Business Income-slides - 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. © 2010 Tran Chung 1
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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. © 2010 Tran Chung 2
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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 © 2010 Tran Chung 3
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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 Circumstances that caused the disposition – an unsolicited offer (lack of plan to turn a profit
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This note was uploaded on 11/03/2010 for the course COMM 355 taught by Professor Trancheung during the Winter '10 term at The University of British Columbia.

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

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