Deductions prohibited Flashcards
1
Q
List of prohibited expenses
A
- interest and penalties on late income tax penalties
- club dues and expenses for use and maintenance of yacht, camp, lodge, or golf course
- accruals for contigent liabilities.
- Payments under the Act: federal income taxes, interest and penalties. (Exception: interest paid on tax refund where the taxpayer is required to repay the refund.)
5.
2
Q
Deductible for accounting purposes but not for tax purposes.
A
Expamples of disallowed deductions that allowed for accounting purposes:
- writedown of property to fair market value
- amortization
- capital expenditures
- contingent liabilities such as future cost of environmental cleanup
3
Q
Unpaid amounts in non-arm’s length circumstances
A
- must be paid within two years of the end of the taxation year in which it was declared payable or accrued, otherwise
- it must be brought back into income on the 1st day of the third taxation year following that in which the payment was declared (.e.g., unpaid amount declared payable in 2009 must be paid by the end of 2011 or brought back into income at the beginning of the 2012 taxation year.
4
Q
Discount on debt obligations
A
Discount on debit obligations like a bond, debenture, note, mortgage, etc.:
- amortization of bond discounts is prohibited because it is considered to be in the nature of a prohibited reserve
- a full deduction of the discount (an actual cash outlay on redemption or maturity (redemption cost minus receipt at issue) is permitted only if:
- the debit security is issued at not less than 97% of face value; and
- the yield to maturity is not more than 4/3 of the nominal or coupon interest rate.
- if one or both of these conditions are not met only 1/2 the deduction is permitted
5
Q
Principal amount of indebtedness from issuing shares or borrowing money
A
Deduction for amounts paid or payable on account of the principal amount of the indebtedness is not allowed.
