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 Remembering Clarence Byrd and Ida Chen
Pearson Canada grieves the loss of both Clarence Byrd and Ida Chen, the beloved
authors of Canadian Tax Principles. For more than 35 years, Clarence and Ida
have been extensively involved in Canadian accounting education. Their book,
Canadian Tax Principles, has been used by thousands of instructors and students
and continues to be read and relied upon by learners across the country.
Our thoughts are with their family, friends, and the education community who
worked with them and knew them personally.

Husband and wife, Clarence Byrd and Ida Chen, authors of Canadian Tax Principles,
passed away on May 30, 2020, and November 6, 2019, respectively. Their impact on
accounting education will not be forgotten.
 In Memoriam of Ida Chen
On November 6, 2019, Ida Chen, my wife of 43 years, died
from cancer.
In our years together, Ida and I authored some 150 books on
financial accounting and tax.
These books were used by tens of thousands of students, as
well as by many accounting professionals.
Canadian Tax Principles has been, by far, our most successful
effort. Through more than 25 annual editions, we piloted this
publication from a niche product that we self-published to its
position today as the most widely adopted text in Canadian
university and college tax courses. We had an ongoing discus-
sion about responsibility for this success. Ida believed that it
was based on the quality of my writing, while I was equally
convinced that its success resulted from her editing work on
my often rough first drafts. The truth is that this publication
In Memoriam of Clarence Byrd
I was first introduced to Clarence indirectly while working
towards a Bachelor of Commerce degree in Montreal in the
early eighties. I was taking an intermediate level accounting
course with emphasis upon the CICA Handbook, consolidation
accounting, and other topics that created a sense of dread in
most accounting students. Unfortunately, the required text-
book was not helpful in clarifying these difficult abstract con-
cepts. The professor, recognizing the difficulty, recommended
a two volume textbook written by Clarence Byrd and Ida Chen
on accounting principles and concepts. I immediately purchased
the books and was sold. The concepts were clearly explained in
easy-to-read language, dissecting the words of the CICA Handbook
to carefully explain step by step (with plenty of examples) these
abstract concepts. Clarence and Ida had taken a complex topic
and broken it down in such a way to make it easy to understand—
the mark of true educators.
Flash forward 15 plus years to the late nineties and our paths
would cross once again in a much more direct way. At the time
I worked for the training organization of the CRA, teaching and
writing courses, and became an income tax rulings officer in
Ottawa shortly thereafter. I regularly read tax textbooks and
other tax literature and came across a relatively new publica-
tion, Canadian Tax Principles, written by Clarence Byrd and Ida
Chen. I read through the textbook and reached out, making rec-
ommendations as to improvements. It was a bit of a bold move,
but it was well received by Clarence who reciprocated by per-
sonally reaching out to me. Clarence realized that my back-
ground with the CRA could only improve the textbook and our
collaboration, which would last for more than 20 years, had
begun. Ida once described our complementary skills as produc-
ing one of the finest writing teams she had ever seen. What
made it all work was that Clarence, Ida, and myself were dedi-
cated to effective quality tax education.
Over the years my wife, Michelle, and I learned firsthand that
Clarence and Ida loved to entertain, and we were invited to their
amazing homes in both Ottawa and Chelsea with the occasional
outing to restaurants in Ottawa and Gatineau. We had become
friends. Clarence would cook, Ida would make certain that every-
thing was perfect, and the evening would finish with a song or
two as Clarence, a gifted concert pianist, would tickle the keys
on his Viennese-made Bosendorfer Concert Grand 290 piano
with Ida accompanying him on occasion on an electric keyboard.
They were good, memorable times.
My role with Clarence and Ida was as a consultant, advisor,
technical reviewer, and sometimes co-author, writing a handful
of chapters and some problem material. It was not unusual for
would have had no success without the synergy resulting from
our unusually complementary contributions.
While Ida’s efforts were essential to the success of our publi-
cations, her contributions to our life together were even more
important to me. We were best friends from the beginning of
our marriage and, during the last 15 years, after my teaching
was restricted to online efforts, we spent pretty much 24/7
together. We skied, hiked, climbed, and biked all over North
America. We shared great food and, over the years, had several
beautiful homes. Both the success of our books and the joy we
found in our life together were beyond our wildest dreams.
We have lived the greatest love story that I have ever wit-
nessed. I miss her terribly.
Clarence Byrd
May 6, 2020
me to speak to Clarence two or three times a day, particularly
during annual federal budgets or unexpected changes to the
income tax laws such as the Accelerated Investment Incentive
property rules, trust reporting, income splitting, etc. Our col-
laboration led to constant discussions on what to add, what not
to add, and how to go about introducing new topics in the most
effective manner.
In September 2019 my wife and I visited Maui for a couple of
weeks. Before leaving, Ida sent me this email…
We hope you and Michelle find Hawaii great, but not so
great you want to move there. We really need you on the
CTP project. Safe travels, Ida.
Ida was the glue that kept it all together. She was a dynamo, a
gifted organizer and administrator who could have easily fit into
the fabric of the largest companies in the world. We knew that
Ida had been struggling with cancer for a few years and beaten
the odds more than a few times, but her passing in November
of 2019 was an incredibly difficult time for my wife and I and
everyone who knew her (https://ohfoundation.ca/be-inspired/
symptoms-strike-and-reveal-shocking-brain-cancer-diagnosis/).
Through it all, Clarence, always a rock, began to show the signs
of stress and his own medical situation worsened. Our collabo-
ration accelerated as he was dedicated to completing what
would be his final edition of Canadian Tax Principles. This publi-
cation held a special place in his heart. Clarence and Ida had
created the textbook together from scratch and they took
exceptional pride in each and every annual release.
In the final weeks before Clarence passed on Saturday, May 30,
2020, he worked furiously with a dedication to complete all the
necessary steps possible to ready the textbook for publication.
Our telephone conversations increased substantially during this
time as our collaborative efforts took on a new urgency, pur-
pose, and meaning. Clarence took comfort in knowing that I
would pick up the reins to ensure the continuity of the success-
ful text that both he and Ida had created together.
I look back on my relationship with these two remarkable indi-
viduals with happiness that our paths crossed for a common
purpose and dedication to ideals of education. Along the way
on this journey my wife and I had the opportunity to enjoy their
company and friendship. We think of them every day and will
miss them tremendously.
Gary Donell
June 9, 2020
CLARENCE BYRD
Clarence Byrd Inc. Byrd & Chen’s
Canadian
IDA CHEN
Clarence Byrd Inc.

Tax
With contributions by
GARY DONELL

Principles
2020–2021 EDITION

Volume I
Please contact https://support.pearson.com/getsupport/s/contactsupport with any queries on this content.
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ISBN 978-0-13-674537-2
ScoutAutomatedPrintCode
 iii

CONTENTS

The textbook is published in Volume I = Chapters 1 to 10

two Volumes: Volume II = Chapters 11 to 21

Chapter VO L U M E I Chapter VO L U M E II

Introduction To Taxable Income and Tax Payable

1 11
Federal Taxation In Canada For Individuals Revisited

2 Procedures and Administration Taxable Income and

12
Tax Payable For Corporations
Income Or Loss From
3
An Office Or Employment Taxation of
13
Corporate Investment Income
Taxable Income and Tax Payable
4
For Individuals 14 Other Issues In Corporate Taxation

5 Capital Cost Allowance Corporate Taxation and

15
Management Decisions
6 Income Or Loss From A Business
16 Rollovers Under Section 85
7 Income From Property
Other Rollovers and
17
Sale Of An Incorporated Business
8 Capital Gains And Capital Losses

18 Partnerships
Other Income, Other Deductions,
9
And Other Issues
19 Trusts And Estate Planning
Retirement Savings And Other
10
Special Income Arrangements 20 International Issues In Taxation

Detailed contents of Volume I, 21 GST/HST

Chapters 1 to 10 follows.
Located at the back of the print
Glossary
and online Study Guide.
iv Table Of Contents (Volume 1)

CHAPTER 1 CHAPTER 2
Introduction To Procedures And Administration
Federal Taxation In Canada
Introduction . . . . . . . . . . . . . . . . . 49
The Canadian Tax System . . . . . . . . . 1 Administration Of The Department . . . . 49
Alternative Tax Bases . . . . . . . . . . . . . 1
Taxable Entities In Canada . . . . . . . . . . 2 Returns And Payments - Individuals . . . . 50
Federal Taxation And The Provinces . . . . . . 3 Requirement To File - ITA 150 . . . . . . . . . . 50
Due Date For Individual Returns . . . . . . . . 51
Tax Policy Concepts. . . . . . . . . . . . . 5 Withholdings For Income Tax - ITA 153 . . . . . 52
Taxation And Economic Policy . . . . . . . . 5 Instalment Payments For Individuals - ITA 156 . 53
Taxation And Income Levels . . . . . . . . . 5 Interest . . . . . . . . . . . . . . . . . . . . . 57
Tax Incidence . . . . . . . . . . . . . . . . . 8 Penalties . . . . . . . . . . . . . . . . . . . . 58
Tax Expenditures . . . . . . . . . . . . . . . 8 Due Date For Balance Owing - Living Individuals . 59
Qualitative Characteristics Of Tax Systems . . 9 Deceased Taxpayers - Balance Due Dates
Income Tax Reference Materials . . . . . 11 And Final Returns . . . . . . . . . . . . . . . . 59
Introduction . . . . . . . . . . . . . . . . . . 11 Returns And Payments - Corporations . . . 59
The Income Tax Act . . . . . . . . . . . . . . 11 Due Date For Corporate Returns - ITA 150 . . . 59
Other Income Tax Legislation . . . . . . . . . 15 Filing Alternatives For Corporations . . . . . . . 60
Other Sources Of Income Tax Information . . 16 Instalment Payments For Corporations . . . . . 60
Liability For Part I Income Tax . . . . . . 18 Due Date For Balance Owing - Corporations . . 62
Background . . . . . . . . . . . . . . . . . . 18 Interest And Penalties For Corporations . . . . 63
Charging Provision For Canadian Residents. . 18 Returns And Payments - Trusts . . . . . . . 63
Charging Provision For Non-Residents . . . . 19 Types Of Trusts . . . . . . . . . . . . . . . . . 63
Residence . . . . . . . . . . . . . . . . . 21 Filing Requirements. . . . . . . . . . . . . . . 63
Importance . . . . . . . . . . . . . . . . . . 21 Due Dates For Returns . . . . . . . . . . . . . 63
Residence Of Individuals . . . . . . . . . . . 21 Payment Of Taxes . . . . . . . . . . . . . . . . 63
Residence Of Corporations . . . . . . . . . . 27 Interest And Penalties. . . . . . . . . . . . . . 64
Residence Of Trusts . . . . . . . . . . . . . . 29 Income Tax Information Returns . . . . . . 64
Alternative Concepts Of Income . . . . . 29 Books And Records . . . . . . . . . . . . . 64
The Economist’s View. . . . . . . . . . . . . 29
The Accountant’s View . . . . . . . . . . . . 30 Assessments And The CRA
The Income Tax Act View . . . . . . . . . . . 30 My Account Service . . . . . . . . . . . 64
CRA Website - My Account Service. . . . . . . 64
Net Income For Tax Purposes . . . . . . 30 Notice Of Assessment . . . . . . . . . . . . . 65
Structure . . . . . . . . . . . . . . . . . . . 30 Notice Of Reassessment . . . . . . . . . . . . 65
Components . . . . . . . . . . . . . . . . . 31
Combining The Components - ITA Section 3 . 32 Refunds . . . . . . . . . . . . . . . . . . . 65
Loss Carry Overs . . . . . . . . . . . . . . . 34
Net Income For Tax Purposes - Example . . . 35 Adjustments To Income Tax Returns . . . . 66

Net Income To Taxable Income . . . . . . 36 Disputes And Appeals . . . . . . . . . . . 67

Representation By Others . . . . . . . . . . . 67
Principles Of Tax Planning . . . . . . . . 37 Informal Request For Adjustments . . . . . . . 67
Introduction . . . . . . . . . . . . . . . . . . 37 Notice Of Objection . . . . . . . . . . . . . . . 67
Tax Avoidance Or Reduction . . . . . . . . . 37 Tax Court Of Canada . . . . . . . . . . . . . . 69
Tax Deferral . . . . . . . . . . . . . . . . . . 37 Federal Court And Supreme Court Of Canada . 70
Income Splitting. . . . . . . . . . . . . . . . 38
Tax Evasion, Avoidance, And Planning. . . 70
Abbreviations To Be Used . . . . . . . . 39 Tax Evasion . . . . . . . . . . . . . . . . . . . 70
Tax Avoidance And Tax Planning. . . . . . . . . 71
Key Terms Used In This Chapter . . . . . 40 General Anti-Avoidance Rule (GAAR) . . . . . . 71
References . . . . . . . . . . . . . . . . . 41 Collection And Enforcement . . . . . . . . 72
Problems For Self Study (Online) . . . . 41 Taxpayer Property . . . . . . . . . . . . . . . . 72
Collections . . . . . . . . . . . . . . . . . . . 72
Assignment Problems . . . . . . . . . . 42 Other Penalties . . . . . . . . . . . . . . . . . 73
(Continued)
 Table Of Contents (Volume 1) v

Chapter 2 - Continued Taxable Vs. Non-Taxable Allowances . . .

Taxpayer Relief Provisions . . . . . . . . . 74
Fairness Package . . . . . . . . . . . . . . . . 74
Voluntary Disclosure . . . . . . . . . . . . . . 75
Key Terms Used In This Chapter . . . . . . 75
References . . . . . . . . . . . . . . . . . . 76
Problems For Self Study (Online) . . . . . 77
Assignment Problems . . . . . . . . . . . 77
Reasonable Allowances For Motor Vehicles.
106
107
Employer’s Perspective Of Allowances . . 108
Employee’s Perspective Of Allowances. . 108
Inclusions - Employee Insurance
Benefits . . . . . . . . . . . . . . . . 109
Life Insurance . . . . . . . . . . . . . . . 109
Disability Insurance (a.k.a. Group
Sickness Or Accident Insurance Plans) . . 109
Loans To Employees . . . . . . . . . . 110
General Rules . . . . . . . . . . . . . . . .110
Tax Planning For Interest Free Loans . . . .112

Inclusions - Stock Option Benefits. . . 114

CHAPTER 3 The Economics Of Stock Option
Arrangements . . . . . . . . . . . . . . . .114
Overview Of The Tax Rules . . . . . . . . .115
Income Or Loss From CCPCs Vs. Public Companies . . . . . . . .117
An Office Or Employment Rules For Public Companies . . . . . . . .117
Rules For Canadian Controlled Private
Employment Income Defined . . . . . 81 Corporations (CCPCs) . . . . . . . . . . . .118
General Rules . . . . . . . . . . . . . . . . 81 Other Inclusions. . . . . . . . . . . . . 120
Cash Basis And The Use Of Bonus Payments By Employer To Employee . . . 120
Arrangements . . . . . . . . . . . . . . . . 82 Forgiveness Of Employee Loans . . . . . 120
Net Concept. . . . . . . . . . . . . . . . . 83 Housing Loss Reimbursement . . . . . . 120
Employee Versus Self-Employed. . . . 84 Discounts On Employer’s Merchandise. . 121
Introduction . . . . . . . . . . . . . . . . . 84 Specific Deductions. . . . . . . . . . . 121
Employee Perspective . . . . . . . . . . . 84 Overview . . . . . . . . . . . . . . . . . 121
Employer Perspective . . . . . . . . . . . . 86 Salesperson’s Expenses Under ITA 8(1)(f) . . 122
Making The Distinction . . . . . . . . . . . 86 Travel Expenses And Motor Vehicle Costs
Inclusions - Employee Benefits. . . . . 88 Under ITA 8(1)(h) and 8(1)(h.1) . . . . . . 123
Basic Concepts . . . . . . . . . . . . . . . 88 The Salesperson’s Dilemma. . . . . . . . 124
Other Expenses Of Performing Duties
Inclusions - Salaries And Wages . . . . 88 Under ITA 8(1)(i) . . . . . . . . . . . . . . 125
Automobile And Aircraft Expenses Under
Inclusions - Non-Salary Benefits . . . . 89
ITA 8(1)(j) . . . . . . . . . . . . . . . . . 125
Introduction . . . . . . . . . . . . . . . . . 89
Work Space In The Home Costs For
Legislative Guidance . . . . . . . . . . . . 89
Employees . . . . . . . . . . . . . . . . 126
Non-Legislative Guidance . . . . . . . . . . 91
Tax Planning Considerations . . . . . . . . 95 Key Terms Used In This Chapter . . . . 127
Inclusions - GST/HST/PST On Taxable References . . . . . . . . . . . . . . . . 127
Benefits . . . . . . . . . . . . . . . . 96
Problems For Self Study (Online) . . . 128
Inclusions - Automobile Benefits . . . . 97
Employees And Automobiles . . . . . . . . 97 Assignment Problems . . . . . . . . . 128
Taxable Benefits - Standby Charge . . . . . 98
Operating Cost Benefit . . . . . . . . . . .101
Payments By Employee For Automobile
Use . . . . . . . . . . . . . . . . . . . . .101
CHAPTER 4
Summary Of Automobile Benefit
Calculations . . . . . . . . . . . . . . . . 102 Taxable Income And Tax Payable
Example - Employer Owned Automobile . 102 For Individuals
Example - Employer Leased Vehicle . . . . 103
Employer Provided Cars And Tax Planning . 104 Introduction . . . . . . . . . . . . . . . . . 139
Inclusions - Allowances . . . . . . . . . 105 Taxable Income Of Individuals . . . . . . . 140
Allowance Vs. Reimbursement . . . . . . 105 Available Deductions . . . . . . . . . . . . . . 140
General Rules . . . . . . . . . . . . . . . 105 Ordering Of Deductions. . . . . . . . . . . . . 140
(Continued)
vi Table Of Contents (Volume 1)
Chapter 4 - Continued
Deductions For Payments - ITA 110(1)(f) . . . . 140
Northern Residents Deductions - ITA 110.7 . . . 141
Calculation Of Tax Payable . . . . . . . . . 141
Federal Tax Payable Before Credits . . . . . . . 141
Provincial Tax Payable Before Credits . . . . . . 142
Types Of Income . . . . . . . . . . . . . . . . 143
Taxes On Income Not Earned In A Province . . 144
Calculating Tax Credits . . . . . . . . . . . 144
Federal Amounts . . . . . . . . . . . . . . . . 144
Provincial Amounts . . . . . . . . . . . . . . . 144
Personal Tax Credits - ITA 118(1) . . . . . . 145
Basic Personal Amount (BPA) - ITA 118(1.1) . . . 145
Individuals With A Spouse Or Common-Law
Partner - ITA 118(1)(a) . . . . . . . . . . . . . . 146
Individuals Supporting A Dependent
Person - ITA 118(1)(b) . . . . . . . . . . . . . . 147
Canada Caregiver Amount For
Child - ITA 118(1)(b.1) . . . . . . . . . . . . . . 149
Single Persons (Basic Personal Tax
Credit) - ITA 118(1)(c) . . . . . . . . . . . . . . 149
Canada Caregiver Tax Credit - ITA 118(1)(d) . . . 150
Other Tax Credits For Individuals . . . . . 152
Age Tax Credit - ITA 118(2) . . . . . . . . . . . 152
Pension Income Tax Credit - ITA 118(3) . . . . . 153
Canada Employment Tax Credit - ITA 118(10) . . 154
Adoption Expenses Tax Credit - ITA 118.01 . . . 154
Digital News Subscriptions Credit - ITA 118.02 . 155
Home Accessibility Tax Credit - ITA 118.041 . . 155
First-Time Home Buyer’s Tax
Credit - ITA 118.05. . . . . . . . . . . . . . . . 157
Volunteer Firefighters And Volunteer
Search And Rescue Workers Tax
Credits - ITA 118.06 And 118.07 . . . . . . . . . 157
Charitable Donations Tax Credit - ITA 118.1 . . . 158
Medical Expense Tax Credit - ITA 118.2 . . . . . 160
Disability Tax Credit - ITA 118.3 . . . . . . . . . 163
Education Related Tax Credits. . . . . . . . . . 165
Employment Insurance (EI) And Canada
Pension Plan (CPP) Tax Credits - ITA 118.7 . . . 168
Overpayment Of EI Premiums And CPP
Contributions . . . . . . . . . . . . . . . . . . 168
Transfers To A Spouse Or Common-Law
Partner - ITA 118.8. . . . . . . . . . . . . . . . 169
Political Contributions Tax Credits - ITA 127(3) . 170
Labour Sponsored Venture Capital
Corporations Credit - ITA 127.4 . . . . . . . . . 171
Dividend Tax Credit . . . . . . . . . . . . . . . 171
Foreign Tax Credits . . . . . . . . . . . . . . . 171
Investment Tax Credits . . . . . . . . . . . . . 171
Refundable Credits . . . . . . . . . . . . . 171
Introduction . . . . . . . . . . . . . . . . . . . 171
GST/HST Credit - ITA 122.5 . . . . . . . . . . . 172
Refundable Medical Expense
Supplement - ITA 122.51 . . . . . . . . . . . . 172
Canada Workers Benefit - ITA 122.7
(Formerly Working Income Tax Benefit) . . . . . 173
Refundable Teacher And Early Childhood
Educator School Supply Tax Credit - ITA 122.9 . 174
Climate Action Incentive Payments . . . . . . . 174
Canada Training Credit - ITA 122.91 . . . . . . . 175
Social Benefits Repayment (OAS And EI). . 176
Basic Concepts . . . . . . . . . . . . . . . . . 176
Employment Insurance (EI) Benefits Clawback . 177
Old Age Security (OAS) Benefits Clawback . . . 177
Comprehensive Example . . . . . . . . . . 178
Key Terms Used In This Chapter . . . . . . 180
References . . . . . . . . . . . . . . . . . . 180
Sample Tax Return And Tax Software
SS Problem . . . . . . . . . . . . . . . . 181
Problems For Self Study (Online) . . . . . 181
Assignment Problems . . . . . . . . . . . 182
Tax Software Assignment Problems. . . . 192
CHAPTER 5
Capital Cost Allowance
Note On Eligible Capital Expenditures . . 199
Capital Cost Allowance System . . . . . . 200
General Rules . . . . . . . . . . . . . . . . . .200
Tax And Accounting Procedures Compared. . .200
Additions To Capital Cost. . . . . . . . . . 202
Determination Of Amounts . . . . . . . . . . .202
Available For Use Rules . . . . . . . . . . . . .205
Segregation Into Classes . . . . . . . . . . . .205
Capital Cost Allowances . . . . . . . . . . 206
General Overview . . . . . . . . . . . . . . . .206
Rates For Commonly Used CCA Classes . . . .207
Half-Year Rules (a.k.a. First Year Rules) . . . . . 210
Accelerated Investment Incentive (AccII) . . . . 211
Zero Emission Vehicles . . . . . . . . . . . . . 215
Short Fiscal Periods . . . . . . . . . . . . . . . 216
Class 14.1 . . . . . . . . . . . . . . . . . . . . 217
Tax Planning Considerations For CCA. . . . . . 219
Dispositions Of Depreciable Assets . . . . 220
Overview Of Procedures . . . . . . . . . . . .220
Capital Gains . . . . . . . . . . . . . . . . . .222
Recapture Of Capital Cost Allowance . . . . . .222
Terminal Losses . . . . . . . . . . . . . . . . .223
Dispositions Of Class 54 Assets
(Zero Emission Vehicles) . . . . . . . . . . . .224
Dispositions Of Class 14.1 - Differences
From Other Classes . . . . . . . . . . . . . . .225
Summary Of Disposition Tax Consequences . .227
(Continued)

