VOLUME I Chapter VOLUME II - Pearson Ed

Chapter V O L U M E I

1Introduction ToFederal Taxation In Canada

2 Procedures and Administration

3Income Or Loss From An OfficeOr Employment

4Taxable Income and Tax PayableFor Individuals

5Capital Cost Allowances AndCumulative Eligible Capital

6 Income Or Loss From A Business

7 Income From Property

8 Capital Gains And Capital Losses

9Other Income, Other DeductionsAnd Income Attribution

10Retirement Savings And OtherSpecial Income Arrangements

The detailed contents of bothVolume I and II follow.

Chapter V O L U M E I I

11Taxable Income and Tax PayableFor Individuals Revisited

12Taxable Income andTax Payable For Corporations

13Taxation ofCorporate Investment Income

14Other Issues InCorporate Taxation

15Corporate Taxation andManagement Decisions

16 Rollovers Under Section 85

17Other Rollovers and Sale Of AnIncorporated Business

18 Partnerships

19 Trusts And Estate Planning

20 International Issues In Taxation

21 GST/HST

CONTENTS

The textbook is published intwo Volumes:

Volume I = Chapters 1 to 10Volume II = Chapters 11 to 21

CHAPTER 1Introduction To Federal Taxation

In Canada

The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1

Taxable Entities In Canada . . . . . . . . 2

Federal Taxation And The Provinces . . . . 4

Tax Policy Concepts . . . . . . . . . . . . . 5Taxation 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 . . . . . . 10The Income Tax Act . . . . . . . . . . 11

Other Income Tax Legislation . . . . . . 14

Other Sources Of Income Tax Information . 16

Liability For Income Tax . . . . . . . . . . 17Charging Provision For Canadian Residents . 17

Charging Provision For Non-Residents . . . 18

Alternative Concepts Of Income . . . . . . 20The Economist’s View . . . . . . . . . 20

The Accountant’s View . . . . . . . . . 20

The Income Tax Act View . . . . . . . . 21

Net Income For Tax Purposes . . . . . . . 21Structure . . . . . . . . . . . . . . 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 . . . . . . 26

Principles Of Tax Planning . . . . . . . . . 27Introduction . . . . . . . . . . . . . 27

Tax Avoidance Or Reduction . . . . . . . 27

Tax Deferral . . . . . . . . . . . . . 27

Income Splitting . . . . . . . . . . . . 28

Abbreviations To Be Used . . . . . . . . . 29

Key Terms Used In This Chapter . . . . . . 30

References . . . . . . . . . . . . . . . . . 30

Problems For Self Study . . . . . . . . . . 31

Assignment Problems . . . . . . . . . . . 32

CHAPTER 2Procedures And Administration

Administration Of The Department . . . . 35

Source Deductions . . . . . . . . . . . . . 36Withholdings - ITA 153 . . . . . . . . . 36

Employer’s Remittance Of Source Deductions 37

Returns And Payments - Individuals . . . 38Due Date For Individual Returns . . . . . 40

Instalment Payments For Individuals - ITA 156 41

Interest . . . . . . . . . . . . . . . 44

Penalties . . . . . . . . . . . . . . . 45

Due Date For Balance Owing - Individuals . 46

Final Returns For Deceased Taxpayers . . . 46

Returns And Payments - Corporations . . . 47Due Date For Corporate Returns (ITA 150) . 47

Instalment Payments For Corporations . . . 47

Due Date For Balance Owing - Corporations . 49

Interest And Penalties For Corporations . . . 50

Returns And Payments - Trusts . . . . . . 50

Income Tax Information Returns . . . . . . 51

Refunds . . . . . . . . . . . . . . . . . . . 51

Books And Records . . . . . . . . . . . . . 52

Assessments . . . . . . . . . . . . . . . . 52

Adjustments To Income Tax Returns . . . 53

Appeals . . . . . . . . . . . . . . . . . . . 54Consent Form . . . . . . . . . . . . 54

Informal Request For Adjustments . . . . . 54

Notice Of Objection . . . . . . . . . . 54

Tax Court Of Canada . . . . . . . . . . 55

Federal Court And Supreme Court Of Canada 56

Tax Evasion, Avoidance And Planning . . . 57Tax Evasion . . . . . . . . . . . . . 57

Tax Avoidance And Tax Planning . . . . . 57

General Anti-Avoidance Rule (GAAR) . . . 58

Reasonable Expectation Of Profit (REOP) . . 59

Collection And Enforcement . . . . . . . . 60

Taxpayer Relief Provisions (Fairness Package) 62

Key Terms Used In This Chapter . . . . . . 63

References . . . . . . . . . . . . . . . . . 64



Detailed Table Of Contents For Both Volumes (Page 2)

V O L U M E I

CHAPTER 3Income Or Loss From

An Office Or Employment

Employment Income Defined . . . . . . . 71Cash Basis And The Use Of Bonus Arrangements 72

Net Concept . . . . . . . . . . . . . 73

Employee Versus Self-Employed . . . . . . 73Employee Perspective . . . . . . . . . 74

Employer Perspective . . . . . . . . . . 75

Making The Distinction . . . . . . . . . 76

Inclusions - Salaries And Wages . . . . . . 77

Inclusions - Fringe Benefits . . . . . . . . 77ITA 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/PSTOn Taxable Benefits . . . . . . . . . . . 84

Inclusions - Board And Lodging . . . . . . 84

Inclusions - Automobile Benefits . . . . . . 85Employees And Automobiles . . . . . . . 85

