Donell ByrdchenCTP 2023-24 Ch09

Byrd & Chen’s Canadian Tax Principles
2023–2024 Edition
Chapter 9
Other Income and
Deductions, and Other
Issues
Copyright © 2024 Pearson Canada Inc. 9-1

Introduction – Chapter 9 (1 of 2)
• “Other sources of income” – Subdivision d (ITA 56
– 59.1)
– Determines whether taxpayers are in receipt of
specifically described amounts; if yes, rules set out
amounts & timing of inclusion
 Examples: scholarships, spousal support payments,
Canada Emergency Response Benefit (CERB)
• “Deductions in computing income” –
Subdivision e (ITA 60 – 66.8)
– Additional deductions to reduce net income; if qualify
for deduction, the rules set out when & how much
Introduction – Chapter 9 (2 of 2)
• “Rules relating to the computation of income”-
Subdivision f (ITA 67 – 80.6)
– Rules that set out how certain transaction, events &
circumstances change income tax outcome
– Examples:
 Reasonableness of expenses (ITA 67)
 50% limitation on meals and entertainment (ITA 67.1)
 Non-arm’s length transactions (ITA 69)
 Transfers of property between spouses (ITA 73)

Other Types of Income – Subdivision d
Inclusions (1 of 7)
• Pension Benefits - ITA 56(1)(a)(i)
– Payments from registered pension plan (RPP)
– CPP, OAS
– Includes foreign source unless treaty exempt
• Retiring Allowances - ITA 56(1)(a)(ii)
– Covers most payments on termination of employment
– If retirement allowance relates to employment services
before 1996, employee allowed to transfer part to
RRSP or RPP [ITA 60(j.1)]
– ITA 60(o.1): deduction can be claimed for legal fees
paid in year for purpose of either establishing right to a
retiring allowance or its collection once established

Interaction Between ITA 56 and ITA 60
• Example:
– Jennifer retired in September 2023 and received a
$75,000 retiring allowance. She was permitted to
transfer $15,500 of that amount to an RRSP. She made
the contribution in February 2024.
• Analysis:
– $75,000 included in 2023 net income [ITA 56(1)(a)(ii)]
– $15,500 deduction allowed in 2023 for RRSP
contribution [ITA 60(j.1)]
– The ITA & income tax return treat inclusion & deduction
separately
Inclusions (2 of 7)
• Death Benefit - ITA 56(1)(a)(iii)
– Means the
 “total of amounts received by a taxpayer in a taxation
year on or after the death of an employee in recognition
of the employee’s service in an office or employment…”
– Included in the net income of the individual taxpayer
who is entitled to receive the amount in the year
received (e.g., spouse, children)
– The first $10,000 is exempt
 Surviving spouse is given priority for exemption before
can be used by another person

Inclusions (3 of 7)
• CPP death benefit - ITA 56(1)(a.1)
– $2,500 paid to assist with funeral expenses
– Included in net income of estate
 Note: ITA 56(1)(a)(iii) does not apply to a CPP death
benefit since not a death benefit paid in recognition of
employee’s service

Inclusions (4 of 7)
• General overview:
– Deferred income plan inclusions/deductions in/from net
income found in ITA 56 & 60; however, specific rules
found in ITA 144 to 148.1 (covered in Chapter 10)
– RRSP withdrawals - ITA 56(1)(h)
– DPSP payments - ITA 56(1)(i)
– RRIF withdrawals - ITA 56(1)(h) and (t)
– Home Buyers’ Plan & Lifelong Learning Plans – ITA
56(1)(h.1), (h.2)
 Amounts withdrawn from RRSP must be repaid
 Repayments not made are added to income

Inclusions (5 of 7)
• Scholarships, fellowships & bursaries – ITA 56(1)
(n)
– Included in net income if exceed exemption [ITA 56(3)]
– In most cases, exemption = scholarship, if amounts
received are in connection with
 An education program in which individual is a qualifying
student*; or
 An elementary or secondary school education program
 *individual enrolled as full-time student in a qualifying
education program at a designated institution

Inclusions (6 of 7)
• Research grants – ITA 56(1)(o)
– Included in income if exceed unreimbursed research
costs
• Additional resource:
– IT Folio S1-F2-C3 “Scholarships, Research Grants,
and Other Education Assistance”
Copyright © 2024 Pearson Canada Inc. 9 - 10

Inclusions (7 of 7)
• Social Assistance - ITA 56(1)(u) & Workers’
Compensation – ITA 56(1)(v)
– Included in net income
– Deducted from taxable income [ITA 110(1)(f)]

Other Deductions – Subdivision e
Deductions (1 of 2)
• CPP Contributions on Self-Employed Earnings –
ITA 60(e) & (e.1)
– Review of CPP contributions for employee:
 Maximum employee CCP contribution (2023) is
$3,754.45 (rounded to $3,754); only $3,123.45 ($3,123)
is included in base for CPP tax credit
– Remaining $631 ($3,754 - $3,123) is a deduction under
ITA 60(e.1)
 The employer makes matching CPP contribution of
$3,754 which is a deductible business expense

Deductions (2 of 2)
• CPP Contributions on Self-Employed Earnings –
ITA 60(e) & (e.1)
• For self-employed individual (2023):
– Must pay both halves of CPP - $7,509 {[(2)(5.95%)
($66,600 - $3,500)]}
 Tax credit base is $3,123 [(4.95%)($64,900 - $3,500)]
 Deduction for $631 ($3,754 - $3,123) [ITA 60(e.1)]
 Deduction for $3,754 (equivalent to what employer
would have paid) – ITA 60(e)

