CHAPTER 1

TAXATION― ITS ROLE IN BUSINESS DECISION MAKING

Solutions to Review Questions

R1-1 Once profit is determined, the amount of income tax that results is determined by the
Income Tax Act. However, at all levels of management, alternative courses of action are
evaluated and decided upon. In many cases, the choice of one alternative over the other
may affect both the amount and the timing of future taxes on income generated from that
activity. Therefore, the person making those decisions has a direct input into future after-tax
cash flow. Obviously, decisions that reduce or postpone the payment of tax affect the
ultimate return on investment and, in turn, the value of the enterprise. Including the tax
variable as a part of the formal decision process will ultimately lead to improved after-tax
cash flow.

R1-2 Expansion can be achieved in new geographic areas through direct selling, or by
establishing a formal presence in the new territory with a branch office or a separate
corporation. The new territories may also cross provincial or international boundaries.
Provincial income tax rates vary amongst the provinces. The amount of income that is
subject to tax in the new province will be different for each of the three alternatives
mentioned above. For example, with direct selling, none of the income is taxed in the new
province, but with a separate corporation, all of the income is taxed in the new province.
Because the tax cost is different in each case, taxation is a relevant part of the decision and
must be included in any cost-benefit analysis that compares the three alternatives [Reg.
400-402.1].

R1-3 A basic understanding of the following variables will significantly strengthen a decision
maker's ability to apply tax issues to their area of responsibility.

Types of Income - Employment, Business, Property, Capital gains

Taxable Entities - Individuals, Corporations, Trusts

Alternative Business - Corporation, Proprietorship, Partnership, Limited

Structures partnership, Joint arrangement, Income trust

Tax Jurisdictions - Federal, Provincial, Foreign

R1-4 All cash flow decisions, whether related to revenues, expenses, asset acquisitions or
divestitures, or debt and equity restructuring, will impact the amount and timing of the tax
cost. Therefore, cash flow exists only on an after tax basis, and, the tax impacts whether or
not the ultimate result of the decision is successful. An after-tax approach to
decision-making requires each decision-maker to think "after-tax" for every decision at the
time the decision is being made, and, to consider alternative courses of action to minimize
the tax cost, in the same way that decisions are made regarding other types of costs.

Failure to apply an after-tax approach at the time decisions are made may provide
inaccurate information for evaluation, and, result in a permanently inefficient tax structure.

1
 CHAPTER 2

FUNDAMENTALS OF TAX PLANNING

Solutions to Review Questions

R2-1 There is a distinction between tax planning and tax avoidance. Tax planning is the process
of arranging financial transactions in a manner that reduces or defers the tax cost and that
arrangement is clearly provided for in the Income Tax Act or is not specifically prohibited.
In other words, the arrangement is chosen from a reasonably clear set of options within the
Act.

In contrast, tax avoidance involves a transaction or series of transactions, the main purpose
of which is to avoid or reduce the tax otherwise payable. While each transaction in the
process may be legal by itself, the series of transactions cause a result that was not
intended by the tax system.

R2-2 Both tax planning and tax avoidance activities clearly present the full facts of each
transaction, allowing them to be scrutinized by CRA. In comparison, tax evasion involves
knowingly excluding or altering the facts with the intention to deceive. Failing to report an
amount of revenue when it is known to exist or deducting a false expense are examples of
tax evasion.

R2-3 CRA does not deal with all tax avoidance transactions in the same way. In general terms,
CRA attempts to divide tax avoidance transactions between those that are an abuse of the
tax system and those that are not. When an action is considered to be abusive, CRA will
attempt to deny the resulting benefits by applying one of the anti-avoidance rules in the
Income Tax Act.

R2-4 There are three general types of tax planning activities:

• Shifting income from one time period to another.

• Transferring income to another entity.
• Converting the nature of income from one type to another.

Shifting income to another time period can be a benefit if it results in a lower rate of tax
applying to the income. Even if a lower rate of tax is not achieved, a benefit may be gained
from delaying the payment of tax to a future time period.

