Computation/Timing Principles Flashcards
Profit and Timing (What is it and sections)
Another aspect of profit is timing (when you include income and when you take a deduction)
S 9 (net income (profit) = revenue - expenses)
S 18 - some rules & limitations for deductions
GAAP (what is it & case law)
How do accountants treat a certain expense? When does GAAP allow a deduction to be taken? When does GAAP require an item be included in income.
Canderel - Generally use GAAP, but not decisive, whatever methodology yields an accurate picture of income.
Tax Accounting (who is received, who is receivable?)
Cash method - deduction taken and income included when received (employment)
Accrual - deduction taken and income included when receivable (S12(1)(b)
Case law for receivable/accrual basis
Colford - holdback payment. Receivable means a clearly legally enforceable right/some right to receive. Precarious right does not equal receivable.
Benaby - right to receive but not knowing amount means hard to say something is owed/receivable if you don’t know the amount.
West Kootenay - Amount known and service delivered, amounts owed could be reasonably ascertained
Maritime Telegraph - If bill sent or not, entitled to income then is deemed receivable.
What is a capital expense? Section, how are they treated? and case law
S 18(1)(a) - capital expenses are treated differently than other expenses
Capital expenses are deductible over time (or not at all)
British Insulated - money spent on pension. Does it create “enduring benefit” for the business? If so, capital expense.
Denison Mines - Must be new, tangible to create a capital expense. In mining operation could not see provision of enduring value.
Dominion Natural Gas - Legal expenses capital expense? Generally legal expenses are recurring. Here, found right to supply customer enduring benefit & capital expense.
Kellogg - spent money on legal expenses to protect trademark. Capital expenses are voluntary, if mandatory leans to current.
Canada Starch - money paid to ensure withdrawal of trademark dispute. Just confirmed right, did not create new enduring benefit for business.
Capital Expenses: Improvement or Maintenance (Case Law)
Canada Steamship - making something new is capital expenditure. Repairs are seen as current expenses, even if the repairs are huge.
Shabro Investments - making something stronger, better, improved and a different kind of repair from originally constructed is capital expense.
Goldbar Developments - bricks. Merely replaced. Repairs are involuntary, replacements are voluntary. Significant upgrades are capital improvements.
Deduction of Capital Expenses (Section)
S 18(1)(b) denies deductions for capital expenses.
S 20(1) helps create a capital cost allowance system, capital expense must be spent to gain or produce income to be found deductible under s 20.
Capital Cost Allowance System (Essentials)
Asset must be incurred to gain or produce income.
Cannot claim CCA if deducted as a “current” expense”
No CCA on land and shares (no depreciation here)
1/2 year rule (increases cost of property UCC + 1/2 (new asset)
Recapture - if over-depreciated property S 13(1) recaptures all the depreciation you claimed and is included in income (negative)
Terminal Loss - if took to little depreciation (positive UCC) S 20(16) then you get an immediate deduction for the depreciation you didn’t take.
Buildings and Land bought at same time (section, case law, what does it mean?)
S 68 - have to figure out what you paid for building and what you paid for land.
Bens Ltd - bought houses to expand bakery, before year end destroyed houses. Are you using to gain or produce income?
CCA Formula (and meaning)
System allows for deduction of expenses in a year for capital expenses that depreciate.
UCC = ACB - CCA + POD
S13(21) defines depreciable property
ACB = what you bought it for
POD = what you sold it for.
CCA = previous deductions taken.
