CONTENTS The textbook is published in two Volumes: Volume I = Chapters 1 to 10 Volume II = Chapters 11 to 21 Chapter I Chapter 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 20 International Issues In Taxation The detailed contents of both Volume I and II follow. 21 GST/HST
Detailed Table Of Contents For Both Volumes (Page 2) I CHAPTER 1 Introduction To Federal Taxation In Canada The Canadian Tax System.......... 1 Alternative Tax Bases.......... 1 Taxable Entities In Canada........ 2 Federal Taxation And The Provinces.... 4 Tax Policy Concepts............. 5 Taxation And Economic Policy....... 5 Taxation And Income Levels....... 6 Tax Incidence............. 8 Tax Expenditures............ 8 Qualitative Characteristics Of Tax Systems.. 9 Income Tax Reference Materials...... 10 Introduction............. 10 The Income Tax Act.......... 11 Other Income Tax Legislation...... 14 Other Sources Of Income Tax Information. 16 Liability For Income Tax.......... 17 Charging Provision For Canadian Residents. 17 Charging Provision For Non-Residents... 18 Alternative Concepts Of Income...... 20 The Economist s View......... 20 The Accountant s View......... 20 The Income Tax Act View........ 21 Net Income For Tax Purposes....... 21 Structure............... 21 Components............. 21 Combining The Components - ITA Section 3. 23 Loss Carry Overs........... 25 Net Income For Tax Purposes - Example.. 25 Net Income To Taxable Income...... 27 Principles Of Tax Planning......... 27 Introduction............. 27 Tax Avoidance Or Reduction....... 27 Tax Deferral............. 28 Income Splitting............ 28 Abbreviations To Be Used......... 29 Key Terms Used In This Chapter..... 30 References................. 30 Problems For Self Study.......... 31 Assignment Problems........... 33 CHAPTER 2 Procedures And Administration Administration Of The Department.... 37 Returns And Payments - Individuals... 38 Requirement To File - ITA 150...... 38 Due Date For Individual Returns..... 39 Withholdings - ITA 153......... 40 Instalment Payments For Individuals - ITA 156 41 Interest............... 44 Penalties............... 45 DueDateForBalanceOwing- Individuals. 46 Final Returns For Deceased Taxpayers... 47 Returns And Payments - Corporations... 47 Due Date For Corporate Returns (ITA 150). 47 Filing Alternatives For Corporations.... 47 Instalment Payments For Corporations... 48 DueDateForBalanceOwing-Corporations. 50 Interest And Penalties For Corporations... 50 Returns And Payments - Trusts...... 51 Income Tax Information Returns..... 51 Refunds................... 52 Books And Records............. 52 Assessments................ 52 Adjustments To Income Tax Returns... 53 Appeals................... 54 Consent Form............. 54 Informal Request For Adjustments..... 54 Notice Of Objection.......... 54 Tax Court Of Canada.......... 56 Federal Court And The Supreme Court Of Canada 57 Tax Evasion, Avoidance And Planning... 57 Tax Evasion............. 57 Tax Avoidance And Tax Planning..... 57 General Anti-Avoidance Rule (GAAR)... 58 Reasonable Expectation Of Profit (REOP).. 60 Collection And Enforcement........ 60 Taxpayer Relief Provisions (Fairness Package) 62 Key Terms Used In This Chapter..... 63 References................. 64 Problems For Self Study.......... 66 Assignment Problems........... 68
Detailed Table Of Contents For Both Volumes (Page 3) I CHAPTER 3 Income Or Loss From An Office Or Employment Employment Income Defined....... 71 Cash Basis And The Use Of Bonus Arrangements 72 Net Concept............. 73 Employee Versus Self-Employed...... 73 Employee Perspective......... 74 Employer Perspective.......... 75 Making The Distinction......... 76 Inclusions - Salaries And Wages...... 77 Inclusions - Fringe Benefits........ 77 ITA 6(1) - Amounts To Be Included In Income 77 CRA Administrative Practice On Fringe Benefits (IT-470R).............. 78 Tax Planning Considerations....... 82 Inclusions - GST/HST/PST On Taxable Benefits........... 84 Inclusions - Board And Lodging...... 85 Inclusions - Automobile Benefits..... 85 Employees And Automobiles....... 85 Taxable Benefits - Standby Charge..... 86 Operating Cost Benefit......... 89 Payments By Employee For Automobile Use. 90 Example - Employer Owned Automobile.. 90 Example - Employer Leased Vehicle.... 91 Employer Provided Cars And Tax Planning. 92 Inclusions - Allowances.......... 93 Allowance Vs. Reimbursement...... 93 General Rules............. 93 Taxable Vs. Non-Taxable Allowances.... 