Chapter V O L U M E I
1Introduction ToFederal Taxation In Canada
2 Procedures and Administration
3Income Or Loss From An OfficeOr Employment
4Taxable Income and Tax PayableFor Individuals
5Capital Cost Allowances AndCumulative Eligible Capital
6 Income Or Loss From A Business
7 Income From Property
8 Capital Gains And Capital Losses
9Other Income, Other DeductionsAnd Income Attribution
10Retirement Savings And OtherSpecial Income Arrangements
11Taxable Income and Tax PayableFor Individuals Revisited
Chapter V O L U M E I I
12Taxable Income andTax Payable For Corporations
13Taxation ofCorporate Investment Income
14Other Issues InCorporate Taxation
15Corporate Taxation andManagement Decisions
16 Rollovers Under Section 85
17Other Rollovers and Sale Of AnIncorporated Business
18 Partnerships
19 Trusts And Estate Planning
20 International Issues In Taxation
21 GST/HST
The detailed contents of bothVolume I and II follow.
CONTENTS
The textbook is published intwo Volumes:
Volume I = Chapters 1 to 11Volume II = Chapters 12 to 21
CHAPTER 1Introduction To Federal Taxation
In Canada
The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1
Taxable Entities In Canada . . . . . . . . 2
Federal Taxation And The Provinces . . . . 4
Tax Policy Concepts . . . . . . . . . . . . . 5Taxation And Economic Policy . . . . . . . 5
Taxation And Income Levels . . . . . . . 6
Tax Incidence . . . . . . . . . . . . . 8
Tax Expenditures . . . . . . . . . . . . 8
Qualitative Characteristics Of Tax Systems . . 9
Income Tax Reference Materials . . . . . . 10Introduction . . . . . . . . . . . . . 10
The Income Tax Act . . . . . . . . . . 11
Other Income Tax Legislation . . . . . . 14
Other Sources Of Income Tax Information . 15
Liability For Income Tax . . . . . . . . . . 17Charging Provision For Canadian Residents . 17
Charging Provision For Non-Residents . . . 18
Alternative Concepts Of Income . . . . . . 20The Economist’s View . . . . . . . . . 20
The Accountant’s View . . . . . . . . . 20
The Income Tax Act View . . . . . . . . 21
Net Income For Tax Purposes . . . . . . . 21Structure . . . . . . . . . . . . . . 21
Components . . . . . . . . . . . . . 21
Combining The Components - ITA Section 3 . 22
Loss Carry Overs . . . . . . . . . . . 24
Net Income For Tax Purposes - Example . . 25
Net Income To Taxable Income . . . . . . 26
Principles Of Tax Planning . . . . . . . . . 27Introduction . . . . . . . . . . . . . 27
Tax Avoidance Or Reduction . . . . . . . 27
Tax Deferral . . . . . . . . . . . . . 27
Income Splitting . . . . . . . . . . . . 28
Abbreviations To Be Used . . . . . . . . . 29
Key Terms Used In This Chapter . . . . . . 30
References . . . . . . . . . . . . . . . . . 30
Problems For Self Study . . . . . . . . . . 31
Assignment Problems . . . . . . . . . . . 32
CHAPTER 2Procedures And Administration
Administration Of The Department . . . . 35
Source Deductions . . . . . . . . . . . . . 36Withholdings - ITA 153 . . . . . . . . . 36
Employer’s Remittance Of Source Deductions 37
Returns And Payments - Individuals . . . 38Due Date For Individual Returns . . . . . 39
Instalment Payments For Individuals - ITA 156 41
Interest . . . . . . . . . . . . . . . 44
Penalties . . . . . . . . . . . . . . . 45
Due Date For Balance Owing - Individuals . 46
Final Returns For Deceased Taxpayers . . . 46
Returns And Payments - Corporations . . . 46Due Date For Corporate Returns (ITA 150) . 46
Instalment Payments For Corporations . . . 47
Due Date For Balance Owing - Corporations . 49
Interest And Penalties For Corporations . . . 50
Returns And Payments - Trusts . . . . . . 50
Income Tax Information Returns . . . . . . 51
Refunds . . . . . . . . . . . . . . . . . . . 51
Books And Records . . . . . . . . . . . . . 52
Assessments . . . . . . . . . . . . . . . . 52
Adjustments To Income Tax Returns . . . 53
Appeals . . . . . . . . . . . . . . . . . . . 53Consent Form . . . . . . . . . . . . 53
Informal Request For Adjustments . . . . . 54
Notice Of Objection . . . . . . . . . . 54
Tax Court Of Canada . . . . . . . . . . 55
Federal Court And Supreme Court Of Canada 56
Tax Evasion, Avoidance And Planning . . . 56Tax Evasion . . . . . . . . . . . . . 56
Tax Avoidance And Tax Planning . . . . . 57
General Anti-Avoidance Rule (GAAR) . . . 57
Reasonable Expectation Of Profit (REOP) . . 59
Collection And Enforcement . . . . . . . . 60
Taxpayer Relief Provisions (Fairness Package) 62
Key Terms Used In This Chapter . . . . . . 63
References . . . . . . . . . . . . . . . . . 64
Problems For Self Study . . . . . . . . . . 65
Assignment Problems . . . . . . . . . . . 67
Detailed Table Of Contents For Both Volumes (Page 2)
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CHAPTER 3Income Or Loss From
An Office Or Employment
Employment Income Defined . . . . . . . 71Cash Basis And The Use Of Bonus Arrangements 72
Net Concept . . . . . . . . . . . . . 73
Employee Versus Self-Employed . . . . . . 73Employee Perspective . . . . . . . . . 74
Employer Perspective . . . . . . . . . . 75
Making The Distinction . . . . . . . . . 76
Inclusions - Salaries And Wages . . . . . . 77
Inclusions - Fringe Benefits . . . . . . . . 77ITA 6(1) - Amounts To Be Included In Income 77