Taxable Benefits - Standby Charge . . . . . 86

Operating Cost Benefit . . . . . . . . . 88

Payments By Employee For Automobile Use . 90

Example - Employer Owned Automobile . . 90

Example - Employer Leased Vehicle . . . . 91

Employer Provided Cars And Tax Planning . 91

Inclusions - Allowances . . . . . . . . . . 92Allowance Vs. Reimbursement . . . . . . 92

General Rules . . . . . . . . . . . . . 93

Taxable Vs. Non-Taxable Allowances . . . . 93

Reasonable Allowances For Motor Vehicles . 94

Employer’s Perspective Of Allowances . . . 95

Employee’s Perspective Of Allowances . . . 95

Inclusions - Employee Insurance Benefits . 96Life Insurance . . . . . . . . . . . . . 96

Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 96

Health Care Insurance . . . . . . . . . 97

Loans To Employees . . . . . . . . . . . . 97General Rules . . . . . . . . . . . . . 97

Home Relocation Loans . . . . . . . . . 98

Tax Planning For Interest Free Loans . . . . 99

(continued)

CHAPTER 3, continuedInclusions - Stock Option Benefits . . . . 101

CCPCs Vs. Public Companies . . . . . . 103

Rules For Public Companies . . . . . . . 104

Rules For CCPCs . . . . . . . . . . . 105

Cash Payment In Lieu Of Shares . . . . . 107

Other Inclusions . . . . . . . . . . . . . 107Payments By Employer To Employee . . . 107

Forgiveness Of Employee Loans . . . . . 107

Housing Loss Reimbursement . . . . . . 107

Discounts On Employer’s Merchandise . . 108

Club Dues And Recreational Facilities . . . 108

Specific Deductions . . . . . . . . . . . . 108Salesperson’s Expenses Under ITA 8(1)(f) . . 110

Travel Expenses And Motor Vehicle Costs . 111

The Salesperson's Dilemma . . . . . . . 111

Automobile And Aircraft Expenses . . . . 112

Home Office Costs For Employees . . . . 113

Key Terms Used In This Chapter . . . . . 113

References . . . . . . . . . . . . . . . . . 114



CHAPTER 4Taxable Income And Tax Payable

For Individuals

Introduction . . . . . . . . . . . . . . . . 131

Taxable Income Of Individuals . . . . . . 132Available Deductions . . . . . . . . . 132

Ordering Of Deductions . . . . . . . . 132

Deductions For Payments - ITA 110(1)(f) . . 133

Home Relocation Loan - ITA 110(1)(j) . . . 133

Northern Residents Deductions - ITA 110.7 134

Calculation Of Tax Payable . . . . . . . . 134Federal Tax Payable Before Credits . . . . 134

Provincial Tax Payable Before Credits . . . 135

Types Of Income . . . . . . . . . . . 136

Taxes On Income Not Earned In A Province 136

Calculating Tax Credits . . . . . . . . . . 137Federal Amounts . . . . . . . . . . . 137

Provincial Amounts . . . . . . . . . . 137

(continued)


V O L U M E I

CHAPTER 4, continuedPersonal Tax Credits - ITA 118(1) . . . . 138

Individuals With A Spouse OrCommon-Law Partner . . . . . . . . 138

Individuals Supporting Dependent Person . 139

Child Tax Credit . . . . . . . . . . . 140

Single Persons (Basic Personal Tax Credit) . 141

Caregiver Tax Credit . . . . . . . . . 141

Infirm Dependant Over 17 Tax Credit . . 141

Family Caregiver Tax Credit - Proposed . . 142

Interaction:Eligible Dependant Credit Vs.Caregiver Or Infirm Dependant Over 17 . 142Caregiver Vs. Infirm Dependant Over 17 . 143

Other Tax Credits For Individuals . . . . 144Age Tax Credit . . . . . . . . . . . . 144

Pension Income Tax Credit . . . . . . . 144

Canada Employment Tax Credit . . . . . 145

Adoption Expenses Tax Credit . . . . . . 145

Public Transit Passes Tax Credit . . . . . 147

Child Fitness Tax Credit . . . . . . . . 147

Children’s Arts Tax Credit - Proposed . . . 148

First Time Home Buyer’s Tax Credit . . . 148

Volunteer Firefighters Tax Credit - Proposed . 148

Charitable Donations Tax Credit . . . . . 148

Medical Expenses Tax Credit . . . . . . 150

Disability Tax Credit . . . . . . . . . . 154

Education Related Tax Credits . . . . . . 156

Employment Insurance (EI) AndCanada Pension Plan (CPP) Tax Credits . 159

Transfers To Spouse Or Common-Law Partner 160

New Graduates Working In Designated Areas 161

Political Contributions Tax Credits . . . . 161

Labour Sponsored Funds Tax Credit . . . 162

Refundable Credits . . . . . . . . . . . . 163Refundable GST Credit - ITA 122.5 . . . . 163

Working Income Tax Benefit - ITA 122.7 . . 164

Canada Child Tax Benefit . . . . . . . 165

Social Benefits Repayment (OAS And EI) . 166

Comprehensive Example . . . . . . . . . 167


References . . . . . . . . . . . . . . . . . 170

Sample Tax Return For Chapter 4 . . . . 172



Tax Software Assignment Problems . . . 184

CHAPTER 5Capital Cost Allowances AndCumulative Eligible Capital

Capital Cost Allowance System . . . . . . 191

Additions To Capital Cost . . . . . . . . . 193Determination Of Amounts . . . . . . . 193

