ITA

Question 1

s. 212.3 ITA

Answer 1

Foreign Affiliate Dumping Rules

May apply where a Canadian corporation controlled by a non-resident person (or group) makes an investment in a foreign affiliate. The Canadian corporation is deemed to have payed a dividend to its non-resident parent, subject to withholding tax (in certain circumstances, the paid-up capital may be reduced instead).

Question 2

Foreign Affiliate Dumping Rules

Answer 2

Section 212.3 ITA

May apply where a Canadian corporation controlled by a non-resident person (or group) makes an investment in a foreign affiliate. The Canadian corporation is deemed to have payed a dividend to its non-resident parent, subject to withholding tax (in certain circumstances, the paid-up capital may be reduced instead).

Question 3

Mandatory Disclosure Requirements - Transactions

Answer 3

s. 237.3 ITA : reportable transaction when it meets at least one of three defined hallmarks (contingent fee arrangement, confidentiality protection or contractual protection)
s. 237.4 ITA : notifiable transactions (designated by the government)
s. 237.5 ITA : uncertain tax treatments for public corporations

Question 4

s. 237.3-5 ITA

Answer 4

Mandatory disclosure rules - Transactions

s. 237.3 ITA : reportable transaction when it meets at least one of three defined hallmarks (contingent fee arrangement, confidentiality protection or contractual protection)
s. 237.4 ITA : notifiable transactions (designated by the government)
s. 237.5 ITA : uncertain tax treatments for public corporations

Question 5

Deemed disposition of a trust after 21 years

Answer 5

104(4) ITA

Question 6

104(4) ITA

Answer 6

Deemed disposition of a trust after 21 years

Question 7

Paragraphs 128.1(4)(b) and (c)

Answer 7

Departure Tax

When an individual ceases to be resident in Canada for tax purposes, the individual is deemed to have disposed of each property owned immediately before the time of departure and to have reacquired the same property at a cost equal to the deemed proceeds of disposition (that is, FMV)

Question 8

Departure Tax

Answer 8

Paragraphs 128.1(4)(b) and (c)

When an individual ceases to be resident in Canada for tax purposes, the individual is deemed to have disposed of each property owned immediately before the time of departure and to have reacquired the same property at a cost equal to the deemed proceeds of disposition (that is, FMV)

Question 9

PUC

Answer 9

The expression “paid-up capital” is defined in subsection 89(1) of the ITA. In general terms, paid-up capital (or “PUC”) represents capital that can be returned to a shareholder on a non- taxable basis

Question 10

PUC grind

Answer 10

PUC can be reduced (“PUC grind”) under various provisions of the ITA (“Tax PUC” and “Corporate PUC” may be different)

Question 11

Subsection 39(4)

Answer 11

Election to treat Canadian securities as capital property, which ensure any gains or losses are capital gains.

Question 12

Election to treat Canadian securities as capital property

Answer 12

Subsection 39(4)

Question 13

39(5)

Answer 13

Exceptions from the 39(4) election for capital gain treatment of shares.
- trader or dealer in securities
- financial institution
- corporation whose principal business is lending money or purchasing debt
- non-resident

Question 14

Subsection 10(1)

Answer 14

To compute income from a business (that is not an adventure or concern in the nature of trade), each item in inventory must be valued at the end of the year at the lowest of cost and FMV.

Question 15

Capital dividend

Answer 15

83(2)

The corporation must make the capital dividend election, at or before the time the dividend becomes payable, or on the first day on which any part of the dividend was paid if that day is earlier.

(a) the dividend shall be deemed to be a capital dividend to the extent of the corporation’s capital dividend account immediately before the particular time; and

(b) no part of the dividend shall be included in computing the income of any shareholder of the corporation.

Question 16

83(2)

Answer 16

Capital dividend

The corporation must make the capital dividend election, at or before the time the dividend becomes payable, or on the first day on which any part of the dividend was paid if that day is earlier.

(a) the dividend shall be deemed to be a capital dividend to the extent of the corporation’s capital dividend account immediately before the particular time; and

(b) no part of the dividend shall be included in computing the income of any shareholder of the corporation.

Question 17

Regulation 2101

Answer 17

Prescribed form/manner the capital dividend election

-Prescribed form: T2054
-Certified copy of directors’ resolution authorizing the election to be made
-Schedules showing computation of capital dividend account

Question 18

Prescribed form/manner - Capital dividend election

Answer 18

Regulation 2101

-Prescribed form: T2054
-Certified copy of directors’ resolution authorizing the election to be made
-Schedules showing computation of capital dividend account

Question 19

Eligible dividend

Answer 19

• Defined in subsection 89(1) of the ITA: The portion of a taxable dividend received by a person resident in Canada, paid by a corporation resident in Canada and designated under subsection 89(14) to be an eligible dividend
• In general terms, eligible dividends are paid out of a corporation’s general rate income pool, and receive a more favourable dividend tax credit to compensate for higher corporate taxes paid at the general rate

Question 20

89(14)

Answer 20

• Eligible Dividends must be designated in accordance with subsection 89(14)
“A corporation designates a portion of a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom the dividend is paid that the portion of the dividend is an eligible dividend.”

Question 21

Eligible dividend designation

Answer 21

• Eligible Dividends must be designated in accordance with subsection 89(14)
“A corporation designates a portion of a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom the dividend is paid that the portion of the dividend is an eligible dividend.”

Question 22

84(1)

Answer 22

An increase in PUC of a class of shares results in a deemed dividend (84(1) ITA)
Exceptions to deemed dividend treatment:
• Stock dividend (84(1)(a) ITA)
• Transaction by which value of assets less liabilities is increased (84(1)(b)(i) ITA)
• Transaction by which liabilities less value of assets decreases (84(1)(b)(ii) ITA)
• Transaction by which PUC of other share classes is reduced by an amount not less than the increase in PUC (84(1)(c) ITA)
• Any action by which the corporation converts into PUC in respect of a class of shares any of its contributed surplus that arose on the acquisition of property by the corporation (for no consideration or for consideration that did not include shares of the corporation) from a person who at the time of the acquisition held issued shares of the class (ie. a contribution of capital): (84(1)(c.3)(ii) ITA)
• Any action by which the corporation converts into PUC in respect of a class of shares any of its contributed surplus that arose as a result of any action by which the PUC in respect of that class of shares (or in respect of shares of a substituted class) was reduced (84(1)(c.3)(iii) ITA)

Question 23

Deemed dividend for artificial increases of PUC

Answer 23

An increase in PUC of a class of shares results in a deemed dividend (84(1) ITA)
Exceptions to deemed dividend treatment:
• Stock dividend (84(1)(a) ITA)
• Transaction by which value of assets less liabilities is increased (84(1)(b)(i) ITA)
• Transaction by which liabilities less value of assets decreases (84(1)(b)(ii) ITA)
• Transaction by which PUC of other share classes is reduced by an amount not less than the increase in PUC (84(1)(c) ITA)
• Any action by which the corporation converts into PUC in respect of a class of shares any of its contributed surplus that arose on the acquisition of property by the corporation (for no consideration or for consideration that did not include shares of the corporation) from a person who at the time of the acquisition held issued shares of the class (ie. a contribution of capital): (84(1)(c.3)(ii) ITA)
• Any action by which the corporation converts into PUC in respect of a class of shares any of its contributed surplus that arose as a result of any action by which the PUC in respect of that class of shares (or in respect of shares of a substituted class) was reduced (84(1)(c.3)(iii) ITA)

Question 24

General concept of «Stated Capital»

Answer 24

A corporation’s stated-capital account tracks the consideration that the corporation received in exchange for issuing its shares—in other words, the account tracks the amount paid by the shareholder to the corporation. The corporation will keep a separate stated-capital account for each class or series of shares. And proper accounting should allow you to discern the stated capital for each issued share.

Generally, the stated-capital account tracks the fair market value of the consideration that the corporation received upon issuing a class or series of shares. But, in certain circumstances, corporate law allows the corporation to increase its stated capital by less than the full fair market value of the consideration received. The amount of the consideration that isn’t added to the stated capital is called a “contributed surplus,” and it can later be capitalized and added to the appropriate stated-capital account.

In addition, the stated-capital account for a class or series of shares must decrease if the corporation purchases, acquires, or redeems shares in that class or series.

Question 25

General concept of «PUC»

Answer 25

Paid up capital (PUC) measures the contributed capital and capitalized surpluses that a corporation can return to its shareholders on a tax-free basis.

Paid up capital and stated capital are closely related concepts. The corporation’s stated capital serves as the basis for computing the paid up capital of its shares. And, like stated capital, PUC is an attribute of each issued corporate share.

But PUC may deviate from stated capital. Stated capital is a corporate-law concept; paid up capital is a tax-law concept. So, while PUC derives from stated capital, the two may diverge.

Question 26

General concept of «ACB»

Answer 26

The adjusted cost base (ACB) is the shareholder’s tax cost for purchasing the shares. The ACB, when deducted from the proceeds of disposition, determines the amount of a capital gain or capital loss when the shareholder disposes of the shares.

The ACB is an attribute of the shareholder; stated capital and PUC are attributes of the shares. So, the shareholder’s ACB for a share need not accord with the share’s stated capital or PUC. The stated capital and PUC only capture a shareholder’s contribution to the corporation for a share; the ACB captures a shareholder’s contribution to any vendor for a share.

Question 27

84(2)

Answer 27

Under subsection 84(2), upon the corporation’s liquidation or winding up, any property or cash distributed to a shareholder in excess of a share’s PUC is deemed a dividend.

But when computing the capital gain for disposing the shares, the shareholder reduces the liquidation proceeds by the amount of the deemed dividend. This ensures that the shareholder’s liquidation proceeds aren’t double taxed as both deemed dividends and capital gains.

The deemed-dividend rule in subsection 84(2) doesn’t apply if: (1) subsection 84(1) applies to the same transaction; or (2) the corporation’s share purchase for cancellation was an open-market transaction.

Question 28

84(3)

Answer 28

Subsection 84(3) deems the shareholder to have received a dividend to the extent that the share redemption proceeds exceeded the share’s PUC.

But when computing the capital gain for disposing the shares, the shareholder offsets the redemption proceeds by the amount of the deemed dividend. This ensures that the shareholder’s redemption proceeds aren’t double taxed as both deemed dividends and capital gains.

The deemed-dividend rule in subsection 84(3) doesn’t apply if: (1) subsection 84(1) applies to the transaction; (2) the corporation’s share purchase for cancellation was an open-market transaction; or (3) the redeeming corporation was a public corporation

Question 29

Deemed dividend on the redemption of shares

Answer 29

Subsection 84(3) deems the shareholder to have received a dividend to the extent that the share redemption proceeds exceeded the share’s PUC.

But when computing the capital gain for disposing the shares, the shareholder offsets the redemption proceeds by the amount of the deemed dividend. This ensures that the shareholder’s redemption proceeds aren’t double taxed as both deemed dividends and capital gains.

The deemed-dividend rule in subsection 84(3) doesn’t apply if: (1) subsection 84(1) applies to the transaction; (2) the corporation’s share purchase for cancellation was an open-market transaction; or (3) the redeeming corporation was a public corporation

Question 30

84(4), 84(4.1)

Answer 30

Subsection 84(4) applies where a Canadian resident corporation reduced its PUC for any class of shares. Generally, a corporation reduces its PUC when it pays a tax-free return of capital to its shareholders. Subsection 84(4) anticipates situations where the corporation pays an amount exceeding the appropriate corresponding decrease in PUC. Basically, the provision says that, to the extent that the payment exceeds the amount of the PUC reduction, it is deemed a dividend.

