Complete Chapters Solutions Included ✅
Study Guide Included ✅
2025-2026 46e ✅
, APPENDIX
Short Questions and Discussion Notes
CHAPTER 2
Liability for Tax
Short Questions
(1) Will Canadian residents who earn investment income in another country be taxed in both countries on
the same amount of income?
(2) Mr. Smith went to Kuwait to work in the oil fields for an American company. He left his family (wife
and three minor children) in Canada, and was away for three years. During this period he would visit Canada for
vacations but would not stay more than four weeks during any one year. Is Mr. Smith a non-resident?
(3) Ms. Jones and her family have decided to move to Arizona in order for her to take up a lucrative one-
year contract. They have sold their house and possessions in Canada and are renting a house in the U.S. They have
also indicated to the bank, their clubs and their friends that they are becoming non-residents of Canada. At the end
of the one-year contract they plan to travel for six months before returning to Canada. Will they be non-residents?
(4) If an individual were to leave Canada on September 30 of this year (breaking all ties with Canada) for a
five-year contract in the U.K., then would he or she still be considered to be a resident of Canada throughout this
year since he or she lived here for over 183 days in the year?
(5) If an individual were to leave Canada on September 30 of this year (breaking all ties with Canada) and
move to Buffalo, then would he or she be considered to be a non-resident even though he or she continued to carry
on his or her business in St. Catharines through a company incorporated in Ontario after he or she left?
(6) A client, who is resident in Canada, decides to set up a company in the U.S. to carry on business there.
In doing so she wants to maintain control over the operations and, therefore, she is the President and the sole
director and makes all important decisions. All other employees are resident in the U.S. Is this U.S. company
resident in Canada or the U.S.?
(7) If a person is considered to be resident in Canada by the Canadian authorities and in the U.S. by the U.S.
authorities, then will that person be subject to tax in both countries?
Discussion Notes for Short Questions
(1) Yes. They will pay tax in the foreign jurisdiction based on the investment income earned there and also
include the same amount in their Canadian income. However, they can obtain a foreign tax credit in Canada [ssec.
126(1)] for the income tax paid in the foreign country.
(2) Probably not. It appears that Mr. Smith has not made a “clean break” from Canada. He has a “continuing
state of relationship” in Canada since his wife, children and family home are still here.
(3) Probably. Significant residential ties involving dwelling, spouse and dependants have been cut and so
have some secondary ties. If there is evidence that her return to Canada was foreseen at the time of her departure
(e.g., a contract for employment upon return to Canada), the CRA will presume that she did not sever all residential
ties on leaving Canada [Income Tax Folio S5-F1-C1. par. 1.17].
(4) No, he or she would be considered a part-year resident [sec. 114]. The sojourning rules [ssec. 250(1)]
only apply to persons who sojourn in Canada for 183 days or more during a period in a year in which they are a
non-resident.
(5) Since the business is being carried on in Canada by a corporation, the individual is not carrying on
business in Canada. Therefore, he or she will be subject to the part-time resident rules [sec. 114] and taxable on
his or her world income up to September 30. From October 1, he or she would only be taxed in Canada on his or
her income from employment, carrying on business and from the sale of taxable Canadian property [ssec. 2(3)].
571
,572 Introduction to Federal Income Taxation in Canada
(6) Under the common law principles the “central management and control” would reside with the directors
and officers and, therefore, be in Canada. Reference to the Canada–U.S. tax treaty would be necessary to avoid
any double taxation.
(7) No. Paragraph 2 of Article IV of the Canada–U.S. tax treaty provides tie-breaking rules to follow when
a person is considered to be resident of both countries. This prevents double taxation.
CHAPTER 3
Employment Income
Short Questions
(1) When determining whether a person is employed or self-employed, one of the tests used is the “economic
reality test.” What does this test involve?
(2) A director of a corporation is considered to be an employee of the corporation for tax purposes and the
director’s fees are income from employment. Comment.
(3) If an employer were to pay the premiums for an individual disability policy (i.e., for the president of the
company), then there would not be a taxable benefit as a result of subparagraph 6(1)(a)(i) and any disability benefits
received from the plan would not be taxable under paragraph 6(1)(f). Comment.
