TAX OUTLINE

DEFINING INCOME AS THE TAX BASE

WHAT IS INCOME?
 Income tax will be paid on taxable income for each taxation year of every person resident in Canada at any time in the year. (ITA, s 2(1))
 Taxable income = the taxpayer’s income for the year plus the additions and minus the deductions permitted by division C (ITA, s 2(2))
o Note that taxable income cannot be negative (ITA, section 248(1)). Neither can net income – it will simply be valued as zero. (ITA,
section 3(f))
NET INCOME
 Income is defined as the gain derived from capital, labour, or from both combined. Income is the “fruit” that comes from the capital “tree”
(Eisner v Macomber)
 Income is not defined specifically in the ITA. However, section 3(a) of the ITA specifies that the income of a taxpayer is to be determined by
the total of all amounts (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada,
including income from office, employment, business and property.
o Section 3(b) deals with capital gains. Where they exceed allowable capital losses (other than allowable business losses), the positive
result must be included under paragraph 3(b). Where allowable capital losses exceed taxable gains, no amount shall be taken into
account at this point.
o Section 3(c) includes potential deductions, not related to the specific sources of income outlined in 3(a). The maximum amount
deductible is the aggregate of the amounts determined under paragraphs 3(a) and 3(b).
o Section 3(d) deals with losses that can be deducted according to each of the specific sections relating to each source of income and
allowable business investment losses (as long as these amounts do not exceed the amount obtained after paragraph 3(c).
o Section 3(e) states that if, after you apply all permitted deductions, an amount remains, this is the taxpayer’s net income for the year.

THE CAPITAL-INCOME DISTINCTION

WHAT IS A CAPITAL GAIN?
 A capital gain or capital loss occurs on the disposition of capital property. The gain or loss is the difference between the cost and the
proceeds of disposition. A CAPITAL GAIN occurs when the proceeds of disposition exceed costs of disposition + the ACB of the property. A
CAPITAL LOSS results in the opposite case. (ITA, para 40(1)(a) and (b))
o Capital gains are taxable at half (really what happens is half your capital gain is taxed at 100% - same outcome though). Where you
have a capital loss, you can apply half your capital losses against any taxable capital gains for the year. (ITA, s 39)
 Capital property of a taxpayer is any depreciable property of the taxpayer, and any property (other than depreciable property), any gain
or loss from the disposition of which would, if the property were disposed of, be a capital gain or loss as the case may be, of the
taxpayer. (248(1))
o Depreciable property = includes capital property used to earn income from a business or property.
 Note that if you have a capital loss in 2018, you can use it to reduce any capital gains you had in the year to a balance of zero. If your capital
losses are more than your capital gains, you may have a net capital loss for the year. Generally, you can apply your net capital losses to
taxable capital gains of the three preceding years and to taxable capital gains of any future year. For more, see “capital losses” section on
priority loss relief.
 There are two restrictions on a taxpayer’s right to carry their capital losses back three years:
o An earlier year’s loss must be deducted before a later year’s loss (paragraph 111(3)(b));
o Each item of loss can be deducted only once.
ACB
 The adjusted cost base of a property is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees.
ACB may also include capital expenditures, such as the cost of additions and improvements to the property. (Section 54, “adjusted cost
base”, paragraph (a))
 The ACB of depreciable property at any given time is its capital cost to the taxpayer at that time (Section 54), whereas the ACB of capital
property other than depreciable property is its “cost” adjusted as of the relevant time in accordance with section 53 (section 54 “adjusted
cost base”, paragraph (b)
 Capital gains can apply to the disposition of depreciable property for proceeds greater than its cost and the expenses of disposition, but
there cannot be a capital loss on the disposition – if the proceeds are less than capital cost, a terminal loss under subsection 20(16) may
result.
ADDITIONS, REDUCTIONS AND NEGATIVE ACB
 Additions – Amounts that relate to the value of the property and were included in income may be added to the cost of the property under
section 52(1). When an asset is sold, the amount previously included in income will reduce the amount of gain and may create a capital loss.
 Reductions – Deductions may include technical adjustments relating to shares, interests in trusts and partnerships, and certain obligations.
Government grants, subsidies and other public assistance are subtracted from cost, for capital gains purposes, to prevent taxpayers from
deriving double relief for the same outlay.
 Negative ACB is precluded, except in the case of certain partnership interests, by subsection 40(3). If at any time in a taxation year,
deductions from cost exceed the property’s ACB immediately prior to such deductions, the excess is deemed to be proceeds of disposition
and a capital gain at that time. The CG is then added to the ACB, restoring it to zero for future gain or loss computations.
 In computing a capital gain or loss, the taxpayer may add to the ACB any outlays or expenses to the extent that they were made or incurred
for the purpose of making the disposition (s 40(1)(a)(i), (b)(i))
o Ex. fixing up expenses, finder’s fees, commissions, surveyor’s fees, transfer taxes and other reasonable expenses directly
attributable to facilitating the dispositions.
CANADIAN SECURITIES
 Profits realized on the disposition of Canadian securities can always be treated as capital gains under section 39(4).
 However, section 39(5) prohibits a trader or dealer in securities from making such an election. A taxpayer loses the right to make the
election to characterize the disposition of Canadian securities as capital gains or capital losses when he becomes a trader or dealer – that is
to say, when his dealings amount to carrying on a business and can no longer be characterized as investor’s transactions or mere
adventures or concerns in the nature of trade. (The Queen v Vancouver Art Metal Works Ltd)
o Question of fact as to whether one’s activities amount to carrying on a trade or business. One may consider the frequency of the
transactions, the duration of the holdings, the intention to acquire for resale at a profit, the nature and quantity of the securities
held or made the subject matter of the transaction, and the time spent on the activity (The Queen v Vancouver Art Metal Works Ltd)
o To characterize a taxpayer as a trader requires finding a course of conduct amounting to carrying on a business of buying and selling
securities with particular or special knowledge. Relevant factors include intention, frequency of transactions, duration of holdings,
nature and quality of services, time spent and particular knowledge (Sandnes v The Queen)
 Ex. Taxpayer’s special knowledge of the market in which the shares were traded made him a trader or dealer in securities and
excluded him from making the election (Kane v The Queen)
o Section 39(6) defines Canadian security as a share of the capital stock of a corporation resident in Canada, a unit of a mutual trust fund
or a bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation issued by a person resident in Canada.
 Taylor Test for adventure in the nature of trade:
o If the venture consisted of simply an isolated purchase of some article against an expected rise in price and subsequent sale of it,
perhaps not a venture in the nature of trade.
o “a single transaction falls as far short of constituting a dealer’s trade as the appearance of a single swallow does in making a summer.”
o If the operations were the same kind or carried on in the same way as those which are characteristic of ordinary trading in the line of
business in which the venture was made.
o If the person deals with the commodity purchased in the same was a dealer in it would ordinarily do, such a dealing is a trading
adventure.
o A transaction may be an adventure in the nature of trade even though nothing was done to the subject matter of the transaction to
make it saleable.
o A transaction may be an adventure in the nature of trade although the person entering upon it did so without any intention to sell
its subject matter at a profit.
o The singleness or isolation of a transaction cannot be a test of whether it was an adventure in the nature of trade… this does not
mean that the isolation or singleness of a transaction has no bearing on whether it was a business or trading transaction.
 Ex. Taylor bought an obscene amount of lead, the only thing he could do with it was sell it for a profit – this was always a venture in
the nature of trade.
o The element of speculation is an important factor in the decision that the transaction was not the realization of an investment and
its transfer into another form but the gaining of profit by the sale of property and thus a transaction that is characteristic of what a
trader would do.

POLICY REASONS TO TAX CAPITAL GAINS

1. It results in greater equity.
o Horizontal – A taxpayer who realizes $1000 in capital gain on the stock market is put more nearly in the same tax position as the taxpayer
who earns $1000 from employment.
o Vertical – Rich taxpayers deriving a large part of their income from capital transactions are made to assume a more appropriate burden
of taxation as compared to poorer taxpayers.
2. It makes the tax system more neutral. It reduces the incentive for taxpayers to structure their transactions to look like capital transactions
rather than income-producing transactions.
3. It promotes certainty. If treated the same, gets rid of superfluous distinction between capital gains and business income.
Capital gains currently receive more favourable tax treatment than other forms of income. They are subject to their own set of rules set out in
sections 38 – 40. On the other hand, capital losses receive less tax relief than other types of losses because, with one exception, capital losses
are only deductible from capital gains and not from any other type of income.

VENTURE IN THE NATURE OF TRADE VERSUS CAPITAL GAIN

 Most cases that distinguish between business income and capital gain revolve around whether or not a transaction can be characterized as
an “adventure or concern in the nature of trade” within the definition of “business” in subsection 248(1).
 Where a person habitually does something that is capable of producing profit, they will typically be seen to be carrying on a trade or
business (notwithstanding that these activities may be quite separate and apart from his ordinary occupation. If a thing is done infrequently
or even once, it still may be a business transaction if it can be shown that the person is engaged in “an adventure or concern in the nature of
trade.” (Interpretation Bulletin IT-459, 1980)
 If you have a capital gain, argue it was capital to benefit from the 50% taxation rate. If you have a capital loss, argue it is a venture in the
nature of trade so you can deduct 100% from business expenses.
 To determine if a thing is an adventure or concern in the nature of trade, look to all the circumstances of the transaction.
 The question of taxability cannot be determined solely by seeking to ascertain the primary subjective intention of the purchaser at the
time of purchase. (Irrigation Industries)
 Guiding factors include:
1. Did the taxpayer deal with the property acquired by him in the same way as a dealer in such property ordinarily would deal with it? Did the
taxpayer try to improve the marketability of the property? The listing of the property for sale when the improved marketability was
achieved suggests that it was not required as an investment but to “flip” like a dealer flips property.
2. Does the nature and quantity of the property exclude the possibility that its sale was the realization of an investment or was otherwise of a
capital nature, or that it could have been disposed of other than in a transaction of a trading nature? (Irrigation Industries)
 Where property is of a nature that it cannot produce enjoyment or income for the owner by virtue of the ownership, the
presumption is that the purchase and sale was an adventure or concern in the nature of trade.
 If the taxpayer can only make a profit by selling the property (i.e. you can’t operate it to gain profit) then the presumption is the
purchase and sale was an adventure or concern in the nature of trade.
3. Is the taxpayer’s intention (established or deduced) consistent with other evidence pointing to a trading motivation?
 An intention to sell at a profit is not sufficient by itself to establish he was involved in an adventure or concern in the nature of
trade. This intention is almost invariably present even when a true investment has been acquired, if circumstances should arise that
would make it financially more beneficial to sell the investment than to continue to hold it. (Interpretation Bulletin IT-459, 1980)
 Secondary intention may be significant – i.e. was the secondary intention to sell the property if the primary intention could not be
fulfilled? (Regal Heights Ltd v MNR – where shopping mall project was entirely speculative in nature and secondary intention to sell
formed when it flopped, it was not a capital gain but a venture in the nature of trade.)
 Contrast with Riznek where there was no evidence of a secondary intention to sell, the taxpayer was unable to meet one of the
building requirements when the owner of a small parcel of land changed his mind at the last moment).
 Hughes has same facts as Regal, but the Court ordered an apportionment between income and capital so only the gain accrued
after the change in intention was treated as ordinary income. The other part was treated as a capital gain.
 Evidence that efforts were soon made to find or attract purchasers or a that a sale took place within a short period of time after the
acquisition of the property by the taxpayer points toward a trading intention.
 Ex. repairing the property, to make it more attractive for sale (Interpretation Bulletin IT-459, 1980)
 Statements in contracts not determinative – “question is not what business or trade the company might have carried on, but rather,
what business, if any, it did engage in.” (Regal Heights)
4. The following factors, in and of themselves, are not sufficient to prevent a finding that a transaction was an adventure or concern in the
nature of trade: (Interpretation Bulletin IT-459, 1980)
 The transaction was a single or isolated one;
 The taxpayer did not create any organization to carry out the transaction;
 The transaction is totally different from any of the other activities of the taxpayer and he never entered into such a transaction
either before or since.

DISPOSITIONS
 A disposition is broader than a sale. It includes involuntary transfers like expropriation, where compensation paid is the proceeds. It
includes gifts and theft. Even though the property or title to the capital asset has not passed to another person, the taxpayer may have
disposed of it (or part of it) for tax purposes. (248(1))
 Where property has been unlawfully taken, destroyed or damaged, the taxpayer is treated as having disposed of it for the amount received
by way of compensation or insurance. Where the property is damaged, the taxpayer may exclude from proceeds any amount spent within a
reasonable time to repair the damage.
 The definition of “disposition of property” and “proceeds of disposition” are not exhaustive – these expressions must bear both their
normal meaning and their statutory meaning. The term “dispose of” should be given its broadest possible meaning, and is wide enough to
include parting with, destroying or extinguishing property, although no proceeds were received in return (Queen v Compagnie
Immobilière BCN Ltée)
 In principle, any right that is convertible into cash is likely to result in a disposition when it is converted (RCI Environment v The Queen)
 Where, in respect of the property acquired, the purchaser assumes as part of the purchase price liability for the vendor’s “separate existing
debt” or the vendor’s mortgage, it would form part of the vendor’s proceeds of disposition and of the purchaser’s cost (Diashowa-
Marubeni international Ltd v R)
 A sale, whether voluntary or compelled by court order, involves a transfer of property to another for consideration. (Corbett v The Queen)
TRANSACTIONS THAT ARE NOT DISPOSITIONS
 Transfers securing a loan or debt or returning the security to the borrower. For example, a transfer of property by a debtor to a creditor for
the purpose of securing a debt or loan, and the creditor’s return of such property on repayment of the indebtedness are not dispositions.
 Transfers of a bare legal title to property generally are not dispositions, though transfer of a legal title to a trust will trigger a disposition
unless the trust is a bare or passive trust that acts as agent for the beneficiaries.
 Transactions involving the bailment of chattel or a lease of realty or personality do not involve a change in the legal or beneficial ownership,
and therefore are not dispositions by the owner of the property.
DATES AND TIMES OF DISPOSITIONS
 The general rule is that taxpayers must report capital gains and losses from dispositions that occur in a taxation year. The date and sale of
the property may in some cases be a matter of dispute.
 A disposition occurs when the beneficial ownership of the capital property passes from the taxpayer. The passing of a bare legal title or
absolute entitlement to the proceeds of disposition are not determinative.

