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Unformatted text preview: Chapter Five CHAPTER 5 INCOME FROM BUSINESS SOLUTIONS TO REVIEW QUESTIONS 1. The term business is generally defined as a profession, calling, trade, manufacture, or undertaking of any kind whatever and includes an adventure or concern in the nature of trade [S. 248(1)]. Therefore, activities such as manufacturing, mining, exploration, construction, logging, farming, fishing, selling of property as a retailer or wholesaler, transportation, and selling services are obvious business activities. The size of the activity is not relevant in determining whether or not a business activity exists. Therefore a person providing hockey lessons to one person for a fee is conducting a business activity in the same way that the operation of a large hockey school is a business. 2. An adventure or concern in the nature of trade occurs when a taxpayer acquires property for the purpose of reselling it at a profit, even though that activity is not part of the person's normal business activities. For example, an individual, in an isolated transaction, may acquire a piece of land in the hope of trading it at a profit. This isolated transaction is similar to the normal activity of a real estate development and trading business. Consequently, it is an adventure or concern in the nature of trade and is included as a business activity. 3. Yes. A gain or loss on the sale of property can result in business income (loss) or a capital gain (loss). Property acquired and used for the purpose of providing the owner with a long-term benefit is capital property and its disposition results in a capital gain or loss. However, property, even though it has the ability to provide a long-term benefit, will be treated as inventory and the sale will generate business income (loss) if it was acquired for the purpose of reselling it at a profit. Therefore, it is the property's intended use and actual use which determine its tax treatment and not its ability to be used in a certain manner. 4. The amount of risk a person is willing to accept on a particular investment is influenced, in part, by the potential returns which may be achieved as well as the extent of loss exposure. Therefore the tax treatment of potential gains and losses is relevant. On the upside, property that is inventory is fully taxable as business income, whereas property that is capital property is taxable on only one-half of the gain. Therefore, a different classification of the same type of property purchased will result in different after-tax returns even though the pre-tax returns are identical. On the downside, property classified as inventory results in a business loss which is fully deductible against all other sources of income. Therefore, assuming the taxpayer has other sources of income and has a tax rate of 45%, a $100,000 business loss will reduce taxes on other income by $45,000 leaving a maximum loss exposure of only $55,000. In comparison, if the property is classified as 41 Chapter Five capital property, a $100,000 loss can reduce income by only $50,000 (1/2 of...
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This note was uploaded on 09/21/2011 for the course ACC 522 taught by Professor A.vena during the Fall '11 term at Ryerson.
- Fall '11