Available For Use Rules . . . . . . . . 195

Segregation Into Classes . . . . . . . . 195

Capital Cost Allowances . . . . . . . . . 196Rates For Commonly Used CCA Classes . . 197

Half-Year Rules (a.k.a. First Year Rules) . . 199

Short Fiscal Periods . . . . . . . . . . 201

Tax Planning Considerations . . . . . . 202

Dispositions Of Depreciable Assets . . . 203Capital Gains . . . . . . . . . . . . 204

Recapture Of Capital Cost Allowance . . . 205

Terminal Losses . . . . . . . . . . . 206

Summary Of Tax Consequences . . . . . 207

CCA Schedule . . . . . . . . . . . . . . . 207

CCA Determination - Special Situations . 208Separate Class Election . . . . . . . . . 208

Cumulative Eligible Capital (CEC) . . . . 210Eligible Capital Expenditures Defined . . . 210

Additions, Amortization, And Dispositions . 210


References . . . . . . . . . . . . . . . . . 215

Appendix - CCA Rates For Selected Assets 216



CHAPTER 6Income Or Loss From A Business

Overview . . . . . . . . . . . . . . . . . 227Classification Of Income . . . . . . . . 228

Business Income Vs. Property Income . . 230Tax Consequences Of Classification . . . . 230

Business Income Defined . . . . . . . . 231

Property Income Defined . . . . . . . . 232

(continued)


V O L U M E I

CHAPTER 6, continued

Business Income Vs. Capital Gains . . . . 232Capital Gains Defined . . . . . . . . . 233

Criteria For Identifying Capital Gains . . . 233

Business Income And GAAP . . . . . . . 234

Business Income - Inclusions (Revenues) 236Amounts Received And Receivable . . . . 236

Reserves . . . . . . . . . . . . . . 236

Limitations On Deductions FromBusiness And Property Income . . . . 240Specific Limiting Items Under ITA 18 . . . 240

Foreign Media Advertising - ITA 19 And 19.1 246

Provincial Capital And Payroll Taxes . . . 246

Limitations On Deductions From Business,Property, And Employment Income . . 247Reasonableness . . . . . . . . . . . 247

Meals And Entertainment . . . . . . . . 247

“Luxury” Automobile Costs . . . . . . . 248

Automobiles Owned By The Taxpayer . . . 249

Automobile Leasing Costs . . . . . . . 249

Illegal Payments, Fines And Penalties . . . 252

Leasing Property . . . . . . . . . . . 252

Business Income - Specific Deductions . 252Inventory Valuation (Cost Of Sales) . . . . 252

Other Deductions . . . . . . . . . . 254

Reconciliation Schedule . . . . . . . . . . 256

Business Income - Example . . . . . . . . 257

Taxation Year . . . . . . . . . . . . . . . 259General Rules . . . . . . . . . . . . 259

Unincorporated Businesses- Non-Calendar Fiscal Year . . . . . . 259

Special Business Income Situations . . . 260Income For Farmers . . . . . . . . . . 260

Professional Income (Billed Basis) . . . . 262

Sale Of A Business . . . . . . . . . . 263


References . . . . . . . . . . . . . . . . . 265



Tax Software Assignment ProblemFor Chapter 6 . . . . . . . . . . . . . . 286

CHAPTER 7Income From Property

Property Income: General Concept . . . 289

Interest As A Deduction . . . . . . . . . . 290The Singleton And Ludco Court Cases . . . 291

IT-533 - “Interest Deductibility” . . . . . 291

Discount And Premium On Issued Debt . . 294

Interest Income . . . . . . . . . . . . . . 296Discount And Premium On Debt Holdings . 298

Prescribed Debt Obligations . . . . . . 298

Accrued Interest At Transfer . . . . . . . 299

Payments Based On Production Or Use(Royalties) . . . . . . . . . . . . . . . . 300

Rental Income . . . . . . . . . . . . . . . 300Capital Cost Allowances . . . . . . . . 301

Rental Income Example . . . . . . . . 302

Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 303The Concept Of Integration . . . . . . . 303

Eligible Vs. Non-Eligible Dividends . . . . 304

Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 304- Eligible Dividends . . . . . . . . . 307

Comparison Of Investment Returns . . . . 311

Income Trusts . . . . . . . . . . . . . . . 312How Do Trusts Work? . . . . . . . . . 312

Investments In Publicly Traded Trusts . . . 312

Specified Investment Flow-Through Trusts . 314

Taxation Of Income Trusts . . . . . . . 314

Mutual Funds . . . . . . . . . . . . . . . 316Distributions . . . . . . . . . . . . . 316

Adjusted Cost Base . . . . . . . . . . 317

Stock And Capital Dividends . . . . . . . 317

Foreign Source Income . . . . . . . . . . 318

Shareholder Benefits . . . . . . . . . . . 320


References . . . . . . . . . . . . . . . . . 321





V O L U M E I

CHAPTER 8Capital Gains And Capital Losses

Economic Background . . . . . . . . . . 335

General Rules . . . . . . . . . . . . . . . 336Dispositions . . . . . . . . . . . . . 337

Adjusted Cost Base . . . . . . . . . . 338

Calculating The Capital Gain Or Loss . . . 340

Detailed Application Of The Rules . . . . 340Identical Properties . . . . . . . . . . 340

Partial Dispositions . . . . . . . . . . 342

Warranties On Capital Assets . . . . . . 342

Capital Gains Reserves . . . . . . . . . 342

Bad Debts On Sales Of Capital Property . . 344

Special Rule For Sales Of Real Property . . 345

Non-Arm’s Length Transfers Of Property 346Inadequate Considerations - ITA 69 . . . . 347