PRINCIPAL RESIDENCE
 The most significant exemption from capital gains is the principle residence exemption: any gains realized on a disposition of property that
qualifies as a “principal residence” may be exempt from tax.
o If the dwelling qualifies as a taxpayer’s principal residence throughout the period of ownership, the entire gain is exempt. If only a
portion, then that portion is exempt.
 Section 40(2)(b) sets out the formula that apportions the realized gain over the entire period of the taxpayer’s ownership. A capital loss on
the disposition of an owner-occupied dwelling is disallowed as a loss on personal-use property.
WHAT IS A PRINCIPAL RESIDENCE?
 Section 54 defines a principal residence as a housing unit, leasehold interest or share of capital stock of a cooperative housing corporation
owned (jointly or otherwise) by the taxpayer, and ordinarily inhabited by the taxpayer, his or her spouse, former spouse, common law
partner, former common law partner, or child.
o Housing unit – A house, condo, apartment or townhouse, mobile home, camper, trailer, cottage or houseboat.
 A housing unit, for the purpose of subsection 54(g), need not be a building or structure. (Flanagan – it was the van and the
land subjacent to it, but the second property was across the road and not contiguous, not used to accommodate van so not part
of principal residence even though there was a septic tank there.)
o Ordinarily inhabited – Housing unit must be, in most cases, usually or commonly occupied as an abode. Includes seasonal or
recreational occupation.
 Do not have to live there 24/7 – you can have other residences. a person can ordinarily inhabit more than one housing unit a
year if he does so in the customary mode of his life. It is residence in the customary mode of life of the resident. (Flanagan)
 Ex. If only half a duplex is inhabited by the owner, only half of the land and building comprise the principal residence.
 Ex. If a taxpayer owns a house containing three apartment units, one of which he or she occupies, the whole building may
qualify as a principal residence if the division of units is internal and occupiers share common facilities.
 Ex. Vacant lot cannot qualify as a principal residence until it contains a housing unit.
 The principal residence includes up to one-half hectare (1.24 acres) of surrounding land that may reasonably be regarded as contributing
to the taxpayer’s use and enjoyment of the housing unit as a residence.
o The courts and the CRA will accept without proof that land up to 0.5 hectares does contribute to the taxpayer’s use and enjoyment
unless the taxpayer uses the land to earn income. VERY difficult to claim the principal residence exemption over larger areas of land
– the excess is deemed not to have contributed to the use and enjoyment of a housing unit as a residence unless the taxpayer
established it was necessary to such use and enjoyment.
 THE PRINCIPAL RESIDENCE INCLUDES THE BUILDING AND THE LAND SUBJACENT TO IT (Flanagan)
 NOTE that for a property to be a taxpayer’s principal residence for a particular year, he or she must designate it as such for the year and
no other property may have been so designated by the taxpayer for the year. “year-by-year” approach (Income Tax Folio S1-F3-C2:
Principal Residence)
 Ownership is required. The individual must own the property to claim the exemption. Ownership can be jointly with another person or
otherwise. It must be ordinarily inhabited in that year by the person as well. (Income Tax Folio S1-F3-C2: Principal Residence)
o Even if a person inhabits a housing unit for only a short period of time in the year, this is sufficient for the housing unit to be
considered ordinarily inhabited in the year by that person.
o Even if a person disposes of his or her residence early in the year or acquires it late in the year, the housing unit can be considered to
be ordinarily inhabited in the year by that person by virtue of his or her living in it the year before such sale or after such acquisition as
the case may be.
o If the main reason for owning the housing unit is to gain or produce income then it will not generally be considered to be ordinarily
inhabited in the year by the taxpayer when it is only inhabited for a short period of the time in the year
 A person receiving only incidental rental income from a housing unit is not considered to own property mainly for the purpose
of gaining or producing income.
  However, if the main reason for owning a housing unit is to earn income but the housing unit is rented to the taxpayer’s child
who also ordinarily inhabits the housing unit in that year, the taxpayer could still designate that housing unit as the taxpayer’s
principal residence provided the other conditions are met.
CLAIMING EXCESS LAND
 Objectively consider all of the relevant circumstances adduced in evidence which were in existence immediately prior to the disposition of
the property. (Rode v MNR)
 In light of that, ask: on a BOP, have the taxpayers established that without the area of land for which they contend constituting the
subjacent land and immediately contiguous land component of their housing unit they could not practically have used and enjoyed the
unit as residence? (Rode v MNR)
 The taxpayer has to show that the excess land not merely contributed, but was indispensable to the use and enjoyment of the housing unit
as a residence. Evidence from an expert appraiser that the highest and best use of the excess land was for the use and enjoyment of the
housing unit is relevant, but not conclusive.
o Ex. Family bought 10 acres of land and built their home on one acre. They rented the other nine acres to a farmer. Permitted to
claim excess land as necessary because a zoning by-law prevented the taxpayer from selling part of the land (Queen v Yates)
 Taxpayer can establish necessity to use and enjoyment of housing unit as residence by recourse to objective test, but also subjective test –
Court accepted equivocal evidence regarding local land use practice and politics to establish necessity on an objective test. (Carlile v The
Queen)
o But note that the Court in Stuart was dismissive of this approach, preferring objective evidence. In that case, a taxpayer disposing
of a larger estate could make a more cogent argument for complete exemption based on zoning restrictions, barriers to
subdivision, accessibility to roads and utilities as justifying the need for a supersized lot – whereas taxpayer’s preference for more
space or privacy would be less persuasive.
MORE THAN ONE PRINCIPAL RESIDENCE?
 The exemption applies to only one dwelling or one co-interest therein, for each taxation year. (IT-S1-F3-C2) A taxpayer may buy, renovate,
occupy and sell a series of principal residences over the year, but if the transactions become too numerous the houses would be the subject
of an adventure in the nature of trade (Isaaks v The Queen)
 A taxpayer who owns more than one principal residence must, when the first property is disposed of, designate one of the properties as the
principal residence for each year in which both were owned. The taxpayer should determine which of the properties has enjoyed the
greatest increase in value over the years and pick that one to make best use of the exemption.
 The taxpayer must be resident in Canada during the year of the designation, but the property may be located outside of Canada.
SPOUSE OR CHILD OF THE TAXPAYER
 Families may only claim one principal residence. Those who are legally separated or living apart may each claim a principal residence.
 Common law spouses living together can no longer claim two residences as of 1993. Since 2001, same-sex couples are also limited to one
principal residence.
 On marriage breakdown, if one spouse or former spouse receives exclusive possession of a matrimonial home, the other spouse (who owns
the property) can continue to claim the exemption for the period during which he is not in possession. Similarly, if a child of the taxpayer
occupies the home, it qualifies for the exemption.
VACANCY
 A homeowner who vacates the principal residence and rents it out may continue to claim the dwelling as a principal residence for a
maximum period of absence of four years as long as the owner elects under subsection 45(2) to treat the dwelling as personal-use
property while renting it out.
 A period of longer than four years is ok if it is for work relocation – ex. a homeowner who vacates the dwelling in order to move at least
40km closer to a new place of employment may continue to claim the principal residence exemption for the duration of the relocated job
plus one year or until death during the term of employment. The owner must elect to treat the dwelling as PUP (section 54.1)
BUYING AND SELLING MULTIPLE HOMES + CLAIMING PRE
 Have to stave off accusations that you’re actually running a business of buying and selling houses.
 As long as the motivation is not profit, you can claim the exemption. You have to be able to prove this though (Falk v MNR)
 Largely factual and based on all the circumstances – must infer intention from the facts (Isaaks) – ask:
o Nature of business, profession, calling or trade of taxpayer. Do the homeowners have experience in real estate? (Isaaks)
 The more closely a taxpayer’s business or occupation is related to a real estate transaction, the more likely it is that the income will
be considered business income rather than capital gain (Isaaks)
 Falk had no experience in real estate.
o What was the purpose of all the sales (taxpayer intention)? (Isaaks, Vogan, Scopacasa)
 An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade
(Isaaks)
 Falk family needs and occupation was a primary operative motivation throughout – the first house was too small and not well built,
and the next house was a more desirable family home. PRE allowed.
 Where, at the time of acquisition, a resale is envisaged, the profits are taxable as income (Deacon)
 Ex. In Deacon, taxpayer bought a bunch of land, redivided them and sold them. The profits realized could not fall under PRE because
it was always the case that he’d have to resell some of the land to build the house he wished to build. To escape taxation it would
have been necessary to show that the purchase was made as an investment.
o Nature of the property and the use made of it by the taxpayer (work expended on or in connection with property realized (Isaaks,
Scopacasa, Vogan)
  Ex. Where house is not really occupied and work is used to enhance a house’s marketability rather than satisfy personal tastes,
more likely a venture in the nature of trade (Scopacasa)
 property made to the personal specifications of the taxpayer is more likely to point to an intention to make it a personal home
(Vogan)
o Length of period of ownership/frequency of transaction (Scopacasa)
o Circumstances that were responsible for the sale of the property
 Ex. In Scopacasa S claimed he had always intended to live with his family in the house he was building – yet in the sale, he signed a
document stating he never occupied the property.
 Ex. in Vogan, buyer gave an unsolicited and unanticipated offer. Vogan had not controlled or investigated buyers for his property.
o Extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the
taxpayer – transactions involving borrowed money and rapid resale are merely likely to be adventures in the nature of trade.
DEEMED DISPOSITION ON CHANGE OF USE***
 Under subsection 45(1)(a), a disposition at fair market value is deemed to occur when the taxpayer changes the use of property from
personal-use to income-earning purposes and vice-versa.
o “Where a taxpayer
 (i) acquires the property for some other purpose, and then later starts using it to make money or
 acquires property for the purpose of making money, and then later starts using it for something else;
o the taxpayer shall be deemed to have
 disposed of it at that later time for proceeds equal to its FMV at that time; and
 immediately thereafter reacquired it at a cost equal to that FMV.
 See section 85 of the Income Tax Act – allows you to transfer property to a Canadian corporation without immediate tax consequences –
the transfer is often called a “rollover” because it can take place at the cost of the property, thereby avoiding the immediate recognition of
accrued gains – the transfer must be made by election and can allow for a complete rollover (no immediate gain) or partial rollover (some
immediate gain), depending on the “elected amount” on the transfer.
o The elected amount cannot exceed the FMV of the property and cannot be less than the lesser of the FMV of the property and its tax
cost.
 See section 45(1)(c) for more detailed provisions on change in use, on page 41 of long outline
 Change of use occurs when a CLEAR AND UNEQUIVOCAL POSTIVE ACT evidences a change in intention. A mere expression of intention by
the taxpayer to develop the land is insufficient.
o Ex. taxpayer elects to stop using the family home and as such turns it into a real estate development. The home would cease to be a
personal capital asset and would become the subject-matter of the taxpayer’s real estate development business.
o Ex. commencement of construction work or other physical change in the use of the land. Preliminary meets, hiring consultants or the
expenditure of the taxpayer’s time and money examining the feasibility of development may be sufficient acts of a positive nature to
demonstrate the change of use, even though the project never advances beyond the preliminary stage.
 Sometimes a taxpayer purchases a dwelling, rents it for years to tenants and then, after giving the current occupant notice to quit, occupies
it as his or her personal residence. Even though there are no proceeds, the taxpayer may be required to recognize a capital gain because,
upon moving into the house there is a deemed disposition for proceeds equal to fair market value. (Leib v MNR)
o This deemed disposition achieves equity between the taxpayer who moves into a house that was formerly rented out and the
taxpayer who sells the rental house and uses the proceeds (net of tax) to purchase another house for personal occupation.
AVOIDING DEEMED DISPOSITION
 Subsection 45(3) permits a taxpayer to elect out of the deemed disposition at fair market value that would otherwise apply where a
property is converted from an income-earning use to a personal use.
o Only allowed to do so where the property, having been previously used for an income-earning purposes, becomes the taxpayer’s
principal residence.
o You cannot make this choice if you, your spouse or a trust of which either of you is the beneficiary, has claimed CCA in respect of the
property for a taxation year ending after 1984 and on or before the change in use.
o Election must be filed with the Minister in writing within 90 days after a demand or by the deadline for filing the tax return for the
year in which the property is actually disposed of (in other words, the election applies retroactively).
o In addition to the deferral of any accrued gain that would otherwise have been realized on a deemed disposition, the election under
subsection 45(3) also permits the property to qualify as the taxpayer’s principal residence for a maximum of four previous years
during which it was used for an income-earning purpose and was not occupied by the taxpayer, the taxpayer’s spouse, former spouse,
or child.
 Subsection 45(2) permits a taxpayer to elect out of the deemed disposition at FMV that otherwise applies where property is converted from
personal use to income-earning use.
o After a change in use, the taxpayer must report income earned from the property after deducting applicable expenses – but CCA may
not be claimed.
o The taxpayer should weigh the advantages of postponing tax on any accrued gain against the disadvantage of being prevented from
claiming CCA in respect of the asset.
o If, after making the election, the taxpayer revokes it, a disposition is deemed to occur on the first day of that year for proceeds equal
to FMV at that times.
 In the absence of an election under section 45(2), when the taxpayer moves back into a formerly rented property, there would be another
deemed disposition at a fair market value when the use changed from income-producing to personal occupation.
 o The principle residence exemption would not cover any gain during the period that the taxpayer did not personally occupy the
building.
o But, if the taxpayer moves back into the family home while the election is still in effect, and within four years (or longer if a change
in workplace is involved), the gain during the periods that the home was a rental property would be covered by the principal
residence exemption.
 Allocation rule – if you acquire a capital asset for both income producing AND non-productive purposes, you must allocate the cost
according to the relative use for each purpose – and on disposing of the asset, you must allocate the proceeds on the same basis.
o The allocation rule applies when there is a change in the relative use between productive and non-productive purposes.
o The taxpayer is deemed to receive proceeds equal to the fair market value of the asset at that time multiplied by the amount of the
change in use.
o Ex. If you maintain on office in your home or store owners who live on the premises.
EXAMPLE CALCULATION OF PRINCIPAL RESIDENCE EXEMPTION
A taxpayer buys a house in year 1, for $100k. He sells it in year 3 for $300k. T seeks to apply the principal residence exemption in relation to the
resulting capital gain.
1. According to section 40(2)(b), we must calculate the amount of T’s capital gain as if there were no principle residence exemption. That
amount is determined under section 39(1)(a) as follows:
P/D – ACB = $300k - $100k = $200k. This is quantity A.
2. Determine the amount of the capital gain that will be recognized under the provision of section 40(2)(b)(i),(ii).
A x (1 + number of qualifying years) / number of years house is owned.
$200k - $200k x ((1+3)/3) = $266, 667
3. The amount of the capital gain recognized will be the extent to which T’s capital gain “otherwise determined” ($200k) exceeds the
exempt amount.
$200k - $266.667k = 0. As a result, the amount of this capital gain calculated in relation to the principal residence is nil.

PERSONAL USE PROPERTY

 Personal use property is a type of property that an individual does not use for business purposes or as an investment. Quite simply,
individuals use personal use property primarily for the purposes of their own enjoyment. (section 54)
o Clothing, personal effects, hobby assets, cars, boats, furniture and listed personal property.
 Where a taxpayer disposes of part of a PUP, the ACB of the part disposed of is deemed to be the greater of (1) the ACB determined under
subsection 43(1) or (2) the proportion of $1000 that the ACB of the part disposed of bears to the ACB of the whole property (para 46(2)(a))
 Similarly, PD is deemed to be the greater of the proceeds or the same proportion of $1000.
 A disposition of depreciable property for proceeds less than capital cost does not result in an allowable capital loss because the CCA
provisions of the Act deal with proceeds below the property’s capital cost.
 A capital loss on PUP is usually deemed to be nil, which prevents the deduction of capital losses attributable to personal consumption.
(Section 40(2)(g)(iii))
 As an exception to this rule section 41 permits losses on listed personal property to be deducted from gains on such property.
 Second, Section 46(1) permits a $1000 exemption that applies to the disposition of PUP, including LPP.
o If both the proceeds of disposition and the ACB of a property are less than $1000, the capital gain (or loss on LPP) is exempt.
o If the ACB is less than $1000 but the proceeds are greater than $1000, the gain is computed as though the ACB was $1000.
o If the PD is less than $1000 and the ACB is greater than $1000, a loss is computed as if the PD was $1000.
o If both the PD and the ACB are greater than $1000, the exemption is inapplicable and the gain or loss is computed in the ordinary way.
 Section 46(3) deems a number of personal-use-properties, which a taxpayer has separately disposed of, to be one personal-use property
and each disposal to be a part disposition.
 Properties must be of the type that would normally be disposed of as a set;
o Whether a number of articles constitute a set is determined by looking at factors like:
o The items should match or belong together;
o They should have been produced or issued at roughly the same time, and, ordinarily, they are worth more collectively than
individually;
o Even though a taxpayer may have purchased the items individually, as long as the two or more were owned at any time, they would
constitute a set;
o The taxpayer must have disposed of all the items by more than one disposition, either to one person or to the members of a group
who are not at arm’s length with one another.
o The aggregate fair market value of the assets must be more than $1000.
LISTED PERSONAL PROPERTY
 Listed personal property is also PUP, but it’s different – as a “collectible”, its value does not inevitably decline through use. If its value falls,
it may be for essentially the same reasons that cause any capital loss, such as changing market conditions. Nevertheless, losses on LPP may
be deducted only from gains on LPP. (Section 41)
 Also, the LPP losses you deduct in the year cannot be more than your gains from such dispositions for that year.
 The taxable net gain from dispositions of LPP is 0.5 the amount determined under 41(2) to be the taxpayer’s net gain for the year from
dispositions of such property.
 Section 41(2) tells us how to calculate net gain from dispositions of personal use property:
o Determine the amount by which gains from the disposition of LPP exceeds the total of the taxpayer’s losses from disposition of LPP.
 o Then, deduct from this amount any portion of LPP losses for the 7 taxation years immediately preceding and the 3 taxation years
immediately following the taxation year, with the following limitations:
 LPP losses is deductible for a taxation year only to the extent that it exceeds the total of amounts deducted under this paragraph
in respect of that loss for preceding taxation years;
 Can’t deduct LPP of any year until you’ve used up LPP deductions from previous years; and

