Basic Rules: Concept of Business Income

Question 1

What is income from a business?

Answer 1

• Income from a business is the profit for the year.
• Income is the income after the deduction of expenses currently incurred to produce it.

Question 2

What are the rules for calculating profit?

Answer 2

Any method may be used that is not inconsistent with:

1. the provisions of the Income Tax Act;
2. established case law principles or “rules of law”; and
3. well-accepted business practices

Question 3

GAAP refers to what two standards?

Answer 3

1. (IFRS) International Financial Reporting Standards - for public companies
2. (ASPE) Accounting Standards for Private Enterprises - for private companies

Question 4

How is GAAP used?

Answer 4

• In the absence of a specific provision of the Act or a clearly stated legal principle, reliance on GAAP may provide a reasonable guideline.
• Where GAAP envisage more than one method of determining income, choose the method that provides the truer picture of income (“truer picture” approach. (ie. using the matching principle: matching expenses with revenue).