ARCHIVED - Miscellaneous Receipts
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DATE: February 21, 1992
SUBJECT: INCOME TAX ACT
REFERENCE: Section 3 (also section 49, subsections 5(1) and 6(3), paragraphs 6(1)(a), 18(1)(h) and 54(c) and the definition of "property" in subsection 248(1))
This bulletin cancels and replaces Interpretation Bulletin IT-334R dated July 30, 1982.
This bulletin discusses the tax treatment of various receipts, such as strike pay, gambling winnings and forfeited deposits, which do not readily come within any of the more usual categories of receipt. The bulletin indicates whether or not and under what circumstances a particular type of receipt is to be included in calculating income for tax purposes.
Discussion and Interpretation
1. Section 3 brings into income, for tax purposes, a taxpayer's income from all sources and the taxable portion of capital gains net of allowable capital losses. In addition, and without restricting the generality of the previous sentence, section 3 and various other sections of the Act describe specific sources of income and the specific rules applicable in determining taxable capital gains and allowable capital losses.
2. Unless specifically exempted by a provision of the Act, a taxpayer will usually be taxable in full on all non-capital receipts from a source whether or not the particular source is enumerated in section 3. Similarly, unless specifically exempted by a provision of the Act, the capital gain provisions apply on the disposition of property that is capital in nature. "Property" is defined broadly in subsection 248(1) to mean property of any kind whatever and includes, among other things, a right of any kind whatever.Windfalls
3. Subject to the comments in the current version of IT-213, Prizes From Lottery Schemes, Pool System Betting and Giveaway Contests, and those in 4 and 10 below concerning Voluntary Payments and Gambling Profits, a taxpayer in receipt of an amount which can be described as a "windfall" is not subject to tax on the amount. Factors indicating that a particular receipt is a windfall include the following:
(a) the taxpayer had no enforceable claim to the payment,
(b) the taxpayer made no organized effort to receive the payment,
(c) the taxpayer neither sought after nor solicited the payment,
(d) the taxpayer had no customary or specific expectation to receive the payment,
(e) the taxpayer had no reason to expect the payment would recur,
(f) the payment was from a source that is not a customary source of income for the taxpayer,
(g) the payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer, and
(h) the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner.
The factors above are based on those set out in the decision of The Queen v. Cranswick, (1982) CTC 69, 82 DTC 6073 (F.C.A.).
Gifts and Other Voluntary Payments
4. Amounts received as gifts, that is, voluntary transfers of real or personal property without consideration, are not subject to tax in the hands of the recipient. However, when by virtue of an office or employment a voluntary payment or other valuable transfer or benefit is received by an employee from an employer, or from some other person, the amount of the payment or the value of the transfer or benefit is generally included in income pursuant to subsection 5(1) or paragraph 6(1)(a). (See also the current version of IT-470, Employees' Fringe Benefits.) Similarly, voluntary payments (or other transfers or benefits) received by virtue of a profession or by virtue of carrying on a business are taxable receipts. For example, where a lawyer was retained to perform certain services for the class "A" shareholders of a corporation and the class "B" shareholders considered that the lawyer's work had benefited them also, any payment made by the class "B" shareholders to the lawyer would be taxable income. This is so despite the fact that there was no contract or obligation between the class "B" shareholders and the lawyer concerning this payment. (Some related issues are discussed in the current version of IT-490, Barter Transactions.)
Accumulated Vacation and Sick Leave Credits
5. Payments in respect of accumulated vacation leave and sick leave are considered to be income from an office or employment and taxable under subsection 5(1) in the year in which the payment is received. However, as confirmed in the case of Harel v. DMR (Que.), (1977) CTC 441, 77 DTC 5438 (S.C.C.), an amount received upon or after retirement in respect of unused sick leave credits qualifies as a retiring allowance (see the current version of IT-337, Retiring Allowances).
