Canadian Income Taxation 2016/2017 Edition Solution Manual

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter One
1
CHAPTER 1
TAXATION― ITS ROLE IN BUSINESS DECISION MAKING
Review Questions
1. If income tax is imposed after profits have been determined, why is taxation relevant to
business decision making?
2. Most business decisions involve the evaluation of alternative courses of action. For
example, a marketing manager may be responsible for choosing a strategy for
establishing sales in new geographical territories. Briefly explain how the tax factor can be
an integral part of this decision.
3. What are the fundamental variables of the income tax system that decision makers should
be familiar with so that they can apply tax issues to their areas of responsibility?
4. What is an “after-tax” approach to decision making?

Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter One
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Solutions to Review Questions
R1-1 Once profit is determined, the amount of income tax that results is determined by the
Income Tax Act. However, at all levels of management, alternative courses of action are
evaluated and decided upon. In many cases, the choice of one alternative over the other
may affect both the amount and the timing of future taxes on income generated from that
activity. Therefore, the person making those decisions has a direct input into future after-tax
cash flow. Obviously, decisions that reduce or postpone the payment of tax affect the
ultimate return on investment and, in turn, the value of the enterprise. Including the tax
variable as a part of the formal decision process will ultimately lead to improved after-tax
cash flow.
R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
establishing a formal presence in the new territory with a branch office or a separate
corporation. The new territories may also cross provincial or international boundaries.
Provincial income tax rates vary amongst the provinces. The amount of income that is
subject to tax in the new province will be different for each of the three alternatives
mentioned above. For example, with direct selling, none of the income is taxed in the new
province, but with a separate corporation, all of the income is taxed in the new province.
Because the tax cost is different in each case, taxation is a relevant part of the decision and
must be included in any cost-benefit analysis that compares the three alternatives [Reg.
400-402.1].
R1-3 A basic understanding of the following variables will significantly strengthen a decision
maker's ability to apply tax issues to their area of responsibility.
Types of Income - Employment, Business, Property, Capital gains
Taxable Entities - Individuals, Corporations, Trusts
Alternative Business - Corporation, Proprietorship, Partnership, Limited
Structures partnership, Joint ventures, Income trusts
Tax Jurisdictions - Federal, Provincial, Foreign
R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
divestitures, or debt and equity restructuring, will impact the amount and timing of the tax
cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts whether or
not the ultimate result of the decision is successful. An after-tax approach to
decision-making requires each decision-maker to think "after-tax" for every decision at the
time the decision is being made, and, to consider alternative courses of action to minimize
the tax cost, in the same way that decisions are made regarding other types of costs.
Failure to apply an after-tax approach at the time decisions are made may provide
inaccurate information for evaluation, and, result in a permanently inefficient tax structure.

Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Two
3
CHAPTER 2
FUNDAMENTALS OF TAX PLANNING
Review Questions
1. “Tax planning and tax avoidance mean the same thing.” Is this statement true? Explain.
2. What distinguishes tax evasion from tax avoidance and tax planning?
3. Does the Canada Revenue Agency deal with all tax avoidance activities in the same way?
Explain.
4. The purpose of tax planning is to reduce or defer the tax costs associated with financial
transactions. What are the general types of tax planning activities? Briefly explain how
each of them may reduce or defer the tax cost.
5. “It is always better to pay tax later rather than sooner.” Is this statement true? Explain.
6. When corporate tax rates are 15% and tax rates for individuals are 40%, is it always better
for the individual to transfer his or her business to a corporation?
7. “As long as all of the income tax rules are known, a tax plan can be developed with
certainty.” Is this statement true? Explain.
8. What basic skills are required to develop a good tax plan?
9. An entrepreneur is developing a new business venture and is planning to raise equity
capital from individual investors. Her advisor indicates that the venture could be structured
as a corporation (i.e., shares are issued to the investors) or as a limited partnership (i.e.,
partnership units are sold). Both structures provide limited liability for the investors. Should
the entrepreneur consider the tax positions of the individual investors? Explain. Without
dealing with specific tax rules, what general tax factors should an investor consider before
making an investment?
10. What is a tax avoidance transaction?
11. “If a transaction (or a series of transactions) that results in a tax benefit was not undertaken
primarily for bona fide business, investment, or family purposes, the general anti-
avoidance rule will apply and eliminate the tax benefit.” Is this statement true? Explain.

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Two
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Solutions to Review Questions
R2-1 There is a distinction between tax planning and tax avoidance. Tax planning is the process
of arranging financial transactions in a manner that reduces or defers the tax cost and that
arrangement is clearly provided for in the Income Tax Act or is not specifically prohibited.
In other words, the arrangement is chosen from a reasonably clear set of options within the
Act.
In contrast, tax avoidance involves a transaction or series of transactions, the main purpose
of which is to avoid or reduce the tax otherwise payable. While each transaction in the
process may be legal by itself, the series of transactions cause a result that was not
intended by the tax system.
R2-2 Both tax planning and tax avoidance activities clearly present the full facts of each
transaction, allowing them to be scrutinized by CRA. In comparison, tax evasion involves
knowingly excluding or altering the facts with the intention to deceive. Failing to report an
amount of revenue when it is known to exist or deducting a false expense are examples of
tax evasion.
R2-3 CRA does not deal with all tax avoidance transactions in the same way. In general terms,
CRA attempts to divide tax avoidance transactions between those that are an abuse of the
tax system and those that are not. When an action is considered to be abusive, CRA will
attempt to deny the resulting benefits by applying one of the anti-avoidance rules in the
Income Tax Act.
R2-4 There are three general types of tax planning activities:
• Shifting income from one time period to another.
• Transferring income to another entity.
• Converting the nature of income from one type to another.
Shifting income to another time period can be a benefit if it results in a lower rate of tax
applying to the income. Even if a lower rate of tax is not achieved, a benefit may be gained
from delaying the payment of tax to a future time period.
Shifting income to an alternate taxpayer (for example, from an individual to a corporation),
the amount and timing of the tax may be beneficially altered.
There are several types of income within the tax system such as employment income,
business income, capital gains and so on. Each type of income is governed by a different
set of rules. For some types of income, the timing, the amount of income recognized, and
the effective tax rate is different from other types. By converting one type of income to
another, a benefit may be gained if the timing of income recognition, the amount
recognized, and/or the effective tax rate is favorable.
R2-5 The statement is not true. Paying tax later may be an advantage because it delays the tax
cost and frees up cash for other purposes. However, the delay may result in a higher rate
of tax in the future year compared to the current year. In such circumstances there is a
trade-off between the timing of the tax and the amount of tax payable.
R2-6 There is not always an advantage to transfer income to a corporation when the corporate
tax rate is lower than that of the individual shareholder. While an immediate lower tax rate
results, remember that the corporation may be required to distribute some or all of its

