Calculate Individual Tax Flashcards
Is mortgage interest deductible?
Interest on funds borrowing for investment in income-producing asset would be deductible
However it is necessary that the tracing of the borrowing to the use of the funds is clear
Cell phone for self-employed individual
Business use of cell phone would be deductible as a business expense
However the overall cost of the plan must be reasonable and for the corporation to deduct the cost it would have to reimburse you for the business-use portion.
If you want to claim on personal tax return, you could have the corporation require you to incur the cell phone expense as part of employment which would allow a deduction for the business amount.
Business Investment Loss
Taxation
Business investment loss (Taxation)
* For tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil
o Generally, this will yield a capital loss equal to the ACB of the shares
* A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss
o Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source
o The ABIL can be carried back up to three years or forward up to 10 years
o If the ABIL is not used by the end of the 10 years, it will become a capital loss
Reference: ITA 50(1), 39(1)(c), 111
Principal Residence Exemption (PRE)
Taxation
Principal residence exemption (PRE) (Taxation)
The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.
* The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer.
* Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year
* A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year
o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family
* If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence
* To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence
Reference: ITA 54; 40(2)(b)
Replacement property rules
Taxation
Replacement property rules (Taxation)
* In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain
* If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively.
* To be eligible to defer the gain, the replacement property rules must apply:
o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use)
o Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer
Reference: ITA 13(4), 44
