Taxation

Question 1

Primary factors that are considered when deciding whether a disposition (such as real estate) should be treated as income or a capital gain?

Answer 1

1. Intention at the time of acquisition
2. Length of ownership period
3. Number and frequency of transaction
4. Relationship to the taxpayer’s business
5. Nature of asset

Question 2

What is the gross up for eligible dividends?

Answer 2

38%

Question 3

For replacement property what is the ACB of the replacement property

Answer 3

• Replacement cost less capital gain deferred

Question 4

Employer provided automobile –
Standby charge
IT-63R5

Answer 4

Employer provided automobile – Standby charge (Tax)
• Standby charge is a taxable employment benefit that only applies if an employer-provided automobile is available to the employee for personal use

• Calculated as:
o 2% of the original cost per month available; or
o 2/3 of the monthly lease payment per month available
• reduced by payments made by the individual to the employer
• reduced standby charge applicable where personal use less than 1,667 km per month and automobile primarily used for business purposes (consider greater than 50%)

Question 5

What are business investment losses (BILS)

Answer 5

capital losses arising from disposition of shares/debts of small business corporations (SBCS) (except for one when two corporations are not at arms length)

Question 6

Are you able to elect out of the Spousal Transfer

Answer 6

Yes- may elect out of provision

Question 7

What is the dividend tax credit for ineligible dividends?

Answer 7

9.03% of grossed up dividends

Question 8

What are capital gain reserve used for

Answer 8

For amount not due within the year

Question 9

Are you able to create /increase loss from employment with a home office

Answer 9

No

* Un-deducted expenses can be carried forward indefinitely

Question 10

Reserves for Bad Debts

Answer 10

Reserves for bad debts (Tax)
• A reserve may be deducted for bad debts to the extent that it is reasonable and based on specific uncollectible accounts

• A reserve claimed in one taxation year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income
o Effectively this means that the increase in the
reserve amount should be deducted each year

Reference: ITA 20(1)(l), ITA 12(1)(d)

Question 11

What is the maximum amount that can be claimed for boarding school/overnight camps?

Answer 11

$200/week if under 7
$275/week if child with prolonged/sevre disability and eligible for the disability tax credit

$125/week other eligible children

Question 12

For replacement property, what is the capital gain the lesser of?

Answer 12

the actual capital gain

proceeds/deemed proceeds not reinvested

Question 13

Common business expenses DISALLOWED

Answer 13

Common business expenses DISALLOWED (Tax)

• Amortization / Impairment / Accounting Gains & Losses (deduct via CCA)
• Personal expenses and membership / club dues
• Charitable donations – deduction to determine Taxable Income for a Corp.
• Political contributions – limited tax credit available for an individual; Federal Accountability Act deems corporate political contributions to be illegal, resulting in no deduction or credit.
• Taxes, interest and penalties related to tax
• Meals & entertainment (50% for business purposes, deductible for remote or temporary work sites, or special events for employees)
• Expenses re: issue or sale of shares and refinancing costs (deduct over 5 years)
• Life insurance premiums (except where the policy has been assigned as collateral)
• Unpaid amounts & unpaid remuneration (accrued salary which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
• Carrying charges on vacant land (non-deductible portion added to ACB)
• Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes; must be capitalized)

Question 14

What is the carry back and carry forward of
Non-Capital Losses?
What can they be applied to?

Answer 14

Carry back = 3 years
Carry forward = 30 years

Apply against any source of income

Question 15

What are the annual limits for childcare?

Answer 15

Under 7 years with no disability-$8,000
7-16 years of age with no disability -$5,000

15 years + with disability and not qualifying for disability tax credit-$5,000
Any age- with disability that qualified for disability tax credit- $11,000

Question 16

Moving Expenses
ITA 248(1)

Answer 16

In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses.

• Eligible relocation is:
o Occurring as a result of a new work location within Canada, and
o One in which the new residence is at least 40 kilometres closer to the new work location than the old residence

• Deductible moving expenses include:
o Selling costs related to the old residence (i.e. commissions)
o Costs to transport household goods (i.e. moving company costs, etc.)
o Legal fees associated with the purchase of a new residence
o Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses
o Travelling costs
o Meals and lodging (not exceeding 15 days, not including travel days)
o Costs of cancelling a lease on the old residence
o Up to $5,000 of interest, property taxes, insurance, heating and utilities costs on the old resident, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property

• Examples of costs that are not deductible include:
o Home renovations for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property)
o Travel expenses for a house-hunting trip

Question 17

Capital Cost Allowance (CCA)
ITA 20(1)(a)

Answer 17

• CCA may be claimed on all tangible capital property other than land, must be available for use

• Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
• Most classes subject to Accelerated Investment Incentive of 1.5 × CCA on net additions (except 53, 43.1, and 43.2, which are subject to 100% CCA in the year of purchase)
• Dispositions are credited to UCC at lesser of cost and proceeds (excess of proceeds over original cost result in a capital gain)
• Terminal loss – when there is a balance of UCC in the class but there are no assets remaining, the UCC can be claimed as a terminal loss (capital loss cannot arise on the disposition of depreciable property)
• Recapture – arises when the balance in the class is negative (i.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
• Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture. If negative, then terminal loss.

