Nature of Income


Normally, amounts received by a taxpayer from the customers of its business will be included in the computation of its income, so that if the taxpayer then wishes to have its income reduced to reflect that this receipt in turn will be expended in the course of its business, such expenditure must satisfy the jurisprudential and statutory tests for the deduction of an expense. However, this is not always the case.

Exclusion of amounts received subject to an obligation to repay, or pay to a third party

If an amount is received from a supplier or customer as a deposit or otherwise as an amount which the taxpayer is obligated to return to that person on demand or on the occurrence of an event that is contemplated to occur, such amount likely will not be income to the taxpayer until the taxpayer ceases to be obligated to return the amount (Atlantic Engine, Dominion Taxicab). This may be the case even if the prospects for the taxpayer actually being required to return the deposit or similar amount are relatively remote (Dominion Taxicab, see also Morley v. Tattersall).

Similarly, if a taxpayer receives amounts which are subject to a pre-existing obligation of the taxpayer to pay those amounts to a third party, those amounts should be excluded from its income (Premium Iron Ores, Wilson, Leonard Pipeline, Canadian Fruit, see also Minet, Wipf, cf. Canpar.) Furthermore, a dividend which otherwise would have been received by the taxpayer will not be income to it where it has waived the dividend (Perrault).

Where the obligation to repay an amount to a customer (or a third party) will not arise until the occurrence of a future event, such future obligation will not in the meantime be a basis for excluding the related amounts from the taxpayer's income (Foothills).

Exception where no practical likelihood of repayment (or collection)?

Somewhat inconsistently with jurisprudence which has found an amount not to be income if it is received subject to an obligation to pay it to a third party, even where the prospects for such repayment are somewhat remote, it has been found that such an amount is income to the recipient if it has (so far) successfully attempted to conceal its receipt of the amount from its rightful owner, the person to whom it is legally obligated to on-pay the amount (Conforbel). Similarly, it has been stated that "money in fact received by a person in the conduct of a business may, in an appropriate case, be his income for tax purposes despite an alleged obligation to account in some way to other persons." (Ablan Leon) In another departure from emphasis on legal entitlements, it was found that a taxpayer was not required to accrue interest income on an interest-bearing obligation when it became clear that the debtor would be unable to pay the interest (Honeybunch).

Presumption of legality

Where the earning of amounts from a regulated activity would be illegal under that regulatory regime, this will tend to favour a finding that such amounts were not earned by the taxpayer but instead by a third party who would be entitled under such regime to earn those amounts, provided that such finding is not fundamentally inconsistent with the parties' contractual arrangements (Minet, Morisset). Conversely, amounts received by a taxpayer will not be excluded from its income on the basis that the amounts were income of a third party on whose behalf the amounts were received where that third party lacked the legal capacity to earn the amounts, e.g., it was a dissolved corporation (Dello).

Amounts received as trustee or agent

Where amounts are received by a taxpayer in trust for a third party or as agent, they will be excluded from its income (B & B, St Catharines Flying Training School, Gault, see also Bouck). For example, where a taxpayer makes an absolute assignment of its beneficial interest in a lease to a third party, lease payments subsequently received by it will not be its income (On-Line); or where the vendor of a business retains, pursuant to the agreement of purchase and sale, a 1/2 entitlement to the commissions generated by the business for the following three years, those retained revenues will not be income to the purchaser even though it collects those amounts (Gault). However, where the taxpayer pays income over to a third party without being subject to a legal obligation to do so, the amounts will be income to it (Woodward's).

Non-assignability of personal services income

Where the income in question arises from the personal efforts of the taxpayer, e.g., fee income of a professional accountancy practice, a purported transfer of the rights to that income by the taxpayer while he continues to perform the services in question will be ineffective to exclude those amounts from his income (Hadlee).

Relevance of form

Where amounts received by a taxpayer are items of an income character such as rents or sales proceeds of goods, they generally will be included in its income even if a portion of those amounts was in economic substance a contribution of capital to the taxpayer (Wabush) or the amounts received by the taxpayer had the effect of reducing the exercise price received by the taxpayer in a subsequent taxation year on the exercise of an option to purchase a capital property from it (Ages).


Minet Inc. v. The Queen, 98 DTC 6364, [1998] 3 CTC 352 (FCA)

taxpayer had no right to insurance premiums received by it

Because the taxpayer (which conducted its business in Montreal) was not licensed to carry on an insurance brokerage business in a number of the states where this was required, it arranged for U.S. affiliates to be the brokers of record. The taxpayer would bind coverage on behalf of U.S. insurers, receive premiums from them and invest the premiums in certificates of deposit. When the premiums were required to be paid to the U.S. insurers, the affiliates would send the premiums to the insurers, and receive the brokerage commissions from the taxpayer.

In finding that the brokerage commissions were not income to the taxpayer, and in light of the prohibition against US insurers paying commissions to an unlicensed broker such as the taxpayer, Stone J.A. noted (at para. 34) that "the premiums paid by the U.S. insureds were clearly not destined to the appellant but rather to the U.S. insurers" and (at para. 36) that "the appellant could not and never did become the owner of or have any absolute right to the commissions."

Leonard Pipeline Contractors Ltd. v. The Queen, 98 DTC 6134 (FCTD)

amounts received subject to participation agreement obligation

On the purchase of a business, the taxpayer agreed with the vendor that the vendor would share in the proceeds of a joint venture agreement. The amounts that were paid to the vendor pursuant to this participation agreement were (following Wilson) not income in the hands of the taxpayer.

