xvii CONTENTS 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.... 3 Tax Policy Concepts............. 5 Taxation And Economic Policy....... 5 Taxation And Income Levels....... 5 Tax Incidence............. 7 Tax Expenditures............ 7 Qualitative Characteristics Of Tax Systems.. 8 Income Tax Reference Materials...... 10 Introduction............. 10 The Income Tax Act.......... 10 Other Income Tax Legislation...... 14 Other Sources Of Income Tax Information. 15 Liability For Income Tax.......... 17 Charging Provision For Canadian Residents. 17 Charging Provision For Non-Residents... 18 Alternative Concepts Of Income...... 19 The Economist s View......... 19 The Accountant s View......... 20 The Income Tax Act View........ 20 Net Income For Tax Purposes....... 20 Structure.............. 20 Components............. 21 Combining The Components - ITA Section 3. 22 Loss Carry Overs........... 24 Net Income For Tax Purposes - Example.. 24 Net Income To Taxable Income...... 26 CHAPTER 1, continued Principles Of Tax Planning......... 26 Tax Avoidance Or Reduction....... 26 Tax Deferral............. 27 Income Splitting............ 27 Abbreviations To Be Used......... 28 Key Terms Used In This Chapter...... 29 References................. 29 Problems For Self Study.......... 30 Assignment Problems........... 31 CHAPTER 2 Income Or Loss From An Office Or Employment Employment Income Defined....... 35 General Rules............. 35 Cash Basis And Use Of Bonus Arrangements. 36 Net Concept............. 37 Employee Versus Self-Employed...... 37 Introduction............. 37 Employee Perspective......... 38 Employer Perspective.......... 39 Making The Distinction......... 40 Inclusions - Salaries And Wages...... 41 Inclusions - Fringe Benefits........ 41 ITA 6(1) - Amounts To Be Included In Income 41 CRA Administrative Practice On Fringe Benefits (IT-470R).............. 42 Tuition Fees............. 42 Gifts................ 42
xviii Table Of Contents CHAPTER 2, continued Inclusions - Fringe Benefits Non-Taxable Benefits (IT-470R)...... 43 Other ITA 6 Inclusions......... 43 Tax Planning Considerations....... 44 Inclusions - GST On Taxable Benefits... 46 Inclusions - Board And Lodging...... 46 Inclusions - Automobile Benefits...... 47 Employees And Automobiles....... 47 Standby Charge............ 48 Operating Cost Benefit......... 50 Payments By Employee For Automobile Use. 51 Example - Employer Owned Automobile.. 52 Example - Employer Leased Vehicle.... 52 Employer Provided Cars And Tax Planning. 53 Inclusions - Allowances.......... 54 Allowance Vs. Reimbursement...... 54 General Rules............. 54 Taxable Vs. Non-Taxable Allowances.... 55 Reasonable Allowances For Motor Vehicles. 56 Employer s Perspective Of Allowances... 57 Employee s Perspective Of Allowances... 57 Inclusions - Employee Insurance Benefits. 58 Life Insurance............. 58 Disability Insurance).......... 58 Health Care Insurance......... 59 Loans To Employees............ 59 General Rules............. 59 Home Relocation Loans......... 60 Tax Planning For Interest Free Loans.... 61 Inclusions - Stock Option Benefits..... 62 The Economics Of Stock Option Arrangements 62 Overview Of The Tax Rules....... 63 Private Vs. Public Companies....... 65 General Rules For Public Companies.... 66 General Rules For Canadian Controlled Private Corporations......... 67 Deferral On Publicly Traded Shares.... 68 Other Inclusions.............. 71 Payments By Employer To Employee.... 71 Forgiveness Of Employee Loans...... 71 Housing Loss Reimbursement...... 71 Discounts On Employer s Merchandise... 72 Club Dues And Recreational Facilities... 72 CHAPTER 2, continued Specific Deductions............ 72 Salesperson s Expenses......... 74 Travel Expenses And Motor Vehicle Costs.. 75 The Salesperson's Dilemma....... 75 Other Expenses Of Performing Duties... 76 Automobile And Aircraft Expenses..... 76 Home Office Costs For Employees..... 77 Key Terms Used In This Chapter...... 78 References................. 78 Problems For Self Study.......... 79 Assignment Problems........... 85 CHAPTER 3 Taxable Income And Tax Payable For Individuals Introduction................ 93 Taxable Income Of Individuals...... 94 Ordering Of Deductions........ 94 Deductions For Payments........ 94 Home Relocation Loan......... 95 Northern Residents Deductions...... 96 Calculation Of Tax Payable........ 96 Federal Tax Payable Before Credits.... 96 Provincial Tax Payable Before Credits... 97 Types Of Income........... 98 Taxes On Income Not Earned In A Province. 98 Calculating Tax Credits........... 99 Federal Amounts........... 99 Provincial Amounts.......... 99 Personal Tax Credits - ITA 118(1).... 100 Individuals With A Spouse Or Common-Law Partner........ 100 Individuals Supporting An Eligible Dependant 101 Child Tax Credit........... 102 Single Persons............ 102 Caregiver Tax Credit)......... 102 Infirm Dependant Over 17 Tax Credit... 103 Interaction: Eligible Dependant Vs. Caregiver Or Infirm Dependant Over 17. 103 Caregiver Vs. Infirm Dependant Over 17.. 104
