Midterm 1 - Concept of Income

Question 1

Income - Introduction

Why is the concept of income important to tax law?

Answer 1

Provides the TAX BASE

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

Question 2

Income - Introduction

How do you approach an income question?

Answer 2

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

Question 3

Income - Policy (Definitions of income)

Briefly describe the Haig-Simons definition of income

Answer 3

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

Question 4

Income - Policy (Definitions of Income)

Briefly describe the Carter Commission definition of income

Answer 4

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.

Question 5

Income - Policy (Definitions of Income)

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

Answer 5

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

Question 6

Income - Income Tax Act

Explain how the ITA deals with the definition of income

Cite the section

Answer 6

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

Question 7

Income - Income Tax Act

When did the ITA’s language change from “net profit or gain” to “net income”?

Answer 7

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

Question 8

Income - Income from a Source

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

Answer 8

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

Question 9

Income - Income from a Source

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

Answer 9

Agricultural law
Trust law
Schedule Theory - UK 1803 Addington Act

Question 10

Income - Income from a Source

Explain the “surrogatum” principle

Answer 10

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

Point is to make settlements taxable (Tsiaprailis)

Question 11

Income - Income from a Source

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

Answer 11

London and Thames v. Attwooll, 1976 Eng CA

Lord Diplock

Question 12

Income - Income from a Source

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

Answer 12

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

Question 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

Answer 13

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))

Question 14

Income - Income from a Source

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

Answer 14

Office
Employment
Business
Property

Question 15

Income - Income from a Source

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

Answer 15

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

Question 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.

Answer 16

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

Question 17

Income - Capital Gains

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

Answer 17

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

Question 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

Answer 18

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

Question 19

Income - Gifts and Inheritances

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

Answer 19

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

Question 20

Income - Windfalls

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

Answer 20

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)

Question 21

Income - Damages and Settlements

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

Answer 21

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?

Question 22

Income - Damages and Settlements

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

Answer 22

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

Question 23

Income - Damages and Settlements

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

Answer 23

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)

Question 24

Income - Damages and Settlements

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

Answer 24

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

Question 25

Income - Damages and Settlements

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

Answer 25

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

Question 26

Income - Damages and Settlements

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

Answer 26

NOT taxable b/c is an unexpected windfall

Question 27

Income - Imputed Income

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

Answer 27

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

Question 28

Income - Illegal Income

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

Answer 28

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