General Notes regarding Problem 200

 Business income calculation does not include HST

 HST is not included in revenue because although collected by business when sales
are made, it is the government’s money and not kept by the business
 HST paid by the business is not included as expense => government will refund to the
firm through input tax credit
 Non-profit activities are not a business for tax purposes
 Many expenses are deductible under general rule allowing deductions for expenses
incurred for an income-earning purposes
Notes for Deductions
 Cost of preparing tax returns is allowed as a deduction from business or property income
o Deduction only allowed for people earning significant business or property
income that it would be normal practice to hire an accountant
 For any expenses to be deductible, it must be incurred in the current year
 Meals and entertainment are allowed as a deduction, but only for 50% of the amount
o Golf expenditures are not deductible
 Interest expense is only available if loans are for business purposes/expenses
o Compound interest must be paid in the year in order to be deductible
 Drawings are not deductible since no income-earning purpose
 Noise pollution penalty is not deductible
o Tax rules deny deductibility for all fines and penalties imposed by the
government
 Costs relating to conventions are deductible only for two conventions in a year =>
maximize deductions by deducting costs of two most expensive convention
 Capital expenditures (expenditures benefiting business for period of time beyond the
current fiscal year) are not deductible in the year incurred
o Customer-list is non-deductible
 Repairs to Bruno’s house are not deductible as they are not for the purpose of earning
income
 Self-employed people are required to make contributions to the Canada Pension Plan
(CPP) => added to tax payable
Taxation of Individuals
 Individuals mean taxpayers other than corporations
 Minimum tax is alternate method to computing individual’s taxes payable and only
applicable to high-income individuals with large amounts of tax deductions
 Individual must compute their employment income, business and property income,
other income and any capital gains
o Losses may reduce taxation year income to zero, but income and capital gains
cannot be reduced below zero
 o Remaining losses are available for carryover
 Tax return must be filed on a calendar year basis January 1st to December 31st
o Most tax returns for individuals due on April 30 of following year (must pay
taxes by then)
o Self-employed individuals (earning business income) or who have a spouse that is
self-employed allowed to file tax returns on June 15th of the following year
Individuals must file tax return if they
 Owe any taxes
 Disposed of any capital property
 Withdrawn money from RRSP (registered retirement savings plan) and have not fully
repaid their money for purposes of the home buyers plan and/or the lifetime learning plan
 Individual may be eligible to receive GST credit or various provincial credits and
may have also earned income increasing his/her RRSP contribution
 Taxpayers who do not file income return when they are required are liable to
penalties
o 5% of unpaid tax plus 1% of unpaid tax for each full month tax return is late
o Maximum penalty is 17% of unpaid tax
 If already received penalty (repeat offender)
 10% of unpaid tax plus 2% of unpaid tax for each full month tax return is
late and maximum penalty is 50% of unpaid tax
o Penalty equal to greater of $100 and 50% of the tax that would have been owing
had taxpayer made a false statement on return or omitted this income
o Charged with tax fraud under criminal code of Canada
 Interest on unpaid taxes, penalties and penalties themselves are not deductible for tax
purposes
 Voluntary disclose => correct an understatement or overstatement of income or
expenses that have been made in the past
o Protect taxpayer from penalties and criminal prosecution
Instalments and Withholdings at source
 Ensures federal/provincial governments receive tax revenues and people don’t have to
pay one large tax bill
 Employers are required to deduct tax from employee paycheques and remit the taxes
withheld to the government
o Any withholdings or tax at source and/or instalments payments will reduce taxes
owing when individuals files annual tax return
o Government will issue tax refund if individual overpaid tax
Criteria for instalment payments
 Individual owes more than $3000 in tax in the current year after taking into account any
withholdings at source
  Individuals owes more than $3000 in any one of the previous two taxation years
 Instalments must be paid quarterly on March 15, June 15, September 15 and December
15
o On-quarter of estimated taxes owing or current taxation year => exists when
taxpayer expects lower taxes than in prior years (interest on underpaid
instalments)
o One-quarter of the prior year’s taxes owing
o One-quarter of the second preceding year’s taxes owing for the first two
instalment payments, then one-half of the amount by which prior year’s taxes
owing exceeds the first two instalments payments already made
 Any interest charged for late or unpaid instalments, or for unpaid taxes owing, will be
based on the prescribed interest rate set quarterly by the government plus $4
 Interest is charged based on the number of days that the instalment payment, or tax
owing, was outstanding
o Interest owing of $25 or less may be waived
o If taxpayer overpays instalment, government will pay interest to taxpayer at
prescribed rate plus 2%
o Any interest on ta tax refund will be paid at the prescribed rat plus 2%
o Interest on late tax refund will begin accruing 30 days after later of (a) the balance
due day and (b) the day on which tax return was filed
o For corporations, interest on late tax refund will begin accruing on the later of (a)
120 days after the corporation’s year-end; and (b) 30 days after the corporation’s
tax return was filed
Taxation of Corporations
 Corporations can choose any fiscal year-end
 Fiscal year cannot exceed 53 weeks
 Corporation tax returns due six months from fiscal year-end
 Any taxes owing by corporation, must be paid within two months of year-end (three
months for certain CCPS)
 Corporations with taxes owing above certain limit must make monthly instalment
payments to government at the end of each month
o Corporation with taxes of $3000 or less in the previous year does not have to
make instalment payments
 Corporation must pay monthly instalments of the least of:
o 1/12 of the estimate of the current year’s taxes payable
o 1/12 of the prior year’s taxes payable
o 1/12 of the taxes payable from two year sago for the first two monthly instalments
and 1/10 of the amount computed by taking prior year’s taxes payable less the
amount of instalments already paid in the first two months
 Certain CCPS can pay their income tax instalments on a quarterly basis (as opposed
to monthly)
  Each quarterly payment is due on the last day of each quarter and is calculated in a
similar way as the monthly instalments
o (a) ¼ of estimated current year’s taxes payable
o (b) ¼ of the prior year’s taxes payable
o (c) ¼ of the taxes payable from two years prior for the first instalment and 1/3 (of
the prior year’s taxes payable less the first instalment) for the lats three
instalments
Net income taxable income and taxes payable
 Corporations, like individuals, must calculate their net income for tax purposes,
taxable income and taxes payable
o Corporations do not have employment income and are not eligible for
personal tax credits
 Start with accounting net income and any amounts that are deductible for accounting
net income but not for tax purposes must be added back to determine net income
for tax purposes
o Any items included in accounting net income may not be taxable, hence these
amounts are subtracted from accounting net income to determine net income
for tax purposes