Deductions - Specifically Permitted Flashcards
Reserve for services not provided
- limited to reasonable for services that will have to be provided. (Deduct any services that are expected to expire.)
- limited to the amount included in income that has not been provided by the end of the year.
- Each year you must add last year’s reserve back into income and calculate a new reserve.
Reserve for inventory sales
- limited to a three-year period. (A reserve is not deductible for a year-end that is more than 36 months after the sale.)
- Each year you must add last year’s reserve back into income and calculate a new reserve.
- The calculation for the reserve is:
gross profit / gross selling price x amount receivable
Limits for employer contributions to an RPP
Defined benefit plan:
- no limit if they are determined by an actuary to be necessary to fund the plan.
Money purchase or defined contribution plan:
- 18% of employee’s compensation to following yearly maximums:
for 2010: $22,450
for 2011: $22,970
for 2012: $23,820
for 2013: indexed
Limit to employer contribution to a DPSP
Where there is no RPP:
the lesser of:
- 1/2 the money purchase dollar limit and
- 18% of the employee’s compensation
Cancellation of lease
If the property continues to be owned by the lessor or a non-arm’s length person.
- Costs of cancelling a lease may be deducted over what would have been the remaining term of the lease including renewal periods. Prorate the periods in terms of days and include leap years unless specifically asked to ignore the effects of leap years.
If the property is sold:
- the unamortized balance of these costs (or 1/2 the unamortized balance in the case of capital property) is deductible
List of permitted deductions
- landscaping for business premises
- interest on money borrowed to purchase property for business use
- life insurance premium for employee if benefiticiary is employee’s family
- interest on loans to purchase shares.
Meals & Entertainment Expenses
Limited to 50%. The limitation does not apply to:
- The cost of providing meals to customers in the oridinary course of business by a restaurant, airline, or hotel
- expenses relating to an event to benefit a registered charity
- the amount included as a taxable benefit to the employee or where the employer is reimbursed for the cost
- occasional events for the general benefit of all employees at a particular place of business.
Deadline for RPP contributions
To be deductible for the taxation year they must be made no later than 120 days after the applicable taxation year.
Expenses of representation
Can be deducted in full or in ten equal amounts over ten years.
What are the only reserves that may be deducted from income?
The reserves that may be deducted include:
- reserve for doubtful debt
- only to the extent that the amount has already been taken into income.
- reserve for goods not delivered and services not rendered or deposits on returnable containers (other than bottles), but limited another rule;
- cannot be claimed in a year if the sale occurred more than 30 months before the end of the year.
- manufacturer’s warranty reserve for amounts paid or payable to an insurer to insure liability under warranty agreement; and
- reserve for an amount not due until a later year under an instalment sales contract limited by another rule.
Any of these reserves must be brought back into income in the following year under one of the following provisions:
- reserve for doubtful debts; and
- reserve in respect of certain goods and services, deposits or manufacturer’s warranty reserve.
- Note: a bad debt that has been written off need not be included in income in the following year.. If a bad debt is recovered it is added to income i the year of receipt.
Accrued expenses: Under what conditions are they deductible?
In order for an expense (e.g., accrued wages) that remains unpaid at the end of the taxation year to be deductible for tax purposes,
- it must constitute a genuine liability of the taxpayer.
- For a genuine liability to exist there must be an enforceable claim by the creditor (e.g., the employee) with a reasonable expectation that the debt in fact will be paid.
- Where there is not a genuine liability, the amount will be treated as contingent liability or reserve and will be denied.
Write-offs of capital expenditures
Prohibited by section 18 but permitted by section 20 through a system of annual write-offs:
- deduction for the capital cost of a depreciable capital property
- deduction of cost of eligible capital property
Unpaid remuneration and other amounts
Must be paid within 179 days of end of taxation year. (payment by the 180th day will be accepted)
Unpaid amounts in non-arm’s length circumstances
- must be paid within two years of the end of the taxation year in which it was declared payable or accrued, otherwise
- it must be brought back into income on the 1st day of the third taxation year following that in which the payment was declared (.e.g., unpaid amount declared payable in 2009 must be paid by the end of 2011 or brought back into income at the beginning of the 2012 taxation year.
Expenses of issuing shares or borrowing money
These types of expenses are permitted to be deducted but must be amortized equally over five years. For example:
- Expenses of issue or sale of shares:
- printing and advertising costs,
- filing fees,
- legal and accounting fees,
- registration and transfer fees and commissions or bonuses
- Expenses of purchasing capital property to earn income.
- Refinancing costs for the purpose of earning business income such as rescheduling, restructuring, or assumption of debt
