Title: Chapter 3 Liability for Tax, Income Determination, and Administration of the Income Tax System
1Chapter 3 Liability for Tax, Income
Determination, and Administration of the Income
Tax System
- Primary source Income Tax Act
- Other sources
- Income tax regulations
- Tax treaties
- Tax cases
- Bulletins, circulars, ruling, etc. published by
CRA
2The administrative process
- Filing income tax return by taxpayers
- Quick check by CRA and Notice of Assessment is
issued - Filing Notice of Objection if taxpayers disagree
- Taxpayers appeal to the Tax Court
- Further appeal to the Federal Court
- The Supreme Court is the ultimate arbiter
3Structure of the Income Tax Act
- Part I Income Tax
- Division A liability
- Division B computation of income
- Division C taxable income
- Division D non-residents
- Division E tax credits
- Division E.1 minimum tax
4Division B - NIFTP
- Employment income
- Business income
- Property income
- Capital gains/losses
- Other income/deductions
5Income determination
- Aggregate income from employment, business,
property and other sources - Determine net taxable capital gains, i.e.,
taxable capital gains net of allowable capital
losses - Sum up of (a) and (b), and net of other
deductions - Aggregate losses from employment, business, and
property, and allowable business investment
losses (ABIL), and subtracted from (c)
6Example - income determination
- A firm provides the following financial data
- Business income 90,000
- Gain on sale of land
- and building 24,000
- Loss on sale of shares (40,000)
- Net income per
- financial statement 74,000
-
7Additional information
- - Business income included accounting
amortization of 37,000 - - Capital cost allowance available as a tax
deduction - Machinery 20,000
- Equipments 12,000
- Required Compute the net income for tax purpose
(NIFTP).
8Tax planning - all parties
- Planner considers the implication of taxes to all
related parties, employees, employers, creditors,
suppliers, etc.
9Tax planning - all costs
- Taxes represent only one among many business
costs. - Non-tax costs
- - financial reporting
- - capital and other regulations
- - risk sharing
- - incentive systems
10Restriction to tax planningGeneral
Anti-avoidance Rule (GAAR)
- Intends to prevent abusive tax avoidance
transactions arrangements but not interfere with
legitimate commercial and family transactions - Tax benefits (tax reduction, avoidance, and
deferral) from an avoidance transaction will be
denied - Avoidance transaction a transaction with no bona
fide purposes other than getting tax benefits - Transactions that comply with the Act read as a
whole will not be affected
11Whether GAAR should be applied
- 1. Does any other provisions of the Act apply?
(no GAAR if yes) - 2 and 3. Does the transaction result in tax
benefits or is the transaction part of a series
of transactions which result in tax benefits? (no
GAAR if no) - 4. Can the transaction be considered to have been
undertaken for bona fide purposes other than to
obtain tax benefits? (no GAAR if yes) - 5. Does the transaction result in a misuse of the
provision of the Act or an abuse of the Act read
as a whole? (no GAAR if no)
12Examples
- An individual transfers his unincorporated
business to a corporation primarily to obtain the
benefit of the small business deduction.
13Examples
- The owner of land agrees to sell the property to
a purchaser. The purchaser wants to buy the
property for cash, but the owner does not want to
have the profits recognized in the year of sale.
The owner sells the land to an intermediary
deferring receipt of the proceeds for several
years after the date of sale (so reserve can be
claimed). The intermediary sells the land to the
purchaser for cash.
14Tax liability
- An income tax is paid on the taxable income for
each taxation year of every person resident in
Canada at any time in the year. - taxable income
- income for the year special deductions
15Full-time individual resident
- Criterion (common law) a continuing state of
relationship/ties with Canada. - the relationship/ties
- - amount of time spent in Canada on a regular
basis - - motives for being present or absent
- - a dwelling
- - a family
- - personal property and social ties.
16Deemed full-time
- Sojourned in Canada in the year for an aggregate
of 183 days or more. - Full-time resident will be taxed on his worldwide
income for the whole year.
17Part-time
- A clean break or a fresh start
- Transitional status
- Part-time resident will be taxed on his worldwide
income for the part of year while resident, and
on his Canadian-source income for the part of
year while non-resident.
18Residence of corporation
- Deemed resident
- Incorporated in Canada after April 26, 1965,
- or
- Central management and control in Canada
- Non-resident
19Non-resident
- Taxed on his income from
- being employed in Canada,
- carrying on business in Canada,
- disposing of a taxable Canadian property, at any
time in the year or a previous year
20Chapter 4 Employment Income
- Employee vs. self-employed/independent contractor
- The courts consider the following tests
- Economic reality or entrepreneur test
- - control
- - ownership of tools
- - chance of profit/risk of loss
- Integration or organization test
- Specific result test
21Structure
- Basic inclusion
- benefits and allowance
- ESO benefit
- - deductions allowed
- Basic inclusion salary, wages, and other
remuneration, including gratuities received
22Example - payroll
- Salary gross 78,000
- Payroll deductions
- RPP 2,000
- CPP 2,163
- EI 747
- Income tax withheld 17,000
- Union dues 590 (22,500)
- ----------
- Net salary 55,500
-
23Employee benefits
- All benefits are taxable except
- Employers contributions to retirement plans
including RPP and DPSP - Employers contribution to group sickness or
accident insurance plan, private health services
plan, supplementary unemployment benefits plan - Employer pays counselling services of mental or
physical health and the re-employment or
retirement
24Fringe benefits administrative practice
IT-470R
- Employer-paid social club membership is not
taxable if for employer advantage - Employer-paid financial counselling and tax
return preparation are included - Non-cash holiday gifts (up to 2 gifts) not over
500 are not taxable - Benefits from frequent-flyer accumulated through
employer-paid trips are included
25Taxable benefits
- Special Benefit calculations apply to
- Use of employer automobiles
- Loans from employers
- Relocation expenses
- Stock option benefits
26Automobiles
- To the extent that an automobile is for personal
use, a taxable benefit results. - There are two components
- Standby charge, and
- Operating cost benefit.
