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CHAPTER 1Introduction To Federal Taxation
In Canada
The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1
Taxable Entities In Canada . . . . . . . . 2
Federal Taxation And The Provinces . . . . 3
Taxation And Economic Objectives . . . . . 5
Taxation And Income Levels . . . . . . . 5
Tax Incidence . . . . . . . . . . . . . 8
Tax Expenditures . . . . . . . . . . . . 8
Qualitative Characteristics Of Tax Systems . . 9
Canadian Federal Income Tax Legislation . 11History Of The Federal Income Tax Act . . . 11
Structure Of The Federal Income Tax Act . . 11
Parts Of The Act . . . . . . . . . . . . 12
Part I Of The Act . . . . . . . . . . . 12
Other Income Tax Legislation . . . . . . 14
Other Sources Of Income Tax Information . 16
Abbreviations To Be Used . . . . . . . . 18
Key Terms Used In This Chapter . . . . . . 18
References . . . . . . . . . . . . . . . . . 18
Assignment Problems . . . . . . . . . . . 19
CHAPTER 2Procedures And Administration
Introduction . . . . . . . . . . . . . . . . 23
Administration Of The Department . . . . 23
Source Deductions . . . . . . . . . . . . . 24Withholdings . . . . . . . . . . . . . 24
Employer’s Remittance Of Source Deductions 25
CHAPTER 2, continuedReturns And Payments - Individuals . . . 26
Requirement To File . . . . . . . . . . 26
Due Date For Individual Returns . . . . . 27
Instalment Payments For Individuals . . . . 29
Interest . . . . . . . . . . . . . . . 31
Penalties . . . . . . . . . . . . . . . 32
Due Date For Balance Owing - Individuals . 33
Returns And Payments - Corporations . . . 33Due Date For Corporate Returns . . . . . 33
Instalment Payments For Corporations . . . 34
Due Date For Balance Owing - Corporations . 35
Interest And Penalties For Corporations . . . 35
Returns And Payments - Trusts . . . . . . 36
Income Tax Information Returns . . . . . . 36
Foreign Reporting Requirements . . . . . . 37
Refunds . . . . . . . . . . . . . . . . . . . 37
Books And Records . . . . . . . . . . . . . 38
Assessments . . . . . . . . . . . . . . . . 38Initial Assessments . . . . . . . . . . . 38
Reassessments . . . . . . . . . . . . 38
Adjustments To Income Tax Returns . . . 39
Appeals . . . . . . . . . . . . . . . . . . . 40Consent Form . . . . . . . . . . . . 40
Informal Request For Adjustments . . . . . 40
Notice Of Objection . . . . . . . . . . 40
Tax Court Of Canada . . . . . . . . . . 42
Federal Court And Supreme Court Of Canada 43
Tax Evasion, Avoidance And Planning . . . 43Tax Evasion . . . . . . . . . . . . . 43
Avoidance And Planning . . . . . . . . 43
General Anti-Avoidance Rule (GAAR) . . . 44
Reasonable Expectation Of Profit (REOP) . . 45
(continued)
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CONTENTSCONTENTS
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CHAPTER 2, continuedCollection And Enforcement . . . . . . . . 46
Taxpayer Property . . . . . . . . . . . 46
Collections . . . . . . . . . . . . . . 47
Other Penalties . . . . . . . . . . . . 47
Fairness Package . . . . . . . . . . . . . . 48Basic Rules . . . . . . . . . . . . . . 48
Application . . . . . . . . . . . . . . 49
Key Terms Used In This Chapter . . . . . . 50
References . . . . . . . . . . . . . . . . . 50
Problems For Self Study . . . . . . . . . . 51
Assignment Problems . . . . . . . . . . . 53
CHAPTER 3Liability For Tax
Liability For Tax - Residence Issues . . . . 57Charging Provisions . . . . . . . . . . 57
Residence Of Individuals . . . . . . . . 58
Residence Of Corporations . . . . . . . 63
Residence Of Trusts . . . . . . . . . . 64
Taxation Of Non-Residents . . . . . . . . 64Additional Material On Residency . . . . . 65
The Concept Of Income . . . . . . . . . . 65The Economist’s View . . . . . . . . . 65
The Accountant’s View . . . . . . . . . 66
The Income Tax Act View . . . . . . . . 66
Computing Net Income For Tax Purposes . 67ITA Section 3 . . . . . . . . . . . . . 67
Net Income For Tax Purposes - Example . . 69
Principles Of Tax Planning . . . . . . . . . 71Introduction . . . . . . . . . . . . . 71
Tax Avoidance Or Reduction . . . . . . . 71
Tax Deferral . . . . . . . . . . . . . 72
Income Splitting . . . . . . . . . . . . 72
Key Terms Used In This Chapter . . . . . . 74
References . . . . . . . . . . . . . . . . . 74
Problems For Self Study . . . . . . . . . . 75
Assignment Problems . . . . . . . . . . . 77
CHAPTER 4Goods And Services Tax
Note On May, 2006 Budget . . . . . . . . 83
Introduction . . . . . . . . . . . . . . . . 83
Transaction Tax Concepts . . . . . . . . . 84Example . . . . . . . . . . . . . . . 84
Liability For GST . . . . . . . . . . . . . . 87Basic Charging Provision . . . . . . . . 87
The Concept Of Supply . . . . . . . . . . . 87Basic Definition . . . . . . . . . . . . 87
Supply Categories . . . . . . . . . . . 88
Applying the GST Rate . . . . . . . . . . . 90Basic Approach . . . . . . . . . . . . 90
Effect Of Trade-Ins . . . . . . . . . . . 90
Collection And Remittance Of GST . . . . 90
Registration . . . . . . . . . . . . . . . . . 91Meaning Of Person For GST . . . . . . . 91
Who Must Register . . . . . . . . . . . 91
Exemption For Non-Residents . . . . . . 92
Exemption For Small Suppliers . . . . . . 92
Input Tax Credits . . . . . . . . . . . . . . 94Vendors Of Fully Taxable And
Zero-Rated Supplies . . . . . . . . . 94
Vendors Of Exempt Supplies . . . . . . . 95
Accounting And The GST . . . . . . . . 95
Example . . . . . . . . . . . . . . . 96
Relief For Small Businesses . . . . . . . . 98Small Suppliers Exemption . . . . . . . . 98
Quick Method Of Accounting . . . . . . 98
Simplified Input Tax Credit Method . . . . 100
Procedures And Administration . . . . . 101Returns And Payments . . . . . . . . . 101
Associated Persons . . . . . . . . . . 103
Refunds And Rebates . . . . . . . . . 103
Books And Records . . . . . . . . . . 103
Appeals . . . . . . . . . . . . . . 104
General Anti-Avoidance Rule . . . . . . 104
