- When it is disposed of, proceeds minus cost will result in: capital gain or loss, income or loss from a business or property. - Two kinds of transactions therefore exist: o Income or loss from ownership of property o Income or loss from disposition of property (business) - First basic test: is the income earned passive or active? - Passive = income from property - For corps, definition is same but: income is passive unless employs more than 5 employees for it. Affects tax rates used. Normally passive income earned. Active can be things like: interest in AR, interest on short-term investments, rents received from renting an unused portion of manufacturing facility - Partnerships = as long as the partner is inactive, their portion of income is passive - Various reasons for distinction: o Property income not used in calculation of max RRSP contribution limit o Property income not used in calculation of earned income for eligible child care expenses o Property income from rental properties has separate rules o Business income by corps have special rules o Income attribution rules o Non-resident taxpayers are taxed on income from business carried in CAN, income from property is subject to withholding tax.
Inventory Valuation - At lower of cost or market - Once chosen, need to stick with it, due to long-term effects - Specific Identification: if cost can be identified, must use it. - FIFO: if individual items can’t be identified for costing, use FIFO - Opening inventory = ending inventory! - Must value inventory at end of year using same method as end of preceding year - CRA has ability to correct value of opening inventory if it was not valued correctly by Act. Sole Proprietorship - Calendar year end - Applies to sole and professional corporation - Also applies to partnerships where at least 1 is a professional corporation - Can elect to have a differing year end, but specific rules apply - Corps = report on their fiscal period, returns due 6 months after year end. - Both are subject to same business income rules Deferral Anti-Avoidance - To prevent deferral of reporting of income for off-calendar year businesses, a formula is used that computes income with an off-calendar year on a calendar year basis by using an estimation procedure Conversion of Accounting Income to Net Business Income for tax purpose - Four principal sections relating to determination of business income is 9, 12, 18 and 20. The other sections refine principal rules. Net income per F/S (GAAP) – accounting net income XXX ADD: Income that was excluded from accounting income XXX - Sec 12-17 – Income inclusions not included in “profit” XXX - Sec 18 (1) and 19 – disallowed expenses and reserves XXX - Sec 67 – unreasonable amounts XXX XXX DEDUCT: - Sec 20(1) – expenses and reserves specifically allowed (XXX) But not deducted in “profit” ADD/DEDUCT: - Capital gains or loss (book gains or losses on disposal of XXX capital property Net income from a business for tax purposes XXX INCLUSIONS (sections 12-17)
Inclusions in Income for tax purposes 12(1)( a ) Services to be rendered in future 20(1)( m
- Winter '13
- Taxation in the United States, Generally Accepted Accounting Principles