27Standby charge
- Employer owns the automobile, standby charge
-
Original Cost Number of the x 2 x of
Months Automobile Available
28Standby charge
- Employer leases the automobile, standby charge
Monthly Number Lease x 2/3 x of
Months Cost Available
29Reduced standby charge
- Reduced when the distance travelled is primarily
for employment duties (defined as 50 or more) - Personal use must be less than 20,000kms for the
year - Multiplying the standby charge by
- non-employment km/1,667kms x of months
30Operating cost benefit
- Operating Costs Prescribed rate (0.24) x
Personal kms - or
- ½ of standby charge, if primarily for employment
duties (defined as 50 or more)
31Example
- A car is leased by company for 6,000
- Operating costs paid by company for 4,800
- Business use of car 14,000km
- Total use of car 24,000km
- Calculate taxable benefit.
32Employee loans
- Low-interest or interest-free loans provided by
employers are a taxable benefit - Taxable Benefit
- Prescribed rate actual interest paid
33Employee loanshome purchase/relocation loans
- Rate used to determine the deemed interest
benefit is the lesser of - The prescribed rate in the quarter the loan was
outstanding. - The prescribed rate in effect at the time the
loan was granted. - If the prescribed rate declines, the lower rate
can be used.
34Employee loans - Example
- Mr. Maple borrowed 70,000 from his employer on
April 1,2010 at an annual rate of 2, to purchase
common shares of a public co. Interest was
payable monthly. - Note the prescribed rates are Q1 5, Q2 5, Q3
4, Q4 7
35Relocation expenses
- Reimbursement of loss on sale of home
- First 15,000 not taxable, but
- one-half of any amount above 15,000 is taxable
36Allowances
- All allowances are taxable, subject to specific
exceptions. - Allowance refers to
- a fixed, specified amount that is paid on a
regular basis - over and above a normal salary
- to cover certain expenses incurred
37Deductions
- Rule no deductions allowed, unless specifically
permitted - Most Common
- Travelling Expenses
- Salespersons Expenses
- Professional and Union Dues
- Works Space in Home
- Contributions to RPP
38Travel expenses
- Travel expenses incurred in the course of
work-related duties provided that the following
circumstances exist - Ordinarily required to carry employment duties
away from the employers place of business, - Employee is required to pay the travel costs, and
- Has not received a non-taxable allowance designed
to cover such costs.
39Travel expenses
- Travel expenses include
- Transportation
- Meals if away from the metropolitan area of the
employer for at least 12 hours, and limited to
50 - Lodging
40Travel expenses
- Vehicle cost, subject to limitations, include
- Gas and oil, repairs, insurance,
- Financing costs (interest), and
- Capital cost or lease costs
- Limitations to Vehicle Costs
- Vehicle cost limited to 30,000
- Lease cost limited to 800 per month
- Interest cost limited to 300 per month
41Salespersons expenses
- Deduct all amounts spent
- Limited to commission earned
- Items not limited to commission
- CCA on an automobile
- Automobile financing costs
42Salespersons expenses
- The following items are specifically not
deductible - Payments for the use of a yacht, camp, lodge, or
golf course - Membership fees or dues in a club
- main purpose to provide dining, recreational, or
sporting facilities to its members. - Capital expenditures that have a long-term benefit
43Salespersons expenses
- Deductible items include
- Advertising and promotion
- Telephone
- Parking
- Automobile
- Supplies
- Fees paid to assistants
- Work space in home
- Travel expenses
44Work space in home
- Permitted only when the work space is either
- The principal place duties are performed, or
- If first condition not met, then
- Used exclusively for earning employment income,
and - Used on a regular/continuous basis for meeting
customers or clients
45Work space in homeallowable costs
- Non-salesperson
- Appropriate portion of maintenance and utility
costs. - Salesperson
- The preceding items, plus an appropriate
percentage of property taxes and house insurance
premiums.
46Chapter 5 Business Income
- Business Income Defined
- General Rules for Determining Business Income
- Deductions denied and allowed
47Business income defined
- Can be earned by all three of the taxable
entities - individuals, corporations, and trusts
-
- Should be carried on with a reasonable
expectation of profit.