Specific Applications . . . . . . . . . . . 105
Harmonized Sales Tax (HST) . . . . . . . 106
Key Terms Used In This Chapter . . . . . 106
Problems For Self Study . . . . . . . . . . 107
Assignment Problems . . . . . . . . . . . 109
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CHAPTER 5Income Or Loss From
An Office Or Employment
Employment Income Defined . . . . . . . 115General Rules . . . . . . . . . . . . 115
Cash Basis And Bonus Arrangements . . . 116
Net Concept . . . . . . . . . . . . 117
Employee Versus Self-Employed . . . . . 117Introduction . . . . . . . . . . . . . 117
Employee Perspective . . . . . . . . . 118
Employer Perspective . . . . . . . . . 119
Making The Distinction . . . . . . . . 119
Inclusions - Salaries And Wages . . . . . 121
Inclusions - Fringe Benefits . . . . . . . . 121ITA 6(1) - Amounts To Be Included In Income 121
CRA Administrative Practice OnFringe Benefits (IT-470R) . . . . . . . 121
Tuition Fees . . . . . . . . . . . . . 122
Gifts . . . . . . . . . . . . . . . . 122
Non-Taxable Benefits (IT-470R) . . . . . 123
Other ITA 6 Inclusions . . . . . . . . . 123
Tax Planning Considerations . . . . . . 124
Inclusions - GST On Taxable Benefits . . 126
Inclusions - Board And Lodging . . . . . 126
Inclusions - Automobile Benefits . . . . . 127Employees And Automobiles . . . . . . 127
Standby Charge . . . . . . . . . . . 128
Operating Cost Benefit . . . . . . . . . 130
Payments By Employee For Automobile Use 131
Example - Employer Owned Automobile . . 131
Example - Employer Leased Vehicle . . . . 132
Employer Provided Cars And Tax Planning . 133
Inclusions - Allowances . . . . . . . . . . 134Allowance Vs. Reimbursement . . . . . . 134
General Rules . . . . . . . . . . . . 134
Taxable Vs. Non-Taxable Allowances . . . 135
Reasonable Allowances For Motor Vehicles . 135
Employer’s Perspective Of Allowances . . . 136
Employee’s Perspective Of Allowances . . 136
Inclusions - Employee Insurance Benefits 137Life Insurance . . . . . . . . . . . . 137
Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 137
Health Care Insurance . . . . . . . . . 138
CHAPTER 5, continued
Loans To Employees . . . . . . . . . . . . 138General Rules . . . . . . . . . . . . 138
Home Relocation Loans . . . . . . . . 140
No GST Benefit . . . . . . . . . . . 140
Tax Planning For Interest Free Loans . . . 140
Inclusions - Stock Option Benefits . . . . 142The Economics Of Stock Option
Arrangements . . . . . . . . . . . 142
Overview Of The Tax Rules . . . . . . . 143
Private Vs. Public Companies . . . . . . 144
General Rules For Public Companies . . . 145
General Rules For Canadian ControlledPrivate Corporations (CCPCs) . . . . . 146
Charitable Donation Of EmployeeStock Option Shares . . . . . . . . . 148
Deferral On Publicly Traded Shares . . . . 148
Other Inclusions . . . . . . . . . . . . . 150Payments By Employer To Employee . . . 150
Forgiveness Of Employee Loans . . . . . 151
Housing Loss Reimbursement . . . . . . 151
Discounts On Employer’s Merchandise . . 151
Club Dues And Recreational Facilities . . . 151
Specific Deductions . . . . . . . . . . . . 152Overview . . . . . . . . . . . . . . 152
Salesperson’s Expenses Under ITA 8(1)(f) . . 153
Travel Expenses And Motor Vehicle CostsUnder ITA 8(1)(h) and 8(1)(h.1) . . . . . 154
The Salesperson's Dilemma . . . . . . . 155
Other Expenses Of Performing DutiesUnder ITA 8(1)(i) . . . . . . . . . . 156
Automobile And Aircraft ExpensesUnder ITA 8(1)(j) . . . . . . . . . . 156
Home Office Costs For Employees . . . . 156
Employee And Partner GST Rebate . . . . 157General Concept . . . . . . . . . . . 157
Calculating The Amount . . . . . . . . 157
Example . . . . . . . . . . . . . . 158
Key Terms Used In This Chapter . . . . . 159
References . . . . . . . . . . . . . . . . . 159
Problems For Self Study . . . . . . . . . . 160
Assignment Problems . . . . . . . . . . . 166
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CHAPTER 6Income And Tax Payable
For Individuals
Introduction . . . . . . . . . . . . . . . . 173
Taxable Income Of Individuals . . . . . . 174Available Deductions . . . . . . . . . 174
Ordering Of Deductions . . . . . . . . 174
Deductions For Payments . . . . . . . 174
Home Relocation Loan . . . . . . . . 175
Northern Residents Deductions . . . . . 176
Calculation Of Tax Payable . . . . . . . . 176Federal Tax Payable Before Credits . . . . 176
Provincial Tax Payable Before Credits . . . 177
Types Of Income . . . . . . . . . . . 178
Taxes On Income Not Earned In A Province 179
Calculating Tax Credits . . . . . . . . . . 179Federal Amounts . . . . . . . . . . . 179
Provincial Amounts . . . . . . . . . . 179
Personal Tax Credits - ITA 118(1) . . . . 180Individuals With A Spouse Or
Common-Law Partner . . . . . . . . 180
Individuals Supporting An Eligible Dependant 181
Child Tax Credit . . . . . . . . . . . 182
Single Persons . . . . . . . . . . . . 182
Caregiver Tax Credit) . . . . . . . . . 182
Infirm Dependant Over 17 Tax Credit . . 183
Interaction: Eligible Dependant Vs.Caregiver Or Infirm Dependant Over 17 . 183
Interaction: Caregiver Vs.Infirm Dependant Over 17 . . . . . . 184
Other Tax Credits For Individuals . . . . 185Age Tax Credit . . . . . . . . . . . . 185
Pension Income Tax Credit . . . . . . . 185
Canada Employment Tax Credit . . . . . 186
Adoption Expenses Credit . . . . . . . . 186
Public Transit Pass Credit . . . . . . . . 187
Child Fitness Tax Credit . . . . . . . . 188
Charitable Donations Credit . . . . . . . 188
Medical Expense Credit . . . . . . . . 190
Disability Credit . . . . . . . . . . . . 193
Education Related Credits . . . . . . . 195
Employment Insurance (EI) And CanadaPension Plan (CPP) Credits . . . . . . 199
Overpayment Of EI Premiums AndCPP Contributions . . . . . . . . . 199
Transfers To A Spouse OrCommon-Law Partner . . . . . . . . 200
CHAPTER 6, continued
Dividend Tax Credit . . . . . . . . . . 200
Foreign Tax Credits . . . . . . . . . . 200
