Structure of the Income Tax Act
Read 1: II. Do exercise 1 and problem 1 A-E, F-J, K-O.
Canada's estimated total all-government gross debt (March 31, 1996):
$3,460,000,000,000 or $116,000 per person.
GDP: $807,000,000,000
Debt charges: $69,000,000,000.
Total government revenues: $384,000,000,000.
What could be taxed?
Taxes levied:
Government of Canada Budgetary Revenues
| ITA 2: | |
| WHO pays | |
| HOW MUCH tax | |
| calculated HOW | |
| paid WHEN |
Principles of income taxation
1. Taxation should be equitable (fair).
2. Laws should be understandable (and not cost too much to administer).
3. Taxation reflects government policy.
4. What is income?
5. Whose income should be taxed?
ITA 2(1): "An income tax shall be paid ... on the taxable income ..."
ITA 2(2): "The taxable income ... is the taxpayer's income plus the additions and minus the deductions permitted by Division C."
ITA 3:
Annual income =
Employment +
Business +
Property +
Net capital gains -
subdivision e deductions
Note calculation is by source. See IT-206R.
See text page 19.
Read 1: I, III, IV. Do exercise 2 and problem 2a, b-e.
Appeals
Tax evasion
Planning, avoidance, or evasion?
You purchase an apartment in your child's name. You act as landlord, e.g. show it to renters, make repairs, collect rent. Before the year ends you sell it at a profit.
| GST example | ||
| Materials | 30 | 2.10 |
| Labour | 50 | |
| Profit | 20 | |
| Selling price | 100 | 7.00 |
| Goods and services tax | ||
|---|---|---|
| "Registrants" | ||
| "Supplies" | ||
| Input tax credits | ||
| Zero rated supplies: | ||
| Prescription drugs | ||
| Medical devices | ||
| Basic groceries | ||
| Exports | ||
| Exempt supplies: | ||
| Health care | ||
| Child care | ||
| Educational services | ||
| Financial services | ||
| Used houses | ||
| Rental of housing | ||
Tax planning
After tax values (see example):
where:
Read 1: V. Do exercises 3, 4 and problems 4, 5.
115: Non-residents pay tax on Canadian
253: Business income includes employee who:
Tax treaties:
Read 2: I. Do exercises 1, 2 and problems 1, 2, 3.
Residence (corporations):
Read 2: II, III. Do exercise 3 and problems 4, 5, 6.
GST:
Read 3: I. Do exercise 1 and problem 1.
5(1): Employment income is calculated on a cash basis
Income from office or employment includes:
6(1)(a): Value of board & lodging
and other benefits:
Revenue Canada's position
[see IT-470R, the
special release,
IT-529,
and the 1998 article by Lara Friedlander and Jana Steele in the
Canadian Tax Journal Vol. 46, No. 4]:
6(9), 80.4: Deemed interest on employee loans (less amount paid within 30 days of yearend) is taxed.
But: interest benefit on first $25,000 of home relocation loan deducted under
Division C.
6(15): Amount of forgiven loan taxed.
E.g. Employee receives a 3% $60,000 loan on 1 October 1996. Assume the prescribed rate is 4%. Assume she makes one interest payment 1 January 1997, and then loan is forgiven in March 1997.
6(1)(b): Allowances for personal or living expenses:
Read 3: IIA, B, C, D. Do exercises 2, 3, 4 and problem 2.
6(1)(e), 6(2): Auto standby charges
[see IT-63R5],
basically
A/B * (2% * C * D + 2/3 * [E - F])
Employer buys car for $30,000 plus 7% GST and 8% PST.
Employer leases car for $12,000/year plus 7% GST and 8% PST.
Does A/B have an affect?
Operating cost benefit:
Employee drives car for 20,000 km, of which 6000 are personal. Employer pays $5000 of the operating costs.
Read 3: IIE, F. Do problem 3.
6(1)(f): Employment insurance benefits
[see IT-428]:
Read 3: IIG, H, I. Do exercise 5 and problems 4, 5.
7: Stock options
[see IT-113R4]:
Table showing the taxable income arising on the receipt of employee options, the exercise of the option, and the sale of the shares.
Read 3: IIJ. Do problems 8.5, 10.1.
8(1): Deductions from employment income:
(h): Travel expenses
[see IT-522R
and IT-518R]:
(i): Professional and union dues, rent, assistant's wages, supplies
[see IT-352R2].
(m): RPP contributions
[see IT-167R6]:
$86,111 * 2% * 35 years = $60,278
(h.1): Motor vehicle travel expenses (for other than salesmen):
See text exhibit 3-1
(j): Deduct
CCA (at 15% in first year, 30% in other years, 15% in last year if luxury car, otherwise recapture if any)
Example:
Assume car is acquired January 1 for $40,000 plus 7% PST and 7% GST. If the car is 100% financed at 6%, how much interest expense and CCA is deductible?
Employees can file for a refund of GST paid on items deducted under ITA 8;
however the refund is taxable when received [6(8)].
