LAW 508 Taxation - Taxation Course Notes PDF

` LAW 508: Taxation Week 1: Course Introduction and Tax Basics 7 Chapter 1: Income Tax Law (1.1-1.3) 7 Chapter 2: History and Policy (2.3-2.5) 8 Lecture 1: Introduction 8 S. 2(1) -Tax payable by persons resident in Canada 9 ○ s.249(1)- Tax year: 9...

` LAW 508: Taxation Week 1: Course Introduction and Tax Basics 7 Chapter 1: Income Tax Law (1.1-1.3) 7 Chapter 2: History and Policy (2.3-2.5) 8 Lecture 1: Introduction 8 S. 2(1) -Tax payable by persons resident in Canada 9 ○ s.249(1)- Tax year: 9 Progressive Tax System: s. 117 for individuals; s.123 for corporations 10 Week 2: The Tax System and Sources of Income 11 Textbook 1.6: Overview of the income tax system 11 Chapter 4: Income 12 Section 3: Income for taxation year 12 Paragraph 3(a) identifies four traditional sources of income: 14 Income from a source: Strike Pay not income from a source 14 Breach of Contract: Not Taxable 14 Non-compete not income: Fortino - TAXABLE NOW 14 Windfalls: like lottery, is not taxed Leblanc v. R. (2006), 15 ITA: Income Tax - s.2,3,4 15 Class 2: The Tax System and Sources of Income 17 S. 150: Defines how taxpayers must pay their tax 17 Tax Liability For Residents: s. 2(1) 17 Tax Liability For Non-residents: s. 2(3) 18 S. 248 defines person: 18 s. 248(1) defines Individual: a person other than a corporation 18 s. 104(2) A trust shall, for the purposes of this Act, 18 Section 3 continues: 18 s.3 lists the “traditional sources of income 19 ○ S. 4: other sources of income 19 S. 42(2)(f)Windfalls: 20 Exclusions from Income: Subdivision G of Part 1 of the Act 20 s. 81(1)(a) specifies that income is tax exempt if declared so by any other act of Parliament. 20 Other exclusion from income: 21 ○ Private Health Plan benefits in s. 6(1)(a). 21 ○ 50% of Capital gain in s. 38(a) 21 Principal Residence Exemption in s. 40(2)(b), 21 the Scholarship Exemption s. 56(3), and 21 the lifetime capital gains deduction in s. 110.6. 21 Entities Exempt From Income Tax: Division H (s.149-149.2) all together 22 Week 3: Interpreting the ITA, Practitioners Resources, and Tax Administration 22 Chapter 1.6 - Interpreting the Act 22 Chapter 15: Tax Administaration and Ethics 23 S. 150(1): every individual who is liable to pay tax in a taxation year must file a tax return for that year 23 ○ S. 150(2): demand the filing of a return by an individual who is not liable to pay tax 23 Unpaid taxes: S.156.1: Payment of unpaid tax must accompany a taxpayer's income tax return 23 S. 153, the employer must deduct the tax payable by an employee 23 S. 227 establishes penalties for failure by an employer to withhold tax at source 23 S. 152 and 161, interest is charged on late and overdue taxes. 23 S. 230 and 230.1 set out requirements for keeping adequate books of account and records for tax purposes. 23 Assessment and enforcement by the Minister (s. 152, 231, 222, 225) 23 SCC in Johnston v. M.N.R. (1948) that the burden of proof lies on the taxpayer to establish that the factual findings 24 In cases involving the general anti-avoidance rule ("GAAR") in s. 245, the SCC stated in Canada Trustco Mortgage Co. v. Canada (2005) 24 S. 162, 163 and 163.2 50 provide civil penalties for a variety of delinquent acts and omissions 24 Sections 238 and 239 make tax evasion a criminal offence: 24 Week 3: Interpreting the ITA, Practitioners Resources, and TAx Administration 25 ○ Be familiar with defined terms: s. 248(1) 25 Individuals: s.150(1) of the ITA, every individual who is liable to pay tax 26 Multinational Enterprise (MNE): s. 233 27 ○ s. 231.1 & 231.2 gives auditors the power to inspect the taxpayer's books and records 27 S. 222 establishes a 10-year limitation period for the collection of unpaid taxes 27 Penalties: s.224; s. 225; s.162, 163 and 163.21 27 Wanna fight CRA? 27 ○ Reverse Onus: of proof 28 Settlements 28 Rectification: 28 Week 4: Residence (for tax purposes) 29 The ITA imposes tax liability on the basis of "residence" under s. 2(1) and on the basis of "source of income" under s. 2(3). 29 ○ Paragraph 250(4 )(a) deems all corporations incorporated in Canada after April 26, 1965 to be resident in Canada. 30 ○ S. 250(1) deems certain individuals to be resident in Canada throughout a taxation year even if the individual is not physically present in Canada. 30 S. 250(1 )(a) - Sojourned 30 De Beers Consolidated Mines v. Howe (1906): De Facto Control 30 Test for residency for a trust: 30 Week 4: Residence (for tax purposes) 31 Worldwise Tax Principle: 31 ○ Thompson - current position on residency 32 Corporations: s.250(4) 33 The Residence of Trusts s. 104(2) 33 Change of Residence 34 S. 126: Canadian Foreign Tax Credit : 34 Taxing Non-Residents – Division D of Part 1 36 Week 5 - Employment and Office Income 38 Chapter 5: Employment Income 38 Sections 5 to 8 provide for rules on the computation of employment income (or loss) 38 4 Traditional Sources of income in Canada (from s.3 and 4) : 39 ss. 5, 6 and 7 specify what and when amounts must be included in the computation (7 being stock options), and section 8 specifies what and when amounts are deductible 39 s.5(1)Employment income: 39 ○ The “Control test” for independent contractors - look to Integration test 41 A worker can be classified as an employee if the following characteristics are present: 41 A worker can be classified as an independent contractor if: 41 Timing of Employment Income: 42 s.5(1): salary 42 s.6(1)(a) benefits 42 S.6 types of benefits: allowances, automobiles, employee loans, housing benefits, and employee stock options 43 Allowances: 43 Automobiles: s.6(1)(e), (k) and (L) 44 Employee loans: ss.6(9) and 80.4(1) 44 Housing benefits: s. 6(19) to 6(23) 45 Employee stock options: s.7(1). 45 Deductions from Employment/Office Income: s. 8 46 Week 6: Capital Gains 47 Chapter 10: Capital Gains 47 ○ S. 38: defines ”taxable capital gain", "allowable capital loss" and "allowable business investment loss", and prescribes the "taxable" or "allowable" portion to be 50 per cent. 47 ○ Ss. 39 to 55 provide details to support the determination of capital gains or losses in a myriad of ones, involving different types of properties. 47 Capital or income: 48 ○ S. 54 defines "capital property" as: 48 Isolated transactions: 48 Intention on acquisition 48 "Securities" typically include corporate shares and debt obligations. s. 39( 4) 49 Disposition s.248(1) : 49 The change of use: s. 45(1) 49 Superficial losses: A "superficial loss" is deemed to be nil under s. 40(2)(g)(i). 50 Class 6: Capital gains 50 Business Profit: 51 Capital Gains: 51 Deemed Dispositions 54 Change of use (Personal to Commercial and vice versa) s.45(1)& 45(2) 54 Departure from Canada s.128.1(4) 54 Death and inter vivos Gifts s. 70(5) and s.69(1)(b) 55 Personal Trusts (21 yr rule)- s.104(4) 55 Carrying Over Capital losses - s. 111(1)(b) 55 ○ s.54 defines adjusted cost base (ACB) as: 56 There are a number of “special” rules applicable to capital gains these include: 56 ○ De minimus rule for personal-use property: s.46(1) 56 s.54 defines “Personal-use property”: 56 ○ Loss limitation rules s. 40(2)(g)(iii): 56 Loss limitation rules – Superficial losses s. 40(2)(g) 57 ○ Non-arm’s length transactions: s. 251 57 ○ Cost-basis transfers (rollovers); 57 ○ Principal residence exemption s. 40(2)(b): 58 Allowable business investment losses 58 Allowable business investment losses (ABIL) – s. 38(c) and 39(1)(c) 59 Lifetime capital gains exemption (LCGE) – s. 110.6 (aka. capital gains deduction) 59 Week 7 Other Income and Deductions 59 Chapter 11: Other Income and Deductions 59 Other sources of income are specified by ss. 56-59.1 59 Public pensions: S. 56(1)(a) includes in income receipts from two types of public pension programs: 60 Tax-free "direct transfers" to RRSPs, RPPs and DPSPs are allowed by the ITA. These "direct transfers" include the following: 60 ○ S. 248(1) defines a "retiring allowance" as an amount... received... 61 Miscellaneous amounts 61 S. 62 allows a deduction for "moving expenses". 62 Class 7: Other Income and Deductions 62 s. 81 contains a list of payments that are definitely not taxable 62 Other Income: Payments listed in sections 56-59.1 (Subdivision D) generally fall into one of the following categories: 62 Subdivision E (s.60 to 66.8) amounts can be deducted from any of the income sources including taxable capital gains under paragraph 3(b). 62 s. 56(1)(a) includes in income from two types of public pension programs: 62 ○ The federal Old Age Security (OAS) and similar provincial laws, and the Canada Pension Plan (“CPP”) 62 Tax-assisted private pension plans 63 ○ Registered Pension Plans (RPP) 63 Contributions to an RPP by employers (s. 20(1)(q)) and employees (s. 8(1)(m)) are tax- deductible. 63 ○ Deferred Profit Sharing Plans (DPSP) 63 ○ Registered Retirement Savings Plan (RRSP) 64 Tax-free Savings Accounts (TFSAs) 65 Registered Education Savings Plans (RESPs) Under s.146.1 66 Registered Disability Savings Plans (RDSPs) (s.118.3) 66 Tax-free First Home Savings Account (FHSA) Under s. 146.6, 66 Retiring Allowances (aka severance pay) s. 248(1) 67 Death Benefit: s.56(1)(a)(iii) 67 Employment Insurance: s.56(1)(a)(iv). 68 Non-compete payments (restrictive covenants) s.56.4 68 Scholarships, Bursaries And Awards s.56(1)(n) - exemption available under s.56(3). 68 Payments for the support of a spouse or former spouse are deductible by the payer under s.60(b), and must be included in the income of the recipient under s.56(1)(b). 69 Childcare expenses:s.63 69 Moving Expenses: s. 62 69 Week 8: Taxing Individuals and Income Splitting 69 Chapter 12: Taxable Income and for Individuals 69 Tax credits: A tax credit reduces a taxpayer's tax payable dollar by dollar. 70 S.118.1 provides for a three-tier charitable gifts credit: 71 Medical expenses are eligible for tax relief (s. 118.2) 71 Chapter 13: Income Splitting 72 Prohibitions for income splitting: 72 Class 8 - Individuals and Income Splitting 72 Allowable capital losses vs. other losses. 73 Section 31 - Restricted Farm Losses: 73 The Exceptions to the Capital loss “Quarantine” 73 ○ Allowable Business Investment Loss (“ABIL”): s. 39(1)(c) 73 ○ For individuals, the federal marginal tax rates for individuals are set out in s. 117(2) 75 The Final Step: Tax Credits. 75 The personal credits under s.118(1) 76 Basic Personal Amount: s.118(1.1) 76 Spouse or Common-Law Partner Credit: s.118(1)(a). 76 The Eligible Dependent Credit: s.118(1)(a). 76 Tuition Credit -(s. 118.5) 76 Credit for Interest on Student Loans (s.118.62): 76 Charitable Donation Tax Credit s.118.1: 77 Others non-refundable credits in brief: 77 Alternative Minimum Tax (AMT) - s.127.5-127.55 78 Income Splitting 79 ○ s.160 makes both parties (transferor/ee) liable for the tax. 80 Indirect Payments s. 56(2). 