Moreover, subparagraph 53(2)(a)(ii) accounts for the tax-free return of capital by reducing the ACB of the shareholder’s shares. The provision reduces the ACB in proportion to the PUC reduction of the shareholder’s shares.

So, subsection 84(4) permits a private corporation to distribute a tax-free return of capital so long as the distribution corresponds with the PUC reduction. But public corporations can only distribute a tax-free return of capital in limited circumstances.

Subsection 84(4.1) applies to public corporations. The general rule deems as a dividend any payment by a public corporation to its shareholders even if the payment doesn’t exceed the reduction of PUC. In other words, public corporations generally can’t pay a tax-free return of capital to their shareholders.

The public corporation may, however, pay a tax-free return of capital to its shareholders only if the amount came from proceeds that the corporation realized from a transaction “outside the ordinary course of the business of the corporation.” This carve out allows a public corporation to, say, sell a business unit and distribute the proceeds to its shareholders as a return of capital.

Question 31

Deemed dividend upon a reduction of PUC

Answer 31

Subsection 84(4) applies where a Canadian resident corporation reduced its PUC for any class of shares. Generally, a corporation reduces its PUC when it pays a tax-free return of capital to its shareholders. Subsection 84(4) anticipates situations where the corporation pays an amount exceeding the appropriate corresponding decrease in PUC. Basically, the provision says that, to the extent that the payment exceeds the amount of the PUC reduction, it is deemed a dividend.

Moreover, subparagraph 53(2)(a)(ii) accounts for the tax-free return of capital by reducing the ACB of the shareholder’s shares. The provision reduces the ACB in proportion to the PUC reduction of the shareholder’s shares.

For example, a shareholder owns a share with an ACB of $10 and PUC of $10. The corporation pays the shareholder $8 as a return of capital but only reduces the share’s PUC account by $7. As a result, the shareholder receives a deemed dividend of $1 ($8 distribution minus $7 PUC reduction). The shareholder’s ACB for the share is reduced by $7. So, the shareholder owns a share with an ACB of $3 and PUC of $3.

So, subsection 84(4) permits a private corporation to distribute a tax-free return of capital so long as the distribution corresponds with the PUC reduction. But public corporations can only distribute a tax-free return of capital in limited circumstances.

Subsection 84(4.1) applies to public corporations. The general rule deems as a dividend any payment by a public corporation to its shareholders even if the payment doesn’t exceed the reduction of PUC. In other words, public corporations generally can’t pay a tax-free return of capital to their shareholders.

The public corporation may, however, pay a tax-free return of capital to its shareholders only if the amount came from proceeds that the corporation realized from a transaction “outside the ordinary course of the business of the corporation.” This carve out allows a public corporation to, say, sell a business unit and distribute the proceeds to its shareholders as a return of capital.

Question 32

251(1)

Answer 32

«Arms length» principles
- related persons are deemed not to deal with each other at arms length
- in other cases, it is a question of fact

Question 33

Definition of «arms length»

Answer 33

251(1) - «Arms length» principles
- related persons are deemed not to deal with each other at arms length
- in other cases, it is a question of fact

Question 34

251(2)

Answer 34

Definition of «related persons»

Question 35

Definition of «related persons»

Answer 35

251(2)

Question 36

Employee benefit

Answer 36

6(1)a) - The value of any benefits received or enjoyed in the taxation year by the employee must be included in its income.

Question 37

6(1)a)

Answer 37

Employee benefits - The value of any benefits received or enjoyed in the taxation year by the employee must be included in its income.

Question 38

110(1)d)

Answer 38

Employee (stock) option deduction - allows a taxpayer to deduct one-half of the amount included in income by virtue of 7(1) as the value of the employee benefit arising from the exercise or the disposition of securities option. Makes it so the employees’s options are taxed at rates equivalent to capital gains.

Question 39

Employee stock option deduction

Answer 39

110(1)d) - allows a taxpayer to deduct one-half of the amount included in income by virtue of 7(1) as the value of the employee benefit arising from the exercise or the disposition of securities option. Makes it so the employees’s options are taxed at rates equivalent to capital gains.

Question 40

7(1)

Answer 40

Taxes an employee’s benefit derived from the exercise (or disposition) of rights under an agreement with an employer (or a corporation or mutual fund trust not dealing at arms lenght) to sell or issue shares or mutual fund units. Mainly applies to options, but is larger than that.

The benefit is deemed to be income from employment, and section 7 identifies when such income is deemed to have been realized. It is usually triggered on the exercice/disposition of the option.

When certain conditions are met, an employee may deduct 1/2 of the benefit deemed to have been received under 110(1)d).

Question 41

7(1.1)

Answer 41

Exception to 7(1) which applies in respect of options to acquire shares of a CCPC issued to arm’s length employee. The employment benefit is instead deemed arise when the shares acquired upon the exercice of an option are disposed of or exchanged (and not at the time of exercice of the option).

One half of the benefit included may be deducted by the employee if the conditions are respected for either - paragraph 110(1)(d.1) : employee must have kept the shares for two years
- paragraph 110(1)(d) : shares not held for at least two years, then couple of conditions must be met.

Question 42

84.1

Answer 42

Anti-avoidance rule that applies where an individual (or any taxpayer resident in Canada other than a corporation) transfers shares in a corporation to a purchaser corporation with which the individual does not deal at arm’s length and, immediately after the transfer, the corporation is connected with the purchaser corporation.

If applicable, the provision grinds the PUC on the shares received from the purchaser corporation and creates a deemed dividend out of any non-share consideration received from the purchaser corporation that exceeds the greater of PUC or «hard» ACB of the shares transferred.

Question 43

100(1)

Answer 43

Designed to counter tax avoidance through the sale of a partnership interest to a non-resident or tax-exempt organization. The purpose is to prevent the taxpayer from obtaining capital gain treatment on the sale of a partnership interest to an exempt taxpayer in circumstances where the sale of the underlying asset by the partnership would have created ordinary income at full rates.

The totality of the capital gain on the transfer of the partnership interest is taxable in the hands of the seller.

Question 44

15(2)

Answer 44

Shareholder debt - the amount loaned must be included in the shareholder’s income (does not apply to a corporation resident in Canada) . Among other exceptions, repayment within one year (s. 15(2.6))

Question 45

Shareholder debt inclusion

Answer 45

15(2) - the amount loaned must be included in the shareholder’s income (does not apply to a corporation resident in Canada) . Among other exceptions, repayment within one year (s. 15(2.6))

Question 46

Thin Cap Rules

Answer 46

Under subsection 18(4), Canadian resident corporations are denied an interest deduction in respect of interest-bearing debt owed to a “specified non-resident shareholder” (or a non-resident person not dealing at arm’s length with a specified shareholder) that exceeds a 1.5:1 debt-to-equity ratio (i.e., in general terms, a 60:40 debt-to-equity ratio). A “specified non-resident shareholder” of a Canadian corporation is defined as a non-resident shareholder who, either alone or together with other non-arm’s length persons, owns shares that entitle the holder to 25% or more of the votes in the Canadian corporation; or who own shares that have a fair market value of 25% or more of the fair market value of all the issued and outstanding shares of the Canadian corporation.

Under subsections 214(16) and 214(17), the disallowed interest is deemed to be a dividend and is subject to withholding tax under subsection 212(2), even if the amounts have not yet been paid to the non-resident shareholder.

Question 47

18(4)

Answer 47

Thin cap rules - Canadian resident corporations are denied an interest deduction in respect of interest-bearing debt owed to a “specified non-resident shareholder” (or a non-resident person not dealing at arm’s length with a specified shareholder) that exceeds a 1.5:1 debt-to-equity ratio (i.e., in general terms, a 60:40 debt-to-equity ratio). A “specified non-resident shareholder” of a Canadian corporation is defined as a non-resident shareholder who, either alone or together with other non-arm’s length persons, owns shares that entitle the holder to 25% or more of the votes in the Canadian corporation; or who own shares that have a fair market value of 25% or more of the fair market value of all the issued and outstanding shares of the Canadian corporation.

Under subsections 214(16) and 214(17), the disallowed interest is deemed to be a dividend and is subject to withholding tax under subsection 212(2), even if the amounts have not yet been paid to the non-resident shareholder.

Question 48

111(5)

Answer 48

111(5) restricts non‑capital loss carryovers for a corporation if control of the corporation has been acquired by a person or group of persons, unless it continues the same or similar business that incurred the losses

Question 49

111(1)(a)

Answer 49

Section 111(1) (a) of the Income Tax Act allows a taxpayer’s non‑capital losses to be carried back or forward to different taxation years to offset income in those years

Question 50

A taxpayer is required to calculate income from each source separately and total the various amounts to compute “income” for income tax purposes

Answer 50

Section 3 ITA

Question 51

When is income taxable

Answer 51

Two methods of computing income from a business or property.

Under the cash method of accounting, amounts are included in income only when received and expenses are deducted only when paid. Income from an office or employment is always computed on the cash basis.

Under the accrual method of accounting, income is computed for the period during which it has been earned, notwithstanding that it may not have been collected or actually received. When computing income from a business or property, with the exception of farmers, the accrual method rather than the cash method must be used.

Question 52

Sale of accounts receivable (on a sale of business)

Election available. Amounts deducted by the vendor on a sale of accounts receivable are included in the purchaser’s income

Answer 52

22(1)

Question 53

22(1)

Answer 53

Provides an election, or sale of a business including its receivables, so that after the sale the buyer and not the seller can claim the doubtful debt reserve and bad debt deduction.

The amounts deducted by the vendor on a sale of acounts receivable are included in purchaser’s income.

Question 54

110(1.1)

Answer 54

Election so that the deduction under paragraph 110(1)(d) can be claimed even though the taxpayer does not acquire the securities (but rather disposes of the right to acquire), as long as the qualifying person and persons not dealing at arm’s length with the qualifying person do not claim a deduction in respect of the payment made to the taxpayer.

Question 55

2(3)

Answer 55

Non-resident must pay taxes in Canada where he is:

(a) was employed in Canada,

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property,

Question 56

250(4)

Answer 56

S. 250(4): A corporation is deemed to have been resident in Canada throughout a taxation year if:
o It was incorporated in Canada after April 26, 1965;
OR
o It was incorporated in Canada before April 27, 1965 and carried on business in Canada.

Question 57

Corporation incorporated in Canada is deemed to be a resident

Answer 57

250(4)

Question 58

Residence of foreign corporation

Answer 58

De Beers Consolidated Mines, Ltd. v. Howe, [1906] AC 445
Center of mind and will: for income tax purposes, a corporation resides where its real activities are carried on.
- Place of head office
- Actual place of business
- Place where the decision-making center

Question 59

De Beers Consolidated Mines, Ltd. v. Howe, [1906] AC 445

Answer 59

Center of mind and will: for income tax purposes, a corporation resides where its real activities are carried on.
- Place of head office
- Actual place of business
- Place where the decision-making center

Question 60

Definition of «Canadian corporation»

Answer 60

Canadian corporation at any time means a corporation that is resident in Canada at that time and was

(a) incorporated in Canada, or

(b) resident in Canada throughout the period that began on June 18, 1971 and that ends at that time,

Question 61

Definition of «taxable Canadian corporation»

Answer 61

89(1) Taxable Canadian corporation means a corporation that, at the time the expression is relevant,

(a) was a Canadian corporation, and

(b) was not, by reason of a statutory provision, exempt from tax under this Part; (société canadienne imposable)

Question 62

Definition of «private corporation»

Answer 62

89(1) private corporation at any particular time means a corporation that, at the particular time:
- is resident in Canada
- is not a public corporation
- is not controlled by one or more public corporations (other than prescribed venture capital corporations) or prescribed federal Crown corporations or by any combination thereof

Question 63

107(2)

Answer 63

Subsection 107(2) applies when a personal trust or a prescribed trust distributes a property to a taxpayer who is a beneficiary under the trust in satisfaction of part or all of the beneficiary’s capital interest in the trust.