Table Of Contents xix CHAPTER 3, continued Other Tax Credits For Individuals.... 105 Age Tax Credit............ 105 Pension Income Tax Credit....... 105 Canada Employment Tax Credit..... 106 Adoption Expenses Credit....... 106 Public Transit Pass Credit........ 107 Child Fitness Credit.......... 108 Charitable Donations Credit...... 108 Medical Expense Credit........ 110 Disability Credit........... 114 Education Related Credits....... 115 Employment Insurance (EI) And Canada Pension Plan (CPP) Credits... 119 Overpayment Of EI Premiums And CPP Contributions........ 119 Transfers To A Spouse Or Common-Law Partner....... 120 Working Income Tax Benefit...... 120 Political Contributions Tax Credits.... 121 Labour Sponsored Funds Tax Credit... 122 Dividend Tax Credit.......... 122 Foreign Tax Credits.......... 122 Investment Tax Credits......... 123 Refundable Credits............ 123 Introduction............. 123 Refundable GST Credit........ 123 Canada Child Tax Benefit....... 124 Social Benefits Repayment (OAS And EI). 124 Basic Concepts............ 124 Employment Insurance (EI) Benefits Clawback 125 Old Age Security (OAS) Benefits Clawback. 125 Comprehensive Example......... 126 Key Terms Used In This Chapter..... 128 References................. 129 Problems For Self Study.......... 130 Assignment Problems........... 133 Tax Software Assignment Problems... 139 CHAPTER 4 Capital Cost Allowances And Cumulative Eligible Capital Capital Cost Allowance System...... 145 General Rules............ 145 Tax And Accounting Procedures Compared. 145 Additions To Capital Cost......... 147 Determination Of Amounts....... 147 Available For Use Rules........ 149 Segregation Into Classes........ 149 Capital Cost Allowances......... 150 General Overview.......... 150 Commonly Used CCA Classes...... 151 Half-Year Rules (a.k.a. First Year Rules).. 154 Short Fiscal Periods.......... 155 Tax Planning Considerations...... 156 Dispositions Of Depreciable Assets... 157 General Rules............ 157 Capital Gains............ 158 Recapture Of Capital Cost Allowance... 158 Terminal Losses........... 159 CCA Schedule............... 160 CCA Determination - Special Situations. 161 Separate Class Election......... 161 Other Special Situations........ 162 Cumulative Eligible Capital (CEC).... 162 Eligible Capital Expenditures Defined... 162 Terminology............. 163 Additions, Amortization, And Dispositions. 163 Special Situations........... 167 Key Terms Used In This Chapter..... 168 References................. 168 Appendix - CCA Rates For Selected Assets 169 Problems For Self Study.......... 171 Assignment Problems........... 174
xx Table Of Contents CHAPTER 5 Income Or Loss From A Business Defining Business Income........ 179 Business Income Vs. Capital Gains.... 180 Capital Assets Defined......... 180 Criteria For Identifying Capital Gains... 181 Business Income And GAAP....... 182 Business Income - Inclusions (Revenues) 183 Amounts Received And Receivable.... 183 Reserves.............. 184 Other Inclusions........... 186 Limitations On Deductions From Business And Property Income..... 187 Specific Limiting Items Under ITA 18... 188 Foreign Media Advertising....... 193 Provincial Capital And Payroll Taxes... 194 Limitations On Deductions From Business, Property, And Employment Income.. 194 Reasonableness........... 194 Meals And Entertainment........ 195 Costs Of Automobile Ownership And Leasing 196 Automobile Leasing Costs....... 196 Fines, Penalties, and Illegal Payments... 199 Leasing Property........... 199 Business Income - Specific Deductions. 200 Reconciliation Schedule.......... 203 Business Income - Example........ 204 Taxation Year............... 205 General Rules............ 205 Unincorporated Businesses - Non-Calendar Fiscal Year...... 205 Special Business Income Situations... 207 Income For Farmers.......... 207 Income For Professionals........ 208 Ceasing To Carry On A Business..... 209 Scientific Research And Development... 211 Key Terms Used In This Chapter..... 211 References................. 212 Problems For Self Study.......... 213 Assignment Problems........... 219 Tax Software Assignment Problem.... 229 CHAPTER 6 Income From Property Introduction................ 233 Property Income: General Concept... 233 Interest As A Deduction.......... 234 The Problem............ 234 The Government Response....... 234 IT-533 - Interest Deductibility And Related Issues......... 