7%20Income%20from%20Property

7%20Income%20from%20Property - Income from Property General...

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Income from Property
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General Concept of Property Income • Income from property is the return on invested capital where little or no effort is required by the investor in order to produce the return: – Interest, rent, royalties, dividends – Note that capital gains are not treated as property income • If a great deal of time is spent earning what is normally thought of as property income, then it is probably business income – EG, rental property, investment firm – This is an especially important distinction for corporations which can pay a higher rate of tax on property income than on business income.
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Differences from Business Income • Cannot claim CCA to create or increase a net loss from property (usually seen with rental properties) • When property income is being earned by individuals, it is not necessary to reduce CCA for a short fiscal period. • Income attribution rules apply to property income but not to business income • Cannot deduct CEC or convention expenses • Individuals can deduct foreign taxes in excess of 15% of foreign property income (but not foreign business income)
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Interest - Expenses The general rule allows for the deduction of interest, for all types of taxpayers, if it relates to producing business or property income. Not available as a deduction against employment income or capital gains Remember that if an employee receives an interest free or low interest loan from their employer: Imputed interest is treated as a taxable benefit, – This amount is deemed paid – Full amount will be deductible in any situation where interest paid would normally be deductible to the individual (including taxable benefit amount and any actual payments)
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Issues that have come up with interest deductibility What if – A company borrows money to make a loan to a shareholder or employee? – An investor borrows money to purchase preferred shares (with a fixed dividend rate), where the interest cost exceeds the dividend income? – A company borrows money to make an interest free or low interest loan to another company in which the borrower has an interest? – A company borrows in order to make a distribution to shareholders? • IS INTEREST ON THESE LOANS MADE TO EARN BUSINESS INCOME??
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What is Interest? • According to the CRA (see IT 533 on WebCT): – Interest accrues on a continuous basis – Interest must be calculated on a principal sum – Interest must be compensation for the use of the principal sum. • Payments contingent upon a future event (eg profits reaching a certain level) are not deductible until the future event occurs.
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When is Interest deductible? Must be used to produce income from business or property. But does it have to be directly used in this way, or is
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7%20Income%20from%20Property - Income from Property General...

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