Words and Phrases - "income"
Cheung v Commissioner of Taxation, [2024] FCA 1370
Before accepting the applicant’s evidence that the receipts at issue were capital transfers in the nature of family gifts from Vanuatu and did not constitute income under ordinary concepts, Logan J referred (at para. 77) with approval to Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639, which indicated that the “core” of the meaning of “income” as used in the former s 25(1) of the Income Tax Assessment Act 1936 (Cth) was to be found in a statement by Pitney J of the United States Supreme Court in Eisner v Macomber (1920) 252 US 189, including that:
The fundamental relation of ‘capital’ to ‘income’ has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time.
Potash Corporation of Saskatchewan Inc. v. Canada, 2024 FCA 35
The taxpayer (PCS), which produced and sold potash from mines in Saskatchewan, was subject to both a profit tax and to the making of “base payments” under the Mineral Taxation Act, 1983 (Saskatchewan), which was computed by applying a tax rate of tax determined in accordance with the PPTS multiplied by the number of tonnes of potash sold or otherwise disposed of, minus certain permitted deductions. Since the base payment was calculated based on the quantity of potash that was sold, it was only incurred by PCS as a result of sales of potash by it.
After noting (at para. 34) that, in light of Novopharm, “income” in s. 18(1)(a) “means an amount that would be included in computing income for the purposes of the Act” rather than “profit,” Webb JA found that the relevant test in Roenisch, [1931] Ex. C.R. 1, should accordingly read:
… if there is an expenditure which would be made in any case, from which [income] may accrue, the expenditure may be deducted; but an expenditure which will not be incurred unless there is [income] is not an expenditure in order to earn [income].
Applying this test (at para. 35), Webb JA concluded:
For PCS, the base payment was an expenditure that would not have been incurred unless it sold potash, which produced income. The base payment was therefore not an expenditure in order to earn income.
Accordingly, s. 18(1)(a) prohibited the deduction of the base payments.
10 October 2003 Roundtable, 2003-0035645 F - DEDUCTIBILITE DES INTERETS
CCRA accepted that, under Ludco, the income-earning test referenced amounts added in computing income rather than net income, and indicated that, for example. a taxpayer could rely on the direct use test by selling shares in order to pay off personal debt, and then borrowing money to acquired replacement shares.
It indicated that cash damming is usually effected as follows:
A corporation opens two accounts in its financial institution. The only deposits to Account A are those arising from borrowed money and all other deposits (arising from transactions, etc., and not related to previously borrowed money) are made to Account B. The corporation ensures that all payments from Account A are for expenses that clearly meet the applicable conditions for interest deductibility. If some of the expenses paid from Account B were paid with borrowed money, the interest on that borrowing would not be deductible. Although some of the corporation's expenses are for purposes not otherwise eligible for interest deductibility, the borrowed money is used for specific eligible purposes and the taxpayer has clearly demonstrated those purposes.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 16 - Subsection 16(1) | interest imputed on a non-interest-bearing note issued at a discount consists of simple interest (annually deductible) and compound interest (deductible only at maturity) | 127 |
Burton v Commissioner of Taxation, [2019] FCAFC 141
An Australian-resident individual was taxed at the 15% long-term U.S. capital gains rate on his gains on the disposal of U.S. oil and gas drilling rights. For Australian purposes a 50% discount was applied to the capital gain before imposing tax at a rate of around 45% on it. The Australian foreign tax credit (FITO) provision provided a credit for foreign income tax “if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.” The Commissioner successfully took the position that as only half of the U.S. gain had been included in the individual’s income, he was entitled to the FITO for only half of the U.S. tax.
Art. 22(2) of the Australia-U.S. Convention provided:
… United States tax paid under the law of the United States and in accordance with this Convention … in respect of income derived from sources in the United States by …a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. … Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time.
In concurring with Steward J that the Commissioner’s approach accorded with Art. 22(2), Jackson J stated (at paras. 166, 168-169):
The general principle expressed in the first sentence of Art 22(2) is that if a person who is an Australian resident for the purposes of Australian taxation law pays United States tax in respect of income (including a gain) derived from sources in the United States, the Australian government must allow a credit against Australian tax payable in respect of that income. …
The requirement that the amount of income be the same in the case of each of the United States tax paid and the Australian tax payable emerges from the syntax of Art 22(2). But it does not follow that this amount of income must be all the income derived from a given source in the United States that is also subject to taxation in Australia. The term that is used to indicate a connection between the relevant amount of income, whatever that may be, and each of the United States tax and the Australian tax is 'in respect of'. That is indeterminate. No doubt, in each case the connection cannot be a distant, arbitrary or illogical one. But to the extent that it is necessary to identify the connection more precisely, that must be done in accordance with the provisions of the law of Australia. That is what the third sentence of Art 22(2) requires.
