Chapter 4 - Income From Business: General Concepts & Rules Flashcards
What is a business?
S248 refers to an undertaking of any kind and includes an “adventure in the nature of trade” (a scheme designed to make a profit) but excludes employment income.
Last chapter we discussed the common law test distinguishing employment from self-employment (business) income.
S9(1) refers to income from business as the profit therefrom, suggesting revenue net of related expenses.
GAAP or generally accepted business practices be used in calculating “profit” subject to any specific adjustments mandated by the ITA. Therefore GAAP is used as the starting point in all computations of business income. A reconciliation format is then used to add and subtract the various amounts as mandated by tax law.
Business income vs capital receipt:
Another set of common law tests has evolved to distinguish income (business or property) from capital receipt. (Next chapter we will provide information on how to distinguish property income from business income. That will complete our 4 major sources of income.) This is necessary in determining the appropriate tax rules and deductions to consider, but also because capital gains have historically been more favourably taxed than income.
The common law tests are:
Primary Intent
Secondary Intent
Primary Intent
Primary Intent - Was the taxpayer’s intent at the TIME OF PURCHASE of the asset, to resell it at a profit?(like inventory) If so, then business income or loss will result on the sale of this asset. Or, was the taxpayer’s intent at the TIME OF PURCHASE of the asset, to use it within a larger business activity, to assist in the income generating activity?(like capital assets) If so, then the sale of this asset will be considered capital in nature.
Secondary Intent
Secondary Intent - Did the taxpayer have, at THE TIME OF PURCHASE of the asset, a secondary motive (“escape hatch”) of reselling at a profit, should the primary intention (capital use) not be accomplished for any reason. For the CRA to be successful with this test, they must demonstrate that the taxpayer had some “specialized knowledge” at the TIME OF PURCHASE which would make the existence of such secondary intent, likely. This is normally accomplished by establishing that the purchase and sale transactions closely resembled the type of transactions which the taxpayer carried out on a regular basis to earn business or employment income. (Eg A real-estate agent or broker by profession, who enters into a transaction involving their own purchase and ultimate sale of real property. Or, a stock broker by profession who enters into a transaction involving their own purchase and ultimate sale of stocks.)