Chapter 5 - Continued
CCA Schedule . . . . . . . . . . . . . . . . 228
CCA Determination - Special Situations . 229
Separate Class Election . . . . . . . . . . . . .229
Change In Use For Automobiles . . . . . . . .230
Other Special Situations. . . . . . . . . . . . .231
Key Terms Used In This Chapter . . . . . . 232
References . . . . . . . . . . . . . . . . . . 232
Appendix - CCA Rates For Selected Assets . . 233
Problems For Self Study (Online) . . . . . 235
Assignment Problems . . . . . . . . . . . 235
CHAPTER 6
Income Or Loss From A Business
Overview . . . . . . . . . . . . . . . . . . 243
Classification Of Income . . . . . . . . . . . .244
Business Income Vs. Property Income. . . 246
Tax Consequences Of Classification . . . . . .246
Business Income Defined. . . . . . . . . . . .247
Property Income Defined . . . . . . . . . . . .248
Business Income Vs. Capital Gains . . . . 248
Tax Consequences Of Classification . . . . . .248
Capital Gains Defined . . . . . . . . . . . . . .249
Criteria For Identifying Capital Gains . . . . . .249
Business Income And GAAP . . . . . . . . 250
Business Income - Inclusions (Revenues) . .252
Inclusions In Business Income -
Income Tax Act Provisions . . . . . . . . . . .252
Amounts Received And Receivable . . . . . . .252
Reserves . . . . . . . . . . . . . . . . . . . .252
Other Inclusions. . . . . . . . . . . . . . . . .255
Limitations On Deductions From Business
And Property Income . . . . . . . . . . 257
General Approach - Restrictions In ITA 18
Through ITA 19.1 . . . . . . . . . . . . . . . .257
Specific Limiting Items Under ITA 18 . . . . . .257
Foreign Media Advertising - ITA 19 And 19.1 . .263
Limitations On Deductions From Business,
Property, And Employment Income. . . 264
Introduction . . . . . . . . . . . . . . . . . . .264
Reasonableness. . . . . . . . . . . . . . . . .264
Meals And Entertainment. . . . . . . . . . . .264
“Luxury” Automobile Costs. . . . . . . . . . .265
Automobiles Owned By The Taxpayer. . . . . .266
Automobile Leasing Costs - ITA 67.3 . . . . . .266
Table Of Contents (Volume 1) vii
Leasing Property . . . . . . . . . . . . . . . .268
Illegal Payments, Fines And
Penalties - ITA 67.5 And 67.6 . . . . . . . . . .269
Business Income - Specific Deductions . . 269
Inventory Valuation (Cost Of Sales) . . . . . . .269
Other Deductions . . . . . . . . . . . . . . . . 271
Reconciliation Schedule . . . . . . . . . . 273
Business Income - Example . . . . . . . . 274
Example Data . . . . . . . . . . . . . . . . . . 274
Example Analysis . . . . . . . . . . . . . . . .275
Taxation Year . . . . . . . . . . . . . . . . 276
General Rules . . . . . . . . . . . . . . . . . .276
Unincorporated Businesses - Non-Calendar
Fiscal Year . . . . . . . . . . . . . . . . . . . .276
Special Business Income Situations. . . . 278
Income For Farmers. . . . . . . . . . . . . . .278
Professional Income (Billed Basis Of
Recognition). . . . . . . . . . . . . . . . . . .280
Sale Of A Business . . . . . . . . . . . . . . .281
Scientific Research And Experimental
Development . . . . . . . . . . . . . . . . . .283
Key Terms Used In This Chapter . . . . . . 283
References . . . . . . . . . . . . . . . . . . 283
Problems For Self Study (Online) . . . . . 284
Assignment Problems . . . . . . . . . . . 285
CHAPTER 7
Income From Property
Introduction . . . . . . . . . . . . . . . . . 301
Property Income: General Concept . . . . 301
Interest As A Deduction. . . . . . . . . . . 302
The Problem . . . . . . . . . . . . . . . . . .302
IT Folio S3-F6-C1 “Interest Deductibility”. . . .302
What Is Interest? . . . . . . . . . . . . . . . .302
Legislation. . . . . . . . . . . . . . . . . . . .303
Borrowed To Produce Income . . . . . . . . . .303
Direct Or Indirect Use. . . . . . . . . . . . . .303
Discount And Premium On Long Term
Issued Debt . . . . . . . . . . . . . . . . . . .306
Interest Income . . . . . . . . . . . . . . . 308
General Provision . . . . . . . . . . . . . . . .308
Corporations And Partnerships - Full Accrual
Method . . . . . . . . . . . . . . . . . . . . .308
Individuals - Modified Accrual Method . . . . .309
Discount And Premium On Long Term
Debt Holdings . . . . . . . . . . . . . . . . . . 310
Accrued Interest At Transfer. . . . . . . . . . . 310
(Continued)
viii Table Of Contents (Volume 1)

Chapter 7 - Continued Lifetime Capital Gains Deduction . . . . . . . .343

Changes In The Inclusion Rate . . . . . . . 344
Payments Based On Production Or General Rules . . . . . . . . . . . . . . . . 344
Use (Royalties) . . . . . . . . . . . . . . 311 Capital Gains In The Income Tax Act . . . . .
.344
Capital Gains Defined . . . . . . . . . . . . .
.344
Rental Income . . . . . . . . . . . . . . . . 311 Dispositions . . . . . . . . . . . . . . . . . .
.345
General Rules . . . . . . . . . . . . . . . . . . 311 Proceeds Of Disposition . . . . . . . . . . .
.346
Capital Cost Allowances . . . . . . . . . . . . 312 Adjusted Cost Base . . . . . . . . . . . . . .
.346
Rental Income Example. . . . . . . . . . . . . 313 Calculating The Capital Gain Or Loss . . . . 348
Cash Dividends From Taxable Detailed Application Of The Rules . . . . 349
Canadian Corporations . . . . . . . . . 314 Identical Properties . . . . . . . . . . . . . . .349
The Concept Of Integration . . . . . . . . . . . 314 Partial Dispositions . . . . . . . . . . . . . . .350
Implementing Integration . . . . . . . . . . . . 315 Warranties On Capital Assets . . . . . . . . . .350
Gross Up And Tax Credit Procedures - Capital Gains Reserves . . . . . . . . . . . . .351
Eligible Dividends . . . . . . . . . . . . . . . . 317 Bad Debts On Sales Of Capital Property . . . .353
Gross Up And Tax Credit Procedures - Special Rule For Sales Of Real Property . . . .354
Non-Eligible Dividends . . . . . . . . . . . . .320
Provisions For Special Assets . . . . . . . 356
Income Trusts . . . . . . . . . . . . . . . . 323 Principal Residence . . . . . . . . . . . . . . .356
How Do Trusts Work? . . . . . . . . . . . . . .323 Personal Use Property . . . . . . . . . . . . .358
Investments In Publicly Traded Trusts . . . . . .324 Listed Personal Property . . . . . . . . . . . .359
Taxation Of Real Estate Investment Trusts (REITs) . 326 Gains And Losses On Foreign Currency . . 360
Options - ITA 49 . . . . . . . . . . . . . . . . .362
Mutual Funds . . . . . . . . . . . . . . . . 327
Objective . . . . . . . . . . . . . . . . . . . .327 Deemed Dispositions - Change In Use . . 363
Organization. . . . . . . . . . . . . . . . . . .327 General Rules . . . . . . . . . . . . . . . . . .363
Distributions. . . . . . . . . . . . . . . . . . .327 Business To Personal Use . . . . . . . . . . . .364
Adjusted Cost Base . . . . . . . . . . . . . . .328 Personal To Business Use . . . . . . . . . . . .364
Example - Change In Use . . . . . . . . . . . .365
Other Types Of Dividends. . . . . . . . . . 329
Special Rules For Principal Residences . . . 367
Capital Dividends . . . . . . . . . . . . . . . .329
Special Rules For Automobiles . . . . . . . . .369
Stock Dividends . . . . . . . . . . . . . . . . .329

Foreign Source Income . . . . . . . . . . . 330 Deemed Dispositions - Departures From

General Rules . . . . . . . . . . . . . . . . . .330
Foreign Non-Business (Property) Income . . . .330
Foreign Business Income . . . . . . . . . . . .331
Shareholder Benefits . . . . . . . . . . . . 332
Tax Credits Revisited . . . . . . . . . . . . 332
Dividend Tax Credits. . . . . . . . . . . . . . .332
Foreign Income Tax Credits . . . . . . . . . . .332
Key Terms Used In This Chapter . . . . . . 333
References . . . . . . . . . . . . . . . . . . 333
Problems For Self Study (Online) . . . . . 334
Assignment Problems . . . . . . . . . . . 334
Canada . . . . . . . . . . . . . . . . . . 369
Deferral Provisions On Small Business
Investments . . . . . . . . . . . . . . . 370
Basic Provision . . . . . . . . . . . . . . . . .370
Definitions. . . . . . . . . . . . . . . . . . . .370
Example . . . . . . . . . . . . . . . . . . . . . 371
Deferral Provisions On Replacement
Property. . . . . . . . . . . . . . . . . . 372
The Problem . . . . . . . . . . . . . . . . . .372
Voluntary And Involuntary Dispositions . . . . .373
Timing Considerations . . . . . . . . . . . . .373
Application Of ITA 44(1) To Capital Gains . . . .373
Application Of ITA 13(4) To Recapture
Of CCA . . . . . . . . . . . . . . . . . . . . . 374
Combined Application Of ITA 13(4) And 44(1). .375

Capital Gains And Tax Planning . . . . . .378

CHAPTER 8 Key Terms Used In This Chapter. . . . . .379
Capital Gains And Capital Losses References . . . . . . . . . . . . . . . . . . 379
Problems For Self Study (Online) . . . . .380
Economic Background . . . . . . . . . . . 343
Capital Assets And Income Taxation Policy . . .343 Assignment Problems . . . . . . . . . . . 381
 Table Of Contents (Volume 1) ix

CHAPTER 9 Basic Rules - ITA 74.1(1) And (2) . . . . .

Avoiding Income Attribution . . . . . . .
.
.
.
.
.430
.432
Income Attribution - Other Related Parties . . .434
Other Income, Other Deductions, Anti-Avoidance Provisions . . . . . . . . . . .434
And Other Issues Tax Planning And Income Attribution . . . . . .435

Key Terms Used In This Chapter . . . . . . 436

Introduction . . . . . . . . . . . . . . . . . 391
Coverage Of Chapter 9 . . . . . . . . . . . . .391 References . . . . . . . . . . . . . . . . . . 437

Other Income - Subdivision d Inclusions . 392 Problems For Self Study (Online) . . . . . 437
Pension Benefits - ITA 56(1)(a)(i) . . . . . . . .392 Assignment Problems . . . . . . . . . . . 438
Retiring Allowances - ITA 56(1)(a)(ii) . . . . . .393
Death Benefits - ITA 56(1)(a)(iii) . . . . . . . .393
Income Inclusions From Deferred Income
Plans -ITA 56(1)(h), (h.1), (h.2), (i), and (t) .
Scholarships And Prizes - ITA 56(1)(n) . .
. . .394
. . .394 CHAPTER 10
Research Grants - ITA 56(1)(o) . . . . . . . . .394
Social Assistance And Workers’ Retirement Savings And Other
Compensation Payments - Special Income Arrangements
ITA 56(1)(u) And (v) . . . . . . . . . . . . . . .395

Other Deductions - Subdivision e Planning For Retirement . . . . . . . . . . 451

Deductions . . . . . . . . . . . . . . . . 395 Introduction . . . . . . . . . . . . . . . . . . .451
CPP Contributions On Self-Employed Providing Consistency. . . . . . . . . . . . . .451
Earnings - ITA 60(e) and ITA 60(e.1) . . . . . .395 Tax Deferred Savings . . . . . . . . . . . . . .452
Moving Expenses - ITA 62 . . . . . . . . . . .395 Defined Benefit Vs. Money Purchase Plans . .454
Child Care Expenses - ITA 63 . . . . . . . . . .399 Registered Retirement Savings Plans
Disability Supports Deduction - ITA 64 . . . . .402 (RRSPs) . . . . . . . . . . . . . . . . . . 455
Related Inclusions And Deductions . . . . 404 Basic Operations . . . . . . . . . . . . . . . .455
Introduction . . . . . . . . . . . . . . . . . . .404 RRSP Deduction Limit . . . . . . . . . . . . .458
Employment Insurance Benefits - Examples Of RRSP Deduction Calculations . .465
ITA 56(1)(a)(iv) And 60(n) . . . . . . . . . . . .405 Undeducted RRSP Contributions . . . . . . . .466
Pension Income Splitting - ITA 56(1)(a.2) RRSP And RRIF Administration Fees . . . . . .468
And 60(c) . . . . . . . . . . . . . . . . . . . .405 RRSP Withdrawals And Voluntary Conversions .468
Spousal And Child Support - ITA 56(1)(b) Involuntary Termination Due To Age Limitation .469
And 60(b) . . . . . . . . . . . . . . . . . . . .406 Spousal RRSP . . . . . . . . . . . . . . . . . .470
Annuity Payments Received - ITA 56(1)(d) Home Buyers’ Plan (HBP) . . . . . . . . . . . . 471
And 60(a) . . . . . . . . . . . . . . . . . . . .408 Lifelong Learning Plan (LLP) . . . . . . . . . . 474
Departure From Canada. . . . . . . . . . . . .475
Registered Savings Plans . . . . . . . . . 410 Death Of The RRSP Registrant . . . . . . . . .476
Introduction . . . . . . . . . . . . . . . . . . . 410
Tax Free Savings Accounts (TFSAs) . . . . . . 410 Registered Pension Plans (RPPs). . . . . . 477
Registered Education Savings Plans (RESPs) . 412 Establishing An RPP . . . . . . . . . . . . . .477
Registered Disability Savings Plans (RDSPs) . . 418 Employer Contributions To The RPP. . . . . . .478
Employee Contributions To The RPP . . . . . .479
Non-Arm’s Length Transfers Of Property . 418 Options At Retirement . . . . . . . . . . . . .479
Introduction . . . . . . . . . . . . . . . . . . . 418 Phased Retirement . . . . . . . . . . . . . . .479
Inadequate Considerations - ITA 69 . . . . . . 419 Inadequate Retirement Savings. . . . . . . . .479
Inter Vivos Transfers To A Spouse -
ITA 73(1) And 73(1.01) . . . . . . . . . . . . .422
Registered Retirement Income Funds
Non-Arm’s Length Transfers Of Depreciable (RRIFs) . . . . . . . . . . . . . . . . . . 481
Assets - ITA 13(7)(e) . . . . . . . . . . . . . . .424 Establishment . . . . . . . . . . . . . . . . . .481
Inter Vivos Transfer Of Farm Or Fishing RRIF Withdrawals . . . . . . . . . . . . . . . .482
Property To A Child . . . . . . . . . . . . . . .426 Death Of The RRIF Registrant. . . . . . . . . .483
Evaluation Of RRIFs. . . . . . . . . . . . . . .483
Death Of A Taxpayer . . . . . . . . . . . . 427
Deferred Profit Sharing Plans . . . . . . . 484
Income Attribution . . . . . . . . . . . . . 429 General Rules . . . . . . . . . . . . . . . . .484
The Problem . . . . . . . . . . . . . . . . . .429 Tax Planning. . . . . . . . . . . . . . . . . . .484

(Continued)
x Table Of Contents (Volume 1)
Chapter 10 - Continued
Profit Sharing Plans. . . . . . . . . . . . . 484
General Rules . . . . . . . . . . . . . . . . . .484
Part XI.4 Tax On Excess PSP Contributions . . .485
Transfers Between Plans . . . . . . . . . . 485
Accumulated Benefits. . . . . . . . . . . . . .485
Retiring Allowances . . . . . . . . . . . . . . .486
Retirement Compensation Arrangements 486
The Problem . . . . . . . . . . . . . . . . . .486
Arrangements Defined . . . . . . . . . . . . .487
Part XI.3 Refundable Tax . . . . . . . . . . . .487
Salary Deferral Arrangements . . . . . . . 488
The Problem . . . . . . . . . . . . . . . . . .488
The Solution . . . . . . . . . . . . . . . . . . .488
Individual Pension Plans (IPPs). . . . . . . 489
Key Terms Used In This Chapter . . . . . . 490
References . . . . . . . . . . . . . . . . . . 490
Problems For Self Study (Online) . . . . . 491
Assignment Problems . . . . . . . . . . . 491
Index . . . . . . . . . . . . . . . . . . . . . I-1
Study Guide
Your two volume textbook is accompanied by a
separate Study Guide that is available in print and
online.
The chapters of this Study Guide correspond to the
chapters of Byrd & Chen’s Canadian Tax Principles.
Each of these Study Guide chapters contains the
following:
• Detailed guidance on how to work through the
text and problems in the chapter.
• Detailed solutions to the Exercises and Self
Study Problems in the textbook for the chapter.
• A list of learning objectives for the material in
the chapter.
In addition, the Study Guide contains:
• Two sample personal tax returns and two Self
Study Tax Software Problems in Chapters 4
and 11.
• A sample corporate tax return in Chapter 13.
• An extensive Glossary.
 xi

PREFACE

Objectives Of The Canadian Tax Principles Package

Subject Coverage
The objective of this text is to provide coverage of all the tax subjects that are taught in Cana-
dian college and university tax courses. In so doing, it also provides comprehensive coverage of
almost all the tax issues that are required in the educational programs of CPA Canada. The one
area of these programs that is not covered is “Reporting Systems And Data Requirements For
Tax Compliance”.
This material is designed to be used in a two semester university or college course and is far too
extensive to be completely covered in a single one semester course. The traditional split in the
material would be to cover Chapters 1 through 11 in a first course dealing with the determina-
tion of Net Income For Tax Purposes for all taxpayers, as well as the calculation of Taxable
Income and Tax Payable for individuals. This could be followed by a second course where the
focus is primarily on the taxation of corporations. The relevant material on corporations is found
in Chapters 12 through 17. The remaining Chapters 18 through 21 deal with partnerships, trusts,
international taxation, and GST/HST.

