AFM362 Lecture Notes - Lecture 10: Property Income, Pro Rata, Tax Avoidance

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The deduction of interest paid to certain non
-
residents is limited
â—‹
The deduction for interest on borrowed funds to make a contribution to tax sheltered retirement savings
funds, such as RRSPs is denied
â—‹
Management or safe custody fees
•
Accounting fees
•
Any other carrying costs normally incurred to earn property income•
Some carrying charges are allowed to claim as deduction against property income (interest and dividends)
Investment counsel fees can be deducted
Legal and accounting fees are deductible to the extent that they are incurred for the purpose of gaining or producing
Interest expense need only be a reasonable expectation of earning income to be deductible
•
Interest at a reasonable rate on funds borrowed to buy common shares will be fully deductible even if
dividends on those shares are zero, because of the reasonable expectation of an increase in the dividend
rate on common shares
â—‹
No income need actually be earned in a year in order to deduct interest paid or payable in that year•
If I receive a loan from my employer and use it to finance the purchase of securities. I secured the loan with
a mortgage on my house. Interest on the loan is deductible because it could be directly linked to the
purchase of the securities.
â—‹
However if I sold my house and paid off the loan with the proceeds then purchased another house with
mortgage financing, the interest on this mortgage cannot be deducted against my investment income
because the connection is lost.
â—‹
If I didn't pay off the loan but secured the loan with a new mortgage on the new home, I could've
maintained that connection
â—‹
Great care must be taken to maintain the connection between the interest paid and the use of the funds
borrowed
•
Interest deductibility
General strategy is to buy personal assets with your own funds (since interest is not deductible on borrowed funds
used to purchase personal assets) and then use these assets as collateral to borrow to invest in assets that will
earn property income (since interest is deductible in that situation)
•
Look at after
-
tax returns on investment because some interest allows to be deducted and some are not.
•
Tax planning
Reservesâ—‹
Expenses of representation

Site investigation
Utilities services connection

Certain specific expenses such as
â—‹
Convention expenses
â—‹
Short
-
year proration for CCA
â—‹
The following deductions apply only to business income:
•
Provisions applicable to business income only
Restriction on CCA for rental propertiesâ—‹
Attribution rulesâ—‹
Foreign taxes on property income in excess of 15% deductible â—‹
The following deductions apply only to property income
•
Provisions applicable to property income only
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Document Summary

The deduction of interest paid to certain non-residents is limited. The deduction for interest on borrowed funds to make a contribution to tax sheltered retirement savings funds, such as rrsps is denied. Some carrying charges are allowed to claim as deduction against property income (interest and dividends) Any other carrying costs normally incurred to earn property income. Legal and accounting fees are deductible to the extent that they are incurred for the purpose of gaining or producing business or property income. Interest expense need only be a reasonable expectation of earning income to be deductible. No income need actually be earned in a year in order to deduct interest paid or payable in that year. Interest at a reasonable rate on funds borrowed to buy common shares will be fully deductible even if dividends on those shares are zero, because of the reasonable expectation of an increase in the dividend rate on common shares.

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