Arjun Sawhney Section # 2 Student #102562332

Research Assignment

Case # 1

The lawyer’s aim when he pulled back his total working capital from his

business bank account was to economize on interest from taking out a mortgage

on home, while being capable of subtracting the interest loan because it is used to

refill capital and in the burden of produce income.

Agreeing to CICA Handbook, expenses used to gain income are, in fact

deductible. CICA does not define the term interest, the Supreme Court of Canada

defines interest as “the return for the use by one person of a sum of money,

belonging to, in a colloquial sense, or owed to another.” By definition, the amount

of money owed from the loan taken out by the lawyer in order to replenish his

capital would be considered. Interest expenses that are incurred to earn income

are deductible as described by CICA. Due to this reason, it would appear that the

interest created by the loan to replace the capital is fully deductible. This would be

a true statement, in my opinion.

The fact that the lawyer has used capital from his company in order to

purchase a home is belief of what tax planning should be. CICA has seen it all and

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has created provisions even for tax avoidance of this nature. If this were a

completely acceptable practice, it would

be common practice among the business world and it simply is not. The

implications of mixing business with personal affairs have become very awkward in

nature and appropriate policies are needed to be introduced. The practice of using

capital in order to finance a personal mortgage seems somewhat unjust. Using this

research, I must introduce imputed interest to this case. Imputed interest is defined

as interest considered to be paid; even through no interest, payment has been

made. In effect of this, CICA calculates the interest that should have been paid on

the mortgage amount at a fair rate and the Lawyer will be responsible for this

amount with taxes.

Another reason the lawyer could be sting by this transaction is the fact that

he is using company’s funds in order to finance his personal mortgage. The entire

amount of the mortgage is used for personal purposes and thereby the full amount

will be added to the lawyer’s taxable income.

Practically, this bank loan expense is deductible. The mortgage according to

the lawyer’s notion is simply not interest free. The lawyer has already made his

mind and he might face a negative consequence at the end of the year if he does

not pay tax on this amount.

So as you can see, this “tax saving” plot the lawyer has attempted to play

may seem to save taxes and interest in somewhat of a loophole but in the long run

it works out to costing more. CICA is constantly updating and amending its

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practices. They have employees that are well versed in all areas of the tax code,

this way of saving taxes is simply too easy to make logical sense. The lawyer

should have known that this situation was simply too good to be true and

consulted an accountant before making such a huge business decision.

Case # 2

1. Cost = $50,000 , POD = $125,000 , Disposition cost = $15,000

Capital gains = $125,000-$50,000-$15,000 = $60,000

Taxable capital gains = $60,000 * 50% = $30,000

2. There are few factors to think when settling if a transaction is business

income or capital gains in nature. The following measures are crucial in deciding

the nature of the transaction because of the unique results in terms of financial

stability and taxes at the end for the organization. In order to differentiate the

following factors, we must implement:

a. Relation of the transaction to the taxpayer’s business: The

transaction may be believed business income transaction depending

on the similarity to their normal business or profession. In the current

state of affair, the accountant works in an office with real estate agents

and completes real estate transactions every day. However, he is in

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the business of accounting, not the business of real estate. In addition,

the land was purchased on the advice of a client, which may suggests

that the accountant had prior knowledge of the potential profitability of

the land, which would incline toward a business transaction. However,

there are still several items to consider before deciding.

b. Activity or organization normally associated with trade: Was the

transaction handled the same way someone who would actually and

normally buy and sell land? In this scenario, the accountant does not

seem to have undertaken any extraordinary practices in order to

purchase or sell the land. Therefore, this would indicate that the

transaction is capital in nature.

c. Nature of assets involved (the type of asset used): Assets that

are more frequently used and sold such as inventory, helps us

understand the meaning of the asset. These are the items that are

normally will sell for a markup profit, and not used to generate income

on their own. The land sold in this transaction would be viewed as a

situated property because it can produce its own income by itself. This

step would also indicate a transaction that is capital in nature.

d. Number and frequency of transactions by the same taxpayer in

a given period of time: If a taxpayer undertakes several similar

transactions over a relatively short period of time, this may indicate

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that the transactions are to be considered business income. In this

case, however, this is the only transaction of this nature that the

accountant has undertaken in two years. This would also be classified

as capital in nature.

e. Length of the period of ownership of the asset: The length of

time that an asset is held with the taxpayer may be useful in

determining the nature of that given asset. The shorter the asset is

owned, the more likely it is business income.

The asset involved in this transaction has been held for two years, stating

that the accountant has not been working to sell and gain a profit from it

and indicates that this transaction is capital in nature.

f. Circumstances that caused the disposition: An unsought proposal

would indicate that no anticipation of funds was acknowledged before

agreeing to sell the asset. The case indicates that the offer to

purchase was indeed unsolicited, thereby indicating the nature of

transaction as capital in nature.

In my conclusion, established research for this case shows that this type of

transaction should be regarded as capital in nature. By doing this, the profit

is that he will only pay one-half of his gains or loss on this piece of land at the

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end of the year. If he classify as a business income, he will have to pay his

tax on the full gain or loss.

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