Accg_Tax_Notes_C6

Accg_Tax_Notes_C6 - CHAPTER SIX - INCOME FROM PROPERTY (Div...

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CHAPTER SIX - INCOME FROM PROPERTY (Div B, Subdiv b, S9-37; Subdiv f S67- 80.5) What is income from property? Income from property is generally regarded as the return on invested capital when little or no time, labour or attention is expended in producing the return. (ie investment income) It includes dividends, interest, rents and royalties. It should be noted that “little” is a relative term, but is used here in comparison to employment or business activities which require significant time, labour and attention on an ongoing basis. However, it should be noted that even such receipts could constitute business income if sufficient time, labour and attention are expended in earning them! (Contrast an individuals bank interest income and dividend income to the same income earned by a finance company or bank! Contrast the rental income earned by an individual who owns a rental property to similar income earned Income from property is the “profit therefrom for the year”, hence net of related expenses. Income from property does not include capital gains or losses, which are considered a separate source of income. Again, this is important in determining the appropriate rules to apply and deductions allowed in determining income. Interest income : Although not defined in the ITA, the Supreme Court has defined interest as “the compensation for the use of money belonging to another”. It is unclear in some situations whether an amount paid represents interest or “something else”. Provisions have been legislated in the ITA and Regulations deeming amounts to be interest and requiring them to reported in income at specified intervals. Accrual rules : Annual accrual rules are required for most common sources of interest income under S12(3) for corporations and S12(4) for individuals. When interest is actually paid, it must be included in income to the extent it has not already been included under the accrual method per S12(1)(c). S12(3) requires accruals on a daily basis, as we would for accounting purposes. S12(4) only requires accruals on the “anniversary date” of the “investment contract” to the extent the interest has not been received, and hence reported. (See also Prescribed Debt Obligations – page 353 in text.) Deeming rules : Interest received on sale of bonds between interest payment dates, is deemed to be interest income and not part of proceeds in capital gain calculation. Where an investment is made “at discount” and the contract makes no mention of interest but is redeemed “at par”, the difference is deemed to interest income. (Eg Treasury Bills, Zero-coupon Bonds).
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Payments based on production or use of Property (Royalties): Any amount received (cash basis) that is based on the use of or production from property is taxed as income from property under S12(1)(g). It is usually easily distinguished from business income based on the amount of time, labour and attention expended in earning the income (Royalties
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Accg_Tax_Notes_C6 - CHAPTER SIX - INCOME FROM PROPERTY (Div...

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