236 Discount And Premium On Issued Debt.. 239 Interest Income.............. 241 General Provision........... 241 Corporations And Partnerships...... 241 Individuals............. 241 Discount And Premium On Debt Holdings. 242 Prescribed Debt Obligations...... 243 Indexed Debt Obligations....... 244 Accrued Interest At Transfer....... 245 Payments Based On Production Or Use (Royalties)........... 245 Rental Income............... 246 General Rules............ 246 Capital Cost Allowances........ 246 Rental Income Example........ 247 Cash Dividends From Taxable Canadian Corporations......... 248 The Concept Of Integration....... 248 Eligible Vs. Non-Eligible Dividends.... 249 Gross Up And Tax Credit Procedures - Non-Eligible Dividends....... 250 Gross Up And Tax Credit Procedures - Eligible Dividends......... 252 Comparison Of Investment Returns.... 255 Income Trusts............... 256 How Do Trusts Work?......... 256 Tax Consequences Of New Uses For Trusts. 256 Basis For Popularity.......... 257 October 31, 2006 Changes....... 258 Taxation Of Trusts: Pre-2011 Rules... 259 Mutual Funds............... 260 Objective.............. 260 Organization............ 260 Distributions............. 260 Adjusted Cost Base.......... 261
Table Of Contents xxi CHAPTER 6, continued CHAPTER 7, continued Other Types Of Dividends........ 262 Stock Dividends........... 262 Capital Dividends........... 262 Foreign Source Income.......... 262 General Rules............ 262 Foreign Non-Business (Property) Income. 263 Foreign Business Income........ 263 Shareholder Benefits........... 263 Tax Credits Revisited........... 264 Dividend Tax Credits......... 264 Foreign Income Tax Credits....... 264 Key Terms Used In This Chapter..... 265 References................. 265 Problems For Self Study.......... 266 Assignment Problems........... 268 Tax Software Assignment Problem.... 274 CHAPTER 7 Capital Gains And Capital Losses Economic Background.......... 277 Capital Assets And Income Taxation Policy. 277 Lifetime Capital Gains Deduction.... 277 Changes In The Inclusion Rate...... 278 General Rules............... 278 Capital Gains In The Income Tax Act... 278 Capital Gains Defined......... 279 Dispositions............. 279 Proceeds Of Disposition........ 280 Adjusted Cost Base.......... 280 Calculating The Capital Gain Or Loss... 282 Detailed Application Of The Rules.... 282 Identical Properties.......... 282 Partial Dispositions.......... 284 Warranties On Capital Assets...... 284 Capital Gains Reserves......... 285 Bad Debts On Sales Of Capital Property.. 287 Special Rule For Sales Of Real Property.. 287 Non-Arm s Length Transfers Of Property 289 Introduction............. 289 Inadequate Considerations - ITA 69.... 290 Inter Vivos Transfers To A Spouse.... 292 Farm Or Fishing Property To A Child... 294 Non-Arm s Length Transfers Of Depreciable Assets.......... 295 Deferral Provisions On Replacement Property......... 297 The Problem............ 297 Voluntary And Involuntary Dispositions.. 298 Timing Considerations......... 298 Application Of ITA 44(1) To Capital Gains. 298 Application Of ITA 13(4) To Recapture.. 299 Combined Application Of ITA 13(4) And 44(1) 300 Class 1 CCA - 2008 Budget Proposals... 303 Deferral Provisions On Small Business Investments............... 304 Basic Provision............ 304 Example.............. 305 Deemed Dispositions........... 306 Introduction............. 306 Change In Use............ 306 Departures From Canada........ 309 Death Of A Taxpayer......... 310 Provisions For Special Assets....... 312 Principal Residence.......... 312 Personal Use Property......... 316 Listed Personal Property........ 317 Gains And Losses On Foreign Currency.. 318 Options.............. 320 Capital Gains And Tax Planning..... 321 Key Terms Used In This Chapter..... 322 References................. 322 Problems For Self Study.......... 324 Assignment Problems........... 328 Tax Software Assignment Problem.... 337
xxii Table Of Contents CHAPTER 8 Other Income, Other Deductions, and Income Attribution Introduction................ 339 Other Income - Subdivision d Inclusions. 341 Pension Benefits........... 341 Retiring Allowances.......... 341 Death Benefits............ 341 Income Inclusions From Deferred Income Plans........ 342 Scholarships And Prizes........ 342 Research Grants........... 343 Social Assistance And Workers Compensation Payments... 343 Universal Child Care Benefit...... 343 Other Deductions - Subdivision e.... 343 CPP Contributions On Self-Employed Earnings 343 Moving Expenses........... 344 Child Care Expenses......... 346 Disability Supports Deduction...... 350 Related Inclusions And Deductions... 352 Introduction............. 352 Employment Insurance Benefits..... 