THESE LECTURE NOTES

HAVE BEEN PREPARED BY

LARRY GOLDSMAN FOR
USE IN ACCT 385

FALL 2016

1
 TAX

A tax is a compulsory payment made by a taxpayer to a government.

A tax represents a transfer of economic resources from the private
sector (taxpayers) to the public sector (government).

There are 2 general reasons why taxation is necessary:

1. To finance the expenditures of the government

2. To accomplish a range of economic, social and political objectives

2
 TABLE OF CONTENTS

TOPIC PAGES CH.

The Canadian Tax System 4 - 10 1

Residency 11 – 17 20

Employment Income 18 – 39 3

Other Income/Deductions 40 – 50 9

Deferred Income Plans 51 – 61 10

Capital Cost Allowance 62 – 69 5

Business Income 70 – 82 6

Property Income 83 – 95 7

Capital Gains 96 – 105 8

Attribution Rules & Inadequate

Consideration 106 – 110 9

Taxable income - Individuals 111 – 115 4/11

Tax Payable - Individuals 116 – 128 4/11

Corporate Taxation 129 – 144 12/13

Procedures & Administration 145 – 160 2

3
 Chapter 1 – The Canadian Tax System

Sources of Tax Revenue

Various levels of Government (Federal, Provincial and Municipal) finance their

expenditures and programs (e.g., health care, economic objectives) by levying
taxes. There are a number of tax bases that are used as a source of
government revenues:

1. Consumption taxes – GST/QST

2. Income taxes
3. Excise taxes
4. Property taxes
5. School taxes
6. Land Transfer taxes (The Welcome Tax)

The course will concentrate on Federal Income Taxes generated from individual
and corporate taxpayers.

The Canadian Federal tax system uses a progressive approach, i.e., higher
income earners pay a higher rate of tax. This reflects the ability to bear ideology.

2016 Federal rates of tax for individuals – under Part I of the ITA

Tax Rate Tax Brackets

15% Up to $45,282
20.5% $45,283 – $90,563
26% $90,564 - $140,388
29% $140,389 - $200,000
33% $200,001 and over

2016 Provincial rates of tax for individuals

These vary from province to province. For individuals in the top rate of tax, the
combined Federal & Provincial rates of tax will vary between 47% and 59% on
salary, interest and business income depending on the province of residence at
December 31.

4
Some will advocate that a Flat Tax system should be used:

 Simpler
 Does not discourage initiative of taxpayers
 Does not encourage tax evasion
 Fairer if income fluctuates from year to year
 Fairer to 1 income families as there is a greater amount of tax under
a progressive rate system on a 1 income family when compared to a 2
income family earning the same total income.

History

 The Income War Tax Act was introduced in 1917 as a temporary

financing measure for the activities of World War I.

 The Act underwent major modifications in 1949, 1972 and in 1988

 The 1972 changes introduced the taxation of capital gains.

 The 1988 reforms introduced the conversion of personal exemptions to

credits, reduction in tax rates and the introduction of GAAR (General
Anti Avoidance Rules)

5
General Framework of the ITA

 Part I to Part XVII

 Parts broken down into Divisions and then into subdivisions

 Sections, subsections, paragraphs, clauses & subclauses

The course will concentrate on Part I of the ITA, and more specifically on
Division B - computation of net income for tax purposes for individual and
corporate taxpayers.

 Subdivision A Employment Income

 Subdivision B Business & Property Income
 Subdivision C Taxable Capital Gains/Allowable Capital Losses
 Subdivision D Other Sources of Income
 Subdivision E Other Deductions

The sections in the Act are followed by:

 Historical footnotes
 Pre-amended provisions
 Related provisions & regulations
 Related Income Tax Folios
 Related Interpretation Bulletins, Information Circulars and Advance Tax
Rulings
 Authorized & prescribed forms
 Pending amendments

6
Sources of Tax Law

The Income Tax Act (ITA) is the basic source of law. Changes to the Act must
be ratified (voted into law) by Parliament. These changes are usually introduced
in a Budget (usually presented March/April) by way of a Notice of Ways and
Means Motion. Draft legislation is then prepared and presented as a formal Bill
in the House of Commons.

Income Tax Regulations

 To ease & clarify the Act

 Complementary to the Act, but cannot modify or contradict it.

 Changes are made by way of Order in Council (Cabinet), need not be

ratified by Parliament.

 Effective when published in the Canada Gazette

Income Tax Application Rules (ITARs)

 These are transitional measures from the 1971 tax reform, e.g., V-Day
and Median Rule Methods.

Judicial Decisions

 Apply to specific transaction(s)

 Act only as a guide, as they are based on a certain set of facts

 The ITA has been amended to reflect judicial decisions, or to ensure that
the same decision would not apply to similar transactions.

 Decisions from the “Informal Procedures” of the Tax Court cannot be

used as a source of tax law.

 British case law can also be used as a source of law

7
Tax Treaties

 Avoids double taxation of income, reduces withholding rates of tax on

payments to non-residents

 Treaties override the ITA

Other

 Interpretation Bulletins (IT’s) - (CRA) interpretation of the law, being

replaced by Income Tax Folios

 Income Tax Folios - A new technical publication called Income Tax

Folios are being introduced. The Folios are organized into 7 Series. Each
Series is made up of several folios that represent topics in that Series.
Each Folio is then subdivided into topic-specific chapters.

Series 1: Individuals
Series 2: Employers and employees
Series 3: Property, Investments and Savings Plans
Series 4: Businesses
Series 5: International and Residency
Series 6: Trusts
Series 7: Charities and Non-profit organizations

 Information Circulars (IC’S) - deal with administrative matters, e.g.,

withholding on payments to non-residents

 Advance Tax Rulings are requested by taxpayers on transactions

 Technical Interpretations may be requested by the taxpayer from CRA –

not binding to CRA.

 Various guides and pamphlets, e.g., salesman expenses, rental income,

death of a taxpayer

8
Amendments to the ITA

Usually introduced in a Budget:

 Collect additional revenues

 Eliminate inequities

 Achieve economic objectives

 Eliminate loopholes

 Correct anomalies

 Clarify the Act

9
The ITA should provide for the following:

Who is liable for tax - Addressed by Division A of the ITA

Amounts (base) subject to tax - Addressed by Division B-D of the ITA

Division B – Computation of Income

Division C – Computation of Taxable Income
Division D – Taxable Income earned in Canada by Non-residents
Division E – Rates of Tax
Divisions I & J – When & how id the tax to be paid

Principles of tax law

 Clear unmistakable language should be used in writing tax law ☺

 Words should be given their ordinary meaning unless defined otherwise in

the Act.

 Section 248 of the ITA contains the “general definitions” that are used
throughout the ITA. Words/terms may be defined differently than their
dictionary definition. As an example, the word “person” is generically
defined as an individual, but in section 248, the word “person” includes an
individual, a corporation and effectively a trust.

 Other sections also define words/terms, where the definition usually

applies to a specific provision(s).

 Specific sections override general sections, e.g., section 63 allows the

deduction of child care expenses under certain circumstances, even
though personal/living expenses are not deductible under paragraph
18(1)(h) of the ITA.

10
 CHAPTER 20 - Residency

Residency – Basis for Taxation in Canada

 Subsection 2(1) charges who & what amounts are subject to tax. A
resident of Canada will be required to pay tax to Canada on his/her
worldwide income.

 Under Canadian tax law, it is therefore important to determine if the

taxpayer is a resident of Canada or not. A resident will be taxed on
his/her worldwide income, while a non-resident is taxed only on
Canadian source income.

 Residence is not defined in the Act - must therefore look at other sources:

a. Dictionary meaning

b. S5-F1-C1 discusses the guidelines/factors that CRA uses in the

determination of residency.

c. Judicial decisions - factors considered by the courts:

Major Factors

Routine settled life concept (regularly & customarily live)

1. Dwelling
2. Location of immediate family (spouse & children)

Secondary Factors

d. Social & economic ties

e. Ownership of personal property
f. Unforeseen return

Temporary Absences

If based on the above factors, some residential ties still remain, the
courts will also consider:

a. Intent of taxpayer, i.e., was there intention to permanently sever the

residential ties.
b. Frequency of visits (watch out for the 183 day rule)
c. Residential ties outside Canada

11
Factors an individual should consider in severing residential ties:

 Sell home or lease it on a long term basis

 Move personal effects or sell them
 Close bank accounts, safety deposit boxes
 Cancel credit card with Canadian financial institutions & apply for
new ones from financial institution of new country of residence
 Cancel newspaper subscription
 Have mail forwarded to new address
 Immediate family should move ASAP
 Cancel Canadian registration of cars, boats
 Obtain driver’s license from a foreign jurisdiction
 Have immigration status in new country
 Keep visits to Canada to a minimum
 Make sure your last tax return has a non-Canadian address
 Cancel provincial hospitalization plan
 Consider revoking will prepared in accordance with Canadian law
 Consider selling burial plots 

Deemed residents of Canada S250(1):

 Ambassadors, members of the armed forces including spouses

(depending if the spouse was a resident of Canada or not at the time
of marriage) & children. Not always a straightforward rule. See
textbook for additional discussion and examples.

 The Sojourner Rule

 The sojourner rule applies to deem non-residents to be full

time residents of Canada if the individual happens to be in
Canada 183 or more days during the taxation year. It does
NOT apply to part year residents (see below), nor to US
residents living in the US who travel daily to Canada, due to
the fact that they work in Canada.

12
Resident of Canada and another Country (Dual Residence)

If taxpayer is resident of Canada and another country, he may be

subject to double taxation. As a result, relief may be obtained
through any tax treaty/convention that Canada has with the other
country. Article IV of the Treaty usually provides relief by
determining that the individual will be a resident of either Canada or
the other country by applying the tests listed below in the following
order:

a) he shall be deemed to be a resident in only one country if he

has a permanent home in only one country. if he has a
permanent home available to him in both countries or in
neither country, he shall be deemed to be a resident of the
country with which his personal and economic relations are
closer (centre of vital interests);

b) if the country in which he has his centre of vital interests

cannot be determined, he shall be deemed to be a resident
of the Country in which he has an habitual abode (where he
spends more time);

c) if he has an habitual abode in both countries or in neither

country, he shall be deemed to be a resident of the Country
of which he is a citizen; and

d) if he is a citizen of both countries or of neither of them, the

competent authorities of the countries shall settle the
question by mutual agreement.

13
Part Year Resident - S114

An individual coming (establishing residential ties) to Canada or leaving (severs

residential ties) Canada will be considered a part year resident for that particular
year. If emigrating from Canada, the date on which a taxpayer becomes a non-
resident of Canada will be based on the severing of residential tie rules that were
just discussed. If immigrating to Canada, the taxpayer will be considered a
resident of Canada on the date of entry under immigration rules.

1. will be taxed on worldwide income while resident

2. will be taxed on Canadian source income while a non-resident

3. personal tax credits (covered in a later lecture) will be pro-rated

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Non Residents of Canada - S115

Subsection 2(3) will tax at the rates of 15%/22%/26%/29% the following sources
of income under Part I of the ITA:

1. employment income earned in Canada

2. business income earned in Canada

3. taxable capital gains from the disposition of Taxable Canadian Property

(real estate in Canada, capital property used in carrying on business in
Canada, shares of a private corp. whose value is derived principally from
real estate located in Canada, investments in partnerships and trusts
where the value of the investment is generally attributable to taxable
Canadian property)

Income [other than that listed in S2(3)] earned by non-residents

Investment & other sources of income earned in Canada will be taxed under Part
XIII of the ITA

 Certain payments to non-residents by residents of Canada are subject to

a withholding tax of 25%.
 The rate of withholding may be reduced by way of Treaty between
Canada and the foreign jurisdiction

 The tax is withheld by the payer & remitted to the Receiver General. The
payer has the legal obligation to withhold & will be held accountable

 Types of payments that are subject to W/H Tax under Part XIII of the ITA:
 Non arm’s length management fees
 Interest (exemptions for certain situations: see textbook)
 Dividends
 Gross Rental Revenues
 Alimony
 Pensions
 Others: See S212 - 218

 Election to pay tax under Part I is available for rental, alimony, pension
income. Can claim expenses in the case of rental income.

 In the event an individual appears to be a resident of Canada and is also

required to report his income to another tax jurisdiction, the Tax Treaties
have tie breaker rules (assuming there is a tax treaty between the 2
countries)

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Residency of Corporations

A) Place of Incorporation – Deemed Resident - S250(4)

a. Incorporated in Canada after April 26, 1965;

b. Incorporated in Canada prior to April 26,1965 and at any

time in a taxation year after 1965 it was

• resident in Canada (mind and management criteria –

see below), or
• carried on business in Canada at any time after that
date

B) Mind and Management

A company incorporated outside Canada could easily escape

Canadian taxation even though the day to day decisions are taken in
Canada. As a result, case law has developed the mind and
management criteria whereby a corporation will be resident of Canada
where its mind and management is in Canada. Factors include:

• Location of the board of director meetings [Note: This is not the

same as where the directors reside];

• Where the highest functional decisions of the corporation are

made

• Where day to day decision making is made.

• Location of books and records;

• Major business contracts are signed.

C) Resident of Canada and Another Country

If taxpayer is resident of Canada and another country, he will be

subject to double taxation. As a result, relief may be obtained through
any tax treaty/convention that Canada has with another country. Article
IV of the Tax Treaty usually provides relief by determining that the
corporation is resident of the country it was originally created.

16
Person - S248

A “Person” is subject to tax in Canada. Under S248, a person includes:

 An Individual

 A Corporation

 A Trust (covered in Tax 2)

Taxation Year - S249

 Individual – calendar year

 Corporation – Fiscal period (not exceeding 53 weeks)

 Trust
a) Inter-vivos – calendar year
b) Testamentary – calendar year

Concept of Income

 The term “Income” is not defined in the ITA.

 Section 3 establishes sourcing rules

a) employment income (cash basis) S5 - 8

b) business & property income S9 - 37.1

c) taxable capital gains S38 - 55

d) other income S56 - 59.1

e) other deductions S60 - 66.8

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 CHAPTER 3 – Employment Income

Employment Income (S5 - 8) and see CRA information guide (RC4110)

 It is important to distinguish between an employee and a self-employed

individual for tax purposes as the deductions available in computing net
income differ significantly for each of the above.

 Employed individuals are restricted to section 8 deductions in computing net

employment income, while self-employed individuals can look towards
section 20 (broader than S8) deductions in arriving at net business income.
Other important considerations are the CPP/QPP contributions and EI
premiums implications to both the employee/self-employed individual
and the employer/contactor. There are also HST/GST/QST implications if
one is self-employed.

 The courts have looked at a number of factors in determining if an individual

is an employee (employment income) or self-employed (business income):

Control:

Generally, in an employer/employee relationship, the employer controls,

directly or indirectly, the way the work is done and the work methods used.
The employer assigns specific tasks that define the real framework within
which the work is to be done. Is there a master/servant relationship?

Ownership of Tools:

In an employer/employee relationship, the employer generally supplies the

equipment and tools required by the employee. In addition, the employer
usually covers the following costs related to their use: repairs, insurance,
transport, rental, and operations (e.g., fuel).

In some trades, however, it is customary for employees to supply their own

tools. This is generally the case for garage mechanics, painters, and
carpenters. Similarly, employed computer scientists, architects, and
surveyors sometimes supply their own software and instruments.

Chance of Profit/Risk of Loss:

Generally, in an employer/employee relationship, the employer alone

assumes the risk of loss. The employer also generally covers operating
costs, which may include office expenses, employee wages and benefits,
insurance premiums, and delivery and shipping costs. The employee does
not assume any financial risk, and is entitled to his full salary or wages
regardless of the financial health of the business.

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Ability to subcontract or hire assistants

If the individual must personally perform the services, he is likely to be

considered an employee. Alternatively, if he can hire assistants, with the
payer having no control over the identity of the assistants, he is likely to be
considered self-employed.

Responsibility for Investment and Management:

If the individual has no capital investment in the business and no presence in

management, he is likely to be considered an employee. Alternatively, if the
individual has made an investment and is active in managing the business,
he should be considered self-employed.

Other points for consideration:

Does the taxpayer have more than 1 client? Does the taxpayer advertise his
services? Does the taxpayer bill the client on own letterhead? What are the
intentions of the parties?

Must look at all the factors - some may be more important than the others,
depending on the case on hand.

In summary, when hiring a contractor, employers should:

1. Not exert extensive control over the contractors

2. Not mandate hours a contractor must be at the place of work each day
3. Not require contractors to attend staff meetings or other non-essential
administrative events
4. Require contractors to lease office space and use their own tools
5. Ensure that the contractor pursue other business opportunities so that
they are not dependent on the company for their income
6. Pay contractors only after submission of their invoices and ensure that
any GST/HST/PST is paid
7. Pay the contractor’s registered business or corporation rather than directly

19
Inclusions to employment income - S(5)

 Section 5 provides the basic rule for salary/employment income inclusions:

Salary, wages & other remuneration received in the year

 “office” and “employment” are defined in S248.

a) Employment is considered as the position of an individual in the

service of some other person
b) Office is defined as the position of an individual entitling him to a
stipend or remuneration

 Due to the use of the word “received” employment income is reported

on the cash basis.

 Doctrine of Constructive Receipt

 Amounts are included as income even though not actually received,

but are beneficially received or receivable, e.g., tax withheld by
employer, hence, it is the gross salary that is to be included in the
computation of income.

EI & CPP/QPP Premiums

These premiums are typically deducted at source by the employer. The

premiums are not deductible in arriving at net employment income, but rather
used in the computation of a taxpayer’s personal tax credits (covered in a later
lecture).

A self-employed individual is required to pay 2x the amount of CPP/QPP

premiums.

Self-employed individuals can opt into the EI Program. However their benefits
under the plan will be limited. Once opted in, the individual must have been a
contributor to the plan for at least 1 year before a claim can be made. Once a
claim has been made, then the individual is committed for life or until they are no
longer self-employed. Self-employed individuals do not have to pay the
“employer” portion of the premium.

20
S6 – Specific Employment Income Inclusions

Under S6(1)(a), the value of board & lodging provided by the employer is
considered employment income. However employer contributions to the
following plans are not considered employment income in the year of
contribution:

 Registered pension plans

 For group accident/sickness insurance plans (often referred to as

disability plans):

 All amounts received by the employee under the plan is fully

taxable [S6(1)(f)] in the hands of the employee if the plan was
fully/solely funded by the employer.

 If the plan is fully/solely funded by the employee, then none of

the receipts under the plan are taxable as the contributions of the
premium by the employee into the plan were not tax deductible.

 If the plan is funded by both the employer and the employee, the
portion that is taxable in the hands of the employee will consist of
the receipts received less the employee contributions which have
been made.

 Private health services plans (taxable for Quebec)

 Deferred profit sharing plan

 Counseling services re: health, re-employment or retirement (includes

financial counseling related to retirement)

Note: even though group term life insurance and the use of an employer
provided automobile are also listed as part of the exceptions, these are
in fact taxable under S6(4) and S6(1)(e),(2)

21
Certain benefits are not taxed - see IT 470R Archived

 Employee discounts; reasonably subsidized meals; club memberships

(athletic or social), when the benefit is principally for the employer,
whether these are provided in house or fees paid to an outside provider.
Note: amounts paid by the employer to provide such recreational
facilities are NOT deductible by the employer in computing its net
income for tax purposes.

 Uniforms: reimbursement of moving expenses; counseling services

related to re-employment or retirement

 Personal use of frequent flyer points generated from business

travel/expenses on an employees’ personal credit card are not considered
a taxable benefit as long as:

1. the points are not converted into cash;

2. the plan is not an alternative form of remuneration; and
3. the plan is not for tax avoidance purposes

However, if the points are accumulated through a company credit card

with the points accruing to the employee, such would be a taxable benefit.
As well, if the employee is allowed to use his personal credit card to pay
for company expenses (other than those incurred in the performance of
his/her duties of employment) and subsequently gets reimbursed by the
company, the use of the points will result in a taxable benefit.

 Social events: not taxable as long as the cost/employee was less than
$100 and was available to all employees.

 Also see T4130 – Employer’s Guide - Taxable Benefits and Allowances

22
Taxable benefits include:

1. Free or low rent housing

2. Gifts and awards

a. Employers can give any number of non-cash gifts (tax free) as long as
these do not exceed in aggregate $500 (cost to employer). The gifts
would be given for special occasions such as: birthdays, weddings,
Christmas, Hanukkah. Only the excess of the FMV of the total gifts
over $500 is taxable.

b. Can also give on a tax-free basis (not exceeding an aggregate of

$500), non-cash awards for special achievements, years of service,
meeting or exceeding safety standards, etc… Only the excess of the
FMV of the total awards over $500 is taxable.