Deductions: Moving Expenses (1 of 5)
• Moving expenses – ITA 62
• Eligible relocation:
– Individuals who relocate to enable them to
 be employed at a new work location
 carry on business at a new work location
 commence full-time attendance at a post-secondary
institution
– Distance between old residence & new work location is
at least 40 km further than the distance between new
residence & new work location

• Additional conditions:
– No moving expense claim if
 employer paid expenses
 employee receives moving allowance or is reimbursed
unless amounts included in employee’s income
– Moving expenses claimed to extent of income (e.g.,
employment, business, scholarship) at new work
location
 Amounts not claimable in one year can be deducted in
subsequent years to extent of income at that work
location

Deductible moving expenses include:
• Travel costs (taxpayer • Costs of acquiring new
and family) residence
(if taxpayer owned and
• Moving household effects
sold an old residence)
• Meals/lodging at new or
• $5,000 interest, taxes,
old residence (15 days)
insurance, utilities – old
• Lease cancellation costs residence
• Selling costs – old • Cost of revising legal
residence documents

• Vehicle & Meal Expenses – Detailed vs Simplified
Methods:
– Detailed method requires receipts & uses actual
expenses
– Simplified method provides a flat rate per meal or
kilometre (no receipts required)
 Meals: $23 per meal/person ($69 per person/day)
 Mileage: $0.55 per kilometre (for exercises & problems)
(Note: vehicle km rate varies depending on province or
territory)

• Employer Reimbursements & Allowances
– CRA practice: no reimbursement or allowance is
included in net income, but no moving expenses can
be claimed
– If partial reimbursement, CRA ignores requirement that
moving expenses can only be claimed if employee
includes reimbursement or allowance in income
 Employee can claim eligible moving expenses that
exceed employer assistance
• Resources: IT Folio S1-F3-C4; CRA guide T4130

Other Deductions – Subdivision e Deductions –
Child Care Expenses (ITA 63) (1 of 8)
• Purpose of legislation:
– Provide relief for taxpayers who incur child care
expenses in order to work, carry on a business,
conduct research connected to a research grant or to
attend certain educational institutions
• Child care expenses include
– Babysitting services
– Day nursery services
– Boarding schools
– Camps (services provided in Canada)

• Fees must be paid to resident of Canada who is not
the mother or father, a supporting person or a family
member < 18 year of age
• Eligible Child – ITA 63(3)
– Child of individual or the spouse;
– Child dependent on individual or the spouse for support
& whose net income does not exceed $15,000;
– Under 16 at some time during year;
– 16 or older & dependent by reason of mental or
physical infirmity

• Annual Child Care Expense Amount:
– $11,000 (if eligible for disability tax credit)
– $8,000 if child 6 years or less at end of year
– $5,000
 Child aged 7 to 16
 Infirm dependent child 17 and over that is not eligible for
disability tax credit

• Periodic Child Care Expense Amount:
– 1/40th (i.e., 2.5%) of annual limit ($275, $200, of $125)
per week
• Earned Income:
– Salaries, wages, or other remuneration (including
taxable benefits, allowances, ITA 7 stock options)*
– Business income
– Scholarships, training allowances & research grants
 *Note: employment expenses are ignored

• Supporting Person:
– Child’s parent
– Spouse of child’s parent
– Individual who can claim tax credit for child (eligible
dependant or Canada caregiver)
 Note: to qualify as supporting person, individual must
have resided with individual claiming child care expenses
at some time during the relevant year or within 60 days
of following year

• Deduction available to lower net income individual in
a two-parent family or single parent when no other
supporting person
• Least of:
– Amount actually paid*
– Sum of annual child care expense amounts ($11,000,
$8,000, or $5,000 per child)
– 2/3 of individual’s earned income
 *must be supported by proper receipts issued by service
provider including SIN & Form T778

• The higher net income spouse allowed to claim
child care expenses of lower-income spouse for
the number of weeks or months
– In full or part time attendance at secondary school or
designated educational institution
– In prison (> 2 weeks)
– Infirm for at least 2 weeks or for a long & continuous
period due to mental or physical infirmity
 Medical certificate required indicating incapable of caring
for children
– Separated (> 90 days)

• Higher income spouse claim =
– Least of:
 Amount actually paid
 Sum of annual child care expense amounts
 2/3 of individual’s earned income
 Periodic amounts: $125/ $200/ $275 per week lower net
income parent unavailable
– Note: amount claimable by higher income spouse reduces
amount claimed by lower net income spouse

Deductions: Disability Supports – ITA 64 (1 of 5)
• Eligibility: To help disabled individual to
– Work as employee
– Carry on a business
– Attend a designated educational institution or
secondary school
– Carry on research for which a grant was received
• Individual does not need to be eligible for disability tax
credit for this deduction

• Limited to the lesser of:
– Qualifying costs less amounts reimbursed (formula A-
B)
– The total of:
1. Gross employment, net business, scholarships,
research grants
2. If at designated educational institution or secondary
school, the lesser of:
– $15,000
– $375 per week of attendance; and
– Amount by which individual’s net income exceeds
amounts included in item 1
• Choice: expenditures claimed as deduction (ITA 64)
or claimed for medical expense tax credit (ITA 118.2)
– Factors considered:
 Base for medical expense tax credit reduced by 3% of
net income
 Tax credits use lowest income tax bracket of 15%
 Lower income households, entitled to use refundable
medical expense tax credit which does not reduce
medical expense tax credit
 Deduction only available for expenditures paid by
individual whereas medical expense tax credit, spouse or
supporting person can claim if paid for expenditures
• Attendant Care Costs
• If individual does not qualify for disability tax credit ,
can deduct full-time attendant care as disability
supports deduction provided certified by medical
practitioner
• If individual qualifies for disability tax credit & disability
supports deduction
 Can claim attendant care costs as medical expense
tax credit or disability supports deduction