352 Pension Income Splitting........ 352 Spousal And Child Support....... 353 Annuity Payments Received....... 355 Registered Savings Plans......... 357 Registered Education Savings Plans (RESPs). 357 Registered Disability Savings Plans (RDSPs). 363 Tax Free Savings Accounts (TFSAs).... 364 Income Attribution............ 365 The Problem............ 365 Basic Rules - ITA 74.1(1) And (2)..... 366 Income Attribution - Other Related Parties. 369 Anti-Avoidance Provisions....... 370 Tax Planning............ 370 Key Terms Used In This Chapter..... 371 References................. 372 Problems For Self Study.......... 373 Assignment Problems........... 377 Tax Software Assignment Problem.... 384 CHAPTER 9 Retirement Savings And Other Special Income Arrangements Planning For Retirement......... 387 Introduction............. 387 Providing Consistency......... 387 Tax Deferred Savings......... 388 Defined Benefit Vs. Money Purchase Plans. 390 Registered Retirement Savings Plans (RRSPs)................. 391 Basic Operations........... 391 RRSP Deduction Limit......... 393 Examples Of RRSP Deduction Calculations. 399 Undeducted RRSP Contributions..... 401 RRSP And RRIF Administration Fees... 403 RRSP Withdrawals And Voluntary Conversions 403 Involuntary Termination Due To Age Limitation........ 404 Spousal RRSP............ 404 Home Buyers Plan (HBP)....... 406 Lifelong Learning Plan (LLP)....... 408 Departure From Canada........ 409 Death Of The Registrant........ 410 Registered Pension Plans (RPPs)..... 412 Establishing An RPP.......... 412 Employer Contributions To The RPP... 412 Employee Contributions To The RPP... 413 Options At Retirement......... 413 Phased Retirement.......... 414 Registered Retirement Income Funds (RRIFs)................. 414 Establishment............ 414 Minimum Withdrawals......... 415 Death Of The Registrant........ 416 Evaluation Of RRIFs.......... 416 Deferred Profit Sharing Plans....... 416 General Rules............ 416 Tax Planning............ 417 Profit Sharing Plans............ 417 Transfers Between Plans......... 417 Accumulated Benefits......... 417 Retiring Allowances.......... 418
Table Of Contents xxiii CHAPTER 9, continued Retirement Compensation Arrangements 419 The Problem............ 419 Arrangements Defined......... 419 Part XI.3 Refundable Tax........ 419 Salary Deferral Arrangements...... 420 The Problem............ 420 The Solution............. 420 Individual Pension Plans (IPPs)...... 421 Key Terms Used In This Chapter..... 421 References................. 422 Problems For Self Study.......... 423 Assignment Problems........... 426 Tax Software Assignment Problem.... 434 CHAPTER 10 Taxable Income And Tax Payable For Individuals Revisited Introduction................ 437 The Problem............ 437 Our Solution............ 437 Taxable Income Overview........ 438 Lump-Sum Payments........... 439 The Problem............ 439 Treatment Of Losses........... 440 Carry Over Provisions......... 440 Personal Use Property Losses...... 442 Listed Personal Property Losses..... 442 Non-Capital Losses.......... 443 Net Capital Losses.......... 444 Net Capital Losses At Death....... 446 Allowable Business Investment Losses... 447 Farm Losses............. 449 Lifetime Capital Gains Deduction.... 450 Background............. 450 Qualified Property.......... 451 Determining The Deductible Amount... 452 Comprehensive Example........ 455 CHAPTER 10, continued Ordering Of Deductions And Losses... 456 Significance Of Ordering........ 456 Ordering In Computing Net Income For Tax Purposes.......... 456 Ordering In Computing Taxable Income.. 457 Example.............. 457 Tax Payable Overview........... 458 Basic Federal Tax Payable....... 459 Tax On Split Income........... 459 Tax Credits Revisited........... 461 Transfer Of Dividends To A Spouse Or Common-Law Partner... 461 Charitable Donations Credit Revisited... 462 Foreign Tax Credits Revisited...... 467 Alternative Minimum Tax......... 469 General Concept........... 469 Minimum Tax Calculation....... 469 Tax Credits For AMT......... 470 AMT Carry Forward.......... 471 Short Summary Of Filing Procedures... 471 Key Terms Used In This Chapter..... 472 References................. 473 Problems For Self Study......... 474 Assignment Problems........... 480 Tax Software Assignment Problems... 489 CHAPTER 11 Taxable Income And Tax Payable For Corporations Computation Of Net Income....... 497 Computation Of Taxable Income..... 499 Deductions Available To Corporations... 499 Dividends From Other Corporations... 500 Non-Capital Loss Carry Over For A Corporation 503 Ordering Of Taxable Income Deductions. 505
