Chapter 3 and 5 Flashcards
Days Per Quarter
Q1 = 90 days
Q2 = 91 days
Q3 = 92 days
Q4 = 92 days
78(4)
unpaid remuneration and other amounts [a bonus]; see also 248(1) “salary deferral arrangement”
unpaid remuneration and other amounts [a bonus]
78(4): a bonus must be paid within 180 days of the end of the taxation year to be deductible as a business expense;
see also 248(1) “salary defferal arrangement”: if a deferral is more than three years the corporation and employee must claim the amount when it is declared
248(1) “Employee” notes
factors for self-employed vs employee
- Control (over how work is done)
- Ownership of tools and equipment
- Ability to subcontract or hire workers
- Financial risk
- Responsibility for investment and management
- Opportunity for profit
Distinctions have resulted from case law and not the ITA
Factors to Distinguish between Self-Employed vs Employees
248(1) “Employee” notes:
- Control (over how work is done)
- Ownership of tools and equipment
- Ability to subcontract or hire workers
- Financial risk
- Responsibility for investment and management
- Opportunity for profit
Distinctions have resulted from case law and not the ITA
Income or Loss from Office or Employment (Subdivision A) - Inclusions
6(1)(a)
6(1)(a)
Income or Loss from Office or Employment (Subdivision A) - Inclusions
6(1)(k)
Automoblile Operating Expense Benefit
Automoblile Operating Expense Benefit
6(1)(k)
where the employer pays for operating expenses, there is a benefit that is the lesser of
1. (1/2) of the standby charge, or
2. $0.33 (prescribed rate) * personal km driven
Reasonable Standby Charge
6(2)
(A/B)(2%[Purchase Price][days used/30 then rounded up or down]) where
A is the lesser of personal km driven and B, and
B is 1667 * available months
OR
(2/3)(Leasing Costs -Insurance)
- reduced charge determined by A/B only available where km driven were primarily employment related
6(1)(b)
Personal or Living Expenses [allowances]
Personal or Living Expenses [allowances]
6(1)(b)
Employee Loans
80.4(1)
where employees receive loans at interest rates less than the prescribed rates, a benefit has been received;
see Reg. 4301c for prescribed rates
80.4(1)
Employee Loans; see Reg. 4301c for prescribed rates
Deemed Interest
80.5
the employee may deduct deemed interest as well as paid intereset if the loan is used to generate income, which is a Subdivision B expense on business income
“Deemed”
the same as
Employee Stock Option Benefit
7(1)
1. “out of the money”: include FMV less option price in income on exercise date; division C 50% deduction of benefit when calculating taxable income; for CCPC inclusion is deferred until disposition date
2. “in the money”: include FMV less option price in income on exercise date; no deduction available; for CCPC inclusion is deferred until disposition date, and deduction is granted if shares are held for two years after exercise date
Sales Expenses [of Commission Employee]
8(1)(f) is specific to a salesperson, given certain conditions, and allows all of the deductions that 8(1)(h) and [h.1] [travel expenses and motor vehicle costs] allows as well as other expenses, but limits maximum deductions to commissions income; the salesperson must choose between 8(1)(f) OR (h) and (h.1) when deducting expenses from income
Travel Expenses and Motor Vehicle Costs
8(1)(h) and (h.1)
8(1)(h) and (h.1)
Travel Expenses and Motor Vehicle Costs
Work Space in Home
8(13)
8(13)
Work Space in Home
Section 5
receipts that are considered employment income
Section 6
assigns dollar amounts to other receipts that must be included in income
Section 7
establishes rules to detmine income from employer-provided stock option plans
Section 8
lists very specific deductions that can be made from employment income
Capital Cost Allowance
20(1)(1) a deduction in the determination of Business or Property Income based on the capital cost of capital assets; only allowable on income-producing assets, and is analogous to amortization; the ITA requires the use of the declining balance method in the majority of capital property classes, whereby a percentage of the year end UCC is allowed to be deducted from income claimed as a CCA Subdivision B deduction from income; CCA deductions may be used at the discretion of the property owner
Capital Cost
Capital costs, or expenditure, are those incurred to purchase property, improve property, or create, enhance, preserve, or improve upon a business structure, such as machinery, equipment, automobiles, buildings, etc., and include cost freight installation, duties, non-refundable GST/PST etc. It is an acquisition cost. The capital cost would include an expenditure that preserves, enhances, or improves property but which is not simply ongoing routine maintenance. Legal expenses to negotiate a long-term lease on a building that will be used to carry on a business would be capitalized, although no property has been acquired, because the expenditure relates to the creation of a business structure. Capital costs are depreciable. To be capitalized, property must be for the purpose of earning income.
