ACTG 6710 Lecture Notes - Lecture 3: Property Income, Remittance

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28 Oct 2017

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Expenses incurred to generate income from property and a business are deducible. There needs to be a (cid:862)reaso(cid:374)a(cid:271)le expe(cid:272)tatio(cid:374)(cid:863) of ear(cid:374)i(cid:374)g i(cid:374)(cid:272)o(cid:373)e (therefore, (cid:374)o i(cid:374)(cid:272)o(cid:373)e (cid:374)eeds to be generated in reality to be able to deduct the expenses) Interest incurred on borrowed funds to invest in common shares are deductible even if these shares pay no dividends; this is because there is still a (cid:862)reaso(cid:374)a(cid:271)le expe(cid:272)tatio(cid:374)(cid:863) of a(cid:374) i(cid:374)(cid:272)rease i(cid:374) the dividend rates. Interest incurred on borrowed funds to invest in assets for capital appreciation (i. e. capital gains) only are not eligible for deduction (a good example is investing in a vacant land for capital gains) Interest incurred on purchase of personal properties are not deductible. For these expenses to be deductible you need to prove to cra that the borrowed funds were used to produce property or business income. Administration fees you paid for your rrsp or rrif are not deductible.

Related Questions

During 2015, George, a salaried taxpayer, paid the followingtaxes which were not incurred in connection with a trade orbusiness: Federal income tax withheld by employer $1,500; Stateincome tax withheld by employer $1,100; FICA tax withheld byemployer $700; Real property taxes $900; Federal auto gasolinetaxes $300; Federal excise tax on telephone bills $50. What amountcan George claim for 2015 as an itemized deduction for the taxespaid, assuming he elects to deduct state and local incometaxes?

	A.	$1,400
	B.	$1,100
	C.	$1,150
	D.	None are correct
	E.	$2,000

Choose the correct statement:

	A.	If a financial planner becomes certified, then he/she may notdeduct the Certified Financial Planner (CFP) dues because it is notnecessary to be certified in order to engage in the business ofbeing a financial planner.
	B.	If a taxpayer does a lot of business travel, the taxpayer maydeduct the amount paid for an airline club membership.
	C.	None are correct
	D.	Membership dues to a golf club are deductible as long as thereis a business purpose.
	E.	In order to be deductible, dues and subscriptions must berelated to the taxpayerâs occupation.

For 2015, Eugene and Linda had adjusted gross income of $30,000.Additional information for 2015 is as follows: Cash contribution tochurch $1,500; Tuition paid to a parochial school $1,200;Contribution to the American Red Cross $400; Cash contribution to aneedy family $75. What is the maximum amount that they can use as adeduction for charitable contributions for 2015?

	A.	$1,900
	B.	$1,975
	C.	none are correct
	D.	$3,175
	E.	$3,000

For the year ended December 31, 2015, David, a married taxpayerfiling a joint return, reported the following: Investment incomefrom interest $24,000; Investment expenses other than interest$4,000; Interest expense on funds borrowed in 2006 to purchaseinvestment property $70,000. What is the maximum amount that Davidcan deduct in 2015 as investment interest expense?

	A.	$7,000
	B.	$20,000
	C.	None are correct
	D.	$21,000
	E.	$24,000

Barry is a self-employed attorney who travels to New York on abusiness trip during 2015. Barry's expenses were as follows:Airfare $560; Taxis $40; Meals $200; Lodging $350. How much mayBarry deduct as travel expenses for the trip?

	A.	$1,050
	B.	$1,000
	C.	$950
	D.	None are correct
	E.	$0

Christine saw a television advertisement asking for donations ofused vehicles to a charitable foundation and decided to donate herold car. Which of the following statements is correct?

	A.	She can take a deduction greater than the amount for which thecharity actually sells the vehicle.
	B.	She can claim an estimated value for the auto if the charityuses it rather than selling it.
	C.	The charity is not required to provide her with any informationabout what they do with the auto.
	D.	She can take a tax deduction large enough on an after-tax basisto equal the amount she would have received if she sold the cardirectly.

orangemammoth25

It is now late May 2018 and you, CPA, have just finished meetingwith your partner, Ms. Wong. Ms. Wong wants your help with someclients of hers.

One client, Garden Supplies Co. (GSC) has had a new shareholderbuy shares. Ms. Wong wants you to tell her if GSC is a resident ofCanada for tax purposes in 2018 and describe the personal taxconsequences that Mrs. Gardiner will have from her 2018 share sale.You can ignore the acquisition of control rules. Also, given thelist of GSCâs 2018 expenditures in Exhibit I, calculate the total2018 expenses that are deductible in 2018 when computing net incomefor tax purposes. GSC is very profitable and wants to claim themaximum amount of deductions possible. You do not need to commenton non-deductible items.