The basic result of subsection 107(2) is to pass the trust property to the beneficiary at the trust’s cost amount of the property. In certain circumstances, where the beneficiary has an actual or “hard” cost of the capital interest that exceeds the cost amount to the trust of the property distributed to the beneficiary, the cost of the property to the beneficiary may be increased to reflect such excess (subparagraphs 107(2)(b)(i) and (ii)).

Question 64

Distribution of assets by a trust in satisfaction of part or all of the beneficiary’s capital interest in the trust.

Answer 64

107(2) - distribution may be done on a rollover basis. Disposition is made at cost of the assets for the trust.

In certain circumstances, where the beneficiary has an actual or “hard” cost of the capital interest that exceeds the cost amount to the trust of the property distributed to the beneficiary, the cost of the property to the beneficiary may be increased to reflect such excess (subparagraphs 107(2)(b)(i) and (ii)).

Question 65

Subsection 212(2)

Answer 65

Every non-resident person shall pay an income tax of 25% on every amount that a corporation resident in Canada pays or credits, or is deemed by Part I or Part XIV to pay or credit, to the non-resident person on taxable dividends or capital dividends.

Question 66

Withholding on dividend payments to non-resident

Answer 66

25% - s. 212(2)

Question 67

88(1)

Answer 67

Applies where a “taxable Canadian corporation” has been wound-up into a parent taxable Canadian corporation that owns at least 90% of the shares of each class.

Paragraph 88(1)(a) : property of the subsidiary corporation that is distributed to its parent corporation shall be deemed to be disposed of for proceeds equal to the subsidiary’s cost amount.

Paragraph 88(1)(b) : shares of the subsidiary shall be deemed to have been disposed of by the parent corporation for proceeds equal to the greater of (i) PUC of those shares, (ii) the total ACB of the shares.

Paragraph 88(1)(c): the parent corporation acquires the distributed property at the subsidiary’s cost of that property.

88(1)(d) permit a “bump” - In general terms, the parent can bump the cost of eligible property (non-depreciable property, like shares) by an amount equal to the difference between the “outside” basis (i.e., the ACB to the parent of its shares of the subsidiary) and the “inside” basis of that property (i.e., the cost to the subsidiary of its eligible property), up to the amount of the fair market value (“FMV”) of the eligible property at the time the parent last acquired control of the subsidiary.

Question 68

88(1)(d)

Answer 68

88(1)(d) permit a “bump” to increase the cost of certain non-depreciable capital property (“eligible property”, as determined by subparagraphs 88(1)(c)(iii)-(vi)) that is distributed to the parent from the subsidiary on the winding-up or amalgamation. In general terms, the parent can bump the cost of eligible property (non-depreciable property) by an amount equal to the difference between the “outside” basis (i.e., the ACB to the parent of its shares of the subsidiary) and the “inside” basis of that property (i.e., the cost to the subsidiary of its eligible property), up to the amount of the fair market value (“FMV”) of the eligible property at the time the parent last acquired control of the subsidiary.

Question 69

Bump of non-depreciable property on winding-up or amalgamation

Answer 69

88(1)(d)

Question 70

20(1)(c)

Answer 70

Deductibility of interest expenses

For an interest expense to be deductible, it must be a reasonable amount paid pursuant to a legal obligation to pay interest on either: (1) borrowed money used for the purpose of earning income from a business or property, or (2) an amount payable for property acquired for the purpose of gaining or producing income from property or a business.

Question 71

Deductibility of interest

Answer 71

Paragraph 20(1)(c) - it must be a reasonable amount paid pursuant to a legal obligation to pay interest on either: (1) borrowed money used for the purpose of earning income from a business or property,20 or (2) an amount payable for property acquired for the purpose of gaining or producing income from property or a business.

Question 72

150(1)

Answer 72

Subsection 150(1) sets out the time within which various taxpayers are required to file returns of their income.

Question 73

Time within which taxpayers are required to file their income.

Answer 73

150(1)

Question 74

150(1.1)

Answer 74

Exceptions from the filing obligation provided by 150(1).

Question 75

93(1)

Answer 75

Where a corporation resident in Canada, or a foreign affiliate of a corporation resident in Canada, has disposed of a share of a foreign affiliate, section 93 permits and, in certain circumstances described below (see S. 93(1.1): Application of subsection (1.11)), deems the disposing corporation to elect to treat all or a portion of the proceeds as a dividend received on the share of the particular foreign affiliate and to exclude the elected amount from the corporation’s proceeds of disposition. This puts the disposing corporation in the same position as if it had extracted the corporate surplus (to the extent of the elected amount) by way of dividend prior to the sale, assuming the surplus so extracted would have directly reduced the purchase price.

Question 76

Election to treat proceeds on the disposition of shares of a foreign affiliate as dividends

Answer 76

Section 93(1) ITA

Where a corporation resident in Canada, or a foreign affiliate of a corporation resident in Canada, has disposed of a share of a foreign affiliate, section 93 permits and, in certain circumstances described below (see S. 93(1.1): Application of subsection (1.11)), deems the disposing corporation to elect to treat all or a portion of the proceeds as a dividend received on the share of the particular foreign affiliate and to exclude the elected amount from the corporation’s proceeds of disposition. This puts the disposing corporation in the same position as if it had extracted the corporate surplus (to the extent of the elected amount) by way of dividend prior to the sale, assuming the surplus so extracted would have directly reduced the purchase price.

Question 77

18(1)(a)

Answer 77

Under subsection 9(1), a taxpayer’s income from a business or property is the profit therefrom for the year, subject to Part I of the Act. One of the more general provisions in Part I is paragraph 18(1)(a), which states that no outlay or expense is deductible in computing the income of a taxpayer from a business or property except to the extent that is it was made or incurred for the purpose of gaining or producing that income.

Question 78

Restriction of deductibility of expense, which must have been made or incurred for the purpose of gaining income.

Answer 78

18(1)(a)

Under subsection 9(1), a taxpayer’s income from a business or property is the profit therefrom for the year, subject to Part I of the Act. One of the more general provisions in Part I is paragraph 18(1)(a), which states that no outlay or expense is deductible in computing the income of a taxpayer from a business or property except to the extent that is it was made or incurred for the purpose of gaining or producing that income.

Question 79

18(1)

Answer 79

Specific limitations on the deductibility of expenses in computing the income of a taxpayer from a business or property.

Question 80

104(21)

Answer 80

Subsection 104(21) permits a trust to designate a portion of its net taxable capital gains for a taxation year as a taxable capital gain of a beneficiary of the trust. In essence, the designated portion of the net taxable capital gains of the trust is deemed to be the taxable capital gain of a particular beneficiary. Accordingly, the beneficiary may use allowable capital losses realized in the year or previous years to offset this income.

Question 81

Capital gain election for the beneficiary of a trust.

Answer 81

Subsection 104(21) permits a trust to designate a portion of its net taxable capital gains for a taxation year as a taxable capital gain of a beneficiary of the trust. In essence, the designated portion of the net taxable capital gains of the trust is deemed to be the taxable capital gain of a particular beneficiary. Accordingly, the beneficiary may use allowable capital losses realized in the year or previous years to offset this income.

Question 82

17(1)-(1.1)

Answer 82

Subsection 17(1) applies when a non-resident person “owes an amount” to a Canadian resident corporation, which has remained outstanding for one year or longer.
There is an income inclusion if interest, calculated at a reasonable rate, would be greater than the total interest attributable to the amount owed included in the corporation’s income. The inclusion is based on the difference between interest paid and a prescribed rate.

Question 83

Income inclusion for a Canadian resident corporation that is owed money (unpaid within one year) from a non-resident bearing an unreasonable rate.

Answer 83

17(1)-(1.1)

Subsection 17(1) applies when a non-resident person “owes an amount” to a Canadian resident corporation, which has remained outstanding for one year or longer.

There is an income inclusion if interest, calculated at a reasonable rate, would be greater than the total interest attributable to the amount owed included in the corporation’s income. The inclusion is based on the difference between interest paid and a prescribed rate.

Question 84

112(1)

Answer 84

A corporation may deduct in computing taxable income an amount equal to taxable dividends received by it from:

(a) a taxable Canadian corporation; or

(b) any other corporation (except a non–resident-owned investment corporation or a corporation exempt from tax) which is resident in Canada and controlled by it.

Question 85

Deduction by a corporation from its taxable income of dividend received from a taxable canadian corporation or a controlled resident corporation.

Answer 85

112(1)

A corporation may deduct in computing taxable income an amount equal to taxable dividends received by it from:

(a)a taxable Canadian corporation; or

(b)any other corporation (except a non–resident-owned investment corporation or a corporation exempt from tax) which is resident in Canada and controlled by it.

Question 86

55(2), (2.1)

Answer 86

Anti-avoidance provision. Converts the intercorporate dividend (that is deductible under 112(1), thus tax free) to a taxable capital gain where such a distribution that is part of a series of transactions exceeds the payer corporation’s safe income on hand, and one of the purposes of the distribution is to either effect a significant reduction of the capital gain that would have been realized on a disposition of the shares at fair market value, a significant reduction in the fair market value of any share, or a significant increase in the total cost of all properties owned by the dividend recipient.

No purpose test for deemed dividends on the redemption of shares under 84(3).

Question 87

Deemed conversion of an intercorporate tax-free dividend to a capital gain where the distribution exceeds the safe income

Answer 87

55(2), (2.1)

Anti-avoidance provision. Converts the intercorporate dividend (that is deductible under 112(1), thus tax free) to a taxable capital gain where such a distribution that is part of a series of transactions exceeds the payer corporation’s safe income on hand, and one of the purposes of the distribution is to either effect a significant reduction of the capital gain that would have been realized on a disposition of the shares at fair market value, a significant reduction in the fair market value of any share, or a significant increase in the total cost of all properties owned by the dividend recipient.

Question 88

PART IV TAX - Section 186

Answer 88

Refundable tax of 38 1/3% on taxable dividends distributed to a private corporation on :

• Any dividend received from an unconnected (10%) payer corporation
• Dividends received from a connected payer corporation to the extent the payer received a dividend refund at the 38 1/3% (33 1/3% before 2016) rate.

Question 89

Refundable tax of 38 1/3% on taxable dividends distributed to a private corporation on :

• Any dividend received from an unconnected (10%) payer corporation
• Dividends received from a connected payer corporation to the extent the payer received a dividend refund at the 38 1/3% (33 1/3% before 2016) rate.

Answer 89

PART IV TAX - Section 186

A private corporation is required to pay a special refundable tax at the rate of 38 1/3% (33 1/3% before 2016) on taxable dividends distributed to it by corporations with which it is not connected. The rate of 38 1/3% applies to any dividend received from an unconnected payer corporation and will indirectly apply to dividends received from a connected payer corporation to the extent the payer received a dividend refund at the 38 1/3% (33 1/3% before 2016) rate.