If only a portion of the “freebie” $500 is used in one category, it cannot

be carried to the other category.

c. Items such as gift certificates, gold nuggets or any item which may
easily be converted into cash or other items do not qualify as non-cash
items.

d. Non material items such as T-shirts with logos, mugs, plaques, etc., will
not be taxable.

Note: Performance related rewards are not considered gifts and are
fully taxable.

3. Tuition Fees

Tuition fees (for non-employer related courses), scholarships received

from the employer are considered taxable. If the courses are
training/development in nature which will specifically benefit the employer
or other general employment related training (e.g., stress management,
First - Aid), then these would not be considered taxable.

4. Interest free or low interest rate loans – discussed later

5. Employer provided automobile made available for personal use –

discussed later

23
 Taxable
Benefit Non
Benefits provided to employees by
per Taxable
employers Section Benefit
6
Registered pension plan (RPP) contributions 
Registered retirement savings plan (RRSP)
contributions made by employer to an employees’ 
RRSP
Deferred profit sharing plan (DPSP) contributions 
Employer paid private health care premiums

(Not taxable for Federal purposes, but taxable for 

QC income tax filing purposes)
Use of the employer’s recreational facilities 
Reimbursement for various job related expenses
(travel, entertainment, moving) 
Group sickness or accident insurance premiums
(see lecture notes for details – depends on how the  
plan is funded )
Board, lodging, rent-free or low-rent housing 
Most gifts (except annual gifts/awards of under
$500), and incentive awards including cash gifts 
Reasonable employee discounts 
Life insurance premiums 
Reasonably subsidized meals 
Uniforms or special clothing 
Club memberships (athletic or social) when the
benefit is primarily for the employer 
Tuition if course is required by the employer and is
primarily for the employer’s benefit (courses that lead
to a degree do not qualify) 

Adapted from CGA Canada

24
 Taxable
Benefit Non
Benefits provided to employees by per Taxable
employers Section Benefit
6
Employer-paid tuition fees for personal interest courses or 
those primarily for the benefit of the employee (includes
courses that lead to a degree)
Income tax return preparation fees 
Employer-paid financing costs for homes purchased as a 
result of relocation
Reimbursement for loss on sale of former home (one-half 
of the amount in excess of $15,000 is taxable)
Flat monthly automobile allowances 
Reasonable per-kilometre automobile allowance 
Stock option benefits 
Personal use of frequent flyer points (See lecture notes  
for details)
Counseling services relating to mental or physical health, 
retirement or reemployment
Travel costs for family members, unless they required to 
accompany the employee and involved in business
activities on a business trip

Interest-free and low-interest loans 

Adapted from CGA Canada

25
Reimbursement vs Allowance

 A reimbursement is an amount paid to an employee by an employer as a

consequence of an expense report filed by the former.

 An allowance is a non - accountable amount paid to an employee by the

employer.

Personal/Living Allowances - 6(1)(b)

Paragraph 6(1)(b) considers such allowance to be employment income. There

are some exceptions:

 6(1)(b)(v) - reasonable allowance for travel expenses for a

salesperson

 6(1)(b)(vii) - reasonable allowance to cover traveling expenses for a non

salesperson. Also, please note 6(1)(b)(x).

 6(1)(b)(vii.1) - allowance for motor vehicles, must be computed by

reference to a rate/km (paragraph x).

Standby Charge - S6(1),(e),(2),(7)

Applies to employees who are provided with an automobile from their employer
and such automobile is made available for the employees personal use.

 Owned: 2% x O.C. x # of months of availability.

Cost includes GST QST.

 Leased: 2/3 x monthly lease cost x # of months of availability.

Lease rate must include GST & QST.

 Benefit is reduced by any payments made by the employee to the

employer for the use of the car during the year and within 45 days after
December 31.

 If the car is used less than a full month, then round to whole month, e.g.,
used for 286 days: 286/30 = 9.53 = 10 months.
If 285 days: 285/30 = 9.5 = 9 months (.5 is rounded down)

26
Reduced Standby Charge

If less than 1,667 personal use kms/mo. is driven and the automobile is driven at
least 50% of the time for business purposes the standby charge can be reduced:

Reduced SC = S.C. x personal use km

1,667 km x # of months

Note: 1) The numerator cannot exceed the denominator

2) if total days avail/30 results in a portion of a month, round up if >1/2
month

Operating Cost Benefit - S6(1)(k)

 Rate method (2016): $0.26 per personal km.

 50% method: 50% of the standby charge (before any deduction for any
payments made by the employee to the employer for the use of the
automobile) if at least 50% of the km driven is for business purposes.

 For Quebec income tax purposes, employees in Quebec must provide

their employer with a copy of their travel log book so that the taxable
benefit may be appropriately computed. A penalty of $200 could be
assessed if a log book is not provided within 10 days of the year end.

Note: If the employee is not provided with a car, and the employer
pays the operating expenses, the benefit is computed as the actual
operating costs paid by the employer prorated by the employee’s
personal usage - S6(1)(l)

Tax Planning for Automobiles

 Lease car since the lease rate reflects depreciation

 Ensure not available when not used for extended period of time.
Leave keys with the employer. CRA’s position: if voluntary, then still
considered to be available for use. Employer must require the
automobile (& keys) to be returned.

 Record Keeping

27
Example:

Jane had the use of an employer provided automobile throughout 2016.

Details are as follows:

January 1 – June 30:

Cost of automobile: $40,000 (includes taxes)

Operating expenses paid by employer: $3,000
Personal kilometers driven: 10,000
Total kilometers driven: 15,000

July 1 – December 31:

Leasing cost of automobile: $500/mo. (includes taxes)

Operating expenses paid by employer: $4,000
Personal kilometers driven: 5,000
Total kilometers driven: 30,000

What is the 2016 standby charge and operating cost benefit to be reported?

January 1 – June 30:

Standby Charge: $40,000 x 2% x 6 = $4,800

OCB: 10,000 x $0.26 = 2,600
$7,400

No reduction in the SC is available as the 50% test was not met. The 50%
method is not available for purposes of computing the OCB as the 50% test was
not met.

July 1 – December 31:

Standby Charge:
$500 x 2/3 x 6 x [5,000/(1,667 x 6)] = $1,000

OCB: lesser of:

1) $1,000 x 50%; 2) 5,000 x $0.26 = 500
$1,500

It should be noted that the computation is done on a car by car basis.

28
Group Term Life Insurance Premiums - S6(4)

100% of the premium is a taxable benefit

Payments to Employees - S6(3)

Employment related payments made to an employee prior to or subsequent to

their employment period are considered employment income. This will include
signing bonuses and payments for non-compete agreements.

Employee Loans - S6(9), 80.4, 80.5

 Low interest rate loans made to employee by employer

 S80.4 computes the quantum of the benefit

 Imputes employment income as the: “prescribed rate(s) for benefits” times

the loan outstanding less any interest paid by the employee (up to
January 30 of following year).

 The prescribed rate is published on a quarterly basis - Reg. 4300

29
Housing Loans

The interest benefit is computed as the lesser of:

a) [PR (‘the base rate”) for benefits at the time the loan was received X
the amount of the loan] - interest paid

b) [Current quarterly prescribed rate(s) X the amount of the loan] -

interest paid

“Base Rate” changes every 5 years

The interest benefit to be reported should NOT be netted by the Home

Relocation Loan Deduction.

Home Relocation Loans will be discussed later (Division C deduction material).

Example:

Mr. Chin received a $200,000 interest free housing loan on November 1, 2013
when the prescribed rate was 2%.

Assuming the 2016 prescribed rate for benefits is 1% for the entire year, what is
the 2016 interest benefit to be reported?

Lesser of:

1) 200,000 x 2% = $4,000
2) 200,000 x 1% = $2,000

30
Prescribed Rates

Taxable Benefits Overpaid Taxes * Underpaid Taxes

2015

Jan 1 - Mar 31 1% 3% 5%
Apr 1 - Jun 30 1% 3% 5%
July 1 - Sept 30 1% 3% 5%
Oct 1 - Dec 31 1% 3% 5%

2016

Jan 1 - Mar 31 1% 3% 5%
Apr 1 - Jun 30 1% 3% 5%
July 1 - Sept 30 1% 3% 5%
Oct 1 - Dec 31 1% 3% 5%

* For corporate taxpayers, interest will be paid at the prescribed rate used
for benefits.

Deduction of Interest Benefit - S80.5

1. If taxpayer meets the conditions under paragraph 8(1)(j) - interest on loan to

acquire a car

2. Loan was used for investment purposes - interest deductible by virtue of

paragraph 20(1)( c)

Note: The interest benefit is deemed to be interest paid and therefore

deductible in computing net income. The interest paid will also
generally be deductible.

Forgiveness of Employee Loans - S6(15)

 Considered employment income

 Will require amending prior years’ returns to remove any interest benefit
that may have been reported

31
Interest Compensation - Housing S6(23)

 Compensation received from an employer to offset higher mortgage interest

costs (due to higher mortgage rates) are fully taxable. The employer may
have a policy of doing so, when transferring the employee to a new location.

Housing Loss Subsidies - S6(19),(20),(21),(22) – see Chapter 11

Amounts paid from an employer to an employee to reimburse the employee for a

loss (other than an eligible housing loss) incurred on the sale of the employees
residence is considered employment income. The loss will generally be
computed as the difference between its sales price and the greater of its cost or
fair market value.

Eligible Housing Loss S248

A loss that arose due to the relocation of an individual to a new work location,
and the new residence is at least 40km closer to the new work location than the
old residence.

An eligible housing loss is a taxable benefit under S6(20), computes as:

1. ½ of the total amount paid in the year or a preceding year in excess of

$15,000
Minus

2. amounts included as income from an eligible housing loss in a preceding

year

Example:

ACB = $300,000
Sale price = $260,000
Housing loss = $40,000
Employer pays $40,000 loss in two $20,000 installments over 2 years.

Year 1: 20,000 – 15,000 = 5,000; taxable = ½ of 5,000 = 2,500

Year 2: 40,000 – 15,000 = 25,000; ½ of 25,000 = 12,500;
12,500 – 2,500 = 10,000, the amount to be included in income in year 2

32
Stock Option Benefits - S7, 7(1.1)

A stock option is an agreement to issue shares to employees under certain terms

& conditions. The option would generally be exercised if the shares were trading
above the option price. Employment Benefit computed as:

[# of shares x (market price - option price)] - $ paid to secure the option

Shares of Public Corporations

For stock options exercised after March 4, 2010, the benefit is reported in
the year of exercise, based on the number of shares acquired in the year.

Shares of Canadian Controlled Private Corps (CCPC) – S7(1.1)

The Stock Option Benefit is reported when the shares are SOLD, based on the
number of shares sold. Hence for shares of a CCPC, the deferral is automatic.

Other Points

 Stock Option Deduction.

The stock option deduction is a Division C deduction (deduction

from net income to arrive at taxable income) which will be addressed
later on in the course

 Adjusted Cost Base (ACB) of the share = option price + benefit

33
Deductions to Arrive at Net Employment Income - S(8)

 S8(2) states that only S8 deductions are allowed against income from an
office or employment

 S8(1)(b) - legal expenses incurred to collect salary

 S8(1)(i) - Professional Membership fees or Union dues; office rent paid;

home office costs [see 8(13) below]; salaries paid to an assistant; cost of
supplies used in employment activities.

 S8(4) – requires that the taxpayer be away for a period of at least 12

consecutive hours from the municipality or the metropolitan area that
his/her employer is located in, in order to deduct meals as part of travel
costs under S8(1)(f) or (h).

Contributions to a Defined Benefit RPP - S8(1)(m)

The employee contributions are fully deductible as long as these were required
to be made according to the pension plan actuaries.

Contributions to a Defined Contribution RPP - S147.1(1)

 The 2016 deduction is the lesser of:

1. Actual contributions
2. 18% of the current years’ pensionable earnings (salary)
3. $ 26,010 for 2016

 Above limits apply to combined employee and employer contributions

 Employee deducts his/her contributions 1st, employer 2nd

34
Salesmen Expenses: Conditions for Deductibility – 8(1)(f):

 Cannot exceed commission income (excess cannot be carried forward)

 Must pay own expenses by virtue of employment contract

 Duties away from employers’ place of business

 Not in receipt of a tax free allowance under 6(1)(b)(v)

 S8(10) requires form T2200 to be completed by employer - confirms in

writing that the above conditions are met. The form is filed with tax return.

Traveling Expenses: Conditions for Deductibility - 8(1)(h), (h.1)

 Applicable to salesman and non-salesman

 If a deduction is claimed under 8(1)(f), cannot claim under 8(1)(h), (h.1)

 Entertainment, advertising, convention and rental of office

furniture expenses cannot be deducted under paragraph (h)

 Duties away from employers place of business/metropolitan area

 Must pay own expenses by virtue of employment contract

 Not in receipt of a tax free allowance under 6(1)(b)

 Motor vehicle expenses specifically addressed in 8(1)(h.1)

 S8(10) requires form T2200 to be completed by employer

 Expenses claimed under 8(1)(h), (h.1) are not limited to commission

income

35
 Summary of Sales/Travelling Expenses that may be Deducted

Expense Employee Commission Self-

Salesman employed

ITA 8(1)(h), (h.1), (j) ITA 8(1)(f), (j) ITA 20

Car yes yes yes

Parking (at client's) yes yes yes
Other travel (hotel, yes yes yes
plane…)
Memberships, licenses yes yes yes
Office rental yes yes yes
Office supplies yes yes yes
Home office (see table below)
Advertising and no yes yes
promotion
Entertainment (50%) no yes yes
Meals (50%) yes yes yes
if away > 12 hours

Tax return preparation fee no yes yes

Office furniture:
CCA no no yes
Interest (on loan to no no yes
acquire furniture)
Rental no yes Yes

Conventions / training no yes yes

Salary for assistant yes yes yes
Special clothing no no yes

Home office expenses:

S8(13)

Rental (if in apartment) yes yes yes

Supplies yes yes yes
Repairs and maintenance yes yes yes
Telephone yes yes yes
monthly charge is not
Fax/computer rental no yes yes
Insurance no yes yes
Property taxes no yes yes
Mortgage interest no no yes
CCA no no yes

36
Salesperson’s Dilemma: Deduct under S8(1)(f) or S8(1)(h) and (h.1)

If travel expenses exceed commission income, claim as follows:

Claim deduction pursuant to paragraphs 8(1)(h) and (h.1)

+ Deduction under paragraph 8(1)(i): Dues and other expenses
+ Deduction under paragraph 8(1)(j): CCA and interest on Motor
Vehicles

If Travel Expenses does not exceed commission income, claim as follows:

Claim deduction pursuant to paragraphs 8(1)(f)

+ Deduction under paragraph 8(1)(i): Dues and other expenses
+ Deduction under paragraph 8(1)(j): CCA and interest on Motor
Vehicles

Other Considerations – Home Office costs

Where there are utilities and maintenance costs deduct under

paragraph 8(1)(i) and remaining home office expenses pursuant to
paragraph 8(1)(f), 8(13).

37
 Limitations on Leasing Cost of an Automobile - S67.3 & Reg. 7307(1)

The deduction is the lesser of:

1) ($800+taxes) x ( # days in lease for the year) less: a number of adjust.

30

2. total lease charges * ($30,000+taxes) less: a number of adjustments

the greater of: i) ($35,294)* x 85%
ii) MSRP x 85%

* Computed as $30,000 x 100/85

Practicality: Allowed deduction = ($800 + taxes) x # of months.

Note: must be prorated when employment/business usage is < 100%.

Automobile Expenses - S8(1)(j)

 Must meet conditions for deductions re: 8(1)(f) or (h)

 Can deduct capital cost allowance (CCA) and interest expense

(Note: must be prorated when employment/business usage is < 100%)

Restrictions on UCC - S13(7)(g), 67.3, reg. 7307 (1)(a),(b)

 UCC capped at $30,000 + GST + PST

 Separate class (10.1 - 30%) for each automobile that cost $30,000
or more

Restrictions on Interest Expense - S13(7)(g), 67.2, reg. 7307 (1)(a),(b)

 Interest expense on car loan is capped at $10/day. Often referred

to as $300/mo., but this is only really the case for 30 day months.

38
Office in the Home Expenses - S8(13); IT-352R2

 Eligible taxpayers: expenses were deductible under 8(1)(f), or deducted

an expenditure by virtue of 8(1)(i), (ii), (iii)

 Principal (>50%) place of employment, i.e., at least 50% of duties of

employment are performed at home, OR

 Home space is used exclusively for the purpose of earning employment

income & meeting customers or other persons on a regular or continuous
basis in the ordinary course of employment.

 Can deduct expenses (e.g., rent: pro-rated on a sq. meter area, fuel,
electricity, supplies) up to the income generated from “home”. Excess
expenses can be carried forward indefinitely.

 Salaried employees cannot claim CCA, property taxes, insurance

payments or mortgage interest. However, if the taxpayer has earned
commission income, then property taxes and insurance payments
are deductible.

 Mortgage interest and CCA are only deductible by a self- employed

individual against business income

Deductibility of Accrued salaries and bonuses - S78(4)

If such amounts are unpaid more than 179 days after the employers’ fiscal
year-end, these amounts will only be deductible when paid, i.e., on a cash
basis.

A shareholder/manager can defer tax when his company accrues a bonus.

The accrual would be a deductible expense (assuming paid within 179 days
of its year-end) in the company’s current taxation year, and would only have
to be included in the owner-managers income the following taxation year.

Example:

Corporate year-end: December 31, 2016

Bonus declared & accrued in December – deducted in 2016 taxation year by
the corporation.

Bonus paid to the individual in February 2017 (within 179 days): taxed in the
hands of the individual in 2017 as employment income. If paid in July 2017,
payer (corporation) deducts only in 2017 as it is paid outside of the 179 day
window.

39
 CHAPTER 9 – Other Income/Deductions

Pension Income & Other - S56(1)(a)

 RPP - receipts from a pension plan whether by way of lump sum or

annuity

 CPP/QPP plan receipts

 OAS (approx. $572/mo. in 2016). It is reduced by 15% of net income

in excess of $73,756 (S180.2). Fully eliminated when net income is
over $119,398.

 Retiring allowances - defined in S248 - can be transferred (within

limitations – covered later) to an RRSP

 Death Benefit - defined in S248 - exempt portion: is the lesser of

$10,000 or the previous years’ income

 Employment Insurance Benefits – For 2016, if net income (pre

S60(v.1) deduction) exceeds $63,500 there will be a repayment of EI
Benefits computed as the lesser of:
1) 30% of the amount received
2) 30% of the difference between Net Income and $63,500

Note: any amount repaid is deducted under S60(v.1).

40
Alimony & Maintenance Payments - S56(1)(b), ( c ), (c.1), 56.1 (IT118R3)

Alimony

 Separation agreement or court decree order from a family court

 Spouses must be living apart

 To be deductible, payments must be periodic, lump sum payments do

not qualify. If deductible by the payer, then an income inclusion to the
recipient.

 Certain payments to 3rd parties need not be periodic to maintain the

deduction (income inclusion to the spouse), e.g.,

A) Tuition Fees
B) Medical expenses
C) Mortgage payments (deduction taken in taxation year cannot
exceed 20% of the original principal)

 If the monthly payment that is made is for both Alimony & Child Support,
must state what the payment is for, otherwise, considered to be for child
support 1st, which is non- deductible. Only an issue if the taxpayer cannot
make the full required payments for each.

Maintenance payments (child support)

 For agreements entered into after April 30, 1997, there will be no
inclusion/deduction.

 Booklet (Federal Child Support Guidelines) available from the Dept. of

Justice - rules for calculating child support and provides a table of awards
for each province

Note: Unless specified, If the taxpayer receives amounts that are less
than the amount stipulated in the court order, amounts are 1st
applied to child support and then to spousal support (alimony).

41
Annuity Receipts - S56(1)(d), Reg. 300

 Annuities purchased with after-tax $$$’s

 Defined in S248 - Include both capital and interest portion as other income

 S60(a) provides a deduction for the capital element as the annuity receipts
were funded with after tax dollars.

Social assistance & Workers’ Compensation Payments - S56(1)(v)

 Included in the computation of Net Income

 A deduction is available under Division C to arrive at Taxable Income, hence,

these items are not taxed

Scholarships & Bursaries - S56(1)(n), S56(3)

Since 2006, scholarships and bursaries received by a post-secondary student in

connection with a program that entitles the student with an education credit
(covered later) are no longer taxable.

The non-taxability of these items will also be applied to scholarships and

bursaries provided to attend elementary and secondary schools.

Pension Income Splitting S56(1)(a.2), S60(c), S60.03

Since 2007, a taxpayer has been allowed to transfer up to 50% of his/her

pension income to a spouse.

1. Pre age 65: amounts received from an RPP will be eligible

2. Post age 64: amounts from an RPP, RRSP, RRIF, DPSP will be eligible

The taxpayer must file a joint election with his/her spouse in order to split the
pension income. The pension transferee will include the amount into income
under S56(1)(a.2), while the transferor will get a deduction under 60(c).

