Chapter 7 Flashcards
(9 cards)
“An Individual can deduct for tax purpose the interest expense incurred on the mortgage loan attached to their personal residence” can this statement be true? Explain
Yes, the statement can be true if the mortgage loan funds are used to acquire an income-generating investment
A) How does the Dividend Gross Up assist in achieving integration?
The dividend gross-up adjusts dividend to reflect pre-tax corporate income, ensuring shareholders are taxed as if they earned the income directly
B) How does the dividend tax credit assist in achieving integration?
The dividend tax credit offsets corporate taxes already paid, preventing double taxation and achieving integration
Why do we want to achieve integration in the tax system?
We want to achieve integration to ensure that income is taxed the same whether earned personally or through a corporation, preventing double taxation on dividends and maintaining fairness in the tax system
Explain why a business person might view the cost of a $100k building as being significantly higher than the cost of a $100k delivery truck
Because buildings have a lower CCA rate (4% for class 1) compared to vehicles (30% for class 10). This means the tax deductions for depreciation are spread out over a much longer period, delaying tax benefits
To what extent, if any, does the tax treatment of property that is classified as inventory, rather than a capital property, affect a financial risk in acquiring such property
Classifying property as inventory increases financial risk since gains are fully taxable as businesses income, unlike capital gains, which are 50% taxable. However, losses are also fully deductible
An enterprise conducting an active business will separate its business operations from its paper existing assets (such as real estate) by establishing a separate corp for each.
Separating appreciating property from the business classifies it as rental property, leading to higher taxes and reduced cash flow when selling for expansion. Holding it within the business avoids tax recapture and allows tax deferral under the replacement property rules
What is a “charging provision” in a tax statue? Why is it important?
A charging provision in a tax statue is the specific rule that imposes tax liability by defining who is taxed, on what income, and at what rate. It’s important bc without a clear charging provision, government cannot legally collect tax.
It can be said that the actual cost of an expenditure that is deductible for tax purposes is less than the cash outflow for the expenditure.
A deductible expense reduces taxable income, lowering the actual list by the tax savings. The actual cost is calculated as Cash outflow x (1 - Tax Rate) since the deduction offsets taxable income
