xviii Table Of Contents (Volume 1) 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...... 11 The Income Tax Act.......... 11 Other Income Tax Legislation...... 14 Other Sources Of Income Tax Information. 16 Liability For Income Tax.......... 18 Charging Provision For Canadian Residents. 18 Charging Provision For Non-Residents... 19 Alternative Concepts Of Income...... 21 The Economist s View......... 21 The Accountant s View......... 21 The Income Tax Act View........ 21 Net Income For Tax Purposes....... 21 Structure............... 21 Components............. 22 Combining The Components - ITA Section 3. 23 Loss Carry Overs........... 25 Net Income For Tax Purposes - Example.. 26 Net Income To Taxable Income...... 27 Principles Of Tax Planning......... 27 Introduction............. 27 Tax Avoidance Or Reduction....... 28 Tax Deferral............. 28 Income Splitting............ 29 Abbreviations To Be Used......... 30 Key Terms Used In This Chapter..... 31 References................. 31 Problems For Self Study.......... 32 Assignment Problems........... 34 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 For Income Tax - ITA 153.. 40 Instalment Payments For Individuals - ITA 156 41 Interest............... 44 Penalties............... 46 Due Date For Balance Owing - Living Individuals 46 Deceased Taxpayers - Due Dates And Returns 47 Returns And Payments - Corporations... 47 DueDateForCorporateReturns-ITA150. 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..... 52 Books And Records............. 52 Assessments And The CRA My Account Service......... 52 CRA Web Site - My Account Service.... 52 Notice Of Assessment......... 52 Notice Of Reassessment......... 53 Refunds................... 53 Adjustments To Income Tax Returns... 54 Disputes And Appeals........... 54 Representation By Others........ 54 Informal Request For Adjustments..... 55 Notice Of Objection.......... 55 Tax Court Of Canada.......... 56 Federal Court And Supreme Court Of Canada 57 Tax Evasion, Avoidance And Planning... 58 Collection And Enforcement........ 60 Taxpayer Relief Provisions (Fairness Package) 62 Key Terms Used In This Chapter..... 63 References................. 63 Problems For Self Study.......... 65 Assignment Problems........... 68
Table Of Contents (Volume 1) xix CHAPTER 3 Income Or Loss From An Office Or Employment Employment Income Defined....... 73 Cash Basis And The Use Of Bonus Arrangements 74 Net Concept............. 75 Employee Versus Self-Employed...... 75 Employee Perspective......... 76 Employer Perspective.......... 78 Making The Distinction......... 78 Inclusions - Salaries And Wages...... 80 Inclusions - Fringe Benefits........ 80 Amounts To Be Included In Income - ITA 6(1) 80 CRA Administrative Practice On Fringe Benefits (IT-470R).............. 81 Tax Planning Considerations....... 85 Inclusions - GST/HST On Taxable Benefits 86 Inclusions - Board And Lodging...... 87 Inclusions - Automobile Benefits..... 87 Employees And Automobiles....... 87 Taxable Benefits - Standby Charge..... 89 Operating Cost Benefit......... 91 Summary Of Automobile Benefit Calculations 92 Payments By Employee For Automobile Use. 92 Example - Employer Owned Automobile.. 93 Example - Employer Leased Vehicle.... 93 Employer Provided Cars And Tax Planning. 95 Inclusions - Allowances.......... 96 Allowance Vs. Reimbursement...... 96 General Rules............. 96 Taxable Vs. Non-Taxable Allowances.... 97 Reasonable Allowances For Motor Vehicles. 97 Employer s Perspective Of Allowances... 98 Employee s Perspective Of Allowances... 98 Inclusions - Employee Insurance Benefits. 99 Life Insurance............. 99 Disability Insurance (a.k.a. Group Sickness Or Accident Insurance Plan)...... 99 Health Care Insurance......... 101 Loans To Employees........... 101 General Rules............ 101 Home Relocation Loans........ 102 Tax Planning For Interest Free Loans... 103 (continued) CHAPTER 3, continued Inclusions - Stock Option Benefits.... 105 CCPCs Vs. Public Companies...... 107 Rules For Public Companies....... 107 Rules For CCPCs........... 109 Other Inclusions............. 110 Payments By Employer To Employee... 110 Forgiveness Of Employee Loans..... 110 Housing Loss Reimbursement...... 111 Discounts On Employer s Merchandise.. 111 Club Dues And Recreational Facilities... 111 Specific Deductions............ 112 Salesperson s Expenses Under ITA 8(1)(f).. 