INCOME FROM OFFICE OR EMPLOYMENT

SECTION 5 – BASIC RULES
 Any amount received by a taxpayer in the year in respect of an office or employment must be included in income.
 This includes salary and benefits from employment, gratuities (tips), and other remuneration (honoraria, commissions, bonuses, gifts,
rewards, gratuities, and prizes provided as compensation for services). (ITA, s 5(1))
 Office = position of an individual entitling an individual to a fixed or ascertainable stipend or remuneration and includes judicial office, an
office of a Minister of a Crown, the office of a member of the Senate or House of Commons of Canada, the office of a member of a
legislative assembly, the office of a member of a legislative or executive council, and any other office, the incumbent of which is elected by
popular vote or is elected or appointed in a representative capacity (ITA, s 248(1))
 Employment = The position of an individual in the service of some other person. (ITA, s 248(1))
 NOTE that you can include net loss in your employment income! Section 5(2) details that a net loss from office or employment is
deductible against the taxpayer’s other sources of income as calculated under section 3. A net loss from employment will usually be quite
rare.
WHO IS AN EMPLOYEE?
 An individual who is retained to provide services to another individual is either an “employee” or an “independent contractor”. An
independent contractor is synonymous with business person and connotes an individual engaged in business activities as opposed to an
employee who earns employment income.
 Different tax consequences apply depending on whether income earned is employment income, earned by an employee, or business
income, earned by an independent contractor. These differences include:
o Payment and withholding of tax – An employer must withhold and remit a prescribed amount from each payment made to an
employee (ITA, section 153). There is no withholding obligation on payment to an independent contractor, although the recipient may
be required to make monthly or quarterly instalments of tax (ITA, section 156).
o Basis of Measurement – Income from an office or employment is generally calculated on a “cash basis”, whereas income from
business is calculated on an “accrual basis”. Income from an office or employment is recognized when it is “received” and permitted
employment expenses are deductible when “paid”. In contrast, business income is recognized when “earned” and business expenses
when “incurred.”
o Reporting Period of Taxation Year – Section 249 stipulates that the taxation year of the individual is the calendar year. Income from
office and employment is calculated on a calendar-year basis while business income is calculated and reported on the basis of a fiscal
period.
o Scope of Deductions – An employee may deduct the limited set of expenses authorized in section 8. A self-employed businessperson
has considerably wider scope to deduct income-earning expenses under sections 9 and 20.
TEST FOR INDEPENDENT CONTRACTOR
 An employee is engaged in a contract of service. A contractor performs a contract for service. It is largely a function of control. The more
control a worker has over the work and how it is to be done, the more likely it is an independent contractor relationship.
o “The difference between the relations of a master and servant and of principal and agent is this: a principal has the right to direct
what the agent has to do; but a master has not only that right, but also the right to say how it is done.” (R v Walker)
 To assess if someone is an independent contractor, consider four factors, within a BROAD EXAMINATION OF THE WHOLE SCHEME OF
OPERATIONS to determine the TOTAL RELATIONSHIP of the parties (Wiebe Door, confirmed in Sagaz):
o The amount of control;
 Independent contractors have a greater degree of control over the work – merely undertakes to produce a specified result,
employing his own means to get that result (Di Francesco v MNR)
 However, control in and of itself is not always conclusive (Wiebe Door)
 Ex. In Cavanaugh, TA ran the course himself with minimal supervision, set the times whenever he liked and had no tenure with
the school – significant control pointed to independent contractor relationship.
o Ownership of the tools of the trade;
 Ex. in Cavanaugh, TA provided all materials himself and paid his own off-campus expenses.
o Chance of profit; and
o Risk of loss.
 Ex. In Alexander, radiologist stood to take the fall for any mistakes he made, not the hostpial.
 Intentions of the parties may also be informative, but not determinative (Wolf v The Queen, Royal Winnipeg Ballet v MNR, Lang v MNR)
 An employment contract can also be “cogent evidence” of an employer/employee relationship (Moose Jaw Kinsmen Flying Fins Inc v MNR)
 Can also use Lord Denning’s organization test – if you are integrated into and integral to the business, you are an employee. Whereas,
under a contract for services, your work (although done for the business) is not integrated into it but only an accessory to it (Wiebe Door)
 For cases involving artists, see page 117-118 of long outline for a summary of Interpretation Bulletin R525.
 Note that there is an advantage to being characterized as an independent contractor: you can then deduct business expenses instead of
being limited to the specific deductions in section 8 as an employee.
INCLUSIONS: SECTIONS 5, 6 AND 7
 Section 5 requires that a taxpayer include in their income any amounts received as salary, wages, gratuities and “other remuneration”. “
 Sections 6 and 7 require the taxpayer to include all benefits received or enjoyed by virtue of any employment as employment income.
 The rationale behind this section is twofold: (1) it prevents tax evasion by removing an incentive to receive remuneration through benefits
by taxing those benefits anyway; and (2) it promotes equity – those who receive cash are fully taxed, so those who receive equivalent value
in benefits should be treated the same.
 In Lowe v The Queen, the Court notes the equity rationale – section 6(1)(a) aims to equalize the tax payable by employees who receive
their compensation in cash with the amount payable by those who receive compensation in cash and kind. In the absence of this rule, the
tax system would provide an incentive for employees to barter for non-cash benefits.
 To determine if something is a taxable benefit, the item under review must:
1. Provide the employee with an economic advantage that is measurable in monetary terms; and
2. The primary benefit must inure to the employee and not the employer (Lowe v The Queen)
SECTION 6(1)(a): BOARD AND LODGING, OR BENEFITS “OF ANY KIND WHATEVER RECEIVED BY VIRTUE OF OFFICE AND EMPLOYMENT”
 Section 6(1)(a) – Must include the value of board, lodging and other benefits of any kind.
o A hotel room used for bookkeeping and for quick naps when the user has to work at the hotel all day is not a true lodging (Sorin)
o Note that section 6(6) covers a separate exemption for board, lodging and transportation provided to employees working in a remote
area. The employee need not include in income any amount received in board and lodging at a special work site where duties
performed were of a temporary nature if the employee maintained at another location a self-contained domestic establishment as
a principle place of residence that was, throughout the period, available for the employee’s occupancy and not rented to any other
person, and to which, by reason of distance, the employee could not reasonably be expected to have return daily from the special
work site; or at a location which, by virtue of its remoteness from any established community, the employee could not reasonably
be expected to establish and maintain a self-contained domestic establishment.
IN RESPECT OF EMPLOYMENT
 This phrase requires a causal connection between the services rendered by the employee or officer and the receipt or enjoyment of the
benefit. In order to be a taxable benefit, the benefit had to be of the character of remuneration for services.
o Meaning of “benefit of whatever kind” is quite broad. The meaning of in respect of is similarly of the widest possible scope (The
Queen v Savage)
 Ex. $300 cash reward to employee for passing examinations was seen to be a benefit and not an expense of doing business.
Course was clearly connected to her employment. No element of gift, personal bounty or considerations extraneous to
employment (The Queen v Savage)
 Ex. Voucher given to employees as Christmas gift, used to promote feelings of happiness and foster a spirit of personal
relationship among staff were seen to be taxable benefits rather than gifts not constituting rewards. A sum given to an
employee in the hope or expectation that the gift will produce good services by him in the future is taxable. Case would be
different where, out of benevolence, gift is made to employee who is in difficulties (Laidler v Perry)
 Ex. A Christmas party with dinner, open bar and hotel accommodations was a taxable benefit equal to the per person cost of the
event. (Dunlap v The Queen)
GIFTS?
 If an employee is in receipt of a gift from an employer, the CRA takes the position that the gift is excluded from the employee’s income if:
o Gift is for a special occasion like a religious holiday, birthday, wedding or birth of child;
o Award is for an employment-related accomplishment such as outstanding service or employees’ suggestions – a recognition of the
employee’s overall contribution to the workplace, and not recognition of job performance;
o Employee may receive an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the
FMV of the gifts > $500, the amount over $500 must be included in employee’s income (so if you give gifts and awards with a total
value of $650, the employee receives a taxable benefit of $150).
BENEFIT OF ANY KIND WHATEVER
 Benefits are any form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the
taxpayer and does not constitute an exemption (loan or gift), it is taxable within the “all-embracing” definition of section 6 (The Queen v
Huffman)
 No part of expenses should be regarded as a personal benefit unless that part represents a material acquisition of something of value to
him in an economic sense.
o Ex. An all-expenses paid trip was not seen as a benefit because the employee had to be doing business the whole time, and the trip
was clearly a business trip (Lowe v the Queen, Arsens v MNR)
o Ex. Contrast with Phillips v MNR, where a trip was held to be a taxable benefit because the employees got lots of free time to have fun
and do recreational activities.
o Ex. a $500 stipend to a police officer was not a benefit because it was meant to cover the cost of clothes had to ruin for his job – more
of a reimbursement. Did not give anything of value to him, made up for value he had to lose (The Queen v Huffman)
SECTION 6(1)(B): ALLOWANCES
 Subject to certain exceptions, paragraph 6(1)(b) requires allowances received by a taxpayer to be included in income from an office or
employment. Usually, a court will have to interpret whether an amount is an allowance or a reimbursement.
o Ex. allowance for personal or living expenses.
 An allowance is an amount received by an employee, in addition to regular salary, where the employee is not required to itemize the
expenses. An allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of funds towards an
actual expense or cost (The Queen v MacDonald)
ALLOWANCE VS. REIMBURSEMENT
 If an employee needs to incur expenses by reason of, rather than in the course of his employment, then the reimbursement is not taxable.
His remuneration can only be what he has received over and above a reimbursement(Ransom v MNR)
o Ex. Employee had to sell his home by reason of a move forced by his employer, and his employer reimbursed him for the loss he
incurred in selling the home. The reimbursement was not taxable. (Ransom v MNR)
SECTION 6(1)(E): COMPANY CAR ISSUES
 Section 6(1)(e) requires an employee include an amount for a company car where the employer provides a car to the employee.
o The availability of the automobile is not the sole test and the purpose for which the employer provides the automobile is relevant.
(Harman)
 In circumstances where the employer provided the automobile predominantly for use in the employer’s business, paragraph
6(1)(e) is not applicable (Harman)
 Automobile includes a motor vehicle designed primarily to carry individuals and their personal luggage; a motor vehicle commonly known
as a station wagon; and a motor vehicle commonly known as a pick up (section 248)
 See page 80 of book for calculations.
SECTION 7: EMPLOYEE STOCK OPTIONS AND OTHER EMPLOYEE AND SHAREHOLDER BENEFITS
 No tax implications at the time a stock option is granted. Similarly, if an employee must dispose of the option as a consequence of corporate
reorganization within a non-arm’s length corporate group, there are no tax implications at that time if the employee received no other
consideration and did not derive an economic gain on the exchange.
 The general rule is that the benefit is recognized only when the option is exercised. At that time, the benefit realized is equal to the
difference between the option price and the market value of the shares. The benefit is reduced by the amount, if any, paid by the
employee to acquire the stock option. Pursuant to paragraph 7(1)(a), this benefit must be included in the employment income of the
employee.
 Section 7(1.1) contains special rules applicable where a Canadian-controlled private corporation agrees to sell or issue shares of its capital
stock to an employee of the corporation if immediately after the option is granted the employee was dealing at arm’s length with the
corporation and related corporations.
o Here, the tax consequences arise when the shares are disposed of. The difference between the proceeds and the market value at
the time the option are exercised is simply a capital gain.
SECTION 8 – DEDUCTIONS
 Subsection 8(2) provides that except as detailed in that section, no deductions may be made in respect of office or employment income.
 Section 67 also applies to all deductions from any source including income from an office or employment. The provision states that the
amount that is otherwise deductible must also be reasonable. Only the portion that is found to be reasonable will be deductible.
o It is a question of fact as to whether an expense is reasonable in the circumstances.
SECTION 8(1)(B): LEGAL EXPENSES OF EMPLOYEES
 Legal expenses paid in the year by a taxpayer to collect or establish a right to salary owed to him or her by an employer or former employer
may be deducted under paragraph 8(1)(b). But then note that paragraph 6(1)(j) requires an award or reimbursement received by a
taxpayer in respect of an amount deductible under section 8(1) to be included under income unless otherwise included or taken into
account in reducing the amount claimed as a deduction.
o This provision ensures that legal expenses are deducted under paragraph 8(1)(b) only to the extent that they represent a cost of
earning income, net of any awards or reimbursements in respect of expenses.
o Ex. Expenses incurred by a shipmaster to defend his competence and right to command a ship were non-deductible because they
were incurred to protect his means of livelihood, and not to collect salary or wages owing to him (Blagdon v The Queen )
 A deduction under paragraph 8(1)(b) is only allowed in respect of an amount “owed” by an employer or a former employer. If the taxpayer
is not successful in court or otherwise fails to establish that some amount is owed, no deduction for expenses is allowed.
SECTION 8(1)(I): PROFESSIONAL AND UNION DUES, OFFICE RENT
 Under subsection 8(1)(i) you may deduct annual professional and union dues. Because the dues must be annual in nature, the payment of
an additional fee on entry into a profession is not a deductible employment expense.
 Can also deduct office rent, or salary to an assistant or substitute, the cost of supplies that were consumed directly in the performance of
the duties of employment and that the employee was required by contract of employment to supply and pay for.
 Subsection 8(5) allows for the deduction of dues used to provide benefits to members, such as malpractice insurance, so long as these dues
are required to maintain a professional status.
FOOD AND BEVERAGE
 Section 67.1 arbitrarily restricts deductions of expenses incurred for food, beverages, etc. to 50% the cost of those items.