48General rules for determining business income
- The Act A taxpayers income for a taxation year
from a business is the profit therefrom for the
year - Business income for tax purposes is the profit
determined in accordance with well-established
business principles (such as IFRS/ GAAP). - IFRS/GAAP is good starting point adjustments
are made where the Act specifies other
requirements.
49IFRS/GAAP and ITA
- Similarities
- Accrual
- Net Concept
- Major Differences
- Amortization (Depreciation)
- Other Allocations
- Permanent Differences
- Non-Arms Length Transactions
50IFRS/GAAP and the ITA
- Net IFRS/GAAP Income XXX
- Add
- Expenses not allowed
- Disallowed deductions XXX
- Unreasonable amounts XXX XXX
- Deduct
- Expenses specifically allowed (XXX)
- Net income from a business for tax purposes XXX
-
51General limitations
- Expenses are deductible only if the following
conditions are met - Income Earning Purpose Test
- Capital Test
- Exempt Income Test
- Reserve Test
- Personal Expense Test
- Reasonableness Test
52Examples
- Charitable donation if not for producing income
- Accounting depreciation on fixed assets
- Major renovation of delivery vehicle to extend
its useful life - Cost incurred for arrange a buy-sell agreement
for shareholders - Appraisal fees to determine selling price of
fixed assets - Premium for life insurance on the co. president,
the proceeds of which are payable to the co.
53Expenses denied
- Use of recreational facilities and club dues
- No deduction permitted for the use or maintenance
of a yacht, a camp, a lodge, or a golf course,
unless part of normal business - Also denies all expenses incurred as membership
fees or dues in any club - Political contributions
- No political contributions are deductible
54Expenses denied
- Work space in home
- Deduction not permitted unless one of the
following conditions is met - The space is the individuals principal place
of business, or - If first condition not met,
- used exclusively for the purpose of earning
income from business, and - used on a regular or continuous basis for meeting
clients, customers or patients of the individual.
55Expenses denied
- Work space in home
- Permitted expenses include a proportionate amount
of - Maintenance cost (heating, home insurance,
electricity, cleaning material), - Mortgage interest,
- Property taxes,
- Capital Cost Allowance
- Total expenses cannot exceed business income for
the year. - Excess can be carried forward indefinitely.
56Expenses denied
- Meals and entertainment
- Amount permitted is limited to 50 of actual
costs - One of the exceptions (100 deduction)
- cost of food, beverage, and entertainment events
generally available to all employees (limited to
six occasional events per year).
57Expenses allowed
- The Act lists approximately 40 specific items
that are permitted as deductions even though,
according to the six general limitations, they do
not normally qualify.
58Expenses allowed
- Capital cost allowance
- Interest on borrowed money used for earning
business income - Financing Expenses
- Expenses for issuing shares or borrowing money
- Permitted as a deduction equally over five
years - Printing and ad costs, filing fees, legal fees,
transfer fees, commissions etc for issuing shares
59Examples Financing Expenses
- Legal and accounting fees related to the issuance
of shares - Costs incurred regarding the renegotiation of the
bank loans - Appraisal costs to determine value of the
equipment for the bank
60Expenses allowed
- Reserves for doubtful debts
- Can claim a reserve on amounts receivable if
- it is anticipated that they wont be collected,
- reserve is reasonable, and
- that the debt, when established, created income
for the taxpayer.
61Expenses allowed
- Reserves for delayed payment revenues
- Reserve may be deducted when
- inventory has been sold, and
- all or part of payment not due until after two
years. - Long-term payment schedule can be recognized over
a period of time. - Utilized for no more than three years,
- even if payment terms are longer.
62Reserves
- Whenever a reserve is allowed, the deduction must
be added back to income the following year. - A new reserve can be deducted if it can still be
justified.
63Example
- A firm sold its goods for 24,000 with cost of
12,000. It received cash of 15,000 for the sale
with the balance to be paid over the next 3 years
at a rate of 3,000 per year.
64Solution
- Reserve profit unpaid revenue / total revenue
- Profit revenue - COGS
65Expenses allowed
- Representation expenses
- Representation to the government for license,
permit, franchise or trade-mark relating to
business - fully deductible
- can elect to deduct equally over 10 years
- Convention expenses
- Limited to two conventions in a year
66Expenses allowed
- Employers contributions to RPP, DPSP,etc.
- Expenses deductible on a cash basis
- Landscaping
- Site investigation fees
- Utility service connections
67Inventories
- Inventory can be valued
- 1. Value each item of inventory at LCM, OR
- 2. Value all items of inventory at FMV
- Cost of good sold are calculated by
- 1. Specific identification, OR
- 2. Average cost, OR
- 3. FIFO
68SRED
- SRED carried on within Canada, the following
special provisions apply - Expenditures (both current and capital) can be
deducted in full in the year incurred - The business can choose not to deduct and carry
forward indefinitely - A credit will be applied to the expenditures
68
69Chapter 6 Acquisition, Use, and Disposal of
Depreciable Property
- Depreciable Property and Capital Cost Allowance
(CCA). - The Treatment of Eligible Capital Property
(ECP).
70Depreciable property and CCA
- Calculation of the CCA
- Start with opening balance (UCC).
- Add any additional purchases.
- Deduct any disposals.