94 Reasonable Allowances For Motor Vehicles. 94 Employer s Perspective Of Allowances... 95 Employee s Perspective Of Allowances... 96 Inclusions - Employee Insurance Benefits. 96 Life Insurance............. 96 Disability Insurance (a.k.a. Group Sickness Or Accident Insurance Plan)...... 96 Health Care Insurance......... 98 Loans To Employees............ 98 General Rules............. 98 Home Relocation Loans........ 100 Tax Planning For Interest Free Loans... 100 (continued) CHAPTER 3, continued Inclusions - Stock Option Benefits.... 102 CCPCs Vs. Public Companies...... 104 Rules For Public Companies....... 105 Rules For CCPCs........... 106 Other Inclusions............. 107 Payments By Employer To Employee... 107 Forgiveness Of Employee Loans..... 107 Housing Loss Reimbursement...... 108 Discounts On Employer s Merchandise.. 108 Club Dues And Recreational Facilities... 108 Specific Deductions............ 109 Salesperson s Expenses Under ITA 8(1)(f).. 110 Travel Expenses And Motor Vehicle Costs. 111 The Salesperson's Dilemma....... 111 Automobile And Aircraft Expenses.... 113 Home Office Costs For Employees.... 113 Key Terms Used In This Chapter..... 114 References................. 114 Problems For Self Study......... 115 Assignment Problems........... 123 CHAPTER 4 Taxable Income And Tax Payable For Individuals Introduction................ 133 Taxable Income Of Individuals...... 134 Available Deductions......... 134 Ordering Of Deductions........ 134 Deductions For Payments - ITA 110(1)(f).. 135 Home Relocation Loan - ITA 110(1)(j)... 135 Northern Residents Deductions - ITA 110.7. 136 Calculation Of Tax Payable........ 136 Federal Tax Payable Before Credits.... 136 Provincial Tax Payable Before Credits... 137 Types Of Income........... 138 Taxes On Income Not Earned In A Province 139 Calculating Tax Credits.......... 139 Federal Amounts........... 139 Provincial Amounts.......... 139 (continued)
Detailed Table Of Contents For Both Volumes (Page 4) I CHAPTER 4, continued Personal Tax Credits - ITA 118(1).... 140 A Note On The Family Caregiver Amount. 140 Individuals With A Spouse Or Common-Law Partner........ 140 Individuals Supporting Dependent Person. 142 Child Tax Credit........... 144 Single Persons (Basic Personal Tax Credit).. 144 Caregiver Tax Credit......... 144 Infirm Dependant Over 17 Tax Credit.. 145 Interaction: Eligible Dependant Credit Vs. Caregiver Or Infirm Dependant Over 17 Credits 146 Caregiver Vs. Infirm Dependant Over 17. 147 Other Tax Credits For Individuals.... 148 Age Tax Credit........... 148 Pension Income Tax Credit....... 148 Canada Employment Tax Credit..... 149 Adoption Expenses Tax Credit...... 149 Public Transit Passes Tax Credit..... 150 Child Fitness Tax Credit And Children s Arts Tax Credit....... 151 First Time Home Buyer s Tax Credit.... 152 Volunteer Firefighters Tax Credit..... 152 Charitable Donations Tax Credit..... 152 Medical Expenses Tax Credit...... 154 Disability Tax Credit.......... 158 Education Related Tax Credits...... 160 Employment Insurance (EI) And Canada Pension Plan (CPP) Tax Credits.. 163 Transfers To Spouse Or Common-Law Partner 164 Political Contributions Tax Credits.... 165 Labour Sponsored Funds Tax Credit... 166 Refundable Credits............ 167 Refundable GST/HST Credit...... 167 Working Income Tax Benefit...... 168 Canada Child Tax Benefit........ 169 Social Benefits Repayment (OAS And EI). 169 Comprehensive Example......... 171 Key Terms Used In This Chapter..... 173 References................. 174 Sample Tax Return For Chapter 4.... 175 Problems For Self Study......... 175 Assignment Problems........... 182 Tax Software Assignment Problems... 189 CHAPTER 5 Capital Cost Allowances And Cumulative Eligible Capital Capital Cost Allowance System...... 195 Additions To Capital Cost......... 197 Determination Of Amounts....... 197 Available For Use Rules........ 199 Segregation Into Classes........ 199 Capital Cost Allowances......... 200 Rates For Commonly Used CCA Classes.. 201 Half-Year Rules (a.k.a. First Year Rules).. 204 Short Fiscal Periods.......... 205 Tax Planning Considerations...... 206 Dispositions Of Depreciable Assets... 207 Capital Gains............. 208 Recapture Of Capital Cost Allowance... 209 Terminal Losses........... 210 Summary Of Tax Consequences..... 211 CCA Schedule............... 211 CCA Determination - Special Situations. 212 Separate Class Election......... 212 Cumulative Eligible Capital (CEC).... 214 Eligible Capital Expenditures Defined... 214 Additions, Amortization, And Dispositions. 214 Key Terms Used In This Chapter..... 219 References................. 219 Appendix - CCA Rates For Selected Assets 220 Problems For Self Study......... 222 Assignment Problems........... 226 CHAPTER 6 Income Or Loss From A Business Overview................. 231 Classification Of Income........ 232 Business Income Vs. Property Income.. 234 Tax Consequences Of Classification.... 234 Business Income Defined........ 235 Property Income Defined........ 236 (continued)