CRA Administrative Practice On Fringe Benefits(IT-470R) . . . . . . . . . . . . . . 78
Tax Planning Considerations . . . . . . . 82
Inclusions - GST/HST/PST OnTaxable Benefits . . . . . . . . . . . . . 83
Inclusions - Board And Lodging . . . . . . 84
Inclusions - Automobile Benefits . . . . . . 84Employees And Automobiles . . . . . . . 84
Standby Charge . . . . . . . . . . . . 86
Operating Cost Benefit . . . . . . . . . 88
Payments By Employee For Automobile Use . 89
Example - Employer Owned Automobile . . 89
Example - Employer Leased Vehicle . . . . 90
Employer Provided Cars And Tax Planning . 91
Inclusions - Allowances . . . . . . . . . . 92Allowance Vs. Reimbursement . . . . . . 92
General Rules . . . . . . . . . . . . . 92
Taxable Vs. Non-Taxable Allowances . . . . 93
Reasonable Allowances For Motor Vehicles . 94
Employer’s Perspective Of Allowances . . . 95
Employee’s Perspective Of Allowances . . . 95
Inclusions - Employee Insurance Benefits . 95Life Insurance . . . . . . . . . . . . . 95
Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 96
Health Care Insurance . . . . . . . . . 97
Loans To Employees . . . . . . . . . . . . 97General Rules . . . . . . . . . . . . . 97
Home Relocation Loans . . . . . . . . . 98
Tax Planning For Interest Free Loans . . . . 99
(continued)
CHAPTER 3, continuedInclusions - Stock Option Benefits . . . . 100
CCPCs Vs. Public Companies . . . . . . 103
Rules For Public Companies . . . . . . . 103
Rules For Canadian Controlled PrivateCorporations . . . . . . . . . . . . 105
Cash Payment In Lieu Of Shares . . . . . 106
Other Inclusions . . . . . . . . . . . . . 106Payments By Employer To Employee . . . 106
Forgiveness Of Employee Loans . . . . . 107
Housing Loss Reimbursement . . . . . . 107
Discounts On Employer’s Merchandise . . 107
Club Dues And Recreational Facilities . . . 107
Specific Deductions . . . . . . . . . . . . 108Salesperson’s Expenses Under ITA 8(1)(f) . . 109
Travel Expenses And Motor Vehicle Costs . 110
The Salesperson's Dilemma . . . . . . . 111
Automobile And Aircraft Expenses . . . . 112
Home Office Costs For Employees . . . . 112
Key Terms Used In This Chapter . . . . . 113
References . . . . . . . . . . . . . . . . . 114
Problems For Self Study . . . . . . . . . . 115
Assignment Problems . . . . . . . . . . . 121
CHAPTER 4Taxable Income And Tax Payable
For Individuals
Introduction . . . . . . . . . . . . . . . . 131
Taxable Income Of Individuals . . . . . . 132Available Deductions . . . . . . . . . 132
Ordering Of Deductions . . . . . . . . 132
Deductions For Payments . . . . . . . . 133
Home Relocation Loan . . . . . . . . 133
Northern Residents Deductions . . . . . 134
Calculation Of Tax Payable . . . . . . . . 134Federal Tax Payable Before Credits . . . . 134
Provincial Tax Payable Before Credits . . . 135
Types Of Income . . . . . . . . . . . 136
Taxes On Income Not Earned In A Province 137
Calculating Tax Credits . . . . . . . . . . 137Federal Amounts . . . . . . . . . . . 137
Provincial Amounts . . . . . . . . . . 137
Detailed Table Of Contents For Both Volumes (Page 3)
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CHAPTER 4, continuedPersonal Tax Credits - ITA 118(1) . . . . 138
Individuals With A Spouse OrCommon-Law Partner . . . . . . . . 138
Individuals Supporting Dependent Person . . 139
Child Tax Credit . . . . . . . . . . . 140
Single Persons . . . . . . . . . . . . 140
Caregiver Tax Credit . . . . . . . . . . 140
Infirm Dependant Over 17 Tax Credit . . . 141
Interaction:Eligible Dependant Vs.Caregiver Or Infirm Dependant Over 17 . 142
Caregiver Vs. Infirm Dependant Over 17 . 143
Other Tax Credits For Individuals . . . . 144Age Tax Credit . . . . . . . . . . . . 144
Pension Income Tax Credit . . . . . . . 144
Canada Employment Tax Credit . . . . . 145
Adoption Expenses Credit . . . . . . . 145
Public Transit Passes Credit . . . . . . . 146
Child Fitness Credit . . . . . . . . . . 147
First Time Home Buyer’s Tax Credit . . . 147
Charitable Donations Credit . . . . . . 147
Medical Expense Credit . . . . . . . . . 149
Disability Credit . . . . . . . . . . . 153
Education Related Credits . . . . . . . 155
Employment Insurance (EI) AndCanada Pension Plan (CPP) Credits . . . 158
Transfers To A Spouse Or Common-Law Partner 159
Working Income Tax Benefit . . . . . . 159
New Graduates Working In Designated Areas 161
Political Contributions Tax Credits . . . . 161
Labour Sponsored Funds Tax Credit . . . 162
Dividend Tax Credit . . . . . . . . . . 162
Foreign Tax Credits . . . . . . . . . . 162
Investment Tax Credits . . . . . . . . . 162
Refundable Credits . . . . . . . . . . . . 163Refundable GST Credit . . . . . . . . 163
Canada Child Tax Benefit . . . . . . . 164
Social Benefits Repayment (OAS And EI) . 164
Comprehensive Example . . . . . . . . . 166
Key Terms Used In This Chapter . . . . . 168
References . . . . . . . . . . . . . . . . . 168
Problems For Self Study . . . . . . . . . . 170
Assignment Problems . . . . . . . . . . . 175
Tax Software Assignment Problems . . . 181
CHAPTER 5Capital Cost Allowances AndCumulative Eligible Capital
Capital Cost Allowance System . . . . . . 187
