Basic Rules: Other Receipts or Benefits

Question 1

Profits from illegal business

Answer 1

• profits from illegal business are taxable
• substantiated, non-capital expenditures incurred to produce income from an illegal business are normally deductible however specified illegal payments are prohibited such as payments made to :
  
  • government officials in Canada;
  • officials engaged in the administration of justice in Canada;
  • persons responsible for collecting fares or admission fees

to induce or attempt to induce the recipient to breach his or her duty and the payment is made for doing anything that is an offence under the Criminal Code.

Question 2

Subsidies

Answer 2

This question is dependent on the purpose for the subsidy.

An income may result from a subsidy to:

• supplement the taxpayer’s income or enable him or her to operate at a profit; or
• ensure a reasonable return to the taxpayer on captial invested.

A capital receipt may result from a subsidy to:

• assist the taxpayer in respect of a capital outlay; or
• encourage an activity in the public interest such as the prevention of enemployment

Question 3

Foregiveness of debt rules

Answer 3

The rules apply to commercial obligations which are debt obligations incurred for the purpose of earning income from a business or property:

• The interest that was payable on the forgiven debt is a taxable benefit.
• The forgiven amount of the debt is applied to reduce tax values inlcuding non-capital loss and net capital loss carryforwards and the capital costs of assets owned by the debtor.
  
  • The effect of this is to increase income through lower tax-free recovery of costs in the future.
• The balance of debt forgiven that is not otherwise applied to reduce specified tax-loss carryovers or other tax accounts must be included in computing the income of the debtor at an inclusion rate of 50% (or 100% for a partnership). Where the debt was incurred in a business activity, the income inclusion is considered to be income from the business.