Chapter 6 Flashcards
9-11
basic rules for computing income from business or property
12 - 17
inclusions to income from business or property
18 - 19.1
limitations on including income from business or property
20-21
specific deductions from income from business or property (over rides 18-19.1)
67
Subdivision F - reasonability for expenses in computing income
67.1(1)
Subdivision F - expenses for meals and entertainment
Purpose Test
ITA 18(1)(a) is the Purpose Test, under which no deduction may be claimed for expenses unless they are incurred to earn income from business or property
Reasonability Test
ITA 67 is the Reasonability Test, under which no deduction for expenses may be claimed, except to the extent it was reasonable under the circumstances
Convert Accounting Net Income to NITP
ADD
(1) items that were not included in GAAP revenue on the income statement, but should be included in net income for tax purposes
(2) items that were deducted/expensed per GAAP on the income statement, but are not allowed to be deducted/expensed for tax purposes
DEDUCT
(1) items that were included in GAAP revenue on the income statement, but hsouldnot be included in NITP
(2) items that were not deducted per GAAP on the income statement, but may be deducted for NITP
Accrual Basis for Inclusions
ITA 12(1)(b) establishes the accrual basis for inclusions (include receivables)
ITA 12(1)(a) amounts for goods or services not yet rendered must be included (unearned revenue)
Deductible Reserves
20(1)(m) unearned revenue
20(1)(n) accounts receivable
* included in the next year’s income per 12(1)(e)
20(1)(l) doubtful debts
* included in the next year’s income per 12(1)(d)
20(1)(p) actual bad debts
Schedule 1 Reconciliation Method for Given Line Item
(1) was the amount included/expensed for accounting purposes?
(2) should the amount have been included/expensed for tax purposes?
(3) if the answer to (1) and (2) is different, an adjustment must be made
Work Space in the Home
18(12) a work space in the home may be deducted if
(1) it is the individual’s principal place of business, OR
(2) the work space is used exclusively for the purpose of earning income from business AND is used on a regular and continuous basis for meeting clients, customers, or patients of the individual
* where these conditions are met, all home expenses may generally be prorated for floor space related to business
* this may not create a loss on income from the office or employment, but may be carried forward
Net Income (Reconciliation)
inclusion per 9(1)
Income Taxes (Reconciliation)
not deductible per (18)(1)(t)(i)
Unearned Revenue (Reconciliation)
inclusion per 12(1)(a) and deductible per 20(1)(m)(i) for goods or (ii) for services
Life Insurance (Reconciliation)
deductible if used to secure bank loan per 20(1)(e.2)(i)
Financing Expense (Reconciliation)
20% deduction per annum per 20(1)(e)(iii), but note that 80% must be added to income in the year that the financing expense was initially incurred on the income statement
Landscaping (Reconciliation)
deductible per 20(1)(aa)
Amortization (Reconciliation)
not deductible per 18(1)(b)
Charitable Donations (Reconciliation)
not deductible per 18(1)(a), but a division C deduction is available
Reserves (Reconciliation)
also known as allowances, not deductible per 18(1)(e)
Sponsorship of Athletes (Reconciliation)
regular business expense deductible per the purpose test 18(1)(a)
Meals and Entertainment (Reconciliation)
50% of such expenses must be added back to income per 67.1(1)(a)
Staff Parties (Reconciliation)
up to 6 events per year are deductible per 67.1(2)(f)
Membership Dues (golf club, etc.) (Reconciliation)
not deductible per 18(1)(l)(ii)
Loss on Sale of Depreciable Assets (Reconciliation)
any loss on depreciable assets is must be added back to income per 18(1)(b) and a capital loss on depreciable assets is disallowed per 39(1)(b)(i)
Interest (Reconciliation)
deductible per 20(1)(c)