Additions To Capital Cost . . . . . . . . . 189Determination Of Amounts . . . . . . . 189
Available For Use Rules . . . . . . . . 191
Segregation Into Classes . . . . . . . . 191
Capital Cost Allowances . . . . . . . . . 192Rates For Commonly Used CCA Classes . . 193
Half-Year Rules (a.k.a. First Year Rules) . . 195
Short Fiscal Periods . . . . . . . . . . 197
Tax Planning Considerations . . . . . . 198
Dispositions Of Depreciable Assets . . . 199Capital Gains . . . . . . . . . . . . 200
Recapture Of Capital Cost Allowance . . . 201
Terminal Losses . . . . . . . . . . . 202
CCA Schedule . . . . . . . . . . . . . . . 203
CCA Determination - Special Situations . 203Separate Class Election . . . . . . . . . 203
Cumulative Eligible Capital (CEC) . . . . 205Eligible Capital Expenditures Defined . . . 205
Terminology . . . . . . . . . . . . . 206
Additions, Amortization, And Dispositions . 206
Key Terms Used In This Chapter . . . . . 210
References . . . . . . . . . . . . . . . . . 211
Appendix - CCA Rates For Selected Assets 212
Problems For Self Study . . . . . . . . . . 214
Assignment Problems . . . . . . . . . . . 218
CHAPTER 6Income Or Loss From A Business
Overview . . . . . . . . . . . . . . . . . 223Net Income For Tax Purposes . . . . . . 223
Classification Of Income . . . . . . . . 224
Business Income Vs. Property Income . . 226Tax Consequences Of Classification . . . . 226
Business Income Defined . . . . . . . . 227
Property Income Defined . . . . . . . . 228
Detailed Table Of Contents For Both Volumes (Page 4)
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CHAPTER 6, continuedBusiness Income Vs. Capital Gains . . . . 228
Capital Gains Defined . . . . . . . . . 229
Criteria For Identifying Capital Gains . . . 229
Business Income And GAAP . . . . . . . 230
Business Income - Inclusions (Revenues) 232Amounts Received And Receivable . . . . 232
Reserves . . . . . . . . . . . . . . 232
Limitations On Deductions FromBusiness And Property Income . . . . . 236Specific Limiting Items Under ITA 18 . . . 236
Foreign Media Advertising - ITA 19 And 19.1 242
Provincial Capital And Payroll Taxes . . . 242
Limitations On Deductions From Business,Property, And Employment Income . . 243Reasonableness . . . . . . . . . . . 243
Meals And Entertainment - ITA 67.1 . . . 243
“Luxury” Automobile Costs . . . . . . . 244
Automobiles Owned By The Taxpayer . . . 245
Automobile Leasing Costs - ITA 67.3 . . . 245
Illegal Payments, Fines And Penalties . . . 248
Leasing Property . . . . . . . . . . . 248
Business Income - Specific Deductions . 249Inventory Valuation (Cost Of Sales) . . . . 249
Other Deductions . . . . . . . . . . 250
Reconciliation Schedule . . . . . . . . . . 252
Business Income - Example . . . . . . . . 253
Taxation Year . . . . . . . . . . . . . . . 255General Rules . . . . . . . . . . . . 255
Unincorporated Businesses -Non-Calendar Fiscal Year . . . . . . . 255
Special Business Income Situations . . . 256Income For Farmers . . . . . . . . . . 256
Professional Income (Billed Basis) . . . . 258
Ceasing To Carry On A Business . . . . . 259
Scientific Research And Development . . . 260
Key Terms Used In This Chapter . . . . . 261
References . . . . . . . . . . . . . . . . . 261
Problems For Self Study . . . . . . . . . . 263
Assignment Problems . . . . . . . . . . . 272
Tax Software Assignment ProblemFor Chapter 6 . . . . . . . . . . . . . . 282
CHAPTER 7Income From Property
Property Income: General Concept . . . 285
Interest As A Deduction . . . . . . . . . . 286IT-533 - “Interest Deductibility” . . . . . 288
Discount And Premium On Issued Debt . . 291
Interest Income . . . . . . . . . . . . . . 293Discount And Premium On Debt Holdings . 295
Prescribed Debt Obligations . . . . . . 295
Accrued Interest At Transfer . . . . . . . 296
Payments Based On Production Or Use(Royalties) . . . . . . . . . . . . . . . . 297
Rental Income . . . . . . . . . . . . . . . 297Capital Cost Allowances . . . . . . . . 297
Rental Income Example . . . . . . . . 299
Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 300The Concept Of Integration . . . . . . . 300
Eligible Vs. Non-Eligible Dividends . . . . 301
Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 301- Eligible Dividends . . . . . . . . . 304
Comparison Of Investment Returns . . . . 308
Income Trusts . . . . . . . . . . . . . . . 308How Do Trusts Work? . . . . . . . . . 308
Investments In Public ly Traded Trusts . . . 309
Taxation Of Trusts: Pre-2011 Rules . . . 311
Mutual Funds . . . . . . . . . . . . . . . 312Distributions . . . . . . . . . . . . . 313
Adjusted Cost Base . . . . . . . . . . 314
Stock And Capital Of Dividends . . . . . 315
Foreign Source Income . . . . . . . . . . 315Foreign Non-Business (Property) Income . 316
Foreign Business Income . . . . . . . . 316
Shareholder Benefits . . . . . . . . . . . 317
Key Terms Used In This Chapter . . . . . 318
References . . . . . . . . . . . . . . . . . 318
Problems For Self Study . . . . . . . . . . 319
Assignment Problems . . . . . . . . . . . 323
Tax Software Assignment ProblemFor Chapter 7 . . . . . . . . . . . . . . 329
Detailed Table Of Contents For Both Volumes (Page 5)
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CHAPTER 8Capital Gains And Capital Losses