In considering the present case, it does not stretch the language of the article to read 'Australian tax payable in respect of the income' as referring to capital gains tax payable in Australia on assessable income being an amount equal to only 50% of the gain. So reading 'the income' as referring to 50% of the gain derived in the United States is consistent with the general principle in the first sentence of Art 22(2) (acknowledging there will also be differences, such as treatment of capital losses, in the way the laws of different countries calculate the gain).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 91 - Subsection 91(4) | credit “in respect of” income only included the taxable ½ of capital gain | 212 |
29 May 2018 STEP Roundtable Q. 5, 2018-0743961C6 - Tax on Split Income
In the definition of excluded shares, subpara. (a)(i) refers to 90% of the corporation’s "business income" whereas para. (c) uses "all or substantially all of the income". Does “income” refer to net income? If yes, does this require a segmented computation of business income as between income from services and from other sources?
CRA indicated that the references to “business income” and “income” in paras. (a) and (c) respectively both generally mean gross income. Thus, subpara. (a)(i) of that definition requires that less than 90% of business income of the corporation was from the provision of services.
Where the corporation has income from the provision of services and from income from non-services, the two should generally be computed separately, and the non-service income considered in determining if the requirement of the definition is met. However, where the non-service income was necessary for or incidental to the provision of the services themselves, all of the income would be considered to be services income.
26 April 2017 IFA Roundtable Q. 7, 2017-0691221C6 - Clause 95(2)(a)(ii)(D)
S. 95(2)(a)(ii)(D)(IV)2 requires that, for each disregarded 2nd or 3rd affiliate and for each of their relevant taxation years that end in the taxation year of the foreign affiliate making the loan, their members/shareholders at the end of such year be subject to tax in a country other than Canada on all or substantially all of their income for such year.
a) If either the 2nd (2nd LLC) or 3rd (3rd LLC) affiliate has a loss in a taxation year ending after the CFA subsidiary of the Canadian parent made the loan to 2nd LLC, and all other “Cap D” conditions are met, would interest on the loan be eligible for recharacterization under Cap D notwithstanding the reference to “income” in 95(2)(a)(ii)(D)(IV)2 thereof?
b) If the 2nd affiliate (US Holdco), which owns 40% of 3rd LLC (a partnership for Code purposes, with a 60% interest therein held by an arm’s length U.S. resident) sells its 40% interest to an arm’s length U.S. purchaser on June 1, with US Holdco being subject to U.S. tax on its share of 3rd LLC’s income for the stub period up to May 31, would the “end of year” requirement to be met notwithstanding that US Holdco is not a member of 3rd LLC at its calendar year-end?
CRA indicated that:
(a) Interest-income of the CFA making the loan to the 2nd LLC would be eligible for recharacterization (based on all the other conditions of Cap D being met) so that its interest income would still be eligible for recharacterization under Cap D, notwithstanding that either 2nd LLC or 3rd LLC, or both, had a loss in the particular year.
(b) S. 95(2)(a)(ii)(D)(IV)(2) likely would not be satisfied as the members of the 3rd LLC at the end of its taxation year likely will not be subject to U.S. income taxation on substantially all of 3rd LLC’s income, because the 40% of 3rd LLC’s income in the period of January-May that would be allocated to US Holdco. This issue has been brought to the attention of the Department of Finance.
13 January 2014 External T.I. 2013-0512581E5 - Sale of shares of Brazilian corporation
The capital gain realized by a resident of Canada ("Canco") on disposing of shares of a Brazilian company was taxed by Brazil in accordance with Art. 13 of the Canada-Brazil Treaty. Art. 22, para. 2 provides:
[W]here a resident of Canada derives income which, in accordance with the provisions of this Convention, may be taxed in Brazil, Canada shall allow as a deduction from the tax on the income of that person, an amount equal to the income tax paid in Brazil, including business-income tax and non-business-income tax. The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.
CRA stated:
"[I]ncome" in paragraph 2… includes taxable capital gains. Therefore…Canco can claim a deduction from tax for any income or profits tax paid to the government of Brazil in respect of the Capital Gain. This deduction from tax would be computed independent of the provisions of section 126 of the Act; however ... the deduction from tax will be limited to the amount of Canadian income tax otherwise payable on that Capital Gain.
The Queen v. McLaren, 90 DTC 6566, [1990] 2 CTC 429 (FCTD)
The word "income" in s. 63(2) require the existence of a positive sum. Consequently, where the supporting person had no income, s. 63(2) did not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 3 | "income" must be positive | 98 |
| Tax Topics - Statutory Interpretation - Resolving Ambiguity | 41 |
454538 Ontario Ltd. v. MNR, 93 DTC 427, [1993] 1 CTC 2746 (TCC)
Two brothers (the "Mazzoccas"), who constituted two of the three equal shareholders of a corporation ("Tri-M"), transferred their shares of Tri-M on a partial rollover basis to two holding companies and caused the two holding companies to purchase the shareholding of the third shareholder ("Manley"). Immediately thereafter, an arm's length purchaser ("461") lent money to Tri-M sufficient for it to pay a dividend to the two holding companies equal to the estimated accounting retained earnings of Tri-M, following which 461 purchased the shares of Tri-M held by the two holding companies for a reduced purchase price.