Note: Additional information about GSC is provided in ExhibitI.

Another client, Mr. Rich, who is a non-resident of Canada, hasjust purchased a newly built townhouse in Canada for $1,500,000that he plans to rent out. The home was purchased on May 1, 2018and will be rented out starting on July 1, 2018. What Canadianincome tax obligations will Mr. Rich face in 2018? If you have anyrecommendations that will reduce Mr. Richâs Canadian income taxobligations (in 2018 or in future years) with respect to his rentalproperty, then you should provide them. Additional informationabout Mr. Rich is provided in Exhibit II.

Ms. Wong wants you to draft a memo to her answering herquestions. She says you can ignore provincial income taxes, ignoreforeign taxes and ignore any income tax treaties. Explain youranswers, show all your detailed calculations and give IncomeTax Act (ITA) section, subsection and paragraph (whereapplicable) references and Income Tax Regulations sectionand subsection references in order to support your answers. Whengiving references you must be specific. Do not just list multiplereferences!

Exhibit I

Garden Supplies Co.

Garden Supplies Co (GSC) is a private company that wasincorporated in Canada in 1963 by Mr. Taft. Mr. Taft subscribed for1,000 common shares in return for $100 (in aggregate). GSC does nothave any other shares outstanding

GSC has a December 31^st year-end and its board ofdirectors meetings are typically held in the United States(U.S.)

GSC operates gardening supply stores in Canada and it startedwith one store in Toronto in 1963. Now it has 10 stores throughoutCanada

In 2005, Mr. Taft sold his shares to Mrs. Gardiner for $1M inaggregate (which was their FMV at the time)

In late January 2018, Mrs. Gardiner sold 600 of her GSC commonshares for $3,000 per share to Marcus Jones, an armâs length person(she still owns 400 common shares of GSC)

In January 2018, Mrs. Gardiner paid $3,500 to a charteredbusiness valuator to value her GSC shares and paid $2,500 in legalfees related to her sale of GSC shares

The FMV of GSC was determined to be $3M

Mrs. Gardiner incurred $300 of safety deposit box rental fees in2018 and she keeps her GSC share certificates in her safety depositbox

Assume GSC is not a qualified small business corporation

Marcus Jones is a non-resident of Canada

In 2018 GSC incurred the following expenditures:

Income taxes paid of $124,500

Salary and wages expense paid of $390,000

In addition, GSC accrued a bonus payable to Mrs. Gardiner of$70,000 for work performed in 2018. This bonus will not be paiduntil May 31, 2019

Interest expense paid of $5,000 on a bank loan used to financebusiness operations

Dividends paid to shareholders of $55,000

Warranty expense accrued of $25,000 (based on estimated warrantycosts). The actual cost in 2018 of servicing warranties was$20,000

Purchased new shelving units to display merchandise on April 1,2018 for $200,000

Purchased new computer software for $3,000 on January 1,2018

Purchased goodwill for $40,000 as part of a business acquisitionon January 1, 2018

Purchased a patent, with an 18-year legal life remaining onDecember 31, 2018 for $10,000

Accrued office supply expenses of $12,000, for suppliespurchased (and used) in late 2018. Payment of this account payablewas made in early 2019

Paid $7,000 for Toronto Blue Jays (baseball) tickets used totake large customers out to games

Incurred $4,000 of legal fees related to obtaining bankfinancing, and

Incurred lobbying expenses of $1,300 for matters related to thebusiness

Assume all expenditures are reasonable unless otherwiseindicated

Assume the prescribed interest rate is 1% at all times

Exhibit II

Mr. Rich

Mr. Richâs rental income is property income; i.e., he is notrunning a business

Mr. Rich wants to minimize his Canadian rental income and hedoes not have any other Canadian income

Mr. Rich has prepared the following (assume that all theexpenses below are paid in 2018 and are reasonable):

Mr. Richâs Canadian Rental Income

For the year-ended December 31, 2018

Gross rental revenue ($4,000 permonth) $24,000

Mortgage interest ($2,200 permonth) $13,200

Property taxes ($610 permonth) $3,660

Maintenance and repairs ($500 permonth) $3,000

Insurance ($200 permonth) $1,200

Total expenses $21,060

Netincome $2,940

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ACTG 6710 Lecture Notes - Lecture 3: Property Income, Remittance

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