Law 345: Final Outline 2015

Tax

Law 345: Final Outline 2015

Natalie Pawson

Table of Contents

CHECKLISTS 3

Is it Income from a Source? 4

Calculation from the Act 4

Source as a Basis for Tax Liability 4

Retiring Allowance (Taxable) 5

Surrogatum Principle (Taxable) 5

Resident of Canada for Purposes of Tax Liability? 5

Approach 5

Ordinary Residence 5

Deemed Residence 6

Part Year Residence 6

Dual Residence 6

Deemed Corporate Residence 7

Provincial Residence 7

Income from Office or Employment? 8

General Provisions 8

Wiebe Door Test 8

Employee vs. Independent Contractor 9

Is TP entitled to Benefits, Reimbursement or Allowances? 9

Benefits Received 9

IT-470R – CRA PRactices for Benefits 10

Personal or Living Expenses Allowance 10

Vehicle or Travelling Allowance (Exception – Not Included in Income) 11

Special or Remote Worksite (EXCEPTION – NOT INCLUDED in income) 11

Deductions in Computation of Income? 11

General Limitation on EM Deductions 11

Travelling Expenses 12

Legal Expenses 12

Professional or Union Dues – Cost of Performing Duties 13

Cost of Supplies 13

Home Office Expenses 13

Income from Business or Property? 14

Income from Business 14

General 14

Canadian Controlled Private Corporations (CCPC) 14

Personal Services Business (PSB) 14

Specified Investment Business (SIB) 15

Business vs. Personal Endeavour – TEST 15

Gambling or Windfalls 16

Acquiring Capital to Earn Income 16

Adventure or Concern in the Nature Trade - TEST 16

Factors (IT-218R, IT-459) 16

IT-459 17

Income from Property 17

General 17

Interest 18

Rent and Royalties 18

Dividends 19

Can TP Deduct anything from Business or Property? 19

General Provisions 19

Personal or Living Expenses 20

Moving Expenses 20

Vehicle Expenses 21

Home Office Expenses 21

Deduction of Interest Expense 21

Current vs. Capital Expense 22

Depreciable Property and Capital Cost Allowance 22

Policy for Denying Certain Deductions 24

Is there a Capital Gain or Loss? 25

General Provisions 25

Capital Gain - Definition 25

Immigration and Emigration – Deemed Disposition of Property 26

Policy for Capital Gains 26

Lottery Winnings 27

Partial Disposition and Identical Properties 27

Non-Arms Length and Related Persons 27

Gifts and Sales below FMV to Non-Arms Length Person 28

Disposition on Death 28

Spousal Rollover 28

Attribution Rule 29

Personal Use Property (PUP) and Listed Personal Property (LPP) 29

Disposal of pup and lpp 29

lpp Net Capital Losses and Gains 30

Calculation for Capital Gains and LPP Gain 30

Principal Residence Exemption 31

CHECKLISTS

Business Checklist:

1.  Check s.248(1) for definition – is it a profession?

a.  Include yearly salary/income

2.  Is there a CCPC vs. PSB issue? – use Wiebe Door to determine if it is business or EE

3.  Include ALL expenses of running a business as deductions

a.  Used to earn a profit? – DEDUCTION (including if they use their car)

b.  Check specifics as well

c.  Home Office?

EE Checklist:

1.  Include the Salary

2.  Is there a CCPC vs. PSB issue? – use Wiebe Door to determine if it is business or EE

3.  ID ANYTHING THEY RECEIVED FROM ER!! – this is a benefit and needs to be included as taxable income!

a.  Consider CRAs practices from IT-470R

b.  Look for allowances, reimbursements, etc.

4.  Can they deduct anything? – rare to deduct…

a.  Home Office?

b.  Travel expenses – no commuting!!

PRE Checklist:

1.  Disposal of property? (real or shares?)

a.  Could it be covered by PRE if it is a home?

2.  If PRE, does it meet the requirements?

a.  Ordinarily inhabited?

b.  House and land exceed 0.5 hectares?

c.  Years owned since LAST ACQUISITION (deemed acquisition counts, like on immigration or emigration)

d.  Years as PR while resident in Canada?

3.  Determine calculation – want it to equal 0 because you cannot deduct a loss on PUP

Is it Income from a Source?