Investment Tax Credits . . . . . . . . . 200
Political Contributions Tax Credits . . . . . 201
Labour Sponsored Funds Tax Credit . . . . 202
Refundable Credits . . . . . . . . . . . . 202Introduction . . . . . . . . . . . . . 202
Refundable GST Credit . . . . . . . . 202
Refundable Child Tax Benefit . . . . . . 203
Refundable Working Income Tax Benefit . . 204
Social Benefits Repayment (OAS And EI ) 204Basic Concepts . . . . . . . . . . . . 204
Employment Insurance (EI) Benefits Clawback 205
Old Age Security (OAS) Benefits Clawback . 205
Comprehensive Example . . . . . . . . . 206
Key Terms Used In This Chapter . . . . . 208
References . . . . . . . . . . . . . . . . . 209
Problems For Self Study . . . . . . . . . . 210
Self Study Case . . . . . . . . . . . . . . 213
Assignment Problems And Cases . . . . . 215
CHAPTER 7Capital Cost Allowances AndCumulative Eligible Capital
Capital Cost Allowance System . . . . . . 227
Additions To Capital Cost . . . . . . . . . 229Determination Of Amounts . . . . . . . 229
Available For Use Rules . . . . . . . . 231
Segregation Into Classes . . . . . . . . 231
Capital Cost Allowances . . . . . . . . . 233General Overview . . . . . . . . . . 233
March, 2007 Budget Proposals . . . . . 233
Rates For Major Classes . . . . . . . . 234
Half-Year Rules (a.k.a. First Year Rules) . . 236
Short Fiscal Periods . . . . . . . . . . 237
Tax Planning Considerations . . . . . . 238
(continued)
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CHAPTER 7, continuedDispositions Of Depreciable Assets . . . 239
General Rules . . . . . . . . . . . . 239
Capital Gains . . . . . . . . . . . . 240
Recapture Of Capital Cost Allowance . . . 241
Terminal Losses . . . . . . . . . . . 241
CCA Schedule . . . . . . . . . . . . . . . 242
CCA Determination - Special Situations . 243Separate Class Election . . . . . . . . . 243
Special Rule For Buildings . . . . . . . 244
Deferral Provisions On Replacement Property 245
Damaged Property . . . . . . . . . . 248
Change In Use . . . . . . . . . . . . 248
Cumulative Eligible Capital (CEC) . . . . 250Eligible Capital Expenditures Defined . . . 250
Terminology . . . . . . . . . . . . . 251
Additions, Amortization, And Dispositions . 251
Special Situations . . . . . . . . . . . 255
Key Terms Used In This Chapter . . . . . 256
References . . . . . . . . . . . . . . . . . 257
Appendix - CCA Rates For Selected Assets 258
Problems For Self Study . . . . . . . . . . 260
Assignment Problems . . . . . . . . . . . 263
CHAPTER 8Income Or Loss From A Business
Defining Business Income . . . . . . . . 269The Nature Of Business Activity . . . . . 269
Business Income Vs. Capital Gains . . . . 270Importance Of The Distinction . . . . . 270
Capital Assets Defined . . . . . . . . . 270
Criteria For Identifying Capital Gains . . . 271
Business Income And GAAP . . . . . . . 272
Business Income - Inclusions (Revenues) 273Inclusions In The Income Tax Act . . . . . 273
Amounts Received And Receivable . . . . 273
Reserves . . . . . . . . . . . . . . 274
Other Inclusions . . . . . . . . . . . 276
CHAPTER 8, continuedRestrictions On Deductions
From Business And Property Income . 277General Approach . . . . . . . . . . 277
General Limitations . . . . . . . . . . 278
Restrictions On Specific Business AndProperty Income Deductions . . . . . . 278
Restrictions On Specific DeductionsFrom Business Income . . . . . . . . . 284Introduction . . . . . . . . . . . . . 284
Reasonableness . . . . . . . . . . . 284
Meals And Entertainment . . . . . . . . 284
Costs Of Automobile Ownership And Leasing 285
Leasing Property . . . . . . . . . . . 288
Restrictions On Claiming Input Tax Credits 289
Business Income - Specific Deductions . 290Inventory Valuation (Cost Of Sales) . . . . 290
Other Deductions . . . . . . . . . . 291
Reconciliation Schedule . . . . . . . . . . 293
Business Income - Example . . . . . . . . 294
Taxation Year . . . . . . . . . . . . . . . 296General Rules . . . . . . . . . . . . 296
Unincorporated Businesses- Non-Calendar Fiscal Year . . . . . . 296
Special Business Income Situations . . . 297Income For Farmers . . . . . . . . . . 297
Income For Professionals . . . . . . . . 299
Scientific Research And Development . . . 300
Ceasing To Carry On A Business . . . . . 300
Key Terms Used In This Chapter . . . . . 302
References . . . . . . . . . . . . . . . . . 303
Appendix - Taxable Income AndTax Payable For Corporations . . . . . 304Introduction . . . . . . . . . . . . . 304
Net Income For Tax PurposesFor Corporations . . . . . . . . . . 304
Taxable Income For Corporations . . . . 305
Tax Payable For Corporations . . . . . . 306
Example . . . . . . . . . . . . . . 307
A Word Of Caution . . . . . . . . . . 309
Problems For Self Study . . . . . . . . . . 310
Assignment Problems . . . . . . . . . . . 316
Assignment Cases . . . . . . . . . . . . . 324
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CHAPTER 9Income From Property
Introduction . . . . . . . . . . . . . . . . 329
Property Income: General Concept . . . 329
Interest As A Deduction . . . . . . . . . . 330The Problem . . . . . . . . . . . . 330
The Government Response . . . . . . . 330
IT-533 - “Interest DeductibilityAnd Related Issues” . . . . . . . . . 332
Discount And Premium OnLong-Term Issued Debt . . . . . . . 335
Interest Income . . . . . . . . . . . . . . 337General Provision . . . . . . . . . . . 337
Corporations And Partnerships . . . . . . 337
Individuals . . . . . . . . . . . . . 337
Discount And Premium OnLong-Term Debt Holdings . . . . . . . 338
Prescribed Debt Obligations . . . . . . 339
Indexed Debt Obligations . . . . . . . 340
Accrued Interest At Transfer . . . . . . . 341
Payments Based On ProductionOr Use (Royalties) . . . . . . . . . . . 341
Rental Income . . . . . . . . . . . . . . . 342General Rules . . . . . . . . . . . . 342
Capital Cost Allowances . . . . . . . . 342
Rental Income Example . . . . . . . . 343
Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 344The Concept Of Integration . . . . . . . 344
Eligible Vs. Non-Eligible Dividends . . . . 345
Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 345
Gross Up And Tax Credit Procedures- Eligible Dividends . . . . . . . . . 348
Comparison Of Investment Returns . . . . 351
Other Dividends . . . . . . . . . . . . . 352Stock Dividends . . . . . . . . . . . 352
Capital Dividends . . . . . . . . . . . 352
Mutual Funds . . . . . . . . . . . . . . . 352Objective . . . . . . . . . . . . . . 352
Organization . . . . . . . . . . . . 352
Distributions . . . . . . . . . . . . . 353
Adjusted Cost Base . . . . . . . . . . 354
CHAPTER 9, continued
Income Trusts . . . . . . . . . . . . . . . 355How Do Trusts Work? . . . . . . . . . 355
New Uses For Trusts . . . . . . . . . 355
Tax Consequences . . . . . . . . . . 355
Basis For Popularity . . . . . . . . . . 355
October 31, 2007 Changes . . . . . . . 356
Adjusted Cost Base . . . . . . . . . . 357
Foreign Source Income . . . . . . . . . . 358General Rules . . . . . . . . . . . . 358
Foreign Non-Business (Property) Income . 358
Foreign Business Income . . . . . . . . 359
Shareholder Benefits . . . . . . . . . . . 359Benefits Other Than Loans . . . . . . . 359
Shareholder Loans . . . . . . . . . . 360
Tax Credits Revisited . . . . . . . . . . . 363Dividend Tax Credits . . . . . . . . . 363
Foreign Income Tax Credits . . . . . . . 363
Key Terms Used In This Chapter . . . . . 364
References . . . . . . . . . . . . . . . . . 364
Problems For Self Study . . . . . . . . . . 365
Assignment Problems . . . . . . . . . . . 367
Assignment Cases . . . . . . . . . . . . . 370
CHAPTER 10Capital Gains And Capital Losses
Economic Background . . . . . . . . . . 377Capital Assets And Income Taxation Policy . 377
Lifetime Capital Gains Deduction . . . . 377
Changes In The Inclusion Rate . . . . . . 378
General Rules . . . . . . . . . . . . . . . 378Capital Gains In The Income Tax Act . . . 378
Capital Gains Defined . . . . . . . . . 379
Dispositions . . . . . . . . . . . . . 379
Proceeds Of Disposition . . . . . . . . 380
Adjusted Cost Base . . . . . . . . . . 380
Calculating The Capital Gain Or Loss . . . 382
(continued)
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CHAPTER 10, continued
Detailed Application Of The Rules . . . . 382Identical Properties . . . . . . . . . . 382
Partial Dispositions . . . . . . . . . . 384
Warranties . . . . . . . . . . . . . 384
Bad Debts On Sales Of Capital Property . . 384
Capital Gains Reserves . . . . . . . . . 385
Deferral Provisions On Replacement Property 387
Deferral Provisions On SmallBusiness Investments . . . . . . . . . 390
Changes In Use . . . . . . . . . . . 392
Provisions For Special Assets . . . . . . . 393Principal Residence . . . . . . . . . . 393
Personal Use Property . . . . . . . . . 397
Listed Personal Property . . . . . . . . 398
Gains And Losses On Foreign Currency . . 398
Options . . . . . . . . . . . . . . 401
Capital Gains And Tax Planning . . . . . 401
Capital Property And The GST . . . . . . 402GST Definition . . . . . . . . . . . . 402
Input Tax Credits On Capital Personal Property 402
Input Tax Credits On Capital Real Property . 403
Sales Of Capital Personal Property . . . . 403
Sales Of Capital Real Property . . . . . . 404
Residential Property And New Housing Rebate 405
Key Terms Used In This Chapter . . . . . 406
References . . . . . . . . . . . . . . . . . 407
Appendix A:Application Of The Median Rule . . . . 408
Appendix B: Disposition Of SharesAcquired With Stock Options . . . . . 409Shares Deemed Not Identical Properties . . 409
Example . . . . . . . . . . . . . . 410
Appendix C:Election For Pre-1982 Residences . . . 412
Problems For Self Study . . . . . . . . . . 414
Assignment Problems . . . . . . . . . . . 417
Assignment Cases . . . . . . . . . . . . . 423
CHAPTER 11Other Income AndOther Deductions
Content Of Chapters 11 Through 13 . . . 429Coverage Of Chapters 11 and 12 . . . . . 429
Organization Of Chapters 11 And 13 . . . 429
Other Income - Subdivision d Inclusions . 430Pension Benefits. . . . . . . . . . . . 430
Retiring Allowances . . . . . . . . . . 430
Death Benefits . . . . . . . . . . . . 431
Income Inclusions From Deferred Income Plans 431
Education Assistance Payments . . . . . 432
Social Assistance AndWorkers’ Compensation Payments . . . 432
Universal Child Care Benefit . . . . . . 432
Other Deductions- Subdivision e Deductions . . . . . . . 433CPP Contributions On Self-Employed Earnings 433
Moving Expenses . . . . . . . . . . . 433
Child Care Expenses . . . . . . . . . 435
Disability Supports Deduction . . . . . . 439
Related Inclusions And Deductions . . . 441Introduction . . . . . . . . . . . . . 441
Employment Insurance Benefits . . . . . 441
Pension Income Splitting . . . . . . . . 441
Spousal And Child Support . . . . . . . 442
Annuity Payments Received . . . . . . 444
Registered Savings Plans . . . . . . . . . 446Introduction . . . . . . . . . . . . . 446
Registered Education Savings Plans (RESPs) . 447
Registered Disability Savings Plans (RDSPs) . 452
The Problem . . . . . . . . . . . . 452
Basic Features . . . . . . . . . . . . 452
Key Terms Used In This Chapter . . . . . 454
References . . . . . . . . . . . . . . . . . 454
Problems For Self Study . . . . . . . . . . 455
Assignment Problems . . . . . . . . . . . 457
Assignment Cases . . . . . . . . . . . . . 459
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CHAPTER 12Non-Arm’s Length Transactions,
Income Attribution AndDeemed Dispositions At
Emigration And Death
Non-Arm’s Length Transfers Of Property 465Inadequate Considerations . . . . . . . 465
Inter Vivos Transfers To A SpouseOr Common-Law Partner . . . . . . . 468
Non-Arm’s Length TransfersOf Depreciable Assets . . . . . . . . 469
Non-Arm’s Length Leasing Arrangements . . 470
Farm Or Fishing Property Rollover To A Child 471