xxiv Table Of Contents CHAPTER 11, continued Geographical Allocation Of Income... 505 Permanent Establishments....... 505 Activity At Permanent Establishments... 506 Example - Permanent Establishments... 506 Federal Tax Payable............ 507 Basic Rate............. 507 Federal Tax Abatement........ 507 General Rate Reduction........ 507 Provincial Tax Payable........... 508 General Rules............ 508 General Rate............ 508 Other Goals Of The Corporate Tax System 510 Small Business Deduction........ 510 Introduction............. 510 Canadian Controlled Private Corporation (CCPC).............. 511 Active Business Income........ 512 Annual Business Limit......... 514 Allocation Among Associated Companies. 514 Calculating The Small Business Deduction. 514 Elimination Of Small Business Deduction For Large CCPCs.......... 516 Personal Services Corporations..... 518 Professional Corporations And Management Companies....... 519 Manufacturing And Processing Profits Deduction................ 520 Calculating The Deduction....... 520 Eligibility.............. 522 M&P Profits Defined......... 522 General Rate Reduction - ITA 123.4(2).. 523 Approach To Rate Reductions...... 523 Full Rate Taxable Income........ 523 Application To Companies Other Than CCPCs 523 Application To CCPCs......... 524 Foreign Tax Credits For Corporations.. 525 Calculation Of Foreign Tax Credits.... 525 Key Terms Used In This Chapter..... 527 References................. 528 Problems For Self Study.......... 529 Assignment Problems........... 534 CHAPTER 12 Taxation Of Corporate Investment Income Integration................. 541 The Basic Concept.......... 541 Dividend Gross Up And Tax Credit Procedures 542 Integration And Business Income..... 543 Refundable Taxes On Investment Income 546 Meaning Of Aggregate Investment Income. 546 Basic Concepts............ 547 Refundable Part I Tax On Investment Income......... 548 Additional Refundable Tax On Investment Income (ART)..... 548 Problem One: Excessive Tax Rates On The Flow Through Of A CCPC s Investment Income.... 550 Solution To Problem One: Refundable Portion Of Part I Tax.... 552 Refundable Part IV Tax On Dividends Received........ 555 Problem Two: Use Of Multi-Level Affiliations To Defer Taxes On Investment Income.. 555 Solution To Problem Two: Refundable Part IV Tax........ 556 Part IV Tax On Portfolio Dividends Received 556 Dividends From A Connected Corporation. 558 Dividends Paid Out Of Mixed Income Of A Connected Corporation..... 560 Refundable Dividend Tax On Hand (RDTOH)................ 561 RDTOH - General Definition...... 561 Refundable Portion Of Part I Tax Payable. 561 The Dividend Refund......... 564 Example.............. 564 Designation Of Eligible Dividends.... 567 CCPCs And Their GRIP........ 568 Non-CCPCs And Their LRIP....... 570 Part III.1 Tax On Excessive Eligible Dividend Designations............ 571 A Final Word On Eligible Dividends... 572 Key Terms Used In This Chapter..... 573 References................. 573 Problems For Self Study.......... 573 Assignment Problems........... 578
Table Of Contents xxv CHAPTER 13 Other Issues In Corporate Taxation Introduction................ 585 Acquisition Of Control Rules....... 585 Economic Background......... 585 Acquisition Of Control Legislation.... 586 Deemed Year End.......... 586 Restrictions On The Use Of Charitable Donations............. 586 Restrictions On The Use Of Losses.... 587 Unrecognized Losses At Deemed Year End. 588 Deemed Disposition Election...... 589 Associated Companies.......... 591 The Problem............ 591 Investment Tax Credits.......... 595 Procedures............. 596 Eligible Expenditures......... 596 Rates............... 597 Refundable Investment Tax Credits.... 598 Carry Overs Of Investment Tax Credits.. 599 Acquisition Of Control......... 599 Tax Basis Shareholders Equity...... 600 Shareholders Equity Under GAAP.... 600 Paid Up Capital........... 600 Tax Basis Retained Earnings....... 601 Pre-1972 Capital Surplus On Hand (CSOH) 602 Capital Dividend Account....... 602 Distributions Of Corporate Surplus... 604 Regular Cash Dividends........ 605 Stock Dividends........... 605 Dividends In Kind.......... 606 Capital Dividends Under ITA 83(2).... 606 Deemed Dividends Under: ITA 84(1) - Increase In PUC...... 607 ITA 84(2) - On Winding-Up...... 608 ITA 84(3) - On Redemption, Acquisition, Or Cancellation Of Shares..... 610 ITA 84(4) And ITA 84(4.1)....... 611 Key Terms Used In This Chapter..... 612 References................. 613 Problems For Self Study.......... 614 Assignment Problems........... 616 Tax Software Assignment Problem.... 620 CHAPTER 14 Procedures And Administration Introduction................ 623 Administration Of The Department... 623 Source Deductions............ 624 Withholdings............ 624 Employer s Remittance Of Source Deductions 625 Returns And Payments - Individuals.. 