Chapter 8

Income Or Loss From A Business

Business Income Defined

 ITA 248
 Includes a profession,
calling, trade, manufacture
or undertaking of any kind
whatever
 ITA 253
 A more detailed listing

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Business Income In The Act
 Subdivision b (ITA 9 Through 37.3)
 9-11 – Basic Rules
(Includes Inventory Valuation)
 12-17 – Inclusions Inco
m
Tax e
 18 – General Limitations Act
 20-21 – Specific Deductions

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Problem Areas
 Business Vs. Employment

 Active Vs. Passive

(Property Income)

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Business Income Vs.
Capital Gains

 Importance - Gains
 [(45% Tax Rate)(1/2)] =
22.5% vs. 45.0%
 Importance - Losses
 1/2 Deductible
 Only Against Capital Gains

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Criteria
 Intention And Course Of Conduct
 Number And Frequency Of Transactions
 Relationship To Taxpayer’s Business
 Supplemental Work On Property
 Nature Of Assets
 Objectives In Articles Of Incorporation

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Business Income And GAAP
 Similarities
 Accrual
 Net Concept
 Major Differences
 Amortization (Depreciation)
 Other Allocations
 Permanent Differences
 Non-Arm’s Length Transactions
 Reasonableness

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Inclusions
 Amounts Received Or
Receivable

 ITA 12 Establishes The

Accrual Basis

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Reserves
 A Deduction For Future Events
 General Rules
 Only For Items Listed In ITA 20
 If Deducted In One Period, It Must Be Included In
The Following Period

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Specific Reserves
 ITA 20(1)(l) Bad Debts

 ITA 20(1)(m) Undelivered Goods And

Services

 ITA 20(1)(n) Unpaid Amounts

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Bad Debts

Example: At December 31, 2006, Jones Inc. estimates

that $2,000 of its $50,000 in Accounts Receivable will be
uncollectible.
ITA 20(1)(l) - Deduct $2,000

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Bad Debts

During 2007, write offs total $2,200.

ITA 20(1)(p) - Deduct $2,200

On December 31, 2007, it is estimated that $2,500 of the

$62,500 in Accounts Receivable will be uncollectible.

ITA 12(1)(d) - Add $2,000

ITA 20(1)(l) - Deduct $2,500

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Undelivered Goods – ITA
20(1)(m)
During 2007, Receipts = $300,000, with $40,000 for
goods to be delivered next year.
ITA 12(1) – Include $300,000

ITA 20(1)(m) = Deduct $40,000

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Uncollected Amounts – ITA
20(1)(n)
During 2007, sell item for $300,000, payable in three
$100,000 instalments in 2007, 2008, and 2009.
2007 – ITA 20(1)(n) – Deduct $200,000

2008 – Add $200,000, Deduct $100,000

2009 – Add $100,000

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Other Inclusions
 Recapture
 CEC Dispositions
 Damage Payments Received
 Gambling Profits
 Profits From An Illegal Business
 Debt Forgiveness
 Government Assistance
 Inducement Receipts
 Restrictive Covenant Receipts

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Restrictions
 18(1)(a) Must Be To Produce
Income
 Reasonable Expectation Of Profit
(Proposed)
 18(1)(b) No Capital Expenditures
 18(1)(c) No Expenditures For
Exempt Income
 18(1)(e) No Reserves Unless
Specified

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Restrictions
 Fines And Penalties
 ITA 67.6: Not Deductible

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Restrictions

 18(1)(h) No Personal Expenditures

 18(1)(l) No Recreational Facilities
 18(1)(m) No Political Contributions
 18(1)(r) No Excess Automobile
Mileage Payments

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Restrictions
 18(9) No Prepaid Expenses
 18(11) No Expenses Of Sheltered Plans
 18(12) Work Space In The Home

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Restrictions
 19 And 19.1 Advertising Expenditures
 Foreign Print Media
 Foreign Broadcast Media
 Directed At Canadian Market
 Certain Periodicals Exempt

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Restrictions
 Business Meals And Entertainment
 50% Deductible – Remainder Lost

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Restrictions
 Automobile Mileage Costs (2007)
 $0.50 For First 5,000 km
 $0.44 For Excess

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Restrictions
 Interest And Property Taxes On Land
 18(1)(a) - Not Producing Income
 18(2) - To Extent Of Revenues
 18(22) - Base Level Deduction

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Automobile Costs
Employees And Business

 Interest Expense
 Capital Cost Allowance
 Leasing Costs

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Interest Expense
 Lesser Of
 Interest Paid For Year
 $10 Per Day
 Prescribed As $300 Per
Month (30 days)

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Capital Cost Allowance
 < $30,000
 Class 10 (30%)
 > $30,000
 Class 10.1 (30%)
 Separate Class
 Limit = $30,000
 No Recapture Or
Terminal Loss
 1/2 CCA In Last Year

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Leasing Costs
 Limited To Prescribed Amount Of $800 Per Month

 Implemented Through The Use Of One Of Two Formulae:

- Cumulative Formula

- Current Year Formula

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Cumulative Formula
 [A x B/30] - C - D – E, where
A is a prescribed amount ($800 for 2007)
B is the number of days from the beginning of the term of the lease
to the end of the taxation year
C is the total of all amounts deducted in previous years for leasing
the vehicle
D is a notional amount of interest since the inception of the lease,
calculated at the prescribed rate on refundable amounts paid by
the lessee in excess of $1,000
E is the total of all reimbursements that became receivable before
the end of the year by the taxpayer in respect of the lease

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Current Year Formula
 [A x B/0.85C] - D – E, where
A is the total of actual lease charges paid or payable in the year
B is a prescribed amount ($30,000 for vehicles leased in 2007)
C is the greater of a prescribed amount ($35,294) and the
manufacturer’s list price for the vehicle
D is a notional amount of interest for the current year, calculated at
the prescribed rate on refundable amounts in excess of $1,000
E is the total of all reimbursements that became receivable during
the year by the taxpayer in respect of the lease

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Inventory Valuation
 Valuation Methods
 Lower Of Cost Or Market
 Market
 Determination Of Cost
 Specific Identification
 FIFO
 LIFO (Can’t use for tax purposes)
 Average Cost
 Depreciation In Inventories

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Leasing Property
 Accounting requires
capitalization

 Tax: A lease must be treated

as a lease – No capitalization

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Restrictions On Input Tax
Credits
 Club memberships
 Business meals and
entertainment
 Passenger vehicles
 Personal or living
expenses
 Reasonableness

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Specific Deductions
 20(1)(a) And (b) CCA And
CEC
 No Capital Costs Or Eligible
Capital Expenditures
 CCA And CEC

 20(1)(c) And (d) Interest

 Must Be To Produce Income

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Specific Deductions
 20(1)(e) Financing Costs
 Amortized Over Five Years

 20(1)(e.2) Life Insurance

Premiums
 Only If Required By
Financing

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Specific Deductions
 20(1)(f) Discount On
Debt Obligations
 97% Maturity Value
 Yield < 4/3 Coupon
 Can Deduct Full Amount
At Maturity
 Otherwise, A Capital
Loss

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Specific Deductions

 Reserves
 20(1)(l) Doubtful Debts
 20(1)(m) Undelivered
Goods And Services
 20(1)(m.1) Warranties
 20(1)(n) Unpaid Amounts

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Specific Deductions
 20(1)(z) Lessor Payments For
Lease Cancellation

 20(1)(aa) Landscaping Costs

 Others
 Representation
 Site Investigation
 Utilities Service Connection
 Convention Expenses

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Farm Losses
 Full Time Farmer
 Losses Fully Deductible
 Hobby Farmer
 No Losses Deductible
 Part Time Farmer
Restricted With Carry Over
 First $2,500
 ½ Next $12,500
 Max = $8,750

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Income Of Professionals
 Full Accrual
 Billed Basis - ITA 34
 Accountants
 Dentists
 Doctors
 Lawyers
 Veterinarians
 Chiropractors

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Scientific Research
 Unlimited Carry
Forward
 Deduction Of Capital
Expenditures
 Generous Investment
Tax Credits

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Ceasing To Carry On Business
 The Problem

 ITA 23 - Inventories

 ITA 22 - Accounts Receivable

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ITA 22 - Example
Vendor has accounts receivable with a face value of
$25,000 and a fair value of $20,000. He has deducted a
reserve of $3,000.
1. No Election
Vendor adds $500 [$3,000 – (1/2)($5,000)]
Purchaser: capital gain or loss on amount collected
2. Election
Vendor deducts $2,000 ($3,000 - $5,000)
Purchaser adds reserve, but can deduct actual

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Appendix

To Chapter 8

Taxable Income and

Tax Payable For Corporations

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Net Income For Tax Purposes -
Corporations
 Similarities To Individuals
 Net Business Income
 Net Property Income
 Net Taxable Capital Gains
 Differences From Individuals
 No Employment Income
 No Subdivision d Inclusions
 No Subdivision e Deductions

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Taxable Income -
Corporations
 Deductions Available To Corporations
 Loss Carry Overs
 Charitable Donations
 Dividends Received From Taxable Canadian
Corporations

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Charitable Donations

 Limit Of 75% Of Net

Income
 Carry Forward Period
Of Five Years

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Dividends
 Not Tax Deductible
When Declared
 Paid Out Of After Tax
Income
 Included In Net Income
For Tax Purposes
 Deducted From
Taxable Income

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Tax Payable - Corporations

 Basic Amount – 38%

 General Rate Reduction (GRR) – 7%
 No Income Eligible For Small Business Deduction
 Federal Tax Abatement – 10%
 Income Allocated To A Province
 Corporate Surtax – Currently 4% - Repealed For
2008 and Subsequent years

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Small Business Deduction
(SBD)
 Canadian Controlled Private
Corporation (CCPC)
 Available On First $400,000 (2007)
Of Active Business Income
 16% Of Qualifying Active Business
Income

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Manufacturing And Processing
Deduction
 Profits From
Manufacturing And
Processing
 Formula Reflects
Portion Of Labour
Costs And Capital
Assets Used In M&P
 No Longer Of
Significant Importance
(GRR)

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Provincial Income Taxes -
Corporations
 Allocated To Provinces
Where Corporation Has
Permanent
Establishments
 [(Provincial Tax Rate)
(Taxable Income)]
 Low Rate – SBD
Eligible Income
 High Rate – Other
Types Of Income

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