Inter Vivos Transfers To A Spouse . . . . 350

Non-Arm’s Length Transfers OfDepreciable Assets . . . . . . . . . 352

Farm Or Fishing Property To A Child . . . 354

Replacement Property Deferral Provisions 355Voluntary And Involuntary Dispositions . . 355

Timing Considerations . . . . . . . . . 356

Application Of ITA 44(1) To Capital Gains . 356

Application Of ITA 13(4) To Recapture . . 357

Combined Application Of ITA 13(4) And 44(1) 358

Small Business Investments - Deferral . . 361

Deemed Dispositions . . . . . . . . . . . 363Change In Use . . . . . . . . . . . . 363

Departures From Canada . . . . . . . . 367

Death Of A Taxpayer . . . . . . . . . 368

Provisions For Special Assets . . . . . . . 370Principal Residence . . . . . . . . . . 370

Personal Use Property . . . . . . . . . 374

Listed Personal Property . . . . . . . . 375

Gains And Losses On Foreign Currency . . 376

Options . . . . . . . . . . . . . . 378

Capital Gains And Tax Planning . . . . . 379


References . . . . . . . . . . . . . . . . . 380



Tax Software Assignment Problem . . . . 399

CHAPTER 9Other Income, Other Deductions,

and Income Attribution

Introduction . . . . . . . . . . . . . . . . 401

Other Income - Subdivision d Inclusions . 403Pension Benefits. . . . . . . . . . . . 403

Retiring Allowances . . . . . . . . . . 403

Death Benefits . . . . . . . . . . . . 403

Income Inclusions From Deferred Income Plans 404

Scholarships And Prizes . . . . . . . . 404

Research Grants . . . . . . . . . . . 405

Social Assistance And Workers’ CompensationPayments - . . . . . . . . . . . . 405

Universal Child Care Benefit . . . . . . 405

Other Deductions - Subdivision e . . . . 406CPP Contributions On Self-Employed Earnings 406

Moving Expenses . . . . . . . . . . . 406

Child Care Expenses . . . . . . . . . 409

Disability Supports Deduction . . . . . . 412

Related Inclusions And Deductions . . . 415Employment Insurance Benefits . . . . . 415

Pension Income Splitting . . . . . . . . 415

Spousal And Child Support . . . . . . . 416

Annuity Payments Received . . . . . . . 418

Registered Savings Plans . . . . . . . . . 420Registered Education Savings Plans (RESPs) . 420

Registered Disability Savings Plans (RDSPs) . 426

Tax Free Savings Accounts (TFSAs) . . . . 428

Income Attribution . . . . . . . . . . . . 429The Problem . . . . . . . . . . . . 429

Basic Rules - ITA 74.1(1) And (2) . . . . . 430

Avoiding Income Attribution . . . . . . 432

Income Attribution - Other Related Parties . 434

Anti-Avoidance Provisions . . . . . . . 434

Tax Planning And Income Attribution . . . 435


References . . . . . . . . . . . . . . . . . 436





V O L U M E I

CHAPTER 10Retirement Savings And OtherSpecial Income Arrangements

Planning For Retirement . . . . . . . . . 455Tax Deferred Savings . . . . . . . . . 456

Defined Benefit Vs. Money Purchase Plans . 458

Registered Retirement Savings Plans (RRSPs) 458RRSP Deduction Limit . . . . . . . . . 461

Examples Of RRSP Deduction Calculations . 468

Undeducted RRSP Contributions . . . . . 470

RRSP And RRIF Administration Fees . . . 471

RRSP Withdrawals And Voluntary Conversions 471

Involuntary Termination Due To Age . . . 472

Spousal RRSP . . . . . . . . . . . . 473

Home Buyers’ Plan (HBP) . . . . . . . 474

Lifelong Learning Plan (LLP) . . . . . . . 476

Departure From Canada . . . . . . . . 478

Death Of The Registrant . . . . . . . . 478

Registered Pension Plans (RPPs) . . . . . 480Employer Contributions To The RPP . . . 480

Employee Contributions To The RPP . . . 481

Options At Retirement . . . . . . . . . 482

Phased Retirement . . . . . . . . . . 482

Registered Retirement Income Funds (RRIFs) 482RRIF Withdrawals . . . . . . . . . . . 483

Death Of The Registrant . . . . . . . . 484

Evaluation Of RRIFs . . . . . . . . . . 484

Deferred Profit Sharing Plans . . . . . . . 485

Profit Sharing Plans . . . . . . . . . . . . 485

Transfers Between Plans . . . . . . . . . 486Retiring Allowances . . . . . . . . . . 486

Retirement Compensation Arrangements 487Arrangements Defined . . . . . . . . . 487

Part XI.3 Refundable Tax . . . . . . . . 488

Salary Deferral Arrangements . . . . . . 488

Individual Pension Plans (IPPs) . . . . . . 489


References . . . . . . . . . . . . . . . . . 490



Tax Software Assignment ProblemFor Chapter 10 . . . . . . . . . . . . . 504

GlossaryThe Glossary can be found:

• at the back of the separate paperStudy Guide, and

• on the FITAC-CTP CD-ROM within the FITACversion of Canadian Tax Principles.

