Tax Flashcards
(27 cards)
Deductibility of expense ITA 18(1)(a)
- General limitations:
to be deductible, expense or outlay must be made or incurred by the TP for the purpose of gaining, producing or maintaining income and be expected to generate income related to the TP’s business or property
Common business expenses DISALLOWED ITA 20(1), 18(1)
Amortization / impairment/ accounting gains & losses (deduct via CCA)
Personal expenses and membership/club dues
Charitable donations - deduction to determine taxable income of Corp
Political contributions - limited tax credit available for an individual; Federal Accountability ACT deems corporate contributions to be illegal, resulting in no deduction or credit
Taxes, interest and penalties related to tax
M&E (50% for business purposes, 100% deductible for remote or temp work sites or special events for employees)
Expenses: Re: issue or sale of shares and refinancing costs (deducted over 5 years)
Life insurance premiums (except where policy has been assigned as collateral)
Unpaid amounts & unpaid remuneration (accrued salary, which is unpaid 180 days after fiscal period is deemed not to have been incurred until actually paid)
Carrying charges on vacant land (non-deductible portion added to ACB)
Soft costs on construction of building (include interest, legal, accounting fees, insurance, property taxes) - must be capitalized
Common business expenses ALLOWED
ITA 20 （1）
Automobile expenses
Home office expenses
Convention expenses (limited 2 per year)
Foreign taxes (deductions in excess of 15% on foreign-source property income, since foreign tax credits limited to 15%; if no foreign tax credit can be claimed, entire amount of foreign non-business income tax is deductible)
Inventory valuation (lower cost or market, method must be consistent, LIFO not permitted)
Reserves - no deduction for a reserve, contingent liability or sinking fund in general BUT reserve is permitted for doubtful debts, amounts not due under an instalment sales contract, any reserve deducted in one year must be taken into income the next year
Capital Cost Allowance ITA 20 (1)(a)
- CCA may be claimed on all tangible capital property that is available for use EXCEPT for land
- Inducements (such as leasehold improvements) may be included in income or used to reduce capital cost
- Most classes subject to half year rule (except class 12, 14, and 52)
- Dispositions are credited to UCC at LESSER of:
COST and PROCEEDS (excess of proceeds over original cost result in a capital gain) - Terminal Loss: When there is a balance of UCC in the class there are no assets remaining, the UCC can be claimed as terminal loss (Capital loss cannot arise on the disposition of depreciable property)
- Recapture - arises when the balance in the class is negative (I.e. when the adjustment re: disposal is in excess of the UCC) and is taken into income
- Recapture / Terminal loss calculated as: Lesser of a) proceeds and b) cost; less UCC. If positive, then recapture; If negative, then terminal loss
Retiring allowance rollover to RRSP ITA 60(j.1)
A retiring allowance (severance pay) is an amount paid to officers or employees when or after they retire from an office or employment, in RECOGNITION of long service or for the loss of office or employment. A retiring allowance includes:
- payments for unused sick-leave credits on termination; and - amounts individuals received when their office or employment is terminated, even if the amount is for damages (wrongful dismissal when the employee does not return to work)
Individuals with years of service before 1996 may be able to directly transfer all or part of a retiring allowance to a RPP or RRSP. The amount eligible for transfer is limited to:
- $2000 for each year prior to 1996 - Additional $1500 for each year prior to 1989 (if no vested contributions to RPP or DPSP by employer)
Shareholder loan ITA 15(2), ITA 80.4
- Principal amount must be added to the shareholders income
- no imputed interest
- can be deducted under ITA 20(1)(j) when it is repaid
EXCEPTIONS:
- if loan repaid prior to second B/S date of corporation, then the principal amount does not need to be added to the S/H income, but imputed interest under ITA 80.4(2) would apply. However it cannot be a series of loans and payments (ITA 15(2.6))
- Loan advanced as an EE rather than S/H to acquire RESIDENCE, CAR FOR WORK OR SHARE OF THE COMPANY, as long as the time of the loan was made, bona-fide arrangements were made for repayment of the loan within a reasonable amount of time
Residency
- CRA considers both primary and secondary ties in assessing whether a TP is a resident of Canada
- Primary ties - factors that make a strong case, in and of themselves, that residential ties exist:
- a home in Canada
- a spouse/common law partner in Canada
- dependents in Canada
- Secondary ties - factors that MAY contribute to whether residential ties exists (including, but not Ltd to):
- personal property in Canada (car, furniture, etc)
- social ties in Canada (memberships in Canadian recreational groups, etc)
- economic ties in Canada (Cdn bank account or credit card, etc)
- Cdn driver’s license, Cdn passport, Cdn health ins
Resident of Canada:
- taxed on all WORLDWIDE income
Non-Res of Canada
- only income tied to Cdn sources
Employee vs. Contractor
No single test is decisive MUST CONSIDER: - intention of the parties - control of work (hrs, location, how job is completed) - ownership of tools (who supplies) - chance of profits and risk of loss - ability to subcontract work or hire assistants - integration
ISSUES:
- contractors can deduct all reasonable expenses whereas employment deductions are limited
- EEs can receive EI benefits, contractors can opt in with restrictions
- ERs are required to withhold source deductions for EEs
- ER may be responsible for both EE and ER contributions of EI and CPP if an individual is incorrectly classified as a CONTRACTOR
Employer provided automobile - Standby Charge
- standby charge is a taxable employment benefit that only applies if an ER provided auto is available to the EE for PERSONAL USE
Calculated as:
- 2% of the original cost per month available; or
- 2/3 of the monthly lease payment per month available
- reduced by payments made by the individual to the ER
- standby charge rate is reduced (reduce taxable benefit - good) when EE personal use of auto < 1667 km per month and auto is used >50% business purpose
Employer provided automobile - Operating cost benefit
Taxable employment benefit calculated as:
- $0.26 (2018) or $0.28 (2019) per KM of personal use; or
- 50% of the standby charge (only when vehicle used at least 50% for business)
Operating cost include gas, insurance and maintenance, but not parking
Employer provided automobile - Tax planning
- Consider EE purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
- consider EE including allowance in income and claiming business portion of actual car expenses if they exceed the allowance
- consider sale and leaseback for ER-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
- maintain log to justify business vs. Personal km
- Lower standby charge by reducing # of days vehicle available for personal use
- increase business use by visiting clients on the way to and from work
Employment - Taxable benefits
- Board and lodging (unless at remote location)
- most rent-free and low-renting housing
- trips of a non-business nature
- gifts greater than $500 (that are not cash or near-cash)
- cash and near-cash gifts
- cost of tools where EE is not required to have tools to work
- forgiveness of debt
- ER-paid education when primarily for the benefit of EE
Employment - Non-Taxable benefits
- uniforms and special clothing required to be worn
- transportation to job site
- moving expenses reimbursed, excluding housing loss reimbursement
- recreational facilities at place of work
- Premiums paid under private health services plans
- professional membership fees when primarily benefit the ER
Business use of home expenses
A TP can DEDUCT expenses for business use of a WORKSPACE in the home as long as they meet ONE of the following conditions:
- > the home is the PRINCIPAL place of business
- > They use the space ONLY to earn business income, and the TP uses it on a REGULAR and ONGOING basis to MEET clients, customers or patients
ELIGIBLE costs - heat, HOME INS, electricity, PROPERTY TAX, R&M, MORTGAGE INTEREST or rent (if tenant)
- > expenses are pro-rated using reasonable basis such as area of work space over total area of home
- > Home office expenses also prorated for a short business year
- > Losses cannot be created by home office expenses. UNUSED expenses are carried forward for use in a later year
- > DO NOT CLAIM CCA on principal res, as it may negatively impact the ability to use the PRE
Business income vs. Property Income
- CAPITAL PROPERTY = property that provides LT and enduring benefit
- DISPOSITION of capital property gives rise to CG or CL
- Business income will arise from an “adventure or concern in the nature of trade”, determined as follows:
- CONDUCT
- > how long was the asset held? Have there been similar transactions?
- NATURE OF THE ASSET
- > Is the asset capable of producing income? Is the asset related to the taxpayer’s ordinary business?
- INTENT
- > Did the TP originally acquire the asset with the intention to sell?
- CONDUCT
- for an individual, BI is generally taxed @ a higher rate than CG, as only 50% of the CGs are taxable
- For a CCPC, earning less than the SB limit, capital gain is generally taxed @ higher rate than BI, as the SBD does not apply to CGs.
Tax implications of Going Public
- Co. status will change from CCPC to public co.
- deemed year end on date of chg in status
- possible acquisition of control
- tax balances that are no longer available -> CDA, RDTOH
- Small business deduction only available to CCPC -> public company will be taxed @ higher rate, creating General Rate Income Pool (GRIP) and eligible dividends.
- any undistributed Small Business earnings in the Low Rate income pool must be paid out first as OTHER THAN ELIGIBLE DIVIDENDS
- SRED - public co. Qualifies for lower rate of ITC, and they are not refundable (only refundable for CCPC)
- public co. Shares do not qualify for capital gains exemption
Employer paid auto expenses - taxable benefit
Perfecto Painters, Solar Panel
- a taxable benefit arises when an EE is given something that is personal in nature or if something that is personal in nature is paid for by the co.
- a benefit may include an allowance or a reimbursement of an EE’s personal expense (personal fuel is reimbursed)
- The value of the benefit is generally its FMV
- If an EE is provided with a taxable benefit, the amt must be included in their income
Owner-manager compensation - Salary vs. Dividends
- Corp are separate legal entities therefore, to extract funds, an owner manager must either receive a dividend or be paid a salary
- the Canadian tax system is meant to charge the same level of tax on income regardless on whether it is earned directly as an individual (salary) or flowed through a corporation (dividends); this is referred to as INTEGRATION
- salary payment are deductible to the corporation whereas dividends are not
- dividend payments will be paid out of after-tax profits and be eligible for a dividend tax credit which offsets the higher corporate rate of tax paid
- salary is considered earned income for the purpose of generating RRSP contribution room and pensionable earnings for CPP
- salary payment may result in reduced net cash flow available to an owner manager, as there are CPP costs associated with this type of compensation; these remittances are not required for dividend payments
- dividend payments will reduce an individual’s cumulative net investment loss (CNIL)
Reserves for bad debts
- a reserve may be deducted for bad debts to the extent that it is reasonable and based on specific collectible accounts
- a reserve claimed in one tax year must be included in income in the following tax year and a new reserve based on the current specific uncollectible accounts will be calculated and deducted from income
- effectively this means that the increase isn the reserve amt should be deducted each year
Business investment loss
- for tax purposes, in the year a corporation declares bankruptcy, or is insolvent (subject to certain conditions), its shareholder(S) may file an election to deem the shares to have been disposed of for proceeds equal to nil
- Generally, this will yield a capital loss equivalent to the ACB of the shares
- A capital loss of small business corporations is given special treatment and is deemed to be a business investment loss
- half of the business investment loss is determined to be an ALLOWABLE BUSINESS INVESTMENT LOSS (ABIL) and can be applied immediately against income from any source
- the ABIL can be carried back up to 3 years or forward up to 10 years
- If the ABIL is not used by the end of 10 years, it will become a capital loss
Moving expenses
In order for any moving costs to be deductible for tax purposes, the move must be an “eligible relocation” and the costs incurred must be deductible moving expenses
- Eligible relocation is:
- Occurring as a result of a new work location in Canada, and
- One in which the new residence is at least 40 km closer to the new work location than the old residence
- Deductible moving expenses include:
- selling costs related to the old residence (commissions)
- costs to transport household goods (moving co. Costs)
- Legal fees associated with the purchase of the new residence
- Disconnecting and connecting utilities, revising legal documents to reflect a new address, replacing driver’s licenses
- travelling costs
- Meals and lodging (not exceeding 15 days, not including travel days)
- Costs of cancelling a lease on the old residence
- Up to $5,000 of interest, property taxes, insurance, heating and utility costs of the old residence, subsequent to the time when the taxpayer has moved out, during which reasonable efforts are made to sell the property
Examples of costs that are not deductible include:
- Home Reno for the old property in advance of the sale (these are capital in nature and would be added to the capital cost of the old property) - Travel expenses for a house hunting trip
Principle residence exemption (PRE)
The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free
- The formula for determining the PRE is (A x (1+B)/C), where:
A = the capital gain on the disposition of the property
B = # of years the property is being designated as a PR
C = # of years the property was owned by the TP - Only 1 property can be designated as a PR for a TP and his/her family in any given year
- A principal residence is an accommodation that is ordinarily inhabited by the TP / TP’s family in the year
- To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the TP/TP’s family - If more a TP/TP’s family own more than 1 PR in a year, they will have to choose 1 to designate as a PR
- To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence
Replacement property rules
- in an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the FMV, and any excess of proceeds over ACB is a capital gain
- if replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amt of the recapture/capital gain, respectively
- To be eligible to defer the gain, the replacement property rules must apply:
1. It is reasonable to conclude that the property was acquired by the TP to replace the former property (and put to the same or similar use)
2. Where the former property was used by the TP or a person related to the TP for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the TP for such a purpose
3. Where the former property was a taxable Cdn property of the TP, the particular capital property is a taxable Cdn property of the TP
Refundable dividend tax on hand (RDTOH)
For tax years beginning on or after Jan 1, 2019, there are two types of RDTOH balances:
- Non-eligible RDTOH: includes refundable taxes on investment income and part IV tax on non-eligible portfolio dividends
- Only the payment of a non-eligible dividend can trigger a refund from this account - Eligible RDTOH: This tracks refundable taxes paid on eligible dividends received by the corporation
- Any type of dividend (either eligible or non-eligible) can trigger a refund out of this account; however, when non-eligible dividends are paid, the refund must come out of non-eligible RDTOH first.
At the date of transition, the eligible RDTOH balance will be calculated as the lesser of:
1. The existing RDTOH balance; and 2. 38 1/3% of the General Rate Income Pool (GRIP) balance