- Apply the appropriate CCA rate to the resulting
balance.
71CCA rates
- The Act assigns various types of assets to
specific classes. - Each class has a specific rate attached to it.
- signifies the maximum deductible in any year.
- No requirement to claim this maximum
- can choose to claim any amount up to the max.
- Unclaimed portions is available for deduction in
future years.
72Common classes
- Class 1 4
- Buildings After 1987
- Class 8 20
- Miscellaneous Tangible (equipment, office
furniture etc.)
73Common classes
- Class 10 30
- Vehicles
- Movable equipment
- Class 10.1 30
- Vehicles With Cost Greater Than 30,000
74Common classes
- Class 12 100
- Small Tools
- Computer Software
- Dishes
- Books
75Common classes
- Class 43 30
- Manufacturing Equipment
- Class 44
- Patents after April 26, 1993
- Can choose to use class 14
- Class 52 - 100
- Computers acquired after Jan 27, 2009 and before
Feb 2011
76Pooling assets of the same class
- Assets of the same class are placed in a common
pool, - provided all used in the same business.
- A purchase will add that pool of assets.
- A sale of an asset will remove it from the pool.
77Pooling assets of the same class
- The one-half rule applies only on net additions.
- If disposals exceed purchases, no one-half rule.
- When assets are sold, the CCA pool is reduced by
lower of - Original cost, or
- Proceeds of disposition.
78Example Class 8
Undepreciated Cost of Capital
- UCC beginning of year 70,000
- Additions 60,000
- Disposals (50,000) 10,000
- 80,000
- CCA
- 20 x 70,000 14,000
- 20 x 10,000 x ½ 1,000 (15,000)
- UCC 65,000
79Gains/losses on disposition
- Gains/losses can occur at three points
- Terminal Loss
- All assets in pool are disposed of, and
- Positive balance in the pool.
- Recapture
- Negative balance left in a pool
- Regardless of whether there are assets left.
- Capital Gain
- The selling price exceeds the original cost.
80Special treatment of passenger vehicles luxury
- Passenger vehicles costing more than 30,000.
- Class 10.1 limits the tax deduction for luxury
cars. - Maximum claim is 30,000 regardless of cost.
- Assets are not pooled.
- No recapture or terminal loss
- One-half rule
- Applies in the year of acquisition
- Is claimable in disposal year.
81Exceptions to declining balance
- Leasehold improvement (class 13)
- Tenant is responsible for the cost of making the
rented space suitable to their needs. - Expenditures are
- tangible improvements to the rental property,
and - at the end of the lease, cannot be removed.
- Allocated using the straight-line method over the
life of the lease plus one renewable option
period.
82Exceptions to declining balance
- Franchises and licences ( class 14)
- a limited legal life
- CCA is determined separately for each item
- The annual CCA
- straight-line basis based on number of days owned
in the year divided by the total number of days
in the life of the asset.
83 Eligible capital property
- Intangible nature with unlimited life
- Some common types
- Goodwill (purchased).
- Franchises, licences, and concessions with no
legal limited life. - Trademarks.
- Customer lists.
- Incorporation costs.
84Rules for eligible capital property
- All assets are pooled together.
- Additions and disposals are recorded at 75.
- Annual rate of 7.
- No one-half rule
85Example
- In 2009, a firm purchased an existing business
and acquired a franchise (unlimited life) for
10,000 and goodwill for 30,000. In 2011, the
franchise was sold for 60,000 but the business
continues.
86Chapter 7 Income from Property
- Income from Property Defined
- General Rules
- The Unique Features of Property Income
87Income from property
- An annual or regular return received for allowing
another party to use ones property. - Property income includes
- Dividends shares
- Interest loans, deposits, etc.
- Rental income real estate
- Royalties patents, etc.
88General Rules
- Net amount
- Deduction of expenses which are incurred for
earning property income
89Interest income
- Interest income the compensation received for
the use of borrowed funds. - Corporations on an accrual basis
- Include as income on a daily basis,
- even though not received or receivable until some
future time. - Individuals -
- The cash method
- The annual accrual method
90Annual Accrual Method
Required method so cannot defer for long periods
Loans 100,000 on February 1, 20X1. Loan must be
repaid in two years. Interest is charged at 12,
compounded annually and is payable at the end of
two years.
- Cash Method
- Year Income
- 20X1 0
- 20X2 0
- 20X3 25,440
- Total 25,440
- Annual Accrual Method
- Year Income
- 20X1 0
- 20X2 12,000
- 20X3 13,440
- Total 25,440
Yr 1 100,000 x 12 12,000 Yr 2 112,000 x 12
13,440 25,440
91Foreign interest
- Gross amount is included
- amount received plus foreign taxes withheld.
- If foreign tax is withheld may receive a
foreign tax credit
92Dividend income
Individual
Individual
Dividend
Dividend
Corporation
Dividend
Corporation
Corporation
93Dividends received by individuals
- Dividends from taxable Canadian corporate shares
are included when received - Grossed Up
- Received from Private Corporations
- 125 - if eligible for special low-tax rates.
- 144 - if not eligible for special low-tax rates.
