Tax Payable by Persons Resident in Canada

Introduction

Basic Structure of Income Tax

Tax payable by persons resident in Canada

1. Tax Unit

Tax payable by persons resident in Canada

a. Who is a “person”?

b. Who is “resident in Canada”?

2. Tax Rate

Individuals

Corporations

Inter Vivos Trusts

Policy Considerations:

3. Tax Base

Inclusions

Deductions

Losses

4. Accounting Period

Policy Considerations

Evaluating Income Tax Provisions

Income from Office or Employment

Contract of Service vs. Contract for Services

Wiebe Door Services Ltd. V MNR (1986, Fed CA)

671122 Ontario Ltd. V Sagaz Industries (2001, SCC)

Wolfe v The Queen (1975, SCC)

Incorporated Employees

Limitation re personal services business expenses

Dynamic Industries v Canada (2005, FCA)

I. Inclusions

Remuneration

Inducement Payments

Curran v MNR (1959, SCC)

Moss v MNR (1963, Exch)

Quance v Canada (1974, FCTD)

Torts Damages

Cirella v Canada (1978)

Benefits

Lowe v Canada (1996, FCA)

R v Savage (1983, SCC)

Detchon v Canada (1995, TCC)

Automobile Benefits

Standby Charge

Hewitt v Canada (1995, TCC)

Side Notes from Class in case he asks more details about how this Operating Benefit is calc’d

Automobile operating expense benefit

Insurance Benefits

Tsiaprailis v The Queen (2005, SCC)

Interest Free and Low Interest Loans

Canada v Hoefele (1995, FCA)

Relocation Assistance

Splane v MNR (1990, FCA)

Pezzalo v Canada (1995, TCC)

Phillips v MNR (1994, FCA)

Allowances

MacDonald v Canada (AG) (1994, FCA)

Blackman v MNR (1967, TAB)

Statutory Exclusions

Guilbert v MNR (1991, TCC)

Dionne v Canada (1996, TCC)

II. Deductions

Travel Expenses

Motor vehicle travel expenses

Nelson v MNR (1981)

Canada v Cival (1983, FCA)

Yurkovich v MNR (1986, TCC)

Luks v MNR (1958, Ex Ct)

Meals

Healy v Canada (1979, FCA)

Legal Expenses

Werle v The Queen (1995, TCC)

Professional Membership Dues

MNR v Montgomery (1970, Ex Ct)

Office Rent

Prewer v MNR (1989, TCC)

Expenses of Sales Persons

Creighton v MNR (1951, TAB)

Bowman v MNR (1985, TCC)

Verrier v MNR (1990, FCA)

Income/Loss from a Business or Property

MNR v Taylor (1956, Ex Ct)

Regal Heights Ltd. v MNR (1960, SCC)

Gambling

MNR v Morden (1961, Ex Ct)

Reasonable Expectation of Profit (REOP)

Stewart v Canada (2002, SCC)

i.Inclusions

Gains from Illegal Activities

No. 275 v MNR (1955, TAB)

Damages and Compensation

Canada v Manley (1985, FCA)

Queen v Atkins (1976)

Interest

Perini Estate v MNR (1982, FCA)

Sherway Centre v Canada (1998, FCA)

Queen v Greenington Group (1979, FCTD)

Payments of Interest and Capital Combined

Groulx v MNR (1967, SCC)

Vanwest Logging v MNR (1971, Ex Ct)

Discounts and Premiums

O’Neil v MNR (1991, TCC)

Royalties

MNR v Morrison (1966, Ex Ct)

Huffman v MNR (1954, TAB)

Rent

Pitman v MNR (1954, TAB)

Inducements, Reimbursements and Refunds

Iron Ore Co. of Canada Ltd v Canada (2001, FCA)

II. Deductions

Damage Payments

Imperial Oil Ltd v MNR (1947, Ex Ct)

Fines and Penalties

65302 British Columbia Ltd. v Canada (1999, SCC)

Theft

Thayer Lumber Company Ltd. v MNR (1957, TAB)

Cassidy’s Ltd v MNR (1989, TCC)

Legal Defense Costs

Rolland Paper Co v MNR (1960, Ex Ct)

Neeb v Canada (1997, TCC)

Promotional Expenses

Ace Salvage Alberta Ltd. v MNR (1985, TCC)

Ross v Canada (2005, TCC)

No 511 v MNR (1958, TAB)

Olympia Floor & Wall Tile v MNR (1970, Ex Ct)

Recreation, Meal and Entertainment Expenses

Royal Trust Company v MNR (1957, Ex Ct)

Fehrenbach v MNR (1994, TCC)

Fingold v MNR (1993, TCC)

Scott v Canada (1998, FCA)

Clothing Expenses

No 360 v MNR (1956, TAB)

Home Office Expenses

Work space in home

Locke v MNR (1965, TAB)