The Queen v. Foothills Pipe Lines (Yukon) Ltd., 90 DTC 6607, [1990] 2 CTC 448 (FCA)

The taxpayer, which had incurred various expenses in respect of the second phase of a pipeline project which had not yet been constructed, was permitted by the National Energy Board to levy a special charge to Alberta producers of natural gas in respect of those costs. The Board indicated that it intended to make changes to the applicable regulations that would have the effect of refunding the special charge to the Alberta producers, and in the meantime required the taxpayer to give an undertaking to the Canadian government to repay the special charges.

Urie J.A. found that given that the date of completion of the second phase was unknown (and that date must occur before the requirement to repay could be implemented), that the recipients of the repayments could not in the relevant years be identified and that the method of repayment was completely unknown, the obligation to repay was not a liability for income tax purposes. Accordingly, such obligation did not deprive the special charges received by the taxpayer from having the quality of income.

Ablan Leon (1964) Ltd. v. MNR, 76 DTC 6280, [1976] CTC 506 (FCA)

All the income received by the corporate taxpayer was its income, notwithstanding that - given a finding that a limited partnership which supposedly had received the income was a nullity - the income technically may have been the income of a predecessor partnership (of which the taxpayer had been a partner) which had purportedly transferred its business to the limited partnership. "[I]t seems to me that money in fact received by a person in the conduct of a business may, in an appropriate case, be his income for tax purposes despite an alleged obligation to account in some way to other persons."

Perrault v. The Queen, 76 DTC 6021, [1976] CTC 65 (FCTD), aff'd 78 DTC 6272, [1978] CTC 395 (FCA)

The jurisprudence as well as departmental practice relating to waiver of dividends has established a clear distinction between the acceptance of a dividend together with the assigning it to somebody else, in which event the dividend is taxable in the hands of the initial recipient, and the simple unconditional waiver of same whether before or after its declaration.

Wipf v. The Queen, 75 DTC 5034, [1975] CTC 79 (FCA), aff'd 76 DTC 6059, [1976] CTC 57 [1970] S.C.R. 958

not entitled to retain profits

The taxpayers were members of Hutterian colonies whose profits from farming belonged to trustees, or to corporations limited by guarantee. Since the taxpayers were entitled under their arrangements with the trustees or corporations to nothing for their efforts on the farms other than payments for their maintenance, their income was limited to those subsistence payments rather than an aliquot portion of the farming profits.

Philp v. MNR, 70 DTC 6237, [1970] CTC 330 (Ex Ct)

incentive trip to Bahamas

The Oshawa Group pursuant to a sales incentive program paid the costs of a six-day excursion to the Bahamas of a partner ("Bermack") in a firm which carried on a retail food business and which was a customer to which The Oshawa Group supplied groceries and other goods. The excursion was devoted to recreational activities, with the exception of a two-hour business session for three mornings. After stating (at p. 6242) that if the trip represented something of value to Bermack "it seems obvious that that something arose from its business and that the value of it represented a gain or profit from his business", Thurlow J. went on to find that the portion of the value of the trip which represented such a profit was 1/2 of the cost to The Oshawa Group.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) sales incentives paid to 3rd-party employees were taxable benefits 129
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business incentive trip to Bahamas 134
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 134

Minister of National Revenue v. Atlantic Engine Rebuilders Ltd., 67 DTC 5155, [1967] CTC 230, [1967] S.C.R. 477

The taxpayer was in the business of rebuiliding Ford engines, which it sold to Ford dealers. In order to secure a regular supply of rebuildable engines, when it sold an engine to a dealer, it required that the dealer provide it with a large deposti, which it would repay once the dealer provided it with another rebuildable engine. The probabilities were 96% that a deposit would be returned to a dealer in the near future.

Although the deposits received by the taxpayer did not constitute a trust fund in its hands, they nonetheless were not ordinary trading receipts, and a deposit was not to be included in the computation of its profit from its business until the taxpayer ceased to be under a liability to return the deposit to the dealer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing deposits returned if future supply 152

Premium Iron Ores Ltd. v. Minister of National Revenue, 66 DTC 5280, [1966] CTC 391, [1966] S.C.R. 685

prior enforceable agreement to on-pay the receipt

A mining company ("Steep Rock") appointed the taxpayer as its exclusive agent for the sale of iron ore to be mined from the deposit under Steep Rock Lake. The taxpayer shortly after the appointment and well before the mine came into production agreed to pay 20% of the commission which otherwise would be receivable by it for its selling services to the president of one of its shareholders, and ultimately to that shareholder, in recognition of services to be rendered to the taxpayer. Ritchie J. held that because the 20% share had by an enforceable agreement become the property of that group, those amounts did not form part of the taxpayer's taxable income.

MNR v. Gault, 65 DTC 5157, [1965] CTC 261 (Ex Ct)

An agreement dated 21 March 1960 between the estate of an insurance agent ("Bulley") and the taxpayer, pursuant to which the estate sold the goodwill of the insurance business of Bulley (including all client lists) to the taxpayer, provided for the payment by the taxpayer to the estate of 1/2 of all renewal commissions received during the following three-year period relating to clients of Bulley. The agreement was characterized as a "mere agency for the purpose of collecting" premiums on behalf of the estate, with the result that the 50% amounts collected and remitted to the estate were not income to the taxpayer.

Lloyd Estate v. MNR, 63 DTC 1349 (Ex Ct), briefly aff'd 65 DTC 5031 (SCC)

The taxpayer acquired a mortgage at a discount, and later foreclosed on the mortgage and sold the foreclosed mortgage for a purchase price which was secured by a mortgage in favour of the taxpayer. After finding that the taxpayer realized income in the year of foreclosure and sale, Noël J. stated (p. 1358):

It might have been possible to establish that the real value of the security recovered did not cover all of the amount of the discount and with proper evidence this might have been done. However, the evidence before me does not enable me to establish whether such is the case or not and the fact that the appellant agreed to accept a new mortgage from the purchaser for apparently the amount outstanding, presumably comprising the full amount of the discount, ... would indicate, I believe, that the value of the security recovered was sufficient to cover the full amount of the discount ...

