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TAXX301 (ch.7)
Income or Loss from Property
| Question | Answer |
|---|---|
| what fiscal period is property income always based on? | it's based on the calendar year (no fiscal period) |
| what types of property can exist within property income sources? | depreciable and non-depreciable propertt can exist, but no inventory |
| does property income include capital gains/losses? | no it does not |
| what's the main differences between income from property and business | property: passive, waits for return business: active, ongoing work |
| what are the 5 sources of property income listed in the textbook? | 1. investment property 2. rental properties 3. properties generating interest income (loans, bonds, savings accounts) 4. patents/rights to use property 5. interest/dividends earned from ownership of mutual fund units |
| what is the three step analysis for determining if a source of income exists? | 1. has property been acquired or an activity undertaken 2. is there a personal element to property/activity 3. is the level of activity from property owner active/continuous or passive? |
| what aspects apply to property income but not to business income? | - CCA can't contrib. to rental loss - No CCA short fiscal per. rule - Cap. gains deduction not avail. if gain on shares of prop. income corp - RRSP contrib. based on inc. but restr. for prop. inc. - mov. and child care exp. not deduct. from prop. inc. |
| what must interest relate to in order to be deductible from property income? | - borrowed funds used to earn business/property income - amount payable for purchase of property used to earn income from business or property |
| does direct use have to be considered for interest as a deduction from property income? | yes, direct use must be considered (ex. if you withdraw from a partnership, using funds to buy a home, and taking out a loan to replace partnership funds would not be direct use) *economic reality doesn't override direct use |
| what is a disappearing source with respect to interest deductibility from property income? | - applies if property is non-depreciable other than real estate - happens when you sell investment at a loss, and proceeds cannot pay loan balance |
| what is the deductibility consequence in the case of a disappearing source? | borrowed money still considered connected to a source of property income, and interest deductible |
| what is "filling the hole" with respect to interest expense with property income? | interest is deductible when borrowed money is used to pay dividends, repurchase/redeem shares, or return part of capital/equity |
| what are "interest free loans" with respect to interest expense with property income? | - interest on borrowed money to re-lend to one's own corporation interest-free or below received rate is deductible - interest on borrowed money is deductible by corporation if to employees but not to shareholders |
| what is the interest deductibility for common and preferred shares? | CRA allows interest deductibility on funds borrowed to buy shares as long as capability exists to earn property income *no interest deduction if corp declares it doesn't pay dividends in the foreseeable future |
| what are discounts and premiums on debt obligations? | discount: when a debt obligations is issued with an interest rate below current market rate (maturity value > price) premium: when a debt obligation is issued with an interest rate above current market rate (price > maturity value) |
| when are excess amounts paid to retire bonds over proceeds from sale deductible (at maturity)? | - bonds issued at at least 97% of maturity value, and - effective yield not more than 4/3 of the stated rate (otherwise only 50% deductible) |
| what are the tax consequences of issuance of debt at a premium for different types of taxpayers? | money lenders: premium taken into income immediately corporations to add to capital structure in support of business that has nothing to do with money lending: premium taken as capital receipt other taxpayers: premium is a non-taxable receipt |
| when is interest income recognized for corps and partnerships vs individuals? | corps/partnerships: full accrual (same as GAAP) Individuals: modified accrual method (interest must be accrued on each anniversary date of the investment contract) |
| on what basis is rental income calculated? | - accrual basis - cash basis allowed if rental income/loss is nearly the same as teh accrual method |
| what are the 6 deductions from rental income indicated in the textbook? | - interest - utilities - property taxes - repairs and maintenance - management fees - CCA (restricted) |
| what is the CCA rate for buildings acquired after 1987? | 4% (class 1) |
| what is the CCA rate for buildings acquired before 1988? | 5% (class 3) |
| what is the CCA rate for new buildings acquired after March 18th, 2007 and used more than 90% for rental purposes? | 10% or 6% based on usage *election must be made to include as separate class 1 |
| what must be done for each rental property acquired to 1971 costing over $50,000? | must be included in separate class 1 |
| can CCA be used to contribute to a rental loss? | no it cannot |
| what is the purpose of the rules toward short-term rentals? | the are designed to penalize short-term rentals of residential properties in cities/municipalities where they are prohibited, or when they are allowed but owners have not satisfied registration, permit, or license requirements |
| what is the penalty for short-term rentals (non-compliant amount) | amount disallowed from rent expense as per formula: AxB/C A) total deductible rent expenses (including CCA) B) # of days in year where property is non-compliant C) # of days in the year that property is offered for rent as a short-term rental |