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Two
5
after-tax income to the shareholder which causes a second level of tax. Whether or not an
advantage is achieved depends on the amount of that second level of tax and when it
occurs. Other factors may also be relevant such as the tax treatment of a possible business
failure or sale.
R2-7 The statement is not true. Knowing the tax rules is, of course, a major element in the tax
planning process, but, it does not guarantee the expected outcome. Planning means that
certain steps are taken now in preparation for certain activities that may occur in the future.
However, those anticipated activities might not occur and the desired tax result may not be
achieved. Tax planning also requires that one must anticipate and speculate on possible
future scenarios and relate them to the current tax planning steps. Those scenarios are
never certain.
R2-8 To develop a good tax plan, one must be able to:
• Understand the fundamentals of the income tax system.
• Anticipate the complete cycle of transactions.
• Develop optional methods of achieving the desired business result and analyze each of
their tax implications.
• Speculate on possible future scenarios and assess their likelihood.
• Measure the time value of money.
• Place the tax issue in perspective by applying common sense and sound business
judgement.
• Understand the tax position of other parties involved in the transaction.
R2-9 Yes, the entrepreneur should consider the tax position of the potential investors. They will
be taking a risk in accepting the investment. If the entrepreneur knows the tax effect on the
investors, of each alternative organization structure, the entrepreneur can choose the one
that provides investors the most favorable tax treatment (i.e., one that reduces their after-
tax loss if the investment fails, or increases their after-tax income if it succeeds). Before
making the investment the investor should determine the tax impact on:
• income earned by the venture,
• income distributed to the investor,
• losses incurred by the venture,
• the loss of the investment if the venture fails, and
• the gain on the investment when it is eventually sold.
R2-10 A tax avoidance transaction is a term used within the general anti-avoidance rule (GAAR)
of the Income Tax Act. An avoidance transaction is a transaction or series of transactions
that results in a tax benefit and was not undertaken primarily for bona fide business,
investment or family purposes [ITA 245].
R2-11 The statement is not true. In order for the tax benefit to be denied under the general anti-
avoidance rule (GAAR), the transaction, in addition to not being primarily for bona fide
business, investment or family purposes, must be considered to be a misuse or abuse of
the income tax system as a whole. What constitutes a misuse or abuse is not always clear.
However, certain avoidance transactions are permitted and others are not [ITA 245(3), IC
88-2].
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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Two
6
Key Concept Questions
QUESTION ONE
The Income Tax Act contains a general anti-avoidance rule (GAAR) in section 245. Consider
each of the following situations and determine whether the GAAR will likely apply. Income tax
reference: ITA 245(1),(2),(3),(4); IC 88-2.
1. Chris transferred her consulting business to a corporation primarily to obtain the benefit of
the low corporate tax rate.
2. Paul owns 100% of the shares of P Ltd. Paul provides services to P Ltd. In the current year
he received no remuneration for his services because the payment of a salary to Paul would
increase the amount of the loss that P Ltd. will incur in the year.
3. A Canadian-controlled private corporation pays its shareholder/manager a bonus that will
reduce the corporation’s income to the amount eligible for the low tax rate. The bonus is not
in excess of a reasonable amount.
4. A profitable Canadian corporation has a wholly owned Canadian subsidiary that is
sustaining losses and needs additional capital to carry on its business. The subsidiary could
borrow the funds from its bank but could not obtain any tax saving in the current year by
deducting the interest expense due to its loss situation. Therefore, the parent corporation
borrows the funds from its bank and subscribes for additional common shares of the
subsidiary. The parent corporation reduces its taxable income by deducting the interest
expense. The subsidiary uses the funds to earn income from its business.
QUESTION TWO
John has owned all of the shares of Corporation A and Corporation B since their inception. In the
current year, John had Corporation A transfer, on a tax-deferred basis, property used in its
business to Corporation B. The reason for the transfer is to enable Corporation B to apply the
income earned on the transferred assets against its non-capital losses.
Will the GAAR in ITA 245(2) apply to disallow the tax benefit? Income tax reference: ITA
245(1),(2),(3),(4); IC 88-2.

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Two
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Solutions to Key Concept Questions
KC 2-1
[ITA: 245(2) – GAAR]
The GAAR provision in ITA 245(2) is to be used when specific anti-avoidance provisions do not
suffice. For the GAAR to apply, the following four conditions must be met:
1) A tax benefit results from a transaction or part of a series of transactions [ITA 245(1) –
“tax benefit” definition],
2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit [ITA 245(3) – “Avoidance
transaction” definition],
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole [ITA 245(4)].
The transactions described in each of the four situations:
• A tax benefit results in each case,
• The transactions have been undertaken primarily to obtain a tax benefit and are,
for that reason, avoidance transactions, and
• Are not subject to any other anti-avoidance rule in the Act,
Therefore, the issue to be determined is whether the tax benefit would result in a misuse or abuse
of the Act, read as a whole.
Situation 1: There is nothing in the Act that prohibits Chris from incorporating her business. The
incorporation is consistent with the Act read as a whole and, therefore, the GAAR would not apply.
Situation 2: There is no provision in the Act requiring a salary to be paid to Paul and the failure
to pay a salary is, therefore, not contrary to the scheme of the Act read as a whole. The GAAR
would not apply to deem a salary to be paid by P Ltd. or received by Paul.
Situation 3: The Act recognizes the deductibility of reasonable business expenses which include
bonuses. The payment of the bonus is not an abusive transaction and, therefore, the GAAR
should not apply to the payment.
Situation 4: The borrowing by the parent corporation is for the purpose of gaining or producing
income as required by paragraph 20(1)(c) of the Act. The GAAR should, therefore, not apply. In
fact, CRA has indicated, in comfort letters, that where one corporation (A Ltd.) borrows from a
financial institution to invest in shares of another corporation (B Ltd.) and B Ltd. re-loans the funds
back to A Ltd. and charges interest at a reasonable rate, thus, shifting income from A Ltd. to B
Ltd., the transactions are permissible and will not be challenged.