Woodward's Pension Society v. The Minister of National Revenue, 62 DTC 1002, [1962] CTC 11, [1962] S.C.R. 224

In rejecting a submission that profits realized by a society incorporated under the Societies Act of British Columbia were not income to it because its objects were to pay such profits to the trustees of an employee pension plan, Judson J. stated (p. 1004):

The income received by the appellant was its own income, not subject to the legal claim of any other person. After receipt it was applied by the appellant in accordance with the stated objects.

Minister of National Revenue v. St. Catharines Flying Training School Ltd., 55 DTC 1145, [1955] CTC 185, [1955] S.C.R. 738

Profits earned by the taxpayer under a contract with the Crown for the training of pilots were by virtue of that contract held on terms that unless the Crown should consent to the accumulated profits being paid over to a non-profit flying club after the termination of the contract, the profits were to be paid to the Crown. Since the profits therefore were in effect held in trust for the Crown, they were not income to the taxpayer.

Wilson v. Minister of National Revenue, 55 DTC 1065, [1955] CTC 87, [1955] S.C.R. 352

annuity charged on lands was excluded from receipts

Lands were devised by the testator to the taxpayer on the condition that the taxpayer would pay a monthly annuity to his mother. The lands were charged with the annuity, to secure which the title remained in the names of the trustees during the life of the widow. The annuity was held to be in substance an equitable rent charge which was payable out of the lands as her property and did not form part of his income. An amount equal to the annuity accordingly was excluded from the business income generated by the lands.

Canadian Fruit Distributors Ltd. v. MNR, 54 DTC 1145, [1954] CTC 284 (Ex. Ct.)

income reduced to nil by obligation to pay

The taxpayer, which was the subsidiary of a non-profit fruit growers' non-share corporation, agreed with its parent that the parent would pay schedular "estimated charges" from time to time to the taxpayer for the taxpayer's services in connection with marketing the fruit products of the parent, and that the taxpayer would repay to the parent an amount equal to the difference between its receipts for the fiscal year (which included revenues for marketing services which it provided to third parties) and its operating expenses. Thorson P. characterized the payments of the "estimated charges" as the making of advances by the parent to the taxpayer, rather than as the receipt by the taxpayer of income, and found that what otherwise would have been income of the taxpayer for the year was reduced to nil as a result of the taxpayer's agreement to pay that amount each year to its parent.

Dominion Taxicab Association v. Minister of National Revenue, 54 DTC 1020, [1954] CTC 34, [1954] S.C.R. 82

The appellant, a taxicab association, entered into contracts with its members when they joined the association under which the member would pay to it the sum of $500, which sum the association was contingently liable to return until such time as the member left the association and the parties failed to agree on a satisfactory successor to the retiring member. To date, no such sum had been so forfeited.

Cartwright J found that as the sums deposited with the association did not become its absolute property, they were not profit from its business.

Bouck v. Minister of National Revenue, 52 DTC 1090, [1952] CTC 90, [1952] 2 S.C.R. 17

The will of the taxpayer's late husband directed that the executors pay to the credit of an income account the annual net revenues from a trust fund, and directed that such money should be under the sole control of the taxpayer to be used by her for the maintenance of her and her children and otherwise for the benefit of her and her children as she in her sole discretion might from time to time determine. In finding that the estimated portion of the income received by the taxpayer which was used for the maintenance of her children was not her income, Kellock J. stated (p. 1096):

... the wife, being obligated to apply the income needed for the benefit not only of herself but also for the children, although her discretion is absolute ... has an interest limited to that which she appropriates for herself, and the children become entitled to the remainder in the proportions she from time to time determines.

B & B Royalties, Ltd. v. MNR, [1940-1941] CTC 65 (Ex Ct)

The taxpayer was found to have alienated its interest in a portion of the production of oil and gas from leased lands, or the proceeds of such production, to a trustee for various unit holders. Accordingly, the proceeds derived from the sale of the production in question did not belong to it (the "moment the oil was pumped to the surface the legal interest therein passed to the Trustee and, accordingly, the net proceeds of production paid to the unit holders were not a net profit or gain to the taxpayer.

See Also

Victoria Power Networks Pty Ltd v Commissioner of Taxation, [2019] FCA 77

a calculated reduction in the amount of a rebate required to be paid by a taxpayer was not income to it

The subsidiaries of the taxpayer, who distributed electricity (the “Distributors”) were required to connect customers even if the present value of the incremental cost exceeded the present value of the incremental revenue. However, in those circumstances, the customer was required to make a “Customer Cash Contribution” to the Distributor, based on the shortfall.

In finding that the Customer Cash Contributions were ordinary income to the Distributors, Moshinsky J stated (at para. 165):

As the Distributors’ businesses included connecting new customers to the electricity network, and as the Customer Cash Contributions were gains (in the sense that they were amounts derived) in respect of new connections, it follows that they constituted ordinary income … . The Customer Cash Contributions were derived by the Distributors under transactions that occurred as an ordinary incident of their electricity distribution businesses.

In the above “uneconomic” scenario, the customer could choose to perform the work, in which case, on transferring the constructed assets to the Distributor, the Distributor would pay a rebate that did not represent the full cost of the work, so that again, the customer effectively bore the excess of the present value of the incremental cost over the present value of the incremental revenue (the “Customer Contribution”). In finding that the Customer Contributions were not ordinary income to the Distributors (and before going on to find that they were income under a special deeming provision), Moshinsky J stated (at para. 179):

[T]he Distributor offered to pay the customer an amount (the Rebate) calculated as the estimated cost of construction less the Customer Contribution. The customer accepted that offer. In these circumstances, in my view, the Customer Contribution was not a payment or gain received by the Distributor; it was merely a component used in the calculation of the amount to be paid by the Distributor to the customer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments additonal customer connection charges to cover loss were income receipts 205

Howard v. Commissioner of Taxation, [2014] HCA 21

agreement assigned rights to proceeds of law suit rather than entitlement under law suit

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants. Around the time of launching the action, he and the two other directors entered into a "litigation agreement" with Disctronics which provided (para. 101):

In consideration of [Disctronics'] promises [to pay all costs and disbursements] the directors…assign absolutely unto… [Disctronics], any award of damages (whether on revenue or capital account)… made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings… .