Supplementary ReadingsThe Supplementary Readings can be found onthe 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 - Transfer Pricing


V O L U M E I


For Individuals Revisited

Introduction . . . . . . . . . . . . . . . . 507

Lump-Sum Payments . . . . . . . . . . . 509

Treatment Of Losses . . . . . . . . . . . 510Carry Over Provisions . . . . . . . . . 510

Personal Use Property Losses . . . . . . 512

Listed Personal Property Losses . . . . . 512

Non-Capital Losses . . . . . . . . . . 513

Net Capital Losses . . . . . . . . . . 514

Net Capital Losses At Death . . . . . . . 516

Allowable Business Investment Losses . . . 517

Farm Losses . . . . . . . . . . . . . 519

Lifetime Capital Gains Deduction . . . . 520Qualified Property . . . . . . . . . . 521

Determining The Deductible Amount . . . 522

Comprehensive Example . . . . . . . . 525

Ordering Of Deductions And Losses . . . 526Significance Of Ordering . . . . . . . . 526

Ordering In ComputingNet Income For Tax Purposes . . . . . 526

Ordering In Computing Taxable Income . . 527

Example . . . . . . . . . . . . . . 527

Tax Payable Overview . . . . . . . . . . . 528Basic Federal Tax Payable . . . . . . . 529

Tax On Split Income . . . . . . . . . . . 529

Tax Credits Revisited . . . . . . . . . . . 532Transfer Of Dividends To A

Spouse Or Common-Law Partner . . . . 532

Charitable Donations Credit Revisited . . . 533

Foreign Tax Credits Revisited . . . . . . 538

Alternative Minimum Tax . . . . . . . . . 540General Concept . . . . . . . . . . . 540

Minimum Tax Calculation . . . . . . . 540

Tax Credits For AMT . . . . . . . . . 541

AMT Carry Forward - ITA 120.2 . . . . . 542


References . . . . . . . . . . . . . . . . . 543



Tax Software Assignment Problems . . . 562


For Corporations

Computation Of Net Income . . . . . . . 569

Computation Of Taxable Income . . . . . 571Deductions Available To Corporations . . . 571

Dividends From Other Corporations . . . 572

Non-Capital Loss Carry Over . . . . . . 575

Ordering Of Taxable Income Deductions . 577

Geographical Allocation Of Income . . . 578Permanent Establishments . . . . . . . 578

Example - Permanent Establishments . . . 578

Federal Tax Payable . . . . . . . . . . . . 579Basic Rate . . . . . . . . . . . . . 579

Federal Tax Abatement . . . . . . . . 579

General Rate Reduction . . . . . . . . 579

Provincial Tax Payable . . . . . . . . . . . 581Small Business Rate . . . . . . . . . . 581

Investment Income Rates . . . . . . . . 582

Small Business Deduction . . . . . . . . 583Canadian Controlled Private Corporation . 584

Active Business Income . . . . . . . . 584

Annual Business Limit . . . . . . . . . 586

Allocation Among Associated Companies . 586

Calculating The Small Business Deduction . 586

Elimination Of Small Business DeductionFor Large CCPCs . . . . . . . . . . 589

Personal Services Corporations . . . . . 590

Professional Corporations And ManagementCompanies . . . . . . . . . . . . 591

Manufacturing And Processing ProfitsDeduction . . . . . . . . . . . . . . . . 592Calculating The Deduction . . . . . . . 592

M&P Profits Defined . . . . . . . . . 594

General Rate Reduction - ITA 123.4(2) . . 595Full Rate Taxable Income . . . . . . . . 595

Application To Companies Other Than CCPCs 596

Application To CCPCs . . . . . . . . . 597

Foreign Tax Credits For Corporations . . 598


References . . . . . . . . . . . . . . . . . 601




V O L U M E I I

CHAPTER 13Taxation Of

Corporate Investment Income

Integration . . . . . . . . . . . . . . . . . 615The Basic Concept . . . . . . . . . . 615

Dividend Gross Up And Tax Credit Procedures 616

Integration And Business Income . . . . . 617

Refundable Taxes On Investment Income 619Meaning Of Aggregate Investment Income . 619

Basic Concepts . . . . . . . . . . . . 620

Refundable Part I Tax OnInvestment Income . . . . . . . . . . . 622Additional Refundable Tax

On Investment Income (ART) . . . . . . 622

Problem One: Excessive Tax Rates On FlowThrough Of A CCPC’s Investment Income 623

Solution To Problem One:Refundable Portion Of Part I Tax . . . . 625

Refundable Part IV Tax OnDividends Received . . . . . . . . . . . 628Problem Two: Use Of Multi-Level Affiliations

To Defer Taxes On Investment Income . . 628

Solution To Problem Two:Refundable Part IV Tax . . . . . . . . 629

Part IV Tax On Portfolio Dividends Received 630

Dividends From A Connected Corporation . 631

Dividends Paid Out Of Mixed IncomeOf A Connected Corporation . . . . . 633

Refundable Dividend Tax On Hand . . . 634Basic Concepts . . . . . . . . . . . . 634

RDTOH - General Definition . . . . . . 635

Refundable Portion Of Part I Tax Payable . 635

The Dividend Refund . . . . . . . . . 638

Example Of RDTOH Calculations . . . . 638

Designation Of Eligible Dividends . . . . 641Basic Concepts . . . . . . . . . . . . 641

CCPCs And Their GRIP . . . . . . . . 642

Non-CCPCs And Their LRIP . . . . . . . 644

Part III.1 Tax On Excessive Eligible DividendDesignations . . . . . . . . . . . . 645


References . . . . . . . . . . . . . . . . . 647



CHAPTER 14Other Issues In

Corporate Taxation

Introduction . . . . . . . . . . . . . . . . 661

Acquisition Of Control Rules . . . . . . . 661Economic Background . . . . . . . . . 661