Economic Background . . . . . . . . . . 331
General Rules . . . . . . . . . . . . . . . 332Dispositions . . . . . . . . . . . . . 333
Adjusted Cost Base . . . . . . . . . . 334
Calculating The Capital Gain Or Loss . . . 336
Detailed Application Of The Rules . . . . 336Identical Properties . . . . . . . . . . 336
Partial Dispositions . . . . . . . . . . 337
Warranties On Capital Assets . . . . . . 338
Capital Gains Reserves . . . . . . . . . 338
Bad Debts On Sales Of Capital Property . . 340
Special Rule For Sales Of Real Property . . 341
Non-Arm’s Length Transfers Of Property 342Inadequate Considerations - ITA 69 . . . . 343
Inter Vivos Transfers To A Spouse . . . . 346
Non-Arm’s Length Transfers OfDepreciable Assets . . . . . . . . . 347
Farm Or Fishing Property To A Child . . . 349
Replacement Property Deferral Provisions 350Voluntary And Involuntary Dispositions . . 351
Timing Considerations . . . . . . . . . 351
Application Of ITA 44(1) To Capital Gains . 352
Application Of ITA 13(4) To Recapture . . 352
Combined Application Of ITA 13(4) And 44(1) 354
Small Business Investments - Deferral . . 357
Deemed Dispositions . . . . . . . . . . . 358Change In Use . . . . . . . . . . . . 359
Departures From Canada . . . . . . . . 362
Death Of A Taxpayer . . . . . . . . . 363
Provisions For Special Assets . . . . . . . 365Principal Residence . . . . . . . . . . 365
Personal Use Property . . . . . . . . . 369
Listed Personal Property . . . . . . . . 370
Gains And Losses On Foreign Currency . . 370
Options . . . . . . . . . . . . . . 373
Capital Gains And Tax Planning . . . . . 373
Key Terms Used In This Chapter . . . . . 374
References . . . . . . . . . . . . . . . . . 375
Problems For Self Study . . . . . . . . . . 376
Assignment Problems . . . . . . . . . . . 382
Tax Software Assignment Problem . . . . 391
CHAPTER 9Other Income, Other Deductions,
and Income Attribution
Introduction . . . . . . . . . . . . . . . . 393
Other Income - Subdivision d Inclusions . 395Pension Benefits . . . . . . . . . . . 395
Retiring Allowances . . . . . . . . . . 395
Death Benefits . . . . . . . . . . . 395
Income Inclusions From Deferred Income Plans 396
Scholarships And Prizes - ITA 56(1)(n) . . . 396
Research Grants . . . . . . . . . . . 397
Social Assistance AndWorkers’ Compensation Payments . . . 397
Universal Child Care Benefit . . . . . . 397
Other Deductions - Subdivision e . . . . 398CPP Contributions On Self-Employed Earnings 398
Moving Expenses . . . . . . . . . . . 398
Child Care Expenses . . . . . . . . . 401
Disability Supports Deduction . . . . . . 404
Related Inclusions And Deductions . . . 406Introduction . . . . . . . . . . . . . 406
Employment Insurance Benefits . . . . . 406
Pension Income Splitting . . . . . . . . 407
Spousal And Child Support . . . . . . . 408
Annuity Payments Received . . . . . . . 410
Registered Savings Plans . . . . . . . . . 411Registered Education Savings Plans (RESPs) . 412
Registered Disability Savings Plans (RDSPs) . 417
Tax Free Savings Accounts (TFSAs) . . . . 419
Income Attribution . . . . . . . . . . . . 420The Problem . . . . . . . . . . . . 420
Basic Rules . . . . . . . . . . . . . 421
Income Attribution - Other Related Parties . 424
Anti-Avoidance Provisions . . . . . . . 425
Tax Planning . . . . . . . . . . . . 426
Key Terms Used In This Chapter . . . . . 426
References . . . . . . . . . . . . . . . . . 427
Problems For Self Study . . . . . . . . . . 428
Assignment Problems . . . . . . . . . . . 433
Tax Software Assignment ProblemFor Chapter 9 . . . . . . . . . . . . . . 441
Detailed Table Of Contents For Both Volumes (Page 6)
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CHAPTER 10Retirement Savings And OtherSpecial Income Arrangements
Planning For Retirement . . . . . . . . . 443Tax Deferred Savings . . . . . . . . . 444
Defined Benefit Vs. Money Purchase Plans . 446
Registered Retirement Savings Plans . . 447RRSP Deduction Limit . . . . . . . . . 449
Examples Of RRSP Deduction Calculations . 456
Undeducted RRSP Contributions . . . . . 457
RRSP And RRIF Administration Fees . . . 459
RRSP Withdrawals And Voluntary Conversions 459
Involuntary Termination Due To Age . . . 461
Spousal RRSP . . . . . . . . . . . . 461
Home Buyers’ Plan (HBP) . . . . . . . 462
Lifelong Learning Plan (LLP) . . . . . . . 464
Departure From Canada . . . . . . . . 466
Death Of The Registrant . . . . . . . . 467
Registered Pension Plans (RPPs) . . . . . 468Employer Contributions To The RPP . . . 469
Employee Contributions To The RPP . . . 469
Options At Retirement . . . . . . . . . 470
Phased Retirement . . . . . . . . . . 470
Registered Retirement Income Funds . . 470RRIF Withdrawals . . . . . . . . . . . 471
Death Of The Registrant . . . . . . . . 472
Evaluation Of RRIFs . . . . . . . . . . 472
Deferred Profit Sharing Plans . . . . . . . 473
Profit Sharing Plans . . . . . . . . . . . . 473
Transfers Between Plans . . . . . . . . . 474Retiring Allowances . . . . . . . . . . 474
Retirement Compensation Arrangements 475Arrangements Defined . . . . . . . . . 475
Part XI.3 Refundable Tax . . . . . . . . 476
Salary Deferral Arrangements . . . . . . 476