• Attendant Care Costs
• If individual qualifies for disability tax credit, can claim
attendant care costs; however, if
 Attendant care costs > $10,000
– Medical expense tax credit for all amounts paid & will
lose disability tax credit, or
– Claim amounts for disability supports deduction (if
certified by medical practitioner) & allowed disability
tax credit
 Part-time attendant care:
– Limited to $10,000 for medical expense tax credit
– Retains access to disability tax credit

Related Inclusions and Deductions –
Pension Income Splitting
• Pension Income • Potential Issues
Splitting – Clawback of OAS
– Can transfer up to payments
50% – Loss or reduction of
– Transferee includes tax credits:
under ITA 56(1)(a.2)  Spousal
– Pensioner deducts  Age
under ITA 60(c)  Medical expense
– Can create pension – Tax software needed
tax credit for for optimizations
transferee
Spousal and Child Support (1 of 4)
• Child support amount* is basically what isn’t identified
in an agreement or court order as spousal/common-
law support
– Child support is not deductible to payer
– Child support is not taxable to recipient
– *Note: any amount not designated as
spousal/common-law support is child support

• Conditions for Deduction and Inclusion
– An amount is considered a support payment if
 Payable or receivable on periodic basis
 Paid for maintenance of recipient, children of recipient or
both
 Recipient has discretionary use of payments
 Where recipient is spouse or former spouse, parties are
living separate & apart
 Paid pursuant to a formal agreement or court order
– If support payment, then included in recipient’s income
less what is considered child support

• Additional Considerations
– Lump-sum payments that represent retroactive
payment to make up for overdue periodic payments are
considered periodic
– If insufficient payments, first payments made are
considered child support, rather than spousal support
– Payments for spouse to third parties can be deductible
and taxable
– Payer not permitted to claim legal expenses; recipient
is allowed in certain circumstances (e.g., enforcing
collection of overdue payments)

• Additional Considerations
– Spousal support payments impact RRSP contributions
for payer & recipient
– Recipient of child support can claim credit for eligible
dependant if does not have another spouse
– Individual is not eligible for credit for spouse or eligible
dependant if deducting support payments to that
spouse

Annuity Payment Received (1 of 3)
• Annuities are either payments (combined interest and
return of capital) for
– a specified period, or
– the life of the annuitant
• ITA 56(1)(d) requires the inclusion of all annuity
payments “not otherwise required to be included”
– Note: ITA 56(1)(d) does not include payments from tax
deferred plans (e.g., RRSPs) as these are otherwise
included under other ITA provisions

• Annuity payments covered by ITA 56(1)(d) are allowed
a deduction [ITA 60(a)] to isolate taxable income
component from the non-taxable capital component

Example: Purchase, with after-tax funds, a ten-year
annuity of $16,055 per year. Cost = $100,000.
– ITA 56(1)(d): Include $16,055
– ITA 60(a): Deduct $10,000 [($16,055)($100,000 ÷

$160,550)]
 Note: effect is to ensure only income component of
$6,055 is subject to income tax ($16,055 - $10,000)

Registered Savings Plans (1 of 4)
• Registered Education Savings Plans (RESPs)
• Registered Disability Savings Plans (RDSPs)
– Limited coverage only
• Tax-Free Savings Accounts (TFSAs)
• Note: Topics are covered in this chapter due to
allowable income-splitting opportunities:

• Contributions to these deferred income plans (RESPs,
RDSPs, TFSAs) are not deductible but offer
significant income tax opportunities:
– Tax deferral
– Tax reduction (RESPs and RDSPs) because earnings
from plans are distributed to lower-income student or
disabled individual
– Tax reduction (TFSAs) because no part of withdrawal
from TFSA is taxable including income earned within
TFSA

• Chapter 10 will cover the following plans:
– Registered Pension Plans (RPPs)
– Registered Retirement Savings Plan (RRSP)
– Registered Retirement Income Funds (RRIFs)
– Deferred Profit Sharing Plans (DPSPs)


Tax-Free Savings Accounts (TFSAs)
(1 of 5)
• Beginning in 2009, contributions are

2009 to 2012 $5,000 2016 to 2018 $5,500
2013 and 2014 $5,500 2019 to 2022 $6,000
2015 $10,000 2023 $6,500
– For individual who was 18 in 2009, as of 2023, the

TFSA contribution room = $88,000
 [(4 years)($5,000) + (2 years)($5,500) + (1 year)
($10,000) + (3 years)($5,500) + (4 years)($6,000) + (1
year)($6,500)]

(2 of 5)
• Qualified investments: ITR 4900 provides detailed

listing, includes
– Publicly traded shares,
– Mutual fund units,
– Bonds,
– Mortgages,
– Warrants, and
– Rights
• Restricted investments: shares of private
companies & direct investments in real estate

(3 of 5)
• Withdrawals add back to total contribution room but

does not occur until following year
• 50% tax can apply on FMV of non-qualified
investments & prohibited investments
• Excess contributions are subject to penalty
• The income attribution rules do not apply to TFSA
contributions by one spouse to another
• On death of taxpayer, TFSA transferred to spouse (if
designated successor holder)

(4 of 5)
• Withdrawals are 100 percent tax free and are added

back to contribution room in the following year
Example
Salim contributes and invests $5,000. Investment goes to $10,000
and he withdraws the full amount.
Analysis
The $10,000 will not be subject to tax. Salim can now contribute
$10,000 ($5,000 + $5,000) in the following year in addition to the limit
for that year.