Classes of Depreciable Capital Property
The ITR sets out the classes of depreciable property and the methods, rates, and other rules to be applied to determine the maximum CCA that can be claimed in a given taxation year. ITR Schedules II through VI provide a detailed listing of depreciable property classes and rates for the determination of CCA. Prescribed rates vary from 4% to 100%, so the property class can have a significant impact on the CCA that can be claimed.
Additions to Capital Cost
improvements of capital are added to the capital cost if they
1. provide a lasting benefit
2. improve, and do not just maintain, an asset
3. does not create a new asset, but adds to an existing one
Undepreciated Capital Cost
13(20) “Undepreciated Capital Cost” or UCC is the capital cost of a depreciable asset class, less the cumulative CCA that has been taken to date; analagous to book value
UCC = capital cost of property acquired + recapture – terminal loss – CCA claimed - dispositions
Half-Year Rule
covered in Reg. 1100(2); under this rule the UCC base at the end of the relevant taxation year to which the required CCA rate is applied is reduced by one-half of the net additions to the class made during the year; in other words, CCA for net additions are prorated for a half year regardless of purchase date; this makes late-year asset purchases tax advantaged
Capital Gains on Dispositions of Capital Asset
When there is a disposition of depreciable property, the UCC of the class is reduced, at that time, by an amount equal to the lesser of
1) the proceeds of disposition, or
2) the capital cost of the property
If the proceeds of disposition exceed the capital cost (ACB) of the property, there will be a capital gain (and potential recapture if CCA has been claimed on the property). There can never be a capital loss on the disposition of capital property for tax purposes per ITA 39(1)(b)(i)
Recapture
ITA 13(1); If the disposition amount for capital property subtracted from the UCC is such that there is a negative balance in the relevant property class on the last day of the taxation year, that negative amount is included in income as recapture for that taxation year. Class 10.1 is an exception to this rule as there is no recapture for this class. Recapture only requires the existence of a negative UCC balance and applies regardless of whether there are any properties remaining in the class on the last day of the taxation year.
Terminal Loss
ITA 20(16); If, on the last day of the taxation year, the UCC balance for a class is positive and there are no properties remaining in the class then the positive balance can be deducted in full in that taxation year as a terminal loss. There are two exceptions. No terminal loss can be recognized for Class 10.1 and terminal losses can generally only be recognized for class 14.1 when the underlying business has ceased to be carried on.
Short Taxation Year Rule
Reg. 1100(3); limits the CCA that can be claimed where the taxation year is less than 365 days. The CCA is prorated based on the number of days of the shortened fiscal period of the taxpayer (the number of days in the short fiscal period divided by 365). All other provisions remain the same.
Separate Class Rules
Reg. 1101(1):
(1)If a taxpayer owns two or more depreciable properties of the same class, the properties are to be placed in separate classes if they are used in separate businesses or to earn income from separate properties.
(2)Building acquired after 1971 at a cost of $50,000 or more are required to be placed in separate CCA class where they are principally used for the purpose of earning rent.
(3) Separate class rules apply to passenger vehicles that are new or used an that have a capital cost in excess of $37,000 (Class 10.1).