Level Of Coverage
In terms of style, we have attempted to strike a balance between the kind of complete docu-
mentation that can render the material incomprehensible to anyone other than a tax profes-
sional, and the total elimination of references that would make it impossible for readers to
expand their understanding of particular points. In those situations where we feel the issue is
sufficiently complex that further investigation could be helpful, we have provided a list of refer-
ences to the relevant Sections of the Income Tax Act or other related materials. In contrast, no
direction has been provided when the material is either very straightforward or where the rele-
vant parts of the Act would be obvious.
This book can be used with or without additional source material. Some instructors require stu-
dents to acquire a copy of the Income Tax Act and permit its use as a reference during examina-
tions. For instructors wishing to take this approach, frequent references to the Act have been
included. For instructors not wishing to require the use of the Income Tax Act, we have designed
the problem material so that students should be able to solve all of the included problems rely-
ing solely on the text as a reference.

The Need For Two Volumes

In the over 30 years that we have been writing this text, we have seen the content grow from
about 400 pages to more than 1,500 pages. We initially dealt with this increase in size by provid-
ing a separate Study Guide. However, the text alone has grown to over 1,000 pages and, while
accommodating this in a single volume is feasible, the result would be far less useful to stu-
dents than dividing the material into two reasonably sized volumes.
If there was any consensus among our users as to which subjects should be dealt with in each
volume, they could be made available separately. However, virtually all of our users omit material
from Volume I and include material from Volume II. Further, there is no consistent pattern as to
xii Preface
Problem Material

which material is omitted and which material is included. Given this, it would not be possible to
produce separate volumes that meet the needs of all of our users.

The Study Guide

The major objective of the Study Guide is to provide students with convenient access to the
solutions for the Exercises and Self Study Problems. Having these solutions in a separate vol-
ume makes it much easier for students to simultaneously view the problem while solving it and
then consult its complete and detailed solution.
The Study Guide also provides a number of additional features to enhance the learning experi-
ence. These can be described as follows:
• Detailed instructions on “How To Work Through” each Chapter in the text. This includes
guidance on when to attempt Exercises and Self Study Problems as the student reads
through the text.
• A detailed list of “Learning Objectives” for each Chapter. This allows the student to
ensure that he/she has understood all of the relevant subjects covered in the Chapter.
• Sample tax returns for both individuals and corporations. These are useful practice for
students using the ProFile tax software that is available with this text.
• At the end of each Chapter in the text, there is a list of key terms that were used in that
Chapter. All of these terms are alphabetically listed in a Glossary that is at the back of
the Study Guide. This provides an easy way to find the meaning of a term that was intro-
duced in one Chapter, but is being referred to again in a subsequent Chapter.

Problem Material
For Students
The Canadian Tax Principles package contains a large number of problems with detailed solu-
tions. See the MyLab section of this preface for more information. The various types of prob-
lems and their location are as follows:
Exercises These are short problems that are focused on a single issue. Each Exercise
is presented in the Canadian Tax Principles text, directly following the material that is
relevant to its solution. This provides you with immediate feedback as to whether you
have understood the material that you have just read. Solutions to the Exercises can be
found in the Study Guide.
Self Study Problems These problems are more complex than the Exercises and
include a number of comprehensive problems. We have marked the point within the
text that you should work each Self Study Problem. Solutions to the Self Study Problems
are included in the Study Guide, while the problems are available on MyLab.
Tax Software Self Study Problems These problems are designed to be solved using
the ProFile software that is available with Canadian Tax Principles. These problems are
found in the Study Guide. The completed tax returns and solutions are available on MyLab.
Supplementary Self Study Problems Additional Self Study Problems, along with
their detailed solutions, are available on MyLab for each chapter.
Practice Examinations A 90 minute practice examination and solution is available on
MyLab for each chapter.

For Instructors
Canadian Tax Principles contains several types of problems designed for instructors:
Assignment Problems These problems vary in difficulty and include the most difficult
non-comprehensive problems in the text. They are found at the end of each chapter of
 Preface xiii
MyLab Accounting

Canadian Tax Principles. They are sometimes adapted from professional examinations
and may involve a number of different issues. Solutions to these problems are available
only to instructors, through the Instructor’s Resources links on MyLab.
Assignment Problems (Comprehensive) These comprehensive problems are the
most challenging type of problem material in the text. They are cumulative in that they
incorporate issues from previous chapters. There are two comprehensive assignment
problems per chapter in Chapters 6 through 11 and they are found at the end of the
Assignment Problems for the chapter. Solutions to these problems are available only to
instructors, through the Instructor’s Resources links on MyLab.
Tax Software Assignment Problems Tax Software Assignment Problems dealing
with personal tax returns are found at the end of Chapters 4 and 11. An additional
Assignment Tax Software Problem, involving a corporate tax return, is located at the
end of Chapter 14. Solutions to Assignment Tax Software Problems are available only to
instructors, through the Instructor’s Resources links on MyLab.
Examination Problems For instructors adopting Canadian Tax Principles, a large
and comprehensive selection of problems and solutions for use on examinations is
available. These include multiple choice questions (over 700), true/false questions
(over 200), essay questions (over 400), exercises (over 400), as well as more than 350
comprehensive types of problem ranging in difficulty from easy to very difficult. These
are available only to instructors, through the Instructor’s Resources links on MyLab.

MyLab Accounting
The various items that are included on MyLab can be described as follows:
• Pearson eText This eText gives you access to the text whenever and wherever you
have access to the Internet, through various devices. It contains the content of both vol-
umes of the text and the Study Guide. The eText pages look exactly like the printed text
and offer powerful functionality. You can create notes, highlight text in different colours,
create bookmarks, zoom, and search.
• NEW Data Analytics Project With this new assignable project, students analyze a
comprehensive data set and make a series of accounting decisions. This assignment
is designed to prepare students for the data analytics competencies that have been
included in the most recent CPA Competency Map. Students will use Excel-based tools
to assess data for accuracy, then organize and filter large quantities of information to
make the data appropriate for income tax calculations. Students will then incorporate
income tax concepts, including the calculation of Net Income, Taxable Income, and Tax
Payable using the outputs of their data analysis in Excel. This assignment also includes
data visualization and incorporates tax planning concepts for a business.
• Self Study Problems Self Study Problems are available on MyLab, with solutions in
your Study Guide. In the textbook, we have marked the point within the text that you
should work each Self Study Problem.
• Supplementary Self Study Problems Additional Self Study Problems for each chap-
ter, along with their detailed solutions, are available for further practice in problem solv-
ing. These are separated out by chapter.
• EY’s Federal Income Tax Collection (FITAC) This comprehensive electronic tax
research library contains the Income Tax Act, Income Tax Folios, and other official mate-
rials. In addition, it includes an electronic version of the Canadian Tax Principles text.
Designed for reference purposes, this version provides electronic links from the text
material to the various references contained in FITAC (e.g., the Income Tax Act). Note
xiv Preface
Recent Changes

however, it only includes the text and does not have the Exercises and other problem
material that are provided with the printed text.
• ProFile Tax Return Preparation Software Intuit’s professional tax preparation soft-
ware, ProFile, is available free of charge to users of Canadian Tax Principles. You can use
this software to prepare returns for individuals, corporations, and trusts and includes a
large number of tax forms. This software is for educational use only and cannot be used
to file tax returns.
• Corrections Any corrections to the text, Study Guide, or other student material are pro-
vided on MyLab throughout the year. Please check periodically to help avoid frustration.
• Practice Examinations A 90-minute practice examination, along with a solution and
suggested marking guide, is available for each chapter. These examinations contain a
variety of problems, including multiple choice, essay questions, and longer problems.
• Power Point Presentations There is a PowerPoint presentation for each chapter.
These provide the basis for a quick review of the material covered in the chapter.
• Glossary Flashcards These flashcards help you test your understanding of the key
terms used in each chapter.
• 2020 Tax Rates, Credits, and Common CCA Classes This is available as a PDF file,
for reference. This tax information is also available at the front of Volumes 1 and 2, and
CCA classes are available in the Chapter 5 Appendix.
• Tax Returns The Study Guide contains tax return examples and Self Study tax soft-
ware problems, along with notes to their solutions. The completed tax returns are avail-
able on MyLab, to download and use with your ProFile software, or to view in PDF files.

Recent Changes
2020 COVID-19
The tax system in Canada, as in many countries, is premised on regular tax reporting, regular
withholdings, remittances, and payment obligations all based upon a normal functioning econ-
omy. The Canada Revenue Agency (CRA) is mandated to ensure the continuity and smooth
operation of the tax system, which includes the disbursement of benefits such as the GST/HST
credits and the Canada Child Benefit, an audit function to ensure the accuracy of tax reporting,
and many other complementary functions such as Collections, Appeals, and Objections. The
CRA administers both the Income Tax Act (ITA) and Excise Tax Act (ETA) and provides administra-
tive positions for a multitude of issues all with the purpose of upholding its mandate and the
integrity of the Canadian tax system.
The March 11, 2020, announcement by the World Health Organization (WHO) declaring a pan-
demic changed the lives of Canadians as COVID-19 found its way into Canadian homes and
institutions. Aside from the devastating impact on Canadian lives the necessary action to con-
tain the virus effectively shut down a significant part of the Canadian economy, resulting in mil-
lions of Canadians unable to work as businesses shut down. We no longer had a smooth func-
tioning economy, and both the Federal and provincial governments were called on to address
the unprecedented financial impact upon Canadians.
The Federal government quickly rose to the challenge by instituting targeted financial assistance
measures. We all have become familiar with acronyms such as the CERB (Canadian Emergency
Response Benefit), the CEWS (Canadian Emergency Wage Subsidy), and the CESB (Canadian
Emergency Student Benefit) to name but a few. In the interim Canadians found themselves facing
income tax reporting obligations such as the standard April 30 deadline for filing individual income tax
returns, instalment payments for both income tax and GST/HST, various tax withholding obligations,
etc. In step with the Federal government announcements, the CRA issued numerous releases
 Preface xv
Recent Changes

delaying the filing of individual tax returns, payment obligations for outstanding amounts owing for
2019, delayed instalment payments for 2020, and a promise that no interest or penalties would be
charged until the extended times had lapsed. The audit and appeals functions came to an abrupt halt
for the most part as CRA employee efforts were redirected to dealing with COVID-19 related mat-
ters. There remains a plethora of additional, albeit temporary, administrative changes that the CRA
has announced to give some breathing room to Canadians as we all struggle with this unprece-
dented pandemic in modern times. Most of these announcements are supported by new legislation.
Given the temporary nature of these government initiatives and administrative changes by the
CRA it is our view that providing detail of the numerous COVID-19 measures would not further
the fundamental understanding of Canadian Tax Principles and as a result we have opted not to
include coverage of these measures within the textbook. We would direct any of our readers
who seek additional detailed information to visit the CRA website specifically at https://www.
canada.ca/en/revenue-agency/campaigns/covid-19-update.html, which provides all the neces-
sary and continually updated tax related information concerning COVID-19.

2018 Fall Economic Statement

One of the most important relatively recent income tax changes was announced on November 21,
2018, when the Department Of Finance released the Accelerated Investment Incentive (AccII)
provisions as part of its fall economic statement. The new supportive legislation considerably
revises the manner in which capital cost allowance (CCA) is calculated with respect to depre-
ciable property acquired from November 21, 2018, to December 31, 2027. In comparison to the
pre-November 21, 2018, system the new rules generally triple the normal CCA claims in the year
of purchase for most depreciable property acquired before January 1, 2024. The incentives are
reduced for depreciable property acquired from January 1, 2024, to December 31, 2027. In
simple terms this new CCA system allows a larger first year CCA claim without changing the
total CCA that can be claimed.
The details of these relatively new rules are discussed in Chapter 5 titled “Capital Cost Allow-
ance”. Since CCA is an important topic in income tax these changes affect almost every subse-
quent Chapter.

2019 Economic and Fiscal Update

In recent years it has become common for the Federal government to release an Economic and
Fiscal update typically, since 2011, in November. The title of the releases has not always remained
the same – in 2018 the release was titled the “Fall Economic Statement”, as mentioned above.
In any case, since 2016 the Federal government has used the annual fall release to introduce
selective changes to the income tax system often targeted at the “middle class”. The 2019
update was released December 16, 2019, and included a change to the personal tax credits that
would increase the Basic Personal Amount that had been previously indexed and announced at
$12,298 for 2020 to $13,229 with plans to further increase the amount to $15,000 by 2023. The
additional $931 of credit amount for 2020 would be automatic for individuals with Net Income
of $150,473 or less, nil for those individuals with Net Income of $214,368 or higher, and prorated
for individuals with Net Income between those two thresholds.
The details of the additional credit amount are discussed in Chapter 4 titled “Taxable Income
And Tax Payable For Individuals”.

The 2020 Federal Budget?

Complications
The Federal government, in early March 2020, announced that the 2020 budget would be
released March 30, 2020. Shortly thereafter the pandemic announcement by the WHO quickly
xvi Preface
Recent Changes

brought to an end plans to go ahead with that budget. In May 2020 Prime Minister Trudeau
announced that there were no plans to release a budget this year given the circumstances. In
June the government announced a July 8 release date for an “Economic and Fiscal Snapshot”
that appears to be designed to disclose the financial and economic affairs of the country follow-
ing the unprecedented expenditure programs to assist Canadians throughout the pandemic. As
a result we find ourselves in an interesting position without any significant tax changes that
would typically accompany an annual Federal budget. There are, of course, plenty of changes to
incorporate the numerous indexed amounts that are adjusted each year.
In addition it has become standard practice that Federal budgets introducing tax changes generally
apply those changes to the immediately following or later years. As a result, the 2020 taxation year
for example is impacted much more as a result of the 2019 Federal budget than it would have
been by a 2020 Federal budget. We discuss this in the next section.
Previously Announced Measures
There are several measures that were announced in previous budgets that are still working their
way through the system in 2020. They can be described as follows:
Employee Stock Options In the 2019 Federal budget the government announced that
draft legislation would be released to address perceived unfairness in the taxation of
employee stock options, particularly the 50 percent stock option deduction that results
in only one-half of stock option employee benefits included in income. The government
identified that their primary concern was that employee stock options were being used
to compensate wealthy executives of large mature companies when in their view such
tax deferred compensation should be limited to CCPCs and non-CCPCs in the start-up
or emerging phase of their existence.
Draft legislation was released June 2019 giving interested persons a six month
consultation period to provide feedback to the Department of Finance by December
2019. The government subsequently indicated that revised legislation would accompany
the 2020 Federal budget, which as we have seen has been postponed with no future
date in sight. As a result the taxation of employee stock options remains unchanged at
the moment.
New Trust Reporting Requirements In the 2017 Federal budget the government
announced their intention to enhance the information requirements for both resident
and non-resident trusts. Details were released when the 2018 Federal budget was
tabled February 27, 2018. The new reporting requirements will apply to the 2021 taxation
year of most trusts, require the completion of a T3 return even though one may not have
previously been required, and the completion of a new information schedule that will
oblige the trust (subject to penalties) to identify all trustees and beneficiaries. In addition
the trust will be required to identify persons who have the ability to exert control or
override trustee decisions with respect to allocations of income and capital.
As a rule trusts have historically only been required to file a tax return (T3) if they owe
tax or have made distributions of income or capital to beneficiaries. The new information
reporting requirements will now oblige trusts to file an income tax return to provide the
additional information beginning with the 2021 taxation year. Certain trusts, however,
are exempted from these new reporting requirements. Notable exemptions include
trusts that have been in existence less than three months, have less than $50,000 of
assets, Graduated Rate Estates, Qualified Disability Trusts, and RRSP trusts.
2020 Content
The March 19, 2019, budget contained a fairly large number of proposals that were of varying
importance. The following lists many of the changes that are relevant to this textbook.
 Preface xvii
Recent Changes

Personal Tax Measures

• Provisions designed to prevent mutual funds from utilizing certain methods to allocate
capital gains or income to unit holders on the redemption of their units that inappro-
priately defer tax or convert ordinary income into capital gains. The new rules apply to
taxation years beginning on or after March 19, 2019.
• A new Canada training credit that will become available in 2020 (see Chapter 4).
• An increase in the Home Buyers’ Plan withdrawal limit from $25,000 to $35,000 as of
March 20, 2019 (see Chapter 10).
• A modification of the change in use rules for multi-unit residential properties to expand
the scope of the elective options to defer tax to include partial changes of use. The
elective options previously only applied where all of the property use changed. The new
rules apply to partial changes of use occurring after March 19, 2019 (see Chapter 8).
• An expansion of the types of annuities that can be used by certain registered plans to
fund retirement income beginning with the 2020 taxation year (see Chapter 10).
• Changes to the rules for Registered Disability Savings Plans beginning 2021 (with a tran-
sitional rule back to March 19, 2019) where a beneficiary becomes ineligible because of
temporarily failing to qualify for the disability tax credit.
• Changes to the rules for kinship care providers to allow them to qualify for certain
tax incentives for children in their care even though they receive financial assistance.
Changes are retroactive to January 1, 2009.
• Removal of the requirement that donations of Canadian cultural property be of national
importance in order to qualify for enhanced charitable donations treatment. Amend-
ment applies as of March 19, 2019.
• Amendments effective October 17, 2018, for the medical expense tax credit to reflect
the new rules on the legalization of cannabis and the introduction of the Cannabis Act.
• Modification of the rules to restrict tax-free transfers from Registered Pension Plans to
Individual Pension Plans beginning March 19, 2019.
• New rules, beginning in 2019, to impose the highest tax rate where a TFSA is consid-
ered to be carrying on a business and to expand the list of those jointly responsible for
the tax.
Business Tax Measures
• New rules that add two new depreciable property classes (54 and 55), which will provide
for a first year write-off of 100 percent for zero emission vehicles purchased between
March 19, 2019, and December 31, 2023; 75 percent for zero-emission vehicles purchased
in 2024 and 2025; and 55 percent for purchases made in 2026 and 2027. (Chapter 5).
• Removal of the taxable income constraint for determining the amount of scientific
research expenditures that are eligible for the enhanced 35 percent refundable invest-
ment tax credit. The change applies to taxation years ending after March 18, 2019 (see
Chapter 14).
• Changes in the rules to correct an anomaly that would have resulted in certain farming
and fishing income from qualifying for the small business deduction. This change is
retroactive to 2016.
• Several provisions to enhance government support for Canadian journalism. These
include:
• a non-refundable tax credit of up to $500 for digital news subscriptions for 2020
to 2024 (see Chapter 4);
• a refundable labour credit for salaries paid to “eligible newsroom employees” begin-
ning January 1, 2020 (see Chapter 12); and
• a provision that extends qualified donee status to registered journalism organiza-
tions also beginning January 1, 2020.
We have provided coverage of some, but not all, of these changes as indicated by the Chapter
references included in the list items.
xviii Preface
Acknowledgments

Acknowledgments
We would like to thank the many students who have used this book, the instructors who have
adopted it at colleges and universities throughout Canada, as well as the assistants and tutors
who have been involved in these courses.
In terms of the content of the book, we would like to give special thanks to:
Gary Donell After many years with the CRA, Gary is now affiliated with the Ottawa
office of Welch LLP. Gary has been a significant contributor to this text for nearly
20 years, bringing to it an outstanding knowledge of income tax issues. He has made
many valuable suggestions that have contributed greatly to the accuracy and clarity
of the material. In addition, he was responsible for writing much of the Chapter 18
material on partnerships and the Chapter 20 material on international taxation. Gary
has undertaken this work independently of his work with Welch LLP. The views that are
contained in this publication do not, in any way, reflect the policies of Welch LLP.
Ruth Ann Strickland (a.k.a. Eagle Eye) - Western University (London) Over the last
few years, Ruth Ann has shown an uncanny ability to spot both major and minor errors.
She has been responsible for helping us eliminate many such items, greatly enhancing
the quality of our material. We are very grateful for her assistance.
Also of great help in improving the text over the years were the comments and corrections pro-
vided by the following instructors:
• Joseph Armanious - McGill University (Montreal)
• Ann Bigelow - Western University (London)
• Laura Cumming - Dalhousie University (Halifax)
• Larry Goldsman - McGill University (Montreal)
• Susan Hurley - NAIT (Edmonton)
• Patrick Massicotte - St. Lawrence College
• Jay Perry - Niagara College (Niagara-On-The-Lake)
• Victor Waese - BCIT (Burnaby)
• Ronald Wong - Capilano University (Vancouver)

It’s Our Fault

As always, we have made every effort to accurately reflect appropriate tax rules. Every word in
the text, problems, and solutions has been read by at least two and, in most cases three, indi-
viduals. However, it is virtually certain that errors remain. These errors are solely the responsibil-
ity of the authors and we apologize for any confusion that they may cause you.
Clarence Byrd, Clarence Byrd Inc.
Ida Chen, Clarence Byrd Inc.
February 2020
 2020 Rates, Credits And Other Data xix
Information Applicable To Individuals

2020 Rates, Credits, And Other Data

For your convenience, this information, as well as the Chapter 5

Appendix of common CCA rates, is available online as a .PDF file.