Question 90

Part VI.1 Tax - Section 191.1

Answer 90

Section 191.1 currently imposes a tax of 40% on the payer of dividends on short-term preferred shares, and a tax of either 25% or 40% on the payer of dividends on taxable preferred shares other than short-term preferred shares.

Levied only to the extent that the total of non-excluded dividends on taxable preferred shares exceeds a $500,000 dividend allowance, defined in subsections 191.1(2) to 191.1(6).

Question 91

Tax on taxable preferred shares

Answer 91

Part VI.1 Tax - Section 191.1 -

Currently imposes a tax of 40% on the payer of dividends on short-term preferred shares, and a tax of either 25% or 40% on the payer of dividends on taxable preferred shares other than short-term preferred shares.

Question 92

70(5)

Answer 92

When a taxpayer dies, subsection 70(5) provides for a deemed disposition of each capital property of the taxpayer immediately before the death.

Question 93

Deemed disposition on death

Answer 93

When a taxpayer dies, subsection 70(5) provides for a deemed disposition of each capital property of the taxpayer immediately before the death.

Question 94

70(6)

Answer 94

Under subsection 70(6), the tax implications resulting from the deemed disposition on death (70(5)) can generally be deferred with a rollover if, as a consequence of the death, the capital property is transferred or distributed to the taxpayer’s spouse, common-law partner, or to a spousal trust.

Question 95

Deferral of deemed disposition on death under 70(5)

Answer 95

Under subsection 70(6), the tax implications resulting from the deemed disposition on death (70(5)) can generally be deferred with a rollover if, as a consequence of the death, the capital property is transferred or distributed to the taxpayer’s spouse, common-law partner, or to a spousal trust.

Question 96

Subsection 73(1)

Answer 96

Subsection 73(1) generally allows for the transfer of property to a trust without triggering capital gains where the property is transferred by an individual to the individual’s spouse, common-law partner or certain trusts

Question 97

Tax deferred transfer of property to spouse or common law partner or certain trusts

Answer 97

73(1)

Question 98

248(6)

Answer 98

Pursuant to subsection 248(6) of the Income Tax Act (the “ITA”), where a corporation has issued shares of a class of its capital stock in one or more series, references in the ITA to a “class” must be read, with such modifications as the circumstances require, as a reference to a “series of the class.”

Question 99

How to interpret the ITA where a corporation has issued series of shares for a particular class

Answer 99

Pursuant to subsection 248(6) of the Income Tax Act (the “ITA”), where a corporation has issued shares of a class of its capital stock in one or more series, references in the ITA to a “class” must be read, with such modifications as the circumstances require, as a reference to a “series of the class.”

Question 100

128.1(1)(b)(c)

Answer 100

Bump to the tax cost of most property on immigration to Canada to FMV

Question 101

Bump to the tax cost of most property on immigration to Canada to FMV

Answer 101

128.1(1)(b)(c)

Question 102

80

Answer 102

Section 80 deals with debt for- giveness generally. Most significantly, section 80 requires a taxpayer that settles a debt for less than the amount the taxpayer received on its issuance to offset the forgiven amount against various tax balances and to include one-half of any unapplied amount in income.

Question 103

Debt forgiveness - general rule

Answer 103

Section 80 deals with debt for- giveness generally. Most significantly, section 80 requires a taxpayer that settles a debt for less than the amount the taxpayer received on its issuance to offset the forgiven amount against various tax balances and to include one-half of any unapplied amount in income.

Question 104

Section 50

Answer 104

If a taxpayer establishes that an amount receivable on capital account other than in respect of the disposition of a personal-use property is a bad debt, or that the share of a corporation is insolvent / being wound-up, section 50 provides for a deemed disposition at the end of the year and a reacquisition immediately thereafter at nil cost. Election available.

Question 105

Bad debt / bad shares, deemed disposition and reacquisition after election

Answer 105

Section 50 - If a taxpayer establishes that an amount receivable on capital account other than in respect of the disposition of a personal-use property is a bad debt, or that the share of a corporation is insolvent / being wound-up, section 50 provides for a deemed disposition at the end of the year and a reacquisition immediately thereafter at nil cost. Election available.

Question 106

Proceeds of disposition of the shares of a subsidiary upon a vertical amalgamation (and paper reduction in PUC planning)

Answer 106

Under paragraph 88(1)(b) , the shares of the subsidiary are treated as having been disposed for proceeds of disposition equal to the greater of

1. the lesser of the PUC of the shares and another computed amount33 and
2. the total adjusted cost base to the parent corporation of the shares of the subsidiary disposed of because of the winding up.

A paper reduction of PUC can also avoid the risk that a capital gain may arise on the windup of a wholly owned subsidiary that is a taxable Canadian corporation into a parent corporation that is also a taxable Canadian corporation.

Question 107

88(1)(b)

Answer 107

Under paragraph 88(1)(b) , the shares of the subsidiary are treated as having been disposed for proceeds of disposition equal to the greater of

1. the lesser of the PUC of the shares and another computed amount33 and
2. the total adjusted cost base to the parent corporation of the shares of the subsidiary disposed of because of the winding up.

A paper reduction of PUC can also avoid the risk that a capital gain may arise on the windup of a wholly owned subsidiary that is a taxable Canadian corporation into a parent corporation that is also a taxable Canadian corporation.

Question 108

Non-arm’s lenght debt for expenses incured that are outstanding for more than two years must be included in income

Answer 108

Section 78 may apply in respect of non-arm’s length debts and may require a debtor to reverse deductions taken where the amounts remain outstanding for more than two years after the end of the year in which the expense was incurred

Question 109

Section 78

Answer 109

Section 78 may apply in respect of non-arm’s length debts and may require a debtor to reverse deductions taken where the amounts remain outstanding for more than two years after the end of the year in which the expense was incurred

Question 110

160(1)

Answer 110

Subsection 160(1) provides that where a taxpayer (transferor) has transferred property to his or her spouse or common-law partner, to a person who has since become the taxpayer’s spouse or common-law partner, to a person under 18 years of age, or to any other person with whom the taxpayer did not deal at arm’s length, the transferor and transferee are jointly and severally or solidarily liable for certain taxes for which the transferor would otherwise alone be liable.

The liability extends to the tax owed by the transferor in the year of transfer and previous years, but is reduced to the extent that the transferee pays consideration for the property so transferred. Subsection 160(1) also provides that a transferor and transferee will be jointly and severally liable for taxes owing in respect of income attributed to the transferor under the income attribution rules of sections 74.1 through 74.5.

Question 111

Subsection 78(1)

Answer 111

Subject to paragraph 78(1)(b), paragraph 78(1)(a) includes an amount in the income of a taxpayer that is owed to a non-arm’s-length person for more than two years in respect of a deductible outlay or expense. Paragraph 78(1)(b) provides that paragraph 78(1)(a) does not apply when the taxpayer and the non-arm’s-length person file an agreement with the CRA in prescribed form that the outstanding amount is deemed to have been paid by the taxpayer, received by the non-arm’s-length person, and lent by the non-arm’s-length person to the taxpayer.

Question 112

Income inclusion of amount that a taxpayer owes to a non-arm’s-length person for more than two years in respect of a deductible outlay or expense.

Answer 112

Subject to paragraph 78(1)(b), paragraph 78(1)(a) includes an amount in the income of a taxpayer that is owed to a non-arm’s-length person for more than two years in respect of a deductible outlay or expense. Paragraph 78(1)(b) provides that paragraph 78(1)(a) does not apply when the taxpayer and the non-arm’s-length person file an agreement with the CRA in prescribed form that the outstanding amount is deemed to have been paid by the taxpayer, received by the non-arm’s-length person, and lent by the non-arm’s-length person to the taxpayer.

Question 113

212(1)(b)

Answer 113

25% withholding tax on interest payments to (1) non-arm’s lenght non-residents or (2) non-residents where the payment qualifies as «participating debt interest»

Question 114

25% withholding tax on interest payments to (1) non-arm’s lenght non-residents or (2) non-residents where the payment qualifies as «participating debt interest»

Answer 114

212(1)(b)

Question 115

Back-to-back Loan Rules

Answer 115

Subsections 18(6) and (6.1) also contain certain back-to-back rules meant to capture loan arrangements that would otherwise circumvent the thin capitalization rules of 18(4) (which only take into account debt owed to non-residents that have more than 25% interest) by interposing an arm’s length intermediary in a transaction between a specified non-resident shareholder and its Canadian subsidiary. The rules operate to “look through” the arm’s length non-resident bank and deem the non-resident parent to be the ultimate funder of the loan for purposes of the thin capitalization rules.

Question 116

18(6)(6.1)

Answer 116

Subsections 18(6) and (6.1) also contain certain back-to-back rules meant to capture loan arrangements that would otherwise circumvent the thin capitalization rules of 18(4) (which only take into account debt owed to non-residents that have more than 25% interest) by interposing an arm’s length intermediary in a transaction between a specified non-resident shareholder and its Canadian subsidiary. The rules operate to “look through” the arm’s length non-resident bank and deem the non-resident parent to be the ultimate funder of the loan for purposes of the thin capitalization rules.

Question 117

16(1)

Answer 117

Subsection 16(1) is designed to deal with the situation where an amount received or to be received can reasonably be considered to be in part interest or other amount of an income nature and in part to be a capital amount. In such a case, irrespective of the form or legal effect of the governing contract or arrangement or when it was made, the part of the amount that can reasonably be regarded as interest is treated as interest on a debt obligation. The part that can reasonably be regarded as any amount of an income nature other than interest must be included in the income of the recipient or intended recipient for the taxation year in which it was received or became due, unless it has otherwise been included in that person’s income.

Question 118

Where an amount received or to be received can reasonably be considered to be in part interest and in part to be a capital amount, the amount is treated as interest on a debt obligation.

Answer 118

Subsection 16(1) is designed to deal with the situation where an amount received or to be received can reasonably be considered to be in part interest or other amount of an income nature and in part to be a capital amount. In such a case, irrespective of the form or legal effect of the governing contract or arrangement or when it was made, the part of the amount that can reasonably be regarded as interest is treated as interest on a debt obligation. The part that can reasonably be regarded as any amount of an income nature other than interest must be included in the income of the recipient or intended recipient for the taxation year in which it was received or became due, unless it has otherwise been included in that person’s income.

Question 119

13(7)

Answer 119

Subsection 45(1) provides that when a taxpayer, having acquired property for the purpose of earning income, has commenced at a later time to use it for some other purpose (or vice versa), the taxpayer is deemed to have disposed of the property for fair market value at the time of the “change-in-use” and to have reacquired the property for that same amount. The deemed disposition can be deferred through the filing of certain elections. Subsection 13(7) ensures that certain consequences resulting from the disposition or acquisition of depreciable property, such as recapture, terminal loss and computation of undepreciated capital cost, also apply in respect of the deemed disposition due to a change in use of the property.

Question 120

Deemed disposition upon a change of use of property.

