Deductions

Question 1

Interest

Answer 1

• Interest is only deductible if it is incurred to earn income. Interest purchase a property that will not earn income is capitalized with the property.
• Interest is always calculated on a daily basis; e.g. 153/365

Question 2

Rental Property

Answer 2

• CCA cannot be claimed to create or increase a loss on rental property unless it belongs to a corporation whose principal business is the leasing, rental, development or sale, or any combination thereof, of real property owned by it.

Question 3

CCA - less than max procedure

Answer 3

Where less than the maximum capital cost allowance is taken, the less than maximum amount should be taken in classes with relatively higher CCA rates, so that the UCC carried forward to the following year is eligible for CCA at the higher rate in that subsequent year.

Question 4

Interest deductible on common shares paying no dividends?

Answer 4

Yes, because the expectation is that they will eventually pay dividends.

Question 5

Special Rules for Rental Properties that limit the treatment of CCA

Answer 5

• Each rental property having of cost of $50,000 or more must be held in a separate CCA class.
• CCA on rental properties can only be deducted to the extent that it does not create or increase a net loss from all rental properties combined.

Question 6

Other Deductions

Answer 6

• Carrying charges:
  
  • safety deposit boxes
  • management or safe custody fees
  • accounting fees
  • any other carrying costs normally incurred to earn property income
• Investment counsel fees:
  
  • for advisability of buy or selling a specific security
  • administration or management of shares or securities
  • must be related to earning income outside of a tax-deferred account or RRSP
• Foreign non-business income tax
  
  • foreign tax credit limited to 15% of foreign income from property
  • deduction from property income equal to foreign taxes paid in excess of 15%

Question 7

What are “Soft Costs”?

Answer 7

“Soft costs” relating to construction of buildings or ownership of land include:

• interest expenses,
• legal and accounting fees,
• mortgage fees,
• insurance, and
• property taxes

Soft costs incurred, during the period of construction, renovation, or alternation of a buliding, are not deductible as current expenses, and must be added to the cost of the builiding.

Similarly, such costs in repect of the ownership of the land on which the building is under construction must also be capitalized with the building.

Costs such as CCA, landscaping expense, and disability-related modifications to builiding are exempted form the above rules.

The Act also permits a taxpayer to deduct soft costs incurred in the year up to the taxpayer’s income earned on the building under construction, renovation, or alteration. Soft costs deducted from income would not increase the capital cost of the building.

Issuance costs, such as accounting fees and underwriter fees, are one-time costs and the general tax treatment is to amortize them over five years instead of through the CCA schedule of the underlying asset.