Subsection 4(1) - Income or loss from a source or from sources in a place
Paragraph 4(1)(a)
Cases
Du Pont Canada Inc. v. The Queen, 2001 DTC 5269, 2001 FCA 114
A sale by the taxpayer, a manufacturer, of most of the assets of its explosives manufacturing operation in Nipissing was found not to be a sale of a separate business in light of the fact that such division and other manufacturing operations were operated through the provision (principally in Mississauga) of centralized services, including all borrowing and financing, cash management, foreign exchange management, the granting of credit, invoicing of customers, collection of accounts, purchasing, processing of supplier invoices and preparation of expense reports. It also was important that the Du Pont brand name and trade marks were used consistently for all of the taxpayer's products, but they ceased to be an attribute of the explosives manufactured at the explosives plant after the sale; and that there was cross-selling of products of the different divisions. Because the depreciable assets that were sold were included in the same class as depreciable assets retained by the taxpayer, the recaptured capital cost allowance realized by the taxpayer was reduced accordingly.
Hickman Motors Ltd. v. The Queen, 97 DTC 5363, [1997] 2 S.C.R. 336
The taxpayer, which at all relevant times had been engaged in the leasing of cars and trucks, received on the winding-up of its subsidiary heavy duty equipment that the subsidiary had been renting-out, and then transferred that same equipment to another subsidiary of the taxpayer five days later. L'Heureux-Dubé J. found on the evidence that the taxpayer during that five-day period was engaged in one business, rather than two businesses, i.e., "a single integrated business of sales, servicing, leasing and rental of cars and trucks, and of construction, forestry and rock-drilling equipment".
Engler v. The Queen, 94 DTC 6280 (FCTD)
Before going on to find that the taxpayer had a reasonable expectation of profit with respect to one of his businesses for only one of the taxation years in question, Joyal J. stated (p. 6281) that:
"... section 4 of the Act, in establishing the 'sourcing' or 'matching' principle in the determination of any income or loss, limits considerably the more imaginative ways in which a taxpayer may lump all his income from all sources and deduct all his expenses from these sources and consolidate his return accordingly."
Gulf Canada Ltd. v. The Queen, 90 DTC 6622 (FCTD), aff'd 93 DTC 6123 (FCA)
It was found that ss.124.1 and 124.2 established specific rules for computing income which related to production, and that the general "income from source" rules in ss.3 and 4 accordingly did not apply.
In responding to a submission that "production" simpliciter could not be a "source" of income, Hugessen J.A. stated (p. 6127):
"When Parliament has described 'production' as being a 'source', as it clearly has in sections 124.1 and 124.2, it must be understood as the business of production."
Macmillan Bloedel Ltd. v. The Queen, 90 DTC 6219 (FCTD)
Interest on employee advances, overdue trade accounts, loans to customers, and working capital advances to subsidiaries, gave rise to income from the taxpayer's logging operations, whereas money on short-term deposits constituted income from a separate non-logging source.
Pe Ben Industries Co. Ltd. v. The Queen, 88 DTC 6347, [1988] 2 CTC 120 (FCTD)
An operation of trucking goods and materials from a railway yard to a Syncrude plant pursuant to a 5-year contract was held to be a separate business from the taxpayer's general oil field transportation business.
Excelsior Life Insurance Co. v. The Queen, 85 DTC 5164, [1985] 1CTC 213 (FCTD)
An argument of the Crown, that segregated funds and non-segregated funds of life insurers are to be equated with "sources" of income under s. 4(1), was rejected. The income of the two funds had common sources such as interest, dividends, royalties and rentals.
Klie v. The Queen, 81 DTC 5061, [1981] CTC 154 (FCTD)
Rentals which a farmer obtained by leasing shorefront lands to tenants who built cottages on those lands, were held to be receipts from his farming business rather than from a separate business.
"[T]his source of casual or incidental income and expenses of his farming business is an example of a commonplace situation that obtains in respect to farming operations on farms bordering on lakes and rivers in Canada."
