CHAPTER 3

LIABILITY FOR TAX, INCOME DETERMINATION, AND

ADMINISTRATION OF THE INCOME TAX SYSTEM

Key Concept Questions

QUESTION ONE
Determine the Canadian residency status for the current year for each of the following
taxpayers. Income tax reference: ITA 250(1), (4); IT-221R3.
a)

Paula was born and lived her life to date in Canada. On November 1st of the current year
she left Canada permanently.

b)

Al spent the current year in Belgium on temporary work assignment. His family and friends
are looking forward to his return to Canada in June of next year.

c)

Kimberley lives in Ireland. In the current year she was in Canada throughout the months of
February through May and again throughout the months August through October caring for
a sick friend.

d)

102864 Limited was incorporated in Canada five years ago. The corporation has always
carried on business exclusively in Bermuda since incorporation.

e)

Navy Ltd. was incorporated in the United States. In the current year Navy Ltd. carried on
business in Canada as well as in the United States.

QUESTION THREE
A Ltd. is resident in Canada for tax purposes. In the current year A Ltd. earned interest income
of $4,000 in Canada, $6,000 in England, and $8,000 in Bermuda.
What amount of interest income must be reported on A Ltd.s Canadian corporate income tax
return for the current year? Income tax reference: ITA 2(1), 3(a).

QUESTION FOUR
The Canadian income tax system includes five specific categories of income. Identify the
income category to which each of the following pertains:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Interest earned on a bond investment.

Pension income.
Consulting fees.
Profit on the sale of shares of a public corporation. The shares were acquired as a longterm investment.
Wages from employment services.
Share of profits from a partnership that operates a restaurant.
Dividends from the shares of a corporation that carries on a retail business.
Tips from customers of an employers business.
Rents from tenants of a commercial building.
Fees for providing piano lessons to several students.
Profit on the sale of land that was used by the owner for farming.
Profit on the sale of a summer cottage that was used by the owner for personal
enjoyment.
Profit on the sale of land that was purchased for resale.

QUESTION SEVEN
What is the filing due date for each of the following income tax returns? Income tax reference:
ITA 150(1)(a),(b),(d).
(a) A corporation for its year ending November 30, 20X6.
(b) An individual for the year 20X6. The individual carried on business in 20X6.
(c) An unmarried individual living alone for the year 20X6. The individual did not carry on
a business.
(d) An individual for the year 20X6. The individual died on February 21, 20X7.

QUESTION FIFTEEN
Dee Ltd. is a Canadian company carrying on a clothing wholesale business. For the first quarter
of the current year, its financial results were as follows:
Revenue:
Expenses:

Sales within Canada

Exports
Inventory purchased
Salaries & wages
Rent

$200,000
30,000
50,000
40,000
10,000

a) Assuming Dee Ltd. is a GST registrant, calculate the GST to be remitted to the CRA for
the first quarter of the year.
b) Assuming Dee Ltd. is a HST registrant, calculate the HST to be remitted to the CRA for
the first quarter of the year. Assume a HST rate of 13%.

Solutions to Key Concept Questions

KC 3-1
[ITA: 250(1), (4) Residence]
a)
b)
c)

d)
e)

Paula is a part-year resident. She is resident in Canada from January 1 to November 1

and non-resident for the remainder of the year.
Al is resident in Canada. Although he is out of the country on a temporary work
assignment for the current year, his residential ties remain in Canada.
Kimberley is deemed to have been resident in Canada throughout the current taxation
year. Although she is not ordinarily resident in Canada, she sojourned (temporary stay) in
Canada for more than 182 days, in total, in the current year [ITA 250(1)(a)].
102864 Limited is resident in Canada. Any company incorporated in Canada after April 26,
1965 is deemed resident in Canada [ITA 250(4)(a)].
Navy Ltd. is a non-resident corporation.

KC 3-3
[ITA: 2(1), 3(a) World income reported by residents]
Since A Ltd. is resident in Canada, income earned anywhere in the world must be reported on
its Canadian tax return. Therefore, all $18,000 of interest income earned must be included on
the Canadian corporate income tax return.
KC 3-4
[Income categories]
1.
Property income
2.
Other income
3.
Business income
4.
Capital gain
5.
Employment income
6.
Business income
7.
Property income

8.
9.
10.
11.
12.
13.