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. After finding that the taxpayer had not become entitled to his share of the award as constructive trustee for Disctronics, Hayne and Crennan JJ. then turned to the effect of the litigation agreement, stating that "the better construction of the litigation agreement is that it provided for the assignment of any proceeds of the action, not for the assignment of the appellant's rights under any judgment obtained in the proceedings" (para. 104). As thus "the litigation agreement provided for the assignment of future income, dissociated from the proprietary interest which produced the income, the proceeds of the action, when received….were income in the hands of the appellant [Booth [1987] HCA 61; (1987) 164 CLR 159 at 167 per Mason CJ.]" (para. 102).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) damages not received as constructive trustee as not received qua director 191
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) agreement assigned rights to proceeds of law suit rather than entitlement under law suit 344
Tax Topics - Income Tax Act - Section 9 - Compensation Payments damages not corporate income as not received qua director 191

Gainor v. The Queen, 2011 DTC 1317 [at 1798], 2011 TCC 442

The taxpayer had been a director of corporation ("Canam") which had been struck from the corporate registry. Unaware of Canam's dissolution, CIBC maintained a corporate account for Canam, over which the taxpayer had sole signing authority. The taxpayer deposited a fraudulently altered cheque into the account in the amount of $350,000, and $118,000 of the money disbursed was not later recovered by CIBC. It was unclear whether the fraud had been perpetrated by the taxpayer or by an associate, Mr. Craine, who died before a proper investigation could be conducted. In finding that the $102,000 of funds that the taxpayer disbursed for the benefit of Mr. Craine was not income of the taxpayer, Hogan J. stated (at para. 48):

The cases of Nigro [(2007 DTC 224, 2006 TCC 589] and Obodoechina [2003 DTC 574, 2003 TCC 190)] establish that where the amounts of payments are substantiated as being attributable to another person and as having been made for that person's purposes, those amounts are not to be taxable in the hands of the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 174

On-Line Finance & Leasing Corporation v. Canada, 2010 DTC 1325 [at 4243], 2010 TCC 475

The taxpayer's business was to facilitate B.C. municipalities in obtaining vehicles and equipment. The taxpayer would borrow funds from the B.C. Municipal Finance Authority (the "MFA"), purchase the equipment from the supplier, and lease the equipment to the municipality. It would then assign the lease payments, lease, and equipment to the MFA.

Campbell J. interpreted such assignment as an absolute assignment rather than one by way of security only. In effect, the taxpayer was only acting as a "conduit" through which municipalities could borrow from the MFA to acquire equipment. Accordingly, such assignment repaid an interim loan from the MFA, and the lease payments subsequently received under the lease were not income to the taxpayer.

Wabush Iron Company Limited v. The Queen, 2009 DTC 814, 2009 TCC 239

The taxpayer, which was a member of a joint venture which produced iron pellets, had agreed with its shareholders to sell them its share of the pellets produced by the joint venture for a sales price equal to the greater of the fair market value of the pellets and the cost of producing those pellets. In the years in question, in which the costs of production exceeded the fair market value of the pellets produced, it treated only the fair market value of the pellets as sales revenue for purposes of computing its income for purposes of the Act, and treated the balance as a contribution of capital, notwithstanding that its financial statements had treated the full amount received from its shareholders as sales revenue.

In finding that the full amounts received by the taxpayer were income to it, Paris, J. noted that although one of the motivating factors behind the sales agreement was to provide financing for the taxpayer's joint venture operations in order to protect the bondholders, the means chosen by the parties to achieve this purpose was a guaranteed purchase price (so that the legal character of the amounts received was sales price) and that the fact that the shareholders agreed to defray the taxpayer's costs of production even if production was interrupted was not inconsistent with their interests under the agreement being as purchasers. Furthermore, even if the amounts in excess of fair market value were intended as a reimbursement to the taxpayer for any shortfall between its revenue and its share of the net operating expenses of the joint venture, these amounts were received by it as part of its ordinary business operations so that they were received on income account even if they were not sales revenue.

Morisset c. La Reine, 2008 DTC 3864, 2006 TCC 483

Chiropractic income earned by a corporation of which the taxpayer was the sole shareholder was income of the taxpayer in light of the prohibition under Quebec law against the sharing by a chiropractor of his fees with a person who is not a member of the Order of Chiropractors.

Dello v. The Queen, 2003 DTC 788, 2003 TCC 392

A corporation of which the taxpayer was the sole shareholder and director was dissolved for failure to file annual returns in 1984, an application for a revival of the corporation was prepared in 1990 but no certificate of revival was issued until February 1998 given deficiencies in the application. The Minister reassessed the taxpayer for 1991 to 1994 in respect of income that the taxpayer took the position should be treated as income of the corporation.

After noting that at the time the certificate of revival was obtained pursuant to section 209 of the CBCA, subsection 209(4) of the CBCA had not been amended to provide that a revival had retroactive effect, Dussault T.C.J. stated (at p. 793):

From 1991 to 1994, the Corporation was quite simply non-existent. It therefore did not have the capacity to act and, thus, to operate or own a business. The income earned accordingly belongs to the person who generated that income through his activity, that is to say to the person who operated the business, even if that person claims to have done so for and on behalf of the Corporation, which was dissolved at the time ... .

