Introduction to Federal Income Taxation in Canada, 45th Edition (2024-2025) Nathalie Johnstone
Introduction to Federal Income Taxation in Canada, 45th Edition (2024-2025) Nathalie Johnstone
%20Nathalie%20Johnstone.jpg)
CHAPTER 1
Introduction
Solution 1: Identify section of the Act
The following summary is
discussed in more detail below:
|
Case |
Topic |
Part |
Division |
Subdivision |
Provision |
|
(A) |
Person......................................................... |
XVII |
— |
— |
subsection 248(1) |
|
(B) |
Donation by individual............................. |
I |
E |
a |
subsection 118.1(3) |
|
(C) |
Balance-due day........................................ |
XVII |
— |
— |
subsection 248(1) |
|
(D) |
Life insurance premiums.......................... |
I |
B |
a |
subsection 6(4) |
|
(E) |
Capital dividend......................................... |
I |
B |
h |
subsection 83(2) |
|
(F) |
Income tax instalments for
individual..... |
I |
I |
— |
subsection 156(1) |
|
(G) |
Qualified small business
corporation share |
I |
C |
— |
subsection 110.6(1) |
|
(H) |
Information
return for dividends.............. |
— |
— |
— |
Reg. Part II, paragraph 201(1)(a) |
|
(I) |
Definition of testamentary
trust............... |
I |
B |
k |
subsection 108(1) |
|
(J) |
Employee loan........................................... |
I |
B |
f |
subsection 80.4(1) |
|
(K) |
Disposition of
non-depreciable capital property...................................................... |
XVII |
— |
— |
subsection 248(1) |
|
(L) |
RRSP administration fees......................... |
I |
B |
b |
paragraph 18(1)(u) |
|
(M) |
Limit on deductible expenses................... |
I |
B |
f |
section 67 |
|
(N) |
Taxable dividends received
by Canadian corporation................................................. |
I |
C |
— |
subsection 112(1) |
|
(O) |
RRSP excess contributions....................... |
X.I |
— |
— |
subsection 204.1(1) |
(A) Person — Part XVII,
subsection 248(1): The term is used throughout the Act, so it is likely to be
found in the interpretation section. The definition is similar to many in the
Act in that it does not tell you exactly what a person is; it tells you what a
person includes.
(B) Donation by an
individual — Part I, Division E, Subdivision a, subsection 118.1(3): Tax
credits are found in Division E. Credits that are particular to individuals are
found in Subdivision a of Division E.
(C) Balance-due day —
Part XVII, subsection 248(1): The term has application to all tax filers and,
therefore, should be found in the interpretation section. However, the term has
a different meaning depending on the type of tax filer. For trusts and
individuals, specific timing is provided. For corporations, the provision
refers to section 157.
(D) Group term life
insurance premiums paid by employer — Part I, Division B, Subdivision a,
subsection 6(4): Payments made on behalf of an employee by an employer
likely result in income from employment. Subdivision a includes the provisions
for calculating income from employment.
(E) Capital dividend —
Part XVII, subsection 248(1): The term is found in subsection 248(1) but a
definition is not actually provided, only a reference. It refers to another
section — Part I, Division B, Subdivision h, subsection 83(2): Capital
dividends are tax-free distributions by a corporation to its shareholders, so
the provision is likely to be found in Part I, Division B, Subdivision h that
deals with corporations and their shareholders.
(F) Income tax
instalments for an individual — Part I, Division I, subsection 156(1): The
information that is required deals with payments to the CRA; therefore this
information should be found in Division I dealing with returns, assessments,
payment and appeals. [Some students may also identify subsection 155(1) as dealing
with farmers and fishermen.]
(G) Qualified small
business corporation share — Part I, Division C, subsection 110.6(1): The
capital gains deduction that is available for qualified small business
corporation shares is a deduction that is available in computing taxable income
and is therefore found in Division C.
(H) Filing information return for dividends paid —
Regulations Part II, subsection 201(1): The Regulations provide important
detail regarding a number of the income tax rules. In order to ensure that
individuals are advised of the information required to be reported on their
personal tax returns (and to allow the CRA to ensure that the income is
reported), corporations are required to file slips such as T5s for dividends
paid.
(I) Testamentary trust — Part I, Division B, Subdivision k,
subsection 108(1): The phrase describes a trust so it is likely that the
definition will be found in Subdivision k dealing with trusts. Section 108
contains definitions for the subdivision.
(J) Interest-free loan benefit — Part I, Division B,
Subdivision f, subsection 80.4(1): Since the amount relates to an employee, it
might be expected that the provision would be found in section 6 (in fact the
provision that requires an income inclusion is found in subsection 6(9)).
However, the actual calculation of the amount of income is found in Subdivision
f which contains rules related to the calculation of income.
(K) Disposition of non-depreciable capital property — Part
XVII, subsection 248(1): The term “disposition” is used throughout the Act, so
it is likely to be found in this definition section.
(L) Limit on deduction of RRSP administration fees — Part I,
Division B, Subdivision b, paragraph 18(1)(u):
At one time, when the fees were deductible, they were considered a carrying
charge deductible in computing income from property. Therefore, the restriction
on the deduction is found in section 18 which provides a list of items that are
specifically not deductible in computing income from business or property.
(M) Limit on deductible expenses — Part I, Division B,
Subdivision f, section 67: The restriction on the amount of deductible expenses
applies throughout the Act. Therefore, the provision is found in general rules
for computing income that are found in Subdivision f.
(N) Corporate dividend deduction — Part I, Division C,
subsection 112(1): The concept deals with a deduction that is available to a
corporation. It might be expected to be found in Division B, Subdivision b
dealing with the calculation of income from property. However, in this case,
the deduction is not considered to reduce income from property but is a general
deduction available in computing taxable income.
(O) Excess RRSP contributions — Part X.I, subsection
204.1(1): This is a special tax that is found in the Act and applies when an
individual has contributed more to an RRSP than is allowed by the Act. In this
case, the special tax is intended to discourage people from taking advantage of
the benefits of an RRSP beyond those that are provided for in the rules.
Solution 2: Determine Income Using Ordering Rules
[Note to instructors: Changes to this problem from the prior
year include—Property income changed from $775 to $1,350 and Business loss from
$400 to $700]
Division B — Sec. 3
|
Par. 3(a) |
Subdivision a |
|
|
|
|
|
Sec. 5, 6, 7, 8 |
Employment
income......................................................... |
$ |
$ 78,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subdivision b |
|
|
|
|
|
Sec. 9 |
Property income................................................................ |
$ 1,350 |
|
|
|
Sec. 9 |
Rental property
income..................................................... |
975 |
2,325 |
|
|
Subdivision d: Miscellaneous sources |
|
|
|
|
|
Par. 56(1)(a) |
Employment insurance..................................................... |
$ 600 |
|
|
|
Par. 56(1)(a) |
Retiring allowance............................................................ |
800 |
1,400 |
|
|
|
|
|
$ 82,125 |
|
Par. 3(b) |
Subdivision c: Net taxable capital
gains |
|
|
|
|
|
Par. 38 |
Taxable capital gains (net of allowable capital losses)..... |
|
100 |
|
|
|
|
|
$ 82,225 |
|
Par. 3(c) |
Subdivision e: Miscellaneous
deductions |
|
|
|
|
|
Sec. 62 |
Moving expense................................................................ |
$ 1,700 |
|
|
|
Sec. 63 |
Child care expense............................................................ |
1,800 |
|
|
|
|
CPP enhanced and additional deduction |
838 |
(4,338) |
|
|
|
|
|
$ 77,887 |
|
Par. 3(d) |
Losses from non-capital
sources: |
|
|
|
|
|
Sec. 9 |
Business loss.................................................................... |
|
(700) |
|
Division B income............................................................................................. |
|
$ 77,187 |
||
|
Division
C: |
Deductions — Sec 111.1 |
|
|
|
|
|
Par. 111(1)(a) Non-capital losses................................................................................ |
(600) |
||
|
Taxable income............................................................................................................................................ |
$ 76,587 |
|||
|
Division E: Basic federal tax — Sec.
118.92 |
|
|||
|
Tax before
credits................................................................................................................................ |
$ 12,666 |
|||
|
Sec. 118 Personal credits............................................................................................................ |
(2,356) |
|||
|
Sec. 118.7 CPP contribution credit .............................................................................................. |
(483) |
|||
|
Sec. 118.7 EI premium credit ....................................................................................................... |
(157) |
|||
|
Ssec. 118(10) Canada Employment
tax credit .................................................................................. |
(215) |
|||
|
Sec. 118.2 Medical expense credit................................................................................................ |
(9) |
|||
|
Sec. 118.1 Charitable donations credit......................................................................................... |
(26) |
|||
|
Basic federal tax.................................................................................................................................. |
$ 9,420 |
|||
Solution 3: Identify and Define Words/Terms Found in Section
2
Words and terms found in section 2
(A) Division A of Part I of the Act consists of section 2 of the Act. Section
2 consists of three subsections.
Subsection 2(1):
“taxable income” — This is defined
in subsection 2(2).
“taxation year” — Subsection 249(1) contains the definition
of a taxation year. For corporations, the taxation year is the fiscal period of the corporation; for
individuals, the taxation year is the calendar
year.