Answer 120

13(7) Lorsqu’un contribuable a acquis un bien en vue d’en tirer un revenu ou de générer un revenu ou de l’utiliser dans une entreprise et commence, à une date ultérieure, à l’utiliser à une autre fin, il est réputé en avoir disposé à la date du changement et l’avoir acquis de nouveau immédiatement après pour un montant égal au produit de disposition. Le produit de disposition est réputé la juste valeur marchande du bien à cette date. Ceci signifie que, lorsque le bien est un bien amortissable, la fraction non amortie du coût en capital (FNACC) de la catégorie à laquelle appartient le bien sera réduite du moins élevé de cette juste valeur marchande ou du coût en capital du bien. Les futures DPA seront donc réduites et une récupération peut en résulter.

Question 121

97(1)

Answer 121

Property transfers to a partnership from partners or from persons who are partners immediately after the transfer are deemed to take place at the fair market value of the property at the time of transfer under subsection 97(1).

Question 122

97(2)

Answer 122

Subsection 97(1) provides that the transfer takes place at the fair market value of the transferred property. However, if an election is made between the transferor partner and the partnership, a tax-deferred rollover is provided under subsection 97(2). The analogy is to a contribution to a corporation in exchange for shares under the subsection 85(1) rollover.

Question 123

Rollover for a contribution to a partnership

Answer 123

97(2)

Subsection 97(1) provides that the transfer takes place at the fair market value of the transferred property. However, if an election is made between the transferor partner and the partnership, a tax-deferred rollover is provided under subsection 97(2). The analogy is to a contribution to a corporation in exchange for shares under the subsection 85(1) rollover.

Question 124

40(1)(a)(iii)

Answer 124

In general, subparagraph 40(1)(a)(iii) of the Act provides that a taxpayer may claim the deduction of a reasonable amount as a reserve in computing the gain for a taxation year from the disposition of any property where a portion of the proceeds of disposition of the property is payable to the taxpayer after the end of the year. Maximum of 5 years reimbursment.

Question 125

2(3)

Answer 125

A person that was not resident in Canada at any time in the year, but was (1) employed in Canada , (2) carried on a business in Canada, or (3) disposed of TCP, must pay an income tax on the person’s taxable income earned in Canada for the year determined in accordance with Division D.

Question 126

2(2)

Answer 126

Taxable income is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C.

Question 127

2(1)

Answer 127

A person resident in Canada at any time in the year must pay an income tax on its taxable income.

Question 128

Section 3

Answer 128

General rules to compute the taxpayer’s income for the year:

Paragraph 3(a) = requires a taxpayer to determine income from every source and to aggregate the various amounts.

Paragraph 3(b) = determine the total of the taxpayer’s taxable capital gains in the year (other than from dispositions of listed personal property) plus the taxpayer’s taxable net gain for the year from dispositions of listed personal property, in excess of the taxpayer’s allowable capital losses for the year other than allowable business investment losses.

Paragraph 3(c) = deduct the deductions permitted by subdivision e of Division B (sections 60 to 66.4): CPP contributions for self-employed; premiums paid to RRSPs and RRIFs; payments into pension plans; fees paid in connection with taxation disputes, etc.

Paragraph 3(d) = determine the amount, if any, by which the amount previously determined exceeds the combined total of the taxpayer’s loss from each employment, business and property and the taxpayer’s allowable business investment loss for the year. If there is no excess, the taxpayer’s income for the year is zero, and the balance is available as a “non-capital loss” (defined in subsection 111(8)).

Question 129

Section 4

Answer 129

Section 4 provides general rules for determining income or losses from a particular source or a particular place.

• Income or loss from a source is to be computed as if the taxpayer had no other income or loss except from that particular source. However, only deductions which may reasonably be regarded as wholly applicable to a particular source may be claimed against income from that source.
• A similar rule is used where the taxpayer carries on business or the duties of office or employment, as the case may be, in different places during the taxation year. The income or loss of the taxpayer is required to be computed as if the taxpayer had no income or loss except from that particular place and the taxpayer is entitled to claim only those deductions which may reasonably be regarded as wholly applicable to that part of the business or those duties.

Question 130

Section 5

Answer 130

Section 5 defines “income from an office or employment” and “loss from an office or employment”. Included in income from an office or employment under subsection 5(1) are the more commonly recognized benefits such as salary, wages and gratuities.

Question 131

Section 6

Answer 131

Section 6 specifically includes in income (from an office or employment) a list of benefits from employment which do not clearly fit within the general words of subsection 5(1).

Question 132

Section 7

Answer 132

Employee stock option rules - special rules that apply where a corporation or a Canadian mutual fund agrees to sell or issue its securities to an employee or to an employee of a related company.

With two key exceptions, these employee stock options are taken into the employee’s income when the option is either disposed of or exercised. The exceptions defer the taxable event to the subsequent disposition of the securities that are acquired by exercising the options:

• There are special rules where the stock option applies to shares of a Canadian-controlled private corporation (“CCPC”). If the CCPC shares are acquired by an arm’s length employee, the benefit is deferred to the year in which the shares are sold.
• While emigration rules deem a taxpayer’s property to be disposed of upon the cessation of Canadian residency, taxation of the employee benefit on CCPC shares is deferred until the shares’ actual disposition.

Question 133

Section 8

Answer 133

Except as specifically permitted by section 8, no deductions from employment income are permitted.

Question 134

39(1.1)

Answer 134

This provision calculates the capital gains and losses that arise from foreign currency dispositions by an individual (other than a trust) in taxation years effective August 20, 2011. Essentially, for administrative convenience, it provides a carve-out rule for $200 (which was previously included in subsection 39(2)) for each taxation year.

Question 135

10(15)

Answer 135

Under s. 10(15), property of a taxpayer that is a swap agreement, a forward purchase or sale agreement, a forward rate agreement, a futures agreement, an option agreement, or any similar agreement, is deemed not to be inventory for purposes of section 10 (i.e., the obligation to realize losses accrued on intentory at the ead of the year under 10(1))

Question 136

Section 10.1

Answer 136

Since 2017, section 10.1 of the Act sets out rules for the timing of recognition of a taxpayer’s profit or loss in respect of derivatives held on income account. These rules have two basic components. The first component of these rules introduces a new elective regime that allows a taxpayer to mark-to-market its eligible derivatives (as defined in new subsection 10.1(5)) on an annual basis. In general terms, subsection 10.1(5) defines an eligible derivative as any financial derivative instrument held on income account that has a practically verifiable fair market value. The second
component of these rules, contained in new subsection 10.1(8), imposes the realization method as the default method of profit computation for any derivative held on income account (including eligible derivatives) by a taxpayer that is not a financial institution and that has not elected into the mark-to-market regime.

Question 137

Section 9

Answer 137

Subsection 9(1) provides that, subject to the provisions of Part 1, a taxpayer’s income from a business or property is the taxpayer’s profit therefrom for the year. “Profit” is not defined in the Act.

Subsection 9(3) provides that a capital gain or loss from the disposition of a property does not constitute income or loss from that property.

Computation of profit is subject to six “guiding principles” set out by the Supreme Court of Canada in the Canderel. According to these principles, a taxpayer is “free to adopt any method which is not inconsistent with” the provisions of the Act, legal principles and well-accepted business principles, although the method must also provide an accurate picture of the taxpayer’s income position. However, since well-accepted business principles (incl. GAAP) are interpretive aids only, and not rules of law, it appears that a method of computing profit which is consistent with the provisions of the Act and the legal principles will suffice, assuming that it provides an accurate picture of income.

Question 138

Section 10

Answer 138

Exception to the rule under 9 which provides that a taxpayer’s income from a business is the taxpayer’s “profit” from that business for the year.

Section 10 requires that, regardless of the accounting principles otherwise adopted by the taxpayer in computing “profit”, the determination of “income” from the business must be in accordance with the principles of inventory valuation prescribed by section 10 or the Regulations.

In computing a taxpayer’s income from a business that is not an adventure or concern in the nature of trade, subsection 10(1) requires each item in the inventory to be valued at the end of the year at the lower of (i) cost or (ii) fair market value. Under Regulation 1801, generally, the only alternative to subsection 10(1) is to value all the inventory of the business at FMV at the end of the year.

In computing income from a business that is an adventure or concern in the nature of trade, subsection 10(1.01) requires the property described in the inventory of the business be valued at cost.

Question 139

Section 11

Answer 139

While an individual carries on business as a proprietor he may during the year also earn or produce other income from other sources such as investments or possibly even employment. Subject to the comments below, it is not always the case that the fiscal period of the business coincides with the calendar year and therefore, the end of the taxation years from the various sources of income may not match. Section 11 is intended to provide rules on how to determine which income periods are applicable when computing income under these circumstances.

Question 140

Section 68

Answer 140

S. 68 requires a reasonable allocation of purchase price (i) amongst the various assets purchased, (ii) for the provision of services, and (iii) for restrictive convenants. A price adjustment clause may be useful/appropriate.

It provides that the part of the purchase price that can reasonably be regarded as being the consideration for the disposition of a particular property (or service or restrictive covenant) is deemed to be the vendor’s proceeds of disposition of the property, regardless of the form or legal effect of the purchase and sale agreement. The same amount is deemed to be the purchaser’s acquisition cost.

Question 141

Section 56.4

Answer 141

Generally, per s. 56.4(2), amounts received in a year under a restrictive covenant (incl. non-compete, and perhaps also non-solicit, confidentiality, exclusivity, and supply agreements) are fully included in the vendor’s income, unless an exception applies (no capital gain treatment, and thus no LCGE). Under 68(c), must reasonably allocate to restrictive covenant part of purchase price. As a result, the consideration may be included in the taxpayer’s income under s. 56.4(2), that is unless one of the exceptions apply:

Amounts included in employment income

Disposition of eligible capital property (election deems it to be disposition of Class 14.1 property)

Dispositions of eligible shares and partnership interests

Covenants provided by an employee of a business that is sold

Arm’s length dispositions of goodwill

Question 142

251.2(2)

Answer 142

Loss restriction event (definition)

Per s. 251.2(2)(a), a corporation is subject to a loss restriction event when control (de jure) of the corporation is acquired by a person or group of persons.

Per s. 251.2(2)(b), a trust is subject to an acquisition of control where a person (or group) becomes a majority interest beneficiary

Question 143

256.1

Answer 143

Anti-avoidance rule to 251.2 (acquisition of control). S. 256.1 is intended to prevent taxpayers from avoiding the loss trading restrictions by structuring a corporation acquisition such that an acquisition of control does not otherwise occur. Under these rules, where shares having more than 75% of the fair market value (“FMV”) of a corporation are acquired, but control is not otherwise acquired, by a person or group of persons, there is a deemed acquisition of control that triggers what effectively would be an LRE.

Question 144

256(7)

Answer 144

)S. 256(7) can deem a change of control either to occur or to not occur. The provision generally applies to certain share acquisitions, amalgamations, and share-for-share exchanges. It applies for the purposes of the various loss restriction rules, notably including s. 251.2(2)(a) (definition of LRE)

Question 145

Section 44.1

Answer 145

Small-business share rollover

Generally speaking, under 44.1(2), where an individual disposes of shares of a small business corporation and realizes a capital gain, that gain can be deferred to the extent the proceeds of disposition are reinvested in one or more qualifying small business corporations.

The cost base of the new investment will be reduced by the capital gain deferred in respect of the initial investment.

Question 146

22(1)

Answer 146

A special election under s. 22(1) is available where a person sells all or substantially all of their business assets, including accounts receivable. The vendor and the purchaser of the business may elect jointly in respect of the debts using Form T2022. This election allows the vendor to deduct any loss incurred on sale of the debts (excluding those previously written off as bad debts), and the purchaser must include the same amount in income for the year of the sale. The purchaser may then deal with the debts for tax purposes as though they had arisen during the course of the purchaser’s business. Without this election, the accounts receivable would be treated as a capital asset to the vendor.