Employment income
Property income
Business income
Capital gain
Capital gain
Business income

KC 3-15
(a) [GST remittance]
Sales within Canada $200,000 x 5%
Inventory purchased
Rent

$10,000
$50,000
10,000
$60,000

x 5%

GST remittance

(3,000)
$ 7,000

(b) [HST remittance]

Sales within Canada $200,000 x 13%
Inventory purchased
Rent
HST remittance

$26,000
$50,000
10,000
$60,000

x 13%

(7,800)
$18,200

Problems
PROBLEM TWO
[ITA: 2(1); 2(3); 3(a); 114; 115(1)(a)(ii); 212(1)(b); 250(1)(a); 250(4)]
To what extent, if any, are the following individuals or corporations liable for tax in Canada?
1.

An individual who lives and works in Canada received an inheritance from an uncle in
France. The inheritance consists of shares, bonds, and French real estate. During the
year, the investments generated interest, dividends, and rents, which were retained in
France and reinvested.

2.

A large corporation based in Alabama operates a branch in Winnipeg that employs

Canadian staff, holds a supply of inventory, and sells to the Canadian market.

3.

An American citizen who normally resides in New York and has extensive American
income, for health reasons takes an extended vacation of six-and-a-half months in Banff,
Alberta in the current calendar year.

4.

A Manitoba corporation is controlled and managed by its British parent corporation.

5.

A Canadian individual, who is a student at the University of Saskatchewan, earns

income during the summer by operating a street-vending unit in Boulder, Colorado.

6.

An individual has been employed in Canada by a large Canadian corporation. He

accepts a transfer to manage, on a permanent basis, the corporations operations in
Denver, Colorado. He leaves Canada with his family on March 31, 20X0.

7.

An individual who resides in England receives annual dividend income from an

investment in a Canadian corporation.

Solution to P3-2
1.

The individual is a resident of Canada and taxed on world income. Therefore, the interest,
rents and dividends are taxable in Canada [ITA 3(a)].

2.

The Alabama corporation is not a resident of Canada. However, as a non-resident it

carries on business in Canada from a branch location in Winnipeg. It is, therefore, liable
for Canadian tax on the branch profits only [ITA 2(3), 115(1)(a)(ii)].

3.

Even though the individual does not have a continuing state of relationship with Canada,
he/she is deemed to be a Canadian resident throughout the current year because of
his/her presence in Canada for 183 days or more (6 1/2 months) and is, therefore, taxable
in Canada on world income which includes the U.S. income [ITA 2(1), 250(1)(a)].

4.

The Manitoba corporation is a resident of Canada because it is incorporated in Canada. It

is taxable in Canada on its world income [ITA 2(1), 3(a), 250(4)].

5.

The student has a continuing relationship with Canada, is a resident and taxable on world
income including the summer business income from the U.S. [ITA 2(1), 3(a)].

6.

The individual ceases to be a Canadian resident on March 31, 20X0 and is taxable on
world income in Canada only up to March 31, 20X0 [ITA 2(1), 114].

7.

The individual is not a resident of Canada. Therefore, the Canadian dividend income is
NOT reported on a Canadian tax return. The Canadian corporation paying the dividend is
required to withhold tax and remit the tax withheld to the Canadian government. The rate
for the withholding tax specified by the Income Tax Act is 25% [ITA 212(2)].

PROBLEM FIVE
[ITA: 3]
A taxpayer has the following financial results for a particular year:
Business profitA Enterprise
Business lossB Enterprise
Other sources of incomepension
Property incomeinterest
Allowable capital losses on sale of land
Allowable business investment loss
Taxable capital gains on sale of securities
Other deductionsalimony payments (spousal support)
Employment income

$10,000
3,000
12,000
5,000
20,000
2,000
15,000
3,000
30,000

Required:
Determine the taxpayers net income for tax purposes in accordance with the statutory scheme
formula.

Solution to P3-5
The statutory scheme formula is found in Section 3 of the ITA.
3(a)

Employment income
Business income - Enterprise A
Property income
Other sources

3(b)

Taxable capital gains

Allowable capital losses

3(c)

Other deductions

3(d)

Losses:
Business Loss - Enterprise B
Allowable Business Investment Loss
Net income for tax purposes

$30,000
10,000
5,000
12,000
57,000
$15,000
(20,000 )

0
57,000
(3,000)
54,000

(3,000)
(2,000 )

(5,000)
$49,000