Exempt Receipts/Business

Table of Contents

Exempt Receipts/Business
Cases(24)
See Also(23)
Administrative Policy(41)
Articles(2)

Cases

Morguard Corporation v. Canada, 2013 DTC 5009 [at 5554], 2012 FCA 306

taxable break fee of regular bidder

The taxpayer negotiated a support agreement with another public corporation ("Acanthus"), which agreed to pay the taxpayer a "break fee" of $4.7 million if it should cease to support the taxpayer's bid and support another bid. After Acanthus supported a higher bid from another bidder ("Cadim"), it paid the break fee. After the taxpayer entered into a further support agreement, Cadim raised its bid, which Acanthus then supported and paid a further break fee to the taxpayer of $3.0 million; and the taxpayer sold its 19% position in Acanthus at a gain.

The trial judge found that the taxpayer's ordinary business activities included the making of business acquisitions, and that the break fees were obtained in the course of those business activities, and therefore that the break fees were income from business.

The Court dismissed the taxpayer's appeal. The taxpayer had argued that the trial judge erred in law in finding that the taxpayer was "essentially in the business of doing acquisitions and take-overs," as Neonex establishes that the acquisition of capital properties cannot be a business in itself. Sharlow J.A. stated (at para. 13):

As I read Neonex, this Court accepted the finding of the trial judge that Neonex was not carrying on a business consisting of the acquisition of income producing assets. I do not understand the Court to be establishing a rule of law that the acquisition of income producing assets can never be a business in itself.

Canada v. Johnson, 2013 DTC 5004 [at 5515], 2012 FCA 253

taxable gains from contract with Ponzi operator

The taxpayer realized gains of $1.3 million from periodically placing funds with a rogue ("Lech") who, it was later discovered, had not invested the funds in options trading but instead used them in a ponzi scheme. The taxpayer made periodic payments to Mr. Lech, who would in return issue approximately nine weekly post-dated cheques for (in aggregate ) a larger amount, which he then honoured with the exception of the last such transaction.

In finding that the net gains of the taxpayer were income from a source, Sharlow J.A. stated (at para. 46):

[The taxpayer] is not being taxed because she profited innocently from a Ponzi scheme. She is being taxed because she entered into a series of agreements with Mr. Lech to receive a profit on her investments with him, and she received what she bargained for. The fact that Mr. Lech funded her payments with the proceeds of a Ponzi scheme is irrelevant.

Regarding the taxpayer's contention that Ponzi schemes cannot be a source of income because the are "by their very nature, doomed to collapse," Sharlow J.A. stated (at para. 43):

A Ponzi scheme may well be a source of income for some participants during some part of its existence. This case suggests how that could be so. Hypothetically, if Ms. Johnson had made her payments to Mr. Lech knowing that he would use the money to operate a Ponzi scheme, she would have profited exactly as she did in the years in issue in this case, 2002 and 2003.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) failure to seek confirmatory independent advice 204
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit contractual payments derived from Ponzi scheme were income 263

2529-1915 Québec Inc. v. Canada, 2009 DTC 5023 [at 5585], 2008 FCA 398

shares premiums received for marketing tax scheme were business income

Overview of facts. The two individual taxpayers devised a scheme to: generate artificial capital gains of $110 million in some home-grown companies; pay the supposedly resulting capital dividend accounts (CDAs) of $55 million to another company (1915); generate artificial capital losses in the home-grown companies to offset their capital gains; effectively sell negotiated portions of the CDA to 3rd-party purchasers by having them subscribe for preferred shares at a 21% premium to their redemption amount with the shares' redemption amounts effectively being flowed out to the 3rd parties as purported capital dividends; and then pocketing such subscription "premiums" as capital dividends paid out to them. A more detailed summary of the facts is under s. 83(2).

Share premiums were business income. In finding that the share premiums received by 1915 were business income to it, Noël JA found (at para. 64) that as the maximum value of the preferred shares was $1,000 "the premium was therefore paid for something other than the shares [and] this was obviously access to the CDAs," and stated (at para. 66):

[A]s additional amounts collected by the corporate appellants were generated in the course of successive operation the purpose of which was to produce surpluses, all the factors underlying the existence of a business are present."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham capital dividend elections for distributions of what should have been known to be income-account gains were shams 266
Tax Topics - General Concepts - Tax Avoidance capital dividend elections for distributions of what should have been known to be income-account gains were shams 266
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business shares premiums received for marketing tax scheme were business income 213
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2) capital dividend elections for distributions of what should have been known to be income-account gains were shams 718
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares shares acquired for immediate resale as part of capital dividend account generation scheme were on income account 177

Manrell v. Canada, 2003 DTC 5225, 2003 FCA 128

non-taxable non-compete

Consideration received by the taxpayer for giving a non-compete covenant on the sale of shares of companies owned by him directly or through holding companies was found to be a non-taxable capital receipt.

