Income Taxation – Fall 2011 Professor: Claudette Allard Summary: Michael Shortt

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(Income) Taxation – Fall 2011

Professor: Claudette Allard

Summary: Michael Shortt
Where you’ll learn that the textbook authors think the details of tax law don’t matter;

that they’re wrong; that £10 tax cases go to the House of Lords;

and that even in tax law, home is where the heart is.
Note: numbers in [brackets] refer to textbook pages. Also, I haven’t included any of the examples we worked out

in class, but they’re really important to understand what’s going on, especially in the later parts of the class

(capital gains, ECE, etc). Do them!
Table of Contents

Chapter 1: Introduction 3

Section 1.1: Sources of Tax Law 3

Section 1.2: Structure of Tax Law 3

Section 1.3: Introduction to Canadian Income Tax 4

Section 1.4: The (Federal) Income Tax Act 4

Section 1.5: MNR’s Assumptions and the Evidentiary Burden 5

Section 1.6: Constitutional Issues in Tax Law 5

Chapter 2: Statutory Interpretation 6

Section 2.1: Summary of Text’s Materials on Tax Interpretation 7

2.1.1 Historical Position 7

2.1.2 The Modern Approach 8

2.1.3 Other Rules and Definitions 8

Chapter 3: Taxation Unit 9

Section 3.1: Subjects of Taxation 9

Section 3.2: Residency 10

3.2.1 Statutory Provisions 10

3.2.2 Resident or Ordinarily Resident - Persons 10

3.2.3 Corporations 13

3.2.4 Trusts 13

Chapter 4: The Source Concept of Income 13

Section 4.1: Introduction 13

4.1.1 Statutory Provisions 14

4.1.2 General Cases and Materials on “Sources” 14

4.1.3 Nexus Between a Taxpayer and a Source of Income 15

4.1.4 The Innominate Source Concept 16

Chapter 5: Income from Office or Employment 16

Section 5.1: Introduction 16

Section 5.2: Employee or Independent Contractor? 16

Section 5.3: Inclusions 19

5.3.1 Benefits 20

5.3.2 Valuation 22

5.3.3 Allowances 23

Section 5.4: Deductions 24

5.4.1 Travel Expenses 24

5.4.2 Legal Expenses 25

5.4.3 Professional and Union Dues 25

Chapter 6: Income from Business or Property 26

Section 6.1: Differences Between Business and Property Income 26

Section 6.2: Defining Business Income 26

Section 6.3: Inclusions in Income from Business 28

Section 6.4: Property Income 29

6.4.1 Interest Income 29

6.4.2 Rent or Royalty Income 30

6.4.3 Dividends 30

Section 6.5: Deduction from Business/Property Income 30

6.5.1 Introduction 30

6.5.2 Legislative Provisions 30

6.5.3 Business Purpose Test 31

6.5.4 Business Expenses vs Personal Expenses 32

6.5.5 Some Specific Expense Types 33

6.5.6 Public Policy 34

6.5.7 Interest Expenses 35

6.5.8 Reasonableness of Deductions 37

Chapter 7: Computation of Profit/Timing Principles 37

Section 7.1: Introduction to Timing Issues 37

7.1.1 Timing: Recognition of Revenue 39

7.1.2 Timing: Recognition of Expenses 40

7.1.3 Special Cases for Recognition of Income/Expenses 41

Section 7.2: Inventory 42

Section 7.3: Current Expense vs Capital Expenditures 43

Section 7.4: Capital Cost Allowance (Depreciation) 46

7.4.1 Calculation of CCA 47

7.4.2 Terminal Losses and Recapture 48

7.4.3 Other Legal Issues 49

Section 7.5: Eligible Capital Expenditures 49

7.5.1 Definition 49

7.5.2 Calculation and Regime 50

7.5.3 Classifying Eligible Capital Expenditures 50

Chapter 8: Capital Gains and Losses 51

Section 8.1: Overview and Solutions Map 51

Section 8.2: Capital Gain or Adventure in the Nature of Trade? 51

8.2.1 Calculating Capital Gains 53

8.2.2 Adjusted Cost Base 53

8.2.3 Disposition and Proceeds of Disposition 54

8.2.4 Capital Losses 56

8.2.5 Non-recognized Capital Losses 56

8.2.6 Intra-Family Transfers 57

8.2.7 The Principal Residence 57

Chapter 9: Deductions 58

Chapter 10: List of Key ITA Provisions 59

Chapter 1: Introduction

Tax is intellectually exciting because it constitutes the rules of a fast game played by dedicated people for high stakes. [3]

Section 1.1: Sources of Tax Law

The Income Tax Acts: Federal and Québec Acts are quite similar. We focus on Federal for obvious reasons. These acts are long, strangely drafted, and exceedingly complex. They are detailed, but the details change every six to twelve months, so that memorizing the details really isn’t worth it, even for practitioners. The Department of Finance is empowered to amend the ITA by regulation.

Case Law: Rendered by a small number of specialized courts and tribunals, such that jurisprudence has remained remarkably coherent over time.

Canada Revenue Agency: If a taxpayer and the CRA disagree about an assessment, the taxpayer can object to the Objection Branch of the CRA.

Tax Court of Canada (formerly Tax Review Board): Created to handle tax matters instead of the Federal Court. Appeals from the Objection Branch are heard here.

Federal Court of Appeal: Appeals from the TCC to the FCA are as of right, strangely enough.

Supreme Court of Canada: Must grant leave to appeal. Tends to render wackier/less predictable judgments.

Occasionally provincial courts will hear tax cases, but generally only tangentially to other issues.

Administrative Documents: The Canada Revenue Agency issues Interpretation Bulletins, Information Circulars and other administrative documents in which it sets out its position on how the ITA should be interpreted, and how it intends to apply the ITA. These documents do not have force of law, but are considered by judges (see [254] for a judge rejecting IT Bulletin use). Note that these opinions are not binding on the CRA either. It can change its mind, even retroactively and without issuing new documents.

A special kind of administrative document is the tax ruling, which is like a pre-clearance or pre-assessment of the tax effects of a given transaction. The taxpayer tells the CRA what he or she plans to do and the CRA tells the taxpayer what the tax consequences will be. If the taxpayer carries out the plan exactly as documented in the tax ruling, the CRA is bound by its ruling. Any deviation and all bets are off.

Doctrine: Often written by practitioners. Few tax academics exist in Canada. I didn’t get the impression this was a very important source. Funnily enough, the textbook refers to practitioners making “indecent amounts of money” in tax law [3]!
Legislative Debates: The textbook deals with the use of Hansard and other parliamentary materials to interpret tax law at [763-764]. For a long time there was a common law prohibition on using this rule, but the rule was increasingly ignored over the course of the twentieth century and there plenty of examples in modern Canadian law.
Another source is, arguably, administrative practice and political expediency, since MNR has a fair amount of discretion to settle cases or otherwise make discretionary decisions about how to handle a particular tax lawsuit. Optical Recording Co v MNR (1990), (116 NR 200): MNR has authority to settle tax cases on whatever grounds seem to be in the public interest (ex: to avoid causing the bankruptcy of the taxpayer due to a sudden unpaid tax lawsuit, it might be best to accept 50% of the value, or to extend payment of back taxes over several years).

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