General comments:
Read 3: III, IV, V, VI. Do exercises 6, 7, 8, 9, 10 and problems 6, 7A, 7B, 8A, 8B, 9, 4.4A, 4.5A, 4.5B.
Start with GAAP
Income vs. capital account
E.g. If you buy a cow intending to fatten it and resell it, then the sale is on income account.
If you buy the cow intending to sell her milk, then any eventual sale of the cow is on capital account
Income vs. capital damages:
see IT-185R
Income vs. capital subsidies:
see IT-273R
and IT-273RSR
Windfalls
Illegal revenues
[see IT-256R]
& expenses [see ITA 67.5]
Do exercise 2.
ITA 10: Inventory valuation:
see IT-473.
General exclusions:
18(1)(a): Not laid out to gain or produce income from business.
67: Reasonable in the circumstances.
78(1): Unpaid amounts owing to non-arm's length parties.
If not paid in 1997 or 1998, then
78(4): Unpaid remuneration.
ITA 12: Specific inclusions:
ITA 20: Deductions permitted Example: 6 year bond with
20(1)(l),(m),(n); 20(8): Reserves:
Example: Sell widget for $100, with cost of $60.
Read 4: IB, II, IIIA. Do exercises 3, 4, 5, 6, 8 and problem 6.
Farming & fishing business
Example:
Read 4: IIIB, E, G. Do problem 8.
Do problems 2, 10.3.
GST: input tax credits
ITC cannot be claimed for:
CCA basic rules [see IT-128R
and IT-285R2]:
CCA special cases:
Read 5: IA, B. Do exercises 1, 2, 3 and problems 1A, 1B, 2A, 2B.
13(4): Exchange of property election
[see IT-259R2]: E.g. what if item 2 replaced in 1995 by item 4 costing $2500?
Read 5: IC. Do exercise 4 and problem 3.
IT-233R: Capital lease
13(7): Change in use:
Read 5: IF. Do exercise 6 and problem 6 (determine CCA and capital gain amounts).
14, 20(1)(b): Eligible capital property ("nothings")
[see IT-143R2 and the
special release]
Examples:
Note that patents belong in class 44 (or class 14 if they have a limited life).
CECA [see IT-123R4]:
Read 5: II. Do exercises 7, 8 and problems 7, 8, 9A, 9B, 10A, 10B.
GST and capital property
Capital personal property (CPP):
Change of use:
Commercial passenger vehicles:
Read 5: III.
12(1)(c), 20(14): Interest income
[see IT-396R]:
12(4): Individuals include interest received plus,
Example: Purchase $1000 6% bond on November 1, 1998, interest paid annually on October 31.
ITR 7000: Note use of effective interest rate.
12(1)(g): Payments based on production or use
[see IT-462].
Read 6: IA, B. Do exercise 1 and problem 2.
12(1)(j) and 82(1): Dividends from Canadian corporations:
15(1): Benefit conferred on a shareholder
[see IT-432R2]
15(2): Loans to shareholders
[see IT-119R3,
the special release,
and taxation article in May 1997 CA Magazine]:
Exceptions:
Example: Borrow $1000 at 4% 1 October 1996, pay back $1060 31 March 1998.
15(9): But may still have taxable deemed interest benefit under 80.4.
80.4: Interest benefit on loans:
Read 6: ID. Do exercises 2, 3, 4 and problem 3.
Income attribution
[see IT-510
and IT-511R]:
Except:
56(4.1): Attribution also applies to non-arm's length
[see ITA 251 and
IT-419R]
loans, not at FMV, if main reason for loan is to reduce tax.
Read 6: IE. Do exercise 5 and problem 4.
Income from property - Deduction limitations
18(2): Carrying charges on land:
For instance, firm has a piece of land in downtown Winnipeg originally purchased for $40,000, being used as a parking lot.
Read 6: IIA. Do exercise 6 and problem 5.
18(3.1): Construction soft costs:
Rental properties
[see IT-195R4
and IT-434R
and the special release]:
E.g.: Purchase a building in 1995 for $60,000, earn rent of $6000 less expenses of $5000; sell in 1996 for $67,000.
Read 6: IIB, C. Do exercise 7 and problem 6.
Personal loans
[see IT-445
and IT-498]:
Read 6: IID, E, F. Do exercises 8, 9 and problems 7, 9, 10.
GST & Property Income
Interest & dividends are exempt from GST.
"Supply" includes provision of property, including license, rental or lease, other than:
Shareholder benefits under 15(1) are subject to GST as are employee benefits under 6(1)(a).
Read 6: III, IV. Do exercises 10,11 and problem 8.
Assessing taxpayer's intention (primary and secondary):
Basic example:
40(1): Capital gain (loss) =
- Adjusted cost base [ITA 54]
- Expenses of disposition
- Reserve (for cash not received)
- Exemptions (principal residence)
38(a): Taxable capital gain = 75% of capital gain.
38(b): Allowable capital loss = 75% of capital loss.
38(c): Allowable business investment loss (A.B.I.L.) = 75% of business investment loss.