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Two
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KC 2-2
[ITA: 245(2) – GAAR]
The GAAR provision in ITA 245(2) is to be used when specific anti-avoidance provisions do not
suffice. For the GAAR to apply, the following four conditions must be met:
1) A tax benefit results from a transaction or part of a series of transactions,
2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit,
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole.
In the case of John and his two corporations:
• The transaction does result in a tax benefit as using the losses will reduce tax,
• It appears that the transaction was undertaken primarily for the tax benefit, and
• There is no provision in the Income Tax Act prohibiting the transfer of the property on a
tax-deferred basis to a related corporation nor the deduction of the losses by Corporation
B,
So, the question that remains is whether the transaction is an abusive transaction.
Since the Act contains specific provisions permitting the transfer of losses between related
corporations, the transfer in question is consistent with the scheme of the Act and, therefore, is
not an abusive transaction. Thus, the GAAR should not apply.
However, had the transfer of a property been undertaken to avoid a specific rule, such as a rule
designed to preclude the deduction of losses after the acquisition of control of a corporation by
an arm's length person, such a transfer would be a misuse of the provisions of the Act and be
subject to the GAAR [IC88-2].
Where the GAAR applies, the tax benefit that results from an avoidance transaction will be denied.
In order to determine the amount of the tax benefit that will be denied, the provision indicates that
the tax consequences of the transaction to a person will be determined as is reasonable in the
circumstances.

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Three
9
CHAPTER 3
LIABILITY FOR TAX, INCOME DETERMINATION, AND
ADMINISTRATION OF THE INCOME TAX SYSTEM
Review Questions
1. Which of the following entities are subject to income tax?
(a) proprietorship
(b) individual
(c) joint venture
(d) trust
(e) limited partnership
(f) corporation
(g) partnership
2. Describe how the income earned by any of the non-taxable entities listed above is
included in the Canadian tax system.
3. How and when does income earned by a corporation affect the tax position of an
individual who is a shareholder?
4. In describing who is liable for tax in Canada, the Income Tax Act simply states, “An
income tax shall be paid, as required by this Act, on the taxable income for each taxation
year of every person resident in Canada at any time in the year.” Accepting that “person”
includes both an individual and a corporation, briefly discuss the meaning and
ramifications of this statement.
5. In what circumstances are non-residents subject to Canadian income tax?
6. Can a Canadian resident be subject to tax in Canada as well as in a foreign country on
the same earned income? If yes, explain how. Also, what mechanism is available to
minimize double taxation?
7. Explain the difference between net income for tax purposes and taxable income for the
taxable entities.
8. Explain what is meant by the statutory scheme, and describe the scheme’s relevance to
the Canadian income tax system.
9. For tax purposes, would you prefer that a financial loss be a capital loss or a business
loss? Explain.
10. Explain the difference between income from property and a gain on the sale of capital
property.

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Three
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11. One often hears that “corporations are entitled to more deductions for tax purposes than
individuals.” Based on your reading of Chapter 3, is this statement true? Explain.
12. If an individual earns a living as a lawyer, what possible categories of income, for tax
purposes, may he or she generate? Describe the circumstances for each possible
classification.
13. What types of income for tax purposes may result when a profit is achieved on the sale
of property (e.g., land)?
14. Individual A, a Canadian resident, owns and operates a profitable small farm in North
Dakota, U.S.A. He also has a large amount of money earning interest in an American
bank. Individual B, also a Canadian resident, owns 100% of the shares of an American
corporation that operates a profitable small farm in North Dakota. The corporation also
has a large amount of money earning interest in an American bank.
Describe and compare the tax positions of these two individuals who conduct the same
activities but use different organizational structures.
15. Jane Q owned an apple orchard for 20 years. During that time, she had cultivated a
unique brand of apple that was popular with health food fans. Toward the end of the
20X0 growing season, Q became seriously ill and put the orchard up for sale. Q’s
neighbour agreed to purchase the entire orchard for $250,000. It upset Q to have to sell
at that time of year because that year’s crop was of high quality and in three weeks
would have been ripe for picking.
What types of property might have been included in the total purchase price of
$250,000? For tax purposes, what types of income might have been generated from the
sale of the orchard? Explain your answer.

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Three
11
Solutions to Review Questions
R3-1 Of the seven entities listed the following are subject to tax:
• individuals
• corporations
• trusts
R3-2 Proprietorships, partnerships, joint ventures and limited partnerships can all earn income
as separate entities. However, for tax purposes the income is allocated annually to the
owners of the entities and included in their income for tax purposes. The owners are
normally one of the taxable entities, individuals, corporations or trusts.
R3-3 A corporation is a separate legal entity distinct from its owners - the shareholders.
Consequently a corporation is taxed on its income earned in each taxation year. However,
the after-tax corporate profits may be distributed as a dividend to the individual
shareholder. Upon receipt of the dividend the individual shareholder has earned property
income (return on the share capital) and is subject to tax consequences at that time [ITA
12(1)(j),(k)].
Alternatively, if the corporation does not distribute the after-tax profits but retains them for
corporate use, the value of the shares owned by the shareholder will increase in value. If
and when the shareholder disposes of the shares a capital gain may result due to the
increased share value caused by the corporate earnings retained [ITA 40(1)(a)(i)].
R3-4 This statement is important because it establishes the basic framework of the income tax
system, who is liable for tax, and on what income. The statement indicates that tax is
calculated on the taxable income of resident persons for each taxation year. By defining
each of the relevant terms in the statement the general scope of the tax system is
apparent. It is, therefore, necessary to define the terms person, resident, taxable income,
and taxation year [ITA 2(1)].
As stated in the question, both individuals and corporations are considered to be persons
for tax purposes. Therefore, resident individuals and resident corporations are liable for
Canadian tax [ITA 248(1)].
Individuals are resident of Canada if they maintain a continuing state of relationship with
the country. Whether or not an individual has a continuing state of relationship is a
question of fact determined from the facts of each situation. To establish this relationship
the courts consider the time spent in Canada, motives for being present or absent, the
maintenance of a dwelling place, the origin and background of the individual, the routine
of life, and the existence of social and financial connections. If an individual does not have
a continuing state of relationship, the individual may be deemed to be a resident if the
individual is present in Canada for 183 days or more in a particular year [ITA 250(1)(a)].
A corporation is a resident of Canada if it has been incorporated in Canada [ITA 250(4)].