Income Attribution . . . . . . . . . . . . 472The Problem . . . . . . . . . . . . 472
Basic Rules) . . . . . . . . . . . . . 472
Anti-Avoidance Provisions . . . . . . . 476
Tax Planning . . . . . . . . . . . . 476
Income Attribution - Other Related Parties . 477
Leaving Or Entering Canada . . . . . . . 478Taxable Canadian Property . . . . . . . 478
Entering Canada - Immigration . . . . . 478
Departures From Canada - Emigration . . . 478
Unwinding A Deemed Disposition . . . . 481
Short-Term Residents . . . . . . . . . 482
Emigration And Stock Options . . . . . . 482
Death Of A Taxpayer . . . . . . . . . . . 484Representation . . . . . . . . . . . . 484
Deemed Disposition Of Capital Property . . 484
Filing Requirements . . . . . . . . . . 486
Use Of Deductions And Credits . . . . . 487
Procedures For Specific Returns . . . . . 488
Payment Of Taxes . . . . . . . . . . 489
Allowable Capital Losses- Special Rules At Death . . . . . . . 490
Charitable Donations - Special Rules At Death 491
Medical Expenses - Special Rules At Death . 491
Deferred Income Plans At Death . . . . . 491
Key Terms Used In This Chapter . . . . . 491
References . . . . . . . . . . . . . . . . . 492
Problems For Self Study . . . . . . . . . . 493
Assignment Problems . . . . . . . . . . . 496
Assignment Cases . . . . . . . . . . . . . 500
CHAPTER 13Retirement Savings And OtherSpecial Income Arrangements
Planning For Retirement . . . . . . . . . 505Tax Deferred Savings . . . . . . . . . 506
Defined Benefit Vs. Money Purchase Plans . 508
Registered Retirement Savings Plans . . . . 509RRSP Deduction Limit . . . . . . . . . 511
Examples Of RRSP Deduction Calculations . 517
Undeducted RRSP Contributions . . . . . 519
RRSP And RRIF Administration Fees . . . 521
RRSP Withdrawals And Voluntary Conversions 521
Involuntary Termination Due To Age . . . 522
Departure From Canada . . . . . . . . 522
Death Of The Registrant . . . . . . . . 523
Spousal RRSP . . . . . . . . . . . . 524
Home Buyers’ Plan (HBP) . . . . . . . 525
Lifelong Learning Plan (LLP) . . . . . . . 528
Registered Pension Plans . . . . . . . . . 529Employer Contributions To The RPP . . . 530
Employee Contributions To The RPP . . . 531
Options At Retirement . . . . . . . . . 531
Phased Retirement . . . . . . . . . . 531
Registered Retirement Income Funds . . 532Establishment . . . . . . . . . . . . 532
Minimum Withdrawals . . . . . . . . . 532
Death Of The Registrant . . . . . . . . 533
Evaluation Of RRIFs . . . . . . . . . . 533
Deferred Profit Sharing Plans . . . . . . . 534
Profit Sharing Plans . . . . . . . . . . . . 534
Transfers Between Plans . . . . . . . . . 535Retiring Allowances . . . . . . . . . . 535
Retirement Compensation Arrangements 536Part XI.3 Refundable Tax . . . . . . . . 537
Salary Deferral Arrangements . . . . . . 537
Individual Pension Plans (IPPs) . . . . . . 538
Key Terms Used In This Chapter . . . . . 539
References . . . . . . . . . . . . . . . . . 539
Problems For Self Study . . . . . . . . . . 541
Assignment Problems . . . . . . . . . . . 544
Assignment Cases . . . . . . . . . . . . . 549
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CHAPTER 14Taxable Income And Tax Payable
For Individuals Revisited
Introduction . . . . . . . . . . . . . . . . 555
Taxable Income Overview . . . . . . . . 556
Lump-Sum Payments . . . . . . . . . . . 557
Treatment Of Losses . . . . . . . . . . . 558Carry Over Provisions . . . . . . . . . 558
Personal Use Property Losses . . . . . . 560
Listed Personal Property Losses . . . . . 560
Non-Capital Losses . . . . . . . . . . 561
Net Capital Losses . . . . . . . . . . 562
Allowable Business Investment Losses . . . 564
Farm Losses . . . . . . . . . . . . . 566
Lifetime Capital Gains Deduction . . . . 567Qualified Property . . . . . . . . . . 568
Determining The Deductible Amount . . . 569
Example . . . . . . . . . . . . . . 572
Ordering Of Deductions And Losses . . . 573Ordering In Computing Net Income
For Tax Purposes . . . . . . . . . . 573
Ordering In Computing Taxable Income . . 574
Example . . . . . . . . . . . . . . 574
Tax Payable Overview . . . . . . . . . . . 576
Tax On Split Income . . . . . . . . . . . 576
Tax Credits Revisited . . . . . . . . . . . 578Transfer Of Dividends To A Spouse
Or Common-Law Partner . . . . . . . 578
Charitable Donations Credit Revisited . . . 579
Foreign Tax Credits Revisited . . . . . . 584
Alternative Minimum Tax . . . . . . . . . 586Minimum Tax Calculation . . . . . . . 586
Tax Credits For AMT . . . . . . . . . 588
AMT Carry Forward . . . . . . . . . . 588
Key Terms Used In This Chapter . . . . . 589
References . . . . . . . . . . . . . . . . . 590
Appendix: Revoked Stock Option Election 590
Problems For Self Study . . . . . . . . . . 592
Self Study Case . . . . . . . . . . . . . . 599
Assignment Problems . . . . . . . . . . . 602
Assignment Cases . . . . . . . . . . . . . 610
CHAPTER 15Taxable Income And
Tax Payable For Corporations
Computation Of Net Income . . . . . . . 617
Computation Of Taxable Income . . . . . 619Deductions Available To Corporations . . . 619
Dividends From Other Corporations . . . 620
Acquisition Of Control Rules . . . . . . . 623Economic Background . . . . . . . . . 623
Acquisition Of Control Legislation . . . . 623
Deemed Year End . . . . . . . . . . 623
Restrictions On Use Of Charitable Donations 624
Restrictions On The Use Of Losses . . . . 624
Unrecognized Losses At Deemed Year End . 625
Deemed Disposition Election . . . . . . 626
Other Taxable Income Considerations . . 628Non-Capital Loss Carry Over For A Corporation 628
Ordering Of Taxable Income Deductions . 630
Geographical Allocation Of Income . . . 631Permanent Establishments . . . . . . . 631
Activity At Permanent Establishments . . . 631
Example - Permanent Establishments . . . 631
Federal Tax Payable . . . . . . . . . . . . 632Federal Corporate Rates . . . . . . . . 632
Federal Tax Abatement . . . . . . . . 633
Corporate Surtax . . . . . . . . . . . 633