Bellingham v. The Queen, 96 DC 6075 (FCA)

"Additional interests" received for the expropriation of land held on income account was a tax-free receipt because it was, in substance, similar to a punititive damage award.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 29

The Queen v. TCG International Inc., 96 DTC 6547 (FCTD)

In finding that the decision of the Court of Appeal in the Ikea case established that a tenant inducement payment received by the taxpayer was fully taxable, Gibson J. stated (at p. 6549):

"No distinction can be drawn from the fact that the premises here in question were head office premises, as opposed to wholesale and retail sales outlet premises. I am satisfied that head office activities and the premises at which those activities are carried on are equally as integral to the business operations of a limited company such as the Defendant as are wholesale and retail premises."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement tenant inducement 104

Harrowston Corp. v. The Queen, [1997] 1 CTC 101, 96 DTC 6544

The taxpayer's entitlement under s. 215(6) in respect of non-resident withholding tax that it had failed to deduct from interest payments made to a non-resident holder of its debt, and which was unrecoverable from the non-resident and a non-resident assignee, did not qualify as a deductible bad debt because, if the amount had been recovered, it would not have had the character of income.

Winemaker v. The Queen, 96 DTC 6040 (FCA)

In affirming the finding of the Toronto judge that a "gift" received by a practising solicitor in order induce him to act in connection with a Florida real estate project was income, Marceau J.A. stated (at p. 6041):

"... While it may be that a person would confer some money to another with whom he has business dealings as a tribute or testimonial, and not as a payment for his services, whether or not it is so in a particular instance is essentially a question of fact ..."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement gift rceeived in course of business 92

The Queen v. Remington, 94 DTC 6549, [1995] 1 CTC 9 (FCA)

The taxpayer, who through various companies was engaged in real estate - related activities, requested a $900,000 inducement in offering to lease vacant space in a building. This sum was to be made available to him after the taxpayer had sublet the space. In a side deal, the taxpayer was provided with an additional $100,000 in view of an increase in the quoted annual rent and the offer to lease has finally concluded.

In finding that the $900,000 was a taxable receipt, Mahoney J.A. noted that the taxpayer had signalled his intention of engaging in the business of subletting the premises and, had this arrangement been carried out, his business profit would have been entirely dependent upon the receipt of the inducement.

The $100,000 clearly was a taxable receipt, although the taxpayer was permitted to deduct an off-setting reserve under s. 20(1)(l)(i).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 147

R. v. Fogazzi, 93 DTC 5183, [1993] 2 CTC 319 (Ont CA)

Funds received for investment by the accused from his Italian relatives were found to have been misappropriated by him in connection with a business given that the the funds were received by him in the normal course of the operation of his investment business and his dishonest act took place in connection with the operation of that business. Accordingly, the misappropriated amounts consitituted income from a business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 69

Johnson & Johnson Inc. v. The Queen, 92 DTC 6373, [1992] 2 CTC 86 (FCTD)

A federal sales tax refund was taxable income given that the receipt was linked to the taxpayer's income-earning process (the price at which the taxpayer sold its products included the federal sales tax, although the taxpayer felt it had no responsibility to pass on the amount of the refund to its customers).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 54

Suzy Creamcheese (Canada) Ltd. v. The Queen, 92 DTC 6291, [1992] 1 CTC 242 (FCTD)

Leasehold inducements or allowances which a company in the retail women's clothing business received from landlords in connection with opening up 13 new stores were capital receipts. Collier J. stated that "I do not agree that the number of lease transactions entered into by the plaintiff taxpayer here, with ensuing payments, was a business activity converting the receipts into income" (p. 6293).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 62

The Queen v. Rumack, 92 DTC 6142, [1992] 1 CTC 57 (FCA)

A "cash for life" lottery of $1,000 per month won by the taxpayer which was funded through the purchase by the Ontario Association for the Mentally Retarded of an annuity on the taxpayer's life from an insurance company was income. The facts that the payments were "periodic, regular, certain, foreseeable, expected and enforceable", and were to endure for the taxpayer's lifetime, were indicative of their income character.

Inshore Investments Ltd. v. The Queen, 92 DTC 6162, [1992] 1 CTC 189 (FCTD)

A written agreement between the taxpayer (a venture capital corporation) and another corporation ("Taiga") provided for the sale by the taxpayer of shares and debentures of Taiga back to Taiga and for the payment to the taxpayer of $250,000 "on account of special management services which the [taxpayer] acknowledges had been performed by [Taiga]". The taxpayer was not permitted to resile from this characterization of the $250,000 as a taxable fee for services given that the agreement had been signed after negotiation with the benefit of legal counsel, and in light of evidence that the taxpayer in fact had provided significant management services to Taiga.

Kay v. Coffin, 91 DTC 5350, [1991] 2 CTC 154 (Ont HCJ.)

Description of a structured settlement on which Revenue Canada had favourably ruled.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 14

Woodward Stores Ltd. v. The Queen, 91 DTC 5090, [1991] 1 CTC 233 (FCTD)

The taxpayer, which was a well-known general merchandiser operating 24 department stores in Western Canada, negotiated and received "fixturing allowances" of $3,000,000 and $750,000 on leasing premises for two stores in Red Deer and Calgary. The actual amounts expended on fixtures exceeded the allowances. Joyal J. found, in light of the fact that the inducements were applied to capital improvements and in light of the accounting treatment of the payments (which was to credit them to the cost of the improvements) that they were tax-exempt receipts.

