Marina Bezrukova: Taxation with Allard/2000

Taxation Summary by Marina Bezrukova

Fall 2000 Prof. Allard

Dear peers, this is not a summary of caselaw, but a concise summary of legal principles deducted from caselaw and the ITA. It can be a great tool in preparation for the exam.

Income

if a receipt is in the nature of income, it will be taxed.
A receipt is in the nature of income, if you have earned it.
Hence, a windfall like gift, lottery winning, inheritance is not an income.

Residence

s. 2: Income should be paid on income by every Resident in Canada.

Common Law Residence

The person meets the c/law residence test when the cumulative effect of multiple factors demonstrates that his customary mode of life is centralized in Canada, that he has a sufficient nexus or link to Canada: Thomson, Lee

Being a question of fact and degree, the link or nexus can be determined by various factors: Lee
ownership of property or dwelling in Canada
location of family home
residence of spouse, children
regularity and length of physical presence; and its purpose
mode of life, past and present habits of life
presence of business interest
presence of social interest
ties to jurisdiction: memberships, registration of vehicles, credit cards, mailing address, telephone listing, bank account, subscriptions
ties elsewhere

general propositions:
no single factor is determinative: Lee
citizenship is not a factor: Thomson
a taxpayer must reside somewhere: Thomson, Lee
intention and free choice of domicile are not necessary to establish residence: Lee
taxpayer may have more than one residence and pay taxes in two countries: Thomson

Part-time Residence s. 114

Special rules for calculating (y) apply to individuals who are resident in Canada for only part of a taxation year (they have either "commenced" to reside or "ceased" to reside in Canada).

Test: have you ceased to have ties with Canada? Factors:

permanence an purpose of stay abroad
residential ties in Canada
residential ties elsewhere
regularity and length of visits to Canada.
However, if some of ties remain, the individual must prove that the reason for keeping these ties is not underlined by the intention of residing in Canada. E.g. in Schujahn, ownership of a family home and presence of a spouse and children in Canada were justified by the individual's intent to sell the house at a better price. Intent is key here.

Deemed Residence under s. 250(1)(a)

If an individual is not found to be a resident or a part-time resident, he can still be deemed (can be rebutted!) to be a Canadian resident for the entire year where he

(a)for the total of 183 days (6 months) or more

(b)sojourned in Canada. R&L Food Distributors:

sojourning means more than mere physical presence. Taxpayer must establish temporary

residence in Canada, to have home, family, and social ties in Canada (by requiring this much, Canadian courts have eroded the distinction b/n c/l test of residence and of sojourning);

must have temporary residence and remain there for a time; clearly missing where the

individuals returns to a home in US every evening after word;

even if the individual has a residence in Canada, he must prove that it was not causal and

uncertain, but that it was in the ordinary regular course and that the usual relationship of such residence was beyond a doubt.

Ordinary Resident in Canada s. 250(3)

Test of "ordinarily resident" is narrower than "resident". Not popular with courts.

Even if you are absent from Canada for the whole year, you may be a Canadian rez in that year. The court will consider the taxpayer's activities over a period of years and whether you have intention and likelihood of coming back to Canada. E.g. in Reeder, the taxpayer was likely to return to Canada, because his work in France, though was indeterminate in length, was temporary. Thus, residence is more than physical presence.

Residence of Corporations

s. 250(4):

1st: Corporation is a Canadian resident if it was incorporated in Canada after 26.04.65:

De Beers:

2nd: if not incorporated in Canada, it is still a Canadian resident if the corporation's "central management and control" abide in Canada. Factors:

location of meetings of directors
with today's powerful communication, might rather consider the residence of directors
residence of shareholders is irrelevant.

Employment Income

Is this an (y) from employment as opposed to (y) from business? If yes,
S. 5 = employment (y) is salary + benefits + reimbursements for p/l expenses + gifts.
S. 6 = specific inclusions of benefits
S. 8 = specific deduction of expenses made for the benefit of e'er

Employee v. Independent K'or?