Whittles v. Uniholdings Ltd. (No. 3), [1995] BTC 119 (Ch. D.)

In order to lower the effective interest rate payable by it on a loan of £14,056,000, the taxpayer and its bank agreed that at the time the bank paid £14,056,000, to the account of the taxpayer, the bank would debit a U.S.-dollar loan facility with the equivalent sum in U.S. dollars and that the bank would purchase for the taxpayer's account for forward delivery enough U.S. dollars to enable the taxpayer to repay the outstanding principal on the U.S.-dollar loan facility on its maturity date.

Although the U.S. dollars delivered under the contract appreciated significantly, Sir John Vinelott found (at p. 137) that:

... the agreement between the company and the bank was a single composite agreement under which the company could not deal with the forward contract without the consent of the bank and under which the bank was to be at liberty to use the dollars purchased in discharge of the dollar loan, to the extent that that had not been repaid before 15 March 1983. If that is right, it must follow that the company did not make any profit on the forward purchase of dollars and made no sterling loss on the repayment of the dollar loan, ...

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 210

Conforbel Canada Ltée, 94 DTC 1190 (TCC)

contractual refunds were income notwithstanding technical obligation to on-pay

The taxpayer, which had a cost-plus contract for the performance of construction work, discovered that it had made excess contributions to a government agency in respect of the wages paid by it under the contract, and applied for a refund of the overpayments without informing the contractor. The refunds received by it constituted income to it notwithstanding its legal obligation to refund the same amounts to the contractor because it appeared that in all probability it would not have to do because of its successful concealment to date of the refund from the contractor.

Hadlee v. C.I.R., [1993] 2 WLR 696 (PC)

The taxpayer, who was a partner in a New Zealand professional accounting firm, assigned 40% of his units to the trustee of a trust for the benefit of his wife and child. The partnership agreement required each partner to "diligently attend to the business ... and devote his whole time and attention thereto." Lord Jauncey of Tullichettle applied the dictum of Henry J. in Spratt v. CIR, [1964] N.Z.L.R. 272, 277 that:

No taxpayer can, by way of assignment, escape assessment of tax on income arising from his personal activities - such income always remains truly his income and is derived by him irrespective of the method he may adopt to dispose of it.

He found that because, at law, such an assignment only transferred property consisting of a right to share in profits and the right on dissolution to share in assets on the deferred terms set out in the Partnership Act, therefore, "the income which accrued to the assignee flowed not from a capital asset which was capable of assignment but from the performance by the taxpayer of such obligations as he was required to perform under the partnership contract."

Honeybunch Bakeries (Saskatoon 1975) Ltd. v. MNR, 90 DTC 1549, [1990] 2 CTC 2148 (TCC)

The taxpayer was not required to accrue interest income on an interest-bearing obligation after it had become quite clear that no interest was going to be paid and, in fact, the repayment of the principal of the note was in serious jeopardy.

Canpar Holdings Ltd. v. Saskatchewan (Minister of Energy and Mines) (1987), 60 Sask R 128 (C.A.)

amounts received were revenue notwithstanding on-payment obligation

The taxpayer, which was the co-owner along with Dome Petroleum of the operating rights to certain mineral properties, agreed to pay a percentage of the net proceeds of production from the taxpayer's working interest to Dome Petroleum in consideration for Dome Petroleum's services as operator. In addition, the taxpayer conveyed a net profits interest in Canadian resource properties to a subsidiary of Dome Petroleum in return for fixed payments.

Before going on to find that both categories of payments made by the taxpayer were deductible on other grounds, Gerwing J.A. first rejected a submission that those amounts were not "amounts received or receivable by him in the taxation year as, on account of or in lieu of payment of, or in satisfaction of, any revenue derived from the production of freehold oil from all oil wells" for purposes of s. 4 of the Oil Well Income Tax Act (Saskatchewan). She stated (p. 137):

It cannot be said in this case that the appellant never had any rights to these proceeds. It had the operating rights from which the right to funds arose, and having these rights, chose to alienate them to third parties, giving these third parties a contractual right to claim the funds from them.

Ages v. MNR, 71 DTC 86 (TAB)

A partnership agreed to lease real estate under a lease that ran for 25 years, that provided for a yearly rental of $27,396 payable in monthly instalments, and that provided that during a period of approximately five years beginning shortly after the commencement of the lease, the lessee was entitled to acquire the property for a price equal to $710,000 minus 30% of all payments previously made under the lease. Mr. Fordham found that the exercise of this option over two years after the commencement of the lease could not result in 30% of the rent payments received up to that date being excluded from the taxpayer's income and stated (at p. 87):

"I know of no authority for the proposition that money received as rent initially can later be treated ... as having been paid on capital account by reason of a subsequent happening."

Morley v. Messrs. Tattersall (1938), 22 TC 51 (CA)

At the end of its relevant fiscal periods a firm of bloodstock auctioneers had on hand unclaimed balances from the auction sale of horses which, under the terms of the sale, were not required to be remitted by it to the owners until written demand was made therefor. The Crown unsuccessfully submitted that these sums became a trading receipt to the firm when, at subsequent dates, the liability which had been set up for the obligation of the firm to pay those amounts was reclassified as part of the capital accounts of the partners and the partners agreed to bear any payments which the firm actually was required to make in respect of the unclaimed balances in proportion to their share of partnership income. Greene M.R. held (at p. 65) that the facts the monies had not been received as trade receipts and that the partners continued to be liable to account for the monies to the clients, had not been altered, with the result that the unclaimed balances had not been transformed into trade receipts.

