xi CONTENTS The textbook is published in two Volumes: Volume I = Chapters 1 to 10 Volume II = Chapters 11 to 21 Chapter VOLUME I Chapter VOLUME II 1 Introduction To Federal Taxation In Canada 11 Taxable Income and Tax Payable For Individuals Revisited 2 Procedures and Administration 12 Taxable Income and Tax Payable For Corporations 3 Income Or Loss From An Office Or Employment 13 Taxation of Corporate Investment Income 4 Taxable Income and Tax Payable For Individuals 14 Other Issues In Corporate Taxation 5 Capital Cost Allowances And Cumulative Eligible Capital 15 Corporate Taxation and Management Decisions 6 Income Or Loss From A Business 16 Rollovers Under Section 85 7 Income From Property 8 Capital Gains And Capital Losses 9 Other Income, Other Deductions And Other Issues 17 Other Rollovers and Sale Of An Incorporated Business 18 Partnerships 19 Trusts And Estate Planning 10 Retirement Savings And Other Special Income Arrangements Detailed contents of Volume II, Chapters 11 to 21 follows. 20 International Issues In Taxation 21 GST/HST Glossary Located at the back of the print and online Study Guide.
xii Table Of Contents (Volume 2) CHAPTER 11 Taxable Income And Tax Payable For Individuals Revisited Introduction................ 491 Lump-Sum Payments........... 493 Treatment Of Losses........... 494 Carry Over Provisions......... 494 Personal Use Property Losses...... 496 Listed Personal Property Losses..... 496 Non-Capital Losses.......... 497 Net Capital Losses.......... 498 Net Capital Losses At Death....... 500 Allowable Business Investment Losses... 501 Farm Losses............. 503 Lifetime Capital Gains Deduction.... 504 Current And Future Limits....... 504 Qualified Property.......... 505 Determining The Deductible Amount... 505 Comprehensive Example........ 508 Ordering Of Deductions And Losses... 509 Ordering In Computing Net Income.... 510 Ordering In Computing Taxable Income.. 510 Example.............. 511 Tax Payable Overview.......... 512 Tax On Split Income........... 513 Tax Credits Revisited........... 515 Transfer Of Dividends To A Spouse.... 515 Charitable Donations Credit Revisited... 516 Foreign Tax Credits Revisited...... 521 Alternative Minimum Tax......... 523 Minimum Tax Calculation....... 524 Tax Credits For AMT......... 525 Key Terms Used In This Chapter..... 526 References................. 526 Appendix - Returns For Deceased Taxpayers... 527 Special Rules At Death......... 527 Procedures For Specific Returns..... 528 Filing Requirements.......... 530 Payment Of Taxes.......... 532 Problems For Self Study (Online)..... 533 Assignment Problems........... 533 CHAPTER 12 Taxable Income And Tax Payable For Corporations Computation Of Net Income....... 559 Computation Of Taxable Income..... 561 Deductions Available To Corporations... 561 Dividends From Other Corporations... 562 Non-Capital Loss Carry Over For A Corporation 565 Ordering Of Taxable Income Deductions. 567 Geographical Allocation Of Income... 568 Permanent Establishments....... 568 Example - Permanent Establishments... 568 Federal Tax Payable............ 569 Basic Rate.............. 569 Federal Tax Abatement........ 569 General Rate Reduction........ 569 Provincial Tax Payable.......... 570 Small Business Rate.......... 571 Investment Income Rates........ 571 Small Business Deduction........ 572 Canadian Controlled Private Corporation. 573 Active Business Income........ 573 Annual Business Limit......... 575 Allocation Among Associated Companies.. 575 Calculating The Small Business Deduction. 576 Elimination Of Small Business Deduction For Large CCPCs.......... 579 Personal Services Corporations..... 580 Professional Corporations And Management Companies............ 582 Manufacturing And Processing Profits Deduction............... 582 Calculating The Deduction....... 583 Eligibility.............. 584 General Rate Reduction - ITA 123.4(2).. 585 Full Rate Taxable Income........ 585 Application To Companies Other Than CCPCs 586 Application To CCPCs......... 587 Foreign Tax Credits For Corporations.. 588 Key Terms Used In This Chapter..... 590 References................. 591 Problems For Self Study (Online)..... 592 Assignment Problems........... 592