The control test (power of selection of the servant, payment of wages, control over the method or work, the master's right of suspension or dismissal) cannot be decisive when in dealing with a professional: Houser.
Having moved away from single criterion tests (e.g. control), the courts today look at the whole scheme of operations to determine relationship between parties: see Weibe Door Service
Thus, one must apply total relationship/multiple criteria test:

(a)whether the person's work is integral to the services/business of the e'er;

(b)whether the person provides his own equipment, tools and other administrative accessories like own office, secretary, accountant, etc.;

(c)whether he hires his own helpers and can alone fire them;

(d)what degree of financial risk is taken, what degree of responsibility for investment and management he has;

(e)whether he has an opportunity of profiting from sound management in the performance of his test;

(f)does the person have to accomplish as specified amount of work, specific project and the K does not require him to do it personally (can hire someone) or does he have to do work on the continuous basis without there being any limited or specified amount of work (e.g. in Houser, the doctor's professional service where at all time at the disposition of the H and his work included whatever had to be done).

(g)does the person receive e'ment benefits like other similarly situated e'ee and is he subject to the same requirements and rule as other e'ee (e.g. in Rosen, the person did not have to research, publish, attend meetings like other professors. These factors made this case a borderline case);

(h)whether he seeks his own clients (e.g. in Houser, test were done only to patient of the Hospital; the person did not seek them out himself);

(i)to how many clients does the person provide his skills (the more, the better; in Rosen, had the taxpayers taught at 5 or more schools, it would have been much harder to consider him an e'ee);

General principles:

E'ment test is a question of fact and degree; one must weigh up factors which point in one direction against factors that point in the opposite direction;
The advantage of independent K'or is larger scope of deductions. E'ee can deduct only what s. 8 allows.
Existence of K that says that the taxpayer is an independent K'or is not determinative of the relationship: Weibe.

Is it a benefit?

Tennant v. Smith: only $ and what is convertible into money can constitute benefit. Benefit is what is put in e'ee's pocket, and not what is saved. E.g. a discount given to e'ees (but now below CGS to e'er)

Is it a taxable benefit?

A. Benefits, Reimbursements, Allowances

6(1)(a): lodging, board, and other benefits of any kind received by virtue of e'ment
6(1)(b) personal or living expenses (as opposed to expenses incurred for the benefit of e'er: s. 8)

As per Phillips and Savage, the reimbursement payment is a taxable benefit where:

(1)the e'ee received it in his capacity as an e'ee and not as a person

╚> look at e'er's intention and purpose of payment. Was it an act of altruism (e.g. paying for e'ee's H when it burned down) or for purposes of protecting and promoting parties' economic interest in each other?

(2)the payment resulted in an economic benefit to e'ee (i.e. in accounting terms, did the net worth of e'ee increased?) Onus is on the taxpayer to show that there was no advantage and that the expense was not personal but for the benefit of the e'er like in Huffman.

Compensation for a higher cost of houses/living at a new city is a taxable benefit: Phillips.

Personal Consumption issue: benefit is not measured by the taxpayer's subjective perception: E.g. If $ of your old house cannot buy you an equally nice house in a new city, tough luck: Phillips.

If no economic advantage, this payment is a reimbursement for expense incurred in relation to

e'ment and does not fall within s. 6(1).

In Ransom, the net worth of e'ee did not change, because the payment compensated for the capital loss. In Phillips, the 10,000 enabled e'ee to acquire a more valuable asset (an increased equity). This payment effectively represents a temporary wage increase not available to all e'ees. In Splane, the e'er payment of difference in higher mortgage payments was not taxable to e'ee, because e'ee's equity (principal) in the old and the new house were the same. In Savage, the payment for e'ees' course completion improved e'ee's knowledge and her opportunity for promotion. On the part of the e'er, it was not personal bounty or consideration extraneous to e'ee's employment. In Huffman, e'ee made expenses for the benefit of e'ee, not for personal benefit, because his work clothing had to be a larger size than his regular outside-out-work clothing. He was returned what he spent for the e'er.

