Tax Law: Skill Objectives Outline

Tax Law: Skill Objectives Outline

Spring 2014, Professor Mark Gillen

University of Victoria Faculty of Law

James Billingsley

Residence

ISSUEA threshold issue is whether ______is subject to tax under the ITA.

RULE

• Income tax is a tax on the income of a tax unit. S. 2(1) of the Act provides that income tax is payable on the taxable income of “every person resident in Canada at any time of the year.” Accordingly, it must be determined whether ______is “resident in Canada” for the purposes of the Act.
• DEFN TAXABLE INCOME: 2(2) The taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C.
• WORLDWIDE INCOME: 3(a) Residents are taxed on worldwide income (income “from a source inside or outside Canada”) including from office, employment, business and property. Part I; a progressive rate structure.
• While “Residence” is not expressly defined in the Act, the meaning of the term has been interpreted and applied in case law.
• In Thomson (1946), the SCC found that residence “depends on the spatial bounds within which a person spends his or her life or to which his or her ordered or customary living is related.” Although not binding in law per se, para 1.6 of Income Tax Folio S5-F1-C1 [formerly Interpretation Bulletin IT-221R3] references the remarks of Estey J. in Thomson, noting that residence is the “place where a person in the settled routine of his or her life normally or customarily lives.”
• In Beaumont and Russell, the courts indicated that a primary factor in determining residence is whether the taxpayer has available a place in which he or she has the right to stay. (ITF 1.11).
• In Allchin, the TCC also noted that the presence of one’s family is a primary factor. (ITF 1.11). However, compare with Shih (Taiwan), Shujahn (selling house), Nicholson (divorced).
• As per Thomson, the intention of the taxpayer, while perhaps relevant, is not determinative.
• Draw in any other relevant law from cases below.
  

APPLY

• In the present case, there are ____ key factors that make it likely that ___ is resident in Canada:
• ____ has had a place to stay in ______since ______.
• ______.
• ______.

PolicyEconomic allegiance theory, benefit theory, ability to pay, neutrality, enforceability

CONCLUDE ______.

1. It must be assumed that every person has at all times a residence.
2. Not necessary for residence that a person have a home, place of abode or shelter.
3. A person may have more than one residence.
4. The intention of the taxpayer (Bermuda), while perhaps relevant, not determinative.

• Para. 1.11 : “the residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's:

Residence of Corporations

ISSUEWhether a corporation is “resident” in Canada for the purposes of the ITA.

• Person under s. 2(1) includes a corporation, as corporation is regarded as a person for the purposes of the ITA under s. 248(1). Reference 3(a) and 3(d).
• Deemed Residency: corporations incorporated in Canada on or after 27 Apr 1965 are deemed to be resident in Canada. (250(4))
• A corp incorporated in Canada before is resident in Canada if: (250(4)(c))
• It has carried on business in Canada after that date, OR
• It is resident under the common law rule.
• APPLY: Corporation is incorporated in Canada; thus resident for the purposes of the ITA
  

• OLD LAW: A corporation is resident wherever “the central management and control actually abides”. (DeBeers. This is usually where the board of directors meets. (DeBeers). The directors’ location is generally determinative, unless their power has been “usurped”. (Wood)
• When the shareholders dictate the directors’ actions (e.g. where there is a majority shareholding company), the test is where the shareholders reside. (Unit Construction)
• Central management and control test:
• De facto. Where does control actually reside? (not merely de jure) (Unit Construction)
• Even when the location is selected for tax avoidance and the corp does all of its business in Canada, if the directors are non-Canadian and non-usurped, it’s not a Canadian resident. (Wood). This indicates a high degree of formalization of the test.

Residence of Trusts

ISSUEWhether a trust is “resident” in Canada for the purposes of the ITA.

• When the ITA refers to a “trust”, it’s referring to the trustee. (104(1), 248(1))
• Trusts are deemed to be individuals (and taxed accordingly). (104(2))
• General Test: the trust resides wherever the trustee resides.
• Multiple Trustees: the law here is presently unclear – NB the CRA uses the same test as Garron.
• The central management and control test has been applied to trusts. (Garron)

Non-Residents

• NON RESIDENTS PAY TAX IF:
  2(3) Where a person who is not taxable under 2(1) for a taxation year

(a) was employed in Canada

(b) carried on business in Canada, or

(c) disposed of a taxable Canadian property,

income tax shall be paid on the person’s taxable income earned in Canada in accordance with Div D

• 115 in Division D outlines “taxable income earned in Canada by non-residents”; also PART I tax so progressive

The Concept of Income

ISSUEThe first issue is to determine if ______qualifies as income for the purposes of the ITA, and if so

whether it constitutes income from a source, enumerated or unenumerated.

