Business Income-notes

Business Income-notes - Tran Chung Income or Loss from a...

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Tran Chung Income or Loss from a Business What is a business? See definition under subsection 248(1). Business Income and GAAP Subsection 9(1) – income from a business for a taxation year is the “profit” …. Canderel Ltd vs. The Queen (SCC) 1. Determination of profit is a question of law (not accounting) 2. The profit of the business is determined by setting against revenue from the business and the expenses incurred in earning the said profit 3. In seeking to ascertain profit, the taxpayer is free to use any method which is not inconsistent with: o The provisions of the Income Tax Act o Established case law principles or “rules of law”; and o Well-accepted business principles. 4. Well-accepted business principles, which include but are not limited to the formal codification found in GAAP, are not rules of law but interpretative aids (to be used and determined on a case-by-case basis). Once the taxpayer evidenced that he has provided an accurate picture of income, the onus shifts to the Minister to show either that the figure provided does NOT represent an accurate picture, or that another method of computation would provide a more accurate picture. Business Income vs. Capital Gains When an asset is being disposed, one has to determine whether the economic gain or loss should be considered business income or loss or capital gains or loss. Two main reasons: Capital gain is taxed at an inclusion rate of 50% Allowable capital loss (50% of the capital loss) can only be deducted against taxable capital gain. This issue is one of the greyest areas in Canadian income taxation and gives rise to thousands of court cases. Fruit and tree example to be discussed in class. The courts have over the years determined the following criteria (which has to be applied to the specific facts and circumstances of the taxpayer and hence, the many court cases): © 2010 Tran Chung 1
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Intent and course of conduct – did the taxpayer deliberately seek a profit of an income rather than a capital gain nature? Secondary intention – whether the taxpayer has built into a transaction (at the time of purchase) a profitable alternative in the event the primary intention was frustrated/ Relation of the transaction to the taxpayer’s business – transaction may be regarded as income if it is very similar to the taxpayer’s business Activity or organization normally associated with trade – determine how the transaction was organized (e.g. same way as a normal business). Example, Taxpayer buys a carload of toilet paper and resold it for profit. Nature of the assets involved – fixed assets versus working capital assets Number and frequency of transactions – a relatively large number of transactions in a given period of time may indicate that the taxpayer is in that business Length of period of ownership of the asset – consider the turnover of assets Supplemental work on or in connection with the property disposed of in the
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Business Income-notes - Tran Chung Income or Loss from a...

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