Ch.7 Business income

Question 1

Determination of business income

Answer 1

1. Amounts that increase accounting net income but are not subject to tax - deduct
2. Amounts that have not been included in accounting net income but are subject to tax - add
3. Amounts that are deductible in determining accounting net income but are not deductible for tax purposes - add
4. Amounts that have not been deducted in determining accounting net income but are deductible for tax purposes - deduct

Question 2

Items to add back

Answer 2

• any expenses not incurred to earn business income must be added back for tax.
  any unreasonable amounts are added back in the reconciliation (only the reasonable amount may be deducted). A reasonable amount is generally considered to be the amount that would be paid to an arm’s length party.
  eg.
  income tax - current and deferred
  interest/penalties on late payment on income tax
  amortization - accounting
  recapture
  acctg loss on disposal of asset
  taxable cap gain
  charitable donation
  political donation
  scientific research for acctg purposes
  reserves and contingent liabs
  warranties
  pensions
  meals / entertains - 50%
  club dues
  bond discount amortization
  auto milage - $0.59 for the first 5,000 kilometres
  • $0.53 for each additional kilometre after that
  Lease costs on a passenger vehicle in excess of the permitted amount
  Equity losses on investments accounted for using the equity method of accounting
  Dividends received on investments accounted for using the equity method
  Asset write-downs (including impairments)
  Illegal payments, fines, and penalties
  Foreign advertising
  Personal or living expenses
  Life insurance where the corporation is the beneficiary
  Convention expenses
  Foreign taxes paid
  Unpaid amounts in a non-arm’s length transaction
  Carrying charges on vacant land (including interest and property taxes)
  Soft costs on construction or renovation of a building
  Reserves: Bad debts
  Reserves: Undelivered goods or services
  Reserves for an amount not due under an instalment sales contract
  Unpaid remuneration

Question 3

items to deduct

Answer 3

cca
terminal loss
Financing expenses
Bond premium amortization-Interest on bonds is deductible to the extent it is legally payable in the year
Accounting gains on disposal of capital assets
Allowable capital losses
Scientific research expenditures deductible for tax purposes
Pension contributions to the trustee of the pension plan assets
Cash paid for warranties expenditures
Allowable business investment losses
Landscaping costs that have not been deducted in determining accounting net income
Equity income on investments accounted for using the equity method of accounting