Midterm Test 2 Flashcards
chapter 5,7,8
Property Income
The annual or regular return received for allowing another party to use ones property
Deduction of interest expense
deductible if loan was incurred to purchase investment to earn property income
Principles for Maximizing After tax Cash Flows
- use excess cash to purchase personal assets
- Use borrowed funds to purchase investment assets
- Us excess cash to pay down personal debt first
EXAMPLE: Consider an individual who borrows 10,000 at 10% to purchase a cottage or investment at na 45% tax rate
Cottage - personal use
loan 10,000
interest paid 1,000
tax savings 0
cost of loan after tax 1,000
Investments
loans 10,000
interest paid 1,000
tax savings (450)
cost of loan 550
Receivable Method
included in income when the amount is legally due and payable
Cash method
included in income in the year received
Anniversary day Accrual Method
requires that interest income be recognized for every 12 month period from the date the investment was made
Deductions from Interest Income
-interest expense on loans to acquire interest
-investment counselling fees
-costs incurred to obtain loan
-investment management fees
-fees paid to a financial institution to hold securities
-accounting fees
-reserves for uncollectible where interest income has been accrued
Dividends
the returns provided on the investment in shares of a corporation
Dividends Received by Individuals
From Private corps - 115%
from Public corps - 138%
Stock dividends
corporation issues additional shares in lieu of a cash dividend
Rental income
compensation received for allowing another party to use ones property
= rent - expenses
Deductions from rental income
-costs incurred to obtain loan
-insurance
-property tax
-repairs
-maintenance costs
-utility costs
-advertising
-landscaping costs
-CCA
-Salaries and wages
-property management fees
-accounting costs
a disposition of property occurs when,
a) a property is sold
b) involuntary disposition - theft, destructions or expropriation
c) a share/bond is cancelled, redeemed or settled
d) share converted by amalgamation or merger
Calculating Capital Gains
= Proceeds - ACB - selling costs
Adjusted cost base (ACB)
original purchase price plus other costs incurred, brokerage fees, installation costs, legal fees
Example of ACB and Mutual fund
Distribution Reinvested
Interest 100
Dividend 100
Capital gain 100
total 300
Taxable amount
Interest 100
Dividend 138
Capital Gain 50
total 288
Person use property
-property used primarily for personal use and enjoyment and that does not generate financial returns
-losses are nil
-1000 floor rule for proceeds and ACB
Allowable Business Investment Loss (ABIL)
An ABIL can offset against all other sources of income as an exception to the normal capital loss rule
Listed personal property
-PUP that has some element of investment value
-losses on LPP are recognized but only deductible against gains on LPP
Financial Property
Property acquired primarily to generate a benefit through a financial reward
-shares, bonds, loans
-land, buildings, equipment
-patents, licences, franchises
-vehicles
Principle Residence Reduction Formula
1 + # of years designated principle residence / # of years owned x gain
Business Income
can be earned by all three taxable entities, individual corp and trusts
Income Earning purpose test
must be incurred for the purpose of gaining producing or maintaining income from business
Capital test
cannot deduct items of capital nature
exempt income test
an expense is not deductible even though it was incurred to earn income, if the income that is expected to be generated is itself not taxable revenue
Reserve Test
no reserves are deductible for tax purposes
personal expense test
no deductions are permitted for a tax payers personal or living expenses except for those travel expenses incurred away from home in the course of carrying on business
Reasonableness test
an outlay or expense is deductible only to the extent it is reasonable in the circumstances, designed to combat abuse and confine business expenses to those incurred in the income earning process
Expenses that CANNOT be deducted
-use of rec. facilities
-political contributions
-advertising expenses
Meals and Entertainment
Amount permitted is limited to 50% of actual costs incurred (exception for employee events and charity functions 100%)
Auto Allowances
maximum allowance that can be deducted by an employer is .66 for the first 5,00 km and .62 for each additional km
Auto Expenses
-costs for purposes of claiming a deduction for CCA cannot exceed 36,000
-the deduction for a leased car cannot exceed 950/month
-the interest cost on money borrowed to acquire a vehicle cannot exceed 300/month
RPPs
-money purchase plans max contribution limit is 30,780
