6%20Income%20or%20Loss%20from%20a%20Business

6%20Income%20or%20Loss%20from%20a%20Business - Income or...

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Income or Loss from a Business
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What is Business Income • Covered in ITA 9 – 37.3 • These sections also cover property income, but there are differences in how these two sources of income are calculated. • Business income comes from a profession, calling, trade, manufacture or undertaking of any kind whatever, but does not include an office or employment • Property income comes from buying and holding an asset as an investment. The asset could be depreciable or not (eg a building, or land)
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Business Income • Compared to employment income – Many more deductions available as discussed earlier • Compared to property income (Active vs. Passive) – Becomes more important for corporations which have a lower tax rate for business income than for property income. Therefore, we must be able to distinguish. If I own one rental property, it’s property income, if I own 50, it’s probably business income. • Compared to capital gains – Similar distinction to that discussed above under property income. Is important because of the special tax treatment afforded capital gains and losses. Complete Exercise Six-1 on page 228
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Business Income/Capital Gains This is an important area for tax practitioners because it is often an area where litigation and disputes with CRA will arise. A capital asset is held to earn income through its use , not by being sold. While the asset is held, it creates property income. Capital assets create capital gains and losses when they are sold, but also recapture or terminal losses if the asset is depreciable. An asset that is held so a taxpayer can profit on its sale is an adventure or concern in the nature of trade, and this generates business income through its use, and capital gains/losses or recapture or terminal losses when sold if the asset is depreciable. Land can be a capital asset – if we build a manufacturing facility on it, and use it for manufacturing, the land was acquired to earn income through it’s use. It’s sale will result in a capital gain or loss. But, land can also generate business income, if we buy with the intent to resell at a profit – then we have purchased it so we can profit from its sale. Here, the sale of the land generates fully taxable business income.
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Points to consider: – Intent and course of conduct of the taxpayer If the intention was to profit from a quick sale, may be business income If the intention was to hold and produce income, Capital Gain when sold eventually – Number and frequency of transactions A large number of frequent transactions looks more like business income – Relationship to the taxpayer’s business If related to another source of business income, may be business income – Supplemental work on the property Working on improving the property to enhance it’s sale price is more like business income – Nature of the assets This is a weaker argument – Objectives declared in Articles of Incorporation of a corporation. Complete Exercise Six-2 on pg. 230
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This note was uploaded on 01/31/2011 for the course MOS 4462 taught by Professor Ann during the Fall '10 term at UWO.

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6%20Income%20or%20Loss%20from%20a%20Business - Income or...

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