Ch7: Income From Property

Question 1

What is the general concept of income from property?

Answer 1

Passive income:
- little or no effort required
- includes interest, rent, dividends, and royalties
- does not include capital gains

Question 2

What is interest as a deduction?

Answer 2

Either all deductible or none deductible
- based on Canadian approach: does the borrowed money have the potential to produce income? E.g., buy company, shares, rental property (proration if you live in portion of your rental property)
- if yes: all deductible
- if no (personal purposes): none deductible

Question 3

Interest as a deduction: non-deductible amounts include

Answer 3

If amount is:
- to purchase RRSPs or TFSAs loans
- for personal loans
- to pay late income tax payments

Question 4

What is interest as an inclusion?

Answer 4

Corporations:
- ITA 12(3) requires full accrual
- generally the same as GAAP

Individuals:
- ITA 12(1)(c) allows use of cash basis (usually this one), receivable basis, or full accrual.
- generally speaking, individuals report interest income on a cash basis unless the amount receivable takes more than a year. In that case, you need to accrue the amount to include in income.

Accrual rules - ITA 12(4):
- annual accrual: interest must be accrued on each anniversary date of debt

Question 5

What is rental income (rental loss)? General and special rules.

Answer 5

General rules:
- rents included on an accrual basis
- deductions: interest, insurance, property taxes, maintenance, management fees, CCA (restricted).

Special rules:
- separate class for each rental property with a cost greater than $50,000
- CCA cannot be used to increase or create a rental loss.

Question 6

What are cash dividends?

Answer 6

1. Non-eligible dividends (usually paid by CCPCs)
   - gross up: 15% of actual dividends received (taxable dividend)
   - federal credit: 9/13 of gross up (federal dividend tax credit against your federal taxes payable)
2. Eligible dividends (usually paid by public companies)
   - gross up: 38% of actual dividends received (taxable dividend)
   - federal credit: 6/11 of gross up

Question 7

What are stock dividends?

Answer 7

Definition: I received more shares of a company, or company paid me a dividend with its shares.
- treated exactly like cash dividends for tax purposes (taxable dividend).
- amount of dividend added to ACB of shares (when you get shares, value of stock dividend becomes the cost of your shares).

Question 8

What are capital dividends?

Answer 8

Only CCPCs. Answer should always be 0.
- paid from non-taxable portion of capital gains (received tax free & does not reduce ACB)

Question 9

What is foreign source income?

Answer 9

Non-business income:
- include 100% of the GROSS foreign investment income in net income (amount before taxes paid to the foreign government).
- will receive a credit against tax payable for amounts withheld (credit maximum is 15% for individuals)

Business income:
- include 100% of the GROSS foreign investment income in net income (amount before taxes paid to the foreign government).
- will receive a credit against tax payable for amounts withheld (no limit)

Question 10

What are shareholder benefits?

Answer 10

When company pays for your personal expenses. Examples:
- low or interest free loans
- automobile benefits
- non-business travel
- improvements to personal residences

For non-business travel and improvements to personal residences, the amount paid by the corporation must be included in income as a benefit and the amount is not deductible to the corporation (company cannot claim —> disallow the expense)