(5 of 5)
• Comparison with RRSP

– Earnings
 Tax free in both types of accounts
– Contributions
 RRSP contributions are deductible
 TFSA contributions are not deductible
– Withdrawals
 RRSP withdrawals are taxed
 TFSA withdrawals are not taxed
– RRSP room is lost when amounts are withdrawn but
reinstated for TFSAs in year following withdrawal
Registered Education Savings Plans
(RESPs) – ITA 146.1 (1 of 11)
• Plan designed to set aside funds for post-secondary
education of a child
– Contributions not deductible
– Income earned in plan is exempt from income tax
– Tax-free accumulation limited to 35 years once plan is
established (40 years if single beneficiary who is
eligible for disability tax credit)
 Plan deregistered & tax-exempt status no longer applies
– No annual limit
– $50,000 total for each beneficiary
– Penalty for excess contributions
(RESPs) – ITA 146.1 (2 of 11)
• When RESP beneficiary enrolled in an eligible post-
secondary educational program
– Amounts withdraw from RESP as Education Assistance
Payments (EAPs)
 Included in income of student RESP beneficiary
– Amounts restricted by ITA per 13-week period to
$5,000 for full-time students & $2,500 for part-time
students
• 2023 federal budget increases withdrawal limit to
$8,000 for full-time students & $4,000 for part-time
students (effective March 28, 2023)
(RESPs) – ITA 146.1 (3 of 11)
• Canada Education Savings Grants (CESG)
– Federal government will make additional contributions
to supplement contributions to RESP
 Basic CESG: 20% of current-year contributions to
maximum of $500/ beneficiary [(20%)($2,500)]
– If unused contribution room from previous years, up to
$1,000 in CESG available in current year
– Lifetime CESG maximum = $7,200

(RESPs) – ITA 146.1 (4 of 11)
 Additional CESG for low-income families = 10% to
20% of first $500 of contributions
– At 20% if 2023 family income is $53,359 or less
(maximum $100);
– At 10% if 2023 family income between $53,360 &
$106,717 (maximum of $50); and
– 0% if 2023 family income > $106,717

(RESPs) – ITA 146.1 (5 of 11)
– Not paid for RESP beneficiaries for year turning 18 or
in subsequent years
– CESG are intended for long-term planning
 In year in which beneficiary is between age 15 and age
17, CESG only made when
– Minimum of $2,000 of RESP contributions made by
December 31 of calendar year in which beneficiary
becomes 15; or
– Minimum $100 in annual RESP contributions in any 4
years before calendar year in which beneficiary turns 15

(RESPs) – ITA 146.1 (6 of 11)
• Canada Learning Bonds (CLBs)
– Apply to children born in 2005 & who have RESP in
their names
 Each year that family is eligible for the National Child
Benefit Supplement
– 1st year child eligible for CLB contribution: $500 + $25 (for
administrative costs)
– Subsequent years: $100
– Continues until child turns 15

(RESPs) – ITA 146.1 (7 of 11)
• Types of Plans
– “Family plans”
 Typically established for several siblings under age 18 to
allow for flexibility for subscriber
– Scholarship plans
 All funds must be invested in government guaranteed
investments
– Self-directed plans
 Investors choose own qualified investments

(RESPs) – ITA 146.1 (8 of 11)
• Education Assistance Payments (EAP)
– Amounts paid to student beneficiaries from
accumulated earnings, CESG amounts & CLB amounts
 Included in recipient’s net income
 For CESG & CLB amounts, if beneficiary does not
pursue post-secondary education, amounts return to
government

(RESPs) – ITA 146.1 (9 of 11)
• Education Assistance Payments (EAP)
– Student in qualifying educational program (at least 10
hours per week)
 $5,000 for first 13 weeks
 No limit thereafter
– Student in specified educational program (at least 12
hours per month) & at least 16 years old
 $2,500 for first 13 weeks
– Payments to beneficiaries from capital: no limits

(RESPs) – ITA 146.1 (10 of 11)
• Accumulated Income Payments to Subscribers
– Subscriber must be resident of Canada, and one of the
following applies
– Payment made after year that includes 9th anniversary of
plan & each beneficiary has reached age 21 & not eligible
for EAP.
– Payments made after plan de-registered
– All beneficiaries are deceased
– Included in subscriber’s net income
– Additional tax of 20% of accumulated income payments
added to federal tax payable
– Can be transferred to RRSP ($50,000 maximum)

(RESPs) – ITA 146.1 (11 of 11)
• Comparison To RRSPs
– RESPs and RRSPs: Tax free accumulation of earnings
– RESPs: Availability of CESG grants
– RESPs: Availability of Canada Learning Bonds
– RESPs: Payments to student may be tax free or taxed
at low rates
– RRSPs: Contributions are deductible
– RRSPs: Payments are taxed at full rates which may be
higher or lower than the rate at which contributions
were deducted.

