COMMERCE 4SB3 Lecture Notes - Lecture 1: Zero-Coupon Bond, Financial Statement, Income Statement
31 Jan 2018
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4SB3 September 27, 2017
Chapter 4
Is it business income or capital gain?
-Capital gain – only half goes on income tax
- So want everything to be capital gains since half the tax of capital gain gets to go into income
- If you have $100 of business income, put all on tax return; capital gain only put $50
-Prior to 1972, zero capital gain got put on tax return; inclusion rate in Canada was zero
-If it was business income the tax rate back in the day was excessive of 80%. You may have paid 80% tax
on the profit
- Now it caps at around 50%, in Ontario, pay 53.6%
-Lots of court cases to determine is it business income or capital gain
p.177 exhibit for capital vs income; Exhibit 4.2
• The underlying tree if it is sold is a capital transaction
• Think of rental property, rent you receive is fully taxable income
• Rental property itself is a capital asset therefore if sell it then it is a capital gain
• Concept of tree versus the fruit
• Fruit is income stream that gets 100% included
• Look at the relationship of transactio to tapaer’s usiess
o How you disclose that asset on your balance sheet
o Is it a fixed asset? – Need that asset to geerate usiess ioe; idiatio that it’s a
capital asset; if sell that asset then capital gain
o Is it in inventory? – Deriving compa profit’s u akig ad sellig that ietor;
generates business income when you sell it; Expensed in cost of goods sold
• If something looks like a capital asset, if buy and sell it may be business income
o Ex. Bob works as Steelman. He wants to create some income for retirement, go buys a
retal propert ak i 8’s. He pas $4k to u a house ad as goig to ret it out.
Had tenants from hell, cops phone him up because of noise, breaking stuff, etc. After
about 6 months Bob sold rental property for $50k. Recorded 10k capital gain.
o Over 6 year period, sold 7 rental properties. Revenue Canada audited. Rental stream is ,
acting like a land developer. Even though you work as employee, those capital gains you
get. He sold and bought more than one a year. Based on the frequency of the
transactions therefore need to record as business income. Bob had about 80-100k of
capital gains from buying and selling. He acted like a land/real estate speculator. If you
own 7 rental properties that you flip. Revenue Canada has a problem with that
• Inventory is sitting in current asset, PPE is in long term asset
o The longer you hold the asset, looks like a capital asset, capital investment; Short
holding period business income; LT hold capital asset
▪ Ex. Bob went and bought a lot to put his cottage. Paid $500k. Went out did site
surveying, gets phone from neighbor. He says that is ruins his view and wants to
oe it. But Bo does’t at to. Neighor said fie I’ll u that lot, Bo sas
no. Bob got offered 900k for 6 months. Bob says sure. Gets 400k profit. Bob get
mail from CRA that you generated 900k profit. Explain how that happened.
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Document Summary
Capital gain only half goes on income tax. So want everything to be capital gains since half the tax of capital gain gets to go into income. If you have of business income, put all on tax return; capital gain only put . Prior to 1972, zero capital gain got put on tax return; inclusion rate in canada was zero. If it was business income the tax rate back in the day was excessive of 80%. You may have paid 80% tax on the profit. Now it caps at around 50%, in ontario, pay 53. 6% Look at the relationship of transactio(cid:374) to ta(cid:454)pa(cid:455)er"s (cid:271)usi(cid:374)ess: how you disclose that asset on your balance sheet. Need that asset to ge(cid:374)erate (cid:271)usi(cid:374)ess i(cid:374)(cid:272)o(cid:373)e; i(cid:374)di(cid:272)atio(cid:374) that it"s a capital asset; if sell that asset then capital gain. Deriving compa(cid:374)(cid:455) profit"s (cid:271)u(cid:455) (cid:373)aki(cid:374)g a(cid:374)d selli(cid:374)g that i(cid:374)(cid:448)e(cid:374)tor(cid:455); generates business income when you sell it; expensed in cost of goods sold.