80 ○ Tax on split income (TOSI): 80 Pension Splitting 81 Week 9 - Business and Property, Inclusions and Deductions 82 Chapter 14: Income Earned through Private Corporations, Partnership and Trust 82 Class 9 : Corporations, Trusts, and Partnerships 84 Corporations: 84 ○ Public Corporations: (s. 246(1) through s. 89(1)) 84 ○ Multinational Corporations or Multinational enterprise (MNE): 84 ○ Private Corporations: (defined in s.248(1) through s.89(1)): 85 i) Canadian-Controlled Private Corporations (“CCPCs”): 85 ii) Other: if they are not CCPCs 85 Canadian-Controlled Private Corporations (“CCPCs”) (defined-ish in s.125(7)): 85 Small Business Deduction 86 Specified corporate income (s.125(7)) 86 Personal Services Business (s.125(7)): 86 ○ A Specified Investment Business (s.125(7)) : 87 The Small Business Deduction Summary 87 The “integration” of corporate and personal tax 87 Corporations designate dividends as eligible or other than eligible (non-eligible dividends). The type of dividends depends on the status of the corporation: 88 Removing the tax deferral advantage on CCPCs: Investment limit 88 Removing the Tax Deferral Advantage on CCPCs: Taxing Passive Investment Income 88 Partnerships 89 Partnerships and Tax 90 Limited Partnerships and losses: (s.96(2.1) to (2.4), 111(1)(e) and 143.2 90 Equity Interest in the Partnerships s.53(1)(e) and 53(2)(c) 91 Difference partnership and corporations: 91 Trusts: A trust is not a legal entity, although it is treated as such for Canadian tax purposes (s.104(2)). 91 Personal Trusts 91 ○ Spousal trust, only the spouse is a beneficiary. It allows rollover transfers to the trust. s.70(6) & 73 (includes common law partner) 91 ○ Qualified disability trusts are testamentary trusts for a beneficiary that qualifies for the disability tax credit. s.118.3(1)(a), (b), and s. 108(1) “preferred beneficiary”. 91 Personal Trusts - taxed in the hands of the beneficiaries s.104(14) and (15) 92 Week 10 - Business and Property, Inclusions and Deductions 93 Chapter 6: Business and Property Income: Profit 93 The ITA subsection 248(1) defines "business" by giving illustrative examples: 93 In Stewart (2002), SCC replaced the REOP test with the pursuit of profit test. 94 Chapter 7: Business and Property Income: Inclusion 95 As part of the ecosystem for computing profit, the inclusion rules support s. 9 in several ways. 95 Para.h 12(1)(g) requires a taxpayer to include in computing income any amount received that is dependent upon the use of or production from property. 96 Chapter 8: Business and Property Income: Deductions 96 Case law identifies some factors as relevant to determining if an expense is a personal or living expense, but no factor is conclusive on its own. These factors include: 96 Entertainment expenses: Section 67.1 97 Section 67 prohibits the deduction of an otherwise deductible expense except to the extent that the expense was "reasonable in the circumstances". 97 Class 10 - Business and Property 97 The key feature of property and business income is that it is net income - profit - s. 9 97 Income from property can fall into two “sources”: business income vs capital gains 97 s.9(3) (basic rules of business and property income) explicitly says that “income from a property” excludes capital gains and “loss from a property” excludes capital losses. 98 An Adventure or Concern in the Nature of Trade 98 Stewart and the Pursuit of Profit Test 98 Property Income Vs. Business Income 100 ○ “Business income is generally distinguished from property income on the basis that a business requires an additional level of taxpayer activity...” - Stewart 100 ○ There is a rebuttable presumption that a corporation carries on a business. Marconi Company v. The Queen, (1986) 100 ○ The attribution rules of s. 74.1 and 74.2 – these are the anti-income splitting rules for property. 100 Income derived from property can be characterized as coming from 3 different sources: 100 Profit: s.9(1) 100 s. 9(2) defines business and property loss as: 101 What’s s.31?...Restricted Farm Losses. 101 Calculating Profit: 102 Calculating Profit - Inclusions (if unsure business or property) - Sections 9 to 11; s. 12-17 103 Dividends - 12(1)(j), 82(1)(a), and 12(1)(k 104 Rent or Royalty (amounts dependent on the use of or production from property) - s.12(1)(g) 104 Interest - s.12(1)(c) 104 Current versus capital expenditures: 105 Capital Expenditures and Capital Cost Allowance 105 Capital Cost Allowance and Capital Gains 105 Current versus capital expenditures 106 The General purpose test: – s.9(1) and 18(1)(a) and (h) 106 Personal Or Living Expenses Are Not Deductible - expressly denied by s. 18(1)(h). 106 Business expenses subject to statutory limitations 107 ○ Entertainment expenses: s.67.1 107 ○ Home office expenses: s.18(12) 107 Business expenses subject to statutory limitations 107 Business expenses must be reasonable to be deductible. - s.67 107 Business expenses must be incurred to be deducted. - 18(1) 107 Week 11: Tax Avoidance, Evasion, and the GAAR 108 Chapter 17: Tax Avoidance 108 ITA s. 245: 111 Class 11: avoidance evasion and the GAAR 114 Week 1: Course Introduction and Tax Basics Chapter 1: Income Tax Law (1.1-1.3) * GAAR: "general anti-avoidance rule," a failsafe in the ITA to prevent tax abuses; and * The Carter Commission / Report: refers to an analysis of the Canadian income tax system and general tax policy from the 1960's. * A tax: a levy, enforceable by law imposed under the authority of a legislature, imposed by a public body and levied for a public purpose * Income tax is levied on income * Indirect incentives are based on how heavily something is taxed * “In" and "come" suggest that income is "something" arising from or flowing out of a "place" that remains intact * Roles of Income Taxes: * Raising revenue: over 55% of the federal government's revenue * Redistributing income * Incentivizing or subsidizing private activities * Sources of income tax law: * The Income Tax Act (ITA): started during WWI and remained (current statute from 1971) * Amended through the Budget Bill * Legislative process: The Department of Finance is responsible for tax policy, which includes formulating amendments to the ITA * Income tax application rules (ITARs): consist of transitional rules, which were needed to shift from the old Act to the new one * Income Tax Regulation (Regulations): are introduced under authority conferred by section 221 of the ITA. * Section 221 provides that the Governor in Council may make regulations "prescribing anything that, by this Act, is to be prescribed or is to be determined or regulated by regulation" * Tax treaties: purpose to avoid double taxation and to prevent fiscal evasion * Associated with sources vs residency of taxation * Relieving of taxes in nature * Usually prevails over other laws * Case law - ITA is not subject to case law (hard statute) * Provincial income tax statutes * Administrative publications: The CRA provides commentary on the law and how it is administered, both on its website and in the forms and reference documents * CRA is the administrator of the tax law: Information Bulletins,Tax Folios & Advanced Rulings * General information and interpretive guidance * Advance rulings Chapter 2: History and Policy (2.3-2.5) * Benefit principle: taxpayer contribute in proportion to the benefit they derive from the government * Purchase of the taxpayers from the government * Ability to pay principle: equity or fairness should be the major principle of the tax system * The Carter Commission took the view that the criterion of ability to pay required that: * Tax be levied at progressive rate * Comprehensive tax base * Tax levied on families not individuals * Tax concession to particular industries or activities be avoided * Corporate and personal income tax on corporate profits be integrated to avoid double taxation * Neutrality: tax system should be designed to bring about minimum change in the allocation of resources within the private sector of the economy * Simplicity: often prioritized over other priorities * Each person is a tax unit, every individual or corporation is separate taxpayer * ITA does recognize the interdependence of family members * Tax credit for dependent spouse or common-law partner * The Carter Commission recommended that families become the tax paying unit * However, “tax on marriage” was deemed undesirable * It would disincentive the second spouse from entering work force as they would be taxed at a higher rate * Commision suggested a different tax rate for families and individuals * Imputed income: value of the benefit derived by a person from his or her own persona services (caregiving, cooking etc.) and use of own property Lecture 1: Introduction * Taxes area compulsory charge imposed by a government on the Tax Base * Types of taxes: * Tariffs: type specific fee imposed on the specific good (i.e. alcohol) * Duties: all goods that come in can get dutied * Income Taxes (Personal and Corporate) * Consumption: GST/HST * Excise Taxes: things that are bad for you get taxed higher by the government * Capital Gains Tax: (different from Income Tax): not result of work, result of selling asset, selling the source of income * Selling the tree not the fruit * Payroll Tax: * Purpose of tax: * Raise revenue for government programs * Income Redistribution * Motivating taxpayer behavior (nudges) * Two Levels of Taxation: * Federal Government: they can tax any way they want * Provincial Government: they can only do direct taxation (Re: Eurig Estate) * Is limited to the power of “direct taxation” Constitution s. 92(2). These are taxes levied onto provincially located persons, property or transactions – within their boundaries and only for Provincial purposes * Alberta is the only exception * Types of Taxpayers: * Individuals: ITA s. 248(1): defined as a person other than a corporation * Taxes levied against individuals as a taxation unit (not family or group) * For the purposes of some tax credits - the unit as a family * Corporation: separate from their owners/shareholders * Public or private * Public are listed publicly stock exchange - open on stock market * Private * Tax integration: ITA treats corporate in corporation with individuals receiving income * Corporation pay flat tax - 15% * Small business tax rate - brings the 15% to 9% (only on $0.5M income or lower) * Trusts: separate tax paying entity (top federal income 33%) * But can also be also treated by the ITA as flow through entities. * * Partnerships: agreements between two or more parties to carry a business out together * Limited Partner: only liability * General Partner: unlimited liability * Limited liability partnership: limits partners limited personal liability - if sued liability only for themselves not for other parties * ITA Definition of a Taxpayer: * Persons: All taxpayers under the ITA are persons, whether they are individuals, corporations, or trusts (Partnerships are not) see. s. 2(1). * S. 2(1) -Tax payable by persons resident in Canada * An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year. * Residence: the ITA applies on the basis of Canadian residence, or – in the case of on-residents – the Canadian source of their income * Basic Tax Concepts: * Tax Base: is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. * All the things that are taxed * s.249(1)- Tax year: * for individuals is a calendar year, corporations choose any 12 months periods * Carter Commission/Report: 1966 report on Canada’s income tax system,often cited as the best analysis of tax policy ever produced * Tax Equity * Vertical Equity: a taxpayer’s liability to pay tax ought to depend on their level of income for discretionary use; & * Horizontal Equity: people in the same circumstances should pay the same taxes * Progressive Tax System: s. 117 for individuals; s.123 for corporations * Tax Rate: the rate applied to a taxpayer's taxable income to determine their taxes payable * Effective tax rate: or “average tax rate” - total tax amount you pay - tax payable divided net income (before exclusions credit,exemptions) * Self-assessment Tax System: Canada is Tax DIY Country for now * Many other countries -have implement return free filing for certain taxpayers * Tax Credit: Directly removed from the taxes owed. * Non-refundable - if the deduction makes a negative tax, there is no refund. * Refundable - can get in cash the refund info taxes to get taxes into negative. * Tax deduction: reduces the amount of income that is subject to income tax * Basic personal amount (BPA):The basic personal amount is a non-refundable tax credit every Canadian resident is entitled to claim on their income tax return. * Starting 2022, the federal basic personal amount is based on your net income for the year. The maximum basic personal amount is applied to your return to reduce the amount of income you’re required to pay tax on. * Changes with the Consumer Basic Basket of goods (CB) * You’re also entitled to claim a corresponding provincial basic personal amount, which varies in amount depending on which province or territory you live in * For 2024: the BPA is between $14,156 - $15,705 for taxpayers with net income of $173,205 or less. For incomes above this threshold, the additional amount of $1,549 is reduced until it becomes zero at net income of $246,752. * As a tax credit, the Basic Personal Amount can appear to be confusing as the amount is not the actual tax deducted but the base for deduction. * Beginning Jan. 1, federal income tax bracket thresholds in Canada rose 4.7 % across all brackets & basic personal amount have also been adjusted to account for inflation * Basic Tax Concepts: * RRSP: contributions are exempt from being taxed in the year they are made. Any investment income earned from investments held within the RRSP can then grow tax-deferred, so long as the money remains within the RRSP, until it's withdrawn. * They are “registered” with the federal government such that only certain investments are eligible. * TFSA: contributions are made after tax, but gains and withdrawals from the account are tax free. * FHSA: Contributions to the FHSA (up to $8,000 per year, up to a lifetime maximum of $40,000 ) are tax deductible, while gains and withdrawals are tax-free so long as used to purchase a home. * RESP: are designed to help taxpayers save for the post-secondary education of a beneficiary, who is normally, but not necessarily, their child. Contributions are not tax-deductible but these specific amounts are also not taxed when they are distributed to the student. The federal government provides certain amounts into these plans, The income earned in the plan plus any federal contributions are taxed as the income of the beneficiary when paid out. * If you are below a certain brackets - government will contribute regardless of contribution of the person saving in it * Timing is important enough such that most tax planning revolves around deferring tax to a future time. * To be able to defer a tax consequence to a future year is equivalent to a tax-free loan of that amount. * The ITA has rules when income, losses, gains, etc occur and when they can be claimed * ITA Definition - s. 281(1) * Tax Fiction: Deeming provisions * Capital Gains evasion * Taxable event: when the taxes incur * Tax Assessment vs. Audit - assessment happens every year, tax audit - formal procedure * Income vs Profit: * Taxable for business is profit * Income: employees * Source Theory of Income: ITA lists sources of income, the money received have to be put into a specific time of income * Depreciation and capital cost allowance * Withholding Taxes - assumption of what the government thinks you owe it (from RRSP) * Tax Integration = how individuals would be treated whether or not they are incorporated * Tax Avoidance vs. Tax Evasion: * Avoidance is not criminal, just need to pay back * Evasion: knowingly misleading CRA (jail) * GAAR: refers to the "general anti-avoidance rule," a failsafe in the ITA to prevent tax abuses * If the spirit of what you doing is wrong Week 2: The Tax System and Sources of Income Textbook 1.6: Overview of the income tax system * Three principles: * Who is the subject accountable to pay tax * Tax base: what is the manifestation of value * Tax realization event - what occurs * ITA is organized as following - * Who is liable for tax * What is the tax base * When is tax payable * How much tax is payable * How are the taxes collected * Liability for tax: an income tax shall be paid as required by [ITA] on taxable amount for each year of every peon resident in Canada * Subsection 2(3) refines the scope of this change to non-resident of Canada to include income made in Canada * Person, not family * Individual: Person other than corporation * Residence: Canadian resident is liable for tax * Tax base: s. 2 ITA taxable income computed under s. 3 - taxable income minus deductions permitted by Division C * Section 4 requires or track quality of income:business, employment, property, or gain income * Whose income is it: taxes can be shifted from high- to low- income individual in the family, or using an entity like a corporation * In general: * Income from employment or personal service is earned by the person who renders the service * Income from property is earned by the owner of the property * Income from sale of the property is earned by the owner of the property * Income from business, owner of the business * Timing and accounting period: annually for the taxation year , for corporation a fiscal year (any 12 months) * Personal income taxes are progressive, corporation are flat 15% * Credits:reduce a taxpayer liability * The alternative minimum tax (AMT) - calculating both ordinary tax and AMT * CRA collects and reviews taxes * Tax dispute resolution: through administrative appeal or/and judicial appeal Chapter 4: Income * Section 3: Income for taxation year * 3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the year determined by the following rules: * (a) determine the total of all amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each office, employment, business and property, * (b) determine the amount, if any, by which * (i) the total of * (A) all of the taxpayer's taxable capital gains for the year from dispositions of property other than listed personal property, and * (B) the taxpayer's taxable net gain for the year from dispositions of listed personal property, exceeds * (ii) the amount, if any, by which the taxpayer's allowable capital losses for the year from dispositions of property other than listed personal property exceed the taxpayer's allowable business investment losses for the year, * (c) determine the amount, if any, by which the total determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the total of the deductions permitted by subdivision e in computing the taxpayer's income for the year (except to the extent that those deductions, if any, have been taken into account in determining the total referred to in paragraph (a)), and * (d) determine the amount, if any, by which the amount determined under paragraph (c) exceeds the total of all amounts each of which is the taxpayer's loss for the year from an office, employment, business or property or the taxpayer's allowable business investment loss for the year, and for the purposes of this part, * (e) where an amount is determined under paragraph (d) for the year in respect of the taxpayer, the taxpayer's income for the year is the amount so determined, and * (f) in any other case, the taxpayer shall be deemed to have income for the year in an amount equal to zero. * ITA does not define income - leaves ordinary meaning * The words is rather than includes - indicates the limited to intention - enumeration intent * Net profit and gain replaced with income * General Meaning: * Income = does not have a universal definition - salaries,dividends, * There is elusivity about some gray areas of income * All tax credits are designed to be delivered tax-free social assistance * Most precedents are focused on the wording of “source” of income * Income vs capital: * Income Fruit only never tree * A taxpayers savings, or after-tax salary, business profits are capital * Cash, personal assets, real property or investments * Surrender of the sources of profit are capital and not income for tax purposes * Haig-Simons theory: "Personal income may be defined as the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and the end of the period in question". * Income = consumption plus gain in net worth in the tax year * Carter Commission: The comprehensive tax base has been defined as the sum of the market value of goods and services consumed or given away in the taxation year by the tax unit [the taxpayer], plus the annual change in the market value of the assets held by the unit. * Idea of an equitable tax system * Taxation of capital gains: * From Carter’s Commission - the idea that the capital gains increases wealth and thus should be taxable * Been taxed since 1972 * Income From a source: * ITA codifies only income from a source * Yield of productive resource * In the case law, adjectives, such as "real", "productive", or "profitable" have all been used to describe or qualify the word "source". * Based on the case law, an income source seems to have one or more of the following characteristics: * It recurs on a periodic basis; * It involves organized effort, activity, or pursuit on the part of the taxpayer; * It involves a marketplace exchange; * It gives rise to an enforceable claim to the payment by the taxpayer; and * In the case of a business or property source, there is a pursuit of profit. * Paragraph 3(a) identifies four traditional sources of income: * Office, employment, business and property * In determining whether a receipt has a source, the courts tend to first fit the receipt into one of the enumerated sources before deciding that the receipt is a non-taxable gift or a windfall gain * Income from a source: Strike Pay not income from a source * Canada v. Fries (1990) the SCC held that it was not satisfied that strike pay was "income... from a source" within the meaning of section 3; and "the benefit of the doubt" should go to the taxpayers * Breach of Contract: Not Taxable * In Schwartz v. Canada (1996),57 the SCC held that a payment of damages for breach of contract was not taxable * Non-compete not income: Fortino - TAXABLE NOW * The Court held in Fortino that non-compete payments did not constitute income from a source. * Characterization of selected receipts: * Gifts are a "voluntary and gratuitous transfer of property" with no strings attached * Personal gifts and inheritances: As Robertson J. stated in Bellingham, * There is no need to cite authorities for the proposition that gifts and inheritances are immune from taxation. It is well accepted that these items represent non-recurring amounts and the transfer of old wealth. Underlying the source doctrine is the understanding that income involves the creation of new wealth. Gifts do not flow from a productive source of income. * If an amount is given because of some relationship to an office or employment or a business, it is likely treated as income from an office, employment or a business. * Gift of property: while the value of gifts is tax-free to the donee, the donor may be liable to income tax on any capital gain realized at the time of gifting. * Windfalls: like lottery, is not taxed Leblanc v. R. (2006), * "the general perception that lottery winnings are not taxable is deeply embedded in the Canadian fiscal psyche * Damages: for tax purposes, damages or compensation received pursuant to a court judgment or an out-of-court settlement may be considered as on account of income, capital or windfall to the recipient * Nature of damage will dictate * Compensation for a loss of income is taxed as income * The recovery of an expense is not income, unless the expense was deducted * Personal injury damage is not taxable: * Personal injuries include both physical injuries (the loss of a limb) and non-physical injuries (loss of dignity or reputation as a result of libel or defamation) * Punitive damages are not taxable * Imputed Income: consists of the flow of benefits derived from labour on one's own behalf as well as the benefits from the ownership or use of property. * Housework - earning income from renting space within the space you are living * Not a taxable income * The ITA also "quarantines" capital losses from the traditional sources of income: capital losses generally can only be used to offset capital gains * The income earned by certain taxpayers is exempt from tax under section 149. These taxpayers include charities, non-profit organizations (hospitals and universities),The income earned by certain taxpayers is exempt from tax under section 149. These taxpayers include charities, non-profit organizations (hospitals and universities), ITA: Income Tax - s.2,3,4 * Division A: Taxable income: s. 2 * (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year. * (2) The taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C. * (3) Where a person who is not taxable under subsection 2(1) for a taxation year * (a) was employed in Canada, * (b) carried on a business in Canada, or * (c) disposed of a taxable Canadian property, * at any time in the year or a previous year, an income tax shall be paid, as required by this Act, on the person’s taxable income earned in Canada for the year determined in accordance with Division D. * Division B: Computation of Income s. 3 The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year determined by the following rules: * (a) determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property, * (b) determine the amount, if any, by which * (i) the total of * (A) all of the taxpayer’s taxable capital gains for the year from dispositions of property other than listed personal property, and * (B) the taxpayer’s taxable net gain for the year from dispositions of listed personal property, * Exceeds * (ii) the amount, if any, by which the taxpayer’s allowable capital losses for the year from dispositions of property other than listed personal property exceed the taxpayer’s allowable business investment losses for the year, * (c) determine the amount, if any, by which the total determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the total of the deductions permitted by Subdivision E in computing the taxpayer’s income for the year (except to the extent that those deductions, if any, have been taken into account in determining the total referred to in paragraph (a), and * (d) determine the amount, if any, by which the amount determined under paragraph (c) exceeds the total of all amounts each of which is the taxpayer’s loss for the year from an office, employment, business or property or the taxpayer’s allowable business investment loss for the year, * and for the purposes of this Part, * (e) where an amount is determined under paragraph (d) for the year in respect of the taxpayer, the taxpayer’s income for the year is the amount so determined, and * (f) in any other case, the taxpayer shall be deemed to have income for the year in an amount equal to zero. * Income or loss from a source or from sources in a place: 4 (1) For the purposes of this Act, * (a) a taxpayer’s income or loss for a taxation year from an office, employment, business, property or other source, or from sources in a particular place, is the taxpayer’s income or loss, as the case may be, computed in accordance with this Act on the assumption that the taxpayer had during the taxation year no income or loss except from that source or no income or loss except from those sources, as the case may be, and was allowed no deductions in computing the taxpayer’s income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or to those sources, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto; and * (b) where the business carried on by a taxpayer or the duties of the office or employment performed by a taxpayer was carried on or were performed, as the case may be, partly in one place and partly in another place, the taxpayer’s income or loss for the taxation year from the business carried on, or the duties performed, by the taxpayer in a particular place is the taxpayer’s income or loss, as the case may be, computed in accordance with this Act on the assumption that the taxpayer had during the taxation year no income or loss except from the part of the business that was carried on in that particular place or no income or loss except from the part of those duties that were performed in that particular place, as the case may be, and was allowed no deductions in computing the taxpayer’s income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that part of the business or to those duties, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto. * (2) Subject to subsection 4(3), in applying subsection 4(1) for the purposes of this Part, no deductions permitted by sections 60 to 64 apply either wholly or in part to a particular source or to sources in a particular place. * (3) In applying subsection 4(1) for the purposes of subsections 104(22) and 104(22.1) and sections 115 and 126, * (a) subject to paragraph (b), all deductions permitted in computing a taxpayer’s income for a taxation year for the purposes of this Part, except any deduction permitted by any of paragraphs 60(b) to (o), (p), (r) and (v) to (z), apply either wholly or in part to a particular source or to sources in a particular place; and * (b) any deduction permitted by subsection 104(6) or 104(12) shall not apply either wholly or in part to a source in a country other than Canada. Class 2: The Tax System and Sources of Income * Three kinds of taxpayer are Individuals, Corporations, and Trusts * Types of Taxpayer: * Colloquially, “Individuals” are generally natural persons (but technically include Trusts); * Corporations (artificial entities); * Trusts (relationships) * Partnerships (flow through relationships) * S. 150: Defines how taxpayers must pay their tax * An individual is a taxpayer and must file a tax return but, generally, only if tax is payable for the year. * Corporations & trusts are also taxpayers but must file separate returns regardless of tax payable. * A trust is, for most purposes, considered to be an individual but is subject to special rules that depend upon the type of trust [s.104(2)]. * A partnership is not a taxpayer, but we determine its income at the partnership level as if it is an entity, and partners declare their share of income in their tax returns [s.96(1)]. * Tax Liability For Residents: s. 2(1) * s. 2(1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year. * Tax Liability For Non-residents: s. 2(3) * s. 2(3) Where a person who is not taxable under subsection 2(1) for a taxation year (a) was employed in Canada, (b) carried on a business in Canada, or (c) disposed of a taxable Canadian property, * Both apply to “Persons” * S. 248 defines person: * or any word or expression descriptive of a person, includes any corporation, and any entity exempt, because of sub-sec. 149(1), from tax under Part I on all or part of the entity’s taxable income and the heirs, executors, liquidators of a succession, administrators or other legal representatives of such a person, according to the law of that part of Canada to which the context extends * In most cases, the terms “person” and “taxpayer” are interchangeable. Note the difference for an “individual.” * s. 248(1) defines Individual: a person other than a corporation * s. 104(2) A trust shall, for the purposes of this Act, * and without affecting the liability of the trustee or legal representative for that person’s own income tax, be deemed to be in respect of the trust property of an individual… * Hence Trusts are treated as individuals for tax purposes. * WARNING: just because humans (natural persons) and Trusts are “individuals” under the ITA, does not mean they are taxed the same. * Therefore progressive taxation * Trusts are individuals for tax purposes * Corporation =/=business; corporation means incorporated * Employees get taxed when they get paycheck * With respect to INCOME, the act contains many timing provisions for when an event is taxable, for example wages and salary are taxed when they are “received” (s.5(1)). Business revenues and the corresponding calculation of net profit generally occur when the income is “receivable” (s.9), which is when the business has a legal right to those sums (e.g. It issues a bill / invoice) * Capital gains are taxable when they are realized - where the asset is sold or disposed of. * Capital gains happens when you sell a capital * Section 3 continues: * 3. The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year determined by the following rules: * (a) determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property, [and] * (b)(i) (A) all of the taxpayer’s taxable capital gains for the year from dispositions of property * What is income: Inside and outside of Canada + Anything you receive is taxable + Income is not only salary * A person, whether an individual or a corporation, who qualifies as a resident of Canada, is subject to tax in Canada on income from all sources inside or outside Canada * Non-reisdent: taxable in Canada under subsection 2(3), the liability to tax in Canada is limited to the taxpayer's income earned in Canada * s.3 lists the “traditional sources of income * Office, employment, business and property. * S. 4: other sources of income * Specific other * Assets that appreciate or depreciate - large assets that you buy or sell (house, stocks,and bonds) * Income that is classified as Capital gains are not really considered to be from a “Source,” per se * What distinguishes capital gains from the other sources is that they are derived from selling something that was itself a source of income (office, employment, business, property or defined other). The provisions related to capital gains are contained in Subdivision C, s. 38-55 of the act. * Tree not the fruit * Though note the wording of s. 3(a): * The income of a taxpayer…[is], without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property, * Hence this list is deliberately not exhaustive: * Despite the non-exhaustive nature of the list, the SCC has stated that if there is ambiguity as to whether a payment falls within a source, the “benefit of the doubt” should go to the taxpayer. * i.e. that payment should not be taxable – see Canada v. Fries 1990. * Each of the four options are calculated separately - the deductions and everything else applies first and then they are added up; * Office: elected office, on a board, hold an office (there is no T4) * Employment: * Business: run a business, money that comes from