Travel Expenses

Cumming v MNR (1967, Ex Ct)

Interest Expense

Bronfman Trust v Canada (1987, SCC)

Ludco Enterprises Ltd v Canada (2001, SCC)

Tennant v MNR (1996, SCC)

Hills v MNR (1970, TAB)

Emerson v Canada (1985, FCTD)

Leslie v Canada (1998, TCC)

Timing Issues

Inclusions

West Kootenay Power & Light Co v MNR (1992, FCA)

Canderel Ltd v Canada (1998, SCC)

MNR v Benaby Realites (1967, SCC)

Commonwealth Construction v MNR (1984, FC)

Deductions

Amounts Payable

JL Guay Ltee v MNR (1971, FCTD)

Wawang Forest Products Ltd v Canada (2001, FCA)

Canada v Burnco Industries Ltd (1984, FCA)

Buck Consultant Ltd v Canada (2000, FCA)

Capital Expenditures

Canada v Johns-Mansville (1985, SCC)

Wardean Drilling (1969, Ex Ct)

CAPITAL COST ALLOWANCES (CCA)

UCC

ReCapture and Terminal Loss

MNR v Browning Harvey Ltd (1990, FCTD)

Hewlett Packard v Canada (2004, FCA)

Eligible Capital Expenditures

Pre-Paid Expenses

Urbandale Realty Corp v MNR (2000, FCA)

Toronto College Park Ltd v Canada (1996, FCA)

Canderel Ltd v Canada (1998, SCC)

Doubtful Debts

Coppley Noyes & Randall Ltd v MNR (1991, FCTD)

Bad Debts

Anjalie Enterprises Ltd. v Canada (1994, TCC)

Taxable Capital Gains and Allowable Losses

Real Property

Regal Heights Ltd v MNR (1960, SCC)

Tangible Personal Property

Canadian Kodak Sales Ltd v MNR (1954, Ex Ct)

Corporate Shares

Irrigation Industries Ltd v MNR (1962, SCC)

Debt Obligations

Wood v MNR (1969, SCC)

MNR v Freud (1968, SCC)

Millford Developments v MNR (1993, FCTD)

Canadian Securities

Vancouver Art Metal Works Ltd v Canada (1993, FCA)

Foreign Exchange

Tip Top Tailors Ltd v MNR (1957, SCC)

Shell Canada Ltd v Canada ()

Computing Taxable Capital Gains

Disposition of Capital Property

MNR v Keiboom

Proceeds of Disposition:

Robert v MNR (1990, TCC)

Anti Avoidance Rules:

Adjusted Cost Base

Sterling v Canada (1983, FCA)

Expenses of Disposition

Avis Immobilien GmbH v Canada (1996, FCA)

Special Computation Rules

Personal Use Property

Burnett v Canada (1995, TCC)

Boudreau v Canada (1999, TCC)

Listed Personal Property

Principle Residence

Flanagan v MNR (1989, TCC)

Ennist v MNR (1985, TCC)

Jukic v Canada (1994, TCC)

Falk v MNR (1991, TCC)

Surrounding Land

Canada v Yates (1983, FCTD)  affirmed by FCA

Rode v MNR (1985, TCC)

Augart v MNR (1993, FCA)

Designation

Dispositions

DEEMED DISPOSITTIONS

Change in Use

Duthie Estave v Canada (1995, FCTD)

Death

Mastronardi Estate v Canada (1977, FCA)

Rollovers

Exchanges of Property

Glaxo Wellcome Inc v Canada (1996, TCC)

McKervey v MNR (1992, TCC)

Transfer of Property to Spouse or C/l Partner

Transfer of Farming or Fishing Property to Child

Stop-Loss Rules

Other Deductions

Support Payments

Thibaudeau v Canada (1995, SCC)

Allowance and Discretionary Use

Armstrong v Canada (1996, FCA)

Mambo v Canada (1995, TCC)

Velleaux v Canada (2002, FCA)

Larsson v Canada (1997, FCA)

Arsenault v Canada (1995, TCC)

Hak v Canada (1999, TCC)

Serby v Canada (2001, TCC)

Periodic Maintenance Payments

McKinnon v MNR (1989, FCA)

Sills v MNR (1985, FCA)

Widmer v Canada (1995, TCC)

Stephenson v Canada (2007, TCC)

Ostrowski v Canada (2002, FCA)

Pouzar v Canada (2007, TCC)

Rules Relating to Computing Income

Reasonableness

Cipollone v Canada (1994, TCC)

Mohammed v Canada (1997, FCA)

Gabco Ltd v MNR (1968, Ex Ct)

Meals and Entertainment

Stapley v Canada (2006, FCA)

Pink Elephant Inc v Canada (2011, TCC)

Introduction

Although taxes of one form or another have been collected in most societies throughout human civilization, broad-based income tax is a relatively recent development associated w/ the formation of modern nation states.

