Income From Property rules

Income From Property rules - DRAFT INCOME FROM PROPERTY F...

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DRAFT INCOME FROM PROPERTY ©F. BARRY GORMAN, PHD, CA, TEP A. INCOME RULES 1. Overview 2. Interest (a) General Rules (b) Specific Rules 3. Rentals 4. Dividends (a) Corporations (b) Individuals (c) Stock Dividends and Dividends in Kind 5. Foreign Investment Income 6. Payments Based on Production From or Use of Property 7. Shareholder Appropriations (a) Shareholder Benefits (b) Shareholder Loans (c) Income Attribution (i) Transfers to Spouse or Related Minor (ii) Transfers to Corporation (iii) Transfer of Right to Income to Non-Arm’s Length Person (iv) Loans to Non-Arm’s Length Individual 8. Partnerships and Proprietorships B. DEDUCTION RULES 1. Repayment of Shareholder Loan 2. Investment Counselling Fees 3. Interest Incurred to Generate Property Income A. INCOME RULES 1. Overview Property income is essentially income generated from an asset held as an investment, or from the non business use of an asset . The major forms of property income are interest, rents, dividends, royalties, and shareholder appropriations . 2. Interest - ITA 12(1)(c); ITA 12(3); ITA 12(4); ITA 12(9); ITA 12(11); ITA 12.1; ITA 12.2; ITA 16(1); ITA 20(14); IT-87; IT-396 (a) General Rules Interest has traditionally been reported on a cash basis (that is, when received), on a receivable basis (that is, when the amount is legally due and payable), or on the accrual 1
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basis (that is, daily as the interest is earned), depending upon the taxpayer’s normal computation method. Regardless of the method chosen, the taxpayer had to be consistent from year to year per type of investment . A voluntary change from the cash or receivable basis to the accrual basis was permitted, but not vice versa . When such a change took place, all past unreported interest had to be brought into income. Although the above general principle continues to apply, current legislation effectively requires the accrual of interest not reported on either the cash or receivable basis . Corporations report accrued interest not otherwise reported at the year-end. Individuals report accrued interest on the annual anniversary of debt instruments and not previously included in income. ITA 12(9) makes the point that it is interest that accrues while the taxpayer owns the debt instrument that is required to be inccluded in income. Example: Corp. III acquired a 10 per cent 5-year $60,000 investment certificate on August 1, 20X4. All interest, which is computed on a straight-line basis, is receivable on maturity. The Corp has a December 31 year-end. Corp III reports accrued interest as follows: Dec. 31, 20X4 – $2,500 Dec. 31, 20X7 – $6,000 Dec. 31, 20X5 – $6,000 Dec. 31, 20X8 – $6,000 Dec. 31, 20X6 – $6,000 Dec. 31, 20X9 – $3,500 Example: An individual acquired a 10 per cent 5-year $60,000 investment certificate on August 1, 20X4. All interest, which is computed on a straight-line basis, is receivable on maturity. The individual reports accrued interest as follows: 20X4 – nil 20X5 – $6,000 (from August 1, 20X4 to July 31, 20X5)
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This note was uploaded on 01/07/2012 for the course ACCT 4453 taught by Professor Gorman during the Spring '11 term at Dalhousie.

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Income From Property rules - DRAFT INCOME FROM PROPERTY F...

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