Registered Disability Savings Plans
(RDSPs) – ITA 146.4 (1 of 2)
• To provide parents with disabled children with needed
care & financial support
– Non-deductible contributions to trust with a disabled
person as beneficiary
– Earnings in plan accumulate tax free.
– Maximum $200,000 contributions over lifetime of
disabled person
– Government supplements contributions
– Payments out of plan are a combination of taxable and
non-taxable amounts.
– CRA guide “ Registered Disability Savings Plans”
Registered Disability Savings Plans
(RDSPs) – ITA 146.4 (2 of 2)
• To establish an RDSP for an individual 18 years of
age and older generally requires establishing a legal
representative
– Federal government expanded legislation to allow
parents, spouses, & common-law partners to create an
RDSP where they would be the plan holder
– Change set to expire on Dec. 31/23 but in the 2023
federal budget proposal to
 expand list of qualifying family members to include
brothers & sisters
 extend timeline to Dec. 31/26

Non-Arm’s-Length Transactions –
Introduction (1 of 5)
• When property sold in transaction between persons
there is assumption the price reflects FMV
– Key feature of FMV is parties to transaction are “acting
at arm’s length”
– Arm’s length refers to an agreement made between 2
parties freely & independently of each other without
some special relationship, control, or influence by one
of the parties
• The transaction price is susceptible to manipulation
with the purpose of reducing income tax (e.g., selling
property to family members at below FMV)
• Related persons [251(1)(a)]
– Are deemed not to deal with each other at arm’s length
so no need to examine particulars of transaction to
determine whether arm’s-length bargaining
– Individuals
 Family members but not cousins, nieces, nephews,
uncles and aunts
 Note: parents, grandparents, and siblings are not
considered related to same members of one’s spouse or
common-law partner’s family

• Personal trusts [251(1)(b)]
– Non-arm’s length transaction between
 Beneficiary of trust & trust
 Person that is non-arm’s length with beneficiary & trust
• Factual non-arm’s-length test [251(1)(c)]

– “question of fact” whether persons are dealing with
each other at arm’s length (except where ITA 251(1)(a)
or (b) apply)
– Rules allows the CRA to challenge transactions
between persons who are not related

• Common indicators of factual non-arm’s length
include
1. Common mind setting & dictating terms of transaction
for both parties,
2. Whether the parties are “acting in concert” without
true separate interests, and
3. De facto control where one party has effective control
or significant influence over the other

• Issues
– Inadequate Considerations
 ITA 69 (anti-avoidance rule)
– Rollovers
 ITA 73(1) - Spouse
 ITA 73(3.1) and (4.1) – Farming and Fishing Properties
– Depreciable property
 ITA 13(7)(e)

Inadequate Consideration – ITA 69 (1 of 10)
• The Problem:
– The sale price (which should reflect the FMV of the
property being sold) establishes the POD & tax cost of
property to the purchaser
 “Exchange principle” is consistently applied throughout
the ITA: when property is sold the POD = FMV of the
property received in exchange & when property is
purchased the cost of that property is = FMV of
consideration given up to acquire the property

• Example:
– Father (marginal income tax rate, 29%) sells
investments with FMV of $200,000 to son for amount
equal to ACB of $150,000. The son has no income.
• Analysis:
– If father sold property for FMV of $200,000, he would
have paid federal income taxes of $7,250 [($200,000 -
$150,000)(1/2)(29%)] on taxable capital gain.
– Instead, son will include a $25,000 taxable capital gain
which will be taxed at the lowest marginal federal tax
rate of 15%
• Further Analysis:
– There must have been a valid disposition of property
from father to son (meaning son has acquired
beneficial ownership of property)
– If son is not permitted to do anything he wants with
property but is obliged to sell property, it could be
argued that he never acquired the property
– If beneficial ownership was not acquired by son, then
no disposition takes place

• Inadequate Consideration – ITA 69

– The problem: Manipulation of POD to transfer income
in an advantageous manner
– Addresses two main situations:
 Donations or gifts of property where no consideration
received (applies regardless of whether parties to
transaction are at arm’s length or not)
 Non-arm’s length transactions where consideration paid
is < or > FMV of property sold
– Application of ITA 69 can be avoided if genuine efforts
were made to determine FMV & “price adjustment clause”
(PAC) used (PAC discussed in Chapter 16)

Donations and Non-Arm’s-Length Dispositions—ITA 69

Transfer Price POD for Transferor ACB for Transferee
FMV FMV FMV
Above FMV Actual Proceeds FMV
Below FMV FMV Actual Proceeds
Nil (gift, donation, FMV FMV

or inheritance)

ITA 69 – Example 1 (Donation)

Used car owned by individual is donated to local charity. The car is a
personal-use property with a cost of $10,000 and FMV of $1,500.
Analysis
- Car deemed sold for $1,500. No resulting tax implications. Individual is
entitled to charitable donation credit (assuming charity is registered)
- Charity acquires car for $1,500.

ITA 69 – Example 2 – Transfer above FMV

John Dough owns securities with an ACB of $200,000 and a FMV of
$350,000. He sells them to his brother for $500,000.
Analysis
- John has POD of $500,000 and a capital gain of $300,000 ($500,000 -
$200,000)
- His brother has an ACB of $350,000 (= FMV not what he paid)
- If brother sells, there is potential for double taxation on $150,000
($500,000 - $350,000)

ITA 69 – Example 3 – Transfer below FMV

$350,000. He sells them to his brother for $300,000.
Analysis
- John has POD of $350,000 (FMV) and a capital gain of $150,000
($350,000 - $200,000)
- His brother has an ACB of $300,000 (what he paid; not John’s POD)
- If brother sells, there is potential for double taxation on $50,000
($350,000 - $300,000)

ITA 69 – Example 3 - Gift

$350,000. He gifts the securities to his brother.
Analysis
- John has a capital gain of $150,000 ($350,000 - $200,000)
- His brother has an ACB of $350,000
- No potential for double taxation

• ITA 69 - Override
– Opening words of ITA 69 are “except as expressly
otherwise provided in this Act”
 Meaning: if another provision in the ITA permits POD
that is different than the FMV of the property in question,
ITA 69 is overridden by that other rule
– Examples:
• Certain dispositions of property to a spouse [ITA 73(1)]
• Transfers of farm property to a child [ITA 73(3.1)]
• Corporate rollovers (Volume 2)