(4) Mr. Chow is the VP Marketing for Compusale Inc., a computer company. He and his wife are taking a
company-paid trip to a trade show in Hawaii at which he will be working. His wife is not an employee of the
company but she will be in charge of hospitality for Compusale Inc. at the show. She will spend the hours from
1:00 p.m. until 9:00 p.m. each day on this assignment getting things organized while her husband is in the company
booth. She will spend the mornings on the beach. Do you think that Mrs. Chow’s expenses will be a taxable benefit
to Mr. Chow?
(5) Mr. Benton, the President of Publicco Ltd., travels extensively on company business. It is the company
policy to pay him a meal allowance of $100 per day and $200 for hotel while he is on the road. The standard
salesperson’s allowances are $40 for meals and $100 for hotel. Comment on the reasonableness of the President’s
allowances.
(6) XYZ Co. leases a car for its salesperson at a monthly lease cost that includes insurance. How should the
company deal with the insurance cost when calculating the taxable benefit for the salesperson?
(7) Mr. Tse is a stock broker working in downtown Toronto. He arrives at the office early in the morning to
read the papers and organize his day. Throughout the day he is on the telephone calling clients and prospective
clients. He occasionally takes clients out for lunch or dinner while he is downtown. He is required by his employer
to pay his own entertaining expenses. Can he deduct these entertainment expenses on his personal tax return?
(8) Name and describe the two basic types of pension plans.
(9) Ms. Betty is a salesperson for XYZ Ltd. She is paid a travel allowance of $250 per month with a
reconciliation done at the end of the year to make sure that it is actually calculated based on the company policy
of $0.72 per km. How will this be treated for tax purposes?
(10) Ms. Jones is a salesperson for an office supply company. She has bought a computer for the client
management aspect of her business. It is a portable, so she can take it with her to the office and home. Assuming
she otherwise meets the conditions to claim expenses under paragraph 8(1)(f), can she deduct CCA on this
computer?
Discussion Notes for Short Questions
(1) The economic reality test examines several economic factors and draws from them an inference as to the
nature of the relationship. In particular, four dimensions have been advanced involving:
(a) control,
(b) ownership of the tools,
(c) chance of profit, and
(d) risk of loss.
In cases where the taxpayer supplies neither funds nor equipment, takes no financial risks, and has no liability,
an employer-employee relationship is implied.
(2) The definition of “employee” in subsection 248(1) includes an “officer” and the definition of “officer”
includes a corporate director. Paragraph 6(1)(c) includes director’s fees in income under Subdivision a.
, Appendix: Short Questions and Discussion Notes 573
(3) The exclusion under paragraph 6(1)(a) provides for “group” sickness or accident insurance plans. A plan
taken out for one individual would not qualify for this exclusion of the premium paid by the employer. However,
any disability benefit the president receives under this plan would not be taxable since the contributions are paid
by the president through the fact that he or she paid tax on the taxable benefit [IT-428, par. 20].
(4) Given that she has specific responsibilities to carry out and that she will be working a full day (8 hours)
performing her duties, it is unlikely that her travel costs will be a taxable benefit. Income Tax Folio S2-F3-C2,
indicates that there is no employment benefit to the employee if the spouse was, in fact, engaged primarily in the
business activities on behalf of the employer.
(5) The word “reasonable” is not defined in the Act and, therefore, must be applied to the particular facts of
the situation. It is not unreasonable that the President should receive a larger allowance while on the road than a
salesperson, since he is representing the company and must present a certain image. The difficulty is determining
when the “reasonable” amount is exceeded. If the allowance is in excess of what top-rate meals and hotel rooms
cost, then it would be considered unreasonable and the full allowance would be included in his income
[spar. 6(1)(b)(vii)]. He would then be able to claim his expenses [par. 8(1)(h)].
(6) The cost of the insurance should be excluded from the calculation of the standby charge [ssec. 6(2)].
However, the operating cost benefit [par. 6(1)(k)] would cover the insurance.
(7) In order to meet the conditions of paragraph 8(1)(f), he must “ordinarily be required to carry on the duties
of his employment away from his employer’s place of business.” In this case it does not appear that there is such
a requirement since he spends virtually all of his time in his office. Therefore, he would not be able to deduct his
expenses.
