IFITC Chapter_4

IFITC Chapter_4 - Chapter 4 Income from Business: General...

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Unformatted text preview: Chapter 4 Income from Business: General Concepts and Rules Business Income Income from a business (sec. 9) What is profit? The role of GAAP Business Income vs. Capital Receipt Why distinction important? Income receipts are fully taxed Capital receipts are only partially taxed as capital gains To determine, courts look at taxpayer intention Observable behavioural factors or badges of trade Exhibit 4-1 Income vs. Capital Damages Non-performance of business contract Cancellation of agency agreements Loss of property Other Receipts or Benefits Profits from an illegal business Profits from betting, gambling, and windfalls Subsidies Forgiveness of debt rules Business Income vs. Property Income Property held to earn income is either: Income/loss from a business; or Income/loss from property. On disposition of property, proceeds less the cost will either be: Capital gain/loss or Income or loss from business or from property Business Income or Property Income The source is property or business income depends on whether taxpayer has purchased property or inventory Basic test of whether income is from business or property: Is income earned active or passive? Business Income or Property Income Important because: Most property income excluded from calculation of: maximum RRSP contribution limit earned income used for eligibility of child care expenses Property income derived from rental properties subject to separate rules. Business income earned by a corporation has special rules (SBD, M&P deduction) Income attribution rules Non-resident taxation Inventory Valuation Basis of Valuation: Market or lower of cost or market Specific identification First in, first out (FIFO) Note: adjustment required for amortization allocation to inventory in Absorption Accounting Sole Proprietorship Generally, must report on a calendar basis Election available for alternative fiscal year but additional rules for reporting business income apply Accounting Income to Net Business Income for Tax Purposes Income from a business for tax purposes is equal to: Start with: ssec. 9(1) Accounting Net income (Profit) ADD: secs. 12 to 17 Income inclusions not included in profit ssec. 18(1), 19 Disallowed expenses and reserves sec. 67 Unreasonable amounts Capital losses book losses on the disposal of capital property MINUS: ssec. 20(1) Expenses specifically allowed but not allowed in profit Capital gains book gains on the disposal of capital property EQUALS: Income from a business for tax purposes Inclusions in Income for Tax Purposes ITA Reference Description Related References 12(1)( a ) Services to be rendered in future 20(1)( m ), (...
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This note was uploaded on 11/07/2011 for the course ACCT 470 taught by Professor Dixon during the Spring '11 term at Camosun College.

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IFITC Chapter_4 - Chapter 4 Income from Business: General...

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