitution and Taxation
Pacer Dome Canada Ltd. v. Ontario (Minister of Finance) (2006 SCC) – Tax Act Interpretation
The Source Concept of Income
Section 3 – Income for Taxation Year – (pg3/4)
Section 4(1)(a) – (pg4)
Section 56(1)(a)(ii) – Retiring Allowance – (pg35)
“Retiring Allowance” - Section 248(1)
“Employment” – Section 248(1)
Section 6(3) – Payments by Employer to Employee – (pg7)
Surrogatum Principle: see Tsiaprailis
Interpretation Bulletin 365R2 – Damages, Settlements and Similar Receipts
Case Law on Income from a Source:
Bellingham v. The Queen (FCA 1996) – income not from a source – win-fall gains
Schwartz v. The Queen (SCC 1996) – Retiring Allowances (s.56)
Curran v. MNR (SCC 1959) – Payment in consideration for future services and lost benefits - income
Tsiaprailis v. The Queen (2005) – Surrogatum Principle
Siftar v. The Queen (2003 FCA) – Apportionment Principles
Nexus Between Taxpayer and a Source of Income
General Rule:
Calculation Rules attempt to resolve Three Basic Questions:
Case Law on Source-Taxpayer Nexus:
Field v. The Queen (2001 TCC) – Nexus for RRSP withdrawals
Buckman v. MNR (1991 TCC) – Factors to Consider Instead of Just Strict Ownership
Residence as the Primary Basis of Canadian Tax Liability
Approach:
Residence as a Tax Base
Section 2 – Taxation of Residents and Non-Residents - (pg3)
Section 250(1) – Person Deemed Resident
Section 250(3) – Ordinary Resident
Interpretation Bulletin IT-221R3 – Determination of Residence (CRA)
Case Law on Residence as a Base:
Thomson v. MNR (1946 SCC) – Determining Residence/Ordinary Residence – LEADING
Lee v. MNR (1990 TCC) – Determining Ordinary Residence; Cit/Imm status not determinative
R&L Food Distributors Ltd v. MNR (1977 TRB) – Application of Sojourning
Part-Year Residence
Section 114 – Individual Resident in Canada for Only Part of Year
Section 249(1)(b) – “Taxation Year”
Case Law on Part-Year Residence:
Schujahn v. MNR (1962 Exch Ct) – Establishing Part-Year Residence
The Queen v. Reeder (1975 FCTD) – Where Residency is long established, difficult to show Severance
Avoidance of Dual Tax Residence
Section 250(5) – Deemed Non-Resident
Tax Treaties
Section 128.1(4) – Departure Tax
Case Law on Avoidance of Dual Tax Residence:
Salt (2007 TCC) – indicia of non-residence (severance of ties with Canada) – Can/Aus Treaty
Provincial Residence
Regulation 2601 – Residents of Canada
Regulation 2607 – Dual Residency
BC ITA Section 2 – Liability for Tax
Case Law on Provincial Residence:
Mandrusiak v. The Queen (2007 BCSC) – Thompson used to determine ordinary residence
Residence of Corporations and Trusts
Section 250(4) – Corporation Deemed Resident
Case Law on Residence of Corporations and Trusts:
De Bears Consolidated Mines Ltd v. Howe (1906 HL) – Residency for corporations is a question of fact
Sources as a Basis of Tax Liability
Income from Office or Employment
Basic Definitions and Provisions
Section 248(1) – Definitions Section for Office or Employment
Section 5 – Income / Loss from an Office or Employment
Section 6(1)(a) – Basic Inclusion in Income from Employment (see Savage)
Section 8(2) – Limitation on Deductions
Section 153(1)(a) – Withholding of Tax by Employer
Section 118(10) – Canada Employment Credit
Employee vs. Independent Contractor/Consultant/Sole Proprietor
Differences Between Employee and Independent Contractor
TEST for Employee vs. Independent Contractor:
Case Law on Employee vs. Independent Contractor:
Wiebe Door Services v. MNR (1986 FCA) – Leading – single question test to employee/contractor
Ontario v. Sagaz Industries Canada (2001 SCC)
Wolf v. The Queen (2002 FCA) – Intention is a valid factor to be considered
Royal Winnipeg Ballet v. MNR (2008 FCA) – Intention in the K should be considered
Lang v. MNR (2007 TCC) – Intent should not be ignored, but weight is in question
Personal Services Businesses and Incorporated Employees
Section 18(1)(p) – General Limitations on Deductions from Business or Property Income
Section 125(7) – Definitions
Section 248(1) – Specified Shareholder
Benefits, Reimbursements and Allowances
Savage (SCC) – Benefit need only be a material acquisition which confers a benefit upon the employee
Lowe (FCA) – Is there a measurable economic benefit? Who possesses the primary benefit?
