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

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.
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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).
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.
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The courts have over the years determined the
following criteria:
•
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).
•
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
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•
Supplemental work on or in connection with
the property disposed of in the transaction –
whether work done on a property to enhance its
value or make it more marketable
•