INCOME FROM BUSINESS OR PROPERTY

SECTION 9: BASIC RULES

 Section 9(1) provides that a taxpayer’s income from business or property is the taxpayer’s profit from that business or property in a year.
o “Profit” is not defined in the ITA, but Courts define profit to be a net amount calculation which determines the difference between
total receipts and the costs and expenses necessary to produce such receipts.
o Determination of profit is a question of law, determined according to the test of “well-accepted principles of business (or accounting)
practice” or “generally accepted accounting principles” except where these principles are inconsistent with the specific provision of
the Act or principles of law.
 Sections 12– 17 lay out the inclusions in business and property.
 Sections 18 – 21 lay out the deductions.
 Property = Property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the
foregoing, includes:
o A right of any kind whatever, a share or a chose in action;
o Unless contrary intention is evident, money;
o A timber resource property; and
o The work in progress of a business that is a profession. (248(1))
INCOME FROM A BUSINESS VERSUS INCOME FROM PROPERTY
 Carrying on a business usually requires time, effort and work while property income does not (or requires it to a much lesser degree).
 Income from business and income from property are generally treated the same, but in some cases it is necessary to distinguish between
the two. This distinction is important where:
o Active business income of a Canadian-controlled private corporation is taxed at a special low tax rate because of a tax credit under
section 125, known as the “small business deduction”. The low rate is unavailable for property income of a specified investment
business.
o A dividend refund available to private corporations under section 129 is computed in a way that excludes income from active
business.
o The attribution rules in sections 74.1 and 74.2 apply to income from property, but not to income from a business.
o Certain rules with respect to rental and leasing properties apply if this type of income is from property and not business. These rules
are designed to prevent taxpayers from creating or increasing losses from rental property through deduction of CCA.
o The deduction under paragraph 20(1)(b) for cumulative eligible capital is available only in respect of a business, not property.
o Tax liability of non-resident taxpayers is tied to the source of income. For example, income from a business carried on in Canada is
taxable under Part I of the Act on a net basis, whereas income from property is generally subject to a 25% withholding tax under Part
XIII on a gross basis.
INCOME FROM A BUSINESS
 Business = a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c),
54.2 or 95(1) and 110.6(14), an adventure or concern in the nature of trade but does not include an office or employment (248(1))
 This definition is not exhaustive! Many cases use the late nineteenth century statement from Smith v Anderson as a starting point:
anything which occupies the time, attention and labour of a man for the purpose of profit is a business.
 Most case law defines business as an organized activity that is carried on for the purpose of profit.
IS IT A BUSINESS
 The winning of a bet does not result in profit or gain – a bet is merely an irrational agreement that one person should pay another person
something on the happening of an event. Not like book-keeping, which requires an organizational effort (Graham v Green)
1. Ask was there an INTENTION on the bettor’s part to make profit, and not for amusement or hobby. What was the dominant object of
the taxpayer, amusement or business? (Walker v MNR, Morden v MNR, Stewart (leading case))
o The taxpayer must establish that his predominant intention is to make a profit from the acitivty and that the activity has been
carried out in accordance with objective standards of businesslike behaviour. Consider: (Stewart)
 The profit and loss experience in past years;
 The taxpayer’s training;
 The taxpayer’s intended course of action; and
 The capability of the venture to show profit.
 Ex. In Graham v Green, appellant bet on horses frequently and made an income off of it. It was found to constitute his
means of living – but since no organization, there was no tax on habit.
 Ex. CONTRAST with Walker v MNR, where taxpayer had insider knowledge on the horses and systematically attended all
races, in sometimes four cities, to bet on most events.
 Ex. In Tobias (Oak Island case), taxpayer argued that he had always intended to make a profit, didn’t matter that it was
speculative.
2. ORGANIZATION component is key – where betting is only occasional or amounts to nothing more than a hobby or indulging in
recreation, net income is not taxable. (MNR v Morden)
o Fact that an activity has been financed externally is an indication that the taxpayer is operating his or her activity in a
businesslike manner. As such, the existence of financing is an element which adds to the commerciality of a venture, and thus
operates in favour of characterizing the activity as a source of income. (Stewart)
3. Where taxpayer works to MINIMIZE RISK (like in Luprypa where pool shark practised pool like a job, never drank while playing and
targeted inebriated opponents), more likely to be a business. (Balanka)
o Ex. In Balanka, appellant did not enjoy watching horse races without having bet on it – it was a hobby. Not a business, no matter
how much he indulged himself.
o Ex. Betting on games of pure chance, like lotteries, simply lacks the badges of trade (Leblanc v The Queen)
o Ex. A lawyer who left his law practice to gamble full time, spending upwards of eight hours a day in gambling activities, was
found not to be engaged in a business (Cohen v The Queen)
4. Must have a REASONABLE EXPECTATION OF PROFIT. (Moldowan, but REJECTED in Stewart so use as an informative factor only) To
determine reasonableness, consider:
o Profit and loss experience in past years;
o Taxpayer’s training;
 o Taxpayer’s intended course of action;
o Capability of the venture as capitalized to show a profit after charging capital cost allowance.
o However, to deny deductions on the ground that the losses signify that no business source exists is contrary to the words and
scheme of the Act. Whether or not a business exists is a separate question from the deductibility of expenses (Stewart)
5. The amount of time the taxpayer devotes to the activity in question is also a factor to be considered in determining if the taxpayer’s
activities were commercial in nature. (Sipley v The Queen)
o Ex. the considerable amount of time and effort that party put into locating sunken ship indicated it was closer to a business than
a hobby. (MacEachern)