Question 147

12(3)

Answer 147

Section 12(3): applies to corporations, partnerships and most trusts, and essentially provides that interest on a debt obligation that accrues to such a taxpayer to the end of a taxation year is included in computing the taxpayer’s income for the year.

This essentially overrides 12(1)(c), under which a taxpayer must include interest in income in the year in which it is received or receivable, depending on the method regularly followed by the taxpayer in computing income.

Question 148

12(4)

Answer 148

Section 12(4): generally applies to individuals other than trusts, and ensures that interest income on an “investment contract” with a term of one year or more must be reported on an accrual basis to the extent it is not otherwise included on a receipt or receivable basis.

This essentially overrides 12(1)(c), under which a taxpayer must include interest in income in the year in which it is received or receivable, depending on the method regularly followed by the taxpayer in computing income.

Question 149

12(9)

Answer 149

Subsection 12(9) provides for the timing and manner of recognizing accrued interest on “prescribed debt obligations” as defined in regulation 7000(1). Such accrued interest is determined in accordance with regulation 7000(2). The amount of interest deemed to accrue applies for the purposes of reporting accrued interest under subsections 12(3) and 12(4) and 20(14) and 20(21), as the case may be.

Four types of “prescribed debt obligation” can trigger the deeming rule of subsection 12(9):
-Non-Interest-Bearing Debt Obligations
- Proportion of Principal Does Not Equal Proportion of Interest
- Deferred Interest Obligations
- Contingent Interest Obligations

Question 150

52(1)

Answer 150

Section 52 generally provides a series of adjustments to “cost”, which forms the basis for “adjusted cost base” as defined in section 54.

Where no other provision effects this result with respect to a particular property acquired, subsection 52(1) provides that the portion already taxed of the value of the property (by being included in income or subject to Part XIII tax) will be added to the cost of the property for the purpose of calculating its adjusted cost base.

Question 151

16(3)

Answer 151

Under subsection 16(3), the amount of a discount on certain obligations issued by governments, tax-exempt entities, and non-residents (other than non-residents carrying on business in Canada) must be included in income in full in the year in which the first holder acquired the obligation. This provision applies only to so-called deep discount obligations, under which the discount increases the yield to more than four-thirds of the stipulated interest rate.

Generally speaking, where subsection 16(3) applies, “the first Canadian resident owner of the obligations must include in computing income for the year in which the obligation is acquired (whether directly from the issuer or from a previous ineligible owner) the full amount of the difference between the “principal amount” of the obligation and the amount for which it was issued.” Its consequences are therefore drastic: instead of being taxed on an accrual basis, the deemed interest is fully taxed in the year the underlying obligation is acquired.

Question 152

16(1)

Answer 152

Subsection 16(1) provides that a portion of an amount paid under a contract or other arrangement will be included in income if part of the payment can reasonably be regarded as a payment of interest or other payment of an income nature.

By deeming the amounts involved to be not merely interest but specifically “interest on a debt obligation,” paragraph 16(1)(a) appears to make the accrual rules under subsections 12(3) and 12(4) applicable.

Question 153

45(1)

Answer 153

Subsection 45(1) provides that when a taxpayer, having acquired property for the purpose of earning income, has commenced at a later time to use it for some other purpose (or vice versa), the taxpayer is deemed to have disposed of the property for fair market value at the time of the “change-in-use” and to have reacquired the property for that same amount. The deemed disposition can be deferred through the filing of certain elections. Subsection 13(7) ensures that certain consequences resulting from the disposition or acquisition of depreciable property, such as recapture, terminal loss and computation of undepreciated capital cost, also apply in respect of the deemed disposition due to a change in use of the property.

Question 154

120

Answer 154

Subsection 120(1) imposes a surtax on that proportion of an individual’s “tax otherwise payable under this Part” that the taxpayer’s income for the year not earned in a province (specifically, the income other than the individual’s “income earned in the year in a province”) is of the taxpayer’s total income for the year. The surtax is applied at a rate of 48% for the 2000 and subsequent years.

Question 155

52(2)

Answer 155

Rule for the cost / proceeds of disposition of dividend in kind (other than stock dividend)

If a corporation pays a dividend in kind after 1971 (other than as a stock dividend, as to which see subsection 52(3)), the receiving shareholder acquires the property at its fair market value and the corporation is deemed to have disposed of it for proceeds of disposition of the same amount. This treatment prevails for property of all kinds, not just capital property. Accordingly, the corporation may realize a capital gain or loss, recapture or a terminal loss, or business income or a business loss.

This notably ensures that the FMV of the property that was included in income as a dividend under paragraph 12(1)(j), even if offset by a corresponding deduction under subsection 112(1), is not included in income a second time on the disposition of the property

Question 156

52(3)

Answer 156

Rule for the cost of stock dividends.

Amended subparagraph 52(3)(a)(i) provides that, where the stock dividend is received by an individual, the cost of the share to the individual is the “amount” of the stock dividend, which is generally the increase in the paid-up capital of the payer corporation.

In all other cases (i.e., stock dividends received by corporations, etc.), amended subparagraph 52(3)(a)(ii) provides that the cost of the stock dividend is the sum of two amounts which are determined under clauses (A) and (B) respectively. For such dividends, the amount is now the greater of the paid-up capital of the shares and the fair market value.

Question 157

52(8)

Answer 157

Subsection 52(8) provides that where a corporation becomes resident in Canada, the cost base of the shares (excluding shares that are considered taxable Canadian property) to the non-resident shareholder is equal to the fair market value of the shares at that time.

Question 158

Section 12(1)

Answer 158

Specific income inclusions (that are added to the computation of profit under section 9) as income from a business or property.

Question 159

12(1)(a)

Answer 159

Paragraph 12(1)(a) expressly provides that unearned amounts such as those received in a year on account of goods to be delivered or services to be rendered after the end of the year are included in income.

This essentially overides the rules under section 9 that an amount that is received is normally included in income if it has the “quality of income”, meaning that the taxpayer’s right to it is absolute and under no restriction as to its disposition, use or enjoyment (see Robertson v. M.N.R., 2 DTC 655 (Ex. Ct)).

Amounts included under paragraphs 12(1)(a) may be eligible for the reserves in paragraph 20(1)(m) which can have the effect of deferring the income inclusions.

Question 160

12(1)(b)

Answer 160

Paragraph 12(1)(b) provides that amounts in respect of property sold or services rendered in the course of a business are nonetheless included in the taxpayer’s income in the year they become receivable. Such amounts are included in income even if they would not otherwise be included in profit under the general principles of computing profit under section 9.

Question 161

12(1)(c)

Answer 161

Under 12(1)(c), a taxpayer must include interest in income in the year in which it is received OR receivable, depending on the method regularly followed by the taxpayer in computing income.

However, even if the taxpayer regularly follows the receipt method of computing interest income, corporations, partnerships and certain trusts must generally include interest on an accrual basis under s. 12(3). An accrual rule also applies to individuals in s. 12(4), although it is based on an accrual of interest up to an “anniversary day” of an “investment contract” in the taxation year (both terms are defined in s. 12(11)).

Question 162

20(1)(l)

Answer 162

Paragraph 20(1)(l) permits a taxpayer to deduct a reasonable amount as a reserve for certain doubtful debts under certain circumstances.

Where a taxpayer has taken such a reserve in a particular taxation year, paragraph 12(1)(d) requires the taxpayer to include in his income for the following year the amount deducted by him under paragraph 20(1)(l).

The above process requires the taxpayer to eventually deduct the amount as a bad debt expense under paragraph 20(1)(p) or return it into income.

Question 163

12(1)(d)

Answer 163

Paragraph 20(1)(l) permits a taxpayer to deduct a reasonable amount as a reserve for certain doubtful debts under certain circumstances.

Where a taxpayer has taken such a reserve in a particular taxation year, paragraph 12(1)(d) requires the taxpayer to include in his income for the following year the amount deducted by him under paragraph 20(1)(l).

The above process requires the taxpayer to eventually deduct the amount as a bad debt expense under paragraph 20(1)(p) or return it into income.

Question 164

20(1)(p)

Answer 164

Three categories of indebtedness can lead to a deduction for bad debt under paragraph 20(1)(p)

• debts which were included in computing the taxpayer’s income for the year or a previous year (i.e., unpaid revenue that has been earned by the taxpayer) and established to have become bad debts in the year;
• loans or lending assets (other than 142.2(1) “mark-to-market properties”) of a taxpayer who was an insurer or whose ordinary business included the lending of money, made or acquired in the ordinary course of business by the taxpayer and established to have become uncollectible in the year
• a “specified debt obligation” held by a “financial institution”

Question 165

12(1)(e)

Answer 165

Paragraph 12(1)(e) brings back into income for a particular taxation year the amount of certain reserves claimed by the taxpayer in the immediately preceding taxation year:
-The reserve available under paragraph 20(1)(m) or subsection 20(6) in respect of goods or services to be delivered or rendered after the end of the year, prepaid rent or goods to be returned.
-The reserve available in some cases under paragraph 20(1)(n) in respect of the sale price of property sold in the ordinary course of business which is not due until after the end of the year.

Question 166

20(1)(m)

Answer 166

S. 12(1)(a) brings into income for a year certain amounts received in that year for services to be rendered or goods to be delivered in a later year. Complementing this provision, s. 20(1)(m) allows the taxpayer to deduct certain reserves in respect of amounts so included. The amount has to be included back in income in the next year under 12(1)(e).

Question 167

18(1)(e)

Answer 167

s. 18(1)(e) prohibits the deduction of an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by Part 1 of the Act.

Question 168

20(1)(n)

Answer 168

Reserve for unpaid amounts

S. 12(1)(b) requires amounts receivable in a future year in respect of goods sold or services rendered in a particular year to be included in income for the year when the sale is made / services are rendered.

On the other hand, s. 20(1)(n) allows taxpayers to claim reserves in respect of the profit portion of this income, provided that at the time of sale the receivable was not due until at least two years after that time, and is not payable until after the current year end.

Question 169

12(1)(g)

Answer 169

Payments based on production or use

Subsection 9(1) (S. 9(1): Income) states that income from property is the “profit” therefrom, which is often computed on an accrual basis rather than a cash basis. Paragraph 12(1)(g) requires the inclusion of amounts received by a taxpayer in a taxation year which are dependent upon the use of or production from property.

However, subsection 12(2.01) provides that paragraph 12(1)(g) cannot defer the inclusion in the taxpayer’s income of any amounts that would be included under section 9.

Although s. 12(1)(g) can apply to share sales that are subject to earn-out agreements, the CRA generally allows a cost recovery method of reporting capital gains or losses in such cases.

Should not apply to a reverse earn-out agreement.

Question 170

12(1)(i)

Answer 170

Income inclusion - Bad debts recovered

Where a deduction has been taken under paragraph 20(1)(p) in respect of a bad debt or loans or lending assets that have become uncollectible, then amounts recovered subsequently must be included in income by virtue of paragraph 12(1)(i).

Question 171

12(1)(l)

Answer 171

Income inclusion - Partnership income

Paragraph 12(1)(l) provides for inclusion in the taxpayer’s income for a taxation year of any amount that is, by virtue of subdivision j, income of the taxpayer for the year from a business or property. Subdivision j (sections 96 to 103) sets out the rules under which a taxpayer computes the income from a partnership where the taxpayer is a member of a partnership.

