Statutes
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The income tax laws and regulations in the United States are dealt with at the "USA" tab in the left column of this web page.
The income tax laws ard regulations in Canada are dealt with below:
The following quotes from the Canadian INCOME TAX ACT are for tax lawyers and accountants who want to verify the information presented on our home page.
Please Note: In Canadian legislation, a "leased employee" is called an "incorporated employee," and throughout this discussion about legislation the term incorporated employee will be used.
The relevant parts of each section are shown in blue bold print.
Comments and Explanations are shown in green italics.
The Canadian INCOME TAX ACT
[Inclusions]
Amounts to be included as income from office or employment
6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable
[Value of benefits]
(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit
(i) derived from the contributions of the taxpayer's employer to or under a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,
(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust,
[COMMENT: Section 6(1)(a) makes taxable all received benefits, except various pension and insurance benefits. This means that employment benefits NOT received are not taxable. So money earned, but not received, is not taxable. And loan proceeds are not taxable. This is what the Income Tax Act has done to make our plan work.]
General limitations
18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
[Limitation re personal services business expenses]
(p) an outlay or expense to the extent that it was made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a personal services business, other than
(i) the salary, wages or other remuneration paid in the year to an incorporated employee of the corporation,
(ii) the cost to the corporation of any benefit or allowance provided to an incorporated employee in the year,
(iii) any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation if the amount would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount, and
(iv) any amount paid by the corporation in the year as or on account of legal expenses incurred by it in collecting amounts owing to it on account of services rendered
that would, if the income of the corporation were from a business other than a personal services business, be deductible in computing its income;
[COMMENT: Section 18(1)(p) was enacted in response to a decision in 1984 of the Federal Court of Appeal (The Queen v. Parsons, [1984] 2 F.C. 909, 84 DTC 6345), declaring that the creation of an incorporated employee was not an artificial transaction. That case allowed the taxpayer to deduct for tax purposes all the business expenses that an ordinary business is allowed to deduct. So the amended Income Tax Act reversed part of the effect of that decision. So now incorporated employees cannot deduct any expenses other than those that an ordinary employee can deduct.]
Unpaid amounts
78. (1) Where an amount in respect of a deductible outlay or expense that was owing by a taxpayer to a person with whom the taxpayer was not dealing at arm's length at the time the outlay or expense was incurred and at the end of the second taxation year following the taxation year in which the outlay or expense was incurred, is unpaid at the end of that second taxation year, either
(a) the amount so unpaid shall be included in computing the taxpayer's income for the third taxation year following the taxation year in which the outlay or expense was incurred, or
(b) where the taxpayer and that person have filed an agreement in prescribed form on or before the day on or before which the taxpayer is required by section 150 to file the taxpayer's return of income for the third succeeding taxation year, for the purposes of this Act the following rules apply:
(i) the amount so unpaid shall be deemed to have been paid by the taxpayer and received by that person on the first day of that third taxation year, and section 153, except subsection 153(3), is applicable to the extent that it would apply if that amount were being paid to that person by the taxpayer, and
(ii) that person shall be deemed to have made a loan to the taxpayer on the first day of that third taxation year in an amount equal to the amount so unpaid minus the amount, if any, deducted or withheld therefrom by the taxpayer on account of that person's tax for that third taxation year.
[Idem]
(2) Where an amount in respect of a deductible outlay or expense that was owing by a taxpayer that is a corporation to a person with whom the taxpayer was not dealing at arm's length is unpaid at the time when the taxpayer is wound up, and the taxpayer is wound up before the end of the second taxation year following the taxation year in which the outlay or expense was incurred, the amount so unpaid shall be included in computing the taxpayer's income for the taxation year in which it was wound up.
[Late filing]
(3) Where, in respect of an amount described in subsection 78(1) that was owing by a taxpayer to a person, an agreement in a form prescribed for the purposes of this section is filed after the day on or before which the agreement is required to be filed for the purposes of paragraph 78(1)(b), both paragraphs 78(1)(a) and (b) apply in respect of the said amount, except that paragraph 78(1)(a) shall be read and construed as requiring 25% only of the said amount to be included in computing the taxpayer's income.
[Unpaid remuneration and other amounts]
(4) Where an amount in respect of a taxpayer's expense that is a superannuation or pension benefit, a retiring allowance, salary, wages or other remuneration (other than reasonable vacation or holiday pay or a deferred amount under a salary deferral arrangement) in respect of an office or employment is unpaid on the day that is 180 days after the end of the taxation year in which the expense was incurred, for the purposes of this Act other than this subsection, the amount shall be deemed not to have been incurred as an expense in the year and shall be deemed to be incurred as an expense in the taxation year in which the amount is paid.