The Queen v. Dorchester Drummond Corp. Ltd., 79 DTC 5163, [1979] CTC 219 (FCTD)
Semble, that the making of loans and the derivation of revenues from land constituted a single business of the taxpayer company.
Randall v. MNR, 67 DTC 5151, [1967] CTC 236, [1967] S.C.R. 484
The management by the taxpayer and his brother of horse racing activities at tracks in Vancouver and Portland, Oregon were found to be one business:
"The income of that business from the various geographic bases was income from the business as a whole just as the business of a bank or any other enterprise which has branches in many areas remains one business and not many separate businesses, each to be dealt with separately." (p. 5153)
Interprovincial Pipe Line Co. v. MNR, 59 DTC 1229, [1959] CTC 339, [1959] S.C.R. 763
Before finding that s. 127(1)(av) of the 1948 Act did not apply to require the deduction of interest on general corporate borrowings of the taxpayer from its interest income on a loan to a U.S.subsidiary (so as to deny a foreign tax credit for US withholding tax levied on such interest income), Locke J. stated (p. 1233) that the provision was intended:
"to prevent a taxpayer who might be engaged in two separate businesses not related to each other by reason of their nature from taking into account losses or expenses incurred in one in computing the taxable income of the other."
Canadian Kodak Sales Ltd. v. MNR, 54 DTC 1194 (Ex Ct)
The taxpayer, whose business was to purchase photographic equipment from affiliates and sell them to customers, in 1940 acquired the business of another affiliate, which consisted of leasing out "recordaks" (i.e., machines which took reduced photographs and microfilms of documents) to customers for all of the economic life of the recordaks. In 1951, the taxpayer informed its customers that they now could purchase the leased recordaks, and in 1951 and 1952, 40% and 5%, respectively, of the customers did so.
The resulting gains were taxable in light inter alia of the recordak division being part of the taxpayer's business of exploiting photographic equipment.
See Also
Kruger Inc. v. The Queen, 2015 TCC 119
The taxpayer ran, along with its subsidiaries, a lumber and paper goods business with annual sales of approximately $2.5 billion. In response to the group's accounts receivable being denominated in foreign currencies, the taxpayer began trading options. The trading quickly expanded, with one currency trader and three bond and security traders. The team's stated objective was to mirror, on a smaller scale, the "same sort of structure" as the trading flow of TD Bank.
In the course of finding that the taxpayer could treat its options as inventory (and hence claim losses in the year in question based on a decline in the value of its portfolio), Rip J found that the taxpayer's trading activities constituted a business. He noted, for example, the scale of operations (it was the third- or fourth-largest currency options trader in Quebec), and its conduct generally reflected a business enterprise entirely separate from its manufacturing business (para. 38).
See summary under s. 9 –timing.
Ruff v. The Queen, 2012 TCC 105
The taxpayer, a lawyer, was bilked of $400,000 by scam artists, posing as clients, who induced him to incur "processing " fees in connection with the recovery of a supposed container in the Ivory Coast containing US$8.5 million of cash.
Before finding that deduction of the taxpayer's outlays was barred by s. 67, Webb J. found that the outlays arose out of activities (seeking to act as a trustee for supposed clients) that were undertaken as part of his law practice and, thus, related to a source of income (that business).
CAE Inc. v. The Queen, 2011 DTC 1362 [at 2031], 2011 TCC 354, aff'd 2013 DTC 5084 [at 5944], 2013 FCA 92
The taxpayer manufactured flight simulators which it used to provide flight training services directly or which were leased by it to airlines for their training purposes (coupled in many instances with a sale of the simulator to a third party). Jorré found (at para. 71) that the taxpayer's flight training and leasing/sale operations were part of a single civil aviation simulator business.