626 Requirement To File......... 626 Due Date For Individual Returns..... 627 Instalment Payments For Individuals... 629 Interest............... 631 Penalties.............. 633 Due Date For Balance Owing - Individuals. 633 Final Returns For Deceased Taxpayers... 634 Returns And Payments - Corporations.. 634 Due Date For Corporate Returns..... 634 Instalment Payments For Corporations... 634 Due Date For Balance Owing - Corporations 636 Interest And Penalties For Corporations.. 637 Returns And Payments - Trusts...... 637 Income Tax Information Returns..... 638 Refunds.................. 638 Books And Records............ 639 Assessments................ 639 Initial Assessments.......... 639 Reassessments............ 639 Adjustments To Income Tax Returns... 640 Appeals.................. 640 Consent Form............ 640 Informal Request For Adjustments.... 641 Notice Of Objection......... 641 Tax Court Of Canada......... 642 Federal Court And Supreme Court Of Canada 643 Tax Evasion, Avoidance And Planning.. 644 Tax Evasion............. 644 Avoidance And Planning........ 644 General Anti-Avoidance Rule (GAAR)... 644 Reasonable Expectation Of Profit (REOP). 646
xxvi Table Of Contents CHAPTER 14, continued CHAPTER 15, continued Collection And Enforcement....... 647 Taxpayer Property.......... 647 Collections............. 647 Other Penalties........... 648 Taxpayer Relief Provisions (Fairness Package)........... 649 Basic Rules............. 649 Application............. 650 Key Terms Used In This Chapter..... 650 References................. 651 Problems For Self Study.......... 652 Assignment Problems........... 653 CHAPTER 15 Corporate Taxation And Management Decisions The Decision To Incorporate....... 657 Basic Tax Considerations........ 657 Other Advantages And Disadvantages... 658 Tax Reduction And Deferral....... 659 Approach.............. 659 Basic Example............ 660 Public Corporation.......... 662 CCPC - Active Business Income..... 664 CCPC - Investment Income Other Than Dividends........... 666 CCPC - Dividend Income....... 668 Conclusions On Tax Reductions And Deferrals 669 Provincial Taxes And Integration..... 671 Introduction............. 671 Tax Deferral............. 671 Tax Reduction............ 672 Tax Free Dividends............ 675 Tax Rates On Dividends........ 675 Use Of Tax Credits.......... 676 Tax Free Amounts For 2008....... 677 Income Splitting.............. 678 Basic Concept............ 678 Example.............. 678 Shareholder Benefits........... 680 The Owner-Manager Environment.... 680 Shareholder Benefits Other Than Loans.. 680 Shareholder Loans.......... 681 Management Compensation....... 684 General Principles.......... 684 Salary Vs. Dividends.......... 685 Salary Vs. Dividends For The Owner - Manager......... 685 The Basic Trade-Off.......... 685 Other Considerations......... 686 Conclusion............. 693 Key Terms Used In This Chapter..... 694 References................. 694 Problems For Self Study.......... 695 Assignment Problems........... 698 CHAPTER 16 Rollovers Under Section 85 Rollovers Under Section 85........ 705 Introduction............. 705 General Rules For The Transfer...... 705 Transferor And Transferee....... 705 Eligible Property........... 706 Consideration To Transferor....... 706 Making The Election......... 706 Establishing The Transfer Price...... 707
Table Of Contents xxvii CHAPTER 16, continued Transfer Prices - Detailed Rules..... 709 Rules Applicable To All Assets...... 709 Accounts Receivable......... 709 Inventories And Non-Depreciable Capital Property.......... 710 Non-Depreciable Capital Property - Disallowed Capital Losses...... 711 Depreciable Property......... 713 Depreciable Property - Terminal Losses Disallowed............ 715 Eligible Capital Property........ 716 Eligible Capital Property - Disallowed Deductions............ 717 Allocation Of The Elected Value..... 718 Consideration Received By The Transferor (Shareholder)............ 718 Assets Acquired By The Corporation... 719 Paid Up Capital Of Shares Issued.... 720 General Rules............ 720 Paid Up Capital Reduction....... 721 More Than One Class Of Shares..... 721 Section 85 Rollovers Comprehensive Example...... 723 Excluded Assets........... 723 Implementing The Election....... 724 Gift To Related Person - Section 85... 725 Example.............. 725 Section 85 - Excess Consideration.... 727 ITA 15(1) Shareholder Benefit...... 727 ITA 84(1) Deemed Dividend...... 728 Dividend Stripping ITA 84.1...... 729 Background............. 729 Applicability Of ITA 84.1........ 729 Example - Post-1971 Shares....... 730 Capital Gains Stripping ITA 55(2)... 732 The Problem............ 732 Application Of ITA 55(2)........ 