Midterm Test 2

Question 1

Property Income

Answer 1

The annual or regular return received for allowing another party to use ones property

Question 2

Deduction of interest expense

Answer 2

deductible if loan was incurred to purchase investment to earn property income

Question 3

Principles for Maximizing After tax Cash Flows

Answer 3

1. use excess cash to purchase personal assets
2. Use borrowed funds to purchase investment assets
3. Us excess cash to pay down personal debt first

Question 4

EXAMPLE: Consider an individual who borrows 10,000 at 10% to purchase a cottage or investment at na 45% tax rate

Answer 4

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

Question 5

Receivable Method

Answer 5

included in income when the amount is legally due and payable

Question 6

Cash method

Answer 6

included in income in the year received

Question 7

Anniversary day Accrual Method

Answer 7

requires that interest income be recognized for every 12 month period from the date the investment was made

Question 8

Deductions from Interest Income

Answer 8

-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

Question 9

Dividends

Answer 9

the returns provided on the investment in shares of a corporation

Question 10

Dividends Received by Individuals

Answer 10

From Private corps - 115%
from Public corps - 138%

Question 11

Stock dividends

Answer 11

corporation issues additional shares in lieu of a cash dividend

Question 12

Rental income

Answer 12

compensation received for allowing another party to use ones property
= rent - expenses

Question 13

Deductions from rental income

Answer 13

-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

Question 14

a disposition of property occurs when,

Answer 14

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

Question 15

Calculating Capital Gains

Answer 15

= Proceeds - ACB - selling costs

Question 16

Adjusted cost base (ACB)

Answer 16

original purchase price plus other costs incurred, brokerage fees, installation costs, legal fees

Question 17

Example of ACB and Mutual fund

Answer 17

Distribution Reinvested
Interest 100
Dividend 100
Capital gain 100
total 300

Taxable amount
Interest 100
Dividend 138
Capital Gain 50
total 288

Question 17

Person use property

Answer 17

-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

Question 17

Allowable Business Investment Loss (ABIL)

Answer 17

An ABIL can offset against all other sources of income as an exception to the normal capital loss rule

Question 18

Listed personal property

Answer 18

-PUP that has some element of investment value
-losses on LPP are recognized but only deductible against gains on LPP

Question 19

Financial Property

Answer 19

Property acquired primarily to generate a benefit through a financial reward
-shares, bonds, loans
-land, buildings, equipment
-patents, licences, franchises
-vehicles

Question 20

Principle Residence Reduction Formula

Answer 20

1 + # of years designated principle residence / # of years owned x gain

Question 21

Business Income

Answer 21

can be earned by all three taxable entities, individual corp and trusts

Question 22

Income Earning purpose test

Answer 22

must be incurred for the purpose of gaining producing or maintaining income from business

Question 23

Capital test

Answer 23

cannot deduct items of capital nature

Question 24

exempt income test

Answer 24

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

Question 25

Reserve Test

Answer 25

no reserves are deductible for tax purposes

Question 26

personal expense test

Answer 26

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

Question 27

Reasonableness test

Answer 27

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

Question 28

Expenses that CANNOT be deducted

Answer 28

-use of rec. facilities
-political contributions
-advertising expenses

Question 29

Meals and Entertainment

Answer 29

Amount permitted is limited to 50% of actual costs incurred (exception for employee events and charity functions 100%)

Question 30

Auto Allowances

Answer 30

maximum allowance that can be deducted by an employer is .66 for the first 5,00 km and .62 for each additional km

Question 31

Auto Expenses

Answer 31

-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

Question 32

RPPs

Answer 32

-money purchase plans max contribution limit is 30,780