Deck 2 TAX Flashcards
What is the treatment?
Income tax - current and deferred future taxes
Add
What is the treatment?
Interest and penalties on late payments of income taxes?
Add back
What is the treatment?
Accounting amortization on intangible capital assets?
Add back
What is the treatment?
Recapture of CCA
Add back
What is the treatment?
Accounting losses on disposal of Capital assets?
Add back
What is the treatment?
Taxable Capital Gains (Sole Proprietor)
For individuals earning self employed business income as sole-proprietor:
Included in the Taxable Capital Gains section of the individual’s personal tax return, not in business income.
What is the treatment?
Taxable Capital Gain: Corporation
Net income includes business income and aggregate investment income. Taxable Capital gains are part of Aggregate investment income.
What is the treatment?
Charitable Donations : Individuals
Not deductible for computing Net income but are the basis for a tax credit
What is the treatment?
Charitable Donations; Corporations
Division C deduction for corporations subject to 75% net income limitation
What is the treatment?
Political Donations: Individuals
Not deductible, but treated as the basis for a tax credit for individuals
What is the treatment?
Political Donations: Corporations
Not deductible
Under the Canadian Elections Act, corporations are not permitted to make federal political contributions.
What is the treatment?
Reserves and Contingent Liabilities
Reserves and Contingent liabilities are not deductible for tax purposes.
ITA 18(1)(d)
What is the tax treatment?
Warranties
This is an example of contingent liabilities not deductible for tax purposes.
Amounts paid to satisfy warranties are deductible on a cash basis for tax purposes.
2 Ways to make adjustments
1. Add back warranty expense deducted in determining accounting income and deduct cash paid for warranties
2. Add back warranty liability at the end of the year and deduct warranty liability at the beginning of the year. ( Add end deduct beginning)
What is the tax treatment?
Pensions
Example of reserve that cannot be deducted for tax purposes.
Contributions to the company’s pension plan are deductible on a cash basis if made within 120 days of the end of the taxation year.
There are 2 ways to make the required adjustments:
- Add back the pension expense deducted for accounting purposes and deduct that cash transferred to the trustee of plan assets.
- Add back pension liability at the end of the year and deduct the pension liability at the beginning of the year.
What is the tax treatment?
Meals and Entertainment
Are there any exceptions?
50% of the meals and entertainment are not deductible and need to be added back.
Exceptions:
- Food and beverages are provided in the ordinary course of the taxpayer’s business ( restaurant industry)
- The expense is billed to the client
- The meals and entertainment are included in the employee’s income as a taxable benefit
- All employees benefit such as a Christmas party limited to 6 events in a year.
What is the tax treatment?
Club dues and recreation fees
No deduction is allowed for the following:
- amounts to maintain a yacht, camp, lodge, golf course or facility
- membership fees or dues for dining, sporting, or recreation
What is the tax treatment?
Bond discount amortization
Interest on bonds is deductible to the extent that it is legally payable in the year (based on par value and coupon rate).
Bond discounts are added back to income over the debt term and deducted in the year the bond liability is extinguished.
What is the tax treatment?
Automobile mileage allowances
Add back automobile mileage allowances unless it is a taxable benefit to the employee.
If the employee pays a tax on it (due to it being a taxable benefit), no adjustment is needed.
Automobile Mileage payments to employees
limitation
Limited to
$.59 for first 5000 kms
and
$.53 for each additional km after that
Lease cost on passenger vehicles
Add back lease costs on passenger vehicles in excess of the permitted amount.
Equity losses on investments accounted for using the equity method of accounting
Add back
Dividends received on investments accounted for using the equity method of accounting
Add back
Asset write-downs (including impairments)
Add Back
Illegal payments, fines, and penalties
Add back - no deduction is allowed for illegal payment, fine, or penalty.
Foreign advertising
- Add back/Not deductible, if directed at the Canadian market by engaging the services of a foreign company or media (foreign print or foreign broadcast media)
- Deductible if directed at the non-Canadian market
Personal and living expenses
Not deductible as not incurred to earn business income.
Life insurance where the corporation is the beneficiary
NOT deductible unless the below are met
- Required as collateral for a loan
- Lender is a restricted financial institution
- Interest payable on the loan is deductible
if MET, the amount deductible is lesser of
- Premium paid
- Net cost of pure insurance
Deduction is the portion of the premium on part of the insurance policy that reasonably relates to the loan
Conventions expenses
Add back unless
- Organized by another business or professional organization.
- It is attended in connection with the taxpayer’s business or professional practice.
- It is held at a location that may reasonably be regarded as consistent with the territorial scope of the organization.
Limited to 2 in a year (NAB + another)
Unpaid amounts in a non-arm’s length transaction
If an amount remains unpaid at the end of two years after the end of the taxation year in which it was accrued, it is required to be brought back into income in the third taxation year
Carrying charges on vacant land (including interest and property taxes)
Deductible to the extent of income earned on the vacant land.
Non-deductible portion is added to the cost base of the land.
Soft costs on construction or renovation of a building
Soft costs incurred during the period of construction, renovation, or alteration of a building are not deductible. Because they are not deductible, they are added to the cost base of the building.
Soft costs include interest, professional fees, insurance, and property taxes.
Reserves: Bad debts
Reserves for bad debts (accounting allowance for doubtful accounts) are an exception to the general rule that reserves are not deductible.
Reserves: Bad debts
Estimated as a percentage of AR balance
A reserve determined as an estimated percentage of the accounts receivable balance would not be deductible.
Reserves: Bad Debt
Based on specific identified accounts
Reasonable reserves are deductible if based on anticipated bad debts. For instance, specific identified accounts, such as those unpaid over 90 days, may be deducted as a reserve.
Reserves: Bad Debt
Based on anticipated bad debt
If, for accounting purposes, the allowance for doubtful accounts is based on anticipated bad debts, no adjustment is required, as a reserve for bad debts based on anticipated bad debts is also deductible for tax
Reserves: Undelivered goods or services
Reserves for undelivered goods or services are an exception to the general rule that reserves are not deductible
Reserves: Undelivered goods when Cash received in Advance
Where the taxpayer receives cash in advance of providing goods or services to a customer, a reasonable reserve is deductible for goods / services that will be provided in the future