732 Capital Gains Stripping - Example One.. 733 Capital Gains Stripping - Example Two.. 734 Key Terms Used In This Chapter..... 736 References................. 736 Problems For Self Study.......... 737 Assignment Problems........... 742 CHAPTER 17 Other Rollovers And Sale Of An Incorporated Business Introduction................ 749 Share For Share Exchanges........ 749 Example.............. 750 Exchange Of Shares In A Reorganization. 751 Application Of Section 86....... 751 Conditions For The Reorganization.... 751 Procedures............. 752 Example Using ITA 86 In An Estate Freeze. 753 Gift To Related Person (Benefit Rule)... 756 Practical Considerations........ 758 Using Section 86 - Advantages and Disadvantages........... 758 Amalgamations.............. 759 Position Of The Amalgamated Company.. 760 Position Of The Shareholders...... 761 Vertical Amalgamations........ 761 Non-Tax Considerations........ 761 Tax Planning Considerations...... 762 Winding-Up Of A 90% Owned Subsidiary 763 The Nature Of A Winding-Up...... 763 Acquisition Of Assets......... 763 Disposition Of Shares......... 766 Tax Planning Considerations - Amalgamation Vs. Winding-Up.... 767 Winding-Up Of A Canadian Corporation. 768 Convertible Properties.......... 771 Application............. 771 Sale Of An Incorporated Business.... 772 Alternatives............. 772 Restrictive Covenants (a.k.a. Non-Competition Agreements).. 772 Sale Of Individual Assets........ 773 Sale Of Assets As A Going Concern.... 773 Sale Of Shares............ 776 Evaluation Of Alternatives....... 776 Example.............. 778 Key Terms Used In This Chapter..... 780 References................. 781 Problems For Self Study.......... 782 Assignment Problems........... 785
xxviii Table Of Contents CHAPTER 18 Partnerships Introduction................ 793 Taxable Entities In Canada....... 793 Partnerships Defined........... 794 The Importance Of Defining A Partnership. 794 Basic Partnership Elements....... 794 Types Of Partnerships......... 795 Co-Ownership, Joint Ventures And Syndicates............. 796 Introduction............. 796 Co-Ownership............ 796 Joint Ventures............ 797 Syndicates............. 797 Partnership Income, Losses, Tax Credits 798 Introduction............. 798 Basic Concepts............ 798 Calculating Partnership Income Or Loss.. 799 Allocations To Partners And Partner Expenses............ 802 Method Of Allocation......... 802 Allocation Of Specific Items....... 802 The Partnership Interest......... 804 The Concept............ 804 Acquiring A Partnership Interest..... 804 Adjustments To The ACB Of A Partnership Interest........ 806 Limited Partnerships And Limited Partners 809 Definitions............. 809 At-Risk Rules............ 809 Transfer Of Property To And From A Partnership.............. 811 Introduction............. 811 Transfers With No Rollover Provision... 812 Common Partnership Rollovers..... 813 Specified Investment Flow Through (SIFT) Partnerships.............. 816 Key Terms Used In This Chapter..... 817 References................. 817 Problems For Self Study.......... 818 Assignment Problems........... 822 CHAPTER 19 Trusts And Estate Planning Introduction................ 829 Basic Concepts.............. 830 What Is A Personal Trust?........ 830 Establishing A Trust.......... 831 Non-Tax Reasons For Using Trusts.... 832 Classification Of Trusts.......... 833 Introduction............. 833 Personal Trusts............ 833 Testamentary Vs. Inter Vivos Trusts.... 834 Taxation Of Trusts............ 835 The Basic Model........... 835 Rollovers To A Trust.......... 836 Rollovers To Capital Beneficiaries.... 839 21 Year Deemed Disposition Rule.... 839 Net Income For Tax Purposes Of A Trust 840 Basic Rules............. 840 Preferred Beneficiary Election...... 841 Amounts Deemed Not Paid....... 841 Amounts Retained For A Beneficiary Under 21 Years Of Age........ 841 Taxable Income Of A Trust........ 841 Income Allocations To Beneficiaries... 842 General Rules............ 842 Discretionary And Non-Discretionary Distributions............ 843 Flow Through Provisions........ 843 Principal Residence Exemption..... 845 Tax Payable Of Personal Trusts...... 845 General Approach.......... 845 Taxation Of Testamentary Trusts..... 845 Taxation Of Inter Vivos Trusts...... 846 Other Tax Payable Considerations.... 846 Trust Tax And Information Returns.... 847 Income Attribution............ 848 General Rules............ 848 Attribution To Settlor (Reversionary Trust). 849 Purchase Or Sale Of An Interest In A Trust 849 Income Interest........... 849 Capital Interest............ 849