Provincial Tax Payable . . . . . . . . . 634
Small Business Deduction . . . . . . . . 636Canadian Controlled Private Corporation
(CCPC) . . . . . . . . . . . . . . 637
Active Business Income . . . . . . . . 638
Annual Business Limit . . . . . . . . . 640
Associated Companies . . . . . . . . . 640
Calculating The Small Business Deduction . 644
Elimination Of Small Business DeductionFor Large CCPCs . . . . . . . . . . 647
Personal Services Corporations . . . . . 648
Professional Corporations And ManagementCompanies . . . . . . . . . . . . 649
Manufacturing And Processing ProfitsDeduction . . . . . . . . . . . . . . . . 650Calculating The Deduction . . . . . . . 650
Eligibility . . . . . . . . . . . . . . 652
M&P Profits Defined . . . . . . . . . 653
Applying The Formula . . . . . . . . . 655
(continued)
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CHAPTER 15, continuedGeneral Rate Reduction - ITA 123.4(2) . . 656
Approach To Rate Reductions . . . . . . 656
Full Rate Taxable Income . . . . . . . . 656
Application To Companies Other Than CCPCs 656
Application To CCPCs . . . . . . . . . 657
Foreign Tax Credits For Corporations . . 658Foreign Non-Business (Property) Income
Tax Credit . . . . . . . . . . . . . 659
Foreign Business Income Tax Credit . . . 660
Investment Tax Credits . . . . . . . . . . 661Procedures . . . . . . . . . . . . . 661
Eligible Expenditures . . . . . . . . . 661
Rates . . . . . . . . . . . . . . . 662
Refundable Investment Tax Credits . . . . 663
Carry Overs Of Investment Tax Credits . . 663
Acquisition Of Control . . . . . . . . . 664
Key Terms Used In This Chapter . . . . . 665
References . . . . . . . . . . . . . . . . . 666
Appendix: SR&ED Expenditures . . . . . 667General Rules . . . . . . . . . . . . 667
Qualifying Expenditures . . . . . . . . 667
Shared Use Capital Equipment . . . . . 669
Prescribed Proxy Amount . . . . . . . . . 669
Problems For Self Study . . . . . . . . . . 671
Assignment Problems . . . . . . . . . . . 677
CHAPTER 16Integration, Refundable Taxes, And
Corporate Surplus Distributions
Integration . . . . . . . . . . . . . . . . . 687The Basic Concept . . . . . . . . . . 687
Dividend Gross Up And Tax Credit . . . . 688
Integration And Business Income . . . . . 689
Tax Basis Shareholders’ Equity . . . . . . 691Shareholders’ Equity Under GAAP . . . . 691
Paid Up Capital (Tax Basis Contributed Capital) 691
Tax Basis Retained Earnings . . . . . . . 692
Pre-1972 Capital Surplus On Hand (CSOH) 693
Capital Dividend Account . . . . . . . 693
CHAPTER 16, continuedDistributions Of Corporate Surplus . . . 695
Introduction . . . . . . . . . . . . . 695
Regular Cash Dividends . . . . . . . . 696
Stock Dividends . . . . . . . . . . . 696
Dividends In Kind . . . . . . . . . . 697
Capital Dividends Under ITA 83(2) . . . . 697
Deemed Dividends UnderITA 84(1) - Increase In PUC . . . . . . 698
ITA 84(2) - On Winding-Up . . . . . . 699
ITA 84(3) - On Redemption, Acquisition,Or Cancellation Of Shares . . . . . 700
ITA 84(4) And ITA 84(4.1) . . . . . . 701
Refundable Taxes On Investment Income 703Meaning Of Aggregate Investment Income . 703
Basic Concepts . . . . . . . . . . . . 703
Refundable Part I TaxOn Investment Income . . . . . . . . . 705Additional Refundable Tax
On Investment Income (ART) . . . . . 705
Problem One: Excessive Tax Rates On FlowThrough Of A CCPC’s Investment Income 707
Solution To Problem One:Refundable Portion Of Part I Tax . . . . 708
Refundable Part IV Tax On DividendsReceived . . . . . . . . . . . . . . . . 711Problem Two: Use Of Multi-Level Affiliations
To Defer Taxes On Investment Income . . 711
Solution To Problem Two:Refundable Part IV Tax . . . . . . . . 712
Part IV Tax On Portfolio Dividends Received 713
Dividends From A Connected Corporation . 714
Dividends Paid Out Of Mixed IncomeOf A Connected Corporation . . . . . 716
Refundable Dividend Tax On Hand(RDTOH) . . . . . . . . . . . . . . . . 717RDTOH - General Definition . . . . . . 718
Refundable Portion Of Part I Tax Payable . 718
The Dividend Refund . . . . . . . . . 720
Example . . . . . . . . . . . . . . 720
Designation Of Eligible Dividends . . . . 723CCPCs And Their GRIP . . . . . . . . 725
Non-CCPCs And Their LRIP . . . . . . . 727
Key Terms Used In This Chapter . . . . . 728
References . . . . . . . . . . . . . . . . . 729
Problems For Self Study . . . . . . . . . . 730
Assignment Problems and Case . . . . . . 736
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CHAPTER 17Corporate Taxation AndManagement Decisions
The Decision To Incorporate . . . . . . . 745Basic Tax Considerations . . . . . . . . 745
Other Advantages And Disadvantages . . . 746
Tax Reduction And Deferral . . . . . . . 747Approach . . . . . . . . . . . . . . 747
Basic Example . . . . . . . . . . . . 748
Public Corporation . . . . . . . . . . 749
CCPC - Active Business Income . . . . . 751
CCPC - Investment Income
\Other Than Dividends . . . . . . . . . 754
CCPC - Dividend Income . . . . . . . 755
Conclusions On Tax Reductions And Deferrals 756
Provincial Taxes And Integration . . . . . 758Introduction . . . . . . . . . . . . . 758
Tax Deferral . . . . . . . . . . . . . 759
Tax Reduction . . . . . . . . . . . . 759
Tax Free Dividends . . . . . . . . . . . . 763Tax Rates On Dividends . . . . . . . . 763
Use Of Tax Credits . . . . . . . . . . 763
Tax Free Amounts For 2007 . . . . . . . 764
Income Splitting . . . . . . . . . . . . . . 765Basic Concept . . . . . . . . . . . . 765
Example . . . . . . . . . . . . . . 765
Management Compensation . . . . . . . 767General Principles . . . . . . . . . . 767
Salary Vs. Dividends . . . . . . . . . . 768
Salary Vs. Dividends For TheOwner - Manager . . . . . . . . . . . . 768The Basic Trade-Off . . . . . . . . . . 768
Other Considerations . . . . . . . . . 769
Conclusion . . . . . . . . . . . . . 777
Key Terms Used In This Chapter . . . . . 777
References . . . . . . . . . . . . . . . . . 778