Administrative Policy

S4-F14-C1 - Artists and Writers

Canada Council grants and Public Lending Rights payments included in artist’s income

1.27 When a taxpayer receives financial assistance in the course of operating a business, the amount is included in the calculation of their business income. An example of such assistance is Canada Council for the Arts grants to self-employed artists. In addition, payments made for the purchase of works of art from a self-employed artist such as under an art bank program are considered to be ordinary business income to the artist … .

1.29 The Canada Council for the Arts distributes annual Public Lending Rights (PLR) payments to Canadian authors through the PLR program as a form of discretionary cultural support to eligible individual creators of literary and scholarly works that are found in the public library collections. The CRA considers PLR payments to be taxable as business income.

Royalties are generally property income to other than generator

1.30 Royalties are considered payments received as compensation for using or allowing the use of a copyright, patent, trademark, formula, or secret process. They can also include payments in regard to cinematic films, film works, or television tapes.

1.31 Although royalty income is generally considered to be income from property, such income will be considered to be income from a business where the income is related to business activities carried on by the recipient taxpayer in the year, or the recipient taxpayer is, in the year, in the business of originating property from which the royalties are received. For example, if a taxpayer is in the business of composing music, the royalty income earned from their copyrighted music would generally be considered business income.

5 October 2018 APFF Roundtable Q. 16, 2018-0768871C6 F - Dépenses de bureau à domicile et d’automobile

payment of taxpayer’s expenses by another might give rise to s. 9 or 80 inclusion
In 2019-0799241E5 F, CRA corrected Section 3.2 (3rd paragraph) by indicating that property taxes and home insurance costs of a home office generally are NOT deductible under ss. 8(13) and 8(1)(i).

Respecting the situation where an independent contractor incurred home office or automobile expense and another person (who might be a spouse) paid such expenses, CRA stated:

Where business expenses have been paid by someone other than the taxpayer carrying on the business, the amounts so paid could, depending on the circumstances, be included in the income of the taxpayer's business or give rise to the application of section 80.

The question of whether those amounts should be included in the income from the taxpayer's business is one of facts that can only be resolved after an analysis of all relevant facts specific to each situation.

The jurisprudence (Ikea Limited v. The Queen, [1998] 1 S.C.R. 196 and Canderel Ltd. v. The Queen, [1998] 1 S.C.R. 147) has established principles for determining whether an amount qualifies as income for the purposes of the Income Tax Act for a taxation year. The principles developed by the jurisprudence will help a taxpayer to determine whether the amounts paid by another person must be included in the taxpayer’s income under section 9.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(g) example of proration of capped s. 13(7)(g) capital cost 157
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A capital cost of co-ownership interest 74
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property depreciable property must be owned 78
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense payment of expenses of taxpayer by another does not preclude “incurring” by taxpayer 175

28 October 2016 External T.I. 2016-0654331E5 F - Transfer of rights to income

where rental lands purchased subject to obligation to pay the rents to vendor, rents did not have quality of income to purchaser under s. 9

Upon a sale by A of leased land to a non-arm’s length corporation (Corporation A) in which A did not hold any shares, A and Corporation A agreed to a redistribution of income in which Corporation A undertook to pay to A all the related rental income. How might ss. 9(1), 15(1), 56(2), 56(4) and 18(1)(a) apply – and would this change if there were instead an agreement for royalties on a land sale? Before turning to the application of s. 56(2) (or, in some circumstances, s. 56(2)) to A, CRA stated:

[T]he rent collections by Corporation A…would probably not have the "quality of income” to Corporation A since it would not be Corporation A which had an absolute and unconditional right to these amounts, as it was obligated to pay them over to A … [and] would not be included in Corporation A's income under subsection 9(1). Similarly, the payment of the amount to A would not be an expense incurred to earn income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense where rental lands purchased subject to obligation to pay the rents to vendor, no income inclusion and deduction of the rents by the purchaser under ss. 9 and 18(1)(a) 89
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) where rental lands purchased subject to obligation to pay the rents to NAL vendor, s. 56(4) trumps s. 9 to include rents in purchaser’s income 169
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) s. 56(2) could apply to shareholder of purchaser of lands if vendor did not pay FMV consideration for retaining rights to rents 168

30 March 2016 Internal T.I. 2014-0547931I7 F - Voyages offerts par une compagnie

full value of incentive trips, including business portion, included in income of recipient personal corporations

2012-0472211I7 concerned a Canadian company (the “Taxpayer”) that provided free annual trips to southern resorts to high-performing brokers and sales agents of its products or services, who could be performing the services as individual proprietorships, or through personal corporations. The trips included morning briefings on the Taxpayer’s products.and services. CRA clarified that:

In determining the taxpayer's profit for a taxation year for the purposes of section 9, the Canada Revenue Agency generally expects, in a situation similar to that described, that the taxpayer will include the value of the business part and the personal part of the trip.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 200 - Subsection 200(1) company providing free trips to incorporated sales reps is required to T4A the individuals if they received the trip qua employee (but not shareholder) of their corporation 174

S2-F1-C1 - Health and Welfare Trusts

contractual penalties

1.45 ...[P]enalties charged by a health and welfare trust for the late remittance of employer contributions would be considered incidental income. Employer and employee contributions (including any provincial sales tax collected by the trust), and insurance policy proceeds received by a health and welfare trust from the plans described in ¶1.2 are not included in computing its gross trust income.