Table Of Contents xxix CHAPTER 19, continued CHAPTER 20, continued Tax Planning................ 850 Family Trusts............ 850 Spousal Or Common-Law Partner Trusts.. 852 Alter Ego Trusts........... 852 Joint Spousal Or Common-Law Partner Trusts 853 Estate Planning.............. 853 Non-Tax Considerations........ 853 Tax Considerations.......... 854 Estate Freeze............... 854 Objectives Of An Estate Freeze..... 854 Techniques Not Involving Rollovers.... 855 Section 86 Share Exchange....... 856 Rollover Provisions - Section 85 vs. Section 86 857 SIFT Partnerships And Trusts....... 858 The Problem............ 858 The Solution: Specified Investment Flow-Through Entities........ 859 A Word Of Caution.......... 861 Key Terms Used In This Chapter..... 862 References................. 863 Problems For Self Study.......... 864 Assignment Problems........... 866 CHAPTER 20 International Issues In Taxation Introduction................ 871 Subjects Covered........... 871 The Role of International Tax Treaties... 872 Residence................. 872 Importance............. 872 Residence Of Individuals........ 872 Residence Of Corporations....... 877 Residence Of Trusts.......... 878 Non-Residents Earning Canadian Source Income............. 878 Basic Approaches - Part I Or Part XIII Tax. 878 Canadian Source Employment Income.. 879 Carrying on Business in Canada..... 881 Dispositions of Taxable Canadian Property. 882 Canadian Source Property Income.... 884 The Problem Of Double Taxation.... 887 Sources Of The Problem........ 887 Dual Residence........... 887 Dual Source............. 889 Residence Vs. Citizenship....... 889 Residence Vs. Source......... 890 Immigration And Emigration....... 891 Entering Canada - Immigration..... 891 Departures From Canada - Emigration... 891 Unwinding A Deemed Disposition.... 894 Short-Term Residents......... 895 Emigration And Stock Options...... 895 Foreign Source Employment Income... 896 Foreign Source Business Income..... 897 Foreign Source Capital Gains....... 897 Foreign Source Investment Income.... 898 Basic Concepts............ 898 Foreign Investment Reporting Requirements 898 Non-Resident Entities......... 899 Foreign Affiliates........... 901 Controlled Foreign Affiliates....... 902 Foreign Accrual Property Income (FAPI).. 903 Foreign Affiliate Dividends....... 905 Foreign Investment Entities....... 907 Dividends From Foreign Non-Affiliated Companies............ 909 Transfer Pricing.............. 909 Key Terms Used In This Chapter..... 909 References................. 909 Problems For Self Study.......... 911 Assignment Problems........... 913
xxx Table Of Contents CHAPTER 21 Goods And Services Tax Note On 2007 Economic Statement... 923 Transaction Tax Concepts........ 924 Liability For GST.............. 927 The Concept Of Supply.......... 928 Basic Definition........... 928 Supply Categories.......... 928 Applying the GST Rate.......... 930 Effect Of Trade-Ins.......... 930 Collection And Remittance Of GST.... 930 Registration................ 931 Meaning Of Person For GST...... 931 Who Must Register.......... 931 Exemption For Non-Residents...... 932 Exemption For Small Suppliers...... 932 Input Tax Credits............. 934 Vendors Of Fully Taxable And Zero-Rated Supplies......... 934 Vendors Of Exempt Supplies...... 936 Accounting vs. Income Tax vs. GST.... 936 Example.............. 937 Relief For Small Businesses........ 939 Quick Method Of Accounting...... 939 Small Suppliers Exemption....... 941 Simplified Input Tax Credit Method.... 941 GST Procedures And Administration... 942 GST Returns And Payments....... 942 Associated Persons.......... 943 Refunds And Rebates......... 944 Books And Records.......... 944 Appeals.............. 944 General Anti-Avoidance Rule...... 945 Employee And Partner GST Rebate.... 945 Calculating The GST Rebate Amount... 945 Example.............. 946 Residential Property And New Housing Rebate.......... 947 Sale Of A Business............ 947 Sale Of Assets............ 947 Sale Of Shares............ 948 CHAPTER 21, continued Specific Applications........... 949 Harmonized Sales Tax (HST)....... 950 Partnerships And GST........... 950 General Rules............ 950 Partner Expenses........... 951 Disposition Of A Partnership Interest... 951 Transfers Between Partners And Partnerships 951 Reorganization Of The Partnership.... 951 Trusts And GST.............. 952 Key Terms Used In This Chapter..... 952 Problems For Self Study.......... 953 Assignment Problems........... 956 INDEX................ 963 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 - Revoked Stock Option Election No. 3 - Stock Option Shares Deemed Not Identical Property No. 4 - Election For Pre-1982 Residences No. 5 - Determining M&P Profits No. 6 - SR & ED Expenditures No. 7 - Final Returns For Deceased Taxpayers No. 8 - Business Valuations No. 9 - Tax Shelters No. 10 - Transfer Pricing