Acquisition Of Control Legislation . . . . 662

Deemed Year End . . . . . . . . . . 662

Restrictions On The Use Of CharitableDonations . . . . . . . . . . . . . 662

Restrictions On The Use Of Losses . . . . 663

Unrecognized Losses At Deemed Year End . 664

Deemed Disposition Election . . . . . . 665

Associated Companies . . . . . . . . . . 667The Problem . . . . . . . . . . . . 667

Investment Tax Credits . . . . . . . . . . 672Procedures . . . . . . . . . . . . . 672

Eligible Expenditures . . . . . . . . . 672

Rates . . . . . . . . . . . . . . . 673

Refundable Investment Tax Credits . . . . 674

Carry Overs Of Investment Tax Credits . . 675

Acquisition Of Control . . . . . . . . . 676

Tax Basis Shareholders’ Equity . . . . . . 676Shareholders’ Equity Under GAAP . . . . 676

Paid Up Capital (Tax Basis Contributed Capital) 676

Tax Basis Retained Earnings . . . . . . . 677

Pre-1972 Capital Surplus On Hand . . . 678

Capital Dividend Account . . . . . . . 678

Distributions Of Corporate Surplus . . . 680Regular Cash Dividends . . . . . . . . 681

Stock Dividends . . . . . . . . . . . 681

Dividends In Kind . . . . . . . . . . 682

Capital Dividends Under ITA 83(2) . . . . 683

Deemed Dividends Under:ITA 84(1) - Increase In PUC . . . . . . 684ITA 84(2) - On Winding-Up . . . . . . 686ITA 84(3) - On Redemption, Acquisition,

Or Cancellation Of Shares . . . . . 687ITA 84(4) And ITA 84(4.1) . . . . . . . 688


References . . . . . . . . . . . . . . . . . 690



Tax Software Assignment Problem . . . . 702


V O L U M E I I

CHAPTER 15Corporate Taxation AndManagement Decisions

The Decision To Incorporate . . . . . . . 705Basic Tax Considerations . . . . . . . . 705

Other Advantages And Disadvantages . . . 706

Tax Reduction And Deferral . . . . . . . 707Approach . . . . . . . . . . . . . . 707

Basic Example . . . . . . . . . . . . 708

Public Corporation . . . . . . . . . . 710

CCPC - Active Business Income . . . . . 712

CCPC - Investment Income OtherThan Dividends . . . . . . . . . . . 715

CCPC - Dividend Income . . . . . . . 716

Conclusions On Tax Reductions And Deferrals 718

Provincial Taxes And Integration . . . . . 720Tax Deferral . . . . . . . . . . . . . 720

Tax Reduction . . . . . . . . . . . . 721

Summary: Tax Deferral And Tax Reduction 725

Tax Free Dividends . . . . . . . . . . . . 725Tax Rates On Dividends . . . . . . . . 725

Use Of Tax Credits . . . . . . . . . . 726

Tax Free Amounts For 2011 . . . . . . . 727

Income Splitting . . . . . . . . . . . . . . 728Basic Concept . . . . . . . . . . . . 728

Example . . . . . . . . . . . . . . 728

Shareholder Benefits . . . . . . . . . . . 730The Owner-Manager Environment . . . . 730

Shareholder Benefits Other Than Loans . . 730

Shareholder Loans . . . . . . . . . . 731

Management Compensation . . . . . . . 734General Principles . . . . . . . . . . 734

Salary Vs. Dividends . . . . . . . . . . 735

Salary Vs. Dividends ForThe Owner - Manager . . . . . . . . . 735The Basic Trade-Off . . . . . . . . . . 735

Other Considerations . . . . . . . . . 736

Conclusion . . . . . . . . . . . . . 744


References . . . . . . . . . . . . . . . . . 745



CHAPTER 16Rollovers Under Section 85

Rollovers Under Section 85 . . . . . . . . 757

General Rules For The Transfer . . . . . . 758Transferor And Transferee . . . . . . . 758

Eligible Property . . . . . . . . . . . 758

Consideration To Transferor . . . . . . . 759

Making The Election . . . . . . . . . 759

Establishing The Transfer Price . . . . . . 759

Transfer Prices - Detailed Rules . . . . . 761Rules Applicable To All Assets . . . . . . 761

Accounts Receivable . . . . . . . . . 762

Inventories, Non-Depreciable Capital Property 763

Disallowed Capital Losses . . . . . . . 764

Depreciable Property . . . . . . . . . 766

Disallowed Terminal Losses . . . . . . 768

Eligible Capital Property . . . . . . . . 768

Eligible Capital Property- Disallowed Deductions . . . . . . . 770

Summary Of Transfer Price Rules . . . . . 771

Allocation Of The Elected Value . . . . . 771Consideration Received By The Transferor . 771

Assets Acquired By The Corporation . . . 772

Paid Up Capital Of Shares Issued . . . . 774Paid Up Capital Reduction . . . . . . . 774

More Than One Class Of Shares . . . . . 775

Section 85 Rollovers— Comprehensive Example . . . . . . 776

Gift To Related Person - Section 85 . . . 779General Rules . . . . . . . . . . . . 779

Example . . . . . . . . . . . . . . 779

Section 85 - Excess Consideration . . . . 781Shareholder Benefit - ITA 15(1) . . . . . 782

Dividend Stripping — ITA 84.1 . . . . . . 783Applicability Of ITA 84.1 . . . . . . . . 784

Dividend Stripping Example . . . . . . . 784

Capital Gains Stripping — ITA 55(2) . . . 787Application Of ITA 55(2) . . . . . . . . 787