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Buckwold and Kitunen, Canadian Income Taxation, 2016-2017 Ed.
Solutions Manual Chapter Three
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Taxable income is defined as the person's net income for tax purposes minus a limited
number of deductions. Net income for tax purposes consists of world income derived from
five specific sources: employment, business, property, capital gains, and other sources.
These sources are combined in a basic formula known as the statutory scheme. If income
does not fit one of the above five categories, it is not taxable. Both individuals and
corporations determine net income for tax purposes using the same set of rules.
Tax is calculated on taxable income for each taxation year. The taxation year of an
individual is the calendar year. The taxation year for a corporation is the fiscal period
chosen by the corporation, which cannot exceed one year, 53 weeks to be exact [ITA
249(1), 249.1(1)]. Professional corporations (a corporation that carries on the
professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or
chiropractor [ITA 248(1)]) are required to have a fiscal period that coincides with the
calendar year [ITA 249.1(1)(b)].
R3-5 A non-resident individual or corporation is subject to Canadian income tax in a manner
similar to a Canadian resident on taxable income earned in Canada if they are employed
in Canada, carry on business in Canada, or dispose of taxable Canadian property [ITA
2(3)].
In addition, a non-resident who does not have any of the above activities in Canada may
be subject to a special withholding tax (a flat tax) on income which has its source in
Canada [ITA 212]. (For example, dividends, rents royalties, certain management fees, and
so on.)
R3-6 Yes. The resident of Canada is taxed on world income and the foreign country, which is
the source of that income, may also impose tax. For example, a Canadian corporation
which operates a business branch location in a foreign country will be taxable on the
branch profits in both countries. In order to avoid double taxation, the Canadian tax
calculation permits a reduction of Canadian taxes for foreign taxes paid on the same
income [ITA 126(1), (2)].
R3-7 Net income for tax purposes consists of a taxpayer’s combined net income from
employment, business, property, capital gains and other sources. The separate sources of
income are combined in accordance with an aggregating formula which takes into
account any losses from the above sources. Net income for tax purposes is determined
by the same set of rules for individuals and corporations.
Taxable income is the base amount upon which the rates of tax are applied, and is
determined by reducing a taxpayer's net income for tax purposes (above) by a limited
number of specific deductions. While individuals and corporations use the same formula
for determining net income, the calculation of taxable income is different. Deductions for
individuals include a capital gains deduction on qualified properties, and unused losses of
other years. Deductions for corporations include charitable donations, dividends from
Canadian corporations and foreign affiliates, and unused losses of other years.
R3-8 The statutory scheme is the fundamental base of the income tax system. It is simply an
aggregating formula which establishes the concept of a taxpayer's income for tax

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Solutions Manual Chapter Three
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purposes in comparison to other concepts of income. The formula defines what types of
income are subject to tax and how any related losses affect a taxpayer's income. As the
formula is restricted to five basic types of income activities, the scope of the tax system is
established. The formula establishes that, although a taxpayer may carry on several
separate activities, each separate type of income is not taxed separately but rather forms
part of a total concept of income. As a result, with the exception of capital losses, a loss
from one activity within a specified time period may be offset against the income derived
from other activities.
In spite of the fact that the formula combines several types of income into a single income
amount, each type of income is determined in accordance with its own sets of rules. The
formula then binds them together and establishes their relationships.
R3-9 A taxpayer would normally prefer that a loss incurred be a business loss as opposed to a
capital loss. In accordance with the aggregating formula for computing net income, a
business loss can be deducted from any other source of income which increases the
opportunity to reduce taxes payable as soon as possible. A capital loss, on the other
hand, can only be deducted against a capital gain and, therefore, its ability to reduce
taxes payable is considerably restricted. In addition, only one-half of a capital loss is
included as part of the aggregating formula [ITA 3(b)].
For example, a taxpayer who has employment income of $30,000 and a business loss of
$30,000 has no net income under the aggregating formula and, therefore, no tax liability.
However, if the same taxpayer has employment income of $30,000 and a capital loss of
$30,000, a tax liability would be incurred because the net income for tax purposes would
be $30,000 (from employment) and the capital loss would remain unused.
R3-10 Income from property is the return that is earned on invested capital. For example,
dividends earned on shares of a corporation are property income because they represent
the return from the ownership of capital property (the shares). On the other hand, a gain
derived from the sale of capital property is considered to be a capital gain. Using the
previous example, if the shares were sold at a profit the gain from that property would be
a capital gain and not property income.
R3-11 Based on the determination of net income for tax purposes, the statement is not true.
Both individuals and corporations determine net income for tax purposes in accordance
with the same aggregating formula. In addition, an individual who earns business income
determines that income in accordance with the same set of rules as a corporation that
earns business income.
With respect to the conversion of net income for tax purposes to taxable income,
individuals are entitled to a capital gains deduction whereas a corporation is not. In this
context an individual receives preferential treatment. In arriving at taxable income, a
corporation can reduce its net income by dividends received from other Canadian
corporations, whereas, individuals cannot. However, corporate income is ultimately
distributed to shareholders who are individuals and, therefore, this corporate advantage is
temporary [ITA 110.6, 112(1)].

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R3-12 Working as a lawyer, an individual may earn either employment income or business
income. If the lawyer provides services to a law firm as an employee in return for a salary,
bonus, and fringe benefits, the income would constitute employment income. If the lawyer
independently provides services directly to clients on a fee-for-service basis, the income
derived is business income [ITA 5(1), 9(1)].
R3-13 A profit derived from the sale of property may be classified as either business income or
capital gain. Using the example of property that is land, business income will occur if the
land was acquired for the purpose of reselling it at a profit. Alternatively, if the land was
acquired, not for resale, but for long term use to generate income or for personal
enjoyment, the profit on the sale will be a capital gain.
R3-14 All Canadian residents are taxed on their world income. The world income of individual A
includes the business profits from the U.S. farm plus the interest earned from the U.S.
bank account. These amounts are, therefore, taxable in Canada in the year earned. The
income would also be taxable in the U.S. but Canadian taxes may be reduced by U.S.
taxes on that income.
In comparison, individual B's world income does not include the U.S. farm profits and the
U.S. interest. This income belongs to the U.S. corporation and is, therefore, taxed only in
the U.S. The foreign corporation is not a resident of Canada and is not subject to
Canadian tax. The after-tax profits of the foreign corporation may be distributed to
individual B in the form of dividends at some future time. Such foreign dividends would
then be part of B's world income and taxed a second time.
Although both A and B conduct the same activities, the organization structure alters the
amount and the timing of the related taxes on the income.
R3-15 The sale of the entire orchard for a total price of $250,000 may include the following
separate properties:
• land
• the permanent stock of trees
• the almost mature crop of apples
(The student may also recognize the possibility of including equipment and the intangible
property of goodwill.)
The sale of the land may result in a capital gain because it is property that was acquired
and used to generate income. Similarly the sale of the trees is capital property because
the trees are used to produce a regular crop of apples.
The profit on the sale of apples would constitute business income because the apples are
being produced for the purpose of resale at a profit. Even though the apples are not
mature, they represent inventory in process.
___________________________________________________________