Information Applicable To Individuals

Federal Tax Rates For Individuals
Taxable Income Marginal Rate
In Excess Of Federal Tax On Excess
$ -0- $ -0- 15.0%
48,535 7,280 20.5%
97,069 17,230 26.0%
150,473 31,115 29.0%
214,368 49,645 33.0%

Federal Tax Credits For Individuals – Personal Tax Credits (ITA 118)
Reference
118(1.1) Basic Personal Amount (BPA) There are three alternatives dependent upon Net Income.
(1) For individuals with Net Income of $150,473 or less the BPA is $13,229, (2) for individuals
with Net Income of $214,368 or higher the BPA is $12,298, and (3) for individuals with Net
Income between $150,474 and $214,367 the BPA is calculated as $13,229 – [$931][(Net Income
– $150,473) ÷ $63,895]
118(1)(a) Married Persons 15% the of BPA for the individual
118(1)(a) Spousal 15% of the BPA for the individual and:
if the spouse of the married individual is dependent because of a mental or physical
infirmity, there is an additional amount of $2,273 added to the BPA. The total of these
two amounts ($15,502) is reduced by the income of the individual's spouse.

118(1)(b) Eligible Dependant 15% of BPA for the individual and:

if the dependent person is dependent because of a mental or physical infirmity, there
is an additional amount of $2,273 added to the BPA. The total of these two amounts
($15,502) is reduced by the income of the dependent person.

118(1)(b.1) Canada Caregiver For Child Under 18 15% of $2,273 ($341).

118(1)(c) Single Persons 15% of the BPA.

118(1)(d) Canada Caregiver 15% of $7,276 ($1,091), reduced by 15% of the dependant’s income in
excess of $17,085.

118(2) Age 15% of $7,637 ($1,146). The base for this credit is reduced by the lesser of $7,637 and
15% of the individual’s net income in excess of $38,508. Not available when income is more
than $89,421. If the individual cannot use this credit, it can be transferred to a spouse or
common-law partner.

118(3) Pension 15% of up to $2,000 of eligible pension income for a maximum credit of $300 [(15%)
($2,000)]. If the individual cannot use this credit, it can be transferred to a spouse or common-
law partner.

118(10) Canada Employment Credit 15% of up to $1,245. This produces a maximum credit of $187.
 xx 2020 Rates, Credits And Other Data
Information Applicable To Individuals

Other Common Federal Personal Credits (Various ITA)

118.01 Adoption Expenses Credit 15% of eligible expenses (reduced by any reimbursements) up to
a maximum of $16,563 per adoption. This results in a maximum credit of $2,484.

118.02 Digital News Subscriptions 15% of the lesser of $500 and the cost of qualifying subscription
expenses.

118.041 Home Accessibility Credit 15% of lesser of $10,000 and the amount of qualifying expendi-
tures for the year.

118.05 First Time Home Buyer’s Credit 15% of $5,000 ($750) of the cost of an eligible home.

118.06 Volunteer Firefighters Credit 15% of $3,000 ($450) for qualifying volunteers.

118.07 Volunteer Search And Rescue Workers Credit 15% of $3,000 ($450) for qualifying
volunteers.

118.1 Charitable Donations - Regular The general limit on amounts for this credit is 75% of Net
Income. There is an addition to this general limit equal to 25% of any taxable capital gains and
25% of any recapture of CCA resulting from a gift of capital property. In addition, the income
inclusion on capital gains arising from a gift of some publicly traded shares is reduced from one-
half to nil. For individuals, the credit is equal to:

[(15%)(A)] + [(33%)(B)] + [(29%)(C)] where:

A = The first $200 of eligible gifts.

B = The lesser of:
• Total gifts, less $200; and
• Taxable Income, less $214,368.
C = The excess, if any, by which the individual’s total gifts exceed the sum of $200 plus
the amount determined in B.

118.2 Medical Expenses The medical expense tax credit is determined by the following formula:

[15%] [(B - C) + D], where:

B is the total of an individual’s medical expenses for him- or herself, his or her spouse
or common-law partner, and any of his or her children who have not reached
18 years of age at the end of the year.
C is the lesser of 3% of the individual’s Net Income For Tax Purposes and $2,397
(2020 figure).
D is the total of all amounts each of which is, in respect of a dependant of the individual
(other than a child of the individual who has not attained the age of 18 years before
the end of the taxation year), an amount determined by the formula:

E - F, where:

E is the total of the dependant’s medical expenses

F is the lesser of 3% of the dependant’s Net Income For Tax Purposes and $2,397
(2020 figure).

118.3 Disability - All Ages 15% of $8,576 ($1,286). If not used by the disabled individual, it can be
transferred to a person claiming that individual as a dependant.
 2020 Rates, Credits And Other Data xxi
Information Applicable To Individuals

118.3 Disability Supplement - Under 18 And Qualifies For The Disability Tax Credit 15% of
$5,003 ($750), reduced by the total of amounts paid for attendant care or supervision in excess
of $2,930 that are deducted as child care costs, deducted as a disability support amount, or
claimed as a medical expense in calculating the medical expense tax credit.

Education Related Credits

118.5 • Tuition Fees, Which Includes Examination And Ancillary Fees
• 15% of qualifying tuition fees
• 15% of examination fees for both post-secondary examinations and examinations
required in a professional program
• 15% of ancillary fees that are imposed by a post-secondary educational institution
on all of their full or part time students. Up to $250 in such ancillary fees can be
claimed even if not required of all students.

118.62 • Interest On Student Loans

15% of interest paid on qualifying student loans.

118.9 • Transfer Of Tuition Credit

If the individual cannot use the credit, is not claimed as a dependant by his or her
spouse, and does not transfer the unused credit to a spouse or common-law part-
ner, then a parent or grandparent of the individual can claim up to $750 [(15%)
($5,000)] of any unused tuition credit. The amount that can be transferred is reduced
by the amount of the credit claimed by the student for the year.

118.7 Employment Insurance 15% of amounts paid by employees up to the maximum Employ-
ment Insurance premium of $856 (1.58% of $54,200). This produces a maximum tax credit of
$128 [(15%)($856)].

118.7 Canada Pension Plan 15% of 4.95 percent of contributions. The maximum credit base for
all individuals is $2,732 [(4.95%)($58,700 - $3,500)]. This produces a maximum tax credit of
$410 [(15%)($2,732)].

122.51 Refundable Medical Expense Supplement The individual claiming this amount must be
over 17 and have earned income of at least $3,714. The amount is equal to the lesser of
$1,272 and 25/15 of the medical expense tax credit. The refundable amount is then reduced
by 5% of family Net Income in excess of $28,164. Not available when family income is more
than $53,604.

122.9 Refundable Teacher And Early Childhood Educator School Supply Tax Credit A maximum
of 15% of up to $1,000 ($150) of eligible expenditures that are made by eligible educators.

122.91 Canada Training Credit The lesser of training amount limit and 50% of eligible training costs
incurred in the previous year.

127(3) Political Donations Three-quarters of the first $400, one-half of the next $350, one-third of
the next $525, to a maximum credit of $650 on donations of $1,275.

127.4 Labour Sponsored Venture Capital Corporations (LSVCC) Credit The federal credit is equal
to 15 percent of acquisitions of provincially registered LSVCCs.
 xxii 2020 Rates, Credits And Other Data
Information Applicable To Individuals

ITA 82 and Dividend Tax Credit

ITA 121
• Eligible Dividends These dividends are grossed up by 38%. The federal dividend tax
credit is equal to 6/11 of the gross up. The credit can also be calculated as 15.02% of the
grossed up dividends, or 20.7272% of the actual dividends received.
• Non-Eligible Dividends These dividends are grossed up by 15%. The federal dividend tax
credit is equal to 9/13 of the gross up. The credit can also be calculated as 9.0301% of the
grossed up dividends, or 10.3846% of the actual dividends received.

Other Data For Individuals

ITA 82 Dividend Gross Up
Eligible Dividends For these dividends, the gross up is 38% of dividends received.
Non-Eligible Dividends For these dividends, the gross up is 15% of dividends
received.
Chapter 4 OAS Clawback Limits The tax (clawback) on Old Age Security (OAS) benefits is based on the
lesser of 100% of OAS benefits received, and 15% of the amount by which “threshold income”
(Net Income For Tax Purposes, calculated without the OAS clawback) exceeds $79,054.

Chapter 4 EI Clawback Limits The tax (clawback) on Employment Insurance (EI) benefits under the
Employment Insurance Act is based on the lesser of 30% of the EI benefits received, and 30%
of the amount by which “threshold income” exceeds $67,750 (1.25 times the maximum insur-
able earnings of $54,200). For this purpose, “threshold income” is Net Income For Tax Purposes,
calculated without the OAS or EI clawbacks.

Chapter 9 Child Care Expenses The least of three amounts:

1. The amount actually paid for child care services. If the child is at a camp or boarding
school, this amount is limited to a weekly amount $275 (any age if eligible for disabil-
ity tax credit), $200 (under 7 year of age), or $125 (age 7 through 16 or over 16 with
a mental or physical impairment).
2. The sum of the Annual Child Care Expense Amounts for the taxpayer’s eligible
children. The per child amounts are $11,000 (any age if eligible for disability tax credit),
$8,000 (under 7 year of age), or $5,000 (age 7 through 16 or over 16 with a mental or
physical impairment).
3. 2/3 of the taxpayer’s Earned Income (for child care expenses purposes).

Chapter 10 RRSP Deduction Room For 2020, the addition to RRSP deduction room is equal to:
• the lesser of $27,230 and 18% of 2019 Earned Income,
• reduced by the 2019 Pension Adjustment and any 2020 Past Service Pension Adjustment,
• and increased by any 2020 Pension Adjustment Reversal.

Chapter 11 Lifetime Capital Gains Deduction For 2020, the deduction limit for dispositions of shares of
qualified small business corporations is $883,384. There is an additional amount for farm or fish-
ing properties of $116,616, providing a total of $1,000,000 for such properties.

Provincial Tax Rates And Provincial Credits For Individuals Provincial taxes are based on Taxable
Income, with most provinces adopting multiple rates. The number of brackets range from three to
five. Provincial tax credits are generally based on the minimum provincial rate applied to a credit base
that is similar to that used for federal credits. In addition to regular rates, two provinces, Ontario and
Prince Edward Island, use surtaxes.
 2020 Rates, Credits And Other Data xxiii
Information Applicable To Corporations

Information Applicable To Individuals And Corporations

ITR 4301 Prescribed Rate The following figures show the base rate that would be used in calculations
such as imputed interest on loans. It also shows the rates applicable on amounts owing to and
from the CRA. For recent quarters, the interest rates were as follows:

Year Quarter Base Rate Owing From* Owing To

2017 All 1% 3% 5%
2019 I 1% 3% 5%
2019 II to IV 2% 4% 6%
2020 I, II 2% 4% 6%
*The rate on refunds to corporations is limited to the base rate, without the additional 2%.
Automobile Deduction Limits
• CCA is limited to the first $30,000 of the automobiles cost, plus applicable GST/HST/
PST (not including amounts that will be refunded through input tax credits).
• Interest on financing of automobiles is limited to $10 per day.
• Deductible leasing costs are limited to $800 per month (other constraints apply).
• Operating cost benefit = $0.28 per kilometre.
• Deductible rates = $0.58 for first 5,000 kilometres, $0.52 for additional kilometres.

CCA Rates See Appendix to Chapter 5.

Quick Method Rates (GST Only)

Percentage On GST Included Sales

First $30,000 On Excess
Retailers And Wholesalers 0.8% 1.8%
Service Providers And Manufacturers 2.6% 3.6%

Note Different rates apply in the provinces that have adopted an HST system.

Information Applicable To Corporations

Federal Corporate Tax Rates are as follows (federal tax abatement removed):

General Business (Before General Rate Reduction) 28%

General Business (After General Rate Reduction Of 13%) 15%
Income Eligible For M&P Deduction 15%
Income Eligible For Small Business Deduction 9%
Part IV Refundable Tax 38-1/3%
Part I Refundable Tax On Investment Income Of CCPC (ART) 10-2/3%
Reference
89(1) General Rate Income Pool A CCPC’s General Rate Income Pool (GRIP) is defined as follows:
• The GRIP balance at the end of the preceding year; plus
• 72% of the CCPC’s Taxable Income after it has been reduced by amounts eligible for the
small business deduction and aggregate investment income; plus
• 100% of eligible dividends received during the year; plus
• adjustments related to amalgamations and wind-ups; less
• eligible dividends paid during the preceding year.
 xxiv 2020 Rates, Credits And Other Data
Information Applicable To Corporations

125(1) Small Business Deduction is equal to 19% of the least of:

A. Net Canadian active business income.
B. Taxable Income, less:
1. 100/28 times the ITA 126(1) credit for taxes paid on foreign non-business income,
calculated without consideration of the additional refundable tax under ITA 123.3 or
the general rate reduction under ITA 123.4; and
2. 4 times the ITA 126(2) credit for taxes paid on foreign business income, calculated
without consideration of the general rate reduction under ITA 123.4.
C. The annual business limit of $500,000, less any portion allocated to associated
corporations, less the grinds for large corporations and passive income.
123.3 Additional Refundable Tax On Investment Income (ART) is equal to 10-2/3% of the lesser of:
• the corporation’s “aggregate investment income” for the year [as defined in ITA 129(4)]; and
• the amount, if any, by which the corporation’s Taxable Income for the year exceeds the
amount that is eligible for the small business deduction.
123.4(2) General Rate Reduction is equal to 13% of Full Rate Taxable Income. This is Taxable Income
reduced by income eligible for the small business deduction, income eligible for the M&P
deduction, and the corporation’s “aggregate investment income” for the year.
125.1 Manufacturing And Processing Deduction is equal to 13% of the lesser of:
A. Manufacturing and processing profits, less amounts eligible for the small business
deduction; and
B. Taxable Income, less the sum of:
1. the amount eligible for the small business deduction;
2. 4 times the foreign tax credit for business income calculated without consideration
of the ITA 123.4 general rate reduction; and
3. “aggregate investment income” (of CCPCs) as defined in ITA 129(4).
126(1) Foreign Tax Credits For Corporations The Foreign Non-Business Income Tax Credit is the
lesser of:
• The tax paid to the foreign government (for corporations, there is no 15% limit on
the foreign non-business taxes paid); and
• An amount determined by the following formula:
Foreign Non - Business Income
c d [Tax Otherwise Payable]
Adjusted Division B Income
126(2) The Foreign Business Income Tax Credit is equal to the least of:
• The tax paid to the foreign government;
• An amount determined by the following formula:
Foreign Business Income
c d [Tax Otherwise Payable] ; and
Adjusted Division B Income

• Tax Otherwise Payable for the year, less any foreign tax credit taken on non-business
income under ITA 126(1).
129(4) Refundable Portion Of Part I Tax Payable is defined as the least of three items:
1. the amount determined by the formula
A - B, where
 2020 Rates, Credits And Other Data xxv
Information Applicable To Corporations

A is 30-2/3% of the corporation’s aggregate investment income for the year, and
B is the amount, if any, by which the foreign non-business income tax credit
exceeds 8% of its foreign investment income for the year.
2. 30-2/3% of the amount, if any, by which the corporation’s taxable income for the
year exceeds the total of:
• the amount eligible for the small business deduction;
• 100 ÷ 38-2/3 of the tax credit for foreign non-business income; and
• 4 times the tax credit for foreign business income.
3. the corporation’s tax for the year payable under Part I.
129(4) Aggregate Investment Income is the sum of:
• net taxable capital gains for the year, reduced by any net capital loss carry overs
deducted during the year; and
• income from property including interest, rents, and royalties, but excluding divi-
dends that are deductible in computing Taxable Income. Since foreign dividends are
generally not deductible, they would be included in aggregate investment income.
129(4) ELIGIBLE 2019 Refundable Dividend Tax On Hand (RDTOH) is defined as follows:
Beginning Balance The balance in the Eligible RDTOH at the end of the preceding taxation
year.
Additions
• Part IV taxes paid on eligible dividends from non-connected taxable Canadian corpo-
rations. These are commonly referred to as portfolio dividends.
• Part IV taxes paid on eligible dividends from connected corporations to the extent
that such dividends included a refund from the paying corporation's Eligible RDTOH.
Deduction Deducted from this total would be any dividend refund claimed from the
Eligible RDTOH account in the previous taxation year.

NON-ELIGIBLE 2019 Refundable Dividend Tax On Hand (RDTOH) is defined as follows:

Beginning Balance The balance in the Non-Eligible RDTOH at the end of the preceding
taxation year.
Additions There are three items that are added to the Non-Eligible RDTOH beginning
balance:
• All of the Part I refundable tax for the year.
• Part IV taxes paid on non-eligible dividends from connected corporations to the
extent that such dividends included a refund from the paying corporation’s Non-
Eligible RDTOH.
• Part IV taxes paid on non-eligible dividends from non-connected taxable Canadian
corporations.
Deduction Deducted from this total would be any dividend refund claimed from the
Non-Eligible RDTOH account in the previous taxation year. For 2019, this deduction is
reflected in the transitional RDTOH and will not be deducted again.

186(1) Part IV Tax is assessed at a rate of 38-1/3% of portfolio dividends, plus dividends received
from a connected company that gave rise to a dividend refund for the connected company as a
result of the payment.
xxvi 2020 Rates, Credits And Other Data
Tax Related Web Sites

Tax Related Web Sites

GOVERNMENT
Canada Revenue Agency www.canada.ca/en/revenue-agency
Department of Finance Canada www.canada.ca/en/department-finance.html

CPA FIRMS
BDO www.bdo.ca/en-ca/services/tax/domestic-tax-services/overview/
Deloitte. www2.deloitte.com/ca/en/pages/tax/topics/tax.html
Ernst & Young www.ey.com/CA/en/Services/Tax
KPMG www.kpmg.com/ca/en/services/tax
PricewaterhouseCoopers www.pwc.com/ca/en/tax/publications.html

OTHER
CPA Canada www.CPAcanada.ca
Canadian Tax Foundation www.ctf.ca
ProFile Tax Suite www.profile.intuit.ca
 1

CHAPTER 1

Introduction To Federal Taxation

In Canada

The Canadian Tax System

Alternative Tax Bases
1-1. There are a variety of ways in which taxes can be classified. One possible basis of classifi-
cation would be the economic feature or event that is to be taxed. Such features or events are
referred to as the base for taxation, and a large number of different bases are used in different
tax systems throughout the world. Some of the more common tax bases are as follows:
Income Tax A tax on the income of certain defined entities.
Property Tax A tax on the ownership of some particular set of goods.
Consumption Tax A tax levied on the consumption or use of a good or service. Also
referred to as sales tax or commodity tax.
Value Added Tax A tax levied on the increase in value of a good or service that has
been created by the taxpayer’s stage of the production or distribution cycle.
Tariffs or Customs Duties A tax imposed on the importation or exportation of certain
goods or services.
Transfer Tax A tax on the transfer of property from one owner to another.
User Tax A tax levied on the user of some facility such as a road or airport.
Capital Tax A tax on the invested capital of a corporation.
Head Tax A tax on the very existence of some classified group of individuals.
1-2. At one time or another, some level of Canadian government has used, or is still using, all of
these bases for taxation. For example, the Canadian federal government currently has, in addition
to income taxes on corporations, individuals, and trusts, such taxes as the goods and services tax
(GST), an alcoholic beverages tax, special transaction taxes, a gasoline tax, as well as others.
1-3. In terms of the tax bases that are being used 7, Figure 1-1 (following page) provides the
2019/2020 distribution of Federal Revenues by source.
2 Chapter 1
The Canadian Tax System

Figure 1 - 1 Federal Government Revenues By Source

Percent Or
Total Revenues
Personal Income Tax 50.3
Corporate Income Tax 13.7
GST 12.0
Other Sources 9.1
Employment Insurance Premiums 6.5
Other Excise Taxes 3.6
Non-Resident Income Tax 2.9
Custom And Import Duties 1.9
Total 100.0

1-4. Figure 1-1 makes it very clear that the dominant form of Canadian taxation at the federal
level is the income tax that is levied on individuals. More than 50 percent of federal revenues
come from this source.
1-5. Running a distant second is income taxes on Canadian corporations at 13.7 percent of
federal revenues, closely followed by GST collections at 12 percent. These two sources have
been moving closer together as GST collections have become a more important source.
1-6. Employment insurance revenues at 6.5 percent of the total are also important. Taken
together, non-resident revenues, customs duties, and excise taxes, provide 8.4 percent of the
total. Other revenues consist of revenues from Crown corporations, fuel charges, other pro-
grams, and net foreign exchange.

