Property Income

Question 1

When is property income considered Business income

Answer 1

• if owner commits significant amount of effort to the income generation process, then the property income will be considered business income

Question 2

Common types of property income

Answer 2

• interest
• dividends
• rental income
• foreign property income
• royalties
• NOT capital gain or loss on sale

Question 3

Property income

Answer 3

• return on invested capital but only if owner does not commit a significant amount of time and labor to the income generating process
• if significant time and labor is met, then property income would be business income

Question 4

Interest income

Answer 4

• return/consideration/compensation for use or retention by one person of a sum of money belonging to or owed to another
• corporations/trusts/partnerships: report interest income based on accrual method
• individuals: report interest income on the earlier of when cash is received or accrual on anniversary date (which is 1 day before full year anniversary)

Question 5

Dividend income

Answer 5

• payments received as a share of earnings
• Corporations (when receiving dividend from CAD corp.): included in NIFTP but deducted from taxable income, and this is because dividends from CAD corps. are not taxable to other CAD corps.
• Priavte corporations: may need to pay refundable tax (Part IV) on dividends received (from non CAD and non connected)
• Individuals and Trusts: dividend tax credit applied to offset personal tax payable

Question 6

Types of Dividends: Tax at the Individual and Trust level

Answer 6

• eligible dividend: Gross up = 38%, tax credit = 6/11 of gross up
• non-eligible dividend: Gross up = 15%, tax credit = 9/13 of gross up
• stock dividends: treated the same way as cash dividends (gross up and credit)
  Capital dividend: paid out of CDA and not taxable to recipient
• Foreign dividend: not grossed up, full amount in income, and foreign tax credit for withholding tax paid

Question 7

Dividend Integration

Answer 7

• dividends are taxed at shareholder level to prevent double taxation
• induvial pay same amount whether taxed in corporation or taxed individually
• point is to have income be the same whether earned at corporate or individual level

Question 8

Rental Income

Answer 8

• rental income (due in year whether received or not) less eligible expenses = net income or loss
• Eligible expenses: utilities, repairs, insurance, advertising, CCA, maintenance, interest, property taxes, management fees

Question 9

Foreign source property income

Answer 9

• included in income, translated to CAD and tax withheld by foreign government

Question 10

Royalties

Answer 10

• if taxpayer inventor = business income
• is taxpayer purchased = royalty income

Question 11

Deductions from Property Income

Answer 11

• carrying charges on vacant land (interest on loans and property tax deductible to the extent of income earned otherwise added to cost)
• soft costs: interest, legal, accounting, insurance, property taxes (not deductible during construction/renovation of building and otherwise added to cost)
• Interest: deductible if earnings and must be able to tie borrowed funds to acquisition of income producing asset