PROP 1020 / CHAPTER 7 Flashcards
Rental income or rental loss may be considered or “sourced” as either ________ or _________.
Rental income or rental loss may be considered or “sourced” as either “business” or “property”.
Why is the distinction between business income and property income important?
The distinction may be important in certain cases as the income tax rules differ, depending on how the income is sourced, due to the following:
certain tax credits and lower tax rates may be available if sourced as income from business income;
certain deductions are permitted from business income which are not permitted as deductions from property income
it may be important that the taxpayer is carrying on a business. To illustrate, for a partnership to exist (perhaps including a limited partnership), a business must exist. If no business were to exist, what may be intended to be a partnership may be regarded simply as co-ownership.
Generally, the rental income will be business income when _ _ _ _ _ _ _ _
Generally, the rental income will be business income when there is time, labour and attention spent on the activity.
________ income is generally passive in nature.
Property income is generally passive in nature. Rents earned by individuals are often treated as income from property on the basis the individual does not spend a lot of time, labour and attention to earn the rental income.
Rental income will be sourced as business income
when _ _ _ _ _
Rental income will be sourced as business income
when there is time, labour and attention spent on the activity.
When _______ is sold, the resulting income is taxed in full, as business income.
When inventory is sold, the resulting income is taxed in full, as business income.
TRUE OR FALSE?
When capital property is disposed, only one-half of the gain (i.e., appreciation realized) will be taxed.
ANSWER: TRUE
The Act does not contain rules for determining whether real property is regarded as inventory or capital property.
Determination is made using common law principles and criteria that have been developed over the years through court cases and precedents.
Factors include _____, ______, ______, _____, ______, and ______. <list></list>
The Act does not contain rules for determining whether real property is regarded as inventory or capital property.
Determination is made using common law principles and criteria that have been developed over the years through court cases and precedents.
Factors include primary and secondary intention, length of holding, frequency of transactions, leverage, the related business of the taxpayer, and a concept called “adventure in the nature of trade.”
If the taxpayer’s primary intention for acquiring the real estate is to trade, any appreciation realized through the sale should be treated as _ _ _ _ _ _ _ _
If the taxpayer’s primary intention for acquiring the real estate is to trade, any appreciation realized through the sale should be treated as business income.
Generally, the longer the holding period, the more likely that the property will be considered to be _ _ _ _ _ _ _
Generally, the longer the holding period, the more likely that the property will be considered to be capital property.
When the taxpayer engages in numerous transactions in real property, especially within a short period of time, the tax rules would indicate that the appreciation would be regarded as _ _ _ _ _ _ _ _ _
When the taxpayer engages in numerous transactions in real property, especially within a short period of time, the tax rules would indicate that the appreciation would be regarded as business income.
TRUE OR FALSE?
The cost of land can never be deducted from the income during the holding period.
ANSWER:
TRUE
To determine whether an expenditure on a depreciable property qualifies as a current deduction and not as a capital expenditure, the following principles are used:
The duration of the benefit (a capital expenditure provides a lasting benefit or advantage, current expense recurs after a short period of time);
Whether the expenditure restores the property to its previous condition (generally a current expense) or whether the expenditure improves or upgrades the property (capital);
Whether a repair is inexpensive in relation to the value of the asset. From a practical perspective, an inexpensive expense may be considered as a current expense whereas a capital expenditure is more costly and may be considered as a capital expenditure;
_____ is the name for depreciation of capital property for tax purposes.
CCA is the name for depreciation of capital property for tax purposes.
To qualify for CCA, an asset must be ___________
To qualify for CCA, an asset must be depreciable.
Depreciable property is defined as _ _ _ _ _ _ _
Depreciable property is defined as a capital asset that was acquired for the purpose of earning income.
NOTE ONLY
CCA is only applicable to capital property, not inventory.
NOTE ONLY
CCA is only applicable to capital property, not inventory.
