4.7 Prohibited Deductions (13) Flashcards
Prohibited deductions – s 23
Certain deductions which are allowable under general deductions formula may be prohibited by one of provisions in s 23
● Private and domestic expenditure – s23(a) and (b)
● Losses or expenses recoverable under a contract of insurance, guarantee, security or indemnity – s 23(c)
● Taxes, penalties and interest on tax – s 23(d)
● Provisions – s 23(e)
● Expenses to produce exempt income – s 23(f)
● Restraint of trade payment s- 23(l)
● Expenses relating to employment – s 23(m)
● Fines and unlawful activities – s 23(o)
● Expenses incurred in production of foreign dividends – s 23(q)
● Premiums on life and unemployment polices – s 23(r)
Private and domestic expenditure – s 23(a) and (b)
● Section 23(a) prohibits the deduction of the cost of maintenance of the taxpayer, his family or home (groceries, etc)
● Section 23(b) prohibits the deduction of any private or domestic expenses
Losses or expenses recoverable under a contract of insurance, guarantee, security or indemnity – s 23(c)
Any losses or expenses which are recoverable are not deducted.
However any portion not recovered may be deducted.
If it’s uncertain whether insurance proceeds will be received by end of year they may deduct but if it’s recovered will have to add back to income in next year.
Taxes, penalties and interest on tax – s 23(d)
● Any tax, duty, levy, interest or penalty imposed under Income Tax Act
● Any additional tax imposed under the VAT Act
● Any interest or penalty payable due to late payment of any tax, duty or levy
The following taxes may be claimed to the extent that they form part of a deductible expense:
● VAT
● Customs duty
● Stamp duty
● Uncertificated securities tax
● Transfer duty
Provisions – s 23(e)
Taxpayer may not claim provisions for future expenses, unless specifically provided for (eg. Doubtful debts)
Expenses to produce exempt income – s23(f)
Expenses incurred in production of exempt income are not deductible.
If produces both income and exempt income then a portion will be allowed.
Calculated as % of expense based on income
Ie. (Gross income - Exempt income) / Gross income
Restraint of trade payments – s 23(l)
Not allowed except as allowed under s 11(cA)
Expenses relating to employment – s 23(m)
Restricts the deduction of expenses for individuals who earn employment income (other than mainly commission) to the following expenses:
● Section 11F – Contributions to retirement, pension and provident funds
● Section 11(nA) and 11 (nB) – refund of persons salary or refund of restraint of trade payment
● Section 11(c) legal expenses related to employment
● Section 11(e) wear and tear on assets used in employment
● Section 11(i) bad debts allowance on salary amounts
● Section 11(j) doubtful debts allowance on salary amounts
● Home office expenses (income mainly commission and work performed mainly in home office)
● Donations to certain PBO’s
Fines and unlawful activities – s 23(o)
Prevents the deduction of bribes and unlawful kickbacks and any fine or penalty charged as a result of unlawful activities. (eg. Traffic fines)
Expenses incurred in the production of foreign dividends – s 23(q)
Taxpayers will no longer be allowed to deduct any such expenses.
Premiums on life and unemployment policies – s 23(r)
Prohibits the deduction of any premium for a policy that covers: (because you’re not taxed on proceeds paid out)
● Illness
● Injury
● Disability
● Death
● Unemployment
Employees home office allowance
If the employee is required to work mainly from home and they have a room specifically equipped and used regularly and exclusively for this purpose it is common to pay a home office allowance.
This is included in gross income but then can claim expenses relating to the office on a pro rata basis. (Total household expenditure X Area used) / Total area of residence
Even if you don’t get an allowance you can claim home office expenses