Dubois v. The Queen, 2007 DTC 1534, 2007 TCC 461
Before going on to find that legal fees incurred as a result of a cancellation by the taxpayer of an agreement to purchase a building were capital expenditures, Paris J. rejected a submission that they should not be considered to have been incurred in connection with a source of business. Although Paris J accepted the Crown's submission that the property, if acquired, would have represented a source of income that was separate from the two rental properties already held by the taxpayer, the property to be acquired already represented a source of income at the time the taxpayer agreed to purchase it. A business commenced where some significant activity was undertaken as "an essential preliminary to normal operations" (para. 14) and (at para. 16) "in the case at bar, the Appellant promised, in an enforceable contract, to purchase the building, and that is an essential preliminary to the operation of the property".
The Queen v. London Life Insurance Co., 90 DTC 6001 (F.C.A)
The taxpayer had excess computer capacity that was needed to meet peak demands of its life insurance business but not otherwise, and which it provided for a fee to a wholly-owned subsidiary for sale by the subsidiary to the public. It was found that the taxpayer was engaged in a business separate from its life insurance business with respect to its dealings related to this excess computer capacity.
Re Seagrams Distillers (Ontario) Ltd. (1985), 54 OR (2d) 289 (Ont. D.C.)
The businesses of subsidiaries acting as sales organizations for their parent, a distiller, were found to be an integral part of that distilling business.
River Estates Sdn. Bhd. v. Dir. Gen. of Inland Revenue, [1984] BTC 20 (PC)
Since there was some doubt as to whether or not a forestry operation and a tree plantation operation were separate businesses, it was not unreasonable of the special commissioners to conclude that the taxpayer carried on separate businesses.
Re Aluminum Co. of Canada Ltd. (1984), 46 OR (2d) 614 (HC), aff'd 54 OR (2d) 249 (Ont. D.C.).
The business of one company does not embrace the business of a second company if the second company is not the agent or puppet of the first and is not under the direct management and control of the first. The business of one subsidiary of Alcan International Ltd., which consisted of providing research and development services for a fee to affiliated companies, was distinct from the manufacturing business of another subsidiary of Alcan International Ltd. [C.R.: "Tax Avoidance"]
Gloucester Railway Carriage and Wagon Co., Ltd., [1925] AC 469 (HL)
The taxpayer manufactured railway wagons, which it sold outright (outright or under hire purchase agreements) as well as letting out wagons on simple hire (i.e., no purchase options). After the First World War there was a great scarcity of wagons and the taxpayer decided to sell all the wagons which were being hired out. The Special Commissioners had stated that "we are unable to draw the very sharp line which we are asked to draw between wagons sold, wagons let on hire purchase and wagons let on simple hire...." Before concluding that the gain on this sale was a taxable profit, Lord Dunedin stated (at p. 474):
The hiring accounts were kept separate, but is was all one business.
Administrative Policy
7 May 2014 Memorandum 2014-0528251I7 - Surface Rentals for Wind Farms
Would income received by a farmer for the rental of land to a wind farm developer for the purpose of constructing and operating a wind farm be properly included in farming income. After noting that "generating electricity from a "wind farm" does not meet the definition of 'farming' in subsection 248(1)," CRA stated:
[W]hether or not the income from… the other activities can be included in the taxpayer's farming income generally depends on whether the other activities are considered to be incidental to the taxpayer's farming operations, or are, in fact, a separate business. …
The expression "incidental" implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether particular activities are incidental to the farming operation would include the quantum of income generated, the scale of operations and the relative capital or labour invested in the non-farming activity.
19 November 2013 T.I. 2013-0510351E5 - Steel Tanks and Oak Barrels of a Winery Business
The taxpayer in 2013-0503311E5 carried on a wine-making business that involved both farming activities (i.e., growing grapes) and non-farming activities (i.e., producing wine for sale). Its fermentation tanks and barrels were considered to likely qualify for class 29 purposes as property used primarily in the manufacturing or processing of goods for sale. In clarifying that the exclusion in Reg. 1104(9) of "farming" from "manufacturing or processing" did not apply, CRA stated:
[G]enerally where a farmer or farming corporation separates the activities of farming and the processing of farm products, the CRA will essentially consider the processing activity to be a distinct business from that of farming provided that there is a clear delineation of the income from each business activity, and that the income from the processing business is properly calculated and is not eligible for any of the special sections in the Act dealing with income from a farming business (such as the cash method of computing income in section 28…).