Detailed Table Of Contents For Both Volumes (Page 5) I CHAPTER 6, continued Business Income Vs. Capital Gains.... 236 Tax Consequences Of Classification.... 236 Capital Gains Defined......... 237 Criteria For Identifying Capital Gains... 237 Business Income And GAAP....... 239 Business Income - Inclusions (Revenues) 240 Amounts Received And Receivable.... 240 Reserves.............. 241 Limitations On Deductions From Business And Property Income.... 244 Specific Limiting Items Under ITA 18... 245 Foreign Media Advertising - ITA 19 And 19.1 250 Provincial Capital And Payroll Taxes... 250 Limitations On Deductions From Business, Property, And Employment Income.. 251 Reasonableness........... 251 Meals And Entertainment........ 251 Luxury Automobile Costs....... 252 Automobiles Owned By The Taxpayer... 253 Automobile Leasing Costs....... 253 Illegal Payments, Fines And Penalties... 256 Leasing Property........... 256 Business Income - Specific Deductions. 257 Inventory Valuation (Cost Of Sales).... 257 Other Deductions.......... 258 Reconciliation Schedule......... 260 Business Income - Example........ 262 Taxation Year............... 263 General Rules............ 263 Unincorporated Businesses - Non-Calendar Fiscal Year...... 263 Special Business Income Situations... 265 Income For Farmers.......... 265 Professional Income (Billed Basis)..... 267 Sale Of A Business.......... 267 Key Terms Used In This Chapter..... 269 References................. 269 Problems For Self Study......... 271 Assignment Problems........... 281 Tax Software Assignment Problem For Chapter 6.............. 291 CHAPTER 7 Income From Property Property Income: General Concept... 295 Interest As A Deduction......... 296 The Singleton And Ludco Court Cases... 297 IT-533 - Interest Deductibility..... 297 Discount And Premium On Issued Debt.. 300 Interest Income.............. 302 Individuals - Modified Accrual Method.. 303 Discount And Premium On Debt Holdings. 304 Prescribed Debt Obligations....... 304 Accrued Interest At Transfer....... 305 Payments Based On Production Or Use (Royalties)............... 306 Rental Income............... 306 Capital Cost Allowances........ 307 Rental Income Example........ 308 Cash Dividends From Taxable Canadian Corporations.............. 309 The Concept Of Integration....... 309 Eligible Vs. Non-Eligible Dividends.... 310 Gross Up And Tax Credit Procedures - Non-Eligible Dividends....... 311 - Eligible Dividends......... 313 Comparison Of Investment Returns.... 317 Income Trusts............... 318 How Do Trusts Work?......... 318 Investments In Publicly Traded Trusts... 318 Specified Investment Flow-Through Trusts. 320 Taxation Of Income Trusts....... 321 Mutual Funds............... 322 Distributions............. 322 Adjusted Cost Base.......... 323 Stock And Capital Dividends....... 324 Foreign Source Income.......... 325 Shareholder Benefits........... 326 Key Terms Used In This Chapter..... 327 References................. 328 Problems For Self Study......... 329 Assignment Problems........... 334 Tax Software Assignment Problem For Chapter 7.............. 340
Detailed Table Of Contents For Both Volumes (Page 6) I CHAPTER 8 Capital Gains And Capital Losses Economic Background.......... 343 General Rules............... 344 Capital Gains Defined......... 345 Dispositions............. 345 Proceeds Of Disposition........ 346 Adjusted Cost Base.......... 347 Calculating The Capital Gain Or Loss... 348 Detailed Application Of The Rules.... 349 Identical Properties.......... 349 Partial Dispositions.......... 350 Warranties On Capital Assets...... 350 Capital Gains Reserves......... 351 Bad Debts On Sales Of Capital Property.. 353 Special Rule For Sales Of Real Property.. 354 Provisions For Special Assets....... 355 Principal Residence.......... 355 Personal Use Property......... 358 Listed Personal Property........ 358 Gains And Losses On Foreign Currency.. 359 Options.............. 