Midterm 2 - Income from Business (Inclusions) Flashcards
Explain why income from property does not include a return of capital.
s. 9(1) taxes income from business or property; it taxes the PROFIT, not a return of capital or capital gains
a return of capital is not income (e.g. principal on loan = just return of capital; selling house for same price as purchased = just change form of wealth)
Return of capital does NOT add accretion to wealth
Explain why income from property does not include capital gains on the disposition of property.
Because it is taxed separately under capital gains tax regime
• income from property is determined under subdivision b while capital gain determined under subdivision c
• only one-half of a capital gain is included in income
• there are also distinctions in terms of the deduction of expenses
Income from property = from ownership (rent, royalties, etc)
Capital gain = from disposing the property when sold for more than it cost to buy it
Identify the test for when an amount is included in income from business or property.
IKEA case (citing Robertson)
- an amount is included when it has the quality of income
- it has the quality of income if the taxpayer has an ABSOLUTE RIGHT to it with no restrictions, contractual or otherwise as to its disposition, use or enjoyment
Explain what s. 12(1)(b) requires in terms of when an amount is to be recognized as income.
Includes “Any amount RECEIVABLE by the taxpayer in respect of property sold or services RENDERED IN THE COURSE OF A BUSINESS IN THE YEAR, notwithstanding that the amount or any part thereof is not due until a subsequent year, …”
BUT s. 20(1)(m) allows this to be DEDUCTED as a “reserve”
Main purpose - compel reporting of this, and allow comparison across years
Identify the test for when an amount is considered receivable and explain how it applies to holdbacks and expropriation compensation.
M.N.R. v. Colford Contracting (1960 S.C.C.) it was said that,
“In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient has a precarious right to receive an amount in question, but he must have a CLEARLY LEGAL [RIGHT], though not necessarily immediate […].”
Explain how s. 12(1)(a), together with ss. 20(1)(m) and (m.2), compares to the accrual method of accounting and why the Act has these provisions.
s. 12(1)(a) together with s. 20(1)(m) essentially reinforces the accrual method of accounting, while allowing the TP to keep reserves to reduce the burden on the TP that would arise from using just the accrual method of accounting.
Also facilitates TRACKING OF the amounts receivable next year, the reserves, and allows for easy cross-checking
prevents deferral
Describe the approach of the CRA to determining when an amount is receivable from the sale of goods and from the sale of real property
amount is receivable from sale of goods on the DATE OF EXCHANGE and, where date of exchange not specified, then when INCIDENTS OF OWNERSHIP (possession, use and risk) PASS to the purchaser
Sale of goods - often passes on delivery
Sales of real propety - closing date
Identify the test for when amounts must be included in income for services rendered.
payments for services are usually receivable WHEN SERVICES HAVE BEEN RENDERED
- Maritime Telegraph and Telephone Company v. The Queen
- West Kootenay Power and Light Company Ltd. (1991),
Describe the exception provided for certain types of professional service
where LAWYER, DOCTOR, DENTIST, VETERINARIAN or CHIROPRACTOR is required to include in income an amount in respect of WORK IN PROGRESS on basis amount was receivable in the year, the lawyer, etc. can ELECT under SECTION 34 to not include such amounts
- must CONTINUE TO USE s. 34 ELECTION in future years and CAN ONLY REVOKE ELECTION with consent of the Minister
Describe a “dividend”, describe how it is defined in the Income Tax Act and identify the basis on which it is taxed.
the word “dividend” generally refers to a pro rata distribution from a corporation to its shareholders (except for a distribution made when the corporation is liquidated or on a return of capital)
s. 248(1) DEFINES “dividend” to include a “stock dividend” – a “stock dividend” is a dividend paid in shares of the corporation instead of cash
dividends on shares are considered income from property and are specifically included in income under:
• section 12(1)(j) [resident corporations] , and 12(1)(k) [other corporations]
Dividends included in income on CASH BASIS (i.e. when received)
Identify the basis on which rent is included in income.
- if the services provided are just those services normally connected with the RENTAL of property such as maintenance, electricity, heating, air conditioning, parking, water then still treated as INCOME FROM PROPERTY
- where, however, other services are provided that GO BEYONDnormal rental property such as security services, restaurant, mail service, house-keeping service, laundry service then it is more likely to be treated as income from BUSINESS
Explain why an instalment on the sale of property that is based on the use of property, or production from property, is included in income.
s. 12(1)(g) goes on to say that amounts based on production or use are included “whether or not that amount was an installment of the sale price of the property”
Define “interest”.
there is NO DEFINITION of “interest” in the Act
• broadly speaking it is the price of borrowed money (price paid to lender by borrower for the loan)
• interest usually expressed as a percentage per annum although usually paid more frequently (e.g., monthly; semi-annually)
• interest is income from property
Explain why the inclusion of interest in income should, in theory, be adjusted for inflation.
interest that is compensating for inflation would just be compensation for the decline in purchasing power –> NO INCREASED ABILIT TO PAY
Provide a possible explanation for why interest income is not adjusted for inflation.
the Act taxes all of the interest whether the portion due to inflation or not
Explain how the Act deals with blended payments of interest and principal to a lender.
a
ID the basis on which interest is included in income pursuant to the Income Tax Act and explain the modifications to that basis that are made in the Income Tax Act.
a