Economic Purposes of Modern Government:

Allocation Function: Allocating costs (through taxes) to goods and services to address market-failures: (e.g. roads, military, etc.)
i.e. providing goods that≠ easily be restricted to only those willing to pay for them o eliminate “free rider” problem
Provision of Services: (e.g. education, healthcare, pensions, etc.) to ensure collective value and paternalistic considerations
E.g. public education: collective value in bringing children of diff backgrounds together; paternalistic aim in providing opportunities for meaningful choices
Redistribute Wealth: i.e. taxing wealthy more heavily than poor
Stabilization through Fiscal Policyin pursuit of price stability, econ growth, and full employment
E.g. by increasing tax rates gov can reduce demand and inflation or by decreasing tax rates and running a deficit gov can increase demand, reduce unemployment,

Basic Structure of Income Tax

Tax Unit: The person/corporation who’s subject to tax
Tax Base: The amount to which rate of tax applies
Accounting Period: The time over which tax base is computed
Tax Rate: The rate of tax applied to the tax base

The first 3 elements are in s. 2(1), while the tax rate is set out in 117(2)

Tax payable by persons resident in Canada2.(1)An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

tax unit= every person resident in Canada at anytime in the year
tax base= taxable income
tax period = tax year

1. Tax Unit

Tax unit = the person to whom tax applies

Per 2(1) the basic unit of tax is “every person resident in Canada at any time in the year”

2 Elements: PERSON + RESIDENCY

a. Who is a “person”?

Defined in 248(1)[pg. 1662]

“person”, or any word or expression descriptive of a person, includes any corporation, and any entity exempt, because ofss. 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

This really just expands on the ordinary meaning of the word “person” so it is useful to consider dictionary definitions:

-individual human being;

-corporations;

-intervivos trusts;

-tax exempt entity: heirs, executors, liquidators of a succession

In Canada the tax unit is the Individual (as opposed to familial/couple based (USA) or household (France))

Arguments justifying the use of the “individual” tax unit:

“Control Principle” & “Distributive Justice”: Income tax is based on the economic power that persons have over their income

Whereas proponents of spousal/familial unit support allocation of tax burden based on the economic benefit received from their income or others’, rather than control over income (“Benefit Principle”)

But this suggests couple should be taxed more heavily than individuals w/ half the income of the couple

The diversity of groupings and the impact on personal autonomy necessary to monitor such diverse relationships make it difficult to define and require an element of intrusiveness that e don’t want the gov. to have
The familial unit violates tax neutrality by encouraging/discouraging the familial/couple unit
The familial unit discourages participation in the paid labour force by secondary earners (I.e. if you taxed the marital unit, and the second spouse went to work they’d be taxed at a higher rates, thus encouraging that 2nd person not to work)

Implications of individual taxation and progressive rates:

Because progressive rates apply to an individual’s income, families w/ the same total income can face diff tax burdens dep. on the share of the total amount received by each individual
This system means that families where each member contributes to total income actually have a lower tax burden than families where income is received by a single member – thus creating incentive to income split

Implication of the Incentive to income split:

More complex Tax Act and constant amendments: This is b/c policy decisions by gov impacts the affected tax payer and acts as a catalyst for individuals to take actions, which then causes the gov to create policy to counteract those actions

-Tax planning requires careful reading/analysis and interpretation of the Act

-To understand all provisions, you need to understand the scheme of the Act as a whole

b. Who is “resident in Canada”?

General Rule: Canadian residents are subject to tax on their worldwide income

-Exceptions: Act permits tax-credit for income tax paid to foreign govs and some income from foreign sources is exempt from Cdn tax per bilateral tax treaties

Canada has treaties w/ many OACD countries, though not w/ countries considered tax havens

“Residency” not definitively defined in Act and thus courts have held that it should receive the meaning ascribed by common usage:

-Courts have referred to dictionary definitions: “chiefly a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living w/ its accessories in social relations, interests and conveniences at or in the place in question (Thomson v MNR)

Thus courts must engage in detailed inquiry into a person’s ordinary mode of living to determine whether he is resident in Canada. Guidelines from CRA:

It is assumed that every person has at all times a residence
A person may be resident in more than one country at the same time
Residence is primarily a question of fact
Intent to reside in a certain place is relevant (≠ determinative) must be viewed objectively
Residence generally involves physical presence in the jurisdiction or the right to own or occupy a building in the jurisdiction
Where person is not physically present, residence may turn on social, economic or residential ties:
Most imp residential ties:
Dwelling place
Residency of family, spouse or c/l partner
Dependents
Secondary residential ties:
Ownership of real or personal property (car, clothes, furniture)
Social ties in religious orgs, clubs, unions, recreationalor professional orgs.
Employment w/ Canadian employer, invol in Cnd economy, owning bank acc
Landed immigrant status or work permits
Provincial Healthcare Coverage
Provincially registered vehicle, provincial driver’s license
Seasonal dwelling in Canada
Have Canadian passport
Of limited importance (except when taken together w. other residential ties)
Retention of Canadian mailing address, post office box
Retention of safety deposit box
Personal stationary (incl business cards) showing Cnd address/phone
Local Canadian newspaper or magazine subscriptions

