Business Income Flashcards
Income tax — current and deferred / future taxes
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Interest and penalties on late payment of income taxes
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Accounting amortization on tangible and intangible capital assets
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CCA is a permitted deduction for tax purposes, so accounting amortization is not deductible
Recapture of CCA
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Accounting losses on disposal of capital assets
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Taxable capital gains
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For an individual
-earning self-employed business income as a sole proprietor, taxable capital gains are included in the taxable capital gains section of the individual’s personal tax return
For a corporation
Taxable capital gains are classified as aggregate investment income.
Charitable donations
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Not deductible when computing net income for tax purpose, but treated as:
• the basis for a tax credit for individuals (see eBook chapter on tax credits)
• a Division C deduction for corporations (see eBook chapter on taxable income for corporations), subject to 75% net income limitation
Political donations
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Not deductible, but treated as the basis for a tax credit for individuals
Under the Canadian Elections Act, corporations are not permitted to make federal political contributions.
Scientific research expenditures deducted for accounting purposes
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Reserves and contingent liabilities
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Warranties
A warranty liability is an example of a reserve that is not deductible for tax purposes. Amounts paid to satisfy warranties are deductible on a cash basis for tax purposes.
There are two ways to make the required adjustments for warranties:
• Add back warranty expense deducted in determining accounting income, and deduct cash paid for warranties.
• Add back the warranty liability at the end of the year, and deduct the warranty liability at the beginning of the year.
Pensions
A pension liability is another example of a reserve that is not deductible for tax purposes.
Contributions to a company pension plan are deductible on a cash basis if made within 120 days of the end of the taxation year.
There are two ways to make the required adjustments for pensions:
- Add back the pension expense deducted in determining accounting income, and deduct cash transferred to the trustee of plan assets.
- Add back the pension liability at the end of the year, and deduct the pension liability at the beginning of the year.
Meals and entertainment expenses
Add back 50%
Club dues and recreation fees
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Bond discount amortization
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Automobile mileage allowances, unless the allowances are a taxable benefit to the employee, in which case no adjustment is required
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Lease costs on a passenger vehicle in excess of the permitted amount
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Equity losses on investments accounted for using the equity method of accounting
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Dividends received on investments accounted for using the equity method
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Asset write-downs (including impairments)
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Illegal payments, fines, and penalties
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Foreign advertising
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Not deductible for tax purpose if the expenditures are made for advertising in foreign print or foreign broadcast media and the advertising is directed primarily at the Canadian market.
Deductible if the advertising is directed to a non-Canadian market.
Personal or living expenses
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Not deductible for tax purposes, as they are not incurred to earn business income.
Life insurance where the corporation is the beneficiary
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Not deductible unless the following requirements are met:
• It is required by the lender as collateral for a loan.
• The lender is a “restricted financial institution.”
• Interest payable on the loan is deductible.
If these requirements are met, the amount deductible is the lesser of:
• premiums paid
• the net cost of “pure insurance”
In addition, the deduction is the portion of premiums on the part of the life insurance policy that reasonably relates to the loan.
Convention expenses
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Not deductible unless all of the following criteria apply:
- It is held by a business or professional organization.
- It is attended in connection with the taxpayer’s business or professional practice.
- It is held at a location that may reasonably be regarded as consistent with the territorial scope of the organization.
Limited to two conventions per year.
Foreign taxes paid
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Not deductible to the extent they are claimed as a tax credit.
Unpaid amounts in a non-arm’s length transaction
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If an amount remains unpaid at the end of two years after the end of the taxation year in which it was accrued, it is required to be brought back into income in the third taxation year.
Carrying charges on vacant land (including interest and property taxes)
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Deductible to the extent of income earned on the vacant land. Non-deductible portion is added to the cost base of the land.
Soft costs on construction or renovation of a building
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Soft costs incurred during the period of construction, renovation, or alteration of a building are not deductible. Because they are not deductible, they are added to the cost base of the building.
Soft costs include interest, professional fees, insurance, and property taxes.
Reserves
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Exceptions
Reserves for bad debts
-Reasonable reserves are deductible if based on anticipated bad debts.
-A reserve determined as an estimated percentage of the accounts receivable balance would not be deductible.
Reserves: Undelivered goods or services
Where the taxpayer receives cash in advance of providing goods or services to a customer, a reasonable reserve is deductible for goods / services that will be provided in the future.
If a reserve has been claimed for accounting purposes (amount received is included in unearned income or revenue), no adjustment is required.
Reserves for an amount not due under an instalment sales contract
A reasonable reserve may be claimed for an amount not due under an instalment sales contract. The reserve may be claimed for three years (including the year of the sale).
A reserve that is deducted in one year must be brought back into income in the following year, and a new reserve may be claimed if some of the proceeds are not yet due. Due means an enforceable right to immediate payment.
Unpaid remuneration
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CCA
Deduct
Terminal losses
Deduct
Financing expenses
Deduct
Costs incurred for the purposes of issuing shares or borrowing money are deductible on a straight-line basis over five years [20(1)(e) deduction].
If the loan is paid off (prior to five years), any remaining amount may be deducted in that year.
Bond premium amortization
Deduct
Accounting gains on disposal of capital assets
Deduct
Allowable capital losses
Deduct
Scientific research expenditures deductible for tax purposes
Deduct
Pension contributions to the trustee of the pension plan assets
Deduct
Allowable business investment losses
Deduct
Landscaping costs that have not been deducted in determining accounting net income
Landscaping costs paid in the year are deductible for tax purposes if they are paid for landscaping around a building used in the business.
Equity income on investments accounted for using the equity method of accounting
Deduct