Question 18

What can commissioned employees deduct as their home office expenses (if they meet the requirements)

Answer 18

• rent
• supplies
• repairs and maintenance
• property tax
• home insurance
• rented equipment

Question 19

Business Investment Loss

Answer 19

• For tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(s) may file an election to deem the shares to have been disposed of for proceeds equal to nil
o Generally, this will yield a capital loss equal to the ACB of the shares

• A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss
o Half of the business investment loss is determined to be an “allowable business investment loss” (ABIL) and can be applied immediately against income from any source
o The ABIL can be carried back up to three years or forward up to 10 years
o If the ABIL is not used by the end of the 10 years, it will become a capital loss

Question 20

For rental properties, at which threshold do you need to have a separate CCA class

Answer 20

$50,000 +

Question 21

Employment – Non taxable benefits

Answer 21

• Uniforms and special clothing required to be worn
• Transportation to job site
• Moving expenses reimbursed, excluding housing loss reimbursement
• Recreational facilities at place of work
• Premiums paid under private health services plans
• Professional membership fees when primarily for benefit of the employer

Question 22

Refundable dividend tax on hand (RDTOH)

Answer 22

For tax years beginning on or after January 1, 2019, there are two types of RDTOH balances:

• Non-eligible RDTOH: Includes refundable taxes on investment income and Part IV tax on non-eligible portfolio dividends.
o Only the payment of a non-eligible dividend can trigger a refund from this account.
• Eligible RDTOH: This tracks refundable taxes paid on eligible dividends received by the corporation.
o Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account; however, when non-eligible dividends are paid, the refund must come out of non-eligible RDTOH first.
At the date of transition, the eligible RDTOH balance will be calculated as the lesser of:
• The existing RDTOH balance; and
• 38 1/3 % of the General Rate Income Pool (GRIP) balance.

Question 23

Gross up for dividends from a public company?

Answer 23

38%

Question 24

Retiring allowance rollover to RRSP

Answer 24

A retiring allowance (also called severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment. A retiring allowance includes:
• payments for unused sick-leave credits on termination; and
• amounts individuals receive when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work).

Individuals with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). The amount that is eligible for transfer is limited to:
• $2,000 for each year prior to 1996
• Additional $1,500 for each year prior to 1989 (if no vested contributions to RPP or DPSP by employer)

Question 25

What is the deduction available in regards to stock options for tax purposes

Answer 25

Deduction benefit of 50% only if:

a) the FMV of shares when option granted does not exceed the option exercise price
b) For CCPC, the shares were held for at least two years subsequent to the option exercise

Question 26

Business income vs. property income

Answer 26

• It is a question of fact whether income is from business or property.
• Capital property is property that provides a long term or enduring benefit
• Disposition of capital property gives rise to capital gains or losses

• Business income will arise from an “adventure or concern in the nature of trade”, determined as follows:
o Conduct
 How long was the asset held? Have there been similar transactions?
o Nature of the asset
 Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business?
o Intent
 Did the taxpayer originally acquire the asset with the intention to sell?

• For an individual, business income is generally taxed at a higher rate than capital gain, as only 50% of capital gains are taxable.
• For a CCPC earning less than the SB Limit, capital gain is generally taxed at a higher rate than business income, as the SBD doesn’t apply to capital gains

Question 27

What constitutes a deemed disposition

Answer 27

Change in use
Gift
Death
Cessation of Canadian Residency

Question 28

What is the dividend tax credit for eligible dividends

Answer 28

15.02% of gross up dividend

Question 29

If you were to transfer depreciable property to your spouse what would it transfer at?

Answer 29

UCC

Question 30

Replacement property rules

Answer 30

• In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain
• If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively.

• To be eligible to defer the gain, the replacement property rules must apply:
o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use)
o Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer

Question 31

Employer provided automobile –

Tax planning

Answer 31

• Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
• Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance
• Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
• Maintain log to justify business vs. personal km
• Lower standby charge by reducing number of days vehicle available for personal use
• Increase business use by visiting clients on the way to and from work

Question 32

What is the gross up for ineligible dividends

Answer 32

15%

Question 33

What are the tests for determining if someone is a contractor or an employee?

Answer 33

• Control of work
• Ownership of tools and equipment
• Subcontracting work or hiring assistants
• Financial Risk
• Responsibility for investment and management
• Opportunity for profit

Question 34

Are you able to claim a capital loss on depreciable property?