Balanko v. MNR, 88 DTC 6228, [1988] 1 CTC 317 (FCTD)

The gains of an inveterate gambler were not taxable. A statement of Judge Bonner was adopted that "there is a total absence of any evidence here which indicates the presence of any organized system for the minimization or management of risk." [C.R.: 248(1) - "Business"]

French Shoes Ltd. v. The Queen, 86 DTC 6359, [1986] 2 CTC 132 (FCTD)

The taxpayer, which operated 22 shoe stores in various leased premises, was found to negotiate leases as a very important part of its business. A sum of $50,000 which it received as its condition for entering into a lease was a taxable profit. "[I]ncentive payments, inducements, generally form part of the revenue of the taxpayer. The payment is received as a result of the business activity carried on by the taxpayer and would not have otherwise been received."

R. v. Christensen, 83 DTC 5359 (BCSC)

Proceeds from the operation of an illegal bookmaking business were income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 13

The Queen v. Cranswick, 82 DTC 6073, [1982] CTC 69 (FCA)

It was held that an amount of $3.35 per share, which the majority shareholder of a company voluntarily paid in cash to shareholders of that company (who chose not to accept an alternative offer of the majority shareholder to purchase their shares for $26 per share) in order to avoid a possible complaint by them about the sale of part of the company's assets at less than their sale price in a previous deal which had fallen through, was not the sort of payment that one would expect to earn from shares and was thus a non-taxable "windfall". [C.R: 9 - "Compensation Payments"]

The Queen v. Audet, 78 DTC 6554, [1978] CTC 788 (FCTD)

An amount of $8,000 earned by the individual taxpayer as a fee for guaranteeing a loan of $50,000 made to his friends constituted income from a business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 27

Alberta Gas Trunk Line Co. Ltd. v. Minister of National Revenue, [1972] S.C.R. 498, 71 DTC 5403, [1971] CTC 723

Gas transportation contracts under which the taxpayer was entitled to receive payments in U.S. dollars from shippers of natural gas were characterized as entitling the taxpayer to payment in U.S. dollars for the services provided by it, rather than containing separate promises by the shippers to (a) pay for the cost of transporting their gas and (b) indemnify the taxpayer against any exchange loss arising from its U.S.-dollar borrowings.

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 - Expense Reimbursement 134
Tax Topics - Income Tax Act - Section 9 - Nature of Income incentive trip to Bahamas 134

MNR v. Eldridge, 64 DTC 5338, [1965] 1 Ex. C.R. 758, [1964] CTC 545

profits of call girl operation were taxable

The taxpayer, the operator of an unlawful call girl business, was entitled to deduct the expenses incurred in earning the profits of that business where they were substantiated with documentary evidence. The permissible deductions included the expenses incurred in obtaining bail bonds for her employees, legal expenses paid to defend her employees from criminal charges, the cost of hiring individuals to provide physical protection for her employees, and rent paid for the premises used by her employees.

See Also

Hakki v. Secretary of State for Work and Pensions & Anor, [2014] BTC 22, [2014] EWCA Civ 530

careful and successful poker playing was not a trade or business

The question of whether the appellant was obligated to pay child support maintenance out of his poker winnings turned on whether, under the Social Security Contributions and Benefits Act 1992, he was "a person gainfully employed in Great Britain," with "employment" including any trade, business, profession or vocation, and "employed" having a corresponding meaning. After noting findings that the appellant appeared on television for a few weeks and won a prize, communicated his strategies for online poker online and, when gambling in person, carefully selected favourable tables and set a target sum to win after which he stopped, Longmore LJ stated (at para. 20):

Even in combination these findings do not to my mind amount to such organisation as to constitute a trade, profession or vocation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit careful and successful poker playing was not a trade or business 132

Versteegh Ltd & Ors v. Commissioners, [2013] UKFTT 642 (TC)

taxable share interest on loan held by affiliate

One company in a group of UK companies (the "Lender") made a loan to a subsidiary (the "Borrower"). The loan terms obligated the Borrower to issue preference shares, in an amount equivalent to a market rate of interest on the loan, to another subsidiary of the Lender (the "Share Recipient"). The Borrower deducted that amount as interest, and no group company recognized interest income on the loan.

The Shares were taxable to the Share Recipient under Sched. D, Case VI as income from a source. Berner J stated (at paras. 128, 130):

[T]he shares, when received by the Share Recipient, were derived from the loan agreement, and the obligation of the Borrower under that agreement. …I follows from this that…the source of the issue of the Shares was the loan agreement. The Share Recipient had an entitlement under that agreement because of the obligation of the Borrower under that agreement to issue the Shares to the Share Recipient.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) required transfer of value between subs not a benefit 202

Bégin v. The Queen, 2012 DTC 1111 [at 3061], 2012 TCC 18 (Informal Procedure)

commissions on personal/family policies

The taxpayer, an insurance salesman, purchased life insurance policies on himself and several family members, seeking to earn sales commissions in excess of the premiums he expected to pay on the policies before cancelling.

Hogan J. found that the commissions were business income in the taxpayer's hands. The taxpayer had clearly bought the policies (and thus earned the commissions) in order to realize a profit. Moreover, leaving aside his intentions in the transaction in question, the commissions arose in the course of the taxpayer's practice as an insurance agent.