the business * Property: rentals (does not have to be real estate), could be dividends * Other: non-compete clauses * These are found in sections 56-59.1 (Subdivision D) * Fortino. R - non-compete clauses are not taxable * Changed became taxable now * Similar to s.3(a), s.56 similarly states: “without restricting the generality of section 3” * you may (cautiously) assume that if a payment does not fall within a traditional source (office, employment, business, or property), one of the “other” sources listed in Subdivision D, or is a capital gain – that the payment is not taxable. * Benefit of the doubt” should go to the taxpayer. ( Canada v. Fries 1990) * If taxes don’t fall into specific categories listed, courts do not find it to be up to taxation * Recall the common law characteristics of a source of income: * It reoccurs periodically; * It involves organized effort, activity or pursuit by the taxpayer; * It involves a marketplace exchange; * It gives rise to an enforceable claim for payment; and/or * In the case of a business or property source, it is in the pursuit of profit * Personal cash gifts are non-taxable (assumed to be already taxed) * Inheritance - it tax free * Commercial gifts (from a business) : usually taxable * Under $500 not taxable; sum form of benefit up to $500 tax free * If the company stamps its name, my name - it drops in value * Gifts of property: gifts of property is not taxable; the giver is being taxable * Can result in taxes being owed by the giver. S. 69(1) deems (recall deemed disposition) that the giver sold the property for a fair market value and is forced to recognize any gains or losses. This is not always the case, as in certain circumstances the tax liability in the is regard can “rollover.” I.e. between spouses. * S. 42(2)(f)Windfalls: * non-recurring prizes, (loterry) - not taxable * Gambling prizes: one time, or sporadic casino wins are not taxed, but can become taxable if the taxpayer is in the business of gambling, or an adjunct thereof. * Surrogatum principle. From: London and Thames Haven Oil Wharves, Ltd. v. Attwooll, , aka London and Thames. * The surrogatum principle aims at determining what the payment is intended to replace and, once that is determined, determine the tax treatment of the replaced amount. * If it replaces something taxable than taxable * Damages: * Personal Injury Damages: can be physical or non-physical and are non-taxable (restitution) * Punitive Damages While these go beyond making the victim whole, they are still non-taxable, as the courts deem them to be closer to personal gifts or windfalls. Bellingham v R. (1995). * Imputed income: non-taxable * They are generally the ‘gain’ of value by a person when they avoid paying for services by providing the services to themselves or owning a good compared to renting it * Exclusions from Income: Subdivision G of Part 1 of the Act * contains amounts that are excluded from the computation of income. * s. 81(1)(a) specifies that income is tax exempt if declared so by any other act of Parliament. * The Indian Act is one of such acts. * Refers to individual who receive “Indian status” makes them exempt from tax * Metis and Innuit do not qualify for Indian Status * Eentitled to registration under s. 6 of the act * The Indian Act, s. 87 - Status Indians or an Indian band situated on a reserve; (Nowegijick v The Queen,SCC ) if the “situs” of the income in question can be said to be the reserve * Situs: the place to which, for purposes of legal jurisdiction or taxation, a property belongs * Interest and other investment income earned by a Status Indian can be tax exempt based primarily on the following connecting factors: location of the financial institution; place where payment is required to be made; location of the term deposits; contract entered into on the reserve Bastien. * There are no fixed rules for determining whether the situs of income is situated on a reserve, there must be “sufficient connecting factors” to the reserve, see Williams, and Bastien * Factors include the payor's and payee's residence, place of payment, and the location of the work generating the income; but depending on the context, different factors may be given different weight * CRA: * Guideline 1: When at least 90% of the duties of an employment are performed on a reserve * Guideline 2: When the employer is resident on a reserve, and the Status Indian lives on a reserve * Guideline 3: When > 50% of the duties of an employment are performed on a reserve, and the Status Indian or employer is resident on a reserve * First Nation’s Income Tax: A First Nation may impose its own Income Tax under an agreement with the federal government. Status Indians will be liable for such a tax even if they have Indian Act exemption. * Why the exemption? * The S.C. noted in Mitchell v. Peguis Indian Band (1990) that this exemption is not meant to help remedy the economically disadvantaged position of aboriginal people in Canada or bring economic benefits to them, it is rather to prevent market forces from eroding the use of Indian property on reserves. * Other exclusion from income: * Private Health Plan benefits in s. 6(1)(a). * 50% of Capital gain in s. 38(a) * [this has recently gotten more complicated] - if capital gains over $250,00 imclussion rate goes up to 66% [NOT WRITTEN YET] * Some deductions (not exemptions) that can total 100% of the payment, and hence act as an exemption, such as: * Principal Residence Exemption in s. 40(2)(b), * When you seel primary residence - no capital gains on that sale * the Scholarship Exemption s. 56(3), and * Anything in connection with your learning * the lifetime capital gains deduction in s. 110.6. * Canadian controlled corporation * Sale of farm or fishing purposes * Entities Exempt From Income Tax: Division H (s.149-149.2) all together * Include entities that manage pension plans, crown corporations, registered charities, nonprofits, foreign diplomats * The exemption provisions of Division H give complete freedom from tax to the entire taxable income of certain classes of “persons” (for example, foreign diplomats in Canada), whereas * Those of section 81 generally limit the tax exemption to certain kinds of income (such as income earned on a reserve) while leaving the recipient taxable in respect of income from other sources * GST/HST * GST/HST is a sales tax on supplies of most goods and services in Canada, as well as many supplies of real property and intangible personal property. Businesses are responsible for collecting and remitting the GST/HST they charge to clients and van generally claim input tax credits (ITCs) on GST/HST paid on purchases used in commercial activities * GST (or Goods and Services Tax) is a federal tax and whether kept separate or harmonized, would be applied to the same goods and services across the country. The current rate of GST is 5% * PST (or Provincial Sales Tax) is a tax that’s applied to goods and services by a specific province. Alberta is the only province that does not charge PST, and the rate will vary by province. * HST (or Harmonized Sales Tax), is a combination of the federal GST and a provincial sales tax (PST). Five provinces in Canada have implemented HST, and the rate varies by province. Currently 13% in Ontario * A business in Canada (with the exception of small suppliers), must charge, collect and remit GST/HST, along with any other applicable sales taxes. It can also recover the GST/HST it spent on purchases used in commercial activities by claiming input tax credits (ITCs) on its tax returns. * Business making under 30k don’t have to include GST/HST * If the purchaser is not an end user - you can get HST/GST get credited back * Most goods and services sold in Canada are subject to the Goods and Services Tax (GST) / Harmonized Sales Tax (HST), which is added to their final price. * The GST/HST also applies to real property (e.g., land and buildings) and intangible personal property (e.g., intellectual property rights, admissions and digitized products downloaded over the internet). * GST/HST is a value-added tax (VAT) applied at each level in the manufacturing and marketing chain. However, the tax does not apply to supplies that are zero-rated (i.e. taxed at 0%) or exempt. * Examples of zero-rated supplies include basic groceries, medical and assistive devices, and prescription drugs. Examples of exempt supplies include most health care, educational, and financial services. Week 3: Interpreting the ITA, Practitioners Resources, and Tax Administration Chapter 1.6 - Interpreting the Act * Keep in mind the following presumptions. Every word has a meaning; the same words have the same meaning(s); and different words have different meanings. * Context is important: When reading a provision of the ITA, one should always observe where it is located in the structure of the Act. * "neighbourhood" in which the specific provision is located. * Watch for defined terms * Learn the word patterns. There are some commonly used words and phrases in the ITA: * "the total of [A] and [B]" (indicating addition), * "the amount by which [A] exceeds [B]" (indicating subtraction), * "that proportion of... that [A] is of [B]" (expressing a fraction A/B) * "the lesser of [A] and [B]" (indicating a maximum limit), * "the greater of [A] and [B]" (indicating a minimum). * Do not overlook small words such as "and" and "or" - this indicates big difference * Skip non-essential words * Find the basic rule Chapter 15: Tax Administaration and Ethics 15.2 - Compliance by taxpayers: * S. 150(1): every individual who is liable to pay tax in a taxation year must file a tax return for that year * S. 150(2): demand the filing of a return by an individual who is not liable to pay tax * Returns by individuals must generally be filed no later than April 30 of the following year. The deadline is extended to June 15th if the taxpayer (or his or her spouse or common-law partner) has income from a business. * Corporate returns must be filed within six months of the end of the taxation year, which is the corporation's fiscal period. * Corporations with gross revenues in excess of $1 million must generally e-file their returns. * Unpaid taxes: S.156.1: Payment of unpaid tax must accompany a taxpayer's income tax return * S. 153, the employer must deduct the tax payable by an employee * from each payment of remuneration and remit the tax deducted to the government. * S. 227 establishes penalties for failure by an employer to withhold tax at source * The employee is also liable for tax that was never withheld, but the employee is not liable for tax that was withheld but not remitted to the CRA. * Can pay overdue taxes by April 30th of next year * S. 152 and 161, interest is charged on late and overdue taxes. * S. 230 and 230.1 set out requirements for keeping adequate books of account and records for tax purposes. Assessment and enforcement by the Minister (s. 152, 231, 222, 225) * The Minister is required by s. 152(1) to assess the tax payable by the taxpayer. * A small number of returns are selected for audit. The audit program is mainly directed at those categories of taxpayers who are most likely to have under-reported their income. * Taxpayers such as self-employed individuals, corporations, and trusts are the most likely candidates for audit. * S.231.1: auditors have the power to inspect the taxpayer's books and records, and to enter business premises without a warrant, and to require the owner or manager of the premises to provide "all reasonable assistance" and to answer "all proper questions". * S.231 outlines the rights that Minister has in relation to the auditing and accessing information * Reassessment: * A notice of reassessment is issued following an examination or audit. * A taxpayer may request reassessment when they discover an error in the return after receiving the notice of assessment * S.222 establishes a 10-year limitation period for the collection of unpaid taxes. * S.224 enables the Minister to effect collection of taxes and other amounts owing under the ITA by way of garnishment. * S. 225: Minister may certify that a taxpayer's tax has not been paid and direct that the taxpayer's goods and chattels be seized. 