Income from Property Income

Question 1

Property Income - General Concept

-What is property income?

Answer 1

Property Income - General Concept

-Property income is described as income earned with little or no effort.

-Eg: rent, Interest, dividends, royalties.
1. Rent - sometimes a property
management company would spend time
earning rental income - considered
Business Income - allowed SBD

Question 2

Property Income - General Concept

-Why is this classification import?

Answer 2

Property Income - General Concept

• Property income is not entitled to SBD
• CCA applied to proerty income cannot create a loss
• Property income - no pro rata of CCA for short fiscal perio
• Income attribution rules are applied on property income.
• Property income - foreign tax deduction

Question 3

Interest as a Deduction

-When can interest be deducted?

Answer 3

Interest as a Deduction

• Interest can only be deducted when it is used to produce business or property income.
• Not for acquisitions of personal consumption
• Not for acquisitions of assets which produce income partially taxed (capital gains)

**Note, interest free loan by employer = taxable benefit. If used to produce proerty or business income. Deductible.

Question 4

Interest as a Deduction

-How are employee and shareholders loan treated from the business perspective?

Answer 4

Interest as a Deduction

• If they take a loan out to give a loan to the employee - interest deductible.
• If they take a loan out to give a loan to the shareholders - interest deductible only as much as the interest revenue received by shareholder.

Question 5

Interest as a Deduction

-How are investment in businesses handled?

Answer 5

Interest as a Deduction

-Investment in business - the interest is ONLY deductible is if the LOAN money is used to produce income and they couldn’t get the loan with same terms from anyone else.

Question 6

Direct of Indirect Use

-How does the direct or indirect use influence the deductibility of interest?

Answer 6

Direct of Indirect Use

-You need to look at the direct use of the borrowed funds vs the indirect or the “economic reality”

-Exceptions:
1. Filling the Hole - money if being used
to fulfill some other role.
2. Money borrowed to give interest free
loan.
** Unless given to employee or can
be shown that its used to product
business income

Question 7

Linking interest to current use

-What is this?

Answer 7

Linking interest to current use

-If you borrow money to invest in a rental property ad then you sell it and buy a personal use property - you can no longer deduct the interest.

Question 8

Disappearing Source Rules

-What is this?

Answer 8

Disappearing Source Rules

-Essentially it may happen that you borrowed funds invested in a property and then the proerty lost value. Current say you can’t deduct the interest of wtv you couldn’t repay - disappearing source rule says you can.

Question 9

Investment in Common Shares

-How does this work?

Answer 9

Investment in Common Shares

-If you borrow funds to purchase Common shares - although no promise of receiving dividends - it is considered that at some point you will receive dividends therefore you can deduct interest borrowed funds.

**However if you invest in a company thats states directly no dividends will be received - cannot deduct interest.

Question 10

Interest Income

-How does corporation and partnership account for interest income?

Answer 10

Interest Income

-On an accrual basis

Question 11

Interest Income

-How do individuals account for interest income?

Answer 11

Interest Income

• There is a different method used for individual. Interest accrual is recognized on each anniversary date of the debt contract.
• Do an example to understand.

Question 12

Cash Dividends from Taxable Canadian Corporation

-What is the concept of integration?

Answer 12

Cash Dividends from Taxable Canadian Corporation

-The concept of integration simply states that a dollar of income resulting from a business or a proerty is taxed in the same manner whether the income is received directly by an individual or if the income is received by the individual through a corporation.

Question 13

Eligible vs Non-Eligible Dividends

-Why is this difference there?

Answer 13

Eligible vs Non-Eligible Dividends

• CCPC’s because of the SBD are taxed are at lowered effectivee tax rate than larger public corps - therefore the revenue streams received through a large corp was taxed higher rate not respecting the INTEGRATION principal.
• Therefore, they created two groups eligible (large public corps) and non-eligible in order to differentiate the gross up and tax credits received in order to match integration.

Question 14

Gross up and Tax credit for Non-Eligible Dividends

How is this done?

Answer 14

Gross up and Tax credit for Non-Eligible Dividends

• Gross up is about 25%
• Dividend Tax credit is:
  
  1. 2/3 of the gross up
  2. 16 2/3% of 80K
  3. or 13 1/3% of 100K

Question 15

Gross up and Tax Credit of Eligible Dividends

-What are eligible dividends?

Answer 15

Gross up and Tax Credit of Eligible Dividends

-Usually the corporations specifies that a dividend is eligible.

 1. Dividends received by Canadian public
  corp.
 2. CCPCs dividends out of ABI
 3. CCPCs out of eligible dividends it
 received.

Question 16

Gross up and Tax Credit of Eligible Dividends

-Because of the higher tax rate - how is the gross up and dividend tax credit treated for eligible dividends?

Answer 16

Gross up and Tax Credit of Eligible Dividends

-Dividend gross up is 45%.

• Dividend tax credit is:
  
  1. 11/18 of the gross up
  2. 27.5% of dividends received
  3. 18.9655 of grossed up dividends. ty