SECTION 18 AND 20: BUSINESS DEDUCTIONS

 Section 18 sets out restrictions: it lists the amounts that cannot be deducted.
 Section 20 lists various expenses that are deductible.
SECTION 18(1)(A) – GENERAL PRINCIPLES AND PURPOSE
 In order to be deductible, an expense must have been made or incurred for the purpose of gaining or producing income from a business or
property.
 When an expenditure is not expressly deductible under the ITA, the proper way to determine the deductibility of such an expenditure is to
see if it is deductible according to ordinary principles of commercial trading and accepted business practices (Rolland Paper)
 To determine whether or not an expense is incurred by the taxpayer for the purpose of gaining income within the exception provided by
section 18(1)(a), it must first be determined whether the outlay was incurred in accordance with the ordinary principles of commercial
trading or well-accepted principles of business practice (Day & Ross)
 An expense may be deducted without violating section 18(1)(a) so long as it is incidental to the business – the business purpose test set out
in Imperial Oil tells us this happens where:
o The amount included in accordance with the ordinary principles of commercial trading (industry standard) or good business practice,
or generally accepted accounting principles?
o If yes, is it expressly prohibited by the Act?
o Would the need have existed outside of the business (would the expense have occurred outside the need to make business income?
(Leduc)
SECTION 18(1)(B) – CAPITAL OUTLAY OR LOSS
 No deduction is to be made in respect of an outlay, loss or replacement of capital, a payment on account of capital or an allowance in
respect of depreciation, obsolescence or depletion. Section 18(1)(b) prohibits the deduction of capital expenses (subject to section 20).
 Determining whether something is a capital outlay is a common-sense appreciation of all the circumstances (Algoma Central Railway)
o Ex. Expenses on an advertising campaign to attract business to a railway was not a capital outlay. While there was a possibility of long-
term benefit to the taxpayer’s business, creating this benefit was not the immediate purpose of the expenditures (Algoma Central
Railway)
 Something is a capital expenditure where it is obtained for an enduring benefit. A capital expenditure is a “once and for all” expenditure
that is made “with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.” (British Insulated)
 An expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an addition to
such an entity, structure or organization, is an expenditure on account of capital; and an expenditure in the process of operation of a profit-
making entity, structure or organization is an expenditure on revenue account (Canada Starch)
 Monies are paid on account of capital when they are paid in the course of putting together a new business structure, paid for an addition
to a business structure already in existence, or moneys paid to acquire an existing business structure. (Canada Starch)
 Ask: were these sums expended on the structure within which the profits were to be earned or were they part of the money-earning
process? (Johns-Manville Canada Inc). “The difference between a capital and income expenditure is the difference between the acquisition
of the means of the production and the use of them, between establishing or extending a business organization and the carrying on of a
business, between establishing or extending a business organization and the carrying on of a business… between an enterprise itself and the
sustained effort of those engaged in it.”
o Ex. Purchase for a new boiler was a capital outlay, but money spent on ship repair was not (Canada Steamship Lines)
o Ex. fitting expenses incurred in transferring a manufacturing business to new premises;
o Ex. costs incurred in promoting a Bill which was dropped on the desired facilities being obtained by agreement;
o Ex. expenditures incurred by a shipbuilding firm in deepening a channel and creating a deep water berth to enable vessels constructed
by them to put out to sea.
o Ex. promotion expenses incurred by coal masters in connection with two parliamentary bills giving authority to construct a line to
serve the coalfield (Moore v Hare)
o Ex. Creation of pension fund (British Insulated)
o Ex. Defending a trademark was not a capital outlay because they did not get an enduring benefit – they just got a judicial affirmation
of an advantage already in existence and enjoyed by Kellogg. (Kellogg)
o Ex. Likewise, when farmer paid money to help fix a dam to try and prevent his business from being crippled, expense was not a capital
outlay. Rather than enhancing the business, and thus acquiring an advantage of enduring nature, the expenditure just maintained
what was before (Inskip)
 The word asset is not confined to something material, and the advantage paid for need not be of a positive character. May be in defense of
a part of a franchise as in Dominion Natural Gas, where the cost was incurred once and for all to procure for the company ‘the advantage of
an enduring benefit’ – they continued to enjoy their franchise unattacked.
REASONABLENESS
 KEEP IN MIND section 67, which is of general application to the whole Act. In computing income, deductions must always be reasonable in
the circumstances. This means even if a deduction is authorized by a specific section, part of the expense can be denied if the CRA considers
the entire amount is not reasonable.
 Ex. Evaluating salaries – in Neufeld, wife of president’s salary was reasonable because she provided substantial assistance in the business,
she was an officer and a shareholder in the company.
 Ex. Contrast with Mulder Bros where wife’s salary was equal to her husband’s. Unreasonable because she did not do the same amount of
work as him, even though she was very active in doing the company’s work and was also a secretary-treasurer.
 Advertising can be important for a business, but that does not mean that one engaged in business must spend on advertising all of the
profits produced from his business activity. The legitimacy of the thing does not always legitimize the expenditures and their quantums (No
511)
ENTERTAINMENT
 If the principle purpose of the entertainment is business, the expenses are deductible. However, subsection 67.1(1) limits the deduction of
food and entertainment expenses to 50% of the lesser of the actual cost or a reasonable amount. Section 18(1)(h) has been amended to
take this into account.
 Ask: was the entertaining solely for the purposes of business, that is, solely with the object of promoting the business or its profit earning
capacity? (Roebuck)
o Ex. Throwing a party for your niece to reach out to your clients is not gonna pass muster (Roebuck)
 Ask: was the deduction consistent with ordinary principles of commercial trading or well-accepted principles of business and accounting
practice? Must be a strong link between the entertainment and the business’ pursuit of profit. Not necessary that the outlay or expense
should have resulted in income. Just must be made for the purpose of gaining or producing income “from a business”. (Royal Trust)
o Ex. Club fees and dues counted as a deductible business expenses, where business used clubs and social settings to recruit clients.
(Royal Trust)
SECTION 18(1)(H) – PERSONAL AND LIVING EXPENSES
 Personal and living expenses are generally not deductible in computing income.
 In order to determine whether an expense qualifies as a reasonable business expense or whether it is a personal and living expense, the
following questions are helpful (Scott)
o What is the need the expense meets?
o Would the need exist apart from the business? (e.g. Symes)
 If the need exists even in the absence of business activity, and irrespective of whether the need was or might have been
satisfied by an expenditure to a third party or by the opportunity cost of personal labour, the expense to meet the need would
traditionally be viewed as a personal expense (Symes, Scott)
 Expenses that can be identified in this way are expenses which are incurred by the taxpayer in order to relieve the taxpayer
from personal duties and to make the taxpayer available to the business, and are not considered business expenses since the
taxpayer is expected to be available to the business as a quid pro quo for business income received.
 Expenses of a personal nature, like housekeeping, are not deductible (Benton)
o So, where a farmer hired a housekeeper to engage in domestic duties, her salary was not deductible as it did not ‘contribute’ to the
upkeep of the farm (women’s invisible labour, smh) (Benton)
 APPORTIONMENT – SEE BENTON – if expenditure if of a hybrid nature, then apportion the cost between business expense and personal
expense and deduct the business expense.
 A home office does not count as a personal living expense – where the office is used for business purposes only it is not a personal expense
(Cumming)
o Ex. In Cumming, doctor had a locker at the hospital, but no office or desk. No place at the hospital where his administrative functions
could be carried out. By contrast, his home was built to serve his needs and to his specifications. He worked there about 12 hours a
week on his accounts, etc. Permitted to deduct expenses of operating an automobile to and from his office.
o Ex. In Logan, heart specialist had a full-time business office but it was not suitable for nighttime work, which was necessary in his line
of trade. Was permitted to deduct expenses for office upkeep because he used the office only for the purposes of the profession, and
the office was effectively segregated from the Appellant’s home life as if it had been in a separate office. (Logan)
o Ex. Contrast with Mallouh, where the doctor had a home office but there was barely any use of the office for business reasons – he
practised his profession at his main office and there was no necessity whatsoever of carrying out any part of his medical practice at
home.
o Ex. Food expenses, to the degree that they were ‘extra fuel’ above and beyond what normal people need to eat for a foot courier that
travelled upwards of 150km on foot a day were deductible (Scott)
 Childcare is also not deductible under business expenses, as they would exist regardless of a taxpayer’s business activities. Childcare
expenses are incurred to make the taxpayer available to practise her profession, rather than for any other purpose associated with the
business itself. (Symes, but see L’H-D’s dissent)
o Section 63 deals explicitly with childcare expenses, but it restricts the expense by reference to the income generated by the freedom
from other domestic duties.
NOTES ON CHILD SUPPORT
 Section 56(1)(b) of the ITA required a separated or divorced parent to include in computing income any amounts received as alimony for the
maintenance of children, while section 60(b) allowed a parent who has paid such amounts to deduct hem from his income. This was held to
be constitutional in Thibaudeau
SECTION 18(1)(L) - YACHTS
 Section 18(1)(L) details that no deduction shall be made for an amount to maintain yachts and cottages, etc. and membership fees or dues
unless it is for business.
o Doesn’t matter how you use the property, except to the extent that such use identifies the nature of the property i.e. a boat that is
used as a tugboat is not a yacht. (CIP Inc)
o The paragraph is aimed at recreational facilities including a yacht used for pleasure. So where a boat owner used the boat to gather
information and do research relating to the creation of his almanac which was a part of his business, it was not a yacht and the
expense of the boat was deductible (John Barnard Photographers)
SECTION 18(2) – PERSONAL DOMESTIC ESTABLISHMENT
 Can’t deduct income used for a self-contained domestic establishment in which the individual resides, unless the work spaces is the
individual’s principle place of business, or used exclusively for the purpose of earning income from a business and is used on a regular and
continuous basis for meeting clients, customers or patients of the individual in respect of the business.
 If these conditions are met, then the amount you can deduct cannot exceed your income for the year from the business.
ILLEGALITY AND BUSINESS DEDUCTIONS
 The illegality of an expense does not affect its deductibility for tax purposes. (Rolland Paper, Eldridge, 65032 British Columbia
Corporation)
o Ex. Since ITA provisions are applicable to taxpayers carrying out illegal businesses, deductions ought to apply too. The payment of
legal fees to defend charges were made in accordance with the principles of good business practice for a company in the fine paper
industry (Rolland Paper)
o Ex. Earnings from illicit operations or businesses are subject to tax (Eldridge)
 Purloining by office boys and thefts by shop employees should, prima facie, be allowed as deductions. They may be shown to be incidental
to, and perhaps inevitable in, the operations which produce income (General Stampings)
 Ex. fines can be deductible, especially in circumstances where fines result from day-to-day operations from the taxpayer’s transport
business and are effectively a necessary expense (Day & Ross)
o HOWEVER, be aware of section 67.6, which acts to deny the deduction of fines or penalties (other than prescribed fines or penalties)
imposed under federal, provincial, territorial or foreign law. The only ones exempt are the ones the ITA prescribes, and so far the ITA
has prescribed none.