Taxable Entities In Canada

Federal Income Tax
1-7. Three types of entities are subject to federal income taxation. These are:
• Individuals (human beings)
• Corporations
• Trusts
1-8. You should note that the Income Tax Act uses the term “person” to refer to all three types
of taxable entities. This can be a bit confusing in that the dictionary defines person as “a human
being, whether man, woman, or child”. Despite this conventional usage of the term person, the
Income Tax Act applies it to both corporations and trusts. When the Act wishes to refer to a
human taxpayer, it uses the term “individual”.
1-9. For income tax purposes, unincorporated businesses such as partnerships and proprietor-
ships are not viewed as taxable entities. Rather, income earned by an unincorporated business
organization is taxed in the hands of the proprietor (who would be an individual) or the partner.
Note that members of a partnership may be individuals, trusts, or corporations.
1-10. As discussed in Chapter 2, “Procedures And Administration”, all three types of taxable
entities are required to file income tax returns. The return for an individual is referred to as a T1,
for a corporation, a T2, and for a trust, a T3. Proprietorships and partnerships do not file income
tax returns as they are not taxable entities.

GST
1-11. The requirement to register to collect and remit GST generally extends to any person
engaged in commercial activity in Canada. You should note that the definition of a person for GST
purposes is different from that used in the Income Tax Act. For income tax purposes, a “person”
is generally restricted to an individual, a corporation, or a trust. Unincorporated businesses do
not file separate income tax returns.
 Introduction To Federal Taxation In Canada 3
The Canadian Tax System

1-12. Under GST legislation, the concept of a person is much broader, including individuals,
partnerships, corporations, estates of deceased individuals, trusts, charities, societies, unions,
clubs, associations, commissions, and other organizations. Chapter 21, “GST/HST” includes
detailed coverage of the goods and services tax and the harmonized sales tax.

Exercise One - 1

Subject: Taxable Entities For Income Tax Purposes

Which of the following entities could be required to file an income tax return?
• Max Jordan (an individual)
• Jordan’s Hardware Store (an unincorporated business)
• Jordan & Jordan (a partnership)
• The Jordan family trust (a trust)
• Jordan Enterprises Ltd. (a corporation)
• The Jordan Foundation (an unincorporated charity)

Exercise One - 2

Subject: Taxable Entities For GST Purposes

Which of the following entities could be required to file a GST return?
• Max Jordan (an individual)
• Jordan’s Hardware Store (an unincorporated business)
• Jordan & Jordan (a partnership)
• The Jordan family trust (a trust)
• Jordan Enterprises Ltd. (a corporation)
• The Jordan Foundation (an unincorporated charity)

SOLUTIONS available in print and online Study Guide.

Federal Taxation And The Provinces

Personal Income Taxes
1-13. Under the Constitution Act, the federal, provincial, and territorial governments have the
power to impose taxes. The provinces and territories are limited to direct taxation as delegated
in the Act, a constraint that leaves all residual taxation powers to the federal government. The
provinces are further limited to the taxation of income earned in the particular province and the
income of persons resident in that province. Within these limitations, all of the provinces and
territories impose both personal and corporate income taxes.
1-14. Under the federal/provincial tax collection agreement, provincial taxes are calculated by
applying a provincial tax rate to a Taxable Income figure. With the exception of Quebec, all of the
provinces use the same Taxable Income figure that is used at the federal level.
1-15. Despite the use of the federal Taxable Income figure, the provinces have retained consid-
erable flexibility in their individual tax systems. This flexibility is achieved in two ways:
• Each province can apply different rates and surtaxes to as many tax brackets as it wishes.
• More importantly, each province is able to set different provincial tax credits to apply
against provincial Tax Payable. While most provinces have provincial credits that are simi-
lar to credits that are established at the federal level, the value of these credits varies con-
siderably at the provincial level. For example, the basic personal credit is over $10,000 higher
in the province with the highest amount than it is in the province with the lowest figure.
4 Chapter 1
The Canadian Tax System

1-16. The provincial differences complicate the preparation of tax returns. The level of complica-
tion varies from province to province, depending on the degree to which provincial tax brackets
and provincial tax credits resemble those applicable at the federal level.
1-17. Because of these complications, the problem material in this text will, in general, not require
the calculation of provincial taxes for individuals. However, because the combined federal/
provincial rate is important in many tax-based decisions (e.g., selecting between alternative
investments), we will continue to refer to overall combined rates, despite the fact that such
figures are very specific to the province in which the income is taxed.

Exercise One - 3

Subject: Federal And Provincial Taxes Payable

John Forsyth has Taxable Income of $27,000. For the current year, his federal tax
rate is 15 percent, while the corresponding provincial rate is 7.5 percent. Determine
Mr. Forsyth’s combined federal and provincial tax payable, before consideration of any
available credits against Tax Payable.

SOLUTION available in print and online Study Guide.

Corporate Income Taxes

1-18. The system used to calculate provincial corporate income tax payable is similar to the
system that is applicable to individuals. Provincial corporate income tax is levied on Taxable
Income. All of the provinces, with the exception of Alberta and Quebec, use the federal Income
Tax Act to compute Taxable Income. Even in Alberta and Quebec, the respective provincial Tax
Acts have many of the same features as the federal Act.
1-19. With respect to the collection of corporate income taxes, only Alberta and Quebec collect
their own corporate income taxes. In all other provinces and territories, corporate income taxes
are collected by the federal government on behalf of the provinces.

GST, HST, And PST

1-20. Although detailed coverage of GST and HST can be found in Chapter 21, “GST/HST”, we
will provide a short overview here as part of our introduction to federal taxation. When the fed-
eral government proposed a joint federal/provincial goods and services tax (GST) in 1987, the
lack of interest by provincial governments meant that the GST was introduced only at the federal
level. Provincial sales taxes remained in place without significant alteration. As a result, two dif-
ferent sales taxes were collected, accounted for, and remitted.
1-21. This situation was very costly and time consuming for businesses operating in more than
one province, as they had to file multiple sales tax returns under different sets of rules. This was
clearly an inefficient way to generate tax revenues and, not surprisingly, considerable pressure
developed for the harmonization of the separate federal and provincial sales taxes.
1-22. Despite the obvious efficiencies that would result from harmonization, it has not been
accepted across Canada. Quebec administers its own Quebec sales tax (QST), which is a some-
what harmonized system. While its coverage is similar to the GST, it is not identical.
1-23. In several provinces there is a harmonized sales tax (HST) which is, in effect, a combined
federal/provincial sales tax. These systems differ from the Quebec model in that the HST is a
single tax administered by the federal government. The HST provinces are New Brunswick,
Nova Scotia, Newfoundland, Prince Edward Island, and Ontario.
1-24. Since each HST province chooses the rate for the provincial portion of the HST and the
provinces have selected different rates, the HST is not a single rate throughout the HST prov-
inces. As a result, even among the HST provinces, the application of the HST on a sale can result
in a sales tax figure that varies depending on the province of sale.
 Introduction To Federal Taxation In Canada 5
Tax Policy Concepts

1-25. The various provincial sales tax regimes have left Canada with a fragmented sales tax
system. The effective rates range from 5 percent (GST only) to 15 percent (HST rate).

Tax Policy Concepts

Taxation And Economic Policy
1-26. The traditional goal of tax legislation has been to generate revenues for the relevant tax-
ing authority. However, it is clear that today’s approach to tax legislation is multi-faceted. We use
tax legislation as a tool to facilitate a number of economic policy objectives:
Resource Allocation Tax revenues are used to provide public goods and services.
Pure public goods such as the cost of our national defence system are thought to
benefit all taxpayers. As it is not possible to allocate costs to individuals on the basis
of benefits received, such costs must be supported with general tax revenues. Similar
allocations occur with such widely used public goods as education, health care, and
pollution control. In some cases, the tax system also has an influence on the allocation
of private goods. For example, excise taxes are used to discourage the consumption of
alcohol and tobacco products.
Distribution Effects Our tax system is used to redistribute income and wealth
among taxpayers. Such provisions as the federal GST tax credit and provincial sales
tax exemptions on food and low priced clothing have the effect of taking taxes paid
by higher income taxpayers and distributing them to lower income wage earners or
taxpayers with higher basic living costs in proportion to their income.
Stabilization Effects Taxes may also be used to achieve macroeconomic objectives.
At various times, tax policy has been used to encourage economic expansion, increase
employment, and to assist in holding inflation in check. An example of this is the
emphasis on stimulating the economy that is found in recent budgets.
Fiscal Federalism This term refers to the various procedures that are used to allocate
resources among different levels of government. These transfers are approaching $80 billion
per year. While this is less than transfers to persons and direct spending by the Federal
government, it is still a very significant amount.

Taxation And Income Levels

General Approaches
1-27. Policy makers are concerned about the relationship between income levels and rates of
taxation. Taxes can be proportional, in that a constant rate is applied at all levels of income. In
theory, this is our general approach to taxing the income of corporations. For public companies,
the system is based on a flat rate that is applicable to all income earned by the company. How-
ever, a wide variety of provisions act to modify the application of this rate, resulting in a situation
where many Canadian companies are not subject to this notional flat rate.
1-28. As an alternative, taxation can be regressive, resulting in lower effective rates of taxation
as higher income levels are reached. Sales taxes generally fall into this regressive category as
lower income individuals spend a larger portion of their total income and, as a consequence, pay
a greater portion of their total income as sales taxes levied on their expenditures.
EXAMPLE Consider the Werner sisters:
Gertrude Werner has income of $200,000 and spends $40,000 of this amount. She lives
in a province with a 13 percent harmonized sales tax (HST) on expenditures, resulting
in the payment of $5,200 in HST. This represents a 2.6 percent effective tax rate on her
$200,000 income.
Ingrid Werner has income of $40,000 and spends all of this amount. She lives in the
same province as her sister, resulting in the payment of $5,200 in HST. This represents
a 13 percent effective tax rate on her $40,000 income.
6 Chapter 1
Tax Policy Concepts

Exercise One - 4

Subject: Regressive Taxes

Margie Jones has Taxable Income for the current year of $895,000, of which $172,000
is spent on goods and services that are subject to harmonized sales tax (HST) at a rate
of 13 percent. Her sister, Jane Jones, is a part-time student living in the same province
and has Taxable Income of $18,000. During the current year, as a result of using some
of her savings, she spends $27,500 on goods and services that are all subject to HST.
Determine the effective sales tax rate as a percentage of the income of the two sisters.

SOLUTION available in print and online Study Guide.

We suggest you work Self Study Problem One-1 at this point.

1-29. In contrast to the regressive nature of sales taxes, the present system of personal income
taxation is designed to be progressive, since higher rates are applied to higher levels of income.
A low Federal rate of 15 percent applies to roughly the first $50,000 of Taxable Income, with the
rate increasing to 33 percent as Taxable Income approaches $215,000.

Progressive Vs. Regressive

1-30. As noted in the preceding paragraph, the federal income tax system taxes individuals using
a progressive system. The major arguments in favour of this approach can be described as follows:
Equity Higher income individuals have a greater ability to pay taxes. As their income
is above their basic consumption needs, the relative cost to the individual of having a
portion of this income taxed away is less than the relative cost to lower income individuals,
where additional taxation removes funds required for such essentials as food and housing.
Stability Progressive tax rates help maintain after-tax income stability by shifting
people to lower tax brackets in times of economic downturn and to higher brackets
when there is economic expansion. The resulting decreases or increases in income
taxes serve to cushion the economic swings.
1-31. There are, however, a number of problems that can be associated with progressive rates.
These can be briefly described as follows:
Complexity With progressive rates in place, efforts will be made to divide income
among as many individuals (usually family members) as possible. These efforts to make
maximum use of the lower tax brackets necessitate the use of complex anti-avoidance
rules by taxation authorities.
Income Fluctuations In the absence of relieving provisions, progressive rates
discriminate against individuals with highly variable income streams. That is, under a
progressive system, an individual with $1,000,000 in income in one year and no income
for the next three years will pay substantially more in taxes than an individual with the
same $1,000,000 total earned over four years at a rate of $250,000 per year.
Family Unit Problems Progressive tax rates discriminate against single income family
units. A family unit in which one spouse makes $200,000 and the other has no Taxable
Income would pay significantly more in taxes than would be the case if each spouse
earned $100,000.
Economic Growth It is clear that the high tax brackets that can be associated with
a progressive system can discourage both employment and investment efforts. This
could serve to limit economic growth.
 Introduction To Federal Taxation In Canada 7
Tax Policy Concepts

Tax Concessions The high brackets associated with progressive systems lead to
pressure for various types of tax concessions to be made available. Because high
income individuals have a greater ability to take advantage of favourable provisions in the
income tax legislation, they may actually wind up paying taxes at lower effective rates.
In response to the possibility that, in extreme cases, some high income individuals pay
no income taxes at all, there is an alternative minimum income tax that is imposed on
certain taxpayers (see Chapter 11).
Tax Avoidance And Evasion Progressive rates discourage income reporting and
encourage the creation of various means to evade taxation. Evasion strategies range from
simple bartering, to cash only transactions, to offshore tax havens, and finally to criminal
activities.
Reduced Tax Revenues There is evidence that, if tax rates are too high, the result
may be reduced aggregate tax revenues. Some authorities believe that this begins to
occur at tax rates between 40 and 50 percent.
We would note that, with the maximum federal rate at 33 percent, the maximum
combined federal/provincial rate in most provinces exceeds 50 percent, going as
high as 54 percent in some provinces for income approaching $250,000. While it
is difficult to determine the degree to which this will encourage tax evasion, it is
almost certain that maximum tax rates at this level has and will be a major factor
in decisions involving significant amounts of income being moved out of Canada.
Without resorting to tax evasion, high income individuals have great flexibility in
relocating their income.
Of particular importance is the possibility of moving to the U.S. The maximum Federal
rate in that country is around 35 percent, and there are several states, including Florida,
that have no income tax. This means that income is only taxed at the Federal level.
The maximum Federal rate is around 35 percent in the U.S. Further, this rate is not
reached until the individual’s Taxable Income exceeds one-half million dollars. For some
individuals this could involve an annual tax savings of hundreds of thousands of dollars.
It is not surprising that some research has found that when the Canadian maximum
Federal rate was increased from 29 percent to 33 percent, the change resulted in
reduced revenues.

Flat Tax Systems

1-32. While progressive tax systems continue to be pervasive, there has been a worldwide
trend towards flattening rate schedules. One of the reasons for this trend is the fact that effec-
tive tax rates are not as progressive as the rate schedules indicate. As mentioned in the preced-
ing paragraph, high bracket taxpayers tend to have better access to various types of tax conces-
sions, which can significantly reduce the effective rates for these individuals.
1-33. Given this situation, it has been suggested that we could achieve results similar to those
which, in fact, prevail under the current system by applying a single or flat rate of tax to a broad-
ened taxation base. In this context, the term base broadening refers to the elimination of tax
concessions, resulting in tax rates that are applied to a larger income figure.
1-34. There is currently no flat provincial tax system in place in Canada. At one time, the
Province of Alberta had such a system. However, this was replaced by a progressive system
in 2016.

We suggest you work Self Study Problem One-2 at this point.

8 Chapter 1
Tax Policy Concepts

Tax Incidence
1-35. Tax incidence refers to the issue of who really pays a particular tax. While statutory inci-
dence refers to the initial legal liability for tax payment, the actual economic burden may be
passed on to a different group. For example, certain taxes on production might be the legal liabil-
ity of the producer. However, they may be partly or entirely shifted to consumers through price
increases on the goods produced.
1-36. Policy makers must be concerned with this to ensure that the system is working as
intended. It is generally assumed that the incidence of personal income tax falls on individuals.
In addition, in their role as consumers, individuals also assume the responsibility for a large por-
tion of the various sales taxes that are levied in Canada. The incidence of corporate taxes is more
open to speculation. Shareholders may bear the burden of corporate taxes in the short run.
However, most authorities believe that, in the long run, this burden is shared by employees and
consumers.

Tax Expenditures
1-37. In contrast to government funding programs that provide payments to various entities in
the economy, tax expenditures reflect revenues that have been given up by the government
through the use of tax preferences, concessions, and other tax breaks. These expenditures may
favour selected individuals or groups (senior citizens), certain kinds of income (capital gains), or
certain characteristics of some taxpayers (the disabled).
1-38. In an effort to quantify the importance of these expenditures, the Department of Finance
produces the publication, “Tax Expenditures And Projections” each year. Using this source,
some examples of these costs are found in Figure 1-2:
1-39. It is clear that such tax expenditures are of considerable significance in the management
of federal finances. It is equally clear that the provision of this type of government benefit has
become entrenched in our tax system. This situation can be explained by a number of factors:
• It is less costly to administer tax expenditures than it is to administer government fund-
ing programs.
• More decisions are left to the private sector so that funds may be allocated more efficiently.
• Tax expenditures reduce the visibility of certain government actions. This is particularly
beneficial if some social stigma is attached to the programs. For example, a child tax
benefit system is more acceptable than increasing social assistance (welfare) payments.
• Tax expenditures reduce the progressivity of the tax system. As many of the tax expen-
ditures, such as tax shelters, are more available to higher income taxpayers, they serve
to reduce effective tax rates in the higher rate brackets.

Figure 1 - 2 Tax Expenditures

2013 Actual and 2020 Projections (Millions Of Dollars)

Actual Projected
2013 2020
Low Rate For Small Corporations 2,950 5,575
Accelerated Investment Incentive For CCA NA 3,005
Non-Taxation Of Gains On Principal Residences 4,160 5,915
Registered Retirement Savings Plans 13,435 17,515
Basic Personal Tax Credit 31,055 38,410
 Introduction To Federal Taxation In Canada 9
Tax Policy Concepts

1-40. Tax expenditures are not only very substantial, they are also difficult to control. This was
expressed several years ago by a former auditor general, as follows:
A cost conscious Parliament is in the position of a team of engineers trying to design a
more fuel efficient automobile. They think they have succeeded, but the engine seems
to go on consuming as much gas as it did before. They cannot understand the problem
until they notice that, hidden from view, a myriad of small holes have been punched
through the bottom of the gas tank. This is too often the way of tax expenditures.
Revenue leaks away, and MPs do not know about it until it is too late.

Qualitative Characteristics Of Tax Systems

General Concepts
1-41. Accounting standard setting bodies have established such concepts as relevance and
reliability as being desirable qualitative characteristics of accounting information. While not
established with the same degree of formality, it is clear that there are similar concepts that can
be used to evaluate tax systems. Some of these desirable qualitative characteristics can be
described as follows:
Equity Or Fairness Horizontal equity entails assessing similar levels of taxation for
people in similar economic circumstances. If two individuals each have Taxable Income
of $50,000, horizontal equity would require that they each pay the same amount of
taxes.
In contrast, vertical equity means dissimilar tax treatment of people in different
circumstances. If an individual has Taxable Income of $100,000, he should pay more
taxes than an individual with Taxable Income of $50,000.
Neutrality The concept of neutrality calls for a tax system that interferes as little as
possible with decision making. An overriding economic assumption is that decisions
are always made to maximize the use of resources. This may not be achieved when tax
factors affect how taxpayers save, invest, or consume. Taxes, by influencing economic
decisions, may cause a less than optimal allocation of resources.
Adequacy A good tax system should meet the funding requirements of the taxing
authority. It is also desirable that these revenues be produced in a fashion that is
dependable and relatively predictable from year to year.
Elasticity Tax revenues should be capable of being adjusted to meet changes in
economic conditions, without necessitating tax rate changes.
Flexibility This refers to the ease with which the tax system can be adjusted to meet
changing economic or social conditions.
Simplicity And Ease Of Compliance A good tax system is easy to comply with
and does not present significant administrative problems for the people enforcing the
system.
Certainty Individual taxpayers should know how much tax they have to pay, the basis
for payments, and the due date. Such certainty also helps taxing authorities estimate
tax revenues and facilitates forecasting of budgetary expenditures.
Balance Between Sectors A good tax system should not be overly reliant on either
corporate or individual taxation. Attention should also be given to balance within these
sectors, insuring that no type of business or type of individual is asked to assume a
disproportionate share of the tax burden.
International Competitiveness If a country’s tax system has rates that are out of line
with those in comparable countries, the result will be an outflow of both business and
skilled individuals to those countries that have more favourable tax rates.
10 Chapter 1
Tax Policy Concepts

Conflicts Among Characteristics

1-42. In designing a tax system, many compromises are required. Examples include the fact
that flexibility is often in conflict with certainty, equity requires trade-offs in simplicity and neu-
trality, and some taxes with very positive objectives are very non-neutral in nature. An example
of this last conflict is that the rates available to small businesses are very favourable because the
government believes that this attracts investment to this sector, thereby encouraging employ-
ment and the development of active business efforts. However, this may not result in the opti-
mal allocation of resources to the business sector as a whole.