Question 172

12(1)(m)

Answer 172

Income inclusion - Benefits from trusts

Under this provision amounts defined as income under the rules of subdivision k (Trusts and Their Beneficiaries, at S. 104(1)) and subsection 132.1(1) (mutual fund trusts at S. 132.1(1)) are included in the income of the taxpayer for the year from business or property.

Question 173

12(1)(t)

Answer 173

Income inclusion - ITC

A general rule is that a taxpayer should not be able to claim as an expense or part of the cost of the underlying property any government assistance rendered to the taxpayer.

For this reason paragraph 12(1)(t) was enacted. It provides that the taxpayer must include the amount of the ITC claimed to the extent that it has not been applied to:

(a) reduce the cost of the depreciable property under paragraph 13(7.1)(e);

(b) reduce the UCC of the depreciable property under subsection 13(21);

(c) reduce the deduction in respect of scientific research and experimental development under paragraph 37(1)(e);

(d) reduce the ACB of an interest in a partnership under subparagraph 53(2)(c)(vi);

(e) reduce the ACB of a capital interest in a trust under subparagraph 53(2)(h)(ii); or

Question 174

12(1)(x)

Answer 174

Paragraph 12(1)(x) requires a taxpayer to include in income any amount received in the taxation year as an inducement or contribution in respect of the cost of property or as an allowance in respect of an outlay or expense.

Question 175

20(1)(hh)

Answer 175

Permissible Deduction - Repayment of inducements

Paragraph 20(1)(hh) allows the taxpayer a deduction in income for the repayment of any amount which has been previously included in income under paragraph 12(1)(x).

Question 176

12(1)(z.7)

Answer 176

Paragraph 12(1)(z.7) requires a taxpayer to include in income any profit derived from the acquisition or disposition of property under a derivative forward agreement. A “derivative forward agreement” is defined in s. 248(1) and in general terms includes an agreement made to buy or sell capital property, at a date more than 180 days in the future, with a total price which is linked to some unrelated underlying interest other than the value of the property and/or economic return on the property (this exception is only available under certain conditions).

This provision was introduced to target “character conversion transactions” designed to convert ordinary income into capital gains through the use of derivative contracts. Where an amount is included in income under s. 12(1)(z.7), an adjustment is made to the cost base of property under s. 53(1)(s) or (t), to ensure the amount is not taxed again as a capital gain. Where the purchase or sale under a derivative forward agreement results in a loss, a corresponding deduction is available under 20(1)(xx).

Question 177

12(4.1)

Answer 177

Impaired debt obligations

Subsection 12(4.1) provides that a taxpayer is not required to include an amount in income in respect of a debt obligation under paragraph 12(1)(c) (general rule - inclusion when received or receivable, depending) or subsections 12(3) or 12(4) (accrual rules) for that portion of the taxpayer’s year in which the obligation is impaired and where an amount in respect of the obligation is deductible by the taxpayer for the year pursuant to subparagraph 20(1)(l)(ii)

Question 178

12(12)-(14)

Answer 178

Flipped property

Subsection 12(12) provides that where a taxpayer disposes of “flipped property”, the taxpayer is deemed to carry on a business that is an adventure or concern in the nature of trade with respect to the disposition, and the flipped property is deemed to be inventory of the taxpayer’s business.

Flipped property is defined in subsection 12(13) as a housing unit or a right to acquire a housing unit located in Canada that was held by the taxpayer for less than 365 days. Exceptions :

(a) The death of the taxpayer or a related person;

(b) A person related to the taxpayer becoming a member of the taxpayer’s household or vice versa;

(c) The breakdown of the taxpayer’s marriage or common-law partnership;

(d) A threat to personal safety;

(e)A serious illness or disability;

(f)An “eligible relocation”;

(g) An involuntary termination of the employment;

(h) The taxpayer’s insolvency;

(i) The destruction or expropriation of the property.

Question 179

Section 13

Answer 179

Recaptured depreciation

Section 13 establishes the so-called “recapture” principle under which the capital cost allowance deducted over the years by a taxpayer under paragraph 20(1)(a) may be wholly or partially brought back into the taxpayer’s income in a later year.

Where the UCC of the class at the year end is negative, subsection 13(1) requires that this negative balance be recaptured and included in income for that taxation year

Question 180

20(1)(a)

Answer 180

Paragraph 20(1)(a) establishes a capital cost allowance system. Under this system, taxpayers are generally entitled to deduct capital cost allowance in respect of all depreciable property on a class by class basis in accordance with the class schedule and maximum rates set out in Part XI of the Regulations.

Question 181

20(16)

Answer 181

Terminal loss

The converse of the recapture principle is the terminal loss allowed by subsection 20(16).

In general terms, a terminal loss occurs when there is no property left in a class of depreciable property and the UCC balance of the class is positive at the end of a taxation year. The loss is fully deductible in computing income in the year.

Question 182

13(21)

Answer 182

Definition of UCC

One of the amounts that reduces the UCC of a particular class:

• where there have been dispositions out of the class, the lesser of the proceeds of disposition of the particular property disposed of and its original capital cost;

Question 183

Section 15

Answer 183

Section 15 provides that benefits conferred on a shareholder by a corporation are to be recognized as non-dividend income. To be included in income, shareholder benefits must have been received due to a recipient’s status as, or affiliation with, a shareholder or a contemplated shareholder.

Question 184

15(1)

Answer 184

Subsection 15(1) provides that the amount or value of benefits conferred on a shareholder (or in contemplation of the person becoming a shareholder) by a corporation are included in the shareholder’s income.

Exception for benefits conferred in the circumstances or in the manner specified in paragraphs 15(1)(a) to (d) or to the extent the benefit is deemed to be a dividend under section 84.

Question 185

125(7)

Answer 185

125(7) defines a “Canadian-controlled private corporation” (CCPC) to mean a private corporation that is Canadian corporation other than:

(a) a corporation that is controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations with a class of shares listed on designated stock exchanges or by any combination thereof;

(b) a corporation that would be controlled by a person directly or indirectly, in any manner whatever, if all of the shares of the corporation owned by non-resident persons, public corporations (other than prescribed venture capital corporations), and corporations with a class of shares listed on designated stock exchanges were owned by that person;

(c) a corporation that has a class of shares listed on a designated stock exchange; or

(d) a corporation that has elected under 89(11), which deals with determining the corporation’s general rate income pool, not to be a CCPC only for the limited purposes set out in paragraph (d) of the definition.

Question 186

123.3

Answer 186

123.3: Refundable tax on CCPC’s (or substantive CCPC) investment income

An additional 10 2/3% tax of Part I tax is payable by Canadian-controlled private corporations on “aggregate investment income”. “

Aggregate investment income” is defined in subsection 129(4). Generally, it includes income from property (net of losses), net taxable capital gains, and net income earned from a specified investment business.

The additional 102/3% tax is levied on the lesser of

(1) the corporation’s aggregate investment income for the year, and

(2) the amount, if any, by which its taxable income for the year exceeds the amount of its income eligible for the small business deduction found in subsection 125(1).

The additional tax is added to the corporation’s “refundable dividend tax on hand” account in subsection 129(3), so that it is refundable under subsection 129(1) when taxable dividends are paid by the corporation.

Question 187

Surplus Account Rules?

Answer 187

The surplus account rules are relevant only to Canadian resident corporate shareholders receiving dividends from “foreign affiliates”.

A “foreign affiliate” is a non-resident corporation in which (i) the taxpayer’s “equity percentage” is at least 1% and (ii) the total of all “equity percentages” of the taxpayer and related persons is not less than 10%.

There are four surplus accounts:

(a) Dividends received from exempt surplus (active bysiness income) are tax-free.

(b) Dividends received from taxable surplus (FAPI ; must have be taxed at 53% or income inclusion is higher than deduction) or hybrid surplus (certain capital gains on disposition of foreign affiliate shares
/ partnershi interests) are taxable in Canada, subject to an effective credit for any foreign tax paid in respect of the income or capital gains generating the dividends, as well as an effective credit for any foreign withholding tax paid by the shareholder receiving the dividends.

(c) Dividends received from pre-acquisition surplus are not taxable but reduce the corporate shareholder’s adjusted cost base (ACB) in its shares of the foreign affiliate and may give rise to a capital gain to the extent the ACB goes negative.

Question 188

7(1.5)

Answer 188

Subsection 7(1.5) applies in certain circumstances where an employee disposes of or exchanges a security (old security) that was acquired under an employee stock option agreement that was eligible for the deferral under subsection 7(1.1) (CCPC shares) in exchange for another security (new security). Where the provision applies, the recognition of the deemed benefit associated with the old security will continue to be deferred until the employee disposes of the new security.

Similar to the conditions of subsection 7(1.4), the employee must receive no consideration for the old securities other than new securities of either the same qualifying person or a non-arm’s length qualifying person, a corporation formed on the amalgamation of the qualifying person and another corporation, a qualifying person that does not deal at arm’s length with such amalgamated corporation immediately after the exchange, or a mutual fund trust to which the particular qualifying person has transferred property under the mutual trust reorganization rules of subsection 132.2(1). etc.

Question 189

91(1)

Answer 189

The heart of the FAPI regime is subsection 91(1), which requires a resident taxpayer to include in income each year a percentage of the FAPI of each CFA of the taxpayer.[1][2] Loosely speaking, the percentage is determined by reference to the taxpayer’s direct and indirect economic interest in each CFA or in the income of each CFA.

Subsection 91(1) applies to a resident taxpayer for a taxation year if the taxpayer owns shares of a CFA in the year (the top-tier CFA). It requires the taxpayer to include in income for the taxation year, in respect of each such share, the following amounts of FAPI:

the top-tier CFA’s FAPI for its taxation year ending in the taxpayer’s taxation year multiplied by the share’s participating percentage in respect of the CFA at the end of the CFA’s taxation year (“participating percentage” is explained below), and

for each lower-tier CFA in which the top-tier CFA has a direct or indirect shareholding interest, the lower-tier CFA’s FAPI for its taxation year ending in the taxpayer’s taxation year multiplied by the participating percentage of the top-tier CFA share in respect of the lower-tier CFA at the end of the lower-tier CFA’s taxation year.

Question 190

Definition of “foreign affiliate”

Answer 190

Subsection 95(1) ITA.

A “foreign affiliate” of a taxpayer resident in Canada is a non-resident corporation in which the taxpayer’s “equity percentage” is at least 1% and the total of all “equity percentages” in the foreign affiliate owned by the taxpayer and all persons “related” to the taxpayer for the purposes of the ITA is not less than 10%.

Question 191

90(1)

Answer 191

Dividend received from a non-resident corporation must be included in income.

As such, dividends paid out of taxable surplus from a FA is fully includible in the taxable income of the corporate shareholder pursuant to subsection 90(1) ITA. However, there is a deduction for foreign corporate taxes paid in respect of the repatriated surplus and for withholding tax paid on the dividend is available to offset all or part of the income inclusion under paragraphs 113(1)(b)-(c) ITA. To be fully offset, the amount of tax payable would have to be more than 52% for 2022 and after.

Question 192

96(1.01)

Answer 192

For taxation years that end after March 22, 2011, paragraph 96(1.01)(a) was amended so that for the allocation of partnership income or loss for a taxation year, a taxpayer who is a former member of a partnership is deemed to be a member of that partnership at the end of the taxation year in which he or she ceased to be a member. The effect of (b) is that the calculation of the ACB at the time of disposition by the former partner will include their share of the stub period net income or loss from the partnership.