Shifting income to an alternate taxpayer (for example, from an individual to a corporation),

the amount and timing of the tax may be beneficially altered.

There are several types of income within the tax system such as employment income,
business income, capital gains and so on. Each type of income is governed by a different
set of rules. For some types of income, the timing, the amount of income recognized, and
the effective tax rate is different from other types. By converting one type of income to
another, a benefit may be gained if the timing of income recognition, the amount
recognized, and/or the effective tax rate is favorable.

R2-5 The statement is not true. Paying tax later may be an advantage because it delays the tax
cost and frees up cash for other purposes. However, the delay may result in a higher rate
of tax in the future year compared to the current year. In such circumstances there is a
trade-off between the timing of the tax and the amount of tax payable.

2
R2-6 There is not always an advantage to transfer income to a corporation when the corporate
tax rate is lower than that of the individual shareholder. While an immediate lower tax rate
results, remember that the corporation may be required to distribute some or all of its
after-tax income to the shareholder which causes a second level of tax. Whether or not an
advantage is achieved depends on the amount of that second level of tax and when it
occurs. Other factors may also be relevant such as the tax treatment of a possible business
failure or sale.

R2-7 The statement is not true. Knowing the tax rules is, of course, a major element in the tax
planning process, but, it does not guarantee the expected outcome. Planning means that
certain steps are taken now in preparation for certain activities that may occur in the future.
However, those anticipated activities might not occur and the desired tax result may not be
achieved. Tax planning also requires that one must anticipate and speculate on possible
future scenarios and relate them to the current tax planning steps. Those scenarios are
never certain.

R2-8 To develop a good tax plan, one must be able to:

• Understand the fundamentals of the income tax system.

• Anticipate the complete cycle of transactions.
• Develop optional methods of achieving the desired business result and analyze each of
their tax implications.
• Speculate on possible future scenarios and assess their likelihood.
• Measure the time value of money.
• Place the tax issue in perspective by applying common sense and sound business
judgement.
• Understand the tax position of other parties involved in the transaction.

R2-9 Yes, the entrepreneur should consider the tax position of the potential investors. They will
be taking a risk in accepting the investment. If the entrepreneur knows the tax effect on the
investors, of each alternative organization structure, the entrepreneur can choose the one
that provides investors the most favorable tax treatment (i.e., one that reduces their after-
tax loss if the investment fails, or increases their after-tax income if it succeeds). Before
making the investment the investor should determine the tax impact on:

• income earned by the venture,

• income distributed to the investor,
• losses incurred by the venture,
• the loss of the investment if the venture fails, and
• the gain on the investment when it is eventually sold.

R2-10 A tax avoidance transaction is a term used within the general anti-avoidance rule (GAAR)
of the Income Tax Act. An avoidance transaction is a transaction or series of transactions
that results in a tax benefit and was not undertaken primarily for bona fide business,
investment or family purposes [ITA 245].

R2-11 The statement is not true. In order for the tax benefit to be denied under the general anti-
avoidance rule (GAAR), the transaction, in addition to not being primarily for bona fide
business, investment or family purposes, must be considered to be a misuse or abuse of
the income tax system as a whole. What constitutes a misuse or abuse is not always clear.
However, certain avoidance transactions are permitted and others are not [ITA 245(3), IC
88-2].

___________________________________________________________
3
Solutions to Key Concept Questions

KC 2-1

[ITA: 245(2) – GAAR]

The GAAR provision in ITA 245(2) is to be used when specific anti-avoidance provisions do not
suffice. For the GAAR to apply, the following four conditions must be met:

1) A tax benefit results from a transaction or part of a series of transactions [ITA 245(1) –
“tax benefit” definition],

2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit [ITA 245(3) – “Avoidance
transaction” definition],

3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and

4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole [ITA 245(4)].

