AFM362 Lecture Notes - Lecture 5: Property Income, Contingent Liability, Deferral
28 Jun 2018
School
Department
Course
Professor
Passive = property e.g. dividends on shares, interests on savings
○
Check if income earned is passive or active•
The degree of activity is hard to be determined•
For a corporation, 5 or less employees employed to earn an income from property would count as passive
therefore property income.
•
Investment income earned by a corporation is generally considered income from property•
The profit of a business for a taxation year is to be determined by setting against the revenue from the business
for that year the expenses incurred in earning that income
•
"truer picture" approach = matching of expenses to the income that was generated by the expenditure •
In the absence of a specific provision, GAAP are applied to meet the objectives of the income tax system•
On reassessment, once the taxpayer shows he has done his part of complying with law and provided accurate
picture, it is on the onus of the Minister to show misrepresentation of another form of computation is better
•
Property income is considered return on equity and determines RRSP contribution limit○
Determined child care eligibility○
CCA for property income
○
Small business deduction for business income○
We distinguish between the two because:•
If has more than 5 employee, it is to earn business income•
However interest on A/R, interest on short-term investments, rents received from unused portion are
business income
○
Where any short-term investment becomes permanent - that is never depleted in the course of carrying on
the business, it is property income
○
Investment income earned is normally property•
There is an provision for an alternative fiscal period - deferral anti-avoidance○
Individuals who report business income must report it on a calendar year basis •
Profits from illegal business still taxable•
Illegal payments is prohibited not deductible•
Profits from betting, gambling, windfalls is not taxable as long as it is not organized of a business nature•
Section 67 is to restrict taxpayers from deducting unreasonable expenses•
50% of meals and entertainment expense be added accounting net income for tax purposes•
Business income versus property income
Any amount receivable by the taxpayer (including amounts receivable in future taxation years) for goods or
services rendered in the course of business in the taxation year are to be included in income
•
See page 196•
A reasonable reserve for unearned amounts can be taken - see the deduction section○
Amounts received or receivable is included, different from GAAP•
WIP at year end is considered inventory ○
Election can be made to exclude WIP from income ○
Amounts receivable in respect of services that have been billed •
Government subsidies, inducement payments to tenants, reimbursements, forgivable loans, or allowances
received in a form of payment
○
Inducement or reimbursements•
Payments received for a restrictive covenant •
Each partner in a partnership must include in his tax return the partner's share of partnership income•
Barter transaction •
Inclusions
Deductible using GAAP
○
Not a capital expenditure○
Incurred to earn business income or be expected to generate income related to the taxpayer's business or
property
○
Not personal/living expense○
Reasonable○
Generally, if an expense is not specifically in section 18, it is deductible if the expense is•
Personal expenses for travel away from home in the course of carrying on business is deductible •
Deductions
Write down of property (associated with capital expenditure) •
Only deductible in the year that it comes an unconditional liability○
Provisions for reserves/ contingent liability (hard to estimate) •
Properties not maintained in connection with business
○
Premiums for life insurance, annuities, and similar contracts○
Expenses for property maintained for the beneficiary of an estate or trust○
Personal and living expenses•
Payments on discounted bonds•
Club and recreational facilities•
A deduction of the cost of meals incurred a golf course will be allowed. Its not the same thing as golf course. ○
Maintenance of a yacht, camp, lodge, golf course unless it is used to provide to the public to boost business •
Political contribution - a separate tax credit is provided•
If the employee did include the allowance in his income, then there's no limit to this deduction. ○
Automobile expense allowance paid to an employee for the employment use of an automobile is limited if the
allowance to the employee is not included in his income. Then 54 cents for the first 5,000 km and 48 cents per km
after is the limit.
•
A deduction for interest paid on a tax refund is deductible
○
Payment under the Act such as federal income taxes, interest, penalties •
Payments for services to be rendered after the end of the year○
Payments of interest, tax, rent after the end of the year○
Payments for insurance after the end of the year○
Prepaid expenses - Only deductible in the year of outlay•
Expenses of investing in sheltered plans•
The workspace is the individual's principal place of business○
It is used on a regular and continuous basis for meeting clients, customers, to earn income for business○
Workspace in home - only allowed if one of the following is met•
In order for an expense that remains unpaid at the end of the taxation year to be deductible for tax
purposes, it must constitute a genuine liability of the taxpayer meaning there must be an enforceable claim
by the creditor with a reasonable expectation that the debt in fact will be paid.
○
Without genuine liability, the amount will be treated as a contingent liability and no deduct. ○
Accrued expenses•
Unpaid amounts in non-arm's length circumstances must be paid within two years of the end of the taxation year
or it'll be brought back into income on the first day of the third taxation year following that the payable was
declared
•
Unpaid remuneration must be paid within 179 days of the end of the taxation year or else it'll not be deductible
until the year in which it is actually paid.
•
See page 210•
Disallowed deductions
Chapter 4 - income from business
January 13, 2018 4:20 PM
AFM 362 Page 1
Document Summary
Check if income earned is passive or active. Passive = property e. g. dividends on shares, interests on savings. The degree of activity is hard to be determined. For a corporation, 5 or less employees employed to earn an income from property would count as passive therefore property income. Investment income earned by a corporation is generally considered income from property. The profit of a business for a taxation year is to be determined by setting against the revenue from the business for that year the expenses incurred in earning that income. "truer picture" approach = matching of expenses to the income that was generated by the expenditure. In the absence of a specific provision, gaap are applied to meet the objectives of the income tax system.