Table Of Contents (Volume 2) xiii CHAPTER 13 Taxation Of Corporate Investment Income Integration................ 601 The Basic Concept.......... 601 Dividend Gross Up And Tax Credit Procedures 602 Integration And Business Income..... 603 Refundable Taxes On Investment Income 606 Meaning Of Aggregate Investment Income. 606 Basic Concepts............ 606 Refundable Part I Tax On Investment Income......... 608 Additional Refundable Tax On Investment Income (ART)........ 608 Problem One: Excessive Tax Rates On Flow Through Of A CCPC s Investment Income. 610 Solution To Problem One: Refundable Portion Of Part I Tax.... 611 Refundable Part IV Tax On Dividends Received........ 615 Problem Two: Use Of Multi-Level Affiliations To Defer Taxes On Investment Income.. 615 Solution To Problem Two: Refundable Part IV Tax........ 616 Part IV Tax On Portfolio Dividends Received 617 Dividends From A Connected Corporation. 618 Dividends Paid Out Of Mixed Income Of A Connected Corporation..... 620 Other Part IV Tax Considerations..... 620 Refundable Dividend Tax On Hand... 621 RDTOH - General Definition...... 621 Refundable Portion Of Part I Tax Payable. 622 The Dividend Refund......... 624 Example Of RDTOH Calculations.... 624 Working Through Large Corporate Tax Problems.............. 627 Designation Of Eligible Dividends.... 628 CCPCs And Their GRIP........ 629 Non-CCPCs And Their LRIP....... 631 Part III.1 Tax On Excessive Eligible Dividend Designations............ 631 Key Terms Used In This Chapter..... 633 References................. 633 Problems For Self Study (Online)..... 635 Assignment Problems........... 635 CHAPTER 14 Other Issues In Corporate Taxation Introduction................ 649 Acquisition Of Control Rules....... 649 Economic Background......... 649 Acquisition Of Control Legislation.... 650 Deemed Year End.......... 650 Restrictions On Use Of Charitable Donations 650 Restrictions On The Use Of Losses.... 651 Unrecognized Losses At Deemed Year End. 652 Deemed Disposition Election...... 653 Associated Companies.......... 655 Definitions............. 656 Examples - Associated Corporation Rules.. 657 Investment Tax Credits.......... 660 Procedures............. 660 Eligible Expenditures......... 661 Rates............... 661 Refundable Investment Tax Credits.... 663 Carry Overs Of Investment Tax Credits.. 663 Effect Of Acquisition Of Control On Investment Tax Credits...... 664 Tax Basis Shareholders Equity...... 664 Shareholders Equity Under GAAP.... 664 Paid Up Capital (Tax Basis Contributed Capital) 665 Tax Basis Retained Earnings....... 665 Capital Dividend Account....... 666 Distributions Of Corporate Surplus... 668 Regular Cash Dividends........ 669 Stock Dividends........... 669 Dividends In Kind.......... 671 Capital Dividends Under ITA 83(2).... 672 Deemed Dividends Under ITA 84(1) - Increase In PUC...... 672 ITA 84(2) - On Winding-Up...... 674 ITA 84(3) - On Redemption, Acquisition, Or Cancellation Of Shares...... 675 ITA 84(4) And ITA 84(4.1)....... 677 Key Terms Used In This Chapter..... 678 References................. 678 Problems For Self Study (Online)..... 680 Assignment Problems........... 680 Tax Software Assignment Problem.... 691