Problems For Self Study . . . . . . . . . . 779
Assignment Problems . . . . . . . . . . . 781
CHAPTER 18Rollovers Under Section 85
Rollovers Under Section 85 . . . . . . . . 787
General Rules For The Transfer . . . . . . 787Transferor And Transferee . . . . . . . 787
Eligible Property . . . . . . . . . . . 788
Consideration To Transferor . . . . . . . 788
Making The Election . . . . . . . . . 788
Establishing The Transfer Price . . . . . . 789
Transfer Prices - Detailed Rules . . . . . 791Rules Applicable To All Assets . . . . . . 791
Accounts Receivable . . . . . . . . . 791
Inventories And Non-DepreciableCapital Property . . . . . . . . . . 792
Non-Depreciable Capital Property- Disallowed Capital Losses . . . . . . 793
Depreciable Property . . . . . . . . . 795
Depreciable Property- Terminal Losses Disallowed . . . . . 797
Eligible Capital Property . . . . . . . . 798
Eligible Capital Property- Disallowed Deductions . . . . . . . 799
Allocation Of The Elected Value . . . . . 800Consideration Received By The Transferor
(Shareholder) . . . . . . . . . . . . 800
Assets Acquired By The Corporation . . . 800
Paid Up Capital Of Shares Issued . . . . 802General Rules . . . . . . . . . . . . 802
Paid Up Capital Reduction . . . . . . . 802
More Than One Class Of Shares . . . . . 803
Section 85 Rollovers— Comprehensive Example . . . . . . 804Basic Information . . . . . . . . . . . 804
Excluded Assets . . . . . . . . . . . 805
Implementing The Election . . . . . . . 805
Gift To Related Person - Section 85 . . . 807General Rules . . . . . . . . . . . . 807
Example . . . . . . . . . . . . . . 807
Section 85 - Excess Consideration . . . . 809Introduction . . . . . . . . . . . . . 809
ITA 15(1) Shareholder Benefit . . . . . . 809
ITA 84(1) Deemed Dividend . . . . . . 810
GST And Section 85 Rollovers . . . . . . 810
(continued)
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CHAPTER 18, continued
Dividend Stripping — ITA 84.1 . . . . . . 811Background . . . . . . . . . . . . . 811
Applicability Of ITA 84.1 . . . . . . . . 812
Dividend Stripping Example- Post-1971 Shares . . . . . . . . . 812
Capital Gains Stripping — ITA 55(2) . . . 814The Problem . . . . . . . . . . . . 814
Application Of ITA 55(2) . . . . . . . . 815
Capital Gains Stripping - Example One . . 815
Capital Gains Stripping - Example Two . . 816
Key Terms Used In This Chapter . . . . . 818
References . . . . . . . . . . . . . . . . . 818
Problems For Self Study . . . . . . . . . . 819
Assignment Problems . . . . . . . . . . . 824
CHAPTER 19Other Rollovers,
Business Valuation,Sale Of An Incorporated Business
And Tax Shelters
Introduction . . . . . . . . . . . . . . . . 831
Share For Share Exchanges . . . . . . . . 831
Exchange Of Shares In A Reorganization . 833Application Of Section 86 . . . . . . . 833
Conditions For The Reorganization . . . . 833
Procedures . . . . . . . . . . . . . 834
Example Using ITA 86 In An Estate Freeze . 835
Gift To Related Person (Benefit Rule) . . . 837
Practical Considerations . . . . . . . . 840
Section 86 - Advantages and Disadvantages 840
Amalgamations . . . . . . . . . . . . . . 841The Nature Of An Amalgamation . . . . . 841
Position Of The Amalgamated Company . . 841
Position Of The Shareholders . . . . . . 842
Vertical Amalgamations (Parent And Subsidiary) 842
Non-Tax Considerations . . . . . . . . 843
Tax Planning Considerations . . . . . . 843
CHAPTER 19, continued
Winding-Up Of A 90 PercentOwned Subsidiary . . . . . . . . . . . 844The Nature Of A Winding-Up . . . . . . 844
Acquisition Of Assets . . . . . . . . . 845
Disposition Of Shares . . . . . . . . . 848
Tax Planning Considerations- Amalgamation Vs. Winding-Up . . . . 848
Winding-Up Of A Canadian Corporation . 849The Nature Of The Transaction . . . . . 849
Example . . . . . . . . . . . . . . 850
Convertible Properties . . . . . . . . . . 852Application . . . . . . . . . . . . . 852
Other Considerations . . . . . . . . . 853
The Valuation Of A Business . . . . . . . 853Coverage Of Subject . . . . . . . . . 853
Alternative Methods Of Valuation . . . . 853
Asset Based Methods . . . . . . . . . 854
Income Based Methods . . . . . . . . 854
Sale Of An Incorporated Business . . . . 856Alternatives . . . . . . . . . . . . . 856
Restrictive Covenants(a.k.a. Non-Competition Agreements) . . 856
Sale Of Individual Assets . . . . . . . . 858
Sale Of Assets As A Going Concern . . . . 858
Sale Of Shares . . . . . . . . . . . . 860
Evaluation Of Alternatives . . . . . . . 861
Example . . . . . . . . . . . . . . 862
GST Implications . . . . . . . . . . . . . 864Sale Of Assets Or Shares . . . . . . . . 864
Other Situations . . . . . . . . . . . 865
Tax Shelters . . . . . . . . . . . . . . . . 866A Cautionary Note . . . . . . . . . . 866
Introduction . . . . . . . . . . . . . 866
Marketing Of Tax Shelters . . . . . . . 866
Legal Forms . . . . . . . . . . . . . 867
Resource Investments . . . . . . . . . 868
Rental Properties . . . . . . . . . . . 868
Evaluation Of Tax Shelter Investments . . . 869
Key Terms Used In This Chapter . . . . . 870
References . . . . . . . . . . . . . . . . . 871
Problems For Self Study . . . . . . . . . . 872
Assignment Problems . . . . . . . . . . . 875
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CHAPTER 20Partnerships
Introduction . . . . . . . . . . . . . . . . 883Taxable Entities In Canada . . . . . . . 883
Chapter Coverage . . . . . . . . . . 884
Partnerships Defined . . . . . . . . . . . 884The Importance Of Defining A Partnership . 884
Basic Partnership Elements . . . . . . . 884
Types Of Partnerships . . . . . . . . . 885
Co-Ownership, Joint Ventures AndSyndicates . . . . . . . . . . . . . . . . 886Co-Ownership . . . . . . . . . . . . 886
Joint Ventures . . . . . . . . . . . . 887
Syndicates . . . . . . . . . . . . . 887
Partnership Income, Losses And Tax Credits 888Basic Concepts . . . . . . . . . . . . 888
Calculating Partnership Income Or Loss . . 889