15 September 2014 Internal T.I. 2014-0545001I7 - Grants paid to employers of reservists

compensation for reservist costs

Amounts that are received from the Compensation for Employers of Reservists Program by employers of reservists and by self-employed individuals who are the reservist would be included in income pursuant to s. 9 (or, failing that, under s. 12(1)(x).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) compensation for reservist costs 40

18 December 2013 Internal T.I. 2012-0472211I7 F - Voyages offerts par une compagnie

Caribbean sales incentive trip provided to incorporated sales reps was s. 9 income to their corp to extent of personal portion

The corporate "Taxpayer" annually offers an annual free trip to a southern location (perhaps a Caribbean resort) to its associated brokers and agents ("Sellers") who have attained specified sales objectives. The qualifying Sellers ("Travelers") must attend some morning briefings on the Taxpayer's products, with the same sessions being offered in Canada to the balance of the Sellers. Group dinners also are organized. Spouses are invited but do not attend the briefings (unless they also are Sellers). The balance of the time at the resort is free time or spent on organized recreational activities. Most of the Seller services are provided through a personal corporation, with the balance being proprietorships.

Respecting the taxability to the sales corporations of the value of the trips if the purpose of the trips was mostly personal, CRA stated (TaxInterpretations translation) that "the value of the trip must be included in the computation of the income of the corporation by virtue of section 9." The expenses of a spouse's trip also would be included.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) Caribbean sales incentive trip provided to incorporated sales reps represents a benefit to them from their corporation 392
Tax Topics - Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(d) Caribbean sales incentive trip provided to incorporated sales reps excluded if s. 6(1)(a) benefit to them qua employee 178
Tax Topics - Income Tax Act - Section 67.1 - Subsection 67.1(4) - Paragraph 67.1(4)(b) Caribbean sales incentive trip is "entertainment" 175

11 October 2013 Roundtable, 2013-0495701C6 F - Financement participatif

crowdfunding amounts received by an entrepreneur are prima facie business income

For each $25 crowdfunding "donation", an entrepreneur offers a "reward" of $10 cash value to the "donor" (for example, a copy of an album produced at a cost of $6 each). Is the $25 taxable? CRA responded:

[T]he CRA is prima facie of the view that $25 could be business income. However, the CRA cannot make a final determination without a complete review of all the facts of this arrangement.

18 May 2011 Internal T.I. 2010-0380391I7 F - Convention entre des co-propriétaires

agreement of co-owners to share revenues disproportionately would be recognized if such agreement is binding

Two co-owners of a triplex (the “Taxpayers”) agree that the first Taxpayer can live in one of the units free of rent and that the other Taxpayer, whose daughter resides in a second unit, would be exclusively allocated for inclusion in that Taxpayer’s return all the revenues generated by that unit. Would this agreement be respected for tax purposes?

The Directorate responded:

[T]o the extent that the Agreement is valid under the Civil Code of Québec, the Canada Revenue Agency should examine the specific provisions of the Agreement to determine the tax consequences applicable to Taxpayers arising from the application of the Agreement. As part of that analysis, we have assumed that none of the Taxpayers would receive any benefit because of the Agreement.

17 October 2011 External T.I. 2011-0423361E5 F - Loi sur le courtage immobilier

Quebec real estate broker can generate commissions in a controlled corporation

After noting that the Quebec Real Estate Brokerage Act (the “REBA”) required a real estate or mortgage broker carrying on brokerage activities through a controlled corporation to treat the remuneration therefor as belonging to the corporation, CRA stated:

[I]f the activities of a real estate or mortgage broker under the REBA … can be lawfully exercised through a corporation - which appears to be the case here - remuneration for the activities of the broker will be taxable in the hands of that corporation.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality Quebec real estate brokers can earn their remuneration through a corporation 155

14 March 2011 External T.I. 2010-0382091E5 F - Revenu d'entreprise exploitée activement

provision of fully-furnished units together with cleaning services generated property rather than business income

A corporation (the "Taxpayer") provides fully furnished housing units (bedding, dishes, television and cable) to victims of disasters such as from fire or flood for short-term rental, and also provides complete cleaning services. In addressing whether the Taxpayer derives its income from property or a business, CRA stated (without referring to the specified investment business definition):

[I]ncome generated by the Taxpayer's activities appears to be more like income from property. Indeed, the services offered by the Taxpayer do not seem as exhaustive as those provided by a taxpayer operating a motel or a hotel, the latter activities representing activities that give rise to income from a business.

29 October 2010 External T.I. 2009-0347791E5 F - Somme reçue par une société

application of judicial definitions of “royalty”

A corporation ("Holdco") holding some of the voting shares of a corporation ("Opco") may receive amounts (contingent payments) from a non-resident corporation or its subsidiary, in the event that certain events (liquidity events) occur in relation to the non-resident corporation or its subsidiary, with the payments to Holdco representing a percentage of the cash derived from the shares of the non-resident corporation's subsidiary (in the form of dividends or the sale of such shares). Are the amounts royalties, income from property, business or capital gain? After referring to various judicial definitions of “royalty, CRA stated:

[T]he amounts described in the contract as "contingent payments" that may be paid to Holdco do not, in our view, appear to represent royalties to Holdco.

It went on to indicate that there was insufficient information to determine whether the amounts were income from property or a business or a capital gain.

Words and Phrases

8 February 2010 External T.I. 2009-0337691E5 F - Assurance frais-généraux

excess of overhead disability insurance received over overhead expense actually incurred was s. 9 income

The correspondent, who had purchased a disability insurance policy providing for the payment of the monthly overhead expenses incurred in the operation of the correspondent’s business. CRA indicated that the excess of the amounts received under the policy over the expenses actually incurred were business income, and that the premiums incurred were deductible in computing such income.