39(4): Taxpayer can elect to have all Canadian securities [ITA 39(6)] be capital properties,
40(1)(a)(iii): Reserves [see IT-236R3
and IT-436R]:
See example.
Read 7: I, II. Do problem 2 (capital account only).
47: ACB of identical properties:
53(1): ACB (of non-depreciable capital property) additions:
53(2): ACB (of non-depreciable capital property) reductions:
Read 7: IIID, E, F, IV. Do exercises 3, 4, 5 and problems 6, 9.
The following topics are not covered this year:
Discussion of capital gains continues in Chapter 8.
GST
Read 7: V.
44(5): Replacement property:
13(4) and 44: Election on replacement
[see IT-271R]:
Read 8: IID, E. Do exercise 4 and problems 1 and 2 (ignore the ssec 44(6) election).
13(21.1): Disposition of building for less than cost amount (share of UCC):
E.g.
Suppose land sold for $96 and building on it for $24. Cost was $16 each; building has a UCC of $12. Then there is recapture of $4 and a capital gain of $120 - 32 = $88. Division B income is $66 + 4 = $70.
Read 8: IIF. Do problem 3.
45: Property with more than one use:
Example: Buy land to use in business at $10. Convert to inventory when FMV = $18, sell at $16.
45(2): Where property initially acquired for personal use, can elect not to have deemed disposition on change of use.
ITA 54 definition of "principal residence" permits an individual to designate home as principal residence even after change in use to income earning (or before change in use from income earning):
Read 8: IIG, K, L, M.
251: Non-arms length
[see IT-419R]:
69(1): Transfers
[see IT-405
and IT-209R]:
E.g. I give my sister 100 BCE shares (which I purchased at $8/share) currently trading at $14/share.
Read 8: III. Do exercises 8, 9.
73, 74.2: Attribution of capital gains and losses
Do exercise 10 and problems 5, 6A (ignore the V-Day values).
70(5,5.1,6,6.2): Death
[see IT-305R4]:
E.g. Bequeath asset with original cost of $10,000, UCC of $4,165 and FMV of $7,500.
Subdivision d: other sources of income:
Alimony and maintenance:
Other inclusions:
Pension reform:
8301: Pension adjustment:
RRSP deduction limit:
146(1): Earned income is income from employment (ignoring RPP contributions), self-employment, rental income, authors'/inventors'
royalties, alimony, net research grants.
RRSPs:
146.01: Home buyers plan
RRSP maturity:
Death of annuitant:
Transfers:
Do exercises 1,2,3 and problems 1,2a,2b.
Other deductions in computing income (subdivision e):
62: Moving expenses incurred
Do exercise 4 and problem 3.
63: Child care expenses:
Higher income spouse limited to lessor of:
Lower income spouse gets lessor of (a), (b), and (c) (computed using her earned income) less what higher income spouse claims.
Do exercise 5 and problem 4.
64: Attendant care expenses:
64.1: "Factual" residents:
Do problems 5, 6
DIVISION C DEDUCTIONS:
111: Prior year losses
[see IT-232R3]:
111(8): Net capital loss:
111(8): Non-capital loss:
Claiming loss carry-overs:
Read 10 IB. Do exercise 1 and problems 1, 2, 3 (ignore the listed personal property).
DIVISION E COMPUTATION OF TAX:
118(1): Personal credits:
118.7: 17% tax credit for UIC and CPP premiums payable for the year.
82(1), 82(3), 121: Dividend tax credit:
180.1: Individual surtax:
127(3): Political contributions:
126: Foreign tax deduction:
Read 10: IIA, B, C, H, J, M, O, T. Do exercises 3, 8 and problems 7, 10A (ignore medical).
Other credits:
110.1: Charitable donations:
111: Prior year losses
are classified into
[see IT-232R2]:
Read 11: IA, B, C, D. Do exercises 1-5 and problem 1.
Where control of a corporation is acquired by a (group of) persons: 111(5.1), (5.2): UCC
and CEC must be brought down to FMV by claiming extra CCA and CECA.
111(5): Non-capital losses can only be deducted against income of
similar
[see IT-302R3
and IT-206R]
business carried on with a reasonable expectation of profit.
Read 11: IE, F. Do exercises 6, 7 and problems 2A, 2Bi, 2Bii, 3, 4, 5.
Division E: Computation of tax
Taxable income earned in a province
[see IT-177R2
and the special release]:
Example:
Read 11: IIA, B, C. Do problem 6.
Tax credits/deductions
127(3): Political contributions:
126: Foreign tax deduction:
Do problem 10.
Canadian manufacturing and processing profits
[see
IT-145R]:
Read 11: IV. Do exercise 9 and problem 9.
Discussion of tax credits for corporations continues in Chapter 12.
125(7): Active business
[see IT-73R5]:
Active business income includes ancillary income (e.g. interest on temporary investments).
Read 12: I, IIA, B, C. Do exercise 1 and problem 1.
251(1): Related persons are deemed not to deal at
arm's length.
251(2): Related persons:
256(1): Associated corporations
[see IT-64R3]:
256(1.2): Control
256: Ownership includes:
Read 12: IID. Do exercises 2, 3, 4, and 5 and problems 2AE, 2FJ, 3AD, 3EG, and 4.
125.1(1): Manufacturing and processing profits deduction
Read 12: IIF, H.
Refundable taxes on investment income:
123.3: Refundable Part I tax:
= V(0) * [1 + r] ^ n
= V(0) * [1 + R * {1 - t}] ^ n
= V(0) * {[1 + R] ^ n * [1 - t(n)] + t(n)}
= V(0) * {{[1 + R] ^ n - 1} * [1 - t(n)] + 1}
V(n) = V(0) / [1 - t(0)] * {[1 + R(1)] * ... * [1 + R(n)] * [1 - t(n)]}
= V(0) / [1 - t(0)] * [1 + R] ^ n * [1 - t(n)]
Chapter 2 (revised 97.03.27): Residence of taxpayers
Residence (individuals):
See IT-221
and the special release.
2(1): Residents pay tax on world income.
Purchaser has legal liability for payment.
"Commercial" excludes:
Registration exemptions:
If not registered, cannot claim input credits.
Chapter 3 (revised 98.11.30): Income from employment
Employee or contractor?
[See IT-525R
and the 1997 article by Joanne Magee in the
Canadian Tax Journal Vol. 45, No. 3.]
Including amounts that there is an unconditional right to receive
[see IT-335R
and IT-440R2].
[9(1): Business
and property
income are calculated on an accrual basis.]
5(1): Salary, wages, gratuities, and advances
[see IT-222R]
6(1)(c): Director's fees
6(3): Signing bonuses and contract completion gratuities
See Reg. 4301 for prescribed rates.
Year
Quarter
Rate
1997 I 4%
1997 II 3%
1997 III 4%
1997 IV 4%
1998 I 4%
1998 II 5%
1998 III 5%
1998 IV 5%
Does it matter if loan is used to buy:
Prorated if less than 10% of km and 1000 km/month are personal.
Standby charge is 2% * 12 * $30000 * 1.15 = $8,280.
Standby charge is $12000 * 2/3 * 1.15 = $9,200
Personal kms
1200
2400
Total (annual) kms
10,000 No No
20,000 10%* No [* = 1200/12000]
30,000 10% 20%** [** = 2400/12000]
6(1)(k): employer owned (or leased) car:
50% of standby charge (> 50% business use),
Otherwise: 14 cents per kilometre. (See Reg. 7305.1.)
6(1)(l): employee owned (or leased) car: percent of kilometres
Taxable benefit:
Benefit = FMV - option price when exercised
(less 25% in Division C
[110(1)(d) and (d.1)], provided option price > FMV at date option granted).
Benefit is deferred till shares sold for arms-length employees of CCPCs.
Cases C and D are for an employee of a CCPC who holds the shares less than 2 years. Case
Exercise price
Date option issued
Date option exercised
Date shares sold
Share price: 11 44 96
A 4 0 40 52 - 13 = 39
B 20 0 24 - 6 = 18 52 - 13 = 39
C 4 0 0 40 + 52 - 13 = 79
D 20 0 0 24 + 52 - 13 - 6 = 57
E 4 0 0 40 + 52 - 13 - 10 = 69
F 20 0 0 24 + 52 - 13 - 6 = 57
Cases E and F are for an employee of a CCPC who holds the shares more than 2 years.
Note that if the employee paid 7 for the option, then employment income would be 7 less, and the 25% reduction would apply in every case.
(b): Legal expenses to collect employment income
(f): Sales expenses
[see IT-522R]:
8(10): T2200 form
8(4): meals can be claimed only if out of town > 12 hours
67.1(1): 50% rule for meals and entertainment
Money purchase RPPs, DPSPs, RRSPs limited to
Defined benefits plans limited to 2% of highest income (< $86,111) times years of service (< 36).
$9 deposited into pension plan is assumed to yield $1 of annual pension.
So $18 deposited yields $2.
$18 deposited annually for 35 years yields $70 annual pension.
18% * $86,111 = $15,500, maximum contribution to money purchase plan.
See Canadian Tax Journal Vol. 46, No. 1 (1998) p. 125 - 146.
Cannot deduct if allowance was excluded from income.
(i.e. Exclude allowance and expenses
or Include allowance in income and
itemize expenses, including interest and CCA.)
Note that the personal portion is not deductible.
and interest on car, limited to:
$26,000 [$25,000 if lease began in 1997] plus PST and GST
. 85 * manufacturer's list price
Times the lease payments
What if leased at $10,200 (including PST and GST) a year?
E.g. If pay $321 for gas and 1/3 is business use, deduct $107. Claim GST refund of $7 and include $7 in income next year.
Compliance by employers through T4 filing
Deductions limited since most employers provide reasonable allowances and reimbursements.
If employer gives allowance for costs, possible benefit under 6(1)(b)(viii.1), (x),
(xi).
If employee incurs costs, possible deduction under 8(1)(f), (h.1), (j).
Chapter 4 (revised 98.10.08): Business income
ITA 9: What is business [defined in ITA 248] profit?
Exclude capital items
Adjust for ITA provisions:
If you acquired the asset intending to make money by selling it, it's inventory (i.e. on income account).
If not, it's on capital account.
see IT-459,
IT-218R for real estate sales,
and IT-479R
and IT-479SR
for security sales.
Read 4: IA. Do exercise 4.1 and problems 4.1, 7.1.
12(1)(r): Depreciation in inventory
18(1)(b): On account of capital.
18(1)(e): A reserve (e.g. for a contingent liability or warranty).
See IT-215R.
18(1)(h): Personal or living expenses.
18(1)(l): Club dues.
See IT-148R3
and IT-211R.
18(1)(r): Car allowance of over 29 cents/kilometre.
18(12): Home office must be principal work place or regular meeting
place. See IT-514 and
8(13).
19, 19.1: Foreign advertising.
67.1(1): 50% rule for meals and entertainment.
See IT-518R.
Include in income in third year after accrual.
See IT-109R2.
31.12.96 Dr. Legal exp. 500
Cr. A.P. 500
01.01.99 Dr. A.P. 500
Cr. Legal exp. 500
Accrual deemed void if unpaid 180 days after yearend.
20(1)(a) CCA
20(1)(b) CECA
20(1)(c) Interest
20(1)(d) Compound interest
20(1)(e) Expenses of raising capital
[see IT-343R3]
20(1)(e.1)(e.2) Financing costs
[see IT-309R2]
20(1)(f) Bond discounts
then 100% of amount paid, otherwise 75%.
face value of $1000 issued at:
See IT-442R
and IT-154R
and IT-152R3.
Collect $10 at date of sale,
balance is payable at $20 per year plus interest.
Do exercise 7 and problems 3, 4B, 7.
28: Can use cash method. See IT-433R.
Losses
Taxpayer incurs loss from farming of $15,000.
Can claim $2,500 + .5 (15,000 - 2,500) = $2,520 + .5 (12,500) = 8,750.
Remaining $15,000 - 8,750 =
$6,250 is a
restricted farm loss
which cannot be claimed this year.
Read 4: IV.
Chapter 5 (revised 98.10.15): Capital cost allowance
13, 20(1)(a): CCA
What if item 2 sold for $1900 instead of $2000? 1991 1992 1993 1994 Total
Opening balance 0 4750 4275 2439
Additions
3000 3000
2000 2000
1000 1000
Proceeds of disposition
-2565 -2565
-2000 -2000
-500 -500
5000 4750 2710 -61 935
Half year rule -2500 0 0 0
2500 4750 2710 -61
10% CCA -250 -475 -271 0 -996
Recapture 0 0 0 61 61
Half year rule 2500 0 0 0
Closing balance 4750 4275 2439 0 0
What if item 2 sold for $2400 instead of $2000?
Lease term expires before 31 December 2006.
There are then 10 twelve month periods, so $50 is deductible in 1996 and 2006 and $100 is deductible in each of 1997 to 2005.
If lease term expires before 31 December 2001 then amounts would be $100 and $200.
Reduce any recapture by cost of replacement property.
Replacement property must be acquired before end of:
following year of recapture.
The reduction is treated as POD of an item in same class as the replacement property.
What if item 4 only costs $25?
Only if title is expected to pass.
(From or to income producing.)
E.g.: Buy class 8 property for $1000. Year later use it for something else. FMV when use changed is $1200.
Capital gain of $200.
If originally used to produce income, then CCA claimed in first year will be recaptured in second.
If originally used personally then year 2 CCA limited to .5 * 20% * [$1000 + .75($200)] = $115.
Similar to CCA, but:
600
1985 ECE on franchise of $1,200 * 50%
-60
1985 CECA of 10% * 600
540
1985 CEC balance
270
Adjustment time gross-up of 50% * 540
810
Balance after gross-up
-56
1994 CECA of 7% * 810
754
1994 CEC balance
-1200
1995 POD of franchise of $1,600 * 75%
-446
1995 CEC balance before resetting to zero
30
Exempt amount = 50% (60)
-416
Recapture of CECA
Note recapture = 75% * (1600 - 1200) + 60 + 56.
Recall that in general an ITC can be claimed when the GST is paid or payable.
Capital property for GST includes capital property under the ITA except that in class 12 or 14.
Capital property is either:
ITC may be claimed where CPP is used commercially primarily.
If commercial use < 50%, no ITC can be claimed.
If used primarily commercially immediately before sale, GST must be charged on sale price.
If CPP ceases to be used primarily commercially, GST is payable on FMV.
If CPP begins to be used primarily commercially, ITC can be claimed on lower of:
No ITC can be claimed on cost over > $24,000 [$26,000 in 1998]
For individual and partnerships, use must be exclusively (> 90%) commercial.
For others, use must be primarily (> 50%) commercial.
Chapter 6 (revised 98.11.05): Income from property
Income from property - Inclusions
12(3): Corporations, partnerships accrue interest income as for GAAP.
Individuals may also use GAAP rules.
at each anniversary date, income accrued but not yet received [12(11)].
E.g.: Buy $1000 6% 2 year compound interest CSB November 1 1998.
CSB pays (accrues) 6% year 1, 7% year 2. Corporation Individual
1998 $10.00 nil
1999 $60.60 $60.00
2000 $53.00 $63.60
Corporation: Individual:
1998 $10.53 nil
1999 $64.89 (65.52) $64.84
2000 $54.58 (57.84) $65.16 (69.05)
121: For individuals, add 25% gross-up; receive 13.33%
tax credit.
See examples on p. 304 re effect on effective return on investment.
112(1): For corporations, may receive deduction in calculating
taxable income.
Most included in income.
Repayment deducted under (20)(1)(j).
15(2.3): Made in ordinary course of money lending business.
15(2.4): Made to employee to acquire:
and (e): received because he was an employee (not because he was a shareholder)
and (f): the repayment terms are reasonable.
15(2.6): Repaid by end of lender's next taxation year, but not part of series of loans and repayments.
See text exhibit 6-1, p. 310.
Equals interest calculated at the prescribed (ITR 4300) rate
less interest paid within 30 days of yearend
Income or loss from property transferred or loaned to:
74.1(1): Spouse (& capital gain [74.2(1)])
74.1(2): Minor son, daughter, niece, nephew.
Example: what are the tax implications if:
Lee's my spouse
Lee's my child
Lee's my parent
I lend Lee my motorhome for a month
Or I give it to Lee because I have no use for it, and
Are interest & property tax,
Can be deducted with respect to vacant land held for investment only to extent of income from the land,
Are instead added to cost.
Cannot claim loss, instead it is added to cost of land. If land sold for $50,000, gain is $6700.
Revenue $1200
Property tax (2500)
Mortgage interest (2000)
Loss (3300)
Include interest, property taxes, insurance, professional fees,
20(29): Can be deducted only to extent of income from the property,
Are instead added to cost.
ITR 1101(1ac): Each rental building costing over $50,000 goes in a separate CCA class.
ITR 1100(11): Rental losses cannot be created or increased by CCA.
Purchase: $60,000
CCA (@ 4% / 2): ( 1,000)
UCC, Dec. 31, 1995: 59,000
POD: (60,000)
Recapture: ( 1,000)
1995 Income: $6000-5000-1000=0
1996 Capital gain: $ 7,000
Chapter 7 (revised 98.09.17): Capital gains and losses
Income vs. capital account
If you acquired the asset intending to make money by selling it, it's inventory (i.e. on income account).
If not, it's on capital account.
E.g. If you buy a cow intending to fatten it and resell it, then the sale is on income account.
If you buy the cow intending to sell her milk, then any eventual sale of the cow is on capital account
see IT-459,
IT-218R for real estate sales,
and IT-479R
and IT-479SR
for security sales.
Read 4: IA, 7: 1A, B. Do exercise 4.1 and problems 4.1, 7.1.
Lee sells 5 hectare parcel of land for $900, paying a commission of $100. Its original cost was $600.
Additional information:
Proceeds of disposition [ITA 54]
39(1)(c): B.I.L.
[see IT-484R2]
= capital loss on sale of shares or debt in a "small business corporation", i.e. [ITA 248]:
See IT-479R
and IT-479SR
and IT-346R.
Lesser of:
(a) proceeds not yet due times the gain
(b) 80% of gain in first year,
Use average cost.
Chapter 8 (revised 98.11.12): Capital gains continued
43: Part disposition: see
IT-264R and
the special release.
Must be for similar use, and
if former property used in a business, replacement must be used in similar business.
[See IT-491 and
the special release.]
Note that Revenue Canada
[IT-259R3]
interprets "similar" quite broadly.
For voluntary replacements, property must be real estate used in a business.
Recapture
is deferred to extent it is less than cost of replacement property.
Capital gain is deferred to extent that cost of replacement property exceeds cost of former property.
E.g.: What if item 2 in chapter 5 notes
sold for $2600 and replaced with item costing $2500?
(a) If occurs in same year as land sale, POD redistributed to FMVs and to eliminate any terminal loss.
(b) If occurs after land sale, then POD increased to reduce terminal loss by 25% of greater of
Suppose instead land is sold for $120 with proviso that there be no building on it.
Rules (re deemed disposition, change in partial use) similar to those for
CCA in ITA 13(7).
Revenue Canada [IT-218R] does not consider change from one income producing use to another to be a change in use.
Where change is from inventory to capital or vice versa, eventual gain/loss may be part on capital account and part on income account.
Capital gain is $18 - 10 = $8.
Income gain is $16 - 18 = -$2.
But then cannot claim CCA.
Those related by blood, marriage, adoption, control.
For others, a "question of fact".
(c) Gifts at FMV.
(a,b) Sales will be adjusted (one side only) to FMV.
I have POD of $1400 and she has ACB of $1400.
Suppose instead I sell her the shares for $12/share.
Then she has ACB of $1200, but I have POD of $1400.
Suppose she sells the shares for $15/share.
All property disposed of at FMV,
except that transferred to spouse.
If disposition does not result in full recapture,
difference is deemed to be CCA claimed by inheritor.
Then deemed disposition at date of death of $7,500 giving recapture of $3,335.
Inheritor deemed to acquire at $10,000 less deemed CCA of $2,500.
Inheritor sells a year later for $11,000.
Chapter 9 (Revised 96.04.08)
Review structure of ITA:
56(1)(a):
(i)(A) OAS [The March 1996 budget proposes that OAS, GIS, and the pension and age tax credits be replaced by refundable tax credits in 2001.]
(i)(B) CPP/QPP
(iii) death benefit (248(1))
(iv) UIC
(ii) retiring allowance (248(1)):
Receipts taxable under 56(1)(b) and (c); see also 56.1.
Payments deductible under 60(b) and (c); see also 60.1.
Periodic allowance for "spouse" and/or "child[ren]".
Living apart when payment made and for rest of year.
Pursuant to written agreement or court decision.
[The March 1996 budget proposes that the above provisions not apply to child support paid pursuant to an agreement made after 30 April 1997.]
56(1)(l): Legal costs awarded that would be deductible under 60(o) re appealing an ITA assessment.
56(1)(m): National Training Act allowance.
56(1)(n): Scholarships and bursaries - $500.
56(1)(o): Net research grants.
56(1)(u): Social assistance.
(Deductible under Division C.)
56(1)(v): WCB.
(Deductible under Division C.)
Maximum contributable (by employer and employee combined):
(Can also contribute $1000 to RRSP)
(2,4,11): For DPSP and money purchase RPP:
amount contributed for the year.
(6): For defined benefit RPP:
9 * pension entitlement - $1000
E.g. If employee "earns" a pension entitlement of 2% * $40,000, then the pension adjustment is $6,200.
18% of last year's earned income,
Less last year's pension adjustment.
E.g. If earned income also $40,000, then RRSP contribution limited to 18% * $40,000 - $6,200 = $1,000.
If maximum not contributed (after 1990), can be carried forward.
204.1(2.1): Can over-contribute $2000, excess is taxed at 1%/month.
Can contribute to spousal RRSP:
146(8.3): but if spouse withdraws funds, then current and last two years' contributions included in income.
Permits up to $20,000 tax-free RRSP withdrawal:
Must repay in < 16 years, starting second calendar year after withdrawal.
Contributions to RRSP made within 90 days before withdrawal cannot be deducted, unless at least that amount remains after the withdrawal.
Must be before year in which annuitant turns 72. [70 per March 1996 budget]
Can withdraw funds (taxed in full).
Can buy fixed term or life annuity.
Can transfer to RRIFs.
Transfer to spouse or dependent child (or grandchild) is tax-free.
Otherwise, value of RRSP or RRIF is income in year of death.
60(j.1): Retiring allowance can be transferred to RRSP,
to a maximum of $2000 for each calendar year {prior to 1996, per 1995 budget} employed by that employer.
180.2: Claw back of OAS:
For taxpayers whose income exceeds $53,215 (indexed), their OAS is reduced by 15% of this excess.
The reduction is deductible under 60(w).
For example, if income before any clawback is $54,215, then the clawback is $150. Taxpayer pays Part I.2 tax of $150, and reduces income by $150.
To get at least 40 kilometres closer to new work location (or full time college).
Can claim only to extent of income from work or education assistance.
Must be in excess of any reimbursement.
62(3): List of eligible expenses
Must be incurred in the year by the taxpayer or a "supporting person".
Cannot be paid to related minor or a dependent.
a) actual amount incurred (but not more than $150/week/child under 7
b) $5000 * # of children under 7 at end of year or older with "impairment"
c) 2/3 of his
earned income (business income plus that under ITA 5, 6, 7, 56(1)(m,n,o)) [any income if both parents are full time students, per March 1996 budget];
d) $150 * # of children under 7 at end of year or older with "impairment"
Excel spreadsheet for calculating child care deduction: childcr.xls.
For "impaired" individual.
Paid to unrelated non-minor.
Limited to 2/3 of earned income.
Limited to $5,000. [The February 1997 budget proposed to remove this limit.]
I.e. those resident in Canada for tax purposes.
Eligible for moving, child care, and attendant expenses, even if references to "in Canada" not met.
Chapter 10 (revised 98.10.23): Taxable income and tax of individuals
2(1): "An income tax shall be paid ... on the taxable income ..."
2(2): "The taxable income ... is the taxpayer's income plus the additions and minus the deductions permitted by Division C."
110(1)(d): Employee stock options
110(1)(d.1): CCPC stock options
110(1)(f): Social assistance receipts
110(1)(j): Interest benefits on first $25,000 of home relocation loan in first 5 years
Allowable capital losses (other than
ABILs)
- taxable capital gains
+ ABILs over 7 years old.
111(1)(b) and 111(1.1):
Example: A $20,000 loss in 1980 would have been only 50% deductible.
So if no capital gains in that year, there would have been a $10,000 net capital
loss available in 1981.
If not used till 1993 it would become a
$10,000 / 50% * 75% = $15,000 net capital loss.
See text pages 496 and 569:
Division B income less division C deductions listed above and other loss carry-overs claimed
111(1)(a): Can be carried back 3 years and forward 7 years.
Some care should be taken so that losses do not expire unused.
Generally claim capital losses as soon as possible.
See example.
Note that these amounts are indexed from those given in 117(2) in accordance with 117.1(1). Amounts are indexed to extent increases in CPI exceed 3%.Taxable
income
Tax
$ 0
- $29,590
17%
$29,590
- $59,180
$ 5,030 +
26% on taxable income over $29,590
$59,180
-
$12,724 +
29% on taxable income over $59,180
17% times sum of:
Charitable donations:
110.1: Are deductible in computing taxable income for corporations.
118.1(3): Provide tax credits for individuals:
17% of first $200
29% of excess.
Donations (other than those made in year of death or those of ecologically sensitive land) limited to 75% of income
[plus 25% of recapture and
taxable capital gains arising on donations of capital items].
Unclaimed donations can be carried forward 5 years.
If giving capital property or self-created inventory, may elect POD to be amount between FMV and adjusted cost base.
Only 37.5% (rather than 75%) of the capital gain on donation of publicly traded securities is taxable.
Suppose donate $90,000 of securities
having an ACB of $50,000.
For individuals, add 25% gross-up; receive 13.33% tax credit.
May include spouse's dividends.
See examples on text page 304.
3% of basic federal tax,
plus 5% of basic federal tax over $12,500,
minus:
Effectively this amounts to:
Basic federal
tax
Surtax
$ 0
- $8,333
0%
$8,333
- $12,500
9% on basic federal tax over $8,333
$12,500
-
$375 +
8% on basic federal tax over $12,500
Notice that this tax is regressive!
Credit is:
75% of first $100;
50% of next $450;
33 1/3% of next $600.
Maximum is $500.
Is the lesser of:
In this course, we will assume that the deduction equals the tax paid.
See Chapter 10 notes (Revised 96.03.11)
Chapter 11 (revised 98.09.28): Taxable income and tax of corporations
Division C deductions:
112(1): Taxable dividends
(118.1(3): Provide tax credits for individuals)
Donations (other than those made in year of death or those of ecologically sensitive land) limited to 75% of income
[plus 25% of recapture and
taxable capital gains arising on donations of capital items].
Unclaimed donations can be carried forward 5 years.
If giving capital property or self-created inventory, may elect POD to be amount between FMV and adjusted cost base.
Only 37.5% (rather than 75%) of the capital gain on donation of publicly traded securities is taxable.
Suppose donate $90,000 of securities
having an ACB of $50,000.
Claiming loss carry-overs:
Some care should be taken so that losses do not expire unused.
Generally claim capital losses as soon as possible.
249(4): The corporation has a year-end.
Note impact on:
111(5.3): Allowances for doubtful accounts
[see IT-442R]
become write-offs.
111(4)(c), (d): Other capital property must be written down to FMV, creating capital losses.
111(4)(e), 13(7)(f): For capital property whose FMV > ACB/cost amount, can elect to have a deemed disposition
(as for change in use)
at any amount between the FMV and the ACB.
All other non-capital losses, including ABILs and property losses, expire.
111(4)(a): Net capital losses expire.
See spreadsheet for example.
123: 38% of taxable income,
124(1): less 10% of taxable income earned in a province,
123.2: plus 4% surtax,
equals 29.12%.
Reg. 402(2): Is nil if there is no permanent establishment in the province.
Reg. 402(1): Is 100% of taxable income if it has a permanent establishment in no other province.
Reg. 402(3): Is x% of taxable income, where x is the average of:
Total revenue: $300,000
Total wages: $90,000
Taxable income: $60,000
Manitoba revenue:
Manitoba wages:
Manitoba taxable income:
Credit is:
75% of first $100;
50% of next $450;
33 1/3% of next $600.
Maximum is $500.
Is the lesser of:
In this course, we will assume that the deduction equals the tax paid.
125.1(1): 7% tax reduction (to 22.12%).
Reg. 5200: formula for calculation.
See text p. 612 and example.
Chapter 12 (revised 98.11.16): Integration of corporate and shareholder income
125(1): The small business deduction:
Is a tax credit.
Is designed to achieve tax integration.
[See discussion on dividend gross-up and tax credit.]
Is available to Canadian controlled private corporations (defined in 125(7)).
[See IT-458R.]
Is 16% of lesser of:
Includes an adventure in the nature of trade.
Excludes a specified investment business.
Excludes a personal services business.
See text exhibit 12-3.
251(6): Individuals connected by:
Control:
(a): one controls the other
(b): both controlled by same group
(c):
(d):
(e):
(a) requires ownership
and includes case where:
is not applicable to income subject to the small business deduction.
Are designed to achieve tax integration.
Are designed to eliminate tax deferral.
Are available to private corporations.
Include:
Are refunded $1 for every $3 paid out as dividends.
Is payable by CCPCs.
Is 6 2/3% of the lesser of: