Chapter 1

Introduction

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 Areas of Practice and Role of the
Professional Accountant
• Why study taxation?
• Four Areas of Practice:
– Compliance
– Tax planning
– Legal interpretation
– Tax appeals and tax litigation
• Role of professional accountant in tax matters
(next)

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Role of the Professional Accountant
in Tax Matters

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 Ethics and the tax adviser

• Numerous large multinational corporations criticized for paying little

to no tax in jurisdictions where they had significant presence.
(Isle of Man, Panama Papers)
• Is this a question of ethics or is the media blowing it out of
proportion?
• Have tax practitioners rationalized overly aggressive tax planning?
• What does the new climate mean to tax practice?
• Can tax planning within the law be unethical?
 Question – Ethics and Tax advisors
Jen recently started her tax practice as a CPA. This year she filed a tax
return for a client, Lam, who was referred by her friend.
Lam is a wealthy local businessman with many business interests and
connections in other parts of the world. From some reliable sources,
Jen learned that Lam also had other income that he did not disclose at
the time of filing his return. When Jen reviewed Lam’s tax situation,
she discovered a considerable overseas investment for which Lam had
not reported income in Canada for the last three years, including this
year.
When Jen discussed the situation with Lam, he said, “I don’t want to
pay any tax on this amount. There is no way CRA will find this amount
and they should have nothing to do with my overseas income. Don’t
worry and file my return without this amount. Next week I’ll bring you
some of my other friends who may be interested in your services.”

What should Jen do in this situation?

 Tax Principles and Concepts
Classification of Taxes:
• Basis of the tax
– Head tax, income tax, wealth tax, commodity tax, user
tax, tariff tax, transfer tax, or business transfer tax
• Incidence of the tax
(direct–Personal Inc. Tax, Indirect–old MST, Corp. Inc Tax)
• Nature of the tax
(regressive – HST, progressive – Personal Inc. Tax)

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 Tax Principles and Concepts
Desirable characteristics of an income tax:
• Vertical equity (higher income, higher tax paid)
• Horizontal equity (all income types taxed the same)
• Neutrality (does the tax system effect decision making)
• Flexibility (permits ITA to be used a policy instrument)
• Certainty (know in advance consequences of decisions)
• Simplicity and compliance (ease of compliance)
• Feasibility and efficiency (low cost to administer &
collect)

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Structure of the Income Tax Act

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 The Income Tax Act
How do I reference the Act?

Section – subsection – paragraph – subparagraph – clause

6(1)(b)(vii)(A)
Find this clause in the Act

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 The Income Tax Act
How do I read the Act? 6(1)(a)(vi)
Start with Subsection 6(1): There shall be included
in computing …
Go to paragraph 6(1)(a) benefits – the value of …
except
Go subparagraph (vi) that is received … to assist
individuals to further their education …
Plain English: All amounts received from office in
employment on account of benefits are included,
unless it meets the exception provided, in this
case amounts relating to assisting employees
with their education
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 Introduction to Income Tax
• Approaches to defining income (not defined in the
Act)- Turn to Section 9 of the ITA:

• Interpretation becomes very important

when law is vague

• Income calculated for Accounting

purposes does not always equal income
for Taxation purposes

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Important concepts within the Act
• Doctrine of constructive receipt
• Income vs. capital
• Aggregation formula (Section 3)
• Sourcing and tracing of income

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Calculation of Tax Liability
Division B
Net Income for Tax Purposes
Subsection 3(1)

Division C deductions
Sections 110–114.2 Taxable Income
Subsections 2(1), 2(2)

Division E & E.1

Tax Liability
Sections 117–127.55

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 Exercise – using the Act

Division C Deductions are Sections 110-114.2. Using the

ITA, which of the following is not a Division C deduction?

You may use either the topical index or the Sectional List of
the Income Tax Act – (front of Act)

1) Employee options (Employee stock option deduction)

2) Capital gains deduction
3) Deduction for Payments (Social assistance receipts)
4) RRSP deduction

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 The Canadian Tax System
• History and Legislation
– Brief history of the Income Tax Act
Each province has its own legislation as well.
– Constitutional basis for income taxation
Constitution allows for taxation by federal and provincial
governments
– The Federal budgetary process (next)

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The Federal Budgetary Process

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 Administration and Enforcement of
the Act
• Onus of Proof – Taxpayer
• Administration and Enforcement – CRA (Part XV)
- Audit function has a wide range of authority,
ex. Issue requirement for information (sec 231.2(1))
- Impose civil penalties (page 2736-Offences & Penalties),
Referral to prosecution
- Ability to prosecute criminally
• Appeals (Courts)
• Tax Evasion, Avoidance, and Planning (next slide)

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 Question
Which of the following institutions is responsible for the
development and evaluation of taxation policy in Canada?