Evaluation Of The Canadian System

1-43. Canadian policy makers often refer to the preceding qualitative characteristics in dis-
cussions involving taxation policies. This would make it appropriate to consider how the cur-
rent system of federal taxation stacks up against these criteria. While any comprehensive
evaluation of this question goes well beyond the objectives of this text, we offer the following
brief comments:
• With respect to equity, Canada continues to have situations in which high income indi-
viduals pay little or no tax and relatively low income individuals are subjected to fairly
high effective rates. While the alternative minimum tax was instituted to correct this
problem, inequity is unlikely to be eliminated in a tax system that attempts to accom-
plish as many diverse objectives as does the current Canadian system.
• As noted previously, the Canadian system has a very heavy reliance on the taxation
of personal income and receives a very low portion of its revenues from the corporate
income tax. Also on the low side is the contribution of the GST.
• The Canadian system has had problems with stability and dependability of revenues.
• The Canadian tax system is very complex, making compliance difficult for many tax-
payers. In addition, administration of the legislation is made more difficult by the large
number of provisions and the lack of clarity in their content.
The inability to achieve a harmonized GST/HST system has made this situation much
worse. As we have noted, different provinces have adopted different systems, thereby
complicating inter-provincial transactions. Further, in a given province, there are signifi-
cant variations in the types of goods and services that are subject to taxation within a
given system.
• With respect to international competitiveness, the situation is similar for corporations
and individuals vis-a-vis the United States.
• Over the last few years, tax rates on Canadian corporations have been reduced. These
reductions leave Canada with corporate rates that compare very favorably with most
foreign jurisdictions. However, this situation has changed dramatically in 2018 with
the Trump sponsored reduction in the maximum U.S. corporate rate from 35 percent
to 21 percent.
• Increasing the maximum federal tax rate on individuals to 33 percent in 2016
has made Canada less competitive with other countries, particularly the United
States. With provincial taxes considered, several provinces tax individuals at a
maximum rate of 54 percent. This compares to a maximum rate in some U.S.
venues of 35 percent.

We suggest you work Self Study Problem One-3 at this point.

 Introduction To Federal Taxation In Canada 11
Income Tax Reference Materials

Income Tax Reference Materials

Introduction
1-44. To this point in our discussion of the Canadian tax system and related tax policy concepts,
we have considered a variety of taxation bases as they apply at both the federal and provincial
level. However, with the exception of Chapter 21, which deals with the goods and services tax,
the focus of this book is on the federal taxes that are assessed on the income of individuals,
corporations, and trusts.
1-45. Reference materials related to the federal income tax are very extensive. In addition to
the Income Tax Act, there are many other sources of information. These include other legislative
materials, other publications of the Canada Revenue Agency (CRA), documents related to court
decisions, as well as interpretive materials from a wide variety of sources.
1-46. If presented in paper format, a complete library of these materials would run to thou-
sands of pages and would have to be included in a large number of separate volumes. Given
this, almost all tax practitioners work with an electronic database that provides for easy access
through key word searches.
1-47. These electronic databases are published by several Canadian organizations, including
CCH, Carswell, and CPA Canada. Through our affiliation with CPA Canada, we are able to provide
you with access to their Federal Income Tax Collection (FITAC). Instructions on how to access
this electronic database are available online through the MyLab for this text. FITAC includes:
• The Income Tax Act and Income Tax Regulations.
• Most CRA publications, including Income Tax Folios, Interpretation Bulletins, Informa-
tion Circulars, Guides, and forms.
• An electronic copy of this text, without problem material, that is searchable and has
electronic links to other reference materials in the database.
1-48. A description of all of these materials will be found in the sections that follow.

The Income Tax Act

Importance
1-49. This is the most important source of information for dealing with matters related to the
federal income tax. Interpretation and guidance can be found in many other sources. However,
at the end of the day, this document provides the basis for any final decision related to the
amount of income tax that will have to be paid by an individual, corporation, or trust.
1-50. It is a very long document, running over 2,500 pages in paper format. It is also written in
a very legalistic style which, in our opinion, cannot be readily understood by most individuals.
Given this, the design of our text is such that it does not require the use of the Income Tax Act in
order to understand its content or complete the related problem material.
1-51. While the design of this text does not require the use of the Income Tax Act as a reference, it
is still important to have some understanding of the structure of this document. One reason for this
is that the organization of this book generally follows the structure of the Income Tax Act. In addition,
you will find many references to the Act embedded as part of the text. There are two reasons for this:
• The most important reason for these references is to allow interested individuals to
explore a particular issue to a depth that goes beyond the scope of this text. The pres-
ence of Income Tax Act references greatly facilitates this process.
• The use of references can also be convenient. In dealing with a particular subject, it is
often more efficient to refer to a subject with a reference to the Act than to repeatedly
use the full description of the subject.
1-52. Given these considerations, we will provide a description of the basic structure and con-
tent of this important legislation.
12 Chapter 1
Income Tax Reference Materials

Figure 1 - 3 Basic Structure Of The Income Tax Act

Part I - XIX Section Subsection Paragraph Subparagraph

(in Divisions (1 - 281) (Arabic (lower case (lower case
and numeral) letter) Roman
Subdivisions) numeral)

Structure Of The Federal Income Tax Act

1-53. Figure 1-3 diagrams the basic structure of the Act. As can be seen in this diagram, the
major divisions of the Income Tax Act are referred to as Parts. Some, but not all of these Parts,
contain two or more Divisions (e.g., Part I of the Act contains Divisions A through J). Some Divi-
sions, but again not all of them, contain Subdivisions. For example, Division B of Part I contains
Subdivisions a through k. Note that, while the Parts are numbered I through XIX, there are more
than 19 Parts. This reflects the fact that when a new Part is added, it has been more convenient
to attach a decimal designation to the new Part, as opposed to renumbering all of the Parts that
follow the new Section. For example, Part I is followed by Part I. 01, Part I.1, Part I.2, and Part I.3.
1-54. All of the Parts contain at least one Section. However, there is considerable variance in
the size of the Parts. Part I.2, ”Tax On Old Age Security Benefits”, contains only one Section. In
contrast, Part I, the largest and most important Part of the Act, contains Sections 2 to 180.
1-55. The Sections are labeled 1 through 281. However, as was the case with Parts of the Act,
decimals are used to label new Sections. For example, Section 12 is followed by Section 12.1,
Section 12.2, Section 12.3 (repealed), Section 12.4, Section 12.5, and Section 12.6.
1-56. Sections may be further subdivided into Subsections [designated with Arabic numerals,
as in Subsection 84(1)]. This is followed by Paragraphs [designated with lower case letters, as in
Paragraph 84(1)(b)], and by Subparagraphs [designated with lower case Roman numerals, as in
Subparagraph 84(1)(b)(i)]. In some cases, the outlining process goes even further with Clauses
(designated with upper case letters) and Subclauses (designated with upper case Roman numer-
als). Putting all of this together means that the reference:
ITA 115(1)(e)(ii)(C)(I)
could be read as Income Tax Act Section 115, Subsection (1), Paragraph (e), Subparagraph (ii),
Clause C, Subclause I. However, the usual practice is to only mention the last part of the refer-
ence. In the preceding example, the reference would be to subclause 115(1)(e)(ii)(C)(I). Also in
practice, the relevant Part of the Act (Part I in this case) is not indicated in such references.

Parts Of The Act

1-57. The Parts of the Income Tax Act are numbered I through XIX. As noted, because of the use
of decimal designations there are more than 19 Parts.
1-58. About 70 percent of the Sections of the Income Tax Act are found in Part I, which is titled
“Income Tax”. This Part contains Sections 2 through 180 of the Act and, because of its impor-
tance, we will provide a more detailed description of this Part in the following material.
1-59. Parts I.01 through XVII cover a variety of special taxes as well as rules related to mat-
ters of administration, enforcement, and interpretation. For example, Part V is titled” Tax And
Penalties In Respect Of Qualified Donees” and Part XII.3 is titled ”Tax On Investment Income
Of Life Insurers”. As the great bulk of our attention in this text will be focused on Part I of the
Act, there is little point in providing a list of these Parts for you to read. However, if you have
further interest in their content, we would refer you to the complete copy of the Income Tax
Act that is included in the FITAC database. This database can be installed from the MyLab for
this text.
 Introduction To Federal Taxation In Canada 13
Income Tax Reference Materials

Part I Of The Act

1-60. Part I, the largest and most important Part of the Income Tax Act, is divided into eleven
Divisions. Some of these Divisions are further divided into Subdivisions. The Divisions and their
more significant Subdivisions are described in the following paragraphs:
Division A: “Liability For Tax” (ITA Section 2) This short Division is concerned with
the question of who is liable for payment of income tax in Canada. This Division will be
covered in Chapter 1.
Division B: “Computation Of Income” (ITA Sections 3 through 108) This is the
longest Division in Part I and concerns itself with the determination of Net Income
For Tax Purposes. Its first five Subdivisions describe the major sources of income and
deductions and are as follows:
• Subdivision a - “Income Or Loss From An Office Or Employment” This Subdivi-
sion deals with the ordinary wages and salaries that are earned by individuals while
as an employee. The material in this Subdivision provides the basis for Chapter 3.
• Subdivision b - “Income Or Loss From A Business Or Property” This Subdivi-
sion deals with business income earned by corporations, trusts, and by individuals
through proprietorship or partnership arrangements. Also covered in this Subdivi-
sion is property income, which includes rents, interest, dividends, and royalties.
The material in this Subdivision provides the basis for Chapters 5, 6, and 7.
• Subdivision c - “Taxable Capital Gains And Allowable Capital Losses” This Subdi-
vision deals with gains and losses resulting from the disposal of capital property.
The material in this Subdivision is dealt with in Chapter 8.
• Subdivision d - “Other Sources Of Income” Covered here are miscellaneous
income sources, such as spousal support received and various types of pension
income, that do not fit into any of the major categories dealt with in Subdivisions
a, b, and c. This material is covered in Chapter 9.
• Subdivision e - “Deductions In Computing Income” Covered here are miscella-
neous deductions such as moving expenses, child care costs, and spousal support
paid. These are deductions that do not fit into any of the categories in Subdivisions
a, b, and c. This material is also covered in Chapter 9.
Subdivisions a, b, and c each provide for both inclusions and deductions and, as a conse-
quence, require the calculation of a net income figure. The deductions that are specified
in Subdivisions a, b, and c can only be deducted from inclusions in that same Subdivision.
That is, deductions related to business income (Subdivision b) cannot be deducted from
the inclusions for employment income (Subdivision a). This becomes a very important
point when the inclusions in a particular Subdivision are not sufficient to support all of the
available deductions in that Subdivision.
The remaining six Subdivisions of Division B do not provide new sources of income but,
rather, provide additional rules related to the determination of Net Income. These
remaining Subdivisions are as follows:
• Subdivision f - ”Rules Relating To Computation Of Income” This Subdivision con-
tains a variety of rules related to the deductibility of expenses, income attribution,
and the death of a taxpayer. These rules are covered in Chapters 6 and 9.
• Subdivision g - “Amounts Not Included In Computing Income” This is a very spe-
cialized Subdivision, dealing with certain types of exempt income. It is not given
significant coverage in this text.
• Subdivision h - “Corporations Resident In Canada And Their Shareholders” This
Subdivision presents a number of rules related to the taxation of Canadian resi-
dent corporations. This material is covered in Chapters 12 through 17.
14 Chapter 1
Income Tax Reference Materials

• Subdivision i - ”Shareholders Of Corporations Not Resident In Canada” This is a

specialized Subdivision. Limited coverage is available in Chapter 20.
• Subdivision j - “Partnerships And Their Members” This Subdivision, dealing with
rules related to partnerships, is given detailed coverage in Chapter 18.
• Subdivision k - “Trusts And Their Beneficiaries” This Subdivision, dealing with the
taxation of trusts, is given detailed consideration in Chapter 19.
Division C: “Computation Of Taxable Income” (ITA Sections 109 through 114.2) This
Division covers the conversion of Division B income (commonly referred to as Net
Income For Tax Purposes, or simply Net Income) into Taxable Income for residents. For
individuals, it is given initial coverage in Chapter 4, followed by more detailed coverage
in Chapter 11. For corporations, the coverage is in Chapter 12.
Division D: ”Taxable Income Earned In Canada By Non-Residents” (ITA Sections 115
through 116) Coverage of this material can be found in Chapter 20.
Division E: “Computation Of Tax” (Sections 117 through 127.41) This Division is con-
cerned with determining the taxes that are payable on the Taxable Income determined
in Divisions C and D. It has eight Subdivisions as follows:
• Subdivision a - Rules applicable to individuals
• Subdivision a.1 - Canada Child Benefit
• Subdivision a.2 - Working Income Tax Benefit
• Subdivision a.3 - Climate Action Incentive
• Subdivision a.4 - School Supplies Tax Credit
• Subdivision a.5 - Canada Training Credit
• Subdivision b - Rules applicable to corporations
• Subdivision c - Rules applicable to all taxpayers
The computation of tax for individuals is largely covered in Chapter 4, with some
additional coverage in Chapter 11. The corresponding material for corporations is found
in Chapters 12 and 13.
Division E.1: “Minimum Tax” (Sections 127.5 through 127.55) This Division is
concerned with the obligation of individuals to pay a minimum amount of tax, as well as
the computation of this alternative minimum tax. This material is covered in Chapter 11.
Division F: “Special Rules Applicable In Certain Circumstances” (Sections 128 through
143.4) Much of this Division is devoted to very specialized situations (bankruptcies) or
organizations (cooperative corporations). While these situations are not given coverage
in this text, the Division covers two subjects that are of more general importance. These
are immigration to and emigration from Canada, which are covered in Chapter 20, and
refundable dividends for private corporations, which is covered in Chapter 13.
Division G: “Deferred And Other Special Income Arrangements” (Sections 144 through
148.1) This important Division covers the rules related to Registered Retirement Savings
Plans, Registered Pension Plans, Deferred Profit Sharing Plans, as well as other deferred
income arrangements. Detailed attention is given to this material in Chapter 10.
Division H: “Exemptions” (Sections 149, through 149.2) Covered here are
exemptions for individuals and organizations such as certain employees of foreign
countries, pension trusts, and charitable organizations. These topics are not given
coverage in this text.
Divisions I And J: “Returns, Assessments, Payment And Appeals” and “Appeals To
The Tax Court Of Canada And The Federal Court” (Sections 150 through 180) These
Divisions deal with the resolution of disputes between taxpayers and the Canada
Revenue Agency (CRA). Limited coverage of this material is found in Chapter 2.
 Introduction To Federal Taxation In Canada 15
Income Tax Reference Materials

Other Income Tax Legislation

1-61. While the Income Tax Act constitutes the major source of legislation relevant to the
study of federal income tax, there are three other sources of legislative materials that are rel-
evant. These are draft legislation, the Income Tax Regulations, and a group of International Tax
Treaties between Canada and other countries. A general description of these legislative materi-
als follows.

Draft Legislation
1-62. It is traditional for the federal government to issue a Budget in the first half of each year.
Budgets are presented as a Notice Of Ways And Means Motion. While such proposals some-
times contain the relevant draft legislation, often the budget content is of a general nature and
does not contain the actual legislative provisions that are required for implementation. In either
case, considerable time may pass before the actual proposals pass through parliament.
1-63. These time lags can create a somewhat difficult situation in which returns for a particular
taxation year must sometimes be filed prior to the actual passage of the legislation relevant to
that year.

Income Tax Regulations

1-64. Section 221 of the Income Tax Act allows the Governor In Council to make Regulations
concerning the administration and enforcement of the Income Tax Act. Some of the items listed
in this Section include:
• prescribing the evidence required to establish facts relevant to assessments under this Act;
• requiring any class of persons to make information returns respecting any class of infor-
mation required in connection with assessments under this Act;
• prescribing anything that, by this Act, is to be prescribed or is to be determined or regu-
lated by regulation; and
• defining the classes of persons who may be regarded as dependent for the purposes
of this Act.
1-65. While these Regulations cannot extend the limits of the law, they can serve to fill in
details and, to some extent, modify the statutes. For example, most of the rules for determining
the amount of Capital Cost Allowance that can be deducted are established in the Regulations.
Such Regulations provide an essential element of flexibility in the administration of the Act in
that they can be issued without going through a more formal legislative process.
1-66. You should also note that references to material in the Regulations are often referred to
in the Income Tax Act as “prescribed”. For example, the rate the CRA charges on late tax pay-
ments, a “prescribed” rate of interest, is determined by a procedure that is described in Regula-
tions 4301 and 4302.

International Tax Treaties And Information Exchange Agreements

1-67. Canada currently has tax treaties (also known as tax conventions) with nearly 100 coun-
tries. The most important of these are the Tax Conventions with the United States and the
United Kingdom. While there is considerable variation in the agreements, most of them are
based on the model convention developed by the Organisation For Economic Co-operation And
Development (OECD).
1-68. The purpose of these treaties is twofold. First, they attempt to avoid double taxation of
taxpayers who may have reason to pay taxes in more than one jurisdiction and, second, they
try to prevent international evasion of taxes. In situations where there is a conflict between the
Canadian Income Tax Act and an international tax treaty, the terms of the international tax
treaty prevail.
16 Chapter 1
Income Tax Reference Materials

1-69. There are also over 20 Tax Information Exchange Agreements, which generally involve
small countries and are less comprehensive in nature. Chapter 20 will provide additional discus-
sion of Canada’s tax treaties. Particular attention will be given to the tax treaty between Canada
and the U.S.

Income Tax Application Rules, 1971

1-70. When capital gains taxation was introduced in Canada in 1972 (more than 40 years ago),
a large number of transitional rules were required, primarily to ensure that the effects of the new
legislation were not retroactive. These transitional rules are called the Income Tax Application
Rules, 1971, and they can be of some significance in certain situations involving pre-1972 assets.

Other Sources Of Income Tax Information

Electronic Library Resources
1-71. As noted in Paragraph 1-46, most tax practitioners rely on an electronic library for their tax
reference materials. Also as noted, the MyLab for this text provides access to one of these
libraries — CPA Canada’s Federal Income Tax Collection (FITAC).

CRA Website
1-72. The CRA has an extensive website at www.canada.ca/en/services/taxes. Almost all of
the forms, Guides, Income Tax Folios, Interpretation Bulletins, and other documents provided by
the CRA that are described in Paragraph 1-73 are available on the website. The forms and publi-
cations can be viewed and printed online or downloaded to a computer in one or more formats.
The website is constantly being expanded to provide more forms and publications and more
personalized information on a taxpayer’s various tax accounts.

CRA Publications
1-73. The CRA provides several publications to the public which, while they do not have the
force of law, can be extremely helpful and influential in making decisions related to income
taxes. These can be described as follows:
Income Tax Folios In 2013, the CRA introduced a new type of technical publication, called
Income Tax Folios, a.k.a. IT Folios or simply Folios. Their goal is to update the information
currently found in Interpretation Bulletins and to introduce improved web functionality. The
Income Tax Folios are organized into seven Series with each Series divided into Folios that
contain Chapters on specific topics. For example, under Series 1, Individuals, Folio 1 is
Health and Medical, and Chapter 1 covers the Medical Expense Tax Credit. This Chapter is
designated S1-F1-C1, which stands for Series 1, Folio 1, Chapter 1.

This is, of course, a huge project that will require a number of years to complete. To date,
progress has been very slow, with many important areas not yet covered.