[Where s. (1) does not apply]
(5) Subsection 78(1) does not apply in any case where subsection (4) applies.
[Late filing]
(6) (Repealed by S.C. 1986, c. 55, s. 21(1).)
S.C. 1970-71-72, c. 63, s. 1"78"; S.C. 1986, c. 55, s. 21; S.C. 1994, c. 7, Sch. II, s. 56.
[COMMENT: Section 78(1) makes taxable the salary owed to the incorporated employee by Graycliff after it has not been paid for two years. This is one of the reasons that our clients need Graycliff, for it is Graycliff that assumes full liability for the income tax that would ordinarily be payable by the client. This is what the Income Tax Act has done to make our plan more difficult. But not too difficult, for we can still make it work because of limited liability, a benefit the Canadian Government provided under the Canada Corporations Act.]
Loans
80.4. (1) Where a person or partnership receives a loan or otherwise incurs a debt because of or as a consequence of a previous, the current or an intended office or employment of an individual, or because of the services performed or to be performed by a corporation carrying on a personal services business, the individual or corporation, as the case may be, shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the total of
(a) all interest on all such loans and debts computed at the prescribed rate on each such loan and debt for the period in the year during which it was outstanding, and
(b) the total of all amounts each of which is an amount of interest that was paid or payable in respect of the year on such a loan or debt by
(i) a person or partnership (in this paragraph referred to as the "employer") that employed or intended to employ the individual,
(ii) a person (other than the debtor) related to the employer, or
(iii) a person or partnership to or for whom or which the services were or were to be provided or performed by the corporation or a person (other than the debtor) who does not deal at arm's length with that person or any member of that partnership,
exceeds the total of
(c) the amount of interest for the year paid on all such loans and debts not later than 30 days after the end of the year, and
(d) any portion of the total determined in respect of the year under paragraph 80.4(1)(b) that is reimbursed in the year or within 30 days after the end of the year by the debtor to the person or entity who made the payment referred to in that paragraph.
[Interpretation]
(1.1) A loan or debt is deemed to have been received or incurred because of an individual's office or employment, or because of services performed by a corporation that carries on a personal services business, as the case may be, if it is reasonable to conclude that, but for an individual's previous, current or intended office or employment, or the services performed or to be performed by the corporation,
(a) the terms of the loan or debt would have been different; or
(b) the loan would not have been received or the debt would not have been incurred.
[Idem]
(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) was
(a) a shareholder of a corporation,
(b) connected with a shareholder of a corporation, or
(c) a member of a partnership, or a beneficiary of a trust, that was a shareholder of a corporation,
and by virtue of that shareholding that person or partnership received a loan from, or otherwise incurred a debt to, that corporation, any other corporation related thereto or a partnership of which that corporation or any corporation related thereto was a member, the person or partnership shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which
(d) all interest on all such loans and debts computed at the prescribed rate on each such loan and debt for the period in the year during which it was outstanding
exceeds
(e) the amount of interest for the year paid on all such loans and debts not later than 30 days after the later of the end of the year and December 31, 1982.
[Where ss. (1) and (2) do not apply]
(3) Subsections 80.4(1) and (2) do not apply in respect of any loan or debt, or any part thereof,
(a) on which the rate of interest was equal to or greater than the rate that would, having regard to all the circumstances (including the terms and conditions of the loan or debt), have been agreed on, at the time the loan was received or the debt was incurred, between parties dealing with each other at arm's length if
(i) none of the parties received the loan or incurred the debt by virtue of an office or employment or by virtue of the shareholding of a person or partnership, and
(ii) the ordinary business of the creditor included the lending of money,
except where an amount is paid or payable in any taxation year to the creditor in respect of interest on the loan or debt by a party other than the debtor; or
(b) that was included in computing the income of a person or partnership under this Part.
[Interest on loans for home purchase or relocation]
(4) For the purpose of computing the benefit under subsection 80.4(1) in a taxation year in respect of a home purchase loan or a home relocation loan and for the purpose of paragraph 110(1)(j), the amount of interest determined under paragraph 80.4(1)(a) shall not exceed the amount of interest that would have been determined thereunder if it had been computed at the prescribed rate in effect at the time the loan was received or the debt was incurred, as the case may be.