SPECIAL RULES: SHAREHOLDER BENEFITS AND LOANS

BENEFITS
 When a corporation confers a benefit on a shareholder or person in contemplation of becoming a shareholder, the amount of the benefit
must be included in computing the recipient’s income under subsection 15(1).
 The provision has the intended effect of preventing a shareholder from appropriating property owned by the corporation, other than by a
payment of a dividend.
 The provision does not apply to benefits conferred on a shareholder by way of the payment of a dividend, including a deemed dividend,
reduction of capital, certain rights or offerings, or the capitalization of contributed surplus.
 Benefits include:
o Sale of corporate property to a shareholder for an amount less than FMV;
o The sale of property by a shareholder to the corporation for an amount in excess of FMV of the property;
o Rent-free use of corporate property by a shareholder; and
o The payment by a corporation of a shareholder’s personal expenses.
 Benefits included in income under subsection 15(1) are not treated as dividend. Consequently, the recipient is not entitled to the benefit of
a dividend tax credit.
LOANS
 Shareholder loans are where a SH receives a loan or incurs an indebtedness to a corporation. Subsections 15(2) – (9) apply in the case of any
loan from a corporation any other form of indebtedness representing alternative methods of appropriating a corporation’s property.
 When a corporation has made a loan (or permitted any other form of indebtedness) to a shareholder (or a connected person), the amount
of the loan or indebtedness must be included in the income of the shareholder for the taxation year during which the loan was made or the
indebtedness arose. This implies the shareholder must amend his or her tax return if already filed for the year.
 Shareholders who repay all or a portion of the amount included in their income for a preceding year under subsection 15(2) can later
deduct the amount repaid when calculating their income for the year during which the repayment is made.
o May include the amount of the loan, except where:
 The loan was made for certain specified purposes (ex. purchases of a dwelling by an officer of the corporation) and bona fide
arrangements have been made for the repayment of the loan, within a reasonable time.
 The loan was repaid within one year from the end of the taxation year in which it was made and the repayment is not a part of a
series of loans and repayments; or
 It is reasonable to conclude that the debtor received the loan as a result of a person’s capacity as an employee and not in their
capacity as a shareholder.

BUSINESS AND PROPERTY – CAPITAL COST ALLOWANCE (SECTION 20(1)(A))

 Items used in a business depreciate in value with use. A taxi cab may wear out over two or three years of use, for example. The amount of
its value that is ‘used up’ each year should be deducted from the gross income for that year to obtain an accurate statement of net
income. This matches the cost of the taxi to the value it produces.
 Section 20(1)(a) (deductions permitted) provides for an amount to reflect depreciation under the title of capital cost allowance (CCA). It
specifically states that notwithstanding paragraph 18(1)(a), (b) or (h), an amount which is allowed by the regulations is deductible.
o However, no deductions are permitted for expenditures that are not for the purpose of earning income or that are of a personal
nature. (Regulation 1102(1)(c))
GENERALLY
 CCA is a deduction that represents a portion of the capital cost of property acquired by a taxpayer. Thus, the taxpayer can, over time, write
off the cost of property used to produce or gain income from a business or property.
 Instead of calculating a deduction for each asset, the ITRs set out classes grouping assets of the same nature or of the same sector of the
industry. Two methods are used to calculate the portion of the capital cost that can be deducted from income:
1. Straight line method – The cost of the asset is allocated evenly over the asset’s useful life. This method is used for certain property like
leasehold interests, patents, concessions, franchises or licenses.
2. Declining-balance method – The annual amount of depreciation is based on a fixed percentage of the asset’s written down cost (after
taking into account depreciation from previous years). The amount of depreciation is usually greater in earlier years with this method,
which is used for tax purposes.
 When a taxpayer disposes of depreciable property, it is necessary to determine its original capital cost and proceeds of disposition minus
any outlays. The lesser of these two amounts reduce the balance in the class (the UCC). Should this balance become negative, it will be
included in the taxpayer’s income as recaptured depreciation by virtue of subsection 13(1).
o However, this recapture can be avoided if depreciable property of the same class is acquired before the end of the fiscal year for
an amount that is at least equal to the recaptured depreciation.
o Section 13(4) recognizes the situation where a taxpayer intends to replace a depreciable property but is unable to do so prior to a
year end by allowing deferral of the recapture where the disposition was involuntary.
 By contrast, where an asset depreciates much quicker than CCA deductions permit, subsection 20(16) permits a deduction for a terminal
loss.
DEPRECIABLE PROPERTY
 Subsection 13(21) defines depreciable property as property acquired by a taxpayer in respect of which the taxpayer has been allowed a
deduction under paragraph 20(1)(a).
o Further, the definition of “capital property” in section 54 states that depreciable property is treated as capital property.
 Subsection 1102(1) of the Regulations details that the following assets are not depreciable property:
o Property that was not in fact acquired by the taxpayer;
o The cost of which is deductible in computing the taxpayer’s income;
o That is described in the taxpayer’s inventory;
o That was not acquired for the purpose of gaining or producing income;
o That was acquired as an expenditure in respect of which the taxpayer is allowed deduction in computing income under section 37.
WHAT IS A CAPITAL ASSET?
Since depreciable property does not include property whose cost is deductible in computing income, we must determine whether the
expenditure was capital in nature (because depreciable property was acquired or improved) or whether it is currently deductible (because it is
in the maintenance or repair of properties). To determine whether an expenditure is capital in nature, ask:
 Did the expense confer an advantage of an enduring benefit?
o Haulageways not a capital asset (Denison Mines)
o Ex. Property acquired for the sole purpose of making a site for a factory, and thus buildings on the site were torn down. The buildings
were therefore not property subject to CCA. (Ben’s Bakery)
o Ex. Acquiring new land was to remove an obstacle to the mine and were incurred year in and year out as an integral part of the
operations of the taxpayer – the land was not acquired for any intrinsic value but merely by reason of location and was “consumed” in
the mining process. No enduring benefit (John-Mansvill)
 Was it made for maintenance or for the purposes of improvement?
 Was the expenditure made to repair a part of a property, or rather was it to acquire property that is in itself a separate asset?
o Ex. Defense of intangible assets – Denison Mines
o Ex. Farmer paying $38k to help repair a dam was a current expense – the advantage being sought was in respect of the current
operations, prevented them from being severely crippled, did not change the farm operation at all. Rather than enhancing the
business, and thus acquiring an advantage of enduring nature likened to an assembly of assets in the capital structure of the
business, the expenditure was shown to have merely maintained what was had before. (Inskip)
 What is the amount of the expenditure in relation to the value for the whole property?
 Were the repairs made to put used property in a suitable condition?
 Were the repairs made in anticipation of a sale?
“The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the
business entity, structure or organization set up or established for the earning of property and the process by which such an organization
operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.”
(Canada Starch)
o An expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an
addition to such an entity, structure or organization, is an expenditure on account of capital, and (Canada Starch)
 o An expenditure in the process of operation of a profit-making entity, structure or organization is an expenditure on revenue account.
(Canada Starch)
Note that “a trademark is not a capital asset that has been acquired by a payment made for its acquisition, but is a capital asset that arises out of,
and can only arise out of, current operations of the business; and registration of a trademark does not create a trademark that is such a business
or commercial reality, but is merely statutory device for improving the legal protection for it. (Canada Starch)
DATE OF ACQUISITION
 In order for a taxpayer to claim CCA in respect of an asset, it becomes necessary to determine whether and where the taxpayer has acquired
the asset. According to Interpretation Bulleting IT-285R2, a taxpayer is considered to have acquired a depreciable property at the earlier of
o The date on which title to it is obtained; or
o The date on which the taxpayer has all the incidents of ownership such as possession, use and risk even though legal title remains in
the vendor as security for the purchase price.
 “A purchaser has acquired assets of a class in schedule B when title has passed, assuming that the assets exist at that time, or when the
purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the
purchase price as is commercial practice under conditional sales agreements.” (MNR v Wardean Drilling)
 To claim CCA the taxpayer must have legal acquisition and legal possession of the property. Not possible to have legal possession of a
building before its completion. (Schultz)
 Rules 13(26) to (32) of the Act contain some statutory rules dealing with the timing of acquisition of depreciable property for CCA purposes.
THE “AVAILABLE-FOR-USE RULE”
 Section 13(26) details that, for the purposes of section 20(1)(a) and related regulations, no addition may be made to the undepreciated
capital cost of a class in respect of the acquisition of a property until the property has become “available for use” by a taxpayer. These
“available-for-use” rules apply to property acquired after 1989.
 Under this section, the taxpayer is deemed to have acquired an asset when it is ready to be used for the purpose of earning income from a
business or property. As a result, CCA may not be claimed until that time.
 Section 13(27) details that property other than a building acquired by a taxpayer is considered available for use at the earliest of:
o The time at which the property is first used for the purpose of earning income;
o The time which is the beginning of the first taxation year commencing more than 357 days after the taxation year in which the
property was acquired;
o The time immediately before the property is disposed of by the taxpayer; and
o The time the property is delivered or made available for the use or benefit of the taxpayer and is capable of producing a saleable
product or performing a saleable service.
 Section 13(28) details that a building shall be considered to be available for use at the time which is the earliest of:
o The time at which all or substantially all of the building is used by the taxpayer for the intended purpose;
o The time at which the construction of the building is complete;
o The time at which the beginning of the first taxation year commencing more than 357 days after the taxation year in which the
property was acquired;
o The time immediately before the property is disposed of by the taxpayer.
 Where the property acquired has not been made available for use within a maximum period of two years, the “two-year rule” applies such
that the property is deemed to have become available for use and may give rise to appropriate tax incentives.
DEFINITION OF COST
 The term capital cost of property generally means the full cost to the taxpayer of acquiring the property. It includes legal, accounting,
engineering and other fees incurred to acquire the property.
 The capital cost of depreciable property manufactured by a taxpayer for the taxpayer’s own use includes material, labour and overhead
costs reasonably attributable to the property, but nothing for any profit which might have been earned had the asset been sold.
 Under the term “A” of the definition of “undepreciated capital cost” in subsection 13(21), the cost of a depreciable asset is added to the
UCC of a class for CCA purposes. Although undefined in the Act, the “cost” of an asset is ordinarily the amount spent to acquire it.
 A new tax system was introduced in 1971 with respect to capital gains and losses. As a result, a number of transitional provisions ensure
that when capital property was acquired before the new system came into effect is disposed of, the pre-system gains and losses are
excluded from the post-system gains and losses. For property acquired after 1971, purchasing price is typically used as the main component
of ACB. However, sometimes the ITA imposes a deemed cost – sometimes it uses FMV, nil cost or ACB for the actual cost. (s 248(1))
o Fair market value is usually the highest dollar value you can get for your property in an open and unrestricted market, between a willing
buyer and a willing seller who are acting independently of one another.
o If an outlay is made before the deemed acquisition of the property, the taxpayer’s expenses are excluded from the cost base because
the Act prescribes the FMV as the cost of acquisition. (Allison v Murray)
 The capital cost of depreciable property must be reduced by the amount of any investment tax credit or any government assistance that is
received in respect of the property’s acquisition (section 13(7.1))
 Capital expenditures to improve property after acquisition are also included in its cost – must be in money or money’s worth – the
taxpayer’s own labour in improve the asset will not increase its cost base.
 Except where the Act specifically provides otherwise, expenses of ownership such as interest, property taxes, storage charges and
maintenance may not be added to the cost of the property. However, if the taxpayer chooses, interest and borrowing costs incurred to
acquire depreciable property may be added to capital cost (Section 21)
CALCULATION OF CAPTIAL COST ALLOWANCE
 The amount of CCA deduction that is available under paragraph 20(1)(a) is determined by regulation 1100(1)(a) The amount is equal to the
appropriate percentage of the undepreciated capital cost.
 Subsection 13(21) defines undepreciated capital cost as the aggregate of the cost of all acquisitions of property in a class + recapture (the
aggregate of all CCA previously claimed in respect of the class, which includes any terminal loss previously deducted in respect of the class.
o In practice, in computing UCC for a particular year, a taxpayer simply needs to take the UCC of the class at the end of the previous
year, deduct CCA claimed for the previous year, add up the cost of new purchases in that year and subtract the proceeds of
disposition (up to the cost) of the property disposed of in that year.
THE HALF-YEAR RULE
 As set out in regulation 1100(2), CCA on assets acquired in the year to one-half of the normally applicable amount. There is a small list of
exceptional assets/classes that are not subject to the half-year rule (like patents!)
 Note that this rule only applies when depreciable property has been acquired in the taxation year and its effect is limited to that year only.
RENTAL PROPERTIES
o Under regulation 1100(11), the amount otherwise deductible in CCA in respect to “rental properties” is limited to the taxpayer’s net income
from all such properties, ignoring CCA.
o The rationale is to eliminate the ability to use CCA to reduce income from other sources and effectively lower the after-tax cost of investing
in rental properties.
o “Rental property” = a building used principally for the purpose of producing gross revenue that is rent. (regulation 1100(14))