The transactions described in each of the four situations:

• A tax benefit results in each case,

• The transactions have been undertaken primarily to obtain a tax benefit and are,
for that reason, avoidance transactions, and

• Are not subject to any other anti-avoidance rule in the Act,

Therefore, the issue to be determined is whether the tax benefit would result in a misuse or abuse
of the Act, read as a whole.

Situation 1: There is nothing in the Act that prohibits Christine from incorporating her business.
The incorporation is consistent with the Act read as a whole and, therefore, the GAAR would not
apply.

Situation 2: There is no provision in the Act requiring a salary to be paid to Paul and the failure
to pay a salary is, therefore, not contrary to the scheme of the Act read as a whole. The GAAR
would not apply to deem a salary to be paid by P Ltd. or received by Paul.

Situation 3: The Act recognizes the deductibility of reasonable business expenses which include
bonuses. The payment of the bonus is not an abusive transaction and, therefore, the GAAR
should not apply to the payment.

Situation 4: The borrowing by the parent corporation is for the purpose of gaining or producing
income as required by paragraph 20(1)(c) of the Act. The GAAR should, therefore, not apply. In
fact, CRA has indicated, in comfort letters, that where one corporation (A Ltd.) borrows from a
financial institution to invest in shares of another corporation (B Ltd.) and B Ltd. re-loans the funds
back to A Ltd. and charges interest at a reasonable rate, thus, shifting income from A Ltd. to B
Ltd., the transactions are permissible and will not be challenged.

4
KC 2-2

[ITA: 245(2) – GAAR]

The GAAR provision in ITA 245(2) is to be used when specific anti-avoidance provisions do not
suffice. For the GAAR to apply, the following four conditions must be met:

1) A tax benefit results from a transaction or part of a series of transactions,

2) The transaction is an avoidance transaction, in that, it was not undertaken primarily for
bona fide purposes other than to obtain the tax benefit,
3) No other provision of the Act stops the taxpayer from achieving the intended tax
advantage, and
4) The transaction is an abusive transaction, in that, it can reasonably be concluded that the
tax benefit would result in a misuse or abuse of the Act, read as a whole.

In the case of John and his two corporations:

• The transaction does result in a tax benefit as using the losses will reduce tax,

• It appears that the transaction was undertaken primarily for the tax benefit, and

• There is no provision in the Income Tax Act prohibiting the transfer of the property on a
tax-deferred basis to a related corporation nor the deduction of the losses by Corporation
B,

So, the question that remains is whether the transaction is an abusive transaction.

Since the Act contains specific provisions permitting the transfer of losses between related
corporations, the transfer in question is consistent with the scheme of the Act and, therefore, is
not an abusive transaction. Thus, the GAAR should not apply.

However, had the transfer of a property been undertaken to avoid a specific rule, such as a rule
designed to preclude the deduction of losses after the acquisition of control of a corporation by
an arm's length person, such a transfer would be a misuse of the provisions of the Act and be
subject to the GAAR [IC88-2].

Where the GAAR applies, the tax benefit that results from an avoidance transaction is denied. In
order to determine the amount of the tax benefit that is denied, the provision indicates that the tax
consequences of the transaction to a person will be determined as is reasonable in the
circumstances.

5
 CHAPTER 3
LIABILITY FOR TAX, INCOME DETERMINATION, AND
ADMINISTRATION OF THE INCOME TAX SYSTEMSolutions to Review
Questions