[Idem]
(5) Where an individual has, before November 13, 1981,
(a) received a housing loan, or
(b) made arrangements in writing in respect of a home purchase loan that would, if the loan were made before 1982, have been a housing loan,
for the purpose of computing the amount of interest referred to in paragraph 80.4(1)(a) on the loan, the amount of the loan may be reduced
(c) for the 1982 taxation year, by the amount, if any, by which $40,000 exceeds the total of
(i) all amounts claimed as a reduction under this subsection for the year by the individual's spouse or common-law partner with whom the individual resided in the year, and
(ii) all amounts claimed as a reduction under this subsection for the year by the individual on all other loans, and
(d) for the 1983 taxation year, by the amount, if any, by which $20,000 exceeds the total of
(i) all amounts claimed as a reduction under this subsection for the year by the individual's spouse or common-law partner with whom the individual resided in the year, and
(ii) all amounts claimed as a reduction under this subsection for the year by the individual on all other loans.
[Deemed new home purchase loans]
(6) For the purposes of this section, other than paragraph 80.4(3)(a) and subsection 80.4(5), where a home purchase loan or a home relocation loan of an individual has a term for repayment exceeding five years, the balance outstanding on the loan on the date that is five years from the day the loan was received or was last deemed by this subsection to have been received shall be deemed to be a new home purchase loan received by the individual on that date.
[Definitions]
(7) In this section,
["home purchase loan"]
"home purchase loan" means that portion of any loan received or debt otherwise incurred by an individual in the circumstances described in subsection 80.4(1) that is used to acquire, or to repay a loan or debt that was received or incurred to acquire, a dwelling, or a share of the capital stock of a cooperative housing corporation acquired for the sole purpose of acquiring the right to inhabit a dwelling owned by the corporation, where the dwelling is for the habitation of
(a) the individual by virtue of whose office or employment the loan is received or the debt is incurred,
(b) a specified shareholder of the corporation by virtue of whose services the loan is received or the debt is incurred, or
(c) a person related to a person described in paragraph (a) or (b),
or that is used to repay a home purchase loan;
["prescribed rate"]
"prescribed rate" of interest means
(a) 6% per annum before 1978,
(b) 8% per annum for 1978, and
(c) for any year, or part thereof, after 1978, such rate of interest as is prescribed therefor except that, for the purpose of computing the benefit under subsection 80.4(1) in a taxation year on a home purchase loan received after November 12, 1981 and before 1982, the prescribed rate of interest at the time the loan was received shall be deemed to be 16% per annum.
[Persons connected with a shareholder]
(8) For the purposes of subsection 80.4(2), a person is connected with a shareholder of a corporation if that person does not deal at arm's length with the shareholder and if that person is a person other than
(a) a foreign affiliate of the corporation; or
(b) a foreign affiliate of a person resident in Canada with which the corporation does not deal at arm's length.
8S.C. 1977-78, c. 1, s. 35; S.C. 1977-78, c. 32, s. 16; S.C. 1979, c. 5, s. 25; S.C. 1980-81-82-83, c. 48, s. 42; S.C. 1980-81-82-83, c. 140, s. 44; S.C. 1984, c. 45, s. 25; S.C. 1985, c. 45, s. 38; S.C. 1986, c. 6, s. 40; S.C. 1994, c. 7, Sch. II, s. 60; S.C. 1994, c. 7, Sch. VIII, s. 32; S.C. 1999, c. 22, s. 22; S.C. 2000, c. 12, s. 142.
[COMMENT: Section 80.4(1) makes taxable the interest that would normally be charged on the loan from Graycliff to the incorporated employee. However, if at least the normal rate of interest is charged (even if it is not paid) then, by virtue of Section 80.4(3), no interest is taxable except interest actually received. Section 80.4(1) is what the Income Tax Act has done to make our plan more difficult. And Section 80.4(3) is what the Income Tax Act has done to make it no problem at all. It seems that the Income Tax Act always wants to create a way out for people who just don't want to pay any income tax at all. They just don't want to make it too simple, so that only the few will ever find the way out of the income-tax maze.]
Deemed interest
80.5. Where a benefit is deemed by section 80.4 to have been received in a taxation year by
(a) an individual or corporation under subsection 80.4(1), or
(b) a person or partnership under subsection 80.4(2),
the amount of the benefit shall, for the purposes of subparagraph 8(1)(j)(i) and paragraph 20(1)(c), be deemed to be interest paid in, and payable in respect of, the year by the debtor pursuant to a legal obligation to pay interest on borrowed money.
S.C. 1980-81-82-83, c. 140, s. 45; S.C. 1984, c. 1, s. 36.