Allocations To Partners AndPartner Expenses . . . . . . . . . . . . 892Method Of Allocation . . . . . . . . . 892
Allocation Of Specific Items . . . . . . . 892
The Partnership Interest . . . . . . . . . 894The Concept . . . . . . . . . . . . 894
Acquiring A Partnership Interest . . . . . 894
Adjustments To The ACB OfA Partnership Interest . . . . . . . . 896
Limited Partnerships And Limited Partners 899Definitions . . . . . . . . . . . . . 899
At-Risk Rules . . . . . . . . . . . . 899
Transfer Of Property To And FromA Partnership . . . . . . . . . . . . . . 901Transfers With No Rollover Provision . . . 902
Common Partnership Rollovers . . . . . 903
Partnerships And GST . . . . . . . . . . . 906General Rules . . . . . . . . . . . . 906
Partner Expenses . . . . . . . . . . . 906
Disposition Of A Partnership Interest . . . 906
Transfers Between Partners And Partnerships 907
Reorganization Of The Partnership . . . . 907
Key Terms Used In This Chapter . . . . . 907
References . . . . . . . . . . . . . . . . . 908
Problems For Self Study . . . . . . . . . . 909
Assignment Problems . . . . . . . . . . . 913
CHAPTER 21Trusts And Estate Planning
Introduction . . . . . . . . . . . . . . . . 921
Basic Concepts . . . . . . . . . . . . . . 922What Is A Personal Trust? . . . . . . . . 922
Establishing A Trust . . . . . . . . . . 923
Non-Tax Reasons For Using Trusts . . . . 924
Classification Of Trusts . . . . . . . . . . 925Personal Trusts . . . . . . . . . . . . 925
Testamentary Vs. Inter Vivos Trusts . . . . 926
Taxation Of Trusts . . . . . . . . . . . . 927The Basic Model . . . . . . . . . . . 927
Rollovers To A Trust . . . . . . . . . . 928
Rollovers To Capital Beneficiaries . . . . 931
21 Year Deemed Disposition Rule . . . . 931
Net Income For Tax Purposes Of A Trust 932Basic Rules . . . . . . . . . . . . . 932
Preferred Beneficiary Election . . . . . . 932
Amounts Deemed Not Paid . . . . . . . 933
Amounts Retained For A BeneficiaryUnder 21 Years Of Age . . . . . . . . 933
Taxable Income Of A Trust . . . . . . . . 933
Income Allocations To Beneficiaries . . . 934General Rules . . . . . . . . . . . . 934
Discretionary And Non-DiscretionaryDistributions . . . . . . . . . . . . 935
Flow Through Provisions . . . . . . . . 935
Principal Residence Exemption . . . . . 937
Tax Payable Of Personal Trusts . . . . . . 937Taxation Of Testamentary Trusts . . . . . 937
Taxation Of Inter Vivos Trusts . . . . . . 938
Tax Credits And The Alternative Minimum Tax 938
Trust Tax And Information Returns . . . . 938
Income Attribution . . . . . . . . . . . . 939General Rules . . . . . . . . . . . . 939
Attribution To Settlor (Reversionary Trust) . 940
Purchase Or Sale Of An Interest In A Trust 940
Tax Planning . . . . . . . . . . . . . . . . 941Family Trusts . . . . . . . . . . . . 941
Spousal Or Common-Law Partner Trusts . . 943
Alter Ego Trusts . . . . . . . . . . . 943
Joint Spousal Or Common-Law Partner Trusts 944
(continued)
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CHAPTER 21, continued
Estate Planning . . . . . . . . . . . . . . 944Non-Tax Considerations . . . . . . . . 944
Tax Considerations . . . . . . . . . . 945
Estate Freeze . . . . . . . . . . . . . . . 945Objectives Of An Estate Freeze . . . . . 945
Techniques Not Involving Rollovers . . . . 946
Section 86 Share Exchange . . . . . . . 947
Rollover Provisions - Section 85 vs. Section 86 948
GST And Trusts . . . . . . . . . . . . . . 949
Key Terms Used In This Chapter . . . . . 949
References . . . . . . . . . . . . . . . . . 950
Assignment Problems . . . . . . . . . . . 953
CHAPTER 22International Taxation
Introduction . . . . . . . . . . . . . . . . 957Background . . . . . . . . . . . . . 957
Chapter Content . . . . . . . . . . . 957
Neutrality In International Taxation . . . 958The Basic Concept . . . . . . . . . . 958
Capital Export Neutrality . . . . . . . . 958
Capital Import Neutrality . . . . . . . . 958
The Role Of Tax Treaties . . . . . . . . . 959
Residence . . . . . . . . . . . . . . . . . 961Importance . . . . . . . . . . . . . 961
Factual Vs. Deemed Residence . . . . . 961
Dual Residence . . . . . . . . . . . 961
The Problem Of Double Taxation . . . . 963Sources Of The Problem . . . . . . . . 963
Dual Source/Dual Residence . . . . . . 963
Residence Vs. Source - Legislative Solutions 964
Non-Residents Earning CanadianSource Income . . . . . . . . . . . . . 966Basic Approaches - Part I Or Part XIII Tax . 966
Employment Income . . . . . . . . . 967
Carrying on Business in Canada . . . . . 968
Dispositions of Taxable Canadian Property . 970
Income From Property And Other(Passive) Sources . . . . . . . . . . 971
CHAPTER 22, continued
Foreign Source Employment Income . . . 975
Foreign Source Business Income . . . . . 975
Foreign Source Capital Gains . . . . . . . 976
Foreign Source Investment Income . . . . 976Basic Concepts . . . . . . . . . . . . 976
Foreign Investment Reporting Requirements 977
Non-Resident Entities . . . . . . . . . 978
Foreign Affiliates . . . . . . . . . . . 979
Controlled Foreign Affiliates . . . . . . . 980
Foreign Accrual Property Income (FAPI) . . 981
Foreign Affiliate Dividends . . . . . . . 983
Foreign Investment Entities . . . . . . . 985
Dividends From Foreign Non-AffiliatedCompanies . . . . . . . . . . . . 988
Transfer Pricing . . . . . . . . . . . . . . 988Definition . . . . . . . . . . . . . . 988
The Problem . . . . . . . . . . . . 988
The Solution . . . . . . . . . . . . . 989
Transfer Pricing Methods . . . . . . . . 989
Key Terms Used In This Chapter . . . . . 990
References . . . . . . . . . . . . . . . . . 991
Problems For Self Study . . . . . . . . . . 992
Assignment Problems . . . . . . . . . . . 994
INDEX . . . . . . . . . . . . . . . . 999
GLOSSARYThe Glossary can be found at the back of theseparate paper Study Guide and on the StudentCD-ROM within the Folio Version of CanadianTax Principles.
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