R3-1 Of the seven entities listed the following are subject to tax:
• individuals
• corporations
• trusts
R3-2 Proprietorships, partnerships, joint ventures and limited partnerships can all earn
income as separate entities. However, for tax purposes the income is allocated
annually to the owners of the entities and included in their income for tax purposes.
The owners are normally one of the taxable entities, individuals, corporations or
trusts.
R3-3 A corporation is a separate legal entity distinct from its owners - the shareholders.
Consequently a corporation is taxed on its income earned in each taxation year.
However, the after-tax corporate profits may be distributed as a dividend to the
individual shareholder. Upon receipt of the dividend the individual shareholder has
earned property income (return on the share capital) and is subject to tax
consequences at that time [ITA 12(1)(j),(k)].
Alternatively, if the corporation does not distribute the after-tax profits but retains
them for corporate use, the value of the shares owned by the shareholder will
increase in value. If and when the shareholder disposes of the shares a capital gain
may result due to the increased share value caused by the corporate earnings
retained [ITA 40(1)(a)(i)].
R3-4 This statement is important because it establishes the basic framework of the
income tax system, who is liable for tax, and on what income. The statement
indicates that tax is calculated on the taxable income of resident persons for each
taxation year. By defining each of the relevant terms in the statement the general
scope of the tax system is apparent. It is, therefore, necessary to define the terms
person, resident, taxable income, and taxation year [ITA 2(1)].
As stated in the question, both individuals and corporations are considered to be
persons for tax purposes. Therefore, resident individuals and resident corporations
are liable for Canadian tax [ITA 248(1)].
Individuals are resident of Canada if they maintain a continuing state of relationship
with the country. Whether or not an individual has a continuing state of relationship
is a question of fact determined from the facts of each situation. To establish this
relationship the courts consider the time spent in Canada, motives for being present
or absent, the maintenance of a dwelling place, the origin and background of the
individual, the routine of life, and the existence of social and financial connections.
If an individual does not have a continuing state of relationship, the individual may
be deemed to be a resident if the individual is present in Canada for 183 days or
more in a particular year [ITA 250(1)(a)].
A corporation is a resident of Canada if it has been incorporated in Canada [ITA
250(4)].
Taxable income is defined as the person's net income for tax purposes minus a
limited number of deductions. Net income for tax purposes consists of world income
derived from five specific sources: employment, business, property, capital gains,
and other sources. These sources are combined in a basic formula known as the

