Income or Loss from a Business Flashcards
Employment vs Business Income:
-Why is this distinction important?
Employment vs Business Income:
-Business income is entitle to more deductions vs an individual earning employment income.
Property Income vs Business Income:
-Why is this distinction important?
Property Income vs Business Income:
-Property income is not entitled to the small business deduction along with provincial rate reduction which makes a significant difference how they are taxed.
Capital Gain vs Business Income:
-Why is this distinction important?
Capital Gain vs Business Income:
-Capital gains are taxed favourably and capital losses can only be applied against capital gains and not any other income.
Capital Assets
-What are capital assets?
Capital Assets
-Capital assets are assets that produce income through their use and not by being sold.
Criteria for Identifying Capital Gains
-What criteria do we have to look at when deciding whether income is capital in nature?
Criteria for Identifying Capital Gains
- Intent and Course of Conduct: Was it intended to be held on for a while so that IT could earn income or was it intended to be resold for a quick profit.
- Number and frequency of Transactions: Selling large volumes closely apart from each other = business income
- Relationship to the Taxpayer’s Business: Real Estate agent and selling a house & Broker selling stocks and bonds.
- Suplemental Work on the Property: Adventure in the nature of trade = business income.
- Nature of the Asset
- Objectives Declared In Articles of Incorporation
Tax Net Income vs GAAP Net Income
-What are some of the important differences between GAAP Net Income and Tax Net Income?
Tax Net Income vs GAAP Net Income
-Amortization vs CCA
1. Method: GAAP allows you to choose
various methods. Tax tells you which
method and rate to use.
2. Policy: GAAP requires you to keep
the same policy throughout the life of
asset, CCA policy can be changed year
to year.
3. CAA gives you a maximum amount
one CAN deduct but doesn’t HAVE to.
-Permanent Differences:
1. Capital gains: 100% included in ACCT
income, 50% included in Tax.
2. Meals and entertainment.
-Unreasonable Expenses:
1. In accounting any exp used to produce
income is expensed. In tax must be
reasonable.
-Non-Arm’s Length Transactions:
1. Imp in Tax - not imp in ACCT
Business Income Inclusions
What is included in business income?
Business Income Inclusions
-Amounts received or to be received.
1. Amounts received for services not yet
rendered are also considered INCOME.
Business Income Inclusions
-What does the term reserve refer to?
Business Income Inclusions
-Reserve are essentially amounts that are deducted from revenue.
1. Warranty reserves: Not permitted for
Income Tax.
-Reserves deducted in previous year must be added back to revenue in the next year.
Business Income Inclusions
-How do reserves for doubtful accounts work?
Business Income Inclusions
-Reserves for AFDA:
1. Allowed to be deducted at year end.
2. Included back in income of next year
actual bad debt is deducted.
3. A new reserve is then taken.
Business Income Inclusions
-How do reserves for Undelivered Goods and Services?
Business Income Inclusions
-Unlike GAAP services money received for services not rendered yet are included in INCOME for TAX - however you have a reserve you can use to deduct it.
Business Income Inclusions **
-Reserve for amount unpaid - how does this work?
Business Income Inclusions
-Sometimes you received payments in instalments - reserve can be taken for this
Specific Limiting Items - Not to be Deducted
-What deductions are not allowed?
Specific Limiting Items - Not to be Deducted
- General Rule of Thumb: ANy expense generated to produce income - is deductible. or expensed because of an EARNING PROCESS.
- A LOT of exceptions -
Specific Limiting Items - Not to be Deducted
- How are capital cost treated?
- How are expenses related to income that is not taxable?
Specific Limiting Items - Not to be Deducted
- Cannot deduct any capital expense. Can claim CCA on them though.
- Can’t claim the expense.
Specific Limiting Items - Not to be Deducted
-How are cost related to personal and living expenses treated?
Specific Limiting Items - Not to be Deducted
- Expenses related to personal stuff is NOT deductible by the business and may be included in the salary of the beneficiary.
- Best solutions - give extra salary. At least deductible by company.
Specific Limiting Items - Not to be Deducted
-How do we treat recreational facilities and club dues?
Specific Limiting Items - Not to be Deducted
- Cannot deduct these expenses
- UNLESS - it was given for fitness to ALL employees OR Legitimate meals and entertainment expenses (50%) as long as their not memberships.