Peek v. The Queen, 2007 DTC 602, 2007 TCC 152

cheque kiting operation

Sums which the taxpayer obtained fraudulently through a cheque kiting operation were income from a business given the frequency (several cheques daily) and magnitude of the transactions.

Leblanc v. The Queen, 2007 DTC 307, 2006 TCC 680

compulsive gamblers rather than professionals

The two taxpayers, who together won over $5.5 million during a four year period from playing sports lottery parlay games, were found to not be subject to tax under s. 9 on those winnings and to have realized the gains as exempt capital gains under s. 40(2)(f). Bowman C.J. found that the large number of bets placed by them was not itself indicative of anything other than a tendency to bet heavily and accepted expert testimony that given the rigid game structure, artificial winning caps and the minimal impact (if any) of sports-related knowledge, sports lottery parlay games offered overwhelming odds against players succeeding on a regular basis, so that they could not reasonably expect to earn a profit. The taxpayers were not professional gamblers who assessed the risks, minimized them and relied on inside information and knowledge and skill but, instead, would more accurately be described as compulsive gamblers.

Pellerin c. La Reine, 2006 DTC 3341, 2006 TCC 383 (Informal Procedure)

gift in personal recognition

Amounts received by the taxpayer from her son while he was suffering partial, permanent incapacity from a traffic accident did not represent income from employment or income from services rendered but, instead, represented amounts given by him to her in appreciation for what she had done for him.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) amounts received from accident-victim son in mother's care were not income to her 50
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 50

Rocovitis v. Dominion of Canada General Insurance Co. (2005), 63 OR (3d) 402 (CA)

odd jobs not a business

An exclusion in an insurance policy for loss resulting from engaging in a "trade, profession or occupation" did not apply to an individual doing odd jobs for a minimal payment. Not all activities generating profits will be automatically classified as "business" activities.

656203 Ontario Inc. v. The Queen, 2003 DTC 405, 2003 TCC 264

The taxpayer had failed to show that the allocation of the Minister of amounts received by it in settlement of two actions brought against its insurance company following the destruction of its sawmill by fire as between replacement of lost income (fully taxable business income), proceeds of disposition of building and compensation for loss of goodwill (eligible capital amounts) was unreasonable. In response to a submission of the taxpayer that a portion of the damages were non-taxable punitive damages, Lamarre T.C.J. stated (at p. 414):

"Bearing in mind that punitive damages are normally awarded by a court for malicious and oppressive misconduct, it would be surprising if the Insurers would have voluntarily agreed to pay damages to the appellant on that basis."

Ipsco Inc. v. The Queen, 2002 DTC 1421 (TCC)

A lump sum which the taxpayer received in settlement of an action it brought because a "quench and temper" pipe treatment system that had been installed at its pipe manufacturing plant did not perform to specifications, was an exempt receipt rather than proceeds of disposition of depreciable property. There was no disposition of depreciable property on general principles (as the taxpayer did not abandon or transfer its assets), nor was there "compensation for property injuriously affected" under paragraph (e) of the definition of "proceeds of disposition" given that this phrase referred only to consequential damage to other property where expropriation of a particular property had occurred.

C.I.R. (New Zealand) v. Wattie & Anor., [1998] BTC 438 (PC)

Before going on to find that a lump sum received by an accounting firm in consideration for entering into a lease of office premises was a capital receipt, Lord Nolan stated (at p. 446) that:

"The crucial question is whether in all the circumstances, the payment or receipt can properly be attributed to a particular year."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 61

Frank Beban Logging Ltd. v. R., 98 DTC 1393, [1998] 2 C.T.C. 2493 (TCC)

A gratuitous lump sum payment made by the B.C. government to the taxpayer to compensate the taxpayer for having banned logging in the area in which the taxpayer had been carrying on logging operations was an exempt receipt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 41

Fortino v. R., 97 DTC 55, [1997] 2 CTC 2184 (TCC), briefly aff'd on procedural grounds 2000 DTC 6060 (FCA)

Lump sums received by individual vendors of shares in consideration for their entering into non-competition agreements with the purchaser were characterized as being for their surrender of a potential source of profit and, therefore, represented capital receipts that were not taxable under s. 3.

Murray Barrett Ltd. v. MNR, 94 DTC 1886, [1994] 1 CTC 2880 (TCC)

A lump sum received by the taxpayer in settlement of a claim against a solicitor for professional negligence was an exempt capital receipt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 25

Campbell v. MNR, 92 DTC 1855, [1992] 2 CTC 2256 (TCC)

A self-employed individual who provided Christian teachings at three evening sessions per week received offerings given at these sessions and included them in his income. In addition, amounts of $500 which were paid to him every two weeks on a purely voluntary basis by a construction company owned equally by three first cousins, were required to be included in his income. Teskey J. stated (p. 1856) that he saw "no difference between the Appellant and the musician standing on a street corner playing a violin and receiving money from passersby".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 90

Buckman v. MNR, 91 DTC 1249, [1991] 2 CTC 2608 (TCC)

Funds misappropriated by a solicitor were income to him.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 11

Molony v. MNR, 90 DTC 1394, [1990] 1 CTC 2570 (TCC)

The taxpayer was not in the business of gambling. His trait placed him "on the road to certain financial ruin" and, accordingly, he had no reasonable expectation of profit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 31

IRC v. Aken, [1990] BTC 352 (C.A.)