13 June 2012 T.I. 2012-0440381E5 -
Where a US-resident hockey player plays for a team that has a permanent establishment only in Ontario but he performs his duties of employment in part at arenas outside Ontario and outside Canada, s. 4 will require a reasonable allocation of his employment income to Canada as only the portion earned in Canada must be reported under s. 115(1)(a)(i). "The income allocation is usually calculated on a per diem basis."
29 February 2012 T.I. 2012-0435151E5 -
Respecting the question as to whether income earned by an individual taxpayer from the sale of electricity generated from a solar photovoltaic system to the Ontario Power Authority would be included in the computation of the income of the taxpayer from his business of operating a roofing business, CRA stated:
The CRA will generally consider income from activities undertaken outside the normal business operations of a taxpayer to be from the same business if the activities are incidental to the taxpayer's normal business operations and the income generated by these activities is not material in relation to the taxpayer's business revenue. The expression "incidental" is not defined in the Income Tax Act...but implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in each activity.
20 January 2010 Memorandum 2009-0348571I7
a Canadian resource corporation in the ordinary course of business had borrowed under long-term financings and entered into interest rate swaps (apparently to change its effective interest expense from a floating to fixed rate). The taxpayer submitted that payments made under these swaps did not reduce its resource profits because the swaps represented separate sources of income.
The Directorate advised the large case file manager that the payments made (or received) under the swaps should be sourced to the resource business in the course of which the borrowings had been made even though those borrowings had been repaid. Among other factors, in the financial statements the swap payments were treated as adjustments to the interest expense, and "resource activity" is defined in Reg. 1206(1) to include activities that are "ancillary to, or in support of" a qualifying production activity (para. (g)) and activities taken "as a consequence of" such production activity (notwithstanding the production activity may have ceased.)
17 July 1997 Memorandum 7-970054 -
The disposal of machinery would be considered as related and attributable to a mining business for purposes of ss.9 and 18(1)(a) even though such business was inactive and there were no mining operations.
88 CPTJ - Q.23
All amounts must be related to a source of income to be deductible under the Act. If there is no potential source of income, there is no deduction.
IT-206R "Separate Businesses" 1 January 1995
2. Whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon the degree of interconnection, interlacing or interdependence and the extent of the unity embracing the business operations. The fact that the business operations of a taxpayer are of different natures, for example manufacturing and selling, does not preclude them from being the same business if there is a sufficient interconnection, interlacing or interdependence between the operations.
3. When determining the degree of interconnection, interlacing, or interdependence between simultaneous business operations, factors to be considered could include, but are not to be restricted to, the following:
- (a) The extent to which the two operations have common factors that may be pertinent. For example do the two operations have the same: processes, products, customers, services offered to customers, types of inventories, employees, machinery and equipment.
- (b) Whether the operations are carried on in the same premises. For example, if a hardware store and a sporting goods store are operated in two distinct locations, it is possible that they should be looked upon as separate businesses, but if they are in one store, it is almost certain that they are one business.
- (c) One operation may exist primarily to supply the other. An example of this might be the carrying on of market-garden operations chiefly for the purpose of supplying a hotel with fresh produce; in these circumstances, the two operations likely should be regarded as one business, even if a small amount of the market-garden produce is sold elsewhere.
- (d) Whether the operations have differing fiscal year-ends.
- (e) Whether the taxpayer's accounting system records the transactions of both operations as if they were those of one business, or whether separate complete sets of records are maintained throughout the year; if the latter, too much weight should not be given to the possible merging of the results into one statement at the year-end for tax and other reporting purposes.
Paragraph 4(1)(b)
Articles
Markovitz, "Permanent Establishment - Home Office Relations", International Tax Planning, 1996 Canadian Tax Journal, Vol. 44, No. 4, p. 112.
