Property Income-notes

Property Income-notes - Tran Chung Income From Property...

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Tran Chung Income From Property INTRODUCTION I want to cover only the following topics: Interest income and deduction Payments based on productions or use Dividends from a corporation resident in Canada Shareholder benefits on loan Income attribution Rental properties INCLUSIONS Interest Income The term “interest” is not defined in the Act. The Supreme Court of Canada has defined interest to be: “the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.” Must have three elements: 1. Accrue on a continuous basis 2. Calculated on a principal sum 3. Compensation for the use of money Does this definition include discounts on bond? It is not clear, so the Act contains legislation to bridge any gaps. Method of Reporting Income The primary method for computing interest on a “debt obligation” is the annual accrual method. See subsections 12(3) and 12(4). “Debt obligation” is not defined, but the CRA indicates debt obligations is considered to include: bank accounts, term deposits, guaranteed investment certificates, Canada Savings Bonds, mortgages, corporate bonds and loans –see IT-396R para 19. Paragraph 12(1)(c) states that when interest is received, it must be included in income to the extent that the interest has not been included previously by the accrual method. As a result, it is not possible to defer the recognition of, for example, compounding interest by using the cash method to report that interest only when it is received. Accrual rules for Individual © 2010 Tran Chung 1
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Subsection 12(4) requires that individuals holding an interest in an investment contract include in income on every anniversary of that contract, any interest accrued to that day, to the extent that its has not previously included in income. Discounts and Premiums on Loan Where a loan is made at a discount, but repayable at par, or is made at part, but repayable at a premium, the question arises as to whether the discount or premium is interest or capital gain. Paragraph 12(1)(c) must be read together with subsection 16(1) , which states that where a payment can reasonably be regarded as being part a payment of interest and in part a payment of capital, the part that can be reasonably be regarded as interest is to be included in the income of the receipt. For example, if no interest is charged (such as T-Bills and zero coupon bonds), a discount or premium may be considered in the nature of interest. Payments Based on Production or Use Paragraph 12(1)(g) states that any amount received that is dependent on the use of or production of property is taxed as income. The CRA’s policy (IT-462) on the application of paragraph 12(1)(g) is that
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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 UBC.

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Property Income-notes - Tran Chung Income From Property...

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