(a)Gifts and gratuities (Christmas gifts, holiday trips, tuition fees)

The cumulative factors emerging from Laidler and Campbell:

(1)but-for: would the e'er would make this gift had the person not been an e'ee.

(2) regularity of the gratuitous payments (in Laidler, it was done every Christmas and e'ees came to expect it); contrast this with once and for all gift for e'ee's wedding;

(3)intention of the e'er (in Laidler = good future performance; in Campbell = business interest in a goodwill of the newspaper);

(4)business pressure or interest to make the payment;

(5)the size of the gift in relation to e'ee's income (question of degree)

(6)prior business relationship;

(7)the absence of a legal obligation to make payment is irrelevant: Campbell., but existence of a K is a strong factor in favor of a taxable benefit;

(8) the e'ee's argument that he did not want the gift is irrelevant; the test is objective;

(9)Where the benefit is received from a 3rd party, the test is the same: did the person receive this benefit in his personal capacity or by virtue of his e'ment : Waffle. The party creating the benefit must have an economical interest, albeit indirect, in good work of the e'ee and his company. (here an e'ee of a car dealership receives vacation trip from Ford Corp.)

C. What is the Value of the Benefit:

(1)Value of the benefit (to the e'ee or shareholder) is profits forgone by the business as a result of devoting $$$ to the employee's business instead of profit making activity: Youngman.

(2)The cost of replacement of the benefit is also a valid method of valuation where a comparable situation exists. (it was impossible in Youngman, b/c the house was custom-made to fit sh's wishes.)

(3)Apportionment of the value of the benefit that includes both business and personal pleasure purposes is possible : Ferguson. In such case, the court will confer on the taxpayer a portion of the employer's cost: Philip.

(4)The degree of luxury element attaches to the benefit received by e'ee. For e.g. the luxury of a car is the benefit in itself irrespective of the degree of personal use that is taxable to the user: Zakoor.

D. Timing:

Cash Basis: did the e'ee have means for realizing the receipt (e.g. could cash the check) in the taxation year?

E. Deductions: section 8

Traveling expenses: where e'er had to carry out work duties away from the e'er's place or by K required to travel in the performance of duties.
Meals: only if the e'ee has been away from the e'er's work site for a period of more than 12 hours.
Expenses must be reasonable: s. 67.

Income from Property & Business

Source issue: is it an income from Business/Property?

Inclusions:

If yes, it should be included in the taxpayer's net income: s. 9;

Examine if s. 12 commands any specific inclusions;

Deduction:

General limitation on deductions s. 18(1);

See specific prohibited deductions: s. 18 (capital outlays, living & person expense);

See s. 20 which allows certain deductions despite s. 18 (CCA, CECA).

Is the TXP engaged in Business/Adventure in the Nature of Trade (versus Hobby?)

S. 248 definition of "personal and living expenses" allows s. 18(1)(h) to deny any deduction for expenses of a business where there is no Reasonable Expectation Of Profit (REOP).

I. Moldowan test for a REOP considers whether:

i. the profit & loss over the years of this activity (profit in some years gives a hope for profit in future: see e.g. history of revenue from published books in Zolis);

ii. the taxpayer's training and skills were engaged; the level of professionalism of work accomplished;

iii. he had an intended course of action (e.g. made profitability & market studies, feasibility projections like the taxpayer in Tonn, knew that there is market for his product/service: Zolis, etc.);

iv. the venture as capitalized has capability to show a profit after charging CCA (was absent in Stewart).

II. Tonn qualified Moldowan test to prevent courts from second-guessing the taxpayer's business judgment. The REP test should be applied sparingly where:

i. the taxpayer's "business judgment" is involved

ii. there is not strong personal element

iii. the extent of the deductions claimed is not on its face questionable (i.e. intentional losses to create tax refund)

Walls v. Buvyer, [2000] 1 C.T.C. 324 (FCA), same court goes even further: REOP concept does not apply unless there is a personal element to activity.