42
Other receipts included as part of Other Income:

RRSP receipts - S56(1)(h): Covered in chapter 9

DPSP receipts - S56(1)(i): Covered in chapter 9

RRIF receipts - S56(1)(t): Covered in chapter 9

43
Registered Education Savings Plan (RESP) - S146.1

The income and grant component withdrawn by the student is an income

inclusion under S56(1)(q).

Purpose of the RESP is to allow income to accumulate on a tax deferred basis

and then be used by a child to attend post-secondary education.

 Contributions are not deductible; Max. RESP period: 35 years, i.e., plan
must be terminated by the end of the 35th year (40 years if beneficiary is
eligible for the disability tax credit).

 Income earned in the plan is not taxable until paid to the student

 Plan can be redirected to another sibling under age 21

 If not used by child (or redirected) for post-secondary schooling,

contributions are returned to parent tax free. The CESG (see below)
must be refunded to the federal government. The contributor will also
be allowed to transfer up to $50K of the income earned in the plan to his
(or spousal) RRSP if there’s enough contribution room (the amount
withdrawn would be included in income, but then offset by a deduction
of up to $50K to the RRSP). If there is insufficient room, the excess is
taxable and there will be an additional tax of 20% of the RESP income
that can’t be transferred. This additional 20% tax is designed to
compensate for the deferral of tax while the income remained in the
RESP.

 A total contribution of $50,000 per beneficiary is allowed. There is no

longer an annual contribution limitation.

 Access to RESP assistance for part-time post-secondary students

allowing these students to access up to $2,500 of their income and
grants for each 13-week semester of study. Students will be required to
spend at least 12 hours a month on courses, in a course lasting at least
3 consecutive weeks.

44
 RESP: Canada Education Savings Grants:

 Computed as a % on the 1st $2,500 of annual contribution ending in the

year the beneficiary reaches age 17. The annual grant is usually
capped at $500, computed by reference to the table below. The
maximum CUMULATIVE CESG grant is $7,200 ($36,000 x 20%). If
contribution is not made in a particular year, entitlement to the grant can
be carried forward 1 year - therefore have 1 year grace to catch up.

 If the RESP is not used by the child to attend post-secondary studies the
RESP trustee will be required to make a CESG repayment equal to 20%
of the withdrawal that has benefited from the grant. Contributions that
were made and did not benefit from the CESG will not be subject to the
20% repayment.

Family Income 2016 Annual Grant (as a % of the

Contribution)

< $45,283 40% on the 1st $500 + 20% on the excess

Between 45,283 – 90,563 30% on the 1st $500 + 20% on the excess

> $90,564 20% of the contribution

RESP: Canada Learning Bond:

 Available to low income families (income below $23,000 or so)

 Lump sum bond of $500 when child is born
 $100 for each year of availability, until child turns 15
 See textbook material for further details

45
Registered Disability Savings Plan (RDSP)
The Registered Disability Savings Plan allows funds to be invested tax-free until
the investment and grant component is withdrawn. It is intended to help parents
and others to save for the long-term financial security of a child with a disability.
Contributions to an RDSP will be eligible for the Canada Disability Savings Grant
and Canada Disability Savings Bond for individuals with lower family net
incomes.
Eligibility
Any person who is:
 Eligible for the Disability Tax Credit and is a Canadian resident; or
 A parent or legal representative of a person who is resident in Canada
and is eligible for the Disability Tax Credit.
Contribution Limits
Anyone can contribute to an RDSP; however, contributions are limited to a
lifetime maximum of $200,000 in respect of an individual, with no annual limit.
Contributions will be permitted until the end of the year in which the individual
attains 59 years of age.
The Canada Disability Savings Grant and the Canada Disability Savings Bond
These are two programs designed to augment funds in the RDSP. The
government will contribute an annual grant computed as follows:

Beneficiary’s Family Income* Grant Computation Maximum Grant

$90,563 or less:
On 1st $500 $3 for every $1 $1,500
contribution
On Next $1,000 $2 for every $1 $2,000
contribution
More than $90,563
On 1st $1,000 $1 for every $1 $1,000
contribution
If family income is no more than $90,563 a $1,500 contribution will generate a
total grant of $3,500 (1,500 + 2,000). The maximum lifetime grant is $70,000.
The government will also contribute up to $1,000 annually in Canada Disability
Savings Bonds depending on the net income (no more than $44,000) of the
beneficiary's family. The maximum amount of bonds that can be received is
$20,000.

46
Tax-Free Savings Account (TFSA)

 Available since January 1, 2009, the TFSA is a registered savings

account that allows taxpayers to earn investment income tax-free
inside the account. Contributions to the account are not deductible for
tax purposes and withdrawals of contributions and earnings are not
taxable. It is available to any individual who is a resident of Canada
who is at least 18 years of age.

 Each year, you could contribute an amount up to your contribution

room for the year. The contribution room would be made up of three
amounts:

1. Annual Limit

a) 2009 – 2012: $5,000/year

b) 2013 – 2014: $5,500/year
c) 2015: $10,000
d) 2016 and subsequent years: $5,500/year

2. Any withdrawals made in the previous year would be added to the

contribution room of the current year

3. Any unused contribution room from the previous year would be

added to the contribution room for the year.

 The unused contribution room can be carried forward indefinitely

 If the contribution exceeds the contribution room, there will be a

penalty of 1%/month, for each month that the excess remains in the
plan.

 A TFSA would generally be permitted to hold the same type of

investments as an RRSP. This would include mutual funds, publicly
traded securities, GIC’s, bonds and certain shares of small business
corporations.

 The income attribution rules do not apply if the taxpayer provides

funds to a spouse to invest in a TFSA.

47
Other Deductions

Annuity

Capital element of an annuity that is funded with after-tax $$$’s is deductible

under 60(a)

Alimony Payments - S60(b), ( c ), (c.1), S60.1

See discussion of item under the income inclusion provision, i.e., S56

Canada Pension Plan (CPP) payments on self employed earnings - S60(e)

Maximum deductible amount paid into the CPP for 2016 is $2,544

48
Moving Expenses - S62

 New residence must be at least 40 km closer to a new work location than

that of the old residence (move must be within Canada). Need not be
new employer. Need not to have been employed prior to the move, but
employment must begin within a reasonable period of time.

 Available to employed and self-employed individuals

 Student moving to attend a post-secondary school qualifies, but the

expenses are deductible only against research grants.

 Expenses cannot be claimed in excess of the income earned from the

new work location. Unused expenses can be carried forward to the
following year and applied against income at that time. Form T1-M.

 Expenses must be reasonable at all times and include:

 Traveling costs, including meals & hotels
 Transportation costs of household effects
 Meals (50% rule does NOT apply) & accommodation for a
maximum of 15 days near either the old or new location. The 15
days does not apply to days spent “en route” from the old location
to the new location
 For meals, can use alternate method (no receipts are required):
2015 rates: $17 per meal per person ($51/day)
 Alternate method for automobile expenses: rate per km ranging
from $0.445 - $0.615 (2015 rates) (Ont: $0.55; Qc $0.50.5)
depending on the province. Rate used is that of province of
departure.
 Lease cancellation costs of old residence
 Selling costs of old residence
 Up to $5,000 of interest, property taxes, insurance &
heating/utilities cost on the old residence, subsequent to the move.
Reasonable efforts must be made to sell the old residence.
 Costs of new curtains, rugs, appliances are not deductible
 Others - see S62(3) & IT178R3

 Employer reimbursed costs reduce deductible moving expenses

 Under CRA’s administrative practice, an employer can pay the

employee a $650 non-accountable (i.e., non-taxable) moving
allowance.

49
Child Care Expenses - S63

 Must be expended to earn income

 Generally deductible by the spouse with the lower income, some

exceptions: other spouse is disabled or in full time attendance in high
school or post-secondary studies

 An eligible child is one that is under age 16 at some time during the year,
if older, then by reason of a disability.

 The deduction accorded to the lower income spouse is the least of:
1. the amount paid for regular child care + the limited weekly amount
for boarding school or camp;
2. $8,000/child for children < age 7;
3. $5,000/child for others (> age 6, < age 16, unless disabled – no
upper age limit;
4. If the child (regardless of age) is eligible for the impairment
credit, the eligible amount is $11,000; NOTE: can be considered
disabled but not eligible for the impairment credit – therefore child
>age 15 would qualify for the $5,000;
5. 2/3 of earned income as defined in S63(3) - generally employment
& business income;

 No requirement that the amounts be spent on individual children

 If attending boarding school or camp, limits are:

 $200/week for each child <7; $125/week for each child >6, < 16;
$275/week if eligible for the $11,000, i.e., impaired child.

 If the higher income spouse claims the expenses due to the exceptions
described above, the deduction is the lesser of:

 the limits described above

 $200/week for each child <7; $125/week for each child >6, < 16;
$275/week if eligible for the $11,000, i.e., impaired child.
 If due to spouse attending school on a part time basis, then it’s
$275/200/125 per week.

 Payments are not deductible if made to a relative that is under 18 years of

age

 Receipts (bearing amount paid, name of payee & SIN of payee) must be
filed.

50
 CHAPTER 10 – Deferred Income Plans

Registered Pension Plans, S8(1)(m), S147.2(4)

1. Defined Benefit Pension Plans

Pension entitlements (which are guaranteed) are based on salary/years of

service formula.

 Contributions are fully deductible as long as the plan required such

contributions.

 Benefits computed using a pre-determined % of employees’ salary

over a number of years

 Vesting: beginning 1987, after 2 years of service, the employee has

entitlement to the employers’ contribution to the RPP

 Portability: employee can transfer post 1986 employee & employer

contributions (plus earnings) to a locked in RRSP. Pre 1987
contributions can usually be transferred if the employee is at least
age 45 with 10 or more years of service. If cannot be transferred,
then a deferred pension entitlement is created.

 Locked in RRSP: Cannot have access to the funds until retirement

age. (LIRA – Locked In Retirement Account)

If a taxpayer, who is aged 55 or older, has less than $25,370 in a

LIRA, he/she will be allowed to wind down the account entirely.

If aged 55 or older and there is more than $25,370 in the LIRA, the
taxpayer is entitled to transfer, one time, up to 50% of the account
balance to an RRSP or RRIF.

Note: The above is only allowed with regard to Federally Governed

plans, i.e., the amount transferred to the LIRA must have been
transferred from a federally governed RPP.

51
Registered Retirement Savings Plan - S146(1)

 The 2016 deduction is generally computed as the lesser of:

1. Actual contributions yet to be deducted

2. 18% of the prior year’s earned income [S146(1)] less the Pension
Adjustment of the previous year plus the previous year’s Unused
Room
3. $25,370 ($26,010 in 2017) less the Pension Adjustment of the
previous year plus the previous years’ Unused Room.

Pension Adjustment:

The PA reflects the value of the employee’s and employer’s contributions

allocated to that individual in the employer’s RPP or DPSP. The “richer”
the pension plan, the higher the PA. The PA decreases the taxpayer’s
RRSP Contribution Room.

For defined benefit plans, the P.A. is computed by a formula reflecting the
pension entitlements.

For money purchase plans, the P.A. reflects employee and employer
contributions to an RPP and/or DPSP made in the previous year.

Pension Adjustment Reversal

When the taxpayer loses pension entitlements, e.g., terminated

employee, before his/her rights are fully vested, it means that the PA that
was reported for prior years is in hindsight, to high. In order to “give back”
the RRSP room, the PAR serves to increase the RRSP Contribution
Room for previously reported PA’s that are greater than the termination
benefit received.

Past Service Pension Adjustment

The PSPA represents the value of pension plan improvements granted to

an individual in a year in respect of past services. This means that the PA
that was reported in prior years was too low. The PSPA reduces the
taxpayers RRSP Contribution Room.

52
 Earned income includes:

1. employment income
2. business income (losses)
3. rental income (losses) from real property
4. royalties where the recipient is the author, composer or inventor
5. net research grants
6. CPP/QPP disability benefits received
7. taxable alimony receipts
8. less: deductible alimony payments

 Unused Room can be carried forward indefinitely

 Contributions made within 60 days after the end of the year may be
deducted in the taxation year or in the year of contribution.

 Undeducted RRSP contributions may also be carried forward, i.e., can

deduct less than is contributed in a given year

 Taxpayer can over contribute up to $2,000 overall maximum without being

subject to an over contribution penalty. 1% penalty on excess
contribution, until withdrawn or more RRSP room is created.

 The withdrawal of the excess contribution is included in income. A

deduction will be accorded if withdrawn in the year or the year
subsequent to the over contribution.

 A taxpayer cannot have an RRSP beyond December 31 of the year in

which he/she turns 71.

 Can still contribute to a spousal RRSP even if past age 71 as long as

spouse is under 72 years of age and taxpayer (contributor) has earned
income.

 Can have as many RRSP plans as taxpayer wishes. Should contribute as

early as possible in the year in order to take advantage of tax deferral on
earnings. Self-directed plans allow for control of the investments.

 The income earned in the plan loses it “character”. When withdrawals are
made, these are fully taxable as ordinary income, even though the income
earned in the plan may be capital gains (where only 50% is taxable if
earned outside a deferred plan) or dividends (where dividend tax credits
would be available if the dividend was earned outside a deferred plan).

53
 Contribution of property (e.g., shares) to an RRSP plan results in a
deemed disposition of the property at its fair market value (capital gains
implications) to the taxpayer and a contribution to the RRSP equal to the
fair market value amount.

Example of a regular contribution:

Mr. Galley’s 2015 earned income is $80,000. His PA is $9,000 and he has
Unused Room of $4,100. On January 4, 2017 he contributed $10,000 to his
RRSP. He made no contributions in 2016. What is his deductible 2016 RRSP
contribution?

His 2016 deduction would be computed as the lesser of:

1. $10,000
2. (18% of 80,000) – 9,000 + 4,100 = 9,500
3. 25,370 – 9,000 + 4,100 = 20,470

Answer: $9,500 may be deducted in 2016, while the $500

excess, (10,000 – 9,500), would be available as a 2017 deduction.

54
Spousal RRSP Plans - S146(8.3)

 A taxpayer can contribute (based on his/her limits) to an RRSP where

his/her spouse is the beneficiary (annuitant).

 If the spouse withdraws funds within 2 taxation years (could be 3

calendar years if the contribution is made within the 1st 60 days of the
following year), attribution (for up to the amount withdrawn) to the
contributing spouse’s income will take place if the contributing spouse
made a contribution to any spousal plan in the current year or
preceding 2 years.

 The amount attributed back, i.e., included in income, to the

contributing spouse is the lesser of:

1. The amount withdrawn

2. The premiums paid by the individual in the 3 year period.

 The amount withdrawn is included in the income of the spouse who

made the withdrawal, and a deduction equal to the amount attributed
back will be taken by that spouse in order to avoid double taxation.

55
Spousal RRSP Contribution/Withdrawal Example:

Derek made the following contributions to his spousal RRSP:

2013: $6,000
2014: 10,000 (contribution was made in the 1st 60 days of 2014
and deducted in 2013)
2015: 4,000
2016: nil

Derek’s spouse, Ann, withdrew $9,000 from the RRSP in 2016.

What are the 2016 tax implications to Derek and Ann.

Answer:

Ann will be required to include in her income the full $9,000, but will get an
offsetting deduction for $9,000, which is the amount that is attributed back
to Derek. Derek will report in his 2016 income the $9,000.

If a contribution is made in the year of withdrawal or within the 2

preceding taxation years, S146(8.3) will require the attribution to Derek of
the lesser of the amount withdrawn or the contributions made within the
above time frame. Even though the $10,000 contribution of 2014 was
deducted in 2013, it is still caught by the attribution rules as it is the year
of contribution that is relevant, not the year of deduction.

56
Home Buyers Plan

 Can w/d up to $25,000 from an RRSP to purchase a home (1 st time

buyer is a person who has not owned a home in the preceding 4
years) to be used as a principal residence.

 Can also be used to purchase a home for a related individual who is

eligible for the disability Credit.

 Must be used to acquire a home before Oct. 1 of the year following the
withdrawal. If a home is not acquired within the above timeframe, the
amounts withdrawn may be returned to the RRSP by Dec. 31 of that
year without penalty.

 Taxpayer cannot have owned a home for more than 30 days prior to
the RRSP withdrawal, i.e., must use the HBP no later than 30 days
after a house has been purchased.

 Withdrawals must be repaid over a period of 15 years. The

repayments must begin the 2nd calendar year following the year of
withdrawal. The 60 day rule applies to effectively stretch the
repayment date. If the “minimum” amount is not repaid, it must be
included as income. The minimum amount to be repaid is computed
as follows:

withdrawal - cumulative repayments - amounts included in income

15 - # of years from 1st year of required repayment

 CRA will advise taxpayer of the minimum repayment amount

 Taxpayer should not designate more than the minimum amount if

there is still some Unused RRSP Room

 Contributions made within the last 90 days of the HBP withdrawal will
not be deductible unless there were sufficient funds (excluding the
contributions made in the last 90 days) in the RRSP to cover the
withdrawal.

 Individuals who have owned and lived in a home as a principal

residence at any time in the preceding 4 calendar years are not eligible
to use the HBP. An individual who has previously used the HBP may
do so again as long as all amounts have been repaid to the RRSP with
respect to that withdrawal – subject to the 4 year rule above.

57
 Life Long Learning Plan

 Taxpayer may w/d up to $10K/year in any one year; maximum

cumulative withdrawal is $20K

 For own or spouses education

 Must be repaid in installments over 10 years (1/10, 1/9, 1/8…),

otherwise the annual amount is included in income.

 First payment will be due at the earlier of 2 dates:

A) 60 days after the 5th year following the 1st withdrawal

B) The 2nd year after the last year the student was enrolled in
full-time studies

 The 90 day rule also applies, i.e., if an RRSP contribution is made

within 90 days of a non-taxable withdrawal, the contribution will not be
deductible

TFSA or RRSP

Points to consider:

1. Likely more beneficial to contribute to a TFSA when taxpayer is young

and income is relatively low, thereby accumulating RRSP Unused Room.
2. Contribute to an RRSP at a later age when income is likely higher (so
would be the UR) and the deductible contribution results in greater tax
savings as the taxpayer would be in a higher tax bracket.
3. If taxpayer expects his/her rate of tax to remain relatively low (30%?)
during their lifetime, the TFSA option would likely be preferable.
4. If taxpayer expects to be in a higher tax bracket when retired, then the
withdrawal from the RRSP/RRIF would result in tax that will exceed the
tax savings obtained when the contributions were made. A proper analysis
would have to take into account present valuing such.
5. If at all possible, hold equities in a unregistered account, and invest in
fixed income items (e.g. bonds) inside an RRSP or TFSA.
6. Ideally, the taxpayer is flush with cash and can max out both the TFSA
and RRSP. ☺

58
Departure from Canada

 No requirement to cash out RRSP before becoming a non-resident

 Once a non-resident, any receipts (includes cashing out) would be
subject to Part XIII tax of 25% (or a reduced rate for Treaty Countries)

Maturing of an RRSP

The taxpayer is not allowed to have an RRSP beyond age 71.

Options available:

1. Lump sum withdrawal (subject to W/H tax)

2. Transfer to a Registered retirement income fund (RRIF)
3. Life Annuity
4. Term Annuity

59
Transfers to a RRIF - minimum withdrawals:

 Can be established at any age, regardless if the taxpayer is

retiring
 can use spouses age (if lower) in formula below
 Withdrawal requirements - Reg. 7308

Age at 31/12
of preceding year Current year W/D %

Under 71 1/(90-age)
71 5.28
72 5.40
73 5.53
74 5.67
75 5.82
76 5.98
77 6.17
78 6.36
79 6.58
80 6.82
81 7.08
82 7.38
83 7.71
84 8.08
85 8.51
86 8.99
87 9.55
88 10.21
89 10.99
90 11.92
91 13.06
92 14.49
93 16.34
94 18.79
95+ 20.00

Life Annuity

Based on taxpayers’ life expectancy - guaranteed payment periods

Term Annuity

Annuity for a guaranteed period of time

60
Rollovers - S60(j.1)

Retiring Allowances can be transferred to an RRSP or another RPP within

certain restrictions:

1. $2,000 for each year of pre 1996 service plus an additional

$1,500 for each year of service prior to 1989 if employer
contributions to RPP or DPSP for those years are not vested to
the employee.
2. Part year counts as a full year.

RRSP’s & RRIF’s Upon Death:

 If the beneficiary is the spouse: tax-free rollover (transfer) of

RRSP/RRIF account balance to the spouse’s RRSP/RRIF.

 Where the beneficiary is not a spouse, the commuted value (i.e., the
FMV at date of death) is taxable in the hands of the deceased
taxpayer.