xiv Table Of Contents (Volume 2) CHAPTER 15 Corporate Taxation And Management Decisions The Decision To Incorporate........ 693 Basic Tax Considerations......... 693 Other Advantages And Disadvantages.... 694 Tax Reduction And Deferral........ 695 Approach.............. 695 Basic Example............. 696 Public Corporation........... 698 CCPC - Active Business Income...... 699 CCPC - Investment Income Other Than Dividends......... 702 CCPC - Dividend Income........ 703 Conclusions On Tax Reductions And Deferrals 704 Provincial Taxes And Integration...... 707 Tax Deferral............. 707 Tax Reduction............. 708 Examples-EffectsOfProvincialRates On Integration............ 709 Summary: Tax Deferral And Tax Reduction. 712 Tax Free Dividends............. 712 Tax Rates On Dividends......... 712 Use Of Tax Credits........... 712 Tax Free Amounts For 2016....... 714 Income Splitting............... 714 Basic Concept............. 714 Example............... 715 Shareholder Benefits Including Loans... 716 The Owner-Manager Environment..... 716 Shareholder Benefits Other Than Loans... 717 Shareholder Loans........... 717 Management Compensation........ 721 General Principles........... 721 Salary Vs. Dividends.......... 722 Salary Vs. Dividends For The Owner - Manager.......... 722 The Basic Trade-Off.......... 722 Other Considerations.......... 723 Conclusion.............. 731 Key Terms Used In This Chapter...... 732 References.................. 732 Problems For Self Study (Online)...... 733 Assignment Problems............ 733 CHAPTER 16 Rollovers Under Section 85 Rollovers Under Section 85......... 741 General Rules For The Transfer....... 742 Transferor And Transferee........ 742 Eligible Property............ 742 Consideration To Transferor....... 743 Making The Election.......... 743 Establishing The Transfer Price...... 743 Transfer Prices - Detailed Rules...... 745 Rules Applicable To All Assets....... 745 Accounts Receivable.......... 746 Inventories, Non-Depreciable Capital Property 747 Disallowed Capital Losses........ 748 Depreciable Property.......... 750 Disallowed Terminal Losses....... 752 Eligible Capital Property......... 752 Eligible Capital Property - Disallowed Deductions........ 754 Summary Of Transfer Price Rules..... 755 Allocation Of The Elected Value...... 755 Consideration Received By The Transferor.. 755 Assets Acquired By The Corporation.... 756 Paid Up Capital (PUC) Of Shares Issued.. 758 Paid Up Capital Reduction........ 758 More Than One Class Of Shares...... 759 Comprehensive Example - Section 85 Rollovers.......... 761 Gift To Related Party - Section 85..... 763 General Rules............. 763 Example............... 764 Excess Consideration - Section 85..... 766 Shareholder Benefit - ITA 15(1)...... 766 Dividend Stripping ITA 84.1....... 768 Applicability Of ITA 84.1......... 769 Dividend Stripping Example....... 769 Capital Gains Stripping ITA 55(2).... 772 Application Of ITA 55(2)......... 772 Capital Gains Stripping - Examples..... 773 Key Terms Used In This Chapter...... 776 References.................. 776 Problems For Self Study (Online)...... 777 Assignment Problems............ 777
Table Of Contents (Volume 2) xv CHAPTER 17 Other Rollovers And Sale Of An Incorporated Business Introduction................. 787 Share For Share Exchanges - ITA 85.1... 787 General Rules............. 787 Conditions For The Application Of ITA 85.1. 788 Example............... 788 Exchange Of Shares In A Reorganization - ITA 86.................. 790 Conditions For The Reorganization..... 791 Procedures.............. 792 Example Using ITA 86(1) In An Estate Freeze. 793 Gift To Related Person - ITA 86(2)..... 795 Using ITA 86(1) - Tax Planning Considerations 798 Amalgamations - ITA 87.......... 799 Position Of The Amalgamated Company... 799 Position Of The Shareholders....... 800 Vertical Amalgamations......... 801 Asset Bump-Ups............ 801 Non-Tax Considerations......... 801 Amalgamations - Tax Planning Considerations 801 Winding-Up Of A 90% Owned Subsidiary. 802 Acquisition Of Assets.......... 803 Disposition Of Shares.......... 