Inter Vivos Transfers to a Spouse – ITA
73(1) & (1.01) (1 of 5)
• ITA 73 & (1.01) allow for inter vivos transfer (i.e., a
disposition of property during an individual’s lifetime)
to a
– spouse, former spouse, common-law partner, or former
common-law partner
• Essentially the transferee assumes tax costs of the
transferor
• Note: ITA 69 does not apply unless taxpayer elects
out of rollover

73(1) & (1.01) (2 of 5)
• Change of ownership takes place without any income
inclusion for transferor
• Position Of Transferor
– Non-depreciable property: Deemed POD = ACB
– Depreciable property: Deemed POD = UCC (or
proportionate amount of UCC if not all properties in
class transferred)

73(1) & (1.01) (3 of 5)
• Position Of Transferee
– Non-Depreciable property:
 ACB = Deemed POD of transferor (“old ACB”)
 Cost = UCC or proportionate UCC of transferor
 Capital Cost = Old capital cost of transferor
– Difference between capital cost and UCC is deemed to be
CCA previously claimed

73(1) & (1.01) (4 of 5)
• Example:
– Marg Cardiff gifts land (ACB $100,000; FMV of
$250,000) & all class 10 depreciable properties (capital
cost, $225,000; FMV, $310,000; UCC, $195,000) to her
spouse, Bernie.
• Analysis:
– Marg: deemed received POD of $100,000 for land &
POD of $195,000 for class 10 properties
– Bernie: deemed acquired land at $100,000; class 10
properties acquired for $195,000 & for CCA & UCC,
capital cost is $225,000, CCA deemed claimed =
$30,000
73(1) & (1.01) (5 of 5)
• Electing out of ITA 73
– Qualifying transfer results in automatic application of
this rollover; however, can elect out
 By filing an election in tax return (no required form*)
– ITA 69 becomes applicable which results in FMV
disposition
 Income tax consequences to transferor include capital
gains & recapture
– *Note: election is considered to have been made if
transferor reports transaction at FMV

Non-Arm’s-Length Transfers of
Depreciable Property – ITA 13(7)(e) (1 of 3)
• The problem: The non-taxable portion of the capital
gain on transfer becomes deductible for CCA claims
to transferee
– Note: ITA 13(7)(e) does not apply when disposition
results on death
• The solution: For UCC, transferee is limited to old
cost plus amount of difference included in income [ITA
13(7)(e)]
– Formula: A + [(1/2)(B - A)]
 A = transferor’s capital cost
 B = transferee’s cost
Example 1: FMV Exceeds Transferor’s Capital Cost

A depreciable property with a capital cost of $110,000 and a UCC of
$85,000 is sold for FMV of $150,000 in a non-arm’s length transaction.
Analysis
- Seller has capital gain of $40,000 ($150,000 - $110,000); taxable capital
gain = $20,000 [(50%)($40,000)] & recapture of $25,000.
- Non-arm’s length buyer has capital cost for CCA purposes (UCC) of
$130,000 [$110,000 + (1/2)($150,000 - $110,000)]
- Capital cost for capital gains purposes is $150,000

Example 2: FMV Less Than Transferor’s Capital Cost

A depreciable property with a capital cost of $325,000 and a UCC of
$150,000 is sold for FMV of $200,000 in a non-arm’s length transaction.
Analysis
- Seller has recapture of $50,000.
- Non-arm’s length buyer’s capital cost deemed = $325,000. Difference
between $325,000 & purchase price ($200,000) is deemed CCA of
$125,000. UCC = $200,000 ($325,000 - $125,000)

Inter Vivos Transfers of Farm or Fishing
Property to a Child – ITA 73(3.1) & (4.1) (1 of 2)
• Purpose: provides for intergenerational transfers of
farm and fishing business to family members who
carry on the business
• Definition of child:
– Children and their spouses
– Grandchildren, great grandchildren
– Any other person, who prior to reaching age 19, was
dependent on individual & under custody or control
• Child must be resident of Canada at time of transfer

Inter Vivos Transfers of Farm or Fishing
Property to a Child – ITA 73(3.1) & (4.1) (2 of 2)
• If farm or fishing property gifted:
– POD to parents = tax costs of properties
– Child’s tax cost = POD to parents & for depreciable
properties, retains characteristics same as ITA 73(2)
• If not gifted, parents can choose a POD for
– Non-depreciable property between FMV (upper limit)
and ACB (lower limit)
– Depreciable property, lower limit is UCC & upper limit is
FMV; transferee retains original capital cost

Death of an Individual Taxpayer (1 of 3)
• ITA 70(5):
– Non-depreciable property
 Deemed disposition at FMV
 Beneficiary acquires at FMV
 Deemed disposition at FMV
 If capital cost exceeds FMV, beneficiary retains old
capital cost
• Note: deemed FMV disposition rules apply to all capital property (even
PUPs)

Example: Depreciable Property at Death

Depreciable property with cost of $100,000, FMV of $60,000, and UCC of
$50,000. Property left to son.
- Deceased: transfer takes place at FMV - $60,000; in final tax return,

recapture = $10,000.
-Son: new UCC = $60,000 and retains father’s original capital cost =
$100,000. The $40,000 difference is deemed previously claimed CCA

• Other Considerations
– Transfers to a spouse
 A rollover under ITA 70(6) at tax cost
 No tax consequences to deceased
 Can elect out
• Farm or fishing property to a child

– A rollover under ITA 70(9)
– Can elect value between ACB and FMV (same rules as
for inter vivos transfer of farm or fishing to a child)