113 Travel Expenses And Motor Vehicle Costs. 114 The Salesperson's Dilemma....... 114 Automobile And Aircraft Expenses.... 116 Work Space In Home Costs For Employees. 116 Key Terms Used In This Chapter..... 117 References................. 117 Problems For Self Study......... 118 Assignment Problems........... 128 CHAPTER 4 Taxable Income And Tax Payable For Individuals Introduction................ 139 Taxable Income Of Individuals...... 140 Available Deductions......... 140 Ordering Of Deductions........ 140 Deductions For Payments - ITA 110(1)(f).. 141 Home Relocation Loan - ITA 110(1)(j)... 141 Northern Residents Deductions - ITA 110.7. 142 Calculation Of Tax Payable........ 142 Federal Tax Payable Before Credits.... 142 Provincial Tax Payable Before Credits... 143 Types Of Income........... 144 Taxes On Income Not Earned In A Province 145 Calculating Tax Credits.......... 145 Federal Amounts........... 145 Provincial Amounts.......... 146 (continued)
xx Table Of Contents (Volume 1) CHAPTER 4, continued Personal Tax Credits - ITA 118(1).... 146 Family Caregiver Amount (FCA)..... 146 Individuals With A Spouse Or Common-Law Partner - ITA 118(1)(a).. 147 Individuals Supporting A Wholly Dependent Person - ITA 118(1)(b)... 148 Child Tax Credit - ITA 118(1)(b.1).... 150 Single Persons - ITA 118(1)(c)...... 150 Caregiver Tax Credit - ITA 118(1)(c.1)... 151 Infirm Dependant Over 17 Tax Credit.. 151 Interactions: Eligible Dependant Vs. Caregiver Vs. Infirm Dependant Over 17 Credits.. 152 Other Tax Credits For Individuals.... 154 Age Tax Credit - ITA 118(2)....... 154 Pension Income Tax Credit - ITA 118(3).. 155 Canada Employment Tax Credit - ITA 118(10) 155 Adoption Expenses Tax Credit - ITA 118.01. 155 Public Transit Passes Tax Credit - ITA 118.02 157 Child Fitness Tax Credit - ITA 118.03 And Children s Arts Tax Credit - ITA 118.031. 157 First Time Home Buyer s Credit - ITA 118.05 159 Volunteer Firefighters And Workers Tax Credits 159 Charitable Donations Tax Credit - ITA 118.1 159 Medical Expense Tax Credit - ITA 118.2.. 162 Disability Tax Credit - ITA 118.3..... 166 Education Related Tax Credits...... 168 EI And CPP Tax Credits - ITA 118.7.... 171 Overpayment Of EI And CPP Contributions. 172 Transfers To Spouse Or Common-Law Partner 172 Political Contributions Tax Credits - ITA 127(3) 173 Labour Sponsored Funds Tax Credit... 174 Refundable Credits............ 175 Refundable GST/HST Credit - ITA 122.5.. 175 Working Income Tax Benefit - ITA 122.7.. 176 Canada Child Tax Benefit........ 177 Social Benefits Repayment (OAS And EI). 178 Comprehensive Example......... 179 Key Terms Used In This Chapter..... 182 References................. 182 Sample Tax Return For Chapter 4.... 184 Problems For Self Study......... 184 Assignment Problems........... 192 Tax Software Assignment Problems... 199 CHAPTER 5 Capital Cost Allowances And Cumulative Eligible Capital Capital Cost Allowance System...... 205 Additions To Capital Cost......... 207 Determination Of Amounts....... 207 Available For Use Rules........ 210 Segregation Into Classes........ 210 Capital Cost Allowances......... 211 Rates For Commonly Used CCA Classes.. 212 Half-Year Rules (a.k.a. First Year Rules).. 214 Short Fiscal Periods.......... 216 Tax Planning Considerations...... 217 Dispositions Of Depreciable Assets... 218 Capital Gains............ 219 Recapture Of Capital Cost Allowance... 220 Terminal Losses........... 221 Summary Of Tax Consequences..... 222 CCA Schedule............... 222 CCA Determination - Special Situations. 223 Separate Class Election......... 223 Cumulative Eligible Capital (CEC).... 225 Eligible Capital Expenditures Defined... 225 Additions, Amortization, And Dispositions. 226 Key Terms Used In This Chapter..... 230 References................. 231 Appendix - CCA Rates For Selected Assets 232 Problems For Self Study......... 234 Assignment Problems........... 239 CHAPTER 6 Income Or Loss From A Business Overview................. 245 Classification Of Income........ 246 Business Income Vs. Property Income.. 248 Tax Consequences Of Classification.... 248 Business Income Defined........ 249 Property Income Defined........ 250 (continued)