(8) Defined benefit plans guarantee a predetermined amount of retirement income based on a flat amount per
year of service or a percentage of the employee’s earnings over a defined period. These plans are funded by
actuarially determined contributions by the employee and/or the employer.
Money purchase plans provide whatever pension income the contributed funds in the plan can purchase
through the acquisition of an annuity. No predetermined amount of pension income is guaranteed under these plans.
Benefits will depend upon the actual contributions, the investment return of the plan and annuity rates at the date
of purchase.
(9) According to IT-522R, this method is acceptable and she will not have an income inclusion if:
(a) there is a beginning-of-the-year agreement stating that she will get a stated amount per kilometre
for business travel;
(b) there is a year-end accounting for the difference between the payments and the business travel times
$0.72; and
(c) the amounts paid are reasonable.
Generally, the per kilometre charges will be considered reasonable as long as they are within the rates set out
by the CRA, i.e., $0.72 (2025) for the first 5,000 km and $0.66 (2025) on the remaining.
(10) Paragraphs 8(1)(j) and (p) are the only provisions that will allow an employee to deduct CCA. These
paragraphs are restricted to automobiles, aircraft and musical instruments. It does not allow the deduction of CCA
on computers. Therefore, according to subsection 8(2), CCA on the computer will not be allowed.
CHAPTER 4
Income from Business: General Concepts and Rules
Short Questions
(1) In their manufacturing process, Canco uses specialized parts. These parts are identical, but each has its
own serial number. As they are received, they are put into storage compartments in front of the existing inventory.
As they are used, the ones closest to the front are taken first. When Canco calculates its year-end inventory it uses
the LIFO method in arriving at the inventory value. Canco uses the same for tax purposes and feels that this is
correct. Comment.
(2) ServiceCo is in the business of selling service contracts to customers and then providing the service as
needed over the term of the contract. The customers pay for the service contract at the beginning of the contract.
ServiceCo believes that it does not have to record these receipts as income when the cash is received but only over
the term of the contracts. Comment.
(3) A client is about to relocate to a new office tower. The new landlord is offering large incentives to attract
long-term tenants and has offered your client a cash payment of $100,000 in order to move in. The tenant is then
Study Guide Included ✅
2025-2026 46e ✅
, APPENDIX
Short Questions and Discussion Notes
CHAPTER 2
Liability for Tax
Short Questions
(1) Will Canadian residents who earn investment income in another country be taxed in both countries on
the same amount of income?
(2) Mr. Smith went to Kuwait to work in the oil fields for an American company. He left his family (wife
and three minor children) in Canada, and was away for three years. During this period he would visit Canada for
vacations but would not stay more than four weeks during any one year. Is Mr. Smith a non-resident?
(3) Ms. Jones and her family have decided to move to Arizona in order for her to take up a lucrative one-
year contract. They have sold their house and possessions in Canada and are renting a house in the U.S. They have
also indicated to the bank, their clubs and their friends that they are becoming non-residents of Canada. At the end
of the one-year contract they plan to travel for six months before returning to Canada. Will they be non-residents?
(4) If an individual were to leave Canada on September 30 of this year (breaking all ties with Canada) for a
five-year contract in the U.K., then would he or she still be considered to be a resident of Canada throughout this
year since he or she lived here for over 183 days in the year?
(5) If an individual were to leave Canada on September 30 of this year (breaking all ties with Canada) and
move to Buffalo, then would he or she be considered to be a non-resident even though he or she continued to carry
on his or her business in St. Catharines through a company incorporated in Ontario after he or she left?
(6) A client, who is resident in Canada, decides to set up a company in the U.S. to carry on business there.
In doing so she wants to maintain control over the operations and, therefore, she is the President and the sole
director and makes all important decisions. All other employees are resident in the U.S. Is this U.S. company
resident in Canada or the U.S.?
(7) If a person is considered to be resident in Canada by the Canadian authorities and in the U.S. by the U.S.
authorities, then will that person be subject to tax in both countries?
Discussion Notes for Short Questions
(1) Yes. They will pay tax in the foreign jurisdiction based on the investment income earned there and also
include the same amount in their Canadian income. However, they can obtain a foreign tax credit in Canada [ssec.
126(1)] for the income tax paid in the foreign country.