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Key Concept Questions
QUESTION ONE
Determine the Canadian residency status for the current year for each of the following
taxpayers. Income tax reference: ITA 250(1), (4); Folio S5-F1-C1.
a) Paula was born and lived her life to date in Canada. On November 1st of the current year
she left Canada permanently.
b) Al spent the current year in Belgium on temporary work assignment. His family and friends
are looking forward to his return to Canada in June of next year.
c) Kimberley lives in Ireland. In the current year she was in Canada throughout the months of
February through May and again throughout the months August through October caring for
a sick friend.
d) 102864 Limited was incorporated in Canada five years ago. The corporation has always
carried on business exclusively in Bermuda since incorporation.
e) Navy Ltd. was incorporated in the United States. In the current year Navy Ltd. carried on
business in Canada as well as in the United States.
QUESTION TWO
Bill is not a resident of Canada. For the current year Bill has worldwide income of $120,000,
including $15,000 of employment income earned in Canada and $2,000 of interest received on
Canada savings bonds. The remainder of his income was from sources outside of Canada.
What amount of income must be reported on Bill’s Canadian personal income tax return for the
current year? Income tax reference: ITA 2(3).
QUESTION THREE
A Ltd. is resident in Canada for tax purposes. In the current year A Ltd. earned interest income
of $4,000 in Canada, $6,000 in England, and $8,000 in Bermuda.
What amount of interest income must be reported on A Ltd.’s Canadian corporate income tax
return for the current year? Income tax reference: ITA 2(1), 3(a).

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QUESTION FOUR
The Canadian income tax system includes five specific categories of income. Identify the
income category to which each of the following pertains:
1. Interest earned on a bond investment.
2. Pension income.
3. Consulting fees.
4. Profit on the sale of shares of a public corporation. The shares were acquired as a long-
term investment.
5. Wages from employment services.
6. Share of profits from a partnership that operates a restaurant.
7. Dividends from the shares of a corporation that carries on a retail business.
8. Tips from customers of an employer’s business.
9. Rents from tenants of a commercial building.
10. Fees for providing piano lessons to several students.
11. Profit on the sale of land that was used by the owner for farming.
12. Profit on the sale of a summer cottage that was used by the owner for personal
enjoyment.
13. Profit on the sale of land that was purchased for resale.
QUESTION FIVE
Taxpayer A Taxpayer B Taxpayer C
Employment income $30,000
Business income (loss) $(20,000)
Property income (loss) $(1,000)
Pension income 40,000
Capital gain (loss) 50,000 (6,000)
Calculate net income for tax purposes for each of the three taxpayers. Income tax reference:
ITA 3.
QUESTION SIX
Maureen, a resident of Canada, has the following sources of income and losses for tax
purposes for the current year.
• Employment income $60,000
• Business X profit 3,000
• Business Y loss 7,000
• Interest income 2,000
• Taxable capital gain on sale of land 18,000
• Allowable capital loss on sale of securities 20,000
• Allowable business investment loss 5,000
Calculate Maureen’s net income for tax purposes for the current year in accordance with
Section 3 of the Income Tax Act.

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QUESTION SEVEN
What is the filing due date for each of the following income tax returns? Income tax reference:
ITA 150(1)(a),(b),(d).
(a) A corporation for its year ending November 30, 20X6.
(b) An individual for the year 20X6. The individual carried on business in 20X6.
(c) An unmarried individual living alone for the year 20X6. The individual did not carry on
a business.
(d) An individual for the year 20X6. The individual died on February 21, 20X7.
QUESTION EIGHT
For each of the following individuals, determine when their income tax return for the current year
is due and when any balance of tax owing is due. Income tax reference: ITA 150(1), 156.1(4),
248(1) balance-due day.
a) Bob is a bachelor. He has two sources of income, employment income and interest
income.
b) Mary is a self-employed lawyer. Her law practice has a December 31 year end.
c) Ron’s only source of income is employment income. Ron is married to Mary. See (b)
above.
d) Zeta is married to Leo. Their only source of income is pension income. Zeta died on
November 20th of the current year.
e) Sarah died on March 12th of the current year without having filed her tax return for the
prior year.
QUESTION NINE
When is the balance of tax due for each of the following entities? Income tax reference: ITA
156.1(4); 157(1)(b).
a) A public corporation, resident in Canada.
b) A Canadian-controlled private corporation, with taxable income less than $500,000, and
claiming the Small Business Deduction.
c) An individual who carried on business in the year.
d) An individual where no business is carried on by the individual or the spouse.

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QUESTION TEN
For each of the following corporations, determine when the income tax return for the current
year is due and when any balance of tax owing is due. Income tax reference: ITA 150(1),
157(1)(b), 248(1) balance-due day.
A Ltd. is a public corporation with a May 31 year end.
B Ltd. is a private corporation with an October 31 year end. All of B’s income is taxed at the high
corporate rate.
C Ltd. is a Canadian-controlled private corporation with an October 31 year end. Last year all of
C’s income was subject to the low rate of tax from claiming the small business deduction.
D Ltd. is a Canadian-controlled private corporation with a May 31 year end. Last year
D had taxable income of $550,000. D claimed the small business deduction this year as well as
last year.
QUESTION ELEVEN
A taxpayer’s tax liability was $1,200 for 20X1, $12,000 for 20X2, and is expected to be $36,000
for 20X3.
Is the taxpayer required to make tax instalments for 20X3 and if so, what are the amounts and
the due dates for each instalment? Income tax reference: ITA 156(1), 156.1(1),(2),
157(1),(1.1),(1.2),(2.1).
QUESTION TWELVE
The sending date on the notice of reassessment for the taxpayer’s 20X2 tax return was July 10,
20X7. The sending date on the original notice of assessment for the taxpayer’s 20X2 tax return
was June 20, 20X3.
a) Does the CRA have the right to reassess the 20X2 tax return on July 10, 20X7? Income
tax reference: ITA 152(3.1).
b) If the taxpayer wishes to dispute the reassessment, by what date must the notice of
objection be filed? Income tax reference: ITA 152(3.1), 165(1).