Interpretation Bulletins As noted, over 500 Interpretation Bulletins were issued

by the CRA prior to 2013, though many of these have been cancelled. The objective of
these Bulletins was to give the CRA’s interpretation of particular sections of the law that it
administers and to announce significant changes in departmental interpretation along with
the effective dates of any such changes.

The CRA stopped issuing new Interpretation Bulletins in 2003, but continued to issue many
revisions until 2013. The content of the existing Bulletins is being gradually replaced by the
series titled Income Tax Folios (see preceding material).

Information Circulars While over 300 of these circulars have been issued, there are
currently about 60 in effect. The objective of these publications is to provide information
regarding procedural matters that relate to both the Income Tax Act and the provisions of
the Canada Pension Plan, and to announce changes in organization, personnel, operating
programs, and other administrative developments.
 Introduction To Federal Taxation In Canada 17
Income Tax Reference Materials

Guides And Pamphlets The CRA publishes a large number of non-technical Pamphlets
and Guides that provide information on particular topics of interest to taxpayers. Examples
of Pamphlets are “Canadian Residents Going Down South” (P151) and “Tax Information
For People With Disabilities” (P149). Examples of Guides are “Canadian Residents Abroad”
(T4131), “Preparing Returns For Deceased Persons” (T4011), and “RRSPs And Other
Registered Plans For Retirement” (T4040).
CRA News Releases, Tax Tips, And Fact Sheets The CRA publishes News Releases on a variety
of subjects, such as prescribed interest rates, corporate EFILE, deferral of taxation on employee
stock options, and maximum pensionable earnings. They also provide information on when monthly
payments will be released under the Canada Child Benefit system and when quarterly payments
will be released under the GST tax credit program. Some of the News Releases take the form of
questions and answers, while others deal with the subject in some depth.
Advance Income Tax Rulings And Technical Interpretations In recognition of the
considerable complexity involved in the interpretation of many portions of the Income
Tax Act, the Income Tax Rulings Directorate of the CRA will, for a fee, provide an Advance
Income Tax Ruling on how it will tax a proposed transaction, subject to certain limitations and
qualifications. Advance Income Tax Rulings are available to the public, but only in severed
format with much of the relevant information that may permit identification of the parties
deleted. The result is that such publications are of questionable value.
The Income Tax Rulings Directorate of the CRA also provides both written and telephone
Technical Interpretations to the public (other than for proposed transactions where an
Advance Income Tax Ruling is required) free of charge. Such interpretations however are not
considered binding on the CRA.
Income Tax Technical News Prior to 2012, the CRA issued newsletters titled Income Tax
Technical News, which provided up-to-date information on current tax issues. None have
been issued since 2011 and existing newsletters are being cancelled as new Income Tax
Folios are gradually incorporating their content.

Court Decisions
1-74. Despite the huge volume of information available for dealing with income tax matters,
disputes between taxpayers and the CRA regularly find their way into the Canadian court sys-
tem. Of the hundreds of tax cases that are reported each year, the great majority do not involve
tax evasion or other criminal offences. Rather, they involve an honest difference of opinion
between the taxpayer and the CRA. Common areas of litigation include:
• the deductibility of both business and employment related expenses;
• whether an individual is working as an employee or an independent contractor;
• establishing a property’s fair market value;
• the question of whether a transaction took place at arm’s length;
• the deductibility of support payments;
• distinguishing between profits that are capital in nature and those that are ordinary
business income; and
• the deductibility of farm losses against other sources of income.
1-75. With the large number of court cases and the fact that they cover the great majority of
issues that might arise in the application of income tax legislation, attention must be given to
the precedents that have been established in the court decisions. While court decisions cannot
be used to change the actual tax law, court decisions may call into question the reasonableness
of interpretations of the ITA made by either the CRA or tax practitioners. Given the volume and
complexity of court cases on income tax, we will cite only very important cases in our coverage
of the various subjects in this text. However, a careful review of all relevant case material would
be essential in researching any complex tax issue.

We suggest you work Self Study Problem One-4 and 5 at this point.
Another random document with
no related content on Scribd:
face so close to hers. “That’s inherent in the design of all really fast
machines . . . and we simply don’t know any way of getting away
from it. . . . Why? What has that to do with the case?”
“A lot—I hope. When I was working in a flitter I had to wait up to
half an hour sometimes, for the sigma curve to stabilize enough so
that the equations would hold valid will give a longer valid
prediction.”
“Stabilize? How? I’ve never seen a sigma curve flatten out. Or
does ‘stabilize’ have a special meaning for you vortex experts?”
“Could be. It’s what happens when a sigma becomes a little more
regular than usual, so that a simpler equation will give a longer valid
prediction.”
“I see; and a difference in wave-form that would be imperceptible
to me might mean a lot to you.”
“Right. It just occurred to me that a similar line of reasoning may
hold for this seemingly entirely different set of conditions. The less
unstable the curve, the less complicated the equations and the
smaller the volume of actual data. . . .”
“Oh!” Joan’s thought soared high. “So Margie may work yet, if we
wait a while?”
“Check. Browning can’t take the ship away from you, can he?”
“No. Nobody can do anything until the job is done or I punch that
red ‘stop’ button there. D’you suppose she can do it? Storm? How
long can we wait?”
“Half an hour, I’d say. No, to settle the point definitely, let’s wait
until I can get a full ten-second prediction and see what Margie’s
doing about the situation then.”
“Wonderful! But in that case, it might be a good idea for you to be
looking at the chart, don’t you think?” she asked, pointedly. His eyes,
at the moment, were looking directly into hers, from a distance of
approximately twelve inches.
“I’ll look at it later, but right now I’m. . . .”
The ship quivered under the terrific, the unmistakable trip-
hammer blow of propellant heptadetonite. Unobserved by either of
the two scientists most concerned, the sigma curve had,
momentarily, become a trifle less irregular. The point of the saw-
tooth wave had touched the zero line. Margie had acted. The
visiplate, from which the heavily-filtered glare of the vortex had
blazed so long, went suddenly black.
“She did it, Storm!” Joan’s thought was a mental shriek of pure
joy. “She really worked!”
Whether, when the ship went free, Joan pulled Storm down to her
merely to anchor him, or for some other reason; whether Cloud
grabbed her merely in lieu of a safety-line or not; which of the two
was first to put arms around the other; these are moot points
impossible of decision at this date. The fact is, however, that the two
scientists held a remarkably unscientific pose for a good two minutes
before Joan thought that she ought to object a little, just on general
principles. Even then, she did not object with her mind; instead she
put up her block and used her voice.
“But, after all, Storm,” she began, only to be silenced as beloved
women have been silenced throughout the ages. She cut her screen
then, and her mind, tender and unafraid, reached out to his.
“This might be the perfect time, dear, to merge our minds? I’ve
been scared to death of it all along, but no more . . . let’s?”
“Uh-huh,” he demurred. “I’m still afraid of it. I’ve been thinking
about it a lot, and doing some drilling, and the more I play with it the
more scared I get. It’s dangerous. It’s like playing with duodec. I’ve
just about decided that we’d better let it drop.”
“Afraid? For yourself, or for me? Don’t try to lie with your mind,
Storm; you can’t do it. You’re afraid only for me, and you needn’t be.
I’ve been thinking, too, and digging deep, and I know I’m ready.” She
looked up at him then, her quick, bright, impish grin very much in
evidence. “Let’s go.”
“QX, Joanie, and thanks. I’ve been wanting this more than I ever
wanted anything before in my life. But not holding hands, this time.
Heart to heart and cheek to cheek.”
“Check—the closer the better.”
They embraced, and again mind flowed into mind; this time with
no thought of withholding or reserve on either side. Smoothly,
effortlessly, the two essential beings merged, each fitting its tiniest,
remotest members into the deepest, ordinarily most inaccessible
recesses of the other; fusing as quickly and as delicately and as
thoroughly as two drops of water coalescing into one.
 In that supremely intimate fusion, that ultimate union of line and
plane and cellule, each mind was revealed completely to the other; a
revealment which no outsider should expect to share.
Finally, after neither ever knew how long, they released each
other and each put up, automatically, a solid block.
“I don’t know about you, Storm,” Joan said then, “but I’ve had just
about all I can take. I’m going to bed and sleep for one solid week.”
“You and me both,” Storm agreed, ungrammatically, but feelingly.
“Good night, sweetheart . . . and this had all better be strictly hush-
hush, don’t you think?”
“I do think,” she assured him. “Can’t you just imagine the field-
day the psychs would have, taking us apart?”
In view of the above, it might be assumed that the parting was
immediate, positive, and undemonstrative; but such was not exactly
the case. But they did finally separate, and each slept soundly and
long.
And fairly early the next morning—before either of them got up, at
least—Cloud sent Joan a thought.
“Awake, dear?”
“Uh-huh. Just. ’Morning, Storm.”
“I’ve got some news for you, Joanie. My brain is firing on ten
times as many barrels as I ever thought it had, and I don’t know what
half of ’em are doing. Among other things, you made what I think is
probably a top-bracket perceiver out of me.”
“So? Well, don’t peek at me, please . . . but why should I say that,
after having studied in Rigel Four for two years? Women are funny, I
guess. But, for your information, I have just extracted the ninth root
of an eighteen-digit number, in no time at all and to the last
significant decimal place, and I know the answer is right. How do you
like them potatoes, Buster?”
“Nice. We really absorbed each other’s stuff, didn’t we? But how
about joining me in person for a soupcon of ham and eggs?”
“That’s a thought, my thoughtful friend; a cogent and right
knightly thought. I’ll be with you in three jerks and a wiggle.” And she
was.
Just as they finished eating, Vesta breezed in. “Well, you two
deep-sleepers finally crawled out of your sacks, did you? It is
confusing, though, that ship’s time never agrees with planetary time.
But I live here, you know, in this city you call ‘Vegiaton,’ so I went to
bed at noon yesterday and I’ve got over half a day’s work done
already. I saw my folks and bought half of my uncle’s bank and made
the no-gambling declaration and I want to ask you both something.
After the Grand Uproar here at the ’port in your honor, will you two
and Helen and Joe and Bob and Barbara come with me to a little
dance some of my friends are having? You’ve been zo good to me,
and I want to show you off a little.”
“We’ll be glad to, Vesta, and thanks a lot,” Joan said, flashing a
thought at Cloud to let her handle this thing her own way, “and I
imagine the others would be, too, but . . . well, it’s for you, you know,
and we might be intruding. . . .”
“Why, not at all!” Vesta waved the objection away with an airy flirt
of her tail. “You’re friends of mine! And everybody’s real friends are
always welcome, you know, everywhere. And it’ll be small and quiet;
only six or eight hundred are being asked, they say. . . .” she paused
for a moment: “. . . of course, after it gets around that we have you
there, a couple of thousand or so strangers will come in too; but
they’ll all smell nice, so it’ll be QX.”
“How do you know what they’ll smell like?” Cloud asked.
“Why, they’ll smell like our crowd, of course. If they didn’t they
wouldn’t want to come in. It’s QX, then?”
“For us two, yes; but of course we can’t speak for the others.”
“Thanks, you wonderful people; I’ll go ask them right now.”
“Joan, have you blown your stack completely?” Cloud demanded.
“Small—quiet—six or eight hundred invited—a couple of thousand or
so gate-crashers—what do you want to go to a brawl like that for?”
“The chance is too good to miss—it’s priceless. . . .” She paused,
then added, obliquely: “Storm, have you any idea at all of what Vesta
thinks of you? You haven’t snooped, I’m sure.”
“No, and I don’t intend to.”
“Maybe you ought to,” Joan snickered a little, “except that it
would inflate your ego too much. It’s hard to describe. It’s not exactly
love—and not exactly worship, either god-worship or hero-worship. It
isn’t exactly adoration, but it’s very much stronger than mere
admiration. A mixture of all these, perhaps, and half a dozen others,
coupled with a simply unbelievable amount of pride that you are her
friend. It’s a peculiarly Vegian thing, that Tellurians simply do not feel.
But here’s why I’m so enthused. It has been over twenty years since
any non-Vegian has attended one of these uniquely Vegian parties
except as an outsider, and a Vegian party with outsiders looking on
isn’t a Vegian party at all. But we Storm, will be going as insiders!”
“Are you sure of that?”
“Positive. Oh, I know it isn’t us she wants, but you; but that won’t
make any difference. As Vesta’s friend—‘friend’ in this case having a
very special meaning—you’re in the center of the inner circle. As
friends of yours, the rest of us are in, too. Not in the inner circle,
perhaps, but well inside the outside circle, at least. See?”
“Dimly. ‘A friend of a friend of a friend of a very good friend of
mine,’ eh? I’ve heard that ditty, but I never thought it meant
anything.”
“It does here. We’re going to have a time. See you in about an
hour?”
“Just about. I’ve got to check with Nordquist.”
“Here I am, Storm,” the Lensman’s thought came in. Then, as
Cloud went toward his quarters, it went on: “Just want to tell you we
won’t have anything for you to do here. This is going to be a straight
combing job.”
“That won’t be too tough, will it? A Tellurian, sixty, tall, thin, grave,
distinguished-looking . . . or maybe. . . .”
“Exactly. You’re getting the idea. Cosmeticians and plastic
surgery. He could look like a Crevenian, or thirty years old and two
hundred pounds and slouchy. He could look like anything. He
undoubtedly has a background so perfectly established that fifteen
thoroughly honest Vegians would swear by eleven of their gods that
he hasn’t left his home town for ten years. So every intelligent being
on Vegia who hasn’t got a live tail, with live blood circulating in it, is
going under the Lens and through the wringer if we have to keep
Vegia in quarantine for a solid year. He is not going to get away from
us this time.”
“I’m betting on you, Nordquist. Clear ether!”
The Lensman signed off and Cloud, at the end of the specified
hour, undressed and redressed and went to the computer room. All
the others except Joe were already there.
“Hi, peoples!” Cloud called; then did a double-take. “Wow! And
likewise, Yipes! How come the tri-di outfits didn’t all collapse, Joan,
when those two spectaculars took up cybernetics?”
“I’ll never know, Storm.” Joan shook her head wonderingly, then
went on via thought; and Cloud felt her pang of sheer jealousy. “Why
is it that big girls are always so much more beautiful than little ones?
And the more clothes they take off the better they look? It simply isn’t
fair!”
Cloud’s mind reached out and meshed with hers. “Sure it is,
sweetheart. They’re beauties; you can’t take that away from
them. . . .”
And beauties they certainly were. Helen, as has been said, was
lissom and dark. Her hair was black, her eyes a midnight blue, her
skin a deep, golden brown. Barbara, not quite as tall—five feet
seven, perhaps—was equally beautifully proportioned, and even
more striking-looking. Her skin was tanned ivory, her eyes were gray,
her hair was a shoulder-length, carefully-careless mass of gleaming,
flowing, wavy silver.
“. . . they’ve got a lot of stuff: but believe me, there are several
grand lots of stuff they haven’t got, too. I wouldn’t trade half of you
for either one of them—or both of them together.”
“I believe that—at least, about both of them,” Joan giggled
mentally, “but how many men. . . .”
“Well, how many men do you want?” Cloud interrupted.
“Touché, Storm . . . but do you really. . . .”
What would have developed into a scene of purely mental
lovemaking was put to an end by the arrival of Joe Mackay, who also
paused and made appropriate noises of appreciation.
“But there’s one thing I don’t quite like about this deal,” he said
finally. “I’m not too easy in my mind about making love to a moll who
is packing a Mark Twenty Eight DeLameter. The darn thing might go
off.”
“Keep your distance, then, Lieutenant Mackay!” Helen laughed.
“Well, are we ready?”
They were. They left the ship and walked in a group through the
throng of cheering Vegians toward the nearby, gaily-decorated
stands in which the official greetings and thank-yous were to take
place. Helen and Babs loved it; just as though they were parading as
finalists in a beauty contest. Bob and Joe wished that they had
stayed in the ship and kept their clothes on. Joan didn’t quite know
whether she liked this kind of thing or not. Of the six Tellurians, only
Neal Cloud had had enough experience in public near-nudity so that
it made no difference. And Vesta?
Vesta was fairly reveling—openly, unashamedly reveling—in the
spotlight with her Tellurian friends. They reached the center stand,
were ushered with many flourishes to a reserved section already
partly filled by Captain Ross and the lesser officers and crewmen of
the good-will-touring Patrol ship Vortex Blaster II. Not all of the
officers, of course, since many had to stay aboard, and
comparatively few of the crew; for many men insist on wearing
Tellurian garmenture and refuse to tan their hides under ultra-violet
radiation—and no untanned white Tellurian skin can take with
impunity more than a few minutes of giant Vega’s blue-white fury.
Of the ceremonies themselves, nothing need be said; such things
being pretty much of a piece, wherever, whenever, or for whatever
reason held. When they were over, Vesta gathered her six friends
together and led them to the edge of the roped-off area. There she
uttered a soundless (to Tellurian ears) whistle, whereupon a group of
Vegian youths and girls formed a wedge around the seven and drove
straight through the milling crowd to its edge. There, by an evidently
pre-arranged miracle, they found enough copters to carry them all.
 Chapter 16

