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University of Waterloo
Accounting & Financial Management
AFM 361
Dan Rogozynski

• Badges of trade i. Relation of transaction to the tax payer’s business ii. Activity or organization normally associated with trade iii. Nature of the assets involved iv. Number and frequency of transactions by the same taxpayer in a given period of time v. Length of the period of ownership of the asset vi. Supplemental work on or in connection with the property disposed of in the transaction vii. Circumstances that caused the disposition viii. Corporate objects or partnership agreement • Income from a business for tax purposes = profit or accounting net income + income inclusions not included in profit + disallowed expenses and reserves (includes capital expenditures) + unreasonable amounts – expenses specifically allowed but not deducted in profit + capital losses – capital gains • Notes on business deductions o 20% of legal and accounting fees on share issuance is deductible • In order to be qualified as a business, it must have a reasonable expectation of profit o How it is operated o Reasonable pleasure derived o Expertise o Performance history o Time and effort o Financial status o Size of occasional profit o Continuation of activity o Other success record o Expected appreciation of assets • Remember o For INVENTORY  remember to use LOWER OF COSTAND MARKET, use SPECIFIC ID when you can o BUSINESS DEDUCTIONS  NOT CAPITAL, NOT PERSONALAND REASONABLE o CAPITAL GAIN is taxed 50% while income is taxed 100% • DISALLOWED EXPENSES: o Reserves  contingent liabilities o Club dues o Automobile  deduction capped at $0.52/km in case of reimbursement o Penalties and Interest to CRA o Hope office  can’t create or make worse a loss o Accrued expenses to related parties  unpaid amounts in general can remained unpaid for 2 years; salaries have to be paid in 180 days o TheAct specifically prohibits the amortization of an amount that is capital in nature; i.e., interest expense included amortization of bnond discount on bonds maturing in 2012 o Life insurance premiums (unless required for a bank loan) o Dividends payable o EXPENSES NOT INCURRED TO EARN INCOME o Capital expenses o Expenditures incurred for the maintenance of lodging o Estimated Warranty expenses • LIMITS: o MEALS & ENTERTAINMENT can only deduct 50% of cost (each) o INTEREST ON CAR LOANS  $300/month o Car lease payments  $800/month o RPP 18% of salary • Net-of-tax cost of asset = (Cost x Tax rate x CCA rate)/(rage of return + CCA rate); for half-year, multiply by (1 + rate of return/2)/(1 + rate of return) • Rate for CEC is 7% • CCA: o UCC beg of year o Add: purchases during year o Deduct: dispositions at LOCP o UCC before adjustment o Deduct: ½ net amount [Net amount = purchases – LOCP] o Undepreciated capital cost before CCA o Deduct: CCA o Add: ½ net amount o UCC of the class at beg of following year • CECA  ¾ GOING INAND OUT, CECArate is 7% • Recapture (BUSINESS INCOME) for eligible capital is a + b a. Lesser of 1. The negative balance in the pool 2. The CECAthat’s been taken over the life b. 2/3(1 -2) Then you add to this “Non-taxable balance 1/3 of “gain”” which is 1-2 • INVOLUNTARY DISPOSITION: Instead of LOCP, it’s lesser of  Recapture amount  Replacement cost o When you do put the new asset in a class, instead of adding the new building cost to the class, you add Cost – Delayed recapture o Note: 1. Amended returns 2. Different classes is allowed o The CAPITALGAIN= ½ x lesser of 1. Capital gain
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