Kuhlman: REOP is not undermined by the fact that a business has start up losses; must give grace period given the particular nature of the activities. The issue is whether there is a REOP in future.

Profit does not include CG: s. 9(3) and Stewart.

For there be no deduction, the expectation must be "irrational, absurd, and ridiculous": Kuhlman

Kuhlman: "much more is required than one's love for one's work to attract the scrutiny by Tonn". there should be a strong element of personal enjoyment which is the dominant & motivating force.
Kuhlman: a personal element may coexist with a profit motive. In this case, the love for animals qualified the taxpayer even more strongly as a competent entrepreneur in the horse industry.
Stewart: an intention to create losses (deductions) is supported by the fact that the taxpayer, as an experience real estate developer, has not in the past financed his acquisition through such massive borrowing.
Stewart: there can be no REOP so long as no significant payments are made against the principal amount of the indebtedness and where there are independent projections of losses (by Remark).
Landry: the court might not business not only because it is a hobby, but also because the taxpayer conducted his practice so inefficiently that there was no REOP (inefficient old lawyer). Opposite result in Camtois.

B. During Ownership: Business (y) v. Property (y)

Hollinger test: the distinction between these two types of income depends on the degree of effort, time and labor devoted by the taxpayer. Income from property results from the use of property without the active and extensive business-like intervention of its owner.

More complex e.g. hotel rent: on the one hand, the hotel is property and rental (y) is usually income from property, but here the owner spends time and labor to provide service, and therefore the hotel income represent a combination of property use and other service from which the tenants benefited.

See test in Walsh: Were the additional services provided to tenants relatively significant and sufficient to convert the taxpayer from landowner into a conductor of business? To decide this question, ask whether the services provided have become a norm, an expected accessory to tenants in accommodations of this kind and were they ancillary to the property, like provision of heating for e.g. Could find B(y) where provision of breakfast, maid, linen, laundry, etc.

C. Proceeds of disposition: Business (y) v. Capital Gain

OwnershiplSale

______l______

B(y) or P(y)lp.o.d = B(y) or CG?

The characterization of (Y) during ownership has no effect on characterization of p.o.d.

But the fact that the income was earned prior to sale points two CG, but still intention is key.

Why makes the difference?

B(y) is good when you want to deduct interest: Laidco. If you borrow for purpose of selling inventory, interest is deductible.
Business Losses are deductible against all types of income. CL, are deductible only again CG.
ACL = 50% of CL, while Business Loss is 100 % deductible
BL can be carried 3 year back, and indefinitely forward: 111(1)(a).

CL can be carried over 3 year and 7 forward: 111(8).

The key factor = motive /intent to make money on resale rather than to make money through ownership and only incidentally on resale: Taylor.

Regal Heights: Where the "primary intention" to invest does not materialize, the "secondary intention" to sell can result in the gain being held to be B(y) where the secondary intention is not only the thought of sale at a profit, but also that the prospect of such a sale be an operating motivationat the time the acquisition of the property. The secondary intention is different from changing one's mind later.

*** SI is particularly important when the facts suggest that there was little likelihood of the property being retained by the txp b/c of the lack of financial resource, skills, etc.

The latter was contradicted by Regina Shoppers Mail where the subsequent change of intention was enough to change characterization. In Hughes, however, the court ordered an apportionment between (y) and capital, so that only the gain accrued after the change in intention was treated as ordinary (y).

These factors help to determine motive:

The type of property: some kinds lend themselves more easily to characterization of CG or B(y):

common shares, gold, silver investments (in the absence of frequent transactions) = CG; vacant land = B(y). With these, the subject matter is a factor stronger than all others; sort of an exception to the general rule.

length of period of ownership;

improvement work on the property to make it more marketable points twd dealings (B(y));

the circumstances that were responsible for the realization (e.g. if there was an urgent need of $,

this negates the idea of any planned dealing);

frequencies (high turnover) or number of similar transactions by the same person. BUT,

an isolated transaction which is in the nature of trade can still be taxable as B(y); need no