▂▂▂▂▂▂VEGIAN JUSTICE
THE NEARER THEY got to their destination the more fidgety Vesta
became. “Oh, I hope Zambkptkn could get away and be there by
now—I haven’t seen him for over half a year!”
“Who?” Helen asked.
“My brother. Zamke, you’d better call him, you can pronounce
that. The police officer, you know.”
“I thought you saw him this morning?” Joan said.
“I saw my other brothers and sisters, but not him—he was tied up
on a job. He wasn’t sure just when he could get away tonight.”
The copter dropped sharply. Vesta seized Cloud’s arm and
pointed. “That’s where we’re going; that big building with the landing-
field on the roof. The Caravanzerie. Zee?” In moments of emotion or
excitement, most of Vesta’s sibilants reverted to Z’s.
“I see. And this is your Great White Way?”
It was, but it was not white. Instead, it was a blaze of red, blue,
green, yellow—all the colors of the spectrum. And crowds! On foot,
on bicycles, on scooters, motorbikes, and motortricycles, in cars and
in copters, it seemed impossible that anything could move in such a
press as that. And as the aircab approached its destination Neal
Cloud, space-hardened veteran and skillful flyer though he was,
found himself twisting wheels, stepping on pedals, and cutting in
braking jets, none of which were there.
How that jockey landed his heap and got it into the air again all in
one piece without dismembering a single Vegian, Cloud never did
quite understand. Blades were scant fractional inches from blades
and rotors; people were actually shoved aside by the tapering
bumpers of the cab as it hit the deck; but nothing happened. This, it
seemed, was normal!
The group re-formed and in flying-wedge fashion as before,
gained the elevators and finally the ground floor and the ballroom.
Here Cloud drew his first full breath for what seemed like hours. The
ballroom was tremendous—and it was less than three-quarters filled.
Just inside the doorway Vesta paused, sniffing delicately. “He is
here—come on!” She beckoned the six to follow her and rushed
ahead, to be met at the edge of the clear space in head-on collision.
Brother and sister embraced fervently for about two seconds. Then,
reaching down, the man broke his sister’s grip and flipped her
around sidewise, through half of a vertical circle, so that her feet
pointed straight up. Then, with a sharp “Blavzkt!” he snapped into a
back flip.
“Blavzkt—Zemp!” she shouted back, bending beautifully into such
an arch that, as his feet left the floor, hers landed almost exactly
where his had been an instant before. Then for a full minute and a
half the joyous pair pinwheeled, without moving from the spot; while
the dancers on the floor, standing still now, applauded
enthusiastically with stamping, hand-clapping, whistles, cat-calls,
and screams.
Vesta stopped the exhibition finally, and led her brother toward
Cloud and Joan. The music resumed, but the dancers did not.
Instead, they made a concerted rush for the visitors, surrounding
them in circles a dozen deep. Vesta, with both arms wrapped tightly
around Cloud and her tail around Joan, shrieked a highly
consonantal sentence—which Cloud knew meant “Lay off these two
for a couple of minutes, you howling hyenas, they’re mine”—then,
switching to English: “Go ahead, you four, and have fun!”
The first two men to lay hands on the two tall Tellurian beauties
were, by common consent and without argument, their first partners.
Two of the Vegian girls, however, were not so polite. Both had hold
of Joe, one by each arm, and stood there spitting insults at each
other past his face until a man standing near by snapped a few
words at them and flipped a coin. The two girls, each still maintaining
her grip, leaned over eagerly to see for themselves the result of the
toss. The loser promptly relinquished her hold on Joe and the winner
danced away with him.
“Oh, this is wonderful, Storm!” Joan thought. “We’ve been
accepted—we’re the first group I ever actually knew of to really
break through the crust.”
 The Vegians moved away. Vesta released her captives and
turned to her brother.
“Captain Cloud, Doctor Janowick, I present to you my brother
Zamke,” she said. Then, to her brother: “They have been very good
to me, Zambktpkn, both of them, but especially the captain. You
know what he did for me.”
“Yes, I know.” The brother spoke the English “S” with barely a
trace of hardness. He shook Cloud’s hand firmly, then bent over the
hand, spreading it out so that the palm covered his face, and inhaled
deeply. Then, straightening up: “For what you have done for my
sister, sir, I thank you. As she has said, your scent is pleasing and
will be remembered long, enshrined in the Place of Pleasant Odors
of our house.”
Turning to Joan, and omitting the handshake, he repeated the
performance and bowed—and when an adult male Vegian sets out
to make a production of bowing, it is a production well worth seeing.
Then, with the suddenest and most complete change of manner
either Cloud or Joan had ever seen he said: “Well, now that the
formalities have been taken care of, Joan, how about us hopping a
couple of skips around the floor?”
Joan was taken slightly aback, but rallied quickly. “Why, I’d love it
. . . but not knowing either the steps or the music, I’m afraid I couldn’t
follow you very well.”
“Oh that won’t make any. . . .” Zamke began, but Vesta drowned
him out.
“Of course it won’t make any difference, Joan!” she exclaimed.
“Just go ahead and dance any way you want to. He’ll match your
steps—and if he so much as touches one of your slippers with his
big, fat feet, I’ll choke him to death with his own tail!”
“And I suppose it is irrefutable that you can and will dance with
me with equal dexterity, aplomb, and insouciance?” Cloud asked
Vesta, quizzically, after Joan and Zamke had glided smoothly out
into the throng.
“You zaid it, little chum!” Vesta exclaimed, gleefully. “And I know
what all those words mean, too, and if I ztep on either one of your
feet I’ll choke my zelf to death with my own tail, zo there!”
 Snuggling up to him blissfully, Vesta let him lead her into the
crowd. She of course was a superb dancer; so much so that she
made him think himself a much better dancer than he really was.
After a few minutes, when he was beginning to relax, he felt an itchy,
tickling touch—something almost impalpable was creeping up his
naked back—the fine, soft fur of the extreme tip of Vesta’s ubiquitous
tail!
He grabbed for it, but, fast as he was, Vesta was faster, and she
shrieked with glee as he missed the snatch.
“See here, young lady,” he said, with mock sternness, “if you
don’t keep your tail where it belongs I’m going to wrap it around your
lovely neck and tie it into a bow-knot.”
Vesta sobered instantly. “Oh . . . do you really think I’m lovely,
Captain Nealcloud—my neck, I mean?”
“No doubt about it,” Cloud declared. “Not only your neck—all of
you. You are most certainly one of the most beautiful things I ever
saw.”
“Oh, thanks . . . I hadn’t. . . .” she stared into his eyes for
moments, as if trying to decide whether he really meant it or was
merely being polite; then, deciding that he did mean it, she closed
her eyes, let her head sink down onto his shoulder, and began to
purr blissfully; still matching perfectly whatever motions he chose to
make.
In a few minutes, however, they heard a partially-stifled shriek
and a soprano voice, struggling with laughter, rang out.
“Vesta!”
“Yes, Babs?”
“What do you do about this tail-tickling business? I never had to
cope with anything like that before!”
“Bite him!” Vesta called back, loudly enough for half the room to
hear. “Bite him good and hard, on the end of the tail. If you can’t
catch the tail, bite his ear. Bite it good.”
“Bite him? Why, I couldn’t—not possibly!”
“Well, then give him the knee, or clout him a good, solid tunk on
the nose. Or better yet; tell him you won’t dance with him any more
—he’ll be good.”
 “Now you tell us what to do about tail-ticklers,” Cloud said then.
“S’pose I’d take a good bite at your ear?”
“I’d bite you right back,” said Vesta, gleefully, “and I bet you’d
taste just as nice as you smell.”
The dance went on, and Cloud finally, by the aid of both Vesta
and Zamke, did finally manage to get one dance with Joan. And, as
he had known he would, he enjoyed it immensely. So did she.
“Having fun, chum? I never saw you looking so starry-eyed
before.”
“Oh, brother!” she breathed. “To say that I was never the belle of
any ball in my schooldays is the understatement of the century, but
here . . . can you imagine it, Storm, me actually outshining Barbara
Benton and Helen Worthington both at once?”
“Sure I can. I told you. . . .”
“Of course it’s probably because their own women are so big that
I’m a sort of curiosity,” she rushed on, “but whatever the reason, this
dance is going down in my memory book in great big letters in the
reddest ink I can find!”
“Good for you—hail the conquering heroine!” he applauded. “It’ll
do you good to have your ego inflated a little. But what do you do
about this tail-tickling routine?”
“Oh, I grab their tails”—with her sense of perception, she could,
of course—“and when they try to wiggle them free I wiggle back at
them, like this,” she demonstrated, “and we have a perfectly
wonderful time.”
“Wow! I’ll bet you do—and when I get you home, you
shameless. . . .”
“Sorry, Storm, my friend,” the big Vegian who cut in wasn’t sorry
at all, and he and Cloud both knew it. “You can dance with Joan any
time and we can’t. So loosen all clamps, friend. Grab him, Vzelkt!”
Vzelkt grabbed. So, in about a minute, did another Vegian girl;
and then after a few more minutes, it was Vesta’s turn again. No
other girl could dance with him more than once, but Vesta, by some
prearranged priority, could have him once every ten minutes.
“Where’s your brother, Vesta?” he asked once. “I haven’t seen
him for an hour.”
 “Oh, he had to go back to the police station. They’re all excited
and working all hours. They’re chasing Public Enemy Number One—
a Tellurian, they think he is, named Fairchild—why?” as Cloud
started, involuntarily, in the circle of her arm. “Do you know him?”
“I know of him, and that’s enough.” Then, in thought: “Did you get
that, Nordquist?”
“I got it.” Cloud was, as the Lensman had said that he would be,
under surveillance every second. “Of course, this one may not be
Fairchild, since there are three or four other suspects in other places,
but from the horrible time we and the Vegians both are having, trying
to locate this bird, I’m coming to think he is.”
The dance went on until, some hours later, there was an unusual
tumult and confusion at the door.
“Oh, the police are calling Vesta—something has happened!” his
companion exclaimed. “Let’s rush over—oh, hurry!”
Cloud hurried; but, as well as hurrying, he sent his sense of
perception on ahead, and meshed his mind imperceptibly with
Vesta’s as well.
Her mind was a queerly turbid, violently turbulent mixture of
emotions: hot with a furiously passionate lust for personal, tooth-and-
claw-revenge; at the same time icily cold with the implacable,
unswervable resolve of the dedicated, remorseless, and merciless
killer.
“Are you sure, beyond all doubt, that this is the garment of my
brother’s slayer?” Vesta was demanding.
“I am sure,” the Vegian policeman replied. “Not only did
Zambkptkn hold it pierced by the first and fourth fingers of his left
hand—the sign positive, as you know—but an eyewitness verified
the scent and furnished descriptions. The slayer was dressed as an
Aldebaranian, which accounts for the size of the garment your
brother could seize before he died; his four bodyguards as
Tellurians, with leather belts and holsters for their blasters.”
“QX.” Vesta accepted a pair of offered shears and began to cut
off tiny pieces of the cloth. As each piece began to fall it was seized
in mid-air by a Vegian man or girl who immediately ran away with it.
And in the meantime other Vegians, forming into a long line, ran past
Vesta, each taking a quick sniff and running on, out into the street.
Cloud, reaching outside the building with his perceptors, saw that all
vehicular traffic had paused. A Vegian stood on the walkway, holding
a bit of cloth pinched between thumb and fingernail. All passersby,
on foot or in any kind of vehicle, would pause, sniff at the cloth, and
—apparently—go on about their business.
But Cloud, after reading Vesta’s mind and the policeman’s,
turned as white as his space-tan would permit. In less than an hour
almost every Vegian in that city of over eight million would know the
murderer by scent and would be sniffing eagerly for him; and when
any one of them did find him. . . .
Except for the two Vegians and the six Tellurians, the vast hall
was now empty. Vesta was holding a pose Cloud had never before
seen—stiffly erect, with her tail wrapped tightly around her body.
“Can they get a scent—a reliable scent, I mean—that fast?”
Cloud asked.
“Zertainly,” Vesta’s voice was cold, level, almost uninflected.
“How long would it take you to learn that an egg you started to eat
was rotten? The man who wore this shirt is a class A Triple Prime
stinker—his odor is recognizable instantly and anywhere.”
“But as to the rest of it—don’t do this thing, Vesta! Let the law
handle it.”
“The law comes second. He killed my brother; it is my right and
my privilege to kill him. . . .”
Cloud became conscious of the fact that Joan was in his mind.
“You been here all along?” he flashed.
“In or near. You and I are one, you know,” and Vesta’s voice went
on:
“. . . and besides, the law is merciful. Its death is instant. Under
my claws and teeth he will live for hours—for a full day, I hope.”
“But officer, can’t you do something?”
“Nothing. The law comes second. As she has said, it is her right
and her privilege.”
“But it’s suicide, man—sheer suicide. You know that, don’t you?”
“Not necessarily. She will not be working alone. Whether she
lives or dies, however, it is still her right and her privilege.”
Cloud switched to thought. “Nordquist, you can stop this if you
want to. Do it.”
 “I can’t, and you know I can’t. The Patrol does not and cannot
interfere in purely planetary affairs.”
“You intend, then,” Cloud demanded furiously, “to let this girl put
her naked hands and teeth up against four trigger-happy gunnies
with DeLameters?”
“Just that. There’s nothing else I or any other Patrolman can do.
To interfere in this one instance would alienate half the planets of
Civilization and set the Patrol back five hundred years.”
“Well, even though I’m a Patrolman—of sorts—I can do
something about it!” Cloud blazed, “and by God, I will!”
“We will, you mean, and we will, too,” Joan’s thought came
forcibly at first, then became dubious: “That is, if it doesn’t mean
getting you blasted, too.”
“Just what?” Nordquist’s thought was sharp. “Oh, I see . . . and,
being a Vegian, as well as a Patrolman, and the acknowledged
friend of both the dead man and his sister. . . .”
“Who’s a Vegian?” Cloud demanded.
“You are, and so are the other five of your group, as you would
have been informed if the party had not been broken up so violently.
Honorary Vegians, for life.”
“Why, I never heard of such a thing!” Joan exclaimed, “and I
studied them for years!”
“No, you never did,” Nordquist agreed. “There haven’t been many
honorary Vegians, and to my certain knowledge, not one of them has
ever talked. Vegians are very strongly psychic in picking their off-
world friends.”
“You mean to tell me that that bleached blonde over there won’t
spill everything she knows fifteen minutes after we leave here?”
Cloud demanded.
“Just that. You can’t judge character by hair, even if it were
bleached, which it isn’t. You owe her an apology, Storm.”
“If you say so, I do, and I hereby apologize, but. . . .”
“But to get back to the subject,” the Lensman went on, narrowing
his thought down so sharply as to exclude Joan. “You can do
something. You’re the only one who can. Such being the case, and
since you are no longer indispensable. I withdraw all objections. Go
ahead.”
 Cloud started a thought, but Joan blanked him out. “Lensman,
has Storm been sending—can he send information to you that I can’t
dig out of his mind?”
“Very easily. He is an exceptionally fine tuner.”
“I’m sorry, Joanie,” Cloud thought, hastily, “but it sounded too
much like bragging to let you in on. However, you’re in from now on.”
Then, aloud, “Vesta, I’m staying with you,” he said, quietly.
“I was sure you would,” she said, as quietly. “You are my friend
and Zamke’s. Although your customs are not exactly like ours, a
man of your odor does not desert his friends.”
Cloud turned then to the four lieutenants, who stood close-
grouped. “Will you four kids please go back to the ship, and take
Joan with you?”
“Not on Thursdays, Storm,” Joe said, pointing to an
inconspicuous bronze button set into a shoulder-strap. “We both rate
Blaster Expert First. Count us in,” and Bob added:
“Joan has been telling us an earful, and what she didn’t tell us a
couple of Vegian boys did. The Three Honorary Vegian Musketeers;
that’s us. Lead on, d’Artagnan!”
“Bob and Joe are staying, too, Vesta,” Cloud said then.
“Of course. I’m sorry I didn’t get to tell you myself about being
adopted, but I knew somebody would. But you, Joan and Barbara
and Helen, you three had better go back to the ship. You can be of
no use here.”
Two of them were willing enough to go, but:
“Where Neal Cloud goes, I go,” Joan said, and there was no
doubt whatever that she meant exactly that.
“Why?” Vesta demanded. “Commander Cloud, the fastest
gunman in all space, is necessary for the success of this our
mission. He can, from a cold, bell-tone start, at thirty yards, burn the
centers out of six irregularly-spaced targets. . . .”
“Nordquist! Lay off! What in hell do you think you’re doing?”
Cloud thought, viciously.
“I don’t think—I know,” came instant reply. “Do you want her
hanging on your left arm when the blasting starts? This is the only
possible way Joan Janowick can be handled. Lay off yourself!” and
Vesta’s voice went calmly on:
 “. . . in exactly two hundred and forty nine mils. Lieutenant
Mackay and Lieutenant Ingalls, although perhaps not absolutely
necessary, are highly desirable. They are fast enough, and are of
deadly accuracy. When either of them shoots a man in a crowd,
however large, that one man dies, and not a dozen bystanders. Now
just what good would you be, Lieutenant-Commander Janowick?
Can you fire a blaster with any one of these men? Or bite a man’s
throat out with me?”
For probably the first time in her life, Joan Janowick stood mute.
“And suppose you do come along,” Vesta continued relentlessly.
“With you at his side, in the line of fire, do you suppose. . . .”
“Just a minute—shut up, Vesta!” Cloud ordered, roughly. “Listen,
all of you. The Lensman is doing this, not Vesta, and I’ll be damned if
I’ll let anybody, not even a Lensman, bedevil my Joan this way. So,
Joan, wherever we go, you can come along. All I ask is, you’ll keep a
little ways back?”
“Of course I will, Storm,” and Joan crept into the shelter of his
arm.
“Ha—I thought you’d pop off at about this point,” Nordquist’s
thought came chattily into Cloud’s mind. “Good work, my boy; you’ve
consolidated your position no end.”
“Well, what do we do now?” Joe Mackay broke the somewhat
sticky silence that followed.
“We wait,” Vesta said, calmly. “We wait right here until we receive
news.”
They waited; and, as they waited the tension mounted and
mounted. Before it became intolerable, however, the news came in,
and Cloud, reading Vesta’s mind as the ultra-sonic information was
received, relayed it to other Tellurians. The murderer and his four
bodyguards were at that moment entering a theater less than one
city block away. . . .
“Why, they couldn’t be!” Helen protested. “Nobody could be that
stupid . . . or . . . I wonder. . . ?”
“I wonder, too.” This from Joan. “Yes, it would be the supremely
clever thing to do; the perfect place to hide for a few hours while the
worst of the storm blows over and they can complete their planned
getaway. Provided, of course, they’re out-worlders and thus don’t
know what we Vegians can do with our wonderful sense of smell. Of
course they aren’t a Tellurian and four Aldebaranians any more, are
they?”
“No, they are five Centralians now. Perfectly innocent. They think
their blasters are completely hidden under those long over shirts, but
now and again a bulge shows—they’ve still got blasters on their hips.
The theater’s crowded, but the five friends want to sit together. The
manager thinks it could be arranged, by paying a small gratuity to a
few seat-holders who would like to make a fast credit that way . . .
he’ll place them and it’s almost time for us to go. ’Bye, Joanie—stay
back, remember!” and she was in his arms.
“How about it, Helen?” Joe asked. “Surely you’re going to kiss
your Porthos good-bye, aren’t you?”
“Of a surety, m’enfant!” she exclaimed, and did so with
enthusiasm. “But it’s more like Aramis, I think—he kissed everybody,
you know—and since I’m not hooked like Joan is—yet—don’t think
that this is establishing a precedent.”
“Well, Babs, that leaves you and me.” Bob reached out—she was
standing beside him—and pulled her close. “QX?”
“Why, I . . . I guess so.” Barbara blushed furiously. “But Bob . . . is
it really dangerous?” she whispered.
“I don’t know. Not very, really, I don’t think. At least I certainly
hope not. But blasters are not cap-pistols, you know, and whenever
one goes off it can raise pure hell. Why? Would you really miss me?”
“You know I would, Bob,” and her kiss had more fervor than either
she or he would have believed possible a few minutes before. And at
its end she laughed, shakily, and blushed again as she said, “I’ve got
sort of used to having you around, so be sure and come back.”
They left the building and walked rapidly along a strangely quiet
street to the theater. Without a word they were ushered up a short
flight of stairs.
“Hold up, Vesta!” Cloud thought sharply. “We can’t see a thing—
wait a couple of minutes.”
They waited five minutes, during which time they learned exactly
where the enemy were and discussed every detail of the proposed
attack.
 “I still can’t see well enough to shoot,” Cloud said then. “Can they
give us a little glow of light?”
They could. By almost imperceptible increments the thick, soft
blackness was relieved.
“That’s enough.” The light, such as it was, steadied.
“Ready?” Vesta’s voice was a savage growl, low, deep in her
throat.
“Ready.”
“No more noise, then.”
They walked forward to the balcony’s edge, leaned over it, looked
down. Directly beneath Vesta’s head was seated a man in Centralian
garb; four others were behind, in front of, and at each side of, their
chief.
“Now!” Vesta yelled, and flung herself over the low railing.
At her shout four Vegians ripped four Centralian shirts apart,
seized four hip-holstered blasters, and shouted with glee—but they
shouted too soon. For the real gun-slick, then as now, did not work
from the hip, but out of his sleeve; and these were four of the
coldest, fastest killers to be found throughout the far flung empire of
Boskone. Thus, all four flashed into action even before they began
rising to their feet.
But so did Storm Cloud; and his heavy weapon was already out
and ready. He knew what those hands were doing, in the instant of
their starting to do it, and his DeLameter flamed three times in what
was practically one very short blast. He had to move a little before he
could sight on the fourth guard—Vesta’s furiously active body was in
the way—so Joe and Bob each got a shot, too. Three bolts of
lightning hit that luckless wight at once, literally cremating him in air
as he half-crouched, bringing his blaster to bear on the catapulting
thing attacking his boss.
When Vesta went over the rail she did not jump to the floor below.
Instead, her hands locked on the edge; her feet dug into the
latticework of the apron. She squatted. Her tail flashed down,
wrapping itself twice around the zwilnik’s neck. She heaved, then,
and climbed with everything she had; and as she stood upright on
the railing, eager hands reached down to help her tail lift its burden
up into the balcony. The man struck the floor with a thud and Vesta
jumped at him.
“Your fingers first—one at a time,” she snarled; and, seizing a
hand, she brought it toward her mouth.
She paused then as if thunderstruck; a dazed, incredulous
expression spreading over her face. Bending over, she felt, curiously,
tenderly, of his neck.
“Why, he . . . he’s dead!” she gasped. “His neck . . . it’s . . . it’s
broken! From such a little, tiny pull as that? Why, anybody ought to
have a stronger neck than that!”
She straightened up; then, as a crowd of Vegians and the
Tellurian women came up, she became instantly her old, gay self.
“Well, shall we all go back and finish our dance?”
“What?” Cloud demanded. “After this?”
“Why certainly,” Vesta said, brightly. “I’m sorry, of course, that I
killed him so quickly, but it doesn’t make any real difference. Zamke
is avenged; he can now enjoy himself. We’ll join him in a few years,
more or less. Until then, what would you do? What you call ‘mourn’?”
“I don’t know . . . I simply don’t know,” Cloud said, slowly, his arm
tightening around Joan’s supple waist. “I thought I’d seen everything,
but . . . I suppose you can have somebody take that body out to the
ship, so they can check it for identity?”
“Oh, yes, I’ll do that. Right away. You’re sure you don’t want to
dance any more?”
“Very sure, my dear. Very sure. All I want to do is take Joan back
to the ship.”
“QX. I won’t see you again this trip, then; your hours are so funny.
I’ll send for my things. And I won’t say good-bye, Captain Nealcloud
and you other wonderful people, because we’ll see each other again,
soon and often. Just so-long, and thanks tremendously for all you
have done for me.”
And Vesta the Vegian strode away, purring contentedly to herself
—tail high.