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QUESTION THIRTEEN
Tooblue Ltd., a Canadian-controlled private corporation, filed its tax return for its year ended
December 31, 20X6 on June 30, 20X7. The Notice of Assessment was received August 31,
20X7. The sending date on the Notice of Assessment was August 28, 20X7.
1) Assuming there were no misrepresentations and that a waiver was not filed, how long
does the CRA have to issue a reassessment for Tooblue Ltd.’s 20X6 taxation year?
Income tax reference: ITA 152(3.1).
2) If Tooblue Ltd. wishes to object to the original Notice of Assessment for the 20X6
taxation year, by what date must the Notice of Objection be filed? Income tax reference:
ITA 165(1).
QUESTION FOURTEEN
Successful Ltd. is a Canadian company with a December 31 year end. The federal income tax
return for last year was filed with the CRA on September 30th of this year. The balance of tax
owing, $10,000, was paid at the bank on September 30th as well.
Calculate the late-filing penalty for Successful Ltd. Income tax reference: ITA 162(1).
QUESTION FIFTEEN
Dee Ltd. is a Canadian company carrying on a clothing wholesale business. For the first quarter
of the current year, its financial results were as follows:
Revenue: Sales within Canada $500,000
Exports 30,000
Expenses: Inventory purchased 50,000
Salaries & wages 40,000
Rent 10,000
a) Assuming Dee Ltd. is a GST registrant, calculate the GST to be remitted to the CRA for
the first quarter of the year.
b) Assuming Dee Ltd. is a HST registrant, calculate the HST to be remitted to the CRA for
the first quarter of the year. Assume a HST rate of 13%.

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Solutions to Key Concept Questions
KC 3-1
[ITA: 250(1), (4) – Residence]
a) Paula is a part-year resident. She is resident in Canada from January 1 to November 1
and non-resident for the remainder of the year.
b) Al is resident in Canada. Although he is out of the country on a temporary work
assignment for the current year, his residential ties remain in Canada.
c) Kimberley is deemed to have been resident in Canada throughout the current taxation
year. Although she is not ordinarily resident in Canada, she sojourned (temporary stay) in
Canada for more than 182 days, in total, in the current year [ITA 250(1)(a)].
d) 102864 Limited is resident in Canada. Any company incorporated in Canada after April 26,
1965 is deemed resident in Canada [ITA 250(4)(a)].
e) Navy Ltd. is a non-resident corporation.
KC 3-2
[ITA: 2(3) – Tax payable by non-residents]
A non-resident must report three sources of income on a Canadian tax return: employment
income earned in Canada, business income from carrying on business in Canada, and gains on
the disposal of taxable Canadian property [ITA 2(3)]. In this case, Bill must report on a
Canadian tax return his $15,000 of employment earned in Canada.
KC 3-3
[ITA: 2(1), 3(a) – World income reported by residents]
Since A Ltd. is resident in Canada, income earned anywhere in the world must be reported on
its Canadian tax return. Therefore, all $18,000 of interest income earned must be included on
the Canadian corporate income tax return.
KC 3-4
[Income categories]
1. Property income 8. Employment income
2. Other income 9. Property income
3. Business income 10. Business income
4. Capital gain 11. Capital gain
5. Employment income 12. Capital gain
6. Business income 13. Business income
7. Property income

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KC 3-5
[ITA: 3 – Net income]
Taxpayer
A
Taxpayer B Taxpayer
C
3(a) Employment Income $30,000
Business income
Property income
Other income (pension) $40,000 .
40,000 30,000
3(b) Taxable capital gains $25,000 0
Allowable capital losses (0) (3,000)
Excess 25,000 0
40,000 25,000 $30,000
3(c) Other deductions 0 0 0
40,000 25,000 30,000
3(d) Business loss (20,000)
Property loss (1,000) (0)
(1,000) (20,000)
Net Income $39,000 $ 5,000 $30,000
KC 3-6
[ITA: 3 – Net income]
3(a) Employment income $60,000
Business income 3,000
Property income (interest) 2,000
65,000
3(b) Taxable capital gain $18,000
Allowable capital loss (20,000)
Excess 0 0
65,000
3(c) Other deductions 0
65,000
3(d) Business loss (7,000)
Allowable business investment loss (5,000) (12,000)
Net income $53,000

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KC 3-7
[ITA: 150(1)(a), (b), (d) – Filing due dates]
The filing due dates are as follows:
a) May 31, 20X7 (six months after the year-end of the corporation [ITA 150(1)(a)]). When
the corporation’s tax year ends on the last day of a month, the tax return is due by the
last day of the sixth month after the end of the tax year.
b) June 15, 20X7 [ITA 150(1)(d)(ii)]
c) April 30, 20X7 [ITA 150(1)(d)(i)]
d) August 21, 20X7 (later of six months after death and the normal filing due date
[ITA 150(1)(b)]
KC 3-8
[ITA: 150(1), 156.1(4), 248(1) – filing deadline and balance-due day for individuals]
a) Bob’s tax return is due April 30th of the following year [ITA 150(1)(d)(i)]. The balance of tax
owing, if any, is due on the same day [ITA 156.1(4), 248(1)].
b) Mary’s tax return is due June 15th of the following year [ITA 150(1)(d)(ii)]. The balance of tax
owing, if any, is due on April 30th of the following year [ITA 156.1(4), 248(1)].
c) Ron’s tax return is due June 15th of the following year [ITA 150(1)(d)(ii)]. The balance of tax
owing, if any, is due on April 30th of the following year [ITA 156.1(4), 248(1)].
d) Zeta’s tax return is due May 20th of the following year, being the later of April 30th of the
following year and 6 months after the date of death [ITA 150(1)(b)]. The balance of tax
owing, if any, is due on the same day [ITA 156.1(4), 248(1)].
e) Sarah’s tax return for the current year (the year of death) is due April 30th or June 15th of the
following year being the later of the date the return is normally due and 6 months after the
date of death. The balance of tax owing, if any, is due on April 30th of the following year. [ITA
156.1(4), 248(1)]. Also note that Sarah’s tax return for the prior year is due September 12th
being the later of the date the tax return would normally be due and 6 months after the date
of death [ITA 150(1)(b)]. The balance of tax owing, if any, is due on September 12th as well
[ITA 156.1(4), 248(1)].
KC 3-9
[ITA: 156.1(4); 157(1)(b); 248 – Balance-due day]
The balance of tax is due as follows:
a) Two months after the corporation’s year-end [ITA 157(1)(b), “balance-due day” ITA 248]
b) Three months after the corporation’s year-end [ITA 157(1)(b), “balance-due day” ITA 248]
c) April 30th of the following year [ITA 156.1(4), “balance-due day” ITA 248]
d) April 30th of the following year [ITA 156.1(4), “balance-due day” ITA 248]