Accelerated Investment Incentive (AccII)
Reg. 1100(2); replaces the half-year rule on eligible property by allowing greater than 50% CCA deductions in the year an asset is purchased; it is in a phase-out period from 2023 until 2027, allowing 100% of the maximum CCA in the year of purchase
Class 1
Buildings (4%, 6%, or 10%); in general Class 1 is a 4% declining balance class that applies to buildings acquired after 1987. This class also includes bridges, canals, culverts, subways, tunnels, and certain railway roadbeds. Rental buildings with a cost of $50,000 or more are placed in a separate Class 1.
Class 8
Various Machinery, Equipment, and Furniture (20%); Class 8 is a 20% declining balance class. It includes most machinery; equipment; structures such as kilns, tanks, and vats; electrical generating equipment; advertising posters; bulletin boards; and furniture not specifically included in another class.
Class 10
Vehicles (30%) Class 10 is a 30% declining balance class. It includes automotive equipment such as most vehicles (excluding luxury vehicles, taxis, and zero-emission vehicles), automotive equipment, trailers, and wagons (and more).
Class 10.1
13(7)(g) and Reg. 7307(1); Passenger Vehicles (Luxury Automobiles)(30%) Class 10.1 is a class established for passenger vehicles with a cost in excess of a prescribed amount excluding GST/HST or PST, which is set at $37,000 beginning Jan 1, 2024. Class 10.1 is a 30% declining balance class; however, each vehicle is automatically allocated to a separate class 10.1, and its capital cost is capped at $37,000, unless there is non-redeemable GST/PST, in which case the sales tax applicable to the $37,000 limit can be added to the capital cost. In the year of disposition, the allowable CCA for the year is reduced by 50%. Terminal losses and recapture are not allowed in the year of disposition.
Class 12
Computer Software and Certain Low-Cost Property (100%) Class 12 includes computer software that is not systems software, books in a lending library, dishes, cutlery, jigs, dies, patterns, uniforms and costumes, linen, motion picture films, and videotapes. This class is subject to 100% CCA rate in the year of acquisition.
Class 50
Computer Hardware and Systems Software (55%) This class includes computer hardware and systems software acquired after January 31, 2011. CCA on this class is calculated on a declining balance basis, using a 55% rate. Depreciable property in this class included computers, laptops, smartphones, tablets, and other devices and equipment that meet the definition of “general purpose electronic data processing equipment” (ITR 1104)
Class 13
ITR 1102(5) allows individuals to claim CCA on renovation costs on property they are leasing from its owner by recognizing a leasehold improvement as depreciable property. CCA is calculated on a straight-line basis, treating each leasehold improvement as if it were a separate property. The maximum CCA claim for a specific leasehold improvement will be the lesser of
1) 1/5th of the capital cost of the leasehold improvement; or
2) the capital cost of the leasehold improvement divided by the lease term remaining plus the first renewal option, if any. 40 years max for this figure.
If the lease term expires or is cancelled, the leasehold improvement will be considered to have been disposed of at that time for nothin
Class 14
limited life intangible assets (copyrights, patents, trademarks, etc); CCA on a straight-line basis over the legal life of the asset
Class 14.1
Goodwill and Other Intangible Property (5%) The rate for any additions to this class is 5% applied on a declining balance basis. Class 14.1 includes goodwill, incorporation costs, the cost of customer lists, and other intangible capital property that does not fit in any other class. In general, this will largely be intangible property with an unlimited life. No terminal loss can be claimed on class 14.1 until the business has ceased to be carried on by the taxpayer (but CCA can still be claimed on any positive balance no longer attached to any properties)
20(1)(a)
CCA is a Subdiv B deduction which is netted against property or business income, and included in 3(a) income or 3(d) losses; CCA cannot create or increase a rental property loss
Reg. 1100 (1)
a quick reference of classes and CCA rates
Schedule II
lists CCA rates, and terms included in CCA classes, near end of regulations
13(21)
definitions, including “undepreciated capital cost”
