The Lawyers Weekly - February 3, 2012

Money
Continued From Page 1

■ Court’s criteria for income from source

currently being appealed, and the CRA declined to comment as a result.

In this case, said Michael Calder, a chartered accountant and member of MNP LLP’s National Tax Services in Calgary, “the taxpayer made capital contributions to an individual who she believed was an option trader. However, there was no such operation. The taxpayer put up $10,000 and made $1,316,000. The issue before the court was whether the net receipts were taxable.”

In his decision The Queen v Cranswick, 82 DTC 6073 (FCA), Justice Gerald Le Dain identified a list of criteria that identified if income was from a source. Those criteria, which stand today, are as follows:

criminal

The Tax Court of Canada determined they were not—but acknowledged it was not necessarily an easy conclusion to reach.

n;The taxpayer had no enforceable
claim to the payment.
n;There was no organized effort on
the part of the taxpayer to receive
the payment.
n;The payment was not sought
after or solicited by the taxpayer in
any manner.
n;The payment was not expected
by the taxpayer, either specifically
or customarily.

n;The payment had no foreseeable
element of recurrence.
n;The payor was not a customary
source of income to the taxpayer.
n;The payment was not in consider-
ation for or in recognition of property,
services or anything else provided or
to be provided by the taxpayer.
n;It was not earned by the taxpayer,
as a result of any pursuit of gain car-
ried on by the taxpayer or otherwise.

The tax court also commented on whether reassessments would have been statute barred or if they could be reopened by the CRA if the income had been from a source. The court noted that reassessment would have been possible only if there was misrepresentation due to neglect, carelessness, or wilful default.

justice

Rae
Continued From Page 4

Justice Woods found that, for the 2002 income tax year, none of these conditions was met.

accountant and tax partner with KPMG LLP in Waterloo, Ont.

This means tax professionals will have to tread lightly when situations step outside the ordinary. When it’s not straightforward, Downie said, “we will have to ask questions.”

“If there had been income from a source, the CRA could still not have assessed tax for this reason,” Downie said.

After reviewing the principles laid out in The Queen v Cranswick, 82 DTC 6073 (FCA), which sets out how it is determined if income is from a source, Justice Judith Woods stated: “The application of these principles is difficult in this case. On the one hand, the returns by the appellant do have some characteristics of income from a source in that the appellant’s capital was provided to [the trader] and she did receive something in return.

For the taxpayer here, nothing was actually earned with the capital, Calder of MNP added. “The agreement in place between the parties was to provide earnings based on the invested funds, but this did not happen. This was simply a shuffle of cheques between the victims of the fraud. The court, therefore, ruled that the taxpayer was not taxable.

The same did not hold true for the 2003 taxation year, however. “Circumstances had changed substantially by the time the 2003 tax return was due,” Justice Woods stated. “By the end of 2003, [the trader] was no longer in operation. The bank had stopped cashing his cheques, a class action suit was in the works and the appellant was interviewed by the lawyer acting for investors in the class action.

tion in Ontario for Premier Dalton McGuinty; the other, as a member of the Security Review Intelligence Committee for the federal government recommending an inquiry into the 1985 Air India bombing (he resigned from the NDP in 1998 upon his appointment to the committee). During this period, he also was involved with conflict resolution and constitutional issues in Sri Lanka, Sudan and Iraq through the Forum of Federations, which he chaired for seven years.

“I think of myself as a lawyer, and a lot of the way in which I deal with politics has been affected by the law,” Rae says.

“On the other hand,” she observed, “in reality there was very little connection between the capital and the net receipts. Over all, I am not satisfied that there is a sufficient connection between the capital and the net receipts that would justify a conclusion that the capital is the source.”

Specifically, Justice Woods wrote, “the appellant thought that the capital was being invested but that was not the reality…The nature of the net receipts should reflect what they actually were, and not simply what the appellant thought they were.”

The court’s logic in this case is in keeping with decisions that have dealt with the flip side of the fraud coin, Morris said. “Most unwitting participants in a fraudulent scheme will lose money. There are a number of tax cases where such participants have attempted to claim deductions for such losses where the CRA has successfully denied the claim on the basis that there was no source of income. This case confirms balance in the law—the CRA should not be able to deny deductions for unwitting participants that claim deductions for losses while at the same time tax unwitting participants that were fortuitously up money.”

“In my view,” she added, “it was obvious at this point that there were serious questions that needed answering about [the trader]. The failure of the appellant to more carefully scrutinize [him], including his statements about tax, was careless. If the appellant had acted prudently towards the obligation to properly report income, she would have started asking questions much earlier.” n

Since returning to politics in 2008 as the Liberal MP for Toronto Centre and taking over the interim leadership last year, his focus has been revitalizing the Liberals, who were relegated to third-party status in last May’s election.

“There needs to be a connection between the capital invested and what you receive,” said David Downie, a chartered

The issue of income from a source is usually straightforward, but it is not defined in the Income Tax Act. “There is case law on the point,” Loukidelis said, “[but] the case law doesn’t provide a dictionary definition of what a source is.”

Canada’s national tax agency is not yet prepared to throw in the legal towel. The decision is

Citation: Johnson v. The Queen, 2011 TCC 540

Part of the process has been striving “to engage with the public,” including reaching out to the legal community to solicit input and ideas on improving the criminal justice system—as with an ad in this newspaper that set out to recruit lawyers to oppose the government’s omnibus crime Bill C-10 last year. n

Ontario Family Law Reporter

The January issue examines:

Editor: Jeffery Wilson Practice Editor: Rui J. Alves Social Welfare Editors: Chelsea Hooper & Maryellen Symons Consulting Tax and Business Valuator Editor: Andrew J. Freedman,

C.A., C.B.V.

Neuroscience and the Rights

of Young People.

$515 + tax | 12 Issues per Year + Index | Newsletter (Print Only) | Annual Subscription | ISBN: 9780433467595

$515 + tax | 12 Issues per Year + Index | Newsletter (PDF* Only) | Annual Subscription | ISBN: 9780433467601

$665 + tax | 12 Issues per Year + Index | Newsletter (Print + PDF*) | Annual Subscription | ISBN: 9780433467618

What scientific thought allows judges to categorize the views of young people in a high-conflict parenting dispute as suspect because of limited physiological capacity? What expertise knowledge supports the notion that youth have undeveloped brains, as one unchallenged expert opined in a recent decision? What are the implications for categorizing a group of persons amongst us as unableto independently form their own views, although with sufficient capacity to instruct legal counsel? Is this more thought that is evolving than that of science, a return to the lesson of the “shaken-baby syndrome”?