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KC 3-10
[ITA: 150(1), 157(1)(b), 248(1) – filing deadline and balance-due day for corporations]
• A Ltd.’s tax return is due November 30th (6 months after the year end) [ITA 150(1)]. The
balance of tax owing, if any, is due July 31st (2 month after the year end) [ITA 157(1)(b),
248].
• B Ltd.’s tax return is due April 30th of the following year (6 months after the year end) [ITA
150(1)]. The balance of tax owing, if any, is due December 31st (2 month after the year
end) [ITA 157(1)(b), 248].
• C Ltd.’s tax return is due April 30th of the following year (6 months after the year end) [ITA
150(1)]. The balance of tax owing, if any, is due January 31st of the following year (3 month
after the year end) since C Ltd. is a CCPC whose taxable income in the previous year did
not exceed the business limit and the small business deduction was claimed [ITA 157(1)(b),
248].
• D Ltd.’s tax return is due November 30th (6 months after the year end) [ITA 150(1)]. The
balance of tax owing, if any, is due July 31st (2 month after the year end). Although D Ltd. is
a CCPC claiming the small business deduction, it does not qualify for the one month
extension since its taxable income in the preceding year exceeded the business limit [ITA
157(1)(b), 248].
KC 3-11
[ITA: 156(1), 156.1(1), (2), 157(1), (2.1) – instalments for individuals and corporations]
If the taxpayer is an individual, instalments are required for 20X3 since the tax liability for 20X3
is expected to exceed $3,000 and the tax liability for 20X2 exceeded $3,000 [ITA 156.1(1)]. The
instalments are due the 15th day of March, June, September, and December. The amount
payable for each instalment is calculated using one of the following three methods [ITA 156(1)]:
1) $9,000; ¼ x estimated tax payable for 20X3 (1/4 x $36,000)
2) $3,000; ¼ x tax payable for 20X2 (1/4 x $12,000)
3) $300 for the March and June instalments; ¼ x tax payable for 20X1 (1/4 x $1,200); and
$5,700 for the September and December instalments; ½ ($12,000 - $600).
The CRA uses method (3) in their instalment notices. Since method (3) results in the taxpayer
paying the least amount of tax in March and June, the taxpayer will probably choose this
method.
If the taxpayer is a corporation, instalments are required for 20X3 since the tax liability for
20X2 and the estimated tax liability for 20X3 exceed $3,000 [ITA 157(2.1)].

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The instalments are generally due at the end of each month. The amount payable for each
instalment is calculated using one of the following three methods [ITA 157(1)]:
1) $3,000; 1/12 x estimated tax payable for 20X3 (1/12 x $36,000)
2) $1,000; 1/12 x tax payable for 20X2 (1/12 x $12,000)
3) $100 for the first two instalments; 1/12 x tax payable for 20X1 (1/12 x $1200); and
$1,180 for the remaining ten instalments; 1/10 x ($12,000 - $200).
If the taxpayer is a small-CCPC then quarterly tax instalments are permitted. The quarterly
instalments are due the last day of each quarter and are calculated using one of the following
three methods [ITA 157(1.1)]:
1) $9,000; ¼ x estimated tax payable for 20X3 (1/4 x $36,000)
2) $3,000; ¼ x tax payable for 20X2 (1/4 x $12,000)
3) $300 for the March instalment; ¼ x tax payable for 20X1 (1/4 x $1,200); and $3,900 for
the June, September and December instalments; 1/3 x ($12,000 - $300).
A small-CCP has the following characteristics [ITA 157(1.2)]:
• Taxable income for the current or preceding year does not exceed $500,000,
• Taxable capital for the current or preceding year does not exceed $10 million,
• Claims the small business deduction in the current or preceding year, and
• Has a perfect compliance record for the past 12 months with respect to tax payments
and filing of returns.
KC 3-12
[ITA: 152(3.1), 165(1) – Normal reassessment period and notice of objection]
a) Individuals, trusts, and CCPCs can be reassessed within three years of the date the original
assessment was mailed. For other corporations, the time limit is extended to four years.
Since the date of sending of the notice of assessment was June 20th, 20X3, the normal
reassessment period expired prior to July 10th, 20X7 for all taxpayers. However, a tax return
can be reassessed at any time if the taxpayer has made a misrepresentation that is
attributable to neglect, carelessness, or willful default or has committed any fraud in filing the
return or supplying information.
b) The notice of objection must be filed by October 8, 20X7. If the taxpayer is an individual, the
notice of objection must be filed by the later of April 30, 20X4, being one year after the tax
return filing date for the 20X2 year; and October 8, 20X7, being 90 days after the date the
reassessment was mailed. For all other taxpayers the notice of objection must be filed by
90 days after the date the reassessment was mailed.

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KC 3-13
[ITA: 152(3.1)(b); 165(1)(b) – Normal reassessment period; Notice of objection]
1) The CRA has until August 28, 20X10, being three years from the date of sending of the
Notice of assessment (August 28, 20X7) to issue a reassessment [ITA 152(3.1)(b)].
2) If Tooblue Ltd. wishes to object to the Notice of assessment, the Notice of objection must
be filed by November 26, 20X7, being 90 days after the sending date on the Notice of
assessment [ITA 165(1)(b)].
KC 3-14
[ITA: 162(1) – Late filing penalty]
The late filing penalty is $800, being $10,000 x 8% (5% + 1% x 3 months). The tax return was
filed three complete months late. The penalty is 5% of the unpaid tax that is due on the filing
deadline, plus 1% of this unpaid tax for each complete month that the return is late, up to a
maximum of 12 months.
KC 3-15
(a) [GST remittance]
Sales within Canada $500,000 x 5% $25,000
Inventory purchased $50,000
Rent 10,000
$60,000 x 5% (3,000)
GST remittance $22,000
(b) [HST remittance]
Sales within Canada $500,000 x 13% $65,000
Inventory purchased $50,000
Rent 10,000
$60,000 x 13% (7,800)
HST remittance $57,200

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Problems
PROBLEM ONE
John Day and Carol Knight conduct similar financial activities. Each is employed and has a
portfolio of investments, and during the current year, each started a separate small business.
Their financial results for the year ended December 31, 20X1, are identical, as follows:
Employment income $40,000
Interest income from investment portfolio 15,000
Loss from new small business operation (20,000)
The only difference between Day and Knight is that Day operated his business as a
proprietorship, whereas Knight operated her business from a wholly owned corporation.
Required:
1. Assuming that individual tax rates are 40%, compare the tax liability of Day with that of
Knight for 20X1.
2. How and when may Knight utilize her business loss to reduce her tax liability?
3. What impact may the difference in tax treatment have on Day’s and Knight’s wealth
accumulation and on their long-term returns on investment?