806 Tax Planning Considerations - Amalgamation Vs. Winding-Up..... 806 Winding-Up Of A Canadian Corporation.. 808 Example............... 808 Convertible Properties........... 811 Application.............. 811 Sale Of An Incorporated Business..... 812 Restrictive Covenants (a.k.a. Non-Competition Agreements)... 812 Sale Of Individual Assets......... 813 Sale Of Assets As A Going Concern..... 814 Sale Of Shares............. 816 Evaluation Of Alternatives........ 817 Example............... 818 Key Terms Used In This Chapter...... 820 References.................. 821 Problems For Self Study (Online)...... 822 Assignment Problems............ 822 CHAPTER 18 Partnerships Introduction................. 831 Taxable Entities In Canada........ 831 Chapter Coverage........... 832 Partnerships Defined............ 832 The Importance Of Defining A Partnership.. 832 Basic Partnership Elements........ 833 Types Of Partnerships.......... 833 Co-Ownership, Joint Ventures, And Syndicates.............. 834 Introduction............. 834 Co-Ownership............. 835 Joint Ventures............. 835 Syndicates.............. 836 Partnership Income, Losses, And Tax Credits.............. 836 Introduction............. 836 Applicable Concepts.......... 837 Calculating The Amounts To Be Allocated.. 839 Methods Of Allocation......... 844 The Partnership Interest.......... 845 The Concept............. 845 Acquiring A Partnership Interest...... 845 Adjusted Cost Base Of Partnership Interest.. 846 Disposition Of A Partnership Interest.... 850 Limited Partnerships And Limited Partners 851 Definitions.............. 851 At-Risk Rules............. 851 Transfer Of Property To And From A Partnership............... 853 Definition Of Canadian Partnership.... 853 Transfers With No Rollover Provision.... 854 Common Partnership Rollovers...... 855 Specified Investment Flow Through Partnerships............... 859 Key Terms Used In This Chapter...... 859 References.................. 859 Problems For Self Study (Online)...... 861 Assignment Problems............ 861
xvi Table Of Contents (Volume 2) CHAPTER 19 Trusts And Estate Planning A Note On Changes For 2016........ 871 Basic Concepts............... 873 What Is A Trust?............ 873 Establishing A Trust........... 874 Returns And Payments - Trusts...... 875 Non-Tax Reasons For Using Trusts..... 876 Classification Of Trusts........... 876 Personal Trusts............ 876 Testamentary Trusts Vs. Inter Vivos Trusts.. 877 Taxation Of Trusts............. 880 Rollovers To A Trust.......... 881 Rollovers To Capital Beneficiaries..... 883 21 Year Deemed Disposition Rule..... 884 Net Income For Tax Purposes Of A Trust. 885 Preferred Beneficiary Election....... 886 Amounts Deemed Not Paid....... 886 Amounts Retained For A Beneficiary.... 886 Taxable Income Of A Trust......... 887 Income Allocations To Beneficiaries.... 887 Discretionary And Non-Discretionary Distributions............. 888 Flow Through Provisions......... 888 Principal Residence Exemption...... 890 Tax Payable Of Personal Trusts....... 890 Calculation Of Basic Amount....... 890 Other Tax Payable Considerations..... 891 Income Attribution - Trusts......... 892 Purchase Or Sale Of An Interest In A Trust 894 Tax Planning................ 895 Qualifying Spousal Trusts........ 897 Alter Ego Trusts............ 897 Joint Spousal Trusts........... 898 Estate Planning............... 898 Estate Freeze................ 899 Key Terms Used In This Chapter...... 903 References.................. 903 Problems For Self Study (Online)...... 905 Assignment Problems............ 905 CHAPTER 20 International Issues In Taxation Introduction................. 911 Residence.................. 912 Residence Of Individuals......... 912 Residence Of Corporations........ 919 Residence Of Trusts........... 920 Part I Tax On Non-Residents........ 