1) Canada Revenue Agency (CRA)

2) Minister of National Revenue
3) Department of Finance
4) Tax Court of Canada

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Tax Planning, Tax Avoidance, and Tax Evasion
Tax Planning Tax Avoidance Tax Evasion
Taxpayer Goal To favourably Deliberate Avoid taxes by
reduce taxes planning of failing to disclose
payable within events and complete and
object and spirit transactions to accurate
of law avoid taxes information
Legality Legal Not illegal; Illegal; criminal
transactions can offence; civil
be ignored if wrongdoing
successfully
challenged
Penalty None Arrears and Fine, possible
interest plus taxes imprisonment,
owing and arrears, interest
possible penalties plus taxes, and
owing civil penalties

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 Question – Tax Avoidance
Which of the following is tax avoidance?
1) An accountant does not claim CCA as his home office expense to
preserve the principal residence exemption.
2) A business owner decides to incorporate as a CCPC to obtain the
benefits of the small business deduction (low tax rate).
3) A business owner retains in the CCPC income that she otherwise
needs for her personal expenses.
4) A business owner who wholly owns two companies moves income
from one to the other to claim losses.
 Question – Tax Avoidance -Answer
Which of the following is tax avoidance?
1) An accountant does not claim CCA as his home office expense to
preserve the primary residence capital gain exemption. NO – CCA is a
discretionary deduction
2) A business owner decides to incorporate as a CCPC to obtain the
benefits of the small business deduction. NO-Legal tax planning option
3) A business owner retains in the CCPC income that she otherwise
needs for her personal expenses. NO – Tax deferral is a goal of legitimate
tax planning
4) A business owner who wholly owns two companies moves income
from one to the other to claim losses. YES- This is a situation where the
owner artificially shifts income – This does not reflect the true facts.
Exercise: Search – using Topical
Index- real scenario
• “I have an estate client whose decedent’s
share investments produced a sizeable
capital gain (deemed sale at market) at Date
Of Death, but the estate is realizing a capital
loss from that position when they liquidated
the shares. What can I do to utilize the
losses?”
• REQUIRED: Find the ITA reference to help
the client using the Topical Index of the
ITA.
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Exercise: Search – using Topical
Index- real scenario
• Answer: 164(6)
• Disposal of estate – Capital Gains or Losses
• Allows an election to carry capital losses
back to final tax return of deceased taxpayer
to offset deemed capital gains on final
return.

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 Related References
• Historical footnotes
• Related matters
• Draft legislation: Pending amendments
• Income tax application rules
• International tax conventions or treaties
• Income tax regulations

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 Other Interpretive Sources
• Judicial decisions (common law)
• Forms (www.canada.ca/en/revenue-agency.html)
• Canadian Revenue Agency (CRA) publications
• Information Circulars
• Interpretation Bulletins*
• Advanced Tax Rulings
• Technical Interpretations
• Information Booklets
• Income Tax Technical News*
• Income Tax Folios
• Technical notes and explanations
• GAAP

* Gradually being replaced by Income Tax Folios

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 Interpretation of Tax Legislation
Considerations:
• Precision
• Plain and obvious
meaning
• Definitions in the Act (ex.
section 248)
• Meaning and distinction in
words commonly used in
the Act
• Intention of Parliament
• Remission orders
• Contextual Approach
• Form versus substance
• Exceptions override general
• Specific words followed by
general
• Precedents
• Interpretation Act
(page 2667)
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 Interpretation: Exercise
• Facts: Taxpayer travels weekly to attend college in NY State.
Taxpayer lived 75 km from US Border.
• Question: Is taxpayer entitled to claim tuition credit under paragraph
118.5(1)(c)?
Tuition credit
• 118.5 (1) For the purpose of computing the tax payable under this Part
by an individual for a taxation year, there may be deducted, …
• (c) where the individual resided throughout the year in Canada near
the boundary between Canada and the United States if the individual
• (i) was at any time in the year a student enrolled at an educational
institution in the United States that is a university, college or other
educational institution providing courses at a post-secondary school
level, and
• (ii) commuted to that educational institution in the United States,

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 Interpretation: Exercise - solution
• In Van de Water v. MNR -[1990] 1 CTC 2200 (TCC), the taxpayer met
conditions in subparagraphs (i) and (ii), but the court ruled the
taxpayer did not live “near” the border
• “In reaching this conclusion, Dussault, J. first noted that the word
“near” is not defined in the Income Tax Act and then went on to
consider its ordinary dictionary meanings before turning to the
definition in Black's Law Dictionary”
• In Humphreys v. the Queen, a taxpayer with similar circumstances
appealed the disallowance of the credit by CRA. The appeal was
allowed.
• “The word “near”, as noted in the Black’s definition, is “a relative
term”, the interpretation of which will depend on the particular
circumstances of each case. … It seems to me that by choosing to use
the word “near” in these provisions, rather than specifying a particular
distance, Parliament intended to recognize the great diversity
of Canada’s geography and demographics.
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