| what is a short-term rental? | when a residential property is offered for rent for a period of less than 90 consecutive days |
| when do the penalization rules for short-term rentals begin? | effective as of 2024 |
| when are dividends from a taxable Canadian corporation included as property income? | when received (declaration date is irrelevant) |
| what is a taxable Canadian corporation? | - incorporated in Canada - resident in Canada - exempt from part I tax |
| what is a dividend gross-up? | dividends received by an individual from a TCC are increased by an amount that reflects income tax paid by the corporation |
| what is a dividend tax credit? | - individual calculates income tax payable on grossed up taxable dividend amount - the DTC is applied against individuals gross income tax (equals approximate amount of corporate income taxes paid by corporation) |
| what are the 2 issues with reaching perfect integration with dividends from TCC's? | hard to apply specific gross-up and DTC numbers that apply to all TCC's because... - corporations subject to federal and provincial income tax rates that can vary province to province - different types of corporate income subject to different tax rates |
| what are the two categories of taxable dividends created as an attempt to achieve uniformity? | 1. elligible dividends 2. non-elligible dividends |
| what are elligible dividends? | - generally issued by Canadian public companies - gross-up: 38% - assumed income tax rate for integration: 27.536% |
| what are non-elligible dividends? | - generally issued by CCPC's - gross-up: 15% - assumed income tax rate for integration: 13.043% |
| how is the elligible federal dividend tax credit calculated? | - 6/11 (54.5455%) of 38% dividend gross up amount - 15.0198% of grossed up dividends, or - 20.7273% of actual dividends received |
| how is the non-elligible federal dividend tax credit calculated? | - 9/13 of 15% gross up amount - 9.030% of grossed up dividends, or - 10.3846% of actual dividends received |
| what is a mutual fund? | most mutual funds are organized as trusts to allow for allocation of investment income to individual unitholders as if owned investment directly |
| what is a mutual fund trust? | - individual investors hold units - unitholders are considered beneficiaries of trust, entitling them to receive distributions of income and capital from trust |
| trusts are a ___ entity for income tax purposes | flow-through entity (if trust distributes all income, unitholder is the only one paying tax on trust income) |
| what does MFT stand for? | mutual fund trust |
| what does MFC stand for? | mutual fund corporation |
| what are mutual fund corporations? | - mutual fund taxed at regular corporate income tax rates on investment income - individual investors hold shares (shareholders) - distributions are treated as dividends subject to gross up and tax credit |
| what doe ACB stand for? | adjusted cost base |
| what is an adjusted cost base? | the starting point for calculating capital gain |
| how does adjusted cost base apply to mutual fund trusts? | - allocated income to unitholder can be reinvested without unitholder receiving anything - still subject to tax - reinvestment amount added to ACB of trust units if MFT makes capital distribution that is a return of capital, ACB of trust units reduced |
| how does adjusted cost base apply to mutual fund corporations? | - ACB not changed after dividend distribution - if return of capital made by corporation, ACB of shares reduced and no income inclusion - if dividends reinvested, cost of additional shares are added to ACB of original shares |
| what are capital dividends | - dividends paid to shareholders from a companies capital account (i.e. shareholders equity) - tax free status achieved if election made by private corporation that has capital dividend account (CDA) |
| what does CDA stand for? | capital dividend account |
| what accumulates in a CDA? | amounts of private corporation that are tax-free (i.e. life insurance proceeds, half of capital gains/losses, etc.) |
| how are capital dividends declared? | - corporation first declares a regular dividend, then files election to treat dividend as tax-free capital dividend - CDA balance is then reduced |
| what does the ITA look at with respect to stock dividends? | paid up capital |
| what does PUC stand for? | paid up capital |
| what is paid up capital? | - basically equivalent to accounting share capital - amount of dividend=increase in PUC - amount of dividend added to ACB of shares |
| what type of tax credit is provided to avoid excess tax or double taxation of foreign income of Canadian residents? | a foreign tax credit |
| what does FTC stand for? | foreign tax credit |
| what is included in foreign non-business income? | foreign employment income, capital gains, rental income from foreign properties (passive), foreign investment income (dividends, interest) |
| what is the maximum tax credit for foreign non-business income and how is it calculated? | - maximum tax credit of 15% for individuals - ITA 20(11) permits amount in excess of 15% to be deducted against foreign non-business income |
| what is the maximum tax credit for foreign business income and how is it calculated? | - no limit on how much foreign taxes can be claimed as FTC; - however FTC can't be higher than amount of Canadian tax that would have applied had income been earned in Canada |
| does property income include amounts where an individual is a shareholder of a corporation? | yes it does |
| what are the 4 examples of property income earned as a benefit from being a shareholder of a corporation? | - low or interest free loans - provision of automobiles - non-business travel - cash withdrawals from corporate bank account or personal expenditures charged to corporation through a corporate line of credit or corporate credit card |
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