Table Of Contents (Volume 1) xxi CHAPTER 6, continued Business Income Vs. Capital Gains.... 250 Tax Consequences Of Classification.... 250 Capital Gains Defined......... 251 Criteria For Identifying Capital Gains... 251 Business Income And GAAP....... 253 Business Income - Inclusions (Revenues) 254 Amounts Received And Receivable.... 254 Reserves.............. 255 Limitations On Deductions From Business And Property Income.......... 258 Specific Limiting Items Under ITA 18... 259 Foreign Media Advertising - ITA 19 And 19.1 264 Provincial Capital And Payroll Taxes... 265 Limitations On Deductions From Business, Property, And Employment Income.. 265 Reasonableness........... 265 Meals And Entertainment........ 266 Luxury Automobile Costs....... 267 Automobiles Owned By The Taxpayer... 267 Automobile Leasing Costs - ITA 67.3... 268 Leasing Property........... 270 Illegal Payments, Fines And Penalties... 271 Business Income - Specific Deductions. 271 Inventory Valuation (Cost Of Sales).... 271 Other Deductions.......... 273 Reconciliation Schedule......... 274 Business Income - Example........ 276 Taxation Year............... 277 General Rules............ 277 Unincorporated Businesses - Non-Calendar Fiscal Year...... 278 Special Business Income Situations... 279 Income For Farmers.......... 279 Professional Income (Billed Basis)..... 281 Sale Of A Business.......... 282 Key Terms Used In This Chapter..... 284 References................. 284 Problems For Self Study......... 286 Assignment Problems........... 299 CHAPTER 7 Income From Property Property Income: General Concept... 313 Interest As A Deduction......... 314 The Singleton And Ludco Court Cases... 315 IT-533 - Interest Deductibility..... 315 Discount And Premium On Issued Debt.. 318 Interest Income.............. 320 Individuals - Modified Accrual Method.. 321 Discount And Premium On Debt Holdings. 322 Prescribed Debt Obligations....... 322 Accrued Interest At Transfer....... 323 Payments Based On Production Or Use (Royalties)........... 324 Rental Income............... 324 Capital Cost Allowances........ 325 Rental Income Example........ 326 Cash Dividends From Taxable Canadian Corporations.............. 327 The Concept Of Integration....... 327 Implementing Integration........ 328 Gross Up And Tax Credit Procedures - Eligible Dividends......... 330 - Non-Eligible Dividends....... 332 Comparison Of Investment Returns.... 335 Income Trusts............... 335 How Do Trusts Work?......... 335 Investments In Publicly Traded Trusts... 336 Taxation Of Income Trusts....... 338 Mutual Funds............... 339 Distributions............. 340 Adjusted Cost Base.......... 340 Stock And Capital Dividends....... 341 Foreign Source Income.......... 342 Foreign Non-Business (Property) Income. 343 Foreign Business Income........ 343 Shareholder Benefits........... 344 Key Terms Used In This Chapter..... 345 References................. 345 Problems For Self Study......... 347 Assignment Problems........... 353
xxii Table Of Contents (Volume 1) CHAPTER 8 Capital Gains And Capital Losses Economic Background.......... 361 General Rules............... 362 Capital Gains Defined......... 363 Dispositions............. 363 Proceeds Of Disposition........ 364 Adjusted Cost Base.......... 365 Calculating The Capital Gain Or Loss... 366 Detailed Application Of The Rules.... 367 Identical Properties.......... 367 Partial Dispositions.......... 368 Warranties On Capital Assets...... 368 Capital Gains Reserves......... 369 Bad Debts On Sales Of Capital Property.. 372 Special Rule For Sales Of Real Property.. 372 Provisions For Special Assets....... 374 Principal Residence.......... 374 Personal Use Property......... 376 Listed Personal Property........ 377 Gains And Losses On Foreign Currency.. 378 Options.............. 380 Deemed Dispositions - Change In Use.. 381 Example - Change In Use........ 383 Special Rules For Principal Residences... 385 Special Rules For Automobiles...... 387 Deemed Dispositions - Departures From Canada....... 387 Small Business Investments - Deferral.. 388 Replacement Property - Deferral.... 390 Voluntary And Involuntary Dispositions.. 391 Timing Considerations......... 391 Application Of ITA 44(1) To Capital Gains. 391 Application Of ITA 13(4) To Recapture.. 392 Combined Application Of ITA 13(4) And 44(1) 393 Capital Gains And Tax Planning..... 396 Key Terms Used In This Chapter..... 397 References................. 397 Problems For Self Study......... 399 Assignment Problems........... 410 CHAPTER 9 Other Income, Other Deductions, And Other Issues Introduction................ 