- Received from Public Corporations
- 144
- A dividend tax credit (DTC) is available
94Dividends received by individuals
Corporation Income 100 Tax _at_ 20
(20) Net earnings 80
- Individual Shareholder
- Dividend from Corporation 80
- Taxable dividend (80 x 1.25) 100
- Tax _at_ 45 45
- less DTC (20)
- Net personal tax 25
- Total tax paid on Corporate profits
- Paid by corporation 20
- Paid by individual 25 45
95Rental Income
- Rental Income Rent Expenses
- Interest expenses, costs incurred to obtain loan
financing - Insurance, property taxes, utility costs
- Repairs, maintenance costs
- Landscaping costs around a building
- CCA
- Salaries and wages, property management fees
- Accounting costs, costs incurred to collect rents
96Special Rules for CCA
- Apply only to rental property
- CCA claimed on rental properties cannot incur a
rental loss - Separate classes for each rental building costing
50,000 or more
97Shareholder-manager remuneration package
- Salary vs. dividends
- Paying dividends
- reduces shareholders tax payable
- not tax deductible for the corporation.
- Paying salary
- tax deductible for the corporation
- taxed in the employees hand
- Which is best - dividend or salary, or a
combination? - A mix of dividend and salary is best when the
corporate tax rate is less than 20 - Paying salary is best when the corporate tax rate
is above 20
98Salary vs.dividend
- Other considerations
- Paying salary will be qualified for contributing
to RRSP and RPP because salary income is used to
calculate the contribution limit. Dividends are
not qualified - Paying salary may incur payroll tax
99Tax-planning
- Evaluating investment choices based on after-tax
return - Use excess cash to purchase personal assets use
borrowed funds to purchase investment assets
maintain clear records
100Example
- An individual borrows 10,000 at 10 to
purchase either a cottage or an investment.
Individual has a tax rate of 45. - Cottage personal use
- Interest paid 1,000
- Tax saving 0
- Cost of loan 1,000
- Investments
- Interest paid 1,000
- Tax saving (450)
- Cost of loan 550
101Chapter 8 Capital Gains and Losses
- CG/CL Defined
- Determining CG/CL General Rules
- Specific Capital Properties
102Determining CG/CL
- Proceeds of disposition xxx
- less adjusted cost base (ACB) (xxx)
- less disposition expenses (xxx)
- net amount xxx
- less reserve (xxx)
- CG/CL xxx
- TCG/ACL ½CG/CL
103Deferred Proceeds
- Maximum reserve in any year is equal to the
lesser of - (i) deferred proceeds / total proceeds x net
amount, and - (ii) 80 of the gain in year 1, 60 in year 2,
40 in year 3 20 in year 4 and 0 in year 5
104Reserves an example
- Selling a piece of land with ACB of 130,000 for
200,000 in 2009, he receives 80,000 in cash at
time of sale, 30,000 in 2010 and 90,000 in
2011. - Net amount 70,000
- Reserve claimed in 2009
- 70,000 x 120,000/200,000 42,000, or
- 4/5 x 70,000 56,000 (42,000)
- Capital Gain recognized in 2009 28,000
- Taxable Capital Gain 1/2x28,000 14,000
105Small business corporation (SBC)
- a private corporation that is Canadian-controlled
(CCPC), and - that uses all or substantially all of its assets
(at least 90) to conduct an active business.
106Small business corporation (SBC)
- Up to 250,000 taxable capital gains from QSBCS
are exempted. - Qualified small business corporation shares
(QSBCS) - (a) a share of SBC at the time of disposition
- (b) held throughout 24 months and
- (c) the share for the past 24-month was a share
of CCPC and more than 50 assets were used in an
active business - Allowable business investment loss (ABIL)
incurred on the disposition of - a loan to a small business corporation, or
- shares of that corporation
- An ABIL can offset against all other sources of
income
107Superficial Losses (denied)
- No intention of disposing of the asset,
- disposed of and then reacquired within 30 days.
