AFM202 Chapter Notes - Chapter 1: Property Income, Operating Lease, Accrual
18 May 2018
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• net income for tax purposes adds up net income from different sources such as employment
income, business and property income, capital gains, and other income and deductions.
• After computing net income for tax purposes, various deductions from net income are allowed
under Division C of the Act.
• Taale ioe is a tapaer’s et ioe for ta purposes less a appliale Diisio C dedutios
4.1 business and property income
• Tapaer’s ioe for a taatio ear fro a usiess or propert is the tapaer’s profit fro the
business or property.
• Any expenditure incurred to earn income is deductible (some are not deductible and some are
capitalized and amortized over time)
• Busiess ad propert ioe is iluded i a tapaer’s ioe usig arual aoutig. arued
revenue and expenses are included)
• RULE 1, if an expenditure is incurred in order to earn income, then it is likely deductible
• RULE 2, also think about if it is a current or capital expenditure. Current expenditures that are
incurred to earn income are typically deductible in the year incurred; whereas, capital expenditures
incurred to earn income are typically deductible over time (capitalized and amortized)
• Leases are not capitalized for tax purposes. It will be deductible in the year. As long as it incurred
to ear ioe ad are reasoale, does’t atter hether the lease is a apital fiae or
operating lease.
• Employment income is not considered business income.
• Hobbies are not carried out in order to earn profits and are not considered a business (stamps
collection). Expenditures regarding hobbies are not deductible
• Determining whether a person providing services is an s earning employment or self employed and
earning business income is sometimes difficult
• Non profit organizations are typically exempt from income taxation
• Capital gains are not considered to be business income or property income
• Property income is income earned from owning assets
• Since capital gains and losses are not part of the computation of income from property, expenses
incurred to earn capital gains are not deductible
• Typical property income includes rent, interest and dividends
• Typical expenses that may be deducted from property income include interest, investment counsel
fees, accounting and tax return preparation fees, and expenses related to owning a rental property.
• There are no tax consequences when money is borrowed or repaid.
• Any interest charged on the debt may be deductible to the payer and must be included in the
income of the lender.
• Interest expense on money borrowed to earn business or property income is typically deductible.
• If the borrowed money was used to earn tax free income like investments held in RESP, then the
interest expense is not deductible
• Legal fees paid in the year by a taxpayer related to an objection or appeal of a CRA notice of
assessment are deductible in the year paid.
• Property income is included in income using accrual accounting rules
• Compound interest expense must be paid in the taxation year in order to be deductible
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Document Summary
Current expenditures that are incurred to earn income are typically deductible in the year incurred; whereas, capital expenditures incurred to earn income are typically deductible over time (capitalized and amortized) Interest expense on money borrowed to earn business or property income is typically deductible. If the borrowed money was used to earn tax free income like investments held in resp, then the interest expense is not deductible. Individuals accrue interest each year to the anniversary day of their investment contract. Business purposes: any meals or entertainment included in the cost of the convention is 50% deductible. If it is included in the overall cost and not known then per day is charged; hence, only. 50% of this amount will be deductible: corporations often do not register for or (cid:862)atte(cid:374)d(cid:863) (cid:272)o(cid:374)(cid:448)e(cid:374)tio(cid:374)s. i(cid:374)stead e(cid:373)plo(cid:455)ees of the corporation register. Intracompany meetings, seminars and training courses are not considered to be conventions.