Income Attribution Rules

Income Attribution – Overview (1 of 2)
• The Problem
– Most effective forms of income splitting are only
available to the wealthy
– Attribution rules serve to limit such splitting to
acceptable forms (e.g., contributions to RRSPs &
TFSAs for spouses)

Income Attribution – Overview (2 of 2)
• Attribution rules:
– If a transfer of investment-type property owned by one
individual to another family member,
 the income from the investment property is redirected
(i.e., attributed) back to the transferor
• Tax on split income (TOSI) rules:
– Passive income (e.g., dividends) taxed at highest
federal tax rate (i.e., 33%) if it can be traced back to an
underlying source of income where a close family
member involved
 Note: TOSI takes precedence over attribution rules

Income Attribution – Basic Rules (1 of 2)
• Basic attribution rules apply where an individual
transferred property to
– A spouse or common-law partner [ITA 74.1(1)]; or
– An under the age of 18 individual who
 does not deal at arm’s length with transferor or,
 is the niece or nephew of transferor
• Applicable to
– property income, and
– capital gains (if transfer to spouse or minor child for
farm/fishing property)

Income Attribution – Basic Rules (2 of 2)
• Not applicable:
– After death of transferor
– To business income
– Income subject to TOSI rules (see Chapter 11)

Income Attribution – Summary of Rules
Attribution by Type of Income
Business income No attribution
Property income Attributed from spouse,
common-law partner, or
related minor to transferor
Capital gains Attributed from spouse or

common-law partner, but not
from related minor
Income subject to No basic attribution

tax on split income

Avoiding Income Attribution
• Related minors (or niece or nephew): transfer made
for FMV consideration
– If payment made with a promissory note, note must
include interest at prescribed rate & interest paid with
30 days at end of following year
• Spouse: must elect out of ITA 73, and
– Transfer for consideration equal to or > FMV
– If payment made with a promissory note, note must
include interest at prescribed rate & interest paid with
30 days at end of following year

Income Attribution – Non-Arm’s-Length
Loans [ITA 56(4.1)]
• Attribution rules apply when
– individual receives loan from non-arm’s length
individual (or becomes indebted) and
– uses loan to purchase property that generates income
 one of the main reasons is to reduce or avoid tax
• Does not apply if

– main reason not to reduce or avoid tax
– loan given includes interest at prescribed rate &
interest paid within 30 days at end of following year

Tax Planning and Income Attribution
(1 of 2)
• Tax Planning
– Pension income splitting
– TFSAs
– RESPs
– Spousal RRSPs
– Transfer of capital property with future capital gains
potential to minors
– Loans at prescribed rate
– Segregating gifts to spouses and minors

Tax Planning and Income Attribution
(2 of 2)
• Tax Planning
– Detailed records to trace funds
– Incorporated businesses
– Reasonable salaries to family members

Tax on Split Income (TOSI) – ITA
120.4 (1 of 2)

Tax on Split Income (TOSI) – ITA 120.4 (2
of 2)
• Income splitting arrangements the federal government

considered offensive
 Dividend sprinkling
 Management services structures
• Prior to the TOSI rules, the federal government
unsuccessfully challenged income splitting in court

Income Splitting Part 1: The 2000 TOSI
(Kiddy Tax) (1 of 4)
• Applied only to passive income (i.e., split income)
earned by individuals under 18
• Kiddy tax applied to split income which included
 taxable dividends declared & paid by private
companies,
 shareholder benefits conferred by private
companies whether received directly or through a
partnership or trust
• Split income is included in the minor child’s income
but then subtracted under ITA 20(1)(ww) so it is not
subject to Part I tax rather a separate tax is applied
• Kiddy tax contains its own separate income tax
calculation on the split income (33% federal tax rate)
– Highest provincial/territorial income tax rates also apply
– Tax credits are limited to dividend tax credit or foreign
tax credit that relates to split income & disability tax
credit
– Parents are jointly liable for payment of kiddy tax

• As of March 23, 2011, kiddy tax expanded to include
– taxable capital gains of minor children realized in non-
arm’s length transactions
 deemed to be non-eligible dividends equal to 2 times the
taxable capital gain
• Example – next slide

• Example: $10,000 taxable capital gain deemed to be
a $20,000 non-eligible dividend subject to 33% kiddy
tax
Split income – taxable non-eligible dividend [($20,000) $23,000
(1.15)]
Tax rate 33%
Tax payable before dividend tax credit $ 7,590
Dividend tax credit [(9/13)(15%)($20,000)] (2,077)
TOSI federal income tax payable $ 5,513

(referenced as “TOSI”)
• “TOSI” applies to adults 18 years of age & older
• The underlying premise of “TOSI” is presumption of
income splitting if individual receives income from
related person & contributes little or nothing toward
earning that income
• The “TOSI” rules contemplated age groups
– Between 18 and 24
– Between 25 and 64
– 65 and over

Applying the TOSI (1 of 3)
• The Basic Analysis:
– Receipt of “split income” by a “specified individual”
 Specified individual: individual resident in Canada at end
of year split income received
 Split income includes:
– Taxable dividends from a private company
– Shareholder benefits or loans from a private company
– Income from a partnership or trust including from a related
business & from rental properties
– Capital gains on disposition of private company shares

• General exclusions from TOSI:
– Capital gains eligible for CGD
 Capital gain on sale of QFP or QSBC shares excluded
from split income if eligible for CGD
 CGD does not have to claimed
 Note: this exclusion does not apply to kiddy tax
– Property acquired as a result of breakdown of marriage
or common-law partnership
– Property acquired as result of death of parent if
individual is between 18 and 24

• Exclusion:
– If the TOSI does not apply to an individual 65 or older,
then it shouldn’t apply to that individual’s spouse or
common-law partner
 Split income does not include income received by a
spouse of any age if:
– income would not have been split income if it had been
received by spouse who is 65 years of age or older