RULE

• Defined: Income is a net concept – it is net of expenses incurred in the generation of that income. This concept of income reflects the policy rationale of taxing accretions to wealth and tracking a taxpayers’ ability to pay. The identification of an amount or transaction as income is important for tax policy, as it affects the income tax base. It is also important in this case _.
• Source: While the ITA does not specifically define “income,” it indicates under s. 3(a) that income is “from a source.” S. 3(a) enumerates four sources of income: office, employment, business or property.
• The ITA provides a set of rules for the determination of income from these enumerated sources — subdivision a (ss. 5-8) has rules on income from office & employment, and subdivision b (ss. 9-37) has rules on business and property.
• Apply: ______is income from [source]; whereas ______.

• Unenumerated: However, s. 3(a), prefaces the four enumerated sources with the phrase “without restricting the generality of the foregoing.” Thus, while income must have a source, the sources could extend beyond the four listed. This is supported by s. 56, which states that the other types of income listed there, including pension and EI benefits, do not restrict the generality of s. 3. The court in Fries implicitly and court in Schwartz explicitly recognize unenumerated sources
• Accordingly, the ITA contemplates sources of income unenumerated in the Act.
• Apply: if not income from ______, ______may be income from an unenumerated source.

Factors that Suggest No Unenumerated Source — non-exhaustive list from Cranswick

• D had no enforceable claim to the payment.
• No organized effort by D to receive the payment.
• Payment was not sought after or solicited by D in any manner.
• Payment was not expected by D, either specifically or customarily.
• Payment had no foreseeable element of recurrence.
• Payor was not a customary source of income to D.
• Payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by D (i.e. not earned by D’s or another’s activities).

In addition to the factors in Cranswick, the courts have also considered:

• Not a productive source (i.e. a source that can produce income) (Bellingham)
• Eg: D underpaid for expropriated land, awarded damages against city that include statutory-imposed “additional interest”. Not a productive source. (Bellingham)
• The activity was not in the pursuit of profit (i.e. no intent to earn money). (Stewart)
• The taxpayer’s intention is determinative if reasonable (evidence to support)
• Eg: D buys property, takes yearly losses, sells for capital gain. No REOP. (Stewart)
• Eg: D owns shares in company A; parent company B pays out all of A’s shareholders to avoid litigation. Payment of “an unusual and unexpected kind”, no source. (Cranswick)

• Reluctance: While the possibility of unenumerated sources has been expressly acknowledged—such as in the Schwartz decision—courts are reluctant to extend the sources beyond those specifically listed in the Act. This may be because the ITA provides no rules or guidance on calculating income from such sources. Courts are likely more comfortable in deferring to Parliament to amend the ITA and expressly include them as sources if Parliament so chooses, rather than finding new unenumerated sources at common law.
• Damages for breach of an employment K prior to work starting is not income from a source (Swartz)
• A non-competition agreement is not income form a source. (Fortino).
• Strike pay is not income from a source. (Fries).

Policy: is there an accretion to wealth? [equity]; does the surrogatum principle apply?

Gifts, Inheritances, Windfalls, Illegal Income, Imputed Income

• Gifts and inheritances: personal gifts are not taxable, but gifts received in the course of business or employment are seen as benefits and thus included (see below).
• Gifts of property are deemed to be dispositions at FMV, and thus may incur capital gains. There are rollovers for gifts between spouses or shareholders and their companies. (69(1))
• Inheritances are not taxed.
• Windfalls: not taxable as long as they don’t constitute a business (e.g. horse racing eg. below).
• Illegal income is taxable as an accretion to wealth. (Buckman, Poynton, Eldridge), unless the proceeds are seized during an investigation —there is no accretion to wealth and thus no income.
• Imputed income is just an expense avoided (e.g. avoiding rent by owning a house). Not taxed.

Damages and Settlements – The Surrogatum Principle

• Surrogatum: tax damages and settlements are intended to replace something.
• Tax them in the same manner as you would the thing they are replacing. (London & Thames)

Contractual Damages

• Expectation damages: where damages for lost income are awarded, tax damages as income.
• Exception: where a breach of contract has resulted in the loss of the whole business (e.g. breach of franchise license), that is compensation for the loss of the source; a capital gain.
• Reliance damages: this is not an accretion to wealth (just replacing wealth) – not taxed.
• Exception: if the amount is to compensate for the loss of property (e.g. a destruction of a building), it will be taxed as a disposition of property, and thus a capital gain.
• Restitution damages: like reliance damages, not taxed – just compensation for loss.

Personal Injury Awarded

• Usually have no source. You are being compensated for the loss of physical ability or the infringement of the right not to be injured. Really non-contractual restitutionary damages. (Schwartz)
• Cost of care: not taxed (no accretion to wealth).
• Compensation for lost earning capacity: (Tsiaprailis)
• Post-judgment damages: not taxable. Replacing a source, to be invested. Tax on interest.
• Post-injury, pre-judgment lost income: also not taxable.
• Punitive damages: like a windfall, not taxed. Victim’s gain is only incidental to the policy decision to penalize the wrongdoer. (Bellingham)

Computation of Income

• Income is determined by totaling all of the amounts from each source. (3(a))
• Income from sources is included in income and must be (a) calculated source-by-source, and (b) territorially (province-by-province and country-by-country). (3(a), 4)
• Net taxable capital gains are included n income (but are calculated under a different scheme, presented in Part I, Division B, subdivision c). (3(b))
• Policy-based deductions: deductions under subdivision e are allowed (e.g. RRSP, s.60, moving expenses, s.62, partial child care expenses, s.63). (3(c), 60, 62, 63)
• Loss recognition: current year losses from enumerated sources can be deducted. (3(d))
• If the amount produced under 3(d) is negative, income is deemed to be 0. (3(f))
• The amount calculated by 3(d) or 3(f) is a person’s net income. (3(e))

• Capital Gains: Act treats capital gains separately since they do involve not income from a source but the disposition of a source.
• Other Types of Income: The ITA also adds other types of income that Parliament has decided to tax that might not be generated from a “source” and thus might not fall in s. 3(a).

Income from Office and Employment: Employee or Independent Contractor?

ISSUEThe issue turns to whether _ could be regarded as an independent contractor earning income from business, or whether _ could be regarded an employee earning income from employment. S. 3(a) provides that the taxpayer’s income for a taxation year is determined by calculating the total of all amounts each of which is the taxpayer’s income for the year, including from each of office, employment, business or property. The rules for calculating income from employment are set out in ss. 5 to 8 of the ITA. They are distinct from the rules calculating income from business, which are set out in ss. 9-37. Whether _ is an employee or an independent contractor has tax implications and is thus a frequent area of tax litigation. One reason for this is that an independent contractor is entitled to a wider scope of deductions than an employee, as exemplified in the case of Gifford v R.

RULE

• “Employment” is statutorily defined in s. 248(1) as “the position of an individual in the service of some other person.” Employment can in this respect be contrasted with business. Business income for tax purposes involves a “contract for services” rather than a contract of service.
• Beyond the definition of “employment” in the Act, the courts have frequently dealt with the distinction between an “employee” and an “independent contractor.”
• The most recent SCC decision to deal with the subject is the decision in the Sagaz case, which dealt with the distinction in the context of vicarious liability. In that case, the court held that the test is the so-called “control” test, plus a non-exhaustive list of factors, including: (i) whether the worker provides his own equipment; (ii) whether the worker hires his or her own helpers; (iii) the degree of financial risk taken by the worker; (iv) the degree of responsibility for investment and management held by the worker; and (v) the worker’s opportunity for profit in the performance of his or her tasks.

• Subsequently, however, in the Wolf case, the Federal Court of Appeal found that the factors traditionally developed in the case law prior to Sagaz had not been discarded. Instead, “they remain valid although somewhat reformulated.” Consequently, the tests and factors in the earlier case law, particularly the decisions in Wiebe Door, Pletch, and Royal Winnipeg Ballet, are likely relevant.
• One of the earlier decisions that the Supreme Court of Canada referred to with approval was the Federal Court of Canada decision in Wiebe Door. In that case, McGuigan J. canvassed four tests — the control test, the integration test, the economic reality test, and the specific result test, and then noted, much like Sagaz, that one must look to the “total relationship” of the parties. The four tests:

(1) control test — looks at the degree of control possessed by the employer over the work to be performed.