Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
TAXX301 (ch.6)
Income or Loss From a Business
| Question | Answer |
|---|---|
| what is the definition of a business under the ITA? | ITA 248(1) - Includes a profession, calling, trade, manufacture, or undertaking of any kind |
| what is the key difference between business and property income? | Business: ongoing, continuous activity Property: Little or no activity |
| what is the criteria for commencement of a business? | - some significant activity is undertaken that is part of the regular income earning process - there is an essential preliminary step taken - person is committed to a course of action and actively taking steps to create the necessary business structure |
| what is the three step process in determining if there is a source of income? | 1. has property been acquired or an activity undertaken? 2. is there a personal element to property acquired or the activity? 3. is the level of activity of property owner or person undertaking activity passive, or active on a continuous basis |
| what is a flip transaction? | property purchased with sole intention of immediately selling and earning a quick profit |
| what is the criteria for a flipped property? | a housing unit situated in Canada that was owned <365 consecutive days before it's disposition and was not already considered to be inventory |
| are there exceptions to the flipped property rule? | yes, life events like birth of a child, divorce, etc. can cause a grounds for exception to the flipped property rule |
| what are the tax consequences for the taxpayer when they dispose of flipped property at a gain? | 1. they are considered to have carried on business with respect to flipped property 2. property is considered inventory not capital property 3. income from flipped property is considered business income, not a capital gain (loss is nil not capital loss) |
| what are the three types of property? | 1. Inventory 2. Depreciable property 3. Non-depreciable capital property |
| what are the tax applications for inventory? | - gain (loss) on sale is treated as business income (loss) - 100% included in income, 100% deductable for losses - not applicable to income |
| what are the tax applications for depreciable property? | - forms part of income earning source (business/property) - sale can result in recapture, terminal loss, capital gain |
| what are the tax applications for non-depreciable capital property? | - disposition results in capital gains/losses - no requirement that capital property be used in income earning activity |
| does income (loss) from property include capital gains/losses? | no, capital gains/losses are treated separately in subdivision c |
| are symmetrical treatment and the matching principle required by the ITA? | no, unless specific provision requires it |
| what must be done to accounting profit to determine business income for tax purposes? | accounting profit is a starting point, but it must be reconciled to income for tax purposes |
| what is the general rule for reconciling accounting income to tax income? | the 9-12-18-20 rule ITA9: accounting income (starting point) ITA12: additions to property/business income ITA18: general limitations on deductions ITA20: permitted deductions other specific provisions |
| when are amount deemed receivable on an accrual basis? | the day invoice was sent, or would have been sent if no undue delay |
| what is the reserve concept for unearned revenue? | - include whole amount received in advance - include separate claim for reserve of the same amount (if reserve is deducted in one period, it must be included in income for the following period) *optional and not allowed when amount has been earned |
| what are the criteria for a business to have "quality of income"? | - business has absolute and unconditional right to amount - was under no restriction (contractual or otherwise) as to it's disposition, use, or enjoyment |
| what are the 3 specific reserves allowed by the ITA? | - bad debts - undelivered goods and services - unpaid amounts |
| when is the bad debt deduction allowed (ITA 20)? | - if it was included in income in current or preceeding year - determined efforts to collect were unsuccessful - clear evidence to indicate |
| how is the inventory reserve for unpaid amounts applied (ITA 20)? | - calculate gross profit percentage - apply gross profit percentage to unpaid amount at year end (net increase in business income for year is gross profit - reserve) |
| what are the 5 general rules for limitations on deductions from business/property income? | 1. expense is connected to existing source of income 2. must be incurred for income earning purpose 3. it can be a capital expenditure, but only if allowed in ITA 4. expense cannot be personal 5. amount claimed must be reasonable |
| is "must be incurred to produce income" a specific limitation (ITA 18)? | yes, expense must be connected to business/property source of income - ask "would the expenditure have been incurred in the absence of business or property?" |
| how do capital expenditures apply under ITA 18? | no deduction for capital expenditures |