421 Other Income - Subdivision d Inclusions 422 Pension Benefits - ITA 56(1)(a)(i)..... 422 Retiring Allowances - ITA 56(1)(a)(ii)... 423 Death Benefits - ITA 56(1)(a)(iii)..... 423 Income Inclusions From Deferred Income Plans 424 Scholarships And Prizes - ITA 56(1)(n)... 424 Research Grants - ITA 56(1)(o)...... 424 Social Assistance And Workers Compensation 424 Universal Child Care Benefit - ITA 56(6).. 425 Other Deductions - Subdivision e.... 425 CPP Contributions On Self-Employed Earnings 425 Moving Expenses - ITA 62....... 426 Child Care Expenses - ITA 63...... 428 Disability Supports Deduction - ITA 64.. 432 Related Inclusions And Deductions... 434 Employment Insurance Benefits..... 435 Pension Income Splitting........ 435 Spousal And Child Support....... 436 Annuity Payments Received...... 438 Registered Savings Plans......... 440 Registered Education Savings Plans (RESPs). 441 Registered Disability Savings Plans (RDSPs). 445 Tax Free Savings Accounts (TFSAs).... 446 Non-Arm s Length Transfers Of Property 448 Inadequate Considerations - ITA 69.... 448 Inter Vivos Transfers To A Spouse.... 451 Transfers Of Depreciable Assets..... 453 Transfer Of Farm Or Fishing Property To Child 455 Death Of A Taxpayer........... 456 Income Attribution............ 458 Basic Rules - ITA 74.1(1) And (2)..... 459 Avoiding Income Attribution...... 460 Anti-Avoidance Provisions....... 463 Tax Planning And Income Attribution... 464 Key Terms Used In This Chapter..... 465 References................. 465 Problems For Self Study......... 467 Assignment Problems........... 477
Table Of Contents (Volume 1) xxiii CHAPTER 10 Retirement Savings And Other Special Income Arrangements Planning For Retirement......... 489 Tax Deferred Savings......... 490 Defined Benefit Vs. Money Purchase Plans. 492 Registered Retirement Savings Plans (RRSPs)493 RRSP Deduction Limit......... 495 Examples Of RRSP Deduction Calculations. 502 Undeducted RRSP Contributions..... 504 RRSP And RRIF Administration Fees.... 506 RRSP Withdrawals And Voluntary Conversions 506 Involuntary Termination Due To Age... 507 Spousal RRSP............ 507 Home Buyers Plan (HBP)....... 509 Lifelong Learning Plan (LLP)....... 511 Departure From Canada........ 512 Death Of The RRSP Registrant...... 513 Registered Pension Plans (RPPs)..... 515 Employer Contributions To The RPP... 515 Employee Contributions To The RPP... 516 Options At Retirement......... 516 Pooled Registered Pension Plans (PRPPs).. 517 Registered Retirement Income Funds (RRIFs)518 RRIF Withdrawals........... 519 Death Of The RRIF Registrant...... 520 Evaluation Of RRIFs.......... 520 Glossary The Glossary can be found: at the back of the separate paper Study Guide, and on the Student DVD within the FITAC version of Canadian Tax Principles. Supplementary Readings The Supplementary Readings can be found on the Student DVD. No. 1 - Application Of The Median Rule No. 2 - Stock Option Shares Deemed Not Identical Property No. 3 - Determining M&P Profits No. 4 - Cancelled No. 5 - Final Returns For Deceased Taxpayers No. 6 - Business Valuations No. 7 - Tax Shelters No.8-TransferPricing Deferred Profit Sharing Plans....... 521 Profit Sharing Plans............ 521 Transfers Between Plans......... 522 Retiring Allowances.......... 522 Retirement Compensation Arrangements 523 Arrangements Defined......... 524 Part XI.3 Refundable Tax........ 524 Salary Deferral Arrangements...... 525 Individual Pension Plans (IPPs)...... 526 Key Terms Used In This Chapter..... 526 References................. 527 Problems For Self Study......... 527 Assignment Problems........... 536
xiv Table Of Contents (Volume 2) CHAPTER 11 Taxable Income And Tax Payable For Individuals Revisited Introduction................. 545 Lump-Sum Payments............ 547 Treatment Of Losses............ 548 Carry Over Provisions.......... 548 Personal Use Property Losses....... 550 Listed Personal Property Losses...... 550 Non-Capital Losses........... 551 Net Capital Losses........... 552 Net Capital Losses At Death....... 554 Allowable Business Investment Losses.... 555 Farm Losses.............. 557 Lifetime Capital Gains Deduction..... 558 Qualified Property........... 558 Determining The Deductible Amount.... 559 Comprehensive Example......... 562 Ordering Of Deductions And Losses.... 563 Significance Of Ordering......... 