NOTE ONLY
Land is also not depreciable because of its permanence, although improvements to land and chattels on it may be depreciable.
NOTE ONLY
Land is also not depreciable because of its permanence, although improvements to land and chattels on it may be depreciable.
How is UCC calculated?
UCC is comprised of the capital cost of the acquisitions/improvements, less any CCA previously claimed.
Explain how the FREQUENCY OF TRANSACTIONS can be used to distinguish between inventory or capital property?
Frequency of Transactions
When the taxpayer engages in numerous transactions in real property, especially within a short period of time, the tax rules would indicate that the appreciation would be regarded as business income and not a capital gain.
TRUE OR FALSE?
Capital cost allowance on rental properties cannot be used to create a negative taxable income.
ANSWER:
TRUE
EXPLAIN the First Year Rule?
ANSWER
In the first year only 50% of the cost of the asset gets added to the CCA class.
In essence, in the first year of acquisition most assets are only depreciated at 50% of its total cost.
NOTE ONLY / CAPITAL GAINS & LOSSES
When capital property is disposed, only one-half of the gain (i.e., appreciation realized) will be taxed. This taxable portion of a capital gain is referred to as a taxable capital gain. If there is a loss on the disposition of a capital property, one-half of the capital loss is referred to as an allowable capital loss.
NOTE ONLY / CAPITAL GAINS & LOSSES
When capital property is disposed, only one-half of the gain (i.e., appreciation realized) will be taxed. This taxable portion of a capital gain is referred to as a taxable capital gain. If there is a loss on the disposition of a capital property, one-half of the capital loss is referred to as an allowable capital loss.
TRUE OR FALSE?
CCA is a discretionary expense, a taxpayer can choose to deduct the max CCA or not
ANSWER: TRUE
NOTE ONLY
When real estate that is owned by a partnership is sold, the income is allocated to each partner of the partnership, and each partner pays tax on their share of allocated income.
NOTE ONLY
When real estate that is owned by a partnership is sold, the income is allocated to each partner of the partnership, and each partner pays tax on their share of allocated income.
NOTE ONLY / Corporate Ownership
When a corporation sells its real estate property, tax will be payable by the corporation on the income generated.
For the purchaser, buying an asset directly is the least risky because each asset purchased is identified and valued.
Purchasing a real estate asset indirectly through a share sale means the asset’s cost is not directly known from the purchase price.
NOTE ONLY / Corporate Ownership
When a corporation sells its real estate property, tax will be payable by the corporation on the income generated.
For the purchaser, buying an asset directly is the least risky because each asset purchased is identified and valued.
Purchasing a real estate asset indirectly through a share sale means the asset’s cost is not directly known from the purchase price.
It is a general principle that when a person habitually does a thing that is capable of producing a profit, then he is carrying on a trade or business notwithstanding that these activities may be quite separate and apart from his ordinary occupation. An example is that of a dentist who habitually buys and sells real estate.
Where such a thing is done only infrequently, or possibly only once, rather than habitually, it still is possible to hold that the person has engaged in a business transaction if, in accordance with the definition of “business” in subsection 248(1), it can be shown that he has engaged in _ _ _ _ _ _ _ _ _ _ _ _ _
It is a general principle that when a person habitually does a thing that is capable of producing a profit, then he is carrying on a trade or business notwithstanding that these activities may be quite separate and apart from his ordinary occupation. An example is that of a dentist who habitually buys and sells real estate.
Where such a thing is done only infrequently, or possibly only once, rather than habitually, it still is possible to hold that the person has engaged in a business transaction if, in accordance with the definition of “business” in subsection 248(1), it can be shown that he has engaged in “an adventure or concern in the nature of trade”.
TRUE OR FALSE?
GST/HST is only charged on new or “substantially renovated” residential housing.
ANSWER
TRUE
Licensing fees charged by the Real Estate Council are exempt from GST?
ANSWER: TRUE
What is the final year rule?