6
 statutory scheme. If income does not fit one of the above five categories, it is not
taxable. Both individuals and corporations determine net income for tax purposes
using the same set of rules.
Tax is calculated on taxable income for each taxation year. The taxation year of
an individual is the calendar year. The taxation year for a corporation is the fiscal
period chosen by the corporation, which cannot exceed one year, 53 weeks to be
exact [ITA 249(1), 249.1(1)]. Professional corporations (a corporation that carries
on the professional practice of an accountant, dentist, lawyer, medical doctor,
veterinarian or chiropractor [ITA 248(1)]) are required to have a fiscal period that
coincides with the calendar year if the professional corporation carries on business
as a member of a professional partnership [ITA 249.1(1)(b)].
R3-5 A non-resident individual or corporation is subject to Canadian income tax in a
manner similar to a Canadian resident on taxable income earned in Canada if they
are employed in Canada, carry on business in Canada, or dispose of taxable
Canadian property [ITA 2(3)]. In addition, a non-resident who does not have any of
the above activities in Canada may be subject to a special withholding tax (a flat
tax) on income which has its source in Canada [ITA 212]. (For example, dividends,
rents royalties, certain management fees, and so on.)
R3-6 Yes. The resident of Canada is taxed on world income and the foreign country,
which is the source of that income, may also impose tax. For example, a Canadian
corporation which operates a business branch location in a foreign country will be
taxable on the branch profits in both countries. In order to avoid double taxation, the
Canadian tax calculation permits a reduction of Canadian taxes for foreign taxes
paid on the same income [ITA 126(1), (2)].
R3-7 Net income for tax purposes consists of a taxpayer’s combined net income from
employment, business, property, capital gains and other sources. The separate
sources of income are combined in accordance with an aggregating formula which
takes into account any losses from the above sources. Net income for tax purposes
is determined by the same set of rules for individuals and corporations.
Taxable income is the base amount upon which the rates of tax are applied, and is
determined by reducing a taxpayer's net income for tax purposes (above) by a
limited number of specific deductions. While individuals and corporations use the
same formula for determining net income, the calculation of taxable income is
different. Deductions for individuals include a capital gains deduction on qualified
properties, and unused losses of other years. Deductions for corporations include
charitable donations, dividends from Canadian corporations and foreign affiliates,
and unused losses of other years.
R3-8 The statutory scheme is the fundamental base of the income tax system. It is simply
an aggregating formula which establishes the concept of a taxpayer's income for
tax purposes in comparison to other concepts of income. The formula defines what
types of income are subject to tax and how any related losses affect a taxpayer's
income. As the formula is restricted to five basic types of income activities, the scope
of the tax system is established. The formula establishes that, although a taxpayer
may carry on several separate activities, each separate type of income is not taxed
separately but rather forms part of a total concept of income. As a result, with the
exception of capital losses, a loss from one activity within a specified time period
may be offset against the income derived from other activities.
In spite of the fact that the formula combines several types of income into a single
income amount, each type of income is determined in accordance with its own sets
of rules. The formula then binds them together and establishes their relationships.
7
R3-9 A taxpayer would normally prefer that a loss incurred be a business loss as opposed
to a capital loss. In accordance with the aggregating formula for computing net
income, a business loss can be deducted from any other source of income which
increases the opportunity to reduce taxes payable as soon as possible. A capital
loss, on the other hand, can only be deducted against a capital gain and, therefore,
its ability to reduce taxes payable is considerably restricted. In addition, only one-
half of a capital loss is included as part of the aggregating formula [ITA 3(b)].
For example, a taxpayer who has employment income of $30,000 and a business
loss of $30,000 has no net income under the aggregating formula and, therefore,
no tax liability. However, if the same taxpayer has employment income of $30,000
and a capital loss of $30,000, a tax liability would be incurred because the net
income for tax purposes would be $30,000 (from employment) and the capital loss
would remain unused.
R3-10 Income from property is the return that is earned on invested capital. For example,
dividends earned on shares of a corporation are property income because they
represent the return from the ownership of capital property (the shares). On the
other hand, a gain derived from the sale of capital property is considered to be a
capital gain. Using the previous example, if the shares were sold at a profit the gain
from that property would be a capital gain and not property income.
R3-11 Based on the determination of net income for tax purposes, the statement is not
true. Both individuals and corporations determine net income for tax purposes in
accordance with the same aggregating formula. In addition, an individual who earns
business income determines that income in accordance with the same set of rules
as a corporation that earns business income.
With respect to the conversion of net income for tax purposes to taxable income,
individuals are entitled to a capital gains deduction whereas a corporation is not. In
this context an individual receives preferential treatment. In arriving at taxable
income, a corporation can reduce its net income by dividends received from other
Canadian corporations, whereas, individuals cannot. However, corporate income is
ultimately distributed to shareholders who are individuals and, therefore, this
corporate advantage is temporary [ITA 110.6, 112(1)].
R3-12 Working as a lawyer, an individual may earn either employment income or business
income. If the lawyer provides services to a law firm as an employee in return for a
salary, bonus, and fringe benefits, the income would constitute employment income.
If the lawyer independently provides services directly to clients on a fee-for-service
basis, the income derived is business income [ITA 5(1), 9(1)].
R3-13 A profit derived from the sale of property may be classified as either business
income or capital gain. Using the example of property that is land, business income
will occur if the land was acquired for the purpose of reselling it at a profit.
Alternatively, if the land was acquired, not for resale, but for long term use to
generate income or for personal enjoyment, the profit on the sale will be a capital
gain.
R3-14 All Canadian residents are taxed on their world income. The world income of
individual A includes the business profits from the U.S. farm plus the interest earned
from the U.S. bank account. These amounts are, therefore, taxable in Canada in
the year earned. The income would also be taxable in the U.S. but Canadian taxes
may be reduced by U.S. taxes on that income.
In comparison, individual B's world income does not include the U.S. farm profits
and the U.S. interest. This income belongs to the U.S. corporation and is, therefore,
taxed only in the U.S. The foreign corporation is not a resident of Canada and is not
8
 subject to Canadian tax. The after-tax profits of the foreign corporation may be
distributed to individual B in the form of dividends at some future time. Such foreign
dividends would then be part of B's world income and taxed a second time.
Although both A and B conduct the same activities, the organization structure alters
the amount and the timing of the related taxes on the income.
R3-15 The sale of the entire orchard for a total price of $250,000 may include the following
separate properties:
• land
• the permanent stock of trees
• the almost mature crop of apples
(The student may also recognize the possibility of including equipment and
goodwill.)
The sale of the land may result in a capital gain because it is property that was
acquired and used to generate income. Similarly the sale of the trees is capital
property because the trees are used to produce a regular crop of apples.
The profit on the sale of apples would constitute business income because the
apples are being produced for the purpose of resale at a profit. Even though the
apples are not mature, they represent inventory in process.

