Chapter 6 – Income from Property
Section 12 – Interest Income
Interest income is the compensation received for the use of borrowed funds. It includes dividends,
interest, rents and royalties.
Income from property is the “profit therefrom for the year”, hence net of related expenses.
Income from property does not include capital gains or losses – these are considered a separate source of
Two methods individuals use to recognize interest income: Section 12 (4)
1. Cash Method – used when interest is received every year
2. Annual Accrual Method – used when interest is not received every year
- Interest is accrued to the anniversary date.
Corporations used the Annual Accrual Method to recognize interest. Section 12 (3)
- Income is included on a daily basis and accrued to the taxation year end (even though it is
not received or receivable until some point in the future)
Cash and Annual Accrual Method Examples:
I loan $100,000 on February 1, 2010. Loan must be repaid in two years. Interest is charged at 12%,
compounded annually and payable at the end of the two year.
Cash Method: Full amount recognized on anniversary date Year Income
Year 1: $100,000 X 12% = $12,000 2011 $0
Year 2: ($100,000 + $12,000) X 12% = $13,440
Total = $12,000 + $13,440 = $25,440 Total $25,440
Annual Accrual Method: Interest recognized (accrued) each year its earned
Year 1: $100,000 X 12% = $12,000 Year Income
Year 2: ($100,000 + $12,000) X 12% = $13,440 2011 $12,000
Total = $12,000 + $13,440 = $25,440 2012 $13,440
Dividends received from taxable Canadian Corporate shares are included into income when received.
Dividends received from Allowable Business Investment (ABI) or investment income from a CCPC:
- Dividends are grossed by 25% - This means (1+.25) X amount received from corp.
- Federal Dividend tax credit is available equal to 16.67% of the dividends received Dividends from a public corporation of CCPC that is not eligible for above calculations:
- Dividends are grossed by 38% - This means (1+.38) X amount received from corp.
- Federal Dividend tax credit is available equal to 20.70% of the dividends received
Gross-up purpose is to reset the dividend to its pre-tax income earned by the corporation. This allows the
individual shareholder to calculate tax on this dividend income at their marginal income tax rate.
Dividend Tax Credit (DTC) - This credit is meant to allow for the tax already paid by the corporation
when it originally earned the income now being distributed.
Dividends Received from CCPC Example:
Corporate income $100 - $20 (tax) = $80 Net earnings
Dividends from Corporation $80
Taxable Dividend (80 X 1.25) $100 *this is a 25% gross up
Tax (46% X $100) $46
Less Dividend Tax Credit (DTC) $(20) *tax paid by corporation is $20
Net Personal Tax $26
Total Tax paid by Corporation: $20
Total Tax paid by individual: $26 *remaining amount is paid by individual
Total Tax paid $46
When dividends are received from foreign corporations, there is:
- No Dividend Gross Up
- No Dividend Tax Credit