Selected Chapter 6 Problems and Solutions: Property Income
Solution 10 (Basic)
Net income from employment, team salary
Net income from proprietorship business
Net income from endorsements (business income)
Net income from property:
Dividends from Canadian corporation
Add 45% gross-up
Dividends from foreign corporation
Interest from Canadian bank
One-year anniversary interest accrual on GIC
(attributed to Trent)
Interest on loan
Net income from property
Basic Tax Planning
Consider using a deferred-income fund, such as an RRSP, for the GICs.
Investigate whether the investment in the foreign corporation might not be better invested in a Canadian
corporation because of the dividend tax credit.
Pay higher, yet reasonable, compensation to Mary.
Mary has a salary in her own right; consider investing it rather than spending it on family personal needs.
This will result in the investment income being taxed in her hands.
Consider incorporating the sporting goods store.
Consider setting up a tax-free savings account in 2009.
Solution 14 (Basic)
Interest expenses are deductible if there is a reasonable expectation of earning income from property.
Preferred shares (RRSP)
Deductible interest = $90,000 × 8.5% = $7,650
NOTES TO SOLUTION
As there is often an expectation of dividend income on common shares, the interest is deductible.
As capital treatment has been chosen for gains/losses on the gold bullion, the interest is not deductible.
The corporate bond is income-producing and the associated interest would be deductible.
The preferred shares were purchased in an RRSP; deduction of interest is disallowed.
The associated interest on the common shares and GICs would be deductible, as there is the expectation of
earning property income.
The paintings from well-known galleries would be considered an investment for earning future capital gains
and, therefore, the associated interest would not be deductible.