 After March 3, 2010, a taxpayers’ RRSP/RRIF will be allowed to be

rolled-over to the RDSP of the deceased individual’s financially
dependent child or grandchild

Deferred Profit Sharing Plan - S147(5.1)

Deferred Income Plan based on profitability of the corporation and only

the employer may contribute on behalf of the employee

 Employer 2016 deductible contributions computed as the least of:

1. 18% of employee current years’ earnings

2. $13,005 (which is ½ of the RPP money contribution/purchase
limit)
3. Amount contributed

61
 CHAPTER 5 – Capital Cost Allowance

Capital Cost Allowance - Reg. 1100, Schedule II

 Taxpayer is entitled to deduct capital cost allowance (CCA) by virtue of

S20(1)(a) with respect to depreciable property

 Depreciable property is defined in S13(21) as property that would allow

the taxpayer to a deduction under S20(1)(a)

 Taxpayer must have ownership or all of the incidents of title such as

possession and must be used by the taxpayer to produce income from
business or property.

 Asset must be capital in nature, not inventory

 The term “Undepreciated Capital Cost” is defined in S13(21) as:

Opening Balance
+
Cost of assets acquired (net of any Input Tax Credits)
-
Lesser of cost or proceeds
-
Donations & Grants
-
Investment Tax Credits
-
Adjustment for the ½ year rule
-
CCA claimed
+
Adjustment for the ½ year rule
=
Closing Balance

 “Proceeds of Disposition” is defined in S13(21) to include the sales

price of the property, compensation for property unlawfully taken,
destroyed or damaged.

 Depreciable property is grouped into “classes” for purposes of

computing CCA.

62
Common CCA Classes

Class Rate Description

1 4% Buildings acquired after 1987
1(separate class) 4% + 2% Non-residential bldgs acquired > 19/03/07
1(separate class) 4% + 6% Buildings used for manufacturing or
processing acquired after March 19/03/07

3 5% Buildings acquired prior to 1988

8 20% Furniture & fixtures, machinery (not used

in manufacturing), and any other asset
not included in any other class

10 30% Automobiles (< $30,001), trucks, vans,

trailers

10.1 30% Passenger vehicles, > $30,000

12 100% Tools (<$500), linen, cutlery, applications

software, video cassettes, uniforms

13 SL Leasehold Improvements

14 SL Licenses, franchises & patents of a

limited life

17 8% Roads, parking area, sidewalks

29 50% SL Mfg. equip. between 19/03/07 – 31/12/15

44 25% Patents (must elect, otherwise class 14)

45 45% PC’s, general purp. electronic data equip.

acquired between 23/03/04 – 19/03/07

46 30% Data Network Infrastructure & Systems

Software therefore (website Dev. Costs)
50 55% PC’s, general purpose electronic data
equip. acquired after 19/03/07 but before
28/01/09; and after 31/01/11.

52 100% If acquired after January 27, 2009 and

before February 2011. The half – year
rule did NOT apply on such.
53 50% DB Mfg. equipment acquired after 2016

63
Non-Residential Buildings
In 2007, CCA rates were increased from 4% to 10% for buildings used in
manufacturing or processing in Canada, and from 4% to 6% for other non-
residential buildings.
These rates will be provided through an additional allowance of 6% for buildings
used for manufacturing or processing and 2% for non-residential buildings. The
half-year rule, will apply to these additional allowances.
In order to be eligible for one of the additional allowances, a building will be
required to be placed into a separate class. If the taxpayer forgoes the separate
class, the current treatment will apply (i.e. a CCA rate of 4%). Further, at least
90 per cent of the building (measured by square footage) must be used for the
designated purpose at the end of the taxation year. Buildings used for
manufacturing or processing that do not qualify for the additional 6% allowance
(i.e. because they do not meet the minimum eligible-use requirement) will be
eligible for the additional 2% if the 90% test is not met.
The additional allowances will be available for buildings that were acquired by a
taxpayer on or after March 19, 2007 (including new buildings any portion of
which is acquired by a taxpayer on or after March 19, 2007, where the building
was under construction on March 19, 2007) that have neither been used, nor
acquired for use, before March 19, 2007

64
Terminal Loss

When a terminal loss is incurred, the amount is deducted to arrive at net

income. The following conditions will result in a terminal loss:

 Positive balance in the class

 No assets left in the class

Once the terminal loss is deducted from income, the class balance reverts to
zero.

Recapture

 Occurs when the class balance is negative, even if there are assets in the
class

 When recapture takes place, the negative amount is included as income

in the year for tax purposes.

 Can keep generating recapture, as there may still be assets in the class

 Can avoid recapture by purchasing assets of that class before the end of
the year.

Half - Year Rule

Taxpayer is entitled to deduct only ½ of the normal CCA in the year of acquisition

 Applied to “net additions” with respect to declining balance classes, By

definition, “net additions” is a positive amount. If the so called net
additions are zero or negative, then the ½ year rule would not apply as
there are no “net additions”.
 Applied to “gross additions” with respect to straight line classes
 Some exceptions:
1. Class 12(a), (b), (c), (e) to (i), (k), (l), (p) to (s)
2. Class14 (pro-rated based on number of days), 15, 23

Taxation Years Less Than 12 Months

 Must prorate the CCA based on # of days

 ½ year rule still applies

65
Passenger Vehicles – Class 10.1

 Vehicles costing more than $30,000 (PST+GST) must be put in

separate classes - Reg. 1101(1af)
 Terminal loss is denied, but
 Entitled to claim ½ of the normal CCA (on the opening UCC) on the
disposed automobile in the year of disposition as terminal losses are
denied – Reg. 1100 (2.5)
 No prorating of the CCA in the year of acquisition by an individual
 ½ year rule still applies
 No recapture, i.e., does not apply to class 10.1

Class 13 - Leasehold Improvements

 Capital improvements made to a leased property, amounts paid to a

landlord to extend a lease, obtain a lease or permit a sublease

 Since this is a straight line class, every leasehold improvement is in a

separate class

 The CCA that may be claimed with respect to such expenditures is

computed as the lesser of:

1. 1/5 of the cost of the improvement

2. cost of the leasehold improvement

base term of the lease + 1st renewal option

The CCA on leasehold improvement must be claimed in a

period not exceeding 40 years - i.e., the denominator
cannot exceed 40.

 The ½ year rule applies on the gross addition

 Cannot have a terminal loss unless there are no other leasehold

improvements. If still have other leasehold improvements, continue
taking CCA.

66
CCA Flexibility

 CCA is an elective deduction. The taxpayer may claim anywhere from $0

to the maximum amount. If the taxpayer does not claim the maximum
CCA in a particular year, the CCA claimed should be done so by claiming
it from the lower rate classes 1st.

 This allows for a greater amount of CCA for future years. This is due to
the declining balance nature of the majority of the UCC classes.

 The following is an example where the maximum CCA is not required in

the 1st year, but it is needed in the 2nd year.

Class 1 - 6% Class 10 - 30%

UCC balance 100 100

Year 1: CCA of $6

Option: A 6 0

Option B 0 6

UCC - Option A 94 100

UCC - Option B 100 94

Year 2 - Maximum CCA

Option A: 5.6 30.0

Option B: 6.0 28.2

Total CCA - Year 2

Option A: 35.6 Greater CCA

entitlement in year 2 as
the CCA in year 1 was
taken from the lower
rate class

Option B: 34.2

67
Cumulative Eligible Capital Account (CECA)

Note: Beginning January 1, 2017, additions will now be included in a new

class 14.1 (5% DB). Each asset will be included in a separate class. 100% of
the cost of the asset will be added to the class.

There will be transitional rules to move the December 31, 2016 balance in
the CECA to a separate Class 14.1 (7% DB for the 1st 10 years, then down to
5%) on January 1, 2017.

Intangible assets such as goodwill, articles of incorporation, franchises of an

unlimited life, customer lists and others

 ¾ of the amount expended is added to the CECA

 The CECA balance is amortized for tax purposes at a 7% DB rate

 The ½ year rule does not apply.

 Prorated for short taxation years

 Terminal Losses are not allowed, but can continue to claim 7% DB on

the balance

 ¾ of the proceeds (even if these exceed the cost) are credited to the pool
even if proceeds exceed cost

 Since ¾ of the proceeds are credited to the account, it is possible that

the negative balance in the pool is greater than the CEC claim over the
years. If such is the case, the negative amount is broken down between real
recapture and an income inclusion component which is tantamount to an
amount that would have been included if it were a capital gain.

68
Example (2016 rules):

Assume that $100,000 is spent on an eligible expenditure. The account

would be increased by $75,000. After a number of years, the account
balance is at $55,000 (hence, $20,000 of claim has been made. The
intangible asset is sold for $160,000. The account would be credited by
$120,000 (3/4 of $160,000), resulting in a negative balance of $65,000. Only
$20,000 of the $65,000 would be considered recapture, while 2/3 of the
difference, $45,000 would be considered an income inclusion, i.e., $30,000.
This makes sense considering that the asset was sold for $60,000 in excess
of its cost, which would normally result in a taxable capital gain of $30,000.

100,000 x ¾ = 75,000
CECA claim (20,000)
55,000
160,000 x ¾ = (120,000)
Recapture? (65,000)

Income Inclusion would consist of:

Recapture of $20,000 + an additional income inclusion of

$30,000 [2/3 of (65,000 – 20,000]) for a total of $50,000.

Example (new rules):

The post 2016 acquisition would have been included in Class 14.1. Assuming
the balance in the Class 14.1 was $55,000 prior to the disposition of the
asset which is being sold for $120,000, the result would be as follows:

Recapture: $45,000 (55,000 – 100,000)

Taxable Capital Gain: $10,000 ((120,000 – 100,000) x ½)

69
 CHAPTER 6 – Business Income

 The term “business” is defined in S248(1) as a profession, calling,

trade, manufacture & undertaking of any kind, an adventure or concern
in the nature of the trade, but does not include an office or
employment. Broad definition.

 The term “profit” is not defined in the Act

 Start with Financial Statements (GAAP) and adjust based

on the provisions of the Act, e.g., depreciation vs capital
cost allowance – Compute Net Income for tax
purposes

 S9 is the charging section, which states that a taxpayers’ income from

a business is his profit for the year from that business, hence to be
included in computing net income for the year.

 The term “taxation year” is defined in S249(1)

 For a corporation: fiscal period, cannot exceed 53 weeks

 For an individual, it is the calendar year

Business Income vs Capital Receipt

Factors which have been looked at by the Courts:

 Primary intention (intent & course of conduct)

 Secondary intention (intent & course of conduct)
 Relation of the transaction to the taxpayers business
 Organization associated with the trade: “An Adventure in the Nature of
the Trade”.
 Supplemental work done on the property: could indicate an “Adventure
in the Nature of the Trade”
 Nature of the asset: capital vs inventory
 Number & frequency of transactions
 Length of period asset is held
 Circumstances that caused the disposition

Important to distinguish as income is fully taxable, while only ½ of a capital gain

is included (taxable) in the computation of net income.

70
Accounting Income vs Income for Tax Purposes

Net Income as reported under IFRS must be adjusted by certain provisions of

the ITA. The application of IFRS, which is subject to some level of interpretation,
could lead to major differences in the determination of profit.

When reconciling from accounting income to business income for tax purposes,
examples of adjustments include:

NET INCOME PER FINANCIAL STATEMENTS XXXX

Add:

• Accounting Income Tax Expense

• Accounting Depreciation
• Recapture of CCA
• Tax reserves deducted in prior year
• Accounting (Book) Losses on disposal of assets
• Accounting Scientific Research Expenditures
• Accounting Warranty Expenses
• Foreign Tax Paid
• Taxable Capital Gains (1/2 of Capital Gains)
• Interest and Penalties paid for income tax purposes
• Non-deductible automobile costs
• ½ of meals and entertainments
• Equity loss
• Club dues and recreational facilities
• Accounting Reserves
• Charitable Contributions1
• Accounting Write-Downs XXX

Deduct:

• Allowable Capital Losses (1/2 of Capital Loss)

• CCA
• CEC
• Terminal Losses
• Current Year Tax Reserves
• Equity income
• Accounting (Book) Gains on disposal of assets
• Tax Scientific Research Expenditures
• Warranties paid
• Foreign Non-Business Tax Deduction S20(11)
• Allowable Business Investment Losses (XXX)

NET INCOME FOR TAX PURPOSES XXXX

1
Not a deduction in arriving at Net Income for tax purposes

71
NET INCOME FOR TAX PURPOSES XXXX

Less Division C Deductions:

• Dividends received
• Charitable Donations
• Losses carried forward (XXXX)

TAXABLE INCOME FOR CORPORATIONS XXXX

72
Inventory Valuation - S10, Reg. 1801

 By virtue of S10(1), all items in inventory must be valued at the lower

of cost or market or, by virtue of reg. 1801, all at market value.

 Absorption costing is allowed, however an adjustment will be required for

any depreciation/amortization expense included in inventory.
1. S12(1)(r) requires the inclusion (in computing net income for tax
purposes) of any amortization expense included in the ending
inventory.

2. S20(1)(ii) requires the deduction (in computing net income for tax
purposes) of any amortization expense included in the opening
inventory.

 Standard costing is acceptable as long as there is no significant variation

between it and actual costs. If actual costs and standard costs are
substantially different, it is usual to adjust the standard cost to estimated
actual cost by using an appropriate percentage factor.

 Prime costing (no overhead is allocated) is not allowed for tax purposes

73
Inclusions to Income - S12

 Amounts received for goods/services rendered after year end - S12(1)(a).

A reserve will be allowed under S20(1)(m). The intent of this paragraph is
to prompt businesses to monitor their reserve accounts and establish new
reserves based on the estimated services or goods to be delivered after
the Taxation year.

 Amounts receivable (gross receivables – the accounting Allowance for

Doubtful Accounts is NOT allowed) for goods/services rendered during
the year - S12(1)(b). Small companies do not necessarily follow GAAP,
i.e., they may be using the cash basis instead of the accrual basis. A
reserve is available under S20(1)(l) and (p).

 Reserve for doubtful debts which has been deducted for tax purposes by
virtue of S20(1)(l) must be added back to income the following year -
S12(1)(d)

 Certain other reserves allowed under S20 in a previous year must be

added back to income in the current year - S12(1)(e)

 Bad debts recovered - S12(1)(i) - as these were deducted in a previous

year

 Share of partnership income - S12(1)(l).

Note, that for professionals such as accountants, lawyers, medical

doctors, dentists, chiropractors and veterinarians, an exception is
made re Work-in-Progress (WIP). For accounting purposes, WIP is
included in income for accounting purposes. These professionals can
chose to exclude such WIP and recognize income only after an actual
billing for services which have been rendered. If such is the case, the
adjustment would be as follows: Deduct ending WIP; Add opening
WIP.

 Dividends from other corporations - S12(1)(j),(k) (investment income)

 Depreciation expense included in closing inventory - 12(1)( r )

 Inducement payments - S12(1)(x), unless the taxpayer has elected to

reduce the cost of the asset under S13(7.4), resulting in lower CCA

74
Deductibility of Expenses

In practice, if an expense is not specifically addressed by the Act, it is usually

deductible for tax purposes if the expense is:

1. Deductible under IFRS

2. Not a capital expenditure
3. Incurred to earn Taxable income
4. Not a personal expense or expenditure
5. Reasonable in the circumstances
6. Incurred to earn a profit

Based on Jurisprudence, it is very probable that an expense is deductible if

it was incurred to reduce expenses, preserve the working capital or prevent a
business from ceasing operations.

Based on a recent decision (Stewart and Walls) rendered by the SCC, If the
activity is clearly commercial with no personal element involved, there is no need
for further inquiry into the activity, because such endeavors necessarily involve
the pursuit of profit. Hence, the reasonable expectation of profit test which CRA
applied need no longer be met.

75
General Limitations - S18

 To be deductible, amount must be incurred for purposes of earning,

maintaining, or generating income - S18(1)(a)

 No deduction allowed for a capital outlay, depreciation etc. - S18(1)(b)

 No deduction if expended to earn exempt income, (e.g., life insurance

proceeds, lottery winnings, see Section 81 for others) - S18(1)( c )

 No deduction for accounting reserves – S18(1)(e)

Accounting reserves are not allowed as alternative methods of
calculation often result in income manipulation.

 Only reserves specifically provided for in the Act are deductible

 No deduction for discounts on bonds, unless it is less than 3% and the

yield is no greater than 4/3 of the stated rate - the deduction will be
accorded when the bond is repaid - S20(1)(f). If the above conditions are
not met, the discount is deductible as a capital loss when paid.
(See chapter 9)

 Premium: If the bond is issued at a premium, then it is considered

a non-taxable capital receipt unless it is issued by a money lender
(e.g., financial institution), where in that case it would be
considered income in the year of the bond issue (See chapter 9)

 Add back required for the amortization of bond discount.

 Payment as interest on an income bond - S18(1)(g), S15(3). Deemed to

be a dividend for tax purposes to both the payer and recipient

 Membership fees to a recreational/dining club - S18(1)(l)

 Personal/living expenses are not deductible - S18(1)(h)

 Political contributions are not deductible - S18(1)(n); a personal tax credit

is available under S127(3) for individuals. Corporations are no longer
allowed to make political contributions.

 Automobile allowances exceeding certain thresholds

($.54/$.48) for 2016 – S18(1)( r ), Reg. 7306

76
  Property taxes & interest expense incurred on vacant land exceeding
income earned from the land - S18(2)

 Prepaid expenses are deductible for tax purposes under the same basis
as GAAP - S18(9). Example: prepayment of future years’ interest
expense would not be deductible on a cash basis, but over the life of the
debt.

 Interest, penalties & taxes payable under the Act are not deductible -
S18(1)(t)

Fines and Penalties – S67.6

 No deduction is available for fines and/or penalties imposed under a law

or political subdivision of a country. Example: parking tickets

Foreign Media Advertising S19, 19.1

 Deduction is disallowed re: cost of print & broadcast advertising in a

foreign print or broadcast media where the advertising is directed
primarily at the Canadian market.

 Some exceptions under S19.01

Home Office Costs - S18(12)

Conditions for deductibility:

 Must be principal place of business

 Used exclusively to earn income on a regular basis
 Dedicated area in the home
 Cannot exceed income earned from that business
 Expenses include CCA, mortgage interest, rent, insurance, electricity,
property taxes, fuel, supplies, maintenance
 Expenses cannot create a business loss. Unused expenses can be
carried forward
 IT 514

77
Reasonability of Expenses - S67

Expenses must be reasonable, if not, the whole amount could be denied as a

deduction. Facts of each case must be looked at. Courts will examine what the
“prudent” person would do given the same set of circumstances.

Meals & Entertainment - S67.1

 Can generally only deduct 50% of such expenditures. There are some
exceptions, e.g., when meals & entertainment are for the benefit of all
employees (limited to 6 special events during the year); part of child care
expenses; part of a fund raising activity; or part of moving expenses.
See IT518R Archived

 If fee paid for attending a course includes a meal, $50/day is deemed to

have been expended on the meal.

Interest Expense re: Passenger Vehicles - S67.2 & Reg. 7307(2)

 Cannot deduct interest exceeding $10/day for automobiles.

 See IT521R Archived, 522R Archived

Cost of Leasing Passenger Vehicles - S67.3 & Reg. 7307

 Restricted to $800/mo. + PST + GST

 The $800 is a general rule. The actual formulas are more complex.

 The $800 applies to the term of the leasing contract. It is not adjusted for
any changes to the $800 limit which may take place under the
Regulations.

78
Deductibility of accrued salaries and bonuses, - S78(4)

If such amounts are unpaid more than 179 days after the employers’ fiscal
year-end, these amounts will only be deductible when paid, i.e., on a cash
basis.

A corporation with a year-end post June 30th can defer tax when accruing a
bonus. The accrual would be a deductible expense (assuming paid within
179 days and after the calendar year) for the company’s fiscal year-end, and
would only have to be included in the owner-managers income the following
taxation year.

Example:

Corporate year-end: December 31, 2016

Bonus declared & accrued on December 1, 2016 and paid to the individual in
January 2017: deducted as an expense in the 2016 taxation year by the
company and reported as 2017 employment income by the individual.

Bonus declared & accrued on December 1, 2016 and paid to the individual in
August 2017: deducted as an expense in the 2017 taxation year (violation of
the 179 day rule) by the company and reported as 2017 employment income
by the individual.

Restriction on deductibility of non-arms length payments - S78(1)

78(1) applies to a deductible outlay or expense owing by a taxpayer If:

a) the amount is unpaid at the end of the second taxation year following the
taxation year in which the outlay or expense was incurred, and

b) the taxpayer and the person to whom the amount is owing are not dealing
at arm's length,

If such is the case, the taxpayer must include in its income in the third
taxation year the amount that was originally deducted.

