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1

Income - Introduction

Why is the concept of income important to tax law?

Provides the TAX BASE

Policy - calculation of income (and competing considerations) are influenced by this

2

Income - Introduction

How do you approach an income question?

1. Broad POLICY question
2. approach under the ACT
3. INTERPRETATION of the Act by the courts

3

Income - Policy (Definitions of income)

Briefly describe the Haig-Simons definition of income

Haig-Simons Theory - income tax base should include EVERYTHING that contributes to the TP's ability to pay (ie ALL accretions to wealth)

Including unrealized capital gains, lottery, gifts, inheritance, RRSPs, TFSAs which are all excluded in Canada

4

Income - Policy (Definitions of Income)

Briefly describe the Carter Commission definition of income

Carter Commission definition RESTATED Haig-Simons -> comprehensive tax base = SUM of the MARKET VALUE of the goods and services consumed or given away in the tax year by the TP, plus the ANNUAL CHANGE in market value of assets held by the TP.

5

Income - Policy (Definitions of Income)

Describe the Carter Commission's approach to a comprehensive tax base.

Purpose per Carter was to measure ability to pay (need comprehensive measure)
COST and SIMPLICITY standards need to be kept in mind as well -> therefore modified from Haig-Simons to be MORE PRACTICAL

6

Income - Income Tax Act

Explain how the ITA deals with the definition of income

Cite the section

s. 3 does not define income -> s.3(a) requires income from SOURCES (lists office, employment, business, property)
s. 3(b) - capital gains
s. 3(d) - other types of income
Income is NET concept

7

Income - Income Tax Act

When did the ITA's language change from "net profit or gain" to "net income"?

1948 - changed to net income b/c only NET income results in increase in TP's ability to pay

8

Income - Income from a Source

Explain the source theory of income in terms of the TREE/FRUIT analogy

Tree = SOURCE of income (capital producing income)
Fruit = INCOME
Increase in value of TREE are increase in capital, not income

9

Income - Income from a Source

Note and explain three possible origins of the source theory of income

Agricultural law
Trust law
Schedule Theory - UK 1803 Addington Act

10

Income - Income from a Source

Explain the "surrogatum" principle

Surrogatum Principle - surrogate for lost source of income = counts as income

Point is to make settlements taxable (Tsiaprailis)

11

Income - Income from a Source

What case is the Surrogatum Principle derived from? Who was the judge?

London and Thames v. Attwooll, 1976 Eng CA

Lord Diplock

12

Income - Income from a Source

What is the TEST for applying the Surrogatum principle? Cite the case

Tsiaprailis, 2005 SCC - 1) What was the payment intended to replace? --> If sufficiently clear answer 2) Would the replaced amount have been TAXABLE?

13

Income - Income from a Source

Can the surrogatum principle be applied if a lump sum includes both taxable and non-taxable amounts? Cite the case

No; must be able to identify the portions of a lump sum award that are taxable (Schwartz); TP bears the burden (Antonija Siftar, s. 152(8))

14

Income - Income from a Source

Identify the enumerated sources of income in s. 3 of the ITA

Office
Employment
Business
Property

15

Income - Income from a Source

Are sources of income limited to the enumerated sources in s. 3? Explain

No. s. 3(a) says "without limiting the generality of the foregoing" which implies that it can be expanded -> courts reluctant to do so however

Aff'd by SCC in Schwartz

16

Income - Income from a Source

Explain, in terms of the approach to income in the Income Tax Act, why courts may have had a tendency to stick with the enumerated sources of income in the Act.

Parliament has, often (eg Schwartz) put in specific provisions to deal with many forms of income -> easier to allow parliament to define additional sources, than to do so themselves

17

Income - Capital Gains

Describe and explain the Carter Commission's recommended approach to capital gains.

Recommendation - capital gains should be taxed b/c increases wealth and ability to pay + exclusion of it undermines progressivity -> inequality of taxing capital gains when realized possible, but administratively efficient

18

Income - Statutory Inclusions

Indicate the inclusion of other specific items as income pursuant to the ITA and explain, in general terms, why there are such specific inclusions

other items specifically included in SECTION 56 -> to deal with where it is not clear they come from a source, but should be taxed for policy reasons

justified b/c they increase a person's ability to pay -> equity

19

Income - Gifts and Inheritances

Describe and explain the Carter Commission's recommended approach to gifts and inheritances

recommendation - should be taxed --> gifts and inheritances increase ability to pay and therefore should be taxed + will increase progressivity

Also recommended estate and gift taxes to be repealed

Result - repealed estate & gift taxes but no gifts and interitances tax

20

Income - Windfalls

Describe and explain the Carter Commission's recommended approach to windfalls.

recommended that windfalls SHOULD be taxed b/c they increase ability to pay (including gambling winnings)

But NOT taxed (except if organized -> leading to expectation of net gain)

21

Income - Damages and Settlements

Explain the general approach to the inclusion of damages or settlements in income.

General approach is from Tsiapralis - 1) what was the payment intended to replace? 2) would the amount have been taxable in the recipient's hands?

22

Income - Damages and Settlements

What is the approach to a reliance-based damage award?

Generally NOT TAXABLE b/c purpose is merely to RESTORE the plaintiff --> no net gain -> no increased ability to pay

23

Income - Damages and Settlements

What is the approach to an expectation-based damages award for lost profits?

Likely TAXABLE because replaces INCOME which would have been income from a source (even if not in contract to earn income -> has EXPECTATION of profit and therefore taxable per Cranswick)

24

Income - Damages and Settlements

What is the approach to personal injury awards for cost of care?

Likely NOT taxable - b/c getting injured is not something you can organize to get a gain (does not meet Cranswick critieria)

25

Income - Damages and Settlements

What is the approach to personal injury awards for lost earning capacity?

likely TAXABLE post-Tsiapralis b/c replacing income from employment, which is normally taxable (though Tsiapralis COULD be read more narrowly)

26

Income - Damages and Settlements

What is the approach to personal injury awards for punitive damages?

NOT taxable b/c is an unexpected windfall

27

Income - Imputed Income

Describe the Carter Commission's recommended approach to imputed income from property and services

CC recommended NOT taxing income from property and services --> because would be administratively difficult to implement (difficult to measure, would need to value accomodation and services)

DID recommend allowing RENTERS to deduct rent from tax -> not implemented

28

Income - Illegal Income

Describe and explain the Carter Commission's recommended approach to illegal income

Approach - case law says it is TAXABLE (eg income from stealing (Buckman), embezzlement (Ponyton), Call girl service (Eldridge))