Individual Pension Plans (IPPs) . . . . . . 477
Key Terms Used In This Chapter . . . . . 478
References . . . . . . . . . . . . . . . . . 479
Problems For Self Study . . . . . . . . . . 480
Assignment Problems . . . . . . . . . . . 486
Tax Software Assignment ProblemFor Chapter 10 . . . . . . . . . . . . . 492
CHAPTER 11Taxable Income And Tax Payable
For Individuals Revisited
Introduction . . . . . . . . . . . . . . . . 495
Lump-Sum Payments . . . . . . . . . . . 497
Treatment Of Losses . . . . . . . . . . . 498Carry Over Provisions . . . . . . . . . 498
Personal Use Property Losses . . . . . . 500
Listed Personal Property Losses . . . . . 500
Non-Capital Losses . . . . . . . . . . 501
Net Capital Losses . . . . . . . . . . 502
Net Capital Losses At Death . . . . . . . 504
Allowable Business Investment Losses . . . 505
Farm Losses . . . . . . . . . . . . . 507
Lifetime Capital Gains Deduction . . . . 508Qualified Property . . . . . . . . . . 509
Determining The Deductible Amount . . . 510
Comprehensive Example . . . . . . . . 513
Ordering Of Deductions And Losses . . . 514Significance Of Ordering . . . . . . . . 514
Ordering In ComputingNet Income For Tax Purposes . . . . . 514
Ordering In Computing Taxable Income . . 515
Example . . . . . . . . . . . . . . 515
Tax Payable Overview . . . . . . . . . . . 516Basic Federal Tax Payable . . . . . . . 517
Tax On Split Income . . . . . . . . . . . 517
Tax Credits Revisited . . . . . . . . . . . 519Transfer Of Dividends To A Spouse
Or Common-Law Partner . . . . . . . 519
Charitable Donations Credit Revisited . . . 520
Foreign Tax Credits Revisited . . . . . . 525
Alternative Minimum Tax . . . . . . . . . 527General Concept . . . . . . . . . . . 527
Minimum Tax Calculation . . . . . . . 528
Tax Credits For AMT . . . . . . . . . 529
AMT Carry Forward - ITA 120.2 . . . . . 529
Key Terms Used In This Chapter . . . . . 530
References . . . . . . . . . . . . . . . . . 531
Problems For Self Study . . . . . . . . . . 532
Assignment Problems . . . . . . . . . . . 539
Tax Software Assignment Problems . . . 550
Detailed Table Of Contents For Both Volumes (Page 7)
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CHAPTER 12Taxable Income And Tax Payable
For Corporations
Computation Of Net Income . . . . . . . 557
Computation Of Taxable Income . . . . . 559Deductions Available To Corporations . . . 559
Dividends From Other Corporations . . . 560
Non-Capital Loss Carry Over . . . . . . 563
Ordering Of Taxable Income Deductions . 565
Geographical Allocation Of Income . . . 565Permanent Establishments . . . . . . . 565
Example - Permanent Establishments . . . 566
Federal Tax Payable . . . . . . . . . . . . 567Basic Rate . . . . . . . . . . . . . 567
Federal Tax Abatement . . . . . . . . 567
General Rate Reduction . . . . . . . . 567
Provincial Tax Payable . . . . . . . . . . . 568Small Business Rate . . . . . . . . . . 569
Investment Income Rates . . . . . . . . 569
Small Business Deduction . . . . . . . . 570Canadian Controlled Private Corporation . 571
Active Business Income . . . . . . . . 571
Annual Business Limit . . . . . . . . . 573
Allocation Among Associated Companies . 574
Calculating The Small Business Deduction . 574
Elimination Of Small Business DeductionFor Large CCPCs . . . . . . . . . . 576
Personal Services Corporations . . . . . 578
Professional Corporations And ManagementCompanies . . . . . . . . . . . . 579
Manufacturing And Processing ProfitsDeduction . . . . . . . . . . . . . . . . 579Calculating The Deduction . . . . . . . 580
M&P Profits Defined . . . . . . . . . 582
General Rate Reduction - ITA 123.4(2) . . 582Full Rate Taxable Income . . . . . . . . 583
Application To Companies Other Than CCPCs 583
Application To CCPCs . . . . . . . . . 584
Foreign Tax Credits For Corporations . . 585
Key Terms Used In This Chapter . . . . . 587
References . . . . . . . . . . . . . . . . . 588
Problems For Self Study . . . . . . . . . . 589
Assignment Problems . . . . . . . . . . . 596
CHAPTER 13Taxation Of
Corporate Investment Income
Integration . . . . . . . . . . . . . . . . . 603The Basic Concept . . . . . . . . . . 603
Dividend Gross Up And Tax Credit Procedures 604
Integration And Business Income . . . . . 605
Refundable Taxes On Investment Income 607Meaning Of Aggregate Investment Income . 607
Basic Concepts . . . . . . . . . . . . 608
Refundable Part I Tax OnInvestment Income . . . . . . . . . . . 610Additional Refundable Tax
On Investment Income (ART) . . . . . 610
Problem One: Excessive Tax Rates On FlowThrough Of A CCPC’s Investment Income 611
Solution To Problem One:Refundable Portion Of Part I Tax . . . . 613
Refundable Part IV Tax OnDividends Received . . . . . . . . . . . 616Problem Two: Use Of Multi-Level Affiliations
To Defer Taxes On Investment Income . . 616
Solution To Problem Two:Refundable Part IV Tax . . . . . . . . 617
Part IV Tax On Portfolio Dividends Received 618
Dividends From A Connected Corporation . 619
Dividends Paid Out Of Mixed IncomeOf A Connected Corporation . . . . . 621
Refundable Dividend Tax On Hand . . . 622Basic Concepts . . . . . . . . . . . . 622
RDTOH - General Definition . . . . . . 623
Refundable Portion Of Part I Tax Payable . 623