INCOME FROM BUSINESS OR PROPERTY – OTHER HYBRID CAPITAL-INCOME ITEMS

BUSINESS INVESTMENT LOSSES (BIL)

 Business investment losses allow special tax relief for individuals who invest in small business corporations. You can use a business
investment loss to offset income from a source, but not a capital gain.
 Section 39(1)(c) details that the taxpayer must calculate the capital loss in respect to shares, debts or other securities issued by small
business corporations. Once there is a concrete capital loss, it is reclassified as an allowable business investment loss, which can be taken
into consideration in section 3(b) and section 3(d).
 Note that section 38(b) and (c) detail that only 50% of a capital loss or business investment loss is allowable. In section 3(b), the calculation
is the net taxable capital gain (allowable capital loss – allowable business investment loss). If the sole capital loss is the same as the business
loss, they will cancel each other out. The business investment loss can then be calculated in section 3(d).

PRIORITY OF LOSS RELIEF

 Tax payable is calculated by applying the relevant tax rates to taxable income and then reducing this amount by any available tax credits.
Subsection 2(2) defines a taxpayer’s taxable income as his or her income for the year under section 3, plus the additions and minus the
deductions permitted by Division C of Part I of the ITA (ss 110 - 113)
 To the extent that the current year losses cannot be used in the year that they arise (section 3 does not permit a negative balance that
would entitle a taxpayer to a refund of tax), the losses may be carried over to another year (either forward or backward) and deducted in
the calculation of taxable income for the year. The carryover period and deductibility rules differ depending on the nature of the loss.
NON-CAPITAL LOSSES
 Section 111(1)(a) permits the deduction of non-capital losses, defined in section 111(8) over a 23-year period (the three taxation years
before the loss was incurred and the 20 subsequent taxation years).
 Allowing taxpayers to offset losses against income of the three preceding years should produce tax refunds close to the time when the loss
was incurred, a time when the money is particularly needed. As a general rule, there is no restriction on the source of income of the
taxpayer from which the loss is deductible.
 This creates a potential tax advantage for taxpayers who purchase corporations with undeducted losses realized in previous years. After
buying such a corporation, a taxpayer could transfer a business to it and future profits of the business could be reduced by the losses carried
forward.
o Sections 111(5) to (5.4) and section 249(4) have been enacted to limit this perceived abuse of the non-capital loss carryforward
provisions and limit the availability of unused losses on a change in control of a corporation.
FARM LOSSES AND RESTRICTED FARM LOSSES
 Farm losses (defined in subsection 111(8)) and restricted farm losses, as defined in section 31 may be carried back three years and forward
20 years in accordance with subsection 111(1)(d) and (c).
 Subject to change of control rules for the non-capital losses of a corporation, farm losses may be deducted against income from any source.
However, restricted farm losses are only deductible from farming income.
NET CAPITAL LOSSES
 Net capital losses (defined in subsection 111(8)) may be carried back three years, and forward indefinitely (s 111(1)(b)) but are deductible
only from taxable capital gains (s 111(1.1)).
 In the taxation year ending immediately before an individual’s death and the preceding tax year, net capital losses are deductible as if they
were non-capital losses (s 111(2))
 Where control of a corporation is acquired, the net capital losses are not deductible (s 111(4))
 Capital losses accrued at the time of the change of control are similarly restricted, although the corporation may elect to realize accrued
gains against which the non-deductible capital losses may be offset.

MISCELANEOUS
TAX CONSEQUENCES FOR SOLE PROPRIETORSHIP OR INCORPORATION
There can be some significant advantages of choosing a corporate format. These include:
o Tax deferral on business income that is eligible for the small business deduction, Canadian manufacturing and processing profits
deduction or the general rate reduction, assuming the individual is in the highest personal tax bracket;
o Income splitting potential with family members as employees or shareholders;
o Estate planning advantages on the transfer of future growth in value to children;
o Stabilization of income of the individual through salary payments or greater flexibility in the timing of the receipt of income subject to
personal tax; and
o Potential access to the $800k capital gains exemption on a disposition of the shares of a qualifying small business corporation.
Incorporating a business can also result in a number of tax disadvantages, including:
o A prepayment of tax if the corporate income is ineligible for the small business deduction, Canadian manufacturing and processing
credit or the general rate reduction, and the individual is not in the highest personal tax bracket;
o The additional costs of maintaining a corporation including the cost of administrative filings and tax filings; and
o A loss of the availability of business and capital losses to offset personal income
The main reason for the tax advantages or disadvantages is that a corporation is taxed as a separate entity, whereas a sole proprietorship is
not. Business income earned through a sole proprietorship is taxed directly to the proprietor.

INCORPRATION OR PARTNERSHIP?
The use of a partnership can provide some benefits to compared to the use of a corporate form of business organization, including:
o The potential ability to flow through losses, investment tax credits, and, where applicable, scientific research and experimental
development costs and claim them against personal income;
o No double taxation on the distribution of profits; and
o Distribution of an amount in excess of contributed capital without immediate adverse tax consequences.
Potential disadvantages of a partnership compared to the corporate form of organization include:
o No access to the small business deduction, Canadian manufacturing and processing profits credit or the general rate reduction;
o No access to the $800k enhanced capital gains exemption on the disposition of businesses; and
o Limited income-splitting opportunities.

CORPORATE FINANCING
DEBT FINANCING
The use of debt to finance a corporation has a clear tax advantage to the corporation as the interest on the debt is deductible by the
corporation if the requirements of paragraph 20(1)(c) are satisfied. Interest is generally taxable to holders of the debt instrument.
EQUITY FINANCING
Dividend payments are not deductible by the taxpayer. Therefore, there is some potential for “double tax” as recipients of dividends must
include them in income under paragraph 12(1)(j). The impact of this income inclusion and potential for double tax is addressed by the “gross-
up” and “dividend tax credit” mechanisms in subsection 82(1) and section 121.
HYBRID FINANCING
The provisions of the Act generally have not kept pace with changes in financial markets. Accordingly, a measure of uncertainty exists as to the
proper characterization of debt-equity hybrid. Moreover, there is only limited jurisprudence in the area. The weight of the existing
jurisprudence is that a hybrid instrument should be characterized as debt or equity based upon its predominant characteristics rather than
being bifurcated into separate debt and equity components.
FINANCING OWNER-MANAGED BUSINESSES
Closely-held corporations give rise to different financing considerations.

CORPORATE TAX LIABILITY

The way in which a corporation produces income that ends up in personal income is:
1. Corporations may pay interest on bonds – when corporate interest payments are incurred with respect to its debt obligations, that
constitutes debt and can be deductible. If corporation incurs expenses, even if the payments involve are payments that arise from
debt financing, it is an expense incurred for the purpose of earning business and can be deductible.
2. If a corporation were to issue shares in order to raise operating capital, as opposed to issuing bonds or engaging in various kinds of
loans, then the payments that would be made on the issuance of stock or shares to individuals would produce, not dividends, but
debt service or reward for investing in the corporation. Dividends are a non-taxable, non-interest type of expense.
For greater detail, see pages 131 – 147 of long outline.
TAX AVOIDANCE TRANSACTIONS
 Section 245(1) – (4) details that avoidance transactions are bad, and not allowed.