563 Ordering In Computing Net Income For Tax Purposes...... 564 Ordering In Computing Taxable Income... 564 Example............... 564 Tax Payable Overview........... 566 Tax On Split Income - The Kiddie Tax.. 567 Tax Credits Revisited............ 569 Transfer Of Dividends To A Spouse Or Common-Law Partner........ 569 Charitable Donations Credit Revisited.... 570 Foreign Tax Credits Revisited....... 575 Alternative Minimum Tax.......... 577 General Concept............ 577 Minimum Tax Calculation........ 577 Tax Credits For AMT.......... 578 AMT Carry Forward - ITA 120.2...... 579 Key Terms Used In This Chapter...... 579 References.................. 580 Sample Tax Return For Chapter 11..... 581 Problems For Self Study........... 581 Assignment Problems............ 592 Tax Software Assignment Problems.... 602 CHAPTER 12 Taxable Income And Tax Payable For Corporations Computation Of Net Income........ 615 Computation Of Taxable Income...... 617 Deductions Available To Corporations... 617 Dividends From Other Corporations.... 618 Non-Capital Loss Carry Over For A Corporation 621 Ordering Of Taxable Income Deductions.. 623 Geographical Allocation Of Income.... 624 Permanent Establishments........ 624 Example - Permanent Establishments.... 624 Federal Tax Payable............. 625 Basic Rate.............. 625 Federal Tax Abatement......... 625 General Rate Reduction......... 625 Provincial Tax Payable........... 626 Small Business Rate........... 627 Investment Income Rates........ 627 Small Business Deduction......... 628 Canadian Controlled Private Corporation.. 629 Active Business Income......... 629 Annual Business Limit.......... 631 Allocation Among Associated Companies.. 631 Calculating The Small Business Deduction.. 632 Elimination Of Small Business Deduction For Large CCPCs........... 634 Personal Services Corporations...... 636 Professional Corporations And Management Companies............. 637 Manufacturing And Processing Profits Deduction................. 638 Calculating The Deduction........ 638 M&P Profits Defined.......... 640 General Rate Reduction - ITA 123.4(2)... 640 Full Rate Taxable Income........ 640 Application To Companies Other Than CCPCs 641 Application To CCPCs.......... 642 Foreign Tax Credits For Corporations... 643 Key Terms Used In This Chapter...... 645 References.................. 646 Problems For Self Study........... 647 Assignment Problems............ 653
Table Of Contents (Volume 2) xv CHAPTER 13 Taxation Of Corporate Investment Income Integration................. 661 The Basic Concept........... 661 Dividend Gross Up And Tax Credit Procedures 662 Integration And Business Income..... 663 Refundable Taxes On Investment Income. 665 Meaning Of Aggregate Investment Income.. 665 Basic Concepts............ 666 Refundable Part I Tax On Investment Income.......... 668 Additional Refundable Tax On Investment Income (ART)........ 668 Problem One: Excessive Tax Rates On Flow Through Of A CCPC s Investment Income. 669 Solution To Problem One: Refundable Portion Of Part I Tax..... 671 Refundable Part IV Tax On Dividends Received......... 674 Problem Two: Use Of Multi-Level Affiliations To Defer Taxes On Investment Income.. 674 Solution To Problem Two: Refundable Part IV Tax......... 675 Part IV Tax On Portfolio Dividends Received. 676 Dividends From A Connected Corporation.. 677 Dividends Paid Out Of Mixed Income Of A Connected Corporation...... 679 Refundable Dividend Tax On Hand.... 680 Basic Concepts............ 680 RDTOH - General Definition....... 680 Refundable Portion Of Part I Tax Payable.. 681 The Dividend Refund.......... 683 Example Of RDTOH Calculations..... 683 Working Through Large Corporate Tax Problems............... 686 Designation Of Eligible Dividends..... 687 CCPCs And Their GRIP......... 688 Non-CCPCs And Their LRIP....... 690 Part III.1 Tax On Excessive Eligible Dividend Designations............. 691 Key Terms Used In This Chapter...... 693 References.................. 693 Problems For Self Study........... 694 Assignment Problems............ 700 CHAPTER 14 Other Issues In Corporate Taxation Introduction................. 711 Acquisition Of Control Rules........ 711 Economic Background.......... 711 Acquisition Of Control Legislation..... 712 Deemed Year End........... 712 Restrictions On Use Of Charitable Donations. 712 Restrictions On The Use Of Losses..... 713 Unrecognized Losses At Deemed Year End.. 714 Deemed Disposition Election....... 715 Associated Companies........... 717 Definitions.............. 718 Examples - Associated Corporation Rules.. 719 Investment Tax Credits........... 722 Procedures.............. 722 Eligible Expenditures.......... 722 Rates................ 723 Refundable Investment Tax Credits..... 724 Carry Overs Of Investment Tax Credits... 725 Effect Of Acquisition Of Control On Investment Tax Credits......... 725 Tax Basis Shareholders Equity....... 726 Shareholders Equity Under GAAP..... 726 Paid Up Capital (Tax Basis Contributed Capital) 726 Tax Basis Retained Earnings........ 727 Capital Dividend Account........ 728 Distributions Of Corporate Surplus.... 730 Regular Cash Dividends......... 730 Stock Dividends............ 731 Dividends In Kind........... 732 Capital Dividends Under ITA 83(2)..... 733 Deemed Dividends Under: ITA 84(1) - Increase In PUC....... 734 ITA 84(2) - On Winding-Up....... 735 ITA 84(3) - On Redemption, Acquisition, Or Cancellation Of Shares...... 737 ITA 84(4) And ITA 84(4.1)....... 738 Key Terms Used In This Chapter...... 739 References.................. 740 Problems For Self Study........... 741 Assignment Problems............ 747 Tax Software Assignment Problem..... 757
xvi Table Of Contents (Volume 2) CHAPTER 15 Corporate Taxation And Management Decisions The Decision To Incorporate........ 759 Basic Tax Considerations......... 759 Other Advantages And Disadvantages.... 760 Tax Reduction And Deferral........ 761 Approach.............. 761 Basic Example............. 762 Public Corporation........... 764 CCPC - Active Business Income...... 765 CCPC - Investment Income Other Than Dividends......... 768 CCPC - Dividend Income........ 769 Conclusions On Tax Reductions And Deferrals 770 Provincial Taxes And Integration...... 773 Tax Deferral............. 773 Tax Reduction............. 774 Examples-EffectsOfProvincialRates On Integration............ 775 Summary: Tax Deferral And Tax Reduction. 778 Tax Free Dividends............. 778 Tax Rates On Dividends......... 778 Use Of Tax Credits........... 778 Tax Free Amounts For 2014....... 780 Income Splitting............... 780 Basic Concept............. 780 Example............... 781 Shareholder Benefits Including Loans... 782 The Owner-Manager Environment..... 782 Shareholder Benefits Other Than Loans... 783 Shareholder Loans........... 783 Management Compensation........ 787 General Principles........... 787 Salary Vs. Dividends.......... 788 Salary Vs. Dividends For The Owner - Manager.......... 788 The Basic Trade-Off.......... 788 Conclusion.............. 797 Key Terms Used In This Chapter...... 797 References.................. 797 Problems For Self Study........... 799 Assignment Problems............ 804 CHAPTER 16 Rollovers Under Section 85 Rollovers Under Section 85......... 811 General Rules For The Transfer....... 812 Transferor And Transferee........ 812 Eligible Property............ 812 Consideration To Transferor....... 813 Making The Election.......... 813 Establishing The Transfer Price...... 813 Transfer Prices - Detailed Rules...... 815 Rules Applicable To All Assets....... 815 Accounts Receivable.......... 816 Inventories, Non-Depreciable Capital Property 817 Disallowed Capital Losses........ 818 Depreciable Property.......... 820 Disallowed Terminal Losses....... 822 Eligible Capital Property......... 822 Eligible Capital Property - Disallowed Deductions......... 824 Summary Of Transfer Price Rules..... 825 Allocation Of The Elected Value...... 825 Consideration Received By The Transferor.. 825 Assets Acquired By The Corporation.... 826 Paid Up Capital Of Shares Issued..... 828 Paid Up Capital Reduction........ 828 More Than One Class Of Shares...... 829 Comprehensive Example - Section 85 Rollovers.......... 830 Gift To Related Party - Section 85..... 833 General Rules............. 833 Example............... 834 Excess Consideration - Section 85..... 836 Shareholder Benefit - ITA 15(1)...... 836 Dividend Stripping ITA 84.1....... 838 Applicability Of ITA 84.1......... 839 Dividend Stripping Example....... 839 Capital Gains Stripping ITA 55(2).... 841 Application Of ITA 55(2)......... 842 Capital Gains Stripping - Examples..... 842 Key Terms Used In This Chapter...... 845 References.................. 846 Problems For Self Study........... 846 Assignment Problems............ 854
