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3520-3 - 3520-3 1 Lecture 3 Income from Property Capital...

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3520-3: 8/24/2009 1 1 Lecture 3: Income from Property, Capital gains and Capital Losses 1.1 Topics Covered This week’s lecture looks at the basics of how investments are taxed, i.e. the taxation of interest, dividend and rental income (earned while the investment is held) and the taxation of capital gains and losses (generally earned when an investment is sold). CTP ch. 6 covers property income and expenses, i.e. how dividend income, interest income, rental income and other types of property income are taxed and the expenses that can be deducted against this income. CTP ch. 7 covers capital gains and losses, i.e. how the gain on the sale of an investment (including your home) is taxed during your lifetime. As before, urls to background materials are included for those who are interested in additional information. 1.2 Designated problems Exercises 6-3, 6-6 to 6-8, self-study problem 6-3 Exercises 7-2, 3, 21, 22 and 25. 2 Property Income [6-2 to 6-4] passive income from investments (investment income) most interest, dividends, rental income (minus expenses) and royalties In some cases, a corporation's activity of earning property income can be considered an active business, e.g. a corporation earning investment income because of the number of employees (more than 5 full-time employees throughout the year) Most of the rules in subdivision b of Division B of Part I of the ITA apply to both income from business and property 2.1 A few significant differences between business and property income: You cannot generally create or increase a property loss on a rental property with CCA For a background note on CCA, see http://www.parl.gc.ca/information/library/prbpubs/prb0606-e.htm You cannot deduct cumulative eligible capital amount (CECA) and convention expenses against property income (only business income) Attribution rules apply to property income (and capital gains, in the case of spousal loans and transfers) but not business income. Jason Fleming [[email protected]]
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3520-3: 8/24/2009 2 You cannot deduct home office expenses against property income according to the case law 2.2 Interest Expense [6-5 to 6-9] The general rule allowing the deduction of interest expense is ITA 20(1)(c). The conditions are as follows: The interest expense must be pursuant to a legal obligation, e.g. a signed agreement meet a purpose test = to produce income from business or property (not capital gains) relate to funds directly used for that income-earning activity Read 6-6, 6-8 and 6-9 2.2.1 Deemed Interest Expense [ITA 80.5] The deemed interest benefit on employee loans is deemed to be interest paid for purposes of ITA 20(1)(c) and 8(1)(j) 2.2.1.1 Examples The imputed interest benefit on a loan made to an employee to buy company shares is typically deductible (since the shares (can) earn dividend, i.e., property, income) The interest benefit is reported as employment income. The interest (deemed paid) can be deducted as an investment expense under ITA 20(1)(c)
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