Class Notes (994,847)
CA (574,161)
UW (20,770)
AFM (994)
AFM362 (30)
Betty Xing (16)
Lecture 9

AFM362 Lecture Notes - Lecture 9: Foreign Tax Credit, Dividend Tax, Property Income
Premium

1 Page
62 Views
Winter 2018

Department
Accounting & Financial Management
Course Code
AFM362
Professor
Betty Xing
Lecture
9

This preview shows half of the first page. Sign up to view the full page of the document.
interest income from savings, deposits, loans, bonds, and debentures
Dividends from shares
Income based on the production or use of property
Calculation of income from a property:
The primary method for computing interest on a "debt obligation" is an annual accrual method
The Act uses words "received" or "receivable" which indicates taxpayer has a choice between cash basis and the
receivable basis.
However, when interest is received, it must be included in income to the extent that the interest has not been
included previously by the accrual method
Must include interest income in net income for tax purposes the earlier of
The date the interest is paida)
The anniversary date of the contractb)
Individuals are allowed cash method or annual accrual method
Anniversary date = the day that is one year after the day before the date of issue and every successive one year
interval.
For corporations, there's only the accrual method. Cash method and annual accrual method not available.
Interest income inclusion
Stock dividends is treated specially
A CCPC earns active business income that is taxed at the low corporate rate or CCPC that earns investment
income
Gross up by 17%, apply the federal + provincial tax rate, find the tax, subtract the tax credit which equals the
-
gross up dividends to minus the tax payable to find after
-
tax dividend.
Dividends other than eligible dividends - type 1
Dividends from a public corporation resident in Canada taxed at the general corporate rate and a CCPC
resident in Canada distributed from business income taxed at general corporate rate (not low corporate
rate)
Eligible dividends - type 2
Corporations are NOT subject to the dividend gross up and dividend tax credit, only trusts and individuals will
include them. Because dividends received by corporate shareholders are not taxable.
The shareholder still receives the after corporate tax dividends but we just use the pre corporate tax
dividends as the calculation.
The taxpayer always benefit from the gross up and dividend tax credit procedure because although dividend
is gross up to a bigger amount = higher tax calculated from this bigger amount, you get to subtract the full
gross up amount afterwards which more than offset the tax that was calculated on the gross amount. I hope
you can remember this logic future Billy, if not, just look at them examples in the book.
Keep in mind that the purpose of the gross up is to restore the actual dividends received back to the pre-tax
income earned in the corporation.
If there is a tax withheld at source, you add it back and then deduct it as a foreign tax credit later.
Dividends received by individuals from non
-
resident corporations are still taxable but the dividend gross up and
tax credit rule do not apply as they are not Canadian
-
sourced.
Dividends income inclusion
Income earning test: no outlay or expenses can be deducted unless it was incurred for purpose to earn
income
Capital test: no deduction of a capital outlay unless specifically listed in the Act
Reserve test: no deduction unless specifically listed
Personal expenses: no deduction
Reasonableness test: all expenses must be reasonable under the circumstances
To determine the eligibility of the deduction of expenses against property income, start point is to look at section
18
Then look at section 20 which overrides rules in 18
Deductions
Discourages speculation in real estate because they won't have any income from the land to deduct
carrying charges from since they hold the piece of property for capital gains.
Applies to property developers whose business is the sale or development of land, or to land that is held but
not used in a business
Any carrying charges that cannot be deducted will be added to the cost base of the land which reduce
capital gain on the land when sold
Carrying charges (interest and property taxes) on vacant land are only deductible to the extent of the taxpayer's
net income from the land
Land held primarily for income producing purpose (not held for speculation) is exempted from the above
limitation (in excess of net income)
The limit of this deduction is interest computed at the prescribed rate on a loan of $1 million
outstanding throughout the year
Corporation whose principal business is the leasing, rental or sale, and the development for lease, rental or
sale of real property are permitted to deduct carrying charges on vacant land, in excess of net income before
deducting carrying charges.
Exceptions to this rule
Limitation on deduction of carrying charges
-
vacant land
Soft costs include interest expense, legal and accounting fees, mortgage fee, insurance and property taxes
incurred during the period of construction, renovation, or alternation of a building are not deductible as current
expenses but add to the cost of the building.
"soft costs"
Recall that CCA pool of assets can be negative due to disposition which will trigger a recapture. However, we can
offset the negative balance in a class of assets with purchases of similar assets during the year to reduce or
eliminates the need to pay tax on income from recapture of capital cost allowances on the sale of an asset in the
year
The Act restricts this ability for certain rental property to avoid the deferral of recapture indefinitely
Results in recapture when a building is sold for proceeds in excess of the undepreciated capital cost in the
class. (when UCC balance becomes negative)
Each rental property purchased that costs $50,000 or more is a separate CCA class
Taxpayer cannot shelter other sources of income (business or employment income) by offsetting a loss
created by CCA on a rental building or leasing properties.
Losses from rental property
Rental properties limitations related to CCA
The Act allows a taxpayer to deduct interest on money borrowed to earn income from business or property
Is paid or payable in the year
Arises from a legal obligation
Is payable on borrowed money that is used for the purpose of earning income from a business or property
Is reasonable in amount
A taxpayer can deduct interest if:
The deduction of interest imposed under the Act is denied
The deduction of interest on funds borrowed to buy vacant land is limited
Interest that is part of soft costs must be capitalized
The deduction of interest paid to certain non
-
residents is limited
Limitation on deduction of interest
Interest
Note that provincial dividend tax credit may vary, but in all the cases so far, it has been the plug to add
to the federal tax credit to make it 1 so it's the same as the gross up amount.
Note if tax on gross up dividend
-
tax credit = negative, the net tax payable is nil, and the negative
amount is available to deduct from federal tax on other income.
Note when choosing between shares or bond, look at the after
-
tax return and also remember that there
may be a greater potential for a return from capital gains on the shares compared to the bonds.
CCA is limited to bring net income before CCA to zero but not to a loss.
Chapter 6 Income from property
January 27, 2018 5:43 PM
AFM 362 Page 1