The Dividend Refund . . . . . . . . . 625
Example Of RDTOH Calculations . . . . 625
Designation Of Eligible Dividends . . . . 628Basic Concepts . . . . . . . . . . . . 628
CCPCs And Their GRIP . . . . . . . . 630
Non-CCPCs And Their LRIP . . . . . . . 631
Part III.1 Tax On Excessive Eligible DividendDesignations . . . . . . . . . . . . 632
Key Terms Used In This Chapter . . . . . 634
References . . . . . . . . . . . . . . . . . 634
Problems For Self Study . . . . . . . . . . 635
Assignment Problems . . . . . . . . . . . 641
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CHAPTER 14Other Issues In
Corporate Taxation
Introduction . . . . . . . . . . . . . . . . 647
Acquisition Of Control Rules . . . . . . . 647Economic Background . . . . . . . . . 647
Acquisition Of Control Legislation . . . . 648
Deemed Year End . . . . . . . . . . 648
Restrictions On The Use OfCharitable Donations . . . . . . . . 648
Restrictions On The Use Of Losses . . . . 649
Unrecognized Losses At Deemed Year End . 650
Deemed Disposition Election . . . . . . 651
Associated Companies . . . . . . . . . . 653The Problem . . . . . . . . . . . . 653
Investment Tax Credits . . . . . . . . . . 657Procedures . . . . . . . . . . . . . 657
Eligible Expenditures . . . . . . . . . 658
Rates . . . . . . . . . . . . . . . 659
Refundable Investment Tax Credits . . . . 660
Carry Overs Of Investment Tax Credits . . 661
Acquisition Of Control . . . . . . . . . 661
Tax Basis Shareholders’ Equity . . . . . . 662Shareholders’ Equity Under GAAP . . . . 662
Paid Up Capital (Tax Basis Contributed Capital) 662
Tax Basis Retained Earnings . . . . . . . 663
Pre-1972 Capital Surplus On Hand . . . 663
Capital Dividend Account . . . . . . . 664
Distributions Of Corporate Surplus . . . 666Regular Cash Dividends . . . . . . . . 666
Stock Dividends . . . . . . . . . . . 667
Dividends In Kind . . . . . . . . . . 668
Capital Dividends Under ITA 83(2) . . . . 669
Deemed Dividends Under:ITA 84(1) - Increase In PUC . . . . . . 670ITA 84(2) - On Winding-Up . . . . . . 671ITA 84(3) - On Redemption, Acquisition,
Or Cancellation Of Shares . . . . . 672Under ITA 84(4) And ITA 84(4.1) . . . . 673
Key Terms Used In This Chapter . . . . . 674
References . . . . . . . . . . . . . . . . . 675
Problems For Self Study . . . . . . . . . . 676
Assignment Problems . . . . . . . . . . . 680
Tax Software T2 Assignment Problem . . 685
CHAPTER 15Corporate Taxation AndManagement Decisions
The Decision To Incorporate . . . . . . . 687Basic Tax Considerations . . . . . . . . 687
Other Advantages And Disadvantages . . . 688
Tax Reduction And Deferral . . . . . . . 689Approach . . . . . . . . . . . . . . 689
Basic Example . . . . . . . . . . . . 690
Public Corporation . . . . . . . . . . 692
CCPC - Active Business Income . . . . . 694
CCPC - Investment IncomeOther Than Dividends . . . . . . . . 697
CCPC - Dividend Income . . . . . . . 698
Conclusions On Tax Reductions And Deferrals 699
Provincial Taxes And Integration . . . . . 702Introduction . . . . . . . . . . . . . 702
Tax Deferral . . . . . . . . . . . . . 702
Tax Reduction . . . . . . . . . . . . 703
Tax Free Dividends . . . . . . . . . . . . 706Tax Rates On Dividends . . . . . . . . 706
Use Of Tax Credits . . . . . . . . . . 706
Tax Free Amounts For 2010 . . . . . . . 707
Income Splitting . . . . . . . . . . . . . . 708Basic Concept . . . . . . . . . . . . 708
Example . . . . . . . . . . . . . . 709
Shareholder Benefits . . . . . . . . . . . 710The Owner-Manager Environment . . . . 710
Shareholder Benefits Other Than Loans . . 711
Shareholder Loans . . . . . . . . . . 711
Management Compensation . . . . . . . 714General Principles . . . . . . . . . . 714
Salary Vs. Dividends . . . . . . . . . . 715
Salary Vs. Dividends ForThe Owner - Manager . . . . . . . . . 716The Basic Trade-Off . . . . . . . . . . 716
Other Considerations . . . . . . . . . 716
Conclusion . . . . . . . . . . . . . 724
Key Terms Used In This Chapter . . . . . 725
References . . . . . . . . . . . . . . . . . 725
Problems For Self Study . . . . . . . . . . 726
Assignment Problems . . . . . . . . . . . 731
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CHAPTER 16Rollovers Under Section 85
Rollovers Under Section 85 . . . . . . . . 737
General Rules For The Transfer . . . . . . 738Transferor And Transferee . . . . . . . 738
Eligible Property . . . . . . . . . . . 738
Consideration To Transferor . . . . . . . 738
Making The Election . . . . . . . . . 739
Establishing The Transfer Price . . . . . . 739
Transfer Prices - Detailed Rules . . . . . 741Rules Applicable To All Assets . . . . . . 741
Accounts Receivable . . . . . . . . . 742
Inventories, Non-Depreciable Capital Property 742
Disallowed Capital Losses . . . . . . . 743
Depreciable Property . . . . . . . . . 745
Terminal Losses Disallowed . . . . . . . 747
Eligible Capital Property . . . . . . . . 748
Eligible Capital Property- Disallowed Deductions . . . . . . . 749
Allocation Of The Elected Value . . . . . 750Consideration Received By The Transferor . 750
Assets Acquired By The Corporation . . . 751
Paid Up Capital Of Shares Issued . . . . 752Paid Up Capital Reduction . . . . . . . 753
More Than One Class Of Shares . . . . . 754
Section 85 Rollovers— Comprehensive Example . . . . . . 755
Gift To Related Person - Section 85 . . . 757General Rules . . . . . . . . . . . . 757
Example . . . . . . . . . . . . . . 758
Section 85 - Excess Consideration . . . . 759Shareholder Benefit - ITA 15(1) . . . . . 759
Dividend Stripping — ITA 84.1 . . . . . . 761Applicability Of ITA 84.1 . . . . . . . . 762
Dividend Stripping Example . . . . . . . 762
Capital Gains Stripping — ITA 55(2) . . . 764Application Of ITA 55(2) . . . . . . . . 765
Capital Gains Stripping - Example One . . 766
Capital Gains Stripping - Example Two . . 767
Key Terms Used In This Chapter . . . . . 768
References . . . . . . . . . . . . . . . . . 769
Problems For Self Study . . . . . . . . . . 770
Assignment Problems . . . . . . . . . . . 776
CHAPTER 17Other Rollovers And
Sale Of An Incorporated Business
Introduction . . . . . . . . . . . . . . . . 783
Share For Share Exchanges . . . . . . . . 783General Rules . . . . . . . . . . . . 784
Conditions For The Application Of ITA 85.1 784
Example . . . . . . . . . . . . . . 784
Exchange Of Shares In A Reorganization . 786Application Of ITA 86(1) . . . . . . . . 786
Conditions For The Reorganization . . . . 786
Procedures . . . . . . . . . . . . . 787
Example Using ITA 86(1) In An Estate Freeze 788
Gift To Related Person - ITA 86(2) . . . . 791
Practical Considerations . . . . . . . . 793
Using ITA 86(1) - Tax Planning Considerations 793
Amalgamations . . . . . . . . . . . . . . 794Position Of The Amalgamated Company . . 795
Position Of The Shareholders . . . . . . 796
Vertical Amalgamations (Parent And Subsidiary) 796
Non-Tax Considerations . . . . . . . . 796
Amalgamations - Tax Planning Considerations 797
Winding-Up Of A 90 Percent OwnedSubsidiary . . . . . . . . . . . . . . . . 798Acquisition Of Assets . . . . . . . . . 798
Disposition Of Shares . . . . . . . . . 801
Tax Planning Considerations- Amalgamation Vs. Winding-Up . . . . 802
Winding-Up Of A Canadian Corporation . 803Example . . . . . . . . . . . . . . 803
Convertible Properties . . . . . . . . . . 806Application . . . . . . . . . . . . . 806
Sale Of An Incorporated Business . . . . 807Restrictive Covenants
(a.k.a. Non-Competition Agreements) . . 807
Sale Of Individual Assets . . . . . . . . 808
Sale Of Assets As A Going Concern . . . . 809
Sale Of Shares . . . . . . . . . . . . 811
Evaluation Of Alternatives . . . . . . . 812
Example . . . . . . . . . . . . . . 813
Key Terms Used In This Chapter . . . . . 816
References . . . . . . . . . . . . . . . . . 816
Problems For Self Study . . . . . . . . . . 818
Assignment Problems . . . . . . . . . . . 822
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CHAPTER 18Partnerships
Introduction . . . . . . . . . . . . . . . . 829Taxable Entities In Canada . . . . . . . 829
Partnerships Defined . . . . . . . . . . . 830The Importance Of Defining A Partnership . 830
Basic Partnership Elements . . . . . . . 830
Types Of Partnerships . . . . . . . . . 831
Co-Ownership, Joint VenturesAnd Syndicates . . . . . . . . . . . . . 832Co-Ownership . . . . . . . . . . . . 832
Joint Ventures . . . . . . . . . . . . 833
Syndicates . . . . . . . . . . . . . 833
Partnership Income, Losses, Tax Credits . 834Introduction . . . . . . . . . . . . . 834
Basic Concepts . . . . . . . . . . . . 834
Calculating Partnership Income Or Loss . . 835
Allocations To Partners AndPartner Expenses . . . . . . . . . . . . 839Method Of Allocation . . . . . . . . . 839
Allocation Of Specific Items . . . . . . . 840
The Partnership Interest . . . . . . . . . 841The Concept . . . . . . . . . . . . 841
Acquiring A Partnership Interest . . . . . 841
Adjustments To The ACB OfA Partnership Interest . . . . . . . . 843
Limited Partnerships And Limited Partners 846Definitions . . . . . . . . . . . . . 846
At-Risk Rules . . . . . . . . . . . . 847
Transfer Of Property To And FromA Partnership . . . . . . . . . . . . . . 849Transfers With No Rollover Provision . . . 849
Common Partnership Rollovers . . . . . 851
Specified Investment Flow ThroughPartnerships . . . . . . . . . . . . . . 854
Key Terms Used In This Chapter . . . . . 854
References . . . . . . . . . . . . . . . . . 855
Problems For Self Study . . . . . . . . . . 856
Assignment Problems . . . . . . . . . . . 861
CHAPTER 19Trusts And Estate Planning
Introduction . . . . . . . . . . . . . . . . 869
Basic Concepts . . . . . . . . . . . . . . 870What Is A Personal Trust? . . . . . . . . 870
Establishing A Trust . . . . . . . . . . 871
Returns And Payments - Trusts . . . . . . 872
Non-Tax Reasons For Using Trusts . . . . 873
Classification Of Trusts . . . . . . . . . . 873Personal Trusts . . . . . . . . . . . . 873
Testamentary Vs. Inter Vivos Trusts . . . . 874
Taxation Of Trusts . . . . . . . . . . . . 875Rollovers To A Trust . . . . . . . . . . 876
Rollovers To Capital Beneficiaries . . . . 879
21 Year Deemed Disposition Rule . . . . 879
Net Income For Tax Purposes Of A Trust 880Preferred Beneficiary Election . . . . . . 881
Amounts Deemed Not Paid . . . . . . . 881
Amounts Retained For A BeneficiaryUnder 21 Years Of Age . . . . . . . . 881
