Test #2 Flashcards
(24 cards)
What is the calculation of capital cost allowance (CCA) ?
- Starts with Opening Balance
- Then adds additional purchases and deducts any disposals
- The appropriate CCA rate is then applied to obtain the deduction for tax purposes for the current year
- Opening Balance + new purchases - dispositions x applicable CCA rate
Define Recapture.
At the end of the fiscal year, if the profit is greater than the sale of the depreciated property, the remainder profit will be taxed.
- Negative pool at the end of the year
Ex. If company sells trucks that are worth $70,000.00 for $100,000.00, the remaining profit will be taxed
Define Terminal Loss.
- Opposite of recapture
- Positive pool at the end of the year
Ex. Company sells trucks that are worth $100,000.00 for $70,000.00, the remainder is considered to be a terminal loss suffered by the company. (No assets - not taxed as CCA)
What are the pool requirements for Recapture and Terminal Loss?
Recapture - Negative Pool
Terminal Loss - Positive Pool
Who and what assets qualify for CCA?
- Any entity who acquires capital assets for purpose of producing income
- Tangible assets other than land
- Intangible assets that have limited legal life
- Patents, Franchises, Licenses
What is the Declining Balance method?
- Annually applies a constant percentage to the remaining undepreciated portion of the original capital cost.
- Percentage apples is the designated CCA rate for the asset’s class
What are the common types of expenditures that qualify as Eligible Capital Property?
- Goodwill
- Franchises, Licenses and Concessions - no specific legal limited life
- Customer lists
- Trademarks
- Incorporation costs
What is a RRSP?
A contract or plan between you, the plan “annuitants”, and the plan “issuer”, usually a financial institution.
- You can make contributions to the plan over a period of years; these contributions are invested and earn income, providing you with savings to live on in your retirement
- RRSP is an account, not a specific type of investment
- It can include stocks, bonds, mutual funds
What are the 3 main benefits of having a RRSP?
- You get a tax deduction for the amounts continued (up to certain limits)
- Earnings on assets in a RRSP accumulate tax-free
- RRSP funds are only taxed when withdrawn
What happens upon the death of a taxpayer?
- All income to DOD
- Deemed Disposition of Capital Property
- RRSP and RRIF taxable unless rollover to spouse
* Executors T-3 Trust Return after date of death
Define Change In Use.
When small enterprises use assets for business purposes that were previously used for personal use.
- A change from personal use to business use causes a deemed disposition for tax purposes.
- The individual is deemed to have sold and bought the asset from himself at a value equal to the assets fair market value at that time
What is an Involuntary Disposition?
If assets are destroyed, lost, stolen, or expropriated, the receipt of insurance or compensation causes a disposition to occur,
- 2 year rule for insurance proceeds
- 1st year acquisition + year of disposition - 1/2 normal rate of CCA applies
Define Dividend Income.
The returns provided on the investment in shares of a corporation; they reflect the distribution of a portion of the corporations profits to the shareholders. Ex. Stock Dividends
Define Interest Income.
The compensation received for the use of borrowed funds. Ex. Life insurance policies and foreign interest
Define Rental Income.
The compensation received for allowing another party to use ones tangible property. Rental income is derived from the ownership of real estate.
Define Royalty Income.
- Normally treated as property income from an investment received for the use of owned property such as a trademark, copyright, patent or other similar intangible properties.
Define Capital Gains.
The gain (or loss) realized on the disposition of capital property. For a property to be classified as capital property, it must have been acquired and used for the purpose of providing the owner with a long-term or enduring benefit.
- Intended purpose of acquisition was long-term or enduring to achieve benefits
Benefit - Financial or Personal Enjoyment
Intention - for resale vs. enduring benefit
What factors should be considered for Capital Gains.
- Period of Ownership
- Nature of Transaction
- Number or Frequency of Transaction
- Relation to Taxpayers’ business
What are the exclusions from income
- Gifts
- Inheritances
- Tax-Free savings account
- Life Insurance proceeds
- Lotteries and Gambling
- Accidents or Sickness Insurance
What are the categories of Capital Property?
- Personal-use property
- listed personal property
- Financial property
Define personal use property.
Property owned by the taxpayer that is primarily used for the personal use and enjoyment of the tax payer.
- Does not generate financial returns
Define Listed Personal Property.
Includes items that are for personal use but also have some element of investment value.
Define Financial Property
Property acquired to generate a benefit through a financial reward
Define Statutory Scheme
A formula for determining net income for tax purposes