361 Deemed Dispositions - Change In Use.. 362 Example - Change In Use........ 364 Special Rules For Principal Residences... 366 Special Rules For Automobiles...... 368 Deemed Dispositions - Departures From Canada....... 368 Small Business Investments - Deferral.. 369 Replacement Property - Deferral.... 371 Voluntary And Involuntary Dispositions.. 372 Timing Considerations......... 372 Application Of ITA 44(1) To Capital Gains. 372 Application Of ITA 13(4) To Recapture.. 373 Combined Application Of ITA 13(4) And 44(1) 374 Capital Gains And Tax Planning..... 377 Key Terms Used In This Chapter..... 378 References................. 378 Problems For Self Study......... 380 Assignment Problems........... 388 Tax Software Assignment Problem For Chapter 8.............. 397 CHAPTER 9 Other Income, Other Deductions, And Other Issues Introduction................ 399 Other Income - Subdivision d Inclusions 400 Pension Benefits........... 400 Retiring Allowances.......... 401 Death Benefits............ 401 Income Inclusions From Deferred Income Plans 402 Scholarships And Prizes........ 402 Research Grants........... 403 Social Assistance And Workers Compensation 403 Universal Child Care Benefit - ITA 56(6).. 403 Other Deductions - Subdivision e.... 403 CPP Contributions On Self-Employed Earnings 403 Moving Expenses........... 404 Child Care Expenses.......... 407 Disability Supports Deduction...... 410 Related Inclusions And Deductions... 412 Employment Insurance Benefits..... 412 Pension Income Splitting........ 413 Spousal And Child Support....... 414 Annuity Payments Received...... 416 Registered Savings Plans......... 418 Registered Education Savings Plans (RESPs). 419 Registered Disability Savings Plans (RDSPs). 423 Tax Free Savings Accounts (TFSAs).... 424 Non-Arm s Length Transfers Of Property 426 Inadequate Considerations....... 426 Inter Vivos Transfers To A Spouse.... 429 Transfers Of Depreciable Assets...... 431 Farm Or Fishing Property To A Child... 433 Death Of A Taxpayer........... 434 Income Attribution............ 436 Basic Rules............. 436 Avoiding Income Attribution...... 438 Tax Planning And Income Attribution... 441 Key Terms Used In This Chapter..... 442 References................. 443 Problems For Self Study......... 444 Assignment Problems........... 450 Tax Software Assignment Problem For Chapter 9.............. 461
Detailed Table Of Contents For Both Volumes (Page 7) I CHAPTER 10 Retirement Savings And Other Special Income Arrangements Planning For Retirement......... 463 Tax Deferred Savings......... 464 Defined Benefit Vs. Money Purchase Plans. 466 Registered Retirement Savings Plans (RRSPs) 467 RRSP Deduction Limit......... 469 Examples Of RRSP Deduction Calculations. 476 Undeducted RRSP Contributions..... 478 RRSP And RRIF Administration Fees.... 480 RRSP Withdrawals And Voluntary Conversions 480 Involuntary Termination Due To Age... 481 Spousal RRSP............ 481 Home Buyers Plan (HBP)....... 483 Lifelong Learning Plan (LLP)....... 485 Departure From Canada........ 486 Death Of The Registrant........ 487 Registered Pension Plans (RPPs)..... 489 Employer Contributions To The RPP... 489 Employee Contributions To The RPP... 490 Options At Retirement......... 490 Phased Retirement.......... 490 Pooled Registered Pension Plans (PRPPs).. 491 Glossary The Glossary can be found: at the back of the separate paper Study Guide, and on the Student CD-ROM within the FITAC version of Canadian Tax Principles. Supplementary Readings The Supplementary Readings can be found on the Student CD-ROM. No. 1 - Application Of The Median Rule No. 2 - Stock Option Shares Deemed Not Identical Property No. 3 - Election For Pre-1982 Residences No. 4 - Determining M&P Profits No. 5 - SR & ED Expenditures No. 6 - Final Returns For Deceased Taxpayers No. 7 - Business Valuations No. 8 - Tax Shelters No.9-TransferPricing Registered Retirement Income Funds (RRIFs) 492 RRIF Withdrawals........... 492 Death Of The Registrant........ 493 Evaluation Of RRIFs.......... 494 Deferred Profit Sharing Plans....... 494 Profit Sharing Plans............ 495 Transfers Between Plans......... 495 Retiring Allowances.......... 496 Retirement Compensation Arrangements 497 Arrangements Defined......... 497 Part XI.3 Refundable Tax........ 497 Salary Deferral Arrangements...... 498 Key Terms Used In This Chapter..... 499 References................. 500 Problems For Self Study......... 501 Assignment Problems........... 508 Tax Software Assignment Problem For Chapter 10............. 516