- The actual loss is added to the ACB of the
reacquired asset
108Superficial loss example
- Taxpayer sold 500 shares in Corp X for 8,000 on
Dec. 31, 2010 with an ACB of 10,000. On Jan 5,
2011 he reacquires 500 shares of Corp X for
7,500. - Shares sold on December 31, 2010
- POD 8,000
- ACB ( 10,000)
- Actual loss ( 2,000)
- Superficial loss deemed to be nil nil
- ACB of shares purchased on Jan 5, 2011
- Original POD 7,500
- Denied loss 2,000
- New ACB 9,500
109Personal Use Property (PUP)
- Gains Taxed
- Losses Non-Deductible
- This restriction is applied to each item of
personal property. - Minimum POD 1,000
- Minimum ACB 1,000
110Listed Personal Property (LPP)
- PUP that has some element of investment value
- A print, etching, drawing, painting, or
- sculpture, or other similar works of art
- Jewellery
- A rare folio, rare manuscript, or rare book
- A stamp
- A coin
- Losses recognized, but only deductible against
gains on LPP. - Unused losses
- Carried back 3 years, or forward 7 years
- Remember
- Minimum POD 1,000
- Minimum ACB 1,000
111Identical properties
- The ACB of each identical property acquired is
the weighted average cost of all the identical
properties acquired
112ACB Identical properties
- Acquire shares as follows
- Year of Shares Cost per share Total
- 20X6 100 6 600
- 20X7 200 8 1,600
- 20X8 80 10 800
- 380 3,000
- ACB per share (3,00/380) 7.89
- Sale Proceeds ( 150 x 9) 1,350
- ACB (150 x 7.89) ( 1,183)
- Capital Gain 167
113Principal residence
- Owned and ordinarily inhabited for personal use,
one principal residence per family unit,
designation at sale - Claim exemption against capital gains
114Principal residence
- exemption
- The 1 is included to cover the year in which
two houses are owned as a result of the normal
process of selling one house and acquiring a new
one
1 Yrs. Designated Principal Residence X
Gain Number of Years Owned
115Principal residence an example
- A taxpayer acquired a house in 2006 for
100,000. In 2008 he acquired a vacation home for
50,000. In 2010 both properties were sold the
house for 150,000 and the vacation home for
95,000
116Comprehensive example
- Properties proceeds cost
- Shares of co.X 60,000 40,000
- Shares of co.P 17,000 41,000
- Art 8,000 6,000
- Boat 9,000 12,000
- Grand piano 11,000 10,000
- Stamp collection 18,000 21,000
- Shares of small
- business corp. 8,000 20,000
117Chapter 9 Other Income/Deductions, and Special
Rules for NIFTP
- Other Income
- Other Deductions
- Special Rules for NIFTP
118Other income
- RRSP and RRIF benefits
- Pension benefits from employers pension plan
- OAS, CPP, EI
- DPSP benefits
- Foreign pension benefits
- Retiring allowances
- Scholarship, fellowships, bursaries
- Support payments
119Other deductions
- Major items
- RRSP contributions
- Support payments to a former spouse, if
- Periodic and
- By virtue of a court order.
- Fees/expenses for objection or appeal of a tax
assessment - Moving expenses
- Child care expenses lower income spouse
120Moving expenses
- Deductible if
- incurred for relocation to commence a business or
employment - attend a university or other post-secondary
school - to the extent of income earned in the new
location - Moving Income in
- expense gt new location
- Then
- Carry forward unclaimed portion and deduct in
following year.
121Moving expenses
- Deductible expenses include
- Travel costs in moving to new place (meal 51 per
day w/o receipt), - Transportation and storage of belongings,
- Temporary board and lodging (up to 15 days),
- Costs of cancelling a lease for the old
residence, - Selling costs of the old residence,
- Legal fees and land transfer taxes,
- Cost of maintaining a vacant former residence
within limits (up to 5,000), - Cost of revising legal documents
122Child care expenses
- Includes
- the cost of babysitting, day care, or lodging at
a boarding school, - children 16 years of age or less,
- If incurred so taxpayer could pursue employment,
business, or research activities. - Limits
- 4,000 per child 7 to 16, 7,000 per child under
7, or - 2/3 of the taxpayers earned income for the year.
- Lower income spouse claims
123Example
- Marge and Homer have 3 kids, aged 8,6, and 1. In
the year, Marge earned 40,000 and Homer earned
15,000. Marge paid 250/week for the three
children for 52 weeks in the year, which were
qualified as child care expenses. What is the
amount deductible for tax purposes?
124NAL transactions
- Non-arms length (NAL)
- special rules prevent the elimination or
reduction of tax by selling at a price other than
fair market value. - Taxpayers are considered not to be dealing at
arms length if they are related to each other.
125Non-Arms Length (NAL)
- Sell Price lt FMV
- Vendor deemed to have sold at FMV
- Purchaser no adjustment
- Sell Price gt FMV
- Vendor no adjustment
- Purchaser ACB is deemed equal to FMV
- Gifting
- Vendor sales price FMV
- Purchaser ACB FMV
126Non-Arms Length (NAL)
- 1. Individuals are related if they are
direct-line descendents - 2. Individual is related to a corporation if
- controls the corporation,
- a member of a related group that controls the
corporation, or - is related to an individual who controls the
corporation - 3. Corporations are related if control
127Property transferred to spouse or child
- Transferred to spouse
- Deemed to have been sold at cost automatic.
- Can choose to recognize a gain on spousal
transfer - Transferred to child
- whether by gift or sale, is deemed for tax
purposes to have been sold at FMV per NAL rules
described.
128Attributions
- Subsequent income received by spouse/child on
transferred property is attributed back to
original owner - Exceptions
- if property is transferred to a spouse at FMV
- Income on property transferred to child
- If over 18
- If capital gains or losses
- Second-generation income
129Example
- Ms. Martel has 6000 shares with ACB of 35 per
share. She is thinking of transfer the shares
equally to her spouse and two sons (one is 15 and
the other is 21), - by gifting
- selling at 20 per share
- Discuss the tax consequences.
130Chapter 10 Individuals Taxable Income And Taxes
Payable
- Taxable income
- Calculation of Tax for Individuals
131Taxable income
- A taxpayers taxable income for a taxation year
is - The special reductions are grouped together in
Division C of The Act. - Stock options
- Losses not utilized in other years
- Lifetime capital gain deduction
Taxable income Net Income Special Reductions
132Taxable income
- Net income for tax purposes
- a) Employment Income
- Business Income
- Property Income
- Other items
- Plus
- b) Net Taxable Capital Gains
- Less
- Other items of deductions
- Less
- Aggregate of losses from Employment
- Business, Property and ABILS
- Net Income for tax purposes (NIFTP)
133Taxable income
- Net income for tax purposes XXX
- Less
- Special Reductions
- Stock Options (XXX)
- Losses not utilized in other years (XXX)
- Lifetime capital gain deduction (XXX)
- Taxable Income
134Loss carryovers
- Net capital loss
- Non capital loss
- Farm loss and restricted farm loss
135Net capital losses
- Net Capital Losses
- Allowable capital losses incurred in current
year but cannot be utilized, - can be carried back three years, and
- forward indefinitely,
- only deductible against capital gains.
- Exception upon the death,
- unused losses may be deducted against any type of
income earned in the year of death or in the
preceding year.
136Non-capital losses
- Unused business, property and employment losses
and ABILs - Can be carried back three years and forward
twenty against any source of income.
137ABIL - special treatment
- ABIL unused after twenty-years
- reclassified as a net capital loss, and
- can be carried forward indefinitely
- to be used only against future capital gains.
138Farm losses
- Farm losses chief source of income is farming
or fishing. - Farm losses are treated the same as business
losses.
139Restricted farm losses
- Part-time farming
- Unused losses classified as restricted farm
losses. - Unused losses can be
- carried back three years, and
- forward twenty years,
- only be deducted against farming losses
140Capital gain deduction
- Lifetime Capital Gain Deduction is available only
for - Qualified small business corporation shares, and
- qualified farm property.
- Deduction is 1/2 of 500,000 (250,000)
141Calculation of tax for individuals
- Income tax is imposed by the federal and
provincial governments - Federal tax - of taxable income
- Provincial tax - of taxable income
142Determination of Tax for an Individual
143Primary Federal Tax
Taxable Income Range (2006) Rate
Up to 40,970 15
40,971 - 81,941 22
81,942 - 127,021 26
Over 127,021 29
144First category of credits
- Dividend tax credit Type A Corporations
- Equal to 25.9 of the taxable amount of dividends
received from Canadian corporations. - Dividend tax credit Type B Corporations
- Equal to 16 2/3 of the taxable amount of
dividends received from Canadian corporations.
145Dividend tax credit
- Type A Corporations
- Canadian Public Corporations
- Canadian Private Corporations not Canadian
controlled - CCPC not eligible for SBD
- Type B Corporations
- CCPC eligible for SBD
- CCPC earning investment income
146First category of credits
- Basic
- 15 x 10,382
- Spouse or equivalent to spouse
- 15 x
- 10,382, reduced by spouses net income
147First category of credits
- Infirm dependants
- Individuals supporting a
- related person,
- over the age of 18, and
- dependent by reason of physical or mental
infirmity. - Tax credit 15x4,223
- reduced by 15 of dependants net income in
excess of 5,992. - necessary for dependant to be living with
supporting individual.
148First category of credits
- Caregiver
- Provide in-home care for
- a parent or grandparent who is 65 or older, or
- dependent relative who is infirm.
- 633 tax credit against federal tax.
- Reduced by 15 of the dependents income in
excess of 14,422.
149Personal credits - summary
- Every taxpayer will take either the married,
equivalent to married, or single credit - A dependent credit can only be claimed if the
dependent is 18 or older and mentally or
physically infirm - The same dependent person cannot be used for both
equivalent to married and the dependent credit - The same dependent person cannot be used for both
dependent and caregiver credit
150Planning for personal credits
- If you have a single dependent who qualifies
infirm dependent (and therefore also equivalent
to married), you will generally want to take
equivalent to married - If you have a second dependent, who would not
meet infirm dependent but meet equivalent to
married status (e.g., a child of the taxpayer
under 18), use the second dependent to claim
equivalent to married and the first to claim the
dependent credit
151First category of credits
- Age amount 65 years of age or older.
- Disability a severe prolonged mental or
physical impairment. - Can be transferred to spouse
- CPP and EI
- 15 x CPP and EI contributions
152First category of credits
- Pension
- 15 on first 2,000
- qualified pension income received in a year.
- Charitable donations
- 15 x first 200 of annual contributions
- 29 x the remainder.
- Annual donations cannot exceed 75 net income.
- Unused Donations can be carried forward for 5
years.
153First category of credits
- Medical expenses
- 15 x qualified medical expenses exceeding
- either 3 of the taxpayers net income, or
- 2,024, whichever is less. Tax planning
- Choose the 12 month period to maximize the
credit, i.e., group the maximum amount together
in the 12 month period - As the credit depends on the income in the year,
this may affect the year you take the credit in
(the period you choose)
154First category of credits
- Tuition fees
- attend a university, college, or other certified
post-secondary institution. - 15 x tuition fees paid.
- Education amount and textbook credit
- Full-time students 15 x 465 x each month of
full-time attendance. - Part-time education 15 x 140 x each month of
part-time attendance.
155Tuition and education credits
- The student may not have sufficient income to
utilize the above credits. - The unused portion is transferable up 750 (15
x 5,000) annually to a spouse, parent, or
grandparent. - Alternatively, the student may keep the unused
credit and carry it forward indefinitely.
156Second category of credits
- Foreign tax credit
- Political contributions
- Based on a graduated scale.
- The annual credit is
- 75 of the first 400,
- 50 of the next 350, and
- 33 1/3 of contributions over 750.
- Maximum of 650 annually
- Investment tax credits
157Chapter 11 Corporations An Introduction
- Determination of Taxable Income
- Calculation of Corporate Tax
- The Integration of Corporate and Individual
Taxation
158Determination of taxable income
- A corporations taxable income is
- Net income for tax purposes
- less special deductions
- Donations to charitable organizations
- Loss carryovers
- Inter-corporation dividends
159Calculation of corporate tax
- Two basic categories for tax purposes
- Public corporations
- Canadian residence and shares are traded on a
stock exchange. - Canadian-controlled private corporations (CCPCs)
- Canadian residence
- Not a public corporation, and
- Not controlled by non-residents of Canada.
160Determination of Tax for Corporations
161Tax Rates
- Basic federal tax rate 38
- Federal abatement for provincial tax (10)
- Net federal tax 28
- General rate reduction (10)
- Total federal tax 18
- Provincial tax (assume) 13
- Effective total tax 31
-
162Corporate taxation in Europe
- Countries Tax rates
- Austria 34
- Belgium 40
- France 35
- Germany 39
- Ireland 16
- Italy 40
- Netherland 35
- Spain 35
- UK 30
163Multi-provincial tax
- A corporation carries on business in a province
through a permanent establishment such as an
office, branch, warehouse, or factory - The profits attributable to that province are
based on the ratio of - sales in the province to total sales, and
- wages paid in the province to total wages,
164Example
- Ontario Alberta U.S.
- Salary 40,000 (40) 30,000 (30) 30,000 (30)
- Sales 100,000 (20) 200,000 (40)200,000 (40)
- Average30 (4020)/2 35 (3040) 35
- Taxable income earned in a province is 65
- Income tax paid to Ontario taxable income ? 30
? Ontario tax rate - Income tax paid to Alberta taxable income ? 35
? Alberta tax rate
165Refundable tax on investment income (ART)
- Applies only to the investment income of a CCPC.
- Additional tax is 6 2/3 of investment income
and - Fully refundable to the corporation when
dividends are paid.
166General rate reduction
- Public corporations
- 10 x taxable income not subject to manufacturing
and processing activities - CCPC
- 10 x active business income
- Above the annual small business limit, and
- Not eligible for the MP reduction
167Small business deduction (SBD)
- Available only to CCPCs
- 17 x the first 500,000 of annual active
business income of the corporation, or - Taxable income, whichever is lower
168Manufacturing and processing deduction
- Profits from manufacturing and processing (MP)
activities - Public corporation - 10 of MP profits
- CCPCs 10
- only on annual manufacturing profits in excess of
the SBD amount
169The integration of corporate and individual
taxation
- Corporations are taxed on their profits separate
from their shareholders. - After-tax corporate profits are distributed in
the form of a dividend, - tax is again payable on the dividends received.
- Two-tier system creates the possibility of double
taxation.
170Chapter 13 CCPC
- Taxation of Income Earned by a CCPC
- Overall Tax Calculation for a CCPC
171Taxation of income earned by a CCPC
- Net income for tax purposes must be allocated
into five areas before taxes can be computed - Active business income
- Specified investment business income
- Capital gains
- Dividends
172Active Business Income (ABI)
- ABI is business income from any business carried
on by the corporation other than - a specified investment business, and
- a personal services business.
- ABI includes property income closely related or
incidental to business activities - i.e. interest income earned on overdue A/R.
173Tax Treatment of ABI
- First 500,000 x 17 (federal tax)
- Referred to as the small business deduction
(SBD). - The 500,000 SBD limit is an annual amount
- if unused, cannot be carried over to other years.
174Specified Investment Business Income
- A business with a primary purpose to earn
property income which includes - interest,
- rents,
- royalties, and
- dividends from non-affiliated foreign
corporations. - Dividends from other Canadian corporations and
foreign affiliates are excluded from this
definition since these dividends are not taxable.
175Tax Treatment of Specified Investment Business
Income
- Disqualified as ABI
- is not entitled to the SBD
- In addition a special refundable tax of 6 2/3
must be paid. - This special refundable tax is fully refundable
to the corporation upon payment of dividends.
176Capital Gains
- Taxable capital gains treated the same as
specified investment business income. - Capital Dividend
- a mechanism to avoid double taxation on capital
gains - distributes the tax-free portion of the gain to
the shareholders - an election is required
177Dividends
- Taxable Canadian dividends received by a CCPC are
subject to special tax treatment. - This special treatment depends on the degree of
ownership that the corporation has in the
corporation paying the dividend.
178Dividends Received from Non-Connected
Corporations
- Non-connected if
- Non-Connected Dividends received are taxed at 33
1/3 (Part IV tax) of actual dividends received
but this tax is fully refundable upon the payment
of