ADMS 3520 Lecture Notes - Lecture 8: Photocopier, Ontario Health Insurance Plan, Accounts Receivable
25 Jun 2018
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Professor
1 Lecture 8: Income or Loss from a Business and Introduction to GST/HST
1.1 Coverage
â–ŞUse the lecture notes for studying; for parts that you think you really need more info please
search for the relevant materials in CTP ch. 6 and ch. 21
â–ŞSelf-study problem 6-9: ignore items 12 and 13
2 Business Income Compared to Employment Income, Property Income and Capital Gains
â–ŞThe rules for computing income or loss from business or property are contained in
subdivision
b of Division B of ITA 9 to 37
â–ŞBefore we can apply the rules in subdivision b we must decide if it is business income or
employment income (subdivision a) or property income (also subdivision b) or capital gains
(subdivision c)
▪Although “business” is defined in ITA 248(1) there have been many court cases on this
â–ŞBusiness income is generally speaking income earned from selling goods or providing
services.
However providing the services of an employee is not business income (it is
employment income).
Employment income and the difference between an employee and a
self-employed business
person were discussed in lecture 2
â–ŞBusiness income differs from property income in that property income is typically passive
income earned from investing assets whereas business income actually involves selling goods
or
providing services to clients or customers. Property income was discussed in lecture 3
â–ŞA capital gain on the sale of a capital asset is not business income. Business income occurs
when a taxpayer sells inventory and inventory is not a capital property. The difference
between inventory and capital property is covered in lecture 3
â–Şread CTP 6-13
3 Determining Business Income: ITA 9 to 37 (fiscal period ITA 249.1)
â–ŞITA 9: start with profit (generally accounting net income)
â–ŞITA 10: deals with inventory. Inventory must be recorded at the lower of cost or fair market
value
â–ŞITA 12: income inclusions
â–ŞITA 18: items you can't deduct
â–ŞITA 20: what you can deduct
â–ŞITA 37: deduction of most costs of scientific research and experimental development (SRED
or
R&D) carried on in Canada (except land and buildings, which are capitalized)
â–ŞThe deduction does not have to be taken in the year
â–ŞThe costs go into a pool and can be carried forward indefinitely
â–ŞThere is a related investment tax credit
find more resources at oneclass.com
find more resources at oneclass.com
â–ŞITA 249.1: deals with the fiscal period (individuals must generally use the calendar year,
corporations can choose a non-calendar year end but must be consistent once they choose
one)
3.1 Some other rules that apply for all purposes of the ITA are also applicable to the calculation
of business income including:
3.1.1 The Reasonable Requirement
â–ŞITA 67 says that expenses in excess of a reasonable amount cannot be deducted
â–Şe.g. if a salary in excess of a reasonable amount is paid (e.g. to a family member), the
excess amount is not deductible
3.1.2 The 50% meals and entertainment rule
â–ŞITA 67.1 says that you can only deduct 50% of meals and entertainment
â–ŞThis includes meals claimed as a traveling expense and business deductions for taking
clients to the ballet, opera, plays, sporting events, etc.
â–ŞDifferent rules apply to truck drivers (not discussed in this course)
3.1.2.1 There are a few exceptions to the 50% rule that mean that the outlay is 100% deductible,
these include:
â–Şevents generally available to all employees at a work location
â–Şe.g. Christmas party, not exceeding six per year
â–ŞThe 50% rule in ITA 67.1 would apply to the 7th and all subsequent such
events
â–Şevents to raise funds for registered charities
â–Şe.g. cost of a ticket to a charity dinner/fundraiser
â–Şwhere taxpayer was compensated by someone else for the meals
â–Şe.g. the accountant who bills the meals to a client can claim 100% of the cost as a
deduction (as long as they include in income the amount billed to their client)
â–Şwhere meals and entertainment are provided as a part of normal course of business, etc
(e.g. the cost of meals to a hotel, resort or airline)
3.1.3 Fines and Penalties
â–ŞITA 67.6 says there is no deduction allowed for fines and penalties levied by a country,
province or municipality
â–Şe.g. parking tickets, government fines for pollution, etc
find more resources at oneclass.com
find more resources at oneclass.com
3.1.4 Car restrictions
â–ŞThere are various restrictions on the deduction of items related to automobiles, designed to
restrict deductions on expensive cars (covered in ADMS 4561)
â–Ştax-free car allowances [ITA 18(1)(r), Reg. 7306]
â–ŞCCA on passenger vehicles [ITA 13(7)(g), Reg. 7307]
â–Şinterest payments on car loans [ITA 67.2, Reg. 7307]
â–Şcar lease payments [ITA 67.3, Reg. 7307]
4 Business Income and Accounting Financial Statements
â–ŞWhen you prepare a tax return reporting business income, you generally start with the
accounting (financial statement) net income
â–ŞThe next step is to make adjustments (you add back certain items and deduct others) to
convert the accounting net income to the tax net income (called Division B net income or net
income for tax purposes)
â–ŞThis applies when you are computing business income for an individual or a corporation
â–ŞITA 9 says that to compute business income, you start with "Profit" and adjust as the ITA
requires
â–ŞCorporate tax returns (T2s) reporting business income must contain: a reconciliation
(Schedule 1) between financial statement (accounting) income and net income for tax
purposes; and
must include the financial statements of the business prepared using the CRA's standardized
financial statement format, the "General Index of Financial Information" (GIFI) = a standard
way of categorizing financial statements
â–ŞThe adjustments required to reconcile financial statement income to business income for tax
purposes are mostly add backs – there are very few deductions
â–ŞThere is case law on whether a taxpayer has to follow GAAP (generally accepted
accounting principles) when the ITA is silent
â–ŞThe Supreme Court of Canada has said no in Canderel Ltd. v. Canada, [1998] 1 SCR
147
▪Taxpayer has to provide an “accurate picture of profit” that does not necessarily
have to be in accordance with GAAP
â–ŞAn example is the treatment of tenant inducements paid by a landlord (fully
deductible for tax but amortized over the lease term for accounting purposes)
â–ŞFinally, profits of an illegal business are taxable and damages are taxable if they replace
amounts that would have been income
4.1 Add back and deduct items in adjustments
â–ŞNote: if an item is deducted in the computation of accounting net income and not deductible
for tax purposes then you “add it back” to accounting net income (in order to determine net
income for tax purposes)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Lecture 8: income or loss from a business and introduction to gst/hst. Coverage: use the lecture notes for studying; for parts that you think you really need more info please search for the relevant materials in ctp ch. Self-study problem 6-9: ignore items 12 and 13. Business income compared to employment income, property income and capital gains. The rules for computing income or loss from business or property are contained in subdivision of division b of ita 9 to 37. Business income is generally speaking income earned from selling goods or providing services. However providing the services of an employee is not business income (it is employment income). Employment income and the difference between an employee and a self-employed business person were discussed in lecture 2. Business income differs from property income in that property income is typically passive income earned from investing assets whereas business income actually involves selling goods or providing services to clients or customers.