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Solution to P 3-1
1. Tax liability of Day:
Employment Income $40,000
Property Income 15,000
$55,000
Less business loss (20,000)
$35,000
Tax @ 40% $14,000
Tax liability of Night:
Employment Income $40,000
Property Income 15,000
$55,000
Tax @ 40% $22,000
2. Knight's business loss belongs exclusively to the corporation as a separate taxable entity.
The loss in the corporation is preserved and can be offset against future profits of the
business, if they occur within 20 years [ITA 111(1)(a)].
Alternatively, Knight may dispose of the shares of the corporation at a reduced value and
may recognize a capital loss of which only one-half is available for tax purposes.
Assuming the corporation is a small business corporation, the loss is an allowable
business investment loss which can be offset against other sources of income, but not
until the year in which the shares are disposed. Therefore, both the timing and amount of
loss which can be used to reduce income are affected [ITA 38, 39(1)(c)].
3. Impact on return on investment: because Day's tax liability is $8,000 less in year 20X1,
Day has a greater cash flow which can be used for reinvestment. This increased cash
flow may provide a greater long-term return on investment than can be achieved by
Knight (who may reduce taxes from the loss at some future time). In addition, if Knight
recognizes the loss from a sale of shares, a lesser amount of tax savings will be received
as only one-half of the loss is deductible.
Because Day has higher cash flow than Knight in the first year, Day can use this cash
flow to fund the loss of the business thereby reducing the risk of a complete business
failure. Consequently, Day may achieve greater and more immediate success from the
business. In other words, the increased cash flow may reduce the risk of business failure.

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PROBLEM TWO
[ITA: 2(1); 2(3); 3(a); 114; 115(1)(a)(ii); 212(1)(b); 250(1)(a); 250(4)]
To what extent, if any, are the following individuals or corporations liable for tax in Canada?
1. An individual who lives and works in Canada received an inheritance from an uncle in
France. The inheritance consists of shares, bonds, and French real estate. During the
year, the investments generated interest, dividends, and rents, which were retained in
France and reinvested.
2. A large corporation based in Alabama operates a branch in Winnipeg that employs
Canadian staff, holds a supply of inventory, and sells to the Canadian market.
3. An American citizen who normally resides in New York and has extensive American
income, for health reasons takes an extended vacation of six-and-a-half months in Banff,
Alberta in the current calendar year.
4. A Manitoba corporation is controlled and managed by its British parent corporation.
5. A Canadian individual, who is a student at the University of Saskatchewan, earns
income during the summer by operating a street-vending unit in Boulder, Colorado.
6. An individual has been employed in Canada by a large Canadian corporation. He
accepts a transfer to manage, on a permanent basis, the corporation’s operations in
Denver, Colorado. He leaves Canada with his family on March 31, 20X0.
7. An individual who resides in England receives annual dividend income from an
investment in a Canadian corporation.

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Solution to P3-2
1. The individual is a resident of Canada and taxed on world income. Therefore, the interest,
rents and dividends are taxable in Canada [ITA 3(a)].
2. The Alabama corporation is not a resident of Canada. However, as a non-resident it
carries on business in Canada from a branch location in Winnipeg. It is, therefore, liable
for Canadian tax on the branch profits only [ITA 2(3), 115(1)(a)(ii)].
3. Even though the individual does not have a continuing state of relationship with Canada,
he/she is deemed to be a Canadian resident throughout the current year because of
his/her presence in Canada for 183 days or more (6 1/2 months) and is, therefore, taxable
in Canada on world income which includes the U.S. income [ITA 2(1), 250(1)(a)].
4. The Manitoba corporation is a resident of Canada because it is incorporated in Canada. It
is taxable in Canada on its world income [ITA 2(1), 3(a), 250(4)].
5. The student has a continuing relationship with Canada, is a resident and taxable on world
income including the summer business income from the U.S. [ITA 2(1), 3(a)].
6. The individual ceases to be a Canadian resident on March 31, 20X0 and is taxable on
world income in Canada only up to March 31, 20X0 [ITA 2(1), 114].
7. The individual is not a resident of Canada. Therefore, the Canadian dividend income is
NOT reported on a Canadian tax return. The Canadian corporation paying the dividend is
required to withhold tax and remit the tax withheld to the Canadian government. The rate
for the withholding tax specified by the Income Tax Act is 25% [ITA 212(2)].

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PROBLEM THREE
[Min Shan Shih v the Queen 2000 DTC 2072 – Residence]
Read the Tax Court of Canada case Min Shan Shih v the Queen 2000 DTC 2072 and explain in
your own words the reason for the decision in the case.
Solution to P3-3
The taxpayer was found not resident in Canada for the years in question because when all of
the facts were considered, the taxpayer never became a resident of Canada. His normal
routine of daily living remained in Taiwan (i.e., his work, parents, social ties, etc.). The
taxpayer’s wife and children became resident in Canada so that the children could be educated
in Canada.
Facts supporting the position that the taxpayer was resident in Canada throughout the years in
question, 1997, 1998, and 1999:
• Taxpayer owned a house in Canada, readily available to him at all times,
• Taxpayer’s wife and children lived in Canada in the family home throughout the years in
question,
• Taxpayer filed a Canadian tax return for each of the years,
• Taxpayer gave the family home in Canada as his address on his tax returns,
• Taxpayer had applied for permanent residence status in Canada for himself and his
family,
• In 1996 the taxpayer and his family were admitted to Canada as landed immigrants,
• Taxpayer maintained a bank account in Canada jointly with his wife,
• Taxpayer owned a car in Canada,
• Taxpayer obtained an Ontario driver’s license and an Ontario health card,
• Taxpayer was the sole shareholder of a Canadian corporation,
• In 2000 the taxpayer’s wife and children became citizens of Canada, and
• The family home in Taiwan was sold prior to coming to Canada.
Facts supporting the position that the taxpayer was not resident in Canada throughout the years
in question:
• Taxpayer was employed in Taiwan throughout the years in question,
• Taxpayer maintained an apartment in Taiwan,
• Taxpayer’s pay (employment income) was deposited into his Taiwanese bank account,
• Taxpayer had a Taiwanese driver’s license and pharmacist’s license,
• All of the taxpayer’s club, church and professional association memberships were in
Taiwan,
• Taxpayer visited Canada only twelve times during the span 1996 – 1999,
• Taxpayer spent a great deal more time in Taiwan than in Canada,

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Subject

Taxation