Valuation of Employment Benefits
Giffen v. The Queen (1995 TCC) – Method of valuing benefits – no longer used for loyalty points – IT470R
Dunlap
Allowances
The Queen v. Huffman (1990 FCA) – distinction between allowance and reimbursement
The Queen v. MacDonald (1994 FCA) – Leading case on s.6(1)(b) – what constitutes an allowance
Special and Remote Worksites
Automobile and Traveling Allowances
Deductions and Computing Income from Office or Employment
General Limitations on Deductions:
Traveling Expenses
Martyn v. MNR (1962) – Travel to and from work is not deductable
Hogg v. The Queen (2002 FCA) – Travel to/from work not deductable even w/ work-related security issues
Legal Expenses
Professional and Union Dues
The Queen v. Swingle (1977) – s. 8(1)(i)(i) – interpreted strictly – professional required by statute
Cost of Supplies
Home Office Expenses
Income from Business or Property
Business Source of Income: Organized Activity and Pursuit of Profit
Framework for Income from Business or Property
Definition of a Business
Luprypa v. The Queen (1997 TCC) – Specific expertise or a system to make money gambling = business
LeBlanc v. The Queen (2007) – Lottery is pure chance = not an expected earning source = no source/no tax
The Pursuit of Profit – Reasonable Expectation of Profit (REOP)
Stewart v. The Queen (2002 SCC) – New test to find out if activity is a Business or Property
Adventure or Concern in the Nature of Trade (ACNT)
IT-459 – Adventure or Concern in the Nature of Trade:
MNR v. James A Taylor (1956 Exch Ct) – Transaction is ACNT – factors to consider – trade was business-like
Regal Heights Ltd v. MNR (1960 SCC) – Secondary objective of earning profit on land results in an ACNT
Irrigation Industries Ltd v. MNR (1962 SCC) – Investment in shares of a company are capital investments
Arcorp Investments (2000 FCTD) – Securities trading business = business income (not ACNT)
Income from a Property
Business vs. Property
Hollinger v. MNR (1972) – Approach for Business vs. Property Income
Walsh and Micay v. MNR (1965) – Rental properties generally seen as income from property, not business
Interest
Groulx v. MNR (1967 SCC) – Court found blended payments from an increased purchase price
Rent and Royalties
Wain-Town Gas and Oil (1952) – After-sale share in profits are royalties and subject to income tax
Dividends
Deductions in Computing Income from Business and Property
Structure of the Act – Business/Property
Income Earning Purpose Test
Imperial Oil (1947) – If Expense in ordinary course of business, then generally deductible
Royal Trust Co v. MNR (1957 Exch Ct) – Ordinary course of business expenses are generally deductible
Personal and Living Expenses
Section 18(1)(h) – Personal and Living Expense
Benton (Thomas Harry) v. MNR (1952) – House-keeper is a personal expense – not deductable
Section 63 – Child Care Expense Deduction
Symes v. The Queen (1994 SCC) – s.63, found not discriminatory towards women – note LHD dissent
Commuting Expenses
Dr. E Ross Henry – Travel from/to Home is not deductable aginst income from business/property
Moving Expenses
Home Office Expenses
McCreath (2008 TCC) – Travel between home-workspace and place of employment MAY not be deductable
Example Problem – Home Office Deductions and Carry-forward
Deduction of Interest Expense – see handout
Section 20(1) – Deductions Permitted in Computing Income from Business/Property
The Queen v. Bronfman Trust (1987 SCC) – Requirement that Borrowed funds be used for an income earning purpose; Money must be borrowed to use directly on the income earning purpose
Policy Reasons for Denying Decuctions
Eldridge
Bribery of Certain Officials – s. 67.5
Fines and Penalties – s. 67.6
Policy:
Computation and Timing
Capital vs. Current Expenditures
Section 18(1)(b) – Capital Outlay or Loss
British Insulated and Helsby Cables Ltd v. IRC (1926 HL) – One time payment to create asset - capital
Repair of Tangible Assets
Canada Steamship Lines Ltd v. MNR (1966 Exch) – Boiler of the ship is a capital asset itself
The Queen v. Shabro Investments Ltd (1979 FCA) – New tech improved the building – capital outlay
Gold Bar Developments Ltd v. The Queen (1987 FCTD) – New test outlined for finding repairs over capital
Timing – Amounts Receivable
Section 12(1) – Income Inclusions
CASE LAW RULES:
J. Colford Contracting – When an amount becomes receivable, it must be included in income
Benaby Realties – An amount is not ‘receivable’ for tax purposes until the actual amount is ascertained
West Kootenay Power and Light (1992 FCA) – Receivable means: everything has been done that is required to give rise to entitlement to be paid – even where customer is not legally obliged to pay at that moment
JL Guay Ltee – An amount is not receivable while it is still contingent on a condition precedent
Non-Capital Losses
Section 111(1)(a) – Carry Forward and Back of Non-Capital Losses
Capital Gains
Introduction to Capital Gains
Taxation of Capital Gains and Losses: 3(b) and subdivision E
Distinguish Income from Property: 9(3)
Calculation of Capital Gains and Capital Losses:
Carry Forward and Back of Capital Losses: 111(1)(b) and 111(2)(a)
Policy Evaluation of Preferential Taxation of Capital Gains
Definitions
Section 248(1) – “Property”
Section 54 – Definitions
Example – Identical Properties:
Section 248(1) – “Disposition”
The Queen v. Compagnie Immobiliere BCN Ltee (1979 SCC) – Disposition and POD – stat/normal meaning
Deemed Dispositions and Deemed Proceeds
Section 128.1(1) – Immigration
Section 128.1(4) – Emigration
Gifts and Sales Below FMV to Non-Arm’s Length Persons
Section 70(5) – Capital Property of a Deceased Taxpayer
Lottery Winnings Revisited
Rollovers: Transfer of Capital Property to Spouse/CLP
Section 248(1): “Common-Law Partner”
Section 73(1) and (1.01) – Inter Vivos Transfers
Example – Spousal Rollover
Section 74.2(1)(a) – Spousal Attribution Rule
Example – Opt-out of Spousal Rollover and Attribution Rule
Spousal Rollover on Death
Personal Use Property (PUP) and Listed Personal Property (LPP)
Section 54 – Definitions
Section 46(1) – Personal use Property
Section 40(2)(g)(iii) – Loss on PUP other than LPP is Deemed NIL
Calculation of LPP Net Capital Losses and Gains
Principle Residence Exemption
Policy for Principle Residence Exemption
Section 54 – “Principle Residence”
Section 40(2)(b) – Calculation of Principle Residence Exemption (PRE)
Example – Principle Residence Exemption
Example – Principle Residence Exemption 2
Basic Concepts and Canada’s Tax System
-Tax is a compulsory and unrequited (nothing identifiable is returned for that payment)
-Used to fund government/public services
-Wealth distribution from rich to the poor
-Reflects how society thinks Canada should function – what to encourage/discourage
Compared to Other Govt Collected Payments
-Tax is compulsory and unrequited
-Fines/penalties – compulsory as well but are used to deter/punish behaviour
-Royalties – made to Crown for extraction of natural resources | to company for software use rights
-Prices – a ‘requited’ payment to the govt in exchange for a good or service (licence, transit, etc)
-Taxes are sometimes used to encourage a certain behaviour (RRSP, RESP, etc) or discourage/account for a dangerous behaviour (alcohol/tobacco)
Attributes of Taxes
Tax Bases:
-Income, Consumption, Wealth (not usually used in Canada)
Rates of Tax:
-Statutory (set out in s. 117)
-Marginal Rate – highest rate that applies to the last dollar of income for a tax year
-Average Rate – total tax paid divided by the taxable income
-Effective Rate – total tax paid divided by the total income (including non-taxable income
-Classifications:
- Progressive Rates: increasing proportion of income as income rises
- Higher income persons have a greater ability to pay – they should be paying
- Regressive Rates: declining proportion of income as income rises – usually results from flat tax
- Low income persons pay a higher portion of their disposable income
Tax Period:
-Period over which tax is calculated; Income – annually
-Instalments may be required over the period
-Others are transactionally based
Exemptions: exempted income does not have be reported
-Lottery Winnings; Gifts; Strike Pay
Deductions: taxable income = total income – deductions
-RRSP/RESP; Moving Expenses; Childcare Expenses; Union Dues
Credits: tax payable = total taxes – credits
-Personal Tax Credit; Education Credits; etc
Generally Accepted Accounting Principles (GAAP)
-Rules set out by the Canadian Institute of Chartered Accountants for how to produce financial statements
-May be relevant for tax purposes, but may be overwritten by ITA or case law
Section 152 – Net Worth Assessments
(7) Assessments no dependent on return information – The Minister is not bound by a return or information supplied by T, and in making an assessment, may assess the tax payable
(8) Assessment deemed valid and binding – Assessment shall be deemed to be valid and binding absent errors
Equity and Policy in the Tax Law
Equity:
-Vertical Equity: Tax should consider how parties are situated against those in unequal positions
-Horizontal Equity: Those that are similarly situated should be taxed in a similar fashion
-Tax is premised on the notion of equity/fairness – most important factor
Neutrality:
-Taxes should not unduly effect personal decisions – marriage vs. common law, market factors, etc
-Difficult to obtain because our tax system is built on encouraging/discouraging certain actions
Simplicity:
-Comprehensibility – should be able to se how the system is meant to work with little effort
-Certainty – should be able to determine in advance the tax consequences of decisions
-Compliance Convenience – should not be difficult or inconvenient to comply with tax law
-Administrative Convenience – should not be too difficult for govt to administer the tax collection
-Difficult to Avoid/Evade – should be efficient to avoid dishonesty
Tax Expenditures:
-Where individuals would not be able to participate in a govt encouraged initiative, they are given tax breaks in the form of deductions, exemptions or credits
-Evaluation Expenditures
- What govt objective is being served by the expenditure?
- Are benefits distributed fairly? Is a program efficient? Does govt have control over the spending and politically accountable for it? Can the money be better spent elsewhere?
Constitution and Taxation
-91(3): Fed has unlimited power to tax/raise money by any mode
-92(2): Prov can impose direct taxes for the purpose of raising revenue for Provincial purposes
-Tax Collection Agreements – Feds collect on behalf of both Fed/Prov and then distribute to Prov
Pacer Dome Canada Ltd. v. Ontario (Minister of Finance) (2006 SCC) – Tax Act Interpretation
-Words of the Act are to be read in their entire context and in their grammatical and ordinary sense, harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament-Where the words are plain in their meaning, that is the favoured interpretation
-Only where there is ambiguity, greater recourse to the context and purpose is necessary
-There is a rarely relied upon residual presumption in favour of the T, only where cannot be resolved
-T has the burden of establishing that the factual findings of the assessment are wrong (Siftar)
The Source Concept of Income
Section 3 – Income for Taxation Year – (pg3/4)
Non-Capital Income
T’s income for a taxation year is the T’s income for the year determined by the following rules:
(a)Determine the total of all positive income (other than taxable capital gains) from a source inside or outside Canada, including but not limited to, the T’s income from each office, employment, business and property
NOTE: New sources are allowed by the Act, but none found to date - Bellingham
Capital Gains and Losses
(b)Determine amount by which
- The total of: (A) T’s taxable capital gains from disposition of property other than LPP, AND (B) T’s taxable net gain for the year from dispositions of LPP (must be a positive figure for LPP)
Exceeds
- The amount of T’s allowable capital losses for the year from dispositions of property other than LPP
(c)Determine the amount of (a) plus (b) exceeds the allowable deductions permitted by 60, 62, 63
Non-Capital Losses
(d)Determine the amount (c) exceeds the total amount of T’s loss from the year from an office, employment, business or property
Section 4(1)(a) – (pg4)
-Calculate income/loss from each source separately
-Because deductions/inclusions differ from source to source
-Net income is still a consolidation of all the income/loss from each source
Section 56(1)(a)(ii) – Retiring Allowance – (pg35)
-There shall be included in computing T’s income, a retiring allowance, other than an amount received out of an employee benefit plan, retirement compensation arrangement or a salary deferral arrangement
“Retiring Allowance” - Section 248(1)
-An amount received (other than superannuation, pension, death benefit)
- (a) On or after retirement of T from an office or employment in recognition of T’s long service OR
- (b) In respect of loss of an office/employment whether or not received as damages or pursuant to an order or judgment of a competent tribunal
“Employment” – Section 248(1)
-Position of an individual in the service of some other person
Section 6(3) – Payments by Employer to Employee – (pg7)
-(a)Payments made during a period while the payee was an officer or in the employment of the payer, OR (b) on account, in lieu of payment or in satisfaction of an obligation, shall be deemed income from an office or employment under section 5
-UNLESS, the payment was made (c) as consideration for accepting the office/contract/employment, (d) as remuneration for services as an officer or under k for employment; OR (e) in consideration for a covenant with reference to what the officer/employee is or is not to do before/after termination
Surrogatum Principle: see Tsiaprailis
-When payment is received in substitute for another payment, where the payment being replaced is taxable, then the replacement payment should also be taxable
-Two-part Test:
- 1. What was the payment intended to replace? (Must be clear)
- 2. Would the replaced amount have been taxable in the recipient’s hands?
Interpretation Bulletin 365R2 – Damages, Settlements and Similar Receipts
-Damages for personal injury or death are excluded from income
-Except the amount that could reasonably be considered to be income from employment