Capital Gains Stripping - Examples . . . . 788


References . . . . . . . . . . . . . . . . . 791




V O L U M E I I

CHAPTER 17Other Rollovers And

Sale Of An Incorporated Business

Introduction . . . . . . . . . . . . . . . . 807

Share For Share Exchanges . . . . . . . . 807General Rules . . . . . . . . . . . . 808

Conditions For The Application Of ITA 85.1 808

Example . . . . . . . . . . . . . . 808

Exchange Of Shares In A Reorganization . 810Application Of ITA 86(1) . . . . . . . . 810

Conditions For The Reorganization . . . . 810

Procedures . . . . . . . . . . . . . 811

Example Using ITA 86(1) In An Estate Freeze 812

Gift To Related Person - ITA 86(2) . . . . 815

Practical Considerations . . . . . . . . 817

Using ITA 86(1) - Tax Planning Considerations 817

Amalgamations . . . . . . . . . . . . . . 818Position Of The Amalgamated Company . . 819

Position Of The Shareholders . . . . . . 820

Vertical Amalgamations (Parent And Subsidiary) 820

Non-Tax Considerations . . . . . . . . 820

Amalgamations - Tax Planning Considerations 821

Winding-Up Of A 90% Owned Subsidiary 822Acquisition Of Assets . . . . . . . . . 822

Disposition Of Shares . . . . . . . . . 825

Tax Planning Considerations- Amalgamation Vs. Winding-Up . . . . 826

Winding-Up Of A Canadian Corporation . 827Example . . . . . . . . . . . . . . 828

Convertible Properties . . . . . . . . . . 830Application . . . . . . . . . . . . . 830

Sale Of An Incorporated Business . . . . 831Alternatives . . . . . . . . . . . . . 831

Restrictive Covenants(a.k.a. Non-Competition Agreements) . . 831

Sale Of Individual Assets . . . . . . . . 833

Sale Of Assets As A Going Concern . . . . 833

Sale Of Shares . . . . . . . . . . . . 835

Evaluation Of Alternatives . . . . . . . 836

Example . . . . . . . . . . . . . . 837


References . . . . . . . . . . . . . . . . . 840



CHAPTER 18Partnerships

Introduction . . . . . . . . . . . . . . . . 853Taxable Entities In Canada . . . . . . . 853

Partnerships Defined . . . . . . . . . . . 854The Importance Of Defining A Partnership . 854

Basic Partnership Elements . . . . . . . 855

Types Of Partnerships . . . . . . . . . 855

Co-Ownership, Joint VenturesAnd Syndicates . . . . . . . . . . . . . 857Introduction . . . . . . . . . . . . . 857

Co-Ownership . . . . . . . . . . . . 857

Joint Ventures . . . . . . . . . . . . 857

Syndicates . . . . . . . . . . . . . 858

Partnership Income, Losses And Tax Credits 858Introduction . . . . . . . . . . . . . 858

Applicable Concepts . . . . . . . . . 859

Calculating The Amounts To Be Allocated . 860

Methods Of Allocation . . . . . . . . . 866

The Partnership Interest . . . . . . . . . 866The Concept . . . . . . . . . . . . 866

Acquiring A Partnership Interest . . . . . 867

Adjusted Cost Base Of The Partnership Interest 868

Disposition Of A Partnership Interest . . . 872

Limited Partnerships And Limited Partners 873Definitions . . . . . . . . . . . . . 873

At-Risk Rules . . . . . . . . . . . . 873

Transfer Of Property To And FromA Partnership . . . . . . . . . . . . . . 875

Transfers With No Rollover Provision . . . 876

Common Partnership Rollovers . . . . . 877

Specified Investment Flow ThroughPartnerships . . . . . . . . . . . . . . 880


References . . . . . . . . . . . . . . . . . 881




V O L U M E I I

CHAPTER 19Trusts And Estate Planning

Introduction . . . . . . . . . . . . . . . . 897

Basic Concepts . . . . . . . . . . . . . . 898What Is A Personal Trust? . . . . . . . . 898

Establishing A Trust . . . . . . . . . . 899

Returns And Payments - Trusts . . . . . . 900

Non-Tax Reasons For Using Trusts . . . . 901

Classification Of Trusts . . . . . . . . . . 901Personal Trusts . . . . . . . . . . . . 901

Testamentary Vs. Inter Vivos Trusts . . . . 902

Taxation Of Trusts . . . . . . . . . . . . 903Rollovers To A Trust . . . . . . . . . . 904

Rollovers To Capital Beneficiaries . . . . 907

21 Year Deemed Disposition Rule . . . . 907

Net Income For Tax Purposes Of A Trust 908Preferred Beneficiary Election . . . . . . 909

Amounts Deemed Not Paid . . . . . . . 909

Amounts Retained For A BeneficiaryUnder 21 Years Of Age . . . . . . . . 909

Taxable Income Of A Trust . . . . . . . . 910

Income Allocations To Beneficiaries . . . 910Discretionary And Non-Discretionary

Distributions . . . . . . . . . . . . 911

Flow Through Provisions . . . . . . . . 911

Principal Residence Exemption . . . . . 913

Tax Payable Of Personal Trusts . . . . . . 913Testamentary vs. Inter Vivos Trusts . . . . 913

Income Attribution . . . . . . . . . . . . 916

Purchase Or Sale Of An Interest In A Trust 917

Tax Planning . . . . . . . . . . . . . . . . 918Qualifying Spousal Trusts . . . . . . . . 920