| how do recreational facilities and club dues apply under ITA 18? | no deductions for amounts incurred to maintain yacht, camp, lodge, golf course, or facility (unless taxpayer is in business of providing said properties for hire) |
| how do safety deposit box fees apply under ITA 18? | no deductions for safety deposit box fees |
| how do political contributions apply under ITA 18? | no deductions for political contributions (limited tax credit for individuals) |
| how do lease cancellation payments apply under ITA 18? | no deduction for lease cancellation payments |
| how do certain automobile allowances apply under ITA 18? | - restriction of amount employer can deduct to per kilometer allowance paid to employee ($0.72/$0.66 or $0.76/$0.70 for territories) - if employee is required to include allowance in income, employer can fully deduct without regard to prescribed amounts |
| how do payments under the ITA apply under ITA 18? | no deduction for amounts charged under ITA 18 including federal income taxes, interest, and penalties |
| how do interest and property taxes on land apply under ITA 18? | - if not used in the process of a business, deduction limited to gross revenue less all other expenses - property taxes and interest can't be used to contribute to a business/property loss (if land is inventory, add property taxes and interest to cost) |
| how do soft costs apply under ITA 18? | - not deductable - addded to cost of building examples: interest, legal, accounting, insurance, property taxes |
| how do prepaid expenses apply under ITA 18? | - no deduction for outlays and expenses paid in current year for goods/services to be delivered after end of tax year - matching concept applied - deductions limited to year which expense relates |
| how does business use of home office expenses apply under ITA 18? | - deductable conditionally - must be either principle place of business, orused exclusively for earning business income and used on a regular and continuous basis for client, customers, and patients of the individual |
| what home office expenses are deductable to all types of income earners? | - rent (as tenant) - utilities - repairs/maintenance - home phone and internet (to the extent used for business) |
| what home office expenses are deductable to those with business income and employees earning commissions, but not regular employees? | - municipal property tax - home insurance |
| what home office expenses are deductable to those with business income only? | - mortgage interest - CCA on home |
| what are the tax consequences of expenses for foreign media directed at the Canadian market? | no expenses allowable, unless 80% of non-advertising content is "original editorial content" in which case 50% of advertising expenses are deductable |
| what are the 2 permitted inventory valuation methods? | - lower of cost and FMV for each inventory item, or class of items - FMV of entire inventory *selected method must be applied consistently year-over-year (FMV is either replacement cost or NRV) |
| what inventory methods are allowed? | - specific identification - average cost - FIFO - retail method |
| what inventory method is not allowed for tax or accounting purposes? | LIFO |
| what 2 overhead absorption methods are allowed? | - direct costing (not permitted for accounting) - absorption costing *must choose method that provides most accurate picture of business income |
| how does CCA apply under ITA 20? | - deductions of capital expenditures as CCA are allowed |
| how do incorporation expenses apply under ITA 20? | - maximum of $3,000 - excess added to CCA class 14.1 |
| how does simple interest apply under ITA 20? | - it is deductable - includes interest on borrowed money used for earning business/property income - also includes interest on amount payable on property used for business/property income |
| how does compound interest apply under ITA 20? | allowable as a deduction when paid (not when accrued) |
| how do financing expenses apply under ITA 20? | - deductable on straight line basis over 5 years (20% per year) - includes legal fees, guarantee fees, mortgage applications, brokerage fees |
| how do annual fees for financing apply under ITA 20? | - fully deductable in year incurred - includes registrar fees and filing/service fees |
| how do premiums on life insurance apply under ITA 20? | - deductable if required as collateral/security by financial institution |
| how do discounts on debt obligations apply under ITA 20? | - includes bonds, mortgages, and notes issued at a discount - if issued at 97% or more of maturity value, or if yield is more than 4/3 coupon rate, only 50% is deductable |
| how do employer DPSP apply under ITA 20? | deducted if paid within 120 days from end of year |
| how do costs of lease cancellations apply under ITA 20? | deducted on pro rate per diem basis over remaining lease term, including all renewal periods - max 40 years |
| how do landscaping costs apply under ITA 20? | deductable but must be paid within year (no accrual) |