Answer 34

No- not allowed to claim a capital loss on depreciable property. May be able to claim a terminal loss

Question 35

What is the carry back and carry forward of ABIL? What can they be applied to

Answer 35

Carry back 3 years
Carry forward 10 years

Any Source (if unused after 10 years; they become a net capital loss and can be carried forward indefinitely and applied against net taxable capital gains)

Question 36

Filing and payment deadlines

Answer 36

• Income taxes
o Filing deadline is six months after year end.
o Tax balances owing are due two months after year end (three months for CCPCs eligible for small business deduction).

• GST/HST filing deadline
o Annual taxable supplies of:
 $1.5 million or less = annual reporting
 More than $1.5 million up to $6 million = quarterly reporting
 More than $6 million = monthly reporting
o Annual or quarterly filers have the option to report more frequently.
o Quarterly and monthly filers must file and remit the balance owing within one month after the end of the reporting period.
o Annual filers must file and remit the balance owing within three months after the fiscal year end.
o Annual filers are required to pay quarterly instalments if net GST owing in the previous year was more than $3,000.

Question 37

What reserves are deducted for tax purposes

Answer 37

Bad Debts
Undelivered goods and services
Unpaid amounts

Question 38

Owner-Manager Compensation

Salary vs. Dividends

Answer 38

• Corporations are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
• The Canadian tax system is meant to charge the same level of tax on income regardless of whether it is earned directly as an individual (i.e. salary) or flowed through a corporation (i.e. dividend); this is referred to as integration
• Salary payments are deductible to the corporation whereas dividends are not
• Dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
• Salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
• Salary payment may result in reduced net cash flow available to an owner-manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments
• Dividend payments will reduce an individual’s cumulative net investment loss (CNIL)

Question 39

What is the carry back and carry forward of Net Capital Loss? What can they be applied to?

Answer 39

Carry back = 3 years
Carry forward = indefinite

Apply against net taxable capital gains

Question 40

With personal use property are you allowed to claim the loss?

Answer 40

No- losses are denied on personal use property

Question 41

Common business expenses ALLOWED

Answer 41

• Automobile expenses
• Home office expenses
• Convention expenses (limited to 2 per year)
• Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
• Inventory valuation (lower of cost or market, method must be consistent, LIFO not permitted)
• Reserves – no deduction for a reserve, contingent liability or sinking fund in general, but reserve is permitted for doubtful debts, amounts not due under an installment sales contract; any reserve deducted in one year must be taken into income the next year

Question 42

Principal Residence Exemption (PRE)

Answer 42

Principal residence exemption (PRE)
The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.

• The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer.
• Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year

• A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year
o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family

• If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence
• To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence

Question 43

Deductibility of expenses

Answer 43

General limitation – To be deductible, expense or outlay must be made or incurred by the taxpayer for the purpose of gaining, producing or maintaining income, and be expected to generate income related to the taxpayer’s business or property

Question 44

What does the RDTOH balance consist of?

Answer 44

Part 1 refundable tax (30.67% of aggregate investment income)
Part IV tax on dividends (38.33% of portfolio dividend or recipients share of dividend x their ownership %

Question 45

When is the higher income earner able to claim the child care expenses?

Answer 45

When the lower income earner:

a) is in full time/part time post secondary
b) infirm and incapable of caring for children (minimum of 2 weeks)
3) in prison for 2 weeks
4) living apart at least 3 months due to a marriage breakdown

Question 46

Employer provided automobile –

Operating cost benefit

Answer 46

Operating cost benefit (Tax)

• Taxable employment benefit, calculated as:
o $0.26 (for 2018) or $0.28 (for 2019) per km of personal use; or
o 50% of the standby charge (only when vehicle used at least 50% for business)

• Operating costs include gas, insurance and maintenance, but not parking

Question 47

Shareholder loan

Answer 47

• Principal amount must be added to shareholder’s income ITA 15(2)
• No imputed interest under ITA 80.4(3)
• Can be deducted under ITA 20(1)(j) when it is repaid
• Exception: If loan repaid prior to second balance sheet date of corporation, then principal amount need not be added to shareholder’s income, but imputed interest under ITA 80.4(2) would apply. However, it cannot be a series of loans and payments (as per ITA 15(2.6))
• Exception: Loan advanced as an employee, rather than shareholder, to acquire residence, auto for work or shares of the company, under ITA 15(2.4), as long as at the time the loan was made, bona-fide arrangements were made for repayment of the loan within a reasonable amount of time

Question 48

Employee vs. Contractor

Answer 48

• No single test is decisive. Must consider:
o Intention of the parties
o Control of work (hours, location, how job is completed)
o Ownership of tools (who supplies)
o Chance of profit and risk of loss
o Ability to subcontract work or hire assistants
o Integration

• Issues:
o Contractors can deduct all reasonable expenses whereas employment deductions are limited
o Employees can receive EI benefits, contractors can opt in with restrictions
o Employers are required to withhold source deductions for employees
o Employer may be responsible for both employee and employer contributions of EI and CPP if an individual is incorrectly classified as a contractor

Question 49

What is ABIL?