___________________________________________________________

9
Solutions to Key Concept Questions
KC 3-1
[ITA: 250(1), (4) – Residence]
a) 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.
b) 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.
c) 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)].
d) 102864 Limited is resident in Canada. Any company incorporated in Canada after
April 26, 1965 is deemed resident in Canada [ITA 250(4)(a)].
e) Navy Ltd. is a non-resident corporation.

KC 3-2

[ITA: 2(3) – Tax payable by non-residents]

A non-resident must report three sources of income on a Canadian tax return:
employment income earned in Canada, business income from carrying on business in
Canada, and gains on the disposal of taxable Canadian property [ITA 2(3)]. In this case,
Mateo must report on a Canadian tax return his $15,000 of employment earned in
Canada.
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 8. Employment income
2. Other income 9. Property income
3. Business income 10. Business income
4. Capital gain 11. Capital gain
5. Employment income 12. Capital gain
6. Business income 13. Business income
7. Property income

10
KC 3-5
[ITA: 3 – Net income]
Taxpayer Taxpayer Taxpayer
A B C
3(a) Employment Income $30,000
Business income
Property income
Other income (pension) $40,000 .
40,000 30,000

3(b) Taxable capital gains $25,000 0

Allowable capital losses (0) (3,000)
Excess 25,000 0

40,000 25,000 $30,000

3(c) Other deductions 0 0 (80)

40,000 25,000 29,920

3(d) Business loss (20,000)

Property loss (1,000) (0)
(1,000) (20,000)

Net Income $39,000 $ 5,000 $29,920

Taxpayer C has $30,000 of employment income and is entitled to a deduction for CPP
enhanced contributions of 0.3% of ($30,000 – basic exemption $3,500) = $80.

11
KC 3-6
[ITA: 3 – Net income]
3(a) Employment income $60,000
Business income 3,000
Property income (interest) 2,000
65,000
3(b) Taxable capital gain $18,000
Allowable capital loss (20,000)
Excess 0 0
65,000
3(c) Other deductions (166)
64,834
3(d) Business loss (7,000)
Allowable business investment loss (5,000) (12,000)

Net income $52,834

Maureen has $60,000 of employment income and is entitled to a deduction for CPP
enhanced contributions of (5.25% - 4.95%) x ($58,700 – basic exemption $3,500) =
$166.
KC 3-7
[ITA: 150(1)(a), (b), (d) – Filing due dates]
The filing due dates are as follows:
a) May 31, 2021 (six months after the year-end of the corporation [ITA 150(1)(a)]). When
the corporation’s tax year ends on the last day of a month, the tax return is due by
the last day of the sixth month after the end of the tax year.
b) June 15, 2021 [ITA 150(1)(d)(ii)]
c) April 30, 2021 [ITA 150(1)(d)(i)]
d) August 21, 2021 (later of six months after death and the normal filing due date [ITA
150(1)(b)]

12
KC 3-8
[ITA: 150(1), 156.1(4), 248(1) – filing deadline and balance-due day for individuals]
a) Bob’s tax return is due April 30, 2021,[ITA 150(1)(d)(i)]. The balance of tax owing, if
any, is due on the same day [ITA 156.1(4), 248(1)].
b) Maria’s tax return is due June 15, 2021 [ITA 150(1)(d)(ii)]. The balance of tax owing,
if any, is due on April 30, 2021 [ITA 156.1(4), 248(1)].
c) Ron’s tax return is due June 15, 2021 [ITA 150(1)(d)(ii)]. The balance of tax owing, if
any, is due on April 30, 2021 [ITA 156.1(4), 248(1)].
d) Zeta’s tax return is due May 20, 2021, being the later of April 30th of the following year
and 6 months after the date of death [ITA 150(1)(b)]. The balance of tax owing, if any,
is due on the same day [ITA 156.1(4), 248(1)]. Leo’s tax return is also due on May 20,
2021, however, his balance of tax is due on April 30, 2021.
e) Sarah’s tax return for the current year, 2020, (the year of death) is due April 30th or
June 15th of 2021 being the later of the date the return is normally due and 6 months
after the date of death. The balance of tax owing, if any, is due on April 30, 2021 [ITA
156.1(4), 248(1)]. Also note that Sarah’s tax return for the prior year (2019) is due
September 12, 2020, being the later of the date the tax return would normally be due
and 6 months after the date of death [ITA 150(1)(b)]. The balance of tax owing, if any,
is due on September 12, 2020 as well [ITA 156.1(4), 248(1)].
KC 3-9
[ITA: 156.1(4); 157(1)(b); 248 – Balance-due day]
The balance of tax is due as follows:
a) Two months after the corporation’s year-end [ITA 157(1)(b), “balance-due day” ITA
248]
b) Three months after the corporation’s year-end [ITA 157(1)(b), “balance-due day” ITA
248]
c) April 30th of the following year [ITA 156.1(4), “balance-due day” ITA 248]
d) April 30th of the following year [ITA 156.1(4), “balance-due day” ITA 248]
KC 3-10
[ITA: 150(1), 157(1)(b), 248(1) – filing deadline and balance-due day for corporations]
• A Ltd.’s tax return is due November 30, 2020 (the last day of the 6th month after the
year end) [ITA 150(1)]. The balance of tax owing, if any, is due July 31, 2020 (2 month
after the year end) [ITA 157(1)(b), 248].
• B Ltd.’s tax return is due April 30, 2021 (the last day of the 6th month after the year
end) [ITA 150(1)]. The balance of tax owing, if any, is due December 31, 2020 (2
month after the year end) [ITA 157(1)(b), 248].
• C Ltd.’s tax return is due April 30, 2021 of the following year (the last day of the 6th
month after the year end) [ITA 150(1)]. The balance of tax owing, if any, is due
January 31, 2021 of the following year (3 month after the year end) since C Ltd. is a
CCPC whose taxable income in the previous year did not exceed the business limit
and the small business deduction was claimed [ITA 157(1)(b), 248].
• D Ltd.’s tax return is due November 30, 2020 (the last day of the 6th months after the
year end) [ITA 150(1)]. The balance of tax owing, if any, is due July 31, 2021 (2 month
after the year end). Although D Ltd. is a CCPC claiming the small business deduction,
it does not qualify for the one month extension since its taxable income in the
preceding year exceeded the business limit [ITA 157(1)(b), 248].

KC 3-11

[ITA: 156(1), 156.1(1), (2), 157(1), (2.1) – instalments for individuals and corporations]
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If the taxpayer is an individual, instalments are required for 2020 since the tax liability
for 2020 is expected to exceed $3,000 and the tax liability exceeded $3,000 for one of
the two prior years (2019) [ITA 156.1(1)]. The instalments are due the 15th day of March,
June, September, and December. The amount payable for each instalment is calculated
using one of the following three methods [ITA 156(1)]:
1) $9,000; ¼ x estimated tax payable for 2020 (1/4 x $36,000)
2) $3,000; ¼ x tax payable for 2019 (1/4 x $12,000)
3) $300 for the March and June instalments; ¼ x tax payable for 2018 (1/4 x $1,200);
and $5,700 for the September and December instalments; ½ ($12,000 - $600).
The CRA uses method (3) in their instalment notices. Since method (3) results in the
taxpayer paying the least amount of tax in March and June, the taxpayer will probably
choose this method.
If the taxpayer is a corporation, instalments are required for 2020 since the tax liability
for 2019 (the prior year) and the estimated tax liability for 2020 exceed $3,000 [ITA
157(2.1)].
The instalments are generally due at the end of each month. The amount payable for
each instalment is calculated using one of the following three methods [ITA 157(1)]:
1) $3,000; 1/12 x estimated tax payable for 2020 (1/12 x $36,000)
2) $1,000; 1/12 x tax payable for 2019 (1/12 x $12,000)
3) $100 for the first two instalments; 1/12 x tax payable for 2018 (1/12 x $1200); and
$1,180 for the remaining ten instalments; 1/10 x ($12,000 - $200).
If the taxpayer is a small-CCPC then quarterly tax instalments are permitted. The
quarterly instalments are due the last day of each quarter and are calculated using one
of the following three methods [ITA 157(1.1)]:
1) $9,000; ¼ x estimated tax payable for 2020 (1/4 x $36,000)
2) $3,000; ¼ x tax payable for 2019 (1/4 x $12,000)
3) $300 for the March instalment; ¼ x tax payable for 2018 (1/4 x $1,200); and $3,900
for the June, September and December instalments; 1/3 x ($12,000 - $300).

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A small-CCP has the following characteristics [ITA 157(1.2)]:

• Taxable income for the current or preceding year does not exceed $500,000,
• Taxable capital for the current or preceding year does not exceed $10 million,
• Claims the small business deduction in the current or preceding year, and
• Has a perfect compliance record for the past 12 months with respect to tax
payments and filing of returns.

KC 3-12

[ITA: 152(3.1), 165(1) – Normal reassessment period and notice of objection]

a) Individuals, trusts, and CCPCs can be reassessed within three years of the date the
original assessment was mailed. For other corporations, the time limit is extended to
four years.
Since the date of sending of the notice of assessment was June 20th, 2016, the normal
reassessment period expired prior to July 10, 2020 for all taxpayers. However, a tax
return can be reassessed at any time if the taxpayer has made a misrepresentation
that is attributable to neglect, carelessness, or willful default or has committed any
fraud in filing the return or supplying information.
b) The notice of objection must be filed by October 8, 2020. If the taxpayer is an
individual, the notice of objection must be filed by the later of April 30, 2017, being one
year after the tax return filing date for the 2015 year; and October 8, 2020, being 90
days after the date the reassessment was mailed. For all other taxpayers the notice
of objection must be filed by 90 days after the date the reassessment was mailed.
KC 3-13
[ITA: 152(3.1)(b); 165(1)(b) – Normal reassessment period; Notice of objection]
a) The CRA has until August 28, 2023, being three years from the date of sending of
the Notice of assessment (August 28, 2020) to issue a reassessment [ITA
152(3.1)(b)].
b) If the corporation wishes to object to the Notice of assessment, the Notice of
objection must be filed by November 26, 2020, being 90 days after the sending
date on the Notice of assessment [ITA 165(1)(b)].
KC 3-14

[ITA: 162(1) – Late filing penalty]

The late filing penalty is $800, being $10,000 x 8% (5% + 1% x 3 months). The tax return
was filed three complete months late. The penalty is 5% of the unpaid tax that is due on
the filing deadline, plus 1% of this unpaid tax for each complete month that the return is
late, up to a maximum of 12 months.

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