Inducements Received to Change Employment
6. When an employee receives an amount which is intended as an inducement to leave his or her present employment and accept new employment, the payment is included in the recipient's income. Subsection 6(3) will normally apply to include in income such an inducement paid to an employee by a prospective employer. (Subsection 6(3) is discussed in the current version of IT-196, Payments by Employer to Employee.) Furthermore, regardless of who pays the amount, any payment received by an employee as an inducement to accept new employment is considered to be for the purpose of acquiring that taxpayer's experience and capabilities and to be by its nature an income item; see the case of Curran v. MNR, (1959) CTC 416, 59 DTC 1247 (S.C.C.), in which a payment made by a shareholder to induce an individual to resign a managerial position and accept new employment was included in the individual's income.
Fees Received for Entering into Service Contracts
7. Where a taxpayer's business consists of, or includes, the rendering of services to persons with whom service contracts have been made, fees charged for entering into such contracts are income from that business. This is not the case when the amount received is a true deposit that must eventually be returned to the depositor.
8. A taxpayer entitled to retain a deposit upon the cancellation of a contract may realize a capital gain on the forfeiture where the taxpayer's rights under the contract are capital in nature. Cancellation of the contract constitutes a disposition of the taxpayer's rights under that contract pursuant to clause 54(c)(ii)(B). However, if the rights disposed of under the contract are of an income nature, the amount forfeited will be ordinary income to the taxpayer. For a discussion of the tax treatment of a taxpayer who forfeits a deposit, see the current version of IT-461, Forfeited Deposits. If the deposit is on account of an option to purchase, the rules of section 49 apply (see the current version of IT-96, Options Granted by Corporations to Acquire Shares, Bonds or Debentures).
Novation of a Contract
9. When a taxpayer receives an amount to accept the substitution of a new contract for an existing one between the same or different parties (novation), there is a disposition of the rights under the former contract. In such cases, the taxpayer will either realize a capital gain or be in receipt of ordinary income. Whether it is a capital or income receipt will depend on the nature of the rights disposed of as a result of the novation of the contract.
10. Profits derived from bookmaking or from the operation of any gambling establishment (carried on legally or otherwise) constitute income from a business. In addition, an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; see the decision of MNR v. Morden, (1961) CTC 484, 61 DTC 1266 (Ex. Ct.). The issue of whether or not an individual's activities are such that he or she can be considered to be carrying on a gambling business is a question of fact that can be determined only by an examination of all of the circumstances and the taxpayer's entire course of conduct. Although no one factor may be conclusive, the following criteria should be considered in making the determination:
(a) the degree of organization that is present in the pursuit of this activity by the taxpayer,
(b) the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance,
(c) the taxpayer's intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood, and
(d) the extent of the taxpayer's gambling activities, including the number and frequency of bets.
It is clear from various decisions of the courts that earnings from illegal operations or illicit businesses, such as illegal gambling and fraudulent business schemes, are not exempt from tax. (See for example, the decisions in The Queen v. Poynton, (1972) CTC 411, 72 DTC 6329 (Ont. C.A.) and MNR v. Eldridge, (1964) CTC 545, 64 DTC 5338 (Ex. Ct.).) Hobbies
11. In order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit. Where such an expectation does not exist (as is the case with most hobbies), neither amounts received nor expenses incurred are included in the income computation for tax purposes and any excess of expenses over receipts is a personal or living expense, the deduction of which is denied by paragraph 18(1)(h). On the other hand, if the hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit; if so, the net income may be taxable as income from a business. The current version of IT-504, Visual Artists and Writers, discusses the concept of "a reasonable expectation of profit" in greater detail. Where a hobby consists of collecting personal-use property or listed personal property, dispositions should be accounted for as described in the current version of IT-332, Personal-Use Property.
Union Members Assistance
12. A member of a union who is on strike or locked out need not include in income payments of the type commonly referred to as "strike pay" that are received from his or her union, even if the member performs picketing duties as a requirement of membership. In the decision of the Supreme Court of Canada in Wally Fries v. The Queen, (1990) 2 CTC 439, 90 DTC 6662, payments by way of strike pay were held not to be "income from a source". On the other hand, payments made by a union to its members for services performed during the course of a strike are included in income if the member is employed by or is a consultant to the union whether permanently, as a member of a temporary committee or in some other capacity. Regular salary, wages and benefits received by employees of unions are subject to tax in the usual manner.
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