| how do expenses of representation apply under ITA 20? | - amounts paid in year for purpose of obtaining license, permit, franchise, trademark - relates to business carried on by taxpayer |
| how do site investigation costs apply under ITA 20? | allowed in year paid |
| how to utilities service connections costs apply under ITA 20? | allowed in year paid |
| how to disability related costs and equipment apply under ITA 20? | allowed in year paid |
| how do convention expenses apply under ITA 20? | - deductable, but no more than 2 per year - must be in location consistent with territorial scope of organization |
| what is explained under ITA 67 - Reasonableness? | - allows reasonable portion of expense that is still linked to existing source of income - "what would a businessperson in a similar circumstance have expensed?" - used commonly by CRA in non arms-length situations |
| what is explained for meals and entertainment under ITA 67.1? | - 50% deductable, remainder lost - includes meals with clients, tickets, vacations, etc. |
| what are the limitations on deductions for taxpayer owned automobiles ITA 67? | - CCA limitation of $38,000 for class 10.1 ($61,000 for class 54) - interest limitation of lesser of interest paid for year or $11.67 per day (applies to classes 10.1 and 54) |
| what are the limitations on deductions for automobile leasing costs ITA 67? | - limitation to prescribed amount of $1,100 (2025) plus GST/HST and PST for each 30 day period |
| what is the final deductable amount for automobile leasing costs? | the least of... - actual lease payments - amount determined by basic cumulative formula - amount determined by anti-avoidance formula |
| what is the basic cumulative formula? | (AxB/30) - C - D - E A: lease limit B: # days from lease start and year end C: total past deductions for lease D: notional interest since lease start (prescribed rate on amounts paid by lesee over $1,000) E: reimbursements paid n year by taxpayer |
| what are the prescribed lease limit amounts from before 2022 to 2025? | before 2022: $800 2022: $900 2023: $950 2024: $1,050 2025: $1,100 *prescribed amount for lease is locked in at start of term |
| why is the anti avoidance formula necessary? | to prevent reduced impact of limitation by extending the lease term, or requiring lesee to purchase vehicle at end of lease at inflated value, or by paying a large up front amount |
| what is the anti-avoidance formula? | (A)(B/0.85C) - D - E A: yearly lease charges B: presc. amount (10.1 or 54) C: greater of ($38,000 * 100/85), or vehicle list price D: notional int. since lease start (prescribed rate on amounts paid by lesee over $1,000) E: reimb. in year by taxpayer |
| how is leasinf of property treated in tax vs accounting? | accounting: some leases need to be capitalized tax: no capitalizing |
| from what tax year are business profits included when they have a non calendar fiscal year | the calendar year of the last day of fiscal period |
| what is a stub period for business income? | period between start of fiscal period to december 31st (in first year of operations) |
| in what year is stub period income included? | in the year following the year business began |
| how is 2025 business income calculated for a company with a Jan 31 fiscal period that was incorporated on Nov 1st, 2024? | Nov '24 - Jan '25 (92 days) Profit: $25,000 Feb - Dec '25 (334 days ) estimate ($25,000 * (334/92): $90,761 2025 business income: $115,761 |
| how is 2026 business income calculated for a company with a Jan 31 fiscal period that was incorporated on Nov 1st, 2024? | Feb '25 - Jan '26 Profit: $80,000 deduction of 2025 estimate added: $(90,761) estimate income Feb 1 - Dec 31 '26 ($80,000 * (334/365): $73,205 2026 business income: $62,444 |
| what is deductability of business losses for a full time farmer under RFL rules? | business losses fully deductable |
| what is the deductability of business losses for a part time farmer under RFL rules? | - involved in farming business, but not main source of income - losses restricted (ITA 31) |
| what is the deductability of losses for a hobby farmer under RFL rules? | no source of income, no business exists, no losses deductable |
| what are the two pieces of farm loss calcualted for part time farms under ITA 31? | 1. unrestricted 2. RFL |
| what is the calculation for unrestricted farm loss for part time farms under ITA 31? | loss of up to $2,500: the farm loss loss of $2,500 to $32,500: $2,500 + 50% of loss above $2,500 loss of $32,500 and higher: maximum amount of $17,500 |
| what is the calculation for RFL for part time farms under ITA 31? | - difference between total loss and unrestricted farm loss |
| what is the application of the RFL for part time farms? | the amount is deductable in future years against profits from the same farm |
| what does WIP mean in an income tax context? | work in progress. amounts expected to be receivable after year-end (unbilled work) |
| how is WIP treated under ITA 10(4,5)? | it is treated as inventory |
| what is the value of WIP? | lower of cost and FMV |
| should WIP be included in business income? | Yes it should be |
Created by:
user-2025479