CCA cannot be claimed for an asset in the year of disposition, even if the asset is owned for the majority of the year.
TRUE OR FALSE? CCA is only applicable to capital property, not inventory.
ANSWER: TRUE
TRUE OR FALSE? Depreciable properties cannot have capital lossess
ANSWER: TRUE
Depreciable properties cannot have capital losses - since they already get a CCA deduction
TRUE OR FALSE? Depreciable properties can have capital gains if sold for above the original cost?
ANSWER: TRUE
**NOTE ONLY
You cannot claim capital cost allowance to create or increase a rental loss. So if your net rental income before CCA is $1,500 you can only claim up to $1,500 of CCA for that year. If you have a net rental loss in a year, then you cannot claim any CCA in that year.**
NOTE ONLY
You cannot claim capital cost allowance to create or increase a rental loss. So if your net rental income before CCA is $1,500 you can only claim up to $1,500 of CCA for that year. If you have a net rental loss in a year, then you cannot claim any CCA in that year.
When is rental income treated as property income?
Rents earned by individuals are often treated as income from property on the basis the individual does not spend a lot of time, labour and attention to earn the rental income.
Explain how LEVERAGE can be used to distinguish between inventory or capital property?
When all or a portion of the acquisition of real estate is funded with debt, the concept of leverage arises. When real estate property is highly leveraged, particularly with short-term debt, there is a strong argument to treat the appreciation as business income because of the apparent absence of an intention to acquire an investment for a yield of rental income.
Explain how INTENTION can be used to distinguish between inventory or capital property?
If the taxpayer’s primary intention for acquiring the real estate is to trade, any appreciation realized through the sale should be treated as business income.
Explain how LENGTH OF HOLDING can be used to distinguish between inventory or capital property?
Length of Holding
The length of time that the taxpayer owns the real property is a factor in determining income or capital treatment. There is no minimum time of holding and each situation is different. However, generally, the longer the holding period, the more likely that the property will be considered to be capital property.
Real estate property can be used as inventory or as capital property. What are the six criteria used to determine if property is inventory or capital property?
Real Property Inventory or Capital Property?
Criteria
1. Intention
2. Length of Holding
3. Frequency of Transactions
4. Leverage
5. Related Business of Taxpayer
6. Adventure in the Nature of Trade
Explain: Adventure in the Nature of Trade
CRA frequently uses the concept to reassess profit on the sale of real estate as business income of taxpayers (who may have had no idea that they had a real estate business for tax purposes).
Even an isolated transaction, if very speculative and risky and conducted like a trading transaction, could be an adventure in the nature of trade, and considered as business income for tax purposes.
Facts of each case must be examined for the elements of risk and similarity to a trading transaction in the application of this concept.
NOTE ONLY / RECAPTURE
Recapture of CCA
Any CCA claimed during the holding period of a real estate investment that does not represent an actual decline in market value of the asset is considered to be taxable income at the time of disposition of the property.
Recapture of CCA occurs when the amount credited’ to the class of a depreciable asset exceeds the UCC (remaining depreciable base).
If the net sale price of an asset is greater than its initial capital cost, the amount of CCA recaptured will be equal to the total of all CCA claimed over the holding period, and the excess of the sale price (proceeds of disposition) over the capital cost (adjusted cost base) will be a capital gain.
NOTE ONLY / RECAPTURE
Recapture of CCA
Any CCA claimed during the holding period of a real estate investment that does not represent an actual decline in market value of the asset is considered to be taxable income at the time of disposition of the property.
Recapture of CCA occurs when the amount credited’ to the class of a depreciable asset exceeds the UCC (remaining depreciable base).
If the net sale price of an asset is greater than its initial capital cost, the amount of CCA recaptured will be equal to the total of all CCA claimed over the holding period, and the excess of the sale price (proceeds of disposition) over the capital cost (adjusted cost base) will be a capital gain.