Subsection 4(3) - Deductions applicable
Cases
Interprovincial Pipe Line Co. v. MNR, 68 DTC 5093, [1968] CTC 156, [1968] S.C.R. 498
The enactment of s. 139(1b) (now s. 4(3)) required the taxpayer to net related interest expense against interest income receivable by it from its U.S. subsidiary for purposes of computing the foreign tax credit available to it with respect to U.S. withholding taxes exigible on the interest income receivable by it from the U.S. subsidiary.
Administrative Policy
27 March 2013 Folio S5-F2-C1
Provided that s. 4(3) is satisfied, "allocation of expenses to a source of gross income in a particular foreign country for financial statement purposes is normally accepted for the purpose of computing a foreign tax credit for that country" provided this is done consistently (para. 1.86).
In allocating interest expense, a specific tracing method may be appropriate where the borrowed funds are used for identifiable purposes. Where there is a general purpose borrowing, allocation among countries based on relative asset values may be appropriate. The situs of security may not be relevant (para. 1.87). Provided that the overall limitations (e.g., under the rental property restriction rules) are respected, "capital cost allowance deductions may be arbitrarily allocated" amongst countries (para. 1.88).
Commentary
Where a taxpayer has a particular source of income, such as a business, s. 4(1)(a) requires among other things that the income from that source be computed only on the basis of taking deductions that may reasonably be regarded as being wholly applicable to that source. (The provision also refers to the potentially intractable concept of there being more than one source of income "in a particular place," and stipulates the same wholly-applicable rule respecting deductions in computing income from those sources in the particular place.) The [pin type="node_head" href="70-Interprovincial"]Interprovincial Pipe Line[/pin] case indicated that the purpose of what now is s. 4(1)(a) was "to prevent a taxpayer who might be engaged in two separate businesses not related to each other by reason of their nature from taking into account losses or expenses incurred in one in computing the taxable income of the other." (Note that [pin type="subtopic" href="70-Section4(3)"]s. 4(3)[/pin] effectively reversed the actual finding in this case, although not this dictum.)
Where the taxpayer is earning business income, the application of s. 4(1)(a) will depend on whether the taxpayer is viewed as carrying on more than one business. Various cases addressing this issue are discussed below and at [pin type="subtopic" href="931-Section1115a"]s. 111(5)(a)[/pin]. One of the early Canadian cases is [pin type="node_head" href="931-Utah"]Utah[/pin], where two operations were found to be separate businesses because there was no inter-connection, interlacing or interdependence of the two operations. This interconnection test is adopted in [pin type="node_head" href="70-IT-206R"]IT-206R[/pin]. Conversely, in [pin type="node_head" href="70-DuPont"]Du Pont[/pin], manufacturing divisions were found to be one business in light inter alia of the centralized management and financing of the divisions.
Operations of both selling and leasing equipment of the same general type have been found to be one business ([pin type="node_head" href="70-CAE"]CAE[/pin], [pin type="node_head" href="70-CanadianKodak"]Canadian Kodak[/pin]) even where, for accounting purposes, profits from the two operations were separately shown ([pin type="node_head" href="70-Gloucester"]Gloucester[/pin]). An operation of leasing two lines of products was also found to be a single business ([pin type="node_head" href="70-Hickman"]Hickman Motors[/pin]). An operation of using equipment (e.g., computer equipment) to the public when such equipment is not used in a business (e.g., an insurance business) of the taxpayer can constitute a separate business ([pin type="node_head" href="70-LondonLife"]London Life[/pin]).
It is likely that operations, of the same character and with common management, carried on at different locations will be found to be one business (see [pin type="node_head" href="70-Randall"]Randall[/pin]).
Expenses incurred with a view to potentially earning income from a business generally will be considered to applicable to that business even though, with the benefit of hindsight, they did not contribute to the success of that business (e.g., a loss from fraud, see [pin type="node_head" href="69-Ruff"]Ruff[/pin]).