(2) Probably not. It appears that Mr. Smith has not made a “clean break” from Canada. He has a “continuing
state of relationship” in Canada since his wife, children and family home are still here.
(3) Probably. Significant residential ties involving dwelling, spouse and dependants have been cut and so
have some secondary ties. If there is evidence that her return to Canada was foreseen at the time of her departure
(e.g., a contract for employment upon return to Canada), the CRA will presume that she did not sever all residential
ties on leaving Canada [Income Tax Folio S5-F1-C1. par. 1.17].
(4) No, he or she would be considered a part-year resident [sec. 114]. The sojourning rules [ssec. 250(1)]
only apply to persons who sojourn in Canada for 183 days or more during a period in a year in which they are a
non-resident.
(5) Since the business is being carried on in Canada by a corporation, the individual is not carrying on
business in Canada. Therefore, he or she will be subject to the part-time resident rules [sec. 114] and taxable on
his or her world income up to September 30. From October 1, he or she would only be taxed in Canada on his or
her income from employment, carrying on business and from the sale of taxable Canadian property [ssec. 2(3)].
571
,572 Introduction to Federal Income Taxation in Canada
(6) Under the common law principles the “central management and control” would reside with the directors
and officers and, therefore, be in Canada. Reference to the Canada–U.S. tax treaty would be necessary to avoid
any double taxation.
(7) No. Paragraph 2 of Article IV of the Canada–U.S. tax treaty provides tie-breaking rules to follow when
a person is considered to be resident of both countries. This prevents double taxation.
CHAPTER 3
Employment Income
Short Questions
(1) When determining whether a person is employed or self-employed, one of the tests used is the “economic
reality test.” What does this test involve?
(2) A director of a corporation is considered to be an employee of the corporation for tax purposes and the
director’s fees are income from employment. Comment.
(3) If an employer were to pay the premiums for an individual disability policy (i.e., for the president of the
company), then there would not be a taxable benefit as a result of subparagraph 6(1)(a)(i) and any disability benefits
received from the plan would not be taxable under paragraph 6(1)(f). Comment.
(4) Mr. Chow is the VP Marketing for Compusale Inc., a computer company. He and his wife are taking a
company-paid trip to a trade show in Hawaii at which he will be working. His wife is not an employee of the
company but she will be in charge of hospitality for Compusale Inc. at the show. She will spend the hours from
1:00 p.m. until 9:00 p.m. each day on this assignment getting things organized while her husband is in the company
booth. She will spend the mornings on the beach. Do you think that Mrs. Chow’s expenses will be a taxable benefit
to Mr. Chow?
(5) Mr. Benton, the President of Publicco Ltd., travels extensively on company business. It is the company
policy to pay him a meal allowance of $100 per day and $200 for hotel while he is on the road. The standard
salesperson’s allowances are $40 for meals and $100 for hotel. Comment on the reasonableness of the President’s
allowances.
(6) XYZ Co. leases a car for its salesperson at a monthly lease cost that includes insurance. How should the
company deal with the insurance cost when calculating the taxable benefit for the salesperson?
(7) Mr. Tse is a stock broker working in downtown Toronto. He arrives at the office early in the morning to
read the papers and organize his day. Throughout the day he is on the telephone calling clients and prospective
clients. He occasionally takes clients out for lunch or dinner while he is downtown. He is required by his employer
to pay his own entertaining expenses. Can he deduct these entertainment expenses on his personal tax return?
(8) Name and describe the two basic types of pension plans.
(9) Ms. Betty is a salesperson for XYZ Ltd. She is paid a travel allowance of $250 per month with a
reconciliation done at the end of the year to make sure that it is actually calculated based on the company policy
of $0.72 per km. How will this be treated for tax purposes?
(10) Ms. Jones is a salesperson for an office supply company. She has bought a computer for the client
management aspect of her business. It is a portable, so she can take it with her to the office and home. Assuming
she otherwise meets the conditions to claim expenses under paragraph 8(1)(f), can she deduct CCA on this
computer?
Discussion Notes for Short Questions
(1) The economic reality test examines several economic factors and draws from them an inference as to the
nature of the relationship. In particular, four dimensions have been advanced involving:
(a) control,
(b) ownership of the tools,
(c) chance of profit, and
(d) risk of loss.
