Business Income

Question 1

Income tax — current and deferred / future taxes

Answer 1

Add back

Question 2

Interest and penalties on late payment of income taxes

Answer 2

Add back

Question 3

Accounting amortization on tangible and intangible capital assets

Answer 3

Add back

CCA is a permitted deduction for tax purposes, so accounting amortization is not deductible

Question 4

Recapture of CCA

Answer 4

Add back

Question 5

Accounting losses on disposal of capital assets

Answer 5

Add back

Question 6

Taxable capital gains

Answer 6

Add back

For an individual
-earning self-employed business income as a sole proprietor, taxable capital gains are included in the taxable capital gains section of the individual’s personal tax return

For a corporation
Taxable capital gains are classified as aggregate investment income.

Question 7

Charitable donations

Answer 7

Add back

Not deductible when computing net income for tax purpose, but treated as:
• the basis for a tax credit for individuals (see eBook chapter on tax credits)
• a Division C deduction for corporations (see eBook chapter on taxable income for corporations), subject to 75% net income limitation

Question 8

Political donations

Answer 8

Add back

Not deductible, but treated as the basis for a tax credit for individuals
Under the Canadian Elections Act, corporations are not permitted to make federal political contributions.

Question 9

Scientific research expenditures deducted for accounting purposes

Answer 9

Add back

Question 10

Reserves and contingent liabilities

Answer 10

Add back

Question 11

Warranties

Answer 11

A warranty liability is an example of a reserve that is not deductible for tax purposes. Amounts paid to satisfy warranties are deductible on a cash basis for tax purposes.

There are two ways to make the required adjustments for warranties:
• Add back warranty expense deducted in determining accounting income, and deduct cash paid for warranties.
• Add back the warranty liability at the end of the year, and deduct the warranty liability at the beginning of the year.

Question 12

Pensions

Answer 12

A pension liability is another example of a reserve that is not deductible for tax purposes.

Contributions to a company pension plan are deductible on a cash basis if made within 120 days of the end of the taxation year.

There are two ways to make the required adjustments for pensions:

• Add back the pension expense deducted in determining accounting income, and deduct cash transferred to the trustee of plan assets.
• Add back the pension liability at the end of the year, and deduct the pension liability at the beginning of the year.

Question 13

Meals and entertainment expenses

Answer 13

Add back 50%

Question 14

Club dues and recreation fees

Answer 14

Add back

Question 15

Bond discount amortization

Answer 15

Add back

Question 16

Automobile mileage allowances, unless the allowances are a taxable benefit to the employee, in which case no adjustment is required

Answer 16

Add back

Question 17

Lease costs on a passenger vehicle in excess of the permitted amount

Answer 17

Add back

Question 18

Equity losses on investments accounted for using the equity method of accounting

Answer 18

Add back

Question 19

Dividends received on investments accounted for using the equity method

Answer 19

Add back

Question 20

Asset write-downs (including impairments)

Answer 20

Add back

Question 21

Illegal payments, fines, and penalties

Answer 21

Add back

Question 22

Foreign advertising

Answer 22

Add back

Not deductible for tax purpose if the expenditures are made for advertising in foreign print or foreign broadcast media and the advertising is directed primarily at the Canadian market.

Deductible if the advertising is directed to a non-Canadian market.

Question 23

Personal or living expenses

Answer 23

Add back

Not deductible for tax purposes, as they are not incurred to earn business income.

Question 24

Life insurance where the corporation is the beneficiary

Answer 24

Add back

Not deductible unless the following requirements are met:
• It is required by the lender as collateral for a loan.
• The lender is a “restricted financial institution.”
• Interest payable on the loan is deductible.

If these requirements are met, the amount deductible is the lesser of:
• premiums paid
• the net cost of “pure insurance”
In addition, the deduction is the portion of premiums on the part of the life insurance policy that reasonably relates to the loan.

Question 25

Convention expenses

Answer 25

Add back Not deductible unless all of the following criteria apply: * It is held by a business or professional organization. * It is attended in connection with the taxpayer's business or professional practice. * It is held at a location that may reasonably be regarded as consistent with the territorial scope of the organization. Limited to two conventions per year.

Question 26

Foreign taxes paid

Answer 26

Add back Not deductible to the extent they are claimed as a tax credit.

Question 27

Unpaid amounts in a non-arm's length transaction

Answer 27

Add back If an amount remains unpaid at the end of two years after the end of the taxation year in which it was accrued, it is required to be brought back into income in the third taxation year.

Question 28

Carrying charges on vacant land (including interest and property taxes)

Answer 28

Add back Deductible to the extent of income earned on the vacant land. Non-deductible portion is added to the cost base of the land.

Question 29

Soft costs on construction or renovation of a building

Answer 29

Add back Soft costs incurred during the period of construction, renovation, or alteration of a building are not deductible. Because they are not deductible, they are added to the cost base of the building. Soft costs include interest, professional fees, insurance, and property taxes.

Question 30

Reserves

Answer 30

Add back Exceptions Reserves for bad debts -Reasonable reserves are deductible if based on anticipated bad debts. -A reserve determined as an estimated percentage of the accounts receivable balance would not be deductible. Reserves: Undelivered goods or services Where the taxpayer receives cash in advance of providing goods or services to a customer, a reasonable reserve is deductible for goods / services that will be provided in the future. If a reserve has been claimed for accounting purposes (amount received is included in unearned income or revenue), no adjustment is required. Reserves for an amount not due under an instalment sales contract A reasonable reserve may be claimed for an amount not due under an instalment sales contract. The reserve may be claimed for three years (including the year of the sale). A reserve that is deducted in one year must be brought back into income in the following year, and a new reserve may be claimed if some of the proceeds are not yet due. Due means an enforceable right to immediate payment.

Question 31

Unpaid remuneration

Answer 31

Add back

Question 32

CCA

Answer 32

Deduct

Question 33

Terminal losses

Answer 33

Deduct

Question 34

Financing expenses

Answer 34

Deduct Costs incurred for the purposes of issuing shares or borrowing money are deductible on a straight-line basis over five years [20(1)(e) deduction]. If the loan is paid off (prior to five years), any remaining amount may be deducted in that year.

Question 35

Bond premium amortization

Answer 35

Deduct

Question 36

Accounting gains on disposal of capital assets

Answer 36

Deduct

Question 37

Allowable capital losses

Answer 37

Deduct

Question 38

Scientific research expenditures deductible for tax purposes

Answer 38

Deduct

Question 39

Pension contributions to the trustee of the pension plan assets

Answer 39

Deduct

Question 40

Allowable business investment losses

Answer 40

Deduct

Question 41

Landscaping costs that have not been deducted in determining accounting net income

Answer 41

Landscaping costs paid in the year are deductible for tax purposes if they are paid for landscaping around a building used in the business.

Question 42

Equity income on investments accounted for using the equity method of accounting

Answer 42

Deduct