[COMMENT: Section 80.5 merely says what year any interest deemed by Section 80.4(1) to be taxable falls into. It not only makes the interest taxable to the deemed recipient, but it also makes it deductible by the deemed payor. However, since in our plan we utilize Section 80.4(3), we have no deemed interest to deal with.]
Small business deduction
125.
["personal services business"]
(7) In this section,
"personal services business" carried on by a corporation in a taxation year means a business of providing services where
(a) an individual who performs services on behalf of the corporation (in this definition and paragraph 18(1)(p) referred to as an "incorporated employee"), or
(b) any person related to the incorporated employee
is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than five full-time employees, or
(d) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year;
[COMMENT: For the corporation-small-business deduction, Section 125(7) defines "personal services business" to exclude any business with over five full-time employees.]
PART XVI
TAX AVOIDANCE
Definitions
245. (1) In this section,
["tax benefit"]
"tax benefit" means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act;
["tax consequences"]
"tax consequences" to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount;
["transaction"]
"transaction" includes an arrangement or event.
[Idem]
(1.1) (Repealed by S.C. 1988, c. 55, s. 185(1).)
[General anti-avoidance provision]
(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
[Avoidance transaction]
(3) An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
[Where s. (2) does not apply]
(4) For greater certainty, subsection 245(2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.
[Determination of tax consequences]
(5) Without restricting the generality of subsection 245(2),
(a) any deduction in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, any income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be recharacterized, and
(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.
[Request for adjustments]
(6) Where with respect to a transaction
(a) a notice of assessment, reassessment or additional assessment involving the application of subsection 245(2) with respect to the transaction has been sent to a person, or
(b) a notice of determination pursuant to subsection 152(1.11) has been sent to a person with respect to the transaction,
any person (other than a person referred to in paragraph 245(6)(a) or 245(6)(b)) shall be entitled, within 180 days after the day of mailing of the notice, to request in writing that the Minister make an assessment, reassessment or additional assessment applying subsection 245(2) or make a determination applying subsection 152(1.11) with respect to that transaction.
[Exception]
(7) Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.
[Duties of Minister]
(8) On receipt of a request by a person under subsection 245(6), the Minister shall, with all due dispatch, consider the request and, notwithstanding subsection 152(4), assess, reassess or make an additional assessment or determination pursuant to subsection 152(1.11) with respect to that person, except that an assessment, reassessment, additional assessment or determination may be made under this subsection only to the extent that it may reasonably be regarded as relating to the transaction referred to in subsection 245(6).
S.C. 1970-71-72, c. 63, s. 1"245"; S.C. 1986, c. 6, s. 124; S.C. 1988, c. 55, s. 185.
[COMMENT: Although Section 245(2) and (3) seem to create a problem for our system, Section 245(4) comes to the rescue because we make use of provisions of the Income Tax Act that specifically authorize our system. The authority for this is Husky Oil Limited v. The Queen, (F.C.A.) 95 DTC 5244, affirming (T.C.C.) 95 DTC 316. There it was held that the avoidance transaction provisions did not apply, since the taxpayer's benefit had merely flowed from the provisions of the Income Tax Act. Similarly, all of the benefits of our system flow from the provisions of the Income Tax Act.]
Benefit conferred on a person
246. (1) Where at any time a person confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in the taxpayer's income or taxable income earned in Canada under Part I and would be included in the taxpayer's income if the amount of the benefit were a payment made directly by the person to the taxpayer and if the taxpayer were resident in Canada, be
(a) included in computing the taxpayer's income or taxable income earned in Canada under Part I for the taxation year that includes that time; or
(b) where the taxpayer is a non-resident person, deemed for the purposes of Part XIII to be a payment made at that time to the taxpayer in respect of property, services or otherwise, depending on the nature of the benefit.
[Arm's length]
(2) Where it is established that a transaction was entered into by persons dealing at arm's length, bona fide and not pursuant to, or as part of, any other transaction and not to effect payment, in whole or in part, of an existing or future obligation, no party thereto shall be regarded, for the purpose of this section, as having conferred a benefit on a party with whom the first-mentioned party was so dealing.
S.C. 1970-71-72, c. 63, s. 1"246"; S.C. 1984, c. 45, s. 91; S.C. 1988, c. 55, s. 186.
[COMMENT: Section 246(1) does not create a problem for our system because loans at market interest rates are not benefits. In any event, Section 246(2) further prevents any problems for our system because the parties are all dealing with each other at arms length.]
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