Question 193

96(1.1)

Answer 193

in some circumstances, provision is made among the partners to continue to remunerate the retired partner. In some circumstances there could have been a question whether these payments would be deductible as a business expense to the continuing partners. Also, the payments may have been treated as remuneration and subject to withholding tax at source.

To overcome these difficulties, subsection 96(1.1) provides that this type of payment is to be treated as a distribution of partnership profits for the purpose of subsection 96(1). This provision is applicable where the following conditions are met:

(1) the principal activity of the partnership is the carrying on of business in Canada;

(2) the partners have entered into an agreement to allocate income or loss to a former partner;

(3) in the case of a predecessor partnership, the current partners have acceded to the agreement; and

(4) the allocation of profit or loss is made to the former partner, his spouse, heirs or estate.

Where the above conditions are met, the retired partner is deemed to be a member of the partnership, for the purposes of the flow-through of income under subsection 96(1), the allocation of a share of the gain from the disposition of farm land under section 101 and the anti-avoidance provisions of section 103. Therefore, for example, the amounts allocated to a retired partner will be included in income in the calendar year in which the partnership fiscal period ends (see also paragraph 96(1.1)(b)).

Question 194

88(2)

Answer 194

Where a Canadian corporation (as defined in subsection 89(1)) which is not a 90%-owned subsidiary of a taxable Canadian corporation is being wound up and in the course thereof all or substantially all its property is being distributed to the shareholders, paragraph 88(2)(a) sets out three rules. These rules apply for the purpose of computing the corporation’s capital dividend account (where it is a private corporation) and its capital gains dividend account (where it is a non-resident-owned investment corporation). The three rules are as follows:

(1)The time immediately before the actual distribution of property is designated as the “time of computation”.

(2)The taxation year that would otherwise have included the time of actual distribution is deemed to end immediately before the time of computation. This is set out in subparagraph 88(2)(a)(iv).

(3)As provided in subparagraph 88(2)(a)(v), the properties distributed by the corporation in the course of the winding-up are deemed to have been disposed of immediately before the deemed year-end for proceeds equal to their fair market value.

Question 195

96(1)

Answer 195

Each partner must, in computing income for the taxation year in which the fiscal period of the partnership ends, include his or her share of the partnership’s income or loss from all sources.

Partnership income and loss is computed as if the partnership were a separate person resident in Canada with a taxation year concurrent with the partnership’s fiscal period.

Capital cost allowance is claimed at the partnership level rather than by the partners

Question 196

197

Answer 196

Tax on SIFT Partnerships

Part IX.1 imposes a tax on the “taxable non-portfolio earnings” (as defined below) of a SIFT partnership.

A SIFT partnership is a Canadian resident partnership that, at any time in the taxation year, holds non-portfolio property and for which investments in the partnership are listed or traded on a stock exchange or other public market.

Part IX.1 tax is made up of two components. The first component is equal to the federal general corporate rate (see ¶8300), net of the general rate reduction (see ¶8475), and the provincial abatement (see ¶8315). [3] The second component of the SIFT tax is the “provincial SIFT tax rate”, meaning the general provincial corporate income tax rate of each province in which a SIFT has a permanent establishment.

The Part IX.1 tax is imposed at the partnership level. The amount of the partnership’s taxable non-portfolio earnings, net of the Part IX.1 tax, is deemed to be a taxable dividend received by the partnership, and is flowed out to the partners under the regular partnership rules. [5] As a result, a SIFT partnership and its partners are taxed, in respect of the partnership’s taxable non-portfolio earnings, in a manner that replicates the taxation of a public corporation and its shareholders on income that is distributed as taxable dividends.

Question 197

96(2.1)–(2.7)

Answer 197

Limited Partners—At-Risk Rules

In general terms, the amount of losses which can be deducted by a limited partner for tax purposes is limited to the partner’s “at-risk amount” (ACB of interest + LP’s share of income which has not yet increased ACB, which is done at EOY - amounts owing by LP to partnership) for the year less certain deductions (including the ITC received in the year).

Losses rendered non-deductible are designated as limited partnership losses and are eligible for an indefinite carryforward against future income from the partnership which generated the losses. As well, limited partnership losses may be deducted in future years where the taxpayer’s at-risk amount in respect of the partnership increases, for example, by way of an increased investment in the partnership.

Question 198

127(8)–(8.5).

Answer 198

Rules regarding the repartition of ITC between partners.

The amount of the investment tax credit which a limited partner could claim is notably limited to its at-risk amount. Restricted amounts can be allocated to the GP.

Question 199

257

Answer 199

Where an amount is to be calculated using a formula in the ITA, unless specified otherwise, the result cannot be negative.

Question 200

Sec. 40(3.1)–(3.19).

Answer 200

The ACB of a partnership interest is generally exempt from the rule that a negative balance at the end of the year results in a deemed capital gain.

However, where the adjusted cost base of a partnership interest of a “limited partner” or “specified member” (i.e., passive investor) of a partnership is negative at the end of a particular fiscal period of the partnership, the negative amount is a deemed capital gain and the adjusted cost base is reset to nil.

These rules allow a partner’s subsequent positive adjusted cost base at the end of a partnership’s fiscal period to be claimed (and carried back to offset the gain where timing permits) as a capital loss to the extent of prior deemed gains.

Question 201

53(1)(e)

Answer 201

Amounts to be added to / reduced from ACB of a partnership interest.

ADD Share of income of partnership.

ADD capital dividends of partnership.

ADD capital contribution to partnership.

ADD negative partnership ACB of limited or passive partner.

REMOVE the partner’s share of any loss of the partnership.

REMOVE any amount paid to a partner in respect of the partner’s share of profits of the partnership or the partner’s investment in the capital of the partnership

REMOVE the amount of any ITC, claimed by the partner, that was allocated by the partnership.

Question 202

96(8)

Answer 202

1 Partnership’s capital cost of its depreciable capital property becomes the lesser of the FMV, and the cost otherwise determined.

Where a resident of Canada becomes a member of a partnership which previously had no Canadian resident members, the (new) Canadian partner is prevented from claiming losses previously realized in the partnership from dispositions of property, and from benefiting from unrealized losses inherent in any partnership property.

Question 203

98(5)

Answer 203

A tax-free rollover is permitted on the transfer of a partner’s share of the property of a Canadian partnership to a sole proprietorship (whether an individual, a trust, or a corporation) where, within three months of the termination of the Canadian partnership, one, but not more than one, of the partners commences to carry on the business of the previous partnership as a sole proprietor, using the partnership property received as proceeds of disposition of his or her partnership interest.

Question 204

Section 47

Answer 204

Section 47 provides a set of rules that apply when a taxpayer owns a number of identical properties which have been purchased at different times for different amounts. Generally, the cost base of each identical property is averaged by dividing the total cost of all identical properties owned by the taxpayer by the number of such properties.

Question 205

47(3)

Answer 205

Subsection 47(3) also provides that a security acquired by an employee under an employee securities option that qualifies for the deferral under either subsection 7(1.1) or subsection 7(8)(deferral security) is deemed not to be identical to any other security owned by the employee. Accordingly, the adjusted cost base of the deferral security, which will include the amount of the deferred benefit in respect of that security, will not be subject to the cost averaging rules of subsection 47(1).

Same thing for shares sold within 30 days of their acquisition under (7(1.31))

Question 206

56.4

Answer 206

Section 56.4 of the Income Tax Act provides the income tax treatment applicable to amounts received in respect of “restrictive covenants”

The general charging provision is subsection 56.4(2), which provides that an amount received or receivable by a taxpayer or a person not dealing at arm’s length with the taxpayer in a taxation year in respect of a “restrictive covenant” of the taxpayer is included in the taxpayer’s income for the year.

The second main set of rules in section 56.4 (subsecs 56.4(5)–(7)) apply where no proceeds are received or receivable for granting the restrictive covenant in question. For example, in a share or asset purchase transaction, this will be the case where no proceeds are allocated to the non-competition agreements or covenants granted by the shareholders or employees of the business in question. In such a case, the CRA is armed with a tool in section 68 to deem an amount to have been paid for the restrictive covenant by shifting to the restrictive covenant an amount that was allocated to something else. If the CRA is successful in doing so, then subsection 56.4(2) will apply to require such amount to be included in the taxable income of the grantor of the covenant. However, if the requirements of either subsection 56.4(6) or (7) are met (which may require the filing of an election), section 68 will not apply and thus the amount that can reasonably be regarded as being consideration for the restrictive covenant generally will be included as proceeds of disposition of the property in question rather than included in income under subsection 56.4(2).

Question 207

56(2)

Answer 207

In general terms, subsection 56(2) of the Act requires a taxpayer to include in income a payment or transfer of property made to another person pursuant to the direction of, or with the concurrence of, the taxpayer, or as a benefit that the taxpayer desired to have conferred on that other person, to the extent the payment or transfer would have been included if paid or transferred directly to the taxpayer.

Question 208

246(1)

Answer 208

In general terms, subsection 246(1) of the Act requires a taxpayer to include in income the amount of a benefit conferred on the taxpayer, directly or indirectly, in any manner whatever by another person, to the extent that the benefit is not otherwise included in the taxpayer’s income, if the amount would have been included in the taxpayer’s income if paid directly to the taxpayer.

Question 209

250(5)

Answer 209

If a person is determined to be resident in another jurisdiction for purposes of a tax treaty, the person will also be deemed not to be resident in Canada for purposes of the ITA

Question 210

250(1)

Answer 210

Generally, pursuant to subsection 250(1), residence in Canada is imputed to individuals who “sojourn” in Canada for 183 days or more in the course of a year, to members of the Canadian Forces and their school staff, and to members of the diplomatic service, and their families.

Question 211

Allowable Business Loss

Answer 211

An allowable business investment loss (or “ABIL”) is a special type of capital loss that has special tax characteristics.

39(1)(c) defines a business investment loss (or “BIL”) as being a capital loss incurred on the disposition of a share held in, or a debt owed you, by a small business corporation (“SBC”) (defined below)

to a person with whom you deal at arm’s length, or

(in the case of shares) because the corporation has become formally bankrupt or effectively insolvent and you have elected to have the deemed disposition rules in 50(1) apply, or

(in the case of debt) because the debt is uncollectible and you have elected to have the deemed disposition rules in 50(1) apply.

38(c) provides that one-half of the BIL is an allowable business investment loss (ABIL), which you may deduct from your income for the year from any source under 3(d)—not just from capital gains as would be the case for other types of capital losses. The definition of “non-capital loss” in 111(8) effectively provides that the carryforward period for unused ABILs to be used against any type of income is limited to 10 years—since 2006, no longer the same as provided in 111(1)(a) for non-capital losses which now have a 20 year carryforward period. Both types of losses may also be carried back 3 years.

Question 212

40(3.4)

Answer 212

Subsection 40(3.4) (with reference to subsection 40(3.3)) provides new stop-loss rules which replace the former stop-loss rules found in former subsection 85(4) and former paragraph 40(2)(e). The stop-loss rules apply to deny a capital loss of a corporation, trust or partnership (the transferor) on a disposition of a non-depreciable capital property, where the transferor or an “affiliated person” acquires the property or an identical property in the period beginning 30 days before the disposition and ending 30 days after the disposition, and the transferor or affiliated person owns such property at the end of that period.