79
Deductions Permitted - S20

 Capital cost allowance - S20(1)(a)

 CECA - S20(1)(b)

 Interest expense incurred to earn business/investment income - S20(1)(c)

(See Chapter 6)

 S20.1 (and other proposed amendments) may restrict the

deductibility in a number of situations:

1. When borrowings are used to make low interest loans to

individual shareholders
2. Dividends paid to shareholders – interest would be deductible
to the extent the loan used to pay the dividends does not
exceed the shareholders’ equity amount.
3. The investment is disposed of, and the initial borrowings are
still outstanding. If the proceeds of sale are reinvested to
acquire income producing property or used to pay down the
debt, then the interest on the outstanding loan would still be
deductible.
4. If the funds are used to purchase common shares, where it
is clearly established that the issuer has no intention of
paying dividends

Interest is not deductible:

1. To acquire personal property

2. Incurred to make interest free loans
3. To pay tax installments or tax owing
4. To pay for personal living expenses
5. To make RRSP contributions

IT 533 addresses the issue of interest deductibility in

greater detail

80
 Expenses relating to the issue of debt/shares are deductible over a 5 year
period - S20(1)(e)

 Life insurance premiums are deductible only if the policy was required by
the lender to be taken out as security against the loan - S20(1)(e.2)

 Amortization of bond issue premiums - S20(1)(f).

 Reasonable reserve for doubtful debts - S20(1)(l). Requires taxpayer to

do a thorough aging of accounts receivable.

 Reserve for amounts received but goods/services not delivered till after
year end - S20(1)(m)

 Once a receivable has been determined to be uncollectible, S20(1)(p),

permits the taxpayer to deduct the amount as a bad debt expense

 If inducement receipts have to be repaid, S20(1)(hh), permits a deduction

if these were originally included in income under S12(1)(x).

 Depreciation expense included in opening inventory - S20(1)(ii)

 Landscaping costs are deductible when paid - S20(1)(aa), if not for this
provision, they would be required to be capitalized.

 Investment counselor fees - S20(1)(bb)

 Lease Cancellation Fees are deductible over the remaining term of the
lease that has been cancelled. If the property is subsequently sold by the
owner, then any undeducted fees may be deducted at that time by the
payer (i.e., previous lessee) of the cancellation fees – S20(1)(z),(z.1)

 Convention expenses – S20(10): can deduct the costs of no more than 2

conventions per year, as long held in a location that is consistent with the
territorial scope of the organization.

 Foreign taxes – S20(11): If foreign taxes on property income exceed 15%

of the foreign income, a deduction is accorded for the excess, as the
credit is limited to 15% (and no carry forward of any excess). This
provision applies to individual taxpayers only.

81
Non deductible auto. allowances paid by employer - S18(1)(r), Reg. 7306

 Amounts paid in excess of $0.54/km (2016) on the 1st 5,000 km

 Amounts paid in excess of $0.48/km (2016) on km exceeding 5,000

 Computed on an employee by employee basis. Amounts paid in excess

of the above amounts are not deductible to the payer.

82
 Chapter 7 - Investment & Property Income

Nature of Investment/Property Income

Investment and property income typically includes interest, rental, and dividend
income. It does NOT include Capital Gains.

Interest

 Interest income is not defined in the Act

 Defined by the Supreme Court as return for the use of money borrowed
by one person belonging to another

 Deducted from income by virtue of S20(1)(c). Please refer to

deductibility issues [S20.1] discussed in the previous chapter notes.

 Included in income by virtue of S12(1)(c)

 Corporations, Partnerships & Trusts report the interest using the accrual
basis of accounting (day to day) - S12(3). While individuals also report on
the accrual basis, but computed on the anniversary date of the investment
contract – S12(4).

 Bond discounts/premiums are treated as capital gains/losses (NOT

interest) to the purchaser

83
Jurisprudence – Interest expense deductibility issues

The Singleton Case

Facts

1. Mr. Singleton, a lawyer, made a withdrawal of funds from his

capital account in the partnership (law firm) in which he
worked.

2. The funds withdrawn from the partnership were used to

purchase a residence for his personal use.

3. Mr. Singleton then borrowed sufficient funds from a bank to

replace the capital balance that he had withdrawn from his
partnerships and then deducted the interest.

Isssue(s)

1. The CRA denied the interest deduction on the basis that the
series of transactions actually resulted in Mr. Singleton
deducting his home mortgage.

2. Mr. Singleton maintained that the requirements of paragraph

20(1)(c) were met as the borrowed funds were used to
replace the capital balance of the partnership and that the
legal realities of the transaction were met and that the
economic realities of the transaction are not pertinent.

Judgment

1. The Tax Court of Canada (TCC) agreed with CRA

2. The Federal Court of Appeal (FCA) and the Supreme Court

of Canada (SCC) disagreed with CRA and maintained
that the interest was deductible for the reasons put forth
by Mr. Singleton.

84
The Ludco Case

Facts

1. Ludco Ltd. borrowed $7.5 million to finance investments in

two offshore companies.

2. During the period that these investments were held, Ludco

paid $6 million in interest on the borrowings and received
$600,000 in dividends on the shares held.

3. When the shares were ultimately redeemed, Ludco realized

a $9.2 million capital gain.

Isssue(s)

1. The CRA denied the deduction of the interest on the

grounds that the shares were acquired for the purpose of
earning a capital gain, not for the purpose of earning
property income.

2. Ludco disagreed and held that the interest was deductible

as it was producing income from property ($600,000 of
dividends) and that there was no requirement in paragraph
20(1)(c) that the amount of income has to be equal to or
greater than the interest deduction.

Judgment

1. The TCC and FCA did agree with the CRA.

2. The SCC agreed with Ludco and confirmed that there is no

quantitative requirement in paragraph 20(1)(c) that the
interest deduction may not exceed the income from
property.

85
Blended Payments - S16

 When a receipt is a combination of interest & return of capital, only the

interest portion is to be included in income

 Treasury Bills: The spread between the purchase price & the maturity
amount is considered interest income.

Prescribed Debt Obligations - S12(9), Reg. 7000

Debt that carries no or little interest, e.g., zero coupon bonds, stripped bonds.
The holder is deemed to earn interest based on the yield rate, e.g.,: Strip Bond
is acquired for $1,500 & will mature to $10,000 in 20 years. The yield on
this bond can be computed as 9.95% [1500 = 10,000/(1+i) 20]

Interest in Year 1: $1,500 x 9.95% = $149.25

Interest in Year 2: ($1,500 + 149.25) x 9.95% = 164.10

86
Rental Income

 Net rental income is included in the computation of net income, i.e, rental
revenues – expenses, such as heat, repairs, maintenance, property taxes,
interest and possibly CCA

 Depreciation & capital expenditures deducted for book purposes are not
deductible expenses - S18(1)(a)

 Capital Cost Allowance may be claimed, restriction:

1. Cannot create a rental loss from CCA

2. Cannot increase a loss from CCA

exception: The rental income is business income

 Can claim CCA from 1 rental property to be applied to the net rental
income of another property, i.e., the computation of net rental
income for tax purposes is done on an aggregate basis when there
are 2 or more properties.

 Each building whose cost exceeds $50,000 must be put in a separate

UCC class.

 Any terminal loss (recapture) that is available (when there is more

than 1 rental property) is deducted (added) before any CCA claim.

87
Dividend Income - S12(1)(j), S89(1)(j)

Received by individuals in 2016: non-eligible dividends – S82(1)

 From taxable Canadian corporations - gross up by 1.17X

 A dividend tax credit (DTC) equal to 10.52% of the grossed up
dividend.

Year Gross Up DTC – % of Tax.

Dividend

2016 17% 10.52%

Note: was 18% & 11% in 2015.

Received by individuals in 2016: eligible dividends – S89(1)

Under S89(1), the corporation designates the dividend to be such. This is

simply accomplished by notifying the recipient that the dividend is eligible
for the enhanced gross up of 1.38 and a higher dividend tax credit rate.

 Eligible dividends will consist of dividends paid after 2005 by:

1. public corporations that are subject to the general corporate tax

rate,
2. Canadian controlled private corporations (CCPCs), out of active
business income that has been taxed at the general corporate
tax rate, i.e., not eligible for the Small Business Deduction, and
3. CCPC’s, out of eligible dividends that it has received from other
corps.

Year Gross Up DTC – % of Tax.

Dividend

2016 38% 15.02%

88
 Dividends received by corporations

 From taxable Canadian corporations - no gross up

 From foreign corporations - include the gross amount (the
pre withholding tax amount) converted to Canadian $ (foreign tax
credit will be available)

Dividends received from foreign corporations

Received by individuals or corporations

 Include the gross amount (before any foreign withholding

tax) converted to Canadian $ (foreign tax credit will be
available)

Non Taxable Dividends - S83

A S83(2) dividend is a dividend from the Capital Dividend Account (CDA). The
CDA tracks non-taxable items, e.g., non-taxable portion of capital gains. This
dividend does not reduce the ACB of the shares.

Stock Dividends

Received from a public or private corporations

 Taxable dividend = Increase in paid up capital * gross up

factor
 The shares are received at an ACB = to the increase in paid
up capital

S82(3) Election

Allows the taxpayer to add to his income the spouses’ dividend income only if
this results in an increase in the spousal credit. The taxpayer would only elect if
this results in a reduction of taxes. The additional tax would be offset by the
increase in the marital credit and the availability of the dividend tax credit.

89
Integration Concept – CCPC’s (Income eligible for the SBD)

Whether income is earned at the corporate level and passed by way of dividends
to the shareholder, it should have the same tax cost as if the individual had
earned the income directly.

The following is an example of the Integration model (perfect) with respect to the
1st $500,000 of Active Business Income earned by a corporation

Corporation:

Pre Tax Income 100.00

Tax @ 17.5% (28 - 17.5 + 7) 17.50
Available for dividend 82.50

Individual:

Cash dividend received 82.50

Gross up by 17% 14.03
Taxable dividend 96.53

Federal Tax @ 26% (assumed MR) 25.16

Provincial Tax @ 13%(assumed 50% of Fed) 12.58
37.74
Federal Dividend Tax Credit @ 10.52% (10.15)
Provincial Dividend Tax Credit @ 5.26% (5.08)

Net tax by individual 22.51

Net tax by corporation 17.50
Total tax 40.01

If earned directly by the individual $100 @ 39% 39.00

Federal Rate: 28.0%

Small Business Deduction: (17.5)
Assumed Prov. Rate: 7.0
17.5%

90
Imperfections of the Integration Concept

The model assumes a corporate rate of tax of 17.5% (28 – 17.5 + 7). Not
all corporate income is taxed at the rate of 28% less the small business
deduction of 17.5% plus an assumed provincial rate of 7%).

Since not all income is taxed at the low rate, e.g., ABI that exceeds
$500,000, investment income and in the case of public corporations, all of
the income is taxed at the high rate (i.e., does not benefit from the SBD),
Integration was not working. To better integrate such income, the gross
up was revised to 1.38X and the dividend tax credit has also been
adjusted accordingly. Corporations must now designate the dividend
(that is paid) as being eligible for the higher gross – up. The company will
now be required to keep track of the amount of higher taxed income in an
account that will serve to determine the amount of dividends which can be
designated without penalty.

91
Achieving Integration for income in excess of SBD:

In reality, for income that is not eligible for the SBD, integration is not
achieved as public corporations are subject to a federal corporate tax rate
of 15% (28% Fed. rate - 13% Rate Reduction).

As a result, the dividend gross-up was increased to 1.38 for income not
eligible for the SBD. The federal dividend tax credit for eligible dividends
is 15.02%. The following assumptions have been used in establishing the
new dividend and its tax credit system:

Corporation:

 26% Combined Federal and Provincial Tax Rate for Corporations

in 2016:

 15% federal corporate tax rate on active business

income not eligible for SBD
+
 11% (assumed) Provincial Rate of Tax

Individual:

 46% Combined Federal and Provincial Tax rate for Individuals in

2016:

 29% Federal Tax Rate (not the top rate)

+
 17% Provincial Tax Rate

 Federal dividend tax credit of 15.02% (eligible dividend) of the

taxable dividend.

92
Distribution of Corporate Earnings

Taxable Income $100,000

Federal Tax @ 28% 28,000

General Rate Reduction (13%) (13,000)
Federal Tax 15,000
Provincial Tax 11,000
Total Income Tax 26,000

Cash Available for Dividend $74,000

Taxable Dividend (1.38 gross up ) $102,120

Federal Tax (29%) 29,615

Federal Dividend Tax Credit (15.02%) (15,338)
Federal Tax 14,277

Provincial Tax (17%) 17,360

Provincial DTC (average of 11%) (11,233)
6,127

Total Income Tax

(26,000 + 14,276 + 6,127) $46,404

b) Earned Directly

Self-employed business income $100,0000

Total Income Tax @ 46% (29% + 17%) $46,000

93
CCPC’s and the General Rate Income Pool (GRIP) S89(1)

The following material is discussed in Chapter 13. You are

not responsible for the computation of the GRIP account.

NOTE: CCPC’s will pay non-eligible dividends, unless when there is

a GRIP account balance. Dividends paid out of the GRIP are
considered eligible dividends.

To the extent that CCPC’s earn income that have been taxed at full
corporate rates, the GRIP account will be used to keep track of the
amount available to pay eligible dividends.

The GRIP Account will be generally computed as follows:

1. The balance at the end of the preceding year,

+
2. 72% of (TI - # eligible for the SBD – Invest. Income), plus
+
3. Eligible dividends received by the CCPC during the year
from other corporations,
-
4. Eligible dividends paid in the preceding year and losses
carried back from a year to the 3 previous years

Note: the 72% (after-tax $$$) reflects a notional combined federal &
provincial rate of tax of 28% (100% - 28% = 72%).

Part III.I Tax on Excessive Eligible Dividend Designations (EEDD)

If a CCPC designates more than the account balance, it will be subject to

a penalty of 20% of the excess amount, if the EEDD is inadvertent. The
corporate taxpayer would be allowed to use an election to effectively undo
the election.

If CRA concludes that it was advertent, the penalty will be 30% of the
entire dividend and NO election is available to undo the excessive
election.

Non- CCPC’s and the Low Rate Income Pool (LRIP) S89(1)

Non-CCPC’s generally pay eligible dividends. Any non-eligible dividends

received are included in the LRIP. Dividends paid out of the LRIP are non-
eligible.

94
Integration Concept – Public Corporations

Whether income is earned at the corporate level and passed by way of dividends
to the shareholder, it should have the same tax cost as if the individual had
earned the income directly.

The following is an example of the Integration model with respect to Business

Income earned by a public corporation

Corporation:

Pre Tax Income 100.00

Tax @ 29% 29.00
Available for dividend 71.00

Individual:

Cash dividend received 71.00

Gross up by 38% 26.98
Taxable dividend 97.98

Federal Tax @ 26% (assumed rate) 25.47

Provincial Tax @ 13% (assumed 50% of Fed) 12.74
38.21
Federal DTC @ 15.02% (14.72)
Provincial DTC @ 13.0% (assumed) (12.74)

Net tax by individual 10.75

Net tax by corporation 29.00
Total tax 39.75

If earned directly by the individual $100 @ 39% 39.00

Above example reflects an imperfect model.

Federal Rate (28 – 13): 15.00

Provincial Rate: 14.00
29.00

The 15% Federal rate consists of 28% less the 13.0% General
Rate Reduction

95
 CHAPTER 8 - Capital Gains

Income vs capital receipt

See lectures notes on business income material

 Primary & secondary intention, frequency factor, reasons for sale,

relationship of transaction to taxpayer…

 Must identify if a capital property has been disposed of:

 Capital property is defined in S54(b):

 Depreciable property & any other property the disposal of which

would result in a capital gain

 Election on Canadian Securities – S39(4),(5)

 Allows taxpayer to elect to deem all securities be deemed capital

property and, as a result, be subject to capital gain or loss
treatment
 S39(5) states that the election is not available to traders or
dealers in securities.

 Proceeds of disposition is defined in S54(h)

 Adjusted cost base (ACB) as defined under S54 is:

 For depreciable property: its cost

 For other property, cost as adjusted by virtue of S53:

1. Acquisition & selling costs

2. Donations & grants
3. Stock option benefits
4. Stock dividends
5. Capitalization of interest & property taxes re: vacant
land
6. Superficial losses

 Capital Gain (CG) = proceeds - ACB (which includes selling expenses).

Proceeds is defined as gross proceeds.

96
 Deemed dispositions: not an actual sale, but an event has taken place
where for tax purposes the property is considered to have been
disposed of:

 Change in use of property

 Death of the taxpayer
 Becoming a non-resident

Inclusion Rates

1. < 1972: not taxable

2. 1972 – 1987: ½ inclusion rate
3. 1988 – 1989: 2/3 inclusion rate
4. 1990 – Feb, 27/00: ¾ inclusion rate
5. Feb. 28/00 – Oct. 17/00: 2/3 inclusion rate
6. Oct. 18/00 – present: ½ inclusion rate

Taxable capital gain = capital gain x ½

Allowable capital loss = capital loss x ½

 If a loss is incurred it can be used against current years’ gains. The

portion which can be used against a taxable capital gain (TCG) is called
an allowable capital loss.

 Excess losses can be carried back 3 years & forward indefinitely

 Capital losses are denied with respect to the disposition of:

1. Depreciable property
2. Personal use property (PUP)
3. Deemed dispositions (to the extent they exceed capital
gains)

97
Disposition of Identical Properties (Shares)

Must segregate Pre V Day (pre 1972) Pool & Post V Day (post 1971) Pool

Post V Day Pool (post 1971 acquisitions)

Compute the Adjusted Cost Base (ACB) of the shares using the
average cost method that is used under the Perpetual Method of
inventory

Pre V Day Pool (pre 1972 acquisitions)

At this point in time, usually applies with respect to real estate property.
Very few disposals of pre 1972 acquired shares.

Median Rule: applies to all taxpayers

The ACB is the middle amount of:

1. Proceeds of disposition
2. V Day Value
3. Cost (FIFO basis)

If two amounts are equal, then the ACB is that amount

V Day Method: available only to individual taxpayers

 Election must be made

 V Day Value is the fair market value at 22/12/71 for
publicly traded securities & 31/12/71 for other
property
 Accrued gains are therefore not taxed
 V Day Value for publicly traded securities are listed in
the Act - Reg. Schedule VII. Beware: stock splits,
amalgamations

 If the V Day Method is used, no need to compute average

cost of pre V Day property

 Once a method is chosen by the individual taxpayer, that

same method must be used for post 1971 dispositions of
pre 1972 properties.

98
ACB of Mutual Fund Trusts Units

The Adjusted Cost Base of the units is increased by any distributions that are
reinvested in in the fund.

The Adjusted Cost Base is reduced by any amounts that represent a tax free
return of capital.

Superficial losses

Capital property is sold at a loss but the property was acquired or reacquired
within 30 days from the date of sale & the taxpayer or an affiliated person
(e.g., spouse, corporation controlled by the taxpayer, BUT does NOT
include children or other family members) acquires the property 30 days after
the disposition.

The loss is denied (the denied loss is referred to as a Superficial Loss and
added back to the ACB of the reacquired property (pro-rata if only part is
reacquired)

Personal Use Property – S54

 Defined in S54

 Cars, furniture, clothes, etc.

 $1,000 floor rule with respect to proceeds & ACB

 Capital gain is taxed, but Capital loss is denied, considered a personal

expense

Listed Personal Property – S54

 Defined in S54

 Coins, stamps, jewellery, paintings, drawings, sculptures, and rare books

 $1,000 floor rule applies

 Losses can only be applied against gains from LPP

 Can be carried back 3 years & forward only 7 years (in computing net
income as opposed to taxable income)

99
Bad debt on sale of capital property

These are considered capital losses. Any amounts collected in the future are
treated as a capital gain.

Reserve on Capital Gains – Election - S40(1)

Reserve is computed as the lesser of:

1. Outstanding proceeds X Capital Gain

Total proceeds

2. (1/5 of the gain) X (4 - # of preceding years)

year 1 reserve = 4/5 of the gain

year 2 reserve = 3/5 of the gain
year 3 reserve = 2/5 of the gain
year 4 reserve = 1/5 of the gain
year 5 reserve = 0/5 of the gain

 At least 20% of the gain is taken into income each year

 Capital Gain is fully recognized no later than the 5 th year after the
disposition

Note: On the disposition of shares in a Qualifying Small Business

Corporation, a 10 year deferral is available.

100
Capital Gains Reserves

Proceeds from sale: $300,000

ACB: 40,000
Capital Gain $260,000

Proceeds are to be received as follows:

Year 1: $ 10,000 Year 2: 130,000 Year 3: 60,000

Year 4: 80,000 Year 5: nil Year 6: 20,000

Required:

Compute the minimum taxable capital gain to be reported in each of years 1 – 6.