921 Carrying on Business in Canada...... 922 Canadian Source Employment Income... 923 Dispositions of Taxable Canadian Property.. 925 Part XIII Tax On Non-Residents...... 926 Interest Payments........... 927 Dividend Payments........... 928 Royalty Payments........... 928 Rental Income............. 929 Pension Payments, Other Retirement Benefits 930 Shareholder Loans To Non-Residents.... 931 Immigration And Emigration........ 932 Entering Canada - Immigration...... 932 Departures From Canada - Emigration... 932 Unwinding A Deemed Disposition..... 935 Short-Term Residents.......... 935 Foreign Source Income Of Canadian Residents............ 936 Foreign Investment Reporting Requirements. 936 Foreign Source Employment Income.... 938 Foreign Source Business Income..... 939 Foreign Source Interest Income...... 940 Foreign Source Capital Gains....... 940 Foreign Source Dividend Income - Problems. 940 Foreign Source Dividends Received By Individuals............ 942 Foreign Dividends Received From Non-Affiliated Corporations.... 942 Dividends Received From Non-Controlled Foreign Affiliates.. 943 Dividends Received From Controlled Foreign Affiliates.... 947 Foreign Accrual Property Income (FAPI)... 947 Key Terms Used In This Chapter...... 950 References.................. 950 Problems For Self Study (Online)...... 952 Assignment Problems............ 952
Table Of Contents (Volume 2) xvii CHAPTER 21 GST/HST Introduction................. 963 Transaction Tax Concepts......... 965 Value Added Tax (VAT)......... 967 Liability For GST/HST............ 969 The Concept Of Supply......... 969 Supply Categories.............. 970 Taxable Supplies............ 970 Exempt Supplies............ 971 Applying the GST/HST Rate......... 972 Place Of Supply............ 972 Applying The Rate........... 973 Collection And Remittance Of GST/HST.. 973 Registration................. 974 Meaning Of Person For GST/HST..... 974 Who Must Register........... 974 Exemption For Small Suppliers...... 975 Input Tax Credits.............. 977 VendorsOfFullyTaxableAnd Zero-Rated Supplies.......... 977 Vendors Of Exempt Supplies....... 979 Examples.............. 980 Relief For Small Businesses......... 983 Quick Method Of Accounting....... 983 Small Suppliers Exemption........ 986 Streamlined Input Tax Credit Method.... 986 GST/HST Procedures And Administration. 987 GST/HST Returns And Payments...... 987 Associated Persons........... 989 Refunds And Rebates.......... 989 Books And Records........... 989 Appeals............... 990 General Anti-Avoidance Rule....... 990 Employee And Partner GST/HST Rebate.. 991 General Concept............ 991 Calculating The GST/HST Rebate Amount.. 991 Example............... 991 Residential Property, New Housing Rebate 992 General Rules For Residential Property... 992 New Housing Rebate.......... 992 CHAPTER 21, continued Sale Of A Business............. 993 Specific Applications............ 995 Partnerships And GST/HST......... 996 Trusts And GST/HST............ 997 Key Terms Used In This Chapter...... 997 Problems For Self Study (Online)...... 999 Assignment Problems............ 999 STUDY GUIDE Your two volume textbook is accompanied by a separate Study Guide available in print and online. The chapters of this Study Guide correspond to the chapters of Byrd & Chen's Canadian Tax Principles. Each of these Study Guide chapters contains the following: Detailed guidance on how to work through the text and problems in the chapter. Detailed solutions to the Exercises in the textbook and online Self Study Problems for the chapter. A list of learning objectives for the material in the chapter. In addition, the Study Guide contains: Two sample personal tax returns and two Self Study Tax Software Problems in Chapters 4 and 11. A sample corporate tax return in Chapter 13. An extensive Glossary.