ch5so - Chapter 5 Income from a Business Questions 5-1 The...

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Chapter 5 Income from a Business Questions 5-1 The issue in both taxpayers’ cases is whether or not the profits from the sale  of property will be treated as business income or capital. In making this  determination, it is necessary to evaluate the facts of each situation against  certain criteria that has evolved over time through the courts. Gran Smith Primary Intent:  Gran’s primary intent in the sale of the trees was to  earn a profit. This is clear from the fact that she makes her living from  selling such trees from inventory to make a profit. Secondary Intent:  Since the primary intent was to sell the trees for a  profit, the secondary intent becomes irrelevant in this case. Number and Frequency of Transactions:  Gran grows trees and sells  them on a two-year cycle. Therefore, she makes several such transactions on  a frequent and regular basis. Relationship to Regular Business:   In this case, the relationship is  100%. The transaction is Gran’s regular business. Conclusion 45
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46 TAXATION   IN   CANADA Gran’s primary intent, the number and frequency of transactions, and  the relationship of the transaction to her regular business all strongly suggest  that the profit earned on the disposition of trees is income from business.
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INCOME   FROM   A   BUSINESS 47 Mac Tosh Primary Intent:  Mac’s primary intent in owning the trees was to earn  income from the sale of apples grown on the trees. Secondary Intent:  Mac may have had the intention of someday selling  the orchard at a profit upon retirement. Number and Frequency of Transactions:  The sale of the trees is the  first such transaction Mac has entered into in 40 years. Therefore, it does not  occur frequently. Relationship to Regular Business:   The sale of the trees could  be  considered to be closely related to Mac’s regular business. As an orchard  owner, it is probable that Mac takes an interest in the sale of trees in the area  in which he farms. Conclusion The   close   relationship   between   the   transaction   and   Mac’s   regular  business and the implied secondary intent behind the transaction indicate  that the gain or loss could be treated as business income. However, Mac’s  primary intent and the fact that such a sale has never occurred before  outweigh the tests that indicate treatment as business income. Based on the  strength of the primary intent test and the number and frequency test, Mac  should treat any gain (or loss) on the transaction as a capital gain (or loss).  Mac must be careful, however, when disposing of the orchard for retirement  purposes to avoid having profits from such disposals treated as business 
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This note was uploaded on 06/03/2009 for the course BUSINESS AIT 805 taught by Professor Shirenekhan during the Winter '09 term at Seneca.

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ch5so - Chapter 5 Income from a Business Questions 5-1 The...

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