Solution to Capital Gains Reserve Example

Year 1 Year 2 Year 3 Year 4 Year 5

Cap. Gain 260,000

Reserve – 0 208,000 138,667 86,667 17,333

Prev. year

Reserve – 208,000 138,667 86,667 17,333 0

Curr. year
Cap. Gain 52,000 69,333 52,000 69,334 17,333

TCG 26,000 34,667 26,000 34,667 8,666

Year 1: Lesser of : 1) (290/300) x 260,000 = 251,333

2) 80% x 260,000 = 208,000

Year 2: Lesser of : 1) (160/300) x 260,000 = 138,667

2) 60% x 260,000 = 156,000

Year 3: Lesser of : 1) (100/300) x 260,000 = 86,667

2) 40% x 260,000 = 104,000

Year 4: Lesser of : 1) (20/300) x 260,000 = 17,333

2) 20% x 260,000 = 52,000

Year 5: Lesser of : 1) (20/300) x 260,000 = 17,333

2) 0% x 260,000 = 0

101
Capital Gains Rollover/Deferral - S44.1

Individuals can defer the CG where the proceeds of disposition from the sale of a
Eligible Small Business Corporation (ESBC) is reinvested in shares of other
small business corporations.

A ESBC is a CCPC where at least 90% of the fair market value of the assets are
used in an active business carried on primarily (> 50%) in Canada. If the 90%
test is not met, the corporation should take action (disposing of assets not used
to carry on an active business, paying off shareholder loans…) to ensure the
90% test is met.

The shares of the corporation must have been purchased from treasury and
must have been held for at least 6 months (185 days) before a gain can be
deferred.

At the time the investment is made and immediately after, the total carrying
value of the corporation’s assets and those of all related corporations does
not exceed $50 million.

The replacement investment must be acquired within the same year of the
disposition or within 120 days after the end of that year. The individual must
also designate in his personal tax return for the year that the replacement
investment is a qualifying disposition.

In order to defer the full gain, all of the proceeds must be reinvested, otherwise,
only a portion of the gain may be deferred.

The deferral works by reducing the ACB of the new investment by the deferred
gain. Hence, when the replacement investment is sold, the deferred gain would
be realized at that time.

102
Example:

Mary realizes an $80,000 CG ($100,000 - $20,000) on the sale of

Tax.Com Ltd. If she reinvests only $70,000 of the $100,000 of proceeds,
then only 70% i.e., $56,000 of the gain can be deferred. Hence the ACB
of the shares in the new investment will be $14,000 ($70,000-$56,000).
Mary will be subject to tax on a taxable capital gain of $12,000 (1/2 of
$24,000), the non-deferred gain.

Technically, the deferred gain is computed as:

CG x [Lesser of: i) Cost of replacement shares or ii) Proceeds of Disposition

Proceeds of Disposition

Using the above example:

Capital Gain: $80,000

Deferred gain: 80,000 x 70,000 = (56,000)

100,000

Revised Gain: $24,000

ACB of reinvested Shares: 70,000 – 56,000 = $14,000

103
Principal Residence - S40(2)(b), S40(6)

 Defined in S54(g) as a house or unit by the taxpayer & his family &
ordinarily inhabited by such

 Beginning 1982, 1 principal residence per household

 Prior to 1982, 1 principal residence per taxpayer

 Principal residence includes building and generally, no more than ½

hectare of land

 Must designate principal residence

 If have more than 1 residence, e.g., city house & cottage, when
allocating years of designation to determine exempt portion of gain,
must consider:

 Which property has the greatest accrued gain per year of

ownership
 The time frame for disposition of the properties

 The exempt portion of the gain is computed as:

1 + # of years of designation > 1971 X Capital Gain

# of years owned > 1971

 The +1 factor takes care of the year a residence is sold and another
purchased, since can only designate 1 principal residence per year

 Report to CRA only if there is a non-exempt gain - T2091

Please refer to the example problem that was done in class

104
Allowable Business Investment Losses - S39(1)( c ) – Chapter 14

Disposition of shares or debt of a small business corporation

 Defined in S248, as a CCPC & all or substantially all (90%) of its

assets on a FMV basis is used principally in an active business.

 If the 90% test is not met, the corporation should take action
(disposing of assets not used to carry on an active business,
paying off shareholder loans…) to ensure the 90% test is met.

 The allowable capital loss (ACL) is treated as an allowable

business investment loss (ABIL), which can be used against any
source of income.

 The ABIL would be reduced by any Capital Gains Deduction

claimed in previous years.

- The ABIL reduction reverts to an allowable capital loss

 The ABIL can be carried back 3 years & forward 10 (not 20) years
and used as if it was a non-capital loss

 If still unused at the end of 10 years, it reverts to an ACL

Gifting of Capital Property to a Registered Charity

 If gifting shares of a public corporation (or ecologically

sensitive land), 0% of the capital gain is taxable

105
Non-Arms Length Transfers/Sales – S69(1) (Covered in chapter 9)

For Non-Depreciable Property:

Transfer Vendor Purchaser

Greater than FMV No adj. to proceeds ACB = FMV

Less than FMV Proceeds = FMV ACB = $ Paid

Gift Proceeds = FMV ACB = FMV

Non Arms Length Transactions & The Attribution Rules - S74.1

(Covered in chapter 9)

Spousal Transfers - S74.1(1)

This is an anti-avoidance provision that deals with the transfer of property

from one spouse to the other for no consideration:

 S73(1) states that when a spouse transfers property to the other

spouse (includes a spousal trust), the transferor is deemed to
have disposed of the property at:

1. Its ACB for non-depreciable property

2. Its UCC in the case of depreciable property. if the
asset is 1 of many assets in the class, then the
Deemed Proceeds of Disposition is computed as:

UCC of class x FMV of asset transferred

FMV of all assets in the class

If the transferor did not elect out of S73(1) it is not

considered a sale, hence, there are no capital gains
implications to the transferor at the time of transfer.

Transferee:

The ACB or UCC of the transferor will generally flow through

to the Transferee. Attribution will apply unless the transferor
receives FMV and elects out of S73(1).

106
Tax Consequences if the taxpayer elects out of S73(1).

1. And the taxpayer receives FMV consideration:

This would be considered as an actual disposition.

The transferor is required to report the capital gain
realized at the date of transfer.

Any capital gain realized when the actual disposition

takes place is not attributed back, nor is any income
attributed back.

If debt is taken back as consideration, it must bear

interest at the prescribed rate & the interest must be
paid within 30 days after year end.

Note: the ACB to the transferee spouse is the

FMV at date of transfer

2. And FMV consideration is NOT received

A capital gain is reported by the transferor at date of

transfer based on the FMV at that date. Property
income and any capital gain realized when the
property is actually disposed of by the transferee will
be attributed back.

The rules of S69 would be applicable if the

consideration received is either less than or greater
than FMV. As discussed earlier, this would result in
double taxation.

Note: if gifting the property, deemed proceeds of

disposition is equal to FMV.

Attribution also applies to spousal trusts set up for

this purpose

2nd generation income is not attributed back and

income on substituted property is attributed back

Attribution ceases if there’s a divorce (or death).

Separation is still considered married.

107
 Transfers to Minors (Dependent) - S74.1(2)

A minor is one who is under age 18 at December 31

 Deemed disposition for FMV considerations to the transferor

 Property income is attributed back (but not capital gains) until child
reaches age 18

 Attribution also applies to substituted property

 If the FMV consideration was received, then the attribution rules

would NOT apply

 Reasonable gifts can be made without concern of attribution rules

Attribution Rules if transferee not a Spouse or minor Child

Please note that the attribution rules do not apply if the asset is transferred to a
family member that is not a spouse or minor child of the taxpayer.

108
Tax on Split Income “The Kiddie Tax” – S120.4

 The Kiddie Tax is based on “split income”, i.e., the child’s income is split in
2, where part is all subject to the top rate of tax of 33%, while the other part
is subject to the marginal rates of tax.

 It applies only to children who are under 18 years of age at December 31 of

the taxation year in question.

 Split income as defined under subsection 120.4(1) includes taxable

dividends received by a minor child on shares of private corporations and
also includes shareholder benefits or shareholder loans included in the
child’s income in respect of shares of a private corporation. It also applies
to capital gains realized on the disposition of such shares.

 As well, it also applies to situations where a minor child receives business

and rental income from a related partnership or trust.

 Dividends remain eligible for the dividend tax credit but no other deductions
or credits are allowed in computing a minor’s split income or the tax
thereon.

 The tax also applies to capital gains that have been realized by the minor
child on the disposition of shares of private corporations.

109
For Depreciable Property, S13(7) will determine the UCC:

Where the ACB of the vendor is > the price paid by the purchaser:

a) The ACB to the purchaser is equal to the sellers’ ACB.

b) If the price paid is < the UCC of the vendor, the purchaser’s UCC is equal
to the sellers’ UCC
c) If the price paid is > the UCC of the vendor, the purchaser’s UCC will be
equal to the price paid.

Example:

John sells a building to his daughter Jane:

Sales price: $110,000

FMV: 200,000
ACB: 120,000
UCC: 90,000

Jane’s ACB for capital gains purposes will be $120,000. Her UCC will be
$110,000. John will report a CG of $80,000 and recapture of $20,000.

If the price paid is > ACB of vendor:

a) The ACB to the purchaser will equal the FMV

b) The UCC to the purchaser will be computed as:

Cost of Vendor + ½(transferor’s POD – ACB)

Generally, the purchasers’ UCC = Vendors’ ACB + TCG.

Example:

John sells a building to his daughter Jane.

Sales price: $200,000

FMV: 200,000
ACB: 120,000
UCC: 90,000

Jane’s ACB for capital gains purposes will be $200,000.

Her UCC will be computed as follows:
120,000 + ½(200,000 -120,000) = $160,000

John will report a CG of $80,000 and recapture of $30,000

110
 Chapters 4 & 11 - Taxable Income and Tax Payable for Individuals:

Computation of Taxable Income

The individual taxpayer may be entitled to a number of deductions from

net income to arrive at taxable income under Division C of the ITA:

Employee Stock Option Deduction - S110(1)(d),(d.1), (d.01)

 A deduction equal to ½ of the stock option benefit included in

income by virtue of S7, S7.1

 If the shares from the exercise stock option are gifted to a

charitable organization, the stock option deduction is 100% of the
stock option benefit.

 The shares must be common shares

 For Public Corp Shares: The option price must have been
greater than or equal to the FMV of the shares at the time the option
was granted.

 If Private Corp Shares: The option price must have been greater
than or equal to the FMV of the shares at the time the option was
granted. But, if this condition is not met, the stock option
deduction will still be granted if the shares must have been held
for at least 2 years after the date the option is exercised.
S110(1)(d.1)

Deduction for Gifts (made to a registered charity) of publicly traded

securities acquired through stock options

 The taxpayer is entitled to an additional deduction of 50% of the

stock option benefit; hence none (taking into account the original
50% Stock Option Deduction) of the stock option benefit is
effectively taxed. This parallels the non-taxability of capital gains
on the gifting of capital property.

 The shares must be gifted within 30 days of the date of exercise.

111
Home Relocation Loan Deduction - S110(1)(j)

 Home relocation loan is defined in S248 as a loan that was made as

a result of an employment relocation which meets the 40 km test

 The deduction is equal to the least of:

1. Amount of the net taxable benefit

2. $25,000 X the prescribed rate used in the benefit
calculation

The deduction is available for a period of no more than 5 years

Deduction for certain payments - S110(1)(f)

Certain receipts are exempt from income. These amounts are included in
computing net income but are not taxable (a deduction for these amounts
will be available to arrive at taxable income):

 Workman’s compensation payments received under a law of

Canada/province
 Social Assistance payments (e.g. welfare, Guaranteed Income
Supplement received by seniors)
 Employment Income from a prescribed international organization

112
Capital Gains Deduction - S110.6

 Available on the disposition of:

1. Shares of a Qualifying Small Business (QSBC shares)

[CCPC with over 90% of the FMV of its assets used in an
active business carried on primarily (>50%) in Canada] at
the date of sale and at least 50% of the FMV of its assets
were used to earn business income in Canada in the 2
preceding years, i.e., must have held shares for at least 2
years.

Note: The shares must have been held for at least 2 years
prior to their sale

2. Farm property or Shares in a farm corporation

3. Qualified property used in a family fishing business (post
May 2, 2006 dispositions)

 Up to $824,176 (was $813,600 in 2015) of Capital Gains

Deduction. The amount is to be indexed annually.
 For Qualified Farm or Fishing Property, the CGD is the greater of
$1,000,000 or the indexed annual limit of $824,176 for shares of a
QSBC

 The annual limit is reduced by the amount of any Capital Gains

Deduction(s) claimed in prior years.

 Owners of unincorporated businesses may incorporate their

interest (on a tax free basis under S85) before a sale and be
eligible to claim the Capital Gains Deduction on their shares,
provided that 90% or more of the FMV of the assets of the
proprietorship or partnership were used in an active business
primarily (>50%) in Canada and the shares were not held by
anyone other than the individual (or a person or partnership related
to the individual) throughout the immediately preceding 24 months.

S48.1 Election: CCPC becoming a public corporation

Individuals who own eligible shares of a CCPC may elect under S48.1
to have a deemed disposition of the shares. The deemed disposition
amount cannot exceed FMV. Under the election a deemed capital gain
would be reported which would be offset by any unused capital gains
deduction. Form T2101 is required to be completed.

113
Losses Carried Forward - S111

Non Capital Losses - S111(8)(b)

Net loss from non-capital sources

Increased by:

1) Stock Option Deduction S110(d)(d.1)

2) Home Relocation Loan Deduction S110((1)(j)
3) Deduction for Exempt Items S110(1)(f)
4) Capital Gains Deduction S110.6

Non Capital Loss of the year

 Non-Capital Losses may (i.e., not required to) be carried

back 3 years and forward 20 years, for losses which arise in
taxation years ending after 2005.

 Non-capital losses may be used against any source of

income.

 Can still claim net capital losses carried forward against

current years’ TCG even if net income is less than the
TCG. See in class example.

114
Net Capital Losses - S111(1)(a),(b)

 Can only be used against taxable capital gains

 From the disposal of capital assets, allowable capital loss of the
year exceeding taxable capital gains of the year
 Can be carried back 3 years and forward indefinitely
 In the year of death, by virtue of S111(2), these can be used
against any income in the year of death or in the taxation year
preceding the year of death.

115
 Chapters 4 & 11 - Taxable Income and Tax Payable for Individuals:

Computation of Tax Payable for Individuals

Once Taxable Income has been computed, tax payable is computed. The
marginal rates of tax are applied to taxable income. The tax liability is
subsequently reduced by any personal tax credits that may be available to
the taxpayer.

2016 Federal rates of tax for individuals – under Part I of the ITA

Tax Rate Tax Brackets

15% Up to $45,282
20.5% $45,283 – $90,563
26% $90,564 - $140,388
29% $140,389 - $200,000
33% $200,001 and over

2016 Provincial rates of tax for individuals

These vary from province to province. For individuals in the top rate of tax, the
combined Federal & Provincial rates of tax will vary between 47% and 59% on
salary, interest and business income depending on the province of residence at
December 31.

Provincial taxes

 Individual taxed on province of residence at December 31 on all

sources of income except business income where the income is
allocated to those provinces where there exists a permanent
establishment – see ITR 2600 – 2607.
 Tax rates vary from province to province (5% - 25.75%)
 Quebec Abatement of 16.5%
 Ontario Surtax results in effective top rate of 17.41%
 A non-resident will usually not be a resident of a province at
December 31. As a result, a surtax of 48% of the basic federal tax
is levied

116
Federal Tax Credits for Individuals

Almost all of these are non-refundable credits, i.e., they can only be
used to reduce the taxpayer’s tax liability to nil.

If a part-year resident, most of the credits are pro-rated based on days of

residency. Some exceptions: adoption and charitable donation credits as
these are computed based on amounts paid.

Non Refundable Personal Tax Credits

Personal tax credits are computed using a rate of 15%

Personal Tax Credits - S118(1)(a),( c )

Basic:

$1,721 (15% of $11,474))

Spousal:

$1,721 (15% of $11,474; $13,595 if disabled)

The base of $11,474/$13,595 is reduced by the spouses’ net

income.

 in year of marriage, income of whole year is taken into

account
 in year of breakup, income while married only is taken into
account

The credit is available to:

 Married taxpayers (same sex couples also qualify)

 common law spouses (same sex couples also qualify) -
living together for at least 12 months
 If the taxpayer has both a spouse and common law
partner, the credit can only be claimed for one of these.

117
 Eligible Dependent – S118(1)(b):

 $1,721 (15% of $11,474; $13,595 if disabled)

 The base of $11,474/13,595 is reduced by the dependents’

Net Income.

 Single, divorced, separated or widowed taxpayers can claim

the credit if the taxpayer supported a dependent (usually a
child). If the taxpayer has a common-law spouse, precluded
from claiming this credit.

 Dependent must be related to the taxpayer by blood, marriage

or adoption, generally be under 18 years of age (exception:
infirmity)

 Must be living in same establishment at some time during the

year

 Only one taxpayer can claim the equivalent to married credit

for a particular dependent. If can’t agree (e.g. separated
spouses), neither spouse will be entitled to the claim

 The credit cannot be claimed by the taxpayer for an individual

on behalf of whom the taxpayer is required to pay child
support, or if the taxpayer is claiming the spousal credit

 If this credit is claimed, the taxpayer cannot claim the infirm

dependent credit for the same dependent.

Caregiver Credit for children under age 18

 $318 ($2,121 x 15%) for each infirm child that resides with both
parents throughout the year.

 If child does not reside with both parents, the parent who is
entitled to claim the “Amount for an eligible dependent” is to
claim this credit

118
Caregiver Credit - S118(1)(c.1)

 Maximum of $700 (15% of $4,667; $6,788 if dependent

infirmed)
 Reduced by 15% of income of parent exceeding $15,940.
Eliminated when NI > $20,607 (or $22,728)
 Providing in home care to a parent/grandparent who > 64, or
an adult relative who is dependent on the taxpayer because
of an infirmity.
 If claiming this credit, cannot claim infirm dependent credit
(see below) for the same individual
 Caregiver credit would be more advantageous than the
Infirm Dependant Credit due to the higher income threshold.

Infirm Dependant Credit - S118(1)(d)

 $1,018 (15% of $6,788)

 The dependent is a child, grandchild, parent, niece, nephew,
uncle, aunt, brother sister, grandparent of the taxpayer
 The dependent must be at least 18 years of age and
mentally or physically challenged
 The credit is reduced by 15% of the dependents’ net
income exceeding $6,807. Eliminated when NI > $13,595

Family Caregiver Amount - 2016

 An additional $2,121 of base amount is made available

(added to the base amount) for a number of credits if the
dependent(s) is/are infirmed/disabled:

1. Spouse/common law amount ($11,474 + 2,121 = 13,595)

2. Eligible dependent amount ($11,474 + 2,121 = 13,595)
3. Caregiver amount ($4,667 + 2,121 = 6,788)

Age Credit - S118(2)

 $1,069 (15% of $7,125)

 Must be 65 years of age by December 31
 Age tax credit base of $7,125 is reduced by 15% of net
income exceeding $35,927
 Eliminated when NI > $83,427

119
Pension Credit - S118(3)

 Lesser of:
1. $300 (15% of $2,000)
2. 15% of pension income

Pension Income includes - S118(7)

 Receipts from an RPP

 Receipts from an RRSP
 Receipts from a RRIF
 Receipts from a DPSP

Pension Income excludes, CPP/QPP, OAS

Disability Credit - S118.3

 $1,200 (15% of $8,001)

 Mentally or physically disabled
 Medical certificate (Form T2201) required to be completed
by doctor
 Markedly restricted in carrying out daily activities for a period
of at least 12 months (see textbook for further discussion)
 If claiming this credit, cannot claim credit for medical
expenses incurred re: nursing home facilities
 Can be transferred to a person (e.g., parent of the child or
child of the parent) claiming that individual as a dependant

120
Tuition Credit - S118.5

 15% of tuition fees, includes mandatory ancillary fees

charged by post-secondary institutions, post-secondary
examination fees and examination fees required in a
professional program
 Fees incurred on a calendar year basis
 Can transfer up to $750 ($5,000 x 15%) of unused credit
(includes Tuition, Education & Textbook credits) to a
supporting parent, grandparent or spouse
 Any unused credit can be carried forward to future years &
used by the student at that time

Education Credit - S118.6 (will be eliminated in 2017)

 $60 (15% of $400) for each month (or part thereof) for full-
time attendance at post-secondary institution.
 Part time students (at least 12 hours/mo.) are entitled to a
credit of $18/mo. (15% x $120)
 Any unused credit can be transferred to a parent,
grandparent or spouse as part of the $750
 Any unused credit can be carried forward to future years &
used by the student at that time

Textbook Credit – S118.6(2.1) (will be eliminated in 2017)

 $10 (15% of $65) for each month of full-time time

attendance at a post-secondary establishment
 $3 (15% of $20) for each month, if part – time.
 Any unused credit can be transferred to a parent,
grandparent or spouse as part of the $750
 Any unused credit can be carried forward to future years &
used by the student at that time

Interest on Student Loan Credit - S118.62

 15% of interest paid on loans issued under the Canada

Student Loans Act or similar provincial statute. Can be
carried forward for 5 years.

