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Lecture 4

AFM362 Lecture 4: Module 4 - Income From Business


Department
Accounting & Financial Management
Course Code
AFM362
Professor
Andrew Bauer
Lecture
4

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Mod 4: Income From Business
1
Business Income
Under Part I, Division B, subdivision b:
Basic Rules
Sec. 9 Income
Inclusions
Sec. 12 Income inclusions
Deductions
Sec. 18 General limitations
Sec. 20 Specific expenses allowed
Under Part I, Division B, subdivision f:
Computation of Income
Sec. 67 Reasonableness test for expenses
What Does the Act Say?
9(1) Income Subject to this Part, a taxpayer's income for a taxation year from a business or
property is the taxpayer's profit from that business or property for the year.
12(1) Income inclusions There shall be included in computing the income of a taxpayer for a
taxation year as income from a business or property such of the following amounts as are
applicable:
(a) Services, etc., to be rendered any amount received by the taxpayer in the year in
the course of a business
(b) Amounts receivable any amount receivable by the taxpayer in respect of property
sold or services rendered in the course of a business in the year, notwithstanding that
the amount or any part thereof is not due until a subsequent year
18(1) General limitations In computing the income of a taxpayer from a business or property
no deduction shall be made in respect of
(a) General limitation an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income from the
business or property;
(b) Capital outlay or loss
(c) Limitation re: exempt income
(e) Reserves, etc.
(h) Personal and living expenses
(l) Use of recreational facilities and club dues
20(1) Deductions permitted in computing income from business or property Notwithstanding
paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a
business or property, there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may reasonably be regarded
as applicable thereto:
(a) Capital cost of property
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2
(b) Cumulative eligible capital amount
(c) Interest
(e) Expenses re financing
(l) Doubtful or impaired debts
(m) Reserve in respect of certain goods and services
(p) Bad debts
67 General limitation re expenses In computing income, no deduction shall be made in
respect of an outlay or expense in respect of which any amount is otherwise deductible under
this Act, except to the extent that the outlay or expense was reasonable in the circumstances
Business Income
What is a business?
Income earning process involving regular and continuous activity
What is profit?
Question of law which is best calculation of profit of a business, however, GAAP is
generally accepted as best measure most of the time
GAAP vs. Tax
Certain items acceptable for GAAP specifically treated differently for tax (reason why we
have a reconciliation schedule “Schedule 1”)
Business Income vs. Property Income
Income from property ownership (rents, interest, revenues, etc)
Income/loss from a business vs Income/loss from property (determination depends on
amount of activity)
Change in value, realized on disposal
Capital gain/loss or Income/loss from business or from property (again, determination
depends on how the asset was used/activity involved)
Classification of income depends on activity
Type of asset: property or inventory?
Use of asset: passive (investment) or active?
Net Income For Tax Purposes (Schedule 1 Reconciliation)
Net income after tax from the financial statements $XXXXX
Add:
Income not reported for accounting but included for tax xxxxxx
Expenses deducted for accounting but not allowed for tax xxxxxx
Deduct:
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