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Chapter 6 Income from property January 27, 2018 5:43 PM Calculation of income from a property: interest income from savings, deposits, loans, bonds, and debentures Dividends from shares Income based on the production or use of property Interest income inclusion The primary method for computing interest on a debt obligation is an annual accrual method The Act uses words received or receivable which indicates taxpayer has a choice between cash basis and the receivable basis. However, when interest is received, it must be included in income to the extent that the interest has not been included previously by the accrual method Individuals are allowed cash method or annual accrual method Must include interest income in net income for tax purposes the earlier of a) The date the interest is paid b) The anniversary date of the contract Anniversary date = the day that is one year after the day before the date of issue and every successiveone year interval. For corporations,theres only the accrual method. Cash method and annual accrual method not available. Dividends income inclusion Stock dividends is treated specially Dividends other than eligible dividends type 1 A CCPC earns active business income that is taxed at the low corporate rate or CCPC that earns investment income Gross up by 17, apply the federal + provincial tax rate, find the tax, subtract the tax credit which equals the gross up to find the tax payable, and use the pregross up dividends to minus the tax payable to find after tax dividend. Eligible dividends type 2 Dividends from a public corporation resident in Canada taxed at the general corporate rate and a CCPC resident in Canada distributed from business income taxed at general corporate rate (not low corporate rate) Corporations are NOT subject to the dividend gross up and dividend tax credit, only trusts and individuals will include them. Because dividends received by corporate shareholders are not taxable. Keep in mind that the purpose of the gross up is to restore the actual dividends received back to the pretax Note that provincial dividend tax credit may vary, but in all the cases so far, it has been the plug to add income earned in the corporation. The shareholder still receives the after corporatetax dividends but we just use the pre corporate tax to the federal tax credit to make it 1 so its the same as the gross up amount. dividends as the calculation. Note if tax on gross up dividend tax credit = negative, the net tax payable is nil, and the negative The taxpayer always benefit from the gross up and dividend tax credit procedure because although dividend is gross up to a bigger amount = higher tax calculated from this bigger amount, you get to subtract the full amount is available to deduct from federal tax on other income. gross up amount afterwards which more than offset the tax that was calculated on the gross amount. I hope Note when choosing between shares or bond, look at the aftertax return and also remember that there you can remember this logic future Billy, if not, just look at them examples in the book. Dividends received by individuals from nonresident corporations are still taxable but the dividend gross up and may be a greater potentialfor a return from capital gains on the shares compared to the bonds. tax credit rule do not apply as they are not Canadiansourced. If there is a tax withheld at source, you add it back and then deduct it as a foreign tax credit later. Deductions To determine the eligibility of the deduction of expenses against property income, start point is to look at section 18 Income earning test: no outlay or expenses can be deducted unless it was incurred for purpose to earn income Capital test: no deduction of a capital outlay unless specifically listed in the Act Reserve test: no deduction unless specifically listed Personal expenses: no deduction Reasonableness test: all expenses must be reasonable under the circumstances Then look at section 20 which overrides rules in 18 Limitation on deduction of carrying charges vacant land Carrying charges (interest and property taxes) on vacant land are only deductible to the extent of the taxpayers net income from the land Applies to property developers whose business is the sale or development of land, or to land that is held but not used in a business Discourages speculation in real estate because they wont have any income from the land to deduct carrying charges from since they hold the piece of property for capital gains. Any carrying charges that cannot be deducted will be added to the cost base of the land which reduce capital gain on the land when sold Exceptions to this rule Land held primarily for income producing purpose (not held for speculation) is exempted from the above limitation (in excess of net income) Corporation whose principal business is the leasing, rental or sale, and the development for lease, rental or sale of real property are permitted to deduct carrying charges on vacant land, in excess of net income before deducting carrying charges. The limit of this deduction is interest computed at the prescribed rate on a loan of 1 million outstanding throughout the year soft costs Soft costs include interest expense, legal and accounting fees, mortgage fee, insurance and property taxes incurred during the period of construction, renovation, or alternation of a building are not deductible as current expenses but add to the cost of the building. Rental properties limitations related to CCA Recall that CCA pool of assets can be negative due to disposition which will trigger a recapture. However,we can offset the negative balance in a class of assets with purchases of similar assets during the year to reduce or eliminates the need to pay tax on income from recapture of capital cost allowances on the sale of an asset in the year The Act restricts this ability for certain rental property to avoid the deferral of recapture indefinitely Each rental property purchased that costs 50,000 or more is a separate CCA class Results in recapture when a building is sold for proceeds in excess of the undepreciated capital cost in the class. (when UCC balance becomes negative) Losses from rental property Taxpayer cannot shelter other sources of income (business or employment income) by offsetting a loss CCA is limited to bring net income before CCA to zero but not to a loss. created by CCA on a rental building or leasing properties. Interest The Act allows a taxpayer to deduct interest on money borrowed to earn income from business or property A taxpayer can deduct interest if: Is paid or payable in the year Arises from a legal obligation Is payable on borrowed money that is used for the purpose of earning income from a business or property Is reasonable in amount Limitation on deduction of interest The deduction of interest imposed under the Act is denied The deduction of interest on funds borrowed to buy vacant land is limited Interest that is part of soft costs must be capitalized The deduction of interest paid to certain nonresidents is limited AFM 362 Page 1
More Less
Unlock Document

Only half of the first page are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

You've reached the limit of 4 previews this month

Create an account for unlimited previews.

Already have an account?

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit