Exam (elaborations)
TAXX 301 CHAPTER 7; INCOME OR LOSS FROM PROPERTY EXAM QUESTIONS AND VERIFIED ANSWERS
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TAXX 301 CHAPTER 7; INCOME OR LOSS FROM PROPERTY EXAM QUESTIONS AND VERIFIED ANSWERS.....
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What is the difference between business and property sources of income?business income requires time, attention, and labour for the activity that can
generate a profit, but property income involves acquiring property and awaiting
returns
what is property?
a right of any kind (e.g. a right to receive back $100 that you loaned)
What is the source analysis to identify property source of income
1. Is there property acquired/activity undertaken?
2. If yes, is the activity have a personal element to it?
3. If no, is it passive in nature?
Business Income Tax Treatment Pros
- income included in earned income for RRSP contribution limits
- capital gains can be deducted if they are for the sale of shares in a business
Business Income Tax Treatment Cons
- short fiscal period only used for business income to calculate CCA
Property Income Tax Treatment Pros
the calendar is used to claim more CCA
Property Income Tax Treatment Cons
there is no deduction for sales of shares from property and rental losses cannot
be created/increased by CCA claims
How does interest expense deductibility fit into the 9-12-18-20 rule?
, Interest can be deducted under ITA 20 if it is a capital expenditure (to borrow
money or acquire property), or under ITA 9 if it is a non-capital expenditure
(used for working/circulating business capital)
what does ITA 20 say about interest deductibility?
interest must be charged pursuant to a legal obligation, on borrowed funds or on
an amount payable for buying income-earning property
indebtedness
when one buys property on account
what is interest?
calculated on a day-to-day accrual basis, based on a (right to) a principal sum,
and is compensation for use of/right to principal sum
when does the ITA deem imputed interest as interest payable pursuant to a legal
obligation?
If an employee receives an interest-free loan, or if a contract requires a larger
repayment than the amount borrowed
what is the purpose test for interest deductibility?
interest may have multiple purposes, but as long as one of them is to earn
property income, the expense can be deducted
direct and indirect use
as long as the direct use of the funds is to earn income, the interest expense is
deductible. The indirect use does not matter
tracing rule
the taxpayer must be able to trace borrowed funds to an eligible use (it must be
to earn income)
tracing rule and loan allocation
percentage of interest will be deductible based on the percentage of the loan
used to earn income
disappearing source rule
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