250(1) [pg. 1701] expands the def’n of resident and “deems” people residents in certain circs:

250(1)(a) deems to be residents, those who have sojourned (presence) in Canada for 183 days or more

Situations where presence in Canada is somewhere between temporary visitor and permanent resident

2. Tax Rate

“Marginal Tax Rate” = the tax rate that applies to your last dollar of income

-Personal income taxes are applied in Canada at “progressive” rates above basic exemptions

Basic Personal Exemption: Exempts a basic amount of income from tax by providing a credit against tax otherwise payable

-~ $10,500 which is not taxable - this = amount gov says is what everyone needs to live off.

So if you make $20,000 the first $10,500 is not taxable

3 subsections of Act set out the “marginal tax rates” based on who the person is:

Individuals

117(2)[pg. 873] sets out how to compute the amount of tax payable by individuals in the given accounting period:

Income / Rate
$0 to $40,726 / 15% / 117(2)(a)
$40,726 to $81,452 / 22% (on amnt over $40,726) / 117(2)(b)
$81,452 to $126,264 / 26% (on amnt over $81,452) / 117(2)(c)
$126,264 and over / 29% (on amnt over $126,264) / 117(2)(d)

Corporations

123(1) deals w/ rules re corporations

(a)says tax payable is 38% of its amount taxable for the year

Inter Vivos Trusts

122(1) deals w/ tax rates applicable to inter vivos trusts:

(a)says 29% on the amount taxable for the year

Policy Considerations:

Arguments for Progressive Tax Rates:

Moderates inequality by redistributing wealth from rich to poor
There is a greater proportionate ability of higher income taxpayers to pay
Provides a stabilization function (collects proportionately more or less revenue as econ activity increases or decreases)

Arguments for Flat Tax Rates:

Redistributive function is questionable
No fiscal accountability when bulk of taxes falls on a disproportionate minority of high-income earners
Progressive tax rates discourage work effort, risk taking saving, and encourages tax avoidance
Progressive rates increase the complexity of the tax regime and the difficulty of its administration - Strength of this argument questionable

3. Tax Base

Tax Base = amount to which the rate(s) of tax apply to determine the amount of tax payable

Tax Baseis set out in:

2(1) Tax Base = the taxpayers “taxable income” for the taxation year

Taxable Income is defined as:

2(2) “taxable income” = the “taxpayers income for the year + additions – deductions permitted by division C”

Taxpayer’s income for the year is set out in as a formula:

INCOME(3(a))+TAXABLE CAPITAL GAIN (3(b))– (DEDUCTIONS per 3(c)LOSSESper 3(d))

Inclusions

3(a) captures:

-Income sources inside or outside Canada

-Income from 4 sources

Office and employment (s. 5 - 8)
Business (s. 9 - 37)
Property (s. 9 - 37)

(These are not only sources of income poss but courts hesitant to find sources outside these 4)

3(a) the total of all income amounts (other than taxable capital gain from disposition of property) from a source inside or outside Canada, including… the taxpayers income for the year from each office, employment, business, and property

3(b) captures:

-“taxable capital gain”from dispositions of property

Deductions

Section 3(c)

Used to reduce income (from employment, office, business, property)

-Generally, are a costs to the taxpayer in earning his income

Deductions for losses from business or property can also be deducted from income  Policy: encourage risky activities

(but are limited as capital losses can only be used to offset capital gains)

May be used by gov to encourage certain behavior (e.g. save for retirement, grow small business)

Distinguishing Deductions from Credits:

-Deduction: reduces amount of taxable income

-Credit: reduces amount of tax you’d otherwise have to pay

Credits are subtracted from the amount of tax payable resulting in a reduction or a refund where no tax is otherwise owing

-Non-Refundable = reduce amount of tax payable

Not useful for very poor who aren’t paying much tax anyway

-Refundable = operates as an overpayment of tax

Very poor would rather have this
Promote bad behavior b/c people view as ATM and will do anything to get this cash

Policy Implications:

-Deductions are generally seen as inequitable. They benefit higher incomes (taxed at higher rates) more than lower incomes

-Tax credits benefit all incomes equally so are seen as a better policy

-Thus many deductions have been converted into tax credits since 80’s

Losses

Section 3(d)

Distinguishing: Net Capital Losses vs Non-Capital losses:

Need to distinguish these b/c of the way “income” is distinguished from “capital gains”