Detailed Table Of Contents For Both Volumes (Page 8) II CHAPTER 11 Taxable Income And Tax Payable For Individuals Revisited Introduction................ 519 Lump-Sum Payments........... 521 Treatment Of Losses........... 522 Carry Over Provisions......... 522 Personal Use Property Losses...... 524 Listed Personal Property Losses..... 524 Non-Capital Losses.......... 525 Net Capital Losses.......... 526 Net Capital Losses At Death....... 528 Allowable Business Investment Losses... 529 Farm Losses............. 530 Lifetime Capital Gains Deduction.... 531 Qualified Property.......... 532 Determining The Deductible Amount... 533 Comprehensive Example........ 536 Ordering Of Deductions And Losses... 537 Significance Of Ordering........ 537 Ordering In Computing Net Income For Tax Purposes..... 537 Ordering In Computing Taxable Income.. 538 Example.............. 538 Tax Payable Overview.......... 539 Basic Federal Tax Payable....... 540 Tax On Split Income........... 540 Tax Credits Revisited........... 543 Transfer Of Dividends To A Spouse Or Common-Law Partner....... 543 Charitable Donations Credit Revisited... 543 Foreign Tax Credits Revisited...... 548 Alternative Minimum Tax......... 550 General Concept........... 550 Minimum Tax Calculation....... 551 Tax Credits For AMT......... 552 AMT Carry Forward - ITA 120.2..... 552 Key Terms Used In This Chapter..... 553 References................. 554 Problems For Self Study......... 555 Assignment Problems........... 565 Tax Software Assignment Problems... 575 CHAPTER 12 Taxable Income And Tax Payable For Corporations Computation Of Net Income....... 583 Computation Of Taxable Income..... 585 Deductions Available To Corporations... 585 Dividends From Other Corporations... 586 Non-Capital Loss Carry Over...... 589 Ordering Of Taxable Income Deductions. 591 Geographical Allocation Of Income... 592 Permanent Establishments....... 592 Example - Permanent Establishments... 592 Federal Tax Payable............ 593 Basic Rate.............. 593 Federal Tax Abatement........ 593 General Rate Reduction........ 593 Provincial Tax Payable.......... 594 Small Business Rate.......... 595 Investment Income Rates........ 596 Small Business Deduction........ 596 Canadian Controlled Private Corporation ). 597 Active Business Income........ 598 Annual Business Limit......... 600 Allocation Among Associated Companies.. 600 Calculating The Small Business Deduction. 600 Elimination Of Small Business Deduction For Large CCPCs.......... 603 Personal Services Corporations..... 604 Professional Corporations And Management Companies....... 605 Manufacturing And Processing Profits Deduction............... 606 Calculating The Deduction....... 606 M&P Profits Defined......... 608 General Rate Reduction - ITA 123.4(2).. 609 Full Rate Taxable Income........ 609 Application To Companies Other Than CCPCs 609 Application To CCPCs......... 610 Foreign Tax Credits For Corporations.. 611 Key Terms Used In This Chapter..... 613 References................. 614 Problems For Self Study......... 615 Assignment Problems........... 621
Detailed Table Of Contents For Both Volumes (Page 9) CHAPTER 13 Taxation Of Corporate Investment Income II CHAPTER 14 Other Issues In Corporate Taxation Integration................ 627 The Basic Concept.......... 627 Dividend Gross Up And Tax Credit Procedures 628 Integration And Business Income..... 629 Refundable Taxes On Investment Income 631 Meaning Of Aggregate Investment Income. 631 Basic Concepts............ 632 Refundable Part I Tax On Investment Income........... 634 Additional Refundable Tax On Investment Income (ART)..... 634 Problem One: Excessive Tax Rates On Flow Through Of A CCPC s Investment Income. 635 Solution To Problem One: Refundable Portion Of Part I Tax.... 637 Refundable Part IV Tax On Dividends Received.......... 640 Problem Two: Use Of Multi-Level Affiliations To Defer Taxes On Investment Income.. 640 Solution To Problem Two: Refundable Part IV Tax........ 641 Part IV Tax On Portfolio Dividends Received 642 Dividends From A Connected Corporation. 643 Dividends Paid Out Of Mixed Income Of A Connected Corporation..... 645 Refundable Dividend Tax On Hand... 646 Basic Concepts............ 646 RDTOH - General Definition...... 647 Refundable Portion Of Part I Tax Payable. 647 The Dividend Refund......... 650 Example Of RDTOH Calculations.... 650 Working Through Large Corporate Tax Problems.............. 653 Designation Of Eligible Dividends.... 