121
Charitable Donation Credit - S118.1

 15% on the 1st $200

+ 33% on the lesser of:

1) charitable donations made - $200, and
2) the difference between Taxable Income - $200,000

+ 29% of the charitable donations made exceeding the

amount used in the 33% computation + $200

Example:

Let’s assume that Catherine has $215,000 of taxable

income in 2016 and donates $20,000 to charity.

($200 x 15%) + (($15,000 – 200) x 33%) +

[(20,000 – (14,800 + 200) x 29%] = $6,364

 Donations claimed cannot exceed 75% of net income (100%

in the year of death)
 Gifts to registered charities - CRA registration number
 Receipts must be filed
 Unused donations can be carried forward 5 years
 If gifting capital property, deemed disposition at FMV,
charitable donation = FMV
 If gifting shares of a public corporation (or ecologically
sensitive land), 0% of the capital gain is taxable

Note: If the individual is a 1st time donor (taxpayer or spouse

did not claim the charitable donation credit after 2007), then
an additional 25% credit will be made available. It may be
claimed only once in the years 2013 – 2017. Only cash
donations are eligible.

122
Medical Expense Credit - S118.2

 15% on non-reimbursed medical expenses in excess of

the lesser of:

1. $2,237
2. 3% of net income

 Eligible expenses include: doctors’ fees, prescription drugs,

dental fees, nursing fees, eyeglasses, and medical
apparatus for the disabled as well as renovations to a
disabled taxpayers’ home that would be required due to
his/her condition. See IT519R2 for a more complete listing.
 Expenses of taxpayer, spouse & dependents
 Should be claimed by lower income taxpayer to reduce
threshold amount
 Expenses for any 12 month period ending in the calendar
may be claimed

EI & QPP/CPP credit - S118.7

 15% of the lesser of:

1. Actual contributions
2. Maximum EI premiums for 2016: $955 ($772 for
Quebec taxpayers due to the Parental Insurance Plan
Premiums: $392 for 2016); and $2,544 in annual
premiums for the CPP, and $2,737 for the QPP)

 Any excess EI & CPP contributions are refunded when the

taxpayer files his federal return. In the case of QPP
premiums, these are refunded by way of the filing of the
Quebec income tax return.

 For self-employed individuals, the “employer share” of

CPP/QPP payments will be deductible as an expense in
computing business income, while the “employee share” will
be available as a personal tax credit.

123
Canada Employment Credit – S118(10)

Lesser of: 1) $174 (15% of $1,161)

2) 15% of net employment income (excluding any
employment income deductions)

Public Transit Pass Credit – S118.02

 15% of the cost of a weekly (must cover 20/28 days of the

month) or monthly (or longer duration) transit pass

Adoption Credit - S118.01

 15% of the lesser of:

1. $15,453
2. Eligible adoption expenses

Hence, the maximum credit is $2,318

Child Fitness Tax Credit – S118.03 (will be eliminated in 2017)

 $75 (15% of $500)

 Enrollment of a child <16 enrolled in an eligible program of
physical activity
 This is a refundable credit

Child Art’s Tax Credit – S118.031 (will be eliminated in 2017)

 $38 (15% of $250)

 Enrollment of a child <16 enrolled in an eligible program of
artistic, cultural, recreational or developmental activities

First Time Homebuyer’s Credit

 $750: 15% of the first $5,000 of the cost of an eligible home.

 Must not have owned another home in the year of
acquisition or in the preceding 4 years.

124
Transfer of Unused Spousal Credits – S118.8

Certain non-refundable credits which are still unused after bringing

the taxpayers’ liability to nil may be transferred to the spouse:

1. Tuition & education credit (max. that can be transferred is

$750 (5,000 x 15%)
2. Age Credit
3. Pension Credit
4. Mental & physical impairment credit

Dividend Tax Credit - S121

 For non-eligible dividends, computed as 10.52% of the taxable

dividend or can be computed as 21/29 of the gross-up amount.

 For eligible dividends (public corporations resident in Canada &

CCPC dividends paid out of fully taxed income), the credit is
15.02% of the taxable dividend or can be computed as 6/11 of
the gross-up amount

 S82(3) election allows the taxpayer to include his spouses taxable

dividends as his income, only if this results in an increase in the
spousal credit. The dividend tax credit and the additional spousal
credit may offset the additional tax resulting from the dividend
inclusion

Political Contributions Tax Credit - S127(3)

Computation of credit is available for individuals only.

1. 75% on the 1st $400

2. 50% on the next $350
3. 33.33% on the next $525

The Federal Accountability Act limits the annual contributions that an

individual can make to each of: registered parties, leadership
candidates and nomination contestant to $1,100.

125
Foreign Tax Credit - S126

 The credit is used to offset all or a portion of the Canadian tax

attributable to the foreign income
 It is generally computed as the lesser of:

1. Foreign tax paid

 If relating to non-business income, cannot exceed
15% of the foreign income. Any excess, i.e.,
amounts exceeding the 15% is deducted as a
business expense

2. Foreign income X CDN taxes otherwise payable

Total Income

Only credits with respect to business income may be carried back 3

years & forward 10 years.

Example:

Foreign Corp pays to Mr. Canada $100,000 of investment income.

Foreign Corp withholds $25,000 (25%).

Canadian resident receives $ 75,000 (net of the $25,000 of tax).

Tax Result:

Investment income inclusion: 100,000

S20(11) Deduction: 10,000
Net and taxable Income 90,000

Tax @ 29 % 26,100
FTC (limited to 15% of $100,000) (15,000)
Net tax payable 11,100

Note: the above assumes that the Canadian tax otherwise payable on
the foreign income is at least equal to $15,000. If not, the credited
would be based on the following pro-ration:

Foreign income X CDN taxes otherwise payable

Total Income

126
GST Credit - S122.5

 Refundable Credit
 $276 for Adults
 $145 for children - under age 19
 Reduced by 5% of combined spouses income exceeding $35,926
 If taxpayer does not have a spouse, there is an additional credit of
up to $145 that is available if the individuals’ net income exceeds
$8,948

Refundable Quebec Abatement

 16.5% of the Basic Federal Tax, which is computed as:

Federal tax less non-refundable credits less dividend tax credits

 The Abatement is provided due to differences in the funding of

certain social programs between the Federal and provincial
governments.

 Quebec is the only province that collects its own personal income
taxes.

127
The Alternative Minimum Tax - S127.5

The AMT may apply to taxpayers who claim more than $40,000
in “tax preference items”.

Add back to “regular taxable income:

1. Film losses created through CCA, carrying charges

2. Losses on resource properties (CEE, CDE)
3. 30% capital gains (effectively, 80% of capital gains
are included in income for AMT purposes)
4. 60% of a stock option deduction claimed (effectively,
this allows a 20% stock option deduction rather than
the regular 50% deduction)
5. Home relocation loan deduction
6. Losses from tax shelters (identification # from RCA)

Amounts deducted to arrive at Taxable Income for

AMT purposes:

1. $40,000
2. Gross up on Canadian dividends
3. 60% of the ABILs deducted during the year

Once the AMT taxable Income is computed, it is multiplied by the

AMT tax rate of 15%. The taxpayer then deducts his non-
refundable credits to arrive at his tax payable under AMT

The taxpayer pays the greater of his regular tax or the AMT tax

Any AMT tax exceeding the regular tax may be carried forward 7
years and used as a credit against the regular tax to the extent
the regular tax exceeds the AMT tax. This mitigates the effects
when large tax preferences are claimed in one year but not in
another.

128
 CHAPTERS 12 & 13: CORPORATE TAXATION

RECONCILIATION SCHEDULE - EXAMPLE

NET INCOME PER FINANCIAL STATEMENTS XXXX

Add:

• Accounting Income Tax Expense

• Accounting Depreciation
• Recapture of CCA
• Tax reserves deducted in prior year
• Accounting Losses
• Accounting Scientific Research Expenditures
• Accounting Warranty Expenses
• Foreign Tax Paid
• Taxable Capital Gains (1/2 of Capital Gains)
• Interest and Penalties paid for income tax purposes
• Non-deductible automobile costs
• ½ of meals and entertainments
• Equity loss
• Club dues and recreational facilities
• Accounting Reserves
• Charitable Contributions
• Accounting Write-Downs XXX

Deduct:

• Allowable Capital Losses (1/2 of Capital Loss)

• CCA
• CEC
• Terminal Losses
• Current Year Tax Reserves
• Accounting Gains
• Tax Scientific Research Expenditures
• Warranties Paid
• Equity income
• Foreign Non-Business Tax Deduction – S20(11)
• Allowable business investment losses (XXX)
NET INCOME FOR TAX PURPOSES XXXX

Deduct (applicable to corporations):

• Dividends received
• Charitable Donations
• Losses carried forward (XXXX)

TAXABLE INCOME FOR CORPORATIONS XXXX

129
Computation of Net Income

Reconcile net income as computed under GAAP to net income for tax purposes
As per above schedule

Computation of Taxable Income

Net income under Division B less Division C deductions:

Deduction for dividends under S112 & S113

 S112 provides a deduction for dividends received from taxable Canadian

Corporations
 S113 provides a deduction for dividends received from foreign affiliates –
(if the recipient corporation holds at least 10% of any class of shares,
directly and/or indirectly of the paying corporation, then it is a foreign
affiliate)
 Dividends are the distribution of after tax earnings, providing a deduction
to the recipient corporation avoids double taxation under Part I of the Act
 Dividends received by private corporations may be subject to Part IV Tax i

Charitable Donations – S110

 Can be deducted up to 75% of income

 Gifts to her Majesty not subject to the 75% rule
 Unused donations can be carried forward 5 years.

Losses Carried Forward (Back) - S111

Non & Net capital losses from other years are deducted from Net Income to
arrive at Taxable Income

130
Computation of Non Capital Loss - S111

Net income as computed under Division B of the Act

-
S112, S113 Dividends
-
Charitable Donations (up to 75% of NI)

 If net income includes any taxable capital gains, and the taxpayer
has net capital losses carried forward, then these losses should
be used against the TCG, thereby preserving the non capital
losses which can be used against any source of income

 Ensure losses do not expire by not taking discretionary deductions, or

by amending prior years’ discretionary deductions. RC will accept
such on an administrative basis as long as there is no change in taxes
payable.

131
Public Corporation - S89(1)

Defined as a corporation resident in Canada whose shares are listed on a

prescribed Canadian Stock Exchange, e.g., Toronto Stock Exchange, TSX
Venture Exchange, Nasdaq Canada.

Private Corporation - S89(1)

Defined as a corporation resident in Canada which is not a public corporation

nor controlled by one or more public corporations

All private corporations are subject to Part IV Tax

Canadian Controlled Private Corporation - S125(7)

Defined as a private corporation which is not controlled by a non- resident, public

corporation or combination thereof

1. It is subject to Part IV Tax

2. Part I Refundable Tax applies
3. Entitled to the Small Business Deduction

132
Rates of Tax

General rate: 38%

 Made up of a federal rate of 28%

 An implied provincial rate of 10%
 General Rate Reduction of 13% (discussed later)

Federal Abatement:

It is computed as 10% of the portion of taxable income earned in a

province or territory of Canada. Note that since the allocation is based
on sales & salaries, as long as all sales are earned in Canada, then even
foreign investment income that is included in taxable income will benefit
from the abatement.

 Provinces compute their tax as the taxable income allocated to the

province X the actual provincial rate(s)
 Income is allocated to a province if the corporation has a permanent
establishment in the province. Reg. 400 (2), states that there is a PE
where there is a fixed place of business such as:

a. an office
b. branch
c. warehouse
d. factory
e. business agent if the agent can sell on behalf of the corporation or
contractually bind the corporation

 Taxable income is usually allocated on a weighted average of

revenues & salaries earned in the province/paid to employees in the
province
 There are other basis for certain types of industries
 Provincial tax rates vary between 1% & 16%, depending on the type of
income

133
Small Business Deduction - S125

 Only CCPC’s throughout the year are eligible

 Available on Active Business Income, defined as income other than

income from a Specified Investment Business or a Personal Service
Corporation:

1. Specified Investment Business (SIB): one which principally earns

interest, rental, dividend income and realizes capital gains
[definition of Aggregate Investment Income is found in S129(4)]

Exception for a Specified Investment Business

a) If the above businesses employ more than 5 full time (5 full time +
1 part time) employees, or
b) an associated corporation which carries on an active business
provides managerial, administrative financial, maintenance or
other similar services to the corporation in the year and the
corporation could reasonably be expected to require more than 5
full-time employees if those services had not been provided the
income would hence be considered to be income from an active
business.

2. Personal Service Corporation (PSC): where the income is earned

by a specified shareholder who is also considered an employee of
the corporation (an “incorporated employee”). The provision also
applies to any person that is related to the incorporated employee.

A PSC is not entitled to the SBD nor the General Rate Reduction of
13% (discussed later). As such it is taxed at the full Federal rate of
28%.

A further restriction is that no deduction is permitted to the

corporation for any expenses other than:

e) salaries, wages, other remuneration, and benefits paid in

the year to the individual who performed the services on
behalf of the corporation; and

f) other expenses that would normally be deductible against

employment income, for example, travel expenses
incurred to earn employment income.

134
The SBD is computed as 17.5% (was 17% in 2015) on the lesser of:

1. Taxable Income
2. Active Business Income earned in Canada
3. Annual Business Limit - maximum of $500,000 in 2014
 Associated corporations must share the ABL
 Corporations are associated if one controls the other
or is controlled by the same person or group of
persons - S256

 The reduction in the ABL is computed as follows:

ABL X (Previous years’ taxable capital* - $10M) x .225%

11,250

* taxable capital of all associated corps

 Taxable Capital generally consists of debt + equity of

the corporation less debt and equity investments in
other corporations.

 For purposes of the ABL reduction, the 1st

$10,000,000 of taxable capital is exempt. Therefore,
the ABL will be ground down to nil when the taxable
capital is $15,000,000.

 The ABL may be allocated among corporations in the

manner management wishes to do so.
13% Rate Reduction

Computed as 13% on a REDUCED taxable income number:

Taxable Income LESS:

1. 100/13 of any M & P deduction taken

(this results in the amount that was used to compute
the M&P Deduction)
2. 100/17 of any Small Business Deduction claimed
(this results in the amount that was used to compute
the SBD)
3. The investment income subject to tax under Part I of
the Act by a CCPC. Note: Investment income earned
by a non-CCPC is eligible for the 13% Rate
Reduction.
4. Income from a Personal Service Corporation

135
Manufacturing & Processing Profits Deduction - S125.1

 A 13% tax reduction is available for those who carry on this activity

 The term “manufacturing & processing” is not defined in the Act.

S125.1(1) states what is not included as Manufacturing and Processing.
IT411R looks at the meaning of construction. Manufacturing involves the
application of physical labor or mechanical power to produce goods.
Processing includes the operations necessary to make a product more
useable. CRA does not interpret processing broadly. Farming, fishing &
construction are not eligible activities

 Regulation 5202 definitions provide guidance as to what activities qualify

for the deduction. Listed as qualifying:

- engineering design of products and production facilities, receiving

and storing of raw materials;, producing, assembling, and
handling of goods in process.
 The deduction (reduction in Part I tax) is generally computed as 13% of
the lesser of:

1. M & P Profits less amount eligible for the SBD

2. Taxable Income less amount eligible for the SBD (if a CCPC also
deduct aggregate investment income)

 M & P Profits is computes as follows:

MC + ML X Adjusted business income

C + L

 Adjusted business income is active business income less any

incidental active business income (investment income considered
to be ABI)

 “C” stands for the cost of capital computed as 10% of the cost of
depreciable assets + the lease of depreciable assets

 “MC” is 100/85th of the portion of the cost of capital relating to

manufacturing activities, not to exceed “C”

 “L” stands for the total cost of labor

 “ML” is 100/75th of the direct cost of labor associated with

manufacturing activities, not to exceed “L”

136
The 10 2/3% Tax on investment income and integration

The tax is intended to ensure that the Integration Concept is met with respect
to the earning of investment income.

The tax is computed as 10 2/3% (was 6 2/3% prior to 2016) on the lesser of:

1. Investment income taxed under Part I

2. Taxable income – (less) amount eligible for the SBD

137
Integration Concept & Investment Income

We have already looked at integration concept re: business income

Investment income is not eligible for the SBD, and is therefore taxed at a higher
rate. Integration with respect to investment income is addressed by Part I
Refundable Taxes.

Part I Refundable Taxes

To ensure that any investment income flowing through a corporation &

subsequently passed on to the shareholder by way of dividend has the same tax
cost as if received personally.

Investment income generally consists of:

1. Net rental Income, Interest Income

2. Current years’ taxable capital gain less any net capital losses
claimed in the year under Division C
3. Dividend income taxed under Part I of the Act

The refundable portion is generally computed as the least of:

1. 30 2/3% of Investment Income (was 26 2/3% prior to 2016)

2. 30 2/3% of (Taxable income less the amount that was eligible for
the SBD). Losses carried forward deducted to arrive at TI may
effectively reduce the amount of investment income that gets taxed

3. Part I Tax. Credits may reduce the tax on the investment income,
which may have resulted in minimal taxes. The taxpayer should
not be entitled to a full Part I Refundable Tax amount (30 2/3% of
investment income) if minimal taxes have been paid

The refundable portion is then added to a memo account called the

Refundable Dividend Tax on Hand Account (RDTOH).

For the exact computation of Part I Refundable Tax – see the

textbook.

138
Part IV Tax - S186

Dividends received by Private corporations not taxed under Part I of the Act
may be subject to tax under Part IV of the Act. The Part IV Tax is an actual
tax that is payable. It is also added to the corporation’s RDTOH account.

 Dividends from non-connected corporations are fully subject to

Part IV Tax at the rate of 38.33% (was 33.33% prior to 2016)

 Dividends received from connected corporations are not subject to

Part IV Tax unless the corporation paying the dividend is entitled
to a Dividend Refund from its RDTOH account.

 The recipient corporation will be required to pay Part IV Tax “equal

to its share of the paying corporation’s dividend refund”, e.g.,

1. Co. A owns 60% of Co. B

2. B pays a dividend of $100,000 and gets a dividend
refund of $10,000
3. A receives a $60,000 dividend from B
4. A will have to pay Part IV Tax of $6,000 (60% of
$10,000)
5. Of the $60,000 dividend received by A, $15,652
(6,000/.3833) of it is a taxable dividend for
purposes of Part IV Tax.

 Dividends subject to Part IV may be reduced by non-capital losses. T

Note: This election would only be used if the non-capital losses are
expected to expire. Doing otherwise would be a waste of the use of
non-capital losses, as the Part IV Tax is a Refundable Tax.

 Corporations are connected [S186(4)] if one corporation holds more

than 10% of the voting shares and more than 10% of the FMV of all of
the issued shares or when one corporation controls (if more than 50%
of the voting shares is held by the taxpayer and/or people related to it)
the other.

139
Refundable Dividend Tax on Hand - S129

It is a memo account that keeps track of Part I Refundable Tax and Part IV Tax.

It is decreased by the previous year’s dividend refund and increased by any

Part I Refundable Tax and Part IV Tax.

Dividend Refund

Computed as the lesser of:

1. 38.33% of taxable dividends paid

2. Balance in the RDTOH account at the end of the year

140
Sample Corporate Problem

The Cardinal Co. is a Canadian controlled private corporation. The company

reports the following information for its December 31, 2016 fiscal year-end:

Active Business Income (all Canadian sourced) $220,000

Capital Gains 120,000
Interest Income 5,000
Dividend from Blue Jay Co., a connected corporation 100,000
Dividends from non-connected corporations 54,000

Additional Information:

1. Cardinal Co. paid the following dividends:

Year 2015: $ 180,000

Year 2016: $ 216,000

2. Cardinal Co. has the following available losses carried forward as reported
in its 2015 tax return:

Net Capital losses: 40,000

3. Cardinal Co. is associated with other corporations. Its’ share of the Annual
Business Limit is $180,000.

4. 100% of Cardinal Co.’s income is earned in Canada.

5. Blue Jay Co. paid a $400,000 dividend in 2016 and received a dividend
refund of $50,000

6. Cardinal Co.’s Taxable Capital (including that of its associated corporations)

for purposes of the ABL is $11,600,000.