Profits from prostitution were subject to charge under Schedule D. There was no evidence that such profits represented earnings from an illegal trade.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 25

Potvin v. MNR, 90 DTC 1644 (TCC)

The taxpayers, who managed two large apartment buildings and lived in one of the suites on a rent-free basis, realized an income benefit equal to 25% of the fair market rental value of the suite which they occupied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 39

Hall v. MNR, 90 DTC 1431 (TCC)

The taxpayer received a subsidy in order to render a piece of land suitable for the cultivation of blueberries and not with respect to the operation of the blueberry farm. The purpose of the subsidy legislation was to generate additional jobs and not to increase income. Accordingly, this subsidy was a capital receipt to the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 58

Mackenzie v. Arnold (1952), 33 TC 363 (C.A.)

Royalties received by the taxpayer after becoming a U.K. resident that were in respect of novels that the taxpayer wrote while he was a non-resident of the U.K. were subject to tax under Schedule D as "annual profits or gains arising or accruing ... from any trade, profession, employment, or location".

Commissioner of Income Tax (Queensland) v. The Bank of New South Wales (1913), 16 C.L.R. 504 (HC of A.)

A bank issued shares at a premium of £5 per share and for accounting purposes credited the amount of the cash premium received to its profit and loss account. The premium was "not an accretion to any other capital: it has not arisen from the use of any other capital; it is an original sum brought into the general stock of working capital", and was an exempt receipt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 69

Higgs v. Olivier (1952), 33 TC 136 (C.A.)

After the filming of Henry V was completed, the film company experienced initial difficulties in promoting the film and determined that it would have even greater difficulties if the taxpayer were to act in other films. Accordingly, the film company paid a lump sum of £15,000 to the taxpayer in consideration for his agreement to give up all film work for an 18-month period. Before finding that this sum was not taxable as "profit or gains arising or accruing" from the taxpayer's profession or vocation as an actor, Sir Evershed M.R. stated (at p. 145) that "according to the ordinary sense profits or gains in order to be taxable must arise or accrue from a profession in the sense that they arise from the exercise of the profession".

Minister of Finance v. Smith, [1927] A.C. 193 (PC)

A reference was made to the Judicial Committee as to whether it was lawful for Canada to impose tax under the Income War Tax Act on the profits of a liquor trading business carried on in contravention of the Ontario prohibition law. In responding affirmatively, Lord Haldane stated (at p. 197):

Construing the Dominion Act literally, the profits in question, although by the law of the particular Province they are illicit, come within the words employed....There is nothing in the Act which points to any intention to curtail the statutory definition of income, and it does not appear appropriate under the circumstances to impart any assumed moral or ethical standard as controlling in a case such as this the literal interpretation of the language employed. There being power in the Dominion Parliament to levy the tax if they thought fit, their Lordships are therefore of the opinion that it has levied income tax without reference to the question of Provincial wrongdoing.

Administrative Policy

2 March 2011 External T.I. 2010-0377321E5 F - Jeux de hasard sur Internet

on-line internet gambling winnings non-taxable if no business
2010-0379181E5 F is largely identical but has some added paragraphs

Respecting winnings of an individual from daily gambling at an internet casino, CRA stated, after discussion inter alia Leblanc:

[W]here a given activity does not constitute a source of income, neither the amounts received nor the expenses incurred in connection with that activity should be included in computing the taxpayer's income and any excess of expenses over revenues is personal expenses or living expenses that are not deductible under paragraph 18(1)(h).

The summary states:

Generally such activities will not be a source of income.

S3-F6-C1 - Interest Deductibility

1.96 Loan issuance premium. "Where the borrowed money constitutes stock-in-trade for taxpayers in the financing business (for example, moneylenders), the premium amount will be included in computing income under section 9. For other taxpayers it will generally be considered a non-taxable capital receipt."

7 May 2014 Ministerial Correspondence 2014-0525991M4 - Tax Treatment of Monetary Inheritances

inheritances

Most gifts and inheritances are exempt.

21 August 2014 Internal T.I. 2014-0542121I7 - Payments from the province of BC

parent compensation for teachers' strike

The proposed Temporary Parental Educational Support payments would be provided by the B.C. government to parents of children in kindergarten through grade seven in the public school system in the event that a labour dispute with teachers was not resolved. The payment would be $40 per day per eligible child to help offset the cost of tutoring, child care or supervision. CRA stated:

[T]he Payment to be received by parents does not appear to be income from a source…and likely will not be taxable in the hands of the recipients.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 63 - Subsection 63(1) - Paragraph 63(1)(d) parent compensation for teachers' strike 160

18 August 2014 External T.I. 2014-0528171E5 - Condominium Corporations and 149(1)(l)

condominium solar revenue treated as members' income

A condominium corporation (the "Corporation") enters into a leasing agreement with a solar company, which would lease several roofs within the complex for the use of solar panels, with the output sold to the public electrical grid. The solar company would assume all costs of the arrangement, and the Corporation would receive annual income of approximately $XX or a percentage of the revenues generated, which would be contributed to the Corporation's reserve fund thus potentially offsetting or freezing any annual reserve fund increase, and/or reducing annual reserve fund contributions and/or reducing property owner's monthly maintenance fees. CRA stated:

[I]ncidental income from the rental of common areas may be treated as income of the Corporation and generally will not affect [its] tax-exempt status… . Incidental, in this context, means both minor and directly related to activities undertaken to meet the Corporation's not-for-profit objectives of managing and maintaining the condominium property and required reserves. …

Income that is not incidental will usually be considered to be income of the unit owners, if this is appropriate under the relevant provincial law. Subsection 11(2) of the Condominium Act of Ontario (S.O. 1998, c.19) provides that "the owners are tenants in common of the common elements…". …

Where the relevant provincial law indicates that the income is the income of the Corporation, then we would agree that the Corporation may not be tax-exempt pursuant to paragraph 149(1)(l)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(l) condominium solar revenue treated as members' income 250

15 July 2014 Internal T.I. 2014-0527761I7 - Macau Wealth Sharing Scheme

government payments not income

Macau Wealth Sharing Scheme payments from the Macau Special Administrative Region (i.e., in 2013, payments of MOP$ 8,000 for permanent residency cardholders and MOP$ 4,800 for temporary residency cardholders) are not income from a source, nor are they taxable under a specific provision of the Act. Such payments appear to be a windfall in accordance with the factors listed in IT334R2.

8 July 2013 Internal T.I. 2012-0472651I7 F - Crédit pour l'embauche par les petites entreprises

small business job credit received for payroll of non-business employees, exempt

A taxpayer who does not carry on a business and who hires and remunerates employees such as a home care worker, a gardener, a maid, a housekeeper and a cleaner as well as other employees ("Employees"), and deducts source deductions and files T4 slips as required thereby generates the small business job credit ("SBJC"). The Directorate stated:

Given that the remuneration of the Employees and the portion of the EI employer's contribution paid by the taxpayer are personal expenses for the taxpayer, we are of the view that a SBJC amount would not be an amount included in computing the taxpayer’s income … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.2 - Subsection 118.2(3) - Paragraph 118.2(3)(b) small business job credit received for personal-care workers was “reimbursement” 131
Tax Topics - Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(b.1) single service does not qualify as attendant care 74

28 March 2014 External T.I. 2013-0514361E5 - XXXXXXXXXX pension

personal injury pensions

Life-time payments received by individuals which were set up by a Foundation out of lump sum payments were non-taxable as they were received as damages for personal injury.

23 April 2014 Ministerial Correspondence 2014-0522731M4 - Lottery Commissions

prizes of lottery ticket retailers

Since January 1, 2014, lottery ticket retailers must include in their income the amount or value of any prize they receive in a year from a provincial lottery corporation for selling a winning ticket, because these amounts are received as part of their normal business activity.

25 October 2013 External T.I. 2013-0508971E5 - Crowdfunding

Amounts received through crowdfunding might be loans, capital contributions, gifts, income, or a combination thereof. Their treatment would depend on a review of the facts. "In order for a transfer to be considered as voluntary there must be no obligation to make such a transfer."The statement in IT-334R2 that payments received in the course of a business or profession are generally taxable receipts, even if they are voluntary, also applies to crowdfunding amounts.

8 October 2013 External T.I. 2011-0428931E5 F - Assurance-invalidité

proceeds received as a result of business credit card insurance were not income
Facts

As a condition to making a loan to finance the purchase by a corporation of a building, a financial institution required that the corporation take out disability insurance on its two individual shareholders (the "Loan Insurance"). In the event of disability of a shareholders, the insurance company would pay the benefits for the account of the corporation, in order that it could service the loan. The two shareholders also had credit cards used only for the business purposes of the corporation, and took out credit card disability insurance (the "Credit Card Insurance") which entitled them to a fixed monthly benefit in the event of disability.

Questions

Would amounts paid under either policy be included in the income of the disabled shareholder or of the corporation; and would the premiums payable by the corporation under the two policies be deductible in computing its income?

Credit Card Insurance

After noting that IT-223 (archived), para. 2 still represented CRA policy, CRA stated (TaxInterpretations translation):

[T]he Credit Card Insurance accords the right to a fixed monthly amount for XX years irrespective of the amount of the actual overhead expenses incurred…by the corporation during the period of disability of the shareholder. Accordingly…the criteria stated in the Bulletin are [not] complied with. The premiums paid by the corporation respecting the Credit Card Insurance thus are not deductible as business expenses. As for benefits …paid to the shareholder which are remitted to the corporation, these are taxable neither to the shareholder nor to the corporation.

Loan Insurance

CRA stated that the Loan Insurance:

provides protection in the case of a loss of income where one of the two shareholders is disabled. … [T]his policy was not acquired with a view to earning income from the business. Consequently the premiums…are not deductible and the benefits received are not taxable to either the corporation or the shareholder.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose non-deductibility of disability insurance premiums 385

29 October 2013 External T.I. 2013-0509101E5 - Crowdfunding

Worded identically to 2013-0508971E5.

16 August 2013 External T.I. 2013-0484941E5 - Crowdfunding

In finding that "crowdfunding" receipts were generally taxable, CRA stated:

The specific scenario outlined in your letter involves a project such as producing a recording by a musical group, or a project relating to developing a product for market. Crowdfunding operations are undertaken to allow individuals and businesses to raise funds from the public towards a specific project. The person making the contribution generally receives an incentive gift such as a copy of the finished product (for example, a musical recording) or promotional items such as T-shirts. The contributors do not receive any form of equity in the project. ...

In our view, amounts received by a taxpayer from crowdfunding activities would generally be included in income pursuant to subsection 9(1) of the Act as income from carrying on a business.

Expenses related to crowdfunding efforts may be deductible.

12 March 2012 External T.I. 2011-0425361E5 F - Assistance paid by franchisor

reimbursements of business expenses increase income

A franchisor organizes a contest which is restricted to franchisees. Awards received by a franchisee would be considered to be non-governmental assistance (either taxable under s. 9 or 12(1)(x)) since the award would be based on the merits of the franchisee's application and would be open only to franchisees. In this regard, CRA stated:

If the amount earned was for the purpose of reimbursing expenses attributable to income, we are of the view that it should be included in computing the taxpayer's business income in accordance with subsection 9(1) in the taxation year in which such amount would be realized, provided that such amount is free from conditions or restrictions as to its use.

As stated in paragraph 2 of Interpretation Bulletin IT-273R2, if the application of well-accepted business principles relating to the calculation of profit or loss for the purpose of section 9 does not require the government assistance to be included in income, or to reduce the cost or capital cost of a property or the amount deductible as an expense, paragraph 12(1)(x) should be analyzed ... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) contest awards paid to franchisees includible under s. 12(1)(x) if not under s. 9 117

28 February 2005 External T.I. 2004-0108551E5 - Disability Insurance Through a Professional Assoc.

"Where an insurance policy, including one purchased through a professional association, provides the self-employed taxpayer with a benefit for loss of income earning capacity, such as income disability insurance, it is our view that the premium paid on such a policy is a personal and living expense which is non-deductible. However, benefits received by the taxpayer under such a plan would generally not be included in income for tax purposes."

17 February 2005 External T.I. 2004-0104731E5 - Disability Income Insurance

"Where a Policy, purchased directly from an insurance company or indirectly through a professional association, provides an Individual, carrying on a business or practicing a profession, with a benefit for loss of income-earning capacity, the premium paid on such a Policy by the Individual is a personal or living expense that is not deductible for income tax purposes. Additionally, the receipt of disability benefits under the Policy will not be included in computing the individual's business income."

3 March 2004 Internal T.I. 2004-0061781I7 F - Engagement de non-concurrence

Manrell inapplicable where recipient of non-compete carried on the related business

In finding that consideration received by a corporation for a non-compete covenant given by it on the sale of one of its two businesses gave rise to an eligible capital amount, the Directorate indicated that Manrell and Fortino were inapplicable because there, unlike here, the two shareholders who received consideration for a non-compete covenant respecting the sale of their corporations “were not carrying on any business.”

14 November 2000 External T.I. 2000-0052925 - DAMAGES-BREACH OF CONTRACT

Damage awards for defamation generally are non-taxable.

30 November 1996 Ruling 9709133 - TAXABILITY OF GENERAL DAMAGES

Damages to be received by a resigning employee in respect of her sexual harassment claim and in respect of a claim for malicious prosecution, malicious investigation, breach of statutory duty, abuse of power, intentional infliction of mental suffering, defamation, injury to reputation, breach of fiduciary duty, negligence, and as reimbursement of legal expenses not incurred in respect of the settlement of the retiring allowance portion of amounts paid to her, would be exempt receipts.

9 September 1994 Internal T.I. 9421957 - DEDUCTIBILITY OF DEEP DISCOUNTS AS INTEREST AND IT-114

The main concerns respecting IT-114 related to paragraph 3 (respecting whether a discount is interest) and paragraph 29 (respecting whether the amount of a premium is regarded as income).

15 August 1994 External T.I. 9412805 - STRUCTURED SETTLEMENTS

RC has favourably ruled where a casualty insurer has, with the consent of the claimant, assigned all liability under a settlement agreement with the claimant to a third-party insurer with such insurer undertaking to fund its obligations by means of an otherwise qualified structured settlement. The insurer in these circumstances potentially can be an insurer who carries on business outside Canada.

14 June 1994 Internal T.I. 9413947 - VOLUNTARY PAYMENTS TO A PRIEST

A retired Catholic priest who is requested by former parishioners to conduct masses on special occasions and, after conducting the mass, may receive voluntary payments from those requesting his services, will be subject to tax on those amounts. While the payments are voluntary, the services provided by him give rise to the payments.

13 June 1994 External T.I. 9335135 - TAXATION OF SETTLEMENT PROCEEDS

Damages received from a taxpayer's financial advisors as a result of the overpayment of income taxes attributable to inappropriate advice on their part likely will be a capital receipt. "This view is based on the fact that income tax is not a deductible expense and it would seem to follow that an amount paid to compensate an injured party for such taxes in the circumstances should not be included in income ... ."

4 February 1993 T.I. (Tax Window, No. 29, p. 20, ¶2435)

Proceeds of an accidental death and dismemberment insurance policy received by a corporation in respect of directors or shareholders will not be included in its income.

29 January 1993 T.I. 9200395 (Tax Window, No. 27, p. 1, ¶2360)

Where a casualty insurer acquires an annuity contract to fund a series of periodic payments to compensate an injured party for lost income and acquires a second annuity contract providing for a series of periodic and balloon payments to fund future medical and personal care expenses with both series of payments having a guarantee period and specified beneficiaries to whom the payments are directed in the event of the injured person's death before the end of the guarantee period, RC will require the first annuity contract to be non-commutable during the guarantee period or the life of the insured person. However, RC will consider it to be acceptable for the second annuity contract to be commutable after the death of the injured person if payments made under the annuity contract after death are directed to the casualty insurer.

22 January 1993 T.I. 9203635 (Tax Window, No. 27, p. 1, ¶2360)

A structured settlement agreement that provides for balloon payments which the injured person can elect in the future to take either as a lump sum or as a further series of periodic payments (whose terms would be determined at the time of making the election) will not comply with IT-365R2 and, therefore, will not be exempt from tax.

12 October 1992 External T.I. 5-922359

"The Department's position is that in general a taxpayer should apply generally accepted accounting principles ("GAAP") in determining profit unless a provision of the Act requires a departure from GAAP. In a situation where assistance would be included in income under section 9 of the Act, paragraph 12(1)(x) of the Act would not override that provision to also include the amount in income."

31 July 1992 External T.I. 5-911918

Amounts received as guarantee fees ordinarily are taxable on income account.

4 May 1992 TI 920636

Benefits received by the individual partners of a partnership for loss of their income earning capacity under a long-term disability plan would not be included in their income. However, premiums paid by the partnership would be added back to the partnership income at the end of the partnership's fiscal period and included in the income of the particular partners at year end as partnership profit allocation.

16 March 1992 T.I. (Tax Window, No. 18, p. 15, ¶1807)

If a structured settlement meets all the conditions set out in IT-365R2, paragraph 5, the periodic payments received would be accepted as being non-taxable irrespective whether an advance ruling had been obtained.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 34

11 October 1991 T.I. (Tax Window, No. 11, p. 23, ¶1521)

Disaster relief is not required to be included in the income of a recipient who has no legal entitlement to the relief or who received the relief solely in relation to personal losses. Disaster relief received in respect of a business is treated analogously to insurance roceeds.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 49

19 and 22 February 1991 T.I. (Tax Window, Prelim. No. 3, p. 14, ¶1124)

RC has recently issued a favourable advance tax ruling concerning a structured settlement that involved the assignment of a settlement agreement.

An annuity issued pursuant to a structured settlement will not meet the requirements of IT-365R2 if a component of the annuity is invested in a variable annuity.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 53

ATR-40 (18 March 1991) "Structured Settlements"

Description of the non-taxable receipt of periodic payments for damages in a personal injury case.

31 May 1990 T.I. (October 1990 Access Letter, ¶1468)

1% of the price paid to the vendor of a winning lottery ticket under Lotto-Québec would be not taxable to the vendor.

3 May 1989 Directive ASG-89-18 (June 1990 Access Letter, ¶1289)

Third party recipients, including foster parents in group home operators, of social assistance payments must include such payments in income under s. 9 if they are carrying on a business with a view to profit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 34

14 December 89 T.I. (May 1990 Access Letter, ¶1201)

Pre-judgment interest received by a taxpayer pursuant to the settlement of a wrongful dismissal action is not included in income.

19 September 89 T.I. (February 1990 Access Letter, ¶1102)

Amounts paid by an insurer under a disability insurance policy are not taxable to the recipient (a business man).

88 C.R. - F.Q.4

Where a self-employed individual travelling on business has claimed a business expense for the cost of an airline ticket under the frequent flyer program which was subsequently used for personal travel, the value of the personal travel is taxable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 39

86 C.R. - Q.7

The French Shoes case has not altered the position in IT-359R2, paragraph 9.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 13

9 November 1981 TI 5-3119

Proceeds received under a key man disability insurance policy (as contrasted to a key man life insurance policy) would not flow into the corporation's capital dividend account under s. 89(1) and would be included in its income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement 38

IT-114 — Discounts, premiums and bonuses on debt obligations

Cancelled

29. The amount of a premium on the issue of an obligation is included in computing income of the issuer where he is in the business of lending money. In any other case the amount of a premium is not regarded as income; nor is it regarded as a capital gain unless subsection 39(3) applies.

Articles

Benjamin Alarie, "The Taxation of Winnings from Poker and Other Gambling Activities in Canada", 2011 Canadian Tax Journal, Vol 59, p. 731, at p. 757

"Only when a taxpayer as established a clear and consistent record of accomplishment in poker will there be sufficient evidence to take the position that he or she has the requisite skill or knowledge to ensure profitability," so as to make the winnings taxable.

Lewis, "The Taxation of Structured Settlements", British Tax Review, 1994, No. 1, p. 19

A discussion of authorities supporting the position of Inland Revenue that the full amount of payments under a structured settlement are installers of capital and not income.

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