Module 3 Notes

Question 1

Business Income vs Property Income (Capital Gaines) - Determination

Answer 1

• No specific rules
• It is necessary to evaluate the facts of each case.
• Property income (capital gains) is generally passive income. Capital gains are only 50% taxable
• The following factors must be looked it for the determination
  
  • Original intention:
    
    • Primary: Did the taxpayer deliberately seek a profit from an income rather than a capital nature?
    • Secondary: Did the taxpayer build into a transaction, at the time of purchase,a profitable alternative in the event that the primary intention is frustrated?
  • Number and frequency of transactions;
  • Relation of transaction to taxpayer’s business;
  • Circumstances that caused the disposition

Question 2

Calculation of Taxable Business Income

Answer 2

• Taxable business income is not the same as GAAP net income
• Tax rules must be followed to calculate taxable business income
• Taxable business income is generally calculated on an accrual basis
• Section 12 contains specific business income inclusions

Question 3

Business Income Inclusions (sec 12)

Answer 3

• Services to be rendered in the future
• A/R for services rendered
• Reserves - bad debts and warranties
• Insurance proceeds - depreciable property
• Payments based on production or use
• Bad debts recovered
• Interest, dividends
• Partnership income
• Inducement payments, reimbursments

Question 4

Business Income Deductions

Answer 4

• Section 18 contains specific limits or exclusions on business income deductions
• Section 20 contains specific allowed deductions
• All reasonable business expenses are generally deductible except capital expenses or reserves.
  
  • capital expenses usually go through the capital cost allowance system
  • only specific reserves are allowed. A reserved claimed in one year must be added back in the next year and then a new reserve may be claimed.
• For employement income, a special provision is generally needed to deduct an expense. Contrast this requirement to a business income expense
• Deductions of business losses can be denied if reasonable expectation of profit cannot be demonstrated. (e.g. setting up a home-based business with not prospect for revenue just to generate losses to offset employment income.)

Question 5

Specific allowed deductions (sec 20)

Answer 5

1. Capital cost allowance
2. Cumulative eligible capital amount (CECA)
3. Interest (on loans for purchases to produce income.
4. Expenses of issuing shares or borrowing money.
5. Premiums on life insurance used as collateral.
6. Discount on debt obligations
7. Reserves
   
   • doubtful debts
   • goods not delivered
   • services not rendered
   • deposits on returnable containers (other than bottles)
   • manufacturer’s warranty reserve
   • amount not due until a later year under an instalment sales contract
   • A reserve claimed in one year must be added back in the next year and then a new reserve can be claimed.
8. Employer’s contribution to RPP
9. Employer’s contribution to DPSP
10. Cancellation of lease
11. Landscaping of grounds
12. Expenses of representation
13. Investigation of site
14. Utilities service connection
15. Disability-related modifications and equipment
16. Convention expenses