653 CCPCs And Their GRIP........ 655 Non-CCPCs And Their LRIP....... 656 Part III.1 Tax On Excessive Eligible Dividend Designations............ 657 Key Terms Used In This Chapter..... 659 References................. 659 Problems For Self Study......... 660 Assignment Problems........... 666 Introduction................ 673 Acquisition Of Control Rules....... 673 Economic Background......... 673 Acquisition Of Control Legislation.... 674 Deemed Year End.......... 674 Restrictions On The Use Of Charitable Donations............. 674 Restrictions On The Use Of Losses.... 675 Unrecognized Losses At Deemed Year End. 676 Deemed Disposition Election...... 677 Associated Companies.......... 679 Examples - Associated Corporation Rules.. 681 Investment Tax Credits.......... 684 Procedures............. 684 Eligible Expenditures......... 684 Rates............... 685 Refundable Investment Tax Credits.... 686 Carry Overs Of Investment Tax Credits.. 687 Acquisition Of Control......... 688 Tax Basis Shareholders Equity...... 688 Shareholders Equity Under GAAP.... 688 Paid Up Capital (Tax Basis Contributed Capital) 688 Tax Basis Retained Earnings....... 689 Pre-1972 Capital Surplus On Hand.... 690 Capital Dividend Account....... 690 Distributions Of Corporate Surplus... 692 Regular Cash Dividends........ 693 Stock Dividends........... 693 Dividends In Kind.......... 694 Capital Dividends Under ITA 83(2).... 695 Deemed Dividends Under ITA 84(1) - Increase In PUC...... 696 ITA 84(2) - On Winding-Up...... 698 ITA 84(3) - On Redemption, Acquisition, Or Cancellation Of Shares...... 699 ITA 84(4) And ITA 84(4.1)....... 700 Key Terms Used In This Chapter..... 701 References................. 702 Problems For Self Study......... 703 Assignment Problems........... 710 Tax Software Assignment Problem.... 715
Detailed Table Of Contents For Both Volumes (Page 10) II CHAPTER 15 Corporate Taxation And Management Decisions The Decision To Incorporate....... 717 Basic Tax Considerations........ 717 Other Advantages And Disadvantages... 718 Tax Reduction And Deferral....... 719 Approach.............. 719 Basic Example............ 720 Public Corporation.......... 722 CCPC - Active Business Income..... 724 CCPC - Investment Income Other Than Dividends........ 726 CCPC - Dividend Income........ 727 Conclusions On Tax Reductions And Deferrals 729 Provincial Taxes And Integration..... 731 Tax Deferral............. 731 Tax Reduction............ 732 Summary: Tax Deferral And Tax Reduction 736 Tax Free Dividends............ 736 Tax Rates On Dividends........ 736 Use Of Tax Credits.......... 737 Tax Free Amounts For 2012....... 738 Income Splitting.............. 739 Basic Concept............ 739 Example.............. 739 Shareholder Benefits Including Loans.. 741 Shareholder Benefits Other Than Loans.. 741 Shareholder Loans.......... 742 Management Compensation....... 745 General Principles.......... 745 Salary Vs. Dividends.......... 746 Salary Vs. Dividends For The Owner - Manager......... 746 The Basic Trade-Off.......... 746 Other Considerations......... 747 Conclusion............. 755 Key Terms Used In This Chapter..... 756 References................. 756 Problems For Self Study......... 757 Assignment Problems........... 762 CHAPTER 16 Rollovers Under Section 85 Rollovers Under Section 85........ 769 General Rules For The Transfer..... 770 Transferor And Transferee....... 770 Eligible Property........... 770 Consideration To Transferor....... 771 Making The Election.......... 771 Establishing The Transfer Price...... 771 Transfer Prices - Detailed Rules..... 773 Rules Applicable To All Assets...... 773 Accounts Receivable......... 774 Inventories, Non-Depreciable Capital Property 775 Disallowed Capital Losses....... 776 Depreciable Property......... 778 Disallowed Terminal Losses...... 780 Eligible Capital Property........ 780 Eligible Capital Property - Disallowed Deductions....... 782 Summary Of Transfer Price Rules..... 783 Allocation Of The Elected Value..... 783 Consideration Received By The Transferor. 783 Assets Acquired By The Corporation... 784 Paid Up Capital Of Shares Issued.... 786 Paid Up Capital Reduction....... 786 More Than One Class Of Shares..... 787 Comprehensive Example - Section 85 Rollovers......... 788 Gift To Related Person - Section 85... 791 General Rules............ 791 Example.............. 791 Excess Consideration - Section 85.... 793 Shareholder Benefit - ITA 15(1)..... 794 Dividend Stripping ITA 84.1...... 795 Applicability Of ITA 84.1........ 796 Dividend Stripping Example....... 796 Capital Gains Stripping ITA 55(2)... 799 Application Of ITA 55(2)........ 799 Capital Gains Stripping - Examples.... 800 Key Terms Used In This Chapter..... 802 References................. 802 Problems For Self Study......... 804 Assignment Problems........... 810
