Unit 1

Question 1

ITA format

Answer 1

-Division A: First the basis for taxation is established in Canada; that is who needs to read the ITA. Part I determines who must pay income tax
- Division B:
Sections 3-4: Sources of income
Subdivision a-d: rules for determining NI
for each source
-Division C: Adjustments made to calc TI
-Division E-J: Tax credits & applicable federal income rates to calc TP

Question 2

Personal sources of income

Answer 2

-Employment income
-Business income
-Prop income
-Capital gains and capital lossess

Question 3

Employment income

Answer 3

Generally includes:
- Salary, wages, and gratuities
-Bonus, tips honorariums, and commission
-Other inclusions arising from employment
-Deductions allowed against EI

Question 4

Property income

Answer 4

Property income generally includes:
-Interest income from savings, deposits, loans, bonds, and debentures
-Taxable dividend income including a gross-up
-Net rental income after relevant deductions
-Royalty income

Question 5

Capital cost allowance

Answer 5

UCC beg+purchases- Disposals (lesser of cost and proceeds)+ AII (if additions greater than disposals)=Base amount for current yr CCA.
-UCC ending= UCC beg+Additons-Dispoals-(CCA base*rate)
-Taken when asset is available for use

Question 6

Available for use

Answer 6

-Earliest of the following:
a) The time its first used by the taxpayer to generate income
b) Second taxation yr the following the acquisition

Question 7

Short taxation yr

Answer 7

-CCA in yr 1= max CCA* # of days in fiscal yr/365

-AOC

Question 8

Classes

Answer 8

-1: Buildings (4%) & nonresidential buildings (6%) & manufacturing and processing (10%)
-3: Building acquired before 1988 (5%)
-8: Furniture/fixtures/equipment (20%)
-10: Passenger vehicles under $34K (30%)
-10.1: Passenger vehicles over $34K (30%)
-12: Small tools less than $500 (100%)
-13: Leaseholds improvements (lesser of 5yrs & remaining lease term+ first renewal)
-14: Limited life intangible (over legal life)
-50: Computer hardware and software (55%)
-43: Electric vehicles (30%/50% depending on KW)

Question 9

Class 10.1

Answer 9

-Each vehicle costing more than $34K
-No terminal loss/recapture on disposition
-When immediate expensing has not been taken: one-half of the CCA that would otherwise have been allowed had the vehicle not been disposed of may be claimed
-When the taxpayer made use of the immediate expensing rules: in the year of disposal, adjusted proceeds are credited to UCC, resulting in recapture (since UCC is 0)
Adjusted proceeds = proceeds * ($34,000/original cost of the vehicle)

Question 10

CCA claimed for the year is equal to

Answer 10

-Where AII applies: Acquisition1.5rate
-Where 1/2 yr rule applies= Acquisition0.5rate

Question 11

Recapture (gain)

Answer 11

-An income inclusion of the negative UCC balance after adding the cost of all additions and deducting all disposals
- Taxpayer took too much CCA and needed to be added back to NIFTP

Question 12

Terminal loss

Answer 12

-An income deduction if after adding the cost of all additions and deducting all disposals a + balance remainings in the class and no other assets remain

Question 13

Immediate expensing rule

Answer 13

-Immediate expensing of eligible properties (after Apr 19, 2021)
-Limit of $1.5M shared between associated CCPCs
-Available when acquisition> disposals
- Excluded classes:
Class 1-6 & 14.1 & 17 & 47 & 49 & 51

Question 14

Rental prop sale

Answer 14

-POD are allocated to the land&building based on each FMV
-Above results in a TL on the building and a CG on the land, the following must be done
-TL>CG: Reduce TL by CG and deduct the remaining balance on NITP
-CG>TL: Reduce CG by TL and include 1/2 of the remaining balance on NITP

Question 15

SCH 1 add-backs
ITA Part I Division B

Answer 15

-Any expenses incurred for reasons other than earning income.

-Income taxes / CRA interest & penalties/ Amortization/ Political contributions / 50% of ME

-Recapture (gain)

-TCG
Individuals: Separate section
Corp: classifeid as AII

-Donations
Deducted in Divison C

-Recreational dues (golf, yacht club,etc)

-Bond discount amort

-Automobile mileage allowance unless its a taxable benefit to the employees 

-Lease costs excess of permitted amount

-Life insurance: amount deductible is the lesser of prem paid and net cost. Deductible if its required by the lender as loan collateral

-Equity loss & dividends on investment

-Asset write-downs

-Reserves

-Unpaid remunerations:
Deductible if paid 180 days at yr end

Question 16

Reserve adjustment

Answer 16

-Deducted on a cash basis
-2 ways to adjust:
1) Addback ending liability & deduct beg
liab
2) Addback amount expensed & deduct
amount paid

Question 17

SCH 1 deductions

Answer 17

-CCA / Acc gains / Equity income
-Terminal losses
-Finance expense (deducted over 5 yrs)
-Allowable business investment loss
-Contribution to a CPP within 120 days of yr end

Question 18

Interest income
CH10

Answer 18

-Return consideration or compensation for the use or retention by one person of a sum of money.

Question 19

Reporting interest
CH 10

Answer 19

-Corporations&partnerships: use the accrual method to report interest income for tax purposes.
-Individuals: when paid

Question 20

Dividend income
CH10

Answer 20

-Corporations: included in NITP and deducted to determine TI. DIVIDENDS RECEIVED BY CORPORATIONS ARE NOT SUBJECT TO PART I TAX
-Individuals: Include actual dividends+gross up in income.
-Non eligible dividends: paid out of after tax ABI, eligible for SBD or from after-tax AII
- Eligible dividends: Paid out of after tax income generated at GRR.

Question 21

Dividends gross-ups and tax credits
CH10

Answer 21

-Eligible dividends:
GU=38%
Tax credit=6/11
Net: 20.727
-Non-eligible
GU=15%
Tax credit=9/13
Net: 10.385%

Question 22

Foreign dividends
CH10

Answer 22

Individuals: Not GU & taxed the same way as interest income.
-Corporation:
If from foreignaffiliate, division C deduction
FTW on dividend used to calc credit &
deducted in TP calc

Question 23

Capital property

Answer 23

-Acquired with the intention of holding it to earn income throughout its use & not with the intention of reselling for a profit

Question 24

Capital gain vs business income
CH11

Answer 24

1) Intention at the time of acquisition
2)Relationship of the transaction to the taxpayer business-normal course of busi vs one-off
3) Nature of asset-if can be used over time to generate income
4) Number of frequent transactions
5) Length of ownership-long period capital asset
6) Feasibility of taxpayer intention
7) Extent to which intentions were carried out by tax payer

Question 25

Capital losses
CH11

Answer 25

-Carried back 3 yrs
-Carried forward forever
-Lossess can be applied to TCG

Question 26

Deemed dispositions of property
CH11

Answer 26

1) Change in use
2) Death of taxpayer
3) Ceasing to be a resident of Canada
4) Gifting property to another person

Question 27

POD include
CH11

Answer 27

-Cash
-Note receivable
-Other props
-Assumption of debt

Question 28

ACB
CH11

Answer 28

+Cost of acquiring
- Government grants
+non deductible prop tax & interest
+ESOP benefit

Question 29

Superficial Losses
CH11

Answer 29

• When an individual disposes of prop at a loss and acquires a similar one within 30 days

Question 30

Capital gain reserves
CH11

Answer 30

-If payments are received over a period
-Reserve is the lesser of:
a) CG* (POD not due/total POD)
b) 20% * CG * (4- # of preceding yrs
ending after disposal
Start with 4/5 and go to 1/5 * cg
-REVERSES DEDUCTED IN 1 YR MUST BE BROUGH BACK INTO INCOME THE FOLLOWING

Question 31

Business investment loss
CH11

Answer 31

-Relief on capital lossess that arise of disposal of small busi corp
-Small busi corp- 90%> of assets are used in active business
-ABIL:
Can be ducted in any source of income, CB 3 yrs & CF 10 yrS
If not used transferred to net capital loss balance

Question 32

Principle residence exemption
CH11

Answer 32

• PRE= Total gain * [(1+years designated)/years the property was owned)
  -To maximize PRE designate the prop with the highest gain/yr

Question 33

PUP

Answer 33

-Prop used primarily for taxpayer use and enjoyment
-To calc gain
ACB=greater of $1K or ACB
POD=greater of $1K or POD
-Losses are denied

Question 34

LPP

Answer 34

-Subset of PUP that includes collectibles that do not tend to depreciate in value
-To calc gain
ACB=greater of $1K or ACB
POD=greater of $1K or POD
-Losses can be deducted on LPP gains
-CB 3 yrs & CF 7 yrs

Question 35

Due dates
PC1

Answer 35

If TI is less than 500K in the year, installments are due 2 months after yr end.