ch7so - Chapter 7 Income from Property Questions 7-1 An...

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Chapter 7 Income from Property Questions 7-1 An apartment building owned by a corporation whose principal purpose was  to earn rental income would be able to treat the income as business income  where the corporation has more than five full-time employees. An individual  or a corporation without six full-time employees would treat the income as  income from property. 7-2 (a) The annual accrual rule restricts the ability of taxpayers to defer their  taxes and encourages tax-neutral investment decisions. For example,  without this restriction taxpayers could structure their affairs to take  advantage of debt instruments, such as zero coupon bonds, designed  to allow for the deferral of interest. (b) Disallowing   CCA   deductions   to   create   or   increase   rental   losses  prevents taxpayers from sheltering other sources of income from tax  with CCA. This sheltering would be accomplished by using the rental  loss to offset other sources of income. (c) The dividend gross-up and tax credit rules are designed to neutralize  double taxation by integrating the personal and corporate tax systems.  Without these rules, both the corporation and the individual would be  taxed   on   the   dividend   because   dividends   are   not   an   allowable  75
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76 TAXATION   IN   CANADA deduction for corporations. This system is designed to be decision- neutral, in that it makes taxpayers indifferent between earning income  in a corporation and earning income directly.
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INCOME   FROM   PROPERTY 77 (d) The purpose of this inclusion and subsequent deduction is to allow  dividends to flow tax-free through a corporation (or corporations)  without incurring tax until the dividend income is received by an  individual. Such a mechanism avoids double taxation, which would  have a stifling effect on investment and business activity. The reason  the dividend is included in income and then deducted is that there are  several restrictions regarding the deduction (i.e., subsections 112(2.1),  (2.2), (2.3), (2.4)). These restrictions may deny the deduction of the  dividend or limit the deduction. In such a case, the full dividend  would still be included in income. (e) Interest   may   not   be   deducted   for   a   personal   residence   because  paragraph 20(1)( c ) states that the interest expense incurred must be on  account  of  debt  used   for   the  purpose  of   earning   income  from   a  business or property. The legislative intent behind this restriction is to  prevent taxpayers from enjoying tax-assisted purchases of personal- use assets. Such assets do not produce income; thus they do not  increase the  government’s tax base. The interest is not deductible 
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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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ch7so - Chapter 7 Income from Property Questions 7-1 An...

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