In confirming reassessments by the Minister which included the amount of the dividends in the proceeds of disposition realized by the holding companies, Sarchuk J. rejected submissions inter alia:
- that the transactions were grandfathered on the basis that they occurred as part of a series of transactions or events which commenced prior to April 22, 1980 the evidence disclosed that "there was no serious intention on the part of the Mazzoccas to dispose of their interest in Tri-M prior to late summer and fall of 1980" (p. 431);
- that the reference to "income earned or realized" was ambiguous and therefore should be interpreted in the taxpayers' favour to refer to accounting retained earnings (it was clear in light of the wording of ss.55(5)(c) and in light of the decision in Mattabi Mines Ltd. v. MNR, [1988] 2 CTC 294, [1988] 2 S.C.R. 175 that "income" referred to income determined in accordance with the Part I of the Act); and
- that s. 55(2) was void for uncertainty (the problems in application of s. 55(2) were "not surprising given the complexity of the subject matter" and it could not be concluded that it was "couched in such vague or general language that it does not contain an intelligible standard" (p. 437)).
The Queen v. McLaren, 90 DTC 6566, [1990] 2 CTC 429 (FCTD)
Before dealing specifically with the interpretation of s. 63(2), MacKay J. found (p. 6572) "that the word 'income', both in its ordinary usage and that employed in the context of the Act imputes the existence of a positive amount" and found, with respect to section 3 "which is the closest thing to a definition of 'income' under the Act" that "the very explicit use of the words 'remainder, if any' in the final phrase of the section truly mandates the existence of something positive before the taxpayer can be said to have income for purposes of the Act" (p. 6572).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 63 - Subsection 63(2) | "income" imports positive income | 26 |
| Tax Topics - Statutory Interpretation - Resolving Ambiguity | 41 |
Ludco Enterprises Ltd. v. Canada, 2001 DTC 5505, [2001] 2 S.C.R. 1082, 2001 SCC 62
A group of Canadian investors, including the taxpayers, invested in the shares of two Panamanian corporations (collectively, "Justinian") whose principal activity was investing in bonds. Each year Justinian paid an annual dividend equal to 1% of the original cost of the share subscriptions in its capital. It was contemplated that the Canadian investors would receive substantially all their return as a capital gain when their shares in Justinian were redeemed (which, in fact, occurred) and that, in the meantime, the earnings of Justinian after payment of the annual dividends would accumulate free of Canadian tax. Their shareholdings were limited to 9.9% so as to avoid the foreign accrual property income (FAPI) rules.
In finding that interest (equal to approximately 10 times the dividends received) on money borrowed by the taxpayer (which was traceable to the Justinian share investment) was deductible, Iacobucci J. stated (at paras. 51, 54) that:
[A]bsent a sham or window dressing or other vitiating circumstances, a taxpayer's ancillary purpose may be nonetheless a bona fide, actual, real and true objective of his or her investment, equally capable of providing the requisite purpose for interest deductibility in comparison with any more important or significant primary purpose.
...Having determined that an ancillary purpose to earn income can provide the requisite purpose for interest deductibility, ... the requisite test ... is whether, considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the investment was made.
In the present case, even though deferral of income tax was the primary purpose, an ancillary purpose (objectively determined) for subscribing in Justinian with the borrowed money was the earning of (dividend) "income", which in the context of s. 20(1)(c)(i) referred not to net income, but to income subject to tax ("Amounts of income such as dividends which must be included in income ... do not cease to be income merely because they are exceeded by the cost of their production" (quoting Mark Resources at para. 60).)
With respect to one of the later taxation years in question, in which one of the taxpayers disposed of its shares of Justinian to a wholly-owned subsidiary on a rollover basis in consideration for both non-interest bearing notes and interest-earning assets (principally preferred shares), Iacobucci J. found that because the value of the income-earning assets received on this transaction exceeded the amount of the borrowed money, those income-producing replacement properties could be linked to the entire amount of the loan with the result that the purpose test continued to be satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Purpose/Intention | objective and subjective manifestations of purpose | 104 |
| Tax Topics - General Concepts - Tax Avoidance | right to structure for tax avoidance | 129 |
| Tax Topics - Statutory Interpretation - Certainty | inferring of subjective test is contrary to the objective of certainty | 103 |
Mark Resources Inc. v. The Queen, 93 DTC 1004, [1993] 2 CTC 2259 (TCC)
In order to utilize the losses of its U.S. subsidiary, the taxpayer borrowed funds in Canada from an arm's length bank and made a capital contribution of those funds to the U.S. subsidiary. The U.S. subsidiary purchased a term deposit from the bank bearing a lower rate of interest than that charged on the bank loan to the taxpayer and pledged the deposit to the bank as security for that loan. The interest generated by the term deposit was paid as a dividend to the taxpayer.
The interest paid to the bank was non-deductible because the absorption of business losses of the U.S. subsidiary was not a "purpose of earning income". However, Bowman J. rejected the Crown's submission that "income" in s. 20(1)(c) referred to net income as essentially defined in s. 9 of the Act. "Amounts of income such as dividends which must be included in income under paragraphs 12(1)(j) and (k) do not cease to be income merely because they are exceeded by the cost of their production."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) | 106 |