Detailed Table Of Contents For Both Volumes (Page 11) II CHAPTER 17 Other Rollovers And Sale Of An Incorporated Business Introduction................ 819 Share For Share Exchanges - ITA 85.1.. 819 General Rules............ 820 Conditions For The Application Of ITA 85.1 820 Example.............. 820 Exchange Of Shares In A Reorganization - ITA 86................. 822 Conditions For The Reorganization.... 822 Procedures............. 823 Example Using ITA 86(1) In An Estate Freeze 824 Gift To Related Person - ITA 86(2).... 827 Practical Considerations........ 829 Using ITA 86(1) - Tax Planning Considerations 829 Amalgamations - ITA 87......... 830 Position Of The Amalgamated Company.. 831 Position Of The Shareholders...... 832 Vertical Amalgamations (Parent And Subsidiary) 832 Non-Tax Considerations........ 832 Amalgamations - Tax Planning Considerations 833 Winding-Up Of A 90% Owned Subsidiary 834 Acquisition Of Assets......... 834 Disposition Of Shares......... 837 Tax Planning Considerations - Amalgamation Vs. Winding-Up.... 838 Winding-Up Of A Canadian Corporation. 839 Example.............. 840 Convertible Properties.......... 842 Application............. 842 Sale Of An Incorporated Business.... 843 Restrictive Covenants (a.k.a. Non-Competition Agreements)............ 843 Sale Of Individual Assets........ 845 Sale Of Assets As A Going Concern.... 845 Sale Of Shares............ 847 Evaluation Of Alternatives....... 848 Example.............. 849 Key Terms Used In This Chapter..... 852 References................. 852 Problems For Self Study.......... 853 Assignment Problems........... 858 CHAPTER 18 Partnerships Introduction................ 865 Taxable Entities In Canada....... 865 Chapter Coverage.......... 866 Partnerships Defined........... 866 The Importance Of Defining A Partnership. 866 Basic Partnership Elements....... 867 Types Of Partnerships......... 867 Co-Ownership, Joint Ventures And Syndicates............. 868 Introduction............. 868 Co-Ownership............ 869 Joint Ventures............ 869 Syndicates............. 870 Partnership Income, Losses, And Tax Credits870 Introduction............. 870 Applicable Concepts......... 870 Calculating The Amounts To Be Allocated. 872 Methods Of Allocation......... 878 The Partnership Interest......... 878 The Concept............ 878 Acquiring A Partnership Interest..... 878 Adjusted Cost Base Of The Partnership Interest 880 Disposition Of A Partnership Interest... 884 Limited Partnerships And Limited Partners 884 Definitions............. 884 At-Risk Rules............ 885 Transfer Of Property To And From A Partnership.............. 887 Definition Of Canadian Partnership.... 887 Transfers With No Rollover Provision... 887 Common Partnership Rollovers..... 888 Specified Investment Flow Through Partnerships.............. 892 Key Terms Used In This Chapter..... 892 References................. 892 Problems For Self Study......... 894 Assignment Problems........... 899
Detailed Table Of Contents For Both Volumes (Page 12) II CHAPTER 19 Trusts And Estate Planning Introduction................ 907 Basic Concepts.............. 908 What Is A Personal Trust?........ 908 Establishing A Trust.......... 909 Returns And Payments - Trusts...... 910 Non-Tax Reasons For Using Trusts.... 911 Classification Of Trusts.......... 911 Personal Trusts............ 911 Testamentary Vs. Inter Vivos Trusts.... 912 Taxation Of Trusts............ 913 Rollovers To A Trust.......... 914 Rollovers To Capital Beneficiaries.... 917 21 Year Deemed Disposition Rule.... 917 Net Income For Tax Purposes Of A Trust 918 Preferred Beneficiary Election...... 919 Amounts Deemed Not Paid....... 919 Amounts Retained For A Beneficiary Under 21 Years Of Age........ 919 Taxable Income Of A Trust........ 920 Income Allocations To Beneficiaries... 920 Discretionary And Non-Discretionary Distributions............ 921 Flow Through Provisions........ 921 Principal Residence Exemption..... 923 Tax Payable Of Personal Trusts...... 923 Testamentary vs. Inter Vivos Trusts.... 923 Income Attribution - Trusts........ 926 Purchase Or Sale Of An Interest In A Trust 927 Tax Planning............... 928 Qualifying Spousal Trusts........ 