Applying the TOSI – Specific
Exclusions Overview (1 of 7)
• TOSI may not apply if specified individual made some
contribution to business or activity
• Definitions for specific exclusions from TOSI:
– Related Business
– Excluded business
– Excluded shares
– Reasonable return, safe harbour capital return, and
arm’s-length capital

• Related Business
– Related business in respect of a specified individual
means a business carried on by
 A related individual as a sole proprietor;
 A partnership, corporation, or trust where a related
individual is actively & regularly engaged in the business;
 A partnership if the related individual is a partner; or
 Corporation where related individual owns 10% or more
of FMV of all issued & outstanding shares of corporation
at any time in year

• Excluded business
– A business in which the specified individual is actively
engaged on a regular, continuous, and substantial
basis
– Active engagement in any 5 years (current & preceding
& do not need to be consecutive)
– Average of 20 hours per week during time business is
in operation
– Active engagement depends on facts & circumstances
in each case

• Excluded shares
– TOSI does not apply to individuals who reach age 25 if
dividends or capital gains relating to private corporation
shares meet definition of “excluded shares”

• Shares are classified as excluded shares if all
following conditions are met:
– Individual owns at least 10% of outstanding shares
(both fair market value & voting rights) at time split
income received
– Must not be a professional corporation
– < 90% of gross business income is from providing
services
– < 10% of its income is from a related business

• Reasonable return, safe harbour capital return,
and arm’s-length capital
– Specific exception recognizes actual contributions a
specified individual has made may justify earning split
income
– Safe Harbor Capital Return (specified individuals
ages18 to 24)
 based on highest of the lowest quarterly prescribed rate
applied to FMV contributed property

• Arm’s-Length Capital (individuals 18 to 24)
– test based on a reasonable return on contributed
arm’s-length capital only (inherited property and salary)
• Reasonable Return (individuals 25 & older)
– TOSI does not apply to split income based on
 Work performed, property contributed, risks assumed,
total amounts paid to individual in respect of related
business (see previous slide for definition)
 Split income in excess of reasonable amount subject to
TOSI

TOSI – Analytical Summary
• Five ways to avoid TOSI
1. No related business;
2. Business is an excluded business;
3. Shares are excluded shares (25 years & older only);
4. Safe harbour capital return or reasonable return on
arm’s-length capital exceeds split income (18 to 24
years of age only);
5. Amount of reasonable return based on labour, capital
contributions, & other factors exceeds split income
(25 years and older only).

Summary – Application of TOSI (1 of 3)
• Step 1:
– Individual resident in Canada at end of year? If yes,
continue. If no, TOSI does not apply
• Step 2:
– Individual received split income? If yes, continue. If no,
TOSI does not apply
• Step 3:
– Do general exclusions apply? If no, continue. If yes,
TOSI does not apply

• Step 4:
– Related business? If yes, continue. If no, TOSI does
not apply
• Step 5:
– Excluded business? If no, continue. If yes, TOSI does
not apply
• Step 6:
– If individual is over 25, are the shares excluded
shares? If no, continue. If yes, TOSI does not apply

• Step 7:
– Do any of the reasonableness tests apply (including
safe harbour capital return & arm’s length capital)? If
no, TOSI applies. If they do apply, amount subject to
TOSI reduced by relevant amount

TOSI Example – Taxable Dividends to
an Adult Child Away at School

TOSI – Two Components
• If specified individual receives split income, tax
payable is made up of 2 components
– 1st component (i.e., the split income component):
calculation under ITA 20(1)(ww), removes split income
from total income; this amount is
 Subject to federal tax rate of 33%
 Only dividend and foreign tax credits allowed that relate
to split income & disability tax credit
– 2nd component (i.e., regular income component):
 Subject to regular graduated rates
 Eligible for usual tax credits

TOSI – Example (1 of 3)
• Facts:
– In 2023, Helen, who is 25 years old, receives $20,000
in non-eligible dividends from a private company
controlled by her father.
– In addition, Helen has interest income of $25,500 from
a savings account funded by an inheritance.
– Her only tax credits are the BPA & the dividend tax
credit.
– None of the TOSI exceptions apply

Solution:
Regular Income Component
Taxable non-eligible dividends [(115%)($20,000) $ 23,000
Interest income 25,500
Deduction for split income – ITA 20(1)(ww) (23,000)
2023 net income and taxable income $ 25,500
Tax rate 15%
Federal income tax payable before credits $ 3,825
BPA - 2023 [(15%)($15,000)] (2,250)
2023 - federal income tax payable on regular income $ 1,575

Solution:
Split Income Component
Split income – taxable non-eligible dividends [(115%)($20,000) $23,000
Tax rate 33%
Federal income tax payable before dividend tax credit $ 7,590
Dividend tax credit [(9/13)(15%)($20,000)] (2,077)
2023 TOSI federal income tax payable $ 5,513
Total 2023 federal income tax payable ($5,513 + $1,575) $ 7,088

Donell ByrdchenCTP 2023-24 Ch09

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Byrd & Chen’s Canadian Tax Principles

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– ITA 56(1)(d): Include $16,055

– ITA 60(a): Deduct $10,000 [($16,055)($100,000 ÷

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• Beginning in 2009, contributions are

– For individual who was 18 in 2009, as of 2023, the

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• Qualified investments: ITR 4900 provides detailed

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• Withdrawals add back to total contribution room but

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• Withdrawals are 100 percent tax free and are added

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• Comparison with RRSP

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• Factual non-arm’s-length test [251(1)(c)]

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