Taxable Income Of A Trust . . . . . . . . 882
Income Allocations To Beneficiaries . . . 882Discretionary And Non-Discretionary
Distributions . . . . . . . . . . . . 883
Flow Through Provisions . . . . . . . . 883
Principal Residence Exemption . . . . . 885
Tax Payable Of Personal Trusts . . . . . . 885Testamentary vs. Inter Vivos Trusts . . . . 885
Income Attribution . . . . . . . . . . . . 888
Purchase Or Sale Of An Interest In A Trust 889
Tax Planning . . . . . . . . . . . . . . . . 890Qualifying Spousal Trusts . . . . . . . . 892
Alter Ego Trusts . . . . . . . . . . . 892
Joint Spousal Or Common-Law Partner Trusts 893
Estate Planning . . . . . . . . . . . . . . 893
Estate Freeze . . . . . . . . . . . . . . . 895
SIFT Partnerships And Trusts . . . . . . . 898
Key Terms Used In This Chapter . . . . . 902
References . . . . . . . . . . . . . . . . . 903
Problems For Self Study . . . . . . . . . . 904
Assignment Problems . . . . . . . . . . . 906
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CHAPTER 20International Issues In Taxation
Introduction . . . . . . . . . . . . . . . . 911
Residence . . . . . . . . . . . . . . . . . 912Importance . . . . . . . . . . . . . 912
Residence Of Individuals . . . . . . . . 912
Residence Of Corporations . . . . . . . 917
Residence Of Trusts . . . . . . . . . . 918
Non-Residents Earning CanadianSource Income . . . . . . . . . . . . . 919Basic Approaches - Part I Or Part XIII Tax . 919
Canadian Source Employment Income . . 920
Carrying on Business in Canada . . . . . 921
Dispositions of Taxable Canadian Property . 923
Canadian Source Property Income . . . . 924
The Problem Of Double Taxation . . . . 927Sources Of The Problem . . . . . . . . 927
Dual Residence . . . . . . . . . . . 928
Residence Vs. Citizenship . . . . . . . 930
Residence Vs. Source . . . . . . . . . 930
Immigration And Emigration . . . . . . . 931Entering Canada - Immigration . . . . . 931
Departures From Canada - Emigration . . . 931
Unwinding A Deemed Disposition . . . . 934
Short-Term Residents . . . . . . . . . 935
Foreign Source Employment Income . . . 935
Foreign Source Business Income . . . . . 936
Foreign Source Capital Gains . . . . . . . 936
Foreign Source Investment Income . . . . 936Foreign Investment Reporting Requirements 937
Non-Resident Entities . . . . . . . . . 938
Foreign Affiliates . . . . . . . . . . . 940
Controlled Foreign Affiliates . . . . . . . 941
Foreign Accrual Property Income (FAPI) . . 941
Foreign Affiliate Dividends . . . . . . . 944
Foreign Investment Entities . . . . . . . 946
Dividends From Foreign Non-AffiliatedCompanies . . . . . . . . . . . . 947
Transfer Pricing . . . . . . . . . . . . . . 948
Key Terms Used In This Chapter . . . . . 948
References . . . . . . . . . . . . . . . . . 948
Problems For Self Study . . . . . . . . . . 950
Assignment Problems . . . . . . . . . . . 952
CHAPTER 21GST/HST
Introduction . . . . . . . . . . . . . . . . 981
Transaction Tax Concepts . . . . . . . . 983
Liability For GST/HST . . . . . . . . . . . 987The Concept Of Supply . . . . . . . . 987
Supply Categories . . . . . . . . . . . . . 988Taxable Supplies . . . . . . . . . . . 988
Exempt Supplies . . . . . . . . . . . 989
Applying the GST/HST Rate . . . . . . . . 990Place Of Supply . . . . . . . . . . . 990
Collection And Remittance Of GST/HST . 991
Registration . . . . . . . . . . . . . . . . 992Who Must Register . . . . . . . . . . 992
Input Tax Credits . . . . . . . . . . . . . 995Vendors Of Fully Taxable And
Zero-Rated Supplies . . . . . . . . . 995
Vendors Of Exempt Supplies . . . . . . 997
Example . . . . . . . . . . . . . . 998
Relief For Small Businesses . . . . . . . 1000Quick Method Of Accounting . . . . . 1000
Small Suppliers Exemption . . . . . . . 1003
Simplified Input Tax Credit Method . . . 1003
GST/HST Procedures And Administration 1004GST/HST Returns And Payments . . . . 1004
Associated Persons . . . . . . . . . . 1006
Refunds And Rebates . . . . . . . . . 1006
Appeals . . . . . . . . . . . . . . 1006
Employee And Partner GST/HST Rebate 1007Calculating The GST/HST Rebate Amount . 1008
Example . . . . . . . . . . . . . . 1008
Residential Property, New Housing Rebate 1009New Housing Rebate . . . . . . . . . 1009
Sale Of A Business . . . . . . . . . . . . 1010
Specific Applications . . . . . . . . . . . 1011
Partnerships And GST/HST . . . . . . . 1012
Trusts And GST/HST . . . . . . . . . . . 1013
Key Terms Used In This Chapter . . . . 1014
Problems For Self Study . . . . . . . . . 1015
Assignment Problems . . . . . . . . . . 1019
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GlossaryThe Glossary can be found:
• at the back of the separate paperStudy Guide, and
• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.
Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.
No. 1 - Application Of The Median Rule
No. 2 - Revoked Stock Option Election
No. 3 - Stock Option Shares Deemed
Not Identical Property
No. 4 - Election For Pre-1982 Residences
No. 5 - Determining M&P Profits
No. 6 - SR & ED Expenditures
No. 7 - Final Returns For Deceased Taxpayers
No. 8 - Business Valuations
No. 9 - Tax Shelters
No. 10 - Transfer Pricing
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