Calculation from the Act

*NOTE: it is up to the TP to report income correctly and include everything reportable and have the burden of proof to show that the amounts are taxable or not (Siftar)

s.4(1)(a) – calculate income from EACH source INDEPENDENTLY and take deductions off PER source

1.  S.3(a) – total POSITIVE amounts of income from worldwide sources (office, employment, business, property), other sources not listed, must be from productive source (Curran, Schwartz)

a.  S.56(1) – other sources: (a) pension benefits, EI benefits, retiring allowance, (h) RRSP withdrawals, (n) non-exempt scholarships, (q) RESP withdrawals, (u) welfare benefits

i.  Embezzled funds or illegal business (Buckman)

b.  New sources are allowed under s.3(a) but none found to date, courts will not add sources if they are dealt with by other areas of the Act (Bellingham)

i.  Advanced payments for future services is closest to new source so far (Curran)

c.  NOT income from source: punitive damages (Bellingham, Cartwright), gambling, windfalls (Cranswick), gifts and inheritance (Bellingham), strike pay (Fries), lottery (LeBlanc)

i.  Personal injury damages UNLESS it is reasonably considered EM income then will be taxable (IT-365R2, Tsiaprallis)

d.  Factors to determine if it comes from a source re windfall (Cranswick):

i.  TP had no enforceable claim to the payment

ii. No organized effort on the part of TP to receive payment

iii.  Payment was not sought after or solicited by TP in any manner

iv.  Payment was not expected by TP, either specifically or customarily

v. Payment had no foreseeable element of recurrence

vi.  Payor was not in consideration for in in recognition of property, services or anything else provided or to be provided by the TP; it was not earned by the TP, either as a result of any activity or pursuit of gain carried on by the taxpayer or otherwise

e.  Once determined income is from a productive source, determine if there is sufficient nexus between amount and TP

i.  Must have personally received and benefited from amount (Field)

ii. Strict ownership isn’t exclusive test, examine surrounding circumstances about how money was received and manner it was held in (Buckman) – consider behaviour of TP, intention to repay funds, manner amount was held

2.  S.3(b) – add taxable capital gains minus allowable capital losses

a.  S.111(1)(a) – non-capital losses can be carried back 3 years, forward 20 years

b.  S.111(1)(b) – net capital losses can be carried back 3 years, forward 20 years

c.  S.111(2) – in year TP dies, net capital losses are used to offset income for year of death and preceding year

3.  S.3(c) – subtract deductions allowed under subdivision E (s.62 moving)

4.  S.3(d) – deduct losses from sources (non-capital losses: office, employment, business, property)

5.  S.3(e) – ultimate taxable income for purposes of s.2(2)

Source as a Basis for Tax Liability

·  S.2(1) – tax payable by persons resident in Canada – on worldwide income

·  S.2(3) – tax payable by non-residents for: EM and business, disposal of property in Canada

·  S.212(1) – 25% tax on certain payments by residents to non-residents when they move (rent, royalties, pension, retiring allowance, interest, management fees)

·  S.215(1) – obligation to withhold and remit tax on behalf of non-resident

o  S.215(6) – if amounts are NOT withheld, corporation/person is jointly and severally liable for tax owing

·  S.249(1)(b) – taxation year – for individual it is a calendar year (year end = December 31st)

Retiring Allowance (Taxable)

·  S.56(1)(a)(ii) – taxable amount received out of EE benefit plan, retirement plan or salary deferral included in income, on or after retirement in recognition of TP’s long service

o  Only applies when TP is an actual EE of the company (Schwartz)

o  Severance pay is included in EI

·  S.248(1) – Retiring Allowance: amount received (other than pension/death benefit), for T’s retirement from office or employment in recognition of T’s long service OR in respect of loss of office/employment whether or not damages

·  Can include amounts for wrongful dismissal!!

Surrogatum Principle (Taxable)

·  In the case that a payment is received in substitute for another or different payment, where the payment replaces taxable income, then the replacement will also be taxable (Tsiaprallis, London v Thames)

TEST from Tsiaprallis

1.  What was the payment intended to replace? MUST BE CLEAR;

2.  Would the replaced amount have been taxable in recipient’s hands?

a.  If the amount is a substitute for earning potential = non-taxable

b.  Can’t apply if there is no evidentiary basis for payment (Schwartz)

c.  Burden on TP to show amount wasn’t attributable to taxable payments (Schwartz)

·  If award is meant to compensate for future earnings, award will be taxable!

·  Periodic employer insurance payments WILL be taxable

Resident of Canada for Purposes of Tax Liability?

Approach

·  Canadian tax is based on residence and source – emphasises economic association with country and easier to enforce (more control over source and TP)

·  S.2(1) – tax paid on income of every resident

·  S.2(2) – determines the income

·  S.2(3) – not taxable under s.2(1) (non-resident) but worked in a Canadian company or had active sources of income in Canada – must file tax return as non-resident, pay tax

·  Residency is a factual determination – look at details of how and where they lived, income, connections to the place (Thomson, IT Folio Residency)

o  Distinction between person who has always been resident then tries to not be resident (difficult!) and person who comes to Canada for a while then leaves (easier)

·  S.128.1(4) – Emigration: where a resident becomes a non-resident, subject to departure tax

o  Deemed disposition at FMV of all property OTHER THAN real property, at time TP ceases to be resident – realize CG and report and pay taxable gains on exit (IT Folio Residency)

·  S.128.1(1) – Immigration: becoming a resident of Canada, subject to entry tax

Ordinary Residence

·  S.250(3) – Ordinary Resident: everyone has a residence at all times

o  Restricted meaning: residence in the ordinary course of customary mode of life, distinguished from visiting/sojourning (Thomson)

o  Resident: matter of the degree to which a person in mind, in the settled routine of TPs life, he regularly, normally or customarily lives (not casual or uncertain) (Thomson)

o  Intention is NOT relevant! (Thomson, Lee)

·  Determining residence is a matter of fact

o  Factors to consider (Lee): Past and present habits, regularity and length of visits in the jurisdiction asserting residence, ties within that jurisdiction, ties elsewhere, permanence and purpose of stay abroad

·  Main determinates for residences: (IT Folio Residency)

o  Dwelling place, spouse/CL partner, dependents location

·  Secondary ties: (IT Folio Residency)

o  Personal property, social ties (clubs, friends, siblings), economic ties, immigration status, medical insurance, DL, cars, seasonal dwellings, Canadian passport

Deemed Residence

·  S.250(1) – deemed resident of Canada throughout the entire taxation year

o  (a) – sojourn for +183 days (not required to have residential ties)

o  (b) – armed forces (abroad)

o  (c) – public servant of Canada (EE of government abroad), resident before appointment

·  Sojourn = to make a temporary stay in a place, to remain or reside for a time

o  Includes holidays, business trips, unexpected/unusual stays – anything overnight!

·  Commuting to Canada for day’s work is NOT sojourning, generally have to stay overnight (R&L Food Distributors)

Part Year Residence

·  S.114 – not taxed on the portion of the year when TP started/ended residency in Canada

o  Situation where the TP leaves in the middle of the year – determine when they stopped being resident (factual inquiry)

o  Take income for the whole year and then for the period of non-residency, only taxed on portion they would be taxed for as a non-resident (income from Canadian sources)

o  Use the Thomson test to determine residency

·  Must establish facts to show severing Canadian residency, looking to the connections to the place (Schujahn)

o  On re-establishing residency in another country, date they leave the country is the date they become non-resident (Schujahn)

·  Temporary or indeterminate time away from Canada is insufficient for a long-time Canadian resident (Reeder) – use Lee factors

o  Must sever ALL ties to Canada to be treated as non-resident (Reeder)

o  More difficult for Canadians to prove non-residency

Dual Residence

1.  Determine if there is dual residency issue – TP wants to avoid double taxation – MUST BE DETERMINED TO BE RESIDENTS OF BOTH COUNTRIES BEFORE THIS

a.  Determine if resident in Canada by any of the following:

i.  S.250(1) – deemed residency

ii. S.250(3) – ordinary resident

b.  Consider centre of vital interest – personal and economic ties to country

2.  Tie Breakers – any tax treaties that exist to determine which residency prevails

a.  Go through steps under the treaty

b.  Pg.63-65 in Student Edition – UK and US treaties

3.  S.250(5) – person is deemed non-resident for tax purposes where TP is a resident of another country under a tax treaty

·  In order to apply tie breaker, must have found residency in both countries, THEN apply tie breaker and that prevails (Salt)

o  Adult children are social tie, not significant residential tie

o  When a home is not fully available (sublet, requiring notice to move back in), residence will be the other country – permanence is essential (Salt)

Deemed Corporate Residence

·  Corporation is a legal person – distinction between shareholders, CEOs and actual corporation

·  S.250(4) – deemed corporate residence in Canada if:

o  (a) incorporated in Canada AFTER 1965; OR

o  (b) incorporated in Canada BEFORE 1965 and at any time since incorporation were resident in Canada under CL rule or did business in Canada (business operations)

·  Common Law Test: residence is where real business of corporation is carried on, where the central management and control abides (Debeers)

o  Central Management and control = where board of directors meets to make decisions for corporation

o  Residence is where decisions about company are being made – if following direction of majority shareholder or another person, residence will be where that shareholder/person lives (Debeers, Unit Construction)