930 Alter Ego Trusts............ 930 Joint Spousal Or Common-Law Partner Trusts 931 Estate Planning.............. 931 Estate Freeze............... 933 SIFT Partnerships And Trusts....... 936 Key Terms Used In This Chapter..... 940 References................. 941 Problems For Self Study......... 942 Assignment Problems........... 944 CHAPTER 20 International Issues In Taxation Introduction................ 949 Residence................. 950 Residence Of Individuals........ 950 Residence Of Corporations....... 957 Residence Of Trusts.......... 958 Part I Tax On Non-Residents....... 958 Canadian Source Employment Income.. 959 Carrying on Business in Canada..... 960 Dispositions of Taxable Canadian Property. 962 Part XIII Tax On Non-Residents..... 963 Interest Income........... 964 Dividends.............. 965 Royalties.............. 965 Rent................ 966 Pension Benefits, Other Retirement Benefits 967 Immigration And Emigration....... 968 Entering Canada - Immigration...... 968 Departures From Canada - Emigration... 968 Unwinding A Deemed Disposition.... 971 Short-Term Residents......... 972 Foreign Source Income Of Residents - Part I 972 Basic Issues............. 972 Foreign Source Employment Income... 973 Foreign Source Business Income..... 973 Foreign Source Capital Gains...... 974 Foreign Source Investment Income.... 975 Foreign Investment Reporting Requirements 976 Foreign Source Income Of Residents - Part II................. 977 Non-Resident Entities......... 977 Foreign Affiliates........... 978 Controlled Foreign Affiliates....... 979 Foreign Accrual Property Income (FAPI).. 980 Foreign Affiliate Dividends....... 983 Foreign Investment Entities....... 985 Dividends From Foreign Non-Affiliated Companies....... 986 Key Terms Used In This Chapter..... 987 References................. 987 Problems For Self Study......... 988 Assignment Problems........... 991
Detailed Table Of Contents For Both Volumes (Page 13) II CHAPTER 21 GST/HST Introduction................ 999 Transaction Tax Concepts........ 1001 Value Added Tax (VAT)........ 1003 Liability For GST/HST.......... 1005 The Concept Of Supply........ 1005 Supply Categories............ 1006 Taxable Supplies.......... 1006 Exempt Supplies........... 1008 Applying the GST/HST Rate....... 1008 Place Of Supply........... 1008 Applying The Rate.......... 1009 Collection And Remittance Of GST/HST 1010 Registration............... 1010 Meaning Of Person For GST/HST.... 1010 Who Must Register.......... 1010 Exemption For Small Suppliers..... 1011 Input Tax Credits............ 1013 VendorsOfFullyTaxableAnd Zero-Rated Supplies........ 1013 Vendors Of Exempt Supplies...... 1016 Examples............. 1017 Relief For Small Businesses....... 1019 Quick Method Of Accounting..... 1019 Small Suppliers Exemption....... 1022 Simplified Input Tax Credit Method... 1022 GST/HST Procedures And Administration 1023 GST/HST Returns And Payments.... 1023 Associated Persons.......... 1025 Refunds And Rebates......... 1025 Books And Records......... 1025 Appeals.............. 1025 General Anti-Avoidance Rule...... 1026 Employee And Partner GST/HST Rebate 1026 General Concept.......... 1026 Calculating The GST/HST Rebate Amount. 1027 Example.............. 1027 Residential Property, New Housing Rebate 1028 General Rules For Residential Property.. 1028 New Housing Rebate......... 1028 (continued) CHAPTER 21, continued Sale Of A Business............ 1029 Sale Of Assets............ 1029 Sale Of Shares........... 1029 Other Situations........... 1029 Specific Applications.......... 1030 Partnerships And GST/HST....... 1032 General Rules............ 1032 Partner Expenses.......... 1032 Disposition Of A Partnership Interest... 1032 Transfers Between Partners And Partnerships 1032 Reorganization Of The Partnership... 1032 Trusts And GST/HST........... 1033 Key Terms Used In This Chapter.... 1033 Problems For Self Study......... 1034 Assignment Problems.......... 1038 Glossary The Glossary can be found: at the back of the separate paper Study Guide, and on the Student CD-ROM within the FITAC version of Canadian Tax Principles. Supplementary Readings The Supplementary Readings can be found on the Student CD-ROM. No. 1 - Application Of The Median Rule No. 2 - Stock Option Shares Deemed Not Identical Property No. 3 - Election For Pre-1982 Residences No. 4 - Determining M&P Profits No. 5 - SR & ED Expenditures No. 6 - Final Returns For Deceased Taxpayers No. 7 - Business Valuations No. 8 - Tax Shelters No.9-TransferPricing