15.4 - Dispute resolution * If the Minister's decision under s. 165 is not acceptable to the taxpayer, the taxpayer has the right of appeal to the Tax Court of Canada ("TCC") under s.169. * There are two alternative procedures at the TCC: * The informal procedure and the general procedure. * Where the amount of tax and penalties in issue is no more than $12k, the amount of loss in issue is no more than $24k, or only interest is in issue. * The general procedure is used in all other cases, * SCC in Johnston v. M.N.R. (1948) that the burden of proof lies on the taxpayer to establish that the factual findings * In cases involving the general anti-avoidance rule ("GAAR") in s. 245, the SCC stated in Canada Trustco Mortgage Co. v. Canada (2005) * burden is on the Minister to establish that there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit, or purpose of the provisions relied upon by the taxpayer. * Where a taxpayer is prosecuted for a criminal offence under s. 238 or 239 of the ITA, the prosecution is conducted in the provincial court system under the rules of the Criminal Code. * Smerchanski v. M.N.R. (1976): once waived the appeal right cannot go back * The effect of the Smerchanski and Cohen cases is that the taxpayer is bound by a settlement agreement, but the Minister is not. * Rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. (Fairmont) * S. 162, 163 and 163.2 50 provide civil penalties for a variety of delinquent acts and omissions * Sections 238 and 239 make tax evasion a criminal offence: * Section 238 makes it an offence to fail to file a tax return or to break various other provisions of the ITA (strict liability) * Section 239 makes it an offence to falsify records or to evade compliance or payment in other ways. (need mens rea) 15.6 - Tax practice and ethics * Tax practice involves work in four principal areas: compliance, dispute resolution, planning and tax policy. * Tax practice involves ethical issues that are common to all lawyers and accountants, as well as some issues unique to tax. * The proper functioning of the self-assessment system largely depends on the involvement of well-trained tax practitioners. It could be said that the tax system relies on tax lawyers and other professionals acting as "gatekeepers". Week 3: Interpreting the ITA, Practitioners Resources, and TAx Administration * Tax law is entirely statutory in origin, case law does not create tax liability, only clarifies statutory meaning and application * Changes from cases - usually implemented into ITA * Rules of statutory interpretation are found in case law, as the ITA does not contain a general interpretation rule * Parliament is generally reluctant to tell judges how to interpret legislation * S. 12 of the Interpretation Act states: * Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects. * Various way of interpreting: * Strict interpretation: * This is difficult in tax law * “plain meaning” - as it says it means * “Modern rule” or the “textual, contextual and purposive” (TCP) approach. * The general trend has been to move from a literal, formalistic approach to a more liberal, substantive approach that has evolved into the TCP approach. * The “textual, contextual and purposive” (“TCP”) principle was adopted by the SCC in Trustco Mortgage Co. v. Canada, (2005) * “The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole.” * How to read the Act - ITA * Be familiar with the context: * Be mindful of the “neighbourhood” in which the specific provision is located * The whole provision interact with itself - need to read it in whole to get the whole context * Be familiar with defined terms: s. 248(1) * Found in s. 248(1) and many other places in the Act. * A defined meaning trumps an ordinary meaning * For example, qualifying individual - would differ in specific eligibility contexts * Note: The scope of a definition is limited by the words introducing it. Therefore, definitional provisions should be read very carefully. In addition, it is important to be alert for hidden definitions; terms in a particular section may be defined in the same section, or in a separate section or part of the Act. * Learn the word patterns: * “the total of [A] and [B]” (indicating addition), * “the amount by which [A] exceeds [B]” (indicating subtraction), * See s.146(1) “earned income” for both. * “that proportion of... that [A] is of [B]” (expressing a fraction A/B), * “the lesser of [A] and [B]” (indicating a maximum limit), * see 248 “death benefit” * “the greater of [A] and [B]” (indicating a minimum) * Do not overlook small words such as “and” and “or” * The word “and” is used as a conjunctive. Where “and” is used in respect of tests that must be satisfied, all of the tests must be satisfied before the resulting rules apply. * In contrast, the word “or” is used as a disjunctive. If any one of the conditions set out is met, the resulting rules will apply....but be careful * The words “includes” and “excludes” are expansive * Includes ads in addition to the ordinary meaning * In definition provisions, the word “includes” is generally used to expend upon a more restrictive interpretation * Deeming Provisions * A “deeming” provision is presumptively conclusive in law, regardless of any other facts that may suggest otherwise. “Shall be deemed” * A deeming provision artificially import additional meaning into a word or an expression which it would not otherwise have, in addition to the normal meaning * In certain circumstances, the verb “is” can mean “shall be deemed to mean”. Since deeming provisions are a legal fiction, they does not have to align with the ordinary meaning of words * Skip over non-essential words. * The best way of doing this is to scan the whole provision first and then highlight the essential words * Find the basic rule * Note: Total all would make an or a conjunctive - means both of the options together * Section 248(1) defines according to s. 125(7): Canadian-Controlled Private Corporation (CCPC) * Legal person that has been incorporated in Canada, that resides in Canada and that is not * one of the exceptions mentioned in s. 125(7), i.e. controlled by non-residents * listed on a stock exchange, nor * “controlled” by a company listed on a stock exchange * ITA: David Sherman and McCarthy are useful for the information Administering the Canadian Tax system * Individuals: s.150(1) of the ITA, every individual who is liable to pay tax * Generally then, children, students, those with no taxable income don’t have to file. Returns must generally be filed no later than April 30 of the following year, or June 15th if the taxpayer (or his or her spouse or common-law partner) has income from a business. * Corporations: have to file regardless, and must be filed within six months of the end of the taxation year, which is the corporation's fiscal period * Regardless if they make loss or gains * Taxpayer information the CRA holds is confidential. s.241 with limited exceptions * When do you pay tax: * S. 153 states the employer must deduct the tax payable by an employee from each payment of remuneration and remit the tax deducted to the government * Taxable events: paycheque * In general, an individual who derives income which is not subject to withholding at source (eg, income from business or property) must pay tax in quarterly instalments if that total (federal + provincial) tax liability exceeds $3,000 * Multinational Enterprise (MNE): s. 233 * Sets out Canada's rules on country-by-country (CbC) reporting filing obligations. The CbC report is a form that multinational enterprise groups are required to complete and file annually to provide information of their global operations in each tax jurisdiction where they do business * This filing requirement is part of a global initiative by the OECD/G20 to enhance transparency for tax administrations * All taxpayers returns are usually assessed * Notice of assessment is issued: any outstanding tax are due, and any overpaid taxes will be refunded * Audits are mainly directed at returns that are not - at face value - accurate, and at those categories of taxpayers who are most likely to have under-reported their income. * s. 231.1 & 231.2 gives auditors the power to inspect the taxpayer's books and records * and to enter business premises without a warrant, to require the owner or manager of the premises to provide “all reasonable assistance” and to answer “all proper questions” and to demand information or documents from the taxpayer and from others * S. 222 establishes a 10-year limitation period for the collection of unpaid taxes * After an audit concludes, the taxpayer is provided a notice of reassessment. This generally must be performed within three years from the date of mailing of the original assessment for individuals, and 4 for CCPC * Penalties: s.224; s. 225; s.162, 163 and 163.21 * s.224 allows the CRA to garnish the taxpayer's wage without a court order. * s. 225 allows the Minister to direct that the taxpayer's goods and chattels be seized, having provided a 30-day notice. Again, no court order is required * s.162, 163 and 163.21 provide civil penalties for a variety of acts and omissions, such as the late filing of a tax return, the failure to file a return, the failure to report an item of income, the making of a false statement or an omission in a return, and the misrepresentation of another person's tax matters by a third party. * The late-filing penalty is 5% of your 2023 balance owing, plus an additional 1% for each full month that you file after the due date, to a maximum of 12 months * Wanna fight CRA? * Objecting to an assessment / reassessment : can be initiated by the taxpayer within a year of filing their tax return (or 90 days after their notice of assessment/reassessment), by serving a notice of objection on the Minister. s.165 * Appeal to the Tax Court: must follow a CRA decision about an objection, and must be initiated within 90 days from the day of the mailing of the Minister's notice of objection decision. There are two procedures: * Informal procedure: where the amount of tax and penalties at issue is no more than $12,000, the amount of loss at issue is no more than $24,000, or only interest is in issue. The decision is subject to judicial review by the Federal Court of Appeal. * General procedure: occurs in all other case or where the taxpayer elects. It is real court. * Burden of proof: In making assessments, the Minister proceeds on assumptions and the initial onus is on the taxpayer to “demolish” the Minister's assumptions in the assessment (Hickman Motors Ltd. v. Canada) * The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen * Reverse Onus: of proof * s. 163(2) of the Act authorizes the Minister to impose a penalty on a person who has either “knowingly” or “under circumstances amounting to gross negligence” made a false statement or omission in an income tax return. In these circumstances, the burden of proof is on the Minister to establish the gross negligence. * s.163(2) requires that the Minister show not only that there has been an act of omission or misstatement by the taxpayer (or his or her agent), but also that the taxpayer (or agent) had a state of mind that justifies a finding of gross negligence. * In Udell v MNR: “In my view the use of the verb ‘made’ in the context in which it is used also involves a deliberate and intentional consciousness on the part of the principal to the act done.” * Settlements * are both common and utilitarian, the CRA has noted that it has – and will continue to – enter into private agreements with taxpayers to settle outstanding tax debts * Hence, the taxpayer is bound by a settlement agreement, but the Minister is not * Smerchanski v. M.N.R., (1976) determined that taxpayer, who had agreed to waive a right of appeal from an assessment as part of a settlement agreement, could not later change his mind and exercise that right of appeal. * Cohen v. R., (1980), held that a settlement agreement, under which the Minister agreed to could not bind the Minister * Despite the foregoing, s.220(3.1) empowers the Minister of National Revenue to give a taxpayer relief from penalty or interest costs that the CRA has assessed going backwards up to 10 years prior * Rectification: * For tax cases, this generally revolve around the intentions to lawfully avoid a tax consequence, which is not property affected by the drafting of the contract between parties * The precedent is Canada v. Fairmont Hotels Inc and Jean Coutu Group (PJC) Inc. v. Canada: * Rectification is available not to cure a party's error in judgment in entering into a particular agreement, but an error in the recording of that agreement in a legal instrument. Alternatively put, rectification aligns the instrument with what the parties agreed to do, and not what, with the benefit of hindsight, they should have agreed to do... Courts do not “rectify” agreements where their faithful recording in an instrument has led to an undesirable or otherwise unexpected outcome Week 4: Residence (for tax purposes) Chapter 3: Residence * S. 2(1) of the ITA provides that an income tax is payable on the taxable income of every person resident in Canada at any time in the year. * S. 2(3) speaks to persons who are non-residents of Canada, and taxes such persons only on income derived from three Canadian sources: * Income from employment in Canada * Carrying on business in Canada * The disposition of taxable Canadian property. * The ITA imposes tax liability on the basis of "residence" under s. 2(1) and on the basis of "source of income" under s. 2(3). * A person resident in Canada is liable for tax on the person's taxable income. * Benefit theory: benefit from the public services provided by a country should be charged for such services * This theory justifies the taxation of residents as well as the taxation of domestic-source income earned by non-residents. * The ability to pay principle is the foundation of progressive personal income taxation in Canada and other countries. * Taxpayers may not accurately report their foreign income on their tax returns and it is very difficult for the tax administration to obtain and verify tax information in respect of offshore activities. * Person's residence in Canada may be displaced by a treaty tie-breaker rule so that the person becomes a non-resident of Canada. * It is probably the best of all the alternatives, although the taxation of a resident alien (who cannot vote) can be criticised as "taxation without representation", and the concept of residence (as Citizenship enables the taxing country to tax its citizens who have moved to tax havens such as the Bahamas or Bermuda * Residency: For the purposes of income tax legislation, it must be assumed that every person has at all times a residence. * Whether the taxpayer's spouse and children are residents of Canada. The relevance of having a spouse and children resident in Canada varies, depending on the other facts of the taxpayer's situation. * In Alchin (2003),, the taxpayer worked in the United States from 1992 to 1997 * She was able to argue not being a citizen * In Shih and Schujahn the fact that the spouse and children stayed in Canada did not make the taxpayer who was living and working outside Canada a Canadian resident. * In Hauser, an Air Canada pilot did not sufficiently "divorce" himself from Canada when moving to the Bahamas. * Unless an individual servers all significant residential ties with Canada (i.e., dwelling place, spouse or common-law partner, and dependants) upon leaving the country, the CRA will generally consider the individual to remain a Canadian resident * The primary taxing provisions of s. 2 and 3 apply to "persons" and "taxpayers", and both these terms include corporations. * There have been a number of Canadian cases in which the evidence appeared to establish de facto control by the major shareholder, and yet the courts refused to conclude that central management and control was exercised from outside the board of directors. * Statutory rules: * Paragraph 250(4 )(a) deems all corporations incorporated in Canada after April 26, 1965 to be resident in Canada. * Corporations that were incorporated in Canada before April 27, 1965 are deemed to be resident in Canada if, at any time after April 26, 1965 they were resident in Canada under the common law test or carried on business in Canada (paragraph 250(4)(c)). * A foreign-incorporated corporation that is granted articles of continuance in Canada is deemed to be incorporated in Canada at the time of continuation under subsection 250(5.1) * These deeming rules, in effect, create a "citizenship" test for corporations and render the central management and control test irrelevant for corporations incorporated in Canada. * S. 250(1) deems certain individuals to be resident in Canada throughout a taxation year even if the individual is not physically present in Canada. * S. 250(1 )(a) - Sojourned * a person shall be deemed to have been resident in Canada throughout a taxation year "if the person sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more" * The term "sojourn" means something less than residence. A sojourner is a person who is physically present in Canada, but on a more transient basis than a resident. * Thompson established that length of time spent physically present in Canada is not crucial in determining whether or not a person is a resident at common law. * De Beers Consolidated Mines v. Howe (1906): De Facto Control * "[The] real business (of a corporation] is carried on where the central management and control actually abides." * The place where a corporation's board of directors meets will be the place where the central management and control actually abides. * Test for residency for a trust: * [T]here are many similarities between a trust and corporation that would, in our view, justify application of the central management and control test in determining the residence of a trust, just as it is used in determining the residence of a corporation. Some of these similarities include * (1) Both hold assets that are required to be managed; * (2) Both involve the acquisition and disposition of assets; * (3) Both may require the management of a business; * (4) Both require banking and financial arrangements; * (5) Both may require the instruction or advice of lawyers, accountants and other advisors; and * (6) Both may distribute income, corporations by way of dividends and trusts by distributions. * When making a determination as to where the central management and control of a trust actually takes place, the CRA will "look to any evidentiary support that demonstrates the exercise of decision-making powers and responsibilities over the trust". (Garron) * Residence in a treaty country: for Canadian tax purposes because the treaty may reduce or eliminate Canadian tax that is otherwise payable under the Act, such as under subsection 2(3). This is known as "treaty benefit". * In Garron, the transactions were designed to make the trust a resident of Barbados so that the capital gains would be protected by the treaty from Canadian taxation. * The tie-breaker rule identifies only one country as the resident country by considering a number of factors: the place of permanent home, habitual abode, and nationality are taken into account; where these factors do not supply an answer, the treaties allow "the competent authorities" of the two countries to determine the question "by mutual agreement". * Provincial tax: business is deemed to have been earned in the province or country where the permanent establishment is located. * Where person is located on the last day of the calendar year is their provincial tax Week 4: Residence (for tax purposes) * s. 2(1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year. AND s. 3(a) taxing sources from a source inside or outside Canada. i.e. Worldwide Income * If you are resident in Canada - you are taxable on all your income * s. 2(3) Where a person who is not taxable under subsection 2(1) for a taxation year * (a) was employed in Canada, * (b) carried on a business in Canada, or * (c) disposed of a taxable Canadian property * Worldwise Tax Principle: * Tax is paid according to the one’s global economic capacity, regardless of both the source of the income and the localisation of the wealth. * This is the default position to ensure the tax base is as broad (and perhaps as fair) as possible, but it does not mean it is the end result * Double taxation is not tax on tax * So taxation on the goods purchased is tax on tax it is fine * Taxation on the basis of residence: emphasizes the social and economic connections between a taxpayer and Canada. The ITA does not adopt a test of citizenship or domicile (where you intend to live) that are used by other countries in determining tax jurisdiction for individuals. * USA is one of the only country and Eritrea - based on citizenship * UK: tax based on the domicile - roots based taxation - country you intend to be * S. 250(3) provides that “a person resident in Canada includes a person who was at the relevant time (the tax period in question) ordinarily resident in Canada.” * Ordinarily implies non-exclusivity, so when a Canadian departs Canada but remains anchored in Canadian interests * Likediplomats, military on aborad missions * The CRA’s position is that a resident must generally severs all significant residential ties with Canada (i.e., dwelling place, spouse or common-law partner, and dependants) upon leaving * Evaluated case-by-case * Dwelling place: if available for their occupation despite their absence. The nature of any leasing arrangement while the individual is absent is considered * No High water test case by case * Spouse common-law partner/dependents: where a spouse or common-law partner remains in Canada, then that spouse or common-law partner will usually be a significant residential tie with Canada during the individual's absence from Canada * The CRA’s position also considers secondary residential ties that must be looked at collectively, which include: * personal property in Canada, such as a car or furniture * social ties in Canada, such as memberships in Canadian recreational or religious organizations * economic ties in Canada, such as Canadian bank accounts or credit cards * a Canadian driver's licence * a Canadian passport * health insurance with a Canadian province or territory * The CRA’s position finally considers other residential ties that the Courts have considered in determining the residence status of an individual while outside Canada, including: * the retention of a Canadian mailing address, post office box, or safety deposit box * personal stationery (including business cards) showing a Canadian address * telephone listings in Canada * local (Canadian) newspaper and magazine subscriptions * Examples: * Saunders - taking a sabbatical - still a resident * McFadyen - accepted a position at the Canadian embassy in Japan, sufficient ties - family ties, real estate, bank accounts * Nichlson: a taxpayer was held not be a resident in Canada (despite maintaining a matrimonial home in Canada and his provincial health program during that period) because he had no intention to return to Canada * Thompson - current position on residency * The intention of the taxpayer is not determinative of their residence; * A person can be resident in more than one country at the same time; * Every person is presumed to be resident somewhere * For individuals attempting to abandon Canadian residency, the following factors can be relevant: * The length of time the taxpayer is physically present in Canada; Hauser v. R., (2005) * The taxpayer's ties to another country; Thomson * The taxpayer's social and economic ties with Canada (ownership of property, professional or other memberships in Canada etc.); Ferguson v. Minister of National Revenue, 1989 * Worked abroad but the income went into Canadian bank account,wife is in Canada * The taxpayer's intention to return to Canada; Beament v. M.N.R., * The failure to pay tax or file tax returns in a foreign country. R. v. Sherwood, * Sojourner: (noun) a person who is physically resident in Canada, but is here on a more transient basis than a resident. (merely presence in Canada) * Vacation/business trip * S. 250(1)(a), a person shall be deemed to have been resident in Canada throughout a taxation year “if the person sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more. * Sojourners deemed to be resident in Canada are taxpayers under the ITA for tax purposes and are potentially liable for Part 1 tax (ie if they have taxable income). * However, because an individual who is deemed to be resident in Canada under subsection 250(1) is not factually resident in Canada (does not hold a dwelling place), they will generally not be resident in a particular province for provincial tax purposes. Some consequences of this are: * the individual will not be entitled to any provincial tax credits (refundable or otherwise) that might otherwise be available; * the individual will not be entitled to any direct, tax-based, provincial benefits (for example, provincial payments in respect of dependent children or infirm family members), and * the federal government will charge a 48% surtax on their taxable income in placeof their provincial taxes owing. s.120(1) * Corporations: s.250(4) * As persons for tax purposes, Corporations must also be resident in Canada to be taxable under ss.2 & 3. * s. 250(4)(a) deems all corporations incorporated in Canada after April 26, 1965 to be resident in Canada. * s. 250(4)(c)) If incorporated prior to the above date, corporations are deemed to be resident in Canada if, at any time after April 26, 1965 they were resident in Canada under the common law test or carried on business in Canada. * Common Law Test is where the central management and control generally where the Directorsmeet (Unit 1959) * Where control of the company meet * The Residence of Trusts s. 104(2) * s.104(2) of the ITA: a trust shall be deemed to be “an individual”. * s. 248(1) defines an individual as “a person other than a corporation” * Trusts are individuals liable for tax of they are residents under ITA * Garron Family Trust (Trustee of) v. R: held that a trust resides where its real business is carried on, which is where the central management and control of the trust actually takes place, and that the residence of the trustee does not always determine the residence of the trust. * Usually the management and control of the trust rests with, and is exercised by, the trustee, executor, liquidator, administrator, heir or other legal representative of the trust. * Where there is more than one trustee to be involved in exercising the central management and control over a trust. The trust will reside in the jurisdiction in which the more substantial central management and control actually takes place * In making a determination as to the jurisdiction in which the central management and control of a trust is exercised, the CRA will consider any relevant factor, which may include: * The factual role of a trustee and other persons with respect to the trust property, including any decision-making limitations imposed thereon, either directly or indirectly, by any beneficiary, settlor or other relevant person; and * the ability of a trustee and other persons to select and instruct trust advisors with respect to the overall management of the trust. * The CRA can determine that a trust is resident in Canada even if another country considers the trust to be resident in that other country. * The s. 94 rules are applicable to a non-resident trust that receives a "contribution" from a Canadian resident, or where * (i) the trust receives a contribution from a former Canadian resident, either within five years of leaving Canada or within five years before returning to Canada, and * (ii) the trust has a Canadian resident beneficiary * Change of Residence * Individual: S. 114 allows a part-year resident ( ie. becomes a Canadian resident or ceases to be a Canadian resident during a tax year) to exclude from taxable income all foreign income earned during the part of the year when the taxpayer was not resident in Canada * There is accordingly a clear advantage (for Canadian tax purposes) to being a part-year resident as opposed to a sojourner who is liable for Part 1 * Corporation and Trusts: s. 128.1(4)(a) provides that where a taxpayer that is a corporation or a trust ceases to be resident in Canada at any particular time, that taxpayer's taxation year shall be deemed to end immediately before that time. The taxpayer shall also be deemed to have begun a new taxation year at the particular time * Deemed Disposition: s.128.1 deems a human and/or corporation who has ceased to be a resident of Canada to have disposed of certain taxable property at fair market value immediately before ceasing to be a resident, triggering capital gains tax. * S. 126: Canadian Foreign Tax Credit : * Individuals who are residents of Canada and who paid income tax to a foreign government may be eligible to claim a foreign tax credit, which provides a tax credit against Canadian income tax payable for income taxes paid to a foreign government up to a limit of the Canadian tax on that income. * In general terms, the foreign tax credit (FTC) prevents double tax by allowing a credit to a Canadian resident for an amount of foreign income tax paid on foreign-source income, up to a limit of the Canadian tax on that income determined on a proportional basis * Tax you would pay in foreign location, Canada charges the difference * Canada has tax conventions or agreements AKA tax treaties with other countries. * The main purposes of tax treaties are to avoid double taxation and to prevent tax evasion. * Tax treaties: * Define which taxes are covered and who is a resident and eligible to the benefits, * Often reduce the amounts of tax to be withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country, * Limit tax of one country on business income of a resident of the other country to that income from a * Permanent establishment in the first country, * Define circumstances in which income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension, and other income, * May provide for exemption of certain types of organizations or individuals, and * Provide procedural framework for enforcement and dispute resolution * Canadian taxation requires the CRA to have the necessary information on foreign income earned by Canadian residents. In the absence of a tax treaty or a tax information exchange agreement (TIEA), the CRA has no legal means to obtain tax information from foreign governments about specific taxpayers (recall taxpayer information is confidential otherwise). * Tax treaties provide reciprocal treatment (e.g. s. 153 and 212(1) withholding taxes) in both countries by limiting the taxing right set forth in domestic law, * For the purpose of a Tax Treaty, the residence of a taxpayer is determined by the domestic law of the treaty country. * For corporations – recall that in Canada they are effectively all deemed to be the resident in Canada if incorporated here by s. 250(4) – though the domestic law of the treaty country may operate differently, (generally similar to the common law place of management test) and conflicts can arise * Treaties override the ITA whenever a corporation is considered resident in more than one country. * In general: A corporation not incorporated in Canada will be considered to be resident in Canada (by a treaty) under the Canadian common law test of central management and control (exercised in Canada) * If a company incorporated in Canada is granted Articles of Continuance in another jurisdiction, the corporation is deemed to have been incorporated in the other jurisdiction and not to have been incorporated in Canada. * However, a company incorporated in Canada that is continued into a foreign jurisdiction may still maintain residency in Canada under the common law principles for the determination of residency (i.e. central management and control). * Similarly, a foreign corporation will become resident in Canada if it is continued in Canada or is a predecessor corporation of an amalgamated corporation that is resident in Canada * Treaty shopping: typically involves the attempt by a taxpayer (generally corporation) to indirectly access the benefits of a tax treaty between two jurisdictions without being a resident of one of those jurisdictions. * Dual residency: where a person is resident in Canada (deemed or ordinary) and another country under the domestic laws of both countries * In these cases, to eliminate any conflicts and the double taxation that might otherwise result, Canada's tax treaties often provide special residency 'tie-breaker' rules for determining residency. * Most of time not explicit leaves it up to the authorities * Provincial Taxes and Residence * r. 2601 of the Income Tax Regulations provides that the province in which the individual resided on the last day of the taxation year is entitled to tax the individual on their entire income for the year. * Exception of income from a business with a “permanent establishment” outside the province, in which case that income is taxable in the province of permanent establishment