Table Of Contents (Volume 2) xvii CHAPTER 17 Other Rollovers And Sale Of An Incorporated Business Introduction................. 863 Share For Share Exchanges - ITA 85.1... 863 General Rules............. 864 Conditions For The Application Of ITA 85.1. 864 Example............... 864 Exchange Of Shares In A Reorganization - ITA 86.................. 866 Conditions For The Reorganization..... 867 Procedures.............. 868 Example Using ITA 86(1) In An Estate Freeze. 869 Gift To Related Person - ITA 86(2)..... 872 Using ITA 86(1) - Tax Planning Considerations 874 Amalgamations - ITA 87.......... 875 Position Of The Amalgamated Company.. 876 Position Of The Shareholders....... 877 Vertical Amalgamations (Parent And Subsidiary) 877 Non-Tax Considerations......... 877 Amalgamations - Tax Planning Considerations 878 Winding-Up Of A 90% Owned Subsidiary. 879 Acquisition Of Assets.......... 879 Disposition Of Shares.......... 882 Tax Planning Considerations - Amalgamation Vs. Winding-Up..... 883 Winding-Up Of A Canadian Corporation.. 884 Example............... 885 Convertible Properties........... 887 Application.............. 887 Sale Of An Incorporated Business..... 888 Restrictive Covenants (a.k.a. Non-Competition Agreements)... 889 Sale Of Individual Assets......... 890 Sale Of Assets As A Going Concern..... 890 Sale Of Shares............. 892 Evaluation Of Alternatives........ 893 Example............... 895 Key Terms Used In This Chapter...... 897 References.................. 898 Problems For Self Study........... 898 Assignment Problems............ 903 CHAPTER 18 Partnerships Introduction................. 911 Taxable Entities In Canada........ 911 Chapter Coverage........... 912 Partnerships Defined............ 912 The Importance Of Defining A Partnership.. 912 Basic Partnership Elements........ 913 Types Of Partnerships.......... 913 Co-Ownership, Joint Ventures, And Syndicates.............. 914 Introduction............. 914 Co-Ownership............. 915 Joint Ventures............. 915 Syndicates.............. 916 Partnership Income, Losses, And Tax Credits.............. 916 Introduction............. 916 Applicable Concepts.......... 917 Calculating The Amounts To Be Allocated.. 919 Methods Of Allocation......... 924 The Partnership Interest.......... 925 The Concept............. 925 Acquiring A Partnership Interest...... 925 Adjusted Cost Base Of The Partnership Interest 926 Disposition Of A Partnership Interest.... 930 Limited Partnerships And Limited Partners 931 Definitions.............. 931 At-Risk Rules............. 931 Transfer Of Property To And From A Partnership............... 933 Definition Of Canadian Partnership.... 933 Transfers With No Rollover Provision.... 934 Common Partnership Rollovers...... 935 Specified Investment Flow Through Partnerships............... 938 Key Terms Used In This Chapter...... 939 References.................. 939 Problems For Self Study........... 940 Assignment Problems............ 946
xviii Table Of Contents (Volume 2) CHAPTER 19 Trusts And Estate Planning Introduction................. 953 Basic Concepts............... 954 What Is A Personal Trust?........ 954 Establishing A Trust........... 955 Returns And Payments - Trusts...... 956 Non-Tax Reasons For Using Trusts..... 956 Classification Of Trusts........... 957 Personal Trusts............ 957 Testamentary Vs. Inter Vivos Trusts..... 958 Taxation Of Trusts............. 959 Rollovers To A Trust.......... 960 Rollovers To Capital Beneficiaries..... 963 21 Year Deemed Disposition Rule..... 964 Net Income For Tax Purposes Of A Trust. 964 Preferred Beneficiary Election....... 965 Amounts Deemed Not Paid....... 965 Amounts Retained For A Beneficiary Under 21 Years Of Age........ 966 Taxable Income Of A Trust......... 966 Income Allocations To Beneficiaries.... 967 Discretionary And Non-Discretionary Distributions............. 967 Flow Through Provisions......... 968 Principal Residence Exemption...... 970 Tax Payable Of Personal Trusts....... 970 Testamentary vs. Inter Vivos Trusts..... 970 Income Attribution - Trusts......... 972 Purchase Or Sale Of An Interest In A Trust 973 Tax Planning................ 975 Qualifying Spousal Trusts........ 976 Alter Ego Trusts............ 977 Joint Spousal Or Common-Law Partner Trusts 977 Estate Planning............... 978 Estate Freeze................ 979 SIFT Partnerships And Trusts........ 