In cases where the taxpayer supplies neither funds nor equipment, takes no financial risks, and has no liability,
an employer-employee relationship is implied.
(2) The definition of “employee” in subsection 248(1) includes an “officer” and the definition of “officer”
includes a corporate director. Paragraph 6(1)(c) includes director’s fees in income under Subdivision a.
, Appendix: Short Questions and Discussion Notes 573
(3) The exclusion under paragraph 6(1)(a) provides for “group” sickness or accident insurance plans. A plan
taken out for one individual would not qualify for this exclusion of the premium paid by the employer. However,
any disability benefit the president receives under this plan would not be taxable since the contributions are paid
by the president through the fact that he or she paid tax on the taxable benefit [IT-428, par. 20].
(4) Given that she has specific responsibilities to carry out and that she will be working a full day (8 hours)
performing her duties, it is unlikely that her travel costs will be a taxable benefit. Income Tax Folio S2-F3-C2,
indicates that there is no employment benefit to the employee if the spouse was, in fact, engaged primarily in the
business activities on behalf of the employer.
(5) The word “reasonable” is not defined in the Act and, therefore, must be applied to the particular facts of
the situation. It is not unreasonable that the President should receive a larger allowance while on the road than a
salesperson, since he is representing the company and must present a certain image. The difficulty is determining
when the “reasonable” amount is exceeded. If the allowance is in excess of what top-rate meals and hotel rooms
cost, then it would be considered unreasonable and the full allowance would be included in his income
[spar. 6(1)(b)(vii)]. He would then be able to claim his expenses [par. 8(1)(h)].
(6) The cost of the insurance should be excluded from the calculation of the standby charge [ssec. 6(2)].
However, the operating cost benefit [par. 6(1)(k)] would cover the insurance.
(7) In order to meet the conditions of paragraph 8(1)(f), he must “ordinarily be required to carry on the duties
of his employment away from his employer’s place of business.” In this case it does not appear that there is such
a requirement since he spends virtually all of his time in his office. Therefore, he would not be able to deduct his
expenses.
(8) Defined benefit plans guarantee a predetermined amount of retirement income based on a flat amount per
year of service or a percentage of the employee’s earnings over a defined period. These plans are funded by
actuarially determined contributions by the employee and/or the employer.
Money purchase plans provide whatever pension income the contributed funds in the plan can purchase
through the acquisition of an annuity. No predetermined amount of pension income is guaranteed under these plans.
Benefits will depend upon the actual contributions, the investment return of the plan and annuity rates at the date
of purchase.
(9) According to IT-522R, this method is acceptable and she will not have an income inclusion if:
(a) there is a beginning-of-the-year agreement stating that she will get a stated amount per kilometre
for business travel;
(b) there is a year-end accounting for the difference between the payments and the business travel times
$0.72; and
(c) the amounts paid are reasonable.
Generally, the per kilometre charges will be considered reasonable as long as they are within the rates set out
by the CRA, i.e., $0.72 (2025) for the first 5,000 km and $0.66 (2025) on the remaining.
(10) Paragraphs 8(1)(j) and (p) are the only provisions that will allow an employee to deduct CCA. These
paragraphs are restricted to automobiles, aircraft and musical instruments. It does not allow the deduction of CCA
on computers. Therefore, according to subsection 8(2), CCA on the computer will not be allowed.
CHAPTER 4
Income from Business: General Concepts and Rules
Short Questions
(1) In their manufacturing process, Canco uses specialized parts. These parts are identical, but each has its
own serial number. As they are received, they are put into storage compartments in front of the existing inventory.
As they are used, the ones closest to the front are taken first. When Canco calculates its year-end inventory it uses
the LIFO method in arriving at the inventory value. Canco uses the same for tax purposes and feels that this is
correct. Comment.
(2) ServiceCo is in the business of selling service contracts to customers and then providing the service as
needed over the term of the contract. The customers pay for the service contract at the beginning of the contract.
ServiceCo believes that it does not have to record these receipts as income when the cash is received but only over
the term of the contracts. Comment.
(3) A client is about to relocate to a new office tower. The new landlord is offering large incentives to attract
long-term tenants and has offered your client a cash payment of $100,000 in order to move in. The tenant is then