Alter Ego Trusts . . . . . . . . . . . 920

Joint Spousal Or Common-Law Partner Trusts 921

Estate Planning . . . . . . . . . . . . . . 921

Estate Freeze . . . . . . . . . . . . . . . 923

SIFT Partnerships And Trusts . . . . . . . 926


References . . . . . . . . . . . . . . . . . 931



CHAPTER 20International Issues In Taxation

Introduction . . . . . . . . . . . . . . . . 939

Residence . . . . . . . . . . . . . . . . . 940Residence Of Individuals . . . . . . . . 940

Residence Of Corporations . . . . . . . 946

Residence Of Trusts . . . . . . . . . . 948

Part I Tax On Non-Residents . . . . . . . 948Canadian Source Employment Income . . 949

Carrying on Business in Canada . . . . . 950

Dispositions of Taxable Canadian Property . 952

Part XIII Tax On Non-Residents . . . . . 953Interest Income . . . . . . . . . . . 954

Royalties . . . . . . . . . . . . . . 954

Rent . . . . . . . . . . . . . . . . 955

Dividends . . . . . . . . . . . . . . 956

Pension Benefits, Other Retirement Benefits 956

Immigration And Emigration . . . . . . . 957Entering Canada - Immigration . . . . . 957

Departures From Canada - Emigration . . . 958

Unwinding A Deemed Disposition . . . . 960

Short-Term Residents . . . . . . . . . 961

Foreign Source Income Of Residents - Part I 962Basic Issues . . . . . . . . . . . . . 962

Foreign Source Employment Income . . . 962

Foreign Source Business Income . . . . . 963

Foreign Source Capital Gains . . . . . . 964

Foreign Source Investment Income . . . . 964

Foreign Investment Reporting Requirements 965

Foreign Source Income Of Residents- Part II . . . . . . . . . . . . . . . . . 966Non-Resident Entities . . . . . . . . . 966

Foreign Affiliates . . . . . . . . . . . 967

Controlled Foreign Affiliates . . . . . . . 968

Foreign Accrual Property Income (FAPI) . . 969

Foreign Affiliate Dividends . . . . . . . 972

Foreign Investment Entities . . . . . . . 974

Dividends From ForeignNon-Affiliated Companies . . . . . . . 975


References . . . . . . . . . . . . . . . . . 976




V O L U M E I I

CHAPTER 21GST/HST

Introduction . . . . . . . . . . . . . . . . 989

Transaction Tax Concepts . . . . . . . . 991Value Added Tax (VAT) . . . . . . . . 993

Liability For GST/HST . . . . . . . . . . . 995The Concept Of Supply . . . . . . . . 995

Supply Categories . . . . . . . . . . . . . 996Taxable Supplies . . . . . . . . . . . 996

Exempt Supplies . . . . . . . . . . . 997

Applying the GST/HST Rate . . . . . . . . 998Place Of Supply . . . . . . . . . . . 998

Applying The Rate . . . . . . . . . . 999

Collection And Remittance Of GST/HST . 999

Registration . . . . . . . . . . . . . . . 1000Meaning Of Person For GST/HST . . . . 1000

Who Must Register . . . . . . . . . . 1000

Exemption For Small Suppliers . . . . . 1001

Input Tax Credits . . . . . . . . . . . . 1003Vendors Of Fully Taxable And

Zero-Rated Supplies . . . . . . . . 1003

Vendors Of Exempt Supplies . . . . . . 1005

Examples . . . . . . . . . . . . . 1006

Relief For Small Businesses . . . . . . . 1009Quick Method Of Accounting . . . . . 1009

Small Suppliers Exemption . . . . . . . 1012

Simplified Input Tax Credit Method . . . 1012

GST/HST Procedures And Administration 1013GST/HST Returns And Payments . . . . 1013

Associated Persons . . . . . . . . . . 1014

Refunds And Rebates . . . . . . . . . 1015

Books And Records . . . . . . . . . 1015

Appeals . . . . . . . . . . . . . . 1015

General Anti-Avoidance Rule . . . . . . 1016

Employee And Partner GST/HST Rebate 1016General Concept . . . . . . . . . . 1016

Calculating The GST/HST Rebate Amount . 1016

Example . . . . . . . . . . . . . . 1017

Residential Property, New Housing Rebate 1018General Rules For Residential Property . . 1018

New Housing Rebate . . . . . . . . . 1018

(continued)

CHAPTER 21, continuedSale Of A Business . . . . . . . . . . . . 1019

Sale Of Assets . . . . . . . . . . . . 1019

Sale Of Shares . . . . . . . . . . . 1019

Other Situations . . . . . . . . . . . 1019

Specific Applications . . . . . . . . . . . 1020

Partnerships And GST/HST . . . . . . . 1021General Rules . . . . . . . . . . . . 1021

Partner Expenses . . . . . . . . . . 1021

Disposition Of A Partnership Interest . . . 1022

Transfers Between Partners And Partnerships 1022

Reorganization Of The Partnership . . . 1022

Trusts And GST/HST . . . . . . . . . . . 1022

Key Terms Used In This Chapter . . . . 1023

Problems For Self Study . . . . . . . . . 1024

Assignment Problems . . . . . . . . . . 1028

GlossaryThe Glossary can be found:

• at the back of the separate paperStudy Guide, and

• on the FITAC-CTP CD-ROM within the FITACversion of Canadian Tax Principles.

Supplementary ReadingsThe Supplementary Readings can be found onthe 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 - Transfer Pricing


V O L U M E I I

Documents

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