Answer 49

50% of BIL

able to be applied against all other income (not just taxable capital gains)

Question 50

What are the general limitations for expense deductibility in regards to income taxes

Answer 50

• incurred for the purpose of earning income
• Reasonable
• Not of capital nature

Question 51

Tax rate to use on a transaction for personal taxes

Answer 51

ordinary income -52%
eligible dividends - 37%
non-eligible dividends - 46%

Question 52

Business use of home expenses

Answer 52

A taxpayer can deduct expenses for the business use of a workspace in the home, as long as they meet one of the following conditions:

• The home is the principal place of business.
• They use the space only to earn business income, and the taxpayer uses it on a regular and ongoing basis to meet clients, customers, or patients.
Eligible costs include: heat, home insurance, electricity, property taxes, repairs and maintenance, mortgage interest or rent (if tenant).
• Expenses are pro-rated using a reasonable basis such as the area of the work space divided by the total area of the home.
• Home office expenses are also pro-rated for a short business year.
• Losses cannot be created by home office expenses. Unused expenses are carried forward for use in a later year.
• Do not claim CCA on a principal residence, as it may negatively impact the ability to use the principle residence exemption.

Question 53

When determining the capital gain on thepersonal use property the ACB is the greater of what? and the proceeds is the greater of what?

Answer 53

ACB is the greater of the original cost and $1000

Proceeds are the greater of actual proceeds and $1000

Question 54

Eligible versus non-eligible dividends

Answer 54

• Individuals must include the actual dividend plus a gross-up in their net income for tax purposes. The grossed-up dividend is referred to as the taxable dividend. Dividends received by individuals will have been designated as either eligible or non-eligible by the corporation paying the dividend.

• Non-eligible dividends are paid by Canadian-controlled private corporations (CCPCs) out of after-tax active business income eligible for the small business deduction or from after-tax aggregate investment income subject to RDTOH.
o Since both of these types of income are taxed at preferential rates inside the
corporation, the gross-up and dividend tax credit rates on non-eligible
dividends are lower than the gross-up and dividend tax credit rates on
eligible dividends.
• Eligible dividends are paid by: Canadian public companies out of after-tax income taxed at the general corporate tax rate, or CCPCs out of the general rate income pool (GRIP).
• A CCPC’s GRIP balance comprises eligible dividends received and 72% of active business income not eligible for the small business deduction.

Question 55

If you were to transfer non-depreciable capital property to your spouse what would it transfer at?

Answer 55

ACB

Question 56

Tax rate to use on transactions for corporations

Answer 56

ABI qualifying for SBD - 12%
other ABI- 27%

Investment income- 50%

Question 57

Residency

Answer 57

• CRA considers both significant and secondary residential ties in assessing whether a taxpayer is a resident of Canada

• Significant residential ties – factors that make a strong case, in and of themselves, that residential ties exist:
o a home in Canada
o a spouse or common-law partner in Canada
o dependents in Canada

• Secondary residential ties – factors that may contribute to whether residential ties exist (including, but not limited to):
o personal property in Canada (car, furniture, etc.)
o social ties in Canada (memberships in Canadian recreational groups, etc.)
o economic ties in Canada (Canadian bank account or credit cards, etc.)
o Canadian driver’s licence, Canadian passport, or Canadian health insurance

• If a taxpayer is determined to be a resident of Canada, they are taxed on all of their worldwide income; non-residents of Canada are taxed only on income tied to Canadian sources

Question 58

Capital gain reserves are the lesser of what?

Answer 58

• reasonable reserve based on amount not due until after the end of the year and
• 1/5 of gain x (4- number of preceding years)

Question 59

Employer paid

automobile expenses - Taxable benefit

Answer 59

• A taxable benefit arises when an employee is given something that is personal in nature or if something that is personal in nature is paid for by the company
• A benefit may include an allowance or a reimbursement of an employee’s personal expense (e.g. personal fuel is reimbursed)
• The value of the benefit is generally its FMV
• If an employee is provided with a taxable benefit, the amount must be included in their income

Question 60

For replacement property, what is the UCC of the replacement property

Answer 60

• Replacement cost less capital gain and recapture deferred.

Question 61

Listed personal property includes what?

Answer 61

prints, etchings, drawings, paintings, scupltures, etc
jewellery
rare folios, rare manuscripts/books
stamps
coin