28 September 2010 External T.I. 2010-0357141E5 F - Prix de présence et tirages

business income from draw won by brokerage

An insurance company, which pays commissions to a network of independent brokerage offices, as part of a promotion, organized draws pursuant to which it paid brokerage office owners and their employees prizes ranging from $500 to $2,500 in cash or in the form of a travel certificate. CRA stated:

[T]hese prizes will be required to be included in the income of the owners and employees receiving them pursuant to subsection 9(1) and paragraph 6(1)(a), respectively.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) promotional prize as income to employee of third party 155

12 June 2009 Internal T.I. 2008-0294921I7 F - Montant reçu à l'égard d'un surplus actuariel

lump sum paid to asset vendor for actuarial surplus in transferred pension plan was s. 9 income under Ikea expense-adjustment principle

On the sale by the Vendor of one of its business divisions, the employees of that division were transferred to the purchaser, and the assets of the defined benefit pension plan regarding those employees (the “Plan”) were transferred to the Purchaser and the Purchaser assumed the related pension commitments, in two transfers. There was an actuarial surplus respecting the Plan, which could allow the purchaser to enjoy a contribution holiday. On each transfer, the Purchaser paid an amount to the Vendor in respect of the actuarial surplus.

In finding that these amounts were taxable to the Vendor under s. 9, CRA noted that, from the Vendor’s perspective, such amounts essentially represented an adjustment to the amounts it had claimed as deductible contributions to the Plan (i.e., recognizing “that the employer has over the years paid an amount of employer contributions that exceeds the actual need of the plan and that an adjustment is necessary,”) and, before quoting Ikea in support of this statement, stated:

Since the employer's contributions to the plan give rise to deductions in computing the employer's business income, we are of the view that the amounts the employer receives in respect of such surplus assets must also be reflected in computing its business income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Superannuation or Pension Benefit transfer of a pension plan assets and liabilities to the asset purchaser with regulatory approval entailed a plan “modification” rendering actuarial surplus compensation taxable 292

21 November 2008 External T.I. 2008-0279231E5 F - Revenu de commission

CRA exempting of non-substantial commissions received by brokers for sales to themselves of life insurance or critical illness policies does not extend to other financial products

Were commissions, received by self-employed workers (financial security advisors) for sales of financial products made to themselves, taxable? Included in the inquiry were "joint" products, such as RESPs, RRSPs, jointly-held mutual funds and joint lines of credit.

CRA responded that, generally, the commission from the sale of a life insurance policy of which that individual is the owner is not includible in the advisor's business income provided that the advisor is required to pay the premiums related to the policy (and similarly for a critical illness insurance policy) unless the amount of the commission is “substantial” – but that “commissions received by such a self-employed worker as a result of the sale of mutual funds or mortgage loans for which the individual is the owner must be included in his or her income from a business” – and similarly for the "joint" products described above.

6 April 2003 External T.I. 2003-0054461E5 F - Traitement fiscal d'un cadeau

“gift” may be business income to the recipient

In indicating that an amount described as a “gift” could be business income to the recipient, CRA stated:

…IT-334R2[, para. 4] … states that voluntary payments received by virtue of a profession or by virtue of carrying on a business are taxable receipts. Paragraph 11 … states that if the hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit. In such case, the net income may be taxable as business income. … [P]articipation in a specific arrangement that allows for the receipt of money may be an indicator that the money is business income and therefore taxable.

Words and Phrases

26 August 2005 Internal T.I. 2005-0121871I7 F - Assurance-vie commissions reçues par une société

exemption for life insurance commissions on broker’s own life inapplicable where commission is assigned to his corporation carrying on the business

A corporation is engaged in an insurance business. The broker's licence is in the name of the shareholder. The broker takes out a life insurance policy of which he is the beneficiary and holder of the policy. CRA indicated that assuming the assignment of the commission to the corporation was valid, the commission was required to be included in its income (notwithstanding, per 2001-0070655, the commission would have been exempt if received by him).

6 September 1994 Internal T.I. 9410837 - LIFE INSURANCE COMMISSIONS

A commission received by a salesperson of a life insurance policy on a policy that is owned by her and on which she is obligated to pay the required premiums, will not be taxable to her.

18 March 1992 T.I. (Tax Window, No. 18, p. 15, ¶1815)

The difference between the amount of GST collected on taxable sales and the amount of GST required to be remitted under the quick method of accounting is income subject to tax.

27 August 1991 Memorandum (Tax Window, No. 8, p. 22, ¶1414)

Where a tenant makes an interest-free loan to a landlord in order to pay less than fair market value rent, a benefit equal to the amount of the rent reduction is taxable to the tenant to the extent that the rented premises are for the tenant's personal use.

6 May 1991 T.I. (Tax Window, No. 3, p. 27, ¶1240)

Canadian beneficiaries of a U.K. trust who apply for a refund of 45% U.K. tax to which the trust income was subject, will be treated as earning income when they receive such refund.


John Tobin, "Infrastructure and P3 Projects", 2017 Conference Report (Canadian Tax Foundation), 10:1-31

Distinction between cost-reduction of interim progress payments received and income-account treatment of phase-completion payments (p. 10:9-10)

One challenge is determining how to treat progress payments during the construction phase. Proponents will often make progress payments to reduce the cost of construction, intending to decrease the amount of long-term financing needed for the project. The CRA has ruled that the interim payments reduce construction costs (and the value of the concession) pursuant to subsection 13(7.1). [fn 21: … 2003-0051741R3 [and] …2004-0105611R3…] This policy was adopted when the customary amount of the “interim payments” was not substantial in the context of total project cost. However, in more recent transactions, proponents have prepaid substantially all of the construction-period expenses on substantial completion, leaving financing in place only for operating expenditures such as payroll and overhead. Projectcos continue to rely on the above-referenced rulings and treat the prepayments as reducing the capital cost of class 14 assets. … If a substantial portion of the revenue from the project is being received at the end of each construction phase, such amounts may be treated as construction revenue rather than as a government subsidy toward a capital asset. The CRA also stated that payments during the operation phase do not relate to an earlier period and therefore are not within subsection 13(7.1). Instead, such amounts are income as received …[fn 23 … IT-464R …quoted in … 2012-045508117].