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3520-4-updated 2013.doc

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York University
Administrative Studies
ADMS 3520

35203 last updated on September 23 2013111 1Lecture 4 Income from Property Capital gains and Capital Losses11Topics CoveredThis weeks lecture looks at the basics of how investments are taxed ie the taxation of interest dividend and rental income earned while the investment is held and the taxation of capital gains and losses generally earnedrealized when an investment is soldCTP ch 7 covers property income and expenses ie how dividend income interest income rental income and other types of property income are taxed and the expenses that can be deducted against this incomeCTP ch 8 covers capital gains and losses ie how the gain on the sale of an investment including your home is taxed during your lifetimeAs before urls to background materials are included for those who are interested in additional information12Designated problemsExercises 73 76 to 78 selfstudy problem 74Exercises 82 83 88 89 and 8102Property Income 72 to 75passive income from investments investment incomemost interest dividends rental income minus expenses and some royaltiesIn some cases a corporations activity of earning property income can be considered an active business eg a corporation earning investment income because of the number of employees more than 5 fulltime employees throughout the year Discussed further in ADMS 4562Most of the rules in subdivision b of Division B of Part I of the ITA apply to both income from business and property21A few significant differences between business and property incomeYou cannot create or increase a property loss on a rental property with CCAFor a background note on CCA see httpwww2parlgccaContentLOPResearchPublicationsprb0606ehtmYou cannot deduct cumulative eligible capital amount CECA and convention expenses against property income only business income Attribution rules apply to property income and capital gains in the case of spousal loans and transfers but not business incomeYou cannot deduct home office expenses against property income according to the case lawThis edition of the notes was updated by Priya Shah pshahyorkuca35203 last updated on September 23 2013211 22Interest Expense 76 to 710The general rule allowing the deduction of interest expense is ITA 201c The conditions are as followsThe interest expense mustbe pursuant to a legal obligation eg a signed agreementmeet a purpose testto produce income from business or property not capital gainsrelate to funds directly used for that incomeearning activity221Deemed Interest Expense ITA 805The deemed interest benefit on employee loans is deemed to be interest paid for purposes of ITA 201c and 81j2211ExamplesThe imputed interest benefit on a loan made to an employee to buy company shares is typically deductible since the shares can earn dividend ie property incomeThe interest benefit is reported as employment income The interest deemed paid can be deducted as an investment expense under ITA 201cThe imputed interest benefit on a loan to buy a car for employment use is typically partially deductibleAll of the interest benefit is reported 100 as employment incomeThe interest deemed paid can be deducted partially ie theused for employment purposes as employment expense under s 81j222Frequently asked questionsIs home mortgage interest deductibleHome mortgage interest may be deductible if the funds from the mortgage are used directly to earn income from business or property The term mortgage means that real estatecollateral for the loan Funds from most home mortgages are used to buy a house to live inBut if part of the house is rented or used for a business then a portion of the interest may be tax deductibleAlternatively if the house is purchased with cash or the mortgage is paid off and the house is remortgaged and the cash from the bank loan is invested directly to produce income from a business see Singleton case at 712 to 715 or property mutual funds shares the interest will be deductibleIs interest on money borrowed to buy investments deductibleThe interest may be deductible if the funds are used directly to earn income from business or propertyThis edition of the notes was updated by Priya Shah pshahyorkuca
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