Income/Loss from a Business and Capital Cost Allowance
Why is there such a tension between characterizing income as investment/property income or as capital gains?
Because of different tax treatment where the tax treatment for capital gains is superior because only 1/2 the income is taxed
In the real estate industry, this is the main source of interest income.
Rent
What precent of capital gains income is taxable?
50%
Compare and contrast tax avoidance and tax evasion
Similarities: Both involve finding ways to pay less/no tax
Tax avoidance: Reducing tax while staying within the letter of the law
Tax evasion: Not remitting what is legally due (going outside the law)
What are three different times when a tax-savings vehicle could taxed or exempted from tax?
(1) Contribution, (2) growth, and (3) withdrawal/disposition
How is (a) a business distinguished from hobbies and (b) business income distinguished from property income in Stewart v Canada?
Business vs. Hobbies: By looking at commercial intent, i.e., legitimate pursuit of profit.
Business income vs. Property income: By looking at the level of taxpayer activity
These are the 3 types of business income that lead to various tax treatments.
(1) Sales of inventory, (2) property income from passive investments, and (3) capital gains from the sale of assets
According to subpara. 40(1)(a)(i), this is how capital gains is calculated
CG = POD - ACB - SELL EXP
How does CIR v Willoughby differentiate tax avoidance from tax mitigation?
Avoidance: Reducing tax liability without incurring the economic consequences Parliament intended
Mitigation: Taking advantage of the fiscally attractive option Parliament intended taxpayers to take and experience those economic consequences
Who pays the tax or when is tax applied for RESPs?
Parents pay the tax during contribution and the child pays the tax on withdrawal. (TET, money grows tax free.)
Explain whether the capital cost allowance a credit or a deduction.
CCA is a slow, depreciating economic depreciation that is meant to deduct the cost of a capital asset throughout its useful life
Compare and contrast debt and equity
Similarity: Both are on the side of liabilities in accounting because they finance the company
Debt: Creates fixed repayment obligations
Equity: Creates ownership shares that involves issuing dividends and the opportunity to grow their values.
This is when all your capital assets are taxable as capital gains immediately after death in accordance with ss. 70(5).
Deemed disposition
This is the ratio from IRC v Duke of Westminster in determining whether the Duke’s action was tax evasion.
Every person is entitled to arrange their affairs to pay the least amount of tax possible
Why might there be an asterisk on E*ET for RRSP?
Because there is a limit to the contribution amount that can remain as tax-exempt in accordance with ss. 146(1).
How does Regal Heights v MNR differentiate business investment income from capital gains? How was this clarified in Canada Safeway v R?
Already established that being motivated to sell a business asset for a profit makes the transaction an investment income.
Regal Heights said it’s still investment income if it was a secondary/alternative motive.
Safeway clarifies/reiterates that an operating motive to sell the business asset is sufficient for the transaction to be income and not capital gains.
This is the method built into the tax system to ensure individuals earning income from a business or property creates a similar tax liability to earning the same income through a corporation.
Integration
When is capital gains income taxed and what is a concern with this system?
Taxed only when capital asset is sold (and not while it’s owned)
As the gain can accrue geometrically at the original cost, it can lead to a lock-effect.
Name the 3 steps of the GAAR test pursuant to ss 245(2).
1. There was a benefit
2. There was an avoidance transaction
3. The transaction misused/abused the statute; it frustrated the object, spirit, and purpose of the statute (Canada Trustco Mortgage v Canada).
What does the life-cycle model assume regarding savings behaviour in retirement?
Assumes that wealth is accumulated during the working years to provide consumptions in retirement.
Describe the general limitations of deducting expenses as to lower business/property income deductions according to para. 18(1)(a)
Expenses can only be deducted to the extent of in which it was incurred to produce income for the business/property.
You can't deduct expenses incurred for personal benefit.
According para. 20(1)(c), what three criteria must be made in order for interest paid on debt to be deductible?
1. The debt interest was payable in the year
2. The debt interest was paid due to a legal obligation.
3. The debt as used to produce business/property income.
What does Tsiaprailis v Canada and London and Thames Haven Oil Wharves v Attwooll tells us about when damage payments are taxable?
Damage payments are taxable when it was issued to cover profits/income (in accordance with the Surrogatum principle).
This is the ratio in R v Jarvis regarding CRA’s compliance audits and tax evasion investigations.
Compliance audits and tax evasion investigations must be treated differently. CRA must relinquish their investigative powers.
Due to the criminal nature of tax evasion, an adversarial relationship crystalizes between the taxpayer and the tax officials, and section 7 of the Charter applies.
How does the First Home Savings Account promote inequality?
You are not taxed for neither contribution, growth, nor withdrawal (EEE). This benefit can only be realized by people with higher income because they are likely to have high levels of disposable income.