Chapter 6 Flashcards
What is a business income?
Business income is income you earn from a profession, a trade, a manufacture or undertaking of any kind, an adventure or concern in the nature of trade, or any other activity you carry on for profit and there is evidence to support that intention. For example, income from a service business is business income.
Business versus capital, why is it important?
The distinction between capital gains and business income is important because capital gains receive preferential income tax treatment over business income. The main criteria used to distinguish capital gains from business income have been developed through court precedent.
Business income is inventories and Capital Income is Capital gains and losses
Business versus capital requirements?
Intention
The taxpayer’s intention for how to utilize the asset is the most important consideration. If the taxpayer intends to sell the item quickly for a profit, it should be considered inventory, while the intention for capital assets is to use them to earn income.
Ownership Period
Typically, capital assets are owned for longer periods than inventory, which is turned over quickly.
Frequency of Transactions
Typically, inventory assets are held for a short period of time and sold quickly, several times throughout the fiscal period. On the other hand, capital assets are held for a long period of time, and disposed of rarely.
Supplemental Work on Property
Typically, capital assets will be maintained and repaired several times to ensure the asset can be utilized for a longer period of time. Inventory is not usually maintained or repaired to the same extent as capital assets, and often damaged inventory is disposed of immediately.
Basically if frequency and ownership is short, it is inventory, if they are high it is capital asset. Intention is key, if person wants to sell the asset quick it is considered inventory but if they intend to hold onto it, it is capital asset. Inventory is less repaired and maintained than a capital asset.
How do we calculate reserve for Long term receivables?
This reserve is to defer the profit from the sale of inventory which results in a long term accounts receivable
– Proceeds must be received at least 2 years after the date the property is sold
– Reserve is limited to a maximum of 3 years (e.g.
the current year and the following 2 years)
How is reconciliation for a business done?
Start by net income
Add :
Income tax expense
Ammortization
Anything related to licensing
Add: Corporation benefits
Benefit
What do we do with golf?
It is never deducted, always added to income
Benefit
What do we do with foreign advertising?
If it is done in a foreign jurisdication and aimed at your clients it can be deducted otherwise it is added.
Benefit
How do we calculate the mileage benefit?
We first add up the total milage used by employees = A
Take to total mileage and multiply by given rate in the question = B
Then we use the rate sheet to calculate “$0.61/km for first 5,000, $0.55/km for remainder” = C
Now we take A - B (difference) and that is what will be added to income calculation.
What are the deductions for business income?
Landscaping
Warranty costs
Modifying buildings to improve access for disabled person
Deferred profit sharing plan
Contribution to RPP
How do membership fees work?
If they are business related they are entertainment expenses that will be deducted by 50%
If they are non business related, they are fully taxable and added to income
Deduction
Incorporation expenses
Incorporation expenses are deducted
Deduction
Meals and entertainment for businesses
Meal and entertainment expenses are considered to include meals with customers;
ticket costs to attend concerts, theatre, and sporting events; expenses to entertain guests at
clubs (social clubs and night clubs); the cost of cruises; the cost of private boxes at sporting
events; and the cost of hospitality suites or room rentals for entertainment purposes. The CRA
clarifes that meal expenses claimed while on vacation would be disallowed entirely. They add
that the cost of season tickets to a sporting event would also be completely disallowed unless
there was evidence that the cost represented a promotional expenditure, in which case 100% of
the expense would be allowed.
Additions and subtractions to a reconciliation schedule
List of additions to business income
- Interest income
- Dividend income
- Rental income
- Sale of assets
- Gains from investments
- Royalty income
- Service fees
- Revenues from sales
- Grants and subsidies
- Tax credits
- Insurance reimbursements
- Foreign exchange gains
- Profits from partnerships
- Profits from joint ventures
- Gains on disposal of fixed assets
List of deductions to business income
- Cost of goods sold
- Depreciation
- Interest expense
- Advertising expenses
- Employee wages and benefits
- Rent and utilities
- Professional fees
- Insurance
- Charitable contributions
- Taxes
