Midterm 1 - Concept of Income Flashcards
Income - Introduction
Why is the concept of income important to tax law?
Provides the TAX BASE
Policy - calculation of income (and competing considerations) are influenced by this
Income - Introduction
How do you approach an income question?
- Broad POLICY question
- approach under the ACT
- INTERPRETATION of the Act by the courts
Income - Policy (Definitions of income)
Briefly describe the Haig-Simons definition of income
Haig-Simons Theory - income tax base should include EVERYTHING that contributes to the TP’s ability to pay (ie ALL accretions to wealth)
Including unrealized capital gains, lottery, gifts, inheritance, RRSPs, TFSAs which are all excluded in Canada
Income - Policy (Definitions of Income)
Briefly describe the Carter Commission definition of income
Carter Commission definition RESTATED Haig-Simons -> comprehensive tax base = SUM of the MARKET VALUE of the goods and services consumed or given away in the tax year by the TP, plus the ANNUAL CHANGE in market value of assets held by the TP.
Income - Policy (Definitions of Income)
Describe the Carter Commission’s approach to a comprehensive tax base.
Purpose per Carter was to measure ability to pay (need comprehensive measure)
COST and SIMPLICITY standards need to be kept in mind as well -> therefore modified from Haig-Simons to be MORE PRACTICAL
Income - Income Tax Act
Explain how the ITA deals with the definition of income
Cite the section
s. 3 does not define income -> s.3(a) requires income from SOURCES (lists office, employment, business, property)
s. 3(b) - capital gains
s. 3(d) - other types of income
Income is NET concept
Income - Income Tax Act
When did the ITA’s language change from “net profit or gain” to “net income”?
1948 - changed to net income b/c only NET income results in increase in TP’s ability to pay
Income - Income from a Source
Explain the source theory of income in terms of the TREE/FRUIT analogy
Tree = SOURCE of income (capital producing income)
Fruit = INCOME
Increase in value of TREE are increase in capital, not income
Income - Income from a Source
Note and explain three possible origins of the source theory of income
Agricultural law
Trust law
Schedule Theory - UK 1803 Addington Act
Income - Income from a Source
Explain the “surrogatum” principle
Surrogatum Principle - surrogate for lost source of income = counts as income
Point is to make settlements taxable (Tsiaprailis)
Income - Income from a Source
What case is the Surrogatum Principle derived from? Who was the judge?
London and Thames v. Attwooll, 1976 Eng CA
Lord Diplock
Income - Income from a Source
What is the TEST for applying the Surrogatum principle? Cite the case
Tsiaprailis, 2005 SCC - 1) What was the payment intended to replace? –> If sufficiently clear answer 2) Would the replaced amount have been TAXABLE?
Income - Income from a Source
Can the surrogatum principle be applied if a lump sum includes both taxable and non-taxable amounts? Cite the case
No; must be able to identify the portions of a lump sum award that are taxable (Schwartz); TP bears the burden (Antonija Siftar, s. 152(8))
Income - Income from a Source
Identify the enumerated sources of income in s. 3 of the ITA
Office
Employment
Business
Property
Income - Income from a Source
Are sources of income limited to the enumerated sources in s. 3? Explain
No. s. 3(a) says “without limiting the generality of the foregoing” which implies that it can be expanded -> courts reluctant to do so however
Aff’d by SCC in Schwartz
Income - Income from a Source
Explain, in terms of the approach to income in the Income Tax Act, why courts may have had a tendency to stick with the enumerated sources of income in the Act.
Parliament has, often (eg Schwartz) put in specific provisions to deal with many forms of income -> easier to allow parliament to define additional sources, than to do so themselves
Income - Capital Gains
Describe and explain the Carter Commission’s recommended approach to capital gains.
Recommendation - capital gains should be taxed b/c increases wealth and ability to pay + exclusion of it undermines progressivity -> inequality of taxing capital gains when realized possible, but administratively efficient
Income - Statutory Inclusions
Indicate the inclusion of other specific items as income pursuant to the ITA and explain, in general terms, why there are such specific inclusions
other items specifically included in SECTION 56 -> to deal with where it is not clear they come from a source, but should be taxed for policy reasons
justified b/c they increase a person’s ability to pay -> equity
Income - Gifts and Inheritances
Describe and explain the Carter Commission’s recommended approach to gifts and inheritances
recommendation - should be taxed –> gifts and inheritances increase ability to pay and therefore should be taxed + will increase progressivity
Also recommended estate and gift taxes to be repealed
Result - repealed estate & gift taxes but no gifts and interitances tax
Income - Windfalls
Describe and explain the Carter Commission’s recommended approach to windfalls.
recommended that windfalls SHOULD be taxed b/c they increase ability to pay (including gambling winnings)
But NOT taxed (except if organized -> leading to expectation of net gain)
Income - Damages and Settlements
Explain the general approach to the inclusion of damages or settlements in income.
General approach is from Tsiapralis - 1) what was the payment intended to replace? 2) would the amount have been taxable in the recipient’s hands?
Income - Damages and Settlements
What is the approach to a reliance-based damage award?
Generally NOT TAXABLE b/c purpose is merely to RESTORE the plaintiff –> no net gain -> no increased ability to pay
Income - Damages and Settlements
What is the approach to an expectation-based damages award for lost profits?
Likely TAXABLE because replaces INCOME which would have been income from a source (even if not in contract to earn income -> has EXPECTATION of profit and therefore taxable per Cranswick)
Income - Damages and Settlements
What is the approach to personal injury awards for cost of care?
Likely NOT taxable - b/c getting injured is not something you can organize to get a gain (does not meet Cranswick critieria)