7. Cardinal Co. had a balance of $345,000 in its RDTOH account at 31/12/15.

Required:

Compute Cardinal Co.’s 2016:

a) Minimum Part I Tax

b) Part I Refundable Tax
c) Part IV Tax
d) RDTOH account balance at December 31, 2016
e) 2016 Dividend Refund

141
Solution to Sample Corporate Problem

Active Business Income 220,000

Taxable Capital Gains 60,000
Interest income 5,000
Dividend Income 154,000
Net Income 439,000

Taxable Dividends – S112 (154,000)

Net Capital Losses (40,000)
Taxable Income $245,000

a) Part I Tax

Tax @ 38% 93,100

Federal Abatement 245,000 * 10% (24,500)
Small Business Deduction:
17.5% of the lesser of:
1. 245,000
2. 220,000
3. 180,000 – [180,000 x (11.6M – 10M) x .225%/11,250]
= 122,400 (21,420)

General Rate Reduction:

13 % of (245,000 – 122,400 – (65,000 - 40,000)) (12,688)

102/3% Investment Tax:

102/3% of the lesser of:
1. 60,000 + 5,000 – 40,000 = 25,000 2,667
2. 245,000 – 122,400 = 122,600 _______
Part I Tax $ 37,159

b) Part I Refundable Tax

Least of:
A. 302/3% of the Lesser of:
1. 60,000 + 5,000 – 40,000 = 25,000 7,667
2. 245,000 – 122,400 = 122,600
B. Part I Tax 36,771

Refundable Portion is the lesser of the above $ 7,667

142
Solution to Sample Corporate Problem – Cont’d

c) Part IV Tax

Taxable Dividends
- Non - Connected 54,000
- Connected [(100,000/400,000) * 50,000]/.383333 32,609
86,609
x 38 1/3%
$ 33,200

d) RDTOH account balance at December 31, 2016

Opening Balance $ 345,000

2015 Dividend Refund 180,000 * 33 1/3% (60,000)
285,000
Part I Refundable Tax 7,667
Part IV Tax 33,200
Balance 31/12/16 $ 325,867

e) 2016 Dividend Refund

Lesser of:
1. $325,867
2. 216,000 * 38 1/3% $ 82,800

143
Integration Concept – 2016

Corporate Earnings Distributed

Business Interest Dividend Capital Gain

Gross Income $100,000 $100,000 $100,000 $100,000

Taxable Income 100,000 100,000 N/A 50,000

Fed. Tax @ 38% 38,000 38,000 N/A 19,000

Additional tax on
property income N/A 10,667 (10 2/3%) 38,333 (Part IV) 5,333 (10 2/3%)
Prov. Abatement (10%) (10,000) (10,000) N/A (5,000)
28,000 38,667 38,333 19,333

SBD @ 17.5% 17,500 N/A N/A N/A

Federal Tax (11%) 10,500 38,667 38,333 19,333
Provincial Tax (7%/12%) 7,000 12,000 0 6,000
Total Income Tax 17,500 50,667 38,333 25,333

Cash avail. For dividend 82,500 49,333 61,667 74,667

Capital Dividend N/A N/A N/A (50,000)
RDTOH dividend refund N/A 30,667 38,333 15,333
82,500 80,000 100,000 40,000

Taxable Dividend (1.17) 96,525 93,600 117,000 46,800

Federal Tax @ 33% 31,853 30,888 38,610 15,444

Federal DTC (10.52%) (10,154) ( 9,847) (12,308) ( 4,923)
Federal Tax 21,699 21,041 26,302 10,521
Prov. Tax @ 48% x FT 10,416 10,100 12,625 5,050
32,115 31,141 38,937 15,571

Net After Tax 50,385 48,859 61,063 24,429

Add Capital Dividend N/A N/A N/A 50,000
Net Cash 50,385 48,859 61,063 74,429

Earned Directly by Individual (assumes already in top bracket)

Gross Income $100,000 $100,000 $100,000 $100,000

Taxable Income 100,000 100,000 117,000 50,000

Federal Tax @ 33% 33,000 33,000 38,610 16,500

DTC @ 10.52% N/A N/A (12,308) N/A
Provincial Tax at 50% of
the net Federal Tax 16,500 16,500 13,151 8,250
Total Income Tax 49,500 49,500 39.453 24,750

Net Cash 50,500 50,160 60,546 75,250

144
 CHAPTER 2: Administration & Enforcement

Filing of tax returns - S150

 An individual is generally required to file his/her income tax return

by April 30th of the following year if:

1. There’s a liability at the date of filing

2. The taxpayer disposed of capital property
3. The taxpayer reports a taxable capital gain during the year
4. The taxpayer has an outstanding balance under the
HBP/LLP
5. Is requested to file a return by CRA

 The filing deadline is extended to June 15th if the individual or

his/her cohabitating spouse carried on a business - but must
pay all amounts owing by April 30th in order to avoid interest
penalties.

 The filing due dates for deceased taxpayers and the taxation of
deceased taxpayers is covered in ACCT 486.

 If in a refund position, or entitled to GST credit, Guaranteed Income

Supplement, must file in order to receive these.

 Paper file, EFILE (for tax professionals), NETFILE

 Trust must file within 90 days from its year end

 Corporation must file within 6 months from its year end

145
Employer Tax Withholdings/Deductions at Source - S153

 Every person paying salaries and other amounts, e.g., a retiring

allowance, payments from an RRSP, must withhold & remit within a
prescribed time frame the amounts (taxes, EI/CPP Premiums)
deducted at source to the Receiver General of Canada. Large
employers (avg. monthly withholdings of $50,000 or more) must
remit 4x/month: 7th, 14th, 21st and last day of the month.

 Employers who remit late are subject to significant penalties:

a) up to 3 days late: 3% of remittances
b) 5% if 4 or 5 days late
c) 7% if 6 or 7 days late
d) 10% if 8 or more days late

 There are also penalties for failing to withhold, generally 10% on

the amount that should have been withheld. If knowingly did not
withhold, the penalty is increased to 20%.

 Form TD1 completed by individuals which reflect personal tax

credit entitlements is used as a basis in determining employer
withholdings. The employee can also request for increased
withholding of tax.

 Form T1213 is completed and sent to CRA to request reduction of

taxes withheld by employer. Employee must be able to document
losses or deductions that would be available.

 The directors of a corporation or other entity that fails to withhold

taxes can also be held personally liable.

146
Installments for Individuals - S156

 An individual will be required to make quarterly payments if the

difference between the tax payable and amounts withheld at
source is greater than $3,000 [$1,800 for Quebec residents] in
both the current year and either of the two preceding years.

 The installments are made on the 15th of March, June,

September, December

 CRA notifies the taxpayer of the amounts that are to be paid by

way of installments. Note that if the taxpayer does not expect a tax
liability (not taking into account quarterly installments), such need
not be made. However, if incorrect, then interest on late/deficient
installments will be charged.

 Late or deficient installments will attract interest

Installments for corporations - S157

 Installments are to be made on a monthly basis, at the end of each

month (see textbook for details).

 No installments are required if the taxes payable for the current or

preceding year does not exceed $3,000

 A corporation has up to 2 months (3 for CCPC’s) after its year end

to satisfy all taxes owing in order not to attract interest

 Late or deficient installments will attract interest

147
Foreign Reporting Requirements

 Taxpayers and partnerships are required to File form T1135 “Foreign

Income Verification Statement” if certain property (foreign bank
accounts, shares of non-resident corps., land & buildings, interests in a
mutual fund, debts owed to residents by non-residents, interest in a
partnership, patents, copyrights, trademarks) held outside Canada
cost more than $100,000.

 Allows CRA to be more fully satisfied that residents of Canada fully

report their worldwide income.

 Failure to file the form can lead to penalties of $500/mo. for up to 24

months. It is doubled if a demand to file is served.

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Refund of Interest by CRA - S164(3)

Interest is paid at the prescribed rate (middle rate) from the latest of:

1. For all taxpayers, the date the overpayment arose (refund due to a
loss carry back)

2. For individuals, 30 days following the day the return was or would
have been due

3. For individuals, the day the return is filed

4. For corporations, 120 days after the end of the filing due date

Interest and Penalties - S161, S162,S163, S238, S239

Interest Charges - S161

 Interest will be charged at the high prescribed rate on deficient or

late installments or on amounts owing by the taxpayer to the
Receiver General. For individuals, any balanced owing at April 30th
for the preceding taxation year, but paid after that date will be
charged interest.

 The interest is not deductible for tax purposes

 Interest compounded on a daily basis.

Late Filing Penalty – S162

 5% penalty on the amount owing + 1% per month for up to 12

months if the liability remains unpaid - S162(1)

 In the case of a corporate taxpayer who has no liability, under

S235, the penalty is computed as .0005%/mo. (max. of 40 months)
of its Taxable Capital employed in Canada. Taxable Capital
generally consists of a company’s long term liabilities +
shareholders’ equity – an investment allowance.

 If the taxpayer has already been assessed a penalty under S162(1)

in any of the 3 preceding years, S162(2) imposes a penalty of 10%
+ 2% (for up to 20 months) of the unpaid tax

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Failure to report income - S163(1)

If a taxpayer fails to report at least $500 of income in the year and in any
of the 3 preceding years, the penalty will be computed as the lesser of:

1. 10% of the amount of the unreported income

2. 50% of the difference in the tax liability

Other penalties which a taxpayer may be subject to:

1. Gross negligence - S163(2)

 Taxpayers who knowingly or under circumstances of
gross negligence has made or participated in the making
of false statements or omissions in a return…could be
subject to a penalty of up to 50% of the difference in tax
liability

2. Criminal Offenses - S238

 Fine of $1,000 - $25,000 and/or up to a 12 month prison
term.
 Onus of proof is on CRA

3. Criminal Offenses - S239

 A fine of anywhere between 50% - 200% of the tax
sought to be evaded and/or up to a 2 year prison term.

Fines and Penalties levied under the ITA or any other law are not
deductible, even though the fine/penalty was incurred to earn business
income.

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Civil Penalties - S163.2: Misrepresentation of a Tax Matter by a Third Party

 The section allows CRA to assess penalties against tax advisors who
make or participate in making false statements or omissions that could be
used for tax purposes. The new rules are very broad.

 The new rules will not only effect individuals and firms traditionally thought
of as tax advisors, such as lawyers and accountants, but will also affect
others, such as employees who assist in the preparation of tax filings for
their employers, and company executives who are responsible for the
action of individuals who prepare tax filings. For the purpose of these
rules, all of these individuals are considered to be tax advisors.

 The penalties will apply to a tax preparers and advisors/promoters if he or

she knowingly, or in circumstances amounting to “culpable conduct”,
makes or participates in making a false statement or omission in any tax
filing.

 “Culpable conduct” means conduct by a tax advisor that is tantamount to

intentional conduct, shows indifference as to whether the tax law is
complied with, or shows a willful, reckless or a wanton disregard for the
law.

 The penalty [S163.2(5)] on the Tax Preparer for participating in a

misrepresentation (e.g., creation of fictitious expenses) in the preparation
of a tax return is the Greater of:

1. $1,000
2. The gross compensation to which the tax planner (e.g., a tax shelter
promoter) preparer is entitled to receive.

 The penalty [S163.2(3)] on the Tax Planner for participating in a

misrepresentation (e.g., creation of fictitious expenses) in the preparation
of a tax return is the Greater of:

1. $1,000
2. The lesser of:
a) the penalty assessed on the client for making a false statement
or omission under S163(2)
b) $100,000 plus the gross compensation to which the
tax return preparer is entitled to receive.

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Books and Records - S230

“Adequate” books & records must be maintained at the place of business or

residence.

The term “adequate” is not defined. IC 78-10R2 discusses what is should be

available

Reg. 5800 provides a set of rules for certain books/records that should be
maintained 6 years.

 Request permission from CRA to destroy these

 Keep in mind other legal requirements, e.g., provincial sales tax

legislation, Excise Tax Act.

Assessments & Reassessments - S152

 CRA must assess the Taxpayers’ return with “due dispatch”, which
usually means 6 months - Note: there is no specific timeframe in the Act

 CRA may reassess in the future:

 Within 3 years for individuals, trusts & CCPC’s (4 years for public
corps.) from the date of the Notice of Assessment

 Within 6 years (7 years for a public corporation) of the taxation year

to which a loss is carried back to

 Any time if the taxpayer waives the time limit

 The Waiver can specify items

 The Waiver can be revoked by taxpayer with 6 months’ notice

 At any time if there have been misrepresentations due to neglect,

fraud by the taxpayer. Onus of proof is on CRA in such cases.

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Adjustment to Income Tax Returns

 Must be made within the normal reassessment period of the taxpayer.

Changes can be requested by filing Form T1-ADJ, sending a letter to
CRA, or by using the My Account online service.

 If carrying back a loss - Form T1-ADJ

 CRA will accept the requested change(s) if (see IC 75-7R3):

1. It is satisfied that the previous assessment was wrong

2. Made within the normal reassessment period
3. The change is not based solely on a permissive deduction, e.g.,
CCA. However, on an administrative basis, it will accept the
change as long as there is no change in tax payable.
4. Not due to a successful appeal to the courts by another taxpayer
5. The taxpayer’s return has been filed within 3 years of the end of the
year to which it relates.

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Collection of Taxes: S222 - 226, S231– 2

 Usually done through deductions at source & installments

 If taxpayer does not meet his obligations, CRA can:

1. Obtain a judicial authority to seize & sell the taxpayers

assets
2. Require debtor of taxpayer to make payments directly to
CRA
3. Demand immediate payment if leaving Canada

 Under S158, taxpayers are required to pay amounts owing forthwith

from the date of Notice of Assessment

 CRA would not be able to legally collect:

1. For 90 days after the date of the Notice of Assessment or

Reassessment, if no Notice of Objection is filed
2. For 90 days after an assessment is upheld or varied following a
Notice of Objection if no appeal is made to the Courts
3. If appealed to the Courts, until the decision is rendered


st
If the taxpayer loses the appeal, interest is due beginning the 31 day after
the Notice of Assessment/Reassessment. Hence, may wish to pay the
assessment up front as interest is not deductible - taking into account:
chances of winning & cash flow. For large corporations, CRA is allowed to
collect ½ of any assessed amount disputed by the corporation

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Objections & Appeals: S164 – 180

If the taxpayer disagrees with the Notice of Assessment or Notice of

Reassessment, the taxpayer has the following avenues available:

 Contact CRA, may simply be a mistake or issued can easily be resolved, if

unresolved:

1. File a formal Notice of Objection (states the issues, the relief sought
& the facts and reasons for the objection)
2. Using MyAccount & selecting the “Register my Formal Dispute”
option
3. Write a letter to the Chief of Appeals at the relevant Appeals Intake
Centre

File a Notice of Objection from the later of:

a) 90 days [can be extended in exceptional circumstances-

subsection 166.1(7)] from the date of the Notice of Assessment
(should still do so if waiting for clarification from CRA)

b) If an individual or a testamentary trust: 1 year from the date the

return was due to be filed

Note: A taxpayer can, within 1 year for the above deadline,

request an extension of the filing deadline if the
taxpayer could not act or instruct another to act on
the taxpayer’s behalf, or had bone fide intentions to
object but due to circumstances could not and it
would be equitable to grant the application and the
application was made as soon as possible.

 The Minister is required to reply to the taxpayer:

1. Vacating the N. of A.,

2. Confirming it,
3. Varying it, or
4. Reassessing

 If CRA’s response to the N. of O. is not satisfactory

the taxpayer can appeal to the Tax Court within 90
days

 The Tax Courts are divided into 2 “Procedures”,

Informal & General Procedures.

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Informal Procedures:

 The taxpayer may choose to go to the Informal procedures if

the tax at issue is no more than $25,000 or the income item
at issue is no more than $50,000. If the amounts exceed
the above limits, can still choose the informal procedure, but
$’s are capped to the aforementioned limits,

 CRA may apply to have the issue heard through the General
Procedures if the outcome could affect another Appeal or
assessment of the taxpayer, or the issue is common to a
group or class of persons or deem to be a “test case”. The
Minister would be required to pay for the taxpayer’s
reasonable legal costs.

 Flexible court rules apply

 An individual can represent himself or by a 3rd party

 A corp. taxpayer must be represented by legal counsel

 CRA must submit a reply to the Court within 45 days after

receiving the Notice of Appeal. If Crown fails to do so,
taxpayer wins the case

 The case is heard within 90 days from the above reply

 The decision is rendered within 60 days (unless there are

exceptional circumstances) after the hearing ends

 Decisions rendered are not to be used as precedent in other

court cases since the research and legal submissions are
not as complete as they should be due to the $ involved

 Decisions can only be appealed if the Tax Court failed to

observe a principle of natural justice.

 Taxpayer cannot be asked to pay court costs.

 Usually completed within 7 months

 If taxpayer is at least 50% successful, the judge can order

the Minister to pay all or part of the taxpayer’s costs.

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 General Procedures

 Strict rules of law apply

 Must be represented by a legal counsel

 Taxpayer may be asked to pay court costs.

 If taxpayer is at least 50% successful, the judge can order the

Minister to pay all or part of the taxpayer’s costs.

 No set time frame for when the case has to be heard or number
of days for decision to be rendered after the case is heard -
however, a motion for judgment may be applied by the taxpayer,
75 days after the case has been heard

 If a case is not heard or terminated after 1 year from the time the
case was appealed, the case may be dismissed for delay

 Taxpayer/CRA may appeal the Tax Court decision to the

Federal Court of Appeal within 30 after being rendered

 Decisions from the Federal Court of Appeal may only be

appealed to the Supreme Court of Canada only if the Federal
Court of Appeal decides that the appeal should be referred to the
Supreme Court or the Supreme Court authorizes the appeal.

 If taxpayer is at least 50% successful, the judge can order the

Minister to pay all or part of the taxpayer’s costs. If the taxpayer is
unsuccessful, the Court may still require that costs be paid by the
Minister.

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General Anti Avoidance Rules (GAAR) - S245

GAAR stipulates that when a person is involved in an “avoidance transaction” tax

will be adjusted to deny the benefit that would have resulted from the transaction
or series of transactions

 Not intended to interfere with legitimate tax planning, carried out within the
spirit of the Act.

 GAAR tries to distinguish between legitimate tax planning & abusive tax
avoidance

 Transactions that comply with the object & spirit of the Act “read as a
whole” will not be effected, even if carried out primarily for tax purposes

 If the transaction is considered an avoidance transaction:

1. Deduction may be disallowed

2. Deduction or income may be allocated to a 3 rd party
3. A payment may be re-characterized, e.g. from capital to income
4. The tax effects of the transaction will be ignored

 The Supreme Court has set out 3 requirements must be established for
the application of GAAR:

1. There must be a tax benefit resulting from the transaction or

part of a series of transactions.
2. The transaction must be an avoidance transaction, it the sense
that it cannot be said to have been reasonable undertaken or
arranged primarily for a bone fide purpose other than to obtain a
tax benefit.
3. There must be abusive tax avoidance in the sense that it cannot
be reasonably concluded that allowing a tax benefit would be
consistent with the object, spirit or purpose of the income tax
act provision.

The burden is on the taxpayer to refute points 1 & 2 above and on

CRA to establish 3.

 CRA has stated that a transaction will not be an avoidance transaction if

the taxpayer establishes that it is undertaken primarily for bona fide
business, investment or family purposes.

 Guidance is available from CRA’s IC88-2

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Fairness Package

Allows the taxpayer to amend prior years’ returns (no more than 10 years)
beyond the statutory period for:

1. Claiming deductions or credits that were “missed”,

2. Requesting for accepting late/amended or revoked Elections,
3. Requesting reductions or cancellation of interest and/or penalties
that have been levied under the Act,

Examples

a) Extraordinary circumstances such as a serious illness,

b) Actions by CRA such as processing delays and errors in materials
made available by CRA
c) Financial hardship, such as the need to extend payment arrangements
or the inability of an individual to provide basic necessities for his
family.

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 PRINCIPLES OF TAX PLANNING

Tax Planning

Is the legitimate arranging of one’s financial affairs in a manner which minimizes

and/or defers taxes. Such arrangements do not break the law and are
consistent with the overall spirit of the law. Examples: RRSP contributions,
Pension Income Splitting, use of the Capital Gains Deduction

Tax Avoidance/Reduction

Tax avoidance is the minimization of taxes within the technical legal rules. Tax
avoidance may involve transactions, which while legal in them, are planned and
carried out by the use of a scheme, arrangement or device, often of a complex
nature, mainly to avoid, reduce or defer tax payable. The means used to reduce
the taxes are not carried out within the “spirit” of the law. In some cases the
transactions do not reflect the real facts of the situation and may be regarded as
an abuse of the system.

As Vern Krishna (tax counsel at Borden Ladner Gervais) has stated, “the
difference between tax evasion and avoidance can be the thickness of a prison
wall”.

Tax Evasion

It is the commission or omission of an act with intent to deceive. It is the

reduction of taxes through illegal means. It includes making false
representations, concealment and dishonest reporting with criminal intent. It
includes knowingly failing to report income or claiming false deductions. The
above would lead to the laying of charges under S239(1) of the ITA.

Income Splitting

Try to legally “split” income between spouses to take advantage of the marginal
rates of tax, e.g., spousal RRSP, splitting of pension income.

160