983 Key Terms Used In This Chapter...... 983 References.................. 984 Problems For Self Study........... 985 Assignment Problems............ 987 CHAPTER 20 International Issues In Taxation Introduction................. 993 Residence.................. 994 Residence Of Individuals......... 994 Residence Of Corporations....... 1001 Residence Of Trusts.......... 1002 Part I Tax On Non-Residents....... 1002 Carrying on Business in Canada..... 1003 Canadian Source Employment Income... 1005 Dispositions of Taxable Canadian Property. 1007 Part XIII Tax On Non-Residents...... 1008 Interest Payments........... 1009 Dividend Payments.......... 1010 Royalty Payments........... 1010 Rental Income............ 1011 Pension Payments, Other Retirement Benefits 1012 Shareholder Loans To Non-Residents... 1013 Immigration And Emigration....... 1014 Entering Canada - Immigration...... 1014 Departures From Canada - Emigration... 1014 Unwinding A Deemed Disposition.... 1016 Short-Term Residents......... 1017 Foreign Source Income Of Residents... 1018 Introduction............. 1018 Foreign Investment Reporting Requirements. 1019 Foreign Source Employment Income.... 1020 Foreign Source Business Income..... 1021 Foreign Source Interest Income...... 1022 Foreign Source Capital Gains...... 1022 Problems With Foreign Source Dividend Income.......... 1023 Foreign Source Dividends Received By Individuals............ 1024 Foreign Dividends Received From Non-Affiliated Corporations.... 1025 Dividends Received From Non-Controlled Foreign Affiliates.... 1025 Dividends Received From Controlled Foreign Affiliates...... 1029 Foreign Accrual Property Income (FAPI).. 1030 Key Terms Used In This Chapter..... 1033 References................. 1033 Problems For Self Study.......... 1034 Assignment Problems........... 1040
Table Of Contents (Volume 2) xix CHAPTER 21 GST/HST Introduction................ 1049 Transaction Tax Concepts......... 1051 Value Added Tax (VAT)......... 1053 Liability For GST/HST........... 1055 The Concept Of Supply......... 1055 Supply Categories............. 1056 Taxable Supplies........... 1056 Exempt Supplies........... 1057 Applying the GST/HST Rate........ 1058 Place Of Supply............ 1058 Applying The Rate........... 1059 Collection And Remittance Of GST/HST. 1059 Registration................ 1060 Meaning Of Person For GST/HST..... 1060 Who Must Register.......... 1060 Exemption For Small Suppliers...... 1061 Input Tax Credits............. 1063 VendorsOfFullyTaxableAnd Zero-Rated Supplies......... 1063 Vendors Of Exempt Supplies....... 1065 Examples.............. 1066 Relief For Small Businesses........ 1069 Quick Method Of Accounting...... 1069 Small Suppliers Exemption....... 1072 Streamlined Input Tax Credit Method... 1072 GST/HST Procedures And Administration. 1073 GST/HST Returns And Payments..... 1073 Associated Persons.......... 1075 Refunds And Rebates......... 1075 Books And Records.......... 1075 Appeals............... 1076 General Anti-Avoidance Rule...... 1076 Employee And Partner GST/HST Rebate. 1077 General Concept........... 1077 Calculating The GST/HST Rebate Amount. 1077 Example.............. 1077 Residential Property, New Housing Rebate 1078 General Rules For Residential Property... 1078 New Housing Rebate......... 1079 (continued) CHAPTER 21, continued Sale Of A Business............. 1079 Sale Of Assets............ 1079 Sale Of Shares............ 1080 Other Situations........... 1080 Specific Applications............ 1081 Partnerships And GST/HST........ 1082 General Rules............ 1082 Partner Expenses........... 1082 Disposition Of A Partnership Interest... 1082 Transfers Between Partners And Partnerships 1083 Reorganization Of The Partnership.... 1083 Trusts And GST/HST............ 1083 Key Terms Used In This Chapter..... 1084 Problems For Self Study.......... 1084 Assignment Problems........... 1089 Glossary The Glossary can be found: at the back of the separate paper Study Guide, and on the Student DVD within the FITAC version of Canadian Tax Principles. Supplementary Readings The Supplementary Readings can be found on the Student DVD. No. 1 - Application Of The Median Rule No. 2 - Stock Option Shares Deemed Not Identical Property No. 3 - Determining M&P Profits No. 4 - Cancelled No. 5 - Final Returns For Deceased Taxpayers No. 6 - Business Valuations No. 7 - Tax Shelters No.8-TransferPricing