“fiscal period” —
This is also a defined term, found in subsection 249.1(1).
“corporation” —
This word is part of a defined term in subsection 248(1), “corporation
incorporated in Canada”.
“individual” —
Subsection 248(1) defines individual as a
person, other than a corporation,
“person” — This is
also defined in subsection 248(1). This is expanded below.
“calendar year” —
This is not defined in the Act. However, the Interpretation Act defines the term in paragraph 37(1)(a) to mean a period of twelve
consecutive months commencing on January 1.
“person” — The definition of person is found in subsection
248(1). Section 248 is an interpretation section and many of the words and
terms used in the Act, which require definition, are found in this section.
Person is defined to include any body corporate and politic, and the heirs,
executors, administrators or other legal representatives of such body.
“resident” — Although the Act includes a definition of deemed
residents (subsections 250(1) and (4)), the word “resident” is not itself
defined in the Act. Canadian residents are taxed on their worldwide income. As
this term is fundamental to establishing a liability for Canadian tax, there
have been many court cases centred on the issue of residency. The common law
principles which have evolved from these cases are the basis for the
interpretation of this word. Residency is more fully discussed in Chapter 2.
“Canada” — Section 255 defines Canada to include certain sea
beds adjacent to the coasts, as well as the airspace above the geographic
boundaries of Canada.
Subsection 2(2):
As mentioned above, subsection 2(2) is itself a definition.
This subsection is for the purpose of defining “taxable income.”
“taxpayer” is found in subsection 248(1). This is any person,
whether or not liable to pay tax.
“income for the year” — Section 3 contains the blueprint for
the calculation of income. The term “income,” however, is not defined. Section
3 states: “The income of a taxpayer for a taxation year for the purposes of
this Part is his income determined by
the following rules ...” In order to determine income under section 3, one has
to first know what income is. As income is not defined, we again must turn to
jurisprudence and common language. Again, there are numerous court cases over
the issue of what constitutes income.
Subsection 2(3):
“employed” — Subsection 248(1) defines this word as
performing the duties of an office or employment.
“business” — Subsection 248(1) defines this word to include a
profession, calling, trade, manufacture, or undertaking of any kind whatever,
and an adventure or concern in the nature of trade. The definition excludes an
office or employment.
“carrying on a business in Canada” — Section 253 provides an
extended meaning of this term, as it applies to non-residents. This provides a
number of criteria to expand when a business will be considered to be conducted
in Canada. However, the term “carrying on a business” is not, itself, defined.
Therefore, although we have an extended meaning of this term legislated by the
Act, we will not find a legislated definition of the term itself. Again, there
have been numerous cases disputing whether a business was carried on.
“disposed” — Although the term disposed is not itself
defined, “disposition” is defined in subsection 248(1) to be, in paragraph (a),
any event or transaction which entitles the taxpayer to “proceeds of
disposition.” “Proceeds of disposition” is, itself, a defined term found in
subsection 13(21) and section 54.
“taxable Canadian property” — This is defined in subsection
248(1) and is quite a lengthy definition. Taxable Canadian property includes,
among other items, real property situated in Canada, shares of private Canadian
companies, and certain partnership interests and trust interests which derive
their value principally from these former two types of property.
“taxable income earned in Canada” — Subsection 248(1) defines
this term to mean taxable income determined in accordance with Division D of
Part I, but in no case can this ever be less than nil.
A review of section 2 clearly emphasizes the importance of
understanding the terms used throughout the Act. In many examples, the Act will
expand upon terms or provide computational rules for certain terms, but does
not extend to providing a statutory definition of the term itself. This is one
of many reasons why interpretation of the statute remains, at times, an
imprecise practice. It also demonstrates that, while the Act is the cornerstone
for the taxation system, it cannot be studied in isolation as it draws meaning
from other external sources.
Components
of subsection 2(3)
Subsection
2(3), like subsection 2(1), is a “charging provision”, because it charges
someone with the responsibility to pay a tax.
|
Components
of subsection 2(3)
(i) the person who is the subject of the provision
·
"a person who
is not taxable under subsection (1)", i.e., a person who is not resident
in Canada (i.e., a non-resident)
(ii) the activity, event or condition that must be
met for the provision to apply
·
a person ·
was employed in
Canada ·
carried on business
in Canada or ·
disposed of taxable
Canadian property
·
note the use of the
word "or" in the list of three activities
(iii) the consequences of the activity or event to
the person who is the subject of the provision
·
"an income tax
shall be paid ... on the person's
taxable income earned in Canada for the year ..."
·
note the use of the
word "shall", indicating a mandatory payment
(iv) the
timeframe for the application of the provision
· income is earned |
·
at any
time in the year or a previous year
Comments
Post a Comment