ADMS 3520 Chapter Notes - Chapter 6: Property Income, Fiscal Year, Deferral
Course CodeADMS 3520
Income or Loss From A Business
The Word business includes a profession, calling, trade, manufacture or undertaking of any
kind whatever…an adventure or concern in the nature of trade but does not include an
office or employment.
It is necessary to distinguish between:
•business income and employment income
•business income and property income
•business income and Capital Gains
The reason is that in arriving at the business income, business income incurred can be
deducted while it is not so while arriving at the employment income and there are few
restrictions in arriving at property income.
Capital gains are only taxed at 50% and the capital loss can be only deducted against
How to identify whether a particular income is business income or from capital gain.
Following are the factors to be considered:
•Intent and the course of the conduct.
•Number and frequency of the transactions
•Relationship to the taxpayer’s business
•Supplemental work on the property
•Nature of Assets
•Objectives defined in the Articles of Association
Business Income is computed based on the accounting income and adjusted for the tax
Business income is computed based on the GAAP(Generally Accepted Accounting
Modifications are carried out in respect of CCA, permanent differences, unreasonable
Amounts received or receivable.
Reserves created during the year is allowed as a deduction. However, the reserve created
during the year has to be added back as the income next year.
Reserves can only be created for the following three reasons allowed by the Act.
•Reserve for doubtful debts
•Reserve for undelivered goods and services
•Reserve for Unpaid Amounts
Restrictions on Deductions form the business and property income:
•Deduction for the expense can be made only when incurred for the purpose of the
•No capital Expenditure is allowed except provided by the act
•No expenses allowed for producing the exempt income
•Fines and penalties are not allowed
•Illegal payments allowed as expense against the illegal incomes
•Personal and living expenses are not allowed
•Amount incurred for maintaining recreational facilities are not allowed
•Contributions made under the supplementary Deferred Profit Sharing Plans are not
•Restrictions are there on the deduction of any expenses other than the interest and
the property taxes on the vacant land. Similar restrictions are there on the
deductibility of the soft costs.
• Prepaid expenses are not allowed as a deduction in the current year and the same is
allowed in the year in which the same is incurred.
•Foreign Media Advertising-Not allowed if advertised in the foreign media targeted
at the Canadian market.
•50 % disallowance in respect of the meal and entertainment expenses incurred.
•Home office costs:
Following elements of Home office costs are deductible in the proportion of area
occupied to the total area of the home.
Home office Expenses are not allowed to create or increase the loss. If there
are any unabsorbed expenses, the same is carried over to the next year.
Following restrictions apply in respect of the passenger vehicles:
Restriction in respect of the CCA allowance costing 30000 $ plus unrecovered
taxes (GST/PST). CCA granted only on the first 30000$ cost and the rest ignored
for CCA purposes.
Maximum Interest allowable at the rate 10 Dollars a day.
Allowable at the rate of 800 $ plus GST/PST a month. Passenger vehicles costing
over 30000 $ will have 15% disallowance.
Valuation permitted by either of the following methods:
•Cost or Fair Market Value
•Fair market Value
FIFO method is recognized and not the LIFO.
Valuation permitted based on either Direct Costing or the Absorption
For Unincorporated Business:
Tax year should be only on a calendar basis.
For Incorporated Business:
Fiscal year can be any period of 12 months and not to exceed 53 weeks or
Restricted Farm Losses:
Where the farming is not the chief source of earning, it’s a restricted Farm
Loss.Loss allowed to be deducted is first 25000 $ plus 50% of remaining
12500 $. Maximum loss allowed is 8750 $.